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Category: Direct Taxes

Appellate Tribunal – Additional ground – Admissibility – Section 143(2) and 147 – A. Ys. 2005-06 to 2008-09 – The requirement of issuance of the notice u/s. 143(2) is a jurisdictional one – It does go to the root of the matter as far as the validity of the reassessment proceedings u/s. 147 is concerned – There being no fresh evidence or disputed facts sought to be brought on record, and the issue being purely one of law, the Tribunal was not in error in permitting the assessee to raise the addi

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Prin. CIT vs. Silver Line; 283 CTR 148 (Del):

In an appeal before the Tribunal filed by the Assessee, the assessee raised the additional ground for the first time that since the requisite notice u/s. 143(2) was not issued before completing assessment u/s. 147 the assessment u/s. 147 has to be held to be invalid. The Tribunal allowed the ground and decided in favour of the assessee.

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

“i) The legal position appears to be fairly well settled that section 292BB talks of the drawing of the presumption of service of notice on an assessee and is basically a rule of evidence. The failure of the Assessing Officer, in reassessment proceedings, to issue notice u/s. 143(2), prior to finalising the reassessment order, cannot be condoned by referring to section 292BB. Consequently the Court does not find merit in the objection of the Revenue that the assessee was precluded from raising the point concerning the nonissuance of notice u/s. 143(2) in the present case in view of the provisions of section 292BB.

ii) As regards the objection of the Revenue to the Tribunal permitting the assessee to raise the point concerning the non-issuance of notice u/s. 143(2) for the first time in the appeal before the Tribunal, the Court is of the considered view that in view of the settled legal position that the requirement of issuance of such notice u/s. 143(2) is a jurisdictional one, it does go to the root of the matter as far as the validity of the reassessment proceedings u/s. 147/148 is concerned. It raises a question of law as far as present cases are concerned since it is not in dispute that prior to finalisation of the reassessment orders, notice u/s. 143(2) was not issued by the Assessing Officer to the assessee. With there being no fresh evidence or disputed facts sought to be on record, and the issue being purely one of law, the Tribunal was not in error in permitting the assessee to raise such a point before it.”

DCIT vs. Mahanagar Gas Ltd. ITAT Mumbai `B’ Bench Before R. C. Sharma (AM) and Mahavir Singh (JM) ITA No. 1945/Mum/2013 A.Y.: 2009-10. Date of Order: 15th April, 2016 Counsel for revenue / assessee: Sanjiv Jain / A. V. Sonde & P. P. Jayaraman

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Sections 40(a)(ia), 192 – Amounts paid by way of reimbursement of salary of employees, working with the assessee under a secondment agreement are not subject to TDS in assessee’s hands.

Facts
In the course of assessment proceedings, the Assessing Officer (AO) noticed from Schedule M forming part of P & L Account that the assessee had debited a sum of Rs. 193.46 lakh on account of secondment charges under the head `personnel cost’ but TDS had not been deducted on the same. He disallowed this sum u/s. 40(a)(ia) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who, relying on the decision of the co-ordinate bench in the case of IDS Software Solutions (India) Pvt. Ltd. 122 TTJ 410 (Bang.) and also the decision of the Bombay High Court in the case of CIT vs. Kotak Securities Ltd. (ITA No. 3111 of 2009) decided the appeal in favour of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held
Upon going through the joint venture agreement entered into by the assessee with M/s GAIL and British Gas in respect of secondment charges paid by the assessee, it was observed that there was no mark up in payments made by them. Secondment agreement was entered into because the IPR rights were to remain with British Gas. The assessee also filed a letter from British Gas which clearly stated that all the taxes due in India of the employees seconded to the assessee have been deducted from salary paid to secondees and paid to the Government of India

The Tribunal observed that the issue is covered by the decision of ITAT Bangalore Bench in the case of IDS Software Solutions (India) (P.) Ltd. vs. ITO (supra). Following the ratio of the said decision, the Tribunal dismissed the appeal filed by the revenue.

The appeal filed by the Revenue was dismissed.

Gurpreet Kaur vs. ITO ITAT Amritsar Bench (SMC) Before A. D. Jain (JM) ITA No. 87/Asr/2016 A.Y.: 2011-12. Date of Order: 24th March, 2016 Counsel for assessee / revenue : J. S. Bhasin / Tarsem Lal

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Section 143(3), CBDT Instruction dated 8.9.2010 – As per CBDT instruction dated 8.9.2010, if a case is selected for scrutiny on the basis of AIR information then the scope of scrutiny is to be limited to verification of the said AIR information. AO is not entitled to widen the scope of scrutiny without approval of the CIT. Order passed by the AO in violation of the specific CBDT instruction is not legally sustainable.

Facts
The assessee filed his return of income on 17.10.2011. The Assessing Officer (AO) issued a notice dated 21.9.2012 seeking information in connection with return of income submitted by the assessee. This notice was marked “AIR Only”. Thereafter, the AO issued a notice, dated 15.7.2013, u/s. 142(1) of the Act, asking the assessee to produce accounts/or documents and information as per questionnaire to the said notice. The questionnaire called for details on various issues apart from the information of cash deposits made by the assessee in his savings bank account. The assessee, in his reply, stated that the notice was seeking information with evidence on various issues not covered by AIR information, though the first notice was marked “AIR Only” and that in accordance with instruction dated 8.9.2010 issued by CBDT scrutiny of cases selected on the basis of information received through the AIR returns would be limited only to aspects of information received through AIR.

In response to the query regarding the source of alleged cash deposit of Rs. 25 lakh in the assessee’s savings bank account with OBC, the assessee stated that she sold her residential house for Rs.32.25 lakh of which Rs. 25 lakh were received by cash which cash was deposited by her into her savings bank account. To substantiate her contention, copy of the sale deed was filed.

The AO noticed that the assessee had received a sum of Rs. 3,00,000 from Smt. Balbir Kaur under agreement dated 15.3.2009 entered into by the assessee with Smt. Balbir Kaur for sale of assessee’s property. Copy of the agreement was filed. He called upon the assessee to produce Smt. Balbir Kaur for his examination. Since the assessee had subsequently on 7.5.2010 sold this property to a different person, but had not refunded the amount received from Balbir Kaur to her, the AO added this sum of Rs. 3,00,000 as income of the assessee on the ground that it was forfeited by the assessee. He also denied exemption claimed by the assessee under section 54 of the Act.

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

Aggrieved, by the order passed by CIT(A), the assessee preferred an appeal to the Tribunal.

Held
The Tribunal observed that in the present case, the question is, whether while computing capital gain and denying benefit of section 54 to the assessee, the AO has contravened CBDT’s Instruction no. F.No. 225/26/2006- ITA –II(Pt.) dated 8.9.2010 thereby rendering the assessment order invalid. It was observed that the Delhi Bench of ITAT has in the case of Crystal Phosphates Ltd. vs. ACIT 34 CCH 136 (Del. Trib.) held that once CBDT has issued instructions, the same have to be followed in letter and spirit by the AO. It also noted that the Calcutta High Court has in the case of Amal Kumar Ghosh vs. Addl. CIT 361 ITR 458 (Cal.), held that when the department has set down a standard for itself, the department is bound by that standard and it cannot act with discrimination. It also noted that the operative word in section 119(1) is `shall’. It observed that in the present case, the assessee’s case was picked up for scrutiny on the basis of AIR information and the notice was stamped “AIR Only” in compliance with para 3 of the CBDT instruction dated 8.9.2010. The AIR information in the present case was regarding cash deposit of Rs. 25 lakh by assessee in her savings bank account with OBC. The assessee explained the same as sale proceeds of her residential house. This assertion of the assessee was supported by a copy of the sale deed. As per CBDT instruction, nothing further was to be gone into by the AO since the information received through AIR was the cash deposits. The act of the AO of asking the assessee to produce Smt. Balbir Kaur for examination to ascertain whether the agreement was finalised or cancelled was not covered by AIR information and therefore, was not within the purview of the AO. This act of the AO amounted to widening the scope of scrutiny, which as per para 2 of the CBDT instruction, could have been done with the approval of the administrative Commissioner. Since this approval was not taken, the Tribunal held that the action of the AO was violative of the CBDT instruction and therefore the order passed by the AO in violation of specific CBDT instruction was not legally sustainable.

The Tribunal allowed the appeal filed by the assessee.

[2015] 154 ITD 768 (Mumbai) ITO vs. Structmast Relator (Mumbai) (P.) Ltd. A.Y.: 2009-10 Date of Order: 25th March, 2015.

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Section 24(b) of the Income-tax Act, 1961 – The interest bearing security deposits partakes the character of borrowed money and the assessee is eligible to claim deduction u/s. 24(b) of the interest paid on the same.

FACTS
During the year under consideration, the assessee, who was engaged in the business of builders and developers, had taken an interest-free loan of Rs. 11 crore from ‘R’ for a short period to purchase an immovable property which was then let out to various tenants. The assessee received deposits from them whereon it had to pay interest at the rate of 6% p.a. These deposits were utilised for the repayment of loan taken from the ‘R’. The assessee claimed deduction of interest u/s. 24(b).

The A.O. disallowed the deduction u/s. 24(b) on the grounds that interest should be payable on capital borrowed or the capital borrowed must be for the purpose of repayment of old loan. He held that the security deposits cannot be termed as capital borrowed for the purpose of repayment of old loan.

CIT(A) holding in favour of assessee stated that such deposits were in fact a kind of loan only, as they bore interest and were utilised for the purpose of repayment of original loan taken for the purchase of house property.

On Revenue’s Appeal-

HELD
It is an undisputed fact that interest at 6% is payable on these refundable deposits under consideration which were taken to repay the original loan. The controversy is whether these deposits can be considered as borrowed money and accordingly whether interest on the same should be allowed u/s 24(b) to the assessee or not.

The word ‘borrow’ as defined in Law Lexicon (2nd edition) means to take or receiving from another person as a loan or on trust money or other article of value with the intention of returning or giving an equivalent for the same. A person can borrow on a negotiated interest with or without security. If the deposits are interest bearing and are to be refunded, then a debt is created on the assessee which it is liable to be discharged in future.

If the deposits had been security deposit simplicitor to cover the damage of the property or lapses on part of the tenant either for non-payment of rent or other charges, then such a deposit cannot be equated with the borrowed money, because then there is no debt on the assessee. However in the given case, it is clear that the intention of taking the deposit is not so.

It was held in favour of the assessee that the moment the security put is accepted on interest, it partakes the character of borrowed money and the assessee is eligible to claim deduction u/s. 24(b) of the interest paid on the same.

[2015] 154 ITD 803 (Chennai) DCIT vs. Ganapathy Media (P.) Ltd. A.Y.: 2009-10 Date of Order: 19th June 2015

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Section 194J of the Income-tax Act, 1961 – The transaction of
acquiring the right to telecast a cinematographic film through satellite
for a period of 99 years is in the nature of purchase of
cinematographic film and not fees paid for technical services and
therefore is not liable to TDS.

FACTS
The assessee
company was in the business of buying and selling rights of the feature
films as a trader for consideration. During the year under
consideration, it was granted rights to telecast films through satellite
for a period of 99 years. The transaction was observed by the AO to be
in the nature of fees paid for technical services and therefore he
disallowed the payment u/s. 40(a)(ia) on the grounds that no TDS u/s.
194J was deducted on the same. The CIT(A) held the transaction to be in
the nature of purchase of cinematographic film by the assessee and
therefore deleted the disallowance made by the AO.

On revenue’s appeal –

HELD
The
issue before the Tribunal was whether the right to telecast the
cinematographic film through satellite is a mere assignment of right or
it is a purchase of the feature film.

The assessee claimed that
it amounted to purchase of films since the satellite right was given to
the assessee for 99 years. However, the Revenue claimed that it is only
an assignment, therefore, the assessee had to deduct tax u/s. 194J of
the Act.

The Tribunal relied on the decision of the Madras High
Court in K. Bhagyalakshmi vs. Dy. CIT [2014] 221 Taxman 225 wherein it
was held the copyright subsists only for a period of 60 years.
Therefore, the right given to the assessee beyond the period of 60 years
has to be treated as sale of the right for cinematographic film. The
order of CIT(A) was upheld and the issue was decided in favour of the
assessee.

Appeal to High Court – Finding of fact arrived at by the Tribunal cannot be set aside without a specific question regarding a perverse finding of fact having been raised before the High Court. Business Expenditure – Legal expenses incurred after the take over of a partnership firm is allowable as a deduction u/s. 37. Depreciation – Plant includes intellectual property rights.

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Mangalore Ganesh Beedi Works v. CIT [2015] 378 ITR 640 (SC)

In 1939, the late Sri S. Raghuram Prabhu started the business of manufacturing beedis. He was later joined the business by Sri Madhav Shenoy as a partner and thus M/s. Mangalore Ganesh Beedi Works (for short “MGBW”) came into existence with effect from February 28, 1940.

The partnership firm was constituted from time to time and its last constitution and partnership deed contained clause 16 relating to the manner in which the affairs of the partnership firm were to be wound up after its dissolution. Clause 16 of the partnership deed reads as follows:

“16. If the partnership is dissolved, the going concern carried on under the name of the firm Mangalore Ganesh Beedi Works and all the trade marks used in course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the partner who offers and pays or two or more partners who jointly offer and pay the highest price therefore as a single group at a sale to be then held as among the partners shall be entitled to bid. The other partners shall execute and complete in favour of the purchasing partner or partners at his/her or their expense all such deed, instruments and applications and otherwise and him/her name or their names of all the said trade marks and do all such deed, acts and transactions as are incidental or necessary to the said transferee or assignee partner or partners.”

Due to differences between the partners of MGBW, the firm was dissolved on or about December 6, 1987, when the two partners of the firm applied for its winding up by filing Company Petition No.1 of 1988 in the High Court. While entertaining the Company Petition the High Court appointed an official liquidator and eventually, after hearing all the concerned parties, a winding up order was passed on June 14, 1991.

In its order passed on June 14, 1991, the High Court held that the firm is dissolved with effect from December 6, 1987, and directed the sale of its assets as a going concern to the highest bidder amongst the partners.

Pursuant to the order passed by the High Court on June 14, 1991, an auction was conducted in which three of the erstwhile partners forming an association of persons (hereinafter referred to as “AOP-3”) emerged as the highest bidders and their bid of Rs.92 crores for the assets of MGBW was accepted by the official liquidator on or about November 17, 1994. With effect from November 18, 1994, the business of the firm passed on into the hands of AOP-3 but the tangible assets were actually handed over by the official liquidator to AOP-3 on or about January 7, 1995.

MGBW (hereinafter referred to as “the assessee”) filed its return for the assessment year 1995-96 relating to period November 18, 1994, to March 31, 1995, and, subsequently, filed a revised return. Broadly, the assessee claimed a deduction of Rs.12,24,700 as a revenue expenditure permissible u/s. 37 of the Incometax Act, 1961 (hereinafter referred to as “the Act”) towards legal expenses incurred. The assessee also claimed deduction u/ss.35A and section 35AB of the Act towards acquisition of intellectual property rights such as rights over the trade mark, copyright and technical know-how. In the alternative, the assessee claimed depreciation on capitalizing the value of the intellectual property rights by treating them as plant.

The Assessing Officer passed an order on March 30, 1998, rejecting the claim of the assessee under all the three sections mentioned above. Feeling aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) who passed an order on October 15, 1998. The appeal was allowed in part inasmuch as it was held that the assessee was entitled to a deduction towards legal expenses. However, the claim of the assessee regarding deduction or depreciation on the intellectual property rights was rejected by the Commissioner of Income-tax(Appeals).

As a result of the appellate order, the Revenue was aggrieved by the deduction granted to the assessee in respect of legal expenses and so it preferred an appeal before the Tribunal. The assessee was aggrieved by the rejection of its claim in respect of the intellectual property rights and also filed an appeal before the Tribunal.

By an order dated October 19, 2000, the Tribunal allowed the appeal of the assessee while rejecting the appeal of the Revenue.

The High Court set aside the findings of the Income-tax Appellate Tribunal (for short “the Tribunal”) and restored the order of the Assessing Officer.

The Supreme Court with regards to the claim of deduction of Rs.12,24,700/- as revenue expenditure held that there was a clear finding of fact by the Tribunal that the legal expenses incurred by the assessee were for protecting its business and that the expenses were incurred after November 18, 1994. According to the Supreme Court there was no reason to reverse this finding of fact particularly since nothing had been shown to them to conclude that the finding of fact was perverse in any manner whatsoever. That apart, if the finding of fact arrived at by the Tribunal were to be set aside, a specific question regarding a perverse finding of fact ought to have been framed by the High Court.

The Supreme Court therefore set aside the conclusion arrived at by the High Court on this question and restored the view of the Tribunal.

In so far as the question of granting depreciation on the value of trade marks, copy rights and know how was concerned, the Supreme Court noted that the fundamental basis on which these questions were decided against the assessee and in favour of the Revenue was the finding of the High Court that what was sold by way of auction to the highest bidder was the goodwill of the partnership firm and not the trade marks, copyrights and technical know-how.

According to learned counsel for the Revenue, MGBW was already the owner of the trade marks, copyrights and technical know-how and essentially the rights in the intellectual property might be included in goodwill, but these were not auctioned off but were relinquished in favour of AOP-3.

The Supreme Court observed that the trade marks were given a value since in the beedi industry the trade mark and brand name have a value and the assessee’s product under trade mark “501” had a national and international market. As far as the copyright valuation was concerned, beedis were known not only by the trade mark but also by the depiction on the labels and wrappers and colour combination on the package. The assessee had a copyright on the content of the labels, wrappers and the colour combination on them. Similarly, the know-how had a value since the aroma of beedis differ from one manufacturer to another, depending on the secret formula for mixing and blending tobacco.

The Supreme Court noted that AOP-3 had obtained a separate valuation from the chartered accountant M. R. Ramachandra Variar. In his report dated September 12, 1994, the technical know-how was valued at Rs.36 crore, copyright was valued at Rs.21.6 crore and trade marks were valued at Rs.14.4 crore making a total of Rs.72 crore.

The Supreme Court noted that in the case of M. Ramnath Shenoy (an erstwhile partner of MGBW) the Tribunal had accepted (after a detailed discussion) the contention of the assessee that trade marks, copyrights and technical know-how alone were comprised in the assets of the business and not goodwill. It was also held that when the Revenue alleges that it is goodwill and not trade marks, etc., that is transferred the onus will be on the Revenue to prove it, which it was unable to do. The Tribunal then examined the question whether the sale of these intangible assets would attract capital gains. The question was answered in the negative and it was held that the assets were self-generated and would not attract capital gains. The decision of the Tribunal was accepted by the Revenue and therefore according to the Supreme Court there was no reason why a different conclusion should be arrived at in so far as the assessee was concerned.

The Supreme Court observed that the High Court denied any benefit to the assessee u/ss 35A and 35AB of the Act since it was held that what was auctioned off was only goodwill and no amount was spent by AOP-3 towards acquisition of trade marks, copyrights and know-how. In coming to this conclusion, reliance was placed in the report of the chartered accountants Rao and Swamy who stated that the assets of MGBW were those of a going concern and were valued on the goodwill of the firm and no trade marks, copyrights and know-how were acquired. According to the Supreme Court, the High Court rather speculatively held that the valuation made by the chartered accountant of AOP-3 that is M. R. Ramachandra Variar that the goodwill was split into know-how, copyrights and trade marks only for the purposes of claiming a deduction u/ss 35A and 35AB of the Act and the value of the goodwill was shown as nil and the deduction claimed did not represent the value of the know-how, copyrights and trade marks.

The Supreme Court however left open the question of the applicability of sections 35A and 35AB of the Act for an appropriate case. This was because learned counsel submitted that if the assessee was given the benefit of section 32 read with section 43(3) of the Act (depreciation on plant) as had been done by the Tribunal, the assessee would be quite satisfied. The Supreme Court observed that unfortunately, this alternative aspect of the assessee’s case was not looked into by the High Court. Therefore, according to the Supreme Court now the question to be answered was whether the assessee was entitled to any benefit u/s. 32 of the Act read with section 43(3) thereof for the expenditure incurred on the acquisition of trade marks, copyrights and know-how.

The Supreme Court noted that the definition of “plant” in section 43(3) of the Act was inclusive. A similar definition occurring in section 10(5) of the Income-tax Act, 1922 was considered in CIT vs. Taj Mahal Hotel wherein it was held that the word “plant” must be given a wide meaning. The Supreme Court held that for the purposes of a large business, control over intellectual property rights such as brand name, trade mark, etc., are absolutely necessary. Moreover, the acquisition of such rights and know-how is acquisition of a capital nature, more particularly in the case of the assessee. Therefore, it could not be doubted that so far as the assessee was concerned, the trade marks, copyrights and know-how acquired by it would come within the definition of “plant” being commercially necessary and essential as understood by those dealing with direct taxes. The Supreme Court noted that section 32, as it stood at the relevant time did not make any distinction between tangible and intangible assets for the purposes of depreciation.

In this context, the Supreme Court observed that by denying that the trade marks were auctioned to the highest bidder, the Revenue is actually seeking to re-write clause 16 of the agreement between the erstwhile partners of MGBW. This clause specifically states that the going concern and all the trademarks used in the course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the highest bidder. Under the circumstances, it was difficult to appreciate how it could be concluded by the Revenue that the trade marks were not auctioned off and only the goodwill in the erstwhile firm was auctioned off. The Supreme Court restored the order of the Tribunal directing the Assessing Officer to capitalise the value of trade marks, copyrights and technical know-how by treating the same as plant and machinery and to grant depreciation thereon.

Recovery of Tax – Stay of Demand – Subsequent events should be taken into consideration.

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Sidhi Vinayak Metcom Ltd. vs. UOI [2015] 378 ITR 372 (SC)

The assessment in respect of the assessment years 2010-11 and 2011-12 was reopened by the Income-tax Department by issuing notice u/s. 148. Assessments for these years were carried out afresh by the Assessing Officer imposing an additional tax demand of Rs.64 lakhs. The Petitioner had filed appeals against the said order which were pending before the Commissioner of Income-tax (Appeals). The Petitioner also moved an application for stay of the demand. On this, application, the Commissioner of Income-tax (Appeals) passed orders granting stay of interest and in respect of the tax amount, the petitioner was permitted to deposit the same in 16 installments. However, the Petitioner committed default in making payment of the very first installment because of which the bank account of the Petitioner was attached. The order was challenged by filing a writ petition in the High Court which was dismissed.

Before the Supreme Court it was pointed out that up to now the Petitioner had paid a sum of Rs.27.7 lakh in all. It was also pointed out by the learned counsel for the Petitioner that the main reason for reopening of the assessment for the aforesaid years by issuance of notice u/s. 148 was certain proceedings under the Central Excise Act. A copy of the decision dated September 16, 2015, paused by the Customs, Excise and Service Tax Appellate Tribunal was filed before the Supreme Court by way of additional document, revealing that in appeal against the Order-in- Original of the Excise Department, the CESTAT had set aside the said order and remitted the case back to the adjudicating authority for fresh adjudication.

According to the Supreme Court, in view of the aforesaid subsequent event, it would be appropriate if the petitioner approached the Commissioner of Income-tax (Appeals) once again with an application for stay bringing the aforesaid events to the notice of the Commissioner of Income-tax (Appeals). The Supreme Court was confidant that the Commissioner of Income-tax (Appeals) would consider the application on its own merits and pass orders thereon within a period of four weeks from the date of filing the application. The Supreme Court disposed the special leave petition accordingly.

TDS – Payment to non-resident – Sections 195 and 201 – A. Y. 2002-03 – Transaction not resulting in liability to tax – Tax not deductible at source – Assessee not in default

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Anusha Investments Ltd. vs. ITO; 378 ITR 621 (Mad):

The assessee had purchased shares from a non-resident company which had resulted in capital loss to the nonresident company. Therefore, the assessee had not deducted tax at source. The Tribunal held that whether or not the non-resident company suffered a loss or gain on the sale of shares, a duty was cast on the assessee to deduct the tax whenever it made payment to the nonresident and that the assessee was not only liable to deduct the tax at source, but it also had to pay the tax so collected to the exchequer.

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

“In the present transaction, admittedly, there was no liability to tax. As a result, the question of deducting tax at source and the assessee violating the provisions of section 195 did not arise and, therefore, the assessee could not be treated as an assessee in default.”

Revision – Section 263 – A. Y. 2007-08 – Question whether total income for purposes of section 36(1)(viia)(c) should be computed after allowing deduction u/s. 36(1)(viii) – Two possible views – Debatable issue – Revision u/s. 263 not justified

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CIT vs. Power Finance Corporation Ltd.; 378 ITR 619 (Del):

For the A. Y. 2007-08, the Assessing Officer completed the assessment u/s. 143(3), allowing the deduction u/s. 36(1)(viia)(c) and u/s. 36(1)(viii). The Commissioner exercised the revisional powers u/s. 263 and held that the deduction u/s. 36(1)(viia)(c) should have been computed after allowing deduction u/s. 36(1)(viii). The Tribunal set aside the order of the Commissioner holding that on the question whether the total income for the purpose of section 36(1)(vii)(c) should be computed after allowing the deduction u/s. 36(1)(viii) there were at least two possible views as reflected in the orders of the Delhi and Chennai Benches of the Tribunal. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) I ndependent of the two decisions, the stand of the Revenue as set out in its memorandum of appeal and that of the assessee that both deductions were independent of each other, gave rise to two further possible interpretations.

ii) The view taken by the Assessing Officer was a possible one and there was no occasion for the Commissioner to have exercised the jurisdiction u/s. 263.”

Presumptive tax – Section 44BBA – A. Y. 1989-90 to 1993-94 – Non-residents – Business of operation of air craft – Section 44BBA is not charging provision, but only a machinery provision – It cannot preclude an assessee from producing books of account to show that in any particular assessment year there is no taxable income – When there is no taxable income, section 44BBA cannot be applied to bring to tax presumptive income constituting 5 per cent of gross receipts

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DIT vs. Royal Jordanian Airlines; [2015] 64 taxmann.com 93 (Delhi):

The assessee-airline was established by the Ministry of Transport of the Kingdom of Jardon. It appointed Jet Air Pvt. Ltd. as its general sales agency in India. The assessee commenced its operations in India, carrying passengers and cargo on international flights from and to India from 1989 onwards. Since commencement of operations in India, assessee had been incurring losses. For relevant years, the assessee filed its return declaring nil income. The Assessing Officer opined that assessee was a foreign company and was liable to pay tax in India in terms of section 44BBA. He thus proceeded to determine income at the rate of 5 per cent of the net sales. The Tribunal upheld the order of Assessing Officer on merits. However, the Tribunal remanded the matter back for recomputation of income u/s. 44BBA.

The Delhi High Court allowed the assessee’s appeal and held as under:

“i) Inasmuch as section 44BBA is not charging provision, but only a machinery provision, it cannot preclude an assessee from producing books of account to show that in any particular assessment year there is no taxable income.

ii) Where there is no income, section 44BBA cannot be applied to bring to tax the presumptive income constituting 5 per cent of the gross receipts in terms of section 44BBA(2). No doubt, for that purpose the assessee has to produce books of account to substantiate that it has incurred losses or that its assessable income is less than its presumptive income, as the case may be.

iii) The Tribunal has noted the factual position regarding the losses incurred by assessee for the relevant years. This has not been disputed by the revenue in its appeal against the aforesaid order. Consequently, the question of assessee being asked to pay tax on presumptive basis u/s. 44BBA for the said year, or the matters being sent to the Assessing Officer for verifying the said facts does not arise.

In the result, assessee’s appeal has to be allowed.”

Uday K. Pradhan vs. Income Tax Officer ITAT “F” Bench, Mumbai Before Jason P. Boaz (AM) and Sandeep Gosain (JM) ITA No. 4669/Mum/2014 A.Y.: 2005-06. Date of Order: 6th April, 2016 Counsel for assessee / revenue: Dharmesh Shah / Sandeep Goel

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Section 2(22)(d): Redemption of preference shares does not constitute “deemed dividend”

Facts
The assessee was a partner in a firm which was converted into a company. As per the books of the erstwhile firm, the assessee had a credit balance of Rs. 38.74 lakh and in lieu of the said credit balance, the assessee received two lakh equity shares and 2,07,417 redeemable preference shares. In the year under appeal, the said redeemable preference shares were redeemed at par and the assessee received Rs. 20.74 lakh. The AO was of the view that the assessee’s receipt of the sum of Rs. 20.74 lakh on redemption of preference shares resulted in reduction of the share capital and therefore, invoked the provisions of section 2(22)(d) of the Act to bring the same to tax as deemed dividend. On appeal, the CIT(A) was of the view that this was a colourable device for distribution of accumulated profits without any payment by the assessee and which benefitted the assessee/shareholder to the tune of Rs. 20.74 lakh therefore it was exigible to tax u/s. 2(22)(d).

Held
Based on the records, the Tribunal noted it was evident that the assessee received the 2,07,417 redeemable preference shares in lieu of his credit balance in capital account of Rs. 38.74 lakh in the erstwhile firm which had since been corporatised. Thus, the assessee was allotted the redeemable preference shares for valuable consideration and that there was no distribution of accumulated profits by the company to its shareholders on redemption of preference shares, which could result in reduction of share capital. Therefore the Tribunal held that the provisions of section 2(22) (d) of the Act would not apply. The Tribunal noted that even as per section 80(3) of the Companies Act, 1956, the redemption of preference shares is not considered as reduction of share capital. Therefore, according to the Tribunal, treating the redemption of preference shares as deemed dividend u/s. 2(22) (d) of the Act does not arise, as it can be treated so only when there is distribution of accumulated profits by way of reduction of share capital.

In coming to this finding the Tribunal relied on the decision of the Coordinate Bench in the case of Parle Biscuits Pvt. Ltd. In ITA Nos. 5318 & 5319/Mum/2008 and 447/ Mum/2009 dated 19.08.2001.

[2016] 156 ITD 770 (Mumbai ) GSB Capital Markets Ltd. vs. DCIT A.Y.: 2010-11 Date of Order: 16th December, 2015

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Section 74 – Even though loss arising from transfer of short-term capital assets (on which STT is paid) is assessed at 15% tax rate, the said loss can be brought forward and set off against the long term capital gains which are assessed at 20% tax rate.

Facts
The assessee-company was a member of the Bombay Stock Exchange and engaged in the business of share broking, trading and dealing in shares and securities

The assessee had claimed set-off of brought forward short term capital loss against the long term capital gains during the relevant assessment year.

The AO opined that loss arising from transfer of shortterm capital assets (on which STT is paid) was assessed at 15 per cent tax rate while the long-term capital gain was assessed at 20 per cent tax rate and hence it could not be set-off in view of section 70(3).

The CIT(A) upheld the order of AO.

On appeal before Tribunal.

Held
Section 70 deals with the set-off of losses from one source against the income from another source under the same head of income and deals with intra-head adjustment of losses during the same assessment year under the different heads of income.

On the other hand, section 74 which deals with the carry forward of capital losses and set-off against the income of the subsequent financial year, clearly stipulates that loss arising from transfer of short-term capital asset which is brought forward from earlier years, can be set-off against the capital gain assessable for subsequent assessment year, in respect of any other capital asset which could be either long-term capital gain or short-term capital gain.

Circular no. 8 of 2002, dated 27-08-2002 issued by CBDT explains the amendment made by the Finance Act, 2002 as follows:

“Since long-term capital gains are subject to lower incidence of tax, the Finance Act, 2002 has rectified the anomaly by amending the sections to provide that while losses from transfer of short-term capital assets can be set-off against any capital gains, whether short-term or long-term, losses arising from transfer of long-term capital assets, will be allowed to be set-off only against long-term capital gains. It is further provided that a long term capital loss shall be carried forward separately for eight years to be set-off only against long-term capital gains. However, a short-term capital loss, may be carried forward and setoff against any income under the head Capital gains”.

Thus, in view of our above discussions and reasoning, it was held that the assessee had rightly claimed set-off of brought forward short term capital loss against the long term capital gains during the relevant assessment year.

In result, the appeal filed by the assessee-company was allowed and the orders of CIT-(A) and AO were set aside.

[2016] 156 ITD 793 (Kolkata ) Manoj Murarka vs. ACIT A.Y.: 2007-08 Date of order: 20th November, 2015

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Section 2(22)(e) – For the purposes of artificial categories of dividends u/s. 2(22), accumulated profits do not include any exempt capital gains. Thus, where assessee has negative accumulated profits excluding exempt capital gains, provisions of deemed dividend cannot be invoked in respect of any amount overdrawn by the assessee.

Facts
During the relevant assessment year, the assessee, his son and daughter had overdrawn certain amount from a company in which the assessee was a substantial shareholder holding 41% of shares. The son and daughter were not shareholders in the company.

The AO treated the aforesaid amount overdrawn by the assessee and his son and daughter from the company as deemed dividend u/s. 2(22)(e) and added the same in the income of the assessee.

The CIT(A) held that the deemed dividend could be taxed only in the hands of shareholder holding more than 10% voting power in the company from which monies are drawn. He therefore deleted the addition made towards deemed dividend in respect of the amount overdrawn by the son and daughter, as they were not shareholders of company.

However, he confirmed the addition made towards deemed dividend in respect of the amount overdrawn by the assessee by ignoring assessee’s contention that there was only negative accumulated profits, if the tax exempt long term capital gain was excluded from accumulated profits.

On cross appeals to the Tribunal:

Held
In respect of amount overdrawn by son and daughter
Both the son and daughter of the assessee are not shareholders in the lending company. The deemed dividend, if any, could be assessed only in the hands of the shareholders and not otherwise. This argument was taken by the assessee even before the lower authorities and the revenue has not brought on record any contrary evidence to this fact. Hence, the provisions of section 2(22)(e) could not be invoked in respect of amount overdrawn by the son and daughter.

In respect of amount overdrawn by assessee
The legal fiction created in the Explanation 2 to section 2(22) states that ‘accumulated profits’ shall include all profits of the company up to the date of distribution or payment. For reckoning the said accumulated profits, apart from the opening balance of accumulated profits, only the profits earned in the current year are to be added and then the total accumulated profits should be considered for the purpose of calculation of dividend out of accumulated profits, if any. The said Explanation nowhere contemplates to bring within the ambit of expression ‘accumulated profits’ any capital profits which are not liable to capital gains tax.

In the instant case, the capital gains derived by the company are tax exempt and hence, the same should not be included in accumulated profits and if the said gains are excluded, then there are only negative accumulated profits available with the company.

In the absence of accumulated profits, there is no scope for making any addition towards deemed dividend u/s. 2(22)(e).

Accordingly, the ground raised by the assessee is allowed and appeal of the revenue is dismissed.

Note: Reliance was placed on CIT vs. Mangesh J. Sanzgiri [1979] 119 ITR 962 (Bom. HC) and ACIT vs. Gautam Sarabhai Trust No. 23 [2002] 81 ITD 677 (Ahd. Trib).

[2016] 177 TTJ 18 (Chandigarh) H. P. State Electricity Board vs. Addl. CIT A.Y.s.: 2007-08 to 2010-11 Date of Order : 10th December, 2015

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Section 271C – Penalty u/s. 271C is not leviable on an assessee who is not treated as an “assessee-in-default” as per section 201 of the Act more so when there was a reasonable cause for not deducting tax on payment made by the assessee.

Facts
The assessee company was engaged in generation, transmission and distribution of power in the State of Himachal Pradesh. It purchased/sold power from PGCIL and was also selling power to consumers. Power was transmitted through transmission network of PGCIL and assessee made payments on account of wheeling charges, SLDC, transmission charges to PGCIL. In respect of payments made by the assessee to PGCIL, during the financial years 2006-07 to 2009-10, the assessee company was liable to deduct tax at source, but did not deduct tax at source.

Since PGCIL was found to have paid taxes on its income received from the assessee, the assessee was not treated as an assessee-in-default u/s. 201 of the Act. However, the AO levied penalty u/s. 271C of the Act amounting to Rs.1,36,00,187; Rs., 2,48,13,453; Rs.2,76,67,625 and Rs.5,71,017 for the financial years 2006-07, 2007-08, 2008-09 and 2009-10 respectively. He held that there was no reasonable cause for the deductor assessee not to deduct tax at source. 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, having noted the provisions of section 271C of the Act and also the ratio of the decision of the Karnataka High Court in the case of Remco (BHEL) House Building Co-operative Society Ltd. vs. ITO (2015) 273 CTR 57 (Kar), and observed that the assessee has not been treated as “assessee in default” as per section 201 of the Act, and is therefore neither liable to deduct nor pay any tax as per Chapter XVII-B. It held that in such circumstances, the question of levy of penalty u/s. 271C does not arise. It observed that this view has been upheld by the Hyderabad Bench of the Tribunal, in the case of ACIT vs. Good Health Plan Ltd. in ITA No. 155/Hyd/2013, wherein penalty levied u/s. 271C was deleted, since the assessee was not held to be an assessee in default. The Tribunal held that no penalty u/s. 271C could be levied in the case of the assessee.

The Tribunal also observed, that the fact that the tax on impugned sums had been reimbursed to PGCIL had not been controverted by the Revenue. It held that in such circumstances, the belief harboured by the assessee that by deducting further TDS, it would tantamount to double taxation, appears to be a reasonable and bonafide belief. It considered the explanation of the term “reasonable cause” as explained by the Delhi High Court in the case of Woodward Governor India (P.) Ltd. vs. CIT (2001) 168 CTR 394 (Del), and held that there is no merit in the contention of the Department Representative (DR) that the assessee did not have reasonable cause for not deducting tax at source.

The Tribunal held that the assessee not being in default in respect of the amount of tax itself, there cannot be any levy of penalty u/s. 271C, and more so, where there was a reasonable cause for not deducting the TDS on the payment made.

This ground of appeals filed by the assessee was allowed.

2016-TIOL-547-ITAT-DEL Hindustan Plywood Company vs. ITO A.Y.: 2009-10 Date of Order: 19th February, 2016

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Section 40(a)(ia) – Section 40(a)(ia) inserted w.e.f. 1.4.2013 is curative in nature and has retrospective effect.
Section 40(b)(v) – Profit on sale of godown credited to profit & loss account by the assessee is not to be excluded for computing remuneration allowable to partners.

Facts – I
The Assessing Officer (AO) in the course of assessment proceedings, noticed that the assessee had not deducted tax at source on interest amounting to Rs. 2,52,043 paid to various depositors and also on Rs. 1,44,000 paid towards car hire charges. He disallowed both these expenses u/s. 40(a)(ia) of the Act.

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 contended that the second proviso is curative in nature, intended to supply an obvious omission, take care of unintended consequence and make the section workable and is therefore retrospective.

Held – I
The Tribunal noted that the contention made on behalf of the assessee is supported by the decision of the ITAT , Kolkata Bench in the case of Santosh Kumar Kedia vs. ITO in ITA No. 1905/Kol/2014 for AY 2007-08; order dated 4.3.2015. It observed that the Delhi High Court in the case of CIT vs. Ansal Landmark Township Pvt. Ltd. (377 ITR 635) has also taken the similar view. The Tribunal restored this issue to the file of the AO, with the direction that the assessee shall provide all details to the AO with regard to the recipients of the income and taxes paid by them. The AO shall carry out necessary verification in respect of the payments and taxes of such income and also filing the return by the recipient. In case, the AO finds that the recipient has duly paid the taxes on the income, the addition made by the AO shall stand deleted.

This ground of appeal filed by the assessee was allowed.

Facts – II
The assessee had credited Rs. 10,20,430 to its Profit & Loss Account being profit on sale of godown on which it had been claiming depreciation from year to year. The AO was of the view that salary paid to partners is not to be paid on these profits. He excluded profit on sale of godown for the purposes of computation of remuneration to partners. Accordingly, he recomputed the partners remuneration and disallowed Rs. 3,60,540 out of Rs. 5,40,000 claimed by the assessee as salary paid to the partners.

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 – II
The Tribunal considered the provisions of section 40(b)(v) which lay down the maximum quantum of remuneration payable to partners and also Explanation 3 thereto which defines “book profit”. It held that from the Explanation 3, it is apparent that the book profit has to be the profit as has been shown in the profit & loss account for the relevant previous year. It observed that the profit received by the assessee on sale of godown amounting to Rs. 10,20,430 was credited to Profit & Loss Account as prepared by the assesse and was part of net profit as shown in profit & loss account. Both the authorities below did not appreciate the provisions of section 40(b)(v), Explanation 3 and misinterpreted definition of “book profit” as given under Explanation 3 to section 40(b) of the Act. It observed that this view is supported by the decision of the Calcutta High Court in the case of Md. Serajuddin & Brothers vs. CIT (2012 – TIOL- 593- HC – CAL) as well as the following decisions –

i) Suresh A. Shroff & Co. (Mum) (2013) 140 ITD 1;

ii) CIT v. J. J. Industries – (2013)(Guj.) 216 Taxman 162;

iii) S. P. Equipment & Services vs. ACIT – (Jaipur)(2010) 36 SOT 325;

iv) ITO vs. Jamnadas Muljibhai – 99 TTJ 197 (Rajkot);

v) Deepa Agro Agencies vs. ITO – 154 Taxman 80 (Bang. Trib.);

vi) Allen Career Institution vs. Addl CIT – (2010) 37 DTR 379 (Jp)(Trib.);

vii) ACIT vs. Bilawala & Co. – 133 TTJ 168 (Mum.)(Trib.)

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

[2016] 177 TTJ 1 (Mumbai.) Crompton Greaves Ltd. vs. CIT A.Y.: 2007-08 Date of Order: 1st February, 2016

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Sections 246A(1)(a), 253(1) – An appeal against order passed u/s.
143(3) r.w.s. 263 lies with CIT(A) u/s. 246A(1)(a) being an order passed
by AO u/s. 143(3). Order passed u/s. 143(3) r.w.s. 263 does not find
place in section 253(1).

Facts
The assessment of total
income of the assessee company was completed by the Assessing Officer
(AO) vide his order dated 28th December, 2010 passed u/s. 143(3) of the
Act. Subsequently, the AO passed an order, dated 24th February, 2014, to
give effect to an order dated 6th February, 2013 passed u/s. 263 of the
Act.

Aggrieved by the additions made in the order dated 6th
February, 2013 passed u/s. 143(3) r.w.s. 263 of the Act, the assessee
preferred an appeal to the Tribunal.

Held
The
Tribunal observed that the assessee company has preferred a first appeal
directly before the Tribunal against order passed u/s. 143(3) r.w.s.
263 of the Act. The Tribunal noticed that an appeal against an order
passed u/s. 143(3) r.w.s. 263 lies with the CIT(A), u/s. 246A(1)(a) of
the Act, being an order passed u/s. 143(3) and not with the Tribunal
under section 253. Referring to the decision of the Apex Court in the
case of CIT vs. Ashoka Engineering Co. (1992) 194 ITR 645 (SC), it
observed that an appeal under the Act is a statutory right which
emanates only from the statute. The assessee does not have a vested
right to appeal, unless provided for in the statute.

The
Tribunal held that it cannot adjudicate the appeal filed by the
assessee, and that the assessee is at liberty to file an appeal before
the CIT(A) u/s. 246A(1)(a) of the Act, for adjudication on merits. It
also observed that while adjudicating the condonation application, the
CIT(A) shall liberally consider the fact that in the intervening period,
the assessee company was pursuing the appeal with the Tribunal, albeit
at the wrong forum with the Tribunal, instead of filing the first appeal
with the CIT(A) as provided in the Act.

The appeal filed by the assessee was dismissed.

Exemptions – On sale of Agricultural land – Sections 54 B & 54 F:

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Commissioner of Income Tax vs. Narsing Gopal Patil INCOME TAX APPEAL NO. 2319 of 2013 dated: 1st MAR CH, 2016. (Bom HC)

(Narsing Gopal Patil, Pune vs. Asst CIT ITA No. ITA No.1544/PN/2012 & ITA 1815/PN/2012 (A Y: 2008-09) dt 3rd, May 2013).

The assessee for the subject assessment year, sold land which according to him had been used as agricultural land. The sale consideration was partly invested in the purchase of agricultural land and partly utilised for construction of the two buildings claiming it to be a residential house. The assessee claimed the benefit of exemption as available u/s. 54B of the Act to the extent the sale proceeds were utilised for purchase of the agricultural land and section 54F to the extent that the sale proceeds were utilised to construct the residential house. The Assessing Officer denied both the claims. Regarding the claim for the benefit of section 54B was concerned, he held that the assessee had not been able to prove that the land sold had been used for Agricultural purposes in the two preceding years prior to its sale.

The CIT(A) held that the assessee was entitled to the benefit of section 54B in as much as it had led evidence before the Assessing Officer, that the user of the land sold was for agricultural purposes by furnishing 7/12 extract and his return of income filed for the Assessment years 2002 – 03 to 2007 – 08 disclosing agricultural income. The other claim of the assessee for exemption u/s. 54F was denied by the CIT(A).

The Dept. challenged the CIT (A) order to the extent it allowed the claim for benefit of section 54B, and assessee as regard section 54 F, before the Tribunal. The Tribunal upheld the order of the CIT(A) in granting the benefit of section 54B to the assessee, on the ground that the assessee had produced evidence, to show that the land which was sold, was in fact used for agricultural purpose during the period of two years prior to the date of its transfer. This evidence was in the form of 7/12 extract as per land revenue record and also return of income filed for the assessment year 2005 – 2006 to 2007- 2008 in which the assessee had declared its agricultural income.

Similarly, the Tribunal upheld the claim of section 54 F by holding that, so long as the assessee’s claim of exemption was limited to the investment in the construction of the residential portion of the building, the same was held to be allowable.

The Hon’ble High Court observed that the finding recorded by the lower authorities was a finding of fact, that the subject land was being used for agricultural purpose in the two years preceding the date of the sale. This finding of fact was rendered on the basis of 7/12 extract led as evidence before the Assessing Officer, which indicates the manner in which the land is being used. In fact, as correctly observed by the Tribunal, there is a presumption of the correctness of entries in the land revenue record in terms of section 157 of the Maharashtra Land Revenue Code, 1966. This presumption is not an irrebuttable presumption and it will be open for the Assessing Officer to lead evidence to rebut the presumption. However, no such evidence was brought on record by the Revenue to rebut the presumption. Moreover, the assessee has also placed before the authorities its return of income filed for the assessment year 2005 – 2006 to 2007- 2008, wherein he had inter alia declared agricultural income. In view of the fact that the revenue has not been able to establish that the evidence led by the assessee is unreliable by leading any contrary evidence, there is no reason to discard the evidence produced by the assessee. Thus, there is a concurrent finding of fact by CIT(A) as well as the Tribunal that the land has been used for agricultural purpose. Thus, no substantial question of law arises. However, the Court admitted the question relating to section 54 F claim i.e allowing exemption under section 54F, when the investment made by the assessee is in a ‘commercial cum housing complex’.

Section 14A – Shares held as stock in trade – Disallowance cannot be made :

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Difference in brokerage income shown in service tax return and in the Profit and Loss account – Excess brokerage on account of method of accounting:

Commissioner of Income Tax 4 vs. Credit Suisse First Boston (India) Securities Pvt. Ltd. INCOME TAX APPEAL NO.2387 of 2013 dt : 21ST MAR CH, 2016 (Bom HC) (Affirmed Mumbai ITAT decision on the above issues DCIT, CIT – 4(1) vs. M/s Credit Suisse First Boston (India) Securities Ltd. ITA no : 7354/Mum/2004, AY : 2001- 02 dt: 06/03/ 2013)

The assessee had been reflecting in the service tax return, the brokerage on accrued basis but in profit and loss account the brokerage was been shown on actual basis on the basis of constant method adopted by the assessee. The AO made an addition on this account . The CIT (A) and Tribunal recorded a finding that sometime the assessee was required to reduce the brokerage at the request of the assessee during the final settlement of the bills and some time the assessee was also required to waive part of the brokerage disputed by the clients. Therefore, difference as per the service tax return and as per profit and loss account was found explainable. This was a minor difference, which had been reconciled by the assessee. In the above view, the Hon’ble Court held that question as formulated does not give rise to any substantial question of law.

As regards section 14 A, it was observed that the Assessing Officer had disallowed the expenditure, on the ground that the Assesee had earned dividend income in respect of the shares held by the assessee. There is no dispute between the parties that the shares held by the Assessee are stock in trade, as the assessee is a trader in shares and had in its books classified it under the head ‘Stock in Trade’. The Revenue conceeded that the issue stood concluded against the Revenue and in favour of the Assessee, by the decisions of this Court in HDFC Bank Ltd. vs. The Deputy Commissioner of Income Tax2(3) (Writ Petition No.1753 of 2016 rendered on 25th February, 2016). In view of the above, the Hon’ble Court held that question as formulated did not give rise to any substantial question of law.

Section 48 – Capital gain – Full value of consideration – computation of capital gain only refers to full value of consideration received – no occasion to substitute the same :

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Commissioner of Income Tax Central IV vs. M/s. B. Arunkumar & Co. Income Tax Appeal NO.2337 OF 2013 dt 8/3/2016 . (Bom HC)

(Affirmed Mumbai ITAT decision in ACIT Cir.16(3) vs. M/s. B. Arunkumar & Co., ITA No.8272/M/11, AY : 2008- 09, Bench B, dt: 24.05.2013).

The assessee was a firm belonging to one Harshad Mehta Group. The assessee firm owned 19% shares in a company namely M/s. Inter Gold (India) Pvt. Ltd. Shares in the aforesaid company were acquired by the assessee-firm during the years 2002 and 2003 at different rates and these shares were not tradable in the open market. The balance share holding in M/s. Inter Gold was held by Sh. Arun Kumar Mehta family members (38%) and by foreign companies (41%). The assessee sold its 19% shareholdings in M/s. Inter Gold (India) Pvt. Ltd. to one M/s. Rosy Blue (I) (P) Ltd. and returned a capital loss on account of indexation. The consideration for the sale of shares in two tranches was Rs.750 per share and Rs.936 per share respectively.

The Assessing Officer did not accept the capital loss as claimed and sought to substitute the consideration received by the assessee at Rs.936 and Rs.750 per share with the value of Rs.1,225 per share as consideration received on the sale of its shares to M/s. Rosy Blue India Pvt. Ltd. This substituted value being the breakup value of the shares, was taken as its fair market value (FMV). In the result, the Assessing officer worked out the long term capital gains at Rs.4.57 crore instead of loss at Rs.3.65 crore as claimed. Being aggrieved, the assessee carried the issue in appeal to the CIT (Appeals). The CIT (Appeals) allowed the appeal of the assessee. He held that in the absence of any provision in the Act to replace the consideration received on sale of shares, by adopting the market value is not permissible.

In contrast, attention was drawn to section 50C, which provides for substitution of the consideration received on sale of land and buildings by the stamp duty value of land and buildings (immovable property). He further held, that the Assessing Officer cannot substitute the consideration shown as received on sale of shares by the assessee in the absence of evidence, to indicate that the consideration disclosed on sale of shares was not the complete consideration received and/or accrued to the assessee. Being aggrieved, the Revenue carried this issue in appeal to the Tribunal. The Tribunal reiterated the findings of fact rendered by the Commissioner of Income Tax (Appeals) that the transfer of the shares at the declared consideration was not done by the assessee with the object of tax avoidance or reducing its tax liability. The Tribunal, in the impugned order, placed reliance upon the decision of the Apex Court in CIT vs. Gillaners Arbuthnot and Co. (87 ITR 407) and CIT vs. George Henderson & Co. Ltd. (66 ITR 622), to conclude that, where a transfer of a capital assets takes place by sale on receipt of a price, then the consideration fixed/bargained for by the parties should be accepted for the purpose of computing capital gains. It cannot be replaced by the market value or a notional value. The full value of consideration is the money received to transfer the assets. Accordingly, the Tribunal dismissed the Revenue’s Appeal and upheld the order of the CIT (Appeals).

The Revenue before the Hon’ble High Court, contented that the decisions of the Apex Court relied upon in the impugned order were rendered under Income-tax Act, 1922 and therefore, would not apply while considering the Act.

The Hon’ble court held that, it was not the case of the revenue that the amount disclosed by the respondent assessee, was less than what has been received by them or what had accrued on sale of its shares. The revenue has not in any manner shown that the consideration disclosed by the assessee to the revenue, is not the correct consideration received by them and that the same should be replaced. Moreover, wherever the Parliament thought it fit ,that the consideration on a transfer of a capital asset has to be ascertained on the basis of market value of the asset transferred, specific provision has been made in the Act. To illustrate section 50C provides for stamp value duty in case of transfer of land or buildings. Similarly, section 45(2) and 45(4) provide that in cases of conversion of the investment into stock in trade or transfer of shares on dissolution of a firm to its partners respectively has to be at market value. The consideration disclosed on sale of shares by the assessee was infact the only consideration received/ accrued to it, no occasion to substitute the same can arise. Accordingly, the appeal of Revenue was dismissed.

TDS – Disallowance u/s. 40(a)(i) – Royalty – Payment for import of software – Not royalty – Tax not deductible at source on such payments – Amount not disallowable u/s. 40(a)(i)

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Wipro Ltd. vs. Dy. CIT; 382 ITR 179 (Karn)

The Assessing Officer disallowed the claim for deduction of expenditure incurred for import of software relying on section 40(a)(i), on the ground that the payment was a royalty and that the tax was not deducted at source. The Tribunal allowed the assessee’s claim, holding that the payment made by the assessee for import of software is not royalty.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held that the payments made by the assessee for import of software did not constitute royalty u/s. 9(1)(vi) of the Act and there was no obligation to deduct tax at source u/s. 195 and as such the expenditure cannot be disallowed u/s. 40(a)(i) of the Act.

TDS – Rent – Section 194I – Where One Time Nonrefundable Upfront Charges paid by the assessee was not (i) under the agreement of lease and (ii) merely for the use of the land and the payment was made for a variety of purposes such as (i) becoming a co-developer (ii) developing a Product Specific SEZ(iii) for putting up an industry in the land and both the lessor as well as the lessee intended to treat the lease virtually as a deemed sale, the upfront payment made by the assessee for the acquisition of leasehold rights over an immovable property for a long duration of time say 99 years could not be taken to constitute rental income at the hands of the lessor and hence lessee, not obliged to deduct TDS u/s. 194-I

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Foxconn India Developer (P.) Ltd. vs. ITO; [2016] 68 taxmann.com 95 (Mad)

In the appeal filed by the assessee, the following questions were raised before the Madras High Court:

“i)
Whether the upfront payment made by an assessee, under whatever name
including premium, for the acquisition of leasehold rights over an
immovable property for a long duration of time say 99 years, could be
taken to constitute rental income at the hands of the lessor, obliging
the lessee to deduct tax at source u/s. 194-I ?

ii) Whether in
the facts and circumstances of the case and in law, the Tribunal was
right in confirming the levy of interest u/s. 201(1-A) ?”

The High Court held as under:

“i)
The One Time Non-refundable Upfront Charges paid by the assessee was
not (i) under the agreement of lease and (ii) merely for the use of the
land. The payment made for a variety of purposes, such as (i) becoming a
co-developer (ii) developing a Product Specific Special Economic Zone
in the Sriperumbudur Hi-Tech Special Economic Zone (iii) for putting up
an industry in the land. The lessor as well as the lessee intended to
treat the lease virtually as a deemed sale, giving no scope for any
confusion. In such circumstances, we are of the considered view that the
upfront payment made by the assessee for the acquisition of leasehold
rights over an immovable property for a long duration of time, say 99
years, could not be taken to constitute rental income at the hands of
the lessor, obliging the lessor to deduct tax at source u/s. 194-I.
Hence, the first substantial question of law is answered in favour of
the appellant/assessee.

ii) Once the first substantial question
of law is answered in favour of the appellant/assessee, by holding that
the assessee was not under an obligation to deduct tax at source, it
follows as a corollary that the appellant cannot be termed as an
assessee in default. As a consequence, there is no question of levy of
interest u/s. 201(1-A).

iii) In the result, the appeal is allowed.”

Revision against a deceased person is not valid – Sections 263 and 159 and 292BB – A. Y. 2009-10 – Where revision Proceedings u/s. 263 are initiated against a deceased assessee after the Income Tax Department comes to know of his death by notice returned by postal dept with remarks “addressee deceased”, such proceedings are a nullity and are not saved by section 292BB by reason of legal heirs having co-operated in revision proceedings nor by section 159

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CIT vs. M. Hemananthan; [2016] 68 taxmann.com 22 (Mad)

For the A. Y. 2009-10, the assessment was completed u/s. 143(3) on 26/03/2011 in the case of the assessee, M. A. Margesan. Subsequently, a notice u/s. 263 of the Act dated 06/09/2013 was issued in the name of the assessee, who had died on 13/06/2013. The notice was sent by post, but was returned with the endorsement ‘addressee deceased’. This fact was intimated by the Income Tax Officer to the Assistant Commissioner, by a communication dated 23/9/2013. However, thereafter the Department served the very same show cause notice on the son (Resdpondent)of the deceased assessee through a messenger. Left with no alternative, the son engaged the services of an authorised representative, who participated in the proceedings u/s. 263. Eventually, an order was passed by the Commissioner on 21/3/2014, sustaining the show cause notice, setting aside the scrutiny assessment order dated 23/6/2011 and remitting the matter back to the Assessing Officer to pass orders afresh. The Tribunal allowed the appeal holding that the order passed u/s. 263 against a dead person is a nullity.

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

“Where revision proceedings u/s. 263 are initiated against a deceased assessee after the Income Tax Department comes to know of his death by notice returned by postal dept with remarks “addressee deceased”, such proceedings are a nullity and are not saved by section 292BB by reason of legal heirs having co-operated in revision proceedings nor by section 159. There is a distinction between proceedings initiated against a person, who is alive, but continued after his death and a case of proceedings initiated against a dead person.”

Non-resident – Royalty – Sections 9 and 90 – A. Ys. 2007-08 and 2009-10 – Royalty having same meaning under I. T. Act and DTAA – Subsequent scope in I. T. Act widening scope of “royalty” – Meaning under DTAA not changed – Assessee entitled to exemption as per DTAA

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DIT vs. New Skies Satellite BV; 382 ITR 114 (Del):

The assessee, a non-resident, derived income from the “lease of transponders” of their respective satellites. This lease was for the object of relaying signals of their customers; both resident and non-resident television channels, that wished to broadcast their programs for a particular audience situated in a particular part of the world. The assessees were chosen because the footprint of their satellites, i.e. the area over which the satellite could transmit its signal, included India. Having held the receipts taxable u/s. 9(1)(vi), the Assessing Officer held that the assessee would not get the benefit of DTAA between India and Thailand and between India and Netherlands. The Tribunal held that they were not taxable in India in view of the DTAA .

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

“i) Just because there is a domestic definition similar to the one under the DTAA , amendments to the domestic law, in an attempt to counter, restrict or expand the definition under its statute, cannot extend to the definition under DTAA . In other words, the domestic law remains static for the purpose of DTAA . Consequently, the Finance Act, 2012 will not affect article 12 of the DTAA , and it would follow that the first determinative interpretation given to the word ”royalty” in the case of Asia Satellite, when the definitions were in fact pari materia, will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve DTAA , unless the DTAA s are amended jointly by both parties to incorporate income from data transmission services as partaking the nature of royalty, or amend the definition in a manner so that such income automatically becomes royalty.

ii) T he receipts of the assessee from providing data transmission services were not taxable in India.”

Penalty – Sections 269T, 271E and 275(1)(c) – A. Y. 2005-06 – Assessment order u/s. 143(3) with direction to initiate penalty proceedings u/s. 271E passed on 28/12/2007 – Penalty order u/s. 271E passed on 20/03/2012 is barred by limitation

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Principal CIT vs. JKD Capital and Finlease Ltd.; 378 ITR 614 (Del):

For the A. Y. 2005-06, the assessment order u/s. 143(3) was passed on 28/12/2007 with a direction to initiate proceedings for penalty u/s. 271E of the Act. A show cause notice initiating penalty proceedings u/s. 271E was issued on 12/03/2012 and a penalty of Rs.17,90,000/- was imposed. The Commissioner (Appeals) deleted the penalty on the ground that, in terms of section 275(1) (c), the penalty order should have been passed on or before 30/06/2008 and therefore, penalty order passed on 20/03/2012, was barred by limitation. The Tribunal confirmed the order of the Commissioner (Appeals).

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

“i) There are two distinct periods of limitation for passing a penalty order, and one that expires later will apply. One is the end of the financial year in which the quantum proceedings are completed in the first instance. In the present case, at the level of the Assessing Officer, the quantum proceedings were completed on 28/12/2007. Going by this date, the penalty order could not have been passed later than 31/03/2008. The second possible date was the expiry of six months from the month in which the penalty proceedings were initiated. With the Assessing Officer having initiated the penalty proceedings in December 2007, the last date by which the penalty order could have been passed was 30/06/2008. The later of the two dates was 30/06/2008.

ii) The decision of the Tribunal did not suffer from any legal infirmity.”

Depreciation – Section 32 – A. Y. 1996-97 – Purchase and lease back of energy measuring devices – Lessee not claiming depreciation – Assessee entitled to depreciation

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CIT vs. Apollo Finvest (I) Ltd.; 382 ITR 33 (Bom):

In the relevant year, the assessee claimed 100% depreciation on energy measuring devices purchased from the Haryana State Electricity Board. After purchase, they were leased back to the Board, under a lease agreement dated 29/09/1995. The Assessing Officer held that the purchase and lease back transaction was in fact and in substance a finance lease agreement. He disallowed the depreciation relying on the Circular No. 2 of 2001 dated 09/02/2001 and added the amount to income of the assessee. The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) The condition precedent in a case of hire purchase is ownership of the assets and user for purposes of the business, i.e., not usage of the assets by the assessee itself but for purposes of its business of leasing.

ii) The entire case of the Department was based on Circular No. 2 of 2001, dated 09/02/2001. CIT(A) had examined the transactions and found them to be genuine. It was not disputed that the lessee had not claimed depreciation and the assessee had also taken loan against security of the leased assets.

iii) Accordingly, appeal is dismissed.”

Capital or revenue receipt – A. Y. 2009-10 – Money to be used in purchase of plant and machinery temporarily placed in fixed deposits – Inextricably linked with setting up of plant – Interest on fixed deposits is capital receipt

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Princ. CIT vs. Factor Power Ltd.; 380 ITR 474 (Del):

In the A. Y. 2009-10, the assessee received an amount of Rs. 70,75,843/- from the bank as interest on fixed deposits but did not declare that amount in the return. Instead the assessee reduced the interest amount from the capital work-in-progress. The assessee claimed that it is a capital receipt and not income. The Assessing Officer rejected the claim of the assessee and made an addition of Rs. 70,75,843/- as “income from other sources”. The Tribunal allowed the assesee’s claim and deleted the addition.

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

“i) The test that is required to be employed is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the business.

ii) The findings of fact had been returned by the Commissioner(Appeals) and had been confirmed by the Tribunal to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee. The Revenue had also not been able to point out any perversity in such finding and, therefore, the factual findings had to be taken as those accepted by the Tribunal which is the final fact finding authority in the income-tax regime.

iii) Thus, the revenue generated on account of interest on the fixed deposits would be in the nature of capital receipt and not a revenue receipt.”

Business expenditure – Section 37 – A. Y. 2003-04 – Year in which allowable – Project abandoned as unviable at capital-work-in-progress stage – No claim made in earlier year – Expenses allowable in the year of write-off

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Binani Cement Ltd. vs CIT; 380 ITR 116 (Cal):

In the A. Y. 2003-04, the assessee claimed deduction of the expenditure on a project which had been abandoned when it was found to be unviable. The expenditure was not claimed or allowed earlier as business expenditure and was written off as capital-work-in-progress in the relevant year. The Commissioner (Appeals) held that when construction/acquisition of a new facility was abandoned when it was found to be unviable at the work-in-progress stage, the expenditure did not result in an enduring advantage and such expenditure, when written off, had to be allowed u/s. 37. The Tribunal reversed the order of the Commissioner(Appeals) holding that the expenditure incurred in the earlier years could not be deducted in the A. Y. 2003-04.

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

“There was no challenge on the finding of the Commissioner(Appeals) on the facts before the Tribunal or even the appeal. There would have been no occasion to claim the deduction if the work-in-progress had completed its course. Because the project was abandoned the workin- progress did not proceed any further. The decision to abandon the project was the cause for claiming the deduction. The decision was taken in the relevant year. Thus the expenditure arose in the relevant year. The question is answered in favour of the assessee.”

ALP – International transaction – Sections 92CA and 144C – A. Y. 2012-13 – Amount in dispute exceeding Rs. 5 crore – Matter has to be referred to TPO

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Carrier Race Technologies Pvt. Ltd. vs. ITO; 380 ITR 483 (Mad):

For the A. Y. 2012-13, the assessee had entered into international transactions. The international transactions were certified to be at arm’s length, based on the transactional net margin method as defined. The transfer pricing report and the transfer pricing documentation had been filed. The Assessing Officer computed the arm’s length price on his own and completed the assessment which resulted in an addition of more than Rs. 5 crore.

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

“i) Under the CBDT Instruction dated 20/05/2003, once the disputed value crosses a sum of Rs. 5 crore, necessarily the assessing authority has to refer the matter to the Transfer Pricing Officer so as to proceed further.
ii) Since the provisions of the Act make it clear that u/s. 92CA the only option was to place the matter before the Transfer Pricing Officer, and that option had not been followed, the assessment order was not valid and had to be set aside.”

Business Income – Special Deduction – Proceeds generated from sale of scrap not includable in “Total turnover” for the determining the admissible deduction u/s. 80HHC.

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Mahavira Cycle Industries vs. CIT & Anr. [2015] 379 ITR 357 (SC)

The assessee-firm was dealing in trading and manufacturing of cycle parts. It claimed that the scrap was bi-product of manufacturing which was not part of the total turnover. On November 29, 1999, the assessee filed its original return for the assessment year 1999-2000 declaring a total income as nil. The assessee claimed deduction of Rs.1,73,53,957 u/s. 80HHC of the Act. The return was processed u/s. 143(1)(a) on March 21, 2001. The case was reopened u/s. 148 of the Act. During the assessment proceedings, it was found that the assessee had made sale of scrap amounting to Rs.79,25,489. According to the view point of the Revenue, the sale proceeds of the scrap was a part of the total turnover though the assessee had ignored to include the amount of sale of scrap while computing the deduction u/s. 80HHC of the Act. At the same time, the Assessing Office excluded the profit on sale of scrap from the profit of the business on proportionate basis for the purposes of calculation of deduction u/s. 80HHC. The Assessing Officer, thus, vide order dated July 10, 2006, modified the deduction admissible u/s. 80HHC.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals) (for short “the CIT(A)”). The Commissioner of Income Tax (Appeals) held that the Assessing Officer fell in legal error by including the sale of scrap in the total turnover for the purpose of computation of deduction u/s. 80HHC. It was also clarified that the sale of scrap shall not be considered while computing the profits of the business and, accordingly, by its order dated September 25, 2006, the Commissioner of Income Tax (Appeals) allowed the appeal.

The order giving effect to the order of the Commissioner of Income Tax (Appeals) was passed on October 3, 2006 by the Assessing Officer wherein the total income was assessed at nil. However, later on the Assessing Officer was of the opinion that while giving effect to the order of the Commissioner of Income Tax (Appeals), a mistake apparent on the face of the record had occurred as the scrap sales amounting to Rs.79,25,489 had to be excluded from the total turnover as well as from the profits of the business for computing deduction u/s. 80HHC. The Assessing Officer rectified its earlier order giving appeal effect by exercise of the powers under section 154 of the Act, vide order dated November 28, 2006 and recomputed the deduction by excluding the entire turnover of sale of scrap from the profits of the business. The assessee again filed an appeal before the Commissioner of Income Tax (Appeals) challenging the order dated November 28, 2006 of the Assessing Officer. The Commissioner of Income Tax (Appeals), however, dismissed the appeal, vide order dated December 28, 2007, in the light of its earlier order dated September 25, 2006, holding that u/s.154 the Assessing Officer was competent to initiate proceedings to exclude the turnover of sale of scrap from the profit of business for the purpose of computation of deduction u/s. 80HHC. The assessee further took the matter in appeal before the Tribunal, impugning the orders passed by the Commissioner of Income Tax (Appeals) dated December 28, 2007, and September 25, 2006. The main submission that was raised on behalf of the assessee was that the Commissioner of Income Tax (Appeals) had erred in holding that the entire turnover of sale of scrap was to be excluded from profits of business while computing the deduction u/s. 80HHC.

The Tribunal vide order dated September 29, 2008, held that the deduction u/s. 80HHC of the Act should be computed after excluding the profit on sale of scrap from the profit of business and the sale of scrap also would not form part of the total turnover, for the purpose of calculation of deduction u/s. 80HHC and dismissed both the appeals of the assessee.

The High Court held that the question regarding the inclusion of profit on sale of scrap in calculating business profit u/s. 80HHC had come up for consideration before the Kerala High Court in CIT vs. Kar Mobiles Ltd.’s case (311 ITR 478) where after examining the provisions of section 80HHC and Explanation (baa)(1) attached thereto, it was held that the profits arising from the sale of scrap shall form part of business profits referred to in the formula for determining admissible deduction u/s. 80HHC of the Act. It was also recorded that the sale of scrap shall also form part of the total turnover of the assessee.

Before the Supreme Court, the Revenue acknowledged that the controversy in hand has been adjudicated upon by the Supreme Court in CIT vs. Punjab Stainless Steel Industries (364 ITR 144), in which it was held that sale proceeds of scrap were not includible in turnover.

The Supreme Court therefore allowed the application of the assessee and disposed of the civil appeals in terms of the judgment in CIT vs. Punjab Stainless Steel Industries.

Penalty u/s. 271E -When the original assessment is set aside, the satisfaction recorded therein for the purpose of initiation of penalty proceeding would not survive – Penalty imposed on the basis of original order cannot be sustained.

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CIT vs. Jai Laxmi Rice Mills (2015) 379 ITR 521 (SC)

In respect of the assessment year 1992-93, assessment order was passed on February 26,1996, on the basis of the CIB information informing the Department that the assessee was engaged in a large scale purchase and sale of wheat but it was not filing income–tax return. Ex parte proceedings were initiated, which resulted in the aforesaid order, as per which the net taxable income of the assessee was assessed at Rs. 18,34,584. While framing the assessment, the Assessing Officer also observed that the assessee had contravened the provisions of section 269SS of the Act and because of this, the Assessing Officer was satisfied that penalty proceedings u/s. 271E of the Act were to be initiated.

The assessee carried out this order in appeal. The Commissioner of Income-tax (Appeals) allowed the appeal and set aside the assessment order with a direction to frame the assessment de novo after affording adequate opportunity to the assessee.

After remand, the Assessing Officer passed a fresh assessment order. In this assessment order, however, no satisfaction regarding initiation of penalty proceedings u/s. 271E of the Act was recorded.

It so happened that on the basis of the original assessment order dated February 26, 1996, show-cause notice was given to the assessee and it resulted in passing the penalty order dated September 23, 1996. Thus, this penalty order was passed before the appeal of the assessee against the original assessment order was heard and allowed thereby setting aside the assessment order itself. It is in this backdrop, a question arose as to whether the penalty order, which was passed on the basis of the original assessment order and when that assessment order had been set aside, could still survive.

The Tribunal as well as the High Court held that it could not be so for the simple reason that when the original assessment order itself was set aside, the satisfaction recorded therein for the purpose of initiation of the penalty proceeding u/s. 271E would also would not survive. According to Supreme Court this was the correct proposition of law stated by the High Court in the impugned order.

The Supreme Court observed that, in so far as the fresh assessment order was concerned, there was no satisfaction recorded regarding the penalty proceeding u/s. 271E of the Act though in that order the Assessing Officer wanted penalty proceeding to be initiated u/s. 271(1)(c) of the Act. The Supreme Court thus held that in so far as penalty u/s. 271E was concerned, it was without any satisfaction and, therefore, no such penalty could be levied. The Supreme Court accordingly dismissed the appeals filed by the Revenue.

Business Expenditure – Interest on borrowed capital cannot be disallowed in a case where advances are made to subsidiary out of such borrowed capital due to business expediency.

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Hero Cycle P. Ltd. vs. CIT (2015) 379 ITR 347( SC)

In the income-tax return filed by the assessee for the aforesaid assessment year, the assessee, inter alia, claimed deduction of interest paid on borrowed sums from bank under the privisions of section 36(1)(iii) (hereinafter referred to as “the Act”). The aforesaid deduction was disallowed by the Assessing Officer, vide his assessment order dated March 26, 1991, on the following two points:

(1) The assessee had advanced a sum of Rs. 1,16,26,128 to its subsidiary company known as M/s. Hero Fibres Ltd. and this advance did not carry any interest. According to the Assessing Officer, the assessee had borrowed the money from the banks and paid interest thereupon. Deduction was claimed as business expenditure but substantial money out of the loans taken from the bank was diverted by giving advance to M/s. Hero Fibres Ltd. on which no interest was charged by the assessee. Therefore, he concluded that the money borrowed on which interest was paid was not for business purposes and no deduction could be allowed.

(2) In addition, the assessee had also given advances to its directors in the sum of Rs. 34 lakh on which the assessee charged from those directors interest at the rate of 10%, whereas interest payable on the money taken by way of loans by the assessee from the banks carried interest at the rate of 18%. On that basis, the Assessing Officer held that charging of interest at the rate of 10% from the abovementioned persons and paying interest at much more rate, i.e., at the rate of 18% on the money borrowed by the assessee could not be treated for the purposes of business of the assessee.

The assessee had claimed deduction of interest in the sum of Rs. 20,53,120. The Assessing Officer, after recording the aforesaid reasons, did not allow the deduction of the entire amount and re-calculated the figures, thereby disallowed the aforesaid claim to the extent of Rs. 16,39,010.

The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals).

In so far as the advance given to M/s. Hero Fibres Ltd. was concerned, the case put up by the assessee even before the Assessing Officer was that it had given an undertaking to the financial institutions to provide M/s. Hero Fibres Ltd. the additional margin to meet the working capital for meeting any cash losses. It was further explained that the assessee-company was the promoter of M/s. Hero Fibres Ltd. and since it had the controlling share in the said company that necessitated giving of such an undertaking to the financial institutions. The amount was, thus, advanced in compliance with the stipulation laid down by the three financial institutions under a loan agreement which was entered into between M/s. Hero Fibres Ltd. and the said financial institutions and it became possible for the financial institutions to advance that loan to M/s. Hero Fibres Ltd., because of the aforesaid undertaking given by the assessee. No interest was to be paid on this loan unless dividend was paid by that company.

On that basis, it was argued that the amount was advanced by way of business expediency. The Commissioner of Income-tax (Appeals) accepted the aforesaid plea of the assessee.

In so far as the loan given to its own directors at the rate of 10 % was concerned, the explanation of the assessee was that this loan was never given out of any borrowed funds. The assessee had demonstrated that on the date when the loan was given, that is on March 25,1987, to these directors, there was a credit balance in the account of the assessee from where the loan was given. It was demonstrated that even after the encashment of the cheques of Rs. 34 lakh in favour of those directors by way of loan, there was a credit balance of Rs. 4,95,670 in the said bank account. The aforesaid explanation was also accepted by the Commissioner of Income-tax (Appeals) arriving at a finding of fact that the loan given to the directors was not from the borrowed funds. Therefore, the interest liability of the assessee towards the bank on the borrowing, which was taken by the assessee had no bearings because otherwise, the assessee had sufficient funds of its own which the assesse could have advanced and it was for the Assessing Officer to establish the nexus between the borrowings and advancing to prove that the expenditure was for non-business purposes which the Assessing Officer failed to do.

The Revenue challenged the order of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal upheld the aforesaid view of the Commissioner of Income-tax (Appeals) and, thus, dismissed the appeal preferred by the Revenue.

The appeal of the Revenue before the High Court filed u/s. 260A of the Income-tax Act, however, was allowed by the High Court, by simply following its own judgment in the case of CIT vs. Abhishek Industries Ltd. (286 ITR 1).

The Supreme court applying the ratio of its decision in S. A. Builders vs. CIT (288 ITR 1) to the facts of this case and referring to the decision of the Delhi High Court in CIT vs. Dalmia Cement (B) Ltd. (254 ITR 377) which was approved in S. A. Builders (supra), held that it was manifest that the advance to M/s. Hero Fibres Ltd. became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to meet working capital for cash losses.

The Supreme Court noted that, subsequently, the assessee-company had off-loaded its shareholding in the said M/s. Hero Fibres Ltd. to various companies of the Oswal group and at that time, the assessee-company not only got the back the entire loan given to M/s. Hero Fibres Ltd. but this was refunded with interest. In the year in which the aforesaid interest was received, the same was shown as income and offered to tax.

In so far as the loans to the directors was concerned, the Supreme Court observed that it could not be disputed by the Revenue that the assessee had a credit balance in the bank account when the said advance of Rs. 34 lakh was given. Further, as observed by the Commissioner of Income-tax (Appeals) in his order, the company had reserve/surplus to the tune of almost 15 crore and, therefore, the assessee-company could in any case, utilise those funds for giving advance to its directors.

In view of above, the Supreme Court allowed the appeal thereby setting aside the order of the High Court and restoring that of the Income-tax Appellate Tribunal.

Note:- The judgment of the Apex Court in the case of S. A. Builders was analysed in the column ‘ Closements’ of BCAJ in the month of February, 2007.

Obligation of Foreign Company to File Return of Income where Income Exempt under DTAA

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The obligation to file a return of income under the Income -tax Act, 1961 arises by virtue of section 139 of that Act. Section 139(1) provides that every person, being a company or a firm, or being a person other than a company or a firm, having total income exceeding the maximum amount not chargeable to income tax during the previous year, shall file a return of income in the prescribed manner. The provisos to this s/s. and s/s.s (4A) to (4F) of this section, require filing of returns of income by various entities, even where these entities’ income may not be chargeable to tax.

The 3rd proviso to section 139(1) provides that every company or firm shall furnish its return of income or loss before the due date in every previous year. The 4th proviso further requires every person, who is resident and ordinarily resident and who otherwise is not required to furnish a return of income, and who holds any foreign asset as a beneficial owner or otherwise, or who is a beneficiary of any foreign asset, to file a return of income. Sub-section (4A) applies to charitable or religious institutions claiming exemption u/s.s 11 and 12, s/s. (4B) applies to political parties, s/s. (4C) applies to research associations, news agencies, profession regulatory bodies, educational institutions, hospitals, mutual funds, securitisation trusts, venture capital funds, trade unions, infrastructure debt funds, etc., s/s. (4D) applies to research organisations, s/s. (4E) applies to real estate investment trusts and infrastructure investment trusts, while s/s. (4F) applies to alternative investment funds.

A foreign company may at times have income which is chargeable to tax in India under the provisions of the Act, but which may be exempt from tax by virtue of the provisions of a Double Taxation Avoidance Agreement (“DTAA”). The issue has arisen before the Authority for Advance Rulings (“AAR”) as to whether such a foreign company, whose entire Indian income is not taxable in India by virtue of a DTAA, is required to file its return of income in India. There have been conflicting rulings of the AAR on this issue, at times holding that there is no such obligation to file a return of income in India, while at times holding that a return of income has necessarily to be filed in India by a foreign company, irrespective of the fact that its income is not liable to tax in India.

Castleton Investment Ltd ’s case
The issue had arisen before the AAR in the case of Castleton Investment Ltd, in re, 348 ITR 537.

In this case, the assessee was a Mauritius company, part of a multinational group, which held shares of a listed company in India, amounting to 3.77% of the paid-up capital of the listed company. As a part of the reorganisation of the group structure, it proposed to transfer the shares held by it in the listed company in India to another group company based in Singapore, either through a transaction on a recognised stock exchange on which the shares were listed, or through an off market sale.

It filed an application for a ruling before the AAR, as to whether the capital gains arising from transfer of the shares of the listed company would be subjected to tax in India, or whether such capital gains would be exempt from tax by virtue of paragraph 4 of Article 13 of the India Mauritius DTAA . It also raised the question as to whether the provisions of section 115JB, relating to Minimum Alternate Tax (MAT) was applicable to it. One of the other questions raised by it in the application was that if the transfer of shares of the listed company was not taxable in India, whether it was required to file any return of income u/s. 139.

The authority held that the capital gains arising to the assessee was not chargeable to tax in India by virtue of paragraph 4 of Article 13 of the DTAA between India and Mauritius. As regards the issue of whether the assessee was under an obligation to file the return of income, it was argued on behalf of the assessee that since the income was not taxable in India under the Act read with the DTAA, there was no obligation on the assessee to file a return of income u/s. 139. On behalf of the revenue, it was argued that whatever may be the position under the DTAA , the applicant was bound to file a return of income as mandated by section 139.

The AAR, analysing the provisions of section 139, observed that every person, being a company, firm or a person other than a company or firm, had to file a return of income if its/his total income exceeded the maximum amount which was not chargeable to income tax. If an assessee had income which was chargeable under the Act, or after claiming the benefit of a DTAA, if it had chargeable income exceeding the maximum amount not chargeable to tax, it was bound to file a return as per the language of section 139.

The Authority observed that a person claiming the benefit of the DTAA could do so by invoking the provisions of section 90(2) of the Income-tax Act to claim such benefit. In other words, a person earning an income that was otherwise chargeable to tax under the Act had to make a claim by invoking section 90(2) of the Act for getting the benefit of a DTAA in order to enable him to be not liable to payment of tax in India. According to the AAR, even if a person was entitled to a relief under the DTAA , he had to seek it, and that would be during the consideration of his return of income or at best, while filing the return of income. The AAR accordingly was of the view that the obligation u/s. 139 did not simply disappear merely because a person was entitled to claim the benefit of a DTAA.

Addressing the argument that a DTAA overrides the Act, and was not the same as claiming an exemption under the Act, the AAR observed that surely, in terms of section 90(2), it had to be shown that the benefit of a DTAA was being claimed, that the claimant was eligible to make that claim, and that the DTAA was more beneficial to the claimant than the Act. According to the AAR, that had to be shown before the assessing authority, and this emphasised the need to file a return of income to claim such a relief. The AAR therefore held that the assessee had an obligation to file a return of income in terms of section 139. Incidentally, in this case, the AAR also held that the provisions of section 115JB relating to MAT on book profits, applied to the assessee.

A similar view had been taken by the AAR in the cases of VNU International BV, in re 334 ITR 56, SmithKline Beecham Port Louis Ltd., in re 348 ITR 556, ABC International Inc., in re 199 Taxman 211, and XYZ/ABC Equity Fund, in re 250 ITR 194, in all of which cases, the income was taxable in India under the Act, but exempt under the DTAA . In XYZ/ABC Equity Fund’s case, a case where business profits earned in India were held not liable under the DTAA in absence of a permanent establishment in India, a view has been taken that:

“‘Total income’ is to be computed in accordance with the provisions of the Income-tax Act. According to section 5, total income of a non-resident includes all income from whatever source derived which is received or is deemed to be received in India in a given year or accrues or arises or is deemed to accrue or arise to the non-resident in India during such year. Therefore, if the income received by or on behalf of the non-resident exceeds the maximum amount which is not chargeable to income-tax, a return of income has to be filed. It may be that in the final computation after all deductions and exemptions are allowed, it will turn out that the assessee will be not liable to pay any tax. The exemptions and deductions cannot be taken by the assessee on his own. He is obliged to file his return showing his income and claiming the deductions and exemptions. It is for the Assessing Officer to decide whether such deductions and exemptions are permissible or allowable. The assessee cannot be allowed to pre-judge the issues and decide for himself not to file the return, if he is of the view that he will not have any taxable income at all.”

Even in the case of Deere & Co, in re 337 ITR 277 (AAR), where the transaction of gift of shares to another group company was not chargeable to capital gains tax at all even under the Act, as well as under the DTAA , the AAR has taken the view that the assessee was under an obligation to file its return of income, following its earlier rulings.

FactSet Research System’s case
The issue had also come up before the AAR in the case of FactSet Research Systems Inc, in re 317 ITR 169.

In this case, the assessee was a US company, which maintained a database of financial and economic information, including fundamental data of a large number of companies worldwide, at its data centres located in the USA. The databases contained the published information collated, stored and displayed in an organised manner, which facilitated retrieval of publicly available information in a shorter span of time and in a focused manner by its customers, who were mostly financial intermediaries and investment banks. The customers paid a subscription to access the database.

Besides seeking a ruling from AAR as to whether such subscription received from customers in India would be taxable in India under the Income-tax Act or under the DTAA between India and the USA, the assessee also raised the question of whether it was absolved from filing a tax return in India under the provisions of section 139 with regard to the subscription fees, assuming that it had no other taxable income in India.

The AAR held that the payment of the subscription fees did not constitute royalty either under the Act [as it then stood before the retrospective amendment to section 9(1)(vi)] or under the India USA DTAA. While examining whether the subscription fees was taxable as business income under the DTAA , the AAR took note of the assessee’s submissions that the Mumbai office of a group subsidiary provided marketing and support services to its customers in India, but that, after initial discussions with the prospective customers, the contract was signed by the customer and by the assessee, and that the Mumbai office did not have the authority to conclude contracts with customers. The AAR accepted the assessee’s submission, but left it open to the Department to make enquiry as to the existence or otherwise of an agency PE, and as to the attribution of income to such PE.

As regards the question of obligation to file a return of income, based on its finding that there was no royalty income and on the facts stated by the assessee that there was no PE in India, the AAR held that there was no obligation on the assessee to file the return of income in India.

A similar view had been taken by the AAR in the case of Venenburg Group BV, in re (2007) 289 ITR 462, where the AAR observed that the liability to pay tax was founded upon sections 4 and 5 of the Act, which were the charging sections. Section 139 and other sections were merely machinery sections to determine the amount of tax. According to the AAR, relying on the decision in the case of Chatturam vs. CIT (1947) 15 ITR 302, there would be no occasion to call a machinery section to one’s aid, where there was no liability at all. Therefore, the assessee was not required to file any tax returns, though the capital gains from the proposed transaction would be chargeable to tax under the Act, but would be exempt under the DTAA .

Observations
Section 139(1) requires a filing of return of income by a person other than a company or a firm if income exceeds the maximum amount which is not chargeable to income tax. Clause(a) provides for filing of return of income by a company or a firm and in doing so does not expressly limit the requirement to the cases of income exceeding the maximum amount not chargeable to tax. This may be on account of the fact that a company or a firm does not have any maximum amount which is not chargeable to income tax, since it is liable to pay tax on its entire chargeable income at a flat rate of tax.

The definition of “company” u/s. 2(17) includes a body corporate incorporated by or under the laws of the country outside India and a foreign company would be subjected to the provisions of the Act provided its activities has some connection with India. Obviously, every company in the world cannot be required to file its return of income in India, if it does not have any source of income in India keeping in mind the fact that the scope of the Act as envisaged in section 1(2) is restricted to India and the intention is to charge income, which has some connection with India.

Section 5 of the Act in a way spells out the connection with India which creates a charge to tax, when read with section 4. For a non-resident, the charge to tax is of income received or deemed to be received in India, or income accruing or arising or deemed to accrue or arise in India.

Section 90(2) of the Act spells out the overriding nature of DTAA s. It provides that where a DTAA has been entered into by the Central Government with the Government of any country outside India for granting relief of tax or avoidance of double taxation, in case of an assessee to whom the DTAA applies, the provisions of the Act will apply to the extent that they are more beneficial to the assessee. Therefore, the provisions of the DTAA or the Act, whichever is more beneficial to the assessee, would apply. The DTAA would therefore override all the provisions of the Act, except chapter X-A relating to General Anti-Avoidance Rules, as provided in section 90(2A).

It must be remembered that the charge to tax u/s. 4 is on the total income, and the total income is computed under the Act, after various exemptions and deductions, including those available under the DTAA . If income of an assessee is completely exempt from tax, there is no charge to tax at all. Similarly, if the income does not accrue or arise or is not deemed to accrue or arise or is not received or deem to be received in India, it does not fall within the scope of total income, and there is no charge to tax of such income. Given the fact that there is no charge to tax, can the other machinery provisions relating to filing of return, computation of tax, etc. apply?

The AAR in Venenburg Group’s case (supra) rightly referred to the decision of in Chatturam’s case. In that case, the assessee was a resident of a partially excluded area, and received a notice to furnish his return of income. His assessment was completed, and his appeals to the tribunal were dismissed. A notification was issued after he had filed his return, but before completion of his assessment, directing that certain income tax laws would apply to that area where the assessee was a resident retrospectively. The Court, while holding that the assessments were validly made on the assessee, observed as under:

“The income-tax assessment proceedings commence with the issue of a notice. The issue or receipt of a notice is not, however, the foundation of the jurisdiction of the Income-tax Officer to make the assessment or of the liability of the assessees to pay the tax. It may be urged that the issue and service of a notice under Section 22(1) or (2) may affect the liability under the penal clauses which provide for failure to act as required by the notice. The jurisdiction to assess and the liability to pay the tax, however, are not conditional on the validity of the notice. Suppose a person, even before a notice is published in the papers under Section 22(1), or before he receives a notice under Section 22(2) of the Income-tax Act, gets a form of return from the Income-tax Office and submits his return, it will be futile to contend that the Income-tax Officer is not entitled to assess the party or that the party is not liable to pay any tax because a notice had not been issued to him The liability to pay the tax is founded on Sections 3 and 4 of the Income tax Act, which are the charging sections. Section 22 etc are the machinery sections to determine the amount of tax. Lord Dunedin in Whitney v. Commissioners of Inland Revenue [1926] AC 37; 10 Tax Cas 88 stated as follows:—”Now, there are” three stages in the imposition of a tax. There is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment, that ex hypothesi has already been fixed. But assessment particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery if the person taxed does not voluntarily pay”. In W.H. Cockerline & Co. v. Commissioners of Inland Revenue [1930] 16 Tax Cas 1, at p. 19, Lord Hanworth, M.R., after accepting the passage from Lord Dunedin’s judgment quoted above, observed as follows:—”Lord Dunedin, speaking, of course, with accuracy as to these taxes was not unmindful of the fact that it is the duty of the subject to whom a notice is given to render a return in order to enable the Crown to make an assessment upon him; but the charge is made in consequence of the Act, upon the subject; the assessment is only for the purpose of quantifying it He quoted with approval the following passage from the judgment of Sargant, L.J., in the case of Williams Not reported: —” I cannot see that the non-assessment prevents the incidence of the liability, though the amount of the deduction is not ascertained until assessment. The liability is imposed by the charging section, namely, Section 38 (of the English Act) the words of which are clear. The subsequent provisions as to assessment and so on are machinery only. They enable the liability to be quantified, and when quantified to be enforced against the subject, but the liability is definitely and finally created by the charging section and all the material for ascertaining it are available immediately”. In Attorney-General v. Aramayo and Others [1925] 9 Tax Cas 445, it was held by the whole Court that there may be a waiver as to the machinery of taxation which inures against the subject. In India these well-considered pronouncements are accepted without reservation as laying down the true principles of taxation under the Income-tax Act.”

These observations of the Court, when applied to provisions of section 139, clarifies that the machinery provisions cannot be divorced from the charging provisions.

There are various persons whose income is exempt from tax, and which were earlier not required to file a return of income u/s. 139, on account of the fact that the total income was exempt from tax. Wherever the legislature thought fit that such persons should file their returns of income, the law has been amended by insertion of various sub-sections to section 139, from time to time, being s/s.s (4A) to (4F) referred to earlier. There has been no such amendment requiring foreign companies whose total income is exempt under a DTAA to file their returns of income, in spite of the fact that the AAR has held as far back as 2007 that foreign companies need not do so.

As regards the argument that the availability of the exemption under the DTAA needs to be examined, and therefore the return of income needs to be filed, taking the argument to its logical conclusion, can one say that every agriculturist in India is required to file his return of income, even though he has only agricultural income, on account of the fact that, whether his income is agricultural or not and whether the exemption u/s. 10(1) is available or not, needs to be examined by the assessing officer?

Interestingly, this aspect of examination of the availability of exemption has also been a matter of controversy between the High Courts in the context of assessees exempt u/s. 10(22), with the Bombay High Court holding, in the case of DIT(E) vs. Malad Jain Yuvak Mandal Medical Centre (2001) 250 ITR 488, that the return of income was required to be filed for such examination of whether exemption was available, and the Delhi High Court, in the case of DIT(E) vs. All India Personality Enhancement & Cultural Centre For Scholars Aipeccs Society 379 ITR 464, holding that there was no such requirement to file return of income if the income was exempt u/s. 10(22).

A DTAA cannot be read in exclusion, but has to be read in conjunction with the Act. In particular, a DTAA does not create a charge to tax, but modifies the charge to tax created by the Act. The fact that DTAAs override the Act implies that, by virtue of the provisions of a DTAA , an income which would otherwise have been chargeable to tax under the Act, may not be chargeable to tax on account of the beneficial provisions of the DTAA. In such a case, one cannot take the view that the income is chargeable to tax in India under the Act, even though it is exempt from tax, since the DTAA takes such income outside the purview of sections 4 and 5 of the Act.

Given this background, the liability to file returns by a foreign company can perhaps be viewed by looking at the different possible situations relating to tax liability of a foreign company in India.

The first would be a situation where the income is chargeable to tax under the Act, as well as under the DTAA . In such a case, there is no doubt that the foreign company is liable to file its income tax return in India.

The second would be a situation where the income is exempt under the Act, as well as under the DTAA. In such a case, since even under the Act, there is no income chargeable to tax, the machinery section, section 139, cannot be brought into play, since it would serve no purpose. Therefore, in such a case, there would be no obligation to file the return of income in India.

The third will be the situation where the income is chargeable to tax under the provisions of the Act, but is exempt from tax by virtue of the DTAA beneficial provisions. In such a case, as discussed above, the better view would be that there is again no obligation to file the return of income in India, in the absence of a specific provision containing such requirement.

The fourth will be the situation where the foreign company has no activity in India and its income cannot be taxed in India under the Act and therefore, it is under no obligation at all to file its return of income under the Act, in India.

DTAA – “International traffic” under Art 8 of India-Singapore DTAA – Journey of a vessel between two Indian ports is “international traffic” if the same is part of a larger journey between two foreign ports – It is only when a ship or aircraft is operating ‘solely’ between places in a contracting state that the transport is excluded from scope of “international traffic”

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CIT vs. Taurus Shipping Services; [2015] 64 taxmann. com 64 (Guj):

The
assessee is a company and had acted as an agent of three vessels which
had transported goods from Kandla Port to Visag. The freight beneficiary
was one M/s. Jaldhi Overseas Pte Limited, who claimed benefit of DTAA
between India and Singapore. The vessels had undertaken such freight
transportation during the journey from Singapore elude to Dubai. The
Assessing Officer came to the conclusion that such transportation
between Kandla to Visag cannot be considered as international traffic as
defined in DTAA between India and Singapore. The Tribunal held in
favour of the assessee relying on the decision of the Tribunal in
similar cases.

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

“i)
U nder Art 8 of India-Singapore DTAA , the journey of a vessel between
two Indian ports is “international traffic” if the same is part of a
larger journey between two foreign ports. It is only when a ship or
aircraft is operating ‘solely’ between places in a contracting state
that the transport is excluded from scope of “international traffic”.

ii)
It is not the case of the Revenue that the journey being undertaken by
such vessels in question were confined between the two ports in India
either routinely or even in individual isolated case.”

Depreciation – Additional depreciation – Section 32(1)(iia) – A. Y. 2008-09 – Assessee is engaged in the business of FM radio broadcasting, producing, recording, editing and making copies of the radio programme amounts to manufacture/production of article or things – Radio programme produced is “thing” if not an “article” as Dictionary meaning of the word envisages that “thing” could have intangible characteristic – Assessee is entitled to additional depreciation

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CIT vs. Radio Today Broadcasting Ltd.; [2015] 64 taxmann.com 164 (Delhi):

Assessee is engaged in the business of FM radio broadcasting. In the A. Y. 2008-09, the assessee had claimed additional depreciation u/s. 32(1)(iia). AO rejected the Assessee’s contention that the above radio programmes were “the articles or things produced by it”. The AO held that “by no stretch of imagination can ‘production of radio programmes’ be considered as ‘production of article or thing’. The additional depreciation claimed was disallowed. 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) Radio programme produced is “thing” if not an “article” as Dictionary meaning of the word envisages that “thing” could have intangible characteristic. The production of radio programmes involved the processes of recording, editing and making copies prior to broadcasting.

ii) When the radio programmes is made there comes into existence a ‘thing’ which is intangible, and which can be transmitted and even sold by making copies. ‘manufacture’ could include a combination of processes. In the context of ‘broadcast’ it could encompass the processes of producing, recording, editing and making copies of the radio programme followed by its broadcasting. The activity of broadcasting, in the above context, would necessarily envisage all the above incidental activities which are nevertheless integral to the business of broadcasting.

iii) In that view of the matter, the Assessee can be said to have used the plant and machinery acquired and installed by it after 31st March 2005 for manufacture/ production of an ‘article or thing.’

 iv) Since the Assessee has satisfied the requirements of Section 32 (1) (iia) of the Act, it is entitled to the additional depreciation as claimed by it for the assessment year in question.”

Charitable purpose – Exemption u/s. 11 – Management and development programme and consultancy charges part and parcel of Institute of management studies set up by assessee – No element of business in conducting management courses – Surplus funds applied towards attainment of objects of institute – Income generated from giving various halls and properties – Assesse entitled to exemption u/s. 11

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DIT(E) vs. Shri Vile Parle Kelvani Mandal; 378 ITR 593 (Bom):

The assessee trust set up thirty schools and colleges. The Tribunal held that the management and development programme and consultancy charges were part and parcel of the institute of management studies set up by the assessee. The Tribunal found that the element of business was missing in conducting the management courses and that some surplus was generated which itself was applied towards the attainment of the object of the educational institute and that separate books of account could not be insisted upon. The Tribunal held that the assessee is entitled to exemption u/s. 11.

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

“i) The finding of fact arrived at by the Tribunal could not be termed perverse and it was in consonance with the factual aspect regarding the activities of the trust and the object that it was seeking to achieve.

ii) The letting out of halls for marriages, sale and advertisement rights had not been found to be a regular activity undertaken as a part of business. The income was generated from giving various halls and properties of the institution on rental only on Saturdays and Sundays and on public holidays when they are not required for educational activities, and this could not be said to be a business which was not identical to attainment of the objects of the trust. This being merely an incidental activity and the income derived from it having been used for the educational institute and not for any particular person, and separate books of account having been maintained, this income could not be brought to tax.”

Penalty – Concealment of income – Section 271(1) (c): A. Y. 2001-02 – Allowability of deduction pending consideration by High Court in appeal – Admission of appeal makes it clear that addition is debatable – No concealment of income – Penalty could not be imposed

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CIT vs. Ankita Electronics Pvt. Ltd.; 379 ITR 50 (Karn):

The assessee is engaged in the business of computer consumables. Assessee’s quantum appeal was admitted by the High Court and was pending adjudication u/s. 260A . The Tribunal cancelled the penalty imposed by the Assessing Officer u/s. 271(1)(c) on account of the fact that the quantum appeal has been admitted by the High Court.

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

“i) In the present case, the details of the claim were provided by the assessee. The question whether or not on such details, deduction could be allowed was still in doubt. Such questions had been admitted for determination by the High Court in the appeal filed by the assessee. The mere admission of the appeal by the High Court on the substantial question of law would make it apparent that the additions made were debatable.

ii) There was no concealment of income or furnishing of inaccurate particulars of income. Penalty could not be imposed u/s. 271(1)(c) of the Act.”

Assessment – Sections 143(2), 143(3) and 147 – A. Ys. 2006-07 to 2011-12 – Assessment u/s. 143(3) – Condition precedent – Issue of valid notice u/s. 143(2) – Difference between issue and service of notice – Deeming fiction – Section 292BB not applicable to non-issue of notice

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ACIT vs. Greater Noida Industrial Development Authority; 379 ITR 14 (All): 281 CTR 204 (All):

The assessee challenged the validity of the assessment orders before the Tribunal on the following ground:

“That the order of learned Assessing Officer is void ab initio in so much as no mandatory notice u/s. 143(2) of the Income-tax Act, 1961, was issued at any stage of the assessment proceedings.”

The Tribunal allowed the appeals and quashed the assessment orders holding that the mandatory requirement of issuance of a notice u/s. 143(2) was not followed and, therefore, it was incurable and that the defect in the assumption of jurisdiction by the Assessing Officer could not be cured by taking recourse to the deeming fiction u/s. 292BB of the Act.

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

“i) Since the Assessing Officer failed to issue notice within the specified period u/s. 143(2) of the Act, the Assessing Officer had no jurisdiction to assume jurisdiction u/s. 143(2) of the Act and this defect could not be cured by recourse to the deeming fiction provided u/s. 292BB of the Act.

ii) Consequently, the Tribunal was justified in setting aside the orders of the Assessing Officer.”

Deduction u/s 80-IB(10) – Delay in Receipt of Completion Certificate

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Issue for Consideration
Section 80-IB(10) of the Income-tax Act, 1961 provides for a deduction of 100% of the profits derived from the undertaking of developing and building a housing project approved before 31st March 2008 by a local authority. One of the conditions, contained in clause(a) of s. 80IB(10), subject to which this deduction is granted is that the undertaking has commenced development and construction of the housing project on or after 1st October 1998, and completes such construction:

(i) where the housing project has been approved by the local authority before 1st April 2004, on or before 31st March 2008;

(ii) where the housing project has been approved by the local authority on or after 1st April 2004 but not later than 31st March 2005, within 4 years from the end of the financial year in which the housing project was approved by the local authority;

(iii) where the housing project has been approved by the local authority on or after 1st April 2005, within 5 years from the end of the financial year in which the housing project was approved by the local authority.

The explanation to clause (a) of this sub-section clarifies that the date of completion of construction of the housing project shall be taken to be the date on which the completion certificate in respect of the housing project is issued by the local authority.

Given the fact that there are often delays in issue of the completion certificate by the local authority, the question has arisen before the courts as to whether the benefit of the deduction would be available in a situation where the completion certificate is issued by the local authority beyond the specified time limit, though the actual construction may have been completed within the permissible time-limit. The issue has also arisen as to whether this time limit applies to housing projects whose plans have been approved prior to 1st April 2005, and whether the deduction would be available where the completion certificate has been obtained belatedly, though the housing project has been certified to have been completed within the specified time period.

While the Gujarat and the Delhi High Courts have taken the view that the deduction would be available in cases where completion certificate is not obtained within the prescribed time, the Madhya Pradesh High Court has taken a contrary view and held that the deduction would not be available in such cases.

CHD Developers’ case
The issue came up for consideration before the Delhi High Court in the case of CIT vs. CHD Developers Ltd. 362 ITR 177.

In that case, the assessee, a real estate developer launched a project in Vrindavan, for which it obtained the approval from the Mathura Vrindavan Development Authority on 16th March 2005. It applied for a completion certificate from the authority on 5th November 2008. For assessment year 2007-08, the assessee claimed a deduction u/s. 80-IB(10).

The assessing officer disallowed the claim for deduction u/s. 80-IB(10), on the ground that the completion certificate had not been granted for the project. The Commissioner(Appeals) upheld the order of the assessing officer.

The Tribunal allowed the benefit of the deduction to the assessee on the following grounds:

(i) the approval for the project was granted on 16th March 2005, before the insertion of the time limits for completion of the project u/s. 80-IB(10), which came into effect from 1st April 2005. Prior to insertion of these time limits for completion of the project, the only requirement of time was that the development and construction of the housing project should commence on or after 1st October 1998. Therefore, at the time of sanction of the project, there was no condition for production of completion certificate.

(ii) It is a settled position in law that the law existing at a particular point of time will be applicable unless and until it is specifically made retrospective by the legislature. The insertion of the requirement of completion certificate within a particular time frame was applicable prospectively and not retrospectively. Had the legislature so intended, nothing prevented the legislature from doing so.

(iii) It was evident from the letter filed for request of completion certificate on 5th November 2008 that the construction had been completed and the request was made for grant of completion certificate of phase I. Since the development authority had neither said that the project was not complete, nor completion certificate was issued to the assessee, the project was presumed to be complete as on 5th November 2008.

(iv) if such certificate was not issued to the assessee, the assessee could not be penalised for the act of an authority on which it had no control, in the absence of any variation or allegation.

Reliance was placed by the tribunal on the decision in the case of CIT vs. Anriya Project Management Services (P) Limited 209 Taxman 1 ( Karn.) for the proposition that the amendment was prospective and did not apply to projects approved before 1st April 2005, where the court had held that another amendment made at the same time to section 80-IB(10), inserting the definition of built-up area, was prospective in nature applicable from 1st April 2005, and did not apply to housing projects approved by the local authority prior to that date.

Besides various other decisions of the Tribunal, the Tribunal had also relied upon the decision of the Gujarat High Court in the case of CIT vs. Tarnetar Corporation 362 ITR 174, in deciding the issue in favour of the assessee.

The Delhi High Court, after considering the decision of the tribunal, noted the decisions of the Karnataka High Court in the case of Anriya Project Management Services (P) Limited (supra), the Bombay High Court in the case of CIT vs Brahma Associates 333 ITR 289, and the Gujarat High Court in the case of Manan Corpn. vs. Asst CIT 214 Taxman 373, all of which had taken the view that the amendments to section 80-IB(10) , effective 1st April 2005 were prospective in nature, and not retrospective.

The Delhi High Court also considered instruction number 4 of 2009 dated 30th June 2009 issued by the CBDT, where the CBDT had clarified that the deduction u/s. 80- IB(10) could be claimed on a year-to-year basis, where the assessee was showing profit from partial completion of the project in every year, and in case it was later found that the condition of completion of the project within the specified time limit of 4 years had not been satisfied, the deduction granted to the assessee in earlier years should be withdrawn. The Delhi High Court inferred from the said instruction that in the post-amendment period, strict adherence to completion period of 4 years was insisted upon where project completion method was followed, and that the limitation of period did not exist prior to the amendment. If an assessee was following percentage of completion method, it would have got the deduction for the earlier years prior to the amendment, but because it was following completed contract method, and the contract was completed after the amendment, the deduction was being denied to it. According to the Delhi High Court, the amendment could not discriminate against those assessees following project completion method.

The Delhi High Court noted that in the case before it, the approval of project for commencement was given prior to the amendment, which required the obtaining of completion certificate within the end of the 4 year period. It agreed with the Gujarat High Court, that the application of such stringent conditions, which were left to an independent body such as the local authority, which was to issue the completion certificate, would have led to not only hardship, but absurdity. Accordingly, the Delhi High Court held that the assessee was entitled to the deduction, and upheld the decision of the Tribunal.

A similar view was taken by the Gujarat High Court in the case of CIT vs. Tarnetar Corporation (supra). In that case, the assessee had applied and got approval for the housing project from the local authority before 1st April 2004, and therefore, had to complete the project by 31st March 2008. It completed the construction in the year 2006 and applied for completion certificate in February 2006. This application was rejected in July 2006 for technical reasons, and thereafter, after fresh effort, the completion certificate was received on 19th March 2009. In the meanwhile, several residential units were sold and occupied without the necessary permission before the last date for completion of construction, for which the assessee paid a penalty and got such occupation regularised.

The Gujarat High Court held that it was not in doubt that the assessee had completed the construction well before 31st March 2008. It was true that formal completion certificate was not granted by the municipal authority by that date, and that section 80-IB linked the completion of the construction to the completion certificate being granted by the local authority. However, according to the Gujarat High Court, not every condition of the statute could be seen as mandatory. If substantial compliance of the conditions was established on record, the court could take the view that minor deviation therefrom would not vitiate the very purpose for which deduction was being made available. Accordingly, the Gujarat High Court had held that the assessee was entitled to the benefit of the deduction in that case.

A similar view was also taken by the Bombay High Court in the case of CIT vs. Hindustan Samuh Awas Ltd. 377 ITR 150, holding that mere delay in receipt of completion certificate could not result in denial of the deduction.

Global Reality’s case
The issue came up again recently before the Madhya Pradesh High Court in the case of CIT vs. Global Reality 379 ITR 107.

In this case, the approval for the housing project was granted by the Municipal Corporation before 31st March 2004. The assessee on completion of the project applied to the Municipal Corporation for completion certificate on 16th January 2008. The Inspector of the Municipal Corporation inspected the site on 27th February 2008. The completion certificate was however issued on 4th May 2010, and the certificate did not mention the date of completion of the project. By a subsequent letter dated 23rd March 2011, the Municipal Corporation clarified that the date of completion of the project was 27th February 2008.

The assessee claimed deduction u/s. 80-IB(10) on the basis that the project was completed before the cutoff date, but this claim was rejected by the assessing officer on the ground that in spite of repeated opportunity given to the assessee during assessment proceedings, the completion certificate obtained before 31st March 2008 was not produced before him, and that on inquiry, in December 2008, the Municipal Corporation had confirmed that completion certificate had not been issued to the assessee till that date, and that the application of the assessee was still being processed. The assessee’s appeal was dismissed by the Commissioner(Appeals), but was allowed by the Income Tax Appellate Tribunal.

Before the High Court, it was argued on behalf of the revenue, that the tribunal had misconstrued the effect of section 80-IB(10)(a), as amended, and that the benefit was available only to specified housing projects, which were completed within the prescribed time. According to the revenue, the express provision introduced in the form of amended clause (a) of section 80-IB(10) must be construed on its own, and not on the logic applicable to other situations mentioned in the same section, where the courts had taken the view that the amended law applied only to projects approved on or after 1st April 2005. The stipulation contained in clause(a) was in the nature of withdrawal of benefit of deduction in respect of projects which had not or could not be completed within the stipulated time. The date of completion of construction had been defined to be the date on which the completion certificate was issued by the local authority. For that, sufficient time had been provided to the developer to complete the project and obtain completion certificate from the local authority well within time.

According to the revenue, in case of housing projects approved before the amendment, they were required to be completed before 31st March 2008, irrespective of the date of approval. In respect of housing projects approved on or after 1st April 2004, they were required to be completed within 4 years from the end of the financial year in which the housing project was approved by the local authority.

It was argued on behalf of the Department that as per clause (ii) of the explanation to section 80-IB(10)(a), compliance of this condition was mandatory. Any other interpretation would result in rewriting the amended provision and render the legislative intent of explicitly providing for the date on which completion certificate was issued by the local authority otiose. The very nature of amended provision in clause (a) showed that it could not be construed as having retrospective effect. Further, developers of housing projects had been treated evenly by giving 4 years time frame from the coming into force of the amendment to complete their projects and for obtaining completion certificate from the local authority with the same time. Any other interpretation would be flawed, as it would result in treating similarly placed persons unequally, as projects approved prior to the amendment would get an unlimited extended period to obtain completion certificate from the local authority to avail of the deduction. By providing an identical cut off period for obtaining completion certificate to similarly placed persons, no hardship whatsoever had been caused.

It was further argued that it was always open to the legislature to provide benefit of deduction to be availed of during a specified period on fulfilment of certain conditions. The 4 years time frame given to the respective class of developers could, by no standards, be said to be asking them to do something which was impossible. Further, it was not a case of withdrawal of benefit or of any vested rights in the concerned assessee, since no developer could claim vested right to continue with the project for an indefinite period. It was argued that the amended provision could neither be termed as amounting to change of any condition already specified nor could it said to be unreasonably harsh or producing absurd results.

On behalf of the assessee, reliance was placed on the Supreme Court decisions in the cases of CIT vs. Veena Developers 227 CTR 297 and CIT vs. Sarkar Builders 375 ITR 392, where the Supreme Court had held that section 80-IB(10) as a whole had prospective application and would not apply to housing projects approved by the local authority before the amendment. It was claimed that in any case, an assessee, who maintained books of accounts on work in progress method, as in the assessee’s case, would not be covered by the condition of obtaining completion certificate before the cut-off date. It was further argued that there was a substantial compliance with the condition, even if the completion certificate issued by the local authority was issued after the cut-off date, since the certificate unambiguously recorded the date of completion of project before the cutoff date. The assessee had no control over the working of the local authority, and once the application for issue of completion certificate had been filed prior to 31st March 2008, but the local authority finally issued the certificate after 1st April 2008, confirming that the project was in fact completed before the cut-off date, the assessee must be granted the benefit of the deduction. Taking a contrary view would result in asking an assessee to do something which was impossible and not within its control. The delay caused by the local authority in processing and issuing the completion certificate could not be the basis of denial of benefit to the assessee. Besides placing reliance on the two Supreme Court decisions, the assessee relied on various other High Court decisions, including those of the Gujarat High Court in the case of Tarnetar Corporation (supra) and of the Delhi High Court in the case of CHD Developers Ltd (supra).

The Madhya Pradesh High Court referred to the decision of the Supreme Court in the case of Sarkar Builders (supra). It noted that the issue in that case, as well as in the case of Veena Developers, related to non-compliance with the conditions in other clauses of section 80-IB(10), in particular, clause (d), relating to the commercial area not exceeding 5% of the total project area, and not in relation to the conditions in clause (a), which were the subject matter of the appeal before the High Court. In the case of Sarkar Builders, the Supreme Court had noted that all other conditions were fulfilled by the assessee, including the date by which approval was to be given and the date by which the projects were to be completed. The Supreme Court observed that if clause (d) was applied to projects approved prior to the amendment and completed within the specified time, it would result in an absurd situation and would amount to expecting the assessee to do something which was almost impossible. It was on that basis that the Supreme Court held that the provisions such as clause (d) would have prospective application, and would not apply to projects approved prior to the amendment. Since clause (d) was treated as inextricably linked with the approval and construction of the housing project, the assessee could not be called upon to comply with a new condition, which was not in contemplation either of the assessee or even of the legislature, at the time when the housing project was given approval by the local authority.

Further, the Madhya Pradesh high court observed, the Supreme Court noted that if such a condition was held applicable to projects approved prior to the amendment, then an assessee following the project completion method of accounting would not be entitled to the entire deduction claimed in respect of such housing project merely because he offered his profits to tax in assessment year 2005-06 or a subsequent year, while an assessee following the work in progress method of accounting would be entitled to the deduction u/s. 80-IB(10) up to assessment year 2004-05, and would be denied the benefit only from assessment year 2005-06. According to the Supreme Court, it could never have been the intention of the legislature that the deduction u/s. 80-IB(10) available to a particular assessee should be determined on the basis of the method of accounting followed. The Supreme court therefore held that section 80-IB(10)(d) was prospective in nature, and would not apply to projects approved prior to the amendment.

The Madhya Pradesh High Court, then referred to the decisions of the Delhi High Court in the case of CHD Developers and of the Gujarat High Court in the case of Tarnetar Corporation. The court noted that though the Delhi High Court had referred to the prospective applicability of clause (d) of section 80-IB(10), which was dealt with by the Supreme Court in Veena Developers and Sarkar Builders cases, it finally concluded on the basis that the application of a stringent condition, which was left to an independent body, such as a local authority, which was to issue the completion certificate, would result in causing hardship to an assessee and also result in absurdity. The court further noted that the Gujarat High Court had found that the assessee completed the construction well before the last date, and also sold several units which were completed and actually occupied, and it had also applied for the permission to the local authority before that date and the court’s decision was on the basis of the finding recorded by the tribunal that the construction was completed in 2006, and that the application for completion certificate was submitted to the principal authority in February 2006. It was in the context of those facts that the Gujarat High court went on to observe that not every condition of statute can be seen as mandatory and that a substantial compliance of such condition was substantiated, the court can take the view that minor deviation thereof would not vitiate the very purpose for which deduction was being made available. The Madhya Pradesh High Court having noted the above stated facts and the reasons for the decisions by the high courts, expressed its inability to agree with the decisions of the Delhi and Gujarat High Courts.

According to the Madhya Pradesh High Court, the Supreme Court decisions in the case of Veena Developers and Sarkar Builders had to be understood only in the context of a new condition stipulated regarding the built-up area of the project, by way of an amendment through clause (d), with which the assessee could not have complied at all, even though the construction of the housing project was otherwise in full compliance of all conditions set out in the approval given by the municipal authority. In the view of the Madhya Pradesh High Court, clause (a) could not be considered as a condition that was sought to be retrospectively applied, and that too incapable of compliance, since it dealt with the time frame within which the incomplete housing project was expected to be completed to get the benefit of the prescribed deduction.

According to the Madhya Pradesh High Court, it could not be treated as a new condition linked to the approval and construction, or having retrospective effect as such, since it gave at least 4 years timeframe to both class of housing projects, those approved prior to 1st April 2004 or after 1st April 2004. The 4 years period obviously had prospective effect, though limiting the period for completion of the project to avail of the benefit and such period of 4 years could not be said to be unreasonable, harsh, absurd or incapable of compliance.

The Madhya Pradesh High Court was of the view that it was also not a case of withdrawal of vested right of the developer, since no developer could claim vested right to complete the housing project in an indefinite period. The right arising from section 80-IB was coupled with the obligation or duty to complete the project in the specified time frame. If the developer did not complete the housing project within the specified time, it would not receive that benefit. According to the Court, the provision for claiming tax deduction for profits could certainly prescribe reasonable conditions and time frame for completion of the project in larger public interest.

Addressing the argument as to whether the stipulation contained in clause(a) of section 80-IB(10) could be said to be directory, the Madhya Pradesh High Court observed that considering the substantial benefit offered by section 80-IB of 100% of the profits, which was a burden on the public exchequer due to waiver of commensurate revenue, and the purpose underlying the same, the stipulation for obtaining completion certificate from the local authority before the cut-off date must be construed as mandatory. The fact that compliance with this condition was dependent on the manner in which the proposal was processed by the local authority, could not make the provision a directory requirement. According to the Madhya Pradesh High Court, it was a substantive provision mandating issuance or grant of completion certificate by the local authority before the cut-off date, as a precondition to get the benefit of tax deduction. Otherwise, it would be open to an assessee to rely on other circumstances or evidence to plead that the housing project was complete, requiring enquiry into those matters by the tax authorities, in the absence of a completion certificate. According to the High Court, if the argument of substantial compliance were accepted, it would lead to uncertainty about the date of completion of the project, which was the hallmark for availing of the benefit of tax deduction. It was only with this intent, according to the High Court, that the legislature had laid down that the date of completion of construction was taken to be the date on which the completion certificate was issued by the local authority. The Madhya Pradesh High Court observed that to interpret it to include a subsequent certificate issued after the cut-off date would not only result in rewriting of the express provision, but also run contrary to the unambiguous position pronounced in the section and would be against the legislative intent.

According to the Madhya Pradesh High Court, the provision should then have read as “date of completion of construction of the housing project shall be taken to be the date certified by the local authority in that behalf”, irrespective of the date of issuance of such certificate by the local authority. The High Court observed that only if the assessee was able to prove that the completion certificate was in fact issued by the local authority before the cut-off date, but could not be produced by the assessee within the time due to reasons beyond its control, the argument of substantial compliance of the provision could be tested. Any other interpretation would result not only in uncertainty, but the finding regarding the date of completion also would depend upon the subjective satisfaction of the assessing authority and invest wide discretion in that authority, which eventually would lead to litigation. According to the High Court, if the assessee had failed to comply with the condition of obtaining completion certificate from the local authority before the cut-off date, it must bear the consequence thereof of the denial of benefit of tax deduction offered to it.

The Madhya Pradesh High Court therefore held that the issuance of completion certificate after the cut-off date by the local authority, though mentioning the date of completion of the project before the cut-off date, did not fulfil the conditions specified in 80-IB(10)(a) read with explanation (ii), and accordingly the assessee was not entitled to the benefit of the deduction.

Observations
The condition of obtaining the completion certificate within the prescribed time is applicable to all the projects irrespective of the date of commencement of project and, looked at from the said point of view, the issue on hand has wider implications. The ratio of the decision of the Madhya Pradesh High Court, if held to be laying down the correct law on the subject, can have serious ramifications. The courts generally, while dealing with the requirement of obtaining certificates by prescribed dates, have taken a liberal view in favour of assesses in cases where the compliance in principle is shown to have been ensured. On touchstone of this test, it may be fair to demand that the benefit of deduction u/s. 80IB(10) should not be denied in cases where the project has been completed by the prescribed date but the application for certificate has been delayed or the cases where the application has been made within the prescribed time but the certificate is issued after the prescribed date. This position in law can be supported by the ratio of the decisions of the Delhi and Gujarat High Courts, squarely and fairly. In our considered opinion, no issue should revolve around the situation discussed in this paragraph and the assesseee should be conferred with the benefit of deduction in respect of the profits and gains derived from a housing project.

In cases where the project has commenced on or after the amendment, difficulties would arise where the assessee has failed to even complete the project by the prescribed date. In such cases, it may be difficult for the assessee to be the beneficiary of the deduction unless the courts read down the explanation to clause(a) or grant deduction on liberal construction of incentive provisions. It may not be possible otherwise to claim deduction, as the legislature has not only forewarned the assessee but has given sufficient time for completion, unless of course the courts read down the said explanation that stipulates time for completion, independent of the main provision. It may not be appropriate to suggest that the condition providing for obtaining of certificate from a local body is absurd, simply because it is a local body. It may also not be possible for the post amendment projects to be covered by the ratio of the decision in Veena Developers’ case, which dealt with the pre amendment project, and that too a pre amended assessment year. Nor will it be possible to be covered by the ratio of the decision in the case of Sarkar Builders’ case which dealt with the pre amended project and post amendment assessment of such a project. The post amendment projects claiming deduction in post amendment assessment years can be said to be claiming deduction with eyes wide open, and would be expected to comply with the conditions. Seeking a ‘read down’ is the best option for them.

As regards the pre-amendment projects, claiming deduction in the post amendment assessment years’, the decision of the Madhya Pradesh High Court has added an interesting dimension by separating the condition of clause (a) from the remaining conditions in clauses(b) to (d) of section 80IB(10). Subsequent to the decision of the Supreme Court in the case of Sarkar Builders, it was widely believed that such project would not be subjected to the conditions of the post amendment period. The decision has expressly dissented with the decisions of the Gujarat High Court delivered on similar facts. The Madhya Pradesh High Court has chosen to distinguish the ratio of the Supreme Court decision by restricting the scope of the said decision to clauses (b) to (d). Whether such was the view of the apex court or not, that can be clarified by the court only. In the meanwhile, we hereafter explain how the views of the Gujarat and Delhi High Courts represent a better view.

The whole basis of the Madhya Pradesh High Court order seems to be on the fact that the approval granted is not inextricably linked to the period within which the project construction would be completed. It needs to be kept in mind that the provisions of section 80-IB applied only to large projects, where the project was on the size of a plot of land which had a minimum area of one acre. Obviously, such large projects take a substantial time to complete.

The approval granted by the local authority is of the plans of the project. In most cases, the developer would have planned a phased development of the project, on the basis of which the plans were submitted. If at the point of time of approval of the plans, there was no time limit for completion of the project, a subsequent time limit of 4 years laid down for completion of the project may not suffice to complete the phased development. In such a case, the developer would either need to change the entire plan of the project, so as to ensure completion within the time limit of 4 years, which process would need an amended approval, or would suffer the loss of the deduction u/s. 80-IB in the event of failure to do so. At times, a change of plan may also not be possible on account of the fact that the construction may have been carried out in a particular manner based on the original plan, which does not permit of alteration to reduce the time period of construction.

Therefore, in most cases, the approved plan and the period of construction are inextricably linked to each other, in the same manner as the breakup of the constructed area into commercial area and residential area is linked to the plans approved. Therefore, the ratio of the Supreme Court decisions in Veena Developers and Sarkar Builders applies equally to the period of construction, as it applies to the percentage of commercial area in the project. This commercial aspect does not seem to have been properly appreciated by the Madhya Pradesh High Court.

Secondly, the Madhya Pradesh High Court held that the time limit for issue of the certificate is mandatory, and not directory, on the ground that otherwise an assessing officer would have to make enquiries and use his discretion to find out the correct date of completion. Various decisions of High Courts and the Supreme Court, in the context of different time periods specified under the Income-tax Act, have held that the purpose of laying down a time limit for furnishing of a certificate or audit report is to ensure that the assessing officer is able to complete the assessment on the basis of the certificate or audit report, and that so long as the certificate or audit report is available before the completion of assessment, that would suffice to give the benefit of the deduction or exemption to the assessee, even though the law may have prescribed a time limit for filing of the certificate or audit report, beyond which limit it was actually furnished. In these decisions, it has been invariably held that while the requirement of furnishing of the certificate or audit report is mandatory, the requirement of the time limit within which it has to be furnished is directory. A few such cases where this view has been taken by the Supreme Court is in the cases of CIT vs. Nagpur Hotel Owners Association 247 ITR 201 in the context of application for accumulation u/s. 11(2), CIT vs. G.M. Knitting Industries (P.) Ltd 376 ITR 456 in the context of audit certificate for additional depreciation, CIT vs. AKS Alloys (P.) Ltd. 376 ITR 456 in the context of audit report for deduction u/s. 80-IB, etc.

Therefore, though the obtaining of the certificate should be regarded as mandatory, the time limit for obtaining such certificate should be regarded as directory, particularly so as the actual issue of the certificate is not within the control of the assessee, once he has applied for it within the specified time.

Once the plans had been approved prior to the amendment, and all the conditions then applicable for claim of deduction u/s. 80-IB(10) had been fulfilled, viz. commencement of development of the project on or after 1st October 1998, minimum size of plot of land of one acre, and residential units having a maximum built-up area as specified, the assessee had a right to claim the deduction u/s 80-IB. That was a vested right, which could not have been taken away by a subsequent amendment, adding an additional condition, as rightly held by the Supreme Court in the cases of Veena Developers and Sarkar Builders.

The whole purpose of obtaining the certificate of completion from the local authority was to ensure that the project has been completed within the specified time. This ensured that the objective of the deduction u/s. 80-IB(10) of making residential housing available was fulfilled. So long as the completion of the project before the specified date could be demonstrated, even if it was by a certificate issued on a later date, and so long as that evidence was available at the time of assessment, the benefit of the deduction should be granted to the assessee.

As held by the Supreme Court in the case of Bajaj Tempo Ltd .196 ITR 188, in case of an incentive provision, the law should be interpreted in a liberal manner so as to grant the benefit of the deduction of the assessee, rather than deny it to the assessee on technical grounds, particularly where there is substantial compliance by the assessee. In that case, the Supreme Court observed:

“A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. Since a provision intended for promoting economic growth has to be interpreted liberally the restriction on it too has to be construed so as to advance the objective of the section and not to frustrate it.”

Therefore, the view taken by the Delhi and Gujarat High Courts, that the belated obtaining of the completion certificate beyond the prescribed time limit in cases where the plans were approved prior to 1st April 2005, is not fatal to the assessee’s claim for deduction u/s. 80- IB, so long as the completion of the housing project is within the prescribed time, seems to be the better view of the matter.

In any case, if a part of the project is completed and certificate of completion has been received for such part in time, the assessee would certainly be entitled to deduction in respect of the part of the project which has been completed, as held by the Gujarat High Court in the case of CIT vs. B. M. and Brothers 42 taxmann.com 24.

Penalty –Assessee having already paid tax and interest u/s. 201 (1) and (1A) so as to end the dispute with the Revenue, the deletion of penalty levied u/s. 271C did not give rise to any substantial question of law.

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CIT vs. Bank of Nova Scotia [2016] 380 ITR 550 (SC)

The Tribunal after noting the case of the assessee that it had already paid the tax and interest u/s. 201(1) and (1A) so as to end the dispute with Revenue deleted the penalty levied u/s. 271C following the decision of Delhi High Court in CIT vs. Itochu Corporation [2004] 268 ITR 172 (Del) and CIT vs. Mitsui and Co. Ltd. [2005] 272 ITR 545 (Del).

The High Court rejected the appeal of the Revenue on the ground that no substantial question of law, arose in the matter.

On further appeal, Supreme Court dismissed the appeal of the Revenue holding that there was no substantial question of law, the facts and law having properly and correctly been assessed and appreciated by the Commissioner of Income-tax (Appeals) as well as by the Income- Tax Appellate Tribunal.

Section 263 – An Analysis

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Introduction:
1.1 Section 263 empowers the Commissioner of Income Tax to revise any order passed under the Income-tax Act, 1961, “ the Act” which is erroneous insofar as it is prejudicial to the interest of the revenue. These are special and wide powers conferred upon the Commissioner of Income Tax, to bring to tax any loss of revenue from the orders passed under the Act. At the same time, these are not unfettered powers but are specific and are subject to conditions contained in the section for invoking the jurisdiction. A bare reading of section 263, makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo moto under it is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent—if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue—recourse cannot be had to section 263(1) of the Act.

1.2 In the above background, in many cases, the ground of invoking jurisdiction u/s. 263 is found to be non-inquiry or failure to make inquiry by the Assessing Officer that warrants revision of the order passed by the Assessing Officer. The law had been settled that if there is a failure to make enquiry which causes prejudice to the interest of the revenue, the Commissioner gets the jurisdiction to revise the order. By the Finance Act 2015, an amendment has been brought in by adding an Explanation to section 263 providing that an order passed by the Assessing Officer shall be deemed to be erroneous insofar as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, the order is passed without making inquiries or verification which should have been made. The Amendment has raised concerns about the exact implications of the Amendment and the possible interpretations of the Explanation. An attempt is therefore made to analyse the law that prevailed and the ramifications of the Amendment.

2. Failure to make inquiry – Erroneous:
2.1 Whenever the orders passed by the Assessing Officers are found to be cryptic and without any inquiry, thereby accepting the return of income as filed by the assessee, the orders have been held to be erroneous and prejudicial to the interest of revenue. The Supreme Court in case of Rampyari Devi Sarogi vs. CIT ( 67 ITR 84) and in Smt. Tara Devi Aggarwal vs. CIT ( 88 ITR 323) have upheld the orders u/s. 263 on this ground. In these cases, the assessment record showed lack of inquiry by the Assessing Officers and mere acceptance of the returned income. The Commissioners made independent inquiries to show that the order caused prejudice to the revenue. In these facts, the Supreme Court came to the conclusion that passing an order without any inquiry would make the order erroneous.

The Delhi High Court in case of Ghee Vee Enterprises vs. Add CIT ( 99 ITR 375) has given a further dimension to the aspect of ‘failure to make inquiry.’ It held that the position and function of the ITO is very different from that of a civil Court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil Court in the absence of any rebuttal. The civil Court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The ITO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word “erroneous” in section 263 emerges out of this context. It is because it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would make such an inquiry necessary. The word “erroneous” in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.

It implies that the Assessing Officer is bound to carry out prudent inquiries so as to ascertain and assess the correct income of the assessee. If they are lacking, the order becomes erroneous.

3. Failure to make inquiry – Scope:
The ground of failure to make inquiry would cover different situations. They can be categorised as follows

i. There is a complete failure to make inquiry while passing the order. The entire assessment order is passed summarily. The record does not show any examination or verification of the details furnished. The AO called for the basic details of income returned and accepted the same. The record, order sheet as well as the order is cryptic and silent about the application of mind by the AO. In this situation, the simple ground of non-enquiry by AO is sufficient to make the order erroneous and could warrant action u/s. 263 by CIT.

ii. In a given case, the AO may have completely missed verification of one aspect of income and no facts or details have been called for and furnished by the assesse. This lack of inquiry then results into prejudice to the revenue. In this situation both the error as well as prejudice to revenue is so apparent and glaring which could not have escaped the attention of any prudent Assessing Officer. E.g. the assessee had significant borrowings and at the same time, there are significant non-business advances to sister concerns. The rates of interest are variable. If the AO does not make any inquiry whatsoever about the claim of interest, the order may become erroneous if the facts prima facie indicate prejudice to the revenue.

iii. The AO has made enquiries about the income of the assessee. After applying his own judgment about the inquiries to be carried out, the income was assessed by him. The record is speaking about the inquiries, examination and application of mind by the AO. In such situation, CIT feels that a particular inquiry should have been carried out in a particular manner which has not been done or the AO should have taken particular view about a particular income. On such ground of failure of inquiry, action for revision is invoked. The Bombay High Court in a well- known decision in the case if CIT vs. Gabriel India Ltd. ( 203 ITR 108) has dealt with the situation and explained the law as –An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO , who passed the order, unless the decision is held to be erroneous. Cases may be visualised where ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and, left to the Commissioner, he would have estimated the income at a higher figure than the one determined by the ITO . That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interest of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo moto revision because the first requirement, namely, the order is erroneous, is absent.”

In CIT vs. Honda Siel Power Products Ltd., the Delhi High Court held that while passing an order u/s. 263, the CIT has to examine not only the assessment order, but the entire record of the profits. Since the assessee has no control over the way an assessment order is drafted and since, generally, the issues which are accepted by the AO do not find mention in the assessment order and only those points are taken note of on which the assessee’s explanations are rejected and additions/disallowances are made, the mere absence of the discussion would not mean that the AO had not applied his mind to the said provisions. In this connection, reference is invited to the decisions in CIT vs. Mulchand Bagri (108 CTR 206 Cal.) CIT vs. D P Karai (266 ITR 113 Guj) and Paul Mathews vs. CIT ( 263 ITR 101 Ker).

4. Failure to make inquiry vs. Application of mind:
4.1. In Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 (SC) the Apex Court considered the scope of the word “erroneous” and held that:

“The provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase “prejudicial to the interests of the Revenue” is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO , the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase “prejudicial to the interest of the Revenue” has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue, for example when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.”

4.2 The above observations of the Supreme Court highlight the fact that if there is an application of mind by the AO, the order cannot become erroneous. The question has to be decided by evaluating the process of assessment undertaken by the AO. If the assessment has been done after proper application of mind and thereby adopting a permissible course of action, it cannot be said to be erroneous.

5. Prejudice to the Revenue:
5.1 The lack of inquiry making the order erroneous has to be coupled with prejudice to the interest of the revenue. As explained by Bombay High Court in case of Gabriel India Ltd., there must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. There must be material available on record called for by the Commissioner to satisfy him, prima facie, that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo moto revision under such circumstances will amount to arbitrary exercise of power.

6. Principles Emerging:
The following principles emerge from the above discussion-

1. Failure to make inquiries coupled with prejudice to revenue makes the order vulnerable for revision u/s. 263 being erroneous and prejudicial to the interest of the revenue.

2. For evaluating as to whether inquiry was made or not, the complete record at the time of assessment has to be seen. Absence of discussion in the assessment order is not sufficient to conclude that there has been no noninquiry.

3. The ground of lack of inquiry so as to substitute the judgment of CIT over that of AO is not permissible. If AO has used his judgment and passed the order in accordance with law, CIT cannot substitute his judgment about how a particular assessment has to be done by carrying out enquiries in a particular manner.

4. The powers of revision cannot be invoked to correct each and every mistake but only when the order is erroneous on account of an incorrect assumption of facts or an incorrect application of law or without applying the principles of natural justice or without application of mind or inquiry.

5. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue, for example when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.

7. Amendment by Finance Act 2015:

7.1 With effect from 1st June 2015, an Explanation is added to section 263 which provides as under-

“Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,—

(a) the order is passed without making inquiries or verification which should have been made;

(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.”

8. Memorandum Explaining the Provisions:
The memorandum explaining the provisions states as under

“Revision of order that is erroneous in so far as it is prejudicial to the interests of revenue

The existing provisions contained in sub-section (1) of section 263 of the Income-tax Act provides that if the Principal Commissioner or Commissioner considers that any order passed by the assessing officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making an enquiry pass an order modifying the assessment made by the assessing officer or cancelling the assessment and directing fresh assessment. The interpretation of expression “erroneous in so far as it is prejudicial to the interests of the revenue” has been a contentious one. In order to provide clarity on the issue it is proposed to provide that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,—

(a) the order is passed without making inquiries or verification which, should have been made;
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.”

9. Analysis of the Amendment:
9.1 A plain reading of the above amendment implies that the said Explanation has been added for clarifying the scope of the words ‘erroneous so far as prejudicial to the interest of the revenue.’ The term was not been defined under the Act. But by way of this amendment, the scope of the term has been clarified. While clarifying the position, four different situations have been contemplated so as to call an order to be ‘erroneous so far as prejudicial to the interest of the revenue.’ The provision further creates a fiction as to order being erroneous in so far as prejudicial to the interest of revenue if the Commissioner or Principal Commissioner forms an opinion about the existence of four situations stated therein.

9.2 Considering the phraseology or the words used in the amendment and also considering the fact that the amendment pertains to procedural or machinery provisions, the same is perceived as clarificatory and may apply to pending proceedings. The amendment can also be understood to be a “Declaratory Law” thereby explaining or clarifying the law that prevailed all along. Needless to mention, assessee would like to argue that the amendment is substantive in nature and therefore would operate prospectively. In that situation, the question would become debatable and would be left for the Courts to decide.

9.3 The question arises as to whether it implies a subjective opinion of the Commissioner or Principal Commissioner and having formed such opinion, the jurisdiction u/s. 263 can be invoked without any fetters. The question has relevance to mainly to first situation as well as second situation regarding inquiry not done by AO as it deals with more of a factual or practical situation and may lend unfettered powers to the Commissioner for revising the order. The other two situations mainly consider the incorrect application of law by not applying the relevant circular or judicial decisions. Extending the question further, does the provision mean merely a formality on the part of the Commissioner or Principal Commissioner to form an opinion and invoke the jurisdiction?

9.4 To answer the above question, the scheme of revision provisions under the Act has to be considered. The power of revision is vested with Commissioner which is perceived to be his exclusive jurisdiction to be excercised upon satisfaction of conditions stated therein. The powers can be invoked on his satisfaction arrived after examination of record. The words satisfaction or opinion of Commissioner perceived in section 263 has been explained by Bombay High Court in Gabriel India Ltd. as- “ It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on records to satisfy it in that regard. If the action of the authority is challenged before the Court, it would be open to the Courts to examine whether the relevant objective factors were available from the records called for and examined by such authority. Any other view in the matter will amount to giving unbridled and arbitrary power to revising authority to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. It is quasi-judicial power hedged with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly it is an administrative act, but on examination, “to consider”, or in other words, to form an opinion that the particular order is erroneous in so far as it is prejudicial to the interest of the Revenue, is a quasijudicial act because on this consideration or opinion the whole machinery of reexamination and reconsideration of an order of assessment, which has already been concluded and controversy about which has been set at rest, is again set in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from records called for by the Commissioner.”

The above principles explained by the Bombay High Court therefore enable us to reach to the conclusion that the formation of opinion cannot be arbitrary and left at the whims of the authority this being a quasi judicial act that would be subjected to judicial review by higher authorities.

9.5 The further question arises about the application of fiction as to whether it allows an interpretation that having formed an opinion about non inquiry the order becomes erroneous and prejudicial to the interest of revenue. The fiction impliedly raises a presumption. It can be seen that the factum of inquiry is always verifiable with reference to record. If after forming an opinion by Commissioner about non inquiry, the record speaks about proper inquiry and application of mind by AO, the presumption should be open for rebuttal. More so since the question of inquiry is a factual aspect. The Explanation therefore can be interpreted to raise a rebuttable presumption. The rebuttal can be made before the higher authorities contesting the validity of action with reference to the actual record. The possibility of rebuttal can also be supported with the power of revision being a quasi judicial act subjected to judicial review.

9.6 The law that prevailed all along with reference to the application of mind by AO or adopting a permissible course of action in law cannot be understood to have been disturbed. Since the Income-tax Act gives exclusive jurisdiction of assessment to the Assessing Officer, the act of assessment is perceived as an independent quasi judicial act. The Commissioner under the provisions of revision could not substitute his judgment over the Assessing Officer about the manner in which the assessment or inquiry or a particular view to be adopted. The said amendment nowhere makes a departure from the above position by the phraseology or the contextual meaning.

9.7 The Explanatory Memorandum with reference to the said amendment refers to the intention behind the said amendment. In view of that, the interpretation of ‘erroneous in so far as prejudicial to the interest of the revenue’ was a contentious issue. In order to provide clarity on the issue, an amendment has been brought in by way of an Explanation. Considering the law explained by Courts with reference to the expression used in the amendment, there does not appear to be any deviation from the principles evolved. It broadly defines the scope of ‘erroneous in so far as prejudicial to the interest of the revenue’ and provides support to the main section. Reading the main provision along with the Explanation, the Scheme of revision with reference to the principles laid down, remains the same.

9.8 In the first situation, the words used are ‘if the order is passed with making inquiries or verification which should have been done’. The expression ‘which should have been done’ suggests an objective test to be applied so as to highlight necessity of making appropriate inquiry for assessing the correct income and absence of which may cause prejudice to the revenue. The condition of ‘prejudice to the interest of the revenue’ also cannot be said to have toned down or understood to have impliedly complied with formation of an opinion.

10. Conclusion:
The amendment by way of an Explanation to section 263 may give rise to extreme interpretations or an impression that the power of revision is at the whims of Commissioner. The Department is likely to adopt such interpretation and use the same causing to revision of the orders passed by the Assessing Officers at the sweet will of the Commissioners. However, considering the law laid down and on proper interpretation of the amendment, such view is unlikely to be supported by higher judicial forums. Let us hope that the judiciary would make a just interpretation and avoid giving unfettered powers to the Commissioner.

Section 69 – Treating the long-term capital gain disclosed on the sale of shares as non genuine, bogus and sham transaction – Off market transaction not unlawful

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SLP Dismissed CIT vs. Mukesh R. Marolia SLP No. 20146 / 2012 dt. 27th January, 2014; (Mukesh R. Marolia vs. Addl. CIT (2006) 6 SOT 247 (Mum.); Affirmed by Hon’ble Bombay High Court Judgement CIT vs. Mukesh R. Marolia ITA No. 456 of 2007, dated 7th Sept. 2011;)

Statement of one Mukesh Choksi was recorded during the search proceedings u/s. 132 on the group companies run by him, and it was recorded that the group companies are involved in business of accommodation entries. The transaction carried out by the assessee were outside stock exchange i.e. off market transaction. The assessing officer treated sale proceed of shares as unexplained investment u/s. 69 of the Act and added the same as income of the assessee. The Tribunal held that Mr. Mukesh Choksi has nowhere in the statement, recorded during the search proceedings, has referred to the Appellant; or made any statement against the appellant. The statement given by him is general in nature wherein he has described the manner in which accommodation of entries were carried out by his group companies. Books of account maintained by assessee clearly reflected the transaction. It is not unlawful to carry out sale or purchase transaction outside the floor of the Stock exchange. Off market transactions are not illegal. The Hon’ble Bombay High Court upheld the order of ITAT . The Revenue filed SLP before Supreme Court which was dismissed.

Business expenditure – Capital or revenue – A. Y. 1996-97 – Assessee carrying on business of letting out properties – Payment to tenant for vacating premises – Rental income earned by the assessee is assessed under the head ‘Business’ and the compensation of Rs. 53,50,000/- paid by it for obtaining possession from lessee/tenant so as to earn higher income is an admissible revenue deduction

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Shyam Burlap Company Ltd. vs CIT; 281 CTR 458 (Cal):

The
assessee was the owner of the property and was carrying on the business
of letting out. The assesee had paid compensation of Rs. 53,50,000/- to
obtain possession from the lessee/tenant so as to earn a higher rental
income. For the A. Y. 1996-97, the assessee offered the rental income as
business income and claimed the deduction of compensation of Rs.
53,50,000/- as revenue expenditure. The Assessing Officer and the
Tribunal held that the rental income is assessable as house property
income and disallowed the claim for deduction.

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

“i) Though in earlier assessment years the assessee had shown rental income as “income from house property”’ however, in this assessment year it has claimed rental income as business income, in view of the object as set out in clause 4 of its Memorandum of association. Since the object in the said memorandum permitted the assessee to carry on business in letting out properties and as 85% of the income of the assessee was by way of deriving rent and lease rentals, the income from rent constituted business income.

ii) Observations of the Tribunal that the assesssee had all along shown the income under the head “income from house property” cannot be a ground for treating the income as business income.

iii) Rental income earned by the assessee was assessable under the head ‘business’ and the compensation of Rs. 53,50,000/- paid by it for obtaining possession from lessee/tenant so as to earn higher income is an admissible revenue deduction.”

Deductibility of Brokerage from Rent u/S. 23

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The annual value of a house property is chargeable to income tax u/s. 22 of the Income-tax Act, 1961, under the head “Income from House Property”. Section 23 provides for a deeming fiction where under “the annual value of any property shall be deemed to be:

(a) The sum for which the property might reasonably be expected to let from year to year; or
(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or
(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year, and owing to such vacancy, the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable.”

The proviso to section 23 allows a deduction from the annual value, of the municipal taxes actually paid during the year. Two other deductions are also permitted by section 24 – standard deduction @ 30% of the annual value, and a deduction for the interest payable on borrowed capital, where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital.

In a case where a property has been let out, the actual rent receivable during the year would be the annual value of the property in accordance with section 23, which value will be further reduced by the deductions specified in section 24 of the Act. In many cases where a property is let out, a broker is appointed to identify a tenant, and brokerage is paid to the broker for finding the tenant. The question has arisen before the Tribunal as to whether such brokerage paid to a broker for letting of the property on rent is an allowable deduction from the actual rent receivable in computing the annual value of the property or not?

While a bench of the Mumbai Tribunal has taken the view that such brokerage is an allowable deduction, another bench of the Mumbai Tribunal has taken a contrary view that brokerage is not an allowable deduction in computing the income from house property .

Govind S. Singhania’s case
The issue came up before the Mumbai bench of the Tribunal in the case of Govind S. Singhania vs. ITO in ITA No. 4581/Mum/2005 dated 3 April 2008 (reported in July 2008 40-A BCA Journal 449).

In that case, relating to assessment year 2002-03, the assessee gave his office premises at Mittal Towers on lease to a company, and incurred expenses of Rs.30,000 for stamp duty and Rs.85,000 for brokerage on account of renewal of lease agreement. The assessing officer held that these expenses were not allowable in computing the income under the head Income from house property, because they did not fall within the category of allowable expenses that were specified by the legislature. The Commissioner (Appeals) confirmed the order of the assessing officer.

Before the Income Tax Appellate Tribunal, it was contended by the assessee that it could not have earned the rental income without incurring these expenses. The stamp duty had to be paid as per the provisions of the Stamp Act on the lease agreement, as a mandatory requirement and since the assessee had let out the premises to the company through a broker, the payment of brokerage was also an obligation on the part of the assessee, which he had to incurr in order to earn the rent. It was further argued that the assessee could have asked the tenant to pay the stamp duty and brokerage, and could have adjusted such expenditures by reducing the amount of rent, in which case the assessee would have got a lower rent equivalent to the net rent. Therefore, such expenses were overriding in nature in relation to the rent receivable and were claimed to be allowable in computing the annual value. It was further argued that it was not the actual gross rent, which was to be treated as annual letting value, but the rent (net of these expenses), which was to be treated as actual rent received by the assessee and as annual letting value.

Reliance was also placed on various decisions of the Mumbai bench of the Tribunal in the context of deductibility of the society maintenance and non-occupancy charges paid to the Society, where it had been held by the tribunal that it was the rent net of such charges, which was to be taken as the annual letting value.

The Tribunal observed that it was not in dispute that without incurring those expenses, the assessee would not have earned the rental income. Further, in computing the annual value u/s. 23(1)(b), rental income received or receivable by the owner had to be taken into consideration and such rent had to be taken net of the expenses on stamp duty and brokerage, and that the said expenses had to be deducted from the very beginning, since whatever came into the hands of the assessee was only the net amount.

The Tribunal also found substantial force in the argument of the assessee that had these expenses been borne by the tenant, and only the net rent paid by the tenant, then the amount of such net rent only would have been taken to be the annual letting value u/s. 23(1)(b). Accordingly, the tribunal held that the annual letting value should be taken net of stamp duty and brokerage paid by the assessee.

Radiant Premises’ case
The issue again recently came up before the Mumbai bench of the Tribunal in the case of Radiant Premises (P) Ltd. vs. ACIT 61 taxmann.com 204.

In this case, relating to the assessment year 2010-11, the assessee had earned a gross rental income of Rs. 1.29 crore in respect of its office premises. It had paid a brokerage of Rs.1.12 crore for sourcing and securing a suitable licensee for the office premises, being 2 months of the rent and 2% of the security deposit. After reducing 30% of the annual value amounting to Rs.0.05 crore, the assessee offered the net rental income of Rs.0.12 crore to tax under the head “Income from House Property”.

The assessing officer did not allow the deduction of Rs. 1.12 crore paid towards the brokerage, holding that the computation had to be done only in accordance with the provisions of section 23, and only standard reduction was allowable u/s. 24. According to the assessing officer, there was no express provision regarding allowance of any expenditure such as brokerage, commission, etc. for determination of the annual value of the property, except the taxes levied by the local authority on payment basis in respect of the property. Relying upon the decisions of the tribunal in the cases of Tube Rose Estates (P) Ltd. vs. ACT 123 ITD 498 (Del) and ACIT vs. Piccadilly Hotels (P) Ltd .97 ITD 564, the assessing officer disallowed the claim of brokerage paid by the assessee.

The Commissioner (Appeals) confirmed the disallowance of brokerage on the ground that such deduction of brokerage was nowhere specified either in section 23 or in section 24.

Before the Income Tax Appellate Tribunal, it was argued that the payment of brokerage was directly related to the earning of rental income, and had therefore to be deducted from the gross rent, since section 23(1)(b) contemplated the actual rent received/receivable. It was argued that in various decisions, the Tribunal had held that stamp duty charges on license agreement, maintenance charges paid to the Housing Society, etc. were allowable u/s. 23 itself, and on the same analogy, brokerage also had to be allowed.

On behalf of the Department, it was argued that no expenditure could be allowed other than those deductions or expenses as specified in sections 23 and 24. It was further argued that most of the decisions cited by the assessee were in respect of maintenance charges paid to the society, which stood on a different footing, because such charges were for the maintenance of the property itself so that rights in the property could be enjoyed.

The Tribunal negatived the plea of the assessee that the phrase “actual rent received or receivable” meant the rent, net of deductions, actually received in the hands of the assessee. According to the tribunal, what was contemplated u/s. 23 was that the annual value of the property, which was let out should be the amount of rent received or receivable by the owner from the tenant/licensee. The first and foremost condition was that the amount should be in the nature of rent as previously agreed upon between the 2 parties for the enjoyment of rights in the property let out against payment of rent. The deductions envisaged in sections 23 and 24 were only in respect of municipal taxes, 30% of the actual value and interest payable on capital borrowed for acquisition, construction, repair, etc.

According to the Tribunal, the word “rent” connoted a return given by the tenant or occupant of the land or structure to the owner for the possession and use thereof. The rent was a sum agreed between the tenant and the owner to be paid at fixed intervals for the usage of such property. The phrase “rent received” and “rent receivable” contemplated the amount received for the enjoyment of the property and certain rights in the property by the tenant. According to the Tribunal, if there was a charge directly related to the rental income or for the property without which the rights in the property could not be enjoyed by the tenant, then it could be construed as part and parcel of enjoyment of the property from where it was received, and then such charges could be held to be allowable from the rent received or receivable. However, in the Tribunal’s view, the brokerage paid to the third party had nothing to do with the rental income paid by the tenant to the owner for enjoying the property. It could therefore not be said to be a charge that had been created in the property for enjoying the rights, and at best, it was only an application of income received/receivable from the rent.

The Tribunal referred to the decision of the Delhi Tribunal in the case of Tube Rose Estates (supra), for the proposition that where services had been provided by a third party to whom the brokerage was payable, the value of such services was not included in the rent. In that case the Tribunal had also distinguished a situation where part of the rent might have become payable to a third party before it accrued to the assessee in terms of an overriding charge, in which case there was diversion of rent at source, and to that extent, could be claimed as deduction while computing the income from house property. In case of payment of brokerage, the Tribunal had held that there was no charge created on the property, much less an involuntary charge enforceable by law, which could be claimed as a deduction.

The Mumbai Tribunal expressed a view that if expenses such as brokerage, professional fees, etc. were held to be allowable, then numerous other expenses like salary or commission to an employee/agent who collected the rent may also be held to be allowable, which was not the mandate of the law. It noted that the decisions cited before it mainly pertained to maintenance charges paid to a society, which was held to be an allowable deduction u/s. 23 itself. It distinguished between maintenance charges and brokerage paid, on the basis that maintenance charges were paid for the very maintenance of the property so as to enjoy the property itself, whereas brokerage had nothing to do with the property or the rent, and was given to a third party, who had facilitated the agreement between the landlord and the tenant to rent the property. It also distinguished the case where stamp duty had been held to be allowable, on the ground that stamp duty was directly related and was in connection with the lease agreement for renting of the property.

The Mumbai bench of the Tribunal therefore held that payment of brokerage could not be allowed as deduction either u/s. 23 or u/s. 24, and confirmed the disallowance of the brokerage paid while computing the income from house property.

A similar view had also been taken by the Mumbai bench of the Tribunal in the case of Township Real Estate Developers (India) (P) Ltd. vs. ACIT 51 SOT 411.

Observations
The issue, as far as section 23 is concerned, revolves around the true meaning of the term ‘actual rent received or receivable’. This term is interpreted in a manner that leaves a room for deducting such expenditure from rent where the expenditure is found to be directly related or in connection with the agreement for letting or receipt of rent. This part even Mumbai Tribunal records with approval in the Radiant Premises’ case. Brokerage is an expenditure that is incurred for earning rent. It is also an expenditure connected to the agreement of lease. It is also not in dispute that a broker, on payment of the brokerage, fetches you the best possible rent. There are no two views about it. In fact, brokerage is more directly related to the earning of better rent than the stamp duty and maintenance charges.

Once it is admitted that the said term used in section 23 is capable of inclusion, it is fair to not limit its scope in an arbitrary manner by selecting a few expenditures in preference to the other few. The interpretation that encourages the deduction is preferable, more so when the facts suggest that the brokerage paid has the effect of fetching a better rent and perhaps a better lessee. If society charges are found to be diverted under an overriding title, there does not appear to be logic in leaving the brokerage behind.

In Radiant Premises’ case (supra), the Tribunal took the view that the brokerage was not a diversion of the rent by overriding title, whereas the society charges was a case of diversion of rent by overriding title. While doing so, the Tribunal failed to appreciate that the brokerage preceded the earning of the rent, and that had it not been for the payment of the brokerage, there may have been no earning of rent. Further, society charges are payable as a consequence of letting out on rent, and arise subsequent and consequent to the accrual of rent. Therefore, if society charges are a diversion of income by overriding title, brokerage is all the more so. Both are inextricably linked with the rental income, and paid to third parties, other than the landlord and the tenant.

It is improper to deny deduction of an expenditure on brokerage simply on the ground that the payment was made to a third party. Payment of stamp duty or maintenance charges are always made to the third party and not to a lessee. In any case, the lessor in rare cases makes a payment to the lessee and therefore the condition that the expenditure should qualify for deduction on the basis of the status of the payee is not tenable. In Tube Rose’s case (supra), the Tribunal held that brokerage was not deductible, as it was paid to a third party. That logic does not appear to be correct, since society charges, which are also paid to a third party, have been held to be deductible.

A separate deduction was provided for collection charges vide section 24(1)(vii), till assessment year 1992-93,. Thereafter the scope of deduction u/s. 24(1)(i) for repairs was enhanced to include collection charges, and the quantum of deduction thereunder was raised to 1/5th of the annual value. Subsequently, with effect from assessment year 2002-03, various other deductions allowable till then, u/s. 24, such as insurance premium, annual charge, land revenue tax, etc. along with the deduction for repairs and collection charges, were replaced by a standard deduction u/s. 24(1)(a) at 30% of the annual value.

It does not appear to be appropriate to hold that substitution of new section 24 for its older version eliminated any possibility altogether for claim of any deduction even u/s. 23 of the Act. One cannot conclude that the standard deduction of 30% is meant to cover even collection charges as well, as was done by the Tribunal in Township Real Estate Developers’ case.

The Tribunal, in the case of Banwari Lal Anand vs. ITO 62 ITD 301 (Del), for assessment year 1989-90, in the context of section 24, held that “any sum spent to collect rent”, referred to in section 24(1)(vii), should be interpreted to mean “any amount spent with an aim to collect rent” and in that view of the matter, brokerage was held allowable as an amount spent to collect rent, being an amount spent with an aim to collect rent. Does this mean that after the amendment, brokerage would now not be allowable?

It is true that in computing the income under each head, only such expenses are allowed that are specifically allowed under the specified chapters that deal with the respective head of income. Admitting this position does not rule out the fundamental understanding that only such an income can be subjected to tax which is the real income. Taxing the gross rent without deduction of the brokerage paid is a case of taxing an unreal income.

Lastly, the logic that, had the parties provided for lower rent, with brokerage payable by the tenant, the annual value would have been such lower rent, is an extremely compelling argument to support deduction of brokerage and the logic is approved in Govind Singhania’s case (supra). Can a mere change of form, without change in substance, change the annual value?

No doubt two views may be possible on the subject, the better view appears to be that, just as society charges and stamp duty are held to be allowable deductions in computing the annual value u/s. 23 itself, brokerage paid for obtaining a tenant too shall also be allowable as a deduction in computing the annual value u/s. 23. It is suggested that the law should be amended to put the issue beyond doubt by providing for a specific deduction, as doing so would make the taxation more realistic.

Deduction of tax at source – Rent – Definition – Landing and parking charges paid by Airlines to Airports Authority of India are not for the use of the land but are charges for services and facilities offered in connection with the aircraft operation at the airport and hence could not be treated as “rent” within the meaning of section 194-I

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Japan Airlines Co. Ltd. vs. CIT (Civil Appeal No.9875 of 2013) CIT vs. Singapore Airlines Ltd. (Civil Appeal No.9876 – 9881 of 2013) [2015] 377 ITR 372 (SC)

The International Civil Aviation Organization (“ICAO”) to which India is also a Contracting State has framed certain guidelines and rules which are contained in the Airports Economic Manual and ICAO’s Policies on Charges for Airports and Air Navigation Services. All member States abide by the guidelines and rules prescribed for various charges to be levied for facilities and services provided including landing/parking charges.

The Airports Authority of India (AAI) under the provisions of the Airport Authority of India Act, 1994, has been authorised to fix and collect charges for landing, parking of aircrafts and any other services and facilities offered in connection with aircraft operations at airport and for providing air traffic services such as ground safety services, aeronautical communications and navigational aides, meteorological services and others at the airport.

Japan Airlines Ltd. (JAL), a foreign company incorporated in Japan is engaged in the business of international air traffic. It transports passengers and cargo by air across the globe and provides other related services. JAL is a member of the International Air Transport Agreement (“IATA”) and during the financial year 1997- 98 (assessment year 1998-99) it serviced inward and outbound air traffic to and from New Delhi, India. The AAI levied certain charges on the JAL for landing and also for parking its aircrafts. JAL paid the charges after deducting tax at source u/s. 194C of the Act. The JAL received letter dated 2nd August, 1996, from the AAI informing it that the AAI had applied to the income-tax authorities for exemption from the tax deduction and were awaiting the clearance. It was further stated in the said letter that in the meanwhile JAL should deduct the tax on landing and parking charges at 2 % u/s. 194C. JAL, accordingly started making TDS at 2 %. In the relevant assessment year, it paid the AAI a sum of Rs.61,60,486 towards landing and parking charges. On this amount, TDS comes to Rs.1,57,082 when calculated at 2 % which was deducted from the payments made to the AAI and deposited with the Revenue. The JAL thereafter filed its annual return in Form 26C for the financial year 1997-98.

The Assessing Officer passed an order under section 201(1) of the Act on 4th June, 1999, holding the JAL as an assessee-in-default for short deduction of tax of Rs.11,59,695 at source. He took the view that payments during landing and parking charges were covered by the provisions of section 194-I and not under section 194C of the Act and, therefore, the JAL ought to have deducted tax at 20 % instead of at 2 %. The JAL filed the appeal against this order before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) accepted the contention of the JAL and allowed the appeal, vide order dated 31st January, 2001, holding that landing and parking charges were inclusive of number of services in compliance with the International Protocol of the ICAO. The Revenue challenged the order of the Commissioner of Income-tax (Appeals) by filing an appeal before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal dismissed this appeal on 25th October, 2004, confirming the order of the Commissioner of Income-tax (Appeals).

The Revenue persisted with its view that the matter was covered by section 194-I and therefore, it went to the High Court by way of further appeal u/s. 260A of the Act. Two questions were raised (i) whether the Tribunal was correct in holding that the landing/parking charges paid by the JAL to the AAI were payments for a contract of work u/s. 194C and not in the nature of “rent” as defined in section 194-I; and (ii) whether the Tribunal was correct in law in holding that the JAL was not an assessee-indefault. The High Court allowed the appeal by answering the questions in favour of the respondent following its earlier decision in the case of United Airlines vs. CIT. In that case, the High Court had taken the view that the term “rent” as defined in section 194-I had a wider meaning than “rent” in the common parlance as it included any agreement or arrangement for use of land. The High Court further observed that the use of land began when the wheels of an aircraft touched the surface of the airfield and similarly, there was use of land when the aircraft was parked at the airport.

A Special Leave Petition was filed against the aforesaid judgment of the High Court in which leave was granted.

In another appeal which involved Singapore Airlines Ltd., the Commissioner of Income-tax/Revenue had filed the appeals before Supreme Court as the High Court of Madras in its judgment dated 13th July, 2012, had taken a contrary view holding that the case was covered u/s. 194C of the Act and not u/s. 194-I of the Act thereof. The Madras High Court had taken the note of the judgment of the Delhi High Court but had differed with its view.

The Supreme Court observed that the two judgements were in conflict with each other and it had to determine as to which judgment should be treated in consonance with the legal position and be allowed to hold the field. According to the Supreme Court since the main discussion in the impugned judgment rendered by the High Court of Delhi and also the High Court of Madras centered around the interpretation that is to be accorded to section 194-I of the Act, it would first discuss as to whether the case is covered by this provision or not.

The Supreme Court held that from the reading of section 194 I, it became clear that TDS is to be made on the “rent”. The expression “rent” is given much wider meaning under this provision than what is normally known in common parlance. In the first instance, it means any payments which are made under any lease, sub-lease, tenancy. Once the payment is made under lease, sublease or tenancy, the nomenclature which is given is inconsequential. Such payment under lease, sub-lease and/or tenancy would be treated as “rent”. In the second place, such a payment made even under any other “agreement or arrangement for the use of any land or any building” would also be treated as “rent”. Whether or not such building is owned by the payee is not relevant. The expressions “any payment”, by whatever name called and “any other agreement or arrangement” have the widest import. Likewise, payment made for the “use of any land or any building” widens the scope of the proviso.

The Supreme Court noted that in the present case, the airlines are allowed to land and take-off their aircrafts at IGIA for which landing fee is charged. Likewise, they are allowed to park their aircrafts at IGIA for which parking fee is charged. It is done under an agreement and/or arrangement with the AAI. The moot question therefore was as to whether landing and take-off facilities on the one hand and parking facility on the other hand, would mean “use of the land”.

The Supreme Court observed that in United Airlines’ case [287 ITR 281 (Del)], the High Court held that the word “rent” as defined in the provision has a wider meaning than “rent” in common parlance. It includes any agreement or arrangement for use of the land. In the opinion of the High Court, “when the wheels of an aircraft coming into an airport touch the surface of the airfield, use of the land of the airport immediately begins”. Similarly, for parking the aircraft in that airport, there is use of the land. This was the basic, nay, the only reason given by the High Court in support of its conclusion.

The Madras High Court, on the other hand, had a much bigger canvass before it needed to paint a clearer picture with all necessary hues and colours. Instead of taking a myopic view taken by the Delhi High Court by only considering use of the land per se, the Madras High Court examined the matter keeping wider perspective in mind thereby encompassing the utilisation of the airport providing the facility of landing and take-off of the airplanes and also the parking facility. After taking into consideration these aspects, the Madras High Court came to the conclusion that the facility was not of “use of land” per se, but the charges on landing and take-off by the AAI from these airlines were in respect of number of facilities provided by the AAI which was to be necessarily provided in compliance with the various international protocol. The charges therefore, were not for the land usage or area allotted simpliciter. These were the charges for various services provided. The substance of these charges was ingrained in the various facilities offered to meet the requirement of passengers’ safety and on safe landing and parking of the aircraft and these were the consideration that, in reality, governed by the fixation of the charges. According to the Supreme Court, the aforesaid conclusion of the High Court of Madras was justified which was based on sound rationale and reasoning.

The Supreme Court after noting the technological aspects of the runways in some detail held that the charges which were fixed by the AAI for landing and take-off services as well as for parking of aircrafts were not for the “use of the land”. That would be too simplistic an approach, ignoring other relevant details which would amply demonstrate that these charges are for services and facilities offered in connection with the aircraft operation at the airport. These services include providing of air traffic services, ground safety services, aeronautical communication facilities, installation and maintenance of navigational aids and meteorological services at the airport.

The Supreme Court concluded that the charges were not for the use of land per se, and therefore, it would not be treated as “rent” within the meaning of section 194-I of the Act.

Note: The Supreme Court, however, disagreed with the interpretation of the expression “any other agreement or arrangement for the use of land or any building” made by the Madras High Court limiting the ambit of the words “any other agreement or arrangement” by reading it ejusdem generis from the expression “lease, sub-lease or tenancy”. According to the Supreme Court, the second part was independent of the first part which gives much wider scope to the term “rent” and to that extent it agreed with the Delhi High Court that the scope of the definition of rent is very wide and not limited to what is understood as rent in common parlance.

Foreign Account Tax Compliance Act (FAT CA) and Common Reporting Standards (CRS) – the next stage

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Background
In the first two of my articles that were
published in the BCA Journal (February 2015 and April 2015 issues), we
had looked at the broad approach under FATCA and some portions of the
(then) draft regulations which had been at that stage circulated by the
Government to a small group for comments. The purpose of this article is
to trace the developments since then and address specific matters.

Before
proceeding, I must state that the views expressed in the article are my
personal views. They are not intended to be in the nature of tax advice
to the reader. They cannot be used as a defence against penalties
either under FATCA or any other law. The intent is to make readers aware
of a possible view. In regard to specific situations, they should
obtain advice from US tax advisors.

In the field of FATCA, the
Government of India signed the Model 1 Inter-Governmental Agreement
(IGA) on 9th July, 2015. The Rules for reporting u/s. 285BA were
notified on 7th August, 2015 and the first reporting deadline in respect
of records for 2014 was set at 31st August, 2015. This deadline was
later extended to 10th September, 2015. The initial guidance was issued
on 31st August and it is expected that additional detailed guidance may
be available later in the year. Even before these developments took
place, India signed the Minutes of Multilateral Competent Authority
Agreement (MCAA) in Paris as part of India’s commitment to be an early
adopter of OECD’s Common Reporting Standards (CRS).

IGA and the Rules
The
IGA lays down certain broad principles of the inter- Governmental
cooperation. Under Article 10(1), the IGA enters into force on the day
when India notifies the US that it has completed its internal procedures
for entry into force of the IGA. As India notified the US accordingly,
the IGA has entered into force.

Rules 114F, 114G and 114H
governing the reporting and the new reporting form i.e. Form 61B have
been introduced in the Income-tax Rules 1962 with effect from August 7,
2015. The attempt here is to examine the IGA and the Rules together for
ease of comparison and understanding.

Reporting deadlines and information required
The Table below gives the FATCA and the CRS reporting deadlines and the information required to be reported.



Abbreviations:
TIN – Taxpayer Identification Number; DOB – Date of birth; POB – Place
of Birth; DOI – Date of Incorporation; POI – Place of Incorporation;
NPFI – Non-Participating Financial Institution

An NPFI is a
financial institution as defined in Article 1(r) of the IGA1 other than
an Indian financial institution (FI) or an FI of any other jurisdiction
with which the US has an IGA. Where an FI is treated as an NPFI in terms
of the IGA between that other jurisdiction and the US, such NPFI will
also be treated as an NPFI in India.

Who is to report
In
terms of Rule 114G(1), every reporting financial institution (FI) has
to do the relevant reporting. The term reporting FI is defined under
Rule 114F(7) to mean

– A financial institution which is resident
(the reference here is to tax residence status) in India but excluding a
branch outside India of an Indian FI
– A ny branch in India of an FI that is not (tax) resident in India

In both cases, a non-reporting FI (not to be confused with NPFI) will be excluded from the ambit of the term reporting FI.

An Indian bank’s branch in (say) London will not be treated as a reporting FI but a Singapore or a US bank’s branch in India will be treated as reporting FI under Rule 114F(7).

Rule
114F(3) defines a financial institution to mean a custodial
institution, a depository institution, an investment entity or a
specified insurance company. The Explanation to Rule 114F(3) explains
the meaning of the four terms used in the sub-rule.

Under Rule 114F(5), a ‘non-reporting financial institution’ means any FI that is, –

(a)
A Government entity, an international organisation or a central bank
except where the FI has depository, custodial, specified insurance as
part of its commercial activity;
(b) R etirement funds of the Government, international organisation, central bank at (a) above;
(c) A non-public fund of the armed forces, an employee state insurance fund, a gratuity fund or a provident fund;
(d)
A n entity which is Indian FI solely because of its direct equity or
debt interest in the (a) to (c) above; (e) A qualified credit card
issuer;
(f) A FI that renders investment advice, manages portfolios
for and acts on behalf or executes trades on behalf a customer for such
purposes in the name of the customer with a FI other than a
non-participating FI;
(g) A n exempt collective investment vehicle;
(h)
A trust set up under Indian law to the extent that the trustee is a
reporting FI and reports all information required to be reported in
respect of financial accounts under the trust;
(i) A n FI with a local client base;
(j) A local bank;
(k)
In case of any US reportable account, a controlled foreign corporation
or sponsored investment entity or sponsored closely held investment
vehicle.

Paras (I), (J) and (K) of the Explanation to Rule
114F(5) clarify that Employees State Insurance Fund set up under the ESI
Act 1948 or a gratuity fund set under the Payment of Gratuity Act 1972
or the provident fund set up under the PF Act 1925 or under the
Employees’ (PF and Miscellaneous Provisions) Act 1952 will be treated as
non-reporting FI.

Para (N) of the Explanation to Rule 114F(5)
defines an FI with a local client base as one that does not have a fixed
place of business outside India and which also does not solicit
customers or account holders outside India. It should not operate a
website that indicates its offer of services to US persons or to persons
resident outside India. The test of residency to be applied here is
that of tax residency. At least 98%, by value, of the financial accounts
maintained by the FI must be held by Indian tax residents. The local FI
must, however, set in place a system to do due diligence of financial
accounts in accordance with Rule 114H.

The term ‘local bank’ will
include a cooperative credit society, which is operated without profit
i.e. it does not operate with profit motive. In this case also offering
of account to US persons or to persons resident outside India, will be
treated as a bar to being characterised as a local bank. The assets of
the local bank should not exceed US$ 175 million (assume Rs. 1050
crores, although the USD-INR exchange rate may fluctuate) and the sum of
its assets and those of its related entities does not exceed US$ 500
million (assume Rs. 3,000 crores). Certain other conditions also apply.

What is a financial account
Rule
114F(1) defines a ‘financial account’ to mean an account (other than an
excluded account) maintained by an FI and includes (i) a depository
account; (ii) a custodial account (iii) in the case of an investment
entity, any equity or debt interest in the FI; (iv) any equity or debit
interest in an FI if such interest in the institution is set up to avoid
reporting in accordance with Rule 114G and for a US reportable account,
if the debt or equity interest is determined directly or indirectly
with reference to assets giving rise to US withholdable payments; and
(v) cash value insurance contract or an annuity contract (subject to
certain exceptions).

For this purpose, the Explanation to Rule 114F(1) clarifies that a ‘depository account’ includes any commercial, savings, time or thrift account or an account that is evidenced by certificate of deposit, thrift certificate, investment certificate, certificate of indebtedness or other similar instrument maintained by a FI in the ordinary course of banking or similar business. It also includes an account maintained by an insurance company pursuant to a guaranteed investment contract. In ordinary parlance, a ‘depository account’ relates to a normal bank account plus certificates of deposit (CDs), recurring deposits, etc. A ‘custodial account’ means an account, other than an insurance contract or an annuity contract, or the benefit of another person that holds one or more financial assets. In normal parlance, this would largely refer to demat accounts. The National Securities Depository Ltd. (NSDL) statement showing all of their investments listed at one place will give the readership an idea of what a ‘custodial account’ entails. These definitions are at slight variance with the commonly understood meaning of these terms in India.

Para (c) of the Explanation clarifies that the term ‘equity interest’ in an FI means,

(a)    In the case of a partnership, share in the capital or share in the profits of the partnership; and
(b)    In the case of a trust, any interest held by
–    Any person treated as a settlor or beneficiary of all or any portion of the trust; and
–    Any other natural person exercising effective control over the trust.

For this purpose, it is immaterial whether the beneficiary has the direct or the indirect right to receive under a mandatory distribution or a discretionary distribution from the trust.

An ‘insurance contract’ means a contract, other than an annuity contract, under which the issuer of the insurance contract agrees to pay an amount on the occurrence of a specified contingency involving mortality, morbidity, accident, liability or property. An insurance contract, therefore, includes both assurance contracts and insurance contracts. An ‘annuity contract’ means a contract under which the issuer of the contract agrees to make a periodic payment where such is either wholly or in part linked to the life expectancy of one or more individuals. A ‘cash value insurance contract’ means an insurance contract that has a cash value but does not include indemnity reinsurance contracts entered into between two insurance companies. In this context, the cash value of an insurance contract means

(a)    Surrender value or the termination value of the contract without deducting any surrender or termination charges and before deduction of any outstanding loan against the policy; or

(b)    The amount that the policy holder can borrow against the policy

whichever is less. The cash value will not include any amount payable on death of the life assured, refund of excess premiums, refund of premium (except in case of annuity contracts), payment on account of injury or sickness in the case of insurance (as opposed to life assurance) contracts Para (h) of the Explanation to Rule 114F(1) defines an ‘excluded account’ to mean

(i)    a retirement or pension account where

  •     the account is subject to regulation as a personal retirement account;

  •     the account is tax favoured i.e. the contribution is either tax deductible or is excluded from taxable income of the account holder or is taxed at a lower rate or the investment income from such account is deferred or is taxed at a lower rate;

  •    information reporting is required to the income-tax authorities with respect to such account;
  •    withdrawals are conditional upon reaching a specified retirement age, disability, death or penalties are applicable for withdrawals before such events;

  •    the contributions to the account are limited to either US$ 50,000 per annum or to US$ One million through lifetime.

(ii)    an account which satisfies the following requirements viz.

  •    the account is subject to regulations as a savings vehicle for purposes other than retirement or the account (other than a US reportable account) is subject to regulations as an investment vehicle for purposes other than for retirement and is regularly traded on an established securities market;

  •    the account is tax favoured i.e. the contribution is either tax deductible or is excluded from taxable income of the account holder or is taxed at a lower rate or the investment income from such account is deferred or is taxed at a lower rate;

  •     withdrawals are conditional upon specific criteria (educational or medical benefits) or penalties are applicable for withdrawals before such criteria are met;

  •     the contributions to the account are limited to either US$ 50,000 per annum or to US$ One million through lifetime.

(iii)    An account under the Senior Citizens Savings Scheme 2004;

(iv)    A life insurance contract that will end before the insured reaches the age of 90 years (subject to certain conditions to be satisfied);

(v)    An account held by the estate of a deceased, if the documentation for the account includes a copy of the will of the deceased or a copy of the deceased’s death certificate;

(vi)    An account established in connection with any of the following

  •    A court order or judgment;

  •   A sale, exchange or lease of real or personal property, if the account is for the extent of down payment, earnest money, deposit to secure the obligation under the transaction, etc.

 

  •    An FI’s obligation towards current or future taxes in respect of real property offered to secure any loan granted by the FI;

(vii)    In the case of an account other than a US reportable account, the account exists solely because a customer overpays on a credit card or other revolving credit facility and the overpayment is not immediately returned to the customer. Up to December 31, 2015, there is a cap of US$ 50,000 applicable for such overpayment.

How to report

Under Rule 114G(9), the reporting FI must file the relevant Form 61B with the office of the Director of Income-tax (Intelligence and Criminal Investigation) electronically under a digital signature of the designated director. The reporting FI must register on the income-tax e-filing website through its own login giving certain information including a ‘designated director’ and a ‘principal officer’. Although not stated in the Rules, the latter will generally be the contact person for the Government of India for any queries and the former will be the escalation point. These two terms are used under the Prevention of Money Laundering Act (PMLA). Currently, the registration is possible without obtaining a General Intermediary Identification Number (GIIN).

The report in Form 61B is, however, required to be uploaded through the personal PAN login of the designated director on the e-filing website. This feature is likely to undergo a change for the next reporting cycle.

Next steps and developments to come

The FIs will need to set up systems to do extensive due diligence procedures for existing accounts in order to comply with Rule 114H and to develop systems to capture the reporting information. Under Rule 114G(11), the local regulators for the FIs viz. the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory Development Authority will have to issue instructions or guidelines to the FIs under their respective supervision. To avoid conflicting instructions, such instructions must be synchronised. At the Government’s end, the e-filing website must allow for filing of Form 61B through the reporting FIs login under the digital signature of a person who is not necessarily a person authorised to sign the tax return of the reporting FI. We will connect again on due diligence and on these other developments.

Assessment – Disallowance/addition on the basis of statement of third party – Reliance on statements of third party without giving the assessee the right of cross-examination results in breach of principles of natural justice

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M/s. R. W. Promotions P. Ltd. vs. ACIT (Bom), ITA No. 1489 of 2013 dated 13/07/2015 -www.itatonline.org:

The
assessee was engaged in the business of advertisement, market research
and business promotions for its clients. In the A. Y. 2007-08, the
assessee had engaged services of M/s. Inorbit Advertising and Marketing
Services P. Ltd. (Inorbit) and M/s. Nupur Management Consultancy P. Ltd.
(Nupur) to enable them to carry out promotional and advertisement
activities. The amount of Rs. 1.15 crore paid to them was claimed as
expenditure. The Assessing Officer reopened the assessment to disallow
the claim on the basis of the statements of representatives of Inorbit
and Nupur. The assessee requested for the copies of the statements and
also requested for an opportunity of cross examining the deponents. The
Assessing Officer completed the assessment disallowing the expenditure
of Rs. 1.15 crore without giving the opportunity to cross examine the
deponents.

The Tribunal upheld the disallowance. The Tribunal
held that it is a final fact finding authority and it could direct cross
examination in case it felt that material relied upon by the Assessing
Officer to disallow expenses was required to be subject to the cross
examination. It held that denial of cross examination of the
representatives of Inorbit and Nupur had not led to breach of the
principle of natural justice.

On appeal by the assessee, the Bombay High Court held as under:
“i)
We find that there has been breach of principle of natural justice in
as much as the Assessing Officer has in his order placed reliance upon
the statements of representatives of Inorbit and Nupur to come to the
conclusion that the claim for expenditure made by the appallent is not
genuine. Thus, the appellant was entitled to cross examine them before
any reliance could be placed upon them to the extent it is adverse to
the appellant. This right to cross examine is a part of “audi altrem
partem” principle and the same can be denied only on strong reason to be
recorded and communicated.

ii) The impugned order holding that
it would have directed cross examination if it felt it was necessary, is
hardly a reason in support of coming to the conclusion that no cross
examination was called for in the present facts. This reason itself
makes the impugned order vulnerable.

iii) Moreover, in the
present facts, the appellant had also filed affidavits of the
representatives of Inorbit and Nupur which indicates that they had
received payments from the appellant for rendering services to the
appellant. These affidavits also have not been taken into account by any
authority including the Tribunal while upholding the disallowance of
the expenditure.

iv) Thus, the appellant was not given an
opportunity to cross examine the witnesses whose statement is relied
upon by the revenue and the evidence led by the appellant has not been
considered. Therefore, clearly a breach of principle of natural justice.
In view of the above, we set aside the order of the Tribunal and
restore the issue to the Assessing Officer for fresh disposal after
following the principles of natural justice and in accordance with law.”

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Settlement of cases – Provision for abatement of proceedings – The Supreme Court agreed with the High Court which read down the provision of section 245HA(1)(iv) to mean that only in the event the application could not be disposed of for any reason attributable on the part of the applicant who has made an application u/s. 245C by cut-off date the proceeding would abate

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UOI vs. Star Television News Ltd. (2015) 373 ITR 528 (SC)

In all
the special leave petitions filed by the Union of India, before the
Supreme Court, the correctness of judgment dated 07.08.2009 rendered by
the Bombay High Court in a batch of writ petitions was questioned. In
those writ petitions filed by various assessees, the validity of
Sections 245 HA(1)(iv) and 245HA(3) of the Income-tax Act, 1961, as
amended by Finance Act, 2007 was challenged. The High Court, by a
detailed judgment, found the aforesaid provisions to be violative of
Article 14, etc., but at the same time, it did not invalidate these
provisions as the High Court was of the opinion that it was possible to
read down the provisions of Section 245HA(1)(iv) in particular to avoid
holding the provisions as unconstitutional. The conclusion so arrived at
was summed up in paragraph 54 of the impugned judgment, which read as
under:

“54. From the above discussion having arrived at a
conclusion that fixing the cut-off date as 31st March, 2008 was
arbitrary the provisions of Section 245HA(1)(iv) to that extent will be
also arbitrary. We have also held that it is possible to read down the
provisions of Section 245HA(1)(iv) in the manner set out earlier. This
recourse has been taken in order to avoid holding the provisions as
unconstitutional. Having so read, we would have to read section
245HA(1)(iv) to mean that in the event the application could not be
disposed of for any reasons attributable on the part of the applicant
who has made an application u/s. 245C. Consequently only such
proceedings would abate u/s. 245HA(1)(iv). Considering the above, the
Settlement Commission to consider whether the proceedings had been
delayed on account of any reasons attributable on the part of the
Applicant. If it comes to the conclusion that it was not so, then to
proceed with the application as if not abated. Respondent No.1 if
desirous of early disposal of the pending applications, to consider the
appointment of more Benches of the Settlement Commission, more so as the
Benches where there is heavy pendency like Delhi and Mumbai.”

The
Supreme Court was of the opinion that a well-considered judgment of the
High Court did not call for any interference. All these special leave
petitions and the appeals were accordingly dismissed by the Supreme
Court.

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Reassessment – Notice – There is no question of change of opinion when the return is accepted u/s. 143(1) inasmuch as while accepting the return as aforesaid no opinion is formed.

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DCIT vs. Zuari Estate Development and Investment Co. Ltd. (2015) 373 ITR 661 (SC)

The income-tax return filed by the respondent-assessee for the assessment year 1991-92 was accepted u/s. 143(1) of the Income-tax Act, 1961. After sometime, the Assessing Officer came to know that there was a sale agreement dated June 19,1984, entered into between the respondent and Bank of Maharashtra to sell a building for Rs.85,40,800 on the condition that the sale would be completed only after the five years of the agreement but before the expiration of the sixth year at the option of the purchaser and the purchaser can rescind the same at certain consideration. After the bank had paid to the assessee-company on June 20, 1984, the sum of Rs.84,47,111 being 90 % of the consideration agreed upon, the assessee put and handed over possession in part performance of the agreement of sale to the bank on June 20, 1984, itself. By letter dated June 12, 1990, in terms of clause 5 of the agreement of sale dated June 19, 1984, the bank called upon the assessee to complete the transactions and convey the property to the bank by June 18, 1990. By a letter dated June 16, 1993, the assessee confirmed that the assessee-company had put the premises in possession of the bank and that the assessee company would take all necessary steps for transfer of the said premises on or before September 30, 1993. Even after the said date, the assessee was unable to complete the transaction on the pretext that certain dispute had arisen owing to which the assessee did not complete the transaction. The assessee’s accounts for the year 1991 had disclosed the amount of Rs.84,47,112 by it as a current liability under the heading “advance against deferred sale of building”. In the course of assessment proceedings for the assessment year 1994- 95, the Assessing Officer raised a query as to why the capital gains arising on the sale of the premises should not be taxed in the assessment year 1991-92. On this basis, notice dated December 4, 1996, u/s. 143 read with section 147 of the Income-tax Act was served upon the assessee on the ground that the assessee had escaped tax chargeable on its income in the assessment year 1991-92. Challenging the validity of this notice, the respondent preferred a writ petition in the High Court of Bombay. The High Court had allowed the writ petition:

On appeal by the Revenue, the Supreme Court after going through the detailed order passed by the High Court found that the main issue which was involved in this case was not at all addressed by the High Court. A contention was taken by the appellant-Department to the effect that since the assessee’s return was accepted u/s. 143(1) of the Income-tax Act, there was no question of “change of opinion” inasmuch as while accepting the return under the aforesaid provision no opinion was formed and, therefore, on this basis, the notice issued was valid. According to the Supreme Court, this aspect was squarely covered by its judgment in Asst. CIT vs. Rajesh Jhaveri Stock Brokers Private Ltd.[2007] 291 ITR 500 (SC).

The Supreme Court thus held that the judgment of the High Court was erroneous. The Supreme Court allowed the appeal setting aside the impugned judgment of the High Court.

The Supreme Court further found that pursuant to the notice issued u/s. 143 of the Income-tax Act, the Assessing Officer had computed the income by passing the assessment order on the merits and rejecting the contention of the respondent that the aforesaid transaction did not amount to a sale in the assessment year in question. Against the assessment order, the respondent had preferred the appeal before the Commissioner of Income-tax (Appeals) which was also dismissed. Further appeal was preferred before the Income-tax Appellate Tribunal. This appeal, however, had been allowed by the Tribunal, vide order dated January 29, 2004, simply following the impugned judgment of the High Court, whereby the assessment proceedings itself were quashed. Since the Supreme Court had set aside the judgment of the High Court, as a result, the order dated January 29, 2004, passed by the Income-tax Appellate Tribunal also was set aside. The Supreme Court remitted the matter back to the Income-tax Appellate Tribunal to decide the appeal of the respondent on the merits.

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Export – Special Deduction – To avail benefit of section 80HHC, there has to be positive income from export business – section 80HHC

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Jeyar Consultant and Investment Pvt. Ltd. vs. CIT (2015) 373 ITR 87 (SC).

The appellant company was engaged in the business of export of marine products and also financial consultancy and trading in equity shares. Its total business did not consist purely of exports but included business within the country.

The Assessing Officer, while dealing with the assessment of the appellant in respect of the assessment year 1989- 90 took the view that the deduction was not allowable on the ground that there was no relationship between the assessee-company and the processors. The appellant carried the said order in appeal. The appeal against the assessment order was dismissed by the Commissioner of Income-tax (Appeals). The Appellant filed an appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal set aside the order of the Assessing Officer and came to a conclusion that the appellant was entitled to full relief u/s. 80HHC and directed the Assessing Officer to grant relief to the assessee.

On remand, the Assessing Officer passed a fresh order giving effect to the orders of the Income-tax Appellate Tribunal. While giving the effect, the Assessing Officer found that the appellate had not earned any profits from the export of marine products and in fact, from the said export business, it had suffered a loss. Therefore, according to the Assessing Officer, as per section 80AB, the deduction u/s. 80HHC could not exceed the amount of income included in the total income. He found that as the income from export of marine products business was in the negative, i.e. there was a loss, the deduction u/s. 80HHC would be nil, even when the assessee was entitled to deduction under the said provision. With this order, the second round of litigation started. The assessee challenged the order passed by the Assessing Officer before the Commissioner (Appeals) contending that the formula which was applied by the Assessing Officer was different from the formula prescribed u/s. 80HHC of the Act and it was also in direct violation of the Central Board of Direct Taxes Circular dated July 5, 1990. The Commissioner (Appeals), however, dismissed the appeal of the assessee principally on the ground that u/s. 246 of the Income-tax Act, an order of the Assessing Officer giving effect to the order of the Incometax Appellate Tribunal is not an appealable order. The assessee approached the Income-tax Appellate Tribunal questioning the validity of the orders passed by the Assessing Officer and the Commissioner (Appeals). The Income-tax Appellate Tribunal also dismissed the appeal of the assessee, and upheld the order of the Assessing Officer. Challenging the order of the Income-tax Appellate Tribunal, the assessee approached the High Court u/s. 256(2) of the Act seeking reference to it. The High Court directed the Income-tax Appellate Tribunal to frame the reference and place the same before the High Court. On this direction of the High Court, the Income-tax Appellate Tribunal referred the following question to the High Court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the deduction admissible to the assessee u/s. 80HHC is nil?”

The High Court answered this question against the assessee holding that the assessee admittedly had not earned any profits from the export of the marine products. On the other hand, it had suffered a loss. The deduction permissible u/s. 80HHC is only a deduction of the profits of the assessee from the export of the goods or merchandise. By the very terms of section 80HHC, it was clear that the assessee was not entitled to any benefit thereunder in the absence of any profits.

On further appeal by the appellant, the Supreme Court observed that there were two facets of this case which needed to be looked into. In the first instance, it had to consider as to whether the view of the High Court that the deduction was permissible u/s. 80HHC only when there are profits from the exports of the goods or merchandise was correct or it would be open to the assessee to club the income from export business as well as domestic business and even if there were losses in the export business but after setting off those against the income/ profits from the business in India, still there was net profit of the business, the benefit u/s. 80HHC would be available? The second question that would arise was as to whether the formula applied by the fora below was correct? In other words, while applying the formula, what would comprise “total turnover”?

The Supreme Court after considering its decisions in IPCA Laboratories Ltd. vs. DCIT [(2004) 260 ITR 521 (SC)] and A.M. Moosa vs. CIT [(2007) 294 ITR 1 (SC)] held that it stood settled, on the co-joint reading of the above judgments, that where there are losses in the export of one type of good (for example, self-manufactured goods) and profits from the export of other type of goods (for example trading goods) then both are to be clubbed together to arrive at net profits or losses for the purpose of applying the provisions of section 80HHC of the Act. If the net result was loss from the export business, then the deduction under the aforesaid Act is not permissible. As a fortiori, if there is net profit from the export business, after adjusting the losses from one type of export business from other type of export business, the benefit of the said provision would be granted.

The Supreme Court however noted that in both the aforesaid cases, namely, IPCA and A.M. Moosa, the Court was concerned with two business activities, both of which related to export, one from export of self manufactured goods and other in respect of trading goods, i.e., those which are manufactured by others. In other words, the court was concerned only with the income from exports.

The Supreme Court observed that in the present case, however, the fact situation was somewhat different. Here, in so far as the export business was concerned, there were losses. However, the appellate-assessee relied upon section 80HHC(3)(b), as existed at the relevant time, to contend that the profits of the business as a whole, i.e., including profits earned from the goods or merchandise within India should also be taken into consideration. In this manner, even if there were losses in the export business, but profits of indigenous business outweigh those losses and the net result was that there was profit of the business, then the deduction u/s. 80HHC should be given. The Supreme Court held that having regard to the law laid down in IPCA and A.M. Moosa, it could not agree with the appellant. From the scheme of section 80HHC, it was clear that deduction was to be provided under subsection (1) thereof which was “in respect of profits retained for export business”. Therefore, in the first instance, it had to be satisfied that there were profits from the export business. That was the prerequisite as held in IPCA and A.M. Moosa as well. S/s. (3) came into the picture only for the purpose of computation of deduction. For such an eventuality, while computing the “total turnover”, one may apply the formula stated in clause (b) of sub-section (3) of section 80HHC. However, that would not mean that even if there were losses in the export business but the profits in respect of business carried out within India were more than the export losses the benefit u/s. 80HHC would still be available. In the present case, since there were losses in the export business, the question of providing deduction u/s. 80HHC did not arise and as a consequence, there was no question of computation of any such deduction in the manner provided under s/s. (3). The Supreme Court therefore held that the view taken by the High Court was correct on the facts of this case.

With this, according to the Supreme Court there was no need to answer the second facet of the problem as the questi

Special Leave Petition – Supreme Court refused to entertain the appeal, since the tax effect was nominal and the matter was very old.

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CIT vs. Central Bank of India (2015) 373 ITR 524 (SC);
CIT vs. Dhanalakshmi Bank Ltd.(2015) 373 ITR 526 (SC);
CIT vs. Navodaya(2015) 373 ITR 637 (SC); and
CIT vs. Om Prakash Bagadia (HUF)(2015) 373 ITR 670 (SC)

The
Supreme Court refused to entertain the appeals having regard to the
fact that the tax effect was minimal leaving the question of law open.

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Interest from undisclosed sources – In case there has been a double taxation, relief must be accorded to the assessee

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Ashish Plastic Industries vs. ACIT [2015] 373 ITR 45(SC)

During the course of survey operation on the assessee, a manufacturer of PVC, excess stock of Rs.13,92,000 was found. On this basis, an addition was made in the assessment order. Before the Commissioner of Incometax (Appeals), the assessee sought to explain this difference by pointing out that sales of 32,809 kgs. of finished products made by one of the sister concerns, namely, Ashish Agro Plast P. Ltd. was wrongly shown as to be that of the assessee. On remand it was found that sales of finished product of 32,809 kgs. as shown is sales register of the sister concern tallied with impounded stock register and that the sister concern had received sales proceeds of the same through the bank accounts prior to the date of survey. It was however further found that sale of 33,682 kgs. of finished goods was nothing but unaccounted sales out of which 32,809 kgs. was made to the aforesaid sister concern. Taking this into consideration, the Commissioner of Income-tax (Appeals) upheld the addition. This order was upheld by the Tribunal and the High Court. The Supreme Court issued a notice on a Special Leave Petition being filed by the assessee limiting to the question as to whether in respect of sales of 32,809 kgs. which were shown in the stock register of Ashish Agro Plast P. Ltd., there had been double taxation. The Supreme Court remanded the case back to the Assessing Officer authority for enabling the assessee to demonstrate as to whether the sister concern had already paid tax on the aforesaid income from the aforesaid sales and directing that, if that was shown, to the extent of tax that was paid, benefit should be accorded to the assessee.

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Wealth-Tax – Company – Exemption – Building used by the assessee as factory for the purpose of its business – Not only the building must be used by the assessee but it must also be for the purpose of its business – Section 40(3)(vi) of the Finance Act, 1983

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Kapri International (P) Ltd. vs.CWT [2015] 373 ITR 50(SC)

The assessee company manufactured bed sheets on a property situated at Plot No.39, Site IV, Sahibabad. It’s own subsidiary company, namely, M/s. Dior International Pvt. Ltd., a company under the same management was doing processing work, namely, dyeing, for the assesseecompany in a part of the factory building situated at the aforesaid property. M/s Dior International Pvt. Ltd. installed its own machinery for the said job work of dyeing and that the assessee charged a sum of Rs.20,000 per month as licence fee from M/s. Dior International Pvt. Ltd. The said sum of Rs.20,000 per month charged as licence fee had been claimed by the assessee to be business income. Further, the job work undertaken by M/s. Dior International Pvt. Ltd., though done wholly for the assessee, was nonetheless charged to the assessee’s account and paid for by the assessee. The question that arose on the facts in this case was whether u/s. 40(3)(vi) of the Finance Act, 1983, “the building” was used by the assessee as a factory for the purpose of its business.

The assessing authority for the assessment year 1984- 85 held that the part of the building given to M/s. Dior International Pvt. Ltd., on licence was not being used for the assessee’s own business and, therefore, the assessee was not entitled to exemption in respect of the said part of the Sahibabad building property. On an appeal to the Commissioner of Income Tax (Appeals), agreed with the assessing authority and dismissed the appeal. In a further appeal to the Income-tax Appellate Tribunal, the Tribunal agreed with the view of the authorities below and dismissed the appeal. The High Court of Delhi agreed with the reasoning of the Tribunal.

On further appeal, the Supreme Court held that not only the property must be used by the assessee but it must also be “for the purpose of its business”. According to the Supreme Court on the property, it was clear on the facts that the assessee and M/s. Dior International Pvt. Ltd. were doing their own business and were separately assessed as such. The charging of Rs.20,000 per month as licence fee by the assessee from M/s. Dior International Pvt. Ltd. changed the complexion of the case. Once this was done, the two companies, though under the same management, were treating each other as separate entities. Also, for the job work done by M/s. Dior International Pvt. Ltd., M/s. Dior International Pvt. Ltd. was charging the assessee company and this again established that two companies preserved their individual corporate personalities so far as the present transaction was concerned. The Supreme Court dismissed the appeal, agreeing with the reasoning of the Tribunal, which had found favour with the High Court.

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Glen Williams vs. Assistant Commissioner of Income Tax ITAT “A” Bench : Bangalore Before N. V. Vasudevan (J.M.) and Jason P. Boaz (A. M.) ITA No. 1078/Bang/2014 Assessment Year 2009-10. Decided on 07.08.2015 Counsel for Revenue / Assessee: T. V. Subramanya Bhat / P. Dhivahar

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Section 41(1) and 68 – Old liability of sundry creditors remaining unpaid – Since not arising from current year’s transaction not taxable u/s. 68 – Also nothing on record to show remission or cessation of liability hence, not taxable u/s. 41(1)

Facts:
The assessee who is a dealer in sale of bakery and confectionary products, filed his return of income declaring an income of Rs.29.07 lakh. In the course of assessment proceedings, the AO called for confirmations and names and addresses of sundry creditors totalling to Rs.68.59 lakh. The assessee could furnish the names & addresses of 12 creditors out of total 22 creditors. The letters sent u/s. 133(6) to these creditors returned with the endorsement “no such person”, except in the case of one creditor. The assessee explained that the creditors were old creditors and the addresses given were the address available in the records of the assessee and therefore the assessee was not in a position to confirm whether those creditors were residing in that address. The AO was not satisfied with this reply and made an addition of Rs.65.67 lakh. On appeal by the assessee, the CIT(A) confirmed the order of the AO.

Held:
The Tribunal noted that neither the order of the AO nor that of the CIT(A) was clear as to whether the impugned addition made was u/s. 68 or 41(1) of the Act. According to it, the provisions of section 68 will not apply as the balances shown in the creditors’ account did not arise out of any transaction during the previous year relevant to AY 2009-10. As regards the applicability of section 41(1) is concerned, according to it, in the case of the assessee it has to be examined whether by not paying the creditors for a period of four years, the assessee had obtained some benefit in respect of the trading liability allowed in the earlier years. It further observed that the words “remission” and “cessation” are legal terms and have to be interpreted accordingly. Referring to the observations of the Supreme court referred to by the Delhi High Court in CIT vs. Sri Vardhaman Overseas Ltd.(343 ITR 408) viz. “a unilateral action cannot bring about a cessation or remission of the liability because a remission can be granted only by the creditor and a cessation of the liability can only occur either by reason of operation of law or the debtor unequivocally declaring his intention not to honour his liability when payment is demanded by the creditor, or by a contract between the parties, or by discharge of the debt”, the tribunal noted that there was nothing on record or in the order of the AO or the CIT(A) to show that there was either remission or cessation of liability of the assessee. Accordingly, it held that the provisions of section 41(1) of the Act could not be invoked by the Revenue. Therefore, the appeal filed by the assessee was allowed.

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[2015] 69 SOT 25 (Chennai) DCIT vs. Sucram Pharmaceuticals ITA Nos. 804 & 806 (Mds)of 2014 Assessment Years: 2010-11 and 2011-12. Date of Order: 18th August 2014

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Sections 80AC, 80IC – For AY 2010-11, where a manual return was furnished before due date while electronic return was filed after due date, provision of section 80AC, so as to claim deduction u/s. 80IC was complied with.

Where without a plausible reason, return of income was not filed before due date, assessee would not be entitled to claim deduction u/s. 80IC.

Facts:
The assessee company filed its return of income, for AY 2010-11, manually in a physical form, on 9th September, 2010. Subsequently, on January 25, 2011 an electronic return was furnished. The assessee had claimed deduction u/s. 80IC of the Act. The Assessing Officer (AO) disallowed Rs. 61,93,667 claimed by the assessee as deduction u/s. 80IC of the Act on the ground that the assessee had failed to file the return of income in electronic mode within due date specified u/s. 139(1) of the Act.

For assessment year 2011-12, the assessee filed its return of income electronically on 12th December, 2011. The assessee had claimed deduction u/s. 80IC. The Assessing Officer disallowed the claim of deduction u/s. 80IC on the ground that the assessee had failed to file the return of income within due date specified u/s. 139(1) of the Act.

Aggrieved, the assessee preferred appeals to CIT(A) who allowed the appeals on the ground that the fault was only technical which was beyond the control of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD
Since Rule 12(3)(ab) requiring the assessee to file return of income electronically was amended with effect from AY 2010-11, the Tribunal accepted the contention of the assessee that the accountants/tax consultants of the assessee, due to oversight, missed the amendment in the Rules. The Tribunal noted that, however, the manual return was filed before due date specified in section 139(1) of the Act. Accordingly, the Tribunal held that the assessee is entitled to claim deduction u/s. 80IC if otherwise it has complied with the conditions laid down in section 80IC of the Act. Since the AO had not examined the genuineness of the claim of the assessee u/s. 80IC, it remitted the file back to the AO to consider the claim of the assessee u/s. 80IC and allow the same, if the assessee has complied with the conditions required to be satisfied.

However, for assessment year 2011-12, the assessee contended that the tax consultants of the assessee were not fully aware of the fact that the return has to be filed before 30th September of every year. The Tribunal noted that no manual return was filed as in assessment year 2010-11 and also no plausible reason was given by the assessee for furnishing return after the elapse of due date. It observed that since assessment year 2010-11 was the first year in which, furnishing of return electronically under digital signature was made mandatory there were chances that the tax consultants may not be aware of the amended provisions. The benefit of ignorance of the tax consultants was given to the assessee in assessment year 2010-11. After committing the mistake once, if the same mistake is committed again in the next assessment year, it is unpardonable. The Tribunal was of the opinion that the assessee does not deserve any clemency. It held that the assessee had not complied with the provisions of section 80AC and is thus not eligible to claim deduction u/s. 80IC.

The appeal filed by the revenue were allowed.

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[2015] 68 SOT 338 (Agra)(SMC) ACIT vs. Krafts Palace ITA No. 2 & 60 of 2015 CO Nos. 3 & 4 (Agra) of 2015 Assessment Year: 2003-04. Date of Order: 31st March 2015

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Section 255(3) – Power of Single Member Bench to hear a case does not depend upon the quantum of addition or disallowances impugned in appeal but on the total income assessed by the AO being upto Rs. Five lakh.

Facts:
The assessee filed its return of income declaring gross total income/business income of Rs. 8,55,068. However, the Assessing Officer (AO) assessed the gross total income of the assessee, before set off of brought forward business loss at Rs.31,41,645. The total income assessed after set off of brought forward business loss was Rs. 4,83,017 and thus well under Rs.5,00,000 threshold limit of assessed income as specified in section 255(3). However, the dispute involved involved in the appeal and the cross objections involved much higher amounts, in excess of that limit.

In view of the above mentioned facts, a question arose as to whether the matter could be heard by Single Member Bench or should it be referred to a Division Bench.

Held:
In terms of section 255(3) the criterion, so far as class of matters which can be heard by SMC Bench, is concerned is only with respect to the assessed income, i.e., total income as computed by the Assessing Officer (AO). The Single Member Bench has the powers to hear any case, which is otherwise in the jurisdiction of this Bench, pertaining to an assessee whose total income as computed by the AO does not exceed Rs.5,00,000 irrespective of the quantum of the additions or disallowances impugned in the appeal.

Once SMC Bench has the powers to hear such an appeal, it is only a corollary to these powers that the Bench has a duty to hear such appeals as well. The reason is simple. All the powers of someone holding a public office are powers held in trust for the good of public at large.

There is, therefore, no question of discretion to use or not to use these powers. It is for the reason that when a public authority has the powers to do something, he has a corresponding duty to exercise these powers when circumstances so warrant or justify.

Having held that a SMC Bench has the power, as indeed the corresponding duty, to decide appeals arising out of an assessment in which income assessed by the AO does not exceed Rs.5,00,000 it may be added that ideally the decision to decide as to which matter should be heard by a Division Bench should be determined on the basis of, if it is to be based on a monetary limit, the amount of tax effect or the subject matter of dispute in appeal rather than the quantum of assessed income.

There seems to be little justification, except relative inertia of the tax administration in disturbing status quo in the policy matters, for the assessed income as a threshold limit to decide whether the appeal should be heard by the SMC Bench or the Division Bench, particularly when, for example because of the brought forward losses, underneath that modest assessed income at the surface level, there may be bigger ice bergs lurking in the dark representing high value tax disputes, adjudication on which may benefit from the collective wisdom and checks and balances inherent in a Division Bench.

However, as the law stands its assessed income which matters and not the tax effect or the quantum of disallowances or additions, impugned in the appeal. All that is relevant to decide the jurisdiction of the SMC Bench is thus the assessed income and nothing other than that.

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[2015] 153 ITD 153 (Chennai) DDIT (Exemptions) vs. Sri Vekkaliamman Educational & Charitable Trust A.Y. 2009 – 10 Date of Order – 27th September 2013.

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Section 13 read with section 11 – Provisions of section 13(1)(c) and
13(2)(c), are not violated when contract for construction is awarded by
the assessee trust on basis of open bid to a firm belonging to managing
trustee as the said firm quoted the lowest rates. Further, the sum
advanced by the assessee to the said firm for ongoing construction work
in normal course of business activity are business advances and the said
advances would not come within the ambit of advances u/s. 13(1)(d).

FACTS
The assessee was registered as a charitable trust u/s. 12AA. It declared nil income and claimed deduction u/s. 11.

The
assessee had given, a contract of building construction, to the firm of
the managing trustee for which the assessee had advanced certain sum to
the said firm. The AO held that the aforesaid advances come within the
ambit of section 13(1)(d) and thus disentitles the assessee to claim
exemption u/s. 11 of the Act.

Also it was admitted fact that the
said firm had earned a benefit of Rs. 17.30 lakh from the said
contract. The AO therefore held that the Managing Trustee enjoyed
benefits out of the income derived by the trust which is against the
provisions of section 13(1)(c) and thereby disallowed the exemption
claimed by the assessee u/s. 11 of the Act.

The CIT(A) after
considering the submissions of both the sides, held that there is no
violation of provisions of section 13(1)(c) or (d) and allowed exemption
u/s. 11.

On appeal by the Revenue before the Tribunal.

HELD THAT
It is an admitted fact that the firm of the managing trustee had carried out the construction of building of the trust.

A
perusal of section 13(1)(c) would show that the Act puts restriction on
the use of income or any property of the trust directly or indirectly
for the benefit of any person referred to in sub-section(3) of section
13.

A reading of Clause (cc) of sub-section (3) of section 13
would show that it includes any trustee of the trust or manager. The
Assessing Officer declined to grant benefit of section 11, as in the
present case construction of building has been carried out by the firm
of a Managing Trustee and thus, derived direct benefit from the
assessee-trust.

A further perusal of clause(c) of sub-section(2)
of section 13 would show that without prejudice to the generality of
the provisions of clause-(c) and clause-(d) of subsection( 1) of section
13, the income or property of the trust or any part of such income or
property shall be deemed to have been used or applied for the benefit of
the person referred to in s/s. (3), if any amount is paid by way of
salary, allowance or otherwise during the previous year to any person
referred to in s/s. (3) out of the resources of the trust or institution
for services rendered and the amount so paid is in excess of what may
be reasonably paid for such services. In the present case, the Assessing
Officer has out rightly held that the assessee is not entitled to the
benefit of section 11 without ascertaining the reasonableness of the
amount paid for the services rendered.

The construction contract
has been awarded to the firm on the basis of open bid. Since the firm
quoted lowest rates, the contract was awarded to the firm. The
Commissioner (A) has categorically given a finding that in cases of
civil construction contracts, especially were no proper books are
maintained the Act recognises normal profit margins at the rate of 8 %.
The firm has earned a profit of 5.8 % which is very reasonable.

Since
the contract was awarded on competitive basis and the profit earned is
reasonable, hence it is held that the provisions of section 13(2)(c) are
not violated.

The CIT(A) has given a well reasoned finding
that certain sum was advanced by the assessee to the firm of Managing
Trustee for the on-going construction work in the normal course of
business activity and thus it was business advance. The aforesaid advances thus do not come within the ambit of advances u/s. 13(1)(d) of the Act.
The appeal of the Revenue is dismissed.

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[2015] 152 ITD 850 (Cochin) Muthoot Finance Ltd. vs. Additional CIT A.Y. 2009-10 Date of Order – 25th July 2014.

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Section 40(a)(i) – Where assessee does not claim the payment made to
nonresident as expenditure but capitalises the same and claims only
depreciation thereon, no disallowance can be made u/s. 40(a)(i).

FACTS
The
assessee, a non-banking financial company, was engaged in providing
gold loans and other allied investment activities. It made payment to
non-resident for providing engineering site services but did not deduct
tax at the time of payment.

The AO disallowed the entire payment made by the assessee u/s. 40(a)(ia) on account of nondeduction of tax at source

The
assessee submitted that it had not claimed said payment made to
non-resident as expenditure but capitalised same and claimed only
depreciation. He submitted that the disallowance could be considered
only in case the assessee claimed deduction while computing the income
chargeable to tax and it had not claimed any deduction.

On appeal, the CIT-(A) upheld the order of the AO.

On
second appeal before the Tribunal, a query was also raised by the bench
whether the disallowance was to be made u/s. 40(a)(ia) or 40(a)(i). In
response to which the representative of the assessee clarified that the
disallowance was made by the lower authority u/s. 40(a) (ia) and section
40(a)(i) was not taken into consideration.

Regarding the merits of the case

HELD THAT
The
payment made to non-resident for technical services provided to the
assessee is admittedly taxable in India, therefore, the assessee is
bound to deduct tax. The assessee can claim the same as expenditure only
if the assessee deducts the tax at the time of payment.

The
language of section 40 clearly says that the amount paid to
non-resident on which tax was not deducted shall not be deducted while
computing the income chargeable to tax. Therefore, if the assessee
has not claimed the amount on which no tax has been deducted, as
expenditure while computing the chargeable income, there is no necessity
for further disallowance. In other words, if the assessee has not
claimed the payment to non-resident as expenditure and not deducted
while computing the income chargeable to tax, there is no question of
further disallowance by the authorities.

Since no material is
available on record to verify whether the amount paid to the
non-resident was deducted or not, while computing the income chargeable
to tax, the issue is remitted back to the AO to decide the same in
accordance with law after giving reasonable opportunity to the assessee.

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TDS – Income deemed to accrue or arise in India – Sections 9(1)(vii)(b) and 195 – A. Ys. 1998- 99 to 2000-01 – Wet-leasing aircraft to foreign company – Operational activities were abroad – Expenses towards maintenance and repairs were for purpose of earning abroad – Payments falling within the purview of exclusionary clause of section 9(1)(vii)(b) – Not chargeable to tax and not liable for TDS

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DIT vs. Lufthansa Cargo India; 375 ITR 85(Del):

The assessee acquired four old aircrafts from a nonresident company outside India and wet-leased them to a foreign company. “Wet-leasing” means the leasing of an aircraft along with the crew in flying condition to a charterer for a specified period. As the assessee was obliged to keep the aircraft in flying condition, it had to maintain them in accordance with the DGCA guidelines to possess a valid airworthiness certificate as a pre-condition for its business. The assessee entered into an agreement with the overhaul service provider, T. T carried out maintenance repairs without providing technical assistance by way of advisory or managerial services.

The Assessing Officer noticed that no tax was deducted at source on payments to T and no application u/s. 195(2) was filed. He held that the payments were in the nature of “fees for technical services” defined in Explanation 2 to section 9(1)(vii)(b) and were, therefore, chargeable to tax and tax should have been deducted at source u/s. 195(1). He passed order u/s. 201 deeming the assesee to be assessee in default for the F. Ys. 1997-98 to 1999- 2000 and levied tax as well as interest u/s. 201(1A). The Tribunal held that the payments made to T and other foreign companies for maintenance repairs were not in the nature of fees for technical services as defined in Explanation 2 to section 9(1)(vii)(b) and that in any event these payments were not taxable for the reason that they had been made for earning income from sources outside India and, therefore, fall within the exclusionary clause of section 9(1)(vii)(b).

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

“i) The level of technical expertise and ability required in such cases is not only exacting but specific, in that, the aircraft supplied by the manufacturer has to be serviced and its components maintained, serviced and overhauled by the designated centers. International and national regulatory authorities mandate that certification of such component safety is a condition precedent for their airworthiness. The exclusive nature of these services could not but lead to the inference that they are technical services within the meaning of section 9(1)(vii).

ii) However, the overwhelming or predominant nature of the assessee’s activity was to wet-lease the aircraft to a foreign company. The operations were abroad and the expenses towards maintenance and repairs payments were for the purpose of earning abroad. Therefore, the payments made by the assessee fell within the purview of the exclusionary clause of section 9(1)(vii)(b) and were not chargeable to tax at source.

iii) The question of law is answered in favour of the assessee and against the revenue.”

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TDS – Chit Fund – Interest – Section 194A – A. Ys. 2004-05 to 2006-07 – Amount paid by Chit Fund to its subscribers – Not interest – Tax not deductible at source on such interest

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CIT vs. Avenue Super Chits P. Ltd.; 375 ITR 76 (Karn)

The assessee ran a chit fund. The assessee had several chit groups which were formed by having 25 to 40 customers to make one chit group. The customers subscribed an equal amount, which depended upon the value of chits. There were two types of chits. One was the lottery system and the other was the auction system. In the lottery system the lucky winner got the chit amount and in the auction system the highest bidder got the chit amount. Under the scheme the unsuccessful members in the auction chit would earn dividend and the successful bidders would be entitled to retain the face value till the stipulated period under the scheme. The Revenue took the view that when the successful bidder in an auction took the face value or the prize money earlier to the period to which he was entitled, he was liable to pay an amount to others who contributed to the prize money which was termed as interest and that this interest amount, which had been paid by the assessee to its members was liable for deduction of tax u/s. 2(28A) and section 194A of the Income-tax Act, 1961. The Commissioner (Appeals) held that the amount paid by way of dividend under the chit scheme by the assessee to the members of the chit could not be construed as interest under the Act and, therefore, there was no liability on the part of the assessee to deduct tax at source. This was upheld by the Tribunal.

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

“In the first place the amount paid by way of dividend could not be treated as interest. Further, section 194A of the Act had no application to such dividends and, therefore, there was no obligation on the part of the assessee to make any deduction u/s. 194A of the Act before such dividend was paid to its subscribers of the chit.”

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Penalty – Concealment – Section 271(1)(c): A. Y. 2003-04 – The rigors of penalty provisions cannot be diluted only because a small number of cases are picked up for scrutiny – No penalty can be levied unless assessee’s conduct is “dishonest, malafide and amounting to concealment of facts” – The AO must render the “conclusive finding” that there was “active concealment” or “deliberate furnishing of inaccurate particulars”

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CIT vs. M/s. Dalmia Dyechem Industries Ltd. (Bom); I. T. A. No. 1396 of 2013 dated 06/07/2015: www. itatonline.org.

For the A. Y. 2003-04, the Assessing Officer disallowed the proportionate interest out ofthe interest paid for the interest free advances given to the sister concern, holding that the assessee had borrowed funds of which interest liability had been incurred. The Assessing Officer also levied penalty holding that the assessee concealed it’s income by furnishing inaccurate particulars. The Commissioner (Appeals) allowed the appeal and cancelled the penalty. The Commissioner came to the conclusion that merely because the claim made by an Assessee was disallowed, penalty cannot be levied, unless it is demonstrated that the Assessee had any malafide intention. The Tribunal accepted the reasoning of the Commissioner (Appeals) that the penalty cannot be levied merely because the claim of the Assessee is found to be incorrect. The Commissioner and the Tribunal relied upon the decision of the Apex Court in the case of CIT vs. Reliance Petroproducts Pvt. Ltd. [2010] 322 ITR 158 (SC):

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

“i) Section 271(1)(c) of the Act lays down that the penalty can be imposed if the authority is satisfied that any person has concealed particulars of his income or furnished inaccurate particulars of such income. The Apex Court in CIT vs. Reliance Petroproducts Pvt. Ltd. [2010] 322 ITR 158 (SC) applied the test of strict interpretation. It held that the plain language of the provision shows that, in order to be covered by this provision there has to be concealment and that the assessee must have furnished inaccurate particulars. The Apex Court held that by no stretch of imagination making an incorrect claim in law, would amount to furnishing inaccurate particulars.

ii) Thus, conditions u/s. 271(1)(c) must exist before the penalty can be imposed. Mr. Chhotaray tried to widen the scope of the appeal by submitting that the decision of the Apex Court should be interpreted in such a manner that there is no scope of misuse especially since a miniscule number of cases are picked up for scrutiny. Because small number of cases are picked up for scrutiny does not mean that rigors of the provision are diluted. Whether a particular person has concealed income or has deliberately furnished inaccurate particulars, would depend on the facts of each case. In the present case, we are concerned only with the finding that there has been no concealment and furnishing of incorrect particulars by the present assessee.

iii) Though the assessee had given interest free advances to it’s sister concerns and that it was disallowed by the Assessing Officer, the assessee had challenged the same by instituting the proceedings which were taken up to the Tribunal. The Tribunal had set aside the order of the Assessing Officer and restored the same back to the Assessing Officer. Therefore, the interpretation placed by Assessee on the provisions of law, while taking the actions in question, cannot be considered to be dishonest, malafide and amounting to concealment of facts. Even the Assessing Officer in the order imposing penalty has noted that commercial expediency was not proved beyond doubt. The Assessing Officer while imposing penalty has not rendered a conclusive finding that there was an active concealment or deliberate furnishing of inaccurate particulars. These parameters had to be fulfilled before imposing penalty on the Assessee.”

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Scientific research expenditure – Weighted deduction – Section 35(2AB) – A. Y. 2003-04 – Denial of deduction by AO on ground that machinery is required to be installed and commissioned before expiry of relevant previous year – Not proper

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CIT vs. Biocon Ltd.; 375 ITR 306 (Karn):

The assessee was engaged in the business of manufacture of enzymes and pharmaceutical ingredients. The Assessing Officer rejected the assessee’s claim for weighted deduction u/s. 35(2AB) of the Income-tax Act, 1961 on three machineries acquired during the year on the ground that the machineries had not been installed and commissioned during the year. 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 provision nowhere suggests or implies that the machinery is required to be installed and commissioned before expiry of the relevant previous year. The provision postulates approval of a research and development facility, which implies that a development facility shall be in existence, which in turn, presupposes that the assessee must have incurred expenditure in this behalf.

ii) The Tribunal had rightly concluded that if the interpretation of the Assessing Officer were accepted, it would create absurdity in the provision inasmuch as words not provided in the statute were to be read into it, which is against the settled proposition of law with regard to the plain and simple meaning of the provision. The plain and homogeneous reading of the provisions would suggest that the entire expenditure incurred in respect of research and development has to be considered for weighted deduction u/s. 35(2AB) of the Act.”

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[2015] 153 ITD 664 (Mumbai – Trib.) DIT (Exemptions) vs. Critical Art and Media Practices A.Y.: 2012 – 13 Date of Order: 11th March 2015.

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Section 2(15), read with sections 12A and 11 – If activities of an assessee trust are charitable and property is held wholly and exclusively under trust for charitable and religious purposes, then such a trust cannot be denied registration merely because its activities are extended outside India. Also the income applied outside India is also eligible for exemption, subject to the provisions of section 11(1)(c), if the activities of the assessee trust tend to promote the international welfare in which India is interested and the approval has been granted by the Board for such application of income.

FACTS
The Ld. DIT(E) had rejected the application of the appellant trust observing that the trust deed of the appellant trust reveals that the appellant trust has charitable as well as non charitable objects such as hosting of artists-inresidence programmes for international artists and raising funds for organising trips, seminars and conferences within and outside the country etc.

The Ld. DIT(E) had further observed that objects of the applicant trust were not merely confined to the territories comprising in India but also extended to and encompassed the whole world and consequently concluded that any activities carried out by the applicant trust in pursuit of aforesaid objects would involve application of funds of the trust outside India which renders it ineligible for exemption. He had therefore held that the objects of the trust contravene the provisions of section 11 of the Act, wherein it has been specifically provided that the application of income of the trust has to be within India, and consequently held that the applicant trust would not be entitled to registration u/s. 12AA of the Act.

On appeal:

HELD THAT
A careful reading of the twin conditions mentioned in section 11(1) reveals that these conditions can be differentiated on the point that the requirement of the first condition is that the property should be held under trust for ‘charitable purposes’ and whether the property is held in India or outside India is not relevant. As per second condition, it is not restricted that the whole of the income should be applied to charitable purposes in India only. The second condition suggests that ‘the income to the extent to which it is applied in India’ for charitable purposes is not to be included in the total income. The interpretation that can be drawn from the above provision is that even if the income is applied for charitable purposes outside India, then, it cannot be said that the purpose or activity of the trust is not charitable. However, the exemption from inclusion in the total income will not be given to such an expenditure incurred by the trust. The exemption as per the second condition has been restricted to the extent up to which such income is applied for charitable activities in India. Hence, if a charitable trust applies some of its income for charitable activities outside India and some of its income for charitable activities in India then it will be entitled to exemption up to the extent such income is applied in India and not otherwise and subject to the other conditions laid down in other provisions of the Act.

A careful reading of the main provision reveals that for a purpose or activity to be charitable in nature, there is no condition that such an activity should be performed ‘in India’ only. Such a condition of activities to be performed in India only is missing in the wording of the section 2(15) defining charitable purposes. Hence, the charity as per the provisions of the Act is not confined or limited to the boundaries of India only. If the activities of a trust fall within the domain of above definition e.g. relief to the poor, education, medical relief or advancement of any other object of general public utility etc. as mentioned above, then it is to be treated as a charitable trust.

The definition of ‘charity’ in no manner can be restricted to the activities done in India only, the ‘charity’ remains the ‘charity’, whether it is done in India or whether elsewhere in any part of the world irrespective of the territorial boundaries. However, so far as the computation of income or the relief under the Income-tax Act is concerned, the Act has restricted the exemption from inclusion in total income to the extent such an income is applied in India. So in the given example, if an institution offers help and support not only in India but also outside India for charitable purposes, such an institution will get benefit of exemption from tax of the income to the extent it is applied in India and not in relation to the income which is applied outside India. But, the fact remains that such an institution will be called a charitable institution only and not a commercial institution.

If the activities of the trust fall in the definition of ‘charitable purposes’ as defined u/s. 2(15) and the property is held under the trust wholly and exclusively for charitable and religious purposes as provided u/s. 11, and the Commissioner is satisfied about the genuineness of such activities, the trust is to be granted registration. For the purpose of grant of registration, the application of income in India is not a pre-condition, if its activities otherwise fall in the definition of ‘charitable activities’. However, so far as the computation of the income is concerned, such an institution will get exemption of income to the extent it is applied in India and not in relation to the income, even if applied for charitable purposes, outside India.

Further, as per the provisions of clause (c) of section 11(1), if the activities upon which the income is applied outside India tend to promote international welfare in which India is interested, such an income is also exempt but subject to approval of the Board.

In the present case, the objects of the trust suggest that the trust has been formed to promote art and culture of India within India and globally which fall in the definition of ‘any other object of general public utility’ and, hence, included in the definition of ‘charitable purposes’. So far as the application of income outside India is concerned, the assessee has vehemently stressed that the projects, conferences and seminars had been carried out by the trust to promote Indian culture and art at international level, further that the activities such as to host artists-inresidence programmes for national as well as international artists for the benefit of society are the objects that promote international welfare in which India is interested. He has further stressed that the trust has received permission from the Home Ministry, Government of India, to carry out such activities outside India. Considering the overall discussion it is to be held that the activities of the trust would fall in the definition of ‘charitable purposes’. However, so far as the application of income outside India, as claimed to have been applied to promote international welfare in which India is interested is concerned, it is to be proved with necessary evidences and also subject to approval of the Board for entitlement of exemption from tax on such income. However, the registration cannot be refused on the ground that the income is applied for charitable purposes outside India. 

In result, the appeal of the assessee-trust is allowed.

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[2015] 152 ITD 828 (Mumbai – Trib.) Navi Mumbai SEZ (P.) Ltd. vs. Assistant CIT A.Y.: 2008-09 Date of Order: 22nd December 2014.

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Section 37(1) – Where assessee incurs certain expenditure for increase in share capital and if the entire incremental share capital is used to meet the need for more working funds, then the said expenditure is to be allowed as revenue expenditure.

FACTS
The assessee filed its return wherein expenditure incurred for increase on share capital was claimed as revenue expenditure.

The revenue authorities rejected assessee’s claim holding that expenditure in question was capital in nature

On appeal before Tribunal:

HELD THAT
It was noted from record that the entire incremental share capital has been absorbed in the inventories. There is not an iota of doubt that the increase in the share capital has been fully utilised only in the purchase of trading stock.

In the present day scenario, the authorised/paid up capital is not static and can also be reduced as per provisions of the Companies Act. In the light of the factual matrix of the balance sheet, plea raised by the assessee is allowed and the Assessing Officer is directed to treat the expenditure in question as revenue expenditure..

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

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TDS- Disallowance u/s. 40(a)(ia) – A. Ys. 2008-09 and 2009-10 – Second proviso to section 40(a)(ia) which states that TDS shall be deemed to be deducted and paid by a deductor if resident recipient has disclosed the amount in his return of income and paid tax thereon, is retrospective in nature

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CIT vs. Ansal Land Mark Township (P.) Ltd.; [2015] 61 taxmann.com 45 (Delhi):

The following question was raised before the Delhi High Court:

“Whether the second proviso to Section 40(a)(ia) (inserted by the Finance Act, 2012), which states that TDS shall be deemed to be deducted and paid by a deductor if resident recipient has disclosed the amount in his return of income and paid tax thereon, is retrospective in nature or not ?”

The High Court held as under:

“i) Section 40(a)(ia) was introduced by the Finance (No. 2) Act, 2004 to ensure that an expenditure should not be allowed as deduction in the hands of an assessee in a situation where income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. Hence, section 40(a)(ia) is not a penalty provision for tax withholding lapse but it is a provision introduced to compensate any loss to the revenue in cases where deductor hasn’t deducted TDS on amount paid to deductee and, in turn, deductee also hasn’t offered to tax income embedded in such amount.

ii) The penalty for tax withholding lapse per se is separately provided u/s. 271C. and, therefore, section 40(a)(ia) isn’t attracted to the same. Hence, an assessee could not be penalized u/s. 40(a)(ia) when there was no loss to revenue.

iii) The Agra Tribunal in the case of Rajiv Kumar Agarwal vs. ACIT [2014] 45 taxmann.com 555 (Agra – Trib.) had held that the second proviso to Section 40(a) (ia) is declaratory and curative in nature and has retrospective effect from 1st April, 2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004, even though the Finance Act, 2012 had not specifically stated that proviso is retrospective in nature.”

The High Court affirmed the ratio laid down by the Agra Tribunal and held that the said proviso is declaratory and curative in nature and has retrospective effect from 1st April 2005.

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TDS – Failure to deduct – Section 201(1), (1A), (3) – A. Y. 2008-09 – Notice and order deeming the assessee in default – Notice declared barred by limitation by court – Amendment extending period of limitation – AO has no power to issue notice afresh on the same basis

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Oracle India P. Ltd. vs. Dy. CIT; 376 ITR 411 (Del):

In respect of F. Y. 2007-08, the Dy. Commissioner had issued a notice u/s. 201 dated 17/02/2014 and thereafter passed an order pursuant to the notice. The assessee filed a writ petition and contended that under proviso to section 201(3) introduced w.e.f. 01/04/2010, an order can be passed at any time on or before 31/03/2011 and that the notice and the order were barred by limitation. The Court allowed the writ petition and held that the notice dated 17/02/2014 was barred in view of the provisions of section 201(3) as it then existed. Thereafter another notice was issued on 20/01/2015, to take advantage of the amended section 201(3) which was brought into effect from 01/10/2014 whereby the period of limitation had been extended to seven years.

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

“The notice that was issued on 20/01/2015, was on the basis of the same information in respect of which the notice dated 17/02/2014 had been issued. Thus, those proceedings which had ended and attained finality with the passing of the order of the Court in the writ petition could not be sought to be revived. Even otherwise, in so far as the F. Y. 2007-08 is concerned, the period for completing the assessment u/s. 201(1)/201(1A) had expired on 31/03/2015. The impugned notice is set aside.”

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Refund – Adjustment against demand u/s. 245 – A. Ys. 2004-05, 2007-08 and 2008-09 – Grant of stay of demand – Section 245 cannot be invoked

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Hindustan Unilever Ltd. vs. Dy. CIT; 279 CTR 71 (Bom):

By an intimation u/s. 245 dated 31/07/2013, the Assessing Officer sought to adjust the refund for the A. Y. 2006-07 against the demand for the A. Ys. 2004-05, 2007-08 and 2008-09. The assessee filed its objections pointing out that no demand is outstanding for A. Y. 2004-05 and stay of the demand has been granted u/s. 220(6) in appeal pending before he CIT(A) for the A. Ys. 2007-08 and 2008-09. Ignoring the objections, the Assessing Officer adjusted the refund against the demand.

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

“Factually there was no due outstanding for the A. Y. 2004-05 and the demand for the A. Ys. 2007-08 and 2008-09 had been stayed pending disposal of the assessee’s appeal before the CIT(A). Section 245 cannot therefore be invoked.”

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Reassessment – Sanction u/s. 151 – A. Y. 2007-08 – In the absence of the requisite sanction u/s. 151 the notice u/s. 148 will be invalid

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Dhadda Export vs. ITO; 278 CTR 258 (Raj):

For the A. Y. 2007-08,
the Assessing Officer issued notice u/s. 148 without obtaining the
prior sanction u/s. 151 of the Act. The objection raised on this count
was countered by relying on section 292B of the Act.

The Rajasthan High Court allowed the writ petition challenging the notice and held as under:
“i)
The objection has been rejected by the ITO citing the reason that
required sanction of CIT was not taken due to oversight that assessment
of the assessee firm had already been completed u/s. 143(3). It was
stated that mistake was committed inadvertently and is curable by
recourse to section 292B.
ii) That plea is liable to be rejected
because when specific provision has been inserted in the proviso to
section 151(1), as a prerequisite condition for issuance of notice,
namely, sanction of the CIT or the Chief CIT, the Assessing Officer
cannot find escape route for not doing so by relying on section 292B.
Resort to section 292B cannot be made to validate an action, which has
been rendered illegal due to breach of mandatory condition of the
sanction on satisfaction of Chief CIT or CIT under proviso to
sub-section (1) of section 151.
iii) This is an inherent lacunae
affecting the very correctness of the notice u/s. 148 and is such which
is not curable by recourse to section 292B.”

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Income from house property – Annual letting value – Section 23 – A. Y. 1986-87 – Annual value is lesser of fair rent and standard rent

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Vimal R. Ambani vs. Dy. CIT; 375 ITR 66 (Bom):

For the A. Y. 1986-87, the Assessing Officer determined the annual value on the basis of the standard rent and not on the basis of the rateable value as determined by the municipal corporation. This was upheld by the Tribunal.

On appeal by the assessee, the following question was raised before the Bombay High Court:

“Whether, on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal was right in holding that in computing the property income u/s. 23 of the Income-tax Act, 1961, the annual letting value of the self-occupied property has to be the sum equivalent to the standard rent under the Rent Control Act and not the municipal rateable value.”

The Bombay High Court held as under:

“(i) While determining the annual letting value in respect of properties which are subject to rent control legislation and in cases where the standard rent has not been fixed, the Assessing Officer shall determine the annual letting value in accordance with the relevant rent control legislation. If the fair rent is less than the standard rent, then, it is the fair rent which shall be taken as annual letting value and not the standard rent. This will apply to both self-acquired properties and general cases where the property is let out.

(ii) The order of the Tribunal had to be set aside. Matter stands remanded for consideration in accordance with the aforesaid norms.”

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Deemed dividend – Section 2(22)(e) – A. Y. 2009- 10 – Loan to shareholder – Amounts taken as loan from company and payments also made to company – AO directed to verify each debit entry and treat only excess as deemed dividend

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Sunil Kapoor vs. CIT; 375 ITR 1 (Mad):

For the A. Y. 2009-10,
the Assessing Officer made an addition of Rs. 76,86,829/- as deemed
dividend u/s. 2(22) (e) of the Income-tax Act, 1961, being the loan
received from KIPL of which the assessee was a shareholder. The
Assessing Officer noted that there were certain payments as on
31/03/2009 and the balance due to the company was Rs.39,32,345/-. The
assessee pointed out that there was credit balance in favour of the
assessee in a sum of Rs.45,44,303/- while there was debit balance of
Rs.39,32,345/-, and accordingly, the company itself had to pay
Rs.6,11,957/-. CIT(A) and the Tribunal held that the Assessing Officer
had erred in not taking into consideration the amount that has been
repaid by the assessee to KIPL. Therefore, the Assessing Officer was
directed to verify each and every transaction and, accordingly, to
determine the dividend amount.

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

“i)
Any amount paid to the assessee by the company during the relevant
year, less the amount repaid by the assessee in the same year, should be
deemed to be construed as “dividend” for all purposes. However, the
Assessing Officer had taken the entire amount of Rs.76,86,829/- received
by the assessee from the company as dividend, while computing the
income but had lost sight of the payments made.

ii) In such
circumstances, the Commissioner(Appeals) had rightly come to the
conclusion that the position as regards each debit would have to be
individually considered because it may or may not be a loan. The
Assessing Officer, was, therefore, directed to verify each debit entry
on the aforesaid line and treat only excess amount as deemed dividend
u/s. 2(22)(e) of the Act.”

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Charitable Institution – Exemption u/s. 11 – A. Y. 2006-07 – Where the objects of the trust include “(2)Devising means for imparting education in and improving the Ayurvedic system of Medicine and preaching the same. In order to gain objects No. 2, it is not prohibited to take help from the English or Yunani or any other system of medicine and according to need one or more than one Ayurvedic Hospital may be opened.”, it cannot be held that running an allopathic hospital is ultra vires to the ob<

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Mool Chand Khairati Ram Trust vs. DIT; [2015] 59 taxmann.com 398 (Delhi)

The Assessee was a charitable institution engaged in running a hospital (both Allopathic and Ayurvedic). For the A. Y. 2006-07, the Assessing Officer had denied the exemption claimed by the Assessee u/ss. 11 and 12 of the Act as the Assessing Officer was of the view that the activities of the Assessee were not in accordance with its objects. In addition, the Assessing Officer also denied the Assessee’s claim for depreciation on assets purchased by the Assessee by application of its income that was exempt u/s. 11 of the Act. The CIT (Appeals) allowed the Assessee’s claim and also held that the Assessee was entitled for depreciation on the assets purchased by application of its income, which was exempt u/s. 11 of the Act.

The Tribunal accepted the Revenue’s contention that the properties of the Assessee had not been applied towards its objects. The Tribunal held that the Assessee’s activities relating to Allopathic system of medicine had more or less supplanted the activities relating to Ayurvedic system of medicine and concluded that predominant part of the Assessee’s activities exceeded the powers conferred on the trustees and the objects of the Assessee Trust were not being followed. The Tribunal held that whilst the activities of the Assessee relating to providing medical relief by the Ayurvedic system of medicine were intra vires its objects, the activities of providing medical reliefs through Allopathic system of medicine was ultra vires its objects. Consequently, the Assessee was not entitled to exemption u/s. 11 of the Act in respect of income from the hospital run by the Assessee, which offered medical relief through Allopathic system of medicine. Accordingly, the Tribunal directed that the income and expenditure of the Assessee from the activities relating to the two disciplines of medicine, namely Ayurveda and Allopathy, be segregated. Insofar as the Assessee’s claim for depreciation was concerned, the Tribunal held that deprecation on assets, used for providing relief through Ayurvedic system of medicine or used in education and research relating to Ayurvedic system of medicine, was allowable notwithstanding that the expenditure on purchase of the assets was exempted u/s. 11(1)(a) of the Act. However, insofar as the assets purchased for providing medical relief through Allopathic system of medicine was concerned, the Tribunal held that depreciation would not be available if the expenditure incurred on purchase of the assets had been exempted u/s. 11(1)(a) of the Act.

On appeal by the assessee, the Delhi High Court held as under:

“i) In our view, the Assessing Officer and the Tribunal erred in concluding that the Assessee’s activities were in excess of its objects. Running an integrated hospital would clearly be conducive to the objects of the Assessee. The trustees have carried out the activities of the trust bonafide and in a manner, which according to them best subserved the charitable objects and the intent of the Settlor. Thus the activities of the Assessee cannot be held to be ultra vires its objects. The Assessing Officer and the Tribunal were unduly influenced by the proportion of the receipts pertaining to the Ayurvedic Research Institute and the hospital. In our view, the fact that the proportion of receipts pertaining to the Ayurvedic Research Institute is significantly lower than that pertaining to the hospital would, in the facts of the present case, not be material. Undisputedly, significant activities are carried out by the Assessee for advancement and improvement of the Ayurvedic system of medicine in the institution established by the Assessee and though the receipts from the Allopathic treatment are larger, the same does not militate against the object for which the institution has been set up and run.

ii) Insofar as the issue regarding depreciation on assets used for providing Allopathic systems of medicine is concerned, the learned counsel for the Revenue did not dispute that the depreciation would be allowable if the activities of the Assessee were considered to be within the scope of its objects. The Tribunal had denied the claim of depreciation, in respect of assets used for providing medical relief through Allopathic system of medicine, only on the basis that the Assessee’s activity for running the hospital was ultra vires its objects. In the circumstances, the third question is to be answered in the negative and in favour of the Assessee.”

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Business income or short term capital gain – A. Ys. 2005-06 and 2006-07 – Transaction in shares NBFC – Whether business transactions or investment – Frequency of transactions is not conclusive test – Concurrent finding that transactions not business activity – Upheld

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CIT vs. Merlin Holdings P. Ltd.; 375 ITR 118 (Cal):

The assessee was a certified NBFC. Its main activities were giving loans and taking loans and investing in shares and securities. For the A. Ys. 2005-06 and 2006-07, the Assessing Officer opined that the activity which, according to the assessee was on investment account amounted business activity and, therefore, he treated the short term capital gains of Rs.1,01,00,000 as business income. The Commissioner (Appeal) and the Tribunal accepted the assessee’s claim that it is short term capital gain.

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

“i) The frequency of transactions in shares alone cannot show that the intention of the investor was not to make investment. The Legislature has not made any distinction on the basis of frequency of the transactions. The benefit of short term capital gains can be availed of, for any period of retention of shares upto 12 months. Although a ceiling has been provided, there is no indication as regards the floor, which can be as little as one day. The question essentially is a question of fact.

ii) The assessee had adduced proof to show that some transactions were intended to be by way of investment and some transactions were by way of speculation. The revenue had not been able to find fault from the evidence adduced. The mere fact that there were 1,000 transactions in a year or mere fact that the majority of the income was from the share dealings or that the managing director of the assessee was also the managing director of a firm of share brokers could not have any decisive value.

iii) The Commissioner (Appeals) and the Tribunal have concurrently held against the views of the Assessing Officer. On the basis of the submissions made on behalf of the Revenue, it was not possible to say that the view entertained by the Commissioner (Appeals) or the Tribunal was not a possible view. Therefore, the decision of the Tribunal could not be said to be perverse. No fruitful purpose was likely to be served by remanding the matter.”

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Business expenditure – Section 37 – A. Y. 2005- 06 – Assessee running hospital – Daughter of MD working in hospital as doctor – Expenditure on her higher studies incurred by assessee – She comes back to work in hospital – Expenditure had nexus with business of assessee – Expenditure allowable as deduction

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Mallige Medical Centre P. Ltd. vs. JCIT; 375 ITR 522 (Karn):

The assessee company was running a hospital. In the A. Y. 2005-06, it had claimed deduction of Rs.5 lakh spent for the higher education of the daughter of the managing director of the company who was working in the assessee’s hospital as a doctor. The deduction was claimed on the ground that the daughter was committed to work for the assessee after successful completion of studies. The Assessing Officer disallowed the claim for deduction. The Tribunal upheld the disallowance.

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

“i) Before the expenditure was incurred, the daughter had acquired a degree in medicine. She was employed by the assessee. She was sent outside the country for acquiring higher educational qualification, which would improve the services, which the assessee was giving to its patients. It was in this context, that the sum of Rs.5 lakh was spent. That was not in dispute. After acquiring the degree she had come back and she was working with the assessee.

ii) Therefore, there was a direct nexus between the expenses incurred towards the education, with the business, which the assessee was carrying on. In that view of the matter, the expenditure was deductible.”

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Penalty – Concealment of income – Section 271(1)(c) – A. Y. 2005-06 – Assessment u/s. 115JB – No change in book profits and assessed tax – Penalty u/s. 271(1) (c) could not be levied

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CIT vs. Citi Tiles Ltd.; 278 CTR 245 (Guj):

For the A. Y. 2005-06, the assessee was assessed u/s. 115JB of the Income-tax Act, 1961. There was addition to the normal income but the book profits remained the same. The Assessing Officer imposed penalty u/s. 271(1)(c) for concealment of income. The Tribunal cancelled the penalty.

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

“CIT(A) having not permitted addition in book profits u/s. 115JB even after detection of concealment, there remained no tax sought to be avoided. Hence penalty u/s. 271(1)(c) could not be levied.”

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Smt. Shreelekha Damani vs. DCIT ITAT Mumbai `F’ Bench Before Vijay Pal Rao (JM) and N. K. Bhillaiya (AM) ITA No. 4061 /Mum/2012 A. Y. : 2007-08. Decided on: 19th August, 2015. Counsel for assessee / revenue : J. D. Mistry / Manjunath R. Swamy

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Sections 153A, 153D – If the approval granted by the Additional Commissioner is devoid of application of mind, mechanical and without considering the materials on record, such an approval renders the assessment order void.

Facts:
In the search carried out on Simplex group of companies and its associates, the office/residential premises of the company and its directors/connected persons were covered. On the basis of incriminating documents/books of account found during the course of search, assessment was completed u/s. 143(3) r.w.s. 153A of the Act. As per endorsement on page 11 of the assessment order, the assessment order was passed with the prior approval of the Addl. CIT, Central Range-7, Mumbai.

Aggrieved by the additions made, the assessee preferred an appeal to the CIT(A).

Aggrieved, by the order passed by CIT(A), the assessee preferred an appeal to the Tribunal.

In the Tribunal, the assessee preferred an application to raise additional ground viz., that the A.O. has not complied with the provisions of section 153D and hence the assessment u/s. 153A was bad in law.

Held:
The Legislative intent is clear inasmuch as prior to the insertion of section 153D, there was no provision for taking approval in cases of assessment and reassessment in cases where search has been conducted. Thus, the legislature wanted the assessments/reassessments of search and seizure cases should be made with the prior approval of superior authorities which also means that the superior authorities should apply their minds on the materials on the basis of which the officer is making the assessment and after due application of mind and on the basis of seized materials, the superior authorities have to approve the assessment order.

The Tribunal noted that the Addl. CIT had granted approval vide his letter dated 31.12.2010 where he mentioned that as per his letter dated 20.12.2010, the AOs were asked to submit the draft orders for approval u/s. 153D on or before 24.12.2010. He had also mentioned that since the draft order in the case of the assessee was submitted on 31.12.2010, there was not much time left for him to analyse the issues of draft order on merit. Therefore, he approved the draft order as it was submitted.

Having noted the language of the approval, it came to a conclusion that the language of the approval letter established that there has been no application of mind by the Addl. CIT. It held that the approval granted is devoid of any application of mind, is mechanical and without considering the materials on record. It held that in its opinion the power vested in the Joint Commissioner to grant or not to grant approval is coupled with a duty. The Addl CIT is required to apply his mind to the proposals put up to him for approval in the light of the material relied upon by the AO. The said power cannot be exercised casually and in a routine manner.

The Tribunal held the assessment order under consideration to be bad in law and annulled it.

The appeal filed by the assessee was allowed.

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2015-TIOL-1363-ITAT-HYD C. H. Govardhan Naidu Prodduturu vs. DCIT A. Ys.: 2007-08 to 2011-12. Date of Order: 5th August 2015

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Section 263, 271D – Failure of the AO to initiate proceedings u/s. 271D for violation of section 269SS could not be considered as an error calling for revision u/s. 263.

Facts:
Consequent to the search and seizure action u/s. 132 of the Act, at the residential premises of the assessee, notices were issued and assessments made by the Assessing Officer for assessment years 2007-08 to 2011- 12 u/s. 143(3) r.w.s. 153A of the Act.

The CIT on examining the assessment record found that for A.Y. 2007-08 to 2011-12, the assessee had raised/repaid loans in cash, violating the provisions u/s. 269SS/269T which attract penalty leviable u/s. 271D/ 271E of the Act. Since the same, according to him, were not examined by the A.O. the assessments so completed required revision u/s. 263. He issued notices u/s. 263, to the assessee, to show cause why assessments made for all five years under consideration should not be revised.

The CIT, considering the submissions made by the assessee to be not acceptable, passed an order directing the A.O. to redo the same after making detailed inquiries and investigations on the issues pointed out by him in the notices issued u/s. 263.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The issue under consideration is squarely covered in favour of the assessee by the decision of Kolkata Bench of the Tribunal in the case of M. Dhara & Brothers vs. CIT-XVI (2015-TIOL-482-ITAT-KOL) wherein it was held by the Tribunal by following the decision of the Hon’ble Calcutta High Court in the case of CIT vs. Linotype & Machinery Ltd. 192 ITR 337 (Kol)., that the failure of the A.O. to initiate proceedings u/s. 271D for violation of section 269SS could not be considered as an error calling for revision u/s. 263.

The Tribunal held that there were no errors in the orders passed by the A.O. u/s. 143(3) r.w.s. 153A of the Act for all the five years under consideration which were prejudicial to the interest of the revenue calling for revision by the Learned CIT(A) u/s. 263. The Tribunal set aside the impugned common order passed by the CIT, u/s. 263, for all the five years under consideration and restored the orders passed by the A.O. u/s. 143(3) r.w.s. 153A.

The appeals of the assessee were allowed.

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2015-TIOL-1467-ITAT-MUM ACIT vs. Tops Security Ltd. A. Y.: 2008-09. Date of Order: 27th May 2015

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Section 43B – Amount of service tax, billed to the client but not
received, not having been paid to the Central Government, in view of the
provisions of the Finance Act, 1994 read with Rule 6 of Service Tax
Rules, 1994, cannot be disallowed u/s. 43B.

Facts:
The
Assessing Officer disallowed a sum of Rs.6,43,88,850 u/s. 43B of the
Act in view of the fact that the assessee had not paid this amount till
due date of filing its return of income.

Aggrieved, the assessee
preferred an appeal to the CIT(A) where it contended that the amount
under consideration though was included in the bills but was not
collected from the customers. Referring to Rule 6 of Service Tax Rules,
1994, it was argued that tax becomes payable only when it is collected
from the customers. The CIT(A) following the decision of the Madras
Bench of the Tribunal in the case of CIT vs. Real Image Media
Technologies [114 ITD 573(Mad)] allowed this ground of appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
TheTribunal
noted that in the assessee’s own case, for A.Y. 2005-06, this issue was
decided in favour of the assessee. It noted the following observations
in order dated 14.11.2014 –

“We further note that an
identical issue was considered and decided by this Tribunal in
assessee’s own case for A.Y. 2005-06, vide decision dated 30.6.2010, in
ITA No. 5393/ Mum/2008 in para 14 as under:-

14. After
considering the rival submissions and perusing the relevant material on
record it is seen that a sum of Rs.2,74,26,695 represents the amount
which was debited to the profit and loss account but not paid to the
Government as it was not collected. The remaining amount of Rs.45 lakh
and odd represents the amount which was collected by the assessee and in
turn paid to the Government in this year. The contention of the learned
Departmental Representative that the said sum of Rs. 3.19 crore which
was claimed as deduction should be disallowed u/s 43B as it was not paid
to the Government, does not merit acceptance in view of the direct
order of the Tribunal passed by the Chennai Bench in ACIT vs. Real Image
Media Technologies (P.) Ltd. [114 ITD 573 (Chennai)]. In this case it
has been held that service tax though billed but not received not having
been credited to the Central Government by virtue of Finance Act, 1994
read with Rule 6 of the Service Tax Rules, 1994, cannot be disallowed
u/s. 43B. No contrary judgment has been brought to our notice by the
learned Departmental Representative. Respectfully following the
precedent, we uphold the view taken by the learned CIT(A) on this issue.
This ground is not allowed.”

2.2 The issue before us, is
regarding disallowance of Service Tax which was not collected by the
assessee from the customers to the tune of Rs.5,12,22,734/-. Since an
identical issue was directed by this Tribunal in assessee’s own case
(supra), accordingly, following the earlier order of this Tribunal, we
do not find any error or illegality in the impugned order of CIT(A) qua
this issue. …..”

Following the above mentioned decision, for
the sake of consistency, the Tribunal decided this issue in favour of
the assessee and against the Revenue.

This ground of appeal of the revenue was dismissed.

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2015-TIOL-1376-ITAT-HYD ACIT vs. Manjeera Hotels & Resorts Ltd. A. Y.: 2008-09. Date of Order: 10th July 2015

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Section 32 – Transformers, HT lines & miscellaneous civil works form part of wind mill and are entitled to depreciation @ 80% under that category. These are not separate independent Plant & Machinery but are integral part of the windmills system and have no independent existence as Plant & Machinery. The civil works such as foundations cannot be treated as buildings so as to consider them as independent assets.

Facts:
The assessee company, engaged in hotel business, forayed into business of wind mills power generation. In its return of income filed the assessee had claimed depreciation on items like transformer, HT lines, electrical supplies and certain civil work @ 80%. The Assessing Officer (AO) disallowed part of depreciation on these items. He allowed depreciation on items of plant and machinery (transformer, HT lines and electrical supplies) @ 15% and on civil works @ 10%.

Aggrieved, the assessee preferred an appeal to CIT(A). The CIT(A) following the decision in the case of ACIT vs. Rakesh Gupta (Chd Trib)[ 60 SOT 81].

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the issue under consideration is squarely covered, in favor of the assessee, by the following decisions of the co-ordinate bench – ACIT vs. Rakesh Gupta [60 SOT 81 (Chd) DCIT vs. Lanco Infratech Ltd. [2014-TIOL-133-ITAT-HYD]

Following the above decisions, the Tribunal held that the items which were treated by the AO as separate independent Plant & Machinery were integral part of the windmill system and have no independent existence as Plant & Machinery. The civil works such as foundations cannot be treated as buildings so as to consider them as independent assets. The Tribunal held that these items qualify for depreciation @ 80%.

The appeal filed by the Revenue was dismissed.

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Export oriented undertaking – Exemption u/s. 10B – A. Y. 2007-08 – Development Commissioner granting approval to assessee as 100% export oriented unit – Board of Approval ratifying this subsequently – Ratification relates back to date on which Development Commissioner granted approval – Assessee is entitled to exemption

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Principal CIT vs. ECI Technologies Pvt. Ltd.; 375 ITR 595 (Guj):

For
the A. Y. 2007-08, the assessee claimed deduction u/s. 10B as a 100%
export oriented unit. It had obtained approval from the Development
Commissioner. The Assessing Officer disallowed the claim on the ground
that there was no ratification of the decision of the Development
Commissioner by the Board of Approval. The Commissioner(A) found that
the approval was subsequently ratified by the Board of Approval and
accordingly allowed the assessee’s claim. The Tribunal confirmed the
decision of the Commissioner (Appeals).

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

“i)
Circular No. 68 issued by the Export Promotion Council for EOUS and
SEZS dated May 14, 2009, made it clear that from 1990 onwards the Board
of Approval had delegated the power of approval of 100% export oriented
undertakings to the Development Commissioner and, therefore, the
Development Commissioner, while granting the approval of the 100% export
oriented unit, exercises delegated powers.
ii) In any case when at
the relevant time the Development Commissioner granted approval of the
100% export oriented unit in favour of the assessee, which came to be
subsequently ratified by the Board of Approval the ratification shall be
from the date on which the Development Commissioner granted the
approval. Hence, both the Commissioner (A) as well as the Tribunal have
rightly held that the assessee was entitled to deduction u/s. 10B as
claimed.”

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Export oriented undertaking – Exemption u/s. 10B – A. Y. 2007-08 – Part of manufacture outsourced but under control and supervision of assessee – Assessee entitled to exemption

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MKU (Armours) P. Ltd. vs. CIT; 376 ITR 514 (All):

The assessee is a 100% export oriented unit. For the A. Y. 2007-08 the Assessing Officer disallowed the assessee’s claim for exemption u/s. 10B on the ground that the assessee had got the manufacture outsourced. The Commissioner (Appeals) found that only a part of the manufacturing activity was got done by the assessee from outside agency and that too under the direct control and supervision of the staff of the assessee. After the job work, the product was returned to the assessee’s factory, where the final product was assembled, packed and dispatched to the overseas buyers. He allowed the claim of the assessee. However, the Tribunal restored the order of the Assessing Officer.

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

“A new product had come out at the final stage. It was not a case of changing the label or the cover of the product. Only a part of the manufacturing activities was got done by the assessee from the outside agency and that too under the direct control and supervision of the managerial and technical staff available with the assessee. The assessee was entitled to exemption u/s. 10B.”

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Educational Institution – Exemption u/s. 10(23C)(vi) – A. Y. 2009-10 – One of the object clauses providing trust could run business – No finding recorded that predominant object of trust was to do business – Trust is entitled to exemption

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HARF Charitable Trust vs. CCIT.; 376 ITR 110 (P&H):

The
assessee trust was running educational institutions. The Chief
Commissioner rejected the assessee’s application for grant of approval
for exemption u/s. 10(23C)(vi) of the Income-tax Act, 1961, on the
ground that the assessee trust had an intention to carry out business
activity which was not permissible for a charitable organisation. The
trustees were in place for the whole duration of their life and it gave
the organisation a look and character of a private body rather than a
charitable organisation and the objectives were not related the
promotion of education and the educational trust did not exist solely
for educational purposes.

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

“i) The school run by the assessee as such was affiliated with the Central Board of Secondary Education and had also been granted registration u/s. 12A w.e.f. 15/07/1997. Merely because one of the clauses of the trust deed provided that the trust would carry on other business as decided by the trustees that would not per se disentitle it from being considered for registration u/s. 10(23C)(vi).
ii) The reasoning that the trust had intention to carry out the business and the institution was not existing solely for educational purposes would amount to giving a very narrow meaning to the section and the predominant object test was to be applied. It was not that the Chief Commissioner came to the conclusion that the trust was doing some other business and the business was generating substantial amounts which would override the main objects of the trust which pertain mainly to the cause of education. In the absence of any such finding that the trust was doing business, the application could not have been rejected only on this ground that one of the clauses in the objects provided such right to the trust. The prescribed authority could have made it conditional by holding that if any such business was carried out, the registration granted was liable to be cancelled.
iii) Therefore, the order refusing to grant approval of exemption u/s. 10(23C)(vi) could not be justified solely on the ground that in view of a clause which provided that the trust could run a business, it would be debarred as such for registration on the ground that it was not existing solely for educational purposes. That merely a conferment of power to do business would not debar the right of consideration of the trust without any finding being recorded that the predominant object of the trust was to do business.
iv) Thus, the Chief Commissioner misdirected himself in rejecting the application on this ground without coming to any conclusion that the trust was carrying on any other activity under clause (i). It was also a matter of fact now that the trust had already also deleted the objectionable clause for the year 2010-11. The Chief Commissioner was directed to decide the assessee’s application afresh.”

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Disallowance u/s. 14A – A. Y. 2004-05 – Section 14A will not apply if no exempt income is received or receivable during the relevant previous year

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Cheminvest Ltd. vs. CIT; [2015] 61 taxmann.com 118 (Delhi)

In
the case of the assessee Cheminvest Ltd., the Special Bench of the ITAT
in [2009] 121 ITD 318 (DELHI)(SB) held that section 14A disallowance can
be made in year in which no exempt income has been earned or received
by assessee. It referred to the decision of Apex Court in case of CIT
vs. Rajendra Prasad Moody [1978] 115 ITR 519 to settle this controversy.

In the appeal by the assessee, the following question was raised before the Delhi High Court:

“Whether
disallowance under Section 14A can be made in a year in which no exempt
income has been earned or received by assessee?

The High Court held in favour of assessee as under:
“(i)
The Special Bench has relied upon the decision of the Supreme Court in
Rajendra (supra). In such case the Supreme Court held that Section
57(iii) does not say that expenditure shall be deductible only if any
income is made or earned. The decision of Supreme Court was rendered in
context of allowability of deduction u/s. 57(iii). Thus, such decision
could not be used in reverse to contend that even if no income has been
received, the expenditure incurred can be disallowed u/s. 14A.

(ii)
The expression ‘does not form part of total income’ in Section 14A
envisages that there should be an actual receipt of income, which is not
includible in the total income, for the purpose of disallowing any
expenditure in relation to said income.

(iii) In other words,
Section 14A will not apply if no exempt income is received or receivable
during the relevant previous year.”

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Business expenditure-Capital or revenue expenditure – Section 37 – A. Y. 1998-99 – Machine not put to use on ground that technology had become obsolete – Expenditure incurred for development of machines is revenue expenditure

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CIT vs. Britannia Industries Ltd.; 376 ITR 299 (Cal):

In the previous year relevant to A. Y. 1998-99, the assessee had developed four machines at a cost of Rs. 46,26,552/. However, after the machines were developed, the assessee found that the technology used had already become obsolete. Therefore, the machines were not put to use for manufacturing purposes. The assessee claimed the expenditure as revenue expenditure. The Assessing Officer rejected the claim. CIT(A) held that the expenditure is allowable u/s. 37. The Tribunal upheld the allowance.

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

“The question whether the expenses incurred on account of development of machines was revenue expenditure or not basically is a question of fact and when the Tribunal had concurred with the views expressed by the Commissioner (Appeals) and the view taken by them was a plausible view, no interference in the order of the Tribunal was warranted.”

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Total Income – Income of minor child of assessee from admission to the benefits of partnership cannot be taxed in the hands of the assessee u/s. 64(1) (iii) even when read with Explanation 2A where income earned by the trust cannot be utilised for the benefit of the minor during its minority.

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Kapoor Chand (Deceased) vs. ACIT (2015) 376 ITR 450 (SC)

The
brother-in-law of the appellant, namely Shri Ram Niwas Agarwal had
created two trusts for the benefit of two minor children of the
appellant, Kapoor Chand. One trust known as Priti Life Trust was for the
benefit of Kumari. Priti who was aged about 7 years and the other trust
was created by the name of Anuj Family Trust for the benefit of master
Anuj, minor son of the appellant, Kapoor Chand. One of the important
terms of both the trust deeds was that income so earned by the trusts
shall not be received by two minors during their minority and will be
spent for their benefits only once they attain the majority. Another
fundamental clause in both the trust deeds was that in case any of the
beneficiaries died before attaining majority, his/ her share would be
given to the other sibling. Both these trustees became partners in the
partnership firm. The said partnership firm earned profits in the year
1980-81 and share of the two trusts was given to them.

Since
these trusts were for the benefit of two minor children of the
appellant, invoking the provisions of section 64(1) (iii) of the
Income-tax Act, 1961 (“the Act”), the Assessing Officer included the
said income in the income of the assessee and taxed it as such.

The appellant contested the assessment by filing an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) allowed the appeal holding that since the minors had no right to receive the income of the trusts till the time they were minors, the provisions of section 64(1)(iii) read with Explanation 2A of the Act would not be attracted.

The Department challenged the aforesaid order of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal. The Tribunal allowed the appeal and set aside the order of the Commissioner of Income-tax (Appeals).

Dissatisfied with the outcome, the appellant approached the High Court of Uttaranchal by way of an appeal filed u/s. 260A of the Act which appeal was dismissed by the High Court.

On further appeal, the Supreme Court held that it was clear from a plain reading of the aforesaid section that while computing the total income of any individual the income of a minor child of such individual from the admission of the minor to the benefits of partnership in a firm is to be included as the income of the said individual. Explanation 2A clarifies that if the minor child is a beneficiary under a trust, income arising to the trust from the membership of the trustee in a firm shall also be treated as income of the child and the provisions of sub-clause (iii) of section 64(1) shall get attracted even in that eventuality.

The Supreme Court noted that in the present case, it was clear from the facts narrated above, that two minor children of the appellant were the beneficiaries under the two trusts. The said trustees were the partners in the firm and had their shares in the income as partners in the said firm.

According to the Supreme Court, the entire controversy revolved around the question as to whether such income could be treated as income of a minor child. This controversy had arisen because of the reason that the income that had been earned by the trustees was not available to the two minor children till their attaining the age of majority.

The Supreme Court observed that this very question had come up before it in almost identical circumstances in the case of CIT vs. M. R. Doshi [1995] 211 ITR 1 (SC). The court, after taking note of some judgments of High Courts including the judgment of the High Court of Bombay in Yogindraprasad N. Mafatlal vs. CIT [1977] 109 ITR 602 (Bom) interpreted the provisions of section 64(1)(v) of the Act in the following manner (page 4 of 211 ITR):

“Section 64(1)(v) requires, in the computation of the total income of an assessee, the inclusion of such income as arises to the assessee from assets transferred, otherwise than for adequate consideration, to the extent to which the income from such assets is for the immediate or deferred benefit of, inter alia his minor children. The specific provision of the law, therefore, is that the immediate or deferred benefit should be for the benefit of a minor child. Inasmuch as in this case the deferment of the benefit is beyond the period of minority of the assessee’s three sons, since the assets are to be received by them when they attain majority, the provisions of section 64(1)(v) have no application.”

The Supreme Court held that in the present case, as pointed out above, specific stipulation which is contained in both the trust deeds is that in case of demise of any of the minors the income would accrue to the other child. Therefore, the receipt of the said income was also contingent upon the aforesaid eventuality and the two minors had not received the benefit immediately for the assessment year in question, viz., as “minor” children. Explanation was of no help to the Department. The provision that is contained in Explanation 2A is only to take care of the income even when a trust is created. It does not go further and make any provision to the effect that even when the income earned by the trust cannot be utilised for the benefit of the minor during his minority the Explanation 2A shall be attracted. There is no such stipulation in the said Explanation. Moreover, the language of section 64(1)(iii) is clear and categorical which makes the income of minor child taxable at the hands of individual. Thus, in the first instance it has to be shown that the share of income is in the hands of minor child which requirement was not satisfied in the present case.

The Supreme Court however observed that the Department was not without remedy inasmuch as the income earned by the two minors would not go untaxed. On attaining majority when the aforesaid money in the form of income is received by the two individuals it would be open to the Department to tax the income at that time. Or else, the Department could take up their cases u/s. 166 of the Act, if permissible.

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Heads of Income – Where letting of property is the business of the assessee, the income is to be assessed under the head “Income from business”

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Chennai Properties and Investments Ltd. vs. CIT (2015) 373 ITR 673 (SC)

The appellant – assessee was incorporated under the Indian Companies Act, with its main object, as stated in the memorandum of association, to acquire the properties in the city of Madras (now Chennai) and to let out those properties. The assessee had rented out such properties and the rental income received therefrom was shown as income from business in the return filed by the assessee. The Assessing Officer, however, refused to tax the same as business income. According to the Assessing Officer, since the income was received from letting out of the properties, it was in the nature of rental income. He, thus, held that it would be treated as income from house property and taxed the same accordingly under that head.

The assessee filed the appeal before the Commissioner of Income-tax (Appeals) who allowed the same holding it to be income from business and directed that it should be treated as such and taxed accordingly. Aggrieved by that order, the Department filed an appeal before the Incometax Appellate Tribunal which declined to interfere with the order of the Commissioner of Income-tax (Appeals) and dismissed the appeal. The Department approached the High Court. This appeal of the Department was allowed by the High Court, holding that the income derived by letting out of the properties would not be income from business but could be assessed only income form house property. The High Court primarily rested its decision on the basis of the judgment of the Supreme Court in East India Housing and Land Development Trust Ltd. vs. CIT [1961] 42 ITR 49 (SC) and in Sultan Brothers (P) Ltd. vs. CIT [1964] 51 ITR 353(SC).

On appeal to the Supreme Court, the Court noted that as per the memorandum of association of the appellantcompany the main object of the appellant company was to acquire and hold the properties known as “Chennai House” and “Firhaven Estate” both in Chennai and to let out those properties as well as make advances upon the security of lands and buildings or other properties or any interest therein. The entire income of the appellant company was through letting out of the aforesaid two properties namely, “Chennai House” and “Firhaven Estate”. There was no other income of the assessee except the income from letting out of these two properties.

According to the Supreme Court the judgment in Karanpura Development Co. Ltd. vs. CIT [1962] 44 ITR 362 (SC) squarely applied to the facts of the present case. In that case the position in law was summed up in following words:

“Where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The dividing line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned.”

The Supreme Court held that in this case, letting of the properties was in fact the business of the assessee. The assessee, therefore had rightly disclosed the income under the head “Income from business”. It could not be treated as “Income from the house property”. The Supreme Court accordingly allowed the appeal and set aside the judgment of the High Court and restored that of the Income-tax Appellate Tribunal.

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Substantial Question of Law – Appeal to High Court – High Court cannot decide the appeal without framing a question of law.

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P.A. Jose & Ors. vs. CWT (2015) 376 ITR 448 (SC)

The Revenue filed connected wealth-tax appeals against the order of the Tribunal holding that cash in hand in excess of Rs.50,000 in the hands of the assessee who were all individuals, did not form part of the asset u/s. 2(ea)(vi) of the Wealth-tax Act. The High Court allowed the appeal holding that cash in hand in excess of Rs.50,000 held by the individual assessees formed part of assets under section 2(ea)(vi). The individual assesses approached the Supreme Court. The learned counsel for the assessee’s contended that the High Court had committed an error by not framing substantial question of law as per the provisions of section 27A(3) of the Wealth-tax Act, 1957. The Supreme Court held that the appeal under the aforesaid section could be admitted only when a substantial question of law is involved in the appeal and according to s/s. (4), of the question of law has to be formulated by the High Court.

The Supreme Court found that the such a question had not been framed and without framing question of law, the appeal had been decided by the High Court. The Supreme Court therefore remitted the matter to the High Court so that a substantial question of law could be framed, if any, and the appeal be heard again.

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Report of Accountant to be filed along with the return – Condition is directory and not mandatory – The report should however be filed before the order of assessment is made.

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CIT vs. G.M. Knitting Industries (P) Ltd. and CIT vs. AKS Alloys (P) Ltd. [2015] 376 ITR 456 (SC)

Additional depreciation u/s. 32(1)(iia) had been denied to the assessee on the ground that the assessee had failed to furnish form 3AA along with the return of income. The Tribunal allowed additional depreciation as claimed by the assessee. The High Court noted that the Form 3AA was submitted during the course of assessment proceedings and that it was not in dispute that the assessee was entitled to the additional depreciation. The High Court dismissed the appeal of the Revenue in the light of its judgment in CIT vs. Shivanand Electronics (1994) 209 ITR 63 (Bom). On further appeal by the Revenue, the Supreme Court dismissed the appeal concurring with the view of the High Court and holding that even if Form 3AA was not filed along with the return of income but same was filed during the assessment proceedings and before the final order of the assessment was made, that would amount to sufficient compliance.

Note: The above were the facts in G.M. Knitting Industries (P) Ltd.

The facts in AKS Alloys (P) Ltd. were as under:

The Appellant was engaged in the business of manufacture of steel ingots. In respect of the assessment year 2005-06, assessment order dated December 26, 2007, was passed u/s. 143(3) of the Act, in which, the Assessing Officer disallowed the claim of the assessee made u/s. 80-IB of the Act on the ground that for the purpose of claiming deduction, the assessee did not file necessary certificate in Form 10CCB along with the return of income.

The first Appellate authority allowed the appeal, thereby granting the claim of the assessee made u/s. 80-IB of the Act. The Appellate Tribunal, dismissed the appeal of the Revenue. On further appeal the Supreme Court held that the substantial question of law namely, whether the filing of audit report in Form 10CCB is mandatory, was well settled by a number of judicial precedents that before the assessment is completed, the declaration could be filed.

The Supreme Court disposed of both the matters by a common order.

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Admission Of Appeal and Section 271(1)(c)

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Issue for Consideration Section 271(1)(c) provides for the imposition of penalty by an AO in cases where he is satisfied that the person has concealed the particulars of his income or has furnished inaccurate particulars of such income. The penalty leviable shall not be less than the amount of tax sought to be evaded but shall not exceed three times the amount of such tax.

Section 273B provides that no penalty shall be imposable where the person proves that there was a reasonable cause for his failure to disclose the particulars of his income or to furnish accurate particulars of such income. It is thus, essential for a person, for escaping the penalty to prove that he had not concealed the particulars of his income or has not furnished inaccurate particulars of his income or in any case he was prevented by a reasonable cause in concealing the income or furnishing the inaccurate particulars.

None of the relevant terms namely, concealment, inaccurate particulars or reasonable cause are defined under the Income-tax Act. Needless to say, that a person has therefore to rely on the several decisions delivered by the Courts for assigning true meaning to the said terms. Over a period, a judicial consensus has emerged where under a decision taken under a bona fide belief is considered to be not a case of concealment or a case of furnishing inaccurate particulars of income. Likewise, selecting one of the possible views on a subject that is capable of 2 views is held to be providing the person with a reasonable cause for his failure to disclose or furnish accurate particulars of his income.

There seems to be an unanimity about the understanding that no penalty is leviable in a case where the issue concerning a claim of allowance/disallowance/ addition/ deduction/ exemption is debatable. Recently, the term ‘debatable’ has attracted the attention of the judiciary where under, the Courts are asked to determine whether an issue can be said to be debatable in a case where a High Court has admitted the appeal on merits of the claim by holding the issue to be one which involves a substantial question of law. While the Gujarat High Court has held that simply because an appeal has been admitted on merits of the claim of an assesse, it could not automatically be held that the issue was debatable and that no penalty was leviable. The Bombay High Court approving the 3rd member decision of the Ahmedabad bench of the Tribunal held that the issue became debatable once an appeal on merits of the claim was admitted on the ground that it formed a substantial question of law.

Dharamshi B. Shah’s case
The Gujarat high court had an occasion to consider the issue in the case of the CIT vs. Dharamshi B. Shah, 51 taxmann.com 274 (Gujarat). In the said case, an addition made by the AO on account of capital gains computed u/s. 45(3) was upheld by the tribunal and the assessee’s appeal against such an order was admitted by the High Court. The AO subsequently had passed an order levying penalty u/s. 271(1)(c), which was deleted by the Tribunal on the ground that no penalty was leviable once an appeal on the merits of the case was admitted by the court. In an appeal by the revenue department against such an order of the Tribunal, the court was asked to consider whether merely because the assessee’s appeal in respect of an addition on the basis of which penalty u/s. 271(1)(c) was levied, had been admitted by High Court, it could be said that the issue was debatable so as to delete the penalty. One of the substantial questions of law raised before the court by the revenue was:

“Whether, in the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal is justified in not upholding the penalty u/s. 271(1)(c) of the Act imposed by the Assessing Officer and upheld by the Commissioner of Income-tax (Appeals) holding that since the substantial question of law in respect of the addition on which the penalty has been levied, has been admitted by the hon’ble Gujarat High Court, the penalty would not survive without appreciating that the addition on which the penalty was levied was confirmed by the Commissioner of Income-tax (Appeals) and by Income-tax Appellate Tribunal itself ? ”

The Revenue submitted that;

  • in the case before the court, the Tribunal had deleted the penalty imposed by the AO and confirmed by the Commissioner (Appeals) solely on the ground that the appeal against the order passed by the Tribunal on the merits of the case, was admitted by the high court and, therefore, the issue was not free from debate and, consequently, the tribunal had set aside the penalty,
  • the issue involved in the appeal was squarely covered by the decision of the court in the case of CIT vs. Prakash S Vyas rendered in Tax Appeal No. 606 of 2010, now reported in 58 taxmann.com 334, wherein the aforesaid view was not accepted by the Division Bench of the court,
  • the impugned order passed by the tribunal was required to be quashed and set aside and the matter was required to be remanded to the Tribunal to decide the appeal afresh in accordance with law and on its own merits.

The court noted the following observations of the tribunal while setting aside the order of the AO levying penalty:

 “… This is the settled position of law that the penalty under section 271(1)(c) of the Income-tax Act, 1961, is imposable in respect of any concealment of income or furnishing of inaccurate particulars of income by the assessee. When for the addition made by the Assessing Officer which is confirmed by the Tribunal, a substantial question of law is admitted by the hon’ble Gujarat High Court, it has to be accepted that the issue is not free from debate, and, hence, in our considered opinion, under these facts, it cannot be said that the assessee has concealed his income or furnished inaccurate particulars of income, and, therefore, penalty is not justified. We, therefore, delete the same.”

The court noted with approval its decision on an identical question in Tax Appeal No. 606 of 2010 now reported in 58 taxmann.com 334, wherein the court had observed as under and had quashed and set aside the order of the tribunal deleting the penalty and had remanded the matter to the Tribunal to consider the appeal afresh in accordance with law and on its own merits.

“10. Having, thus, heard learned counsel for the parties, we reiterate that the sole ground on which the Tribunal deleted the penalty was that with respect to the quantum additions, the assessee had approached the High Court and the High Court had admitted the appeal framing substantial questions of law for consideration. In view of the Tribunal, this would indicate that the issue was debatable and that, therefore, no penalty under section 271(1)(c) could be imposed.

11.    We are of the opinion that the Tribunal erred in deleting the penalty on this sole ground. Admission of a tax appeal by the High Court, in majority cases, is ex parte and without recording even prima facie reasons. Whether ex parte or after by-parte hearing, unless some other intention clearly emerges from the order itself, admission of a tax appeal by the High Court only indicates the court’s opinion that the issue presented before it required further consideration. It is an indication of the opinion of the High Court that there is a prima facie case made out and the questions are required to be decided after admission. Mere admission of an appeal by the High Court cannot without there being anything further, be an indication that the issue is a debatable one so as to delete the penalty under section 271(1)(c) of the Act even if there are independent grounds and reasons to believe that the assessee’s case would fall under the mischief envisaged in said clause (c) of sub-section (1) of section 271 of the Act. In other words, unless there is any indication in the order of admission passed by the High Court simply because the tax appeal is admitted, would give rise to the presumption that the issue is debatable and that, therefore, penalty should be deleted.

12.    This is not to suggest that no such intention can be gathered from the order of the court even if so expressed either explicitly or in implied terms. This is also not to suggest that in no case, admission of a tax appeal would be a relevant factor for the purpose of deciding validity of a penalty order. This is only to put the record straight in so far as the opinion that the Tribunal as expressed in the present impugned order, viz., that upon mere admission of a tax appeal on quantum additions, is an indication that the issue is debatable one and that, therefore, penalty should automatically be deleted without any further reasons or grounds emerging from the record.

13.    This is precisely what has been done by the Tribunal in the present case. The order of the Tribunal, therefore, cannot be sustained. The question framed is answered in favour of the Revenue and against the assessee. The order of the Tribunal is reversed. Since apparently the assessee had raised other contentions also in support of the appeal before the Tribunal, the proceedings are remanded before the Tribunal for fresh consideration and disposal in accordance with law. The tax appeal is disposed of accordingly.”

The court approving the reasons stated in the said decision, quashed and set aside the order of the tribunal and remanded the matter to the Tribunal for fresh consideration and disposal in accordance with law on its own merits while holding that penalty u/s. 271(1)(c) could not be deleted on the sole ground that assessee’s appeal in respect of addition on basis of which penalty was levied had been admitted by the High Court.

Nayan Builders Case

The issue also arose before the Bombay High Court in the case of CIT vs. Nayan Builders, 368 ITR 722 wherein the court found that the appeal of the Revenue department could not be entertained as it did not raise any substantial question of law.

In the said case the addition of income of Rs. 1,04,76,050 and disallowance of expenses of Rs.10,79,221 on brokerage and Rs. 2,00,000 on legal fees made by the A.O. were sustained by the Tribunal and the appeal of the assessee u/s. 260A was admitted by the High Court on the ground that the said addition and the disallowances represented a substantial question of law.

The A.O., pending the disposal of the appeal by the High Court, had levied a penalty of Rs. 37,32,777 u/s. 271(1)(c) of the Act which was confirmed by the Commissioner(Appeals). On a further appeal by the assessee to the Tribunal, challenging the levy of the penalty, the Tribunal held that, when the High Court admitted a substantial question of law on the merits of an addition/disallowance, it became apparent that the issue under consideration on the basis of which penalty was levied, was debatable. It held that the admission by the high court lent credence to the bona fides of the assessee in claiming deduction. It held that the mere fact of confirmation of an addition/disallowance would not per se lead to the imposition of penalty, once it turned out that the claim of the assessee could have been considered by a person properly instructed in law and was not completely debarred in law. Relying on the decisions in the cases of Rupam Mercantile Ltd. vs. DCIT, 91 ITD 237(Ahd.) (TM) and Smt. Ramilaben Ratilal Shah vs. ACIT, 60 TTJ 171(Ahd.), the Tribunal held that no penalty was exigible u/s. 271(1)(c), once the high court had held that the issue of addition/disallowance represented a substantial question of law.

On an appeal by the Revenue, the Bombay High Court held that the imposition of the penalty was not justified. The court noted that the Tribunal as a proof that the penalty was debatable and involved an arguable issue, had referred to the order of the court passed in the assessee’s appeal in quantum proceedings and had also referred to the substantial questions of law which had been framed therein.

The court perused its order dated September 27, 2010, passed by it for admitting the Income Tax Appeal No. 2368 of 2009 on merits of the case, and held that there was no case made out for imposition of penalty and the same was rightly set aside. It held that where the high court admitted an appeal on the ground that it involved a substantial question of law, in respect of which penalty was levied, impugned order of penalty was to be quashed. It held that the appeal challenging the order of the Tribunal, passed for deleting the penalty levied, raised no substantial question of law and as a consequence dismissed it with no order as to costs.

Observations

An appeal u/s.260A lies to the High Court from an order of the Tribunal only where the High Court is satisfied that the case involves a substantial question of law. The issue under consideration in such an appeal should not only involve a question of law but should be one which involves a substantial question of law similar to the one required u/s.100 of the Civil Procedure Code, 1908. A full bench of the Supreme Court in the case of Santosh Hazari vs. Purshottam, 251 ITR 84, held that to be a substantial, a question of law must be debatable, not previously settled by law of the land or a binding precedent…. that it was not free from difficulty or that it called for a discussion for an alternate view. It further held that the word “substantial” qualifying “question of law” meant having substance, essential, real, of sound worth, important or considerable.

Recently, the Patna High Court in the case of DCIT vs. Sulabh International Social Service Organisation, 350 ITR 189, has held that a substantial question of law must be one which was debatable and not previously settled under the law of the land or a binding precedent.

A question can be a substantial question of law even when it affects the substantial rights of the party or is of general importance or where a finding based on no evidence is given or where a finding is given without appreciating the admissible evidence or where the order passed is perverse or unreasonable. A question can be held to be a substantial question of law on varied counts – it is largely so in the cases where issues are debatable or call for a discussion for alternate view and are not previously settled by law of the land and binding precedent.

In the context of the provisions of Income-tax Act, it is appropriate in most of the cases, to hold that the issue on hand is debatable, open, capable of having an alternate view once the same is held to be representing a substantial question of law by the Jurisdictional high court at the time of admission of appeal. Once it is so found, it is also appropriate to hold, unless otherwise established, that the assessee was under a bona fide belief for staking his claim and was under a reasonable cause for any failure, if any and in the presence of these factors no penalty u/s. 271(1)(c ) r.w.s.273B was leviable.

The Bombay High Court, in Nayan Builder’s case, following the above discussed logic had held that no penalty u/s.271(1)(c) was leviable once an appeal on merits of the case was admitted by the Court by holding that the issue on merits represented a substantial question of law. It does not appear that even the Gujarat High Court in Dharamshi B. Shah’s case has a different view other than when it held that dropping of the penalty should not be an automatic consequence of an admission of appeal on merits of the case. Even in that case, the Court set aside the order of the Tribunal with a direction to it to examine the issue afresh to find out whether there was a bona fide belief or a reasonable cause in the relevant case or not.

In our experience, a court records its satisfaction about the presence of a substantial question of law only where it is satisfied that the essential requisites forming such a question are placed on record. In the circumstances, the Gujarat High Court may be said to side with the view of the Bombay High Court, which view has been taken by the Court while approving the decisions of the Tribunal in the cases of Rupam Mercantile 91 ITD 273 (Ahd.), Ramilaben Ratilal Shah 60 TTJ 171 (Ahd).

Income Tax Officer vs. Late Som Nath Malhotra (through Raj Rani Malhotra) ITAT Bench ‘G’, New Delhi Before D. Manmohan, (V.P) and N. K. Saini, (A.M.) ITA No. 519/Del/2013 Assessment Year : 2003-04. Decided on 02.07.2015 Counsel for Revenue / Assessee: J. S. Minhas / Piyush Kaushik

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Section 148 & 292BB – Assessment made on the basis of notice issued in the name of the deceased is null and void despite the fact that the legal heir attended the proceeding.

Facts:
The AO on the basis of information received from DIT (Investigation), New Delhi that one Deepak Changia had given an accommodation entry of Rs. 2.01 lakh to the deceased assessee, issued notice dated 31.03.2010 u/s 148. In response to the said notice the legal heir, the wife of the deceased assessee, informed the AO that the assessee had expired on 06.12.2002 and she also furnished the death certificate and copy of Income Tax Return filed on 29.08.2003. The AO however framed the assessment in the name of the deceased assessee at an income of Rs. 23 lakh by making the addition of Rs. 19.94 lakh.

On appeal, the CIT(A) held that since the legal heir of the deceased assessee had informed the AO at the very beginning of assessment proceedings that the assessee had expired, the entire reassessment proceeding made in the name of the deceased was null and void. Against the order of the CIT(A), the revenue appealed before the Tribunal and contended that the CIT(A) erred in ignoring the provisions of section 292BB and holding the assessment not valid when the legal heir of the assessee had duly attended the proceedings and not objected to the same.

Held:
The Tribunal noted that in the present case the AO recorded the reasons for issuing the notice u/s. 148 of the Act in the name of the deceased assessee and got the approval of the Addl. CIT also in the same name. The AO issued notice dated 31.03.2010 u/s. 148 of the Act also in the name of the deceased assessee. In response when the legal heir informed him about the death of assessee, then also the AO did not issue any notice u/s. 148 of the Act or 143(2) of the Act in the name of the legal heir. Thus, according to the Tribunal, the entire assessment proceeding by the AO was on the basis of the notice which was invalid under the Act. Therefore, relying on the decision of the Allahabad High Court in the case of CIT vs. Suresh Chand Jaiswal (325 ITR 563), it was held that the assessment framed on the basis of the invalid notice was void ab initio.

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U.P. Electronics Corporation Ltd. vs. DCIT (TDS) ITAT Lucknow “A” Bench Before Sunil Kumar Yadav (J. M.) and A. K. Garodia (A. M.) ITA No.538/LKW/2012 Assessment Year:2009-10. Decided on 23.01.2015 Counsel for Assessee / Revenue: R. C. Jain / K. C. Meena

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Section 14A – Investments in wholly owned subsidiaries (WOS) – Before any disallowance can be made the AO must record objectively his satisfaction as regards the expenditure incurred by the assessee – With respect to investment in WOS no expenditure is generally incurred to earn dividend hence no disallowance u/s. 14A

Facts:
The assessee had made investment of Rs. 60.9 crore in the share capital of three wholly owned subsidiary companies. During the year under appeal, the assessee earned dividend income of Rs. 7.52 lakh. Applying the provisions of section 14A read with Rule 8D(2)(iii), the AO disallowed the sum of Rs. 40.31 lakh.

On appeal, the CIT(A) confirmed the order of the AO. Before the Tribunal, the assessee submitted that before applying the provisions of section 14A the Assessing Officer had failed to record objective satisfaction as regards the claims made by the assessee and secondly, the investment made is of long term and of strategic in nature, in the wholly owned subsidiaries. According to it, no decision is required in making the investment or disinvestment on regular basis and, therefore, there cannot be any direct or indirect expenditure.

Held:
The Tribunal agreed with the assessee that recording of objective satisfaction by the AO with regard to the correctness of the claim of the assessee is mandatorily required in terms of section 14A(2) of the Act. It also noted that in the instant case, the AO had simply recorded that the contention of the assessee is not acceptable. Further, it also noted that the entire investment by the assessee was made in the subsidiary companies, therefore, in those cases disallowance u/s. 14A(2) of the Act cannot be worked out unless and until it is established that certain expenditures are incurred by the assessee in these investments. Further, relying on the decisions of the Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. vs. Addl. CIT (I.T.A. No. 1733/PN/2012), of the Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. vs. Dy. CIT (328 ITR 81) and of the Mumbai Bench of the Tribunal in the case of M/s. JM Financial Limited vs. Addl. CIT, I.T.A. No. 4521/Mum/2012, the Tribunal accepted the submission of the assesse and allowed its appeal.

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[2015] 68 SOT 550(Mumbai) Archana Parasrampuria vs. ITO ITA No. 1196 (Mum) of 2009 Assessment Year: 2005-06. Date of Order: 26.11.2014

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Section 54F – Acquisition of “transferable tenancy rights” which constitute substantial rights over the property and were almost identical to ownership of property qualify for exemption u/s. 54F.

Facts:
The assessee earned long term capital gains on transfer of shares. She claimed the capital gain so arising to be exempt u/s. 54F on the ground that she had purchased a residential flat.

In the course of assessment proceedings, on examination of the transfer deed, the Assessing Officer (AO) noted that the assessee had acquired “transferable tenancy rights” and not “ownership” of the flat. He, disallowed the claim made by the assessee u/s. 54F of the Act.

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

Held: The Tribunal noted that the assessee had purchased rights in one of the flats from the developer, which under the agreement were allotted to him (developer) for selling to the intended purchasers. The assessee had paid a sum of Rs. 78,10,001 as consideration/premium to the developer for obtaining the tenancy rights in the flat in question. Though under the agreement in question, the assessee was liable to pay a monthly rent of Rs. 4,000 to the owner, the Tribunal was of the view that considering the overall facts and circumstances of the case and amount of rent being a meager amount when compared to the amount of rent otherwise payable on such a property in the area, it is apparent that the assessee is not the mere tenant in the house. The Tribunal concluded that she has purchased substantial rights in the flat in question. It observed that a perusal of clause 7 of the agreement reveals that the assessee is entitled to carry out repairs and renovation in the said flat except the changes which could be detrimental to the basic structure of the building. The owner was not entitled to terminate the tenancy of the assessee on any ground, whatsoever, except for nonpayment of rent. In the event of destruction of the said building or construction of a new building, the assessee/ tenant was entitled to obtain tenancy in respect to the new flat having the same carpet area on the same floor without any payment or consideration or premium to the owner under the agreement. The assessee had absolute rights to transfer or assign the tenancy rights in respect of the flat in favor of any person of her choice and to charge such consideration/premium for such transfer/assignment and the tenant/assessee would not be required to obtain any permission from the owner and will not be required to pay any premium for consideration to the owner for such transfer/assignment of tenancy rights. The tenant is also entitled to create mortgage in respect of the tenancy rights in the said flat and also bequeath the tenancy rights in respect of any person.

The Tribunal held that the rights of the assessee in the flat were not the mere tenancy rights but were substantial rights giving the asseseee dominion, possession and control over the property in question with transferable rights, which were almost identical to that of an owner of the property. There was no denial that the assessee has purchased the rights in the said flat for residential purposes.

The provisions of s. 54F having regard to its beneficial objects are required to be interpreted liberally. The coordinate Bench of the Tribunal, in somewhat similar circumstances, in the case of Smt. Meena S. Raheja vs. Dy. CIT (ITA No.3941(Mum) of 2009), dated 22.9.2010 in a case of 99 year leasehold rights has held that the assessee is entitled to the benefit of deduction u/s. 54F of the Act.

The Tribunal held that the assessee qualified for deduction u/s. 54F of the Act. The appeal filed by the assessee was allowed.

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[2015] 171 TTJ 145 (Asr) Sibia Healthcare (P) Ltd. vs. DCIT ITA No. 90/Asr/2015 Assessment Year: 2013-14. Date of Order: 9.6.2015

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Sections 200A, 234E – Prior to 1.6.2015 there was no enabling
provision for raising a demand in respect of levy of fees u/s. 234E.

Facts:
The
assessee company delayed the filing of TDS statements. In the course of
processing of TDS statements, the AO(TDS) raised a demand, by way of an
intimation dated 9th September, 2013 issued u/s. 200A of the Act, for
levy of fees u/s. 234E for delayed filing of the TDS statement.

Aggrieved
by the levy of fees in the intimation issued, the assessee preferred an
appeal to the CIT(A). The CIT(A) upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The
Tribunal noted the statutory provisions of section 234E as introduced
by the Finance Act, 2012 w.e.f. 1.7.2012 and also of section 200A as
inserted by the Finance Act, 2009 w.e.f. 1.4.2010. It also noted that
the provisions of section 200A were amended by Finance Act, 2015 w.e.f.
1.6.2015 to provide that in the course of processing of a TDS statement
and issuance of intimation u/s. 200A in respect thereof an adjustment
could also be made in respect of the “fee, if any, shall be computed in
accordance with the provisions of section 234E.”

The Tribunal
held that there was no enabling provision for raising a demand in
respect of levy of fees u/s. 234E. While examining the correctness of
intimation u/s. 200A, it had to be guided by the limited mandate of
section 200A, which, at the relevant point of time, permitted
computation of amount recoverable from or payable to, the tax deductor
after making adjustments specified therein which did not include fees
levied u/s. 234E.

The adjustment in respect of levy of fees u/s.
234E was beyond the scope of permissible adjustments contemplated u/s.
200A. This intimation is appealable order u/s. 246A(a), and, therefore,
the CIT(A) ought to have examined legality of the adjustment made under
this intimation in the light of the scope of section 200A. It also
observed that there is no other provision enabling a demand in respect
of this levy and in the absence of the enabling provisions u/s. 200A, no
such levy could be effected.

The appeal filed by the assessee was allowed.

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Settlement of cases – Interest – Section 245D(2C) – B. P. 01/04/1995 to 05/10/2001 – Assessee depositing tax on admitting additional income: Required amount deposited within time when application admitted – Further tax liability determined final order satisfied – Interest on further tax for the period during the pendency of application before Settlement Commission is unwarranted

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CIT vs. Vishandas and ors; 374 ITR 591 (Del):

The assessee and two others disclosed Rs. 10,00,000/- in the hands of each of the three assesses. The Settlement Commission directed to accept the offer of additional income of Rs. 1,48,16,160/- and rejected the waiver of interest. While computing the amount payable, the Assessing Officer made an addition of Rs. 13,03,211/- as interest recoverable for the period between 01/01/2004 and 26/03/2010 u/s. 245D(2C) of the Income-tax Act, 1961. The Commissioner (Appeals) held that section 245D(2C) could be invoked only if the assessee did not deposit the tax payable on income disclosed and admitted u/s. 245D(1). In the instant case, the assessee deposited Rs. 6,12,000/- within the time prescribed u/s. 245D(2C) on the income of Rs. 10,00,000/- in terms of order u/s. 245D(1) and deleted the addition. This was confirmed by the Tribunal.

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

“i) When the application was filed before the Settlement Commission, the assessee deposited the admitted tax liability. Soon, thereafter, when the application was admitted, the amount required was deposited within the time stipulated u/s. 245D(6A). The further tax liability determined was payable after the final decision. The records and the materials examined by the Commissioner (Appeals) and upheld by the Tribunal disclosed that even the tax liability finally determined was satisfied. In these circumstances, the addition of interest for the period during the pendency of the application before the Settlement was entirely unwarranted.

ii) We do not see any reason to disturb the concurrent findings of fact. The appeals do not raise any substantial question of law and are, consequently, dismissed.”

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ITAT: Power to grant stay beyond 365 days: Section 254(2A) – Section 254(2A) third proviso cannot be interpreted to mean that extension of stay of demand should be denied beyond 365 days even when the assesseee is not at fault. ITAT may extend stay of demand beyond 365 days if delay in disposing appeal is not attributable to assessee: ITAT should make efforts to decide stay granted appeals expeditiously

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DCIT vs. Vodafone Essar Gujarat Ltd. (Guj);SCA No. 5014 of 2015; dated 12/06/2015; www.itatonline.org: [2015] 58 taxmann.com 374 (Guj)

The Tribunal passed an order extending stay of recovery of demand beyond the period of 365 days. The department filed a Writ Petition to challenge the said order on the ground that in view of the third proviso to section 254(2A) of the Act, the Tribunal has no jurisdiction to extend the stay of demand beyond 365 days.

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

“(i) It is true that as per third proviso to section 254(2A) of the Act, if such appeal is not so disposed of within the period allowed under the first proviso i.e. within 180 days from the date of the stay order or the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed three hundred and sixty-five days, the order of stay shall stand vacated after the expiry of such period or periods, even if the delay in disposing of the appeal is not attributable to the assessee. Therefore, as such, legislative intent seems to be very clear. However, the purpose and object of providing such time limit is required to be considered. The purpose and object of providing time limit as provided in section 254(2A) of the Act seems to be that after obtaining stay order, the assessee may not indulge into delay tactics and may not proceed further with the hearing of the appeal and may not misuse the grant of stay of demand. At the same time, duty is also cast upon the learned Tribunal to decide and dispose of such appeals in which there is a stay of demand, as early as possible and within the period prescribed under first proviso and second proviso to section 254(2A) of the Act i.e. within maximum period of 365 days.

ii) However, one cannot lost sight of the fact that there may be number of reasons due to which the learned Tribunal is not in a position to decide and dispose of the appeals within the maximum period of 365 days despite their best efforts. There cannot be a legislative intent to punish a person/ assessee though there is no fault of the assessee and/or appellant. The purpose and object of section 254(2A) of the Act is stated herein above and more particularly with a view to see that in the cases where there is a stay of demand, appeals are heard at the earliest by the learned Tribunal and within stipulated time mentioned in section 254(2A) of the Act and the assessee in whose favour there is stay of demand may not take undue advantage of the same and may not adopt delay tactics and avoid hearing of the appeals. However, at the same time, all efforts shall be made by the learned Tribunal to see that in the cases where there is stay of demand, such appeals are heard, decided and disposed of at the earliest and periodically the position/ situation is monitored by the learned Tribunal and the stay is not extended mechanically.

(iii) By section 254(2A) of the Act, it cannot be inferred a legislative intent to curtail/withdraw powers of the Appellate Tribunal to extend stay of demand beyond the period of 365 days. However, the aforesaid extension of stay beyond the period of total 365 days from the date of grant of initial stay would always be subject to the subjective satisfaction by the Tribunal and on an application made by the assessee / appellant to extend stay and on being satisfied that the delay in disposing of the appeal within a period of 365 days from the date of grant of initial stay is not attributable to the appellant / assessee.

iv) As observed hereinabove, the Tribunal can extend the stay granted earlier beyond the period of 365 days from the date of grant of initial stay, however, on being subjectively satisfied by the Tribunal and on an application made by the assessee/appellant to extend stay and on being satisfied that the delay in disposing of the appeal within a period of 365 days from the date of grant of initial stay, is not attributable to the appellant / assessee and that the assessee is not at fault and therefore, while considering each application for extension of stay, the Tribunal is required to consider the facts of each case and arrive at subjective satisfaction in each case whether the delay in not disposing of the appeal within the period of 365 days from the date of initial grant of stay is attributable to the appellant – assessee or not and/or whether the assessee / appellant in whose favour stay has been granted, has cooperated in early disposal of the appeal or not and/or whether there is any delay tactics by such appellant / assessee in whose favour stay has been granted and/or whether such appellant is trying to get any undue advantage of stay in his favour or not. Therefore, while passing such order of extension of stay, Tribunal is required to pass a speaking order on each application and after giving an opportunity to the representative of the revenue – Department and record its satisfaction as stated hereinabove. Therefore, ultimately if the revenue – department is aggrieved by such extension in a particular case having of the view that in a particular case the assessee has not cooperated and/or has tried to take undue advantage of stay and despite the same the Tribunal has extended stay order, revenue can challenge the same before the higher forum/High Court. (Commissioner of Customs and Central Exercise, Ahmedabad vs. Kumar Cotton Mills Pvt. Ltd (2005) 180 ELT 434(SC) & Commissioner vs. Small Industries Development Bank of India in Tax Appeal No.341 of 2014 followed; Commissioner of Income Tax vs. Maruti Suzuki (India) Limited decided on 2.1.2014 in Writ Petition (Civil) No.5086 of 2013 not followed)”

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Capital gain – Agricultural land – Section 2(14)(iii) (b) – A. Y. 2009-10 – Land situated within prescribed distance from municipal limit – Measurement of distance – Amendment in 2014 providing that distance should be measured aerially is prospective and not to apply to earlier years

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CIT vs. Nitish Rameshchandra Chordia; 374 ITR 531 (Bom):

On 10/04/2007, the assessee purchased agricultural land and sold it on 15/04/2008. The assessee claimed the profit as exempt on the ground that the land sold was agricultural land and not a capital asset according to section 2(14) of the Income-tax Act, 1961, urging that the land was situated beyond 8 kms. of the municipal limits. The Assessing Officer rejected the claim holding that the distance must be measured by the shortest distance as the crow flies or the straight line method and not by the road distance. The Tribunal allowed the assesses claim.

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

“i) The amendment in the taxing statute, unless a different legislative intention is clearly expressed, shall operate prospectively. If the assessee has earned business income and not the agricultural income, section 11 of General Clauses Act, 1897, will prevail unless a different intention appears to the contrary. The relevant amendment prescribing that the distance to be counted must be aerial came into force w.e.f. 01/04/2014. The need for the amendment itself showed that in order to avoid any confusion, the exercise became necessary. This exercise to clear the confusion, therefore, showed that the benefit thereof must be given to the assessee.

ii) In such matters, when there is any doubt or confusion, the view in favour of the assessee needs to be adopted. Circular No. 3 of 2014, dated 24/01/2014, dealing with applicability expressly stipulates that it takes effect from 01/04/2014, and, therefore, prospectively applies in relation to the A. Y. 2014-15 and subsequent assessment years. Hence, the question whether prior to the A. Y. 2014-15 the authorities erred in computing the distance by road did not arise at all.”

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Business expenditure – Disallowance u/s. 40(a) (ia) -: Section 40(a)(ia) – Argument that the disallowance for want of TDS can be made only for amounts “payable” as of 31st March and not for those already “paid” is not correct. In Liminie dismissal of SLP in Vector Shipping does not mean Supreme Court has confirmed the view of the HC

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P. M. S. Diesel vs. CIT (P&H); ITA No. 716 of 2009 dated 29/04/2015:www.itatonline.org: 277 CTR 491(P&H):

Dealing with the scope of section 40(a)(ia) of the Income Tax Act, 1961, the Punjab and Haryana High Court held as under:

“(i) The introduction of Section 40(a)(ia) had achieved the objective of augmenting the TDS to a substantial extent. When the provisions and procedures relating to TDS are scrupulously applied, it also ensured the identification of the payees thereby confirming the network of assessees and that once the assessees are identified it would enable the tax collection machinery to bring within its fold all such persons who are liable to come within the network of tax payers. These objects also indicate the legislative intent that the requirement of deducting tax at source is mandatory.

(ii) The argument that section 40(a)(ia) relates only to assessees who follow the mercantile system and does not pertain to the assessees who follow the cash system is not acceptable. The purpose of the section is to ensure the recovery of tax. We see no indication in the section that this object was confined to the recovery of tax from a particular type of assessee following a particular accounting practice.

(iii) The argument that section 40(a)(ia) applies only to amounts which are “payable” and not to amounts that are already “paid” is also not acceptable (Commissioner of Income Tax vs. Crescent Export Syndicate (2013) 216 Taxman 258 (Cal) and Commissioner of Income Tax vs. Sikandar Khan N. Tunwar (2013) 357 ITR 312 (Guj) followed)

(iv) Though in Commissioner of Income Tax vs. M/s Vector Shipping Services (P) Ltd (2013)262 CTR (All) 545, 357 ITR 642, it was held that no disallowance could be made u/s 40(a)(ia) as no amount remained payable at the year end and the Special Bench decision of the Tribunal in Merilyn Shipping & Transports, 136 ITD 23 (SB) (Vishakhapatnam) was noted, this cannot be agreed with as there is no reasoning for the finding. The dismissal of the department’s petition for special leave to appeal (SLP) was in limine. The dismissal of the SLP, therefore, does not confirm the view of the Allahabad High Court.”

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Business expenditure – Disallowance of payment to directors – Section 40(c) – A. Y. 1981-82 – Film production – Amounts paid as professional charges to directors for directing and producing film – Amounts not paid in their capacity as members of Board of Directors – No disallowance can be made u/s. 40(c)

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CIT vs. Rupam Pictures Pvt. Ltd.; 374 ITR 450 (Bom)

The assessee was in the business of production of films. In the A. Y. 1981-82, two directors of the assessee company were paid Rs. 3 lakh and Rs. 1.5 lakh, respectively for directing and producing a film. The Assessing Officer applied section 40(c) of the Income-tax Act, 1961 and disallowed the payment in excess of Rs. 72,000/- in respect of each of them. The Tribunal deleted the addition.

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

“i) The disallowance made by the Income-tax Officer u/s. 40(c) was not justified. The amounts paid to the two individuals were not paid in their capacity as members of the Board of Directors but as professional charges for directing and producing a film.

ii) The Revenue was, therefore, not justified in disallowing the claim, the character of remuneration mode being different.”

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Proviso to section 3 and section 37(1) – Business is set-up on recruitment of employees and all expenditure incurred thereafter are allowable as business expenditure.

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5. Reliance Gems & Jewels Ltd. vs. DCIT
ITAT “D” Bench, Mumbai
Before N.K. Billaiya (A M) and Amarjit Singh (J. M.)
I.T.A. No.3855/Mum/2013
A. Y. : 2008-09. Date of Order: 28.10.2015
Counsel for Assessee / Revenue: F.V. Irani / Vivek Anand Ojha

Proviso to section 3 and section 37(1) – Business is set-up on recruitment of employees and all expenditure incurred thereafter are allowable as business expenditure.

FACTS

The assessee is in the business of trading and merchandising of diamonds and gold jewelleries. Return for the year was filed disclosing loss of Rs. 87.26 lakh. On perusal of the annual account, the Assessing Officer found that the assessee had not started its business therefore the entire expenditures were disallowed. The assessee carried the matter before the CIT(A) who upheld the order of the AO. Before the Tribunal, the assessee placed before it the details of employee-wise salaries alongwith job description and details of tax deducted at source as well as the details regarding other expenses. The assessee further submitted that the setting up of business is different from commencement of business and the expenditures are allowable on setting up of business. It also relied on the decision of the Delhi High Court in the case of Omniglobe Information Tech India Pvt. Ltd. vs. CIT (Income Tax appeal No. 257 of 2012). The Revenue strongly relied on the orders of the lower authorities and contended that the decision relied upon by the assessee relates to service industries and therefore same cannot be applied on the facts of the assessee’s case.

HELD

The Tribunal noted that the assessee had recruited the employees for the purpose of its business. According to the Tribunal, the type of business the assessee was engaged in, require persons who have expertise in understanding the jewellery, and without such recruitment, it would not be possible to commence the business. It also referred to the proviso to section 3 of the Act, which defines the term “previous year” in relation to a newly setup business (and not with reference to the commencement of business), thus as contended by the assessee, the setting up of business was more relevant than the date of commencement of business.

Therefore, relying on the decision of the Delhi High Court in the case of Omniglobe Information Tech India Pvt. Ltd., the Tribunal held that the recruitment of employees was indicative that business was set up by the assessee. Accordingly, the appeal filed by the assessee was allowed.

Section 10A – Unless the initial years claim is withdrawn, subsequent years claim cannot be denied.

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4. ACIT vs. Sitara Diamond Pvt. Ltd.
ITAT Mumbai `E’ Bench
Before N. K. Billaiya (AM) and Ram Lal Negi (JM)
ITA Nos. 4422/Mum/2012 and 6727/Mum/2011
A. Y.s: 2006-07 and 2007-08.  
Date of Order: 2.09. 2015.
Counsel for revenue / assessee: S. K. Mahapatra / Nitesh Joshi

Section 10A – Unless the initial years claim is withdrawn, subsequent years claim cannot be denied.

FACTS

Deduction u/s. 10A was first made by the assessee in assessment year 2005-06, which was allowed by the order dated 10.12.2008 passed u/s. 143(3) of the Act. For the assessment years 2006-07 and 2007-08, the Assessing Officer (AO) denied claim for deduction u/s. 10A. Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the claim of the assessee on merits. Aggrieved, the revenue preferred an appeal to the Tribunal where on behalf of the assessee it was argued that while the CIT(A) has allowed the appeal on merits, the Revenue could not withdraw the claim of deduction since unless the initial years claim is withdrawn, subsequent years claim cannot be denied.

HELD

The Hon’ble High Court of Bombay has considered such issue in the case of CIT vs. Paul Brothers 216 ITR 548 wherein the Hon’ble High Court has held that “unless deductions allowed for the assessment year 1980-81 on the same grounds were withdrawn, they could not be denied for the subsequent years”. This decision of the Hon’ble High Court of Bombay was followed by the Hon’ble high Court in the case of CIT vs. Western Outdoor Interactive Pvt. Ltd. 349 ITR 309 wherein the Hon’ble High Court has held that “where a benefit of deduction is available for a particular number of years on satisfaction of certain conditions under the provisions of the Income-tax Act, 1961, then unless relief granted for the first assessment year in which the claim was made and accepted is withdrawn or set aside, the Incometax Officer cannot withdraw the relief for subsequent years. More particularly so, when the Revenue has not even suggested that there was any change in the facts warranting a different view for subsequent years.”

Following the ratio laid down by the High Court, the Tribunal declined to interfere with the order of CIT(A). The appeals filed by the Revenue were dismissed.

Section 88E – STT paid on speculation loss has to be considered if after setting off the speculation loss against speculation gain there is positive income which has been included in the computation of total income.

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3. Sanjay Mohanlal Mota (HUF) vs. ITO
ITAT Mumbai `E’ Bench
Before N. K. Billaiya (AM) and Ram Lal Negi (JM)
ITA No. 2988/Mum/2013
A. Y. : 2007-08.                                    
Date of Order: 3. 09. 2015.
Counsel for assessee / revenue : Jitendra Singh / S. K. Mahapatra

Section 88E – STT paid on speculation loss has to be considered if after setting off the speculation loss against speculation gain there is positive income which has been included in the computation of total income.

FACTS

The assessee was trading in shares and stocks and
also derived dividend income, interest income and rent which were
assessed under the head Income from Other Sources. While assessing the
total income, the Assessing Officer (AO) noticed that the loss in
respect of speculative transaction, though assessed, was carried forward
and did not form part of total income. He asked the assessee to show
cause why proportionate STT of Rs.1,79,722 should not be treated as STT
relating to speculative transactions and therefore, why this amount
should not be reduced from the total STT paid. The assessee filed a
detailed reply where it contended that when speculation income is taxed
there is no reason its claim should not be allowed when there is a
speculation loss. It was also contended that there is no provision for
bifurcating STT paid on each type of transaction. The AO rejected the
contentions of the assessee and disallowed the proportionate claim of
STT of Rs.1,79,722. Aggrieved, the assessee preferred an appeal to the
CIT(A) who confirmed the action of the AO. Aggrieved, by the order
passed by CIT(A), the assessee preferred an appeal to the Tribunal.

Held

A
perusal of the section 88E shows that the total income of the assessee
should include income chargeable under the head `profits and gains of
business or profession’ which arises from taxable securities
transactions. If this condition is fulfilled, then the assessee is
entitled to a deduction from the amount of income-tax on such income of
an amount equal to STT paid by him. Since the speculation loss is set
off against the speculation gain and thereafter if any positive income
remains that positive income is taken in the computation of total
income. Even the STT paid on speculation loss has to be considered while
giving effect to it. The Tribunal restored the issue to the file of the
AO with a direction to examine whether there is any positive income
remaining after giving set off to the speculation loss. The AO was
directed to allow the claim if positive income is found under this head
after giving reasonable and sufficient opportunity of being heard to the
assessee. The appeal filed by the assessee was allowed for statistical
purposes.

Sections 22, 56 – Rent received for renting of terrace for installation of mobile antennas is chargeable to tax under the head `Income from House Property’. It is wholly irrelevant as to whether the antenna is part of the building or land appurtenant thereto. As long as the space which has been rented out is part of the building the rent is required to be treated as `income from house property’.

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11. [2015] 168 TTJ (Trib) 502 (Del)
Manpreet Singh vs. ITO
ITA No. 3976/Del/2013
Assessment Year: 2009-10.                   
Date of Order: 6.01.2015

Sections 22, 56 – Rent received for renting of terrace for installation of mobile antennas is chargeable to tax under the head `Income from House Property’. It is wholly irrelevant as to whether the antenna is part of the building or land appurtenant thereto. As long as the space which has been rented out is part of the building the rent is required to be treated as `income from house property’.

FACTS

In the return of income filed by the assessee, an individual, amounts aggregating to Rs.2,91,723 received from Bharati Airtel and Idea Cellular Limited towards renting out its terrace for use by these companies for installing mobile antennas were offered for taxation under the head `Income from House Property’. The assessee had claimed deduction @ 30% u/s. 24(a) of the Act. In the course of assessment proceedings, the Assessing Officer (AO) considered this sum of Rs.2,91,723 to be chargeable to tax under the head `Income from Other Sources’. He denied deduction of Rs.87,516 claimed u/s. 24(a) and added back this sum to the total income. Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO by relying on the decision of Calcutta High Court in the case of Mukherjee Estate (P.) Ltd. vs. CIT 161 CTR 470 (Cal). Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that under the terms of the leave and license agreement entered into by the assessee rent was for use of “roof and terrace” area (not more than 900 sq. ft. in case of Bharti Airtel and not more than 800 sq. ft. in case of Idea Cellular Ltd.). The installations mentioned in the leave and license agreement, which were permitted, were to be done by the companies. The obligation of the assessee did not exceed beyond permitting use of space for such installations. There was no dispute on the fact that the assessee was the owner of the property. The CIT(A) upheld the taxability under the head `income from other sources’ and thus rejected the claim of deduction u/s. 24(a) on the basis of his understanding of the law laid down by the Calcutta High Court. The Tribunal held that the reliance of CIT(A) on the decision of the Calcutta High Court in the case of Mukerjee Estates (P) Ltd. was misplaced since in that case the Tribunal had given a categorical finding that the assessee had let out the hoardings and the assessee had failed to substantiate whether the roof was let out or the hoarding was let out. Undisputedly, the assessee was the owner of the property. Rent was for space to host the antennas and not for the antennas. The Tribunal held that since rent is for the space, terrace and roof space in this case, and which space is certainly a part of the building, the rent can only be taxed as `income from house property’. The appeal filed by the assessee was allowed.