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Category: Direct Taxes

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

Income-tax Officer vs.
Nishant Lalit Jadhav

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

ITA No.: 6883/MUM/2014

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

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

FACTS 

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

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

HELD

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

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

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

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

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

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

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

FACTS  

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

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

HELD  

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

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

Argus Golden  Trades vs. JCIT

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

ITA No.: 522/JP/16

A. Y. : 2011-12.                  

Date of Order: 24th May, 2017

Counsel for Assessee / Revenue: 
Rajeev Sogani / Rajendra Jha

FACTS  

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

HELD  

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

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

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

SNDP Yogam vs. ADIT (Exemption)

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

Date of Order: 1st
March, 2016

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

Facts

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

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

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

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

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

Held

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

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

u/s. 11 of the Act.

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

([2017)] 162 ITD 324 (Delhi – Trib.)

Remfry & Sagar vs. JCIT

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

Date
of Order :– 6th September, 2016

FACTS

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

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

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

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

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

On appeal by the assessee
before ITAT-

HELD

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

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

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

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

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

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

DCIT  vs. Chennupati
Kutumbavathi

ITA No.  45 (Vizag) of
2013

A. Y.: 2007-08                                                    

Date of Order: 9th June, 2017

FACTS  

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

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

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

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

HELD 

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

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

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

The Tribunal dismissed the
appeal filed bythe revenue.

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

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

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

ITA no.: 2158/Mum./2016

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

Counsel for Assessee / Revenue:  Jitendra Jain /  Pooja Swaroop

FACTS

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

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

HELD

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

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

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

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

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

I .T.A. No.: 824 / Kol / 2015. 

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

Counsel for Assessee / Revenue: 
Subash Agarwal / Tanuj Neogi

FACTS

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

– Direct expenses Rs. 3.08 lakh;

– Interest expenses Rs. 34.42 lakh; and

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

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

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

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

HELD

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

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

7.  ACIT vs. Allied
Gems Corporation (Bombay)

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

ITA No.: 2502/Mum/2014

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

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

FACTS

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

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

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

HELD

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

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

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

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

ITA No. 2291/Mum/2015

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

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

FACTS 

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

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

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

HELD 

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

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

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

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

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

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

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

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

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

The Tribunal decided the appeal in favor of the assessee.

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

5.  Devran N. Varn vs.
ITO (Mumbai)

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

ITA No.: 1874/Mum/2014

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

Counsel for assessee / revenue: Dinkle Hariya / J Saravanan

FACTS  

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

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

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

HELD 

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

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

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

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

4.  Beauty Tax vs. DCIT (Jaipur)

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

ITA No. 508/Jp/2016

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

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

FACTS  

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

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

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that –

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

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

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

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

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

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

The appeal filed by the assessee was allowed.

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

3.  Small Wonder Industries vs. CIT (Mum)

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

ITA No.: 2464/Mum/2013

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

Counsel for assessee /
revenue: Prakash Jotwani / Debasis Chandra

FACTS  

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

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

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD  

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

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

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

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

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

The Tribunal allowed the appeal filed by the
assessee.

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

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

Adarsh Kumar Swarup vs. DCIT

ITA No.: 1228 (Delhi) of 2016

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

FACTS

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

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

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

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

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

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

This ground of appeal filed by the assessee was
allowed.

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

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

Nandinho Rebello vs. DCIT

ITA No.: 2378 (Ahd) of 2013

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

FACTS

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

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

 

During the year worked

 

 

Name of the employer

From

upto

Salary

Rupees

Notice pay

Deducted

Rupees

Reliance
Communication Ltd.

1.4.2009

9.5.2009

164636

1,10,550

Sistema Shyam
Teleservices Ltd.

18.5.2009

24.2.2010

1395880

1,66,194

Videocon Tele
Communication Ltd.

3.3.2010

31.3.2010

546060

 

 

 

 

2106576

2,76,744

The AO noted that the assessee has declared salary income of
Rs. 11,45,880 received by him from Sistema Shyam Teleservices Ltd. The
allegedly undisclosed salary income of Rs. 1,64,636 received from Reliance
Communication Ltd. and Rs. 5,46,000 received from Videocon Tele Communications
Ltd. was added to the returned income declared by the assessee.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the amount of notice pay of Rs.
2,76,744 was claimed by the assessee in the return of income as deduction which
was recovered from the salary by the assessee’s previous employers. It observed
that the CIT(A) was of the view that no such deduction is available u/s. 16 of
the Act and the salary income is taxable on due basis or on paid basis. The
Tribunal held that the employers have made deduction from the salary which was
paid to the assessee during the year under consideration because of leaving the
services as per agreement made by the assessee and the respective employer. It
observed that this is a case of recovery of the salary which is already made to
the assessee for which reference to section 16 of the Act is not required.  It observed that the assessee has actually
received the salary from his previous employers after deducting the notice
period as per the job agreement with them. The Tribunal held that the actual
salary received by the assessee is only taxable.

The appeal filed by the assessee was allowed.

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

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

Jitendra V. Faria vs. ITO

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

FACTS 

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

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

Aggrieved, the assessee
preferred an appeal to the Tribunal.

HELD 

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

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

The Tribunal allowed the
appeal filed by the assessee.

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

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

FACTS

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

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

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

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

On appeal by the revenue
before the Tribunal.

HELD

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

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

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

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

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

Special Leave Petitions – An Update

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Revenue filed SLP before Supreme Court which was
dismissed.

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

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

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

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

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

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

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

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

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

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

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

The High Court dismissed the revenue’s appeal.

The Revenue filed SLP before Supreme Court which was
dismissed.

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

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

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

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

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

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

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

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

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

The Assessee filed SLP before Supreme Court
which was granted.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The assessee, an employee of ICICI Bank, retired under the
Early Retirement Option Scheme, 2003. For the year of retirement the assesee
filed the return of income and the assessment was finalised. Subsequently, the
assessee came to know that the Supreme Court, in the case of S. Palaniappan
vs. ITO (2015) 5 ITR-OL 275 (SC) held that a person, who has opted
for voluntary retirement under the Early Retirement Option Scheme shall be
entitled to exemption u/s. 10(10C) of the Act. Following the decision, the CBDT
issued a circular dated 13/04/2016 stating that the judgment of the Supreme
Court be brought to the notice of all officials in the respective jurisdiction
so that relief may be granted to such retirees of the ICICI Bank under Early
Retirement Option Scheme 2003. On coming to know of this, the assessee filed a
revised return claiming the benefit u/s. 10(10C) of the Act, referring to the
said decision and the circular. The Assessing Officer rejected the claim on the
ground that the revised return was filed beyond the time stipulated u/s. 139(5)
of the Act.

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

“i)  Clause (c) of sub-section (2) of section 119
of the Income-tax Act, 1961 states that the CBDT may, if it considers as
desirable or expedient so to do for avoiding genuine hardship in any case or
class of cases, by general or special order, relax any requirement contained in
any of the provisions contained in Chapter IV or Chapter VI-A of the Act. Thus
if the default in complying with the requirement was due to circumstances
beyond the control of the assessee, the Board is entitled to exercise its power
and relax the requirement contained in Chapter IV or Chapter VI-A. If such a
power is conferred upon the Board, this Court, while exercising jurisdiction
u/s. 226 of the Constitution of India, would also be entitled to consider
whether the assessee’s case would fall within one of the conditions stipulated
u/s. 119(2)(c).

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

iii)  The assesee being a senior citizen could not
be denied the benefit of exemption u/s. 10(10C) of the Act and the financial
benefit that had accrued to him, which would be more than a lakh of rupees. The
Respondent is directed to grant the benefit of exemption u/s. 10(10C) of the
Act and refund the appropriate amount to the petitioner, within a period of
three months from the date of receipt of a copy of this order.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Premier Electrical Industries vs. JCIT

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

FACTS

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

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

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

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

On appeal by the assessee before the Tribunal:

HELD

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    

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

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

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

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

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

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

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

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

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

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

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

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

       

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

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

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

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

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

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

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

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

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

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

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

The assessee was
individual deriving income from salaries and income from other source (interest
income). He was also co-owner of an ancestral agricultural land along with
other family members. The land was situated within the limits of village
Panchayat. During relevant year, i.e. A. Y. 2007-08, assessee sold said land.
He claimed gain on sale of agricultural land as exempt since the land did not
constitute ‘Capital Assets’ as defined u/s. 2(14). The Assessing Officer
rejected assessee’s claim holding that the land did not constitute agricultural
land since no agricultural operations were carried out regularly and same was
sold to a company engaged in the business of development of infrastructure
activity. The Tribunal upheld the order of Assessing Officer.

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

“i)  The
impugned order and the whole action of the department proceeds on the
foundation that the land in question so transferred is a “non-agricultural
land” and falls within the ambit of “non-agricultural land”
because of use and/or non-use and/or stated to be unused for specific
agricultural purpose for want of labour and no-agricultural operations and/or
no specific regular income continuously for three years, as required and many
other such facets.

ii)  For the
purposes of such transfer of land, one has to consider the provisions of the
Goa, Daman and Diu Land Revenue Code, 1968. (Code) and the Rules made
thereunder and so also the definition so provided to deal with the concept of
“agricultural land”. Under the Code, there was no bar that an
agriculturist and/or one who possesses agricultural land cannot transfer such
land to any third party who is not agriculturist. Nothing contrary has been
pointed out and/or placed on record that any permission and/or formalities are
required to be completed before transfer of such lands. Under the Code, a transfer
could be made to a non-agriculturist and/or to a person whose activities are
not related to agricultural project or purpose

iii)  The
assessee had received the consideration. Admittedly, the property was not
divided and/or sub-divided. Admittedly, before transfer of the property, the
parties were fully aware about the nature of the land which includes rocky
area, used and usable area for agricultural, number of trees, plants growing or
in existence for so many years, apart from certain plantations. Being the
ancestral agricultural property, the families were using the agricultural
produce for their own consumption.

iv) Here, at
this stage, it is relevant to note the definition of the term
“agriculture”. This definition, ought not to have been overlooked,
while taking any action against the assessee. The definition itself provides
that expression “agriculture” means raising of useful or valuable
products which derive nutriment from the soil with the aid of human labour.
This inclusive definition, no where provides and/or takes away rights of the
assessee to treat such land as an agricultural land which they had been using
before transfer and/or till the date it came to be transferred as an
“agricultural land”

v)  The
definition of “agriculture” itself permitted, such unused land to be
used and utilised even for grazing, horticulture, dairy farming, stock
breeding. This is clear terms of the law and so also the intent of the Code
which governs such agriculture land and its transfer. The report so submitted
and/or referred to by the department against the assessee, is unsustainable,
unacceptable and contrary to the specific provisions of the Code. All the
“agriculture” activities so defined covers the agriculture land in
question. Therefore, exemption from the capital gain is the only option, on
fact and the law.

vi) The whole
approach of the Tribunal and the Assessing Officer is incorrect and
unsustainable in law. Section 105 of the Code further clarifies the position
with regard to presumption of correctness of entries in the record of rights
and register of mutations. It provides that an entry in the record of rights,
and certified entry in the register of mutation shall be presumed to be true
and until the contrary is proved or a new entry is lawfully substituted
therefor. The assessee has placed on record material to justify their claim.
There is no issue with regard to assessee’s ownership, title and the name
recorded in the land records at the relvant time. Even, otherwise, in view of
settled position of law, all concerned are bound by the entries, unless contra
material is placed on record. On the contrary, adverse findings are given by
the department solely based upon the so called inspection initially taken at
the stage of assessment by the concerned officer and later on by the Tribunal
Members. But the fact is that this inspection reports, in no way, has
considered the purpose and object of the Code and the definition of
‘agriculture’ so liberally mentioned.

vii) The
finding of facts recorded by the Tribunal itself confirms the position that the
case of the assessee falls within the ambit of definition of
“agriculture” as defined under the Code. The property requires to be
treated as agricultural land and its ‘activities are “agricultural”
in nature. In view of above, it is held that the property in question cannot be
treated as “capital asset” as contemplated u/s. 2(14)(iii). It is
wrong to hold, in view of the facts and circumstances and the nature of
agricultural land because of peculiar situation of the land near the sea side
or stony side of the sea, that assessees are not doing any regular agriculture
operation, this is also on the ground that they never showed agriculture income
out of it. Any agriculture produce and products can be for personal use also.

viii)In the result, the
impugned order of the Tribunal is set aside and assessee’s appeal is allowed.”

9. Capital gain or business income- A. Y. 2006-07 – Where assessee converted the stock-in-trade of shares into investments and sold the same at a later stage, profit arising from sale of shares shall be deemed to be capital gains and not business income -Since shares were held as long-term capital asset, profit arising from sale of share shall be exempt from tax u/s. 10(38)

Deeplok Financial
Services Ltd. vs. CIT; [2017] 80 taxmann.com 51 (Cal):

The assessee was a company
which was engaged in the business of leasing, finance and investment. On 1st
April, 2004, i.e. during the previous assessment year 2005-06 the
assessee transferred certain shares from its trading stock into investments. In
the A. Y. 2005-06, the assessee sold some of those shares and some more shares
were sold in the A. Y. 2006-07, the relevant year. The assessee claimed the
profit as capital gain and for the A. Y. 2006-07 claimed exemption u/s. 10(38)
of the Act, 1961 as long term capital gain. In the assessment u/s. 143(3) of
the Act, for the A. Y. 2005-06, the Assessing Officer did not accept the
assessee’s claim for conversion of shares from stock-in-trade into investment.
That decision was appealed against and carried up to the Tribunal which
confirmed the same. The assessee though preferred a delayed appeal to the High
Court but was unsuccessful in having the delay condoned and thereby lost that
right of appeal. For the assessment year under consideration i.e. A. Y.
2006-07, the Assessing Officer following the assessment order of the previous
year held accordingly on this claim of conversion by the assessee. The CIT(A)
allowed the assessee’s appeal but the Tribunal upheld the decision of the
Assessing Officer following its order for the A. Y. 2005-06.

The assessee filed appeal
before the Calcutta High Court and raised the following substantial question of
law:

     “Whether
on the facts and circumstances of the case the Tribunal erred in affirming the
order of the AO disregarding the conversion of the trading shares into
investment shares and treating the long term capital gain of Rs.22,27,819/-
arising from the sale of those shares as profit of trading in shares and
bringing the same to tax?”

The High Court formulated
another substantial question of law as under:

     “Whether
the Tribunal was correct in holding that the profit arising from the sale of
the said shares is chargeable to tax in the hands of the assessee as its
business income and not long term capital gain since in the assessee’s own case
in the previous assessment year the conversion of the shares was not accepted
by the Tribunal?”

The High Court decided to
answer both the questions. The High Court held as under:

“i)  A person
cannot transact with himself. It is only after the asset is dealt with to a
third party can a profit or loss be ascertained on the basis thereon. There was
no bar imposed by the Income Tax Act, 1961 on an assessee from converting its
stock-in-trade into investment. That conversion could not be deemed to be a
transaction but when the asset is dealt with, the profit or loss is to be
ascertained and in the case of capital asset, if there is profit then to be
assessed as capital gain. That if shares be disposed of at a value other than
the value at which it was transferred from the business stock, the question of
capital loss or capital gain would arise.

ii)  In
Dhanuka & Sons(1980) 124 ITR 24 (Cal), the same situation was contemplated
where on stock transferred in investment account, the question of capital loss
or capital gain, was held, would arise if such shares be disposed of at a value
other than the value at which it was transferred from the business stock. We,
on noticing that the Tribunal did not really hold otherwise but had held
against the assessee on the point of res judicata, had formulated the
above question. Nevertheless for the reasons aforesaid we answer the question
suggested by the assessee in the affirmative and in its favour. In that regard
the said circular dated 29th February, 2016 has no application
because the assessee’s stand was not accepted by the Revenue.

iii)  So far
as the formulated question relating to res judicata is concerned, in
answering the same reference may be had to the decision in Amalgamated
Coalfields Ltd. & Anr. vs. Janapada Sabha Chhindwara; AIR (1964) SC 1013
in which the Supreme Court, inter alia, held that generally, questions
of liability to pay tax are determined by Tribunals with limited jurisdiction
and so, it would not be inappropriate to assume that if they decide any other
questions incidental to the determination of the liability for the specific
period, the decisions of those incidental questions need not create a bar of res
judicata while similar questions of liability for subsequent years are
being examined.

iv) This
assessee lost its right of appeal to this Court on the question arising in the
previous assessment year on account of delay in preferring the same. There was
no adjudication on merits, of its claim of conversion, on appeal to the High
Court. The only reason given by the Tribunal in rejecting the claim of the
assessee for the previous assessment year, as would appear from its order dated
13th May, 2011, is that to the Tribunal it appeared there is no
provision in the Act in respect of conversion of stock-in-trade into investment
and its treatment. Hence, it held that the lower authorities rightly made the
addition as there was understatement of income by analysing the assessee’s
trading and investment account in shares. Thus, before us there is no
impediment for the assessee to seek adjudication on the point. The question
formulated is answered accordingly and in favour of the assessee.”

8. Business expenditure – Deduction on actual payment – Sections 37 and 43B – A. Y. 2007-08 – Export and import business – Misdeclaration- Evasion of customs duty – Search and arrest – Bail order by court on condition assessee’s deposit amount to be appropriated towards differential liability by custom authorities – Recovery of customs duty from amount deposited by assessee evident from order of Principal Commissioner of Customs. Allowable expenses

Princ. CIT vs.
Praveen Saxena; 391 ITR 365 (Del):

The assessee was a
proprietor of a concern doing export and import business. A search was
conducted by the customs authorities in the premises. The assessee was arrested
subsequently by the Directorate of Revenue Intelligence on the suspicion of
evasion of payment of duties. In the course of the court proceedings, the
customs authorities had contended that bail could be granted to the assessee
only if a substantial amount of the customs duty and penalty levied was
deposited. Therefore, the court directed the assessee to deposit the amount
which was to be appropriated by the customs authorities. In addition the
assessee was also directed to furnish an adequate security amount. For the A.
Y. 2007-08, the assessee claimed that the amount of deposit had to be allowed
u/s. 43B of the Income-tax Act,(hereinafter for the sake of brevity referred to
as the “Act”) 1961. The Assessing Officer disallowed the expenses on
the grounds that the amount was a penalty and consequently, even otherwise, in
the absence of an adjudication order, no amount was payable. The Commissioner
(Appeals) and the Tribunal allowed the assessee’s claim.

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

“i)  It was
evident from the order of the Principal Commissioner of Customs that the duty
element and the identical amount of penalty had been determined. If there was
no misdeclaration by assessee to the customs authority and consequential
differential liability towards differential duty, the Department could not have
contended that the amount duly paid constituted allowable expenditure on
account of statutory liability u/s. 43B of the Act. The assessee did not do so
but was rightly made to do so did not in any manner detract its basic liability
which it always had to satisfy.

ii)  Therefore,
the contentions of the Department were misconceived and were rejected. The
deposit amounts paid were expenses and within the ambit of section 43B. The
appeal is dismissed.”

7. ALP – International transaction – Sections 92 and 92C – R. 10B of I. T. Rules 1962 – A. Y. 2008-09 – Comparables accepted for earlier years excluded – Onus on Department to justify exclusion –

CIT vs. Welspun Zucchi
Textiles Ltd.; 391 ITR 211 (Bom):

The assessee was in export
business and entered into international transactions with its associated
enterprises. The assessee determined arm’s length price of exports to its
associated enterprises for the  A. Y.
2008-09, by benchmarking the price of exports of comparable companies, SEL and
VTI which had been accepted as comparables for the earlier assessment years.
Accordingly, no transfer pricing adjustment was made by the assessee. The
Transfer Pricing Officer while determining arm’s length price excluded two
companies SEL and VTI without assigning any reasons and enhanced the price of
exports made by the assessee to its associated enterprises. The Assessing
Officer in terms of the order of the Transfer Pricing Officer enhanced the
income on account of international transactions and passed an order. The
Tribunal held that the exclusion of the two companies was not justified.

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

“i) If the
Department was of the view that only because of the losses of the assessment
year in question the two companies were not comparable, further examination or
enquiry ought to have been done by it to find out whether loss was a symptom of
the reference points in Rule 10B(2) of the Rules making them non-comparable. It
was more so as the Department did not dispute that otherwise the two companies
were comparables to the assessee even on the parameters laid down in Rule
10B(2).

ii)  Therefore,
if the Department sought to discard the two companies SEL and VTI from the
comparables for the assessment year in question, the onus was upon the
Department to justify it. A finding has been recorded that the Department had
not shown that the two companies were consistently loss making companies, which
required examination to ascertain if it was hit by one of the reference points
mentioned in Rule 10B(2).

iii)  The
Department itself has accepted the companies SEL and VTI as comparables for the
earlier assessment years. The appeal is dismissed.”

Expenditure by Pharmaceutical Companies On Doctors

Issue for Consideration

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

It is the usual industry practice for companies, engaged in
the business of manufacturing pharmaceutical products, to distribute their
products amongst the medical practitioners by way of free samples and gift
articles; to conduct and sponsor seminars and lectures in and outside India; to
hold dinner and parties; to sponsor holidays and pay for travel and
accommodation of doctors and their spouses and incur such other expenses.

The expenditures so incurred is usually classified as the
advertisement and sales promotion expenses and is claimed as a business
expenditure. The validity of such claim is examined by the Supreme Court in the
case of Eskayef Pharmaceuticals Ltd, 245 ITR 116 (SC), in the context of section
37(3A), now omitted. A controversy has arisen, on account of the
conflicting decisions of the Tribunal, in the recent years, on the subject of
allowance or otherwise of the deduction of such expenditure, post issue of a
circular No.5 dt. 1.08.2012 by the CBDT in pursuance of the amendments of 2009
in the Indian Medical Council (Professional Conduct, Etiquette & Ethics)
Regulations, 2002 ( ‘Regulations’).

Liva Healthcare Ltd’s case.

The issue had first arisen in the case of Liva Healthcare
Ltd. vs. DCIT, 161 ITD 63. In the said case, the company for assessment
year 2009-10 had incurred expenditure on travel and accommodation of doctors
and their spouses to Istanbul and Hongkong and towards distribution of free
samples to the physicians. The tours were conducted to promote the products and
samples were distributed free of cost as a necessity of business requirement of
the assessee. The company had submitted before the AO that the expenditures
were incurred, including on samples given free of cost to doctors, to obtain
information regarding efficacy of the medicine and for the purposes of
advertisement, publicity and sales promotion; that samples were given free of
cost to the doctors so that they could try the same on patients and inform the
medical representative of the assessee about their results and their
experiences; that the nature of the product sought to be sold was such that it
could be done through the doctors alone and as such promoted sales also; that
when such expenditure was incurred on doctors and samples were given to
doctors, certain amount of good relationship was created with them who might
then buy or prescribe those medicines in preference to other similar products.
In a nutshell, it was explained that the twin purpose of such expenditures was
to test the efficacy of the products as well as for advertisement, publicity or
sales promotion. It was also submitted that the samples were manufactured as
“physician samples not for sale” and the suppliers invoices were
marked as “physician samples” only. The assessee relied upon a few
decisions including the decision in the case of Eskayef Pharmaceuticals
(India) Ltd., (supra) :

In assessing the total income, the A.O. disallowed the
expenditure incurred on travel and accommodation in full and also disallowed
25% of the expenditure claimed on distribution of free samples by applying
Explanation 1 to section 37(1) of the Act. The CIT(A) upheld the
disallowance of the travel and accommodation expenditure but deleted the
addition on account of disallowance of the expenditure in part of distribution
of the free samples by allowing the appeal of the assessee company, in part.

In cross appeals to the Tribunal, the revenue relied upon the
order of the A.O. while the assessee company reiterated its stand taken before
the A.O. Significantly, it brought to the notice of the Tribunal the order
passed by the Tribunal in its own case for assessment year 2008-09. The
Tribunal examined the provisions of the said Regulations of 2002 and in
particular clauses 6.4 and 6.8 as also the then newly amended clause
6.8. It also took into consideration the decision of the Himachal Pradesh
High Court in the case of the Confederation of Pharmaceutical Industry vs.
CBDT, 355 ITR 388 wherein validity of the said CBDT circular No. 5 of
2012 and the said Regulations of 2002 governing professional ethics
of doctors was challenged and was found by the court to be as per the law and
salutary and issued in the interest of public and patients. The Tribunal also
took note of the decision of the Punjab and Haryana High Court in the case of CIT
vs. Kap Scan and Diagnostic Centre (P.) Ltd., 344 ITR 478, wherein the
court had confirmed the disallowance of commission paid to the doctors, as not
allowable u/s. 37(1) of the Act, being against public policy and
prohibited by law.

The Tribunal at the outset expressed their agreement, in
principle, with its decision in assessee’s own case for assessment year
2008-09, so far as the expenditure incurred on distributing free samples to
test the efficacy of the pharmaceutical products, in accordance with the ratio
of the case of Eskayef Pharmaceuticals (India) Ltd. (supra), at the
initial stage of introduction of the products to get the feedback of the users
and held that such expenses could be said to be incurred wholly and exclusively
for the purposes of business satisfying the mandate of section 37 of the Act.
The Tribunal held that the physicians’ samples were necessary to ascertain the
efficacy of the medicine and for introduction of a new product in the market,
it was only by distributing the free samples that the purpose was achieved.

The Tribunal however proceeded to hold that where a
particular medicine had already been introduced into the market, in the past,
and its uses were established, giving of free samples could only be as a
measure of sales promotion and advertisement and that the ratio of the said
decision in the case of Eskayef Pharmaceuticals (India) Ltd.(supra),
delivered in the context of section 37(3A) of the Act, did not apply due to the
fact that the Finance Act, 1998 had thereafter, introduced an Explanation to
section 37(1) of the Act which required that an expenditure, the purposes
which was an offence or prohibited under the law, was disallowed.

The Tribunal noted that the purpose for incorporation of the
said Explanation to section 37(1) had been explained by the CBDT in Circular
No. 772, dated December 23, 1998. It further noted that the said Regulations
of 2002 prohibited, vide regulation 6.4.1, a physician from receiving any
gifts, gratuity, commission or bonus in consideration or return for referring
the patients for medical, surgical or other treatment.

It held that once the pharmaceutical products were
distributed after the products were introduced in the market and its uses were
established, giving of free samples to doctors and physicians would be a measure
of sales promotion which would be hit by regulation 6.4.1 of the said Regulations
of 2002. It further held that the said regulation had a force of law and
the receipt of free samples amounted to receipt in consideration of or return
for referring patients and that such receipts were prohibited under regulation
6.4.1 of the said Regulations of 2002 inasmuch as the stated
objective of giving free samples to the doctors and physicians was to induce
them to write prescriptions of the said pharmaceutical products. It held that
the expenses could not be allowed as deduction while computing income from
business or profession.

The Tribunal drew support from the decision in the case of Eskayef
Pharmaceuticals (India) Ltd. (supra) to hold that the test laid down by the
court, read in conjunction with Explanation to section 37 of the Act and
regulation 6.4.1. of the said Regulations of 2002, made it clear
that the expenditure on such free samples was hit by the Explanation to
section 37 of the Act and was not allowable as deduction.

In conclusion, the Tribunal held that the expenditure on
foreign travel and accommodation of doctors and their spouses was incurred with
the intent and the objective of profiting from the distribution and
entertainment and had a direct nexus with promoting the sales and
profitability, all of which made such expenditure violate the provisions of the
said Regulations of 2002. It held that the expenditure was incurred to
seek favours from the doctors by way of recommendation of the company’s
products which was an illegal gratification, was against public policy, was
unethical and was prohibited by law. Accordingly, the expenditure in question
was liable for disallowance in full as was held by the A.O. and the CIT(A).

PHL Pharma (P) Ltd.

The issue had again arisen in the case of PHL Pharma (P)
Ltd. vs. ACIT, 163 ITD 10(Mum. ). In this case, the assessee company had
debited an amount aggregating to Rs. 83.93 crore to the Profit & Loss
Account towards advertisement and sales promotional expenses, for the year
ending on 31.03.2010. The said expenditure included expenses on distribution of
free samples and gift articles to medical practitioners and doctors, besides
the expenditures on conducting seminar and lecture meetings, journals and
books, travel and accommodation and such other items and things. The A.O.
disallowed an amount of Rs. 23 crore being that part of the expenditure that
was incurred on or after 10.12.2009, i.e. the date of notification of the said
amendments in the said Regulations of 2002. On appeal, the CIT(A) agreed
with the case of the assessee company and allowed the appeal.

On appeal by the Income tax Department to the Tribunal, it
was held as under:

–   The said Regulations of 2002 dealt
with the professional conduct, etiquette and ethics for the registered medical
practitioners, only; it requires that they shall not aid or abet or commit any
of the prescribed unethical acts; it laid down the code of conduct for doctors
in their relationship with pharmaceutical and allied health sector industry.

–   The CBDT Circular No. 5 of 2012 had
heavily relied upon the said Regulations of 2002.

–   The code of conduct has meant to be followed
and adhered to by the medical practitioners and doctors alone and did not apply
any manner to pharmaceutical companies and the Delhi High Court in the case of Max
Hospitals vs. MCI had confirmed this position in WPC 1334 of 2013 dt.
10.01.2014.

–   The Indian Medical Council did not have any
jurisdiction nor had any authority upon the pharmaceutical companies and could
not have prohibited such companies in conduct of their business.

–   As far as the company was concerned, there
was no violation of any law or regulation. The provisions of section 37(1)
applied to a company claiming the expenditure and the violation of section
37(1) was to be examined w.r.t the company incurring the expenditure and not
the doctors who were the beneficiary of the expenditure. Even the additional
prohibition prescribed on 01.12.2016 applied only to the medical practitioners
and not to the pharmaceutical companies .

–   The punishments or penalties prescribed in
the said Regulations applied only to the medical practitioners and not to the
companies.

–   The CBDT in issuing the said circular No.
5 had enlarged the scope of the said Regulations by applying it to
the pharmaceutical companies without any enabling provisions to do so. It had
no power to create a new impairment adverse to an assesee or a class of
assessees, without any sanction of law. The circular issued should have
confirmed with the tax laws and should not have created a new burden by
enlarging the scope of a different regulation.

–   The circular in any case could not be
reckoned retrospectively i.e., it could not be applied before the date of its
issue on 01.08.2012.

–   The expenditure incurred by the assessee
company was in the nature of sales and business promotion and was to be
allowed; the gift articles bore the logo of the assessee and could not be held
to the freebies; the free samples proved the efficacy of the products of the
company and again were not in violation of the said Regulations framed
by the Medical Council of India.

–   The decision in the case of Confederation
of Indian Pharmaceutical Industry (supra) upheld the validity of the said
circular with a rider that no disallowance should take place where the assessee
satisfied the authority that the expenditure was not in violation of the Regulations
framed by the Medical Council of India.

–    The assesseee company, in the opinion of the
CIT(A),  in the case had proved that the
expenditure were not in violation of the said Regulations.

–   The action of the CIT (A) was upheld and the
expenditure claimed was allowed by the Tribunal.

Observations

The conflicting decisions have brought out a very interesting
issue wherein all the sections of the society are required to address a few
pertinent questions; whether one can participate in an offence, even trigger
it, and still not be accused of the offence? For example, can one give a bribe
to a government official and still plead that he cannot be punished or can one
pay a ransom and plead that he cannot be punished? Can one be a party to illcit
activities and plead that not him but the other person be punished for the
crime? Can one be an abettor or instigator of a crime or an offence and plead
innocence?

It may be possible to legally resolve the controversy by
holding, that in the absence of a provision of law that expressly provides for
the conviction, in explicit words, of both the parties to an offence, one of
the parties to an offence, though found to be abetting the offence, will go
scot free. The apparently simple answer may not remain so when the facts are
tested on the touchstone of public policy and ethics and importantly the
questions raised. In our view, these are the questions and the factors that
were relevant for deciding an issue of allowance of an expenditure even before
the Explanation to section 37 was issued in the year 1998. The courts, in scores
of the decisions, had occasion to address this issue even before the issuance
of the said Explanation and had largely held that an expenditure that was
against the public policy was not deductible. It is this aspect of the issue
that was partly touched in Liva Healthcare’s case and with
respect could have been explored in depth in the PHL Pharma’s case.

Medical Council of India is constituted under the Medical
Council Act, 1956 with the object of governing and regulating the practice of
medicines in India. It has been empowered to formulate rules and regulations
for effectively carrying out its objectives. The said council, empowered under
the said Act, has formulated The Indian Medical Council (Professional
Conduct, Etiquette and Ethics) Regulations, 2002 which was amended in 2009
and the amendment was notified on 10-12-2009 by the council. The said Regulations
vide amended clauses 6.4 and 6.8 provide for rules that prohibit receipt of the
freebies and many related acts and items and things by the medical
practitioners. Vide regulation 6.4.1, a physician is prohibited to
receive any gifts, gratuity, commission or bonus in consideration or return for
referring the patients for medical, surgical or other treatment. It reads as:
“6.4 Rebates and Commission: 6.4.1 A physician shall not give, solicit, or
receive nor shall he offer to give solicit or receive, any gift, gratuity,
commission or bonus in consideration of or return for the referring,
recommending or procuring of any patient for medical, surgical or other
treatment. A physician shall not directly or indirectly, participate in or be a
party to act of division, transference, assignment, subordination, rebating,
splitting or refunding of any fee for medical, surgical or other
treatment.”

Subsequent to the
notification of the said regulations, the CBDT has issued the Circular No. 5
dated 1-8-2012 directing the Income-tax authorities to disallow the expenditure
incurred on distribution of freebies on application of Explanation 1 to section
37(1) of the Income-tax Act. The relevant part reads as under; “It has been
brought to the notice of the Board that some pharmaceutical and allied health
sector Industries are providing freebees (freebies) to medical practitioners
and their professional associations in violation of the regulations issued by
Medical Council of India (the ‘Council’) which is a regulatory body constituted
under the Medical Council Act, 1956. 2. The council in exercise of its
statutory powers amended the Indian Medical Council (Professional Conduct,
Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009
imposing a prohibition on the medical practitioner and their professional
associations from taking any Gift, Travel facility, Hospitality, Cash or
monetary grant from the pharmaceutical and allied health sector Industries. 3.
Section 37(1) of Income Tax Act provides for deduction of any revenue
expenditure (other than those failing under sections 30 to 36) from the
business Income if such expense is laid out/expended wholly or exclusively for
the purpose of business or profession. However, the explanation appended to
this sub-section denies claim of any such expense, if the same has been
incurred for a purpose which is either an offence or prohibited by law. Thus,
the claim of any expense incurred in providing above mentioned or similar
freebees in violation of the provisions of Indian Medical Council (Professional
Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under
section 37(1) of the Income Tax Act being an expense prohibited by the law.
This disallowance shall be made in the hands of such pharmaceutical or allied
health sector Industries or other assessee which has provided aforesaid
freebees and claimed it as a deductable expense in its accounts against
income.”

The validity of the said circular has been examined by the
Himachal Pradesh High Court in the case of Confederation of Indian
Pharmaceutical Industries, 353 ITR 388. The Punjab and Haryana High Court
in the case of KAP Scan and Diagnostics, 343 ITR 476 has examined the
issue of allowance of expenditure incurred on payment of commission to the doctors
by the diagnostic company. Recently, the Chennai Tribunal examined the issue of
allowance of deduction of an expenditure incurred by the pharmaceutical
manufacturers on distribution of freebies to the medical practitioners in the
case of Apex Laboratories (P) Ltd, 164 ITD 81 to hold that such an
expenditure was not allowable as deduction in view of the said Regulations of
2002 issued by the MCI.

 The same CBDT circular
had come up for consideration in the case of Syncom Formulations (I) Ltd. IT
Appeal Nos. 6429 & 6428 (Mum.) of 2012, dated 23-12-2015, wherein the
Tribunal held that CBDT circular was not be applicable in the A.Ys. 2010-11 and
2011-12 as it was introduced w.e.f. 1.8.2012. Similar issue of allowance of
such expenditure in the case of pharmaceutical companies had been decided in
favour of the assessee, in the case of UCB India (P.) Ltd. v. ITO, IT Appeal
No. 6681 (Mum.) of 2013, dated 13-05-2016, wherein it was held that the
CBDT circular could not have a retrospective effect.

The question is, can a person participating in an act, which
is considered as an offence in the hands of other party, be held to have not
offended the law? Can he not be said to have abetted an offence? Can he be
treated as a conspirator? Can he be said to have triggered the offence? Can he
not be punished for exploiting the weakness of the week? The answers in our
opinion may or may not be available in the express provisions of a statute but
will have to be found from the understanding of the public policy which is one
of the important pillars of the jurisprudence, civil or criminal. It may be
simple to hold that once an act is an offence for one party it shall equally be
an offence for anothers party whether expressly provided for in a statute or
not and the other party shall not be allowed to reap the benefits of such an
act, however, this apparently simple solution in our opinion, may not really
hold water in all cases and may not even be judicious. For example, in cases
involving ransom or protection money. The issue requires an in-depth debate
involving conscience of the society and perhaps cannot be adjudicated by only
interpreting one of the provisions of a statute in isolation.

Interestingly, the said circular vide paragraph
4 encourages the AO to tax the sum equivalent to value of freebees enjoyed by
the medical practitioner as business income or income from other sources as the
case may be depending on the facts of each case. The AO of such medical
practitioner or professional associations are directed to examine the facts and
take an appropriate action.

17. Quick Flight Ltd. vs. ITO (International Taxation)(Ahd) Members: R. P. Tolani (JM) and Manish Borad (AM) ITA No. 1204/Ahd/2014 A.Y.: 2011-12. Date of Order: 4th January, 2017. Counsel for assessee / revenue: Urvashi Shodhan / Rakesh Jha

Sections 115A(1)(b), 206AA – Provisions of
section 206AA cannot be invoked in a case where the payment has been made to
deductees, not having PAN, on the strength of beneficial provisions of section
115A(1)(b).

FACTS  

The assessee company, engaged in the
business of chartering, hiring and leasing aircraft made payment of fees for
technical services to a non-resident viz. M/s Honeywell, USA, not having
PAN.  Tax was deducted at source @ 10%
plus applicable surcharge and cess as per provisions of section 115A of the
Act.  The Assessing Officer (AO) alleged
that tax was required to be deducted @ 20% in view of the provisions of section
206AA of the Act as the assessee was not having PAN and accordingly raised
demand of Rs. 30,250 towards short deduction and Rs. 5,750 towards interest on
short deduction.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD  

The Tribunal noted that similar issue on
almost identical facts came up before the co-ordinate Bench in the case of Alembic
Ltd. vs. ITO (ITA No. 1202/Ahd/2014) wherein the co-ordinate Bench observed
that the issue is squarely covered by the decisions of Uniphos Envirotronic
Pvt. Ltd. vs. DCIT (ITA No. 1974/Ahd/2015 
for AY 2014-15) and the decision of Pune Bench of the Tribunal in the
case of DCIT vs. Serum Institute of India Ltd. and decided the appeal in
favor of the assessee.  The Bench has in
the case of Alembic Ltd. (supra) held that in case where payments have
been made to the deductees on the strength of the beneficial provisions of
section 115A(1)(b) of the Act or as per DTAA rates r.w.s. 90(2) of the Act,
then provisions of section 206AA cannot be invoked by the AO insisting to
deduct tax @ 20% for non-availability of  PAN.

The Tribunal following the decision of the
co-ordinate Bench in the case of Alembic Ltd. (supra) held that in the
present case as well, payment was made towards fees for technical services to a
non-resident through banking channel as approved by RBI and payment is well
covered u/s. 115A(1)(b) of the Act and therefore, special rate of TDS i.e.
11.33% was applicable and was rightly deducted and deposited by the assessee
and the provisions of section 206AA of the Act cannot be made applicable to
this payment.  The Tribunal set aside the
order of CIT(A) and deleted the claim of Rs. 30,250 towards short deduction.

The Tribunal allowed the appeal filed by the
assessee.

16. Gamzen Plast Pvt. Ltd. vs. ITO (Mum) Members: R. C. Sharma (AM) and Pawan Singh (JM) ITA No. 7449/Mum/2014 A.Y.: 2010-11 Date of Order: 28th October, 2016 Counsel for assessee / revenue: B. V. Jhaveri / Jeevanlal Lavedia

Section 80IC – Losses of the eligible unit
which have been fully set off in earlier years against profits of non-eligible
unit cannot be artificially carried forward.

FACTS  

The assessee company, engaged in the
business of manufacturing, assembling and repairing construction machinery and
piling equipments, started an additional unit in Uttarakhand in the previous
year relevant to AY 2008-09. Since the said unit was located in a declared
backward area it was entitled to Excise Duty exemption for 10 years and also
income-tax exemption u/s. 80IC(3)(ii) of the Act. The production in Uttarakhand
unit commenced in AY 2008-09.

In respect of the eligible unit at
Uttarakhand, the assessee incurred a loss of Rs. 51,55,665 in AY 2008-09 and a
loss of Rs. 2,38,08,961 in AY 2009-10. 
These losses were set off against the profits of non-eligible unit at
Mumbai in AY 2008-09 and AY 2009-10 respectively. Therefore, these losses were
not available to be carried forward and set off in AY 2010-11. However, the
Assessing Officer (AO) while completing the assessment of AY 2010-11 notionally
carried forward the losses of AY 2008-09 and 2009-10 which were already set off
against the profit of non-eligible unit at Mumbai and again set them off
against the profit of Rs. 4,48,33,073 of the eligible unit at Uttarakhand for
AY 2010-11 and allowed only the balance of Rs. 1,58,68,447 as deduction u/s.
80IC of the Act.  Thus, he reduced the
claim of deduction u/s. 80IC by Rs. 2,89,64,626.

Aggrieved, the assessee preferred an appeal
to the CIT(A) who held that assessee was not correct in setting off loss of
earlier years in the eligible unit against profit of non-eligible unit.  He upheld the action of the AO.

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

i)   Velayudhaswamy Spinning
Mills Pvt. Ltd. vs. ACIT (340 ITR 477)(Mad);

ii)  ACIT vs. Hamilton
Houseware Pvt. Ltd. (ITA No. 988/Ahm/2009 dated 9.6.2015);

iii)  ACIT vs. Sanjeev Auto
Parts Manufacturers Pvt. Ltd. (ITA No. 1387/PN/2014 for AY 2011-12; dated
17.2.2016);

iv) DCIT vs. Bajaj
Electricals (ITA No. 909/Mum/2011; AY 2006-07; Order dated 15.5.2015).

HELD  

The undisputed
facts are that losses of AYs 2008-09 and 2009-10 have already been set off
against the income of unit at Mumbai. The said losses were not available to be
carried forward and set off during the year under consideration i.e. AY 2010-11
under these facts and circumstances, applying the legal propositions discussed
above as referred by learned AR, we do not find any merit in the action of
lower authorities for notionally carry forward and set off of losses which have
already been set off in the earlier years against the profit of eligible unit
during AY 2010-11 under consideration. 
The Tribunal also observed that the decisions relied upon by the CIT(A)
were rendered prior to the decision of Madras High Court in the case of Velayudhswamy
Spinning Mills Pvt. Ltd. vs. ACIT (supra). 
It also observed that the decision of ACIT vs. Goldmine Shares &
Finance Pvt. Ltd. (113 ITD 209)(Ahd SB) has been overruled by the Madras
High Court in the case of Velayudhswamy Spinning Mills Pvt. Ltd. (supra).

This ground of appeal filed by the assessee
was allowed.

20. Assessment – Transfer pricing – DRP is superior to AO- AO is bound by decision of DRP – ESPN Star Sports Mauritius

S. N.
C. ET Compagnie vs. UOI; 388 ITR 383 (Delhi):

In this
case, the DRP declared that the Assessing Officer lacked jurisdiction to deal
with an issue. However, the Assessing Officer passed a final assessment order
ignoring the order of the DRP.  

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

“i)  The
language used by the Assessing Officer while disagreeing with the binding order
of the DRP was wholly unacceptable.

ii)  The
draft assessment order dated 28/03/2014 and the final assessment order dated
28/01/2015, passed by the Assessing Officer were void ab initio and
liable to be quashed on that basis.”

52. Notice – Validity- Service of notice- Reassessment- Sections 148 and 282 – A. Y. 1996-97- Service of notice on accountant of assessee company- Power of attorney given to accountant to conduct assessment proceedings does not include authority to accept any fresh notice- Notice not validly served on assessee- Reassessment proceedings vitiated

CIT vs. Kanpur Plastipack Ltd.; 390 ITR 381 (All):

The managing director of the assessee company had executed a
power of attorney in favour of the company’s accountant to represent the
company in the assessment proceedings. Notice u/s. 148 of the Act, was served
on him. The Appellate Tribunal held that the assessment proceedings were
invalid and quashed the assessment order on the ground that the notice u/s. 148
was not validly served on the assessee.

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

“i)   The power of attorney had confined the
authority to representation to conduct the case. It did not include in it any
authority to accept any fresh notice.

ii)   The
person on whom the notice u/s. 148 of the Act was served was not the principal
officer of the assessee nor was there any material to show that he had been
authorized by the assessee to accept any notice. The Appellate Tribunal was
correct in concluding that the reassessment proceedings, which were initiated
on the basis of the notice u/s. 148 dated 28/05/2002 were vitiated.”

51. Income- Transport subsidy – whether income or capital- A. Y. 2001-02 – Transport subsidy to stimulate industrial activity in backward region is capital receipt and not income

Shiv Shakti Floor Mills P. Ltd. vs CIT; 390 ITR 346
(Gauhati):

For the A. Y 2001-02, the assessee had claimed the transport
subsidy received by it to stimulate industrial activity in backward region to
be capital receipt and not income. The Assessing Officer treated the subsidy as
income and made addition to the total income. The Tribunal upheld the addition.

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

“The transport subsidy received by the assessee was intended
to stimulate industrial activity in the backward region, to generate employment
opportunities and bring about development in the North Eastern States and it
was not meant to provide higher profit for the entrepreneur. It was intended to
encourage investment in difficult and far flung states and the sum received as
subsidy could not be treated as revenue receipt.”

50. DTAA between India and Singapore- Shipping corporation in Singapore earning income from operations in India – Article 8 of DTAA stating that such income would be taxable in Singapore-Article 24 of DTAA stating that if income were taxed by contracting state on basis of remittance clause 8 would not apply – Certificate by Internal Revenue of Singapore that income accrued and was taxable in Singapore – Fact that freight receipts were remitted to UK not relevant – Income not taxable in India

M. T. Maersk Mikage vs. DIT( Int. Taxation); 390 ITR 427
(Guj):

ST was a shipping and transport company based in Singapore.
It was taxed as a resident of Singapore. During the period relevant to the A.
Y. 2011-12, ST had through ships owned or chartered by it, undertaken voyages
from various Indian ports and earned income from exporters and out of other
such business. ST through the assessee, filed return of income u/s. 172(3) of
the Act, declaring the gross profit calculations, but claiming Nil income
relying on article 8 of the DTAA between India and Singapore. According to ST
such income was taxable only in Singapore and therefore, was exempt from tax
under the Indian Income-tax Act. It produced a certificate issued by the
Internal Revenue Authority of Singapore dated 09/01/2013 which stated that the
income in question derived by ST would be considered as income accruing in or
derived from the business carried on in Singapore and such income therefore,
would be assessable in Singapore on accrual basis. The Assessing Officer held
that ST was not entitled to the benefit of article 8 of the DTAA by virtue of
the provisions contained in article 24 therein. He noted that the freight
receipts were remitted to London and not to Singapore. The assessee filed a
revision petition u/s. 264 of the Act which was rejected.

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

“i)   Article 8 of the DTAA between India and
Singapore states that with reference to shipping and air transport profits
derived by an enterprise of a contracting state from the operation of ships or
aircraft in international traffic shall be taxable only in that state. Article
24 of the Agreement pertains to limitation of relief. The essence of article
24.1 is that in case certain income is taxed by a contracting state not on the
basis of accrual, but on the basis of remittance, the applicability of article
8 would be ousted to the extent such income is not remitted. This clause does
not provide that in every case of non-remittance of income to the contracting
state, article 8 would not apply irrespective of tax treatment of such income
is given.

ii)   In the absence of any rebuttal material
produced by the Revenue, one would certainly be guided by the factual
declaration made by the Internal Revenue Authority of Singapore in the
certificate and this declaration was that the income would be charged at
Singapore considering it as an income accruing or derived from business carried
on in Singapore. In other words, the full income would be assessable to tax on
the basis of accrual and not on the basis of remittance. The amount was not
taxable in India.”

49. DTAA between India and Germany – Amount received by assessee – international airlines as IATP members by rendering technical facilities i.e. line maintenance facilities to other member airlines at various Indian airports being covered under Article 8(4) of DTAA between India and Germany and article 8(1) and 8(3) of DTAA between India and Netherlands respectively, was not liable to tax in India

DIT vs. KLM Royal Dutch Airlines; 2017] 78 taxmann.com 1
(Delhi):

The assessees namely ‘Lufthansa’ and ‘KLM’, were
international airlines with headquarters and controlling offices in Cologne,
Germany and Amsterdam, Netherlands respectively and branch offices in India.
They operated aircraft in the international traffic business; these activities
were also carried out in India inasmuch as they operated aircraft in
international traffic from, and to, various Indian airports. Both the assessees
were members of the International Airlines Technical Pool (‘IATP’ or the
‘Pool’). As IATP members they extended minimal technical facilities (line
maintenance facilities) to other International Air Transport Association
(‘IATA’) member airlines at Indian airports. The assessees claimed that the
amounts received from various IATP member airlines for the above services
rendered in India were not taxable in India. The Assessing Officer held that
such amounts received by them in India were taxable, holding that these
activities were not covered under the term ‘Air Transport Services’. He held
that the assessees’ branch offices in India constituted permanent
establishments and, therefore, the income relating to the engineering and
traffic handling was taxable in India, as the same was not covered under
article 7 of DTAA. The Tribunal held that the assessees profit due to participation
in a pool was covered under article 8(4) of the DTAA between India and Germany
and by articles 8(1) and 8(3) of DTAA between India and Netherlands and such
profit could not be brought to tax in India.

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

“i)   While interpreting tax treaties and
conventions, the emphasis is upon the context in the instrument itself, and
‘any subsequent agreement between the parties’ as to the interpretation of the
treaty or the application of its provisions. The expression ‘profit from the
operation of ship or aircraft in international traffic’ has not been defined in
the Indo-Dutch DTAA, or in the Indo-German DTAA.

ii)   The Tribunal while explaining the meaning of
profit from the operation of ships or aircraft in international traffic in both
Lufthansa and the KLM cases took into consideration the bye-laws of IATP,
because this organisation authorised its members to share aircrafts, aircrafts
pooling, ground handling equipment and manpower all over the world. The
Tribunal also considered the relevant clauses of the IATP manual and held that
any receipt by the assessee due to participation in the IATP pool as provided
in its manual and dealt with in article 8(4) of Indo-German DTAA will not be
taxable in India under article 8(1); a similar finding was rendered in the case
of KLM too.

iii)   The assessees participated in the IATP pool
and earned certain revenues from such activities and also incurred expenditure.
There is, clear reciprocity as to the extension of services; IATP membership is
premised upon each participating member being able to provide facilities for
which it was formed (line services, OMR services, etc.) of a required mandate
standard. As there was reciprocity in the rendering and availing of services,
there was clearly participation in the pool; in terms of the two DTAAs
(Indo-German and India-Netherlands) the profits from such participation were
not taxable in India.”

48. Demonetisation – PMGKY deposit scheme – Where person from whom cash was seized during demonetisation 2016 and he was not tried under any provision of law, he would be eligible to deposit amount in PMGKY deposit scheme on or before 30-3-2017

Vishal Jain vs. State of Punjab; [2017] 78 taxmann.com 172
(P&H):

The assessee was travelling in a cab from Delhi carrying Rs.
30 lakh. The cash amount was seized by police officials and handed over to
Income-tax Officers. The assessee filed a writ petition seeking declaration
against action of respondents in depriving him of cash amount, unconditional
release of amount to petitioner; with a further prayer to permit him to have
his advocate present during his interrogation. He further seeked refrain of any
coercive action against him alleging to the aforesaid dispute; with a liberty
to avail the remedy under ‘Pradhan Mantri Garib Kalyan Yojana, 2016’ by
depositing the aforesaid amount, tax, surcharge and penalty.

The Punjab and Haryana High Court allowed the petition and
held as under:

“i)   The case of the petitioner has to be examined
as per the aforementioned Scheme, in view of the amendment Act, notification
and circular. Though he is eligible yet cannot be deprived of the statutory
entitlement to declare and deposit his undisclosed income or pay tax, surcharge
and penalty. The aforementioned scheme has been promulgated for a limited
period with effect from 17-12-2016 to 31-3-2017.

ii)   From the provisions of the scheme, it is
evident that a person can avail the remedy of declaration. Last date for
submitting the Form 1 as prescribed in the rules may be made at anytime on or
before 31-3-2017. The explanation is in tune of section 199 (o) of the Finance
Act as the petitioner has made a categoric statement that he is not involved in
any of the offences as referred above.

iii)   The use of the words “in relation of
prosecution of any offence” instead of “in relation to investigating
for any of the offence” clearly shows legislative intent of provisions
would apply only if the charge sheet or complaint is filed for prosecuting any
person under any of the aforementioned provisions of Act and not merely when
investigations are going on.

iv)  In the instant case, as per the petitioner’s
claim, no complaint or charge sheet is pending against him. The alleged
undisclosed seized income of the petitioner, as per the statement of Yatinder
Sharma, has been handed over to Income-tax department and summons, has already
been served upon the petitioner.

v)   The petitioner is not, thus, trying to
falsify to project undisclosed income as duly accounted for availing the
remedy. Since the petitioner is not amongst the persons mentioned in paragraph
8 of the circular No. 43 of 2016, being not eligible for availing the PMGKY
Deposit Scheme, therefore, the Income-tax Officer cannot, deny the petitioner
adjustment from his cash account seized by the department, tax charge and
penalty.

vi)  Economic offences are very serious and have a
wider ramification. The statutory investing scheme appears to be positive
process for not only enhancing the revenue collection but at the same time, it
is an opportunity for reforming those who had earlier failed to make true and
correct disclosure of income in normal course by taking into consideration the
provisions of the aforementioned Scheme.

vii)  The prayer of the petitioner of taking any
coercive steps appears to be genuine. The writ petition can be disposed of with
a direction to respondents not to take any coercive action against the
petitioner and he may be granted a permission to take the assistance of a
lawyer to be present at visible but not audible distance during his
interrogation and recording of statement in connection with said seizure in the
instant case or any proceedings consequential thereto.

viii) However, prayer of the petitioner for directing
unconditional return of the seize amount is hereby rejected. In case, the
petitioner submits any application to the Income-tax Department, the
authorities can look into matter for the purpose of declaration of undisclosed
income by availing the remedy under the PMGKY Scheme. They shall consider the
same and pass an appropriate order thereon as it enables the Government to earn
straightway 50 per cent of the amount, 25 per cent for depositing of the bonds
and 25 per cent to be deposited in the account which shall be released only
after 4 years. While releasing the amount after 4 years, the Income-tax
Authorities can release the same only when there is no outstanding amount due
towards them from the petitioner.”

47. Business expenditure- Disallowance u/s. 14A – A. Y. 2008-09- Where securities in question constituted assessee’s stock-in-trade and assessee did not hold securities to earn dividend or interest but traded in them and dividend or interest accruing thereon was only a by-product thereof or an incidental benefit arising therefrom, same would not be subject to provisions of section 14A

Principal CIT vs. State Bank of Patiala; [2017] 78
taxmann.com 3 (P&H):

The assessee held shares and securities as stock-in-trade and
not for earning dividend. Incidentally, the assessee earned dividend which was
exempt from tax. For the A. Y. 2008-09, the assessee claimed that no
disallowance was warranted u/s. 14A of the Income-tax Act, 1961 (hereinafter
for the sake of brevity referred to as the “Act”), as the shares were
held as stock-in-trade and not as investment for earning dividend. The learned
Assessing Officer rejected the claim and made disallowance u/s. 14A applying
Rule 8D. The Tribunal allowed the assessee’s claim and deleted the addition.

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

“i)   What is of vital importance in the above
judgment are the observations emphasised by us. Each of them expressly states
that what is disallowed is expenditure incurred to “earn” exempt
income. The words “in relation to” in section 14A must be construed
accordingly. Thus, the words “in relation to” apply to earning exempt
income. The importance of the observation is this.

ii)   We have held that the securities in question
constituted the assessee’s stock-in-trade and the income that arises on account
of the purchase and sale of the securities is its business income and is
brought to tax as such. That income is not exempt from tax and, therefore, the
expenditure incurred in relation thereto does not fall within the ambit of
section 14A.

iii)   Now, the dividend and interest are income.
The question then is whether the assessee can be said to have incurred any
expenditure at all or any part of the said expenditure in respect of the exempt
income viz. dividend and interest that arose out of the securities that
constituted the assessee’s stock-in-trade. The answer must be in the negative.
The purpose of the purchase of the said securities was not to earn income
arising therefrom, namely, dividend and interest, but to earn profits from
trading in i.e. purchasing and selling the same. It is axiomatic, therefore,
that the entire expenditure including administrative costs was incurred for the
purchase and sale of the stock-in-trade and, therefore, towards earning the
business income from the trading activity of purchasing and selling the
securities. Irrespective of whether the securities yielded any income arising
therefrom, such as, dividend or interest, no expenditure was incurred in
relation to the same.

iv)  In CCI Ltd. vs. JCIT [2012] 250 CTR 291
(Karn), the Karnataka High Court held that when the assessee has not
retained shares with the intention of earning dividend income and that the
dividend income is incidental to the business of sale of shares it cannot be
said that the expenditure incurred in acquiring the shares has to be
apportioned to the extent of dividend income and that should be disallowed from
deduction.

v)   A financial decision of an assessee that
trades in securities may and, in fact, would factor in the dividend or interest
that the securities it acquires as its stock-in-trade yields or is likely to
yield. Such a decision would be taken for acquisition, retention and disposal
of the securities. That, however, is a financial consideration not with a view
to earning the dividend or interest but with a view to assessing the price at
which the security ought to be acquired, retained and sold. In other words,
such dividend or interest is an aspect that the assessee takes into
consideration for incurring the expenditure for the purpose of acquiring the
stock-in-trade and dealing with it thereafter as well as for the sale thereof.
This is entirely different from saying that the expenditure is incurred for
earning the dividend or interest. Once it is found that no expenditure was
incurred in earning this income, there would be no further expenditure in
relation thereto that falls within the ambit of section 14A.”

Section 10A – Claim for deduction u/s. 10A cannot be denied merely beause the assessee has inadvertently omitted to furnish the relevant details relating to deduction u/s. 10A in the appropriate columns of the return of income filed electronically

10.  ACIT vs. Albert A. Kallati
ITAT  Mumbai `A’ Bench
Before B. R. Baskaran (AM) and Amit Shukla (JM)
ITA No.: 2888/Mum/2013
A.Y.: 2009-10. Date of Order: 3rd August, 2016.
Counsel for revenue / assessee: Reepal Tralshawala / Sachchidanand Dubey

FACTS
The assessee, a manufacturer of diamond studded gold jewellery having manufacturing unit located in SEZ, filed his return of income for the year under consideration on 30.9.2009.  Subsequently, he revised his return of income twice.  In all the three returns of income, the assessee did not show any claim for deduction u/s. 10A of the Act, even though the total income was shown at Rs. Nil in the original return. Hence, the Assessing Officer (AO) did not allow deduction u/s. 10A of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who called for a remand report wherein the AO submitted that the assessee had been allowed deduction u/s.10A of the Act in AY 2006-07 to 2008-09.  Before the CIT(A) the assessee submitted the relevant details relating to deduction u/s. 10A which were inadvertently omitted to be furnished int eh appropriate columns of the return of income filed electronically. The CIT(A) was convinced that there was a genuine mistake and accordingly, he directed the AO to allow the deduction.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD
The Tribunal observed that there was no dispute with regard to the fact that the assessee is eligible for deduction u/s. 10A of the Act for the year under consideration.  The AO did not allow the claim, since it was not claimed in the return of income.  However, the conduct of the assessee shows that he assessee had intended to claim the same, but the relevant details were omitted to be entered in the return of income.  The Tribunal held that the inadvertent omission so made should not come in the way of the assessee to claim the deduction, which he is legally entitled to.  The Tribunal upheld the order of the CIT(A).

The appeal filed by the revenue was dismissed.

Section 54G – Unutilised amount of capital gain deposited on or before date of filing of return u/s. 139(5) will qualify for deduction u/s. 54G.

6. [2017] 79 taxmann.com 250 (Kolkata – Trib.)

DCIT vs. Kilburn Engineering Ltd.

ITA No. : 1987 (Kol) of 2013

A.Y.: 2009-10 Date of Order: 
1st March, 2017

FACTS 

The assessee’s industrial undertaking was situated in
Bhandup, Mumbai an urban area. Under a scheme to shift its factory to a
non-urban area, the assessee sold its land & building to HDIL under two
agreements dated 8.11.2007 and 30.1.2009 for a consideration of Rs. 115 crore.
Sale consideration was payable in instalments. 
Long term capital gain of Rs. 81,57,21,820 resulted on sale of property
at Bhandup.

For claiming deduction u/s. 54G, the amount of capital gain
not utilised for the purposes mentioned in section 54G(1) has to be deposited
in an account with a bank, in accordance with the notified scheme, and has to
be utilised for the purposes mentioned in section 54G(1). Further, such
unutilised amount of capital gain has to be deposited in an account on or
before the due date of furnishing the return of income u/s. 139 of the Act.
Section 54G(2) further provides that such deposit should be made in any case
not later than due date applicable to the assessee for furnishing return of
income u/s. 139(1) of the Act. In the original return, the assessee claimed Rs.
25,61,43,054 to be exempt u/s. 54G. Subsequently, the assessee deposited Rs. 10
crore in capital gains account on 30.3.2010. In the revised return of income
filed on 28.10.2010, the assessee claimed Rs. 35,61,43,054 to be exempt u/s.
54G.

The Assessing Officer disallowed the additional claim of
exemption of Rs. 10 crore on the ground that the deposit was made after due
date of filing return of income u/s. 139(1).

Aggrieved, the assessee preferred an appeal to the CIT(A).
The CIT(A) noted that the assessee had deposited Rs. 47,33,55,000 but has
claimed deduction of Rs. 35,61,43,054. He observed that the buyer had defaulted
in making payments to the assessee on due dates. In absence of receipt of
money, it was impossible to deposit amount in capital gain account specially
for the assessee which has come out of BIFR only because of receipt of money
from sale of land. He relied on the judgment of Kolkata Bench of the Tribunal
in the case of Chanchal Kumar Sircar vs. ITO [2012] 50 OST 289 (Kol.)
and the decision of Pune Bench of the Tribunal in the case of Mahesh
Nemichandra Ganeshwade vs. ITO [2012] 51 SOT 155 (Pune). He held that the
assessee is permitted to deposit money within the due date of filing `revised
return’ permitted u/s. 139(5) and filing a revised return subsequently. 

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the Punjab & Haryana High
Court, in the case of CIT vs. Jagriti Agarwal (2011) 203 Taxman 203, has
held that if the deposit is made within the time limit mentioned in section
139(4) of the Act, deduction cannot be denied to an assessee. The Tribunal held
that since section 139(5) is akin to section 139(4), the ratio of this decision
will hold good in the context of a revised return filed u/s. 139(5) as well.
The Tribunal held the deposit of Rs. 10 crore made on 30.3.2010 to be within
the time limit mentioned in section 54G(2) of the Act.

The Tribunal also held that the decision of the ITAT Kolkata
bench in the case of Chanchal Kumar Sircar and the decision of the Pune Bench
in the case of Mahesh Nemichandra Ganeshwade support the plea of the assessee.
It noted that in these two decisions it is held the period of six months for
making deposit u/s. 54EC of the Act should be reckoned from the dates of actual
receipt of the consideration because if the assessee receives part payment as
on the date of transfer and receives part payment after six months then it
would lead to an impossible situation by asking assessee to invest money in
specified asset before actual receipt of the same. It observed that even on
this basis the order of CIT(A) deserves to be upheld.

The Tribunal dismissed the appeal filed by the
revenue.

53. TDS- Fees for technical services or for execution of contract-Sections 9(1)(vii), 194C, 194J and 201(1) – A. Y. 2011-12- Deployment of technical personnel not for and on behalf of customer but for and on behalf of contractor for execution of contract- Consideration paid not for professional or technical services rendered to assessee- Section 194C is applicable and not 194J

Principal CIT(TDS) Vs. BHEL; 390 ITR 322 (P&H):

For the A. Y. 2012-13, the Assessing Officer found that the
assessee had made payments to five contractors in respect of various contracts
and deducted tax in respect thereof u/s. 194C Act, at the rate of 2% and paid
to the Government treasury. He found that all the contracts involved the
provision of professional and technical services which fell within the ambit of
the provisions of section 194J and not u/s. 194C. The Assessing Officer held
that the contracts were not only for the erection and installation work, but
also for the commissioning, testing and trial operation of the various
equipment and other related machinery and that under the terms of the contract
it was the duty of the contractor to provide all types of labour, supervisors,
engineers, inspectors, measuring and testing equipments, testing and
commissioning for the execution of the project in accordance with the
specifications of the assessee. He held that the level of human intervention
was high and sophisticated and accordingly held the assessee to be in default
u/s. 201(1A) of the Act for not deducting tax at source u/s. 194J. The
Commissioner (Appeals) held that the scope of the work given to the
sub-contractors involved construction work, welding, erection, alignment,
transportation of equipment and materials with the help of machines which did
not fall within the scope of technical services as defined in Explanation 2 to
section 9(1)(vii). He also held that merely because technical personel were
employed in the execution of contract it did not follow that the contract was
one for technical services. He allowed the appeal filed by the assessee. The
Tribunal upheld the decision of the Commissioner (Appeals).  

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

“i)   The contract entered into between the
assessee and each of the contractors did not involve supply of professional and
technical services at least within the meaning of section 194J Act. Therefore,
considerations paid under the contracts were not for professional or technical
services rendered by the contractors to the assessee and section 194J was not
applicable.

ii)   The technical personel were deployed not for
and on behalf of the customer, but for and on behalf of the contractor itself
with a view to ensuring that the contractor supplied the equipment in
accordance with the contractual specifications. The nature of human
intervention is reflected in the terms and conditions of the agreement itself.

iii) Questions are decided in favour of the
assessee. The appeal is, therefore, dismissed.”

Section 271AAA – Penalty u/s. 271AAA cannot be levied in a case where the revenue had not asked the assessee the manner of earning undisclosed income.

12   [2017] 83 taxmann.com 231 (Ahmedabad – Trib.)

ACIT  vs. Shreenarayan Sitaram Mundra

ITA No. : 2878 (Ahd) of
2013

A. Y. : 2010-11                                                   

Date of Order:  18th May, 2017

FACTS  

In the course of search,
the assessee, an individual engaged in the business of manufacturing and
trading of textiles admitted an unaccounted income of Rs. 2 crore and included
the said amount of Rs. 2 crore in the total income of Rs. 2.21 crore declared
in the return of income filed in response to notice issued u/s. 153A.  The returned income was assessed to be total
income. 

The Assessing Officer (AO)
imposed a penalty u/s. 271AAA on the ground that the assessee had not specified
the manner in which income declared was earned which is one of the conditions
u/s. 271AAA for being exonerated from penalty. 

Aggrieved, the assessee
preferred an appeal to the CIT(A) who noted that the assessee had in his
statement mentioned that the said sum of Rs. 2 crore was earned by him from taxable
business and moreover, it was also substantiated by the assessee in his
statement and the  declaration of the
said undisclosed income earned was based on entries as mentioned in the
impounded documents inventorised in the form of `receivables’ and due taxes had
been paid on the said declared income while filing return of income.  The CIT(A) held that the conditions required
to be satisfied for non-imposition of penalty had been satisfied by the
assessee.  He allowed the appeal filed by
the assessee.

Aggrieved, the revenue
preferred an appeal to the Tribunal.

HELD  

The Tribunal noted that the
Revenue is aggrieved by non-compliance of the section 271AAA(2)(i) of the
Act.  As per section 271AAA(2)(i), one of
the conditions for obtaining relief from the imposition of penalty u/s.271AAA
is that the assessee in the statement recorded u/s.132(4) of the Act admits the
undisclosed income and ‘specifies the manner’ in which such income has been
derived. Section 271AAA(2)(ii) casts obligation on the part of the assessee to
‘substantiate the manner’ in which the undisclosed income was derived. The
Tribunal held that s/s.(2)(ii) finds its genesis from s/s. 2(i) of the Act. It
noted that admittedly, the Revenue is not aggrieved by the condition stipulated
in s/s. 2(ii) of the Act. Impliedly, the Revenue admits that the assessee has
not failed to substantiate the manner in which the undisclosed income derived.
This being so, it follows by necessary implication that the assessee has not
failed to specify the manner at the first place when substantiation thereof has
not been called into question by the Revenue. Thus, the case of the Revenue
requires to be summarily dismissed on this ground alone. Notwithstanding, the
assessee has replied to the query raised while recording the statement as
called for. The revenue does not appear to have quizzed the assessee for
satisfying the manner in which the purported undisclosed income has been
derived. The income considered as an undisclosed income in the statement u/s.
132(4) has been duly incorporated in the return filed pursuant to search.
Therefore, the revenue in our view now cannot plead deficiency on the part of
the assessee to specify the manner which has not been called into question at
the time of search. The Tribunal noted that no where in the assessment order or
in the penalty order, the revenue has made out a case that the manner of
earning undisclosed income was enquired into post search stage either.  It stated that the revenue has not pointed
out any query which remained unreplied or evaded in the course of search or
post search investigation. The Tribunal held that looking from any angle, it is
difficult to hold in favor of the revenue. The Tribunal upheld the order passed
by CIT(A).

The Tribunal dismissed the appeal filed by the assessee.

9 Brought forward business losses – can be set off against the gains arising from any business or profession – though chargeable to tax under any other head of income : Set off of brought forward unabsorbed depreciation against the short term capital gain

Commissioner of Income
Tax, vs. M/s. Hickson & Dadajee Pvt. Ltd. [ Income tax Appeal no 1493 of
2014 dt : 28/02/2017 (Bombay High Court)].

[M/s.
Hickson & Dadajee Pvt. Ltd, VS ACIT [ ITA No: 5882/M/2012 dated 28/02/2014
; A Y: 2009-10 .
Mum.  ITAT ]

The assessee
company, carrying on the business of manufacturing of dyes and dyes
international, harmless food colours as well as construction business, filed
its return of income for the year under consideration on 28-9-2011 declaring
total income of Rs. 1,23,70,170/-. In the said year, the assessee had derived
income from sale of plant & machinery and building which was offered to tax
as deemed short term capital gain u/s. 50 of the Act, 1961. Against the said
income, brought forward business losses of the earlier year and unabsorbed
depreciation were set off by the assessee. The A.O., however, did not allow the
claim of the assessee for such set off on the ground that the income from sale
of plant & machinery and building was chargeable to tax as short term capital
gain u/s. 50 of the Act.

 

On appeal,
the ld. CIT(A) upheld the order of the A.O. on this issue relying on the
decision of the Mumbai Bench of the Tribunal in the case of Dura Foam
Industries Pvt. Ltd. vs. JCIT (ITA No. 4917 & 4918/Mum/2008).

 

Aggrieved by
the order of the ld. CIT(A), the assessee has preferred this appeal before the
Tribunal. Tribunal find that assessee’s appeal is squarely covered by the
decision of the co-ordinate Bench of this Tribunal in the case of Digital
Electronics Ltd. vs. Addl. CIT reported in 49 SOT 65 wherein the claim of
the assessee for set off of brought forward business losses against the short
term capital gain on sale of factory building, plant and machinery was
disallowed by the A.O. on the ground that as per section 72 of the Act, the
brought forward business losses could be set off only against profits and gains
of business or profession. Tribunal allowed the claim of the assessee for set
off of brought forward business losses against short term capital gain.

 

The Tribunal
respectfully follow the decision of the co-ordinate Bench of the  Tribunal in the said case and direct the A.O.
to allow the claim of the assessee for set off of brought forward business
losses against the deemed short term capital gain arising from sale of plant
& machinery and building.

Being aggrieved, the Revenue carried the issue in
appeal to the High Court. The Hon.  High
Court observed  that the Revenue has
accepted  the decision of the Tribunal in
Digital Electronics Ltd. (supra). Further no distinguishing features in
the present facts had been shown to the court, which would warrant taking of a
different view from that taken by the Tribunal in Digital Electronics Ltd. (supra)
and accepted by the Revenue. In the above view, appeal of revenue was  dismissed.

As regards
the issue involved relating to the assessee’s claim for set off of brought
forward unabsorbed depreciation against the short term capital gain the Court
observed that same was  also covered in
favour of the assessee by the decision of CIT vs. Hindustan Unilever Ltd. (2016)
72 taxman.com 325 wherein this Court upheld the view of the Tribunal in
following the decision of Gujarat High Court in General Motors India
(P.)Ltd. vs. Dy. CIT (Special Civil Application No. 1773 of 2012 dated
23-8-2012) wherein a similar issue was decided in favour of the assessee.

Accordingly, appeal
dismissed.

8 Charitable Purpose – The activity of sale of milk being incidental to its Panjrapole activity – does not amount to carrying on of any business activity – it is not in contravention to the proviso to section 2(15) of the Act

Director of Income Tax
(E) vs. M/s. Shree Nashik Panchvati Panjrapole. [ Income tax Appeal no 1695 of
2014, dt : 20/03/2017 (Bombay High Court)].

Director of Income Tax
(E) vs. M/s. Shree Nashik Panchvati Panjrapole.] [ITA NO. 1198/Mum/2012;  Bench : J ; dated 26/03/2014 ; A Y: 2009-10 .
Mum.  ITAT ]

The assessee trust is over 130 years old and
registered with the Charity Commissioner since 1953. The assessee was granted
Certificate of Registration under Section 12A of the Act. By Finance (No.2)
Act, 2009, the definition of “Charitable Purpose” u/s. 2(15) of the Act was
amended w.e.f. 12th April, 2009. Therefore, in view of the newly
added proviso, charitable purpose would not include advancement of any other
object of general purpose utility, if it involves carrying out activities in
the nature of trade, commerce or business, with receipts in excess of Rs.10
lakhs. In view of the above amendment, the DIT (Exemption) issued a show cause
notice that the income and expenditure account of the assessee, revealed income
on account of sale of milk at Rs.1.57 crore and income from interest and
dividend at Rs.58.34 lakh. Thus, indicating that the activities carried out by
the assessee of selling milk was in the nature of trade, commerce or business.

In its
reply, the assessee pointed out that it is running a Panjrapole i.e. for
protection of cows and oxen for over last 130 years. The activity of selling
milk was incidental to its Panjrapole activity and in any case did not involve
any trade, commerce or business, so as to be hit by the newly added proviso to
section 2(15) of the Act.

The DIT(E)
cancelled the respondent’s registration under the Act by invoking section
12AA(3) of the Act. The basis for cancellation of the registration was that in
view of the newly added proviso to section 2(15) of the Act, its income by way
of sale of milk, interest and dividend being in excess of Rs.10 lakhs the
assessee would cease to be a trust for charitable purpose. The DIT (E) further
records in his order the fact that the assessee was earning only Rs.3.76 lakhs
from its aforesaid activity of selling milk would not detract from the
application of the newly added proviso to section 2(15) of the Act. This for
the reason that the proviso as applicable is receipt based and not profit /
income based.

Being
aggrieved, the assessee filed an appeal to the Tribunal. The Tribunal records
the following facts : ( a) the fundamental / dominant function of the Trust is
to provide asylum to old, maimed, sick, weak, disabled and stray animals and
birds particularly cows; (b) that only 25% of the cows being looked after yield
milk and it is these milk yielding cows which support the balance 75% of the
cows which are non milk yielding; (c) that the milk needs to be procured from
the cows otherwise it will be detrimental to the health of the cows, if not
fatal; (d) the milk so procured is distributed free of charge to children,
schools, hospitals etc. and the balance amount of milk remaining after such free
distribution is sold to the general public at nominal rate; (e) the assessee is
selling milk at subsidized rates; and (f) nothing has been brought on record to
suggest that the Trust conducted its affairs solely on commercial basis.

The Tribunal 
after recording the above facts inter alia placed reliance on a decision
of the Tribunal in the case of Sabarmati Ashram Gaushala Trust vs. ADIT (Exem)
25 ITR 701 on an identical facts situation wherein it has been held that
the activities of selling milk by a Panjrapole will not by itself make the
newly added proviso to section 2(15) of the Act applicable. Further, reliance
was also placed in the impugned order upon the decision of the Delhi High Court
in ICAI vs. Director General of Income Tax (Exemption) 347 ITR 99 to
hold that the activities of selling milk by the assessee would be incidental in
running a Panjrapole in view of the proviso to section 2(15) of the Act. Thus,
the appeal of the assessee was allowed. 

On appeal by the Revenue the Hon. High Court observed
that  there is no bar in law to a Trust
selling its produce at market price as held 
by the Gujarat High Court   in
Sabarmati Ashram Gaushala Trust in Tax Appeal No.1162 of 2013 dated 15th
January, 2014. In fact, the above factor alone will not make it an activity of
trade, commerce or business or even in its nature.

The Court also referred to another decision of the
Delhi High Court in Institute of Chartered Accountants of India & Anr.
(ICAI) vs. Director General of Income Tax (Exemption) & Ors. 358 ITR
91, where the Court held that the expression “business”, “trade” or “commerce”
as used in the first proviso must, thus, be interpreted restrictively and where
the dominant object of an organisation is charitable any incidental activity
for furtherance of the object would not fall within the expressions “business”,
“trade” or “commerce”.” (emphasis supplied).

The Court observed
that  the Revenue has not been able to
show that the view taken by the Apex Court in Surat Art Silk Cloth
Manufacturers’ Association (supra), Gujarat High Court in Sabarmati
Ashram Gaushala Trust in Tax Appeal No.1162 of 2013 (supra) and the
Delhi High Court in ICAI 347 ITR 99 (supra) and ICAI and Anr. 358 ITR 91
(supra) laying down the dominant activity test should not be followed.
Therefore, it was held that the question as proposed does not give rise to any
substantial question of law. Thus, appeal was dismissed.

7 Assessee entitled to raise claims not made in ROI before appellate authorities – which not made in ROI Expenses incurred for issuance of FCCBs is revenue in nature – even if the FCCB are convertible into equity at a later date

CIT vs. M/s. Faze Three Ltd. [ Income tax Appeal no 1761
of 2014, dt : 16/03/2017 (Bombay High Court)].

[M/s. Faze Three Ltd
vs. ACIT. [ITA No.5449/MUM/2011 ;  Bench
: F ; date:16/08/2013 ; A Y: 2007- 2008. MUM. 
ITAT ]

In the course of assessment the assessee filed
a letter claiming deduction of Rs. 2.24 crore towards expenses incurred on
issue of FCCBs. It was claimed that the assessee missed to lodge claim for
deduction in the computation of total income. The AO refused the claim by
relying on the decision of the Hon’ble Supreme Court in Goetz India vs. CIT [284
ITR 323] by assigning the reason that since revised return was not filed, this
claim was not entertainable. The learned CIT(A) upheld the assessment order on
this issue.

The Tribunal held that
there is no bar on the appellate authorities in considering a claim made by the
assessee otherwise than by filing a revised return. Thus, the question arose
for consideration was as to whether the expenses on issue of FCCBs can be
allowed as deduction or not.

The Tribunal relied on
the decision of Hon’ble Rajasthan High Court in CIT vs. Secure Meters Ltd. [(2010)
321 ITR 611 (Raj.)] wherein it has been 
held that the debentures when issued are only a loan. Any expenses
incurred on issuing debenture, whether convertible or non-convertible is
allowable deduction. Similarly, the Hon’ble Punjab & Haryana High Court in CIT
vs. Sukhjit Starch & Chemicals Ltd. [(2010) 326 ITR 29 (P&H)] has
also held that the expenditure on the issue of convertible debentures is
admissible. The Tribunal observed  that
there is no qualitative difference between the issuance of debentures or bonds.
Both fall in the realm of loan. Thus the Tribunal  held 
that the assessee was entitled to 
deduction for this amount.

Being aggrieved, the
Revenue filed an appeal to the High Court. The Court observed  that the preliminary  issue arising herein stands concluded against
the Revenue and in favour of the Assessee by the decision of this Court in CIT
vs. Pruthvi Brokers and Shareholders Pvt. Ltd., 349 ITR 336 .

As regards, the expenditure incurred on the
issue of FCCBs should be considered as capital expenditure and not be allowed
as revenue expenditure. The Hon Court 
relied on the decision of the Delhi High Court in CIT vs. Havells
India Ltd., 352 ITR 376 – wherein on an identical fact situation, the
appeal of the Revenue was dismissed. The Revenue was  not able to show any reason which would
require the court to take a view different from that taken by the various High
Courts in the country on an identical issue. In the above circumstances, the
revenue, Appeal was  dismissed.

Sections 40(a)(ia), 194I – U/s. 194I tax is not required to be deducted on reimbursements and therefore, the amount so reimbursed cannot be disallowed u/s. 40(a)(ia)

9.  Aditya Birla Minacs Worldwide Ltd. vs. ACIT
ITAT Mumbai `A’ Bench
Before B. R. Baskaran (AM) and Amit Shukla (JM)
ITA No.: 4549/Mum/2014
A.Y.: 2007-08. Date of Order: 2nd August, 2016
Counsel for assessee / revenue: Ronak G. Doshi / A. Ramachandran

FACTS
The assessee reimbursed rent and parking charges amounting to Rs. 71.49 lakh to its holding company, PSI Data System Ltd.  The holding company had entered into a rent agreement with M/s Golf Links. The assessee entered into a Memorandum of Understanding with its holding company on 1.4.2006 pursuant to which the assessee company would occupy a portion of premises taken on lease by the holding company and the holding company shall apportion the rent payment with the assessee company in the ratio of space actually utilised by the assessee.  The MOU also provided that all statutory liabilities in relation to rental facilities such as TDS, service tax, are the responsibilities of the holding company.  

During the year under consideration, the assessee reimbursed a sum of Rs. 71,49,545 to its holding company as its share of rental expenditure incurred by the holding company. The assessee did not deduct tax at source from the said payment on the reasoning that the liability to deduct tax at source from the rent payment paid to the landlord was taken up by the holding company.  The landlord, M/s Golf Links, had obtained a certificate u/s. 197(1) for non-deduction of tax at source, therefore, the holding company did not deduct tax at source from the rent paid by it to the landlord.  The holding company had obtained no deduction certificate for payments covered by sections 194A, 194C and 194J.  It was also submitted to the AO that the holding company was of a bonafide belief that reimbursement of rent from the assessee would not form part of its income in its hands and hence it did not obtain  specific certificate for payments covered by section 194I.  

The AO held that the assessee should have deducted tax from rent payments made by the assessee to its holding company. He disallowed Rs. 71,49,545 by invoking provisions of section 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.

HELD
The Tribunal noted that the rental agreement has been entered into between the holding company and the land lord and hence the inference drawn by the tax authorities is against the facts available on record. The Tribunal observed that an identical issue was considered by the co-ordinate bench of the Tribunal in the case of Prime Broking Co. (I) Ltd. vs. ACIT (ITA No. 6627/Mum/2010 dated 19.10.2012) and the Tribunal held that the provisions of section 194I shall not apply to reimbursement of rent.  The decision rendered by the Tribunal has since been upheld by the Bombay High Court vide its order dated 9th June, 2015 reported in 2015-TIOL-1472-HC-Bom-IT.

The Tribunal further observed that the return of income of the holding company for the year under consideration has been accepted. Since the payment received from the assessee towards rent has been offered in the return of income filed by the holding company, the provisions of section 40(a)(ia) cannot be applied to the case of the assessee as per the second proviso thereto, which is held to be retrospective by the Delhi High Court in the case of Ansal Land Mark Township (P.) Ltd. (377 ITR 635)(Del).  

Considering the ratio of the judgments of the Bombay High Court and the Delhi High Court, the Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition made u/s. 40(a)(ia) of the Act relating to reimbursement of rent.

Section 41(1) – Amounts shown in Balance Sheet cannot be deemed to be cases of “cessation of liability” only because they are outstanding for several years. The AO has to establish with evidence that there has been a cessation of liability with regard to the outstanding creditors.

8.  ITO vs. Vikram A. Pradhan

ITAT  Mumbai `F’ Bench
Before Jason P. Boaz (AM) and Sandeep Gosain (AM)
ITA No.: 2212/Mum/2012
A.Y.: 2008-09.  Date of Order: 24th August, 2016
Counsel for revenue / assessee: M. V. Rajguru / None

FACTS

In the course of assessment proceedings the Assessing Officer (AO) observed that the assessee’s balance sheet reflected creditors of Rs. 33,44,827.  Upon enquiry, the assessee submitted that these are old creditors pertaining to the period when he carried out business in Indore and that these have been carried forward for past 7 to 8 years and are unpaid due to disputes with the creditors.

The AO considered the entire creditors balance outstanding aggregating to Rs. 33,44,827 as income of the assessee by invoking section 41(1) as cessation of liability for the reason that these are old amounts and pertain to assessee’s old place of business and still remain unpaid.

Aggrieved, the assessee preferred an appeal to the CIT(A) who after considering the material on record and also referring to the judicial pronouncements of the Apex Court in the case of CIT vs. Sugauli Sugar Works (P.) Ltd. 236 ITR 518 (SC) and UOI vs. J. K. Synthetics Ltd. (199 ITR 14)(SC) held that in the case on hand there was no write back of liability payable to creditors which is disclosed in the assessee’s balance sheet.  He also observed that no independent inquiries were carried out by the AO to establish that these creditors have written off the debts appearing in their respective account.  He held that the AO was not justified in unilaterally deciding that the amounts reflected as liabilities in the balance sheet of the assessee have ceased to exist within the meaning of section 41(1) of the Act.  He allowed the appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the AO has failed to cause enquiries to be made with or notices issued to creditors to ascertain from them whether they have remitted the dues from the assessees in their books of account.  The fact that the creditors outstanding balances were not written back in the assessee’s books of account, but rather stood reflected in the asseessee’s balance sheet clearly establishes that there is no cessation of liability.  On the contrary, it is an acknowledgement by the assessee of existing debts it owes to its creditors.  It further observed that no material has been brought on record by the AO to show that there was remission or cessation of liability.  When the AO was of the view that there was cessation of liability in the case on hand, it was incumbent upon him to cause necessary enquiries to be made in order to bring on record material evidence to establish the requirement for invoking the provisions of section 41(1) of the Act.  The very fact that the assessee reflects these amounts as creditors in his Balance Sheet is an acknowledgement of his liability to these creditors and this also extends the period of limitation u/s.18 of the Limitation Act.  Once the assessee acknowledges that the debts to creditors are outstanding in his Balance Sheet, that he is liable to pay his creditors, Revenue cannot suo moto conclude that the creditors have remitted their liability or that the liability has otherwise ceased to exist, without bringing on record any material evidence to the contrary.  Since the AO had not brought on record any material evidence to establish that there was cessation of liability in respect of the outstanding creditors reflected in the Balance Sheet, the Tribunal concurred with the finding of the CIT(A) that the addition of Rs. 33,44,827 u/s. 41(1) of the Act is unsustainable.

The Tribunal dismissed the appeal filed by the Revenue.

Sections 271(1)(c), 271AAA – Penalty levied u/s. 271(1)(c) to a case covered by section 271AAA is void

7.  Nukala Ramakrishna Eluru vs. DCIT
ITAT  Vishakapatnam Bench
Before V. Durga Rao (JM) and G. Manjunatha (AM)
ITA Nos.: 189 to 192/Vizag/2014
A.Ys.: 2005-06 to 2008-09.   Date of Order: 16th September, 2016.
Counsel for assessee / revenue: C. Subramanyam / T.S.N. Murthy

FACTS

On 16.11.2007,  a search u/s. 132 of the Act was conducted in the residential as well as business premises of the assessee, engaged in the business of rearing and trading of fish and other ancillary business activities.   During the course of search, department unearthed details of investments made in the purchase of immovable properties standing in the name of the assessee and his family members  including business concerns.  The assessee filed his return of income for AY 2008-09 on 30.09.2008 declaring total income of Rs. 75,39,560.  This return of income was revised on 14.9.2009 and a total income of Rs. 1,82,84,170 was declared in the revised return of income.  Subsequently, this return of income was again revised and in the final revised return of income the income disclosed was Rs. 4,10,32,920.

The AO assessed the total income of the assessee to be Rs. 4,10,32,990. He initiated penalty proceedings u/s. 271(1)(c) of the Act and after asking the assessee to explain why penalty should not be levied for concealment of particulars of income or furnishing inaccurate particulars of income, he levied penalty u/s. 271(1)(c).

Aggrieved, the assessee preferred an appeal to the CIT(A) who directed the AO to levy penalty on the difference between Rs. 1,82,84170 (being total income in first revised return) and Rs. 75,39,560 (being total income in the original return of income).

Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended on his behalf that the levy of penalty for AY 2008-09 u/s. 271(1)(c) of the Act was void ab initio.

HELD

In the present case on hand, on perusal of the facts available on record we find that the search had taken place on 16.11.2007 which falls under the assessment year 2008-09 which is the year before us.  The year before us was therefore, covered by the Explanation of specified previous year as per Explanation (b) to section 271AAA of the Act.  It is not in dispute that the income in question has been assessed as income of the assessment year 2008-09 i.e. specified previous year.  The AO himself has treated the undisclosed income of the assessee as such.  Once we come to the conclusion that the year before us is a specified previous year and the undisclosed income belongs to this year, an inevitable finding in view of the discussions above is that the provisions of section 271AAA will come into play to deal with penalty for concealment of particulars of income.  It is clear from the above fact that the AO has not invoked the correct provisions of law for levying penalty for concealment of income.  Therefore, we are of the view that the AO erred in levying penalty u/s. 271(1)(c) of the Act, when a specific provision is provided by way of section 271AAA to deal with penalty provisions, in cases where search took place on or after 1.6.2007.

The Tribunal considering the facts and circumstances of the case and also the ratio of the decision of the Delhi Bench of the Tribunal in the case of DCIT vs. Subhash M. Patel in ITA No. 256/AHD/2012 dated 20.7.2012, held that the penalty order passed by the AO under s. 271(1)(c) of the Act, is void ab initio and liable to be quashed.

The Tribunal quashed the penalty order passed by the AO u/s. 271(1)(c) of the Act for AY 2008-09.

The appeal filed by the assessee was allowed.

Sections 51 and 56 – Clause (ix) of section 56(2) (inserted w.e.f. 01.04.2015) which lays down that amount of advance received for sale of property shall be treated as income if the same is forfeited and negotiations do not result in transfer of such capital asset and corresponding proviso to section 51 (inserted with effect from 01-04-2015) which states that if the amount of advance received was treated as income in pursuance of section 56(2)(ix), then no deduction of the said amount shall be done in computing the cost of acquisition when the said property is ultimately sold, do not have a retrospective effect.

[2016] 160 ITD 426 (Mumbai Trib.) ITO vs. Fiesta Properties (P.) Ltd.
A.Y.: 2010-11 Date of Order: 11th August, 2016

Section 41(1) read with Sections 28(i) and 51- Prior to 01.04.2015, if an assessee builder had received advance towards sale property held by it as a capital asset and the same was standing as liability in balance sheet of the assessee and if the actual sale transfer didn’t materialise, then the said amount would not be taxable u/s. 41(1) on writing off of corresponding amount by transferee but would be deducted u/s. 51 from cost of acquisition in computing capital gain when the property is ultimately sold.

FACTS

The assessee company was engaged, interalia, in the business of construction of properties. During the year under consideration, the assessee company had shown income mainly from rent under the head ‘Income from house property’ and also ‘Income from business’.

During the course of assessment proceedings, the AO noted that there was a liability of Rs.3.74 crore as shown in the balance sheet of the assessee, in the name of M/s Dawat-E-Hadiyah Trust. The said liability was created in the year 1995, when the assessee had received the said amount from the said trust as an advance for sale of assessee’s property. The AO conducted enquiries from M/s. Dawat-E-Hadiyah Trust, who vide their letter dated 29.11.2012 replied that the liability had been written off in the year under consideration.

AO was of the view that the assessee being in the business of construction had trading liability and hence, the cessation of said liability should be treated as income of the assessee u/s. 41(1) of the Act. Accordingly, he added the said amount of Rs.3.74 crore to the total income of the assessee. The AO also observed that though both the assessee as well as M/s Dawat-E-Hadiyah Trust, contended that the transaction was in respect of transfer of property, but both the parties failed to furnish any proof that the transaction was for an immovable property. Without any documentation, a property transaction of the magnitude of Rs. 3.74 crore in the year 1995 was beyond comprehension. Since there was no supporting evidence, the AO held that the advance received by the assessee from M/s Dawat-E-Hadiyah Trust was an interest-free unsecured deposit in the course of the business of the assessee company. Thus, on the ground of cessation of the liability, the AO added the amount of Rs. 3.74 crore u/s. 41(1) of the Act.

Being aggrieved, the assessee filed appeal before CIT(A). It was submitted that the impugned amount was received by the assessee with regard to sale of property located at Chennai. The assessee also furnished copies of the correspondences between itself and M/s Dawat-E-Hadiyah Trust indicating that all through, the intention of the advance received was for transfer of the assessee’s property at Madras and when the deal did not materialise, the said M/s Dawat-E-Hadiyah started demanding its money back. Copies of all these correspondences were also furnished before the AO. After considering the entire submissions it was held by CIT(A) that impugned amount was not taxable in the hands of the assessee either u/s. 41(1) or u/s. 28(iv) or under any other provisions of the Act and that whenever the impugned property is sold by the assessee, the cost of acquisition of the property shall be reduced by the amount of Rs.3.74 crore for the purpose of computation of capital gains in view of provisions of section 51 of the Act.

On revenue’s appeal before the Tribunal:

HELD

The admitted facts on record are that assessee has been showing its rental income from its properties, including the impugned property located at Madras and the same has also been assessed by the AO under the head ‘Income from house property’. These properties have been undoubtedly shown as capital assets in the balance-sheet and never have been declared as stock-in-trade. This position has all along been accepted by the revenue.

Further, as far as the assessee is concerned, the liability of Rs.3.74 crore is still outstanding in the name of aforesaid party. The CIT(A) has recorded a clear and categorical finding that correspondence between the assessee company and said party revealed that the transaction was in respect of assessee’s property located at Madras. But, the transaction could not be completed. This factual finding could not be rebutted by the Ld DR. Thus, as per facts and records brought before us, aforesaid property is undoubtedly capital asset of the assessee company. Under these circumstances, it has been rightly held by the CIT(A) that the impugned amount of advance received towards sale of immovable property being capital asset of the assessee company, cannot be taxed under the provisions of section 41(1) or section 28(iv) of the Act, especially due to the fact that the legislature has provided the specific provision in this regard, i.e. section 51 of the Act.

Clause (ix) of section 56(2), inserted w.e.f. 01-04-2015, clearly lays down that amount of advance received for sale of property shall be treated as income if the same is forfeited and negotiations do not result in transfer of such capital asset. Also proviso, introduced with effect from 01-04-2015 to section 51, states that if the amount of advance received was treated as income in pursuance of section 56(2)(ix), then no deduction of the said amount shall be done in computing the cost of acquisition when the said property is ultimately sold.

These provisions are not clarificatory in nature. These provisions lay down a substantive law creating additional tax liability upon an assessee and, therefore, this cannot have retrospective effect. Further, with the insertion of these provisions, it becomes clear that earlier the law was not like this. Thus, for the year before us, i.e. A.Y. 2010-11, the then existing provisions of section 51 shall be applicable which clearly provides that the amount of advance received should be reduced from the cost of acquisition of asset.

Thus, the action of CIT(A) in directing the AO to delete the addition of Rs.3.74 crore which was made by the AO u/s. 41(1) of the Act, is hereby upheld.

9. Genuineness of trust – a breach/contravention of the Bombay Public Trust Act, 1950-would not result in the trust being disqualified from being approved u/s. 80G.

D.I.T. (Exemptions) Mumbai vs. Shri Sai
Baba Charitable Trust. [ Income tax Appeal no. 902 of 2014 dt : 15/10/2016
(Bombay High Court)].

[D.I.T. (Exemptions) Mumbai vs. Shri Sai
Baba Charitable Trust., [dated 13/11/2013 ; A Y: 2011-12. Mum. ITAT ]

The assessee is a Charitable Trust duly
registered u/s. 12AA Act. On 2nd December, 2011, the assessee Trust
applied to the Director of Income Tax (Exemption) for renewal of Certificate /
approval u/s. 80G. The application was rejected by the Director of Income Tax
(Exemption). This rejection was on the ground that the Trust had obtained
unsecured loan of Rs. 50 lakh from third parties without obtaining prior
approval of the Charity Commissioner as required u/s. 36A(3) of the Bombay
Public Trust Act, 1950. Thus, concluding that the assessee is not a genuine
trust.

Being aggrieved, the assessee filed an
appeal to the Tribunal. The Tribunal by the impugned order held that there is
no dispute that the assessee fully satisfied the conditions specified in
section 80G(5) of the Act for approval there under. It further observed that
there is no requirement under the Act that a breach / contravention of the
Bombay Public Trust Act, 1950 would result in the trust being disqualified from
being approved u/s. 80G of the Act. It held that the very fact that the Revenue
had not initiated any action u/s. 12AA of the Act to revoke its registration
would imply that the activities of the Trust are genuine.

Moreover, the Tribunal also records the fact
that the Charity Commissioner has not taken any action against the assessee for
violation of the provisions of section 36A of the Bombay Public Trust Act, 1950
in having borrowed funds without its prior permission. In the aforesaid circumstances,
the appeal of the assessee was allowed.

The Revenue appealed before the High Court
and urged that the Trust is not a genuine trust in as much as it has been
borrowing funds on regular basis from third persons and has been repaying it by
borrowing further funds from other parties on regular basis.

The Hon. High Court find that the impugned
order of the Tribunal has on the basis of the clear provision of section 80G
recorded that the assessee completely satisfies/fulfils all the conditions
specified in section 80G(5) for the purposes of availing benefit u/s. 80G. This
coupled with the fact that the Revenue itself has also not taken any
proceedings to have the registration cancelled, would itself imply that the
Revenue does consider the Trust to be a genuine trust.

It is an undisputed position that the assessee
satisfies all conditions for approval of the trust u/s. 80G. Therefore, it is
not open to the Authorities to refuse approval by imposing conditions which are
not mentioned in Section 80G. In the above circumstances, the impugned order of
the Tribunal was upheld. Therefore,
the appeal was dismissed.

8. Interpretation – SUBLATO FUNDAMENTO CEDIT OPUS – Once the foundation is removed, the superstructure falls.

Commissioner of Income Tax, TDS vs.
M/s.Oberoi Constructions Pvt.Ltd. [Income tax Appeal no 573 of 2014 dt :
01/10/2016 (Bombay High Court)].

[Commissioner of Income Tax, TDS vs.
M/s.Oberoi Constructions Pvt.Ltd., [dated 06/10/2013 ; A Y: 2006-07. Mum. ITAT
]

The assessee is in construction business.
During the AY: 2006 – 07, the assessee had paid share application money to one
M/s. Siddhivinayak Realities Pvt. Ltd. The Assessing Officer added the amount
of Rs.10.35 crore as deemed dividend on a substantive basis in the hands of
Siddhivinayak Realities Pvt. Ltd. and on a protective basis in the hands of its
director Mr. Vikas Oberoi in their assessment orders. Being aggrieved, both
M/s.Siddhivinayak Realities Pvt. Ltd. and Mr. Vikas Oberoi challenged their
orders of assessment holding that they are in receipt of deemed dividend. Their
appeals were allowed by the CIT(A) holding that they could not be charged to
tax on the amount of Rs.10.35 crores as recipients of deemed dividend u/s.
2(22)(e).

Being aggrieved by the order of CIT(A), the
Revenue filed an appeal to the Tribunal which was dismissed. Thereafter, the
Revenue filed an appeal to High court, being in the case of M/s.Siddhivinayak
Realities Pvt. Ltd. and Mr. Vikas Oberoi. The High Court by orders dated 4th
July 2014 and 8th June 2016, respectively, dismissed both the
Revenue’s appeals from the orders of the Tribunal holding that M/s.
Siddhivinayak Realities Pvt. Ltd. and Vikas Oberoi cannot be charged to tax as
recipients of deemed dividend.

In the meantime, pending the aforesaid
proceedings, the ACIT (TDS) passed an order dated 11th February 2011
u/s. 201(1) and 201(1A) of the Act holding the assessee to be an assessee in
default for not having deducted tax on the deemed dividend of Rs.10.35 crore
paid to M/s. Siddhivinayak Realities Pvt. Ltd. The assessee, being aggrieved,
filed an appeal to the CIT (A). The appeal of the assessee was allowed by the
CIT (A) holding that as in the appellate proceedings in respect of M/s.
Siddhivinayak Realities Pvt. Ltd. and Mr. ikas Oberoi, the addition of income
to the extent of Rs.10.35 crore u/s. 2(22)(e) of the Act on substantive and
protective basis had been deleted, there was no taxable income which had to
suffer tax deduction at source. Consequently, no failure to deduct tax could
arise.

Being aggrieved, the Revenue carried the
issue in further appeal to the Tribunal. The Tribunal upheld the order of the
CIT (Appeals) holding that once the addition made on account of deemed dividend
is deleted in the hands of the recipient of the amount of Rs.10.35 crore, there
could be no failure to deduct tax at source thereon. Thus, the consequent
demand u/s. 201(1) and 201(1A) upon the assessee was not justified.

Being aggrieved, the Revenue filed an appeal
before High Court. The High Court held that both the CIT (A) as well as the
Tribunal in these (TDS) proceedings have held that as the very basis for
holding the assessee liable for failure to deduct tax did not subsist, the TDS
proceedings must also fail. This was in view of the orders passed in the case
of recipients i.e. M/s.Siddhivinayak Realities Pvt. Ltd. and Mr.Vikas Oberoi in
appeal by the authorities under the Act including this Court that they were not
liable to any tax as they had not received any deemed dividend u/s. 2(22)(e).
Once the foundation is removed, the superstructure falls (sublato fundamento
Cedit opus). The grievance of the Revenue is that in TDS proceedings, one
must ignore the orders passed in the hands of the recipients i.e.
M/s.Siddhivinayak Realities Pvt. Ltd. and Mr.Vikas Oberoi.

The Court observed that the officers of the
Revenue while administering the TDS provisions are not outside the scope of the
Act and orders passed under the Act in respect of the character of the payment
made under the Act are binding upon them. The fact that at the time the order
of the ACIT (TDS) was passed, there was basis to do so does not mean that
orders passed on income in the hands of the recipients will have no bearing in
deciding its validity. One must not ignore the fact that this order of the TDS
officer is tentative in nature and its existence would depend upon the nature
of receipt in the hands of the recipient and subject to the orders passed in
respect thereof by appropriate court. In the above view, the appeal was
dismissed.

Section 54F – The assessee cannot be denied deduction u/s. 54F, if the assessee makes investment in residential house within the time limit prescribed u/s. 54F but is unable to get the title of the flat registered in his name or unable to get the possession of the flat due to fault of the builder.

10.   [2016] 159 ITD 964 (Mumbai Trib.) (SMC)

Rajeev B. Shah vs. ITO
A.Y.: 2010-11      Date of Order: 8th July, 2016

FACTS

During the year under consideration, the assessee had sold one plot of land and had claimed deduction u/s. 54F for investment of sale proceeds in an under-construction flat.

The Developer had allotted, flat No. 602 of 6th floor, to the assessee.

The AO rejected the claim of deduction u/s. 54F of the Act on the ground that the property was incomplete and document related to purchase of property was not registered even after three years of the said investment.

Aggrieved, the assessee preferred appeal before the CIT(A), who also confirmed the action of the AO by stating that merely because a so-called letter of allotment was issued in a building which was never given permission for construction beyond two floors, it cannot be said that for the purpose of section 54F, the appellant’s obligation ended as soon as he issued the cheque.

Aggrieved, the assessee filed appeal before the Tribunal.

HELD

We find that the facts in question are not disputed and the only issue is that whether assessee is eligible for deduction u/s 54F, when the assessee has made investment in purchase of residential house within the time limit prescribed u/s. 54F but is unable to get the title of the flat registered in his name or is unable to get the possession of the flat due to fault of the builder.

The intention of the assessee is very clear that he has invested almost the entire sale consideration of land in purchase of this residential flat. It is another issue that the flat could not be completed and the suit, directing the builder to complete the construction, filed by the assessee, is pending before the Hon’ble BombayHigh Court.

It is impossible for the assessee to complete formalities such as taking over possession for getting the flat registered in his name and this cannot be the reason for denying the claim of the assessee for deduction u/s. 54F of the Act.

Hence, the appeal filed by the assessee is allowed.

7. Reopening of assessment – the reasons for reopening must be based on some material – the material used by the AO for forming his opinion must have some bearing or nexus with escapement of income – If not, the reopening notice would be clearly without jurisdiction: Section 148.

Director of Income Tax (IT) vs. Doosan
Heavy Industries & Construction Co.  
[ Income tax Appeal no. 670 of 2014, dt : 04/10/2016 (Bombay High
Court)].

[Director of Income Tax (IT) vs. Doosan
Heavy Industries & Construction Co,. [ITA No. 3930/MUM/2006, 3897/MUM/2006,
746/MUM/2007; Bench : L ; dated 19/07/2013; AYs: 2000-2001, 2003-2004. Mum.
ITAT ]

The Assessee is a Project Contractor. It
awarded a contract by Kondapalli Power Corporation Ltd.(KPCL), Andhra Pradesh
to set up a power plant on a turnkey basis. Further, KPCL had awarded an
onshore contract to the Assessee for supply of goods and services along with
the commissioning of the plant. KPCL also awarded an offshore supply contract
to Hanjung DCM Co. Ltd. (Hanjung) for supply of equipment valued at US$ 103
million. The equipment valued at US$ 103 million was supplied by Hanjung and
taken delivery of outside India by the Assessee for and on behalf of KPCL. The
aforesaid equipment was lost during its transit after the Assessee took
delivery from Hanjung. As the insurance claim was not honoured, the Assessee
filed a suit against the Insurance Company for recovery of US$ 103 million. The
regular assessment proceeding was completed for the subject  A.Y. u/s. 143(3).

A reopening notice was issued by the
Assessing Officer for the subject A.Y. and the reasons to believe that income
chargeable to tax has escaped assessment u/s. 147 of the Act. During the course
of assessment proceedings, it was noticed that there was another contract
titled “Offshore Equipment Supply Contract” also dated 1st February,
1998 entered into between M/s. Lanco Kondapalli Power Private Limited and M/s.
Hanjung DCM Co. Ltd. (Hanjung). The AO had reason to believe that income of US$
51.5 million chargeable to tax has escaped assessment. Issue notice u/s. 148.

The assessee during the assessment
proceedings consequent to reopening notice dated 26th March 2004
submitted that the same is without jurisdiction and, therefore, must be
quashed. Nevertheless, the AO proceeded on the basis that in the suit filed by
the Assessee in the Secunderabad Court against the Insurance Company it had
claimed to have supplied equipment valued at US$ 103 million which was lost.

The Assessing Officer placed reliance on
para 5 of the plaint, which reads as under :

“ 5. MAIN SUPPLY CONTRACT “

Under the terms
of contract dated 15th February 1998 (“Supply Contract”) between
Plaintiff and LKPL, Plaintiff agreed to supply equipment, materials and design
for the construction of LKPL’s combined cycle power plant at Kondapalli IDA,
Andhra Pradesh in India (the “Kondapalli Project”). The value of this Supply
Contract was about US$ 103 million.” It was on the aforesaid basis that the AO
sought to justify his reasons to believe that income chargeable to tax has
escaped assessment and, therefore, proceeded to hold even on merits against the
Assessee.

On appeal, the CIT(A) examined all the
facts. These facts included not only the suit as filed but also the terms of
the contract and scope of work, in particular the responsibility of the parties
there under. Based on this examination, the CIT(A) concluded that in terms of
its obligation to insure the goods/equipment during transit, the appellant had
taken out an Insurance policy as a contractor with KPCL as the principal. Based
on this policy coupled with the plaint as filed, the CIT(A) observed that the
plaint has to be read as a whole. So read, the nature of the relationship
between the parties as described in paragraph 4 thereof, which, as extracted in
the order, reads as under :

“4. A brief reference to the parties
involved in relation to the subject matter of this suit is as follows :

a. Lanco Kondapalli Power Pvt. Limited (formerly a public limited
company) (‘LKPL’) is the owner of the Kondapalli Power Project.

b. Plaintiff is the EPC
contractor for the Kondapalli Power Project, and an assured under the policy
issued by Defendant.

 i. Encon Services Limited (‘Encon’) is the subcontractor of Plaintiff
for transportation of the GT & GTG from Kakinada to Machilipatnam.

j.   Seaways Shipping Limited
(‘SSL’) was appointed by Encon for inland transportation of GT & GTG from
Kakinada to Machilipatnam, and was the character of ‘Jala Hamsa’ and ‘AmethiI’.

n. Aistom are the suppliers of the GT & GTC, from whom Plaintiff
arranged to procure the replacement equipment for ensuring completion of the
project.”

The CIT(A) came to the conclusion that on
the basis of the words used in para 5 of the plaint, it cannot be established
that the assessee had supplied (as owner) the equipment, material and design,
and that the word “supply” only refers to the responsibilities of the assessee
for setting up of the power project as per the onshore contract. The reasons as
recorded do not therefore suggest any link between the material found by him and
his conclusion that there was reason to believe that the income chargeable has
escaped assessment. He, therefore, concluded that there was no reason to form a
belief that income chargeable to tax has escaped assessment.

On appeal by the Revenue, the Tribunal, by
the impugned order, confirmed the finding of the CIT(A).

The Hon. High Court observed that at the
stage of a notice of reopening, the AO does not have to “establish” that any
income has escaped assessment. However the AO must simply be shown to have
formed an opinion, which, in turn, is supported by reasons. The reasons
themselves must be based on some material. A minimum requirement one would
expect in the face of this scheme of things is that the material used by the AO
for forming his opinion must have some bearing or nexus with escapement of
income. If not, the reopening notice would be clearly without jurisdiction. In
the present case, the material used by the AO for purportedly forming this
opinion is the description of the assessee of itself as “a supplier” of the
equipment in an EPC contract, which inter alia required it to take offshore
delivery of the equipment from a foreign vendor and supply and install the same
onshore. Mere description as a “supplier” in a suit by the assessee against the
insurance company claiming an insurance claim for loss of equipment, when the
assessee insured the equipment jointly with the purchaser, can possibly have no
connection with the escapement of any income arising out of sale of the
equipment. Since that was the only material used by the AO for issuance of the
reopening notice, the notice is without any legal basis or justification. In
these circumstances, the order of the coordinate bench for Assessment Years
1999-2000 and 2002-2003 also supports the Respondent’s contention that they
were not suppliers of the equipment and no income assessable to tax has escaped
assessment. It’s obligation was to insure the goods/equipment during transit
done by it either on its own or through a subcontractor.

The Hon. High Court also found that, the
contract provided that the contractor, i.e. Assessee will provide/arrange at
its own cost in the joint name of the owner and contractor a comprehensive
insurance cover to the project, including any damage to the goods during transit.
It was in that context that the Assessee had made a claim for insurance. Taking
into account the concurrent findings of fact arrived at by the CIT(A) and by
the Tribunal, and that nothing has been shown to indicate that the finding is
perverse the appeal was dismissed.

6. Penalty – CIT(A) could not have imposed penalty on a new ground which was not the basis for initiation of penalty – penalty could be only on the ground on which it was initiated – Not liable for penalty : u/s. 271(1)(c)

CIT vs. Acme Associates. [ Income tax
Appeal no 640 of 2014 dated : 17/10/2016 (Bombay High Court)].

[Acme Associates vs. ACIT. [ITA No.
649/MUM/2011; Bench : I; dated 13/09/2013 ; A Y: 2005- 2006.( MUM.)  ITAT ]

The assessee is in the business of Real
Estate Development. For the A.Y. 2005-06, the assessee has filed its ROI ,
declaring a income of Rs. 2.04 crore claiming 100% deduction u/s. 80IB(10).
During the course of the assessment proceedings, the AO noticed that two
buyers, viz. Ms. Sulbha M. Waghle and Mr. Mangesh G. Waghle had entered into
joint agreement for purchase of flats which in the aggregate exceeded 1,000
sq.ft. Consequently, AO disallowed the deduction claimed u/s. 801B(10) and
initiated penalty proceedings u/s. 271(1)(c) on the aforesaid ground for furnishing
inaccurate information/concealing income.

The assessee carried the issue in appeal to
the CIT(A). During pendency of the appeal, a search action u/s. 132 was carried
out on the assessee group. Consequent to which, notices u/s.153A were issued to
the assessee including one for the subject A Y 2005-06. In the above
circumstances, the assessee withdrew its appeal for A.Y. 2005-06 pending before
CIT(A). Thereafter, by order dated 30th March, 2010, the AO imposed
penalty upon assessee u/s. 271(1)(c). This was on the very ground on which the
AO had initiated penalty proceedings viz. selling of flats to two members of
the family which in the aggregate was in excess of 1000 sq.ft. of built up
area. Therefore concluding that the Assessee has furnished incorrect
particulars of income/concealed particulars of income. Consequently, a penalty
was imposed.

Being aggrieved, the assessee carried the
order of the AO imposing penalty u/s. 271(1)(c) to CIT(A). The CIT (A)
confirmed the penalty imposed by the AO. However, the confirmation was on a
completely new and different ground viz. that during search proceedings, the
assessee had made disclosure that the project in respect of which deduction
u/s. 801B(10) was being claimed was not completed before the due date i.e. 31st
March 2008. Thus confirming the order dated 30th March, 2010.
It is to be noted that CIT(A) in its order did not deal with the issue on which
the AO had initiated and confirmed the penalty upon the assessee.

Being aggrieved, the assessee filed a
further appeal to the Tribunal. The Tribunal held that the initiation and
confirmation of penalty by the AO u/s. 271(1)(c) was not on the ground that the
project was not completed by the due date, on which the CIT (A) confirmed the
penalty. Thus, the Tribunal held that this could not be done by the CIT(A) as
the penalty proceedings were initiated on account of selling flats of an area
in excess of 1000 sq.ft. i.e. a ground different from the ground on which
the   CIT(A) confirmed the penalty. The
order also noted the fact that at the time when the return of income was filed
on 31st October 2005, it was not possible to predict whether the
project would be completed on or before the specified date 31st
March 2008. Further, the Tribunal also examined the issue on which the
Assessing Officer had imposed penalty, namely, selling of two flats to the
members of same family, the area of which in the aggregate exceeded 1000 sq.ft.
built up and held that no material was brought on record that assessee had
constructed a flat of more than 1000 sq.ft. built up area or that the assessee
had sold any unit of more than 1000 sq.ft. It renders a finding of fact that
after units had been sold the buyers had joined two flats resulting in a flat
in excess of 1000 sq.ft. In the aforesaid view, the Tribunal held that there is
no furnishing of inaccurate particulars and/ or concealing of income warranting
the imposition of penalty u/s. 271(1)(c).

The Hon. High Court in the revenue appeal
held that, it was the original ground on basis of which penalty was initiated,
that the assessee was required to offer explanation during penalty proceedings
to establish that the claim as made in the return of income was not on account
of furnishing of inaccurate particulars of income or concealment of income vis-a-vis
of selling flat having area 1000 sq.ft. The AO under the Act also considered
the assessee’s explanation in the context in which the penalty proceedings were
initiated and did not rightly place any reliance upon the subsequent events. In
an appeal from the order of the Assessing Officer, the CIT(A) could not have
imposed penalty on a new ground which was not the basis for initiation of
penalty. The appeal before the CIT(A) was with regard to issue of penalty u/s.
271(1)(c) only on the ground on which the penalty proceedings were initiated in
the assessment order. Although the powers of CIT(A) are coterminous with that
of the AO, the imposition of penalty could be only the ground on which it was
initiated. This is not the case, where the CIT(A) had independently initiated
penalty proceedings on a new ground in an order in quantum proceedings in
appeal from the Assessment Order. This alone could lead to the imposition of
penalty u/s. 271(1)(c) on the new ground. The ground on which the penalty was
initiated and penalty imposed by the AO, namely, that the flat had been sold in
the project which was in excess of 1000 sq.ft., the Tribunal has recorded a
finding of fact that the flats were sold individually by two separate
agreements individually to the purchasers in joint names. However, two flats
were subsequently joined by the purchasers aggregating the size of two flats to
1000 sq.ft. built up purchased from the assessee. This is finding of fact which
has not been shown to be perverse or arbitrary. In the above view, revenue
appeal was dismissed.

28. TDS – Interest u/s. 28 of Land Acquisition Act- capital gain or income from other sources – Sections 45, 56 and 194A – Interest assessable as capital gain – Tax not deductible at source on such interest

Movaliya Bhikhubhai Balabhai vs. ITO; 388
ITR 343 (Guj):

Pursuant to acquisition of land of the
assessee, by a Court order dated 23/03/2011, additional compensation was
awarded with interest. The executive engineer proposed to deduct tax at source
of Rs. 2,07,416/- u/s. 194A. The assessee made an application to the Assessing
Officer u/s. 197 to issue certificate
for Nil deduction of tax. The Assessing Officer rejected the application.

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

“i)  In the case of CIT vs.
Ghanshyam (HUF) 315 ITR 1 (SC), the Supreme Court held that it is clear
that whereas interest u/s. 34 of the Land Acquisition Act, 1894 is not treated
as a part of income subject to tax, interest earned u/s. 28, which is on
enhanced compensation or consideration making it exigible to tax u/s.
45(5).  The substitution of section 145A
by the Finance (No. 2) Act, 2009 was not in connection with the decision of the
Supreme Court in CIT vs. Ghanshyam (HUF) 315 ITR 1 (SC), but brought to
mitigate the hardship caused to the assessee on account of the decision of the
Supreme Court in Rama Bai vs. CIT 181 ITR 400 (SC), whereby it was held
that arrears of interest computed on delayed or enhanced compensation shall be
taxable on accrual basis.

ii)  Therefore, the words
“interest received on compensation or enhanced compensation” in section 145A of
the Act have to be construed in the manner interpreted by the Supreme Court in CIT
vs. Ghanshyam (HUF) 315 ITR 1 (SC). As a necessary corollary, therefore,
the payment made u/s. 28 of the 1894 Act is interest as envisaged u/s.
145A  and cannot be treated as income
from other sources.

iii) The Assessing Officer was not
justified in requiring the deduction of tax at source u/s. 194A in respect of
such interest. The assessee was, therefore, entitled to refund of the amount
wrongly deducted u/s. 194A .”

27. Revision – Limitation – Section 263 – A. Y. 2007-08 – Reassessment in respect of items other than item sought to be revised by Commissioner – Period of limitation begins from original assessment – Not from date of reassessment in which item was not in question

I. G. Electronics India Pvt. Ltd. vs.
Principal CIT; 388 ITR 135 (All):

For the A. Y. 2007-08, the assessment u/s.
143(3) was completed on 31/10/2011. Sales tax incentive received from UP
Government was treated as revenue receipt, but the sales tax subsidy received
from the Maharashtra Government was not treated as revenue receipt and
accordingly was accepted as capital receipt. Subsequently, a reassessment order
u/s. 147 was passed on 15/03/2015 making disallowance u/s. 40(a)(i), on account
of non-deduction of tax at source. Thereafter, on 08/06/2016, the Principal
Commissioner issued notice u/s. 263, on the ground that the sales tax subsidy
accruing to the assessee under the scheme of the Government of Maharashtra was
not brought to tax as revenue receipt.

The Allowed High Court allowed the writ
petition filed by the assessee challenging the notice u/s. 263 and held
as under:

“i)  Limitation prescribed u/s.
263(2) for exercise of power u/s. sub-section (1) thereof is two years from the
end of financial year in which the order sought to be revised was passed.

ii)  The reassessment order was
not for review or reassessment of the entire case but only in respect of a
particular item. In all other respects, the original assessment order was
maintained, and addition made by assessment order dated 26/03/2015 was added in
the income assessed in the original assessment order. Though the notice u/s.
263(1) referred to the reassessment order, in fact, it referred to a
discrepancy in the regular assessment order dated 31/10/2011, wherein the
incentive of value added tax from Maharashtra Government received by the
assessee was allowed to be deducted. This incentive had no concern with the
reassessment proceedings in the order dated 26/03/2015.

iii)  Since the notice issued
by the Principal Commissioner was in reference to a discrepancy in the original
assessment order dated 31/10/2011 and not the reassessment order dated
26/03/2015, the limitation would run from the dated of the regular order of
assessment and therefore, the notice was barred by limitation prescribed u/s.
263(2). Impugned notice dated 08/06/2016 is quashed.”

26. TDS – Payment of salary to priests and nuns of catholic institutions – Ultimate beneficiaries congregation or dioceses with benefit of exemption from tax – No liability to deduct tax at source

Holy Cross Primary School vs. CBDT; 388
ITR 162 (Mad):

The assessee filed writ petition for
quashing of the letter dated 07/10/2015 of the Income-tax Department and the
Circular of the Director of Treasuries dated 26/10/2015 insisting in deduction
of tax at source from the salaries of the religious nuns and priests in the
service of the assessee school contending that, the concerned religious priests
and nuns did not take the salaries, but were ultimately depositing it with the
concerned diocese or congregation or institution only which are exempt from tax.

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

“Tax need not be deducted at source in so
far as the payments of salaries of the religious priests and nuns of the
catholic institutions who were attached to the respective congregation or
dioceses who were already exempted from the purview of the income tax liability
as on the date of the order.”

25. Capital gains – Section 50C: A. Y. 2006-07 – Stamp duty value higher than sale price- Reference to DVO – Valuation by DVO binding on AO

Principal CIT vs. Ravjibhai Nagjibhai
Thesia; 388 ITR 358 (Guj):

In the A. Y. 2006-07, the assessee sold his
land for a consideration of Rs. 16 lakh. The Stamp Valuation Authority valued
the property at Rs. 2,33,70,600/-. The case was therefore referred to the DVO
at the request of the assessee u/s. 50C(2). The DVO valued the property at Rs.
24,15,000/-. However, the Assessing Officer passed the assessment order before
the report of the DVO was received treating the difference of Rs. 2,17,70,600/-
as undisclosed income. The Commissioner (Appeals) and the Tribunal deleted the
addition and held that the capital gain has to be computed u/s. 50C on the
basis of the valuation by the DVO.

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

“i)  Once a reference was made
by the Assessing Officer u/s. 50C of the Act, to the DVO, for valuation of the
capital asset, the Assessing Officer was obliged to complete the assessment in
conformity with the estimation made by the DVO.

ii)  Under sub-section (2) of
section 50C, it was such lower valuation which was required to be taken into consideration
for the purposes of assessment. There was no legal infirmity in the orders of
the appellate authorities warranting interference.”

31 Transfer pricing – Computation of arm’s length price – Section 92C, r.w.s. 144C – A. Ys. 2007-08 and 2008-09 – Failure of Assessing Officer to adhere to mandatory requirement of section 144C(1) and first pass a draft assessment order would result in invalidation of final assessment order and consequent demand notices and penalty proceedings

Turner International India (P.) Ltd. vs. ACIT; [2017] 82
taxmann.com 125 (Delhi):

For the A. Y. 2007-08, the assessee petitioner filed its
return on 31st October 2007, declaring its income at Rs.
10,69,43,491/-. This was later revised on 31st March, 2009 to claim
a higher TDS. As far as A. Y. 2008-09 is concerned, the Petitioner filed a
return of income on 30th September, 2008 declaring its income at Rs.
35,04,23,465/-. In respect of both the returns, since there were international
transactions involving the Assessee, a reference was made by the AO to the
Transfer Pricing Officer (‘TPO’). In respect of both the A.Ys., two separate
orders were passed by the TPO on 29th October, 2010 (in respect of
AY 2007-08) and 17th October, 2011 (in respect of AY 2008-09), in
respect of the Distribution Activity segment. On the basis of the above orders
of the TPO, draft Assessment Orders were passed by the AO. These were objected
to by the Petitioner before the Dispute Resolution Panel (‘DRP’). After the DRP
concurred with the TPO, final assessment orders were passed by the AO. These
were appealed against by the Petitioner before the ITAT. By a common order
dated 14th January 2013, in both the appeals pertaining to the two
A. Ys., the ITAT observed that neither the Petitioner nor the TPO had taken
into consideration appropriate comparables and, therefore, the determination of
arms length price (‘ALP’) was not justifiable. While setting aside the order of
the DRP, the ITAT remanded the matters to the AO for undertaking a transfer
pricing study afresh and framing an assessment in accordance with law.

Following the above order of the ITAT, fresh notices were
sent on 2nd August, 2013 by the TPO to the Petitioner u/s. 92CA(2)
of the Act, 1961. Two separate orders were passed by the TPO on 30th
January, 2015 proposing an upward adjustment to the total income of the
Petitioner for each of the A. Ys. Pursuant to the above order, the AO on 31st
March, 2015 passed final Assessment Orders in respect of both A.Ys. u/ss.
254/143(3)/144C(13)r.w.s. 92CA(4) of the Act confirming the additions as
proposed by the TPO. Accompanying the aforementioned final Assessment Orders
were notices of demand u/s. 156 of the Act and notices u/s. 271(1)(c) of the
Act initiating penalty proceedings.

The assessee filed writ petitions challenging the said orders
and the penalty proceedings. The Delhi High Court allowed the writ petition and
held as under:

“i)   The short ground on
which the aforementioned final assessment orders and the consequent demand
notices have been challenged is that there was non-compliance with the
mandatory provision contained in section 144C(1) of the Act requiring the AO to
first frame draft assessment orders. The question whether the final assessment
order stands vitiated for failure to adhere to the mandatory requirements of
first passing draft assessment order in terms of Section 144C(1) of the Act is
no longer res intregra. There is a long series of decisions to which reference
would be made presently. In Zuari Cement Ltd. vs. ACIT (decision dated
21st February, 2013 in WP(C) No.5557/2012), the Division Bench (DB)
of the Andhra Pradesh High Court categorically held that the failure to pass a
draft assessment order u/s. 144C (1) of the Act would result in rendering the
final assessment order “without jurisdiction, null and void and
unenforceable.” In that case, the consequent demand notice was also set
aside. The decision of the Andhra Pradesh High Court was affirmed by the
Supreme Court by the dismissal of the Revenue’s SLP (C) [CC No. 16694/2013] on
27th September, 2013.

ii)   In Vijay
Television (P) Ltd. vs. Dispute Resolution Panel [2014] 369 ITR 113/225 Taxman
35/46 taxmann.com 100 (Mad.), a similar question arose. There, the Revenue
sought to rectify a mistake by issuing a corrigendum after the final assessment
order was passed. Consequently, not only the final assessment order but also
the corrigendum issued thereafter was challenged. Following the decision of the
Andhra Pradesh High Court in Zuari Cement Ltd.’s case (supra) and a
number of other decisions, the Madras High Court in Vijay Television (P) Ltd.
case(supra) quashed the final order of the AO and the demand notice.
Interestingly, even as regards the corrigendum issued, the Madras High Court
held that it was beyond the time permissible for issuance of such corrigendum
and, therefore, it could not be sustained in law.

iii)   Recently, this
Court in ESPN Star Sports Mauritius S.N.C. ET Compagnie vs. Union of India
[2016] 388 ITR 383/241 Taxman 38/68 taxmann.com 377, following the decision
of the Andhra Pradesh High Court in Zuari Cement Ltd.’s case (supra),
the Madras High Court in Vijay Television (P) Ltd. (supra) as well as
the Bombay High Court in International Air Transport Association vs. Dy. CIT
[2016] 241 Taxman 249/68 taxmann.com 246, came to the same conclusion.

iv)  Mr. Dileep Shivpuri,
learned counsel for the Revenue sought to contend that the failure to adhere to
the mandatory requirement of issuing a draft assessment order u/s. 144C (1) of
the Act would, at best, be a curable defect. According to him, the matter must
be restored to the AO to pass a draft assessment order and for the Petitioner,
thereafter, to pursue the matter before the DRP. The Court is unable to accept
the above submission. The legal position as explained in the above decisions is
unambiguous. The failure by the AO to adhere to the mandatory requirement of
section 144C (1) of the Act and first pass a draft assessment order would
result in invalidation of the final assessment order and the consequent demand
notices and penalty proceedings.

v)  For
the aforementioned reasons, the final assessment orders dated 31st
March, 2015 passed by the AO for AYs 2007-08 and 2008-09, the consequential
demand notices issued by the AO and the initiation of penalty proceedings are
hereby set aside.”

30 Speculation business – Loss – Section 73, Explanation – Penalty u/s. 271(1)(c) – A. Y. 2001-02 – Allotment of shares – No purchase of shares- Loss on sale of shares – Not from speculation business – Question of penalty u/s. 271(1)(c) also would not arise

AMP Spinning and Weaving Mills P. Ltd. vs. ITO; 393 ITR
349 (Guj):

The assessee was a dealer in chemicals and in shares. In the
public issues of certain companies, the assessee applied for and also allotted
shares which it eventually sold and in the process suffered losses. The
assessee claimed set off of the loss as business loss. The Assessing Officer
rejected the claim and contention of the assessee that the application for
shares from the primary market and loss incurred on sale of such shares did not
fall within the purview of speculation loss under the provisions of the
Explanation to section 73 of the Act. This was upheld by the Tribunal. However,
the Tribunal cancelled the consequent penalty imposed by the Assessing Officer
u/s. 271(1)(c) of the Act.

The Gujarat High Court allowed the assessee’s appeal and
dismissed the appeal filed by the Department and held as under:

“i)   Section 73 of the
Income-tax Act, 1961 deals with carry forward and set off of losses from
speculation business. The Explanation to section 73 is a deeming provision
whereunder if the specified conditions are satisfied, purchase and sale of
shares are deemed speculation activities. There is a vital difference between
“creation” and “transfer” of shares. The words “allotment of shares” have been
used to indicate the creation of shares by appropriation out of the
unappropriated share capital to a particular person. A share is a chose in
action. A chose in action implies existence of some person entitled to the
rights in action in contradistinction from rights in possession. There is a
difference between issue of a share to a subscriber and the purchase of a share
from an existing shareholder. The first case is that of creation whereas the
second case is that of transfer of a chose in action.

ii)   Getting the shares
on allotment did not amount to purchase of the shares. The loss incurred on the
sale of the shares was not a loss in speculation business.

iii)   Accordingly, the
question of levy of penalty u/s. 271(1)(c) would not arise.”

29 Income Declaration Scheme 2016 – Assessee not filing returns for A. Y. 2010-11 onwards owing to internal problems – Declaration under Scheme for A. Y. 2010-11 onwards – Advance tax paid and tax deducted at source for those years – Assessee entitled to credit of advance tax and TDS

Kumudam Publications Pvt. Ltd. vs. CBDT; 393 ITR 599
(Del):

For the A. Y. 2010-11 onwards, the assessee company did not
file returns due to non-appointment of statutory auditor and certain internal
disputes in the company which led to litigations. It deposited the advance tax
and the tax deducted at source and Rs. 16,49,23,433 had been paid towards tax
liability by or on behalf of it. Anticipating that proceedings might be
initiated by the Department for its failure to file returns u/s. 139, the
assessee applied u/s. 119(2)(b) and sought permission to file returns ”based on
the unaudited accounts or in any other manner”. Pending disposal of the
application, the assessee also made a declaration under the Income Disclosure
Scheme, 2016 for all the assessment years on the basis of its unaudited
accounts. The details of the total tax payable including the interest and
penalty under the Scheme was Rs. 19.60 crore against which the advance tax paid
and the tax deducted at source to its benefit was Rs. 16.49 crore and the net
due of Rs. 3.11 crore, after giving credit to the sums paid, were disclosed by
the assessee in its declaration. In response to the declaration, the assessee
received an order from the Principal Commissioner demanding tax of Rs. 19.60
crore. The assesee’s representation and reminder letters to the Department and
e-mails to the Chairman CBDT requesting clarification that the net tax payable
was Rs. 3.11 crore only, were not responded to.

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

“i)   There was no bar,
express or implied which precluded the reckoning or taking into account of
previously paid amounts which has nexus with the period sought to be covered by
the Income Declaration Scheme, 2016. There should be something which provides a
clear insight that Parliament wished that past amounts were not to be reckoned
at all for purpose of payments. All that the words of the statute enjoined were
that the tax and surcharge amounts under the Scheme “shall be paid on or before
a date to be notified”. Those words necessarily referred to all payments and
were not limited in their meaning to what was paid immediately before, or, in
the proximity of the declaration filed.

ii)   The provisions of
section 182 of the Finance Act, 2016 stated that for the purposes of the Income
Declaration Scheme, 2016, the undefined terms and expressions should be
understood in terms of the Income-tax Act, 1961, by incorporating those into
the 2016 Act and the Scheme.

iii)   “Undisclosed
income” which was the foundational provision to be invoked by the declarant,
thus, was based on the definition in section 132(1)(c) of the 1961 Act. The
only bar discernible under the scheme as evident from section 189 of the 2016
Act was that “a declarant under the Scheme shall not be entitled, in respect of
undisclosed income declared or any amount of tax and surcharge paid thereon, to
reopen any assessment or reassessment made under the Income-tax Act, 1961 or
the Wealth-tax Act, 1957, or claim any setoff or relief in any appeal, reference
or any other proceeding in relation to any such assessment”. Therefore, there
was no bar for an assessee or declarant to claim credit of advance tax amounts
paid previously which pertained to the assessment years or periods for which it
sought benefits under the Scheme, 2016.

iv)  The respondents were
directed to process the assessee’s application under the 2016 Scheme giving
adjustment or credit to the amounts paid as advance tax and tax deducted at
source to its account.”

28 Depreciation – Additional depreciation – Section 32(1)(iia) – A. Y. 2006-07 – Acquisition of machinery in previous year and installation during A. Y. – Assessee entitled to additional depreciation at 20%

Princ. CIT vs. IDMC Ltd.; 393 ITR 441 (Guj):

The assessee was in the business of fabrication and
manufacture. For the A. Y. 2006-07, in assessment u/s. 143(3), its total income
was assessed at Nil after the Assessing Officer allowed its claim on additional
depreciation of 20% u/s. 32(1)(iia) of the Act, 1961, on account of its newly
purchased machinery. The machinery was purchased in the preceding year, but was
installed in the relevant year (A. Y. 2006-07). The Department audit party
raised the objection that as the machinery was purchased before March 31, 2005,
the claim of additional depreciation was not allowable to the assessee.
Therefore, in reassessment proceedings, the Assessing Officer disallowed the
assessee’s claim for additional depreciation. The Appellate Tribunal allowed
the assessee’s claim.

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

“i)   The purpose and
object of section 32(1)(iia) of the  Act,
1961 is to encourage the manufacturing sector by allowing the deduction of a
further sum equal to 20% of the actual cost of machinery or plant acquired and
installed. Therefore, the underlying object and purpose is to encourage the
industries by permitting the assessee in setting up the new undertaking or
installing a new plant and machinery to claim the benefit of additional
depreciation.

ii)   No error had been
committed by the Appellate Tribunal in allowing the additional depreciation at
the rate of 20% u/s. 32(1)(iia) of the Act on the plant and machinery installed
by the assessee after March 31, 2005, the year in question. The purpose and
object of granting additional depreciation u/s. 32(1)(iia) was to encourage
industries and to give a boost to the manufacturing sector by permitting the
assessees setting up new undertakings or installation of new plant and
machinery an additional depreciation allowance.

iii)  Thus
the provisions of section 32(1)(iia) was required to be interpreted reasonably
and purposively as the strict and literal reading of section 32(1)(iia) would
lead to an absurd result denying the additional depreciation to the assessee
though the assessee had installed new plant and machinery. The question of law
is answered against the revenue and in favour of the assessee.”

27 Charitable purpose – Exemption u/s. 10(23C)(via) – A. Y. 2011-12 – Application for approval cannot be rejected on ground assessee charges fees for educational courses or it entered into arrangements with other institutions to set up satellite centers to give medical treatment or its treatment involved layered subsidisation programme – Rejection of application not justified

Venu Charitable Society vs. DGIT; 393 ITR 63 (Del):

The assessee was registered u/s. 12A of the Act,1961 and also
obtained approval u/s. 80G of the Act. It was also notified for exemption u/s.
35AC of the Act by the National Committee for Promotion of Social and Economic
Welfare. The assessee was notified u/s.10(23C)(via) of the Act for the A. Ys.
2005-06 to 2007-08. But it did not file application for renewal of exemption
for the A. Ys. 2008-09 to 2010-11. In the return of income filed for those
years, the assessee claimed exemption u/s. 11 of the Act in respect of income
earned and applied for charitable purposes, the Assessing Officer while
completing the assessment for the A. Ys. 2005-06 to 2009-10 held that the
activities of the society fell within the ambit of section 2(15) of the Act,
i.e. charitable purpose. The assessee thereafter applied through Form 56D for
grant of exemption u/s. 10(23C)(via) of the Act for the A. Ys. 2011-12 onwards.
The Department rejected the exemption application inter alia on the
ground that (a) the assessee did not exist solely for philanthropic purposes
but for purpose of profit; (b) it had entered into collaboration agreements
with other hospitals and trusts for running satellite hospitals with profit
motive; (c) it provided educational courses such as medical training
programmes, long term super speciality medical programmes in ophthalmology and
was earning profit from those activities; (d) the memorandum of the assessee
society contained objects other than health care; and lastly, that it had made
no application for renewal of exemption u/s. 10(23C)(via) for the A. Ys.
2007-08 to 2010-11.

The Delhi High Court allowed the writ petition filed by the
assessee challenging the order and held as under:

“i)   The objects of the assessee
society were solely for the purpose of education and medical care and not for
purposes of profit. Only if it was found that the assessee was carrying on its
activities for the purpose of profit, contrary to its objects, would the
prescribed authority be justified in rejecting the application for approval
u/s. 10(23C)(via) of the Act.

ii)   Merely because it
charges fees for educational courses or that it enters into arrangements with
other institutions to set up satellite centres, to give medical treatment, or
that its treatment involved a layered subsidisation programme, that would not
justify rejection of its application. Therefore, denial of exemption u/s. 10
23C)(via) was not justified and the order was to be quashed.

iii)  The
Revenue is directed to consider the petitioners application, process it and
pass necessary orders in accordance with law within four weeks from today.”

26 Capital gains – Transfer – Joint development agreement (JDA) – Section 2(47), r.w.s. 53A of the Transfer of Property Act, 1882 – A. Y. 2008-09 – Assessee was member of cooperative housing society which owned certain land – Society entered into tripartite JDA with developers but the JDA was not registered – Assessee was entitled to receive monetary consideration partly in money and balance as a part of built up property – During relevant assessment year, assessee actually received proportionate amount – Unregistered JDA does not fall u/s. 53A of Transfer of Property Act; does not amount to transfer – Tribunal was justified in holding that assessee was not liable to capital gain tax

Princ. CIT vs. Dr. Amrik Singh Basra; [2017] 82
taxmann.com 186 (P & H):

The assessee was a member of a cooperative housing building
society. The society entered into a tripartite ‘JDA’ with developers, viz.,
‘HASH’ and ‘THDC’ under which it was agreed that HASH and THDC would undertake
development of land owned and registered in the name of the society. The agreed
consideration to be paid by the developers was to be disbursed to each individual
member of the society partly in monetary and balance in terms of built up
property. The assessee was entitled to receive proportionate amount.

The Assessing Officer held that impugned transaction involved
allowing the possession of the immovable property to be taken or retained in
part performance of contract of the nature referred to in section 53A of 1882
Act; and thus, it would be treated as transfer for purposes of Income-tax Act.
The Assessing Officer concluded that the assessee was liable to tax during
current assessment year under consideration on the entire amount
received/receivable in future under the head ‘capital gains’. Commissioner
(Appeals) and the Tribunal deleted the addition.

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

“i)   The High Court in
the case of C. S. Atwal vs. CIT [2015] 378 ITR 244/234 Taxman 69/59
taxmann.com 359 (P&H) had arrived at the conclusion that:

–     The parties had
agreed for pro-rata transfer of land.

–     No possession had
been given by the transferor to the transferee of the entire land in part
performance in JDA so as to fall within the domain of section 53A of 1882 Act.

–     The possession
delivered, if at all, was as a licencee for the development of the property and
not in the capacity of a transferee.

–     Further section 53A
of 1882 Act, by incorporation, stood embodied in section 2(47)(v) and all the
essential ingredients of section 53A of 1882 Act were required to be fulfilled.
In the absence of registration of JDA, the agreement does not fall u/s. 53A of
the 1982 Act and consequently s. 2(47)(v) does not apply.

ii)   The
appellant-revenue has not been able to controvert the applicability of the
decision rendered in C.S. Atwal’s case (supra). The substantial
questions of law claimed in these appeals are answered accordingly.
Consequently, both the appeals stand dismissed.”

25 Business expenditure – Capital or revenue – Section 37 – A. Y. 2005-06 – Lease rent paid for plot allotted for period of 10 years by Gujarat Maritime Board – Allowable as revenue expenditure

CIT vs. Mahavir Inductomelt P. Ltd.; 394 ITR 50(Guj):

For the A. Y. 2005-06, the assessee claimed deduction of a
sum of Rs. 18,66,450 as premium paid on plot allotted by the Gujarat Maritime
Board as expenditure in its business of ship breaking. The assessee paid this
amount as premium on leasehold property. According to the Assessing Officer,
the assessee acquired this plot from the Board under lease and the lease
agreement was for 10 years and accordingly, this was a capital asset and
payment made for acquiring capital asset was capital expenditure. The Assessing
Officer allowed deduction only of one tenth of the expenditure. The
Commissioner (Appeals) and the Tribunal deleted the addition.

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

“i)   The amount paid by
the assessee with respect to plot allotted by the Board was allowable as
revenue expenditure.

ii)   The
appeal is dismissed.“

24 Business expenditure – Accrued or contingent liability- A. Y.s. 2001-02 and 2002-03 – Award of damages with interest in arbitration made rule of court – Assessee disputing award of damages and interest and dispute pending before Division Bench – Grant of stay by Division Bench does not relieve assessee from liability of interest – Entitled to deduction on interest

National Agricultural Co-operative Marketing Federation of
India Ltd. vs. CIT; 393 ITR 666 (Del):

For the A.Y.s 2001-02 to 2003-04, the assessee claimed
deduction of interest payable to A, on account of an arbitration award on the
outstanding amount of the award. The Court made the award rule of the Court in
proceedings initiated by A  u/s.5 of the
Foreign Awards (Recognition and Enforcement) Act, 1961 and held that  A was entitled to interest. On appeal by the
assessee against such award, the Court granted stay of the execution of the
decree. The Assessing Officer disallowed the claim for deduction by the
assessee for the A. Y. 2001-02 and 2003-04 and held that the liability of the
assessee was contingent and that it had not been entered in the books of account.
The Appellate Tribunal allowed deduction of interest for the A. Y. 2003-04.

The members of the Appellate Tribunal who heard the appeals
for the A. Y.s. 2001-02 and 2002-03 disagreed with the earlier order for the A.
Y. 2003-04. A reference was made to the Special Bench of the Appellate Tribunal
which held that the assessee had not incurred the liability for the payment of
the interest at the end of the assessment years in question and that under the
mercantile system of accounting, deduction could be granted only where the
incurring of the liability was a certainty. It held that there was no legally
enforceable liability of interest that existed against the assessee. It further
held that where the claim to damages and interest thereon was disputed by the
assessee in a Court, the deduction could not be allowed for the interest on such
damages. It concluded that as a result of the stay order granted by the
Division Bench of the Court, the liability of the assessee to pay interest
remained suspended from the date of stay.

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

“i)   With the award
being made rule of the Court by a single judge, the mere fact that the judgment
and decree was stayed by the Division Bench would not relieve the assessee of
its obligation to pay in terms thereof to A. Such liability had commenced in
the previous year in which the judgment and decree was passed by the single
judge. The order of the Special Bench of the Appellate Tribunal confirming the
disallowance of interest was unsustainable.

ii)   Appeal
is allowed.”

23 Appeal to High Court – Limitation – Appeal by Department – Receipt of copy of order of Tribunal by any of officers in Department including Commissioner (Judicial) will trigger period of limitation – Internal arrangements by Department changing jurisdiction of its officers will not alter period of limitation – Administrative instructions for administrative convenience of Department do not override statute particularly section 260A(2)(a)

CIT vs. Odeon Builders P. Ltd.; 393 ITR 27 (Del)(FB):

On 29/10/2014, the Tribunal had passed a common order in a
batch of 115 cases. A certified copy thereof was received in the office of the
CIT, Ghaziabad on 19/12/2014 and in the office of the Principal Commissioner
Delhi on 28/04/2015. The Department filed an appeal before the High Court on
25/08/2015. Assessee contended that the appeal was filed beyond the limitation
period. The Department explained that at the time the appeals were heard by the
Tribunal, the Commissioner, Ghaziabad was the concerned Commissioner and pursuant
to certain administrative orders issued by the Department, the jurisdiction
relating to the assessee was transferred to the Commissioner, Delhi. The
certified copy was received by the Commissioner, Delhi on 28/04/2015 and the
Commissioner, Delhi thereafter took a decision regarding filing of appeals.
Another appeal against the order of the Tribunal dated 16/05/2014 was filed by
the Department in the High Court on 14/01/2015. The assessee contended that in
accordance with the stamp borne on the certified copy of the order, the Copy of
the order was available with the Commissioner (Judicial) on July 23, 2014 and
with the Commissioner (Central) on July 25, 2014 and therefore, the appeal
which was filed on January 14, 2015 was beyond 120 days from the date of
receipt of the certified copy. The Department contended that limitation would
start to run only from the date of service of the order of the Tribunal on the
concerned Commissioner having jurisdiction over the assessee.

The Full Bench of the Delhi High Court held as under:

“i)   The word “received”
occurring in section 260A(2)(a) of the Income-tax Act, (hereinafter for the
sake of brevity referred to as the “Act”) 1961 would mean received by
any of the named officers of the Department, including the Commissioner
(Judicial). The provision names four particular officers, i.e., the Principal
Commissioner, Commissioner, Principal Chief Commissioner, and Chief
Commissioner of Income Tax. These were the only designated officers who could
receive a copy of the order. In the absence of a qualifying prefix “concerned”,
the receipt of a copy of the order of the Tribunal by any of those officers in
the Department including the Commissioner (Judicial), would trigger the period
of limitation.

ii)   The statute was not
concerned with the internal arrangements that the Department might make by
changing the jurisdiction of its officers. It was for the officer of the
Department who first received a copy of the Tribunal’s order to reach in time
to the officer who was to take a decision regarding the filing of an appeal.

iii)   Where there was a
common order of the Tribunal covering the several appeals, limitation would
begin to run when a certified copy was received first by either the
Commissioner (Judicial) or one of the officers of the Department and not only
when the Commissioner “concerned” receives it. When the same Commissioner had
jurisdiction for more than one assessee, the limitation would begin to run for
all from earliest of the dates when the Departmental representative of the
Commissioner (Judicial) or any Commissioner first receives the order in any of
the cases forming part of the batch disposed by the common order.

iv)  If there were four
separate orders passed, the limitation would begin to run when such separate
orders are received first by any officer of the Department.

v)   Instructions issued
by the Department for its administrative convenience could not alter the time
when limitation would begin to run u/s.260A(2)(a) of the Act. Administrative
instructions are for the administrative convenience of the Department and would
not override the statute, in particular section 260A(2)(a) of the Act.”

15. Krishna Enterprises vs. Addl. CIT (Mum) Members: R. C. Sharma (AM) and Ravish Sood (JM) ITA No. 5402/Mum/2014 A.Y.: 2007-08. Dated: 23rd November, 2016. Counsel for assessee / revenue: Sashank Dandu / A. Ramachandran

Section 50C – AO is not justified in
substituting the value determined by DVO for the sale consideration disclosed
by the assessee in a case where the difference between the sale consideration
of the property as shown by the assessee and FMV determined by the DVO u/s.
50C(2) is less than 10 percent.

FACTS  

On 07.8.2006, the assessee sold four flats
for a consideration of Rs. 1,96,60,000. 
Since the sale agreements were not registered it was submitted that it
was not possible to determine the stamp duty value as per the provisions of
section 50C of the Act.  The Assessing
Officer (AO) referred the valuation of these flats to DVO who declared the
value of the flats to be Rs. 2,07,51,130. 
The difference between the valuation as done by the DVO and the amount
of consideration was added by the AO in assessee’s income u/s. 50C. 

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

Aggrieved, the assessee preferred an appeal
to the Tribunal where it was argued on its behalf that the provisions of
section 50C are not applicable to the facts of the case in AY 2007-08 and since
the total addition is only a small percentage (5.5%) of the total consideration
it needs to be ignored for computing long term capital gain by relying on the
ratio of the decision of Pune bench of the tribunal in the case of Rahul
Constructions vs. DCIT (Pune)(Trib) 38 DTR 19 (2010)(ITA No. 1543 / Pn/2007). 

HELD  

Since the transactions were entered during
the financial year 2006-07 which is prior to 1.10.2009, being the date from
which the amendment to section 50C is effective, as per CBDT Circular No.
5/2010 dated 3.6.2010, the provisions of section 50C are not applicable in so
far as sales deed so executed were not registered with the Stamp Duty Valuation
Authority.  Also, since the difference
between the sale consideration of the property shown by the assessee and the
FMV determined by the DVO u/s. 50C(2) is less than 10%, AO was not justified in
substituting the value determined by the DVO for the sale consideration
disclosed by the assessee. 

The Tribunal allowed the appeal filed by the
assessee.

18. [2017] 77 taxmann.com 49 (Delhi – Trib.) Gopal Saran Darbari vs. ITO A.Ys.: 2007-08 & 2008-09 Date of Order: 25th October, 2016

Section 54 – Even if an assessee acquires a
new house on credit i.e. the payment for which may be made in future, the
assessee cannot be denied the benefit of deduction u/s. 54.

FACTS 

For AY 2007-08,
the assessee in his return of income filed u/s. 139(1) returned long term
capital gain of Rs. Nil after deduction of Rs. 51,27,000 u/s. 54 of the
Act.  This sum of Rs. 51,27,000 comprised
of Rs. 35,00,000 deposited in Capital Gain Account and Rs. 15,27,000 paid to
Ajay Enterprises, a builder, for booking the flat.  During the course of assessment proceedings,
the Assessing Officer, on examination of receipts issued by the builder,
noticed that the assessee had booked two flats viz. A-907 and C-408 and payment
of Rs. 15,27,000 to the builder comprised of Rs. 5,77,000 for Flat No. A-907
and Rs. 9,50,000 for Flat No. C-408.  The
assessee admitted that the amount of Rs. 9,50,000 invested for flat no. C-408
was wrongly considered u/s. 54.  The
Assessing Officer (AO) worked out capital gain after indexation to be Rs.
49,78,349 and allowed deduction of Rs. 40,77,000 u/s. 54 – comprising of Rs.
35,00,000 deposited in capital gain account and Rs. 5,77,000 paid to builder
for flat A-907.  The AO assessed long
term capital gain to be Rs. 9,01,349.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal where it was contended that the assessee has upto 4.12.2008
invested a total sum of Rs. 61,74,683 for purchase of a new house, therefore
there was substantive compliance of section 54 by making required investment in
the new house within the period specified u/s. 54.  For this proposition reliance was placed on
the following decisions –

I)   ITO vs. Smt. Sapana
Dimri [2012] 50 SOT 96 (Delhi)

     ii)  CIT vs. Ms. Jagriti Aggarwal [2011] 339 ITR 610 (P & H)

iii)  Kishore H. Galaiya vs.
ITO [2012] 137 ITD 229 (Mum)

iv) CIT vs. Rajesh Kumar
Jalan [2006] 286 ITR 274 (Gau)

v)  K. S. Ramchandran vs.
ITO [IT Appeal No. 941 (Mds.) of 2011]

HELD 

The Tribunal noted that the assessee had not
surrendered or offered the amount of Rs. 9,50,000 for addition. Before the AO
the assessee stated that the amount of Rs.9.50 lakh should not be considered as
investment u/s. 54.  Even without considering
this amount of Rs. 9.50 lakh, the actual investment by the assessee in purchase
of eligible new house within the specified period of 3 years was more than the
long term capital gain.

Even if an assessee acquires a new house on
credit i.e. the payment for which may be made in future, the assessee cannot be
denied the benefit of deduction u/s. 54 because what is required by sub-clause
(i) is that cost of new house should be equal to or more than the amount of
long term capital gain.

The requirement to invest in a bank account
under the capital gain account scheme is a procedural requirement to ensure
that investment is made in a residential house as claimed in the return of
income. Merely because of technical breach / non-compliance the benefit due to
the assessee by the legislature cannot be denied particularly when there is
substantive compliance made.  Section 54
is a beneficial section and as held by the Apex Court in Bajaj Tempo Ltd.
vs. CIT [1992] 196 ITR 188 (SC) the provisions of a beneficial section
should be construed liberally.

For the above stated reasons and having
considered the ratio of the decisions relied upon by the assessee, the Tribunal
deleted the addition of Rs. 9,01,349.

The Tribunal allowed the appeal filed by the
assessee.

14. Kanungo Ferromet Pvt. Ltd vs. Addl. CIT (Mum) Members : Mahavir Singh (JM) and Ramit Kochar (AM) ITA No. 995/Mum/2014 A.Y.: 2005-06. Date of Order: 4th January, 2016. Counsel for assessee / revenue: Rajkumar Singh / Vikash Kumar Agarwal

Section 271E – Penalty u/s. 271E cannot be
levied in a case where repayment is made by an account payee cheque, though in
the name of the director of the company.

FACTS  

During assessment year 2004-05, the assessee
company, in the normal course of its business, advanced a sum of Rs. 15 lakh to
Shri R. Bhaskaran.  The advance was given
for intended business deal by the assessee company which could not materialise
and therefore the said advance payment was returned by Shri R. Bhaskaran, in
the assessment year 2005-06, through account payee cheque in the name of the
Director of the assessee company Shri Om Prakash Kanungo instead of paying it
back directly to the assessee company. 
The assessee company passed a journal entry debiting the loan account of
Shri Om Prakash Kanungo, Director of the company and credited the advance
account of Shri R. Bhaskaran.

The Assessing Officer (AO) held that the
provisions of section 269T are violated since according to him the assessee
company has received the repayment of the sum of Rs. 15 lakh advanced by it to
R. Bhaskaran in cash.  He levied penalty
u/s. 271E of the Act for violation of the provisions of section 269T of the
Act. 

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD  

The repayment is made by account payee
cheque although in the name of one of the directors of the assessee company.
The Tribunal found that there is a reasonable cause rather the payment is
through account payee cheque.  In its
view, there was no violation of provisions of section 269T and consequential
penalty u/s. 271E was without any basis. 

The Tribunal deleted the penalty and allowed
the appeal filed by the assessee.

20. [2017] 77 taxmann.com 153 (Kolkata – Trib.) BMW Industries Ltd. vs. DCIT A.Y.: 2011-12 Date of Order: 2nd December, 2016

Section
80IA  – The expression ‘owned’ referred
to in section 80IA(4)(1)(a) refers to ownership of the enterprise and not the
ownership of the infrastructure facility that is created.

The definition of `Infrastructure
facility’  as mentioned in Explanation to
section 80IA(4)(i) covers any road including toll road.  It need not be coming under expressway or
highway category.

FACTS 

The assessee filed its return of income
showing total income of Rs.20,48,49,810. 
In arriving at the total income the assessee claimed deduction of Rs.
1,49,16,548 u/s. 80IA(4)(i) towards profits derived from developing, operating
and maintaining infrastructure facility. The Assessing Officer (AO) examined
the claim and reduced it by a sum of Rs. 2,78,385 being amount of proportionate
head office expenses allocated by him towards this unit. 

The CIT in
exercise of his powers u/s. 263 was of the view that the order of the AO in so
far as it relates to allowing the claim of the assessee for deduction u/s.
80IA(4)(i) of the Act was erroneous and prejudicial to the interest of the
revenue.  According to him, the assessee
was merely executing the job of civil construction on the basis of works
contract awarded by Executive Engineer. 
He was also of the view that the roads constructed by the assessee were
not coming under expressway or highway category as mentioned in the Explanation
to the section.  The assessee was not a
developer of an infrastructure facility and was not eligible to claim deduction
u/s. 80IA(4)(i).

HELD

The Tribunal observed that it cannot be said
that the AO failed to deal the specific facts of the case as per law and has
not scrutinised/verified the details in respect of the issues raised in the
show cause notice u/s. 263 of the Act.

The expression “owned” in
sub-clause (a) of clause (1) of sub-section (4) of section 80-IA of the Act
refers to ownership of the enterprise and not the ownership of the
infrastructure facility that is created. The ownership of the enterprise should
be that of a company and not any other person like individual, HUF, Firm etc.
sub-clause (a), clause (i) of sub-section (4) of section 80-IA uses the word
“it” and that denotes the enterprise carrying on the business. The
word “it” cannot be related to the infrastructure facility,
particularly in view of the fact that infrastructure facility includes Rail system,
Highway project, Water treatment system, Irrigation project, a Port, an Airport
or an Inland port which cannot be owned by any one. Even otherwise, the word
“it” is used to denote an enterprise. Therefore, there is no
requirement that the assessee should have been the owner of the infrastructure
facility.

The question as to whether the assessee is
‘developer’ or ‘contractor’ has to be tested in the light of the decisions
rendered on the issue by the Hon’ble Bombay High Court in the case of ABG Heavy
Industries (supra) and the order of the Division Bench of ITAT giving
effect to the larger bench (third member) decision in the case of B.T. Patil
& Sons (supra). According to these decisions, what is to be seen is
as to whether the assessee has shouldered out Investment & technical risk
in respect of the work executed and it is liable for liquidated damages if it
failed to fulfill the obligation laid down in the agreement. The liability that
was assumed by the assessee under terms of the contract would be obligations
involving the development of an infrastructure facility. The assessee has also
in its employment technically and administratively qualified team of persons.
If the above conditions are satisfied then it would not be correct to say that
assessee is merely a contractor and not a developer. Without giving adverse
finding on the above tests, the CIT could not conclude that the order of the AO
was erroneous and prejudicial to the interest of the revenue.

As regards the observation of the CIT that
the roads construed by the Assessee were not coming under expressway or highway
category as mentioned in the Explanation to section 80IA(4)(i) of the Act,
which defines Infrastructure facility for the purpose of claiming deduction
under the aforesaid section the Tribunal held that the definition covers any
road including toll road. It need not be coming under expressway or highway
category.

The Tribunal allowed the appeal filed by the
assessee.

19. [2016] 76 taxmann.com 165 (Bangalore – Trib.) S. K. Properties vs. ITO A.Y.: 2007-08 Date of Orderd: 4th November, 2016

Sections
5, 145  – In case of a developer selling
plots, income in respect of sale of plots can be recognised only in the year in
which conveyance deed executed is registered in favour of the buyers and it in
that year that development expenditure incurred as expenditure or expenditure
likely to be incurred on the plot is to be allowed.  This is in consonance with provisions of AS 9
which clearly lays down that matching is required to be done on accrual basis
in respect of income offered to tax. 

FACTS 

The assessee firm, engaged in the business
of development of property, recognised revenue only in the year in which the
plots were sold and conveyance deed registered. It filed its return of income
declaring total income to be Rs. Nil. 
The Assessing Officer (AO), in the course of assessment proceedings was
of the view that revenue should be recognised at every stage of receipt of sale
consideration.  He, therefore, rejected
the method of accounting followed by the assessee and assessed the total income
to be Rs. 2,37,37,172.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal where it was contended that revenue in respect of sale of plots
can be recognised only when the risk and rewards and ownership of the plots are
transferred to the buyers till such time the revenue cannot be recognised on
sale of plots.

HELD 

The Tribunal observed that the assessee has
recognised the income in respect of sale of plots by adopting Completed
Contract Method, whereas, the AO is of the view that income should be offered
to tax received on year to year basis based on the stage of receipt of
consideration, irrespective of the fact that the title in the plots have been
passed on to the buyer or not. It also noted that the plots formed part of
stock-in-trade of the assessee firm and are immovable properties.The title in
immovable property can be passed only in terms of the provisions of the
Transfer of Property Act. 

The Tribunal noted the ratio of the decision
of the Karnataka High Court in the case of Wipro Ltd. vs. DCIT [2016] 382
ITR 179 (Kar.) and held that the provisions of section 2(47) of the Act
have no application to the transactions of stock-in-trade. In this case, the
stock-in-trade is immovable property and the title in immovable property can be
transferred or alienated in accordance with the provisions of the Transfer of
Properties Act. The right, title or interest in the immovable property can be
transferred only by way of registering the conveyance deed executed in this
behalf. Even the Accounting Standard 9 dealing with the recognition of income
also lays down that the income in respect of transfer of immovable property can
be recognised only when the risks, rewards and ownership of the property is
transferred to the buyer.

It held that the matter requires a fresh
examination by the AO in the light of the above position of law. The Tribunal
remanded the matter back to the file of the AO with a direction that the income
in respect of sale of plots can be recognised only in the year in which
conveyance deed executed is registered in favour of the buyers and to allow the
development expenditure incurred as expenditure or the expenditure likely to be
incurred on the plots sold as expenditure. It held that this direction also
goes in line with and is in consonance with the provisions of Accounting
Standard 9 which clearly lays down that matching is required to be done on
accrual basis in respect of the income offered to tax and upheld by Hon’ble
Supreme Court in the case of Taparia Tools Ltd. vs. Jt. CIT [2015] 372 ITR
605 (SC).

37. Appellate Tribunal – Rectification of mistake – Section 254(2) – Mistake can be on part of litigants or his advisors

Binaguri Tea Co. Pvt. Ltd. vs. Dy. CIT; 389 ITR 648 (Cal):

While assessing the fringe benefit tax, the Assessing Officer
gave the assessee the benefit applicable under rule 8 of the Income-tax Rules
1962. However, invoking section 154, of the Income-tax Act, 1961 (hereinafter
for the sake of brevity referred to as the “Act”) the Assessing
Officer withdrew the benefit. The Commissioner(Appeals) confirmed the
rectification order. The assessee filed an appeal before the Appellate Tribunal
contending that the Commissioner (Appeals) had erred in holding that Rule 8 had
no applicability while calculating the eligible expenses of a company engaged
in the business of cultivation, manufacture and sale of tea for the purpose of
fringe benefit tax. Based on the Tribunal decisions against the assessee, the
assessee was advised by the advisors not to press the appeal. Accordingly, the
assessee did not press the appeal and the Appellate Tribunal dismissed the
appeal. It was subsequently noticed that the said Tribunal decisions were
reversed by the Calcutta High Court and the issue was decided in favour of the
assessee even before the dismissal order of the Tribunal. Therefore, within two
months of the order of the Tribunal, the assessee applied for restoration of
the appeal u/s. 254(2) of the Act which was rejected by the Tribunal for the
following reasons.

“The learned counsel for
the assessee reiterated the stand of the assessee as contained in the
miscellaneous application. We are of the view that jurisdiction u/s. 254(2) of
the Act can be exercised only to rectify an error apparent on the face of the
record. The contention in the miscellaneous application, even if true, cannot
give rise to any mistake in the order of the Tribunal apparent on the face of
the record. The miscellaneous application, in our view, cannot therefore be entertained
and the same is hereby rejected.”

On appeal by the assessee, the Calcutta High Court allowed
the appeal and held as under:

“i)   Section 254(2) of the Act did not provide
that it had to be a mistake solely on the part of the Appellate Tribunal to
recall an order and that the statutory power could also be exercised in the
case of mistake apparent on the part of the litigants or his advisors.

ii)   Neither the Appellate Tribunal nor the
assessee was aware of the judgment of the jurisdictional High Court. Therefore,
the prayer for leave to withdraw the appeal and the order allowing the prayer
were both based on a mistake. The order of the Tribunal is set aside.

iii) The Tribunal shall hear the appeal on
merits.”

Interest Income of a Credit Society and Deductibility U/S. 80p

Issue for Consideration

Section 80P of the Income-tax Act grants a deduction to an
assessee, being a co-operative society, in respect of such sums that,
inter-alia, includes the whole of the amount of profits and gains of business
attributable to any one or more of such activities which are listed in clauses
(i) to (vii) of clause (a) of sub-section (2). One of the sub-clauses grants a
deduction for a co-operative society engaged in carrying on the business of
banking or providing credit facilities to its members.

The Courts, in the past, have time and again examined the
true meaning of the term ‘attributable’, and have found the same to be of wider
import in contrast to the term ‘derived from’. Based on such interpretation,
the courts have been inclined to include income from activities incidental to
the main business or activity of the assessee, and have held that such incidental
income too was eligible for deduction, inasmuch as such income was profits and
gains attributable to the business.

In the recent past, the Supreme Court, in the case of Totgars
Co-operative Sale Society Ltd., 322 ITR 283 held that income from interest
on deposits with the bank, earned by a credit society, was to be taxed u/s.56
of the Income-tax Act.

The above mentioned decision in Totgars Co-operative Sale
Society’s case has become a subject matter of controversy leading to
conflicting decisions of the High Courts, whereunder, the Gujarat High Court
followed the said decision, but the Karnataka High Court chose to distinguish
the same on facts, and the Andhra Pradesh High Court held the said decision to
be applicable only to Totgars Co-operative Sale Society Limited. In fact, the
ratio of the said decision and its applicability has also become debatable.

Tumkur Merchants Souharda Credit Cooperative Ltd.’s case

The issue arose in the case of Tumkur Merchants Souharda
Credit Cooperative Ltd. vs. Income-tax officer, 55 taxmann.com 447 (Karnataka).
The assessee, a Cooperative Society registered under the provisions of section
7 of the Karnataka Co-operative Societies Act, 1959, was engaged in the
activity of carrying on the business of providing credit facilities to its
members. It filed the return of income for the assessment year 2009-10,
declaring a total income of Rs. NIL, after claiming a deduction of
Rs.42,02,079/- under the provisions of section 80P of the Act in respect of its
business income, which, inter alia, included interest from short term
deposits and savings bank accounts aggregating to Rs. 1,77,305.

The assessing authority denied the deduction claimed u/s. 80P
and passed an order of assessment, determining a total income of
Rs.42,02,079/-, as against the declared income of Rs.NIL. Aggrieved by the said
order, the assessee preferred an appeal to the Commissioner of Income Tax
(Appeals) who held that assessee’s interest income earned from short-term
deposits with Allahabad Bank of Rs. 1,55,300/- and savings bank account with
Axis Bank of Rs.22,005/-, totalling to Rs. 1,77,305/- was liable to income tax,
in view of the judgment of the Apex Court in the case of Totgars Cooperative
Sale Society Ltd. vs. ITO, 322 ITR 283(SC).

Aggrieved by that part of the order, the assessee preferred
an appeal to the Tribunal, which dismissed the appeal, following the judgment
of the Apex Court in the aforesaid case. Aggrieved by the said order, the
assessee filed the appeal challenging the order passed by the Tribunal
raising the following substantial question of law: ‘”Whether the Tribunal
failed in law to appreciate that the interest earned on short-term deposits
were only investments in the course of activity of providing credit facilities
to members and that the same cannot be considered as investment made for the
purpose of earning interest income and consequently passed a perverse
order?”

The assessee, assailing the impugned order, contended before
the Karnataka High Court, that the interest accrued in a sum of Rs. 1,77,305/-
was from the deposits made by the assessee in a nationalised bank out of the
amounts which was used by the assessee for providing credit facilities to its
members, and therefore the said interest amount was attributable to the credit
facilities provided by the assessee, and formed part of profits and gains of
business. It therefore submitted that the appellate authorities were not
justified in denying the said benefit in terms of sub-section (2) of section
80P of the Act. In support of the contention that the interest income was
eligible for deduction u/s. 80P, it relied on several judgments, and pointed
out that the Apex Court in the aforesaid judgment had not laid down any law. In
reply, the Revenue strongly relied on the said judgment of the Supreme Court in
Totgars Co-operative Sale Society Ltd. (supra), and submitted that the
case before the court was covered by the judgment of the Apex Court and no case
for interference was called for.

The Karnataka High Court, on hearing the facts and the rival
contentions, noted the undisputed facts emerging that the assessee was a
co-operative society providing credit facilities to its members, was not
carrying on any other business and that the interest income earned by the
assessee by providing credit facilities to its members was deposited in the
banks for a short duration, which had earned interest in the sum of Rs.
1,77,305/- . 

Analysing the provisions of section 80P, the court found that
the word ‘attributable’ used in the said section was of great importance. It
took note of the fact that the Apex Court had considered the meaning of the
word ‘attributable’ as opposed to ‘derived from’ in the case of Cambay
Electric Supply Industrial Co. Ltd. vs. CIT ,113 ITR 84. The court found
from the above decision that the word “attributable to” was certainly
wider in import than the expression “derived from”, and whenever the
legislature wanted to give a restricted meaning, they had used the expression
“derived from”. The expression, “attributable to”, being of
wider import, was used by the legislature whenever they intended to gather
receipts from sources other than the actual conduct of the business. 

The court observed that a cooperative society, which was
carrying on the business of providing credit facilities to its members, earned
profits and gains of business by providing credit facilities to its members;
the interest income so derived and the capital, if not immediately required to
be lent to the members, could not be kept idle, and the interest income earned
on depositing such balance in hand was to be treated as attributable to the
profits and gains of the business of providing credit facilities to its members
only; the society was not carrying on any separate business for earning such
interest income; the income so derived was the amount of profits and gains of
business attributable to the activity of carrying on the business of banking or
providing credit facilities to its members by a co-operative society and was
liable to be deducted from the gross total income u/s. 80P of the Act.

The court further observed that the Apex Court in the case of
Totgars Co-operative Sale Society Ltd.(supra), on which reliance was
placed, was dealing with a case where the assessee – cooperative society, apart
from providing credit facilities to the members, was also in the business of
marketing of agricultural produce grown by its members and the sale
consideration received from marketing agricultural produce of its members was retained
in many cases, and the said retained amount which was payable to its members
from whom produce was bought, was invested in a short-term deposit/security;
such an amount which was retained by the assessee – society was a liability and
it was shown in the balance sheet on the liability side; therefore, to that
extent, such interest income could not be said to be attributable either to the
activity mentioned in section 80P(2)(a)(i) of the Act or u/s. 80P(2)(a)(iii) of
the Act; in the facts of the said case, the Apex Court held that the assessing
officer was right in taxing the interest income u/s. 56 of the Act after making
it clear that they were confining the said judgment to the facts of that case.
It was clear to the Karnataka high court that the Supreme Court in Totgars
Co-operative Sale Society Ltd.(supra) was not laying down any law.

In the instant case, the court noted that the amount which
was invested in banks to earn interest was not an amount due to any members; it
was not the liability; it was not shown as liability in the accounts and that
the amount which was in the nature of profits and gains, was not immediately
required by the assessee for lending money to the members, as there were no
takers. Therefore, they had deposited the money in a bank so as to earn
interest. The court accordingly held that the said interest income was
attributable to carrying on the business of banking and was liable to be
deducted in terms of section 80P(1) of the Act. The court cited with approval
the decision of the Andhra Pradesh High Court in the case of CIT vs. Andhra
Pradesh State co-operative Bank Ltd.,200 Taxman 220.               

State Bank Of India (SBI)’s case

The issue again arose in the case of State Bank of India
vs. CIT , 74 taxmann.com 64 before the Gujarat high court. The assessee, a
co-operative society, namely State Bank of India Employees Co-op Credit and
Supply Society Ltd. was registered under the Gujarat Co-operative Societies
Act, 1961 with the object of accepting deposits from salaried persons of the
State Bank of India, Gujarat region, with a view to encourage thrift and
providing credit facility to them. It had launched various deposit schemes such
as Term Deposit, Recurring Deposit, Aid to Your Family Scheme, Members Retiring
Benefit Fund etc., and at the same time, was advancing loans to the
members, such as consumer goods loan, car-vehicle loan, food grain loan and
general purposes loan, etc. It had filed its return of income for
assessment year 2009-10 and 2010-11, declaring total income at Rs. Nil, after
claiming deduction u/s. 80P of the Income-tax Act, 1961 of Rs.29,69,444/- and
Rs.43,64,828/-.respectively.

The matter was taken up in
scrutiny by the Assessing Officer who called for various details, including
justification regarding claim of deduction u/s. 80P of the Act vide notice
u/s. 142(1). The society submitted its replies, narrating the nature of
activities carried out by it, and details of claim of deduction u/s. 80P with
copy of bye-laws, and the Assessing Officer framed assessment u/s. 143(3) of
the Act accepting the claim.

Subsequently, the Commissioner of Income Tax invoked powers
u/s. 263 of the Act, proposing to revise the above order on the ground that
interest income of Rs.16,14,579/- for assessment year 2009-10 and of
Rs.32,83,410/- from the State Bank of India for assessment year 2010-11 was not
exempt u/s. 80P(2)(d) of the Act. In response, the assessee contended that the
interest income was business income, and was exempt u/s. 80P(2)(a)(i) of the
Act. The Commissioner of Income Tax did not find the explanation satisfactory,
on the ground that interest income was not business income, so as to be exempt
u/s. 80P(2)(a)(i) of the Act. Hence, the assessment order was held to be
erroneous and prejudicial to the revenue.

Being aggrieved, the appellant carried the matter in appeal
before the Income Tax Appellate Tribunal, which held that interest income
earned from members on grant of credit did not have nexus with the interest
earned on deposits made with SBI, and could not be said to be the one arising
from business of providing credit facility to its members, by drawing support
from the decision of the Supreme Court in Totgars Co-operative Sales Society
Ltd. vs. ITO 322 ITR 283(SC) .

The assessee being aggrieved, raised substantial questions of
law in appeal for consideration of the Gujarat High Court, which included ;

‘(1)     Whether on the facts and in the
circumstances of the case, ………… ?

(2)      Whether on the facts and in the
circumstances of the case, the Income Tax Appellate Tribunal was justified in
holding that interest income of Rs……………. on deposits placed with State Bank of
India was not exempt under section 80P(2)(a)(i) of the Income Tax Act, 1961?

On behalf of the society, it was submitted that the assessee
was a co-operative society formed by the employees of the State Bank of India,
Gujarat Circle, under the Gujarat Co-operative Societies Act, 1961 in the
category of Employees’ Co-operative Credit Society for the purpose of
encouragement of savings and providing credit facilities to the members of the
Society; it was not engaged in any other activity except giving credit
facilities to its members, who were employees of State Bank of India, and that
the income generated by the assessee was mainly on account of differential rate
of amount of deposits received from the members and the amount of loans given
to the members; the income generated was only from the contributions received
from the members and it did not deal in any way with any person other than the
members; the employer deducted the contribution from the salary of the
employees and the collective contribution received was remitted to the assessee
society, generally on the first of every month, while the loans were given to
the employees on a fixed day of the month (around 15th of the month)
and not every day, and during the intervening period, the idle money collected
by the assessee was deposited with the State Bank of India for the purpose of
earning interest; as and when the amount was required, the deposits with the
State Bank of India are liquidated and utilised for the purposes of the
assessee.

In the above stated facts, it was pleaded that the deposit of
amount with State Bank of India was during the course of business and was part
of the activities of the assessee society and could not be seen in isolation.
It was submitted that the decision of the Supreme Court in the case of Totgars
Co-operative Sales Society Limited (supra) would not be applicable to the
facts of the present case, inasmuch as to apply the said decision, the
necessary facts had to be on record, and that there was no strait-jacket
formula that the above decision would be applicable. Reliance was placed upon
the decision of the Karnataka High Court in Tumkur Merchants Souharda Credit
Cooperative Ltd. vs. ITO, 55 taxmann.com 447, wherein the court had held
that the word “attributable to” was certainly wider in import than
the expression “derived from” and whenever the legislature used the
expression ‘attributable ‘ they intended to gather receipts from sources other
than the actual conduct of business. Reliance was also placed upon the decision
of the Karnataka High Court in the case of Guttigedarara Credit Co-operative
Society Ltd. vs. ITO, 377 ITR 464 wherein the above view has been
reiterated. Reliance was also placed upon the decision of the Patna High Court
in the case of Bihar State Housing Co operative Federation Ltd. vs. CIT, 315
ITR 286 wherein the court was dealing with the question as to whether on
the facts and in the circumstances of that case, the Tribunal was correct in
holding that the sum of Rs.15,98,590/- received by way of interest on bank
deposit was not ancillary and incidental to carrying on the business of
providing credit facilities to its members and as such, exempt u/s.
80P(2)(a)(i) of the Income-tax Act, 1961. It was submitted that the above
decisions would be squarely applicable to the facts of the present case, as the
factual background in which the said decisions were rendered were similar to
the present case.

It was contended that insofar as the interest earned from
deposits was concerned, section 80P(2)(a)(i) did not make any difference nor
was it possible to read any limitation having regard to the language of the
said provision and every income “attributable to any one or more of such
activities” should be deducted from the gross total income. It was
highlighted that one had to bear in mind the object with which the provision
was introduced, viz. to encourage and promote growth of co-operative sector in
the economic life of the country and in pursuance of the declared policy of the
Government. Reference was made to bye-law 7 of the Bye-laws of the appellant
society to point out that the interest income was a part of the corpus of the
society, and when the corpus was invested, the decision of the Supreme Court in
the case of Totgars Co-operative Sales Society Ltd. (supra) would not be
applicable. It was submitted that the interest income was incidental to the
main activity of the appellant of providing credit facility and that in the
above decision of the Supreme Court, the word ‘incidental’ had not come up for
consideration. In conclusion, it was submitted that the appeals deserved to be
allowed by answering the questions in favour of the assessee and against the
revenue.

Opposing the appeals, it was contended by the Revenue that it
was only the interest received from members towards credit facilities extended
to them that would fall within the ambit of the expression profits and gains of
business attributable to the activities of the appellant; interest from bank on
surplus did not have any direct or proximate connection with the activities of
the society , and hence, it would not be entitled to the benefit of section
80P(2) of the Act in respect of such income.

It was submitted that in case of a credit co-operative
society, it was the income derived from such activity that was exempt.
Adverting to the facts of the present case, it was submitted that the decision
of the Supreme Court in the case of Totgars Co-operative Sales Society Ltd. (supra)
was squarely applicable. It was submitted that section 80P of the Act was based
upon the concept of mutuality, and accordingly exempted any income derived by
the society from its members. As the interest earned from the funds deposited
with the banks lacked the degree of proximity between the appellant and its
members, it could not be categorised as an activity in the pursuit of its
objectives, so as to fall within the ambit of section 80P(2)(a)(i) of the Act.

Reference was made to the decision of the Karnataka High
Court in the case of Totgars Co-operative Sale Society Ltd. (supra), to
point out the nature of the dispute involved in that case. It was submitted
that, in that case, the court was concerned with two activities of the assessee
society: (i) to provide credit facility to its members, and (ii) to market the
agricultural produce of its members. It was submitted that the findings
recorded by the Supreme Court were also in connection with the two activities
and, therefore, to say that the Supreme Court was only concerned with the
surplus of marketing produce was not correct. It was submitted that the
observation regarding the judgment being confined to the facts of that case was
because the assessee was not in the banking business, and all the earlier
decisions in this regard were relating to banking business. It was submitted
that the decision of the Karnataka High Court in the case of Tumkur
Merchants Souharda Credit Cooperative Ltd. (supra) was based upon an
incorrect reading of the above decision of the Supreme Court.

The Gujarat High Court, on hearing the parties to the appeal,
noted that the short question that arose for consideration in these appeals was
as to whether the appellant was entitled to claim deduction u/s. 80P(2)(a)(i)
of the Act in respect of the interest earned on the deposits placed with the
State Bank of India. For the purpose of appreciating the controversy in issue,
it extensively referred to the records of the case and appreciated the
contesting views of the parties before the lower authorities. The court also
examined the ratio of the decision of the Supreme Court in Totgars
Co-operative Sale Society Ltd. (supra), and supplied emphasis where
felt necessary.

Expressing its opinion, the court stated that in case of a
society engaged in providing credit facilities to its members, income from
investments made in banks did not fall in any of the categories mentioned u/s.
80P(2)(a) of the Act; in the case of Totgars Co-operative Sale Society
(supra), the court was dealing with two kinds of activities: interest
income earned from the amount retained from the amount payable to the members
from whom produce was bought and which was invested in short-term
deposits/securities, and the interest derived from the surplus funds that the
assessee therein invested in short-term deposits with the Government
securities. The Gujarat High Court opined that the above decision was not
restricted only to the investments made out of the retained amount which was
payable to its members, but was also in respect of funds not immediately
required for business purposes. For the above reasons, the Gujarat High Court
did not agree with the view taken by the Karnataka High Court in Tumkur
Merchants Souharda Credit Cooperative Ltd. (supra) to the effect
that the decision of the Supreme Court in Totgars Co-operative Sale Society
(supra) was restricted to the sale consideration received from marketing
agricultural produce of its members, which was retained in many cases and
invested in short term deposit/security, and that the said decision was
confined to the facts of the said case and did not lay down any law.

Relying on the principles enunciated by the Supreme Court in Totgars
Co-operative Sale Society (supra), the Gujarat High court held that
in case of a society engaged in providing credit facilities to its members,
income from investments made in banks did not fall within any of the categories
mentioned in section 80P(2)(a) of the Act. In the end, the court did not find
any infirmity in the order passed by the Tribunal warranting interference, and
accordingly held that the Income Tax Appellate Tribunal was justified in
holding that interest income of Rs.16,14,579/- and Rs.32,83,410/-respectively
on deposits placed with State Bank of India was not exempt u/s. 80P(2)(a)(i) of
the Income-tax Act, 1961.

Observations

An assessee, a co-operative society engaged in providing
credit facilities to its members, is entitled to deduction for the whole of the
amount of profits and gains of business attributable to such activity. As per
section 80P(2), in the case of a co-operative society engaged in carrying on
the business of providing credit facilities to its members, what is deductible
is the whole of the amount of profits and gains of business attributable to any
one or more such activities.

A co-operative society which is carrying on the business of
providing credit facilities to its members, earns profits and gains from
business by providing such facilities to its members. The interest income so
earned from members, if not immediately required to be lent to the members,
cannot be kept idle. On deposit of such income in a bank so as to earn
interest, such interest income enhances the capital available for the credit to
its members, besides reducing the cost of interest to members. Such interest so
received from bank has the business nexus, in as much as the source thereof is
the business income, and should be treated as attributable to the profits or
gains of the business of providing credit facilities to its members only, more
so where such deposit with the bank is for short period and further so where
the bye-laws or the enactment require the society to employ funds. The income
so derived is the profits or gains of business that is attributable to the
activity of carrying on the business of providing credit facilities to its
members by a co-operative society and should be eligible for being deducted
from the gross total income u/s. 80P of the Act.

Money is stock-in-trade or circulating capital for a credit
society and its normal business is to deal in money and credit. It cannot be
said that the business of such a society consists only in receiving
contribution from its members. Depositing money with banks or such other societies,
as are mentioned in the objects, in a manner that it may be readily available
to meet the demand of its members, if and when it arises, is a legitimate mode
of carrying on of its business.

The interest received by a credit society on bank deposits,
in any case, is ancillary and incidental to carrying on the business of
providing credit facilities to its members, and as such, is deductible under
the provisions of section 80P(2)(a)(i) of the Act. The nature of credit
business, conducted out of the funds of the employees, clearly creates a
situation where surplus funds are available, which are deposited in a bank,
interest is earned thereon. The placement of such funds, being incidental and
ancillary to carrying on business of providing credit facilities to its
members, and  by reason of section
80P(2)(a)(i) of the Act, the same should be eligible for deduction. 

The business of a credit society essentially consists of
dealing with money and credit. Members put their money in the society at a
small rate of interest. In order to meet their demands, as and when they arise,
the society has always to keep sufficient cash or easily realisable securities.
That is a normal step in the carrying on of the business; in other words, that
is an act done in what is truly the carrying on or carrying out of a business.

It is a normal mode of carrying on credit business to invest
moneys in a manner that they are readily available and that is just as much a
part of the mode of conducting a business as receiving contributions or lending
moneys; that is how the circulating capital is employed and that is the normal
course of business of a credit society. The moneys laid out in the form of
deposits with the bank would not cease to be a part of the circulating capital
of the credit society nor would the deposits cease to form part of its
business. The returns flowing from the deposits would form part of its profits
from its business. In a commercial sense, the managers of the society owe it to
the society to make investments which earn them interest, instead of letting
moneys lie idle. It cannot be said that the funds which were not lent to
borrowers but were laid out in the form of deposits in another bank, to add to
the profit instead of lying idle, necessarily ceased to be a part of the
stock-in-trade of the society, or that the interest arising therefrom did not
form part of its business profits. 

As regards the decision of the Supreme Court in the case of Totgars
Co-operative Sales Society Ltd. (supra), the court, in the facts of that
case, had observed that it was dealing with a case where the assessee –
co-operative society, apart from providing credit facilities to the members,
was also in the business of marketing of agricultural produce grown by its
members; the sale consideration received from marketing agricultural produce of
its members was retained in many cases; the said retained amount which was
payable to its members from whom produce was bought, was invested in a
short-term deposit/security; such an amount which was retained by the assessee
– society was a liability and it was shown in the Balance Sheet on the
liability side. In the above facts, the Supreme Court held that therefore, to
that extent, such interest income could not be said to be attributable either
to the activity mentioned in section 80P(2)(a)(i) of the Act or u/s.
80P(2)(a)(iii) of the Act. In the facts of the said case, the Supreme Court
held that the Assessing Officer was right in taxing the interest income u/s. 56
of the Act. The court further made it clear that it was confining the said
judgment to the facts of the said case and, therefore, was not laying down any
law.

The Supreme Court in that Totgars’ case has held that
interest on such investments, could not fall within the meaning of the expression
“profits and gains of business” and that such interest income could
not be said to be attributable to the activities of the society, namely,
carrying on the business of providing credit facilities to its members or
marketing of agricultural produce of its members. The court held that when the
assessee society provides credit facilities to its members, it earns interest
income and the interest which accrued on funds not immediately required by the
assessee for its business purposes and which had been invested in specified
securities as “investment” were ineligible for deduction u/s.
80P(2)(a)(i) of the Act.

It is true that the apex court, in the case of Totgars
Co-operative Sale Society Ltd.(supra), dealt with a case where the
assessee – co-operative society was also providing credit facilities to the
members besides marketing of agricultural produce grown by its members. On the
available facts, it appears that, in that case, the interest income from bank
was received from the sale consideration received from marketing agricultural
produce of its members, which was retained by the society in many cases before
the same was finally handed over to the members. The said retained amount which
was payable to its members from whom produce was bought, was invested in a
short-term deposit/security. Such an amount which was retained by the assessee
– society was a liability and it was shown in the balance sheet on the
liability side. Relying on such facts found by the Supreme Court, the Karnataka
High Court sought to distinguish the said decision and held that it was not
applicable to the facts of the case before it. Significantly, the Apex court
itself qualified its decision by observing that the decision was confined to
the facts of the said case . In the circumstances, it may be fair to not apply
the ratio of the said decision to the facts of any other case, unless the facts
therein are found to be identical, and are established  to have been considered by the Apex court.

It is most relevant to note that the Apex court in Totgars’
case had no occasion to consider the decisions delivered by the highest
court regularly on the subject, holding that the interest income of a
co-operative bank from its investments with banks or government securities was
eligible for deduction u/s. 80P of the Act. We are of the opinion that had they
been brought to the notice of the court, the decision could have been
different. Another factor that requires that the application of the decision of
the court shall be restricted to Totgars’ case only, is that the court, at no
place, was required to consider whether the income in question could be
considered to be attributable to profits and gains of business or not. The
court was rather concerned about whether the income would be treated as
“profits and gains of business” or from other sources. Again, had the court
been persuaded to consider the language of section 80P and the meaning of the
term “attributable”, we are sure the decision could have been different.

It is also true that this culling of the fact by the
Karnataka High court, from the Supreme court’s decision in Totgar’s
case, has been later on found to be not representing the full facts by the
Gujarat high court by examining the order of the high court passed in Totgars’
case. While that may be the case, it is at the same time important to take into
consideration the fact that the Andhra Pradesh High Court, like the Karnataka
High Court, has also held that the interest income is attributable to carrying
on the main business of banking, and therefore it was eligible for deduction
u/s. 80P(1) of the Act. [Andhra Pradesh State Co-operative Bank Ltd.,200
Taxman 220]. The Andhra Pradesh High Court, while deciding the issue in
favour of the assessee society, did consider the decision of the Apex court in
Totgars’ case. In the circumstances, it may be that the Karnataka High Court
erred in deciding the issue on hand by distinguishing the facts of its case
with that of the facts in Totgar’s case. However the decision could not have
been different once it was appreciated that the income in question was
attributable to the profits and gains of business.

There appears to be merit in the conclusion of the Karnataka
and Andhra Pradesh High Courts, which have based their decisions by following
the ratio of the oft followed decision of the Apex court in Cambay’s case,
dealing with the true meaning of the word ‘attributable’ used in chapter VI-A.
The Apex Court had an occasion to consider the meaning of the word
‘attributable’ in the case of Cambay Electric Supply Industrial Co. Ltd. vs.
CIT 113 ITR 84 as under:

‘As regards the aspect
emerging from the expression “attributable to” occurring in the
phrase “profits and gains attributable to the business of the specified
industry (here generation and distribution of electricity) on which the learned
Solicitor-General relied, it will be pertinent to observe that the legislature,
has deliberately used the expression “attributable to” and not the
expression “derived from”. It cannot be disputed that the expression
“attributable to” is certainly wider in import than the expression
“derived from”. Had the expression “derived from” been
used, it could have with some force been contended that a balancing charge
arising from the sale of old machinery and buildings cannot be regarded as
profits and gains derived from the conduct of the business of generation and
distribution of electricity. In this connection, it may be pointed out that
whenever the legislature wanted to give a restricted meaning in the manner
suggested by the learned Solicitor-General, it has used the expression
”derived from”, as, for instance, in section-80J. In our view, since the
expression of wider import, namely, “attributable to”, has been used, the
legislature intended to cover receipts from sources other than the actual
conduct of the business of generation and distribution of electricity.’

The word “attributable to” is certainly wider in
import than the expression “derived from”. Whenever the legislature
wanted to give a restricted meaning, they have used the expression
“derived from”. The expression “attributable to” being of
wider import, the said expression is used by the legislature whenever they
intended to gather receipts from sources other than the actual conduct of the
business.

The Apex Court, in various decisions, has consistently held
the view that interest income on investments made by the banks was attributable
to the profits and gains of business and was eligible for deduction u/s. 80P of
the Act. [Karnataka State Co-operative Apex Bank, 252 ITR 194 (SC),
Mehsana District, Central Co-operative Bank Ltd., 251 ITR 522 (SC), Nawanshahar
Central Co-operative Bank Ltd.289 ITR 6 (SC), Bombay State Co-operative
Bank Ltd. 70 ITR 86 (SC) (para 16), Bangalore Distt. Co-op. Central Bank
Ltd. 233 ITR 282 (SC), Ponni Sugars & Chemicals Ltd. 306 ITR 392
(SC), Ramanathapuram District Co-operative Central Bank Ltd. 255 ITR 423
(SC), Nawanshahar Central Co-operative Bank Ltd.,349 ITR 689 (SC)].
These decisions are an authority for the proposition that, even though the
investment made does not form part of its main activity, stock in trade or working
capital, still the interest income therefrom would qualify for exemption u/s.
80P of the Income-tax Act.

The Apex court in Nawanshahar Central Cooperative Bank
Ltd.’s case (supra), observed as under. “this Court has consistently held
that investments made by a banking concern are part of the business of banking.
The income arising from such investments would, therefore, be attributable to
the business of bank falling under the head “Profits and gains of
business” and thus deductible under section 80-P(2)(a)( i) of the
Income-tax Act, 1961. This has been so held in Bihar State Coop. Bank Ltd. 39
ITR 114 (SC). Karnataka State Coop. Apex Bank, 259 ITR 144 and Ramanathapuram
Distt. Coop. Central Bank Ltd.255 ITR 423(SC).The principle in these cases
would also cover a situation where a cooperative bank carrying on the business
of banking is statutorily required to place a part of its funds in approved
securities.”

Attention is also invited to clause (b) of sub-section 2 of
section 80P, which clause while providing for deduction for certain primary
societies provides for a deduction in respect of “the whole of the amount of
profits and gains of such business” as against “the whole of the amount of
profits and gains of business attributable to any one or more of such
activities” covered by clause (a) of sub-section 2 of section 80P. A
bare reading of the contrasting provisions clearly shows that scope of clause
(a) is wider than clause (b), plainly on account of the insertion of the terms
‘attributable and activities’. These terms cannot be treated as redundant and
should be given the appropriate meaning.

It is well-settled that a provision for
deduction or tax relief should be interpreted liberally in favour of the
assessee. Such a provision should be construed as to fully achieve the object
of the legislature and not to defeat it. [South Arcot District Cooperative
Marketing Society Ltd.116 ITR 117 (SC), Bajaj Tempo Ltd.196 ITR 188 (SC) and
N.C. Budharaja & Co., 70 Taxman 312(SC).] Liberally interpreting sub-section
2(a)( i) of section 80P of the Act, the conclusion in favour of the assessee
appears to be a better conclusion.

17. [2016] 161 ITD 546 (Chennai Trib.) DCIT vs. Suthanther Assumtha A.Y.: 2010-11 Date of Order: 9th September, 2016.

Section 32, Appendix I to Rule 5 and
Circular No. 652, dated 14-6-1993: An assessee is entitled for higher
depreciation on pay loaders, dozers and water tankers used by it in its
business of transportation of goods on hire.

FACTS

The assessee was engaged in the business of
transportation and had claimed higher rate of depreciation @ 30% on pay
loaders, dozers and water tankers.

During the relevant assessment year, the
main part of assessee’s transportation business was done for M/s Anand
Transport.

The Assessing Officer (AO) studied the
agreement entered by the assessee with 
Anand Transport and found that assessee had to supply pay loaders for
hatch work, loading material into trucks from wharf, transporting to designated
stock yard by trucks, stacking at stock yard, loading from stock yard into
trucks, carting from stock yard to railway siding and loading of goods into
railway wagon.

According to AO, vehicles which were used in
the business of running them on hire were entitled for higher depreciation.

As per the AO, the cranes and pay loaders
were used by the assessee for his own business of transportation and there was
no hiring of vehicles. Hence AO disallowed higher rate of depreciation.

According to the CIT(A), there was an
element of ‘hiring’ in the business activities of the assessee and hence
directed the AO to allow depreciation @ 30%.

On appeal by the revenue before the
Tribunal:

HELD

There is no dispute that the assessee was
engaged in the business of transportation of coal and iron ore.

Part III(3)(ii) of Appendix I to the Income
Tax Rules allows higher rate of depreciation @ 30% to following category of
Machinery and Plant –

‘Motor buses, motor lorries and motor taxis
used in a business of running them on hire’.

By virtue of Circular No. 652, dated
14-6-1993, higher rate of depreciation @ 30% mentioned in Part III(3)(ii) of
Appendix to the Income Tax Rules would get an extended meaning than what
literally follows on their reading.

As per Circular No. 652 (supra), an
assessee shall be entitled to higher rate of depreciation @ 30% on motor
vehicles used by it in its business of transporting of goods on hire.

In our opinion, the agreement entered by the
assessee with M/s Anand Transport clearly shows that its duty was to transport
the goods provided by Anand Transport from one place to another. We cannot say
that element of ‘hiring’ was absent.

Hence, we do not find any reason to
interfere with the order of the CIT(A) and the assessee would be eligible for
higher rate of depreciation on the vehicles used by it in its business of
transportation of goods on hire.

Note – Reliance
had been placed on Bombay High Court in the case of SC Thakur & Bros.
[2010] 322 ITR 463 and JCIT vs. Avinash Transport in ITA No. 1909/Kol/2012
dated 13.8.2015

15. Tribunal jurisdiction u/s. 254(2) of the Act – Once a matter is disposed off by the Tribunal it would be functus officio – It can only exercise limited jurisdiction to rectify its order – No clarification can be sought

CIT vs. Shri Suresh G. Wadhwa. [
Income tax Appeal no. 904 of 2014 dt : 05/12/2016 (Bombay High Court)].

[Shri Suresh G. Wadhwa vs. JCIT,. [ MA
NO. 387/MUM/2013 Arising out of ITA No 6395/MUM/2010; Bench : I ; dated
04/12/2013 ; A Y: 2009-10. Mum. ITAT ]

The Tribunal passed an order dated 2nd
August, 2013 u/s. 254(1) of the Act relating to the AY : 2009-10. The AO was
not interpreting/understanding the said order correctly. In the above view, the
assessee filed an application u/s. 254(2) of the Act seeking clarification of
the order dated 2nd August, 2013, so as to explain its correct
meaning. By the impugned order, the Tribunal allowed the assessee’s
miscellaneous application seeking a clarification of its order dated 2nd
August, 2013. The Tribunal in the impugned order dated 4th December,
2013 records that under the garb of clarification of an order, a party’s right
to interpret the Tribunal’s order cannot be pre-empted. If the parties are
aggrieved by the interpretation of the Tribunal’s order by the lower
authorities, it would only be fair to challenge the same in an appropriate
proceedings. Notwithstanding the above, the Tribunal allowed the application by
the impugned order clarifying its earlier order dated 2nd August,
2013. This the Tribunal did by holding that though such an application for
clarification may not strictly fall u/s. 254(2) of the Act, yet such an
application would be entertained in exercise of its inherent powers and in
support relied upon the Apex Court order in Honda Siel Power
Products Ltd. vs. Commissioner of Income Tax, 295 ITR 466.

The Revenue preferred appeal before
the High Court against the order of the Tribunal passed u/s. 254(2) of the Act.
The Court observed that the Tribunal after passing an order u/s. 254(1) of the
Act has became functus officio in respect of the proceedings which led
to the final order dated 2nd August, 2013 passed in respect of AY :
2009-10. The Tribunal’s powers are for rectification are specifically set out
in section 254(2) of the Act. There is no provision in the Act enabling the
Tribunal to clarify its order after it has became functus officio particularly
when the clarification is not in respect of clerical/typographical errors which
have crept into the order. The Tribunal has no powers of Review. It cannot in
the garb of clarifying its order already passed u/s. 254(1) of the Act, seek to
review the same. The issue is of jurisdiction of the Tribunal to entertain such
an application for clarification. Undoubtedly, an inherent power of procedural
review is available with every Tribunal but not of substantive review. Procedural
review would be cases where the procedure/process of adjudicating the dispute
is not followed, to illustrate an order passed ex parte or when no
notice of hearing is received by party, etc. i.e. the process of
arriving at justice is vitiated. (Grindlays Bank Ltd. vs.
Central Govt. Industrial Tribunal, 1980 (suppl.) SCC 420). Seeking clarification and/or amplification of an order
already passed without it falling within the parameters of an rectification
application, would lead to chaos and uncertainty. No order of the Tribunal
would then be final, as it would always be subject to clarification. Once the
Tribunal has passed an order u/s. 254(1) of the Act, it becomes functus
officio and loses jurisdiction over the lis. It is axiomatic that
once a matter is disposed of by the Tribunal/Court, it would be functus
officio. The Tribunal can only exercise limited jurisdiction as provided in
section 254(2) of the Act, to rectify its order in view of apparent error on
record or in case of procedural issues leading to an order passed u/s. 254(1)
of the Act. Thus, the Tribunal ought not to have entertained such an application on the part of the assessee.

The reliance placed upon
the decision of the Apex Court in Honda Siel Power Products Ltd. (supra)
is inappropriate. In the facts of that case, a binding decision of a coordinate
bench was cited before the Tribunal during the hearing of the appeal and the
same was not considered in the order of the Tribunal. It was in the above
context, that the Tribunal had allowed the application for rectification made
by the party. However, it was reversed by the High Court. On further appeal,
the Apex Court restored the order of the Tribunal. It held that the Tribunal
allowed the application applied u/s. 254(2) of the Act for rectification as a
binding order cited during the hearing before the Tribunal was not considered
in the impugned order of the Tribunal. In fact, this would be a case of
procedural review as held by the Apex Court in Grindlays Bank (supra)
and also fall within the scope of section 254(2) of the Act. It must be noted
that the Apex Court in Honda Siel Power Product Ltd. (supra) did not
exercise inherent powers in the facts before it, but allowed the application
u/s. 254(2) of the Act. Therefore, the reliance of Honda Siel Power Product
Ltd. (supra) is misplaced.

The impugned order dated 4th
December, 2013 was quashed and set aside.

14. Reopening of assessment – No reason to believe that the income chargeable to tax has escaped assessment – reopening notice was bad in law. Section 148

CIT vs. Devkumar Haresh
Vaidya. [ Income tax Appeal no 750 of 2014, dt : 05/12/2016 (Bombay High
Court)].

[Devkumar Haresh Vaidya
(IT) vs. ACIT . [ITA No. 7325/MUM/2012; Bench : J ; AY 2007-08 dt: d 31/07/2013
; Mum. ITAT ]

The Assessee filed its ROI
for  AY 2007-08 declaring a total income
of Rs. 24.69 lakh. The same was accepted u/s. 143(1) of the Act. Thereafter,
the AO received information from the Deputy Director of Income Tax
(Investigation), Surat that property situated at New Delhi (said property) was
sold on 23rd August, 2006 for a total consideration of Rs.148.93
crore by the 12 family members, including the assessee and the assessees’s
share in the said amount was Rs.6.21 crore. Consequently, a notice u/s. 148 of
the Act was issued seeking to reopen the assessment for AY: 2007-08. The reason
for reopening the assessment was that said property had been sold to one
Mineral Management Services (I) Ltd. Thus, the sale was assessable to tax in
the A.Y. 2007-08 as it was so assessed in the hands of Mineral Management
Services (I) Ltd. in that year.

The assessee challenged
the notice pointing out that he had offered to tax the entire consideration of
Rs.6.21 crore (Rs. 4 crore in his hands and Rs.2.21 crore as a part of his late
father’s income was offered to tax) in the earlier A.Y. 2006-07. Moreover, he
had also claimed the benefit of section 54EC of the Act in A.Y. 2006-07. This
was accepted by the AO in scrutiny proceedings u/s. 143(3) of the Act. It was
pointed out that the said property was a family property in which his mother
(Devhuti Vaidya) had undivided and indeterminate rights/share in the said
property. Therefore, though the assessee and his family members did not have
possession of the said property, they had filed caveat objecting the
grant of probate to the Will of the assessee’s maternal grand father Mr.
Anantrai Pattani in favour of his maternal uncle Mr. Kumar Pattani. In the
above view, as a part of the settlement arrived at between the assessee and his
family members with his uncle Mr. Kumar Pattani, an Agreement for Sale dated 25th
October, 2005 by which the assessee sold his rights in the said property to one
M/s. Duce Property and Services Pvt. Ltd. and withdrew his objections to grant
of probate to Mr. Kumar Pattani. All this in consideration of  Rs.12 crore (as a
family) and Rs.4 crore as a part thereof being for the transfer of his interest
/ right in the immovable property was also received in A.Y. 2006-07.

All the above facts were
examined by the AO while passing the assessment order for the A.Y. 2006-07 and
held that the assessee had sold his rights/share in the immovable property and
sought benefit of the investment made of the sales proceeds u/s. 54EC of the
Act. It was also pointed out that as is evident from the reasons for reopening
the assessment that the amendment made in section 54EC of the Act effective
from A.Y. 2007-08 which would restrict the benefit of that provision to Rs.50
lakh had triggered the reopening notice.

This was evident from the
following observations recorded in the reasons, which reads as under :“ In
view of above amendment, if the assessee would have shown the capital gain
correctly in the A.Y. 2007-08, then she would not have been eligible for
deduction of more than Rs.50 lakhs even if she would have complied with the
time limit provision of the section 54EC.”

However, the AO by order
passed u/s. 143(3) r/w section 147 of the Act, did not accept the assessee’s
objections. Consequently, the AO brought to tax an amount of Rs.6.21 crore on
the above account. (Rs.4 crore being the assessee’s share and Rs.2.21 crore
being his share in his late father Mr. Haresh Vaidya’s interest, who had
expired in the meantime.).

On appeal, the CIT(A) also
dismissed the assessee’s appeal.

On further appeal, the
Tribunal held that the AO could not have any reason to believe that income
chargeable to tax has escaped assessment. In particular, it held that the
assessee had offered capital gains to tax in the AY 2006-07 and the same was
accepted after examination / consideration while passing an order u/s. 143(3)
of the Act. Thus, the AO having already assessed the income arising on sale of
rights in the said property as evidenced by the Agreement for Sale dated 25th
August, 2005 and letter dated 17th October, 2005 evidencing the
family arrangement coupled with having received the consideration in the
Assessment Year 2005-06 which was also offered to tax in that year could not
have had any reason to believe that income chargeable to tax has escaped
assessment. The impugned order also records the fact that there were disputes
amongst the legal heirs of late Mr. Anantrai Pattani including pending probate
proceedings before the High Court. The dispute between the assessee and his
uncle Mr. Kumar Pattani stood settled on the basis of offer made by the uncle
in his letter dated 17th October, 2005 to the assessee and his
family members to give up their rights in respect of the said property
(including not contesting the probate petition) on his uncle paying a sum of
Rs.12 crore in the aggregate. 

Further, the fact that the
communication received from the Deputy Director of Income Tax (Investigation),
Surat which was the material for issuing the impugned notice, also seems to
indicate that the entire exercise was only for denying the benefit of section
54EC of the Act in view of the amendment thereto with effect from AY 2007-08.
The Tribunal held that reopening notice was bad in law.

The Hon. High Court held
that once the assessee has offered the capital gains to tax on the basis of the
Agreement for Sale dated 25th October, 2005 read with the letter
dated 17th October, 2005 and the receipt of consideration for sale
of his interest in said property and accepted on due examination u/s. 143(3) of
the Act, the AO could not have had any reason to believe that income chargeable
to tax has escaped assessment. In fact, this is a case of change of opinion,
inasmuch as for the A.Y. 2006-07, the AO in scrutiny proceedings accepted that
the transaction qua the respondent is taxable in A.Y. 2006-07 and now
seeks to tax it in A.Y. 2007-08.

The report received from
the DDIT (Inv), Surat essentially seeks to deny the exemption u/s. 54EC of the
Act in view of the amendment thereto. When the capital gains has been offered
to tax in earlier assessment year and accepted by the Revenue in scrutiny
proceedings, then a mere change in law in the subject assessment year with
regard to extent of exemption will not give any reason to believe that income
chargeable to tax in the subject assessment year had escaped assessment.
Therefore, the appeal was dismissed.

13. Rectification – Retrospective Amendment u/s. 115JB – Rectification made by the A.O on the issue in the order passed u/s. 143(3) r.w.s. 254 of the Act- Such mistake, if any, was in the order originally passed by the A.O. u/s. 143(3) of the Act – Not permissible: u/s. 154 of the Act

CIT vs. Weizmann Ltd. [
Income tax Appeal no 1020 of 2014 dt : 09/12/2016 (Bombay High Court)].

[M/s Weizmann Ltd.,vs.
ACIT. [ITA No. 768 /MUM/2012; Bench : G ; date:31/10/2013 ; A Y: 2001- 2002.
(MUM) ITAT ]

On 27th February,
2004, the assessment order was passed u/s. 143(3) for the subject assessment
year. The assessing officer accepted the assessee’s claim of book profits u/s.
115JB. The book profits as claimed was after allowing of amounts set aside as
provisions for diminution in the value of assets. The assessee being aggrieved
by the assessment order on certain other issues had preferred an appeal to the
appellate authority and carried its grievance up to the Tribunal. On 29th August,
2007, the Tribunal restored some of the issues by which the assessee was
aggrieved to the Assessing Officer. It is relevant to note that the issue of
allowing of amounts set aside as provision for diminution of the value of
assets was not an issue which was restored to the Assessing Officer for
readjudication.

Consequent to the above,
the Assessing Officer passed an order dated 30th December, 2008 u/s.
143(3) r.w.s 254 of the Act giving effect to the order dated 29th
August, 2007 of the Tribunal.

The Finance (No.2) Act of
2009 amended section 115JB of the Act with retrospective effect from 1st April,
2001. The amendment inter alia added to Explanation I to section 115JB
of the Act, clause (i) providing that for purposes of computing that the book
profits thereunder, the profit shown in the profit and loss account is to be
increased by the amounts set aside as provision for diminution in the value of
assets.

In view of the above amendment the A.O. by
order dated 19th August, 2010 u/s. 154 rectified its order dated 30th
December, 2008 and made addition of Rs. 1,28,60,000/- to the book profit
of the assessee on account of provision for diminution in the value of
investment relying on the amendment made in the provisions of section 115JB
that with retrospective effect on 1-4-2001.

The assessee challenged
the order passed by the A.O. u/s. 154 of the Act by preferring an appeal before
the CIT(A) disputing the addition of Rs. 1,28,60,000/- made by the A.O. to the
book profit on account of provision for diminution in the value of investment.
The ld. CIT(A) did not find merit in the said appeal of the assessee and
dismissed the same.

The assessee preferred an
appeal before the Tribunal. The assessee submitted that the order u/s. 143(3)
r.w.s. 254 of the Act, was passed by the A.O. as per the specific directions
given by the Tribunal while restoring only the limited issues to the file of
the A.O. He submitted that the issue relating to the allowability of provision
for diminution in the value of investment was not before the Tribunal and since
the same was not restored by the Tribunal to the file of the A.O., the
consideration of the same was beyond the scope of order passed by the A.O. u/s
143(3) r.w.s. 254 of the Act. He relied on the decision of Hon’ble Bombay
High Court in the case of CIT vs. Sakseria Cotton Mills Ltd. (1980) 124 ITR 570.

The Tribunal held that it
cannot be said that there was any mistake in the order of the A.O. passed u/s
143(3) r.w.s. 254 of the Act on 30-12-2008 in allowing the deduction on account
of provision for diminution in the value of investment calling for any
rectification u/s. 154 of the Act. Such mistake, if any, was in the order originally
passed by the A.O. u/s. 143(3) of the Act on 27-2-2004 and not in the order
passed on 30-12-2008. The rectification made by the A.O. on this issue to the
order passed u/s. 143(3) r.w.s. 254 of the Act by an order dated 19-8-2010
passed u/s. 154 of the Act thus was not permissible. The Tribunal, therefore,
directed the A.O. to delete the addition made by way of rectification order
u/s. 154 of the Act.

The Revenue preferred an
appeal before the High Court. The High Court held that the issue stands concluded
by the decision of this Court in Sakseria Cotton Mills Ltd. (supra) in
favour of the assessee. The distinction sought to be made by the Revenue on the
basis of the amendment to section 115JB of the Act in 2009 with retrospective
effect from 2001 does not address the fundamental issue of non merger of the
order dated 27th February, 2004 with the order dated 30th December,
2008. Therefore, any rectification of the order dated 27th February,
2004 is required to be done within 4 years from 27th February, 2004
as provided u/s. 154 of the Act. It is not disputed before us that issue of the
provisions made for diminution in value of assets which is sought to be
rectified is an issue which was never the subject matter of consideration in
the order dated 30th December, 2008 passed u/s. 143(3) r/w section
254 of the Act. Therefore, in these circumstances, it could not be rectified
u/s. 154 of the Act. In the above view, the revenue appeal was dismissed.

45. Speculative transaction – Business loss – A. Y. 2009-10 – Hedging transactions entered into to cover variation in foreign exchange rate – Impact on business of import and export of diamond – Transactions entered only in regular course of business activity – Not speculative transactions

CIT vs. D. Chetan and Co.; 390 ITR 36 (Bom):

The Assessee was engaged in the business of import and export
of diamonds. For the A. Y. 2009-10, the assessee explained that the amount of
Rs. 78.10 lakhs claimed as loss was on account of hedging transactions entered
into to safeguard variation in exchange rates affecting its transact5ions of
import and export. The Assessing Officer disallowed the claim on the ground
that it was a notional loss of a contingent liability debited to the profit and
loss account. The Commissioner (Appeals) and the Tribunal allowed the
assessee’s claim.

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

“i)   The Tribunal concluded that the transaction
entered into by the assessee was not in the nature of speculative activities.
Further, the hedging transactions were entered into so as to cover variation in
foreign exchange rate which would impact its business of import and export of
diamonds. These concurrent findings of fact were not shown to be perverse in
any manner.

ii)   The Assessing Officer in the assessment order
did not find that the transaction entered into by the assessee was speculative
in nature. At no point of time did the department challenge the assertion of
the assessee that the activity of entering into forward contract was in the
regular course of its business only to safeguard against the loss on account of
foreign exchange variation. The Department never contended that the transaction
was speculative but only disallowed on the ground that it was notional.

iii)   Thus, it was to be concluded that the
transactions entered were only in regular course of business and not speculative.
Therefore, no substantial question of law arose.”

44. Salary – Perquisite – Fringe Benefit Tax – Sections 17 and 115WA of the Act – Once the employer is taxed on the fringe benefits same cannot be taxed as perquisite in hands of employee

Kamlesh K. Singhal vs. CIT; 389 ITR 247 (Guj):

The assessee was employed in ONGC. For the A. Y. 2007-08, the
Assessing Officer issued notice u/s. 148 of the Act, on the ground that his
employer had reimbursed the conveyance maintenance and repair expenditure and
uniform allowance to the assessee but the employer had neither reflected it in
the salary certificate issued nor had deducted the tax at source on those
amounts. Pursuant to the notice, he passed an order u/s. 143(3) r.w.s. 147
levying 20% and 100% tax respectively, on the fringe benefits and made
additions to the assessee’s income accordingly. The assessee filed a revision
petition contending that it would amount to double taxation as his employer had
paid fringe benefits tax u/s. 115WA. The Commissioner rejected the petition.

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

“i)   Once a certain benefit was held to be a
fringe benefit and the employer was taxed accordingly under Chapter XII-H of
the Act, the same benefit could not be included in the income of the
assessee-employee treating it as a perquisite.

ii)   The disallowance of 20% of the reimbursed
conveyance and repair expenses and 100% of the uniform allowance made by the
assessing Officer was reversed. The Assessing Officer was to pass a
consequential order accordingly. The order passed by the Commissioner was
unsustainable.”

43. Income – Accrual – A. Ys. 2005-06 to 2007-08 – Assessee obtaining contract – Work shared by assessee with another person – Amount received for work shared proportionate to work – Amount received by assessee and such other person shown separately – No evidence of sub-contract – Amount received by other person cannot be added to assessee’s income

CIT vs. G. Balraj; 390 ITR 50 (Karn):

The assessee was a PWD contractor and according to the
assessee, he had entered into an agreement with B Construction, whereby a
particular percentage of the income of the contract was to be shared in a
particular proportion. The assessee had shown his income to the extent of the
amount received by it. However, in the assessment proceedings, the Assessing
Officer finding that as tax was deducted at source from the total amount of the
contract(received by the assessee as well as by B Construction), brought the
entire amount under the contract to tax in the assessee’s hands. The Tribunal
deleted the addition.

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

“i)   There was enough material to show that the
amount received from the contract was directly shared by the assessee and B
Construction in accordance with their proportionate share and that it was not a
case where the money/the amount realised from the contract was apportioned as
the income of the assessee and thereafter, a portion of it or a major portion
was paid by the assessee to B Construction. When after receipt of the contract
amount, the shares were identified and taken by both the parties of the joint
venture, it could not be treated as sub-contract.

ii)  There
was no material brought by the Revenue to show that there was any contract
entered into by the assessee to assign the work to B Construction as
sub-contractor. Further, when the respective share was received by the
assessee, it had been shown as the income by the assessee in the return of
income. Similarly, for the respective share of B Construction it had shown its
income of the amount received by it. Under these circumstances, the findings of
the Tribunal that it was a joint venture between the assessee and B
Construction was not contrary to the material or based on conjectures or
surmises.”

42. Educational institution – Exemption u/s. 10(23C)(vi) of the Act – A. Y. 2014-15 – Application for approval can be filed before end of financial year and further information if needed can be sought from assessee – Application filed in the financial year rejected on the ground that it was filed prematurely – Not justified

Shri Guru Ram Dass Ji Education Trust vs. CCIT; 389 ITR
423 (P&H):

The assessee-trust was running educational institutions.
Since its receipts exceeded Rs. 1 crore in the F. Y. 2013-14, it made an
application for approval u/s. 10(23C)(vi) of the Act for the A. Y. 2014-15 onwards. The application was rejected on the
ground that the assessee had prematurely filed the application and that it
could only have been filed after the expiry of the F. Y. 2013-14 and before
September 30, 2014.

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

“i)   The fourteenth proviso to section
10(23C) of the Income-tax Act, 1961 states that an application under the
section can be filed on or before 30th September of the relevant assessment
year, from which the exemption is sought. The proviso simply gives an outer
date for making an application and does not say that the application is to be
made between 1st April and 30th September of the
assessment year. If an application is filed prior to 1st April of
the relevant assessment year and after filing thereof, any further information
is still needed by the Department, before taking a final decision thereon, that
information can be sought from the applicant.

ii)   A trust might know or have reason to believe
prior to 1st April that its receipts were likely to exceed Rs. 1
crore. There was no reason why such an institution ought not to be permitted to
make the application even before the 1st day April of the relevant
year.

iii)   All the accounts for the year ending March
31, 2014, when asked for, were duly provided by the assessee much before the
passing of the order. Further, note 1(a) and note 3 to Form 56D clearly
indicated that the application could be filed even prior to 1st
April of the relevant assessment year, from which the exemption was sought.

iv)   The
Chief Commissioner was directed to consider the application filed by the
assessee for the grant of exemption u/s. 10(23C) of the Act, on the merits.”

41. Charitable purpose – Charitable trust – Exemption u/s. 11 of the Act – A. Y. 2008-09 – Expenditure incurred in excess of income from accumulated funds – Trust entitled to exemption

CIT vs. Krishi Upaj Mandi Samiti; 390 ITR 59 (Raj):

The assessee, a charitable trust, incurred expenditure for
charitable purposes during the previous year relevant to the A. Y. 2008-09 in
excess of the income derived during the relevant period. The excess expenditure
was incurred by transferring the fund from interest bearing public deposit
account to non-interest bearing public deposit account. The Assessing Officer
held that the excess expenditure having been incurred from charity
fund/accumulated fund of earlier years, the assessee was nor entitled to
exemption u/s. 11(1)(a) of the Act – and accordingly, assessed the income as
the taxable income. The Tribunal held that the assessee was entitled to
exemption u/s. 11 of the Act.

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

“i)   When the income of a trust is used or put to
use to meet the expenses incurred for religious or charitable purposes, it is
applied for charitable or religious purposes. The application of the income for
charitable or religious purposes takes place in the year in which the income is
adjusted to meet the expense incurred for charitable or religious purposes.

ii)   In other words, even if the expenses for
charitable or religious purposes have been incurred in an earlier year and the
expenses are adjusted against the income of a subsequent year, the income of
that year can be said to have been applied for charitable or religious purposes
in the year in which the expenses were incurred for charitable and religious
purposes had been adjusted.

iii)   The Tribunal holding the assessee entitled to
claim exemption u/s. 11(1)(a) of the Act during the relevant assessment year
was justified.”

40. Capital gain – Exemption u/s. 54EC of the Act – A. Y. 2008 -09 – Investment in specified bonds from the amounts received as an advance is eligible for section 54EC deduction – The fact that the investment is made prior to the transfer of the asset is irrelevant

CIT vs. Subhash Vinayak Supnekar (Bom); ITA No. 1009 of
2014 dated 14/12/2016; (www.itatonline.org)

An Agreement to Sale for the subject property was entered
into on 21st February, 2006. The final sale took place under a Sale
Deed dated 5th April, 2007. The assessee invested an amount of Rs.50
lakh from the advance received under the Agreement to Sale in the Rural Electrification
Corporation Ltd. bonds on 2nd February, 2007. The Assessing Officer
as well as the Commissioner of Income Tax (Appeals) held that the assessee is
not entitled to the benefit of section 54EC of the Act, as the amounts were
invested in the bonds prior to the sale of the subject property on 5th
April, 2007. The Tribunal allowed the claim of the assessee by following the
decision of its coordinate bench in Bhikulal Chandak HUF vs. Income Tax
Officer 126 TTJ 545 wherein it has been held that where an assessee makes
investment in bonds as required u/s. 54EC of the Act on receipt of advance as
per the Agreement to Sale, then the assessee is entitled to claim the benefit
of Section 54EC of the Act.

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

“i)   The short question is whether an amount
received on sale of a capital asset as an advance on the basis of Agreement to
Sale and the same being invested in specified bonds before the final sale,
would entitle the assessee to the benefit of Section 54EC of the Act.

ii)   The Sale Deed dated 5th April, 2007
records in clause (d) thereof the fact that the Agreement to Sale had been
entered into on 21st February, 2006 in respect of the subject
property and the amounts being received by the vendor (respondent assessee)
under that Agreement to Sale. Thus, these amounts when received as advance
under an Agreement to Sale of a capital asset are invested in specified bonds
the benefit of Section 54EC of the Act is available. In the above view, the
Tribunal holds that the facts of the present case are similar to the facts
before the Tribunal in Bhikulal Chandak HUF (supra). The Revenue does
not dispute the same before us. Moreover, on almost identical facts, this Court
in Parveen P. Bharucha vs. DCIT, 348 ITR 325, held that the earnest
money received on sale of asset, when invested in specified bonds u/s. 54EC, is
entitled to the benefit of section 54EC. This was in the context of reopening
of an assessment and reliance was placed upon CBDT Circular No. 359 dated 10th
May, 1983 in the context of section 54E.

iii)   The Revenue had preferred an appeal against
the order of the Tribunal in Bhikulal Chandak HUF (supra) to this Court
(Nagpur Bench) being Income Tax Appeal No.68 of 2009. This Court by an order
dated 22nd August, 2010 refused to entertain the Revenue’s above
appeal from the decision of the Tribunal in Bhikulal Chandak HUF (supra).
In the above view, the question as proposed for our consideration in the
present facts does not give rise to any substantial question of law.”

39. Capital gain – Exemption u/s. 54 of the Act – A.Y. 2003-04 – Sale of residential property on 04/02/2003 – Agreement to purchase another residential property on 08/09/2003 and invested the capital gain within specified time – Assessee entitled to exemption u/s. 54 even if there is delay in completing the transaction

CIT vs. Mrs. Shakuntala Devi; 389 ITR 366 (Karn):

The assessee sold a flat
in Mumbai for a total consideration of Rs. 1,71,00,000/- on 04/02/2003 and the
consequent capital gain was Rs. 1,44,68,032/-. The assessee entered into an
agreement for purchase of the another residential property on 08/09/2003 for a
consideration of Rs. 3,25,00,000/- and invested the capital gain for the same.
The assessee’s claim for exemption u/s. 54 for the A. Y. 2003-04 was rejected
by the Assessing Officer on the ground that the transaction has not been
concluded, no registration of the sale deed has taken place and the balance
consideration was yet to be paid. The Tribunal held that the assessee is
entitled to exemption u/s. 54 of the Act.  

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

“i)   The Tribunal had rightly held that the date
of purchase was to be taken as the basis for reconing the period of two years
prescribed u/s. 54 of the Act extending the benefit following therefrom.

ii)   In the instant case the consideration paid by
the assessee under the memorandum of understanding dated 08/09/2003 would fully
cover the consideration of capital gains portion for being eligible to claim
exemption u/s. 54 of the Act.”

38. Business expenditure – Interest on borrowed capital – Section 36(1)(iii) of the Act – A. Y. 1989-90 – Advance of loans at lower rate of interest to subsidiary concerns in financial difficulty for business purposes – Commercial expediency- Assessee entitled to deduction

Hindalco Co. vs. CIT; 389 ITR 430 (All):

The assessee paid interest at the rate of 16% on its
borrowings from the bank. The Assessing Officer found that the assessee had
advanced loans to its subsidiary companies at a lower rate of interest, 6% or
12%. He determined the rate of interest at 12%, as the rate at which loans were
advanced to the sister concerns and disallowed the difference between the
interest at market rate and the rate at which loans were advanced to sister
companies u/s. 36(1)(iii) of the Act. The Tribunal upheld the disallowance.

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

“i)   The financial condition of the assessee’s
sister concerns was not good and to help them run smoothly, the assessee
advanced them loans at a lower rate of interest. Both sister concerns were
subsidiaries of the assessee and there was nothing per se adverse.

ii)   For the welfare and proper functioning of the
sister concerns, the assessee had decided to advance loans so that ultimately
they could function properly, and the assessee being the holding company would
also benefit. Therefore, the loans advanced to its sister concerns were for
commercial expediency and the assessee was entitled to the deduction of
interest u/s. 36(1)(iii) of the Act.”

Allowability of Expenditure towards Corporate Social Responsibility

Issue for Consideration

Explanation 2 to Section
37(1) declares that, for the removal of doubts, any expenditure incurred by an
assessee on the activities relating to corporate social responsibility referred
to in section 135 of the Companies Act, 2013 shall not be deemed to be an
expenditure incurred by the assessee for the purposes of business or
profession.

Companies Act, 2013 has made it mandatory for certain
companies to spend at least 2% of the average net profits towards Corporate
Social Responsibility (‘CSR’) as per the policy formulated by the CSR committee
of the company in this regard. While this is the first time a statutory
obligation has been cast upon companies to incur expenditure in the social or
charitable sphere, it is not uncommon for corporate as well as non-corporate
assessees to voluntarily incur charitable expenditure, which may or may not
have a direct nexus to their business operations.

Where such expenditure is expected to benefit the business in
some manner, either by benefitting its employees or by creating goodwill within
the community at large, it is usually claimed as business expenditure under
section 37(1). The issue has arisen on the allowability of such expenditure, on
account of conflicting decisions of the Tribunal. While the Raipur Tribunal has
upheld the claim in the specific facts of the case, the Bengaluru Tribunal has
taken a contrary view, disallowing the claim in respect of charitable expenses.

Jindal Power Limited’s case

The issue came up before
the Raipur Tribunal in the case of ACIT vs. Jindal Power Ltd. 179 TTJ 736.

In the said case, during
assessment year 2008-09, the company had claimed deduction in respect of
expenditure incurred on construction of school building, devasthan/temple,
drainage, barbed wire fencing, educational schemes and distributions of clothes
etc. voluntarily. Without much of a discussion on the factual aspects, the AO
observed that no material had been placed to substantiate the claim or in
support of existence of the facts of development activities. The AO also placed
reliance on the decision of the Patna Tribunal in the case of Central
Coalfields Ltd. for assessment years 1983-84 to 1986-87, wherein it was held
that the expenses were in the nature of charity and though laudable, they could
not be said to have been incurred for the purpose of business.

The CIT(A) made detailed observations on CSR stating that
“CSR policy functions as a built-in, self-regulating mechanism whereby a
business monitors and ensures its active compliance with the spirit of the law,
ethical standards, and international norms. The goal of CSR is to embrace
responsibility for the company’s actions and encourage a positive impact
through its activities on the environment, consumers, employees, communities,
stakeholders and all other members of the public sphere who may also be
considered as stakeholders. CSR is titled to aid an organization’s mission as
well as a guide to what the company stands for and will uphold to its
consumers.” Further, the CIT(A) noted the CSR policy of the assessee company
and that the expenses incurred on water supply for perennial availability of
portable water, roads and culverts, toilets and others, water tanks, other
community works, temple renovation, school building renovation etc. in the
villages for up-gradation as well as expenses for the welfare of the employees
were a part of implementation of CSR policies of the company. The assessee
relied upon various decisions including the decisions in the case of SECL 85
ITD 608 (Nag.) and Madras Refineries Ltd. 266 ITR 170 (Mad.).
Applying the ratio of the said decisions, the CIT(A) held that the expenditure
under the above heads incurred by the appellant company as a good corporate
citizen and as measure of gaining goodwill of the people living in and around
its industries through the aforesaid activities were admissible expenditures.
Only those expenses, which were neither substantiated with proper evidences nor
had any nexus with the CSR policies of the appellant company, were disallowed.

In the appeal before the Tribunal, the fundamental objection
of the AO was that the expenses were voluntary, not mandatory and not for
business purposes. In respect of the contention that expenses, which were
voluntary in nature and not mandatory, were not admissible as deduction, the
Tribunal referred to the judgment of House of Lords in the case of Atherton
v. British Insulated & Helsbey Cables Ltd. 10 Tax Cases 155 (HL), which
has been approved by the Supreme Court in the case of Chandulal Keshavlal &
Co. 38 ITR 601, wherein it was held that a sum of money expended not with a
necessity and with a view to direct immediate benefit to the trade, but
voluntarily and on the grounds of commercial expediency and in order to
indirectly facilitate carrying on of business, may yet be expended wholly and
exclusively for the purpose of the trade and hence be admissible. The Tribunal
also considered the decision of the Supreme Court in the case of Sassoon J
David & Co. (P) Ltd. 118 ITR 261, which laid down the principle that
the fact that somebody other than the assessee also benefited by the
expenditure should not come in the way of an expenditure being allowed by way
of deduction if it otherwise satisfied the tests laid down by law.

Further, on the contention of whether such expenses were for
the purpose of business or not, the Tribunal referred to the decision in the
case of Hindustan Petroleum Corporation Ltd 96 ITD 186 (Mum.) which held
that there could be certain amounts, though in the nature of donations, which may
be deductible under section 37(1) as well and merely because an expenditure was
in the nature of donation, or ‘promoted by altruistic motives’, it did not
cease to be an expenditure deductible under section 37(1). It also took into
consideration the decision in the case of Madras Refineries Ltd. (supra),
wherein it was observed that monies spent by the assessee as a good corporate
citizen and to earn the goodwill of the society help creating an atmosphere in
which the business can succeed in a greater measure with the help of such
goodwill, and therefore, were required to be treated as business expenditure
eligible for deduction under section 37(1) of the Act.

The Tribunal noted that Explanation 2 to Section 37(1) was
introduced with effect from 1st April 2015 and observed that it
could not be construed to the disadvantage of the assessee in the period prior
to this amendment. It further noted that this disabling provision referred only
to such CSR expenses incurred under Section 135 of the Companies Act, 2013,
and, as such, it could not have any application for the period not covered by
this statutory provision, which itself came into existence in 2013. It also
placed reliance on the principle of lex prospicit non respicit (law looks
forward not backward) laid down in the Supreme Court’s five judge
constitutional bench’s landmark judgment, in the case of Vatika Townships
Pvt Ltd 367 ITR 466 (SC), that unless a contrary intention appeared,
legislation was presumed not to be intended to have a retrospective operation
and that law passed today could not apply to the events of the past. The
Tribunal also reiterated the well settled legal position that when a
legislation conferred a benefit on the taxpayer by relaxing the rigour of
pre-amendment law, and when such a benefit appeared to have been the objective
pursued by the legislature, it would be a purposive interpretation giving it a
retrospective effect, but when a tax legislation imposed a liability or a
burden, the effect of such a legislative provision could only be prospective.

Interestingly, the
Tribunal observed that the disallowance was restricted to the expenses incurred
by the assessee under a statutory obligation under section 135 of Companies Act
2013, and thus, there was now a line of demarcation between the expenses
incurred by the assessee on discharging CSR under such a statutory obligation
and under a voluntary assumption of responsibility. The Tribunal further held
that for the former, the disallowance under Explanation 2 to Section 37(1) came
into play, but, as for the latter, there was no such disabling provision as
long as the expenses, even in discharge of corporate social responsibility on
voluntary basis, could be said to be “wholly and exclusively for the
purposes of business”.

Thus, based on all the
aforesaid arguments, since the expenses in question were not incurred under the
statutory obligation, as also for the basic reason that Explanation 2 to
Section 37(1) came into play with effect from 1st April 2015, the Tribunal
concluded that the disabling provision of the said Explanation did not apply to
the facts of this case.

Kanhaiyalal Dudheria’s case

The issue once again came
up for consideration before the Bengaluru Tribunal in the case of Kanhaiyalal
Dudheria v. JCIT 165 ITD 14 

In this case, during assessment year 2011-12, the assessee
firm claimed deduction in respect of expenditure incurred on construction of
houses under an MOU with the Government of Karnataka, that were later handed
over to the Government for helping the people affected by floods. The assessee
claimed that the said expenditure was incurred to yield benefit in the form of
goodwill and therefore, the same was allowable as business expenditure. The AO,
after referring to the MOU, came to the conclusion that the said expenditure
was not incurred wholly and exclusively for the purpose of business and
therefore held that the same was not allowable as deduction u/s 37(1) of the
Act. The CIT(A) upheld the order of the AO.

In the appeal before the Tribunal, the assessee firm relied
on the decisions in the case of Jindal Power Ltd. (supra) and Infosys
Technologies Ltd. 360 ITR 714 (Kar.) stating that on account of incurrence
of expenditure, goodwill was created in the people in the surrounding villages,
which would help in carrying out business and thus,
the expenditure should be allowed as a deduction. On behalf of the revenue, it
was argued that the said expenditure was towards charity and it was nothing but
application of income. The revenue drew support from the decision in the case
of Badrinarayan Shrinarayan Akodiya 101 ITR 817 (MP).

The Tribunal, relying on the decision in the case of Sassoon
J. David & Co. (P.) Ltd. (supra), emphasized that although for claiming
deduction u/s 37(1), it was not required to establish the necessity of
incurring of such expenditure, the onus lay on the assessee to prove that the
expenditure was incurred for the purpose of business. Since in the facts of the
case, the assessee did not establish that the expenditure was incurred for business
purpose, the Tribunal held that the expenditure amounted to application of
income voluntarily towards charity which could not be allowed as a deduction.

The Tribunal also noted that it cannot be said that the
appellant had incurred this expenditure wholly and exclusively for the purpose
of business since there was no nexus between the expenditure incurred and the
benefit derived by the business of the assessee.

Observations

Prior to insertion of
Explanation 2, section 37(1) along with Explanation 1 laid down a four-fold
test for any expenditure to be allowable in computing the income under the head
“Profits and gains of business or profession” –

–    it must
not be of the nature described in sections 30 to 36;

–    it must
not be capital or personal in nature;

–    it must
be laid out or expended wholly and exclusively for the purposes of business or
profession; and

–    it must
not be incurred for a purpose which is an offence or which is prohibited by
law.

There was no requirement,
however, to prove the necessity of incurring such expenditure. In other words,
whether the expenditure was incurred on account of a statutory obligation or
otherwise, did not have a bearing on the allowability of the expenditure.
Expenses in the nature of CSR were considered to be allowable or not allowable
as a deduction in light of the above tests.

It is common for many
taxpayers to contribute to the betterment of their employees and their
families, or the community or society, or the locality where their business
operations are based, etc. in a variety of ways. In most of the cases, there is
some perceived benefit to the business operations, either in the form of better
morale and productivity of employees or through generation of goodwill and
reputation for the business. As a result, in all such cases, the expenditure is
considered to have been spent for the purposes of the business and claimed as
deduction against the business profits. However, in cases where the spending is
not connected with the business of the assessee in any manner whatsoever, it
partakes the character of donation or charity and is not an allowable
expenditure under section 37(1).

At the same time, the mere
fact that a particular expenditure is in the form of donation, more
particularly eligible for deduction under section 80G, would not by itself
imply that it is not deductible under section 37(1). In the case of Mysore
Kirloskar Ltd. v. CIT 166 ITR 836 (Kar.), which was referred to in the case
of Infosys Technologies Ltd. (supra), it was held that if the contribution
by an assessee was in the form of donations of the category specified under
section 80G, but if it could also be termed as an expenditure of the category
falling under section 37(1), then the right of the assessee to claim the whole
of it as allowance under section 37(1) could not be denied if it was “laid
out or expended wholly and exclusively for the purpose of business”.

The debate on the
voluntary nature of the expenses and the necessity of incurring such
expenditure has been definitively settled in the case of Sassoon J. David
and Co. (P.) Ltd. (supra), where the issue arose on deductibility
under section 10(2)(xv) of the Income-tax Act, 1922 (corresponding to section
37(1) of the Income-tax Act, 1961) of expenditure on retrenchment compensation
incurred voluntarily. The Apex Court in the said case has observed as under –

“It has to be observed here that the expression “wholly and
exclusively” used in section 10(2)(xv) of the Act does not mean
“necessarily”. Ordinarily it is for the assessee to decide whether
any expenditure should be incurred in the course of his or its business. Such
expenditure may be incurred voluntarily and without any necessity and if it is
incurred for promoting the business and to earn profits, the assessee can claim
deduction under section 10(2)(xv) of the Act even though there was no
compelling necessity to incur such expenditure. It is relevant to refer at this
stage to the legislative history of section 37 of the Income-tax Act, 1961
which corresponds to section 10(2)(xv) of the Act. An attempt was made in the
Income-tax Bill of 1961 to lay down the “necessity” of the
expenditure as a condition for claiming deduction under section 37. Section
37(1) in the Bill read “any expenditure. . . . laid out or expended wholly,
necessarily and exclusively for the purposes of the business or profession
shall be allowed” The introduction of the word “necessarily” in
the above section resulted in public protest. Consequently when section 37 was
finally enacted into law, the word “necessarily” came to be dropped.
The fact that somebody other than the assessee is also benefited by the
expenditure should not come in the way of an expenditure being allowed by way
of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the
tests laid down by law.”

Although the facts in the
above case were different and the issue under examination was in respect of
retrenchment compensation, the ratio laid down by the Supreme Court in respect
of allowability of voluntary expenditure under section 10(2)(xv) of the 1922
Act and section 37(1) of the 1961 Act would be applicable even in case of CSR
expenditure incurred by taxpayers without any statutory requirement or any
other compulsion.

The issue that remains
disputed then is, in which cases or under what circumstances, will the
expenditure be considered to be “wholly and exclusively for the purposes of the
business or profession”? Here again, the courts have agreed that the words
“for the purpose of business” used in section 37(1) should not be
limited to the meaning of “earning profit alone” and that business
expediency or commercial expediency may require providing facilities like
school, hospital, etc., for the employees or their families. It has also been
held that any expenditure laid out or expended for their benefit, if it
satisfied the other requirements, must be allowed as deduction under section
37(1) of the Act. However, the onus of establishing the nexus between the
expenditure incurred and the business and proving that the expenditure
“satisfies the other requirements” must be discharged by the assessee. The
Supreme Court in the case of Chandulal Keshavlal & Co. (supra) has laid
down certain tests in this regard as under –

“Another fact that
emerges from these cases is that if the expense is incurred for fostering the
business of another only or was made by way of distribution of profits or was
wholly gratuitous or for some improper or oblique purpose outside the course of
business then the expense is not deductible. In deciding whether a payment of
money is a deductible expenditure one has to take into consideration questions
of commercial expediency and the principles of ordinary commercial trading. If
the payment or expenditure is incurred for the purpose of the trade of the
assessee it does not matter that the payment may inure to the benefit of a
third party—Usher’s Wiltshire Brewery v. Bruce 6 TC 399 (HL). Another test is
whether the transaction is properly entered into as a part of the assessee’s
legitimate commercial undertaking in order to facilitate the carrying on of its
business ; and it is immaterial that a third party also benefits thereby —
[Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC)]. But in every case it is
a question of fact whether the expenditure was expended wholly and exclusively
for the purpose of trade or business of the assessee.”

[Emphasis supplied]

The above principle
emerges in both the cases discussed in this article. In the case of Jindal
Power Limited (supra), even though CSR expenses were allowed based on an
understanding of the need for CSR by businesses and that these expenses were a
part of the implementation of the CSR policy of the company, the Tribunal
disallowed those expenses which were not substantiated with evidence and were not
in line with the company’s CSR policy. Similarly, in the case of Kanhaiyalal
Dudheria (supra), deduction of expenses was not allowed on account of failure
on part of the assessee to establish that the expenditure was incurred for
business purpose.

The introduction of
statutory provisions for CSR in Companies Act, 2013 and a corresponding
amendment in the Income-tax Act, 1961 has added another dimension to the
existing controversy.

Section 135 of the
Companies Act, 2013 mandates that every company having –

–    net
worth of Rs. 500 crores or more, or

–    turnover
of Rs. 1,000 crores or more, or

–    net
profit of Rs. 5 crores or more

during any financial year,
shall spend, in every financial year, at least 2% of its average net profits
towards CSR activities as per the CSR policy of the company. It further states
that the company shall give preference to the local area and areas around where
it operates for the CSR spending.

On the one hand, the above
provisions make it mandatory for certain Companies to undertake charitable
spending, while, on the other hand, Finance (No. 2) Act, 2014 introduced
Explanation 2 to section 37(1) with effect from 1st April 2015, to read as
under –

“For the removal of doubts, it is hereby declared that for the purposes
of sub-section (1), any expenditure incurred by an assessee on the activities
relating to corporate social responsibility referred to in section 135 of the
Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure
incurred by the assessee for the purposes of the business or profession.”

The above explanation
states that CSR expenditure shall not be deemed to have been incurred for the
purposes of business. Consequently, such expenditure is not allowable as a
deduction. The Explanatory Memorandum to the Finance Bill states that the
objective of CSR is to share the burden of the Government in providing social
services by companies having net worth/turnover/profit above a threshold and if
such expenses are allowed as tax deduction, this would result in subsidising of
around one-third of such expenses by the Government by way of tax expenditure.
However, it also states that the CSR expenditure which is of the nature
described in section 30 to section 36 of the Act shall be allowed as a
deduction under those sections subject to fulfillment of conditions, if any,
specified therein.

By declaring that
statutory CSR expenditure is not deemed to have been incurred for the purpose
of business, rather than clarifying that such expenditure is not an allowable
expense, Explanation 2 to section 37(1) may end up adding another angle to the
issue. It may be possible to take a view that Explanation 2 to section 37(1)
merely clarifies that the statutory CSR expenditure is not automatically deemed
to have been incurred for the purpose of business on account of the legislative
obligation (as was the presupposition in the arguments against allowability of
voluntary CSR expenses). In other words, statutory CSR expenditure would also
be considered to be incurred for the purposes of business and therefore be
deductible, so long as it satisfies the other tests and requirements discussed
earlier. The fact that the legislature intends to allow CSR expenditure of the
nature described in sections 30 to 36 would imply that the expenditure ought to
be allowed as a deduction if it is otherwise deductible.

Nevertheless, it is
pertinent to note that the explanation only makes a reference to the
expenditure incurred on CSR activities referred to in section 135 of the
Companies Act, 2013 and not to all expenditure in the nature of CSR. Further,
the explanation has been prospectively inserted with effect from 1st April
2015. Interestingly, the case of Jindal Power Limited (supra) pertains
to the period prior to the amendment. The Raipur Tribunal had rightly held that
since Explanation 2 was inserted prospectively and as it was a disabling
provision, it did not apply in that case to the expenditure incurred prior to
the amendment. This clearly implies that CSR expenditure, whether statutory or
voluntary, incurred prior to assessment year 2015-16 would be allowable,
provided it meets the other requirements of section 37(1). Additionally, the
Tribunal observed that there was now a clear distinction between statutory and
voluntary CSR expenditure and that the restriction placed in Explanation 2 to
section 37(1) would at best apply to the CSR expenditure incurred under the
statutory requirements. In other words, if any assessee – company or other than
company – voluntarily spends on CSR activities, whether prior to or after the
Companies Act, 2013 became applicable, the said expenditure would be allowable,
as long as it can be demonstrated to be incurred “wholly and exclusively for
the purposes of business or profession”.

Also noteworthy is the
fact that the CSR expenditure is mandated in the Companies Act, 2013 only for
companies and any expenditure of similar nature by non-corporates will always
be of a voluntary character, as in the case of Kanhaiyalal Dudheria (supra). As
the explanation makes a specific reference to section 135 of the Companies Act,
2013, the question of invoking the same for CSR expenditure incurred by
non-corporate entities does not arise. Quite aptly, therefore, Explanation 2
has not been considered in Kanhaiyalal Dudheria’s case and the allowability of
the CSR expenditure has been decided on the basis of settled principles in
respect of section 37(1) prior to the amendment.

Last but not the least, a
question may arise regarding the validity of the restriction imposed by
Explanation 2 to section 37(1). Where an expenditure is required to be
statutorily incurred and failure to comply with such statutory requirements
could attract penalties, it has a direct nexus to the business of the taxpayer.
In our view, deeming such an expenditure to not be for the purpose of business
or profession is inappropriate. In fact, if similar expenses incurred before
the imposition of the statutory obligation have been held to be deductible, the
deeming fiction was not desired in view of the existing safeguards in place in
section 37(1). Ironically, even after the amendment, the following category of
expenditures will still be allowable as a deduction –

–    CSR
expenses incurred by non-corporate entities, which are demonstrated to be laid
out for the purposes of business or profession;

–    CSR
expenses incurred voluntarily by companies; and

–    CSR expenses incurred by companies in
discharge of the obligation under section 135 of the Companies Act, 2013, which
are covered under section 30 to 36 of the Income-Tax Act, 1961.

This disparity between the deductibility of the
CSR expenses is uncalled for. It is therefore a possibility that the
restriction of Explanation 2 to Section 37(1) may be read down by the Courts.

TDS U/s. 194-Ib on Payment of Rent by Certain Individuals or Hindu Undivided Family

Background

Section 194-I of the
Income-tax Act, 1961 (“the Act”) interalia requires an individual or a
Hindu Undivided Family (HUF) carrying on business or profession of which
turnover or gross receipts in the immediately preceding previous year exceed
the monetary limits mentioned in section 44AB of the Act to deduct tax at source
while making payment of rent, to a resident. Under section 194-I, liability to
deduct tax arises if the amount of rent exceeds Rs. 1,80,000 in a year. Under
section 194-I tax is required to be deducted @ 10%.  

Therefore, an individual or a Hindu undivided family not
carrying on a business or a profession or carrying on a business or profession
the turnover or gross receipts of which did not exceed the monetary limit
mentioned in section 44AB of the Act in the immediately preceding previous year
is not required to deduct tax at source from payment by way of rent.

With a view to widen the scope of tax deduction at source,
the Finance Act, 2017 has, with effect from 1.6.2017, inserted section 194-IB
in the Act. This article attempts to analyse the provisions of section 194-IB
of the Act.

Provision of section 194-IB in brief 

An individual or an HUF (other than those covered by s.
194-I) responsible for paying to a resident, any income by way of rent
exceeding Rs. 50,000 for a month or part of a month during the previous year,
shall deduct an amount equal to five per cent of such income as income-tax
thereon.  The deduction is required to be
made at the time of credit of rent for the last month of the previous year or
the last month of tenancy if the property is vacated during the year, to the
account of the payee or at the time of payment thereof whichever is
earlier.  The deductor is not required to
obtain TAN.  In case the payee does not
have PAN and the provisions of section 206AA apply, the amount of deduction
shall not exceed the amount of rent payable for the last month of the previous
year or the last month of tenancy, as the case may be.

Cumulative Conditions for application of Section 194-IB

i)   the payer is an individual or a Hindu
undivided family;

ii)  in the immediately preceding previous year the
turnover or gross receipts of the business / profession carried on by such
individual or HUF, if any, did not exceed the monetary limits mentioned in
section 44AB;

iii)  the payer is responsible for paying income by
way of rent for use of any land or building or both.  For the purpose of this section, rent is
defined in an Explanation to section 194-IB;

iv) the amount of rent exceeds Rs. 50,000 for a
month or part of a month during the previous year;

v)  the payee is a resident. 

Consequences

If the above mentioned
conditions are cumulatively satisfied, the payer is required to deduct tax @ 5%
of such income as income-tax.

time of deduction 

Tax is required to be deducted on earlier of the following two
dates –

i)   credit to the account of the payee of rent
for the last month of the previous year or the last month of tenancy, if the
property is vacated during the year;  OR

ii)  at
the time of payment thereof in cash or by issue of a cheque or draft of by any
other mode.  It needs to be noted that
the word `thereof’ signifies the payment of rent for last month of the
previous year or the last month of tenancy, if the property is vacated during
the year.

Other points 

i)   The payer is not required to obtain TAN;

ii)  In case the provisions of section 206AA apply
(i.e. the payee does not have PAN) the amount of deduction shall not exceed the
amount of rent payable for last month of the previous year or the last month of
the tenancy, as the case may be. 

Who should be the payer / To whom is the section applicable?

Section 194-IB applies to a payer of rent who is an
individual or an HUF (other than those referred to in the second proviso to
section 194-I). The amount of rent should be in excess of the amount mentioned
in the section (given in subsequent paragraphs).

Therefore, the section will apply to a salaried employee, a
farmer, a retired person, an individual or an HUF carrying on business or
profession whose total turnover or gross receipts in the immediately preceding
previous year does not exceed the monetary limits mentioned in section 44AB of
the Act, an individual not carrying on business and whose total income is less
than the maximum amount not chargeable to tax.

Since the term `individual’ has been held to also include
group of individuals, the section may apply to trustees of a trust [DIT vs.
Sharadaben Bhagubhai Mafatlal Public Charitable Trust (2001) 247 ITR 1 (Bom)].
It may also apply to Executors of the estate of a deceased person [see CIT
vs. G B J Seth 6 Taxman 318 (MP)].

Who should be the payee?

The payee of rent should be a
resident.  If the payee is a
non-resident, then tax may be deductible u/s.195 of the Act but not under this
section.  The legal status of the payee is
not relevant. The payee could be a listed company, a private limited company, a
firm, a trust, LLP, individual, HUF, etc.

Threshold for deduction of tax

Tax is required to be
deducted only if the amount of rent exceeds Rs. 50,000 for a month or a part of
a month during the previous year. Once the rent for a month or part of a month
exceeds Rs. 50,000, tax is deductible on the entire amount of rent. Unlike the
other provisions of TDS, the payments made during the previous year are not
required to be aggregated for deduction of tax at source.  To illustrate, if the amount of rent paid in
first 3 months is at the rate of  Rs.
45,000 per month and for next 6 months @ Rs. 55,000 per month and for last 3
months at Rs. 40,000 per month, tax is required to be deducted only from
rent of those months where the amount of rent exceeds Rs. 50,000 for a month or
part of a month.  Therefore, amount
of tax to be deducted at source will be Rs. 16,500 [5% of Rs. 3,30,000 (55,000
x 6)].

It needs to be noted that
in case of rent for part of a month, the monthly rate of rent is not relevant
but what is relevant is that the amount paid / payable for a part of the month
should be in excess of Rs. 50,000.  To
illustrate, if amount of rent paid for 15 days is Rs. 40,000 tax will not be
required to be deducted (though rent per month is Rs. 80,000) but if the amount
of rent paid for 3 weeks is Rs. 60,000 then tax is required to be deducted
under this section.

Is the limit of Rs. 50,000 per month or part of a month qua each property or qua the payee?

A
question arises as to whether the limit of Rs. 50,000 per month or part of a
month is qua each property or qua each payee. To illustrate if Mr. T has
taken on rent from Mr. L a residential house on a monthly rent of Rs. 15,000
and also a factory for a monthly rent of Rs. 40,000, if the limit of Rs. 50,000
is qua each property, Mr. T is not required to deduct tax at source u/s.
194-IB whereas if the limit of Rs. 50,000 is qua the payee, Mr. T is
required to deduct tax in accordance with the provisions of section
194-IB.  It appears that the limit of Rs.
50,000 per month or part of a month is not qua the property, but qua
the aggregate of all the rents which an individual or a HUF may pay to a payee.
The threshold of Rs. 50,000 per month or part of a month will have to be
examined qua each payee and not qua each property. Therefore, Mr.
T will be required to deduct tax in accordance with the provisions of section
194-IB.

Meaning of `rent’

The section requires deduction of tax from payment of “rent”.  The word “rent” is defined in Explanation to
section 194-IB as follows –

     “Rent means any payment, by whatever
name called, under any lease, sub-lease, tenancy or any other agreement or
arrangement for the use of any land or building or both.”

The definition of ‘rent’ is
similar to the definition in section 194-I. Considering the definition of rent,
it is clear that payment for use of any land or building or both constitutes
rent. However, payment for use of furniture will not be covered by this section. 

Whether payment for use of a part of a building is covered?

A  question arises as to whether payment for use
of a part of the building is covered by the tax deduction obligation imposed by
this section?  It is relevant to note
that the legislature has in sections 27, 194IA, 194LA, 194LAA, 269AB
specifically mentioned part of a building. 
However, in the context of section 194-I, CBDT has in Circular number
718, dated 22.08.1995 (for section 194-I) clarified as under:

     “Query No. 5 : Whether section 194-I
is applicable to rent paid for the use of only a part or a portion of any land
or building?

     Answer : Yes, the definition of the
term “any land” or “any building” would include a part or a
portion of such land or building.”

Further, in view of the legal maxim OmneMajuscontinet in
se minus which means “the greater contains the less” Atma Ram
vs. State of Punjab, AIR 1959 SC 519; ICI India Ltd. vs DCIT, (2004) 90 ITD 258
(Kol)] ], it is possible to argue that rent for part of a building would
also be covered by the provisions of this section.

Therefore, it appears that the
payment for use of a part of a building, say a flat or an office in a building
or an industrial gala in an industrial estate would constitute rent and would
be subject to TDS if other conditions of this section are satisfied.

Composite rent

Where rent is a composite amount
comprising of payment for use of land or building or both as also for other
facilities and amenities and the amount for use of land or building is known
separately then tax is required to be deducted only on the payment for use of
land or building or both.  However, if
the amount of payment for use of land or building or both is not known
separately, can one contend that the section will not apply and no deduction need
be made? One really needs to look at the substance of the arrangement – if it
is primarily for use of land or building, then provisions of section 194-IB
would apply. It is relevant to note that in the context of section 194-I, CBDT,
vide Circular No. 715 dated 8.8.1995, has clarified that tax would be
deductible on the entire amount.  The
relevant portion of the said Circular reads as follows -.

     “Question 24: Whether in a case
of a composite arrangement for user of premises and provision of manpower for
which consideration is paid as a specified percentage of turnover, section
194-I of the Act would be attracted ?

     Answer If the composite arrangement
is in essence the agreement for taking premises on rent, the tax will be
deducted u/s. 194-I from payments thereof.”

Payment to hotel 

A question arises as to
whether payment to a hotel for rooms hired would be covered by the provisions
of this section.  In the context of
section 194-I, the CBDT vide Circular No. 715, dated, 8-8-1995 clarified
that payments made by persons for hotel accommodation taken on regular basis
will be in the nature of rent subject to TDS u/s.194-I (see question 20 of the
Circular).The CBDT further clarified the above, vide Circular No. 5,
dated 30-7-2002 which reads as under:

     “Furthermore,
for purposes of section 194-I, the meaning of ‘rent’ has also been considered.
“‘Rent’ means any payment, by whatever name called, under any lease . . .
or any other agreement or arrangement for the use of any land. . .”
[Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its
ambit and scope. For this reason, payment made to hotels for hotel
accommodation, whether in the nature of lease or licence agreements are
covered, so long as such accommodation has been taken on ‘regular basis’. Where
earmarked rooms are let out for a specified rate and specified period, they
would be construed to be accommodation made available on ‘regular basis’.
Similar would be the case, where a room or set of rooms are not earmarked, but
the hotel has a legal obligation to provide such types of rooms during the
currency of the agreement.”

Further, Andhra Pradesh High Court in case of Krishna
Oberoi vs. UOI [[2002] 123 Taxman 709] held that amount paid to the hotels
for use and occupation of hotel rooms squarely falls within the meaning of
rent.

In view of the above, it appears
that if payment is made to the hotels on a regular basis, it will constitute
rent.  However, for payment to hotels for
occasional use see the discussion hereafter.

Lease premium  

For the following reasons, payment of lease premium would not
require deduction of tax at source under this section –

i)   Lease premium is a capital receipt;

ii)  In the context of section. 194-I, courts have,
considering the facts of the case, held that payment of lease premium does not
require deduction of tax at source. Reference may be made to the following
decisions –

(a) Rajesh Projects (India) (P.) Ltd. vs. CIT
[2017] 78 taxmann.com 263 (Delhi)

(b) ITO vs. Navi Mumbai SEZ Pvt. Ltd. [2013]
38 taxmann.com 218 (Mum. – Trib.)

(c) Earnest Towers (P.) Ltd. [2015] 155 ITD
372 (Kol. – Trib.)

(d) ITO vs. Wadhwa& Associates Realtors (P.)
Ltd. [2013] 36 taxmann.com 526 (Mum. – Trib.)

iii)  The CBDT vide Circular No. 35, dated
13-10-2016 has also clarified that TDS under section 194-I is not
required in case of lump sum lease payment or one time upfront lease payment.

License fee paid under a leave and license agreement for use
of a flat/office/industrial gala

 A question arises as
to whether the payment for use of land or building or both made under a leave
and license agreement will qualify as `rent’. 
The definition of rent interaliacovers payment by whatever name called
under “any other agreement or arrangement for the use of land or building or
both”. 

The expression “any other agreement or arrangement” is not
defined in the section. Considering the context in which the expression has been
used, it appears that income-tax would require to be deducted on payment of
rent made under a leave and license agreement.

In
the context of section 194-I, the meaning of the expression “any other
agreement or arrangement” is explained by High Court in case of Krishna
Oberoi vs. UOI [[2002] 123 Taxman 709 (AP)] as under :

     “9. The expressions ‘any payment, by
whatever name called’, and ‘any other agreement or arrangement’ occurring in
the definition of the term ‘rent’ in Explanation to section 194-I have
widest import. According to Black’s Law Dictionary, the word ‘any’ is
often synonymous with either ‘every’ or ‘all’. Its generality may be restricted
by the context in which that word occurs in a statute. The Supreme Court in Lucknow
Development Authority vs. M.K. Gupta AIR 1984 SC 787 dealing with the use
of the word ‘service’, in the context it has been used in the definition of the
term in Clause (o) of section 2 of the Consumer Protection Act, has opined that
the word ‘any’ indicates that it has been used in wider sense extending from
‘one to all’. In G. Narsingh Das Agarwal vs. Union of India [1967] 1 MLJ
197, the Court opined that the word ‘any’ means ‘all’ except where such a wide
construction is limited by the subject-matter and context of the statute. The
Patna High Court in Ashiq Hassan Khan vs. Sub-Divisional Officer, AIR
1965 Pat.446 (DB) and Chandi Prasad vs. Rameshwar Prasad Agarwal AIR
1967 Pat. 41 has held that the word ‘any’ excludes ‘limitation or
qualification’. In State of Kerala vs. Shaju[1985] Ker. LJ 33, the Court
held that the word ‘any’ is expressive. It indicates in the context ‘one or
another’ or ‘one or more’, ‘all or every’, ‘in the given category’; it has no
reference to any particular or definite individual, but to a positive but
undetermined number in that category without restriction or limitation of
choice. Thus, having regard to the context in which the expressions ‘any
payment’ and “any other agreement or arrangement” occurring in the
definition of the term “rent” (have been used) it only means each and
every payment (that has been) made to the petitioner-hotel under each and every
agreement or arrangement with the customers for the use and occupation of the hotel rooms.”

Warehousing charges  

In the context of section 194-I, the CBDT vide
Circular No. 718, dated 22-8-1995 clarified that TDS is required to be deducted
on warehousing charges. The relevant para of the said Circular reads as under:

    ” Query No. 3 : Whether the tax
is to be deducted at source from warehousing charges ?

     Answer : The term ‘rent’ as defined
in Explanation (i) below section 194-I means any payment by whatever name
called, under any lease, sub-lease, tenancy or any other agreement or
arrangement for the use of any building or land. Therefore, the warehousing
charges will be subject to deduction of tax u/s.194-I.”

Is the section applicable to occasional renting?

 A question arises as to whether tax deduction
obligation under this section arises even in a case where an individual takes
on rent say a land or building occasionally for a period of one day/few days,
say for a wedding in the family and the amount of rent exceeds Rs. 50,000 for a
day, or where a person stays in a hotel for a few days and the aggregate room
rent exceeds Rs. 50,000.  Considering the
language of the section, it appears that the section envisages letting for a
continuous period, e.g., s/s.(2) requires deduction at the time of credit of
rent for the last month of the previous year or last month of tenancy. Similar
is the language in s/s.(4) which deals with the amount of tax to be deducted in
a case where provisions of s. 206AA are applicable. Also, if one looks at the
particulars to be filled in Statement-cum-Challan in Form No. 26QC through
which tax deducted has to be paid to the credit of Central Government one finds
that it requires details of “Period of tenancy” and the notes in the said Form
26QC state that Period of tenancy will be the period (i.e. months) for which
tenant is paying the rent.  Also, “Total
value of rent payable” is required to be mentioned. It is stated that Total
value of rent payable is equal to number of months for which rent is payable
multiplied by value of rent per month. These particulars and notes could be
indicative of the position that the section does not contemplate deduction of
rent in respect of occasional letting. 
However, the matter is not free from doubt and it can also be argued
that a day is also a part of a month and if the amount of rent for the period
the land or building is taken on rent is more than Rs. 50,000 the tax deduction
obligation under this section is triggered if the payer is covered by this
section.  In view of the penal
consequences which arise due to non-deduction, a safer view would be to deduct
tax even in such cases.  Though, in a
case where one has for some reason failed to deduct tax in some genuine case
one may be able to contend that the section requires letting for some
continuous period.

Rate at which tax is required to be deducted

Tax is required to be deducted @
5%. 

Rate at which tax is required to be deducted where payee does
not have PAN

In
a case where payee does not have PAN, section 206AA requires the deductor to
deduct tax at highest of the three rates mentioned in section 206AA. Therefore,
in a case where the payee does not have PAN, by virtue of provisions of section
206AA, deduction of tax could be @ 20%. However, sub-section (4) of section
194-IB clearly states that in a case where provisions of section 206AA apply,
deduction shall not exceed the amount of rent payable for the last month of the
previous year or the last month  of the
tenancy, as the case may be. To illustrate, if rent has been paid @ Rs.60,000
per month from 1.6.2017 to a person who does not have PAN, the amount of tax
required to be deducted at source would be Rs. 1,20,000  [20% of rent paid i.e. 20% (Rs. 60,000 x
10)].  However, by virtue of s/s. (4),
the deduction shall not exceed the amount of rent payable for last month of the
previous year. Therefore, deduction in this case will be restricted to Rs.
60,000.

Payment of rent by deducting tax at a rate lower than 5% or
without deduction of tax at source 

Section
197 which enables an assessee to obtain from the AO a certificate authorising
the payer to deduct tax at a lower rate has not been amended to incorporate a
reference to this section.  Therefore, an
assessee will not be able to obtain a certificate from the AO authorising the
payer to deduct tax at a rate lower than the one mentioned in section 194-IB
i.e. 5%.  Also, the payee may be having
brought forward losses or may not be liable to pay tax on the income by way of
rent being received by him since his total income may be likely to be less than
the maximum amount chargeable to tax. 
However, since the provisions of section 197A have not been amended, the
payee will not be able to issue a declaration in Form No. 15G / 15H authorising
the payer to deduct tax at a lower rate.

Does section require deduction of tax only once during the
previous year?

While it appears that the section requires deduction of tax only once
during the previous year, it may not necessarily be so in all cases. As has
been mentioned above, deduction is at the time of credit of rent of the last
month of the previous year or rent of the last month of tenancy, as the case
may be, to the account of the payee or at the time of payment thereof whichever
is earlier.  To illustrate, in a case
where an individual, living throughout the financial year 2017-18 in a rented
flat changes the flat rented by him (assuming rent is more than Rs. 50,000 per
month) say on September 30, 2017 and also on December 31, 2017, he will be
required to deduct tax thrice during the financial year 2017-18 on September
30, 2017 and December 31, 2017 (being last month of tenancy) and on March 31,
2018 (being last month of the previous year) assuming of course, that he has
credited rent to the account of the payee or has paid the rent on these dates
or thereafter.

If the rent for last month
of the previous year or last month of tenancy is not credited by the payer to
the account of the payee, the tax deduction obligation will arise at the time
of payment of such rent. In such a case, if the two dates fall in different
financial years, there will be difficulty on account of mismatch of TDS as
well.  To illustrate if assuming that in
the illustration referred to in the above para, if the individual assessee did
not credit rent to the account of any of the 3 landlords but paid rent to all 3
landlords on June 30, 2018, he will be required to deduct tax at the time of
payment i.e. on June 30, 2018 and therefore the credit for TDS will be
reflected in Form 26AS of the landlords in the AY 2019-20 whereas they may be
required to offer rental income for taxation in AY 2018-19.

Is the deductor required to obtain TAN?

Sub-section
(3) of section 194-IB clearly provides that the provisions of section 203A
shall not apply to a person required to deduct tax in accordance with
provisions of section194-IB. Therefore, an individual or a HUF deducting tax in
accordance with section194-IB is not required to obtain TAN. 

Time of payment of tax deducted to the credit of Central
Government

Rule 30(2B) requires that the tax
deducted shall be paid within 30 days from the end of the month in which
deduction is made.  The payment shall be
accompanied by a Challan-cum-statement in Form 26QC. This procedure is similar
to the procedure as that for tax deducted at source on payments for purchase of
an immovable property  u/s. 194-IA.

Certificate of deduction 

The payer of rent is
required to furnish to the payee a certificate of deduction of tax at source in
Form No. 16C within a period of 15 days form the due date for furnishing the
challan-cum-statement in Form 26QC.  The
certificate is to be generated and downloaded from the web portal specified by
the Principal Director General of Income-tax (Systems) or the Director General
of Income-tax (Systems) or the person authorised by him.

Payer to have PAN

Payment of tax at source
can be made only if the payer has PAN. Therefore, persons deducting tax at
source under this section, will have to obtain PAN, though they may otherwise
not be required to do so.

Rent for the period prior
to 1.6.2017 

Section 194-IB has been
inserted with effect from 1.6.2017. Therefore, in a case where the time of
deduction was before 1.6.2017, the provisions of this section will not apply.
However, if the time of deduction is on or after 1.6.2017, then the provisions
of this section will apply, and tax will have to be deducted at source even
though the rent pertains to a period prior to 1.6.2017. To illustrate, if rent
for April 2017 and May 2017 was paid prior to 1.6.2017, then tax is not required
to be deducted at source under this section, but if the rent for the month of
May 2017 is paid on 10th June, 2017, then tax will be required to be
deducted at source under this section (ofcourse, if all the other conditions
are satisfied).  Also, if an individual
has not paid rent for financial year 2016-17 but pays it after 1.6.2017, then
tax will be required to be deducted at source in accordance with the provisions
of this section.

Consequences of non-deduction

In a case where an individual of a HUF, required to deduct
tax in accordance with the provisions of s. 194-IB fails to do so or having
deducted the amount fails to pay the whole or part of the tax, such individual
or HUF will be deemed to be an assessee-in-default u/s. 201 of the Act.  This shall be in addition to his obligation
to pay interest/penalty under other provisions of the Act.

Conclusion

Salaried employees paying
rent whether or not claiming exemption u/s.10(13A); individuals/HUFs paying
rent on occasional basis such as individuals going for a vacation and paying
rent for a bungalow/group of bungalows, rent for ground taken on occasion of
marriage in the family, etc.; small businessmen who are not covered by
tax audit, etc. would be required to consider the applicability of the
provisions of this section.

Tax Issues in Computation of Taxable Income for Companies Adopting Ind-AS

The Challenge:

Tax Practioners would need to have knowledge of both
standards i.e. Indian Accounting Standards (Ind-AS) and Income Computation and
Disclosure Standards (ICDS) to assist the companies adopting Ind-AS in
finalising their tax returns

One
of the challenges that tax practitioners will face while finalising tax returns
for assessment year (AY) 2017-18, is in computation of the taxable income of
companies, which have adopted Ind-AS for the first time in the financial year
(FY) 2016-17.  It is normally the profits
as per the profit and loss account which is the starting point for computation
of taxable income. So far, only adjustments required to be made under the
Income-tax Act (the Act) were being made to the computation of taxable income.
However, with the advent of Ind-AS and the corresponding introduction of ICDS,
which is also applicable for the first time from AY 2017-18, a significant
number of adjustments would have to be made to the profit as per the profit and
loss account, to arrive at the taxable income. This requires a proper
understanding not only of ICDS, but also of the differences between accounts
prepared under Ind-AS and those prepared under the earlier accounting standards
(existing AS).

In this article, an attempt has
been made to analyse and list out some significant adjustments which are likely
to be made to the profit and loss account, to arrive at the taxable income of
the companies’ whose accounts are prepared adopting Ind-AS.

Indian Accounting Standards (Ind-AS)

The MCA had notified
IFRS-converged Ind-AS as Companies (Indian Accounting Standards) Rules, 2015
vide Notification dated 16th February 2015. The said Notification
also laid down the roadmap for the applicability of Ind-AS for certain class of
companies as under:

Roadmap for implementation of Ind-AS

Sr. No.

Companies covered

Voluntary
phase

Under Phase I, any company had the
option to adopt Ind-AS on voluntary basis for FY 2015-16.

Mandatory
phase 1

Adoption
of Ind-AS is mandatory for the FY 2016-17 for:

(a) Companies
listed/in process of listing on Stock Exchanges in India or Outside India
having net worth > INR 500 crores,

(b) Unlisted
Companies having net worth > INR 500 crore, and

(c)   Parent,
Subsidiary, Associate and JV of companies listed at (a) and (b).

Mandatory
phase 2

Ind-AS
from FY 2017-18 would be mandatory for:

(a) Companies
which are listed/or in process of listing inside or outside India on Stock
Exchanges not covered in Phase I (other than companies listed on SME
Exchanges),

(b) Unlisted
companies having net worth INR 500 crore> INR 250 crore, and

(c)   Parent,
Subsidiary, Associate and JV of companies listed at (a) and (b).

Mandatory
phase 3

Banks
and NBFCs would be required to adopt Ind-AS from FY 2018-19. Insurance
companies would be required to adopt
Ind-AS from FY 2020-21.

All companies adopting
Ind-AS are required to present comparative information for earlier FY, as per Ind-AS. Accordingly, they will have to apply Ind-AS for preparation of
standalone as well as consolidated Balance sheet and consolidated Statement of
Profit and Loss for FY 2015-16. Once Ind-AS is applicable to the entity for one
year, it has to be mandatorily followed for all subsequent FYs.

Companies listed on SME exchange are not required to apply
Ind-AS. Companies not covered by the above roadmap shall continue to apply
existing Accounting Standards notified in Companies (Accounting Standards)
Rules, 2006 issued by the ICAI as revised vide notification dated 30th March
2016 (“existing AS”).

Income Computation and Disclosure Standards (ICDS)

The Central Government vide Notification No. SO 892(E) dated
31st March 2015 notified 10 ICDS. These ICDS were applicable from FY
2015-16 (AY 2016-17). Subsequent to notification of the ICDS, a number of
representations were received for postponement/cancellation of ICDS. The
implementation of ICDS was kept on hold by the CBDT in July 2016.

In September 2016, the CBDT rescinded the earlier notified
ICDS, and notified revised ICDS (I to X) applicable from FY 2016-17 (AY
2017-18).

Adjustments required to the Profit as per Statement of Profit
& Loss for Companies adopting Ind-AS

1. Revenue recognition from sale
of goods on deferred payment basis

Revenue recognition as 
per Ind-As

As per Ind-AS 18 which deals with Revenue recognition,
revenue shall be measured at the fair value of
the consideration received or receivable. Paragraph 11 of Ind-AS 18 provides as
under:

“11. In most cases, the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents
received or receivable. However, when the inflow of cash or cash equivalents is
deferred, the fair value of the consideration may be less than the nominal
amount of cash received or receivable. For example, an entity may provide
interest-free credit to the buyer or accept a note receivable bearing a
below-market interest rate from the buyer as consideration for the sale of
goods. When the arrangement effectively constitutes a financing transaction,
the fair value of the consideration is determined by discounting all future
receipts using an imputed rate of interest. The imputed rate of interest is the
more clearly determinable of either:

(a)    the prevailing rate
for a similar instrument of an issuer with a similar credit rating; or

(b)    a rate of
interest that discounts the nominal amount of the instrument to the current
cash sales price of the goods or services.”

In such arrangements of deferred receipt of consideration,
the fair value of the consideration is measured by discounting all future
receivables using an imputed rate of interest i.e. a rate of interest that
discounts the nominal amount of the instrument to the current cash sales price
of the goods or services.

The difference between the
fair value and the nominal amount of the consideration would be considered as
interest. Such interest would be recognised as revenue using the effective
interest rate (EIR) method as per Ind-AS 109. EIR is a method of calculating
the amortised cost of a financial asset or a financial liability and allocating the interest income or interest expense
over the relevant period.

Revenue
recognition as per ICDS

As per ICDS IV which deals with basis
of revenue recognition, the revenue from sale of goods is to be recognised when
the seller of goods has transferred to the buyer the property in the goods for
a price or all significant risks and rewards of ownership have been transferred
to the buyer and the seller retains no effective control of the goods
transferred to a degree usually associated with ownership.

As per ICDS IV, the term “Revenue” has been defined to mean
gross inflow of cash, receivables or other consideration arising in the course
of the ordinary activities of a person from the sale of goods.

Difference
between Ind-AS and ICDS

There is a significant difference in the basis of revenue
recognition as per Ind-AS 18 and ICDS IV in respect of sale of goods on
deferred payment basis. As per Ind-AS 18, the seller has to bifurcate the total
sales into fair value of consideration and interest. Fair value of
consideration would be recognised as revenue straightaway in the year of sale,
whereas interest income would have to be recognised as revenue over the
relevant credit period.

The concept of bifurcation of sale consideration in respect
of sale of goods on deferred payment basis is not present in ICDS. As per ICDS,
entire income from sale of goods will be recognised as revenue in the year of
sale, without any bifurcation of total sales consideration into fair value of
consideration and interest.

An Example

An example would explain the above
difference between the treatment under Ind-AS 18 and ICDS IV. A company which
has adopted Ind-AS has sold goods for Rs. 22 lakh on 1st March 2017
to a customer with 10 months credit period. The same goods are sold to other
customers on cash basis at Rs. 20 lakh. Accordingly, as per Ind-AS 18, the
company would have to recognise revenue from sale of goods at Rs. 20 lakh. Rs.
2 lakh would be considered as interest, which would be recognised as revenue in
terms of Ind-AS 109.

Accordingly, a credit
period of 10 months starts from 1 March 2017, Rs. 20,000, being 1/10th of interest
of Rs. 2,00,000, would be recognised as revenue in the FY 2016-17. Balance
interest of Rs. 1,80,000 would be recognized as revenue in the FY 2017-18.
Hence, what would be recognized as revenue in the FY 2016-17 would be Rs. 20
lakh of sales and Rs. 20,000 of interest. Rs. 1,80,000 of interest would be
recognized as revenue in the FY 2017-18. However, as per ICDS IV, entire sale
consideration of Rs. 22 lakh would be recognised as revenue in FY 2016-17.

Impact of
the above differences

CBDT vide Notification No. 10/2017
dated 23 March 2017, in response to question no. 5 has clarified that “ICDS
shall apply for computation of taxable income under the head ” Profit and gains
of business or profession” or “Income from other sources” under the Income Tax Act.
This is irrespective of the accounting
standards adopted by companies i.e. either Accounting Standards or Ind-AS.”

In view of the above
clarification of the CBDT, the company would have to recognise entire sale
consideration of Rs. 22 lakh as revenue in its computation of income for AY
2017-18, even though what has been recognized as revenue in Ind-AS compliant
financials is only Rs. 20.02 lakh.

The company, while preparing computation of taxable income
would have to give effect to such differences which arise as per Ind-AS as well
as the Act/ ICDS. The company would also have to maintain details of such
income streams which gets recognised as revenue in different FYs on account of
different basis of revenue recognition as per Ind-AS and ICDS.

2.    Revenue recognition from composite/bundles transactions

Impact
Revenue Recognition as per Ind-AS

As per paragraph 13 of
Ind-AS 18, the revenue recognition criteria are usually required to be applied
separately for each transaction. However, where the transaction is a composite/
bundled transaction, the revenue recognition criteria has to be applied
separately for each identifiable component of a single transaction, in order to
reflect the substance of the transaction. As per the example given in Ind-AS
18, when the selling price of a product includes an identifiable amount for
subsequent servicing, that amount relatable to subsequent servicing is deferred
and recognised as revenue over the period during which the service would be
performed.

As per paragraph 19 of
Ind-AS 18, “revenue and expenses that relate to the same transaction or
other event are to be recognised simultaneously, as the matching concept of
revenues and expenses. As per the example given in Ind-AS 18, all expenses
including future warranties and other costs to be incurred after the shipment
of the goods, can normally be measured reliably. Such expenses which are to be
incurred in future, directly relatable to sale of goods should be recognised as
expenses in the year of sale, when the other conditions for the recognition of
revenue are satisfied. However, when the expenses to be incurred in future
cannot be measured reliably, any consideration already received for the sale of
the goods should be recognised as a liability”.

Accordingly, where sale of goods comprises of composite/
bundled transaction, the company would have to identify each individual
transaction forming part of composite/ bundled transaction. The company would
have to apply revenue recognition criteria to each transaction. Any expenses to
be incurred on such composite/ bundled transaction have to be measured reliably
and provided for as a liability. Where such expenses to be incurred cannot be
measured reliably, any consideration already received for the sale of the goods
has to be recognised as a liability.

Revenue recognition as per ICDS

As per ICDS IV, there is no provision for splitting up of the
sale consideration in respect of a composite/bundled transaction. The revenue
would be the gross inflow arising from sale of goods, and shall be recognised
when the seller of goods has transferred to the buyer, the property in the
goods for a price or all significant risks and rewards of ownership have been
transferred to the buyer and the seller retains no effective control over the
goods transferred. Therefore, where no separate charge is levied for the
servicing, the entire sales proceeds would be treated as revenue from the sale
of goods.

As per ICDS X, a present obligation arising from past events,
the settlement of which is expected to result in an outflow from the person of
resources embodying economic benefits should be provided for as a liability.
Therefore, a provision for warranty expenses to be incurred on sales effected,
made on a scientific or actuarial basis, would be allowable as a deduction
[which is also in accordance with the Supreme Court decision in the case of Rotork
Controls India (P) Ltd vs. CIT (2009) 314 ITR 62(SC)].

Difference between  Ind-AS and ICDS

Ind-AS, in respect of transaction involving composite/
bundled transactions requires the revenue recognition criteria to be applied
separately for each identifiable component of a single transaction. Revenue and
expenses relating to the same transaction or other event should be recognised simultaneously.
Where such expenses to be incurred in future cannot be measured reliably, any
consideration already received for the sale of the goods should be recognised
as a liability.

ICDS IV however does not give any
guiding principles on bifurcation of consideration for each identifiable
component of a single transaction, forming part of composite/ bundled
transaction. ICDS IV does not allow treatment of consideration already received
for the sale of goods as a liability, where expenses to be incurred cannot be
measured reliably.

An example

An
example on the above would explain the difference between the Ind-AS 18 and
ICDS IV. A company which has adopted Ind-AS, is in the business of
manufacturing and sale of cars. It sold a car to a customer at Rs. 5 lakh on 1st
January 2017. The sale of car also includes free after sale service for a
period of 2 years and free warranty for 1 year. The standard price of after
sale service for 2 years, included in sale price of Rs. 5 lakh, would be Rs.
50,000.

As per Ind-AS 18, the company would have to separately
identify each component of single transaction of sale of car i.e. it has to
bifurcate composite/ bundled transaction of sale of car into separate
identifiable transaction viz. sale of car, rendering of after sale services and
providing warranty.

Accordingly, Rs. 4,50,000 (i.e. sale consideration of Rs. 5
lakh less Rs. 50,000 towards 2 years after sale services) would be recognised
as revenue in the FY 2016-17. Revenue recognition in respect of after sales services
of Rs. 50,000 has to be spread over the 2 years period. Rs. 6,250 for January
to March 2017 has to be recognized as revenue in the FY 2016-17 and balance Rs.
43,750 would be recognised as revenue in the FY 2017-18 and FY 2018-19.

The company would have to estimate the expenditure it would
incur in future over the free warranty, which can be recognised as expenses,
based on principle of matching concept in the year of sale of car. If it is not
in a position to estimate expenses to be incurred as per Ind-AS 18, sale
consideration relatable to free warranty should be recognised as liability in
FY 2016-17 and should be recognised as revenue in subsequent years.

ICDS IV, however is silent on bifurcation of consideration
for each identifiable component of a single transaction, forming part of
composite/ bundled transaction. Further, ICDS does not allow treatment of
consideration already received for the sale of goods as liability, where
expenses to be incurred in future cannot be measured reliably.

Impact of the above differences

Taxation of after-sales
services

In view of the fact that ICDS
does not give any guiding principles on bifurcation of each identifiable
component of composite/bundled transaction, the company may not be able to
bifurcate the consideration of Rs. 50,000 for after sale services of 2 years from
the sales price of cars. Therefore, the gross sales price may have to be
considered as revenue in the year of sale. The question arises whether the
company can claim deduction for the estimated future expenditure that it may
incur on after sales service.

Based on the provisions of
paragraph 5 of ICDS X, if such expenditure is estimated on a scientific basis,
such future liability may be recognised as a provision under the ICDS, which is
a liability. This is on account of the fact that there is a present obligation
as a result of a past event, it is reasonably certain that an outflow of
resources embodying economic benefits will be required to settle the
obligation, and a reliable estimate can be made of the amount of obligation.
Therefore, one can take a view that the estimated liability for after sales
service is an allowable deduction u/s. 37 read with ICDS X.

Warranty expenses

It is a common practice for car manufacturers to make
provision for warranty expenses in the books, based on past experience,
historical data of actual warranty expenses incurred or some ad-hoc estimate
and claim deduction thereof u/s. 37 of the Act.

The issue on allowability
of warranty provision has been settled by the Supreme Court. The Supreme Court
in the case of Rotork Controls vs. CIT (314 ITR 62) (SC) has allowed the
assessee’s claim for deduction of warranty provision as expense on the ground
that “warranty became integral part of the sale price of the product and a
reliable estimate of the expenditure towards such warranty was allowable.”
In this case, the Supreme Court held that all the conditions for recognising a
liability were fulfilled – arising out of obligating events, involving outflow
of resources and involving reliable estimation of obligation.

However, in the tax return, where the company is not in a
position to estimate expenditure to be incurred on warranty on some
scientific/reliable basis, it would not be in a position to postpone revenue
recognition from the sale consideration of car. Such treatment is permitted as
per Ind-AS, but has no specific permission in ICDS. However, where such
warranty provision is made on a scientific basis, under paragraph 5 of ICDS X,
the liability for warranty would be regarded as a provision, which is defined
as a liability which can be measured only by using a substantial degree of
estimation, and would therefore be an allowable deduction.

The company would have to maintain details of such different
basis of revenue recognition as per Ind-AS and ICDS i.e. after sales services
in the above example, to arrive at correct taxable income.

3.    Revenue
recognition in case of rendering of services

Revenue recognition as per Ind-AS

As per Ind-AS 18, the recognition of revenue from rendering
of services is measured by reference to the stage of completion of a
transaction i.e. the percentage of completion method. Under this method,
revenue is recognised in the accounting periods in which the services are
rendered. As per paragraph 20 of Ind-AS 18, “percentage of completion method has
to be followed where the outcome of a transaction can be measured reliably.
Such reliable measurement of outcome requires fulfilment of the following
conditions:

(a) the amount of revenue can be measured reliably;

(b) it is
probable that the economic benefits associated with the transaction will flow
to the entity;

(c) the
stage of completion of the transaction at the end of the reporting period can
be measured reliably; and

(d) the
costs incurred for the transaction and the costs to complete the transaction
can be measured reliably”.

As per paragraph 26 of Ind-AS 18, “when the outcome of the
transaction involving the rendering of services cannot be estimated reliably,
revenue shall be recognised only to the extent of the expenses incurred and are
recoverable”.

As per paragraph 27 of this Ind-AS, “where execution of
the transaction has just started or has only reached preliminary stage
(referred to as early stage of a transaction), it may not be possible to
estimate outcome of the transaction involving the rendering of services. In
such situation, it is permissible for the entity to recognise revenue only to
the extent of costs incurred that are expected to be recoverable”.

Paragraph 28 states “when the outcome of a transaction
cannot be estimated reliably and it is not probable that the costs incurred
will be recovered, revenue is not recognised and the costs incurred are
recognised as an expense”.

Revenue recognition as per ICDS

As per ICDS IV dealing with
Revenue Recognition, revenue from service transactions shall be recognised by
the percentage of completion method. It is expressly provided that ICDS III on
Construction contracts shall apply to the recognition of revenue and associated
expenses, for a service transaction. In view of the express applicability of
ICDS III to a service transaction, where service transactions are at an early
stage, it would be possible for the entity to recognise revenue only to the
extent of the expenses incurred (as under Ind AS). However, ICDS IV provides
that the early stage of a contract cannot extend beyond 25% of the stage of
completion. Therefore, under ICDS IV, recognition of revenue by percentage of
completion method is compulsory beyond 25% of the stage of completion.

When services are provided by an indeterminate number of acts
over a specific period of time, revenue may be recognised on a straight line
basis over the specific period.

ICDS, however provides a
concession to certain service contracts with duration of less than 90 days. In
respect of such service contracts with duration less than 90 days, the assessee
has an option to treat revenue from such contracts to be recognised when the
rendering of services under that contract is completed or substantially
completed.

Difference between the Ind-AS
and ICDS

Ind-AS as well as ICDS requires recognition of revenue from
rendering of services as per the percentage of completion method for all
services. Under Ind-AS, percentage of completion method is to be adopted only
once reliable measurement of outcome is possible, which is possible only when
revenues and expenses can be measured reliably, and stage of percentage of
completion can also be measured reliably. There is no specific stage specified
in the Ind-AS from when the percentage of completion method becomes applicable,
but it would depend upon the conditions being satisfied in each case. However,
under ICDS IV, percentage of completion method would have to be followed once
the 25% stage of completion is reached, irrespective of whether the outcome can
be measured reliably.

Similarly, under Ind-AS, it is possible that when the outcome
of a transaction cannot be estimated reliably and it is not probable that the
costs incurred will be recovered, revenue is not recognised and the costs
incurred are recognised as an expense, resulting in a loss. However, under ICDS
IV read with ICDS III, if 25% threshold has been crossed, only the
proportionate loss based on the percentage of completion can be recognised.
ICDS is silent as to what happens in the early stages when outcome cannot be
reliably measures and the costs will not be recovered.

Further, ICDS additionally
grants an option to the assessee to recognize revenue from the contract with
project duration less than 90 days only on completion of contract or when it is
substantially completed. There is no such provision in Ind-AS 18.

An example

An example on the above would explain the difference between
Ind-AS 18 and ICDS IV. The company is engaged in the logistic business, whereby
it arranges inbound/ outbound transportation of goods. The company has huge
volume of transactions. In all cases of inbound/outbound transportation of
goods, the completion of transport of goods does not take more than 90 days period.

As on the last day of reporting period, the said company has
various pending logistic contracts, which have not reached 100% completion. The
company accordingly has to measure contract revenue from such contracts in
progress, only to the extent of percentage of logistics work complete. The said
estimation requires information of percentage of logistics work completed for
all contracts in progress, and the shipments in many of the contracts may be
mid-road/mid-sea/mid-air on the last day of the reporting period.

For Ind-AS purposes, the
company has to work out revenue from rendering of services by following
percentage of completion method, where the outcome of the contract (including
the stage of completion) can be reliably measured. Accordingly, it would have
to work out the percentage of contract completed for each contract in progress,
and the proportionate revenue and expenditure of each contract in progress, as
on the last day of the reporting period, where the outcome (including stage of
completion) can be reliably measured. However, as per ICDS, while filing the
tax return, the company can opt to offer the entire income from logistics
contracts only on completion of the entire work.

In many cases of logistics contracts, it may not be possible to
reasonably estimate the stage of completion. In that situation, under Ind AS,
the revenue from the contract would be recognised only to the extent of costs
incurred, and the profit would effectively be accounted for on completion of
the contract, as is the case under ICDS.

Impact of the above differences

The company, for commercial
reasons, may want to offer income from logistics contracts, with duration less
than 90 days, to income tax by following ICDS, only on completion of the
contract, where completion of services falls in a different FY. Such a company
would have the option to recognise revenue from contracts with duration of less
than 90 days, only on completion of the
contract. This would be irrespective of the fact that as per Ind-AS, it has recognised contract revenue by reference to the stage of
completion of the contract activity, at the reporting date. In normal
circumstances, where any contract commences as well as is completed in the same
year, revenue recognition as per Ind-AS 18 and ICDS IV would be the same.
However, where any contract with duration of less than 90 days commences and is
completed in a different FY, the company would have to maintain detailed
records, both for Ind-AS purposes as well as ICDS, where it opts for
recognising income on completion basis.

4.    Revenue recognition
in case of Construction contracts

Revenue recognition as per Ind-AS

As per Ind-AS 11
‘Construction Contracts’, the recognition of revenue and expenses is required
to be made by reference to the stage of completion of a contract i.e.
percentage of completion method. Under this method, contract revenue is matched
with the contract costs incurred in reaching the stage of completion, resulting
in the reporting of revenue, expenses and profit which can be attributed to the
proportion of work completed.

As per paragraph 32 of Ind-AS 11, when the outcome of a
construction contract cannot be estimated reliably (a) revenue shall be
recognised only to the extent of contract costs incurred that probably will be
recoverable, and (b) contract costs shall be recognised as an expense in the
period in which they are incurred.

Paragraph 33 of Ind-AS 11 explains a situation, where it
would be necessary for the entity to recognise contract revenue only to the
extent of contract costs. As per the said paragraph, “where the Construction
contract is at the early stages of a contract, it is often the case that the
outcome of the contract cannot be estimated reliably. In such a situation,
contract revenue can be recognized only to the extent of contract costs
incurred that are expected to be recoverable”. Ind-AS 11 also requires
recognition of expected loss, when it is probable that total contract costs
will exceed total contract revenue. This amount of expected loss is allowed to
be recognised as an expense immediately, irrespective of whether work has
commenced on the contract and the stage of completion of contract activity.

Revenue recognition as per ICDS

As per ICDS III dealing with Construction contracts, contract
revenue and contract costs associated with the construction contract should be
recognised as revenue and expenses respectively by reference to the stage of
completion of the contract activity, at the reporting date.

The said ICDS however gives concessional treatment to
contracts in the early stage of execution i.e. contracts which have not
completed a percentage of up to 25% of the total construction. During the early
stages of a contract, where the outcome of the contract cannot be estimated
reliably, contract revenue can be recognized only to the extent of costs incurred.

Difference between the Ind-AS
and ICDS

Ind-AS 11 as well as ICDS III, both permit recognition of
revenue only to the extent of expenses incurred, where the project is at an
early stage of execution and outcome cannot be estimated reliably. Ind-AS
however does not give any specific percentage of the construction activity to
be completed for the construction project to be categorised as ‘early stage of
execution’. Accordingly, for the construction activity where even 30% of the
total construction has been completed, revenue may be recognized only to the
extent of cost incurred, if based on the facts of the particular construction
contract it is established that the outcome cannot be estimated reliably.

The Institute of Chartered Accountants of India (ICAI) has
issued ‘The Guidance Note on Accounting of Real Estate Transactions (revised
2016)’ (GN) which is applicable to entities to which Ind-AS is applicable. As
per the said GN, a reasonable level of development is not achieved if the
expenditure incurred on construction and development costs is less than 25% of
the construction and development costs. As per the GN, a reasonable level of
development is measured with reference to ‘construction and development cost’
and excludes ‘Cost of land and cost of development rights’ as well as
‘Borrowing cost’. Though the GN applies only to real estate transactions and
not to construction contracts, it may be possible to apply this level of 25%
for construction contracts.

ICDS III, however expressly provides that the early stage of
a contract shall not extend beyond 25% of the stage of completion.

Further, Ind-AS requires a company to recognize the entire
expected loss, when total contract costs is likely to exceed total contract
revenue. However, ICDS does not specifically provide for recognition of
expected loss. The expected loss can be recognised only on percentage of
completion method, i.e. proportionately.

Impact of the above differences

 The stage of profit
recognition by following percentage of completion method under Ind-AS and ICDS
may differ on account of the differing concepts of early stage of contract
where outcome cannot be reasonably estimated. While, as per accounts, profits
may not be recognized, it is possible that, under ICDS, profits have to be
recognised.

Where such company has recognised the entire loss on the
contract in the profit and loss account on the ground that total contract costs
is likely to exceed total contract revenue, it would not have the benefit of
the entire expected loss as per ICDS. In the tax return, irrespective of that
fact that there would be a loss at the end of the project, it would have to
recogniswe contract revenue (and therefore estimated total loss) by following
the percentage of completion method, at the year-end.

5.    Purchases of goods
on deferred payment terms

Cost of purchase as per Ind-AS
2

As per Ind-AS 2, the cost of inventories shall comprise all
costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition. Further, where the inventory
is purchased on deferred payment terms, and the purchase price is higher than
the purchase price for such inventory on normal credit terms basis, the
arrangement effectively contains a financing element. In such a situation, the
difference between the actual purchase price and the purchase price of goods
with normal credit terms, is recognized as financing cost.. The said financing
cost has to be charged to the statement of profit and loss, over the period of
the financing.

Cost of purchase as per ICDS
II As per ICDS II which deals with valuation of inventories, the costs of
purchase shall consist of purchase price including duties and taxes, freight
inwards and other expenditure directly attributable to the acquisition.
However, interest and other borrowing costs shall not be included in the cost
of inventories.

Difference between the Ind-AS
and ICDS

There is a difference in the cost of purchase as per Ind-AS 2
and ICDS II. As per Ind-AS 2, where goods are purchased on deferred payment
terms, the difference between the purchase price with normal credit terms and
the amount paid with deferred payment term, is considered as interest expense
and would have to be excluded from the purchase price of goods. However, as per
ICDS II, entire purchase price paid, irrespective of outright purchase price or
purchase on deferred payment terms, is considered as cost of purchase. This
would result in difference in the valuation of stock, as well as timing
difference on account of charge of the financing cost to the Profit & Loss
Account over the finance period in accordance with Ind AS, as against treatment
as purchase as per ICDS.

An example

An example on the above would explain the difference between
the Ind-AS 2 and ICDS II. The company has purchased goods from the seller at
Rs. 75,000 on 1st January 2017 with 12 months credit period. The
same goods could be purchased at Rs. 65,000 with normal credit period of 3
months generally allowed in the Industry. As per Ind-AS 2, difference of Rs.
10,000 would be considered as interest expense, which can be charged to profit
and loss account over the period of financing. Accordingly, interest expense of
Rs. 10,000 beyond normal credit period of up to 31st March 2017,
would be considered as interest expense only in FY 2017-18. Where the company
has purchased such inventory out of borrowed funds, any interest paid would
have to be expensed out to the profit and loss account and would not be
considered as ‘cost of inventory’.

However, as per ICDS II, entire purchase cost of Rs. 75,000,
irrespective of deferred payment terms, would be treated as cost of purchases,
and would be included in the cost of inventory, if the said goods are lying in
stock as on 31st March 2017.

Impact of the above differences

Accordingly, there would be
difference between the cost of purchases as per Ind-AS and ICDS. The company
would have to maintain records of such interest expense arising because of
deferred payment basis and which has been charged to profit and loss account in
subsequent FY. Such interest which has been charged to the profit and loss
account both in current FY as well as in subsequent FY would, under ICDS, have
to be treated as part of purchase cost/ inventory valuation in the current FY.

The company would also have to maintain details of all such
differences which arise because of difference in Ind-AS and ICDS.

6.    Initial cost of
fixed assets purchased on deferred settlement terms

Initial cost of fixed assets as per Ind-AS 16

As per Ind-AS 16, an item of Property, Plant and Equipment
(PPE) that qualifies for recognition as an asset shall be measured at its cost.
The cost of such asset is the cash price
equivalent at the recognition date. If payment is deferred beyond normal
credit terms, difference between the cash price equivalent and the total
payment towards purchase of assets, is recognized as interest over the period
of credit, unless such interest is capitalised in accordance with Ind-AS 23
which deals with borrowing cost. Ind-AS 23 lays down conditions as to when
borrowing cost can be added to the cost of
assets purchased.

Actual cost as per ICDS V

As per ICDS V dealing with tangible fixed assets, the actual
cost of an acquired tangible fixed asset shall comprise of its purchase price,
import duties and other taxes, excluding those subsequently recoverable, and
any directly attributable expenditure on making the asset ready for its
intended use.

Difference between the Ind-AS
and ICDS

There is a material difference in the cost of fixed assets as
per Ind-AS 16 and ICDS V. As per Ind-AS 16, cash price equivalent at the
recognition date would be regarded as initial cost of fixed assets. However, as
per ICDS V, entire purchase price of the fixed assets, irrespective of deferred
payment terms, would be considered as actual cost of fixed assets. Accordingly,
any financing cost arising because of bifurcation of payment towards purchase
of assets into cash price equivalent and the financing element, would have to
be added to written down value of the respective ‘block of assets’ in the year
of purchase, irrespective of its treatment as per Ind-AS.

An example

An example on the above would explain the difference between
the Ind-AS 16 and ICDS V. The company has purchased a machine for Rs. 5,00,000
on 31st March 2017 with 12 months credit period. The said machine
had cash price of Rs. 4,50,000. As per Ind-AS 16, difference of Rs. 50,000
would be considered as finance cost over the period of financing. Accordingly,
Rs. 50,000 would be considered as finance cost in FY 2017-18, as the same
pertains to period after 31st March 2017.

Impact of the above differences

Accordingly, there would be difference between the cost of
PPE as per Ind-AS and ICDS. The company would have to maintain records of such
finance cost arising because of difference between the cash price equivalent
and the total payment towards purchase of PPE. Such cost, which would be
charged to the statement of profit and loss in subsequent FYs, would have to be
added to the cost of the respective ‘block of assets’, in order to comply with
ICDS provisions. The company would be entitled to depreciation on such cost in
the current year itself and would increase its block of assets by the said
amount, even though the same would be charged to the statement of profit and
loss in the next FY.

7.    Interest free loan
to subsidiary or to employee (for long term)

Recognition of
interest free loan given as  per Ind-As 109

Ind-AS 109 requires that financial assets and liabilities
should be recognised on initial recognition at fair value, as adjusted for the
transaction cost. In accordance with Ind-AS 109 ‘Financial Instruments’, in
case the loan is for a period exceeding one year (i.e. long term) the lender
would recognise the loan at its fair value as per the EIR method. Accordingly, interest
free loan exceeding one year given by the parent company to its subsidiary or
by an employer to its employee would be recorded at fair value, which would be
less than the amount of loan given. In spite of the fact that the said loan was
interest free, notional interest on fair value of the loan would be credited as
interest income in the profit and loss.

Recognition of interest free loan given to subsidiary/employee
as per ICDS

Under ICDS, there is no concept of recognition of financial
assets at fair value. There is also no concept of recognition of notional
interest as income in the statement of profit and loss. For income tax
purposes, the said interest free loan given would be recorded at the nominal
amount of the loan. No interest would be regarded as accruing on the loan,
since it is contractually an interest-free loan.

Difference between the Ind-AS
and ICDS

As per Ind-AS, every year the imputed interest income will be
provided in the statement of profit and loss for the year, with the corresponding
debit to the value of loan reflected as an asset. Over the years, loan amount
will finally be reinstated to what would be the repayable amount (the amount
that was received originally). Simultaneously, an appropriate amount will be
transferred from equity to the statement of profit and loss account, which will
have the effect of negating the interest income in the statement of profit and
loss. .

Impact of the above differences

Such notional interest which has been credited to the
statement of profit and loss of the parent company/employer would not be
“income” as per the Act. Accordingly, the same would have to be reduced from
the total income of the parent company/employer to arrive at taxable income.

8.    Borrowing cost

Borrowing cost as per Ind-AS
23

As per Ind-AS 23 dealing with borrowing costs, the borrowing
costs includes interest expense calculated using the effective interest method,
finance charges in respect of finance leases recognised in accordance with
leases and exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs.

Ind AS 23 defines a qualifying asset as an asset that
necessarily takes a substantial period of time to get ready for its intended
use or sale. As per paragraph 7 of Ind-AS 23, the following types of assets may
be qualifying assets: (a) inventories, (b) manufacturing plants, (c) power
generation facilities, (d) intangible assets, (e) investment properties and (f)
bearer plants. Financial assets and inventories that are manufactured or
otherwise produced, over a short period of time are not qualifying assets.
Further, assets that are ready for their intended use or sale when acquired are
not qualifying assets.

As per paragraph 12 of Ind-AS 23, “the amount of borrowing
costs eligible for capitalization is the actual borrowing costs incurred during
the period less any investment income on the
temporary investment of those borrowings.”

Further, as per paragraph 14 of Ind-AS 23, “where the
entity has borrowed funds generally (and not for specific purpose of acquiring
qualifying assets) but used such borrowed funds for acquisition of a qualifying
asset, borrowing costs eligible for capitalisation are to be determined, by
applying a capitalisation rate to the expenditures on that asset”.

As per paragraph 22 of Ind-AS 23, “an entity shall cease
capitalising borrowing costs, when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete”.

Borrowing costs as per ICDS IX read with section 36(1)(iii)

Section 36(1)(iii) provides for deduction of interest in
respect of capital borrowed for the purposes of business. The proviso to
section 36(1)(iii) requires that interest in respect of capital borrowed for
acquisition of an asset from the date of borrowing till the date the asset is
put to use, is not allowable as a deduction.

As per ICDS IX, borrowing costs are interest and other costs
incurred by a person in connection with the borrowing of funds and include (i)
commitment charges on borrowings, (ii) amortised amount of discounts or
premiums relating to borrowings, (iii) amortised  amount 
of  ancillary  costs 
incurred  in  connection 
with  the arrangement of
borrowings and (iv) finance charges in respect of assets acquired under finance
leases or under other similar arrangements.

As per ICDS IX, the term
“Qualifying asset” for the purposes of capitalisation of specific borrowing
costs means: (i) land, building, machinery, plant or furniture, being tangible
assets, (ii) know-how, patents, copyrights, trade-marks, licenses, franchises
or any other business or commercial rights of similar nature, being intangible
assets and (iii) inventories that require a period of twelve months or more to
bring them to a saleable condition.

As per ICDS IX, general borrowing costs are capitalized to
the qualifying assets based on a particular formula. For the purpose of
capitalisation of general borrowing costs, the term “Qualifying Asset” means
any asset which necessarily requires a period of 12 months or more for its
acquisition, construction or production. Further, an entity shall cease
capitalizing borrowing costs, when such asset is first put to use or when
substantially all the activities necessary to prepare such inventory for its
intended sale are complete.

Difference between the Ind-AS
and ICDS

A major difference between Ind AS 23 and ICDS IX is in
respect of capitalisation of costs of borrowings taken specifically for
acquisition of an asset. Under ICDS IX read with the proviso to section
36(1)(iii), cost of borrowings taken for acquisition of all fixed assets, up to
the date of put to use, is to be capitalised. However, under Ind AS 23, qualifying
assets, where such borrowing costs are to be capitalised, are only those assets
which necessarily take a substantial period of time to get ready for their
intended use or sale, and not all fixed assets. This requires judgement to be
applied and can be subjective – the period for qualifying assets under Ind-AS
23 can be even 6 months or even 24 months.

There is also a material difference in the concept of
borrowing costs as per Ind-AS 23 and ICDS IX.As per Ind-AS 23, borrowing cost
is calculated using the effective interest method, whereas as per ICDS, it is
calculated at actual interest and other costs incurred.

Exchange differences arising in respect of foreign currency
borrowing, forms part of borrowing costs as per Ind-AS, whereas the same does
not form part of borrowing cost as per ICDS.

As per Ind-AS, any income from temporary investment of
borrowed funds is to be reduced from the borrowing cost required to be
capitalised, whereas such reduction is not permissible in ICDS.

There is also a material difference in the formula for
capitalising general borrowing cost, in that under ICDS, the cost of general
borrowing is apportioned in the ratio of the qualifying assets to the total
assets based on the opening and closing values of such assets, without
considering the amount of or movement in borrowings during the year Under Ind
AS, the weighted average cost of general borrowing is applied to the value of
qualifying assets for the relevant period.

As per Ind-AS 23, inventories that do not necessarily take a
substantial period of time for getting ready for sale will not qualify as
qualifying assets. The term “substantial period of time” is not defined, and
hence could be even less than 12 months. However, as per ICDS, the period of
time is defined as 12 months, and hence inventories that require less than 12
months to bring them to a saleable condition are not qualifying assets.

As per Ind-AS, an entity shall cease capitalizing borrowing
costs to assets, when substantially all the activities necessary to prepare
such asset for its intended use or sale are complete. However, as per ICDS, the
capitalization would cease where fixed assets are put to use, or when
substantially all the activities necessary to prepare such inventory for its
intended sale are complete.

Impact of the above differences.

There are various differences between Ind-AS and ICDS on
definition of borrowing cost and qualifying assets, treatment of income arising
from temporary investment of borrowed fund, formula for capitalising borrowing
cost in case of general borrowings and finally, on the time of cessation of
capitalisation. These would result in different capitalisation of borrowing
costs as per accounts, and in computation of income as per ICDS. Accordingly,
the interest debited to Statement of Profit and Loss and that allowable as a
deduction would also differ. These differences would also impact the
depreciation.

9.    Financial assets

Financial assets as per Ind-AS
109

As per Ind-AS 109, all financial asset are required to be
subsequently measured at fair value through profit & loss (FVTPL), fair
value through other comprehensive income (FVOCI) or at amortised cost (normally
for debt instruments), at each balance sheet date, depending upon their initial
classification by the entity.

Investments

Investments are not covered by ICDS, but any gain or loss is
to be considered as capital gains on transfer of such investments. Therefore,
any item in statement of profit or loss or other comprehensive income, on
account of remeasurement of financial assets, is to be ignored for computation
of taxable income.

Any security on acquisition as stock in trade shall be
recognised at actual cost. At the end of any previous year, securities held as
stock-in-trade shall be valued at actual cost initially recognised or net
realizable value at the end of that previous year, whichever is lower.
Securities not listed on a recognized stock exchange or listed but not quoted
on a recognised stock exchange with regularity from time to time, shall be
valued at actual cost initially recognized.

For the purpose of applying the above principles, the
comparison of actual cost initially recognised and net realisable value shall
be done category-wise and not for each individual security. For this purpose,
securities shall be classified into the following categories, namely:-

(a) shares,

(b) debt securities,

(c) convertible securities, and

(d) any other securities, not covered above.

The value of securities held as stock-in-trade of a business
as on the beginning of the previous year shall be:

(a) the cost
of securities available, if any, on the day of the commencement of the business
when the business has commenced during the previous year; and

(b) the
value of the securities of the business as on the close of the immediately
preceding previous year, in any other case.

Difference between the Ind-AS
and ICDS

There is material difference in the valuation of securities
held as stock in trade as per Ind-AS 109 and ICDS IX. As per Ind-AS, the
valuation of securities are required to be made at fair value. However, as per
ICDS, the listed securities, held for trading shall be valued at actual cost
initially recognised or net realisable value at the end of that previous year,
whichever is lower, Further, ICDS requires valuation on securities to be made
category-wise., and not on individual investment basis as per Ind-AS.

Impact of the above differences

In view of the above difference, there would be differences
in gain or loss recognised by the company in its profit and loss account vis-à-vis
as per tax return. The company would have to maintain detailed records of
transactions of securities traded as well as held as inventory, by applying
principles laid down in Ind-AS as well as ICDS.

10.  Actual cost of assets
– Cost of Dismantling and restoration

Cost of an asset as per Ind-AS
16

As per Ind-AS 16, an item of property, plant and equipment
that qualifies for recognition as an asset shall be measured at its cost. Cost
for this purpose also includes “the initial estimate of the costs of
dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs.”

Actual cost of asset as per ICDS IV

As per ICDS IV, the actual cost of an acquired tangible fixed
asset shall comprise its purchase price, import duties and other taxes,
excluding those subsequently recoverable, and any directly attributable
expenditure on making the asset ready for its intended use. Any initial
estimate of the costs of dismantling, removing the item and restoring the site
on which it is located, is not treated as actual cost.

Difference between the Ind-AS
and ICDS

Actual cost of assets as per Ind-AS includes cost of the
initial estimate of the costs of dismantling, removing the item and restoring
the site on which it is located. However, the same has to be ignored as per the
ICDS.

Impact of the above differences

Accordingly, any increase in actual cost of the assets
because of cost of dismantling being included as per Ind-AS has to be ignored
while computing actual cost of assets as per ICDS V.

Impact on Book Profits under Minimum Alternative Tax

In the above article, the impact on book profits under
section 115JB has not been considered, since the starting point for that
purpose is the profit as per statement of profit and loss account, and the
further adjustments required to be made are listed out in sub-sections (2A),
(2B) and (2C) of section 115JB.

Conclusion

These are only some of the significant differences which one
may come across, while computing the income chargeable to tax under the
Income-tax Act, 1961, where the accounts have been prepared by adopting Ind AS.

There are many more differences which one may
come across during the course of review of the accounts. Being aware of such
differences is essential for a tax auditor or tax advisor, and hence it is
essential to understand the differing accounting treatment being necessitated
on account of adoption of Ind AS.

Sections 2(42A), 54 – Date of letter of allotment can be considered to compute the period of holding to assess the entitlement of exemption u/s. 54.

12. Nandita Patodia vs. ITO (Mumbai)

Members : G. S. Pannu (AM) and Amarjit Singh (JM)

ITA No.: 5982/Mum/2013

A.Y.: 2010-11.     
Date of Order: 31st March, 2017

Counsel for assessee / revenue: Anuj Kishnadwala / Pradeep
Kumar Singh

FACTS 

The assessee, an individual, filed return of income declaring
total income of Rs. 11,16,013. In the return of income, the assessee claimed
exemption u/s. 54 in respect of long term capital gain of Rs. 45,58,478 arising
on sale of two flats being flat nos. 801 and 802 in Neelkanth Palm Realty. The
exemption was claimed on the ground that the assessee has purchased a new
residential house for Rs. 68,26,400 being Flat No. 701 in Neelkanth Palm Thane.

In the course of assessment proceedings, the Assessing
Officer (AO) found that the agreements for purchase of the flats sold were
dated 26.3.2009 and 27.3.2009. Considering the holding period by adopting these
dates, the gain would be short term capital gain. The assessee had adopted
30.3.2005, being the date of letter of allotment, to be the date of acquisition
of these flats. The AO finalised the assessment by regarding the date of the
agreement as the date of acquisition of flats sold and charged to tax the
capital gain as short term capital gain. He denied exemption claimed u/s. 54 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 was contended that the Mumbai Tribunal in the case of Anupama
Agarwal vs. DCIT [ITA No. 472/Mum/2015 dated 23.9.2016], the assessee’s
sister has considered the holding period from 30.03.2005 being the date of
letter of allotment.

HELD

The Tribunal observed that from the order passed by the
Tribunal in the case of Anupama Agarwal (supra) it is quite clear that
in the case of the sister of the assessee the date of allotment and payment of
first installment was considered by ITAT for assessing whether the gain arising
on sale was short term gain or a long term gain. It held that –

(i)   the case of the assessee is squarely covered
by the case of Anupama Agarwal (supra); and

(ii)  the ratio given in the case of Madhu Kaul
vs. CIT and another [363 ITR 54 (Punj. & Har.)] and CIT vs. S. R.
Jeyshankar [373 ITR 120 (Mad)] are also quite applicable to the facts of
the present case in which the date of allotment letter was considered to assess
the holding period to ascertain the entitlement of exemption u/s. 54 of the
Act.

The Tribunal set aside the finding of the CIT(A) and directed
the AO to consider the allotment letter dated 30.3.205 to determine the long
term / short term capital gain and accordingly the entitlement of exemption
u/s. 54 of the Act.

The appeal filed by
the assessee was allowed.