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

INTRODUCTION

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

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

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

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

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

THE CASES IN WHICH THE BLOCK ASSESSMENT CAN BE MADE

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

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

BLOCK PERIOD

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

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

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

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

ISSUING NOTICE UNDER SECTION 158BC(1)

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

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

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

SCOPE OF ASSESSMENT

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

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

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

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

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

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

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

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

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

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

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

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

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

ABATEMENT OF ASSESSMENT

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

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

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

LEVY OF TAX, INTEREST AND PENALTY

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

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

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

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

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

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

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

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

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

TIME LIMIT TO COMPLETE THE ASSESSMENT

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

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

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

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

ASSESSMENT OF OTHER PERSONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Time which has elapsed from the end of the relevant assessment year Conditions, if any / Observations
For issuance of notice under section 148A
Not more than three years

 

[Section 149(2)(a)]

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

 

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

More than three years but not more than five years

 

[Section 149(2)(b)]

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

 

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

For issuance of notice under section 148
Not more than three years and three months

 

[Section 149(1)(a)]

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

 

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

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

 

[Section 149(1)(b)]

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

 

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

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

5.2 Illustrations:

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

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

5.3 Under the erstwhile provisions, Explanation to section 149 defined “asset”, whereas the amended provisions do not have definition of “asset”. Therefore, the term “asset” in section 149 would have to be understood in its normal sense as is explained by the dictionaries. The following are some of the meanings of “asset”:

(i) As per Black’s Law Dictionary (Eighth edition), the word “asset” means, an item that is owned and has value; the entries on a balance sheet showing the items of property owned, including cash, inventory, equipment, real estate, accounts receivable and goodwill; all the property of a person available for paying debts or for distribution;

(ii) In Velchand Chhaganlal vs. Mussan 14 Bom.L.R. 633, it was held that the word “assets” means, a man’s property of whatever kind which may be used to satisfy debts or demands existing against him;

(iii) In Funk & Wag-nail’s Standard Dictionary, “asset” has been defined as meaning, in accounting, the entries in a balance-sheet showing the properties or resources of a person or business as accounts receivable, inventory, deferred charges and plant as opposed to liability. The assets also signify everything which can be made available for the payment of debts. [UOI vs. Triveni Engg. Works Ltd., (1982) 52 Comp. Cas 109 (Del)];

(iv) “Asset” is a word of wide import. In its common acceptation the term means property, real and personal, property owned, property rights. It represents something over which a man has domain and can transfer with or without consideration, and which may be reached by execution process – Oudh Sugar Mills Ltd. vs. CIT [(1996) 222 ITR 726 (Bom)].

5.4 Under the erstwhile provision, the sum of ₹50 lakh alleged to be income chargeable to tax which has escaped assessment was to be computed with reference to aggregate of investment in asset or expenditure incurred in various years in which such investment was made or expenditure incurred, whereas under the amended provisions, the limit of ₹50 lakh is qua each assessment year.

5.5 The time limit for reopening the assessments has been reduced from ten years under the erstwhile provisions to five years under the amended provisions.

6 Amendments to Section 151: The Amending Act has, with effect from 1st September, 2024, substituted a new Section 151 in place of the erstwhile Section 151.

6.1 Under the erstwhile provisions, the Specified Authority for granting approval for the purposes of section 148 and 148A depended upon the time period which has elapsed after the end of the relevant assessment year till the date of issuance of the notice / passing of an order for which approval was being granted. Under the present provisions, irrespective of the number of years which have elapsed from the end of the relevant assessment year, the Specified Authority is the same.

6.2 The Specified Authority under the erstwhile provisions and under the amended provisions is as mentioned in the Table below:

Number of years which have elapsed from the end of the relevant assessment year Specified Authority under the erstwhile provisions Specified Authority under the amended provisions
Three years or less PCIT or PDIT or CIT or DIT The Additional Commissioner or the Additional Director or the Joint Commissioner or the Joint Director
More than three years PCCIT or PDGIT or CC or CDG

6.3 The expression “Assessing Officer” is defined in section 2(7A) inter alia to mean Additional Commissioner or Additional Director or Joint Commissioner or Joint Director who is directed under 120(4)(b) to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under the Act. Therefore, if an Additional Commissioner or Joint Commissioner has done an assessment of income of the relevant assessment year which is sought to be reopened, can the very same authority be regarded as Specified Authority authorised to grant approval for the purposes of section 148 and 148A? It would be fallacious to contend that same authority which has framed assessment order can grant approval for issuance of notice for reassessment. It is understood that, presently, in practice, Additional Commissioner or Joint Commissioner does not frame assessments and therefore this question is academic.

7 Amendments to Section 152: The Amending Act has, with effect from 1st September, 2024, inserted sub-sections (3) and (4) in Section 152.

7.1 Sub-sections (3) and (4) of section 152 provide that the provisions of sections 147 to 151, as they stood prior to their amendment by the Amending Act shall continue to apply in the following cases:

(i) where on or after 1st April, 2021 but before
1st September, 2024:

(a) a search has been initiated under section 132; or

(b) requisition is made under section 132A; or

(c) a survey is conducted under section 133A [other than under section 133(2A)]; or

(ii) where a case is not covered by (i) above and prior to 1st September, 2024:

(a) a notice under section 148 has been issued; or

(b) an order has been passed under section 148A(d).

7.2 In view of the above, the erstwhile provisions of sections 147 to 151 shall continue to apply to all cases where, up to 31st August, 2024, a notice under section 148 is issued or an order is passed under section 148A(d) of the Act. It is relevant to note that issuance of notice under section 148 up to 31st August, 2024 or passing of an order (and not necessarily its service) under section 148A(d) is sufficient to have the case covered by the erstwhile provisions of sections 147 to 151.

7.3 In respect of a search which has been initiated up to 31st August, 2024, the provisions of erstwhile sections will apply to the assessee in whose case search is initiated. However, if in such a search, any money, bullion, jewellery or other valuable article or thing belonging to any other person is seized, then whether, to such other person, the provisions of erstwhile sections 147 to 151 will apply or will the provisions as amended by the Amending Act apply? It appears that it will be the provisions as amended by the Amending Act which will apply. However, the matter is not free from doubt.

8 Consequence of reduction in time limit for reopening from six years to five years:

8.1 As a result of reduction in time period for re-opening of assessments from six years to five years, on 1st September, 2024, i.e., upon the coming into force of the amended provisions, issuance of notice under section 148 / 148A for assessment year 2018–19 will be time barred. However, if for A.Y. 2018–19, a notice under section 148 is issued up to 31st August, 2024 or an order under section 148A(d) is passed up to 31st August, 2024, then the provisions of erstwhile sections 147 to 151 shall apply. The Department is presently trying to issue notices for A.Y. 2018–19, in all cases where the AO has information that suggests that income chargeable to tax has escaped assessment.

9 Sanctions to be obtained: Under the erstwhile provisions, as were in force immediately before their amendment by the Amending Act, subject to certain exceptions, approval was required for:

(i) conducting an enquiry before issuance of notice under section 148A(b);

(ii) passing of an order under section 148A(d) determining whether or not it is a fit case for issuance of notice under section 148;

(iii) up to 31st March, 2022, issuance of notice under section 148 in all cases;

(iv) from 1st April, 2022, for issuance of notice under section 148 in cases where an order under section 148A(d) was not required to be passed.

Important Amendments by The Finance (No. 2) Act, 2024 – Buy-Back of Shares

BACKGROUND

The tax treatment of buy-back of shares has been a focal point of legislative intervention since the concept’s inception. In a buy-back, a company purchases its own shares for cancellation and pays consideration to the shareholders. From a shareholder’s perspective, this transaction resembles the sale of shares, with the company itself acting as the buyer. However, from the standpoint of the Companies Act, a company purchasing its own shares cannot hold them as treasury stock, and the quantum of the buy-back is partially linked to reserves, aligning its treatment more closely with dividends. This distinction has significantly influenced the legislative framework governing the taxation of buy-backs.

Prior to the Finance Act of 2013, the law provided that any consideration received by a shareholder on a buy-back was not treated as ‘dividend’ due to a specific exemption under section 2(22)(iv). Such buy-back considerations were instead taxed as ‘capital gains’ under section 46A in the hands of shareholders. In the case of shareholders residing in Mauritius or Singapore, India did not have the right to tax capital gains, allowing the entire buy-back proceeds to be repatriated tax-free. Consequently, companies increasingly used buy-backs as an alternative to dividend payments, thereby avoiding the Dividend Distribution Tax (DDT).

This tax arbitrage was addressed by the Finance Act of 2013 through the introduction of section 115QA, which shifted the tax liability to the company executing the buy-back. The Memorandum to the Finance Bill 2013 highlighted the issue:

“Unlisted Companies, as part of tax avoidance schemes, are resorting to buy-backs of shares instead of paying dividends to avoid the payment of tax by way of DDT, particularly where the capital gains arising to the shareholders are either not chargeable to tax or are taxable at a lower rate.”

Following the amendment, the regime for buy-backs became analogous to that of dividends, with the company paying the tax, and the income being exempt in the hands of shareholders under section 10(34A). The Finance Act 2020 abolished DDT (i.e., section 115-O) and reverted to the classical method of taxation, wherein dividends are taxed in the hands of the shareholders. This change led to a shift from a flat DDT rate to variable tax rates for shareholders — 36 per cent for residents and 20 per cent for non-residents (potentially reduced under DTAA rates). However, section 115QA remained intact, with companies continuing to pay tax at a flat rate of 23.296 per cent (inclusive of surcharge and cess), while the shareholders’ income remained exempt under section 10(34A). This discrepancy once again created an opportunity for tax arbitrage. For resident individual shareholders, dividends were taxed at 36 per cent, whereas buy-backs were taxed at 23.296 per cent. Moreover, since the tax was borne by the company, a larger distributable amount remained with the shareholders, prompting unlisted companies to favour buy-backs over dividend declarations to exploit the tax advantage.

This practice was curtailed by the Finance Act (No. 2) of 2024, which introduced a classical, albeit unconventional, split in the tax treatment. The new law proposes to treat the consideration received on a buy-back as a dividend, while the extinguishment of shares by shareholders is treated as a capital gain. This hybrid treatment is the focus of the article’s analysis.

LAW PRIOR TO AMENDMENT

Section 115QA mandated a flat rate of taxation at 23.296 per cent on the company executing the buy-back, while the consideration received by the shareholder was exempt under section 10(34A). The law, as it stood, had several unique features:

  • Tax Liability on the Company: The obligation to pay tax was placed on the company, allowing it to distribute the entire amount computed under section 68 of the Companies Act, 2013, to shareholders. The tax paid on the buy-back did not count towards the limits set by the law, enabling a higher payout to shareholders. Consequently, the effective tax rate, on a derivative basis, reduced to 18.89 per cent (calculated as 23.296/123.926*100).
  • Tax on Distributed Income (DI): The tax was levied on the distributed income, which was defined as the amount received by the company upon the issuance of shares, minus the consideration paid on the buy-back. This definition excluded the cost to the shareholder in cases where shares were purchased through secondary transfers, resulting in tax being paid on a higher amount than the actual income generated.
  • Challenges for Non-Resident Shareholders: Since the tax was paid by the company in addition to the corporate tax, non-resident shareholders faced difficulties in claiming tax credits in their home countries. This scenario often led to the possibility of double taxation.
  • Exemption for Shareholders: With the income being exempt in the hands of shareholders and the tax borne by the company, listed companies frequently offered buy-back prices above market value to incentivize participation. Shareholders, seeing significant value appreciation, were thus motivated to tender their shares in the buy-back.

This tax arbitrage was addressed by the Finance Act (No. 2) of 2024, which introduced significant changes to the tax regime governing buy-backs.

AMENDMENT BY FINANCE (NO. 2) ACT 2024

Finance (No. 2) Act 2024 introduced series of amendment introducing novel method to tax buy back. Following are list of amendments:

i) Introduction of section 2(22)(f) in the ‘Act’ to state that any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013 is taxable as dividend. (Clause 3 of the Bill)

ii) Insertion of proviso to section 10(34A) of the Act to provide that this clause shall not apply with respect to any buy-back of shares by a company on or after the 1st October, 2024. (Clause 4 of the Bill).

iii) Insertion of a proviso to section 46A of the Act w.e.f. 1st October, 2024 to provide that where a shareholder receives any consideration of the nature referred to in sub-clause (f) of section 2(22) from any company, in respect of any buy-back of shares, then the value of consideration received by the shareholder shall be deemed to be “nil’. (Clause 18 of the Bill)

iv) Insertion of a new proviso to section 57 to provide that that no deduction shall be allowed in case of dividend income of the nature referred to in sub-clause (f) of clause (22) of section 2. (Clause 24 of the Bill)

v) Insertion of a further proviso to sub-section 115QA(1) of the Act whereby it would not apply in respect of any buy-back of shares that takes place on or after 1st October, 2024. (Clause 39 of the Bill)

vi) Amendment to section 194 of the Act on deduction of taxes at source @10 percent on payments of dividend, to make it applicable to sub-clause (f) of clause (22) of section 2. (Clause 52 of the Bill)

Provisions are effective from 1st October, 2024. In other words, buy back before cut-off date will be governed by section 115QA. It is advisable that buy back scheme is complete in all respects (including filing with ROC), to avoid transitionary issues.

IMPLICATIONS IN HANDS OF COMPANY

Previously, companies were required to pay buy-back tax under section 115QA. With the recent legislative changes, the law now treats the payment of consideration by the company as a dividend, making it taxable in the hands of the shareholder. Consequently, the company assumes the role of a tax deductor. It will be required to deduct tax under section 194 or section 195 of the Income Tax Act, depending on the specific circumstances. Following the deduction, the company must remit the tax and comply with the filing requirements for TDS (Tax Deducted at Source) and SFT (Statement of Financial Transactions) returns.

The treatment of buy-back proceeds as dividends remains consistent even in scenarios where the company does not have accumulated profits. The deliberate omission of the phrase “to the extent of accumulated profits,” which is present in other provisions of Section 2(22), underscores the intent to classify buy-back transactions as dividends irrespective of the company’s profit status. This is particularly relevant in cases where the buy-back is funded from the securities premium account. However, from an equity perspective, securities premium fundamentally represents a repayment of capital, and therefore, its characterization as a dividend raises questions. The underlying principle is that securities premium should not be treated as a dividend, as it does not constitute income in the traditional sense but rather a return of capital to shareholders.

An intriguing question arises regarding buy-backs conducted under sections 230 to 232 of the Companies Act, which require approval from the National Company Law Tribunal (NCLT). The query is whether such buy-backs will be treated as dividends. This ambiguity exists because section 2(22)(f) of the Income Tax Act specifically refers to the purchase of shares in accordance with the provisions of section 68 of the Companies Act, 2013. A similar situation emerged concerning section 115QA, where the definition of buy-back initially referred only to section 77A of the Companies Act, 1956. This definition was subsequently broadened by the Finance Act of 2016 to include the purchase of shares in accordance with the provisions of any law in force relating to companies. However, this amendment was applied prospectively.

In the absence of a similar broadening of the language in the current context, it can be argued that only buy-backs conducted in accordance with section 68 of the Companies Act, 2013, fall within the scope of the new definition of dividend. At the same time, care and caution needs to be exercised as Court / Tribunal in undernoted decision1 have recharacterised buy back as dividend.

On similar lines, redemption of preference shares is governed by section 55 of Companies Act 2013 and should be outside the purview of provisions.

TAX IMPLICATIONS IN THE HANDS OF RESIDENT SHAREHOLDERS

CHARACTERISATION OF BUY-BACK CONSIDERATION

Section 2(22) of the Income-tax Act defines “dividend,” and clause (f) within this section specifically includes payments made by a company for purchasing its own shares as dividends. This definition of dividend is applied consistently across the entire Act, meaning that the consideration received by shareholders during a buy-back transaction will be treated as dividend income. Consequently, this income must be reported under the head “Income from Other Sources” and taxed accordingly.


1 Cognizant Technology-Solutions India Pvt. Ltd., vs. ACIT [2023] 154 taxmann.com 309 (Chennai - Trib.); Capgemini India (P.) Ltd., In re [2016] 67 taxmann.com 1 (Bombay HC)

Section 57 of the Act prohibits any deductions against this income, implying that the entire buy-back consideration will be taxed on a gross basis, without allowing any deduction for the original cost of the shares. Shareholders must also account for this dividend income when calculating their advance tax obligations. However, interest obligations under Section 234C will only commence from the quarter in which the dividend is actually received.

The Act allows this dividend income to be set off only against losses under the heads “House Property” or “Business Loss.” The fiction of treating buy-back consideration as dividend is intended to be applied uniformly throughout the provisions of the Act. For shareholders that are domestic companies, the benefit of Section 80M should be available. In essence, buy-back consideration deemed as dividend can be considered by the company if it further declares dividends to its shareholders or engages in additional buy-backs, allowing the company to claim a deduction under Section 80M. As a result, tax will only be paid on the income exceeding the relief available under Section 80M. Additionally, an Indian company can claim a capital loss for the shares bought back and set it off against future capital gains, effectively allowing for a double benefit under the new regime.

TAX RATE ON DIVIDEND INCOME

Dividend income, classified as “Income from Other Sources,” is taxed according to the applicable income tax slab rates. The highest tax rate for a resident individual taxpayer is 36 per cent. It’s important to note that the surcharge on Buy-Back Tax (BBT) is capped at 12 per cent, compared to a 15 per cent surcharge on dividend income, potentially resulting in a higher overall tax burden on dividend income. On the other hand, if a shareholder’s income falls below the taxable slab limits, the entire dividend income may be tax-free, allowing the shareholder to carry forward the cost of acquisition as a capital loss.

SHARES HELD AS STOCK IN TRADE

The new scheme of taxation primarily addresses cases where shares are held as capital assets. However, an important issue arises when shares are held as stock-in-trade, which is particularly relevant because dividend income is generally required to be offered for tax under the head “Income from Other Sources” without any deductions.

In the author’s view, since these shares are held as business assets, the appropriate head of income for dividend income should be “Business Income” under Section 28 of the Income-tax Act2. This approach would allow for a more accurate reflection of the economic reality of holding shares as part of the business inventory. Accordingly, the cost of shares should be allowed as a deduction when computing the business income, ensuring that the income is taxed in a manner consistent with its treatment as part of the business operations3. This interpretation aligns with the principle of matching income with related expenses, thereby providing a fair and logical tax outcome for shares held as stock-in-trade.


2 Refer CIT v Coconada Radhaswami Bank Ltd (1965) 57 ITR 306 (SC)
3 Badridas Daga v CIT (1958) 34 ITR 10 (SC); Dr TA Quereshi v CIT (2006) 287 ITR 547 (SC)

COST OF ACQUISITION OF SHARES

From the shareholder’s perspective, the buy-back results in the extinguishment of shares. Under the law, the cost of acquisition of these shares is treated as a capital loss, which can then be set off against other capital gains. This treatment is facilitated by an amendment to Section 46A, a special provision introduced by the Finance Act of 1999. This section states that, subject to the provisions of Section 48, the difference between the consideration received on buy-back and the cost of acquisition is deemed to be capital gains for the shareholder.

The Finance Act (No. 2) 2024 adds a proviso to Section 46A, deeming the value of the consideration received by the shareholder as Nil. Since the consideration is deemed Nil, the cost of acquisition becomes a capital loss, which can be carried forward according to the provisions of the capital gains chapter. The law’s intention is to allow shareholders to offset this loss against future gains, thereby economically maintaining the status quo. The Memorandum to the Finance Bill provides detailed numerical examples illustrating this tax neutrality.

Because the consideration is deemed Nil, this treatment applies uniformly across all provisions of the Act. Notably, the provisions of Section 50D or Section 50CA cannot be used to notionally increase the consideration. This fiction of Nil consideration will also hold true in the context of transfer pricing provisions involving non-resident Associated Enterprises (AEs).

An interesting question arises regarding the determination of the cost of acquisition for the purposes of Section 46A. Shareholders may acquire shares through direct purchase, various modes specified in Section 47 read with Section 49, or by acquiring shares before 31st January, 2018, which would qualify for the grandfathering benefit under Section 55(2)(ac). Section 46A references the cost of acquisition and explicitly makes its provisions subject to Section 48, which outlines the mode of computation but does not define the cost of acquisition itself.

While Section 49 provides the cost of acquisition for specific modes of acquisition, Section 46A does not directly reference this section, nor does it explicitly refer to Section 55, which defines the cost of acquisition for the purposes of Sections 48 and 49. This creates ambiguity, as Section 46A does not provide a clear fallback to Sections 49 and 55 for determining the cost of acquisition.

There are two possible interpretations of this issue:

1. Strict Interpretation (Recourse Not Permissible): Some may argue that Section 46A, being a special provision, is intended to override the general provisions of Sections 45 and 47. If this interpretation is followed, it would imply that recourse to other provisions, such as those allowing for a step-up in cost under Sections 49 and 55, may not be permissible. This view treats Section 46A as a self-contained code, limiting the ability to refer to other sections for determining the cost of acquisition.

2. Contextual Interpretation (Recourse Permissible): On the other hand, it can be argued that this interpretation is too extreme. Section 46A is explicitly made subject to Section 48, and Section 55 provides the cost of acquisition for the purposes of Section 48. Therefore, it stands to reason that the cost step-up provisions, including those under the grandfathering rules in Section 55(2)(ac), should be available to shareholders. Additionally, the headnotes of Section 49 state that it pertains to the “cost with reference to certain modes of acquisition,” which suggests that it should be interpreted in a manner similar to Section 55. This interpretation aligns with the legislative intent to preserve the cost base for shareholders, ensuring that they are not disadvantaged by the lack of explicit reference in Section 46A.

In conclusion, while there is room for debate, the contextual interpretation that allows recourse to Sections 49 and 55 seems more consistent with the broader legislative intent and the structure of the Income-tax Act. This approach ensures that shareholders can benefit from the cost step-up provisions, thereby maintaining their cost base and achieving a fairer tax outcome.

The grandfathering provisions under Section 55(2)(ac) require a comparison of three key values: the cost of acquisition, the fair market value of the asset as on 31st January, 2018, and the full value of consideration received or accruing as a result of the transfer. Among these, the lowest value must be adopted as the cost base for computing capital gains.

However, the proviso to Section 46A introduces a significant twist by deeming the third limb—the full value of consideration received — to be Nil in the context of buy-back transactions. As a result, the benefit of the grandfathering provisions effectively becomes unavailable in these cases. Since the deemed consideration is Nil, the computed capital gains could potentially be much higher, negating the protective intent of the grandfathering rules.

Given this scenario, shareholders might find themselves better off by selling their shares in the open market and paying tax on the resultant long-term capital gains, rather than opting for a buy-back. This approach would allow them to fully utilise the grandfathering benefit, thereby reducing their tax liability. Consequently, this provision makes buy-back transactions less attractive compared to a straightforward market sale, especially for shares that have appreciated significantly since 31st January, 2018.

TREATMENT OF CAPITAL LOSS

The cost of acquisition treated as a capital loss in the hands of the shareholder falls under the head “Capital Gains” and is governed by Section 74. A short-term capital loss can be set off against either short-term or long-term capital gains, while a long-term capital loss can only be set off against long-term gains. Overall, capital losses can be carried forward for a period of eight years.

Capital loss from a buy-back may arise from both listed and unlisted shares and can be set off against capital gains from the sale of shares, immovable property, or any other capital asset. This broad spectrum of gains available for set-off provides flexibility to shareholders. There may be instances where capital loss may not be available for set off:

  • If no future gains arise within the eight-year period, the capital loss becomes a dead cost.
  • In cases where the transfer is exempt under the Income-tax Act, such as transfers between a holding company and its subsidiary, the capital loss from a buy-back may not be allowable for set-off. Although the buy-back would be fully taxed, the exemption on the transfer prevents the recognition of the capital loss, leading to double jeopardy for the holding company, which faces taxation without the benefit of loss offset.
  • If shares were converted into stock-in-trade prior to 1st October, 2024, and the buy-back occurs after this date, the entire proceeds would be taxed as dividend income. Simultaneously, the suspended capital gains tax on the conversion would become taxable under Section 45(2) of the Income-tax Act. This situation again results in double jeopardy, as the shareholder faces dual taxation. However, in such cases, the fair market value of the stock-in-trade as on the date of conversion should be allowed as a business loss at the time of the buy-back, providing some relief to the tax payer. From an equity perspective, the consideration is taxed as a dividend at a rate of 36 per cent, while the set-off of capital loss is available against long-term gains taxed at 12.5 per cent or short-term gains at 20 per cent. This discrepancy results in higher taxable income, reducing the real gain in the hands of the shareholder. Additionally, shareholders must file a return of income to carry forward the loss in accordance with Section 80, even if they have no other income chargeable to tax.

For the company, capital loss is attached to the company itself. In cases of merger or demerger, there are no transitional provisions since Section 72A only addresses the transfer of business loss. Furthermore, shareholders of unlisted companies cannot carry forward and set off capital losses if there is a change in shareholding that triggers Section 79.

TAX IMPLICATIONS IN HANDS OF NON-RESIDENT SHAREHOLDER

TAX RATE

For non-resident shareholders, dividend income is taxed under Section 115A of the Income-tax Act at a flat rate of 20 per cent (plus applicable cess and surcharge). However, this rate can be reduced under the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the shareholder’s country of residence. Depending on the specific treaty, the tax rate may be reduced to 5 per cent4 or 10 per cent5 or 15 per cent6, provided the non-resident shareholder meets the treaty eligibility criteria, such as the Principal Purpose Test (PPT) or the Limitation of Benefits (LOB) clause.


4 Hongkong, Malaysia, Mauritius if shareholding in India Company is at least 15%
5 UK, Norway, Ireland, France
6 USA, Singapore

Regarding the cost of shares, it will be treated as a capital loss, which can be set off in the manner prescribed earlier. However, this brings into focus a potential tax disadvantage for Foreign Direct Investment (FDI) shareholders who do not have any other investments in India. The capital loss arising from the buy-back of shares can typically only be set off against capital gains from the sale of shares in the FDI company. In such cases, the conventional route of declaring dividends might be more tax-efficient for the non-resident shareholder, as it would allow for a more immediate and potentially beneficial tax treatment compared to the deferral and potential loss of the capital loss offset in the buy-back scenario.

DIVIDEND CHARACTERISATION UNDER DTAA

Shareholders have the option to choose between the provisions of the Double Taxation Avoidance Agreement (DTAA) and domestic law, depending on which is more beneficial to them. The Dividend Article under most DTAAs offers a concessional rate of taxation. However, an important consideration is whether the dividend defined under Section 2(22)(f) of the Income-tax Act qualifies as a dividend under the DTAA.

One approach is the “pick and choose” method, where the shareholder adopts the domestic law definition of “dividend” for characterisation purposes and then opts for the concessional DTAA rate. This approach has been supported by courts and tribunals in various cases7, allowing shareholders to leverage the more favourable aspects of both the domestic and treaty provisions.


7 ACIT vs. J. P. Morgan India Investment Company Mauritius Ltd [2022] 143 taxmann.com 82 (Mumbai - Trib.)

Alternatively, one might argue that the dividend under Section 2(22)(f) does not fall within the Dividend Article of the DTAA. If successful, this argument would imply that the consideration received during the buy-back is not taxable as a dividend under the DTAA. Instead, it would fall under the Capital Gains Article, with its computation governed by domestic law. Under Section 46A, the consideration is deemed to be Nil, and this fiction remains absolute, irrespective of the taxability of the consideration in the hands of the shareholder. The “Other Income” Article in the DTAA would only apply if the income is not addressed by any other specific Article.

For this discussion, let’s consider the Dividend Article as defined in the OECD Model Convention (MC) and the UN Model Convention (MC). The definition of “dividend” under these conventions comprises three parts:

1. Income from shares;

2. Income from other rights, not being debt-claims, participating in profits; and

3. Income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the Contracting State of which the company making the distribution is a resident.

These parts are interconnected, particularly through the use of “other” in the second and third parts, which serves as a linking element. While the first two parts are intended to be autonomous, the third part is complementary, including income from other corporate rights, provided it is subject to the same tax treatment as income from shares under the laws of the source State. However, this does not automatically imply that all income treated domestically as dividend would fall within this definition.

Arguments Supporting that Dividend under Section 2(22)(f) Does Not Fall Within the Definition of Dividend under the DTAA:

  • For income to fall under any of the three limbs of the Dividend definition, it must originate “from” shares, other rights, participation in profits, or corporate rights. The term “from” implies a direct relationship between the income and the asset. The asset must exist at the time the income arises, which is a crucial aspect of the definition.
  • All three limbs require the asset to continue existing after the income is realised. This is consistent with the Supreme Court’s decision in Vania Silk Mills, where it was held that the charge under the capital gains article fails if the asset no longer exists after the transaction.
  • The Dividend Article should be interpreted from the shareholder’s perspective, not the company’s. Section 2(22)(f) is specific to the company, as indicated by the words “any payment by a company on purchase of its own shares from a shareholder.” From the shareholder’s perspective, this payment is the consideration received for selling shares, and the tax consequences should not differ merely because the shares are purchased by the company itself.
  • In cases involving buy-backs, there is a conflict between the Capital Gains Article and the Dividend Article. From the shareholder’s perspective, the transaction results in the extinguishment of rights in the company. This is acknowledged by the Memorandum to the Finance Bill, and the amendment to Section 46A, which deems the consideration to be Nil, indicates that the transaction is governed by capital gains provisions. The characterization of the transaction under the treaty should remain consistent, even if domestic law prescribes a different method of taxing the consideration.
  • The first limb of the Dividend definition deals with “income from shares.” If this were interpreted to include income from the alienation of shares, it would render the Capital Gains Article redundant.
  • The references to “other rights” or “other corporate rights” should be understood as rights arising from shareholding, not from the sale of shares. Klaus Vogel supports this interpretation, noting that “corporate rights” are meant to distinguish from “contractual rights” and should stem from a member’s rights within the company, not from a creditor’s right based on a contract or statute.

““With respect to the second element, income will stem from ‘corporate rights’ if it flows to the recipient because of a right held in the company, rather than against the company which implies a direct deviation from a member right as opposed to the right of a creditor based on any other contractual or statutory relationship.”

  • The OECD Commentary on Articles 10 also suggests that payments reducing membership rights, such as buy-backs, do not fall within the definition of dividends. Following are relevant extracts:

“The reliefs provided in the Article apply so long as the State of which the paying company is a resident taxes such benefits as dividends. It is immaterial whether any such benefits are paid out of current profits made by the company or are derived, for example, from reserves, i.e., profits of previous financial years. Normally, distributions by a company which have the effect of reducing the membership rights, for instance, payments constituting a reimbursement of capital in any form whatever, are not regarded as dividends.”

Arguments Supporting that Dividend under Section 2(22)(f) Does Fall Within the Definition of Dividend under the DTAA:

  • The DTAA does not exhaustively define “dividend,” leaving it to the contracting states to provide definitions. As such, Section 2(22)(f) could fall within the scope of the DTAA’s definition.
  • Characterising capital gains transactions as dividends is not unprecedented. For instance, Section 2(22)(c), which deals with capital reduction, treats payments as deemed dividends to the extent of accumulated profits.
  • The Mumbai Tribunal in KIIC Investment Company vs. DCIT8 sdealt with whether deemed dividends under Section 2(22)(e) fall within the Dividend Article of the India-Mauritius DTAA. The Tribunal held that, given the explicit reference to domestic law in the third limb of the definition, deemed dividends under Section 2(22)(e) should be considered dividends under the DTAA. Following are relevant extract:

“We have considered the aforesaid plea of the assessee, but do not find it acceptable. The India-Mauritius Tax Treaty prescribes that dividend paid by a company which is resident of a contracting state to a resident of other contracting state may be taxed in that other state. Article 10(4) of the Treaty explains the term “dividend” as used in the Article. Essentially, the expression ‘dividend’ seeks to cover three different facets of income; firstly, income from shares, i.e., dividend per se; secondly, income from other rights, not being debt claims, participating in profits; and, thirdly, income from corporate rights which is subjected to same taxation treatment as income from shares by the laws of contracting state of which the company making the distribution is a resident. In the context of the controversy before us, i.e., ‘deemed dividend’ under Section 2(22)(e) of the Act, obviously the same is not covered by the first two facets of the expression ‘dividend’ in Article 10(4) of the Treaty. So, however, the third facet stated in Article 10(4) of the Treaty, in our view, clearly suggests that even ‘deemed dividend’ as per Sec. 2(22)(e) of the Act is to be understood to be a ‘dividend’ for the purpose of the Treaty. The presence of the expression “same taxation treatment as income from shares” in the country of distributor of dividend in Article 10(4) of the Treaty in the context of the third facet clearly leads to the inference that so long as the Indian tax laws consider ‘deemed dividend’ also as ‘dividend’, then the same is also to be understood as ‘dividend’ for the purpose of the Treaty.”


8 [2019] 101 taxmann.com 19 (Mumbai - Trib.)
  • The OECD Commentary on Article 13 supports the idea that domestic law treatment can be decisive in determining whether a transaction falls within the Dividend Article, even when the transaction involves the alienation of shares.

“If shares are alienated by a shareholder in connection with the liquidation of the issuing company or the redemption of shares or reduction of paid-up capital of that company, the difference between the proceeds obtained by the shareholder and the par value of the shares may be treated in the State of which the company is a resident as a distribution of accumulated profits and not as a capital gain. The Article does not prevent the State of residence of the company from taxing such distributions at the rates provided for in Article 10: such taxation is permitted because such difference is covered by the definition of the term “dividends” contained in paragraph 3 of Article 10 and interpreted in paragraph 28 of the Commentary relating thereto, to the extent that the domestic law of that State treats that difference as income from shares.”

  • Klaus Vogel’s Commentary (5th Edition, Page 939) also emphasises that domestic law treatment should prevail when determining whether a payment is considered a dividend, thereby supporting the inclusion of Section 2(22)(f) within the DTAA’s Dividend Article.

“Sale proceeds of shares and other corporate rights generally fall under Article 13 and not under Article 10 ODCD and UN MC, as such income is not derived from shares within the meaning of the OECD MC but stems from the alienation of shares. If one considered sale proceeds to come within the meaning of ‘income from shares’, Article 13 OECD and UN MC would still prevail, however, by virtue of its more specialised nature regarding such transactions. Problems may arise, however, in either case, to the extent that such proceeds may represent undistributed profits of the paying company, as it would open up an easy way to avoid source taxation, in particularly by way of share repurchase in lieu of dividend distribution. Thus, the OECD MC Comm. Acknowledges that Article 13(5) does not prevent source State from taxing ‘the difference between the selling price and the par value of the shares’ as dividend in accordance with Article 10 OECD and UN MC where the shares are sold to the issuing company.
……… (Page 981)

Moreover, nothing in the provision requires income to be derived from an ‘equity investment’: a mere recharacterisation of the income (rather than the underlying right) under domestic law is sufficient to trigger the application of Article 10.”

In the author’s view, the reference to domestic law is broad enough to encompass payments falling within the scope of Section 2(22)(f), allowing them to be treated as dividends under the DTAA. This interpretation aligns with the intention to provide clarity and consistency in the application of tax treaties.

TRANSFER PRICING IMPLICATIONS

Under the Buy-Back Tax (BBT) regime, it was possible to argue that in cases involving Associated Enterprises (AEs), the amount of consideration paid by the company needed to be benchmarked against the Arm’s Length Price (ALP) criteria. Shareholders were largely indifferent to this aspect since the income from the buy-back was exempt in their hands. However, the new taxation regime introduces an intriguing dimension to this issue.

Transfer pricing regulations focus on the substance of the transaction. While the transaction is still treated as a dividend in the hands of the company, it will now require benchmarking as if the buy-back were a transfer, meaning the company must determine the ALP of the consideration paid. Theoretically, there should not be any adverse implications if the consideration paid does not align with the ALP, since buy-back payments are not deductible expenses for the company. The company’s primary responsibility remains the withholding of tax.

A plausible interpretation is that the withholding tax obligation applies to the transaction value rather than the ALP value. In hands of shareholder Section 46A deems the consideration to be Nil for tax purposes. This fiction is absolute and is not affected by the ALP price. Thus, benchmarking needs to be done for compliance purposes without any impact on tax computation.

INTERPLAY WITH SECTION 56(2)(X)

Buybacks often involve a company using its free cash flow to purchase its own shares, leading to an increase in the remaining shareholders’ stakes without them having to dip into their own cash reserves. This tactic has become a popular method for realigning shareholding structures, particularly in the context of family arrangements or the elimination of cross holdings. However, when buy-backs are executed at prices below the Rule 11UA value, questions inevitably arise regarding the applicability of Section 56(2)(x).

At first glance, Section 56(2)(x) applies to the “receipt” of property, a term that has been interpreted to mean the receipt that benefits the recipient. In the case of a buy-back, the shares are technically received by the company solely for the purpose of cancellation, with no economic enrichment resulting from this transaction. This lack of enrichment leads to the failure of the charge under Section 56(2)(x). This line of reasoning has found favour in various judicial decisions9.


9. Vora Financial Services (P.) Ltd. v ACIT [2018] 96 taxmann.com 88 (Mumbai); DCIT v Venture Lighting India Ltd [2023] 150 taxmann.com 523 (Chennai - Trib.); VITP (P.) Ltd v DCIT [2022] 143 taxmann.com 304 (Hyderabad - Trib.);

Section 115QA adds another layer of defence. By shifting the liability to pay Buy-Back Tax (BBT) onto the company, Section 115QA acts as a special provision and a self-contained code. According to the principles of statutory interpretation, a special provision like Section 115QA should override more general provisions such as Section 56(2)(x).

However, the new taxation regime introduces a fresh angle to the interplay with Section 56(2)(x). Section 2(22)(f) deems the payment by a company on the purchase of its own shares as a dividend. Sections 194 and 195 impose an obligation on the company to withhold tax on such payments. Following the fiction created by Section 2(22)(f) to its logical conclusion, this payment should be treated as a dividend for all purposes under the Act, effectively preventing the application of Section 56(2)(x) from the outset.

In the absence of any anti-abuse provision requiring the company to pay dividends at fair market value, it is arguable that considerations below the Rule 11UA value should not be taxed under Section 56(2)(x).

COMPARISON WITH CAPITAL GAIN

Under the new regime, long-term capital gains are taxed at a rate of 12.5 per cent, and short-term capital gains are taxed at 20 per cent on net gains (i.e., consideration minus the cost of acquisition). For non-resident shareholders, dividend income is taxed according to the provisions of the applicable DTAA, with most DTAAs providing a concessional rate of 10 per cent for dividend taxation.

Shareholders, particularly those holding stakes in startups or joint ventures, will need to carefully evaluate buy-back as an alternative to conventional exit strategies. In cases where shares have significantly appreciated, opting for buy-back could result in the gains being taxed as dividends, potentially reducing the overall cash tax outflow. Additionally, the cost of acquisition can be offset against other capital gains, thereby improving overall tax efficiency.

This scenario presents an opportunity to structure transactions more efficiently. Instead of providing an exit through secondary sales, shareholders might consider infusing equity into the company, followed by a buy-back. This approach could optimize the tax implications and enhance the financial outcome of the transaction.

BUY-BACK AND INDIRECT TRANSFER

Explanation 5 to Section 9(1)(i) of the Income-tax Act provides that the shares of a company are deemed to be situated in India if they derive their value substantially from assets located in India. Circular No. 4 of 2015, dated 26th March, 2015, clarified that the declaration of dividends by a foreign company does not trigger the provisions of indirect transfer under Indian tax law. The term “dividend” in this context, as stated in the Circular, derives its meaning from Section 2(22)(f) of the Income-tax Act, which includes payments made by a company on the purchase of its own shares from a shareholder in accordance with the provisions of Section 68 of the Companies Act, 2013.

A pertinent issue arises when considering buy-backs by foreign companies, which are not conducted in accordance with Section 68 of the Companies Act, 2013. This raises the question of whether a buy-back under the corporate law of a foreign jurisdiction falls within the scope of the indirect transfer provisions.

Non-resident shareholders may consider invoking the Non-Discrimination Article under the applicable DTAA to address this issue. Article 24(1) of many DTAAs provides that nationals of one contracting state shall not be subjected in the other contracting state to any taxation or related requirements that are more burdensome than those imposed on nationals of the other state under similar circumstances.

An argument can be made that the reference to Section 68 should be interpreted as indicative of a buy-back governed by corporate law in general, rather than being limited to Indian law. Non-resident shareholders should not be expected to comply with Section 68 of the Companies Act, 2013, as it applies exclusively to Indian companies. The argument of discrimination has been accepted by the Tribunal in the context of Section 79 in the case of Daimler Chrysler India (P.) Ltd. vs. DCIT10, where similar principles were considered.


10 [2009] 29 SOT 202 (Pune)

CONCLUDING REMARKS

There’s no denying that Income Tax is fundamentally a tax on real income — at least, that’s the theory. However, with the numerous fictions introduced over the years — each one merrily overriding the last —the Income-tax Act has started to resemble a novel with more plot twists than logic. It’s like watching a thriller where the protagonist, just when you think you understand the story, wakes up to find themselves in an entirely different movie.

As we navigate these convolutions, it’s worth remembering that all of this complexity is supposed to bring us closer to fairness and clarity. But in reality, it’s a bit like trying to assemble flat-pack furniture without the instructions — there’s always one piece that doesn’t seem to fit, and you’re never quite sure if that extra screw was supposed to go somewhere.

With the introduction of a new Income-tax Act on the horizon, one can’t help but feel a mix of hope and trepidation. Will this new Act finally streamline these fictions, or will it just add a few new chapters to the saga? Either way, as tax professionals, we’ll be here — armed with our calculators and a good sense of humour — ready to decipher the next instalment of this ever-evolving tax code.

Important Amendments by The Finance (No. 2) Act, 2024 – Capital Gains

The maiden Budget of the Government in their third innings promises simplification and rationalisation of Capital Gains tax regime under the Income-tax Act, 1961 (“the Act”). With the said purpose, the Finance (No. 2) Act, 2024 (“FA (No. 2) 2024”) provides for standardisation of tax rates for the majority of short-term and long-term capital gains tax as well as period of holding of the majority of listed and unlisted capital assets. However, simultaneously, the Capital Gains Chapter of the Act has been amended at various other places making those provisions more complex and litigious thereby clearly contradicting the intention propagated by the Government.

This Article discusses the various amendments brought in by the FA (No. 2) 2024 under the said Chapter1 and the issues arising therefrom.

PERIOD OF HOLDING

Section 2(42A) of the Act determines “Period of Holding” relevant for the purpose of classifying an asset as short-term or long-term. Earlier, there were three holding periods, namely, 12 months, 24 months and 36 months. The period of 12 months was applicable for selected assets such as listed shares, listed equity oriented funds and zero coupon bonds. Further, the period of 24 months was applicable to unlisted shares and immovable properties, being land or building or both.

The said section has now been amended with effect from 23rd July, 2024 so that now, all listed securities shall be regarded as long-term capital asset if held for more than twelve months and all other capital assets shall be regarded as long-term capital asset if held for more than 24 months.

The same is summarised as under:

Nature of Capital Asset Short term Long term
Listed securities =< 12 months > 12 months
Other Assets =< 24 months > 24 months

The said amendment shall apply to any “transfer” of capital asset undertaken on or after 23rd July, 2024. The word “transfer” would need to be understood as used under the Act in the context of capital assets. Hence, where a capital asset was converted before 23rd July, 2024, the same would be considered to be transferred prior to 23rd July, 2024 due to the specific provisions of section 45(2) and accordingly, the old period of holding shall apply even if the converted asset is sold on or after
23rd July, 2024.

Though the intention of the Legislature is to cover all assets within this purview, the said standard rule would still not apply in case of transfer of an undertaking by way of a slump sale which is governed by the provisions of section 50B of the Act. The proviso to sub-section (1) therein specifically provides that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets. Hence, a case of slump sale shall be an exception to the general rule as provided through the FA (No. 2) 2024.

Further, listed securities for the purpose of section 2(42A) means the securities as listed on the recognised stock exchanges of India. Accordingly, for foreign listed securities, the relevant period of holding shall still be 24 months and not 12 months.

The impact of said amendment on various types of capital assets is tabulated in attached Annexure.

RATE OF TAX

Section 112 and section 112A of the Act provides for specific rates of income tax on long-term capital gains in respect of various categories of assets.

Further, section 111A of the Act provides for a specific rate of income tax on short-term capital gains arising from transfer of equity share in a company or a unit of an equity oriented fund or a unit of a business trust (REIT and InVit), subject to the conditions as provided therein.

The rate of tax under the said sections prior to the amendment are tabulated hereunder:

Section Nature of Asset Nature of Capital Gain Rate of Tax
112A Eligible Listed securities* LT 10%
112 Any other long term Capital asset except those covered u/s. 50AA LT 20%**
112(1)(c)(iii)  Unlisted securities transferred by a non-resident/foreign company LT 10% without indexation
111A Eligible Listed securities* ST 15%

* i.e., equity shares, units of equity-oriented funds and business trusts, on which STT is paid at the time of transfer.

** In case of listed securities (other than units) and zero-coupon bonds, option of tax at 10% without indexation is available.

For cases not falling under these provisions, the capital gains are taxable as per the normal applicable rate as provided in the relevant Finance Act.

Further, an exemption up to ₹1 lakh is available from long term capital gain covered u/s. 112A.

Pursuant to various amendments vide FA (No. 2) 2024, the rate of tax applicable w.e.f. 23rd July, 2024 would be as under:

Long-term capital gains: FA (No. 2) 2024 provides a universal tax rate of 12.5 per cent without indexation for all types of long-term capital gains, irrespective of whether the asset is listed or unlisted, STT paid or not, Indian or foreign, held by resident or non-resident, subject to certain exceptions, which are as under:

  • Capital gains arising from assets covered u/s. 50AA is deemed to be short-term capital gains irrespective of period of holding;
  • Capital gains arising from transfer of depreciable assets also continue to be taxed as short-term capital gains u/s. 50A of the Act;
  • In case of immovable property acquired before 23rd July, 2024 by resident individuals or HUFs, the assessee shall have an option to adopt tax rate at 12.5 per cent without indexation or 20 per cent with indexation, whichever is lower. However, loss based on indexed cost would not be allowed to be set-off or carried forward.
  • For non-resident assessees, the benefit of adjustment of foreign exchange fluctuation under first proviso to section 48 on transfer of shares/debentures of Indian Companies continues.
  • Lastly, capital gains up to ₹1.25 Lakhs (aggregate) would not be subject to tax u/s. 112A of the Act. The said limit of ₹1.25 Lakhs would apply to the entire capital gains, whether relating to transfer before or after 23rd July, 2024. Hence, for AY 2025-26, Assessee may choose to set-off this limit against the eligible capital gains u/s. 112A earned pursuant to transfers before 23rd July, 2024, the same being more beneficial to them. For the said purpose, reliance may be placed on the CBDT Circular No. 26(LXXVI-3) [F. No. 4(53)-IT/54], dated 7th July, 1955, wherein the CBDT has clarified that in the absence of any indication on the manner of set-off, the general rule to be followed in all fiscal enactments is that where words used are neutral in import, a construction most beneficial to the assessee should be adopted. Further, it is also settled rule of interpretation that the interpretation, which is more favourable to the taxpayer should prevail, as has been held in the under-noted cases:
  • CIT vs. Vegetable Products Ltd. (88 ITR 192) (SC);
  • CIT vs. Kulu Valley Transport Co. Pvt. Ltd. (77 ITR 518, 530) (SC);
  • CIT vs. Madho Prasad Jatia (105 ITR 179) (SC);
  • CIT vs. Naga Hills Tea (89 ITR 236, 240) (SC);
  • CIT vs. Shahzada Nand (60 ITR 392, 400) (SC).

To give effect to the above, various sections viz. sections 112, 112A, Section 115AD, 115AB, 115AC, 115ACA, 115E, 196B and 196C have been amended to change the rate mentioned therein from 20 per cent to 12.5 per cent in case of long-term capital gains.

The said amendments would apply to transfers undertaken on or after 23rd July, 2024.

SHORT-TERM CAPITAL GAINS

In case of short-term capital gains arising from transfer of equity shares, units of equity-oriented funds and business trusts, on which STT is paid at the time of their transfer, the rate of tax has been increased from 15 per cent to 20 per cent for transfers affected on or after 23rd July, 2024.

Corresponding amendment is made in section 115AD of the Act, which provides rates of taxes for FIIs.

The rate of tax on short-term capital gains for other assets, shall continue to be governed by the rates as applicable to the assessee as per the relevant Finance Act.

These amendments will take effect from 23rd July, 2024 and will accordingly apply in relation to the transfer taking place on or after the said date.

The impact of said amendment on various types of capital assets is tabulated in attached Annexure.

DEEMED SHORT-TERM CAPITAL GAINS U/S. 50AA

FA, 2023 inserted a new provision, Section 50AA which provides for treating the capital gain arising from transfer, redemption or maturity of ‘Market Linked Debentures’ and unit of a ‘Specified Mutual Fund’ as short-term capital gain irrespective of the period of holding.

‘Specified Mutual Fund’ was defined to mean a ‘Mutual Fund by whatever name called, where not more than 35% of its total proceeds is invested in the equity shares of domestic companies’.

The said provision was not applicable to any gain arising from transfer of unlisted bonds and unlisted debentures and accordingly, the same was taxed at the rate of 20 per cent without indexation (in case of LTCG) or at applicable rates (in case of STCG).

Section 50AA has been amended vide FA (No. 2) 2024 redefining the term ‘Specified Mutual Fund’ with effect from AY 2026-27 as under:

  • a Mutual Fund by whatever name called, where more than 65 per centof its total proceeds is invested in debt and money market instruments.
  • a fund which invests at least 65 per cent of its total proceeds in units of a fund referred above (FOFs).

As would be observed, under the new definition, the language has been replaced from earlier negative condition of ‘not’ holding more than 35 per cent in equity shares to a positive condition of holding at least 65% of the total proceeds in debt and money market instruments. As a result, funds other than equity-oriented funds which were covered under the earlier definition, such as on the ETFs, Gold Mutual Fund, Gold ETFs, etc. now stand excluded as such funds do not invest 65 per cent or more of their proceeds in debt instruments.

The said amendment in the definition of ‘Specified Mutual Funds’ is effective only from AY 2026-27 i.e., AY 2026-27 applicable to FY 2025-26 and therefore, capital gain arising from transfer, redemption or maturity of unit of funds like ETFs, Gold Mutual Fund, Gold ETFs acquired after 1st April, 2023 and transferred till 31st March, 2025 will still be covered by the existing provisions of Section 50AA.

Further, the scope of section 50AA has been expanded to tax the capital gain arising from transfer, redemption or maturity of unlisted bonds and unlisted debentures as short-term capital gain irrespective of the holding period. The said amendment is effective from 23rd July, 2024 and will accordingly apply in relation to the transfer taking place on or after the said date.

The impact of said amendment on various types of capital assets is tabulated in attached Annexure.

INCREASE IN RATES OF STT (SECTION 98 (CHAPTER VII) OF FINANCE ACT (NO. 2), 2004)

Section 98 of the Finance Act, 2004 provides a list of various taxable securities along with STT levied on their sale and purchase transactions.

As per the said section, the rate of levy of STT on sale of an option in securities is 0.0625 per cent of the option premium and on sale of a future in securities is 0.0125 per cent of the price at which such futures are traded.

The FA (No. 2) 2024 has increased the said rates on sale of an option and a future in securities. The table below enumerates the same:-

Type of Transaction Old rates New rates
Sale of an option in securities 0.0625% of the option premium 0.1 % of the option premium
Sale of a future in securities 0.0125 % of the price at which such “futures” are traded. 0.02% of the price at which such “futures” are traded

The above amendments will take effect from 1st October, 2024.

As per the explanatory memorandum, the trading in derivatives (F&O) is now accounting for a large proportion of trading in stock exchanges. The said amendment has been made keeping in mind the exponential growth of derivative markets in recent times.

GRANDFATHERING OF CAPITAL GAINS IN CASE OF SHARES OFFERED FOR SALE UNDER AN IPO/FPO

Section 112A of the Act provides for a concessional rate of 12.5 per cent (w.e.f. 23rd July, 2024) on long-term capital gains on transfer of, inter alia, equity shares subject to payment of Securities Transaction Tax (STT) at the time of acquisition and on transfer.

Shares which are transferred under Offer for Sale (OFS) at the time of initial public offering are subject to STT as per S. 97(13)(aa) of Chapter VII of the Finance (No. 2) Act, 2004. Further, such shares are exempt from the requirement of STT at the time of acquisition to avail the benefit of section 112A as per CBDT Notification no. 60 of 2018. Hence, gains on transfer of such shares qualify for concessional tax rates u/s. 112A.

The gains chargeable under said section are allowed grandfathering of gains accrued till 31st January, 2018.

Accordingly, S. 55(2)(ac) of the Act provides that the cost of acquisition in case of long-term equity shares acquired before 1st February 2018 shall be grandfathered as under –

Higher of –

a. The cost of acquisition of such asset; and

b. Lower of:

i. The FMV of such asset as on 31st January, 2018; and

ii. The full value of consideration received

Explanation(a)(iii) to S. 55(2)(ac) defines what is FMV in case of an equity share in a company. The said section presently does not cover cases where unlisted shares are subject to STT and accordingly fall under the ambit of section 112A. As a consequence, there is ambiguity with respect to determining COA of the shares transferred under OFS.

With a view to clarify the ambiguity with regards to determining COA of the shares transferred under OFS, Explanation(a)(iii) to S. 55(2)(ac) has been amended with retrospective effect from AY 2018-19 so as to include within its ambit even transfers in respect of sale of unlisted equity shares under an OFS to the public included in an IPO.

In such cases, FMV shall be an amount which bears to the COA the same proportion as CII for the FY 2017-18 bears to the CII for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 2001, whichever is later.

This amendment is deemed to have been inserted with effect from the 1st day of April, 2018 and shall accordingly apply retrospectively from AY 2018-19 onwards.

CORPORATE GIFTING

Section 47 provides exclusions to certain transactions not regarded as “transfer” for the purposes of Section 45 of the Act. Clause (iii) of section 47 specifies that any transfer of a capital asset under gift, will or an irrevocable trust would not be regarded as transfer. The said provision hitherto applied to all assessees.

The FA (No. 2) 2024 has amended the said clause (iii) of Section 47 with retroactive effect from AY 2025-26 (i.e., for gifts effected on 1st April, 2024 and onwards) to restrict its application only in case of Individuals and HUFs.

As per the Memorandum Explaining the Provisions of the Finance (No. 2) Bill, 2024, even though the Act contains certain anti-avoidance provisions, such as sections 50D and 50CA, in multiple cases taxpayers have argued before judicial fora that transaction of gift of shares by company is not liable to capital gains tax in view of provisions of section 47(iii) of the Act, which has resulted in tax avoidance and erosion of tax base. However, as per the Memorandum, gift can be given only out of natural love and affection and therefore, provisions of section 47(iii) has been restricted to gifts given by individuals and HUFs.

Hence, apparently, the intention of the Legislature is to bring transactions of gift by assessees other than individuals and HUFs within the ambit of provisions such as section 50CA, 50D, etc. However, the question remains as to whether the said provisions can at all apply where there is no consideration involved, irrespective of whether the transaction itself is specifically exempted or not.

Now, the opening words of the provisions such as sections 50CA, 50C, 43CA as well as 50D are identical namely:

“Where the consideration received or accruing as a result of the transfer of ….”

As would be observed, the said provisions apply only where the transfer results in ‘receipt’ or ‘accrual’ of ‘any consideration’. Hence, the moot question which needs consideration is as to whether the said provisions can at all apply where a transfer does not result in receipt or accrual of any consideration.

Now, a transaction involving ‘gift’ essentially means a transaction where no consideration is contemplated at all. The said term is defined u/s. 122 of the Transfer of Property Act, 1882 as under:

“”Gift” is the transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee.”

As is clear, a transaction of ‘gift’ is always without consideration. Now, as per the Explanatory Memorandum, section 47(iii) has been restricted only to Individuals and HUFs since as per the Legislature other entities such as corporate bodies cannot give a valid gift in absence of possibility of any natural love or affection.

However, as is clear from the foregoing definition of ‘gift’, there is no condition of natural gift or affection attached to a gift transaction.

In fact, considering the said definition, various Courts have held in the past that even corporate bodies can give a gift as long as the same is permitted in their charter documents such as memorandum of association since there is no requirement in the Transfer Of Property Act that a ‘gift’ can be made only between natural persons out of natural love and affection. See, for example:

  • PCIT vs. Redington (India) Ltd. [2020] 122 taxmann.com 136 (Madras)
  • Prakriya Pharmacem vs. ITO[2016](66 taxmann.com 149)(Guj)
  • DP World (P) Ltd. vs. DCIT (140 ITD 694)(MumT);
  • DCIT vs. KDA Enterprises Pvt. Ltd. (68 SOT 349) (MumT);
  • Deere & Co. Deere & Co. [2011] 337 ITR 277 (AAR).
  • Jayneer infrapower & Multiventures (P.) Ltd. vs. DCIT [2019] 103 taxmann.com 118 (Mumbai – Trib.)

In Redington’s case (supra), the Madras High Court laid down the essentials of a ‘gift’ as under:

(i) absence of consideration;

(ii) the donor;

(iii) the donee;

(iv) to be voluntary;

(v) the subject matter;

(vi) transfer; and

(vii) the acceptance.

The High Court accordingly held that even a corporate body can make a valid gift, however, on the facts of that case, it held the transaction to not be a valid gift.

Now, after the amendment in section 47(iii), the foregoing decisions may not be relevant for the purpose of applying the provisions of section 47(iii) to corporate gifting. However, the following ratios laid down in these decisions are still relevant, namely:

  • Corporate gifting which satisfies the foregoing essential components is a legally valid transaction, and
  • In such transactions, there can never be any element of consideration.

This brings us back to the question as to whether in absence of any ‘receipt’ or ‘accrual’ of ‘any consideration’ in case of a corporate gifting, can the provisions like section 50CA, 50D, etc. at all trigger even if there is no specific exemption for such gifting, considering that existence of ‘consideration’ is a sine qua non under these provisions.

Recently, the Bombay High Court in the case of Jai Trust vs. UOI [2024] 160 taxmann.com 690 (Bombay) had an occasion to examine taxability of shares gifted by a trust and in that context, also examined the provisions of sections 50CA and 50D. The High Court considering the language used in the said sections, held that, these provisions can apply only where any consideration is received or accruing as a result of the transfer. It held that these sections postulates receiving consideration and not a situation where admittedly no consideration has been received.

Hence, even after amendment in section 47(iii), it is possible to argue that unless any consideration can be demonstrated, the deeming provisions of sections 50D, 50CA and the like cannot be applied to a corporate gifting. Indeed, it is settled law the deeming provisions should be construed strictly2 and therefore, to expand the scope of such deeming provisions than what is specifically mentioned in these sections is not permissible. Besides, if all cases of corporate gifting becomes subject to capital gains, then even CSR donations by corporates would be impacted, which certainly cannot be the intention of the Legislature.

Nevertheless, considering the rationale for the amendment provided in the Memorandum, the tax department is likely to more rigorously scrutinise the transactions corporate gifting and try to apply the said deeming provisions to such transactions.

It is also important to note that such corporate gifting of ‘property’ could now be subject to double whammy, one at the end of the donor under the likes of sections 50CA, etc. and second at the end of the donee under the provisions of section 56(2)(x). This would lead to double taxation of same income, which should not be condoned.

From the magnitude of amendments brought in the capital gains taxation, it is clear that the issues thereunder are far from becoming simple and rationale. Amendments in provisions such as section 2(22)(f) and 47(iii) have raised various unanswered questions, which would be settled only in the due course of time as the law develops before the judicial forums.

Annexure

Name of Capital Asset Nature of Capital Gain Relevant provision Period of Holding Rate of Tax
Old provisions

i.e., before 23rd July, 2024

New provisions

i.e., after 23rd July, 2024

Old provisions

i.e., before 23rd July, 2024

New provisions

i.e., after 23rd July, 2024

Listed Equity Shares (STT paid)* LT 112A > 12 months > 12 months 10% (without indexation) 12.5% (without indexation)
ST 111A ≤ 12 months ≤ 12 months 15.00% 20.00%
Listed Equity Shares (STT not paid) LT 112 > 12 months > 12 months 10% (without indexation) 12.5% (without indexation)
20% (with indexation) 12.5% (without indexation)
ST Rates as per First Schedule of FA (No. 2) 2024 ≤ 12 months ≤ 12 months applicable rate applicable rate
Unlisted Equity shares LT 112 > 24 months > 24 months 20% (with indexation) 12.5% (without indexation)
ST Rates as per First Schedule of FA (No. 2) 2024 ≤ 24 months ≤ 24 months applicable rate applicable rate
Units of Equity Oriented MFs (Listed)* LT 112A > 12 months > 12 months 10% (without indexation) 12.5% (without indexation)
ST 111A ≤ 12 months ≤ 12 months 15.00% 20.00%
Units of Debt Oriented MFs**

(> 65% in debt or

fund of such  funds)

Always ST 50AA (Rates as per First Schedule of FA (No. 2) 2024) > 36 months > 24 months applicable rate applicable rate
Listed Bonds/Debentures (other than Capital index bonds and Sovereign Gold Bonds) LT 112 (without indexation) > 12 months > 12 months 20%3 (without indexation) 12.5% (without indexation)
ST Rates as per First Schedule of FA (No. 2) 2024 ≤ 12 months ≤ 12 months applicable rate applicable rate
Unlisted Bonds/Debentures/Debt-Oriented FOFs LT 50AA (Rates as per First Schedule of FA (No. 2) 2024) > 36 months NA 20% (without indexation) applicable rate
ST 50AA (Rates as per First Schedule of FA, (No. 2) 2024) ≤ 36 months NA applicable rate applicable rate
Market Linked Debentures ST 50AA (Rates as per First Schedule of FA, (No. 2) 2024) NA NA applicable rate applicable rate
Listed Capital Indexed Bonds and Sovereign Gold Bonds LT 112 > 12 months > 12 months 10% (without indexation) 12.5% (without indexation)
20% (with indexation) 12.5% (without indexation)
ST Rates as per First Schedule of FA (No. 2) 2024 ≤ 12 months ≤ 12 months applicable rate applicable rate
Unlisted Capital Indexed Bonds LT 112 > 36 months > 24 months 20% (with indexation) 12.5% (without indexation)
ST Rates as per First Schedule of FA (No. 2) 2024 ≤ 36 months ≤ 24 months applicable rate applicable rate
Zero Coupon Bonds LT 112 > 12 months > 12 months 10% (without indexation) 12.5% (without indexation)
20% (with indexation) 12.5% (without indexation)
ST Rates as per First Schedule of FA (No. 2)  2024 ≤ 12 months ≤ 12 months applicable rate applicable rate
Listed Units of Business Trust (InVITs and REITs)* LT 112A > 36 months > 12 months 10% (without indexation) 12.5% (without indexation)
ST 111A ≤ 36 months ≤ 12 months 15.00% 20.00%
Listed Preference Shares LT 112 > 12 months > 12 months 10% (without indexation) 12.5% (without indexation)
20% (with indexation) 12.5% (without indexation)
ST Rates as per First Schedule of FA (No. 2) 2024 ≤ 12 months ≤ 12 months applicable rate applicable rate
Unlisted Preference Shares LT 112 > 24 months > 24 months 20% (with indexation) 12.5% (without indexation)
ST Rates as per First Schedule of FA (No. 2) 2024 ≤ 24 months ≤ 24 months applicable rate applicable rate
Immovable Properties LT 112 > 24 months > 24 months 20% (with indexation) 12.5% (without indexation)
ST Rates as per First Schedule of FA (No. 2)2024 ≤ 24 months ≤ 24 months applicable rate applicable rate
Physical Gold LT 112 > 36 months > 24 months 20% (with indexation) 12.5% (without indexation)
ST Rates as per First Schedule of FA (No. 2)2024 ≤ 36 months ≤ 24 months applicable rate applicable rate
Foreign Equity LT 112 > 24 months > 24 months 20% (with indexation) 12.5% (without indexation)
ST Rates as per First Schedule of FA (No. 2) 2024 ≤ 24 months ≤ 24 months applicable rate applicable rate

* The limit of exemption from long term capital gain covered u/s. 112A is proposed to be increased from ₹1 Lakh to ₹1.25 lakhs (aggregate).

** For funds purchased before 1st April, 2023, the gains will be LTCG or STCG depending upon its period of holding. Further, this covered even other non-equity funds such as Gold, ETF, Gold funds, etc. purchased on or after 1st April, 2023 and transferred before 1st April, 2025. From 1st April, 2025, these other non-equity bonds / MFs will be taxed as per normal provisions of CG.

Important Amendments by The Finance (No. 2) Act, 2024 – Charitable Trusts

Important Amendments by the Finance (No.2) Act, 2024 are covered in six different Articles. It is not possible to cover all amendments at length and hence the focus is only on important amendments but with a detailed analysis of their impacts. These in-depth analysis will serve as a future guide to know the existing provisions, current amendments and their rationale, and the revised provisions. We hope the readers will enrich by the detailed analysis. – Editor

 

For the past several years, charitable institutions have awaited the Finance Bill of each year with dread and trepidation, as to what further compliance, burden and complexity would be imposed upon them. Since 2009, many new provisions for charitable institutions have been introduced, making the requirement of claiming exemption increasingly difficult.

Fortunately, some of this year’s amendments have sought to alleviate some of the difficulties being faced by charitable institutions. However, there have been no amendments in respect of many other complex and pressing problems faced by charitable institutions (such as the applicability of the proviso to section 2(15) as to what activity constitutes a business, applicability of tax on accreted income under certain circumstances, the low reporting requirement of a cumulative ₹50,000 for substantial contributors, etc).

The amendments made are analysed below:

MERGER OF SECTION 10(23C) EXEMPTION REGIME WITH SECTION 11 EXEMPTION REGIME

Currently, there are two major schemes of exemption for charitable institutions – one contained in various sub-clauses of section 10(23C) available for educational and medical institutions and certain other specific types of institutions. In particular, exemption under the following sub-clauses requires approval of the CIT – these are applicable to:

(iv) charitable institutions important throughout India or a State;

(v) public religious institutions;

(vi) university or other educational institution existing solely for educational purposes and not for purposes of profit, not wholly or substantially financed by the Government and whose gross receipts exceed ₹5 crore;

(vii) hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, not wholly or substantially financed by the Government and whose gross receipts exceed ₹5 crore.

The conditions for exemption under these 4 sub-clauses of section 10(23C) are contained in the 23 provisos to section 10(23C), and by the Finance Act, 2022, these conditions were almost fully aligned with the requirements contained in section 11 for claim of exemption. Only a few minor differences remained, such as option to spend in subsequent year and exemption for capital gains on reinvestment in capital asset, which are available under section 11 but not available under section 10(23C). Given this alignment, it was expected that the exemption under these 4 sub-clauses would finally be merged with the exemption under section 11.

The Finance (No 2) Act 2024 now begins the process of merger of these two exemption regimes. The first and second provisos to section 10(23C) have now been amended to provide that application for approval or renewal of approval under sub-clauses (iv), (v), (vi) and (via) of section 10(23C) can only be made before 1st October, 2024, and that the Commissioner shall only process such applications made before 1st October, 2024. A 24th proviso has been added to section 10(23C) stating that no approvals shall be granted for applications made on or after 1st October, 2024. Simultaneously, amendments have been made to section 12A(1)(ac) with effect from 1st October 2024, requiring such charitable entities to make an application for registration under that section.

This effectively means that charitable entities whose approval expires on 31st March, 2025, can still apply for renewal up to 30th September 2024 since the application for renewal has to be made six months prior to the expiry of approval. Such applications would be processed, and approvals continued to be granted under section 10(23C). Given that the approval would normally be valid for 5 years, they can therefore continue to claim exemption under sub-clauses (iv), (v), (vi) or (via) till 31st March, 2030 (AY 2030-31). Thereafter, they will have to switch to registration under section 12A, and would then be entitled to exemption under section 11 post registration with effect from A.Y. 2031-32.

In case such entities are late in making an application for approval (beyond 30th September, 2024), they will then have to apply for registration under section 12A, and post registration which would be granted with effect from
1st April, 2025, their claim for exemption would then be under section 11 with effect from A.Y. 2026-27.

In case of other entities whose approval under any of the above 4 sub-clauses of section 10(23C) expires after 31st March 2025, if such approval is expiring shortly after March 2025, such entities may choose to make an application before 1st October, 2024 or thereafter, since there is only a minimum prior period for application (since the application has to be made at least 6 months prior to the expiry of approval), and there is no specification as to the maximum prior period within which one can make such an application. Depending on whether the application for renewal is made before 1st October, 2024 or thereafter, the application would have to be made either under any of the above 4 sub-clauses of section 10(23C) or under section 12A, respectively.

All entities whose approval under any of these 4 sub-clauses of section 10(23C) is in force can continue to claim exemption under section 10(23C) till the expiry of that approval.

Effectively therefore, over the next 5 years, all approvals under section 10(23C) will cease to have effect, and entities would migrate to registration under section 12A and consequent claim of exemption under section 11.

Further, exemption for charitable entities under the various other sub-clauses of section 10(23C) and other clauses of section 10 are not being phased out and would continue. These include:

  • Educational or medical institutions wholly or substantially financed by the Government or having gross receipts of less than ₹5 crore – 10(23C)(iiiab), (iiiac),(iiiad) and (iiiae),
  • Research associations – 10(21),
  • Professional regulatory bodies – 10(23A),
  • Khadi and village industries development institutions – 10(23B),
  • Regulatory bodies for charitable or religious trusts – 10(23BBA),
  • Investor Protection Funds of stock exchanges, commodity exchanges and depositories – 10(23EA), 10(23EC) and 10(23ED),
  • Core Settlement Guarantee Fund of clearing corporation – 10(23EE),
  • Notified bodies set up by the Government – 10(46),
  • Housing Boards, Planning & Development Authorities, and other regulatory bodies set up under a State or Central Act – 10(46A), etc.

While no amendment is made to section 11(5) regarding permitted investments, the provisions of section 13(1)(d) have been amended, by adding one more exception in the proviso to section 13(1)(d). The following assets have now been also excluded from the purview of section 13(1)(d):

a. Any asset held as part of the corpus of the trust as on 1st June, 1973;

b. Equity shares of a public company held by the trust as part of the corpus as on 1st June, 1998;

c. Any accretion to such shares held as part of corpus (bonus shares, etc);

d. Debentures issued by a company/corporation acquired by the trust before 1st March, 1983;

e. Jewellery, furniture or other notified article received by way of voluntary contribution. No other article seems to have been notified so far.

AMENDMENT OF SECTION 11(7)

Section 11(7) of the Income Tax Act provides that a trust granted registration under section 12AB cannot claim exemption under section 10, except under certain clauses of section 10. These clauses were:

  • agricultural income – clause (1),
  • educational, medical and other institutions – clause (23C),
  • Investor Protection Fund of Commodity Exchanges – clause (23EC),
  • notified bodies set up by the Government – clause (46), and
  • Housing Boards, Planning & Development Authorities, and other regulatory bodies set up under a State or Central Act – clause (46A).

In some of these cases, once they are approved or notified under the respective clauses, their section 12AB registration becomes inoperative, and can be made operative only by making an application to the Commissioner for doing so. Once section 12AB registration becomes operative, the approval or notification under the respective clause ceases to have effect, and thereafter no claim for exemption can be made under those respective clauses of section 10.

The Finance (No 2) Act, 2024 has added clauses (23EA) – Investor Protection Fund of a stock exchange, (23ED) – Investor Protection Fund of a depository, and (46B) – National Credit Guarantee Trustee Company and trusts managed by it, to these alternative clauses of exemption.

CONDONATION OF DELAY IN MAKING APPLICATION FOR REGISTRATION/RENEWAL OF REGISTRATION U/S 12A

Section 12A(1)(ac) of the Income Tax Act provides that a trust would be entitled to exemption under sections 11 and 12 if it makes an application for registration to the Commissioner/Principal Commissioner and application for renewal within the specified timelines. Given the complex provisions specifying the timelines, with six alternative clauses, many charitable organisations mistakenly filed applications for registration/renewal of registration late. Their applications for registration/renewal of registration were rejected by the Commissioner on the ground that the application was made beyond the prescribed time.

Given the fact that such rejection had severe consequences of applicability of the provisions of tax on accreted income under section 115TD, such trusts filed appeals to the Tribunal against such rejection as well as made applications to the CBDT seeking condonation of delay in filing such applications. Almost all the appeals to the tribunal were decided in favour of the trusts, with the matters being sent back to the Commissioner for processing the application on the merits of each case. The CBDT granted condonations from time to time, the latest condonation being vide CBDT circular No. 7/2024 dated 25th April, 2024, whereunder belated/rectified applications could be made till 30th June, 2024.

The Finance (No. 2) Act, 2024 has now inserted a proviso to section 12A(1)(ac) with effect from 1st October, 2024, giving powers to the Commissioner/Principal Commissioner to condone any delay in making of such applications if he considers that there is a reasonable cause for delay in filing the application. On condonation of delay, the application shall be deemed to have been filed within time.

By this amendment, on or after 1st October, 2024 the Commissioner can consider condonation of any genuine delays in making of such applications which may be noticed during the course of processing such applications, irrespective of whether the delay was before or after 1st October, 2024. This is a much-needed amendment, so that trusts now need not have their applications rejected merely on account of delay in filing the application due to the Commissioner not having the powers to condone any delay.

MODIFICATION OF TIME LIMITS FOR PROCESSING APPLICATIONS UNDER SECTION 12A(1)(ac)

The applications for registration/renewal of registration under section 12A(1)(ac) are required to be processed by the Commissioner/Principal Commissioner within the timelines specified in section 12AB(3), which requires the order under section 12AB(1) to be passed within such timelines. These timelines have now been amended as under with effect from 1st October 2024:

Sub-clause of s.12A(1)(ac) Type of Application Earlier Time Limit Amended Time Limit
(i) Trusts registered u/s 12A/12AA on 31st March, 2021 for registration u/s 12AB to be made by 30th June, 2021 3 months from the end of the month in which the application was received 3 months from the end of the month in which the application was received
(ii) Trusts registered u/s 12AB for renewal 6 months from the end of the month in which the application was received 6 months from the end of the quarter in which the application was received
(iii) Trusts provisionally registered u/s 12AB for renewal
(iv) Trusts whose registration has become inoperative u/s 11(7) to make operative
(v) Trusts which have modified objects not conforming to conditions of registration
(vi)(B) Trusts which have commenced their activities and not claimed exemption u/s 11 and 12 for any year ending before the date of application
(vi)(A) Trusts which have not commenced their activities for provisional registration 1 month from the end of the month in which the application was received 1 month from the end of the month in which the application was received

This amendment is stated to be for better processing and monitoring.

This being a procedural amendment, the revised timeline of 6 months from the end of the quarter may apply even to applications made prior to 1st October, 2024, where the original timeline for processing has not lapsed before 1st October, 2024. Therefore, in case of applications received in April 2024, where the orders could have been passed till October 2024, the orders can now be passed till December 2024.

APPROVAL U/S 80G

A trust which had commenced its activities could have applied for approval under section 80G only if it had not claimed exemption under clause (iv), (v), (vi) or (via) of section 10(23C) or exemption under section 11 for any year ending prior to the date of its application. Therefore, an existing trust having activities for many years claiming exemption under section 11 but not having opted to obtain approval under section 80G earlier, could never have applied for approval. This restriction of not having claimed exemption earlier, has been deleted with effect from 1st October 2024, permitting such existing trusts to seek approval.

Just as in the case of processing of applications under section 12AB, in case of applications for renewal of approval under section 80G or for fresh application under section 80G where activities of the trust have commenced, the timeline for passing the order granting approval or rejecting the application has been amended to a period of 6 months of the end of the quarter in which the application was made, from the period of 6 months from the end of the month in which the application was made.

No amendment has been made to delegate powers to the Commissioner to condone delays in filing applications for approval under section 80G. Perhaps this is on account of the fact that a trust can now make an application at any time after the commencement of its activities. Therefore, even if its earlier application was rejected on account of delay in filing the application, it can make a fresh application again subsequently. However, this will result in it not being approved for the interim period. It would have been better had the power been delegated to the Commissioner in such cases as well.

MERGER OF TRUSTS — SECTION 12AC

A new section, section 12AC, has been inserted with effect from 1st April, 2025. This provides that if a trust approved under clauses (iv), (v), (vi) or (via) of section 10(23C) or registered under section 12AB merges with another trust, the provisions of Chapter XII-EB (Tax on Accreted Income) shall not apply if:

(a) The other trust has similar objects;

(b) The other trust is registered u/s 12AB or under clause (iv), (v), (vi) or (via) of section 10(23C); and

(c) The merger fulfils such conditions as may be prescribed.

The Explanatory Memorandum to the Finance Bill explains the rationale behind this amendment as under:

“Merger of trusts under the exemption regime with other trusts

1. When a trust or institution which is approved / registered under the first or second regime, as the case may be merges with another approved / registered entity under either regime, it may attract the provisions of Chapter XII-EB, relating to tax on accreted income in certain circumstances.

2. It is proposed that conditions under which the said merger shall not attract provisions of Chapter XII-EB, may be prescribed, to provide greater clarity and certainty to taxpayers. A new section 12AC is proposed to be inserted for this purpose.

3. These amendments will take effect from the 1st day of April, 2025.”

While one understands the need to provide clarity on various exemption provisions in the event of merger of an approved/registered trust with another approved/registered trust (e.g., treatment of accumulation, spending out of corpus, loans, etc), the language of the amendment as well as the Explanatory Memorandum explaining the amendment are a little baffling. This is on account of the fact that as the law stands today, tax on accreted income under section 115TD applies to a merger only when an approved/registered trust merges with a trust which is not approved / registered, or which does not have similar objects. Section 115TD(1)(b) does not apply at all when both the trusts involved in the merger are registered trusts having similar objects. There was therefore no need for such a provision at all.

The further interesting aspect is that since section 115TD has not been amended at all, even if conditions are prescribed for the purposes of section 12AC, these conditions cannot create a charge under section 115TD, which excludes a case where both trusts are approved/registered and have similar objects.

One will have to await the rules that will be prescribed, to fully understand the impact of this amendment.

Whether the Order Passed Under Section 139(9) Invalidating the Return Is Appealable?

ISSUE FOR CONSIDERATION

Quite often the income tax returns filed by the taxpayers are considered to be defective and the defect notices are being sent by the Centralised Processing Centre. If the defects pointed out have not been resolved, then such a defective return filed is considered to be an invalid return, by virtue of the provisions of section 139(9). Under such circumstances, it is considered that the assessee has not filed his return of income at all for the relevant year. As a result, the assessee does not get the benefits like getting the refund of excess tax paid or carry forward of unabsorbed losses etc. which he was entitled to get otherwise had the return been considered to be a valid return.

Section 246A provides for the dispute resolution mechanism whereby, if the assessee is aggrieved by the order passed by the income-tax authorities, then he can challenge that order by filing an appeal against it before the Commissioner (Appeals). However, the list of orders against which the appeal can be so filed are listed in sub- section (1) of section 246A. Therefore, the appeal can be filed before the Commissioner (Appeals) against a particular order, only if that order is included in the list of orders which are appealable under section 246A.

The order passed under section 139(9), considering the return of income as invalid return due to non-removal of the defects, is not specifically included in the list of orders which are appealable under section 246A. Therefore, the issue arises as to whether the assessee can file the appeal before the Commissioner (Appeals) against such an order considering the return as a defective return or not. The Pune bench of the tribunal had earlier taken a view that such an order is appealable and the assessee can file the appeal challenging it before the CIT (A). However, in a later case, the Pune bench took a contrary view disagreeing with its earlier decision and held that no appeal can be filed before the CIT (A) against such an order.

DEERE & COMPANY’S CASE

The issue had come up for consideration of the Pune bench of the tribunal in the case of Deere & Company vs. DCIT [2022] 138 taxmann.com 46.

In this case, the assessee was a foreign company and it had filed its return of income for assessment year 2016- 17 declaring the income of ₹474.37 crore and claiming a refund of ₹1.34 crore. The return was processed by the Centralized Processing Centre (CPC), Bengaluru, and a notice dated 15-11-2017 was issued under Explanation (a) to section 139(9) highlighting the difference between the income shown in the return at ₹474.37 crore and as shown in Form No. 26AS at ₹478.62 crore. The assessee responded to the same on 4th December, 2017 through e-portal elaborating the reasons for the difference in the two amounts by maintaining that correct income was reported in the return of income. It was explained that the difference was arising mainly due to two reasons as mentioned below –

1. The assessee had computed its income accruing in India as per Rule 115 whereby invoices raised in foreign currency were converted into Indian Rupees on the basis of SBI TT Buying Rate of such currency prevailing on the date of credit to the account of the payee or payment, whichever is earlier. As against this, the parties on the other hand have deducted tax at source by converting the foreign currency amount into Indian Rupees adopting some other exchange rates.

2. There were certain reimbursements and reversals on which tax had been deducted but they were not in the nature of income of the assessee company.

The DCIT (CPC), Bengaluru rejected the assessee’s contention and declared the return to be invalid by means of the order u/s 139(9) of the Act. The assessee filed an appeal against that order before the CIT(A) which came to be dismissed at the threshold on the ground that the order u/s 139(9) was not appealable under section 246A.

The assessee filed the further appeal before the tribunal against the said order of the CIT (A).

Firstly, the tribunal held that the DCIT (CPC), Bengaluru could not have acted u/s 139(9) in an attempt to correct the mismatch and in the process declared the return as invalid, thereby depriving the assessee from refund claimed in the return of income. The tribunal observed that the AO had activated clause (a) of an Explanation to section 139(9), which stated that: “the annexures, statements and columns in the return of income relating to computation of income chargeable under each head of income, computation of gross total income and total income have been duly filled in”. On this basis, it was held that if all the annexures, statements and columns etc. of the return have been duly filled in, there could be no defect as per clause (a). The defect referred to in clause
(a) was of only non-filling of the requisite columns of the return of income. If the relevant columns in the return of income were duly filled in but were not tallying with the figures reported in Form 26AS due to a valid difference of opinion then it was not covered by clause (a). Further, the tribunal also observed that the Finance Act, 2016 inserted sub-clause (vi) in section 143(1) providing that that if certain amount of income appearing in Form 26AS etc. is not fully or partly included in the total income returned by the assessee, then the AO will process the return u/s 143(1) and make adjustment by way of addition to the total income so computed by the assessee. Therefore, if the intention of the Legislature had been to treat the mismatch of income between Form 26AS and as shown in the return of income rendering the return defective, then there was no need to incorporate clause (vi) of section 143(1)(a) of the Act requiring the AO to carry out the adjustment during the processing of return of income on this score.

With respect to the effect of the return being considered as invalid under section 139(9), the tribunal observed that there were two possibilities. The first possibility was that the assessee could have again filed a fresh return. However, the AO, sticking to his earlier stand, would have held such return also as invalid on the same premise, throwing the proceedings in a vicious circle resulting in an impasse. The second possibility was that the AO, having knowledge of the assessee having taxable income, could have issued a notice u/s 142(1)(i) requiring the assessee to file a return of income. This would have resulted in the assessee filing its return and then the AO determining correct total income of the assessee as per law after making assessment u/s 143(3) of the Act. However, in the instant case, the AO did not issue any notice u/s 142(1) (i) and pushed the proceedings to a dead end, leaving the assessee without any apparent legal recourse. It was under such circumstances, left with no option, the assessee preferred an appeal before the ld. CIT(A) against the order u/s 139(9) of the Act, which has been dismissed as not maintainable on the ground that an order u/s 139(9) is not covered by the list of appealable orders given in section 246A.

In view of these facts, the tribunal held that the assessee could not have been left remediless. Every piece of legislation is ultimately aimed at the well-being of the society at large. No technicality could be allowed to operate as a speed breaker in the course of dispensation of justice. In the context of taxes, if a particular relief was legitimately due to an assessee, the authorities would not circumscribe it by creating such circumstances leading to its denial.

The tribunal held that the first look at different clauses of section 246A(1) transpired that an order u/s 139(9) was ex-facie not covered therein. However, there were two clauses of section 246A(1), namely, (a) and (i), which in the opinion of the tribunal could provide succor to the assessee. The clause (a) of section 246A provided for filing an appeal before CIT(A), inter alia, against “an order against the assessee where the assessee denies his liability to be assessed under this Act”. The word ‘order’ in the expression ‘an order against the assessee where the assessee denies his liability’ was not preceded or succeeded by the word ‘assessment’. Thus any order passed under the Act against the assessee, impliedly including an order u/s 139(9) as in the present case, having the effect of creating liability under the Act which he denies or jeopardizing refund, got covered within the ambit of clause (a) of section 246A(1).

Further, Clause (i) of section 246A(1) dealt with the filing of an appeal before the CIT(A) against an order u/s 237. Section 237 provided that ‘If any person satisfies the Assessing Officer that the amount of tax paid by him or on his behalf or treated as paid by him or on his behalf for any assessment year exceeds the amount with which he is properly chargeable under this Act for that year, he shall be entitled to a refund of the excess.’ Technically speaking, the AO has not passed an order u/s 237 but only u/s 139(9) of the Act. Firstly, the AO could not have treated the return as invalid u/s 139(9) because of mismatch between the figure of income shown in the return and that in Form 26AS and secondly, if at all he did so on a wrong footing, he ought to have issued notice u/s 142(1)(i) of the Act for enabling the assessee to file its return so that a regular assessment could take place determining the correct amount of income and the consequential tax/refund. Here was a case in which the assessee has been deprived by the DCIT (CPC), Bengaluru of any legal recourse to claim the refund. Considering the intent of section 237 in mind and the unusual circumstances of the case, the tribunal held that the order passed by the AO was also akin to an order refusing refund u/s 237 making it appealable u/s 246A(1)(i).

On this basis, the tribunal held that the appeal against the order passed under section 139(9) was maintainable before the CIT (A).

The Mumbai bench of the tribunal has followed this decision of the Pune bench in the case of V.K. Patel Securities Pvt. Ltd. v. ADIT (ITA No. 1009/Mum/2023).

AMRUT RAJENDRAKUMAR BORA’S CASE

The issue, thereafter, came up for consideration before the Pune bench of the tribunal again in the case of Amrut Rajendrakumar Bora [ITA No. 563/Pun/2023 – Order dated 4-8-2023].

In this case, the return of income filed by the assessee for assessment year 2018-19 was treated as invalid under section 139(9) on account non-removal of the defects which were pointed out to the assessee. The appeal filed by the assessee before the CIT (A) against the said order was dismissed on the same ground that it was not an appealable order as per the provisions of section 246A. Before the tribunal, the assessee primarily relied upon the decision in the case of Deere & Co. (supra). As against that, the revenue placed strong reliance on section 246A and contended that it did not contain any specific clause regarding the maintainability of appeal against an order passed under section 139(9) of the Act.

The tribunal held that section 246A was a self-exhaustive provision providing remedy of an appeal against the orders passed by lower authorities in various clauses from (a) to (r) followed by Explanation(s) and statutory proviso(s); as the case may be. The order passed under section 139(9) is not covered specifically under any of the clauses. The tribunal held that a stricter interpretation in such an instance has to be adopted in light of Hon’ble Apex Court’s landmark decision in Commissioner of Customs (Imports), Mumbai vs. M/s. Dilip Kumar And Co. & Ors. [2018] 9 SCC 1 (SC) (FB).

As far as clause (i) was concerned, the tribunal held that it could come into play only when the concerned taxpayer was denying his liability to be assessed under the Act which was not the case as the point involved was limited to the validity of the return of income filed by the assessee. The tribunal further held that section 246A envisaged an appellate remedy before the CIT(A) not based on various consequences faced by an assessee or by way of necessary implications but as per various orders passed by the field authorities under the specified statutory provisions only.

The decision of the co-ordinate bench in the case of Deere & Co. (supra) was held to be per inquirium for not adopting the stricter interpretation as was required. Accordingly, the tribunal upheld the order of the CIT (A) dismissing the appeal of the assessee as not maintainable.

OBSERVATIONS

It is a well-settled principle that the right to make an appeal is not an inherent right, but a statutory right. Therefore, an appeal can be filed against a particular order only if such order is made appealable under the Act. Hence, an appeal cannot be filed before CIT(A) against any order which is not included in the above list. The Supreme Court in the case of Gujarat Agro Industries Co Ltd. vs. Municipal Corporation of City of Ahmedabad (1999) 45 CC 468 (SC) has held that the right of appeal is the creature of a statute. Without a statutory provision creating such a right, the person aggrieved is not entitled to file an appeal. Similarly, in the case of National Insurance Co. Ltd. v. Nicolletta Rohtagi (2002) 7 SCC 456, the Supreme Court has held that the right of appeal is not an inherent right or common law right, but it is a statutory right. The appeal can be filed only if the law so provides.

In light of these principles, one needs to examine the provisions of section 246A for the purpose of determining whether the appeal can be filed against the order passed under section 139(9) considering the return as a defective return. The relevant provision of section 139(9) read as under –

“Where the Assessing Officer considers that the return of income furnished by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of fifteen days from the date of such intimation or within such further period which, on an application made in this behalf, the Assessing Officer may, in his discretion, allow; and if the defect is not rectified within the said period of fifteen days or, as the case may be, the further period so allowed, then, notwithstanding anything contained in any other provision of this Act, the return shall be treated as an invalid return and the provisions of this Act shall apply as if the assessee had failed to furnish the return”

As rightly noted by the tribunal in both the cases as discussed above, the order passed under section 139(9) is not included specifically in the list of orders which are made appealable under sub-section (1) of section 246A. On perusal of sub-section (1) of section 246A, it can be observed that it lists down several orders which have been passed under the specific provisions of the Act which does not include the order passed under section 139(9) of the Act. The only sub-clause which refers to the order in general without referring to any specific provision of the Act is sub-clause (a). It refers to the ‘order against the assessee where the assessee denies his liability to be assessed under this Act’. Therefore, one needs to examine as to whether the order passed under section 139(9) can be considered to be in the nature of an order against the assessee where the assessee denies his liability to be assessed under the Act.

When a person files his return of income taking a particular position, it results into a self-assessment of his liability under the Act. When such a return of income filed by the assessee is considered to be an invalid return of income for non-removal of defects as per the provisions of section 139(9), return of income becomes non-est in law i.e. as if it had never been filed. Consequentially, the self-assessment of the liability which had been declared through the return of income also becomes invalid. Thus, there is no assessment of the liability of the assessee under the Act till that point in time unless it is followed by the specific assessment being made in accordance with the relevant provisions of the Act, which may be either a regular assessment under section 144 or reassessment under section 147. Further, by passing an order under section 139(9), the Assessing Officer is not assessing the liability of the assessee under the Act. Therefore, strictly speaking, the order passed under section 139(9) does not result into assessment of the assessee’s liability in any manner which could have been denied by the assessee.

Alternatively, a view can be taken that the order passed invalidating the return also results in rejecting the self- assessment of the liability of the assessee as declared in the return of income. It might be possible that the assessee claims certain benefits while assessing his liability under the Act in the return of income which has been submitted. Such benefits can be in the nature of claim of loss, or claim of refund on account of excess tax paid in the form of advance tax or TDS. On account of the fact that the return is being considered as invalid return, the benefits so claimed also get rejected indirectly. Therefore, under such circumstance, it is possible to take a view that the liability of the assessee gets increased indirectly as a result of denial of the benefits, which had been claimed by the assessee through the return of income. Although such an increase in the liability of the assessee is not due to any order of assessment, there is an order passed under section 139(9) which is affecting the quantum of the liability of the assessee under the Act. If the claim of refund as made by the assessee in the return becomes invalid, then it results into overcharging of tax upon the assessee to that extent. Therefore, it may be considered as an order affecting the liability of the assessee as originally declared in the return of income and, hence, appealable under section 246A.

The question of applying strict interpretation as laid down by the Supreme Court in the case of Dilip Kumar & Co. (supra) does not arise here as we are not dealing with the exemption provision. The principles of strict interpretation were laid down by the Supreme Court in the context of the exemption provision as the exemption granted affects the exchequer which will then results in increase in tax liability of the other taxpayers. The provision of section like 246A providing for the remedy of filing an appeal against the order passed by the Assessing Officer is no way be compared with the case which was before the Supreme Court in which such a strict interpretation was required.

If a view is taken that the order passed under section 139(9) is not appealable under the provisions of section 139(9), then the only remedies available to the assessee would be to file the petition of revision under section 264 or to knock the doors of the high court by filing certiorari or mandamus writ against such orders. Therefore, a better view seems to be the one which was taken by the Pune bench of the tribunal in its earlier case of Deere & Co. However, the readers may explore the other alternatives as they would be left with no remedy if the appeal filed is not being entertained by following the contrary view.

The CBDT has been given the powers under sub- clause (r) of section 246A(1) to issue direction making any particular order passed by the Assessing Officer as appealable in the case of any person or class of persons having regard to the nature of the cases, the complexities involved and other relevant considerations.

This is a fit case where the CBDT should issue the necessary direction providing for the appeal against the order passed under section 139(9) treating the defective return of income as invalid return.

Glimpses of Supreme Court Rulings

Excise Commissioner Karnataka and Another

vs. Mysore Sales International Ltd. and Ors.

(2024) 466 ITR 205 (SC)

8. Tax collection at source — The liquor vendors (contractors) who bought the vending rights on auction could not be termed as “buyer” under Section 206C of the Income-Tax Act because they were excluded from the definition of “buyer” as per Clause (iii) of Explanation (a) to Section 206C, in as much as the goods [arrack] were not obtained by him by way of auction (i.e., only licence to carry on the business was obtained) and that the sale price of such goods to be sold by the buyer was fixed under a state enactment. Merely because there is a price range providing for a minimum and a maximum under the State Act, it cannot be said that the sale price is not fixed.

Principles of natural justice — Even though the statute may be silent regarding notice and hearing, the court would read into such provision the inherent requirement of notice and hearing before a prejudicial order is passed — Before an order is passed under Section 206C of the Income-Tax Act, it is incumbent upon the assessing officer to put the person concerned to notice and afford him an adequate and a reasonable opportunity of hearing, including a personal hearing.

Prior to 1993, there were several private bottling units in the State of Karnataka, and they were manufacturing and selling arrack.

In the year 1993, the state government discontinued private bottling units from engaging in the manufacture or bottling of arrack and instead decided as a policy to restrict those operations in the hands of state government companies or undertakings, such as, Mysore Sales International Limited and Mysore Sugar Company Limited.

Mysore Sales was entrusted with the above task for the northern districts of the State of Karnataka, while for the rest of the state, Mysore Sugar was entrusted with the responsibility.

The Karnataka Excise Act, 1965 (“the Excise Act”) provides for a uniform law relating to production, manufacture, possession, import, export, transport, purchase and sale of liquor and intoxicating drugs and the levy of duties of excise thereon in the State of Karnataka and for certain matter related thereto. Under the Excise Act, several Rules have been framed for appropriate enforcement of the excise law.

Auctions are conducted periodically for the purpose of conferring lease right for retail vending of arrack. It was conducted with reference to designated areas. Successful bidders are entitled to procure arrack from Mysore Sales and Mysore Sugar depending upon the area allotted to them and then to sell it in retail trade within their respective allotted areas. The retail sale price is fixed by the state government in terms of the Rules.

Section 206C of the Income-tax Act, 1961 casts an obligation on the “seller” of alcoholic liquor, etc., of collecting tax at source at the specified time from the “buyer”. As per Explanation (a), certain persons were not included within, rather excluded from, the definition of “buyer”.

A circular came to be issued by the Excise Commissioner of Karnataka on 16th June, 1998 to which an addendum was also issued. The circular clarified that since arrack was not obtained through auction and since the selling price of arrack was fixed by the Excise Commissioner, there was no question of recovery of tax from the excise (liquor) vendors or contractors.

In view of the above, Mysore Sales and Mysore Sugar (Assesses) did not recover the tax from the liquor vendors.

Assessing Officer (AO) issued notices dated 26th October, 2000 calling upon the Assessee to show cause as to why it should not pay the requisite tax amount which it had failed to collect from the “buyers”, i.e., the excise contractors for the financial years relevant to the assessment years under consideration. The Assessee had submitted its reply to such notice. Thereafter, the AO passed orders dated 17th January, 2001 under Section 206C(6) of the Income-tax Act for the assessment years 2000–2001, 1999–2000, 1998–1999, 1997–1998, 1996–1997 and 1995–1996. The AO held that the Assessee is a “seller” and the liquor vendors are “buyers” in terms of Section 206C of the Income-tax Act and hence, the Assessee was under a legal obligation to collect income tax at source from the liquor vendors (contractors) for the financial years relevant to the aforesaid assessment years. By the aforesaid orders, the Assessee was directed to pay certain sums of money as tax, which it had failed to collect from the liquor vendors or contractors. Following such orders, consequential demand notices for the respective assessment years under Section 156 of the Income-tax Act were also issued to the Assessee by the AO.

Mysore Sales / Mysore Sugar filed writ petitions before the High Court. While the main contention was that Section 206C(6) of the Income-tax Act was not applicable to it, a corollary issue raised was that before passing the order under Section 206C(6) of the Income-tax Act, no opportunity of hearing was given to it. Therefore, there was violation of the principles of natural justice. Learned Single Judge vide the judgment and order dated 27th October, 2003 [(2004) 265 ITR 498] dismissed the writ petitions confirming the orders passed under Section 206C(6) of the Income-tax Act.

Thereafter, Mysore Sales and Ors. preferred writ appeals before the Division Bench. However, by the judgment and order dated 13th March, 2006 [(2006) 286 ITR 136], the writ appeals were dismissed by affirming the orders passed by the AO and also that of the learned Single Judge.

Aggrieved by the aforesaid, SLP(C) No. 12524 of 2006 was preferred by Mysore Sales. After leave was granted on 23rd April, 2007, the same came to be registered as Civil Appeal No. 2168 of 2007. Mysore Sugar also filed an SLP.

According to the Supreme Court, the short point for consideration in this appeal was whether provisions of Section 206C of the Income-Tax Act were applicable in respect of the Appellant and whether the liquor vendors (contractors) who bought the vending rights from the Appellant on auction could be termed as “buyer” within the meaning of Explanation (a) to Section 206C of the Income-tax Act or excluded from the said definition of “buyer” as per Clause (iii) of Explanation (a) to Section 206C of the said Act.

The Supreme Court noted that under Section 17 of the Excise Act, the state government grants lease of right to any person for manufacture, etc., of liquor, arrack in this case. The licencing authority, i.e., Excise Commissioner, may grant to the lessee a licence in terms of his lease. In supplement to the above provision, Rule 3(1) of the 1987 Rules provides that the Excise Commissioner shall grant a licence for any specified area or areas for the manufacture or bottling of arrack. From 1st July, 1993, sub-Rule (2) of Rule 3 has come into force as per which provision the licence under Rule 3 of the 1987 Rules shall be issued only to a company or agency owned or controlled by the state government or to a state government department. This is how Mysore Sales was granted licence for the manufacture and bottling of arrack. Through a process of auction, excise contractors are shortlisted who are thereafter granted licence or permits to vend arrack by retail in their respective area(s). They are required to procure the arrack from the warehouse or depot on payment of the issue price fixed by the Excise Commissioner as per Rule 5(1) of the 1967 Rules. Rule 2 makes it very clear that no arrack in retail vend shall be sold except in sealed bottles or in sealed polythene sachets obtained from either a warehouse or a depot. For such retail vending, Rule 3 of the 1967 Rules requires the excise contractor to construct a counter in the shop. The right to retail vend of liquor is granted either by tender or by auction or by a combined process of tender-cum- auction, etc. As per Rule 17 of the 1987 Rules, the price to be paid by the lessee for the right of retail vend of arrack to the government for the supply of bottled arrack shall be fixed by the Commissioner with prior approval of the government. In so far the retail price is concerned, Rule 4 of the 1967 Rules says that the excise contractor can sell the arrack at a price within the range of minimum floor price and maximum ceiling price that may be fixed by the Excise Commissioner.

The Supreme Court observed that Sub-section (1) of Section 206C provides that every person who is a seller shall collect from the buyer of the goods specified in the table a sum equal to the percentage specified in the corresponding entry of the table. The collection is to be made at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of the receipt of such amount from the said buyer, be it in cash or by way of cheque or by way of draft, etc. In so far alcoholic liquor for human consumption (other than India made foreign liquor, i.e., IMFL), the amount to be collected is 10 per cent. Sub-section (3) provides that any person collecting such amount under Sub-section (1) shall pay the said amount within seven days of the collection to the credit of the central government or as the Central Board of Direct Taxes (CBDT) directs. Sub- section (4) clarifies that any amount so collected under Section 206C(1) and paid under Sub-section (3) shall be deemed as payment of income tax on behalf of the person from whom the amount has been collected and credit shall be given to such person for the amount so collected and paid at the time of assessment proceeding for the relevant assessment year. Sub-section (5) says that every person collecting such tax shall issue a certificate to the buyer within 10 days of debit or receipt of the amount. Sub-section (5A) requires the person collecting tax to prepare half yearly returns for the periods ending on 30th September and 31st March for each financial year and submit the same in the prescribed form before the competent income tax authority. Sub-section (6) says that any person responsible for collecting the tax, fails to collect the same, shall notwithstanding such failure be liable to pay the tax which he ought to have collected to the credit of the central government in accordance with the provisions of Sub-section (3). Sub-section (7) deals with a situation where such tax is not collected in which event the seller is liable to pay interest at the prescribed rate. Sub-section (8) on the other hand deals with a situation where the seller does not deposit the amount even after collecting the tax. In such an event also, he would be liable to pay interest.

The Explanation defines “buyer” and “seller” for the purposes of Section 206C. While Explanation (a) defines “buyer”, (b) defines “seller”. As per Explanation (a), “buyer” means a person who obtains, in any sale by way of auction, tender or by any other mode, goods of the nature specified in the table in Sub-section (1) or the right to receive any such goods but “buyer” would not include:

(i) a public sector company;

(ii) a buyer in the further sale of such goods obtained in pursuance of such sale;

(iii) a buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State Act.

On the other hand, “seller” has been defined to mean the central government, a state government or any local authority or corporation or authority established by or under a central, state or provincial act or any company or firm or cooperative society.

According to the Supreme Court, as per Explanation (a) (iii), if the goods are not obtained by the buyer by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any state enactment, then such a person would not come within the ambit of “buyer”. Explanation (a)(iii), thus, visualises two conditions for a person to be excluded from the meaning of “buyer” as per the definition in Explanation (a). The first condition is that the goods are not obtained by him by way of auction. The second condition is that the sale price of such goods to be sold by the buyer is fixed under a state enactment. These two conditions are joined by the word “and”. The word “and” is conjunctive to mean that both the conditions must be fulfilled; it is not either of the two. Therefore, to be excluded from the ambit of the definition of “buyer” as per Explanation (a)(iii), both the conditions must be satisfied.

In view of the above, the Supreme Court examined the position of an excise contractor. The Supreme Court noted that Mysore Sales was the licensee for the manufacture and bottling of arrack for specified area(s). By a process of auction or tender or auction- cum-tender, etc., excise contractors were shortlisted who are thereafter granted permits to vend arrack by retail in their respective area(s). These retail vendors, i.e., excise contractors had to procure the arrack from the warehouse or depot maintained by Mysore Sales on payment of the issue price fixed by the Excise Commissioner. The arrack was procured in sealed bottles or in sealed polythene sachets. Therefore, according to the Supreme Court, by the process of auction, etc., the excise contractors are only shortlisted and conferred the right to retail vend of arrack in their respective areas. It cannot be said that by virtue of the auction, certain quantities of arrack were purchased by the excise contractors. Thus, at this stage, there were two transactions, each distinct. The first transaction was shortlisting of excise contractors by a process of auction, etc., for the right to retail vend. The second transaction, which was contingent upon the first transaction, was obtaining of arrack for retail vending by the excise contractors on the strength of the permits issued to them post successful shortlisting following auction. Therefore, it was clear that arrack was not obtained by the excise contractors by way of auction. What was obtained by way of auction was the right to vend the arrack on retail on the strength of permits granted, following successful shortlisting on the basis of auction. Thus, the first condition under Clause (iii) was satisfied.

The Supreme Court observed that in Union of India vs. Om Parkash S.S. and Company (2001) 3 SCC 593, it had considered the issue of tax collection at source in respect of the liquor trade under Section 206C of the Income-tax Act and as to whether a licensee who is issued a licence by the government permitting him to carry on the liquor trade would be a “buyer” as defined in Explanation (a) to Section 206C of the Income-tax Act. It was held that “buyer” would mean a person who by virtue of the payment gets a right to receive specific goods and not where he is merely allowed / permitted to carry on business in that trade. On licences issued by the government permitting the licensee to carry on liquor trade, provisions of Section 206C are not attracted as the licensee does not fall within the concept of “buyer” referred to in that section. It was emphasised that a buyer has to be a buyer of goods and not merely a person who acquires a licence to carry on the business.

The requirement of the second condition under Explanation (a)(iii) is that the sale price of such goods to be sold by the buyer is fixed by or under any state statute. After the arrack is obtained in the above manner by the excise contractor, such person has to sell the same in the area(s) allotted to him at the sale price fixed as per Rule 4 of the 1967 Rules. Rule 4 of the 1967 Rules enables the excise contractor to sell the arrack in retail at a price within the range of minimum floor price and maximum ceiling price which is fixed by the Excise Commissioner. A minimum price and a maximum price are fixed within which range the arrack has to be sold by the excise contractor. Thus, according to the Supreme Court, the price of arrack to be sold in retail is not dependent on the market forces but pre-determined within a range. Therefore, though price range is provided for by the statute, it cannot be said that because there is a price range providing for a minimum and a maximum, the sale price is not fixed. The sale price is fixed by the statute but within a particular range beyond which price, either on the higher side or on the lower side, the arrack cannot be sold by the excise contractor in retail. Therefore, the arrack is sold at a price which is fixed statutorily under Rule 4 of the 1967 Rules and thus, the second condition stands satisfied.

The Supreme Court held that since both the conditions as mandated under Explanation (a)(iii) were satisfied, the excise contractors or the liquor vendors selling arrack would not come within the ambit of “buyer” as defined under Explanation (a) to Section 206C of the Income-tax Act.

The Supreme Court further held that though there is no express provision in Sub-section (6) or any other provision of Section 206C of the Income-tax Act regarding issuance of notice and affording hearing to such a person before passing an order thereunder, nonetheless, it is evident that an order passed under Section 206C(6) of the Income-tax Act, as in the present case, is prejudicial to the person concerned as such an order entails adverse civil consequences. It is trite law that when an order entails adverse civil consequences or is prejudicial to the person concerned, it is essential that principles of natural justice are followed. In the instant case, though show-cause notice was issued to the Assessee to which reply was also filed, the same would not be adequate having regard to the consequences that such an order passed under Section 206C(6) of the Income-tax Act would entail. Even though the statute may be silent regarding notice and hearing, the court would read into such provision the inherent requirement of notice and hearing before a prejudicial order is passed. We, therefore, hold that before an order is passed under Section 206C of the Income-tax Act, it is incumbent upon the AO to put the person concerned to notice and afford him an adequate and reasonable opportunity of hearing, including a personal hearing.

The Supreme Court allowed the appeals.

Notes:

1. Though the issue relates to TCS under the Income-tax Act, interestingly, the judgment is reported as Excise Commissioner, Karnataka & Anr [Appellant(s)] vs. Mysore Sales International Ltd & Ors [Respondent(s)]. From the facts, it appears that the Appellant was Mysore Sales International Ltd.

2. In the judgment, it seems inadvertently, in paras 4.5 to 4.8, reference is made to tax deduction at source [TDS] instead of tax collection at source [TCS]. In the above write-up, reference to TDS is avoided.

3. The provisions referred to in the judgment are those in force prior to amendments made by the Finance Act, 2003. It is worth noting that the definition of “buyer” has substantially undergone change as compared to the earlier one, and the current definition does not have the exclusion of the type from the scope of “buyer” under Section 206C which was considered in the above judgment.

Article 13(4) of India-Mauritius DTAA — on facts, assessee was not a conduit company and hence, qualified for exemption of capital gains under Article 13(4) of India-Mauritius DTAA

[2024] 164 taxmann.com 440 (Delhi – Trib.)

India Property (Mauritius) Company-II vs. ACIT

ITA No:1020/Del/2023

A.Y.: 2018–19

Dated: 18th July, 2024

8. Article 13(4) of India-Mauritius DTAA — on facts, assessee was not a conduit company and hence, qualified for exemption of capital gains under Article 13(4) of India-Mauritius DTAA.

FACTS

The assessee is a company incorporated in Mauritius. It is engaged in the business of investment activities. The assessee company claimed to be holding valid tax residency certificate (‘TRC’) and Global Business License-I (‘GBL-I License’) issued by Mauritius Financial Services Commission. During the relevant year, the assessee had transferred shares of certain Indian companies and earned long-term capital gains. Having regard to provisions of section 90(2) of the Act, read with Article 13(4) of India-Mauritius DTAA, the assessee claimed the same as exempt and filed its return of income declaring NIL income.

Return of income of the assessee was selected for scrutiny and pursuant to the directions of DRP, the AO denied DTAA benefits. In reaching his conclusion, the AO had examined fund flow, structure, business operation and other aspects of the assessee. The AO observed that on the principle of doctrine of substance over form and principal purpose test, the assessee did not qualify for benefit under clause 13(4) of India-Mauritius DTAA because of following reasons.

(a) The assessee had acquired the shares through its group company and immediately upon receipt of sale consideration, the assessee transferred the funds to another group company.

(b) The assessee had not incurred any expense on wages or salaries.

(c) The assessee did not have any physical assets such as land and building nor did it pay any rent.

(d) Though the assessee had 7 directors, no remuneration was paid to them during the relevant year. Further out of 7 directors, 4 directors were non-residents and 2 directors were executive directors of group company. One executive director of group company was attending board meetings by teleconference.

(e) The directors who were based in Mauritius did not have any effective say in management. The adviser company and sub-adviser company were both based outside Mauritius. Thus, the effective control and management of the assessee was outside Mauritius.

(f) The assessee has argued that it holds a valid TRC and as per Circular No.789 dated 13th April, 2000, and as per Supreme Court decision in UOI vs. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) and other judicial precedents, DTAA benefits should be granted on the basis of TRC issued by Mauritius revenue authorities. However, subsequent judicial precedents and decisions have held that TRC is not conclusive in deciding tax residency and granting of benefit under DTAA.

HELD

ITAT held that the assessee is the beneficial owner of income on account of the following facts:

  • The assessee had made investments long time ago. Even after disinvestment from the said companies, it continued to hold substantial investments.
  • In its decision in Vodafone BV, Bombay High Court had made a conscious distinction between companies which were without any commercial substance and were established for investments, and those which were interposed as owner of shares in India at the time of disposal of shares to a third party, solely with a view to avoid tax.
  • The AO has nowhere alleged on the basis of any evidence that any investment flowing from India was received for creating the assessee. The assessee had held investments for over five years before it transferred them. The assessee had earlier also made investments and had sold them and even now held investments in various companies. The assessee was beneficially and legally holding the investments in its own name. On facts, it could not be called a fly-by-night operator created merely for purpose of tax avoidance.
  • The genuineness of the activities of assessee could not merely be questioned on the basis that Directors were not residents of Mauritius or that there were no operational expenses or no remuneration was paid to directors.
  • Revenue cannot question genuineness of business operations of an assessee without establishing that administrative activities were sham. The assessee had validly discharged its burden by establishing that the external service provider had been outsourced and it had paid for their services. It is the wisdom and discretion of the assessee as to how it should conduct its day-to-day activities.
  • The AO sought to establish that the assessee was a conduit company by alleging that investment funds were immediately transferred to the assessee before investment, and sale consideration received by the assessee was immediately transferred in the form of share buyback and dividend. However, since the assessee is an investment fund, such transactions are normal. What is material is how long the investments were held and whether the investments had commercial expediency. In his order the AO has reproduced the resolutions of the assessee indicating why the investments were being sold and how the sale proceeds were to be distributed to the investors. Conduit company could not be presumed merely because sale consideration was immediately transferred as the invested funds were to be returned to investors with gains made.
  • The commercial rationale for incorporating the assessee in Mauritius was not for tax avoidance but to attract funds from different jurisdictions for investment in India. In its decision in Azadi Bachao Andolan case, Supreme Court has mentioned that when endeavour of Government of India is to facilitate investment in joint venture and infrastructure projects for the benefit of economy, then attributing malice to investment funds like the assessee is not justified. The AO has not brought any evidence on record to rebut the statutory presumption of genuineness of business activity of the assessee on the basis of TRC.
  • Accordingly, the Tribunal allowed the appeal in favour of the assessee.

S. 12A, 13 — CIT(E) cannot deny registration under section 12A by invoking section 13(1)(b) since section 13 can be invoked only at the time of framing assessment and not at the time of grant of registration

(2024) 165 taxmann.com 141 (Ahd Trib)

Bargahe Husaini Trust vs. CIT

ITA No.: 826(Ahd) of 2023

A.Y.: N.A.

Date of Order: 22nd July, 2024

41. S. 12A, 13 — CIT(E) cannot deny registration under section 12A by invoking section 13(1)(b) since section 13 can be invoked only at the time of framing assessment and not at the time of grant of registration.

FACTS

The assessee-trust was granted provisional registration under section 12A on 24th January, 2022. Thereafter, it filed application for grant of final registration in Form 10AB on 18th March, 2023.

On perusal of the application, the CIT(E) observed that the objects of the applicant were for the benefit of a particular community or caste, that is, Khoja Shia Ishna Ashari Samaj, and hence, covered by the disallowance under section 13(1)(b). He, therefore, rejected the application for final registration under section 12A.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

Noting various judicial precedents including that of jurisdictional High Court / Tribunal, the Tribunal held that provisions of section 13 can be invoked only at the time of framing assessment by AO and not at the time of grant of registration under section 12A by CIT(E). Accordingly, the appeal of the assessee-trust was allowed and the matter was restored to the file of CIT(E) for de-novo consideration.

S. 12A / 12AB — Where the show cause notice was issued on 6th October, 2022, CIT(E) could not have cancelled registration retrospectively with effect from 1st April, 2014 in so far as section 12AA /12AB do not provide for cancellation of registration with retrospective effect

(2024) 165 taxmann.com 39(Cuttack Trib)

Maa Jagat Janani Seva Trust vs. CIT

ITA No.: 248(Ctk) of 2023

Date of Order: 16th July, 2024

40. S. 12A / 12AB — Where the show cause notice was issued on 6th October, 2022, CIT(E) could not have cancelled registration retrospectively with effect from 1st April, 2014 in so far as section 12AA /12AB do not provide for cancellation of registration with retrospective effect.

FACTS

The assessee trust was granted registration under section 12A on 21st May, 2014, w.e.f. 1st April, 2013. It had also filed Form 10A to get re-registration under section 12A and Form 10AC was issued granting registration for the period from AY 2022-23 to AY 2026-27 vide an order dated 5th April, 2022.

Subsequently, a show cause notice was issued by CIT(E) to the assessee on 6th October, 2022 wherein the assessee was asked to explain as to why registration should not be cancelled. The assessee responded from time to time; however, CIT (E) held that the assessee had not submitted any categorical explanation or reply to the show cause notice and cancelled the registration under section 12AA with retrospective effect from 1st April, 2014.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal observed that:

(a) A perusal of the order cancelling the registration showed that CIT(E) had not given any reason for rejecting various explanation given by the assessee to various show-cause notices issued.

(b) In any case, the show cause notice for cancellation of registration having been issued on 6th October, 2022, CIT (E) could not have cancelled registration retrospectively with effect from 1.4.2014 insofar as the provisions of section 12AA/12AB do not provide for the cancellation of registration with retrospective effect, as held by the Tribunal in Amala Jyothi Vidya Kendra Trust vs. PCIT, (2024) 206 ITD 601 (Bangalore Trib).

Accordingly, the Tribunal cancelled the order of CIT(E) and allowed the appeal of the assessee.

S. 45 — Revaluation of asset held by partnership firm and crediting amount of said revaluation to partners’ capital account is transfer taxable section45(4) and the fair market value fixed by stamp authorities should be taken as deemed value of consideration for purpose of section 48

(2024) 165 taxmann.com 261 (Hyd. Trib)

Shree Estatesvs. ITO

ITA No.:469(Hyd) of 2023

A.Y.: 2018-19

Date of Order: 30th July, 2024

39. S. 45 — Revaluation of asset held by partnership firm and crediting amount of said revaluation to partners’ capital account is transfer taxable section45(4) and the fair market value fixed by stamp authorities should be taken as deemed value of consideration for purpose of section 48.

S. 251 — Where CIT(A) considered the same income considered by AO but taxed it under the correct provision, the power exercised by CIT(A) cannot be said to be beyond scope of section 251(1).

FACTS

The assessee was a partnership firm registered on 15th May, 2017 with three partners, formed with capital contribution of land parcels by two partners and ₹1 lakh by third partner. Subsequently, it was reconstituted on 8th November, 2017 with six partners. The firm also revalued the land held by it in its books of account upwards to the tune of ₹12,56,24,460, thereby increasing the value of the land. The said revaluation amount was credited to the capital account of the partners. Subsequently, three partners also converted their loans given to the firm into capital account for which the existing partners agreed.

The assessee filed its return of income declaring total income of ₹1. The case was selected for scrutiny to verify substantial increase in capital in a year. During the course of assessment proceedings, the AO called upon the assessee to furnish the necessary capital account of partners and explain the substantial increase in partners’ capital account. The AO was not satisfied with the explanation furnished by the assessee and therefore, treated the entire capital account as unexplained credit taxable under section 68.

CIT(A) deleted the addition made under section 68; however, he held that the revaluation reserve credited to the partners’ capital account was available for withdrawal by the partners and such credit was taxable under section 45(4).

Aggrieved, the assessee filed an appeal before the ITAT, inter alia, taking an additional legal ground challenging the jurisdiction of CIT (A) to tax a new source of income.

HELD

On the additional legal ground, the Tribunal observed that once the first appellate authority is having the coterminus powers with that of AO, then the powers of CIT (A) under section 251(1)(a) are wide enough to consider any other issues which come to his knowledge during the course of appellate proceedings. However, such issues should have emanated either from the assessment order or from the return of income filed by the assessee. In other words, CIT (A) can very well consider the issues which have been dealt by the AO as it is or he can deal with the issues under proper provisions of law, if facts so demand; but he cannot consider a new issue or new source of income which is either not considered by the AO or not emanated from the return of income filed by the assessee. In the present case, the issue considered by the AO was increase in capital account of partners on account of revaluation of the assets held by the firm and credited such revaluation amount to the capital account of the partners and said issues fall under section 45(4), but the AO considered the issue under section 68 as unexplained cash credit. CIT (A) having noticed this fact had rightly invoked section 45(4). Therefore, the powers exercised by CIT (A) cannot be said to be beyond the scope of section 251(1).

On the issue of taxability under section 45(4), the Tribunal observed –

(a) Following CIT vs. Mansukh Dyeing and Printing Mills, (2022) 449 ITR 439 (SC), the revaluation of the asset held by the firm and crediting the amount of said revaluation to the partners’ capital account is a transfer which falls under section 45(4) and any profit or gain arising from the transfer needs to be taxed in the hands of the appellant firm.

(b) Under section 45(4), the fair market value of the asset on the date of such transfer is deemed to be the full value of consideration for the purpose of section 48. The value recorded by the assessee in the books of account for the purpose of revaluation of asset cannot be a fair market value of the property because it is not ascertainable as what is the basis on which said value has been arrived at.

(c) The guideline value fixed by the stamp duty authorities reflects the correct fair market value of any property and it may be a yardstick to determine the fair market value of the property. Therefore, in absence of contrary evidence to that effect, the fair market value fixed by the stamp duty value authorities should be taken as deemed full value of the consideration for the purpose of section 48 read with section 45(4).

Sec. 153D: Approval u/s 153D is a mandatory and not procedural requirement and mechanical approval without application of mind by the approving authority would vitiate assessment orders

[2024] 112 ITR (T) 224 (Pune – Trib.)

SMW Ispat (P.) Ltd. vs. ACIT

ITA NO. 56 TO 67 AND 72 & 73 (PUN.) OF 2022

A.Y.: 2009-10 TO 2014-15

Date of Order: 20th December, 2023

38. Sec. 153D: Approval u/s 153D is a mandatory and not procedural requirement and mechanical approval without application of mind by the approving authority would vitiate assessment orders.

FACTS

The assessee is a company engaged in the business of manufacturing of TMT Bars. A search and seizure action was conducted at different premises of the Mantri-Soni Group of Jalna / Bhilwara and their family members on 2nd May, 2013. A notice us 153A was issued upon the assessee on 13th February, 2014 requiring him to furnish the return of income from the date of receipt of notice.

The AO had added an amount of ₹2,00,00,000 which was taken from M/s. Sangam Infratech Limited, Bhilwara as unsecured loans on account of accommodation entry in the hands of the assessee. The AO further added unsecured loans of ₹85,00,000 taken from M/s. Swift Venture Pvt Ltd. and determined total income at ₹3,23,94,890 vide its order dated 30th March, 2016 passed us 143(3) r.w.s. 153A of the Act.

Aggrieved by the assessment order, the assessee filed an appeal before CIT(A). The CIT(A) in its order confirmed both the additions made by the AO. Aggrieved by the order, the assessee filed an appeal before the ITAT.

The assessee challenged the action of the AO of initiating the proceedings us 153A of the Act and passing the assessment order us 143(3) r.w.s. 153A of the Act.

HELD

The assessee argued that the Joint Commissioner of Income Tax, Central Range, Nashik granted approval u/s. 153D of the Act on mechanical basis without any independent application of mind, the said approval nowhere deals with the merits of case relating to the additions made in the draft assessment order, the said approval nowhere mentions any reason or justification as to why such approval is being granted and it amply proves beyond doubt that the same was given in mechanical manner with a biased approach without any independent application of mind.

The ITAT observed that there should be some indication that the approving authority examined relevant material in detail while granting the approval u/s 153D of the Act. The approval u/s. 153D is a mandatory requirement and such approval is not meant to be given mechanically. The ITAT observed that on an examination of the approval dated 21st March, 2016 which was placed on record, no reference whatsoever was made by the JCIT or no indication was given for examination of evidences, documents, statements of various persons, etc.

The ITAT also observed that the AO sought approval u/s 153D of the Act on 18th March, 2016, the JCIT granted approval on 21st March, 2016 and the final assessment order u/s 143(3) r.w.s. 153A of the Act was passed on 30.03.2016 which clearly indicates that the approving authority granted approval in one day [19th March, 2016 & 20th March, 2016 was a Saturday & Sunday] mechanically without examining the relevant material.

The ITAT followed the decision of Hon’ble High Court of Orissa in the case of M/s. Serajuddin & Co. in ITA Nos. 39, 40, 41, 42, 43, 44 of 2022 and held that the approval granted u/s. 153D of the Act mechanically without application of mind which resulted in vitiating the final assessment order dated 30th March, 2016 u/s. 143(3) r.w.s. 153A of the Act.

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

EDITORIAL COMMENT

The decision of Hon’ble High Court of Orissa in the case of M/s. Serajuddin & Co. in ITA Nos. 39, 40, 41, 42, 43, 44 of 2022 was confirmed by the Hon’ble Supreme Court vide order dated 28th November, 2023 in SLP(C) No. 026338/2023.

Sec. 68 r.w.s. 148: Where nothing was brought on record by the Assessing Officer to substantiate that assessee had taken accommodation entry, reopening notice was to be quashed

[2024] 112 ITR (T) 158 (Kol – Trib.)

R. S. Darshan Singh Motor Car Finance (P.) Ltd. vs. ITO

ITA NO. 265(KOL) OF 2024

A.Y.: 2013-14

Date of Order: 2nd May, 2024

37. Sec. 68 r.w.s. 148: Where nothing was brought on record by the Assessing Officer to substantiate that assessee had taken accommodation entry, reopening notice was to be quashed.

FACTS

The assessee is a non-banking financial company [NBFC]. The AO had received information from Asst. Director of Income Tax (Investigation) (OSD), Unit-4, Kolkata that the assessee is one of the beneficiaries of the accommodation entries and had received total amount of ₹35,00,000 from M/s. Brahma Tradelinks Pvt. Ltd. during the FY 2012-13. A notice u/s 148 was issued on 19th March, 2020 on perusal of the said information. The assessee had objected the reopening of the assessment proceedings. The AO disposed of the objections without assigning any reasons and enhanced the income of the assessee by ₹35,00,000 as unexplained cash credit u/s 68 of the Act. On appeal before CIT(A), the CIT(A) confirmed the impugned addition of ₹35,00,000 and upheld the assessment order.

Aggrieved by the Order, the assessee preferred an appeal before the ITAT on several grounds and filed an application for additional ground of appeal – “That the impugned order passed u/s 147 of the Act making an addition of ₹35,00,000 is not based on any information leading to escapement of ₹35,00,000 and therefore the entire proceeding is without jurisdiction and hence bad in law”

HELD

The ITAT observed that evidently the assessee had received sum of ₹20,00,000 from M/s. Brahma Tradelinks Pvt. Ltd. during the FY 2012-13. The AO had not brought on record anything to substantiate the alleged receipt of ₹35,00,000 except for the fact that he had received credible information.

Assessee had relied on the following judgments:

  • CIT(Exemptions) vs. B. P. Poddar Foundation for Education [2023] 448 ITR 695 (Cal. HC)
  • CIT vs. Lakshmangarh Estate & trading Co. [2013] 220 Taxman 122 (Cal.)
  • Peerless General Finance and Investment Co. Ltd. vs. DCIT [2005] 273 ITR 16 (Cal. HC)

Relying on the above judgments, the ITAT opined that the burden lies with the AO to verify the genuineness of the credible information and that the information as alleged to be received by AO cannot be said to be a credible information. The ITAT also observed that in the preceding AY 2012-13, reopening was initiated by the then AO against the assessee on the same issue i.e. on the basis of transaction with M/s. Brahma Tradelinks Pvt. Ltd. but no addition was made.

The ITAT held that the AO did not apply his own mind to the information and examine the basis and material of the information, he accepted the plea in a mechanical manner and thus, the issuance of notice u/s 148 of the Act was illegal, wrong and quashed the notice.

In the result, the appeal of the assessee was allowed.

Section 250(6) of the Act obligates the CIT(A) to state points for determination in appeal before him, the decision thereon and the reasons for determination. CIT(A) has no power to dismiss appeal of assessee on account of non-prosecution and without deciding on the merits of the case

Maa Chintpurni Mining Pvt. Ltd. vs. ITO
ITA No. 28/Ranchi/2024
A.Y.: 2015-16
Date of Order: 13th August, 2024
Section: 250

36. Section 250(6) of the Act obligates the CIT(A) to state points for determination in appeal before him, the decision thereon and the reasons for determination. CIT(A) has no power to dismiss appeal of assessee on account of non-prosecution and without deciding on the merits of the case.

FACTS

The assessee, engaged in the business of mining, filed its return of income electronically on 29th October, 2015 declaring total income at ₹21,960. The case of the assessee was selected under limited scrutiny under CASS for the reason ‘large share premium received during the year’. During the assessment proceedings, the assessee failed to substantiate the nature of amount received to the tune of ₹68,11,000 whether it was share premium or otherwise to the satisfaction of the AO.

The assessment order stated that the assessee did not make due compliance to notices issued from time to time. Thus, the Assessing Officer (AO) framed the assessment u/s.144 of the Act assessing total income at ₹68,32,955 after making addition of ₹68,11,000 on account of unexplained cash credit u/s.68 of the Act.

Against the assessment order, the assessee preferred appeal before the ld. CIT(A). Before him, vide three grounds of appeal, the assessee contested the addition made on the ground that the AO erred in making the addition of the amount credited in the bank account as cash credit u/s 68 of the Act. Besides, he erred in making the addition which was not the subject matter of Limited scrutiny. The CIT(A) in his order narrated the non-compliant attitude of the assessee stating that despite number of notices sent through ITBA portal on several occasions, there was no response from the assessee. Therefore, he proceeded to dispose of the appeal based on materials on record. The CIT(A) dismissed the appeal of the assessee upholding the addition made by the AO.

Aggrieved, the assessee filed an appeal to the Tribunal where written submissions were filed on behalf of the assessee.

HELD

The Tribunal observed that while the CIT(A) has claimed that despite several notices issued allowing opportunity of hearing to the assessee during appellate proceedings, there was no compliance, the AR on the other hand, has inter alia claimed vide written submission above (which have been reproduced by the Tribunal in its order) that the CIT(A) ignored the written submission made on e-filing portal within the due date of time allowed. Copies of e-proceeding acknowledgements were enclosed with the written submissions which the Tribunal found to be self-speaking.

The Tribunal held that evidently, it appeared to the Bench that the compliance made by the assessee through e-portal was not in the knowledge of the CIT(A) for some technical issue. Since the appellate proceedings were taken up by NFAC in a faceless manner, such lack of communication cannot be ruled out due to technical glitches. It held that it would be in the fitness of things that the matter be adjudicated de novo on the grounds of appeal before the CIT(A)/NFAC after taking account the reply and other supporting material as claimed by the assessee to have been filed on e-portal.

The Tribunal held that the appeal has not been decided on merits due to miscommunication between the department and the assessee. Referring to provisions of Section 250(6) of the 1961 Act the Tribunal held that CIT(A) is obligated to state points for determination in appeal before him, the decision thereon and the reasons for determination. He has no power to dismiss appeal of assessee on account of non-prosecution and without deciding on the merits of the case.

Thus, in the in the interest of justice, the Tribunal restored the matter to CIT(A) emphasising the need for a thorough and compliant adjudication process.

The appeal filed by the assessee was allowed for statistical purposes.

It is not necessary that the consideration of the original asset be invested in new residential house. Construction of new house can commence before the date of transfer of original asset. Where return of income is filed under section 139(4), investment in new residential house till the date of filing of such return qualifies for deduction under section 54

Jignesh Jaysukhlal Ghiya vs. DCIT

ITA No. 324/Ahd./2020 A.Y.: 2013-14

Date of Order: 7th August, 2024

Sections: 54, 139(4)

35. It is not necessary that the consideration of the original asset be invested in new residential house. Construction of new house can commence before the date of transfer of original asset. Where return of income is filed under section 139(4), investment in new residential house till the date of filing of such return qualifies for deduction under section 54.

FACTS

For the assessment year under consideration the assessee filed his return of income declaring total income of ₹31,71,420. The Assessing Officer (AO) assessed the total income by making an addition of ₹23,17,183 as long-term capital gains.

The assessee sold a residential house on 9th January, 2013 for a consideration of ₹45,00,000 and purchased an unfinished flat on 17th February, 2014 and sale consideration was paid between 4th August, 2011 to 8th December, 2011 (much before sale of original house). The assessee also entered into a Construction Agreement on 25th February, 2014 to complete the construction of unfinished flat for a total consideration of ₹51,65,000. This consideration was paid during 8th December, 2011 to 16th February, 2014. Thereafter, the assessee filed his belated Return of Income u/s. 139(4) of the Act and claimed exemption u/s. 54 (restricted to ₹23,17,183). The Assessing Officer (AO) denied the benefit of section 54 as the assessee failed to deposit unutilised amount of capital gain in separate account and also did not file the Return of Income as prescribed u/s. 139(1) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who partly allowed the appeal and directed the AO to recompute the deduction under section 54 by considering only that part of the investment made in new property which was made after the date of sale of the original house and before the due date of filing of return of income under section 139(1) of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee it was submitted that construction of the new flat has been completed within three years (25th February, 2014) from the date of transfer of original asset (9th January, 2013). Thus, assessee is eligible for exemption u/s. 54 even in respect of investment made prior to the date of transfer of original asset. The date of commencement of construction is irrelevant for the purpose of claim of exemption u/s. 54 of the Act, so long as construction is completed within three years from the date of “transfer of original asset”. Further, the assessee is eligible for exemption u/s. 54 of the Act even in respect of amount of investment in construction made prior to the date of “transfer of original asset”. Reliance was placed on the following decisions:

i) Bhailalbhai N. Patel vs. DCITITA 37/Ahd/2014;

ii) ACIT vs. Subhash S. Bhavnani – (2012) 23 taxmann. com 94 (Ahd);

iii) Kapil Kumar Agarwal vs. DCIT-(2019) 178 ITD 255 (Del);

iv) CIT vs. J. R. Subramanya Bhat (1987) 165 ITR 571 (Karnataka);

v) CIT vs. H. K. Kapoor-(1998) 234 ITR 753 (Allahabad);

vi) CIT vs. Bharti Mishra-(2014) 41 taxmann.com 50 (Del);

HELD

The Tribunal found that both the lower authorities have taken a common view that the sale consideration of the old residential house should form part of construction in the residential house for claiming deduction 54 of the Act. It held that that the assessee is eligible to claim deduction under this section, even if a new residential house is purchased within one year before the date of transfer of original asset, which means that assessee has to make use of funds other than the sale consideration of original asset for investing in a new residential house and it is not mandatory that only the sale consideration of original asset be utilised for purchasing or constructing a new residential house. Since the assessee, in the present case, has utilized other funds (apart from sale consideration) for constructing new residential house, for this reason only he cannot be denied deduction u/s 54 of the Act.

The Tribunal having quoted the provisions of section 54 held that there is no mention about the date of start of construction of residential house, but it only refers to a construction of a residential house, which is the date of completion of the constructed residential house habitable for the purpose of residence.

As regards the question as to whether the assessee is entitled for claiming exemption u/s. 54 where the return is filed belatedly u/s. 139(4) of the Act it noted that this issue is considered by the Co-ordinate Bench of this Tribunal in the case of Manilal Dasbhai Makwana vs. ITO [(2018) 96 Taxmann.com 219] where the Tribunal has held that “when an assessee furnishes return subsequent to due date of filing return under s.139(1) but within the extended time limit under s.139(4), the benefit of investment made up to the date of furnishing of return of income prior to filing return under s.139(4) cannot be denied on such beneficial construction.”

It also noted that the Madras High Court in the case of C. Aryama Sundaram vs. CIT [(2018) 97 taxmann.com 74] has on identical facts decided the issue in favour of the assessee and held that “It is not a requisite condition of section 54 that the construction could not have commenced prior to the date of transfer of asset resulting in capital gain.”

The Tribunal following the above judicial precedents held that the assessee is eligible for deduction u/s. 54 of the Act and directed the AO to grant deduction and delete the addition made by him.

The Tribunal allowed the appeal filed by the assessee.

Mistake in tax calculation whereby tax was calculated at slab rate instead of rate mentioned in section 115BBE is a mistake which can be rectified under section 154 and therefore provisions of section 263 cannot be invoked in such a scenario

Dhashrathsinh Ghanshyamsinh vs. PCIT

ITA No. 223/Ahd./2021

A.Y.: 2015-16

Date of Order: 8th August, 2024

Sections: 115BBE, 154, 263

34. Mistake in tax calculation whereby tax was calculated at slab rate instead of rate mentioned in section 115BBE is a mistake which can be rectified under section 154 and therefore provisions of section 263 cannot be invoked in such a scenario.

FACTS

The assessee filed return of income for AY 2015-16 declaring total income to be a loss of ₹31,52,060. The case was selected for limited scrutiny. The Assessing Officer (AO) passed an order under section 143(3) assessing the total income to be ₹1,89,07,363. The additions made by the AO comprised of addition in respect of interest free advance amounting to ₹3,60,000, addition in respect of cash gift amounting to ₹34,00,000, addition in respect of unsecured loan amounting to ₹19,50,000 and addition in respect of cash deposit in Bank amounting to ₹1,63,49,423. The PCIT issued show cause notice under Section 263 of the Act dated 28th February, 2020 in respect of the observation that during the assessment proceedings, the assessee failed to submit any documentary evidence regarding the source of cash deposit in the Bank and gift received in cash and, therefore, the addition made under section 68 should have been taxed at 30 per cent and not as per the slab rates. Thus, the PCIT passed order under Section 263 on 30th April, 2020 directing the AO to calculate tax as per Section 115BBE of the Act.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD

The PCIT has not pointed out the aspect of assessment order being erroneous and prejudicial to the interest of the revenue. The Tribunal observed that all the additions made by the AO are in consonance with the Income-tax statute. The calculation of tax as per Section 115BBE of the Act is a mistake which can be rectified under Section 154 of the Act and, therefore, the provisions of Section 263 of the Act cannot be invoked in this scenario as it is not derived from Section 263 of the Act where the mistake in the assessment order carried out by the AO can be rectified. Thus, invocation of Section 263 of the Act itself was held to be not justifiable in the assessee’s case.

Section 69C — Bogus Purchase — Genuineness of purchase transaction

Pr. CIT – 1 Mumbai vs. SVD Resins & Plastics Pvt. Ltd

ITXA No. 1662 & 1664 of 2018

A.Ys.: 2009–2010 and 2010–2011

Dated: 7th August, 2024, (Bom) (HC)

14. Section 69C — Bogus Purchase — Genuineness of purchase transaction.

Briefly, the facts are that the assessee was engaged in the business of trading in resins and chemicals on wholesale basis. On information received from the DGIT (Investigation), Mumbai, the Assessing Officer (AO) invoked Section 147 of the Income-tax Act, 1961 to reopen the completed assessment by issuing notice under Section 148 dated 12th March, 2013. In response thereto, the assessee filed a revised return on 20th March, 2013, as also sought the reasons as recorded by the AO. The AO was of the opinion that the assessee had made purchases amounting to ₹1,34,25,500 from six parties who were declared by the Sales Tax Department as ingenuine dealers. It is not in dispute that during the assessment proceedings, the assessee filed ledger accounts, confirmation of suppliers, purchase bills, delivery bank statements and other documentary evidences to justify the genuineness of the purchases. The AO nonetheless was of the opinion that the disputed purchases did not have nexus with the corresponding sales. Accordingly, he made an addition of the said amount under Section 69C of the Act on the grounds of there being unexplained payments qua the disputed purchases.

Before the Commissioner of Income Tax (Appeals), the assessee contended that the AO has not rejected the books of accounts by invoking the provisions of Section 145(3); hence, the AO was not justified in invoking the provisions of Section 69C. It was also the assessee’s case that during the hearing in question as well as the preceding two years, the assessee had declared gross profit for the AY 2007–2008 at 4.23 per cent and for the AY 2008–2009 at 4.28 per cent. It was also contended that for the subsequent AY 2009–2010, a gross profit of 4.74 per cent was declared in respect of the disputed purchase; the disclosed gross profit was 0.27 per cent which was lower by 4.47 per cent than the normal gross profit margin of 4.74 per cent in respect of other accepted genuine transactions. It was also contended that if the disallowance is sustained, there will be an abnormal increase in the gross profit at 17.81 per cent which was almost impossible in trading activity of chemicals, and hence, it was urged before the CIT(A) that an alternate to estimate the total income at 5 per cent on the purchases needs to be accepted. Considering the rival contentions, the CIT(A) estimated the profit at 12.5 per cent on the purchases made by the assessee. The CIT(A) reduced the declared GP from 12.5 per cent and confirmed the addition to the extent of 7.76 per cent.

The Tribunal considering the proceeding and the respective contentions as urged on behalf of the revenue passed the impugned order in which it was observed that the CIT(A) has rightly estimated the profit in regard to the purchases at 12.5 per cent; however, the Tribunal observed that CIT(A) was not correct in reducing the gross profit already returned by the assessee at 4.74 per cent out of the 12 per cent, for the reason that the gross profit returned by the assessee related to the sales made by the assessee and did not have link to the purchases for which assessee might have procured bills by making savings in VAT, etc. For such reason, the Tribunal partly allowed the grounds as raised by the revenue and directed the AO to estimate the income at 12.5 per cent in each of the assessment years, on the purchases so made. The Tribunal rejected the assessee’s challenge to the orders passed by the CIT(A) while partly allowing the revenue’s appeals and dismissing the assessee’s appeal.

The appellant’s / revenue’s primary submission that the approach of the CIT(A) as also the part acceptance of such approach by the tribunal in the impugned order needs interference of this Court on the question of law as raised by the revenue. It is submitted that entire purchases of ₹1,34,25,500 were required to be discarded as bogus purchases, and the relevant amounts brought to tax by making additions to the assessee’s income, as rightly undertaken by the AO. However, the revenue was not in a position to dispute that the assessee had furnished all the relevant documents in so far as the purchases are concerned, namely, the ledger accounts, confirmation of suppliers, purchase bills, delivery statements and other documentary evidence, despite which the AO on the basis of information received from the Sales Tax Department had decided to make additions of the said amounts on the grounds that the purchases were presumed to be doubtful. The revenue further stated that the suppliers were not independently examined nor was their evidence recorded.

The assessee submitted that all these are factual issues which are being raised by the revenue and no question of law rises for consideration of the Court. Reliance was placed on the decision of a co-ordinate bench of this Court in the case of Pr. Commissioner of Income Tax-17 vs. Mohammad Haji Adam & Company, [2019] 103 taxmann.com 459 (Bombay) to contend that in similar circumstances, the Court had not entertained the revenue’s appeal and the same was dismissed, with observations that no question of law had arisen for consideration of the Court in similar facts.

The Honourable Court observed that the basic premise on the part of the AO so as to form an opinion that the disputed purchases were not having nexus with the corresponding sales, appears to be not correct. It was seen that what was available with the department was merely information received by it in pursuance of notices issued under Section 133(6) of the Act, as responded by some of the suppliers. However, an unimpeachable situation that such suppliers could be labelled to be not genuine qua the assessee or qua the transaction entered with the assessee by such suppliers was not available on the record of the assessment proceedings. It was an admitted position that during the assessment proceedings, the assessee filed all necessary documents in support of the returns on which the ledger accounts were prepared, including confirmation of the supplies by the suppliers, purchase bills, delivery bank statements, etc., to justify the genuineness of the purchases; however, such documents were doubted by the AO on the basis of general information received by the AO from the Sales Tax Department. The Honourable Court held that to wholly reject these documents merely on a general information received from the Sales Tax Department would not be a proper approach on the part of the AO, in the absence of strong documentary evidence, including a statement of the Sales Tax Department that qua the actual purchases as undertaken by the assessee from such suppliers, the transactions are bogus. Such information, if available, was required to be supplied to the assessee to invite the response on the same and thereafter take an appropriate decision. Unless such specific information was available on record, it is difficult to accept that the AO was correct in his approach to question such purchases, on such general information as may be available from the Sales Tax Department, in making the impugned additions. This for the reason that the same supplier could have acted differently so as to generate bogus purchases qua some parties, whereas this may not be the position qua the others. Thus, unless there is a case to case verification, it would be difficult to paint all transactions of such supplier to all the parties as bogus transactions. Thus a full addition could be made only on the basis of proper proof of bogus purchases being available as the law would recognise before the AO, of a nature which would unequivocally indicate that the transactions were wholly bogus. In the absence of such proof, by no stretch of imagination, a conclusion could be arrived, that the entire expenditure claimed by the petitioner qua such transactions need to be added, to be taxed in the hands of the assessee.

The Honourable Court observed that in a situation as this, the AO would be required to carefully consider all such materials to conclude that the transactions are found to be bogus. Such investigation or enquiry by the AO also cannot be an enquiry which would be contrary to the assessments already undertaken by the Sales Tax Authorities on the same transactions. This would create an anomalous situation on the sale-purchase transactions. Hence, wherever relevant, any conclusion in regards to the transactions being bogus needs to be arrived only after the AO consults the Sales Tax Department and a thorough enquiry in regards to such specific transactions being bogus is also the conclusion of the Sales Tax Department. In a given case, in the absence of a cohesive and coordinated approach of the AO with the Sales Tax Authorities, it would be difficult to come to a concrete conclusion in regard to such purchase / sales transactions being bogus merely on the basis of general information so as to discard such expenditure and add the same to the assessee’s income. Any halfhearted approach on the part of the AO to make additions on the issue of bogus purchases would not be conducive. It also cannot be on the basis of superficial inquiry being conducted in a manner not known to law in its attempt to weed out any evasion of tax on bogus transactions. The bogus transactions are in the nature of a camouflage and /or a dishonest attempt on the part of the assessee to avoid tax, resulting in addition to the assessee’s income. It is for such reason, the approach of the AO is required to be a well-considered approach and in making such additions, he is expected to adhere to the lawful norms and well-settled principles. After such scrutiny, the transactions are found to be bogus as the law would understand, in that event, they are required to be discarded by making an appropriate permissible addition.

The Honourable Court further observed that the Tribunal directed the AO to assess the income from such disputed transaction at 12.5 per cent in each of the assessment years, on the purchases so made by the assessee. However, in a given case if the Income Tax Authorities are of the view that there are questionable and / or bogus purchases, in that event, it is the solemn obligation and duty of the Income Tax Authorities and more particularly of the AO to undertake all necessary enquiry including to procure all the information on such transactions from the other departments / authorities so as to ascertain the correct facts and bring such transactions to tax. If such approach is not adopted, it may also lead to the assessee getting away with a bonanza of tax evasion and the real income would remain to be taxed on account of a defective approach being followed by the department.

The Honourable Court further observed that the decision in Mohammad Haji Adam & Company [2019] 103 taxmann.com 459 (Bombay) as relied on behalf of assessee is also quite opposite in the context in hand. In this decision, the Court observed that the findings which were arrived by the CIT(A) as also by the tribunal would suggest that the department did not dispute the assessee’s sales, as there was no discrepancy between the purchases as shown by the assessee and the sales declared. This was held to be an acceptable position, in dismissing the revenue’s appeal on the grounds that no substantial question of law had arisen for consideration of the Court.

In view of the same the appeals are accordingly dismissed.

Section 22 vis-à-vis 28 — Income from house property” or “business income” — Rule of consistency — Applicable to tax proceeding

Pr. CIT – 3 Mumbai vs. Banzai Estates P. Ltd.

ITXA No. 1703, 1727 & 1900 of 2018

A.Ys.: 2008–09, 2009–10 and 2010–11.

Dated: 9th July, 2024, (Bom) (HC).

13. Section 22 vis-à-vis 28 — Income from house property” or “business income” — Rule of consistency — Applicable to tax proceeding.

The issue before the Tribunal was as to whether the income received by the Respondent-Assessee from the property owned by it be accepted as “income from house property” or as contended by the Revenue, it should be treated as “business income”.

The Assessee is engaged in the business of hiring and leasing of properties. The Assessee declared an income from a self-owned property situated at MBC Tower, TTK Road, Chennai (for short, “MBC Tower property”) as income from house property. Apart from such income, the Assessee also declared rental income received from sub-letting of four other properties not owned by the Assessee, as income from business. The Assessing Officer did not accept the income earned from the MBC Tower property as “income from house property” and held such income necessarily to be a “business income”.

The CIT-A confirmed the view taken by the Assessing Officer in assessing the income earned by the Assessee from the self-owned property, as income from business (“profits and gains from business”).

Before the Tribunal, the Assessee contended that in the past, the Assessee was consistently treating rental income from the MBC Tower property as income from house property, which was accepted by the Revenue. The Tribunal was of the view that the Revenue was consistent in accepting Assessee’s income derived from MBC Tower property as “income from house property”; it was observed that the Assessing Officer however had taken a reverse position, for the assessment years in question, by treating its income from MBC Tower property to be “income from business”, without a valid reason. The Tribunal, referring to the decision of the Supreme Court in Raj Dadarkar & Associates vs. Assistant Commissioner of Income-tax [2017] 394 ITR 592 (SC) held that in the present case, Section 22 of the Act was clearly applicable as the property in question was owned by the Assessee. The Tribunal also observed that the Supreme Court in the case of Commissioner of Income-tax vs. Shambhu Investment (P.) Ltd. [2003] 263 ITR 143 (SC) confirmed the decision of the Calcutta High Court in Shambhu Investment P. Ltd. vs. Commissioner of Income-Tax [2001] 249 ITR 47 (Calcutta), wherein the High Court had taken a view that when the Assessee was the owner of certain premises, then the income derived from such property would be income from house property. The Tribunal also considered other relevant decisions to come to a conclusion that the Appeal filed by the Assessee must be allowed.

The revenue submitted that this was a clear case where the income earned by the Assessee from letting out the MBC Tower property was required to be assessed as income, under the head “business income”, and not under the head of “income from house property” for the reason that the primary business of the Assessee was a business of letting out properties and deriving income therefrom. It was submitted that for such reason, the rental income received by the Assessee from MBC Tower property could not be categorised under the head “income from house property”. The Revenue placed reliance on the decision of the Supreme Court in Chennai Properties & Investment Ltd. vs. Commissioner of Income-tax, Central-III, Tamil Nadu [2015] 277 CTR 185 (SC). Thus, the primary contention as urged on behalf of the Revenue is that in the context of Section 22 read with Section 24 of the Act, the provisions would permit a distinction in categorising income under different heads, in the facts and circumstances in hand. It is her contention that such a position stands approved by the Supreme Court in the case of Chennai Properties & Investment Ltd (supra).

The Assessee submitted that Section 22 of the Act makes no distinction on the basis of the Assessee’s business, and in fact, it was appropriate in the facts of the present case for the Assessee to treat the rental income from the MBC Tower property as an income from house property. It was submitted that there was nothing improper much less illegal for the benefit being conferred under Section 24 of the Act, to be availed by the Assessee. It was submitted that in fact in the previous three Assessment Years, i.e., in 2005–06, 2006–07 and 2007–08, the Revenue had accepted that this very income be taken to be income from house property and without any material change in the circumstances, much less in law, the Revenue has taken a position contrary to what had prevailed in the earlier assessment years. Hence, it was not appropriate for the Assessing Officer to take a different position for the Assessment Years in question. It was therefore submitted that the questions of law as raised by the Revenue do not arise for consideration on the principles of consistency which need to be accepted, and as applied by the Tribunal.

The Honourable Court held that it is not possible to accept the contentions as urged on behalf of the Revenue, so as to hold that the present proceedings give rise to any substantial question of law raised by the Revenue in the present Appeals. Section 22 of the Act, making a provision for “income from house property” ordains that the “annual value” of property consisting of any buildings or lands appurtenant thereto of which the Assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried out by him, the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head “income from house property”. Section 23 provides the manner in which “annual value” would be determined. Section 24 provides for deductions from income from house property.

In the present case, the Assessee has availed of deduction under Section 24, which appears to be one of the reasons that the Assessing Officer thought it appropriate to disallow what was accepted in the earlier three Assessment Years: 2005–06, 2006–07 and 2007–08. On a bare reading of Section 22, we find that in the present case, the basic requirements for the Assessee to consider the income as received from MBC Tower property as “income from house property” stands clearly satisfied, as the Assessee derives income from house property “owned by it”. Even if the Assessee is to be in the business of letting or subletting of properties and deriving income therefrom, there is no embargo on the Assessee from accounting the income received by it, from the property “owned by Assessee” (MBC Tower) as “income from house property” and at the same time, categorising the rental income from other properties not of Assessee’s ownership under the head “income from business”. The Revenue’s reading of Section 22 differently to those who are in the business of letting out properties as in the present case namely in combination of a property of Assessee’s ownership and also to have income from properties which are not of Assessee’s ownership from which rental income is derived would amount to reading something into Section 22 than what the provision actually ordains. The legislature does not carve out any such categorisation / exception. Thus, the Revenue is not correct in its contention that in the circumstances in hand, a straightjacket formula is required to be applied, namely, that section 22 is unavailable to an Assessee, who is in the business of letting out properties.

In the prior Assessment Years, the Assessing Officer had accepted the Assessee’s treatment of such income as an income from house property, which is one of the factors which has weighed with the Tribunal to allow the Appeals filed by the Assessee, on the principle of consistency. The Court was of the opinion that such principles are appropriately applied by the Tribunal. The Supreme Court has held it to be a settled principle of law that although strictly speaking res judicata does not apply to income tax proceedings, and as such, what is decided in one year may not apply in the following year. Thus, when a fundamental aspect permeating through different Assessment Years has been treated in one way or the other and that has been allowed to continue, such position ought not be changed without any new fact requiring such a direction. (See M/s. Radhasoami Satsang, Saomi Bagh, Agra vs. Commissioner of Income Tax [1992] 193 ITR 321 (SC). The decision of the Supreme Court in M/s. Radhasoami Satsang (supra) has been referred in a decision of a recent origin in Godrej & Boyce Manufacturing Company Ltd. vs. Dy. Commissioner of Income Tax, Mumbai, &Anr (2017) 7 SCC 421.

The further refer to a decision of this Court in the case of Principal Commissioner of Income-tax vs. Quest Investment Advisors (P.) Ltd [2018] 409 ITR 545 (Bombay), in which this Court referring to the decision of the Supreme Court in Bharat Sanchar Nigam Ltd. Anr. vs. Union of India Ors [2006] 282 ITR 273 (SC) which followed the decision in Radhasoami Satsang Sabha (supra) accepted the rule of consistency.

The Honourable Court further observed that the Revenue’s reliance on the decision in Chennai Properties (supra) was not well founded for the reason that in such case, the assessee itself had chosen to account such income derived by the assessee, as an income under the head “income from business”. This was a case where the Revenue was of the contrary view, namely, that such income ought not to be allowed as an income from business and must be treated as income from house property. The Supreme Court thus held that the income was rightly disclosed by the Assessee under the head “gains from business”, and it was not correct for the High Court to hold that it needs to be treated as income from house property. The situation being quite different in the said case, the same would not be applicable in the present facts. This is not a case where the Assessee itself had taken a position that such income be treated as income from business.

Accordingly the Appeals were dismissed.

Section 37: Payments under a Memorandum of Settlement with the trade union — Expenditure not covered by Section 30 to Section 36, and expenditure made for purposes of business shall be allowed under Section 37(1) of the Act.: Section 40A(9) of the Act.

CIT vs. M/s. Tata Engineering & Locomotive

Company Ltd.

[ITXA NO. 321 of 2008 & 2070 of 2009

A.Ys.: 1987–88 and 1988–89

Dated: 30th July, 2024, (Delhi) (HC)].

12. Section 37: Payments under a Memorandum of Settlement with the trade union — Expenditure not covered by Section 30 to Section 36, and expenditure made for purposes of business shall be allowed under Section 37(1) of the Act.: Section 40A(9) of the Act.

The two Appeals arise from common order dated 26th October, 2004 passed by the Income-tax Appellate Tribunal, and involve identical questions of law, extracted below:

“(A) Whether the ITAT was justified in law in upholding the action of the CIT(A) in deleting the disallowance of R1,96,71,842/- made under section 40A(9) of the Act ?

(B) Whether a payment made under a memorandum of settlement under the Industrial Disputes Act can be said to be a payment required by or under any law ?”

The short point that arose for consideration was whether the payments made under a Memorandum of Settlement dated 31st March, 1986 between the Respondent-Assessee and the trade union could be allowed as revenue expenditure under Section 37(1) of the Act; the disallowance canvassed by the Appellant-Revenue was based on the purported applicability of Section 40A(9) of the Act.

The payments were envisaged under a Memorandum of Settlement dated 31st March, 1986 between the Respondent-Assessee and the trade union, namely, TELCO-Workers’ Union, Jamshedpur (“Workmen’s Union”) of the workers employed by the Respondent-Assessee. The expenses were primarily defended as being revenue expenditure as expenses towards development and welfare of the local population in the vicinity of the factory with benefits flowing the business. Such expenditure was claimed to have helped the Respondent-Assessee get the benefit of goodwill and local harmony in the conduct of its business operations in the local ecosystem, thereby justifying the claim that such expenditure should be allowed as revenue expenditure. Apart from these submissions, the Respondent-Assessee also claimed that such expenditure, having been envisaged in the Memorandum of Settlement entered into with the Workmen’s Union of the employees, the expenditure could also be defended as payments made under the law in terms of the settlement reached with the employees.

The Honourable Court observed that from a plain reading of the Memorandum of settlement, it would become clear that the Respondent-Assessee had been expending various amounts towards “Community Services” and “Social Welfare”, and this was recited in the Memorandum of Settlement, with a statement that such measures would continue. There is no commitment of any specific amount that would be spent under these heads of expenses. Owing to the linkage of the expenses with the settlement entered into with the Workmen’s Union, the Appellant-Revenue has argued that Section 40A(9) would disallow deduction of such expenditure in the computation of income under the Act.

Both, the lower authorities gave a concurrent findings to state the nature of these expenses do not fall within the jurisdiction of Section 40A(9) and that they ought to be allowed under Section 37(1) of the Act.

The Honourable Court observed that it was apparent that the expenditure on community services and social welfare, in the context of the Respondent-Assessee’s business in that region, was being undertaken even before the execution of the Memorandum of Settlement. The document merely recited that the Company would continue to spend on such measures. Indeed, employees and their extended families would have benefited from such expenditure, which is why it finds mention in the Memorandum of Settlement. However, the expenses were not aimed at employee welfare alone but formed part of the Company making its presence felt by discharging a wider range of social responsibilities in the area of its operation.

The Court noted that plain reading of the Section 40A(9) would show that the subject matter of what is positively disallowed under the provision is payments made by an assessee “as an employer”. The very core ingredient to attract the jurisdiction of the provision is that the payment ought to have been made by the assessee in the capacity of an employer. The payments that are disallowed under Section 40A are payments made towards setting up, forming or contributing to any fund, trust, company, association of persons, body of individuals, society or other institution for any purpose, but in every case, in the capacity as an employer. Even for such payments, there is an exception in relation to payments that positively fall within the scope of clauses (iv), (iva) and (v) of Section 36(1), which are essentially payments towards contribution to provident fund, pension scheme and gratuity fund. These are specifically legislated as allowable expenses and have therefore been kept out of the mischief of Section 40A(9). Yet, it cannot be overlooked that for any payment to first fall within the mischief of what has to be positively disallowed under Section 40A(9), the payment ought to have been made by the assessee “as an employer”.

The Honourable Court observed that the payments could not be regarded as payments made by the Respondent- Assessee in its exclusive capacity as an employer. The payments in question are made towards wider local welfare measures that would boost its presence in the local ecosystem and enable harmonious conduct of its factory and business operations in the vicinity. Merely because a commitment to continue such welfare measures is recited in the Memorandum of Settlement with the Workmen’s Union, these payments would not partake the character of payments made under the Memorandum of Settlement or payment required to be made under labour law, or for that matter, payment that is made “as an employer”.

The expenditure not covered by Section 30 to Section 36, and expenditure made for purposes of business shall be allowed under Section 37(1) of the Act. At all times, relevant to these appeals, as Section 37 then stood, such expenses were not disallowed under Section 37.

The Court observed that in the instant case, the payments made by the Respondent- Assessee were for public causes in the locality of the business operations and benefits flowed from it to the business of the Assessee. If at all the Memorandum of Settlement is relevant, it would be to show that there was a nexus between such social welfare activity undertaken by the Respondent-Assessee and the business of the Respondent-Assessee. The local harmony and goodwill that the social welfare and community expenses generated, benefited the Respondent-Assessee’s conduct of business. That such expenses were being incurred was acknowledged and recited as a continuing commitment. Thus, merely because such expenditure finds a place in the Memorandum of Settlement, the nature and character of such expenditure would not be altered, so as to fall under Section 37(1), or to attract Section 40A(9). Therefore, the two concurrent views expressed by the CIT-A and the Tribunal need not be faulted.

The Honourable court further observed that the Court, in appellate jurisdiction on substantial questions of law, should not substitute an alternate view merely because another view is possible, unless the views expressed in the concurrent findings are not at all a plausible view.

The Honourable Court held that Section 40A(9) has no application to the facts of the case. The Tribunal was indeed justified in law in upholding the view of the CIT-A in deleting the disallowance made by the Assessing Officer. Insofar as question (B) is concerned, the payments made in the facts of this case were not payments required to be made under the Industrial Disputes Act or payment required by or under any other law, but the same is irrelevant for the matter at hand since Section 40A(9) was not at all attracted. Unless it was attracted, there was no necessity to rely on the exception in that section in relation to payments required to be made or under any law.

Consequently, the two questions of law the Appeals were answered against the Revenue and in favour of the Assessee.

Reassessment — Notice after three years — Limitation — Extension of limitation period under 2020 Act — Notice for A.Y. 2016–17 issued after April 2021 — Alleged escapement of income less than R50 lakhs — Notice barred by limitation

SevenseaVincom Pvt. Ltd. vs. Principal CIT

[2024] 465 ITR 331(Jhar)

A.Y.: 2016–17

Date of order: 11th December, 2023

Ss. 147, 148, 149, 156 of the ITA 1961

43. Reassessment — Notice after three years — Limitation — Extension of limitation period under 2020 Act — Notice for A.Y. 2016–17 issued after April 2021 — Alleged escapement of income less than R50 lakhs — Notice barred by limitation.

The petitioner is a private limited company registered under the Companies Act, 2013. A notice dated 30th June, 2021 u/s. 148 of the Income-tax Act, 1961 for the A.Y. 2016–17 was issued to the petitioner. Thereafter, the Revenue issued a letter on 30th May, 2022 deemed to be a notice u/s. 148A(b) of the Act. However, no information and material relied upon by the respondent-Department were provided to the petitioner. Department passed the order on 21st July, 2022 u/s. 148A(d) of the Act and on the same date, i.e., 21st July, 2022 notice u/s. 148 of the Act was also issued for reassessment for the A.Y. 2016–17 and finally a reassessment order was passed on 31st May, 2023 against this petitioner and consequential notice of demand was also issued. The income claimed to have escaped assessment was less than ₹50 lakhs.

The petitioner wrote a writ petition and challenged the notices and the orders. The Jharkhand High Court allowed the writ petition and held as under:

“i) According to section 149 of the Income-tax Act, 1961 the limitation for issuance of notice u/s. 148 is three years from the end of the relevant assessment year and extendable beyond three years till ten years, provided the income which has escaped assessment is ₹50,00,000 or more and the permission of the prescribed sanction authority is taken u/s. 151.

ii) The notice dated July 21, 2022, issued u/s. 148, for the A. Y. 2016-17 was barred by the limitation period prescribed u/s. 149 since the three-year time period had ended on March 31, 2020. Further, the notice was for alleged escaped income which was less than ₹50 lakhs and therefore, the benefit of the extended period of limitation beyond three years till ten years was not available.

iii) The initiation of reassessment proceedings u/s. 147 was without jurisdiction. If the foundation of any proceeding was illegal and unsustainable, all consequential proceedings or orders were also bad in law. Accordingly, since the notice dated July 21, 2022, issued u/s. 148, was barred by limitation and was illegal, unsustainable and void ab initio and set aside, the subsequent reassessment order u/s. 147 and notice of demand u/s. 156 were also quashed and set aside.”

Reassessment — New procedure — Notice — Reason to believe — Necessity of live link between belief and material available — Information from “insight” portal that assessee had transacted with mutual fund found to be involved in scam — No nexus between belief and material — AO not clear whether assessee had claimed loss or dividend in mutual fund — Non-application of mind — Notices and order set aside.

Karan Maheshwari vs. ACIT

[2024] 465 ITR 232 (Bom)

A.Y.: 2016–17

Date of order: 8th March, 2024

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

42. Reassessment — New procedure — Notice — Reason to believe — Necessity of live link between belief and material available — Information from “insight” portal that assessee had transacted with mutual fund found to be involved in scam — No nexus between belief and material — AO not clear whether assessee had claimed loss or dividend in mutual fund — Non-application of mind — Notices and order set aside.

For the A.Y. 2016–17, the Assessing Officer issued an initial notice u/s. 148A(b), an order u/s. 148A(d) and notices u/s. 148 of the Income-tax Act, 1961, based on the information from the “insight” portal, that the assessee was a beneficiary of dividend income from a mutual fund alleged to have been involved in a scam.

On a writ petition contending that without providing any information as requested, the Department had proceeded to pass the order u/s. 148A(d) and the notices u/s. 148 for reopening the assessment u/s. 147, the Bombay High Court held as under:

“i) The reasons for the formation of the belief that there has been escapement of income u/s. 147 of the Income-tax Act, 1961 must have a rational connection with or relevant bearing on the information. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and his view that there has been escapement of income in the particular year. It is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched which would suggest escapement of the income. The powers of the Assessing Officer to reopen an assessment, though wide, are not plenary. The Act contemplates the reopening of the assessment if grounds exist for believing that income has escaped assessment. The live link or close nexus should be there between the information before the Assessing Officer and the belief which he has to prima facie form an opinion regarding the escapement of the income u/s. 147.

ii) The assessee was himself a victim of the alleged fraud of the mutual fund and was again being victimised by the Assessing Officer. Even in the order u/s. 148A(d) wherein it was mentioned that statement of the key management personnel of the mutual fund was recorded, there was nothing to indicate that the assessee was part of the alleged sham mutual fund. The assessee was not a distributor and was only a client. The allegation in the initial notice issued u/s. 148A(b) that the assessee was one of the persons who had claimed fictitious short-term capital loss was without any basis. The assessee had, based on public announcement, invested in the mutual fund. The receipt of tax free dividend fund and the fact that the assessee had suffered a loss could not be held against the assessee. Even assuming that the transaction was preplanned, there was nothing to impeach the genuineness of the transaction. The assessee was free to carry on his business which he did within the four corners of the law. Mere tax planning without any motive to evade taxes through colourable devices was not frowned upon even in Mcdowelland Co. Ltd. v. CTO [1985] 154 ITR 148;

iii) That the Assessing Officer’s allegations in the notice issued u/s. 148A(b), that the mutual fund had manipulated accounting methodology so as to artificially inflate the distributable surplus and the investors, in order to reduce their tax liability, had entered into sham transactions and received dividend and short-term capital loss, did not implicate the assessee in any manner. There was nothing to indicate that the assessee had participated knowingly in a sham transaction to reduce his tax liability or to earn dividend or book short-term capital loss.

iv) The Assessing Officer was also not clear whether the assessee had booked loss or claimed dividend in the mutual fund which indicated non-application of mind by the Assessing Officer. The initial notice u/s. 148A(b), the order passed u/s. 148A(d) and the notices u/s. 148 were therefore, quashed and set aside.”

Reassessment — Notice — Limitation — New procedure — Extension of period of limitation by 2020 Act — Supreme Court ruling in UOI vs. Ashish Agarwal [2022] 444 ITR1 (SC) — Effect — Notice for reassessment u/s. 148 after 31st March, 2021 for A.Y. 2015–16 — Extension of period not applicable where limitation had already expired — Notice does not relate back to original date — 2020 Act would not extend limitation

Hexaware Technologies Ltd. vs. ACIT

[2024] 464 ITR 430 (Bom)

A.Y.: 2015–16

Date of order: 3rd May, 2024

Ss. 119, 147, 148, 148A(b), 148A(d) and 149 of ITA 1961

41. (A) Reassessment — Notice — Limitation — New procedure — Extension of period of limitation by 2020 Act — Supreme Court ruling in UOI vs. Ashish Agarwal [2022] 444 ITR1 (SC) — Effect — Notice for reassessment u/s. 148 after 31st March, 2021 for A.Y. 2015–16 — Extension of period not applicable where limitation had already expired — Notice does not relate back to original date — 2020 Act would not extend limitation.

(B) Reassessment — Notice — Document identification number — CBDT Circular stipulating mention of document identification number — Binding nature of — Failure to mention document identification number in notice — Violation of mandatory requirement — Notice invalid.

(C) Reassessment — Notice — Jurisdiction — Faceless assessment scheme — Specific jurisdiction assigned to jurisdictional Assessing Officer or faceless Assessment Officer under scheme is to exclusion of other — No concurrent jurisdiction — Office memorandum cannot override mandatory specifications in scheme.

In its return for the A.Y. 2015–16, the assessee claimed deduction u/s. 10AA of the Income-tax Act, 1961, and special deduction u/s. 80JJAA, filing audit reports in forms 56F, 10DA, 3CB and 3CD. Notices were issued calling upon the assessee to file details of the deductions with all supporting documents with which the assessee complied. The Assessing Officer passed an assessment order u/s. 143(3) of the Act, accepting the return of income filed by the assessee. On 8th April, 2021, the Assessing Officer issued notice u/s. 148 of the Act.

The assessee filed a writ petition challenging the notice as having been issued on the basis of provisions which had ceased to exist. The petition was allowed and the court held that the notice dated 8th April, 2021 was invalid.

Pursuant to the decision of the Supreme Court in UOI vs. Ashish Agarwal [2022] 444 ITR 1 (SC); directing that notices issued u/s. 148 of the Act after 1st April, 2021 be treated as notice issued u/s. 148A(b) of the Act, the Assessing Officer issued notice dated 25th May, 2022 to the assessee u/s. 148A(b) proposing, inter alia, to deny the deduction u/s. 80JJAA of the Act. Notwithstanding the detailed reply filed by the assessee, the Assessing Officer issued a notice called for further information due to change in incumbency as per the provisions of section 129 of the Act. The assessee informed the Assessing Officer that the submissions earlier made should be considered as a response to the notice. The Assessing Officer thereafter passed an order u/s. 148A(d) dated 26th August, 2022, inter alia, dismissing the assessee’s objections. Separately, a communication dated 27th August, 2022 was issued where the Assessing Officer stated that document identification number had been generated for the issuance of notice dated 26th August, 2022 u/s. 148 of the Act.

On the grounds that the notice dated 25th May, 2022 purporting to treat notice dated 8th April, 2021 as notice issued u/s. 148A(b) of the Act for the A.Y. 2015–16, the order dated 26th August, 2022 u/s. 148A(d) of the Act for the A.Y. 2015–16, and the notice dated 27th August, 2022 issued u/s. 148 of the Act for the A.Y. 2015–16, were unlawful, the assessee filed a writ petition. The Bombay High Court allowed the writ petition and held as under:

“i) F or the A. Y. 2015-16 the provisions of the 2020 Act were not applicable. The reliance by the Department on Instruction No. 1 of 2022 ([2022] 444 ITR (St.) 43) issued by the CBDT was misplaced and neither the provisions of the 2020 Act nor the judgment in UOI v. Ashish Agarwal [2022] 444 ITR 1 (SC); provided that any notice issued u/s. 148 of the 1961 Act after March 31, 2021 would travel back to the original date.

ii) The notice, dated August 27, 2022, u/s. 148 of the 1961 Act was barred by limitation since it was issued beyond the period of limitation prescribed in section 149 read with the first proviso. Section 149(1)(b) of the unamended provisions provided a time limit of six years from the end of the relevant assessment year for issuing notice u/s. 148. The relevant assessment year, being 2015-16, the sixth year had expired on March 31, 2022. The first proviso to section 149 provided that up to the A. Y. 2021-22 (period before the amendment), the period of limitation as prescribed in the unamended provisions of section 149(1)(b) would be applicable and only from the A. Y. 2022-23, the period of ten years as provided in section 149(1)(b), would be applicable. To interpret the first proviso to section 149 to be applicable only for the A. Ys. 2013-14 and 2014-15, i. e., for the assessment years where the period of limitation had already expired on April 1, 2021, was contrary to the plain language of the proviso and would render the first proviso to section 149 redundant and otiose and one phrase would have to be substituted with another in section which was impermissible. When the limitation period had already expired on April 1, 2021 when section 149 was amended for the A. Ys. 2013-14 and 2014-15, it could not be revived by way of a subsequent amendment and, hence, for these assessment years the proviso to section 149 was not required. Reopening for the A. Ys. 2013-14 and 2014-15 had already been barred by limitation on April 1, 2021. Accordingly, the extended period of ten years as provided in section 149(1)(b) would not have been applicable to the A. Ys. 2013-14 and 2014-15, de hors the proviso. Hence, to give meaning to the proviso it has to be interpreted to be applicable for the A.Y. up to 2021-22.

iii) The period of limitation and the restriction under the proviso to section 149 were provided in respect of a notice u/s. 148 and not for a notice u/s. 148A. The notice dated April 8, 2021, which though originally issued as a notice u/s. 148, (under the old provisions prior to the amendments made by the Finance Act, 2021), had now been treated as a notice issued u/s. 148A(b) in accordance with the decision of the Supreme Court in UOI v. Ashish Agarwal [2022] 444 ITR 1 (SC). Once the notice dated April 8, 2021 had been treated as having been issued u/s. 148A(b), it was no longer relevant for the purpose of determining the period of limitation prescribed u/s. 149 or the restriction in the first proviso to section 149. Therefore, for considering the restriction on issue of a notice u/s. 148 prescribed in the first proviso to section 149, the fresh notice dated August 27, 2022 issued u/s. 148 was required to be considered. Such notice was beyond the period of limitation of six years prescribed by the 1961 Act prior to its amendment by the Finance Act, 2021. For the A. Y. 2015-16, the unamended time limit of six years had expired on March 31, 2022 and the notice u/s. 148 had been issued on August 27, 2022 and, therefore, was barred by the restriction of the first proviso to section 149.

iv) Even if the fifth and sixth provisos were to be applicable, the notice u/s. 148 dated August 27, 2022 for the A. Y. 2015-16 would still be beyond the period of limitation. The fifth proviso extends limitation with respect to the time or extended time allowed to an assessee in the show-cause notice issued u/s. 148A(b) or the period, during which the proceeding u/s. 148A were stayed by an order of injunction by any court. Hence, in view of the fifth proviso, the period to be excluded would be counted from May 25, 2022, i.e., the date on which the show-cause notice was issued u/s. 148A(b) by the Assessing Officer subsequent to the decision in UOI v. Ashish Agarwal [2022] 444 ITR 1 (SC) and up to June 10, 2022, which is a period of 16 days. The period from June 29, 2022 up to July 4, 2022 could not be excluded since it was not based on any extension sought by the assessee, but at the behest of the Assessing Officer. Even if it was it would only be an exclusion of five days. Even after considering the excluded periods, the notice dated August 27, 2022 was still beyond limitation. The fact that the original notice dated April 8, 2021 issued u/s. 148 was stayed by this court on August 3, 2021, and its stay came to an end on March 29, 2022 on account of the decision of this court, would not be relevant for providing extension under the fifth proviso. The fifth proviso provides for extension only for the period during which the proceeding u/s. 148A is stayed. The original stay granted by the court was not with respect to the proceeding u/s. 148A but with respect to the proceeding initiated under the unamended provisions of section 148 and, hence, such stay would not extend the period of limitation under the fifth proviso to section 149. On the facts, the sixth proviso was not applicable.

v) The notice issued u/s. 148 for the A. Y. 2015-16 had been issued without mentioning a document identification number. Issuance of a separate intimation letter on even date would not validate the notice issued u/s. 148 since the intimation letter referred to a document identification number with respect to some notice u/s. 148 dated August 26, 2022. The notice in question issued to the assessee was dated August 27, 2022 and not August 26, 2022 for which the document identification number was generated. The procedure prescribed in Circular No. 19 of 2019 dated August 14, 2019 ([2019] 416 ITR (St.) 140) for non-mention of document identification number in case letter or notice or order had not been complied with by the Assessing Officer. If the document identification number was not mentioned the reason for not mentioning it, and the approval from the specified authority for issuing such letter or notice or order without the document identification number had to be obtained and mentioned in such letter or notice or order. No such reference was stated in the notice.

vi) The notice dated August 27, 2022 u/s. 148 had been issued by the jurisdictional Assessing Officer and not the National Faceless Assessment Centre and hence was not in accordance with the Scheme announced by notification dated March 29, 2022 ([2022] 442 ITR (St.) 198).

vii) The Scheme dated March 29, 2022 ([2022] 442 ITR (St.) 198) in paragraph 3 clearly provides that the issuance of notice ‘shall be through automated allocation’. It was not the contention of the Assessing Officer that he was the random officer who had been allocated jurisdiction.

viii) No reliance could be placed by the Department on the Office Memorandum, dated February 20, 2023, to justify that the jurisdictional Assessing Officer had jurisdiction to issue notice u/s. 148. The Office Memorandum, merely contained the comments of the Department issued with the approval of Member (L&S) of the CBDT and was not in the nature of a guideline or instruction issued u/s. 119 to have any binding effect on the Department.

ix) The guidelines dated August 1, 2022 did not deal with or even refer to the Scheme dated March 29, 2022 ([2022] 442 ITR (St.) 198) framed by the Government u/s. 151A. The Scheme dated March 29, 2022 u/s. 151A, would be binding on the Department and the guidelines dated August 1, 2022 could not supersede the Scheme and if it provided anything to the contrary to the Scheme, it was invalid.

x) There was no allegation regarding income escaping assessment u/s. 147 on account of any undisclosed asset. In his order, the Assessing Officer had restricted the escapement of income only with regard to the claim of deduction u/s. 80JJAA and had made disallowance of claim of foreign exchange loss. The Assessing Officer had accepted the contentions of the assessee in respect of the foreign exchange loss and therefore, it could not be justified as an escapement of income. He had also accepted that the transactions in issue had been duly incorporated in the assessee’s accounts and that no deduction was claimed in respect of the deduction allowed u/s. 10AA. None of the issues raised in the order showed an alleged escapement of income represented in the form of asset as required u/s. 149(1)(b). The alleged claim of disallowance of deduction did not fall either under clause (b) or clause (c) as it was neither a case of expenditure in relation to an event nor of an entry in the books of account as no entries were passed in the books of account for claiming a deduction under the provisions of the Act.

xi) The assessment could not be reopened u/s. 147 based on a change of opinion. The Assessing Officer had no power to review his own assessment when the information was provided and considered by him during the original assessment proceedings. The claim of deduction u/s. 80JJAA was made by the assessee in the return of income and form 10DA being the report of the chartered accountant had been filed. In the note filed along with form 10DA, the assessee had specifically submitted that software development activity constituted “manufacture or production of article or thing”. During the assessment proceedings, in response to the notice the assessee had furnished the details of deduction claimed under Chapter VI of the Act along with supporting documents. The Assessing Officer had passed the assessment order allowing the claim of deduction u/s. 80JJAA. Such claim had been allowed in the earlier assessment as well from the A. Y. 2010-11. The concept of change of opinion being an in-built test to check abuse of power by the Assessing Officer and the Assessing Officer having allowed the claim of deduction u/s. 80JJAA, reopening of assessment on change of opinion or review of the original assessment order was not permissible even nder the new provisions.

xii) The initial notice issued u/s. 148A(b), the order u/s. 148A(d) to issue the notice and the notice issued u/s. 148 for the A. Y. 2015-16 were quashed and set aside.”

Reassessment — Change of law — Jurisdiction — Notice issued under existing law and reassessment order passed and becoming final — Issue of notice u/s. 148A pursuant to subsequent direction of Supreme Court in UOI vs. Ashish Agarwal — Without jurisdiction and therefore quashed

Arvind Kumar Shivhare vs. UOI
[2024] 464 ITR 396(All)
A.Y.: 2017–18
Date of order: 4th April, 2024
Ss. 147, 148 and 148A of the ITA 1961

40. Reassessment — Change of law — Jurisdiction — Notice issued under existing law and reassessment order passed and becoming final — Issue of notice u/s. 148A pursuant to subsequent direction of Supreme Court in UOI vs. Ashish Agarwal — Without jurisdiction and therefore quashed.

The assessee was originally assessed to tax u/s. 143(3) of the Income-tax Act, 1961 for the A.Y. 2017–18, by an assessment order dated 29th May, 2019. Thereafter, the assessee received a reassessment notice dated 31st March, 2021 issued u/s. 148 of the Act. The assessee participated in the reassessment proceeding and a reassessment order dated 28th March, 2022 was passed by the Assessing Officer. The assessee did not challenge it, and it attained finality. A second reassessment notice for the A.Y. 2017–18 dated 30th July, 2022 was issued, invoking section 148A of the Act.

The assessee filed a writ petition and challenged the validity of notice u/s. 148A.

The counsel for the Revenue contended that since the reassessment notice dated 31st March, 2021 was digitally signed on 1st April, 2021, by virtue of the law declared by the Supreme Court in Civil Appeal No. 3005 of 2022 (UOI vs. Ashish Agarwal 1), decided on 4th May, 2022, the Revenue authorities have taken a view that the notice dated 31st March, 2021 was wrongly acted upon. That notice having been digitally signed on 1st April, 2021, the day when the amended law that introduced section 148A of the Act after making amendment to sections 147 and 148 of the Act came into force, the entire proceedings culminating in the reassessment order dated 28th March, 2022 were vitiated.

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

“i) There could exist only one assessment order for an assessee for one assessment year. Since the reassessment order had already been passed on March 28, 2022 for the A. Y. 2017-18, there was no proceeding pending to have been influenced or affected or governed by the order of the Supreme Court dated May 4, 2022 in UOI v. Ashish Agarwal 1.

ii) In the absence of any declaration of law to annul or set aside the pre-existing reassessment u/s. 147 and assessment order dated March 28, 2022, after issuing notice u/s. 148, the assessing authority had no jurisdiction to reissue the notice dated July 30, 2022 u/s. 148A. The proceedings were without jurisdiction and a nullity, and therefore, quashed.”

Non-resident — Double taxation avoidance — Income deemed to accrue or arise in India — Royalty — Meaning of — Difference between transfer of copyright and right to copyrighted article — Provision of customer relationship management services by resident of Singapore — Fees received not royalty within meaning of Act — Not also taxable in India under DTAA between Singapore and India.

CIT (International Taxation) vs. Salesforce.Com

Singapore Pte. Ltd.

[2024] 464 ITR 257 (Del)

A,Ys.: 2011–12 to 2017–18

Date of order: 14th February, 2024

Ss. 9(1)(vi), Expl. 2of the ITA 1961: and DTAA

between Singapore and India Art. 12(4)(b)(1)

39. Non-resident — Double taxation avoidance — Income deemed to accrue or arise in India — Royalty — Meaning of — Difference between transfer of copyright and right to copyrighted article — Provision of customer relationship management services by resident of Singapore — Fees received not royalty within meaning of Act — Not also taxable in India under DTAA between Singapore and India.

The assessee was a tax resident of Singapore and was stated to provide a customer relationship management services application which was stated to be an ‘enterprise business application’. The application enabled customers and subscribers to record, store and act upon business data, formulate business strategies and enable businesses to manage customer accounts, track sales positions, evaluate marketing campaigns as well as bettering postsales services. The income derived from the subscription fee, which the assessee received from customers in India for providing customer relationship management-related services, was assessed to income-tax.

The Tribunal held that the amount was not assessable in India.

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

“i) Section 9 of the Income-tax Act, 1961, defines royalty as the amount received for the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. The right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the definition of royalty.

ii) In order qualify as fees for technical services, the services rendered ought to satisfy the ‘make available’ test. Therefore, in order to bring services within the ambit of technical services under the Double Taxation Avoidance Agreement between India and Singapore, the services would have to satisfy the ‘make available’ test and such services should enable the person acquiring the services to apply the technology contained therein.

iii) S ince the copyright in the application was never transferred nor vested in a subscriber, the fees were not assessable u/s. 9 of the Act.

vi) Article 12(4)(b) of the DTAA between Singapore and India would have been applicable provided the Department had been able to establish that the assessee had provided technical knowledge, experience, skill, know-how or processes enabling the subscriber acquiring the services to apply the technology contained therein. The explanation of the assessee, which had not been refuted even before the High Court was that the customer was merely accorded access to the application and it was the subscriber which thereafter inputs the requisite data and took advantage of the analytical attributes of the software. This would clearly not fall within the ambit of article 12(4)(b) of the Agreement.

v) That the amount was not assessable in India.”

Charitable purpose — Exemption — Denial of exemption by AO on grounds that assessee did not furnish proper information to Charity Commissioner, that there was shortfall in provision for indigent patients fund, that assessee had generated huge profits, that hospital did not serve poor and underprivileged class, and assessee paid remuneration to two trustees — Grant of exemption by appellate authorities on finding that orders for earlier assessment years not set aside in any manner or over-ruled by court — No infirmity in order of Tribunal granting exemption

CIT(Exemption) vs. Lata Mangeshkar Medical Foundation

[2024] 464 ITR 702 (Bom.)

A.Y.: 2010–11

Date of order: 30th August, 2023

S. 11 of ITA 1961

38. Charitable purpose — Exemption — Denial of exemption by AO on grounds that assessee did not furnish proper information to Charity Commissioner, that there was shortfall in provision for indigent patients fund, that assessee had generated huge profits, that hospital did not serve poor and underprivileged class, and assessee paid remuneration to two trustees — Grant of exemption by appellate authorities on finding that orders for earlier assessment years not set aside in any manner or over-ruled by court — No infirmity in order of Tribunal granting exemption.

The assessee-trust was running a medical institution. For the A.Y. 2010–11, the Assessing Officer (AO) denied the assessee-trust exemption u/s. 11 of the Income-tax Act, 1961 on the grounds that (a) the assessee did not furnish proper information to the Charity Commissioner, (b) there was shortfall in making provision for indigent patients fund, (c) the assessee had generated huge surplus and therefore, its intention was profit making, (d) the hospital of the assessee did not provide services to the poor and under-privileged class of the society, and (e) there was violation of provisions of section 13(1)(c) since the assessee paid remuneration to two individual trustees who did not possess significant qualification and one of them was beyond 65 years of age.

The Commissioner (Appeals) restored the exemption u/s. 11 following the orders of the Tribunal for the A.Y. 2008–09 and 2009–10. The Tribunal affirmed his order of the Commissioner (Appeals).

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

“i) There was no reason to interfere with the order of the Tribunal. The Tribunal had followed its own decision in which it had granted exemption u/s. 11 to the assessee for the A. Ys. 2008-09 and 2009-10. Since there was nothing on record that such orders had been set aside or overruled in any manner by the court, the Tribunal had found no reason to interfere with the order of the Commissioner (Appeals).

ii) There was no infirmity in the order of the Tribunal granting exemption u/s. 11 to the assessee for the A. Y. 2010-11.”

Business expenditure — Capital or revenue expenditure — Software development expenses — Product abandoned on becoming obsolete due to development in technology — No enduring benefit accrued to the Assessee — Expenditure incurred revenue in nature and allowable

Principal CIT vs. Adadyn Technologies Pvt. Ltd.

[2024] 465 ITR 353 (Kar.)

A.Ys.: 2015–16 and 2016–17

Date of order: 10th April, 2023

S. 37 of the ITA 1961

37. Business expenditure — Capital or revenue expenditure — Software development expenses — Product abandoned on becoming obsolete due to development in technology — No enduring benefit accrued to the Assessee — Expenditure incurred revenue in nature and allowable.

The Assessee was engaged in the business of rendering customised internet advertising services for advertisers which could be used on the desktop. The Assessee had incurred software development expenditure of R6,06,30,146 during A.Y. 2015–16 and R20,80,24,899 during A.Y. 2016–17. In the scrutiny assessment, the Assessing Officer (AO) held that if the software platform was developed, it would give enduring benefit to the Assessee, and therefore, held the expenditure to be capital in nature.

The CIT(A) confirmed the action of the AO. The Tribunal reversed the finding of the AO and allowed the appeals of the Assessee.

The Karnataka High Court upheld the decision of the Tribunal and held as under:

“i) The Assessee’s investment to develop a software platform for desktops had become obsolete due to rapid change in the technology and the Assessee had abandoned further development as a result of which it had abandoned the product and incurred a loss. The project having been abandoned, the assessee would not get any enduring benefit.

ii) The Tribunal, on correct analysis of the facts, had held that the expenditure was revenue and not capital in nature. There was no ground for interference with the findings recorded by the Tribunal.”

Disallowance under section 13 relating to benefit to interested persons cannot apply to charities notified under section 10(23C)(iv).

33 ITO vs. Theosophical Society

(2024) 163 taxmann.com 770 (ChennaiTrib)

ITA No.: 624 (Chny) of 2024

A.Y.: 2014–15

Date of order: 10th June, 2024

Sections: 10(23C), 13

Disallowance under section 13 relating to benefit to interested persons cannot apply to charities notified under section 10(23C)(iv).

FACTS

The assessee was a society notified under section 10(23C)(iv) and also registered under section 12A(1)(a) of the IT Act. The assessee filed its return of income on 26th September, 2014, admitting NIL income after claiming exemption under section 11.

The AO denied exemption under section 11 on the grounds that two individuals who had made donations to the society [“interested persons”] had stayed in the lodging facilities of the society by paying nominal maintenance charges, and therefore, the society had violated section 13(1)(c)(ii).

CIT(A) allowed all the grounds of appeal of the assessee-society and observed that:

(a) On perusal of details of interested persons, it was seen that those individuals were providing services to the society without remuneration and their stay in guest house was for theosophical work. It was debatable whether such donors to society will be qualified as interested persons. People staying in society lodgings to serve the society are obviously not benefitting from the society as such.

(b) Even if it was so, then such instance would only affect the case of an assessee since sections 11 to 13 relating to interested persons could not be imported to deny exemption under section 10(23C) as per CBDT Circular No.557 dated 19th March, 1990.

Aggrieved, the revenue filed an appeal before ITAT.

HELD

The Tribunal noted that it was an admitted fact that the society was notified under section 10(23C)(iv) and registered under section 12A(1)(a) and held that the conditions prescribed under section 13 of the IT Act were not applicable, as per CBDT Circular No.557 dated 19th March, 1990, once the society was notified under section 10(23C). Similarly, the AO could not make any disallowance under section 11 as the society was an organisation notified under section 10(23C)(iv) of the IT Act.

Author’s note: The law has undergone a change by the insertion of the 21st proviso to section 10(23C) w.e.f. A.Y. 2023–24.

Deeming provision of section 50C is not applicable to leasehold rights in property.

32 Shivdeep Tyagi vs. ITO

(2024) 163 taxmann.com 614(DelTrib)

ITA No.: 484(Delhi) of 2024

A.Y.: 2011–12

Date of order: 18th June, 2024

Section: 50C

Deeming provision of section 50C is not applicable to leasehold rights in property.

FACTS

The assessee, a salaried employee, filed his return of income without declaring capital gains on sale of leasehold property for ₹60,00,000.

Subsequently, based on AIR information, the AO reopened the case. Since the assessee did not file any proof of cost of acquisition of the leasehold property, the assessment was completed under section 143(3) / 147 by taxing the entire sale consideration of ₹75,94,850 for stamp duty purposes under section 50C as against the actual sale consideration of ₹60,00,000.

The assessee did not succeed in the appeal filed before CIT(A). CIT(A) also did not adjudicate on the issue of validity of reopening of assessment.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

Since the issue of validity of reopening of the assessment had not been adjudicated by CIT(A), the Tribunal restored the matter of validity of reopening of the assessment to the file of CIT(A) to decide it afresh.

On merits, the Tribunal observed as follows:

(a) It is axiomatic that the leasehold right in a plot of land is neither “land or building or both” as such nor can be included within the scope of “land or building or both”. The distinction between a capital asset being “land or building or both” and any “right in land or building or both” is well recognised under the Act, as can be seen from section 54D, which shows that “land or building” is distinct from “any right in land or building”;

(b) Section 50C is a special provision for full value of consideration in certain cases and is a deeming provision; therefore, the fiction created therein cannot be extended to any asset other than those specifically provided therein;

(c) Following decision of the coordinate bench in the case of Noida Cyber Park (P.) Ltd., (2021) 123 taxmann.com 213 (Delhi Trib), section 50C, being deeming provision, is not applicable to leasehold right in a plot of land;

(d) However, the AO was empowered to compute capital gains as per the IT Act, without invoking the provisions of section 50C.

Interest earned by a co-operative housing society on investment with co-operative banks in Maharashtra is eligible for deduction under section 80P(2)(d).

31 Ashok Tower “D” Co Op Housing Society Ltd. vs. ITO

(2024) 163 taxmann.com 598 (Mum Trib)

ITA No.: 434(Mum) of 2024

A.Y.: 2015–16

Date of order: 21st June, 2024

Section: 80P

Interest earned by a co-operative housing society on investment with co-operative banks in Maharashtra is eligible for deduction under section 80P(2)(d).

FACTS

The assessee, a cooperative housing society, filed its return of income, claiming deduction under section 80P(2)(d) on the interest income of ₹14,72,930 earned by it from its investment in co-operative banks.

During scrutiny proceedings, the AO denied the deduction under section 80P(2)(d) on the grounds that such deduction is available only in case of investment in another co-operative society and co-operative banks cannot be regarded as “co-operative society” under section 2(19) of the IT Act.

CIT(A) rejected the contentions of the assessee and confirmed the addition made by AO.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

Noting that a “co-operative bank” is defined under section 2(10) of the Maharashtra Co-operative Societies Act, 1960 to mean a “co-operative society” which is doing the business of banking, the Tribunal held that the amount of investment in fixed deposit receipts or in savings bank account made by the assessee with co-operative banks in Maharashtra is also investment made in co-operative society, and therefore, interest earned thereon is also eligible for deduction under section 80P(2)(d) of the IT Act.

Where assessee sold a land and made investment in new land from sale proceeds of old land in name of his son, assessee is entitled to exemption u/s 54B even if investment was made before registration of sale deed.

30 Siddhulal Patidar vs. ITO

[2024] 111 ITR(T) 541 (Indore – Trib.)

ITA No. 110 (IND.) of 2023

A.Y.: 2011–12

Date of order: 28th February, 2024

Section 54B

Where assessee sold a land and made investment in new land from sale proceeds of old land in name of his son, assessee is entitled to exemption u/s 54B even if investment was made before registration of sale deed.

FACTS

The assessee sold a land vide agreement dated 29th September, 2006 for ₹35,00,000, which was registered on 6th September, 2010. The assessee made a new investment of ₹53,29,440 on 20th June, 2007 in purchase of an agricultural land in the name of his son, Shri Rameshwar Patidar. On the strength of this investment, the assessee had claimed exemption u/s 54B.

The AO had denied the exemption u/s 54B for two reasons, namely:

  •  the new land was purchased in the name of son and not in the name of assessee himself;
  •  the new investment was made on 20th June, 2007 whereas the sale deed was registered on 6th September, 2010; thus, the investment has been made before the date of transfer which is not permitted u/s 54B.

Aggrieved by the assessment order, the assessee filed an appeal before the CIT(A). The CIT(A) confirmed the order of the AO. Aggrieved by the order, the assessee filed an appeal before the ITAT.

HELD

The ITAT followed the decision of Hon’ble Jurisdictional High Court of Madhya Pradesh in PCIT vs. Balmukund Meena ITA No. 188/2016 and held that the assessee can be said to be entitled for exemption u/s 54B even if the registration was taken in the name of son.

As for the second reason, the ITAT relied on the following decisions wherein it is already established that the assessee is eligible for exemption u/s 54B where the investment was made by assessee after execution of sale agreement but before registration of sale deed, from the moneys received under sale agreement:

  •  Dharmendra J. Patel vs. DCIT [2023] 152 taxmann.com 465 (Ahmedabad – Trib.)
  •  Ramesh Narhari Jakhadi vs. ITO [1992] 41 ITD 368 (Pune)
  •  Smt. Narayan F. Patel vs. PCIT [2023] 152 taxmann.com 53 (Surat-Trib.) – It followed the decision of Hon’ble Bombay High Court in Mrs. Parveen P Bharucha vs. Union of India WP No. 10437 of 2011 dated 27th June, 2012 (Para No. 12 of order).

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

EDITORIAL COMMENT

The Hon’ble Punjab and Haryana High Court in the case of Bahadur Singh vs. CIT(A) [2023] 154 taxmann.com 456 (P&H) had rejected assessee’s claim of exemption u/s 54B on the basis of purchase of land in the name of wife and the assessee’s SLP against the said decision was dismissed by Hon’ble Supreme Court vide order dated 29th August, 2023 published in [2023] 154 taxmann.com 457/295 Taxman 313 (SC). The ITAT followed the view favourable to the assessee by relying on the decision of CIT vs. Vegetable Products [1973] 88 ITR 192 (SC) and also mentioned that the Hon’ble SC had dismissed the assessee’s SLP against the decision of Hon’ble Punjab & Haryana High Court by passing a one line summary order; therefore, as per settled judicial view, such dismissal cannot be treated as pronouncement of final law by the Hon’ble Supreme Court.

Addition made by Assessing Officer during reassessment proceedings, not being based on any incriminating material during search and seizure action, was to be deleted.

29 Ashish Jain vs. DCIT

[2024] 111ITR(T)152 (Chd – Trib.)

ITA No. 352 (CHD) of 2023

A.Y.: 2012–13

Date of order: 23rd January, 2024

Section: 153A

Addition made by Assessing Officer during reassessment proceedings, not being based on any incriminating material during search and seizure action, was to be deleted.

FACTS

A search and seizure operation u/s 132(1) was carried out at the residential and business premises of M/s Jain Amar Clothing Pvt. Ltd. Group of cases on 26th February, 2016, and the assessee’s premises were also searched on the said date. Thereafter, a notice dated 28th September, 2016 u/s 153A was issued upon the assessee.

The assessee had purchased 1,700 equity shares of M/s. Maple Goods Pvt. Ltd. in F.Y. 2010–11 through share broker S.K. Khemka. M/s. Maple Goods Pvt. Ltd. was later on amalgamated with M/s. Access Global Ltd. and as against 1 share of M/s Maple Goods (P) Ltd., 47 equity shares of M/s Access Global Ltd. were allotted. The shares of M/s. Access Global Ltd. were received in D-Mat account of the assessee. The assessee had sold these shares in F.Y. 2012–13 and earned long-term capital gains (LTCG) of ₹87,04,733 thereon.

The AO had referred upon the report of the Directorate of Income-tax (Inv.), Kolkata dated 27th April, 2015, which stated that the share of M/s Access Global Ltd. and M/s Maple Goods (P) Ltd. resembled the character of Penny Stocks and provided accommodation entries in the guise of LTCG. The AO further referred to the documents so seized from the locker no. 194, HDFC Bank, Ludhiana which belonged jointly to Shri Sunil Kumar Jain, the father of the assessee and Smt. Kamla Jain, the grandmother of the assessee and that documents so seized were share certificates of M/s Maple Goods (P) Ltd. in respect of shares purchased by the assessee through Shri S.K. Khemka and the copy of the contract cum bill notes issued by Shri S.K. Khemka. The AO also referred to the statement recorded on oath on 13th March, 2015 of Shri S.K. Khemka who had admitted to provide “kachhapanna” [Purchase Contract Notes] of M/s Maple Goods (P) Ltd. and provided bogus LTCG entries to the assessee.

During the course of assessment proceedings, the assessee submitted that no incriminating material was found during the action of search but the AO stated that the said contention is not tenable and treated the LTCG of ₹87,04,733 as bogus and added to the total income of the assessee treating the same as unexplained cash credit under section 68 of the Act.

Aggrieved by the assessment order, the assessee filed an appeal before the CIT(A). The CIT(A) in its order held that the assessment order and remand report of the AO dated 5th February, 2020, clearly brought on record the share certificates and the contract bills seized from the bank locker no. 194, HDFC Bank which belonged jointly to Shri Sunil Kumar Jain, the father of the assessee and Smt. Kamla Jain, the grandmother of the assessee on the basis of which bogus LTCG had been claimed by the assessee were incriminating in nature as they had a direct bearing on the estimation of correct income of the assessee. Further, on merits as well, various contentions raised by the assessee were rejected, and the findings and order of the AO was confirmed.

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

HELD

The ITAT observed that it was an undisputed fact that the assessee had purchased 1,700 equity shares of M/s. Maple Goods Pvt. Ltd. in F.Y. 2010–11 through share broker S.K. Khemka, which were later on amalgamated with M/s. Access Global Ltd and received 79,900 shares of M/s. Access Global Ltd. The assessee had earned LTCG gains of R87,04,733 in A.Y. 2012–13 from sale of these shares which were disclosed in the original return of income u/s 139(1) of the Act.

The only issue was whether the documents seized from the bank locker no. 194, HDFC Bank – share certificate / contract cum bill notes in the name of the assessee issued by Shri S.K. Khemka for purchase of shares of M/s. Maple Goods Pvt. Ltd were incriminating material found during the course of search in case of the assessee.

The assessee had submitted that:

  •  it is a case of unabated assessment, and during the course of search on the assessee, no incriminating material / evidence was found in respect of LTCG on shares;
  •  the share certificates and the contract notes relating to purchase of shares cannot be an incriminating material; rather the said documents support the case of the assessee that the purchase of shares is genuine and is backed by proper documents;
  •  the statements of Shri S.K. Khemka and Shri Sunil Kumar Kayan and others had nothing to do with the search proceedings of the assessee as these were recorded during their respective investigation proceedings way back in the year 2015.

The ITAT held that the term “incriminating material” has to be read and understood in the context of one or more of the conditions stipulated in section 132(1) of the Act, on satisfaction of which a search can be authorised and search warrant can be issued. Therefore, the information in possession of the competent authority at the time of authorisation of search becomes relevant, and on the basis of the same, his satisfaction that search action is warranted coupled with material actually found and seized during the course of search which has not been disclosed or produced or submitted in the course of original assessment.

The ITAT further held that in case of unabated assessment, the reassessment can be made on the basis of the satisfaction note pursuant to which the search has been initiated and books of account or other documents not produced in the course of original assessment but found in the course of search which indicate undisclosed income or undisclosed property, and the reassessment can be made on the basis of the undisclosed income or undisclosed property which is physically found and discovered in the course of search.

Applying the aforesaid legal proposition, the ITAT held that it was not the case of the revenue that the locker from which the documents were seized was in the possession of the assessee or was being operated by the assessee, and thus, what was found and seized was from the possession of third persons, who no doubt were part of the assessee’s family and covered as part of the same search proceedings, but the same cannot be held as found during the course of search in case of the assessee.

The ITAT further observed that though the assessee was part of the search proceedings and action was initiated u/s 153A in his case, the same doesn’t take away the statutory requirement of recording of satisfaction note by the AO of family members whose locker was searched and from where the documents belonging to the assessee were found and seized.

The ITAT held that:

  •  it was an admitted and undisputed position that the assessee had purchased the shares of M/s Maple Goods (P) Ltd. during the F.Y. 2010–11 relevant to A.Y. 2011–12 and thus, the said transaction doesn’t pertain to impugned A.Y. 2012–13 and cannot be held as incriminating in nature for the impugned A.Y.;
  •  the assessee had purchased the shares wherein the payment was made through normal banking channel and the transaction was duly reflected and disclosed in the bank statement;
  •  proceedings for A.Y. 2011–12 were also reopened u/s 153A pursuant to search action and the reassessment proceedings were completed u/s 153A r/w 143(3) vide order dated 29th December, 2017 where the AO has not recorded any adverse findings regarding the aforesaid purchase of shares;
  •  the transaction of sale and purchase of shares have been duly disclosed as part of the original return of income, and the assessment thereof stood completed / unabated as on the date of search;
  •  the share certificates and contract notes represent and corroborate a disclosed transaction of purchase and sale of shares as part of the original return of income and cannot be termed as incriminating material so found and seized during the course of search;
  •  where there is no incriminating material found during the course of search, the statement of Shri S.K. Khemka (and what has been stated therein) which is recorded well before the date of search in case of the assessee and in the context of some other proceedings, independent of the impugned search proceedings, is availability of certain “other material / documentation” with the AO during the course of reassessment proceedings but not material / documentation which is incriminating in nature found during the course of search in case of assessee for the impugned assessment year.

In view of the aforesaid discussion and in the entirety of facts and circumstances of the case, the ITAT was of the view that the addition of ₹87,04,733 made by the AO during the reassessment proceedings completed u/s 153A is not based on any incriminating material found or seized during the course of search and seizure action u/s 132 of the Act in case of the assessee. Being a case of completed / unabated assessment, in absence of any incriminating material found during the course of search, the addition so made cannot be sustained and was directed to be deleted.

In the result, the appeal of the assessee was allowed.

The loss incurred on the sale of shares on stock exchange platform, where STT was duly paid, is eligible to be set of against the long-term capital gain earned by the assessee from sale of unlisted shares.

28 Rita Gupta vs. DCIT

ITA No. 46/Kol./2024

A.Y.: 2014–15

Date of Order: 6th June, 2024

Sections:10(38), 45, 70, 74

The loss incurred on the sale of shares on stock exchange platform, where STT was duly paid, is eligible to be set of against the long-term capital gain earned by the assessee from sale of unlisted shares.

FACTS

The assessee filed return of income on 31st July, 2014, declaring total income of ₹18,31,980. The Assessing Officer (AO) assessed the total income of the assessee, making various additions including the addition of ₹47,90,616, resulting on non-allowance of set off of loss from sale of equity shares on recognised stock exchange with STT paid against the profit on sale of unquoted equity shares. The AO held that the long-term capital gain on sale of quoted shares is exempt u/s 10(38) of the Act and similarly, the loss incurred was also not liable to be set off against the other taxable income.

Aggrieved, the assessee preferred an appeal to the CIT(A) who dismissed the appeal of the assessee and confirmed the action of the AO on this issue on the same reasoning that since long-term gain from sale of securities / shares are exempt in terms of provisions of Section 10(38) of the Act, and therefore, on the same analogy, the long-term capital loss resulting from the sale of equity shares with STT paid cannot be allowed to be set off against the taxable long-term capital gain resulting from sale of any other asset.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD

The Tribunal having perused the provisions of sections 2(14), 45, 47, 70 to 74 held that it is only the long-term capital gain resulting from sale of shares / securities which was granted exemption u/s 10(38) subject to the fulfilment of certain conditions and not the entire source which was excluded from the aforesaid sections. Therefore, when the entire source is not excluded from the charging section and only special type of income is excluded, then the interpretation of law has to be made strictly and cannot be deemed to include any other income or loss resulting or falling within the same source. The case of the assessee is squarely covered by the decision of Hon’ble jurisdictional High Court in the case of Royal Calcutta Turf Club vs. CIT [144 ITR 709 (Cal)].

The Tribunal noted that:

i) the Co-ordinate Bench in another decision in the case of Raptacos Brett & Co Ltd. [69 SOT 383] has also decided the similar issue by following the decision of Calcutta High Court in the case of Royal Calcutta Turf Club vs. CIT (supra) and by considering the decision of CIT vs. Hariprasad & Co. Pvt. Ltd. [99 ITR 118] as relied by the CIT(A);

ii) the decision of Hon’ble Apex Court in the case of CIT vs. Hariprasad & Co. Pvt. Ltd. (supra) did not apply to the case of the assessee as the principle laid down in the above decision would be applicable if entire source is excluded from the charging section.

The Tribunal having perused the decision relied upon by the CIT(A) found that except two decisions of the coordinate benches namely Nikhil Sawhney [119 taxmann.com 372] and DDIT vs. Asia Pacific Performance SICAV [55 taxmann.com 333] and decision of Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani vs. ACIT [367 ITR 261], all others are distinguishable of facts.

In the case of Nikhil Sawhney (supra), the Co-ordinate Bench has relied on the decision of Supreme Court in the case of CIT vs. Hariprasad& Co. Pvt. Ltd., which has been rendered on the different principle that the income includes loss; however, the said legal proposition would apply only when the entire source is exempt and not liable to tax and not as in a case where the income falling within such source is treated as exempt. The Hon’ble Supreme Court in the case of Hariprasad & Co. Pvt. Ltd. (supra) has held that the expression “income” shall include loss because the loss is nothing but negative income. But in our opinion, the principle laid down by the Hon’ble Apex Court that income includes negative income can be applied only when the entire source of income falls within the charging provision of Act but where the source of income is otherwise chargeable to tax but only a specific kind of income derived from such source is granted exemption, then in such case, the proposition that the term “income” includes loss would not be applicable. Thus, if the source which produces the income is outside the ambit of charging provisions of the section, in such case negative income or loss can be said to be outside the ambit of taxing provisions. Consequently, the negative income is also required to be ignored for tax purpose. In other words, where only one of the streams of income from a source is granted exemption by the legislature upon fulfilment of specified conditions, then the concept of income includes loss would not be applicable. Similarly, the second decision of DDIT vs. Asia Pacific Performance SICAV (supra) has relied on the decision of Hariprasad & Co. Pvt. Ltd. [55 taxmann.com 333], CIT vs. J H Gotla [156 ITR 323], and CIT vs. Gold Coin Health Food Pvt. Ltd. [304 ITR 308], which are distinguishable of facts. In the case of Kishorebhai Bhikhabhai Virani vs. ACIT [367 ITR 261], the issue was decided against the assessee; but in the said decision, the decision of Hon’ble Calcutta High Court in the case of Royal Calcutta Turf Club (supra) has not been referred at all, and considering the ratio laid down by the Hon’ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. 88 ITR 192 (SC), where there are two construction, then the construction / interpretation which is in favour of the assessee has to be followed.

The Tribunal held that the loss incurred on the sale of shares on stock exchange platform, where STT was duly paid, is eligible to be set of against the long-term capital gain earned by the assessee from sale of unlisted shares.

Payment made by assessee to tenants of a co-operative housing society towards alternate accommodation charges / hardship allowance / rent are not liable for deduction of tax at source under section 194I.

27 ITO vs. Nathani Parekh Constructions Pvt.

ITA Nos. 4088 and 4087/Mum/2023 and 4101 and 4100/Mum/2023

A.Ys.: 2013–14 & 2016–17

Date of Order: 21st May, 2024

Sections: 194I, 201

Payment made by assessee to tenants of a co-operative housing society towards alternate accommodation charges / hardship allowance / rent are not liable for deduction of tax at source under section 194I.

FACTS

The assessee, a real estate developer, engaged in the business of development and construction, entered into a redevelopment agreement with M/s Dalal Estate Co-operative Housing Society Ltd. In the course of survey conducted under section 133A(2A) of the Act, it was found that the assessee has debited amounts under the head “Alternate Accommodation / Rent” in each of the four years under appeal.

The Assessing Officer (AO) called upon the assessee to explain why tax has not been deducted at source in respect of the payments debited under the head “Alternate Accommodation / Rent”. The assessee submitted that it has entered into a re-development agreement dated 30th April, 2017 with M/s Dalal Estate Co-operative Housing Society Ltd., which was encumbered with more than 300 tenants and that for the purpose of vacating the premises, the assessee had agreed to pay compensation of hardship according to the nature of tenancy occupied by each tenant. The assessee further submitted that these tenants could not be provided the alternate accommodation, and therefore, the assessee agreed to pay the above amount as compensation for the hardship of the tenants. The assessee also submitted that the amount paid towards alternate accommodation / hardship allowance does not fall within the definition “Rent”, and therefore, tax was not liable to be deducted at source on the said payments. The assessee accordingly submitted that no tax was deducted at source from the payment of alternate accommodation charges / rent.

The AO did not agree with the contentions of the assessee and held that the payment made by the assessee is liable for deduction of tax at source under section 194I of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal of the assessee by relying on the decisions of the Co-ordinate Bench in the case of Jitendra Kumar Madan (32 CCH 59, Mumbai), Sahana Dwellers Pvt. Ltd. [2016] 67 taxmann.com 202 (Mum. Trib.) and Shanish Construction Pvt. Ltd. in ITA Nos. 6087 and 6088/Mum/2024 dated 11th January, 2017.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the common issue arising in each of the four appeals preferred by the Revenue is “Whether the payment made by the assessee to the tenants of M/s Dalal Estate Co-operative Housing Society Ltd. towards alternate accommodation charges/hardship allowance/rent are liable for tax deduction under section 194I of the Act.”

On behalf of the assessee, it was contended that:

i) the impugned payment is made in lieu of the alternate accommodation which the assessee could not provide to the tenants / members of the society;

ii) the definition of term “Rent” as per the provisions of section 194I which states that the payment which is made towards use of land or building. In assessee’s case, the payment is made not towards the use of land or building but as a compensation for the hardship that the tenants would undergo by vacating the property for the purpose of re-development;

iii) the CIT(A) has correctly relied on the various decisions of the Co-ordinate Bench which has been consistently holding that the amount paid towards compensation / hardship allowance is not taxable in the hands of the tenants for the reason that the same is not paid towards use of land or building but for the hardship in vacating the property for re-development;

iv) the Hon’ble Bombay High Court in the case of Sarfaraz S. Furniturewalla vs. Afshan Sharfali Ashok Kumar & Ors in Writ Petition No. 4958 of 2024, has held that the “transit rent” i.e., the rent paid by the developer to the tenant who suffers due to dispossession is not a revenue receipt and is not liable to be taxed. As a result, there will not be any question of deduction of TDS from the amount payable by the developer to the tenant.

The Tribunal having quoted the decision of the Bombay High Court in Sarfaraz S. Furniturewalla (supra) observed that the Hon’ble High Court in the above decision has held that the transit rent which is paid to the tenant who suffers hardship due to dispossession does not fall within the definition “rent” under section 194I. It held that in assessee’s case, the payment is made towards compensation for handing over the vacant possession of the property and towards rent if any payable by the tenants in the alternate accommodation until the completion of the re-development.

Applying the ratio of the decision of the Hon’ble High Court, the Tribunal held that the payment made by the assessee towards “Alternate accommodation charges / rent” is not liable for tax deduction under section 194I, and accordingly, the Tribunal upheld the order passed by the CIT(A) for A.Y. 2013–14 to 2016–17, setting aside the order of the AO treating the assessee as an assessee in default for non-deduction and non-payment of TDS under section 194I of the Act.

Section 9(1)(vi): Supply of software — “Royalty” — Article 12 under the Indo-US DTAA.

11 CIT (IT) -3 Mumbai vs. M/s. Lucent Technologies GRL LLC

Income Tax Appeal (L) Nos. 3695 & 3693 of 2018

A.Ys.: 2006–07 & 2010–11 alongwith other companion appeals

Dated: 1st July, 2024 (Bom) (HC)

Section 9(1)(vi): Supply of software — “Royalty” — Article 12 under the Indo-US DTAA.

The Revenue has raised the following question of law:

“Whether on the facts and in the circumstances of the case and in law, the Tribunal has erred in not holding payments received by the assessee for supply of software to Reliance Infocomm Limited (now Reliance Communication Limited) to be in the nature of “royalty” under Section 9(1)(vi) of the Income Tax Act, 1961?”

In the connected Appeals, the question of law as raised is similar, which by consent of the parties was re-framed as under:

“Whether on the facts and circumstances of the case and in law, the Tribunal has erred in holding that the payment made to assessee did not amount to income of the payee by way of ‘royalty’ under Section 9(1)(vi) of the Income Tax Act, 1961?”

The Respondent-assessee filed its return of income declaring NIL income, and also claimed Tax Deducted at Source (TDS) from the payments received from the purchasers (referred as “Reliance”). The return as filed by the Respondent was taken up for scrutiny. The Assessing Officer was of the view that receipts of the amounts in question from Reliance were on account of supply of the copyright software as per the terms of the Wireless Software Assignment and License Agreement. However, the case of the assessee was to the effect that the amount was a business income and was not taxable in India, in the absence of assessee having a Permanent Establishment (PE) in India.

The Respondent-assessee contended that the Revenue receipts were in terms of the sale, as the software supplied to Reliance was not a customised software but a software which was sold to several clients. The AO did not agree with the assessee’s case, and held that the supply of such software amounted to a transfer of intellectual property rights, and hence, the consideration paid to the assessee was in fact towards a license to use the software as no title or interest in the software was transferable to the user. The AO, accordingly, held that the transaction not being a sale of the software and being a payment received for the license to use such software, it was taxable as “royalty” in terms of Section 9(1)(vi) of the Act, read with relevant Article of the Double Taxation Avoidance Agreement (DTAA) (i.e., Article 12 under the Indo-US DTAA and similar clauses in the other DTAA’s). Thus, the amount received by the assessee from Reliance was assessed as royalty and, accordingly, was sought to be taxed.

The assesee’s appeal was adjudicated by the CIT(A) taking into consideration the agreements in question, as also the transaction being viewed and considered on the applicability of Section 9(1)(vi) of the Act and the relevant Articles of the DTAA, namely, Article 12. The CIT(A) accordingly held that such amount received by the assessee did not amount to receipt of “royalty” within the meaning of Section 9(1)(iv) of the Act.

The Revenue being aggrieved by such orders of the CIT(A) carried the proceedings before the Tribunal. By the impugned orders, the Tribunal confirmed the orders passed by the CIT(A) by upholding the contentions as raised on behalf of the assessee and recording finding against the Revenue.

The Hon. Court observed that the question whether the payments made by Reliance Communication Limited for obtaining computer software, whether were liable to be taxed in India as ‘royalties’ under the provisions of Section 9(1)(vi) of the Act, had fallen for consideration of the Court in a batch of appeals filed by the Revenue on similar issues filed against Reliance Industries Ltd., came to be disposed of by an order dated 24th June, 2024.

The Respondent-assessee submitted that once in respect of the party making payment to the assessee, such question of law had fallen for consideration of the Court, and when the Court had come to a considered view that the payment for software which was supplied by the assessee was not liable to be taxed as “royalty” under the provisions of Section 9(1)(vi) of the Act, then certainly, the present assessee, which had in fact supplied the software, cannot be treated differently and the same parameters of law would be required to be applied.

The Hon. Court observed that the question of law as raised by the Revenue in the present batch of appeals would stand covered by the orders in Income Tax Appeal No. 1655 of 2018 and also a batch of appeals decided on 24th June, 2024 in Income Tax Appeal No. 28 of 2018 and other connected appeals.

The Court further observed that the order dated 24th June, 2024 passed in Income Tax Appeal No. 28 of 2018 is also required to be noted.

The Hon. Court observed that the question of law would stand covered by the authoritative pronouncement of the Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income Tax 2. [2021] 125 taxmann.com 42 (SC).

The Revenue appeals were accordingly dismissed.
No costs.

Section 148 / 151: Reopening of assessment — Beyond three years — Sanction by the specified authority.

10 Cipla Pharma and Life Sciences Limited vs. Dy. CIT Circle – 1(1)(1)

WP NO. 149 OF 2023

A.Y.: 2016–17

Dated: 2nd July, 2024, (Delhi) (HC)

Section 148 / 151: Reopening of assessment — Beyond three years — Sanction by the specified authority.

The primary ground of challenge before the Hon. High Court was that the impugned notice u/s. 148 of the Act had been issued in breach of the provisions of Section 151 of the Act, which provides for a sanction by the specified authority before issuance of notice.

The Petitioner-assessee contended that the sanction to issue the impugned notice dated 30th July, 2022 was issued by the Principal Commissioner which itself is contrary to the provisions of Section 151(ii), in as much as admittedly the impugned notice was issued after a period of more than three years having elapsed from that of the relevant assessment year 2016–17. Accordingly, such sanction ought to have been issued by the Specified Authority as set out in Section 151(ii) and not by an authority falling under clause (i) of the said provision. It was contended that once such compliance itself was lacking, the impugned notice issued under Section 148 would be rendered illegal, and on such count, would be required to be quashed and set aside. In support, reliance was placed on the decision of the Division Bench of this Court in Siemens Financial Services Pvt. Ltd. vs. Deputy Commissioner of Income Tax, Circle 8 (2)(1), Mumbai &Ors. (Writ Petition No. 4888 of 2022, decided on  25th August, 2023).

The Hon. Court observed that on a plain reading of Section 148A, it is clear that the Assessing Officer (AO) before issuing any notice under Section 148 is required to follow the procedure as set out in clauses (a) to (d) of Section 148A. One of the pre-conditions as ordained by clause (d) of Section 148A is that an order under such provision can be passed by the AO only with the approval of “Specified Authority”. Thus, necessarily when clause (d) of Section 148A provides for prior approval of specified authority, it relates to the provisions of Section 151 of the Act providing for “Specified authority for the purposes of Section 148 and Section 148A of the Act”. In the present case, Section 151 as amended by the Finance Act, 2021 and Section 148A as also introduced by Finance Act, 2021 have become applicable, as although the assessment year in question is 2016–17 in respect of which the assessment is sought to be reopened by issuance of notice under Section 148, which is dated 30th July, 2022. Such amended provision would squarely become applicable the date of notice under section 148 itself being 30th July, 2022.

The Hon. Court further observed that the record clearly indicates that the sanction in the present case was issued by the Principal Commissioner which can only be in respect of cases if three years or less than three years have elapsed from the end of the relevant assessment year, as would fall under the provisions of clause (i) of Section 151 of the Act. As in the present case, the assessment year in question is 2016–17 and the impugned notice itself has been issued on 30th July, 2022, it is issued after a period more than three years having elapsed from the end of the said assessment year. Accordingly, clause (ii) of Section 151 of the Act was applicable, which required the sanction to be issued by either Principal Chief Commissioner or Principal Director General or where there is no Principal Chief Commissioner or Principal Director General, Chief Commissioner or Director General for issuance of notice under Section 148 of the Act.

The Hon. Court further observed that such an issue fell for consideration of the Division Bench of this Court in Siemens Financial Services Pvt. Ltd. (supra), wherein the Division Bench considered the provisions of Section 151 of the Act read with the provisions of Section 148A(b). The latter provision clearly provided that prior to issuance of any notice under Section 148 of the Act, the AO shall provide an opportunity of being heard to the assessee, only after considering the cumulative effect of Section 148A(b) read with Section 151 of the Act. As provided under sub-clause (d), the AO shall decide on the basis of material available on record, including reply of the assessee, whether or not it is a fit case to issue a notice under Section 148 by passing an order, with the prior approval of specified authority within one month from the end of the month in which the reply is received. The sanction of the specified authority has to be obtained in accordance with the law existing when the sanction is obtained. Therefore, the sanction is required to be obtained by applying the amended Section 151(ii) of the Act, and since the sanction has been obtained in terms of Section 151(i) of the Act, the impugned order and impugned notice are bad in law and should be quashed and set aside.

The Hon. Court further observed that the respondent’s case based on the notification dated 31st March, 2020 issued under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (for short, “TOLA”) was concerned, the Court held that such notification was a subordinate legislation, and it could not override the statute enacted by the Parliament and in that regard, the position in law was discussed by the Division Bench in Siemens Financial Services Pvt. Ltd. (supra), paragraph 27 of the said decision.

The impugned notices are quashed and set aside, the petition is allowed.

Writ — Competency to file writ petition — Chartered Accountant authorised to represent assessee in income-tax matters — Chartered Accountant could file writ against order of assessment.

36 TiongWoon Project and Contracting Pte. Ltd. vs. CBDT

[2024] 463 ITR 641 (Mad)

A.Ys. 2012–13 and 2013–14

Date of order: 22nd January, 2024

ART. 226 of Constitution of India

Writ — Competency to file writ petition — Chartered Accountant authorised to represent assessee in income-tax matters — Chartered Accountant could file writ against order of assessment.

The petitioner is a company incorporated in Singapore and engaged in undertaking turnkey construction projects involving erection, installation and commissioning activities. In these two writ petitions, the petitioner assails a common order dated 3rd November, 2023 refusing to condone delay in filing the return of income of the petitioner for the A.Y. 2012–13 and 2013–14. The writ was signed by the chartered accountants. The assessee-company had authorised the chartered accountants to represent it in relation to its Income-tax assessments and all other proceedings arising therefrom.

The standing counsel for the respondents raised the preliminary objection that the writ petition should not have been filed by the chartered accountants of the petitioner. By referring to the authorisation issued by the petitioner to the chartered accountants, it was submitted that the authorisation does not extend to the conduct of proceedings before this court. A reference was also made to the ethics code of the Institute of Chartered Accountants of India and the annual report of TiongWoon Corporation Holding Ltd. to contend that the chartered accountants through whom the writ petitions were filed were the statutory auditors of one of the subsidiaries of the above-mentioned holding company, and that the chartered accountants should not act as authorised representatives in such situation.

Rejecting the preliminary objection of the Respondents, the Madras High Court held as under:

“The authorisation in favour of the chartered accountants was on record and the assessee-company had authorised the chartered accountants to represent it in relation to its Income-tax assessments and all other proceedings arising therefrom. Although proceedings before the court were not expressly referred to the language of the authorisation was wide enough to embrace these proceedings. As regards the alleged breach of the ethics code, even if established, that could not be the basis to reject this petition.”

Revision — Powers of Commissioner — Commissioner (Appeals) holding amounts included in fringe benefits tax return not chargeable to fringe benefits tax — Revision application for refund of fringe benefits tax — Revision application rejected on grounds of delay — Commissioner conferred with power to condone delay to do substantial justice — Commissioner (appeals) taking long time to dispose of appeal — Commissioner ought to have condoned delay — Order rejecting revision application quashed — Direction to condone delay and consider revision application on merits and pass reasoned order.

35 Hindalco Industries Ltd. vs. UOI

[2024] 464 ITR 236 (Bom.)

A.Y. 2007–08

Date of order: 17th January, 2024

Ss. 115WD(1) and 264 of the ITA 1961

Revision — Powers of Commissioner — Commissioner (Appeals) holding amounts included in fringe benefits tax return not chargeable to fringe benefits tax — Revision application for refund of fringe benefits tax — Revision application rejected on grounds of delay — Commissioner conferred with power to condone delay to do substantial justice — Commissioner (appeals) taking long time to dispose of appeal — Commissioner ought to have condoned delay — Order rejecting revision application quashed — Direction to condone delay and consider revision application on merits and pass reasoned order.

For the A.Y. 2007–08, the Commissioner (Appeals) by order dated 31st August, 2016, held the amounts included in the fringe benefits tax return as not chargeable to fringe benefits tax. Since the Commissioner (Appeals) allowed the claim of the assessee, the assessee filed an application u/s. 264 of the Income-tax Act, 1961 for refund of the fringe benefits tax return. The Commissioner rejected the revision application on the grounds of substantial delay in filing the application and that the intimation u/s. 143(1) of the Act was not an assessment order.

The assessee preferred a writ petition contending that the Commissioner (Appeals) took almost five to six years to decide that the amounts included in the fringe benefits tax returns were not chargeable to fringe benefits tax and hence there was no delay in filing the revision application. The Bombay High Court allowed the writ petition and held:

“i) On the issue of condonation of delay in an application filed u/s. 264 of the Income-tax Act, 1961, courts have held that the authorities should not take a pedantic approach but should be liberal. The courts have held that the words ‘sufficient cause’ should be given a liberal construction so as to advance substantial justice when no negligence or inaction or want of bona fides is imputable to the assessee. The courts have held that the principle of advancing substantial justice is of prime importance and while considering the question of condonation, the revisional authority is not all together excluded from considering the merits of the revision petition.

ii) U/s. 264 of the Act, the Commissioner is empowered either on his own motion or on an application made by the assessee to call for the record of any proceedings under the Act and pass such order thereon not being an order prejudicial to the assessee and this power has been conferred upon the Commissioner in order to enable him to give relief to the assessee in cases of over-assessment.

iii) The Commissioner having been conferred power to condone the delay to do substantial justice to parties by disposing of the matter on the merits should, considering the facts and circumstances of the case, in particular that it took a long time for the Commissioner (Appeals) to dispose of the assessee’s appeal, have condoned the delay. The order rejecting the application u/s. 264 of the Act was quashed and set aside. The Commissioner was directed to condone the delay and consider the application u/s. 264 of the Act on the merits and pass a reasoned order in accordance with the law.”

Revision — Rectification of mistake — Time limit — Computation of long-term capital gains — Sale of flat inherited by the assessee and three others — Omission of claim of deduction of indexed renovation expenses in return of income — Rejection of application for rectification and revision on grounds that new claim not raised earlier — Revision Application within one year from the date of rectification order — AO accepting indexed renovation expenses in case of co-owner — Amount accepted in co-owner’s case to be accepted as correct and allowance to be made while computing long-term capital gain.

34 Pramod R. Agrawal vs. Principal CIT

[2024] 464 ITR 367 (Bom.)

A.Y.: 2007–08

Date of order: 13th October, 2023

S. 48, 143(3), 154 and 264 of ITA 1961

Revision — Rectification of mistake — Time limit — Computation of long-term capital gains — Sale of flat inherited by the assessee and three others — Omission of claim of deduction of indexed renovation expenses in return of income — Rejection of application for rectification and revision on grounds that new claim not raised earlier — Revision Application within one year from the date of rectification order — AO accepting indexed renovation expenses in case of co-owner — Amount accepted in co-owner’s case to be accepted as correct and allowance to be made while computing long-term capital gain.

The assessee was a co-owner of a flat which was inherited by the assessee along with three others. The assessee’s share was to the extent of 25%. In the return of income, the assessee offered capital gains from the sale of the said flat. The assessee offered the capital gains without claiming the indexed cost of improvement in respect of the renovation expenses incurred. On the advice of the chartered accountant that a co-owner had sought rectification and had been allowed deduction of the entire renovation expenses of the flat from full value of consideration, while computing the share of capital gains, the assessee also filed an application u/s. 154 of the Act seeking rectification by allowing deduction of indexed cost of improvement being renovation expenses not claimed in the original return of income. The assessee’s application for rectification was rejected on the grounds that the claim was made for the first time in the application u/s. 154 and it was never brought to the attention of the lower authorities earlier. Against this order rejecting the assessee’s application for rectification of mistake, the assessee filed a revision application u/s. 264 of the Act which application was also rejected.

Against this order rejecting the assessee’s application u/s. 264, the assessee filed a writ petition before the High Court. The Bombay High Court allowed the petition and held that:

“i) Section 264 confers wide jurisdiction on the Commissioner. The proceedings u/s. 264 of the Act are intended to meet a situation faced by an aggrieved assessee who is unable to approach the appellate authorities for relief and has no alternate remedy available under the Act. The Commissioner is bound to apply his mind to the question whether the assessee was taxable on that income and his powers are not limited to correcting the error committed by the sub-ordinate authorities but could even be exercised where errors are committed by the assessee. It would even cover situation where the assessee because of an error has not put forth legitimate claim at the time of filing the return and the error is subsequently discovered and is raised for the first time in an application u/s. 264 of the Act.

ii) There was no delay in filing the application u/s. 264 of the Income-tax Act, 1961 because the application u/s. 264 of the Act was against the order passed u/s. 154 of the Act and not that passed u/s. 143(3) of the Act. The order u/s. 154 of the Act was passed within one year from the date of application filed u/s. 264 of the Act.

iii) In the assessment order passed in the case of another co-owner of the flat, the Assessing Officer had accepted certain amount as the cost of indexed renovation. Therefore, the amount had to be accepted as correct and suitable allowance should be made while arriving at the long-term capital gains. The order is quashed and set-aside. The matter was remanded for de novo consideration and to pass a reasoned order after providing the assessee with an opportunity of hearing.”

Return of income — Delay in filing revised return — Condonation of delay — Power to condone — Meaning of “genuine hardship” — Power vested in authority to be judiciously exercised — Compensation received on compulsory land acquisition inadvertently declared as income — Payment of tax more than liability is “genuine hardship” — Department to enable assessee to file revised return of income.

33 K. S. Bilawala and Others vs. Principal CIT

[2024] 463 ITR 766 (Bom.)

A.Y. 2022–23

Date of order: 16th January, 2024

S. 119(2)(b) of the ITA 1961

Return of income — Delay in filing revised return — Condonation of delay — Power to condone — Meaning of “genuine hardship” — Power vested in authority to be judiciously exercised — Compensation received on compulsory land acquisition inadvertently declared as income — Payment of tax more than liability is “genuine hardship” — Department to enable assessee to file revised return of income.

For the A.Y. 2022–23, the assessee inadvertently declared as income the compensation received by him on acquisition of its land under the provisions of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. The return of income was processed u/s. 143(1) of the Income-tax Act, 1961 and the assessee received an intimation. Thereafter, the assessee filed an application u/s. 119(2)(b) for condonation of delay and leave to file a revised return. The application was rejected on the grounds that he did not show any genuine hardship which was caused due to delay in the application.

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

“i) The phrase ‘genuine hardship’ used in section 119(2)(b) of the Income-tax Act, 1961 should be considered liberally. There cannot be a straitjacket formula to determine what is genuine hardship. The power to condone delay has been conferred to enable the authorities to do substantial justice to the parties by disposing of matters on the merits. While considering these aspects, the authorities are expected to bear in mind that no applicant stands to benefit by filing delayed returns. Refusing to condone the delay can result in a meritorious matter being thrown out at the very threshold and the cause of justice being defeated, but, when the delay is condoned, a cause would be decided on the merits after hearing the parties.

ii) When the assessee felt that the amount of compensation that it received under the 2013 Act need not have been offered to tax, under the 1961 Act, the authority should have condoned the delay and considered the matter on the merits. The fact that an assessee had paid more tax than what he was liable to pay would cause hardship and that would be a ‘genuine hardship’. The delay in filing the revised return was to be condoned and accordingly the Department was to enable the assessee to file the revised return for the A. Y. 2022-23. Thereafter, the authority could decide whether or not the compensation received by the assessee under the 2013 Act was liable to tax.”

Reassessment — Notice — Sanction of Authority — Application of mind to material on basis of which reopening of assessment sought for by AO — Discrepancy in quantum of escapement of income in order in initial notice and order for issue of notice — Not noticed by concerned Sanctioning Authorities — Non-application of mind in passing sanction order — Orders and consequent notice set aside.

32 Vodafone India Ltd. vs. Dy. CIT

[2024] 464 ITR 385 (Bom.)

Date of order: 19th March, 2024

Ss. 147, 148, 148A(b), 148A(d) and 151 of the ITA 1961

Reassessment — Notice — Sanction of Authority — Application of mind to material on basis of which reopening of assessment sought for by AO — Discrepancy in quantum of escapement of income in order in initial notice and order for issue of notice — Not noticed by concerned Sanctioning Authorities — Non-application of mind in passing sanction order — Orders and consequent notice set aside.

In this case, the petitioner is impugning a notice dated 30th March, 2023, u/s. 148A(b) of the Income-tax Act, 1961, an order dated 19th April, 2023 passed u/s. 148A(d) of the Act and a notice dated 19th April, 2023 issued u/s. 148 of the Act on various grounds. One of the grounds raised across the Bar is that the sanction for issuance of the order u/s. 148A(d) of the Act has been granted without application of mind by all the five officers involved.

The Bombay High Court allowed the petition and held:

“i) The power vested in the sanctioning authorities u/s. 151 of the Income-tax Act, 1961 to grant or not to grant approval to the Assessing Officer to reopen the assessment u/s. 147 is coupled with a duty. The sanctioning authorities are duty bound to apply their mind to the proposal put up for approval considering the material relied upon by the Assessing Officer and cannot exercise their power casually on a routine perfunctory manner. While recommending and granting approval it is obligatory on the part of the officers to verify whether there is any genuine material to suggest escapement of income on all the authorities and the Principal Chief Commissioner in particular to consider whether or not power to reopen is being invoked properly.

ii) The contention that the record had been carefully considered before granting approval u/s. 151 was an incorrect statement made by the Principal Chief Commissioner. The information annexed to the notice issued u/s. 148A(b) had stated the quantum of income that had escaped assessment more than the amount mentioned in the order passed u/s. 148A(d) without any explanation as to how the amount had changed or had been reduced. In the affidavit it was stated that in the notice the value of the transaction in question was taken gross and subsequently it was seen that there were duplicate entries which were corrected while passing the order u/s. 148A(d). The notice did not contain any duplicate entries. If there were duplicate entries, the Assessing Officer was duty bound to clarify in the order and also give details of what were those duplicate entries and should have come clean on the error made. If the Principal Chief Commissioner or the other officers had seen the records and had applied their mind those errors would not have crept in. This displayed non-application of mind by all those persons who had endorsed their approval for issuance of notice u/s. 148.

iii) Had the authorities read the record carefully, they would have never come to the conclusion that this was a fit case for issuance of notice u/s. 148 and would have either told the Assessing Officer to correct the amounts or would have sent the papers back for reconsideration. They had substituted the form for substance, important safeguards provided in sections 147 and 151 were treated lightly by the concerned officers. The order of approvals u/s. 151, having been granted mechanically and without application of mind in a most casual manner, were quashed and set aside. The order passed u/s. 148A(d) and the consequent notice issued u/s. 148 were also quashed and set aside.”

Offences and prosecution — Compounding of offences — Application for — Limitation — Application can be filed either before or subsequent to launching of prosecution — Circular issued by CBDT stipulating limitation period of 12 months — Contrary to legislative intent of provision — Application for compounding rejected as barred by limitation period prescribed in circular issued by CBDT — Not sustainable — Relevant clause of Circular struck down — Matter remitted to decide application on the merits.

31 Jayshree vs. CBDT

[2024] 464 ITR 81 (Mad)

A.Y.: 2013–14

Date of order: 3rd November, 2023

S. 119(1) and Explanation to S. 279(2) of the ITA 1961

Offences and prosecution — Compounding of offences — Application for — Limitation — Application can be filed either before or subsequent to launching of prosecution — Circular issued by CBDT stipulating limitation period of 12 months — Contrary to legislative intent of provision — Application for compounding rejected as barred by limitation period prescribed in circular issued by CBDT — Not sustainable — Relevant clause of Circular struck down — Matter remitted to decide application on the merits.

During the previous year relevant to the A.Y. 2013–14, the assessee sold an immovable property and reinvested the capital gains in the purchase of another immovable property. The Assessee was under the impression that since there was no liability to pay income tax, she was not required to file return of income and, therefore, did not file her return of income. The return of income was filed belatedly on 13th June, 2016. Subsequently, she was prosecuted for delay in filing of the return. In view of provisions of section 279(2) of the Act, the assessee filed an application for compounding of offence in the year 2021. The application was rejected on the grounds that it was filed beyond the time limit of 12 months from the date of launching prosecution which was prescribed under the Circular F. No. 285/08/2014-IT(Inv.) 147 dated 14th June, 2019.

The assessee filed the writ petition and challenged the order of rejection. The Madras High Court allowed the writ petition as under:

“i) The power of the CBDT u/s. 119(1) of the Income-tax Act, 1961 to issue circulars, directions and instructions should not be exercised beyond the scope of the Act. The CBDT is not empowered to fix the time limit for filing the application for compounding of offences u/s. 279, which is contrary to the provisions of section 279(2) in terms of which the assessee can file the application for compounding of offences either before or subsequent to the launching of the prosecution. The Explanation to section 279 which empowers the CBDT to issue circulars is only for the purpose of implementation of the provisions of the Act with regard to the compounding of offences and not for the purpose of fixing the time limit for filing the application for compounding of offences.

ii) Nowhere in section 279(2), had a time limit been mentioned for filing an application for compounding of offences u/s. 279 though the Explanation thereunder, stated that the CBDT was empowered to issue orders, circulars, instructions and directions for the purpose of implementation of the Act. The intention of the legislation for bringing section 279(2) was to permit the assessee to file an application for compounding of offences either before institution of proceedings or after institution of proceedings. The fixing of a time limit by the CBDT by way of a Circular was contrary to the intention of the legislation and amounted to amendment of section 279(2). Since the idea of the legislation was that the compounding of offences was permissible either before or after the institution of the proceedings, the CBDT could not issue a circular contrary to the object of the provisions of section 279. Clause 7(ii) of Circular F.No. 285/08/2014-IT(Inv.V)/147, dated June 14, 2019 was beyond the scope of the Act and hence, that portion of the circular was to be struck down.

iii) The matter was remitted to the authority to decide the application on the merits in accordance with law.”

Offences and prosecution — Failure to file returns in time — Relief from prosecution — Effect of proviso to s. 276CC — Prepaid taxes resulting in NIL liability — Prosecution u/s. 276CC not valid.

30 Manav Menon vs. DCIT

[2024] 463 ITR 752 (Mad)

A.Y. 2013–14

Date of order: 17th November, 2023

S. 276CC of ITA 1961

Offences and prosecution — Failure to file returns in time — Relief from prosecution — Effect of proviso to s. 276CC — Prepaid taxes resulting in NIL liability — Prosecution u/s. 276CC not valid.

For the A.Y. 2013–14, the Assessing Officer filed complaint for the offence punishable u/s. 276CC of the Income-tax Act, 1961 for non-filing of income-tax return. The crux of the complaint is that the accused is an assessee within the jurisdiction of the respondent. During the course of proceedings for assessment, the respondent detected that the petitioner failed to file his return of income for A.Y. 2013–14. As per section 139(1) of the Income-tax Act, the petitioner ought to have filed the return of income on or before 30th September, 2013.

The assessee filed a criminal writ petition for quashing the prosecution proceedings. The Madras High Court allowed the writ petition and held as under:

“i) Filing of the Income-tax return is mandatory in nature u/s. 139(1) of the Income-tax Act, 1961 and failure to file the Income-tax return is punishable u/s. 276CC of the Act, 1961. The proviso to section 276CC gives some relief to genuine assessees. The proviso in clause (ii)(b) to section 276CC provides that if the tax payable determined by regular assessment as reduced by advance tax paid and tax deducted at source does not exceed ₹3,000, such an assessee shall not be prosecuted for not furnishing the return u/s. 139(1) of the Act. Therefore, this proviso takes care of genuine assessees who either file their returns belatedly but within the end of the assessment year or those who have paid substantial amounts of their tax dues by prepaid taxes from the rigour of the prosecution u/s. 276CC.

ii) A perusal of the records revealed that admittedly the assessee had failed to file his return of income for the A. Y. 2013-14. However, the assessee had paid taxes under the heads of advance tax, tax deducted at source, tax collected at source, and self assessment tax to the tune of ₹23,75,066. According to his returns, the total tax and interest payable by him was ₹23,74,610. Therefore, he had claimed a refund of ₹460 and the proviso (ii)(b) to section 276CC would come to the rescue of the assessee from the rigour of the prosecution u/s. 276CC of the Act. Therefore, the initiation of prosecution for the offence punishable u/s. 276CC of the Act could not be sustained.”

Accrual of income — Meaning of accrual — Time of accrual — Assessee terminating lease following dispute — Assessee not accepting lease rent — Matter before Small Causes Court — Small Causes Court allowing lessor to deposit lease rent in Court specifying that deposit was allowed without prejudice to rights of contestants — Matter still pending in Small Causes Court — Lease rent did not accrue to the Assessee.

29 T. V. Patel Pvt. Ltd. vs. DCIT

[2024] 464 ITR 409 (Bom.):

A.Ys. 1986–87 to 1991–92, 1993–94

Date of order: 4th December 2023

Ss. 4 and 5 of the ITA 1961

Accrual of income — Meaning of accrual — Time of accrual — Assessee terminating lease following dispute — Assessee not accepting lease rent — Matter before Small Causes Court — Small Causes Court allowing lessor to deposit lease rent in Court specifying that deposit was allowed without prejudice to rights of contestants — Matter still pending in Small Causes Court — Lease rent did not accrue to the Assessee.

The assessee entered into a sub-lease agreement with IDBI on an annual lease rent of ₹3,42,720. The said income was offered for tax under the head “Income from Other Sources”. During the previous year 1980–81, dispute arose between the assessee and IDBI for breaches committed by IDBI, which lead to termination of the sub-lease agreement by the assessee, and subsequently, the assessee refused to accept rent from IDBI post termination of the agreement. In October 1981, IDBI filed a Declaratory Suit in the Small Causes Court and obtained injunction against the assessee from terminating the sub-lease agreement.

In March 1984, the Department issued a garnishee notice u/s. 226(3) in respect of the outstanding tax arrears of the assessee and directed IDBI to pay rent to the Department. In response to the notice, the assessee informed the Department that the sub-lease agreement had been terminated and there was no rent due and payable to the assessee and, therefore, the notice issued by the Department was illegal. The Assessee also addressed a letter to IDBI about the termination and recorded that IDBI should not make payment to the Income-tax Department. However, IDBI made the payment to the Department despite the fact that the agreement was terminated.

Thereafter, in the year 1984, the Assessee filed a suit for eviction and claimed reliefs. On an application made by IDBI to the Small Causes Court, the Small Causes Court allowed IDBI to deposit the lease rent in Court. The assessee, however, did not withdraw any amount.

In the return of income for A.Ys. 1982–83 to 1986–87 filed by the assessee, the lease rent was not offered for tax. The assessments were completed and no addition was made. Subsequently, the assessment for A.Y. 1986–87 was re-opened for assessing the lease rent which the assessee had not offered for tax in the return of income for A.Y. 1986–87. In the re-assessment order, the AO added the amount of annual lease rent agreed between the assessee and IDBI.

On appeal before the CIT(A) and the Tribunal, both dismissed the appeal of the assessee. The reason for dismissing the appeal was that the claim for arrears of rent and compensation was pending before the Court. The consideration under the agreement had been paid by IDBI. The assessee was demanding compensation over and above the amount of rent. It was held by the Tribunal that the consideration did accrue to the assessee and it was being utilised for payment of tax arrears.

Against the order of the Tribunal, the Assessee filed an appeal before the High Court. The Bombay High Court allowed the appeal and held as follows:

“i) Section 5(1)(b) of the Income-tax Act, 1961 provides for scope of total income to include all income which ‘accrues’ or ‘arises’ or ‘is deemed to accrue or arise’ in India during such year. The words ‘accrue’ or ‘arise’ have different meanings attributed to them while the former connotes the idea of a growth or accumulation, the latter connotes the idea of crystallisation of the former into a definite sum that can be demanded as a matter of right. For determining the point of time of accrual, two factors are relevant. The first is a qualitative factor and the second is a quantitative factor. The qualitative factor is relatable to the terms of the agreement or the conduct of the parties for determining when the legal right to receive income emerges. The quantitative factor is relatable to the exact sum in respect of which the qualitative factor of legal right to receive is applied. These two factors have no order of priority between them. When both converge, there is a legal right to receive a certain sum of money as income. Such convergence determines a point of time of accrual. In order that the income may be said to have accrued at a particular point of time, it must have ripened into a debt at that time, that is to say, the assessee should have acquired a right to receive payment at that moment, though the receipt itself may take place later. There must be a debt owed to the assessee by somebody at that moment or, as is otherwise expressed, ‘debitum in praesentisolvendum in futuro’. Until it is created in favour of the assessee, the debt due by somebody, it cannot be said that he has acquired a right to receive any income accrued to him.

ii) There is also a difference between ‘accrue or arise’ or ‘earned’. Earning income is not the same as accrual of income but is a stage anterior to accrual of income. A person does not have a legal right to receive the income by merely earning income. Although, earning of income is a necessary prerequisite for accrual of income, mere earning of income without right to receive it does not suffice. A person may be said to have ‘earned’ his income in the sense that he has contributed to its production by rendering service and the parenthood of the income can be traced to him but in order that the income may be said to have ‘accrued’ to him an additional element is necessary that he must have created a debt in his favour.

iii) There is a distinction between cases where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received and cases where the right to receive payment is admitted and the quantification of the amount received is left to be payable in amount. The principle of law as laid down in various decisions is to the effect that if the matter is pending before the judicial forum or the amount is allowed to be withdrawn by the party, till the case is decided finally by the judicial forum, it cannot be said that the assessee has acquired a right to receive the income for the purposes of section 5 of the Act. The time of accrual for taxing income gets postponed till the dispute is adjudicated by the civil court.

iv) In the present case, it was not disputed that the cross suits filed by the assessee and the tenant against each other were pending before the Small Causes Court. It was also not disputed that the assessee had not accepted the rent from the tenant post termination of the sub-lease agreement in the year 1981. The Small Causes Court had permitted the tenant to deposit the lease rent in the court till the rights of the parties were decided and the order of deposit of the rent was without prejudice to the rights and contentions of the parties. In the light of these facts, whether the sub-lease agreement between the tenant and the assessee subsisted post 1981 termination by the assessee, was itself a subject matter of dispute between the assessee and the tenant which was pending adjudication. In the light of these facts, it could not be said that the assessee was entitled to receive a sum of ₹3,42,720 under the sub-lease agreement with the tenant or a right was vested in the assessee to that sum. The determination of the amount payable by the tenant to the assessee as prayed for by the assessee in its suit was to be determined by the Small Causes Court and when the Court passed a final decree one could not say that the right to receive the sum decreed by the Small Causes Court had accrued to the assessee. Till then, the right to receive any sum by the assessee was in jeopardy and sub judice before the Small Causes Court. Therefore, the Revenue was not justified in bringing to tax the sum of ₹3,42,720 as accrued income for the A. Y. 1986-87 and for the other years being A. Y. 1988-89 to 1991-92 and 1993-94.”

Applicability of Section 50c to Rights in Land

ISSUE FOR CONSIDERATION

Section 50C of the Income Tax Act, 1961 provides for substitution of the actual consideration by the stamp duty valuation on the transfer of a capital asset, being land or building, if the consideration is less than the stamp duty valuation, for purposes of computing capital gain under section 48. In other words, the full value of consideration, in such cases, shall be deemed to be the value adopted for the purpose of levy of stamp duty. Section 50C reads as follows:

“Where the consideration accruing as a result of transfer of the capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereinafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer.”

The issue has arisen before the Courts as to whether this deeming fiction of s. 50C applies to a case of transfer of leasehold or other rights in land or building, which are not ownership rights and are not land and building simpliciter. While the Rajasthan High Court has held that the provisions of section 50C do apply to such leasehold and other rights, the Karnataka and Bombay High Courts have held that the provisions of section 50C do not apply in such cases.

RAM JI LAL MEENA’S CASE

The issue had come up before the Rajasthan High Court in the case of Sh. Ram Ji Lal Meena s/o Sh. Bachu Ram Meena vs. ITO 423 ITR 439 (Raj).

In this case, the land was sold by the assessee under a registered sale deed for a consideration of ₹11,70,000. The Registering Authority adopted the value of the property at ₹53,11,367 for stamp duty purposes. The assessee or the transferee did not file any appeal against such valuation by the stamp authorities before the appellate authorities appointed under the stamp duty law. The land in question had been allotted by a cooperative society to the assessee’s predecessor, from whom the assessee had purchased the land. The land was acquired by the Government for the public purpose for RIICO after its purchase / allotment by / to the co-operative society. A writ petition for validating the purchase / allotment of land was filed by the co-operative society, which was allowed by the Rajasthan High Court. At the time of validation of the sale to the society, an appeal by RIICO against the Rajasthan High Court’s order was pending before the Supreme Court. Subsequent to the sale by the assessee, the Supreme Court reversed the High Court’s order on an appeal by RIICO, and upheld the acquisition by the Government for RIICO.

The assessee did not file any tax return either u/s 139(1) or in response to a notice received for reassessment u/s 148. During reassessment proceedings, he merely filed a computation of total income, disclosing a capital loss of ₹1,22,303. In reassessment proceedings, the assessee objected to the stamp duty valuation. The Assessing Officer referred the matter to the Departmental Valuation Officer, who returned the reference stating that statutory references normally required 120 days, and it was not possible to take up the case, as it was getting time barred by 31st March 2016.

The assessee contended that section 50C was not applicable as the land was under dispute, and the assessee had only sold out / transferred the rights to the land under dispute. The Assessing Officer did not accept the assessee’s contention and made an addition of ₹41,80,805 to the capital gains by applying the provisions of section 50C.

The Commissioner (Appeals) dismissed the appeal of the assessee.

The Tribunal, on appeal by the assessee, held that there was a transfer of a plot of land, by the assessee, and not just rights in land as claimed by the assessee, because the Rajasthan High Court’s order, which had held that the co-operative society was entitled to the land, was in force at the point of sale of the land by the assessee and as such the assessee sold the land in his capacity as the owner of the land. The Tribunal however restored the matter to the file of the Assessing Officer to decide the matter afresh after obtaining a valuation report from the Departmental Valuation Officer.

The assessee filed an appeal to the High Court against the order of the Tribunal. Before the Rajasthan High Court, it was argued on behalf of the assessee that this was not a case of transfer of land, but the transfer of rights therein, since the land was under acquisition by the Government for RIICO. Due to upholding the order of acquisition by the Supreme Court, it was claimed that the land vested in the State Government, and the possession remained with RIICO and not with the assessee. It was therefore urged that it was wrongly taken as a transfer of land when what was transferred by the assessee was only rights in land. Therefore, it was submitted that section 50C was not applicable.

It was also submitted that as per the revenue records the rights in land were khatedari rights, the ownership of the land vested with the Government and not the assessee, and the assessee had leasehold and not freehold rights over land, and as such section 50C could not have been invoked. Reliance was placed on various decisions of the Tribunal and the decision of the Bombay High Court in the case of Greenfield Hotels & Estates Pvt Ltd 389 ITR 68, to support the contention that section 50C would not be applicable when there was a transfer of leasehold land. It was contended that the assessee had rights similar to that possessed by a leaseholder, and therefore section 50C would not apply.

The High Court observed that a sale deed was executed for the sale of land, and the assessee had received consideration. The sale deed was registered by the Sub-Registrar. A transfer of a capital asset existed and for a valuable consideration received by the assessee. There was a dispute regarding possession of the property, which possession according to the assessee was with RIICO, but according to the revenue, the possession was with the assessee. The High Court noted that the material on record did not show any possession with RIICO, as only a notification for the acquisition of land had been issued, and there was no award passed for the acquisition by the Government for RIICO. It was the notification, the court noted, that was in dispute before the Supreme Court and not the possession of the land.

The High Court held that no question of law was involved in the case, as the dispute had been raised on facts, and the Commissioner (Appeals) and the Tribunal had held that section 50C would apply in the circumstances. According to the High Court, the appeal preferred by the assessee against the order passed by the Tribunal could not be admitted.

The Rajasthan High Court rejected reliance placed on behalf of the assessee on the decision of the Ahmedabad Tribunal in the case of Smt Devindraben I Barot vs. ITO 159 ITD 162 (Ahd), on the ground that in that case there was a relinquishment without there being a relinquishment deed and that the tribunal had decided the case without examining what was the difference between sale of the land and relinquishment of right therein. The Rajasthan High Court also rejected the reliance placed by the assessee on the Jaipur Tribunal decision in the case of ITO vs. Tara Chand Jain 155 ITD 956 (Jp), on the ground that the finding in that case that the assessee had transferred only the right in the land for valuable consideration and thereby did not transfer the capital asset, was recorded without proper scrutiny of facts and without elaborate finding on the issue. The tribunal in that case had not examined how the land and building or both were disclosed by the assessee in the balance sheet had not been taken note of, nor had it been shown how it was not a transfer of capital asset.

Referring to the decision of the Bombay High Court in the case of Greenfield Hotels & Estates Pvt Ltd (supra), the Rajasthan High Court observed that a bare perusal of section 50C did not show that transfer of a capital asset for consideration should be other than that of leasehold property or khatedari land, and that the Court could not rewrite the provision. According to the Rajasthan High Court, if the analogy taken by the Bombay High Court was applied in general, then section 50C would not be applicable in the majority of the cases as it was not allowed for leasehold property. The Rajasthan High Court further observed that the Bombay High Court had not referred to how the land was reflected in the balance sheet, whether as a capital asset or not. It therefore expressed its inability to apply the ratio of the judgment of the Bombay High Court to the case before it.

The Rajasthan High Court dismissed the appeal, holding that it did not find any question of law involved in the case before it.

V S CHANDRASHEKHAR’S CASE

The issue had also come up before the Karnataka High Court in the case of V S Chandrashekhar vs. ACIT 432 ITR 330.

In this case, the assessee had entered into an unregistered agreement for the purchase of land from Namaste Exports Ltd for a consideration of ₹4.25 crore. Under the agreement, the assessee was neither handed over the possession of the land nor was power of attorney executed in his favour. Namaste Exports Ltd. subsequently sold the land to another person, to which agreement the assessee was a consenting party.

The assessing officer of the assessee made an addition under section 50C, in his hands, in respect of the capital gains offered by the assessee for the transaction of consenting to the transfer by Namaste Exports Ltd. of the land. The appeals by the assessee to the Commissioner (Appeals) and the Tribunal confirmed the order of the assessing officer.

Before the Karnataka High Court, on appeal by the assessee, it was claimed that the provisions of section 50C were not applicable to the case of the assessee, since he was merely a consenting party in the transaction of transfer of land by a third party. It was urged that section 50C, being a deeming provision, required strict interpretation, and applied to the transfer of the land, by Namaste Exports Ltd. In its hands, and not to the assessee, who was a consenting party and not the transferor / co-owner of the property. It was further argued that since the assessee was only a consenting party, he had no locus standi in the transaction of transfer of land. It was further pointed out that section 50C used the expression ‘capital asset’ as being ‘land, building or both’, and the expression ‘being’ was more like ‘namely’, and therefore section 50C did not deal with interest in land but only dealt with land.

It was also urged on behalf of the assessee that where the language of the statute was clear and unambiguous, there was no room for the application of either the doctrine of ‘causes omissus’ and external aids for interpretation of the provision of s.50C could also not be taken recourse to. It was submitted that the assessee could not be taxed without clear words for the purpose and that every Act of Parliament must be read according to the natural construction of words.

Various alternative arguments were made on behalf of the assessee, including that the land was stock-in-trade and that section 50C did not therefore apply.

On behalf of the Revenue, besides rebutting the arguments that the land was stock-in-trade, it was contended that section 50C mandated the adoption of consideration on the basis of guidance value prescribed by the State Government for the purposes of stamp duty, as the consideration reflected by the assessee was much less than the guidance value provided by the Government of Karnataka. Therefore, the assessing officer had rightly adopted the stamp duty valuation in terms of section 50C.

It was also argued on behalf of the revenue that since the assessee had entered into a purchase agreement and had paid substantial consideration to the extent of 80%, rights had accrued in his favour, which had been extinguished by the sale deed, which would amount to transfer under section 2(47). Reliance was placed on the decision of the Supreme Court in the case of Sanjeev Lal vs. CIT 365 ITR 389 for this proposition that consideration had rightly been subjected to capital gains.

The Karnataka High Court examined the provisions of section 2(47) and section 50C. It noted that explanation 1 to section 2(47) used the term “immovable property”, whereas section 50C used the term “land or building or both” instead of “immovable property”. The Karnataka High Court was of the view that it was pertinent that wherever the legislature intended to expand the meaning of land to include rights or interest in land, it had said so specifically; viz., sections 35(1)(a), 54G(1), 54GA(1), 269UA(d) and Explanation to section 155(5A). According to the Court, section 50C therefore applied only in the case of a transferor of land, which in the case before the court, was Namaste Exports Ltd., and not the assessee, who was only a consenting party and not the transferor or co-owner of land.

According to the Karnataka High Court, the assessee had certain rights under the agreement, but from the clear, plain and unambiguous language used in section 50C, it was evident that it did not apply to a case of rights in land. According to the Karnataka High Court, it was a well-settled rule that in interpreting the taxing statutes no charge should be applied where the words used in the law by the legislature are clear and not ambiguous and the words used in the statute should be given natural meaning when they were clear and unambiguous, and the extended meaning should not be read into such words in the name of legislative intent and for any other reason.

For these reasons, the Karnataka High Court was of the view that the provisions of section 50C were not applicable to the case of the assessee.

OBSERVATIONS

The issue under consideration though moves in a narrow compass has a wider application. Other provisions of the Act namely, s.2(42A), s. 43CA and 56(2)(x) apply in the same context of bringing to tax the difference between the agreement value and the stamp duty value in respect of the transfer of land or building or both or for determination of the period of holding a capital asset. Besides these direct provisions, the Act is replete with provisions that use the term ‘immovable property’ in preference to the term ‘land or building or both’. They are found in s.27, 35(1)(a), 54G(1), 54GA(1), 269UA(d) and Explanation to section 155(5A) of the Act. The Transfer of Property Act and the General Clauses Act also deal with immovable property instead of land or building. All of these make one thing clear that the term immovable property is wider in its scope and embraces in its sweep the terms land and building, though the converse of the same is not true.

Various benches of the tribunal and some high courts have held that the profits and gains on transfer of rights in the land or building are not exigible to the deeming provisions being discussed herein. This is based on the application of the understanding that the terms ‘land or building’ have narrower meaning than the term ‘immovable property’ which is wider to include in its scope the rights and interest in the land or building, besides the land or building. These decisions hold that tenancy rights, leasehold rights, and rights in buildings under construction and development rights are not the same as the ‘land’ or ‘building’.

It’s useful to refer to the meaning of the term ‘immovable property’ provided under s.269UA of the Income Tax Act s.3 of the Transfer of Property Act (“TOPA”) and s.3 of the General Clauses Act (“GCA”). Immovable property, under TOPA and GCA, is defined to mean “Immovable property does not include standing timber, growing crops and grass”,. and “Immovable property shall include land benefits to arise out of the land, and things attached to the earth ”, respectively. S. 269UA of the Income-tax Act defined the term as under;

“immovable property” means-

(i) any land or any building or part of a building, and includes, where any land or any building or part of a building is to be transferred together with any machinery, plant, furniture, fittings or other things, such machinery, plant, furniture, fittings or other things also.

Explanation. – For the purposes of this sub-clause, “land, building, part of a building, machinery, plant, furniture, fittings and other things” include any rights therein;

(ii) any rights in or with respect to any land or any building or a part of a building (whether or not including any machinery, plant, furniture, fittings or other things, therein) which has been constructed or which is to be constructed, accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement of whatever nature), not being a transaction by way of sale, exchange or lease of such land, building or part of a building;

A bare reading of the definitions leaves no doubt that the term ‘immovable property’ as defined, is wider in its scope and includes the terms land or building while the latter terms are not defined and would be assigned their natural meaning, and not the wider meaning to include the rights in the land and building.

Importantly, the legislature in framing the different provisions of the Income Tax Act has a clear perception and understanding of the difference between these terms which is made clear by the use of different terms at different places with different objectives. Had the intention been to cover the cases of the rights in land too in the ambit of the provisions being examined namely, s.43CA, 50 C and 56(2), the legislature would have used the term’ immovable property’ in place and stead of the terms ‘land’ or ‘building’. S.27, 35(1)(a), 54G(1), 54GA(1), 269UA(d) and Explanation to section 155(5A) of the Act use the term ‘immovable property’ whose meaning would be supplied reference to the enactments which define this term while the meaning of the terms ‘land’ or ’building’ used in the Act should be gathered by the natural meaning of these terms.

This issue had first come up before the Bombay High Court in the case of CIT vs. Greenfield Hotels & Estates (P) Ltd 389 ITR 68. In that case, the Bombay High Court noted that the tribunal had followed its decision in Atul G Puranik vs. ITO 132 ITD 499, which had held that section 50C is not applicable while computing capital gains on the transfer of leasehold rights in land and buildings. In that case, the counsel for the revenue stated that the revenue had not preferred any appeal against the decision of the tribunal in the case of Atul G Puranik (supra). The Bombay High Court therefore stated that it could be inferred that the tribunal decision in Atul Puranik’s case had been accepted by the Government. The High Court referred to its own decision in the case of DIT vs. Credit Agricole Indosuez 377 ITR 102 and the decision of the Supreme Court in the case of UOI vs. Satish P Shah 249 ITR 221, for the salutary principle that where the revenue had accepted the decision of the court / tribunal on an issue of law and not challenged it in appeal, then a subsequent decision following the earlier decision cannot be challenged. Therefore, the Bombay High Court had taken the view that no substantial question of law arose in that case.

An identical view had been taken by the Bombay High Court on the same reasoning earlier in CIT vs. Heatex Products Pvt Ltd 2016 (7) TMI 1393 – Bombay High Court. However, in a subsequent matter in the case of Pr CIT vs. Kancast Pvt Ltd 2018 (5) TMI 713Bombay High Court, the Bombay High Court took note of its decisions in Greenfield Hotels & Estates (P) Ltd (supra) and Heatex Products Pvt Ltd (supra) and observed that these were decided on the basis that no appeal had been filed against the Tribunal’s decision in the case of Atul G Puranik (supra). The High Court observed that in the case before it, reliance had been placed on the Tribunal decisions in the case of Atul G Puranik (supra) and ITO vs. Pradeep Steel Re-Rolling Mills Pvt Ltd 2011(7) TMI 1101 – ITAT Mumbai (supra). The counsel for the Revenue pointed out that the Revenue had preferred an appeal against the Tribunal’s order in Pradeep Steel Re-Rolling Mills Pvt Ltd (supra), which was admitted. It was however later withdrawn in view of the low tax effect.

The Bombay High Court noted that when both appeals in Greenfield Hotels & Estates Pvt Ltd (supra) and Heatex Products Pvt Ltd (supra) were not entertained by it, the decision of the Court in Pradeep Steel Re-Rolling Mills Pvt Ltd (supra) admitting the appeal on the same question had not been brought to its notice. It therefore admitted the appeal on the substantial question of law in Kancast Pvt Ltd’s (supra) case. Therefore, the issue is still pending for decision before the Bombay High Court.

However, in a decision of the Bombay High Court in the case of Pr CIT vs. MIG Co-op. Hsg. Soc. Group II Ltd 298 Taxman 284 (Bom), in the context of a redevelopment agreement entered into by a co-operative housing society, the Bombay High Court noted with approval the following observations of the Tribunal in the case before it:

“We also hold that Society was only the lessee  and what was transferred to the developer is development rights, not land or building. Section 50C of the Act stipulates as under:

“Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both.….…”

No authority is required to hold that terms’ land or building’ ‘or both’ do not include development rights and that in the case before (them) there was the transfer of such rights only.”

Looking at the number of judicial decisions, including various decisions of the Tribunal, it appears that the majority of the Courts and the Tribunals seem to favour the proposition that given the express language of section 50C, referring to “capital asset, being land or building or both” and not using the broader term “immovable property”, the intention clearly seems to be that only land building per se was intended to be covered, and not all types of immovable property.

The facts in both cases are highly peculiar. In the case before the Rajasthan High Court, the subsequent order of the Supreme Court has made the entire transaction of the transfer by the assessee non-est and not enforceable in law, and the assessee would have been better off by contending that no capital gains could be said to have arisen out of a non-est transaction by relying on the settled position in law including by the decisions of the Supreme Court in the case of Balbir Singh Maini,86 taxmann.com 94 and Ranjit Kaur, 89 taxmann.com 9. In the facts of the assessee before the Karnataka High court the assessee had never acquired any land or building, nor had he acquired even the rights in the land, nor had he possessed the land, neither had he transferred the land, nor was he capable of doing so; he was just a consenting or confirming party and was included for the reason of he having made the part payment to the extent of 80% of the consideration agreed. In such facts, it was not possible for the court to have come to any other conclusion other than the one delivered by it.

Therefore, the better view is that rights in immovable property which are inferior to ownership rights, such as leasehold rights or the right to acquire immovable property, would not be covered by section 50C.

Glimpses of Supreme Court Rulings

6 Special Leave Petition — Dismissed on grounds of efflux of time — Question of Law kept open

PCIT vs. Atlanta Capital Pvt. Ltd.

(2024) 464 ITR 346 (SC)

A notice dated 27th March, 2008 u/s. 148 of the Act for the assessment year 2001–02 was issued to the assessee at an old address, though the Assessing Officer had served letters dated 8th August, 2007 and intimation u/s. 14(1) dated 25th January, 2008 for the assessment year 2006–07 at the new address. The Tribunal quashed the reassessment proceedings holding that there was no proper service of notice. The Delhi High Court dismissed the appeal holding that there was no substantial question of law. According to the High Court, the mere fact that an assessee participated in the reassessment proceedings despite not having been issued or served with the notice u/s. 148 of the Act in accordance with law will not constitute a waiver of the jurisdictional requirement of the issuance and the service of notice.

The Supreme Court observed that the said notice as followed by the order passed by the Assessing Officer/Commissioner was set aside by the Income-Tax Appellate Tribunal on 21st June, 2013. Subsequently the order of the Tribunal was upheld by the High Court on 15th September, 2015. The proceeding initiated in 2008 was concluded by the order of the High Court in 2015. Yet another decade had passed thereafter. Under the circumstances, while keeping the question of law open for consideration in another case, the Supreme Court decided not to interfere with the judgment of the High Court.

7 Business Expenditure—Expenditure cannot be disallowed merely because no income is earned SLP dismissed since it was accepted that the business had commenced
PCIT vs. Hike Pvt. Ltd (2024) 464 ITR 394 (SC)

The assessee filed its return of income for the assessment year 2014–15 declaring a loss of ₹42,24,57,146. The assessment order u/s. 143(3) was passed determining total income at ₹78,83,350. The Assessing Officer inter alia disallowed the expenses of ₹43,01,40,500 for the reason that the assessee had not earned any revenue from its business. The only income that it had earned was income from other sources, i.e., interest earned on fixed deposits.

On an appeal, the Commissioner of Income-tax (Appeal) inter alia confirmed the disallowance of expenses.

The Tribunal reversed the view taken by the Commissioner of Income-tax (Appeals) noting that for AY 2012–13, the Assessing Officer had accepted the stand of the assessee that the expenses incurred by it were on revenue account and the later order passed by the Commissioner u/.s 263 for AY 2012–13 was quashed by the Tribunal.

Before the High Court, the Revenue contended that the expenditure was incurred before the business was set up and therefore not allowable. The High Court noted that the objection of the Assessing Officer was that the said amount was spent in building a brand for future utilization, therefore, was not in the nature of revenue. The High Court noted that even in AY 2012–13 the expenses were disallowed because according to the Assessing Officer, the business was not set up and the software purchased was not put to use.

The High Court considering that the assessee was in the business of software development did not interfere with the order of the Tribunal.

On a special leave by the Revenue, the Supreme Court declined to interfere with the High Court judgment as it was accepted that the business had commenced.

Article 11 of India-Cyprus DTAA — Assessee is the beneficial owner of income if it has the right to receive and enjoy interest income without any obligation to pass on income to any other person.

7 [2024] 162 taxmann.com 766 (Delhi — Trib.)

Little Fairy Ltd vs. ACIT

ITA No: 1513/Del/2022

A.Y.: 2017–18

Dated: 15th May, 2024

Article 11 of India-Cyprus DTAA — Assessee is the beneficial owner of income if it has the right to receive and enjoy interest income without any obligation to pass on income to any other person.

FACTS

Assessee, a tax resident of Cyprus, invested in Compulsorily Convertible Debentures (CCDs) of an Indian Company (ICO). In terms of India-Cyprus DTAA, the assessee offered a gross amount of interest on CCDs to tax @10 per cent. AO held that the assessee was not the beneficial owner of income as (a) the Assessee had not performed any activity in Cyprus; (b) there were other companies having the same registered address; and (c) the Assessee was merely a conduit for channelizing the funds invested in CCDs. Accordingly, AO charged tax @40 per cent on the interest income of the assessee.

On appeal, CIT(A) confirmed the order of AO. Being aggrieved, the assessee appealed to ITAT.

HELD

ITAT held that the assessee is the beneficial owner of income on account of the following facts:

  •  The Assessee had taken the following decisions in its Board meeting held in Cyprus:

               (a) Decision to invest in ICO. (b) Declaration of dividend to its sole shareholder.

  •  The parent company by itself does not become the beneficial owner of income because it does not get any right over the assets of the assessee.
  •  The Assessee made an investment in CCD’s of ICO in its own name through proper banking channels. Unlike in the case of manufacturing and trading businesses where a person is required to undertake business activity, after making an investment, no activity is required since the investment may fetch either interest or capital gains to the assessee without doing anything.
  •  The Assessee being an investment company, does not require any personnel other than directors on its payroll to carry out day-to-day operations. The Directors of the assessee company were qualified and competent to run the company and make its business investment decisions. Furthermore, the assessee had availed services of a professional administrator for general administration, such as book-keeping, company secretarial services, etc., and there was no need to have any employee on its own payroll.
  •  The Assessee received interest in its bank account. Assessee had the right to receive interest income. There was no compulsion or contractual obligation to simultaneously pass on the same to another entity. The assessee had also borne foreign currency risk as well as counter-party risk.

S. 115JB, 147–Reopening under section 147 is not maintainable where MAT liability would not get disturbed on correct application of law and tax on such book profits exceeded the total income determined as per the normal provisions of the Act.

26 (2024) 162 taxmann.com 730 (DelhiTrib)

Genus Power Infrastructure Ltd. vs. ACIT

ITA Nos.: 2573 & 2680(Del) of 2023

A.Y.: 2010–11

Dated: 10th May, 2024

S. 115JB, 147–Reopening under section 147 is not maintainable where MAT liability would not get disturbed on correct application of law and tax on such book profits exceeded the total income determined as per the normal provisions of the Act.

FACTS

For AY 2010–11, the assessee filed its return of income on 23rd September, 2010 declaring total income at Nil. The case was subjected to regular assessment vide order under section 143(3) dated 28th March, 2013 and income was assessed at ₹8,71,08,200 and book profit under section 115JB at ₹31,04,38,156.

Thereafter, notice under Section 148 was issued by the AO on 31st March, 2017, that is, after a period of four years from the end of the assessment year where the original assessment was earlier completed under Section 143(3). The reasons recorded by AO showed that an adjustment at ₹4,28,41,017 was proposed to the book profit on the ground that provision on the repair of partly damaged assets had been wrongly allowed and was not eligible for deduction while computing book profits. The reasons recorded also made allegations towards escapement of income on varied grounds [namely, prior period expenses, deduction under s. 80IC, calculation mistakes etc.] while reassessing the taxable income under the normal provisions of the Act. The book profit was thus reassessed at ₹35.31 crores [as opposed to ₹31.04 crores in original assessment] whereas the taxable income under the normal provisions was assessed at ₹13.67 crores [as opposed to ₹8.71 crores in original assessment].

Cross appeals were filed by the Revenue and assessee against the order of CIT(A).

A jurisdictional controversy had been raised before the Tribunal as to whether re-opening under section 147/148 is maintainable where MAT liability as per book profits computed under section 115JB would not get disturbed on the correct application of the law, and tax on such book profits also exceeded the total income determined as per normal provisions.

HELD

The Tribunal observed as follows:

Escapement alleged qua book profits did not meet the conditions embodied in the first proviso to section 147 having regard to full and true disclosure of the relevant/material facts attributable to provisions for repairs in the ROI by making disallowances under normal provisions and suitable declarations in the audited financial statement;

One cannot say that when the adjustment on account of such provision for repairs has been made by the assessee while determining the income as per normal provisions of the Act, there was a failure on the part of the assessee to disclose facts in not making such corresponding adjustments while determining the book profit. The disclosures were also made in the financial statement. The condition of the first proviso was thus clearly not satisfied in the instant case. Hence, the escapement qua book profits were not sustainable in law.

In the absence of escapement qua book profits, the escapement alleged under normal provisions was of no consequence since despite the purported escapement qua normal provision which may lead to enhancement of taxable income under the normal provision, the tax liability thereon would still be lower than the book profits assessable in law;

The claim of the assessee that the tax liability on book profit was higher than the income assessable under normal provisions including escapement alleged qua normal provisions, had not been disputed by the revenue.

Accordingly, following the decisions of the Gujarat High Court in India Gelatine and Chemical Ltd. vs. ACIT, (2014) 364 ITR 649 (Guj) and Motto Tiles P. Ltd. vs. ACIT, (2016) 286 ITR 280 (Guj), the Tribunal quashed the reassessment notice and declared the reassessment order null and void.

S. 12A–Where the assessee-trust selected an incorrect clause in an application for section 12A / 80G, since the mistake was not fatal, CIT was directed to treat the application under the appropriate clause and consider the case on merits.

25 Shree Swaminarayan Gadi Trust vs. CIT

(2024) 162 taxmann.com 772 (SuratTrib)

ITA Nos.: 369 & 370(Srt) of 2024

A.Y.: N.A

Dated: 13th May, 2024

S. 12A–Where the assessee-trust selected an incorrect clause in an application for section 12A / 80G, since the mistake was not fatal, CIT was directed to treat the application under the appropriate clause and consider the case on merits.

FACTS

The assessee-trust applied for registration under section 12A and section 80Gin Form 10AB. Instead of selecting section 12A(1)(ac)(iii) in the Form, the assessee incorrectly selected section 12A(1)(ac)(iv). A similar mistake was also made in the Form relating to section 80G. In the proceedings before CIT(E), the assessee requested the CIT to consider the application under the appropriate sub-clause.

CIT(E) held that he has no power to change / amend / rectify Form 10AB and therefore, rejected the applications.

Aggrieved, the assessee filed appeals before ITAT.

HELD

The Tribunal observed as follows—

a) the mistake in filing entry was not fatal and could be considered under the appropriate sub-clause or clause of section 12A(1).

b) Being the first appellate authority, the plea of the assessee for correction in Form-10AB should be accepted and the order of CIT(E) be set-aside.

The Tribunal directed CIT(E) to treat the application of the assessee under Section 12A(1)(ac)(iii) in place of Section 12A(1)(ac)(iv) and to consider the case on merit and pass the order in accordance with the law. Similar directions were also given for application for approval under section 80G(5).

I. The area of Balconies open to the sky is not to be considered as part of the built-up area of a particular residential unit. Claim for deduction under section 80IB(10) cannot be denied in respect of those residential units whose built-up area exceeds 1,000 sq. feet only when the area of open balcony is added to the built-up area of the residential unit. II. The project completion method is the right method for determining the profits. The Project Completion Method should not have been disturbed by the AO as it was being regularly followed by the assessee in earlier years also and there is no cogent reason to change the method.

24 Shipra Estate Ltd. & Jai Krishan Estate Developers Pvt. Ltd. vs. ACIT

ITA No. 3569/Del./2016

Assessment Year: 2012–13

Date of Order: 24th April, 2024

Section: 80IB(10)

I. The area of Balconies open to the sky is not to be considered as part of the built-up area of a particular residential unit. Claim for deduction under section 80IB(10) cannot be denied in respect of those residential units whose built-up area exceeds 1,000 sq. feet only when the area of open balcony is added to the built-up area of the residential unit.

II. The project completion method is the right method for determining the profits. The Project Completion Method should not have been disturbed by the AO as it was being regularly followed by the assessee in earlier years also and there is no cogent reason to change the method.

FACTS I

The assessee aggrieved by the order of CIT(A) denying a claim for deduction under section 80IB(10) in respect of those residential units whose built-up area exceeds 1,000 sq. feet only when the area of open balcony is added to the built-up area of the residential unit preferred an appeal to the Tribunal.

HELD I

The Tribunal upon perusal of the orders of the authorities below and the decision of the Tribunal in the assessee’s own case for AYs 2008–09 to 2011–12 observed that the Tribunal for AYs 2008–09 and 2009–10 in the common order dated 30th May, 2016 in ITA Nos. 1950/Del/2012 & 5849/Del/2012 allowed the claim for deduction under section 80IB(10) of the Act in respect of flats excluding the balcony open to the sky for the purpose of calculating the built-up area of the individual units. Following the earlier orders, the Tribunal allowed the claim for deduction u/s 80IB(10) in respect of those flats whose area exceeded 1,000 sq. feet only as a result of including a balcony open to the sky. The AO was directed to verify the claim of the assessee after obtaining the details and allow the deduction after providing adequate opportunity of being heard by the assessee.

FACTS II

Aggrieved by the order of the CIT(A) directing the AO to accept the project completion method followed by the assessee, revenue preferred an appeal to the Tribunal.

It was submitted that this issue came up for adjudication in assessee’s case for AY 2008–09 to 2011–12. It was also mentioned that the Tribunal for AY 2008–09 and 2009–10 has upheld the order of the CIT(A) in accepting the project completion method adopted by the assessee.

HELD II

The Tribunal observed that the Tribunal has decided the issue in appeal in favour of the assessee by sustaining the order of CIT(A) in holding that the project completion method adopted by the assessee is the right method for determining the profits. The CIT(A) had held that the AO should not have disturbed the project completion method followed by the assessee regularly and there is no cogent reason to change the method. Both these findings of the CIT(A) were upheld by the Tribunal for AYs 2008–09 and 2009–10. The appeal of the revenue has been dismissed by the High Court in ITA No. 766/2016 and 178/2017 dated 16th May, 2017 holding that there is no substantial question of law. The tribunal also observed that the Court held that the question “whether the addition made by the AO to the income of the Respondent for the relevant year based on percentage completion method was not correct as held by the ITAT’ stands answered in favour of the assessee and against the revenue by order dated 16th November, 2016 in ITA No. 802/2016 in PCIT vs. Shipra Estate Ltd. & Jai Krishan Estate Developers Pvt. Ltd. Following this decision of the High Court, Tribunal rejected the ground of the revenue.

For a claim of deduction under section 54 the date of possession and not the date of agreement should be considered to be the date of purchase.

23 Sunil Amritlal Shah vs. ITO

ITA No. 4069/Mum./2023

Assessment Year: 2011-12

Date of Order: 13th May, 2024

Section: 54

For a claim of deduction under section 54 the date of possession and not the date of agreement should be considered to be the date of purchase.

FACTS

The assessee, an individual, preferred an appeal against the assessment order dated 3rd October, 2023 passed under section 144C(13) read with section 147 read with section 254 of the Act determining total income of ₹35,97,395 and denying a claim of deduction of ₹34,25,243 made under section 54 of the Act.

During the year under consideration, the assessee had long-term capital gain on the sale of a residential house on 10th February, 2011. The entire long-term capital gain was claimed to be exempt under section 54 on the ground that the assessee purchased a residential house at Ghatkopar. For this new house, the assessee entered into an agreement for sale with builder Runwal Capital Land India Private Limited on 25th July, 2009 for a consideration of ₹73,06,530. The possession of the new house was granted to the assessee on 2nd February, 2011 after receipt of the occupancy certificate and when the building was habitable. Assessee considered the date of possession i.e., 2nd February, 2011 to be the date of acquisition of the property. The AO denied the claim by holding the date of acquisition of the property to be 25th July, 2009.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD

On behalf of the assessee reliance was placed on the decision of Bombay High Court in CIT vs. R K Jain [ITA No. 260 of 1993 (1994) 75 Taxman 145] wherein the Court has held that the date of possession of new residential premises is considered for exemption under section 54F instead of the date of sale agreement. It was submitted that there is no difference in the eligibility for deduction under section 54F and section 54 of the Act. It was also submitted that following this decision of the jurisdictional High Court, the co-ordinate bench in the case of Sanjay Vasant Jumde vs. ITO [148 taxmann.com 34] has so held. Reliance was also placed on several other decisions.

HELD

The Tribunal observed that —

(i) by agreement dated 25th July, 2009, the assessee acquired a `right to purchase a house’ which was under construction. On 2nd February, 2011 when the house was handed over to the assessee, when it was inhabitable (sic habitable) the assessee purchased the house;

(ii) in PCIT & Others vs. Akshay Sobit & Others [(2020) 423 ITR 321 (Delhi)], the Delhi High Court held that the provision in question is a beneficial provision for assessees who replace the original long-term capital asset with a new one. It was further held that booking of the bare shell of a flat is a construction of house property and not purchase. Therefore, the date of completion of construction is to be looked into which is as per provision of section 54 of the Act. In the present case as well, the assessee has booked the flat under construction which was handed over to the assessee upon completion of construction;

(iii) the Bombay High Court in the case of Beena K Jain [217 ITR 363 (Bom.)], in connection with section 54F which is parimateria, affirmed the action of the Tribunal and held that the date of the agreement is not the date of purchase but the date of payment of full consideration amount on flat becoming ready for occupation and having obtained possession of the flat is the date of purchase. The action of the Tribunal in looking at the substance of the transaction and coming to the conclusion that the purchase was substantially effected when the agreement of purchase was carried out or completed by full payment of consideration and handing over of possession of the flat on the next day was upheld by the court;

(iv) the co-ordinate bench in Bastimal K Jain vs. ITO [(2016) 76 taxmann.com 368 (Mum.)] has also held that the assessee’s claim for deduction under section 54 was to be reckoned from the date of handing over of possession of the flat by the builder to the assessee.

The Tribunal held that the assessee is entitled to deduction under section 54 of the Act on the purchase of a new house considering the date of possession when it is completed as the date of purchase of property as agreement to purchase the property was for under-construction property. By entering into an agreement to purchase assessee acquired the right to purchase the property and did not purchase the property as the same was under construction. The section requires “purchase” of property.

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

An assessment order passed, in search cases, without obtaining approval of the Joint Commissioner under section 153D is void. Failure on the part of the department to produce a copy of the approval gives rise to a presumption that there was no approval at all. In the absence of the same, no conclusion can be drawn if the approval was in accordance with the law or not.

22 Emaar MGF Land Limited vs. ACIT

ITA Nos. 825 to 820/Del/2018 and 1378/Del/20123

Assessment Years: 2010–11 & 2015–16

Date of Order: 30th May, 2024

Section: 153D

An assessment order passed, in search cases, without obtaining approval of the Joint Commissioner under section 153D is void. Failure on the part of the department to produce a copy of the approval gives rise to a presumption that there was no approval at all. In the absence of the same, no conclusion can be drawn if the approval was in accordance with the law or not.

FACTS

The assessments of the assessee company for AY 2010–11 to 2015–16 were completed by the Assessing Officer (AO). Aggrieved by the assessments so made, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) who vide his order dated 30th November, 2017 decided some of the grounds in favour of the assessee and some of the grounds were decided against the assessee.

Aggrieved by the order passed by CIT(A), the assessee preferred an appeal to the Tribunal. In the course of appellate proceedings before the Tribunal, the assessee filed an application under Rule 11 of the Income-tax Appellate Tribunal Rules, 1963 for admission of additional grounds which inter alia had the following as an additional ground —

“5. That, on the facts and circumstances of the case and in law, the approval under section 153D of the Act is mechanical and without application of mind and thus the impugned assessment order is illegal, bad in law and liable to be quashed.”

It was only ground no. 5 out of the additional grounds filed which was pressed and since the same raised purely a question of law, the Tribunal admitted the same.

HELD

Upon the Revenue not being able to produce a copy of the approval granted by the Range Head under section 153D of the Act, it was contended that as there is no order available with the Department for the purpose of section 153D of the Act, presumption has to be drawn that no such order was passed and in the absence of such order the assessment concluded in the relevant assessment years under section 153A read with section 143(3) of the Act are void. For this proposition reliance was placed on the decision of the Delhi High Court in the case of Rajsheela Growth Fund (P.) Ltd. vs. ITO [ITA No. 124/202 and other judgment dated 8th May, 2024].

On behalf of the revenue, reliance was placed on concluding para 7 of the assessment order and it was submitted that there is a reference of letter No. Jt. CIT/C.R.-1/153D Appr./2016–17/1025 dated 26th December 2016, by which approval was given, so it is not correct to contend that there was no approval under section 153D of the Act.

The Tribunal held that it is now a settled proposition of law that prior approval of competent authority under section 153D of the Act is mandatory and the same is required to pass rigour of the law, to show that the approval was granted after due consideration of the assessment record and it was not a mechanical approval.

In spite of giving reasonable and sufficient opportunities to the department, AO failed to produce any copy or other evidence of the existence of the approval. That only gives rise to a presumption that there was no approval at all. In the absence of the same, no conclusion can be drawn if the approval was in accordance with law or not but to hold that the assessments in hand were concluded without the requisite approval under section 153D of the Act.

The Tribunal allowed additional ground no. 5 with a caveat that, in case the department is able to lay hand on any evidence showing existence and content of approval, application may be filed for re-calling this order and to contest this issue afresh on merits along with other issues raised in respective appeals.

The Tribunal allowed the appeals of the assessee.

The resulting company in case of demerger and the Transferee Company in the case of transfer are eligible to claim TDS credit, even if the TDS certificates are in the name of the demerged company / Transferor Company.

21 Culver Max Entertainment Pvt. Ltd. vs. ACIT

ITA Nos. 7685/Mum/2019 and 925/Mum/2021

Assessment Years: 2015–16 & 2016–17

Date of Order: 02nd May, 2024

Section: 199

The resulting company in case of demerger and the Transferee Company in the case of transfer are eligible to claim TDS credit, even if the TDS certificates are in the name of the demerged company / Transferor Company.

FACTS

MSM Satellite (Singapore) Pte Ltd. (MSN Singapore) a wholly owned subsidiary of the assessee purchased, in March 2005, a TV channel named “SAB TV” from a company named Shri Adhikari Brothers. Subsequently, during the financial year 2014–15 MSN Singapore demerged its broadcasting business and the same was taken over by the assessee herein. The demerger scheme was sanctioned by the Bombay High Court on 10th January, 2014 and it came into effect on 1st April, 2014.

Upon completion of the assessment u/s 143(3) r.w.s. 144C of the Act in pursuance of the directions given by the Dispute Resolution Panel, the assessee preferred an appeal to the Tribunal. One of the grounds of the appeal was with regards to the non-granting of TDS to the tune of ₹8,13,81,645.

On behalf of the assessee, it was submitted that the TDS credit was not given by the Assessing Officer (AO) for the reason that the TDS certificates were not in the name of the assessee, but it was in the name of amalgamated / demerged company. The contention was that the relevant income has already been assessed in the hands of the assessee and hence the TDS deducted from the said income should be allowed credit in the hands of the assessee.

HELD

The Tribunal noted that in the following cases, in identical circumstances, the AO has been directed to allow TDS credit —

(a) Popular Complex Advisory P. Ltd. vs. ITO [ITA No. 595/Kol./2023; order dated 22nd August, 2023];

(b) Adani Gas Ltd. vs. ACIT [ITA Nos. 2241 & 2516/Ahd./2011; order dated 18th January, 2016];

(c) Ultratech Cement Ltd. vs. DCIT [ITA No. 1412/Mum./2018 & Others; order dated 14th December, 2011]

The Tribunal observed that —

(i) In the above-mentioned cases, the co-ordinate benches have held that the resulting company in the case of demerger and transferee company in the case of transfer, are eligible to claim TDS credit, even if the TDS certificates are in the name of demerged company / transferor company;

(ii) The assessee has offered the relevant income, even though the TDS certificates were in the name of demerged company.

Following the above decisions, the Tribunal directed the AO to allow TDS credit to the assessee after verifying that the relevant income has been assessed by the AO this year.

Section – 148 — Reassessment — Assessment Year 2013–14 — Search — computation of the “relevant assessment year”.

9 Flowmore Limited vs. Dy. CIT Central Circle – 28

WP (C) No. 3738 OF 2024 & CM APPL. 15409/2024

Dated: 27th May, 2024. (Del) (HC)

Section – 148 — Reassessment — Assessment Year 2013–14 — Search — computation of the “relevant assessment year”.

Pursuant to a search and seizure operation conducted in respect of the Alankit Group on 18th October, 2019, the Petitioner was served a notice under Section 153C on 3rd March, 2022. On culmination of those proceedings, the Department proceeded to pass a final order of assessment on 23rd March, 2023, accepting the income which had been assessed originally under Section 143(3) of the Act. The Petitioner stated that insofar as the original Section 143(3) assessment was concerned, an appeal was taken to the Income Tax Appellate Tribunal which ultimately accorded relief to the petitioner with respect to disallowances made under Section 40(a)(ia) of the Act.

The subsequent notice under Section 148 of the Act dated 31st March, 2023 was concerned with a search which was conducted in the case of the Proform Group on 9th February, 2022.

The court noted that for the purposes of reopening, bearing in mind the proviso to Section 149(1), action could have been initiated only up to A.Y. 2014–15. Since the notice was issued on 31st March, 2023, it would be the amended regime of reassessment which came into effect from 1st April, 2021 which would be applicable. The action for reassessment would thus have to satisfy the provisions made in the First Proviso to Section 149(1) of the Act.

The Court observed that from a reading of that provision, any action for reassessment pertaining to an A.Y. prior to 1st April, 2021 can be sustained only if it be compliant with the timeframes specified under Section 149(1)(b), Section 153A or Section 153C as the case may be and on the anvil of those provisions as they existed prior to the commencement of Finance Act, 2021. Viewed in that light, it is manifest that the assessment for A.Y. 2013–14 could not have been reopened.

The Honourable Court referred and relied on the following decisions:

Filatex India Ltd. vs. Deputy Commissioner of Income Tax & Anr.[WP(C) 12148/2023]; Principal Commissioner of Income Tax-1 vs. Ojjus Medicare Pvt. Ltd[2024 SCC OnLine Del 2439]

Principal Commissioner of Income Tax-Central-1 vs. Ojjus Medicare Pvt. Ltd.[2024 SCC Online Del 2439]

The Court further observed that the computation of the “relevant assessment year” from the date of the impugned Section 148 notice dated 31st March, 2023 would be as follows:

Therefore, ex-facie evident that A.Y. 2013–14 falls beyond the 10-year block period as set out under Section 153C read with Section 153A of the Act. Consequently, the impugned notice was unsustainable.

The writ petition was allowed, and the notice dated 31st March, 2023 under Section 148 of the Act was quashed.

Section – 220(6) — Stay application — Rectification application —Adjustment of a disputed tax demand against refunds which were due during pendency of the above application.

8 National Association of Software and Services Companies vs. Dy. CIT (Exemption) Circle – 2(1)

WP (C) NO. 9310 of 2022

A.Y.: 2018–19

Dated: 1st March, 2024, (Delhi) (HC)

Section – 220(6) — Stay application — Rectification application —Adjustment of a disputed tax demand against refunds which were due during pendency of the above application.

The Petitioner filed its Return of Income for A.Y. 2018–19 on 29th September, 2018 claiming a refund of ₹6,45,65,160 on account of excess taxes deducted at source which was deducted during the course of the said year. In the course of processing of that ROI, notices under Sections 143(2) and 142(1) of the Act came to be issued on 22nd September, 2019 and 9th January, 2020, respectively. On 16th November, 2019, the petitioner received an intimation, referable to Section 143(1) of the Act, apprising it of an amount of ₹6,42,30,413 being refundable along with interest. However, when the assessment was ultimately framed and a formal order was passed under Section 143(3) read with Section 144B of the Act, various additions came to be made to the income disclosed in the ROI and leading to the creation of a demand of ₹10,26,85,633.

Aggrieved by the aforesaid, the petitioner preferred an appeal before the Commissioner of Income Tax (Appeals), which was pending. Simultaneously, petitioner also moved an application purporting to be under Section 154 of the Act for correction of rectifiable mistakes, which according to it were apparent on the face of the record. Along with the rectification application, the petitioner on 28th May, 2021 also filed a stay application in respect of the demand so raised. The rectification application however came to be perfunctorily rejected in terms of an order dated 7th June, 2021

During the pendency of the appeal before CIT(A), NFAC, and without attending to the stay application which had been moved, the department proceeded to adjust the demand that stood created by virtue of the assessment order dated 29th April, 2021 against various refunds which were payable to the petitioner for A.Y.s’ 2010–11, 2011–12 and 2020–21.

According to the Petitioner, the action so initiated and the adjustments effected are wholly arbitrary and illegal in as much as there existed no justification for the adjustments being made without its application referable to Section 220(6) being either considered or examined. According to petitioner, the very purpose of Section 220(6) has been nullified by the action of the department who have proceeded to make the impugned adjustments without even examining the application of the petitioner for not being treated as an “assessee in default”.

The Petitioner relied on the Central Board of Direct Taxes Office Memorandum No. 404/72/93-ITCC6 dated 31st July, 2017, to state that the department could have at best required the petitioner to deposit 20 per cent of the outstanding demand.

The department contented that the application for stay which was moved by the writ petitioner was not accompanied by any challan evidencing deposit of monies against the demand for A.Y. 2018–19 which was outstanding. Thus, and according to department, since a pre-condition as specified in the Office Memorandum dated 31st July, 2017 and OM dated 29th February, 2016 was not adhered to, the application of the assessee was rightly not considered.

The Honourable Court observed that the Revenue department have proceeded on a wholly incorrect and untenable premise that the assessee was obliged to tender or place evidence of having deposited 20 per cent of the disputed demand before its application for stay under section 220(6) of the Act could have been considered. The interpretation which was sought to be accorded to the aforesaid OM was misconceived.

The Honourable Court noted that the two OMs neither prescribe nor mandate 15 per cent or 20 per cent of the outstanding demand as the case may be, being deposited as a pre-condition for grant of stay. The OM dated 29th February, 2016, specifically spoke of a discretion vesting in the AO to grant stay subject to a deposit at a rate higher or lower than 15 per cent dependent upon the facts of a particular case. The subsequent OM merely amended the rate to be 20 per cent. In fact, while the subsequent OM chose to describe the 20 per cent deposit to be the “standard rate”, the same would clearly not sustain.

The Honourable Court referred and relied on the decision of Avantha Realty Ltd. vs. The Principal Commissioner of Income Tax Central Delhi 2 & Anr [2024] 161 taxmann.com 529 (Delhi) wherein it was observed that the administrative circular will not operate as a fetter on the Commissioner since it is a quasi-judicial authority, and it will be open to the authorities, on the facts of individual cases, to grant deposit orders of a lesser amount than 20 per cent, pending appeal.

The Honourable Court further relied on the order passed by the Supreme Court in Principal Commissioner of Income Tax & Ors. vs. LG Electronics India Private Limited [2018] 18 SCC 447 wherein it had been emphasised that the administrative circular would not operate as a fetter upon the power otherwise conferred on a quasi-judicial authority; and that it would be wholly incorrect to view the OM as mandating the deposit of 20 per cent, irrespective of the facts of an individual case. This would also flow from the clear and express language employed in sub-section (6) of Section 220 which speaks of the Assessing Officer being empowered “in his discretion and subject to such conditions as he may think fit to impose in the circumstances of the case”. The discretion thus vested in the hands of the AO is one which cannot possibly be viewed as being cabined by the terms of the OM.

The Honourable Court further referred the following decisions:

Dabur India Limited vs. Commissioner of Income Tax (TDS) & Anr. [2023] 291 Taxman 3 (Delhi); Indian National Congress vs. Deputy Commissioner of Income Tax Central – 19 & Ors.[2024] 463 ITR 182 (Delhi); Benara Valves Ltd. & Ors. vs. Commissioner of Central Excise & Anr [2007] 6 STT 13 (SC).

Thus, the Honourable Court held that while 20 per cent is not liable to be viewed as an entrenched or inflexible rule, there could be circumstances where the department may be justified in seeking a deposit in excess of the above dependent upon the facts and circumstances that may be obtained. This would have to necessarily be left to the sound exercise of discretion by the department based upon a consideration of issues such as prima facie, financial hardship and the likelihood of success.

The Court held that the department have clearly erred in proceeding on the assumption that the application for consideration of outstanding demands being placed in abeyance could not have even been entertained without a 20 per cent pre-deposit. The aforesaid stand as taken is thoroughly misconceived and wholly untenable in law.

Undisputedly, and on the date when the impugned adjustments came to be made, the application moved by the petitioner referable to Section 220(6)of the Act had neither been considered nor disposed of. This action of the department was wholly arbitrary and unfair. The intimation of adjustments being proposed would hardly be of any relevance or consequence once it is found that the application for stay remained pending and the said fact is not an issue of contestation.

The writ petition was allowed and the matter was remitted to the department for considering the application of the petitioner under Section 220(6) in accordance with the observations made hereinabove.

Search and seizure — Assessment in search cases — Special deduction — Return processed and no notice issued for enquiry — No incriminating material found during search — Special deduction cannot be disallowed on basis of statement recorded subsequent to search.

28 Principal CIT vs. Oxygen Business Park Pvt. Ltd.

[2024] 463 ITR 125 (Del)

A.Y. 2011–12

Date of order: 8th December, 2023

Ss. 80IAB, 132, 143(1), 143(2) and 153A of ITA 1961

Search and seizure — Assessment in search cases — Special deduction — Return processed and no notice issued for enquiry — No incriminating material found during search — Special deduction cannot be disallowed on basis of statement recorded subsequent to search.

For the A.Y. 2011–12, the assessee’s return of income wherein it claimed deduction of net profit u/s. 80-IAB of the Income-tax Act, 1961 was processed u/s. 143(1). Thereafter, on 29th October, 2013, search and seizure operation was conducted u/s. 132 at the premises of the assessee. In response to notice u/s. 153A, the assessee requested the Department to treat the original return of income as the return filed in response to notice u/s. 153A of the Act. The Assessing Officer disallowed the deduction claimed u/s. 80-IAB and also initiated penalty proceedings u/s. 271(1)(c).

The Commissioner (Appeals) accepted the contention of the assessee that since no incriminating material belonging to the assessee was found during the course of the search, initiation of proceedings u/s. 153A was bad in law, especially because the assessment proceedings stood closed u/s. 143(1) and partly allowed the assessee’s appeal. The Tribunal dismissed the Department’s appeal.

The following question was raised in the appeal by the Department:

“Whether the decision in the case of CIT vs.. Kabul Chawla applies to a case where a fresh material/information received after the date of search is sufficient to reopen the assessment under section 153A (see Dr. A. V. Sreekumar vs. CIT)?”

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

“i) The assessment for the A. Y. 2011-12 was finalized on 20th January, 2012 and no notice u/s. 143(2) having been issued, no assessment was pending on the date of search, i. e., 29th October, 2013. Also, during the search of the assessee no incriminating material was found and the material in the form of statement sought to be relied upon by the Department was recorded subsequent to the search action.

ii) In view of the aforesaid, we are unable to find any substantial question of law in this appeal for our consideration u/s. 260A of the Act. Therefore, the appeal is dismissed.”

Reassessment — Initial notice — Order for issue of notice — Notice — Investments by foreign companies in shares of their own Indian subsidiaries — Transactions are capital account transactions — No proof of transactions being consequence of round tripping — AO treating investments as escapement of income chargeable to tax — In contravention of CBDT circular — Investment in shares capital account transaction not income — Notices and orders set aside.

27 Angelantoni Test Technologies Srl vs. Asst. CIT

[2024] 463 ITR 139 (Del)

A.Y.: 2019–20

Date of order: 19th December, 2023

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

Reassessment — Initial notice — Order for issue of notice — Notice — Investments by foreign companies in shares of their own Indian subsidiaries — Transactions are capital account transactions — No proof of transactions being consequence of round tripping — AO treating investments as escapement of income chargeable to tax — In contravention of CBDT circular — Investment in shares capital account transaction not income — Notices and orders set aside.

Where the assessees, foreign companies, invested in shares of their own Indian subsidiaries, the Assessing Officer (AO) treated the investment as giving rise to income chargeable to tax which had escaped assessment. On writ petitions challenging the notices issued u/s. 148A(b) of the Income-tax Act, 1961, the orders passed by the AO u/s. 148A(d) of the Act, the consequential notices issued to the assessees u/s. 148 of the Act, the Delhi High Court allowed the writ petition and has held as under:

“i) It is settled law that investment in shares in an Indian subsidiary cannot be treated as ‘income’ as it is in the nature of a ‘capital account transaction’ not giving rise to any income.

ii) It was an admitted position that the transactions were capital account transactions. Though there was a doubt expressed that the transactions might be a consequence of round tripping, no evidence or proof of these said allegations had been stated or annexed with the orders and notices. Further, the action of the respondents was in contravention of the Central Board of Direct Taxes Instruction No. 2 of 2015, dated 29th January, 2015 [2015] 371 ITR (St.) 6, reiterating the view expressed by the Bombay High Court in Vodafone India Services Pvt. Ltd. vs. Union of India. In fact, the judgment of the Bombay High Court was accepted by the Union Cabinet and a press note dated January 28, 2015, was issued by the Press Information Bureau, Government of India. Consequently, the notices issued under section 148A(b) of the Act, orders passed under section 148A(d) of the Act and the notices issued under section 148 of the Act and all consequential actions taken thereto were set aside.

iii) It was clarified that if any material became subsequently available with the Revenue, it shall be open to it to take proceedings in accordance with law.”

Penalty — Concealment of income — Immunity from penalty — Effect of ss. 270A and 270AA — Application for immunity — Assessee must be given opportunity to be heard — Amount surrendered voluntarily by assessee — Assessee entitled to immunity from penalty.

26 Chambal Fertilizers and Chemicals Ltd. vs. Principal CIT

[2024] 462 ITR 4 (Raj)

A.Y. 2018–19

Date of order: 4th January, 2024

Ss. 270A and 270AA of ITA 1961

Penalty — Concealment of income — Immunity from penalty — Effect of ss. 270A and 270AA — Application for immunity — Assessee must be given opportunity to be heard — Amount surrendered voluntarily by assessee — Assessee entitled to immunity from penalty.

The petitioner had filed its original return of income u/s. 139(1) of the Income-tax Act 1961 on 30th November, 2018 for the A.Y. 2018–19 and revised return of income on 29th March, 2019 u/s. 139(5) of the Act. The case of the petitioner was selected for complete scrutiny and an exhaustive list of issues was communicated by a notice u/s. 164(2) of the Act on 22nd September, 2019. During the course of scrutiny, various notices u/s. 142(1) of the Act were issued and replies to the same were submitted by the petitioner. It is claimed that during the course of scrutiny proceedings, the petitioner realised that “provision for doubtful goods and services tax input tax credit” amounting to ₹16,30,91,496 had been inadvertently merged with another expense account and mistakenly claimed as expenses under the income-tax provisions. Accordingly, the said amount was suo motu surrendered by the petitioner by revising its return of income and adding back the amount “provision for doubtful goods and services tax input tax credit”, to the total income. The said aspect was communicated vide letter dated 24th February, 2021 along with submission of revised computation.

The assessment order u/s. 143(3) of the Act was passed by the National E-Assessment Centre (“NeAC”), making only addition of suo motu surrendered amount of ₹16,30,91,496; however, it was observed in the order that the penalty u/s. 270A of the Act is imposed for misreporting of the income. The petitioner filed an application u/s. 270AA of the Act against the penalty order before the Deputy Commissioner, which came to be rejected by an order dated 27th July, 2021.

The petitioner challenged the order of rejection by filing revision petition u/s. 264 of the Act, inter alia, on the grounds that no opportunity of hearing was provided to the petitioner, which was in non-compliance of section 270AA of the Act and that the order rejecting the application did not specify how there was misreporting of the income when the amount was disclosed by the petitioner on its own volition and that the case of the petitioner did not fall in any of the exceptions u/s. 270AA of the Act. However, the revision petition came to be rejected by an order dated 13th March, 2023.

The assessee filed a writ petition challenging the order u/s. 264. The Rajasthan High Court allowed the writ petition and held as under:

“i) A perusal of sections 270A and 270AA of the Income-tax Act, 1961, would reveal that under sub-section (3) of section 270AA of the Act, the assessing authority can grant immunity from imposition of penalty u/s. 270A, where the proceedings for penalty u/s. 270A have not been initiated under the circumstances referred to in sub-section (9) of section 270A of the Act, and under the provisions of sub-section (4), it has been provided that no order rejecting an application shall be passed unless the assessee has been given an opportunity of being heard.

ii) Although several notices were issued u/s. 142 of the Act, during the course of scrutiny proceedings, and as many as ten issues were raised, on which the authority could not make any additions, the aspect of merging goods and services tax input tax credit with expenses was not pointed out/detected and this was only pointed out voluntarily by the assessee. Admittedly, the assessee in its application u/s. 270AA of the Act had sought personal hearing and the authority was bound to provide such personal hearing, but, admittedly no opportunity of hearing was provided to the assessee. The Deputy Commissioner had violated the provisions of the proviso to section 270AA(4) of the Act by not providing any opportunity of hearing, and the order passed was wholly laconic.

iii) The order passed by the assessing authority rejecting the application u/s. 270AA and the order passed by the revisional authority rejecting the revision petition, could not be sustained.”

Notice — Service of notice — Method and manner of service of notice under statutory provisions — Charitable purpose — Registration — Notice by Commissioner (Exemptions) — Notice and reminders not sent to assessee’s e-mail address or otherwise but only reflected on e-portal of Department — Assessee not able to file reply — Violation of principles of natural justice — Notice set aside.

25 Munjal Bcu Centre of Innovation and Entrepreneurship vs. DY. CIT(Exemptions)

[2024] 463 ITR 560 (P&H)

Date of order: 4th March, 2024

Ss. 12A(1)(ac)(iii) and 282(1) of the ITA 1961;

R. 127(1) of the Income-tax Rules, 1962.

Notice — Service of notice — Method and manner of service of notice under statutory provisions — Charitable purpose — Registration — Notice by Commissioner (Exemptions) — Notice and reminders not sent to assessee’s e-mail address or otherwise but only reflected on e-portal of Department — Assessee not able to file reply — Violation of principles of natural justice — Notice set aside.

A notice was issued to the assessee by the Commissioner (Exemptions) for initiating proceedings u/s. 12A(1)(ac)(iii), but the notice was not sent to the assessee’s e-mail address or otherwise and was only reflected on the e-portal of the Department. Thereafter, two reminders in respect of the notice were published on the e-portal of the Department. The notice and reminders were not served upon the assessee, no e-mail was sent by the Department to the assessee, and an order was passed.

The assessee filed a writ petition and challenged the orde.: The Punjab and Haryana High Court allowed the writ Petition and held as under:

“i) The provisions of section 282(1) of the Income-tax Act, 1961 and rule 127(1) of the Income-tax Rules, 1962 provide for a method and manner of service of notice and orders. It is essential that before any action is taken, communication of the notice must be done in terms of these provisions. The provisions do not mention communication to be ‘presumed’ upon the placing of the notice on the e-portal. A pragmatic view has to be adopted in these circumstances. An individual or a company is not expected to keep the e-portal of the Department open all the time so as to have knowledge of what the Department is supposed to be doing with regard to the submissions of forms. The principles of natural justice are inherent in the Income-tax provisions which are required to be necessarily followed.

ii) The assessee had not been given sufficient opportunity to make its submissions with regard to the proceedings under section 12A(1)(ac)(iii) since it was not served with any notice. The assessee would be entitled to file its reply and the Department would be entitled to examine it and pass a fresh order thereafter. The order was quashed and set aside.

iii) The assessee was to reply to the notice and the Department would provide an opportunity of hearing to the assessee, consider the submissions of the assessee and thereafter pass an order.”

Deduction of tax at source — Failure by payer to deposit tax deducted — No recovery towards tax deducted at source can be made from assessee — Recovery proceedings can only be initiated against deductor — Assessee entitled to refund.

24 BDR Finvest Pvt. Ltd. vs. Dy. CIT

[2024] 462 ITR 141 (Del)

A.Y.: 2019–20

Date of order: 31st October, 2023

Ss. 154, 194, 205 and 237 of ITA, 1961

Deduction of tax at source — Failure by payer to deposit tax deducted — No recovery towards tax deducted at source can be made from assessee — Recovery proceedings can only be initiated against deductor — Assessee entitled to refund.

The order was passed pursuant to a rectification application filed by the petitioner concerning the return of income (ROI) dated 10th August, 2019. Via the rectification application, the petitioner sought to stake a claim with respect to the tax which had been deducted at source on the interest paid by its borrower, namely, Ninex Developers Ltd. This application was dismissed by an order dated 21st September, 2023.

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

“i) Tax deducted at source is part of the assessee’s income and therefore, the gross amount is included in the total income and offered to tax. It is on this premise that the tax deducted at source would have to be treated as tax paid on behalf of the assessee. The amount retained against remittance made by the payer is the tax which the assessee or deductee has offered to tax by grossing up the remittance. The ‘payment of tax deducted at source to the Government’ can only be construed as payment in accordance with law.

ii) No recovery towards tax deducted at source could be made from the assessee in terms of the provisions of section 205 of the Income-tax Act, 1961.

iii) The assessee should be given credit for the tax deducted at source though it was not reflected in form 26AS. The assessee had followed the regime put in place in the Act for collecting tax albeit, through an agent of the Government. The agent for collecting the tax under the Act who was the deductor had failed to deposit the tax with the Government and the recovery proceedings could only be initiated against the deductor. The order passed u/s.154 was accordingly set aside. Since the assessee had lodged a claim with the resolution professional, if it were to receive any amount, it would deposit with the Department the amount not exceeding the tax deducted at source by the deductor undergoing the corporate insolvency resolution process.”

Collection of tax at source — Scope of S. 206C — Sale of liquor and scrap — Meaning of scrap — Company owned by State Government having monopoly over sale of liquor in state — Licence granted to bar owners for sale of liquor and collection of empty liquor bottles — Empty liquor bottles not scrap within meaning of S. 206C — Assessee not taxable on income from sale of empty liquor bottles.

23 Tamil Nadu State Marketing Corporation Ltd. vs. DY. CIT(TDS)

[2024] 463 ITR 487 (Mad)

A.Ys.: 2016–17 to 2023–24

Date of order: 22nd December, 2023

S. 206C of the ITA 1961

Collection of tax at source — Scope of S. 206C — Sale of liquor and scrap — Meaning of scrap — Company owned by State Government having monopoly over sale of liquor in state — Licence granted to bar owners for sale of liquor and collection of empty liquor bottles — Empty liquor bottles not scrap within meaning of S. 206C — Assessee not taxable on income from sale of empty liquor bottles.

The assessee-company was wholly owned by the Government of Tamil Nadu. It was a statutory body which had been vested with the special and exclusive privilege of effecting wholesale supply of Indian-made foreign spirits in the entire State of Tamil Nadu under section 17C(1A)(a) of the Tamil Nadu Prohibition Act, 1937. The assessee ran a number of retail vending liquor shops across the State and, as a policy decision, it did not want to get into the business of running bars. The assessee had taken the responsibility of ensuring bars were located adjacent to its shop so that liquor sold in its shops were consumed in the licensed bars. From 2005, the assessee floated tenders to select third-party bar contractors (licensees) to sell eatables and collect empty bottles from bars situated adjacent to or within the assessee’s retail shops. The assessee awarded contracts to various bar owners to run the bar adjacent to the retail shops run by the assessee. The licensees who had been issued licences to run the bar adjacent to the retail outlets of the assessee were required to offer their bid to run the bar under a tender process under the Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003. In the bar, the bar contractors (successful licensees) were entitled to sell food items (short eats) and collect the bottles left by the consumers after consuming liquor from the retail outlet in the premises licensed under the Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003 to the bar licensees. For the A.Y. between 2016–17 and 2023–24, the Assessing Officer held that the assessee ought to have collected tax at source u/s. 206C(1) of the Income-tax Act, 1961 on the amounts tendered by the successful bar licensee, inter alia, towards tax from sale of empty bottles by treating the sale of bottles as scrap.

Assessee filed writ petition challenging the orders. The Madras High Court allowed the writ petition and held as under:

“i) Section 206C of the Income-tax Act, 1961, seeks to prevent evasion of taxes and therefore shifts the burden to pay tax on the seller. Section 206C was enacted in the year 1988 to ensure collection of taxes from persons carrying on particular trades in view of peculiar difficulties experienced by the Revenue in the past in collecting taxes from the buyer. It therefore needs to be construed strictly to achieve the purpose for which it was inserted in the year 1988 in the Income-tax Act, 1961. Section 206C of the Act deals with profits and gains from the trading in alcoholic liquor, scrap, etc. Section 206C contemplates a seller of specified goods to collect as tax from a buyer, a sum equal to the percentage specified entry in column 3. There is no definition for the expression ‘buyer’ in section 206C of the Act. ‘Buyer’ is defined in section 2(1) of the Sale of Goods Act, 1930 as a person who buys or agrees to buy goods. Under sub-section (7) to section 206C of the Act, where a person responsible for collecting tax fails to collect it in accordance with section 206C(1) of the Income-tax Act, 1961, shall be liable to pay tax to the credit of the Central Government in accordance with the provisions of sub-section (3). The expression ‘scrap’ has been defined to mean waste and scrap from the ‘manufacture’ or ‘mechanical working of materials’ which is definitely not usable as such because of breakage, cutting up, wear and other reasons. The expression ‘mechanical working of materials’ in the definition of ‘scrap’ in Explanation (b) to section 206C has not been defined separately. Both manufacture and ‘mechanical working of material’ can generate ‘scrap’. Although, an activity may not amount to ‘manufacture’ yet waste and scrap can be generated from ‘mechanical working of material’. Though the expression ‘manufacture’ has been defined in the Income-tax Act, 1961, the expression ‘mechanical working of material’ has not been defined in the Act.

ii) The principle of nocitur a sociis, provides that words and expression must take colour from words with which they are associated. In the absence of definition for the expression ‘mechanical working of materials’ in section 206C of the Act, the doctrine of nocitur a sociis can be usefully applied. Only those activities which resemble ‘manufacturing activity’, but are not ‘manufacturing activity’ can come within the purview of the expression ‘mechanical working of material’. Only such ‘scrap’ arising of such ‘mechanical working of material’ is in contemplation of section 206C.

iii) Mere opening, breaking or uncorking of a liquor bottle by twisting the seal in a liquor bottle would not amount to generation of ‘scrap’ from ‘mechanical working of material’ for the purpose of the Explanation to section 206C of the Act. That apart, the activity of opening or uncorking the bottle was also not done by the assessee. These were independent and autonomous acts of individual consumers who decided to consume liquor purchased from the shops of the assessee which had a licensed premises (bar) adjacent to them under the provisions of the Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003. Scrap, if any, was generated at the licensed premises which were leased by the licensees from the owners of the premises. Rule 9(a) of the Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003 merely grants privilege to the respective bar owners only to run the bars to sell the eatables and to clear left over empty bottles. Bottles are neither ‘scrap’ nor the property of either the assessee or bar licensee.

iv) There was neither ‘manufacture’ nor generation of ‘scrap’ from ‘mechanical working of materials’, and the liability u/s. 206C of the Income-tax Act, 1961 was not attracted. Therefore, invocation of sections 206C, 206CC and 206CCA of the Act was wholly misplaced and unwarranted. The order were not valid.”

Assessment — Limited scrutiny — Jurisdiction of AO — CBDT instruction — Conditions mandatory — AO cannot traverse beyond issues in limited scrutiny — Inquiries on new issue without complying with mandatory conditions not permissible.

22 Principal CIT vs. Weilburger Coatings (India) Pvt. Ltd.

[2024] 463 ITR 89 (Cal):

A.Y. 2015–16

Date of order: 11th October, 2023

Ss. 143(2) and 143(3) of ITA 1961

Assessment — Limited scrutiny — Jurisdiction of AO — CBDT instruction — Conditions mandatory — AO cannot traverse beyond issues in limited scrutiny — Inquiries on new issue without complying with mandatory conditions not permissible.

The return of the assessee for the A.Y. 2015–16 was selected for limited scrutiny. The assessee was issued notice u/s. 143(2) of the Income-tax Act, 1961 in respect of the disallowance of carry forward of losses of earlier years. The assessee participated in the proceedings and thereafter, the assessment was completed u/s. 143(3) of the Act.

The Commissioner (Appeals) affirmed the disallowance. The assessee preferred an appeal before the Tribunal, raising an additional ground that the action of the Assessing Officer (AO) in making additions in respect of issues not mentioned in limited scrutiny were beyond the jurisdiction of the AO. The Tribunal, holding that the issue was jurisdictional and could be raised by the assessee at any point of time, admitted it and, holding that the AO had exceeded his jurisdiction in completing the assessment u/s. 143(3) of the Income-tax Act, 1961 on grounds which were not subject matter of limited scrutiny u/s. 143(2) for the A.Y. 2015–16, deleted the disallowance of carry forward of losses of earlier years.

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

“i) The finding of the Tribunal, that the additional ground raised by the assessee against the order of the Commissioner (Appeals) confirming the addition made by the Assessing Officer in respect of issues not mentioned in the limited scrutiny were beyond jurisdiction of the Assessing Officer since it was selected for limited scrutiny assessment and not complete scrutiny, was a jurisdictional issue and could be raised by the assessee at any point of time was justified and in accordance with the settled legal principle. The Tribunal had also considered the Central Board of Direct Taxes Instruction No. 5 of 2016 to hold that the Assessing Officer had exceeded his jurisdiction.

ii) The Tribunal did not err in deleting the disallowance of carry forward of losses of earlier years and in holding that the Assessing Officer had exceeded his jurisdiction in enquiring into other issues which were beyond the scope of limited scrutiny u/s. 143(2) for the A. Y. 2015-16.”

Taxation of Interest on Compensation

ISSUE FOR CONSIDERATION

The Constitution of India has vested the Government of India with the power to acquire properties for public purposes, provided an adequate compensation is paid to the owner for deprivation of the property. Such a power was largely exercised by the government under the Land Acquisition Act, 1894 (“LAA”), which Act has been substituted by the Right to Fair Compensation and Transparency in Land Acquisition and Rehabilitation and Resettlement Act, 2013 (“RFCTLARRA”) w.e.f 1st January, 2014. In addition, various specifically legislated enactments permit the government to acquire properties, e.g., The National Highways Act and The Metro Railways Act.

On acquisition of properties, the government is required to adequately compensate the owner with payment of the assured amount under the award. This amount is determined as per certain guidelines provided in the respective acts and in the rules. At times, the awards are challenged on several grounds, including on the ground of inadequacy of the compensation. The government usually pays compensation as per the award within a reasonable period and the enhanced compensation is paid on settlement of the dispute.

The government pays interest for delay in payment of the awarded compensation under s. 34 of the LAA (s.72 of RFCTLARRA), and pays interest under s. 23 and 28 of the LAA (section 80 of RFCTLARRA) in cases of enhanced compensation for the period commencing from the date of award to the date of the payment of the enhanced compensation after settlement of the dispute.

Section 45 (5) of Income Tax Act, 1961 provides a deeming fiction to tax the compensation, including enhanced compensation, in the year of receipt of the compensation under the head “Capital Gains”. Section 10(37) of the Act provides for exemption from tax on capital gains arising in the hands of an individual or HUF on transfer of an agricultural land. A separate exemption is provided under s. 10(37A) for acquisition of properties under the Land Pooling Scheme of Andhra Pradesh on or after 2nd June, 2014 in the hands of an individual or HUF for development of the proposed city of Amravati. In addition, section 96 of the RFCTLARRA provides an independent exemption from payment of income tax on a compensation received under an award or an agreement under the said Act. No capital gains tax is payable at all on application of the provisions of the section 10 (37) and 10(37A) of the IT Act and section 96 of the RFCTLARRA. In respect of the other cases, the taxation is governed by section 45(5) of the Act.

Section 56(2)(viii) was inserted by the Finance Act, 2009 w.e.f A.Y 2010-11 to provide for taxation of interest on compensation in the year of receipt of the interest. Simultaneously section 145A/145B have been amended /inserted to provide that such interest would be taxed in the year of receipt, irrespective of the method of accounting followed by the assessee.

An interesting issue has arisen recently in relation to taxation of interest on the enhanced compensation. The Punjab and Haryana High Court, in a series of cases, held that such interest was taxable under the head Income From Other Sources, while the Gujarat High Court has held that such interest on enhanced compensation was a part of the compensation, and was governed by the provisions of section 45(5) and / or the tax exemption provisions. In fact, the Punjab & Haryana High Court has not followed its own decisions in later decisions, and the Pune bench of the Income tax Appellate tribunal has given conflicting decisions.

MANJET SINGH (HUF) KARTA MANJEET SINGH’S CASE

The issue first arose in the case of Manjet Singh (HUF) Karta Manjet Singh vs. UOI, 237 Taxman 161(P&H). During the period relevant to the assessment year 2010-11, the assessee, a landowner, received interest under section 28 of the Land Acquisition Act, 1894 and claimed that the said interest did not fall for taxation under section 56 as income from other sources, in view of the judgment of the Apex Court in the case of Ghanshyam (HUF) 315 ITR 1.

In this case, Notifications under sections 4 and 6 of the Land Acquisition Act, 1894 were issued on 2nd January, 2002 and 24th December, 2002 respectively for acquisition of land in District Karnal. After considering all the relevant factors, the Land Acquisition Collector assessed the compensation vide award No.22, which award was contested by way of a reference under Section 18 of the 1894 Act, which was accepted vide order dated 11th August, 2009. Higher Compensation was awarded on reference, along with other statutory benefits, including the interest in accordance with sections 23(1-A), 23(2) and 28 of the 1894 Act. Form ‘D’ had been drawn on 11th May, 2010 and 27th May, 2010 by the Land Acquisition Officer containing the complete details regarding the names of the petitioners, principal, interest, cost, total amount, TDS and net payable in accordance with the decision dated 11th August, 2009.

Proceedings for reassessment were initiated under Section 148 of the Income Tax Act,1961 on 9th April, 2012, by issue of notice under Section 148 of the Act to the assessee.

In the reply submitted to the Assessing Officer, the benefit of exemption under Section 10(37) of the Act was claimed. It was also pointed out that interest under section 28 of the 1894 Act did not fall for taxation under Section 56 of the Act as income from other sources in view of the judgment of the Apex Court in the case of Ghanshyam (HUF), and in case it was still treated as income from other sources by the AO, then the assessee was entitled to mandatory deduction as enumerated under Section 57(iv) of the Act on a protective basis.

A Writ Petition was filed before the Punjab & Haryana High Court by the assessee challenging the notice under s. 148, and requesting for appropriate orders by the court, including on the prayer of the assessee to refund the tax deduced at source from the compensation for the land acquisition which was claimed to be exempt from deduction under Section 194LA of the Act.

The High Court also noted that the assessee, on the basis of the judgment of the Supreme Court rendered in the case of Ghanshyam (HUF) (supra), had sought reconsideration of judgment of the Punjab and Haryana High Court in CIT vs.Bir Singh [IT Appeal No. 209 of 2004, dated 27th October, 2010], where the Division Bench had held that element of interest awarded by the Court on enhanced amount of compensation under section 28 of the 1894 Act fell for taxation under section 56 as income from other sources in the year of receipt.

The High Court noted that the primary question for consideration related to the nature of interest received by the assessee under section 28 of the 1894 Act. In other words, whether the interest which was received by the assessee partook the character of income or not, and in such a situation, was it taxable under the provisions of the Income-tax Act.

In accordance with the decision of the Apex Court in Ghanshyam (HUF), 315 ITR 1, it was claimed by the assessee that the amount of interest component under section 28 of the 1894 Act should form part of enhanced compensation, and secondly, that concluded matters should not be reopened. Reliance was placed by the assessee upon following observations in Ghanshyam (HUF)’s case (supra):—

To sum up, interest is different from compensation. However, interest paid on the excess amount under Section 28 of the 1894 Act depends upon a claim by the person whose land is acquired whereas interest under Section 34 is for delay in making payment. This vital difference needs to be kept in mind in deciding this matter. Interest under Section 28 is part of the amount of compensation whereas interest under Section 34 is only for delay in making payment after the compensation amount is determined. Interest under Section 28 is a part of the enhanced value of the land which is not the case in the matter of payment of interest under Section 34.”

The claim of the assessee was controverted by the revenue by filing a written statement. In the reply, the initiation of proceedings under Section 148 of the Act was sought to be justified by relying upon judgment of this Court in Bir Singh (HUF’s case (supra). It had also been stated that legislature had introduced Section 56(2) (viii) and also Section 145A(b) of the Act by Finance (No.2) Act, 2009 with effect from 1st April, 2010, according to which the interest received by the assessee on compensation or enhanced compensation should be deemed to be his income in the year of receipt, irrespective of the method of accountancy followed by the assessee subject however to the deduction of 50 per cent under Section 57(iv) of the Act. It had further been pleaded that the amendment was applicable with effect from assessment year 2010-11, and the assessee had received the interest amount during the period relevant to assessment year 2010-11 and therefore, the assessee was liable to pay tax.

The assessee submitted that the judgment of this Court in Bir Singh (HUF)’s case (supra) required reconsideration being contrary to the decision of the Hon’ble Supreme Court in Ghanshyam’s case (supra). In response, the revenue contended that the judgment in Bir Singh (HUF)’s case (supra) neither required any reconsideration nor any clarification, as the same was in consonance with the Scheme of the 1894 Act and law enunciated by the Constitution Bench of the Apex Court in Sunder vs. Union of India JT 2001 (8) SC 130.

The court reiterated that the main grievance was regarding the treatment given qua the amount of interest received under section 28 of the 1894 Act while arriving at the chargeable income under the Act. It observed that the grant of interest under Section 28 of the 1894 Act applied when the amount originally awarded had been paid or deposited and subsequently the Court awarded excess amount and in such cases interest on that excess alone was payable; section 28 empowered the Court to award interest on the excess amount of compensation awarded by it over the amount awarded by the Collector; the compensation awarded by the Court included the additional compensation awarded under Section 23(1A) and the solatium under Section 23(2) of the said Act. It further observed that Section 28 was applicable only in respect of the excess amount, which was determined by the Court after a reference under Section 18 of the 1894 Act.

The High Court observed that a plain reading of sections 23(1A) and 23(2) as also section 28, clearly spelt out that additional benefits were available on the market value of the acquired lands under sections 23(1A) and 23(2), whereas benefit of interest under section 28 was available in respect of the entire compensation. The High Court observed that the Constitution Bench of the Supreme Court in the case of Sunder vs. Union of India JT 2001 (8) SC 130 had approved the observations of the Division Bench of the Punjab and Haryana High Court made in the case of State of Haryana vs. Smt. Kailashwati AIR 1980 Punj. & Har. 117, that the interest awardable under section 28 would include within its ambit both the market value and the statutory solatium, and as such the provisions of section 28 warranted and authorised the grant of interest on solatium as well.

The High Court then noted that the Three Judge Bench of the Supreme Court in the case of Dr. Shamlal Narula, 53 ITR 151 had considered the issue regarding award of interest under the 1894 Act, wherein the interest under section 28 was considered akin to interest under section 34, as both were held to be on account of keeping back the amount payable to the owner, and did not form part of compensation or damages for the loss of the right to retain possession. The principle of Dr. Shamlal Narula’s case had subsequently been applied by a Three Judge Bench of the Apex Court in a later decision in T.N.K. Govindaraju Chetty, 66 ITR 465.

The High Court also took note of another Three Judge Bench of the apex Court in the case of Bikram Singh vs. Land Acquisition Collector, 224 ITR 551, wherein the court following Dr. Shamlal Narula’s case (supra), and taking into consideration definition of interest in section 2(28A) of the Income-tax Act, had held that interest under section 28 of the 1894 Act was a revenue receipt and was taxable.

The High Court cited with approval the decision of the Supreme Court in the case of Dr. Shamlal Narula vs. CIT, 53 ITR 151, which had considered the issue regarding award of interest under the 1894 Act and held that the interest under Section 28 of the 1894 Act was considered akin to interest under Section 34 thereof, as both were held to be on account of keeping back the amount payable to the owner and did not form part of compensation or damages for the loss of the right to retain possession. It was noticed as under:—

“As we have pointed out earlier, as soon as the Collector has taken possession of the land either before or after the award the title absolutely vests in the Government and thereafter owner of the land so acquired ceases to have any title or right of possession to the land acquired. Under the award he gets compensation or both the rights. Therefore, the interest awarded under s. 28 of the Act, just like under s. 34 thereof, cannot be a compensation or damages for the loss of the right to retain possession but only compensation payable by the State for keeping back the amount payable to the owner.”

The Punjab & Haryana High Court held that in view of the authoritative pronouncements of the apex court in cases of Dr. Sham Lal Narula, T.N.K. Govindaraja Chetty, Bikram Singh (supra), State of Punjab vs. Amarjit Singh, 2011 (2) SC 393, Sunder vs. Union of India [2001] (8) SC 130, Rama Bai, 181 ITR 400 and K.S. Krishna Rao, 181 ITR 408, the assessee could not derive any benefit from the observations made by the Supreme Court in the case of Ghashyam (HUF) (supra).

While deciding the issue of the taxation of interest, the court kept open the issue of tax deduction at source, which was not being agitated in this case, and stated that it would be taken up in an appropriate case and thus the issue was left open, observing “We make it clear that since no arguments have been addressed with regard to the tax deduction at source, the said issue is being left open which may be taken up in accordance with law.”

It also noticed the claim of the assessee based on provisions of Section 10(37) and 57(iv) of the Act, and held that the issue required examination based on factual matrix, and therefore directed that the assessee might plead and claim the benefit thereof before the Assessing Officer in accordance with law.

Accordingly, finding no merit in the petitions, the court dismissed the same.

MOVALIYA BHIKHUBHAI BALABHAI’S CASE

The issue arose before the Gujarat High Court, this time under s.194 LA of the Income tax Act relating to the tax deduction at source in the case of Movaliya Bhikhubhai Balabhai vs. ITO TDS-1, Surat, 388 ITR 343.

In this case, the assessee’s agricultural lands were acquired under the provisions of the Land Acquisition Act, 1894 for the public purpose of developing irrigation canals. The compensation awarded by the Collector was challenged by the assessee before the Principal Senior Civil Judge, who awarded additional compensation with other statutory benefits. Pursuant to such award, the Executive Engineer of the irrigation scheme calculated the amount payable to the petitioner, that included an amount of interest of ₹20,74,157 computed as per s. 28 of the said Act. An amount of tax of ₹2,07,416 was proposed to be deducted at source as per section 194A of the Income tax Act by the Executive Engineer.

The assessee made an application to the Income-tax Department under section 197(1) for ascertaining the tax liability on interest, claiming that such interest was not taxable and requested the AO to issue a certificate for Nil tax liability. The application was rejected on the ground that the interest for the delayed payment of compensation and for enhanced value of compensation was taxable as per the provisions of sections 56(2)(viii) and 145A(b) r.w.s 57(iv). Being aggrieved, the assessee filed a writ petition before the Gujarat High Court.

The assesseee submitted to the court that, when the interest under section 28 of the Act of 1894 was to be treated as part of compensation and was liable to capital gains under section 45(5) of the I.T. Act, such amount could not be treated as Income from Other Sources and hence no tax could be deducted at source. It was submitted that subsequent to the refusal to grant the certificate under section 197 of the I.T. Act, the Executive Engineer deducted tax at source to the extent of ₹2,07,416, which was not in consonance with the statutory provisions, and directions should be issued for refund of tax deducted.

On behalf of the revenue, it was submitted that the interest in question was taxable under the head Income from Other Sources on insertion of s. 56(2) (viii) and s. 145A of the Act. Reliance was placed upon several decisions of the High Courts, including the decision of the Punjab and Haryana High Court in the case of Manjet Singh (HUF) Karta Manjeet Singh vs. Union of India (supra) in support of the view of the revenue.

Opposing the petition, the revenue submitted that the Income Tax Officer, TDS-1, Surat, while rejecting the application made by the petitioner under section 197 of the I.T. Act, had taken into consideration the provisions of section 57(iv) read with section 56(2)(viii) and section 145A(b) of that Act, and the action of the AO in rejecting the application was just, legal and valid in terms of the provisions of section 57(iv) read with section 56(2)(viii) and section 145A(b) of the I.T. Act. It was submitted that tax was required to be deducted at source under section 194A of the I.T. Act at the rate of 10% from the interest payable under section 28 of the Act of 1894.

Referring to the provisions of section 56 of the I.T. Act, it was pointed out that sub-clause (viii) of sub-section (2) thereof provided that income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A was chargeable to income tax under the head “Income from other sources”. It was pointed out that under sub-clause (iv) of section 57, in case of the nature of income referred to in clause (viii) of sub-section (2) of section 56, a deduction of a sum equal to fifty per cent of such income was permissible. It was pointed out that under section 145A of the Act, interest received by the assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it was received. It was submitted that the interest on enhanced compensation under section 28 of the Act of 1894, being in the nature of enhanced compensation, was deemed to be the income of the assessee in the year under consideration and had to be taxed as per the provisions of section 56(2)(viii) of the Act, as income from other sources.

As regards the decision of the Supreme Court in the case of Ghanshyam (HUF) (supra), it was submitted on behalf of the revenue that such decision was rendered prior to the amendment in the I.T. Act, whereby clause (b), which provides that interest received by an assessee on compensation or on enhanced compensation, as the case may be, should be deemed to be the income in the year in which it was received, came to be inserted in section 145A of the Act and hence, the said decision would not have any applicability in the facts of the case before the court.

In support of the submissions, the revenue placed reliance upon the decision of the Punjab & Haryana High Court in the case of Hari Kishan vs. Union of India [CWP No. 2290 of 2001 dated 30th January, 2014] wherein the court had placed reliance upon its earlier decision in the case of CIT vs. Bir Singh (HUF) ITA No. 209 of 2004 dt. 27th October, 2010, wherein the court, after considering the decision of the Supreme Court in Ghanshyam (HUF)’s case (supra), had held that the interest received by the assessee was on account of delay in making the payment of enhanced compensation, which would not partake the character of compensation for acquisition of agricultural land and thus, was not exempt under the Income Tax Act. Once that was so, the tax at source had rightly been deducted by the payer.

The Gujarat High Court held that it was not in agreement with the view adopted by the other high courts, which were not consistent with the law laid down in the case of Ghanshyam (HUF) 182 Taxman 368 (SC). The Gujarat High Court took notice of the decision in Manjet Singh (HUF) Karta Manjeet Singh’s case, 237 Taxman 116 by the Punjab and Haryana High Court, wherein the court had chosen to place reliance upon various decisions of the Supreme Court rendered during the period 1964 to 1997, and had chosen to brush aside the subsequent decision of the Supreme Court in Ghanshyam (HUF)’s case (supra), which was directly on the issue, by observing that the assessee could not derive any benefit from the observations made by the Supreme Court in that case.

The court held that the view of the Punjab and Haryana High Court was contrary to what had been held in the decision of the Supreme Court in Ghanshyam (HUF)‘s case (supra), that interest under section 28, unlike interest under section 34, was an accretion to the value, hence it was a part of enhanced compensation or consideration, which was not the case with interest under section 34 of the 1894 Act. The Gujarat High Court stated that it was rather in agreement with the view adopted by the Punjab and Haryana High Court in Jagmal Singh vs. State of Haryana [Civil Revision No. 7740 of 2012, dated 18th July, 2013], which had been extensively referred to in paragraph 4.1 of the later decision of the said court.

It was clear to the Gujarat High Court that the Supreme Court, after considering the scheme of section 45(5) of the I.T. Act, had categorically held that payment made under section 28 of the Act of 1894 was enhanced compensation. As a necessary corollary, therefore, the contention that payment made under section 28 of the Act of 1894 was interest as envisaged under section 145A of the I.T. Act and had to be treated as income from other sources, deserved to be rejected.

The court also held that the substitution of section 145A by the Finance (No. 2) Act, 2009 was not in connection with the decision of the Supreme Court in Ghanshyam (HUF)’s case (supra) but was brought in to mitigate the hardship caused to the assessee on account of the decision of the Supreme Court in Rama Bai’s case, 181 ITR 400, wherein it was held that arrears of interest computed on delayed or enhanced compensation should be taxable on accrual basis. Therefore, in reading the words “interest received on compensation or enhanced compensation” in section 145A of the I.T. Act, the same have to be construed in the manner interpreted by the Supreme Court in Ghanshyam (HUF)’s case (supra).

The upshot of the above discussion, the court stated, was that since interest under section 28 of 1894 Act partook the character of compensation, it did not fall within the ambit of the expression ‘interest’ as contemplated in section 145A of the Income-tax Act. The Income Tax Officer was, therefore, not justified in refusing to grant a certificate under section 197 of the Income-tax Act to the assessee for non- deduction of tax at source, inasmuch as, the taxpayer was not liable to pay any tax under the head ‘income from other sources’ on the interest paid to him under section 28 of the Act of 1894.

The court noted that the assessee had earlier challenged the communication dated 9th February, 2015, whereby its application for a certificate under section 197 had been rejected, and subsequently, tax on the interest payable under section 28 of the Act of 1894 had already been deducted at source. Consequently, the challenge to the above communication had become infructuous and hence, the prayer clause came to be modified. However, since the amount paid under section 28 of the Act of 1894 formed part of the compensation and not interest, the Executive Engineer was not justified in deducting tax at source under section 194A of the Income-tax Act in respect of such amount. The assessee was, therefore, entitled to refund of the amount wrongly deducted under section 194A.

For the foregoing reasons, the court allowed the petition. The Executive Engineer, having wrongly deducted an amount of ₹2,07,416 by way of tax deducted at source out of the amount of ₹20,74,157 payable to the assessee under section 28 of the Act of 1894 and having deposited the same with the income-tax authorities, taking a cue from the decision of the Punjab and Haryana High Court in Jagmal Singh’s case (supra), the High Court directed the AO to forthwith deposit such amount with the Reference Court, which would thereafter disburse such amount to the assessee.

OBSERVATIONS

Under the land acquisition laws, two types of payments are generally made, besides the payment of compensation for acquisition of property. These payments are referred to in the respective amendments as “interest”. One such ‘interest’ is payable under section 34 of LAA (s.80 of RFCTLARRA) for delay in payment of the amount of compensation award, in the first place, on passing of an award of acquisition. This interest is payable on the amount of award for the period commencing from the date of award and ending with the date of payment of the compensation awarded. Another such ‘interest’ is payable on the increased/enhanced compensation under section 23 and/or s. 28 of the LAA of section 72 of the RFCTLARRA for the period commencing from the date of the award to the date of award for enhanced compensation, on the amount of enhanced compensation.

Section 28 of the LAA reads as “28. Collector may be directed to pay interest on excess compensation. – If the sum which, in the opinion of the court, the Collector ought to have awarded as compensation is in excess of the sum which the Collector did award as compensation, the award of the Court may direct that the Collector shall pay interest on such excess at the rate of nine per centum per annum from the date on which he took possession of the land to the date of payment of such excess into Court.”

Section 34 of the LAA reads as; “34. Payment of interest- When the amount of such compensation is not paid or deposited on or before taking possession of the land, the Collector shall pay the amount awarded with interest thereon at the rate of nine per centum per annum from the time of so taking possession until it shall have been so paid or deposited.

Provided that if such compensation or any part thereof is not paid or deposited within a period of one year from the date on which possession is taken, interest at the rate of fifteen per centum per annum shall be payable from the date of expiry of the said period of one year on the amount of compensation or part thereof which has not been paid or deposited before the date of such expiry.”

Section 2(28A) defines “interest” for the purposes of the Income -tax Act effective from 1-6-1976. The expression “interest” occurring in section 2(28A) widens the scope of the term “interest” for the purposes of the Income-tax Act.

The interest of the first kind, payable under section 34 of LAA, is paid for the delay in payment of the awarded compensation and therefore represents an interest as is so understood in common parlance. In contrast, the ‘interest’ on the enhanced compensation is not for the delay in payment of compensation, but is in effect a compensation for deprivation of the amount of the compensation otherwise due to be payable to the owner of the property. The nature of the two payments referred to as ‘interest’ under the LAA is materially different; while one represents the interest the other represents the compensation for deprivation of the lawful due which was otherwise withheld and not paid on account of an unjust order. LAA awards ‘interest’ both as an accretion in the value of the lands acquired and interest for undue delay. Interest under section 28 is an accretion to the value and is a part of enhanced compensation or consideration which is not the case with interest under section 34 of LAA. Additional amount paid under section 23(1A) and the solatium under section 23(2) form part of enhanced compensation under section 45(5)(b) of the 1961 Act , a view that is confirmed by clause (c) of section 45(5). Equating the two payments, with distinct and different characters, as interest under the Income tax Act is best avoidable. The Supreme Court in the case of Ghanshyam (HUF), 315 ITR1, vide it’s order dated 16th July, 2009 passed for assessment year 1999-2000, held that the interest on enhanced compensation paid under LAA was compensation itself and its taxability or otherwise was governed by the provision of section 45(5) of the Income Tax Act in the following words;

“The award of interest under section 28 of the 1894 Act is discretionary. Section 28 applies when the amount originally awarded has been paid or deposited and when the Court awards excess amount. In such cases interest on that excess alone is payable. Section 28 empowers the Court to award interest on the excess amount of compensation awarded by it over the amount awarded by the Collector. The compensation awarded by the Court includes the additional compensation awarded under section 23(1A) and the solatium under section 23(2) of the said Act. This award of interest is not mandatory but is left to the discretion of the Court. Section 28 is applicable only in respect of the excess amount, which is determined by the Court after a reference under section 18 of the 1894 Act. Section 28 does not apply to cases of undue delay in making award for compensation” [Para 23].

“To sum up, interest is different from compensation. However, interest paid on the excess amount under section 28 of the 1894 Act depends upon a claim by the person whose land is acquired whereas interest under section 34 is for delay in making payment. This vital difference needs to be kept in mind in deciding this matter. Interest under section 28 is part of the amount of compensation whereas interest under section 34 is only for delay in making payment after the compensation amount is determined. Interest under section 28 is a part of enhanced value of the land which is not the case in the matter of payment of interest under section 34.” [Para 24].

It is true that ‘interest’ is not compensation. It is equally true that section 45(5) refers to compensation. But the provision of the 1894 Act awards ‘interest’ both as an accretion in the value of the lands acquired and interest for undue delay. Interest under section 28 unlike interest under section 34 is an accretion to the value. Hence, it is a part of enhanced compensation or consideration which is not the case with interest under section 34 of the 1894 Act. So also, additional amount under section 23(1A) and solatium under section 23(2) of the 1894 Act form part of enhanced compensation under section 45(5)(b) of the 1961 Act. The said view is reinforced by the newly inserted clause (c) in section 45(5) by the Finance Act, 2003 with effect from 1-4-2004.” [Para 33]

“When the Court/Tribunal directs payment of enhanced compensation under section 23(1A), or section 23(2) or under section 28 of the 1894 Act, it is on the basis that award of the Collector or the Court under reference has not compensated the owner for the full value of the property as on date of notification.” [Para 35]

The ratio of this decision of the Supreme Court was followed by the apex court in the later decisions in the cases of Govindbhai Mamaiya, 367 ITR 498, Chet Ram (HUF), 400 ITR 23 and Hari Singh and Other, 302 CTR 0458.

In the background of this overwhelming positioned in law, it is relevant to examine the true implications of the insertion of section 56(2)(viii) and section 145A/B of the Income tax Act which provide for taxation of interest on compensation under the head Income from other sources. The Punjab and Haryana High Court, guided by the amendments in the Income Tax Act, has held in a series of cases, distinguishing the decision in the case of Ghanshyaam (HUF)(supra), that interest on enhanced compensation was taxable under the head Income From Other Sources, in the year of receipt of interest on enhanced compensation. The Gujarat high court has chosen to dissent from the decisions of the Punjab and Haryana high court to hold that such interest was in the nature of compensation even after insertion/amendment of the Income Tax Act. The Supreme Court has dismissed the Special Leave Petition of the assessee, 462 ITR 498, against the order of the high court in one of the decisions of the high court in the case of Mahender Pal Narang, 423 ITR 13(P&H), a decision where the court has dissented form the decision of the Gujarat high court. Like the high courts, there are conflicting decisions of the different benches of the Income tax Appellate Tribunal; the Pune bench has delivered conflicting decisions on the same subject. All of these conflicting decisions highlight the raging controversy about taxation of interest under consideration.

The issue according to us moves in a narrow compass; whether the law laid down by the Supreme Court in the series of cases, that interest on enhanced compensation is taxable as compensation and not as an interest has undergone any change on account of insertion of section 56(2)(viii) and 145A/B of Income Tax Act. In our considered opinion – No.

The insertion / amendment of the Income tax Act has the limited object of providing for the year of taxation of such interest in the year of receipt. The objective of the amendment is limited to settle the then prevailing controversy about the year of taxation of interest in cases where such interest was otherwise taxable. This can be gathered and confirmed by a reference to the Notes to Clauses and the Explanatory Memorandum accompanying the Finance (No.2) Bill, 2009. Circular No. 5 of 2010 in a way confirms that the amendments by the Finance Act, 2010 Act are not in connection with the decision of the Supreme Court in Ghanshyam’s case (supra); they are made to mitigate the hardship caused by the decision of Supreme Court in Rama Bai’s case about the year or years of taxation of interest, where taxable. Under no circumstances, the amendments should be viewed to have changed the law settled by the Supreme Court, where the apex court held that the interest on enhanced compensation was nothing but compensation and the payment being labelled as interest under the LAA did not change the character of the receipt of compensation for the purposes of the Income tax Act.

The better and the correct view is to treat the interest on enhanced compensation as a payment for unjust deprivation of the lawful dues payable under the statute and treat such payment as a compensation and not as an interest taxable under the head Income from Other Sources.

Glimpses of Supreme Court Rulings

4.  Condonation of delay in filing an appeal — Filing a belated appeal after knowing  of a subsequent decision is not a sufficient ground for condonation of the delay

Commissioner of Income (International Taxation) vs. Bharti Airtel Ltd

(2024) 463 ITER 63 (SC)

The Supreme Court noted that before the High Court, the Commissioner of Income-tax filed an affidavit stating that pursuant to the impugned order a decision was taken not to file an appeal and it was only after coming to know that in another case, that the Tribunal had given a decision in favour of the Department, it was decided to file the appeal. The appeal was filed after a delay of about four years and 100 days.

According to the Supreme Court, the explanation given for the delay in filing the appeal had no merits and neither could it be construed to be a sufficient cause for condoning the same.

The Supreme Court dismissed the SLP holding that the High Court was justified in dismissing the appeal filed under section 260A of the Act on the ground of delay.

5. Substantial questions of law — Once an appeal under section 260A is admitted, the same has to be decided on merits at the time of final hearing

Commissioner of Income-tax vs. I.T.C. Ltd

(2024) 461 ITR 446 (SC)

The Supreme Court noted that the High Court had admitted the appeal formulating ten questions of law.

When the matter came up for final hearing, the High Court dismissed the appeal holding that no substantial questions of law arose from the judgement of the Tribunal.

According to the Supreme Court, on a combined reading of the order of admission and the order dismissing the appeal upon final hearing, it had no option but to set aside the impugned order and remand the matter to the High Court for hearing of the appeal.

The Supreme Court accordingly restored the appeal on the record of the High Court and directed the High Court to decide the case on merits.

Whether an Inordinate Delay in the Disposal of Appeals by the First Appellate Authorities is Justifiable?

INTRODUCTION

The Indian public, especially professionals, are perturbed, agitated and upset as there has been an inordinate delay on the part of First Appellate Authorities in passing appellate orders in respect of appeals filed by the assessees against assessment orders passed by the Assessing Officers. This is for the reason that the assessees who may have received high-pitched assessment orders raising huge tax and interest demands must have approached the First Appellate Authorities by preferring appeals before them. However, it is very disturbing that the First Appellate Authorities, for reasons best known to them, have refrained from taking any further action in deciding the appeals, except sending notices after notices in standard formats to the assessees to file submissions in support of their grounds of appeal. It may be noted that after the introduction of the Faceless Appeal Scheme by the Government, the Faceless Appeal Centre conducts the functions of the First Appellate Authorities.

In this write-up, an attempt is made to highlight the legal position as to whether the time limit for passing appellate orders by the First Appellate Authorities is mandatory or directory, the consequences of inaction on the part of the First Appellate Authorities in hearing and disposing of appeals, whether the First Appellate Authorities can be made accountable for their inaction, and whether there is any remedy against such inaction.

PROVISIONS OF THE INCOME TAX ACT, 1961

The provisions relating to the appeals before the Joint Commissioner (Appeals) and the Commissioner (Appeals) (hereinafter referred to as “the First Appellate Authorities”) are contained under Chapter XX of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) covering sections 246 to 251 of the Act. Section 250 of the Act provides for the procedure in appeal. The Finance Act, 1999, for the first time, inserted sub–section (6A) to section 250 of the Act, which reads as follows:

Sub-section (6A)

In every appeal, the Commissioner (Appeals), where it is possible, may hear and decide such appeal within a period of one year from the end of the financial year in which such appeal is filed before him under section (1) of section 246A.

The Finance Act, 2023, slightly amended the above sub-section by including the Joint Commissioner (Appeals) in the said sub-section and also provided for the time limit for passing orders when the appeal gets transferred to the First Appellate Authority. The amended sub-section (6A) reads as under:

Amended Sub-section (6A)

In every appeal, the Joint Commissioner (Appeals) or Commissioner (Appeals), as the case may be where it is possible, may hear and decide within a period of one year from the end of the financial year in which such appeal is filed before him under subsection (1) or transferred to him under subsection (2) or sub-section (3) of section 246 or filed before him under sub-section (1) of section 246A as the case may be.

The memorandum explaining the provisions of the Finance Bill, 1999, giving the reasons for the insertion of sub-section (6A) in section 250 of the Act, reads as under:

“In the absence of any statutory provision, there is considerable delay in the disposal of appeals. It is also seen that there is a disinclination to take up old appeals for disposal by the Commissioner (Appeals). To ensure accountability as well as to ensure disposal of appeals within a reasonable timeframe, it is proposed to provide that the Commissioner (Appeals) where it is possible, may hear and decide every appeal within a period of one year from the end of the financial year in which the appeal is filed.”

WHETHER THE PROVISIONS OF SUB-SECTION (6A) TO SECTION 250 ARE MANDATORY OR ONLY DIRECTORY?

There are several judicial pronouncements in which the Supreme Court has held that where a public officer is directed by a statute to perform his duty within a specified timeframe, the provisions as to time are only directory. Reliance in this regard may be placed on the ratio of the decision of the Supreme Court in the case of P. T. Rajan vs. T. P. M. Sahir (2003) 8 SCC 498.

As per the ratio of the decision of the Supreme Court in the case of T. V. Usman vs. Food Inspector Tellicherry Municipality JT 1994 (1) SC 260 it can be argued that although the provisions in a statute requiring a public officer to perform a public duty within a particular timeframe are directory, nonetheless the other party on whom the right is conferred is seriously prejudiced on account of non — performance of such duty within the prescribed timeframe then in such cases, the related provisions with regard to performance of public duty by a public officer within the prescribed time can be construed as imperative. Therefore, on the basis of this decision of the Supreme Court, it can be contended that even though the legislature has used the words “may” in the context of hearing and deciding appeals by using the expression “where it is possible may hear and decide every appeal” in sub-section (6A) to section 250 of the Act, as the assessees are seriously prejudiced on account of non — performance of their duties by the First Appellate Authorities in hearing and disposal of appeals within the time limit of one year, the said provisions with regard to time limit should be considered as mandatory. In such cases, assessees on whom the right is conferred to challenge the appellate orders before the Tribunals cannot do so on account of non-performance of duties by the First Appellate Authorities within the stipulated timeframe. Further, the legislature, in fixing the time limit, has contemplated that the First Appellate Authorities should be made “accountable” for not acting within the prescribed timeframe because, in the memorandum explaining the provisions of the Financial Bill, 1999, it has been emphasised that “to ensure accountability as well as to ensure disposal of appeals within a reasonable timeframe”, the time limit of the year has been prescribed for hearing and deciding the appeals. There are conflicting decisions of the Supreme Court with regard to reliance on the memorandum explaining the provisions of the Bill while interpreting the provisions of the Enactment, for example, in the case of Ajoy Kumar Bannerjee vs. Union of India, AIR 1984 SC 1130, while interpreting the provisions of section 16 of the General Insurance Business (Nationalisation) Act, 1972, the Supreme Court relied on the memorandum of the relevant Bill explaining the object of clause 16 of the Bill, which became section 16 of the said Act. Further, one can rely on the ratio of mischief rule laid down in the famous Heydon’s case for the proposition that “accountability” was contemplated by the First Appellant Authorities to cure the mischief of delaying the hearing and deciding appeals within a reasonable time.

But the directory provisions do not vest in the concerned First Appellate Authorities, who are quasi-judicial authorities to act according to their whims and fancy. Assuming for the sake of argument that the provisions regarding hearing and deciding appeals within one year, as stated in sub-section (6A) to section 250, are directory, then whether the First Appellate Authorities can take the assessees for a ride by not deciding the appeals for several years?

MEANING OF “ACCOUNTABILITY”

The Cambridge Dictionary defines the word “accountable” as meaning “someone who is accountable is completely responsible for what they do and must be able to give a satisfactory reason for it.” The Collins Dictionary defines the word accountable as meaning “if you are accountable to someone for something that you do, you are responsible for it and must be prepared to justify your actions to that person.” The synonym for the word “accountable” is “answerable” which has been defined by Mitra’s Legal & Commercial Dictionary as “Liable to be called to account, responsible, liable to answer.” When it comes to the accountability of public servants, the word “accountable” assumes a greater significance because a public servant is answerable to the Government and the Public for justification for his inactions.

Para 5 of the “Tax Payers’ Charter issued by the Income Tax Department states that the Department shall make decisions in every income tax proceeding within the time prescribed under the law. Therefore, non-passing of appellate orders within the timeframe prescribed under sub-section (6A) of section 250 of the Act amounts to infringement of the provisions of the Tax Payers’ Charter issued by the Income Tax Department, and this is a serious matter. The CBDT has also released a Citizen Charter in which it has been emphasized that the Income Tax Department should act in a fair manner with the taxpayers.

Now, the Tax Payers’ Charter has the mandate of section 119A of the Act and therefore, the Income Tax Department should not take this matter lightly, where a large number of assessees are adversely affected.

Way back in the Year 1955, the CBDT had issued administrative instructions for the guidance of Income Tax Officers on matters pertaining to assessment in terms of Circular No. 14 (XL — 35) dated 11th April, 1955 inter-alia stating in Para 3 that the officers of the Department must not take advantage of the ignorance of an assessee as to his rights. As the powers of the First Appellate Authorities are coterminous with those of the Assessing Offices, these instructions apply with equal force to the First Appellate Authorities.

Even the Direct Tax Laws Committee, in its Interim Report in the Year 1977 had observed that whenever litigation is inevitable, the same will be disposed of as expeditiously as possible.

It may be noted that in which manner the public officers performing public duty, including the First Appellate Authorities, can be made accountable for their inactions is a matter of great concern. Our constitution is silent for making public officers accountable for their acts of omission as well as their inaction in performing their official duties. Further, section 293 of the Act offers a shield to those erring officers, as the said section states that no suit shall be brought in any civil court to set aside or modify any proceeding taken or order made under this Act, and no prosecution, suit or other proceedings shall lie against the Government or any officer of the Government for anything in good faith done or intended to do under this Act. It needs to be emphasized that this section bars suits, etc., against the Government or its officers for anything in good faith done or intended to be done under this Act. Whether non-disposal of appeals by the First Appellate Authorities for several years, overstepping the time limit of one year laid down under sub-section (6A) of section 250 of the Act be construed as an act done in good faith? The answer will certainly be in the negative. Whether in such cases, the provisions of section 293 of the Act can be invoked? The answer will be in the affirmative.

EFFECT OF INORDINATE DELAY IN DELIVERING JUSTICE

With regard to the delay in delivering justice, it is apposite to quote the following observations of the Supreme Court in the case of Imtiaz Ahmed vs. State of Uttar Pradesh & Others (AIR 2012 SC 642).

“Unduly long delay has the effect of bringing about blatant violation of the rule of law and adverse impact on the common man’s access to justice. A person’s access to justice is a guaranteed fundamental right under the Constitution and, particularly Article 21.

Denial of this right undermines public confidence in the justice delivery system. It incentivises people to look for shortcuts and other fora where they feel that justice will be done quicker. In the long run, this also weakens the justice delivery system and poses a threat to the Rule of Law.”

Thus, it is very true that non-disposal of appeals within the time frame prescribed for the First Appellate Authorities under the Act has resulted in the blatant violation of the Rule of Law and has shaken the confidence of a large number of assessees who are eagerly awaiting appellate orders in their cases.

WHETHER A LONG TIME TAKEN FOR THE DISPOSAL OF APPEALS BY THE FIRST APPELLATE AUTHORITIES LIKELY TO IMPROVE THE QUALITY OF APPELLATE ORDERS?

If the quality of appellate orders passed by the First Appellate Authorities is likely to improve, then the slight delay in passing such appellate orders by the First Appellate Authorities may be justified.

One is reminded of the case of CIT vs. Edulji F. E. Dinshaw (1943) 11 ITR 340 (Bombay), which came up for consideration before the Bombay High Court in which his Lordship Chief Justice Beaumont remarked as under with regard to the quality of appellate orders passed by the First Appellate Authorities.

“I have been hearing income tax references in this Presidency for the last thirteen years, and I would say that in at least ninety per cent of the cases which have come before this Court, the Assistant Commissioner has agreed with the Income Tax Officer and the Commissioner has agreed with the Assistant Commissioner, however complicated and difficult the questions may have been.”

It appears that even after a long period of more than eighty years, the situation is far from satisfactory, as otherwise, the Income Tax Appellate Tribunals all over India may not have been flooded with appeals filed mostly by the assessees.

JUSTICE DELAYED IS JUSTICE DENIED AND AMOUNTS TO VIOLATION OF ARTICLE 21 OF THE CONSTITUTION OF INDIA

The expression “Justice delayed is justice denied” was used for the first time by the Jurist Sir Edward Coke in the Sixteenth Century.

Article 21 of the Constitution of India, which deals with the Protection of Life and Personal Liberty, states that “No person shall be deprived of his life or personal liberty except according to procedure established by law.”

In the landmark case of Hussainara Khatoon vs. Home Secretary, State of Bihar [1979 SCR (3) 532], the Supreme Court gave a wider interpretation to Article 21 of the Constitution of India, holding that speedy trial is a fundamental right of every litigation.

Thus, by not passing appellate orders in a reasonable timeframe by the First Appellate Authorities, there is a violation of Article 21 of the Constitution of India.

The delayed justice results in mental agony, harassment and frustration amongst the assessees.

HEADS I WIN AND TAILS YOU LOSE APPROACH OF THE INCOME TAX DEPARTMENT

It is a matter of great concern that when it comes to filing of appeals before the First Appellate Authorities against assessment orders passed by the Assessing Officers, the time limit has been laid down under section 249 of the Act, and only in exceptional circumstances, the time limit is extended by the First Appellate Authorities. Where there is a slight genuine delay on the part of the assessee in filing an appeal, he is at the mercy of the First Appellate Authority. In such cases, the assessee has to file a Petition for Condonation of Delay with the supporting affidavit duly notarized. Therefore, the honest assessees suffer at both ends. They have to file appeals within a particular timeframe and also they do not receive appellate orders well in time. The Income Tax Department expects that the assessees should strictly follow the law, but it does not take any action against the erring First Appellate Authorities, who act according to their whims and fancies and do not abide by the law.

CONCLUDING REMARKS

In view of the aforesaid discussion, it is amply clear that on account of the non-disposal of appeals by the First Appellate Authorities —

The delay in justice tantamounts to the denial of justice.

There is a violation of Article 21 of the Constitution of India apart from infringement of the Taxpayers’ Charter.

The Income Tax Department is neither taking any remedial action against the erring First Appellate Authorities nor making them accountable for their inactions. It appears that the Income Tax Department is unperturbed and is a silent observer. Even if the Income Tax Department has taken some actions, they are outside the public domain and certainly did not yield the desired results.

The honest taxpayers’ are suffering, undergoing mental stress and agony and facing considerable hardships on account of the non-disposal of appeals by the First Appellate Authorities within a reasonable period.

The main reason why no attention is being paid to the taxpayers’ grievances is because of the reason that those taxpayers who are willing to fight against grave injustice done to them are not duly supported by others, as a result of which their grievances go unnoticed and remain unredressed.

The eminent Jurist and Senior Lawyer Late Mr. Nani Palkhiwala had, in the context of tinkering with the Act every year, had once remarked during one of the great Budget Speeches that “the patience of the Indian Public is anaesthetised, and it continues to endure injustice and unfairness without any resistance”.

REMEDY

The appropriate remedy in such cases is to approach the High Court by filing a Writ of Mandamus. In the case of Praga Tools Corporation vs. Imannual AIR 1969 SC 1306, the Supreme Court observed that an order of mandamus is a form of a command directed to a person requiring him to do a particular thing which pertains to his office which is in the nature of a public duty. In the case of Samarth Transport Company vs. Regional Transport Authority, AIR 1961 SC 93, it was held by the Supreme Court that where there was an inordinate delay on the part of the Issuing Authority in disposing of an application for renewal of license, a writ of mandamus can be issued. Thus, the assessee can approach the High Court by filing a writ of mandamus against the First Appellate Authority, seeking an order of mandamus from the High Court directing the First Appellate Authority to hear and decide the appeal within a particular timeframe.

Glimpses of Supreme Court Rulings

14 Deputy Commissioner of Gift Tax,

Central Circle-II vs. BPL Ltd.

(2022) 448 ITR 739 (SC)

Gift-tax – Equity shares during lock-in period are not ‘quoted shares’ as defined- Valuation of “unquoted equity shares” in companies – Schedule II to the G.T. Act read with Rule 11 of Part C of Schedule III of the W.T. Act is a statutory rule which prescribes the method of valuation of “unquoted equity shares” in companies, other than investment companies, which prescription and method of valuation is mandatory in nature – The effect of Rule 11 of Part C of Schedule III of the W.T. Act is that unquoted shares must be valued as per the formula prescribed – No other method of valuation is permitted and allowed – Ad hoc depreciation/reduction from the quoted price of equity shares transferable in the open market is not permitted and allowed vide Rule 9 of Part C of Schedule III of the W.T. Act.

The assessee company was engaged in the the manufacture and sale of consumer electronic products like television sets, VCR’s, audio and video products, etc.

The assessee had also invested in various other companies manufacturing allied or similar electrical, electronic and engineering goods. On 2nd March, 1993, the assessee transferred its holdings in eight companies to one Celestial Finance Ltd. for a total consideration of ₹23,10,03,974 which was equal to the cost of acquisition of the shares to the assessee.

The assessee had transferred the shares to Alpha Securities Pvt. Ltd., a 99.7 per cent subsidiary of the assessee. Alpha Securities Pvt. Ltd., in turn, had transferred the same to the 100 per cent subsidiary of Celestial Finance Ltd.

In the course of the assessment proceedings for A.Y. 1993-94, there was an audit objection dated 17th August, 1995. The assessee satisfied the Department that there was no element of gift.

Thereafter, in August, 1998, a search was carried out u/s 132 of the Income-tax Act. The Deputy Commissioner of Gift Tax issued a notice u/s 16 of the Gift Tax Act, 1958. An assessment order was passed that concluded that there was a deemed gift u/s 4(1)(a) [which provided for deemed gift in a case where the property is transferred for inadequate consideration] and 4(1)(b) [this dealt with the situation where consideration was not intended to be passed] to the extent of ₹69,78,49,800. The gift tax with interest u/s 16B (from July, 1993 to January, 2000) was quantified at ₹54,01,12,525.

On appeal, the Commissioner of Income-tax (Appeals) upheld the validity of reopening, but reduced the quantum of the gift tax. He held that the shares of BPL Sanyo Utilities & Appliances Ltd. and BPL Sanyo Technologies Ltd. [the transfer of these shares were also the subject matter of gift tax proceedings] had to be treated as unquoted equity shares as they were in the lock-in-period and, therefore, valued under Rule 5 of Gift Tax Rules and directed that the said value be substituted in place of valuation that adopted the quoted value of shares. He deleted the amount assessed u/s 4(1)(b) as it was difficult to hold that the consideration was not intended to be passed. He also modified the interest u/s 16B.

On further appeal by the assessee and a cross objection by the Revenue, the Tribunal approved the action of the AO but accepted the finding of the Commissioner with regard to issue u/s 4(1)(b). The Tribunal dismissed the assessee’s appeal and accepted the Revenue’s appeal in part.

On an appeal to the High Court by the assessee, it was held that (i) the gift tax proceedings were validly initiated in the facts and circumstances of the case; (ii) there was a ‘deemed gift’ in terms of section 4(1)(a) as the status of subsidiary company was given probably to avoid payment of gift tax; and (iii) as the shares in question were not traded and were not tradable, the valuation made by Commissioner was proper.

The High Court further held that the interest u/s 16B was leviable on the returned income and not on the assessed income.

The High Court noted that the finding of the Commissioner (Appeals) deleting the deemed gift u/s 4(1)(b) for alleged non-receipt of consideration was confirmed by the Tribunal and no further appeal having been filed by the Revenue, the order of the Commissioner (Appeals) had become final.

On an appeal by the Revenue, the Supreme Court noted that the limited issue raised in the appeal before it related to the valuation of 29,46,500 shares of M/s. BPL Sanyo Technologies Ltd. and 69,49,900 shares of M/s. BPL Sanyo Utilities and Appliances Ltd. which were transferred by the Respondent-Assessee, M/s. BPL Ltd. to M/s. Celestial Finance Ltd. on 2nd March, 1993. The shares of M/s. BPL Sanyo Technologies Ltd, and M/s. BPL Sanyo Utilities and Appliances Ltd, both public limited companies, were listed and quoted on the stock exchanges. However, these shares, being promoter quota shares, allotted to the Assessee on 17th November, 1990 and 10thJuly, 1991, were under a lock-inperiod up to 16th November,1993 and 25th May, 1994, respectively.

The Supreme Court noted that Sub-section (1)(a) to Section 4 of the Gift Tax Act, 1958 [G.T. Act] states that where a property is transferred otherwise than for adequate consideration, the amount by which the market value of the property, at the date of the transfer, exceeds the value of the consideration, shall be deemed as a gift made by the transferor. Sub-section (1) to Section 64 of the G.T. Act states that the value of any property, other than cash, which is transferred by way of gift, shall be its value on the date on which the gift was made and determined in the manner as laid down in Schedule II of the G.T. Act. Schedule II, which incorporates the rules for determining the value of a gifted property, states that the value of any property, other than cash, transferred by way of gift, subject to the modifications as stated, shall be determined in accordance with the provisions of Schedule III of the Wealth Tax Act, 1957 [W.T. Act]. The provisions of Part C of Schedule III of the W.T. Act lays down the method of valuation of shares and debentures of a company. Rules 9 and 11 of Part C of Schedule III of the W.T. Act relate to the valuation of quoted shares and debentures of companies and valuation of unquoted equity shares in companies other than investment companies respectively.

The expressions “quoted share” and “quoted debentures”, and “unquoted shares” and “unquoted debentures” have been defined vide Sub-rules (9) and (11), respectively, to Rule 2 of Part A of Schedule III of the W.T. Act. As per the definitions, the expression “quoted share” in case of an equity share means a share which is quoted on any recognised stock exchange with regularity from time to time and where the quotation of such shares is based on current transactions made in the ordinary course of business. Explanation to Sub-rule (9) of Rule 2 of Part A of Schedule III of the W.T. Act states that when a question arises on whether a share is a quoted share within the meaning of the rule, a certificate to that effect furnished by the concerned stock exchange in the prescribed form shall be accepted as conclusive. The expression “unquoted share”, in relation to an equity share, means a share which is not a quoted share.

The Supreme Court agreed with the view expressed by the High Court, which observed that the equity shares under the lock-in period were not “quoted shares”, for the simple reason that the shares in the lock-in period were not quoted in any recognised stock exchange with regularity from time to time.

According to the Supreme Court, when the equity shares are in a lock-in period, then as per the guidelines issued by the Securities and Exchange Board of India (SEBI), there is a complete ban on transfer, which is enforced by inscribing the words “not transferable” in the relevant share certificates.

The Supreme Court noted that the aforesaid position was accepted by the Revenue, which, however, had relied upon a general circular issued by SEBI, wherein it is stated that the shares under the lock-in period can be transferred inter se the promoters. This restricted transfer, according to the Supreme Court, would not make the equity shares in the lock-in period into “quoted shares” as defined vide Sub-rule (9) to Rule 2 of Part A of Schedule III of the W.T. Act, as the lock-in shares are not quoted in any recognised stock exchange with regularity from time to time, and it is not possible to have quotations based upon current transactions made in the ordinary course of business. The possibility of a transfer to promoters via a private transfer/sale does not satisfy the conditions to be satisfied to regard the shares as quoted.

The Supreme Court held that Rule 11 of Part C of Schedule III of the W.T. Act is a statutory Rule which prescribes the method of valuation of “unquoted equity shares” in companies (other than investment companies), which prescription and method of valuation is mandatory in nature. The effect of Rule 11 of Part C of Schedule III of the W.T. Act is that unquoted shares must be valued as per the formula prescribed. No other method of valuation is permitted and allowed. Any ad hoc depreciation/reduction from the quoted price of equity shares transferable in the open market is not permitted and allowed vide Rule 9 of Part C of Schedule III of the W.T. Act. The shares in question being “unquoted shares”, therefore, must be valued in terms of Rule 11 as a standalone valuation method.

Faced with the aforesaid position, the Revenue further relied upon Rule 21 of Part H of Schedule III of the W.T. Act before the Supreme Court.

The Supreme Court noted that Rule 21 of Part H of Schedule III of the W.T. Act had been enacted to clarify and remove doubts. It states that notwithstanding the negative covenants prohibiting or restricting transfer, the property should be valued for the purpose of the W.T. Act and the G.T. Act, but according to the Supreme Court, the valuation is not by overlooking or ignoring the restrictive conditions.

The Supreme Court held that the shares in the lock-in period have market value, which would be the value that they would fetch if sold in the open market. Rule 21 of Part H of Schedule III of the W.T. Act permits valuation of the property even when the right to transfer the property is forbidden, restricted or contingent. Rights and limitations attached to the property form the ingredients in its value. The purpose is to assume that the property which is being valued is being sold, and not to ignore the limitations for the purpose of valuation. This was clear from the wording of Rule 21 of Part H of Schedule III of the W.T. Act, which when read carefully expresses the legislative intent by using the words “hereby declared”. The Rule declares that the price or other consideration for which any property may be acquired by, or transferred, to any person under the terms of a deed of trust or through any other restrictive covenant, in any instrument of transfer, is to be ignored as per the provisions of the Schedule III of the W.T. Act. However, the price of such property is the price of the property with the restrictions if sold in the open market on the valuation date. In other words, notwithstanding the restrictions, hypothetically the property would be assumed to be saleable, but the valuation as per Schedule III of the W.T. Act would be made accounting and taking the limitation and restrictions, and such valuation would be treated as the market value. The Rules do not postulate a change in the nature and character of the property. Therefore, the property must be valued as per the restrictions and not by ignoring them.

In view of the aforesaid discussion, and for thereasons stated above, the appeal by the Revenue was dismissed.

Notes:

1. The above judgment of the Supreme Court gives an impression that this was a case of gift of shares. However, this was a case of transfer/sale of shares at cost and that had raised the issue of valuation of such shares and consequently the issue of deemed gift u/s 4(i)(a) of the Gift-Tax Act, 1958. The relevant facts are available in High Court judgment [(2007) 293 ITR 321(Karn)].

2. The Gift-Tax Act, 1958 is effectively inoperative from 1st October, 1998. Likewise, the Wealth-Tax Act, 1957 is also not operative from A.Y. 2016-17. However, the principle of valuation of shares of listed company during lock-in period of promoters’ quota shares decided by the Court will be still relevant.

15 Indian Institute of Science vs. Dy. Commissioner of Income Tax

(2022) 446 ITR 418 (SC)

Salary – Perquisite – Merely because an assessee might have adopted the Central Government Rules and/or the pay-scales etc., by that itself, it cannot be said that the assessee is a Central/State Government – Employees of such an assessee cannot be construed to be employees of the Central Government for the purposes of computing perquisite value which was governed by Sl. No. 2 of Table 1 appended to Rule 3 of the Rules.

The assessee, a premier research institution engaged in imparting higher learning and carrying out advanced research in science and technology, was recognised as a ‘Deemed University’ under the provisions of University Grants Commission Act, 1956 (‘the UGC Act’).

The service conditions of the employees of the assessee were governed by the rules as were applicable to the Central Government employees.

Accordingly, TDS returns in Form 24Q was filed by the assessee u/s 192 of the Act r.w.s 17(2) of the Act, for the period from 1st April, 2009 to 31st March, 2010, which was applicable in respect of the employees of the Central Government.

The AO, by an order dated 26th April, 2013 passed u/s 201(1) and 201(1A) r.w.s 192 of the Act (A.Y. 2010-11), held that the assessee had not correctly worked out the perquisite value of accommodation in accordance with amended Rule 3 of the Rules, and was liable to be treated as an assessee in default u/s 201(1) of the Act for non-deduction/short deduction. It was further held that the assessee was liable to pay interest u/s 201(1A).

The assessee thereupon filed an appeal before the CIT (A) who, by an order dated 22nd July, 2014, affirmed the orders passed by the AO.

The assessee thereupon filed an appeal before the Tribunal. The Tribunal, by an order dated 27th February, 2015, inter alia, held that the employees of the assessee cannot be construed to be employees of the Central Government for the purposes of computing perquisite value which was governed by Sl. No. 1 of Table 1 appended to Rule 3 of the Rules. Accordingly, the appeal was dismissed.

The assessee, thereupon, filed an appeal before the Karnataka High Court. The High Court noted that the assessee, which was a Trust under the 1890 Act, was controlled and financed by the Central Government, and governed by the Rules governing the service conditions of the employees of the Central Government. According to the High Court, the assessee may be an instrumentality of the State for the purpose of Article 12 of the Constitution of India. However, for the purposes of Rule 3, the requirement was that the accommodation should be provided by the Central or State Government to the employees either holding office or post in connection with affairs of the Union or of a State or serving with anybody or undertaking under the control of such Government from deputation. The High Court held that merely because the assessee is a body or undertaking owned or controlled by the Central Government, it cannot be elevated to the status of Central Government. Thus, the assessee cannot claim that valuation of perquisites in respect of residential accommodation should be computed as in case of an accommodation provided by the Central Government. Therefore, Sl. No. 1 of Table 1 of Rule 3 of the Rules did not apply to the assessee.

The assessee thereupon filed a Special Leave Petition before the Supreme Court.

The Supreme Court agreed with the findings recorded by the High Court that even if the petitioner may be considered as a State instrumentality within the definition of Article 12 of the Constitution of India, the same cannot be treated at par with the Central/State Government employees under Table-I of Rule 3 of the Income- tax Rules, 1962. Accordingly, the rules applicable to government employees for the purpose of computing the value of perquisites u/s 17(2) would not be applicable in the case of the petitioner. The Supreme Court held that merely because the petitioner might have adopted the Central Government Rules and/or the pay-scales etc., by that itself, it cannot be said that the petitioner is a Central/State Government. The Supreme Court therefore declined to interfere with the order of the High Court.

Insofar as the merits of the claim is concerned, the Counsel for the Petitioner pointed out that some of the crucial aspects had not been considered on merits by the High Court and, therefore, the petitioner proposed to file a review application before the High Court pointing out certain aspects on merits.

The Supreme Court, without expressing anything on the same, simply permitted the petitioner to file a review application on the aforesaid only and directed that as and when such a review application is filed, the same be considered in accordance with law and on its own merits.

16 ACIT vs. Kalpataru Land Pvt. Ltd. (2022)

447 ITR 364 (SC)

Reassessment – Assessment could not be reopened on a change of opinion.

The assessment of the assessee, engaged in the business of real estate, for A.Y. 2013-2014 was completed u/s 143(3) of the Income -tax Act, 1961 (the Act) on 20th February 2016 by determining nil total income.

On 27th March 2019, a notice u/s 148 was issued to the petitioner for A.Y. 2013-2014.

The assessment was reopened for the reason that the assessee company had issued its shares at premium of ₹990 per share in F.Y. 2012-13 (relevant to A.Y. 2013-14). During the said period, the assessee company had no significant transaction except having capitalized its interest expenses to the cost of the land purchased. The valuation of shares at a high premium of ₹990 per share by the company was based on the Discounted Cash Flow (DCF) method, which projections of profitability, according the AO, were computed on unrealistic future growth projections. The AO was of the view that the company had received consideration which exceeded the Fair Market Value (FMV) of the shares and therefore was liable to be taxed as the difference between the aggregate value of the shares and FMV u/s 56(2) (viib) of the Act.

The High Court noted that by a letter dated 5th October, 2015, the AO had called upon the assessee to produce evidence in support of increase of the authorised share capital, produce the evidence of share allotment and name and address of the parties from whom share premium was received, among other things. The assessee by its letter dated 23rd December 2015, provided the details of share premium received including name of the party from whom it was received. After considering the same, the assessment order has been passed on 20th February, 2016. Therefore, according to the High Court, it was not permissible for an AO to reopen the assessment based on the very same material with a view to take another view without consideration of material on record once view is conclusively taken by the AO.

The Supreme Court dismissed the SLP, considering the fact that earlier the AO had called upon the assessee to produce the evidence in support of increase of authorised share capital, produce the evidence of share allotment and names and addresses of the parties from whom share premium was received, among other things before passing the assessment order. According to the Supreme Court, the subsequent reopening could be said to be a change of opinion.

Note:

The Supreme Court has also dismissed SLPs of the Revenue for similar reasons in other two cases [(i) PCIT vs. State Bank of India (2022) 447 ITR 368 (SC); and (ii) DCIT vs. Financial Software and Systems P Ltd. (2022) 447 ITR 370 (SC)].

17 Harshit Foundation Sehmalpur Jalalpur Jaunpur vs. Commissioner of Income Tax, Faizabad

(2022) 447 ITR 372 (SC)

Charitable purpose – Registration –There is no provision in the Act by which it provides that on non-deciding the registration application u/s 12AA(2) within a period of six months there shall be deemed registration.

In an appeal filed u/s 260A of the Income-tax Act, 1961 (‘the Act’) by the Revenue before the Allahabad High Court from the order dated 28th June, 2013 passed by the Income-tax Appellate Tribunal, Lucknow, the Appellant had raised a question as to whether non-disposal of the application for registration within a period of six months will result in deemed grant of registration u/s 12AA(2) of the Act.

The High Court set aside the order of the Tribunal and allowed the Revenue’s appeal holding that non-disposal of the application for registration, by granting or refusing registration, before expiry of six months as provided u/s 12AA(2) of the Act would not result in deemed grant of registration by following the decision of its Full Bench in CIT vs. Muzafar Nagar Development Authority (2015) 372 ITR 209 (All) (FB).

After considering in detail the provisions of Section 12AA(2) of the Act, the Supreme Court found that there is no specific provision in the Act by which it provides that on non-deciding the registration application u/s 12AA (2) within a period of six months there shall be deemed registration.

According to the Supreme Court, the Full Bench of the High Court had rightly held that even if in a case where the registration application u/s 12AA is not decided within six months, there shall not be any deemed registration. The Supreme Court was in complete agreement with the view taken by the Full Bench of the High Court. The Special Leave Petition was, therefore, dismissed.

Article 13 of India-Denmark DTAA — Assessee, a Danish tax resident, had obtained software licenses from Microsoft for its group entities and received payments from its Indian AE SGIPL. Since software was used by Indian AE, and such use did not involve any transfer of copyright or other rights, as neither assessee nor SGIPL had right to sub-license or modify software, payment made by Indian AE to assessee could not be characterised as royalty.

6 [2024] 161 taxmann.com 590 (Delhi – Trib.)

Saxo Bank A/S.vs. ACIT

ITA No: 2010/Del/2023

A.Y.: 2020–21

Dated: 16th April, 2024

Article 13 of India-Denmark DTAA — Assessee, a Danish tax resident, had obtained software licenses from Microsoft for its group entities and received payments from its Indian AE SGIPL. Since software was used by Indian AE, and such use did not involve any transfer of copyright or other rights, as neither assessee nor SGIPL had right to sub-license or modify software, payment made by Indian AE to assessee could not be characterised as royalty.

FACTS

Assessee was a tax resident of Denmark. It entered into a global agreement with Microsoft for procuring various shrink-wrapped software licenses such as Microsoft Visual Studios, Dynamic 365, remote desktop, office 365, etc., for entities within the Saxo Group. The assessee received payments from its Indian Associated Enterprise (‘AE’) against the above licenses. Indian AE had withheld tax under section 195 of the Act. In its return of tax, assessee claimed refund of tax withheld by the Indian AE.

AO held that the assessee had received charges from Indian AE for allowing use of its IT infrastructure, which consisted of various third-party software, owned / leased / supported platforms, including hardware systems. Hence, the receipts were taxable as royalty. The DRP upheld order of the AO.

Being aggrieved, the assessee filed appeal to the ITAT.

HELD

  •  The software used by SGIPL and the amount cross-charged by the assessee did not pertain to use or right to use any copyright, as neither the assessee nor the Indian AE had any right to sub-license, transfer, reverse engineer, modify or reproduce the software or user license.
  •  The Indian AE had acknowledged that the Microsoft Software was granted to assessee by Microsoft Denmark ApS under an object code-only, non-exclusive, non-sublicensable, non-transferable, revocable license to access and use the object code version of the proprietary software, solely for internal business purposes of the assessee and its group / associate companies.
  •  The core of a transaction is to authorise the end-user to have access to and make use of the licensed software over which the licensee has no exclusive rights and no copyright is parted. Payment for the same cannot be characterised as royalty.

Article 12 of India-USA DTAA — Subscription fees received by an American scientific society for providing access to online chemistry database and for sale of online journal to Indian subscribers did not qualify as Royalty, either in terms of section 9(1)(vi) of Act, or in terms of article 12(3) of India-USA DTAA.

5 [2024] 161 taxmann.com 354 (Mumbai – Trib.)

American Chemical Society vs. DCIT

ITA No: 415/Mum/2023

A.Y.: 2021–22

Dated: 27th March, 2024

Article 12 of India-USA DTAA — Subscription fees received by an American scientific society for providing access to online chemistry database and for sale of online journal to Indian subscribers did not qualify as Royalty, either in terms of section 9(1)(vi) of Act, or in terms of article 12(3) of India-USA DTAA.

FACTS

The assessee (ACS) was a society based in the USA and supported scientific inquiry in the field of chemistry. Its source of income was subscription fees — for providing access to online chemistry database and for sale of online journals from outside India to Indian subscribers.

Following the orders passed in earlier years, the AO treated the payments received by the assessee as royalty. The DRP upheld the order of the AO.

Being aggrieved, the assessee appealed to the ITAT.

HELD

Following the orders passed for earlier years1, the ITAT held that the subscription fees received by the assessee from its customers for providing access to database and journals was not royalty as the subscribers did not acquire use of a copyright. Key findings of the ITAT in earlier years were:

  •  The grant of a copyright means that the recipient has a right to commercially exploit the database / software, e.g. reproduce, duplicate or sub-license the same.Such payments may be classified as royalty. However, in the present case, assessee had not transferred such rights in the database or search tools to its subscribers.
  •  The user of the copyrighted software does not receive the right to exploit the copyright in the software. He merely enjoys the product or the benefits of the product in the normal course of his business.

The journal provided by ACS did not provide any information arising from its previous experience. The experience of the assessee was in the creation of and maintaining of such online format. By granting access to the journals, the assessee neither shared its experiences, techniques or methodology employed in evolving databases with the subscribers, nor did the assessee impart any information relating to the subscribers.

 


1 American Chemical Society vs. Dy. CIT (IT) [2019] 106 taxmann.com 253 (Mumbai) (para 4) and American Chemical Society vs. Dy. CIT [2023] 151
taxmann.com 74 (Mumbai - Trib.) (para 4).

Sec. 54, Sec. 263.: Where the assessee claimed deduction under section 54 within the prescribed time limits, capital gains not deposited in the CGAS scheme will not be considered as prejudicial to the interest of the revenue and invoking revisionary jurisdiction was bad in law.

20 Ms. Sarita Gupta vs. Principal Commissioner of Income-tax

[2024] 109 ITR(T) 373 (Delhi -Trib.)

ITA NO. 1174 (DELHI) OF 2022

A.Y.: 2012–13

Dated: 7th December, 2023

Sec. 54, Sec. 263.: Where the assessee claimed deduction under section 54 within the prescribed time limits, capital gains not deposited in the CGAS scheme will not be considered as prejudicial to the interest of the revenue and invoking revisionary jurisdiction was bad in law.

FACTS

The assessee was an individual who had sold a residential property during the year under consideration. Based on certain information in this regard, reassessment was initiated by the AO calling upon the assessee to furnish the details of the properties sold and the resultant capital gain. After verifying all the details, the AO accepted the return of income filed by the assessee and accordingly completed the assessment.

The records were examined by the PCIT wherein it was found that the capital gain amount was not deposited in the capital gain account scheme during the interim period till its utilisation in purchase / construction of new property. Revisionary powers under section 263 were invoked by the PCIT.

Rejecting assessee’s submissions, the PCIT set aside the assessment order with a direction to disallow the deduction claimed under section 54 of the Act, on the count that the assessee had failed to deposit the capital gain amount in capital gain account scheme.

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

HELD

The ITAT observed that in the course of assessment proceedings, the AO had thoroughly examined the issue of sale of the immovable property and the resultant capital gain arising from such sale.

On the perusal of the show cause notice issued under section 263 of the Act as well as the order passed, it was observed by the ITAT that the revisionary authority had not expressed any doubt regarding the quantum of capital gain arising at the hands of the assessee and also the fact that such capital gain was invested in purchase/construction of residential house within the time limit prescribed under section 54(1) of the Act.

The ITAT held that treating the assessment order to be erroneous and prejudicial to the interest of Revenue only because the capital gain was not deposited in the capital gain account scheme was bad in law.

In the result, the appeal of the assessee was allowed.

Sec. 48.: Where assessee sold house properties and claimed indexed cost of improvement while computing long term capital gains, since all expenditure incurred enhanced the sale value of the house property, assessee was entitled to deduction towards cost of improvement. Sec. 54.: Where assessee reinvested sale proceeds in purchase of property from his own bank account, then the property being registered in the name of his parents will not disentitle the assessee to claim a deduction u/s 54 of the Act.

19 Rajiv Ghai vs. Assistant Commissioner of Income-tax

[2024] 109 ITR(T) 439 (Delhi – Trib.)

ITA NO. 8490 & 9212 (DELHI) OF 2019

A.Y.: 2016–17

Dated: 26th December, 2023

Sec. 48.: Where assessee sold house properties and claimed indexed cost of improvement while computing long term capital gains, since all expenditure incurred enhanced the sale value of the house property, assessee was entitled to deduction towards cost of improvement.

Sec. 54.: Where assessee reinvested sale proceeds in purchase of property from his own bank account, then the property being registered in the name of his parents will not disentitle the assessee to claim a deduction u/s 54 of the Act.

FACTS

The assessee was an individual who sold two residential properties at Lucknow and Bangalore. The assessee claimed indexed cost of acquisition and indexed cost of certain improvements made to both the properties. Further, the assessee reinvested the sales proceeds towards the purchase of another house property which was registered in the name of his parents and claimed deduction u/s 54 of the Income-tax Act, 1961 (Act).

In the course of scrutiny, the Assessing Officer (AO) partly disallowed the indexed cost of improvements in the computation of long-term capital gains against the Lucknow property. It was contended by the AO that the valuation report and other evidences furnished by the assessee to justify the cost of improvements were vague and insufficient. Further, the AO partly disallowed the indexed cost of improvements for the Bangalore property contending that installation costs of elevator was ineligible to be claimed as cost of improvement. Further, the deduction claimed u/s 54 was disallowed on the count that the house property was registered in the name of assessee’s parents.

Aggrieved by the assessment order, the assessee filed an appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee to the extent of the claim of deduction u/s 54 of the Act.

Aggrieved, the assessee and the Revenue filed an appeal before the ITAT.

HELD

The ITAT observed that the assessee had submitted a valuation report certifying the cost of acquisition and cost of improvement of the Lucknow property. The said valuation was carried out in compliance with the guidelines laid down by the Central Public Works Department.

The ITAT held that all the costs incurred led toimprovement in the value of the house property. The AO had disallowed the improvement costs based on selective reading of the sale agreement. Further, it was held that the AO could not bring anything on record that the statement given by the valuer was wrong on facts or had inconsistencies.

For the Bangalore property, the ITAT held that deductions towards elevator installation and other expenses made the house habitable and should be allowed to be claimed as costs of improvement.

Relying on the decisions in ACIT vs. Suresh Verma (135 ITD 102) & CIT vs. Kamal Wahal (351 ITR 4), the ITAT held that the assessee reinvested sale proceeds in purchase of property from his own bank account. Therefore, the property being registered in the name of his parents will not disentitle the assessee to claim a deduction u/s 54 of the Act.

In the result, the appeal of the assessee was allowed and that of the revenue dismissed.

S. 270A – No penalty under section 270A can be levied for incorrect reporting of interest income if the interest income as appearing in Form 26AS as on date of filing of return was correctly disclosed by the assessee and the difference in interest income was on account of delayed reporting by the deductor. S. 270A – No penalty under section 270A could be levied if the enhanced claim of exemption under section 10(10) of the assessee was on the basis of a mistaken but bona fide belief and he had disclosed all material facts and circumstances of his case S. 270A – Imposition of penalty under section 270A(1) is discretionary and not mandatory.

18 Ravindra Madhukar Kharche vs. ACIT

(2024) 161 taxmann.com 712 (Nagpur Trib)

ITA No.: 228(Nag) of 2023

A.Y.: 2017–18

Dated: 16th April, 2024

S. 270A – No penalty under section 270A can be levied for incorrect reporting of interest income if the interest income as appearing in Form 26AS as on date of filing of return was correctly disclosed by the assessee and the difference in interest income was on account of delayed reporting by the deductor.

S. 270A – No penalty under section 270A could be levied if the enhanced claim of exemption under section 10(10) of the assessee was on the basis of a mistaken but bona fide belief and he had disclosed all material facts and circumstances of his case

S. 270A – Imposition of penalty under section 270A(1) is discretionary and not mandatory.

FACTS

The assessee-individual joined his services with Maharashtra State Electricity Board (MSEB), which was demerged, inter alia, into Maharashtra State Electricity Generation Company Ltd (MSEGCL) which was a State Government of Maharashtra-owned company. Consequently, the assessee’s employer became MSEGCL. He retired from MSEGCL on 31st May, 2016.

He declared total income of ₹44,68,490 with NIL tax liability in his original return of income. Subsequently, the return was revised claiming tax refund of ₹3,09,000, owing to upward revision of claim of exemption of gratuity to ₹20,00,000 (on the belief that his case was covered by CBDT notification dated 8th March, 2019) as against original claim of ₹10,00,000.

While framing assessment under section 143(3),the AO made two additions: (a) addition of ₹10,00,000 arising on account of restricting the claim of exemption of gratuity to ₹10,00,000 under section 10(10) as available to non-government employee, as against the claim of ₹20,00,000 made in revised ITR;(b) addition of ₹21,550 being difference of interest
income offered to tax as against the income reported in Form 26AS.

The assessee did not challenge the disallowances in appeal and paid the assessed tax.

The AO initiated penal proceedings under section 270A pursuant to the aforesaid additions and imposed a penalty of ₹6,02,858 @ 200 per cent of tax sought to evaded under section 270A(8).

CIT(A) confirmed the penalty levied by the AO.

Aggrieved, the assessee filed an appeal before the Tribunal.

HELD

The Tribunal vide an ex-parte order deleted the penalty under section 270A and observed as follows:

(a) With regard to the penalty vis-a-vis incorrect reporting of interest income was concerned, the Tribunal held that no penalty under section 270A could be levied since:

(i) as on the date of filing of return, the amount of interest earned as appearing in Form No 26AS had been rightly offered to tax by the assessee;

(ii) the difference in interest income came to light post filing of ITR and on account of delayed reporting by the deductor / payer bank / financial institution.

(b) With regard to the penalty vis-à-vis disallowance of enhanced claim of gratuity exemption was concerned, the Tribunal deleted the penalty under section 270A since:

(i) Admittedly for part of the service, the appellant was State Government employee whose employment, by enforcement of Electricity Act, 2003 and MSEGCL Employee Service Regulation, 2005, was converted into non-governmental service / employment. Therefore, the belief under which full / extended exemption of retirement benefit claimed in the ITR filed was in first not incorrect in its entirety and certainly it was bonafide and not synthetic one.

(ii) The explanation offered by the appellant in support of his mistaken but bonafide belief and his disclosure of all material facts of his service and circumstances which swayed him to claim full exemption in his ITR, fell within section 270A(6)(a) and therefore, was pardonable.

(iii) The imposition of penalty is at the discretion of AO since section 270A(1) refers to the word “may” and not as “shall”; and in light of facts and circumstance of the present case holistically and in right spirit of law, levy of penalty @ accelerated rate of 200 per cent was unwarranted.

(iv) in respect of penalty in fiscal laws, the principle followed is more like the principle in criminal cases, that is to say, the benefit of doubt is more easily given to the assessee as expounded in V V Iyer vs. CC, (1999) 110 ELT 414 (SC).

Section 17(3) — payment of ex-gratia compensation without any obligation on the part of employer to pay an amount in terms of any service rule would not amount be taxable under section 17(3)(i). The Departmental Representative is required to confine to his arguments to points considered by AO / CIT(A) and could not set up altogether a new case before ITAT and assume the position of the CIT under section 263.

17 ITO vs. Avirook Sen

(2024) 161 taxmann.com 462 (DelTrib)

ITA No.: 6659(Delhi) of 2015

A.Y.: 2009–10

Dated: 12th April, 2024

Section 17(3) — payment of ex-gratia compensation without any obligation on the part of employer to pay an amount in terms of any service rule would not amount be taxable under section 17(3)(i).

The Departmental Representative is required to confine to his arguments to points considered by AO / CIT(A) and could not set up altogether a new case before ITAT and assume the position of the CIT under section 263.

FACTS

During F.Y. 2008–09, the assessee received ₹2,00,00,000 as lumpsum from his employer after his termination from service and ₹13,08,444 for purchase of a new car.

The AO sought to tax the aforesaid amounts as profits in lieu of salary under section 17(3)(i).

CIT(A) allowed the assessee’s appeal.

Aggrieved, the tax department filed an appeal before ITAT.

HELD

The Tribunal observed as follows:

(a) The cases relied by the AO, namely, C.N. Badami vs. CIT,(1999) 240 ITR 263 (Madras) and P. Arunachalam vs. CIT,(2000) 240 ITR 827 (Mad) were distinguishable since unlike in those cases, there was no agreement between the assessee and his employer in the present case and the amounts were received on account of out of court settlement and as value of perquisite.

(b) Since neither the AO nor CIT(A) had considered the applicability of section 17(3)(iii), the Departmental Representative could not set up altogether a new case / arguments before ITAT and assume the position of the CIT under section 263.

(c) As the payment of ex-gratia compensation was voluntary in nature without there being any obligation on the part of employer to pay further amount to assessee in terms of any service rule, it would not amount to compensation under section 17(3)(i).

Accordingly, the Tribunal held that the addition was rightly deleted by CIT(A) and dismissed the appeal of revenue.

Section 50C ­— Leasehold rights in land are not within the purview of section 50C.

16 DCIT vs. A. R. Sulphonates (P.) Ltd.

(2024) 161 taxmann.com 451 (KolTrib)

ITA No.:570(Kol) of 2022

A.Y.: 2017–18

Dated: 22nd March, 2024

Section 50C ­— Leasehold rights in land are not within the purview of section 50C.

FACTS

The assessee was allotted leasehold land by Maharashtra Industrial Development Corporation (MIDC) on 11th April, 2008 for setting up a manufacturing unit.

Subsequently, the assessee decided to transfer the said land to one partnership firm, M/s S. M. Industries (SMI) vide an agreement to sale executed on 28th April, 2011, whereby the assessee agreed to transfer the said leasehold land for a consideration of ₹2 crores (stamp value on such date was ₹1,62,99,500). Against this agreement to sale, assessee received an advance of ₹5 lacs by account payee cheque and the balance was to be received on or before the execution of conveyance deed.

Assessee handed over possession of the said land to the partners of SMI on the date of execution of agreement to sale, that is, on 28th April, 2011. It also sought a permission from MIDC to transfer the leasehold rights in the land. The permission from MIDC got delayed which was eventually given on 23rd February, 2016, whereby assessee took all the necessary steps for execution of conveyance in favour of SMI which was done on 24th August, 2016. The assessee received the balance consideration of ₹1.95 crores as agreed earlier through agreement to sale dated 28th April, 2011.

The AO held that leasehold right of the land acquired by the assessee are capital asset which the assessee acquired from MIDC and subsequently transferred it to the partners of SMI for the remaining period of lease, and the assessee is liable to pay long term capital gain under section 50C.

CIT(A) held in favour of the assessee.

Aggrieved, the tax department filed an appeal before the ITAT.

HELD

Noting the restrictive covenants in the relevant agreements / MIDC order, the Tribunal noted that the leasehold rights of the assessee were limited and restrictive in nature as compared to the ownership rights.

The Tribunal observed that:

(a) It is a settled legal proposition that deeming provision cannot be extended beyond the purpose for which it is enacted. Section 50C(1) does not refer to immovable property but to specific capital asset being, land or building or both.

(b) A reference to “rights in land or building or part thereof” (as used in section 54D , 54G, etc.) does not find place in section 50C(1); therefore, it cannot be inferred that that capital asset being land or building or both, would also include rights in land or building or part thereof and that such provision will also cover leasehold rights which are limited in nature and cannot be equated with ownership of land or building or both. The Act has given separate treatment to land or building or both, and the rights therein.

Accordingly, the Tribunal held that leasehold rights in land are not within the purview of section 50C and concurred with CIT(A).

On the alternate plea of applicability of first and second proviso to section 50C, the Tribunal observed that even if it is assumed that transfer of a leasehold right in land is covered by section 50C(1), the assessee was adequately safeguarded by first and second proviso to section 50C since the stamp duty value at time of agreement to sale was less than the actual consideration of R2 crores.

Where refund arising consequent to granting MAT credit is more than 10 per cent of the total tax liability and is out of TDS and the return of income has been filed by due date mentioned in section 139(1), assessee is entitled to interest u/s 244A from the first day of the assessment year though the claim of MAT credit was made much later in a rectification application filed. Interest on unpaid interest also allowed.

15 Srei Infrastructure Finance Ltd. vs. ACIT

TS-288-ITAT-2024(Kol)

A.Y: 2017–18

Date of Order: 29th April, 2024

Section 244A

Where refund arising consequent to granting MAT credit is more than 10 per cent of the total tax liability and is out of TDS and the return of income has been filed by due date mentioned in section 139(1), assessee is entitled to interest u/s 244A from the first day of the assessment year though the claim of MAT credit was made much later in a rectification application filed.

Interest on unpaid interest also allowed.

FACTS

The assessee originally filed the return on 29th November, 2017, and in this return TDS credit of ₹81,86,10,024 was claimed and this amount was finally revised in the revised return on 30th March, 2019 claiming TDS of ₹75,14,12,726. In the final revised return, the refund claimed by the assessee was only ₹2,89,36,036. Thereafter, the assessee’s case was scrutinised by issuing of noticeu/s. 143(2) and the reference was given to the TPO on 18th October, 2019 and finally assessment order was framed on 29th May, 2021. In the computation sheet attached with the assessment order, the amount payable to assessee was only ₹3,31,49,723. No interest u/s. 244A of the Act was granted because the TDS was less than 10 per cent of the total tax liability.

Thereafter, on 6th June, 2022, the assessee moved a rectification application and one of the points of its application was that the assessee is entitled to substantial MAT credit brought forward from earlier years. The AO passed rectification order on 12th July, 2022 and issued a refund of ₹25,72,14,141 which comprised of tax of ₹25,06,86,616 and interest u/s 244A of ₹65,27,525. Interest was granted for only five months whereas the assessee was of the view that it was entitled to interest for 70 months, i.e., since 1st April, 2017.

Aggrieved with short grant of interest, assessee preferred an appeal to CIT(A) who held that assessee had not raised this issue in rectification application and therefore, there was no need for adjudication of the issue relating to interest u/s 244A.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted the facts and also the year wise details of MAT credit claimed and observed that except for A.Y. 2010–11, all the other amounts of MAT credit were either after the filing of original return of income or during the course of assessment proceedings for the year under appeal. The Tribunal observed that it appears that assessee was not aware of the eligible MAT credit which it was entitled prior to the date of filing the final revised return on 30th March, 2019. It also noted that there was no dispute about the correctness of the MAT credit of ₹33,08,57,877. The Tribunal observed that since the MAT credit available for set off is from preceding assessment years is available to the assessee and has been accepted by the AO in the computation sheet and has given the revised tax component of ₹25,06,86,616, the only point to be examined is for how many months the assessee is entitled to the interest u/s. 244A.

The Tribunal upon perusal of section 244A observed that the assessee’s case falls u/s 244A(1)(a)(i) of the Act because the refund order to the assessee is out of the tax deducted at source upto 31st March, 2017 and the assessee had furnished its original return u/s139(1) of the Act. Even though the assessee has revised the return but for the purpose of calculating interest, assessee’s return shall always be treated to be filed u/s. 139(1) of the Act. Though the refund in the present case has been awarded in the order u/s. 154 of the Act but even section 154 is also forming part of the fleet of other sections mentioned in section 244A(3) of the Act and that comes into action when a refund has already been granted but subsequent to the rectification order, the refund is increased or decreased then the interest given earlier also needs to be increased or decreased. However, in the instant case when the assessee was originally granted the refund no interest was given because the refund was less than 10 per cent of the total tax liability. It was only in the rectification order dated 12th July, 2022 that the refund of tax component of ₹25,06,86,616 was given. After considering the facts and circumstances of the case, and also considering the set off of MAT credit available with the assessee as on the beginning of the assessment year, the Tribunal found merit in the contentions made on behalf of the assessee that the interest u/s 244A of the Act in the case of the for A.Y. 2017–18 needs to be computed from 1st April, 2017 to the date of grant of refund. The Tribunal relying upon the following decisions allowed the effective ground raised by the assessee in its appeal:

i) UOI vs. Tata Chemicals ltd. [(2014) 43 taxmann.com 240 (SC)];

ii) CIT vs. Birla Corporation ltd. [(2016) 66 taxmann.com 276 (Cal)];

iii) CIT vs. Cholamandalam Investment & Finance Co. Ltd. [(2008) Taxman 132 (Madras)];

iv) CIT vs. Ashok Leyland Ltd. [(2002) 125 Taxman 1031 (Madras)];

v) PCIT vs. Bank of India [(2018) 100 taxmann.com 105 (Bom.)]; &

vi) ADIT (IT) vs. Royal bank of Scotland N. V [(2011) 130 ITD 305(Kol)].

The Tribunal also held that the assessee indeed is entitled for interest on unpaid interest.

Disallowance provision in section 143(1)(a)(v), introduced by the Finance Act, 2021, w.e.f. 1st April, 2021, dealing with deductions claimed under Chapter VI-A applies with prospective effect.

14 Food Corporation of India Employees Co-operative Credit Society Ltd. vs. ADIT, CPC

TS-193-ITAT-2024(Mum)

A.Y.: 2019–20

Date of Order: 22nd March, 2024

Sections 80P, 143(1)(a)(v)

Disallowance provision in section 143(1)(a)(v), introduced by the Finance Act, 2021, w.e.f. 1st April, 2021, dealing with deductions claimed under Chapter VI-A applies with prospective effect.

FACTS

The CPC while processing the return of income filed by the assessee for assessment year 2019–20 disallowed the claim of deduction made under section 80P for want of filing the return of income by due date.

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

Aggrieved, the assessee filed an appeal to the Tribunal where revenue contended that the claim made by the assessee could be disallowed u/s 143(1)(a)(ii) at the time of processing of return of income on the grounds that it constituted “incorrect claim, if such incorrect claim is there from any information in the return of income”. Reliance was also placed on the decision of the Madras High Court in the case of Veerappampalayam Primary Agricultural Co-operative Credit Society vs DCIT [(2022) 138 taxmann.com 571 (Mad. HC)]. Attention was also drawn to the provisions of section 80AC.

HELD

In view of the fact that the Finance Act, 2021 has w.e.f. 1st April, 2021 introduced a disallowance provision in section 143(1)(a)(v) dealing with deduction claimed under Chapter VI-A, the contention of the revenue was not found acceptable. The amendment made by the Finance Act, 2021 is prospective and applies w.e.f. 1st April, 2021 whereas the assessment year under consideration is 2019–20. As regards reliance on section 80AC, the Tribunal held that once the legislature itself has made the impugned provision in section 143(1)(a)(v) the same could not have led to the claim of deduction u/s 80P being disallowed in summary “processing”. The Tribunal found the decision of the Madras High Court in Veerappampalayam Primary Agricultural Co-operative Credit Society (supra) to be distinguishable since the said judgment was pronounced on 7th April, 2021 and dealt with A.Y. 2018–19 and did not have the benefit of the amendment made by the Finance Act, 2021. Since the specific provision in section 143(1)(a)(v) is not applicable the general provision in section 143(1)(a)(ii) could not be pressed in action. The Tribunal held that it has adopted the principle of strict interpretation as laid down in Commissioner vs. Dilip Kumar and Co. & Others [(2018) 9 SCC 1 (SC)(FB)] to conclude that the action of both the lower authorities needs to be reversed.

When notice is for under-reporting of income, order passed levying penalty for misreporting of income is not justified.

13 Mohd. Sarwar vs. ITO

TS-193-ITAT-2024(Mum)

A.Y.: 2018–19

Date of Order: 2nd April, 2024

Section 270A

When notice is for under-reporting of income, order passed levying penalty for misreporting of income is not justified.

FACTS

The assessee filed his return of income for the assessment year 2018–19, declaring therein a total income of ₹14,34,180. In the revised return of income filed on 26th July, 2018, the assessee returned total income of ₹6,46,520 and claimed a refund of ₹2,21,980. The TDS credit claimed in revised return of income was ₹2,65,037 as against ₹2,50,037 claimed in the original return. This led to a notice u/s 142(1) being issued along with questionnaire. During the course of assessment proceedings, the assessee furnished a revised computation of income, computing total income to be ₹14,84,160, claiming that certain rental income was overlooked in the return of income filed. It was also submitted that the revised return of income was filed by the tax consultant without his knowledge and that in the revised return of income the tax consultant had erroneously claimed housing loan benefits when there was no such loan. The assessee contended that the revised return of income which has been filed is a fraud played upon the assessee by the tax consultant and this was substantiated by saying that the revised return of income had email id and mobile number of the tax consultant. As per the revised computation of income filed in the course of assessment proceedings, the revised total income was ₹14,84,160 and tax payable worked out to ₹2,65,480.

The Assessing Officer (AO) held that revised return of income claiming large refund was filed with the knowledge of the assessee and that the assessee was responsible for filing of any return under his name and PAN. The refund due on processing of revised return would go to the bank account of the assessee and not the tax consultant. He rejected the contention that the fraud had been played upon the assessee and accepted the revised computation of total income filed and determined the total income by not allowing deduction claimed under Chapter VIA and housing loan and held that the assessee has under-reported his income. The difference between ₹14,84,160 and ₹6,46,520 being amount of total income as per revised return of income was treated as under-reported income. The assessee accepted the proposed modification to the total income. He also issued a notice u/s 274 which mentioned that the assessee has under-reported his income.

The AO, consequently, passed an order dated 22nd January, 2022 levying a penalty of ₹4,44,844 for misreporting of income.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the AO has in the assessment order categorically mentioned that the assessee was involved in under-reporting of income. Also, the notice issued was for under-reporting of income. The Tribunal held that it failed to understand under what circumstances the initial violation which was under-reporting of income was converted into misreporting of income. The Tribunal held that if at all the revenue authorities are intending to charge the assessee for misreporting of income then specific notice is required to be issued which has not been done in the present case. In the present case, a revised return of income was filed claiming huge deduction, which in the estimation of the AO, constituted under-reporting of income and for which a notice was issued. The Tribunal held that once the assessee himself admitted the fact that there was under-reporting of income which was also accepted by the AO then penalty should have been levied only on account of under-reporting of income and not for misreporting of income. The Tribunal modified the order passed by the AO and confirmed by CIT(A) and directed the AO to revise the demand by taking the violation as under-reporting of income u/s 270A of the Act and not misreporting of income.

Notional interest income credited to the profit and loss account in compliance of Indian Accounting Standard (Ind AS) cannot be considered as real income in absence of contractual obligation of repayment.

12 ACIT vs. Kesar Terminals and Infrastructure Ltd.

TS-193-ITAT-2024(Mum)

A.Y.: 2018–19

Date of Order: 8th March, 2024

Section 28

Notional interest income credited to the profit and loss account in compliance of Indian Accounting Standard (Ind AS) cannot be considered as real income in absence of contractual obligation of repayment.

FACTS

The assessee, a public limited company, engaged in the business of storage and handling cargo, had given an interest free loan to its wholly owned subsidiary, viz., Kesar Multimodal Logistic Limited. Though no interest was due as per the agreed terms, yet as per the requirement of Indian Accounting Standard, the assessee accounted for a sum of ₹2,76,81,947 as “notional interest” in the books of account and credited the same to its Profit & Loss Account.

While processing the return, CPC did not allow the exclusion as it was not a deduction allowable under any of the provisions of the Act. Accordingly, the returned income was enhanced by an amount of ₹2.76 crore.

Aggrieved, the assessee challenged the addition in an appeal filed to the CIT(A). In the meantime, assessee also preferred a rectification application before CPC, which was rejected. Aggrieved by the rejection of rectification application, assessee filed another appeal before CIT(A). The CIT(A) took up both the appeals together. However, he first disposed the appeal filed against an order u/s 154. The CIT(A) agreed with the contention of the assessee that “notional interest” did not accrue to the assessee and hence, the same is not liable for taxation. Accordingly, he deleted the disallowance made by CPC.

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

HELD

The Tribunal noted that CIT(A) dismissed the appeal filed against an intimation u/s 143(1)(a) of the Act since he had already granted relief against the very same addition while deciding appeal filed against rectification application u/s 154 of the Act. The Tribunal also noted that the assessee has not challenged the order passed by CIT(A), dismissing the appeal filed against an intimation u/s 143(1)(a) of the Act.

The Tribunal observed that the only issue that arose for adjudication is related to taxability of notional interest income credited by the assessee to its profit & loss account as per requirements of Ind AS. The assessee argued that income tax can be levied only on real income and not on notional income. Since there is no contractual obligation for the debtor to pay interest, notional interest credited to Profit & Loss Account as per requirement of Ind AS cannot be taxed.

The Tribunal noted that the Chennai Bench of the Tribunal in Shriram Properties Ltd. [ITA No. 431/Chny/2022 dated 22nd March, 2023], while deciding the case related to an order passed by PCIT u/s 263 of the Act directing the AO to assess notional guarantee commission credited by the assessee to its P & L Account, in accordance with the requirement of Ind AS, held that “when there is a contractual obligation for not charging any commission, merely for the reason that the assessee had passed notional entries in the books for better representation of the financial statements, it cannot be said that income accrues to the assessee which is chargeable to tax for the impugned assessment year. Therefore, we are of the view that on this issue it cannot be said that there is an error in the order of the Assessing Officer.”

The Tribunal observed that the revenue had not shown that there existed a contractual obligation to collect interest from debtors. The Tribunal following the decision rendered by the Chennai Bench held that notional interest income credited by the assessee to its profit & loss account as per requirements of Ind AS has not accrued to the assessee and hence the same is not liable for taxation under real income principle. The Tribunal held that the CIT(A) was justified in directing the AO to exclude the same.

Section 132 of the Act — Search and seizure — Condition precedent — Revenue authorities must have information in their possession on basis of which a reasonable belief can be formed — Contents of satisfaction note did not disclose any information which would lead authorities to have a reason to believe that any of contingencies as contemplated by Section 132(1)(a) to (c) were satisfied — Search and seizure action was to be quashed and set aside.

7 Echjay Industries (P.) Ltd. vs. Rajendra

WP No. 122 OF 2009 & 2309 OF 2010

A.Y. 2008–09

Dated: 10th May, 2024. (Bom.) (HC).

Section 132 of the Act — Search and seizure — Condition precedent — Revenue authorities must have information in their possession on basis of which a reasonable belief can be formed — Contents of satisfaction note did not disclose any information which would lead authorities to have a reason to believe that any of contingencies as contemplated by Section 132(1)(a) to (c) were satisfied — Search and seizure action was to be quashed and set aside.

Petitioner no. 1 is a private limited company. Petitioner no. 2 is the Chairman and Managing Director of petitioner no. 1. Other Petitioners are Directors, their spouses and family members.

Respondent no. 1 was the officer empowered by the Central Board of Direct Taxes (CBDT) to issue authorisation under Section 132 of the Act for carrying out search and seizure under the Act. In the exercise of his powers under Section 132 of the Act, respondent no. 1 issued authorisations dated 7th July, 2008 in favour of respondent no. 2 and others, authorising them to enter upon and search various premises belonging to petitioners.

Petitioner company was incorporated on 31st December, 1960 under the Companies Act 1956 and was a leading manufacturer of forging and engineering products required in the automobile industry. Petitioners were regularly assessed to income-tax and wealth tax. It is stated in the petition that the income tax assessments of petitioner company for the last 20 years have been made under Section 143(3) of the Act by way of detailed scrutiny. It is also stated that no penalty under Section 271(1)(c) of the Act has ever been levied upon petitioners for any concealment or furnishing inaccurate particulars of income.

On or about 9th and 10th July, 2008, a search was conducted at the business premises of petitioner company as well as at residential premises of Chairman and directors, pursuant to an authorisation dated 7th July, 2008, issued by respondent no. 1 under Section 132(1) of the Act. Respondent no. 2 and other authorised officers entered into various premises and conducted the search. Panchnamas were also drawn up in the course of the search proceedings. It is stated that petitioners submitted various clarifications and explanations to respondents as and when they were called upon to do so. Petitioners stated that by the initiation of search proceedings and also the manner in which the proceedings were conducted, they are apprehensive that respondents will, without jurisdiction or authority of law, proceed against petitioners to make assessments and / or reassessments of past six assessment years in the case of all petitioners and raise huge demands by way of tax, interest and penalties, which will cause hardship and prejudice to petitioner. It is petitioners’ case that authorisations dated 7th July, 2008 issued against petitioners are unconstitutional, ultra vires, invalid, without jurisdiction, etc., and are liable to be quashed and set aside.

The stand taken by the revenue basically is that the grounds raised in the petition are based on presumptions and conjectures. It was submitted that respondent no. 1 had information in his possession of undisclosed assets / documents which represented income or property which has not been or would not be disclosed by petitioners under normal circumstances. There was also reason to believe that petitioners were in possession of documents relating to such undisclosed income, which would not be produced if called for under relevant provisions of the Act. Proper inquiries were made and the relevant material placed on record to give rise to reasons for such belief. It was also stated that authorised officers have not seized the entire cash and jewellery found at various premises but have seized only a part, which remained unexplained by petitioners at the relevant time or in respect of which explanation was not to the satisfaction of the authorised officers. If a bonafide belief was formed on the basis of material available on record which was the case, it is not open to petitioners to challenge the same by way of plea of lack of alternate remedy against such action by respondent no. 1.

It was also submitted by revenue that there was credible basis to believe that petitioners were in possession of assets / documents which were not disclosed or which would not be disclosed. It was stated that there were proper enquiries and application of mind by four different Statutory Authorities. The reasons for authorizing action under Section 132 of the Act are duly recorded in a Satisfaction Note which shows due application of mind by various statutory authorities. All the procedures and safeguards provided in the Act were duly followed and the search has been carried out within the framework of Section 132 of the Act.

As regards making available the details of the information received and the satisfaction note, the Learned ASG and later department counsel both strongly opposed disclosing / making available copies thereof and for that relied upon the decision of the Apex Court in Principal Director of Income-tax (Investigation) vs. Laljibhai Kanjibhai Mandalia [2022] 140 taxmann.com 282/446 ITR 18/288 Taxman 361 (SC). The Learned ASG further submitted that it is settled law that copy of the material leading to the search should not be made available to assessee. It was also submitted that in view of the explanation inserted in Section 132(1) by the Finance Act 2017 with retrospective effect from 1st April, 1962, the reason to believe as recorded by the Income Tax authorities under Section 132(1) shall not be disclosed to any person or any authority or the Appellate Tribunal.

It was also submitted by the Learned ASG that the court may examine the information / documents based on which the authorisations of search and seizure were issued and decide the matter within the principles elaborated in paragraph 33 of Laljibhai Kanjibhai Mandalia (supra).

It was further submitted that the reason behind insertion of the Explanation is to remove the ambiguity created by judicial decisions regarding disclosure of reasons recorded to any person or to any authority.

The Petitioner relied upon the decision of the Apex Court in the matter of ITO vs. Seth Brothers (1969) 74 ITR 836 and Pooran Mal vs.Director of Inspection (Investigation)(1974) 93 ITR 505, and submitted that the court has opined that the necessity of recording of reasons was to ensure accountability and responsibility in the decision-making process. The necessity of recording of reasons also acts as a cushion in the event of a legal challenge being made to the satisfaction reached. At the same time, it would not confer in the assessee a right of inspection of the documents or to a communication of the reasons for the belief at the stage of issuing of the authorisation as it would be counterproductive of the entire exercise contemplated by Section 132 of the Act. At the same time, it is only at the stage of commencement of the assessment proceedings after completion of the search and seizure, if any, that the requisite material may have to be disclosed to the assessee. It was submitted that since the assessment proceedings were commenced, the time is now ripe to disclose the requisite material to petitioners.

The Honourable court noted that a similar matter came up for consideration before the Division Bench of this Court (Nagpur bench) in the case of Balkrushna Gopalrao Buty & Ors. vs. The Principal Director (Investigation), Nagpur & Ors. Judgment dated 23rd April, 2024 in Writ Petition No.1729 of 2024. In that case also, assessee was questioning the search and seizure carried out in his premises pursuant to the provisions of Section 132 of the Act. Assessee has also submitted that a search and seizure has necessarily to be in consequence of some information in possession of the Authority, which provides him a reason to believe that any of the actions, as indicated in Section 132(1)(a) to (c) of the said Act, are likely to occur, which would be the only grounds on which the search and seizure could be made under Section 132 of the said Act. It was assessee’s case therein that the seizure was based on certain transactions which were all disclosed in the returns filed and, therefore, there was no material which would entitle the revenue to conduct the search and seizure in terms of the language and requirement of Section 132 of the said Act. The court analysed Section 132 of the Act and decided not to disclose the reasons recorded in the file for the sake of maintaining secrecy but expressed its view on the satisfaction note. The satisfaction note and the information was made available only to the court for consideration and upon its consideration, the court concluded that the requirement of Section 132(1) of the Act was not satisfied. The Court also held that the department cannot rely upon what was unearthed on account of opening of the lockers of petitioners, as the information and reason to believe as contemplated under Section 132(1) of the Act must be prior to such seizure.

The Honourable court noted that the same approach would be adopted in present matter. The court further relied on the decision in case of Director General of Income Tax (Investigation), Pune vs. Spacewood Furnishers Private Limited (2015) 12 SCC 179.

The Honourable Court noted that as per Section 132(1) of the Act, the Authority must have information in his possession on the basis of which a reasonable belief can be founded that, the person concerned has omitted or failed to produce the books of accounts or other documents for production of which summons or notice has been issued, or such person will not produce such books of accounts or other documents even if summons of notice is issued to him, or such person is in possession of any money, bullion or other valuable articles which represents either wholly or partly income or property which has not been or would not be disclosed, is the foundation to exercise the power under Section 132 of the said Act. The Apex Court in Laljibhai Kanjibhai Mandalia (supra)and in Spacewood Furnishers Pvt Ltd. (supra) has specifically held that such reasons may have to be placed before the High Court in the event of a challenge to formation of the belief of the Competent Authority in which event the Court would be entitled to examine the reasons for formation of the belief, though not the sufficiency or adequacy thereof.

The Honourable Court noted that no notice or summons have been issued to petitioners calling for any information from them at any point of time earlier to the action under Section 132(1) of the Act to give rise to an apprehension of non-compliance by petitioners justifying action under Section 132(1) of the Act. Therefore, no reasonable belief can be formed that the person concerned has omitted or failed to produce books of accounts or other documents for production of which summons or notice had been issued, or that such person will not produce such books of accounts or other documents even if summons or notice is issued to him.

The Honourable Court agreed with the view expressed in Balkrushma Gopalrao Buty (supra) that respondents cannot rely upon what has been unearthed pursuant to the search and seizure action as the information giving a reason to believe as contemplated under Section 132(1) of the said Act must be prior to such seizure.

The Honourable Court read the contents of the file of the department given to court in a sealed envelope by counsel for respondents. Having considered the contents thereof, the court opined that it does not disclose any information which would lead the Authorities to have a reason to believe that any of the contingencies as contemplated by Section 132(1)(a) to (c) of the said Act are satisfied. The reasons recorded only indicate a mere pretence. The material considered is irrelevant and unrelated. For the sake of maintaining confidentiality, the Court did not discuss the reasons recorded in the file, except that the information noted therein is extremely general in nature. The Honourable Court further noted that the reasons forming part of the satisfaction note have to satisfy the judicial conscience. The satisfaction note does not indicate at all the process of formation of reasonable belief. The Honourable Court noted that it has not questioned the adequacy or sufficiency of the information. That apart, the note also does not contain anything altogether regarding any reason to believe, on account of which there is total non-compliance with the requirements as contemplated by Section 132(1) of the said Act which vitiates the search and seizure. It does not fulfil the jurisdictional pre-conditions specified in Section 132 of the Act.

Hence, the action of respondents taken under Section 132(1) of the Act was quashed and set aside. The Honourable Court further observed that even though the search is held to be invalid, the information or material gathered during the course thereof may be relied upon by revenue for making adjustment to the Assessee’s income in an appropriate proceeding.

Section 151, r.w.s 147 and 148 of the Act — Reopening of assessment — Beyond three years — Sanction for issue of notice — Appropriate authority for issuance of notice under Sections 148 and 148A(b) should have been either Principal Chief Commissioner or Principal Director General, or in their absence, Chief Commissioner or Director General – Principal Commissioner of Income Tax, do not fall within specified authorities outlined in Section 151.

6 Ashok Kumar Makhija vs. Union of India

WP (C) NO. 16680 OF 2022

A.Y.: 2017–18

Dated: 7th May, 2024, (Delhi) (HC)

Section 151, r.w.s 147 and 148 of the Act — Reopening of assessment — Beyond three years — Sanction for issue of notice — Appropriate authority for issuance of notice under Sections 148 and 148A(b) should have been either Principal Chief Commissioner or Principal Director General, or in their absence, Chief Commissioner or Director General – Principal Commissioner of Income Tax, do not fall within specified authorities outlined in Section 151.

The petitioner is engaged in the business of wholesale trading of pan masala and beetle nut (supari) through his proprietorship concerns namely, M/s Neelkanth Trades and M/s Prem Supari Bhandar. On 28th March, 2017, he was served with a summon under Section 131(1A) of the Act, seeking verification of cash deposits made by him in his bank account during the period of demonetisation, i.e., 8th November, 2016 to 31st December, 2016.

Accordingly, on 14th October, 2017, ITR was filed by the petitioner for A.Y. 2017–18, declaring a total income of ₹1,70,43,590. The said ITR was subjected to scrutiny assessment on the issues of capital gains / loss on sale of property and cash deposits made during the demonetisation period.

The petitioner claimed that the said cash deposit in his bank account represents the sale proceeds of the business. While issuing notice dated 20th November, 2019 under Section 133(6) of the Act, the Revenue sought confirmation from M/s Mahalaxmi Devi Flavours Pvt. Ltd., from whom the petitioner claimed to have made the purchases. Consequently, on 28th December, 2019, an assessment order under Section 143(3) of the Act came to be passed accepting the aforesaid ITR.

On 8th April, 2021, a notice under Section 148 of the Act was issued, reopening the assessment of the petitioner for A.Y. 2017–18 on the grounds that the income of the petitioner which was chargeable to tax had escaped assessment. However, the said notice was quashed following the decision rendered by in the case of Man Mohan Kohli vs. ACIT 2021 SCC OnLine Del 5250, which inter alia declared that all notices issued under Section 148 of the Act after 1st April, 2021 under the erstwhile law (un-amended provision of Section 148 of the Act) could not have been issued.

In the meantime, the Supreme Court in the case of Union of India vs. Ashish Agarwal 2022 SCC OnLine SC 543 rendered a decision declaring that notices issued under Section 148 of the Act between 1st April, 2021 to 30th June, 2021, under the old provisions shall be treated as notices under Section 148A(b) of the Act, and the same shall be dealt with in the light of the directions contained in the aforesaid decision.

Thereafter, the Revenue issued the impugned notice dated 26th May, 2022, under Section 148A(b) of the Act and initiated reassessment proceedings by supplying the petitioner with the information in its possession, i.e., an exponential increase in the sales turnover of the petitioner during A.Y. 2017–18, alleging that the same has escaped assessment. Consequently, the impugned order under Section 148A(d) dated 30th July, 2022 was passed by the Revenue.

The petitioner submitted that the reassessment proceedings for A.Y. 2017–18 are after a lapse of more than three years, the appropriate authority for issuance of the notice under Sections 148 and 148A(b) of the Act should have been either the Principal Chief Commissioner or Principal Director General, or in their absence, the Chief Commissioner or Director General, instead of the Principal Commissioner of Income Tax, Delhi-10, who does not fall within the specified authorities outlined in Section 151 of the Act. He relied on the decision of this Court in the case of Twylight Infrastructure Pvt. Ltd. vs. ITO &Ors. 2024 SCC OnLine Del 330.

The Honourable Court held that there is no approval of the specified authority, as indicated in Section 151(ii) of the Act.Accordingly, for the reasons assigned in the Twylight Infrastructure (supra) judgment, the impugned notices dated 26th May, 2022 and 30th July, 2022 and the impugned order dated 30th July, 2022 were quashed with liberty to the revenue to commence reassessment proceedings afresh.The writ petition was disposed accordingly.

Non-resident — Income deemed to accrue or arise in India — Situs of share or interest transferred outside India deemed to be located in India by corelating it with underlying assets in India — Insertion of Explanations 6 and 7 to section 9(1)(i) — Prospective or retrospective — Explanations 6 and 7 have to be read along with Explanation 5 which operates from 1st April, 1962 — Explanations 6 and 7 clarificatory and curative — To be given retrospective effect — Deeming provision attracted only where share or interest does not exceed percentage specified or transferor did not exercise right of management and control in company whose share and interest transferred:

21 CIT(IT) vs. Augustus Capital PTE Ltd.

[2024] 463 ITR 199 (Del.)

A.Y.: 2015-16

Date of order 30th November, 2023

S. Explanations 5, 6 and 7 of section 9(1)(i) of the ITA 1961

Non-resident — Income deemed to accrue or arise in India — Situs of share or interest transferred outside India deemed to be located in India by corelating it with underlying assets in India — Insertion of Explanations 6 and 7 to section 9(1)(i) — Prospective or retrospective — Explanations 6 and 7 have to be read along with Explanation 5 which operates from 1st April, 1962 — Explanations 6 and 7 clarificatory and curative — To be given retrospective effect — Deeming provision attracted only where share or interest does not exceed percentage specified or transferor did not exercise right of management and control in company whose share and interest transferred:

The Assessee Company was incorporated under the laws of Singapore on 22nd November, 2011. Between January 2013 and March 2014, the assessee invested in equity and preference shares of APL, a company incorporated in and resident of Singapore. On 27th March, 2015, the assessee sold its investment in APL to an Indian Company, JIPL for ₹41,24,35,969. The return of income for AY 2015-16 was filed declaring NIL income and refund of ₹17,84,19,800 was claimed.

The assessee’s case was selected for scrutiny and queries were raised in the course of assessment proceedings. The main contention of the assessee in its replies was that the assessee had only acquired 0.05 per cent of the ordinary share capital and 2.93 per cent of the preference share capital of APL and the assessee did not have right of management and control concerning the affairs of APL and hence the capital gains arising on account of transfer of shares was not taxable in India. The AO did not accept the contention of the assessee and proposed an addition of ₹36,33,15,969 under the head Capital Gains. In the objections before the DRP, the main contention of the assessee was that Explanation 7 of section 9(1)(i) ought to have been given retrospective effect, and in not doing so, the AO had committed an error. The respondent / assessee asserted that Explanations 6 and 7 clarified Explanation 5, which was introduced via Finance Act 2012. The DRP rejected the objections and the final assessment order was passed confirming the proposed addition. On appeal before the Tribunal, the Tribunal decided the issue in favour of the assessee and deleted the addition.

On appeal before the High Court, the main contention of the Appellant Department before the High Court was that the insertion of Explanations 6 and 7 via Finance Act 2015 was to take effect from 1st April, 2016 and could only be treated as a prospective amendment. The argument advanced in support of this plea was that Explanations 6 and 7 brought about a substantive amendment in section 9(1)(i) of the Act.

The assessee, on the contrary, contended that the provisions of s. 9(1)(i) r.w. Explanations 4, 5, 6 and 7 form a complete code, whereby situs of share or interest transferred outside India is deemed to be located in India, provided a substantial value of the underlying assets, as defined in Explanation 6, is located in India and where the transfer of share and interest exceeds the percentage provided in Explanation 7 and the transferor exercises a right of management and control in the company whose share and interest is being transferred. Explanations 6 and 7 have not brought about a substantive amendment. This is evident upon perusal of the opening words of Explanation 6 and 7, which begin with the expression “For the purpose of this clause….”. Quite clearly, Explanations 6 and 7 are not standalone provisions. The provision made by the legislature via Explanations 6 and 7 will have no meaning if it is not tied in with Explanation 5.

The High Court dismissed the appeal of the Department and the issue was decided in favour of the assessee as follows:

“Explanations 6 and 7 to section 9(1)(i) alone would have no meaning if they were not read along with Explanation 5. If Explanations 6 and 7 are not read along with Explanation 5, no legislative guidance would be available to the Assessing Officer regarding the meaning to be given to the expression “share or interest” or “substantially” found in Explanation 5. Therefore, if Explanations 6 and 7 were to be read along with Explanation 5, which operated from 1st April, 1962, they would have to be construed as clarificatory and curative. The Legislature had taken a curative step regarding the vague expressions “share or interest” or “substantially” used in Explanation 5. Therefore, though the Explanations 6 and 7 were indicated in the Finance Act, 2015 to take effect from 1st April, 2016, they could be treated as retrospective, having regard to the legislative history which had led to the insertion of Explanations 6 and 7.”

Assessment — Company — Dissolution — No corporate existence continues — Company not in existence at the time of passing assessment order — No provision to assess dissolved company — Order against non- existent entity null and void:

20 Rainawari Finance & Investment Company Pvt. Ltd. vs. ITO

[2024] 463 ITR 65 (J&K&L.)

A.Y.: 2004-05

Date of order: 3rd November, 2023

S. 143 of the ITA 1961 and S. 560 of the Companies Act, 1956

Assessment — Company — Dissolution — No corporate existence continues — Company not in existence at the time of passing assessment order — No provision to assess dissolved company — Order against non- existent entity null and void:

The assessee filed a NIL return of income for AY 2004-05. The return of income filed by the assessee contained a note stating that the assessee had filed an application before the ROC u/s. 560 of the Companies Act for striking off the name of the assessee from the Register of Companies. The assessment was completed u/s. 143(3) of the Act and addition of ₹1,00,75,000 was made on account of unsecured loan received during the earlier years and credited to the capital reserve during the previous year. On appeal before the first appellate authority, the appeal was dismissed. On second appeal, the Tribunal remanded the case back to the CIT(A) to adjudicate the case afresh after complying with necessary requirements of deposit of fees under the provisions of the Act. On remand, the CIT(A) confirmed the addition. The Tribunal confirmed the order of the CIT(A). The assessee’s contention that no assessment order could have been passed was rejected by the CIT(A) as well as the Tribunal.

The assessee filed appeal before the High Court on the only ground that the assessing authority could not have passed an assessment order as the assessee company was dissolved as per the provisions of section 560(5) of the Companies Act at the time of making the assessment order.

On the other hand, the Department argued that the Department was not intimated about the assessee company being dissolved and therefore, the assessee could not contend that the aforesaid aspect was not considered by the authorities.

The Hon’ble High Court decided the appeal in favour of the assessee and held as follows:

“i) Once a company is dissolved under section 560(5) of the Companies Act, 1956 it ceases to exist and, therefore, no order of assessment could be validly passed against it under the Income-tax Act, 1961 and if it is passed, it would be a nullity. Section 560(7) of the 1956 Act read along with section 2(31) of the Income-tax Act, 1961 makes it clear that the assessee to be assessed under section 143 of the 1961 Act must be a person in existence. A company is a juridical person but the moment it is struck off from the register of companies and is dissolved, it ceases to exist. An assessment order against a non-existent company would be a nullity and would not give rise to any right or liability under such an order.

ii) For the purpose of challenging the action of the Registrar striking off the registration of the company and effecting its dissolution by publication in the Official Gazette, the company is conferred a juridical personality and may in its own name file an application before the court for setting aside the order passed by the Registrar under sub-section (5) of section 560 of the 1956 Act. Similarly, under section 226(3) of the 1961 Act, it is provided that if there is any tax due from the struck off company it can be recovered from any person who holds or may subsequently hold money for or on account of the assessee-company.

iii) After promulgation of the Companies Act, 2013 and in view of the specific provision made in section 250 thereof, the dissolved company is by fiction of law conferred juridical personality and may, therefore, be competent to challenge the assessment order, if any, passed against it when it stood dissolved by the Registrar under section 248 of the Companies Act, 2013. Similar provision is absent under the Companies Act, 1956.

iv) On the date of passing of the assessment order, the company stood dissolved under section 560(5) of the 1956 Act on the publication of the notice in the Official Gazette and was struck off from the register of companies. In terms of section 143 of the 1961 Act, assessment can be made by the assessing authority only against the assessee, who has filed a return under section 139 or in response to a notice issued under sub-section (1) of section 142. Although the assessee had never brought the aforesaid facts to the notice of the assessing authority, the Commissioner (Appeals) and the Tribunal, all the three authorities committed no illegality in holding that merely because the company was defunct, the assessing authority could not be restrained from passing the assessment order against it. The authorities had concurrently held that there was distinction between the company which was rendered defunct because of stoppage of operations and was formally struck off and dissolved in terms of sub-section (5) of section 560 of the 1956 Act. The order of assessment and the orders of the Commissioner (Appeals) and the Tribunal were set aside.

v) Section 250 of the Companies Act, 2013 was not in existence in the year 2006 nor there was any provision parallel to or in pari materia with this section in the 1956 Act, as was applicable at the relevant point of time. The assessee was given fictional juridical personality only for the purpose of laying challenge before the court to the order of the Registrar striking it off from the register and effecting its dissolution upon publication of the notice in the Official Gazette and no more. The directors of the company who under some circumstances could be held liable to pay the dues owed by the assessee-company to the Department were competent in law to take proceedings against the assessment order passed against a dissolved company, if they were aggrieved. Therefore, all the proceedings by the assessee before the Commissioner (Appeals) and the Tribunal were not maintainable. Similarly, the appeal by the company was also not maintainable. The assessee having ceased to exist was not competent to challenge the assessment order, though, the director might have. Since the company all along been represented by the director, all proceedings taken in the name of the assessee should be treated to be the proceedings by the director of the company.

vi) Notwithstanding dissolution of a struck off company in terms of sub-section (5) of section 560 of the Companies Act, the liability of any person who holds or may subsequently hold money for and on account of the assessee-company or a director of the private company in respect whereof any tax is due in respect of any income of the previous year, as is provided under section 226(3) and section 179 of the 1961 Act, still remains and such person or director shall have the locus standi to challenge the assessment order, if any, passed by the Assessing Officer against such struck off and dissolved company in respect of any income of the previous year.

vii) If the company is not in existence at the time of making the assessment, no order of assessment can be validly passed upon it under the 1961 Act and if one is passed, it must be a nullity.”

Re-assessment — Faceless assessment — Validity — Condition precedent for faceless assessment — Adequate opportunity should be provided to assessee to be heard:

19 Packirisamy Senthilkumar vs. GOI

[2024] 461 ITR 473 (Mad.)

A.Y. 2016-17

Date of order: 2nd June, 2023

Ss. 144B and 147 of ITA 1961

Re-assessment — Faceless assessment — Validity — Condition precedent for faceless assessment — Adequate opportunity should be provided to assessee to be heard:

The assessee, a non-resident Indian, has been resident of Singapore since 1996 and a regular taxpayer there. During the previous year relevant to the AY 2016-17, the assessee purchased immovable properties amounting to ₹90,00,000 for which TDS was deducted. The assessee had not filed his return of income.

The assessee received a clarification letter dated 10th February, 2023 calling upon the assessee to reply along with documentary evidence stating that a sum of ₹1,80,00,000 had escaped assessment for the AY 2016-17. The assessee submitted a detailed reply on 23rd February, 2023 despite which notice u/s. 148A(b) dated 4th March,2023 was issued proposing to re-open the assessment. In response, the assessee once again submitted a detailed response vide letter dated 13th March, 2023 repeating its earlier reply and the reason why no return of income was filed for AY 2016-17. The AO passed order u/s. 148A(d) without considering the submission of the assessee against which the assessee filed a petition before the High Court.

The assessee contended that in the clarification letter as well as the show cause notice u/s. 148A(b), the only reason stated for re-opening of assessment was the purchase of immovable property of ₹90,00,000 and therefore a sum of ₹1,80,00,000 had escaped assessment. However, in the order passed u/s. 148A(d), the AO had dealt with the loan account, employment details, salary certificate, etc. of the assessee and he was never called upon to explain or given time to produce the documents. Therefore, the assessee submitted that the order be set-aside.

On the other hand, the Department contended that the assessee had not given any details as to how a sum of ₹22,50,000 had been sourced by him. The assessee had also not submitted any details about his employment and earnings from such employment. Lastly, it was submitted that no prejudice would be caused to the assessee since the AO had only proceeded to ask clarifications.

The Hon’ble High Court allowing the petition in favour of the assessee held as follows:

“the notice to the assessee had been based only on certain reasons, whereas the order added new reasons for the order. The assessee had not been given an opportunity to answer and explain them. Therefore, taking into account the fact that the very basis of the demand was erroneous and the order proceeded to give new reasons, which the assessee had not been given an opportunity to defend, the order had to be set aside.”

Charitable purpose — Registration of trust — Appeal to appellate tribunal — Power of Tribunal to grant registration: Charitable purpose — Registration of trust — Factors to be considered by Commissioner — Objects of trust and genuineness of activities of trust — Whether trust entitled to exemption on facts to be considered by Assessing Officer:

18 CIT(Exemptions) vs. Nanak Chand Jain Charitable Trust

[2024] 462 ITR 283 (P&H.)

A. Y. 2016-17

Date of order: 8th February, 2023

Ss. 11, 12AA and 254(1) of ITA 1961

Charitable purpose — Registration of trust — Appeal to appellate tribunal — Power of Tribunal to grant registration:

Charitable purpose — Registration of trust — Factors to be considered by Commissioner — Objects of trust and genuineness of activities of trust — Whether trust entitled to exemption on facts to be considered by Assessing Officer:

The assessee trust was set up by one VOL, a limited company as the settlor, to carry out its duties under the CSR as provided under the provisions of section 135 of the Companies Act, 2013. The objects of the trust were in the nature of eradicating hunger and poverty, promotion of education, promoting gender equality etc. An application for grant of registration u/s. 12AA was filed before the Commissioner (Exemptions) on 28th March, 2016 which was rejected by the Commissioner on the ground that the assessee trust had been formed by the settlor for the purpose of carrying out its CSR activities and also rejected the application u/s. 80G(v) holding that the application was void ab initio in terms of Rule 11AA.

On appeal before the Tribunal, the appeal of the assessee was allowed and the order passed by the Commissioner was set aside. The Tribunal, inter alia, held that merely because the trust was formed to comply with the CSR requirements, registration could not be denied to the assessee trust u/s. 12AA of the Act. The Tribunal held that while granting registration under section 12AA of the Act, the Commissioner is required to see only two factors, that is, the objects of the trust, whether they are charitable in nature and the genuineness of the activities of the trust. There is no requirement to see whether the activities are in sync with the Companies Act or not. The CIT is empowered to satisfy himself about the charitable object and the genuineness of the activities and once they are not in doubt, the powers u/s. 12AA end. Such powers do not extend to the eligibility of the trust/ institution for exemption u/s 11 r.w.s 13 of the Act which falls in the domain of the AO. Thus, the Tribunal directed the CIT to grant registration u/s. 12AA of the Act as well as the approval u/s. 80G(5)(vi) of the Act.

On Department’s appeal before the High Cout, the High Court dismissed the appeal of the Department and upheld the view of the Tribunal. The observations of the High Court are as follows:

i) The Tribunal had rightly examined the case of the assessee for grant of registration under section 12AA of the Act. The Tribunal had recorded its satisfaction as the trust fulfilled the following two basic conditions for grant of registration under section 12AA of the Act and the object of the trust, and the genuineness of the activities of the trust / institution. The Tribunal had rightly directed the Commissioner to grant registration under section 12AA and also the approval under section 80G(5)(vi) of the Act to the assessee.

ii) The Commissioner was not to examine with the genuineness of the activities of the trust and whether, if the trust transfers funds to another charitable society, it can be given exemption under section 11 of the Act. This power was restricted to the Assessing Officer. Hence, no useful purpose would be served by remanding the matter to the Commissioner to pass appropriate orders.”

Decision of High Court binding on Income-tax Authorities — Order of assessment ignoring direction of High Court — Not valid

17 Vaani Estates Pvt. Ltd. vs. Addl./Jt./Deputy/Asst. CIT

[2024] 462 ITR 232 (Mad.)

A.Ys.: 2014-15

Date of order: 19th January, 2024

Articles 215, 226 and 227 of the Constitution of India

Decision of High Court binding on Income-tax Authorities — Order of assessment ignoring direction of High Court — Not valid

The assessee company was initially formed by one BGR and his wife SR each holding 5,000 shares. Upon death of BGR, his shares devolved upon his daughter VR. In order to purchase property, SR introduced ₹23.32 crores through banking channels against which she was allotted 10,100 shares at a premium of ₹23,086 per share. The AO treated the share premium as income from other sources u/s. 56(2)(viib) of the Act. When the matter reached in appeal before the Tribunal, the Tribunal decided the issue in favour of the assessee. However, on department’s appeal before the High Court, the High Court remanded the matter back to the AO with the direction to undertake the exercise of fact finding by determining the FMV of the shares in question as required in the Explanation to section 56 of the Act. Further, liberty was given to the assessee to seek necessary clarification from the CBDT on the administrative side.

Pursuant to the orders of the High Court, the assessee approached the CBDT for a clarification vide letter dated 1st November, 2019. Pending such clarification, the AO issued notice u/s. 142(1) calling for details. In response to the notice, the assessee furnished the details and its submissions. The assessee also stated that it had approached the CBDT for seeking clarification on the applicability of section 56(2)(viib) which was pending before the CBDT. Overlooking the fact that clarification from the CBDT was pending, the AO issued a show cause notice proposing to make variation to the total income. In response, the assessee sought 15 days to file its reply and also enclosed the acknowledgment of the reminder letters to the CBDT. However, the AO passed the assessment order.

On writ petition filed by the assessee, the Hon’ble High Court allowed the petition of the assessee and held as follows:

“i) Under article 215 of the Constitution, every High Court shall be a court of record and shall have all the powers of such a court including the power to punish for contempt of itself. Under article 226, it has a plenary power to issue orders or writs for the enforcement of the fundamental rights and for any other purpose to any person or authority, including in appropriate cases any Government, within its territorial jurisdiction. Under article 227 it has jurisdiction over all courts and Tribunals throughout the territories in relation to which it exercises jurisdiction. The law declared by the highest court in the State is binding on authorities or tribunals under its superintendence, and they cannot ignore it either in initiating a proceeding or deciding on the rights involved in such a proceeding. Any order contrary to or disregarding the direction of the High Court cannot be sustained as it renders the order bad for want of jurisdiction.

ii) The High Court had directed the Assessing Officer to undertake the exercise of finding a fair market value of share as contemplated in the Explanation to section56 of the Act. However, the exercise had not been completed. Hence, the assessment order was not valid.”

Search and Seizure — Inordinate delay in return of seized cash — Assessee is entitled to interest on amount returned — Inordinate delay in returning amounts due to the assessee not justified.

16 Vindoa B. Jain vs. JCIT &Ors

[2024] 462 ITR 58 (Bom.)

A.Y. 1991-92

Date of order: 13th September, 2023

Ss. 119, 143(2) and 144 of ITA 1961

Search and Seizure — Inordinate delay in return of seized cash — Assessee is entitled to interest on amount returned — Inordinate delay in returning amounts due to the assessee not justified.

During the previous year 1990-91, the Central Excise Department seized gold items weighing 1545.2 grams and cash of ₹2,60,000/-. The gold and cash were taken over by the Income-tax Department u/s. 132A of the Income-tax Act, 1961 (‘the Act’) and order u/s. 132(5) of the Act was passed retaining the said gold and cash. Scrutiny assessment was completed and order u/s. 143(3) was passed. The matter reached before the Tribunal and the issue was decided in favour of the assessee. No appeal against the said order was preferred by the Department before the High Court and the order of the Tribunal attained finality. There was no outstanding demand against the assessee. Since the Department was not following the order of the Tribunal, the assessee filed an application before the Principal Commissioner who, vide order dated 31st December, 2019 passed u/s. 132B of the Act directed the AO to release the gold and cash. While the seized gold was handed over, the cash was not returned to the assessee. Therefore, the assessee filed the petition before the Hon’ble Bombay High Court. The Hon’ble High Court allowed the petition of the assessee and held as follows:

“i) The Income-tax Act, 1961 recognises the principle that a person should only be taxed in accordance with law and hence where excess amounts of tax are collected from an assessee or any amounts are wrongfully withheld from an assessee without authority of law the Revenue must compensate the assessee.

ii) Notwithstanding the order of the Tribunal which attained finality on 25th September, 2014, the Revenue did not consider it fit to return the cash of ₹2,60,000 that was seized on or about 9th July, 1996. Moreover, even after the Principal Commissioner passed the order on 31st December, 2019 under section 132B of the Act, the Revenue did not consider it fit to process and refund the amount. Even after the petition was filed and served and the lawyer appeared for the Revenue, the Revenue still did not consider it fit to return the money. Therefore, there had been an inordinate delay and this was nothing but a clear case of high handedness on the part of the officers of the Revenue. The assessee would be entitled to interest at 12 per cent. per annum for the post-assessment period, i. e., from 25th September, 2014 until payment / realisation.”

Validity of Notice under Section 148 Issued By the JAO

ISSUE FOR CONSIDERATION

Over the last few years, the Government has adopted a policy of making several processes under the Act fully faceless, which otherwise required interface with the taxpayers. In line with this objective, Section 151A was inserted with effect from  1st November, 2020, which provides for notification of a faceless scheme for the following purposes, namely —

  •  assessment, reassessment or re-computation under section 147;
  •  issuance of notice under section 148;
  •  conducting of enquiries or issuance of show-cause notice or passing of order under section 148A;
  •  sanction for issue of such notice under section 151.

Notification No. 18/2022 was issued notifying the ‘e-Assessment of Income Escaping Assessment Scheme, 2022’ (Scheme) under Section 151A with effect from 29th March, 2022. The scope of this scheme as provided in Clause 3 of the Scheme is reproduced below for reference —

Scope of the Scheme

3. For the purpose of this Scheme, —

(a) assessment, reassessment or recomputation under section 147 of the Act,

(b) issuance of notice under section 148 of the Act,

shall be through automated allocation, in accordance with the risk management strategy formulated by the Board as referred to in section 148 of the Act for issuance of notice, and in a faceless manner, to the extent provided in section 144B of the Act with reference to making assessment or reassessment of total income or loss of assessee.

Even after this Scheme has come into effect, in several cases, the notices under Section 148 have been issued by the concerned Jurisdictional Assessing Officer (JAO) and not by the Faceless Assessing Officer (FAO) or National Faceless Assessment Centre (NFAC).

Therefore, an issue has arisen before the High Courts as to whether such notice issued by the JAO under Section 148 post this Scheme coming into effect is valid, and consequently, whether the reassessment proceeding conducted in pursuance of such notice would be valid. The Calcutta High Court has affirmed the validity of such notices issued by the JAO. However, the Telangana and Bombay High Courts have taken a view that the JAO did not have the power to issue a notice under Section 148 and, therefore, the notice issued by him in contravention of the provisions of Section 151A read with the Scheme was invalid and bad in law.

TRITON OVERSEAS (P.) LTD.’S CASE

The issue had first come up for consideration before the Calcutta High Court in the case of Triton Overseas (P.) Ltd. vs. UOI [2023] 156 taxmann.com 318 (Calcutta).

In this case, the assessee had challenged the notice dated 28th April, 2023, issued under Section 148 relating to the assessment year 2019–20 on the ground that the same had been issued by the JAO and not by NFAC as required under Section 151A. The revenue contended that the issue raised by the assessee was hyper-technical, since the mode of service did not affect the contents and merit of the notice. Further, it was also argued that the issuance of the notice under Section 148 of the Act was justifiable and sustainable in law in view of the office memorandum dated 20th February, 2023, being F No. 370153/7/2023-TPL, issued by the CBDT.

The High Court referred to Paragraph 4 of the said office memorandum which is reproduced below —

“4. It is also pertinent to note here that under the provisions of the Act, both the JAO as well as units under NFAC have concurrent jurisdiction. The Act does not distinguish between JAO or NFAC with respect to jurisdiction over a case. This is further corroborated by the fact that under section 144B of the Act, the records in a case are transferred back to the JAO as soon as the assessment proceedings are completed. So, section 144B of the Act lays down the role of NFAC and the units under it for the specific purpose of conducting assessment proceedings in a specific case in a particular Assessment Year. This cannot be construed to be meaning that the JAO is bereft of jurisdiction over a particular assessee or with respect to procedures not falling under the ambit of section 144B of the Act. Since, section 144B of the Act does not provide for issuance of notice under section 148 of the Act,there can be no ambiguity in the fact that the JAO still has the jurisdiction to issue notice under section 148 of the Act.”

On this basis, the High Court held that there was no merit in the writ petition, and accordingly dismissed it.

HEXAWARE TECHNOLOGIES LTD.’S CASE

The issue recently came up for consideration before the Bombay High Court in the case of Hexaware Technologies Ltd. vs. ACIT [2024] 162 taxmann.com 225 (Bombay).

In this case, the assessee was issued a notice dated 8th April, 2021 under Section 148 for assessment year 2015–16. The assessee filed a writ petition challenging this notice issued under section 148, on the ground that the said notice has been issued under the unamended provisions, which have ceased to exist and are no longer in the statute. The petition was allowed on 29th March 2022 and the Court held that the notice dated 8th April 2021 was invalid.

Thereafter, the JAO issued another notice dated 25th May 2022 stating that the said notice was issued in view of the decision of the Hon’ble Apex Court in Ashish Agarwal, whereby the notice issued under Section 148 during the period from 1st April, 2021 to 30th June, 2021 under the unamended provisions of Section 148 was to be treated as notice issued under Section 148A(b). The JAO also provided a copy of the reasons recorded and claimed that the information relied upon by him was embedded in the said reasons.

The assessee filed a detailed reply vide its letter dated 10th June, 2022 raising objections challenging the validity of the notice on several grounds. The JAO issued another notice dated 29th June, 2022 requiring the assessee to submit any further explanation / documentary evidence in support of its case before 4th July, 2022, and it was also stated that a fresh notice was issued due to a change in incumbency as per the provisions of Section 129. The assessee informed the JAO that its earlier submission dated 10th June, 2022 should be considered as a response to the fresh notice dated 29th June, 2022.

The JAO passed an order under Section 148A(d) dated 26th August, 2022 rejecting the objections raised by the appellant. Thereafter, the JAO also issued the notice under Section 148 dated 27th August, 2022, which was issued manually, stating that he had information in the case of the assessee, which required action in consequence of the judgment of the Hon’ble Apex Court, which suggested that income chargeable to tax for Assessment Year 2015-2016 had escaped assessment. Separately, a communication dated 27th August 2022 was issued where the JAO stated that DIN had been generated for the issuance of notice under Section 148 of the Act dated 26th August, 2022.

The assessee approached the Court under Article 226 of the Constitution of India and challenged the validity of (i) notice dated 25th May 2022 purporting to treat notice dated 8th April 2021 as notice issued under Section 148A(b) for Assessment Year 2015-2016; (ii) the order dated 26th August 2022 under Section 148A(d); and (iii) the notice dated 27th August 2022 issued by the JAO under Section 148.

On the basis of the arguments advanced by both parties, the Court identified the issues as follows which were required to be adjudicated —

(1) Whether TOLA was applicable for Assessment Year 2015-2016 and whether any notice issued under Section 148 of the Act after 31st March 2021 will travel back to the original date?

(2) Whether the notice dated 27th August 2022 issued under Section 148 of the Act was barred by limitation as per the first proviso to Section 149 of the Act?

(3) Whether the impugned notice dated 27th August 2022 was invalid and bad in law as the same had been issued without a DIN?

(4) Whether the impugned notice dated 27th August 2022 was invalid and bad in law being issued by the JAO as the same was not in accordance with Section 151A of the Act?

(5) Whether the issues raised in the impugned order showed an alleged escapement of income represented in the form of an asset or expenditure in respect of a transaction in relation to an event or an entry in the books of account as required in Section 149(1)(b) of the Act?

(6) Whether the Assessing Officer had proposed to reopen on the basis of change of opinion and if it was permissible?

(7) When the claim of deduction under Section 80JJAA of the Act had been consistently allowed in favour of petitioner by the Assessing Officers/ Appellate Authorities in the earlier years, can the Assessing Officer have a belief that there was escapement of income?

(8) Whether the approval granted by the Sanctioning Authority was valid?

Since the subject matter of this article is limited to the issue of jurisdiction of the JAO to issue a notice under Section 148 post notification of ‘e-Assessment of Income Escaping Assessment Scheme, 2022’ under Section 151A, the other issues decided by the Court in this decision are not dealt with here.

With respect to Issue No. (4) as listed above, the assessee argued that the impugned notice dated 27th August, 2022 was invalid and bad in law, being issued by the JAO, which was not in accordance with Section 151A, which gave power to the CBDT to notify the Scheme for the purpose of assessment, reassessment or recomputation under Section 147, for issuance of notice under Section 148 or for conducting of inquiry or issuance of show cause notice or passing of order under Section 148A or sanction for issuance of notice under Section 151. In exercise of the powers conferred under Section 151A, CBDT issued a notification dated 29th March, 2022 after laying the same before each House of Parliament and formulated a Scheme called “the e-Assessment of Income Escaping Assessment Scheme, 2022” (the Scheme). The Scheme provided that (a) the assessment, reassessment or recomputation under Section 147 and (b) the issuance of notice under Section 148 shall be through automated allocation, in accordance with risk management strategy formulated by the Board as referred to in Section 148 for issuance of notice and in a faceless manner, to the extent provided in Section 144B with reference to making assessment or reassessment of total income or loss of assessee. The impugned notice under Section 148 dated 27th August, 2022 had been issued by the JAO and not by the NFAC, which was not in accordance with the aforesaid Scheme and, therefore, bad in law.

The following contentions were raised by the revenue with respect to this issue —

  •  The guideline dated 1st August 2022 issued by the CBDT for issuance of notice u/s. 148 included a suggested format for issuing notice under Section 148, as an Annexure to the said guideline and it required the designation of the Assessing Officer along with the office address to be mentioned, therefore, it was clear that the JAO was required to issue the said notice and not the FAO.
  •  ITBA step-by-step Document No.2 dated 24th June 2022, an internal document, regarding issuing notice under Section 148 for the cases impacted by Hon’ble Supreme Court’s decision dated 4th May 2022 in the case of Ashish Agarwal (Supra), required the notice issued under Section 148 to be physically signed by the Assessing Officers and, therefore, the JAO had jurisdiction to issue notice under Section 148 and it need not be issued by FAO.
  •  FAO and JAO had concurrent jurisdiction and merely because the Scheme had been framed under Section 151A, it did not mean that the jurisdiction of the JAO was ousted or that the JAO could not issue the notice under Section 148.
  •  The notification dated 29th March 2022 issued under Section 151A provided that the Scheme so framed was applicable only ‘to the extent’ provided in Section 144B and Section 144B did not refer to the issuance of notice under Section 148. Hence, the notice could not be issued by the FAO as per the said Scheme.
  •  No prejudice was caused to the assessee when the notice was issued by the JAO and, therefore, it was not open to the assessee to contend that the said notice was invalid merely because the same was not issued by the FAO.
  •  Office Memorandum dated 20th February, 2023 issued by CBDT (TPL Division) with the subject – ‘seeking inputs / comments on the issue of the challenge of the jurisdiction of JAO – reg.’ was also relied upon by the revenue in support of its stand that the notice under Section 148 was required to be issued by the JAO and not FAO.
  •  The revenue also relied upon the decision of the Calcutta High Court in the case of Triton Overseas Pvt. Ltd. (supra).

On this issue under consideration, the Bombay High Court held as under –

  •  There was no question of concurrent jurisdiction of the JAO and the FAO for issuance of notice under Section 148 or even for passing assessment or reassessment order. When specific jurisdiction has been assigned to either the JAO or the FAO in the Scheme dated 29th March, 2022, then it was to the exclusion of the other. To take any other view on the matter would not only result in chaos but also render the whole faceless proceedings redundant. If the argument of Revenue was to be accepted, then even when notices were issued by the FAO, it would be open to an assessee to make submission before the JAO and vice versa, which was clearly not contemplated in the Act. Therefore, there was no question of concurrent jurisdiction of both FAO or the JAO with respect to the issuance of notice under Section 148 of the Act.
  •  The Scheme dated 29th March 2022 in paragraph 3 clearly provided that the issuance of notice “shall be through automated allocation” which meant that the same was mandatory and was required to be followed by the Department and did not give any discretion to the Department to choose whether to follow it or not.
  •  The argument of the revenue that the Scheme so framed was applicable only ‘to the extent’ provided in Section 144B, the fact that Section 144B did not refer to issuance of notice under Section 148 would render the whole scheme redundant. The Scheme framed by the CBDT, which covered both the aspects of the provisions of Section 151A could not be said to be applicable only for one aspect, i.e., proceedings post the issue of notice under Section 148 of the Act being assessment, reassessment or recomputation under Section 147 and inapplicable to the issuance of notice under Section 148. The Scheme was clearly applicable for issuance of notice under Section 148 and accordingly, it was only the FAO which could issue the notice under Section 148 of the Act and not the JAO. The argument advanced by the revenue would render clause 3(b) of the scheme otiose. If clause 3(b) of the Scheme was not applicable, then only clause 3(a) of the Scheme remained. What was covered in clause 3(a) of the Scheme was already provided in Section 144B(1) of the Act, which Section provided for faceless assessment, and covered assessment, reassessment or recomputation under Section 147 of the Act. Therefore, if Revenue’s arguments were to be accepted, there was no purpose of framing a Scheme only for clause 3(a) which was in any event already covered under the faceless assessment regime in Section 144B of the Act. The phrase “to the extent provided in Section 144B of the Act” in the Scheme was with reference to only making assessment or reassessment of total income or loss of assessee. For issuing notice, the term “to the extent provided in Section 144B of the Act” was not relevant. The phrase “to the extent provided in Section 144B of the Act” would mean that the restriction provided in Section 144B of the Act, such as keeping the International Tax Jurisdiction or Central Circle Jurisdiction out of the ambit of Section 144B of the Act, would also apply under the Scheme.
  •  When an authority acted contrary to law, thesaid act of the Authority was required to be quashed and set aside as invalid and bad in law, and the person seeking to quash such an action was not required to establish prejudice from the said act. An act which was done by an authority contrary to the provisions of the statute, itself caused prejudice to the assessee. Therefore, there was no question of the petitioner having to prove further prejudice before arguing the invalidity of the notice.
  •  The guideline dated 1st August 2022 relied upon by the Revenue was not applicable because these guidelines were internal guidelines as was clear from the endorsement on the first page of the guideline — “Confidential For Departmental Circulation Only”. These guidelines were not issued under Section 119 of the Act. Further, these guidelines were also not binding on the Assessing Officer, as they were contrary to the provisions of the Act and the Scheme framed under Section 151A of the Act. The scheme dated 29th March, 2022 issued under Section 151A, which had also been laid before the Parliament, would be binding on the Revenue and the guidelines dated 1st August, 2022 could not supersede the Scheme.
  •  As regards ITBA step-by-step Document No.2 regarding issuance of notice under Section 148 of the Act, relied upon by Revenue, an internal document cannot depart from the explicit statutory provisions of, or supersede the Scheme framed by the Government under Section 151A of the Act, which Scheme was also placed before both the Houses of Parliament as per Section 151A(3) of the Act.
  •  Office Memorandum dated 20th February, 2023 as referred merely contained the comments of the Revenue issued with the approval of Member (L&S) CBDT and the said Office Memorandum was not in the nature of a guideline or instruction issued under Section 119 of the Act so as to have any binding effect on the Revenue. The High Court also dealt with several errors in the position which had been taken in the said Office Memorandum in detail in its order.
  •  With respect to the decision in the case of Triton Overseas Private Limited (supra), it was noted that the Calcutta High Court did not consider the Scheme dated 29th March, 2022 but had referred to an Office Memorandum dated 20th February, 2023, which could not have been relied upon, in the opinion of the Bombay High Court.

The Bombay High Court relied upon the decision of the Telangana High Court in the case of Kankanala Ravindra Reddy vs. ITO [2023] 156 taxmann.com 178 (Tel) wherein it was held that, in view of the provisions of Section 151A read with the Scheme dated 29th March, 2022, the notice issued by the JAOs were invalid and bad in law.

Accordingly, on the basis of the above, the Bombay High Court decided the issue in favour of the assessee and declared the notice issued under Section 148 dated 27th August, 2022 to be invalid and bad in law, having been issued by the JAO and, hence not being in accordance with Section 151A.

OBSERVATIONS

The power of the Assessing Officer to make the assessment or reassessment of income escaping assessment under Section 147 is subject to the provisions of sections 148 to 153. This is evident from the main operating provision of Section 147 which is reproduced below —

If any income chargeable to tax, in the case of an assessee, has escaped assessment for any assessment year, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance or any other allowance or deduction for such assessment year (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year.

Therefore, it is mandatory for the Assessing Officer to comply with the requirements of sections 148 to 153 in order to make the assessment or reassessment of the income escaping assessment. The Assessing Officer will lose his jurisdiction to make the assessment under section 147 if he has contravened the provisions of sections 148 to 153.

Issuance of notice under section 148 is a sine qua non for the purpose of making the assessment or reassessment of income escaping assessment under section 147. There are several conditions which have been imposed under several sections for the purpose of issuing notice under section 148, viz. time limit within which the notice can be issued, obtaining of sanction of the higher authority before issuance of the notice, etc. Time and again, the Courts have held the notice issued under section 148 to be bad in law if it has been issued without fulfilling the relevant conditions which were required to be satisfied before issuing the said notice.

Section 151A is also one of the provisions of the entire scheme of reassessment, as provided in sections 147 to 153. It authorises the Central Government to make a scheme by notification in the Official Gazette. The objective of the said scheme to be notified should be to impart greater efficiency, transparency and accountability by—

(a) eliminating the interface between the income-tax authority and the assessee or any other person to the extent technologically feasible;

(b) optimising utilisation of the resources through economies of scale and functional specialisation;

(c) introducing a team-based assessment, reassessment, re-computation or issuance or sanction of notice with dynamic jurisdiction.

In line with this objective, the Central Government notified e-Assessment of Income Escaping Assessment Scheme, 2022 vide Notification No. 18/2022 dated 29-3-2022. This Scheme provided not only for making of the assessment or reassessment under section 147, but also for issuing notice under section 148 in a faceless manner through automated allocation.

The requirement of issuing notice under section 148 in a faceless manner by the FAO is mandatorily applicable without any exceptions. When the jurisdiction to issue any particular notice under the Act lies with a particular officer, another officer cannot assume that jurisdiction and issue that notice. It is a settled proposition that when a law requires a thing to be done in a particular manner, it has to be done in the prescribed manner and proceeding in any other manner is necessarily forbidden. The Madras High Court in the case of Danish Aarthi vs. M. Abdul Kapoor [C.R.P.(NPD)(MD)No.475 of 2004 and C.R.P.(NPD)(MD)No.476 of 2004] has dealt with this principle extensively and the relevant observations of the High Court in this regard are reproduced below –

20. It is well settled in law that when a statute prescribes to do a particular thing in a particular manner, the same shall not be done in any other manner than prescribed under the law. The said proposition is well recognised as held by the Honourable Supreme Court in the following decisions:

(a) In the decision reported in AIR 1964 SC 358 (State of Uttar Pradesh vs. Singhara Singh) in paragraphs 7 and 8 of the Judgment, it is held thus, “7. In Nazir Ahmed’s case, 63 Ind App 372: (AIR 1936 PC 253 (2)) the Judicial Committee observed that the principle applied in Taylor vs. Taylor, (1876) 1 Ch.D 426 to a Court, namely, that where a power is given to do a certain thing in a certain way, the thing must be done in that way or not at all and that other methods of performance are necessarily forbidden, applied to judicial officers making a record under S.164 and, therefore, held that the magistrate could not give oral evidence of the confession made to him which he had purported to record under S.164 of the Code. It was said that otherwise all the precautions and safeguards laid down in Ss.164 and 364, both of which had to be read together, would become of such trifling value as to be almost idle and that “it would be an unnatural construction to hold that any other procedure was permitted than that which is laid down with such minute particularity in the sections themselves.”

8. The rule adopted in Taylor vs. Taylor (1876) 1 Ch D 426 is well recognized and is founded on sound principles. Its result is that if a statute has conferred a power to do an act and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any other manner than that which has been prescribed. The principle behind the rule is that if this were not so, the statutory provision might as well not have been enacted. A magistrate, therefore, cannot in the course of investigation record a confession except in the manner laid down in S.164. The power to record the confession had obviously been given so that the confession might be proved by the record of it made in the manner laid down. If proof of the confession by other means was permissible, the whole provision of S.164 including the safeguards contained in it for the protection of accused persons would be rendered nugatory. The section, therefore, by conferring on magistrates the power to record statements or confessions, by necessary implication, prohibited a magistrate from giving oral evidence of the statements or confessions made to him.”

(b) The said proposition is also reiterated in the decision reported in (1999) 3 SCC 422 (BabuVerghese vs. Bar Council of Kerala). In paragraphs 31 and 32 of the Judgment, the Honourable Supreme Court held thus, “31. It is the basic principle of law long settled that if the manner of doing a particular act is prescribed under any statute, the act must be done in that manner or not at all. The origin of this rule is traceable to the decision in Taylor vs. Taylor ((1875)1 Ch D 426) which was followed by Lord Roche in Nazir Ahmad vs. King Emperor (AIR 1936 PC 253) who stated as under: “(W)here a power is given to do a certain thing in a certain way, the thing must be done in that way or not at all.”

32. This rule has since been approved by this Court in Rao Shiv Bahadur Singh vs. State of V.P. (AIR 1954 SC 322) and again in Deep Chand vs. State of Rajasthan (AIR 1961 SC 1527). These cases were considered by a three-Judge Bench of this Court in State of U.P. vs. Singhara Singh (AIR 1964 SC 358) and the rule laid down in Nazir Ahmed case (AIR 1936 PC 253) was again upheld. This rule has since been applied to the exercise of jurisdiction by courts and has also been recognised as a salutary principle of administrative law.”

(c) In Captain Sube Singh vs. Lt.Governor of Delhi, AIR 2004 SC 3821 : (2004) 6 SCC 440, the Supreme Court, at paragraph 29, held as follows: “29. In Anjum M.H. Ghaswala a Constitution Bench of this Court reaffirmed the general rule that when a statute vests certain power in an authority to be exercised in a particular manner then the said authority has to exercise it only in the manner provided in the statute itself. (See also in this connection Dhanajaya Reddy vs. State of Karnataka.) The statute in question requires the authority to act in accordance withthe rules for variation of the conditions attached to the permit. In our view, it is not permissible to the State Government to purport to alter these conditions by issuing a notification under Section 67(1)(d) read with sub-clause (i) thereof.”

(d) In State of Jharkhand vs. Ambay Cements, (2005) 1 SCC 368: 2005 (1) CTC 223, at paragraph 26 (in SCC), the Supreme Court held as follows: “26. Whenever the statute prescribes that a particular act is to be done in a particular manner and also lays down that failure to comply with the said requirement leads to severe consequences, such requirement would be mandatory. It is the cardinal rule of interpretation that where a statute provides that a particular thing should be done, it should be done in the manner prescribed and not in any other way. It is also a settled rule of interpretation that where a statute is penal in character, it must be strictly construed and followed. Since the requirement, in the instant case, of obtaining prior permission is mandatory, therefore, non-compliance with the same must result in cancelling the concession made in favour of the grantee, the respondent herein.”

(e) The Division Bench of this Court in 2009 (1) CTC 32 (Indian Network for People living with HIV/AIDS vs. Union of India) and in 2002 (1) LW 672 (Rev. Dr. V. Devasahayam, Bishop in Madras CSI and another vs. D. Sahayadoss and two others) also held to the same effect.

Therefore, the JAO cannot be permitted to issue the notice under section 148 which under the law is required to be issued by the FAO. Further, there is no express provision under the Act providing for concurrent jurisdiction of both; JAO and FAO. To take a view that the JAO also has a concurrent jurisdiction for issuing notice under section 148 would be against the very objective of making the processes under the Act faceless.

The Bombay High Court has dealt with the provisions of section 151A as well as the scheme notified thereunder extensively and took the view that the notice would be invalid if it is issued by the JAO post the effective date of the scheme. The Calcutta High Court merely relied upon the office memorandum dated 20th February, 2023 being F No. 370153/7/2023-TPL issued by the CBDT, which was not having any authority under the Act. In view of this, the view taken by the Bombay High Court and Telangana High Court appears to be the better view of the matter.

Glimpses of Supreme Court Rulings

3 All India Bank Officers’ Confederation vs. The Regional Manager, Central Bank of India and Ors.

Civil Appeal Nos. 7708 of 2014, 18459 of 2017, 18460 of 2017, 18462 of 2017, 18463 of 2017, 18461 of 2017, 18464 of 2017, 18465-18466 of 2017, 18457-18458 of 2017 and 18467 of 2017

Decided On: 7th May, 2024

Does Section 17(2)(viii) and / or Rule 3(7)(i) lead to a delegation of the ‘essential legislative function’ to the CBDT? — The subordinate authority’s power under Section 17(2)(viii), to prescribe ‘any other fringe benefit or amenity’ as perquisite is not boundless, it is demarcated by the language of Section17oftheAct—Anything made taxable by the rule-making authority under Section 17(2)(viii) should be a ‘perquisite’ in the form of ‘fringe benefits or amenity’ — The enactment of subordinate legislation for levying tax on interest free / concessional loans as a fringe benefit is within the rule- making power under Section 17(2)(viii) of the Act

Is Rule 3(7)(i) arbitrary and violative of Article 14 of the Constitution insofar as it treats the PLR of SBI as the benchmark? — SBI is the largest bank in the country and the interest rates fixed by them invariably impact and affect the interest rates being charged by other banks — By fixing a single clear benchmark for computation of the perquisite or fringe benefit, the Rule prevents ascertainment of the interest rates being charged by different banks from the customers and,thus,checks unnecessary litigation — Therefore, Rule 3(7) is intra vires Article 14 of the Constitution of India

The appeals filed by staff unions and officers’ associations of various banks before the Supreme Court, impugned the judgments of the High Courts, which dismissed their writ petitions,where the vires of Section17(2)(viii) of the Income Tax Act, 1961 or Rule 3(7)(i) of the Income Tax Rules, 1962, or both, were challenged.

The Supreme Court noted that Section 17(2)(viii) of the Act includes in the definition of ‘perquisites’,‘any other fringe benefit or amenity’,‘as may be prescribed’. Rule3 of the Rules prescribes additional ‘fringe benefits’ or ‘amenities’,taxable as perquisites, pursuant to Section17(2)(viii). It also prescribes the method of valuation of such perquisites for taxation  purposes. Rule 3(7)(i) of the Rules stipulates that interest-free / concessional loan benefits provided by banks to bank employees shall be taxable as ‘fringe benefits’ or ‘amenities’ if the interest charged by the bank on such loans is lesser than the interest charged according to the Prime Lending Rate of the State Bank of India.

Section 17(2)(viii) and Rule 3(7)(i) were challenged on the grounds of excessive and unguided delegation of essential legislative function to the Central Board of Direct Taxes. Rule 3(7)(i) was also challenged as arbitrary and violative of Article 14 of the Constitution insofar as it treats the PLR of SBI as the benchmark instead of the actual interest rate charged by the bank from a customer on a loan.

The Supreme Court noted that Sections 15 to 17 of the Act relate to income tax chargeable on salaries. Section 15 stipulates incomes that are chargeable to income tax as ‘salaries’. Section 16 prescribes deductions allowable under ‘salaries’. Section 17 defines the expressions ‘salary’, ‘perquisites’ and ‘profits in lieu of salary’ for Sections 15 and 16.

According to the Supreme Court, after specifically stipulating what is included and taxed as ‘perquisite’, Clause (viii) to Section 17(2), as a residuary clause, deliberately and intentionally leaves it to the rule-making authority totax ‘any other fringe benefit or amenity’ by promulgating a rule. The residuary Clause is enacted to capture and tax any other ‘fringe benefit or amenity’ within the ambit of ‘perquisites’, not already covered by Clauses (i) to (viia) to Section 17(2).

The Supreme Court noted that in terms of the power conferred under Section 17(2)(viii), CBDT has enacted Rule 3(7)(i) of the Rules. Rule 3(7)(i) states that interest-free/concessional loan made available to an employee or a member of his household by the employer or any person on his behalf, for any purpose, shall be determined as the sum equal to interest computed at the rate charged per annum by SBI, as on the first date of the relevant previous year in respect of loans for the same purpose advanced by it on the maximum outstanding monthly balance as reduced by interest, if any,actually paid. However, the loans made available for medical treatment in respect of diseases specified in Rule 3A or loans whose value in aggregate does not exceed ₹20,000/-, are not chargeable.

The Supreme Court observed that the effect of the Rule is two-fold. First, the value of interest-free or concessional loans is to be treated as ‘other fringe benefit or amenity’ for the purpose of Section 17(2)(viii) and, therefore, taxable as a ‘perquisite’. Secondly, it prescribes the method of valuation of the interest- free/concessional loan for the purposes of taxation.

The Supreme Court observed that Section 17(2)(viii) is a residuary clause, enacted to provide flexibility. Since it is enacted as an enabling catch-within-domain provision, the residuary Clause is not iron-cast and exacting. A more pragmatic and common sensical approach can be adopted by locating the prevalent meaning of ‘perquisites’ in common parlance and commercial usage.

The Supreme Court noted that the expression ‘perquisite’ is well-understood by a common person who is conversant with the subject matter of a taxing statute. New International Webster’s Comprehensive Dictionary defines ‘perquisites’ as any incidental profit from service beyond salary or wages; hence, any privilege or benefit claimed due. ‘Fringe benefit’ is defined as any of the various benefits received from an employer apart from salary, such as insurance, pension, vacation, etc. Similarly, Black’s Law Dictionary defines ‘fringe benefit’ as a benefit (other than direct salary or compensation) received by an employee from the employer,such as insurance,a company car, or a tuition allowance. The Major Law Lexicon has elaborately defined the words ‘perquisite’ and ‘fringe benefit’.

‘Perquisites’ has also been interpreted as an expression of common parlance in several decisions of this Court. For example, ‘perquisite’ was interpreted in Arun Kumar v. Union of India (2007) 1 SCC 732, with respect to Section 17(2) of the Act. The Court referenced its dictionary meanings and held that ‘perquisites’ were a privilege, gain or profit incidental to employment and in addition to regular salary or wages. This decision refers to the observations of the House of Lords in Owen vs. Pook (1969) 2 WLR 775 (HL), where the House observed that ‘perquisite’ has a known normal meaning, namely, a personal advantage. However, the perquisites do not mean the mere reimbursement of a necessary disbursement. Reference was also made to Rendell vs. Went (1964) 1 WLR 650 (HL), wherein the House held that ‘perquisite’ would include any benefit or advantage, having a monetary value, which a holder of an office derives from the employer’s spending on his behalf.

Similarly, in Additional Commissioner of Income Tax vs. Bharat Patel (2018) 15 SCC 670, the Court held that ‘perquisite’, in the common parlance relates to any perk or benefit attached to an employee or position besides salary or remuneration. It usually includes non-cash benefits given by the employer to the employee in addition to the entitled salary or remuneration.

The Supreme Court thus concluded that, ‘perquisite’ is a fringe benefit attached to the post held by the employee unlike‘profit in lieu of salary’,which is a reward or recompense for past or future service. It is incidental to employment and in excess of or in addition to the salary. It is an advantage or benefit given because of employment, which otherwise would not be available.

From this perspective, the Supreme Court was of the opinion that the employer’s grant of interest-free loans or loans at a concessional rate will certainly qualify as a ‘fringe benefit’ and ‘perquisite’, as understood through its natural usage in common parlance.

According to the Supreme Court, two issues would arise for its consideration: (I) Does Section 17(2)(viii) and/or Rule 3(7)(i) lead to a delegation of the ‘essential legislative function’ to the CBDT?; and (II) Is Rule 3(7)(i)arbitraryandviolativeofArticle14oftheConstitutioninsofarasittreats the PLR of SBI as the benchmark?

I. Does Section17(2)(viii)and/or Rule3(7)(i) lead to a delegation of the ‘essential legislative function’ to the CBDT?

The Supreme Court noted that a Constitution Bench of Seven Judges of this Court in Municipal Corporation of Delhi v. Birla Cotton, Spinning and Weaving Mills, Delhi and Anr.1968: INSC:47, has held that the legislature must retain with itself the essential legislative function. ‘Essential legislative function’ means the determination of the legislative policy and its formulation as a binding Rule of conduct.Therefore,once the legislature declares the legislative policy and lays down the standard through legislation, it can leave the remainder of the task to subordinate legislation. In such cases, the subordinate legislation is ancillary to the primary statute. It aligns with the framework of the primary legislation as long as it is made consistent with it, without exceeding the limits of policy and standards stipulated by the primary legislation.The test,therefore, is whether the primary legislation has stated with sufficient clarity, the legislative policy and the standards that are binding on subordinate authorities who frame the delegated legislation.

The Supreme Court was of the opinion, the subordinate authority’s power under Section 17(2)(viii), to prescribe ‘any other fringe benefit or amenity’ as perquisite is not boundless. It is demarcated by the language of Section 17 of the Act. Anything made taxable by the rule-making authority under Section 17(2)(viii) should be a ‘perquisite’ in the form of ‘fringe benefits or amenity’. According to the Supreme Court, the provision clearly reflects the legislative policy and gives express guidance to the rule-making authority.

Section 17(2) provides an ‘inclusive’ definition of ‘perquisites’. Section 17(2)(i) to (vii)/(viia) provides for certain specific categories of perquisites. However, these are not the only kind of perquisites. Section 17(2)(viii) provides a residuary Clause that includes ‘any other fringe benefits or amenities’ within the definition of ‘perquisites’, as prescribed from time to time. The express delineation does not take away the power of the legislature, as the plenary body, to delegate the rule-making authority to subordinate authorities, to bring within the ambit of ‘perquisites’ any other ‘fringe benefit’ or annuities’ as ‘perquisite’. The legislative intent, policy and guidance is drawn and defined. Pursuant to such demarcated delegation, Rule 3(7)(i) prescribes interest- free/loans at concessional rates as a ‘fringe benefit’ or ‘amenity’, taxable as ‘perquisites’. This becomes clear once we view the analysis undertaken in Birla Cotton (supra)viz. the ‘essential legislative function’ test.

The Supreme Court after referring to plethora of judgements was of the opinion that the enactment of subordinate legislation for levying tax on interest free/concessional loans as a fringe benefit was within the rule-making power underSection17(2)(viii)of the Act.Section17(2)(viii)itself,and the enactment of Rule 3(7)(i) was not a case of excessive delegation and falls within the parameters of permissible delegation. Section 17(2) clearly delineates the legislative policy and lays down standards for the rule-making authority. Accordingly, Rule 3(7)(i) was intra vires Section 17(2)(viii) of the Act. Section 17(2)(viii) does not lead to an excessive delegation of the ‘essential legislative function’.

II. Is Rule3(7)(i) arbitrary and violative of Article 14 of the Constitution in so far as it treats the PLR of SBI as the benchmark?

Rule 3(7)(i) posits SBI’s rate of interest, that is the PLR, as the benchmark to determine the value of benefit to the Assessee in comparison to the rate of interest charged by other individual banks. According to the Supreme Court, the fixation of SBI’s rate of interest as the benchmark is neither an arbitrary nor unequal exercise of power. The rule-making authority has not treated unequal as equals. SBI is the largest bank in the country and the interest rates fixed by them invariably impact and affect the interest rates being charged by other banks. By fixing a single clear benchmark for computation of the perquisite or fringe benefit, the Rule prevents ascertainment of the interest rates being charged by different banks from the customers and, thus, checks unnecessary litigation. Rule 3(7)(i) ensures consistency in application, provides clarity for both the Assessee and the revenue department, and provides certainty as to the amount to be taxed. When there is certainty and clarity, there is tax efficiency which is beneficial to both the taxpayer and the tax authorities. These are all hallmarks of good tax legislation. Rule 3(7)(i) is based on a uniform approach and yet premised on a fair determining principle which aligns with constitutional values. Therefore, Rule 3(7) was held to be intra vires Article 14 of the Constitution of India.

The Supreme Court therefore dismissed the appeals and upheld the impugned judgments of the High Courts of Madras and Madhya Pradesh.

Loss on Reduction of Capital without Consideration

ISSUE FOR CONSIDERATION

Under section 66 of the Companies Act, 2013, a company can reduce its share capital by inter alia cancelling any paid-up share capital which is lost or is not represented by available assets, or for payment of any paid-up share capital which is in excess of the wants of the company, after obtaining the approval of the National Company Law Tribunal (NCLT). The reduction of share capital may be effectuated either by cancelling some shares, or by reducing the paid-up value of all shares. When paid-up share capital which is lost or unrepresented by available assets is reduced, either by cancelling some shares or by reducing the paid-up value of all shares, no consideration is paid to the shareholders, as the share capital is set off against the accumulated losses (debit balance in the Profit & Loss Account).

While the Supreme Court has held that reduction of share capital is a transfer in the hands of the shareholder, in the cases of Kartikeya V. Sarabhai vs. CIT 228 ITR 163 and CIT vs. G Narasimhan 236 ITR 327, and there arose a liability to pay capital gains tax where a consideration was received on reduction of capital the issue has arisen before various benches of the Tribunal as to whether in cases of capital reduction where no amount is paid to the shareholder, whether a capital loss is allowable to the shareholder, since there is no consideration received by him on such reduction.

Special Bench of the Mumbai Tribunal has taken a view that a capital loss is not allowable on reduction of capital without any payment, a recent decision of the Mumbai bench of the Tribunal however has taken the view that in such a case, the shareholder is entitled to claim a loss under the head ‘capital gains’.

BENNETT COLEMAN & CO’S CASE

The issue had come up before the Special Bench of the Mumbai Tribunal in the case of Bennett Coleman & Co Ltd vs. Addl CIT 133 ITD 1(Mum)(SB).

In this case, the assessee had made an investment of ₹2,484.02 lakh in equity shares of a group company, TGL. TGL applied to the Bombay High Court for reduction of its equity share capital by 50 per cent, by reducing the face value of each share from ₹10 to ₹5, which was approved by the High Court. The assessee claimed a capital loss of half its investment, claiming the indexed cost of ₹1,242.01 lakh (₹2,221.85 lakh) as a capital loss.

Before the Assessing Officer (AO), it was claimed that such loss was allowable in view of the decisions of the Supreme Court in the cases of Kartikeya V Sarabhai (supra) and G Narasimhan (supra), where it was held that reduction of face value of shares was a transfer. According to the AO, the decision of the Supreme Court in the case of Kartikeya Sarabhai(supra) could not be applied, because in that case the voting rights were also reduced proportionately on the reduction in face value of preference shares, whereas in the case before him, there was no reduction in the rights of the equity shareholders. According to the AO, since there was no change in the rights of the assessee vis-à-vis other shareholders, no transfer had taken place and thus the assessee was not entitled to the claim of long-term capital loss.

The Commissioner (Appeals) upheld the action of the AO in disallowing the claim for capital loss.

Before the Tribunal, on behalf of the assessee, it was argued that the claim of long-term capital loss had been rejected mainly on the ground that no transfer had taken place. It was pointed out that the accumulated losses of ₹42.97 crore of TGL were written off by the reduction of capital and by utilising the share premium account. Equity shares of ₹10 each were reduced to equity shares of ₹5 each by cancelling capital to the extent of ₹5 per equity share, and thereafter every two such equity shares of ₹5 each were consolidated into one equity share of ₹10 each, under the scheme of reduction of capital. The assessee’s shareholding of 1,34,74,799 shares of ₹10 each was therefore reduced to 67,37,399 shares of ₹10 each. It was argued on behalf of the assessee that the shares received after reduction of capital were credited to the demat account under a different ISIN, which clearly indicated that the new shares were different shares. This was therefore an exchange of shares which was covered by the definition of “transfer”.

On behalf of the assessee it was argued that the Supreme Court had observed in the case of Kartikeya Sarabhai (supra) that the definition of transfer in section 2(47) was an inclusive one, which inter alia provided that relinquishment of an asset or extinguishment of any right therein would also amount to transfer of a capital asset. It was further argued that even if it was assumed that the principle laid down by the Supreme Court in the case of preference shares was not applicable, the principle laid down in the case of G Narasimhan(supra) squarely applied, since the issue in that case was regarding reduction of equity share capital. Reliance was also placed on the decision of the Supreme Court in the case of CIT vs. Grace Collis 248 ITR 323, wherein the Supreme Court observed that the expression ‘extinguishment of any right therein’ could be extended to extinguishment of rights independent of or otherwise than on account of transfer. It was argued that therefore, even extinguishment of rights in a capital asset would amount to transfer, and in the case before the Tribunal, since the assessee’s right got extinguished proportionately due to the reduction of capital, it would amount to transfer.

Attention of the Tribunal was drawn to the following decisions of the Tribunal, where it had been held that reduction of capital would amount to transfer and capital loss was therefore held to be allowable:

Zyma Laboratories Ltd vs. Addl CIT 7 SOT 164 (Mum)

DCIT vs. Polychem Ltd ITA No 4212/Mum/07

Ginners & Pressers Ltd vs. ITO 2010(1) TMI 1307 – ITAT Mumbai

The Bench raised the question that the capital loss had not been disallowed only on the ground that it would not amount to transfer but mainly on the point that the assessee had not received any consideration, by applying the principle laid down by the Supreme Court in the case of CIT vs. B C SrinivasaSetty 128 ITR 294, wherein it was held that if the computation provisions fail, capital gains cannot be assessed under section 45.

Responding to the question, on behalf of the assessee, it was pointed out that in the case of B C Srinivasa Setty (supra), the Supreme Court held that it was not possible to ascertain the cost of goodwill and therefore it was not possible to apply the computation provisions. The proposition was not that if no consideration was received then no gain could be computed, but the proposition was that if any of the elements of the computation provisions could not be ascertained, then the computation provisions would fail, and such gain could not be assessed to capital gains tax. In the case of the assessee, the consideration was ascertainable, and should be taken as zero.

On behalf of the revenue, it was argued that the value of assets of the company remained the same before and immediately after such reduction, and therefore no loss was caused to the assessee. It was argued that a share meant proportionate share of assets of the company, and since share of the assessee in the company’s assets had not gone down, therefore no loss could be said to have been incurred by the assessee. It was argued that reduction of share capital could at best lead to a notional loss.

Attention of the bench was drawn to section 55(2)(v), which defines cost of acquisition in case of shares in the event of consolidation, division or conversion of original shares, as per which clause, original cost had to be taken as cost of acquisition. It was argued that therefore the cost of acquisition would remain the same to the assessee as per this provision.If the loss on reduction of share capital was allowed at this stage, in future if such shares were sold, the assessee could then claim the cost as cost of acquisition, which would be a double benefit to the assessee, which was not permissible under law as laid down by the Supreme Court in the case of Escorts Ltd. vs. Union of India 199 ITR 43.

It was further submitted on behalf of the revenue that whenever a company issued bonus shares, no capital gains was chargeable on the mere receipt of such bonus shares, and capital gains would be charged only when such bonus shares were sold by the assessee. A similar principle needed to be applied in a case when the assessee’s shareholding was reduced on reduction of such capital. It was argued that at best, just as held by the Supreme Court in CIT vs. Dalmia Investment Co Ltd 52 ITR 567that average cost of shares would have to be taken when bonus shares are sold, meaning that the cost of the shares was adjusted and cost of acquisition was taken at average value, the same principle should be applied on reduction of share capital, average cost of holding after reduction of capital would increase, and the loss could be considered only when such shares were transferred for a consideration.

It was argued that this principle has been affirmed by the Supreme Court in the case of Dhun Dadabhoy Kapadia v CIT 63 ITR 651, where the court held that gain was to be understood in a similar way as understood by the commercial world, and receipt on sale of right to subscribe to rights shares was required to be reduced by fall in the value of existing shareholding. Following the same principle, it was argued that at best in the assessee’s case, the value of reduced shareholding could be increased (cost of acquisition could be increased) but the loss could not be allowed, since at the stage of capital it was only a notional loss.

In rejoinder on behalf of the assessee, it was pointed out that no double benefit had been obtained by the assessee, since the cost claimed had been reduced from the value of investment.

The Tribunal referred to the decision of the Supreme Court in the case of CIT vs. Rasiklal Maneklal HUF 177 ITR 198, where shares were received by the assessee in the amalgamated company in lieu of shares held in the amalgamating company. In that case, the Supreme Court had observed that in case of exchange, where one person transfers a property to another person in exchange of another property, the property continues to be in existence. Therefore, the Supreme Court had held that since the shares of the amalgamating company had ceased to be in existence, the transaction did not involve any transfer. Applying those principles to the case before it, the Tribunal observed that if the argument of the assessee was accepted, older shares with different ISIN ceased to exist and new shares with different ISIN were issued, which would not be called a case of extinguishment or relinquishment, but was a mere case of substitution of one kind of share with another. According to the Tribunal, the assessee got its new shares on the strength of its rights with the old shares, and therefore this would not amount to a transfer.

Analysing the decision of the Supreme Court in the case of G Narasimhan(supra), which involved reduction of share capital in respect of equity shares, the Tribunal observed that a careful analysis of this decision indicated that whenever there was reduction of shares and upon payment by the company to compensate the value equivalent to reduction, apart from the effect on shareholders rights to vote, etc, a transfer could be said to have taken place. The question was whether this would still attract section 45.

According to the Tribunal, the answer was given by the Gujarat High Court in the case of CIT vs. MohanbhaiPamabhai 91 ITR 393, where the High Court held that section 48 showed that the transfer that was contemplated by section 45 was a transfer as a result of which consideration was received by the assessee or accrued to the assessee. If there was no consideration received or accruing to the assessee as a result of the transfer, the machinery section enacted in section 48 would be wholly inapplicable, and it would not be possible to compute profits or gains arising from the transfer of the capital asset. According to the High Court, the transaction in order to attract the charge of tax as capital gains must therefore clearly be such that consideration is received by the assessee or accrues to the assesse as a result of the transfer of the capital asset. Where transfer consisted in extinguishment of rights in a capital asset, there must be an element of consideration for such extinguishment, for only then would it be a transfer exigible to capital gains tax. The Tribunal noted that the Supreme Court had dismissed the appeal of the revenue against this decision, which is reported as Addl CIT vs. MohanbhaiPamabhai 165 ITR 166.

Analysing the decision of the Supreme Court in the case of Sunil Siddharthbhai(supra), the Tribunal observed that the court relied upon the principle laid down in the case of CIT vs. B C Srinivasa Setty (supra), and held that unless and until consideration was present, the computation provisions of section 48 would not be workable, and therefore such transfer could not be subjected to tax. The court further held that unless and until the profits or losses were real, the same could not be subjected to tax. Referring to the Supreme Court decision of B C Srinivasa Setty(supra), the Tribunal noted that it was clear that unless and until a particular transaction led to computation of capital gain or loss as contemplated by section 45 and 48, it would not attract capital gains tax.

The Tribunal observed that in the case before it, the assessee had not received any consideration for a reduction of share capital. Ultimately the number of shares held by the assessee had been reduced to 50 per cent, and that nothing had moved from the side of the company to the assessee. Addressing the argument of the assessee that the decision of Mohanbhai Pamabhai (supra) was not applicable, because in this case it was possible to ascertain the consideration by envisaging the same as zero, the Tribunal held that in the case of reduction of capital, nothing moved from the coffers of the company, and therefore it was a simple case of no consideration which could not be substituted to zero. The Tribunal also noted that wherever the legislature intended to substitute the cost of acquisition at zero, specific amendment had been made. In the absence of such amendment, it had to be inferred that in the case of reduction of shares, without any apparent consideration, and that too in a situation where the reduction had no effect on the right of the shareholder with reference to the intrinsic rights on the company, section 45 was not applicable.

The Tribunal rejected the reliance by the assessee on the decision of the Karnataka High Court in the case of Dy CIT vs. BPL Sanyo Finance Ltd 312 ITR 63, a case of claim of loss on forfeiture of partly paid up shares, on the ground that in the case before it, shares had not been cancelled but only the number of shares had been reduced, which was only a notional loss. Further according to the Tribunal, in that case, the decision of the Supreme Court in the case of B C Srinivasa Setty (supra) had not been considered, but it had decided this issue on the basis of the Supreme Court decision in the case of Grace Collis (supra)

Noting the decision of Grace Collis (supra), the Tribunal observed that it was clear that even extinguishment of rights in a particular asset would amount to transfer. It however observed that in the case before it, the assessee’s rights had not been extinguished, since the effective share of the assessee in the assets of the company would remain the same immediately before and after reduction of such capital.

The Tribunal went on to analyse in great detail with illustrations as to how issue of bonus shares by a profit-making company or reduction of capital by a loss-making company did not affect the shareholders rights, because such profit or loss belonged to the company. According to the Tribunal, since the share of the shareholder in the net worth of the company remained the same before and after reduction of capital, there was no change in the intrinsic value of his shares and even his rights vis-à-vis other shareholders as well as vis-à-vis the company would remain the same. Therefore, the Tribunal was of the view that there was no loss that could be said to have actually accrued to the shareholder as a result of reduction in the share capital.

The Tribunal also relied on the decision of the Bombay High Court in the case of Bombay Burmah Trading Corpn Ltd vs. CIT 147 Taxation Reports 570 (Bom), a very short judgment where the facts were not discussed, but the question was answered by the Bombay High Court as being covered by the ratio of the decision of the Supreme Court in the case of B C Srinivasa Setty (supra), and held to be not a referable question of law, as the answer to the question was self-evident. According to the Tribunal, in that case it was held that if no compensation was received, then capital loss cannot be allowed, and that the decision of the jurisdictional High Court could not be ignored by the Tribunal simply because it was assumed that certain aspects of the issue might not have been considered by the jurisdictional High Court.

The Tribunal also relied upon the decision of the Authority for Advance Rulings in the case of Goodyear Tire & Rubber Co, in re, 199 Taxman 121, where the assessee, a US company, propose to contribute voluntarily its entire holding in an Indian company to a Singapore-based group company voluntarily without consideration. The AAR held that no income would arise, as the competition provision under section 48 could not be given effect to, and therefore the charge under section 45 failed, in view of the decisions of the Supreme Court in the case of B C Srinivasa Setty (supra) and Sunil Siddharth bhai (supra).

The Tribunal also agreed with the submissions of the revenue that the provisions of section 55(2)(v) would apply in such a case and that after reduction of share capital, the cost of acquisition of the remaining shares would be reckoned with reference to the original cost.

The Tribunal therefore held that the loss arising on account of reduction in share capital could not be subjected to provisions of section 45 with section 48, and accordingly, such loss was not allowable as capital loss. At best, such loss was a notional loss, and it was a settled principle that no notional loss or income could be subjected to the provisions of the Income Tax Act.

This decision of the Special bench was also followed by another bench of the Mumbai Tribunal in the case of Shapoorji Pallonji Infrastructure Capital Company Pvt Ltd vs. Dy CIT, ITA No 3906/Mum/2019.

TATA SONS’ CASE

The issue again recently came up before the Mumbai bench of the Tribunal in the case of Tata Sons Ltd v CIT 158 taxmann.com 601.

In this case, the assessee held 288,13,17,286 equity shares in TTSL, an Indian telecom company which had incurred substantial losses in the course of its business. A Scheme of Arrangement and Restructuring was entered into by TTSL and its shareholders whereby the paid up equity share capital was to be reduced by reducing the number of equity shares of the company by half, and given effect to by reducing the amount from the accumulated debit balance in the Profit and Loss Account and by a reduction from Share Premium Account. No consideration was payable to the shareholders in respect of the shares which were to be cancelled. The reduction of capital was effected under section 100 of the Companies Act, 1956. As a result of such reduction of capital, the assessee’sshare holding of 288,13,17,286 equity shares in TTSL was reduced to half, i.e. 144,06,58,643 equity shares.

In its return of income, the assessee claimed a long-term capital loss on reduction of the shares of TTSL of ₹2046,97,54,090. During the course of assessment proceedings, in response to a query from the AO, the assessee provided details, the working of the capital gains, and explained how the claim of the assessee for long term capital losses was allowable in view of the decisions of the Supreme Court in the cases of Kartikeya Sarabhai (supra), G Narasimhan (supra) and D P Sandhu Brothers ChemburPvt Ltd 273 ITR 1. It was specifically pointed out that reduction of capital, i.e. loss of shares, was tantamount to a transfer under section 2(47), and that computation provision can fail only if it was not possible to conceive of any element of cost.

A show cause notice was issued by the AO asking as to why corresponding cost of shares on reduction in share capital of TTSL should not be treated as cost of the balance shares of TTSL. The AO asked for further details of capital gains, which was duly provided. After examining the factual and legal submissions, the AO accepted the assessee’s claim for long term capital loss in his assessment order under section 143(3).

The Principal Commissioner of Income Tax (PCIT) initiated revision proceedings under section 263, on various grounds, and held that the assessment order was erroneous and prejudicial to the interests of revenue on the following grounds:

  1.  since no consideration had accrued or received as a result of transfer of the capital asset, the provisions of section 48 could not be applied;
  2.  the Supreme Court decision in the case of Kartikeya Sarabhai was distinguishable as that was not a case of reduction in the face value of shares but an effacement of the entire shares;
  3.  the scheme was claimed as a scheme of arrangement and restructuring but was not a scheme of reduction of capital;
  4. the consideration received is ₹ nil and not ₹ zero;
  5.  in another company, Tata Power Ltd, the AO had disallowed the capital loss in respect of reduction of share capital/cancellation of shares of TTSL.

The PCIT therefore directed the AO to determine the total income by disallowing the long-term capital loss after giving the assessee an opportunity of being heard.

Before the Tribunal, on behalf of the assessee it was argued that:

  1.  the issue had been examined by the AO during assessment proceedings and, if the AO had taken one possible view of the matter, then the CIT could not revise or cancel the assessment order within the scope of section 263;
  2.  the PCIT failed to consider that it is possible in law for schemes of reduction of capital to provide for payment of consideration to the holders of the shares; in such cases the Tribunal has held that it is an allowable capital loss, whether or not consideration was payable in terms of the scheme;
  3.  the PCIT had based his decision on an entirely incorrect legal principle that the provisions of section 48 failed and therefore no capital loss can be determined in the case where no consideration is received/accrues to the transferor of the capital asset. This was contrary to the well-settled law laid down by the Supreme Court in B C Srinivasa Setty (supra) and D P Sandhu Brothers ChemburPvt Ltd (supra), wherein the correct principle laid down was that the capital gains computation provisions may be held not to apply, if and only if, any part thereof cannot conceivably be attracted. The correct principle is that if it is impossible to conceive of consideration as a result of the transfer, then perhaps it could be argued that the provisions of section 48 do not apply.
  4. There is a vast difference between a case where no consideration is conceivable in a transaction, as opposed to a case where nil consideration is received; if it is conceivable that consideration can result, that consideration may be zero or nil or any figure. This is vastly different from no consideration being conceivable.
  5. There could be no dispute that the shares held by the assessee had been reduced, which had led to a huge loss to the assessee, which was clearly a capital loss.
  6. It was undisputed that the reduction of capital effected under the scheme resulted in cancellation of 144,06,58,653 equity shares of TTSL held by the assessee; such cancellation in extinguishment of the shares clearly amounted to a transfer as defined in section 2(47); the provisions of section 45 were clearly attracted as the shares had been transferred; the provisions of section 48 were also clearly attracted; on a plain reading of the provisions, it was indisputable that a capital loss had arisen as a result of transfer of the shares and consequently allow ability of the capital loss was certainly a possible view, and accordingly the provisions of section 263 could not have been invoked by the PCIT;
  7. The view of the PCIT that since no consideration was received by the assessee on reduction of capital, the provisions of section 45 to 48 could not be applied, cannot be termed to be a correct, irrefutable, or definitive view and was not supported by any statutory provision or principle of law or binding judicial precedent.
  8. The decision of the Gujarat High Court in the case of CIT vs. Jaykrishna Harivallabhdas 231 ITR 108 holds in favour of the assessee’s contention that the capital loss was to be computed in cases even where no consideration had been received on the transfer of a capital asset.
  9.  The order of the Delhi High Court approving the scheme specifically provided that the scheme was one of reduction of capital.

Addressing the conclusion of the PCIT that the computation mechanism under section 48 fails, it was argued on behalf of the assessee that the correct principle was that the capital gains provisions may be held not to apply if and only if any part thereof cannot conceivably be attracted. Although no consideration had been received by or had accrued to the assessee, it was certainly possible to conceive of consideration being received or receivable in such cases, and that the consideration here was zero. Reliance was placed on the decisions of the Tribunal in the cases of Jupiter Capital Pvt Ltd vs. ACIT (ITA No 445/Bang/2018) and Ginners and Pressers Ltd v ITO 2010 (1) TMI 1307 – ITAT MUMBAI for the proposition that when there was a reduction by way of cancellation of shares, it constituted a transfer under section 2(47) and the consequential capital loss was allowable whether or not any consideration was received/receivable by the shareholder.

It was argued on behalf of the assessee that the ITAT Special Bench decision in the case of Bennett Coleman and Co Ltd(supra) was not applicable due to the following reasons:

  1. this was a case where section 263 had been invoked where the AO had taken a possible view of the matter, while in Bennett Coleman’s case, there was a dissenting order;
  2.  in Bennett Coleman’s case, there was a substitution of shares, which was not the fact in Tata Sons case. This distinction had been noted by the Tribunal in the case of Carestream Health Inc. vs. DCIT 2020 (2) TMI 325 – ITAT Mumbai, where the Tribunal had allowed capital loss on cancellation of shares.

It was pointed out that section 55(2)(v)(b) does not include the situation of cancellation of shares held consequent to reduction of capital, and hence if the cost of the cancelled shares is not allowed in the year of cancellation, it will never be allowed.

On behalf of the revenue, it was submitted that the AO had not examined the correct principle of law on the facts of the case. The judgements relied upon by the assesse in the facts of the case, because none of the cases pertains to loss on reduction of capital. Even if there is a transfer under section 2(47), the computation mechanism fails because there is no cost. On this very issue there was an ITAT Mumbai Special Bench Decision in the case of Bennett Coleman(supra), which had considered all the judgements of the Supreme Court cited by the assessee, and had categorically held that in the case of reduction of capital, if no consideration can be determined, then the computation mechanism fails. In view of this decision of the Special Bench, it was submitted that the claim of the assessee cannot be upheld, because capital gain / loss cannot be determined.

Looking at the facts, the Tribunal observed that there could be no dispute that there was a loss on the capital account by way of reduction of capital invested, and therefore any loss on capital account was a capital loss. The issue therefore was whether it was a notional loss, and even if it was a capital loss whether the same could be allowed because no consideration had been received by or accrued to the assessee.

The Tribunal analysed the provisions of section 100(1) of the Companies Act, 1956, which provided for the manner in which reduction of capital could be effected. This also envisaged payment of any paid up capital which was in excess of the wants of the company. Thus, the Tribunal noted that there could be a case where the consideration was paid on the reduction of capital, or there could be a case where consideration was not paid at all. The Tribunal questioned as to whether, in such circumstances, two views could be taken in the reduction of capital, one where certain consideration was paid, and another where no consideration was paid. For instance, if the assessee had received a nominal consideration, then it would be entitled to claim the capital loss. Not allowing such loss just because the assessee had not received any consideration, was a reasoning which the Tribunal expressed its inability to accept.

The Tribunal noted that the issue of whether the reduction of face value of shares amounted to transfer or not had been settled by the Supreme Court in the case of Kartikeya Sarabhai(supra), where the court held that it was not possible to accept the contention that there had been no extinguishment of any part of the right as a shareholder qua the company, on reduction of capital by reduction of face value of shares of the company. It noted the observations of the Supreme Court to the effect that when, as a result of reducing the face value of the shares, the share capital is reduced, the right of the preference shareholder to the dividend or his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital. According to the Supreme Court, such reduction of right of the capital asset amounted to a transfer within the meaning of that expression in section 2(47).

Further referring to the decision of the Karnataka High Court in the case of BPL Sanyo Finance Ltd(supra) and the decision of the Supreme Court in the case of Grace Collis(supra), the Tribunal concluded that if the right of the assessee in the capital assets stood extinguished either upon amalgamation or by reduction of shares, it amounted to transfer of shares within the meaning of section 2, and therefore computation of capital gains had to be made. As per the Tribunal, there could be no quarrel that reduction of equity shares under a Scheme of Arrangement and Restructuring in terms of section 100 of the Companies Act amounted to extinguishment of rights in the shares, and hence was a transfer within the ambit and scope of section 2 (47).

As regards cost of acquisition, the Tribunal referred to the Supreme Court decision in the case of D P Sandhu Brothers ChemburPvt Ltd (supra), where the court analysed its decision in B C Srinivasa Setty(supra), and concluded that an asset which was capable of acquisition act at a cost would be included within the provisions pertaining to the head “capital gains”, as opposed to assets in the acquisition of which no cost at all can be conceived. According to the Tribunal, from a plain reading of this judgement, the sequitur was, where the cost of acquisition is inherently capable of being determined or not, i.e. whether it was possible to envisage the cost of an asset which was capable of acquisition at a cost. The distinction had been made by the Supreme Court where the asset which was capable of acquisition at a cost would be included for the purpose of computing capital gains, as opposed to assets in the acquisition of which no cost at all could be conceived. If cost could be conceived, then it was chargeable under the head capital gains.

Applying this ratio to the facts before it, the Tribunal noted that the assessee had incurred the cost for acquiring the shares, and therefore there was no dispute regarding cost of acquisition. The assessee did not receive any consideration due to reduction of capital, which had resulted into a loss to the assessee. The issue examined by the Tribunal was, whether the price could be conceived or not? It noted that the price on paper for which the assessee had acquired the asset had been reduced to half the cost, as half the cost was waived off / extinguished.

The Tribunal raise the question that if Re 1 per share had been received on reduction of capital, could it be said that there was no consideration received or consideration was inconceivable, and if zero was received, could it be said that there was no conceivable consideration at all or that zero was not a consideration?

The Tribunal noted that this issue has been addressed by the Gujarat High Court in the case of Jaykrishna Harivallabhdas (supra), where the Gujarat High Court pointed out the incongruity, anamoly and absurdity of taking a view that in a case where a negligible or insignificant sum was disbursed on liquidation, capital gains was to be computed, but where nothing was disbursed on liquidation of the company, the extinguishment of rights would result in total loss with no consequence. The Gujarat High Court had accordingly held that even when there was a nil receipt of capital, the entire extinguishment of rights had to be written off as a loss resulting from computation of capital gains. According to the Tribunal, this ratio of the Gujarat High Court was clearly applicable on the facts of the case before it, because they could be no distinction where an assessee received negligible point insignificant consideration, and where the assessee received nil consideration. The Tribunal was of the view that this judgement and the ratio clearly clinched the issue in favour of the assessee.

The Tribunal therefore held that:

  1.  the reduction of capital was extinguishment of right on the shares amounting to a transfer within the meaning and scope of section 2(47);
  2.  the loss on reduction of shares was a capital loss and not a notional loss;
  3.  even when the assessee had not received any consideration on reduction of capital but its investment was reduced to a loss, resulting into a capital loss, while computing the capital gain, capital loss had to be allowed or set-off against any other capital gain.

The Tribunal distinguished the decision of the Special Bench in the case of Bennett Coleman & Co(supra) by observing that that was a case of substitution of shares, which was not the case before it. The distinction on the facts had been noted by the Tribunal in the case of Care stream Health Inc.(supra). It noted the minority judgment in the Special Bench decision, where the accountant member had held that a shareholder who is capital has been reduced is deprived of his right to receive that part of the share capital which has been reduced and therefore it is an actual loss. In that minority judgement, the distinction between cases where cost of acquisition is incapable of ascertainment and cases in which it is ascertained as zero was clearly brought out.

The Tribunal observed that it was not relying upon the minority judgment in the Special Bench case, but that the case before it was of the revision under section 263. According to the Tribunal, the dissenting judgement when to show that it was a possible view, if a view had been taken by the AO in favour of the assessee, then the order of the AO could not be said to be erroneous and could not therefore have been set aside or cancelled. It noted that it was following the Gujarat High Court decision in the case of Jaykrishna Harivallabhdas(supra) as against the majority judgment given by the Tribunal Special Bench in Bennett Coleman & Co(supra).

The Tribunal therefore held that the AO had rightly allowed the computation of long-term capital loss, to be set-off against the capital gain shown by the assessee, and therefore set aside the revision order of the PCITu/s 263.

OBSERVATIONS

The heart of the controversy in this case revolved around the understanding of the Supreme Court decision in the case of B C Srinivasa Setty (supra) – whether the ratio decided applied to all situations where there was no cost of acquisition or whether it applied only to situations where the cost of acquisition was not conceivable. The language of the Court was “What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class it may, on the facts of a certain case, be acquired without the payment of money….”

This aspect has been analysed by the Supreme Court in the case of D P Sandhu Brothers ChemburPvt Ltd(supra) where the Supreme Court observed:

“In other words, an asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head ‘capital gains’ as opposed to assets in the acquisition of which no cost at all can be conceived. The principle propounded in B.C. SrinivasaSetty’s case (supra) has been followed by several High Courts with reference to the consideration received on surrender of tenancy rights. [See Among others Bawa Shiv Charan Singh v. CIT [1984] 149 ITR 29 (Delhi); CIT v. MangtuRam Jaipuria [1991] 192 ITR 533 (Cal.); CIT v. Joy Ice Cream (Bang.) (P.) Ltd. [1993] 201 ITR 894 (Kar.); CIT v. MarkapakulaAgamma [1987] 165 ITR 386 (A.P.); CIT v. Merchandisers (P.) Ltd. [1990] 182 ITR 107 (Ker.)]. In all these decisions the several High Courts held that if the cost of acquisition of tenancy rights cannot be determined, the consideration received by reason of surrender of such tenancy rights could not be subjected to capital gain tax.”

It is therefore clear that as per the Supreme Court, capital gains is not capable of being computed only in a case where the cost of acquisition (or consideration as in this case) is not conceivable at all, and not in a case where it is conceivable, but is nil.

Though the decision of the Gujarat High Court in the case of Jaykrishna Harivallabhdas(supra) had been cited before the Special bench in Bennett Coleman’s case, it was not taken into consideration. This decision rightly brings out the absurdity of taking a view that one has to compute capital gains when there is a nominal consideration, and that one cannot compute capital gains when nothing is received. As observed by the Gujarat High Court:

“The contention that this provision should apply to actual receipts only also cannot be accepted for yet another reason, because acceptance of that would lead to an incongruous and anomalous result as will be seen presently. The acceptance of this view would mean whereas even in a case where a sum is received, howsoever negligible or insignificant it may be, it would result in the computation of capital gains or loss, as the case may be, but in a case where nothing is disbursed on liquidation of a company the extinction of rights, would result in total loss with no consequence. That is to say on receipt of some cost, however insignificant it may be, the entire gamut of computing capital gains for the purpose of computing under the head “Capital gains” is to be gone into, computing income under the head “Capital gains”, and loss will be treated under the provisions of Act, but where there is nil receipt of the capital, the entire extinguishment of rights has to be written off, without treating under the Act as a loss resulting from computation of capital gains. The suggested interpretation leads to such incongruous result and ought to be avoided, if it does not militate in any manner against object of the provision and unless it is not reasonably possible to reach that conclusion. As discussed above, once a conclusion is reached that extinguishment of rights in shares on liquidation of a company is deemed to be transfer for operation of section 46(2) read with section 48, it is reasonable to carry that legal fiction to its logical conclusion to make it applicable in all cases of extinguishment of such rights, whether as a result of some receipt or nil receipt, so as to treat the subjects without discrimination. Where there does not appear to be ground for such different treatment the Legislature cannot be presumed to have made deeming provision to bring about such anomalous result.”

Had this reasoning of the Gujarat High Court pointing out the absurdity been considered by the Special Bench in the case of Bennett Coleman(supra), perhaps the conclusion reached might have been different.

Therefore, the view taken by the Tribunal in the case of Tata Sons, that even in a case where nil consideration is received on reduction of capital, the capital loss is to be allowed, seems to be the better view of the matter.

 

Glimpses Of Supreme Court Rulings

2 Bharti Cellular Limited vs. Assistant Commissioner of Income Tax, Circle 57,

Kolkata and Ors.

Civil Appeal Nos. 7257 of 2011 and Ors. Decided On: 28th February, 2024

Deduction of tax at source— Section 194-H of the Act fixes the liability to deduct tax at source on the ‘person responsible to pay’ — The Assessees neither pay nor credit any income to the person with whom he has contracted — The Assessees, therefore, would not be under a legal obligation to deduct tax at source on the income / profit component in the payments received by the distributors / franchisees from the third parties / customers, or while selling/transferring the pre-paid coupons or starter-kits to the distributors

The Assessees were cellular mobile telephone service providers in different circles as per the licence granted to them under Section 4 of the Indian Telegraph Act, 1885by the Department of Telecommunications, Government of India. To carry on business, the Assessees have to comply with the licence conditions and the Rules and Regulations of the DoT and the Telecom Regulatory Authority of India. Cellular mobile telephone service providers have wide latitude to select the business model they wish to adopt in their dealings with third parties, subject to statutory compliances being made by the operators.

As per the business model adopted by the telecom companies, the users can avail of post-paid and prepaid connections.

Under the prepaid business model, the end-users or customers are required to pay for services in advance, which can be done by purchasing recharge vouchers or top-up cards from retailers. For a new prepaid connection, the customers or end-users purchase a kit, called a start-up pack, which contains a Subscriber Identification Mobile card, commonly known as a SIM card, and a coupon of the specified value as advance payment to avail the telecom services.

The Assessees have entered into franchise or distribution agreements with several parties. It is the case of the Assessees that they sell the start-up kits and recharge vouchers of the specified value at a discounted price to the franchisee/distributors. The discounts are given on the printed price of the packs.

This discount, as per the Assessees, is not a ‘commission or brokerage’ under Explanation (i) to Section 194-H of the Act.

The Revenue, on the other hand, submits that the difference between ‘discounted price’ and ‘sale price’ in the hands of the franchisee/distributors being in the nature of ‘commission or brokerage’ is the income of the franchisee / distributors, the relationship between the Assessees and the franchisee/distributor is in the nature of principal and agent, and therefore, the assesses are liable to deduct tax at source under Section 194-H of the Act.

The Supreme Court by its common judgment decided the appeals preferred by the Revenue and the Assessees, who were cellular mobile telephone service providers.

The High Courts of Delhi and Calcutta had held that the Assessees were liable to deduct tax at source under Section 194-H of the Act, whereas the High Courts of Rajasthan, Karnataka and Bombay have held that Section 194-H of the Act was not attracted to the circumstances under consideration.

The Supreme Court noted that Section 194-H of the Act imposes the obligation to deduct tax at source, states that any person responsible for paying at the time of credit or at the time of payment, whichever is earlier, to a resident any income by way of commission or brokerage, shall deduct income tax at the prescribed rate. The expression “any person (…) responsible for paying” is a term defined vide Section 204 of the Act. As per the Clause (iii) of Section 204, in the case of credit or in the case of payment in cases not covered by Clauses (i), (ii), (ii)(a), (ii)(b), “the person responsible for paying” is the payer himself, or if the payer is a company, the company itself and the principal officer thereof.

Explanation (i) to Section 194-H of the Act defines the expressions ‘commission’ or ‘brokerage’, which includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable Article or thing, not being securities;

According to the Supreme Court, payment is received when it is actually received or paid. The payment is receivable when the amount is actually credited in the books of the payer to the account of the payee, though the actual payment may take place in future. The payment received or receivable should be to a person acting on behalf of another person. The words “another person” refer to “the person responsible for paying”. The words “direct” or “indirect” in Explanation (i) to Section 194-H of the Act are with reference to the act of payment. Without doubt, the legislative intent to include “indirect” payment ensures that the net cast by the Section is plugged and not avoided or escaped, albeit it does not dilute the requirement that the payment must be on behalf of “the person responsible for paying”. This means that the payment / credit in the account should arise from the obligation of “the person responsible for paying”. The payee should be the person who has the right to receive the payment from “the person responsible for paying”. When this condition is satisfied, it does not matter if the payment is made “indirectly”.

The Supreme Court noted that the services rendered by the agent to the principal, according to the latter portion of Explanation (i) to Section 194-H of the Act, should not be in the nature of professional services. Further, Explanation (i) to Section 194-H of the Act restricts the application of Section 194-H of the Act to the services rendered by the agent to the principal in the course of buying and selling of goods, or in relation to any transaction relating to any asset, valuable article, or thing, not being securities. The latter portion of the Explanation (i) to Section 194-H of the Act is a requirement and a pre-condition. It should not be read as diminishing or derogating the requirement of the principal and agent relationship between the payer and the recipient / payee.

According to the Supreme Court, it is well settled that the expression ‘acting on behalf of another person’ postulates the existence of a legal relationship of principal and agent, between the payer and the recipient/payee. The law of agency is technical. Whether in law the relationship between the parties is that of principal-agent is answered by applying Section 182 of the Contract Act, 1872. Therefore, the obligation to deduct tax at source in terms of Section 194-H of the Act arises when the legal relationship of the principal-agent is established. It is necessary to clarify this position, as in day-to-day life, the expression ‘agency’ is used to include a vast number of relationships, which are strictly, not relationships between a principal and agent.

The Supreme Court observed that agency in terms of Section 182 of the Contract Act exists when the principal employs another person, who is not his employee, to act or represent him in dealings with a third person. An agent renders services to the principal. The agent does what has been entrusted to him by the principal to do. It is the principal he represents before third parties, and not himself. As the transaction by the agent is on behalf of the principal whom the agent represents, the contract is between the principal and the third party. Accordingly, the agent, except in some circumstances, is not liable to the third party.

The Supreme Court noted that the Assessees had entered into franchise or distribution agreements with several parties. The Assessees sells the start-up kits and recharge vouchers of the specified value at a discounted price to the franchisee/distributors. The discounts are given on the printed price of the packs.

The Supreme Court noted that as per the agreement, the franchisee/distributor is appointed for marketing of prepaid services and for appointing the retailer or outlets for sale promotion. The retailers or outlets for sale promotion are appointed by the franchisee / distributor and not the Assessee.

The Supreme Court noted that the franchisees / distributors were required to pay in advance the price of the welcome kit containing the SIM card, recharge vouchers, top-up cards, e-tops, etc. The above mentioned price was a discounted one. Such discounts were given on the price printed on the pack of the prepaid service products. The franchisee / distributor paid the discounted price regardless of, and even before, the prepaid products being sold and transferred to the retailers or the actual consumer. The franchisee / distributor was free to sell the prepaid products at any price below the price printed on the pack. The franchisee/distributor determined his profits / income.

According to the Supreme Court, the franchisees / distributors earn their income when they sell the prepaid products to the retailer or the end-user / customer. Their profit consists of the difference between the sale price received by them from the retailer/end-user/customer and the discounted price at which they have ‘acquired’ the product. Though the discounted price is fixed or negotiated between the Assessee and the franchisee / distributor, the sale price received by the franchisee / distributor is within the sole discretion of the franchisee/distributor. The Assessee has no say in this matter.

The Supreme Court observed that the income of the franchisee/distributor, being the difference between the sale price received by the franchisee/distributor and the discounted price, is paid or credited to the account of the franchisee / distributor when he sells the prepaid product to the retailer / end-user/customer. The sale price and accordingly the income of the franchisee / distributor is determined by the franchisee / distributor and the third parties. Accordingly, the Assessee does not, at any stage, either pay or credit the account of the franchisee / distributor with the income by way of commission or brokerage on which tax at source under Section 194-H of the Act is to be deducted.

The Supreme Court held that the main provision of Section 194-H of the Act, which fixes the liability to deduct tax at source on the ‘person responsible to pay’ — an expression which is a term of art — as defined in Section 204 of the Act and the liability to deduct tax at source arises when the income is credited or paid by the person responsible for paying. The expression “direct or indirect” used in Explanation (i) to Section 194-H of the Act is no doubt meant to ensure that “the person responsible for paying” does not dodge the obligation to deduct tax at source, even when the payment is indirectly made by the principal-payer to the agent- payee. However, deduction of tax at source in terms of Section 194-H of the Act is not to be extended and widened in ambit to apply to true / genuine business transactions, where the Assessee is not the person responsible for paying or crediting income. In the present case, the Assessees neither pay nor credit any income to the person with whom he has contracted. Explanation (i) to Section 194-H of the Act, by using the word “indirectly”, does not regulate or curtail the manner in which the Assessee can conduct business and enter into commercial relationships. Neither does the word “indirectly” create an obligation where the main provision does not apply. The tax legislation recognises diverse relationships and modes in which commerce and trade are conducted, albeit obligation to deduct tax at source arises only if the conditions as mentioned in Section 194-H of the Act are met and not otherwise. This principle does not negate the compliance required by law.

The Supreme Court further noted, it was not the case of the Revenue that tax is to be deducted when payment is made by the distributors / franchisees to the mobile service providers. It is also not the case of the revenue that tax is to be deducted under Section 194-H of the Act on the difference between the maximum retail price income of the distributors / franchisees and the price paid by the distributors/franchisees to the Assessees.

The Supreme Court observed that the Assessees are not privy to the transactions between distributors / franchisees and third parties. It is, therefore, impossible for the Assessees to deduct tax at source and comply with Section 194-H of the Act, on the difference between the total / sum consideration received by the distributors / franchisees from third parties and the amount paid by the distributors/ franchisees to them.

According to the Supreme Court, the argument of the Revenue that Assessees should periodically ask for this information/data and thereupon deduct tax at source should be rejected as far-fetched, imposing unfair obligation and inconveniencing the assesses, beyond the statutory mandate. Further, it will be willy-nilly impossible to deduct, as well as make payment of the tax deducted, within the timelines prescribed by law, as these begin when the amount is credited in the account of the payee by the payer or when payment is received by the payee, whichever is earlier. The payee receives payment when the third party makes the payment. This payment is not the payment received or payable by the Assessee as the principal. The distributor / franchisee is not the trustee who is to account for this payment to the Assessee as the principal. The payment received is the gross income or profit earned by the distributor / franchisee.It is the income earned by distributor / franchisee as a result of its efforts and work and not a remuneration paid by the Assessee as a cellular mobile telephone service provider.

The Supreme Court concluded that the Assessees would not be under a legal obligation to deduct tax at source on the income / profit component in the payments received by the distributors/franchisees from the third parties / customers, or while selling / transferring the pre-paid coupons or starter- kits to the distributors. Section 194-H of the Act is not applicable to the facts and circumstances of this case. Accordingly, the appeals filed by the Assessee — cellular mobile service providers, challenging the judgments of the High Courts of Delhi and Calcutta were allowed and these judgments are set aside. The appeals filed by the Revenue challenging the judgments of High Courts of Rajasthan, Karnataka and Bombay were dismissed.

Section 119 — CBDT — Pedantic and narrow interpretation of the expression ‘genuine hardship’ to mean only a case of ‘severe financial crises’ is unwarranted — the legislature has conferred power on CBDT to condone the delay to enable the authorities to do substantive justice to the parties by disposing the matter on merits: Section 154 — Rectification of mistake — An error committed by a professional engaged by petitioner should not be held against petitioner — Non disposal of application for six years — the PCCIT to take disciplinary action against JAO for dereliction of duty.

5 Pankaj Kailash Agarwal vs. ACIT – 17(1)

Writ Petition (L) No. 7783 OF 2024

Dated: 8th April, 2024, (Bom-HC)

Section 119 — CBDT — Pedantic and narrow interpretation of the expression ‘genuine hardship’ to mean only a case of ‘severe financial crises’ is unwarranted — the legislature has conferred power on CBDT to condone the delay to enable the authorities to do substantive justice to the parties by disposing the matter on merits:

Section 154 — Rectification of mistake — An error committed by a professional engaged by petitioner should not be held against petitioner — Non disposal of application for six years — the PCCIT to take disciplinary action against JAO for dereliction of duty.

For A.Y. 2016–17, petitioner got his books of accounts audited, and an audit report dated 19th August, 2016 was issued by the auditors M/s Shankarlal Jain & Associates, Chartered Accountants. Petitioner filed his return of income on 7th September, 2016 well before the due date of 30th September, 2016 prescribed under section 139(1) of the Act.

In his return of income, the petitioner claimed a deduction under section 80IC of the Act in respect of an industrial unit / undertaking that petitioner was operating in the name and style of M/s Creative Industries in an export processing zone (EPZ) at Haridwar (Uttaranchal). In terms of section 80IC of the Act, no deduction under section 80IC of the Act could be allowed to an assessee unless the return of income was filed on or before the due date specified under section 139(1) of the Act. Since petitioner had duly filed his return of income within the said due date, petitioner could not have been denied the deduction under section 80IC of the Act. In terms of section 80IC of the Act, petitioner got the accounts of his industrial unit / undertaking also audited and an audit report dated 19th August, 2016 in Form No.10CCB was issued by the chartered accountants of petitioner. While filing the return of income on 7th September, 2016, the figures / details of the deduction under section 80IC of the Act from the audit report dated 19th August, 2016 were duly mentioned. The return of income of petitioner was processed under section 143(1) of the Act and an intimation dated 29th March, 2018 under section 143(1) of the Act was issued to petitioner. In the said intimation, petitioner was denied the deduction under section 80IC of the Act. According to petitioner, while the intimation did not mention any reason for the denial of deduction under section 80IC of the Act, petitioner addressed a letter dated 16th April, 2018 requesting for a rectification of the intimation.

Sometime in January 2019, the chartered accountant of petitioner realised that the audit report dated 19th August, 2016 in Form 10CCB, due to inadvertence, had not been uploaded online, which possibly could be the reason for denial of deduction under section 80IC of the Act. Therefore, on 12th January, 2019, the said audit report dated 19th August, 2016 in Form 10CCB was uploaded online.

It appears that immediately after the rectification application was filed and upon Form 10CCB being uploaded online, on 13th January, 2019, the rectification application was transferred to the JAO. Despite repeated reminders, JAO did not dispose petitioner’s rectification application. Petitioner filed an application under section 264 of the Act before PCIT on 19th November, 2020, seeking the grant of deductions which were denied to petitioner in the intimation under section 143(1) of the Act. Petitioner’s application under section 264 of the Act came to be dismissed on the grounds that petitioner had not applied for revision within the limitation time prescribed and there was a delay of about two and a half years. Since the application under section 264 of the Act was rejected without deciding on merits, petitioner continued to pursue the pending rectification application. According to petitioner, till date, no decision had been taken by JAO on the rectification application filed by petitioner under section 154 of the Act, though almost six years have passed since the same was filed.

Therefore, left with no option, petitioner approached CBDT for condoning the delay, if any, and to direct JAO to allow the rectification application. Petitioner explained to CBDT in the application under section 119(2)(b) of the Act that the reason for not filing Form 10CCB on time was on account of the inadvertence / oversight by the chartered accountants and relying on a judgment of the Apex Court in CIT vs. G. M. Knitting Industries Private Limited(2015) 376 ITR 456 (SC), submitted that filing Form 10CCB was directory and not mandatory. Reliance was also placed on the Circular No.689 dated 24th August, 1994 and Circular No.669 dated 25th October, 1993 issued by CBDT as per which, JAO was bound to consider Form 10CCB and decide the application for rectification. Petitioner’s application was rejected by CBDT on the grounds that the reasons stated by petitioner, i.e. inadvertence on the part of the auditors / chartered accountants of petitioner in uploading Form 10CCB was very general in nature and no reasonable cause was shown to justify the genuine hardship being faced by petitioner.

The Honourable Court observed that innumerable grounds have been raised in the petition but the primary ground was that it was not the case that there was failure on the part of petitioner to comply with the requirements specified in Chapter VI-A of the Act but petitioner relied upon his chartered accountants to do the needful as required under the Act. Petitioner had engaged the services of chartered accountants who audited petitioner’s accounts and also of the undertaking M/s Creative Industries, which was run by petitioner as the sole proprietor. Petitioner was also issued the audit report within the stipulated time and the figures / details of the deductions under section 80IC of the Act were mentioned in the return of income filed by petitioner. The audit report obtained under section 44AB of the Act was filed along with the return of income, and there was no reason to believe that Form 10CCB had not been uploaded by the chartered accountants. According to petitioner, an error committed by a professional engaged by petitioner should not be held against petitioner. According to petitioner, the objective of the Act is not to penalise an assessee for such technical / inadvertent error and deny benefits of statutory provisions. No unfair advantage has been obtained by petitioner on account of this inadvertent error. Therefore, the inadvertence / oversight in uploading Form No. 10CCB by the auditor / chartered accountants of petitioner were circumstances beyond the control of petitioner and would constitute a reasonable cause for not uploading Form No.10CCB along with the return of income.

The petitioner contended that refusal to exercise of powers under section 119 of the Act by respondent no.2 on a pedantic and narrow interpretation of the expression ‘genuine hardship’ to mean only a case of ‘severe financial crises’ is unwarranted. The phrase ‘genuine hardship’ used under section 119(2)(b) of the Act ought to be liberally construed. The petitioner further submitted that the order only says that it has been issued with the approval of the Member (IT&R), CBDT. But no order passed by the said Member has been made available to petitioner or filed along with the affidavit in reply. In TATA Autocomp Gotion Green Energy Solutions Pvt Ltd. Vs. Central Board of Direct Taxes &Ors. Writ Petition No.3748 of 2024 dated 18thMarch, 2024,it was held that the orders of CBDT shall be written, passed and signed by the Member of CBDT who has given a personal hearing. Relying on R. K. Madani Prakash Engineers vs. Union of India &Ors. [2023] 458 ITR 48 (Bom), on this ground alone, the order has to be quashed and set aside.

The Honourable Court observed that no assessee would stand to benefit by lodging its claim late. More so, in case of the nature at hand, where assessee would get tax advantage / benefit by way of deductions under section 80IC of the Act. Of course, there cannot be a straight jacket formula to determine what ‘genuine hardship’. The Court held that, certainly the fact that an assessee feels that he would be paying more tax if he does not get the advantage of deduction under section 80IC of the Act will be a ‘genuine hardship’. The Court relied on the decision in the case of K. S. Bilawala&Ors. vs. PCIT &Ors. (2024) 158 taxmann.com 658 (Bombay).

The Court has held that the phrase ‘genuine hardship’ used in Section 119(2)(b) of the Act should be considered liberally. CBDT should keep in mind, while considering an application of this nature, that the power to condone the delay has been conferred to enable the authorities to do substantial justice to the parties by disposing the matters on merits and while considering these aspects, the authorities are expected to bear in mind that no applicant would stand to benefit by lodging delayed returns. The court also held that refusing to condone the delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this, when the delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties. Similar issue came to be considered in R. K. Madhani Prakash Engineers (supra) wherein the Honourable Court had quashed and set aside the impugned order on the grounds that the impugned order is not passed by the CBDT but only with the approval of the Member (IT & R), CBDT. So also in the case of TATA Autocomp (supra).

The Honourable Court observed that the legislature has conferred power on CBDT to condone the delay to enable the authorities to do substantive justice to the parties by disposing the matter on merits. Routinely passing the order without appreciating the reasons why the provisions for condonation of delay has been provided in the act, defeats the cause of justice. In the circumstances, the impugned order dated 1st September, 2023 was set aside and quashed.

As regards the rectification application filed by petitioner before JAO on 14th April, 2018 for rectification of the intimation dated 29th March, 2018, the Court noted that the affidavit in reply filed through on Shyam Lal Meena, ACIT, stated that the rectification order under section 154 of the Act was not passed as there was no mistake apparent from record. The Court noted that the JAO was duty bound to pass orders on the application which has been pending for almost six years, instead of making such baseless statements in the affidavit in reply. The Honourable Court remarked that “Perhaps, JAO thinks that he or she is not accountable to any citizen of this country”. The Honourable Court directed to place copy of the order before the PCCIT to take disciplinary action against JAO for dereliction of duty.

The Court further held that the impugned order dated 1st September, 2023 has been in utter disregard that the CBDT has for judicial orders. The Honourable Court directed to place copy of this order to the Chairman of CBDT so that suitable actions are taken to comply with the directions given by this Court.

The Writ Petition was disposed directing to dispose off the rectification application.

Bogus purchases — red flagged by the Sales Tax Department — No disallowance warranted without bringing on record any other evidence to prove that the purchases made by assessee were not genuine.

4 Principal Commissioner of Income Tax-2 vs. SRS Pharmaceuticals Pvt Ltd

ITXA No. 1198 of 2018

Dated: 3rd April, 2024 (Bom.) (HC).

Bogus purchases — red flagged by the Sales Tax Department — No disallowance warranted without bringing on record any other evidence to prove that the purchases made by assessee were not genuine.

The Department Appeal pertained to alleged bogus purchases from suppliers, who were red flagged by the Sales Tax Department. The Assessing Officer (AO) had passed the assessment order by disallowing the cost of purchases made, relying only upon the information supplied by the Sales Tax Department / Investigation Wing of the Income Tax Department without bringing on record any other evidence to prove that the purchases made by assessee were not genuine.

The CIT(A), on an appeal filed by assessee had given a categorical finding of fact that purchases made by assessee could not be doubted. Revenue challenged this order of the CIT(A). The Appellate Tribunal dismissed Revenue’s Appeal.

The Honourable Court observed that both the CIT(A) as well as the ITAT have come to a concurrent factual finding that assessee was a 100 per cent export oriented unit and was purchasing goods from various parties. Assessee was getting the goods manufactured from other manufacturers to whom payments had been made through banking channel. Both authorities have accepted the fact that manufacturers were supplying the goods with details of raw materials consumed and the batch number, and the AO had not even doubted the Batch Manufacture Record (BMR), Goods Received Note (GRN), delivery challans, etc., issued by the transporter with regard to supply of goods / supply of raw-materials. The AO had not even pointed out any defect in the tally on the quantity delivered. The AO had not even made enquiry with the suppliers and the payment of Value Added Tax by assessee had also been ignored. Therefore, the CIT(A) and the ITAT came to a finding that the AO cannot, simply relying upon information received by the Sales Tax Department, without doing any further conclude that the purchases made by assessee were not genuine.

In view of the above finding of fact the Department’s appeal was dismissed.

Penalty u/section 271(1)(c) — Furnished inaccurate particulars of income — disallowance of claim of deduction u/s 36(i)(viii) of the Act.

3 Pr. Commissioner of Income Tax-2 vs. ICICI Bank Ltd.

ITXA NO. 1067 OF 2018

Dated: 13th March, 2024, (Bom) (HC)

Penalty u/section 271(1)(c) — Furnished inaccurate particulars of income — disallowance of claim of deduction u/s 36(i)(viii) of the Act.

Assessee-respondent, a banking company, filed its return of income for A.Y. 1999–2000 on 31st December, 1999, declaring total income of ₹1,19,33,33,740 under the normal provisions. Assessee also declared book profit of ₹78,29,67,083 under section 115JA of the Act. Subsequently, assessee filed revised return of income on 27th February, 2001, declaring total income at ₹46,53,59,236 and book profit of ₹1,02,15,58,970. The Assessing Officer (AO) completed the assessment by disallowing certain deductions.

Assessee challenged the assessment order before the Commissioner of Income Tax (Appeals) (CIT(A)) and, thereafter, before the ITAT. When assessee’s appeal was pending before the ITAT, the AO issued a notice to assessee under section 271(1)(c) of the Act and the allegation was the additions made in the assessment order were a result of furnishing of inaccurate particulars of income or concealment of income by assessee. Assessee’s objections were rejected and the AO passed an order imposing penalty of ₹48,86,23,673 under section 271(1)(c) of the Act. In the appeal filed by assessee, the CIT(A) deleted the penalty imposed by the AO. The Department challenged that order of CIT(A) before the ITAT, and the ITAT upheld that finding of the CIT(A).

It is the case of revenue that in the return of income, assessee did not claim certain deductions, during the course of assessment proceedings. Assessee claimed such deductions and, thereby, has furnished inaccurate particulars of income. It is the department’s case that only because assessee has offered income and not claimed deductions in the return of income would not absolve assessee from the liability of section 271(1)(c) of the Act.

The Honourable Court observed that the ITAT correctly held that provisions of section 271(1)(c) of the Act are not attracted. The ITAT was of the view, and rightly so, that assessee had made a bona fide claim under section 36(1)(viii) as such deductions claimed are linked to the business profit. Only because there was variance in the deductions allowable due to change in determination of business profit, it cannot be said that assessee has furnished inaccurate particulars of income or concealed inaccurate particulars of income. The Hon Court relied on the Apex Court decision in the case of Commissioner of Income Tax vs. Reliance Petro Products Pvt Ltd (2010) 322 ITR 158 (SC) wherein it was held that a mere making of the claim which is not sustainable in law by itself will not amount to furnishing inaccurate particulars regarding the income of assessee; such claim made in the return cannot amount to be inaccurate particulars.

In the circumstances, Department’s appeal was dismissed.

Search and seizure — Assessment of undisclosed income of person searched and third person — Difference between sections 153A and 153C — Conditions more stringent u/s 153C:

15 Agni Vishnu Ventures Pvt. Ltd. vs. Dy. CIT

[2024] 460 ITR 438 (Mad)

A.Ys.: 2009–10, 2011–12, 2012–13, 2013–14 to 2019–20

Date of order: 28th January, 2023

Ss. 153A and 153C of ITA 1961

Search and seizure — Assessment of undisclosed income of person searched and third person — Difference between sections 153A and 153C — Conditions more stringent u/s 153C:

Orders u/s. 153C of the Income-tax Act, 1961 were challenged by filing writ petitions. The Madras High Court held as under:

“i) The ingredients of section 153A of the Income-tax Act, 1961, are: (i) initiation of search or requisition under the applicable statutory provisions, (ii) such search or requisition being after May 31, 2003 but before May 31, 2021, (iii) a mandate upon the Assessing Officer who ‘shall’ issue notice to the person searched, (iv) the notice shall require him to furnish within such period as specified, return of income, (v) such returns are to be filed in respect of each assessment year falling within six assessment years referred to in that provision duly verified and containing the required particulars, (vi) upon receipt of the returns, reassess total income of six assessment years immediately preceding the assessment year relating to the previous year that search was conducted or requisition made. The ingredients of section 153C are: (i) satisfaction of the Assessing Officer who is the Assessing Officer of the section 153A notice that money, bullion, jewellery or other valuable article or thing or books of account or documents (incriminating materials) seized or requisitioned belong to or pertain to or any information contained, relate to, a third party, (ii) recording of satisfaction as above, (iii) handing over of the incriminating material to the Assessing Officer having jurisdiction over the third party, (iv) recording of satisfaction by the Assessing Officer of the third party that the incriminating material has a bearing on the determination of total income of the third party, (v) upon condition of recording of the satisfaction of both officers as above, notices be issued to assess or reassess the income of the third party in accordance with the procedure stipulated u/s. 153A.

ii) There is a vital distinction between the object, intention as well as the express language of sections 153A and 153C. Section 153A addresses the searched entity and the procedure set out is evidently a notch higher for this reason. There is no discretion or condition precedent u/s. 153A to the issuance of notice save the conduct of a search u/s. 132 or making of a requisition u/s. 132A. Upon the occurrence of one of these events, it is incumbent upon the officer to issue notice u/s. 153A to the searched entity in line with the procedure stipulated. Section 153C however requires the satisfaction of two conditions prior to issuance of notice: (i) recording of satisfaction by the Assessing Officer of the searched entities that some of the incriminating materials relate to a third party, and (ii) recording of satisfaction by the Assessing Officer of the third party that the incriminating materials have a bearing on the determination of the total income of that third party. Notice u/s. 153C would have to be issued only upon the concurrent satisfaction of both these conditions. To this extent, there is a clear and marked distinction between the provisions of sections 153A and 153C. To clarify, it is only where the satisfaction note recorded by the receiving Assessing Officer, i. e., the Assessing Officer of the third party, reflects a clear finding that the incriminating material received has a bearing on determination of total income of the third party for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made, that such notice would have to be issued for all the years. It thus flows from the provision that the receiving Assessing Officer must apply his mind to the materials received and ascertain precisely the specific year to which the incriminating material relates. It is only when this determination or ascertainment is complete that the flood gates of an assessment would open qua those particular years. The issuance of a notice cannot be an automated function unconnected to this exercise of analysis and ascertainment by an Assessing Officer. The construction of sections 153A and 153C is consciously different and is seen to apply different yardsticks to an entity searched and a third party, such yardstick being more exacting in the case of the former. The process of assessment is demanding and an assessee, once in receipt of a notice, is bound by the stringent procedure under the Act, till finalisation of the process. There are some situations when the spread of information and the nature of the issue itself might need more, and in-depth probing before such year-wise determination is possible. In such cases, the officer would be well within his right to state the nature of the issue and detail the difficulties that present themselves in precise bifurcation at that stage. This would reflect application of mind and, would serve as sufficient compliance with the statutory condition.

iii) The legal issue was in favour of the assessees, and would have to be applied to determine the validity or otherwise of each of the orders of assessment passed in the case of each of the assessees. The court was not in possession of all satisfaction notes. In some cases, the assessing authority had recorded satisfaction by way of a consolidated note, whereas in some others, the satisfaction notes were individual relating to a specific year.

iv) Rather than go through the factual exercise of verification of the satisfaction notes to arrive at a conclusion as to whether the precondition relating to the satisfaction being year-specific, had been complied, by the assessing authority the court left it to the concerned jurisdictional Assessing Officer to collate the satisfaction notes relating to each year and apply the conclusion of the court on the legal issue decided.”

[The court made it clear that the appellate authority should make good the error committed by the assessing authority by ensuring that an effective opportunity of cross-examination was granted to the assessee prior to finalising the appeal proceedings. The powers of the appellate authority u/s. 246 and 246A are co-terminus with those of the Assessing Officer and the direction would suffice to protect the interests of the assessees and to remedy the procedural error committed by the officer while framing the assessment.]

Search and seizure — Unexplained money — Burden of proof — Share capital — Investments in share capital through banking channels — Addition made based on unproven and untested statements recorded during searches — Onus to prove investments bogus not discharged — Deletion of addition.

14 Principal CIT vs. PNC Infratech Ltd.

[2024] 461 ITR 92 (All)

A.Y.: 2010–11

Date of order: 11th December, 2023

Ss. 69 and 132 of the ITA 1961

Search and seizure — Unexplained money — Burden of proof — Share capital — Investments in share capital through banking channels — Addition made based on unproven and untested statements recorded during searches — Onus to prove investments bogus not discharged — Deletion of addition.

The assessee received share capital from three entities in the A.Y. 2010–11 through banking channels. During the search u/s. 132 of the Income-tax Act, 1961, statements were recorded of directors and responsible functionaries of the investor entities and the assessee involved inthe transactions. Relying on the statements made by BK, LJ, RK, SK and SM recorded during the search proceedings, investments made in the form of share capital were added as unexplained cash u/s. 69 to the assessee’s income.

The Commissioner (Appeals) deleted the addition, and this was confirmed by the Tribunal.

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

“i) The investors had duly disclosed the investments in the assessee in their books of account. In the statement recorded during the assessment proceedings BK had claimed ignorance as to the actual business transaction of that company and also as to the investment made by the entity J in the assessee. Therefore, BK did not prove or disprove the fact of investment made by J in the assessee. He had only claimed ignorance. The assessing authority failed to call or examine LJ during the assessment proceedings, but had relied on the unproven or untested statement of LJ allegedly recorded during the search proceedings conducted against the entity J. No material witness was examined during the assessment proceedings.

ii) The assessing authority without affording the assessee any opportunity to cross-examine any such witness had relied on ex parte statements. Other than those statements, there was no evidence to establish that investment made in the assessee by way of share capital by the three entities was bogus and not genuine. The Commissioner (Appeals) has reasoned that the doubts and suspicions howsoever strong could never lead to adverse findings against the assessee. He had categorised the findings recorded by the assessing authority as conjectural being not based on any cogent material or evidence on record. The Department could not produce any evidence to conclude that any part of the investment made in the assessee by the three investor entities was false or bogus. The burden to prove otherwise rested on the Department. Unless the initial onus had been discharged by leading some evidence that led to the conclusion that the investment was never made, the burden that was cast on the Department remained undischarged. Accordingly, the findings of fact recorded by the Tribunal, confirming the order of the Commissioner (Appeals), were based on material and were neither illegal nor perverse.”

Revision — Powers of Commissioner — Power to consider assessment record — Meaning of record — Record includes all material including results of search proceedings — Order of revision without considering results of search proceedings — Not valid.

13 Principal CIT vs. Techno Tracom Pvt. Ltd.

[2024] 461 ITR 47 (Cal.)

A.Y.: 2009–10

Date of order: 27th March, 2023

S. 263 of the ITA 1961

Revision — Powers of Commissioner — Power to consider assessment record — Meaning of record — Record includes all material including results of search proceedings — Order of revision without considering results of search proceedings — Not valid.

The original assessment in the case of the assessee for the A.Y. 2009–10 was completed u/s. 143(3) of the Income-tax Act, 1961 on 28th March, 2011. The Principal Commissioner exercised his jurisdiction u/s. 263 of the Act and passed the order dated 28th March, 2013. Prior to the order being passed u/s. 263 of the Act, a search and seizure operation was conducted on the assessee on 18th February, 2013. The assessee challenged the order passed u/s. 263 of the Act before the Tribunal. The Tribunal remanded the case to the Principal Commissioner to consider the effect of the order passed u/s. 153A. However, this was ignored by the Principal Commissioner stating that it was irrelevant and the Principal Commissioner proceeded to pass the order u/s. 263 of the Act dated 30th March, 2021. The Tribunal quashed the revision order u/s. 263 passed by the Principal Commissioner.

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

“i) U/s. 263 of the Income-tax Act, 1961, the Principal Commissioner has to examine all the records pertaining to the assessment year at the time of examination by him. The expression “record” as used in section 263 of the Act is comprehensive enough to include the whole record of evidence on which the original assessment order was based. Where any proceeding is initiated in the course of assessment proceedings, having relevant and material bearing on the assessment to be made and the result of such proceedings was not available with the Income-tax Officer before the completion of the assessment but the result came subsequently, the revising authority (Principal Commissioner) is entitled to look into the search material as it forms part of the assessment records of that assessment year.

ii) The Principal Commissioner could not have ignored the order passed u/s. 153A of the Act dated March 23, 2015 as being immaterial and irrelevant. The Tribunal had also examined the exercise undertaken by the Assessing Officer while completing the assessment u/s. 153A of the Act and found that the entire records were examined and no adverse inference was drawn against the assessee. Thus, the Tribunal rightly granted relief to the assessee and the order did not call for any interference.”

Offences and prosecution — Wilful attempt to evade tax — Effect of order in penalty proceedings — Tribunal considering facts and holding that there was no concealment of income — Prosecution could not continue.

12 TVH Energy Resources Pvt. Ltd. vs. ACIT

[2024] 460 ITR 433 (Mad.)

A.Y.: 2013–14

Date of order: 13th July, 2023

Ss. 276C and 277 of ITA 1961

Offences and prosecution — Wilful attempt to evade tax — Effect of order in penalty proceedings — Tribunal considering facts and holding that there was no concealment of income — Prosecution could not continue.

The petitioners were prosecuted for the offences u/s. 276C(1) and u/s. 277 of the Income-tax Act, 1961, alleging that the petitioners have not explained the source of income for incurring cash expenses of ₹1,19,72,476 for the A.Y. 2013–14. The respondent also levied a penalty of ₹38,84,470 u/s. 271(1)(c) of the Income-tax Act, 1961. The Income-tax Appellate Tribunal, by its order dated 2nd April, 2018, found that there is no evidence that the petitioner has made any cash payment which is unaccounted and the additions made by the Department are merely based on estimate and not based on any material records, and therefore, allowed the appeal filed by the petitioners and set aside the order of penalty passed u/s. 271(1)(c) of the Act.

Based on the order of the Tribunal cancelling the penalty, the petitioners filed criminal writ petitions for quashing the prosecution proceedings. The Madras High Court allowed the writ petition and held as under:

“i) The ratio which can be culled out from judicial decisions can broadly be stated as follows: (i) Adjudication proceedings and criminal prosecution can be launched simultaneously; (ii) decision in adjudication proceedings is not necessary before initiating criminal prosecution; (iii) adjudication proceedings and criminal proceedings are independent in nature to each other; (iv) the finding against a person facing prosecution in the adjudication proceedings is not binding on the proceeding for criminal prosecution; (v) adjudication proceedings by the Enforcement Directorate are not prosecution by a competent court of law to attract the provisions of article 20(2) of the Constitution or section 300 of the Code of Criminal Procedure, 1973; (vi) the finding in the adjudication proceedings in favour of the person facing trial for identical violation will depend upon the nature of finding. If the exoneration in adjudication proceedings is on technical ground and not on the merits, prosecution may continue; and (vii) in the case of exoneration, however, on the merits where the allegation is found to be not sustainable at all and the person is held innocent,
criminal prosecution on the same set of facts and circumstances cannot be allowed to continue, the underlying principle being the higher standard of proof in criminal cases.

ii) The respondent prosecuted the petitioners for the offences u/s. 276C(1) and 277 of the Income-tax Act, 1961, for the A.Y. 2013-14, alleging that the assessee had not explained the source of income for incurring cash expenses of ₹1,19,72,476. In penalty proceedings the Tribunal by its order found that there was no evidence that the assessee had made any cash payment which was unaccounted and the additions made by the Department were merely based on estimate and not based on any material records, and therefore deleted the penalty. A criminal prosecution on the same set of facts was not maintainable and was unsustainable and the same was liable to be quashed.”

Income from other sources — Consideration received for shares in excess of fair market value — Condition precedent — Transfer of shares — Allotment of new rights shares on proportionate basis — Provision not applicable — Renunciation of rights shares by wife and father in favour of assessee — Exemption for transactions from relatives — Provision not attracted — Renunciation of rights shares by third party in favour of assessee — Third party not related to assessee — Disproportionate allocation of shares — Section 56(2)(vii)(c) applicable — Determination of fair market value of additional shares — Computation on basis of previous year’s balance sheet approved in annual general meeting — Right computation.

11 Principal CIT vs. Jigar Jashwantlal Shah

[2024] 460 ITR 628 (Guj)

A.Y.: 2013–14

Date of order: 28th August, 2023

S. 56(2)(vii)(c) of ITA 1961

Income from other sources — Consideration received for shares in excess of fair market value — Condition precedent — Transfer of shares — Allotment of new rights shares on proportionate basis — Provision not applicable — Renunciation of rights shares by wife and father in favour of assessee — Exemption for transactions from relatives — Provision not attracted — Renunciation of rights shares by third party in favour of assessee — Third party not related to assessee — Disproportionate allocation of shares — Section 56(2)(vii)(c) applicable — Determination of fair market value of additional shares — Computation on basis of previous year’s balance sheet approved in annual general meeting — Right computation.

For the A.Y. 2013–14, the assessee filed the return of income. On noticing that the assessee was receiving salary in the capacity of the director of a company K and two lakhs rights shares of face value ₹10 each in K, the Assessing Officer issued notice u/s. 148 of the Income-tax Act, 1961 to the assessee on the grounds that the correct fair market value of shares allotted to the assessee exceeded the consideration paid for receipt of shares which was taxable u/s. 56(2) of the Act. Thereafter, the AO made additions to the income of the assessee with regard to additional 82,200 shares allotted to the assessee due to renouncement of rights by the assessee’s wife and father, additional shares allotted to the assessee due to renouncement of rights by a third party and adopted the valuation of additional shares allotted to the assessee at ₹255 per share under rule 11UA(1)(c)(b) of the Income-tax Rules, 1962.

The Commissioner (Appeals) held that section 56(2)(vii)(c) of the Act was not applicable to the rights shares allotted proportionate to the existing holding and held the fair market value for the remaining shares to be ₹205.55 per share. The Tribunal held that the renunciation of rights shares by wife and father of the assessee by not exercising the right to subscribe would not attract the provisions of section 56(2)(vii)(c) of the Act and deleted the addition under section 56(2)(vii)(c) of the Act. However, it held that renunciation of rights shares by the third party by not exercising the right to subscribe would attract the provisions of section 56(2)(vii)(c) of the Act. The Tribunal adopted the valuation of shares at ₹205 per share in respect of additional shares allotted to the assessee.

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

“i) The provisions of section 56(2) of the Income-tax Act, 1961 would not be applicable to the issue of new shares. The Explanatory Notes to the Finance Bill, 2010 clarified that section 56(2)(vii)(c) of the Act is to be applied only in the case of transfer of shares. It is trite law that allotment of new shares cannot be regarded as transfer of shares. From a conjoint reading of section 56(2)(vii)(c) as well as the Explanatory Notes to the section, it is clear that only when an individual or a Hindu undivided family receives any property for consideration which is less than the fair market value, the provisions of section 56(2)(vii)(c) would be attracted. Therefore, in order to apply the provisions of section 56(2)(vii)(c), there must be existence of property before receiving it. The term ‘receive’ has been defined as ‘to get by a transfer, as to receive a gift, to receive a letter or to receive money and involves an actual receipt’. Issue of new shares by a company such as rights shares is creation of property and merely receiving such shares cannot be considered as a transfer under section 56(2)(vii)(c) and accordingly, such provision would not be applicable on the issuance of shares by the company in the hands of the allottee.

ii) The shares had come into existence only when the allotment was made by the company as rights shares cannot be said to be ‘received from any person’. The shares which had been allotted to the assessee were not ‘received from any person’ which was the fundamental requirement for invoking section 56(2)(vii)(c) of the Act. In other words, the property must pre-exist for application of section 56(2)(vii)(c), which is clear from the intention of the Legislature. Regarding the issue of 82,200 shares, the names of the wife and father of the assessee would also not be hit by the provisions of section 56(2)(vii)(c) of the Act as both of them would be covered by the definition of ‘relative’ covered in the exemption of relative, and therefore, the provisions of section 56(2)(vii)(c) would not be applicable at all. With regard to the application of section 56(2)(vii)(c) of the Act for the balance 14,800 shares allotted to the assessee as a result of third party shareholder declining to apply for rights shares in favour of the assessee, the Tribunal held against the assessee because renunciation of rights in favour of the assessee by the third party who was not related would lead to disproportionate allocation of shares in favour of the assessee. The findings recorded about valuation of shares to ₹205.55 were concurrent findings of fact which did not require any interference. The Commissioner (Appeals) had rightly computed the fair market value on the basis of the balance-sheet which was available on record for the previous year and which was approved in the annual general meeting.”

Assessment — Limitation — Special audit — Appointment of special auditor extending end date for framing assessment order — Special auditor seeking extension of time for submission of report — AO forwarding request letter with recommendation to Commissioner — Commissioner granting extension of time — Discretion to extend time frame solely with AO — Discretionary power vested in AO not delegable, cannot be exercised by Commissioner.

10 Principal CIT vs. Soul Space Projects Ltd.

[2024] 460 ITR 642 (Del.)

A.Ys.: 2007–08 and 2008–09

Date of order: 11th December, 2023

Ss. 142(2A), 142(2C) and 153B of the ITA 1961

Assessment — Limitation — Special audit — Appointment of special auditor extending end date for framing assessment order — Special auditor seeking extension of time for submission of report — AO forwarding request letter with recommendation to Commissioner — Commissioner granting extension of time — Discretion to extend time frame solely with AO — Discretionary power vested in AO not delegable, cannot be exercised by Commissioner.

Pursuant to search operations at the premises of the assessee, the Assessing Officer issued a notice u/s. 153A of the Income-tax Act, 1961. Thereafter, the AO issued a show-cause notice to the assessee seeking its response to have a special audit conducted concerning its affairs in the exercise of powers u/s. 142(2A) of the Act. The assessee filed its objections but the AO rejected them. The Commissioner issued a show-cause notice before approving the conduct of a special audit, as proposed by the AO. Once again, the assessee filed its objections which were rejected by a letter indicating the grant of approval for special audit based on the reasoning outlined in the order sheet and the appointment of a chartered accountants firm for completion of audit with a time frame of 120 days. Thereafter, the chartered accountants firm sought extension of time to submit the special audit report. The AO forwarded the letter seeking extension of time with a recommendation to the Commissioner and the Commissioner granted extension of 60 days’ time to submit the report.

On appeal, the Tribunal concluded that the further extension of 60 days granted by the Commissioner for completion of the audit was illegal and invalid and thus impaired the viability of the assessment order framed u/s. 153A / 143(3) of the Act, on a day beyond the prescribed period of limitation, which ended on 13th June, 2020.

On appeal by the Revenue, the following substantial question of law was framed:

“Whether the extension given to the chartered accountant appointed under the provisions of section 142(2A) of the Income-tax Act, 1961 (in short, ‘Act’) for submission of the audit report was in consonance with the proviso appended to section 142(2C) of the Act?”

The Delhi High Court upheld the decision of the Tribunal and held as under:

“i) It is the Assessing Officer who, in his proposal, sets up a case for issuance of a direction to the assessee to get its accounts audited, having regard to the circumstances referred to in sub-section (2A) of section 142 of the Income-tax Act, 1961, keeping in mind the interests of the Revenue. Once the specified authority grants its approval, it is obliged to nominate the accountant who would then proceed to audit the assessee’s accounts and generate a report which would advert to the particulars indicated in the prescribed form and,more importantly, other particulars which the Assessing Officer may require the accountant to elicit from the assessee’s accounts. Significantly, this exercise is to be completed within the time frame that the Assessing Officer prescribes.

ii) Under the proviso appended to sub-section (2C) of section 142 of the Income-tax Act, 1961, the Legislature has invested the power in the Assessing Officer to grant an extension of time as well, which can be forone or more periods with a maximum time frame (which includes the original period specified by the Assessing Officer for completion of the audit) not exceeding 180 days.

iii) As long as the authority retains the power to exercise the discretion vested in it by the statute, no fault can be found if it employs ministerial means in effectuating the exercise of discretionary power by the authority in which such power is reposed. In sum, the discretionary power invested in the specified authority should be exercised by that authority alone and none else, even if it causes administrative inconvenience, except in those cases where it is reasonably inferred to be a delegable power.

iv) Since a special auditor was appointed the end date for framing the assessment order was extended to April 14, 2010, by virtue of the provisions of section 153B, Explanation (ii), read with the first proviso appended to the provision. The record showed that the assessment order was framed on August 10, 2010. In the interregnum, the initial time frame granted for completion of the audit, which was 120 days, was extended by 60 days at the request of the special auditor. The Commissioner, in fact, granted the extension of time. The Assessing Officer simply transmitted the request received from the auditors to his superior, who then processed the matter and directed a grant of extension of time for completion of the audit. The Assessing Officer made a recommendation broadly on two grounds. Having noted the diametrically opposite assertions made on the aspect of delay, the legal tenability of the decision taken in the matter depended on which specified authority was invested with the power to extend the time frame. Since the Legislature vested the discretion to extend the time frame solely in the Assessing Officer, he could not have abdicated that function and confined his role to making a recommendation to the Commissioner. The Commissioner had no role in extending the time frame as the Assessing Officer was in seisin of the assessment proceedings. The discretionary power was vested in the Assessing Officer (which was non-delegable), and could not have been exercised by the Commissioner, irrespective of the nature of the power.

v) Thus, for the preceding reasons, the question of law, as framed, is answered against the Revenue and in favour of the assessee. The appeals are disposed of in the aforesaid terms.”

Assessment — Jurisdiction — CBDT Instructions — Binding on authorities — Time prescribed by CBDT — Burden of proof — Burden on authority assuming jurisdiction to establish that instructions satisfied in letter and spirit — Notice issued u/s. 143(2) not in terms of instructions of CBDT — Notice and assessment without jurisdiction.

9 CIT vs. Crystal Phosphates Ltd.

[2024] 461 ITR 289 (P&H.)

A.Y.: 2006–07

Date of order: 28th March, 2023

Ss. 119, 143(2) and 144 of ITA 1961

Assessment — Jurisdiction — CBDT Instructions — Binding on authorities — Time prescribed by CBDT — Burden of proof — Burden on authority assuming jurisdiction to establish that instructions satisfied in letter and spirit — Notice issued u/s. 143(2) not in terms of instructions of CBDT — Notice and assessment without jurisdiction.

The assessee’s case for A.Y. 2006–07 was selected for scrutiny and assessment was completed u/s. 144 of the Income-tax Act, 1961 by making various additions / disallowances.

The appeal was partly allowed by the CIT(A). The assessee as well as the department filed appeals before the Tribunal. The Tribunal disposed the appeal by quashing the notice issued u/s. 143(2) as well as the assessment framed by the AO on the grounds that the department had not shown that the instructions issued by CBDT for selection of cases for scrutiny were followed / satisfied for assumption of jurisdiction.

The Department filed appeal before the High Court to decide the following question:

“Whether as per CBDT instructions/guidelines, the case of the assessee was covered to be picked up for scrutiny, especially keeping in view that for the A.Y. 2007-08, the income was 30% more than the total income declared for the past year i.e. 2006-07?”

The Hon’ble Punjab & Haryana High Court dismissed the appeal of the Department and held as follows:

“i) The question of jurisdiction which was to be decided first by the Assessing Officer had not been done. The assessment order was quashed as being against the instructions of the CBDT. The instructions issued by the CBDT had not been complied with in letter and spirit. The Tribunal had rightly allowed the appeals of the assessee appreciating the facts in the right perspective. The Department had not led any cogent and convincing evidence to prove its case.

ii) As per CBDT instructions, the burden was on the authority assuming jurisdiction to show and establish that such instructions had been duly complied with and satisfied in letter and spirit. Since the notice u/s. 143(2) was not in terms of the instructions of the CBDT, both the notice u/s. 143(2) and the assessment were without jurisdiction and were accordingly quashed. No question of law arose.”

Income in respect of offshore supply of goods made on CIF basis to customers in India did not accrue in India, and hence, was not liable to tax in India because property in goods had passed outside India and payment was also made outside India.

4 [2023] 148 taxmann.com 79 (Mumbai – Trib)

Schindler China Elevator Company Ltd. vs. ACIT

ITA No: 3355/Mum/2023

A.Y.:2020-21

Dated: 22nd March, 2024

Income in respect of offshore supply of goods made on CIF basis to customers in India did not accrue in India, and hence, was not liable to tax in India because property in goods had passed outside India and payment was also made outside India.

FACTS

Assessee was a non-resident company incorporated in China. It was engaged in the business of designing, manufacturing and supplying elevators and escalators.

Assessee had formed a consortium with its Indian AE for bidding in tenders floated by two Indian companies for design, manufacture, supply, installation, testing and commissioning of escalators. Consortium of Assessee and AE were awarded the tenders. During the relevant year, Assessee had earned certain income from supply of escalators. It contended that the said income represented business profits and since it did not have PE in India, in terms of Article 7 of the India-China DTAA, the business profits were not taxable in India.

The AO contended that Assessee had earned income from India in respect of a composite contract having significant on-shore elements. Assessee had entered into an arrangement with its Indian AE for fulfilment of obligations of Assessee under the contracts. Both contracts were composite and indivisible and could not be split into separate parts for supply and commissioning as was contended by Assessee. The AO further contended that the consortium was liable to be assessed as an AOP and income from transactions was chargeable to tax in India because no benefit of India-China DTAA could be granted to AOP. AO held that Assessee had a clear business connection in India and it was having regular income from India from the contracts. Therefore, AO held that 5 per cent of total receipts of Assessee were taxable as income from composite contract and were liable for taxation in India @ 40 per cent.

DRP rejected the objections filed by Assessee and confirmed the draft assessment order. AO passed final assessment order in line with the draft assessment order.

HELD

  •  ITAT noted that the facts in current year were identical to those in Assessee’s own case for earlier year where coordinate bench of ITAT had held that since both transfer of property in goods and also the payment, were carried out outside India, the transaction could not be taxed in India. Hence, for current year also ITAT relied on the said decision. ITAT summarised the relevant observations and operational part of the ruling as follows.
  •  Assessee had formed consortium for bidding in tenders. Assessee had entered into MOU with AE. Both parties had jointly bid for the project as a consortium and each party was responsible for its own scope of work, which was separately defined. Work of AE could begin only after goods reached port of destination. In MOU, the parties had specified the percentage of effort and time that was expected to be spent by each of them on the project. The said percentage did not, in any way, imply share of profit or losses. Each party was to raise separate invoices as per the contract price and retain its own profits, or bear its own losses, as the case may be.
  •  MOU was made part of contracts and thus, the distinct scope of work and separate responsibility of each member of the consortium was also accepted by Indian customers. Assessee had contended that since consideration it received was in respect of offshore supply of elevators and escalators to both customers, it was not taxable in India. The Revenue had not brought any material on record to controvert the contention of the Assessee. AE had offered consideration received by it in respect of its scope of work for taxation in India.
  •  Draft assessment order had held that since the offshore supplies had been made by Assessee at an Indian port of destination, the delivery of the goods was in India. Therefore, profit made by Assessee on CIF basis was liable to be taxed in India since the sale was completed in India.
  •  Relying upon decision of another coordinate bench in JCIT vs. Siemens Aktiengesellschaft, [2009] 34 SOT 16 (Mumbai), coordinate bench of ITAT had rejected these contentions. The said decision referred to the expression “Cost, Insurance and Freight” as per INCO Terms, 1990. It was noted that in case of CIF though the seller pays cost, insurance and freight etc., the buyer bears all risks of loss of, or damage to, the goods from port of shipment to port of destination. Hence, in case of CIF, theproperty in goods passed on to the buyer at the portof shipment. Therefore, when Assessee made offshore supply of equipment to buyer on CIF Bombay basis for agreed consideration, the property in the equipment passed to the buyer at the port of shipment itself.
  •  Following the aforesaid coordinate bench ruling in Siemens Aktiengesellschaft, the coordinate bench of ITAT in case of Assessee for earlier year had held that the title in the property in the goods shipped by Assessee was transferred at the port of shipment itself.
  •  The coordinate bench had also relied upon SC judgment in Ishikawajma-Harima Heavy Industries, wherein SC had held that only such part of incomeas was attributable to operations carried out in Indiacould be taxed in India. Thus, since both transferof property in goods and also the payment, were carried out outside India, the transaction could not be taxed in India.
  •  ITAT held that issues raised in the present case, were similar to those in preceding AY. Hence, relying on the decision of coordinate bench of ITAT in earlier year, ITAT held that since, in the present case, the Assessee did not carry out any operation in India in respect of its scope of work, income earned by Assessee from offshore supply of escalators and elevators to Indian customers was not taxable in India.
  •  Accordingly, ITAT deleted additions.

Capital gains on transfer of shares acquired prior to 1st April, 2017 were not taxable in terms of Article 13(4) of India-Mauritius DTAA because of grandfathering provisions; it was evident from TRC that Assessee was a tax resident of Mauritius.

3 [2024] 160 taxmann.com 632 (Delhi – Trib.)

Norwest Venture Partners X-Mauritius vs. DCIT

ITA No: 2311/Del/2023

A.Y.: 2020-21

Dated: 19th March, 2024

Capital gains on transfer of shares acquired prior to 1st April, 2017 were not taxable in terms of Article 13(4) of India-Mauritius DTAA because of grandfathering provisions; it was evident from TRC that Assessee was a tax resident of Mauritius.

FACTS

Assessee was a non-resident company incorporated under laws of Mauritius. The Assessee was an investment holding company. The ultimate parent company of Assessee was beneficially owned by an American entity. Assessee was issued Category-1 Global Business License in Mauritius. Based on Tax Residency Certificate (“TRC”) issued by Mauritius Revenue Authority, it was a tax resident of Mauritius. In India, Assessee was registered with SEBI as a foreign venture capital investor. Assessee had invested in equity shares of various Indian companies. During the previous year relevant to AY 2020-21, Assessee had sold shares of certain Indian companies and derived capital gains. In its return, Assessee had claimed exemption in respect of LTCG in terms of Article 13(4) of India-Mauritius DTAA.

Revenue noted that ultimate parent company of Assessee was beneficially owned by an American entity. Revenue held that: (a) Assessee was controlled and managed from outside of Mauritius; (b) it did not have any commercial substance or real economic activity in Mauritius; and (c) mere TRC was not sufficient evidence to prove tax residency of Assessee in Mauritius. Therefore, adopting substance over form approach, revenue concluded that Assessee was a shell / conduit company and consequently, it was not entitled to avail benefits under India-Mauritius DTAA.

DRP directed Revenue to factually verify facts and contention of Assessee on the basis of documents/submissions available in the assessment records and without conducting any fresh enquiry. DRP also directed revenue to pass a speaking and reasoned order. Revenue retained the proposed addition in the draft assessment order.

HELD

  •  Assessee was carrying on investment activity in India since July 2007. Even after 1st April, 2017 when capital gain exemption was withdrawn, Assessee continued to make substantial investments in India.
  •  SEBI had registered Assessee as foreign venture capital investor in 2007. SEBI would have granted registration only after due verification of credentials of Assessee. So, Assessee was a genuine investor and not a fly-by-night operator.
  •  Assessee had furnished documentary evidences for claiming benefit in terms of Article 13(4), read with Section 90. On the contrary, neither draft nor final assessment order brought on record any conclusive evidence to prove the allegation that since the control and management of Assessee was not in Mauritius, Assessee was a shell/conduit company.
  •  Category-1 Global business license and TRC would have been issued only after due verification of facts and evidence by Mauritius Tax Authority. Hence, its correctness could not be questioned.
  •  CBDT has also accepted the sanctity of TRC by issuing Circular No.789 dated 13th April, 2000, which states that TRC issued by Mauritius Tax Authority will constitute sufficient evidence regarding residential status and beneficial ownership for applying DTAA provisions, including in respect of income from capital gain on sale of shares. Hence, denial of treaty benefits clearly runs in the teeth of the said Circular.
  •  This issue has been well-settled by now, beginning from SC judgment in Azadi Bachao Andolan. Judgments of Bombay HC in JSH Mauritius and Bid Services, judgement of P & H HC in Serco BPO, and judgement of coordinate bench in MIH India also supported the case of Assessee. Reference made by DRP to LOB clause in Article 27A of DTAA is irrelevant in this case because Assessee had not claimed any benefit under Article 13(3B), and Revenue had also failed to demonstrate fulfilment of conditions therein regarding shell/conduit company.
  •  Restoration of issue by DRP without deciding on merits was contrary to scheme of Section 144C as it did not confer power to set aside. Such an action of DRP had resulted in gross violation of rules of natural justice because once a direction is issued, AO had to pass final assessment order in conformity with such directions without providing any further opportunity of being heard to Assessee. As Revenue had merely confirmed the draft assessment order, the impugned order was also not sustainable since directions of DRP were not implemented in letter and spirit.