BCAJ | Bombay Chartered Accountant Journal

Reassessment — Notice for reassessment after 1st April, 2021 — All relevant information provided by assessee prior to original assessment order — AO has no power to review his own order — Query raised by AO answered and accepted during original assessment — Reopening of assessment on mere change of opinion not permissible.

83 Knight Riders Sports Pvt. Ltd. vs. ACIT

[2023] 459 ITR 16 (Bom)

A.Y.: 2016-17

Date of Order: 26th September, 2023

Ss. 142(1), 143(3), 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Notice for reassessment after 1st April, 2021 — All relevant information provided by assessee prior to original assessment order — AO has no power to review his own order — Query raised by AO answered and accepted during original assessment — Reopening of assessment on mere change of opinion not permissible.

The assessee-company was engaged in the business of operating and running a cricket team in the Indian Premier League. During the assessment proceedings for the A.Y. 2016-17, the Assessing Officer issued various notices u/s. 142(1) of the Income-tax Act, 1961, raising queries, inter alia, regarding foreign payments made and the assessee provided the details. An assessment order u/s. 143(3) of the Act was passed. Thereafter the assessee received notice dated 17th March, 2023, u/s. 148A(b) of the Act alleging that the audit scrutiny of assessment records disclosed payments of consultancy and team management fees to a foreign company and that income was chargeable to tax for the A.Y. 2016-17, had escaped assessment. The Assessing Officer rejected the objections raised by the assessee and passed an order u/s. 148A(d) of the Act, followed by a reassessment notice u/s. 148 of the Act.

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

“i) Reopening of the assessment was not permissible based on change of opinions as the Assessing Officer does not have any power to review his own assessment when during the original assessment the assessee had provided all the relevant information which was considered by the Assessing Officer before passing the assessment order u/s. 143(3) of the Act. Once a query had been raised during the assessment and query had been answered and accepted by the Assessing Officer while passing the assessment order, it followed that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. This would apply even if the assessment order had not specifically dealt with that issue.

ii) The reopening of the assessment was merely on the basis of change of opinion. This change of opinion did not constitute justification to believe that income chargeable to tax had escaped assessment. The notice dated 17th March, 2023, the order dated 30th March, 2023 and the reassessment notice dated 30th March, 2023, were quashed and set aside.”

BCAJ Admin

Offences and Prosecution — Wilful attempt to evade payment of tax — Self assessment tax shown in the return of income but paid late — Penalty levied for delayed payment of tax — Criminal intent of assessee essential — Nothing on record to show deliberate and wilful default of evasion of tax — Complaint and summoning order quashed.

82 Health Bio Tech Ltd. vs. DCIT

[2023] 459 ITR 349 (P&H.)

A.Y.: 2011-12

Date of Order: 14th September, 2023

Ss. 276C(2) and 278B of ITA 1961

Offences and Prosecution — Wilful attempt to evade payment of tax — Self assessment tax shown in the return of income but paid late — Penalty levied for delayed payment of tax — Criminal intent of assessee essential — Nothing on record to show deliberate and wilful default of evasion of tax — Complaint and summoning order quashed.

The assessee, a registered firm, filed its return of income for A.Y. 2011-12 wherein aggregate amount of tax was shown at ₹1,36,20,887. Subsequently, the return of income was revised and the aggregate amount of tax was shown at ₹1,50,81,728. The tax was not paid in time but was paid late. The Department filed a complaint for offence u/s. 276C(2) of the Income-tax Act, 1961 of wilful attempt to evade payment of tax. The trial court admitted the complaint and passed an order summoning the assessee as accused.

The Punjab and Haryana High Court allowed the revision petition filed by the assessee and held as follows:

“i) It was apparently clear from the facts on record, that there was no attempted evasion on the part of the assessee-company. There was undoubtedly delayed payment, but for that penalty had already been levied. While maintaining both these proceedings simultaneously, the one fact that must be present there, that there was or has been a criminal intent in the mind of the accused right from the beginning.

ii) The income tax was self-assessed and payment was also made by the assessee-company, though belatedly. Thus, the question of evasion of tax did not arise in the present facts and circumstances. The facts and circumstances of the case did not reveal that there was a deliberate and wilful default of evasion of tax on the part of the assessee. The complaint and all the consequential proceedings arising therefrom, including the summoning order were quashed.”

BCAJ Admin

Offences and prosecution — Failure to deposit tax deducted at source before due date — Sanction for prosecution — Reasonable cause — Tax deducted at source — Delay to deposit tax deducted at source due to prevalence of pandemic — Assessee depositing tax deducted at source in phased manner with interest though after due date — Reasonable cause for failure — Prosecution orders set aside.

81 D. N. Homes Pvt. Ltd. vs. UOI

[2023] 459 ITR 211 (Orissa)

A.Y.: 2021-22

Date of Order: 13th October, 2023

Ss. 2(35), 276B, 278AA and 278B of the IT Act

Offences and prosecution — Failure to deposit tax deducted at source before due date — Sanction for prosecution — Reasonable cause — Tax deducted at source — Delay to deposit tax deducted at source due to prevalence of pandemic — Assessee depositing tax deducted at source in phased manner with interest though after due date — Reasonable cause for failure — Prosecution orders set aside.

The assessee is a private limited company. As per the TRACES, the assessee deducted tax of ₹2,58,29,945 for F.Y. 2020-21 relevant to A.Y. 2021-22 which was not deposited with the Central Government before the due date. However, the amount was deposited in a phased manner with delay of 31 days to 214 days. The Department filed a complaint against the assessee for an offence u/s. 276B of the Income-tax Act, 1961. The lower Court took cognizance of the offence.

The Orissa High Court allowed the revision petition filed by the assessee and held as under:

“i) The expression “reasonable cause” used in section 278AA of the Income-tax Act, 1961 may not be “sufficient cause” but would have a wider connotation than the expression “sufficient cause”. Therefore, “reasonable cause” for not visiting a person with the penal consequences would have to be considered liberally based on facts of each individual case. The issue of there being a reasonable cause or not is a question of fact and inference of law can be drawn.

ii) The legislative intent would be well discernible on consideration of the provisions of section 201 and section 221 which state that penalty is not leviable when the company proves that the default was for “good and sufficient reasons”, whereas, the expression used in section 278AA is “reasonable cause”. The Legislature has carefully and intentionally used these different expressions in the situations envisaged under those provisions. The intent and purport being to mitigate the hardship that may be caused to genuine and bona fide transactions where the assessee was prevented by cause that is reasonable. Therefore, the court must lean for an interpretation which is consistent with the “object, good sense and fairness” thereby eschew the others which render the provision oppressive and unjust, as otherwise, the very intent of the Legislature would be frustrated.

iii) The expression “reasonable cause” in section 278AA qualifies the penal provision laid under section 276B. Both provisions accordingly are to be read together to ascertain the attractability of the penal provision. In a criminal proceeding by merely showing reasonable cause, an accused can be exonerated and for showing that reasonable cause, the standard of proof of suchfact in support thereof is lighter than the proof in support of good and sufficient reason. A reasonable cause may not necessarily be a good and sufficient reason.

iv) The assessee and its principal officer had deposited the entire tax deducted at source with interest for the delayed deposit before the time of consideration of the matter as to launching of the prosecution u/s. 279(1)of the 1961 Act. The tax deducted at source with interest had been accepted and gone to the State exchequer when by then no loss to the Revenue stood to be viewed.

v) The point for consideration by the authority was not to cull out the justification for delay in depositing the tax deducted at source but was whether to launch the prosecution. Hence, the order u/s. 279(1) passed by the Commissioner (TDS) suffered from the vice of non-consideration of the admitted factual settings as to the existence of reasonable cause for the failure to deposit the tax deducted at source and the complaint was vitiated since the failure was on account of the reasonable cause of the prevalence of covid-19 pandemic.

vi) The order of sanction having been passed without due application of mind and in a mechanical manner and putting the blame upon the assessee and its principal officer for not filing any exemption or relaxation notifications or circulars stood vitiated. Hence, the trial court ought not to have taken cognizance of the offences u/ss. 276B, 2(35) and 278B when even the latter two had no penal provisions and its orders were bad in law and, therefore, set aside.”

BCAJ Admin

Fees for technical services — Make available — Meaning of — Recipient of services should apply technology — Services offered to Indian affiliates — Tribunal holding services to Indian affiliates not fees for technical services as make available test not fulfilled — Agreement between assessee and its affiliate effective for long period — Recipient of services unable to provide same service without recourse to service provider — Not fees for technical services: DTAA between India and Singapore s. 12(4)(b).

80 CIT (International Taxation) vs. Bio-Rad Laboratories (Singapore) Pte. Ltd.

[2023] 459 ITR 5 (Del.)

A.Y.: 2019-20

Date of Order: 3rd October, 2023

S. 260A of ITA 1961

Fees for technical services — Make available — Meaning of — Recipient of services should apply technology — Services offered to Indian affiliates — Tribunal holding services to Indian affiliates not fees for technical services as make available test not fulfilled — Agreement between assessee and its affiliate effective for long period — Recipient of services unable to provide same service without recourse to service provider — Not fees for technical services: DTAA between India and Singapore s. 12(4)(b).

The Tribunal held that the services offered by the assessee to its Indian affiliates did not come within the purview of fees for technical services, as reflected in article 12(4)(b) of the DTAA between India and Singapore, as they did not fulfil the criteria of “make available” test.

The Delhi High Court dismissed the appeal filed by the Department and held as under:

“i) According to the Tribunal, the agreement between the assessee and its affiliate had been effective from 1st January, 2010, and it had run for a long period. In order to bring the services in question within the ambit of fees for technical services under the Double Taxation Avoidance Agreement, 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. The facts on record showed that the recipient of the services was not enabled to provide the same service without recourse to the service provider.

ii) The analysis and conclusion arrived at by the Tribunal were correct.”

BCAJ Admin

Section 92C, read with section 92B, of the Income-tax Act, 1961 — In light of peculiar facts, TPO was correct in recharacterizing part consideration of merger in form of cash and CCD as income. Cash payment was to be treated as deemed loan and ALP for CCD interest was determined at Nil.

14 Dimexon Diamonds Ltd vs. ACIT

[2024] 159 taxmann.com 118 (Mumbai – Trib.)

ITA No: 2429/Mum/2022

A.Ys.: 2018–19

Date of Order: 30th January, 2024

Section 92C, read with section 92B, of the Income-tax Act, 1961 — In light of peculiar facts, TPO was correct in recharacterizing part consideration of merger in form of cash and CCD as income. Cash payment was to be treated as deemed loan and ALP for CCD interest was determined at Nil.

FACTS

DIHPL, an Indian company, was a wholly owned subsidiary of DIHBV, a Netherlands company. Assessee, another Indian company, was a wholly owned subsidiary of DIHPL. DIHPL and the assessee undertook a reverse merger whereby DIHPL merged into the assessee. Assessee discharged following consideration to DIHBV, which held the entire equity capital of DIHPL.

In the transfer pricing report, the assessee disclosed the aforesaid transaction as an international transaction. However, it was stated that the transaction was not required to be benchmarked since pursuant to the implementation of the said scheme of amalgamation, the assessee had neither generated any income nor incurred any expenditure. Without prejudice, the assessee adopted ‘other method’ and placed a third party valuer report to justify consideration.

TPO rejected the valuation report. In particular, TPO: (a) treated cash payment as loan and imputed interest thereon; (b) Disregarded issuance of CCD; and (c) treated ALP of interest as Nil. DRP upheld the order of AO.

Being aggrieved, the assessee appeal to ITAT.

HELD

• Amalgamation results in business restructuring and falls within the definition of international transaction. Each mode of consideration i.e. equity, cash and CCD needs to be examined separately. No adjustment was made by TPO in respect of issuance of equity shares.

• During NCLT proceedings, the assessee submittedthat it would comply with applicable Income Tax law. Thus, even if the scheme is approved by NCLT, the tax department had not waived its right to examine the issue arising out of the scheme of amalgamation. Further, approval of the scheme and computation of ALP are different aspects.

• The valuation report stated that management had decided to give cash consideration to DIHBV as excess cash was available with the assessee. Thus, the valuation report was not prepared scientifically as consideration was determined by management of companies.

• DIHBV was holding the assessee and the other two subsidiaries through DIHPL, After the merger, DIHBV directly held 100 per cent shares of the assessee and the other two subsidiaries through the assessee. Thus, a merger transaction is a mere restatement of the accounts of the subsidiary companies without the actual transfer of any asset and liability by DIHBV.

• ITAT upheld the findings of lower authorities that in substance the transaction is really a relocation of shares and insofar as the parent holding company is concerned nothing has changed in substance.

• Considering the finding in the valuation report that management had excess cash, TPO was correct in holding that the issuance of CCDs and payment of cash of ₹100 crore represents excessive payment.

BCAJ Admin

Section 92C, read with section 92B, of the Income-tax Act, 1961 — Interest-free loan is an international transaction. The nature of advances, whether it is quasi capital in nature or not, must be seen at the time of granting of advance/loan to the subsidiary.

13 Intas Pharmaceuticals Ltd vs. ACIT

[2024] 159 taxmann.com 429

(Ahmedabad —Trib.)

ITA No: 1334/AHD/2017 & Others

A.Ys.: 2009–10 to 2011–12

Date of Order: 31^stJanuary, 2024

Section 92C, read with section 92B, of the Income-tax Act, 1961 — Interest-free loan is an international transaction. The nature of advances, whether it is quasi capital in nature or not, must be seen at the time of granting of advance/loan to the subsidiary.

FACTS

Assessee is engaged in the business of manufacturing and trading of pharmaceuticals. It advanced the amount to its AEs for registration of the assessee’s product in overseas territories. Assessee had the option to convert advances into equity. Hence, the assessee considered that the advances were in the nature of quasi capital. Therefore, the assessee did not charge Interest on the same. In the subsequent year, the assessee converted loans given to three of its AEs into equity.

In the course of the assessment, AO made an upward adjustment on account of interest on loans and advances.

In appeal, CIT(A) gave partial relief in respect of advances given to three of the AEs whose loans were converted into equity in the subsequent year. In respect of other foreign AEs, CIT(A) confirmed the upward adjustment on the grounds that loans and advances given to them were not converted into equity.

Being aggrieved, both parties appeal to ITAT.

HELD

Tribunal confirmed the decision of AO and affirmed upward addition for all the loans.

In the case of quasi capital, there is an option to convert the loan to equity, however, in the case of a loan, the consideration is received in terms of interest and return of principal amount after a pre-decided deferred period¹.

The nature of advances, whether it is quasi capital in nature or not, must be seen at the time of granting of advance/loan to the subsidiary.

In the instant facts, there was nothing to suggest that at the time of advancing the loans to the AEs, such loans were in the nature of quasi-capital. The fact that in the subsequent year, such loans were converted into equity (at the option of the assessee) would not alter the nature of such advance to quasi-capital.

Following considerations were irrelevant for deciding the issue of charging interest on loan:

Advances made were out of commercial expediency.

Advanced by the assessee to its AEs are inextricably linked with export sale of finished goods or such advances have yielded the economic benefits to the assessee including increase in export turnover.

Advances were given from interest free funds available with the assessee.

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1 Bialkhia Holdings Pvt. Ltd. vs. Additional Commissioner of Income Tax 115 taxmann.com 230 (Surat Tribunal)

BCAJ Admin

If the original return of income is filed within the due date under section 139(1), the carry forward of loss claimed in the revised return filed after the due date under section 139(1) cannot be denied.

63 Khadi Grammodhyog Prathisthan vs. CPC

[2024] 108 ITR(T) 94 (Jodhpur – Trib.)

ITA NO.: 87 (JODH.) OF 2023

A.Y.: 2019-20

Date of Order: 31st July, 2023

If the original return of income is filed within the due date under section 139(1), the carry forward of loss claimed in the revised return filed after the due date under section 139(1) cannot be denied.

FACTS

The assessee filed its original return of income for the assessment year 2019–20 on 30^th October, 2019. Thereafter, the assessee revised the return on 15^th January, 2020, which was considered by the CPC as the original return and accordingly, it denied the current year loss of ₹3,51,811. Aggrieved by the intimation, the assessee filed an appeal before the CIT(A).

The CIT(A) considered the revised return filed on15th January, 2020 as the original return and that it was filed after the due date u/s 139(1) of the Act which was 31st October, 2019. The CIT(A) sustained the intimation u/s 143(1) and denied the carry forward of current-year losses. The assessee then filed an appeal before the ITAT.

HELD

The ITAT observed that the apple of discord in this appeal was that the assessee had filed its original return of income on 30^th October, 2019 which was within the extended due date of filing the return of income u/s 139(1). Thereafter, the assessee revised the return of income on 15th January, 2020 which the CPC considered as an original return filed beyond the due date u/s 139(1) and thereby denied the current year loss of ₹3,51,811.

The ITAT held that the return filed on 15^th January, 2020 was not the original return but was a revised one and therefore, the denial of loss was not correct based on the set of facts and evidence available on records. The appeal of the assessee was allowed.

BCAJ Admin

Sec. 271B r.w. Sec. 44AA, 44AB and Sec. 271A: Where Penalty u/s 271A is levied for not maintaining books of accounts u/s 44AA, the assessee could not further be saddled with penalty u/s 271B for failure to get books of accounts, which were not maintained, audited u/s 44AB.

62 Santosh Jain vs. ITO

[2023] 108 ITR(T) 636 (Raipur – Trib.)

ITA NO.: 143, 145 & 147 (RPR) OF 2023

A.Y.: 1993–94 to 1995–96

Date of Order: 24th July 2023

Sec. 271B r.w. Sec. 44AA, 44AB and Sec. 271A: Where Penalty u/s 271A is levied for not maintaining books of accounts u/s 44AA, the assessee could not further be saddled with penalty u/s 271B for failure to get books of accounts, which were not maintained, audited u/s 44AB.

FACTS

The AO imposed the penalties upon the assessee u/s 271A for failure to maintain his books of account and other documents as required u/s 44AA and u/s 271B for failure to get his books of account audited as per provisions of section 44AB.

The assessee filed an appeal before the CIT(A) against the penalty order u/s 271B dated 27th July, 2015 on the averment that as the assessee had been penalized for failure on his part to maintain books of account u/s 271A, the AO was divested from further saddling him with a penalty for getting such non-existing books of accounts audited as per the mandate of law. The CIT(A) upheld the view taken by the AO. Aggrieved, the assessee filed an appeal before the ITAT.

HELD

The ITAT followed the judgment of the Hon’ble High Court of Allahabad in the case of S.K Gupta & Co. [2010] 322 ITR 86 wherein it was observed that the requirement of getting the books of account audited could arise only where the books of account are maintained. It was further observed that if for some reason the assessee had not maintained books of account, then the appropriate provision under which penalty proceedings could be initiated was section 271A of the Act. Accordingly, the ITAT allowed the assessee’s appeal and deleted the penalty levied u/s 271B.

BCAJ Admin

Sec. 68: Where assessee, engaged in financial activities, and the records revealed that the credit entries were repayments of loans, and the third party was not a stranger entity and transactions were transparent and had been found to be routed through banking channel and reported in the return of income by the assessee as well as a third party, addition made under section 68 was to be deleted.

61 ACIT vs. Evermore Stock Brokers (P.) Ltd

[2023] 108 ITR(T) 13 (Delhi – Trib.)

ITA NO.: 5152 (DELHI) OF 2018

A.Y.: 2015–16

Date of Order: 19th September, 2023

Sec. 68: Where assessee, engaged in financial activities, and the records revealed that the credit entries were repayments of loans, and the third party was not a stranger entity and transactions were transparent and had been found to be routed through banking channel and reported in the return of income by the assessee as well as a third party, addition made under section 68 was to be deleted.

FACTS

The assessee was engaged in investments and financial activities and had filed its return of income on 29th September, 2015 declaring total income of ₹96,19,580 for AY 2015–16. The case was selected for limited scrutiny to verify the genuineness of the amount received of ₹47,72,95,676 from M/s. Pioneer Fincon Services Pvt. Ltd. [PFSPL].

The assessee had asserted that the funds were advanced to PFSPL with a view to earn interest on idle funds, rather than obtaining loans and the credit entries appearing in the ledger account of the assessee denote a mere return of pre-existing loans advanced. In the process of such advance of its funds, the assessee also earned the interest of ₹2,39,640 from transactions carried with PFSPL.

To discharge its onus to prove the genuineness of the financial transactions, the assessee submitted the following documents:

i. Assessee’s books of accounts

ii. ledger account of PFSPL as appearing in its books

iii. financial statement of PFSPL

iv. extract of bank statements of both parties to the transaction

The AO, however, alleged that the financial statement of PFSPL does not inspire much confidence in its creditworthiness. The AO issued the summons u/s 131 in the name of the Principal Officer of PFSPL. Shri Sagar Ramdas Bomble attended and submitted that the entity namely PFSPL has been stricken off from the records of the Registrar of Companies and recorded a statement on oath. The AO ultimately concluded that PFSPL is a mere paper company which was used only to route money to the assessee. The AO accordingly considered an amount of R47,72,95,676 as unexplained credit and added the same to the total income of the assessee.

Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) observed that the assessee was never required to explain the sources of funds in the bank account of PFSPL. The CIT(A) observed from the recorded statement of Shri Sagar Ramdas Bomble that PFSPL took a loan from the assessee and repaid the same to the assessee within the financial year along with Interest. Receiving interest by the assessee from PFSPL was an indication that the loans were given by the assessee and not vice versa. The CIT(A) was satisfied that the identity of PFSPL was established as it was regularly filing ROI, genuineness of the transactions stands proved by the fact that all transactions were done through banking channels, the account was squared up during the same year and PFSPL paid interest on such transactions to the assessee while deducting tax at source and creditworthiness cannot be judged only from the site of its balance sheet at the year-end. The CIT(A) allowed the appeal and deleted the addition.

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

HELD

The ITAT observed that the AO failed to understandthat firstly, the credits represented the repayment of the loan advanced by the assessee and secondly, the outstanding at any point in time was only ₹2.06 crore. The AO had made high-pitched additions onmisplaced assumptions of facts. The transactions were carried out through a banking channel and both the assessee as well as the borrower PFSPL, were regularly assessed to tax. The so-called loans were ultimately repaid by PFSPL and there was no outstanding at the end of the year.

The ITAT observed that the order of the CIT(A) clearly brings out the fact that PFSPL was not a stranger entity to the assessee. PFSPL had availed loans from the assessee on commercial considerations, and the interest paid had been subjected to deduction of tax at source. The presence of the Accountant and CFO of the erstwhile PFSPL reflected cooperation of the borrower with the Revenue Authorities. The ITAT also observed that the repayment and squaring up of loans was an overriding point of significance. The factum of repayment thus also validated the stance of bona fide.

The ITAT held that the facts in the present case thus spoke for itself and there appeared no need to amplify the findings of CIT(A) and the reasoning advanced on behalf of revenue lacked merits. Thus, the appeal of the revenue was dismissed.

BCAJ Admin

Where pursuant to a scheme of arrangement and restructuring, assessee’s shareholding in a company was reduced, long-term capital loss arising to assessee on account of reduction of capital has to be allowed even if no consideration is paid to the assessee.

60 Tata Sons Ltd. vs. CIT

ITA No.: 3468/Mum/2016

A.Y.: 2009-10

Date of Order: 23^rd January, 2024

Section: 2(47), section 48 and section 263

Where pursuant to a scheme of arrangement and restructuring, assessee’s shareholding in a company was reduced, long-term capital loss arising to assessee on account of reduction of capital has to be allowed even if no consideration is paid to the assessee.

FACTS

The assessee-company owned 288,13,17,286 equity shares in TTSL acquired at various points of time, which were held as capital assets.

Since TTSL had incurred substantial loss in the course of its business for providing telecom services, a large part of the paid-up share capital of TTSL was utilized so as to finance / bear the said loss.

In view of such losses, a scheme of arrangement and restructuring between TTSL and its shareholders was entered under sections 100 to 103 of the Companies Act, 1956, which was approved by the High Court.

As per the scheme—

— the equity shares of TTSL of ₹10 each from 634,71,52,316 shares was reduced to 317,35,76,158 shares.

— no consideration was payable to the shareholders in respect of the shares which were to be cancelled.

Consequently, the shareholding of the assessee was also reduced to half.

The assessee claimed such a reduction of capital as long-term capital loss, which was set off against other long-term capital gain.

During the course of assessment proceedings under section 143(3), AO specifically raised the issue relating to the assessee’s claim for allowability of long term capital loss. However, after examining the submissions of the assessee, he allowed such loss.

PCIT initiated revision proceedings under section 263 and held that since no consideration was received by or accrued to the assessee by way of reduction of capital, the computation mechanism provided under section 48 fails and consequently, long term capital loss cannot be worked out.

Aggrieved, the assessee filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows:

(a) There can be no dispute that there was a loss on the capital account by way of a reduction of capital invested and therefore any loss on the capital account, is a capital loss and not a notional loss.

(b) If the right of the assessee in the capital asset stands extinguished either upon amalgamation or by reduction of shares, it amounts to the transfer of shares within the meaning of section 2(47) and therefore, computation of capital gains has to be made.

(c) Following the observations of Gujarat High Court in CIT vs. JaykrishnaHarivallabhdas,(1997) 231 ITR 108 (Guj), it held that even when the assessee has not received any consideration on reduction of capital its investment has reduced resulting into capital loss, while computing the capital gain, such capital loss has to be allowed or set-off against any other capital gain.

Accordingly, the Tribunal held that AO had rightly allowed the computation of long-term capital loss to be set off against the capital gain and consequently, it set aside the order of PCIT under section 263.

BCAJ Admin

No exemption under section 54F is allowable in respect of a building which was predominantly used for religious purposes. Section 54F does not allow pro-rata exemption.

59 ACIT vs. Shri Iqbal Ali Khan

ITA No.: 505 / Hyd / 2020

A.Y.: 2013-14

Date of Order: 12th January, 2024

Section: 54F

No exemption under section 54F is allowable in respect of a building which was predominantly used for religious purposes.

Section 54F does not allow pro-rata exemption.

FACTS

The assessee sold two properties for a total consideration of ₹8.81 crores, resulting in capital gain of ₹7.21 crores.

He claimed exemption under section 54F to the extent of ₹5.47 crores, by constructing a building consisting of ground floor plus three floors in Hyderabad.

The assessee had not taken any municipal permission before starting the construction.

However, subsequently, in the application forregularization dated 31st December, 2015 filed with the municipal authorities, it was stated that the property consisted of a mosque, orphanage school and staff quarters.

The Assessing Officer disallowed the exemption under section 54F.

On appeal, by relying on the remand report and verification / enquiry report of the inspector, CIT(A) held partly in favour of the assessee by allowing pro-rata exemption under section 54F in respect of first, second and third floors.

Aggrieved, the revenue filed an appeal before the Tribunal.

HELD

The Tribunal held that –

(a) the property was predominantly being used for religious purposes, namely, mosque, orphanage school and staff quarters and therefore, it did not fit within the definition of “residential house” as contemplated under section 54F.

(b) Further, there was no evidence to show that the assessee had invested in construction of a residential house and therefore, he was not entitled to any relief under section 54F.

(c) The literal reading of section 54F makes it abundantly clear that there was no scope of grant of pro-rata deduction, more particularly when no provision of residence can be made in a mosque.

Accordingly, the grounds of appeal of the revenue were allowed and the order of the Assessing Officer was upheld by the Tribunal.

BCAJ Admin

Where the assessee transferred 62 per cent of the land to a developer in exchange for 38 per cent of the developed area to be constructed over time under an unregistered joint development agreement / irrevocable power of attorney, the transaction was liable to capital gain under section 2(47)(vi) in the year of the agreement.

58 K.P. Muhammed Ali vs. ITO

ITA No.: 1008 / Coch / 2022

A.Y.: 2012-13

Date of Order: 12th January, 2024

Section: 2(47)(v) / (vi)

Where the assessee transferred 62 per cent of the land to a developer in exchange for 38 per cent of the developed area to be constructed over time under an unregistered joint development agreement / irrevocable power of attorney, the transaction was liable to capital gain under section 2(47)(vi) in the year of the agreement.

FACTS

On 27^th June, 2011, the assessee and a developer entered into a Joint Development Agreement (JDA) and a General Power of Attorney (GPA) in respect of a piece of land in Kasaba village for the construction of a residential complex. Both JDA and GPA were not registered.

Under the said agreements, the assessee transferred his rights into 62 per cent of the land in lieu of 38 per cent of the developed area to be constructed over a period of time.

The construction was completed only in 2017. Thereafter, as and when the assessee executed assignment deeds in favour of the various parties who purchased the assessee’s share of apartments, he had declared capital gains in his returns of income for such year(s).

The question before the Tribunal was whether the arrangement can be regarded as transfer under section 2(47) exigible for capital gain in the year of execution of JDA / GPA.

HELD

The Tribunal observed that-

(a) Though the assessee fulfilled the other conditions of section 53A of Transfer of Property Act, 1882 as propounded in Chaturbhuj Dwarkadas Kapadia vs. CIT, (2003) 260 ITR 491 (Bom), with effect from 24th September, 2001, section 53A does not recognize unregistered contracts. Hence, section 2(47)(v) would not apply to the facts of the assessee wherein both the JDA and GPA were unregistered.

(b) However, the constraining factor of registration of a contract would not be relevant in the case of section 2(47)(vi) which applies to any agreement or arrangement or a transaction in any other manner which has effect of transferring or enabling the enjoyment of immovable property, as explained in P. George Jacob vs. ITO (in ITA No. 558/Coch/2022, dated 2.3.2023).

(c) It is well-settled that income is to be taxed in the hands of the right person and for the right year, and it is being offered to tax in the hands of another person or year would be of no relevance in law.

The Tribunal held that the transaction between the assessee and developer under JDA / GPA constituted a transfer under section 2(47)(vi) and was liable to capital gain in the year of entering into the agreements.

With regard to the quantification of capital gain, the matter was set aside to the file of the Assessing Officer with an observation that since land in question was acquired prior to 1st April, 2001, fair market value on that date would be considered cost of acquisition (and further indexed under section 48); and sale consideration would be compared to stamp value on transfer date under section 50C.

BCAJ Admin

Glimpses of Supreme Court Rulings

55 Commissioner of Income Tax vs. Jindal Steel & Power Limited (and connected appeals)

(2024) 460 ITR 162 (SC)

Industrial Undertaking — Captive Power Plant — Deduction under section 80-IA — The market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity for computing the profits of the eligible business — The rate of power sold to or supplied to the State Electricity Board cannot be the market rate of power sold to a consumer in the open market.

Depreciation — There is no requirement under the second proviso to Sub-rule (1A) of Rule 5 of the Rules that any particular mode of computing the claim of depreciation has to be opted for before the due date of filing of the return — All that is required is that the Assessee has to opt before filing of the return or at the time of filing the return that it seeks to avail the depreciation provided in Section 32 Under Sub-Rule (1) of Rule 5 read with Appendix-I instead of the depreciation specified in Appendix-1A in terms of Sub-rule (1A) of Rule 5.

RECOMPUTATION OF DEDUCTION UNDER SECTION 80IA OF THE INCOME TAX ACT, 1961.

The Assessee, M/s Jindal Steel and Power Ltd., Hisar, a public limited company was engaged in the business of generation of electricity, manufacture of sponge iron, M.S. Ingots etc.

Since electricity supplied by the State Electricity Board was inadequate to meet the requirements of its industrial units, the Assessee set up captive power generating units to supply electricity to its industrial units. Surplus power was supplied by the Assessee to the State Electricity Board.

The Assessee filed its return of income for the assessment year 2001-02 on 29th October, 2001 declaring nil income. The total income computed by the Assessee at nil was arrived at after claiming various deductions, including under Section 80IA of the Act. Since there was substantial book profit of the Assessee, net book profit being ₹1,11,43,36,230.00, income tax was levied under Section 115JB of the Act at the rate of 7.5 per cent along with surcharge and interest.

The return of income filed by the Assessee was processed by the Assessing Officer under Section 143(1) of the Act. After such processing, a refund was made to the Assessee.

Thereafter, the case was selected for scrutiny following which statutory notices under Section 143(2) and 142(1) of the Act were issued calling upon the Assessee to furnish details for clarification, which were complied with by the Assessee. During the assessment proceedings, the issue relating to deduction under Section 80IA of the Act came up for consideration. Assessee had claimed deduction under the said provision of a sum amounting to ₹80,10,38,505. The deduction claimed under Section 80IA related to profits of the power generating units of the Assessee.

The Assessing Officer noticed that the Assessee had shown a substantial amount of profit in its power generating units. The power generated was used for its own consumption and also supplied to the State Electricity Board in the State of Chhattisgarh and prior to the creation of the State of Chhattisgarh, to the State Electricity Board of the State of Madhya Pradesh. The electricity generated by the Assessee in its captive power plants at Raigarh (Chhattisgarh) was primarily used by it for its own consumption in its manufacturing units; while the additional/ surplus electricity was supplied to the State Electricity Board. Assessee had entered into an agreement on 15th July, 1999 with the State Electricity Board as per which Assessee had supplied the surplus electricity to the State Electricity Board at the rate of ₹2.32 per unit. Thus, for the assessment year under consideration, the Assessee was paid at the rate of ₹2.32 per unit for the surplus electricity supplied to the State Electricity Board.

It was further noticed by the Assessing Officer that the Assessee had supplied power (electricity) to its industrial units for captive consumption at the rate of ₹3.72 per unit.

Assessing Officer took the view that the Assessee had declared inflated profits by showing supply of power at the rate of ₹3.72 per unit to its sister units i.e., for captive consumption. According to the Assessing Officer, there was no justification to claim electricity charge at the rate of ₹3.72 per unit for supply to its own industrial units when the Assessee was supplying power to the State Electricity Board at the rate of ₹2.32 per unit. Assessing Officer observed that the profit calculated by the Assessee (power generating units) at the rate of ₹3.72 per unit was not the real profit; the price per unit was inflated so that profit attributable to the power generating units could qualify for deduction from the taxable income under the Act. Thus, it was held to be a colourable device to reduce taxable income. On such an assumption, the Assessee was asked to explain its claim of deduction under Section 80IA of the Act which the Assessee complied with.

Response of the Assessee was considered by the Assessing Officer. By the assessment order dated 26th March, 2004 passed under Section 143(3) of the Act, the Assessing Officer held that ₹3.72 claimed by the Assessee as the rate at which power was supplied by it to its own industrial units was not the true market value. According to the Assessing Officer, the rate of ₹2.32 per unit agreed upon between the Assessee and the State Electricity Board and at which rate surplus electricity was supplied by the Assessee to the State Electricity Board was the market value of electricity. Therefore, for the purpose of computing the profit of the power generating units, the selling rate of power per unit was taken at ₹2.32. On that basis, Assessing Officer held that there was an excessive claim of deduction of ₹1.40 per unit on captive consumption (₹3.72 – ₹2.32), following which the Assessing Officer worked out the excess deduction claimed by the Assessee under Section 80IA at ₹31,98,66,505. Therefore, the Assessing Officer restricted the claim of deduction of the Assessee under Section 80IA at ₹48,11,72,000/- (₹80,10,38,505 – ₹31,98,66,505).

Aggrieved by the aforesaid reduction in the claim of deduction under Section 80IA of the Act, the Assessee preferred appeal before the Commissioner of Income Tax (Appeals), Rohtak (‘CIT (A)’). By the appellate order dated 16th May, 2005, CIT (A) confirmed the reduction of deduction under Section 80IA.

Assailing the order of CIT (A), Assessee preferred further appeal before the Income Tax Appellate Tribunal, Delhi (‘the Tribunal’). The Revenue also filed a cross appeal arising out of the same order before the Tribunal but on a different issue. The grievance of the Assessee before the Tribunal in its appeal was against the action of CIT (A) in affirming the reduction of deduction under Section 80IA of the Act made by the Assessing Officer.

In its order dated 7th June, 2007, the Tribunal noted that the dispute between the parties related to the manner of computing profits of the undertaking of the Assessee engaged in the business of generation of power for the purpose of relief under Section 80IA of the Act. The difference between the Assessee and the revenue was with regard to the determination of the market value of electricity per unit so as to compute the income accrued to the Assessee on supply made by it to its own manufacturing units. After referring to the provisions of Section 80IA of the Act, more particularly to Sub-section (8) of Section 80IA and also upon an analysis of the meaning of the expression “market value”, Tribunal came to the conclusion that the price at which electricity was supplied by the Assessee to the State Electricity Board could not be equated with the market value as understood for the purpose of Section 80IA(8) of the Act. In this regard, the Tribunal also analysed various provisions of the Electricity (Supply) Act, 1948 and the agreement dated 15th July, 1999 entered into between the Assessee and the State Electricity Board. Consequently, Tribunal was of the view that the stand of the revenue could not be approved thereafter it was held that the price recorded by the Assessee at ₹3.72 per unit, being the price at which the Electricity Board supplied electricity, was the market value for the purpose of Section 80IA(8) of the Act. Thus, the Tribunal upheld the stand of the Assessee and set aside the order of CIT (A) by directing the Assessing Officer to allow relief to the Assessee under Section 80IA as claimed.

Aggrieved by the aforesaid finding rendered by the Tribunal, revenue preferred appeal before the High Court of Punjab and Haryana under Section 260A of the Act. The High Court in its order dated 2nd September, 2008, disposed of the appeal by following its order dated 2nd September, 2008 passed in the connected ITA No. 544 of 2006 (Commissioner of Income Tax, Hisar vs. M/s. Jindal Steel and Power Ltd.). That was an appeal by the revenue on the same issue against the order dated 31st March, 2006, passed by the Tribunal in the case of the Assessee itself for the assessment year 2000-2001. Insofar as allowance of deduction under Section 80IA of the Act was concerned, the High Court answered the question against the revenue as it was submitted at the bar that the issue already stood covered by the previous decision against the revenue.

Aggrieved, Revenue filed appeal before the Supreme Court. The Supreme Court noted the provisions of section 80-IA, and adverting to Sub-section (1) observed that, where the gross total income of an Assessee includes any profits and gains derived from any business of an industrial undertaking or an enterprise which are referred to in Sub-section (4), referred to as eligible business, this Section provides that a deduction shall be allowed in computing the total income. Such deduction shall be allowed from the profits and gains of an amount which is equivalent to hundred percent of the profits and gains derived from such business for the first five assessment years as specified in Sub-section (2) and thereafter 25 per cent of the profits and gains for a further period of five assessment years. As per the proviso, if the Assessee is a company, then the benefit for the further five years would be 30 per cent instead of 25 per cent.

As per Sub-section (2), the deduction specified in Sub-section (1) may be claimed by the Assessee at its option for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park or generates power or commences transmission or distribution of power.

Adverting to Sub-section (4) of Section 80-IA, the Supreme Court observed that as per Sub-section (4) (iv), Section 80-IA is applicable to an industrial undertaking which is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period commencing on the 1st day of April 1993 and ending on the 31st day of March, 2003; and starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on the 1st day of April, 1999 and ending on the 31st day of March, 2003. Proviso below Clause (iv) says that such deduction shall be allowed only in relation to the profits derived from laying of such a network of new lines for transmission or distribution.

According to the Supreme Court, crucial to the issue under consideration was Sub-section (8) of Section 80-IA.

The Supreme Court noted that Sub-section (8) says that where any goods held for the purposes of the eligible business are transferred to any other business carried on by the Assessee or where any goods held for the purposes of any other business carried on by the Assessee are transferred to the eligible business but the consideration for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods as on the date of the transfer, then for the purposes of deduction under Section 80-IA, the profits and gains of such eligible business shall be computed as if the transfer had been made at the market value of such goods as on that date. The proviso says that if the Assessing Officer finds exceptional difficulties in computing the profits and gains of the eligible business in the manner specified in Sub-section (8), then in such a case, the Assessing Officer may compute such profits and gains on such a reasonable basis as he may deem fit. The explanation below the proviso defines “market value” for the purpose of Sub-section (8). It says that market value in relation to any goods means the price that such goods would ordinarily fetch on sale in the open market.

The Supreme Court observed that the expression “open market” was however not defined.

The Supreme Court also noted the relevant provisions of the Electricity (Supply) Act, 1948 (“the 1948 Act”), which was the enactment governing the field at the relevant point of time. As per Section 43 of the 1948 Act, the State Electricity Board was empowered to enter into arrangements for purchase or sale of electricity under certain conditions. Sub-section (1) says that the State Electricity Board may enter into arrangements with any person producing electricity within the State for purchase by the State Electricity Board on such terms as may be agreed upon of any surplus electricity which that person may be able to dispose of. Thus, what Sub-section (1) provides is that if any person who produces electricity has surplus electricity, he may dispose of such surplus electricity by entering into an arrangement with the State Electricity Board for supply of such surplus electricity by him and purchase thereof by the State Electricity Board.

Section 43A provides for the terms, conditions and tariff for sale of electricity by a generating company. It says that a generating company may enter into a contract for the sale of electricity generated by it with the State Electricity Board of the State in which the generating station owned or operated by the generating company is located or with any other person with the consent of the competent government.

As per Section 44, no person can establish or acquire a generating station or generate electricity without the previous consent in writing of the State Electricity Board. However, such an embargo would not be applicable to the Central Government or any corporation created by a central act or any generating company. As per Section 45, the State Electricity Board has been empowered to enter upon and shut down a generating station if the same is in operation contravening certain provisions of the 1948 Act.

The Supreme Court noted that since electricity from the State Electricity Board to the industrial units of the Assessee was inadequate, the Assessee had set up captive power plants to supply electricity to its industrial units. For disposal of the surplus electricity, the Assessee could not supply the same to any third-party consumer. Therefore, in terms of the provisions of Section 43A of the 1948 Act, the Assessee had entered into an agreement dated 15th July, 1999 with the State Electricity Board as per which, the Assessee had supplied the surplus electricity to the State Electricity Board at the rate of ₹2.32 per unit determined as per the agreement. Thus, for the assessment year under consideration, the Assessee was paid at the rate of ₹2.32 per unit for the surplus electricity supplied to the State Electricity Board. The Supreme Court also noted that the State Electricity Board had supplied power (electricity) to the industrial consumers at the rate of ₹3.72 per unit

According to the Supreme Court, there was no dispute that the Assessee or rather, the captive power plants of the Assessee are entitled to deduction under Section 80-IA of the Act. For the purpose of computing the profits and gains of the eligible business, which was necessary for quantifying the deduction under Section 80-IA, the Assessee had recorded in its books of accounts that it had supplied power to its industrial units at the rate of R3.72 per unit.

The Supreme Court observed that while the Assessing Officer accepted the claim of the Assessee for deduction under Section 80-IA, he, however, did not accept the profits and gains of the eligible business computed by the Assessee on the ground that those were inflated by showing supply of power to its own industrial units for captive consumption at the rate of ₹3.72 per unit. Assessing Officer took the view that there was no justification on the part of the Assessee to claim electricity charge at the rate of ₹3.72 for supply to its own industrial units when the Assessee was supplying surplus power to the State Electricity Board at the rate of ₹2.32 per unit. Finally, the Assessing Officer held that ₹2.32 per unit was the market value of electricity and on that basis, reduced the profits and gains of the Assessee thereby restricting the claim of deduction of the Assessee under Section 80-IA of the Act.

According to the Supreme Court, there was no dispute that the Assessee was entitled to deduction under Section 80-IA of the Act for the relevant assessment year. The only issue was with regard to the quantum of profits and gains of the eligible business of the Assessee and the resultant deduction under Section 80IA of the Act. The higher the profits and gains, the higher would be the quantum of deduction. Conversely, if the profits and gains of the eligible business of the Assessee is determined at a lower figure, the deduction under Section 80-IA would be on the lower side. Assessee had computed the profits and gains by taking ₹3.72 as the price of electricity per unit supplied by its captive power plants to its industrial units. The basis for taking this figure was that it was the rate at which the State Electricity Board was supplying electricity to its industrial consumers. Assessing Officer repudiated such a claim. According to him, the rate at which the Assessee had supplied the surplus electricity to the State Electricity Board i.e., ₹2.32 per unit, should be the market value of electricity. Assessee cannot claim two rates for the same good i.e., electricity. When it supplies electricity to the State Electricity Board at the rate of R2.32 per unit, it cannot claim R3.72 per unit for supplying the same electricity to its sister concern i.e., the industrial units. This view of the Assessing Officer was confirmed by the CIT (A).

The Supreme Court noted that the Tribunal had rejected such contention of the revenue which had been affirmed by the High Court.

The Supreme Court, reverting back to Sub-section (8) of Section 80-IA, observed that if the Assessing Officer disputes the consideration for supply of any goods by the Assessee as recorded in the accounts of the eligible business on the ground that it does not correspond to the market value of such goods as on the date of the transfer, then for the purpose of deduction under Section 80-IA, the profits and gains of such eligible business shall be computed by adopting arm’s length pricing. In other words, if the Assessing Officer rejects the price as not corresponding to the market value of such good, then he has to compute the sale price of the good at the market value as per his determination. The explanation below the proviso defines market value in relation to any goods to mean the price that such goods would ordinarily fetch on sale in the open market. Thus, as per this definition, the market value of any goods would mean the price that such goods would ordinarily fetch on sale in the open market.

But the expression “open market” was not a defined expression.

The Supreme Court noted that Black’s Law Dictionary, 10th Edition, defines the expression “open market” to mean a market in which any buyer or seller may trade and in which prices and product availability are determined by free competition. P. Ramanatha Aiyer’s Advanced Law Lexicon has also defined the expression “open market” to mean a market in which goods are available to be bought and sold by anyone who cares to. Prices in an open market are determined by the laws of supply and demand.

Therefore, according to the Supreme Court, the expression “market value” in relation to any goods as defined by the explanation below the proviso to Sub-section (8) of Section 80IA would mean the price of such goods determined in an environment of free trade or competition. “Market value” is an expression which denotes the price of a good arrived at between a buyer and a seller in the open market i.e., where the transaction takes place in the normal course of trading. Such pricing is unfettered by any control or Regulation; rather, it is determined by the economics of demand and supply.

Section 43A of the 1948 Act lays down the terms and conditions for determining the tariff for supply of electricity. The said provision makes it clear that tariff is determined on the basis of various parameters. That apart, it is only upon granting of specific consent that a private entity could set up a power generating unit. However, such a unit would have restrictions not only on the use of the power generated but also regarding determination of tariff at which the power generating unit could supply surplus power to the concerned State Electricity Board. Thus, determination of tariff of the surplus electricity between a power generating company and the State Electricity Board cannot be said to be an exercise between a buyer and a seller under a competitive environment or a transaction carried out in the ordinary course of trade and commerce. It is determined in an environment where one of the players has the compulsive legislative mandate not only in the realm of enforcing buying but also to set the buying tariff in terms of the extant statutory guidelines. Therefore, the price determined in such a scenario cannot be equated with a situation where the price is determined in the normal course of trade and competition. Consequently, the price determined as per the power purchase agreement cannot be equated with the market value of power as understood in the common parlance. The price at which the surplus power supplied by the Assessee to the State Electricity Board was determined entirely by the State Electricity Board in terms of the statutory Regulations and the contract. Such a price cannot be equated with the market value as is understood for the purpose of Section 80IA (8). On the contrary, the rate at which the State Electricity Board supplied electricity to the industrial consumers would have to be taken as the market value for computing deduction under Section 80IA of the Act.

Thus, on careful consideration, the Supreme Court was of the view that the market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity. It should not be compared with the rate of power sold to or supplied to the State Electricity Board since the rate of power to a supplier cannot be the market rate of power sold to a consumer in the open market. The State Electricity Board’s rate when it supplies power to the consumers have to be taken as the market value for computing the deduction under Section 80-IA of the Act.

That being the position, the Supreme Court held that the Tribunal had rightly computed the market value of electricity supplied by the captive power plants of the Assessee to its industrial units after comparing it with the rate of power available in the open market i.e., the price charged by the State Electricity Board while supplying electricity to the industrial consumers. Therefore, the High Court was fully justified in deciding the appeal against the revenue.

DEPRECIATION-EXERCISE OF OPTION TO ADOPT WRITTEN DOWN VALUE METHOD

The Assessee had purchased 25 MV turbines on and around 8th July, 1998 for the purpose of its eligible business. Assessee claimed depreciation on the said turbines at the rate of 25 per cent on WDV basis.

On perusal of the materials on record, the Assessing Officer held that in view of the change in the law with regard to allowance of depreciation on the assets of the power generating unit w.e.f. 1st April, 1997, the Assessee would be entitled to depreciation on the straight line method in respect of assets acquired on or after 1st April, 1997 as per the specified percentage in terms of Rule 5(1A) of the Income Tax Rules, 1962. Assessing Officer however noted that the Assessee did not exercise the option of claiming depreciation on WDV basis. Therefore, it would be entitled to depreciation on the straight line method. On that basis, as against the depreciation claim of the Assessee of ₹2,85,37,634/-, the Assessing Officer allowed depreciation to the extent of ₹1,59,10,047/-.

In the appeal before the CIT (A), the Assessee contended that the Assessing Officer had erred in limiting the allowance of depreciation on the turbines to ₹1,59,10,047/- as against the claim of ₹2,85,37,634/-. However, vide the appellate order dated 16th May, 2005, CIT (A) confirmed the disallowance of depreciation made by the Assessing Officer.

On further appeal by the Assessee before the Tribunal, vide the order dated 7th June, 2007, the Tribunal on the basis of its previous decision in the case of the Assessee itself for the assessment year 2000-2001 answered this question in favour of the Assessee.

When the matter came up before the High Court in appeal by the revenue under Section 260A of the Act, the High Court referred to the proviso to Sub-rule (1A) of Rule 5 of the Rules and affirmed the view taken by the Tribunal. The High Court held that there was no perversity in the reasoning of the Tribunal and therefore, the question raised by the revenue could not be said to be a substantial question of law.

The Supreme Court noted that Rule 5 provides for the method of calculation of depreciation allowed under Section 32(1) of the Act. It says that such depreciation of any block of assets shall be allowed, subject to provisions of Sub-rule (2), as per the specified percentage mentioned in the second column of the table in Appendix-I to the Rules on the WDV of such block of assets as are used for the purposes of the business or profession of the Assessee during the relevant previous year.

As per Sub-rule (1A), the allowance under Clause (i) of Sub-section (1) of Section 32 of the Act in respect of depreciation of assets acquired on or after the 1st day of April, 1997 shall be calculated at the percentage specified in the second column of the table in Appendix-IA to the Rules. As per the first proviso, the aggregate depreciation of any asset should not exceed the actual cost of that asset. The second proviso says that the undertaking specified in Clause (i) of Sub-section (1) of Section 32 of the Act may instead of the depreciation specified in Appendix-IA may opt for depreciation under Sub-rule (1) read with Appendix-I but such option should be exercised before the due date for furnishing the return of income under Sub-section (1) of Section 139 of the Act. The last proviso clarifies that any such option once exercised shall be final and shall apply to all the subsequent assessment years.

The Supreme Court observed that in the instant case, there was no dispute that the Assessee had claimed depreciation in accordance with Sub-rule (1) read with Appendix-I before the due date of furnishing the return of income. The view taken by the Assessing Officer as affirmed by the first appellate authority that the Assessee should opt for one of the two methods was not a statutory requirement. Therefore, the revenue was not justified in reducing the claim of depreciation of the Assessee on the ground that the Assessee had not specifically opted for the WDV method.

The Supreme Court agreed with the view expressed by the Tribunal and the High Court that there is no requirement under the second proviso to Sub-rule (1A) of Rule 5 of the Rules that any particular mode of computing the claim of depreciation has to be opted for before the due date of filing of the return. All that is required is that the Assessee has to opt before filing of the return or at the time of filing the return that it seeks to avail the depreciation provided in Section 32 under the Sub-Rule (1) of Rule 5 read with Appendix-I instead of the depreciation specified in Appendix-1A in terms of Sub-rule (1A) of Rule 5 which the Assessee had done. According to the Supreme Court there was no merit in the question proposed by the revenue. The same is therefore answered in favour of the Assessee and against the revenue.

56 Shah Originals vs. Commissioner of Income Tax-24, Mumbai

(2024) 459 ITR 385 (SC)

Export profits – Deduction under section 80HHC — The gain from foreign exchange fluctuations from the EEFC account does not fall within the meaning of “derived from” the export of garments by the Assessee — The profit from exchange fluctuation is independent of export earnings and could not be considered for computing deduction under section 80HHC.

The Assessee, a 100 per cent Export-Oriented Unit (EOU), filed its return of income for the assessment year 2000-01 declaring the total taxable income at ₹28,25,080/-. The Assessee for the relevant assessment year had export turnover at ₹8,27,15,688/-. The said turnover included an amount of ₹26,62,927/- being gains on accounts of foreign currency fluctuations in the assessment year 2000-01. The Assessee treated the said earning from foreign currency as income earned by the Assessee in the course of its export of goods/ merchandise out of India, i.e., profits of business from exports outside India. The Assessee claimed deduction under Section 80HHC of the Income Tax Act.

The Assessing Officer (AO), by the assessment order dated 10th February, 2006, disallowed the deduction claim of ₹26,62,927/- and added it to the Assessee’s taxable income. According to the AO, the gain/ profit on account of foreign currency fluctuations in the Exchange Earners Foreign Currency (EEFC) account could not be attributed as an earning from the export of goods/ merchandise outside India by the Assessee. The Assessee had completed the export obligations and received the foreign exchange remittances from the buyers / importers of the Assessee’s goods. The credit of the foreign currency in the EEFC account and positive fluctuation at the end of the financial year could not be treated as the Assessee’s income/ receipt from the principal business, i.e., export of goods and merchandise outside India. The AO noted that the Reserve Bank Notification No. FERA.159/94-RB dated 1st March, 1994 permitted foreign exchange earners to open and operate an EEFC account by crediting a percentage of foreign exchange into the account. The guidelines issued in continuation of the Notification dated 1st March, 1994 allow the units covered by the notification to credit twenty-five per cent or as permitted, in the EEFC accounts and operate in foreign currency. In other words, the credit of foreign exchange to the EEFC account facilitated the foreign exchange earners to use the foreign currency in the EEFC account depending upon the business necessities of the exporter.

The AO observed that the Assessee received the foreign exchange remittances and credited the foreign exchange in the EEFC account. At the end of the financial year, the convertible foreign exchange value was reflected in the Assessee’s balance sheet. The Assessee had gained/ earned from the fluctuation in foreign currency credited to its EEFC account. The AO was therefore of the view that the maintenance of an EEFC account was neither necessary nor incidental in any manner to the export activity of the Assessee. Crediting remittances or maintaining a balance in an EEFC account was akin to any deposit held by an Assessee in the Indian Rupee. The Assessee was not entitled to the deduction under Section 80HHC because gains from foreign currency fluctuation were not profit derived from exporting goods / merchandise outside India.

The Assessee, aggrieved by the disallowance, filed an appeal before the Commissioner of Income Tax (Appeals), who dismissed the Assessee’s appeal by the order dated 21st November, 2006.

The Assessee filed further appeal before the Income Tax Appellate Tribunal, Mumbai. On 25th October, 2007, the Appellate Tribunal. By an order dated 25th October, 2007, the Tribunal set aside the disallowance of the deduction claimed under Section 80HHC of the Act of the gains earned on account of foreign exchange fluctuations.

The Revenue filed an appeal under Section 260A of the Act. The appeal at the instance of Revenue was allowed by the High Court, resulting in restoring the disallowance of the deduction under Section 80HHC of the Act.

The Assessee filed an appeal before the Supreme Court.

According to the Supreme Court, the following question fell for its consideration: “whether the gain on foreign exchange fluctuation in the EEFC account of the Assessee partakes the character of profits of the business of the Assessee from exports and can the gain be included in the computation of deduction under profits of the business of the Assessee under Section 80HHC of the Act?”

The Supreme Court observed that Section 80HHC provides for the deduction of profits the Assessee derives from exporting such goods/merchandise. The operation of Section 80HHC is substantially dependent on two sets of expressions, viz., (a) is engaged in the business of export outside India of any goods/merchandise; (b) a deduction to the extent of profits defined in Sub-section (1B) derived by the Assessee from the export of such goods / merchandise.

The Supreme Court, after noting the construction/ interpretation of the expression “derived from” adopted by it and by few High Courts, observed that the expressions “derived from” and “since” are used in multiple instances in the Act. Unless the context does not permit, the construction of the expression “derived from” must be consistent.

According to the Supreme Court, in interpreting Section 80HHC, the expression “derived from” has a deciding position with the other expression viz., “from the export of such goods or merchandise”. While appreciating the deduction claimed as profits of a business, the test is whether the income/ profit is derived from the export of such goods/ merchandise.

The Supreme Court observed that the relevant words in Section 80HHC of the Act, are, “derived by the Assessee from the export of such goods or merchandise”, and in the background of interpretation given to the said expression by it in catena of cases, the Section enables deduction to the extent of profits derived by the Assessee from the export of such goods and merchandise and none else.

The Supreme Court observed that the policy behind the deductions of profits from the business of exports was to encourage and incentivise export trade. Through Section 80HHC, the Parliament restricted the deduction of profit from the Assessee’s export of goods/ merchandise. According to the Supreme Court, the interpretation now suggested by the Assessee would add one more source to the sources stated in Section 80HHC of the Act. Such a course was impermissible. The strict interpretation was in line with a few relative words, namely, manufacturer, exporter, purchaser of goods, etc. adverted to in Section 80HHC of the Act. From the requirements of Sub-sections (2) and (3) of Section 80HHC, it should be held that the deduction was intended and restricted only to profits of the business of export of goods and merchandise outside India by the Assessee. Therefore, including other income as an eligible deduction would be counter-productive to the scope, purpose, and object of Section 80HHC of the Act.

By applying the meaning of the words “derived from”, as held in the catena of cases, the Supreme Court was of the view that profits earned by the Assessee due to price fluctuation, in the facts and circumstances of this case, could not be included or treated as derived from the business of export income of the Assessee.

The Supreme Court concluded that the gain from foreign exchange fluctuations from the EEFC account does not fall within the meaning of “derived from” the export of garments by the Assessee. The profit from exchange fluctuation is independent of export earnings.

The Supreme Court consequently dismissed the appeal.

BCAJ Admin

Section 254(2): Misc Application — mistakes in the order — No opportunity given to assessee to argue alleged violation of rule 46A — In interest of justice matter remanded to CIT(A)

28 Pravir Polymers Private Limited vs. Income Tax Officer 15(2)(4) and Ors.

Writ Petition No. 2440 of 2023 (Bom.) (HC)

Date of Order: 18th December, 2023

[ITAT order dated 21st November, 2022 in MA No. 178/MUM/2022 and MA No. 179/ MUM/2022 for Assessment Years 2011-2012]

Section 254(2): Misc Application — mistakes in the order — No opportunity given to assessee to argue alleged violation of rule 46A — In interest of justice matter remanded to CIT(A).

The two misc. applications were filed by petitioner (assessee) seeking recall of an order dated 29th April, 2022 passed by the ITAT in ITA No. 2595/MUM/2019 along with Cross Objection No. 103/MUM/2021. Following are the mistakes that were alleged to be apparent on record in the impugned order:

“I. Violation of Rule 46A of the Rules: The Revenue had neither raised the violation of the Rule 46A in the grounds of appeal, nor was it argued by the revenue, nor an opportunity was given to the appellant to explain the case there by violating the principle of natural justice.

Without prejudice to the above, If Department has raised the violation of Rule 46A, the respondent would have made an application before the Appellate Tribunal to admit the additional evidence.

II. Sufficient Opportunity of Hearing : The Assessing Officer has not given sufficient opportunity of hearing (Page 51) of paper book I) hence supplementary papers were filed before the CIT(A). Therefore, there is no violation of Rule 46A.

III. Not dealt with the cases relied on by the Applicant: The Hon’ble Tribunal has not dealt with the decision of the Hon’ble Supreme Court, Jurisdictional High Court and Jurisdictional Tribunal, inter alia which were relied on by the Applicant at the time of hearing.

IV. Non-compliance of Daily Order: Direction of the Hon’ble Tribunal via daily Order dated January 24, 2022 to the Departmental Representative to produce information/document to ascertain as to why the assessment was made under section 148 read with section 143(3) of the Act; The same was not complied by the Departmental Representative.”

The misc. applications came to be rejected by the the ITAT, as regards the alleged violation of Rule 46A of the Income Tax Rules, 1962 (the Rules) ITAT has observed that during the course of the hearing before the ITAT, the authorised representative of the assessee was asked whether the assessee could appear before the learned Commissioner of Income Tax (Appeals) [CIT(A)] or the Assessing Officer in case the matter was restored but the counsel of the assessee did not accept that suggestion because according to the assessee’s representative it was not possible for the assessee to produce the parties, from whom the assessee is alleged to have obtained unsecured loans, before the Assessing Officer or the learned CIT(A).

The Assessee contended that it was not within the power of the assessee to produce third parties before the Income Tax officer. If the officer feels presence of certain parties are required for him to probe the matter further or go behind the entries made by the assessee in its books of accounts, the Assessing Officer should exercise his powers under Section 131 of the Act by issuing a summons to those parties. Of course the assessee would provide the address as the assessee may have as on date and also co-operate in tracking those third parties.

As a background, against the Assessing Officer’s order, petitioner had preferred an appeal before the CIT(A). During the proceedings before the CIT(A), the assessee tendered certain documents. Dept contended that the CIT(A), at that stage, should have followed the procedure prescribed under Rule 46A of the Rules, forwarded a copy of those documents to the Assessing Officer and called for a remand report. Instead of calling for such a remand report, the CIT(A) proceeded to consider those documents and passed an order in favour of the assessee. In effect it is the department who is more affected by the CIT(A) not following the procedure prescribed under Rule 46A of the Rules.

The Assessee submitted that no such issue was raised by the Revenue in its grounds of appeal nor an opportunity was given to the assessee to explain the case of violation of principles of natural justice.

The Hon. Court observed that the assessee had relied on certain documents before the CIT(A) whereas the CIT(A) did not follow the procedure prescribed under Rule 46A of the Rules and call for a remand report. Thus instead of making the parties to go back and forth or devoting precious judicial time including in the appeals that have been filed by petitioner against the order dated 29th April, 2022 passed by the ITAT, interest of justice would be meet if the matter is remanded to the CIT(A) for denovo consideration.

The CIT(A) shall follow the procedure as prescribed under Rule 46A of the Rules and may also exercise all powers that he has under the Act to summon third parties to appear before him and record their statements. After hearing the parties, the CIT(A) may pass such orders, as he deems fit, in accordance with law.

In view of the above, the order dated 29th April, 2022 passed by the ITAT in ITA No. 2595/MUM/2019 alongwith Cross Objection No. 103/MUM/2021 for Assessment Years 2011–2012 and also the impugned order dated 21st November, 2022 were quashed and set aside.

BCAJ Admin

Sec 271(1)(c) — Penalty — Mistake while uploading the return — no intention of furnishing any inaccurate particulars or concealment of income

27 Pr. Commissioner of Income Tax-13 vs. Pinstorm Technologies Pvt Ltd.

ITXA NO. 1117 of 2018 (Bom) (HC)

A.Y.: 2010-11

Date of Order: 20th December, 2023

Sec 271(1)(c) — Penalty — Mistake while uploading the return — no intention of furnishing any inaccurate particulars or concealment of income.

The following substantial question of law was proposed:

“Whether on the facts and circumstances and in law, the Hon’ble ITAT erred in appreciating the fact that the error on the part of the assessee was detected during the course of assessment proceeding u/s. 143(3) of the Act on scrutiny by the AO, failing which the error would not had surfaced and therefore, levy of penalty, as a deterrent, was justified and taking any lenient view would encourage the assessee to perpetuate such mistakes?”

The Respondent (assessee) filed the return of income on 14th February, 2012 for A.Y. 2010-2011 declaring loss of ₹16,10,43,542. During the course of assessment, the Assessing Officer (AO) observed that certain expenses which were not allowable expenses under the Act were not added back to the total income in the computation of income to the tune of ₹13,11,45,849. The AO also observed that disallowance of such expenses has been mentioned by the auditors in the tax audit report furnished by assessee. The AO, therefore, disallowed the said expenses of ₹13,11,45,849 and added the same back to the total income of the assessee. During the scrutiny assessment u/s. 143(3) which was completed on 28th February, 2013, a loss of ₹1,81,57,433 was determined.

Subsequently, penalty proceedings were initiated and notice was issued u/s. 274 r.w.s 271 of the Act for concealing/ furnishing inaccurate particulars of income. Assessee responded to the notice and the stand of assessee was that while filing the return electronically, certain disallowances were not properly entered in the column of disallowances and accordingly it showed a loss. Before the Income Tax Appellate Tribunal (ITAT), affidavit of Managing Director of the assessee was filed stating that return was filed by the then CFO Mr. Sudesh Vaidya and the said Mr. Vaidya has since left the company and migrated to United Kingdom, it is assessee’s case that the CFO made an inadvertent error of not considering the disallowances which were mentioned in the tax audit report while uploading the return of income. It was also submitted that the return of income was filed belatedly and, therefore, the same cannot be revised. It was further asserted that even after the subject disallowances, the return of income showed a loss of return and due to delay in filing the return, even the loss could not be carried forward. Therefore, the mistake was not intentional or deliberate and the penalty proceedings were dropped.

The Dept pointed out that the Commissioner of Income Tax (Appeals) (CIT(A)), has made a factual finding that the tax audit report was not filed. The Hon. High court observed that there was an error in such a finding because the AO has accepted that the tax audit report was filed. In fact, even in this appeal in the facts of the case narrated, it is admitted in paragraph 3.1 that the tax audit report was furnished by the assessee.

The Hon. High further court further observed that ITAT has come to a factual finding that there is no intention on the part of assessee to conceal the income or furnish inaccurate particulars of income. It has also accepted the explanation that the CFO was entrusted with the filing of return and the CFO made a mistake in not properly uploading the return by filling up the return with the disallowances which were already reported by the auditors in the tax audit report. The ITAT has come to a factual finding that there was no intention of furnishing any inaccurate particulars or concealment of income as the facts undoubtedly suggest so. The Hon. Court relied on the decision of Apex Court in the case of Price Waterhouse Coopers Pvt Ltd. vs. Commissioner of Income Tax & Anr (2012) 348 ITR 306(SC).

The Hon. Court held that it was only a mistake while uploading the return of income in the given facts and circumstances of the case. The Dept appeal was dismissed.

BCAJ Admin

Refund — Assessment — Limitation — Change in law — Remand by Tribunal — AO failing to give effect to remand order of Tribunal within prescribed time — Assessment barred by limitation — Refund in terms of declared income to be granted with interest

79 Aricent Technologies (Holdings) Ltd. vs. ACIT

[2023] 458 ITR 578 (Del)

A.Ys.: 2006–07 and 2007–08

Date of Order: 27th February, 2023

Ss. 153(3), 237 and 254 of ITA 1961

Refund — Assessment — Limitation — Change in law — Remand by Tribunal — AO failing to give effect to remand order of Tribunal within prescribed time — Assessment barred by limitation — Refund in terms of declared income to be granted with interest.

The assessee filed an appeal before the Tribunal against the order passed u/s. 143(3) read with section 144C(13) for the A.Y. 2007–08 against the entity FSS which had since amalgamated with the assessee. By an order dated 7th January, 2016, the Tribunal partly deleted the disallowance of the project expenses, the disallowance of deduction claimed u/s. 10B and the transfer pricing adjustment of corporate charges and remanded the matter to the Assessing Officer. Pursuant to the order dated 7th January, 2016 passed by the Tribunal, the Transfer Pricing Officer passed an order dated 24th January, 2017. However, the Assessing Officer did not pass any final order.

The Assessee filed writ petition contending that the amount of refund for the A.Y. 2006–07 due to FSS which was amalgamated with the assessee be refunded with applicable interest on the ground that the assessment for the A.Y. 2007–08 was barred by limitation. The Delhi High Court allowed the writ petition and held as under:

“i) Section 153 of the Income-tax Act, 1961 was amended by the Finance Act, 2017 with retrospective effect from June 1, 2016 and in sub-section (3) thereunder the provision regarding limitation for making an assessment pursuant to any order passed by the Tribunal u/s. 254 was included.

ii) Passing a fresh assessment order pursuant to the Tribunal’s order dated January 7, 2016, was barred by limitation under the provisions of section 153(3) and 153(4) and the income as returned by the amalgamated company FSS for the A.Y. 2007–08 would stand accepted. Consequently, any adjustment that would be made against the refund due to FSS for the A.Y. 2006–07 was not sustainable. Therefore, the amount which was due to FSS as refund for the A.Y. 2006–07 was to be refunded to the assessee with applicable interest.”

BCAJ Admin

Refund of tax deducted at source — Payment to non-resident after deducting withholding tax — Refund to the person who made payment and has borne withholding tax — Amount wrongly deducted to be refunded if the person receiving payment not claimed credit therefor — Payee not claiming credit — Assessee deductor to be refunded the amount with interest

78 Grasim Industries Ltd. vs. ACIT

[2023] 458 ITR 1 (Bom.)

A.Ys.: 1990-91 and 1991-92

Date of Order: 1st September, 2023

Ss. 92CA, 144C and 153 of ITA 1961

Refund of tax deducted at source — Payment to non-resident after deducting withholding tax — Refund to the person who made payment and has borne withholding tax — Amount wrongly deducted to be refunded if the person receiving payment not claimed credit therefor — Payee not claiming credit — Assessee deductor to be refunded the amount with interest.

The assessee entered into a foreign technical collaboration agreement with one M/s. D wherein D agreed to render to the assessee outside India certain engineering and other related services in relation to the project set up for Gas based plant in India. The assessee also entered into supervisory agreement with D to provide supervisory services in India. Under the agreement with D, D had agreed to deliver to the assessee necessary design, drawing, data with respect to the sponge iron plant outside India. D also agreed to train outside India certain employees of the assessee so as to make available to the such employees technical information, scientific knowledge, expertise, etc. for the commissioning, operation and maintenance of the plant. The consideration agreed was a sum of US$ 1,62,31,000 net of tax and it was agreed that any withholding tax required to be deducted will be borne by the assessee and D would be paid a net amount of US$ 1,62,31,000. The assessee sought permission from the AO to make remittance to D without deduction of tax at source. However, the AO held that the amount payable to D was taxable as income in India and the assessee was required to deduct tax at source and deposit the tax with the Income-tax Department. The assessee paid under protest a sum of ₹2,73,73,084 and ₹2,81,83,272 as withholding tax on account of two installments of payments made to D. The assessee claimed that since the withholding tax was borne by the assessee and the payment made to D was not chargeable to tax, the assessee would be entitled to refund.

In the return of income filed by D for A.Ys. 1990–91 and 1991–92, D declared NIL income on the ground that the income received by D neither accrued in India nor received in India therefore not chargeable to tax in India. However, in the assessment of D, it was held that amount received by D under the agreement was chargeable to tax in India and accordingly the withholding tax deducted by the assessee was adjusted towards D’s tax liability. The assessee along with D filed a petition before the Bombay High Court challenging, inter alia, the assessment order and the taxability of the amount received by D under the agreement. Vide order dated 5th May, 2010, the Court held that the assessment orders subjecting the amount received by D under the agreement to tax was not correct and the Department was directed to pass a fresh assessment order excluding the income received by D.

Subsequently, the assessee made a request to the AO to pass an order giving effect to the order of the High Court. Reminder letters were sent to the AO time and again. However, there was no action by the AO. Vide order dated 24th August, 2012, the AO refused to give effect to the order of Bombay High Court holding that the assessee was not entitled to the refund of withholding tax deposited by the assessee as the tax was deducted on behalf of D and therefore no effect could be given in the hands of the assessee.

Therefore, the assessee, by way of writ petition, approached the Bombay High Court. The High Court allowed the petition and held as follows:

“i) Section 248 of the Act, amended by the Finance Bill, 2007 ([2007] 289 ITR (St.) 122), envisages and deals with a situation where a refund could be made to the person by whom the income was payable and who has borne the withholding tax. The amount wrongly deducted or paid to the Revenue authorities where it was not required to be paid would become refundable to the assessee. This is subject to the condition that the person receiving the payment had not claimed credit therefor.

ii) For over 13 years neither D nor its successor-in-interest had claimed any amount from the Revenue but had issued its no objection to the Department making the refund to the assessee. The assessee would be entitled to credit of any tax deducted at source both by the banks and the Department while depositing the amounts with the Prothonotary and Senior Master, High Court, Bombay giving effect to the order of this court by arriving at net amount refundable for the A.Ys. 1990–91 and 1991–92 and after deducting tax at source for the A.Ys. 1990–91 and 1991–92. The amounts having been deposited with Prothonotary and Senior Master, High Court, Bombay, the Prothonotary and Senior Master shall foreclose the fixed deposit and pay over the amount including interest to the assessee.”

BCAJ Admin

Reassessment — Notice after three years — Validity — New procedure — Income chargeable to tax — Gross receipt of sale consideration not income chargeable to tax — Notice issued treating gross receipt on export transaction as asset which had escaped assessment — Not sustainable

77 Nitin Nema vs. Principal CCIT

[2023] 458 ITR 690 (MP)

A.Y.: 2016–17

Date of Order: 16th August, 2023

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

Reassessment — Notice after three years — Validity — New procedure — Income chargeable to tax — Gross receipt of sale consideration not income chargeable to tax — Notice issued treating gross receipt on export transaction as asset which had escaped assessment — Not sustainable.

Words and phrases — “Income” — “Income chargeable to tax” — Distinction.

For the A.Y. 2016-17, reassessment proceedings were initiated against the assessee on the ground that the assessee had sold 16 scooters and earned ₹72,05,084 which had escaped assessment. The Assessee filed a writ petition challenging the order passed u/s. 148A(d) and the consequential notice issued u/s. 148 of the Act claiming that the income mentioned in the order and the notice was not subject to income tax. What was stated therein was the gross sale consideration and on sale of 16 scooters. The assessee submitted that this income was not subject to tax and therefore sections 148A(d) and 148 did not apply.

The Madhya Pradesh High Court allowed the writ petition and held as follows:

“i) The expression “income chargeable to tax” is not defined in the Income-tax Act, 1961. However, the provisions with respect to computation of business income make clear that the definitions of the expressions “income” and “income chargeable to tax” are at variance with each other. The expression “income” is inclusively defined u/s. 2(24) whereas “income chargeable to tax” denotes an amount which is less than “income”. The “income chargeable to tax” is arrived at after deducting from “income” the permissible deductions under the Act. Therefore, the quantum of “income” is invariably more than “income chargeable to tax”.

ii) The Department had failed to understand the fundamental difference between sale consideration and income chargeable to tax. It had relied upon sections 2(24), 14, 28 and 44AD to emphasize the expression “income”. Neither the notice u/s. 148A(b) nor the order u/s. 148A(d), nor the consequential notice u/s. 148 stated that the income alleged to have escaped assessment included land or buildings or shares or equities or loans or advances. The assessee had filed a reply to the notice u/s. 148A(b) wherein it had submitted that the amount of ₹72,05,084 was the gross receipt of sale consideration of 16 scooters which meant that the amount of ₹72,05,084 was the total sale consideration receipt of the transaction in question, and not income chargeable to tax which would obviously be less than such amount. With the reply the assessee had also furnished the details of items sold and payment receipts, computation of total income and the computation of tax on total income and had submitted these to the Assessing Officer before the passing of the order u/s. 148A(b). There was nothing stated in the provisions of section 148, 148A or 149 which could prevent the assessee from taking advantage of these provisions merely because of his failure to file return of income.

iii) Consequently, this petition stands allowed. The impugned order dated March 25, 2023 u/s. 148A(d) of the Income-tax Act vide annexures P-3 and P-4 are quashed. The notice dated March 25, 2023 vide annexure P-5 u/s. 148 issued by the Income-tax Officer, Ward 1(1), Jabalpur is quashed. However, the Department is at liberty to invoke the provisions of section 148A in accordance with law.”

BCAJ Admin

Reassessment – Notice – Sanction of competent authority :- (a) New procedure – Extension of time limits by 2020 Act – Effect of Supreme Court decision in UOI vs. Ashish Agarwal (2022) 444 ITR 1 (SC) – Notices for reassessment issued after 31st March, 2021 u/s. 148 converted into notice deemed to be issued u/s. 148A(b) – Notices do not relate back to original date – Sanction of specified authority to be obtained in accordance with law existing when sanction obtained; (b) Jurisdictional requirement – Notice for A.Y. 2016-17 issued after April 2021 – More than three years elapsing – Approval to be obtained from Principal Chief Commissioner – Approval taken of Principal Commissioner – Notice issued without sanction of correct authority invalid – CBDT instructions for issue of re-assessment notice between 1st April, 2020 and 30th June, 2021 not applicable – Order and notice quashed

76 Siemens Financial Services Pvt. Ltd. vs. DCIT

[2023] 457 ITR 647 (Bom.)

A.Y.: 2016–17

Date of Order: 25th August, 2023

Ss. 147(1), 148, 148A(d), 149(1)(b), 151(i) and 151(ii) of ITA 1961

Reassessment — Notice — Sanction of competent authority :— (a) New procedure — Extension of time limits by 2020 Act — Effect of Supreme Court decision in UOI vs. Ashish Agarwal (2022) 444 ITR 1 (SC) — Notices for reassessment issued after 31st March, 2021 u/s. 148 converted into notice deemed to be issued u/s. 148A(b) — Notices do not relate back to original date — Sanction of specified authority to be obtained in accordance with law existing when sanction obtained; (b) Jurisdictional requirement — Notice for A.Y. 2016-17 issued after April 2021 — More than three years elapsing — Approval to be obtained from Principal Chief Commissioner — Approval taken of Principal Commissioner — Notice issued without sanction of correct authority invalid — CBDT instructions for issue of re-assessment notice between 1st April, 2020 and 30th June, 2021 not applicable — Order and notice quashed.

Reassessment — No power to review assessment — Assessee providing relevant information — AO considered the information before passing assessment order and allowed deduction of expenditure on software consumables as revenue expenditure — Re-assessment by the AO to treat the expenditure as capital expenditure — Change of opinion — Order for issue of notice and consequent notice to be quashed.

The assessee, a NBFC, filed its return of income for A.Y. 2016–17 declaring total income of ₹44,92,46,370. Subsequently, the return of income was revised declaring total income of ₹50,67,32,580. The assessee’s case was selected for scrutiny. During the course of assessment, the assessee submitted a transaction-wise summary of expenditure on software consumables. On 23rd December, 2018, assessment order u/s. 143(3) of the Income-tax Act, 1961 was passed without any adjustment to the total income reported in the revised return. On 25th June, 2021, almost after 3 years, notice u/s. 148 of the Act was issued stating that there was reason to believe that assessee’s income for A.Y. 2016–17 has escaped assessment within the meaning of section 147 of the Act. Vide letter dated 22nd July, 2021, the assessee replied to the AO that the notice had been issued under the old provisions of the Act and that after 1st April, 2021, the AO should issue notice as per the amended provisions of the Act. The assessee thus requested the AO to drop the proceedings. Thereafter, the AO issued a notice dated 26th November, 2021 u/s. 142(1) which was replied to by the assessee. Subsequently, the AO issued a letter / show cause notice dated 31st May, 2022 u/s. 148A(b) of the Act wherein the earlier notice dated 25th June, 2021 issued u/s. 148 of the Act and the judgment of the Supreme Court in the case of UOI vs. Ashish Agarwal were referred and the AO stated that notice issued u/s. 148 of the Act be deemed to be issued u/s. 148A(b) of the Act. The AO relied upon the information and material which was annexed with the show cause notice to suggest that income chargeable to tax escaped assessment and also relied upon the approval of the competent authority which was attached with the show cause notice. In response to the show cause notice, the assessee made submissions vide letters dated 9th September, 2022 and 7th July, 2022. Vide order dated 31st July, 2022 passed u/s. 148A(d), the AO rejected the submissions and issued an intimation letter for issue of notice u/s. 148 of the Act and thereafter issued notice dated 31st July, 2022 u/s. 148 of the Act.

The assessee filed writ petition before the Bombay High Court challenging the impugned show cause notice dated 31st May, 2022, the order dated 31st July, 2022 passed u/s. 148A(d) of the Act and the notice dated 31st July, 2022 u/s. 148 of the Act. The Bombay High Court allowed the petition and held as follows:

“(i) The findings of the Bombay High Court in Tata Communications Transformation Services Ltd. v. Asst. CIT [2022] 443 ITR 49 (Bom) (to the effect that section 3(1) of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 does not provide that any notice issued u/s. 148 of the Income-tax Act, 1961 after March 31, 2021 will relate back to the original date such that the provision as existing on such date will be applicable to notices issued relying on the provision of the 2020 Act) have not been disturbed by the Supreme Court in UOI v. Ashish Agarwal [2022] 444 ITR 1 (SC). The Supreme Court only modified the orders passed by the respective High Courts to the effect that the notices issued under section 148 of the Act which were subject matter of writ petitions before various High Courts shall be deemed to have been issued u/s. 148A(b) of the Act and the Assessing Officer was directed to provide within 30 days to the respective assessee the information and material relied upon by the Department so that the assessee could reply to the show-cause notices within two weeks thereafter. The Supreme Court held that the Assessing Officer shall thereafter pass orders in terms of section 148A(d) in respect of each of the concerned assessees. Thereafter, after following the procedure as required u/s. 148A may issue notice u/s. 148 (as substituted). The Supreme Court also expressly kept open all contentions which may be available to the assessee including those available u/s. 149 of the Act and all rights and contentions which may be available to the concerned assessee and Department under the Finance Act, 2021 and in law, shall be continued to be available. Even by the finding of the Supreme Court in Ashish Agarwal, only the original notice issued u/s. 148 of the Act was converted into a notice deemed to have been issued u/s. 148A(b) of the Act. The judgment in Ashish Agarwal does not anywhere indicate the notices that could be issued for eternity would be sanctioned by an authority other than the sanctioning authority defined under the Act.

ii) The 2020 Act only seeks to extend the period of limitation and does not affect the scope of section 151. The Assessing Officer cannot rely on the provisions of 2020 Act and the notifications issued thereunder as section 151 has been amended by the Finance Act, 2021 and the provisions of the amended section would have to be complied with by the Assessing Officer, with effect from April 1, 2021. Hence, the Assessing Officer cannot seek to take the shelter of 2020 Act as a subordinate legislation cannot override any statute enacted by Parliament. Further, the notification extending the dates from March 31, 2021 till June 30, 2021 cannot apply once the Finance Act, 2021 is in existence. The sanction of the specified authority has to be obtained in accordance with the law existing when the sanction is obtained. It is not open to the Central Board of Direct Taxes to clarify that the law laid down by the Supreme Court means that the extended reassessment notices will travel back in time to their original date when such notices were to be issued and, then, the new section 149 of the Act is to be applied. The 2020 Act does not envisage travelling back of any notice.

iii) The approval for issuance of notice u/s. 148A(d) of the Act had not been properly obtained because:

‘(a) the petition related to the A.Y. 2016-17, and as the order and notice were issued beyond the period of three years which elapsed on March 31, 2020 the approval as contemplated in section 151(ii) of the Act would have to be obtained which had not been done by the Assessing Officer. The approval had been taken of the Principal Commissioner who was not the specified authority u/s. 151 of the Act. The sanction was required to be obtained by applying the amended section 151(ii) of the Act and since the sanction had been obtained in terms of section 151(i) of the Act, the order and notice are bad in law and should be quashed and set aside.

(b) even assuming that it is held that these notices travel back to the date of the original notice issued on June 25, 2021, the approval of the Principal Chief Commissioner should have to be obtained in terms of section 151(ii) of the Act as a period of three years from the end of the relevant assessment year ended on March 31, 2020 for the A.Y. 2016–17.

(c) Instructions dated May 11, 2022 ([2022] 444 ITR (St.) 43) had no applicability to the facts of this case because they expressly provided that they applied only to the issue of reassessment notice issued by the Assessing Officer during the period beginning April 1, 2020 and ending with June 30, 2021 within the time extended under 2020 Act and various notifications issued thereunder.

(d) since the approval of the specified authority in terms of section 151(ii) of the Act was a jurisdictional requirement and in the absence of compliance with this requirement, the reopening of assessment would fail.’

iv) It is settled law that proceedings u/s. 148 cannot be initiated to review the stand earlier adopted by the Assessing Officer. The Assessing Officer cannot initiate reassessment proceedings to have a relook at the documents that were filed and considered by him in the original assessment proceedings as the power to reassess cannot be exercised to review an assessment. If the change of opinion concept is given a go by, that would result in giving arbitrary powers to the Assessing Officer to reopen assessments. It would in effect be giving power to review which he does not possess. The Assessing Officer has only power to reassess not to review. The concept of change of opinion is an in-built test to check abuse of power by the Assessing Officer.

v) The Assessing Officer did not have any power to review his own assessment when during the original assessment the assessee had provided all the relevant information and the Assessing Officer had considered it before passing the assessment order u/s. 143(3) of the Act dated December 23, 2018. The assessee had debited an amount of ₹6,41,87,931 on account of software consumables in the profit and loss account and a detailed break-up of the expenses were submitted before the Assessing Officer during the course of assessment proceedings. The Assessing Officer having allowed the amount of software consumables as a revenue expenditure now sought to treat it as capital expenditure which was a clear change of opinion. This was not permissible.”

BCAJ Admin

Income — Diversion of income by overriding title — State Government undertaking entrusted with Government funds with strict instructions regarding its usage — Income of undertaking diverted to State Government by overriding title — No income accrued to undertaking

75 Principal CIT vs. Jharkhand Tourism Development Corporation Ltd.

[2023] 458 ITR 497 (Jhar.)

A.Ys.: 2012–13 and 2014–15

Date of Order: 21st February, 2023

Income — Diversion of income by overriding title — State Government undertaking entrusted with Government funds with strict instructions regarding its usage — Income of undertaking diverted to State Government by overriding title — No income accrued to undertaking.

The assessee is an undertaking of the State Government of Jharkhand incorporated with the object to promote tourism in the State and to create, operate and maintain infrastructure for tourism on behalf of Central and State Government. The assessee received funds from the Government for making payments in accordance with the guidelines of the Government for approved projects and the assessee was liable to return the unutilized funds to the Government. Under the directions from the Government as well as under an Office Memorandum dated 6th December, 2006 issued by the Ministry of Tourism, the Government of India directed the assessee that funds released as installments of Central Financial Assistance (CFA) from the Ministry of Tourism were to be deposited in saving accounts or fixed deposits in banks. Further it was also directed to ensure utilization of interest earned on deposits for the execution and completion of concerned projects without deviation towards any other expenditure. In case, there was no scope for utilization of the amount, such amount had to be returned to the Ministry of Tourism.

Assessee’s case for A.Y. 2014–15 was selected for scrutiny where under the interest income of ₹4,63,76,660 earned on fixed deposit was taken as income and added to the total income of the assessee. For A.Y. 2012–13, the interest of ₹3,23,99,958 earned on fixed deposit was added to the total income of the assessee. Separate appeals were preferred for each of the years before the CIT(A) which were allowed by the CIT(A). The Tribunal confirmed the action of the CIT(A).

The Department filed appeals before the High Court and contended that interest income was covered under the head “Income from Other Sources”. The guidelines of the Ministry of Tourism could not override the statutory provisions of the Act. Further, the Department contended that the fixed deposits were in the name of the assessee and the TDS on interest was also shown and claimed by the assessee. The Department therefore contended that the AO had rightly treated the interest to be the income of the assessee.

The High Court dismissed the appeals of the Department and held as follows:

“i) The assessee was a Jharkhand State Government undertaking incorporated with the object to promote tourism in the State to create, operate and maintain infrastructure for tourism on behalf of the Central and State Government. The funds from the Central and State Governments were disbursed to the assessee for making payment in accordance with the guidelines of the Government for approved projects and were liable to be refunded if unutilised funds as and when Government made requisition therefor. Thus, the funds always remained the property of the Government and the assessee was authorised to use the funds as well and was duty bound to obey the direction on how to manage the surplus. The assessee under the directions of the Government kept a portion of unutilised funds in short-term bank deposits and interest earned from these deposits was transferred to the respective fund accounts of the Government. As a matter of fact, an office memorandum dated December 6, 2006 issued by the Joint Secretary, Ministry of Tourism, had directed the assessee to deposit funds released as instalments of Central Financial Assistance from the Ministry of Tourism in saving accounts or fixed deposits in banks and as a result a substantial amount accrued as interest on deposits made out of the Central Financial Assistance. It was also directed to ensure utilisation of interest earned on deposits for the execution and completion of the projects without deviation to any other head of expenditure. In case there was no scope to utilise the amount of interest for execution of the project, such amount could be returned to the Ministry of Tourism.

ii) Thus, the income never reached the assessee and was diverted at source by an overriding title. The orders of assessment for the A.Ys. 2012-13 and 2014-15 were not valid.”

BCAJ Admin

Deduction of tax at source — Interest on compensation awarded by Motor Accidents Claims Tribunal — Effect of sub-section (3) of section 194A — Interest assessable only if it exceeds ₹ 50,000 in a financial year

74 Smt Kuni Sahoo vs. UOI

[2023] 457 ITR 777 (Guj.)

Date of Order: 30th January, 2023

S. 194A of ITA 1961

Deduction of tax at source — Interest on compensation awarded by Motor Accidents Claims Tribunal — Effect of sub-section (3) of section 194A — Interest assessable only if it exceeds ₹ 50,000 in a financial year.

The Petitioners are the wife and the children of the deceased who died in a road accident. Pursuant to the death of the deceased in a road accident on 7th January, 2013, the Petitioners were awarded compensation of ₹17,90,760 along with interest at 7 per cent per annum with effect from date of application till the date of realisation. On appeal by the opposite party, the compensation stood reduced to ₹ 15,00,000 with interest vide order dated 13th July, 2019. The interest pertained to the period 2013–14 to 2019–20, that is, for a period of six years and if the interest was spread over in the case of each petitioner over a period of six years, the annual interest would come around ₹35,944. The said amount being less than ₹ 50,000, no deduction of tax was required in view of section 194A(3)(ixa) as amended. However, the Insurance company deposited cheques after deduction of tax at source on the interest.

The Petitioners filed writ petitions claiming that the Insurance company should have deposited interest without deducting tax at source. The Gujarat High Court allowed the writ petition and held as follows:

“i) Section 194A of the Income-tax Act, 1961 being not a charging provision, deals with deduction of tax at source in respect of “interest other than interest on securities”. Under the provisions of section 145A(b) as it existed prior to amendment by virtue of the and sub-section (1) of section 145B of the Act, after the amendment interest received by an 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 is received.

ii) However, u/s. 194A(3)(ixa) the provisions of the section would not be applicable to such income credited by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income paid during the financial year does not exceed fifty thousand rupees.

iii) The interest payable under the Motor Vehicles Act, 1988 was relatable to the period 2013–14 to 2019–20. If the interest were spread over year to year, the amount would not exceed ₹50,000. Under such premise, the deduction of tax at source in respect of interest for delay in deposit of compensation before the Motor Accidents Claims Tribunal would attract the provisions of sub-section (3) of section 194A and no deduction of tax at source was required.”

BCAJ Admin

Commissioner(Appeals) — Power of remand — Scope of s. 251(1)(a) — Commissioner(Appeals) can confirm, reduce, enhance or annul assessment — Finding of Commissioner(Appeals) that AO not justified in making addition and positive direction to delete additions — Order of remand for fresh assessment after further enquiry — Commissioner(Appeals) has no power to remand the matter for fresh assessment after further enquiry — Order of the Tribunal upholding the order of the Commissioner(Appeals) despite noting specific ground by the assessee regarding the powers exceeded by the Commissioner(Appeals) — Order of remand not tenable in law

73 Arun Kumar Bose vs. ITO

[2023] 458 ITR 32 (Cal.)

A.Y.: 2014-15

Date of Order: 2nd August, 2023

S. 251(1)(a) of ITA 1961

Commissioner(Appeals) — Power of remand — Scope of s. 251(1)(a) — Commissioner(Appeals) can confirm, reduce, enhance or annul assessment — Finding of Commissioner(Appeals) that AO not justified in making addition and positive direction to delete additions — Order of remand for fresh assessment after further enquiry — Commissioner(Appeals) has no power to remand the matter for fresh assessment after further enquiry — Order of the Tribunal upholding the order of the Commissioner(Appeals) despite noting specific ground by the assessee regarding the powers exceeded by the Commissioner(Appeals) — Order of remand not tenable in law.

The addition made by the AO with respect to sundry creditors was deleted by the Commissioner(Appeals) holding it to be not justified and remanded the matter to the AO for fresh assessment after enquiry. The Tribunal upheld the order of the Commissioner(Appeals) despite there being a specific ground raised by the Assessee challenging the action of the Commissioner(Appeals) in remanding the matter back to the AO.

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

“(i) Whether on the facts and circumstances of the case the learned Tribunal was justified in upholding the order of the Commissioner of Income-tax (Appeals) when the same is beyond the scope and power vested upon the Commissioner of Income-tax (Appeals) under the provisions of section 251(1)(a) of the said Act ?

(ii) Whether on the facts and circumstances of the case when the additions made in respect of the sundry creditors, namely, M/s. Goodwill Corporation (India), M/s. Quality Udyog and M/s. Swastik Trading and Manufacturing Co. were directed to be deleted as being unsustainable can be subject to the enquiries conducted by the Assessing Officer ?”

The Calcutta High Court allowed the appeal and held as under:

“i) U/s. 251(1)(a) of the Income-tax Act, 1961 the Commissioner (Appeals) may confirm, reduce, enhance or annul the assessment. On a reading of the Finance Act, 2001 (Circular No. 14 of 2001), the Commissioner (Appeals) had no power to remand the matter to the Assessing Officer for fresh assessment in accordance with the direction given by him after making such further enquiry as may be necessary. Though such power was conferred on the Commissioner (Appeals), the said provision stood omitted by the Finance Act, 2001. In the light of the Explanatory Notes to the Provisions related to Direct Taxes, under paragraph 78.1 dealing with the powers of the Commissioner (Appeals) with effect from June 1, 2001, the Commissioner (Appeals) could not have remanded the matter to the Assessing Officer after having decided the case in favour of the assessee in its entirety.

ii) Though in the order passed by the Commissioner (Appeals), the word “prima facie” had been used, from a cumulative reading of an order passed by the Commissioner (Appeals), it was found that the case had been discussed on merits and thereafter, a finding had been recorded that the Assessing Officer was not justified in making the addition and there was a positive direction to delete the addition. Though the assessee had raised a specific ground of exceeding the statutory powers conferred u/s. 251(1)(a) before the Tribunal which had been noted by it in paragraph 3 of the impugned order, this aspect had not been dealt with by the Tribunal. The Tribunal had gone into the correctness of the finding of the Commissioner (Appeals) who held in favour of the assessee and thereafter, had recorded his opinion. Admittedly, the Revenue had not challenged the findings rendered by the Commissioner (Appeals) which was in favour of the assessee.

iii) Thus, not only the Commissioner (Appeals) committed an error of law by remanding the matter to the Assessing Officer for a fresh consideration after having held in favour of the assessee, the Tribunal also did not deal with the said issue. In the light of the statutory embargo, the order of remand passed by the Commissioner (Appeals) is not tenable in law and consequently, was required to be set aside as well as the order passed by the Tribunal.”

BCAJ Admin

Section 9(1)(vi) of the Act; Article 12(3) of India-Sweden DTAA — Since the facts for the relevant year are identical to those of AY 2014–15, where it was held that the receipts in question could not be taxed as “royalty”, both under section 9(1)(vi) of the Act and under Article 12(3) of India-Sweden DTAA, the assessee was not liable to deduct tax

12 Volvo Information Technology AB, Sweden

vs. DCIT, International Taxation, Circle-3(1)(1), New Delhi

ITA Nos.: 393/Del/2018 and 2780/Del/2022

Member: Shri Kul Bharat, Judicial Member and Dr. B.R.R. Kumar

A.Ys.: 2014–15 and 2015–16

Date of Order: 20th December, 2023

Section 9(1)(vi) of the Act; Article 12(3) of India-Sweden DTAA — Since the facts for the relevant year are identical to those of AY 2014–15, where it was held that the receipts in question could not be taxed as “royalty”, both under section 9(1)(vi) of the Act and under Article 12(3) of India-Sweden DTAA, the assessee was not liable to deduct tax.

FACTS

The assessee was a member-company of ‘V Group’, which has global presence. It filed its return of income declaring total income of ₹77.72 crores under the head “income from other sources” and offered the same to tax
@ 10 per cent as per the provisions of DTAA. Subsequently, it revised the return of income declaring nil income.

The AO passed a draft assessment order proposing to assess the total income at ₹77.72 crores by treating the receipts as royalty in terms of section 9(1)(vi) of the Act as well as DTAA and charging tax thereon @ 10 per cent on gross receipts.

The assessee contended that it received the payments for providing facilities to Indian entities of V Group (“Indian entities”), because of which Indian entities were not required to separately obtain right to use the copyright in any of the software / business software / application owned and executed by the assessee.

HELD

The issue pertains to characterising the payments of ₹77.72 crores received by the assessee during the relevant year as royalty and taxing them @ 10 per cent of gross receipts.
The assessee had raised the same issue in its appeal before this Tribunal in respect of A.Y. 2014–15. In A.Y. 2014–15, while the assessee had declared nil income, the AO treated the entire receipts of ₹119.88 crores from India entities as ‘royalty’ in terms of section 9(1)(vi) of the Act as well as under Article 12(3) of India-Sweden DTAA and had charged the same to tax @ 10 per cent on gross receipts.
On the facts and circumstances of the case in respect of A.Y. 2014–15 and in law, this Tribunal held that CIT(A) had erred in treating the payments aggregating to ₹119.88 crores received by the assessee from Indian entities as royalty, both under section 9(1)(vi) of the Act and under Article 12(3) of India-Sweden DTAA.
Since the facts for the relevant year in question are identical to those of A.Y. 2014–15 in the assessee’s own case, where this Tribunal has held that the receipts in question could not be taxed as ‘royalty’. For the same reasons, the entire receipt of ₹77.72 crores received from Indian entities could not be taxed as ‘royalty’. Accordingly, the orders of authorities were set aside.

BCAJ Admin

Sections 9(1)(vii)(b), 195, and 40(a)(i) of the Act — Payments made to foreign service providers for testing, implementation, tutoring and demonstrating services to offshore clients in respect of software developed by the taxpayer is merely a support service and not in the nature of FTS. Even if it is considered to be FTS, still, payment is within the source rule carve out u/s 9(1)(vii)(b) of the Act since: (a) payments were made to foreign service provider who was a non-resident; (b) it had not rendered the services in India; (c) it did not have any permanent establishment in India; and (d) the services were utilised by the taxpayer in business carried on outside India, or for the purpose of making or earning income from a source outside India

11 Dy. CIT/Jt. CIT (OSD), Corporate Circle -1(1) vs. Aspire Systems India (P.) Ltd.

[2023] 157 taxmann.com 699 (Chennai – Trib.)

ITA Nos.: 1069, 1070 & 1071 (Chny.) 2022, 159 & 315 (Chny.) 2023

A.Y.: 2013–14

Date of Order: 13th December, 2023

Sections 9(1)(vii)(b), 195, and 40(a)(i) of the Act — Payments made to foreign service providers for testing, implementation, tutoring and demonstrating services to offshore clients in respect of software developed by the taxpayer is merely a support service and not in the nature of FTS. Even if it is considered to be FTS, still, payment is within the source rule carve out u/s 9(1)(vii)(b) of the Act since: (a) payments were made to foreign service provider who was a non-resident; (b) it had not rendered the services in India; (c) it did not have any permanent establishment in India; and (d) the services were utilised by the taxpayer in business carried on outside India, or for the purpose of making or earning income from a source outside India.

FACTS

The assessee was engaged in the business of providing software development services to offshore customers. In connection with such services, it entered into a contract with a foreign service provider (“F Co”) for providing installation and testing services. As per the agreement between the assessee and F Co, F Co carried out testing, implementation, tutoring and demonstrating services to offshore clients in respect of software developed by the taxpayer. In consideration, the assessee paid outsourcing charges / consultancy charges to F Co in respect of certain American clients of the assessee.

According to the AO, the payments made by the assessee to F Co were in the nature of fee for technical services (FTS) as defined under section 9(1)(vii) of the Act. Accordingly, since the assessee had not deducted tax under section 195 of the Act, the AO disallowed such payments under section 40(a)(i) of the Act.

On appeal, CIT(A) held that the payments made by the assessee to F Co were for rendering services outside India, and hence, they could not be deemed to accrue or arise in India. Therefore, they were not liable for deduction under section 195 of the Act. He further held that services rendered by F Co did not fall under the purview of FTS. Consequently, payments made to F Co could not be disallowed under section 40(a)(i) of the Act for non-deduction of tax at source under section 195 of the Act.

HELD

F Co carried out testing, implementation, tutoring and demonstrating services. Such services by F Co represented services performed on behalf of the assessee for a client of the assessee located in the USA. From the nature of services provided by F Co, it appears that they were support services and not purely technical services for them to fall under the definition of FTS.
Also, for any payment made to a non-resident to be considered as FTS, it should be analysed in light of provisions of section 9(1)(vii) of the Act, read with exceptions thereto. As per clause (b) to section 9(1)(vii) of the Act, payments made by a person who is a non-resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India, or for the purpose of making or earning any income from any source
outside India, is outside the scope of section 9(1)(vii) of the Act. From clause (b), it is evident that the services rendered by F Co clearly fall under the exception whereby the same cannot be deemed to accrue or arise in India.
From perusal of contract between the assesse and F Co, it is clear that payments made by the assessee to F Co are directly related to services rendered to clients of the assessee outside India and income earned by the assessee from such
clients forms part of business income of the assessee. Therefore, it falls under the category of services utilised in a business or profession carried on by such person outside India.
Second aspect of exception in clause (b) to section 9(1)(vii) of the Act is that the services were utilised for the purpose of making or earning any income from any source outside India.
F Co performed services outside India for offshore clients. As the clients were situated outside India and services were utilised for earning income from source outside India, the second part of exception as per section 9(1)(vii)(b) of the Act was also satisfied.
Therefore, payments made to F Co were not chargeable to tax in India as they were covered within exception in section 9(1)(vii)(b) of the Act. Accordingly, provisions of section 195 of the Act were not attracted and the question of disallowance under section 40(a)(i) of the Act did not arise.

BCAJ Admin

Section 9, read with sections 195 and 201, of the Act — Payments made for Live Rights are not payments for copyright as broadcasting Live events does not amount to a work in which copyright subsists — hence, they cannot be charged to tax as royalty under section 9(1)(vi) of the Act

10 Lex Sportel Vision (P.) Ltd. vs. Income Tax Officer

[2024] 158 taxmann.com 129 (Delhi – Trib.)

ITA No.: 2397/Del/2023

A.Y.: 2018–19

Date of Order: 26th December, 2023

Section 9, read with sections 195 and 201, of the Act — Payments made for Live Rights are not payments for copyright as broadcasting Live events does not amount to a work in which copyright subsists — hence, they cannot be charged to tax as royalty under section 9(1)(vi) of the Act.

FACTS

The assessee was engaged in the business of broadcasting or sub-licensing right to broadcast sport events, e.g., golf, cricket, soccer, etc., on live and non-live basis. The assessee filed a return of income for the relevant year declaring nil total income. During the relevant year, the assessee had entered into agreements with certain non-residents for acquiring the following two types of rights.

(a) Right to broadcast live sports events (“Live Rights”).

(b) Right to use audio-visual recording of the sport events for subsequent telecasting, cutting small clips for advertisements, making highlights of the event, etc., (“Non-Live Rights”).

The agreements and the invoices issued by non-residents clearly bifurcated the total consideration between consideration for “Live Rights” and that for “Non-Live Rights”¹.

1. The decision does not mention the respective amounts paid for “Live Rights” and “Non-Live Rights”.

The assessee considered payments towards acquisition of “Non-Live Rights” as “Royalty” in terms of section 9(1)(vi) of the Act. And deducted tax thereon under section 195 of the Act. However, the assessee did not deduct tax under section 195 of the Act on the payments made for “Live Rights”.

In appeal, CIT(A) held that the payment for “Live Rights” was chargeable to tax as “Royalty”.

HELD

Whether payments for Live Rights are for use of copyright?

The Tribunal examined in detail certain judgments² on the subject.
Based on the examination, broadcasting “Live events” does not amount to a work in which copyright subsists, as right to broadcast live events i.e., “Live Rights” is not “copyright”.
Therefore, any payment made towards Live Rights cannot be said to be chargeable to tax as “Royalty” under section 9(1)(vi) of the Act. Further, the judicial authorities have held that when the agreements clearly bifurcate the consideration paid towards Live and Non-Live Rights, it is not open for the Department to deem that the payment made for Live Rights was for a bouquet of rights.

2. CIT vs. Delhi Race Club [2014] 51 taxmann.com 550/[2015] 273 CTR 503/228 Taxman 185 (Hon'ble Delhi HC); Fox Network Group Singapore Pvt. Ltd. vs. ACIT (IT) [2020] 121 taxmann.com 330 (ITAT Delhi); Cricket Australia vs. ACIT (IT) (ITA No. 1179/Delhi/2022) (ITAT Delhi); ESS (formerly known as ESPN Star Sports) vs. ACIT (ITA No. 7903/DEL/2018) (ITAT Delhi); ESPN Star Sports vs. Global Broadcast News Ltd. 2008 (38) PTC 477 (ITA T Delhi); ADIT (IT) vs. Neo Sports Broadcast Pvt. Ltd. [2011] 15 taxmann.com 175/[2011] 133 ITD 468 (ITAT Mumbai); DDIT(IT) vs. Nimbus Communications Ltd (2013) 20 ITR(T) 754 (ITAT Mumbai).

Whether payments were for use of process?

As regards the issue whether the payments were made for the use of “process” or not, the payments in dispute were made to overseas rights holders. The said payments were neither made to any satellite operators nor for use of any satellite. Hence, the payments were not made for use of any “process” as defined under section 9(1)(vi) of the Act. Therefore, they cannot be brought to tax as “Royalty” in the hands of the overseas rights holders.
Accordingly, while passing the order under section 201 of the Act, the AO erred in law by treating the remittances to have been made for use of a “Process”.

BCAJ Admin

Where the firm had borrowed a loan from the bank and raised fresh capital from the incoming partner to settle the debt / capital account of retiring partners, any interest paid on such loan / capital account is allowable under section 36(1)(iii)

57 M/s. Ariff & Company vs. ACIT

ITA No.: 140 / Chny/ 2022

A.Y.: 2007–08

Date of Order: 15th December, 2023

Section: 36(1)(iii)

Where the firm had borrowed a loan from the bank and raised fresh capital from the incoming partner to settle the debt / capital account of retiring partners, any interest paid on such loan / capital account is allowable under section 36(1)(iii).

FACTS

Mr R along with his wife and three children constituted the assessee-partnership firm in 1974, which carried on business of running a hotel called “Hotel President”.

Four partners decided to retire from the firm because they were migrating to the USA, leaving the management completely in the hands of Mr A.

Accordingly, after negotiations, the firm was reconstituted in 2006 with the retirement of four partners and the induction of a new partner, Mrs A.

Before reconstitution of the firm, the assets and liabilities of the firm were revalued and credited in the capital account of partners, and the capital account of the outgoing partners was treated as debt of the partnership firm.

To settle outgoing partners’ capital account, the firm borrowed a loan from Punjab National Bank and paid interest thereon. It had also taken capital contribution from incoming partner, Mrs A and paid interest to her in accordance with section 40(b).

The AO disallowed the interest paid by the assessee-firm to the capital account of partners and on loan borrowed from the Bank on the ground that payment to outgoing partners was nothing but a family settlement.

The disallowance was upheld by CIT(A).

Aggrieved, the assessee filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows:

(a) interest paid on capital account of partners partakes the nature of funds borrowed for the purpose of business of the assessee, and consequently, interest paid thereon is allowable under section 36(1)(iii);

(b) any loan borrowed for the purpose of settling outgoing partners’ capital account which has been treated as debt in the books of accounts of the firm assumes the character of loan borrowed for the purpose of business of the assessee, and consequently, interest paid on borrowed capital account is allowable under section 36(1)(iii);

(c) when the assets were owned by the partnership firm, any settlement of such assets to the outgoing partners cannot be considered as settlement of family property, just because the partners were family members.

(d) merely because the assets of the firm had been revalued before reconstitution of partnership firm (to ascertain the fair market value of assets of the firm and shares of the outgoing partners), it cannot be a reason for the AO to treat the settlement of firm properties among partners as settlement of family property.

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

BCAJ Admin

Interest under section 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left, if any, should be adjusted towards the tax component

56 Tata Sons Pvt. Ltd. vs. DCIT

ITA No.: 2362 / Mum / 2023

A.Y.: 1993–94

Date of Order: 6th December, 2023

Section: 244A

Interest under section 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left, if any, should be adjusted towards the tax component.

FACTS

The return of income of the assessee for A.Y. 1993–94 was filed on 31st December, 1993, returning NIL income.

The return was subject to assessment / re-assessment and rectification over a period of time.

Tribunal, through orders dated 4th February, 2015, and 1st January, 2016, gave relief to the assessee.

The AO passed an order giving effect (OGE) dated 8th March, 2016, granting the refund of ₹30,45,62,594, and the assessee received the said refund on 18th August, 2022.

Aggrieved by the short credit of interest on refund, the assessee filed an appeal before CIT(A) / NFAC.

The CIT(A) / NFAC held against the assessee.

Aggrieved, the assessee filed an appeal before the Tribunal, alleging that:

(a) The AO had incorrectly adjusted the earlier refunds, resulting in a short credit of interest of ₹9,93,09,258;

(b) The AO had not calculated the interest for the interim period from when OGE was passed, that is, 8th March, 2016, and the actual receipt of refund, that is, 18th August, 2022, resulting in short credit of interest of ₹11,27,21,927.

HELD

Dealing with each of the grievances, the Tribunal held as follows:

(a) The amount of interest under section 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left, if any, shall be adjusted towards the tax component; accordingly, the assessee would be entitled for interest on the unpaid refunds in accordance with the principle laid out in Grasim Industries Ltd vs. DCIT (2021) 123 taxmann.com 312(Mum);

(b) In light of the issue being squarely covered in favour of the assessee in CIT vs. Pfizer Limited (1991) 191 ITR 626 (Bom), City Bank NA Mumbai vs. CIT, ITA No. 6 of 2001 and CIT vs. K.E.C International in ITA No. 1038 of 2000 (Bom HC), the assessee was justified in seeking interest under section 244A up to the date of receipt of the refund order, i.e. 18th August, 2022;

(c) Applying the ratio laid down by coordinate bench in ACIT vs. Bharat Petroleum Corporation Ltd, ITA No. 5231 to 5233 of 2019, section 244A(1A) would be applicable in assessee’s case from 1st June, 2016, till the date of actual receipt of refund.

Accordingly, the Tribunal directed the AO to recompute the interest on refund in accordance with the order and as per law.

BCAJ Admin

In the absence of express mention to operate retrospectively, no retrospective cancellation for earlier years can be done under the amended section 12AB(4) introduced with effect from 1st April, 2022

55 Amala Jyothi Vidya Kendra Trust vs. PCIT

ITA Nos.: 458 / Bang / 2023

A.Y.: 2021–22

Date of Order: 1st December, 2023

Section: 12AB(4)

In the absence of express mention to operate retrospectively, no retrospective cancellation for earlier years can be done under the amended section 12AB(4) introduced with effect from 1st April, 2022.

FACTS

The assessee-trust was registered vide trust deed dated 1st April, 2005.

It was registered under the erstwhile section 12AA. Due to the amended provisions with effect from 1st April, 2021, requiring re-registration, the assessee filed an application for registration under section 12A / 12AB, which was granted to it by DIT from A.Y. 2022–23 to A.Y. 2026–27.

On 28th December, 2021, a search was carried out under section 132 in the office premises of assessee-trust in Bangalore.

During the course of search, various incriminating materials were found which were confronted to the trustees and secretary of the assessee-trust, and it was found that they were using the funds of the trust for personal benefit.

Consequently, assessment proceedings were initiated by the AO for A.Y. 2021–22, calling for various details and confronting the evidence collected during the search.

Subsequently, vide letter dated 20th December, 2022, the AO sent a reference to PCIT for A.Y. 2021–22 communicating her satisfaction as per second proviso to section 143(3) of the Act that this was a fit case for cancellation of registration under section 12AB.

Accordingly, on 28th December, 2022, show cause notice was issued by the PCIT requiring the assessee-trust to explain as to why the registration granted to it should not be cancelled under section 12AB.

After considering the reply, the PCIT, invoking the amended provisions of section 12AB(4)(ii) [introduced by the Finance Act, 2022 w.e.f. 1st April, 2022], cancelled the registration granted to the assessee-trust w.e.f. A.Y. 2020–21 and that of subsequent years.

Aggrieved by this, the assessee-trust filed an appeal before the ITAT.

HELD

The Tribunal observed that:

(a) In income-tax matters, law to be applied is the law in force in the assessment year unless otherwise stated or implied. In the present case, the PCIT cancelled the registration granted under section 12AA/12AB w.e.f. previous year 2020–21 relevant to assessment year 2021–22 and therefore, the law as stated in the A.Y. 2021–22 is to be applied and not the law as stood in A.Y. 2022–23;

(b) No retrospective cancellation could be made under section 12AB(4)(ii) since it has not been provided or is seen to have explicitly provided to have a retrospective character or intended. Therefore, without a specific mention of the amended provisions to operate retrospectively, no cancellation for the earlier years could be made;

(c) Since the PCIT invoked section 12AB(4)(ii) which has been introduced by the Finance Act, 2022 w.e.f. 1st April, 2022, so as to cancel the registration with retrospective effect from A.Y. 2021–22, such order is bad in law and deserved to be quashed.

The Tribunal also noted that the same view has been taken by Mumbai ITAT in the case of Heard Foundation of India, ITA No.1524/Mum/2023 vide order dated 27th July, 2023.

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

BCAJ Admin

Section 54F, read with sections 48 and 50C — Where entire actual sales consideration had been invested in purchase and construction of residential house by assessee, capital gain would be exempt under section 54F and provisions of section 50C would not be applicable

54 Lalit Kumar Kalwar vs. Income-tax Officer

[2023] 106 ITR(T) 373 (Jaipur – Trib.)

ITA No.: 379 (JP) OF 2018

A.Y.: 2013–14

Date of Order: 30th May, 2023

Section 54F, read with sections 48 and 50C — Where entire actual sales consideration had been invested in purchase and construction of residential house by assessee, capital gain would be exempt under section 54F and provisions of section 50C would not be applicable.

FACTS

The assessee had sold shops and received actual sale consideration of ₹12 lakhs, which was less than the value accepted by the DLC of ₹20.78 lakhs. The assessee claimed long term capital gain (LTCG) at nil after seeking exemption under section 54F, contending that the entire actual sale consideration was invested in the purchase and construction of the residential house.

The Assessing Officer (AO) disallowed the claim of the assessee for the reason that the assessee had not deposited the sale consideration received on transfer of the property in capital gain account as per provisions of section 54F(4).

Aggrieved, the assessee filed the appeal before the CIT(A). The CIT (A) also upheld the order of the AO.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

After analysing the provisions of S. 54F(1) of the Act, the ITAT found that in Explanation to S. 54F(1), the term “net consideration” means the full value of consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. The meaning of full value of consideration in Explanation to S. 54F(1) was not to be governed by the meaning of words “full value of consideration” as mentioned in S. 50C.

The ITAT also held that the fiction under S. 50C of the Act is extended only to the aspect of computation of capital gains and the same does not extend to the charging section or the exemptions to the charging section. The legislature consciously intended to apply the fiction under S. 50C of the Act only to the expression used in S. 48 of the Act and not in any other place. The ITAT further observed that the cost of new asset was not less than the net consideration, and thus, the whole of the capital gains was not to be charged even if the capital gains had been computed by adopting the value adopted by stamp registration authority. The requirement of law is that net consideration is required to be appropriated towards the purchase of the new asset. Thus, deduction under S. 54F was clearly applicable.

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

BCAJ Admin

S.69A r.w.s. 115BBE — Conversion of Miscellaneous business income into other sources by invoking provisions of section 69A without any evidence and taxing such income at special rate as per section 115BBE was improper

53 Deepak Setia vs. Deputy Commissioner of Income-tax

[2023] 106 ITR(T) 125 (Amritsar – Trib.)ITA NO. 112 (ASR.) OF 2023

A.Y.: 2019–20

Date of Order: 17th June, 2023

S.69A r.w.s. 115BBE — Conversion of Miscellaneous business income into other sources by invoking provisions of section 69A without any evidence and taxing such income at special rate as per section 115BBE was improper.

FACTS

A survey was conducted on the assessee’s premises u/s 133A. The assessee surrendered the amount of ₹29 lakhs and offered it for taxation as business income. Subsequently, the case was selected for scrutiny and out of ₹29 lakhs, amount of ₹14.23 lakhs which was related to miscellaneous business income (MBI) was taken as income from an undisclosed source under section 69A, and tax was calculated as per section 115BBE at a special rate. The rest of the surrendered amount was taken as normal business income, and tax was calculated at normal rate.

Aggrieved, the assessee filed the appeal before the CIT(A). The CIT(A) also upheld the order of the AO.

Aggrieved by the CIT(A) order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that during survey proceedings, the assessee had surrendered total income of ₹29 lakhs out of which amounted to ₹14.23 lakhs related to other discrepancies / MBI, which was treated as income from undisclosed source u/s 69A and tax thereon was calculated as per section 115BBE at special rate during assessment. The entire addition was certainly without forming proper basis for conversion of business income to non-business income. The revenue was not able to submit any evidence during assessment and appeal proceeding that the said income was not connected with the business income of the assessee or was accumulated from a non-recognising source.

The ITAT held that when all the incomes earned by the assessee were only from the business income of the assessee, there did not arise any question as to the application of provisions of section 69A by following the settled principle that “when there is no other / separate source of income identified during the course of survey or during the course of assessment proceedings, any income arising to the assessee shall be treated to be out of the normal business of the assessee only”.

The ITAT had relied on the following Judicial precedents:

1. Harish Sharma vs. ITO [IT Appeal No. 327 (Chd.) of 2020, dated 11th May, 2021]

2. Daulatram Rawatmull vs. CIT [1967] 64 ITR 593 (Cal.)

3. Mansfield & Sons vs. CIT [1963] 48 ITR 254 (Cal.)

4. Sham Jewellers vs. Dy. CIT [IT Appeal No. 375 (Chd.) of 2022, dated 22nd August, 2022]

The ITAT held that the conversion of business income into other income and application of section 69A was bad and illegal and accordingly, levy of tax u/s 115BBE on the business income was liable to be quashed.

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

BCAJ Admin

S. 69A – Where there was a huge amount available with assessee in form of cash which he had deposited during demonetization, it could not be presumed that cash deposited by assessee was out of some undisclosed source without any adverse material

52 Arun Manohar Pathak vs. ACIT

[2023] 106 ITR(T) 14 (Mumbai – Trib.)

ITA NO.: 489 (MUM.) of 2023

A.Y.: 2017–18

Date of Order: 24th May, 2023

S. 69A – Where there was a huge amount available with assessee in form of cash which he had deposited during demonetization, it could not be presumed that cash deposited by assessee was out of some undisclosed source without any adverse material.

FACTS

The assessee was carrying on the milk distribution business. He deposited cash of a certain amount in his bank account during the demonetization period in old currency notes, i.e. specified bank notes (SBNs). The assessee submitted that he was a retailer of milk and the said cash deposits in SBNs were out of collection from sale of milk to persons during the demonetization period, and the same had been used to make payment towards purchase of milk to Gujarat Co-operative Milk Marketing Ltd. (GCMM) by way of demand drafts as reflected in the bank statement of the assessee. However, the Assessing Officer (AO) treated cash deposited in the bank during the demonetisation period in SBNs as unexplained and added the same under section 69A of the IT act.

Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) upheld the order of the AO on the grounds that the assessee was not able to show that he was entitled to claim benefit of Notification No. S.O. 3408(E), issued by the Ministry of Finance (Department of Economic Affairs), dated 8th November, 2016, as the assessee had not filed any material to establish that the assessee qualifies as a milk booth operator under authorisation of Central or State Government.

Aggrieved by the CIT(A) order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that the assessee had placed on record all the documents which supported the averments made by the assessee before the AO and CIT(A). The assessee had submitted the following documentary evidences to substantiate that he was carrying out milk distribution services and, therefore, was entitled to claim benefit of the notification:

1. Copy of License No. 11512018000623 issued by Government of Maharashtra.

2. Cash book, bank book and bank statement of the assessee.

3. Ledger Account of purchases made from GCMM.

Upon perusal of documents / details on record, the ITAT held that the assessee was able to substantiate the stand during the assessment proceedings, and the burden of proof was on the Revenue.

The ITAT observed that the CIT(A) had not dealt with the documents / details furnished by the assessee and failed to either carry out any inquiry / verification into purchase / sale of milk by the assessee to controvert the averments made by the assessee, or to point out any infirmity in the aforesaid documents / details.

The ITAT held that AO as well as CIT(A) were incorrect in holding that the assessee was not covered by the notification. Even if for the sake of arguments, it is believed that though the assessee was not covered by the aforesaid notification, the assessee had a bona fide belief that the assessee was entitled to the benefit of the notification, and therefore, permitted to receive SBNs, and that the assessee did accept SBNs as valid tender.

The ITAT held that the averments made by the assessee, supported by the documents furnished, went uncontroverted and, accordingly, deleted the addition made under section 69A of the act.

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

BCAJ Admin

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’, it cannot be said that the assessee has suppressed or under-reported any income

51 D.C. POLYESTER LIMITED vs. DCIT

2023 (10) TMI 971 – ITAT MUMBAI

A.Y.: 2017–18

Date of Order: 17th October, 2023

Section: 270A

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’, it cannot be said that the assessee has suppressed or under-reported any income.

Where the assessee offered an explanation as to why it reported rental income under the head ‘income from house property’ and the explanation of the assessee was not found to be false, the case would be covered by section 270A(6)(a).

FACTS

The assessee filed its return of income declaring total income to be a loss of ₹72,200. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had offered rental income of ₹29,60,000 under the head ‘income from house property’. The AO noticed that the assessee had declared the rental income from the very same property under the head ‘income from business’ in an earlier year, i.e., in A.Y. 2013–14. However, in the instant year, the assessee had declared rental income under the head ‘income from house property’ and also claimed various other expenses against its business income. He further noticed that there was no business income during the year under consideration.

The assessee submitted that it has reduced its business substantially and all the expenses claimed in the profit and loss accounts are related to the business only. It was submitted that the rental income was rightly offered under the head ‘income from house property’ during the year under consideration. In the alternative, the assessee submitted that it will not object to assessing rental income under the head ‘income from business’. Accordingly, the AO assessed the rental income under the head ‘income from business’.

The AO assessed rental income under the head ‘business’ and consequently, the assessee was not entitled to deduction under section 24(a) of the Act. This resulted in assessed income being greater than returned income.

The AO initiated proceedings for levy of penalty under section 270A. In the course of penalty proceedings, it was submitted that the assessee has not under-reported the income since the addition pertains only to statutory deduction under section 24(a). The AO held that the furnishing of inaccurate particulars of income would have gone undetected, if the return of income of the assessee was not taken up for scrutiny. He also took the view that the claim of statutory deduction as well as expenses in the Profit and Loss account under two different heads of income would tantamount to under-reporting of income under section 270A of the Act. The AO levied a penalty of ₹1,83,550 under section 270A of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that since section 270A of the Act uses the expression “the Assessing Officer ‘may direct’”, there is merit in the contention of the assessee that levying of penalty is not automatic, and discretion is given to the AO not to initiate penalty proceedings under section 270A of the Act.

It held that it is not a case that the assessee has suppressed or under-reported any income. The addition came to be made to the total income returned by the assessee, due to change in the head of income, i.e., the addition has arisen on account of computational methodology prescribed in the Act. It held that, in its view, this kind of addition will not give rise to under-reporting of income. The Tribunal was of the view that the AO should have exercised his discretion not to initiate penalty proceedings u/s 270A of the Act in the facts and circumstances of the case.

The Tribunal observed that the assessee has offered an explanation as to why it reported the rental income under the head ‘income from house property’ and the said explanation is not found to be false. Accordingly, it held that the case of the assessee is covered by clause (a) of sub-section (6) of section 270A of the Act. The Tribunal noted that the Chennai bench of Tribunal has in the case of S Saroja [2023 (5) TMI 1262 – ITAT CHENNAI] held that a bonafide mistake committed while computing total income, the penalty u/s 270A of the Act should not be levied.

The Tribunal deleted the penalty levied under section 270A of the Act.

BCAJ Admin

Proviso to section 56(2)(vii)(b) providing for considering stamp duty value on the date of agreement applies even in a case where a part of the consideration was paid by the co-owner, and not by the assessee, on or before the date of the agreement

50 Rekha Singh vs. ITO

ITA No. 2406/Mum/2023

A.Y.: 2015–16

Date of Order: 30th October, 2023

Section: 56(2)(vii)(b)

Proviso to section 56(2)(vii)(b) providing for considering stamp duty value on the date of agreement applies even in a case where a part of the consideration was paid by the co-owner, and not by the assessee, on or before the date of the agreement.

FACTS

The assessee, an individual, filed a return of income declaring therein a total income of ₹5,93,520 on 27th August, 2015. The case was subjected to limited scrutiny. In the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee has purchased an immovable property for a consideration of ₹84,15,300 as a co-owner jointly with her husband. The consideration was paid by both co-owners. The assessee was a co-owner for the property being 50 per cent share. The AO noticed that while the consideration was ₹84,15,300 whereas the value of property determined by the stamp valuation authority was ₹1,32,82,000. The AO was of the view that section 56(2)(vii)(b) was to be applied.

The assessee explained that as per the proviso to section 56(2)(vii)(b), the stamp duty value on the date of agreement may be taken for the purpose of this clause. It was explained that the date of agreement (letter of allotment) was 16th December, 2010, whereas the purchase deed was registered on 29th December, 2014, and the first payment of R1 lakh was paid through a banking channel on 18th October, 2010, by the husband of the assessee.

The AO did not agree with the submission of the assessee and since property was transferred for a consideration less than its stamp duty value, therefore, 50 per cent of the total difference was assessable as income in assessee’s hands.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that since the initial payment before date of registration was made only by the other co-owner, husband of the assessee, the assessee was not entitled to the benefit of the proviso. He, accordingly, confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

In the course of hearing before the Tribunal, on behalf of the assessee, it was submitted that the property was purchased by the assessee in the joint name of the assessee with her husband, and it is immaterial that the initial consideration was paid by the husband of the assessee who was other co-owner. Reliance was placed on the decision of the co-ordinate bench, Mumbai, in the case of Poonam Ramesh Shahjwanv. ITO(IT) 4(2)(1) A.Y. 2014–15 in ITA No. 2252/Mum/2019 and the decision of ITAT, Pune in the case of Sanjay Dattatrya Dapodikarv. ITO, Ward 6(2) [(2019) 107 taxmann.com 219 (Pune Trib.)].

The Tribunal having perused the decision of ITAT in the case of Poonam Ramesh Shahjwan (supra) wherein on the similar facts, the value of the flat was determined on the date of booking of flat after taking into consideration the payment made by the assessee through banking channel before the registration of the flat as laid down in the proviso to section 56(2)(vii)(b) of the Act. The Tribunal also considered the decision of ITAT, Pune bench in the case of Sanjay Dattatraya Dapodikar (supra) wherein it is held that where the date of agreement for fixing the amount of consideration for purchase of a plot of land and the date of registration of sale deed were different but assessee, prior to date of agreement, had paid a part of consideration by cheque, provisos to section 56(2)(vii)(b) being fulfilled, the stamp value as on date of agreement should be applied for purpose of said section.

The Tribunal directed the AO that the stamp duty value on the date of allotment, in the case of the assessee on 16th October, 2010, be taken for the purpose of section 56(2)(vii)(b) of the Act and not stamp value as on the date of registration of sale deed. Further, the Tribunal did not find any merit in the findings of the CIT(A) that before the registration of the flat only other co-owner, i.e., Ajay Kumar Singh, husband of the assessee has made the payment. Since, it was joint property owned by assessee and her husband, it is immaterial who had made payment before the date of registration of the property.

The Tribunal decided this ground of appeal in favour of the assessee.

BCAJ Admin

Section 54B deduction is allowable even if agricultural land is purchased in the name of the wife.

49 Ravinder Kumar vs. ITO

ITA No. 2265/Del/2023

A.Y.: 2011–12

Date of Order: 8th November, 2023

Section: 54B

Section 54B deduction is allowable even if agricultural land is purchased in the name of the wife.

FACTS

The assessee sold agricultural land which gave rise to long-term capital gain of ₹12,78,456. The assessee claimed that it had purchased another agricultural land and, therefore, the entire long term capital gain of ₹12,78,456 is exempt under section 54B of the Act. The Assessing Officer (AO) denied the claim for deduction under section 54B on the grounds that the land had been purchased in the name of the wife of the assessee.

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

Aggrieved, the assessee preferred an appeal to the Tribunal where, on behalf of the assessee, reliance was placed on the decision of Ashok Kumar vs. ITO [ITA No. 7460/Del/2018; AY: 2009–10; Order dated 28th December, 2022] and on behalf of the revenue, reliance was placed on dismissal of SLP by the SC in the case of Bahadur Singh vs. CIT(A) [(2023) 154 taxmann.com 457 (SC)] against the decision of the Punjab & Haryana High Court wherein purchase of agricultural land in the name of the assessee’s wife was not allowed under section 54B relief to the assessee.

HELD

The Tribunal noted the ratio of the decision of the Tribunal in the case of Ashok Kumar (supra). The Tribunal observed that in the decision relied upon by the DR, it was a dismissal of SLP simpliciter by Hon’ble Apex Court against the decision of Hon’ble Punjab & Haryana High Court. The Tribunal noted that dismissal of SLP simpliciter by Hon’ble Supreme Court does not merge the order of Hon’ble High Court with that of Hon’ble Supreme Court. It also noted that there is no jurisdictional High Court decision on this issue. Further, in case of conflicting, Hon’ble High Court decision one in favour of assessee has to be adopted as per Hon’ble Supreme Court decision in Vegetable Products. Accordingly, the Tribunal followed the precedent relied upon by the assessee which also draws support from Hon’ble High Court decisions referred therein.

The Tribunal set aside the order of the Revenue authorities and decided the issue in favour of the assessee.

BCAJ Admin

Claim of Loss in Revised Return of Income

ISSUE FOR CONSIDERATION

The provisions relating to filing of return of income are contained in section 139 of the Income Tax Act, 1961. A return of income filed within the due date is governed by sub-section (1) of section 139 Sub-section (3) deals with a return of loss. A return not filed in time can be furnished within the time prescribed under sub-section(4). The return furnished under sub-section (1) or (4) can be revised as per sub-section (5) of section 139.

Section 139(5) reads as under:

“If any person, having furnished a return under sub-section (1) or sub-section (4), discovers any omission or any wrong statement therein, he may furnish a revised return at any time before three months prior to the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.”

Section 80 provides that no loss shall be carried forward and set off unless such loss has been determined in pursuance of a return filed in accordance with sub-section (3) of section 139. Section 80 reads as under:

“Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed in accordance with the provisions of sub-section (3) of section 139, shall be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (2) of section 73A or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A.”

Sub-section (3) of section 139 reads as under:

“If any person who has sustained a loss in any previous year under the head “Profits and gains of business or profession” or under the head “Capital gains” and claims that the loss or any part thereof should be carried forward under sub-section (1) of section 72, or sub-section (2) of section 73, or sub-section (2) of section 73A or sub-section (1) or sub-section (3) of section 74, or sub-section (3) of section 74A, he may furnish, within the time allowed under sub-section (1), a return of loss in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and all the provisions of this Act shall apply as if it were a return under sub-section (1).”

A question had earlier arisen before the courts as to whether a return of income filed under section 139(1) declaring a positive income, could be revised under section 139(5) to declare a loss, which could be carried forward for set-off as per s.80 by treating such a return as the one filed under s. 139(3) of the Act. The Gujarat High Court in the case of Pr CIT vs. Babubhai Ramanbhai Patel 249 Taxman 470, the Madras High Court in the case of CIT vs. Periyar District Co-op. Milk Producers Union Ltd 266 ITR 705, and various benches of the Tribunal, in the cases of Sujani Textiles (P) Ltd 88 ITD 317 (Mad), Sarvajit Bhatia vs. ITO ITA No 6695/Del/2018, and The Dhrangadhra Peoples Co-op. Bank Ltd vs. DCIT 2019 (12) TMI 976 – ITAT Rajkot had all taken a view that it was permissible to file a return of loss for revising the return of income, and such a loss so declared in the revised return could be carried forward for set off. The Kerala High Court in the case of CIT vs. Kerala State Construction Corporation Ltd 267 Taxman 256, however, held to the contrary disallowing the right of set-off in the case where the original return of income was for a positive income,

The position believed to be settled was disturbed by a decision of the Supreme Court. The Supreme Court, in the case of Pr CIT vs. Wipro Ltd 446 ITR 1, in the context of withdrawal of a claim for exemption (of a loss) under section 10B through a revised return under section 139(5) claiming to carry forward of such loss (not claimed in view of s.10B exemption), has observed that the Revenue was right in claiming that the revised return filed by the assessee under section 139(5) can only substitute its original return under section 139(1) and cannot transform it into a return under section 139(3), in order to avail the benefit of carry forward or set off of any loss under section 80. The review petition against this order was dismissed by the Supreme Court vide its order reported at 289 Taxman 621.

Subsequent to this Supreme Court decision, the controversy has arisen before the Tribunal as to whether the Supreme Court’s decision has impacted the allowance of a claim for carry forward or set off of a loss not made in the original return by filing a revised return filed under section 139(5), after the due date of filing of the return under section 139(1). While the Pune Bench of the Tribunal has held that a claim of enhanced loss under a revised return is permissible, the Delhi Bench has taken a view that a claim of loss under a revised return would not enable the assessee to carry forward or set off a loss claimed for the first time in the revised return of income.

BILCARE’S DECISION

The issue first came up for discussion before the Pune bench of the Tribunal in the case of Dy CIT vs. Bilcare Ltd 106 ITR(T) 411, the relevant assessment year being the assessment year 2016-17.

In this case, the assessee had a wholly-owned subsidiary in Singapore, which went into liquidation. While the company was ordered to be liquidated within 30 days in February 2014, the assessee made an application to the High Court of Singapore in October 2015 seeking permission to transfer the shares held by it in the Singapore subsidiary to another foreign subsidiary incorporated in Mauritius for a consideration of SGD 1. The permission was granted by the Singapore High Court in October 2015, and the transfer of shares was completed on 22nd October, 2015.

The assessee had not reflected this sale of shares of the Singapore subsidiary in its audited financial statements. The assessee had filed its original return before the due date on 28th November, 2016, declaring a loss of ₹45.98 crore, not taking into consideration such loss on the sale of shares of the Singapore subsidiary. The return was revised after the due date on 29th March, 2018, increasing the loss to ₹968.31 crore. The increase in loss was on account of the claim for long-term capital loss of ₹922.33 crore arising on transfer of shares of the Singapore subsidiary of the company, which claim was not made in the original return of income.

In the draft assessment order, the assessing officer refused to take cognizance of the revised return of income, in which the claim for such long-term capital loss was made. The assessee filed an application before the Joint Commissioner of Income Tax under section 144A for issuance of a direction on the issue of disallowance of the long-term capital loss arising on the sale of shares of the subsidiary of ₹922.33 crore. The Joint Commissioner directed that the loss on sale of shares claimed in the revised return should not be entertained, but that the claim of capital loss of ₹922.33 crore made during the course of assessment proceedings may be examined on merits.

The assessing officer disallowed the claim of long-term capital loss on the sale of shares of the foreign subsidiary on the following grounds:

(i) the claim for deduction of loss on the sale of shares in the revised return of income was not valid in law as the necessity for filing the revised return of income was not on account of any omission or wrong statement in the original return of income;

(ii) the Singapore High Court simply permitted the assessee to sell the shares of the Singapore subsidiary without mentioning the consideration for the sale of shares, and therefore the transaction of sale of shares was not by operation of law;

(iii) the assessee only sold the shares of the Singapore subsidiary to another wholly-owned subsidiary in Mauritius, and there being complete unity of control between the seller and purchaser, the transaction was not undertaken at arm’s length;

(iv) the assessee failed to furnish the information sought by the AO in order to determine the fair market value of the shares in terms of the provisions of rule 11UA of the Income Tax Rules, 1962.

The assessing officer was of the view that it was a dubious method adopted by the assessee in order to avail the benefit of set-off of the long-term capital loss arising on the sale of the shares of the subsidiary. Invoking the doctrine laid down by the Supreme Court in the case of McDowell and Co Ltd vs. CTO 154 ITR 148, the AO denied the claim for deduction of long-term capital loss of ₹922.33 crore arising on sale of shares of the Singapore subsidiary.

The Commissioner (Appeals) considered the chronology of events and facts of the case and upheld the finding of the AO that the long-term capital loss could not have been claimed through a revised return of income. He however held that since the assessee had suffered a loss, the claim made during the course of assessment proceedings could also be considered, placing reliance on the decision of the Bombay High Court in the case of CIT vs. Pruthvi Brokers & Shareholders 349 ITR 336. He therefore directed the AO to allow the loss as the claim was genuine and bona fide.

Before the tribunal, on behalf of the revenue, it was contended that the revised return of income was not valid in law and that the Commissioner (Appeals) ought not to have applied the ratio of the Bombay High Court decision in the case of Pruthvi Brokers & Shareholder (supra), as the decision related to a claim made for the first time before the Commissioner (Appeals) and that the ratio of the decision of the Supreme Court in the case of Goetze (India) Ltd 284 ITR 323 was squarely applicable to the facts of the case. It was further claimed that the Commissioner (Appeals) had failed to examine the colourful device adopted by the assessee and that the transactions of sale of shares of the Singapore subsidiary to another wholly-owned foreign subsidiary were not at arm’s length price.

On behalf of the revenue, it was further claimed that the revised return of income was not valid in law, as the assessee had chosen not to challenge this finding before the tribunal. It was claimed that the Commissioner (Appeals) had failed to take cognizance of the provisions of section 139(3) read with section 80. Reliance was placed on the decision of the Supreme Court in the case of Wipro Ltd (supra).

On behalf of the assessee, it was submitted that the ratio of the decision of the Supreme Court in the case of Wipro Ltd (supra) had no application to the facts of the case, as the issue before the Supreme Court was regarding the interpretation of the provisions of section 10B(8). It was further submitted that the claim of the assessee in the case before the tribunal was totally different from the facts in the case of Wipro Ltd (supra), and therefore the ratio of the decision of the Supreme Court in the case of Wipro Ltd (supra) could not be applied to the facts of the case before the tribunal. It was submitted that the material on record clearly showed that after meeting the liabilities of creditors of the Singapore subsidiary, nothing remained to be distributed amongst the shareholders. Therefore the intrinsic value of the shares was nil, and that there could not be any dispute with regard to consideration received on the sale of the shares.

It was further pointed out on behalf of the assessee that rule 11UA did not apply to the year under consideration, since it came into effect from 1st April, 2018. It was further submitted that the transaction was not a dubious transaction but was a real transaction, as evidenced by the documents showing the completeness of the transaction of the sale of shares. It was argued that the ratio of the decision in the case of McDowell & Co Ltd (supra) had no application to the facts of the case as it was a real transaction, and citizens were free to arrange affairs in order to minimise the tax liability.

Analysing the provisions of section 139, the tribunal observed that there was no dispute that the original return was filed within the due date for filing of the return of income under section 139(1). Even the revised return of income was filed within the prescribed period as required by section 139(5). The revised return could be filed in a situation where an assessee discovered any omission or any wrong statement made in the original return of income. The circumstances that led the assessee not to claim the long-term capital loss in the original return of income were explained before the AO, and which explanation remained uncontroverted. Therefore, according to the tribunal, it could not be said that it was not a bona fide omission made in the original return of income, or that the assessee had failed to satisfy the conditions prescribed under section 139(5) for filing the revised return of income. The Tribunal therefore held that the AO was not justified in not accepting the revised return of income filed by the assessee.

The tribunal observed that it was a settled position of law that an assessee was entitled to revise the return of income within the time allowed under section 139(5). Once the revised return of income was filed, the natural consequence was that the original return of income was effaced or obliterated for all purposes, and it was not open to the AO to revert to the original return of income. This position of law was approved by the Supreme Court in the case of CIT vs. Mahendra Mills/Arun Textile C/Humphreys Glasgow Consultants 243 ITR 56.

As regards the applicability of the Supreme Court decision in the case of Wipro Ltd (supra), the tribunal observed that, in that case, the Supreme Court was concerned with the interpretation of the provisions of section 10B(8), and had made a passing remark that the revised return of income filed by the assessee under section 139(5) only substituted original return of income under section 139(1), and such a return could not be transformed as return of loss filed under section 139(3) in order to avail the benefit of carry forward and set off of any loss under the provisions of section 80. The issue of interpretation of the provisions of section 139(3) and section 80 was not before the Supreme Court in the case of Wipro Ltd (supra). According to the tribunal, it was a settled legal position that every interpretation made by the Honourable Judges did not constitute the ratio decidendi. The tribunal further observed that the observations made by the Supreme Court had no application to the facts of the case before it, as the assessee had filed the original return of income showing loss within the time prescribed under section 139(1), and therefore the decision of the Supreme Court was distinguishable on facts.

According to the tribunal, it was clear that the assessee had discovered and omitted to claim a genuine loss arising on sale of shares, and therefore filed a revised return of income under section 139(5) within the prescribed time limit claiming the determination and carry forward of loss. It was a valid revised return of income filed under section 139(5). Therefore, the findings of the AO as well as the Commissioner (Appeals) to the extent that the revised return of income was not a valid one, was reversed by the tribunal.

The tribunal further rejected the arguments made on behalf of the revenue, that the finding that the revised return of income was not valid was accepted by the assessee as the issue was neither raised in cross-appeal nor in cross-objection, observing that respondent to an appeal could always support the order of the Commissioner (Appeals) on the ground decided against him under the provisions of rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963. The tribunal observed that it was a settled position of law that in a case where the assessee filed the return of loss within the time prescribed under section 139(1), there was no bar under the provisions of the Income Tax Act to claim a higher loss during the course of assessment proceedings, nor were there any fetters on the AO to allow such higher loss.

Placing reliance on the decisions of the Delhi High Court in the case of CIT vs. Nalwa Investment Ltd 427 ITR 229 and Karnataka High Court in the case of CIT vs. Srinivasa Builders 369 ITR 69, the tribunal observed that when the assessee had claimed a lower amount of loss erroneously, which was sought to be corrected during the course of assessment proceedings, the AO was not justified in not determining and allowing the carry forward and set off of the loss, as the conditions for triggering the provisions of section 80 would not apply.

The Tribunal therefore held that the reasoning of the AO, that the loss not claimed in the original return of income but claimed in the revised return of income could not be allowed, was not sustainable in the eyes of the law.

RRPR HOLDING’S DECISION

The issue again came up before the Delhi bench of the tribunal in the case of RRPR Holding (P) Ltd vs. DyCIT 201 ITD 781.

The assessee was an investment holding company set up to acquire and hold shares of NDTV Ltd and its group companies. It filed its original return of income under section 139(1) on 15th October, 2010, declaring total income at ₹4,17,005. The original return was subjected to scrutiny assessment by the issuance of notice under section 143(2) dated 29th August, 2011. Pending completion of assessment under section 143(3), the assessee filed a revised return under section 139(5) on 2nd February, 2012 within the prescribed time. As per the revised return, the assessee claimed a long-term capital loss of ₹206.25 crore arising on the sale of shares, along with the income from other sources of ₹4,17,005 declared in the original return and claimed to carry forward of such loss.

The AO noted that no such loss arising on the sale of shares was claimed in the original return filed by the assessee. Subsequently, according to the AO, enquiries in respect of certain transactions entered into by the assessee were carried out by the Investigation Wing. Following the same, the assessee revised its return of income after a lapse of 17 months and filed a revised return claiming the long-term capital loss. The AO observed that such a revised return was not a valid return, and therefore non-est in the eyes of law. The AO noted that there was not even an iota of reference to any transaction involving any capital gains or capital loss in the original return. As per the AO, for entitlement of carry forward of losses, as per section 139(3), the loss return had to be necessarily filed within the time allowed for filing return under section 139(1), whereas the capital loss had been claimed for the first time in the revised return filed beyond the time limit stipulated under section 139(1). Thus, the AO refused to admit the claim of long-term capital loss and denied carrying forward and setting off of such loss.

The Commissioner (Appeals) upheld the denial of the long-term capital loss, on the ground that the return had to be necessarily filed within the time limit prescribed under section 139(1), but that the loss had been claimed by filing a revised return under section 139(5) beyond the time limit prescribed under section 139(1).

Before the tribunal, on behalf of the assessee, it was contended that where the original return had been filed on or before the due date under section 139(1), the assessee was entitled in law to revise the return under section 139(5) within the due date prescribed therein. The assessee had filed the original return as well as the revised return within the due dates prescribed under the respective sub-sections (1) and (5) of section 139. Thus the loss arising on the sale of the shares claimed as long-term capital loss was not hit by the embargo placed by section 80. Reliance was placed on the decisions of the High Courts in the case of Babubhai Ramanbhai Patel (supra), Dharampur Sugar Mills Ltd (supra), and the decision of the Mumbai bench of the tribunal in the case of Ramesh R Shah vs. ACIT 143 TTJ 166 (Mum) in support of this proposition. It was submitted that the denial of carry forward of losses claimed in the revised return was opposed to the scheme of the Act as interpreted by the judicial dicta and hence was required to be reversed by admitting the claim made towards long-term capital losses by way of revised return, and allowing carry forward and set off of such losses.

On behalf of the revenue, it was submitted that the loss return under section 139(3) must be necessarily filed within the due date prescribed under section 139(1) to avoid the rigours of section 80. The losses claimed had come into consideration by virtue of a revised return which was filed subsequent to the due date prescribed under section 139 (1), and thus the revised return to make a new claim giving rise to losses, could not be allowed in defiance of the provisions of the Act, regardless of the fact that the revised return had been filed within the due date prescribed under section 139(5). It was further submitted that the claim of capital loss had been made for the first time in the revised return, and it was not a case where the claim of loss made in the original return had been modified in the revised return. It was further pointed out that such a huge loss was claimed for the first time by way of a revised return, and that there was no reference to the loss in the original return or in the profit and loss account. It was contended that such an omission to claim the loss in the original return was prima facie willful to hide the transactions from the knowledge of the Department, and therefore the claim of loss made by filing the revised return should not be granted.

The tribunal observed that the moot question in the case was whether the assessee was entitled in law to make an altogether new claim of capital loss in the revised return which was filed within the due date prescribed under section 139(5) but subsequent to the due date prescribed under section 139(1), and consequently, whether the assessee was entitled to carry forward such capital losses claimed in the revised return. The other integral issue was whether the loss claimed in the revised return met the requirement of section 139(5).

The tribunal analysed the provisions of sections 139(1), 139(3), 139(5) and 80. It noted that section 80 began with a non-obstante clause, unequivocally laying down that to get the benefit of carry forward of loss pertaining to capital gains, the return of loss had to be filed within the time allowed under section 139(1). Section 80 therefore prohibited the claim of carry forward of such losses unless determined under section 139(3). Section 139(3) in turn made the mandate of the law clear that the loss return must be filed within the time limit permitted under section 139(1). The revision of the return under section 139(5) was also circumscribed by the expression “discovers any omission or any wrong statement in the original return”.

Analysing the facts of the case before it, the tribunal noted that the original return filed under section 139(1) did not make reference to the existence of any capital loss at all. The loss had been claimed for the first time in the revised return of income filed beyond the time limit prescribed under section 139(1). According to the tribunal, the provisions of section 80 thus came into play. The tribunal observed that the law codified was plain and clear and did not have any ambiguity. Therefore, the tribunal was of the view that the capital loss claimed under a return filed beyond the time limit under section 139(1) could not be carried forward under section 74.

The tribunal was of the view that the decision of the Allahabad High Court in the case of Dhampur Sugar Mills Ltd (supra) did not apply as the facts of the case before it were quite different. The tribunal refused to follow the decision of the Gujarat High Court in Babubhai Ramanbhai Patel (supra) on the ground that section 80 had not been pressed for the consideration of the High Court at all, and reliance upon such judgment rendered without reference to section 80, which was pivotal to the controversy, was of no relevance, and the observations made therein could not be applied to the facts of the case before it.

The tribunal further observed that no explanation was given as to how the omission to account for such a large loss had resulted, and therefore the propriety of such capital loss itself was under a cloud. It was therefore difficult for the tribunal to affirm that the omission or wrongful statement in the original return was sheer inadvertence and not deliberate or willful. The revised return could be filed only if there was an omission or wrong statement. A reference was made by the tribunal to the decision of the Supreme Court in the case of Kumar Jagdish Chandra Sinha vs. CIT 220 ITR 67, where it was held that a revised return could not be filed to cover up deliberate omission etc. in the original return.

The Tribunal therefore upheld the order of the AO.

OBSERVATIONS

There are various facets to the issue of claim of loss vis-à-vis a revised return;

A claim of increased loss where the original return declared loss that was increased in the revised return,
A claim of loss vide a revised return of income filed within the due date prescribed under s. 139(1),
Where the claim for loss was made during the course of assessment before the AO,
Where the claim for loss was made before the appellate authorities.
A claim of loss where the original return disclosed positive income,
Where the omission or wrong statement was conscious.

In Wipro’s case, the Supreme Court has rejected the claim for set-off and carry forward of the loss on two grounds;

the reason for filing the revised return could not be attributed to a mistake or a wrong statement, and
the return so filed could not transform itself into a return of loss under s. 139(3).

The Supreme Court in Wipro’s case considered the facts where the assessee filed a return under section 139(1), claiming exemption under section 10B, and therefore did not claim carry forward of the loss otherwise incurred. After the due date, it filed the declaration under section 10B(8) claiming that the provisions of section 10B should not apply, and claimed loss and the right to carry forward of losses under section 72, withdrawing its claim under section 10B. It may be noted that section 10B(8) requires the filing of the declaration to opt out before the due date prescribed under section 139(1). The Supreme Court held that the requirement to file the declaration under section 10B(8) was a mandatory requirement and not a directory one, and therefore filing the revised return under section 139(5) could not help the assessee to withdraw the claim under s. 10B of the Act and in its place stake a claim for the loss.

The Supreme Court also held that the assessee could file a revised return in a case only where there was an omission or a wrong statement. As per the Supreme Court, the revised return of income could not be filed to withdraw the claim of exemption and stake a claim for set-off of loss and to carry forward such loss. The Court held that the filing of a revised return to take a contrary stand regarding the claim of exemption was not permissible. In deciding so, the Supreme Court observed that the revised return filed by the assessee under section 139(5) only substituted the original return under section 139(1) and could not transform the original return into a return under section 139(3) in order to avail the benefit of carry forward or set-off of any loss under section 80. The issue in Wipro’s case was more about the right to withdraw the claim for an exemption by filing a revised return, and less about the right to claim a loss for the first time in a revised return of income.

In a situation where an original return of income is filed claiming a loss, either under the head “Business or Profession” or “Capital Gains” or both, which is filed within the time limit specified in section 139(1), what has undoubtedly been filed is a return of loss as envisaged by section 139(3), which is regarded as a return under section 139(1) by reason of operation of section 139(3). As held by the Supreme Court in Mahendra Mills case (supra), the revised return effaces or obliterates or replaces the original return, which original return cannot be acted upon by the AO. Any mistake or wrong statement made in a return furnished under section 139(1) can be corrected by filing a revised return under section 139(5) within the time specified in that sub-section. Therefore, logically, a return under section 139(3) declaring a loss under any one of the two heads of income can be revised to disclose a further loss under any of those heads (either the head with a positive income or the head with a loss in the original return) not disclosed in the original return. In Bilcare’s case, this was the position. The Delhi High Court supports this proposition in Nalwa Investments (supra) case, where a higher loss than that filed in the original return was claimed during assessment proceedings and allowed by the High Court. The Madras High Court also supports this proposition in the case of Periyar District Co-op. Milk Producers Union Ltd (supra), where it held that in view of the expression “all the provisions of this Act shall apply as if it were a return under sub-section (1)” contained in section 139(3), there was no reason to exclude the applicability of sub-section (5) to a return filed under sub-section (3). A similar view was taken by the Pune Tribunal in the case of Anagha Vijay Deshmukh vs. DyCIT 199 ITD 409, where a revised return was filed to claim a higher capital loss than that claimed in the original return.

In Bilcare’s case, the tribunal was concerned with a case where the original return of loss was revised and the claim of loss was substituted with the higher loss. This made it easier for the tribunal to hold the case in favour of the assessee as the original return was a return under s. 139(3). The facts presented by the assessee substantiated that there was an omission while filing the original return which was circumstantial and not deliberate. On a co-joint reading of the provisions of s. 139(3) and (5) along with sub-section (1), it is correct to hold that a return of loss filed under s. 139(3) can be revised under s.139(5) of the Act. In our considered view, there is no room for doubt about this position in law. The ratio of the decision in the case of Wipro was not applicable in this case, even where its decision in the context was not held to be obiter dicta.

Likewise, a case where the assessee has filed the revised return filed before the expiry of time prescribed under s.139(1), for claiming the loss for the first time should not pose a problem as such a return is nonetheless within the time permissible under s. 139(3) of the Act. The case of the assessee will be better served where there was a mistake in omitting to claim the loss originally.

A claim for deduction or expenditure is permissible to be made during the course of assessment or appellate proceedings, and such a claim resulting in assessed loss should not be disallowed and should be eligible for carry forward as long as the return of income was filed within the due date of s.139(1).

The challenge remains in a case where the original return of income filed u/s 139(1) was for a positive income which was changed to loss while filing the revised return under s. 139(5), outside the time prescribed under s.139(1) of the Act. It is in such a case that the Supreme Court in Wipro’s case held that it was not possible to grant the claim of loss staked under the revised return. The facts in RRPR’s case were similar to the facts in Wipro’s case, and therefore the tribunal in that case had no option but to apply the ratio of the decision of the Supreme Court.

In all cases of the revised return under s.139(5), the assessee has to establish that the revision was on account of the omission or a wrong statement and was not a deliberate and conscious act. Kumar Jagdish Chandra Sinha (supra),

Assuming that a given case does not suffer from the handicap of the deliberate or intentional act on the part of the assessee, one can perhaps analyse the issue in the absence of Wipro’s decision, notwithstanding the fact that even the application for the review of Wipro’s decision is rejected.

A situation where the income declared in the original return is a positive income under both heads of income, “Business or Profession” as well as “Capital Gains”, but a loss under either head is sought to be claimed in a revised return, as was the situation in RRPR Holding’s case. These were the facts before the Gujarat High Court in Babubhai Ramanbhai Patel’s case, where a positive return of income that was filed was sought to be revised disclosing such income, but also disclosing a speculation loss. While the Gujarat High Court did not expressly refer to section 80, they did hold that accepting the contention of the revenue would amount to limiting the scope of revision of the return, which did not flow from the language of section 139(5).
Similarly, the Karnataka High Court, in the case of Srinivas Builders (supra) allowed the claim for loss made during assessment proceedings, where the return of income originally filed was of a positive income.
A contrary view was taken by the Kerala High Court in the case of CIT vs. Kerala State Construction Corporation Ltd 267 Taxman 256, where the High Court held that when a return is originally filed under section 139(1), the enabling provision under section 139(5) to file a revised return only enables the substitution or revision of the original return filed. On a revised return filed, it can only be a return under section 139(1) and not one under section 139(3). The Kerala High Court relied (perhaps unjustifiably) on the decision of the Punjab & Haryana High Court in the case of CIT vs. Haryana Hotels Ltd 276 ITR 521, which was a case where a loss of an earlier year was claimed for set off without a return of income being filed at all and without any assessment having been done for that earlier year.
In Ramesh R Shah’s case (supra), a return of positive income was sought to be revised by claiming a long-term capital loss which was to be carried forward, in addition to the income declared in the original return. In that case, the Tribunal observed as under:

“In our humble opinion correct interpretation of section 80, as per the language used by the Legislature, condition for filing revised return of loss under section 139(3) is confined to the cases where there is only a loss in the original return filed by the assessee and no positive income and assessee desires to take benefit of carry forward of said loss. Once, assessee declares positive income in original return filed under section 139(1) but subsequently finds some mistake or wrong statement and files revised return declaring loss then can he be deprived of the benefit of carry forward of such loss? In our humble opinion, if we accept interpretation given by the authorities below, it would frustrate the object of section 80. Section 80 is a cap on the right of the assessee, when the assessee claims that he has no taxable income but only a loss but does not file the return of income declaring the said loss as provided in sub-section (3) of section 139. It is pertinent to note here that Legislature has dealt with two specific situations (i) under section 139(1), if the assessee has a taxable income chargeable to tax then it is a statutory obligation to file the return of income within the time allowed under section 139(1). So far as section 139(3) is concerned, it only provides for filing the return of loss if the assessee desires that the same should be carried forward and set off in future. As per the language used in sub-section (3) to section 139, it is contemplated that when the assessee files the original return, at that time, there should be loss and the assessee desires to claim said loss to be carried forward and set off in future assessment years. Sub-section (1) of section 139 cast statutory obligation on the assessee when there is positive income. In the present case, admittedly, the assessee filed the return of income declaring the positive income and even in the revised return, the assessee has declared the positive income as the loss in respect of the sale of shares, which could not be set off, inter-source or inter-head under section 70 or 71 of the Act.

11. We have to interpret the provisions of any statute to make the same workable to the logical ends. As per the provisions of sub-section (5) to section 139, in both the situations where the assessee has filed the return of positive income as well as return of loss at the first instance as per the time limit prescribed and subsequently, files the revised return then the revised return is treated as valid return. In the present case, as the assessee filed its original return declaring the positive income and hence, in our opinion, subsequent revised return is valid return also and the assessee is entitled to carry forward of ‘long-term capital loss’. Sub-sections (1) and (3) of section 139 provides for the different situations and in our opinion, there is no conflict in applicability of both the provisions as both the provisions are applicable in the different situations. We are, therefore, of the opinion that there is no justification to deny the assessee to carry forward the loss.”

Unfortunately, the decision in Ramesh R Shah’s case, though cited before the Tribunal in RRPR Holding’s case, was not considered by it in deciding the matter. It appears that the decision in RRPR Holding’s case was swayed by the assessee’s failure to furnish an explanation of the nature and character of transactions resulting in the capital loss, and therefore the genuineness of the transactions.
This view taken in Ramesh R Shah’s case has also been followed by the Tribunal in the case of Mukund N Shah vs. ACIT, ITA No 4311/Mum/2009 dated 17th August, 2011, where a revised return was filed during the course of assessment proceedings, claiming a capital loss which had not been claimed in the original return filed under section 139(1). The Tribunal held that once the return is revised the original return filed gets substituted by a revised return, and therefore, loss determined as per the revised return was to be treated as loss declared under section 139(3), because the original return was filed within the time allowed under section 139(1). Therefore, the loss determined has to be taken as a loss computed in accordance with the provisions of section 139(3) and such loss has to be allowed to be carried forward under the provisions of section 80. The Tribunal also looked at it from a different angle. If the assessee had not revised the return at all and no loss was shown in the original return due to some mistake, the AO in the assessment under section 143(3) was required to compute income or loss correctly. Once the loss had been determined by the AO under section 143(3), it cannot be said that the loss cannot be allowed to be carried forward when the return has been filed within the time allowed under section 139(1).

A harmonious reading of the provisions of sub-sections (1),(3),(5) of s. 139 with s.80 of the Act reveals that the return of income is to be filed under s.139(1) and of loss under s. 139(3) and both the returns are to be filed within the time prescribed under s.139(1). The reading also confirms that both of these returns can be revised under sub-section (5). There is no express or implicit condition in s.139 that stipulates that a return of income cannot be revised to declare loss for the first time.

Importantly s.139(3) clearly states that all the provisions of the Act shall apply to such a return as if the return of loss is the return of income furnished under s.139(1) of the Act. In our respectful opinion, it is clear that no further transformation is called for where the legislature itself had bestowed the return of loss with the status of a return under s.139(1), and no further aid is required from the provisions of sub-section (5) to further transform the return filed thereunder as one under sub-section (3).

The purpose of section 80 is that, while there is no obligation to file a return of income under section 139(1), the assessee should file a return of income and have the loss determined in order to be able to claim carry forward and set off of the loss. This purpose is achieved even in a situation where the original return declaring a positive income is filed in time but is revised on account of a mistake to reflect a loss. Further, if a return of loss can be revised to claim a higher loss or can be assessed at a higher loss on account of a claim made in assessment proceedings, there is no justification in denying a claim of a loss merely because it was made through a revised return and not through the original return. This view also results in a harmonious interpretation of sections 80, 139(3) and 139(5).

There is no doubt that the ratio of the Supreme Court‘s decision in Wipro Ltd.’s case will be applicable to cases with identical facts, till such time the relevant part of the decision is read as obiter dicta by the courts or the same is reconsidered by the Supreme Court itself. Better still is for the legislature to come forward and correct an aberration that is harmful, and the harm is unintended.

BCAJ Admin

Principle Of Mutuality Cannot Be Extended To Interest Earned By Mutual Concern On Fixed Deposits Placed With Member Banks

INTRODUCTION

1.1 Section 4 of the Income-tax Act, 1961 (‘the Act’) provides that income-tax shall be charged for any assessment year in respect of the ‘total income’ of the previous year of every person. It is a well-settled law that no person can earn profits from himself. This is the basis of the principle of mutuality which has been accepted by the Courts in their decisions rendered from time to time.

1.2 One such decision is that of the Supreme Court in the case of CIT vs. Bankipur Club Ltd. [(1997) 226 ITR 97 –SC)] which was analysed in this column in the August 1998 issue of the BCAJ. In this case, a batch of appeals filed by the department came up before the Supreme Court, and the same were divided into 5 groups. One of the assessees – Cawnpore Club Ltd. which was initially a part of this group of matters was subsequently delinked and kept for hearing separately. While delinking the matter, the Supreme Court observed that it did not appear that the issue of income being exempt on the ground of mutuality was decided in favour of the assessee and the only issue in that appeal filed by the tax department was whether certain income could be taxed under the head Income from house property. In the remaining group of cases, the assessees were companies registered under section 25 of the Companies Act, 1956, and were mutual undertakings in the nature of ‘Members’ clubs’. The issue before the Supreme Court was as to whether the surplus receipts of the clubs earned from providing facilities to its members was in the nature of ‘income’ chargeable to tax. The income received by the clubs from providing facilities to non-members was not an issue before the Supreme Court. The Court held that it was not necessary that the individual identity of contributors and participants should be established for an entity to be regarded as a Mutual Concern. Such identity should be established between the class of contributors and the class of participants. The Court after setting out the facts in each of these groups of cases observed that the receipts for the various facilities extended by the assessee clubs to its members as part of the usual privileges, advantages, and conveniences, attached to the membership of the club could not be said to be ‘a trading activity’ and held that the surplus as a result of mutual arrangement could not be said to be ‘income’ of the assessees.

1.3 Thereafter, the case of CIT vs. Cawnpore Club Ltd. [(2004) 140 Taxman 378 -SC], which was delinked in the above group of cases, was separately taken up by the Supreme Court. The Supreme Court in Cawnpore’s case noted that one of the questions which the High Court had decided in other cases relating to the same assessee was that the doctrine of mutuality applied and, therefore, the income earned by the assessee from the rooms let out to its members could not be subjected to tax. The Supreme Court further noted that no appeal had been filed against the said decision of the High Court and the matter stood concluded in favour of the assessee. Having noted so, the Supreme Court observed that there was no point in proceeding with the appeals on the other questions.

1.4 In the case of Bangalore Club vs. CIT [(2013) 350 ITR 509 –SC], the assessee relying on the principle of mutuality took a stand that interest earned on the fixed deposits kept with certain banks which were corporate members of the assessee was not chargeable to tax. The tax was, however, paid by the assessee on the interest earned on fixed deposits kept with non-member banks. The Supreme Court denied the assessee’s claim for exemption on the basis of mutuality principle. The Supreme Court held that (i) the arrangement lacked a complete identity between the contributors and the participants as once the surplus funds were placed in fixed deposits, the closed flow of funds between the assessee and the member banks was broken and the use of these funds by the member banks for advancing loans to third parties and engaging in commercial operations ruptured the privity of mutuality; (ii) the excess funds of a mutual concern must be used in furtherance of its objects which was not so in the present case and (iii) the third condition that the funds must be returned to the contributors as well as expended solely on the contributors was violated in the present case once the deposits placed by the assessee with the banks were given to third parties by the bank for commercial reasons.

1.5 Recently, this issue of taxability of interest earned by a mutual concern from fixed deposits placed with banks came up before the Supreme Court in the case of Secundrabad Club vs. CIT and it is thought fit to consider the said decision in this column.

Secundrabad Club vs. CIT (2023) 457 ITR 263 – SC

2.1 In this case, the Supreme Court heard a batch of appeals filed by the respective assessees from the decision of the Andhra Pradesh High Court in the case of Secunderabad Club [(2012) 340 ITR 121] and from the decisions of the Madras High Court in the cases of Madras Gymkhana Club [(2010) 328 ITR 348], Madras Cricket Club [(2011) 334 ITR 238], etc. The High Courts in all these cases concluded that the deposit of surplus funds by the appellant Clubs by way of bank deposits in various banks was liable to be taxed in the hands of the Clubs and that the principle of mutuality would not apply in such a case.

2.1.1 Before the Supreme Court, one of the primary arguments urged by the assessee in these appeals against the aforesaid High Court judgments was that the Supreme Court’s decision in the case of Bangalore Club (para 1.4 above) called for a reconsideration in view of the Court’s earlier decision in the case of Cawnpore Club (para 1.3 above).

2.2 The assessee submitted that the two-judge bench decision of the Supreme Court in the case of Bangalore Club was not a binding precedent as the same did not notice the order passed in the case of Cawnpore Club and, therefore, the decision of Bangalore Club required reconsideration. The assessee urged that prior to the decision in the case of Bangalore Club, all interest earned from fixed deposits, and post office deposits by the clubs were entitled to exemption from income tax as the same was surplus income of the clubs earned without any profit motive and such interest income earned from the deposits was exclusively used for the benefit of the clubs and its members.

2.2.1 The assessee further submitted that the reasoning of the Supreme Court in the case of Bangalore Club was flawed and, further, such judgment being contrary to the order passed in Cawnpore Club was per incuriam and not a binding precedent. The assessee pointed out that the Bangalore Club failed to note that once there is no profit motive in the activities of a club and despite such fact, a surplus is generated, the activities and income of the club cannot be tainted with commerciality. The assessee also placed reliance on the Supreme Court’s decision in the case of Kunhayammed vs. State of Kerala [(2000) 6 SCC 359] to urge that when a special leave petition (in the case of Cawnpore Club) is converted into a Civil Appeal and a judgment is rendered in the Civil Appeal, the same is a binding precedent to be followed subsequently by all courts which was not done by the Court in Bangalore Club. The assessee also submitted that as two decisions of the Supreme Court in the case of Cawnpore Club and Bangalore Club took two diametrically opposite views, a reference ought to be made to a larger bench to lay down the correct law.

2.2.2 The assessee also contended that once the triple test for the applicability of the principle of mutuality is satisfied, the notion of rupture of mutuality or one-to-one identity could not have been the basis for denying exemption on the interest income generated by the clubs.

2.2.3 The assessee further urged that for social clubs and mutual associations, the character and nature of the receipt are immaterial and the only thing which is of significance is the utilisation of the income earned by a club only for the benefit of its members. The assessee urged that irrespective of whether the banks are corporate members of the club or not, there is complete identity between the source of deposits made by the Club in banks, post offices etc., and the beneficiaries of the interest earned, as the interest earned on the said deposits are being used for the benefit of the members of the Club.

2.2.4 The assessee submitted that the aspect of profit motive could not be attributed to clubs, as the only intention behind depositing surplus funds of the clubs in a bank was a matter of prudence, and the interest earned thereon along with the principal amount deposited would only be used for the benefit of the members of a club.

2.2.5 The assessee also placed reliance on the decision of the Karnataka High Court in the case of Canara Bank Golden Jubilee Staff Welfare Fund vs. DCIT [(2010) 308 ITR 202] where on the facts of that case, the Karnataka High Court had held that the principle of mutuality would apply even to interest earned from fixed deposits, National Savings Certificates etc., invested by the appellant-Clubs in various banks who may or may not be corporate members of these Clubs.

2.3 On the other hand, the Revenue submitted that the impugned judgments of the High Courts did not require any interference. The Revenue also submitted that the decision of the Supreme Court in Bangalore Club squarely covered the issue at hand and did not call for any reconsideration.

2.3.1 The Revenue placed reliance on Bangalore Club’s decision to urge that the principle of mutuality applied to the generation of surplus funds but once the funds were invested in the form of fixed deposits in the banks (whether corporate members of the club or not), in post offices or through national savings certificates etc., the funds suffer a deflection as a result of being exposed to commercial banking operations or operations of the post offices which use the said funds for advancing loans to their customers and thus, generate a higher income by lending it at a higher rate to the third party customers and pay a lower rate of interest on the fixed deposits made by the clubs.

2.3.2 The Revenue further submitted that the Bombay High Court and the Madras High Court had not concurred with the judgment of the Karnataka High Court in Canara Bank, and had observed that the said judgment may be restricted to the facts of that case alone and cannot act as a precedent, particularly in view of the judgment of the Supreme Court in Bangalore Club. The Revenue contended that the judgment in Bangalore Club had impliedly overruled the decision of the Karnataka High Court in Canara Bank’s case.

2.4 Rebutting the Revenue’s arguments, the assessee pointed out that the Supreme Court had dismissed the special leave petition filed by the Revenue against the judgment of the Karnataka High Court in Canara Bank’s case. The assessee submitted that once the Supreme Court had affirmed the Karnataka High Court’s judgment in the case of Canara Bank which was in line with the judgment of the Supreme Court in Cawnpore Club, the subsequent judgment in Bangalore Club taking a totally contrary view required reconsideration.

2.5 After considering the rival contentions, the Supreme Court set out the jurisprudence on the principle of mutuality and then proceeded to decide the issue.

2.5.1 With respect to the binding nature of Cawnpore Club’s judgment, the Supreme Court held that there was no ratio decidendi that arose from Cawnpore Club’s order which could be treated as a binding precedent for subsequent cases. The relevant observations of the Supreme Court, in this regard, are as follows [page 301]:

“ ……..It must be remembered that the appeals in the case of Cawnpore Club were filed by the Revenue and merely because the Revenue did not press its appeal in respect of the other aspects of the case and this Court found that the income earned by the assessee from the rooms let out to its members could not be subjected to tax on the principle of mutuality, it would not mean that the other questions which were not pressed by the Revenue in the said appeal stood answered in favour of the assessee and against the Revenue. On the other hand, in the absence of there being any indication in the order as to what “the other questions” were in respect of which the principle of mutuality applied, in our view, there is no ratio decidendi emanating from the said order which would be a binding precedent for subsequent cases. In view of the disposal of Revenue’s appeals in the case of Cawnpore Club by a brief order sans any reasoning and dehors any ratio, cannot be considered to be a binding precedent which has been ignored by another Coordinate Bench of this Court while deciding Bangalore Club. In our view, the Order passed in Cawnpore Club binds only the parties in those appeals and cannot be understood as a precedent for subsequent cases.”

2.5.2 The Supreme Court held that there was no need to refer the decision in Bangalore Club’s case to a larger bench as there was no binding ratio decidendi which was laid down in Cawnpore Club’s order which could be said to have been ignored in Bangalore Club’s case. The relevant observations of the Supreme Court are as under [pages 305/306]:

“When the appeals were considered thereafter in the case of Cawnpore Club this Court simply applied the principle of mutuality to the income earned by the club from rooms rented out to its members as not being subject to tax. As far as the other questions were concerned, this Court only observed that “no useful purpose would be served in proceeding with the appeals on the other questions when the respondent cannot be taxed because of the principle of mutuality.” This observation in Cawnpore Club must be juxtaposed with the observations expressed above in Bankipur Club. When the aforesaid observations made in Cawnpore Club are considered in light of the larger plea, we find that the same was not answered in Bankipur Club nor in Cawnpore Club. But, the subsequent decision in Bangalore Club ultimately answered the said larger plea through a detailed reasoning. Therefore, it cannot be held that the short order passed in Cawnpore Club is a precedent which was ignored by a Coordinate Bench of two judges in Bangalore Club, so as to make the latter decision per incuriam. On the other hand, we are of the view that the larger plea which was neither considered in Bankipur Club nor in Cawnpore Club was ultimately considered and answered in Bangalore Club by a detailed judgment.

Therefore, we do not find any fault in a subsequent Coordinate Bench of this Court in Bangalore Club in not noticing the Order passed in the case of Cawnpore Club while dealing, in a detailed manner, on the taxability of the income earned from the interest on fixed deposits made by the said Club in banks, whether the banks are members of the clubs or not………”

2.5.3 The Supreme Court noted that Bangalore Club had noted the three principles of mutuality, namely, (i) complete identity between contributors and participators, (ii) action of the participators and contributors which are in furtherance of the mandate of the associations or the Clubs and (iii) no scope for profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. The Supreme Court concurred with the decision in Bangalore Club and held that the aforementioned tests of mutuality were not satisfied when the assessee club made an investment in fixed deposits of a bank. The Supreme Court observed as under [page 311]:

“………These appellant Clubs just like Bangalore Club are social clubs, and it is the surplus funds earned through various activities of the Clubs which are deposited as fixed deposit in the banks so as to earn an interest owing to the business of banking. In the absence of the said fixed deposits being utilized by the banks for their transactions with their customers, no interest can be payable on the fixed deposits. This is so in respect of any customer of a bank who would deposit surplus funds in a bank. It may be that the interest income would be ultimately used for the benefit of the members of the Clubs but that is not a consideration which would have an impact on satisfying the triple test of mutuality. It was observed in Bangalore Club that even if ultimately the interest income and surplus funds in the fixed deposit are utilised for the benefit of the members of the clubs, the fact remains that when the fixed deposits were made by the clubs in the banks, they were exposed to transactions with third parties, i.e., between the banks and its customers and this would snap the principle of mutuality breaching the triple test. When the reasoning of this Court in Bangalore Club is considered in light of the judgments of overseas jurisdictions, it is noted that this proposition would squarely apply even to fixed deposits made in banks which are members of the clubs. In other words, it is only profit generated from the payments made by the members of the clubs, which would not be taxable…….”

2.5.4 With respect to the reliance by the assessee on the decision of the Karnataka High Court in the case of Canara Bank, the Supreme Court observed that the said decision must be restricted to apply to the facts of that case only and cannot be a precedent for subsequent cases as the judgment of the Karnataka High Court in Bangalore Club’s case was not brought to the notice of the judges hearing the Canara Bank’s case.

2.5.5 The Supreme Court concluded that the reasoning given in its earlier decision of Bangalore Club was proper and did not call for reconsideration and held that interest income earned by the clubs on fixed deposits made in the banks or any income earned from persons who are not members of the club would be liable to be taxed.

CONCLUSION

3.1 In view of the above judgment of the Supreme Court, the issue now stands settled, that any interest income earned by a mutual concern or club from interest on fixed deposits placed with member banks of the club would be subjected to tax and the principle of mutuality would have no applicability in such an instance. For a concern to claim exemption on account of mutuality, it will be necessary to demonstrate that the three tests of mutuality laid down by the Court which are extracted in para 2.5.3 above are fulfilled.

3.2 In light of the Supreme Court’s decision, the fact that the interest earned on the fixed deposits is used only towards the objects of the mutual concern or club is also irrelevant once the surplus has been invested in the fixed deposits which are used by banks to give loans to third parties.

3.3 In the past, the issue had also come up as to whether the ‘annual letting value’ [‘deemed house property income’] of vacant immovable property owned by the Members Club [which is otherwise entitled to benefit of Principle of Mutuality] is liable to tax or the same will not be liable to tax applying the Principle of Mutuality. This issue was considered by the Apex Court in the case of Chelmsford Club Ltd [(2000) 243 ITR 89 -SC] wherein the Court has taken a view that even such ‘deemed house property income’ can be governed by the Principle of Mutuality. This judgment was analysed in this column in the August, 2000 issue of BCAJ.

BCAJ Admin

Glimpses of Supreme Court Rulings

53 Kotak Mahindra Bank Limited vs. Commissioner of Income Tax, Bangalore (2023) 458 ITR 113(SC)

Settlement Commission — Immunity from prosecution and penalty as contemplated — Section 245H — Based on such disclosures and on noting that the Appellant co-operated with the Commission in the process of settlement, the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act — The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act.

The facts giving rise to the present appeal, in a nutshell, are that the Appellant-Assessee, Kotak Mahindra Bank Limited (formerly, “M/s. ING Vysya Bank Limited”) is a Public Limited Company carrying on the business of banking and is assessed to tax in Bangalore where its registered office is located. Apart from the business of banking, the Appellant also carries out leasing business on receiving approval from the Reserve Bank of India (hereinafter “RBI” for short) vide Circular dated 19th February, 1994. Thus, the Appellant derives its income, inter alia, from banking activities as well as from leasing transactions.

The Appellant filed its income tax returns for the assessment years 1994–1995 to 1999–2000, and assessment orders were passed up to the assessment year 1997–1998 and the assessment for the subsequent years was pending. During the assessment proceedings for the assessment year 1997–1998, the Assessing Officer (AO) made certain additions and disallowances based on which the assessment already concluded for the assessment years 1994–1995 to 1996–1997 were proposed to be reopened. The AO then passed an Assessment Order dated 30th March, 2000, for the assessment year 1997–1998. The main issue pertained to the income with respect to the activity of leasing. As per the Assessment Order, the Appellant had been accounting for lease rental received, by treating the same as a financial transaction. As a result, the lease rental was bifurcated into a capital repayment portion and an interest component. Only the interest component was offered to tax. In other words, the Appellant treated such leases as loans granted to the “purported” lessees to purchase assets. In such cases, the ownership of the assets is vested with the lessees. However, the Appellant claimed depreciation on those assets under Section 32 of the Income-tax Act, 1961 (“the Act”) though the Appellant was not the owner of the assets for the purpose of the said transactions.

On 9th June, 2000, the AO issued a notice under Section 148 of the Act for the reassessment of income for the aforesaid assessment years. The AO also passed a penalty order dated 14th June, 2000, levying a penalty under Section 271(1)(c) of the Act, after being satisfied that the Appellant had concealed its income as regards lease rental.

While various proceedings, such as an appeal before the CIT(A) for the assessment year 1997–1998, re-assessment proceedings for the assessment years 1994–1995 to 1996–1997 and regular assessment proceedings for the assessment years 1998–1999 and 1999–2000 were pending before various income tax authorities, the Appellant, on 10th July, 2000, approached the Settlement Commission at Chennai to settle its income tax liabilities under Section 245C(1) of the Act. The Appellant sought for determination of its taxable income for the assessment years 1994–1995 to 1999–2000, after considering the issues pertaining to the income assessable in respect of its leasing transaction; eligibility to avail depreciation in respect of leased assets; the quantum of allowable deduction under Section 80M and exemption under Sections 10(15) and 10(23G); and depreciation on the investments portfolio of the bank classified as permanent investments.

When matters stood thus, the concluded assessments for earlier assessment years were reopened by the issuance of notices under Section 148 of the Act. The Appellant filed returns under protest with respect to the said assessment years.

Before the Settlement Commission, the Respondents-Revenue raised a preliminary objection contending that the Appellant did not fulfil the qualifying criteria as contemplated under Section 245C(1) and, hence, the application filed by the Appellant was not maintainable, as, under the said provision, the Appellant was required to make an application in the prescribed manner containing full and true disclosure of its income which had not been disclosed before the AO and also the manner in which such income had been derived. That unless there is a true and full disclosure there would be no valid application and the Settlement Commission will not be able to assume jurisdiction to proceed with the admission of the application. It was thus contended that the purported application made before the Settlement Commission was not an application as contemplated under Section 245C(1) of the Act for the reason that the Appellant had not made a full and true disclosure of its income which had not been disclosed before the AO.

After considering the contentions of both parties, the Settlement Commission passed an Order dated 11th December, 2000, entertaining the application filed by the Appellant under Section 245C and rejecting the preliminary objections raised by the Revenue. The Settlement Commission allowed the application filed by the Appellant by way of a speaking order and permitted the Appellant to pursue its claim under Section 245D. Thus, the application proceeded further under Section 245D(1) of the Act.

The Revenue challenged the Order dated 11th December, 2000, passed by the Settlement Commission before the High Court of Karnataka at Bangalore by way of Writ Petition No. 13111 of 2001. The Revenue questioned the jurisdiction of the Settlement Commission in entertaining the application filed by the Appellant under Section 245C(1) of the Act.

The learned Single Judge of the High Court of Karnataka, after going through the legislative history of the provisions of Chapter-XIXA, accepted the argument advanced by the Appellant that the proviso to Section 245C as it stood earlier, which enabled the Commissioner to raise an objection even at the threshold to entertain an application of this nature had been later shifted to sub-section (l)(A) of Section 245D and from the year 1991, it had been totally omitted, and in the light of such legislative history, it was not open to the Revenue to raise any such preliminary objection regarding maintainability of the application itself. It was further held that the application can be proceeded with by the Settlement Commission for determination of the same on merits and it was not necessary that the Revenue should be permitted to raise a preliminary objection as to the maintainability of the application.

The learned Single Judge disposed of the above Writ Petition by way of an Order dated 18th August, 2005, in favour of the Appellant herein by holding that notwithstanding any preliminary finding, it was still open to the Commissioner to agitate or to apprise the Commission of all the aspects of the matter that he may find fit to be placed before the Commission. The Single Judge was of the view that it was not necessary to examine the legal position that may require an interpretation of provisions of Section 245C at that stage when the matter itself was still at large before the Settlement Commission as the very object of Chapter-XIXA was to settle cases and to reduce the disputes and not to prolong litigation. Thus, the High Court disposed of the Writ Petition, holding that it was open to the parties to raise all their contentions before the Commission at the stage of disposal of the application and the Commission may, independent of the findings which it has given under the Order dated 11th December, 2000, examine all the contentions and proceed to pass orders on merits in accordance with the provisions of the Act.

As a result of the Order dated 18th August, 2005, passed by the High Court of Karnataka, the Settlement Commission heard both parties on merits as well as on the issue of maintainability. The Settlement Commission upheld the maintainability of the application filed by the Appellant and passed an Order dated 4th March, 2008, under Sections 245D(1) and 245D(4), determining the additional income at ₹196,36,06,201. As regards the issue of immunity from penalty and prosecution, the Commission, having regard to the fact that the Appellant had co-operated in the proceedings before the Settlement Commission, and true and full disclosure was made by the Appellant before the Commission, granted immunity under Section 245H(1) from the imposition of penalty and prosecution under the Act and the relevant Sections of the Indian Penal Code. Further, the Settlement Commission annulled the penalty levied by the AO under Section 271(1)(c) for the assessment year 1997–1998 in respect of non-disclosure of lease rental income. The same was annulled considering that the non-disclosure was on account of RBI guidelines and subsequent disclosure on the part of the Appellant, of additional income of the lease income before the Settlement Commission when the Appellant realised the omission to disclose the same as per income tax law.

Being aggrieved by the Order dated 4th March, 2008, passed by the Settlement Commission, the Respondent-Revenue preferred Writ Petition bearing No. 12239 of 2008 (T-IT) before the High Court of Karnataka assailing the said Order. The learned Single Judge of the High Court vide Order dated 20th May, 2010, upheld the Order of the Settlement Commission as regards the jurisdiction to entertain the application and also as regards the correctness of the Order passed by the Settlement Commission in determining the tax liability, but found fault with the Commission in so far as granting immunity to the Appellant from the levy of penalty and initiation of prosecution was concerned. The Single Judge was of the view that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles and that the burden was on the Appellant herein to prove that there was no concealment or wilful neglect on its part and in the absence of such evidence before the Settlement Commission, the Order granting immunity from penalty and prosecution was an illegal order. The learned Single Judge, thus, remanded the matter to the Settlement Commission for the limited purpose of reconsidering the question of immunity from levy of penalty and prosecution and the Order of the AO levying penalty, after providing an opportunity to both parties.

Being aggrieved by the remand order passed by the learned Single Judge, the Appellant preferred Writ Appeal No. 2458 of 2018 before a Division Bench of the High Court.

In the meanwhile, Revenue preferred Special Leave Petition (C) CC No. 19663 of 2010 before the Supreme Court against the Order dated 20th May, 2010, passed by the learned Single Judge in Writ Petition No. 12239 of 2008. On 6th January, 2012, the Supreme Court directed the Special Leave Petition to stand over for eight weeks and directed the Settlement Commission to dispose of the matter remanded to it by the High Court. In pursuance of the Order dated 6th January, 2012, passed by this Court, the Settlement Commission, Chennai, issued a notice in the remanded matter on 30th January, 2012.

On 10th February, 2012, the Appellant moved an application before the Supreme Court seeking modification of its Order dated 6th January, 2012, by issuing a direction to the High Court to dispose of Writ Appeal No. 2458 of 2010. It was contended that the filing of a Special Leave Petition against the order of the learned Single Judge was not proper as a Writ Appeal should have been filed. That admittedly, Writ Appeal No. 2458 of 2010 was pending before the High Court and the Revenue suppressed this vital information while filing the Special Leave Petition. The Supreme Court by way of an Order dated 21st February, 2012, recalled its earlier Order dated 6th January, 2012, passed in SLP (C) CC No. 19663 of 2010 and directed the High Court to dispose of Writ Appeal No. 2458 of 2010 within a period of two months.

Following the same, a Division Bench of the High Court of Karnataka vide Order dated 6th July, 2012, dismissed the Writ Appeal preferred by the Appellant and upheld the Order passed by the learned Single Judge. It was observed that the Order of the learned Single Judge remanding the matter to the Settlement Commission for adjudication did not suffer from any material irregularity or illegality.

Aggrieved by the judgment dated 6th July, 2012, in Writ Appeal No. 2458 of 2010, the Appellant has preferred Civil Appeal before the Supreme Court.

According to the Supreme Court, the following points emerged for its consideration:

“Whether the Division Bench of the High Court was right in affirming the findings of the learned Single Judge, to the effect that the Settlement Commission ought not to have exercised discretion under Section 245H of the Act and granted immunity to the Assessee de hors any material to demonstrate that there was no wilful concealment on the part of the Assessee to evade tax and on that ground, remanding the matter to the Commission for fresh consideration?”

The Supreme Court found that in the present case, the Settlement Commission had rightly considered the relevant facts and material and, accordingly, decided to grant immunity to the Appellant from prosecution and penalty. The Supreme Court arrived at this conclusion having regard to the following aspects of the matter, recorded by the Settlement Commission:

The Commission in its order dated 4th March, 2008, had noted that the Appellant had realised while adhering to the RBI guidelines of accounting of lease income that there was an error in not disclosing the full lease rental receipts as per income tax law. Thus, the Appellant offered additional income under various heads, which were not considered by the AO. Considering the nature and circumstances and the complexities of the investigation involved, the Commission was of the view that the application was to proceed under Section 245D(1) of the Act and that prima facie, a full and true disclosure of income not disclosed before the AO had been made by the Appellant. The findings of the Commission to this effect are usefully extracted as under:

“4.3 We have considered the rival submissions. We are of the opinion that there is no bar for banking companies to approach the Commission. The disclosure of the material facts in the return of income or the documents accompanying return of income is not a bar for the applicant to approach the Commission. In view of this, we hold that the applicant is eligible to approach the Commission.
…

5.1 Finally we have carefully gone through the settlement application and the confidential annexures and are satisfied that the complexities of investigation as brought out in the application do exist. We have also considered the nature and circumstances of the case as explained by the applicant’s representative. The applicant is an established scheduled bank with several branches. The applicant has realized that when adhering to RBI guidelines of accounting of lease income there was an error in not disclosing the full lease rental receipts as per income tax law. In addition the applicant has offered additional income under various heads not considered by the Assessing Officer. We are satisfied that the nature and circumstances and the complexities of investigation involved do warrant the application to be proceeded with under Section 245D(1) of the Act. We are also reasonably satisfied that, prima facie, a full and true disclosure of income not disclosed before the Assessing Officer has been made by the applicant. Additionally, taking a practical view of the case, we are also concerned by the time taken to dispose of this application, particularly in respect of a scheduled bank. We feel that the matters need to be given a quietus and brought to close as speedy collection of taxes is also an important function of the Settlement Commission. We therefore allow the application to be proceeded with Under Section 245D(1) of the Act.”

According to the Supreme Court, the aforesaid findings of the Settlement Commission demonstrated that it had applied its mind to the aspect of whether there was wilful concealment of income by the Assessee. Having noted that non-disclosure was on account of RBI guidelines, which required a different standard of disclosure, the Commission decided to grant immunity to the Appellant from prosecution and penalty.

In the light of the aforesaid discussion, the Supreme Court was of the view that the learned Single Judge of the High Court was not right in holding that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles. The Division Bench was also not justified in affirming such a view of the learned Single Judge. The Supreme Court was of the view that the Commission had adequately applied its mind to the circumstances of the case, as well as to the relevant law and accordingly exercised its discretion to proceed with the application for settlement and grant immunity to the Assessee from penalty and prosecution. The Order of the Commission dated 4th March, 2008, did not suffer from such infirmity as would warrant interference by the High Court, by passing an order of remand.

The Supreme Court concluded that in the present case, the Appellant placed material and particulars before the Commission as to the manner in which income pertaining to certain activities was derived and has sought to offer such additional income to tax. Based on such disclosures and on noting that the Appellant co-operated with the Commission in the process of settlement, the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act. The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act.

The Supreme Court was of the view that the Order of the Settlement Commission dated 4th March, 2008, was based on a correct appreciation of the law, in light of the facts of the case and the High Court ought not to have interfered with the same. Therefore, the judgment dated 6th July, 2012, passed by the High Court of Karnataka at Bangalore in Writ Appeal No. 2458 of 2010 whereby the judgment of the learned Single Judge dated 20th May, 2010, passed in Writ Petition No. 12239 of 2008, remanding the matter to the Settlement Commission to determine afresh, the question as to immunity from levy of penalty and prosecution was affirmed, was set aside by the Supreme Court. Consequently, the order of the learned Single Judge was also set aside. The Order of the Settlement Commission dated 4th March, 2008, was restored. The appeal was accordingly allowed.

54 Director of Income Tax, New Delhi vs. Travelport Inc. Civil
(2023) 454 ITR 289 (SC)

India-USA DTAA – Article 7 — Under Explanation 1(a) under clause (i) of Sub-section (1) of Section 9 of the Income-tax Act, 1961, what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India — What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact — Article 7 of DTAA is of no assistance as the entire income was taxable in contracting state.

Before the Supreme Court, the Respondents in the appeals before it were in the business of providing electronic global distribution services to Airlines through what is known as “Computerized Reservation System” (hereinafter referred to as CRS). For the said purpose, the Respondents maintain and operate a Master Computer System, said to consist of several mainframe computers and servers located in other countries, including the USA. This Master Computer System is connected to airlines’ servers, to and from which data is continuously sent and obtained regarding flight schedules, seat availability, etc.

In order to market and distribute the CRS services to travel agents in India, the Respondents had appointed Indian entities and had entered into distribution agreements with them.

The Respondents earned an amount of USD 3 / EURO 3 accordingly, as the case may be, per booking made in India. Out of the said earnings, of USD 3 / EURO 3, the Respondents paid various amounts to the Indian entities, which ranged from USD / EURO 1 to USD / EURO 1.8. In other words, the amount paid by the Respondents to their Indian entities ranged from 33.33 per cent to about 60 per cent of their total earnings.

The respective Assessing Officers in the original proceedings came to the conclusion that the entire income earned out of India by the Respondents was taxable. This was on the basis that the income was earned through the hardware installed by the Respondents in the premises of the travel agents and that, therefore, the total income of USD / EURO 3 was taxable.

The orders of assessment so passed were upheld by the respective Commissioners of Income Tax (Appeals) by independent orders.

Appeals were filed by the Respondents before the Tribunal and the Revenue also filed cross objections on a different aspect. The Tribunal held that the Respondents herein constitute Permanent Establishment (PE) in two forms, namely, fixed place PE and dependent agent PE (DAPE). At the same time, the Tribunal also held that the lion’s share of activity was processed in the host computers in USA / Europe and that the activities in India were only minuscule in nature. Therefore, as regards attribution to the PE constituted in India, the Tribunal assessed it at 15 per cent of the revenue and held, on the basis of the functions performed, assets used and risks undertaken (FAR), that this 15 per cent of the total revenue was the income accruing or arising in India. This 15 per cent worked out to 0.45 cents. However, the payment made to the distribution agents was USD 1 / EURO 1 in many cases and much more in some cases. Therefore, the Tribunal held that no further income was taxable in India.

The Revenue filed miscellaneous applications, but the same were dismissed by the Tribunal, clarifying that after apportioning the revenue, no further income was taxable in India, as the remuneration paid to the agent in India exceeded the apportioned revenue.

Appeals were filed both by the Revenue and Assesses against the orders of the Tribunal before the Delhi High Court. The Delhi High Court dismissed the appeals filed by the Revenue on the grounds that no question of law arose in these matters. The Delhi High Court held that insofar as attribution is concerned, the Tribunal had adopted a reasonable approach.

Aggrieved by the orders passed by the Delhi High Court, the Revenue has come up with the above appeals.

Assailing the judgment of the High Court, it was argued by the learned Additional Solicitor General: (i) that the attribution of only 15 per cent of the revenue as income accruing / arising in India within the meaning of Section 9(1)(i) of the Income-tax Act, 1961 read with Article 7 of the Treaty, was completely wrong; and (ii) that the computers placed in the premises of the travel agents and the nodes / leased lines form a fixed place PE of the Respondent in India.

The Supreme Court was of the view that there was no need to go into the second contention of the learned Additional Solicitor General because the approach of the Tribunal and the High Court on the question of attribution appears to be fair and reasonable.

So far as the first contentions were concerned, the Tribunal had arrived at the quantum of revenue accruing to the Respondent in respect of bookings in India, which could be attributed to activities carried out in India, on the basis of FAR analysis (functions performed, assets used and risks undertaken). The Commission paid to the distribution agents by the Respondents was more than twice the amount of attribution, and this had already been taxed. Therefore, the Tribunal had rightly concluded that the same extinguished the assessment.

Further, the question as to what proportion of profits arose or accrued in India was essentially one of the facts. Therefore, according to the Supreme Court, the concurrent orders of the Tribunal and the High Court did not call for any interference.

The Supreme Court observed that under Explanation 1(a), under clause (i) of Sub-section (1) of Section 9
of the Income-tax Act, 1961, what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India. What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact. On this question of fact, the Tribunal had taken into account relevant factors.

According to the Supreme Court, Article 7 of the India-USA DTAA also may not really come to the rescue of the Revenue for the reason that in the contracting state, the entire income derived by the Respondents, namely, USD / EURO 3 would be taxable. That is why Section 9(1) confines the taxable income to that proportion which is attributable to the operations carried out in India.

Therefore, the Supreme Court was of the view that the impugned order(s) of the High Court did not call for interference. Insofar as the second issue, namely, the question of permanent establishment was concerned, the Supreme Court did not go into the same, as it had concurred with the High Court on the first issue.

All the appeals filed by the Appellant-Department of Income Tax were, therefore, dismissed.

BCAJ Admin

Section 148: Reassessment — No new facts — merely to investigate and make enquiry — Not justified — Arbitration Award — Consent term — Amount received in full and final settlement of all disputes and claims raised in regards to firm / Will etc. — Income not chargeable to tax

26 Ramona Pinto vs. Dy. Dy. CIT – 23(3), Mumbai

ITXA No. 2610 Of 2018, (Bom.) (HC)

A.Y.: 2010–2011

Date of Order: 8th November, 2023.

Section 148: Reassessment — No new facts — merely to investigate and make enquiry — Not justified — Arbitration Award — Consent term — Amount received in full and final settlement of all disputes and claims raised in regards to firm / Will etc. — Income not chargeable to tax.

The Assessee — Appellant has preferred an appeal against the impugned order dated 2nd April, 2018, passed by the Tribunal. The following substantial questions of law was admitted:

(i) Whether the Tribunal ought to have held the Respondent No. 1 had assumed jurisdiction under section 147 of the Act without fulfilling the jurisdictional pre-conditions and hence, the reassessment proceedings were without jurisdiction?

(ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal ought to have held that the amount of R28 crores received by the Appellant as per the arbitration Award was not chargeable to tax?

A partnership firm by name M/s. P. N. Writer & Co. (the said Firm) was established in or about the year 1954 between Appellant’s late father Mr. Charles D’Souza and one Mr. P. N. Writer. The said Firm was reconstituted from time to time, and the last partnership deed in this regard, according to Appellant, was executed on 18th January, 1979. As per the partnership deed, Appellant along with her late father and brothers were the partners in the said Firm. Appellant was entitled to a share of 20 per cent in the profits or losses made by the said Firm.

Appellant’s father Mr. Charles D’Souza expired on 24th November, 1997 leaving behind his last Will and Testament dated 16th September, 1990. Appellant was bequeathed a further share of 5 per cent in the profits and losses of the said Firm. Accordingly, the Appellant became entitled to a 25 per cent share in the profits and losses of the said Firm. This fact has been also mentioned in the application for probate filed by Appellant’s brother.

It is Appellant’s case that somewhere in 2005, Appellant realised that the said Firm was reconstituted vide a Deed of Partnership dated 25th November, 1997, entered into between Appellant’s brothers. According to the said Deed, Appellant was treated as having retired from the Firm as and from the close of business on 24th November, 1997. The said Firm had filed its return of income for Assessment Year 1998–1999, enclosing reconstituted Deed of Partnership and financial showing Appellant as an erstwhile partner. Appellant’s case was that she continued to be a partner in the said Firm.

Since disputes arose, Appellant and the continuing partners of the said Firm decided to refer their matter to arbitration. Finally, by an interim order dated 20th July, 2007, the Apex Court directed the said Firm to pay an amount of R50,000 per month to the Appellant. Subsequently, by a final order dated 28th March, 2008, the Apex Court appointed a sole Arbitrator to decide the disputes between Appellant, her siblings and the said Firm.

Claims and counter-claims were filed before the Arbitrator. During the course of arbitration proceedings, the parties arrived at consent terms, which was taken on record by the Arbitrator and an award in terms of the consent terms was passed on 25th September, 2009. As per the consent terms, Appellant relinquished all her rights, claims and demands of any nature whatsoever against the said Firm or its partners. In consideration thereof, Appellant was to receive an amount of ₹28 crores. Appellant was to be paid an amount of ₹7 crores on or before 25th December, 2009 and the balance amount of ₹21 crores was to be paid, in seven equal installments of ₹3 crores, on or before 25th December of each subsequent year.

The Appellant, pursuant to the interim order dated 20th July, 2007, of the Apex Court referred earlier, received an amount of ₹5 lakhs in the previous year relevant to Assessment Year 2008–2009. In the course of assessment proceedings, Respondent no. 1 issued a show cause notice for assessment of the said receipt wherein Appellant contended that the receipt was related to her retirement from the said Firm and was, therefore, not chargeable to tax under the Act. Being satisfied, no addition in respect of the said receipt was made in the assessment order dated 26th November, 2010, passed under Section 143(3) of the Act.

As per the consent terms, during the previous year ending 31st March, 2010, Appellant received an amount of ₹7 crores. Appellant filed return of income for Assessment Year 2010–2011 on 16th July, 2010, offering to tax a total income of ₹18,91,589. In the note annexed to the return of income, Appellant referred to the receipt of ₹7 crores pursuant to the arbitration award. Reference was also made to ₹4,82,258 received during the Financial Year 2009–2010 pursuant to the interim order dated 20th July, 2007 passed by the Apex Court. Appellant claimed that as the amounts were received upon her retirement from the said Firm, the same were not chargeable to tax under the Act. Appellant also relied on various decisions of the Apex Court and of this Court.

The return of income filed by Appellant was processed by the Assessing Officer (AO), on 20th March, 2012, under Section 143(1) of the Act, whereby, the total income as offered by Appellant in her return of income was accepted.

Almost two years later, the Appellant received a notice dated 19th March, 2014, from the AO under Section 148 of the Act alleging escapement of income for Assessment Year 2010–2011. Appellant was directed to file return of income once again which was complied with. Appellant also received a copy of the reasons for reopening. The said reasons referred to the information received in respect of an order dated 21st July, 2007, passed by the Supreme Court as well as the arbitration award dated 25th September, 2009. The reasons also made reference to the fact that the amount of ₹7 crores received by Appellant during the Financial Year 2009–2010, corresponding to Assessment Year 2010–2011, has not been offered for tax in the return of income. Based on this, Respondent no. 1 has formed his belief that income of ₹7 crores chargeable to tax for Assessment Year 2010-2011 has escaped assessment.

The AO passed the assessment order on 30th March, 2015, determining Appellant’s total income at ₹28,18,91,590. Therein, the amount of ₹28 crores was added as business income by invoking Section 28(iv) of the Act. Alternatively, he held that the amount of arbitration award was chargeable to tax as capital gains. It was further alleged that Appellant had not retired from the said Firm because the consent terms did not mention so and further held that the entire amount was not towards her retirement from the said Firm.

Aggrieved by the assessment order, Appellant filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. During the course of hearing before the CIT(A), Appellant filed valuation reports in respect of various properties owned by the said Firm to justify the amount of ₹28 crores that was received as her share from the said Firm. The CIT(A) dismissed the appeal by an order dated 3rd February, 2017. While dismissing the appeal, the CIT(A), however, accepted Appellant’s contention that the provisions of Section 28(iv) had no application to the present case and that the amount of ₹28 crores could not be assessed as capital gains in the hands of the Appellant. The CIT(A), however, held the amount of the arbitration award as income from other sources under Section 56(1) of the Act because the amount had been received for settlement of a composite bundle of rights. It is Appellant’s case that the CIT(A) failed to appreciate that the dispute between Appellant and her brothers was primarily in respect to her wrongful retirement from the said Firm and as reference was also made to the inheritance from the father which also mainly comprised of further partnership interest of 5 per cent in the said Firm being given to her, even assuming that any part of the said award also related to the inheritance right as per the father’s Will, no part

of such amount would be chargeable to tax under the Act.

The Appellant filed an appeal before the Tribunal. Appellant raised all grounds before the Tribunal which dismissed the appeal by the impugned order dated 2nd April, 2018. The Tribunal upheld the reassessment proceedings to be valid on the ground that prima facie there was material on record which shows that income chargeable to tax had escaped assessment. The Tribunal, however, referred to the amount of arbitration award as special income which has to be considered in a wider sense. Miscellaneous application was filed before the Tribunal which came to be dismissed.

The Hon. Court observed that the jurisdictional pre-conditions have not been fulfilled. Therefore, it can be stated that the assumption of jurisdiction by the AO under Section 148 of the Act to reassess the Appellant’s income is without jurisdiction.

The Hon. Court observed that on a bare perusal of the reasons shows that there was no mention as to whether and how the amount as per the arbitration Award was in the nature of income. Apart from referring to the fact that there was a decision of the Supreme Court as well as an arbitration award pursuant to which Appellant had received the amount of ₹7 crores, nothing else has been mentioned in the reasons. The belief formed by the AO without any statement on whether and how the receipt was of an income nature would render the reasons as vague and incomplete thereby making the reassessment proceedings initiated under Section 148 of the Act bad in law. The AO while disposing the objections raised by Appellant to his assumption of jurisdiction under Section 148 of the Act has stated that the receipt of ₹7 crores was not in respect of Appellant’s retirement from the said Firm. The order, however, states that the information / material available with the AO at the time of formation of his belief consisted of information received by him from the AO of P. N. Writer & Co. as well as the note placed by Appellant in her return of income filed for Assessment Year 2010–2011. The information reveals that the said receipt was towards the Appellant’s retirement from the said Firm. Therefore, justification given by the AO in the order dated 21st August, 2014, for taxability of the said receipt as not relating to Appellant’s retirement from the said Firm was contrary to the information / material available with him.

The law is very settled in as much as the belief formed by the AO has to be based on the information / material available with him at the time of formation of the belief. There was no material whatsoever available with the AO at that point of time to show that the said receipt of R7 crores by Appellant as referred to in the reasons did not relate to her retirement from the said Firm. In the absence of any statement in the reasons recorded for reopening the assessment regarding taxability of the said receipt and in view of non-sustainability of the justification provided by the AO, the reassessment proceedings initiated under Section 148 of the Act is bad in law.

The Court further observed that for Assessment Year 2008–2009 also, Appellant had received similar amounts from the said Firm. After scrutinising the character of such receipt, it was held by the predecessor of the AO that the receipt was not taxable in nature. Therefore, the formation of the belief that the amount received for the current year was taxable, tantamount to a change of opinion which is not permissible in law.

The Court further observed that in the present case, as the AO has initiated reassessment proceedings without forming the requisite belief and only with a view to enquire / investigate into the facts, his assumption of jurisdiction under Section 148 of the Act would be bad in law. Moreover, it also indicates that even at the stage of disposing the objections, the AO was not clear on the basis why Appellant’s income chargeable to tax has escaped assessment.

As regards taxability of the amount is concerned, the court observed that having considered the consent terms with the arbitration award and the statement of claim, it is clear, the amount of ₹28 crores was receivable by Appellant in terms of the arbitration award dated 25th September, 2009. As per the award, Appellant has relinquished all her claims against the partnership firm of P. N. Writer & Co. as well as the partners. Appellant had initiated arbitration proceedings as she was wrongfully shown as retired from the said Firm. This is brought out by the statement of claim made by the Appellant before the Arbitrator. Even the claim based on the father’s Will was mainly related to the additional 5 per cent share of the said Firm. Therefore, the real dispute between the parties related to the termination of Appellant’s partnership interest in the said Firm. The consent terms were arrived at between the parties with a view to settle this dispute. It goes without saying that when Appellant’s rights and claims in the said Firm were settled by the consent terms and the arbitration award, there could not be her continuance as a partner with the said Firm. Therefore, the arbitration award was receivable by Appellant in respect of her retirement from the said Firm. As held by the Apex Court in Mohanbhai Pamabhai ((1987) 165 ITR 166) and this Court in Prashant S. Joshi ((2010) 324 ITR 154 (Bom)), the amount receivable upon retirement from the said Firm could not be of an income nature. Therefore, the Tribunal was not correct in holding that the amount of arbitration award receivable by Appellant was not relatable to her retirement from the said Firm.

The Tribunal has failed to appreciate that there was a dispute between Appellant and her brothers with respect to her wrongful retirement from the said Firm. For invocation of arbitration proceedings, the matter was carried right up to the Hon’ble Supreme Court. The settlement amount was receivable by Appellant for relinquishment of her rights and claims as a partner of the said Firm. In these circumstances, though there may be no mention of her retirement from the said Firm in the consent terms or the arbitration award, the only inference possible would be that she no longer continued as a partner of the said Firm after such settlement. It is also not anybody’s case that the Appellant has not played any role in the said Firm or received any share from the said Firm after the settlement.

Further, the said Firm — P. N. Writer & Co. had also filed the relevant information with respect to change of constitution of the firm with the Registrar of Firms which showed that Appellant had retired from the said Firm with effect from 24th November, 1997. The arbitration award was also given for withdrawal of all claims and rights in respect of the suits filed by Appellant against the said Firm and its partners. This fact also supports Appellant’s claim to show that the rights settled were in respect of her partnership interest in the said Firm. As regards the observation on no positive balance in Appellant’s capital account with the said Firm, the same is an irrelevant factor because for working out of rights upon retirement, one is not required to look at the balance in the capital account. Further, Appellant had produced a valuation report valuing the immovable assets of the partnership firm which discloses that the value of the immovable properties of the said Firm was more than ₹100 crores. The fact that the partners agreed to a payment of ₹28 crores fits in with this value. Further, the said Firm had also transferred its business on a going concern basis to a private limited company by name P. N. Writer & Co. Pvt. Ltd., in the Financial Year 1992–1993. The Balance Sheet of the said company as on 31st March, 2006, revealed that there were substantial reserves which showed that the business of the said Firm was extremely profitable. Therefore, the Tribunal was not correct in holding that the amount of the arbitration award was not relatable to the Appellant’s retirement from the said Firm.

Moreover, the amount of the arbitration award was also related to the settlement of the inheritance rights which the Appellant was entitled to under her father’s Will. An amount received in satisfaction of the inheritance rights also cannot be regarded as of an income nature chargeable to tax under the Act. The Tribunal failed to appreciate that the relevant details formed part of the arbitration proceedings, and Appellant had raised this as an alternative claim in view of the stand taken by the AO in the assessment order and the CIT(A) in the appellate order.

The court further observed that the dominant component in the settlement was Appellant’s separation from the said Firm. The Tribunal ought to have considered each component of the rights and claims which were relinquished and withdrawn by Appellant and bifurcated the amount of arbitration award between each of such rights and claims. Instead of doing this exercise and considering whether the amount was capital or revenue in nature, the ITAT has simpliciter accepted the conclusion reached by the CIT(A) to the effect that such receipt is of an income nature chargeable to tax as income from other sources. The Tribunal has failed to consider this issue in a proper perspective.

The Tribunal failed to appreciate that a receipt on capital account cannot be assessed as income unless it was specifically brought within the scope of the definition of the term “income” in Section 2(24) of the Act . The Tribunal erred in evolving a concept of “special income” when no such concept exists either in the Act or in the jurisprudence and saying that the same is judicially settled.

The Court further held that even if the portion of the arbitration award relates to the inheritance by Appellant under the Will of her late father or otherwise, in the absence of Estate Duty or a similar tax, no tax is chargeable in respect of the same. In any event, the same would be on the estate and not on a legatee. Even the provisions of Section 56(2)(vii) which seek to tax an amount received without consideration specifically excludes from the ambit of the charge any amount received pursuant to a bequest.

Alternatively, even if the amount received / receivable under the arbitration award is regarded as damages, the nature of the dispute which was settled was with respect to disputes pertaining to the partnership firm or inheritance and, hence, the receipt should be capital in nature (CIT v/s. Saurashtra Cement Ltd.18). Further, it has been held by this Court in CIT v/s. Abbasbhoy A. Dehgamwalla19 that the amount received as damages also cannot be brought to tax as capital gains.

Burden to show that a particular receipt is of an income nature is on the Revenue which has not been discharged in the facts of the present case. The mere rejection of an assessee’s explanation without any positive finding as to the true character of the receipt cannot justify a conclusion being reached by an AO that the amount is of an income nature.

Therefore, the amount of ₹28 crores can be considered as the amount received by a partner upon retirement from the said Firm and is not chargeable to tax.

In the circumstances, the substantial questions of law were answered in favour of the Appellant. It was held that the reassessment proceedings were without jurisdiction. Further, the Tribunal ought to have held that the amount of ₹28 crores received by Appellant as per the arbitration award was not chargeable to tax.

BCAJ Admin

TDS — Technical services — Contracts — Principle of indivisibility of a contract — Taxing authorities should not overlook the dominant object of the contract — The assessing authority should not break down the indivisibility or composite nature and character of the contract

25 The Commissioner Of Income Tax (TDS) And Another vs. Lalitpur Power Generation Co. Ltd.

ITXA No. 111 of 2018, (All.) (HC)

Date of Order: 16th November, 2023

[Arising from Income Tax Appellate Tribunal, Delhi Bench “C” New Delhi order dated: 20th February, 2018 (Assessment Year 2013–2014)].

TDS — Technical services — Contracts — Principle of indivisibility of a contract — Taxing authorities should not overlook the dominant object of the contract — The assessing authority should not break down the indivisibility or composite nature and character of the contract.

The assessee was engaged in the business of generation of power. It set up a 3×660 MW (Mega Watt) Super Critical Thermal Power Plant at District-Lalitpur, Uttar Pradesh. For that purpose, the assessee was incorporated as a Special Purpose Vehicle (“SPV”) by the State Government of Uttar Pradesh. Later, its ownership was transferred to a private company.

To set up that thermal power plant, the assessee entered into two sets of contracts. First, with Bharat Heavy Electric Ltd. (“BHEL”) to set up a Boiler Turbine Generator (“BTG”) and the second with Carbery Infrastructure Pvt. Ltd. (“CIPL”) to set up a Balance of Plant (“BOP”).

The contract entered into between the assessee and the BHEL involved services of Transportation, Insurance, Erection, Installation, Testing and Commissioning of BTG, for consideration ₹689 crores. Similarly, the contract with CIPL involved Erection, Installation and Commissioning of BOP for ₹197 crores.

These two contracts included description and execution of other work as well, inasmuch as the contract with BHEL for BTG involved supply of BTG package equipments of value ₹5,311 crores, whereas the contract for BOP with CIPL involved procurement and supply of equipments and civil constructions, structural works, engineering, information, design and drawings and project management of value ₹2,008 crores. The supply component under the two contracts entered into by the assessee with BHEL and CIPL does not form the subject matter of dispute in these appeal proceedings.

On 19th June, 2014, individual orders came to be passed under Section 201 of the Act describing the assessee to be in default of deduction of TDS required to be made by it at the higher rate of 10 per cent (under Section 194J of the Act) against the lower rate of 2 per cent (under Section 194C of the Act) applied by the assessee, to the payments made by the assessee in each year, against the two contracts for the works done under the head of “services of Transportation, Insurance, Erection, Installation, Testing and Commissioning of BTG”, awarded to BHEL and also the work under the head of “Erection, Installation and Commissioning of BOP”, awarded to CIPL.

Thus, under the assessment order dated 15th January, 2015 passed by the Assistant Commissioner of Income Tax (TDS), Noida for the Assessment Years 2012–2013, 2013-2014 and 2014–2015, demand for short deduction of TDS and the corresponding demand of interest were raised. The Orders were confirmed on appeal by common order dated 16th March, 2016, passed by the Commissioner of Income Tax (Appeals)-I, Noida.

Upon further appeal, the Income Tax Appellate Tribunal, vide its common order dated 20th February, 2018, allowed the appeals preferred by the assessee.

The Revenue appeal was admitted on following substantial question of law:

Question No. 1

Whether the Tribunal has erred in annulling the assessment order and reaching to a conclusion that Tax Deduction at Source (for short “TDS”) was required to be made under Section 194C of the Act and not under Section 194J of the Income-tax Act, 1961 without first dealing with the reasons and findings recorded by the assessing authority, as affirmed in first appeal?

Question No. 2

Whether, in absence of proper books maintained to establish the exact expenditure incurred by the assessee in availing technical services, the Tribunal has erroneously granted relief to the assessee?

The revenue contended that the assessing authority had made a detailed consideration of facts. It was found that the assessee had not maintained any account to establish the actual payment made to BHEL for the work of Testing and Commissioning of BTG. Similarly, the assessee had not maintained a separate account to establish the payment made to CIPL for Installation and Commissioning of BOP. Since payments for those works performed by the BHEL and CIPL fell under the head “fees for technical services” as defined under clause (b) of sub-section (1) of Section 194J of the Act, read with Explanation [2] to clause (vii) to sub-section (1) of Section 9 of the Act, the assessee was liable to deduct the Tax at Source / TDS, at the rate of 10 per cent in terms of Explanation (b) to section 194J of the Act. Relying on the reasoning given by the assessing authority, it was submitted that it cannot be denied that BHEL had performed Testing and Commissioning of BTG and similarly, CIPL had performed the work of Installation of Commissioning of BOP.

The revenue further contended that since the payments made to BHEL and CIPL were “fees for the technical services”, rendered to the assessee by BHEL and CIPL, the Assessing Officer had not erred in determining the default in deduction of TDS by the assessee.

The assessee contended that the contracts awarded by the assessee to BHEL and CIPL were exactly identical to that awarded to BHEL, as was considered by the Punjab and Haryana High Court in Pr. Commissioner of Income Tax, TDS-II, Chandigarh vs. The Senior Manager (Finance), Bharat Heavy Electricals Ltd., Jhajjar (2017) 390 ITR (P&H).

The assessee further contended that the contract awarded to BHEL was for BTG and the contract awarded to CIPL was for BOP and the reliance placed by the revenue to non-specification or quantification of value of sub-components or parts of the contracts awarded to the BHEL and CIPL is inconsequential. Those contracts remained indivisible or composite. The revenue authorities being obligated to assess income tax payable by the assessee, they could not have broken down that indivisible contract for wholly artificial reasons-to discover on an assumptive basis, the alleged component of “fees for technical services”. The undisputed fact remains that the work awarded to the BHEL was for commissioning of BTG and that awarded to CIPL was for BOP, the contract clauses should have been read in light of that main object. In absence of any internal tool arising therefrom and in absence of any legal provision allowing the assessing authority to break down the indivisibility or composite nature and character of the contract, the exercise carried out by the assessing authority is described as erroneous and impermissible in law.

Reliance was placed on the decision of the division bench of the Karnataka High Court in the case of Commissioner of Income Tax vs. Bangalore Metro Rail Corporation Ltd. (2022) 449 ITR 431 (Karnataka).

The assessee alternatively submitted that it was only a payer. The payees i.e., BHEL and CIPL were subjected to tax. Upon completion of their assessment, those payers were also issued certificates of full payment of tax due. Therefore, if at all the assessee may only be liable for delay in payment of TDS. Yet, liability of short deduction of TDS could not be imposed.

The Hon Court held that it has not been disputed that the essence of the contract involved in the present case and that involved in the case of Pr. Commissioner of Income Tax, TDS-II, Chandigarh vs. The Senior Manager (Finance), Bharat Heavy Electricals Ltd., Jhajjar (supra) were similar — to set up a thermal power plant. In both cases, the dispute arose upon a survey. That inconsequential similarity apart, it is undisputed that in both cases, the element of testing and commissioning of technical works etc. was part of the main contract — to set up a thermal power plant including therein the work of Transportation, Insurance, Erection, Installation, Testing and Commissioning of BTG and also Commissioning of BOP.

In view of the undisputed similarity between two cases, the court followed the reasoning given by the division bench of Punjab and Haryana High Court in the case of Pr. Commissioner of Income Tax, TDS-II, Chandigarh vs. The Senior Manager (Finance), Bharat Heavy Electricals Ltd., Jhajjar (supra) that the work of testing etc., had to be performed by the contractor not by way of independent work awarded to it but by way of execution of the whole contract that was to set up a thermal power plant.

Thus, Punjab and Haryana High Court has principally reasoned that the primary / dominant object of the contract would govern or subsume the other object /clause therein. In absence of any internal tool shown to exist (in the contract), it was incorrect to reach an inference that the contracting parties, i.e., assessee on one hand and BHEL and CIPL on the other, had intended to treat the work of Testing and Commissioning, separate / independent of the contract to set up BTG and BOP by those contracting parties. Further, in absence of any enabling law, it never became open to the taxing authorities to overlook the dominant object of the contract and reach to a conclusion, because part of the contract involved Testing, Commissioning, etc., necessarily, there would exist component of “fees for technical services”, by necessary implication.

Then, the Karnataka High Court in Commissioner of Income Tax vs. Bangalore Metro Rail Corporation Ltd. (supra) has further reasoned that an indivisible / composite contract may not be bifurcated to cull out any indivisible component of such contract, to make a higher deduction of tax at source. Thus, that Court applied the principle of indivisibility of a composite contract. It may not be bifurcated to subject a part of the contract to higher TDS. Thus, that Court applied the principle of indivisibility of a contract, that may not be artificially dissected at the hands of a taxing authority, to the prejudice of the assessee.

On plain reading, the contracts executed by the assessee with BHEL and CIPL were indivisible contracts for BTG and BOP, respectively. The taxing authorities exist to apply the taxing statute to the proven facts of a case. Such facts are not for the taxing authority to imagine or presume or assume. Therefore, the burden existed on the revenue authorities to establish that they were enabled in law and also that the proven facts of the case permitted them to divide an otherwise indivisible / composite contracts executed by the assessee with the BHEL and CIPL. Unless that exercise had been carried out by the assessing authority, no presumption was available in law.

Accordingly, the first question of law framed was answered in negative, i.e., in favour of the assessee and against the revenue.

The question no. 2 was left unanswered, at this stage. Accordingly, the revenue appeal was dismissed.

BCAJ Admin

Search and seizure — Assessment in search cases — Additions to be confined to incriminating material found during the course of search — Not erroneous

72 Principal CIT vs. Kutch Salt and Allied Industries Ltd.

[2023] 457 ITR 44 (Guj)

A.Y.: 2007–08

Date of Order: 5th May, 2023

Ss. 132(1), 143(3) and 153A of ITA 1961

Search and seizure — Assessment in search cases — Additions to be confined to incriminating material found during the course of search — Not erroneous.

For the A.Y. 2007–08, the Assessing Officer in his order u/s. 143(3) read with section 153A(1)(b) of the Income-tax Act, 1961, made disallowances on account of power and fuel expenses, Registrar of Companies and stamping expenses, sale made to group concern, transportation expenses and interest u/s. 36(1)(iii).

The Commissioner (Appeals) recorded a finding that no incriminating material was found at the premises of the assessee during the search u/s. 132(1) and deleted the additions. The Tribunal upheld his order.

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

“The Tribunal had not erred in holding that addition during the assessment u/s. 153A had to be confined to the incriminating material found during the course of search u/s. 132(1). No question of law arose.”

BCAJ Admin

Offences and prosecution — Money laundering — Issue of tax determination certificate in Form 15CB without ascertaining the genuineness of documents — Not an offence

71 Murali Krishna Chakrala vs. Deputy Director, Directorate of Enforcement

[2023] 457 ITR 579 (Mad)

Date of Order: 23rd November, 2022

R. 37BB of Income Tax Rules 1962

Offences and prosecution — Money laundering — Issue of tax determination certificate in Form 15CB without ascertaining the genuineness of documents — Not an offence.

On a complaint given by the Deputy Manager of a Bank, a case was registered against six accused. Since the FIR disclosed the commission of a scheduled offense under the Prevention of Money Laundering Act, 2002, the Enforcement Directorate, took up the investigation of the case. The case was related to moneys remitted abroad on the basis of forged documents. The allegations were to the effect that these persons had opened fictitious bank accounts, submitted forged bills of entry, parked huge amounts in those bank accounts and had them transferred to various parties abroad through the bank in order to make it a legitimate transaction for the alleged purpose of import.

In the course of its investigation, the ED came across 15CB certificates issued by the accused MKC, a Chartered Accountant. In the interrogation, the accused MKC submitted that one of his clients, Mr. KM, approached him for issuance of Form 15CB under Rule 37BB of the Income-tax Rules, 1962, and submitted the documents in support of his request. On perusal of the documents, the accused MKC issued certificates to the effect that it was not necessary to issue Form 15CB for remittances abroad in respect of imports. The certificate numbers were uploaded on the Income-tax portal and copies of certificates were also submitted to the Branch Manager for transferring a sum of R3.45 crores to various entities in Hong Kong.

After completing the investigation, a supplementary complaint was filed by which MKC, inter alia, was declared an accused.

The discharge application was dismissed by the trial court. The Madras High Court allowed the revision petition and held as follows:

i) In issuing form 15CB under rule 37BB of the Income-tax Rules, 1962, a chartered accountant is required only to examine the nature of the remittance and nothing more. The chartered accountant is not required to go into the genuineness or otherwise of the documents submitted by his clients.

ii) The accused MKC had issued five form 15CB in favour of B, which were handed over by him to his client K for which, a sum of ₹1,000 per certificate was given to him as remuneration. The prosecution of MKC in the facts and circumstances of the case at hand, could not be sustained.”

BCAJ Admin

Insurance Business — Computation of profits — Effect of S. 44

70 Sahara India Life Insurance Co. Ltd. vs. ACIT

[2023] 457 ITR 548 (Del.)

A.Y.: 2014–15

Date of Order: 22nd February, 2023

S. 44 of ITA 1961

Insurance Business — Computation of profits — Effect of S. 44.

The assessee carries on a life insurance business. In the assessment for the A.Y. 2014–15, the Assessing Officer (AO) made four disallowances, viz. disallowance on account of amortization of investment, disallowance of interest on TDS, disallowance of unpaid bonus and disallowance on account of unpaid leave encashment.

CIT(A) allowed the assessee’s appeal and deleted all the additions. Except on the ground of amortization of investment, the Tribunal reversed the order of the CIT(A) and upheld the disallowances made by the AO.

In an appeal by the assessee, the High Court framed the following question of law:

“(i) Whether the Tribunal misdirected itself in law and on facts in not appreciating that the profits and gains of the appellant-assessee were to be computed in accordance with the provisions of section 44 read with First Schedule to the Income-tax Act, 1961?”

The Delhi High Court allowed the appeal and held as follows:

“i) What emerges upon perusal of section 44 of the Income-tax Act, 1961 is that it contains a non-obstante clause, which excludes the application of all provisions contained in the Act, which relate to computation of income chargeable under the heads referred to therein, by providing that computation of income qua the said heads will be made in accordance with rules contained in the First Schedule. Therefore, in the event of any dissonance, the provisions of the rules contained in the First Schedule will prevail over the provisions of the Act.

ii) Section 44 of the Act provides for a statutory mechanism for computing profits and gains of an insurance business and includes, in this context, the business carried on by a mutual insurance company or even by a co-operative society. In that sense, it moves away from the usual and general method of computing income chargeable to tax by bearing in mind the heads of income referred to in section 14 of the Act. This is plainly evident, since there is a specific reference to section 199, (which broadly deals with granting credit to the person from whose income tax has been deducted at source) and the sections spanning between sections 28 and 43B. The rules contained in the First Schedule appended to the Act will determine the manner in which the profits and gains of the insurance business are to be ascertained.

iii) Thus, according to us, the Tribunal has committed an error in law, which needs to be corrected.

iv) Therefore, for the foregoing reasons, we allow the appeal and set aside the impugned order. Consequently, the question of law, as framed, is answered in favour of the appellant-assessee and against the respondent-Revenue.”

BCAJ Admin

Capital gains — Capital loss — Capital asset — Leasehold rights in land is a capital asset — Lease of land granted by State Government with permission to build thereon or sub-lease it — Compensation on subsequent cancellation of lease — Loss sustained was a capital loss

69 Principal CIT vs. Pawa Infrastructure Pvt. Ltd.

[2023] 457 ITR 392 (Del)

A.Y.: 2013–14

Date of Order: 18th November, 2022

S. 2(14) of ITA 1961

Capital gains — Capital loss — Capital asset — Leasehold rights in land is a capital asset — Lease of land granted by State Government with permission to build thereon or sub-lease it — Compensation on subsequent cancellation of lease — Loss sustained was a capital loss.

The petitioner, a real estate developer, was allotted a plot of land in Goa by the Government in September 2006. The lease deed was executed and registered in favour of the assessee for an initial period of 30 years which could be further extended by 60 years. The assessee had shown the property as a Fixed Asset in its books of account. Due to a change in the policy, the allotment was subsequently cancelled, and the assessee received ₹28,03,68,246. The said amount included compensation of ₹9,86,07,762. After reducing the indexed cost of cancellation of ₹30,49,54,129, the assessee claimed a long-term capital loss of ₹2,45,85,883 in the return of income filed for the A.Y. 2013–14. On scrutiny assessment, the return of income filed by the assessee was accepted by the Assessing Officer (AO) after considering the replies filed by the assessee with respect to the compensation received on cancellation of allotment of plot.

Subsequently, the Principal Commissioner issued notice u/s. 263 of the Income-tax Act, 1961, for revision of order and directed the AO to pass a fresh order keeping in mind that the assessee had wrongly treated the property in question as a capital asset and the assessee’s claim of indexed cost of acquisition could not be allowed.

The Tribunal allowed the assesee’s appeal and held that compensation received for the cancellation of the plot was capital in nature and not revenue receipt.

The Delhi High Court dismissed the appeal filed by the Department and held as under:

“i) The leasehold rights held by the assessee in the plot created an interest in the land in favour of the assessee. The assessee under the terms of the agreement not only had the right to construct on this plot but it had a further right to transfer and alienate the building along with the land to third parties and, therefore, the leased land came within the definition of capital asset u/s. 2(14) of the Act. Further, in this case, the allotment of land was cancelled by the Government of Goa in pursuance of the Act of 2012. The payment received by the assessee towards compensation was in terms of sub-sections (3) and (5) of section 3 of the Act of 2012. The leasehold rights held by the assessee in the plot were a capital asset and the compensation received by the assessee from the Government of Goa on the cancellation of the plot was a capital receipt and not a revenue receipt.

ii) The Assessing Officer’s order was correct and did not suffer from any error, justifying the invocation of powers u/s. 263 of the Act by the Principal Commissioner.”

BCAJ Admin

Capital Gains — Computation of — Deduction u/s. 48 — Determination of actual amount deductible — Tax payable by seller agreed to be reimbursed by the assessee seller — Is an allowable deduction in proportion to assessee’s share

68 Smt. Durga Kumari Bobba vs. DCIT

[2023] 457 ITR 118 (Kar)

A.Y.: 2009–10

Date of Order: 4th July, 2022

S. 48 of ITA 1961

Capital Gains — Computation of — Deduction u/s. 48 — Determination of actual amount deductible — Tax payable by seller agreed to be reimbursed by the assessee seller — Is an allowable deduction in proportion to assessee’s share.

The assessee agreed to sell her shares in a company for a consideration of ₹2,70,32,278. Clause 7 of the agreement dealt with the payment of taxes, and it had been agreed between the parties that the seller would reimburse the tax that may be levied on the company up to the closing date. In substance, what the parties agreed was for consideration towards the sale of shares at ₹2,70,32,278 minus the tax component of ₹90,74,103. The assessee claimed deduction under the head “Capital gains” on the tax component u/s. 48 of the Income-tax Act, 1961. The Assessing Officer did not allow the claim for deduction.

The Commissioner of Income-tax (Appeals) allowed the appeal in part. The Tribunal dismissed the appeal of the assessee.

On further appeal to the High Court, it was contended by the assessee that the assessee realised the full value of consideration after excluding the tax component. On the other hand, the Department contended that the tax component which was being claimed as a deduction by the assessee was neither an expenditure in connection with transfer nor was it the cost of acquisition being the only permissible deductions u/s. 48 of the Act. Further, it was contended that since a company is not allowed to claim the tax paid as deduction, applying the same analogy, the assessee cannot be allowed the deduction of tax from the sale consideration.

The Karnataka High Court held as follows:

“i) In the facts of this case, the total amount realised, or in other words, which the appellant got in her hand, is R1.80 crores. The deduction is claimed based on the agreement between the parties. A careful perusal of the agreement shows that the intention of the parties is clear to the effect that the value of the shares shall be the amount agreed between the parties excluding the tax component.

ii) The contention urged by the Department that tax components should be distributed among both sellers merits consideration. Therefore, the appellant shall be entitled to a deduction of only 50 per cent of the tax component proportionate to her shareholding.”

BCAJ Admin

Assessment u/s. 144C — Limitation — Order passed on remand by the Tribunal — Section 144C does not exclude section 153 — Final assessment order barred by limitation — Return of income filed by the assessee to be accepted

67 Shelf Drilling Ron Tappmeyer Ltd. vs. ACIT(IT)

[2023] 457 ITR 161 (Bom.)

A.Ys.: 2014–15 and 2018–19

Date of Order: 4th August, 2023

Ss. 92CA, 144C and 153 of ITA 1961

Assessment u/s. 144C — Limitation — Order passed on remand by the Tribunal — Section 144C does not exclude section 153 — Final assessment order barred by limitation — Return of income filed by the assessee to be accepted.

For the A.Y. 2014–15, the assessee filed its return of income declaring a loss of R120,18,44,672 after fulfilling the condition u/s. 44BB(3) of the Act by exercising the option available to compute its income under the regular provisions of the Act. The asssessee’s case was selected for scrutiny and a draft assessment order was passed on 26th December, 2016, after rejecting the books of account and invoking section 145 of the Act. Despite the option exercised by the assessee, the assessee’s income was computed u/s. 44BB(1) of the Act on the presumptive basis at 10 per cent of the gross receipts.

Objections were filed before the DRP against the draft assessment order. The DRP rejected the objections and gave its directions vide order dated 28th September, 2017, and based on such DRP directions, the final assessment order was passed on 30th October, 2017, u/s. 143(3) read with section 144C(13) of the Act.

On appeal, vide order dated 4th October, 2019, the Tribunal disposed of the appeal by remanding the matter back to the Assessing Officer (AO) for fresh adjudication.

The assessee, vide letter dated 5th February, 2020, informed the AO about the order passed by the Tribunal and requested for early disposal of the same. The assessee followed up with the oral requests. Over one year later, on 22nd February, 2021, the AO called upon the assessee to produce the details of contracts entered into by it and reasons for loss incurred during the A.Y. 2014–15. Details were called in time and again, which were replied to. Thereafter, the AO passed an assessment order dated 28th September, 2021, which read like the final assessment order. However, vide communication dated 29th September, 2021, the AO clarified that it was only a draft order. In order to safeguard against the objections being treated as delayed, the assessee filed its objections on 27th October, 2021, before the DRP.

Meanwhile, the assessee also filed a writ petition challenging the order dated 28th September, 2021, on various grounds. The main objection being that the limitation to pass the final order expired on 30th September, 2021, u/s. 153(3) of the Act read with the provisions of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, and the notifications issued thereunder. Therefore, no final assessment order can be passed in the present case, and the same is time-barred, and therefore, the return filed by the assessee should be accepted.

The Bombay High Court allowed the petition and held as under:

“i) Although in passing a final assessment order, sub-section (13) of section 144C of the Income-tax Act, 1961 specifically excludes the provisions of section 153 stating that the Assessing Officer shall pass a final order of assessment even without hearing the assessee, in conformity with the directions issued by the Dispute Resolution Panel within one month from the end of the month when such directions were received by him, the exclusion of section 153 or section 153B is specific to, and comes in only at the stage of, passing of the final assessment order after directions are received from the Dispute Resolution Panel and not at any other stage of the proceedings u/s. 144C. Hence, the entire proceedings would have to be concluded within the time limits prescribed.

ii) No doubt, section 144C is a self contained code for assessment and time limits are in-built at each stage of the procedure contemplated. Section 144C envisions a special assessment, one which includes the determination of the arm’s length price of international transactions engaged in by the assessee. The Dispute Resolution Panel was constituted bearing in mind the necessity for an expert body to look into intricate matters concerning valuation and transfer pricing and it is for this reason that specific timelines have been drawn within the framework of section 144C to ensure prompt and expeditious finalisation of this special assessment. The purpose is to fast-track a special type of assessment. That cannot be considered to mean that overall time limits prescribed have been given a go-by in the process.

iii) Wherever the Legislature intended extra time to be provided, it expressly provided therefore in section 153. Sub-section (3) of section 153 also applies to a fresh order u/s. 92CA being passed in pursuance of an order of the Tribunal u/s. 254. Sub-section (4) of section 153 specifically provides that notwithstanding anything contained in sub-sections (1), (1A), (2), (3) and (3A) where a reference under sub-section (1) of section 92CA is made during the course of the proceeding for assessment or reassessment, the period available for completion of assessment or reassessment, as the case may be, under these sub-sections shall be extended by twelve months. Explanation 1 below section 153 also provides for the periods which have to be excluded while computing the twelve-month period mentioned in section 153(3). However, there is no mention anywhere of section 144C.

iv) The time limit prescribed u/s. 153 would prevail over and above the assessment time limit prescribed u/s. 144C since the Assessing Officer may follow the procedure prescribed u/s. 144C, if he deems fit and necessary but then the entire procedure has to be commenced and concluded within the twelve-month period provided u/s. 153(3) because, the procedure u/s. 144C(1) also has to be followed by the Assessing Officer if he proposes to make any variation that is prejudicial to the interest of the eligible assessee. If the Assessing Officer did not wish to make any variation that is prejudicial to the interest of the eligible assessee, he need not go through the procedure prescribed u/s. 144C.

v) The exclusion of applicability of section 153, in so far as the non-obstante clause in sub-section (13) of section 144C is concerned, is for the limited purpose to ensure that de hors the larger time available, an order based on the directions of the Dispute Resolution Panel is passed within 30 days from the date of the receipt of such directions. Section and subsection have to be read as a whole with connected provisions to decipher the meaning and intentions. A similar non-obstante clause is also used in section 144C(4) with the same limited purpose, even though there might be a larger time limit u/s. 153, once the matter is remanded to the Assessing Officer by the Tribunal u/s. 254, so that the process to pass the final order u/s. 144C is taken immediately. The object is to conclude the proceedings as expeditiously as possible. There is a limit prescribed under the statute for the Assessing Officer and therefore, it is his duty to pass an order in time.

vi) The date on which the draft assessment order had been passed was 28th September, 2021. Therefore, there was no possibility of passing any final assessment order as the matter had got time-barred on 30th September, 2021. Since the final assessment order had not been passed before this date the proceedings were barred by limitation. Therefore, the return as filed by the assessee should be accepted. Since the order had been passed by the Tribunal on 4th October, 2019, the time would be twelve months from the end of the financial year in which the order u/s. 254 was received. The submission of the Department that when there was a remand the Assessing Officer was unfettered by limitation would run counter to the avowed object of provisions that were considered while framing the provisions of section 144C. The assessment should have been concluded within twelve months as provided in section 153(3) when there had been remand to the Assessing Officer by the Tribunal’s order u/s. 254. Within these twelve months prescribed, the Assessing Officer was to ensure that the entire procedure prescribed u/s. 144C was completed. Since no final assessment order could be passed as it was time-barred, the return of income as filed by the assessee was to be accepted.

vii) This would however, not preclude the Department from taking any other steps in accordance with law.”

BCAJ Admin

Appeal to High Court — Deduction of tax at source — Payment to non-resident — Fees for technical services — Agreement entered into by assessee with USA company for testing and certification of diamonds — Execution of work by laboratory in Hong Kong and payment made in its name as instructed by USA company — Payment to non-resident entity which had no permanent establishment in India — No technical knowledge made available to assessee — Assessee not liable to deduct tax — No question of law arose.

66 CIT(IT & TP) vs. Star Rays

[2023] 457 ITR 1 (Guj)

A.Y.: 2015–16

Date of Order: 31st July, 2023

Ss. 9(1)(vii)(b), 201(1), 201(1A) and 260A of ITA 1961; DTAA between India and USA

Appeal to High Court — Deduction of tax at source — Payment to non-resident — Fees for technical services — Agreement entered into by assessee with USA company for testing and certification of diamonds — Execution of work by laboratory in Hong Kong and payment made in its name as instructed by USA company — Payment to non-resident entity which had no permanent establishment in India — No technical knowledge made available to assessee — Assessee not liable to deduct tax — No question of law arose.

The assessee was in the business of cutting, polishing and export of diamonds. For purposes of testing and certification services, the assessee entered into a customer services agreement with GIA, USA, which set up a laboratory in Hong Kong. The invoices were raised by GIA, USA, instructing the assessee to make payment to the offshore bank accounts of GIA, Hong Kong with which the assessee had no direct relationship or any agreement. The assessee made the payments accordingly but erroneously mentioned the name of the beneficiary in forms 15CA and 15CB as GIA, Hong Kong. The Assessing Officer (AO) was of the view that the remittance made by the assessee for diamond testing certification charges to GIA’s Hong Kong laboratory was in the nature of “fees for technical services” u/s. 9(1)(vii)(b) of the Income-tax Act, 1961, which was applicable in the absence of a Double Taxation Avoidance Agreement between India and China or Hong Kong and treated the assessee as in default u/s. 201(1) for non-deduction of tax at source. He held that the assessee having made payments to GIA’s Hong Kong laboratory could not claim the benefit of the Double Taxation Avoidance Agreement between India and USA, and that the assessee ought to have deducted tax on those payments and accordingly passed an order u/s. 201(1) read with section 201(1A). GIA, Hong Kong did not have a permanent establishment in India.

The Tribunal held that in view of the tax residency certificate and form 10F furnished by GIA, USA from the tax authority of that country for the A.Y. 2015–16, the assessee was entitled to the benefits of the Double Taxation Avoidance Agreement between India and USA, even though such services were not rendered by the USA entity but the service was rendered by a subsidiary situated in Hong Kong, and the payment was merely routed through GIA, USA.

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

“i) The concurrent findings of fact by the authorities were that there was a “take in window” where articles were delivered but the service agreement was between the assessee and GIA, USA. The rightful owner of the remittances was also the U.S.A. entity. Based on factual appreciation, especially the condition in the customer service agreement, the bank invoice and the bank remittance advice, a finding of fact had been arrived at that the assessee was protected under the Double Taxation Avoidance Agreement between India and the U.S.A. and that mere rendering of services could not be roped into fees for technical services unless the person utilising the services was able to make use of the technical knowledge. A simple rendering of the services was not sufficient to qualify the payment as fees for technical services.

ii) The orders of the Commissioner (Appeals) and the Tribunal were based on appreciation of facts in the right perspective. No question of law arose.”

BCAJ Admin

Advance tax — Interest u/s. 234B — Advance tax paid in three years proportionately for transaction spread over three years — Transaction ultimately held to be entirely taxable in the first year itself — Assessee is allowed to adjust the advance tax paid in subsequent two assessment years while computing interest liability u/s. 234B.

65 Mrs. Malini Ravindran vs. CIT(A)

[2023] 457 ITR 401 (Mad)

A.Ys.: 2011–12, 2012–13 and 2013–14

Date of Order: 14th November, 2022

Ss. 119 and 234B of ITA 1961

Advance tax — Interest u/s. 234B — Advance tax paid in three years proportionately for transaction spread over three years — Transaction ultimately held to be entirely taxable in the first year itself — Assessee is allowed to adjust the advance tax paid in subsequent two assessment years while computing interest liability u/s. 234B.

The assessee entered into an MOU with a company on 12th December, 2010, for the sale of property for a sale consideration of ₹121,65,21,000. The sale took place over the A.Ys. 2011–12, 2012–13 and 2013–14, and the assessee had computed and paid capital gains for each of the years and also paid advance tax during each of the corresponding financial years. Returns filed by the assessee had become final.

Subsequently, the assessments were re-opened, wherein the Assessing Officer (AO) held that the transfer took place upon the execution of MOU, that is, on 12th December, 2010, and the entire sale consideration was taxable in the A.Y. 2011–12. The AO also made assessments for A.Ys. 2012-13 and 2013-14 on a protective basis.

In the appeal before the first appellate authority, the assessee agreed that the gains were taxable in year one, and the entire demand arose in A.Y. 2011–12. The assessee confirmed that substantive assessment for A.Y. 2011–12 could be confirmed, and the protective assessments for A.Ys. 2012–13 and 2013–14 be cancelled. The CIT(A) confirmed the position vide order dated 31st January, 2019.

While giving effect to the orders passed by the CIT(A), a demand of ₹40,78,17,870 was raised for A.Y. 2011–12 and refunds were due for A.Ys. 2012–13 and 2013–14. The refunds were adjusted against the demand for A.Y. 2011–12 and after adjustment, a sum of ₹8,30,05,290 was determined to be payable by the assessee. The total demand for A.Y. 2011–12 included a sum of ₹19,43,57,718 as interest u/s. 234B of the Act.

The assessee submitted a request for waiver of interest u/s. 234B on the grounds that self-assessment tax / advance tax paid for A.Ys. 2012–13 and 2013–14 be considered as paid towards A.Y. 2011–12. The AO did not accede to her request and held that there was no provision for adjustment of tax paid in one year as against the liability of another year.

Against the said order of rejection of waiver by the AO, as well as the order of the appellate authorities, the petitions were preferred before the High Court. The Madras High Court partly allowing the writ petitions held as under:

“i) The advance taxes relevant to the assessment years 2012–13 and 2013-14 had been paid in time, in the course of financial years 2011–12 and 2012-13, respectively. The reassessments had transpired on 29th December, 2017. The payments were not ad hoc, and had been made specifically towards advance tax for liability towards capital gains in the financial years 2011–12 and 2012–13.

ii) Moreover, the Department had been in possession of the entire amounts from the financial years 2011–12 and 2012–13, since the assessee had satisfied the demands for the corresponding assessment years by way of advance and self-assessment taxes. It was those amounts that had been adjusted against the liability for the assessment year 2011–12 and therefore, substantially revenue neutral.

iii) The phrase ‘or otherwise’ used in section 234B(2) would encompass situations of remittances made in any other context, wherein the amounts paid stood to the credit of the assessee. However, the liability to advance tax had commenced from the financial year relevant to the assessment year in question 2011–12. The assessee sought for credit in respect of the advance tax remitted during the financial years 2011–12 and 2012–13, relevant to the A.Ys. 2012–13 and 2013–14 and there was a delay of one and two years, respectively, since the amounts for which credit was sought for ought to have been remitted in the financial year 2010–11, relevant to the A.Y. 2011–12. To such extent, the assessee was liable to interest u/s. 234B. The order rejecting waiver of interest was set aside to that extent. There was no justification in the challenge to the order of the Commissioner (Appeals) and the consequential order passed by the Assessing Officer.”

BCAJ Admin

The Tribunal held the act of PCIT in treating the assessment order as erroneous and prejudicial to the interest of the revenue only because the capital gain was not deposited in the capital gain account scheme as a hyper-technical approach while dealing with the issue. When the basic conditions of section 54(1) are satisfied, the assessee remains entitled to claim deduction under section 54.

48 Sarita Gupta vs. PCIT

ITA No. 1174/Del/2022

A.Y.: 2012–13

Date of Order: 7th December, 2023

Sections: 54, 263

The Tribunal held the act of PCIT in treating the assessment order as erroneous and prejudicial to the interest of the revenue only because the capital gain was not deposited in the capital gain account scheme as a hyper-technical approach while dealing with the issue.

When the basic conditions of section 54(1) are satisfied, the assessee remains entitled to claim deduction under section 54.

FACTS

The assessee, a resident, filed a return of income declaring total income of ₹6,42,740. The AO upon receiving information that the assessee has sold immovable property for a consideration of ₹62,06,000 issued a notice under section 147. The assessee, in response, filed a return of income declaring the income to be the same as that declared in the original return of income.

In the course of assessment proceedings, the AO asked the assessee to submit details relating to property sold and capital gain arising out of such property. From the documents, the AO observed that the assessee along with one another had purchased the property for ₹20 lakh of which ₹10 lakh was contributed by the assessee. The property was sold for ₹62,06,000, out of which, the share of the assessee was ₹31,03,000. After reducing the indexed cost of acquisition, the long-term capital gain aggregated to ₹14,59,324. The assessee made purchase of a new residential property and consequently claimed that the entire long-term capital gain to be exempt under section 54. The AO completed the assessment accepting the returned income.

Subsequently, PCIT called for an examined assessment record and found that the amount of capital gain was not deposited in the capital gain account scheme during the interim period till its utilisation in purchase / construction of new property. The PCIT was of the view that these facts were not looked into by the AO and therefore the assessment order is erroneous and prejudicial to the interest of the revenue. After issuing a show cause notice and considering the response of the assessee thereto, the PCIT set aside the assessment order with a direction to disallow the deduction claimed under section 54 of the Act as the assessee has failed to deposit the amount of capital gain in the capital gain account scheme.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that in the course of assessment proceedings, the AO had thoroughly examined the issue of the sale of immovable property and the resultant capital gain arising from such sale. The AO had called upon the assessee to furnish details of exemption claimed under section 54 of the Act with supporting evidence. The Tribunal held that the AO has duly examined the issue relating to capital gain from the sale of the property as well as assessee’s claim of deduction under section 54 of the Act.

The Tribunal noted that the PCIT had not doubted the amount of capital gain arising in 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 mentioned in section 54(1) of the Act. It is only because the capital gain was not deposited in the capital gain account scheme, the revisionary authority has treated the assessment order to be erroneous and prejudicial to the interest of the revenue.

The Tribunal held that in its view, the PCIT adopted a hyper technical approach while dealing with the issue. The Tribunal held that when the basic conditions of section 54(1) have been satisfied, the assessee remains entitled to claim deduction under section 54 of the Act. The Tribunal also held that in any case of the matter, there is no prejudice caused to the Revenue as the assessee in terms of section 54(1) of the Act is entitled to deduction. The Tribunal held that exercise of power under section 263 of the Act to revise the assessment order to be invalid. The Tribunal quashed the order passed under section 263 of the Act and restored the assessment order.

The appeal filed by the assessee was allowed.

BCAJ Admin

Levy of penalty under section 271AAB is not mandatory. The AO has discretion after considering all the relevant aspects of the case to satisfy himself that the case of the assessee does not fall within the definition of an `undisclosed income’ as provided in Explanation to section 271AAB of the Act. Initiation of penalty will be invalid where show cause notice for initiation thereof neither specifies the grounds and default on the part of the assessee nor does it specify the undisclosed income on which the penalty is proposed to be levied.

47 JCIT vs. Vijay Kumar Saini

ITA No. 371/Jaipur/2023

A.Y.: 2020–21

Date of Order: 8th November, 2023

Section: 271AAB

Levy of penalty under section 271AAB is not mandatory. The AO has discretion after considering all the relevant aspects of the case to satisfy himself that the case of the assessee does not fall within the definition of an `undisclosed income’ as provided in Explanation to section 271AAB of the Act.

Initiation of penalty will be invalid where show cause notice for initiation thereof neither specifies the grounds and default on the part of the assessee nor does it specify the undisclosed income on which the penalty is proposed to be levied.

FACTS

A search under section 132 of the Act was carried out at the premises of the assessee in connection with search and seizure action on Saini Gupta Malpani — Somani Group of Ajmer on 13th February, 2020. During the year, under consideration, the assessee filed the return of income on 25th February, 2021, declaring a total income of ₹3,34,40,150. During the course of assessment proceedings, the assessee only furnished revised computation of the total income but the revised return of income was not found on the e-filing portal, nor was it furnished by the assessee. Revised computation of total income was not given cognizance and the assessment of total income was completed by making an addition of ₹2,87,50,000 to the returned income on account of an undisclosed business income, and assessing the total income at ₹6,21,90,150 vide order dated 29th September, 2021 passed under section 143(3) of the Act. The AO also initiated proceedings for levy of penalty under section 271AAB(1A) by issuing a show cause notice without specifying the default prescribed under section 271AAB(1A) of the Act.

In response to the show cause notice, the assessee furnished the reply but the same did not find favour with the AO and he held that the assessee is liable for penalty under section 271AAB(1A) @ 60 per cent of the undisclosed income of ₹2,87,50,000 and he levied a penalty of ₹1,72,50,000. In the penalty order, the AO did not point out any specific document and the nature of transactions recorded therein which may substantiate the charge that undisclosed income was detected during the course of search.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the order of CIT(A) by observing the appellant to be guilty of mischief of clause (a) of section 271AAB(1A) instead of clause (b) under which penalty was supposedly levied by the AO. Thus, CIT(A) granted partial relief to the assessee.

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

HELD

At the outset, the Tribunal observed that this appeal by the revenue is a cross appeal against order passed by CIT(A) against which order, the assessee preferred an appeal being ITA No. 303/Jp/2023 raising common issue as raised by the revenue and the said appeal of the assessee has been disposed off vide Tribunal’s order dated 25th July, 2023. It observed that the appeal of the assessee has been decided on legal issues as well as on merits in favour of the assessee after elaborately discussing the matter at great length, and after considering the identical issues as have been decided by the co-ordinate benches in the case of Ravi Mathur vs. DCIT [ITA No. 969/Jp./2017; Order dated 9th April, 2019, and Rajendra Kumar Gupta vs. DCIT [ITA No. 359/Jp./2017; Order dated 18th January, 2019.

The Tribunal noted the decision in the appeal filed by the assessee wherein the Tribunal interalia observed that the assessee, in the course of search, admitted an undisclosed sales of ₹5 crore and offered the same for taxation, and therefore, penalty cannot be levied under section 271AAB of the Act. The Tribunal held that —

(i) it is pertinent to note that the disclosure of additional income in the statement recorded under section 132(4) itself is not sufficient to levy the penalty under section 271AAB of the Act until and unless the income so disclosed by the assessee falls in the definition of `undisclosed income’ as defined in Explanation to section 271AAB(1A) of the Act;

(ii) the question whether the income disclosed by the assessee is undisclosed income in terms of definition of section 271AAB has to be considered and decided in penalty proceedings;

(iii) since the assessee has offered the said income to buy peace and avoid litigation with the department, the question of taking any decision by the AO in the assessment proceedings about the true nature of surrender made by the assessee does not arise, and only when AO has proposed to levy the penalty then it is a pre-condition for invoking the provisions of section 271AAB that the said income disclosed by the assessee in the statement under section 132(4) is an undisclosed income as per definition in section 271AAB. Therefore, the AO in proceedings under section 271AAB has to examine all the facts of the case as well as the basis of surrender and then arrive at the conclusion that the income disclosed by the assessee falls in the definition of undisclosed income.

(iv) it did not agree with the CIT(A) that levy of penalty under section 271AAB is mandatory simply because AO has to first issue a show cause notice and then has to make a decision for levy of penalty after considering the fact that all the conditions provided for in section 271AAB are satisfied. It relied on the ratio of the decision of the co-ordinate bench of the Tribunal in the case of Ravi Mathur vs. DCIT.

As regards the second issue regarding validity of initiation, the Tribunal while deciding the appeal of the assessee held —

“We further note that in the case in hand, the AO in the show cause notice has neither specified the grounds and default on the part of the assessee nor even specified the undisclosed income on which the penalty was proposed to be levied. Thus it is clear that the show cause notice issued by the AO for initiation of penalty proceedings under section 271AAB(1A) is very vague and silent about the default of the assessee and further the amount of undisclosed income on which the penalty was proposed to be levied. Even the Hon’ble Jurisdictional High Court in case of Shevata Construction Co. Pvt. Ltd in DBIT Appeal No. 534/2008 dated 6th December, 2016 has concurred with the view taken by Hon’ble Karnataka High Court in case of CIT vs. Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Karnataka) which was subsequently upheld by the Hon’ble Supreme Court by dismissing the SLP filed by the revenue in the case of CIT vs. SSA’s Emerald Meadows, 242 taxman 180 (SC). Accordingly, following the decision of the Coordinate Bench as well as Hon’ble Jurisdictional High Court, this issue is decided in favour of the assessee by holding that the initiation of penalty is not valid and consequently the order passed under section 271AAB is not sustainable and liable to be quashed.”

Since Revenue did not place any material to controvert the submissions of the assessee, the Tribunal on the basis of observations made while deciding the appeal filed by the assessee, allowed the appeal of the assessee and dismissed the appeal filed by the Revenue as it had become infructuous.

BCAJ Admin

Once tax has been deducted at source credit, it therefore has to be granted to the deductee even though the deductor has not deposited the tax so deducted with the Government

46 Vishal Pachisia vs. ITO

ITA No.: 764/Kol/2023

A.Y.: 2016–17

Date of Order: 7th November, 2023

Section: 205

Once tax has been deducted at source credit, it therefore has to be granted to the deductee even though the deductor has not deposited the tax so deducted with the Government.

FACTS

The assessee, a salaried employee, received a salary of ₹17,40,264. The employer deducted tax at source of ₹3,96,700. The employer did not deposit the tax deducted in the government treasury. The assessee in its return of income claimed credit of taxes deducted at source which interalia included the tax of ₹3,96,700 deducted at source by the employer. The AO, CPC denied the credit in respect of the tax deducted at source by the employer on the ground that the same was not deposited by the employer in the government treasury.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that since the employer of the assessee has not deposited the tax so deducted into the government treasury, the assessee is not entitled to claim the credit.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the case of the assessee is covered in its favour by Departmental Circular No. F.No. 275/29//2014–IT(B) and also by decision in Unique Buildcon Private Limited vs. ITO in W.P.(C) 7797/2003 order dated 31st March, 2023, and also decision of co-ordinate bench Pune in the case of Mukesh Padamchand Sogani vs. ACIT in ITA No. 29/Pune/2022 order dated 30th January, 2023.

The Tribunal observed that in all the above cases the issue of non-deposit of TDS by the deductor has been allowed in favour of the assessee by holding that once TDS is deducted then liability resulting from non-deposit of TDS by the deductor cannot be fastened upon the assessee.

The Tribunal having reproduced the operative part of the decision of the Pune bench in the case of Mukesh Padamchand Sognai (supra) followed the said decision and set aside the order of CIT(A) and directed the AO to allow the credit of TDS to the assessee.

The appeal filed by the assessee was allowed.

BCAJ Admin

Article 13(4) of old India-Mauritius DTAA – Having failed to establish that assessee is a conduit, basis TRC issued by tax authorities, the assessee is a tax resident of Mauritius and is entitled to DTAA benefits

9 Veg N Table vs. DCIT

TS-657-ITAT-2023 (Del)

ITA No.: 2251/Del/2022

A.Y.: 2018-19

Date of Order: 31st October, 2023

Article 13(4) of old India-Mauritius DTAA –— Having failed to establish that assessee is a conduit, basis TRC issued by tax authorities, the assessee is a tax resident of Mauritius and is entitled to DTAA benefits.

FACTS

Assessee, a Mauritius-based investment holdingcompany, sold shares of Indian Company (ICO) and claimed exemption under Article 13(4) of India-Mauritius DTAA. Shares were acquired prior to 1st April, 2017. Assessing Officer (AO) denied exemption noting that:a) ICO was 75 per cent held by UKCO and 25 per centby Canadian individuals b) there were no operatingincome or expense in the books of the assesse since the date of investment c) no remuneration was paid to directors d) two out of three directors held a number of directorships e) Third director was a Canadian individual who was ultimate beneficial owner f) there is no commercial rationale for establishing a company in Mauritius.

The assessee appealed to DRP. DRP upheld the order of AO.

Being aggrieved, the assessee appealed before the Tribunal.

HELD

Assessee holds valid TRC and should be treated as a resident of Mauritius. Reliance was placed on CBDT circulars and under noted decision¹.

AO alleged that the assessee is a conduit company. These allegations are not supported by substantive and cogent material.

GAAR provisions empowered AO to deny DTAA benefits. AO did not invoke GAAR provisions.

1 ABB AG in IT(IT)A No.1444/Bang/2019 dated 24th November, 2020

BCAJ Admin

Section 271(1)(c): Penalty — Concealment of income — Full disclosure of facts — No facts concealed or hidden — Penalty cannot be levied for difference in the opinion

24 Pr. Commissioner of Income Tax – 2 vs. Tata Industries Ltd.

[Income Tax Appeal No. 1039 of 2018, (Bom.) (HC)]

Date of Order: 9th November, 2023

Section 271(1)(c): Penalty — Concealment of income — Full disclosure of facts — No facts concealed or hidden — Penalty cannot be levied for difference in the opinion.

Assessee had filed a return of income on 30th October, 2004, declaring total income at the loss of Rs.15,97,83,660. The Assessing Officer (AO) completed the assessment under section 143(3) of the Act, determining the total income at Rs.32,38,84,147 under the normal provisions of the Act. Various additions / disallowances were made related to capitalisation of fees paid to S. B. Billimoria& Co. of Rs.19,44,000, disallowance of legal fees claimed in case of Deejay System Consultants Pvt Ltd. of Rs.4,85,000 and disallowance of claim of provision of diminution in value of investments written back of Rs.38,84,00,000.

The penalty proceedings under Section 271(1)(c) of the Act were also commenced. The AO came to the conclusion that assessee had committed default by filing inaccurate particulars of total income in respect of certain disallowances and levied penalty of Rs.1,60,96,088 being 100 per cent of the tax on the income of Rs.44,86,69,234 sought to be evaded under the normal provisions of the Act and Rs.18,43,03,149 being 100 per cent of the tax on the income of Rs.51,37,37,000 sought to be evaded under Section 115JB of the Act. The CIT(A) allowed the appeal, and the penalty levied by AO was deleted. The Tribunal dismissed the appeal filed by the Department vide order dated 28th September, 2016.

The Hon Court observed that the Tribunal has upheld the findings of the CIT(A) on the basis that the entire claim was made by the assessee making full disclosure, and no facts were concealed or hidden. The disallowance was made by the AO due to a difference in the opinion of the assessee and the AO. The explanation given by the assessee is a plausible explanation. Further, the AO has not found the expenses to be not genuine or not bona fide. The nature of the disallowance does not appear as the case of concealment or furnishing inaccurate particulars of the claim.

The Hon Court observed that the ITAT on the facts has agreed with the CIT(A) that the assessee had made the claim in a transparent and befitting manner. In view of the conclusions arrived on facts, the ITAT agreed with the view of the CIT(A) that the assessee has not committed any default or filed any inaccurate particulars of income warranting imposition of penalty.

The Apex Court in Commissioner of Income Tax vs. Reliance Petroproducts Pvt Ltd (2010) 322 ITR 158(SC) has held that where assessee has furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as concealment of income on its part, and where the AO has taken a particular view contrary to the view that assessee had, it would not attract any penalty under Section 271(1)(c) of the Act. The Apex Court held that if this contention of the Revenue is accepted, then in case of every return where the claim made is not accepted by the AO for any reason, the assessee will invite penalty under Section 271(1)(c).

Thus, the Department’s appeal was dismissed.

BCAJ Admin

Section 148A and 151: Reassessment — Change of opinion — Tangible material — Reasons/ information cannot be substituted or modified

23 Hasmukh Estates Pvt. Ltd. vs.

Dy. ACIT – 1 (1)1, Mumbai

[W.P. No. 4574 of 2022, (Bom.) (HC)]

A.Y.: 2015–16

Date of Order: 8th November, 2023

Section 148A and 151: Reassessment — Change of opinion — Tangible material — Reasons/ information cannot be substituted or modified.

The Petitioner is a private company engaged in the business of undertaking real estate projects, selling a plot of land situated at Raigad District to one Regency Nirman Limited by a registered agreement to sell, dated 7th October, 2011, for consideration of Rs.18 Crores. The property was valued at Rs.16.50 Crores for the purpose of stamp duty. It was agreed between the Petitioner and the purchaser that in case the Petitioner was unable to discharge any obligation under the agreement, damages shall be settled. Thus, on non-fulfilment of some obligations on the part of Petitioner, the consideration was reduced by R6 Crores, making the consideration payable for the land at Rs.12 Crores. Petitioner e-filed its return of income on 31st March, 2017, declaring income of Rs.8,43,58,620 and booked profits under Section 115JB of the Act at Rs.9,72,27,472. An assessment order came to be passed on 26th December, 2017, accepting Petitioner’s figure of Rs.12 Crores. In the assessment order, the sale of this property and resultant capital gains were discussed. Namely, non-applicability of Section 50C of the Act.

Original notice under Section 148 of the Act was issued on 31st March, 2021, by the Assessing Officer (AO), and Petitioner filed a return of income raising objections against the reasons recorded. Thereafter, Petitioner received a communication dated 28th May, 2022, from the AO conveying that pursuant to the order of the Apex Court in the matter of Union of India vs. Ashish Agarwal, a copy of the approval under Section 151 of the Act and the reasons recorded prior to the issuance of notice under Section 148 of the Act were being forwarded to it. The Petitioner filed its objections to the letter dated 28th May, 2022 and explained its stand on the sale of the plot of land to Regency Nirman Limited. However, Respondent No.1-AO passed an order dated 29th July, 2022, under Section 148A(d) of the Act holding that the sale consideration offered was Rs.12 Crores, which was lesser than the stamp duty valuation of Rs.16.50 Crores, inviting applicability of Section 50C of the Act. The order was passed with prior approval of the PCCIT, Mumbai, followed by notice dated 30th July, 2022, under Section 148 of the Act.

The Hon Court observed that:

(a) The AO has dealt with the entire issue of long-term capital gains during the course of original assessment proceedings, including the fact of deduction of compensation / damages of an amount of Rs.6 Crores from the agreed consideration of Rs.18 Crores and the stamp valuation shown to be Rs.16.50 Crores.

(b) The AO clearly accepted the non-applicability of Section 50C of the Act to the transaction of sale while issuing the original assessment order.

(d) The audit memo was raised by an internal audit of the Department and not by CAG as required by the provision which was in effect prior to the amendment which came into force w.e.f. 1st April, 2022, and applicable to the present case.

(e) The AO conveyed his objections to the audit memo, maintaining that the original assessment order was correct.

(f) The ACIT once again maintained its objections. This time, the said ACIT accepted that the AO did not properly examine the allowability of Rs.6 Crores expense under the long-term capital gains head. Hence, the audit objection was accepted, leading to reopening of the assessment of the income of the Petitioner.

(g) Relying upon the decision of the Apex Court in the matter of Union of India vs. Ashish Agarwal, the notice under Section 148 of the Act dated 21st April, 2021, issued under the old law was treated as notice under Section 148A(b) of the Act.

Thus, the admitted facts indicate that the basis on which the AO issued notice alleging that there was ‘information’ that suggests escapement of income was an internal audit objection. What information is explained in Section 148 of the Act to mean “any objection raised by the Comptroller and Auditor General of India…” and no one else. This itself makes the reopening of assessment in the present case impermissible.

Consequently, a view deviating from that which was already taken during the course of issuing the original assessment order is nothing but a ‘change of opinion’, which is impermissible under the provisions of the Act.

The fact that the notice was issued based on audit objections received by the AO also does not find a mention in the impugned notice. It is settled law that the reopening notice can be sustained only on the basis of the ground mentioned in the reasons recorded. It is not open to the revenue to add and / or supplement later the reasons recorded at the time of reopening notice.

The Hon. Court held that the information which formed the basis of reopening itself does not fall within the meaning of the term ‘information’ under the 1st Explanation to Section 148 of the Act, and hence, the reopening is not permissible as it clearly falls within the purview of a ‘change of opinion’, which is impermissible in law.

BCAJ Admin

Revision u/s. 264 — Powers of Commissioner are not limited to correct an error committed by subordinate authorities but could even be exercised where errors are committed by the assessee — Assessee filed an applicationunder Section 154 and first time claimed indexcost of improvement being renovation expenses which was not claimed in original return of income

22 Pramod R. Agrawal vs. The Pr. CIT Circle – 5

[W.P. No. 2435 of 2017, (Bom.) (HC)]

A.Y.: 2007–08

Date of Order: 13th October, 2023

Revision u/s. 264 — Powers of Commissioner are not limited to correct an error committed by subordinate authorities but could even be exercised where errors are committed by the assessee — Assessee filed an application under Section 154 and first time claimed index cost of improvement being renovation expenses which was not claimed in original return of income.

The assessee, a resident individual, had sold a flat and offered the same as capital gain in the return of income without considering the allowance of indexed cost of improvement in respect of renovation expenses.

The Assessing Officer (AO) had made an addition under Section 50C by taking the stamp duty value as the full value of consideration while computing thecapital gains arising from the sale of said flat. No adjustment was made to the allowances claimed fromthe full value of consideration to determine the capital gains.

On appeal, the Commissioner confirmed the addition made by the AO by an order dated 13th July, 2013.

Thereafter, the assessee filed an application under Section 154 on 4th November, 2015, to rectify the previous orders passed by allowing the deduction of indexed cost of improvement of Rs.2.95 lakhs being renovation expenses incurred in the year 1990. It had claimed in the application that the allowance of the said cost was not claimed in the original return of income and the same should be allowed as it was a rectifiable defect under Section 154.

The ITO, however, rejected the application filed by the assessee on the ground that the claim was made the first time in the application under Section 154, and it was never brought to the notice earlier.

Aggrieved by the order of the ITO, the assessee had filed an application under Section 264, which was also rejected by an order dated 22nd March, 2017.

The Hon’ble Court observed that there was no delay in filing the application under Section 264 because the application under Section 264 was against the order passed under Section 154 and not Section 143(3). The order under Section 154 was passed on 8th December, 2015, and the application under Section 264 was filed on 18th January, 2016, within one year.

The Court further held that the proceedings under Section 264 are intended to meet a situation faced by an aggrieved assessee, who is unable to approach the Appellate Authorities for relief and has no other alternate remedy available under the Act. The Commissioner is bound to apply his mind to the question of whether the assessee was taxable on that income, and his powers are notlimited to correcting the error committed by thesubordinate authorities but could even be exercised where errors are committed by the assessee. It would even cover a situation where the assessee because of an error has not put forth a legitimate claim at the time of filing the return and the error is subsequently discovered and raised for the first time in an application under Section 264.

The Court referred and relied on the case of Asmita A. Damale vs. CIT Writ Petition No. 676 of 2014, dated 9th May, 2014, wherein the Court had held thatthe Commissioner while exercising revisionary powers under Section 264 has to ensure that there isrelief provided to the assessee where the law permits the same.

In the assessment order dated 30th December, 2010, passed under Section 143(3) in the case of Ravi R Agarwal, the other co-owner of the flat, theAO has accepted the amount of Rs. 2.95 lakhs as the cost of renovation of indexation. Therefore, this figure has to be accepted as correct and suitable allowance should be made while arriving at the long-term capital gain.

The impugned order dated 22nd March, 2017, was quashed, and the matter was remanded to the AO for denovo consideration.

BCAJ Admin

S. 69B, 132 – Additions to total income not sustainable when no incriminating material was found during the search. S. 153A, 153C – Additions based on documents found during a search on a third party to be made under section 153C and not 153A of the Act

45 ACIT vs. Atul Kumar Gupta (Delhi – Trib.)

[2023] 103 ITR(T) 13 (Delhi – Trib.)

ITA No.: 1164 and 1931 (Delhi) of 2020 and 205, 206 & 1395 (Delhi) of 2021

A.Ys.: 2011-12, 2014-15 to 2016-17

Date of Order: 13th March, 2023

S. 69B, 132 – Additions to total income not sustainable when no incriminating material was found during the search.

S. 153A, 153C – Additions based on documents found during a search on a third party to be made under section 153C and not 153A of the Act.

FACTS

A search was conducted by income tax authorities in a group case inter alia including the assessee. It was contended that the assessee had purchased shares of some companies at a price which was less than book value and, therefore, the difference between book value and purchase price represented unaccounted investment was added to the total income under section 69B of the Act.

Further, certain additions were made to the total income of the assessee based on ledger accounts found in the course of a third-party search.

Aggrieved, the assessee filed an appeal before CIT(A). The CIT(A) ruled in favour of the assessee and deleted both the additions on the basis that no incriminating material was found during the search to make the impugned addition. CIT(A) further observed that there was no reference to any document that was suggestive of any undisclosed income as a result of the purchase of shares.

Aggrieved, the Revenue, filed an appeal before the ITAT.

HELD

The ITAT observed that the CIT(A) has passed a well-reasoned order appreciating the material on record. The basis for addition as stated by the Assessing Officer was incriminating material found during the search and post search enquiry. However, no material or documents or any other details were specifically indicated or provided by the Assessing officer.

The ITAT further observed that merely stating that seized materials are there and post-search enquiry has shown that the purchase prices have been suppressed, cannot be the basis of addition.

The ITAT thus concurred with the findings of the CIT(A) on the first aspect.

On the next aspect of additions based on ledger accounts found in the course of a third-party search, the ITAT observed that no addition can be made de hors the material found during the search. When a separate independent search was not conducted on the assessee and additions are sought to be made based on ledger accounts found in the course of third-party search, the same have to be made under section 153C of the Act and not under section 153A of the Act.

Accordingly, the ITAT deleted the addition on the second aspect.

The ITAT relied on multiple judicial decisions inter alia includingK.P. Varghese vs. ITO [1981] 131 ITR 597 (SC), CIT vs. Kabul Chawla [2015] 380 ITR 573 (Delhi), CIT vs. Gulshan Kumar [2002] 257 ITR 703 (Delhi), CIT vs. Naresh Khattar HUF [2023] 261 ITR 664 (Delhi) and Pr. CIT vs. SMC Power Generation Ltd.[IT Appeal No. 406 of 2019, dated 23rd July, 2019]

BCAJ Admin

S. 271(1)(c) — Penalty levied without any independent and specific finding being recorded as to how disallowance made by the Assessing Officer (AO) which was upheld by the Tribunal, would lead to a charge of furnishing of inaccurate particulars of income by the assessee, was unjustified and to be deleted

44 ISGEC Heavy Engineering Ltd. vs. ITO

[2023] 103 ITR(T) 152 (Chandigarh – Trib.)

ITA No.: 577 (CHH) OF 2022

A.Y.: 2014-15

Date of Order: 13th March, 2023

S. 271(1)(c) — Penalty levied without any independent and specific finding being recorded as to how disallowance made by the Assessing Officer (AO) which was upheld by the Tribunal, would lead to a charge of furnishing of inaccurate particulars of income by the assessee, was unjustified and to be deleted.

FACTS

The assessee-company’s case was selected for scrutiny proceedings and an assessment order under section 143(3) was passed on 30th December, 2016 making various additions. Thereafter, the AO had passed a rectification order u/s 154 wherein the AO had reduced the addition made u/s 14A r.w. Rule 8D from Rs1,42,26,765 to Rs.63,21,654. On appeal before CIT(A), all the additions were deleted except for the addition made u/s 14A r.w. Rule 8D. On further appeal before the Tribunal, the addition u/s 14A r.w. Rule 8D was restricted to an amount of Rs.5,00,000 on an estimated and lump sum basis.

The AO had initiated penalty proceedings u/s 271(1)(c) vide show cause notice dated 30th December, 2016 and 10th June, 2021. Without taking into account, the reply of the assessee company, the AO passed the order u/s 271(1)(c) and levied a penalty of Rs.1,54,500 on restricted addition of Rs.5,00,000 holding that the assessee had furnished inaccurate particulars of income.

Aggrieved, the assessee company filed an appeal before CIT(A). The CIT(A) confirmed the penalty levied without assigning any reasons.

Aggrieved, the assessee company filed an appeal before the ITAT.

HELD

The ITAT observed that the AO had levied the penalty merely on the basis of the addition of Rs.5,00,000 in the quantum proceedings. The ITAT observed that there was no independent and specific finding which had been recorded by the AO, as to why he was of the belief that the charge of furnished inaccurate particulars of income can be fastened on the assessee company and the reasons for arriving at such a finding given that penalty provisions have to be strictly construed.

The ITAT held that it is a settled legal proposition that the quantum and penalty proceedings are independent proceedings. Though the initiation of penalty proceedings happens during the course of assessment proceedings and has to be evident and emerge from the assessment order, before the penalty is fastened on the assessee, the AO has to record independent finding justifying the charge of furnishing of inaccurate particulars of income or for concealment of particulars of income.

The ITAT further held that before the AO proceeded to calculate the disallowance under Rule 8D(2)(iii), he was supposed to consider the assessee company’s submission and examine the accounts of the assessee company. The AO had to record his reasoning that he was not satisfied with the submissions of the assessee company, but no such exercise was done by the AO.

The ITAT following the decision of the Hon’ble Supreme Court in the case of CIT vs. Reliance Petro Products (P.) Ltd. [2010] 189 Taxman 322/322 ITR 158directed to delete the penalty levied u/s 271(1)(c) and allowed the appeal.

BCAJ Admin

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’ it cannot be said that the assessee has suppressed or under-reported any income. Where the assessee offered an explanation as to why it reported rental income under the head ‘income from house property’ and the explanation of the assessee was not found to be false, the case would be covered by s. 270A(6)(a)

43 D.C. POLYESTER LIMITED vs. DCIT

2023 (10) TMI 971 – ITAT MUMBAI

A.Y.: 2017-18

Date of Order: 17th October, 2023

Section: 270A

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’ it cannot be said that the assessee has suppressed or under-reported any income.

FACTS

The assessee filed its return of income declaring total income to be a loss of Rs.72,200. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee has offered rental income of Rs.29,60,000 under the head ‘income from house property’. The AO noticed that the assessee had declared the rental income from the very same property under the head ‘income from business’ in an earlier year, i.e., in A.Y. 2013-14. However, in the instant year, the assessee has declared rental income under the head ‘income from house property’ and also claimed various other expenses against its business income. He further noticed that there was no business income during the year under consideration.

The AO assessed rental income under the head `business’ and consequently the assessee was not entitled to deduction under section 24(a) of the Act. This resulted in assessed income being greater than returned income.

The AO initiated proceedings for the levy of penalty under s. 270A. In the course of penalty proceedings, it was submitted that the assessee has not under-reported the income since the addition pertains only to statutory deduction under section 24(a). The AO held that the furnishing of inaccurate particulars of income would have gone undetected, if the return of income of the assessee was not taken up for scrutiny. He also took the view that the claim of statutory deduction as well as expenses in the Profit and Loss account under two different heads of income would tantamount to under-reporting of income under section 270A of the Act. The AO levied a penalty of Rs.1,83,550 under section 270A of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that since section 270A of the Act uses the expression “the Assessing Officer ‘may direct” — there is merit in the contention of the assessee that levying of penalty is not automatic and discretion is given to the AO not to initiate penalty proceedings under section 270A of the Act.

It held that it is not a case that the assessee has suppressed or under-reported any income. The addition came to be made to the total income returned by the assessee, due to a change in the head of income, i.e., the addition has arisen on account of computational methodology prescribed in the Act. It held that, in its view, this kind of addition will not give rise to under-reporting of income. The Tribunal was of the view that the AO should have exercised its discretion not to initiate penalty proceedings u/s 270A of the Act in the facts and circumstances of the case.

The Tribunal observed that the assessee has offered an explanation as to why it reported the rental income under the head Income from House property and the said explanation is not found to be false. Accordingly, it held that the case of the assessee is covered by clause (a) of sub. sec. (6) of sec. 270A of the Act. The Chennai bench of the Tribunal has held in the case of S Saroja (supra) that if a bona fide mistake is committed while computing total income, the penalty u/s 270A of the Act should not be levied.

The Tribunal deleted the penalty levied under section 270A of the Act.

BCAJ Admin

The rate of tax mentioned in s. 115BBE does not apply to income surrendered in the course of the search, in a statement made under section 132(4), and the Department has no dispute with regard to the explanation of the assessee regarding the source of the surrendered income

42 DCIT vs. Tapesh Tyagi

TS-642-ITAT-2023 (DEL)

A.Y.: 2017-18

Date of Order: 27th October, 2023

Sections: 69A, 132, 115BBE

The rate of tax mentioned in s. 115BBE does not apply to income surrendered in the course of the search, in a statement made under section 132(4), and the Department has no dispute with regard to the explanation of the assessee regarding the source of the surrendered income.

FACTS

In the course of search action on the assessee, an individual, a loose paper was found in the possession of the assessee with an amount Rs.30.20 mentioned with the description “Com Trade”. In the statement recorded under section 132(4) of the Act, when the assessee was confronted with the said paper, the assessee submitted that it indicates profit earned by him from “Commodity Trade”. This amount was surrendered as an income in the statement recorded. This amount was also offered for taxation in the return of income filed by the assessee subsequent to the search. However, tax on this amount was paid at a normal rate and not at the rate mentioned in section 115BBE.

According to the Assessing Officer (AO), income surrendered by the assessee is in the nature of unexplained money in terms of section 69A of the Act. Though he did not make any separate addition of the said amount in the assessment order, he treated it as income under Section 69A of the Act. However, he did not make any change to the tax rate applied by the assessee. Subsequently, the AO passed an order under Section 154 of the Act, wherein, he applied the rate of tax as prescribed under Section 115BBE of the Act.

Aggrieved with the higher rate of tax being levied, the assessee preferred an appeal to the CIT(A) who held that the income subjected to tax at the rate prescribed under Section 115BBE of the Act cannot be treated as income of the nature provided under Section 69A of the Act. Hence, a normal tax rate would be applicable to such income. The CIT(A) allowed the appeal filed by the assessee.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the short issue arising for consideration is whether a special rate of tax provided under Section 115BBE of the Act would be applicable to the income surrendered by the assessee in the course of search and seizure operation and offered in the return of income.

The Tribunal held that the facts clearly establish that at the time of the search and seizure operation itself, the assessee has explained the source of the amount offered as income to be the profit derived from “commodity trade”, which is in the nature of business income. It observed that It also appears that the departmental authorities have no dispute with regard to the explanation of the assessee regarding the source of the surrendered income.

As rightly observed by the learned First Appellate Authority, section 69A uses the word “may”, which implies that if the explanation offered by the assessee regarding the source of money, bullion, jewellery or other valuable articles is satisfactory, it cannot be treated as unexplained money under Section 69A of the Act. In the facts of the present appeal, there is nothing on record to suggest that the assessee’s explanation regarding the source of the income offered has either been doubted or disputed at the time of the search and seizure operation or even during the assessment proceedings. Therefore, in our view, the income offered by the assessee cannot be treated as unexplained money under Section 69A of the Act. Therefore, as a natural corollary, section 115BBE of the Act would not be applicable.

The Tribunal observed that in the facts of the present appeal, admittedly, the assessee has not offered the income under Section 69A of the Act. It observedthat even, the AO has not made any separate additionunder Section 69A of the Act but has merely re-characterized the nature of income offered by the assessee. The Tribunal held that the provisions of sections 115BBE would not be applicable to the facts of the present appeal.

The Tribunal dismissed the appeal filed by the Revenue.

BCAJ Admin

Where the assessee sold flats at varied rates and the variation in rate was significant, Revenue directed to apply the weighted average rate of all the units for estimating the value of sales (except for one unit which is incomparable) and thus, to be valued at actual instead of the maximum rate applied by the Revenue to estimate sale value of the flats sold at varied rates by the assessee

41 DCIT vs. Mighty Construction Pvt. Ltd.

TS-522-ITAT-2023 (Mum)

A.Ys.: 2011-12 to 2013-14

Date of Order: 25th August, 2023

Section: 28

Where the assessee sold flats at varied rates and the variation in rate was significant, Revenue directed to apply the weighted average rate of all the units for estimating the value of sales (except for one unit which is incomparable) and thus, to be valued at actual instead of the maximum rate applied by the Revenue to estimate sale value of the flats sold at varied rates by the assessee.

FACTS

The assessee, a builder and developer, constructed a building known as `Universal Majestic’. During the assessment year 2011-12, the AO noticed that the flats in this building have been sold at varied rates ranging from Rs.13,513 per sq. feet to Rs.27,951 per sq. feet. He noted the comparable sale instances in the assessment order.

In the reply to the show cause notice, the assessee gave various factors and reasons for the variation in the prices for example, firstly, some units had additional flower bed area; secondly, due to various Vaastu angles and passage for the flat which commanded different prices; thirdly, certain units had additional areas like store room, flower bed and passage area, and lastly, some of the units had no natural ventilation and due to certain market conditions also, the price bookings and rates are varied. Apart from that, it was also submitted that the project was off-location and no good development and construction in the surrounding area was there during that period and it was covered with slums all around the building premises.

The Assessing Officer (AO) rejected all the contentions after giving his detailed reasoning stating that, firstly, the project was centrally located and directly accessible to Eastern Express Highway and easily accessible from Mumbai International Airport and Domestic Airport, and newly built freeway flyovers have come connecting to various important places. Apart from that, he also rebutted the assessee’s contention of the additional flower bed area and passage area on the grounds that as per the Municipal rules, a builder can only sell areas as per the approved plans, and any encroachment done on the flower bed or any alteration without the permission of the Municipal authorities is not permissible and the passage area is only common area property for the society wherein nobody can encroach. Regarding the Vaastu factor also, he has given his detailed analysis by bringing in certain comparable instances of the flats sold by the assessee itself. Thus, he held that the justifications and the submissions given by the assessee to prove the variation in the rates are only an afterthought.

The AO held that the rate per sq. ft should be Rs.27,951, this being the highest rate per sq. ft, as of 31st August, 2010, since most of the other bookings were somewhere close to this date and accordingly, he worked out the sale cost of each unit. The AO added a sum of Rs.46,75,48,737 to the returned total income on this account.

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

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that a huge variation in the sale price of different units of the same project was not found to be justifiable by the AO. The AO has rebutted the explanation given by the assessee but the CIT(A) without much factual analysis has deleted the addition made by the AO.

The Tribunal held that though there could be some variation in the rates per unit depending upon various factors which cannot be brushed aside, but to accept that there would be such huge variation is beyond any prudence and reality. Thus, such a huge difference is certainly not justified and even the action of the AO to take the maximum rate of units sold is also not justified. Because factors like total area, extra accessible and useable area of particular unit and location and ventilation of the unit etc., do have variation in the price and the premium paid. Therefore, it would be very difficult to apply any kind of logic to accept the version of both assessee as well as AO.

The Tribunal asked the AR to submit a weighted average rate at which the flats were sold and noted that the weighted average rate comes to Rs.17,712 per sq. feet. It found that there is one unit which is a shop cum garage and definitely it cannot be compared with other units where the agreement rate was very low and therefore, the same rate of Rs.17,172 cannot be applied. The Tribunal held that in the weighted average, this particular unit sold would be excluded while calculating the weighted average, and the actual price should be taken, and for all other 12 units, the rate for estimating the sales to be taken at Rs.17,172. The Tribunal directed the AO to work out the consequential relief.

BCAJ Admin

Glimpses of Supreme Court Rulings

51 Principal Commissioner of Income Tax vs. Krishak Bharti Cooperative Ltd. (2023) 458 ITR 190 (SC)

Double Taxation Avoidance — Assessee was entitled to credit for the tax, which would have been payable in Oman even though a dividend, being an incentive in Oman to promote development in that country, was exempt in Oman — DTAA between India and Oman, Article 25.

The Assessee, a multi-State Co-operative Society, is registered in India under the administrative control of the Department of Fertilizers, Ministry of Agriculture and Co-operation, Government of India. In the course of its business of manufacturing fertilisers, it entered into a joint venture with Oman Oil Company to form the Oman Fertilizer Company SAOC (for short ‘OMIFCO’ or ‘the JV’), a registered company in Oman under the Omani laws. The Assessee has a 25 per cent share in the JV. The JV manufactures fertilizers, which are purchased by the Central Government. The Assessee has a branch office in Oman which is independently registered as a company under the Omani laws having permanent establishment status in Oman in terms of Article 25 of the DTAA. The branch office maintains its own books of account and submits returns of income under the Omani income tax laws.The assessment for the relevant year was completed under Section 143(3) of the Income Tax Act, 1961 (‘the Act’). The Assessing Officer allowed a tax credit in respect of the dividend income received by the Assessee from the JV. The dividend income was simultaneously brought to the charge of tax in the assessment as per the Indian tax laws. However, under the Omani tax laws, exemption was granted to the dividend income by virtue of the amendments made in the Omani tax laws w.e.f. the year 2000.

The Assessing Officer allowed credit for the said tax, which would have been payable in Oman, but for which exemption was granted.

Thereafter, the Principal Commissioner of Income Tax (‘PCIT’) issued a show cause notice under Section 263 of the Act on the ground that the reliance placed on Article 25(4) of DTAA was erroneous in this case, and no tax credit was due to the Assessee under Section 90 of the Act. This notice was duly replied to by the Assessee. However, the PCIT rejected all the contentions raised by the Assessee inter alia holding that Article 25 of Omani tax laws was not applicable in the instant case because there was no tax payable on dividend in Oman and, accordingly, no tax has been paid and that Assessee was not covered under the exemption.

Questioning the order of PCIT, the Assessee preferred an appeal before the Income Tax Appellate Tribunal (‘ITAT’), which allowed the appeal holding that the order passed by the PCIT under Section 263 of the Act was without jurisdiction and was not sustainable in law.

The order passed by the ITAT was challenged before the Delhi High Court by preferring an Income Tax Appeal, which had been dismissed by the High Court by the impugned judgment holding that as per the relevant terms of the DTAA between India and Oman, the Assessee was entitled to claim the tax credit, which had been rightly allowed by the Assessing Officer.

On further appeal by the Revenue, the Supreme Court noted that Article 25 (2) of the DTAA provides that where a resident of India derives income, which in accordance with this agreement, may be taxed in the Sultanate of Oman, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax paid in the Sultanate of Oman, whether directly or by deduction. Article 25(4) clarifies that the tax payable in a Contracting State mentioned in Clause 2 and Clause 3 of the said Article shall be deemed to include the tax which would have been payable but for the tax incentive granted under the laws of the Contracting State and which are designed to promote development.

The Supreme Court noted that the revenue was relying upon Article 11 which provides that dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. Thus, according to the revenue, the dividend received by the Assessee was taxable in India and was not exempt because the same was not designed as a tax incentive in Oman to promote development in that country. In the same manner, it was argued that the letter issued by the Secretary General for Taxation, Ministry of Finance, Oman was not issued by the competent Omani authority and has no statutory force.

The Supreme Court observed that the term ‘incentive’ is neither defined in the Omani Tax Laws nor in the Income Tax Act, 1961. Faced with this situation, the JV addressed a letter in November, 2000 to Oman Oil Company seeking clarification regarding the purpose of Article 8(bis) of the Omani Tax Laws. The clarification letter dated 11th December, 2000, was addressed by the Secretary General for Taxation, Sultanate of Oman, Ministry of Finance, Muscat to Oman Oil Company SAOC.

The Supreme Court noted that the said letter of the Omani Finance Ministry clarified that the dividend distributed by all companies, including the tax-exempt companies would be exempt from payment of income tax in the hands of the recipients. By extending the facility of exemption, the Government of Oman intends to achieve its objective of promoting development within Oman by attracting investments. Since the Assessee had invested in the project by setting up a permanent establishment in Oman, as the JV was registered as a separate company under the Omani laws, it was aiding in promoting the economic development within Oman and achieving the object of Article 8 (bis). The Omani Finance Ministry concluded by saying that tax would be payable on dividend income earned by the permanent establishments of the Indian Investors, as it would form part of their gross income under Article 8, if not for the tax exemption provided under Article 8(bis).

According to the Supreme Court, a plain reading ofArticle 8 and Article 8(bis) would manifest that underArticle 8, dividend is taxable, whereas, Article 8(bis) exempts dividend received by a company from its ownership of shares, portions, or shareholding in the share capital in any other company. Thus, Article 8(bis) exempts dividend tax received by the Assessee from its PE in Oman and by virtue of Article 25, the Assessee was entitled to the same tax treatment in India as it received in Oman.

Insofar as the argument concerning the Assessee not having PE in Oman, the Supreme Court noted that from the year 2002 to 2006, a common order was made under Article 26(2) of the Income Tax Law of Oman. The High Court had extracted the opening portion of the above order. From the said letter it was apparent that the Assessee’s establishment in Oman had been treated as PE from the very inception up to the year 2011. According to the Supreme Court, there was no reason as to why all of a sudden, the Assessee’s establishment in Oman would not be treated as PE when for about 10 years it was so treated, and that the tax exemption was therefore granted based upon the provisions contained in Article 25 read with Article 8(bis) of the Omani Tax Laws.

The Supreme Court also dealt with the contention raised by the Appellant to the effect that the letter dated 11th December, 2000, issued by the Secretary General for Taxation, Ministry of Finance, Sultanate of Oman had no statutory force as per Omani Tax Laws, hence, the same could not be relied upon to claim exemption. The Supreme Court was of the view that the above letter was only a clarificatory communication interpreting the provisions contained in Article 8 and Article 8(bis) of the Omani Tax Laws. The letter itself did not introduce any new provision in the Omani Tax Laws. In this view of the matter, the Supreme Court was not convinced that the argument raised by the Appellant would lead it to deny exemption to the Assessee.

The Supreme Court concluded that the Appellant had not been able to demonstrate as to why the provisions contained in Article 25 of DTAA and Article 8(bis) of the Omani Tax Laws would not be applicable and, consequently, it held that the appeals had no substance and therefore dismissed.

52 Kerala State Co-operative Agricultural and Rural Development Bank Ltd. vs. The Assessing Officer, Trivandrum and Ors. (2023) 458 ITR 384 (SC)

Deduction in respect of income of co-operative societies — Section 80P — If a co-operative society is not a co-operative bank, then such an entity would be entitled to deduction under Sub-section (2) of Section 80P of the Act but on the other hand, if it is a co-operative bank within the meaning of Section 56 of Banking Regulation Act, 1949 read with the provisions of NABARD Act, 1981 then it would not be entitled to the benefit of deduction in view of Sub-section (4) of Section 80P of the Act.

The Appellant / Assessee, a State-level Agricultural and Rural Development Bank was governed as a co-operative society under the Kerala Co-operative Societies Act, 1969 (“State Act, 1969”) and is engaged in providing credit facilities to its members who are co-operative societies only.

The Kerala State Co-Operative Agricultural Development Banks Act, 1984 (“State Act, 1984”) was passed ‘to facilitate the more efficient working of Co-operative “Agricultural and Rural Development Banks” in the State of Kerala.’

On 27th October, 2007, the Appellant / Assessee filedits Return of Income for the Assessment Year 2007-08 of Rs.27,18,052 claiming deduction under Section 80P(2)(a)(i) of the Act.

Upon scrutiny, on 22nd December, 2009, an Assessment Order under Section 143(3) of the Act, was passed by the Assessing Officer for the Assessment Year 2007-08, disallowing the deduction of Rs.36,39,87,058 under Section 80P(2)(a)(i) holding that the Appellant / Assessee was neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank. The Assessing Officer held the Appellant / Assessee was a “co-operative bank” and thus, was hit by the provisions of Section 80(P)(4) and was not entitled to the benefit of Section 80(P)(2) of the Act. The total income was assessed at Rs.36,69,47,233.

Aggrieved by the Assessment Order dated 27th December, 2009, the Appellant / Assessee filed an appeal before the Commissioner of Income Tax (Appeals) (“CIT(A)”).

The CIT(A) vide Order dated 30th July, 2010 confirmed the disallowance made by the Assessing Officer. The CIT (A) was of the view that the Appellant / Assessee was actively playing the role of a development bank in the State and was no longer a land mortgage bank but was a development bank. CIT(A) further observed that with the insertion of Section 80P(4), co-operative banks are placed at par with other commercial banks and the Appellant / Assessee who was in the business of banking through its primary co-operative banks was definitely a co-operative bank within the meaning of Section 80P(4). Consequently, the appeal was dismissed.

Being aggrieved by the Order passed by CIT(A), the Appellant / Assessee filed a further appeal before the Income Tax Appellate Tribunal (“ITAT”).

The ITAT vide Order dated 23rd February, 2011, partly allowed the appeal. The ITAT held that the Appellant / Assessee was a co-operative bank and was not a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Hence, it was consequently hit by the provision of Section 80P(4) and thus, the deduction claimed was rightly denied. However, the ITAT clarified that to the extent that the Appellant / Assessee was acting as a State Land Development Bank which fell within the purview of the National Bank for Agriculture and Rural Development Act, 1981 (“NABARD Act, 1981”,) and was eligible for financial assistance from NABARD, the Appellant / Assessee’s claim merited acceptance and it would be entitled to deduction under Section 80P(2)(a)(i) on the income relatable to its lending activities as such a bank.

Aggrieved by the Order passed by the ITAT in only partly allowing its appeal, the Appellant / Assessee preferred an appeal against the ITAT’s Order dated 23rd February, 2011. The issue raised by the Appellant / Assessee was with respect to the ITAT’s finding that the Appellant / Assessee was neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank, hence, not entitled to the exemption of its income under Section 80P(2)(a)(i) of the Act.

On 26th November, 2015, the Kerala High Court dismissed the Assessee’s Appeal, holding that the ITAT’s findings did not warrant any interference as the case did not involve any substantial question of law.

Against the judgment dated 26th November, 2015, the Appellant / Assessee preferred a Special Leave Petition (C) bearing No. 2737 of 2016. The Supreme Court vide Order dated 1st February, 2016, issued notice and granted a stay of recovery of demand made by the Income Tax Authorities from the Appellant / Assessee for the A.Y. 2007-08.

The Supreme Court observed that Section 80P speaks about deduction in respect of income of co-operative societies from the gross total income referred to in Sub-section (2) of the said Section. From the said income, there shall be deducted, in accordance with the provisions of Section 80P, sums specified in Sub-section (2), in computing the total income of the Assessee for the purpose of payment of income tax. Sub-section (2) of Section 80P enumerates various kinds of co-operative societies. Sub-section (2)(a)(i) states that if a co-operative society is engaged in carrying on the business of banking or providing credit facilities to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities shall be deducted. The Sub-section makes a clear distinction between the business of banking on the one hand and providing credit facilities to its members by co-operative society on the other.

The Supreme Court noted that while Section 80P was inserted into the Act with effect from 1st April, 1968, however, Sub-section (4) was reinserted with effect from 1st April, 2007, in the present form. Earlier Sub-section (4) was omitted with effect from 1st April, 1970.

The Supreme Court noted the objects and reasons for the insertion of sub-section (4) to Section 80P of the Act by referring to the speech of the Finance Minister dated 28th February, 2006, CBDT Circular dated 28th December, 2006, containing explanatory notes on provisions contained in the Finance Act, 2006 and clarification by the CBDT, in a letter dated 9th May, 2008, and observed that the limited object of Section 80-P(4) was to exclude co-operative banks that function on a par with other commercial banks i.e. which lend money to members of the public.

The Supreme Court noted that a co-operative bank is defined in Section 56 (c)(i)(cci) of the Banking Regulation Act, 1949 to be a state co-operative bank, a central co-operative bank and a primary co-operative bank and central co-operative bank and state co-operative bank to have the same meanings as under the NABARD Act, 1981.

The Supreme Court further noted that Section 2(d) of NABARD Act, 1981 defines central co-operative bank while Section 2(u) defines a state co-operative bank to mean the principal co-operative society in a State, the primary object of which is financing of other co-operative societies in the State, which means it is in the nature of an apex co-operative bank having regard to the definition under Section 56 of the Banking Regulation Act, 1949, in relation to co-operative bank. The proviso states that in addition to such principal society in a State, or where there is no such principal society in a State, the State Government may declare any one or more co-operative societies carrying on the business of banking in that State to be also or to be a state co-operative bank or state co-operative banks within the meaning of the definition. Section 2(v) of NABARD Act, 1981 defines a state land development bank to mean the co-operative society which is the principal land development bank (by whatever name called) in a State and which has as its primary object the providing of long-term finance for agricultural development.

The Supreme Court also noted that as per Clause (c) of Section 5 of the Banking Regulation Act, 1949, a banking company is defined as any company which transacts the business of banking in India. Clause (b) of Section 5 of the Banking Regulation Act, 1949 defines banking business to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Thus, it is only when a co-operative society is conducting banking business in terms of the definition referred to above that it becomes a co-operative bank. In such a case, Section 22 of the Banking Regulation Act, 1949 would apply wherein it would require a licence to run a co-operative bank. In other words, if a co-operative society is not conducting the business of banking as defined in Clause (b) of Section 5 of the Banking Regulation Act, 1949, it would not be a co-operative bank and not so within the meanings of a state co-operative bank, a central co-operative bank or a primary co-operative bank in terms of Section 56(c)(i)(cci).

According to the Supreme Court, if a co-operative society is not a co-operative bank, then such an entity would be entitled to deduction under Sub-section (2) of Section 80P of the Act but on the other hand, if it is a co-operative bank within the meaning of Section 56 of Banking Regulation Act, 1949 read with the provisions of NABARD Act, 1981 then it would not be entitled to the benefit of deduction in view of Sub-section (4) of Section 80P of the Act.

According to the Supreme Court, a co-operative society which is not a state co-operative bank within the meaning of the NABARD Act, 1981 would not be a co-operative bank within the meaning of Section 56 of the Banking Regulation Act, 1949. In the instant case, in A.P. Varghese vs. The Kerala State Co-operative Bank Ltd. reported in AIR 2008 Ker 91, the Kerala State Co-operative Bank being declared as a state co-operative bank by the Kerala State Government in terms of NABARD Act, 1981 and the Appellant society not being so declared, would imply that the Appellant society was not a state co-operative bank.

The Supreme Court thus concluded that although the Appellant society was an apex co-operative society within the meaning of the State Act, 1984, it was not a co-operative bank within the meaning of Section 5(b) read with Section 56 of the Banking Regulation Act, 1949. The Appellant was thus not a co-operative bank within the meaning of Sub-section (4) of Section 80P of the Act. The Appellant was a co-operative credit society under Section 80P(2)(a)(i) of the Act whose primary object was to provide financial accommodation to its members who were all other co-operative societies and not members of the public. Consequently, the Appellant was entitled to the benefit of deduction under Section 80P of the Act.

BCAJ Admin

‘Only Source of Income’ For S. 80-IA/80IB and Other Provisions

ISSUE UNDER CONSIDERATION

A deduction in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development is conferred vide s. 80-IA for varied periods at the specified percentage of profit, subject to compliance with several conditions specified in s. 80-IA of the Income Tax Act, 1961. One of the important conditions is provided by sub-section (5) of s. 80-IA, which overrides the other provisions of the Act, requiring an assessee to determine the quantum of deduction to be computed as if the qualifying business is the only source of income.The said provision of s. 80-IA (5) reads as under;

‘Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of incomeof the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.’

A similar condition is prescribed in a few other provisions of Chapter VIA of the Act, and was also found in some of the provisions now omitted from the Act. Like any other deduction, the benefit of deduction here is subject to compliance with the conditions and the ceilings of s. 80A to 80B of the Act. The computation of the quantum of the ‘only source of income’ has become a major issue that has been before the courts for quite some time. The Delhi, Rajasthan and Madras High Courts have taken a view that, in computing the only source of income, the losses of the preceding previous years relating to the same source should not be set off and adjusted or reduced from the income of the year, where such losses are otherwise absorbed in the preceding previous years. In contrast, the Karnataka High Court has taken a contrary view, holding that such losses, even though absorbed, should be notionally brought forward for computing the quantum of deduction for the year under consideration.

MICROLAB’S CASE

The issue had come up for consideration of the Karnataka High Court in the case of Microlabs Limited vs. ACIT, 230 Taxman 647. In that case, the assessee was engaged in the business of running an industrial undertaking and had derived profit from such business for the year under consideration. The losses remaining to be absorbed of the preceding previous years of such business were absorbed against the other income of the immediately preceding previous year. Accordingly, in computing the quantum of deduction under s. 80-IA for the year under consideration, the assessee company had claimed a deduction in respect of the entire profit of the year of such business. The AO however had reduced the quantum of deduction by the amount of losses of the preceding previous years that were absorbed and adjusted in computing the deduction for the immediately preceding previous year. The action of the AO was upheld by the tribunal.Aggrieved by the action of the AO and the tribunal, the assessee company had raised the following substantial question of law for consideration of the High Court;

“Whether in law, the Tribunal is justified in holding that in view of provision of Section 80-IA(5) of the Income Tax Act, the profit from the eligible business for the purpose of deduction under Section 80-IB of the Act has to be computed after deduction of notional brought forward losses of eligible business even though they have been allowed to set off against other income in the earlier years?”

On behalf of the assessee company, relying on the decision of the Madras High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd. vs. ACIT, 340 ITR 477, it was contended that, once the set-off of losses had taken place in an earlier year against the other income of the assessee, such losses could not be notionally brought forward and set-off against the income of the eligible business for the year in computing deduction under s. 80-IA of the Act.

In contrast, the Revenue, relying on the decision of the Special Bench of the tribunal in the case of ACIT vs.Goldmine Shares and Finance (P) Ltd., 113 ITD 209 (Ahd.), contended that the non-obstante clause in sub-section (5) had the effect of overriding all the provisions of the Act, and therefore the other provisions of the act were to be ignored in computing the deduction for the year. As a consequence, the losses already set off against the other income of the immediately preceding previous year were to be brought forward notionally, and again set off against the profit of the year.

The Karnataka High Court, in deciding the substantial question of law in favour of the Revenue and against the assessee, followed the view taken by the special bench of the tribunal to hold that the losses absorbed in the past should be notionally brought forward to reduce the profit for the year while computing the deduction u/s. 80-IA of the Act.

STERLING AGRO INDUSTRIES’ CASE

Recently the issue again arose before the Delhi High Court in the case of Pr CITvs.Sterling Agro Industries Ltd. 455 ITR 65. In this case, the assessee company had returned an income of Rs.22.12 crore after claiming deduction u/s. 80-IA. On assessment, the AO disallowed the claim of Rs.12.63 crore, by applying the provisions of s. 80-IA(5) of the Act. On appeal to the tribunal, the claim of the assessee was allowed in full by the tribunal, by relying on the decision of the Madras High Court in the case of Velayudhaswamy Spinning Mills (P.) Ltd (supra). In an appeal by the Revenue, the following question of law was placed for consideration by the High Court;

‘Given the facts and circumstances of the case, has the Income Tax Appellate Tribunal erred in deleting the addition made by the Assessing Officer on account of disallowance of deduction under section 80IA of the Income-tax Act, 1961, amounting to Rs.12,63,07,697, ignoring the mandate of provisions of Section 80IA(5) of the Act?’The Revenue contended that the losses of the preceding previous years, though absorbed against the profits of such years, had to be notionally brought forward and reduced from the profit of the year in computing the deduction for the year, in view of the non-obstante clause of sub-section (5) of s. 80-IA, whose contention was upheld by the Karnataka High Court in the case of Microlabs Ltd. (supra).In contrast, the assessee contended that once the losses were absorbed and adjusted in the preceding previous years, such losses could not be brought forward and set off in computing the deduction for the year. The Delhi High Court upholding the decision of the tribunal and the contentions of the assessee company held that;

‘….., there is nothing to suggest in Sub-clause (5) of Section 80IA of the Act that the profits derived by an assessee from the eligible business can be adjusted against “notional losses which stand absorbed against profits of other business.” The deeming fiction created by sub-section (5) of Section 80IA does not envisage such an adjustment. The fiction which has been created is simply this: the eligible business will be the only source of income. There is no fiction created, that losses which have already been absorbed, will be notionally carried forward and adjusted against the profits derived from the eligible business to quantify the deduction that the assessee could claim under section 80IA of the Act.

A perusal of the judgment rendered in the Microlabs Ltd. case (supra) would show that the Karnataka High Court gave weight to the fact that sub-section (5) of Section 80IA commenced with a non-obstante clause. It was based on this singular fact that the Karnataka High Court chose to veer away from the view expressed by the Madras High Court in the Velayudhaswamy Spinning Mills (P.) Ltd. case (supra). This aspect emerges on an appraisal of paragraph 6 of the judgement of the Karnataka High Court rendered in Microlabs Ltd. case (supra).’

The Court observed that similar contentions were advanced by the Revenue in the case of Velayudhaswamy Spinning Mills (P.) Ltd. Case (Supra), and such contentions were disapproved by the Madras High Court. The Court also noted that the decision in the said case was followed by the Madras High Court in the case of Pr CIT vs.Prabhu Spinning Mills (P.) Ltd. 243 taxman 462 (Madras).In deciding the issue in favour of the assessee, the Delhi High Court disagreed with the ratio of the decision in the case of Microlabs Ltd. (supra)and chose to follow the ratio of the two decisions of the Madras High Court, to allow the claim of deduction without adjusting the losses set-off in the preceding previous years.

OBSERVATIONS

This interesting issue has far-reaching economic impact in cases of assessees otherwise qualifying for the deduction. The non-obstante clause of sub-section (5) has the effect of overriding the other provisions of the Act. The said clause requires that while determining the quantum of deduction under s. 80-IA, it should be assumed that the eligible business is the only source of income. The provision throws open a few questions;

What is the true meaning of the term ‘only source of income’,
Whether the other provisions of the Act applied in the preceding previous years should be presumed to have been ignored and the effect thereof be nullified for the purpose of computing deduction for the year on a stand-alone basis,
Whether the concept of stand-alone computation be applied for all the eligible years of deduction or should it be limited to the first year of claim of deduction,
Whether the past losses already absorbed against the past profits of the eligible business be notionally brought forward to the year of claim,
Whether the past losses already absorbed against the past profits of the other business or other income be notionally brought forward to the year of claim,
Whether the losses of the year from other ineligible business be set off and adjusted against the profit for the year of the eligible business in computing the claim of deduction.

The incentive was first conferred by the introduction of S. 80-I by the Finance Act, 1980 with effect from 1st April, 1981, which was substituted by s. 80-IA by the Finance (2) Act, 1991 with effect from 1.4.1991. The said provision was further substituted by the Finance (No 2) Act, 1998 with effect from 1st April, 1998, by splitting the provision into two parts, s. 80-IA and s. 80-IB. The new section 80-IA materially contains the identical provision for granting deduction in respect of profits of an infrastructure development enterprise, and s. 80-IB contains similar provisions for the profits of an industrial undertaking.

The provision of s. 80-IA (5) contains a non-obstante clause for computing only source of income on a stand-alone basis. This provision is made equally applicable to the computation of the deduction u/s. 80-IB as well. Some other incentive provisions of Chapter VIA of the Act also contain similar provisions. The deductions are, as noted earlier, subject to the overall conditions of s. 80A to 80B of the Act, which has the effect of limiting the overall deduction for the year to the gross total income of the year.

The case for higher deduction for the assessee, by holding out that the losses that are absorbed in the preceding previous years stand absorbed and cannot be rekindled by invoking the fiction of s. 80-IA(5), is better in as much as the Madras High Court and the Delhi High Court in three important decisions have held that such absorbed losses should not be notionally revived for set-off against the profits of the year of the eligible business. These High Courts have taken into consideration the ratio of the Special Bench decision in the case of Goldmine Shares & Finance (supra)and, only after considering the counter contentions, have decided the issue in favour of the assessee. The Courts also considered the decisions of the High Courts in the cases of CIT vs. Mewar Oil & General Mills Ltd. 271 ITR 311 (Raj.),Indian Transformers Ltd. vs. CIT, 86 ITR 192 (Ker.),CIT vs. L.M.Van Moppes Diamond Tools (India) Ltd., 107 ITR 386 (Mad.)andCIT vs. Balmer Lawrie & Company Ltd. 215 ITR 249 (Cal), to arrive at a conclusion rejecting the case for notional carry forward of the losses that were absorbed in the preceding previous years.

This view also gets support from CBDT Circular No. 1 dated 15th February, 2016. Importantly, these courts have held that there was nothing in sub-section (5) of s. 80-IA that suggested that profits derived by an assessee from the eligible business should be adjusted against notional losses which have been absorbed against profits of other businesses in the past years. They held that the deeming fiction created by sub-section (5) did not envisage any such adjustment. In the courts’ view, the fiction created was that the eligible business profit should be the only source of income; and that such a fiction did not extend to provide that the losses that have already been absorbed would be notionally carried forward and adjusted against the profits derived from the eligible business, while quantifying the deduction that the assessee could claim under s. 80-IA for the year. The Delhi High Court also held that the Karnataka High Court in Microlabs Ltd. case perhaps gave greater weightage to the non-obstante clause to expand its meaning to notionally carry forward such losses that had already been adjusted and absorbed.

It however is relevant for the record to state that the issue is presently before the Supreme Court, as in some of the cases, including in Microlabs Ltd. case, the apex Court has admitted the special leave petition. Incidentally, in the Prabhu Spinning Mills case, the Supreme Court has rejected the Special Leave Petition filed by the Department.

One of the considerations for the decisions in favour of the assessee was that the profits were allowed full deduction in the preceding previous years without set-off of absorbed losses, and with that, the Revenue had accepted the position in law. The circular of 2016, relied upon by the courts, was rendered in the context of defining the initial assessment year and permitting the deduction for the block period commencing from the initial year assessment year and not from the year of manufacturing or production.

It is also relevant to note that the profits that would finally be eligible for deduction would be limited to such profits that are included in the gross total income. Only such profits remain after the set off of the losses of the year pertaining to ineligible business, in view of a specific provision of s. 80A and s. 80B of the Act, would finally be allowed deduction.

S. 80-I brought in by the Finance Act, 1980 with effect from 1st April, 1981 provided for a similar incentive deduction and the implication and the scope of the deduction were explained by the Explanatory Notes and by the Board vide Circular No. 281 dated 22nd September, 1980. The said section also contained a non-obstante clause namely s. 80-I(6), which is more or less similar to s. 80-IA(7) and now 80-IA(5), presently under consideration. The scope of this section 80-I(6) was examined in the cases of Dewan Kraft System (P.) Ltd., 160 taxman 343 (Del), Ashok Alco Chem Ltd., 96 ITD 160 (Mum.), Prasad Production (P.) Ltd.,98 ITD 212 (Chennai), Sri. Ramkrishna Mills (CBE) Ltd., 7 SOT 356andKanchan Oil Industries Ltd., 92 ITD 557 (Kol.). These decisions largely favoured a view that the losses were required to be notionally carried forward, even though they were set off in the actual computation of earlier years.

The Calcutta High Court in Balmer Lawrie’s case was concerned with the deduction u/s. 80HH of the Act, which provision had no specific overriding clause like s. 80-I(6) or its successors. The decision of the Rajasthan High Court in the case of Mewar Oil & General Mills Ltd., (supra)was a case where the implication of the non-obstante clause was not examined and considered at all at any stage, and the issue involved therein was about the losses that were absorbed before the non-obstante clause was brought in force, or the incentive deduction was provided for. The decision largely concerned itself with an order that was passed u/s. 154 of the Act to withdraw the incentive granted in rectification proceedings.

There is no dispute that the non-obstante clause incorporates a deeming fiction which has to be given meaning, and importantly, has to be carried to its logical conclusion. The view that fiction has to be carried to its logical conclusion and should be given full force without cutting it midway, in the absence of any specific provision to cut it midway, is a settled position in law. Instead of appreciating the need for logically concluding the scope of a legal fiction, the courts have rather abruptly sought to cut its application midway; to hold, in the absence of a specific positive provision, permitting the notional carry forward of absorbed losses, that no fiction can be introduced. The alternative view perhaps was to allow the fiction to run its full course, by permitting the notional carry forward of absorbed losses in the interest of logically concluding such a fiction for the computation of quantum of deduction, and not for the purposes of any other provisions of the Act;

The deeming fiction by use of words ‘only source of income’ might take into consideration the income from that source alone from the initial assessment year and subsequent years, and might lead to computing the profit of the year after setting off the losses not absorbed by such profits, only by applying the rule that the fiction should be extended to the consequence that would inevitably follow by assuming an imaginary state of affairs as real unless prohibited, even where inconsistent corollaries are drawn.

Section 80-IA(5) bids one to imagine and treat the eligible business as the only source of income of an undertaking as real, as if there was no other source of income for the assessee. Having said so, the statute does not provide for limiting one’s imagination when it comes to the inevitable corollaries of the imagined state of affairs. It does not provide that the depreciation or losses of eligible business of past years if set off as per s.70 to 74 or s.32, should remain to be so set off, and should not be brought forward for computing the only source of income.

A legal ?ction of substance is created by sub-section (5) by which the eligible business has been treated as the only source of income. In applying the same, it may not be improper, but necessary, to assume all those facts on which alone the ?ction can operate, so, necessarily, all the provisions in the Act in respect of a source of income will apply. As a consequence, the other sources of income of an assessee / undertaking would have to be assumed as not existing. Consequently, any depreciation or loss of the eligible business cannot be set off against any income from another source which is assumed to have not been in existence, and therefore, the depreciation or the loss of the eligible business has to be carried forward for set off against the pro?ts of the eligible business in the subsequent year, even where such past losses were set off against the profits of the ineligible business as per the other provisions of the Act in the preceding previous year. Because of the ?ction, even if any set off of eligible business loss was made against other sources of income, it has to be assumed to not have been so set off.

“As if that were the only source of income” may require an assessee to ignore all other sources of income and that there was no other source of income. If that be so, the depreciation and loss of the eligible business cannot be absorbed and be set off against any other source or head of income. Consequently, they be carried forward and set off against the income of this very source only, for which the deduction is being computed.

It is not impossible to hold that neither the income nor loss of a business other than the eligible business of any year can be taken into consideration; nor the earlier years’ losses of the eligible business can be ignored, in computing the pro?t and gains to determine the quantum of the deduction under this section. Losses of the eligible business are to be set off only against the subsequent years’ income of the eligible business, even though these were set off against other income of the assessee in that earlier year.

Notes on clauses explaining the scope of sub-section (6) of s.80 I, 123 ITR 126 (Statute) reads as under:

“Sub-section (6) provides that for the purpose of computing the deduction at the speci?ed percentage for the assessment year immediately succeeding the initial assessment year and any subsequent assessment year, the pro?ts and gains will be computed as if such business were the only source of income of the assessee in all the assessment years for which the deduction at the speci?ed percentage under this section is available.”

The relevant part of the Memorandum Explaining the provisions of the Finance Bill, 1980, in the context of s. 80I reads as under;

‘”The new “tax holiday” scheme differs from the existing scheme in the following respects, namely

(i) The basis of computing the “tax holiday” pro?ts is being changed from capital employed to a percentage of the taxable income derived from the new industrial unit, ship or approved hotel. In the case of companies, 25 per cent of the pro?ts derived from new industrial undertaking etc., will be exempted from tax for a period of seven years and in the case of other taxable entities 20 per cent of such pro?ts will be exempted for a like period. In the case of co-operative societies, however, the exemption will be allowed for a period of ten years instead of seven years.

(ii) The bene?t of “tax holiday” under the new scheme would be admissible to all small-scale industrial undertakings even if they are engaged in the production of articles listed in the Eleventh Schedule to the Income-tax Act. In the case of other industrial undertakings, however, the deduction will be available, as at present, where the undertakings are engaged the production of articles other than articles listed in the said Schedule.

(iii) In computing the quantum of “tax holiday” pro?ts in all cases, taxable income derived from the new industrial units, etc., will be determined as if such unit were an independent unit owned by a taxpayer who does not have any other source of income. In the result, the losses, depreciation and investment allowance of earlier years in respect of the new industrial undertaking, ship or approved hotel will be taken into account in determining the quantum of deduction admissible under the new section 80-I even though they may have been set off against the pro?ts of the taxpayer from other sources.”

S. 80-IA(5), by use of the words ‘for initial assessment year and every subsequent year up to and including the assessment year for which the determination is to be made’, has clarified that the provisions of the non-obstante clause shall apply to all the relevant assessment years for which a deduction was claimed and its scope should not be restricted to the initial assessment year alone.

It is also clear that the overriding effect of sub-section (5) is limited to the computation of the quantum of deduction u/s. 80-IA or 80-IB, and has no role to play in computing the total income otherwise as per the provisions of the Act. Therefore, the provisions of s. 80A and s. 80B have their own place in the scheme of the Act. It appearsthat the language of the text of sub-section (5) is clearand unambiguous, and therefore the meaning that has to be supplied for understanding its scope, will have to be from the literal reading of the provision,without bringing in the case for liberal or restricted interpretation.

In our considered opinion, it is appropriate for the Supreme Court or the Legislature to put the issue beyond doubt, in view of the larger effect on the taxpayers.

BCAJ Admin

Recovery of tax — Stay of recovery proceedings — Discretion of Income-tax authorities — Discretion to be exercised in a judicious manner

64 Nirmal Kumar Pradeep Kumar (HUF) vs. UOI

[2023] 456 ITR 386 (Jhar)

A.Y.: 2020–21

Date of Order: 2nd May, 2023

S. 220 of ITA 1961

Recovery of tax — Stay of recovery proceedings — Discretion of Income-tax authorities — Discretion to be exercised in a judicious manner.

In the scrutiny assessment for A.Y. 2020–21, an addition of approximately Rs.202 crores was made on account of payment made by the assessee towards damage to the environment, by treating it as compensation and disallowed under Explanation 1 to section 37(1) of the Act. Pursuant to the completion of the assessment, a demand of Rs.96,99,29,760 was raised. Against the order of assessment, the assessee filed an appeal before the first appellate authority. The assessee also filed a rectification application u/s. 154. Upon rectification application, the order was rectified, and the demand was reduced to Rs.35,28,39,450.

Since the assessee had filed an appeal before the CIT(A), the assessee filed an application for a stay of demand mainly on the grounds that the demand was high-pitched and the disallowance made by the Assessing Officer (AO) was contrary to the decision of the Supreme Court in the case of Common Cause vs. UOI [2017] 9 SCC 499.

The assessee’s application for stay of demand was rejected by AO, stating that as per the Office Memorandum of CBDT dated 31st July, 2017, the assessee is required to pay at least 20 per cent of the outstanding demand and since the assessee had not paid the said demand of 20 per cent, the stay was rejected. The assessee assailed the application further before the Principal Commissioner who directed the assessee to pay Rs.5 crores by 15th March, 2023, and further directed the assessee to pay Rs.10 lakhs from April 2023 till the disposal of the appeal.

The assessee filed a writ petition challenging the orders passed by the AO and the Principal Commissioner. The Jharkhand High Court allowed the petition of the assessee and held as follows:

“i) The power under sub-section (6) of section 220 is indeed a discretionary power. However, it is one coupled with a duty to be exercised judiciously and reasonably (as every power should be), based on relevant grounds. It should not be exercised arbitrarily or capriciously or based on matters extraneous or irrelevant. The Income-tax Officer should apply his mind to the facts and circumstances of the case relevant to the exercise of the discretion, in all its aspects. He has also to remember that he is not the final arbiter of the disputes involved but only the first among the statutory authorities.

ii) Questions of fact and of law are open for decision before two appellate authorities, both of whom possess plenary powers. Thus, in exercising his power, the Income-tax Officer should not act as a mere tax gatherer but as a quasi-judicial authority vested with the power of mitigating hardship to the assessee. The Income-tax Officer should divorce himself from his position as the authoritywho made the assessment and consider the matter in all its facets, from the point of view of the assessee without at the same time sacrificing the interests of the Revenue.

iii) When it comes to granting a discretionary relief like a stay of demand, it is obvious that the four basic parameters need to be kept in mind: (i) prima facie case, (ii) balance of convenience, (iii) irreparable injury that may be caused to the assessee which cannot be compensated in terms of money, and (iv) whether the assessee has come before the authority with clean hands. The requirements of reasonableness, rationality, impartiality, fairness and equity are inherent in any exercise of discretion, such an exercise can never be according to private opinion. In L. G. ELECTRONICS INDIA PVT. LTD. vs. PR. CIT the court stated that administrative circulars would not operate as a fetter upon the assessing authority which is the quasi-judicial authority to grant a stay.

iv) Under section 246 of the Act which provides the remedy of preferring an appeal against the assessment order, there is no pre-deposit stipulated.

v) The Assistant Commissioner had not considered anything and had just mechanically declined to grant a stay placing reliance upon the Office Memorandum dated 31st July, 2017 ([2017] 396 ITR (St.) 55) and recording, inter alia, that since the assessee had not deposited 20 per cent of the disputed demand as stipulated in the Office Memorandum, a stay was liable to be rejected. A bare reading of the order would clearly reveal that there was no independent application of mind and no discussion whatsoever on the prima facie case of the assessee, the balance of convenience and undue hardships including whether the assessee had come with clean hands. Accordingly, the order dated 31st January, 2023 passed by the Assistant Commissioner and the order dated 24th February, 2023 passed by the Principal Commissioner were liable to be quashed and set aside.

vi) The matter is remitted back to respondent No. 3 to pass a fresh order on the application for stay of the petitioner in view of the principles laid down above, after granting due opportunity of hearing to the petitioner.”

BCAJ Admin

Reassessment — Notice — Validity — Notice based on information from Deputy Director in respect of investigation of the firm from which two of assessee’s directors retired alleging that assessee had received bogus accommodation entries in form of imports — Investigation report on which reliance placed by Department not provided to the assessee — Notice vague and not clear — Order for the issue of notice and order of reassessment set aside — Matter remanded

63 Hari Darshan Exports Pvt. Ltd. vs. ACIT

[2023] 456 ITR 542 (Bom)

A.Y.: 2019–20

Date of Order: 11th July, 2023

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

Reassessment — Notice — Validity — Notice based on information from Deputy Director in respect of investigation of the firm from which two of assessee’s directors retired alleging that assessee had received bogus accommodation entries in form of imports — Investigation report on which reliance placed by Department not provided to the assessee — Notice vague and not clear — Order for the issue of notice and order of reassessment set aside — Matter remanded.

The assessee was an exporter. For the A.Y. 2019–20, the assessee was issued a show-cause notice u/s. 148A(b) of the Income-tax Act, 1961, alleging that it had taken accommodation entries in the form of imports from a firm J in which two of the directors of the assessee were partners and had retired. The allegation was on the basis of certain information received from the Deputy Director, Ahmedabad. Along with the notice, a document titled “Verification Details” from the Insight Portal of the Department was provided wherein it was stated that the assessee had used J to import diamonds through a chain of intermediaries to escape any regulation by Government authorities and banks with respect to related party transactions for evading transfer pricing compliance. The assessee was not provided with the requested documentary details of the investigation of J.

Assessee filed a writ petition challenging the order u/s. 148A(d) and the consequent notice u/s. 148. The Bombay High Court allowed the writ petition and held as under:

“i) It was not stated in the order u/s. 148A(d) on what basis the conclusion that the assessee had received accommodation entries in the form of imports from J had been arrived at. The details or documents of the investigation of J or the investigation report had not been made available to the assessee and there was nothing to indicate that this information was provided to the assessee. The order stated that the assessee did not submit any documentary evidence to prove the genuineness of its claim or regarding import to refute the claim that imports were bogus though the assessee had stated that whatever documents were required had been submitted.

ii) There was no allegation that the assessee had made any imports and was not even called upon to produce documents regarding any imports. Therefore, an allegation could not be made that the assessee had not submitted any documentary evidence regarding imports to refute the claim that imports were bogus. On the facts and circumstances, the order passed u/s. 148A(d) and the consequential notice u/s. 148 were quashed and set aside. The matter was remanded to the Assessing Officer for de novo consideration.

iii) Within two weeks the petitioner shall be provided by respondent No. 1 with copies of all documents/information regarding the investigation of M/s. Jogi Gems, including the statements recorded during the course of investigation and documents collected during the investigation. Respondent No. 1 may redact from the documents, portions that may not pertain to the petitioner or M/s. Jogi Gems.

iv) Within two weeks of receiving these documents the petitioner shall, if so advised, file a further reply to the notice. The order to be passed under section 148A(d) of the Act shall be a reasoned order dealing with every sub- mission of the petitioner. Before passing any order, personal hearing shall be given to the petitioner, notice whereof shall be communicated at least five working days in advance.”

BCAJ Admin

Reassessment — Notice u/s. 148 — Reason to believe that income has escaped assessment — Entity with which assessee had sale transaction not established to be shell entity — No enquiry conducted by AO pursuant to the receipt of information from investigation wing — Non-application of mind on part of AO — Notice and order rejecting assessee’s objections set aside

62 B. U. Bhandari Autolines Pvt. Ltd. vs. ACIT

[2023] 456 ITR 56 (Bom)

A.Y.: 2016–17

Date of Order: 10th February, 2023

Ss. 147, 148 of ITA 1961

Reassessment — Notice u/s. 148 — Reason to believe that income has escaped assessment — Entity with which assessee had sale transaction not established to be shell entity — No enquiry conducted by AO pursuant to the receipt of information from investigation wing — Non-application of mind on part of AO — Notice and order rejecting assessee’s objections set aside.

For the A.Y. 2016–17, the Assessing Officer issued a notice u/s. 148 of the Income-tax Act, 1961 against the assessee for reopening the assessment u/s. 147. Reasons were recorded that information was received from the Deputy Director (Investigation) that a search was conducted u/s. 132 in the case of one M and others wherein cash in demonetised currency was seized, that M in his statement named one R as the key accomplice and was connected with a shell entity MT, that from the value-added tax returns it was found that the assessee had made a sale with MT and that, therefore, the sale of goods by the assessee to MT was bogus and that income had escaped assessment on that account. The assessee’s objections to the reopening of the assessment were rejected.

The assessee filed a writ petition challenging the notice and the order rejecting the objections. The Bombay High Court allowed the writ petition and held as under:

“i) The issue of reopening of assessment under section 147 had to be tested only on the basis of the reasons recorded, which could neither be improved upon nor substituted by an affidavit or oral submissions. It had not been alleged in the reasons that the entity MT with whom the assessee had made an alleged sale was being run by R although, in the reply affidavit it was stated by the Assessing Officer that MT was one of the entities which was floated by R for the purpose of providing accommodation entries. The reasons recorded also did not furnish any explanation on what basis and material the Assessing Officer had concluded that MT was a shell entity. The verification of the value-added tax returns referred to in the reasons recorded suggested only transactions between the assessee and the entity MT in regard to goods sold. Therefore, there was no material or basis for the Assessing Officer to hold the transaction between the assessee and MT not a genuine transaction of sale or for that reason to hold that MT was a shell entity.

ii) The Assessing Officer had not independently applied his mind to the information received or conducted his own inquiry into the matter to conclude that income had escaped assessment or that the transaction in question with the alleged shell entity was only a paper transaction. The notice had been issued u/s. 148 without satisfying the conditions precedent u/s. 147. Therefore, the notice and the order rejecting the objections of the assessee were set aside.”

BCAJ Admin

Reassessment — Notice — Res judicata — General principles — Consistency in decision making — Same decision-making authority rendering two decisions inconsistent with each other for different assessment years facts and circumstances being similar — Order and notice set aside

61 Prem Kumar Chopra vs. ACIT

[2023] 456 ITR 8 (Del)

A.Ys.: 2015–16 and 2016–17

Date of Order: 25th May, 2023

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

Reassessment — Notice — Res judicata — General principles — Consistency in decision making — Same decision-making authority rendering two decisions inconsistent with each other for different assessment years facts and circumstances being similar — Order and notice set aside.

The petitioner, a senior citizen, being the proprietor of M/s. Chopra Brothers is an authorised dealer for Kirloskar Electric Motors and is engaged in trading industrial electric motors, mono-block pumps and generator sets, etc. For the A.Y. 2015–16, the petitioner filed a return of his income, declaring the income of Rs.19,94,970 which was processed u/s. 143(1) of the Income-tax Act, 1961. On 7th April, 2021, the Assessing Officer, respondent No. 1 issued a notice u/s. 148 of the Act, which on being challenged by the petitioner, was set aside in terms of the decision in the case of Mon Mohan Kohli vs. Asst. CIT [2022] 441 ITR 207 (Delhi).

Thereafter, in terms of the decision of the Hon’ble Supreme Court in the case of Union of India vs. Ashish Agarwal [2022] 444 ITR 1 (SC); [2022] SCC OnLine SC 543, respondent issued notice dated 26th May, 2022, u/s. 148A(b) of the Act, alleging that on 26th November, 2016, a search had been conducted on the premises of an entry operator, namely, Shri Mohit Garg and during that search, in his statement, Shri Rajeev Khushwaha admitted to having provided bogus sale / purchase bills in exchange for cash; and that during the year relevant to the A.Y. 2015–16, M/s. Chopra Brothers through its proprietor Shri Prem Kumar Chopra was one of the beneficiaries of such accommodation entries to the tune of Rs.13,71,00,000.

An identical notice dated 25th July, 2022, was issued to the petitioner for the A.Y. 2016–17 as well. The petitioner submitted replies dated 10th June, 2022, and 21st July, 2022, to the said show-cause notice, thereby categorically denying any transaction with M/s. Divya International and Shri Rajeev Khushwaha. Along with the replies, the petitioner also submitted all relevant documents.

By way of order dated 28th July, 2022, respondent, accepting the case set up by the petitioner, dropped the proceedings pertaining to the A.Y. 2016–17, concluding that there is no escapement of income during the financial year 2015–16 relevant to the A.Y. 2016–17 in so far as there is no entry of transaction of sale or purchase by the bogus entity, M/s. Divya International, controlled by the entry operator Shri Rajeev Khushwaha to or from M/s. Chopra Brothers and accordingly held that it is not a fit case for issuance of notice u/s. 148 of the Act for the A.Y. 2016–17.

But soon thereafter, by way of an order dated 31st July, 2022, for the A.Y. 2015–16, respondent rejected the case set up by the petitioner, observing that there is escapement of income and accordingly held that it is a fit case for issuance of notice u/s. 148 of the Act.

The assessee, therefore, filed a writ petition challenging the validity of the notice u/s. 148 and the consequent reassessment order. The Delhi High Court allowed the writ petition and held as under:

“i) Consistency, both in content and in procedure has to be adhered to in order to ensure predictability of the decisions. In order to ensure procedural and content consistency in decisions, every decision-making authority should ensure that in a given set of circumstances, their decision must be on the same lines as that of their predecessor or co-ordinate authorities in a similar set of circumstances. Where a decision-making authority finds itself unable to agree with the view earlier taken, by the predecessor or the co-ordinate, the authority concerned is duty bound to record cogent reasons for deviating. The significance of precedence cannot be ignored even in administrative decision-making.

ii) The doctrine of res judicata does not apply to Income-tax proceedings pertaining to different assessment years since each assessment year is a separate assessment unit in itself only if it rests in a separate factual scenario and is supported by reasoning by the concerned authority.

iii) The order u/s. 148A(d) and the notice u/s. 148 for the A.Y. 2015–16 were infirm since they proceeded on a view inconsistent with the earlier order for the A.Y. 2016–17 despite the facts and circumstances being similar and in the backdrop of a similar set of documentary evidence. The concerned Assistant Commissioner had dropped the proceedings pertaining to the A.Y. 2016–17, while for the A.Y. 2015–16, he had opted to proceed further u/s. 148A. The decision taken for the A.Y. 2016–17 was a reasoned decision, based on the analysis of material on record, but the decision taken subsequently for the A.Y. 2015–16 was not only completely inconsistent with the earlier view but even without reason. Though sanction u/s. 151 was accorded by two different sanctioning authorities the satisfactions recorded in both orders were of the same Assistant Commissioner. There was nothing on record to suggest that the latter sanctioning authority for the A.Y. 2015–16 was apprised of the earlier view taken by the sanctioning authority for the A.Y. 2016–17. An assessee deals with the Department as a whole. The order u/s. 148A(d) and the notice u/s. 148 were set aside.”

BCAJ Admin

Offences and Prosecution — Wilful failure to file return — S. 276CC requires mens rea — Belated return and payment of tax and interest based on return accepted — Protective assessment set aside — No imposition of penalty — Prosecution not valid

60 Suresh Kumar Agarwal vs. UOI

[2023] 456 ITR 148 (Jhar)

A.Y.: 2013–14

Date of Order: 29th August, 2022

S. 276CC of ITA 1961

Offences and Prosecution — Wilful failure to file return — S. 276CC requires mens rea — Belated return and payment of tax and interest based on return accepted — Protective assessment set aside — No imposition of penalty — Prosecution not valid.

A search was conducted in the case of the assessee on 19th February, 2014, and subsequently, the assessee was required to file his return of income within 15 days from the date of receipt of the notice issued u/s. 153A of the Act. The assessee failed to file the return of income within the time provided and ultimately filed the same after a lapse of almost 17 months without giving any reasonable cause. The assessee also did not file any petition for condonation of delay.

The Department launched prosecution u/s. 276CC of the Act. The department alleged that the assessee had deliberately, willingly, intentionally and having mens rea in his mind avoided filing the return of income.

The assessee filed a writ petition for quashing the prosecution proceedings. The assessee contended that the delay in filing the return was due to death in the family and on account of not getting photocopies of papers and documents which were seized by the Income-tax Department. Further, the assessee submitted that the tax had been paid in full along with interest. The addition made by the Assessing Officer (AO) had been deleted by the CIT(A). No penalty had been levied by the AO. Lastly, the assessee submitted that since no penalty had been levied and no tax was due from the assessee, the launching of prosecution was bad in law.

The Jharkhand High Court allowed the writ petition and held as follows:

“i) Section 276CC of the Income-tax Act, 1961, provides for prosecution in cases of wilful failure to file returns. The wilful failure referred to in section 276CC of the Act brings in the element of guilt and thus the requirement of mens rea will come into force.

ii) It was admitted that the assessee had not filed his return on time but had filed the return belatedly with interest, which had been accepted by the authority concerned. The subsequent protective assessment was the subject matter before the first appellate authority, which had set aside the entire further assessment of the assessee.

iii) The assessee had already deposited the tax as well as the interest in the light of the statute. When the Income-tax Officer had levied interest for the delay in filing of the return, it must be presumed that the Income-tax Officer had extended the time for filing the return after satisfying himself that there were grounds for delay in filing the return. When the amount in question with the interest had already been paid, no sentence could be imposed on the assessee.”

BCAJ Admin

Computation of Capital Gains — Deduction of expenses wholly and exclusively in connection with transfer of capital asset — Transfer of shares – Amount paid for professional advice in accordance with articles of association of company – Deductible

59 Chincholi GururajacharVenkatesh and Satish Kumar Pandey vs. ACIT

[2023] 456 ITR 459 (Cal)

A.Y.: 2016–17

Date of Order: 16th December, 2022

S. 48 of ITA 1961

Computation of Capital Gains — Deduction of expenses wholly and exclusively in connection with transfer of capital asset — Transfer of shares — Amount paid for professional advice in accordance with articles of association of company — Deductible.

The assessees held shares of one MTPL. During the previous year relevant to the assessment year under consideration, the assessee paid professional fees to KPMG and Khaitan & Co in connection with the transfer of shares of MTPL by the assessees to a German Company. During the assessment proceedings, the AO held that the selling expenses were not incurred wholly and exclusively in connection with the transfer of their shares and disallowed the expense.

The CIT(A) as well as the Tribunal confirmed the addition.

The Calcutta High Court allowed the appeal filed by the assessee and held as under:

“i) U/s. 48 of the Income-tax Act, 1961, in computing capital gains, the expenditure incurred wholly and exclusively in connection with the transfer of capital asset is deductible. The word ‘connection’ in section 48(i) reflects that there should be a casual connect and the expenditure incurred to be allowed as a deduction must be united or in the state of being united with the transfer of the capital asset resulting in income by way of capital gains on which tax has to be paid. The expenditure, therefore, should have a direct connection and should not be remote or have indirect result or connect with the transfer.

ii) Under article 8 of the articles of association of the company a shareholder desirous of selling his shares must notify the number of shares, a ‘fair value’ and the proposed transferee. The assesses’ specific case was that they had engaged the services of the professionals for the purpose. The transfer of shares was not disputed by the Department. Admittedly, K was a firm providing advisory services and K and Co. was a law firm. The assessees had engaged the services of professionals who had identified the investor, negotiated the value and structured the transaction. Therefore, the transaction had an inextricable nexus with the transfer of shares. The expenditure incurred was deductible in computing the capital gains.”

BCAJ Admin

Business expenditure — Accrued or contingent liability — Provision for future expenses based on turnover — Amount set apart to meet future liabilities — Expenses in-built in the contract — Provision not contingent — Allowable deduction

58 Principal CIT vs. CEC SOMA CICI JV

[2023] 456 ITR 705 (Kar)

A.Ys.: 2011–12, 2012–13

Date of Order: 21st March, 2023

S. 37 of ITA 1961

Business expenditure — Accrued or contingent liability — Provision for future expenses based on turnover — Amount set apart to meet future liabilities — Expenses in-built in the contract — Provision not contingent — Allowable deduction.

The assessee entered into a contract with BMCRL to design, construct tunnels and do other civil works. The total projected future expenses (non-billable expenses) included the reconstruction of roads damaged while constructing tunnels and during the other construction activities undertaken by the assessee. The non-billable expenses were in-built in the contract and payment for them was made by the assessee and not BMRCL. For the A.Ys. 2011–12 and 2012–13, based on the turnover, the assessee made provision for expenses and claimed deduction. The Assessing Officer disallowed the claim.

The Commissioner (Appeals) allowed the assessee’s appeal on the grounds that the provision was not contingent in nature but based on the matching expenditure on ascertained liability. The Tribunal upheld his order.

The Karnataka High Court dismissed the appeals filed by the Revenue and held as under:

“i) The provision for expenses was made on a pro rata basis based on the turnover with reference to total unbillable future expenses of the assessee’s project. For the A.Y. 2013–14 after the remand the Assessing Officer had accepted the provision made by the assessee. For the subsequent A.Y. 2014–15, no disallowance had been made.

ii) The Tribunal was right in setting aside the disallowances made by the Assessing Officer in respect of the deduction of future expenses claimed by the assessee for the A.Ys. 2011–12 and 2012–13.”

BCAJ Admin

The Requirement To Provide Materials And Evidences Along With Show Cause Notice U/S 148A(B)

ISSUE FOR CONSIDERATION

The new provision of section 148 as substituted by the Finance Act, 2021, authorizes the Assessing Officer to issue a notice of reassessment where there is information with him which suggests that the income chargeable to tax has escaped assessment in the case of the assessee, subject to fulfillment of other conditions. Section 148A lays down the procedure which needs to be followed by the Assessing Officer before a notice under section 148 is issued by him, except where the search is conducted in the assessee’s case, or where assets or materials seized during the search in someone else’s case belong or pertain to the assessee.

One of the requirements of section 148A contained in clause (b), is to serve a notice upon the assessee providing him with an opportunity of being heard and asking him to show cause within a specified time as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case.

Recently, an issue has arisen as to whether it is sufficient if the relevant information suggesting escapement of income has been mentioned in the show cause notice issued under section 148A(b), or whether the Assessing Officer is also required to provide copies of the materials available with him containing such information and on the basis of which he wants to ascertain whether an income has escaped assessment or not. The Bombay, Delhi, Chhattisgarh and Calcutta High Courts have taken a view that the Assessing Officer is duty bound to provide not only the information but also the copies of the materials to the assessee. However, recently, the Madhya Pradesh High Court has taken a contrary view holding that the copies need not be provided with the notice u/s. 148A of the Act.

ANURAG GUPTA’S CASE

The issue had come up for consideration by the Bombay High Court in the case of Anurag Gupta vs. ITO [2023] 150 taxmann.com 99 (Bombay).

In this case, for the assessment year 2018–19, the Assessing Officer had issued a notice under section 148A(b) on 8th March, 2022, on the ground that the information was received consequent to search / survey action carried out in the case of Antariksh Group, that assessee had purchased a warehouse from BGR Construction LLP for which on-money of ₹70,00,000 was paid, which was not accounted in the books of account of the assessee.

The said show cause notice was replied by the assessee on 14th March, 2022, wherein he totally denied the existence of any transaction with BGR Construction LLP, booking of a warehouse or payment made to the said entity. The assessee also denied any ‘on-money cash transaction’ with the said entity and therefore, demanded that the proceedings initiated under section 147 of the Act be dropped.

Thereafter, on 21st March, 2022, the Assessing Officer issued a clarification in regard to the notice under section 148A(b), this time stating therein that the assessee had also executed a conveyance deed with Meet Spaces LLP and, therefore, the Assessing Officer required the assessee to furnish payment details regarding this deed also.

The assessee did not file any response to the second notice and, therefore, the Assessing Officer proceeded to pass an order under section 148A(d), wherein it was mentioned, firstly, that cash payments had been made by the assessee to BGR Construction LLP as had been confirmed in the statement recorded during the survey action and, secondly, that the assessee had entered into a conveyance deed as a purchaser with Meet Spaces LLP for a consideration of ₹10,00,000, which remained unexplained.

Before the High Court, it was argued on behalf of the assessee that the procedure as prescribed under section 148A(b) as well as the principles of natural justice had been violated. While the assessee was given the information in terms of section 148A(b), the material which ought to have been provided to the assessee was not so furnished. In the absence of the same, the assessee was precluded from filing an effective reply to the show cause notice. On the other hand, the revenue contended that there was no such obligation cast upon the revenue in terms of Section 148A(b) of the Act to provide to the assessee anything beyond providing him with the information.

The assessee also relied upon the decision of the Supreme Court in the case of UOI vs. Ashish Agarwal [2022] 138 taxmann.com 64 wherein on a related matter, the Assessing Officers were directed to provide to the respective assessee the information and material relied upon by the Revenue within thirty days of the decision so that the assessees can reply to the show cause notices within two weeks thereafter. It was urged that the requirement of section 148A(b) has clearly been spelt out in the direction of the Supreme Court in the case of Ashish Agarwal (supra), which envisaged that not only information be provided to the assessee, but also the copies of the material relied upon by the revenue for purposes of making it possible for the assessee to file a reply to the show cause notice in terms of the said section.

The High Court observed that no material had been supplied to the assesse even though there was material available with the Assessing Officer, as could be seen from the order passed under section 148A(d) which was in the shape of a statement recorded, during survey action of the partner of BGR Construction LLP. There also appeared to be a sale list, which was allegedly found during the search operations containing the names of 72 investors, including the assessee, which although referred to in the order under section 148A(d) as also in the subsequent clarification, was also not provided to the assessee. Interestingly, while the said subsequent communication dated 21st March, 2022, did say that the list of total sales “was being attached for the ready reference of the assessee for purposes of submitting a reply to the show cause notice”, no such list was admittedly furnished.

The High Court held that providing information to the assessee, without furnishing the material based upon which the information was provided, would render an assessee handicapped in submitting an effective reply to the show cause notice, thereby rendering the purpose and spirit of section 148A(b) totally illusive and ephemeral. The fact that the material also was required to be supplied could very well be gauged from the clear directions issued by the Supreme Court in the case of Ashish Agarwal (supra). Accordingly, the High Court held that the reassessment proceedings initiated were unsustainable on the ground of violation of the procedure prescribed under section 148A(b), on account of the failure of the Assessing Officer to provide the requisite material, which ought to have been supplied along with the information in terms of the said section. The order passed under section 148A(d) and consequential notice issued under section 148 were quashed, and the matter was left open for the revenue from the stage of the notice under section 148A(b) for supplying the relevant material, if it was otherwise permissible, keeping in view the issue of limitation.

Although the assessee raised the other two contentions with respect to the sanction to be obtained under section 151 and also with respect to the inquiry being not conducted under section 148A(b), the High Court did not deal with those issues, as the order passed under section 148A(d) was found to be bad in law on the ground of not providing the requisite materials to the assessee.

AMRIT HOMES (P) LTD’S CASE

The issue, thereafter, came up for consideration before the Madhya Pradesh High Court in the case of Amrit Homes (P) Ltd vs. DCIT [2023] 154 taxmann.com 289.

In this case, the order was passed under section 148A(d) for the assessment year 2016–17 on 28th April, 2023, which was followed by the issue of notice under section 148 on the same date. The assessee challenged the validity of this order and notice by filing a writ petition under Article 226 of the Constitution. Primarily, the grievance of the assessee was that information/evidence categorized as foundational material was not sufficient to suggest that any income chargeable to tax has escaped assessment.

The High Court held that section 148A was inserted in the Act by the Finance Act, 2021 primarily to give effect to the ratio laid down by Apex Court in GKN Driveshafts (India) Ltd vs. ITO [2003] 259 ITR 19 (SC). In the said decision it was held that the assessee, if it so desired, could seek for the reasons for issuing notice under section 148, could also file the objections to issuance of notice upon receipt of the reasons and the Assessing Officer was bound to dispose of the objections so raised by passing a speaking order. Section 148A has provided a similar opportunity of being heard before reopening the case and issuing notice under section 148.

It was held by the Court that the nature of inquiry contemplated by Section 148A was not a detailed one. The purpose of the inquiry was to communicate to the assessee that the Assessing Officer was in possession of information suggesting that certain income of the assessee which was chargeable to tax had escaped assessment. The communication made by issuance of show cause notice, should contain enough information and reasons to reveal the intention of the Assessing Officer.

The Court further held that the statute however did not oblige the Assessing Officer to supply the relevant material/evidence, which was the foundation for the Assessing Officer to come to the prima facie view that income chargeable to tax had escaped assessment. This was because neither in the judgment of the Apex Court in the case of GKN Driveshafts (India) Ltd. (supra) nor in section 148A any such indication could be gathered. The only duty cast upon the Assessing Officer was to supply information by mentioning the same in the show cause notice issued under section 148A(b). If the inquiry contemplated in Section 148A was interpreted to mean a detailed inquiry, where both sides could seek and adduce evidence / material (documentary / ocular), then the entire object behind Section 148A would stand defeated.

The High Court further held that section 148A did not expressly provide for the supply of any material/evidence in support of the show cause notice under section 148A(b). It did not obligate the Assessing Officer to supply any material / evidence, provided the show cause notice contained reasons disclosing the mind of the Assessing Officer nursing the prima facie view suggestive of a case where income chargeable to tax had escaped assessment.

The High Court also considered the concept of reasonable opportunity, and whether the said concept could be stretched to the extent of supplying material / evidence in support of the opinion of the Assessing Officer that certain income had escaped assessment. On this, the High Court held that the concept of reasonable opportunity in non-taxing statutes was required to be applied to its fullest (including supply of adverse material), irrespective of the presence of any express provision or not, in cases where the authority concerned passed an order entailing civil consequences of adverse nature. However, the law of interpretation of taxing statutes was at variance with the law of interpretation of non-taxing statutes. The difference was that the taxing statute was to be understood by the plain words used in it, without taking aid of other tools of interpretation of statutes e.g. intendment, implication or reading into. The words employed by section 148A(b) provided for affording of opportunity of being heard by way of show cause notice. This requirement of the law was satisfied if the show cause notice contained information which had persuaded the Assessing Officer to form an opinion that certain income had escaped assessment of a particular assessment year. The statute did not compel the Assessing Officer to supply material/evidence (documentary / oral) on the basis of which the aforesaid opinion had been formed by the Assessing Officer.

On the basis of these reasonings, the High Court concluded that the assessee was not entitled to the material/evidence (oral/documentary), which was the foundation of the opinion formed by the Assessing Officer, so long as a show cause notice mentioned about such foundational information and the supportive reasons to form the said opinion.

The Madhya Pradesh High Court disagreed with the view taken by the Delhi High Court in Mahashian Di Hatti (P) Ltd vs. Dy CIT (W.P. (C) 12505/2022), Divya Capital One (P) Ltd vs. Asstt CIT 445 ITR 436 (Delhi), SABH Infrastructure Ltd. vs. Asstt CIT 398 ITR 198 (Delhi), Chhattisgarh High Court in Vinod Lalwani vs. Union of India 455 ITR 738 (Chhattisgarh) and Bombay High Court in Anurag Gupta vs. ITO (W.P. No. 10184/2022) / 454 ITR 326 on the ground that the foundational principle of interpretation of taxing statutes was not considered. It was held that those High Courts were persuaded by the principle of reasonable opportunity, which was ordinarily applied while interpreting non-taxing statutes, and in taxing statutes, nothing could be read into or implied and the plain meaning of the words used in the taxing statute were to be given their due meaning.

The High Court dismissed the petition of the assessee and did not deal with the veracity and genuineness of material/evidence forming the opinion of the Assessing Officer suggesting that the income of the assessee had escaped assessment, as it was considered to be outside the scope of the writ jurisdiction under Article 226 or supervisory jurisdiction under Article 227 of the Constitution.

OBSERVATIONS

The relevant clause of section 148A under which this issue is arising is being reproduced below for reference –

The Assessing Officer shall, before issuing any notice under section 148,—

(a)……………..

(b) provide an opportunity of being heard to the assessee, by serving upon him a notice to show cause within such time, as may be specified in the notice, being not less than seven days and but not exceeding thirty days from the date on which such notice is issued, or such time, as may be extended by him on the basis of an application in this behalf, as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted, if any, as per clause (a);

It can be seen the law expressly provides for issuing a notice on the basis of information available and affording an opportunity of being heard to the assessee, before a view is formed that an income has escaped assessment and the assessee is put to hardship by issuing a notice under section 148. Obviously, in availing the opportunity afforded, the assessee should be allowed to examine the veracity of the information relied upon and refute the derivation of the AO. Though prima facie this would be possible only where copies of the material or information are provided to the assessee. It is a settled principle of law that the opportunity to be heard should be real, reasonable and effective. It should not be an empty formality. The observations of the Hon’ble Supreme Court with respect to the principle of natural justice from the case of Mohinder Singh Gill vs. Chief Election Commissioner AIR 1978 (SC) 851, are noteworthy and they are being reproduced below:

“Natural justice is a pervasive facet of secular law where a spiritual touch enlivens legislation, administration and adjudication, to make fairness a creed of life. It has many colours and shades, many forms and shapes and, save where valid law excludes, it applies when people are affected by acts of authority. It is the bone of healthy government, recognised from earliest times and not a mystic testament of judge-made law. Indeed from the legendary days of Adam — and of Kautilya’s Arthashastra — the rule of law has had this stamp of natural justice, which makes it social justice. We need not go into these deep for the present except to indicate that the roots of natural justice and its foliage are noble and not new-fangled. Today its application must be sustained by current legislation, case law or another extant principle, not the hoary chords of legend and history. Our jurisprudence has sanctioned its prevalence even like the Anglo-American system.”

In order to provide the effective opportunity of being heard, as required in terms of clause (b) of section 148A, it is imperative that the relevant materials containing the information about the escapement of income in the case of the assessee have been provided to the assessee. Without having seen the relevant materials in the possession of the Assessing Officer, the assessee would not be able to effectively defend his case, and prove that there had been no basis to form an opinion that income had escaped assessment in his case. For instance, if the Assessing Officer was relying upon the statement of a third-party and, on the basis of the information provided in that statement with respect to the assessee, an opinion had been formed that income had escaped assessment, then it was obvious that the assessee needed to understand as to what had been deposed by the witness in his statement so recorded, and whether it was true and sufficient to come to a conclusion that income had escaped assessment as alleged by the Assessing Officer.

The Madhya Pradesh High Court has held that the assessee is not entitled to have the materials or evidence which were the foundation of the opinion formed by the Assessing Officer, so long as the show cause notice mentioned about such foundational evidence or materials, and the supportive reasons to form the said opinion. However, the question which arises is how the assessee would be able to show cause that based on the information specified it was not possible to conclude by the AO that the income could have escaped assessment, and defend himself effectively if he is not provided with the relevant materials or evidence which are proposed to be used against him. Such an interpretation would render the provisions of clause (b) to a mere formality, which is against the basic principle of natural justice, that opportunity should not be provided in a manner whereby it becomes a mere formality.

The Supreme Court in the case of Ashish Agarwal (supra) had directed the Assessing Officer to not only provide the information suggesting the escapement of income, but also the relevant materials while validating the notices issued under the erstwhile provisions of section 148, during the time period extended by TOLA. It appears that the relevant observations of the Supreme Court from the case of Ashish Agarwal (supra) were not brought to the notice of the Madhya Pradesh High Court.

Further, with due respect, the distinction drawn between the interpretation of a taxing statute and a non-taxing statute by the Madhya Pradesh High Court is illusive and in any case not very relevant in so far as the issue is with respect to the manner in which the opportunity of being heard should be given. The extent to which the opportunity of being heard is required to be given under a taxing statute can be no less than the extent to which it is required to be given under a non-taxing statute.

While taking a view that the Assessing Officer is not duty bound to provide the relevant materials or evidence, while issuing a show cause notice under section 148A(b), the Madhya Pradesh High Court has relied upon the literal interpretation of the law and noticed that there is no such requirement in the relevant provision of section 148A(b). However, what should have been considered as relevant is the interpretation of the words “provide an opportunity of being heard” as used in section 148A(d). The requirement to provide the relevant materials used against the assessee for forming an opinion about the escapement of income is in-built within the requirement of providing an opportunity to be heard.

Justice must not only be done but should also be seen to have been done. There is a difference between delivering justice and a judgment. A judgment could be delivered by reading the language of the law while justice is delivered on appreciation of the spirit of the law besides of course, the language of the law. We are fortunate to be in a country where both have been given equal weightage by the judiciary in dispensing justice.

The judiciary governed by a rule of law has tacitly and expressly accepted the application of natural justice unless otherwise expressly prohibited by the statute. Following the canons of natural justice is an accepted jurisprudence in dispensing justice. In interpreting the provisions relating to the scheme of reopening and reassessment, even without there being a specific provision, the courts have consistently emphasised the need for an authority to provide to the assessee, the copies of the reasons recorded, material relied upon, information available, sanction obtained, and the inquiry conducted. Please see GKN Driveshafts (India) Ltd., 259 ITR 19 (SC), SABH Infrastructure, (supra), Micro Marbles, 457 ITR 567(Raj.), Tata Capital Financial Services Ltd., 443 ITR 127(Bom.) and Ashish Agarwal (supra).

It is worthwhile to note the suo moto directions of the Delhi High Court on the subject in the case of SABH Infrastructure (supra);

Before parting with the case, the court would like to observe that on a routine basis, a large number of writ petitions are filed challenging the reopening of assessments by the Revenue under sections 147 and 148 of the Act and despite numerous judgments on this issue, the same errors are repeated by the concerned Revenue authorities. In this background, the court would like the Revenue to adhere to the following guidelines in matters of reopening of assessments:

(i)	while communicating the reasons for reopening the assessment, a copy of the standard form used by the Assessing Officer for obtaining the approval of the Superior Officer should itself be provided to the assessee. This would contain the comment or endorsement of the Superior Officer with his name, designation and date. In other words, merely stating the reasons in a letter addressed by the Assessing Officer to the assessee is to be avoided;
(ii)	the reasons to believe ought to spell out all the reasons and grounds available with the Assessing Officer for reopening the assessment—especially in those cases where the first proviso to section 147 is attracted. The reasons to believe ought to also paraphrase any investigation report which may form the basis of the reasons and any enquiry conducted by the Assessing Officer on the same and if so, the conclusions thereof;
(iii)	*where the reasons make a reference to another document, whether as a letter or report, such document and/or relevant portions of such report should be enclosed along with the reasons;*
(iv)	the exercise of considering the assessee’s objections to the reopening of the assessment is not a mechanical ritual. It is a quasi-judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. No attempt should be made to add to the reasons for reopening of the assessment beyond what has already been disclosed.

The application of principles of natural justice is confirmed by the courts by regularly applying various provisions of the natural justice to the practice of the Income-tax Act, to ensure that no order is passed without sharing of information, statements recorded, and the material relied upon and affording of an opportunity of hearing before an adverse order is passed. This is evident, especially in respect of the provisions of s. 131, 132, 133A, 142(3), 147, 151, 153, 250, 254, 260 and chapters dealing with penalties and punishment under the Income tax Act. Most of these provisions do not expressly provide for sharing the copies of the material and information but the courts have read such requirements in implementing the law by applying the simple rule that a person cannot be hanged without a trial and that the trial should be fair and equitable. Even in cases of criminal justice, the application of the provisions of natural justice is desired and is applied by the courts to the extent possible under the facts of the case.

The new scheme of reopening and reassessment has clearly recorded the legislative intent in accepting the law laid down by the courts on the lines of what has been discussed here. In fact, the memorandum explaining the provisions of the new scheme, has expressly stated the need for respecting natural justice and following the mandate of the Supreme Court in the case of GKN Driveshafts (India) Ltd (supra). The new scheme has gone a step further by including a statutory provision in the form of section 148A in the body of the Act containing 4 very important provisions, under clauses (a) to (b), each of which is nothing but affirmation of the tenets of natural justice spelt out by the apex court in the cases of GKN Driveshafts (India) Ltd. (supra) and Ashish Agarwal (supra).

All the High Courts with the exception of the Madhya Pradesh High Court, in interpreting the new scheme of reopening and reassessment have reiterated that there was no change in judicial understanding of the old law, which continues even under the new scheme, that required the authorities to provide copies of the information and the material available with them.

In our respectful opinion, the significant change between the old scheme and the new scheme is that, under the new scheme, the authorities, before issuing the notice under section 148, now have to make up their minds that an income has escaped assessment. For making up their minds, they have to first follow the due procedure of section 148A and thereafter decide that there was an escapement of income and then only issue a notice. Once a decision is taken, the only course open for the AO is to examine the case of the assessee on merits. Having once issued a notice under section 148, it may be difficult for an AO to drop the proceedings by holding that there was no escapement of income, other than doing so on merits of the facts produced before him.

The better view, in our considered opinion, is that the relevant materials and evidences on the basis of which an inquiry is initiated (and subsequently an opinion about the escapement of income would be formed), have to be provided to the assessee along with the show cause notice issued under section 148A(b). If that is not done, the notice would be invalid.

BCAJ Admin

Direct Taxes

84. Due date for filing the Returns of Income for A.Y. 13-14, extended from 31st July, 2013 to August 5th, 2013. – F.No 225-117-2013-ITA. II dated 31st July, 2013

85. Central Government notifies differential rate of interest in respect of rupee denominated bond of an Indian company for the purpose of section 194LD of the Act – Notification no. 56/2013 dated 29th July, 2013

86. Income-tax (11th Amendment) Rules, 2013 – Amendment in Rule 21AB and introduction of Form 10F

– Notification no. 57/2013 dated 1st August, 2013 –

A non-resident proposing to claim benefit under Double Tax Avoidance Agreement entered into between India and his country of residence is required to furnish an undertaking in Form 10F along with the Tax Residency certificate. The amendment is effective from 1stApril, 2013.

87. INSTRUCTION NO.10/2013[F.NO.225/107/2013/ ITA.II], DATED 5th August, 2013 relating to the procedure and criteria for selection of scrutiny cases under compulsory manual during the financial year 2013-14.

88. Income-tax (12th amendment) Rules, 2013 – amendment in Rule 37BB and amendment to Form 15CA and 15CB- Notification no. 58/2013 dated 5th August, 2013

Rule 37BB is amended with effect from 1st October, 2013, which prescribes the procedure to be followed by a person responsible for making a payment to a non-resident. Form 15CA i.e., the form to be filled by the person making remittance and Form 15CB, a certificate to be issued by the Chartered Accountant are amended.

89. Income tax (13th amendment) Rules, 2013 – amendment in Rule 12C and amendment to Form 64- Notification no. 59/2013 dated 5th August, 2013 –

Income paid or credited to by the Venture Capital company or venture capital fund is required to be furnished in Form 64. Form 64 is to now to be furnished electronically under digital signature.

90. Central Government authorises 14 entities to issue during the financial year 2013-14, tax free, secured, redeemable, non-convertible bonds-Notification no. 61/2013 dated 8th August, 2013

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BCAJ Admin

Direct Taxes

Income tax (third amendment) Rules, 2013 – amendment in Rule 12 and substitution of forms SAHAJ (ITR 1), ITR 2, ITR 3, SUGAM (ITR 4S), ITR 4 and ITR V – Notification no- 34/2013 [S.O.1111(E)] dated May 1, 2013 –

The important amendments are as under :

(a) Form SAHAJ (ITR 1) cannot be used if the assessee has incurred a loss under the head ‘Income from other sources’ or if the assessee wants to claim tax relief u/s. 90/90A or has any income exceeding Rs. 5,000 exempt from tax.

(b) Form SUGAM (ITR 4S) cannot be used if the assessee wants to claim tax relief u/s. 90/90A or has any income exceeding Rs. 5,000 exempt from tax.

(d) Mandatory e-filing of return of income, if income exceeds Rs. 5,00,000 or if the assessee wants to claim tax relief u/s. 90/90A.

Procedure for deduction and payment of tax u/s 194 IA, issue of certificate of tax deducted etc.– Notification No. 39/2013 dated May 31, 2013

• Any sum deducted u/s. 194IA of the Act shall be paid electronically to the credit of the Central Government within a period of seven days from the end of the month in which the deduction is made.

• TDS payment u/s. 194IA shall be accompanied by a challan-cum-statement in Form No. 26QB.

• Since tax deducted is to be deposited accompanied by a challan-cum-statement in Form No.26QB, the amount of tax so deducted shall be deposited to the credit of the Central Government by remitting it electronically into the Reserve Bank of India or the State Bank of India or any authorised bank.

• Every person responsible for deduction of tax u/s. 194IA of the Act shall furnish the certificate of deduction of tax at source in Form No. 16B to the payee within 15 days from the due date for furnishing the challan-cum-statement in Form No. 26QB.

• Form 16B is to be generated online from the web portal within 15 days from the due date of deposit and must be downloaded from the TDSCPC website. Once the certificate is downloaded, it must be signed and stamped and then sent to the payee.

Cost Inflation Index for the financial year 2013-14 is 939 – Notification No. 40/2013 dated June 6, 2013

Income tax (Sixth amendment) Rules, 2013 – amendment in Rules 10A to 10E and substitution of Form 3CEB. Notification no- 41/2013 [S.O.1491(E) ] dated June 10, 2013

Income tax (Seventh amendment) Rules, 2013 – amendment in Rule 12 and substitution of forms ITR 2, ITR 3, ITR 4, ITR 5, ITR 6 and ITR 7 – Notification no- 42/2013 [S.O.1513(E)] dated June 11, 2013 – The important amendments are as under :

(a) No attachments to be filed alongwith the return filed in ITR 7.

(b) Mandatory e-filing of audit reports issued u/s 10(23C)(iv), 10(23C)(v), 10(23C)(vi), 10(23C)(via), 10A, 12A(1)(b), 80IA, 80IB, 80IC, 80ID, 80JJAA and 80LA.

The Finance Bill 2013, received the Presidential Assent on May 10, 2013

Agreement for Exchange of information relating to tax matters between India and Monaco enters into force – Notification No. 43 /2013 dated June 12, 2013

Commodities Transaction Tax Rules, 2013 – Notification No. 46/2013 [SO 1769(E)] dated June 19, 2013 – These rules to come in force from July 1, 2013

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BCAJ Admin

Direct Taxes

1. Protocol amending DTAA between India and
Sweden effective from 16th August, 2013 – Notification No. 63/2013 dated
14th August, 2013

2. NEW DRPs constituted – Order No. 2/FT & TR/2013 dated 27-08-2013

The
CBDT has issued this order for Constitution of the Dispute Resolution
Panel in Delhi, Mumbai, Ahmedabad, Pune, Kolkata, Bangalore, Hyderabad
and Chennai with effect from 19-08-2013

3. CBDT Instruction
on unmatched TDS challans in Form 26AS–Instruction No. 11/2013 dated
27-08-2013 ( available on www.bcasonline. org)

4. Income-tax
(14th amendment) Rules, 2013– amendment in Rule 37BB and amendment to
Form 15CA and 15CB-Notification No. 67/2013 dated 2nd September, 2013.

In
terms of Notification No. 58/2013 dated 5th August, 2013, Income-tax
(12th amendment) Rules, 2013 were issued to amend Rule 37BB with effect
from 1st October, 2013. Rule 37BB is further amended vide Notification
No. 67/2013 which prescribes the procedure to be followed by a person
responsible for making a payment to a non-resident. Form 15CA i.e., the
form to be filled by the person making remittance and Form 15CB, a
certificate to be issued by the Chartered Accountant are amended.

CBDT
Instruction on procedure for adjustment of refund against
demand—Instruction No. 12/2013 dated 09-09-2013 ( available on
www.bcasonline.org)

Safe Harbour rules notified vide
Income-tax (16th Amendment) Rules, 2013–Notification No. 73/2013 dated
18th September, 2013 Transfer Pricing: Finance Ministry Press Release
Reg Safe Harbour Rules

The Ministry of Finance has issued a
press release stating that the Safe Harbour Rules have been finalized
after considering the comments of various stake holders. The significant
aspect is that in case of transactions in the nature of routine ITES
and ITS activities the earlier ceiling of Rs. 100 crore has been
removed. Transactions upto Rs. 500 crore have been provided safe harbour
margin of 20% and transaction above Rs. 500 crore have been provided
safe harbour margin of 22%. Similarly, the ceiling of Rs. 100 crore
provided for transactions in the nature of corporate guarantee has been
removed. Also, the rules provide for a time bound procedure for
determination of the eligibility of the assessee and the international
transactions. Any rejection of the option exercised by the assessee
shall be by way of a reasoned order passed after hearing the assessee.
The assessee shall have a right to file an objection with the
Commissioner against adverse finding regarding the eligibility. The
Commissioner shall thereafter decide about the validity of the option
exercised by the assessee.

7. Compulsory manual scrutiny
norms for scrutiny during F.Y. 2013-14 have been modified— Instruction
No. 13/2013 dated 20-09-13 ( available on www.bcasonline.org)

8.
Clarification received on 20-09-2013 from the ADIT (Systems), New Delhi
in respect of mandatory requirement of mentioning of Bank Account No.
& IFSC Code in case of Foreign Companies in ITR-6

On
representation, the ADIT (Systems), New Delhi, has clarified vide an
email to the Society that in ITR 6 in case of Foreign Companies not
having a bank account in India, in the space meant for Bank Account No.
put ‘999999999’ i.e. 9 times 9 and in IFSC Code put ‘NNNN0NNNNNN’ [the
fifth digit being ‘Zero’ and NOT alphabet ‘O’], in all cases where there
is no bank account available in India.

9. Board issues instructions regarding non-filers

Instruction No.14/2013
F.No. 225/153/2013/ITA.II
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes

North Block,ITA-II,Division New Delhi the 23rd of September, 2013

All Chief-Commissioners of Income-tax All Directors-General of Income-tax

Sir/Madam

Subject: Standard Operating Procedure for cases under Non-filers Monitoring System (‘NMS’)-regarding-

The
existing procedure for monitoring cases of ‘Non-Filers of IT Returns’
as identified by Director General of Income Tax (System) has been
examined by the board. It is felt that at present, cases of Non-Filers
are not being uniformly monitored by the Assessing Officers due to lack
of consistency in approach in dealing with such cases. Therefore, in
order to streamline processing of such cases and to ensure consistency
in monitoring NMS cases by the Assessing officers, the Board, hereby
lays down the following Standard Operating Procedure:

1. The
Assessing Officer should issue letter to the assessee with 15 days of
the case being assigned in NMS, seeking information about the return of
income flagged in NMS. Facility to generate letter has been provided in
the NMS module in i-taxnet.

2. If the letter is delivered, the Assessing Officer to capture the delivery date in the NMS module.

3.
If the letter is not delivered, the Assessing Officer should issue
letter to the alternate address of the assessee available in the Online
Monitoring System or any other address available with the Assessing
Officer through field enquiries or otherwise. All addresses used in IT
Return, AIR, CIB databases have been made available to the Assessing
Officer in the Online Monitoring System to assist the field formations
in identification of current address of the taxpayer.

4. If the
return is received, the assessing officer should capture the details in
AST within 15 days of filing of return, if the assessee informs that
paper return has already been filed which was not captured in AST, the
details of return should be entered in the AST within 15 days of
receiving such information. E-files returns will be automatically pushed
to NMS.

5. If no return is required to be filed in the case, (
non-resident etc.), the Assessing Officer should mark “No return is
required” and mention reason for the same in NMS which needs to be
confirmed by Range head.

6. If the Assessing Officer is not able
to serve the letter and identify the taxpayer, assessing officer should
mark the assessee “Assessee not traceable” in NMS which needs to be
confirmed by Range head.

7. In cases where the assessee has been
identified and no return has been filed within 30 days of the time
given in the letter, the Assessing Officer should consider initiation of
proceedings u/s 142(1)148 in AST.

8. The cases will be
processed every week by the Directorate of Systems and will be marked as
closed in NMS. If one of the following actions are taken for A.Yr.’s
2010-11, 2011-12, and 2012-13:

a) Details of return are available in AST

b) Notice u/s 142(1) or 148 has been issued in AST

c) “ No return is required” is marked by the Assessing Officer and confirmed by Range head.

I
am further directed to state that the above be brought to the notice of
all officers working under your jurisdiction for necessary and strict
compliance.

(Rohit Garg)
Deputy Secretary Government of India

Copy to:
1. Chairperson, CBDT.
2. All Members, CBDT.
3. DIT(PR,PP & OL),Mayur Bhawan,New Delhi.
4. The Comptroller and Auditor-General of India.
5. The DGIT(Vigilance),New Delhi.
6. The Joint Secretary and Legal Advisor, Ministry of Law and Justice, New Delhi
7. All Directors of Income Tax, New Delhi.
8. The DGIT(NADT) Nagpur.
9. ITCC Division of CBDT(3 copies).
10. The DGIT (Systems), New Delhi.
11. NIC, N/o Fin –for uploading on the Department’s website.
12. Data Base Cell-for uploading on irs officers website.

(Rohit Garg)

Deputy Secretary Government of India

BCAJ Admin

Direct Taxes

Reverse Mortgage (Amendment) Scheme, 2013 notified to amend the Reverse Mortgage Scheme 2008–Notification No.79 /2013 dated 7th October, 2013

Extension of time to furnish Audit Report electronically

The CBDT has issued an order dated 26th September, 2013, extending time limit from 30th September, 2013 to 31st October, 2013 for electronically furnishing of various Audit Reports.

CBDT extends due date for furnishing of Tax Audit Report for A.Y. 2013-14

The CBDT has issued an order dated 24th October, 2013 u/s. 119 of the Act in continuation of the order dated 26th September, 2013 directing that in cases where the ‘due date’ of furnishing reports of audit and corresponding income-tax returns was 30th September 2013 and where the same are furnished electronically on or before 31st October 2013, such reports of audit and returns of income shall be deemed to have been furnished within the ‘due date’ prescribed u/s. 139(1) of the Income-tax Act, 1961

The Directorate of Income-tax (Systems) has issued a letter dated 22nd October, 2013 stating that pursuant to the decision of the Board the process has been initiated to issue refunds without adjustment of demand as an interim measure in certain cases. The AOs have been requested to carry out necessary verification following the procedure prescribed in section 245 of the Act.

Protocol amending the DTAA between India and Australia signed on the 16th day of December, 2011 shall enter into force on the 2nd day of April, 2013-Notification No .74 dated 20th September, 2013.

Income tax (17th amendment) Rules, 2013 – Introduction of General Anti Avoidance Rules, which will come into force from 1st April, 2016- Notification no-75/2013 dated 23rd September, 2013

Income-Tax Deduction from Salaries during the Financial Year 2013-14 u/s. 192 of the Income-Tax Act, 1961.-Circular No. 8 dated 10th October, 2013

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BCAJ Admin

Direct Taxes

Government notifies Cyprus as a “notified jurisdictional area under Section 94A – Notification No. 86/2013 dated 1st November, 2013

The CBDT has issued Order No. 5/FT&TR/2013 dated 04-11-2013 specifying the jurisdiction of the Dispute Resolution Panel at Delhi and Mumbai and the cases or classes of cases that they are assigned. The CBDT has also issued Order No. 6/FT&TR/2013 dated 04-11- 2013 specifying the reserve members of the DRP at Delhi and Mumbai. Both these orders are available at www.bcasonline.org

Procedure for dealing with Revenue objections – CBDT Instruction No. 16/ 2013 dated 31-10-2013

E-returns filed with payment of self-assessment tax to be treated as deemed defective and standard operating procedure notified by CBDT. – F.No. DIT(S)/II/CPC/2013-14/Unpaid self assessment tax/13798 dated 13th November 2013 – available on www.bcasonline.org

Circular clarifying DRP law under section 144C of the Act – Circular no. 9/2013 dated 19th November 2013

On analysis of the existing track record where there are unsatisfactory settlements, despite detailed procedure laid down by the CBDT, it has now fine tuned the procedure by awarding more powers to the supervisory authorities to fasten the process of settlement and prevent revenue loss for the Government as well as harassment to the tax payers.

CBDT has rectified its mistake made in Circular no. 5/2010 where it was inadvertently mentioned that Section 144C would apply from AY 2010-11 onwards. It is now clarified that section 144C is applicable to any order which proposes to make variation in income or loss returned by an eligible assessee, on or after 1st October, 2009 irrespective of the assessment year to which it pertains. Amendments to other sections of the Income-tax Act referred to in para 45.3 of the circular no. 5/2010 dated 3rd June, 2010 shall also apply from 1st October, 2009

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BCAJ Admin

Glimpses of Supreme Court Rulings

48 Magnum International Trading Co. (P) Ltd vs. Commissioner of Income Tax, Delhi II

[2023] 454 ITR 141 (SC)

Exports – Special deduction — Section 80 HHC — Amendments made to Section 80-HHC(3) of the 1961 Act vide Finance (No. 2) Act, 1991, substituting Sub-section (3) to Section 80-HHC of the 1961 Act and prescribing a different formula, are applicable with effect from 1st April, 1992 and the amendments do not have a retrospective effect — Profits on sale of shares having been taxed as profits and gains of business should be treated as income from business for computation under clause (b) to section 80HHC(3) and should also be included in the total turnover — Surplus funds when deposited in bank or otherwise to earn interest are not taxable under head income from business and could not be considered for computation of deduction under section 80HHC.

Before the Supreme Court, the question raised pertained to the computation of deduction under Section 80-HHC of the Income-tax Act, 1961, as applicable to the aforesaid assessment years 1989-90, 1990-01 and 1991-92.

The Supreme Court noted that in the assessment year 1989-1990, the Assessing Officer had excluded the interest income of ₹1,03,28,913 and income from the sale of shares of ₹1,15,52,953 while computing the deduction under Section 80-HHC of the Act in terms of the proportionality formula prescribed under Sub-section (b) to Section 80-HHC(3) of the Act.

The Supreme Court observed that in P R Prabhakar vs. Commissioner of Income Tax, Coimbatore [2006] 284 ITR 548 (SC) it has been held that the amendments made to Section 80-HHC(3) of the Act vide Finance (No. 2) Act, 1991, substituting sub-section (3) to Section 80-HHC of the Act and prescribing a different formula, were applicable with effect from 01.04.1992. The amendments did not have a retrospective effect.

According to the Supreme Court, on the question of treatment/ head of income from the sale of shares, the Assessing Officer has contradicted himself. In the assessment order, after a detailed discussion, on the one hand, it had been held that income from the sale of shares was income from ‘profits and gains of business or profession’, which was not taxable as ‘income from capital gains’, yet for the purpose of computation of deduction under Section 80-HHC(3) of the Act, income from sale of shares had not been treated as ‘income from business’.

In view of the finding, as recorded by the Assessing Officer, on the head under which income from sale of shares was taxable, which finding has attained finality, the Supreme Court had no difficulty in accepting the plea and stand of the Assessee, that income from the sale of shares should be treated as ‘income from business’ for computation of deduction under Clause (b) to Section 80-HHC(3) of the Act.

The Supreme Court clarified that, once the income from the sale of shares is to be included under the head ‘income from business’, the amount will also be included in the total turnover of the business.

With regard to interest income, the Supreme Court agreed with the stand of the Revenue that this income should be taxed as ‘income from other sources’. The Supreme Court noted that the Commissioner of Income Tax (Appeals) had reversed the findings given by the Assessing Officer on the ground that the surplus funds had been utilised for earning interest income. He held that surplus funds were ‘transitory surplus funds’ and utilisation of the same for earning interest income cannot take away the character of ‘business income’ from such interest. According to the Supreme Court, this finding is fallacious and wrong. The surplus funds, when deposited in a bank or otherwise to earn interest, are not taxable under the head ‘income from business’, but under the head ‘income from other sources’. This income does not have a direct nexus nor is earned by way of business activity. Accordingly, the interest income is not to be treated as ‘income from business’ for computation of the deduction in terms of Clause (b) to Section 80-HHC(3) of the Act.

The Supreme Court clarified that the same reasoning would equally apply in the appeals for assessment years 1990-1991 and 1991-1992, in which years, the issue related to the treatment of interest income is raised, that is, whether it should be taxed under the head ‘income from business’ or under the head ‘income from other sources’. In consonance with its findings recorded above, the interest income earned in the assessment years 1990-1991 and 1991-1992 of R95,83,895 and R1,18,56,913 respectively, would be taxable under the head ‘income from other sources’.

Accordingly, Civil Appeals pertaining to the assessment years 1990-1991 and 1991-1992, were partly allowed.

49 ACIT, Surat vs. Kantilal Exports, Surat

[2023] 454 ITR 112 (SC)

Unexplained expenditure — Section 69C — ITAT found that the Assessee was maintaining the books of account outside the regular books — Addition upheld based on the consumption shown in the audit report which was later explained to be a typographical error by the Chartered Accountant — Reversal of this finding by the High Court solely based on the Statements filed before the ITAT for the first time is not proper.

The Assessing Officer made additions of ₹17,15,00,000 as unexplained expenditure under Section 69C of the Act taking into consideration the actual consumption of diamonds as 4,30,701.14 carats as mentioned in the audit report and after considering the consistent trend on yield which was found to be between 10-18 per cent. The Assessing Officer also considered the alternative prayer made by the Assessee on claiming deductions as expenditure under Section 80HHC. The CIT (Appeals) reversed the addition. The ITAT, on appreciation of the entire material on record and after taking into consideration the remand order which was necessitated due to the affidavits filed before the ITAT of the Typist and the Chartered Accountant, reversed the order passed by the CIT (Appeals) and restored the Assessment Order by upholding the addition of ₹17,50,00,000 as unexplained expenditure under Section 69C of the Act. The High Court set aside the order passed by the ITAT solely relying upon the two affidavits – one of the Typist and another of the Chartered Accountant and accepted the submission on behalf of the Assessee that there was a typographical error in the audit report in which the consumption was shown at 4,30,701.14 carats and that the actual consumption was 2,90,701.14 carats.

The Supreme Court after going through the findings recorded by the Assessing Officer, CIT (Appeals) as well as the ITAT observed that before the Assessing Officer, though it was the specific case on behalf of the Assessee that the figure of ₹4,30,701.10 was a typing mistake, except the statement of the Assessee, no further material was produced before the Assessing Officer. Therefore, the Assessing Officer proceeded further with the assessment taking into consumption of 4,30,701.14 carats. Thereafter, considering the figure of yield in different assessment years, the Assessing Officer came to the conclusion that the percentage of the yield would range between 10-18 per cent. Thereafter, the Assessing Officer specifically gave the finding that taking into consideration the figures on record for the relevant year under consideration, the yield would come to 24 per cent. Therefore, taking into consideration the average yield in the last assessment years, the Assessing Officer treated the same as unexplained income and made the additions of ₹17,50,00,000 under Section 69C. The ITAT has concurred with the said findings. Solely relying upon the statements of the Typist and the Chartered Accountant, the High Court had reversed the findings of the Assessing Officer as well as the ITAT. According to the Supreme Court, the High Court had not properly appreciated and considered the fact that the affidavits were filed for the first time before the ITAT. The High Court had also not at all considered the conduct on the part of the Assessee, which came to be considered in detail by the ITAT in its order. It was found that there had been a search in the case of the Assessee and its group concern on 7th January, 1999 which was concluded on 23rd March, 1999 and during the course of the search, duplicate cash book, ledger and other books showing the unaccounted manufacturing and trading arrived at by the Assessee in diamonds were found. The ITAT had also noted that a huge addition was made in the case of Assessee’s group in the block assessment on the basis of the books so found. Therefore, it was found that the Assessee was maintaining the books of accounts outside the regular books. The aforesaid had not at all been considered by the High Court while passing the impugned order.

In view of the above and for the reasons stated above, the Supreme Court held that the impugned judgment and order passed by the High Court was unsustainable and the same deserved to be quashed and set aside and was, accordingly, quashed and set aside. The orders passed by the ITAT as well as the Assessment Order were restored.

The Appeal was, accordingly, allowed.

50 PCIT vs. R. F. Nangrani HUF

[2023] 454 ITR 426 (SC)

Capital Gains — Amount received by the assessee on retirement from the firm — Amounts received from the incoming partners — Matter remanded for consideration.

The assessee was a partner in a firm. It retired from partnership firm on 14th August, 2008. When it retired, it received a sum of ₹15 crore from the partnership firm M/s Landmark Developments. It purported to be in full and final settlement of its right, title and interest as a partner. The assessee was having 50 per cent share in the firm. The other 50 per cent was being held by two other partners who had a 25 per cent share each.

According to the Assessing Officer, the consideration for payment of ₹15 crore received by the assessee was brought in by three incoming partners. The entire consideration paid accordingly, was debited to the account of the new partners. The Assessing Officer sought to bring the amount of ₹14,15,61,370 to tax. This was after deducting the amount of ₹84,38,630 which stood to the credit of the capital account of the assessee.

This order came to be upheld by the Commissioner of Income Tax (Appeals).

However, the Income Tax Appellate Tribunal allowed the appeal of the assessee. ITAT purported to follow the order passed by the jurisdictional High Court.

In further appeal, the High Court did not find favour with the contentions of the Revenue.

Before the Supreme Court, the Revenue contended that there was no basis for fixing the payment of an ad hoc amount of ₹15 crore to the Assessee. It was only on mutual understanding and after considering the 15-year association of Assessee with the firm and also future expected profit, the Assessee had relinquished his rights and shares in favour of continuing partners (including new partners entered on the date of retirement deed) and has received ₹15 crore as full and final settlement of right, title interest in excess of the amount standing to the credit of the capital account of the assessee.

According to the assessee, though the amount may appear to be in excess of the share standing to the credit of the capital account of the assessee, the amount in excess was attributable to the goodwill. This was subject matter of decisions of the Supreme Court and since goodwill under the law as it stood was to be taken into consideration in determining the share of the retiring partner, no part of the amount received by the assessee was exigible to tax.

According to the Supreme Court, it did not find any discussion in the order of the High Court on any submission on the lines which had been addressed before it. The Supreme Court was therefore of the view that the matter should, therefore, be reconsidered by the High Court with reference to the facts as were not in dispute and the law which governed the field. The Supreme Court allowed the appeal, setting aside the order of the High Court.

BCAJ Admin

Section 263: Revision — Erroneous and Prejudicial to the interest of Revenue — Show Cause Notice (SCN) — Issue not raised in SCN — No opportunity provided — Order cannot be erroneous.

21 Pr. Commissioner of Income Tax – 10 vs. Nilkanth Tech Park Pvt. Ltd [Income Tax Appeal No. 807 of 2018;
Date of Order: 4th October, 2023 (Bom.) (HC)]

Section 263: Revision — Erroneous and Prejudicial to the interest of Revenue — Show Cause Notice (SCN) — Issue not raised in SCN — No opportunity provided — Order cannot be erroneous.

The respondent / assessee was engaged in the business of manufacturing chemicals. The assessee filed a Return of Income for Assessment Year 2009–10 on 29th September, 2009, declaring a total income at the loss of ₹4,88,18,926. The assessment was completed under Section 143(3) of the Act, and an assessment order dated 17th November, 2011, came to be passed.

Thereafter, CIT issued a Show Cause Notice (SCN) dated 4th March, 2014, under Section 263 of the Act, calling upon the assessee to show cause as to why the assessment made by the Assessing Officer (AO) should not be cancelled / set aside to the extent as mentioned in the notice. The issue raised was in regards to share trading loss applicability of Explanation to Section 73 of the Act.

The assessee replied to the SCN, and CIT rejected the submissions of the assessee and concluded that the order passed by the AO was erroneous and prejudicial to the interest of the assessee. CIT set aside the assessment order and directed the AO to pass the assessment order afresh by applying the provisions of Section 45(2) of the Act to the conversion of shares from investments or capital assets to stock-in-trade. The loss was directed to be treated as a speculation loss. The order passed by CIT under Section 263 of the Act was challenged before the Income Tax Appellate Tribunal (ITAT). Various grounds were taken before the ITAT. Apart from the ground that CIT erred in applying provisions of explanation to Section 73 of the Act and thereby, treating the loss as speculative, it was also urged that CIT erred in passing the order under Section 263 of the Act on the issue of Section 45(2) of the Act and treating loss as capital loss without raising the issue in the SCN. Assessee also urged that the order of CIT was a mere change of opinion and hence, erroneous.

The ITAT, after considering the submissions, by an order dated 19th May, 2017, set aside the order of CIT for various reasons, but one of the primary grounds for interfering was that the twin conditions for exercising jurisdiction under Section 263 of the Act, viz., order of the AO being erroneous and that was prejudicial to the interest of Revenue being conjunctive, have not been met. Further, in the notice, there was not even a reference to Section 45(2) of the Act. Thus, in the SCN, there is no discussion or even reference to Section 45(2) of the Act, and the assessee has not been given an opportunity to explain why the provisions of Section 45(2) of the Act should not be applied to the conversion of shares from investment or capital asset to stock-in-trade.

The Commissioner may call for or examine the record of any proceeding if he considers that any order passed therein by the AO is erroneous in so far as it is prejudicial to the interests of the Revenue. Once he is satisfied that the order passed by the AO is erroneous and it is prejudicial to the interest of Revenue, before he passes any order as the circumstances of the case may justify including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment, an opportunity should be given to assessee of being heard. If there is no reference to provisions of Section 45(2) of the Act in the notice issued under Section 263 of the Act, it is obvious that such an opportunity of being heard has not been given to the assessee. The order passed by the CIT was quashed and set aside.

The Court further observed that the ITAT has proceeded to dispose of the matter on merits and has come to the conclusion that the very same issue of converting the capital asset into stock-in-trade was the subject of a query raised during the assessment proceedings. The ITAT came to the conclusion that the assessment order has been passed by the AO by application of mind and after considering the response of the assessee. Revenue has not disputed the replies that were placed by the assessee before the AO.

A point was raised by the tax department that there is no discussion on this in the assessment order. It is settled law as held in the judgment of this court in Aroni Commercials Ltd vs. Deputy Commissioner of Income Tax – 2(1) [2014] 44 taxmann.com 304 (Bombay) that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the AO, while completing the assessment, it is not necessary that an assessment order should contain reference and / or discussion to disclose its satisfaction in respect of the query raised.

The Hon. Court further relied on the judgment of this court in Commissioner of Income Tax vs. Fine Jewellery (India) Ltd [2015] 372 ITR 303 (Bom).

Accordingly, the appeal was dismissed.

BCAJ Admin

Section 254: Nonspeaking and Cryptic order — No reasons stated by ITAT — Matter remanded to rehear.

20 National Centre For Cell Science vs. Dy. CIT Exemption Circle, Pune

[ITA (L) No. 24310 of 2023;

Date of Order: 11th October, 2023 (Bom.) (HC)]

Section 254: Nonspeaking and Cryptic order — No reasons stated by ITAT — Matter remanded to rehear.

The Hon. Court observed that there is no reason given by the ITAT as to why the Tribunal disagrees with the view of the learned CIT(A) and opines that the amount to be carried forward cannot exceed the unspent amount.

In the circumstances, the matter was remanded to the ITAT to give reasons as to why it has opined that the CIT(A) was not correct in concluding that the amount to be carried forward cannot exceed the unspent amount. The Hon. Court relied on the decision of the Hon’ble Apex Court in Udhavdas Kewalram vs. Commissioner of Income-tax (1967) 66 ITR 462 (SC):

“6. The Tribunal performs a judicial function under the Indian IT Act: it is invested with authority to determine finally all questions of fact. The Tribunal must, in deciding an appeal, consider with due care all the material facts and record its findings on all the contentions raised by the assessee and the CIT in the light of the evidence and the relevant law.

7. The judgment of the Tribunal suffers from a manifest infirmity. The Tribunal has not adjudicated upon the truth of the case of the assessee in the light of the evidence adduced by the assessee in support of his case. The infirmity becomes more pronounced when regard is had to fact that, relying upon the documentary evidence tendered by the assessee, the AAC had accepted the claim of the assessee relating to the sale of Gopi Bai’s ornaments. The Tribunal was undoubtedly competent to disagree with the view of the AAC. But in proceeding to do so, the Tribunal had to act judicially, i.e. to consider all the evidence in favour of and against the assessee. An order recorded on a review of only a part of the evidence and ignoring the remaining evidence cannot be regarded as conclusively determining the questions of fact raised before the Tribunal.”

In view of the above, the impugned order was set aside.

BCAJ Admin

Section 148A — Reopening — Incorrect information — Non-application of mind by Assessing Officer — Notice u/s. 148A(b) as well order u/s. 148A(d) bad in law.

19 Narendra Kumar Shah vs. The ACIT Circle – 42 (2)(1)

[WP No. 2558 of 2023;

Date of Order: 10th October, 2023 (Bom.) (HC);

A.Y.: 2019–2020]

Section 148A — Reopening — Incorrect information — Non-application of mind by Assessing Officer — Notice u/s. 148A(b) as well order u/s. 148A(d) bad in law.

Petitioner is an individual assessed on income from salary, house property and other sources. Petitioner filed ROI on 29th November, 2019, for Assessment Year 2019–2020. The return was processed and an order dated 26th February, 2020, was passed under section 143(1) of the Act. Subsequently, Petitioner received a notice dated 31st March, 2023, u/s. 148A(b) of the Act alleging that there was information which suggests that income chargeable to tax for Assessment Year 2019–2020 has escaped assessment within the meaning of Section 147 of the Act. The details of the information / enquiry were also enclosed. Petitioner was directed to submit a reply to the notice along with supporting documents on or before
20th April, 2023.

The only information Respondent No. 1 had was that Petitioner, despite having a salary of ₹58,18,452 per annum and having purchased securities worth ₹5,22,000, was a non-filer for the Assessment Year 2019–2020, having failed to file a return of income. In short, the basis for re-opening is despite having a salaried income, Petitioner has not filed a return of income.

The Petitioner, as per the e-Proceedings response acknowledgement responded to the notice dated 26th April, 2023, issued u/s. 148A(b) of the Act and explained that the Return of Income has been filed and the copy Income Tax Returns were also attached.

On 26th April, 2023, the impugned order u/s. 148A(d) of the Act came to be passed rejecting the objections. The Assessing Officer (AO) observed that “the assessee in his reply only stated that he had filed Income Tax Returns for the year under consideration. However, the assessee did not provide his justification for the transactions in question. Thus it is logical to conclude that the assessee has no explanation to offer with respect to the above-mentioned information suggesting escapement of income in the case for Assessment Year 2019–2020.”

The Hon. Court held that the order dated 26th April, 2023, passed under Section 148A(d) of the Act is unsustainable. This is because the notice under Section 148A(b) of the Act does not call upon Petitioner to provide any justification for any transaction in question. The entire basis for issuing the notice under Section 148A(b) of the Act was that Petitioner was a non-filer for Assessment Year 2019–2020 as he had failed to file the Return of Income, and therefore, the income from salary and purchase of securities have not been declared / offered for taxation. But the fact is, Petitioner had filed his Return of Income and had also paid a total tax of ₹18,36,575 and had also claimed a refund of ₹1,27,100. Therefore, the order under Section 148A(d) of the Act, passed on 26th April, 2023, was quashed and set aside. Consequently, the notice issued under Section 148A(b) of the Act, dated 26th April, 2023, was quashed and set aside.

The Court further observed that even the notice under Section 148A(b) of the Act was unjustified. This is because the AO, before issuing the notice, was bound to at least verify or enquire following the information that was received in accordance with the Risk Management Strategy. The Hon. Court referred to the guidelines for issuance of notice under Section 148 of the Act bearing F. No. 299/10/2022-Dir(Inv.III)/611 dated 1st August, 2022, paragraph 2.1 (vi) and (vii) and the instruction regarding the uploading of data on functionalities / portal of the Income Tax Department bearing F. No. 299/10/2022-Dir(Inv. III)/647 dated 22nd August, 2022, paragraphs 3 and 4.

The court observed that if the AO had only verified in the portal of the assessee before initiating proceedings, particularly when he had the PAN number with him, AO would have realised that not only has Petitioner filed the Return of Income, but also the return has been processed and an order dated 26th February, 2020, under Section 143(1) of the Act had been passed. Therefore, the notice issued under Section 148A(b) of the Act also has to be quashed and set aside.

BCAJ Admin

Recovery of tax — High-pitched assessment — Stay of recovery — Appeals not disposed of for a long time — Assessee is entitled to stay of recovery proceedings.

57 Jankalyan Vinimay Pvt Ltd vs. DCIT

[2023] 455 ITR 456 (Cal.)

A.Ys.: 2011–12, 2012–13 and 2016–17;

Date of Order: 7th February, 2023

S. 220(6) of ITA 1961

Recovery of tax — High-pitched assessment — Stay of recovery — Appeals not disposed of for a long time — Assessee is entitled to stay of recovery proceedings.

For the A.Ys. 2011–12, 2012–13 and 2016–17 high-pitched assessments were completed in the year 2017–18. Well within the period of limitation, the assessee filed the appeals before the Commissioner (Appeals) and the appeals have been pending since 2018. The Assessing Officer rejected the stay application u/s. 220(6) of the Income-tax Act, 1961 by communication dated 8th December, 2022.

Assessee filed writ petitions challenging the orders of the Assessing Officer rejecting the application for stay. Allowing the writ petition a Division Bench of the Calcutta High Court held as under:

“Since the appeals were filed in 2018 and the stay applications filed before the Deputy Commissioner during the year 2018 followed by subsequent reminders, were rejected only on 8th December, 2022, and the assessment orders were not given effect to date, there was to be a direction that the appeals filed before the Commissioner (Appeals) be disposed of at an early date and until then, the Department was not to take any coercive action against the assessee for recovery of the Income-tax, which had been assessed.”

BCAJ Admin

Reassessment — Notice after three years — Limitation — Capital gains — Order for issue of notice without considering reply filed by assessee to initial notice —Words “income chargeable to tax” found in section 149 must be read in terms of “income” as arising out of “capital gains” as provided u/s. 48 in the assessee’s case — Notice barred by limitation — Order and notice set aside.

56 SANATH KUMAR MURALI vs. ITO

[2023] 455 ITR 370 (Kar)

A.Y.: 2016–17; Date of Order: 24th May 2023

Ss. 48, 147, 148, 148A(b), 148A(d) and 149 of ITA 1961

Reassessment — Notice after three years — Limitation — Capital gains — Order for issue of notice without considering reply filed by assessee to initial notice —Words “income chargeable to tax” found in section 149 must be read in terms of “income” as arising out of “capital gains” as provided u/s. 48 in the assessee’s case — Notice barred by limitation — Order and notice set aside.

On 3rd March, 2023, the notice u/s. 148A(b) of the Income-tax Act, 1961 came to be issued to the petitioner stating that information was received which suggested that income chargeable to tax for the A.Y. 2016–17 has escaped assessment within the meaning of section 147, detailing the information along with supporting documents. The information was that as per the TDS statement u/s. 194-IA, during the relevant year the assessee had sold an immovable property for a consideration of ₹55,77,700 which has escaped assessment.

The assessee-petitioner filed a reply to the said notice dated 16th March, 2023, in which details were laid out, setting out the sale consideration relating to the sale deed of 22nd November, 2015, as ₹55,77,700 and also furnishing details of the sale deed by virtue of which the petitioner has purchased the property on 24th September, 2011, for a consideration of ₹15,91,735 (cost of acquisition). The assessee also worked out the long-term capital gain at ₹33,85,769. It was submitted that, as the income escaping assessment did not exceed rupees fifty lakh, in terms of section 149(1)(b) of the Income-tax Act, the notice u/s. 148 could not be issued. However, the Assessing Officer rejected the assessee’s submissions and on 21st March, 2023, passed order u/s. 148A(d) and also issued notice u/s. 148 dated 21st March, 2023.

The assessee filed a writ petition and challenged the order and the notice. The Karnataka High Court allowed the writ petition and held as under:

“i) When the procedure is followed culminating in an order passed u/s. 148A(d) of the Income-tax Act, 1961, the authority is required to apply his mind and consider the reply of the assessee to the show-cause notice u/s. 148A(b) and pass a considered order. The words used in section 149(1)(b) are “income chargeable to tax” which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more for that year. The income chargeable under the head “Capital gains” which would arise in case of a sale transaction is as provided u/s. 48, which provides that income chargeable under the head “Capital gains” shall be computed by deducting from the full value of the consideration, the cost of acquisition and in the event the property purchased has been held for a period beyond three years in terms of the second proviso to section 48 the words, “cost of acquisition” are to be substituted by the words, “indexed cost of acquisition”.

ii) The words found in section 149 “income chargeable to tax” must be read in terms of “income” as arising out of the “capital gains” as provided u/s. 48 and this is the only manner of understanding the words, “income chargeable to tax” u/s. 149(1)(b). Section 48 provides that the entirety of the sale consideration does not constitute “income”. The Memorandum Explaining the Provisions of Finance Act, 2021 does not in any way lead to a different interpretation of the words, “income chargeable to tax”. The words used u/s. 149 for the purpose of the extended time limit is to be interpreted in terms of the plain wording of section 149 and cannot be construed differently while relying on any executive instruction.

iii) The Assessing Officer had not applied his mind to the reply filed by the assessee to the show-cause notice u/s. 148A(b) nor noticed the legal position while deciding the application of the extended period u/s. 149(1)(b) which was pointed out by the assessee in its reply. There is a bar prohibiting the issuance of notice u/s. 148 of the Income-tax Act, 1961 for reopening the assessment u/s. 147 if three years have elapsed from the end of the relevant assessment year unless the case falls under clause (b). Accordingly, no notice u/s. 148 could be issued after three years from the end of the A.Y. 2016-17, and this is subject to the exception of an extended period of limitation of three years, but not more than ten years from the end of the relevant assessment year, if the Assessing Officer had material which would reveal that “the income chargeable to tax” which has escaped the assessment amounted to or was likely to amount to R50 lakhs or more. It could not be stated that since the stage at which the notice was issued was at a premature stage, the entirety of the sale consideration ought to be taken note of.

iv) The order passed u/s. 148A(d) and the notice issued u/s. 148 for the A.Y. 2016-17 were set aside.”

BCAJ Admin

Reassessment — Notice — New procedure — Initial notice — Assessee’s explanation on the ground set down in initial notice accepted — Order for the issue of notice based on new ground — Order invalid — Writ — No question of remanding the matter to AO for passing speaking order — Order u/s. 148A(d) and direction of Court (Single Judge) remanding matter to AO set aside.

55 Excel Commodity and Derivative Pvt Ltd vs. UOI

[2023] 455 ITR 341 (Cal)

A.Y.: 2018–19; Date of Order: 29th August, 2022

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

Reassessment — Notice — New procedure — Initial notice — Assessee’s explanation on the ground set down in initial notice accepted — Order for the issue of notice based on new ground — Order invalid — Writ — No question of remanding the matter to AO for passing speaking order — Order u/s. 148A(d) and direction of Court (Single Judge) remanding matter to AO set aside.

On a writ petition challenging the order u/s. 148A(d) of the Income-tax Act, 1961, the Single Judge of the Calcutta High Court held that the order dated 7th April, 2022, was devoid of reasons and without any discussion on the contentions raised by the assessee in its objections to the show-cause notice issued by the Assessing Officer u/s. 148A(b) and quashed the order but remanded the matter back to the Assessing Officer to pass a fresh speaking order.

The Division Bench allowed the appeal filed by the assessee and held as under:

“i) The term “information” in Explanation 1 u/s. 148 of the Income-tax Act, 1961 cannot be lightly resorted to and to give unbridled power to the Department to reopen an assessment. The procedure contemplated u/s. 148A requires the Assessing Officer to consider the reply to the show-cause notice u/s. 148A(b) and thereafter pass a reasoned order u/s. 148A(d). If in the opinion of the Assessing Officer, the information furnished by the assessee in his reply is satisfactory, then nothing more requires to be done. But if the Assessing Officer is of the view that the reply furnished by the assessee is not acceptable, he has to pass a speaking order u/s. 148A(d). Since the Central Board of Direct Taxes noticed that in several cases information made available or the data uploaded by the reporting entities is not fully accurate due to human or technical error it issued a Circular dated 22nd August, 2022, instructing to Departmental officers with regard to the uploading of data on the portal of the Department to effect due verification and opportunity of being heard given to the assessee before initiating proceedings u/s. 148 or 147.

ii) The Assessing Officer had used the information lightly which had resulted in the issuance of notice. The assessee had submitted an explanation to the notice with documents in support of its claim. The Assessing Officer had accepted the explanation given by the assessee that it had not indulged in fictitious derivative transactions and had given up the allegation which had formed the basis of the show-cause notice u/s. 148A(b). Thereafter, he had proceeded on fresh ground alleging that the transaction with some other company was an accommodation entryand passed the order under section 148A(d). The order passed u/s. 148A(d) was not based on the reason for which the notice dated 22nd March, 2022, was issued u/s. 148A(b). Therefore, on that score also, the order u/s. 148A(d) was to be set aside in its entirety without giving any opportunity to reopen the matter on a different issue.

iii) The order was illegal and unsustainable and the necessity to remand the matter to the Assessing Officer did not arise. The order dated 7th April, 2022 u/s. 148A(d) and the direction of the court remanding the matter to the Assessing Officer were set aside. Consequently, no further action could be taken by the Department against the assessee on the issue in question.”

BCAJ Admin

Income — Assessability — Meaning of “Income” — Institution established by State Government to regulate the registration of nurses and maintain standards of professionalism — One-time grant in aid received by the institution to strengthen it — Not assessable as income.

54 H. P. Nursing Registration Council vs. Principal CIT

[2023] 455 ITR 512 (HP)

A.Y.: 2010–11; Date of Order: 25th May, 2022

S. 2(24) of ITA 1961

Income — Assessability — Meaning of “Income” — Institution established by State Government to regulate the registration of nurses and maintain standards of professionalism — One-time grant in aid received by the institution to strengthen it — Not assessable as income.

The assessee was formed under the Himachal Pradesh Nursing Registration Council Act, 1977 and was substantially funded by the Government. The assessee received ₹1 crore from the Government of India under the scheme of upgradation/strengthening of nursing services under human resources for health. In the return of income, the assessee declared NIL income and claimed exemption u/s. 11(1)(a) of the Act. In the scrutiny assessment, the Assessing Officer treated the grant in aid as the income of the assessee u/s. 2(24)(iia) of the Act. The Assessing Officer concluded that the assessee was not entitled to any exemption as its registration u/s. 12AA was effective from 01.04.2010 relevant to A.Y. 2011-12 and the assessee also did not qualify to be entitled to exemption u/s. 10(23C)(iiiab) of the Act.

The Commissioner(Appeals) and the Tribunal upheld the decision of the Assessing Officer.

The Himachal Pradesh High Court allowed the appeal filed by the assessee and held as under:

“i) The term “income” as defined in section 2(24) of the Income-tax Act, 1961, is inclusive of various heads mentioned therein. It was only by way of the amendment, made effective from 1st April, 2016, that such monetary release by a State or the Central Government has been incorporated as income by way of section 2(24)(xviii). Even in this clause exemption has been carved out in respect of subsidy or grant by the Central Government for the purpose of corpus of a trust or institution established by the Central Government or State Government, as the case may be. This clearly illustrates the legislative intent that prior to 1st April, 2016, this type of grant was not specifically included as income. The later inclusion of such a provision will not have a retrospective application. Even by way of the amendment, exemption is available to such institutions.

ii) Since the assessee received only a one-time grant with a specific purpose which nowhere suggested scope of profit generation or revenue for the assessee, the amount received by the assessee by way of grant-in-aid thus could not be termed to be revenue receipt.”

BCAJ Admin

Document Identification Number (DIN) — Orders from AO — Communication of — Validity — Circular of Board mandating DIN for communications — Circular binding on AO — Order passed in violation of Circular — Not a defect curable u/s. 292B — Communication of such orders not valid.

53 CIT(IT) vs. Brandix Mauritius Holdings Ltd.

[2023] 456 ITR 34 (Del.)

A.Y.: 2011–12; Date of Order: 20th March, 2023

S. 292B of ITA 1961 and CBDT Circular No. 19 of 2019 dated 14th August, 2019

Document Identification Number (DIN) — Orders from AO — Communication of — Validity — Circular of Board mandating DIN for communications — Circular binding on AO — Order passed in violation of Circular — Not a defect curable u/s. 292B — Communication of such orders not valid.

For the A.Y. 2011-12, the final assessment order passed on 15th October, 2019 did not bear the Document Identification Number (DIN). In appeal, the assessee challenged the validity of the assessment order. The Tribunal allowed the appeal of the assessee in view of the CBDT Circular No. 19/2019 dated 14th August, 2019 which specifies the manner in which DIN is required to be generated while communicating any correspondence issued by the Department.

The Delhi High Court dismissed the appeal filed by the Revenue and held as follows:

“i) It is well established that circulars issued by the CBDT in the exercise of its powers u/s. 119 of the Income-tax Act, 1961 are binding on the Department. The CBDT Circular No. 19 of 2019 dated
14th August, 2019 ([2019] 416 ITR (St.) 140) sets out the manner in which the document identification number is required to be generated while communicating a notice, order, summons, letter and any correspondence issued by the Income-tax Department, i.e., the Revenue. Inter alia, the object and purpose of allocating document identification numbers to communications, such as notices, orders, summons, letters or any correspondence emanating from the Revenue is to maintain a proper audit trail. Therefore, the CBDT, in the exercise of its powers, has mandated that no communication shall be issued by any Income-tax authority relating to assessment, appeals, orders, statutory or otherwise, exemptions, enquiry, investigation, verification of information, penalty, prosecution, rectification or approval, to the assessee or any other person, on or after 1st October, 2019, unless it is allotted a computer-generated document identification number. Further, there is a specific requirement under the 2019 circular to quote the document identification number in the body of any such communication. The 2019 circular also sets out certain circumstances in which exceptions can be made. These circumstances are categorically referred to in paragraph 3 of the 2019 circular.

ii) The object and purpose of the issuance of the 2019 circular, inter alia, is to create an audit trail. Therefore, the communication relating to assessments, appeals, orders, etcetera which are mentioned in paragraph 2 of the 2019 circular, albeit without a document identification number, can have no standing in law, having regard to the provisions of paragraph 4 of the 2019 circular. Recourse to section 292B of the Act, is untenable, having regard to the phraseology used in paragraph 4 of the 2019 circular.

iii) The final assessment order was passed by the Assessing Officer on 15th October, 2019, u/s. 147 read with sections 144C(13) and 143(3) of the Act. Concededly, the final assessment order did not bear a document identification number. There was nothing on record to show that the Revenue took steps to demonstrate before the Tribunal that there were exceptional circumstances, as referred to in paragraph 3 of the 2019 circular, which would sustain the communication of the final assessment order manually, albeit, without the document identification number.

iv) Given this situation, clearly paragraph 4 of the 2019 circular would apply. Paragraph 4 of the 2019 circular, decidedly provides that any communication which is not in conformity with paragraphs 2 and 3 shall be treated as invalid and shall be deemed to have never been issued. The phraseology of paragraph 4 of the 2019 circular fairly puts such communication, which includes communication of assessment orders, in the category of communications which are non-est in law. The Tribunal was right in holding that the final assessment order was not valid.”

BCAJ Admin

Appeal to Appellate Tribunal — Scope of proceedings — Appeal by the assessee against order affirming disallowance in part — No cross objections filed by Department — Tribunal remanding of matter in entirety — Prejudicial to the assessee — Tribunal directed to limit its adjudication to issues raised by assessees.

52 Kausalya Agro Farms and Developers Pvt Ltd vs. Dy. CIT

[2023] 455 ITR 432 (Telangana)

A.Ys.: 2012–13 to 2014–15, 2016–17 to 2018–19;

Date of Order: 2nd February, 2023

Ss. 36(1)(iii), 147, 254 of ITA 1961

Appeal to Appellate Tribunal — Scope of proceedings — Appeal by the assessee against order affirming disallowance in part — No cross objections filed by Department — Tribunal remanding of matter in entirety — Prejudicial to the assessee — Tribunal directed to limit its adjudication to issues raised by assessees.

On appeals before the Tribunal against the order of the Commissioner (Appeals) partly affirming the disallowance of interest expenditure u/s. 36(1)(iii) of the Income-tax Act, 1961 and on the issue of validity of reopening of reassessment u/s. 147, the Tribunal remanded the matter in entirety to the Assessing Officer to examine afresh in the light of all the evidence of the assessees’ fund position and the issue as to whether the corresponding borrowings claimed to have carried no interest involving plotted land buyers.

The Telangana High Court allowed the appeal filed by the assessee and held as under:

“i) The Tribunal was required to adjudicate the appeals on the grounds which were raised before it by the assessees. Remanding the matter in its entirety to the Assessing Officer had caused serious prejudice to the assessees in as much as even those reliefs which had been granted by the Commissioner (Appeals) stood nullified in view of the Tribunal’s direction to the Assessing Officer to re-do the whole exercise in its entirety. No cross-appeals have been filed by the Department against the order of the Commissioner (Appeals) granting substantial relief to the assessees.

ii) The common order of the Tribunal u/s. 254 was to be set aside and the Tribunal directed to hear the appeals before it on the limited grounds urged by the assessee, namely, the disallowance of interest expenditure u/s. 36(1)(iii) to the extent disallowed by the Commissioner (Appeals) and the validity of the reassessment proceedings u/s. 147.”

BCAJ Admin

Direct Taxes

DTAA between India and Estonia notified: Notification No. 27/2012 dated 25th July, 2012

The Double Tax Avoidance Agreement signed between Estonia and India on 19th September, 2011 has been notified to be entered into force on 20th June, 2012. The treaty shall apply from 1st April, 2013 in India.

DTAA between India and Lithuania notified : Notification No. 28/2012 dated 25th July, 2012

The Double Tax Avoidance Agreement signed between Lithuania and India on 26th July, 2011 has been notified to be entered into force on 10th July, 2012. The treaty shall apply from 1st April, 2013 in India.

Income tax (Eighth amendment) Rules, 2012 – Amendment in Rule 12 and substitution of ITR 7 – Notification no- 29/2012 [F.No. 142/31/2011-TPL] dated 26th July, 2012

Due date of filing returns for assessee required to file their return by 31st July extended till 31st August 2012 – Direct Tax Order F.No. 225-163-2012-ITA.II dated 31st July, 2012

Disallowance of expenses u/s 37(1) incurred in providing freebees to Medical Practitioner by pharmaceutical and allied health sector Industry – Circular No. 5/2012 dated 1st August, 2012

The Medical Council of India (Governing Body) has imposed a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. It has been clarified by the Board that in cases where such freebees are provided, such expenses would be disallowed as per the provisions of section 37(1) read with its Explanation. Since such expenses would be covered under “prohibited by any law”, and cannot be claimed as business expenses. Further, the AOs of such medical practitioners and their professional associations have been directed to look into and consider the value of such freebees as either business income or income from other sources as the case may be.

Mandatory E-filing of return of income by representative assessees of non-residents and in the case of private discretionary trusts relaxed for assessment year 2012-13 – Circular No. 6/2012 [F.No. 133/44/2012-SO (TPL)] , dated 3rd August, 2012

It would not be mandatory for agents of nonresidents, within the meaning of section 160(1) (i) of the Income-tax Act and for ‘private discretionary trusts’ to electronically furnish the return of income for assessment year 2012-13, though its total income exceeds Rs 10 lakh.

Tax Information Exchange Agreement (TIEA) entered with Guernsey – Notification No. 30 dated 9th August 2012 – India has entered into a TIEA with Guernsey for sharing of information with respect to taxes. The Agreement shall enter into force from 11th June, 2012.

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BCAJ Admin

Direct Taxes

Income tax (12th amendment) Rules, 2012 – Insertion of Rule 21AB and Forms 10FA and 10FB- Notification no- 39/2012 [F.No. 142/31/2011-TPL] dated 17th September, 2012

The Rule prescribes the particulars that must be included in a Tax Residency Certificate, which a nonresident would obtain, from the Government of the country or the specified territory of which he is a resident. The Rule also provides that a person being a resident in India, shall, for obtaining a certificate of residence for the purposes of an agreement referred to in section 90 and section 90A, make an application in Form No. 10FA to the Assessing Officer and the Assessing Officer shall issue a certificate of residence in Form No. 10FB. The Rule will come into force from 1st April, 2013.

Income tax (13th Amendment) Rules, 2012 – Debt securities issued by infrastructure finance companies which are registered with RBI are now included in the list of eligible investments u/s. 11(5) for Charitable trusts – Notification no 40 dated 20th September 2012

Income tax (14th Amendment) Rules, 2012 – Notification no 42 dated 4th October, 2012

In case of search and requisition, specified categories of assessees have been notified wherein assessment/ reassessment notice would not be issued by AO for six assessment years immediately preceding the year for which assessment is in progress as prescribed in these rules.

Annual detailed Circular on Deduction of tax from Salaries during the Financial Year 2012-13 – Circular No. 8 of 2012 [F.No. 275-192-2012-IT(B)] dated 5th October, 2012

TDS on payment of gas transportation charges – Circular No 9/2012 dated 17th October, 2012

The Board has clarified that so long, as it can be established that the transportation of the gas is furtherance to the actual sale of natural gas by the seller, TDS provisions will not be triggered since essentially it is ‘contract of sale’ and not ‘works contract’. In case a third party transports gas, TDS would apply u/s. 194C of the Act.

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BCAJ Admin

Direct Taxes

Explanatory Notes to the Provisions of the Finance Act, 2013 – CIRCULAR No. 3/2014 [F.NO.142/24/2013-TPL], dated 24-01-2014

The CBDT has issued a press release dated 30-01-2014 to keep in abeyance the change in the procedure for PAN allotment, which was introduced vide Circular No. 11 dated 16-01-2014. In the meantime, the old procedure of PAN application and allotment shall continue.

Relaxation of time limit for filing ITR-V – CIRCULAR No. 4/2014 [F.NO.225/198/2013-ITA. II], dated 10-02-2014

The due date for filing ITR-V form for Assessment years 2009-10, 2010-11 and 2011-12 for returns e-filed within the time allowed u/s. 139 and having refund claims is extended upto 31-03-2014

Clarification regarding disallowance of expenses u/s. 14A of the Act – CIRCULAR No. 5/2014 [F.NO.225/182/2013-ITA. II], dated 11-02-2014

CBDT has clarified that disallowance u/s. 14A shall be attracted in even if the assessee has not earned any exempt income in that particular year.

Clarification regarding scope of additional income tax on distributed income u/s. 115R of the Act – CIRCULAR No. 6/2014 [F.NO.225/182/2013-ITA. II], dated 11-02-2014

CBDT has clarified that receipts by way of redemption/ repurchase of mutual fund units of allotment of bonus units are not subject to levy of additional income tax u/s. 115R (2) of the Act.

Finance Bill 2014, introduced in the Lok Sabha on 17-02-2014

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BCAJ Admin

Direct Taxes

DTAA between India and Singapore amended — Notification No. 47/2011, dated 1-9-2011.

DTAA between India and Taipei notified — Notification No. 48/2011, dated 2-9-2011.

Procedure for regulating refund of excess amount of TDS deducted and/or paid — Circular No. 6/2011, dated 24-8-2011.

The CBDT vide Circular No. 2/2011, dated 27-4-2011 had notified the procedure to claim excess amount of TDS deducted/paid from the Assessing Officer (TDS) wherein a time limit of two years from the end of the financial year in which such tax was deducted was laid down. This condition is relaxed for the refund claims pertaining to the period up to 31-3-2009 which may now be submitted to the Assessing Officer (TDS) up to 31-12-2012.

Long-Term Infrastructure Bonds notified — Notification No. 50/2011, dated 9-9-2011.

For the purpose of section 80CCF, CBDT has notified conditions to qualify as Long-Term Infrastructure Bonds, namely:

They shall be issued by IFCI, LIC, IDFC, IIFC and NBFC as classified by RBI as Infrastructure Finance Company during financial year 2011- 2012.
The volume of issuance would be limited to 25% of the additional infrastructure investment (as specified) made by the issuer company during financial year 2011-2012.
Tenure of the Bonds would be ten years with a lock-in period of 5 years. Post that the investor would have the option to sell in the secondary market or opt for buyback scheme as mentioned in the offer document at the time of issue by the issuer. Loan, lien, etc. available post lock-in period.

PAN submission during investment is mandatory.

The yields and the end use of the proceeds have been specified.

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BCAJ Admin

Appeal to Appellate Tribunal — Ex-parte order — Powers of Tribunal — Tribunal has the power to set aside ex-parte order — Matter remanded to the Tribunal to decide the appeal on merits.

51 Cement Corporation of India Ltd vs. ACIT

[2023] 456 ITR 61 (Del.)

A.Y.: 2011–12; Date of Order: 6th February, 2023

S. 254 of ITA 1961 and Rule 24 of Income-tax Rules, 1962

Appeal to Appellate Tribunal — Ex-parte order — Powers of Tribunal — Tribunal has the power to set aside ex-parte order — Matter remanded to the Tribunal to decide the appeal on merits.

By an order dated 24th January, 2018, the Tribunal dismissed the appeal filed by the assessee for non-appearance. The order was received by the assessee on 5th February, 2018. On 24th September, 2018, the assessee filed a miscellaneous application before the Tribunal praying for recalling the order dated 24th January, 2018 and requesting for hearing the appeal. The reason for non-appearance before the Tribunal was that the notice of hearing issued by the Tribunal was misplaced by the authorised officer of the assessee company. The assessee was unaware that its appeal had been dismissed and came to know about it only on 5th February, 2018. Further, the inadvertent delay in filing the miscellaneous application was due to the fact that the concerned employees were transferred to a plant outside Delhi and some of them even retired during the relevant period. The assessee thus submitted there was sufficient cause for delay.

The miscellaneous application was dismissed by the Tribunal on 7th September, 2022 on the ground that the time limit of six months for filing the miscellaneous application as provided by section 254(2) of the Income-tax Act, 1961, expired on 31st July, 2018. In the absence of power with the Tribunal to condone the delay in filing the miscellaneous application, the miscellaneous application came to be dismissed on the ground of limitation.

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

“i) According to rule 24 of the Income-tax (Appellate Tribunal) Rules, 1963, if on the date fixed for hearing by the Tribunal, or on any other date to which the hearing is adjourned, the appellant does not appear in person or through an authorized representative, when the appeal is called out for hearing, the Tribunal may dispose of the appeal on the merits or otherwise, after hearing the respondent. The proviso appended to the rule indicates that where an appeal has been disposed of on the merits, and the appellant appears thereafter, the Tribunal shall set aside the ex parte order and restore the appeal, if it is satisfied that there was sufficient cause for his non-appearance. Although in the main part of rule 24, the expression used is “may”, when read with the proviso appended thereto, it leads to the conclusion that if the Tribunal chooses to dispose of the appeal on the merits or otherwise, after hearing the respondent in the absence of the appellant, and the appellant, thereafter, appears and shows sufficient cause for not appearing on the date when the appeal is disposed of, the Tribunal is obliged, in law, to set aside the order passed and restore the appeal.

ii) Rule 24 of the 1963 Rules which does not have the impediment of limitation, as is prescribed u/s. 254 of the Income-tax Act, 1961. Under section 254, the Tribunal is also vested with incidental and ancillary powers which can be exercised in such situations such as in the assessee’s case. The issue involved in the appeal before the Tribunal which deserved a hearing on the merits, for the reasons that while there was a delay, the assessee had furnished reasons for explaining the delay that the notice of hearing issued by the Tribunal for the hearing on 24th January, 2018, was misplaced, and did not reach the concerned officer, that it was unaware of the passing of the dismissal order dated 24th January, 2018, and came to know about it only on 5th February, 2018, and that the inadvertent delay in filing the miscellaneous application was caused on account of the concerned persons having been temporarily transferred to a plant outside Delhi, and some persons retiring during the relevant period.

iii) The order of the Tribunal was set aside and the matter was remitted to the Tribunal for disposal of the assessee’s appeal on merits.”

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Direct Taxes

44.Extension of time limit for filing ITR V for AY 2010-11 and AY 2011-12 – Notification No 1/2012 under CPR Scheme 2011 dated 23-10-2012

The time limit for filing ITR V forms relating to returns filed electronically for AY 2010-11 (filed during financial year 2011-12) and AY 2011-12 (filed on or after 1 April 11) is extended. These ITR V forms can now be filed upto 31 December 2012 or 120 days from the date of e-filing the return whichever is later.

45.The Capital Gains Account (First Amendment) Scheme, 2012 – Notification no. 44/2012 dated 25-10-2012

Capital Gains Account Scheme, 1988 is amended to extend the benefit to Individuals and HUF, who have earned capital gains on transfer of a residential property and who intend to claim exemption u/s. 54GB of the Act.

46.Specified companies authorised to issue taxfree, secured, redeemable, Non-convertible Bonds during F.Y. 2012-13 – Notification no. 46/2012 dated 06-11-2012

CBDT has notified the companies eligible to issue bonds as prescribed u/s. 10(15) of the Act. Copy of the notification available on www.bcasonline.org.

47.India and United Kingdom have signed a protocol on 30th October, 2012 to amend the India – UK Treaty.

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The CBDT has prescribed a new procedure for the above as under:

For deductions made during the current financial year viz. 2011-12, by companies including banking companies, banks, financial institutions including co-operative societies engaged in banking business, the deductors shall issue TDS certificates generated from the central system of the TIN website which can be downloaded and authenticated using either the digital signature or manual one. For other deductors for the current fiscal this facility is optional viz. they can issue a manual TDS certificate else follow the above procedure.

For deductions made in last year viz. 2010-11, all the deductors have the option of either downloading the Form 16A from the website or issuing a manual one.

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Central Government notifies the National Commodity and Derivatives Exchange Limited, Mumbai as a recognised association for the purposes of clause (e) of the proviso to section 43(5) of the Act with effect from the date of publication of this notification in the Official Gazette – Notification No. 90 dated November 27, 2013.

Last date of payment of the December Quarter Instalment of Advance Tax for the Financial year 2013-14, extended from 15th December 2013 to 17th December 2013 for all the assesses – Order F.No 385 – 8 – 2013-IT(B) dated 13th December 2013.

Central Government has introduced Rajiv Gandhi Equity Savings Scheme, 2013 encourage investment of savings of small investors in the domestic capital market. Investment made in this scheme on or after April 1, 2013, shall be eligible for deduction under section 80CCG of the Act – Notification No. 94 dated 18th December 2013385-8-2013-IT

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Direct Taxes

Wealth tax (1st Amendment) Rules, 2014 – Notification No. 32/2014 dated 23rd June, 2014

Return of Wealth for AY 2014-15 and onwards, is required to be filed in Form BB. No enclosures are required to be filed along with this form. Form BB is to be filed electronically with digital signature. Individuals and HUFs, to whom provisions of section 44AB are not applicable, have an option for AY 2014-15, to file the return in Form BB in paper form. A separate set of Instructions have been issued to guide the assessees file the return of net wealth in the new Form

A Press Release dated 4th July 2014 is issued to provide that all taxpayers are required to update and validate their taxpayer Email ID and Mobile Number on the Income tax website for their e-filing account

Revision of monetary limits for filing of appeals by the Department before Income Tax Appellate Tribunal, High Court and Supreme Court – measures for reducing litigation – Instruction No. 5/2014 dated 10th July 2014 available on www. bcasonline.org

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Direct Taxes

Procedure for response to arrears of demand by assessees and verification and correction of demand by assessing officers – Circular No. 8/2015 dated 14.05.2015

CBDT has laid down detailed procedure to be followed by the assessee on the CPC demand portal when they receive a notice for arrears of demand. It has been provided that the assessee can either

accept the demand and pay it or refund due, if any would be adjusted.

Can partially accept the demand and mention the correct amount and payment thereof.

Can claim that the demand is incorrect and then choose the reasons for the same. Based on the option selected, the assessee needs to furnish additional information like challan details, etc to support its claim.

Option is also available for sorting the matter offline with the assessing officer with the requisite paper trail.

There are guidelines for the Assessing Officer for processing the cases for verification and correction of arrears of demand. A format for the Indemnity bond has also been notified.

No TDS on Corporations established for the welfare and upliftment of ex-service men served for armed forces under Section 10(26BBB) of the Act – Circular No. 7/2015 dated 23rd April 2015

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Direct Taxes

84. New tax returns forms notified – Notification No.- 61/2015
[F.No.142/1/2015-TPL dated 29 July, 2015 – Income tax (Tenth amendment)
Rules, 2015

New forms FORM ITR-3, FORM ITR-4, FORM ITR-5, FORM ITR-6 and FORM ITR-7 have been notified.

85. Due date for filing Return of wealth extended – Circular No. 328 dated 27 July 2015

86.
CBDT has extended the ‘due date’ for filing Return of Income for
assessment year 2015-16 in respect of assesses falling under clause (c)
of explanation 2 of sub-section (1) of section 139 of the Income-tax Act
from 31.7.2015 to 31.8.2015. In view of the same, the ‘due date’ for
filing Return of wealth by such assesses for assessment year 2015-16
also stands extended from 31st July 2015 to 31st August 2015.

87.
Rules 114F, 114G and 114H inserted and Form 61B introduced in respect
of registration of persons, due diligence and maintenance of
information, for matters relating to statement of reportable accounts
-Notification No. 62 [S.O. 2155(E)] dated 7 August 2015 – Income-tax
(11th Amendment) Rules, 2015

88. Rule 126 inserted for providing
method for Computation of period of stay in India in case of seafarers –
Notification No. 70 dated 17 August 2015 – Income-tax (Twelfth
Amendment) Rules, 2015

89. Clarification on grant of
approval and exemption claim for income of universities and educational
institutions u/s. 10(23C)(iv) of the Act- Circular no 14/2015 dated 17
August 2015

CBDT has clarified on issues like scope of
inquiry while granting approval, necessity for registration u/s. 12AA
while seeking approval /claiming exemption u/s. 10(23C) (iv) of the Act,
generation of surplus out of gross receipts, collection of amounts
under different heads of fees from students and impact of extraordinary
powers of the Managing Trustees to appoint, remove or nominate other
trustees in this Circular.

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Direct Taxes

Due date for filing income tax returns extended from 31 August 2015
to 7 September 2015 – Notification no. F No. 225/154/2015/ITA. II dated 2
September 2015

CBDT has revised the monetary limits for Dossier
Cases requiring periodic review and reporting by various tax
authorities to have focused monitoring and rationalising the work load –
Instruction no. 10/2015 dated 16.9.2015

Additional
clarifications have been issued regarding tax compliance for undisclosed
foreign income and assets under The Black Money (Undisclosed Foreign
Income and Assets) and Imposition of Tax Rules, 2015 – Circular no. 15
dated 3 September 2015.

Guidance note issued by CBDT dated
31.08.2015 on implementation of reporting requirements for the US law
called “Foreign Account Tax Compliance Act” (FATCA).

Non-applicability of MAT on FIIs/ FPIs for period prior to 1.4.15 – Instruction No. 9/2015 dated 2.9.15 (reproduced alongside)

A
Committee on Direct Tax Matters chaired by Justice A. P. Shah, was
constituted to examine the issue of applicability of Minimum Alternate
Tax (‘MAT ’) on Flis/FPls for the period prior to 01.04.2015. The
Committee has submitted its final report to the Government on
25.08.2015. The Committee has recommended that section 115JB of the
Income-tax Act, 1961 (‘Act’) may be amended to clarify the
inapplicability of the provisions of section 115JB to FlIs/FPls having
no permanent establishment (PE)/place of business in India. The
Government has accepted the said recommendation and it has been decided
to carry out appropriate amendment in the Act so as to prescribe that
MAT provisions will not be applicable to Flls/FPls not having a place of
business/permanent establishment In India, for the period prior to
01.04.2015.

The field authorities are accordingly advised to
take into consideration the above position and keep in abeyance, for the
time-being, the pending assessment proceedings in cases of Flls/FPls
involving the above issue. They are further advised not to pursue the
recovery of outstanding demands, if any, in such cases.

(Rohit Garg)
Deputy Secretary to the Government of India
F. No. 225/237/2015-ITA -II

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Direct Taxes

Due date for obtaining and filing tax audit report for the assessment year 2014-15 is extended to 30th November, 2014 – Notification No. F.No.133/24/2014-TPL dated 20th August, 2014

CBDT extends the due date for obtaining and filing the tax audit report u/s. 44AB of the Act for non-transfer pricing assessees to 30th November, 2014 since new formats have been issued for tax audit report. It has been clarified, that the tax audit report filed till 24th July, 2014 in the old format will be treated as valid reports.

Committee constituted for deciding on cases covered under the retrospective amendments relation to transfer of assets – Notification No. F.No. 149/141/2014-TPL dated 28th August, 2014

CBDT has passed an order u/s. 119 of the Act constituting a Committee consisting of three members of the CBDT viz. i) Joint Secretary (FT&TR-I), (ii) Joint Secretary (TPLI) and (iii) Commissioner of Income-tax (ITA ).

Any case pertaining to period before 1st April, 2014 wherein the AO feels that income deems to accrue or arise in India through transfer of capital assets in India as covered under the Amendments made u/s. 2 (14), 2(47), 9(1)(i) and section 195, such case would be referred to this Committee subject to conditions prescribed. The AO needs to seek approval from the Committee for any action in this matter. The Committee after giving an opportunity to the assessee, shall endeavor to decide the reference within 60 days of the receipt of the reference in writing, a copy of which would be given to the assessee. The decision of the Committee would be binding on the AO. The AO would proceed in the matter following the directions of the Committee.

CBDT has issued an office memorandum to all the officers instructing them to maintain the schedule of appointment given to the tax payers and not wasting their time by making them wait. – F.N.: DIR(Hqrs)./Ch.DT/20/2013 dated 22nd August, 2014

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Clarification regarding transfer of technical manpower in case of units eligible for deduction u/s. 10A/10AA of the Act applicable to the software industry – Circular No. 14 dated 8th October, 2014

As per the provisions of Section 10A/10AA of the Act read along with Circular no. 12/2014, if upto 20% of technical manpower is transferred from existing unit to new SEZ unit within the first year of commencement of business, it will not be construed as splitting up or reconstruction of an existing business. The upper limit of 20% has been enhanced to 50% of the total technical manpower actually engaged in software development or IT enabled products at the end of the financial year. Alternatively the assessee can also demonstrate that it employed new technical manpower in all its units put together which is at least equal to 50% of the technical manpower of the SEZ unit in the previous year. If either of the two conditions are fulfilled deduction u/s. 10A/10AA of the Act cannot be denied.

A – 12 Point Memorandum has been issued by the CBDT to the assessing officers to ensure a non-adversarial tax regime – F. No. 279/ Misc./52/2014-(ITJ) dated 7th November, 2014 (full text available on www.bcasonline.org)

Erstwhile Bank Term Deposit Scheme,2006 has been revived as Bank Term Deposit (Amendment) Scheme, 2014 effective 13th November, 2014 with the investment limit of Rs. 1,50,000/- u/s. 80C of the Act – Notification No. 63/2014 dated 13th November, 2014

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Cost Inflation Index for Financial year 2015-15 notified as 1081 – Notification No. 60/2015 dated 24th July 2015

Business relationship with auditor clarified under Section 288 of the Act – Notification No. 50 dated 24th June 2015 – Income tax (Ninth Amendment) Rules, 2015

Definition of Accountant is provided in section 288 of the Act,. Rule 51A is inserted , which prescribes the nature of “Business Relationship” for the purposes of sub-clause (viii) of Explanation to section 288(2), which section deals with persons who can act as the Authorised representative of an assessee

i) Sub-clause (viii) provides that a Chartered accountant, holding a valid certificate of practice, may appear as an “authorised representative” before any income tax authority or appellate Tribunal , provided he is not “a person who has business relationship with the assessee of such nature as may be prescribed”.
ii) CBDT now provides that the term “business relationship” shall be construed as any transaction entered into for a commercial purpose.
iii) However, it has excluded commercial transactions in the nature of professional services permitted to be rendered by an auditor, from the ambit of “business relationship”.
iv) Further, it has also excluded commercial transactions entered in the ordinary course of company’s business at arm’s length price, like sale of products or services to the auditor, as customer, by companies engaged in the business of telecommunications, airlines, hospitals and such other similar businesses.

Following Circulars and notifications have been issued in respect of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 and Rules thereunder

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act (Removal of Difficulties) Order, 2015- [Notification No. 56 dated 1st July 2015]

Dates for disclosure of Black Money (Undisclosed Foreign Income and Assets)and Imposition of Tax Act, 2015 (22 of 2015) – [Notification No. 57 dated 1st July 2015]

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015 [Notification No. 58 dated 2nd July 2015]

Explanatory notes on provisions relating to tax compliance for undisclosed foreign income and assets as provided in chapter vi of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 [Circular No.12 dated 2nd July 2015]

Clarifications on Tax Compliance for Undisclosed Foreign Income and Assets [Circular No.13 dated 6th July 2015]

Eligible Institutions with upper limits for issue of tax free secured redeemable non-convertible bonds during the financial year 2015-16 and conditions prescribed – Notification No. 59/2015 dated 6th July 2015

Due date of filing ITR V for AY 2013-14 and AY 2014-15 for returns filed electronically extended till 31st October 2015 or 120 days from filing the return whichever is later.

Procedure laid down for generating and using the Electronic Verification Code for returns to be E-filed verifying the assessee filing the return of income- Notification no. 2/2015 dated 13th July 2015

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Article 12(5) of India-Finland DTAA — Services are performed at the place where service is used and not where services are rendered — In absence of make available clause in India-Finland DTAA, consideration is chargeable to tax in India; Article 21 of India-Finland DTAA — Since providing corporate guarantee was not business activity but shareholder obligation, corporate guarantee fee was Other Income covered under Article 21 of India-Finland DTAA.

8 Metso Outotec OYJ, (Earlier Known as Outotec Oyj) vs. DCIT

[2023] 153 taxmann.com 723 (Kolkata – Trib.)

ITA No: 300/Kol/2022; ITA No: 269/Kol/2023

A.Ys.: 2018–19 & 2020–21

Date of Order: 29th August, 2023

Article 12(5) of India-Finland DTAA — Services are performed at the place where service is used and not where services are rendered — In absence of make available clause in India-Finland DTAA, consideration is chargeable to tax in India; Article 21 of India-Finland DTAA — Since providing corporate guarantee was not business activity but shareholder obligation, corporate guarantee fee was Other Income covered under Article 21 of India-Finland DTAA.

FACTS

Assessee, a tax resident of Finland, had provided IT services to Indian AE (“I Co”) and received consideration from I Co for such services. In view of Assessee, since it had performed IT services in Finland, and since it did not have PE in India, consideration received, therefore, was not chargeable to tax in India in terms of Article 12(5) of India-Finland DTAA¹ .

Further, Assessee had provided corporate guarantee for I Co and received corporate guarantee fee from I Co. In view of Assessee, corporate guarantee fee was business income and since Assessee did not have PE in India, it was not taxable in India.

AO did not agree with the contentions of the Assessee and brought both receipts to tax. DRP ruled that services are performed at the place where beneficiaries can use them and guarantee fees are in the nature of parental support taxable as other income.

Being aggrieved, the Assessee filed an appeal before the Tribunal.

HELD

Income from IT Service

• Assessee had rendered specific services for the use of I Co. As India-Finland DTAA does not have a ‘Make Available’ clause, consideration for providing such services was taxable in India.

• ITAT followed its earlier decision in Assessee’s case², wherein it had held that the performance-based rule in Article 12(5) was not applicable to the case of Assessee for the reasons given on the next page:
• Payment was made for test results which were used in India.

• Though Assessee may have conducted a process of testing outside India, I Co had made payment not for use of the process but for the results of testing which were used by I Co in India.

Income from corporate guarantee fee

• The main line of business of Assessee was to carry on, by itself, or through its subsidiary, the design, manufacture and construction of trade machinery, devices, etc.

• Giving of guarantee was a routine activity. It was the obligation of the Assessee towards its subsidiary. It was more like a shareholder obligation than a service activity.

• Giving of guarantee was not a business activity of Assessee, which was evident from the fact that except for I Co, Assessee had not given guarantee for anyone else.

• The fee received for giving corporate guarantee was in the nature of other income, which was covered under Article 21 of India-Finland DTAA.

Note: Article 21(3) of India-Finland DTAA provides items of income of a resident of a Contracting State not dealt with in other Articles of DTAA and arising in the other Contracting State may be taxed in that other State. The decision has not dealt with the aspect of place or situs where corporate guarantee arises.

1 “Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is … a resident of that State. Where, however, … the fees for technical services relate to services performed, within a Contracting State, then such … fees for technical services shall be deemed to arise in the State in which the right or property is used or the services are performed ….”
2 Outotec (Finland) Oy vs. DCIT [2019] 109 taxmann.com 69 (Kol. – Trib.)

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