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Income returned and assessed in the hands of the wife cannot again be taxed in the hands of the husband by invoking section 64(1)(ii)

11 Ketan Prabhulal Dalsaniya v. DCIT

ITA Nos. 25 to 30 / Rjt/2023 and ITA No. 96/Rjt/2023

Assessment Years: 2013-14 to 2019-20

Date of Order : 7th February, 2024

Sections: 64, 153A

Income returned and assessed in the hands of the wife cannot again be taxed in the hands of the husband by invoking section 64(1)(ii)

FACTS

Consequent to a search action conducted in the group cases of Coral group of Morbi on 3rd January, 2019 warrant was executed in the name of the assessee. For each of the assessment years under consideration, assessment orders were framed under section 153A of the Act. The common addition viz. clubbing of income allegedly earned by the wife of the assessee was clubbed with the income of the assessee under section 64(1)(ii) of the Act. According to the assessee, the additions were made on the basis of statement of the assessee that his wife did not perform any business activity. The income which was added to the total income of the assessee was returned by his wife in the returns filed in response to notice issued under section 153A of the Act and was also assessed in her hands.

HELD

Since the income of the wife of the assessee stands accepted in her hands by the Department in scrutiny assessment vide order passed u/s 143(3) of the Act, on returns filed in consequence to the search action conducted on her u/s 153A of the Act, the Tribunal held that there is no case with the Revenue now to tax the same income in the hands of the assessee also in terms of the clubbing provisions of Section 64(1)(ii) of the Act. Having accepted the said income as belonging to the assessee’s wife in scrutiny assessment, the Department is now debarred from taking a contrary view and taxing it in the hands of the assessee on the ground that his wife was not actually carrying out any business. In view of the above, all the appeals of the assessee are allowed in above terms.

The appeals filed by the assessee were allowed.

Penalty under section 271F cannot be levied if estimated total income was less than maximum amount not chargeable to tax and assessee was not required to file return even pursuant to the provisos to section 139(1) though assessed income may have been greater than maximum amount not chargeable to tax. The basis of determination of income in the assessment order cannot be said to be the basis for filing of return of income under Section 139(1) of the Act.

10 Mahesbhai Prabhudas Gandhi v. ITO

I.T.A. Nos. 759 to 762 & 764 to 767/Ahd/2023

Assessment Years : 2013-14 to 2016-17

Date of Order: 21st February, 2024

Section 271F

Penalty under section 271F cannot be levied if estimated total income was less than maximum amount not chargeable to tax and assessee was not required to file return even pursuant to the provisos to section 139(1) though assessed income may have been greater than maximum amount not chargeable to tax. The basis of determination of income in the assessment order cannot be said to be the basis for filing of return of income under Section 139(1) of the Act.

FACTS

For AY 2013-14, a penalty under section 271F was levied for non-filing of return of income by the assessee. The total income of the assessee for the year under consideration was assessed vide order dated 31st March, 2022 passed under section 144 r.w.s. 147. The contention of the assessee was that his income for the year under consideration was below the maximum amount not chargeable to tax and therefore the assessee was not obliged to file a return of income. The Tribunal noted that the estimated total income of the assessee was ₹2,00,000 for AY 2013-14 and AY 2014-15.

The AO levied penalty under section 271F on the ground that as per assessment order the assessee has deposited considerable amount of cash in different banks and therefore the assessee must have had income above taxable limits and therefore was bound to file return of income and pay due taxes within time.

Aggrieved, the assessee preferred an appeal to CIT(A) which was dismissed.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

It is a trite law that the basis of determination of income in the assessment order cannot be said to be the basis for filing of return of income under Section 139(1) of the Act. As estimated income for the year under consideration was ₹2,00,000/- as per the assessee for A.Ys. 2013-14 & 2014-15 and ₹2,50,000/- for A.Ys. 2015-16 & 2016-17, the assessee was of the firm belief that return of income is not required to be filed under Section 139(1) of the Act.

HELD

The provision of Section 271F of the Act clearly speaks of requirement of furnishing return of income as required under Section 139(1) of the Act or by the provisos of that sub-Section. Precisely, the return of income is to filed on the basis of the total income of any person in respect of which he is assessable under the Act during the previous year, exceeded the maximum amount which is not chargeable to tax, and in this particular case as the estimated income of the assessee is only ₹2,00,000/- i.e. below the taxable limit, the assessee was, therefore, of the firm belief of not being required to file return under Section 139(1) of the Act. The Tribunal held that under this fact and circumstance of the matter, levy of penalty seems not only harsh but also not sustainable in the eye of law under Section 271F of the Act and hence quashed.

This ground of appeal filed by the assessee was allowed.

Management fee paid is allowable as deduction while computing capital gains.

9 Krishnamurthy Thiagarajan v. ACIT (Mumbai)

ITA No. 1651/Mum./2013

A.Y.: 2008-09

Date of Order : 20th February, 2024

S. 48

Management fee paid is allowable as deduction while computing capital gains.

FACTS

The assessee, during the year under consideration, returned short term capital gain of ₹10,04,322. While computing short term capital gain, the assessee had deducted ₹1,71,028 paid to BNP Paribas Investment Services India Pvt. Ltd. as management fees for sale of securities. There was no dispute either about payment by the assessee of management fee or that management fee paid was inextricably linked to earning of short term capital gain. The AO disallowed the claim of deduction of management fees only for the reason that the same is not an allowable deduction under section 48 of the Act.

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

Aggrieved, the assessee, relying on the following decisions, preferred an appeal to the Tribunal-

(i) KRA Holding and Trading Investments Pvt. Ltd. vs. DCIT, ITANo.703/PN/2012 for A.Y.2008-09 decided on 19/09/2013; and

(ii) Nadir A. Modi vs. JCIT, ITA No.2996/Mum/2010 & 4859/Mum/2012 for A.Y. 2005-06, decided on 31st March, 2017.

HELD

The Tribunal noted that the contention of the revenue is that the management fees which are claimed as deduction do not constitute expenditure incurred in connection with transfer nor are they cost of acquisition / cost of improvement and therefore, the same are not allowable as deduction section 48 of the Act. The Tribunal noted that a similar issue had come up for adjudication before a co-ordinate bench in the case of KRA Holding and Trading Investments Pvt. Ltd. (supra). In the said case as well, the revenue rejected the claim of the assessee for the same reasons as has been done in the impugned order. The revenue in the case of KRA Holding and Trading Investments Pvt. Ltd. had placed reliance on the decision in the case of Homi K. Bhabha v. ITO ITA No.3287/Mum/2009 decided on 23rd September, 2011 [48 SOT 102 (Mum)].

The Tribunal noted the observations of the co-ordinate bench in KRA Holding and Trading Investments Pvt. Ltd. (supra) to the effect that the said case was decided based on the decision of the Tribunal in the assessee’s own case for AY 2004-05. Against the decision of the Tribunal for AY 2004-05 in the case of KRA Holding and Trading Investments Pvt. Ltd. (supra) revenue had preferred an appeal to the Supreme Court on the correct head of income under which profit on sale of shares should be taxed but had not preferred an appeal on allowability of claim of deduction of management fees while computing capital gains. The revenue relied upon the decision in the case of Homi K Bhabha (supra) which was dealt with by the Tribunal as follows-

“Since the AO & CIT(A) have followed the order for earlier year in the case of the assessee and since the order of CIT(A) for earlier year has been reversed by the Tribunal, therefore, unless and until the decision of the Tribunal is reversed by a higher court, the same in our opinion should be followed. In this view of the matter, we respectfully following the order of the Tribunal in assessee’s own case for A.Y. 2004-05 allow the claim of the Portfolio Management fees as an allowable expenditure. The ground raised by the assessee is accordingly allowed.”

The Tribunal observed that since there are contrary decisions of the Tribunal on allowability of Management Fee u/s. 48 of the Act. It is a well settled proposition that when two views are possible, the view in favour of assessee should be preferred [CIT vs. Vegetable Products Ltd., 88 ITR 192(SC)]. Accordingly, the Tribunal allowed the ground of appeal filed by the assessee.

Proviso to section 2(15) will not apply to a charity if the profit derived from the services rendered in furtherance of the object of general public utility is very meagre

8 The Institute of Indian Foundrymen vs. ITO

ITA No.: 906 / Kol/ 2023

A.Y.: 2014–15

Date of Order: 18th March 2024

Section 2(15)

Proviso to section 2(15) will not apply to a charity if the profit derived from the services rendered in furtherance of the object of general public utility is very meagre

FACTS

The assessee society was registered under section 12A order dated 30th September, 1989 with the main object relating to the foundry industry (which was an object of general public utility). It derived income by way of contributions from the head office, membership fees, income from publication of the Indian Foundry journal, other grants and donations, interest on fixed deposits, etc. The surplus as per the profit and loss account was ₹17,70,380 which was around 2 per cent of the receipts from the activities.

The AO contended that since gross receipts from such activity in the previous year were more than ₹10 lakhs, the activities of the assessee were hit by the provisoto section 2(15) (as it stood in the relevant year)and the assessee was not entitled to exemption under section 11.

CIT(A)confirmed the addition by the AO.

Aggrieved, the assessee filed an appeal before the Tribunal.

HELD

Relying on the decision of co-ordinate bench in Indian Chamber of Commerce vs. DCIT in ITA Nos. 933 & 934/Kol/2023 (order dated 22nd December, 2023),the Tribunal held that since profit derived by the assessee from the services rendered as public utility was very meagre, the assessee was entitled to the exemption under section 11.

Exemption under section 10(26) is available to the individual members of the Scheduled Tribe and this benefit cannot be extended to a firm which has been recognized as a separate assessable person under the Income Tax Act.

7 M/s Hotel Centre Point, Shillong & Another vs. ITO

ITA Nos.: 348 to 350 / Gty / 2018

A.Y.s: 2013–14 to 2015–16

Date of Order: 19th March 2024

Section 10(26)

[Bench of 3 members]

Exemption under section 10(26) is available to the individual members of the Scheduled Tribe and this benefit cannot be extended to a firm which has been recognized as a separate assessable person under the Income Tax Act.

FACTS

The assessee-partnership firm was running a hotel business in Shillong. It consisted of two partners who were brothers and belonged to the Khasi tribe, a Scheduled Tribe in the State of Meghalaya, and thus, were entitled to exemption under section 10(26) in their individual capacity.

Assessee claimed before AO that since a partnership firm in itself is not a separate juridical person and it is only a collective or compendious name for all of its partners having no independent existence without them, and since the partners of the assessee-firm were entitled to exemption under section 10(26), the same exemption was available to a partnership firm formed by such partners. It also relied on the decision of the Guwahati High Court in CIT v. Mahari & Sons, (1992) 195 ITR 630 (Gau).

The AO did not agree with the assessee and observed that the exemption under section 10(26) was available to individual members of the recognized Scheduled Tribes and not to a partnership firm which is a separate entity under the Income Tax Act.

CIT(A) upheld the order of the Assessing Officer (AO). Division Bench of the Tribunal vide its order dated  13th September, 2019 upheld the order of the CIT(A).

On a further appeal, Meghalaya High Court vide its judgment dated 06th July, 2023 set aside the order of the Tribunal and remanded the matter back to the Tribunal, with a request to the President of the Tribunal to constitute a larger bench.

In view of the directions of Meghalaya High Court, a larger bench of the Tribunal (3 members) proceeded to decide the issues afresh.

HELD

The Tribunal observed as follows-

Under the Income-tax Act, a partnership firm is a separate and distinct “person” assessable to Income Tax. There are separate provisions relating to the rate of income tax, deduction, allowances etc. in relation to a firm as compared to an individual. The benefits in the shape of deductions or exemptions available to an individual are not transferrable or inter-changeable to the firm nor vice versa. The firm in general law may not be treated as a separate juristic person, however, under the Income-tax Act, it is assessable as a separate and distinct juristic person. The Income-tax Act is a special legislation, therefore, the interpretation given in general law cannot be imported when the special law defines the “firm” as a separate person assessable to income tax;

When the relevant provisions of the Partnership Act, 1932 are read together with the relevant provisions of the Income Tax Act and the Code of Civil Procedure, 1908, it leaves no doubt that for the purpose of the Income Tax Act, a partnership firm is a separate assessable legal entity which can sue or be sued in its own name,can hold properties, and is subjected to certain restrictions for want of non-registration. Merely because the liability of the partners is unlimited or to say that the rights against the firm can be enforced against the individual partners also, is not enough to hold that the partnership is not a distinct entity from its individual members under the Income-tax Act, especially when in the definition of “person” under the Income-tax Act, corporate and non-corporate, juridical and non-juridical persons, have been included as separate assessable entities;

Even in the case of a partnership Firm having partners of a Khasi family only, the mother or wife, as the case may be, being the head named “Kur” would not have any dominant position. All the partners, subject to the terms of the contract between them, will have equal status and rights inter se and even equal duties and liabilities towards the firm. The profits of the partnership firm are shared as per the agreement/capital contributed by the partners. Neither the capita nor the profits of the firm can be held to be the joint property of the family;

The ratio decidendi in CIT vs. Mahari & Sons (supra) in the context of a ‘Khasi family’ would not be applicable in the case of a partnership firm, though consisting solely of partners, who in their individual capacity are entitled to exemption under section10(26);

In a partnership, the relation between the partners is purely contractual and no obligation arises out of the family status or relationship, inter se of the partners;

Though it is true, as held in various decisions of the Supreme Court, that the beneficial and promotional exemption provision should be given liberal interpretation; however, liberal interpretation does not mean that the benefit of such exemption provision could be extended to bypass the express provisions of the fiscal law, which have to be construed strictly;

The advantages and disadvantages conferred under the Income-tax Act on separate classes of persons are neither transferrable nor inter-changeable. The scope of the beneficial provisions cannot be extended to a different person under the Act, even after liberal interpretation as it may defeat the mechanism and process provided under the Income Tax Act for the assessment of different class / category of persons.

The Tribunal has the power to condone the delay in filing the application for final approval under clause (iii) of the first proviso to section80G (5)

6 Swachh Vapi Mission Trust vs. CIT(Exemption)

ITA No.:583 / Srt / 2023

Date of Order: 11th March 2024

Section 80G

The Tribunal has the power to condone the delay in filing the application for final approval under clause (iii) of the first proviso to section80G (5)

FACTS

The assessee trust was formed on 15th March, 2021. The assessee received donations / other income of ₹40,401 and spent formation expenses (advocate fees) and other general expenses in FY 2021–22. However, it entered into a service agreement in furtherance of its objects only on 7th November, 2022.

It was granted provisional approval under section 80G on 6th April, 2022 under clause (iv) of the first proviso to section 80G(5) for the period commencing from 6th April, 2022 to AY 2025–26.

An application for final approval under section 80G under clause (iii) of first proviso to section 80G (5) (which requires an assessee to file the application for final approval at least six months prior to expiry of period of the provisional approval or within six months of commencements of its activities, whichever is earlier) was filed by the assessee in Form No.10AB on 2nd December, 2022.

CIT(E), vide his order dated 28th June, 2023, rejectedthe application dated 2nd December, 2022 on the ground that the activities of the assessee had commenced long back and therefore, it was required to file the said application on or before the extended deadline of 30th September, 2022 allowed by CBDT vide Circular No.8/2022 dated 31st March, 2022.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

The Tribunal agreed with the findings of CIT(E) in as much as since the application was filed beyond 30th September, 2022, there was a delay in filing the application. However, following the order of co-ordinate bench in Vananchal Kelavani Trust vs. CIT(E), ITA No.728/SRT/2023 (order dated 09th January, 2024), it held that such delay can be condoned by the Tribunal. Accordingly, the Tribunal condoned the delay in filing the said application under section 80G and remitted the matter back to CIT(E) to adjudicate the issue afresh on merits.

Tax Implications in the Hands of Successor / Resulting Company

Business reorganizations have always been of vital importance for any entity to meet certain needs, expand the business, etc. and have risen over time to explore various opportunities. The drivers that create interest in various forms of restructuring could be internal or external. Equally important is the tax aspect of such business reorganization.

The judiciaries have given importance to the law of succession while interpreting the tax implications in the hands of the successor. In the present article, we have dealt with the tax implications in the hands of the successor / resulting company and the benefits that can be passed on to the resulting company.

The Apex Court has laid down certain principles as a law of succession, which acts as a guide to assess the implications under various scenarios. In the case of succession through amalgamation, the SC1 has held that although the outer shell of the entity is destroyed in case of amalgamation, the corporate venture continues to exist in the form of a new or the existing transferee entity. The SC in another decision2 emphasized the point that the successor-in-interest becomes eligible to all the entitlements and deductions which were due to the predecessor firm subject to the specific provisions contained in the Act. Basis the said findings of the SC, what can be underlined is that the successor should be entitled to the benefits which would have been otherwise available to the predecessor had the restructuring not taken place.

In the present Article, we are discussing the tax implications in the hands of the successor under a few of the provisions of the Act.


1   PCIT vs Mahagun Realtors (P) Ltd. : [2022] 443 ITR 194 (SC)

2   CIT vs. T. Veerabhadra Rao : (1985) 155 ITR 152 (SC)

A) CARRY FORWARD AND SET-OFF OF MAT CREDIT

Section 115JAA deals with the carry forward and set-off of Minimum Alternate Tax (‘MAT’) credit in the subsequent years pursuant to any tax liability discharged under section 115JB of the Act. However, the provisions do not provide any specific clarifications for carrying forward MAT credit in case of business reorganizations, except a restriction to carry forward MAT credit in case of conversion of a Company to an LLP as per section 115JAA(7) of the Act. A few of the important points for consideration are discussed hereunder:

Whether MAT liability entity-specific or business-specific?

Before analyzing the impact under different forms of business reorganization, it is important to understand whether MAT liability is entity-specific or business-specific. And consequently, who should be eligible for the MAT credit; i.e., the entity who has discharged the MAT liability or if the MAT liability pertains to the business, then the entity who is in control of the business.

The provisions of section 115JAA state that the credit of the MAT liability discharged in the past should be allowed to the person who has paid such MAT liability. Relevant extracts of the provisions are reproduced as follows, for easy reference.

“…(1A) Where any amount of tax is paid under sub-section (1) of section 115JB by an assessee, being a company for the assessment year commencing on the 1st day of April 2006 and any subsequent assessment year, then, credit in respect of the tax so paid shall be allowed to him in accordance with the provisions of this section.”

Thus, the wording of the provision, basis literal interpretation, allows credit to the same person who has discharged the liability and the same is the contention of the Revenue.

Generally, tax liabilities are taxpayer-specific, wherein an entity is required to discharge the tax liability on the total book profit (in the case of MAT liability), which would be a consolidated profit from all the businesses carried on by the taxpayer. However, an equally important fact of the tax laws is that tax is on the income earned from the businesses carried on by the taxpayer. As held by the SC in the case of Mahagun Realtors (P) Ltd (supra), in case of amalgamation, the corporate venture continues and it just that the form of the entity changes. Thus, the importance is on the venture undertaken and the assets and liabilities are associated with the said venture and not the entity. Even the provisions for recovery of demand in case of succession permit the Revenue Authority to recover demand from the successor. Thus, these provisions also indicate that the tax is on the income earned from the relevant businesses.

Basis the above interpretation, identifying MAT credit particular to any undertaking could be a point of possibility in order to pass on the MAT credit, which would be available for set-off in the hands of the successor company that takes over the relevant part of the business from the transferor company. To put it in other words, it can be contended that the MAT liability discharged is specific to a particular business carried on by the company and can be passed on to the entity that is in control of such business.

Amalgamations and demergers are tax-neutral

Amalgamations and Demergers, if undertaken by complying with the conditions provided under the Act, are intended to be tax-neutral transactions. Accordingly, the successors should be entitled to all the available tax benefits as a part of succession which are associated with the businesses taken over. Thus, where in the past, any MAT liability was discharged on the book profits in relation to the business transferred, the credit of the same should be entitled to the successor company. To view it from another perspective, if the MAT credit relating to the business transferred is carried forward by the transferor company, it would lead to the set-off of the MAT credit in relation to the business which is transferred, against the tax liability on the income that would be retained by the transferor company. This could be an unjust position. Further, the said proposition would otherwise be impossible, at least in the case of amalgamation, where the amalgamating company ceases to exist. Thus, again, the contention that should prevail is that the MAT credit should be passed on to the successor company.

All the assets and liabilities to be transferred in case of amalgamation and demerger

One of the conditions under section 2(1B) dealing with amalgamation requires all the properties of the amalgamating company to become the properties of the amalgamated company. Similar provisions are for demergers wherein even section 2(19AA) requires all the properties of the demerged undertaking to be transferred to the resulting company.

Thus, all the properties could be contended to include the MAT credits of the entity (in case of amalgamation) and undertaking (in case of demerger). The important consideration would be to identify the MAT credit relating to the demerged undertaking in case of a demerger. Thus, the relevant computation needs to be in place to justify the MAT credit relating to the demerged undertaking and if it is possible to identify such MAT credit, a reasonable argument could be that even the MAT credits, as a part of the business, needs to be transferred.

However, a point that requires deliberation is whether MAT credit could be said to be “property” as the above provisions relating to amalgamation and demerger speaks about “properties” and not “assets”. Ideally, the intention in amalgamation and demergers is to include all the properties including trade receivables, cash and bank balance and other advances, etc. Thus, the word “property” would have a broader meaning and a justifiable proposition should be to also include MAT credits.

Approval of the Schemes by the Courts

If there are no statutory provisions on any specific issue, in that case, the scheme of arrangement as approved by the Courts (now NCLT) would have statutory recognition. The Mumbai Tribunal Bench3 had allowed the demerged entity to carry forward the MAT credit as the scheme was approved by the Court, holding that the tax payments until the appointed date would belong to the demerged entity. Thus, where any scheme of arrangement permits the carry forward of MAT credit to the successor, the scheme will prevail.


3   DCIT vs. TCS E-serve International Limited (ITA No. 2779/Mum/2108)

However, now the judicial authority to grant approvals for the various scheme of arrangements is the National Company Law Tribunal (‘NCLT’). Thus, it needs to be assessed as to whether the decisions, in respect of schemes where Courts were the approving authority, could also prevail and hold good where the approvals of the schemes are through NCLT.

As per the Companies Act, the scheme of arrangement would have statutory force, once the same is approved under the relevant provisions of the Companies Act. Accordingly, it may be argued that the scheme holds a position of sanctity once it receives the sanction of the NCLT and cannot be disturbed. A scheme is said to have statutory force under all the Acts for all the stakeholders unless any clause of the scheme is contrary to other provisions of the Act. Thus, once a scheme is sanctioned and is in force under one law, all the clauses for the said scheme should be said to have legal sanctity.

No case of dual credit

In the case of amalgamation, there are no chances of dual credit that could be claimed by two parties as the amalgamating company would cease to exist post-amalgamation. Hence, there is no question of claiming dual credits by both parties. The same would be a reasonable position to contend4

Even in the case of a demerger, if the MAT credit is transferred to the resulting company and the resulting company has paid for such takeover of credit, then naturally, the demerged entity should be debarred from claiming the MAT credit again.

To summarize, the position of carry forward of MAT credit in case of amalgamation is reasonable and there are judicial precedents providing assent for the same. However, the issue is slightly on a separate footing with distinct judicial precedents in the case of demergers. The Ahmedabad Tribunal5 has allowed the MAT credit to be carried forward by the resulting company in case of demerger, though certain aspects were not considered or argued by the Revenue. Thus, though a strong argument of the law of succession should equally apply in the case of demergers as in the case of amalgamation, the practical difficulties of apportioning the MAT credit to the demerged entity are equally challenging. Additionally, the contention that MAT credit associated with the business undertaking and not to be entity-specific also needs judicial sanction as the wording of the provisions do not support the same, basis the argument of tax being linked with income.


4   Ambuja Cements Ltd. vs. DCIT : [2019] 111 taxmann.com 10 (Mum Tri), Capgemini Technology Services India Ltd. in ITA Nos. 1857 & 1935/Pun/2017
5   Adani Gas Limited vs. ACIT in ITA Nos. 2241 & 2516/Ahd/2011

B) DEDUCTIONS UNDER SECTION 40(A) / 43B

At times, there are certain disallowances under section 40(a) for non-deduction of tax at source, or under section 43B for non-payment of statutory dues, or other payments prescribed under the said section. Generally, the deduction for the said expenses is allowed in the year when the tax is deducted or prescribed payments are made, unless the liabilities are discharged before the filing of the return of income under section 139(1) of the Act as prescribed.

The issue arises as to the allowability of deduction in the case of amalgamations or demergers where the disallowances happen in a particular financial year in the hands of the transferor companies, whereas the payments are made after the appointed date by the transferee companies.

In the absence of any explicit provisions in the above scenarios of business reorganizations, a question arises on the allowability of expense in the hands of the predecessor or successor due to the change of hands of the person incurring expenditure, and the person discharging the liability. There are multiple views adopted by the assessees due to a lack of clarity in the law and diverse judicial precedents.

i) As per the general principles of law, the deductibility of the expense is allowed to the assessee who has incurred the expenditure and expensed it out in the profit and loss account. However, the provisions of section 40(a) and section 43B come with an exception, where the allowability is deferred to the year in which the tax is deducted or expenses are paid, respectively.

ii) In the case of amalgamation as well as demerger, the definitions require all the liabilities to be taken over by the transferee company. Thus, the above statutory liabilities should also be taken over by the transferee company to meet the requirements under the Act. Thus, there is no option available to the predecessor companies in the case of a demerger to continue with such liabilities in the demerged entity. In the said scenarios, the question is whether the transferee company would be eligible for the deduction on making the respective payments or discharging the liabilities, or the same should be allowed to the transferor company.

iii) However, where such liabilities are taken over by the resulting company, the same is contended to be a capital expenditure by the Revenue on the ground that it arises on account of a capital account transaction of acquiring the business. Resultantly, the claim is denied to the transferee company and also to the transferor company.

It could be important to highlight the decision of the SC6 rendered in the context of taxability under section 41 wherein it was held that the amalgamated company should not be subjected to tax under section 41, as the corresponding expenses were claimed as a deduction by the predecessor entity, which ceased to exist. It was then that an amendment was made to section 41 whereby the provisions were specifically introduced to tax the successor company in the above scenario. The said precedence in the context of section 41 could be considered while assessing the deduction in the hands of the transferor company in case of demerger, or successor company in case of amalgamation and demerger.


6   Saraswati Industrial Syndicate Ltd vs. CIT : (1990) 186 ITR 278 (SC)

Implications under section 40(a)

iv) We may first analyze the provisions of section 40(a) of the Act which states that any expenditure on which tax is deductible will be allowed as a deduction only when tax is deducted and paid before filing the return of income under section 139(1) of the Act.

The provisions of the Act simply say that the deduction would be available when the tax is deducted and deposited to the credit of the Central Government. It does not talk about who should be allowed a deduction for the same. Thus, what can be construed is that the person who ultimately complies with the above conditions would be eligible for the deduction. When looking at the intent of the provisions, the focus is on the liability to deduct and deposit tax and naturally, the entity that complies with the condition should be eligible for the deduction.

v) Say for example, there is an expense which is debited to the profit and loss account in the books of the predecessor company. However, the tax is not deducted on the same and thus, there is a disallowance while computing the total income of the amalgamating company. Thereafter, amalgamation takes place, and the tax is deducted and paid by the amalgamated entity. A question arises as to whether the amalgamated company would be eligible for the deduction under section 40(a) of the Act. A similar situation may also arise in the case of a demerger. The only difference is that in the case of a demerger, the demerged entity would continue to be in existence, unlike in the case of amalgamation.

In the above scenario, as far as the amalgamation is concerned, a possible contention could be that the deduction should be allowed to the amalgamated company as the predecessor company ceases to exist. However, the scenario in the case of a demerger may differ as the entity that was subject to the disallowance, i.e., the demerged entity, continues to exist. Thus, taking an analogy from the decision of the SC in the case of Saraswat Industrial Syndicate Ltd. (supra), it can be contended that deduction should be allowed to the demerged entity in the year when the liability is discharged by the resulting company. While adopting such a position, there needs to be co-ordination between the entities to understand when such payments are made and that the resulting company is not claiming the deduction as well.

vi) As an alternate view, reference is made to the decision of the SC in the case of CIT v. T Veerabhadra Rao (cited supra), whereby the claim of bad debts was allowed in the hands of the transferee company even though the corresponding income was offered to tax by the predecessor company. Drawing an analogy from the same, deduction could be claimed by the successor company under section 40(a) on discharge of such liabilities even when the expense was incurred by the predecessor and disallowed in its hands.

Implications under section 43B

vii) Section 43B deals with deduction of any expense only while computing the income in the year in which such liability is paid by the assessee, irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him. Basis the literal reading of the law, the provisions of section 43B do not specifically mention that the deduction will only be allowed in the hands of the person who incurred and discharged the liability.

viii) Similar to the contention adopted for deduction under section 40(a) and adopting an analogy basis the decision of the SC in the case of Saraswat Industrial Syndicate Ltd. (supra), a similar plea could continue even in case of deductibility under section 43B, whereby, the demerged entity can claim deduction once the resulting company discharges the liability. However, due to the act of impossibility in case of amalgamation where the amalgamating company ceases to exist, the deduction could only be claimed in the hands of the successor company.

ix) Another way of looking at the provisions is that the income tax provisions treat certain specific dues mentioned under the section as expenses of the year in which the same are actually paid and no regard is given to the accounting principles followed by the assessee.

Consequently, it can be argued that the deduction should be allowed to the person discharging the liability. The provisions of section 43B are an exception to the general law in which the provision itself states that the expenses which are otherwise allowable under the Act, should be allowed as a deduction on a payment basis. Thus, in light of the same and obeying the provisions of the Act, the deduction of the expense could be allowed as a deduction basis for actual payment to the entity that has made the payment.

x) At the same time, while adopting the above view, there could be a practical difficulty in cases where the year of demerger is also the first year of the resulting company. The liabilities that would be discharged by the resulting company would pertain to the preceding previous years when the resulting company was not in existence and the expenses were booked by the demerged entity. Thus, the reporting under the relevant clause of the Tax Audit Report for section 43B stating liabilities pre-existing on the first day of the previous and being paid during the year, could be a practical challenge.

xi) The Mumbai Tribunal7 has relied on the principle held by the SC in the case of T Veerabhadra Rao, K Koteswara Rao & Co. (cited supra) and allowed the deduction of liabilities under section 43B to the transferee, on the reasoning that the transferee had taken over all the assets and liabilities of the transferor.

xii) The Mumbai Tribunal8 has analyzed the eligibility of deduction under section 43B in the hands of the transferor in the year in which slump sale took place. The Tribunal observed that the transferor cannot by contract, transfer or shift his statutory obligation to the transferee and thus, there was no basis to hold that impugned liability stands discharged by the transferor upon sale of its undertaking on slump sale basis.

Thus, in the absence of any explicit provisions, Revenue can contend a similar proposition even for demergers.

xiii) The implications in the case of demergers are litigious with divergent views. Thus, it is advisable to provide for a suitable clause in the scheme of arrangement for such statutory dues, which would give a legal sanction through approval of the scheme. Separately, it is also advised to have a suitable disclosure in the Tax Audit Report about the positions taken, to reflect the conscious and bonafide claim.


7   In KEC International (2011) 136 TTJ 60 (Mum Tri), Huntsman International (India) Private Limited (ITA No.3916 and 1539/Mum/2014)

8   Pembril Engineering (P) Ltd. v. DCIT (2015) 155 ITD 72 (Mum Tri)

C) IMPLICATIONS UNDER SECTION 79 IN LIGHT OF SECTION 72A

i) Section 79 of the Act restricts the carry forward and set off of business loss incurred in any preceding previous years by a company (other than a company in which the public is substantially interested and an eligible start-up company), if the shares of the company carrying more than 49 per cent of the voting power change hands and are beneficially held by different shareholders in the previous year when the losses are set off, as compared to the year when the losses were incurred. The provisions were introduced to prevent business reorganizations undertaken where the profits earned by a company are intended to be set off against the losses of the target company.

ii) Correspondingly, section 72A of the Act deals with specific provisions for carried forward and set-off of losses in case of amalgamations and demergers, subject to fulfilment of certain conditions.

iii) The provisions are mutually exclusive to each other. However, there could arise a situation in the cases of amalgamation and demergers between unrelated parties, which could lead to a change in the shareholding of the entities and where provisions of section 79 get triggered. At the same time, if the conditions of section 72A are fulfilled, the losses should be allowed to be carried forward in the hands of the successor company. Thus, it would be important to understand the interplay between the two provisions and we have tried to cover some issues in this regard.

Issue regarding carry forward of losses of the predecessor company to the successor company

iv) Before dealing with the interplay between the above provisions, it would be important to understand a scenario where the losses of the demerged entity are transferred to the resulting company, which is a profit-making entity. In the said scenario, the question is whether the provision of section 79 will be applicable in the said scenario. It may be noted that in the above scenario, the demerged entity is not going to claim the losses as the same are transferred to the resulting company. Thus, where the losses are not carried forward and set off by the demerged entity, the question of applying the provisions of section 79 will not be applicable.

Thereafter, another question is whether the provisions of section 79 will be applicable to the resulting company while setting off the losses of the demerged undertaking. It may be noted that the provisions of section 79 could come into play when losses of the same entity are proposed to be set off. In the above scenario, the losses proposed to be set off pertains to the demerged undertaking which comes due to demerger. Thus, ideally, a contention could be that the provisions of section 79 will not be applicable where the resulting company intends to set off the losses acquired by way of demerger.

Having said so, if there is contention to apply the provisions of section 79 even on set-off losses of the demerged undertaking by the resulting company, the following contentions could be considered.

v) One of the important legal interpretations of the above two provisions is that both Section 79 and Section 72A of the Act start with a non-obstante provision. While the former applies notwithstanding anything contained in Chapter VI of the Act, the latter applies notwithstanding anything contained in any other provisions of the Act. Thus, Section 79 of the Act has an overriding effect only over Chapter VI of the Act whereas Section 72A of the Act has an overriding effect over any other provisions of the Act. Thus, section 72A ideally should prevail over the provisions of section 79 of the Act.

vi) Another point to be noted is that the provisions of section 79 speak about losses incurred in the years preceding the previous year in which there is change in the shareholding of more than 49 per cent.

vii) Section 72A(1) states that in case of amalgamation, the losses incurred in the preceding previous years would be deemed to be the loss of the year in which the amalgamation took place and would be available for carry forward and set off for a period of 8 years thereafter. Accordingly, it can be contended that the provisions of section 79 will not be applicable in case of amalgamation and the amalgamated company can carry forward and set off the losses of the amalgamating company.

viii) However, unlike in the case of amalgamation, the provisions relating to a demerger are quite different. The provisions of sub-section (4) of section 72A do not cover the above deeming provisions. Accordingly, the losses of the preceding previous years would pertain to the said years only and would be available for carry forward and set off to the resulting company only for the balance years.

ix) However, a contention may be taken that the provisions of section 72A are more specific as it deal with an explicit scenario of amalgamation and demerger. Thus, as per the general rule of interpretation, the specific provisions will prevail over general provisions. Accordingly, the provisions of section 79 cannot be applied in case of amalgamations and demergers which meet the requirements of section 72A. This proposition is supported by a decision of the Mumbai Tribunal9.


9   Aegis Ltd. vs. Addl. CIT in ITA No. 1213 (Mum) of 2014

x) Thus, overall, considering the general rules of interpretation and intent of the introduction of provisions of section 72A, a liberal view is plausible that provisions of section 79 do not apply where requirements of section 72A are met.

xi) However, it may be noted that the present discussion is only limited towards the interplay of provisions of section 72A v/s section 79. There are other conditions also required to be fulfilled as per other provisions of the Act and requirements prescribed under section 72A need to be met to carry forward and set off the loss.

An issue where the successor company had losses and on account of amalgamation, the shareholding pattern changes by more than 49 per cent.

xii) In this scenario, say for example, the successor company had certain brought forward losses and pursuant to the business reorganization, the shareholding of the successor company changes by more than 49 per cent. Thus, as per the provisions of section 79 of the Act, the losses pertaining to the successor company would lapse. The provisions of section 72A would not apply to such losses, as section 72A deals with losses of the predecessor company getting transferred to the successor company.

xiii) Sub-section (2) of section 79 has provided certain exceptions where the provisions of section 79 will not apply. However, the said exceptions do not cover the above scenario. Thus, a position could be that the provisions of section 79 would get triggered, and the losses of the successor company may lapse.

xiv) Another way to look at the provisions is where the losses of the predecessor company are allowed to be set off in the hands of the successor company even if there is a change in the shareholding of the successor company by more than 49 per cent. However, at the same time, losses of the successor company itself are not allowed to carry forward and set off as the provisions of section 79 get triggered. Thus, this indicates an anomaly in allowing the set off of losses of the predecessor company and the successor company in the same restructuring of amalgamation and demerger.

xv) Additionally, it could also be a difficult proposition to digest the applicability of section 79 as the change in the shareholding is not on account of any transfer of shares by the existing shareholders of the successor company, but change is only in the percentage of shareholding i.e., dilution of the holding due to issue of shares to the new shareholders due to scheme of arrangement. However, it could be difficult to claim losses in the absence of any specific provisions and the basis of the literal reading of the provisions.

xvi) On the contrary, the applicability of section 79 in the above scenario could be genuine to avoid deliberate restructuring to set off the losses of the successor company against the profits of the predecessor company.

xvii) Thus, the contentions could change on the basis of the genuineness of the restructuring undertaken keeping aside the applicability of the provision basis the literal reading.

CONCLUDING THOUGHTS

There are following few other provisions which needs assessment for tax implications in the hands of the successor company:

— Implications under section 56(2)(viib) on the issue of shares pursuant to any business reorganization

— Treatment of depreciation on Goodwill / Intangible assets taken over

— Depreciation on other depreciable assets

— Tax implications under tax holiday provisions

Thus, there are plethora of issues which have implications in the hands of the successor entities apart from other transaction related issues, and it is important to take a position which has a reasonable view.

Power of AO to Grant Stay — Whether Discretionary or Controlled By the Instructions and Circulars

1. GENERAL BACKGROUND AND SCOPE

1.1 Upon completion of the assessment of total income by the Assessing Officer (AO), the amount of tax payable by the assessee is determined. It is quite common to see huge additions being made, in many cases, which result in huge demands arising as a result of a tax on additions made to the returned income and interest thereon under section 234B (and in cases where the return of income was filed beyond due date than under section 234A as well). The amount determined to be payable by the assessee is stated in the notice of demand issued under section 156 and the amount so mentioned is generally payable within 30 days from the date of issue of the notice of demand. The notice of demand issued under section 156 of the Act accompanies the assessment order.

1.2 Non-payment of the amount specified in the notice of demand, which is validly served on the assessee, within the time mentioned in the notice will mean that the assessee becomes an `assessee in default’ and consequently is liable to not only interest and penalty being levied on the amount of demand which is unpaid but also coercive steps being taken for recovery of the unpaid amount. Refunds of other years may be adjusted against such demands which have arisen as a result of disputed additions.

1.3 As per CBDT Instruction No. 1914 dated 2nd February, 1993 (hereinafter referred to as “the said Instruction”) —

i) the Board is of the view that, as a matter of principle, every demand should be recovered as soon as it becomes due;

ii) the responsibility of collection of the demand is upon the AO and the TRO;

iii) except for demands which are stayed every other demand is required to be collected;

iv) it is the responsibility of the supervisory authorities to ensure that the AOs and the TROs take all such measures as are necessary to collect the demand;

v) mere issuance of show cause notice with no follow-up is not to be regarded as an adequate effort to recover taxes.

1.4 While an assessee may choose to file an appeal against the assessment order, a question arises as to whether an assessee is bound to pay the demand which is disputed by the assessee. Many times, demands are of such a magnitude as would disrupt the smooth functioning of the business of the assessee. If recovery proceedings are to continue in spite of an appeal having been preferred, then the entire purpose of the appeal will be frustrated or rendered nugatory.

1.5 Does the filing of an appeal operate as a stay or suspension of the order appealed against? Is the assessee entitled to a stay of demand or instalments? Is the AO empowered to grant stay in a case where the assessee chooses to file a revision application under section 264? What is the position in case an assessee chooses not to contest the additions? Is granting of stay mandatory? Is AO bound by the Guidelines issued by CBDT? Is the AO bound by the restrictions imposed by the guidelines on exercise by the AO of the discretionary power conferred upon him by the statute under section 220(6) of the Act? These are some of the many questions which arise for consideration and are considered in this article.

1.6 Upon completion of the assessment, demand may arise as a result of —

i) additions made which are accepted by the assessee;

ii) additions which are disputed by the assessee and against which the assessee chooses to file a revision application under section 264 of the Act;

iii) additions which are disputed by the assessee and against which the assessee files an appeal under section 246 or section 246A to the JCIT(A) or CIT(A);

iv) additions which are disputed by the assessee and against which the assessee files an appeal to the Tribunal.

1.7 In a situation of the type referred to in (i) above it is quite unlikely (even unimaginable) that, in actual practice, a stay will ever be granted. Situations of the type mentioned in (ii) and (iv) above will be covered by the powers vested in the AO under section 220(3) of the Act. The situation of the type mentioned in (iii) above will be covered by the power vested in the AO under section 220(6) of the Act.

1.8 The power of the Tribunal to grant a stay of demand is not covered by this article.

2 ARE DECISIONS RENDERED IN THE CONTEXT OF PRE-DEPOSIT PRESCRIPTIONS PLACED BY A STATUTE OF RELEVANCE?

2.1 A plethora of judicial precedents are available in the context of pre-deposit prescriptions placed by a statute. The principles enunciated therein would clearly be relevant while examining the extent of power placed in the hands of the AO in terms of section 220(6) of the Act — National Association of Software and Services Companies (NASSCOM) vs. DCIT [(2024) 160 txmann.com 728 (Delhi HC); Order dated 1st March, 2024]. Courts have while deciding upon the allow ability or otherwise of the writ petitions filed by the assesses against refusal to grant stay by authorities, have based their decision on judicial precedents rendered in the context of pre-deposit prescription placed by a statute and have applied the ratio laid down by such decisions.

2.2 Consequently, this article contains references to decisions rendered in the context of Excise and Customs Laws to the extent it is considered that the said decisions are helpful in the context of the provisions of the Act.

3 NO COERCIVE RECOVERY CAN BE TAKEN DURING THE PENDENCY OF THE RECTIFICATION APPLICATION AND/OR STAY APPLICATION AND/OR TILL SUCH TIME AS STATUTORY TIME FOR FILING THE APPEAL EXPIRES.

3.1 Many times, assessment orders and/or tax computations have mistakes which are apparent on record and can be rectified by the AO under section 154 of the Act. An assessee is well advised to check if either the assessment order and/or the tax computation has any mistakes which are rectifiable under section 154 of the Act. In the event any such mistakes are found, an application should be made to the AO under section 154 of the Act requesting him to rectify these mistakes by passing an order under section 154 of the Act. Para D(iii) of the said Instruction requires the rectification application should be decided within 2 weeks of the receipt thereof. It goes on to say that instances where there is undue delay in deciding rectification applications, should be dealt with very strictly by the CCITs / CITs. In actual practice, this instruction is followed more in breach, and we find rectification applications undisposed for prolonged periods. Be that as it may, till the rectification application is not disposed of coercive steps cannot be taken for recovery of the demand because correct demand should be determined before an assessee can be treated as an assessee in default. For this proposition reliance may be placed on the decision in Sultan Leather Finishers P. Ltd. vs. ACIT [(1991) 191 ITR 179 (All. HC)].

3.2 Also, where an assessee has made an application to the AO for granting a stay of the demand which has arisen, then till the stay application is not disposed of by the AO, no coercive steps can be taken for recovery of the demand —Dr T K Shanmugasundaram vs. CIT & Others [(2008) 303 ITR 387 (Mad HC)] and UTI Mutual Fund vs. ITO [(2012) 345 ITR 71 (Bom.)].

Very recently, the Delhi High Court while deciding the writ petition filed by NASSCOM (supra) has termed the action of the AO in adjusting the refund against demand for AY 2018-19, while application for grant of stay under section 220(6) was pending to be wholly arbitrary and unfair. The court observed “Undisputedly, and on the date when the impugned adjustments came to be made, the application moved by the petitioner referable to section 220(6) of the Act had neither been considered nor disposed of. The respondents have thus, in our considered opinion, clearly acted arbitrarily in proceeding to adjust the demand for AY 2018-19 against the available refunds without attending to that application. This action of the respondents is wholly arbitrary and unfair.” The court allowed the writ petition and remitted the matter back to the AO for considering the application under section 220(6) in accordance with the observations made by the court in its order.

3.3 In a case where a stay application filed by the assessee before the AO is rejected or the AO has granted a stay but the assessee is not satisfied and has preferred an application to the PCIT / CIT for review of the order of AO then till such time as the application filed before the PCIT / CIT is not disposed of the AO cannot take any coercive steps to recover the demand. Para B(iii) of the said Instruction is also suggestive of this interpretation. However, the assessee should keep the AO informed of having preferred a review of his order.

3.4 No coercive action shall be taken till the expiry of the period within which an appeal can be preferred against the order which has resulted in the creation of the demand sought to be recovered — Mahindra and Mahindra Ltd. vs. UOI [(1992) 59 ELT 505 (Bom. HC)].

3.5 The Bombay High Court has in the case of UTI Mutual Fund vs. ITO [(2012) 345 ITR 71 (Bom.)] held that no recovery of tax should be made pending—

i) expiry of the time limit for filing an appeal; and

ii) disposal of a stay application, if any, moved by the Applicant and for a reasonable period thereafter to enable the Applicant to move to a higher forum.

3.6 Recovery of demand arising as a result of high-pitched assessment is dealt with in Para 5 herein.

4 POWER OF THE AO TO GRANT STAY IN A CASE WHERE AN APPEAL HAS BEEN PRESENTED TO JCIT(A) / CIT (A) — SECTION 220(6)

4.1Section 220(6) reads as under —

“(6) Where an assessee has presented an appeal under section 246 or section 246A the Assessing Officer may, in his discretion and subject to such conditions as he may think fit to impose in the circumstances of the case, treat the assessee as not being in default in respect of the amount in dispute in the appeal, even though the time for payment has expired, as long as such appeal remains undisposed of.”

4.2 The following points emerge from the above provision—

i) the AO has the discretion to treat the assessee as not being in default in respect of the amount in dispute (in general parlance it is referred to as a grant stay on recovery of the amount demanded);

ii) the stay may be granted without any conditions or with conditions which the AO may think fit to impose in the circumstances of the case;

iii) the discretion can be exercised only in cases where an appeal has been presented under section 246 or section 246A. In other words, the discretion under this sub-section cannot be exercised in cases where an appeal lies to the Tribunal and/or the assessee chooses to file an application under section 264 instead of filing an appeal under section 246A;

iv) the power may be exercised even after the time for making the payment, as per the notice of demand, has expired;

v) the power can be exercised and stay granted only till the appeal remains undisposed;

vi) the discretion can be exercised only in respect of an amount in dispute in an appeal. In a case where a particular addition can be a subject matter of rectification under section 154, it is advisable that the assessee takes up such addition in a rectification application as well as take the issue in appeal;

vii) while the section does not provide that the power will be exercised only upon an application to be made by the assessee, it is unimaginable that an AO may exercise the discretion vested in him by virtue of section 220(6) suo moto;

viii) while on a literal interpretation, it appears that an assessee can make an application / power can be exercised by the AO only where the assessee has `presented an appeal under section 246 or section 246A’.

In practice, it is advisable to make an application even before an appeal is filed. The application, in such a case, should mention that the assessee is in the process of filing an appeal under section 246A of the Act. The assessee should undertake to file an appeal before the expiry of the statutory time for filing of an appeal and also to provide to the AO a copy of the acknowledgement of having filed an appeal once it has been filed. The AO may grant a stay on the condition that an appeal be filed within the statutory time limit. Failure to do so would vacate the stay so granted.

4.3 Every power is coupled with a duty to act reasonably. While section 220(6) confers a discretion / authority upon the AO, going by the principles laid down bythe courts, such an authority has to be construed as a duty to exercise that power. This is evident from the following —

i) The Apex Court in L Hriday Narain vs. ITO [(1970) 78 ITR 26 (SC)] has observed as under —

“If a statute invests a public officer with authority to do an act in a specified set of circumstances, it is imperative upon him to exercise his authority in a manner appropriate to the case when a party interested and having a right to apply moved in that behalf and circumstances for the exercise of authority are shown to exist. Even if the words used in the statute are prima facie enabling, the courts will readily infer a duty to exercise power which is invested in aid of enforcement of a right-public or private — of a citizen.”

ii) The Allahabad High Court in ITC Ltd. vs. Commissioner (Appeals), Customs & Central Excise [2003 SCC Online All 2224] has held as under-.

“24. Thus, even where enabling or discretionary power is conferred on a public authority, the words which are permissive in character, require to be constituted, involving a duty to exercise that power, if some legal right or entitlement is conferred or enjoyed, and for the effectuating of such right or entitlement, the exercise of such power is essential. The aforesaid view stands fortified in view of the fact that every power is coupled with a duty to act reasonably and the Court / Tribunal / Authority has to proceed to have strict adherence to the provisions of law [vide Julius vs. Lord Bishop of Oxford, (1880) 5 Appeal Cases 214; Commissioner of Police, Bombay vs. Gordhandas Bhanji, 1951 SCC 1088; K S Srinivasan vs. Union of India, AIR 1958 SC 419; Yogeshwar Jaiswal vs. State Transport Appellate Tribunal (1985) 1 SCC 725; Ambica Quarry Works, etc. vs. State of Gujarat (1987) 1 SCC 213.”

4.4 CBDT has, from time to time, issued guidelines regarding the procedure to be followed for recovery of outstanding demand, including the procedure for granting of stay of demand. Presently, the said Instruction read with Office Memorandum (OM) dated 31st July 2017 interalia provides for a grant of stay upon payment of 20 per cent of the disputed demand. Undoubtedly, under sub-section (6) of section 220 stay cannot be granted in respect of an amount which is admitted to be payable by the assessee.

4.5 A question often arises as to whether the discretion vested in the AO by section 220(6) is circumferenced by the said Instruction and the OM. Can the AO, in case circumstances so demand, exercise discretion and grant a stay of the entire amount of demand or on payment of an amount less than that mandated by the OM. Supreme Court in PCIT & Ors. vs. L G Electronics India Pvt. Ltd. [(2018) 18 SCC 477] has emphasized that the administrative circular would not operate as a fetter upon the power otherwise conferred upon a quasi-judicial authority and that it would be wholly incorrect to view the OM as mandating the deposit of 20 per cent, irrespective of the facts of the individual case.

The said Instruction states the following cases as illustrative situations where an assessee would be entitled to stay of the entire disputed demand where such disputed demand —

i) relates to the issues that have been decided in the assessee’s favour by an appellate authority or court earlier; or

ii) has arisen as a result of an interpretation of the law on which there is no decision of the jurisdictional high court and there are conflicting decisions of non-jurisdictional high courts;

iii) has arisen on an issue on which the jurisdictional high court has adopted a contrary interpretation, but the Department has not accepted that judgment.

The said Instruction read with OM suggests that where a stay is to be granted by accepting a payment of less than 20 per cent of the disputed demand then the AO should refer the matter to the administrative jurisdictional PCIT / CIT.

Undoubtedly, all such instructions and circulars are in the form of guidelines which the authority concerned is supposed to keep in mind. Such instructions/circulars are issued to ensure that there is no arbitrary exercise of power by the authority concerned or in a given case, the authority may not act prejudicial to the interest of the Revenue.

4.6 The courts have held that —

i) the discretion vested in the hands of the AO is one which cannot possibly be viewed as being cabined in terms of the OM [Nasscom (supra)];

ii) the requirement of payment of twenty per cent of the disputed tax demand is not a pre-requisite for putting in abeyance recovery of demand pending the first appeal in all cases — Dabur India Ltd. vs. CIT (TDS) & Another [2022 SCC OnLine Del 3905];

iii) it becomes pertinent to observe that the 20 per cent deposit which is spoken of in the OM dated 31st July 2017 is not liable to be viewed as a condition etched in stone or one which is inviolable — Indian National Congress vs. DCIT [2024: DHC: 2016 — DB];

iv) CBDT’s Office Memorandum cannot be read as mandating a pre-deposit of 20 per cent of the outstanding demand – Sushem Mohan Gupta vs. PCIT [(2024) 161 taxmann.com 257 (Delhi HC)];

v) Instruction 1914 sets out guidelines to be taken into account while deciding stay applications. As is evident on examining such guidelines, the discretion of the appellate authority remains, and it is not mandated that in all cases 20 per cent of the disputed tax demand should be pre-deposited. This aspect was noticed by this Court in the Order in Kannammal [2019 (3) TMI 1 — MADRAS HIGH COURT] wherein, the appellate authority was directed to take into account the classical principles relating to the consideration of stay petitions – Telugupalayam Primary Agricultural Co-operative Bank vs. PCIT [2024 (2) TMI 549 — MADRAS HIGH COURT];

vi) The requirement of payment of 20 per cent of disputed tax is not a pre-requisite for putting in abeyance recovery of demand pending the first appeal in all cases. The said pre-condition of deposit of 20 per cent of the demand can be relaxed in appropriate cases – Dr B L Kapur Memorial Hospital vs. CIT [(2023) 146 taxmann.com 422 (Delhi HC)];

vii) .. we fail to understand what is so magical in the figure of 20 per cent. To balance the equities, the authority may even consider directing the assessee to make a deposit of 5 per cent or 10 per cent of the assessed amount as the circumstances may demand as a pre-deposit – Harsh Dipak Shah vs. Union of India [(2022) 135 taxmann.com 242 (Guj. HC)].

In spite of the clear position having been explained by various High Courts, an assessee desiring a stay of entire demand or stay of demand by paying an amount less than 20 per cent of the disputed demand has to knock on the doors of the writ courts merely because the AOs take a view that they are bound by the Instructions and OMs issued by CBDT.

4.7 The plain reading of the sub-section (6) of section 220 would indicate that if the assessee has presented an appeal against the final order of assessment under section 246A of the Act, it would be within the discretion of the AO subject to such conditions that he may deem fit to impose in the circumstances of the case, treat the assessee as not being in default in respect of the amount in dispute in the appeal so long as the appeal remains undisposed of. What is discernible from the provisions of section 220(4) is that once the final order of assessment has been passed, determining the liability of the assessee to pay a particular amount and such amount is not paid within the time limit as prescribed under sub-section (1) to section 220 or during the extended time period under sub-section (3) as the case may be, then the assessee, because of the deeming fiction, would be deemed to be in default. Therefore, even if the assessee prefers an appeal challenging the assessment order before the Commissioner of Appeals as the First Appellate Authority, he would still be treated as an assessee deemed to be in default because the mere filing of an appeal would not automatically lead to a stay of the demand as raised in the assessment order. It is in such circumstances that the assessee has to make a request before the authority concerned for appropriate relief for a grant of stay against such demand pending the final disposal of the appeal. This relief that the assessee seeks is within the discretion of the authority. In other words, the authority may grant such a stay conditionally or unconditionally or may even decline to grant any stay. However, the exercise of such discretion has to be in a judicious manner. Such exercise of discretion cannot be in an arbitrary or mechanical manner.

4.8 However, 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.

4.9 The power under section 220(6) 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 AO should apply his mind to the facts and circumstances of the case relevant to the exercise of 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. Questions of fact and law are open for decision before the two appellate authorities, both of whom possess plenary powers. In exercising his power, the AO 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 AO should divorce himself from his position as the authority who 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.

4.10 In the context of what is stated above, the following observations of Viswanatha Sastri J. in Vetcha Sreeramamurthy vs. ITO [(1956) 30 ITR 252 (AP)] (at pages 268 and 269) are relevant —

“The Legislature has, however, chosen to entrust the discretion to them. Being to some extent in the position of judges in their own cause and invested with a wide discretion under section 45 of the Act, the responsibility for taking an impartial and objective view is all the greater.If the circumstances exist under which it was contemplated that the power of granting a stay should be exercised, the Income-tax Officer cannot decline to exercise that power on the ground that it was left to his discretion. In such a case, the Legislature is presumed to have intended not to grant an absolute, uncontrolled or arbitrary discretion to the Officer but to impose upon him the duty of considering the facts and circumstances of the particular case and then coming to an honest judgment as to whether the case calls for the exercise of that power.”

4.11 Since the power under section 220(6) is discretionary it is not possible to lay down any set principles on which the discretion is to be exercised. The question as to what are the matters relevant and what should go into the making of the decision, in such circumstances, has been explained in Aluminium Corporation of India vs. C Balakrishnan [(1959) 37 ITR 267 (Cal.)] as follows—

“A judicial exercise of discretion involves a consideration of the facts and circumstances of the case in all its aspects. The difficulties involved in the issues raised in the case and the prospects of the appeal being successful is one such aspect. The position and economic circumstances of the assessee are another. If the Officer feels that the stay would put the realisation of the amount in jeopardy that would be a cogent factor to be taken into consideration. The amount involved is also a relevant factor. If it is a heavy amount, it should be presumed that immediate payment, pending an appeal in which there may be a reasonable chance of success, would constitute a hardship. The Wealth-tax Act has just come into operation. If any point is involved which requires an authoritative decision, that is to say, a precedent that is a point in favour of granting a stay. Quick realisation of tax may be an administrative expediency, but by itself, it constitutes no ground for refusing a stay. While determining such an application, the authority exercising discretion should not act in the role of a mere tax-gatherer.”

4.12 The Apex Court has in the case of Pennar Industries Ltd. vs. State of A.P. and Ors. [(2009) 3 SCC 177 (SC)] has held that —

“If on a cursory glance, it appears that the demand raised has no leg to stand, it would be undesirable to require the Applicant to pay full or substantive part of the demand. Petitions for stay should not be disposed of in a routine manner unmindful of the consequences flowing from the order requiring the Applicant to deposit full or part of the demand. There can be no rule of universal application in such matters and the order has to be passed keeping in view the factual scenario involved.”

4.13 It is a settled position that when a strong prima facie case, on merits, has been demonstrated, then no demand whatsoever can be enforced. This proposition can be substantiated by the ratio of the following decisions —

i) If the party has made out a strong prima facie case, that by itself would be a strong ground in the matter of exercise of discretion as calling on the party to deposit the amount which prima facie is not liable to deposit or which demand has no legs to stand upon, by itself, would result in undue hardship if the party is called upon to deposit the amount — CEAT Limited vs. Union of India [250 ELT 200];

ii) In the case of UTI Mutual Fund vs. ITO [(2012) 345 ITR 71 (Bom.)] the Bombay High Court, referring to the decision in the case of CEAT Limited (supra) observed that “where the assessee has raised a strong prima facie case which requires serious consideration, as in the present case, a requirement of pre-deposit would itself be a matter of hardship.”

iii) The Delhi Bench of the Tribunal in the case of Birlasoft (India) Ltd. vs. DCIT [(2011) 10 taxmann.com 220 (Delhi Trib.)], following the decision of the Apex Court in Pennar Industries Ltd. (supra) held that where the taxpayer demonstrates prima facie case, the Tribunal must weigh in favour of granting stay of disputed demand, particularly if recovery of such demand would cause financial hardship to the taxpayer.”

4.14 Demand needs to be stayed where the order giving rise to the demand has been passed in violation of principles of natural justice such as the opportunity of personal hearing not having been granted, request for short adjournment for filing reply to show cause notice having been neglected and assessee was devoid of opportunity to file reply on account of option of furnishing the response on the portal having been disabled, assessment order having been passed without considering the reply of the assessee. The assessee in Renew Power P. Ltd. vs. National E-Assessment Centre [(2021) 128 taxmann.com 263 (Delhi HC)] filed a writ against the assessment order as having beenpassed in violation of the principles of natural justice. The court on the basis of prima facie opinion of the order having been passed in violation of principles of natural justice granted a stay on the operation of the assessment order, notice of demand, and also notice for initiation of penalty proceedings under section 270A of the Act.

Similarly, even in the case of B L Gupta Construction P. Ltd. vs. National E-Assessment Centre [(2021) 127 taxmann.com 131 (Delhi HC)], where the assessment order was passed in violation of principles of natural justice, the court granted a stay on the operation of the assessment order and demand notice.

In the following cases also the courts have, in writ petitions filed by the assessee, granted a stay on the operation of the assessment order, demand notice and initiation of penalty proceedings on the ground that the assessment order was passed in violation of principles of natural justice —

i) Lemon Tree Hotels Ltd. vs. NFAC [(2021) 437 ITR 111 (Delhi HC)]

ii) GPL-PKTCPL JV vs. NFAC [(2022) 145 taxmann.com 156 (Delhi HC)]

iii) Dr. K R Shroff Foundation [(2022) 444 ITR 354 (Guj. HC)]

iv) Dangee Dums Ltd. vs. NFAC [(2023) 148 taxmann.com 22 (Guj. HC)]

5 POWER OF THE AO TO GRANT STAY — SECTION 220(3)

5.1 Section 220(3) reads as under —

“(3) Without prejudice to the provisions contained in sub-section (2), on an application made by the assessee before the expiry of the due date under sub-section (1), the Assessing Officer may extend the time for payment or allow payment by instalments, subject to such conditions as he may think fit to impose in the circumstances of the case.”

5.2 The following points emerge from the above provision—

i) the provisions of sub-section (3) of section 220 are without prejudice to the provisions of sub-section (2) of section 220 i.e., even if a stay is granted by the AO under section 220(3), the liability to pay interest leviable under sub-section (2) of the Act shall continue;

ii) the power conferred upon the AO under sub-section (3) can be exercised only upon satisfaction of twin conditions viz. an application being made by the assessee and such application being made before the expiry of the due date under sub-section (1);

iii) the AO has the power to either extend the time for payment or allow the payment by instalments;

iv) extension of time or payment by instalments may be permitted without imposing any conditions or it may be coupled with such conditions as the AO may think fit to impose in the circumstances of the case;

5.3 It is not necessary that the assessee making an application under sub-section (3) should have preferred an appeal under section 246A. This sub-section will therefore cover even cases where an appeal against an order lies to the
Tribunal or the assessee chooses to file a revision application under section 264 of the Act or the assessee accepts the additions made and chooses not to file an appeal.

5.4 On a comparison of the power vested under sub-section (3) with the power vested under sub-section (6), the following similarities and differences are evident —

SIMILARITIES

i) In both cases, the power is discretionary. In both cases, the power can be exercised and stay granted either with or without conditions as the AO may deem fit.

ii) In both cases, the assessee should make out a prima facie case; point of violation of principles of natural justice, if any; financial hardship and balance of convenience may be established.

DIFFERENCES

i) Power vested under section 220(3) can be exercised by the AO only on an application made by the assessee. Sub-section (6) does not have a reference to making an application by the assessee as a pre-condition for the exercise of the power vested under sub-section (6);

ii) Application under sub-section (3) needs to be made before the expiry of the time period mentioned in the notice of demand. However, an application under sub-section (6) may be made by the assessee even after the time period for making the payment, as mentioned in the notice of demand, has expired;

iii) For exercising the power vested under sub-section (3) it is not necessary that the assessee should have preferred an appeal to CIT(A). Even an assessee who has preferred a revision application under section 264 of the Act or an assessee who has preferred an appeal directly to the Tribunal can also apply for a stay. However, the power vested under sub-section (6) can be exercised only after the assessee has presented an appeal to the JCIT(A) / CIT(A).

iv) Sub-section (3) does not provide for an outer limit beyond which stay cannot be continued. However, under sub-section (6) can be granted only till such time as the appeal before CIT(A) is not disposed of.

v) The provisions of sub-section (3) are without prejudice to the provisions of sub-section (2) whereas sub-section (6) is not without prejudice to the provisions of sub-section (2).

vi) The stay granted pursuant to power under sub-section (6) can be only of disputed demand whereas that is not a pre-condition for grant of stay under sub-section (3).

vii) The said Instruction and the Office Memorandums are in connection with powers vested in the AO under sub-section (6).

6 INSTRUCTIONS ISSUED BY CBDT

6.1 With an intention to streamline recovery procedures, the Board has issued Instruction No. 1914 dated 2.2.1993 (herein referred to as “the said Instruction”). The said Instruction is stated to be comprehensive and is in supersession of all earlier instructions on the subjects and reiterates the then-existing Circulars on the subject.

6.2 Instruction No. 1914 is partially modified by Office Memorandum [F. No. 404/72/93-ITCC] dated 29th February, 2016 and also by Office Memorandum [F. No. 404/72/93-ITCC] dated 31st July, 2017.

6.3 OM dated 29th February, 2016 recognises that the field authorities often insist on payment of a remarkably high proportion of disputed demand before granting a stay of balance demand which results in hardship for taxpayers seeking a stay of demand. Therefore, to streamline the process of grant of stay and standardize the quantum of lumpsum payment, OM dated 29th February, 2016 provides for a lump sum payment of 15 per cent of the disputed demand as a pre-condition for a stay of demand disputed before CIT(A). Exceptions to this general rule, as given in the said Instruction read with OMs, are discussed in 6.7 below.

6.4 OM dated 31st July, 20217 only modifies the lump sum payment required to be made from 15 per cent as provided in OM dated 29th February, 2016 to 20 per cent. All other guidelines provided by OM dated 29th February, 2016 continue to be effective.

6.5 It is a settled position that such circulars and instructions are in the nature of guidelines and are issued to assist the Assessing Authority in the matter of grant of stay and cannot substitute or override the basic tenets to be followed in the consideration and disposal of the stay applications. However, the AOs feel that they are bound by the instructions issued by CBDT and therefore cannot act contrary thereto. Consequently, no matter how strong the facts of the case are, an AO never grants a stay of the entire demand but stays 80 per cent of the demand only if 20 per cent of the demand is paid.

6.6 The Bombay High Court in the case of Bhupendra Murji Shah vs. DCIT [(2020) 423 ITR 300 (Bom. HC)] held that the AO is not justified in insisting on payment of 20 per cent of the demand based on CBDT’s instruction dated 29th February, 2016 during the pendency of the appeal before CIT(A). The court held that this approach may defeat and frustrate the right of the Applicant to seek protection against collection and recovery pending appeal. Such can never be the mandate of law. The operative paragraph of the order makes an interesting read and therefore is reproduced hereunder —

“We are not concerned here with the Circular of the Central Board of Direct Taxes. We are not concerned here also with the power conferred in the Assessing Officer of collection and recovery by coercive means. All that we are worried about is the understanding of this Deputy Commissioner of a demand, which is pending or an amount, which is due and payable as tax. If that demand is under dispute and is subject to appellate proceedings, then, the right of appeal vested in the Petitioner / Applicant by virtue of the Statute should not be rendered illusory or nugatory. That right can very well be defeated by such communication from the Revenue / Department as is impugned before us. That would mean that if the amount as directed by the impugned communication is not brought in, the Petitioner may not have an opportunity to even argue his appeal on merits or that appeal will become infructuous if the demand is enforced and executed during its pendency.

In that event, the right to seek protection against collection and recovery pending appeal by making an application for stay would also be defeated and frustrated. Such can never be the mandate of law. In the circumstances, we dispose of both these petitions with directions that the Appellate Authority shall conclude the hearing of the Appeals as expeditiously as possible and during the pendency of these appeals, the Petitioner / Applicant shall not be called upon to make payment of any sum.”

6.7 An AO may demand a lump sum payment which is greater than 20 per cent of the disputed demand in the following cases where the disputed demand is as a result of additions —

i) which are confirmed by the appellate authorities in earlier years;

ii) on which decision of the Apex Court or jurisdictional High Court is in favour of revenue;

iii) which are based on credible evidence collected in a search or survey operation.

However, in cases where the disputed demand arises because of addition which is decided by appellate authorities in favour of the assessee and / or the addition is on an issue which is covered in favour of the assessee by the decision of the Apex Court and / or the jurisdictional High Court and the AO is inclined togrant stay upon payment of an amount lower than 20 per cent of the disputed demand, the OM dated 29th February, 2016 directs the AO to refer the matter to the administrative PCIT / CIT and states that the PCIT / CIT after considering all relevant facts shall decide the quantum / proportion of demand to be paid by the assessee as lump sum payment for granting a stay of the balance demand.

Therefore, while the AO can grant a stay upon directing payment of an amount greater than 20 per cent of the disputed demand, it appears on a literal interpretation of the said Instruction that the AO cannot reduce the magical figure of 20 per cent mentioned in the guidelines. This is contrary to what several courts have held upon interpreting the provisions of section 220(6) and even guidelines and circulars e.g., Madras High Court has in Mrs Kannammal vs. ITO [(2019) 103 taxmann.com 364 (Mad. HC)] has held as under —

“12. The Circulars and Instructions as extracted above are in the nature of guidelines issued to assist the assessing authorities in the matter of grant of stay and cannot substitute or override the basic tenets to be followed in the consideration and disposal of stay petitions. The existence of a prima facie case for which some illustrations have been provided in the Circulars themselves, the financial stringency faced by an assessee and the balance of convenience in the matter constitute the ‘trinity’, so to say, and are indispensable in consideration of a stay petition by the authority. The Board has, while stating generally that the assessee shall be called upon to remit 20 per cent of the disputed demand, granted ample discretion to the authority to either increase or decrease the quantum demanded based on the three vital factors to be taken into consideration.

6.8 In case the AO has granted a stay on payment of 20 per cent of the disputed demand and the assessee is still aggrieved, he may approach the jurisdictional administrative PCIT / CIT for a review of the decision of the AO.

6.9 The AO shall dispose of the stay application within 2 weeks of filing of the petition. Similarly, if reference has been made by the AO to PCIT / CIT or a review petition has been filed by the assessee the same needs to be disposed of within 2 weeks of the AO making such reference or assessee filing such review, as the case may be.

6.10 The other salient points arising out of the said Instruction No. 1914 read with the two OMs dated 29th February, 2016 and 31st July, 2017 are —

i) A demand will be stayed only if there are valid reasons for doing so;

ii) Mere filing of an appeal against the assessment order will not be sufficient reason to stay the recovery of demand;

iii) In the event that an appeal has been filed by an assessee to CIT(A), the AO shall grant stay upon payment of 20 per cent of the disputed demand;

iv) In the following cases, the AO can in his discretion, ask for payment of an amount greater than 20 per cent of the disputed demand —

a) where the disputed demand is on account of an addition which has been confirmed by the appellate authorities in earlier years;

b) where the disputed demand is on account of an issue on which the decision of the Apex Court or jurisdictional High Court is in favour of the revenue;

c) where the addition is based on credible evidence collected in a search or survey operation, etc.

However, this stands modified by a direction to refer the matter to the Administrative PCIT/CIT (see para 6.12).

6.11 The Bombay High Court in Bhupendera Murji Shah vs. DCIT [(2020) 423 ITR 300 (Bom.)] has held that – “The AO is not justified in insisting upon the payment of 20 per cent of the demand based on CBDTs instruction dated 29.2.2016 during the pendency of the appeal before the CIT(A). This approach may defeat and frustrate the right of the assessee to seek protection against collection and recovery pending appeal. Such can never be the mandate of law.”

6.12 However, where the disputed demand is on account of an addition which has been decided by appellate authorities in favour of the assessee in earlier years or where the decision of the Apex Court or jurisdictional High Court is in favor of the assessee, the said Instruction requires the AO to refer the matter to the administrative PCIT / CIT. The said Instruction states “The AO shall refer the matter to the administrative PCIT / CIT who after considering all relevant facts shall decide the quantum / proportion of demand to be paid by the assessee as lump sum payment for granting a stay on the balance demand.” The Instruction is shifting the discretion granted to the AO by the statute under section 220(6) to a superior authority. It is highly debatable as to whether CBDT has the power to divest the AO of his statutory powers and vest the same into a superior authority.

6.13 Section 220(6) empowers the AO to grant a stay subject to such conditions as he may think fit to impose in the circumstances of the case. While the section leaves it to the AO to decide the conditions to be imposed, the said Instruction No. 1914 lists 3 conditions, which may be imposed, as an illustration viz. —

i) requiring an undertaking from the assessee that he will cooperate in the early disposal of the appeal failing which the stay order will be cancelled;

ii) reserve the right to review the order passed after the expiry of a reasonable period (say 6 months) or if the assessee has not co-operated in the early disposal of the appeal, or where a subsequent pronouncement by a higher appellate authority or court alters the above situation;

iii) reserve the right to adjust refunds arising, if any, against the demand to the extent of the amount required for granting stay and subject to the provisions of section 245.

The conditions to be imposed are illustrative. The AO may consider imposing a condition/s which are other than the above-stated 3 conditions. However, such conditions to be imposed by the AO will need to be imposed considering the judicial exercise of his discretion. An AO imposing conditions will need to pass a speaking order listing reasons for his deciding to impose such conditions as he may decide to impose failing which his order may be subject to challenge as being arbitrary and having been passed without application of mind. Gujarat High Court has in the case of Harsh Dipak Shah (supra) observed that “Many times in the overzealousness to protect the interest of the Revenue, the authorities render their discretionary orders susceptible to the complaint that those have been passed without any application of mind.”

6.14 Where stay has been granted by the AO upon payment of 20 per cent as mentioned in the said Instruction and the assessee is aggrieved by such an order, the assessee may approach the jurisdictional administrative PCIT / CIT for a review of the decision of the AO.

6.15 The stay application as well as the review by the PCIT / CIT need to be decided within 2 weeks of filing of the application / making of a reference by the assessee / AO.

7 HIGH PITCHED ASSESSMENTS

7.1 High-pitched assessments are assessments where the assessed income is several times the returned income. Demand arising as a result of high-pitched assessment is generally required to stay.

7.2 The then Deputy Prime Minister, during the 8th Meeting of the Informal Consultative Committee held on 13th May 1969, observed as under —

“Where the income determined on assessment was substantially higher than the returned income, say, twice the amount or more, the collection of tax in dispute should be held in abeyance till the decision on the appeals, provided there was no lapse on the part of the Applicant.”

The above observations were circulated to the field officers by the Board as Instruction No. 96 dated  21st August, 1969 [F. No. 1/6/69-ITCC]. CBDT has on 1st December, 2009 issued `Clarification on Instructions on Stay of Demand’ [F. No. 404/10/2009-ITCC] wherein it is clarified that there is no separate existence of Instruction no. 96 dated 21st August, 1969 and presently it is Instruction No. 1914 which holds the field currently. Instruction No. 1914 does not mention a word about high-pitched assessment.

7.3 The courts have taken note of the tendency to make high-pitched assessments by the AO. Courts have observed that this tendency results in serious prejudice to the assessee and miscarriage of justice and sometimes may even result in insolvency or closure of the business if such power were to be exercised only in a pro-revenue manner — N Jegatheesan vs. DCIT [(2016) 388 ITR 410 (Mad. HC)] and Maheshwari Agro Industries vs. UOI [SB Civil Writ Petition No. 1264/2011 (Raj. HC)]. The Rajasthan High Court in Maheshwari Agro Industries (supra) has held that “it may be like the execution of death sentence, whereas the accused may get even acquittal from higher appellate forums or courts.”

7.4 Courts have consistently understood assessments where assessed income is twice the returned income to be a case of `high pitched assessment’ e.g., Gujarat High Court in Harsh Dipak Shah (infra) has held that the “high pitched assessment” means where the income determined and assessment was substantially higher than the returned income for example, twice the returned income or more”. The Madras High Court in N. Jegatheesan vs. DCIT [(2015) 64 taxmann.com 339 (Mad. HC)], in para 14, observed — “`High Pitched Assessment means where the income determined and assessment was substantially higher than returned income, say twice the later amount or more, the collection of tax in dispute should be kept in abeyance till the decision on the appeal provided there were no lapses on the part of the assessee.”. To a similar effect are the observations of the Delhi High Court in the case Valvoline Cummins Limited vs. DCIT [(2008) 307 ITR 103]; Soul vs. DCIT [(2010) 323 ITR 305] and Taneja Developers and Infrastructure Limited vs. ACIT [(2010) 324 ITR 247].

7.5 The view taken by the AO that in view of the CBDT Instructions and guidelines, he does not have the power to grant a stay unless 20 per cent of the disputed demand is paid is not legally correct.

Para 2B(iii) of the said Instruction No. 1914 states that “the decision in the matter of stay of demand should normally be taken by AO / TRO and his immediate superior. A higher superior authority should interfere with the decision of the AO / TRO only in exceptional circumstances e.g., where the assessment order appears to be unreasonably high pitched ….”

Para 2B(iii) of Circular No. 1914 CBDT which directs factors to be kept in mind both by the Assessing Officer and by the higher Superior Authority continues to exist and this part of Circular No. 1914 is left untouched by Circular dated 29th February, 2016. Therefore, while dealing with an application filed by an Applicant, both the AO and PCIT are required to examine whether the assessment is “unreasonably high pitched” or whether the demand for depositing 20 per cent / 15 per cent of the disputed demand amount would lead to a “genuine hardship to the Applicant” or not? — Flipkart India Pvt. Ltd. vs. ACIT [396 ITR 551 (Kar. HC)].

7.6 The courts have in the following cases stayed the entire demand which was raised pursuant to high-pitched assessments e.g., see —

i) Delhi High Court in Valvoline Cummins Limited vs. DCIT [(2008) 307 ITR 103 (Del HC)]; Soul vs. DCIT [(2010) 323 ITR 305 (Del HC)]; Taneja Developers and Infrastructure Limited vs. ACIT [(2010) 324 ITR 247 (Delhi HC)]; Maruti Suzuki India Ltd. vs. ACIT [222 Taxman 211 (Delhi HC)]; Genpact India vs. ACIT [205 Taxman 51 (Delhi HC)];

ii) Bombay High Court in Humuza Consultants vs. ACIT [(2023) 451 ITR 77 (Bom. HC)]; BHIL Employees Welfare Fund vs. ITO [(2023) 147 taxmann.com 427 (Bom. HC)]; Mahindra and Mahindra vs. Union of India [59 ELT 505 (Bom. HC)]; Mahindra and Mahindra Ltd. vs. AO [295 ITR 42 (Bom. HC)]; ICICI Prudential Life Insurance Co. Ltd. vs. CIT [226 Taxman 74 (Bom. HC)]; Disha Construction vs. Ms. Devireddy Swapna [232 Taxman 98 (Bom. HC)]

iii) Gujarat High Court in Harsh Dipak Shah vs. Union of India [(2022) 135 taxmann.com 242 (Gujarat)];

iv) Andhra Pradesh High Court in IVR Constructions Ltd. vs. ACIT [231 ITR 519 (AP)]

v) Allahabad High Court in Mrs R Mani Goyal vs. CIT [217 ITR 641 (All. HC)]

vi) Rajasthan High Court in Maharana Shri Bhagwat Singhji of Mewar (Late His Highness) vs. ITAT, Jaipur Bench & Others [223 ITR 192 (Raj. HC)]

7.7 Gujarat High Court in Harsh Dipak Shah vs. Union of India [(2022) 135 taxmann.com 242 (Gujarat)] has held that in case of high pitched assessment, wheretax demanded was twice or more of declared taxliability, the application of stay under section 220(6) could not be rejected merely by describing it to be against interest of the revenue if recovery was not made, and; in such cases, revenue could even consider directing the assessee to make a pre-deposit of 5 per cent or 10 per cent of the assessed amount as circumstances may demand.

8 APPLICATION FOR STAY

8.1 It is seen in practice that generally an application made to the AO for a grant of stay is brief and merely mentions the fact that an appeal has been preferred against the order giving rise to the demand in respect of which stay is being sought. However, it needs to be noted that merely filing an appeal against the assessment order will not be sufficient reason to stay the recovery of the demand.

8.2 It is advisable that the stay application should contain arguments to support the contention that the assessee is entitled to a stay of recovery. The assessee must explain the facts of his case in brief, the assessment history, briefly describe the nature of additions made, the arguments in support of the contention that the addition is incorrect and is likely to be deleted in appellate proceedings, and particulars of the appeal filed. The three factors which an assessee must establish in his application are prima facie case, financial stringency, and balance of convenience. In addition, violation of principles of natural justice, if any, must be narrated.

Balance of convenience means comparative mischief or inconvenience that may be caused to either party. An assessee must demonstrate that the balance of convenience is in its favour.

In Avantha Realty Ltd. vs. PCIT [(2024) 161 taxmann.com 529 (Delhi)], the court remanded the matter back for fresh adjudication to the PCIT on the ground that the assessee failed to directly raise contentions such as prima facie case, the balance of convenience and irreparable loss that may be caused. Rajasthan High Court in Kunj Bihari Lal Agarwal vs. PCIT [2023] 152 taxmann.com 339 (Rajasthan)] quashed the order passed by PCIT granting stay upon payment of 20 per cent and remanded it for fresh adjudication since PCIT had failed to give any findings about financial hardships pointed out by assessee and had also not taken into consideration factors such as prima facie case, balance of convenience and irreparable loss while passing impugned order. Madras High Court in Aryan Share and Stock Brokers Ltd. vs. PCIT [(2023) 146 taxmann.com 508 (Madras)] set aside the stay order since it was passed without taking note of financial stringency and balance of convenience.

8.3 Undoubtedly, all instructions and circulars are in the form of guidelines which the authority concerned is supposed to keep in mind. Such instructions/circulars are issued to ensure that there is no arbitrary exercise of power by the authority concerned or in a given case, the authority may not act prejudicial to the interest of the Revenue. However, 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 — Harsh Dipak Shah vs. Union of India [(2022) 135 taxmann.com 242 (Gujarat HC)]

9 PARAMETERS TO BE FOLLOWED BY THE AUTHORITIES WHILE DISPOSING OF STAY APPLICATIONS

9.1 Many times stay applications are disposed of in a routine manner. Applications are rejected without granting reasons. Courts have come down heavily on the disposal of stay applications in an arbitrary manner leading the orders to their challenge in writ courts. Casual disposal of stay applications leads to severe consequences e.g., if a garnishee is issued and recovery made from the bank account then the business may get crippled, salaries / wages which are due could remain unpaid, etc. More than two decades back, the Bombay High Court in the case of K E C International vs. B R Balakrishnan [(2001) 251 ITR 158 (Bombay)] laid down the following parameters which authorities should comply with while passing orders on stay applications —

i) while considering the stay application, the authority concerned will at least briefly set out the case of the assessee;

ii) the authority will consider whether the assessee has made out a case for unconditional stay; if not, whether a part of the amount should be ordered to be deposited for which purpose, some short prima facie reasons could be given by the authority in its order;

iii) in cases where the assessee relies upon financial difficulties, the authority concerned can briefly indicate whether the assessee is financially sound and viable to deposit the amount if the authority wants the assessee to so deposit;

iv) the authority concerned will also examine whether the time to prefer an appeal has expired. Generally, coercive measures may not be adopted during the period provided by the statute to go into appeal. However, if the authority concerned comes to the conclusion that the assessee is likely to defeat the demand, it may take recourse to coercive action for which brief reasons may be indicated in the order; and

The court added that “if the authority concerned complies with the above parameters while passing orders on the stay application, then the authorities on the administrative side of the department like Commissioner need not once again give reasoned order.”

9.2 In spite of clear parameters having been laiddown, the authorities are even today passing orders more in breach of the above parameters. It is in the interest of the revenue to pass orders which are reasoned and speaking so that they stand the tests laid down by the judiciary.

10 CAN A RECOVERY NOTICE BE ISSUED IF THE AO HAS NOT ISSUED A LETTER / PASSED AN ORDER GRANTING A STAY

10.1 A question which often arises in actual practice is that recovery notices are issued while the stay application has been made but no order has been passed rejecting the application / granting a stay. At the outset, such an inaction on the part of the Assessing Officer is contrary to the mandate of para 2B(i) of the said Instruction. Para 2B(i) requires the Assessing Officer to dispose of the stay petition filed with him within two weeks of the filing of the petition by the taxpayer. The said Instruction also states the obvious i.e., the assessee must be intimated of the decision without delay. The said Instruction also deals with a situation where a stay petition is filed with an authority higher than the AO then a responsibility is cast upon such higher authority to dispose of the petition without any delay and in any case within two weeks of the receipt of the petition. Such higher authority is required to communicate the decision thereon to the assessee and also to the Assessing Officer immediately. The obvious reason for communicating the decision to the Assessing Officer immediately is that the Assessing Officer can thereafter take further actions which are in consonance with the said decision.

10.2 As has been mentioned in para 3, no recovery can be made during the pendency of the stay application.

As long as the order rejecting the application is not passed and communicated to the assessee, the position in law would be that the stay application will be regarded as pending and undisposed with the authority to whom it is made. The proposition that no recovery can be made during the pendency of the stay application is supported by the ratio of the decisions of the Madras High Court in Dr T K Shanmugasundaram vs. CIT & Others [(2008) 303 ITR 387 (Mad. HC)] and Bombay High Court in Mahindra and Mahindra Ltd. vs. UOI [(1992) 59 ELT 505 (Bom. HC)] and UTI Mutual Fund vs. ITO [(2012) 345 ITR 71 (Bom.)].

10.3 To sum up, upon an application having been made by an assessee seeking a stay of demand, the AO ought to pass an order granting a stay or rejecting the application made by the assessee.

10.4 The remedy available to an assessee against whom recovery has been made or steps have been taken for recovery while the stay application remains undisposed of will be to approach the higher authorities against such an illegal recovery and/or in the alternative file a writ petition to the High Court. More often than not, in such matters, a writ is the only effective remedy if the assessee wants the recovery made to be restored. Needless to mention, filing a writ petition is both expensive and time-consuming apart from the fact that it results in scarce judicial time on avoidable issues.

11 WHERE DISPUTED DEMAND IS PENDING AND STAY THEREOF HAS BEEN GRANTED UPON PAYMENT OF 20 PER CENT, CAN REFUND BE ADJUSTED AGAINST THE BALANCE WHICH HAS BEEN STAYED

11.1 In a case where disputed demand is outstanding and AO has granted stay thereof upon payment of 20 per cent which has been paid, can the refund due for another year be adjusted against the outstanding demand which has been stayed. The categorical answer is in the negative. Once the demand is stayed then recovery thereof is not permissible. Adjustment of refund against the said demand which has been stayed also amounts to recovery thereof. This position is supported by the ratio of the decision of the Bombay High Court in Bharat Petroleum Corporation Ltd. vs. ADIT [(2021) 133 taxmann.com 320 (Bombay)].

11.2 In the event the assessee has not yet paid the lump sum amount of 20 per cent upon payment of which the stay of balance is to be granted, the refund, if any, can be adjusted only to the extent of 20 per cent. Bombay High Court has in Hindustan Unilever Ltd. vs. DCIT [(20150 377 ITR 281 (Bombay)] that it is not open to the revenue to adjust refund due to the assessee against recovery of demand which has been stayed by order of stay.

11.3 The situation of adjustment of refund against outstanding disputed demand qua which stay application is pending has been dealt with in para 3.2 above.

12 POWER OF CIT(A) TO GRANT STAY

12.1 The Supreme Court in ITO vs. Mohammed Kunhi [(1969) 71 ITR 815 (SC)] held that the Appellate Tribunal had powers to stay the collection of tax even though there was no specific provision conferring such power on the Tribunal. The Supreme Court had approved the principle that the power of the appellate authority to grant a stay was a necessary corollary to the very power to entertain and dispose of appeals. This lends credence to the general principle that wherever the appellate authority has been invested with power to render justice and prevent injustice, it impliedly empowers such authority also to stay the proceedings, in order to avoid causing further mischief or injustice, during the pendency of appeal. In fact, CIT(A) exercising power under section 251 has powerswhich are wider in content, and amplitude as compared to those of a Tribunal under section 254 of the Act. This is apart from the fact that the powers of CIT(A) are co-terminus with the powers of the AO. CIT(A) can do all that the AO can do. Therefore, relying upon the ratio of the decision of the Apex Court in Mohd. Kunhi (supra) it can safely be concluded that section 251 impliedly grants power to CIT(A) to do all such acts (including granting stay) as are necessary for the effective disposal of the appeal.

12.2 It is not correct to say that because a power to grant a stay, while the appeal is pending before CIT(A), has been specifically conferred upon an AO, the CIT(A) does not have power to grant a stay of demand during the pendency of the appeal before him because. Section 220(6) is no substitute for the power of stay, which was considered by the Supreme Court as a necessary adjunct to the very powers of the appellate authority. The powers conferred on the Assessing Officer and Tax Recovery Officer cannot be equated to the powers of the appellate authorities, either in their nature, quality, or extent or vis-à-vis the hierarchy — Paulsons Litho Works vs. ITO [(1994) 208 ITR 676 (Mad)].

12.3 In actual practice, CIT(A) generally does not grant a stay of demand. CIT(A) either keeps the stay application pending or in the alternative contends that under the Act it is the AO who has the discretion to grant a stay of demand or otherwise and that there is no express provision in the Act which grants power to CIT(A) to stay the demand raise.

12.4 The following decisions support the proposition that CIT(A) has the power to grant stay of demand —

i) Karmvir Builders vs. Pr. CIT [(2020) 269 Taxman 45 (SC)];

ii) Sporting Pastime India Ltd. vs. Asstt. Registrar [(2021) 277 Taxman 19 (Mad.)];

iii) Gorlas Infrastructure (P.) Ltd. vs. Pr. CIT [(2021) 435 ITR 243 (Telangana)];

iv) Prem Prakash Tripathi vs. CIT [(1994) 208 ITR 461 (All)];

v) Paulsons Litho Works vs. ITO [(1994) 208 ITR 676 (Mad)];

vi) Debashish Moulik vs. DCIT [(1998) 231 ITR 737 (Cal)];

vii) Punjab Kashmir Finance (P.) Ltd. vs. ITAT [(1999_ 104 Taxman 584 (P & H)];

viii) Bongaigaon Refinery & Petrochemicals Ltd. vs. CIT [ (1999) 239 ITR 871 (Gau)];

ix) Tin Mfg. Co. of India vs. CIT [(1995) 212 ITR 451 (All)]

12.5 Upon the filing of an appeal to CIT(A), where the assessee is of the view that it is entitled to stay of disputed demand without insisting upon the payment of 20 per cent of the disputed demand, it is desirable that a stay application is filed before CIT(A) as well. This will be useful in case the jurisdictional administrative PCIT / CIT does not pass the review order in favour of the assessee.

13 WRIT JURISDICTION

13.1 In cases where the assessee seeks a stay of demand by paying an amount less than 20 per cent of the disputed demand, more often than not, an assessee has to file a writ petition to seek a stay of demand. This is indeed a sorry state of affairs. As to what must be mentioned in the memorandum of the writ has been conveyed by the Apex court in ITO, Mangalore vs. M Damodar Bhat [1969 71 ITR 806 (SC)]. The Apex Court has conveyed that the writ applicant in the memorandum of his writ must furnish specific particulars in support of his case that the AO has exercised discretion in an arbitrary manner. It is just not sufficient to make an averment in the memorandum of writ application that “the order of the ITO made under section 220 is arbitrary and capricious.” In the absence of the specific particulars in the writ application, the High Court should not go into the question of whether the AO has arbitrarily exercised his discretion.

14 CONCLUSION

Section 220(6) confers discretion upon an AO to grant a stay of demand, whether conditionally or otherwise, in cases where the assessee has preferred an appeal to JCIT(A) / CIT(A). While granting a stay the AO has to exercise his discretion judiciously and grant a stay considering the facts and circumstances of the case. Prima facie case, balance of convenience, financial stringency and undue hardship need to be considered before deciding the stay application. The said Instruction, in the garb of standardising the procedure and percentage, curtails the power of the AO when it directs that the AO shall insist upon payment of at least 20 per cent of the demand. The said Instruction has been understood by the courts as only a guideline but not a curtailment of the power vested in the AO by the statute. The said Instruction is unfair as it states that if the circumstances so demand the AO can direct payment of a sum greater than 20 per cent of the disputed demand. However, if the circumstances demand that a sum lower than 20 per cent of the disputed demand be collected and the balance stayed then the said Instruction requires the AO to make a reference to the administrative PCIT / CIT. In case of high-pitched assessment, the assessee should be granted a total stay of demand. Stay application should state briefly the facts of the case and the merits, the application should demonstrate that the assessee has a prima facie case in its favour and bring out financial stringency and balance of convenience. Substantial litigation will be reduced if the authorities consider the stay application judiciously on merits. CBDT should issue a clarification to the effect that while 20 per cent payment is a general rule, the AO can without making a reference to the higher authorities grant a complete stay where circumstances so require.

Glimpses of Supreme Court Rulings

58 C.I.T. Delhi vs. Bharti Hexacom Ltd.

(2003) 458 ITR 593 (SC)

Capital or Revenue expenditure — Amortisation of Licence fees to operate telecommunication services — Payment of one-time entry fee and licence fee based on percentage of annual revenue earned — Both payments are capital in nature and to be amortised.

The National Telecom Policy of 1994 was substituted by the New Telecom Policy of 1999 dated 22nd July, 1999. The said Policy of 1999 stipulated that the licencee would be required to pay a one-time entry fee and additionally, a licence fee on a percentage share of gross revenue. The entry fee chargeable would be the fee payable by the existing operator up to 31,sup>st July, 1999,calculated up to the said date and adjusted upon notional extension of the effective date. Subsequently, w.e.f. 1st August, 1999, the licence fee was payable on a percentage of Annual Gross Revenue (“AGR”) earned. The quantum of revenue share to be charged as a licence fee was to be finally decided after obtaining recommendation of the Telecom Regulatory Authority of India (“TRAI”) but in the meanwhile, the Government of India fixed 15 per cent of the gross revenue of the licencee as provisional licence fee. On receipt of TRAI’s recommendation by the Government, adjustment of the dues was to be made.

Pursuant to the request of the Assessee, a licence was granted to it, inter alia on certain terms and conditions to establish, maintain and operate cellular mobile services. Accordingly, having accepted the Policy of 1999 and migrated there to, after paying the licence fee up to 31st July, 1999, i.e., the one-time licence fee as stipulated in the Communication dated 22nd July, 1999, the Respondent-assessee continued in the business of cellular telecommunication and associated value-added services, under the regime governed by the Policy of 1999.

The Assessee filed its return of income on 1st November, 2004, for the assessment year 2003–2004 declaring nil income. The same was processed under Section 143(1) of the Act on 30th March, 2006. The case was selected for scrutiny and a notice was issued to the Assessee under Section 143(2) of the Act, on 20th October, 2005.

It was noted that an amount of ₹11,88,81,000, which was the licence fee paid by the Assessee on a revenue sharing basis, was claimed by the Assessee as revenue expenditure. In that regard, vide questionnaire dated 15th November, 2006, the Assessee was required to explain as to why the said amount may, instead, be treated as capital expenditure and amortised over the remaining licence period of 12 years. The Respondent-Assessee furnished its response to the questionnaire, on 4th December, 2006. On consideration of the Assessee’s response, an Assessment Order was passed on 27th December, 2006, observing that the amount of ₹11,88,81,000, i.e., the licence fee paid by the Assessee on revenue sharing basis, which was claimed as a revenue expense, ought to have instead been amortised over the remainder of the licence period, i.e., 12 years. Accordingly, an amount of ₹99,06,750 was allowed as a deduction under Section 35ABB of the Act, and the remaining amount of ₹10,89,74,250 was disallowed and added back to the income of the Assessee.

Being aggrieved, the Assessee filed an appeal before the Commissioner of Income Tax (Appeal), New Delhi. In view of the decision of the Commissioner of Income Tax (Appeal) in the Assessee’s own case for the assessment year 2003–2004, it was reaffirmed vide order dated 27th September, 2007 that the annual licence fee calculated on the basis of annual gross revenue of the Assessee would be revenue expenditure deductible under Section 37 of the Act.

Aggrieved by the said order, the Revenue preferred an appeal before the Tribunal, New Delhi. By order dated 24th July, 2009, the Tribunal dismissed the Revenue’s appeal following its earlier order dated 29th May, 2009 in ITA No.5335 (Del)/2003 in the case of Bharti Cellular Ltd., for the assessment year 2000–2001, the facts of which case were held to be identical to the facts of the case at hand. Being aggrieved, the Revenue filed an appeal before the High Court of Delhi.

The Delhi High Court in the judgment dated 19th December, 2013 made the following preliminary observations:

i. Section 35ABB applies when expenditure of a capital nature is incurred by an Assessee for acquiring a right for operating telecommunication services. It is immaterial whether the expenditure is / was incurred before or after commencement of the business to operate telecommunication services but what is material is that the payment should be actually made. That Section 35ABB is not a deeming provision but comes into operation and is effective when the expenditure itself is of a capital nature and is incurred towards acquiring a right to operate telecommunication services or for the purposes of obtaining a licence for the said services. That Section 35ABB does not help in determining and deciding the question, as to, whether licence fee paid under the Policy of 1999 under the 1994 Agreement, was / is capital or revenue in nature.

ii. That there was no decision of the Supreme Court or any of the High Courts directly applicable to the factual matrix of the case.

The Delhi High Court discerned the facts of the present case as under:

i. The licence was issued under a statutory mandate and was required and acquired, before the commencement of operations or business, to establish and also to maintain and operate cellular telephone services.

ii. The licence was for initial setting up but, thereafter, for maintaining and operating cellular telephone services during the term of the licence.

iii. Contrary to what was stated, under the licence agreement executed in 1994, the considerations paid and payable were with the understanding that there would be only two players who would have unfettered right to operate and provide cellular telephone service in the circle. The payment, therefore, had the element of warding off competition or protecting the business from third-party competition.

iv. Under the 1994 agreement, the licence was initially for 10 years extendable by one year or more at the discretion of the Government / authority.

v. 1994 Licence was not assignable or transferable to a third party or by way of a sub-licence or in partnership. There was no stipulation regarding transfer or issue of shares to third parties in the company.

vi. Under the 1994 agreement, the licencee was liable to pay a fixed licence fee for the first three years. For the fourth year and onwards, the licencee was liable to pay variable licence fee @ ₹5,00,000 per 100 subscribers or part thereof, with a specific stipulation on minimum licence fee payable for the fourth to sixth year and with modified but similar stipulations from the seventh year onwards.

vii. The licence could be revoked at any time breach of the terms and conditions or in default of payment of consideration by giving 60 days’ notice.

viii. The authority also reserved the right to revoke the licence in the interest of the public by giving 60 days’ notice.

ix. Under the 1999 policy, the licencee had to forgo the right of operating in the regime of a limited number of operators and agreed to multiparty regime competition where additional licences could be issued without limit.

x. There was a lock-in period on the present shareholding for a period of five years from date of licence agreement, i.e., the effective date, and even transfer of shareholding directly or indirectly through subsidiary or holding company was not permitted during this period. This had the effect of ‘modifying’ or clarifying the 1994 agreement, which was silent.

xi. Licence fee calculated as a percentage of gross revenue was payable w.e.f. 1st August, 1999. This was provisionally fixed at 15 per cent of the gross revenue of the licensee but was subject to the final decision of the Government about the quantum of revenue share to be charged as licence fee after obtaining recommendation of TRAI.

xii. At least 35 per cent of the outstanding dues,including interest payable as on 31st July, 1999 and liquidated damages in full, had to be paid on or before 15th August, 1999. Dates for payments of arrears were specified.

xiii. Past dues up to 31st July, 1999 along with liquidated damages had to be paid as stipulated in the 1999 policy, on or before 31st January, 2000 or on an earlier date as stated.

xiv. The period of licences under the 1999 policy was extended to 20 years starting from the effective date.

xv. Failure to pay the licence fee on a yearly basis would result in cancellation of licences. Therefore, to this extent, licence fee was / is payable for operating and continuing operations as a cellular telephone operator.

On a consideration of the aforesaid aspects, the Delhi High Court held that the payment of licence fee was capital in part and revenue in part and that it would not be correct to hold that the whole fee was capital or revenue in nature in its entirety. It was further observed that the licencees / Assessees in question required a licence in order to start or commence business as cellular telephone operators; that payment of licence fee was a precondition for the Assessees to commence or set up the business. That it was a privilege granted to the Assessee subject to payment and compliance with the terms and conditions.

It was observed by the High Court that the licence granted by the Government or the concerned authority to the Assessee would be a capital asset and yet, since the Assessee had to make the payment on a yearly basis on the gross revenue to continue to be able to operate and run the business, it would also be in the nature of revenue expenditure. Having opined thus, the High Court decided to apportion the licence fee as partly revenue and partly capital and divided the licence fee into two periods, that is, before and after 31st July, 1999 and observed that the licence fee that had been paid or was payable for the period upto 31st July, 1999, i.e. the date set out in the Policy of 1999, should be treated as capital expenditure and the balance amount payable on or after the said date should be treated as revenue expenditure.

In an appeal filed before the Supreme Court by the Revenue, the Supreme Court noted the provisions of the Act and observed that Section 35ABB of the Act governs the treatment of expenditure incurred by entities to obtain a licence for operating telecommunication services in India. The provision addresses the tax treatment of such expenses and ensures that they align with the income tax framework. With effect from 1st April 1996, this provision provides for amortisation of capital expenditure incurred for acquisition of any right to operate telecommunication services, regardless of whether such cost is incurred before the commencement of such business or thereafter. The cost is allowed to be amortised in equal installments in the years for which the licence is in force. The amortisation commences from the year in which such business commences (where such cost is incurred before the commencement of such business) or the year in which such cost is actually paid, irrespective of the method of accounting adopted by the Assessee for such expenditure.

The Supreme Court also noted provisions of the Telegraph Act, which is the parent legislation under which licences to establish, maintain or work a telegraph are issued.

The Supreme Court then referred to the terms of the Licence Agreement entered into under the Policy of 1994 and the terms of migration of the existing licencees to the New Telecom Policy, 1999 regime, with a view to examine whether the nature and character of the licence fee was changed in light of migration.

The Supreme Court, thereafter, made a detailed review of relevant case law detailing the nature and characteristics of capital expenditure and revenue expenditure and the tests to identify the same.

The Supreme Court culled out the broad principles / tests that have been forged and adopted by it from time to time, while determining whether a given expenditure is capital or revenue in nature.

The Supreme Court, having regard to the tests and principles forged by this Court from time to time, proceeded to consider whether the High Court of Delhi was right in apportioning the licence fee as partly revenue and partly capital by dividing the licence fee into two periods, i.e., before and after 31st July, 1999 and accordingly holding that the licence fee paid or payable for the period upto 31st July, 1999 i.e. the date set out in the Policy of 1999 should be treated as capital and the balance amount payable on or after the said date should be treated as revenue.

The Supreme Court answered the said question in the negative, against the assessees and in favour of the Revenue for the following reasons:

i. Reliance placed by the High Court on the decisions in Jonas Woodhead and Sons (1997) 224 ITR 342 (SC) and Best and Co. (1966) 60 ITR 11 (SC) and the decision of the Madras High Court in Southern Switch Gear Ltd. (1984)148ITR272(Mad) as approved by this Court (1998) 232ITR 359(SC) appeared to be misplaced in as much as the said cases did not deal with a single source / purpose to which payments in different forms had been made. On the contrary, in the said cases, the purpose of payments was traceable to different subject matters and accordingly, it was held that the payments could be apportioned. However, in the present case, the licence issued under Section 4 of the Telegraph Act was a single licence to establish, maintain and operate telecommunication services. Since it was not a licence for divisible rights that conceive of divisible payments, apportionment of payment of the licence fee as partly capital and partly revenue expenditure was without any legal basis.

ii. Perhaps, the decision of the High Court could have been sustained if the facts were such that even if the Assessee-operators did not pay the annual licence fee based on AGR, they would still be able to hold the right of establishing the network and running the telecom business. However, such a right was not preserved under the scheme of the Telegraph Act. Hence, the apportionment made by the High Court was not sustainable.

iii. The fact that failure to pay the annual variable licence fee led to revocation or cancellation of the licence vindicated the legal position that the annual variable licence fee was paid towards the right to operate telecom services. Though the licence fee was payable in a staggered or deferred manner, the nature of the payment which flowed was plainly from the licensing conditions and could not be recharacterised. A single transaction cannot be split up, in an artificial manner, into a capital payment and revenue payments by simply considering the mode of payment. Such a characterisation would be contrary to the settled position of law and decisions of the Supreme Court, which suggest that payment of an amount in installments alone does not convert or change a capital payment into a revenue payment.

iv. It is trite that where a transaction consists of payments in two parts, i.e., lump-sum payment made at the outset, followed up by periodic payments, the nature of the two payments would be distinct only when the periodic payments have no nexus with the original obligation of the Assessee. However, in the present case, the successive installments relate to the same obligation, i.e., payment of licence fee as consideration for the right to establish, maintain and operate telecommunication services as a composite whole. This is because in the absence of a right to establish, maintenance and operation of telecommunication services is not possible. Hence, the cumulative expenditure would have to be held to be capital in nature.

v. Thus, the composite right conveyed to the Assessees by way of grant of licences is the right to establish, maintain and operate telecommunication services. The said composite right cannot be bifurcated in an artificial manner, into the right to establish telecommunication services on the one hand and the right to maintain and operate telecommunication services on the other. Such bifurcation is contrary to the terms of the licensing agreement(s) and the Policy of 1999.

vii. Further, it is to be noticed that even under the 1994 Policy regime, the payment of licence fee consisted of two parts:

a) A fixed payment in the first three years of the licence regime;

b) A variable payment from the fourth year of the licence regime onwards, based on the number of subscribers.

Having accepted that both components, fixed and variable, of the licence fee under the 1994 Policy regime must be duly amortised, there was no basis to reclassify the same under the Policy of 1999 regime as revenue expenditure in so far as variable licence fee is concerned.

As per the Policy of 1999, there was to be a multi-licence regime in as much as any number of licences could be issued in a given service area. Further, the licence was for a period of 20 years instead of 10 years as per the earlier regime. The migration to the Policy of 1999 was on the condition that the entire policy must be accepted as a package and consequently, all legal proceedings and disputes relating to the period up to 31st July, 1999 were to be closed. If the migration to the Policy of 1999 was accepted by the Assessees here in or the other service providers, then all licence fee paid up to 31st July, 1999 was declared as a one-time licence fee as stated in the communication dated 22nd July, 1999 which was treated to be a capital expenditure. The licence granted under the Policy of 1999 was non-transferable and non-assignable. More importantly, if there was a default in the payment of the licence fee, the entire licence could be revoked after 60 days’ notice. The provisions of the Telegraph Act, particularly Section 8 thereof, are also to the same effect. Having regard to the aforesaid facts and in light of the aforesaid conclusions, the Supreme Court held that the payment of entry fee as well as the variable annual licence fee paid by the Assessees to the DoT under the Policy of 1999 was capital in nature and may be amortised in accordance with Section 35ABB of the Act.

According to the Supreme Court, the High Court of Delhi was not right in apportioning the expenditure incurred towards establishing, operating and maintaining telecom services as partly revenue and partly capital by dividing the licence fee into two periods, that is, before and after 31st July, 1999 and accordingly, holding that the licence fee paid or payable for the period up to 31st July, 1999 i.e. the date set out in the Policy of 1999 should be treated as capital and the balance amount payable on or after the said date should be treated as revenue. The nature of payment being for the same purpose cannot have a different characterisation merely because of the change in the manner or measure of payment or for that matter the payment being made on an annual basis.

Therefore, in the ultimate analysis, the nomenclature and the manner of payment are irrelevant. The payment post 31st July, 1999 is a continuation of the payment pre-31st July, 1999 albeit in an altered format which does not take away the essence of the payment. It is a mandatory payment traceable to the foundational document, i.e., the license agreement as modified post migration to the 1999 policy. Consequence of non-payment would result in ouster of the licensee from the trade. Thus, this is a payment which is intrinsic to the existence of the licence as well as trade itself. Such a payment has to be treated or characterised as capital only.

In the result, the judgment of the Division Bench of the High Court of Delhi, dated 19th December, 2013 in ITA No.1336 of 2010 and connected matters, was set aside.

The judgments passed by the High Courts of Delhi, Bombay and Karnataka, following the judgment of the Division Bench of the High Court of Delhi, dated 19th December, 2013, were also consequently set aside.

The appeals filed by the Revenue were allowed

Sec 144C(2) — Draft Assessment Order — Due to oversight / inadvertence Petitioner did not inform the AO within 30 days period prescribed under sub-section (2) of section 144C of the Act that it had filed objection — AO passed assessment order unaware of the objection filed before DRP.

33 OmniActive Health Technologies Limited vs. Assessment Unit, Income Tax Department NFAC

[WP No. 474 Of 2024, Dated: 4th March, 2024. (Bom.) (HC).]

Sec 144C(2) — Draft Assessment Order — Due to oversight / inadvertence Petitioner did not inform the AO within 30 days period prescribed under sub-section (2) of section 144C of the Act that it had filed objection — AO passed assessment order unaware of the objection filed before DRP.

Petitioner’s case is that section 144C(2) of the Act, inter alia, requires Assessee, should he choose to file reference before the Dispute Resolution Panel (DRP) to file such objection within 30 days from the receipt of Draft Assessment Order. The section also requires Assessee to file a copy of the reference with the Assessing Officer (“AO”) within the time limit prescribed. Section 144C(4) of the Act requires AO to pass a final order within one month from the end of the month in which the period of filing of objections before DRP and AO expires.

According to Petitioner, though section 144C of the Act requires Petitioner to communicate the objection filed before the DRP to the AO, due to oversight / inadvertence Petitioner did not inform the AO within 30 days period prescribed under sub-section (2) of section 144C of the Act that it had filed objection by way of an email dated 23rd October, 2023. The AO, unaware of Petitioner having filed an objection before the DRP after expiry of the prescribed period of 30 days, proceeded to pass the assessment order dated 21st November, 2023. Petitioner informed the AO only on 28th November, 2023 about having filed objections with the DRP.

The Hon. Court observed that since Petitioner had already filed a reference raising its objections to the DRP within the 30 days period and section 144C(4) of the Act requires the AO to pass a final order including the view expressed by the DRP, the order dated 21st November, 2023 of the AO is set aside. The AO shall take further steps in the matter after the DRP passes its order on the objection filed by Petitioner, in accordance with law.

Sec 147 — Reassessment — Income Declaration Scheme, 2016 (“IDS, 2016”) — having issued a certificate under the IDS, 2016, after verifying the details filed by Petitioner, the declaration cannot be the basis to reopen the assessment of Petitioner.

32 Gaurang Manhar Gandhi vs. ACIT – 3(2)(1)

[WP NO. 2058 OF 2020,

Dated: 4th March, 2024, (Bom) (HC)]

Sec 147 — Reassessment — Income Declaration Scheme, 2016 (“IDS, 2016”) — having issued a certificate under the IDS, 2016, after verifying the details filed by Petitioner, the declaration cannot be the basis to reopen the assessment of Petitioner.

Petitioner, an individual, filed his return of income on24th July, 2014, declaring a total income of ₹88,13,470 for A.Y. 2014–15. Petitioner’s case was selected for scrutiny and Petitioner received a notice under section 143(2) of the Act and under section 142(1) of the Act calling upon Petitioner to provide various details / documents including details of long-term capital gains on sale of shares and short-term capital gain of office premises. Petitioner provided all the documents called for. Petitioner specifically provided details of the transactions reported in Bombay Stock Exchange for contracts of ₹10,00,000 and above. Petitioner made specific disclosure about transactions pertaining to sale of shares in Sunrise Asian Limited (“SAL”). Petitioner disclosed long-term capital gain on sale of shares of ₹6,44,61,215. Petitioner also gave the details of gain on sale of investments / shares / long term and disclosed that he had purchased and sold a quantity of 1,33,439 equity shares of SAL. The cost price is disclosed as ₹26,68,780 and the sale price is disclosed as ₹6,71,29,994.58 and a gain of ₹6,44,61,214.58 is also disclosed.

Subsequently, an assessment order dated 26th April, 2016 came to be passed under section 143(3) of the Act. The assessment order also discusses long-term capital loss, short-term capital loss, etc. which were carried forward.

Following the introduction of Chapter IX dealing with Income Declaration Scheme, 2016 (“IDS, 2016”) by the Finance Act, 2016, which came into effect from1st June, 2016, till 30th September, 2016, Petitioner, to get peace of mind, decided to take advantage of the IDS, 2016 and filed a declaration under section 183 of the Finance Act, 2016. Petitioner declared an amount of ₹6,84,61,220, which consisted of ₹6,44,61,215 pertaining to long-term capital gains on shares of SAL and ₹40,00,000 pertaining to cash income. Petitioner’s declaration was accepted pursuant to which Petitioner paid the amounts payable under the Finance Act, 2016 and Petitioner was also issued a certificate of declaration under section 183 of the Finance Act, 2016.

Over three and half years later, Petitioner received a notice dated 31st March, 2021 issued under section 148 of the Act, stating that there was reason to believe Petitioner’s income chargeable to tax for A.Y. 2014–15 has escaped assessment within the meaning of section 147 of the Act. Petitioner was also provided with the reasons recorded for reopening. The reasons indicate that a total amount of ₹60,25,280 had escaped assessment, which needs to be taxed. This amount is in two parts, i.e., ₹26,68,780 paid by Petitioner for purchase of shares in SAL and ₹33,56,500 as assumed brokerage / commission paid. Reasons do not mention anywhere that this amount was paid or when it was paid or to whom it was paid. It proceeds on the assumption that for the kind of transaction Petitioner had indulged, an operator or broker charges a fixed commission, which might vary between 0.5 per cent to 5 per cent of the entire sale consideration and taking into account that the total sale consideration was ₹6,71,29,995, the brokerage that Petitioner might have paid would be ₹33,56,500, which needs to be taxed. This amount of ₹6,71,29,995 is the sale consideration, which Petitioner had disclosed in the computation of income filed along with the ROI and also during the assessment proceedings in response to a query raised by the Assessing Officer.

In response to the notice received under section 148 of the Act, Petitioner filed objections vide letter dated 17th September, 2021, and the same came to be rejected by an order dated 14th February, 2022. Petitioner, therefore, filed this Petition.

The Hon. Court observed that under the IDS, 2016, and as per the clarifications of the IDS, 2016 dated 30th June, 2016, issued by the Central Board of Direct Taxes (“CBDT”), it is stated that the information contained in the declaration shall not be shared with any other law enforcement agency and not only that, it will not be shared within the Income Tax Department for any investigation in respect of a valid declaration. Since the declaration in Petitioner’s case was a valid declaration, the information as contained in the declaration filed by Petitioner could not have been made available to the AO, who issued the notice under section 148 of the Act. In answer to question no. 5 in the clarifications, which says “where a valid declaration is made after making valuation as per the provisions of the scheme read with IDS Rules and tax, surcharge and penalty as specified in the scheme have been paid, whether the Department will make any enquiry in respect of sources of income, payment of tax, surcharge and penalty” is an emphatic ‘NO’. The Hon. Court agreed with the contention that the information could not have been shared with the AO.

The Hon. Court observed that reliance placed on the declaration made under the IDS, 2016 is against the principles of natural justice and is not valid. Moreover, Respondents having issued a certificate under the IDS, 2016 after verifying the details filed by Petitioner, the declaration cannot be the basis to reopen the assessment of Petitioner.

The Hon. Court further observed that the reopening merely by deeming commission expenses of 5 per cent of total sale consideration of the shares and arbitrarily and in an adhoc manner fixing 5 per cent of the total sale consideration as commission expenses amounting to ₹33,56,500 cannot be accepted. Ad-hoc disallowances without pointing out any specific defects cannot be accepted. In fact, there is not even an allegation in the reasons to believe escapement of income that Petitioner had in fact paid any commission to any broker or operator. The AO proceeds on a surmise that there was no such free service available and, therefore, Petitioner would have paid brokerage. The AO having observed that the brokerage / commission varied between 0.5 per cent to 5 per cent does not even explain why he took into account 5 per cent as the brokerage paid and not 0.5 per cent or any other figure in that band.

The Hon. Court further observed that there has been no failure on the part of Petitioner to disclose any material fact, because in the computation of income filed by Petitioner, (a) Petitioner has disclosed long-term capital gain on sale of shares of ₹6,44,61,214.58, (b) purchase of 1,33,439 equity shares of SAL on 16th September, 2011 for a total consideration of ₹26,68,780, (c) the sale of those shares between 30th July, 2013 up to 23rd October, 2014 for a total consideration of ₹6,71,29,994.58 and (d) the gain of ₹6,44,61,214.58. The Petitioner gave the entire details relating to the transactions in shares of SAL and even in the assessment order, long-term capital loss, short-term capital loss, etc., are discussed. It is also recorded in the assessment order dated 26th April, 2016 that capital gain was nil.

In the circumstances, the subject matter of capital gains in the shares of SAL was certainly a subject matter of consideration of the AO during the original assessment proceedings. Once a query is raised during the assessment proceedings and 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 also not necessary that an assessment order should contain reference and / or discussion to disclose its satisfaction in respect of the query raised. Therefore, the reopening of the assessment is merely on the basis of change of opinion of the AO from that held earlier during the course of assessment proceedings and this change of opinion does not constitute justification and / or reason to believe that income chargeable to tax has escaped assessment.

In the circumstances, the impugned notice dated 31st March, 2021 issued under section 148 of the Act quashed.

Transfer of case — Transfer from one AO to another subordinate to different higher authority — Condition precedent — Agreement between two higher authorities — Assessee should be given adequate opportunity to be heard — Mere speculation that assessee was connected to group of companies against whom search proceedings undertaken and that cases had to be centralized — Order of transfer not valid.

96 Kamal VarandmalGalani vs. PCIT

[2024] 460 ITR 380 (Bom)

A.Y.: 2021–22

Date of Order: 20th April, 2023

S 127 of ITA 1961

Transfer of case — Transfer from one AO to another subordinate to different higher authority — Condition precedent — Agreement between two higher authorities — Assessee should be given adequate opportunity to be heard — Mere speculation that assessee was connected to group of companies against whom search proceedings undertaken and that cases had to be centralized — Order of transfer not valid.

The assessee had been filing return of income for the past 22 years in Mumbai. The assessee was in receipt of show cause notice dated 24th June, 2022 issued by the Principal Commissioner of Income-tax — 19 proposing to transfer the assessment jurisdiction to Deputy Commissioner of Income-tax — Central Circle, Jaipur to enable coordinated assessment with that of Veto Group on whom search proceedings were conducted u/s 132 of the Act. As per the show cause notice, the Principal Commissioner of Income-tax (Central) — Rajasthan had proposed for centralization of the case of the assessee with Veto Group at Jaipur, and therefore, the assessee was asked to file submissions. The assessee filed objections against the aforesaid transfer of jurisdiction on the grounds that there was no search conducted at the premises of the assessee. Only a survey was conducted u/s 133A that too in the case of one company LHPL in which the assessee was a director. There was no material found during the search conducted at Veto group which could be related to the assessee. Similarly, there was no incriminating material found in the course of survey at LHPL which could relate the assessee or even LHPL to Veto Group. Lastly, the show cause notice did not refer to any material collected by the Department against the assessee on the basis of which transfer of jurisdiction was proposed.

The objections of the assessee were rejected on the ground that the assessee was the director of LHPL which was proposed to be centralized with Jaipur jurisdiction and further that the assessee was a key person of the Veto Group. During the course of search / survey at various entities of the group, incriminating documents and data were found / seized / impounded which may relate to the assessee as well as other ssesses of the group. However, what is incriminating material was nowhere specified neither in the show cause notice nor in the order.

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

“i) The Instructions of the CBDT dated 17th September, 2008 make it clear that where an order of transfer is proposed for centralisation of cases, while sending a proposal for centralisation, reasons have to be reflected including the relationship of the assessee with the main persons of the group.

ii) The order passed u/s 127(2) of the Act did not reflect why it was necessary to transfer the jurisdiction from the Deputy Commissioner, Mumbai to Deputy Commissioner, Jaipur. None of the issues raised by the assessee had been dealt with either in the order disposing of the objections raised by the assessee much less had they been reflected in the order u/s 127(2) of the Act. The transfer of assessment jurisdiction from Mumbai to Jaipur would certainly cause inconvenience and hardship to the assessee both in terms of money, time and resources, and therefore, in the absence of the requisite material or reasons as the basis the order would be nothing but an arbitrary exercise of power and therefore liable to be set aside.”

Revision — Powers of Commissioner — Special deduction — Claim to deduction u/s 80-IA not made in return of income and assessment order passed — Principal Commissioner or Commissioner competent to consider claim for deduction — Matter remanded.

95 TATA-ALDESA JVvs. UOI

[2024] 460 ITR 302 (Telangana)

A.Y.: 2014–15

Date of Order: 12th June, 2023

Ss. 80IA, 263 and 264 of ITA 1961

Revision — Powers of Commissioner — Special deduction — Claim to deduction u/s 80-IA not made in return of income and assessment order passed — Principal Commissioner or Commissioner competent to consider claim for deduction — Matter remanded.

For the A.Y. 2014–15, the Assessing Officer passed an order u/s 143(3) of the Income-tax Act, 1961. Thereafter, the assessee filed an application before the Principal Commissioner u/s 264 in which it submitted that it had commenced its business operations during the previous year 2013–14, and accordingly, the A.Y. 2014–15 was the first year under assessment and that though it was entitled to claim deduction u/s 80-IA because of a bona fide error, it did not claim it either at the time of filing the return of income or during the assessment proceeding. The assessee also sought condonation of delay of 52 days. The Principal Commissioner condoned the delay and observed that the assessee did not opt to make the claim to deduction u/s 80-IA and that in the subsequent A.Y. 2015–16 also, the assessee did not make such claim before the Assessing Officer. He opined that the assessee chose not to claim deduction u/s 80-IA and declined to interfere u/s 264 in the order of the Assessing Officer.

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

“i) There is a fundamental difference between sections 263 and 264 of the Income-tax Act, 1961. For invoking the power u/s 263, the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner should be of the opinion that an order passed by the Assessing Officer or Transfer Pricing Officer is erroneous inasmuch as the order is prejudicial to the interests of the Revenue. In that event, he may call for the record of the proceedings before the Assessing Officer or the Transfer Pricing Officer and after making inquiry, may pass such an order as section 263 contemplates. But there is no such limitation in section 264 under which the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may either of his own motion or on an application by the assessee for revision, call for the records of any proceeding relatable to an order other than an order to which section 263 applies and after making due inquiry, he may pass such order thereon as he thinks fit; the only caveat being that such order should not be prejudicial to the assessee. It is not confined to legality or validity of an order passed by the Assessing Officer or a claim made and disallowed or a claim not put forth by the assessee.

ii) There was no limitation on the exercise of power u/s 264 by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. The order rejecting the assessee’s application was set aside. The matter was remanded to the Principal Commissioner for reconsideration of the revision application filed by the assessee u/s 264 on the merits after giving due opportunity of hearing to both the sides.”

Revision — Writ — Powers of Commissioner — Commissioner cannot consider application where appeal lies or is pending — Prohibition does not apply where writ petition has been filed.

94 Ratan Industries Ltd. vs. Principal CIT

[2024] 460 ITR 504 (All.)

A.Y.: 2012–13

Date of Order: 11th May, 2023

S. 264 of ITA 1961

Revision — Writ — Powers of Commissioner — Commissioner cannot consider application where appeal lies or is pending — Prohibition does not apply where writ petition has been filed.

The assessment proceedings for the A.Y. 2012–13 were completed. Against the assessment order, the assessee filed revision application u/s 264 of the Income-tax Act, 1961. The Principal Commissioner rejected the application on the grounds that as the writ petition, filed by the assessee against the order passed initiating reassessment proceedings u/s 143(3)/147 of the Act of 1961 on 30th March, 2019, is pending consideration, in view of the provisions of section 264(4)(a) of the Act, no order can be passed u/s 264 of the Income-tax Act of 1961.

The Allahabad High Court allowed the writ petition filed by the assessee and held as follows:

“i) From a perusal of section 264(4)(a) of the Income-tax Act, 1961, it is clear that the Principal Commissioner or Commissioner shall not revise any order which is under challenge in a case where an appeal against the order lies to the Deputy Commissioner (Appeals) or to the Commissioner (Appeals) or to the Appellate Tribunal but has not been made and the time within which such appeal may be made has not expired, or, in the case of an appeal to the Commissioner (Appeals) or to the Appellate Tribunal, the assessee has not waived his right of appeal. The pendency of a writ petition before the High Court would not amount to pendency of any appeal before any authority.

ii) Once the proceedings were initiated for reassessment by the respondent and the competent authority proceeded to complete the assessment on 31st December, 2019, no occasion arose as to any matter being pending before the High Court as the only challenge before the writ court was for initiation of proceedings u/s 143(3) read with section 147 of the Act. Once the reassessment was made and the proceedings were completed, the writ petition had practically become infructuous. The ground taken by the Principal Commissioner for rejection of the application did not hold any ground as the writ petition is not an appeal according to section 264(4)(a) of the Act. The rejection of the application for revision was not valid.

iii) In view of the above discussions, I find that the order dated 30th March, 2022, passed by the Principal Commissioner of Income-tax-I, Agra, is unsustainable in the eyes of law and, as such, the same is hereby quashed and set aside. Respondent No. 1 is hereby directed to continue with the revisional proceedings initiated by the assessee-petitioner u/s 264 of the Act and shall decide the same expeditiously, in accordance with law.”

Rent — TDS — Agreement with State Government for development — External Development Charges (EDC) paid under Agreement with State Government — Not in the nature of rent — No tax deductible on such charges.

93 DLF Homes Panchkula Pvt. Ltd. vs. JCIT(OSD)

[2023] 459 ITR 773 (Del.)

Date of Order: 24th March, 2023

Ss. 194I read with 194C of the IT Act

Rent — TDS — Agreement with State Government for development — External Development Charges (EDC) paid under Agreement with State Government — Not in the nature of rent — No tax deductible on such charges.

The assessee was engaged in the business of developing real estate. The assessee made application to Director General, Town and Country Planning for grant of license for setting up an IT Park as well as a Group Housing Colony. As per the rules of Haryana Development and Regulation of Urban Areas Rules, 1976 (HUDA Rules), the assessee entered into agreement with the State Government of Haryana for setting up the IT Park and Group Housing Colony. The agreement required the assessee to pay proportionate development charges as and when required and as determined by the Director General.

The Assessing Officer held that the external development charges were in the nature of “rent” and, therefore, tax was liable to be deducted at source under section 194-I of the Act at the rate of 10 per cent. The Assessing Officer quantified the demand.

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

“i) The question as to the nature of external development charges payment was one of the issues that was required to be addressed by the Assessing Officer. He had concluded that the payment was ‘rent’ as it was in the nature of an arrangement to use land. It was not open to the Department to now contend that external development charges were payment made to a contractor under a contract and not ‘rent’ under an arrangement to use land.

ii) The Assessing Officer had held that tax was liable to be deducted at source u/s 194-I of the Act, and he had also proceeded to analyse the section and hold that external development charges were in the nature of rent. He had, in addition, also applied the rate of 10 per cent for assessing the assessee’s liability.

iii) The approach of the Revenue was flawed. The contention that the findings of the Assessing Officer regarding the nature of the external development charges as well as at the provisions referred by him for determining the assessee’s liability were not material was erroneous. The orders passed by the Assessing Officer raising a demand u/s 201(1) and (1A) of the Act were liable to be quashed.”

Reassessment — Notice after three years — Limitation — Change in law — Effect of decision of Supreme Court in Ashish Agarwal — Conditions prescribed under amended provisions of section 149(1)(d) for extended period of limitation — Notices issued beyond limitation period stipulated under amended provisions of section 149(1)(a) not satisfying prescribed conditions — Barred by limitation. Reassessment — Notice after three years — Limitation — CBDT Instructions dated 11th May, 2022 — Validity — Instruction vague about “original date when such notices were to be issued” — Instruction to the extent it propounded “travel back in time” theory unsustainable.

92 Ganesh Dass Khanna vs. ITO

[2024] 460 ITR 546 (Del.)

A.Ys.: 2016–17 and 2017–18

Date of Order: 10th November, 2023

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

Reassessment — Notice after three years — Limitation — Change in law — Effect of decision of Supreme Court in Ashish Agarwal — Conditions prescribed under amended provisions of section 149(1)(d) for extended period of limitation — Notices issued beyond limitation period stipulated under amended provisions of section 149(1)(a) not satisfying prescribed conditions — Barred by limitation.

Reassessment — Notice after three years — Limitation — CBDT Instructions dated 11th May, 2022 — Validity — Instruction vague about “original date when such notices were to be issued” — Instruction to the extent it propounded “travel back in time” theory unsustainable.

A bunch of petitions involving the A.Y.s 2016–17 and 2017–18 were before the Delhi High Court where the common issue to be decided by the Hon’ble High Court was whether the notices issued u/s 148 of the Act were maintainable having regard to clauses (a) and (b) of section 149(1). In other words, where the alleged escaped income is below the threshold of R50 lakhs, the period of limitation of three years as prescribed u/s 149(1)(a) will be applicable.

Owing to the COVID-19 pandemic, Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act was enacted where the due dates / time limit / limitation were extended. Under the TOLA, the end date for proceedings and compliances referred to in section 3(1) of the said Act (which included the compliance regarding the issue of notice u/s 148) was 31st March, 2021. The Finance Act was amended in 2021 whereby significant amendments were made to the provisions relating to reopening of assessment. Sections 147 to 151 were substituted and new provisions u/s 148A and 151 were also introduced. The controversy arose when CBDT issued two notifications, i.e., Notification 20 of 2021, whereby the period of limitation as per provisions of section 149 was extended from 31st March, 2021 to 30th April, 2021 and Notification No. 38 of 2021 further extended the period of limitation to 30th June, 2021. An Explanation was added in both the Notifications which provided that provisions of sections 148, 149 and 151 as existed prior to amendment by Finance Act 2021 shall apply. In other words, the Notifications provided that the old provisions would apply even when the amended provisions were in force. Thus, the Departmentissued notices under the unamended provisions of section 148.

Several petitions were filed before the High Court challenging the notice on broadly two grounds, i.e., the notices could not have been issued under the old provisions when new provisions were in force and the notices were barred by limitation as per the amended provisions of section 149. The High Courts quashed the notices which were issued under the old provisions based on the Explanation contained in the aforesaid Notifications. The Union of India challenged the decision of the High Court before the Supreme Court and the Hon’ble Supreme Court, vide its judgment in Ashsish Agarwal’s case reported in 444 ITR 1 (SC) held that as a one-time measure the notices issued u/s 148 of the Act be treated as notice issued u/s 148A(b) of the amended provisions.

Pursuant to the decision of the Supreme Court, the CBDT issued Instruction dated 11th May, 2022 in compliance with the directions of the Supreme Court in Ashish Agarwal’s case. Accordingly, a second round of notices / communications were issued by the Assessing Officers. The assessees filed their objections once again against the notices.

Amongst the various objections taken, one of the objections was that the time limit prescribed u/s 149(1)(a) had expired and given the fact that the income chargeable to tax which had allegedly escaped assessment amounted to less than ₹50 lakhs, the revenue could not take recourse to the extended limitation period provided in clause (b) of sub-section (1) of section 149 of the 1961 Act. The Department rejected this objection of the assessee and proceeded to pass order u/s 148A(d) of the Act holding it to be fit case for issue of notice u/s 148 and thereby, notices were issued u/s 148 of the Act. It is this second notice issued u/s 148 which is now the subject matter of challenge before the High Court in the bunch of petitions.

The Delhi High Court allowed the petitions and held as under:

“i) Section 149(1) of the Income-tax Act, 1961 as amended by the Finance Act, 2021 mandates that no notice u/s 148 for reopening the assessment u/s 147 would be issued for the relevant assessment year after a period of three years has elapsed from the end of the relevant assessment year. The Assessing Officer can invoke the extended limitation period if the conditions precedent prescribed in clause (b) of sub-section (1) of the amended section 149 are fulfilled. Under clause (b) of sub-section (1) of section 149 one of the conditions for invoking the extended period up to ten years is that income chargeable to tax which has escaped assessment amounts to, or is likely to amount to, ₹50 lakhs or more for the assessment year in issue. Therefore, after the coming into force of the Finance Act, 2021, in cases where, for the relevant assessment year, the alleged escaped income is less than ₹50 lakhs, notice u/s 148 could only be issued for commencement of reassessment proceedings within the limitation period provided in clause (a) of section 149(1) as amended. If proceedings are wrongly initiated, estoppel, waiver or res judicata principles cannot apply in such situations.

ii) The time limit for reopening assessments under the new regime introduced by the Finance Act, 2021 was reduced from six years to three years and only in respect of ‘serious tax evasion cases’, that too, where evidence of concealment of income of R50 lakhs or more in a given period was found, has the period for reopening the assessment been extended to ten years. In order to ensure that utmost care is taken before invoking the extended period of limitation, approval should be obtained from the Principal Chief Commissioner at the highest hierarchical level of the Department. Where escapement of income is below ₹50 lakhs, the normal period of limitation, i.e., three years would apply.

iii) In UOI vs. Ashish Agarwal [2022] 444 ITR 1 (SC); [2023] 1 SCC 617, the Supreme Court held that it would be open to the Department to advance submissions based on the provisions as amended by the 2021 Act and those that might otherwise be available in law. Since the Supreme Court, in no uncertain terms, ruled that the judgments of the various High Courts, which included the decision in Mon Mohan Kohli vs. Asst. CIT [2021] SCC OnLine Del 5250; [2022] 444 ITR 207 (Delhi), stood “modified or substituted” to the extent indicated in the directions issued by the court, it would follow that all rights and contentions would be available to the assessees, notwithstanding any observations made in that judgment which curtailed the defences available to the assessees u/s 149.

iv) The law declared by the Supreme Court, under article 141 of the Constitution of India, is binding on every authority, including the High Court, which would necessarily have to be given effect. The Supreme Court’s directions issued under article 142 are no different.

v) The Supreme Court’s directions issued u/s 142 would show that the court noted that the power of reassessment which existed before 31st March, 2021 continued to exist till 30th June, 2021, with alteration in procedure brought about upon the enactment and enforcement of the 2021 Act. The Supreme Court, in no uncertain terms, declared Explanation A(a)(ii)/A(b) of the Notifications dated 31st March, 2021 and 27th April, 2021, ultra vires the parent statute, i.e., the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020. These Explanations sought to impose the un-amended provisions of sections 148, 149 and 151 of the 1961 Act, although the substituted provisions were in force. It specifically observed that the Legislature was aware of the situation when it enacted the 2021 Act. Its observations made it clear that the amended section 149 continued to operate despite attempts to the contrary made by the introduction of the Explanations in the notifications dated 31st March, 2021 and 27th April, 2021.

vi) There was no power invested under the 2020 Act, and that too through notifications, to amend the statute, which had the imprimatur of the Legislature and since, with effect from 1st April, 2021, when the 2021 Act came into force, the Notifications dated 31st March, 2021 and 27th April, 2021, which were sought to be portrayed by the Department as extending the period of limitation, were contrary to the provisions of section 149(1)(a) of the 1961 Act, they lost their legal efficacy. The extension of the end date for completion of proceedings and compliances, a power which was conferred on the Central Government u/s 3(1) of the 2021 Act, could not be construed as one which could extend the period of limitation provided u/s 149(1)(a) of the 1961 Act.

vii) Section 149(1)(a) applied to the A.Ys. 2016–17 and 2017–18. The third proviso only excluded the timeframe obtaining between the date when the notice u/s 148A(b) was issued and the date by which the assessee filed its response within the time and extended time provided in the notices in question. Therefore, the date could not be shifted beyond the date when the original notice under the unamended section 148 was issued, which was treated as notice u/s 148A(b) of the 1961 Act. Concededly, these notices were issued between 1st April, 2021 and 30th June, 2021, by which time the limitation prescribed u/s 149(1)(a) had already expired. The fourth proviso had no impact on the outcome of the cases at hand, as it provided for a situation where, after the exclusion of the timeframe referred to in the third proviso, the time available to the Assessing Officer for passing an order u/s 148A(d) was less than seven days. Neither the judgment of the Supreme Court rendered in Ashish Agarwal nor the 2020 Act allowed for any such recourse to the Department, i.e., that extended reassessment notice would ‘travel back in time’ to their original date when such notices were to be issued and thereupon application of the provisions of the amended section 149 of the 1961 Act.

viii) The provisions contained in the Instruction dated 11th May, 2022, were beyond the powers conferred on the CBDT u/s 119 of the 1961 Act and were ultra vires the amended provisions of section 149(1) of the 1961 Act.

ix) The decision in Ashish Agarwal did not rule on the provisions contained in the 2020 Act or the impact they could have on the reassessment proceedings u/s 147 of the 1961 Act. The 2020 Act conferred no such power on the CBDT. There is no clarity in the Instruction dated 11th May, 2022 regarding the ‘original date when such notices were to be issued’. The provisions of the Instruction dated 11th May, 2022 in question are also unsustainable because they are vague. “Certainty” in taxing statutes is one of the ground norms, as ordinarily, they are agnostic to equitable principles.

x) The principle of constructive res judicata was not applicable. The orders passed u/s 148A(d) and the consequent notices issued for the A.Ys. 2016–17 and 2017–18 under the amended provisions of section 148 of the 1961 Act were unsustainable. The references made in paragraphs 6.1 and 6.2(ii) of the Instruction dated 11th May, 2022 issued by the CBDT to the extent they propounded the ‘travel back in time’ theory, was bad in law.”

Income from other sources — Shares received at price higher than market value — Determination of fair market value — Change in prescribed formula with effect from 1st April 2018 — Formula that prevails during relevant A.Y. 2014–15 applicable — Application of amended formula as on date of assessment order by AO — Not sustainable.

91 Principal CIT vs. Minda Sm Technocast Pvt. Ltd.

[2024] 460 ITR 7 (Del.)

A.Y.: 2014–15

Date of Order: 4th August, 2023

S. 56(2)(via) of ITA 1961: Rule 11UA of IT Rules 1962

Income from other sources — Shares received at price higher than market value — Determination of fair market value — Change in prescribed formula with effect from 1st April 2018 — Formula that prevails during relevant A.Y. 2014–15 applicable — Application of amended formula as on date of assessment order by AO — Not sustainable.

The assessee purchased 48 per cent of the equity of a company from three entities at a price of ₹5 per share. For the A.Y. 2014–15, the assessee submitted the valuation report of a chartered accountant who had determined the value of the shares at ₹4.96 per share in terms of rule 11UA of the Income-tax Rules, 1962, as applicable in the period in issue, i.e., the A.Y. 2014–15. The Assessing Officer valued the shares at ₹45.72 per share, taking into account rule 11UA of the Rules, as on the date when the order was passed and added the difference to the income of the assessee.

The Commissioner (Appeals) upheld the addition. The Tribunal deleted the addition.

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

“i) The formula prescribed under rule 11UA of the Income-tax Rules, 1962 required calculation of the fair market value by taking into account, inter alia, the book value of the assets shown in the balance-sheet. This underwent a change with effect from April 1, 2018, which resulted in the fair market value of unquoted shares being calculated by taking into account, inter alia, the value of assets such as immovable property, adopted by ‘any authority of the Government’ for the purposes of payment of stamp duty.

ii) The Assessing Officer had committed an error in applying the formula contained in rule 11UA of the Rules, which was not applicable to the A.Y. 2014-15 in question as on the date of passing the assessment order and the error was continued by the Commissioner (Appeals). The assessee had applied the formula prescribed in rule 11UA which was applicable for the A.Y. 2014-15. The error was corrected by the Tribunal and therefore, there was no reason to interfere in its order.”

Block assessment — Procedure — Notice u/s 143(2) — Condition precedent for block assessment — Failure to issue notice u/s 143(2) — Not a curable defect u/s 292BB.

90 Chand Bihari Agrawal vs. CIT

[2024] 460 ITR 270 (Patna)

Date of Order: 25th July, 2023

Ss. 143(2), 158BC and 292BB of ITA 1961

Block assessment — Procedure — Notice u/s 143(2) — Condition precedent for block assessment — Failure to issue notice u/s 143(2) — Not a curable defect u/s 292BB.

A search was conducted at the premises of the assessee. Subsequently, a notice u/s 158BC was issued on 10th December, 2003 directing the assessee to file the return within a period of one month. Thereafter, a notice u/s 142(1) was issued on 9th November, 2004, wherein the assessee was required to file a return in response to the notice issued u/s 158BC issued earlier. The assessee filed the return on 22nd November, 2004. Assessment was made and order was passed u/s 158BC. The assessment was completed without issuing any notice u/s 143(2) of the Act.

The assessee’s appeals before the CIT(A) as well as the Tribunal were dismissed. The Tribunal observed that the return filed by the assessee was non-est as the same was filed beyond the outer limit of 45 days u/s 158BC, and therefore, the Assessing Officer was entitled to proceed for assessment even without the issuance of notice u/s 143(2) of the Act. Further, the Tribunal held that in the event that assessment is defective, the defect was cured by operation of section 292BB. Though section 292BB was introduced later, the Tribunal held that it was merely a procedural clarification, and since the assessee co-operated in the assessment, 292BB would apply.

The Patna High Court allowed the appeal filed by the assessee and held as follows:

“i) Though block assessment under Chapter XIV-B of the Act is a complete code in itself, the procedure under Chapter XIV for regular assessment in so far as it is applicable to block assessments stands incorporated under clause (b) of section 158BC as Circular No. 717, dated August 14, 1995 ([1995] 215 ITR (St.) 70, 98) clarifies the requirement of law in respect of service of notice u/ss. 142, 143(2) and 143(3) of the Act. It is declared that “even for the purpose of Chapter XIV-B of the Act, for the determination of undisclosed income for a block period under the provisions of section 158BC, the provisions of section 142 and sub-sections (2) and (3) of section 143 are applicable and no assessment could be made without issuing notice u/s 143(2) of the Act.

ii) Section 292BB only speaks of a notice being deemed to be valid in certain circumstances, when the assessee has appeared in any proceeding and co-operated in any enquiry relating to assessment or reassessment. It does not take in the circumstance of a complete absence of notice; which does not stand cured u/s 292BB, especially in the teeth of such notice being found to be mandatory under the Act.

iii) The search and seizure was conducted in the residential-cum-business premises of the assessee on February 27, 2003. On the basis of the recovery made, a notice u/s 158BC of the Act was issued on December 9/10, 2003. The assessee was directed to file a return within a period of one month. A further notice u/s 142(1) of the Act was issued on November 9, 2004 wherein again the assessee was required to file a return in response to the notice issued u/s 158BC. The subsequent notice was issued u/s 142(1), to which the assessee responded with a return filed within almost twelve days. The assessment was completed much after, but without issuing a notice u/s 143(2). The assessment completed u/s 158BC without a notice u/s 143(2) could not be sustained and had to be set aside.”

Assessment — Effect of self-assessment — Tax paid on self-assessment entitled to refund and interest on refund.

89 Mrs. SitadeviSatyanarayanMalpani& Others vs. ITSC

[2023] 459 ITR 758 (Bom.)

A.Ys.: 1989–90 to 1996–97

Date of Order: 30th June, 2023

S. 244A of ITA 1961

Assessment — Effect of self-assessment — Tax paid on self-assessment entitled to refund and interest on refund.

Pursuant to a search carried out at the premises of the assessee, an application for settlement was filed u/s 254C(1) of the Income-tax Act, 1961, for the A.Ys. 1989–90 to 1996–97. The Application was admitted on 22nd April, 1998. As per the order, the assessee was required to pay additional tax on the income disclosed. The assessee paid the additional tax and furnished copies of the challans. Pending application, the assessee filed a working of tax and interest for verification and also stated that the assessee shall pay the shortfall, if any. In response, the assessee received communication stating that a sum of ₹55,03,494 was payable by the assessee on account of tax and interest. In response, the assessee submitted that the payments made by the assessee had not been considered and thereby requested that the calculations be revised. During the course of hearing before the Settlement Commission, the assessee furnished the copies of challans. The assessee was informed that the balance amount of ₹1,16,511 was payable and to cover the said shortfall, the assessee made payment of ₹1,30,000. On 3rd August, 2008, an order was passed holding that the application filed by the assessee was not maintainable due to non-compliance of section 245(2D) of the Act and the application was held to have abated u/s 245HA(1)(ii) of the Act.

On writ petition, the assessee contended that the assessee had in fact paid more than the amount he was required to pay on self-assessment. The Settlement Commission contended that credit for such excess tax paid had already been granted to assessee but no interest was payable on the same as excess tax paid was arising out of self-assessment tax paid by assessee which was not eligible for any interest.

The Bombay High Court allowed the petition of the assessee and held as follows:

“i) Tax paid on self-assessment would fall u/s 244A(1)(b) of the Income-tax Act, 1961, i.e., the residual clause covering refunds of amount not falling u/s 244A(1) of the Act and as confirmed by a circular issued by the CBDT (Circular No. 549 dated October 31, 1989 * [1990] 182 ITR (St.) 1), the payment should be considered to bea tax and interest thereon would be payable to the assessee.

ii) It was clear that the tax payable was only ₹19,52,372 whereas the total tax paid was ₹20,06,280 which would leave an excess amount of ₹53,098 as paid. It was not denied that there was an excess tax paid of ₹53,098 but the stand of the Department was that credit for such excess tax paid had already been granted to the assessee but no interest was payable thereon as the excess tax paid arose out of self-assessment tax paid by the assessee which was not eligible for any interest. This was not correct. The assessee had complied with his obligations under the provisions of section 245D of the Act. The order rejecting the application for settlement of cases was not valid.

iii) In the circumstances, we are quashing and setting aside the impugned order dated January 3, 2008.We direct the matter to be placed before the InterimBoard for Settlement constituted u/s 245AA for consideration. Since the matter is old, the petitioners shall file a copy of the settlement application that was originally filed on April 27, 1997 before the Board within two weeks of this order being uploaded. The photocopy shall be certified as true copy by the advocates/chartered accountant of the petitioners. The Interim Board shall dispose of the application on merits in accordancewith law.”

Explanation 5 to Section 9(1)(i) of the Act — Substantial viewership of Channel in India cannot be a reason to hold that Channel is situated in India; situs of intangibles is the situs of owner.

16 Star Television Entertainment vs. DCIT

ITA No: 1814/1813/Mum/2014

A.Ys.: 2009-10

Date of Order: 8th December, 2023

Explanation 5 to Section 9(1)(i) of the Act — Substantial viewership of Channel in India cannot be a reason to hold that Channel is situated in India; situs of intangibles is the situs of owner.

FACTS

Assessee, a Hong Kong based company, transferred ‘Star World’ channel vide a business agreement, to one of its sister concerns based in Hong Kong. The Taxpayer did not offer the gain arising out of such transaction to tax in India based on the contention that the transaction was undertaken between two non-residents and the underlying asset (i.e., channel) was not situated in India and, hence, no income accrued or can be deemed to accrue or arise in India.

AO contended that the transfer of the Channel would result in a trigger of indirect transfer provisions under the Act. Further, gains arising from transfer of channel can be deemed to accrue or arise in India and, hence taxable in India basis the following arguments:

• The very nature of the asset and its ability to regularly generate income from India created a strong nexus and business connection with India.

• Various elements of the asset being the brand name, logo, contents, permits, customer base (advertisers), substantial viewer base etc. were located in India hence the situs of the channel was in India.

DRP upheld order of AO. Being aggrieved, assessee appealed to ITAT.

HELD

• Delhi High Court in the case of Cub Pty Ltd1 held that the situs of intangibles (such as Channel, here) is the situs of the owner i.e., outside India. The down-linking license obtained by the assessee from Ministry of Information and Broadcasting of India, establishes that ownership of the channel is situated outside India. Accordingly, applying the ratio of Delhi High Court, ITAT held that the situs of the channel is also outside India.

• Delhi High Court decision in the case of Asia Satellite Telecommunications Co Ltd2 supports that merely because the footprint area includes India and the viewers of the channel are located in India, does not amount to carrying on a business in India.

• The indirect transfer provision under the Act is a deeming provision which deems that a share or
interest in a company or entity located outside India is located in India, if such share or interest derives substantial value from assets in India. However, there is no such specific provision with regard to the situs of intangible assets.

• Without prejudice, the indirect transfer provisions require that for an asset to be deemed as being situated in India, it must derive substantial value from assets in India. While there may be merit in the argument that viewership in India may affect the determination of whether the Channel derives substantial value from India, AO has not brought any material on record to show that the Channel derives substantial value from assets in India.

• ITAT held that gains from transfer of channel is not taxable in India.


2(2016) 71 taxmann.com 315
3 332 ITR 340

Article 5 of India-Singapore DTAA — For computation of duration of Service PE, only time spent in India needs to be considered. Presence in India should not include days during which employees did not render any services to the client such as days of vacation and business development. Further, presence should be computed based on solar days i.e. day on which more than one employee is present in India should be counted as one day.

15 Clifford Chance PTE Ltd. vs. ACIT

[2024] 160 taxmann.com 424 (Delhi – Trib.)

ITA No: 2681 & 3377/Del/2023

A.Ys.: 2020-21 & 2021-22

Date of Order: 14th March, 2024

Article 5 of India-Singapore DTAA — For computation of duration of Service PE, only time spent in India needs to be considered. Presence in India should not include days during which employees did not render any services to the client such as days of vacation and business development. Further, presence should be computed based on solar days i.e. day on which more than one employee is present in India should be counted as one day.

FACTS

Assessee, a tax resident of Singapore provided legal services to its clients in India. Part of the services were provided remotely from outside India and some services were rendered by the employee physically present in India. Assessing Officer (AO) held that the assessee had Service PE in India as the duration threshold of 90 days as provided in the DTAA was exceeded. AO also included the duration of services provided from outside India, total presence of employees in India inclusive of vacation, non-billable hours in the form of business development and computed period based on man-days. On appeal, DRP upheld the order of AO.

Being aggrieved, the assessee appealed to ITAT.

HELD

• For the purpose of Service PE clause, the actual performance of services in India is essential and only duration of the employees physically present in India for furnishing services are to be taken into account.

• Assessee does not have Service PE in India as its employees were present for 441 days which is less than the 90 days threshold.

• For calculating presence in India, following days should be excluded.

• Days when no service was rendered to the client i.e. employees vacation period.

• Days when employees performed non-revenue generating activities i.e. business development such as identification of customers, technical presentation/providing information to prospective customers, developing market opportunities, providing quotations to customers.

• Presence in India should be computed based on solar days i.e. days on which more than one employees are present in India should be counted as one day.


1 Assessee substantiated this based on time sheet, HR system and employees declaration

Sec. 40A(2)(b).: Disallowance u/s 40A(2)(b) is not justified on merely estimating that more income should have been earned from subcontracting without bringing any comparable figures.

68 Tapi JWIL JV vs. Income-tax Officer

[2023] 108 ITR(T) 27 (Delhi – Trib.)

ITA NO. 6722 (DELHI) OF 2018

A.Y.: 2014-15

Date of Order: 16th October, 2023

Sec. 40A(2)(b).: Disallowance u/s 40A(2)(b) is not justified on merely estimating that more income should have been earned from subcontracting without bringing any comparable figures.

FACTS

M/s TAPI Prestressed Products Ltd. (‘TPPL’) and M/s JITF Water Infrastructure Ltd. (‘JWIL’) had entered into an agreement to form a Joint Venture (JV) with the specific purpose of bidding for construction of 318 MLD 70 MGD Sewage Pumping Station etc. on design, build and operate basis. The contract was awarded by Delhi Jal Board to the assessee JV. TPPL had executed the work and raised bills for ₹15,02,04,381/- to the assessee JV. The assessee JV had raised bills for ₹15,52,33,963/- to Delhi Jal Board. The assessee JV had filed its ITR declaring total income of ₹1,75,600/-.

The AO had passed the assessment order u/s 143(3) in the status of AOP, determining the total income at ₹1,20,77,763/- while making disallowance u/s 40A(2)(b) at ₹1,18,92,163/-. AO held that the assessee JV had suppressed its profit by making excessive payment to TPPL. To work out the amount to be disallowed u/s 40A(2)(b), the AO had applied the net profit rate of 8% on the Sub-Contract Expenses (net) of ₹14,86,52,038/-, and thus arrived at a figure of ₹1,18,92,163/-.

On appeal the CIT(A) held that profit in the hands of the assessee JV should also be calculated by applying a rate of 3.78 per cent and worked out the total income of the assessee JV at ₹ 56,19,047.

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

HELD

The ITAT observed that the AO never alleged nor enquired into the issues nor:

i. recorded his finding that the books of account were not correct and complete

ii. doubted the genuineness of the expenses incurred by the assessee JV

iii. brought on record any material to prove that the expenses incurred by the assessee JV were excessive or unreasonable having regard to the fair market value; and

iv. recorded his finding that he was rejecting the books of account

The ITAT observed that the provisions of section 40A(2)(b) are applicable to the expenses which are considered to be excessive or unreasonable, having regard to the fair market value of the goods / services or facilities for which the payments are made. The AO had made disallowance u/s 40A(2)(b), by opining that the assessee JV should have earned income from sub-contracting.

The ITAT held that section 40A(2)(b) had no application to the income aspect of the assessee JV. The AO had not brought any comparable figures to disallow the expenditure, moreover with the structuring of the JV, provisions of Section 40A(2)(b) were not attracted.

Hence, the ITAT held that the AO had fallen into error in determining the profit @ 8 per cent and also invoking the provisions of Section 40A(2)(b) and the CIT(A) had also erred in determining the profit of the assessee @ 3.78 per cent equal to the profit of one of the parties to the JV.

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

Sec. 69B.: Where the assessee has provided the necessary explanation about the nature and source of unrecorded transactions / assets and the necessary nexus with assessee’s business income has been established, such unrecorded transactions cannot be considered as unexplained and thus, deeming provisions of section 69B cannot be invoked.

67 Montu Shallu Knitwears vs. DCIT

[2024] 109 ITR(T) 1 (Chd – Trib.)

ITA NO. 21 (CHD) OF 2023

A.Y.: 2019-20

Date of Order: 1st December, 2023

Sec. 69B.: Where the assessee has provided the necessary explanation about the nature and source of unrecorded transactions / assets and the necessary nexus with assessee’s business income has been established, such unrecorded transactions cannot be considered as unexplained and thus, deeming provisions of section 69B cannot be invoked.

FACTS

The assessee is a partnership firm engaged in the business of manufacturing of wearing apparels. A survey action u/s 133A was carried out at the business premises of the assessee on 29.08.2018. During the course of the survey, certain discrepancies were encountered in physical verification of stock and in order to buy peace of mind, the assessee had surrendered an amount of ₹50,00,000/- as additional business income for the FY 2018-19. The assessee had credited said amount of ₹50,00,000/- in its profit & loss account for the year ending 31st March, 2019 and the assessee had paid tax at normal rates on such surrendered amount in its Return of Income filed on 30th September, 2019.

The assessee’s case was selected for scrutiny and notice u/s 143(2) was issued on 29th September, 2020. The case of the assessee was finalised and assessment order dated 28th September, 2021 was passed, wherein the AO had assessed total income at ₹1,90,22,390/- after making additions of ₹50,00,000/- on account of disallowance u/s 37 of the Act and applied provisions of section 115BBE of the Act on alleged application of Section 69B of the Act.

Aggrieved by the assessment order, the assessee filed an appeal before the CIT(A). The CIT(A) in its order deleted the disallowance of ₹50,00,000/- u/s 37 of the Act and upheld the application of Section 69B r.w.s. 115BBE on account of the amount surrendered by the assessee during the course of survey proceedings.

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

HELD

The ITAT observed that it is a settled legal proposition that there is difference between the undisclosed income and unexplained income and the deeming provisions are attracted in respect of undisclosed income however, the condition before invoking the same is that the assessee has either failed to explain the nature and source of such income or the AO doesn’t get satisfied with the explanation so offered by him.

The ITAT observed that the stock physically found had been valued and then, compared with the value of stock so recorded in the books of accounts and the difference in the value of the stock so found belonging to the assessee had been offered to tax.

The ITAT held that the Revenue had not pointed out that the excess stock had any nexus with any other receipts other than the business being carried on by the assessee. There was thus a clear nexus of stock physically so found with the stock in which the assessee regularly deals in and recorded in the books of accounts and thus with the business of the assessee and the difference in value of the stock so found was clearly in the nature of business income.

The ITAT held that no physical distinction in unaccounted stock was found by the Revenue. The difference in stock so found out by the authorities had no independent identity and was part and parcel of the entire stock in the normal course of business. It could not be said that there was an undisclosed asset which existed independently. Thus, what was not declared to the department was receipt from business and not any investment as it could not be correlated with any specific asset and the difference should be treated as business income. Therefore, the income of ₹50,00,000/- surrendered during the course of survey cannot be brought to tax under the deeming provisions of section 69B of the Act and the same had to be assessed to tax under the head “business income”. In the absence of deeming provisions, the question of application of section 115BBE did not arise and normal tax rate was applied.

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

Section 2(22)(e) can be invoked only in the hands of the common shareholder who was in a position to control affairs of both the lender company and the receiving company, and not in the hands of the receiving company.

66 ApeejaySurrendra Management Services Pvt. Ltd. vs. DCIT

ITA Nos.: 987 & 988 / Kol/ 2023

A.Y.s: 2013-14 and 2014-15

Date of Order: 19th February, 2024

Section 2(22)(e)

Section 2(22)(e) can be invoked only in the hands of the common shareholder who was in a position to control affairs of both the lender company and the receiving company, and not in the hands of the receiving company.

FACTS

The assessee-company received a sum of ₹5.50 crores as loans / advances from another group company, “APL”.

The assessee was not a registered shareholder of the lender company, APL. However, there was a common shareholder, “KSWPL”, who held substantial interest in both the assessee (57.86 per cent shares) and the lender company (99.96 per cent shares). The lender company had sufficient accumulated profits for distribution in its books.

The Assessing Officer treated the loan / advance as deemed dividend under section 2(22)(e) in the hands of the assessee.

Aggrieved, assessee filed an appeal before CIT(A) who confirmed the addition.

The assessee filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows:

(a) Considering the provisions of the Companies Act, 2013 and the legislative intent of section 2(22)(e), the beneficial ownership was with KSWPL under whose substantial control, loan from APL was granted to the concern, i.e. assessee. The assessee could not influence the decision making of company KSWPL. Similarly, APL could not influence the decision making process of KSWPL. In both the companies, the controlling interest (substantial interest) was held by KSWPL. It is, in fact, KSWPL who was in a position to influence the decision making process of the two companies. Therefore, the deeming fiction of section 2(22)(e) could be applied only in the hands of KSWPL who was the beneficial owner of shares in both, the lender and the receiving company.

(b) A loan or advance received by assessee (a concern) was not per se in the nature of income. It was, in fact, deemed accrual of income under section 5(1)(b) in the hands of the beneficial shareholder and not in the hands of the receiver (concern) who was a non- shareholder.

(c) Even going by the observations of the Supreme Court in CIT vs. National Travel Services (2018) 89 taxmann.com 332 (SC), the beneficial shareholder was KSWPL under whose controlling interest and influence APL had given loan / advance to the assessee. Accordingly, the deeming provisions of section 2(22)(e) were attracted on KSWPL.

Accordingly, the Tribunal held that no addition under section 2(22)(e) can be made in the hands of the assessee-company.

Where the claim of exemption under section 11 of the assessee-Board was on the basis of commercial principles of accountancy and in accordance with directions of the Government of India, such exemption was allowable.

65 DCIT vs. National Fisheries Development Board

ITA No.: 244 / Hyd / 2023

A.Y.: 2015-16

Date of Order: 13th February, 2024

Section 11, 13(1)(d)

Where the claim of exemption under section 11 of the assessee-Board was on the basis of commercial principles of accountancy and in accordance with directions of the Government of India, such exemption was allowable.

FACTS

The assessee was a Board established by the Central Government to act as a nodal agency in developing activities of fisheries among various states in the country.

The major source of receipt of the assessee was grants from the Central Government, and the outflow was release of grants to the State Governments.

In accordance with the accounting procedure and directions issued by the Government of India, the assessee followed the following treatment in its books of accounts-

(a) When the grants from Central Government were received, the same were kept on the liability side;

(b) When the grants were paid to the State Governments for implementing the projects, the same were kept in advances account;

(c) When the amount sanctioned to the State Governments was spent by the implementing agencies / State Governments, utilisation certificate was submitted to the Central Government through the assessee. Such amount was treated as expenditure in the Income & Expenditure Account of the assessee.

(d) The amount so spent (including the administrative expenses of the assessee) was recognised as income in the Income & Expenditure Account.

For assessment year 2015-16, assessee filed the return of income declaring NIL income by claiming exemption under section 11 on the basis of the accounting principles followed by the assessee.

The Assessing Officer did not accept the treatmentof the assessee and contended that the assesse had not utilised 85 per cent of the income, being the total grants-in-aid / refunds received during the year and therefore, the shortfall in application below 85 per cent was liable to be taxed. He also contended thatthe assessee had invested ₹1.55 crores in equity shares in one Sasoon Dock Matsya Sahakara Samstha Ltd., and continued to hold the investment so made, and thereby contravened section 13(1)(d) read with section 11(5).

CIT(A) allowed the appeal of the assessee observing that the treatment of the assessee was based on commercial principles of accountancy and made in compliance with the regulations of the Government of India.

Aggrieved, the revenue filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows-

(a) The assessee had been treating only such part of grants that were utilized by the implementing agencies as income and only such part of the funds released to the implementing agencies in respect of which the utilisation certificates were received as expenditure. This method of accounting followed by the assessee in treating the income and expenditure irrespective of the year of receipt of grant had not been appreciated or referred to by the Assessing Officer so as to find out any defects or reasons to reject the same.

(b) Given the position of the assessee in respect of the funds vis-à-vis the implementing agencies, it wasn’t possible to treat all the grants as receipts and all the allocations as expenditure. Such an approach was not at all scientific, because there was no income element on grant of funds by the Central Government, nor any expenditure incurred merely by allocation. Therefore, there was no illegality or irregularity in the method of accountancy followed by the assessee in treating the funds utilised by the implementing agencies as income and the funds covered by the utilisation certificate as expenditure.

(c) If the contention of the tax department was accepted, then as against the actual grants during the current year to the tune of ₹ 146.40 crores, the assessee had spent a sum of ₹178.13 crores which included the expenditure on account of the grants received for the current year as against the earlier year, which was more than 85 per cent of the grants received. Further, such treatment disturbed the method of accounting consistently followed by the assessee.

(d) Vis-à-vis the contention under section 13(1)(d),there was no contradiction to the plea taken by the assessee that such an investment was made in Sasoon Dock Matsya Sahakara Samstha Ltd., in the financial year 2008-09 and not during the current year and never in the earlier years any objection on that aspect was taken. It was also not in dispute that registration under section 12AA granted by the authorities in favour of assessee was continuing. In these  circumstances, the ground raised by the Assessing Officer was liable to be rejected.

Accordingly, the appeal of the revenue was dismissed.

Where the assessee passed away before framing of the assessment order, no assessment could be made in the name of the deceased without bringing the legal heirs of such person on record. In the absence of specific provision requiring the legal heirs to intimate the tax department, assessment cannot be valid only for the reason that the legal heirs failed to inform the department about the death of the assessee.

64 Bhavnaben K Punjani vs. PCIT

ITA No.: 138 / Rjt / 2017

A.Y.: 2007-08

Date of Order: 15th February, 2024

Where the assessee passed away before framing of the assessment order, no assessment could be made in the name of the deceased without bringing the legal heirs of such person on record.

In the absence of specific provision requiring the legal heirs to intimate the tax department, assessment cannot be valid only for the reason that the legal heirs failed to inform the department about the death of the assessee.

FACTS

During the financial year 2006-07, the assessee sold certain immovable property purportedly for less than stamp value.

The assessee passed away on 15th October, 2013. However, no intimation regarding the demise wasgiven to the tax department by the legal heirs of the assessee.

The Assessing Officer initiated reassessment proceedings under section 147 seeking to adopt stamp value of the property under section 50C; accordingly, he passed best judgment assessment under section 143(3) / 144 read with section 147 vide order dated 23rd February, 2015 in the name of the assessee, that is, after the assessee expired.

PCIT passed an order under section 263 dated 24th March, 2017 revising the said assessment order on the ground that while framing the assessment order, the Assessing Officer did not ascertain the cost and year of acquisition of the property and therefore, the order was made without proper inquiry and investigation.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

The Tribunal observed that-

(a) in absence of any specific statutory provision under the Income Tax Act which requires the legal heirs to intimate the income tax department about the death of the assessee, the assessment order cannot be held to be valid in the eyes of law only for the reason that the legal heirs of the deceased assessee had not informed the income tax department about the death of the assessee.

(b) Since no assessment can be framed in the name of a person who has since expired, any assessment order framed in the name of a deceased person without bringing the legal heirs of such person on record, is invalid in the eyes of law.

Accordingly, since the original assessment order was not valid in law, the Tribunal also set aside the order of PCIT passed under section 263.

Section 43B(h) – The Provisions And Debatable Issues

BACKGROUND

Micro and Small enterprises’ role in developing a country like India is significant. It generates employment opportunities, and rural growth is mainly because of micro and small enterprises. Like all business entities, micro and small enterprises also have various problems. Central and State Governments have always given support and multiple incentives for the growth of micro and small enterprises. Shortage of working capital and effective utilisation of available working capital are two significant problems that micro and small enterprises face. To overcome such a situation, the Government and RBI have provided guidelines for cheap and sufficient working capital finance to micro and small enterprises. However, many micro and small enterprises suffer acute working capital shortages due to delayed payments by buyers of goods and services. Several representations were made to the State and Central Governments for bringing a law to make timely payments to Micro and Small Enterprises mandatory. The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) was enacted to give relief to such units. Provision was introduced in said Act for payment of interest on delayed payments, and such interest was not allowable as a deduction under the Income Tax Act. Further, statutory auditors of companies were asked to provide an ageing analysis of trade payables to Micro and Small Enterprises. However, such measures did not yield the desired result. Hence, the Honourable Finance Minister introduced section 43B(h) in the Income Tax Act, 1961 through Finance Bill, 2023, to disallow expenses in case of delayed payments to micro and small enterprises. It may be noted that the provisions in section 43B(h) apply only to micro and small enterprises and not medium enterprises. Hence, the discussion in this article is restricted to Micro and Small Enterprises only unless expressly referred to as Medium Enterprises. At present, it is the most debated and burning topic for all assessees engaged in business, and hence, it is necessary to understand the provisions of section 43B(h) of the Income Tax Act, 1961 and to see what are the debatable issues in the said provision.

SECTION 43B(h) OF THE INCOME TAX ACT:

It is necessary first to read the provisions of section 43B(h); hence, the section is reproduced below:

S. 43B. Certain deductions are to be only on actual payment. — Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(h) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him:

It is to be noted that this subsection starts with the words “Notwithstanding anything contained in any other provisions of this Act”. Hence, this is a non-obstante clause, overriding other law provisions.

PROVISIONS OF THE MSME ACT, 2006 RELEVANT TO SECTION 43B(H) OF THE INCOME TAX ACT:

The following terms in the MSMED Act, 2006 are relevant for the correct interpretation of provisions of section 43B(h).

  • Micro enterprise — section 2 (h):

“micro-enterprise” means an enterprise classified as such under sub-clause (i) of clause (a) or sub-clause (i) of clause (b) of sub-section (1) of section 7;

(so we should know what is provided in sub-clause (i) of clause (a) or sub-clause (i) of clause (b) of sub-section (1) of section 7).

  • Small enterprise — Section 2 (m):

“small enterprise” means an enterprise classified as such under sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b) of sub-section (1) of section 7;

CLASSIFICATION OF ENTERPRISES UNDER THE MSME ACT, 2006

The MINISTRY OF MICRO, SMALL AND MEDIUM ENTERPRISES vide notification dated 1st July, 2020, which is applicable from 1st July, 2020, has classified an enterprise as a micro, small or medium enterprise on the basis of the following criteria:

Composite Criteria Investment in Plant & Machinery or Equipment Turnover
Micro Does not exceed ₹1 crore Does not exceed ₹5 crores
Small Above ₹1 crore but does not exceed ₹10 crores Above ₹5 Crores but does not exceed ₹50 crores
Medium Above ₹10 crores but does not exceed ₹50 crores Above ₹50 crores but does not exceed ₹250 crores

It is to be noted that both the conditions are simultaneous as the word “and” is coming between “Investment in Plant and Machinery or equipment” and “Turnover”. It is clarified by Explanation 1 to 7(1) of the MSMED Act that in calculating the value of an investment in plant and machinery or equipment, one has to see WDV as per the Income-tax Act of earlier year and plant and machinery does not include land, building, furniture fixtures, office equipment, vehicles like car, two-wheelers, computers, laptops, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification.

In the same manner for calculating turnover, you have to exclude export turnover.

(b) The sum payable means when the sum becomes payable or due, which is prescribed in section 15 of the MSME Act, 2006, which is summarised as under.

 

It is important to note that the written agreement includes credit terms mentioned in any manner, either in the agreement or Purchase order or on the invoice or by any other mode of communication in writing like email or letter etc.

(c) Now let us understand what the day of acceptance or deemed acceptance.

(i) “The day of acceptance” means—

• the day of the actual delivery of goods or the rendering of services; or

• where any objection is made in writing by the buyer regarding the acceptance of goods or services within fifteen days or up to a maximum of forty-five days, as the case may be from the day of the delivery of goods or the rendering of services, the day on which the supplier removes such objection;

(ii) “the day of deemed acceptance” means where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days or up to a maximum of forty-five days, as the case may be, from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;

Above is the understanding of the applicability of section 43B(h) of the Income-tax Act, 1961, read with relevant MSME Act, 2006 provisions. Now, let us discuss some debatable issues.

DEBATABLE ISSUES:

SR. NO. DEBATABLE ISSUE / MATTER AUTHOR’S VIEWS
1 Whether the amount payable from a trader for purchase of goods or services would be covered u/s 43B(h)? Section 43B(h) says “any sum payable by the assessee to a micro or small enterprise” and if we see the definition of enterprise as per section 2 (e) of MSME Act, 2006, it includes an industrial undertaking engaged in the manufacture or production of goods or
engaged in providing or rendering of service or services. In view of the above definition of enterprise, it does not include trader and hence, the amount payable to trader is not covered u/s 43B(h) of Income-tax Act, 1961. A contrary opinion is that since the definition of supplier includes trader of specific nature, section 43B(h) would be applicable to trader who is buying goods from micro and small enterprises. However, in the author’s view, as section 43B(h) talks about amount payable to Micro or Small Enterprise and as enterprise does not include trader, the purchase of goods from trader will not be covered u/s 43B(h) of Income-tax Act,1961. Moreover, as per Para 2 of Office Memorandum: No. 5/2(2)/2020/E/P&G/POLICY dated 2nd July, 2021 issued by the Central Government, it has been clarified that “The Government has received various representations, and it has been decided to include Retail and wholesale trades as MSMEs and they are allowed to be registered on Udyam Registration Portal. However, benefits to Retail and Wholesale trade MSMEs are to be restricted to Priority Sector Lending only.” Central Government’s office memorandum ¼(1)/2021— P&G Policy, dated 1st September 2021, further clarifies that “the benefit to Retail and wholesale trade MSMEs are restricted up to priority sector landing only and other benefit, including provisions of delayed payment as per MSMED Act, 2006, are excluded”.
2 Would opening balance on 1st April, 2023 remaining unpaid on 31st March, 2024 attract section 43B(h)? In the author’s opinion, provisions of section 43B(h) would not be attracted to the opening balance as on
1st April, 2023, as section 43B(h) is for disallowance of the expense of the relevant previous year and in case of opening balance as on 1st April, 2023; the same is for expense debited in FY 2022–23 or earlier year/s and not in FY 2023–24 which is the year from which the said section 43B(h) is applicable and hence, for expense debited in year(s) before FY 2023–24, section 43B(h) would not be applicable.
3 If the amount for purchase of goods or taking services from micro or small enterprise is outstanding as at the year-end in the books of micro or small enterprise beyond the due date, is the amount disallowable u/s 43B(h)? There is no exception to the applicability of section 43B(h) to Micro and Small Enterprises; hence, in this case, the amount would be disallowed u/s. 43B(h). All paying entities, including Micro and Small Enterprises, are covered. Here, it will be against the objective of bringing this provision into law, i.e., Socio-economic benefit to Micro and Small Enterprises,  but till any amendment is made in the law, as per current provisions, it would apply to buyers who themselves are Micro and Small Enterprises.
4 Whether GST is to be included in purchases or expenses for services for disallowance u/s 43B(h)? Where input credit of GST is claimed, and purchase or expense for services is debited net of GST, it will be disallowed without GST as the expense is debited net of GST. However, where GST input credit is not available for any reason, then, in such cases, disallowance would be with GST as expense or purchase would have been debited inclusive of GST. Where the exempt and taxable sale is mixed and proportionate GST credit is taken, the purchase or expense of services will be disallowed, including GST, to the extent of input GST not claimed, disallowed, or reversed.
5 If goods or services are purchased from unregistered Micro and Small Enterprise, will provisions of section 43B(h) apply to such transactions? Para 2 of the Notification provides that any person who intends to establish a Micro, Small or Medium Enterprise may file Udyam Registration online on the Udyam Registration portal based on self-declaration with no requirement to upload documents, papers, certificates, or proof. The word ‘may’, used in the Notification, indicates that an enterprise does not need to get registered to establish itself as an MSME. However, Section 43B(h) mentions Section 15 of the MSMED  Act, which talks about the delay in payment to a ‘supplier’. Section 2(n) defines “supplier” to mean a micro or small enterprise that has filed a memorandum with authority referred to in Section 8(1) (i.e., Udyam Registration). So, without registration on the Udyam Portal, Section 15 of the MSMED Act may not be invoked for disallowance under Section 43B(h) of the Income-tax Act. Further, it is practically impossible for any buyer to determine whether a particular entity is Micro and Small Enterprises. In such circumstances, the only feasible method to conclude the supplier’s classification is to refer to his Udyam registration. Based on this, if the entity is a trader or a medium enterprise, one can ignore it; if it is not, one can take the information for calculating the disallowance.
6 Is the disallowance under Section 43B applicable if supplies are made before obtaining Udyam registration? Section 43B(h) will not apply with respect to payments for supplies made before the date of Udyam Registration. In such a case, the supplier would be regarded as a micro-enterprise or small enterprise only from the date of obtaining such registration, as Udyam Registration does not operate retrospectively. As per the MSMED Act,
registration is not mandatory, but as per the definition of supplier, it is compulsory to file a memorandum, and hence, instead of the date of registration, the most recent date of submission of the memorandum could be considered.
7 Can the information received in one year, say FY 2023–24, about registration as an MSME, be considered permanent and applicable forever? No. Each year, the status may change due to changes like business or investment in plant and machinery or turnover; hence, every year, information on the status of registration of micro or small enterprises must be verified. The registration needs to be renewed every year.
8 Will 43B(h) apply to an entity following the cash method of accounting? Since there would be no amount outstanding at the year-end in the books of account of creditors where the cash method of accounting is followed, provisions of section 43B(h) will not be applicable.
9 Does Section 43B(h) apply with respect to the amounts due towards the purchase of Capital Goods? Section 43B applies to sums payable in respect of which a deduction is otherwise allowable under this Act. Therefore, Section 43B(h) would apply to amounts payable to micro or small enterprises with respect to the purchase of capital goods for which a 100 per cent deduction is admissible under Sections 30 to 36. For example, the deduction of 100 per cent of capital expenditure under Section 35AD and the deduction of 100 per cent of capital expenditure on scientific research under Section. If a 100 per cent deduction of capital expenditure is not allowable, there would be no disallowance with respect to depreciation on capital goods purchased if the MSE supplier of capital goods is not paid in time. This is because depreciation is not a “sum payable in respect of which deduction is otherwise  allowable”, and depreciation is not
an expense but an allowance different from an expense. What can be disallowed under Section 43B(h) must have the character of a sum payable in respect of which deduction is otherwise allowable. The Courts had taken the view that depreciation cannot be disallowed on the cost of the asset, which was capitalised in books of account, but tax thereon was not deducted under Section 40(a)(i)/(ia) of the Act. Refer Lemnisk (P.) Ltd. vs. Dy. CIT [2022] 141 taxmann.com195 (Bangalore – Trib.). The same stand is taken for disallowance under section 40A(3) prior to its amendment, where it is mentioned explicitly that proportionate depreciation will be disallowed for breach of section 40A(3). As no such reference to disallowance of depreciation is available in 43B(h), one can take the stand that the same is not disallowable u/s 43B(h).
10 Is disallowance attracted if the assessee opts for a presumptive taxation scheme under Section 44AD, Section 44ADA, Section 44AE, etc.? Section 43B(h) begins with a non-obstante clause “notwithstanding anything contained in any other provision of this Act”. Therefore, Section 43B apparently overrides all provisions of the Act, including presumptive taxation under Section 44AD, Section 44ADA, Section 44AE, Section 44BBB and Section 115VA (Tonnage Tax). However, Sections 44AD, 44ADA, 44AE, 44BBB and 115VA also begin with non-obstante clauses as ‘Notwithstanding anything to the contrary contained in Sections 28 to 43C,…….’ Therefore, Section 43B(h) overrides all other provisions of the Act except Sections 44AD, 44AE, 44ADA, 44BBB and 115VA. Thus, Section 43B(h) will not apply to eligible assessee-buyers
who opt for presumptive taxation under Sections 44AD, 44AE, 44ADA, 44BBB or 115VA. When two non-obstante clauses are there, which clause will prevail over the other is an issue. Here, courts have also held that specific will prevail over general in such circumstances. In this case, provisions of section 44AD, 44ADA, 44AE, etc, are specific for particular businesses and provisions of section 43B(h) are generally applicable to all entities; in the author’s view, the specific will prevail over the general.
11 Would disallowance be attracted if provisions are made instead of crediting individual accounts of the trade creditors / suppliers? Provisions represent sums payable in respect of which deduction is otherwise allowable under Section 37(1). Therefore, they would fall within the ambit of Section 43B(h) irrespective of whether the same is credited to the creditor’s individual account or to a common “payable account” or “provisions account” by whatever nomenclature called. What is relevant is the booking of the expense and non-payment or delayed payment to the micro and small enterprise for purchasing goods or taking services.
12 Can disallowance under Section 43B(h) be made while computing book profit for MAT purposes? Section 43B(h) is applicable for calculating a company’s taxable business profits in regular assessment under the Act. It is not applicable for calculating Minimum Alternate Tax under Section 115JB of the Act.
13 What if any charitable trust is not making payment or is making a delayed payment to an MSME? Are such delayed or non-payments disallowable under section 43B(h)? As the income of a charitable trust is governed by section 11 to section 13 and is not taxable under the head business and profession, section  43B(h) does not apply to such a trust since, in the case of a trust, there is no allowance of expense. There is the application of income, which is reduced from the income
(donations). Unlike the applicability of sections 40A(3) and 40a(ia), which has been provided for in section 11, there is no provision in section 11 for treating such amount as non-application of income where provisions of section 43B(h) are applicable.
14 How does one compute investment in plant and machinery and turnover in the first year of operations? It is considered based on a declaration made by the enterprise on its own.
15 If the provision for expenses made on year-end is not paid on the due date, i.e., within 15 days or up to 45 days as specified in section 15 of the MSMED Act, will the said expenses be subject to disallowance u/s 43B(h)? In any business, provisions for certain expenses are made on the last date of the year to match the accrual concept of accounting. Where provision for expense is created like audit fees, legal fees, etc., then in the Author’s view, Section 43B(h) will not apply because payment as per Section 15 of the MSMED Act is to be made within the specified time after acceptance of services or goods. In such cases, payment will be made only after the services are rendered. For example, audit fees would become due for payment only after the audit is done, and therefore, such sum will not be hit by Section 15 of the MSMED Act till the services are rendered. Once the services have been rendered, payment must be made within the time limit from the date of rendering of services.
16 When part payment is made on or before the due date, would the entire expense be disallowed, or will only part of the amount not paid be disallowed? In the Author’s view, if part of the amount is paid on or before the due date, said part would be an allowable expense. The other part, if paid after year-end and if paid late or not paid on or before the due date under MSMED Act, shall be disallowed u/s 43B(h).
17 There is no agreement between the buyer and seller, but the seller, in its invoice, mentioned that the credit allowed is 15 days. Can this be treated as an agreement? Yes, if any written communication, whether on the invoice or through the purchase order, email, or letter, is exchanged between the two parties, then the
same could be treated as an agreement.
18 If an entity is engaged in trading and service providing or manufacturing and trading, will it be treated as an enterprise? One has to see the major activity, and if that activity falls into manufacturing and service, it will be treated as an enterprise. If significant activity is trading, it would not be treated as an enterprise.
19 Whether a proprietorship concern is treated as an enterprise? The definition of “enterprise” states that for an entity to be treated as an enterprise, it should be registered. If a proprietary concern is registered under the MSMED Act under the proprietor’s PAN, then the same will be treated as a registered entity and as an enterprise.
20 If one proprietor has more than one proprietorship concern, can all of them be treated as enterprises eligible as micro or small? In such a scenario, the turnover of all concerns should be calculated together. It has to be established that the major activity is manufacturing and/or service. The criteria of investment and turnover are per requirement for micro or small enterprises, and the proprietor has PAN. Then, one can decide whether such a proprietor is a micro or small enterprise.
21 Can retention money withheld by a buyer and outstanding at the year-end beyond the time limit prescribed u/s 15 of MSMED Act be disallowed u/s 43B(h)? As such, retention money is withheld as per contract and is to be paid after a certain period to fulfil certain conditions. So, it is a security deposit given out of payment received (deemed receipt); hence, retention money is not claimed as an expense, and therefore, it ought not to be disallowed u/s 43B(h) of the Act.
22 If a creditor is registered as a Micro or Small Enterprise on, say,
1st October, 2023, the purchase of goods prior to 1st October, 2023
and remaining unpaid as of
31st March, 2024 will be subject to disallowance u/s 43B(h)?
Since registration is mandatory, any purchases prior to registration shall not be subject to disallowance u/s 43B(h). As mentioned earlier, at the most, one could consider the date of filing the Memorandum (application for registration) for the purpose of disallowance rather than the date of registration as in the
definition of supplier u/s 15 of MSMED Act, the supplier is defined as the one that has filed a Memorandum.
23 If adjustment entry is passed for receivable against the sale of goods as payment by debiting the creditor account, is it treated as payment for 43B(h)? In the Author’s view, yes, as in section 43B(h), unlike 40A(3), there is no mention of the mode of payment in a specific manner, and in the case of 40A(3) also, it is treated as valid by rule 6DD.
24 Will payments made after the year-end (31st March) but before the due date of filing the return of income be allowed as a deduction? If the payment is made after the year-end (say, 31st March, 2024) but before the due date of filing the return of income, it will be allowed only in the next year, i.e., the year of payment (Y.E. 31st March, 2025) and not the year in which the expenses are incurred. In this respect, this provision differs from other provisions of section 43B.
25 Would delayed payments (beyond the time limit prescribed under the MSMED Act) to any micro and small enterprise within the Financial Year attract disallowance under section 43B(h)? No. The disallowance under section 43B(h) will be attracted only regarding the delayed payment to a micro and small enterprise, which has remained outstanding at the year’s end (i.e., 31st March).

5. CONCLUSION:

Efforts have been made to analyse all the provisions of section 43B(h) of the Income Tax Act, 1961, keeping in mind provisions of the MSMED Act, 2006 and to consider as many issues as may arise in calculating disallowance u/s 43B(h) while preparing statement of income, showing disallowance u/s 43B(h) in form 3CD and assessment/appellate proceedings. With the passage of time, there will likely be protracted litigation revolving around the interpretation and application of this provision since the impact of tax liability on account of disallowance may be more than taxable income without such disallowance. All assessees, professional bodies, etc., expect a notification from CBDT to clarify various debatable issues to reduce litigation and for better understanding. In the author’s opinion, for compliance with any law, shelter of the Income Tax Act should not be taken all the time. It is nothing but a breach of the real income principle. In some cases, tax liabilities are so high that they bring the business of the assessee to an end which is not the objective of the Government. The government cannot help or support MSMEs to grow at the cost of survival of all other types of enterprises, including MSMEs themselves, as they too may be subjected to disallowance u/s 43B(h) of the Income-tax Act, 1961, if they fail to pay within the timeframe for goods or services bought from other MSME.

Revision under Section 264 of Intimation Issued Under Section 143(1)

ISSUE FOR CONSIDERATION

Section 264 is one of the important provisions under the Act beneficial to the assessee, whereunder the higher authority has been given the power to revise any order passed by the lower authority and pass a revisionary order in favour of the assessee. The CIT or PCIT or CCIT or PCCIT (referred to as CIT hereafter) may, either of his own motion or on an application made by the assessee in this regard, revise any order passed by any authority which is subordinate to him. The CIT has to pass an order as he thinks fit, which cannot be prejudicial to the assessee.

Section 264 reads as under:

“Revision of other orders.

264. (1) In the case of any order other than an order to which section 263 applies passed by an authority subordinate to him, the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may, either of his own motion or on an application by the assessee for revision, call for the record of any proceeding under this Act in which any such order has been passed and may make such inquiry or cause such inquiry to be made and, subject to the provisions of this Act, may pass such order thereon, not being an order prejudicial to the assessee, as he thinks fit.

(2) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner shall not of his own motion revise any order under this section if the order has been made more than one year previously.

(3) In the case of an application for revision under this section by the assessee, the application must be made within one year from the date on which the order in question was communicated to him or the date on which he otherwise came to know of it, whichever is earlier:

Provided that the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may, if he is satisfied that the assessee was prevented by sufficient cause from making the application within that period, admit an application made after the expiry of that period.

(4) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner shall not revise any order under this section in the following cases—

(a) where an appeal against the order lies to the Deputy Commissioner (Appeals) or to the Joint Commissioner (Appeals) or the Commissioner (Appeals) or to the Appellate Tribunal but has not been made and the time within which such appeal may be made has not expired, or, in the case of an appeal to the Joint Commissioner (Appeals) or the Commissioner (Appeals) or to the Appellate Tribunal, the assessee has not waived his right of appeal; or

(b) where the order is pending on an appeal before the Deputy Commissioner (Appeals); or

(c) where the order has been made the subject of an appeal to the Joint Commissioner (Appeals) or the Commissioner (Appeals) or to the Appellate Tribunal.

(5) Every application by an assessee for revision under this section shall be accompanied by a fee of five hundred rupees.

(6) On every application by an assessee for revision under this sub-section, made on or after the 1st day of October, 1998, an order shall be passed within one year from the end of the financial year in which such application is made by the assessee for revision.

Explanation.—In computing the period of limitation for the purposes of this sub-section, the time taken in giving an opportunity to the assessee to be re-heard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.

(7) Notwithstanding anything contained in sub-section (6), an order in revision under sub-section (6) may be passed at any time in consequence of or to give effect to any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.

Explanation 1.—An order by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner declining to interfere shall, for the purposes of this section, be deemed not to be an order prejudicial to the assessee.

Explanation 2.—For the purposes of this section, the Deputy Commissioner (Appeals) shall be deemed to be an authority subordinate to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner.”

Thus, the assessee has been provided the benefit of seeking revision of the order passed by the AO under Section 264, but with the condition that such order should not be appealable, or if appealable, then no appeal should have been filed against such order.

Quite often, the issue has arisen as to whether an ‘intimation’ issued under Section 143(1) can be regarded as an ‘order’ for the purposes of Section 264 and can, therefore, be the subject matter of revision under Section 264. The Delhi and Bombay High Courts have taken a view that the order referred to in Section 264 would include an intimation issued under Section 143(1) and, therefore, can be revised. However, the Gujarat, Kerala and Karnataka High Courts have taken a contrary view.

EPCOS Electronic Components SA’s Case

The issue had come up for consideration by the Delhi High Court in the case of EPCOS Electronics Components SA vs. UOI [WP (C) 10417/2018, 10th July, 2019].

In this case, the assessee filed its return of income for the Assessment Year 2014–15 by offering tax @20 per cent on its earnings for the provision of management services to its associated enterprise, EPCOS India Pvt. Ltd. in terms of Article 13 of the Double Taxation Avoidance Agreement entered into between India and Spain. The AO by an intimation dated 10th March, 2016, under Section 143(1) processed the said return of income. Later, the assessee realised that it had failed to claim the lower rate of tax it was eligible for, by virtue of Clause 7 of the Protocol appended to the India-Spain DTAA. Another mistake committed by the assessee was that it paid a surcharge and cess on the tax, which was not required to be paid, as the tax rate under the DTAA was a final rate inclusive of surcharge and cess. This led the assessee to file a revision petition under Section 264 on 16th January, 2017, before the CIT, seeking to revise the order under Section 143(1), claiming it to be prejudicial to the assessee’s interest.

The CIT rejected the application filed by the assessee under Section 264 on the grounds that no amount was payable by the assessee in terms of an intimation under Section 143(1), and therefore, no prejudice was caused to the assessee in terms thereof. Alternatively, the CIT held that the assessee should have filed a revised return claiming the relief so claimed by it in the revision application. Further, it was held by the CIT that Section 264 could not be invoked to rectify the assessee’s own mistakes, if any. Against the said order, the assessee filed a writ petition before the High Court.

The question before the High Court was whether a revision petition under Section 264 was maintainable to rectify the mistake committed by the assessee while filing its return, which had been accepted by the Department by issuing an intimation under Section 143(1). Before the High Court, the assessee relied upon the decision in the case of Vijay Gupta vs. CIT 386 ITR 643 (Delhi) and the revenue relied upon the decision in the case of ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. 291 ITR 500 (SC) to urge that an intimation under Section 143(1) could not be treated as an ‘order’ and, therefore, no petition under Section 264 could be maintained against such intimation.

The High Court observed that the decision in Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra) was in the context of Sections 147 and 148. If the original assessment was under Section 143(3), then the proviso to Section 147 would be attracted, and the procedure prescribed thereunder for re-opening an assessment would have to be followed. On the other hand, if the return had been accepted by the Department by a mere intimation under Section 143(1), then a different set of consequences would ensue, and there would be no requirement for the department if it were to re-open the assessment to follow the procedure it would have had to had the assessment order been passed under Section 143(3). The context of the case before the High Court was totally different. It was not an attempt by the Revenue to re-open the assessment by invoking Sections 147 and 148 but was of the assessee realising the mistake made by it while filing the return of paying a higher rate of tax.

In such a context, the intimation received by the assessee from the AO accepting the return under Section 143(1) would partake the character of an order for the purpose of Section 264, though in the context of Sections 147 and 148, it might have had a different connotation. However, the consistent view of the High Court, as expressed in Vijay Gupta (supra) and the other decisions which have been cited therein, has been that for the purposes of Section 264, a revision petition seeking rectification of the return accepted by the Department in respect of which intimation is sent under Section 143(1) was indeed maintainable.

On this basis, the High Court disagreed with the view expressed by the CIT and held that a revision petition under Section 264 would be maintainable vis-à-vis an intimation under Section 143(1).

A similar view has also been expressed by the Bombay High Court in the cases of Diwaker Tripathi vs. Pr CIT 154 taxmann.com 634 (Bom),Smita Rohit Gupta vs. Pr CIT 459 ITR 369 (Bom) and Aafreen Fatima Fazal Abbas Sayed vs. ACIT, W.P. (L) NO. 6096 OF 2021 dated 8th April, 2021.

Gujarat Gas Trading Co. Ltd.’s Case

The issue again came up for consideration before the Gujarat High Court in the case of Gujarat Gas Trading Co. Ltd. vs. CIT (Special Civil Application No. 2514 of 2011, order dated 7th September, 2016).

In this case, for the Assessment Year 2003–04, the assessee company filed its return of income declaring income of ₹3.31 crores, which included a sum of ₹1.87 crores pertaining to expenses on account of commission which had been disallowed wrongly. These expenses were disallowed under the mistaken belief that the assessee was allowed to claim a deduction of these expenses only upon payment. The return of income of the assessee company was accepted by the AO under Section 143(1) without scrutiny, and the refund claimed was issued.

Having realised the error in not claiming the deduction of expenditure on accrual basis while filing the return, the assessee filed a petition before the CIT under Section 264 on 29th December, 2008, seeking revision of the intimation / order under Section 143(1). In response, the assessee was called upon to produce necessary evidence in support of the date of receipt of the intimation under Section 143(1). Instead of replying, the assessee filed a fresh petition for revision on 13th April, 2009, which was rejected by an order dated 3rd December, 2009, inter-alia, on the grounds that the revision petition was filed after a lapse of about six years. The assessee approached the High Court against the order of dismissal mainly on the ground that it was not provided any opportunity to explain the delay. The High Court directed the CIT to decide the matter afresh after giving an opportunity of hearing to the assessee.

In the revision proceeding which was initiated afresh, the CIT rejected the revision petition on the grounds of delay as well as maintainability. The CIT held that the intimation was not a revisable order. He relied upon the decision of Karnataka High Court in the case of Avasaraja Automation Ltd. vs. DCIT 269 ITR 163 in which it was held that the petition under Section 264
against intimation was not maintainable in view of the deletion of Explanation to Section 143 with effect from 1st June, 1999. The assessee challenged the order of the CIT on both counts by filing a petition before the High Court.

Before the High Court, with respect to the issue of maintainability, the assessee argued that, under Section 264, any order is subject to revision and not only an order of assessment. Even acceptance of assessment without scrutiny and intimation thereof in terms of Section 143(1) was an order of assessment, may be without scrutiny. The assessee also placed reliance upon the following decisions:

i. C. Parikh & Co. vs. CIT 122 ITR 610 (Guj)

ii. Assam Roofing Ltd. vs. CIT 43 taxmann.com 316 (Gauhati)

iii. Ramdev Exports vs. CIT 251 ITR 873

iv. Vijay Gupta vs. CIT (supra)

The revenue contended that the intimation under Section 143(1) was neither an order of assessment nor an order which was capable of revision under Section 264. It was merely an administrative action of intimating the assessee that his return was accepted. The revenue relied upon the amendment made in Section 143(1) with effect from 1st June, 1999, when the explanation was dropped and submitted that, prior to 1st June, 1999, the AO had the power to make prima facie adjustments. Due to this, the intimation under Section 143(1) was deemed to be an order of assessment for the purpose of Section 264. The revenue also relied upon the following decisions where it had been held that an intimation was not capable of being subject to revision under Section 264:

i. CIT vs. K. V. Mankaram and Co. 245 ITR 353 (Ker)

ii. Avasaraja Automation Ltd. vs. DCIT 269 ITR 163 (Kar)

The High Court held that the assessee had failed to explain the delay and, therefore, the order of the CIT not condoning the delay was upheld. The High Court also accepted the view of the CIT that against the intimation under Section 143(1), the revision petition was not maintainable for the following reasons:

• ‘Any order’ referred to in Section 264 was not meant to cover even mere administrative orders without there being any element of deciding any rights of the parties.

• In the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra), the Supreme Court observed that acknowledgement under Section 143(1) is not done by an AO, but mostly by ministerial staff. It could not be stated that by such intimation, the assessment was done.

• An Explanation was added below Section 143 by the Finance Act, 1991, with effect from 1st October, 1991, which provided that an intimation sent to the assessee shall be deemed to be an order for the purpose of Section 264. This explanation came to be deleted with effect from 1st June, 1999, when Section 143 itself underwent major changes. It could, thus, be seen that during the period when, under subsection (1) of Section 143, the AO had the power of making prima facie adjustments, the legislature provided for an explanation that an intimation sent to the assessee under subsection (1) would be deemed to be an order for the purposes of Section 264. Once, with the amendment of Section 143, such powers were rescinded, a corresponding change was, therefore, made by deleting the explanation and withdrawing the deeming fiction.

The High Court also dealt with each of the decisions which was relied upon by the assessee and distinguished it. The decision in the case of C. Parikh & Co. (supra) was held to be focusing on the question of whose mistake can be corrected by the CIT in revisional powers, whether of the assessee or the AO and did not concern the question whether an intimation was open to revision or not. Similarly, in the case of Ramdev Exports (supra), the question of maintainability of a revision petition against a mere intimation under Section 143(1) did not arise. In the case of Vijay Gupta (supra), before the Commissioner, the assessee had not only challenged the intimation under Section 143(1) but also the rejection of application under Section 154. Thus, these decisions relied upon by the assessee were held to be distinguishable.

OBSERVATIONS

Section 264 is a beneficial provision whereunder the higher authorities have been empowered to pass a revisionary order, not being prejudicial to the assessee, revising the order passed by the lower authorities. The objective of this provision is also to provide a remedy to an assessee when he is aggrieved by any order passed against him, whereby he can approach the higher authority within the given time limit requiring it to pass the revisionary order not prejudicial to him.

The whole controversy under consideration revolves around only one issue, i.e., whether the intimation issued under Section 143(1) upon processing of the return of income filed by the assessee can be considered to be an order. The issue is whether the word ‘order’ used in Section 264 should be interpreted so strictly so as to exclude any other intimation which has not been termed as ‘order’ under the relevant provision of the Act, although it has been generated and issued by the AO, and more particularly when it otherwise determines the total income and tax liability of the assessee.

Firstly, it needs to be appreciated that the term ‘order’ is not defined expressly in the Act. The simple dictionary meaning of the term ‘order’ is an authoritative command or instruction. When the intimation is issued under Section 143(1) upon processing of the return of income filed by the assessee, it is nothing but an official instruction which is issued under the authority of the AO determining the amount of total income and tax liability of the assessee after incorporating necessary adjustments, if any, to the return of income filed. Merely because it has been referred to as ‘intimation’ and not ‘order’ under Section 143(1), it cannot be considered as not falling within the purview of Section 264.

By relying upon the decision of the Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra), the revenue has attempted to argue that the intimation is not an assessment order and, therefore, there is no application of mind by the Assessing Officer when such intimation is issued. However, it needs to be appreciated that the provision of Section 264 does not only bring the ‘assessment order’ within its purview but it brings all types of orders within its purview. Therefore, to examine the applicability of Section 264, it is irrelevant to consider the fact that the intimation issued under Section 143(1) is not an assessment order. What is relevant is that it bears all the characteristics of an order, although it is not an assessment order.

The Gujarat High Court has heavily relied upon the omission of Explanation to Section 143 with effect from 1st June, 1999, which had provided that the intimation shall be deemed to be an order for the purpose of Section 264. It has been observed that since the power to make the prima facie adjustment while processing the return of income had been removed, the intimation was no longer regarded to be an order for the purpose of Section 264. However, it needs to be appreciated that in various cases, the Courts have also allowed the assessees to raise fresh claims under Section 264 which were never raised by them in the return of income. Therefore, it was not only prima facie adjustments in respect of which relief could have been sought under Section 264.

Besides, Section 143(1), as amended by the Finance Act 2008 with effect from 1st April, 2008, now permits certain adjustments to be made under six circumstances referred to in clause (a) thereof. The Gujarat High Court decision was rendered for AY 2003–04, at a point of time when no adjustments were permissible under Section 143(1). Therefore, by the logic of the Gujarat High Court itself, an intimation should now be regarded as an order.

An intimation under Section 143(1) is also now an appealable order under Section 246(1)(a) as well as Section 246A(1)(a) with effect from 1st July, 2012. Though it is appealable only if an assessee objects to the adjustments made, the very fact that it is placed at par with other orders clearly brings out the fact that an intimation is now an order.

The heading of Section 263 also refers to “Revision of Other Orders”, and the section itself refers to any order other than an order to which Section 263 applies. This is broad enough to cover an intimation under Section 143(1).

In CIT vs. Anderson Marine & Sons (P) Ltd 266 ITR 694 (Bom), a case relating to AY 2009–10, a year in which adjustments under Section 143(1) were not permissible, the Bombay High Court held that sending of an intimation, being a decision of acceptance of self-assessment, is in the nature of an order passed by the AO for the purposes of Section 263. If so, the same logic should apply to Section 264 as well.

The Delhi High Court in Vijay Gupta’s case rightly pointed out that Circular No.14(XL-35) of 1955, dated 11th April, 1955, which required officers of the Department to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs, and Article 265 of the Constitution of India, which prohibited the arbitrary collection of taxes stating that ‘no tax shall be levied or collected except by authority of law’, had not been considered by the CIT while rejecting the revision petition. If this is taken into account, the assessee should not be denied a deduction rightfully allowable in law, merely because it is not claimed in the return of income, on the grounds that the assessee has no remedy under Section 264 against an intimation.

Further, an intimation issued under Section 143(1) is amenable to rectification under Section 154. Therefore, consider a case where the order of rectification has been passed under Section 154, rectifying the intimation issued under Section 143(1), either suo moto or upon an application made by the assessee in this regard. In such a case, the rectification order would fall within the purview of Section 264, it being an ‘order’, upon taking such a strict interpretation, whereas the intimation itself which has been rectified by the said order would not fall within its purview. Thus, such an interpretation leads to an absurd result, which needs to be avoided.

Therefore, at least as the law now stands, thebetter view is that taken by the Delhi and Bombay High Courts considering the intimation issued under Section 143(1) to be in the nature of ‘order’ for the purpose of Section 264.

Glimpses of Supreme Court Rulings

57 Mangalam Publications, Kottayam vs. Commissioner of Income Tax, Kottayam

Civil Appeal Nos. 8580-8582 of 2011

Decided On: 23rd January, 2024

Reassessment — No reason to believe – Dehors the provisional balance sheet for the assessment year 1989-90 submitted before the South Indian Bank for obtaining credit (which was considered to be unreliable by CIT(A) in the earlier year), there were no other material in the possession of the Assessing Officer to come to the conclusion that income of the Assessee for the three assessment years had escaped assessment — The assessment cannot be reopened on a mere change of opinion in as much as the original assessment orders were passed after due scrutiny.

Defective return of income — A defective return cannot be regarded as an invalid return — The Assessing Officer has the discretion to intimate the Assessee about the defect(s) and it is only when the defect(s) are not rectified within the specified period that the Assessing Officer may treat the return as an invalid return. Ascertaining the defects and intimating the same to the Assessee for rectification, are within the realm of discretion of the Assessing Officer — It is for him to exercise the discretion — The burden is on the Assessing Officer — If he does not exercise the discretion, the return of income cannot be construed as a defective return.

The Assessee was a partnership firm at the relevant point of time though it had registered itself as a company since the assessment year 1994-95. The Assessee is carrying on the business of publishing newspaper, weeklies and other periodicals in several languages under the brand name “Mangalam”. Prior to the assessment year 1994-95, the status of the Assessee was that of a firm, being regularly assessed to income tax.

For the assessment year 1990-91, Assessee filed a return of income on 22nd October, 1991 showing a loss of ₹5,99,390.00. Subsequently, the Assessee filed a revised computation showing income at ₹5,63,920.00. Assessee did not file any balance sheet along with the return of income on the ground that books of account were seized by the income tax department (department) in the course of search and seizure operations on3rd December, 1995 and that those books of account were not yet returned. In the assessment proceedings, the Assessing Officer did not accept the contention of the Assessee and made an analysis of the incomings and outgoings of the Assessee for the previous year under consideration. After considering various heads of income and sale of publications, the Assessing Officer made a lump sum addition of ₹1 lakh to the disclosed income vide the assessment order dated 29th January, 1992 passed under Section 143(3) of the Act.

Likewise, for the assessment year 1991-1992, the Assessee did not file any balance sheet along with the return of income for the same reason mentioned for the assessment year 1990-1991. The return of income was filed on 22nd October, 1991 showing a loss of ₹21,66,760.00. As per the revised profit and loss account, the sale proceeds of the publications were shown at ₹8,21,24,873.00. The Assessing Officer scrutinised the net sale proceeds as per the Audit Bureau of Circulation figure and the certified Performance Audit Report. On that basis, the assessing officer accepted the sale proceeds of ₹8,21,24,873.00 as correct being in conformity with the facts and figures available in the Audit Bureau of Circulation report and the Performance Audit Report. After considering the incomings and outgoings of the relevant previous year, the Assessing Officer reworked the aforesaid figures but found that there was a deficiency of ₹29,17,931.00 in the incoming and outgoing statement which the Assessee could not explain. Accordingly, this amount was added to the total income of the Assessee. Further, the Assessee could not produce proper vouchers in respect of a number of items of expenditure. Accordingly, an addition of ₹1,50,000.00 was made to the total income of the Assessee vide the assessment order dated 29th January, 2022 passed under Section 143(3) of the Act.

For the assessment year 1992-1993 also, the Assessee filed the return of income on 7th December, 1992 showing a loss of ₹10,50,000.00. However, a revised return was filed subsequently on 28th January, 1993 showing loss of ₹44,75,212.00. Like the earlier years, Assessee did not maintain books of account and did not file the balance sheet for the same reason. However, the Assessee disclosed total sale proceeds of the weeklies at ₹7,16,95,530.00 and also advertisement receipts to the extent of ₹40 lakhs. The profit was estimated at ₹41,63,500.00 before allowing depreciation. On scrutiny of the performance certificate issued by the Audit Bureau of Circulation, the Assessing Officer observed that total sale proceeds of the weeklies after allowing sale commission came to ₹7,22,94,757.00. Following the profit percentage adopted in earlier years, the Assessing Officer estimated the income from the weeklies and other periodicals at 7.50 per cent before depreciation, adding the estimated advertisement receipts of ₹40 lakhs to the total sale receipts of ₹7,22,94,757.00. The Assessing Officer held that the total receipt from sale of weeklies and periodicals came to ₹7,62,94,757.00. The profit earned before depreciation at the rate of 7.50 per cent on the turnover came to ₹57,22,106.00. In respect of the daily newspaper, the Assessing Officer worked out the loss at ₹22,95,872.00 as against the loss of ₹41,23,500.00 claimed by the Assessee. Taking an overall view of the matter, the Assessing Officer estimated the business income of the Assessee during the assessment year 1992-1993 at ₹10,00,000.00 vide the assessment order dated 26th March, 1993 passed under Section 143(3) of the Act.

For the assessment year 1993-1994, the Assessee had submitted the profit and loss account as well as the balance sheet along with the return of income. While examining the balance sheet, the Assessing Officer noticed that the balance in the capital account of all the partners of the Assessee firm together was ₹1,85,75,455.00 as on 31st March, 1993 whereas the capital of the partners as on 31st December, 1985 was only ₹2,55,117.00. According to the Assessing Officer, none of the partners had any other source of income apart from one of the partners, Smt. Cleramma Vargese, who had a business under the name and style of “Mangalam Finance”. As the income assessed for all the years was found to be not commensurate with the increase in the capital by ₹1,83,20,338.00 (₹1,85,75,455.00 – ₹2,55,117.00) from 1985 to 1993, it was considered necessary to reassess the income of the Assessee as well as that of the partners for the assessment years 1988-1989 to 1993-1994. After obtaining the approval of the Commissioner of Income Tax, Trivandrum, notice under Section 148 of the Act was issued and served upon the Assessee on 29th March, 2000.

In respect of the assessment year 1990-1991, the Assessee informed the Assessing Officer that the return of income filed which culminated in the assessment order dated 29th January, 1992 may be considered as the return in the reassessment proceedings. The Assessing Officer took cognizance of the profit and loss account and the balance sheet filed by the Assessee before the South Indian Bank on the basis of which assessment of income for the assessment years 1988 – 1989 and 1989 – 1990 were completed. Objection of the Assessee that the aforesaid balance sheet was prepared only for the purpose of obtaining loan from the South Indian Bank and therefore could not be relied upon for income tax assessment was brushed aside. The reassessment was made on the basis of the accounts submitted to the South Indian Bank. By the reassessment order dated 21st March, 2002 passed under Section 144/147 of the Act, the Assessing Officer quantified
the total income of the Assessee at ₹29,66,910.00 thereafter order was passed allocating income among the partners.

Likewise, for the assessment year 1991-1992, the Assessing Officer passed a reassessment order dated 21st March, 2002 under Section 144/147 of the Act determining total income at ₹13,91,700.00. Following the same, allocation of income was also made amongst the partners.

In so far assessment year 1992-1993 is concerned, the Assessing Officer passed the reassessment order also on 21st March, 2002 under Section 144/147 of the Act determining the total income of the Assessee at ₹25,06,660.00. Thereafter, the allocation of income was made amongst the partners in the manner indicated in the order of reassessment.

The Assessing Officer had worked out the escaped income for the three assessment years of 1990-91, 1991-92 and 1992-93 at ₹50,96,041.00. This amount was further apportioned between the three assessment years in proportion to the sales declared by the Assessee in the aforesaid assessment years.

Against the aforesaid three reassessment orders for the assessment years 1990-91, 1991-92 and 1992-93, Assessee preferred three appeals before the first appellate authority i.e. Commissioner of Income Tax (Appeals), IV Cochin (briefly “the CIT(A)” hereinafter). Assessee raised the ground that it had disclosed all material facts necessary for completing the assessments. The assessments having been completed under Section 143(3) of the Act, the assessments could not have been reopened after expiry of four years from the end of the relevant assessment year as per the proviso to Section 147 of the Act. It was pointed out that the limitation period for the last of the three assessment years i.e. 1992-93, had expired on 31st March, 1997 whereas the notices under Section 148 of the Act were issued and served on the Assessee only on 29th March, 2000. Therefore, all the three reassessment proceedings were barred by limitation. The Assessee also argued that the alleged income escaping assessment could not be computed on an estimated basis. In the present case, the Assessing Officer had allocated the alleged escaped income for the three assessment years in proportion to the corresponding sales turnover. It was further argued that as per Section 282(2), notice under Section 148 of the Act in the case of a partnership firm was required to be made to a member of the firm. In the present case, the notices were issued to the partnership firm. Therefore, such notices could not be treated as valid.

CIT(A) rejected all the above contentions urged by the Assessee. CIT(A) relied on Section 139(9)(f) of the Act and thereafter held that the Assessee had not furnished the details as per the aforesaid provisions and therefore fell short of the requirements specified therein. Vide the common appellate order dated 26th February, 2004, CIT(A) held that, as the Assessee had failed to disclose all material facts necessary to make assessments, therefore it could not be said that the reassessment proceedings were barred by limitation in terms of the proviso toSection 147. The other two grounds raised by the Assessee were also repelled by the first appellateauthority. Thereafter, CIT(A) made a detailed examination of the factual aspect thereafter it proposed enhancement of the quantum of escaped income. Following thesame, CIT(A) enhanced the assessment by fixing the unexplained income at ₹1,44,02,560.00 for the assessment years 1987-88 to 1993-94 which was thereafter apportioned in respect of the relevant three assessment years.

Thus, as against the total escaped income of ₹50,96,040.00 for the above three assessment years as quantified by the Assessing Officer, CIT(A) enhanced and redetermined such income at ₹68,20,854.00.

The CIT(A), however, in the appellate order had noted that the Assessee had filed its balance sheet as on 31st December, 1985 while filing the return of income for the assessment year 1986-87. The next balance sheet was filed on 31st March, 1993. No balance sheet was filed in the interregnum on the ground that it could not maintain proper books of accounts as the relevant materials were seized by the department in the course of a search and seizure operation and not yet returned. CIT(A) further noted that the Assessing Officer had taken the balance sheet as on 31st March, 1989 filed by the Assessee before the South Indian Bank as the base for reconciling the accounts of the partners. It was noticed that CIT(A) in an earlier appellate order dated 26th March, 2002 for the assessment year 1989-90 in the Assessee’s own case had held that the profit and loss account and the balance sheet furnished to the South Indian Bank were not reliable. CIT(A) in the present proceedings agreed with such finding of his predecessor and held that the unexplained portion, if any, of the increase in capital and current account balance with the Assessee had to be analysed on the basis of the balance sheet filed before the Assessing Officer as on 31st December, 1985 and as on 31st March, 1993.

Aggrieved by the common appellate order passed by the CIT(A) dated 26th February, 2004, Assessee preferred three separate appeals before the Tribunal.

In the three appeals filed by the Assessee, revenue also filed cross objections.

By the common order dated 29th October, 2004, the Tribunal allowed the appeals filed by the Assessee and set aside the orders of reassessment for the three assessment years as affirmed and enhanced by the CIT(A). Tribunal held that the re-examination carried out by the Assessing Officer was not based on any fresh material or evidence. The reassessment orders could not be sustained on the basis of the balance sheet filed by the Assessee before the South Indian Bank because in an earlier appeal of the Assessee itself, CIT(A) had held that such balance sheet and profit and loss account furnished to the bank were not reliable. The original assessments were completed under Section 143(3) of the Act. Therefore, it was not possible to hold that the Assessee had not furnished necessary details for completing the assessments at the time of original assessment. In such circumstances, the Tribunal held that the case of the Assessee squarely fell within the four corners of the proviso to Section 147. Consequently, the reassessments were held to be barred by limitation, thus without jurisdiction. While allowing the appeals of the Assessee, the Tribunal dismissed the cross objections filed by the revenue.

Against the aforesaid common order of the Tribunal, the Respondent preferred three appeals before the High Court under Section 260A of the Act. All the three appeals were allowed by the High Court vide the common order dated 12th October, 2009. According to the High Court, the finding of the Tribunal that the Assessee had disclosed fully and truly all material facts necessary for completion of the original assessments was not tenable. Holding that there was no material before the Tribunal to come to the conclusion that the Assessee had disclosed fully and truly all material facts required for completion of original assessments, the High Court set aside the order of the Tribunal, and remanded the appeals back to the Tribunal to consider the appeals on merit after issuing notice to the parties.

It is against this order that the Assessee filed the special leave petitions which on leave being granted were registered as civil appeals. The related civil appeals were also filed by the partners of the Assessee firm which were dependent on the outcome of the main civil appeals.

The Supreme Court observed that from a reading of the reasons recorded by the Assessing Officer leading to formation of his belief that income of the Assessee had escaped assessment for the assessment years under consideration, the only material which came into possession of the Assessing Officer subsequently was the balance sheet of the Assessee for the assessment year 1989-90 obtained from the South Indian Bank. After obtaining this balance sheet, the Assessing Officer compared the same with the balance sheet and profit loss account of the Assessee for the assessment year 1993-94. On such comparison, the Assessing Officer noticed significant increase in the current and capital accounts of the partners of the Assessee. On that basis, he drew the inference that profit of the Assessee for the three assessment years under consideration would be significantly higher which had escaped assessment. The figure of under assessment was quantified at ₹1,69,92,728.00. Therefore, he recorded that he had reason to believe that due to omission or failure on the part of the Assessee to disclose fully and truly all material facts necessary for the assessments, incomes chargeable to tax for the three assessment years had escaped assessment.

The Supreme Court noted that the Assessee did not submit regular balance sheet and profit and loss account for the three assessment years under consideration on the ground that books of account and other materials/documents of the Assessee were seized by the department in the course of search and seizure operation, which were not yet returned to the Assessee. In the absence of such books etc., it became difficult for the Assessee to maintain year-wise regular books of account etc. However, regular books of account and profit and loss account were filed by the Assessee along with the return of income for the assessment year 1993-94.

According to the Supreme Court, the Assessing Officer culled out the figures discernible from the balance sheet for the assessment year 1989-90 obtained from the South Indian Bank, and compared the same with the balance sheet submitted by the Assessee before the Assessing Officer for the assessment year 1993-94 to arrive at the aforesaid conclusion.

The Supreme Court noted that the Assessee had filed its regular balance sheet as on 31st December, 1985 while filing the return of income for the assessment year 1986-87. The next balance sheet filed was on 31st March, 1993 for the assessment year 1993-94. No balance sheet was filed in the interregnum as according to the Assessee, it could not maintain proper books of account as the relevant materials were seized by the department in the course of a search and seizure operation and not yet returned. It was not possible for it to obtain ledger balances to be brought down for the succeeding accounting years.

As regards to the balance sheet on 31st March, 1989 filed by the Assessee before the South Indian Bank, and which was construed by the Assessing Officer to be the balance sheet of the Assessee for the assessment year 1989-90, the Supreme Court observed that the explanation of the Assessee was that it was prepared on provisional and estimate basis and was submitted before the South Indian Bank for obtaining credit and therefore could not be relied upon in assessment proceedings.

The Supreme Court noted that this balance sheet was also relied upon by the Assessing Officer in the reassessment proceedings of the Assessee for the assessment year 1989-90. In the first appellate proceedings, CIT(A) in its appellate order dated 26th March, 2002 held that such profit and loss account and the balance sheet furnished to the South Indian Bank were not reliable and had discarded the same. That being the position, according to the Supreme Court, the Assessing Officer could not have placed reliance on such a balance sheet submitted by the Assessee allegedly for the assessment year 1989-90 to the South Indian Bank for obtaining credit. Dehors such a balance sheet, there was no other material in the possession of the Assessing Officer to come to the conclusion that income of the Assessee for the three assessment years had escaped assessment.

Further, the Supreme Court observed that Section 139 places an obligation upon every person to furnish voluntarily a return of his total income if such income during the previous year exceeded the maximum amount which is not chargeable to income tax. The Assessee is under further obligation to disclose all material facts necessary for his assessment for that year fully and truly. However, the constitution bench of the Supreme Court in Calcutta Discount Company Limited, has held that while the duty of the Assessee is to disclose fully and truly all primary and relevant facts necessary for assessment, it does not extend beyond this. Once the primary facts are disclosed by the Assessee, the burden shifts onto the Assessing Officer.

According to the Supreme Court, it was not the case of the revenue that the Assessee had made a false declaration. On the basis of the “balance sheet” submitted by the Assessee before the South Indian Bank for obtaining credit which was discarded by the CIT(A) in an earlier appellate proceeding of the Assessee itself, the Assessing Officer upon a comparison of the same with a subsequent balance sheet of the Assessee for the assessment year 1993-94 which was filed by the Assessee and was on record, erroneously concluded that there was escapement of income and initiated reassessment proceedings.

According to the Supreme Court, while framing the initial assessment orders of the Assessee for the three assessment years in question, the Assessing Officer had made an independent analysis of the incomings and outgoings of the Assessee for the relevant previous years and thereafter had passed the assessment orders under Section 143(3) of the Act. An assessment order under Section 143(3) was preceded by notice, enquiry and hearing under Section 142(1), (2) and (3) as well as under Section 143(2). If that be the position and when the Assessee had not made any false declaration, it was nothing but a subsequent subjective analysis of the Assessing Officer that income of the Assessee for the three assessment years was much higher than what was assessed and therefore, had escaped assessment. This was nothing but a mere change of opinion which cannot be a ground for reopening of assessment.

The Supreme Court also dealt with the aspect of defective return. According to the Supreme Court, admittedly, the returns for the three assessment years under consideration were not accompanied by the regular books of account. Though under Sub-section (9)(f) of Section 139, such returns could have been treated as defective returns by the Assessing Officer and the Assessee intimated to remove the defect failing which the returns would have been invalid, however, the materials on record do not indicate that the Assessing Officer had issued any notice to the Assessee bringing to its notice such defect and calling upon the Assessee to rectify the defect within the period as provided under the aforesaid provision. In other words, the Assessing Officer had accepted the returns submitted by the Assessee for the three assessment years under question. The Supreme Court noted that it was the case of the Assessee that though it could not maintain and file regular books of account with the returns in the assessment proceedings for the three assessment years under consideration, nonetheless it had prepared and filed the details of accounts as well as incomings and outgoings of the Assessee etc. for each of the three assessment years which were duly verified and enquired into by the Assessing Officer in the course of the assessment proceedings which culminated in the orders of assessment under Sub-section (3) of Section 143.

According to the Supreme Court, a return filed without the regular balance sheet and profit and loss account may be a defective one but certainly not invalid. A defective return cannot be regarded as an invalid return. The Assessing Officer has the discretion to intimate the Assessee about the defect(s) and it is only when the defect(s) are not rectified within the specified period that the Assessing Officer may treat the return as an invalid return. Ascertaining the defects and intimating the same to the Assessee for rectification, are within the realm of discretion of the Assessing Officer. It is for him to exercise the discretion. The burden is on the Assessing Officer. If he does not exercise the discretion, the return of income cannot be construed as a defective return. As a matter of fact, in none of the three assessment years, the Assessing Officer had issued any declaration that the returns were defective.

The Supreme Court noted that the Assessee has asserted that though it could not file regular books of account along with the returns for the three assessment years under consideration because of seizure by the department, nonetheless the returns of income were accompanied by tentative profit and loss account and other details of income like cash flow statements, statements showing the source and application of funds reflecting the increase in the capital and current accounts of the partners of the Assessee etc., which were duly enquired into by the Assessing Officer in the assessment proceedings.

In view of above, the Supreme Court was of the view that the Tribunal was justified in coming to the conclusion that the reassessments for the three assessment years under consideration were not justified. The High Court had erred in reversing such findings of the Tribunal. Consequently, the Supreme Court set aside the common order of the High Court and restored the common order of the Tribunal dated 29th October, 2004.

Section 148A – Reassessment –Sanction – Non Application of mind.

31 ArunaSurulkar vs. Income Tax Officer,

Ward-19(2)(4),

Writ Petition No. 3503 of 2023 (Bom) (HC)

Date of Order: 22nd January, 2024

Section 148A – Reassessment –Sanction – Non Application of mind.

Petitioner challenged the notice dated 23rd March, 2022 issued under Section 148A(b) of the Act and order dated 22nd April, 2022 passed under Section 148A(d) of the Act, also the consequent notice dated 22nd April, 2022 issued under Section 148 of the Act.

Admittedly, Petitioner did not reply to the initial notice dated 23rd March, 2022 that Petitioner received under Section 148A(b) of the Act. The order passed under Section 148A(d) of the Act, whereby in paragraph 3, it is stated as under:

“3. From the details of transactions as mentioned above, it is seen that there is violation of the provisions of section 50C of the Income Tax Act, 1961. Due to noncompliance, assessee also failed to explain the transaction. Further, on verification of assessee’s return of income for AY 2018-2019, it is seen that differential amount of Rs. 26,44,500/- is not offered for taxation.”

The Petitioner contended that provisions of Section 50C of the Act would apply only to a seller and not the assessee in this case, who is the buyer of the property.
Therefore, it is the petitioner’s case that there has been total non application of mind while issuing this order under Section 148A(d) of the Act. If the sanctioning authority had read the order, he would not have granted the sanction because Section 50C of the Act does not apply to buyers.

The Revenue relies on an affidavit-in-reply filed by Mr. Manish and submits that it was a human error. The Court observed that the said Manish is incompetent to make the statement because it is not the said Manish, who had passed the impugned order. There is also nothing to indicate in the affidavit that Manish made inquiries with the officer Abhishek Kumar Sinha, who passed the impugned order seeking an explanation for reliance on Section 50C of the Act.

The Revenue further contended that the reopening was to provide an opportunity to the assessee of being heard and thus, thoroughly analyse the facts of the case with documentary evidence and the sufficiency or correctness of the material cannot be considered at the stage of reopening. The questions of fact and law are left open tobe investigated and decided by the Assessing Authority and therefore, reopening is valid. The Hon. Court did not accept this stand of Respondents in as much as the Assessing Officer before issuing a notice must have satisfied himself that what he writes makes sense. Even the Principal Commissioner, who granted sanction should have also applied his mind and satisfied himself that the order passed under Section 148A(d) of the Act was being issued correctly by applying mind. It cannot be a mechanical sanction.

The court further observed that there is nothingin the notice to explain as to how, if the transaction amount is less than the stamp duty value, there can be escapement of any income particularly in the hands of a buyer.

In the circumstances, the petition was allowed.

Section 36(1)(iii): Interest free advance to subsidiary – for the purpose of business – allowable.

30 Principal Commissioner of Income Tax-7 vs. ESSEL Infra Projects Ltd. (Former PAN India Paryatan Ltd.)

Income Tax Appeal No. 927 of 2018 (Bom.) (HC)

Date of Order: 31st January, 2024

Section 36(1)(iii): Interest free advance to subsidiary – for the purpose of business – allowable.

The Respondent-Assessee is engaged in the business of operating amusement parks, infrastructure development management and finance activities. Assessee had given a sum of ₹25 crores to PAN India Infrastructure Private Limited, its subsidiary. The Assessing Officer took the view that Assessee had diverted the interest bearing fund by giving interest-free advance and, therefore, the entire interest claim of ₹1,48,10,695 needs to be disallowed. There were also certain other disallowances made by AO.

The Commissioner of Income Tax (Appeals) held that the investment made by Assessee in its subsidiary was in the course of carrying on its business and the interest expenditure is not required to be disallowed. It was held that under Section 36(1)(iii) of the Act, interest paid in respect of capital borrowed for the purpose of business is a permissible deduction in the computation of profits and gains of business or profession and the investment made by Assessee being in the course of carrying on its business, interest expenditure is not required to be disallowed.

This was impugned by the Revenue in the appeal filed before the Income Tax Appellate Tribunal.

The Hon. High Court observed that the Tribunal, on the facts, agreed with the finding arrived at by the CIT(A) that the amount given by Assessee to its subsidiary was for the purpose of business of Assessee. The Tribunal has accepted the factual finding of the CIT(A) that Assessee being engaged in the business of ‘infrastructure development management and finance’ in addition to its ‘amusement park and water park’, has set up the subsidiary to which these funds were provided to take up the infrastructure project on behalf of Assessee. A factual finding has been arrived at that the finance provided to the wholly owned subsidiary was for its business of infrastructure and is used for that purpose. It has accepted that the nexus between the advance of funds and the business of Appellant / Assessee carried out through the subsidiary stood established and hence, no disallowance under Section 36(1)(iii) of the Act was warranted.

The Hon Court relied on the decision in case of Vaman Prestressing Co. Pvt. Ltd. vs. Additional Commissioner of Income Tax- Rg.2(3) &Ors., 2023 SCC OnLineBom. 1947.

Held, no substantial questions of law arise.

The Appeal was dismissed.

Section 11(1A) – Charitable trust – Permission from the Charity Commissioner before disposing of its property.

29 Commissioner of Income Tax (Exemption), Pune vs. Shree Ram Ashram Trust Nashik

ITXA (IT) No. 448 of 2018 (Bom) (HC)

Date of Order: 31st January, 2024

Section 11(1A) – Charitable trust – Permission from the Charity Commissioner before disposing of its property.

The Respondent-Assessee is a public charitable trust. It had entered into an agreement in 1994 with Buildforce Properties Pvt. Ltd. (“Buildforce”) to sell its property. Since, the Assessee was a trust, it needed permission from the Charity Commissioner before disposing of the property. The Charity Commissioner granted permission vide order dated 29th December, 1995, subject to certain conditions. As per the conditions imposed, the Assessee was to complete the sale within one year from the date of the order, the sale consideration of ₹6.30 crores was to be invested in fixed deposits with nationalised bank or scheduled bank or co-operative bank or in any public securities earning higher rate of interest and only the interest was to be utilized for the charitable activities of the trust. As per the Memorandum of Understanding (“MOU”) with Buildforce, symbolic possession was given to Buildforce. As per the MOU, Buildforce was to develop the property. Admittedly, a certain dispute arose between Buildforce and Assessee and a suit came to be filed being Suit No. 2395 of 1998. The suit was settled by filing ‘Consent Terms’ and an order was passed by the Hon’ble High Court on 25th July, 2006, taking the Consent Terms on record subject to appropriate directions/permissions to be granted by the Charity Commissioner. Under the Consent Terms, Assessee agreed to accept a sum of₹6.28 Crores in full and final settlement and transferred the property in favour of the nominee of Buildforce, i.e.,M/s. Dilip Estate & Town Planners Pvt. Ltd. (“Dilip Estate”). Post the order of the Hon’ble High Court, permissions were sought from the Charity Commissioner, who vide an order dated 5th April, 2007, extended the time to complete the transaction. The time to execute the conveyance deed was extended up to 31st May, 2007. A sale deed was executed on 20th April, 2007 for the sale of the property to Dilip Estates. On execution of the sale deed, sale proceeds were received by Assessee, who invested the same with Bank of Baroda and Dena Bank, both nationalized banks. During the course of hearing before the Income Tax Appellate Tribunal (“ITAT”) also the fixed deposits continued and the list was also made available to the ITAT. It was the case of Assessee that when the sale proceeds of capital assets are invested in fixed deposit, then no capital gain is to be assessed in the hands of Assessee in view of the provisions of Section 11(1A) of the Act.

As per clause (a) of Section 11(1A), where Assessee holds capital asset under trust wholly for charitable or religious purpose and the same is transferred, then where whole or any part of net consideration is utilized for acquiring another capital asset, the capital gains arising from the transfer shall be deemed to have been applied to charitable or religious purposes. Depending on whether whole or part of net consideration is so utilized, then so much of capital gains equal to the amount, if any, so exceeds the cost of asset is to be allowed as deduction. Therefore, in the hands of Assessee, where Assessee has sold the capital asset being immovable property which Assessee claims it was holding under trust wholly for charitable or religious purposes, and on its transfer,the sale proceeds are invested in long term investments with banks in FDRs, then no capital gain arises to Assessee.

The Assessing Officer did not accept this stand of Assessee because, according to him, Assessee entered into an agreement with Buildforce in 1994 and the sale deed was executed in favour of its nominee, Dilip Estates only on 20th April, 2007, i.e., after a period of almost 12 years. In this intervening period of 12 years, where the possession of the property was with Buildforce as per the MOU, Assessee was not in possession of the property. Therefore, it cannot be held that the property was being held under trust wholly for charitable or religious purposes. Therefore, Assessee has not fulfilled the requirement of Section 11(1A) of the Act. Hence, Assessee is not entitled to the benefit provided under the said Sub-section.

On appeal, the Commissioner of Income Tax (Appeals) allowed the appeal.

The limited issue that was before the ITAT in the appeal that the Revenue filed was whether Assessee was entitled to claim the benefit under Section 11(1A) of the Act. The ITAT, came to the conclusion that Assessee was entitled to claim the benefit.

On appeal the Revenue – Appellant proposed a following substantial question of law:

“Whether on the facts and circumstances of the present case and in law, the Hon’ble ITAT was correct in allowing Exemption under Section 11(1A) of the Income Tax Act in the instant case, even though the property was not held under Assessee Trust wholly for the charitable/religious purpose?”

The Hon. High court observed that admittedly, Assessee was the owner of the property and the sale deed was executed with Dilip Estates only on 20th April, 2007. Even the Charity Commissioner has accorded his permission for the sale. Once the year of sale is taken to be AY 2008-09, then admittedly, the possession of said property is deemed to have been given in the said assessment year. Once the AO has accepted the plea that transfer took place in AY 2008-09 and assessed income under long term capital gains in the hands of Assessee, the ITAT correctly concluded that it cannot be said that the possession was not transferred in AY 2008-09. Once legal possession has been handed over by Assessee, only in 2008-09, then it is presumed and accepted that the said capital asset was held by Assessee trust wholly for charitable purposes till the date of its sale.

In the circumstance, it was held that no substantial question of law arises.

Appeal of Revenue was dismissed.

Rectification of mistake — Mistake apparent from record — Exemption — Income received by non-resident for service rendered on foreign ship outside India — Not taxable in India even if credited to bank in India — Assessee mistakenly declaring in return salary received for services rendered outside India — Rejection of application for rectification — Failure to apply circular issued by CBDT — Error apparent on face of record — Orders refusing to rectify mistake set aside — Assessee entitled to exemption u/s. 10(6)(viii) — Matter remanded to AO. Appeal to Appellate Tribunal — Rectification of mistake — Failure to apply judicial precedents and circular issued by CBDT — Error apparent on face of record — Tribunal has jurisdiction to rectify.

88 Rajeev Biswas vs. UOI

[2023] 459 ITR 36 (Cal)

A.Y.: 2012-13

Date of Order: 22nd September, 2022

Ss. 10(6)(viii), 154 and 254 of ITA 1961

Rectification of mistake — Mistake apparent from record — Exemption — Income received by non-resident for service rendered on foreign ship outside India — Not taxable in India even if credited to bank in India — Assessee mistakenly declaring in return salary received for services rendered outside India — Rejection of application for rectification — Failure to apply circular issued by CBDT — Error apparent on face of record — Orders refusing to rectify mistake set aside — Assessee entitled to exemption u/s. 10(6)(viii) — Matter remanded to AO.

Appeal to Appellate Tribunal — Rectification of mistake — Failure to apply judicial precedents and circular issued by CBDT — Error apparent on face of record — Tribunal has jurisdiction to rectify.

The assessee was employed outside the Indian territory. For the A.Y. 2012-13, the return filed by the assessee was processed u/s. 143(1) of the Income-tax Act, 1961 computing the tax liability at ₹4,40,070. The Chartered Accountant of the assessee filed a petition for rectification stating that the assessee was a non-resident Indian during the period as he had to stay outside the country due to his employment, that he was outside the country for a total of 210 days during the previous year relating to the A.Y. 2012-13 and the income had been assessed without considering the assessee’s non-resident status. The request was rejected by the Deputy Commissioner (International Taxation) on the ground that there was no mistake apparent from the record.

The assessee preferred an appeal before the Commissioner (Appeals) contending that the Assessing Officer had ignored the revised return filed by the assessee where the income earned by the assessee under the head “Salary” was exempted u/s. 10(6)(viii) of the Act. The Commissioner (Appeals) dismissed the appeal. The Tribunal rejected the assessee’s further appeal on the ground that the issue pertaining to the assessee’s claim for exemption on account of salary income stated to be earned outside India was a debatable issue and the Commissioner (Appeals) was right in rejecting the appeal. The assessee preferred an application for rectification before the Tribunal which it dismissed by order dated5th January, 2018.

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

“i) Circular No. 13 of 2017, dated 11th April, 2017 ([2017] 393 ITR (St.) 91) issued by the CBDT states that salary approved to a non-resident seafarer for service rendered outside India on a foreign ship shall not be included in the total income merely because the salary has been credited in the non-resident external account maintained with an Indian bank by the seafarer. In Circular No. 14 (XL-35), dated 11th April, 1995 the CBDT has directed the Officers of the Department not to take advantage of ignorance of an assessee as to his rights and stated that it is the duty of the Officers of the Department to assist the assessee in every reasonable way, particularly in the matter of claiming and securing reliefs under the Income-tax Act, 1961 and that in this regard the Officers should take the initiative in guiding an assessee where proceedings and other particulars before them indicate that some refund or relief is due to the assessee.

ii) The orders of the Tribunal and the Commissioner (Appeals) were perverse because:

(a) On the date when the Tribunal had passed the initial order dismissing the appeal of the assessee there was a binding decision of the court in Utanka Roy vs. DIT (International Taxation) [2017] 390 ITR 109 (Cal) which the Tribunal could not have ignored. The Tribunal having ignored it there was an error which was apparent on the face of the record. The Tribunal ought to have exercised its power when the rectification application was filed by the assessee but had erroneously rejected it. Therefore, the said order dated 5th January, 2018 also suffered from perversity.

(b) The Assessing Officer failed to note that the assessee was an individual and the return of income was filed by the chartered accountant and the chartered accountant on going through the facts found the mistake which had been committed and immediately filed the revised return which has been duly acknowledged by the Department. Thereafter, the rectification application was filedwhich was dealt with by the Deputy Commissioner of Income-tax, International Taxation which was also rejected. In our considered view the Departmentcould have taken a more reasonable stand, more particularly when the law on the subject is in favour of the assessee.

(c) The Assessing Officer and the Commissioner (Appeals) had ignored Circular No. 13 of 2017, dated 11th April, 2017 and Circular No. 14 (XL-35) dated 11th April, 1995 issued by the CBDT.

iii) The initial order and the order in the miscellaneous application passed by the Tribunal, the orders passed by the Commissioner (Appeals), the Deputy Commissioner (International Taxation), the order of rejection of the application under section 154 passed by the Centralised Processing Centre were quashed. The Assessing Officer was to review the assessment in accordance with law and Circular No. 13 of 2017, dated 11th April, 2017 issued by the Central Board of Direct Taxes and grant relief under section 10(6)(viii) by excluding the income received abroad by the assessee.”

Recovery of tax — Stay of demand pending appeal before CIT(A) — Discretion must be exercised in judicious manner — AO not bound by Departmental instructions.

87 Sudarshan Reddy Kottur vs. ITO

[2023] 458 ITR 750 (Telangana)

A.Y.: 2017-18

Date of Order: 30th January, 2023

S. 220(6) of ITA 1961

Recovery of tax — Stay of demand pending appeal before CIT(A) — Discretion must be exercised in judicious manner — AO not bound by Departmental instructions.

Assesee is an individual. For the A.Y. 2017-18, the assessee had filed return of income on 30th October, 2017 declaring total income of ₹15,02,400. By an order dated 30th March, 2022 passed u/s. 147 r.w.s. 144B of the Income-tax Act, 1961, the Assessing Officer determined the total income at ₹24,89,27,611 and raised the demand. The assessee filed an appeal before the CIT(A) and made an application u/s. 220(6) for stay of demand before the Assessing Officer. By the order dated 16th January, 2023, the Assessing Officer directed the assessee to pay 20 per cent of the demand on or before 25th January, 2023, but at the same time rejected the application for stay of demand.

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

“i) When the Income-tax authority exercises jurisdiction u/s. 220(6) of the Income-tax Act, 1961 he exercises quasi-judicial powers. While exercising quasi-judicial powers, the authority is not bound or confined by Departmental instructions.

ii) From a perusal of the order dated 16th January, 2023, it could be seen that the Income-tax Officer had followed instructions of the CBDT dated 21st March, 1996 to the effect that where an outstanding demand was disputed before the appellate authority, the assessee had to pay 20 per cent of the disputed demand. Accordingly, the assessee was directed to pay 20 per cent of the outstanding demand. There had been no application of mind by the Assessing Officer. The order therefore was not valid.

iii) That being the position, we set aside the order dated 16th January, 2023 and remand the matter back to the Assessing Officer for passing a fresh order in accordance with law after giving due opportunity of hearing to the assessee. This shall be done within a period of six (6) weeks from the date of receipt of a copy of this order. Till the aforesaid period of six (6) weeks, the respondents are directed not to take coercive steps for realising the outstanding demand for the A.Y. 2017-18.”

Reassessment — Notice — New procedure — Effect of decision of Supreme Court in Ashish Agarwal — Liberty available to matters at notice stage — Liberty granted by High Court in assessee’s petition against notice under unamended provision prior to Supreme Court decision — AO issuing second notice but allowing proceedings to lapse — Department cannot proceed for third time invoking liberty granted by Supreme Court — Notices and proceedings quashed.

86 Vellore Institute of Technology vs. ACIT(Exemption)

[2023] 459 ITR 499 (Mad)

A.Y.: 2015-16

Date of Order: 30th June, 2023

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

Reassessment — Notice — New procedure — Effect of decision of Supreme Court in Ashish Agarwal — Liberty available to matters at notice stage — Liberty granted by High Court in assessee’s petition against notice under unamended provision prior to Supreme Court decision — AO issuing second notice but allowing proceedings to lapse — Department cannot proceed for third time invoking liberty granted by Supreme Court — Notices and proceedings quashed.

For the A.Y. 2015-16, the Assessing Officer issued notice against the assessee under the unamended provisions of section 148 for reopening the assessment u/s. 147 of the Income-tax Act, 1961. Based on the liberty granted by the court on a writ petition against this notice, the Assessing Officer issued a second notice u/s. 148A(b) which included the details of the information on the basis of which the allegation of escapement of income was made. An order rejecting the objections of the assessee u/s. 148A(d) was passed and notice u/s. 148 was issued. On a writ petition challenging the second notice, the court granted an interim order which stated that while the second notice u/s. 148 could proceed with any decision taken by the Department would be subject to the result of the writ petition. Pursuant to that no notice u/s. 143(2) was issued. Thereafter, based on the decision of the Supreme Court dated 4th May, 2022 in UOI vs. Ashish Agarwal [2022] 444 ITR 1 (SC), the Assessing Officer issued a third notice dated 2nd June, 2022 u/s. 148A(b) and rejected the objections filed by the assessee in his order u/s. 148A(d) stating that the second notice dated 18th April, 2022 was dropped and the first notice u/s. 148 dated 12th April, 2021 which was the subject-matter of the first writ petition filed by the assessee was revived.

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

“i) The distinction between the erstwhile and the new system for reassessment of income that has escaped assessment u/s. 147 of the Income-tax Act, 1961 is that, under the old procedure it was necessary for the Assessing Officer to record reasons on the basis of which a notice u/s. 148 would be issued. The reasons formed the substratum of the proceedings for reassessment. In the new procedure obviating the necessity to record reasons and furnish them to the assessee upon request, the reasons are to be part of the initial notice u/s. 148A(b) and a response thereto is solicited. After hearing the assessee, an order is to be passed u/s. 148A(d) for issuance of notice u/s. 148 after considering the objections raised.

ii) There was no justification for the Department either in law or on fact, to subject the assessee to a third round of reassessment proceedings u/s. 147 merely by invoking the liberty granted in UOI vs. Ashish Agarwal decided on 4th May, 2022. The Department was bound by its decision in full when it dropped the second round of proceedings pursuant to the order of the High Court in the writ petition against the second notice issued under the new procedure. After the passing of the order by the High Court in respect of the second notice, proceedings had been commenced afresh by issuance of a notice u/s. 148A(b) and those proceedings had culminated by issuance of notice u/s. 148 dated 18th April, 2022 pursuant to which no notice u/s. 143(2) had been issued and the proceedings lapsed. The explanation tendered for issuance of a notice under section 148A(b) for the third time on June 2, 2022 was fallacious and unacceptable as the liberty granted by the Supreme Court in its decision dated 4th May, 2022 would be available only in those situations where the matters stood at an initial or preliminary stage of notice for reassessment and not where the proceedings had been carried forward to the stage of passing of order under section 148A(d) and issuance of notice under section 148 .

iii) The Department’s submission that the proceedings initiated pursuant to the first notice stood revived was also factually incorrect as there were material differences between the reasons in the first notice and those in notice u/s. 148A(b) dated 2nd June, 2022. If the third round of proceedings was only a revival of the earlier proceedings, the reasons ought to have been identical but they were not. The notices and consequential proceedings were quashed.”

Reassessment — Initial notice — Order u/s. 148A(d) for issue of notice — Notice u/s. 148 — Validity — Notice based on information from insight portal that assessee had purchased property — Assessee disclosing all details including bank statement in response to notice u/s. 142(1) and duly examined by AO in original assessment — Notices and order for issue of notice set aside.

85 Urban Homes Realty vs. UOI

[2023] 459 ITR 96 (Bom)

A.Y.: 2016-17

Date of Order: 4th July, 2023

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

Reassessment — Initial notice — Order u/s. 148A(d) for issue of notice — Notice u/s. 148 — Validity — Notice based on information from insight portal that assessee had purchased property — Assessee disclosing all details including bank statement in response to notice u/s. 142(1) and duly examined by AO in original assessment — Notices and order for issue of notice set aside.

The assessee was a property developer. For the A.Y. 2016-17, its case was selected for scrutiny for various reasons, one of which was large investment in property. The Assessing Officer stated in his order u/s. 143(3) of the Income-tax Act, 1961 that during the course of assessment proceedings the assessee submitted the details as called for and such details were examined. Thereafter, the Assessing Officer issued an initial notice u/s. 148A(b) on the basis of information from the Insight portal that the assessee had made an investment in a property on account of which income had escaped assessment. The Assessing Officer rejected the assessee’s explanation that all the details in respect of the purchase of the property in question were disclosed in the original scrutiny assessment and passed an order u/s. 148A(d) for issue of notice u/s. 148 and also issued a notice u/s. 148 pursuant thereto.

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

“i) The findings of the Assessing Officer that the issue covered in the scrutiny assessment u/s. 143(3) was not related to verification of source in respect of purchase of property, that the assessee did not furnish relevant bank statement evidencing the payments made for purchase of the property and did not explain the source during the course of issuance of notice u/s. 148A(b) were incorrect. In the notice u/s. 142(1) issued on 24th August, 2018, the assessee was expressly called upon to submit all the details of all the properties purchased with copies of the purchase deed and a copy of statement of the bank account from which the payment was made and the assessee had in its response furnished all the details called for. In his order u/s. 143(3) the Assessing Officer had specifically stated that during the course of assessment proceedings the assessee had submitted various details as called for and that those details were examined and that the data had been verified from the details submitted by the assessee. Therefore, the Assessing Officer was certainly satisfied with all the details provided by the assessee.

ii) In the reply to the notice issued u/s. 148A(b) also, the assessee had given details of the consideration paid for the property and the source of funds. Therefore, the Assessing Officer’s stating in his order u/s. 148A(d) that the assessee did not provide the details or explaining the source was incorrect. Accordingly, the initial notice u/s. 148A(b), the subsequent order u/s. 148A(d) and the consequential notice u/s. 148 were quashed and set aside.”

Reassessment — New procedure — Information that income has escaped assessment — Objection from Comptroller and Auditor General required —Internal audit objection cannot form the basis of reassessment — Reassessment based on change of opinion — Reassessment is impermissible in law.

84 Hasmukh Estates Pvt. Ltd. vs. ACIT

[2023] 459 ITR 524 (Bom)

A.Y.: 2015-16

Date of Order: 8th November, 2023

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

Reassessment — New procedure — Information that income has escaped assessment — Objection from Comptroller and Auditor General required —Internal audit objection cannot form the basis of reassessment — Reassessment based on change of opinion — Reassessment is impermissible in law.

The assessee sold a plot of land to one RNL by a registered agreement to sell dated 7th October, 2011 for a consideration of ₹18 crores, the stamp duty value of which was ₹16.5 crores. Due to non-fulfilment of certain obligations on the part of the assessee, the consideration was reduced to ₹12 crores. The case was selected for scrutiny and the assessment order was passed on 26th December, 2017, accepting the consideration of ₹12 crores. The submission of the assessee to the Assessing Officer in the original assessment proceedings in respect of the sale of land was that section 50C of the Act was not applicable as the sale consideration of ₹18 crores was higher than the stamp valuation of ₹16.50 crores.

Thereafter, an audit memo dated 29th March, 2019 was received by the Assessing Officer raising an objection that Petitioner has shown lower amount of sale consideration than value adopted by the Stamp Duty Authority thus, inviting the applicability of Section 50C of the Act to the transaction. Subsequently, the assessee’s case was reopened to tax the difference between the stamp duty value and the sale consideration u/s. 50C of the Act.

The assessee filed a writ petition challenging the reopening of the assessment. The Bombay High Court allowed the petition, quashed the reassessment proceedings and held as follows:

“i) The admitted facts clearly indicated that the information on the basis of which the Assessing Officer issued notice alleging that there was “information” that suggested escapement of income was an internal audit objection. 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. Prima facie the information which formed the basis of reopening itself did not fall within the meaning of the term “information” under Explanation 1 to section 148 of the Income-tax Act, 1961, and hence, the reopening was not permissible as it clearly fell within the purview of a “change of opinion” which was impermissible in law.

ii) Consequently, dehors any audit objection by the Comptroller and Auditor General, a view deviating from that which was already taken during the course of issuing original assessment order was nothing but a “change of opinion” which was impermissible under the provisions of the Act.”

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.”

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.”

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.”

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.”

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.

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: 31st January, 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.

____________________________________________

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

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 30th October, 2019. Thereafter, the assessee revised the return on 15th 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 30th 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 15th 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.

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.

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.

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: 23rd 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.

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.

 

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 27th 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.

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.

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.

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.

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.”

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.”

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.”

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.”

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.”

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.”

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.”

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.

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.

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”.

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.

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.

(c) The AO had not calculated the interest under section 244A(1A), which led to interest short credit of ₹7,09,13,871.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.”

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.”

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.”

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.”

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.”

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.”

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.”

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.”

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.

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.

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.

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

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.

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.

(c) An audit memo dated 29th March, 2019, raised an objection regarding the applicability of Section 50C of the Act.

(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.

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.

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]

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.

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.

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).

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 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 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.

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.

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.

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.

‘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.

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.”

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.”