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Category: Direct Taxes

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.”

Reassessment — Notice u/s. 148 — Reason to believe that income has escaped assessment — Entity with which assessee had sale transaction not established to be shell entity — No enquiry conducted by AO pursuant to the receipt of information from investigation wing — Non-application of mind on part of AO — Notice and order rejecting assessee’s objections set aside

62 B. U. Bhandari Autolines Pvt. Ltd. vs. ACIT

[2023] 456 ITR 56 (Bom)

A.Y.: 2016–17

Date of Order: 10th February, 2023

Ss. 147, 148 of ITA 1961

Reassessment — Notice u/s. 148 — Reason to believe that income has escaped assessment — Entity with which assessee had sale transaction not established to be shell entity — No enquiry conducted by AO pursuant to the receipt of information from investigation wing — Non-application of mind on part of AO — Notice and order rejecting assessee’s objections set aside.

For the A.Y. 2016–17, the Assessing Officer issued a notice u/s. 148 of the Income-tax Act, 1961 against the assessee for reopening the assessment u/s. 147. Reasons were recorded that information was received from the Deputy Director (Investigation) that a search was conducted u/s. 132 in the case of one M and others wherein cash in demonetised currency was seized, that M in his statement named one R as the key accomplice and was connected with a shell entity MT, that from the value-added tax returns it was found that the assessee had made a sale with MT and that, therefore, the sale of goods by the assessee to MT was bogus and that income had escaped assessment on that account. The assessee’s objections to the reopening of the assessment were rejected.

The assessee filed a writ petition challenging the notice and the order rejecting the objections. The Bombay High Court allowed the writ petition and held as under:

“i)    The issue of reopening of assessment under section 147 had to be tested only on the basis of the reasons recorded, which could neither be improved upon nor substituted by an affidavit or oral submissions. It had not been alleged in the reasons that the entity MT with whom the assessee had made an alleged sale was being run by R although, in the reply affidavit it was stated by the Assessing Officer that MT was one of the entities which was floated by R for the purpose of providing accommodation entries. The reasons recorded also did not furnish any explanation on what basis and material the Assessing Officer had concluded that MT was a shell entity. The verification of the value-added tax returns referred to in the reasons recorded suggested only transactions between the assessee and the entity MT in regard to goods sold. Therefore, there was no material or basis for the Assessing Officer to hold the transaction between the assessee and MT not a genuine transaction of sale or for that reason to hold that MT was a shell entity.

ii)    The Assessing Officer had not independently applied his mind to the information received or conducted his own inquiry into the matter to conclude that income had escaped assessment or that the transaction in question with the alleged shell entity was only a paper transaction. The notice had been issued u/s. 148 without satisfying the conditions precedent u/s. 147. Therefore, the notice and the order rejecting the objections of the assessee were set aside.”

Reassessment — Notice — Res judicata — General principles — Consistency in decision making — Same decision-making authority rendering two decisions inconsistent with each other for different assessment years facts and circumstances being similar — Order and notice set aside

61 Prem Kumar Chopra vs. ACIT

[2023] 456 ITR 8 (Del)

A.Ys.: 2015–16 and 2016–17

Date of Order: 25th May, 2023

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

Reassessment — Notice — Res judicata — General principles — Consistency in decision making — Same decision-making authority rendering two decisions inconsistent with each other for different assessment years facts and circumstances being similar — Order and notice set aside.

The petitioner, a senior citizen, being the proprietor of M/s. Chopra Brothers is an authorised dealer for Kirloskar Electric Motors and is engaged in trading industrial electric motors, mono-block pumps and generator sets, etc. For the A.Y. 2015–16, the petitioner filed a return of his income, declaring the income of Rs.19,94,970 which was processed u/s. 143(1) of the Income-tax Act, 1961. On 7th April, 2021, the Assessing Officer, respondent No. 1 issued a notice u/s. 148 of the Act, which on being challenged by the petitioner, was set aside in terms of the decision in the case of Mon Mohan Kohli vs. Asst. CIT [2022] 441 ITR 207 (Delhi).

Thereafter, in terms of the decision of the Hon’ble Supreme Court in the case of Union of India vs. Ashish Agarwal [2022] 444 ITR 1 (SC); [2022] SCC OnLine SC 543, respondent issued notice dated 26th May, 2022, u/s. 148A(b) of the Act, alleging that on 26th November, 2016, a search had been conducted on the premises of an entry operator, namely, Shri Mohit Garg and during that search, in his statement, Shri Rajeev Khushwaha admitted to having provided bogus sale / purchase bills in exchange for cash; and that during the year relevant to the A.Y. 2015–16, M/s. Chopra Brothers through its proprietor Shri Prem Kumar Chopra was one of the beneficiaries of such accommodation entries to the tune of Rs.13,71,00,000.

An identical notice dated 25th July, 2022, was issued to the petitioner for the A.Y. 2016–17 as well. The petitioner submitted replies dated 10th June, 2022, and 21st July, 2022, to the said show-cause notice, thereby categorically denying any transaction with M/s. Divya International and Shri Rajeev Khushwaha. Along with the replies, the petitioner also submitted all relevant documents.

By way of order dated 28th July, 2022, respondent, accepting the case set up by the petitioner, dropped the proceedings pertaining to the A.Y. 2016–17, concluding that there is no escapement of income during the financial year 2015–16 relevant to the A.Y. 2016–17 in so far as there is no entry of transaction of sale or purchase by the bogus entity, M/s. Divya International, controlled by the entry operator Shri Rajeev Khushwaha to or from M/s. Chopra Brothers and accordingly held that it is not a fit case for issuance of notice u/s. 148 of the Act for the A.Y. 2016–17.

But soon thereafter, by way of an order dated 31st July, 2022, for the A.Y. 2015–16, respondent rejected the case set up by the petitioner, observing that there is escapement of income and accordingly held that it is a fit case for issuance of notice u/s. 148 of the Act.

The assessee, therefore, filed a writ petition challenging the validity of the notice u/s. 148 and the consequent reassessment order. The Delhi High Court allowed the writ petition and held as under:

“i)    Consistency, both in content and in procedure has to be adhered to in order to ensure predictability of the decisions. In order to ensure procedural and content consistency in decisions, every decision-making authority should ensure that in a given set of circumstances, their decision must be on the same lines as that of their predecessor or co-ordinate authorities in a similar set of circumstances. Where a decision-making authority finds itself unable to agree with the view earlier taken, by the predecessor or the co-ordinate, the authority concerned is duty bound to record cogent reasons for deviating. The significance of precedence cannot be ignored even in administrative decision-making.

ii)    The doctrine of res judicata does not apply to Income-tax proceedings pertaining to different assessment years since each assessment year is a separate assessment unit in itself only if it rests in a separate factual scenario and is supported by reasoning by the concerned authority.

iii)    The order u/s. 148A(d) and the notice u/s. 148 for the A.Y. 2015–16 were infirm since they proceeded on a view inconsistent with the earlier order for the A.Y. 2016–17 despite the facts and circumstances being similar and in the backdrop of a similar set of documentary evidence. The concerned Assistant Commissioner had dropped the proceedings pertaining to the A.Y. 2016–17, while for the A.Y. 2015–16, he had opted to proceed further u/s. 148A. The decision taken for the A.Y. 2016–17 was a reasoned decision, based on the analysis of material on record, but the decision taken subsequently for the A.Y. 2015–16 was not only completely inconsistent with the earlier view but even without reason. Though sanction u/s. 151 was accorded by two different sanctioning authorities the satisfactions recorded in both orders were of the same Assistant Commissioner. There was nothing on record to suggest that the latter sanctioning authority for the A.Y. 2015–16 was apprised of the earlier view taken by the sanctioning authority for the A.Y. 2016–17. An assessee deals with the Department as a whole. The order u/s. 148A(d) and the notice u/s. 148 were set aside.”

Offences and Prosecution — Wilful failure to file return — S. 276CC requires mens rea — Belated return and payment of tax and interest based on return accepted — Protective assessment set aside — No imposition of penalty — Prosecution not valid

60 Suresh Kumar Agarwal vs. UOI

[2023] 456 ITR 148 (Jhar)

A.Y.: 2013–14

Date of Order: 29th August, 2022

S. 276CC of ITA 1961

Offences and Prosecution — Wilful failure to file return — S. 276CC requires mens rea — Belated return and payment of tax and interest based on return accepted — Protective assessment set aside — No imposition of penalty — Prosecution not valid.

A search was conducted in the case of the assessee on 19th February, 2014, and subsequently, the assessee was required to file his return of income within 15 days from the date of receipt of the notice issued u/s. 153A of the Act. The assessee failed to file the return of income within the time provided and ultimately filed the same after a lapse of almost 17 months without giving any reasonable cause. The assessee also did not file any petition for condonation of delay.

The Department launched prosecution u/s. 276CC of the Act. The department alleged that the assessee had deliberately, willingly, intentionally and having mens rea in his mind avoided filing the return of income.

The assessee filed a writ petition for quashing the prosecution proceedings. The assessee contended that the delay in filing the return was due to death in the family and on account of not getting photocopies of papers and documents which were seized by the Income-tax Department. Further, the assessee submitted that the tax had been paid in full along with interest. The addition made by the Assessing Officer (AO) had been deleted by the CIT(A). No penalty had been levied by the AO. Lastly, the assessee submitted that since no penalty had been levied and no tax was due from the assessee, the launching of prosecution was bad in law.

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

“i)    Section 276CC of the Income-tax Act, 1961, provides for prosecution in cases of wilful failure to file returns. The wilful failure referred to in section 276CC of the Act brings in the element of guilt and thus the requirement of mens rea will come into force.

ii)    It was admitted that the assessee had not filed his return on time but had filed the return belatedly with interest, which had been accepted by the authority concerned. The subsequent protective assessment was the subject matter before the first appellate authority, which had set aside the entire further assessment of the assessee.

iii)    The assessee had already deposited the tax as well as the interest in the light of the statute. When the Income-tax Officer had levied interest for the delay in filing of the return, it must be presumed that the Income-tax Officer had extended the time for filing the return after satisfying himself that there were grounds for delay in filing the return. When the amount in question with the interest had already been paid, no sentence could be imposed on the assessee.”

Computation of Capital Gains — Deduction of expenses wholly and exclusively in connection with transfer of capital asset — Transfer of shares – Amount paid for professional advice in accordance with articles of association of company – Deductible

59 Chincholi GururajacharVenkatesh and  Satish Kumar Pandey vs. ACIT

[2023] 456 ITR 459 (Cal)

A.Y.: 2016–17

Date of Order: 16th December, 2022

S. 48 of ITA 1961

Computation of Capital Gains — Deduction of expenses wholly and exclusively in connection with transfer of capital asset — Transfer of shares — Amount paid for professional advice in accordance with articles of association of company — Deductible.

The assessees held shares of one MTPL. During the previous year relevant to the assessment year under consideration, the assessee paid professional fees to KPMG and Khaitan & Co in connection with the transfer of shares of MTPL by the assessees to a German Company. During the assessment proceedings, the AO held that the selling expenses were not incurred wholly and exclusively in connection with the transfer of their shares and disallowed the expense.

The CIT(A) as well as the Tribunal confirmed the addition.

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

“i)    U/s. 48 of the Income-tax Act, 1961, in computing capital gains, the expenditure incurred wholly and exclusively in connection with the transfer of capital asset is deductible. The word ‘connection’ in section 48(i) reflects that there should be a casual connect and the expenditure incurred to be allowed as a deduction must be united or in the state of being united with the transfer of the capital asset resulting in income by way of capital gains on which tax has to be paid. The expenditure, therefore, should have a direct connection and should not be remote or have indirect result or connect with the transfer.

ii)    Under article 8 of the articles of association of the company a shareholder desirous of selling his shares must notify the number of shares, a ‘fair value’ and the proposed transferee. The assesses’ specific case was that they had engaged the services of the professionals for the purpose. The transfer of shares was not disputed by the Department. Admittedly, K was a firm providing advisory services and K and Co. was a law firm. The assessees had engaged the services of professionals who had identified the investor, negotiated the value and structured the transaction. Therefore, the transaction had an inextricable nexus with the transfer of shares. The expenditure incurred was deductible in computing the capital gains.”

Business expenditure — Accrued or contingent liability — Provision for future expenses based on turnover — Amount set apart to meet future liabilities — Expenses in-built in the contract — Provision not contingent — Allowable deduction

58 Principal CIT vs. CEC SOMA CICI JV

[2023] 456 ITR 705 (Kar)

A.Ys.: 2011–12, 2012–13

Date of Order: 21st March, 2023

S. 37 of ITA 1961

Business expenditure — Accrued or contingent liability — Provision for future expenses based on turnover — Amount set apart to meet future liabilities — Expenses in-built in the contract — Provision not contingent — Allowable deduction.

The assessee entered into a contract with BMCRL to design, construct tunnels and do other civil works. The total projected future expenses (non-billable expenses) included the reconstruction of roads damaged while constructing tunnels and during the other construction activities undertaken by the assessee. The non-billable expenses were in-built in the contract and payment for them was made by the assessee and not BMRCL. For the A.Ys. 2011–12 and 2012–13, based on the turnover, the assessee made provision for expenses and claimed deduction. The Assessing Officer disallowed the claim.

The Commissioner (Appeals) allowed the assessee’s appeal on the grounds that the provision was not contingent in nature but based on the matching expenditure on ascertained liability. The Tribunal upheld his order.

The Karnataka High Court dismissed the appeals filed by the Revenue and held as under:

“i)    The provision for expenses was made on a pro rata basis based on the turnover with reference to total unbillable future expenses of the assessee’s project. For the A.Y. 2013–14 after the remand the Assessing Officer had accepted the provision made by the assessee. For the subsequent A.Y. 2014–15, no disallowance had been made.

ii)    The Tribunal was right in setting aside the disallowances made by the Assessing Officer in respect of the deduction of future expenses claimed by the assessee for the A.Ys. 2011–12 and 2012–13.”

The Requirement To Provide Materials And Evidences Along With Show Cause Notice U/S 148A(B)

ISSUE FOR CONSIDERATION

The new provision of section 148 as substituted by the Finance Act, 2021, authorizes the Assessing Officer to issue a notice of reassessment where there is information with him which suggests that the income chargeable to tax has escaped assessment in the case of the assessee, subject to fulfillment of other conditions. Section 148A lays down the procedure which needs to be followed by the Assessing Officer before a notice under section 148 is issued by him, except where the search is conducted in the assessee’s case, or where assets or materials seized during the search in someone else’s case belong or pertain to the assessee.

One of the requirements of section 148A contained in clause (b), is to serve a notice upon the assessee providing him with an opportunity of being heard and asking him to show cause within a specified time as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case.

Recently, an issue has arisen as to whether it is sufficient if the relevant information suggesting escapement of income has been mentioned in the show cause notice issued under section 148A(b), or whether the Assessing Officer is also required to provide copies of the materials available with him containing such information and on the basis of which he wants to ascertain whether an income has escaped assessment or not. The Bombay, Delhi, Chhattisgarh and Calcutta High Courts have taken a view that the Assessing Officer is duty bound to provide not only the information but also the copies of the materials to the assessee. However, recently, the Madhya Pradesh High Court has taken a contrary view holding that the copies need not be provided with the notice u/s. 148A of the Act.

ANURAG GUPTA’S CASE

The issue had come up for consideration by the Bombay High Court in the case of Anurag Gupta vs. ITO [2023] 150 taxmann.com 99 (Bombay).

In this case, for the assessment year 2018–19, the Assessing Officer had issued a notice under section 148A(b) on 8th March, 2022, on the ground that the information was received consequent to search / survey action carried out in the case of Antariksh Group, that assessee had purchased a warehouse from BGR Construction LLP for which on-money of ₹70,00,000 was paid, which was not accounted in the books of account of the assessee.

The said show cause notice was replied by the assessee on 14th March, 2022, wherein he totally denied the existence of any transaction with BGR Construction LLP, booking of a warehouse or payment made to the said entity. The assessee also denied any ‘on-money cash transaction’ with the said entity and therefore, demanded that the proceedings initiated under section 147 of the Act be dropped.

Thereafter, on 21st March, 2022, the Assessing Officer issued a clarification in regard to the notice under section 148A(b), this time stating therein that the assessee had also executed a conveyance deed with Meet Spaces LLP and, therefore, the Assessing Officer required the assessee to furnish payment details regarding this deed also.

The assessee did not file any response to the second notice and, therefore, the Assessing Officer proceeded to pass an order under section 148A(d), wherein it was mentioned, firstly, that cash payments had been made by the assessee to BGR Construction LLP as had been confirmed in the statement recorded during the survey action and, secondly, that the assessee had entered into a conveyance deed as a purchaser with Meet Spaces LLP for a consideration of ₹10,00,000, which remained unexplained.

Before the High Court, it was argued on behalf of the assessee that the procedure as prescribed under section 148A(b) as well as the principles of natural justice had been violated. While the assessee was given the information in terms of section 148A(b), the material which ought to have been provided to the assessee was not so furnished. In the absence of the same, the assessee was precluded from filing an effective reply to the show cause notice. On the other hand, the revenue contended that there was no such obligation cast upon the revenue in terms of Section 148A(b) of the Act to provide to the assessee anything beyond providing him with the information.

The assessee also relied upon the decision of the Supreme Court in the case of UOI vs. Ashish Agarwal [2022] 138 taxmann.com 64 wherein on a related matter, the Assessing Officers were directed to provide to the respective assessee the information and material relied upon by the Revenue within thirty days of the decision so that the assessees can reply to the show cause notices within two weeks thereafter. It was urged that the requirement of section 148A(b) has clearly been spelt out in the direction of the Supreme Court in the case of Ashish Agarwal (supra), which envisaged that not only information be provided to the assessee, but also the copies of the material relied upon by the revenue for purposes of making it possible for the assessee to file a reply to the show cause notice in terms of the said section.

The High Court observed that no material had been supplied to the assesse even though there was material available with the Assessing Officer, as could be seen from the order passed under section 148A(d) which was in the shape of a statement recorded, during survey action of the partner of BGR Construction LLP. There also appeared to be a sale list, which was allegedly found during the search operations containing the names of 72 investors, including the assessee, which although referred to in the order under section 148A(d) as also in the subsequent clarification, was also not provided to the assessee. Interestingly, while the said subsequent communication dated 21st March, 2022, did say that the list of total sales “was being attached for the ready reference of the assessee for purposes of submitting a reply to the show cause notice”, no such list was admittedly furnished.

The High Court held that providing information to the assessee, without furnishing the material based upon which the information was provided, would render an assessee handicapped in submitting an effective reply to the show cause notice, thereby rendering the purpose and spirit of section 148A(b) totally illusive and ephemeral. The fact that the material also was required to be supplied could very well be gauged from the clear directions issued by the Supreme Court in the case of Ashish Agarwal (supra). Accordingly, the High Court held that the reassessment proceedings initiated were unsustainable on the ground of violation of the procedure prescribed under section 148A(b), on account of the failure of the Assessing Officer to provide the requisite material, which ought to have been supplied along with the information in terms of the said section. The order passed under section 148A(d) and consequential notice issued under section 148 were quashed, and the matter was left open for the revenue from the stage of the notice under section 148A(b) for supplying the relevant material, if it was otherwise permissible, keeping in view the issue of limitation.

Although the assessee raised the other two contentions with respect to the sanction to be obtained under section 151 and also with respect to the inquiry being not conducted under section 148A(b), the High Court did not deal with those issues, as the order passed under section 148A(d) was found to be bad in law on the ground of not providing the requisite materials to the assessee.

AMRIT HOMES (P) LTD’S CASE

The issue, thereafter, came up for consideration before the Madhya Pradesh High Court in the case of Amrit Homes (P) Ltd vs. DCIT [2023] 154 taxmann.com 289.

In this case, the order was passed under section 148A(d) for the assessment year 2016–17 on 28th April, 2023, which was followed by the issue of notice under section 148 on the same date. The assessee challenged the validity of this order and notice by filing a writ petition under Article 226 of the Constitution. Primarily, the grievance of the assessee was that information/evidence categorized as foundational material was not sufficient to suggest that any income chargeable to tax has escaped assessment.

The High Court held that section 148A was inserted in the Act by the Finance Act, 2021 primarily to give effect to the ratio laid down by Apex Court in GKN Driveshafts (India) Ltd vs. ITO [2003] 259 ITR 19 (SC). In the said decision it was held that the assessee, if it so desired, could seek for the reasons for issuing notice under section 148, could also file the objections to issuance of notice upon receipt of the reasons and the Assessing Officer was bound to dispose of the objections so raised by passing a speaking order. Section 148A has provided a similar opportunity of being heard before reopening the case and issuing notice under section 148.

It was held by the Court that the nature of inquiry contemplated by Section 148A was not a detailed one. The purpose of the inquiry was to communicate to the assessee that the Assessing Officer was in possession of information suggesting that certain income of the assessee which was chargeable to tax had escaped assessment. The communication made by issuance of show cause notice, should contain enough information and reasons to reveal the intention of the Assessing Officer.

The Court further held that the statute however did not oblige the Assessing Officer to supply the relevant material/evidence, which was the foundation for the Assessing Officer to come to the prima facie view that income chargeable to tax had escaped assessment. This was because neither in the judgment of the Apex Court in the case of GKN Driveshafts (India) Ltd. (supra) nor in section 148A any such indication could be gathered. The only duty cast upon the Assessing Officer was to supply information by mentioning the same in the show cause notice issued under section 148A(b). If the inquiry contemplated in Section 148A was interpreted to mean a detailed inquiry, where both sides could seek and adduce evidence / material (documentary / ocular), then the entire object behind Section 148A would stand defeated.

The High Court further held that section 148A did not expressly provide for the supply of any material/evidence in support of the show cause notice under section 148A(b). It did not obligate the Assessing Officer to supply any material / evidence, provided the show cause notice contained reasons disclosing the mind of the Assessing Officer nursing the prima facie view suggestive of a case where income chargeable to tax had escaped assessment.

The High Court also considered the concept of reasonable opportunity, and whether the said concept could be stretched to the extent of supplying material / evidence in support of the opinion of the Assessing Officer that certain income had escaped assessment. On this, the High Court held that the concept of reasonable opportunity in non-taxing statutes was required to be applied to its fullest (including supply of adverse material), irrespective of the presence of any express provision or not, in cases where the authority concerned passed an order entailing civil consequences of adverse nature. However, the law of interpretation of taxing statutes was at variance with the law of interpretation of non-taxing statutes. The difference was that the taxing statute was to be understood by the plain words used in it, without taking aid of other tools of interpretation of statutes e.g. intendment, implication or reading into. The words employed by section 148A(b) provided for affording of opportunity of being heard by way of show cause notice. This requirement of the law was satisfied if the show cause notice contained information which had persuaded the Assessing Officer to form an opinion that certain income had escaped assessment of a particular assessment year. The statute did not compel the Assessing Officer to supply material/evidence (documentary / oral) on the basis of which the aforesaid opinion had been formed by the Assessing Officer.

On the basis of these reasonings, the High Court concluded that the assessee was not entitled to the material/evidence (oral/documentary), which was the foundation of the opinion formed by the Assessing Officer, so long as a show cause notice mentioned about such foundational information and the supportive reasons to form the said opinion.

The Madhya Pradesh High Court disagreed with the view taken by the Delhi High Court in Mahashian Di Hatti (P) Ltd vs. Dy CIT (W.P. (C) 12505/2022), Divya Capital One (P) Ltd vs. Asstt CIT 445 ITR 436 (Delhi), SABH Infrastructure Ltd. vs. Asstt CIT 398 ITR 198 (Delhi), Chhattisgarh High Court in Vinod Lalwani vs. Union of India 455 ITR 738 (Chhattisgarh) and Bombay High Court in Anurag Gupta vs. ITO (W.P. No. 10184/2022) / 454 ITR 326 on the ground that the foundational principle of interpretation of taxing statutes was not considered. It was held that those High Courts were persuaded by the principle of reasonable opportunity, which was ordinarily applied while interpreting non-taxing statutes, and in taxing statutes, nothing could be read into or implied and the plain meaning of the words used in the taxing statute were to be given their due meaning.

The High Court dismissed the petition of the assessee and did not deal with the veracity and genuineness of material/evidence forming the opinion of the Assessing Officer suggesting that the income of the assessee had escaped assessment, as it was considered to be outside the scope of the writ jurisdiction under Article 226 or supervisory jurisdiction under Article 227 of the Constitution.

OBSERVATIONS

The relevant clause of section 148A under which this issue is arising is being reproduced below for reference –

The Assessing Officer shall, before issuing any notice under section 148,—

(a)……………..

(b) provide an opportunity of being heard to the assessee, by serving upon him a notice to show cause within such time, as may be specified in the notice, being not less than seven days and but not exceeding thirty days from the date on which such notice is issued, or such time, as may be extended by him on the basis of an application in this behalf, as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted, if any, as per clause (a);

It can be seen the law expressly provides for issuing a notice on the basis of information available and affording an opportunity of being heard to the assessee, before a view is formed that an income has escaped assessment and the assessee is put to hardship by issuing a notice under section 148. Obviously, in availing the opportunity afforded, the assessee should be allowed to examine the veracity of the information relied upon and refute the derivation of the AO. Though prima facie this would be possible only where copies of the material or information are provided to the assessee. It is a settled principle of law that the opportunity to be heard should be real, reasonable and effective. It should not be an empty formality. The observations of the Hon’ble Supreme Court with respect to the principle of natural justice from the case of Mohinder Singh Gill vs. Chief Election Commissioner AIR 1978 (SC) 851, are noteworthy and they are being reproduced below:

“Natural justice is a pervasive facet of secular law where a spiritual touch enlivens legislation, administration and adjudication, to make fairness a creed of life. It has many colours and shades, many forms and shapes and, save where valid law excludes, it applies when people are affected by acts of authority. It is the bone of healthy government, recognised from earliest times and not a mystic testament of judge-made law. Indeed from the legendary days of Adam — and of Kautilya’s Arthashastra — the rule of law has had this stamp of natural justice, which makes it social justice. We need not go into these deep for the present except to indicate that the roots of natural justice and its foliage are noble and not new-fangled. Today its application must be sustained by current legislation, case law or another extant principle, not the hoary chords of legend and history. Our jurisprudence has sanctioned its prevalence even like the Anglo-American system.”

In order to provide the effective opportunity of being heard, as required in terms of clause (b) of section 148A, it is imperative that the relevant materials containing the information about the escapement of income in the case of the assessee have been provided to the assessee. Without having seen the relevant materials in the possession of the Assessing Officer, the assessee would not be able to effectively defend his case, and prove that there had been no basis to form an opinion that income had escaped assessment in his case. For instance, if the Assessing Officer was relying upon the statement of a third-party and, on the basis of the information provided in that statement with respect to the assessee, an opinion had been formed that income had escaped assessment, then it was obvious that the assessee needed to understand as to what had been deposed by the witness in his statement so recorded, and whether it was true and sufficient to come to a conclusion that income had escaped assessment as alleged by the Assessing Officer.

The Madhya Pradesh High Court has held that the assessee is not entitled to have the materials or evidence which were the foundation of the opinion formed by the Assessing Officer, so long as the show cause notice mentioned about such foundational evidence or materials, and the supportive reasons to form the said opinion. However, the question which arises is how the assessee would be able to show cause that based on the information specified it was not possible to conclude by the AO that the income could have escaped assessment, and defend himself effectively if he is not provided with the relevant materials or evidence which are proposed to be used against him. Such an interpretation would render the provisions of clause (b) to a mere formality, which is against the basic principle of natural justice, that opportunity should not be provided in a manner whereby it becomes a mere formality.

The Supreme Court in the case of Ashish Agarwal (supra) had directed the Assessing Officer to not only provide the information suggesting the escapement of income, but also the relevant materials while validating the notices issued under the erstwhile provisions of section 148, during the time period extended by TOLA. It appears that the relevant observations of the Supreme Court from the case of Ashish Agarwal (supra) were not brought to the notice of the Madhya Pradesh High Court.

Further, with due respect, the distinction drawn between the interpretation of a taxing statute and a non-taxing statute by the Madhya Pradesh High Court is illusive and in any case not very relevant in so far as the issue is with respect to the manner in which the opportunity of being heard should be given. The extent to which the opportunity of being heard is required to be given under a taxing statute can be no less than the extent to which it is required to be given under a non-taxing statute.

While taking a view that the Assessing Officer is not duty bound to provide the relevant materials or evidence, while issuing a show cause notice under section 148A(b), the Madhya Pradesh High Court has relied upon the literal interpretation of the law and noticed that there is no such requirement in the relevant provision of section 148A(b). However, what should have been considered as relevant is the interpretation of the words “provide an opportunity of being heard” as used in section 148A(d). The requirement to provide the relevant materials used against the assessee for forming an opinion about the escapement of income is in-built within the requirement of providing an opportunity to be heard.

Justice must not only be done but should also be seen to have been done. There is a difference between delivering justice and a judgment. A judgment could be delivered by reading the language of the law while justice is delivered on appreciation of the spirit of the law besides of course, the language of the law. We are fortunate to be in a country where both have been given equal weightage by the judiciary in dispensing justice.

The judiciary governed by a rule of law has tacitly and expressly accepted the application of natural justice unless otherwise expressly prohibited by the statute. Following the canons of natural justice is an accepted jurisprudence in dispensing justice. In interpreting the provisions relating to the scheme of reopening and reassessment, even without there being a specific provision, the courts have consistently emphasised the need for an authority to provide to the assessee, the copies of the reasons recorded, material relied upon, information available, sanction obtained, and the inquiry conducted. Please see GKN Driveshafts (India) Ltd., 259 ITR 19 (SC), SABH Infrastructure, (supra), Micro Marbles, 457 ITR 567(Raj.), Tata Capital Financial Services Ltd., 443 ITR 127(Bom.) and Ashish Agarwal (supra).

It is worthwhile to note the suo moto directions of the Delhi High Court on the subject in the case of SABH Infrastructure (supra);

Before parting with the case, the court would like to observe that on a routine basis, a large number of writ petitions are filed challenging the reopening of assessments by the Revenue under sections 147 and 148 of the Act and despite numerous judgments on this issue, the same errors are repeated by the concerned Revenue authorities. In this background, the court would like the Revenue to adhere to the following guidelines in matters of reopening of assessments:

(i) while communicating the reasons for reopening the assessment, a  copy of the standard form used by the Assessing Officer for obtaining the approval of the Superior Officer should itself be provided to the assessee. This would contain the comment or endorsement of the Superior Officer with his name, designation and date. In other words, merely stating the reasons in a letter addressed by the Assessing Officer to the assessee is to be avoided;
(ii) the reasons to believe ought to spell out all the reasons and grounds available with the Assessing Officer for reopening the assessment—especially in those cases where the first proviso to section 147 is attracted. The reasons to believe ought to also paraphrase any investigation report which may form the basis of the reasons and any enquiry conducted by the Assessing Officer on the same and if so, the conclusions thereof;
(iii) where the reasons make a reference to another document, whether as a letter or report, such document and/or relevant portions of such report should be enclosed along with the reasons;
(iv) the exercise of considering the assessee’s objections to the reopening of the assessment is not a mechanical ritual. It is a quasi-judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. No attempt should be made to add to the reasons for reopening of the assessment beyond what has already been disclosed.

The application of principles of natural justice is confirmed by the courts by regularly applying various provisions of the natural justice to the practice of the Income-tax Act, to ensure that no order is passed without sharing of information, statements recorded, and the material relied upon and affording of an opportunity of hearing before an adverse order is passed. This is evident, especially in respect of the provisions of s. 131, 132, 133A, 142(3), 147, 151, 153, 250, 254, 260 and chapters dealing with penalties and punishment under the Income tax Act. Most of these provisions do not expressly provide for sharing the copies of the material and information but the courts have read such requirements in implementing the law by applying the simple rule that a person cannot be hanged without a trial and that the trial should be fair and equitable. Even in cases of criminal justice, the application of the provisions of natural justice is desired and is applied by the courts to the extent possible under the facts of the case.

The new scheme of reopening and reassessment has clearly recorded the legislative intent in accepting the law laid down by the courts on the lines of what has been discussed here. In fact, the memorandum explaining the provisions of the new scheme, has expressly stated the need for respecting natural justice and following the mandate of the Supreme Court in the case of GKN Driveshafts (India) Ltd (supra). The new scheme has gone a step further by including a statutory provision in the form of section 148A in the body of the Act containing 4 very important provisions, under clauses (a) to (b), each of which is nothing but affirmation of the tenets of natural justice spelt out by the apex court in the cases of GKN Driveshafts (India) Ltd. (supra) and Ashish Agarwal (supra).

All the High Courts with the exception of the Madhya Pradesh High Court, in interpreting the new scheme of reopening and reassessment have reiterated that there was no change in judicial understanding of the old law, which continues even under the new scheme, that required the authorities to provide copies of the information and the material available with them.

In our respectful opinion, the significant change between the old scheme and the new scheme is that, under the new scheme, the authorities, before issuing the notice under section 148, now have to make up their minds that an income has escaped assessment. For making up their minds, they have to first follow the due procedure of section 148A and thereafter decide that there was an escapement of income and then only issue a notice. Once a decision is taken, the only course open for the AO is to examine the case of the assessee on merits. Having once issued a notice under section 148, it may be difficult for an AO to drop the proceedings by holding that there was no escapement of income, other than doing so on merits of the facts produced before him.

The better view, in our considered opinion, is that the relevant materials and evidences on the basis of which an inquiry is initiated (and subsequently an opinion about the escapement of income would be formed), have to be provided to the assessee along with the show cause notice issued under section 148A(b). If that is not done, the notice would be invalid.

Direct Taxes

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84. Due date for filing the Returns of Income for A.Y. 13-14, extended from 31st July, 2013 to August 5th, 2013. – F.No 225-117-2013-ITA. II dated 31st July, 2013

85. Central Government notifies differential rate of interest in respect of rupee denominated bond of an Indian company for the purpose of section 194LD of the Act – Notification no. 56/2013 dated 29th July, 2013

86. Income-tax (11th Amendment) Rules, 2013 – Amendment in Rule 21AB and introduction of Form 10F

 – Notification no. 57/2013 dated 1st August, 2013 –

A non-resident proposing to claim benefit under Double Tax Avoidance Agreement entered into between India and his country of residence is required to furnish an undertaking in Form 10F along with the Tax Residency certificate. The amendment is effective from 1stApril, 2013.

87. INSTRUCTION NO.10/2013[F.NO.225/107/2013/ ITA.II], DATED 5th August, 2013 relating to the procedure and criteria for selection of scrutiny cases under compulsory manual during the financial year 2013-14.

88. Income-tax (12th amendment) Rules, 2013 – amendment in Rule 37BB and amendment to Form 15CA and 15CB- Notification no. 58/2013 dated 5th August, 2013

Rule 37BB is amended with effect from 1st October, 2013, which prescribes the procedure to be followed by a person responsible for making a payment to a non-resident. Form 15CA i.e., the form to be filled by the person making remittance and Form 15CB, a certificate to be issued by the Chartered Accountant are amended.

89. Income tax (13th amendment) Rules, 2013 – amendment in Rule 12C and amendment to Form 64- Notification no. 59/2013 dated 5th August, 2013 –

Income paid or credited to by the Venture Capital company or venture capital fund is required to be furnished in Form 64. Form 64 is to now to be furnished electronically under digital signature.

90. Central Government authorises 14 entities to issue during the financial year 2013-14, tax free, secured, redeemable, non-convertible bonds-Notification no. 61/2013 dated 8th August, 2013

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Direct Taxes

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Income tax (third amendment) Rules, 2013 – amendment in Rule 12 and substitution of forms SAHAJ (ITR 1), ITR 2, ITR 3, SUGAM (ITR 4S), ITR 4 and ITR V – Notification no- 34/2013 [S.O.1111(E)] dated May 1, 2013 –

The important amendments are as under :

(a) Form SAHAJ (ITR 1) cannot be used if the assessee has incurred a loss under the head ‘Income from other sources’ or if the assessee wants to claim tax relief u/s. 90/90A or has any income exceeding Rs. 5,000 exempt from tax.

(b) Form SUGAM (ITR 4S) cannot be used if the assessee wants to claim tax relief u/s. 90/90A or has any income exceeding Rs. 5,000 exempt from tax.

(c) Mandatory e-filing of audit reports issued u/s. 44AB, 92E and 115JB

(d) Mandatory e-filing of return of income, if income exceeds Rs. 5,00,000 or if the assessee wants to claim tax relief u/s. 90/90A.

Procedure for deduction and payment of tax u/s 194 IA, issue of certificate of tax deducted etc.– Notification No. 39/2013 dated May 31, 2013

• Any sum deducted u/s. 194IA of the Act shall be paid electronically to the credit of the Central Government within a period of seven days from the end of the month in which the deduction is made.

• TDS payment u/s. 194IA shall be accompanied by a challan-cum-statement in Form No. 26QB.

• Since tax deducted is to be deposited accompanied by a challan-cum-statement in Form No.26QB, the amount of tax so deducted shall be deposited to the credit of the Central Government by remitting it electronically into the Reserve Bank of India or the State Bank of India or any authorised bank.

• Every person responsible for deduction of tax u/s. 194IA of the Act shall furnish the certificate of deduction of tax at source in Form No. 16B to the payee within 15 days from the due date for furnishing the challan-cum-statement in Form No. 26QB.

• Form 16B is to be generated online from the web portal within 15 days from the due date of deposit and must be downloaded from the TDSCPC website. Once the certificate is downloaded, it must be signed and stamped and then sent to the payee.

Cost Inflation Index for the financial year 2013-14 is 939 – Notification No. 40/2013 dated June 6, 2013

Income tax (Sixth amendment) Rules, 2013 – amendment in Rules 10A to 10E and substitution of Form 3CEB. Notification no- 41/2013 [S.O.1491(E) ] dated June 10, 2013

Income tax (Seventh amendment) Rules, 2013 – amendment in Rule 12 and substitution of forms ITR 2, ITR 3, ITR 4, ITR 5, ITR 6 and ITR 7 – Notification no- 42/2013 [S.O.1513(E)] dated June 11, 2013 – The important amendments are as under :

(a) No attachments to be filed alongwith the return filed in ITR 7.

(b) Mandatory e-filing of audit reports issued u/s 10(23C)(iv), 10(23C)(v), 10(23C)(vi), 10(23C)(via), 10A, 12A(1)(b), 80IA, 80IB, 80IC, 80ID, 80JJAA and 80LA.

(c) Mandatory e-filing of return of income, if the applicable audit report are to be mandatorily e-filed

The Finance Bill 2013, received the Presidential Assent on May 10, 2013

Agreement for Exchange of information relating to tax matters between India and Monaco enters into force – Notification No. 43 /2013 dated June 12, 2013

Commodities Transaction Tax Rules, 2013 – Notification No. 46/2013 [SO 1769(E)] dated June 19, 2013 – These rules to come in force from July 1, 2013

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Direct Taxes

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1. Protocol amending DTAA between India and
Sweden effective from 16th August, 2013 – Notification No. 63/2013 dated
14th August, 2013

2. NEW DRPs constituted – Order No. 2/FT & TR/2013 dated 27-08-2013

The
CBDT has issued this order for Constitution of the Dispute Resolution
Panel in Delhi, Mumbai, Ahmedabad, Pune, Kolkata, Bangalore, Hyderabad
and Chennai with effect from 19-08-2013

3. CBDT Instruction
on unmatched TDS challans in Form 26AS–Instruction No. 11/2013 dated
27-08-2013 ( available on www.bcasonline. org)

4. Income-tax
(14th amendment) Rules, 2013– amendment in Rule 37BB and amendment to
Form 15CA and 15CB-Notification No. 67/2013 dated 2nd September, 2013.

In
terms of Notification No. 58/2013 dated 5th August, 2013, Income-tax
(12th amendment) Rules, 2013 were issued to amend Rule 37BB with effect
from 1st October, 2013. Rule 37BB is further amended vide Notification
No. 67/2013 which prescribes the procedure to be followed by a person
responsible for making a payment to a non-resident. Form 15CA i.e., the
form to be filled by the person making remittance and Form 15CB, a
certificate to be issued by the Chartered Accountant are amended.

CBDT
Instruction on procedure for adjustment of refund against
demand—Instruction No. 12/2013 dated 09-09-2013 ( available on
www.bcasonline.org)

Safe Harbour rules notified vide
Income-tax (16th Amendment) Rules, 2013–Notification No. 73/2013 dated
18th September, 2013 Transfer Pricing: Finance Ministry Press Release
Reg Safe Harbour Rules

The Ministry of Finance has issued a
press release stating that the Safe Harbour Rules have been finalized
after considering the comments of various stake holders. The significant
aspect is that in case of transactions in the nature of routine ITES
and ITS activities the earlier ceiling of Rs. 100 crore has been
removed. Transactions upto Rs. 500 crore have been provided safe harbour
margin of 20% and transaction above Rs. 500 crore have been provided
safe harbour margin of 22%. Similarly, the ceiling of Rs. 100 crore
provided for transactions in the nature of corporate guarantee has been
removed. Also, the rules provide for a time bound procedure for
determination of the eligibility of the assessee and the international
transactions. Any rejection of the option exercised by the assessee
shall be by way of a reasoned order passed after hearing the assessee.
The assessee shall have a right to file an objection with the
Commissioner against adverse finding regarding the eligibility. The
Commissioner shall thereafter decide about the validity of the option
exercised by the assessee.

7. Compulsory manual scrutiny
norms for scrutiny during F.Y. 2013-14 have been modified— Instruction
No. 13/2013 dated 20-09-13 ( available on www.bcasonline.org)

8.
Clarification received on 20-09-2013 from the ADIT (Systems), New Delhi
in respect of mandatory requirement of mentioning of Bank Account No.
& IFSC Code in case of Foreign Companies in ITR-6

On
representation, the ADIT (Systems), New Delhi, has clarified vide an
email to the Society that in ITR 6 in case of Foreign Companies not
having a bank account in India, in the space meant for Bank Account No.
put ‘999999999’ i.e. 9 times 9 and in IFSC Code put ‘NNNN0NNNNNN’ [the
fifth digit being ‘Zero’ and NOT alphabet ‘O’], in all cases where there
is no bank account available in India.

9. Board issues instructions regarding non-filers

Instruction No.14/2013
F.No. 225/153/2013/ITA.II
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes

North Block,ITA-II,Division New Delhi the 23rd of September, 2013

To

All Chief-Commissioners of Income-tax All Directors-General of Income-tax

Sir/Madam

Subject: Standard Operating Procedure for cases under Non-filers Monitoring System (‘NMS’)-regarding-

The
existing procedure for monitoring cases of ‘Non-Filers of IT Returns’
as identified by Director General of Income Tax (System) has been
examined by the board. It is felt that at present, cases of Non-Filers
are not being uniformly monitored by the Assessing Officers due to lack
of consistency in approach in dealing with such cases. Therefore, in
order to streamline processing of such cases and to ensure consistency
in monitoring NMS cases by the Assessing officers, the Board, hereby
lays down the following Standard Operating Procedure:

1. The
Assessing Officer should issue letter to the assessee with 15 days of
the case being assigned in NMS, seeking information about the return of
income flagged in NMS. Facility to generate letter has been provided in
the NMS module in i-taxnet.

2. If the letter is delivered, the Assessing Officer to capture the delivery date in the NMS module.

3.
If the letter is not delivered, the Assessing Officer should issue
letter to the alternate address of the assessee available in the Online
Monitoring System or any other address available with the Assessing
Officer through field enquiries or otherwise. All addresses used in IT
Return, AIR, CIB databases have been made available to the Assessing
Officer in the Online Monitoring System to assist the field formations
in identification of current address of the taxpayer.

4. If the
return is received, the assessing officer should capture the details in
AST within 15 days of filing of return, if the assessee informs that
paper return has already been filed which was not captured in AST, the
details of return should be entered in the AST within 15 days of
receiving such information. E-files returns will be automatically pushed
to NMS.

5. If no return is required to be filed in the case, (
non-resident etc.), the Assessing Officer should mark “No return is
required” and mention reason for the same in NMS which needs to be
confirmed by Range head.

6. If the Assessing Officer is not able
to serve the letter and identify the taxpayer, assessing officer should
mark the assessee “Assessee not traceable” in NMS which needs to be
confirmed by Range head.

7. In cases where the assessee has been
identified and no return has been filed within 30 days of the time
given in the letter, the Assessing Officer should consider initiation of
proceedings u/s 142(1)148 in AST.

8. The cases will be
processed every week by the Directorate of Systems and will be marked as
closed in NMS. If one of the following actions are taken for A.Yr.’s
2010-11, 2011-12, and 2012-13:

a) Details of return are available in AST

b) Notice u/s 142(1) or 148 has been issued in AST

c) “ No return is required” is marked by the Assessing Officer and confirmed by Range head.

I
am further directed to state that the above be brought to the notice of
all officers working under your jurisdiction for necessary and strict
compliance.

(Rohit Garg)
Deputy Secretary Government of India

Copy to:
1. Chairperson, CBDT.
2. All Members, CBDT.
3. DIT(PR,PP & OL),Mayur Bhawan,New Delhi.
4. The Comptroller and Auditor-General of India.
5. The DGIT(Vigilance),New Delhi.
6. The Joint Secretary and Legal Advisor, Ministry of Law and Justice, New Delhi
7. All Directors of Income Tax, New Delhi.
8. The DGIT(NADT) Nagpur.
9. ITCC Division of CBDT(3 copies).
10. The DGIT (Systems), New Delhi.
11. NIC, N/o Fin –for uploading on the Department’s website.
12. Data Base Cell-for uploading on irs officers website.

(Rohit Garg)

Deputy Secretary Government of India

Direct Taxes

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Reverse Mortgage (Amendment) Scheme, 2013 notified to amend the Reverse Mortgage Scheme 2008–Notification No.79 /2013 dated 7th October, 2013

Extension of time to furnish Audit Report electronically

The CBDT has issued an order dated 26th September, 2013, extending time limit from 30th September, 2013 to 31st October, 2013 for electronically furnishing of various Audit Reports.

CBDT extends due date for furnishing of Tax Audit Report for A.Y. 2013-14

The CBDT has issued an order dated 24th October, 2013 u/s. 119 of the Act in continuation of the order dated 26th September, 2013 directing that in cases where the ‘due date’ of furnishing reports of audit and corresponding income-tax returns was 30th September 2013 and where the same are furnished electronically on or before 31st October 2013, such reports of audit and returns of income shall be deemed to have been furnished within the ‘due date’ prescribed u/s. 139(1) of the Income-tax Act, 1961

The Directorate of Income-tax (Systems) has issued a letter dated 22nd October, 2013 stating that pursuant to the decision of the Board the process has been initiated to issue refunds without adjustment of demand as an interim measure in certain cases. The AOs have been requested to carry out necessary verification following the procedure prescribed in section 245 of the Act.

Protocol amending the DTAA between India and Australia signed on the 16th day of December, 2011 shall enter into force on the 2nd day of April, 2013-Notification No .74 dated 20th September, 2013.

Income tax (17th amendment) Rules, 2013 – Introduction of General Anti Avoidance Rules, which will come into force from 1st April, 2016- Notification no-75/2013 dated 23rd September, 2013

 Income-Tax Deduction from Salaries during the Financial Year 2013-14 u/s. 192 of the Income-Tax Act, 1961.-Circular No. 8 dated 10th October, 2013

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Direct Taxes

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Government notifies Cyprus as a “notified jurisdictional area under Section 94A – Notification No. 86/2013 dated 1st November, 2013

The CBDT has issued Order No. 5/FT&TR/2013 dated 04-11-2013 specifying the jurisdiction of the Dispute Resolution Panel at Delhi and Mumbai and the cases or classes of cases that they are assigned. The CBDT has also issued Order No. 6/FT&TR/2013 dated 04-11- 2013 specifying the reserve members of the DRP at Delhi and Mumbai. Both these orders are available at www.bcasonline.org

Procedure for dealing with Revenue objections – CBDT Instruction No. 16/ 2013 dated 31-10-2013

E-returns filed with payment of self-assessment tax to be treated as deemed defective and standard operating procedure notified by CBDT. – F.No. DIT(S)/II/CPC/2013-14/Unpaid self assessment tax/13798 dated 13th November 2013 – available on www.bcasonline.org

Circular clarifying DRP law under section 144C of the Act – Circular no. 9/2013 dated 19th November 2013

On analysis of the existing track record where there are unsatisfactory settlements, despite detailed procedure laid down by the CBDT, it has now fine tuned the procedure by awarding more powers to the supervisory authorities to fasten the process of settlement and prevent revenue loss for the Government as well as harassment to the tax payers.

CBDT has rectified its mistake made in Circular no. 5/2010 where it was inadvertently mentioned that Section 144C would apply from AY 2010-11 onwards. It is now clarified that section 144C is applicable to any order which proposes to make variation in income or loss returned by an eligible assessee, on or after 1st October, 2009 irrespective of the assessment year to which it pertains. Amendments to other sections of the Income-tax Act referred to in para 45.3 of the circular no. 5/2010 dated 3rd June, 2010 shall also apply from 1st October, 2009

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Glimpses of Supreme Court Rulings

48 Magnum International Trading Co. (P) Ltd vs. Commissioner of Income Tax, Delhi II

[2023] 454 ITR 141 (SC)

Exports – Special deduction — Section 80 HHC — Amendments made to Section 80-HHC(3) of the 1961 Act vide Finance (No. 2) Act, 1991, substituting Sub-section (3) to Section 80-HHC of the 1961 Act and prescribing a different formula, are applicable with effect from 1st April, 1992 and the amendments do not have a retrospective effect — Profits on sale of shares having been taxed as profits and gains of business should be treated as income from business for computation under clause (b) to section 80HHC(3) and should also be included in the total turnover — Surplus funds when deposited in bank or otherwise to earn interest are not taxable under head income from business and could not be considered for computation of deduction under section 80HHC.

Before the Supreme Court, the question raised pertained to the computation of deduction under Section 80-HHC of the Income-tax Act, 1961, as applicable to the aforesaid assessment years 1989-90, 1990-01 and 1991-92.

The Supreme Court noted that in the assessment year 1989-1990, the Assessing Officer had excluded the interest income of ₹1,03,28,913 and income from the sale of shares of ₹1,15,52,953 while computing the deduction under Section 80-HHC of the Act in terms of the proportionality formula prescribed under Sub-section (b) to Section 80-HHC(3) of the Act.

The Supreme Court observed that in P R Prabhakar vs. Commissioner of Income Tax, Coimbatore [2006] 284 ITR 548 (SC) it has been held that the amendments made to Section 80-HHC(3) of the Act vide Finance (No. 2) Act, 1991, substituting sub-section (3) to Section 80-HHC of the Act and prescribing a different formula, were applicable with effect from 01.04.1992. The amendments did not have a retrospective effect.

According to the Supreme Court, on the question of treatment/ head of income from the sale of shares, the Assessing Officer has contradicted himself. In the assessment order, after a detailed discussion, on the one hand, it had been held that income from the sale of shares was income from ‘profits and gains of business or profession’, which was not taxable as ‘income from capital gains’, yet for the purpose of computation of deduction under Section 80-HHC(3) of the Act, income from sale of shares had not been treated as ‘income from business’.

In view of the finding, as recorded by the Assessing Officer, on the head under which income from sale of shares was taxable, which finding has attained finality, the Supreme Court had no difficulty in accepting the plea and stand of the Assessee, that income from the sale of shares should be treated as ‘income from business’ for computation of deduction under Clause (b) to Section 80-HHC(3) of the Act.

The Supreme Court clarified that, once the income from the sale of shares is to be included under the head ‘income from business’, the amount will also be included in the total turnover of the business.

With regard to interest income, the Supreme Court agreed with the stand of the Revenue that this income should be taxed as ‘income from other sources’. The Supreme Court noted that the Commissioner of Income Tax (Appeals) had reversed the findings given by the Assessing Officer on the ground that the surplus funds had been utilised for earning interest income. He held that surplus funds were ‘transitory surplus funds’ and utilisation of the same for earning interest income cannot take away the character of ‘business income’ from such interest. According to the Supreme Court, this finding is fallacious and wrong. The surplus funds, when deposited in a bank or otherwise to earn interest, are not taxable under the head ‘income from business’, but under the head ‘income from other sources’. This income does not have a direct nexus nor is earned by way of business activity. Accordingly, the interest income is not to be treated as ‘income from business’ for computation of the deduction in terms of Clause (b) to Section 80-HHC(3) of the Act.

The Supreme Court clarified that the same reasoning would equally apply in the appeals for assessment years 1990-1991 and 1991-1992, in which years, the issue related to the treatment of interest income is raised, that is, whether it should be taxed under the head ‘income from business’ or under the head ‘income from other sources’. In consonance with its findings recorded above, the interest income earned in the assessment years 1990-1991 and 1991-1992 of R95,83,895 and R1,18,56,913 respectively, would be taxable under the head ‘income from other sources’.

Accordingly, Civil Appeals pertaining to the assessment years 1990-1991 and 1991-1992, were partly allowed.

49 ACIT, Surat vs. Kantilal Exports, Surat

[2023] 454 ITR 112 (SC)

Unexplained expenditure — Section 69C — ITAT found that the Assessee was maintaining the books of account outside the regular books — Addition upheld based on the consumption shown in the audit report which was later explained to be a typographical error by the Chartered Accountant — Reversal of this finding by the High Court solely based on the Statements filed before the ITAT for the first time is not proper.

The Assessing Officer made additions of ₹17,15,00,000 as unexplained expenditure under Section 69C of the Act taking into consideration the actual consumption of diamonds as 4,30,701.14 carats as mentioned in the audit report and after considering the consistent trend on yield which was found to be between 10-18 per cent. The Assessing Officer also considered the alternative prayer made by the Assessee on claiming deductions as expenditure under Section 80HHC. The CIT (Appeals) reversed the addition. The ITAT, on appreciation of the entire material on record and after taking into consideration the remand order which was necessitated due to the affidavits filed before the ITAT of the Typist and the Chartered Accountant, reversed the order passed by the CIT (Appeals) and restored the Assessment Order by upholding the addition of ₹17,50,00,000 as unexplained expenditure under Section 69C of the Act. The High Court set aside the order passed by the ITAT solely relying upon the two affidavits – one of the Typist and another of the Chartered Accountant and accepted the submission on behalf of the Assessee that there was a typographical error in the audit report in which the consumption was shown at 4,30,701.14 carats and that the actual consumption was 2,90,701.14 carats.

The Supreme Court after going through the findings recorded by the Assessing Officer, CIT (Appeals) as well as the ITAT observed that before the Assessing Officer, though it was the specific case on behalf of the Assessee that the figure of ₹4,30,701.10 was a typing mistake, except the statement of the Assessee, no further material was produced before the Assessing Officer. Therefore, the Assessing Officer proceeded further with the assessment taking into consumption of 4,30,701.14 carats. Thereafter, considering the figure of yield in different assessment years, the Assessing Officer came to the conclusion that the percentage of the yield would range between 10-18 per cent. Thereafter, the Assessing Officer specifically gave the finding that taking into consideration the figures on record for the relevant year under consideration, the yield would come to 24 per cent. Therefore, taking into consideration the average yield in the last assessment years, the Assessing Officer treated the same as unexplained income and made the additions of ₹17,50,00,000 under Section 69C. The ITAT has concurred with the said findings. Solely relying upon the statements of the Typist and the Chartered Accountant, the High Court had reversed the findings of the Assessing Officer as well as the ITAT. According to the Supreme Court, the High Court had not properly appreciated and considered the fact that the affidavits were filed for the first time before the ITAT. The High Court had also not at all considered the conduct on the part of the Assessee, which came to be considered in detail by the ITAT in its order. It was found that there had been a search in the case of the Assessee and its group concern on 7th January, 1999 which was concluded on 23rd March, 1999 and during the course of the search, duplicate cash book, ledger and other books showing the unaccounted manufacturing and trading arrived at by the Assessee in diamonds were found. The ITAT had also noted that a huge addition was made in the case of Assessee’s group in the block assessment on the basis of the books so found. Therefore, it was found that the Assessee was maintaining the books of accounts outside the regular books. The aforesaid had not at all been considered by the High Court while passing the impugned order.

In view of the above and for the reasons stated above, the Supreme Court held that the impugned judgment and order passed by the High Court was unsustainable and the same deserved to be quashed and set aside and was, accordingly, quashed and set aside. The orders passed by the ITAT as well as the Assessment Order were restored.

The Appeal was, accordingly, allowed.

50 PCIT vs. R. F. Nangrani HUF

[2023] 454 ITR 426 (SC)

Capital Gains — Amount received by the assessee on retirement from the firm — Amounts received from the incoming partners — Matter remanded for consideration.

The assessee was a partner in a firm. It retired from partnership firm on 14th August, 2008. When it retired, it received a sum of ₹15 crore from the partnership firm M/s Landmark Developments. It purported to be in full and final settlement of its right, title and interest as a partner. The assessee was having 50 per cent share in the firm. The other 50 per cent was being held by two other partners who had a 25 per cent share each.

According to the Assessing Officer, the consideration for payment of ₹15 crore received by the assessee was brought in by three incoming partners. The entire consideration paid accordingly, was debited to the account of the new partners. The Assessing Officer sought to bring the amount of ₹14,15,61,370 to tax. This was after deducting the amount of ₹84,38,630 which stood to the credit of the capital account of the assessee.

This order came to be upheld by the Commissioner of Income Tax (Appeals).

However, the Income Tax Appellate Tribunal allowed the appeal of the assessee. ITAT purported to follow the order passed by the jurisdictional High Court.

In further appeal, the High Court did not find favour with the contentions of the Revenue.

Before the Supreme Court, the Revenue contended that there was no basis for fixing the payment of an ad hoc amount of ₹15 crore to the Assessee. It was only on mutual understanding and after considering the 15-year association of Assessee with the firm and also future expected profit, the Assessee had relinquished his rights and shares in favour of continuing partners (including new partners entered on the date of retirement deed) and has received ₹15 crore as full and final settlement of right, title interest in excess of the amount standing to the credit of the capital account of the assessee.

According to the assessee, though the amount may appear to be in excess of the share standing to the credit of the capital account of the assessee, the amount in excess was attributable to the goodwill. This was subject matter of decisions of the Supreme Court and since goodwill under the law as it stood was to be taken into consideration in determining the share of the retiring partner, no part of the amount received by the assessee was exigible to tax.

According to the Supreme Court, it did not find any discussion in the order of the High Court on any submission on the lines which had been addressed before it. The Supreme Court was therefore of the view that the matter should, therefore, be reconsidered by the High Court with reference to the facts as were not in dispute and the law which governed the field. The Supreme Court allowed the appeal, setting aside the order of the High Court.

Section 263: Revision — Erroneous and Prejudicial to the interest of Revenue — Show Cause Notice (SCN) — Issue not raised in SCN — No opportunity provided — Order cannot be erroneous.

21 Pr. Commissioner of Income Tax – 10 vs. Nilkanth Tech Park Pvt. Ltd [Income Tax Appeal No. 807 of 2018;
Date of Order: 4th October, 2023 (Bom.) (HC)]

Section 263: Revision — Erroneous and Prejudicial to the interest of Revenue — Show Cause Notice (SCN) — Issue not raised in SCN — No opportunity provided — Order cannot be erroneous.

The respondent / assessee was engaged in the business of manufacturing chemicals. The assessee filed a Return of Income for Assessment Year 2009–10 on 29th September, 2009, declaring a total income at the loss of ₹4,88,18,926. The assessment was completed under Section 143(3) of the Act, and an assessment order dated 17th November, 2011, came to be passed.

Thereafter, CIT issued a Show Cause Notice (SCN) dated 4th March, 2014, under Section 263 of the Act, calling upon the assessee to show cause as to why the assessment made by the Assessing Officer (AO) should not be cancelled / set aside to the extent as mentioned in the notice. The issue raised was in regards to share trading loss applicability of Explanation to Section 73 of the Act.

The assessee replied to the SCN, and CIT rejected the submissions of the assessee and concluded that the order passed by the AO was erroneous and prejudicial to the interest of the assessee. CIT set aside the assessment order and directed the AO to pass the assessment order afresh by applying the provisions of Section 45(2) of the Act to the conversion of shares from investments or capital assets to stock-in-trade. The loss was directed to be treated as a speculation loss. The order passed by CIT under Section 263 of the Act was challenged before the Income Tax Appellate Tribunal (ITAT). Various grounds were taken before the ITAT. Apart from the ground that CIT erred in applying provisions of explanation to Section 73 of the Act and thereby, treating the loss as speculative, it was also urged that CIT erred in passing the order under Section 263 of the Act on the issue of Section 45(2) of the Act and treating loss as capital loss without raising the issue in the SCN. Assessee also urged that the order of CIT was a mere change of opinion and hence, erroneous.

The ITAT, after considering the submissions, by an order dated 19th May, 2017, set aside the order of CIT for various reasons, but one of the primary grounds for interfering was that the twin conditions for exercising jurisdiction under Section 263 of the Act, viz., order of the AO being erroneous and that was prejudicial to the interest of Revenue being conjunctive, have not been met. Further, in the notice, there was not even a reference to Section 45(2) of the Act. Thus, in the SCN, there is no discussion or even reference to Section 45(2) of the Act, and the assessee has not been given an opportunity to explain why the provisions of Section 45(2) of the Act should not be applied to the conversion of shares from investment or capital asset to stock-in-trade.

The Commissioner may call for or examine the record of any proceeding if he considers that any order passed therein by the AO is erroneous in so far as it is prejudicial to the interests of the Revenue. Once he is satisfied that the order passed by the AO is erroneous and it is prejudicial to the interest of Revenue, before he passes any order as the circumstances of the case may justify including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment, an opportunity should be given to assessee of being heard. If there is no reference to provisions of Section 45(2) of the Act in the notice issued under Section 263 of the Act, it is obvious that such an opportunity of being heard has not been given to the assessee. The order passed by the CIT was quashed and set aside.

The Court further observed that the ITAT has proceeded to dispose of the matter on merits and has come to the conclusion that the very same issue of converting the capital asset into stock-in-trade was the subject of a query raised during the assessment proceedings. The ITAT came to the conclusion that the assessment order has been passed by the AO by application of mind and after considering the response of the assessee. Revenue has not disputed the replies that were placed by the assessee before the AO.

A point was raised by the tax department that there is no discussion on this in the assessment order. It is settled law as held in the judgment of this court in Aroni Commercials Ltd vs. Deputy Commissioner of Income Tax – 2(1) [2014] 44 taxmann.com 304 (Bombay) that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the AO, while completing the assessment, it is not necessary that an assessment order should contain reference and / or discussion to disclose its satisfaction in respect of the query raised.

The Hon. Court further relied on the judgment of this court in Commissioner of Income Tax vs. Fine Jewellery (India) Ltd [2015] 372 ITR 303 (Bom).

Accordingly, the appeal was dismissed.

Section 254: Nonspeaking and Cryptic order — No reasons stated by ITAT — Matter remanded to rehear.

20 National Centre For Cell Science vs. Dy. CIT Exemption Circle, Pune

[ITA (L) No. 24310 of 2023;

Date of Order: 11th October, 2023 (Bom.) (HC)]

Section 254: Nonspeaking and Cryptic order — No reasons stated by ITAT — Matter remanded to rehear.

The Hon. Court observed that there is no reason given by the ITAT as to why the Tribunal disagrees with the view of the learned CIT(A) and opines that the amount to be carried forward cannot exceed the unspent amount.

In the circumstances, the matter was remanded to the ITAT to give reasons as to why it has opined that the CIT(A) was not correct in concluding that the amount to be carried forward cannot exceed the unspent amount. The Hon. Court relied on the decision of the Hon’ble Apex Court in Udhavdas Kewalram vs. Commissioner of Income-tax (1967) 66 ITR 462 (SC):

“6. The Tribunal performs a judicial function under the Indian IT Act: it is invested with authority to determine finally all questions of fact. The Tribunal must, in deciding an appeal, consider with due care all the material facts and record its findings on all the contentions raised by the assessee and the CIT in the light of the evidence and the relevant law.

7. The judgment of the Tribunal suffers from a manifest infirmity. The Tribunal has not adjudicated upon the truth of the case of the assessee in the light of the evidence adduced by the assessee in support of his case. The infirmity becomes more pronounced when regard is had to fact that, relying upon the documentary evidence tendered by the assessee, the AAC had accepted the claim of the assessee relating to the sale of Gopi Bai’s ornaments. The Tribunal was undoubtedly competent to disagree with the view of the AAC. But in proceeding to do so, the Tribunal had to act judicially, i.e. to consider all the evidence in favour of and against the assessee. An order recorded on a review of only a part of the evidence and ignoring the remaining evidence cannot be regarded as conclusively determining the questions of fact raised before the Tribunal.”

In view of the above, the impugned order was set aside.

Section 148A — Reopening — Incorrect information — Non-application of mind by Assessing Officer — Notice u/s. 148A(b) as well order u/s. 148A(d) bad in law.

19 Narendra Kumar Shah vs. The ACIT Circle – 42 (2)(1)

[WP No. 2558 of 2023;

Date of Order: 10th October, 2023 (Bom.) (HC);

A.Y.: 2019–2020]

Section 148A — Reopening — Incorrect information — Non-application of mind by Assessing Officer — Notice u/s. 148A(b) as well order u/s. 148A(d) bad in law.

Petitioner is an individual assessed on income from salary, house property and other sources. Petitioner filed ROI on 29th November, 2019, for Assessment Year 2019–2020. The return was processed and an order dated 26th February, 2020, was passed under section 143(1) of the Act. Subsequently, Petitioner received a notice dated 31st March, 2023, u/s. 148A(b) of the Act alleging that there was information which suggests that income chargeable to tax for Assessment Year 2019–2020 has escaped assessment within the meaning of Section 147 of the Act. The details of the information / enquiry were also enclosed. Petitioner was directed to submit a reply to the notice along with supporting documents on or before
20th April, 2023.

The only information Respondent No. 1 had was that Petitioner, despite having a salary of ₹58,18,452 per annum and having purchased securities worth ₹5,22,000, was a non-filer for the Assessment Year 2019–2020, having failed to file a return of income. In short, the basis for re-opening is despite having a salaried income, Petitioner has not filed a return of income.

The Petitioner, as per the e-Proceedings response acknowledgement responded to the notice dated 26th April, 2023, issued u/s. 148A(b) of the Act and explained that the Return of Income has been filed and the copy Income Tax Returns were also attached.

On 26th April, 2023, the impugned order u/s. 148A(d) of the Act came to be passed rejecting the objections. The Assessing Officer (AO) observed that “the assessee in his reply only stated that he had filed Income Tax Returns for the year under consideration. However, the assessee did not provide his justification for the transactions in question. Thus it is logical to conclude that the assessee has no explanation to offer with respect to the above-mentioned information suggesting escapement of income in the case for Assessment Year 2019–2020.”

The Hon. Court held that the order dated 26th April, 2023, passed under Section 148A(d) of the Act is unsustainable. This is because the notice under Section 148A(b) of the Act does not call upon Petitioner to provide any justification for any transaction in question. The entire basis for issuing the notice under Section 148A(b) of the Act was that Petitioner was a non-filer for Assessment Year 2019–2020 as he had failed to file the Return of Income, and therefore, the income from salary and purchase of securities have not been declared / offered for taxation. But the fact is, Petitioner had filed his Return of Income and had also paid a total tax of ₹18,36,575 and had also claimed a refund of ₹1,27,100. Therefore, the order under Section 148A(d) of the Act, passed on 26th April, 2023, was quashed and set aside. Consequently, the notice issued under Section 148A(b) of the Act, dated 26th April, 2023, was quashed and set aside.

The Court further observed that even the notice under Section 148A(b) of the Act was unjustified. This is because the AO, before issuing the notice, was bound to at least verify or enquire following the information that was received in accordance with the Risk Management Strategy. The Hon. Court referred to the guidelines for issuance of notice under Section 148 of the Act bearing F. No. 299/10/2022-Dir(Inv.III)/611 dated 1st August, 2022, paragraph 2.1 (vi) and (vii) and the instruction regarding the uploading of data on functionalities / portal of the Income Tax Department bearing F. No. 299/10/2022-Dir(Inv. III)/647 dated 22nd August, 2022, paragraphs 3 and 4.

The court observed that if the AO had only verified in the portal of the assessee before initiating proceedings, particularly when he had the PAN number with him, AO would have realised that not only has Petitioner filed the Return of Income, but also the return has been processed and an order dated 26th February, 2020, under Section 143(1) of the Act had been passed. Therefore, the notice issued under Section 148A(b) of the Act also has to be quashed and set aside.

Recovery of tax — High-pitched assessment — Stay of recovery — Appeals not disposed of for a long time — Assessee is entitled to stay of recovery proceedings.

57 Jankalyan Vinimay Pvt Ltd vs. DCIT

[2023] 455 ITR 456 (Cal.)

A.Ys.: 2011–12, 2012–13 and 2016–17;

Date of Order: 7th February, 2023

S. 220(6) of ITA 1961

Recovery of tax — High-pitched assessment — Stay of recovery — Appeals not disposed of for a long time — Assessee is entitled to stay of recovery proceedings.

For the A.Ys. 2011–12, 2012–13 and 2016–17 high-pitched assessments were completed in the year 2017–18. Well within the period of limitation, the assessee filed the appeals before the Commissioner (Appeals) and the appeals have been pending since 2018. The Assessing Officer rejected the stay application u/s. 220(6) of the Income-tax Act, 1961 by communication dated 8th December, 2022.

Assessee filed writ petitions challenging the orders of the Assessing Officer rejecting the application for stay. Allowing the writ petition a Division Bench of the Calcutta High Court held as under:

“Since the appeals were filed in 2018 and the stay applications filed before the Deputy Commissioner during the year 2018 followed by subsequent reminders, were rejected only on 8th December, 2022, and the assessment orders were not given effect to date, there was to be a direction that the appeals filed before the Commissioner (Appeals) be disposed of at an early date and until then, the Department was not to take any coercive action against the assessee for recovery of the Income-tax, which had been assessed.”

Reassessment — Notice after three years — Limitation — Capital gains — Order for issue of notice without considering reply filed by assessee to initial notice —Words “income chargeable to tax” found in section 149 must be read in terms of “income” as arising out of “capital gains” as provided u/s. 48 in the assessee’s case — Notice barred by limitation — Order and notice set aside.

56 SANATH KUMAR MURALI vs. ITO

[2023] 455 ITR 370 (Kar)

A.Y.: 2016–17; Date of Order: 24th May 2023

Ss. 48, 147, 148, 148A(b), 148A(d) and 149 of ITA 1961

Reassessment — Notice after three years — Limitation — Capital gains — Order for issue of notice without considering reply filed by assessee to initial notice —Words “income chargeable to tax” found in section 149 must be read in terms of “income” as arising out of “capital gains” as provided u/s. 48 in the assessee’s case — Notice barred by limitation — Order and notice set aside.

On 3rd March, 2023, the notice u/s. 148A(b) of the Income-tax Act, 1961 came to be issued to the petitioner stating that information was received which suggested that income chargeable to tax for the A.Y. 2016–17 has escaped assessment within the meaning of section 147, detailing the information along with supporting documents. The information was that as per the TDS statement u/s. 194-IA, during the relevant year the assessee had sold an immovable property for a consideration of ₹55,77,700 which has escaped assessment.

The assessee-petitioner filed a reply to the said notice dated 16th March, 2023, in which details were laid out, setting out the sale consideration relating to the sale deed of 22nd November, 2015, as ₹55,77,700 and also furnishing details of the sale deed by virtue of which the petitioner has purchased the property on 24th September, 2011, for a consideration of ₹15,91,735 (cost of acquisition). The assessee also worked out the long-term capital gain at ₹33,85,769. It was submitted that, as the income escaping assessment did not exceed rupees fifty lakh, in terms of section 149(1)(b) of the Income-tax Act, the notice u/s. 148 could not be issued. However, the Assessing Officer rejected the assessee’s submissions and on 21st March, 2023, passed order u/s. 148A(d) and also issued notice u/s. 148 dated 21st March, 2023.

The assessee filed a writ petition and challenged the order and the notice. The Karnataka High Court allowed the writ petition and held as under:

“i) When the procedure is followed culminating in an order passed u/s. 148A(d) of the Income-tax Act, 1961, the authority is required to apply his mind and consider the reply of the assessee to the show-cause notice u/s. 148A(b) and pass a considered order. The words used in section 149(1)(b) are “income chargeable to tax” which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more for that year. The income chargeable under the head “Capital gains” which would arise in case of a sale transaction is as provided u/s. 48, which provides that income chargeable under the head “Capital gains” shall be computed by deducting from the full value of the consideration, the cost of acquisition and in the event the property purchased has been held for a period beyond three years in terms of the second proviso to section 48 the words, “cost of acquisition” are to be substituted by the words, “indexed cost of acquisition”.

ii) The words found in section 149 “income chargeable to tax” must be read in terms of “income” as arising out of the “capital gains” as provided u/s. 48 and this is the only manner of understanding the words, “income chargeable to tax” u/s. 149(1)(b). Section 48 provides that the entirety of the sale consideration does not constitute “income”. The Memorandum Explaining the Provisions of Finance Act, 2021 does not in any way lead to a different interpretation of the words, “income chargeable to tax”. The words used u/s. 149 for the purpose of the extended time limit is to be interpreted in terms of the plain wording of section 149 and cannot be construed differently while relying on any executive instruction.

iii) The Assessing Officer had not applied his mind to the reply filed by the assessee to the show-cause notice u/s. 148A(b) nor noticed the legal position while deciding the application of the extended period u/s. 149(1)(b) which was pointed out by the assessee in its reply. There is a bar prohibiting the issuance of notice u/s. 148 of the Income-tax Act, 1961 for reopening the assessment u/s. 147 if three years have elapsed from the end of the relevant assessment year unless the case falls under clause (b). Accordingly, no notice u/s. 148 could be issued after three years from the end of the A.Y. 2016-17, and this is subject to the exception of an extended period of limitation of three years, but not more than ten years from the end of the relevant assessment year, if the Assessing Officer had material which would reveal that “the income chargeable to tax” which has escaped the assessment amounted to or was likely to amount to R50 lakhs or more. It could not be stated that since the stage at which the notice was issued was at a premature stage, the entirety of the sale consideration ought to be taken note of.

iv) The order passed u/s. 148A(d) and the notice issued u/s. 148 for the A.Y. 2016-17 were set aside.”

Reassessment — Notice — New procedure — Initial notice — Assessee’s explanation on the ground set down in initial notice accepted — Order for the issue of notice based on new ground — Order invalid — Writ — No question of remanding the matter to AO for passing speaking order — Order u/s. 148A(d) and direction of Court (Single Judge) remanding matter to AO set aside.

55 Excel Commodity and Derivative Pvt Ltd vs. UOI

[2023] 455 ITR 341 (Cal)

A.Y.: 2018–19; Date of Order: 29th August, 2022

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

Reassessment — Notice — New procedure — Initial notice — Assessee’s explanation on the ground set down in initial notice accepted — Order for the issue of notice based on new ground — Order invalid — Writ — No question of remanding the matter to AO for passing speaking order — Order u/s. 148A(d) and direction of Court (Single Judge) remanding matter to AO set aside.

On a writ petition challenging the order u/s. 148A(d) of the Income-tax Act, 1961, the Single Judge of the Calcutta High Court held that the order dated 7th April, 2022, was devoid of reasons and without any discussion on the contentions raised by the assessee in its objections to the show-cause notice issued by the Assessing Officer u/s. 148A(b) and quashed the order but remanded the matter back to the Assessing Officer to pass a fresh speaking order.

The Division Bench allowed the appeal filed by the assessee and held as under:

“i) The term “information” in Explanation 1 u/s. 148 of the Income-tax Act, 1961 cannot be lightly resorted to and to give unbridled power to the Department to reopen an assessment. The procedure contemplated u/s. 148A requires the Assessing Officer to consider the reply to the show-cause notice u/s. 148A(b) and thereafter pass a reasoned order u/s. 148A(d). If in the opinion of the Assessing Officer, the information furnished by the assessee in his reply is satisfactory, then nothing more requires to be done. But if the Assessing Officer is of the view that the reply furnished by the assessee is not acceptable, he has to pass a speaking order u/s. 148A(d). Since the Central Board of Direct Taxes noticed that in several cases information made available or the data uploaded by the reporting entities is not fully accurate due to human or technical error it issued a Circular dated 22nd August, 2022, instructing to Departmental officers with regard to the uploading of data on the portal of the Department to effect due verification and opportunity of being heard given to the assessee before initiating proceedings u/s. 148 or 147.

ii) The Assessing Officer had used the information lightly which had resulted in the issuance of notice. The assessee had submitted an explanation to the notice with documents in support of its claim. The Assessing Officer had accepted the explanation given by the assessee that it had not indulged in fictitious derivative transactions and had given up the allegation which had formed the basis of the show-cause notice u/s. 148A(b). Thereafter, he had proceeded on fresh ground alleging that the transaction with some other company was an accommodation entryand passed the order under section 148A(d). The order passed u/s. 148A(d) was not based on the reason for which the notice dated 22nd March, 2022, was issued u/s. 148A(b). Therefore, on that score also, the order u/s. 148A(d) was to be set aside in its entirety without giving any opportunity to reopen the matter on a different issue.

iii) The order was illegal and unsustainable and the necessity to remand the matter to the Assessing Officer did not arise. The order dated 7th April, 2022 u/s. 148A(d) and the direction of the court remanding the matter to the Assessing Officer were set aside. Consequently, no further action could be taken by the Department against the assessee on the issue in question.”

Income — Assessability — Meaning of “Income” — Institution established by State Government to regulate the registration of nurses and maintain standards of professionalism — One-time grant in aid received by the institution to strengthen it — Not assessable as income.

54 H. P. Nursing Registration Council vs. Principal CIT

[2023] 455 ITR 512 (HP)

A.Y.: 2010–11; Date of Order: 25th May, 2022

S. 2(24) of ITA 1961

Income — Assessability — Meaning of “Income” — Institution established by State Government to regulate the registration of nurses and maintain standards of professionalism — One-time grant in aid received by the institution to strengthen it — Not assessable as income.

The assessee was formed under the Himachal Pradesh Nursing Registration Council Act, 1977 and was substantially funded by the Government. The assessee received ₹1 crore from the Government of India under the scheme of upgradation/strengthening of nursing services under human resources for health. In the return of income, the assessee declared NIL income and claimed exemption u/s. 11(1)(a) of the Act. In the scrutiny assessment, the Assessing Officer treated the grant in aid as the income of the assessee u/s. 2(24)(iia) of the Act. The Assessing Officer concluded that the assessee was not entitled to any exemption as its registration u/s. 12AA was effective from 01.04.2010 relevant to A.Y. 2011-12 and the assessee also did not qualify to be entitled to exemption u/s. 10(23C)(iiiab) of the Act.

The Commissioner(Appeals) and the Tribunal upheld the decision of the Assessing Officer.

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

“i) The term “income” as defined in section 2(24) of the Income-tax Act, 1961, is inclusive of various heads mentioned therein. It was only by way of the amendment, made effective from 1st April, 2016, that such monetary release by a State or the Central Government has been incorporated as income by way of section 2(24)(xviii). Even in this clause exemption has been carved out in respect of subsidy or grant by the Central Government for the purpose of corpus of a trust or institution established by the Central Government or State Government, as the case may be. This clearly illustrates the legislative intent that prior to 1st April, 2016, this type of grant was not specifically included as income. The later inclusion of such a provision will not have a retrospective application. Even by way of the amendment, exemption is available to such institutions.

ii) Since the assessee received only a one-time grant with a specific purpose which nowhere suggested scope of profit generation or revenue for the assessee, the amount received by the assessee by way of grant-in-aid thus could not be termed to be revenue receipt.”

Document Identification Number (DIN) — Orders from AO — Communication of — Validity — Circular of Board mandating DIN for communications — Circular binding on AO — Order passed in violation of Circular — Not a defect curable u/s. 292B — Communication of such orders not valid.

53 CIT(IT) vs. Brandix Mauritius Holdings Ltd.

[2023] 456 ITR 34 (Del.)

A.Y.: 2011–12; Date of Order: 20th March, 2023

S. 292B of ITA 1961 and CBDT Circular No. 19 of 2019 dated 14th August, 2019

Document Identification Number (DIN) — Orders from AO — Communication of — Validity — Circular of Board mandating DIN for communications — Circular binding on AO — Order passed in violation of Circular — Not a defect curable u/s. 292B — Communication of such orders not valid.

For the A.Y. 2011-12, the final assessment order passed on 15th October, 2019 did not bear the Document Identification Number (DIN). In appeal, the assessee challenged the validity of the assessment order. The Tribunal allowed the appeal of the assessee in view of the CBDT Circular No. 19/2019 dated 14th August, 2019 which specifies the manner in which DIN is required to be generated while communicating any correspondence issued by the Department.

The Delhi High Court dismissed the appeal filed by the Revenue and held as follows:

“i) It is well established that circulars issued by the CBDT in the exercise of its powers u/s. 119 of the Income-tax Act, 1961 are binding on the Department. The CBDT Circular No. 19 of 2019 dated
14th August, 2019 ([2019] 416 ITR (St.) 140) sets out the manner in which the document identification number is required to be generated while communicating a notice, order, summons, letter and any correspondence issued by the Income-tax Department, i.e., the Revenue. Inter alia, the object and purpose of allocating document identification numbers to communications, such as notices, orders, summons, letters or any correspondence emanating from the Revenue is to maintain a proper audit trail. Therefore, the CBDT, in the exercise of its powers, has mandated that no communication shall be issued by any Income-tax authority relating to assessment, appeals, orders, statutory or otherwise, exemptions, enquiry, investigation, verification of information, penalty, prosecution, rectification or approval, to the assessee or any other person, on or after 1st October, 2019, unless it is allotted a computer-generated document identification number. Further, there is a specific requirement under the 2019 circular to quote the document identification number in the body of any such communication. The 2019 circular also sets out certain circumstances in which exceptions can be made. These circumstances are categorically referred to in paragraph 3 of the 2019 circular.

ii) The object and purpose of the issuance of the 2019 circular, inter alia, is to create an audit trail. Therefore, the communication relating to assessments, appeals, orders, etcetera which are mentioned in paragraph 2 of the 2019 circular, albeit without a document identification number, can have no standing in law, having regard to the provisions of paragraph 4 of the 2019 circular. Recourse to section 292B of the Act, is untenable, having regard to the phraseology used in paragraph 4 of the 2019 circular.

iii) The final assessment order was passed by the Assessing Officer on 15th October, 2019, u/s. 147 read with sections 144C(13) and 143(3) of the Act. Concededly, the final assessment order did not bear a document identification number. There was nothing on record to show that the Revenue took steps to demonstrate before the Tribunal that there were exceptional circumstances, as referred to in paragraph 3 of the 2019 circular, which would sustain the communication of the final assessment order manually, albeit, without the document identification number.

iv) Given this situation, clearly paragraph 4 of the 2019 circular would apply. Paragraph 4 of the 2019 circular, decidedly provides that any communication which is not in conformity with paragraphs 2 and 3 shall be treated as invalid and shall be deemed to have never been issued. The phraseology of paragraph 4 of the 2019 circular fairly puts such communication, which includes communication of assessment orders, in the category of communications which are non-est in law. The Tribunal was right in holding that the final assessment order was not valid.”

Appeal to Appellate Tribunal — Scope of proceedings — Appeal by the assessee against order affirming disallowance in part — No cross objections filed by Department — Tribunal remanding of matter in entirety — Prejudicial to the assessee — Tribunal directed to limit its adjudication to issues raised by assessees.

52 Kausalya Agro Farms and Developers Pvt Ltd vs. Dy. CIT

[2023] 455 ITR 432 (Telangana)

A.Ys.: 2012–13 to 2014–15, 2016–17 to 2018–19;

Date of Order: 2nd February, 2023

Ss. 36(1)(iii), 147, 254 of ITA 1961

Appeal to Appellate Tribunal — Scope of proceedings — Appeal by the assessee against order affirming disallowance in part — No cross objections filed by Department — Tribunal remanding of matter in entirety — Prejudicial to the assessee — Tribunal directed to limit its adjudication to issues raised by assessees.

On appeals before the Tribunal against the order of the Commissioner (Appeals) partly affirming the disallowance of interest expenditure u/s. 36(1)(iii) of the Income-tax Act, 1961 and on the issue of validity of reopening of reassessment u/s. 147, the Tribunal remanded the matter in entirety to the Assessing Officer to examine afresh in the light of all the evidence of the assessees’ fund position and the issue as to whether the corresponding borrowings claimed to have carried no interest involving plotted land buyers.

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

“i) The Tribunal was required to adjudicate the appeals on the grounds which were raised before it by the assessees. Remanding the matter in its entirety to the Assessing Officer had caused serious prejudice to the assessees in as much as even those reliefs which had been granted by the Commissioner (Appeals) stood nullified in view of the Tribunal’s direction to the Assessing Officer to re-do the whole exercise in its entirety. No cross-appeals have been filed by the Department against the order of the Commissioner (Appeals) granting substantial relief to the assessees.

ii) The common order of the Tribunal u/s. 254 was to be set aside and the Tribunal directed to hear the appeals before it on the limited grounds urged by the assessee, namely, the disallowance of interest expenditure u/s. 36(1)(iii) to the extent disallowed by the Commissioner (Appeals) and the validity of the reassessment proceedings u/s. 147.”

Direct Taxes

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DTAA between India and Estonia notified: Notification No. 27/2012 dated 25th July, 2012

The Double Tax Avoidance Agreement signed between Estonia and India on 19th September, 2011 has been notified to be entered into force on 20th June, 2012. The treaty shall apply from 1st April, 2013 in India.

DTAA between India and Lithuania notified : Notification No. 28/2012 dated 25th July, 2012

The Double Tax Avoidance Agreement signed between Lithuania and India on 26th July, 2011 has been notified to be entered into force on 10th July, 2012. The treaty shall apply from 1st April, 2013 in India.

Income tax (Eighth amendment) Rules, 2012 – Amendment in Rule 12 and substitution of ITR 7 – Notification no- 29/2012 [F.No. 142/31/2011-TPL] dated 26th July, 2012

Due date of filing returns for assessee required to file their return by 31st July extended till 31st August 2012 – Direct Tax Order F.No. 225-163-2012-ITA.II dated 31st July, 2012

Disallowance of expenses u/s 37(1) incurred in providing freebees to Medical Practitioner by pharmaceutical and allied health sector Industry – Circular No. 5/2012 dated 1st August, 2012

The Medical Council of India (Governing Body) has imposed a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. It has been clarified by the Board that in cases where such freebees are provided, such expenses would be disallowed as per the provisions of section 37(1) read with its Explanation. Since such expenses would be covered under “prohibited by any law”, and cannot be claimed as business expenses. Further, the AOs of such medical practitioners and their professional associations have been directed to look into and consider the value of such freebees as either business income or income from other sources as the case may be.

Mandatory E-filing of return of income by representative assessees of non-residents and in the case of private discretionary trusts relaxed for assessment year 2012-13 – Circular No. 6/2012 [F.No. 133/44/2012-SO (TPL)] , dated 3rd August, 2012

It would not be mandatory for agents of nonresidents, within the meaning of section 160(1) (i) of the Income-tax Act and for ‘private discretionary trusts’ to electronically furnish the return of income for assessment year 2012-13, though its total income exceeds Rs 10 lakh.

Tax Information Exchange Agreement (TIEA) entered with Guernsey – Notification No. 30 dated 9th August 2012 – India has entered into a TIEA with Guernsey for sharing of information with respect to taxes. The Agreement shall enter into force from 11th June, 2012.

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Direct Taxes

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Income tax (12th amendment) Rules, 2012 – Insertion of Rule 21AB and Forms 10FA and 10FB- Notification no- 39/2012 [F.No. 142/31/2011-TPL] dated 17th September, 2012

The Rule prescribes the particulars that must be included in a Tax Residency Certificate, which a nonresident would obtain, from the Government of the country or the specified territory of which he is a resident. The Rule also provides that a person being a resident in India, shall, for obtaining a certificate of residence for the purposes of an agreement referred to in section 90 and section 90A, make an application in Form No. 10FA to the Assessing Officer and the Assessing Officer shall issue a certificate of residence in Form No. 10FB. The Rule will come into force from 1st April, 2013.

Income tax (13th Amendment) Rules, 2012 – Debt securities issued by infrastructure finance companies which are registered with RBI are now included in the list of eligible investments u/s. 11(5) for Charitable trusts – Notification no 40 dated 20th September 2012 

Income tax (14th Amendment) Rules, 2012 – Notification no 42 dated 4th October, 2012

In case of search and requisition, specified categories of assessees have been notified wherein assessment/ reassessment notice would not be issued by AO for six assessment years immediately preceding the year for which assessment is in progress as prescribed in these rules.

Annual detailed Circular on Deduction of tax from Salaries during the Financial Year 2012-13 – Circular No. 8 of 2012 [F.No. 275-192-2012-IT(B)] dated 5th October, 2012

TDS on payment of gas transportation charges – Circular No 9/2012 dated 17th October, 2012

The Board has clarified that so long, as it can be established that the transportation of the gas is furtherance to the actual sale of natural gas by the seller, TDS provisions will not be triggered since essentially it is ‘contract of sale’ and not ‘works contract’. In case a third party transports gas, TDS would apply u/s. 194C of the Act.

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Direct Taxes

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Explanatory Notes to the Provisions of the Finance Act, 2013 – CIRCULAR No. 3/2014 [F.NO.142/24/2013-TPL], dated 24-01-2014

The CBDT has issued a press release dated 30-01-2014 to keep in abeyance the change in the procedure for PAN allotment, which was introduced vide Circular No. 11 dated 16-01-2014. In the meantime, the old procedure of PAN application and allotment shall continue.

Relaxation of time limit for filing ITR-V – CIRCULAR No. 4/2014 [F.NO.225/198/2013-ITA. II], dated 10-02-2014

The due date for filing ITR-V form for Assessment years 2009-10, 2010-11 and 2011-12 for returns e-filed within the time allowed u/s. 139 and having refund claims is extended upto 31-03-2014

Clarification regarding disallowance of expenses u/s. 14A of the Act – CIRCULAR No. 5/2014 [F.NO.225/182/2013-ITA. II], dated 11-02-2014

CBDT has clarified that disallowance u/s. 14A shall be attracted in even if the assessee has not earned any exempt income in that particular year.

Clarification regarding scope of additional income tax on distributed income u/s. 115R of the Act – CIRCULAR No. 6/2014 [F.NO.225/182/2013-ITA. II], dated 11-02-2014

CBDT has clarified that receipts by way of redemption/ repurchase of mutual fund units of allotment of bonus units are not subject to levy of additional income tax u/s. 115R (2) of the Act.

Finance Bill 2014, introduced in the Lok Sabha on 17-02-2014

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Direct Taxes

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DTAA between India and Singapore amended — Notification No. 47/2011, dated 1-9-2011.

DTAA between India and Taipei notified — Notification No. 48/2011, dated 2-9-2011.

Procedure for regulating refund of excess amount of TDS deducted and/or paid — Circular No. 6/2011, dated 24-8-2011.

The CBDT vide Circular No. 2/2011, dated 27-4-2011 had notified the procedure to claim excess amount of TDS deducted/paid from the Assessing Officer (TDS) wherein a time limit of two years from the end of the financial year in which such tax was deducted was laid down. This condition is relaxed for the refund claims pertaining to the period up to 31-3-2009 which may now be submitted to the Assessing Officer (TDS) up to 31-12-2012.

Long-Term Infrastructure Bonds notified — Notification No. 50/2011, dated 9-9-2011.

For the purpose of section 80CCF, CBDT has notified conditions to qualify as Long-Term Infrastructure Bonds, namely:

They shall be issued by IFCI, LIC, IDFC, IIFC and NBFC as classified by RBI as Infrastructure Finance Company during financial year 2011- 2012.
The volume of issuance would be limited to 25% of the additional infrastructure investment (as specified) made by the issuer company during financial year 2011-2012.
Tenure of the Bonds would be ten years with a lock-in period of 5 years. Post that the investor would have the option to sell in the secondary market or opt for buyback scheme as mentioned in the offer document at the time of issue by the issuer. Loan, lien, etc. available post lock-in period.

PAN submission during investment is mandatory.

The yields and the end use of the proceeds have been specified.

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Appeal to Appellate Tribunal — Ex-parte order — Powers of Tribunal — Tribunal has the power to set aside ex-parte order — Matter remanded to the Tribunal to decide the appeal on merits.

51 Cement Corporation of India Ltd vs. ACIT

[2023] 456 ITR 61 (Del.)

A.Y.: 2011–12; Date of Order: 6th February, 2023

S. 254 of ITA 1961 and Rule 24 of Income-tax Rules, 1962

Appeal to Appellate Tribunal — Ex-parte order — Powers of Tribunal — Tribunal has the power to set aside ex-parte order — Matter remanded to the Tribunal to decide the appeal on merits.

By an order dated 24th January, 2018, the Tribunal dismissed the appeal filed by the assessee for non-appearance. The order was received by the assessee on 5th February, 2018. On 24th September, 2018, the assessee filed a miscellaneous application before the Tribunal praying for recalling the order dated 24th January, 2018 and requesting for hearing the appeal. The reason for non-appearance before the Tribunal was that the notice of hearing issued by the Tribunal was misplaced by the authorised officer of the assessee company. The assessee was unaware that its appeal had been dismissed and came to know about it only on 5th February, 2018. Further, the inadvertent delay in filing the miscellaneous application was due to the fact that the concerned employees were transferred to a plant outside Delhi and some of them even retired during the relevant period. The assessee thus submitted there was sufficient cause for delay.

The miscellaneous application was dismissed by the Tribunal on 7th September, 2022 on the ground that the time limit of six months for filing the miscellaneous application as provided by section 254(2) of the Income-tax Act, 1961, expired on 31st July, 2018. In the absence of power with the Tribunal to condone the delay in filing the miscellaneous application, the miscellaneous application came to be dismissed on the ground of limitation.

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

“i) According to rule 24 of the Income-tax (Appellate Tribunal) Rules, 1963, if on the date fixed for hearing by the Tribunal, or on any other date to which the hearing is adjourned, the appellant does not appear in person or through an authorized representative, when the appeal is called out for hearing, the Tribunal may dispose of the appeal on the merits or otherwise, after hearing the respondent. The proviso appended to the rule indicates that where an appeal has been disposed of on the merits, and the appellant appears thereafter, the Tribunal shall set aside the ex parte order and restore the appeal, if it is satisfied that there was sufficient cause for his non-appearance. Although in the main part of rule 24, the expression used is “may”, when read with the proviso appended thereto, it leads to the conclusion that if the Tribunal chooses to dispose of the appeal on the merits or otherwise, after hearing the respondent in the absence of the appellant, and the appellant, thereafter, appears and shows sufficient cause for not appearing on the date when the appeal is disposed of, the Tribunal is obliged, in law, to set aside the order passed and restore the appeal.

ii) Rule 24 of the 1963 Rules which does not have the impediment of limitation, as is prescribed u/s. 254 of the Income-tax Act, 1961. Under section 254, the Tribunal is also vested with incidental and ancillary powers which can be exercised in such situations such as in the assessee’s case. The issue involved in the appeal before the Tribunal which deserved a hearing on the merits, for the reasons that while there was a delay, the assessee had furnished reasons for explaining the delay that the notice of hearing issued by the Tribunal for the hearing on 24th January, 2018, was misplaced, and did not reach the concerned officer, that it was unaware of the passing of the dismissal order dated 24th January, 2018, and came to know about it only on 5th February, 2018, and that the inadvertent delay in filing the miscellaneous application was caused on account of the concerned persons having been temporarily transferred to a plant outside Delhi, and some persons retiring during the relevant period.

iii) The order of the Tribunal was set aside and the matter was remitted to the Tribunal for disposal of the assessee’s appeal on merits.”

Direct Taxes

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44.Extension of time limit for filing ITR V for AY 2010-11 and AY 2011-12 – Notification No 1/2012 under CPR Scheme 2011 dated 23-10-2012

The time limit for filing ITR V forms relating to returns filed electronically for AY 2010-11 (filed during financial year 2011-12) and AY 2011-12 (filed on or after 1 April 11) is extended. These ITR V forms can now be filed upto 31 December 2012 or 120 days from the date of e-filing the return whichever is later.

45.The Capital Gains Account (First Amendment) Scheme, 2012 – Notification no. 44/2012 dated 25-10-2012

Capital Gains Account Scheme, 1988 is amended to extend the benefit to Individuals and HUF, who have earned capital gains on transfer of a residential property and who intend to claim exemption u/s. 54GB of the Act.

46.Specified companies authorised to issue taxfree, secured, redeemable, Non-convertible Bonds during F.Y. 2012-13 – Notification no. 46/2012 dated 06-11-2012

CBDT has notified the companies eligible to issue bonds as prescribed u/s. 10(15) of the Act. Copy of the notification available on www.bcasonline.org.

47.India and United Kingdom have signed a protocol on 30th October, 2012 to amend the India – UK Treaty.

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Direct Taxes

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The CBDT has prescribed a new procedure for the above as under:

For deductions made during the current financial year viz. 2011-12, by companies including banking companies, banks, financial institutions including co-operative societies engaged in banking business, the deductors shall issue TDS certificates generated from the central system of the TIN website which can be downloaded and authenticated using either the digital signature or manual one. For other deductors for the current fiscal this facility is optional viz. they can issue a manual TDS certificate else follow the above procedure.

For deductions made in last year viz. 2010-11, all the deductors have the option of either downloading the Form 16A from the website or issuing a manual one.

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Direct Taxes

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Central Government notifies the National Commodity and Derivatives Exchange Limited, Mumbai as a recognised association for the purposes of clause (e) of the proviso to section 43(5) of the Act with effect from the date of publication of this notification in the Official Gazette – Notification No. 90 dated November 27, 2013.

Last date of payment of the December Quarter Instalment of Advance Tax for the Financial year 2013-14, extended from 15th December 2013 to 17th December 2013 for all the assesses – Order F.No 385 – 8 – 2013-IT(B) dated 13th December 2013.

Central Government has introduced Rajiv Gandhi Equity Savings Scheme, 2013 encourage investment of savings of small investors in the domestic capital market. Investment made in this scheme on or after April 1, 2013, shall be eligible for deduction under section 80CCG of the Act – Notification No. 94 dated 18th December 2013385-8-2013-IT

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Direct Taxes

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Wealth tax (1st Amendment) Rules, 2014 – Notification No. 32/2014 dated 23rd June, 2014

Return of Wealth for AY 2014-15 and onwards, is required to be filed in Form BB. No enclosures are required to be filed along with this form. Form BB is to be filed electronically with digital signature. Individuals and HUFs, to whom provisions of section 44AB are not applicable, have an option for AY 2014-15, to file the return in Form BB in paper form. A separate set of Instructions have been issued to guide the assessees file the return of net wealth in the new Form

A Press Release dated 4th July 2014 is issued to provide that all taxpayers are required to update and validate their taxpayer Email ID and Mobile Number on the Income tax website for their e-filing account

Revision of monetary limits for filing of appeals by the Department before Income Tax Appellate Tribunal, High Court and Supreme Court – measures for reducing litigation – Instruction No. 5/2014 dated 10th July 2014 available on www. bcasonline.org

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Direct Taxes

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Procedure for response to arrears of demand by assessees and verification and correction of demand by assessing officers – Circular No. 8/2015 dated 14.05.2015

CBDT has laid down detailed procedure to be followed by the assessee on the CPC demand portal when they receive a notice for arrears of demand. It has been provided that the assessee can either

accept the demand and pay it or refund due, if any would be adjusted.

Can partially accept the demand and mention the correct amount and payment thereof.

Can claim that the demand is incorrect and then choose the reasons for the same. Based on the option selected, the assessee needs to furnish additional information like challan details, etc to support its claim.

Option is also available for sorting the matter offline with the assessing officer with the requisite paper trail.

There are guidelines for the Assessing Officer for processing the cases for verification and correction of arrears of demand. A format for the Indemnity bond has also been notified.

No TDS on Corporations established for the welfare and upliftment of ex-service men served for armed forces under Section 10(26BBB) of the Act – Circular No. 7/2015 dated 23rd April 2015

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Direct Taxes

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84. New tax returns forms notified – Notification No.- 61/2015
[F.No.142/1/2015-TPL dated 29 July, 2015 – Income tax (Tenth amendment)
Rules, 2015

New forms FORM ITR-3, FORM ITR-4, FORM ITR-5, FORM ITR-6 and FORM ITR-7 have been notified.

85. Due date for filing Return of wealth extended – Circular No. 328 dated 27 July 2015

86.
CBDT has extended the ‘due date’ for filing Return of Income for
assessment year 2015-16 in respect of assesses falling under clause (c)
of explanation 2 of sub-section (1) of section 139 of the Income-tax Act
from 31.7.2015 to 31.8.2015. In view of the same, the ‘due date’ for
filing Return of wealth by such assesses for assessment year 2015-16
also stands extended from 31st July 2015 to 31st August 2015.

87.
Rules 114F, 114G and 114H inserted and Form 61B introduced in respect
of registration of persons, due diligence and maintenance of
information, for matters relating to statement of reportable accounts
-Notification No. 62 [S.O. 2155(E)] dated 7 August 2015 – Income-tax
(11th Amendment) Rules, 2015

88. Rule 126 inserted for providing
method for Computation of period of stay in India in case of seafarers –
Notification No. 70 dated 17 August 2015 – Income-tax (Twelfth
Amendment) Rules, 2015

89. Clarification on grant of
approval and exemption claim for income of universities and educational
institutions u/s. 10(23C)(iv) of the Act- Circular no 14/2015 dated 17
August 2015

CBDT has clarified on issues like scope of
inquiry while granting approval, necessity for registration u/s. 12AA
while seeking approval /claiming exemption u/s. 10(23C) (iv) of the Act,
generation of surplus out of gross receipts, collection of amounts
under different heads of fees from students and impact of extraordinary
powers of the Managing Trustees to appoint, remove or nominate other
trustees in this Circular.

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Direct Taxes

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Due date for filing income tax returns extended from 31 August 2015
to 7 September 2015 – Notification no. F No. 225/154/2015/ITA. II dated 2
September 2015

CBDT has revised the monetary limits for Dossier
Cases requiring periodic review and reporting by various tax
authorities to have focused monitoring and rationalising the work load –
Instruction no. 10/2015 dated 16.9.2015

Additional
clarifications have been issued regarding tax compliance for undisclosed
foreign income and assets under The Black Money (Undisclosed Foreign
Income and Assets) and Imposition of Tax Rules, 2015 – Circular no. 15
dated 3 September 2015.

Guidance note issued by CBDT dated
31.08.2015 on implementation of reporting requirements for the US law
called “Foreign Account Tax Compliance Act” (FATCA).

Non-applicability of MAT on FIIs/ FPIs for period prior to 1.4.15 – Instruction No. 9/2015 dated 2.9.15 (reproduced alongside)

A
Committee on Direct Tax Matters chaired by Justice A. P. Shah, was
constituted to examine the issue of applicability of Minimum Alternate
Tax (‘MAT ’) on Flis/FPls for the period prior to 01.04.2015. The
Committee has submitted its final report to the Government on
25.08.2015. The Committee has recommended that section 115JB of the
Income-tax Act, 1961 (‘Act’) may be amended to clarify the
inapplicability of the provisions of section 115JB to FlIs/FPls having
no permanent establishment (PE)/place of business in India. The
Government has accepted the said recommendation and it has been decided
to carry out appropriate amendment in the Act so as to prescribe that
MAT provisions will not be applicable to Flls/FPls not having a place of
business/permanent establishment In India, for the period prior to
01.04.2015.

The field authorities are accordingly advised to
take into consideration the above position and keep in abeyance, for the
time-being, the pending assessment proceedings in cases of Flls/FPls
involving the above issue. They are further advised not to pursue the
recovery of outstanding demands, if any, in such cases.

(Rohit Garg)
Deputy Secretary to the Government of India
F. No. 225/237/2015-ITA -II

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Direct Taxes

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Due date for obtaining and filing tax audit report for the assessment year 2014-15 is extended to 30th November, 2014 – Notification No. F.No.133/24/2014-TPL dated 20th August, 2014

CBDT extends the due date for obtaining and filing the tax audit report u/s. 44AB of the Act for non-transfer pricing assessees to 30th November, 2014 since new formats have been issued for tax audit report. It has been clarified, that the tax audit report filed till 24th July, 2014 in the old format will be treated as valid reports.

Committee constituted for deciding on cases covered under the retrospective amendments relation to transfer of assets – Notification No. F.No. 149/141/2014-TPL dated 28th August, 2014

CBDT has passed an order u/s. 119 of the Act constituting a Committee consisting of three members of the CBDT viz. i) Joint Secretary (FT&TR-I), (ii) Joint Secretary (TPLI) and (iii) Commissioner of Income-tax (ITA ).

Any case pertaining to period before 1st April, 2014 wherein the AO feels that income deems to accrue or arise in India through transfer of capital assets in India as covered under the Amendments made u/s. 2 (14), 2(47), 9(1)(i) and section 195, such case would be referred to this Committee subject to conditions prescribed. The AO needs to seek approval from the Committee for any action in this matter. The Committee after giving an opportunity to the assessee, shall endeavor to decide the reference within 60 days of the receipt of the reference in writing, a copy of which would be given to the assessee. The decision of the Committee would be binding on the AO. The AO would proceed in the matter following the directions of the Committee.

CBDT has issued an office memorandum to all the officers instructing them to maintain the schedule of appointment given to the tax payers and not wasting their time by making them wait. – F.N.: DIR(Hqrs)./Ch.DT/20/2013 dated 22nd August, 2014

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Direct Taxes

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Clarification regarding transfer of technical manpower in case of units eligible for deduction u/s. 10A/10AA of the Act applicable to the software industry – Circular No. 14 dated 8th October, 2014

As per the provisions of Section 10A/10AA of the Act read along with Circular no. 12/2014, if upto 20% of technical manpower is transferred from existing unit to new SEZ unit within the first year of commencement of business, it will not be construed as splitting up or reconstruction of an existing business. The upper limit of 20% has been enhanced to 50% of the total technical manpower actually engaged in software development or IT enabled products at the end of the financial year. Alternatively the assessee can also demonstrate that it employed new technical manpower in all its units put together which is at least equal to 50% of the technical manpower of the SEZ unit in the previous year. If either of the two conditions are fulfilled deduction u/s. 10A/10AA of the Act cannot be denied.

A – 12 Point Memorandum has been issued by the CBDT to the assessing officers to ensure a non-adversarial tax regime – F. No. 279/ Misc./52/2014-(ITJ) dated 7th November, 2014 (full text available on www.bcasonline.org)

Erstwhile Bank Term Deposit Scheme,2006 has been revived as Bank Term Deposit (Amendment) Scheme, 2014 effective 13th November, 2014 with the investment limit of Rs. 1,50,000/- u/s. 80C of the Act – Notification No. 63/2014 dated 13th November, 2014

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Direct Taxes

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Cost Inflation Index for Financial year 2015-15 notified as 1081 – Notification No. 60/2015 dated 24th July 2015

Business relationship with auditor clarified under Section 288 of the Act – Notification No. 50 dated 24th June 2015 – Income tax (Ninth Amendment) Rules, 2015

Definition of Accountant is provided in section 288 of the Act,. Rule 51A is inserted , which prescribes the nature of “Business Relationship” for the purposes of sub-clause (viii) of Explanation to section 288(2), which section deals with persons who can act as the Authorised representative of an assessee

i) Sub-clause (viii) provides that a Chartered accountant, holding a valid certificate of practice, may appear as an “authorised representative” before any income tax authority or appellate Tribunal , provided he is not “a person who has business relationship with the assessee of such nature as may be prescribed”.
ii) CBDT now provides that the term “business relationship” shall be construed as any transaction entered into for a commercial purpose.
iii) However, it has excluded commercial transactions in the nature of professional services permitted to be rendered by an auditor, from the ambit of “business relationship”.
iv) Further, it has also excluded commercial transactions entered in the ordinary course of company’s business at arm’s length price, like sale of products or services to the auditor, as customer, by companies engaged in the business of telecommunications, airlines, hospitals and such other similar businesses.

Following Circulars and notifications have been issued in respect of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 and Rules thereunder

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act (Removal of Difficulties) Order, 2015- [Notification No. 56 dated 1st July 2015]

Dates for disclosure of Black Money (Undisclosed Foreign Income and Assets)and Imposition of Tax Act, 2015 (22 of 2015) – [Notification No. 57 dated 1st July 2015]

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015 [Notification No. 58 dated 2nd July 2015]

Explanatory notes on provisions relating to tax compliance for undisclosed foreign income and assets as provided in chapter vi of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 [Circular No.12 dated 2nd July 2015]

Clarifications on Tax Compliance for Undisclosed Foreign Income and Assets [Circular No.13 dated 6th July 2015]

Eligible Institutions with upper limits for issue of tax free secured redeemable non-convertible bonds during the financial year 2015-16 and conditions prescribed – Notification No. 59/2015 dated 6th July 2015

Due date of filing ITR V for AY 2013-14 and AY 2014-15 for returns filed electronically extended till 31st October 2015 or 120 days from filing the return whichever is later.

Procedure laid down for generating and using the Electronic Verification Code for returns to be E-filed verifying the assessee filing the return of income- Notification no. 2/2015 dated 13th July 2015

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Article 12(5) of India-Finland DTAA — Services are performed at the place where service is used and not where services are rendered — In absence of make available clause in India-Finland DTAA, consideration is chargeable to tax in India; Article 21 of India-Finland DTAA — Since providing corporate guarantee was not business activity but shareholder obligation, corporate guarantee fee was Other Income covered under Article 21 of India-Finland DTAA.

8 Metso Outotec OYJ, (Earlier Known as Outotec Oyj) vs. DCIT

[2023] 153 taxmann.com 723 (Kolkata – Trib.)

ITA No: 300/Kol/2022; ITA No: 269/Kol/2023

A.Ys.: 2018–19 & 2020–21

Date of Order: 29th August, 2023

Article 12(5) of India-Finland DTAA — Services are performed at the place where service is used and not where services are rendered — In absence of make available clause in India-Finland DTAA, consideration is chargeable to tax in India; Article 21 of India-Finland DTAA — Since providing corporate guarantee was not business activity but shareholder obligation, corporate guarantee fee was Other Income covered under Article 21 of India-Finland DTAA.

FACTS

Assessee, a tax resident of Finland, had provided IT services to Indian AE (“I Co”) and received consideration from I Co for such services. In view of Assessee, since it had performed IT services in Finland, and since it did not have PE in India, consideration received, therefore, was not chargeable to tax in India in terms of Article 12(5) of India-Finland DTAA1 .

Further, Assessee had provided corporate guarantee for I Co and received corporate guarantee fee from I Co. In view of Assessee, corporate guarantee fee was business income and since Assessee did not have PE in India, it was not taxable in India.

AO did not agree with the contentions of the Assessee and brought both receipts to tax. DRP ruled that services are performed at the place where beneficiaries can use them and guarantee fees are in the nature of parental support taxable as other income.

Being aggrieved, the Assessee filed an appeal before the Tribunal.

HELD

Income from IT Service

• Assessee had rendered specific services for the use of I Co. As India-Finland DTAA does not have a ‘Make Available’ clause, consideration for providing such services was taxable in India.

• ITAT followed its earlier decision in Assessee’s case2, wherein it had held that the performance-based rule in Article 12(5) was not applicable to the case of Assessee for the reasons given on the next page:
• Payment was made for test results which were used in India.

• Though Assessee may have conducted a process of testing outside India, I Co had made payment not for use of the process but for the results of testing which were used by I Co in India.

Income from corporate guarantee fee

• The main line of business of Assessee was to carry on, by itself, or through its subsidiary, the design, manufacture and construction of trade machinery, devices, etc.

• Giving of guarantee was a routine activity. It was the obligation of the Assessee towards its subsidiary. It was more like a shareholder obligation than a service activity.

• Giving of guarantee was not a business activity of Assessee, which was evident from the fact that except for I Co, Assessee had not given guarantee for anyone else.

• The fee received for giving corporate guarantee was in the nature of other income, which was covered under Article 21 of India-Finland DTAA.

Note: Article 21(3) of India-Finland DTAA provides items of income of a resident of a Contracting State not dealt with in other Articles of DTAA and arising in the other Contracting State may be taxed in that other State. The decision has not dealt with the aspect of place or situs where corporate guarantee arises.

1 “Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is … a resident of that State. Where, however, … the fees for technical services relate to services performed, within a Contracting State, then such … fees for technical services shall be deemed to arise in the State in which the right or property is used or the services are performed ….”
2 Outotec (Finland) Oy vs. DCIT [2019] 109 taxmann.com 69 (Kol. – Trib.)

Direct Taxes

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TDS under section 195 of the Act relating to payments to non-residents – Instruction no. 2/2014 dated 26 .02.2014 (available on bcasonline.org)

Ex-post facto extension of due date for filing TDS/TCS statements for FYs 2012-13 and 2013-14 for Government deductors -Circular No. 07/2014 dated 4th March, 2014

CBDT has extended the due date of filing of the TDS/TCS statement as prescribed under Section 200(3) /proviso to Section 206C(3) of the Act read with Rule 31A/31AA of the Income-tax Rules, 1962 to 31.03.2014 for a Government deductor and mapped to a valid AIN for –

(i) FY 2012-13 – 2nd to 4th Quarter
(ii) FY 2013-14 – 1st to 3rd Quarter

CBDT extends the due date of payment of final installment of advance tax to 18th March 2014 –F.No.385/8/2013-IT(B) dated 14 th March 2014

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Direct Taxes

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A resident can seek Advance ruling in relation to his tax liability arising out of one or more transactions undertaken or proposed to be undertaken by him , which has an aggregate value of rupees one hundred crore or more – Notification No. 73 dated 28th November 2014

Income-tax (12th Amendment) Rules, 2014 – Amendment in Rule 44E and introduction of Form 34DA – Notification Notification No. 74 dated 28th November 2014 [S.O.3015 (E)] –
Amendment in the procedure for making an application to the Advance Ruling Authority. A specified resident to make an application to the Advance Ruling Authority in Form 34DA .

Income-tax (13th Amendment) Rules, 2014 –- Rule 2BBA inserted Notification No. 79 dated 12th December 2014 [S.O. 3168 (E)] –

For the purposes of sub-Clauses (iiiab) and (iiiac) of Clause (23C)of section 10, any university or other educational institution, hospital or other institution referred therein, shall be considered as being substantially financed by the Government for any previous year, if the Government grant to such university or other educational institution, hospital or other institution exceeds fifty percent. of the total receipts including any voluntary contributions, of such university or other educational institution, hospital or other institution, as the case may be, during the relevant previous year.

TDS on Salaries for Financial year 2014-15: Circular no. 17/2014 dated 10th December 2014

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Direct Taxes

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Agreement between India and USA for implementation of Foreign Account tax Compliance Act of USA (FATCA) – Notification no. 77/2015 dated 30th September 2015

Due date for e-filing returns of income and audit reports extended from 30th September, 2015, to 31st October, 2015 – Circular No. F.No. 225-207- 2015-ITA.II dated 1st October 2015

CBDT simplifies procedure for furnishing NIL withholding declarations

Notification No. 76/2015/F. No.133/ 50/ 2015 -TPL dated 29th September 2015.

Under the new procedure effective from 1st October 2015, payees have the option to furnish declarations in Form 15G/H in paper format or electronic format. The payer will assign a Unique Identification Number (UIN) to each declaration and include the said information of UIN in quarterly withholding tax return. Under the new procedure, physical furnishing of copies of declarations to the Tax Authority on a monthly basis is not required. It will now form part of reporting in the quarterly withholding statements. The payers are required to preserve the declarations for a period of seven years from the end of the financial year in which declarations are received and make them available to the Tax Authority on requisition.

Validation of tax-returns through Electronic Verification Code – Circular No. F.No. 225-141- 2015-ITA.II dated 6th October 2015

Returns of income which are filed on or after 01.04.2015 electronically (without digital signature certificate) for Assessment Year 2014-2015 or returns filed in response to various statutory notices as prescribed under the Act or returns filed as a consequence of condonation of delay u/s. 119 of the Act can also be validated through EVC.

Claim for Medical expenses under section 80DDB of the Act

Notification No. – S.O. No.2791 (E) on 12th October 2015 – Income tax (Fifteenth amendment) Rules, 2015

The amended Rule 11DD relaxes the condition of obtaining the certificate for claiming expenditure under section 80DDB in respect of specified ailments. As per amended Rule 11DD, the prescription can be issued by any specialist mentioned in the amended Rule and not necessarily from a specialist working in a Government hospital.

Revised and Updated Guidance for Implementation of Transfer Pricing Provisions

Direct Tax Instruction No. 15 dated 16th October 2015 and Notification No. 83/2015 dated 19th October 2015

Income from display of rough diamonds in Special Notified Zone carried-out on or after 1st April, 2015 not to be taxable under the provisions of the Income

PIB Press Release dated 16th October 2015

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Direct Taxes

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New tax returns forms notified – Notification no- 28/2014 [S.O. 1418(E) dated 30th May, 2014 – Income tax (Sixth amendment) Rules, 2014

New forms ITR 3, ITR 4 , ITR 5, ITR 6 and ITR 7 have been notified.

Further Rule 12 has been amended with effect from 1st April, 2014 to provide mandatory electronic filing of audit report u/s.10AA, 44DA, 50B and 115VW from A.Y. 2014- 15.

Agreement for Exchange of information for collection of taxes between the Government of India and the Government of the Principality of Liechtenstein to have effect for all requests made in respect of taxable periods beginning on or after 1st April, 2013 – Notification No. 30 /2014 dated 6th June 2014

Cost inflation index for F.Y. 2014-15 is 1024 – Notification No. 31 /2014/ [F.No. 142/3/2014- TPL] dated 11th June, 2014

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Direct Taxes

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Guidelines for notification of Semi conductor Wafer Fabrication manufacturing unit u/s. 35AD of the Act – Notification No. 80/2014 dated 12th December 2014.

CBDT has issued Income-tax (14th Amendment) Rules, 2014 inserting Rule 11 – OB which prescribes broad guidelines. The assessee can apply for notification of the Unit in Form no. 3CS (notified). The Rule also prescribes the conditions under which the notification of the unit can be withdrawn.

CBDT has created a Standard Operating Procedure for TDS credit Mechanism – copy of the same is available on www.bcasonline.org

CBDT has issued a letter prescribing guidelines for Compounding of offences under Direct tax laws 2014 – F.No. 285/35/2013/IT/(Inv.V)/dated 23rd December 2014 – copy of the same is available on www.bcasonline.org

With effect from 01-01-2015, all applications received for compounding of offences would be governed by these guidelines. The offences have been classified into two categories and criteria for compounding of offences for each category, procedure for making application and how they would be dealt with have been prescribed in detail.

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Direct Taxes

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55. Explanatory notes to the provisions of Finance (No 2) Act, 2014 – Circular No. 1 dated 21 January 2015

56. CBDT has issued instruction regarding acceptance of the Order of the Hon’ble High Court of Bombay in the case of Vodafone India Services Pvt. Ltd.- Instruction No. 2 dated 29 January 2015

57. Interest under section 234A of the Act not to be charged on the self assessment tax paid before the due date of filing of the return – Circular no. 2/2015 dated 10 February 2015

58. TDS/TCS is deducted but not deposited within the due date – Circular dated 2 February 2015

All cases where TDS/TCS is deducted but not deposited within the due date, as prescribed, are punishable u/s 276B/276BB or 278A. The selection of cases and their processing is governed by Instruction F.No. 285/90/2008-IT(Inv-I)/05 dated 24th April 2008 which has been modified by the CBDT [vide F.No.285/90/2013- IT(Inv.)] dated 7th February 2013. Presently, the monetary limit specified for cases to be considered for prosecution is as under:-

(i) Cases, where amount of tax deducted is1,00,000 or more and the same is not deposited by the due date as prescribed shall mandatorily be processed for prosecution in addition to the recovery.

(ii) Cases, where the tax deducted is between Rs. 25,000 and Rs. 1,00,000 and the same is not deposited by the due date as prescribed may be processed for prosecution depending upon the facts and circumstances of the case, like where there are instances of repeated defaults and/or tax has not been deposited till detection.

The circular further prescribes the procedure for identification of cases of default, launching prosecution and standard operating procedure defining role of various TDS authorities in addressing the issue of prosecution and compounding of TDS cases.

59. Protocol amending the DTAA between India and of South Africa for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income shall come into force from 26th November, 2014-Notification No. 10-2015-FT and TR-II dated 2nd February 2015

60. Income-tax (2nd Amendment) Rules, 2015 – Amendment in Rule 44E and introduction of Form 3CEFB – Notification No. 11 dated 4th February 2015[S.O.350(E)]

CBDT prescribes Safe Harbour Rules for specified Domestic Transactions which areapplicable for a Government company engaged in generating and supply of electricity, transmission of electricity, wheeling of electricity and Form No. 3CEFB prescribed.

61. Commodities Transaction Tax (First Amendment) Rules, 2014 – Amendment in Rule 3 – Notification No. 13 dated 10th February 2015 [F.No. 142-09-2013-TPL]

62. Clarification regarding amounts not deductible under section 40(a)(i) of the Act – Circular No. 3 dated 12th February 2015

As per the Instruction No. 2/2014 dated 26-02-2014 of CBDT, it has been clarified that under the provisions of section 195 of the Act the AO will determine the appropriate portion chargeable to tax on which TDS should have been deducted in case of prescribed foreign remittance. Now CBDT clarifies that the disallowance u/s. 40(a)(ia) of the Act would be connected to such appropriate amount and not the entire sum remitted.

63. CBDT Lays down procedure for launching prosecution for TDS / TCS defaults – copy of the same is available on www.bcasonline.org

64. Clarification regarding aaplicability of Section 143(1D) of the Act – Instruction no. 1 of 2015 dated 13 January 2015

CBDT has clarified that in case notice has been issued u/s. 143(2) of the Act for scrutiny, then the return need not be processed u/s. 143(1D) of the Act. Also the scrutiny assessment would be completed expediously in such cases.

65. Statement of income to be furnished by business trusts to prescribed authorities and unit holders in prescribed Form 64A and Form 64B – respectively – Income tax (1st Amendment) Rules 2015 – Notification no. 3/2015 dated 19.1.15

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Direct Taxes

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Applications for condonation of delay in filing refund claim and claim of carry forward of losses under section 119(2)(b) of the Act : Circular No. 9 dated 9 June , 2015

Clarifications on Roll back provisions of Advance Pricing Agreement scheme : Circular No. 10/2015 dated 10 June, 2015

Revision Application under section 25 of the Wealth tax Act – Circular No. 11 dated 11 June, 2015

Due to the amendment made by Finance Act, 2013 to sub clause (b) of Explanation 1 to Section 2(ea), the term “urban land” does not include land classified as agricultural land in the records of the Government and used for agricultural purposes, with retrospective effect from 1.4.1993. Wealth tax paid on such land needs to be refunded. CBDT has authorised Principal Commissioner/Commissioner of Wealth tax to admit application for revision under section 25 of the Act from assessee seeking refund arising due to the amendment, after the expiry of period specified under section 25.

Draft rules for computation of Arm’s Length Price of an International Transaction or Specified Domestic Transaction undertaken on or after 1.4.2014 released for comments and suggestion of general public– F.No. 134/11/2015-TPL dated 21 May, 2015

Protocol amending the DTAA between India and Denmark signed on the 10 October, 2013 shall enter into force on 1 February, 2015- Notification No. 45 dated 22 May, 2015.

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Glimpses Of Supreme Court Rulings

5.  (2018) 400 ITR 9 (SC)

DIT
vs. S.R.M.B. Dairy Farming (P.) Ltd.

Dated:
23.11.2017


Appeal to
the High Court – Monetary Limits for Litigation by Department – Circular would
apply even to the pending matters but subject to two caveats provided in Surya
Herbal case

The
Supreme Court was concerned with the implementation of Instruction No.3 of
2011, dated February 9, 2011, providing for appeals not to be filed before the
High Court(s) where the tax impact was less than Rs.10 lakh which was issued in
supersession of the earlier Instruction No. 1979 of 2000, dated March 27, 2000.

The instruction/circular in
question was stated to have a prospective effect as per the revenue and, thus,
cases which were pending in the High Court and had been filed prior to the
instruction in question (Instruction No.3) but had tax effect of less than
Rs.10 lakh were, thus, required to be determined on their merits and not be
dismissed by applying the circular/instruction. 

The Supreme Court noted
that there had been a divergence of legal opinion on this aspect amongst the
High Courts.

The Madras High Court,
Kerala High Court, Chhattisgarh High Court and the Punjab and Haryana High Court
had taken a view that the existing circular/instruction prevailing at the
relevant time when the appeal/reference was made would apply and there would be
no retrospective application of the circular. 

On the other hand, the line
of reasoning adopted by the Bombay High Court, Madhya Pradesh High Court, Delhi
High Court and the Karnataka High Court was, that as the value of money went
down and the cases of the Revenue increased, the choking docket required such
an endeavour and there was no reason why the same policy should not be applied
to old matters to achieve the objective of the policy laid down by the Central
Board of Direct Taxes (“CBDT”). An earlier circular dated June 5, 2007 issued
by the Central Board of Direct Taxes was also taken note of which required all
the appeals pending before the court to be examined, with a direction to
withdraw the cases wherein the criteria for monetary limit as per the
prevailing instructions was not satisfied unless the question of law involved
or raised in the appeal referred to the High Court was of recurring nature, and
therefore, required to be settled by a higher court.

The Supreme Court noted
that the view adopted by the Delhi Court making the  Circular applicable to pending matters came
up before a three-Judges Bench of the Supreme Court in SLP(C) No.CC 13694 of
2011 titled CIT vs. Surya Herbal Ltd. (2013) 350 ITR 300 (SC).

According to the Supreme
Court, the aforesaid order, should have laid the controversy to rest. The
retrospective applicability of the Circular dated February 9, 2011 was not
interfered with, but with two caveats – (i) Circular should not be applied by
the High Courts ipso facto when the matter had a cascading effect; (ii)
where common principles may be involved in subsequent group of matters or a
large number of matters. In that matter it was opined that in such cases, the
attention of the High Court would be drawn and the Department was even given
liberty to move the High Court in two weeks.

The Supreme Court was of
the view that this order held the field and should continue to hold the field.
According to the Supreme Court therefore, the Circular would apply even to the
pending matters but subject to two caveats provided in Surya Herbal case (supra).      

 

6.  (2018) 400 ITR 26 (SC)

Mathur
Marketing Pvt. Ltd. vs. CIT

Dated:
12.09.2017

 

Appeal to
High Court – If an issue is raised specifically before the High Court and it
has not been taken into consideration by the High Court in passing the order,
the appropriate remedy for the aggrieved party would be to file an application
for review of the said order

Vide order dated August 10,
2017, the Supreme Court had permitted the appellant to examine as to whether
the oral arguments were advanced on substantial question No.3 raised in the
memo of appeal filed before the High Court u/s. 260A of the Income-tax Act,
1961.

An affidavit had been filed
on behalf of the appellant in which it had been stated that the issue of powers
of the Commissioner (Appeals) had come in appeal under Rule 46A and were
specifically raised before the High Court.

In that view of the matter,
the Supreme Court was of the opinion that, if indeed such issue was raised
specifically before the High Court and it had not been taken into consideration
by the High Court in passing the impugned order dated January 17, 2006, the
appropriate remedy for the appellant would be to file an application for review
of the said order.

 

7.  (2018) 400 ITR 23 (SC)

CIT
vs. Chet Ram (HUF)

Dated:
12.09.2017

Capital
Gains – Compulsory Acquisition – Enhancement of Compensation

In the appeals before the
Supreme Court, the only question that arose for consideration was as to whether
the respondents-assessees who had received some amount of enhanced compensation
as also interest thereon under an interim order passed by the High Court in
pending appeals relating to land acquisition matter were liable to be assessed for
income-tax in the year in which it has been received or not.

The Supreme Court noted
that in the case of CIT vs. Ghanshyam (HUF) (2009) 315 ITR 1 (SC), it
had considered the provisions of section 45(5) of the Act and had held that in
view of the amendment in the Act, the person who has received enhanced
compensation and interest thereon even by an interim order passed by the court
would be assessed to tax for that enhanced compensation.

Following the above
decision, the Supreme Court allowed the appeals setting aside the orders of the
High Court as also for the Tribunal and held that the Respondents were liable
to pay tax on enhanced amount of compensation and interest received by them
during the year in question.

 

8.  (2018) 400 ITR 141 (SC)

DCIT
vs. ACE Multi Axes Systems Ltd.      
A.Y.: 2005-06 Dated: 05.12.2017

Section
80IB – Deduction in respect of SSI – The scheme of the statute does not in any
manner indicate that the incentive provided has to continue for 10 consecutive
years irrespective of continuation of eligibility conditions. Applicability of
incentive is directly related to the eligibility and not de hors the same. If
an industrial undertaking does not remain small scale undertaking or if it does
not earn profits, it cannot claim the incentive

The
respondent-assessee was engaged in manufacture and sale of components/parts of
CNC lathes and similar machines. Its income was assessed for the assessment
year 2005-2006 at Rs. 1,79,82,653/-. However, the Commissioner of Income Tax,
interfered with the assessment u/s. 263 to the extent it allowed deduction u/s.
80IB(3) of the Act and directed fresh decision on the said issue vide order
dated 16th January, 2009. Thereafter, the Assessing authority on 14th
December, 2009 disallowed the claim of Rs. 75,81,910/- towards deduction u/s.
80IB(3). The same was upheld by the Commissioner in appeal and the Income Tax
Appellate Tribunal in second appeal. However, the High Court had reversed the
said orders and upheld the claim.

The issue before Supreme
Court was when once the eligible business of an assessee is granted the benefit
of deduction u/s. 80-IB on satisfaction of requisite conditions (including the
condition of being small-scale industry) in the initial assessment years,
whether such benefit can be denied for subsequent years [during the qualifying
period of ten consecutive years] when it ceases to be a small-scale industry.

The Supreme Court observed
that the scheme of the statute does not in any manner indicate that the
incentive provided has to continue for 10 consecutive years irrespective of
continuation of eligibility conditions. Applicability of incentive is directly
related to the eligibility and not de hors the same. If an industrial
undertaking does not remain small scale undertaking or if it does not earn
profits, it cannot claim the incentive. No doubt, certain qualifications are
required only in the initial assessment year, e.g. requirements of initial
constitution of the undertaking. Clause 2 limits eligibility only to those
undertakings as are not formed by splitting up of existing business, transfer
to a new business of machinery or plant previously used. Certain other
qualifications have to continue to exist for claiming the incentive such as
employment of particular number of workers as per sub-clause 4(i) of Clause 2
in an assessment year. For industrial undertakings other than small scale
industrial undertakings, not manufacturing or producing an Article or things
specified in 8th Schedule is a requirement of continuing nature.

The Supreme Court on
examination of the scheme of the provision held that there is no manner of
doubt that incentive meant for small scale industrial undertakings cannot be
availed by industrial undertakings which do not continue as small scale
industrial undertakings during the relevant period. Each assessment year is a
different assessment year, except for block assessment.

The Supreme Court was
unable to appreciate the logic of the observations made by the High Court that
the object of legislature is to encourage industrial expansion which implies
that incentive should remain applicable even where on account of industrial
expansion small scale industrial undertakings ceases to be small scale
industrial undertakings. According to the Supreme Court, incentive is given to
a particular category of industry for a specified purpose. An incentive meant
for small scale industrial undertaking cannot be availed by an Assessee which
is not such an undertaking. It does not, in any manner, mean that the object of
permitting industrial expansion is defeated, if benefit is not allowed to other
undertakings.

 

9.  (2018) 400 ITR 279 (SC)

CIT
vs. Chaphalkar Brothers

Dated:
07.12.2017

Capital or
revenue receipt – Subsidy – The object of the grant of the subsidy was in order
that persons come forward to construct Multiplex Theatre Complexes, the idea
being that exemption from entertainment duty for a period of three years and
partial remission for a period of two years should go towards helping the
industry to set up such highly capital intensive entertainment centres – The
fact that the subsidy took a particular form and the fact that it was granted
only after commencement of production would make no difference – The subsidy
was capital in nature

The Supreme Court was
concerned with a batch of appeals arising from the judgements dealing with
cases came from Maharashtra and West Bengal.

The Civil Appeals relating
to Maharashtra were concerned with the subsidy scheme of the State Government
which took the form of an exemption of entertainment duty in Multiplex Theatre
Complexes newly set up, for a period of three years, and thereafter payment of
entertainment duty @ 25% for the subsequent two years. The necessary amendment
in the Bombay Entertainments Duty Act to effectuate the aforesaid subsidy
scheme was first done by way of an ordinance before 4th December,
2001, which ultimately became part of an Amendment Act.

For the sake of
convenience, the Supreme Court took the facts of one of the matters before it,
namely, Civil Appeal Nos. 6513-6514 of 2012, the assessment order in that case
(dated 21.01.2006) found that the aforesaid scheme was really to support the
on-going activities of the multiplex and not for its construction. Since the
scheme took the form of a charge on the gross value of the ticket and
contributed towards the day to-day running expenses, the Assessing Officer held
that it was in the nature of a revenue receipt. The appeal filed before the
Commissioner met with the same fate and was dismissed substantially on the same
reasoning. However, the Income-Tax Appellate Tribunal by its judgment dated
30.06.2009, went into the matter in some detail, and after setting out the
object of the aforesaid scheme allowed the appeal of the assessee. The appeal
before the High Court was dismissed.

The Supreme Court applying
the tests contained in both Sahney Steel and Press Works Ltd. vs. CIT (228
ITR 253 (SC) as well as CIT vs. Ponni Sugars and Chemicals Ltd. (2008)
306 ITR 392 (SC), was of the view that the object, as stated in the
statement of objects and reasons, of the amendment ordinance was that since the
average occupancy in cinema theatres has fallen considerably and hardly any new
theatres have been started in the recent past, the concept of a Complete Family
Entertainment Centre, more popularly known as Multiplex Theatre Complex, has
emerged. These complexes offer various entertainment facilities for the entire
family as a whole. It was noticed that these complexes are highly capital
intensive and their gestation period is quite long and therefore, they need
Government support in the form of incentives qua entertainment duty. It
was also added that government with a view to commemorate the birth centenary
of late Shri V. Shantaram decided to grant concession in entertainment duty to
Multiplex Theatre Complexes to promote construction of new cinema houses in the
State. According to the Supreme Court the aforesaid object was clear and
unequivocal. The object of the grant of the subsidy was in order that persons
come forward to construct Multiplex Theatre Complexes, the idea being that
exemption from entertainment duty for a period of three years and partial
remission for a period of two years should go towards helping the industry to
set up such highly capital intensive entertainment centres. This being the
case, it was difficult to accept Revenue’s argument that it is only the
immediate object and not the larger object which must be kept in mind in that
the subsidy scheme kicks in only post construction, that is when cinema tickets
are actually sold. The Supreme Court opined that the object of the scheme is
only one-there was no larger or immediate object. According to the Supreme
Court the fact that object was carried out in a particular manner was
irrelevant, as had been held in both Ponni Sugar and Sahney Steel.

The Supreme Court therefore
had no hesitation in holding that the finding of the Jammu and Kashmir High
Court in Shree Balaji Alloys vs. CIT (2011) 333 ITR 335 (J&K) on the
facts of the incentive subsidy contained in that case was absolutely correct.
Once the object of the subsidy was to industrialise the State and to generate
employment in the State, the fact that the subsidy took a particular form and
the fact that it was granted only after commencement of production would make
no difference.

The Supreme Court further held that
since the subsidy scheme in the West Bengal case was similar to the scheme in
the Maharashtra case, being to encourage development of Multiplex Theatre
Complexes which are capital intensive in nature, and since the subsidy scheme
in that case was also similar to the Maharashtra cases, in that the amount of
entertainment tax collected was to be retained by the new Multiplex Theatre
Complexes for a period not exceeding four years, the West Bengal cases must
follow the judgement that had been delivered in the Maharashtra case.

 

Glimpses Of Supreme Court Rulings

17. Deemed dividend – Section 2(22)(e) – Decision of the Supreme Court in C.I.T., Delhi-II vs. Madhur Housing and Development Company (2018) 401 ITR 152 (SC)

National Travel Services vs. CIT (2018) 401 ITR 154 (SC)

The Assessee, a partnership firm consisted of three partners, namely, Mr. Naresh Goyal, Mr. Surinder Goyal and M/s. Jet Enterprises Private Limited having a profit sharing ratio of 35%, 15% and 50% respectively. The Assessee firm had taken a loan of Rs. 28,52,41,516/- from M/s Jetair Private Limited, New Delhi. In this Company, the Assessee subscribed to the equity capital of the aforesaid Company in the name of two of its partners, namely, Mr. Naresh Goyal and Mr. Surinder Goyal totaling 48.19 per cent of the total shareholding. Thus, Mr. Naresh Goyal and Mr. Surinder Goyal were shareholders on the Company’s register as members of the Company. They held the aforesaid shares for and on behalf of the firm, which happened to be the beneficial shareholder.

The question that arose before the Supreme Court in this appeal was, as to whether section 2(22)(e) of the Act was attracted inasmuch as a loan had been made to a shareholder, who was a person who was the beneficial owner of shares holding not less than 10% of the voting power in the Company, and whether the loan was made to any concern in which such shareholder was a partner and in which he had a substantial interest, which is defined as being an interest of 20% or more of the share of the profits of the firm.

Before the Supreme Court, the assessee relied upon the judgement of the Delhi High Court in CIT vs. Ankitech Private Limited (2012) 340 ITR 14 (Del) in which it was held that the expression “shareholder” would mean a registered shareholder and also placed on an order dated 05.10.2017 passed by the Supreme Court in Civil Appeal No. 3961 of 2013 [C.I.T., Delhi-II vs. Madhur Housing and Development Company] in which the Supreme Court had expressly affirmed the reasoning of the Delhi High Court and contended that it was clear that the firm, not being a registered shareholder, could not possibly be a person to whom section 2(22)(e) would apply.

The Supreme Court, after hearing the parties was of the view that Ankitech’s case was wrongly decided. According to the Supreme Court, “shareholder”, post amendment, had only to be a person who is the beneficial owner of shares. One cannot be a registered owner and beneficial owner in the sense of a beneficiary of a trust or otherwise at the same time. It was clear therefore that the moment there is a shareholder, who need not necessarily be a member of the Company on its register, who is the beneficial owner of shares, the section gets attracted without more. To state, therefore, that two conditions have to be satisfied, namely, that the shareholder must first be a registered shareholder and thereafter, also be a beneficial owner was not only mutually contradictory but was plainly incorrect.

The Supreme Court was prima facie of the view that the Ankitech judgement (supra) required to be reconsidered, and therefore, directed that the matter be placed before the Hon’ble Chief Justice of India in order to constitute an appropriate Bench of three learned Judges in order to have a relook at the entire question.

Note: This issue had been discussed in Closements in the BCAJ published in December, 2017 and January, 2018.

18. Wealth-tax – Valuation of asset – Section 7(2)(a) is discretionary and enabling provision to Wealth Tax Officer to adopt the method as laid down in section 7(2)(a) for a running business, but the above enabling power cannot be held as obligation or shackles on right of Assessing Officer to adopt an appropriate method

Bimal Kishore Paliwal and Ors. vs. Commissioner of Wealth Tax (2017) 398 ITR 553 (SC)

G.D. & Sons of which firm the Appellants were partners, purchased land and building in semi-constructed condition on 04.06.1965 for a sum of Rs. 8,00,000/-. The construction was completed and Cinema Theatre, Alpana started running in the premises. The Alpana Cinema property was valued by assessment books of accounts. On pending assessment of Wealth Tax of one of the partners, the Wealth Tax Officer made a reference for valuation of the Alpana Cinema to Department Valuation Officer, New Delhi by Reference dated 29.04.1976. Valuation Officer after inspecting the site submitted its report dated 26.04.1977 valuing the property for assessment year 1970-71, 1971-72, 1972-73, 1973-74 and 1974-75. Notices u/s. 17 of the Wealth Tax Act, 1957 were issued to the Appellants on 30.03.1979. Assessees got the property valued by an approved Valuer adopting income capitalisation method. The assessment order was passed by the Wealth Tax Officer in March, 1983 making assessment for the period from 1970-71 to 1974-75. The assessment was completed as per percentage of the right of different Assessees which they had in the Firm. The Assessing Officer relied on the Valuation Report submitted by the Departmental Valuer. The Assessee, aggrieved by the assessment order, filed appeal before the Appellate Assistant Commissioner of Wealth Tax. The Appellate Authority by its detailed order dated 23.01.1986 affirmed the assessment made by the Assessing Officer on the basis of valuation by land and building method. The income capitalisation method as was relied on by the Assessee was not approved.

Being aggrieved by the different assessment orders the Assessees filed Wealth Tax Appeal before the Income Tax Appellate Tribunal (ITAT), Delhi Bench, Delhi. The ITAT accepted the case of the Assessee to the effect that the proper basis for valuing the Cinema building would be capitalisation of the income. The ITAT held that since the building could be used only for film exhibition and it cannot be used for any other purpose, the method of its valuation has to be necessarily different from the one normally adopted in the case of buildings which are capable of being used as commercial buildings. The Revenue, aggrieved by the Tribunal’s order filed reference application through Department. Although, initially the same was rejected by the Tribunal, on the direction of the High Court two questions were referred to the High Court for decision.

The High Court vide its judgment and order dated 21.10.2005 answered the questions in favour of Revenue and against the Assessee. The High Court held that Wealth Tax Officer was justified in adopting the land and building method. The High Court held that yield/rent capitalisation method would not be correct method of valuation of the property in question.

The Supreme Court noted that sub-section (2) of section 7 begins with non obstante Clause which enables the Wealth Tax Officer to determine the net value of the assets of the business as a whole instead of determining separately the value of each asset held by the Assessee in such business. The language of s/s. (2) provides overriding power to the Wealth Tax Officer to adopt and determine the net value of the business having regard to the balance-sheet of such business. The enabling power has been given to Wealth Tax Officer to override the normal Rule of valuation of the properties, that is the value which it may fetch in open market, Wealth Tax Officer can adopt in a case where he may think it fit to adopt such methodology.

The Supreme Court noted that the Appellants’ submission was that the provision of section 7(2)(a) is a stand alone provision and is to be applied in all cases where Assessee is carrying on a business.

The Supreme Court however, did agree with the above submission.

The Supreme Court held that overriding power has been provided to override the normal method of valuation of property as given by s/s. 7(1) to arm the Wealth Tax Officer to adopt the method of valuation as given in s/s. (2)(a). The purpose and object of giving overriding power is not to fetter the discretion. The Wealth Tax Officer is not obliged to mandatorily adopt the method provided in section 7(2)(a) in all cases where Assessee is carrying on a business. The language of s/s. (2)(a) does not indicate that the provisions mandate the Wealth Tax Officer to adopt the method in all cases of running business.

The Supreme Court pointed out in Juggilal Kamlapat Bankers vs. ITO (1984) 145 ITR 485 (SC), it had categorically laid down that resort to section 7(2)(a) is discretionary and enabling provision to Wealth Tax Officer to adopt the method as laid down in section 7(2)(a) for a running business, but the above enabling power cannot be held as obligation or shackles on right of Assessing Officer to adopt an appropriate method.

According to the Supreme Court, in the present case reference was made to the Departmental Valuer by Assessing Officer u/s. 7(3). Thus, there was a conscious decision of the Assessing Officer to obtain the report from the Departmental Valuer. The above conscious decision itself contained the decision of Assessing Officer not to resort to section 7(2)(a). The Valuation report of Departmental Valuer had been received, which has been relied on by the Assessing Officer for assessing the Assessee in the relevant year. The Supreme Court therefore did not find any error in the order of the Assessing Officer in adopting the land and building method by making a reference to Departmental Valuer to value the property on the said method.

The Supreme Court further held that the proposition that if two reasonable constructions of taxing statute are possible, that construction which favours the assessee must be adopted, could not be read to mean that under two methods of valuation the value which is favourable to the assessee should be adopted.

19. Industrial Undertaking – Deduction u/s.  80IA – The quantum of deduction allowable u/s. 80-IA of the Act has to be determined by computing the gross total income from business, after taking into consideration all the deductions allowable Under sections 30 to 43D of the Act irrespective of the fact as to whether the Assessee has claimed the deductions allowable under sections 30 to 43D of the Act or not

Plastiblends India Limited vs. Addl. Commissioner of Income Tax, Mumbai and Ors. (2017) 398 ITR 568 (SC)

The Assessment Years involved in the appeals before the Supreme Court were 1997-98 to 2000-01. The Assessee was engaged in the business of manufacture of master batches and compounds. For this purpose, it had manufacturing undertakings at Daman Units I and II. Units I and II began to manufacture Article or things in the previous years relevant to Assessment Years 1994-95 and 1995-96 respectively. Accordingly, for the year under consideration i.e. Assessment Year 1997-98, profits of the business of both the undertakings were eligible for 100% deduction u/s. 80-IA of the Act. The Assessee did not claim depreciation while computing its income under the head profits and gains of business. Consequently, deduction u/s. 80-IA was also claimed on the basis of such profits i.e. without reducing the same by depreciation allowance. This position was accepted by the Assessing Officer (AO) in an intimation made u/s. 143(1)(a) of the Act. Likewise, for the Assessment Year 1996-97, the Assessee did not claim deduction on account of depreciation. Though this position was not accepted by the AO, the claim of the Assessee was upheld by the Tribunal.

In the Assessment Year 1997-98, from which Assessment Year the dispute had arisen, the annual accounts prepared by the Assessee for the year disclosed that it earned a net profit of Rs. 1,80,85,409/-. This was arrived at after charging depreciation of Rs. 64,98,968/- in accordance with the Companies Act, 1956. The Assessee filed its return of income for Assessment Year 1997-98 determining the gross total income at Rs. 2,46,04,962/-. The gross total income included profits and gains derived from business of undertakings I and II at Daman aggregating to Rs. 2,46,04,962/-, which profits were eligible for deduction u/s. 80-IA of the Act. After reducing the gross total income by the deductions available u/s. 80-IA, the total income was computed at Rs. Nil. The AO initiated reassessment proceedings and passed an assessment order u/s.143(3) read with section 147 computing the gross total income at Rs. 34,15,583/. Though the Assessee had disclaimed deduction in respect of depreciation, the AO allowed deduction on this account as well in respect of the same in the sum of Rs. 2,13,89,379/- while computing the profit and gains of business. After reducing the gross total income by the brought forward loss of Rs. 98,47,170/-, he determined the business loss to be carried forward to Assessment Year 1998-99 at Rs. 66,25,587/-.

Aggrieved by the said assessment order, the Assessee filed the appeal before the Commissioner of Income Tax (Appeals) {CIT(A)} urging that the AO erred in not considering the Tribunal’s decision in the Assessee’s own case for the Assessment Year 1996-97 wherein it had been held that depreciation could not be thrust on it. The CIT(A) upheld the Assessee’s submission that claim for depreciation was optional, based on the Tribunal’s order in its own case for Assessment Year 1996-97 and hence, allowed the appeal.

Aggrieved by the appellate order of the CIT(A), the AO filed an appeal before the Tribunal with the plea that CIT(A) erred in directing him to work out business profit and deduction u/s. 80-IA of the Act without taking into account the corresponding depreciation amount. The Tribunal reversed the appellate order of the CIT(A) following the decision of the High Court of Bombay in Scoop Industries P. Ltd. vs. Income-Tax Officer (2007) 289 ITR 195. Aggrieved by the Tribunal’s order, the Assessee filed the appeal thereagainst before the High Court of Bombay u/s. 260A of the Act on the basis that a substantial question of law arose for consideration. The High Court was pleased to admit the appeal.

The Division Bench of the High Court at Bombay in the Assessee’s case noticed that there was a conflict of opinion in two earlier decisions viz. Grasim Industries Ltd. vs. Assistant Commissioner of Income-Tax and Ors. (2000) 245 ITR 677, wherein it was held that the profits and gains eligible for deduction under Chapter VI-A shall be the same as profits and gains computed in accordance with the provisions of the Act and included in the gross total income and the decision in Scoop Industries P. Ltd., where it was held that depreciation whether claimed or not has to be reduced for arriving at the profits eligible for deduction under Chapter VI-A. Noticing this conflict of opinion, the matter was referred to the Full Bench, to resolve the conflict.

The Full Bench of the High Court of Bombay has upheld the stand of the Revenue, that, whilst computing a deduction under Chapter VI-A, it was mandatory to grant deduction by way of depreciation. The High Court proceeded on the basis that the computation of profits and gains for the purposes of Chapter VI-A is different from computation of profits under the head ‘profits and gains of business’. It has, therefore, concluded that, even assuming that the Assessee had an option to disclaim current depreciation in computing the business income, depreciation had to be reduced for computing the profits eligible for deduction u/s. 80-IA of the Act.  The  High  Court  concluded  that section 80-IA provides for a special deduction linked with profits and is a code by itself and in so doing relied on the decisions of this Court in the case of Liberty India vs. Commissioner of Income Tax (2009) 317 ITR 218, Commissioner of Income Tax vs. Williamson Financial Services and Ors. (2008) 297 ITR 17 and Commissioner of Income Tax, Dibrugarh vs. Doom Dooma India Ltd. (2009) 310 ITR 392. The High Court proceeded on the basis that this Court in the aforementioned decisions has held that for computing such special deduction, any device adopted by an Assessee to reduce or inflate the profits of such eligible business has to be rejected. The High Court ultimately held that the quantum of deduction eligible u/s. 80-IA has to be determined by computing the gross total income from business after taking into consideration all the deductions allowable under Sections 30 to 43D including depreciation u/s. 32.

After the Full Bench answered the reference in the aforesaid manner, the appeal of the Assessee was disposed of by the Division Bench vide order dated November 03, 2009 following the aforesaid opinion of the Full Bench.

According to the Supreme Court, the singular issue which was required to be considered in these appeals pertained to claim of depreciation while allowing deduction u/s. 80-IA.
The Supreme Court noted that interpreting the provisions of section 32 of the Act (which prevailed in the relevant Assessment Years) it had in CIT vs. Mahendra Mills (2000) 243 ITR 56, held that it is a choice of an Assessee whether to claim or not to claim depreciation.

The Supreme Court observed that section 32 deals with depreciation and allows the deductions enumerated therein from the profits and gains of business or profession. Section 80-IA of the Act, on the other hand, contains a special provision for assessment of industrial undertakings or enterprises which are engaged in infrastructure development etc. The issue was as to whether claim for deduction on account of depreciation u/s. 80-IA is the choice of the Assessees or it has to be necessarily taken into consideration while computing the income under this provision.

The Supreme Court held that firstly, the Apex Court decision in the case of Mahendra Mills (supra) could not be construed to mean that by disclaiming depreciation, the Assessee   can   claim  enhanced  quantum  of  deduction u/s. 80IA. Secondly, the Apex Court in the case of Distributors (Baroda) P. Ltd. (supra) and in the case of Liberty India (supra) had clearly held that the special deduction under Chapter VIA has to be computed on the gross total income determined after deducting all deductions allowable under sections 30 to 43D of the Act and any device adopted to reduce or inflate the profits of eligible business has got to be rejected.

Thirdly, the Apex Court in the case of Albright Morarji and Pandit Ltd. (supra), Grasim Industries Ltd. (supra) and Asian Cable Corporation Ltd. (supra) had only followed the decisions of the Apex Court in the case of Distributors Baroda (supra). According to the Supreme Court, the quantum of deduction allowable u/s. 80-IA of the Act has to be determined by computing the gross total income from business, after taking into consideration all the deductions allowable under sections 30 to 43D of the Act.

Therefore, whether the Assessee has claimed the deductions allowable under sections 30 to 43D of the Act or not, the quantum of deduction u/s. 80IA has to be determined on the total income computed after deducting all deductions allowable under sections 30 to 43D of the Act. _

Part A – Direct taxes

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1.    Direct Tax Press Release dated 29th August 2016 -The Protocol amending DTAA between India and Mauritius was signed by both countries on 10th May, 2016. The Protocol was entered into force in India on 19th July, 2016 and has been notified in the Official Gazette on 11th August, 2016.

2.    Search and Survey operations and Income Declaration Scheme – Circular No. 32 dated 1st September 2016

Wherever in the course of search under section 132 or survey operation under section 133A of the Act, any document is found as a proof for having already filed a declaration under the Income Declaration Scheme, including acknowledgement issued by the Income-tax Department for having filed a declaration, no enquiry would be made by the Income-tax Department in respect of sources of undisclosed income or investment in movable or immovable property declared in a valid declaration made in accordance with the provisions of the Scheme.

3.    Press Release dated 5th September 2016 – Income Declaration Scheme 2016

– Government issues Clarifications in the form of Sixth Set of Frequently Asked Questions

4.    RBI Circular DBR.No. Leg.BC. 13-09.07.005-2016-17 dated 8 September 2016

– RBI has instructed the banks to accept cash deposits from all the declarants under the Income declaration Scheme irrespective of amount, over the counters, for making payment under the Scheme through challan ITNS-286.

5.    Order F.No.225-195-2016-ITA-II dated 9th September 2016

– Due-date provided under section 139(1) for furnishing return of Income and obtaining Tax Audit Report extended from 30th September, 2016 to 17th October, 2016.

6.    Further Clarifications on the Direct Tax Dispute Resolution Scheme, 2016

– Circular No. 33 dated 12th September 2016 and Instruction no 8 dated 15 September 2016

7.    Circular No. 34 dated 21st September 2016 – where a declaration is made under the Income Declaration Scheme for years, which are not under assessment on an identical issue which is pending in assessment under section 143(3)/147 of the Act , no penalty or prosecution be initiated against such person if he offers to pay the tax and interest, on such issue for the year pending in assessment under section 143(3)/147

8.    Procedure for generation of scrutiny notices under Section 143(2) for limited and full scrutiny under CASS

– Instruction No. 3 dated 16.09.2016

9.    Revised guidelines for engagement of standing counsels and schedule of fees payable  to them
 
– Instruction no. 6 and 7 dated 7 September 2016

10.    Procedure for issue of NOC , voyage return and voyage assessment in case of foreign shipping companies

– Circular No. 30/2016 dated 26th August 2016

Direct Taxes

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1. CBDT clarifies that printing or printing and publishing be considered as manufacturing for eligibility of additional depreciation u/s. 32(1)(iia) of the Act. 
Circular No. 15 of 2016 dated 19.5.16

2. Finance Ministry issues clarifications and notifications for the Income Declaration Scheme effective 1.6.16 as proposed in the Budget 2016

  • The Income Declaration Scheme Rules, 2016 dated 19.5.16
  • Dates for declaration and tax and penalties payment and regularise benami transactions as provided – Notification No. 32/2016 dated 19.5.2016
  • Explanatory Notes on provisions of The Income Declaration Scheme, 2016 – Circular No. 16 dated 20.05.2015
  • Clarifications on the Income Declaration Scheme, 2016 – Circular No. 17 of 2016 dated 20.5.16

3. CBDT issues a Directive for consistency in taxability of income/loss arising from transfer of unlisted shares under the Act 1961 –

File no. 225/12/2016/ITA .II dated 2.5.16

4. Interest u/s 244A of the Act to be paid to Resident deductors on excess tax paid u/s 195 of the Act from date of payment of tax

 – Circular No 11/2016 dated 26.4.16

5. Commencement of limitation for penalty proceedings u/s. 271D and 271E of Act –

Circular No. 09/DV/2016 dated 26.4.16

It has been clarified by the CBDT that the Range Authority being the Joint Commissioner / Additional Commissioner of Income tax will issue the notice for penalty and dispose / complete the proceedings u/s 275(1)(c ) of the Act. Accordingly AOs below the rank need to refer the matters to their Range Heads.

Finance Bill 2016 received President Assent and hence enacted on 14.5.2016

Glimpses of Supreme Court Rulings

1.   
Business Income – Set of
accumulated losses of amalgamating company by the amalgamated under section 72A
to be allowed after adjusting the remission of cessation of interest liability
of amalgamating company which are chargeable to tax under section 41(1)

 McDowell and Company Ltd. vs. CIT (2017)
393 ITR 570 (SC)

There was a
company known as M/s. Hindustan Polymers Limited (HPL) which had become a sick
industrial company. Proceedings in respect of the said company were pending
before the Board for Industrial and Financial Reconstruction (BIFR) under Sick
Industrial Companies Act (SICA). At that stage, petitions under sections 391
and 392 of the Companies Act, 1956, were filed in the High Court of Bombay and
Madras for amalgamation of HPL with the Assessee-Appellant, i.e., M/s. McDowell
and Company Limited. Both the High Courts approved the scheme of amalgamation
as a result of which, w.e.f. 01.04.1977, HPL stood amalgamated with the
Assessee/Appellant-company.

HPL owed a lot
of money to banks and financial institutions. In its books of accounts, the
interest which had accrued on the loans given by such financial companies was
shown as the money payable on account of interest to the said banking companies
and was reflected as expenditure on that count. As the interest payable was
treated as expenditure, benefit thereof was taken in the assessment orders
made. The Assessee had approached the Central Government, before moving the
High Court, with the scheme of amalgamation for getting benefits of section 72A
of the Act. This section makes provisions relating to carry forward and set off
accumulated loss and unabsorbed depreciation allowance in certain cases of
amalgamation or demerger etc. Under certain circumstances and on
fulfillment of conditions laid down therein, the company which takes over the
sick company is allowed to set off losses of the amalgamating company as its
own losses. The Central Government had made a declaration to this effect u/s.
72A of the Act granting the benefit of the said provision to the Assessee.

Under the
scheme of amalgamation that was approved by the High Court, after following the
procedure in terms of sections 391 and 392 of the Companies Act, which included
the consent of the secured creditors as well, the banks which had advanced
loans to HPL agreed to waive off the interest which had accrued prior to
01.04.1977. This interest was claimed as expenditure by HPL in its returns. On
the waiver of this interest, it became income in terms of section 41(1) of the
Act. In the return filed by the Assessee for the Assessment Year 1983-1984, the
Assessee claimed set off of the accumulated losses which it had taken over from
HPL by virtue of the provisions contained in section 72A of the Act. This was
allowed. However, later on, it came to the notice of the Assessing Officer that
while allowing the aforesaid benefit to the Assessee, the income which had
accrued u/s. 41 of the Act had not been set off against the accumulated loses.
It so happened that on certain grounds, the assessment was reopened by the
Assessing Officer and while undertaking the exercise of reassessment, the
Assessing Officer also noticed that the aforesaid fact, viz., the income which
had accrued within section 41(1) of the Act as mentioned above, was not set off
while giving benefit of accumulated losses u/s. 72A of the Act to the Assessee.
The Assessing Officer, therefore, treated the aforesaid income at the hands of
the Assessee and adjusted the same from the accumulated losses. The assessment
order was drawn accordingly. This reassessment was challenged by the Assessee
by filing appeal before the Commissioner of Income Tax (Appeals), which was
dismissed. However, in further appeal before the ITAT, the Assessee succeeded
inasmuch as the ITAT held that the aforesaid income u/s. 41(1) of the Act was
not at the hands of the Assessee herein but it may be treated as income of the
HPL and since HPL was a different Assessee and a different entity, the Assessee
herein was not liable to pay any taxes on the said income. Feeling aggrieved
thereby, the Revenue sought reference u/s. 256 of the Act and ultimately, the
reference was made on the following questions of law:

“Whether on the
facts and in the circumstances of the case, the Tribunal was justified in law
in upholding that the over due interest waived by the financial institutions
amounting to Rs. 25.02 lakhs is not assessable in the hands of the Assessee?”

This question
of law was decided in favour of Revenue by the impugned judgment.

The Supreme
Court held that the Assessee was given the benefit of accumulated losses of the
amalgamating company. The effect thereof was that though these losses were
suffered by the amalgamating company they were deemed to be treated as losses
of the Assessee company by virtue of section 72A of the Act. In a case like
this, it cannot be said that the Assessee would be entitled to take advantage
of the accumulated losses but while calculating these accumulated losses at the
hands of amalgamated company, i.e., HPL, the income accrued u/s. 41(1) of the
Act at the hands of HPL would not be accounted for. That had to be necessarily
adjusted in order to see what are the actual accumulated losses, the benefit
whereof is to be extended to the Assessee.

According to
the Supreme Court, this appeal was without any merit and was, accordingly,
dismissed.

Note:
Interestingly, the above case arose as a result of amalgamation which was
effective from 1/4/1977, but the issue came-up in relation to Asst. Year.
1983-84. In the above case, the Apex Court distinguished its earlier judgement
in the case of Saraswati Industrial Syndicate Ltd. [186 ITR 278] on the ground
that in the instant case the assessee had the benefit of carry forward losses
of the sick company [amalgamating company] u/s. 72A and the assessee company
[amalgamated company] had, in fact, availed the benefit of the waiver of
interest [which accrued to the assessee after the sick company had ceased to
exist due to amalgamation] and therefore, the same should be adjusted against
such losses and in that case, the Court dealt with the provisions of section
41(1) per se where section 72A was not the subject matter of the
decision. Therefore, the facts of the two cases are different. The judgment in
the case of Saraswati Industrial Syndicate Ltd. has been analysed in the column
“Closements” in the December, 1990 issue of the BCAJ. It may also be
noted that subsequently, section 41(1) has been substituted by the Finance Act,
1992 [w.e.f. Asst. Year. 1993-94] which effectively nullified the effect of the
ratio of the judgment in the case of Saraswati Industrial Syndicate Ltd.

 2. Exemption – Compensation
received on compulsory acquisition of agricultural land – The acquisition
process is initiated by invoking the provisions of Land Acquisition Act, 1894
by the State Government is completed with the award and the only thing that
remains thereafter is to pay the compensation as fixed under the award and take
possession of the land in question from the owner and to avoid litigation if
such owner enters into negotiations and settles the final compensation with the
buyer, the character of acquisition would not change from that of compulsory
acquisition to the voluntary sale

 Balakrishnan
vs. UOI and Ors. (2017) 391 ITR 178 (SC)

The Appellant
was the owner of 27.70 acres of land in Sy. No. 18.60 hectares of paddy field
in Block No. 17 of Attippra village in Thiruvananthapuram District comprised in
Sy. No. 293/8. This was agricultural land. The Appellant was using the same to
grow paddy.

The Government
of Kerala sought to acquire the aforesaid property of the Appellant for the
public purpose namely, ‘3rd phase of development of Techno Park’. For this
purpose, Notification u/s. 4(1) of the Land Acquisition Act, 1894 (hereinafter
referred to as the ‘LA Act’) was issued on 01.10.2005. An opportunity was given
to the Appellant to file his objections, if any, u/s. 5A of the LA Act. Record
does not reveal as to whether such objections were filed or not. However
admittedly, thereafter, declaration u/s. 6 of the LA Act was issued on
02.09.2006 wherein the Government had declared that it was decided to acquire
the land for the aforesaid purpose. After this acquisition, the Land
Acquisition Collector (Special Tahsildar), after following the due procedure,
even passed the award on 15.02.2007. As per this award, compensation was fixed
at Rs. 14,36,616/-. The amount of compensation fixed by the Land Acquisition
Collector was not acceptable to the Appellant. At that stage, some negotiations
started between the parties on the amount of compensation and ultimately it was
agreed by the Techno Park, for whom the property in question was acquired, to
pay a sum of Rs. 38,42,489/-. After this amount was agreed upon between the
parties, the Appellant agreed to execute a sale deed of the property in
question in favour of Techno Park. Such sale deed was executed on 08.05.2008
and duly registered with the Sub-Registrar, Kazhakoottam. While disbursing the
aforesaid amount of sale consideration, the Techno Park deducted 10% of the
amount of TDS and it was later refunded to the Appellant herein by the Income
Tax Department on completion of the assessment for the assessment year 2009-10,
taking a view that no capital gain was payable on the aforesaid amount received
by the Appellant as the same was exempted u/s. 10(37) of the Income-tax Act,
1961 (hereinafter referred to as ‘ the Act’).

However,
thereafter on 30.05.2012, a notice was issued to the Appellant u/s. 148 of the
Act whereby the Income Tax Department decided to re-open the assessment on the
ground that income which was assessable to income tax escaped assessment during
the year 2009-10. The stand which was taken by the Revenue in this notice was
that the amount of compensation/consideration received by the Appellant against
the aforesaid land was not the result of compulsory acquisition and on the
contrary it was the voluntary sale made by the Appellant to the Techno Park
and, therefore, the provisions of section 10(37) of Act were not applicable.

The Appellant
objected to the re-opening of the said assessment by filing his reply dated
30.11.2012. However, the Joint Commissioner, Income Tax Range-I, Kawadiar,
Thiruvananthapuram, took the view that the case did not come under compulsory
acquisition and directed the Assessing Officer to compute the income
accordingly. This direction dated 11.03.2013 of the Joint Commissioner was
challenged by the Appellant by filing a Civil Writ Petition in the High Court
of Kerala. The learned Single Judge, however, dismissed the said writ petition
vide judgement dated 11.07.2013 relying upon the earlier judgement of the same
High Court in case of Info Park Kerala vs. Assistant Commissioner of Income
Tax (2008) 4 KLT 782. The writ appeal preferred by the Appellant met
the same fate as it was dismissed affirming the view of the learned
Single Judge.

It is in the
aforesaid backdrop, the following question arose before the Supreme Court for
its consideration.

“Whether, on
the facts and circumstances of the case, the High Court was justified in
denying the claim for exemption u/s. 10(37) of the Income-tax Act, 1961 to the
Appellant?”

The Supreme
Court observed that on the transfer of agricultural land by way of compulsory
acquisition under any law, no capital gain tax is payable. The Supreme Court
noted that the initial view of the Income Tax Department, while refunding the
aforesaid TDS amount to the Appellant, was that the land in question was
compulsorily acquired under the LA Act and, therefore, capital gain tax was not
payable.

According to
the Supreme Court, from the facts mentioned above, it was apparent that the
acquisition process was initiated by invoking the provisions of LA Act by the
State Government. For this purpose, not only Notification u/s. 4 was issued, it
was followed by declaration u/s. 6 and even Award u/s. 9 of the LA Act. With
the award the acquisition under the LA Act was completed. Only thing that
remained thereafter, was to pay the compensation as fixed under the award and
take possession of the land in question from the Appellant. No doubt, in case,
the compensation as fixed by the Land Acquisition Collector was not acceptable
to the Appellant, the LA  Act provides
for making a reference u/s.18 of the Act to the District Judge for determining
the compensation and to decide as to whether the compensation fixed by the Land
Acquisition Collector was proper or not. However, the matter thereafter is only
for quantum of compensation which has nothing to do with the acquisition. The
Supreme Court held that it was clear from the above that insofar as acquisition
was concerned, the Appellant had succumbed to the action taken by the
Government in this behalf. His only objection was to the market value of the
land that was fixed as above. To reiterate his grievance, the Appellant could
have either taken the aforesaid adjudicatory route of seeking reference under
section18 of the LA Act leaving it to the Court to determine the market value.
Instead, the Appellant negotiated with Techno Park and arrived at amicable
settlement by agreeing to receive the compensation in the sum of Rs.
38,42,489/-. For this purpose, after entering into the agreement, the Appellant
agreed to execute the sale deed as well which was a necessary consequence and a
step which the Appellant had to take.

The Supreme
Court reiterated that insofar as acquisition of the land was concerned, the
same was compulsorily acquired as the entire procedure prescribed under the LA
Act was followed. The settlement took place only qua the amount of the
compensation which was to be received by the Appellant for the land which had
been acquired. According to the Supreme Court, had steps not been taken by the
Government under sections 4 and 6 followed by award u/s. 9 of the LA  Act, the Appellant would not have agreed to
divest the land belonging to him to Techno Park. He was compelled to do so
because of the compulsory acquisition and to avoid litigation entered into
negotiations and settled the final compensation. Merely because the
compensation amount is agreed upon would not change the character of acquisition
from that of compulsory acquisition to the voluntary sale. It may be mentioned
that this is now the procedure which is laid down even under the Right to Fair
Compensation and Transparency in Land Acquisition, Rehabilitation and
Resettlement Act, 2013 as per which the Collector can pass rehabilitation and
resettlement award with the consent of the parties/land owners. Nonetheless,
the character of acquisition remains compulsory.

The Supreme
Court doubted the correctness of the judgment in the case of Info Park
Kerala vs. Assistant Commissioner of Income Tax (2008) 4 KLT 782.
The Court in the said case took the view that since the title in the property
was passed by the land owners on the strength of sale deeds executed by them,
it was not a compulsory acquisition. The Supreme Court did not subscribe with
the aforesaid view. According to the Supreme Court, it was clear that but for
Notification u/s. 4 and Award u/s. 9 of the LA Act, the Appellant would not
have entered into any negotiations for the compensation of the consideration
which he was to receive for the said land. As far as the acquisition of the
land in question was concerned, there was no consent. The Appellant was put in
such a condition that he knew that his land had been acquired and he could not
have done much against the same. The Appellant, therefore, only wanted to
salvage the situation by receiving as much compensation as possible
commensurate with the market value thereof and in the process avoid the
litigation so that the Appellant is able to receive the compensation well in
time. If for this purpose the Appellant entered into the negotiations, such
negotiations would be confined to the quantum of compensation only and cannot
change or alter the nature of acquisition which would remain compulsory. The
Supreme Court, therefore, overruled the judgment of the Kerala High Court in Info
Park Kerala vs. Assistant Commissioner of Income Tax (2008) 4 KLT 782.

The Supreme
Court allowed the appeal of the Appellant and quashed the proceedings u/s.148
of the Act.

Note: The above
judgment is very useful in the context of current scenario of emphasis on
infrastructure development by the government and consequent need for land
acquisition with the resultant issue of taxation of capital gain arising on
compulsory acquisition of urban agricultural land, which may arise very often.
In such cases where the assessee receives higher compensation on negotiations
with the concerned party in the process of such acquisition, the benefit of
exemption u/s. 10(37) will be crucial and this judgement will become beneficial
in that context and may also help in reducing the litigation on contesting the
acquisition proceeding under the LA  Act.
Furthermore, in this case, the issue arising out of re-assessment proceedings
initiated in the year 2012 got finally resolved in 2017 [i.e. in a short period
of 5 years] at the level of the Apex Court. This shows clear advantage of
adopting the route of filing Writ Petition challenging such re-assessment
proceedings, especially involving a clear point of law. In normal course, the
matter generally would not have got resolved at that level in a period of less
than two decades.

 3.
Exemption/Deduction – Though
Section 10A, as amended, is a provision for deduction, the stage of deduction
would be while computing the gross total income of the eligible undertaking
under Chapter IV of the Act and not at the stage of computation of the total
income under Chapter VI

 C.I.T. and Ors. vs. Yokogawa India
Ltd. (2017) 391 ITR 274 (SC)

The Supreme
Court formulated the following specific questions arising in the group of cases
before it for consideration.

(i)   Whether
section 10A of the Act is beyond the purview of the computation mechanism of
total income as defined under the Act. Consequently, is the income of a section
10A unit required to be excluded before arriving at the gross total income of
the Assessee?

 (ii)  Whether
the phrase “total income” in section 10A of the Act is akin and pari
materia with the said expression as appearing in section 2(45) of the Act?

 (iii)  Whether
even after the amendment made with effect from 1.04.2001, section 10A of the
Act continues to remain an exemption section and not a deduction section?

 (iv) Whether
losses of other 10A Units or non 10A Units can be set off against the profits
of 10A Units before deductions u/s.10A are effected?

 (v)  Whether
brought forward business losses and unabsorbed depreciation of 10A Units or non
10A Units can be set off against the profits of another 10A Units of the
Assessee.

The Supreme
Court clarified that the decision of this Court with regard to the provisions
of section 10A of the Act would equally be applicable to cases governed by the
provisions of section 10B in view of the said later provision being pari
materia with section 10A of the Act though governing a different situation.

The Supreme
Court considered the submissions advanced and the provisions of section 10A as
it stood prior to the amendment made by the Finance Act, 2000 with effect from
1.4.2001; the amended section 10A thereafter and also the amendment made by the
Finance Act, 2003 with retrospective effect from 1.4.2001.

The Supreme
Court observed that retention of section 10A in Chapter III of the Act after
the amendment made by the Finance Act, 2000 would be merely suggestive and not
determinative of what is provided by the section as amended, in contrast to
what was provided by the un-amended Section. The true and correct purport and
effect of the amended section would have to be construed from the language used
and not merely from the fact that it had been retained in Chapter III.
According to the Supreme Court, the introduction of the word ‘deduction’ in
section 10A by the amendment, in the absence of any contrary material, and in
view of the scope of the deductions contemplated by section 10A, it had to be
understood that the section embodied a clear enunciation of the legislative
decision to alter its nature from one providing for exemption to one providing
for deductions.

The Supreme
Court held that the difference between the two expressions ‘exemption’ and
‘deduction’, though broadly may appear to be the same i.e. immunity from
taxation, the practical effect of it in the light of the specific provisions
contained in different parts of the Act would be wholly different. The above
implications could not be more obvious than from the cases which had been filed
by assessee having loss making eligible units and/or non-eligible units seeking
the benefit of this section.

The Supreme
Court noted that sub-section 4 of section 10A which provides for pro-rata
exemption, necessarily involving deduction of the profits arising out of
domestic sales, was one instance of deduction provided by the amendment.
Profits of an eligible unit pertaining to domestic sales would have to enter
into the computation under the head “profits and gains from business”
in Chapter IV and denied the benefit of deduction. The provisions of
sub-section 6 of section 10A, as amended by the Finance Act of 2003, granting
the benefit of adjustment of losses and unabsorbed depreciation etc.
commencing from the year 2001-02 on completion of the period of tax holiday
also virtually worked as a deduction which had to be worked out at a future
point of time, namely, after the expiry of period of tax holiday. The absence
of any reference to deduction u/s.10A in Chapter VI of the Act could be
understood by acknowledging that any such reference or mention would have been
a repetition of what has already been provided in section 10A. The provisions
of sections 80HHC and 80HHE of the Act providing for somewhat similar
deductions would be wholly irrelevant and redundant if deductions u/s. 10A were
to be made at the stage of operation of Chapter VI of the Act. The retention of
the said provisions of the Act i.e. section 80HHC and 80HHE, despite the
amendment of section 10A, indicated that some additional benefits to eligible
section 10A units, not contemplated by sections 80HHC and 80HHE, was intended
by the legislature. Such a benefit could only be understood by a legislative
mandate to understand that the stages for working out the deductions u/s. 10A
and 80HHC and 80HHE are substantially different.

The Supreme
Court held that from a reading of the relevant provisions of section 10A it was
more than clear that the deductions contemplated therein were qua the
eligible undertaking of an Assessee standing on its own and without reference
to the other eligible or non-eligible units or undertakings of the Assessee.
The benefit of deduction is given by the Act to the individual undertaking and
resultantly flows to the Assessee. This was also clear from the contemporaneous
Circular No. 794 dated 09.08.2000 which stated in paragraph 15.6 that,

“The export
turnover and the total turnover for the purposes of sections 10A and 10B shall
be of the undertaking located in specified zones or 100% Export Oriented
Undertakings, as the case may be, and this shall not have any material
relationship with the other business of the Assessee outside these zones or
units for the purposes of this provision.”

If the specific
provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and
10A (4)] that the unit that is contemplated for grant of benefit of deduction
is the eligible undertaking and that is also how the contemporaneous Circular
of the department (No. 794 dated 09.08.2000) understood the situation, it was
only logical and natural that the stage of deduction of the profits and gains
of the business of an eligible undertaking has to be made independently and,
therefore, immediately after the stage of determination of its profits and
gains. At that stage the aggregate of the incomes under other heads and the
provisions for set off and carry forward contained in sections 70, 72 and 74 of
the Act would be premature for application. The deductions u/s. 10A therefore
would be prior to the commencement of the exercise to be undertaken under
Chapter VI of the Act for arriving at the total income of the Assessee from the
gross total income. The somewhat discordant use of the expression “total
income of the Assessee” in Section 10A could be reconciled by
understanding the expression “total income of the Assessee” in section
10A as ‘total income of the undertaking’.

The Supreme
Court answered the appeals and the questions arising therein, as formulated
above, by holding that though section 10A, as amended, is a provision for
deduction, the stage of deduction would be while computing the gross total
income of the eligible undertaking under Chapter IV of the Act and not at the
stage of computation of the total income under Chapter VI. All the appeals were
disposed of accordingly.

 4.  Assessment – Prima facie
adjustment – Capital or revenue – Even though it is may be a debatable issue
but where the jurisdictional High Court has taken a particular view,
authorities under its jurisdiction are bound by it and it could not be said that the issue was a debatable one in that State

 DCIT vs.
Raghuvir Synthetics Ltd. (2017) 394 ITR 1 (SC)

The
Respondent-Assessee, a public limited company, filed its return for the
assessment year 1994-95, wherein it had claimed revenue expenditure of Rs.
65,47,448 on advertisement and public issue. However, in the return of income,
the company made a claim that if the aforesaid claim could not be considered as
a revenue expenditure then alternatively the said expenditure may be allowed
u/s. 35D of the Income-tax Act, 1961 (hereinafter referred to as “the
Act”) by way of capitalising in the plant and machinery obtained.

The Assessing
Officer issued an intimation u/s. 143(1)(a) of the Act disallowing a sum of Rs.
58,92,700 out of the preliminary expenditure incurred on public issue. He,
however, allowed one-tenth of the total expenses and raised demand on the
balance amount.

The intimation
was challenged before the first appellate authority which allowed the appeal by
holding that the concept of “prima facie adjustment” u/s.
143(1)(a) of the Act could not be invoked as there could be more than one
opinion on whether public issue expenses were covered by section 35D or section
37 of the Act.

Feeling
aggrieved by the order passed by the first appellate authority, the Revenue
preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal
upheld the order of the Commissioner of Income-tax (Appeals) and dismissed the
appeal filed by the Revenue.

The Appellant
preferred an appeal u/s. 260A of the Act before the High Court of Gujarat at
Ahmedabad. The Division Bench of the High Court by the impugned order dismissed
the appeal on the ground that a debatable issue cannot be disallowed while
processing return of income u/s. 143(1)(a) of the Act.

The Supreme
Court noted that there was a divergence of opinion between the various High
Courts; one view being that the preliminary expenses incurred on raising a
share capital is revenue expenditure and a contrary view that the said expenses
are capital expenditure and cannot be allowed as revenue expenditure.

The Supreme
Court held that even though it was a debatable issue but as the Gujarat High
Court in the case of Ahmedabad Mfg. and Calico (P.) Ltd. (1986) 162 ITR 800
(Guj) had taken a view that it is capital expenditure which was subsequently
followed by Alembic Glass Industries Ltd. vs. CIT (1993) 202 ITR 214 (Guj)
and the registered office of the Respondent-Assessee being in the State of
Gujarat, the law laid down by the Gujarat High Court was binding. Therefore, so
far as the present case was concerned, it could not be said that the issue was
a debatable one.

According to the Supreme
Court, the order passed by the Commissioner of Income-tax (Appeals), the
Income-tax Appellate Tribunal and also the order of the Gujarat High Court were
not sustainable and were therefore set aside as they had wrongly held that the
issue was debatable and could not be considered in the proceedings u/s. 143(1)
of the Act. The Supreme Court allowed the appeal of the Revenue.

Direct Taxes

1.    CBDT issues Guiding Principles for determination of Place of Effective Management of a Company

Circular No. 6 dated 24th January 2017

2.    Place of Effective Management guidelines shall not apply to a company having turnover or gross receipts of Rs. 50 crores or less in a financial year

Circular No. 8 dated 23rd February 2017

3.    Amendment to Rule 114(1) and Rule 114A(1) to provide for a common application form for allotment of PAN/TAN for certain classes of persons to be notified. Income -tax (2nd Amendment) Rules, 2017

Notification No. 9 dated 9th February 2017

4.    Newly incorporating company electronically can apply for PAN in form INC 32 using digital signature as specified by Ministry of Corporate affairs. After generation of Corporate Identity Number, MCA will forward data in prescribed Form 49A to Income tax Authorities using digital signature

Notification No. 2 dated 9th March 2017

5.    India and Belgium sign Protocol amending the India-Belgium Double Taxation Avoidance Agreement and Protocol

-Press Release dated 9th March 2017

6.    Protocol amending the DTAA between India and Israel to come into effect from 14th February 2017

Notification no. 10/2017 dated 14.2.2017

7.    Standard Operating Procedures prescribed by CBDT for verification of cash transactions vis-à-vis Demonetisation 

8.    Under revised India – Korea DTAA – CBDT has clarified that applications for bilateral APA involving international transactions with AE in Korea for the APA period beginning Fiscal Year 2017¬ 18 can be filed along with request for rollback provision in prescribed form – Press Information Bureau dated 17th March 2017

9.    CBDT issues clarification on taxation and investment regime under the Pradhan Mantri Garib Kalyan Yojana, 2016

Circular no. 8/201/ dated 14th March 2017

Direct Taxes

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67. Due date for filing E-appeals extended till 15 June 2016 –.

– Circular No. 20 dated 26th May 2016
E-appeals which were due to be filed by 15.05.2016 can be filed up to 15.06.2016. All e-appeals filed within this extended period would be treated as appeals filed in time

68. Due date for making declarations under the Direct Tax Dispute Resolution Scheme, 2016 notified as 31 December 2016

– Notification No. 34 dated 26th May 2016
A person may make a declaration to the designated authority in respect of tax arrear or specified tax under the Direct Tax Dispute Resolution Scheme, 2016 on or before 31 December 2016

69.Direct Tax Dispute Resolution Scheme Rules, 2016 notified –

Notification No. 35 dated 26th May 2016

70. Clarification regarding cancellation of registration u/s. 12AA of the Income-tax Act, 1961 in certain circumstances –

Circular No. 21 dated 27th May 2016
CBDT has clarified that the registration of a charitable institution granted u/s. 12AA shall not be cancelled only because the proviso to section 2(15) is applicable in one year without there being any change in the activities of the charitable insitution. The process for cancellation of registration will be initiated strictly in accordance with sections 12AA(3) and 12AA(4| after carefully examining the applicability of these provisions.

71. Equalisation levy Rules, 2016 notified –

Notification No. 38 dated 27th May 2016
As introduced in the Finance Act, 2016, rules for Equalisation levy have been notified which outline provisions for rounding off, payment of levy, statement of specified services to be submitted, notice of demand, forms of appeal etc.

72. Admissibility of claim of deduction of Bad Debt –

Circular No. 12 dated 30th May 2016
CBDT has clarified that any debt or part thereof , shall be allowed as a deduction u/s. 36(l)(vii) of the Act, if it is written off as irrecoverable in the books of accounts for that previous year and it fulfills the conditions stipulated in sub section (2) of sub-section 36(2) of the Act. CBDT has directed , no appeals may henceforth be filed on this ground and appeals already filed, on this issue before various Courts/Tribunals may be withdrawn or not pressed upon.

73. Amendment to Rule 31A –

Notification No. 39 dated 31st May 2016- Income-tax (13th Amendment) Rules, 2016 applicable w.e.f. 1st June 2016 –
Time period for filing Form 26QB increased from 7 days to 30 days from the end of the month in which the tax is deducted.

74. Amendment to Rule 8D

–Notification No. 43 dated 2nd June 2016- Income-tax (14th Amendment) Rules, 2016
Sub rule 3 to rule 8D dealing with apportionment of indirect expenditure to be disallowed vis-a-vis exempt income has been deleted. Further the limit of 0.5% has been enhanced to 1% and a total cap of disallowance not exceeding the exempt income has been brought in.

75.Cost Inflation Index for F.Y. 2016-17 is 1125
– Notification No. 42 dated 2nd June 2016

76. Clarification on issues relating to TCS as amended u/s 206C(1D) and newly inserted 206(1F) –
Circular no. 22/2016 dated 8th June 2016 and Circular no. 23 dated 24th June 2016

77. CBDT issues clarification to the payers regarding due date of uploading the simplified Form 15G/15H and manner of dealing with the Forms received between transition period of 1.10.15 to 31.3.16 –
Notification no.9 dated 9th June 2016

78. Prospective applicability of GAAR provisions – Income tax (16th Amendment) Rules, 2016

– Notification no. 49 dated 22nd June 2016
Rule 10(U)(1) has been amended to extend the cut off date to 1 April 2017 for application of GAAR rules to income earned/received by any person from transfer of investments made from erstwhile 30 August 2010. Further Rule 10U(2) also has been amended to provide that GAAR will apply to any arrangement, irrespective of the date it has been entered into, if tax benefit is obtained on or after 1st April 2017 instead of 1st April 2015.

Direct Taxes

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105. CBDT issues Standard Operating Procedures (SOP) to improve the quality of services to taxpayers and also identify the responsibilities of various departments in the Tax office for effective implementation – Letter dated 2 August 2016

106. CBDT issues Standard Operating Procedures (SOP) for handling AIR transactions which do not have valid PAN –

CBDT Directive File no: F No. 225/193/2016/ ITA.II dated 22 July 2016

107. Due date for furnishing returns due on 31 July 2016 extended till 5August 2016 –

F.No. 225/195/2016/ITA.II dated 29 July 2016

108. Income Declaration Scheme (Third Amendment) Rules, 2016 –

Notification No. 74/2016 dated 17 August 2016

IDS Scheme rules has been amended to provide an option to the tax payer to take the stamp duty value as increased by the same proportion as Cost Inflation Index for the year 2016-17 bears to the Cost Inflation Index for the year in which the property was registered or fair market value as on 1.4.1981 whichever is applicable, provided the property declared is evidenced by a registered deed with a competent authority as prescribed.

109. Additional clarifications issued on IDS Scheme –
Circular no. 29/2016 dated 18 August 2016

Glimpses of Supreme Court Rulings

7.  Non-resident – Permanent Establishment – As
per Article 5 of the DTAA with UK, the PE has to be a fixed place of business
‘through’ which business of an enterprise is wholly or partly carried on. Some
examples of fixed place are given in Article 5(2), by way of an inclusion.
Article 5(3), on the other hand, excludes certain places which would not be
treated as PE, i.e. what is mentioned in Clauses (a) to (f) as the ‘negative
list’. A combined reading of sub-articles (1), (2) and (3) of Article 5 would
clearly show that only certain forms of establishment are excluded as mentioned
in Article 5(3), which would not be PEs. Otherwise, sub-article (2) uses the
word ‘include’ which means that not only the places specified therein are to be
treated as PEs, the list of such PEs is not exhaustive. In order to bring any
other establishment which is not specifically mentioned, the requirements laid
down in sub-article (1) are to be satisfied. Twin conditions which need to be
satisfied are: (i) existence of a fixed place of business; and (b) through that
place business of an enterprise is wholly or partly carried out.


Formula
One World Championship Ltd. vs. Commissioner of Income Tax, International
Taxation-3, Delhi and Ors. (2017) 394 ITR 80 (SC)


Brief background of the
factual matrix of this case is: Federation Internationale de l’ Automobile
[FIA], a non- profit association, was established to represent the interest of
motoring organisations and motor car users globally. It is a principal body for
Rules and Regulations for all major international four- wheel motorsports
events and accordingly, was a regulatory body which regulates FIA Formula- One
World Championship [F-1 Championship]. “Formula One” [F-1] is with reference to
set of rules that all participants’ cars must confirm to. This has been the
premier form of motor racing since its inception in 1950. The F-1 Championship
is an annual series of motor racing conducted in the name and style of Grand
Prix over three day duration at purpose-built circuits, etc., in
different countries around the world. The F-1 season consists of series of
races, known as Grand Prix, held across the world on specially designed and
built F-1 circuits. Formula-One World Championship Ltd [FOWC], a UK resident,
entered into an agreement with FIA and Formula-One Asset Management Ltd [FOAM]
under which the FOWC was licensed all commercial rights in the F-1 Championship
for 100 years term and accordingly, FOWC became Commercial Right Holder [CRH]
in respect of F-1 Championship events.


Furthermore, in F-1
Championship events, about 12 to 15 teams typically compete in any one annual
racing season. The teams assemble and construct their vehicle, which complies
with defined technical specifications and engage drivers who can successfully
manoeuvre the F-1 cars in the racing events. All teams are known as
“Constructors” and enter into a contract with FOWC and FIA, known as “Concorde
Agreement”. They also bind themselves in a covenant with FOWC that they would
not participate in any other similar motor racing event what-so-ever nor would
they promote in any name any other rival event. The F-1 racing teams
exclusively participate in about 19 to 21 F-1 annual racing events fixed by the
FIA. As such, on the one hand, participating teams have to enter into Concorde
Agreement with FOWC & FIA and on the other hand, promoters, like Jaypee,
also have to enter in to RPC with FOWC for hosting, promoting and staging F-1
racing events. This is, in effect, a closed circuit event, since no team other
than those bound by a contract with FOWC is permitted participation. Every F-1
racing event is hosted, promoted and staged by a promoter with whom FOWC enters
into contract and whose events is nominated by CRH (i.e. FOWC) to the FIA for
inclusion in the official F-1 racing events calendar. In other words, the FOWC
is the exclusive nominating body at whose instance the event promoter is
permitted participation. Grant of a right to host, stage and promote the F-1
racing event also carries with it a covenant or representation that F-1 racing
teams with their cars, drivers and other ancillary and support staff will
participate in the motor racing event hosted at the promoter’s motor-racing
circuit displaying the highest level of technical skill etc. These teams
and FOWC also represent that the highest level of skill in racing management
and maintenance of cars would be on display in the events. All these would
generally be revealed in the relevant Race Promotion Contract entered into by
promoter with FOWC.


FOWC had entered into a
‘Race Promotion Contract’ (RPC) dated September 13, 2011 with Jaypee Sports
International Ltd, Indian Resident, (Jaypee) granting Jaypee the right to host,
stage and promote the Formula One Grand Prix of India event for a consideration
of US$ 40 million. There was also a prior agreement [RPC] in 2007 between them
[prior RPC] which was replaced by this RPC. Some other agreements were also
entered into between FOWC and Jaypee as well as group companies of FOWC and
Jaypee.


As per the arrangement, the
promoter [Jaypee] was to construct the necessary circuit, as per the
specifications approved by FOWC and FIA, which will meet all the requirements
of the regulations and for which, the final inspection was to be completed by
FIA before the agreed time. In terms of the prior RPC, Buddh International Circuit
in Greater Noida [in National Capital Region (NCR)] was constructed [Buddh
Circuit] and current RPC replaced that RPC. Under the agreement, the promoter
is the owner of the motor racing circuit [in this case Buddh Circuit], which is
capable of hosting various motor racing events. The promoter who wishes to host
various motor racing events at such circuit is bound to include the hosting of
F-1 Grand Prix events. The Jaypee had secured the privilege to host such events
under the RPC. The rights and obligations of both the parties were elaborately
mentioned in the RPC, including the right of access to the circuit by FOWC, as
well as its group concerns, with which also the Jaypee had entered into
separate agreements. Pursuant to this RPC and these agreements, the races were
held in India in 2011, 2012 and 2013.


The applications were filed
by FOWC and Jaypee before the Authority for Advance Rulings (AAR), in which
advance ruling of AAR was solicited on two main questions/queries:

 


“ (i) whether the payment of consideration
receivable by FOWC in terms of the said RPC from Jaypee was or was not royalty
as defined in Article 13 of the ‘Double Taxation Avoidance Agreement’ (DTAA)
entered into between the Government of United Kingdom and the Republic of
India?; and

 

(ii)  whether FOWC was having any ‘Permanent Establishment’ (PE) in India
in terms of Article 5 of DTAA?

 

      Another
related question was also raised, viz.,

 

(iii)  whether any part of the consideration
received or receivable by FOWC from Jaypee outside India was subject to tax at
source Under section195 of the Indian Income Tax Act, 1961 (hereinafter after
referred to as the ‘Act’).”


AAR answered the first
question holding that the consideration paid or payable by Jaypee to FOWC
amounted to ‘Royalty’ under the DTAA. Second question was answered in favour of
FOWC holding that it did not have any PE in India. As far as the question of
subjecting the payments to deduction of tax at source u/s. 195 of the Act was
concerned, AAR ruled that since the amount received/receivable by FOWC was
income in the nature of Royalty and it was liable to pay tax thereon to the
Income-tax department in India, it was incumbent upon Jaypee to deduct the tax
at source on the payments made to FOWC.


FOWC and Jaypee challenged
the ruling on the first issue by filing writ petitions in the Delhi High Court
contending that the payment would not constitute Royalty Under Article 13 of
the India-UK Double Tax Avoidance Agreement (DTAA). Revenue also filed the writ
petition challenging the answer of the AAR on the second issue by taking the
stand that FOWC had ‘permanent establishment’ (PE) in India in terms of Article
5 of the DTAA and, therefore, tax was payable accordingly.


All these writ petitions
were decided by the High Court vide common judgement dated November 30, 2016
[390 ITR 199]. The High Court reversed the findings of the AAR on both the
issues. Whereas it held that the amount paid/payable under RPC by Jaypee to
FOWC would not be treated as Royalty, as per the High Court FOWC had the PE in
India and, therefore, it is taxable in India. The High Court also held, as the sequitur,
that Jaypee was bound to make appropriate deductions from the amount payable to
FOWC u/s.195 of the Act.


The Court also noted that
the bone of contention before this Court pertains to PE of FOWC in India and
the arguments advanced by both parties before this court was virtually the same
which were advanced before the High Court as well.


Therefore, their main
contentions before the High Court may be worth noting in brief. These are
summarised hereunder.


The broad contentions of
the assessees before the High Court, interalia, include that the FOWC
has only one place of business in its office in UK and did not have any fixed
place of office or business in India. By granting the right to host, stage and
promote the race to Jaypee, it did ‘business with a party that is resident of
India’, it did not undertake any business operations in India. Its business was
limited to a grant outside India of the right to Jaypee and after such grant of
the right, the Jaypee could host, stage and promote the F-1 events in
accordance with F-1 regulations. If limited access at the circuit granted to
FOWC by Jaypee accounted a fixed place, it would come into existence only at
the time when the race is held which is after the grant of right by FOWC: A
mere provision in the RPC for Jaypee to allow access to FOWC  for a very short duration and its affiliates
to the circuit for a very short duration prior to and during the F-1 event
could not make the Buddh Circuit [ which belongs to Jaypee] as a place at the
FOWC’s disposal. There was also uncertainty as to staging of event on a regular
basis which could not result in bringing into existence a fixed place PE of
FOWC. Merely because Jaypee had entered into agreement with FOWC’s affiliates,
which were conditions precedent to RPC, it did not extend the scope of its role
nor did it result in its possession or operating from a fixed place of business
in India. The circuit and other rights arose by virtue of the ownership of the
circuit which was that of Jaypee, those rights could be exploited only when
granted by it. The activities were undertaken by each of the affiliates
independently and on their own account and did not constitute its PE.


The broad contentions of
the Revenue before the High Court, interalia, included: for deciding
fixed place of business in terms of Article 5, it is adequate if the place of
business is at the disposal of the enterprise to be used in business. Such
place need not be owned by the enterprise, it could be rented or otherwise
available at the disposal of the enterprise. The mere fact that an enterprise
has certain amount of space at its disposal, which is used for business
activities, is sufficient to constitute a place of business and no formal
/legal right to use the place is necessary. A place of business could
constitute a PE, even if it exists only for a very short period of time because
the nature of the business is such that it will be carried on for that short
period of time. FOWC’s business is to exploit commercial rights arising from
races and this business is carried on through exploitation of these commercial
rights, either by itself or through any one or more of its affiliates as
mentioned in ‘Concorde Agreement’. The fixed place is Buddh Circuit in Greater
Noida, which is owned by Jaypee and which was designed and constructed in terms
of prior RPC of 2007, which was replaced and continued by the current RPC of
2011. The said Buddh Circuit includes not only racing circuit but all the
attached buildings in the complex, including vending areas, hosting and
broadcasting facilities, media centres, etc., as widely defined in the
RPC itself and was available to FOWC and its affiliates (including their
employees and third party contractors appointed by them) for carrying on their
business operations. Under the RPC, Jaypee was obliged to allocate promotional
area in such a manner as FOWC shall specify and access to restricted area is
regulated by passes and tickets issued by FOWC. The FOWC and its affiliates
have complete access to the circuit in all its dimensions for a period
beginning 14 days prior to the event and 7 days after the event. Under the
terms of RPC, the fixed place was available to FOWC for carrying out its
business functions for a period of 5 years, extendable by another period of 5
years. In effect, FOWC had complete control over entire area during the event which
is apparent from the wholesome reading of the RPC and other agreements with
affiliates. Considering the overall arrangement under RPC and agreement with
the affiliates and the actual conduct the FOWC has fixed place of business at
its disposal through which it has carried out business operations and as such
it has a PE in India. For this purpose, the Revenue also relied on various
parts of the commentary of OECD on Article 5.


The judgement of the High
Court was challenged before the Supreme Court.


As per FOWC and Jaypee, no
tax was payable in India on the consideration paid under RPC as it was neither
Royalty nor FOWC had any PE in India. The Revenue did not challenge the
findings of the High Court that the amount paid under RPC does not constitute royalty.
Therefore, that aspect of the matter attained finality. The main question in
the appeals before the Supreme Court, therefore, pertained to PE.


The Supreme Court noted the
scheme of the Act as well as relevant provisions of DTAA on the subject. For
this the Court considered the basic scheme of taxation under sections 4 and 5.
The Court also considered the scope of taxation for non-resident under the Act
and noted that the income tax on non-resident is source based, i.e., source of
such income is India and, therefore, even a non-resident is liable to pay tax
on incomes earned in India. ‘Resident in India’ and ‘Not-ordinarily Resident in
India’ are covered by the provisions contained in section 6.


The Supreme Court further
noted that in the present case, it was concerned with the consideration
received by FOWC as a result of Agreement signed with Jaypee Sports. FOWC,
being a UK Company, was admittedly the non-resident in India. Since the
question was whether the aforesaid consideration/income earned by FOWC was
subject to tax in India or not, it had to be decided as to whether that income
accrued or arose in India. Section 9 contains varied situations where income is
deemed to accrue or arise in India.


The Supreme Court observed
that it was clear from the reading of Clause (i) of sub-section (1) of section
9 of the Act that it includes all those incomes, whether directly or
indirectly, which are accruing or arising through or from any business
connection in India is deemed to accrue in India. Therefore, an income which is
earned directly or indirectly, i.e. even indirectly, is to be deemed to accrue
or earned in India. Further, such an income should have some business
connection in India. Clause (a) of Explanation (1) stipulates that where all
the business operations are not carried in India and only some such operations
of business are carried in India, the income of the business deemed under this
clause to accrue or arise in India shall be only such part of the income as is
reasonably attributable to the operations carried in India. Explanation (2)
makes certain further provisions in respect of ‘business connection’. The
meaning of the expression ‘through’ is again clarified in Explanation (4).


If a non-resident has a PE in India, then
business connection in India stands established. Section 92F of the Act
contains definitions of certain terms, though those definitions have relevance
for the purposes of computation of arms length price, etc. Clause (3) thereof
defines ‘enterprise’ and such an enterprise includes a PE of a person. PE is
defined in Clause (iiia) in the following manner:


 (iiia)
“permanent establishment”, referred to in Clause (iii), includes a
fixed place of business through which the business of the enterprise is wholly
or partly carried on;


The Supreme Court also
noted Article 5 of DTAA between India and United Kingdom which lays down as to
what would constitute a PE. As per sub-article (1) of Article 5, a fixed place
of business through which the business of an enterprise is wholly or partly
carried on, is known as ‘permanent establishment’. It requires that there has
to be a fixed place of business. It also requires that from such a place
business of an enterprise (FOWC in the instant case) is carried on, whether
wholly or partly. Sub-Article (2) gives the illustrations of certain places
which will be treated as PEs. Sub-Article (3) excludes certain kinds of places
from the term PE. Sub-Article (4) enumerates the circumstances under which a
person is to be treated as acting on behalf of non-resident enterprise and
shall be deemed to have a PE under sub-article (4) of the enterprise.
Sub-Article (5) excludes certain kinds of agents of enterprise, namely, broker,
general commission agent or agent of an independent status, by clarifying that
if the business is carried on through these persons, the enterprise shall not
be deemed to be a PE. However, one exception thereto is carved out, namely, if
the activities of such an agent are carried out wholly or almost wholly for the
enterprise, or for the enterprise and other enterprises which are controlled by
it or have a controlling interest in it or are subject to same common control,
then, such an agent will not be treated as an agent of an independent status.
It means that if the business is carried out with such a kind of agent, the
enterprise will be deemed to have a PE in India.


The Supreme Court further
stated that as per Article 5 of the DTAA, the PE has to be a fixed place of
business ‘through’ which business of an enterprise is wholly or partly carried
on. Some examples of fixed place are given in Article 5(2), by way of an
inclusion. Article 5(3), on the other hand, excludes certain places which would
not be treated as PE, i.e. what is mentioned in Clauses (a) to (f) is the
‘negative list’. A combined reading of sub-articles (1), (2) and (3) of Article
5 would clearly show that only certain forms of establishment are excluded as
mentioned in Article 5(3), which would not be PEs. Otherwise, sub-article (2)
uses the word ‘include’ which means that not only the places specified therein
are to be treated as PEs, the list of such PEs is not exhaustive. In order to
bring any other establishment which is not specifically mentioned, the
requirements laid down in sub-article (1) are to be satisfied. Twin conditions
which need to be satisfied are: (i) existence of a fixed place of business; and
(b) through that place business of an enterprise is wholly or partly carried
out.


The Supreme Court was of
the firm opinion that it could not be denied that Buddh Circuit is a fixed
place. From this circuit different races, including the Grand Prix is
conducted, which is undoubtedly an economic/business activity. The core
question was as to whether this was put at the disposal of FOWC? Whether this
was a fixed place of business of FOWC was the next question. For this, the
Court first discussed on a crucial parameter, viz., the manner in which
commercial rights which are held by FOWC and its affiliates, have been
exploited in the instance case. In this context, according to the Court, the
entire arrangement between the FOWC and its affiliates on the one hand and
Jaypee on the other hand is to be kept in mind. Various agreements cannot be
looked into by isolating them from each other. Their wholesome reading would
bring out the real transaction between the parties. Such an approach is
essentially required to find out as to who is having the real and dominant
control over the event to determine as to whether Buddh Circuit was at the
disposal of FOWC and whether it carried out any business therefrom or not.
There is a inalienable relevance of witnessing the wholesome arrangement in
order to have a complete picture of the relationship between FOWC and Jaypee.
That would reveal the real essence of the FOWC’s role. Effectively, according
to the Court, in a case like this, what is to be seen is the substance of the
arrangement and not merely the form.


The Apex Court then
observed that a mere running of the eye over the flowchart of these commercial
rights, produced by the Revenue, bring about the following material factors
evidently discernible:

 


”(i) 
FIA had assigned commercial rights in favour of FOAM vide agreement
dated April 24, 2001 and on the same day another agreement was signed between
FOAM and FOWC vide which these rights were transferred to FOWC. Vide another
agreement of 2011, these rights stand transferred in favour of FOWC for a
period of 100 years. Vide Concorde Agreement of 2009, FOWC is authorised to
exploit the commercial rights directly or through its affiliates only.
Significantly, this agreement defines “F-1 Business” to mean exploitation of
various rights, including media rights, hospitality rights, title sponsorship, etc.

 

(ii)  Armed
with the aforesaid rights, FOWC signed first agreement with Jaypee on October
25, 2007 whereby it granted right to promote the event to Jaypee. This is
replaced by race promotion contract dated September, 13, 2011. Under this
agreement, right to host, stage and promote the event are given by FOWC to
Jaypee for a consideration of US $ 40 million. On the same day, another
agreement is signed between Jaypee and three affiliates of FOWC whereby Jaypee
gives back circuit rights, mainly media and title sponsorship, to Beta Prema 2
and paddock rights to Allsports. FOAM is engaged to generate TV Feed. All the
revenues from the aforesaid activities are to go to the said companies, namely,
Beta Prema2, Allsports and FOAM respectively. 
These three companies are admittedly affiliates to FOWC.

 


Though Beta Prema 2 is
given media rights, etc., on September 13, 2011, it had entered in to
title sponsorship agreement dated August 16, 2011 with Bharti Airtel(i.e., more
than a month before getting these rights from Jaypee) whereby it transferred
those rights to Bharti Airtel for a consideration of US$ 8 million.


Service agreement is signed
between FOWC and FOAM on October, 28, 2011 (i.e., on the date of the race)
whereby FOAM engaged FOWC to provide various services like licensing and
supervision of other parties at the event, travel and transport and data
support services. The aforesaid arrangement clearly demonstrates that the
entire event is taken over and controlled by FOWC and its affiliates. There
cannot be any race without participating/competing teams, a circuit and a
paddock. All these are controlled by FOWC and its affiliates. Event has taken
place by conduct of race physically in India. Entire income is generated from
the conduct of this event in India. Thus, commercial rights are with FOWC which
are exploited with actual conduct of race in India.

 


(iii) Even
the physical control of the circuit was with FOWC and its affiliates from the
inception, i.e. inclusion of event in a circuit till the conclusion of the
event. Omnipresence of FOWC and its stamp over the event is loud, clear and
firm. Mr. Rohatgi is right in his submission that the undisputed facts were
that race was physically conducted in India and from this race income was
generated in India. Therefore, a commonsense and plain thinking of the entire
situation would lead to the conclusion that FOWC had made their earning in
India through the said track over which they had complete control during the
period of race. The appellants are trying to trivialise the issue by harping on
the fact that duration of the event was three days and, therefore, control, if
at all, would be for that period only. His reply was that the duration of the
agreement was five years, which was extendable to another five years. The
question of the permanent establishment has to be examined, keeping in mind
that the aforesaid  race was to be
conducted only for three days in a year and for the entire period of race the
control was with FOWC.

 


(iv) Even
when we examine the matter by examining the race promotion contract agreement
itself, it points towards the same conclusion. The High Court in its judgement
has reproduced relevant clauses of the agreement which we have already
reproduced above. “


The RPC is analysed by the
High Court which brings out the real position and after referring to High
Court’s analysis of various clauses of RPC, the Court stated that it is an
agreement with the same which correctly captures the substance of the relevant
clauses of the RPC. From this, it appears that this seems to be in line with
the above referred material factors brought out by the Court from the flowchart
of commercial rights, produced by the Revenue.


The Supreme Court, after
considering various agreements and nature of business activity involved in this
case, also held that the High Court had rightly concluded that having regard to
the duration of the event, which was for limited days, and for the entire
duration FOWC had full access through its personnel, number of days for which
the access was there would not make any difference. In this context, after
referring to the discussion of the High Court on this aspect, the Court noted
that a stand at a trade fair, occupied regularly for three weeks a year,
through which an enterprise obtained contracts for a significant part of its
annual sales, was held to constitute a PE (Joseph Fowler vs. MNR (1990) 2
CTC 2351 (Tax Court of Canada). Likewise, a temporary restaurant operated
in a mirror tent at a Dutch flower show for a period of seven months was held
to constitute a PE (Antwerp Court of Appeal, 2001 WTD 106-11).


The Supreme Court also
noted the following two judgements referred to by High Court:

 


(i)  In Universal Furniture Ind. AB vs.
Government of Norway, a Swedish company sold furniture abroad that was
assembled in Sweden. It hired an individual tax resident of Norway to look
after its sales in Norway, including sales to a Swedish company, which used to
compensate him for use of a phone and other facilities. Later, the company
discontinued such payments and increased his salary. The Norwegian tax
authorities said that the Swedish company had its place of business in Norway.
The Norwegian court agreed, holding that the salesman’s house amounted to a
place of business: it was sufficient that the Swedish Company had a place at
its disposal, i.e. the Norwegian individual’s home, which could be regarded as
‘fixed’.

 

(ii)  In Joseph Fowler vs. Her Majesty
the Queen 1990 (2) CTC 2351, the issue was whether a United States tax
resident individual who used to visit and sell his wares in a camper trailer,
in fairs, for a number of years had a fixed place of business in Canada. The
fairs used to be once a year, approximately for three weeks each. The court
observed that the nature of the individual’s business was such that he held
sales in similar fares, for duration of two or three weeks, in two other
locales in the United States. The court held that conceptually, the place was
one of business, notwithstanding the short duration, because it amounted to a
place of management or a branch having regard to peculiarities of the business.


Coming to the second aspect
of the issue, namely, whether FOWC carried on any business and commercial
activity in India or not, the Supreme Court held that FOWC is the Commercial
Right Holder (CRH). These rights could be exploited with the conduct of F-1
Championship, which is organised in various countries. It was decided to have
this championship in India as well. In order to undertake conducting of such
races, the first requirement was to have a track for this purpose. Then, teams
would be needed who would participate in the competition. Another requirement
was to have the public/viewers who would be interested in witnessing such races
from the places built around the track. Again, for augmenting the earnings in
these events, there would be advertisements, media rights, etc. as well.
It was FOWC and its affiliates which have been responsible for all the
aforesaid activities. The Concorde Agreement is signed between FIA, FOA and
FOWC whereby not only FOWC became Commercial Rights Holder for 100 years, this
agreement further enabled participation of the teams who agreed for such
participation in the FIA Championship each year for every event and undertook
to participate in each event with two cars. FIA undertook to ensure that events
were held and FOWC, as CRH, undertook to enter into contracts with event
promoters and host such events. All possible commercial rights, including
advertisement, media rights, etc. and even right to sell paddock seats,
were assumed by FOWC and its associates. Thus, as a part of its business, FOWC
(as well as its affiliates) undertook the aforesaid commercial activities in
India.


According to the Supreme
Court, it was difficult to accept the arguments of the Appellants that it was
Jaypee who was responsible for conducting races and had complete control over
the event in question. Mere construction of the track by Jaypee at its expense
would be of no consequence. Its ownership or organising other events by Jaypee
was also immaterial. The examination in the present case was limited to the
conduct of the F-1 Championship and control over the track during that period.


The Supreme Court observed
that, no doubt, FOWC, as CRH of these events, was in the business of exploiting
these rights, including intellectual property rights. However, these became
possible, in the instant case, only with the actual conduct of these races and
active participation of FOWC in the said races, with access and control over
the circuit.


According to the Supreme
Court, the test laid down by the Andhra Pradesh High Court in Visakhapatnam
Port Trust case (1993) 144 ITR 146 (AP) was fully satisfied. Not only the Buddh
Circuit was a fixed place where the commercial/economic activity of conducting
F-1 Championship was carried out, one could clearly discern that it was a
virtual projection of the foreign enterprise, namely, Formula-1 (i.e. FOWC) on
the soil of this country. As per Philip Baker, a PE must have three
characteristics: stability, productivity and dependence. All characteristics
were present in this case. Fixed place of business in the form of physical
location, i.e. Buddh Circuit, was at the disposal of FOWC through which it
conducted business. The taxable event had taken place in India and non-resident
FOWC was liable to pay tax in India on the income it has earned on this soil.


The Supreme Court also
dealt with incidental issues raised by the assessees during the hearing. First
was on the interpretation of section 195 of the Act. It could not be disputed
that a person who makes the payment to a non-resident is under an obligation to
deduct tax u/s.195 of the Act on such payments. The Supreme Court held that the
High Court rightly relying on the judgement in the case of GE India Technology
Centre Private Limited (2010) 327 ITR 456 (SC), held that payments made by
Jaypee to FOWC under the RPC were business income of the FOWC through PE at the
Buddh Circuit, and, therefore, chargeable to tax and Jaypee was bound to make
appropriate deductions from the amounts paid u/s.195 of the Act.


The Supreme Court, however,
accepted the submission of assessee that only that portion of the income of
FOWC, which was attributable to the said PE, would be treated as business
income of FOWC and only from that part of income deduction was required to be
made u/s.195 of the Act. The Supreme Court observed that in GE India Technology
Centre Private Limited, it has been clarified that though there is an
obligation to deduct tax, the obligation is limited to the appropriate portion
of income which is chargeable to tax in India and in respect of other payments
where no tax is payable, recourse is to be made u/s. 195(2) of the Act. It
would be for the Assessing Officer to adjudicate upon the aforesaid aspects
while passing the Assessment Order, namely, how much business income of FOWC
was attributable to PE in India, which was chargeable to tax. At that stage,
Jaypee could also press its argument that penalty etc. be not charged as the
move on the part of Jaypee in not deducting tax at source was bona fide. The
Supreme Court however, made it clear that it had not expressed any opinion on
this either way.


The Court also clarified
that so far as appeal filed by the Revenue is concerned, it was submitted by
the learned counsel appearing for the Revenue that the issue of dependent agent
PE had now become academic. This was in view of the fact that the Court had
already held that the FOWC had a fixed place PE through which it was carrying
on business in India. As such, the Court did not examine that issue and
disposed of the appeal of the Revenue accordingly.


Notes:

i)   
In the above case, the Apex Court has accepted the basic principle that
determination of existence of a PE of an enterprise should be based on actual
facts of the relevant case. The above judgements are primarily based on complex
arrangements and factual matrix of the case from which the Court ascertained
the real position relevant for determination of PE etc. [and rendered
its judgement running into more than 50 printed pages of ITR] which has been
briefly digested. In the process, the Court has made various observations
confirming certain internationally accepted principles and tests (such as test
of fixed place of business, disposal test, duration test, virtual projection of
foreign enterprise test, etc.) relating to determination of fixed place
PE under Article 5 of the relevant DTAA. These principles and tests have been
applied to the real facts emerging in this case to come to the conclusion that
the FOWC has PE in India through which it was carrying on business in India.
Effectively, the Court has gone by the substance of the arrangement rather than
merely its form. The Court, in the process, has also referred to relevant
commentaries on this Article given by OECD as well as by learned authors Philip
Baker and Klaus Vogel and also referred to various judicial precedents
including the celebrated judgements of the Apex Court in the cases of Azadi
Bachao Andolan [(2003) 263 ITR 706], Transmission Corporation [(1999) 239 ITR
587] and GE Technology Center [(2010) 327 ITR 456]. All these three judgments
were analysed by us in the column ‘Closements’ (in the months of December,
2003/ January, 2004, October, 1999 and December, 2010 respectively) of this
journal.

 


ii)    The
assessees should become wiser from the approach of the Court in applying those
principles and tests to such complex arrangements and should be cautious in
arranging their factual affairs in such cases. This judgement should be mainly
viewed from this perspective and now, more so with the GAAR provisions becoming
effective from 01.04.2017. In future, in this respect, global developments in
the area of BEPS should also be borne in mind, more particularly, in this
context, Anti-abuse Rules for PEs situated in third Jurisdiction contained in
Article 10 of MLI [Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Sharing (BEPS)], which is expected
to become effective for certain Indian covered tax agreement [DTAAs] within
about the next two years.

 


iii)   In this column, generally, as a policy
(decided for various justifiable reasons in the past), the judgements reported
in ITRs are digested. Currently, for this column, we are considering 394/395
ITRs. Whenever it is felt that a particular judgement of the Apex Court lays
down some important relevant principles relating to tax matter, which is of a
general interest for larger readership of the journal, the same is picked up
(on a case to case basis) for analysis in greater detail in our another column
‘Closements’ (which now does not feature every month) even before it is so
reported, like the one relating to ‘deemed dividend’ analysed in that column in
this issue of the journal and Part II thereof will appear in the next issue.


iv)   Recently,
another judgement of the Apex Court has also been delivered in the case of
E-funds IT Solution Inc. [which is decided, based on its facts, in favour of
the assessee]. In this also, principles and tests for determination of
existence of PE, in the context of India-USA DTAA, have been considered. In
this, the above judgement has also been considered. The same will be digested
in this column in due course.


 8.  Closing
Stock-Valuation-With dissolution of the firm, if the business comes to an end,
the cost method of valuing closing stock is not permissible and has to be
valued at the market rate but where the dissolution is by operation of law and
the business does not come to an end, it is not necessary to value the stock in
trade at market prices and could be valued at cost method of valuation.


Revision-Erroneous
and prejudicial to revenue- If the view taken by the Assessing Officer is
plausible view, the CIT cannot exercise his power u/s. 263.


Commissioner
of Income Tax-Gujarat-II vs. Kwality Steel Suppliers Complex (2017) 395 ITR 1
(SC)


The Respondent-Assessee was
a registered firm engaged in the business of sale of scrap of ship materials.
The firm was constituted with two partners, i.e., mother and son. During the
period under consideration, the firm was dissolved on 01.02.1993 on account of
the death of one of the partners. At the time of dissolution, the firm had
valued the closing stock at cost price.


The Respondent-Assessee
filed return of income showing total income of Rs. 16,41,760/- for assessment
year 1993-1994. The relevant previous year is financial year 1992-1993. On this
return, the assessment order was passed by the Assessing Officer on 24.02.1995
u/s. 143(3) of the Act accepting the method of valuation adopted by the
Respondent-Assessee.


Subsequently, the
Commissioner of Income Tax (CIT) in exercise of his revisional jurisdiction
u/s. 263 of the Act issued show cause notice dated 27.02.1997 and directed the
Assessing Officer to value the closing stock at the time of dissolution at the
market price. He further observed in his order that the Assessing Officer had
erred while passing the assessment order for the year 1993-1994. According to
him, during the accounting year under consideration, the firm was dissolved,
and therefore, the closing stock was to be valued at market rate in view of the
decision of the Supreme Court in the case of A.L.A. Firm vs. Commissioner of
Income Tax [(1991) 189 ITR 285]. So, he added the average gross profit of
15 per cent to the disclosed value of the closing of Rs. 12 crore and the same
resulted in addition of Rs. 1.82 crore.


The Respondent-Assessee
questioned the validity of the order passed u/s. 263 of the Act taking the plea
that revisional jurisdiction could not be exercised in this manner. However,
the CIT by his order dated 20.03.1997 rejected the contention of the Assessee
and set aside the assessment order with a direction to the Assessing Officer to
pass fresh order in accordance with the direction given in the order passed by
CIT.


The  Assessee 
challenged  the said order dated
20.03.1997 by filing appeal before the Income Tax Appellate Tribunal (ITAT),
ITAT dismissed the appeal on 28.04.2000.


This order of ITAT was
challenged before the High Court in the form of statutory appeal u/s. 260A of
the Act. The High Court has accepted the contention of the Assessee and,
thereby, set aside the revisional order dated 20.03.1997 passed by CIT. For
this, the High Court referred to various judgments of the Apex Court dealing
with cases of dissolution of the firm including the judgement in the case of
Shakhti Trading Co. [(2001) 250 ITR 871] in which it was effectively held that
if post dissolution the business is continued, the closing stock could be
valued at cost.


The Revenue challenged the
order of the High Court before the Supreme Court.


According to the Supreme
Court, the moot question was as to whether the view taken by the Assessing
officer in accepting the valuation of the closing stock at cost price was a
plausible view in the circumstances of this case. If it was so, then CIT could
not have exercised his revisionary jurisdiction u/s. 263 of the Act.


The Supreme Court observed
that the judgement in ALA Firm’s case proceeded on the basis that with the
dissolution of the firm, the business of the firm comes to an end and in that
situation, the cost method of valuing the stock was not permissible.


The Supreme Court wondered
as to whether this situation would apply in the instant case where the
partnership firm stood dissolved by the operation of law in view of the death
of one of the partners, i.e., the mother, but the business did not come to an
end as the other partner, viz., son, who inherited the share of the mother,
continued with the business. According to the Supreme Court, in a situation
like this, there was no question of selling the assets of the firm including
stock-in-trade and, therefore, it was not necessary to value stock-in-trade at
market price.


The Supreme Court on
consideration of the judgement in Chainrup Sampatram vs. CIT (1953) 24 ITR
481 (SC) observed that the position which emerges from the said judgement
is that when a business continues, it may not be necessary to follow the market
rate to value the closing stock as the reasons, because of which the same is to
be done are not available.


According to the Supreme
Court when this position becomes clear, it follows that in the instant case the
view taken by the Assessing Officer in accepting the book value of the
stock-in-trade was a plausible and permissible view. In this scenario, the CIT
could not have exercised his powers u/s. 263 of the Act.


The Supreme Court dismissed
the appeal of the Revenue with costs.


Note:


The judgements of the Apex
Court in the cases of A.L.A Firm and Shakhti Trading Co. (in which the
judgement of the Apex Court in Chainrup Sampatram was also relied) have been analysed
by us in the column ‘Closements’ (in the months of July, 1991 and September,
2001 respectively) of this journal. It may also be noted that para 24 of ICDS
II (Valuation of Inventories) now specifically provides that in the event of
dissolution of a firm, the inventory on the date of dissolution shall be valued
at Net Realizable Value, notwithstanding the fact whether the business is
discontinued or not. It is also worth noting that recently, the Delhi High
Court in the case of the Chamber of Tax Consultants (vide order dated
11.11.2017) has struck down some of the provisions of certain ICDSs as ultra
vires the Act and this includes the said para 24 of ICDS II.


9.  Export markets development allowance –
Weighted deduction – Agreement stated that Mr. Jack Barouk had agreed to work
as an agent of the assessee on payment of the commission and RBI had approved
the same as ‘Selling Agency Agreement’ – Entitled to weighted deduction u/s.
35(1)(b)(iv)


Velvet
Carpet and Co. Ltd. vs. Commissioner of Income Tax (2017) 395 ITR 515 (SC)


In the return filed by the
Assessee for the assessment year 1983-84, it had stated that a sum of Rs.
4,60,433 was paid by the Assessee to one Mr. Jack Barouk of Brussels who was
appointed by the Assessee as its commercial agent in the said country for the
sale of the Assessee’s goods. Section 35B(1)(b)(iv), provides for weighted
deduction that is in addition to the actual amount spent, one-third thereof as
an additional expenditure in case the expenditure is incurred wholly and exclusively
on maintenance outside India of a branch, office or agent for the promotion of
the sale outside India of such goods, services or facilities.


The Appellant had filed
appeal against the order of the Assessing Officer refusing to give benefit of the
aforesaid provision, with the Commissioner of Income-tax (Appeals), which was
dismissed. However, in further appeal preferred before the Income-tax Appellate
Tribunal [ITAT], the Appellant succeeded. The ITAT, looking into the agreement
that was entered into between the Assessee and the aforesaid Mr. Jack Barouk,
found that the agreement was an agency agreement. The ITAT also took into
consideration another supporting fact that as per the legal requirement, the
said agreement was approved by the Reserve Bank of India and the Reserve Bank
of India in its approval had treated this agreement to be an agency agreement.


The High Court while
allowing the appeal of the Department and rejecting the claim of the Assessee,
observed that at no stage, the Assessee had put up a case that it had maintained
branch or agency outside the country.


The Supreme Court observed
that what was not in dispute was that the expenditure was in fact incurred. It
was also incurred wholly and exclusively outside India as the payment was made
to Mr. Jack Barouk a resident of Brussels. It was also not in dispute that this
payment was made against some sales of carpets belonging to the Assessee, made
by the said Mr. Jack Barouk. The only dispute was as to whether he could be
treated as “agent” of the Assessee.


The Supreme Court went
through the agreement that was entered into between the Assessee and Mr. Jack
Barouk. It was in the form of communication dated October 24, 1977 addressed by
Mr. Jack Barouk to the Assessee, stating therein the terms and conditions on
which two parties agreed to work together. In this communication, Mr. Jack
Barouk agreed to keep the goods of the Assessee in his godown, show the said
products to the visiting customers personally and secure orders from the territories
mentioned therein namely, Benelux and France.


This communication further
stated that he will be given 5 % 
commission on all goods shipped by the Assessee to the aforesaid
territories on the orders procured by the said Mr. Jack Barouk. The Assessee
had accepted and agreed on the aforesaid terms contained in the said
communication and there was a specific endorsement to this effect by the
Assessee that the said communication, on acceptance by the Assessee, became a
valid and enforceable agreement between the parties.


The aforesaid terms clearly
stated that Mr. Jack Barouk had agreed to work as an agent of the Assessee and
on the orders procured he was to get 5 % commission. The Supreme Court held
that this aspect that the agreement was in fact an agency agreement which stood
conclusively established by the registration given by the Reserve Bank of India
vide its letter dated October 29, 1977. Captioned communication of the Reserve
Bank of India reads as “Registration of Selling Agency Arrangement”.


 

The Supreme Court observed that the Reserve Bank of India while
giving its accord to the arrangement established between the parties it was
termed as an agency arrangement. The Supreme Court therefore held that Mr. Jack
Barouk was an agent of the Assessee and, therefore, all the conditions
stipulated in section 35B(1)(b)(iv) for giving weighted deduction of
expenditure incurred by the Assessee stood established. The Supreme Court
allowed the appeal and set aside the impugned order of the High Court and
restored the order of the Income-tax Appellate Tribunal. _

 

 

Direct Taxes

106. CBDT issues clarification on implementation of GAAR
provisions under the Income-tax Act

Circular No. 7/2017 dated 27th January 2017.

107. Circular No. 1/2017 on TDS on salaries contained mistake
in the table of due dates for furnishing of the e-TDS statements for the last
quarter of the year 

CBDT has issued a corrigendum on 24thJanuary 2017
to rectify the mistake.

108. Explanatory Notes to the Provisions of the Finance Act,
2016

Circular No. 3/2017, dated 20th January, 2017

109. Instructions laying down standard operating procedures
to investigate the cash deposits above prescribed limits post demonetization
period-

Instruction no. 03/2017 dated 21.02.2017

Glimpses of Supreme Court Rulings

14.  Question of Law –
Whether the trading activity in the nature of re-export of imported goods
carried on by the SEZ unit of the assessee is to be considered as ‘services’
eligible for exemption u/s. 10AA of the Income-tax Act in view of the
definition of ‘services’ in Special Economic Zones Rules, 2006 though there is
no such provision in section 10AA of the Act, is a question of law.

CIT vs. Bommidala Enterprises Pvt. Ltd. (2016) 389 ITR 1
(SC)

In an appeal filed before the Andhra Pradesh High Court, the
Department had raised the following questions of law:

1.  In the facts and circumstances of the case,
whether the Tribunal was correct in upholding the finding of the Commissioner
of Income-tax (Appeals) that the trading activity carried on by the SEZ unit of
the assessee was to be considered as ‘services’ eligible for exemption u/s.
10AA of the Income-tax Act by relying on the definition of “services” as per
Special Economic Zone Rules, 2006 when there was no such provision in section
10AA of the Act?

2.  In the facts and circumstances of the case,
whether the Tribunal was justified in relying on the instructions issued by the
Ministry of Commerce regarding the applicability of exemption u/s. 10AA of the
Income-tax Act to the trading activity in the nature of re-export of imported
goods though there was no subsequent amendment made to the provisions of the
Income-tax Act to give effect to the clarification contained in the
instructions in spite of the mention in the said instructions that appropriate amendments are being issued?

3.  In the facts and circumstances of the case,
whether the Tribunal was correct in law in upholding the exemption claimed u/s.
10AA of the Income-tax Act when the respondent assessee was not involved either
in manufacture or production of article/or/thing or provide any services as
required in the said statutory provision but was engaged in trading activity
only?

The Revenue’s Counsel contended before the High Court that
the assessee was carrying on trading business and not the manufacturing
business. The High Court however held that this was a factual aspect and it had
been taken care of by the authorities below (both CIT(A) and ITAT held that the
assessee was entitled to exemption u/s. 10AA) and that the fact finding could
not be interfered with, unless it was found perverse. The High Court dismissed
the appeal of the Revenue.

On further appeal, the Supreme Court observed that the
question of law that was raised by the Appellant-Revenue herein before the High
Court was as to whether trading activity carried on by the SEZ unit of the
Respondent-Assessee was to be considered as ‘service’ eligible for exemption u/s.
10AA of the Income-tax Act. The Supreme Court noted the submission of the
Appellant that for this purpose, the Income-tax Appellate Tribunal could not
have relied upon the definition of ‘services’ as per SEZ Rules when there was
no such provision u/s. 10AA of the Act.

The Supreme Court observed that a perusal of the order of the
High Court showed that this aspect was not considered and brushed aside by
merely saying that the Tribunal had held it to be a ‘service’ and that it was a
question of fact. The Supreme Court held that no doubt, insofar as activity
carried on by the Respondent-Assessee was concerned, factual aspects were not
in dispute.

However, whether that would constitute ‘service’ within the
meaning of section 10AA of the Act would be a question of law and not a
question of fact. The High Court was, therefore, in error in not entertaining
the said plea and dismissing the appeal of the Revenue by labelling it as a
question of fact. The Supreme Court, therefore, set aside the order of the High
Court and remanded the case to the High Court to decide the aforesaid question
of law.

15. Deduction of tax at source – Assessee not heard by the
High Court and the review petition also dismissed – Supreme Court set aside the
orders and remanded the matter for decision afresh

Novo Nordisk Pharma India Ltd. vs. CIT (2016) 389 ITR 134
(SC)

The High Court allowed the appeal filed by the Revenue. The
question was as to whether the transaction between the assessee and the person
to whom certain payments were made was one attracting the provisions of section
194C of the Act.

The assessee sought review because: (i) the Counsel of the
assessee was unable to appear on the day of hearing and argue the case as he
was engaged in other court; (ii) the Court had not examined the relevant board
circular, (iii) that the deductee having paid the tax, there was no loss to the
Revenue, and as such the situation did not warrant levy of interest.

The High Court dismissed the review petition holding that:
(i) inability to appear due to other engagement could hardly constitute a
ground for review; (ii) the Board Circular was not relevant as the matter was
decided considering the three inter-linking agreements; and (iii) whether the
deductee had paid its tax or not was not a relevant question in so far the
provisions of section 194C was concerned as section 201 was only consequential.

On appeal, the Supreme Court noted that it was a fact that
the assessee was not heard when the impugned judgment was delivered. Even the
review petition filed by the Appellant before the High Court was also rejected.

In the circumstances, the Supreme Court set
aside the impugned judgment and the matters were remitted to the High Court for
hearing afresh.

Glimpses of Supreme Court Rulings

7.  Capital gains –
Exemption u/s. 54E is available to the depreciable assets which is a long term
capital asset and cannot be denied by referring to the fiction created u/s.50.

CIT vs. V.S. Dempo Company Ltd. (2016) 387 ITR 354 (SC)

In the return filed by the assessee for the Assessment Year
1989-90, the assessee had disclosed that it had sold its loading platform M.V.
Priyadarshni for a sum of Rs.1,37,25,000/- on which it had earned some capital
gains. On the said capital gains the assessee had also claimed that it was
entitled for exemption u/s. 54E of the Income Tax Act. The asset was purchased
in the year 1972 and sold sometime in the year 1989. Thus, the asset was almost
17 years old. Going by the definition of long term capital asset contained in
section 2(29B), it was admittedly a long-term capital asset. The Assessing
Officer however rejected the claim for exemption u/s. 54E on the ground that
the assessee had claimed depreciation on this asset and, therefore, provisions
of section 50 were applicable. Though this was upheld by the Commissioner of
Income Tax (Appeals), the Income Tax Appellate Tribunal allowed the appeal of
the assessee herein holding that the assessee was entitled for exemption under
Section 54E of the Act. The High Court dismissed the appeal of the Revenue.
While doing so the High Court relied upon its own judgment in the case of CIT
vs. ACE Builders Pvt. Ltd. [(2006) 281 ITR 210 [Bom]. The High Court
observed that section 50 of the Act which is a special provision for computing
the capital gains in the case of depreciable assets was not only restricted for
the purposes of section 48 or section 49 of the Act as specifically stated
therein, the said fiction created in sub-section (1) & (2) of section 50
had limited application only in the context of mode of computation of capital
gains contained in sections 48 and 49 and would have nothing to do with the
exemption that is provided in a totally different provision i.e. section 54E.
Section 48 deals with the mode of computation and section 49 relate to cost
with reference to certain mode of acquisition. This aspect was analysed by the
judgment of the Bombay High Court in the case of CIT vs. ACE Builders Pvt.
Ltd. (supra) in the following manner:

“In our opinion, the assessee cannot be denied exemption
u/s. 54E, because, firstly, there is nothing in section 50 to suggest that the
fiction created in section 50 is not only restricted to sections 48 and 49 but
also applies to other provisions. On the contrary, section 50 makes it
explicitly clear that the deemed fiction created in sub-section (1) & (2)
of section 50 is restricted only to the mode of computation of capital gains
contained in Section 48 and 49. Secondly, it is well established in law that a
fiction created by the legislature has to be confined to the purpose for which
it is created. In this connection, we may refer to the decision of the Apex
Court in the case of State Bank of India vs. D. Hanumantha Rao reported in 1998
(6) SCC 183. In that case, the Service Rules framed by the bank provided for
granting extension of service to those appointed prior to 19.07.1969.

The respondent therein who had joined the bank on 1.7.1972
claimed extension of service because he was deemed to be appointed in the bank
with effect from 26.10.1965 for the purpose of seniority, pay and pension on
account of his past service in the army as Short Service Commissioned Officer.
In that context, the Apex Court has held that the legal fiction created for the
limited purpose of seniority, pay and pension cannot be extended for other
purposes. Applying the ratio of the said judgment, we are of the opinion, that
the fiction created u/s. 50 is confined to the computation of capital gains
only and cannot be extended beyond that.

Thirdly, Section 54E does not make any distinction between
depreciable asset and non-depreciable asset and, therefore, the exemption
available to the depreciable asset u/s. 54E cannot be denied by referring to
the fiction created u/s. 50. Section 54E specifically provides that where
capital gain arising on transfer of a long term capital asset is invested or
deposited (whole or any part of the net consideration) in the specified assets,
the assessee shall not be charged to capital gains. Therefore, the exemption
u/s. 54E of the I.T. Act cannot be denied to the assessee on account of the
fiction created in Section 50.”

The Supreme Court held that it was in agreement with the
aforesaid view taken by the High Court.

The Supreme Court noted that the Gujarat High Court as well
as Guahati High Court had also taken the same view in the following cases:

1.  CIT 
vs. Polestar Industries [(2014) 221 Taxman 423 (Guj)];

2.  CIT vs. Tax vs. Assam Petroleum Industries
(P.) Ltd. [(2003) 262 ITR 587 (Guj.)].

The Supreme Court also noted that against the aforesaid
judgments no appeal had been filed.

In view of the foregoing, the Supreme Court did not find any
merit in the instant appeal which was accordingly, dismissed.

8. Business Expenditure – Amortisation of expenditure for
issue of share u/s. 35D – Amortisation allowable over a period of 10 years –
Where benefit is allowed for the first two assessment years, it cannot be denied
in the subsequent balance period.

Shasun Chemicals and Drugs Ltd. V. CIT (2016) 388 ITR 1
(SC)  

Business Expenditure – Bonus – Dispute with workmen – Payment
made to Trust to comply with the requirement of section 43B but the dispute was
settled and the payment was made before the expiry of time permissible u/s. 36
– Deduction was allowable and the provisions of section 40A(9) were not
attracted.

The assessee went in for public issue of shares in order to
raise funds to meet the capital expenditure and other expenditure relating to
expansion of its existing units of production both at Pondicherry and Cuddalore
and for expansion of its Research and Development Activity. The assessee issued
to public 15,10,000 equity shares of Rs.10/- each for cash at a premium of
Rs.30/- per share aggregating to Rs.6,04,00,000/-.

The aforesaid issue was opened for public subscription during
the financial year ending 31.03.1995 relevant to the Assessment Year 1995-96.
The assessee had, in the prospectus issued, clearly stated under the column
projects that the production capacity of its existing products, more
particularly Ibuprofen and Ranitidine was proposed to be increased.

The assessee incurred a sum of Rs.45,51,890/- towards the
aforesaid share issue expenses and claimed 1/10th of the aforesaid share issue
expenses each year u/s. 35D of the Act from the Assessment Years 1995-96 to
2004-05. The Assessing Officer on the same set of facts allowed the claim of
the assessee (1/10th of the share issue expenses u/s. 35D of the Act) for the
initial Assessment Year being the Assessment Year 1995-96 after examining the
materials produced. However, the Assessing Officer disallowed the expenses for
the Assessment Year 1996-97 on the ground that the share issue expenses were
not eligible for deduction in view of the decision of the Supreme Court in the
case of Brooke Bond India Ltd. vs. CIT [(1997) 225 ITR 798 (SC)],
stating that the expenditure incurred was capital in nature and hence not
allowable for computing the business profits.

Aggrieved against the aforesaid disallowance made by the
Assessing Officer for the Assessment Year 1996-97, the assessee filed an appeal
before the Commissioner of Income Tax (Appeals), [hereinafter referred to as
CIT(A)] who vide his order directed the Assessing Officer to verify
physically the factory premises of the assessee and find out, whether there
were any additions to the plant and machinery at the factory and whether there
were any additions to the buildings at the factory whereby any expansion has
been made to the existing industrial undertaking to justify the claim made by
the assessee.

In furtherance to the aforesaid direction, the Assessing
Officer after making due physical verification of the factory premises and on
being satisfied with the expansion of the facilities to the industrial
undertaking duly allowed the claim of share issue expenses. While doing so, the
Assessing Officer, for the assessment year 1996-97, passed a detailed and
elaborate order after scrutinising all the materials made available to him and
recorded a positive finding of fact that there was an expansion to the existing
units of the industrial undertaking and after being satisfied of the same duly
allowed the claim of share issue expenses u/s. 35D.

In the return by the assessee for the assessment year
2001-02, it was mentioned by the assessee that it had paid bonus to its
employees to the tune of Rs.96,08,002/- in the said Financial Year and,
therefore, it claimed deduction. However, invoking the provisions of section
40A(9), the said expenditure was disallowed on the ground that it was not paid
in cash to the concerned employees. CIT(A) allowed the expenditure and the same
view was taken by the ITAT but the High Court has reversed the view of ITAT on
this ground also.

In the aforesaid backdrop, two questions were raised before
the Supreme Court by the assessee.

As regards to the issue amortisation u/s. 35D of the
expenditure incurred on issue of shares, the Supreme Court noted that in the
Income Tax Return which was filed for the Assessment Year 1995-96, the assessee
had claimed that it had incurred a sum of Rs.45,51,890/- towards the share
issue expenses and had claimed 1/10th of the aforesaid share issue expenses
u/s. 35D of the Act from the Assessment Year 1995-96. This claim of the
assessee was found to be justified and allowable under the aforesaid provisions
and on that basis 1/10th share issue expenses was allowed u/s. 35D of the Act.
When it was again claimed for the Assessment Year 1996-97, though it was
disallowed and on directions of the Appellate Authority, the Assessing Officer
made physical verification of the factory premises. He was satisfied that there
was expansion of the facilities to the industrial undertaking of the assessee.
It was on this satisfaction that for the Assessment Year 1996-97 also the
expenses were allowed. The Supreme Court held that once this position is
accepted and the clock had started running in favour of the assessee, it had to
complete the entire period of 10 years and benefit granted in first two years
could not have been denied in the subsequent years as the block period was 10
years starting from the Assessment Year 1995-96 to Assessment Year 2004-05. The
Supreme Court observed that the High Court, however, disallowed the same
following the judgment of the Supreme Court in the case of Brooke Bond India
Ltd (supra). In the said case it was held that the expenditure incurred on
public issue for the purpose of expansion of the company is a capital
expenditure. However, in spite of the argument raised to the effect that the
aforesaid judgment was rendered when section 35D was not on the statute book
and this provision had altered the legal position, the High Court still chose
to follow the said judgment. According to the Supreme Court it was here where
the High Court went wrong as the instant case was to be decided keeping in view
the provisions of section 35D. The Supreme Court held that in any case, it
warrants repetition that in the instant case under the very same provisions
benefit was allowed for the first two Assessment Years and, therefore, it could
not have been denied in the subsequent block period. The Supreme Court thus,
answered the question in favour of the assessee holding that the assessee was
entitled to the benefit of section 35D for the Assessments Years in question.

So far as the other question regarding deduction on account
of payment of bonus to the employees of the assessee was concerned, the Supreme
Court noted that in the Assessment Years in question the workers of the
assessee had raised a dispute of quantum of bonus which had led to the labour
unrest as well. Because of this the workers had finally refused to accept the
bonus offered to them. Faced with this situation, the assessee had made the
payment to the Trust to comply with the requirement of section 43B, as the said
provision makes it clear that deduction in respect of bonus would be allowed
only if actual payment was made. Pertinently, the dispute could be settled with
the workers well in time and for that reason payment of bonus was made to the
workers on the very next day of deposit of the said amount in the Trust by the
assessee. This happened before the expiry of due date by which such payment was
supposed to be made in order to claim deduction u/s. 36 of the Act. However,
since the payment was made from the Trust, the Assessing Officer took the view
that as the payment was not made by the assessee to the employees directly in
cash, it was not allowable in view of the provisions of section 40A(9). Though
this view was not accepted by the CIT(A) as well as ITAT, the High Court had
found justification in the stand taken by the Assessing Officer. According to
the Supreme Court, here also the High Court had gone wrong in relying upon the
provisions of section 40A(9) of the Act.

The provisions of section 36 which enumerate various kinds of
expenses which are allowable as deduction while computing the business income
u/s. 28. The amount paid by way of bonus is one such expenditure which is
allowable under clause (ii) of sub-section (1) of section 36. According to the
Supreme Court there was no dispute that this amount was paid by the assessee to
its employees within the stipulated time. Embargo specified u/s. 43B or
40A(9)  did not come in the way of the
assessee. Therefore, the High Court was wrong in disallowing this expenditure
as deduction while computing the business income of the assessee and the
decision of the ITAT was correct.

On both counts, the order of the High Court was set aside by
the Supreme Court and the appeals were allowed.

Note: In the above case, in the context of the second
issue relating to deductibility of bonus payment, some of the observations of
the apex court relating to sections 40A(9) and 43B lack clarity and do not seem
to be in line with the provisions and hence, they are ignored.

9  Appeal to the High
Court – High Court must frame the substantial question(s) of law arising in the
appeal before answering the same.

Jai Hind Cycle Company Ltd. vs. CIT (2016) 388 ITR 482
(SC)

The only point canvassed at the hearing before the Supreme
Court was that the income tax appeal u/s. 260A 
had been decided by the High Court without framing any substantial
question of law. This, according to the Appellant was impermissible on the
basis of several decisions of the Supreme Court including the one in M.
Janardhana Rao vs. Joint CIT reported in [(2005) 273 ITR 50 (SC)].

The Supreme Court after perusing the said order of the Court,
was of the view that the High Court ought to have framed the substantial
question(s) of law arising in the appeal before answering the same. The High
Court having not done that, the Supreme Court set aside the order passed by the
High Court and remanded the matter to the High Court for a de novo
consideration after formulating the substantial question(s) of law arising, if
any.

The Supreme Court clarified that it had
expressed no opinion on the merits of the case.

Direct Taxes

14.  Salary income
accrued by a seafarer for services rendered outside India is not taxable in
India merely because it is received in a NRE account maintained with a bank in
India

Circular No. 13/2017 dated 11. 04. 2017

15. Finance Bill 2017 received Presidential Assent on
31.3.2017

16.  Guidelines for
waiver of interest u/s. 201(1A) of the Act 

Circular No. 11/2017 dated 24. 03. 2017

CBDT has prescribed certain guidelines to be followed by
CCITs and DGITs while considering the applications for waiver of interest u/s.
201 (1A) of the Act in following cases:

–   Search and seizure cases where the assessee
was unable to ascertain the TDS liability to deduct and pay it.

–   As on date of deduction of TDS, the law
prevailing was favouring the assessee and the demand has arisen due to change
of law retrospectively or due to larger bench of jurisdictional Court’s /
Supreme Court’s order against the case of the assessee.

–   Default on account of non-deduction or lower
deduction of tax payment to non resident under prescribed circumstances.

It has been clarified that the waiver application would be
considered even if the assessee has paid the interest.

17.  CBDT issues FAQs
to clarify issues relating to ICDS 

Circular No. 10/2017 dated 23. 03. 2017

Direct Taxes

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19 CBDT provides clarification on classification of income from sale of shares as capital gains or business income –

Circular No. 6/2016 dated 29.02.16

In continuation to the earlier Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007 further clarification has been provided by CBDT for determining income from sale of shares as Capital gains or Business Income:

i) If the assesse has treated the securities in his books as stock in trade the same should be accepted.

ii) In case holding period of the securities is more than a year and the assessee wants to treat it as a Capital asset, then the AO needs to accept it provided the treatment is consistently followed by the assessee in the subsequent years.

iii) In all other cases, the earlier mentioned Instructions and Circular be considered for determination the nature of income.

iv) These guidelines would not apply to transactions where genuineness of transaction is questionable.

It is further clarified that these are broad guidelines and the determination needs to be based on the facts of each case.

20 Clarification by CBDT that the provisions of India-UK DTAA would be applicable to a partnership that is a resident of either India or UK, to the extent that the income derived by such partnership, estate or trust is subjected to tax in the State as the income of a resident, either in its own hands or in the hands of its partners or beneficiaries. –

Circular No. 02/2016 dated 25.02.2016

21 CBDT extends the benefit of higher monetary limits laid down in Circular 21 of 2015 dated 10.12.2015 for filing appeals to Cross Objections filed by Department before ITAT and references made to the High Court u/ss. 256(1) and 256(2) of the Act –

Letter No: F.No.279/Misc./M-142/2007-ITJ (Part) dated 8.03.2016

22 CBDT clarifies on the status of the EPC consortiums – when to be treated as AOP –

Circular no. 7/2016 dated 7.03. 2016

Certain broad parameters are laid down for NOT treating the EPC consortiums as AOP and thereby not taxing it as a separate entity:

i) Clear independence exists between each member in terms of responsibility, resources and risk for the scope of work defined for him.

ii) Each member earns profit/loss for his scope of work though all together can share contract price at the gross level for accounting convenience.

iii) Resources in terms of men and materials used by each member are under his risk and control parameters.

iv) There is no unified control and management of the consortium and common management is for administrative convenience and co-ordination.

v) Other facts and circumstances which point out that consortium is not an AOP.

It is further clarified that this Circular shall not be applicable in cases where all or some of the members of the consortium are Associated Enterprises within the meaning of section 92A of the Act. In such cases, the Assessing Officer will decide whether an AOP is formed or not keeping in view the relevant provisions of the Act and judicial jurisprudence on this issue.

23 Guidelines for Implementation of Transfer Pricing Provisions – Instruction No. 15/2015, dated 16th October, 2015 replaced by Instruction No. 3/2016 dated 10 March 2016 ( full text available on www.bcasonline.org

24 CBDT reaffirms its view point of not adopting coercive action against payees for TDS which is not deposited by the payer and directs the AO to follow the Directives issued in letter dated 01.06.2015. –Office memorandum – no:

F.No. 275/29/2014-IT (B) dated 11 March 2016.

25 Amendment to Rule 114E and Form No.61A – Annual Information Return Notification No. 19 dated 18.3.2016- Income-tax (7th Amendment) Rules, 2016

26 Form Sahaj (ITR-1), ITR-2, ITR-2A, ITR-3, Sugam (ITR-4S), ITR-4, ITR-5, ITR-6, ITR-7 and ITR-V notified for A.Y. 2016-17 – Notification No. 24 dated 30.04. 2016 vide Income-tax (9th Amendment) Rules, 2016

27 Procedure for registration and submission of statement as per clause (k) of sub section (1) of section 285BA read with Sub rule (7) of Rule 114G of Income-tax Rules, 1962 –

Notification No. 4 dated 6.4. 2016

Glimpses of Supreme Court Rulings

6. Appeal to the Supreme Court – Dismissed as it was against
the order of remand

Addl. CIT vs. Vidarbh
Irrigation Department Corporation (2017) 
392 ITR 1 (SC)

The issue that arose
before the Supreme Court was as to whether the Respondent, namely, Vidarbh
Irrigation Department Corporation (VIDC) was a local authority within the
meaning of section 10(20A) of the Act.

The Supreme Court noted
that though this provision stood omitted vide section 4(m) w e f
1-4-2003 by the Finance Act 2002 but as the assessment year in question was
prior thereto and therefore was relevant.

The Supreme Court found
that the High Court referring to the judgement of the Supreme Court in Gujarat
Industrial Development Corporation vs. CIT [(1997) 227 ITR 414(SC)] had
observed that if the authority is constituted under the enactment either for
satisfying the need for housing accommodation or for planning, development or
improvement of cities, towns and villages or for both, income of such authority
was exempt from tax u/s. 10(20A). 

The Supreme Court noted
that according to the High Court the Tribunal had not considered the issue in
the light of the provisions of VIDC as well as the Maharashtra Irrigation Act,
1976 and the Bombay Canal Rules, 1934 and hence it had remanded the case back
to the Tribunal for fresh consideration.

The Supreme Court declined
to interfere with the judgment of the High Court and dismissed the appeal of
the Income-tax Department because the High Court had only remanded the issue to
the Tribunal for fresh consideration.

7.
Depreciation – The construction was made by the firm though the assessee
company had reimbursed the amount but the fact remained that the construction
was not carried out by the assessee himself and therefore, Explanation 1 to
section 32  would not come to the aid of
the assessee – Assessee not entitled to depreciation

Mother Hospital Pvt.
Ltd. vs. CIT (2017) 392 ITR 628 (SC)

A partnership firm Mother
Hospital had been constituted by Dr. M. Ali, Dr. Ayesha Beevi and their three
children. 4.3 acres of land belonged to the firm. The purpose of the
partnership firm was to run a super speciality hospital in Thrissur Town in
Central Kerala and, accordingly, the firm started construction of the hospital
building. Since it was felt expedient to form a private limited company to run
and manage the hospital (then under construction), a company, Mother Hospital
Private Ltd., was formed for the said purpose and was incorporated on
30.12.1988. The shares which are held by seven persons are closely related to
each other, viz., (1) Dr. M. Ali; (2) Dr. Ayesha Beevi (wife of Dr. M. Ali);
(3) Nisha, (4) Shabna and (5) Sharmini (all children of Dr. M. Ali and Dr. Ayesha
Beevi); (6) Khadeeja Beevi (mother of Dr. M. Ali); (7) and Akbar Ali (father of
Ayesha Devi). Out of the total capital of Rs.1,33,63,520/- of the company, the
value of the shares held by Khadeeja Beevi and Akbar Ali were Rs.5,000/- each.

Thereafter, an agreement
was entered into between the firm and the company by which it was agreed that
the firm will complete the construction of the building and hand over
possession of the same on completion, on the condition that the entire cost of
construction of the building should be borne by the company. The relevant
clause in the agreement read as under:

“The hospital building
shall belong to the company on the company taking possession thereof; but
however that the firm has and will have a lien on the hospital building and on
any improvements or additions thereto until the money owing by the company to
the firm by virtue of this agreement is fully paid off.”

The company took
possession of the building on its completion on 18.12.1991 and was running the
hospital therein with effect from 19.12.1991. The accounts of the company were
debited with the cost of construction of the building, i.e., Rs.1,37,83,149.83.
The accounts of the firm had also been credited with the payments of
Rs.1,06,78,456/- made by the company to the firm for completion of the
construction. The balance amount payable by the company to the firm had been
carried as the company’s liability in its Balance Sheet, for which the firm had
a lien on the building.

This amount was later paid
to the firm. The one time building tax payable by the owner of a building under
the Kerala Building Tax Act was also paid by the company.

Since the ownership of the
land had to remain with the firm, it was also agreed that the land would be
given on lease by the firm to the company and agreement dated 01.02.1989
provided for the said contingency as well in clause 4(g) which read as under:

“(g) In consideration of
the FIRM agreeing with the COMPANY to permit situation of the hospital building
or any additions thereto belonging to the FIRM as aforesaid, the COMPANY shall
pay to the FIRM a ground rent of Rs.100/- per month, but however that the
liability to pay such ground rent shall be on and from the 1st day
of April 93 only.”

The first assessment year
of the company was 1992-1993. The company filed its return for the said year in
which it claimed depreciation on the building part of the said property u/s. 32
of the Income-tax Act. The assessment officer, after construing the provisions
of the aforesaid agreement came to the conclusion that the assessee had not
become the owner of the property in question in the relevant assessment year
and, therefore, rejected the claim of depreciation. Appeal preferred by the
assessee-company before the Commissioner of Income Tax (Appeals) met with the
same fate. However, in further appeal before the Income Tax Appellate Tribunal
(ITAT), the appellant succeeded. This success, however, was proved to be only
of temporary nature inasmuch as the appeal of the Revenue against the order of
the ITAT filed u/s. 260A of the Income-tax Act before the High Court was
allowed setting aside the aforesaid order of ITAT.

The High Court held that
the assessee had not become the owner of the property in question in the
relevant assessment year and clause 4(g) could not confer any ownership rights
on the assessee.

On an appeal by the
assessee-company against the order of the High Court, the Supreme Court agreed
with the view taken by the High Court. The Supreme Court held that the building
which was constructed by the firm belonged to the firm. Admittedly it was an
immovable property. The title in the said immovable property cannot pass when
its value is more than Rs.100/- unless it is executed on a proper stamp paper
and is also duly registered with the sub-Registrar. Nothing of the sort took
place. In the absence thereof, it could not be said that the assessee had
become the owner of the property.

Before the Supreme Court,
another argument was raised by the learned counsel appearing for the appellant.
It was submitted that having regard to clause 4(g), the appellant had become
the lessee of the property in question and since the construction was made by
the appellant from its funds, by virtue of Explanation (1) to section 32 of the
Income-tax Act, the assessee was, in any case, entitled to claim depreciation.
This explanation read as under:

“32(1)
……………………

Explanation 1. Where the
business or profession of the assessee is carried on in a building not owned by
him but in respect of which the assessee holds a lease or other right of
occupancy and any capital expenditure is incurred by the assessee for the
purposes of the business or profession on the construction of any structure or
doing of any work in or in relation to and by way of renovation or extension of
or improvement to the building, the provisions of this clause shall apply as if
the said structure or work is a building owned by the assessee.”

According to the Supreme
Court, from the plain language of the aforesaid explanation it was clear that,
it is only when the assessee holds a lease right or other right of occupancy
and any capital expenditure is incurred by the assesee on the construction of
any structure or doing of any work in or in relation to and by way of
renovation or extension of or improvement to the building and the expenditure
on construction is incurred by the assessee, that assessee would be entitled to
depreciation to the extent of any such expenditure incurred.

The Supreme Court held
that in the instant case, the record showed that the construction was made by
the firm. It was a different thing that the assessee had reimbursed the amount.
The construction was not carried out by the assessee himself. Therefore, the
explanation also would not come to the aid of the assessee. The Supreme Court,
thus, dismissed the appeal being without any merit.

8. Non-resident – Shipping Business – Fees for technical
services – Maersk Net System was a facility which enabled the agents to access
several information like tracking of cargo of a customer, transportation
schedule, customer information, documentation system and several other
informations – Expenditure which was incurred for running this business was
shared by all the agents – By no stretch of imagination, payments made by the
agents could be treated as fee for technical service, it was in the nature of
reimbursement of cost whereby the agents paid their proportionate share of the
expenses incurred on these said systems and for maintaining those systems –
Also, Maersk Net System was an integral part of the shipping business and the
business could not be conducted without the same and ‘profit’ from operation of
ships under Article 19 of DTAA would necessarily include expenses for earning
that income and cannot be separated

DIT (International
taxation) vs. A. P. Moller Maersk A/S

(2017) 392 ITR 186 (SC)

The Respondent Assessee, a
foreign company engaged in the shipping business and was a tax resident of
Denmark, with whom India has entered into a Double Taxation Avoidance Agreement
(hereinafter referred to as the ‘DTAA’). The Assessing Officer (AO) assessed
the income in the hands of the Assessee and allowed the benefit of the said
DTAA. However, while making the assessment, the AO observed that the Assessee
had agents working for it, namely, Maersk Logistics India Limited (MLIL),
Maersk India Private Limited (MIPL), Safmarine India Private Limited (SIPL) and
Maersk Infotech Services (India) Private Limited (MISPL). These agents booked
cargo and acted as clearing agents for the Assessee. In order to help all its
agents, across the globe, in this business, the Assessee had set up and was
maintaining a global telecommunication facility called Maersk Net System which
was a vertically integrated communication system. The agents were paying for
said system on pro-rata basis. According to the Assessee, it was merely a
system of cost sharing and the payments received by the Assessee from MIPL,
MLIL, SIPL and MISPL were in the nature of reimbursement of expenses. The AO
did not accept this contention and held that the amounts paid by these three
agents to the Assessee was consideration/fees for technical services rendered
by the assesses and, accordingly, held them to be taxable in India under
Article 13(4) of the DTAA and assessed tax @ 20% u/s. 115A of the Income-tax
Act, 1961.

The Assessee preferred an
appeal against the Assessment Order before the Commissioner of Income Tax
(Appeals) (for short, ‘CIT (A)’). The CIT(A) dismissed the appeal. Aggrieved by
the order passed by the CIT(A), the Assessee preferred further appeal before
the Income Tax Appellate Tribunal (ITAT). Here, the Assessee succeeded as the
ITAT, allowed the appeal of the Assessee.

Aggrieved by the order
passed by the ITAT, the department filed an appeal before the High Court of
Bombay. The High Court, dismissed the Revenue’s appeal holding that the ITAT
had correctly observed that utilisation of the Maersk Net Communication System
was an automated software based communication system which did not require the
Assessee to render any technical services. It was merely a cost sharing
arrangement between the Assessee and its agents to efficiently conduct its
shipping business. The High Court further held that the principles involved in
the decision of The Director of Income Tax (International Taxation)-1 vs.
M/s. Safmarine Container Lines NV  (2014)
367 ITR 209 would also govern the present case and that the Maersk Net used
by the agents of the Assessee entailed certain costs reimbursement. It was part
of the shipping business and could not be captured under any other provisions
of the Income Tax Act except under DTAA. While arriving at the aforesaid
decision, the High Court specifically observed that there was no finding by the
AO or the Commissioner that there was any profit element involved in the
payments received by the Assessee from its agents.

The Supreme Court noted
that the facts which emerged on record were that the Assessee was having its IT
System, which was called the Maersk Net. As the Assessee was in the business of
shipping, chartering and related business, it had appointed agents in various
countries for booking of cargo and servicing customers in those countries, preparing
documentation etc. through these agents. Aforementioned three agents were
appointed in India for the said purpose. All these agents of the Assessee,
including the three agents in India, used the Maersk Net System. This system
was a facility which enabled the agents to access several information like
tracking of cargo of a customer, transportation schedule, customer information,
documentation system and several other informations. For the sake of
convenience of all these agents, a centralised system was maintained so that
agents were not required to have the same system at their places to avoid
unnecessary cost. The system comprised of booking and communication software,
hardware and a data communications network. The system was, thus, integral part
of the international shipping business of the Assessee and ran on a combination
of mainframe and non-mainframe servers located in Denmark. Expenditure which
was incurred for running this business was shared by all the agents. In this
manner, the systems enabled the agents to co-ordinate cargos and ports of call
for its fleet.

The Supreme Court held
that aforesaid were the findings of facts. It was clearly held that no
technical services were provided by the Assessee to the agents. Once these were
accepted, by no stretch of imagination, payments made by the agents could be
treated as fee for technical service. It was in the nature of reimbursement of
cost whereby the three agents paid their proportionate share of the expenses
incurred on these said systems and for maintaining those systems. It was
re-emphasised that neither the AO nor the CIT (A) had stated that there was any
profit element embedded in the payments received by the Assessee from its
agents in India. Record showed that the Assessee had given the calculations of
the total costs and pro-rata division thereof among the agents for
reimbursement. Not only that, the Assessee had even submitted before the
Transfer Pricing Officer that these payments were reimbursement in the hands of
the Assessee and the reimbursement was accepted as such at arm’s length. Once
the character of the payment is found to be in the nature of reimbursement of
the expenses, it could not be income chargeable to tax.

The Supreme Court further
noted that, the Revenue itself had given the benefit of Indo-Danish DTAA to the
Assessee by accepting that under Article 9 thereof, freight income generated by
the Assessee in these Assessment Years was not chargeable to tax as it arose
from the operation of ships in international waters. The Supreme Court held
that once that was accepted and it was also found that the Maersk Net System
was an integral part of the shipping business and the business could not be
conducted without the same, which was allowed to be used by the agents of the
Assessee as well in order to enable them to discharge their role more
effectively as agents, it was only a facility that was allowed to be shared by
the agents. By no stretch of imagination it could be treated as any technical
services provided to the agents. In such a situation, ‘profit’ from operation
of ships under Article 19 of DTAA would necessarily include expenses for
earning that income and cannot be separated, more so, when it was found that
the business could not be run without these expenses.

9. Prevention of Corruption Act – Returns and the orders in
the I. T. proceedings would not by themselves establish that such income had
been from lawful source

State of Karnataka vs.
Selvi J. Jayalalitha & Ors. (2017) 392 ITR 97 (SC)

Cash credits – The process
undertaken by the Income Tax authorities u/s. 68 of the Act is only to
determine as to whether the receipt is an income from undisclosed sources or
not and is unrelated to the lawfulness of the sources or of the receipt.

In a case of a person
having disproportionate assets to his known sources of income under the
Prevention of Corruption Act, 1988, the Supreme Court has made the following
observations:

1. Though
the I.T. returns and the orders passed in the I.T. proceedings in the instant
case recorded the income of the Accused concerned as disclosed in their
returns, in view of the charge levelled against them, such returns and the
orders in the I.T. proceedings would not by themselves establish that such
income had been from lawful source as contemplated in the Explanation to
section 13(1)(e) and that independent evidence would be required to account for
the same.

2. Even if
such returns and orders are admissible in evidence, the probative value would
depend on the nature of the information furnished, the findings recorded in the
orders and having a bearing on the charge levelled. In any view of the matter,
however, such returns and orders would not ipso facto either
conclusively prove or disprove the charge and can at best be pieces of evidence
which have to be evaluated along with the other materials on record.

3.  Neither
the income tax returns nor the orders passed in the proceedings relatable
thereto, either definitively attest the lawfulness of the sources of income of
the Accused persons or are of any avail to them to satisfactorily account the
disproportionateness of their pecuniary resources and properties as mandated by
section 13(1)(e) of the Act.

4.  The
property in the name of the income tax Assessee itself cannot be a ground to
hold that it actually belongs to such an Assessee and that if this proposition
was accepted, it would lead to disastrous consequences. In such an eventuality
it will give opportunities to the corrupt public servant to amass property in
the name of known person, pay income tax on their behalf and then be out from
the mischief of law.

5.  In the
tax regime, the legality or illegality of the transactions generating profit or
loss is inconsequential qua the issue whether the income is from a
lawful source or not. The scrutiny in an assessment proceeding is directed only
to quantify the taxable income and the orders passed therein do not certify or
authenticate that the source(s) thereof to be lawful and are thus of no
significance vis-à-vis a charge u/s. 13(1)(e) of the Act.

6.  The
submission of income tax returns and the assessments orders passed thereon,
does not constitute a full proof defence against a charge of acquisition of
assets disproportionate to the known lawful sources of income as contemplated
under the PC Act and that further scrutiny/analysis thereof is imperative to
determine as to whether the offence as contemplated by the PC Act is made out
or not.

 7. If the Assessing Officer on the consideration
of the materials sought for is not satisfied with the explanation provided by
the Assessee qua an income determined by undisclosed sources, in terms
of section 68, such income can be made subject to income tax.

8. Even if
such transaction is evidenced by banking operations as well as contemporaneous
records pertaining thereto, the same ipso facto would not be
determinative to hold that the transaction was a genuine transaction.

9.    The process undertaken by the Income Tax authorities u/s.
68 of the Act is only to determine as to whether the receipt is an income from
undisclosed sources or not and is unrelated to the lawfulness of the sources or
of the receipt. Thus even if a receipt claimed as a gift is after the scrutiny
of the Income Tax Authorities construed to be income from undisclosed sources
and is subjected to income tax, it would not for the purposes of a charge u/s.
13(1)(e) of the Act be sufficient to hold that it was from a lawful source in
absence of any independent and satisfactory evidence to that effect.

Direct Taxes

89.  CBDT issues
clarification for Assessing Officers to keep the proceeedings of collection of
taxes under abeyance for Residents of Sweden who have invoked the Mutual
Agreement Procedure through the Competent Authority under the DTAA between
India – Sweden for up to two years subject to fulfillment of prescribed
conditions. – Instruction No. 01/2017 dated 04.01.2007.

90.  Circular on TDS on
salaries u/s. 192 for financial year 2016-17 – Circular No. 01/2017 dated
02.01.2017

91.  Circular providing
clarifications on taxation of indirect transfers (Circular no 41/2017) has been
kept in abeyance I in light of various representations received from various
entities including FIIs, FPIs, VCFs and other stake holders – Press release
dated 17th January 2017

92. 
Clarifications  on various
taxation and related issues for the Pradhan Mantri Garib Kalyan Yojana, 2016 –
Circular No.2 of 2017 dated 18.01.2017

Glimpses Of Supreme Court Rulings

14.  Search and seizure – Assessment of third
person – It is an essential condition precedent that any money, bullion or
jewellery or other valuable articles or thing or books of accounts or documents
seized or requisitioned should belong to a person other than the person
referred to in section 153A of the Act.

 

Appeal – Power
to admit additional ground – As per the provisions of section 153C of the Act,
incriminating material which is seized has to pertain to the Assessment Years
in question and when it is undisputed that the documents which are seized do
not establish any co-relation, document-wise, essential requirement u/s. 153C of
the Act for assessment under that provision is not fulfilled, it becomes a
jurisdictional fact – Tribunal was justified in admitting the additional ground

 

Commissioner
of Income Tax-III, Pune vs. Sinhgad Technical Education Society (2017) 397 ITR
344 (SC)

 

A search and
seizure operation was carried out under section 132 of the Act on one Mr. M. N.
Navale, President of the Sinhgad Technical Education Society (the
assessee-society), and his wife on July 20, 2005 from where certain documents
were seized. On the basis of these documents, which according to the Revenue
contained notings of cash entries pertaining to capitation fees received by
various institutions run by the Assessee, a notice u/s.153C of the Act was
issued on April 18, 2007.

 

In the order of
assessment, the Assessee was treated as an Association of Person (AOP). Having
regard to the complexity involved in the accounts and the changes to be
effected on account of the change in the status of the Assessee to that of AOP,
a special audit u/s. 142(2A) of the Act was conducted. On the basis of special
audit report, taxable incomes for the Assessment Years 1999-2000 to 2006-07 had
been worked out.

 

Assessment Year
1999-2000 was covered u/s.147 of the Act, Assessment Year 2006-07 was covered
u/s.143(3) of the Act and Assessment Years 2000-01 to 2005-06 were covered
u/s.153C read with section143(3) of the Act.

The Assessee
filed appeal there against, which was partially allowed by the Commissioner of
Income Tax (Appeals) {CIT(A)}. He, however, upheld the order of the AO, holding
that the Assessee was not eligible for exemption u/s.11 of the Act and,
therefore, donations received were rightly treated as income. Against the
aforesaid part of the order, which was against the Assessee, it preferred further
appeal to the ITAT. In the appeal before the ITAT, the Assessee raised
additional ground questioning the validity of the notice u/s.153C of the Act on
the ground that satisfaction was not properly recorded and also that the notice
u/s.153C was time barred in respect of Assessment Years 2000-01 to 2003-04. The
ITAT allowed the Assessee to raise the additional ground and decided the same
in favour of the Assessee thereby quashing the notice in respect of the
aforesaid Assessment Years. Challenging this order, the Revenue filed appeals
before the High Court. However, the High Court dismissed these appeals.

 

The objection
of the Revenue before the Supreme Court was that it was improper on the part of
the ITAT to allow additional ground to be raised, when the Assessee had not
objected to the jurisdiction u/s.153C of the Act before
the AO.

 

The Supreme
Court noted that the ITAT permitted this additional ground by giving a reason
that it was a jurisdictional issue taken up on the basis of facts already on
the record and, therefore, could be raised. The ITAT had held that as per the
provisions of section 153C of the Act, incriminating material which was seized
had to pertain to the Assessment Years in question and it was an undisputed
fact that the documents which were seized did not establish any co-relation,
document-wise, with the aforesaid four Assessment Years. Since this requirement
u/s. 153C of the Act was essential for assessment under that provision, it
became a jurisdictional fact. The Supreme Court found this reasoning of the
ITAT to be logical and valid, having regard to the provisions of section 153C
of the Act. According to the Supreme Court, para 9 of the order of the ITAT
revealed that the ITAT had scanned through the Satisfaction Note and the material
which was disclosed therein was culled out and it showed that the same belonged
to Assessment Year 2004-05 or thereafter. After taking note of the material in
para 9 of the order, the position that emerged therefrom was discussed in para
10. It was specifically recorded that the counsel for the Department could not
point out to the contrary. It was for this reason the High Court had also given
its imprimatur to the aforesaid approach of the Tribunal. The Supreme
Court further noted that the learned senior Counsel appearing for the
Respondent, had argued that  notices  in  
respect of Assessment Years 2000-01 and 2001-02 were even time-barred.

 

The Supreme
Court held that the ITAT rightly permitted this additional ground to be raised
and correctly dealt with the same ground on merits as well. Order of the High
Court affirming this view of the Tribunal was, therefore, without any blemish.
In view of the aforementioned findings, the Supreme Court was of the view that
it was not necessary to enter into the controversy as to whether the notice in
respect of the Assessment Years 2000-01 and 2001-02 was time-barred.

 

The Supreme
Court observed that the Gujarat High Court in Kamleshbhai Dharamshibhai
Patel vs. CIT (2013) 31 taxmann.com 50 had categorically held that it was
an essential condition precedent that any money, bullion or jewellery or other
valuable articles or thing or books of accounts or documents seized or
requisitioned should belong to a person other than the person referred to in
section153A of the Act. According to the Supreme Court, this proposition of law
laid down by the High Court was correct, which was also stated by the Bombay
High Court in the impugned judgement as well. The Supreme Court noted that
judgement of the Gujarat High Court in the said case went in favour of the
Revenue when it was found on facts that the documents seized, in fact, pertain
to third party, i.e. the Assessee, and, therefore, the said condition precedent
for taking action u/s.153C of the Act had been satisfied.

 

The Supreme
Court also held that likewise, the Delhi High Court in SSP Aviation Limited
vs. DCIT (2012) 346 ITR 177 (Delhi) had also decided the case on altogether
different facts which had no bearing once the matter was examined in the
aforesaid hue on the facts of this case. The Bombay High Court has rightly
distinguished the said judgement as not applicable.

 

According to
the Supreme Court, there was no merit in these appeals.

 

The Supreme
Court however, clarified that it had not dealt with the matter on merits
insofar as incriminating material found against the Assessee or Mr. Navale was
concerned.

The Supreme
Court dismissed the appeals with the aforesaid observations.

 

15. Search and
seizure – In view of the amendment made in section 132A of the IT Act, 1961 by
Finance Act of 2017, namely, that the ‘reason to believe’ or ‘reason to
suspect’, as the case may be, shall not be disclosed to any person or any
authority or the appellate Tribunal as recorded by IT authority u/s.132 or section
132A, the Supreme Court could not go into that question of validity of the
search at all

 

N. K.
Jewellers and Ors. vs. Commissioner of Income Tax

(398 ITR 116
(SC).

 

On 27th
May, 2000, an employee of the Appellant was returning from Amritsar by train No.
2030, Swarn Shatabdi Express and he was found in the possession of Rs. 30 lakh
cash in a search by Railway Police. The SHO, GRP Station, Jalandhar after
making enquiries from the concerned employee registered a case under sections
411/414 of the Indian Penal Code on 27th May, 2000.

 

The said
information was received by the Investigation Unit, Jalandhar from SHO, GRP
Station Jalandhar on 29th May, 2000. Warrant of authorisation
u/s.132A of the IT Act, 1961 (the Act), was obtained from the Director of IT,
Ludhiana and the cash of Rs. 30 lakh was requisitioned on 3rd June,
2000 and seized. Proceeding for assessment for the block period from 1st
April, 1991 to 3rd June, 2000 u/s. 158BD of the Act was initiated.

 

The explanation
of the Appellant before the assessing authority was that his employee had gone
to Amritsar to make some purchases of gold but the transaction did not
materialise. The AO was of the view that the amount represented sales of gold
made by the Appellant on earlier occasions and the sale proceeds were being
carried back to Delhi. After considering the statements of various persons and
other material on record, the authorities came to the conclusion that it was
concealed income and accordingly, the Appellant was assessed to tax. As such, the
explanation of the Appellant was not accepted and the High Court also took the
view that the Appellant was disbelieved for adequate reasons and hence, no
substantial question of law arises for its consideration.

 

Before the
Supreme Court, the learned Counsel for the Appellant submitted that the
proceedings initiated u/s.132 of the Act were invalid for the reason that it
could not be based on a search conducted on a train by the police authorities
and, therefore, the proceedings initiated for block assessment period 1st
April, 1991 to 3rd June, 2000 were without jurisdiction.

 

The Supreme
Court noted that this plea was not raised by the Appellant before any of the
authorities. Further, it noted the amendment made in section 132A of the IT
Act, 1961 by Finance Act of 2017, namely, that the ‘reason to believe’ or
‘reason to suspect’, as the case may be, shall not be disclosed to any person
or any authority or the appellate Tribunal as recorded by IT authority u/s.132
or Section132A. According to the Supreme Court, it therefore, could not go into
that question at all. Even otherwise, the Supreme Court found that the
explanation given by the Appellant regarding the amount of cash of Rs. 30 lakh
found by the GRP and seized by the authorities had been disbelieved and had
been treated as income not recorded in the books of account maintained by it.
In view of the above, according to the Supreme Court there was no infirmity in
the order passed by the High Court.

 

Accordingly,
the civil appeal was dismissed.

 

16. Appeal to
the High Court – In order to admit the second appeal, what is required to be
made out by the Appellant being sine qua non for exercise of powers u/s.
100 of the Code, is existence of “substantial question of law”
arising in the case so as to empower the High Court to admit the appeal for
final hearing by formulating such question

 

Maharaja
Amrinder Singh vs. The Commissioner of Wealth Tax (2017) 397 ITR 752 (SC)

 

The issue
involved in the wealth tax appeals for the three assessment years 1981-82,
1982-83 and 1983-84 was decided by the Tribunal in favour of the Appellant
(assessee) which gave rise to filing of the appeals before the High Court by
the Revenue u/s. 27-A of the Act questioning therein the legality and
correctness of the orders of the Tribunal. The High Court allowed the appeals
filed by the Revenue setting aside the order dated 05.07.2011 passed by the
Income Tax Appellate Tribunal and restoring the order of assessment passed by
the Assessing Officer for levying penalty for the entire period of delay in
respect of the said Assessment Years, which gave rise to filing of these
appeals by way of special leave before the Supreme Court by the Assessee.

 

The short
question, which arose for consideration before the Supreme Court in these
appeals, was whether the High Court was justified in allowing the appeals filed
by the Revenue and thereby was justified in setting aside the orders passed by
the Tribunal.

 

The Supreme
Court observed that in Santosh Hazari vs. Purushottam Tiwari (Deceased) by
L.Rs., (2001) 3 SCC 179, it had held that in order to admit the second
appeal, what is required to be made out by the Appellant being sine qua non for
exercise of powers u/s. 100 of the Code of Civil Procedure, 1908, is existence
of “substantial question of law” arising in the case, so as to
empower the High Court to admit the appeal for final hearing by formulating
such question. In the absence of any substantial question of law arising in
appeal, the same merits dismissal in limine on the ground that the
appeal does not involve any substantial question of law within the meaning of
section100 of the Code.

 

According to
the Supreme Court, the interpretation made by it of section 100 in Santosh
Hazari’s Case (supra), would equally apply to section27-A of the Act
because firstly, both sections provide a remedy of appeal to the High Court;
secondly, both sections are identically worded and in pari materia; thirdly,
section27-A is enacted by following the principle of “legislation by
incorporation”; fourthly, section 100 is bodily lifted from the Code and
incorporated as Section27-A in the Act; and lastly, since both sections are
akin to each other in all respects, the appeal filed u/s. 27-A of the Act has
to be decided like a second appeal u/s.100 of the Code.

 

The Supreme
Court on the facts of the case, found that the High Court had proceeded to
decide the appeals without formulating the substantial question(s) of law. The
High Court did not make any effort to find out as to whether the appeals
involved any substantial question(s) of law and, if so, which was/were that
question(s), nor it formulated such question(s), if in its opinion, really
arose in the appeals. The High Court failed to see that it had jurisdiction to
decide the appeals only on the question(s) so formulated and not beyond it.
[Section27(5)].

 

In the light
of foregoing and keeping in view the law laid down in the case of Santosh
Hazari (supra), the Supreme Court held that the impugned orders were not
legally sustainable and thus were liable to be set aside. As a result, the
appeals succeed and were allowed. Impugned orders were set aside. Both the
cases were remanded to the High Court for deciding the appeals afresh in
accordance with the observations made above. _

 

Glimpses Of Supreme Court Rulings

1. Sedco Forex International Inc. vs. Commissioner of
Income Tax, Meerut and Ors. (2017) 399 ITR 1 (SC). A. Ys.: 1986-87, 1987-88, 2000-2001.

 

Non-resident
– Prospecting for, or extra production of mineral ore – All amounts pertaining
to the aforesaid activity which are received on account of provisions of
services and facilities in connection with the said facility are treated as
profits and gains of the business under section 44BB – The fixed amount which
was paid to the Assessees in respect of the contract which was indivisible was
towards mobilisation fee and the same was not for reimbursement of expenses as
the same was payable irrespective of the amount of expenditure incurred and
thus was covered by the provisions of section 44BB.

 

In the group of appeals
that came up for hearing before the Supreme Court, the appeals filed by Sedco
Forex International Inc., M/s. Transocean Offshore Inc., M/s. Sedco Forex
International Drilling Inc. respectively were taken up as lead matters and,
therefore, for the sake of brevity, the factual matrix from the said appeals,
was considered for answering the question involved.

 

During the years under
consideration, the Assessees were engaged in executing the contracts all over
the world including India in connection with exploration and production of
mineral oil. The Assessees were companies incorporated outside India and,
therefore, non-resident within the meaning of section 6 of the Act. The
Assessees entered into agreements with ONGC, Enron Oil and Gas India Ltd. The
aforesaid agreements provided for the scope of work along with separate
consideration for the work undertaken. Since the dispute was about mobilisation
charges, the Supreme Court noted clauses in respect thereof which read as
under:

 

“Operating
Rate-Receipts for undertaking drilling operations computed by per day rates
provided in the contract. The operating rates shall be payable from the time
the drilling unit is jacked-up and ready at the location to spud the first
well.

 

Mobilisation-charges
for the transport of the drilling unit from a location outside India to a
location in India as may be designated by ONGC”.

 

In addition to the above,
Assessees also received amounts from the operator towards reimbursement of
expenses like catering, boarding/lodging, fuel, customs duty, the supply of
material etc., with which the Supreme Court was not concerned.

 

The Assessees filed their
return of income declaring income from charter hire of the rig. The same was
offered to tax u/s. 44BB of the Act. In the case of Sedco Forex International
Inc., the Assessee did not include the amount received as mobilisation charges
to the gross revenue for the purpose of computation u/s. 44BB of the Act. In
the case of Transocean Offshore Inc., the Assessee included 1% of the
mobilisation fees. The mobilisation fees were offered to tax on a 1% deemed
profit basis on the ratio of the CBDT Instruction No. 1767 dated July 1, 1987.

 

The AO
included the amounts received for mobilisation/demobilisation to the gross
revenue to arrive at the “profits and gains” for the purpose of
computing TAX u/s. 44BB of the Act. The Commissioner of Income Tax (Appeals)
confirmed the action of the AO. The Income Tax Appellate Tribunal in the case
of Sedco Forex International Inc. dismissed the appeal of the Assessee and the
action of the AO was upheld insofar as the mobilisation charges were concerned.
In the case of Transocean Offshore Inc., the ITAT upheld the view taken by the
Assessee and directed the AO to assess the profits on mobilisation charges at
1% of the amount received. This was done following the Circular of CBDT
Instruction No. 1767 dated July 1, 1987 and decision of the third Member in the
case of Saipem S.P.A. vs. Deputy Commissioner of Income Tax 88 ITD 213 (Del).
The High Court held that the mobilization charges reimbursed inter alia
even for the services rendered outside India were taxable u/s. 44BB of the Act
as the same were not governed by the charging provisions of sections 5 and 9 of
the Act. Even on the issue of reimbursement in M/s. Sedco Forex International
Drilling Inc., the High Court followed its earlier judgments dated September
20, 2007 and May 22, 2009 to hold that reimbursement of expenses incurred by
the Assessee was to be included in the gross receipts, and taxable u/s. 44BB of
the Act.

 

According to the Supreme
Court the issue that needed  examination
was as to whether mobilisation charges received by the Assessees could be
treated as ‘income’ u/s. 5 of the Act and would fall within the four corners of
section 9, namely, whether it could be attributed as having arisen or deemed to
arise in India.

 

The Supreme Court noted
that the argument of the learned Counsel appearing for the Assessees was that
the amount was received by way of reimbursement of expenses for the operation
carried outside India and the payment was also received outside India. It was
on this premise, entire edifice was built to argue that it was not an
“income” and, in any case, not taxable in India at the hands of the
Assessees which were foreign entities.

 

The Supreme Court noted
Clause 3.2 of the Agreement dated September 3, 1985 and Clause 4.2 of the
Agreement dated July 12, 1986. Clause 3.2 of the Agreement dated September 3,
1985 pertained to providing the Shallow Dash Water Jack Up Rig against which
payment was made to the Assessees. This Clause said that the Assessees shall be
paid ‘mobilisation fee’ for the mobilisation of drilling unit from its present
location in Portugal to the well location designated by ONGC, offshore Mumbai,
India. Fixed amount was agreed to be paid which was mentioned in the said
Clause. The aforesaid mobilisation fee was payable to the Assessees after the
jacking up of the drilling at the designated location and ready to spud the
well. After the aforesaid operation, Assessees were required to raise invoice
and ONGC was supposed to make the payment within 30 days of the receipt of this
invoice. Insofar as Clause 4.2 of Agreement dated July 12, 1986 was concerned,
it related to mobilisation of drilling unit. Here again, ‘mobilisation fee’ was
payable for the mobilisation of the drilling unit from the place of its origin
to the port of entry (Kandla Port, Mumbai). Hence, a fixed amount of
mobilisation fee was payable under the aforesaid contracts as
“compensation”. Contracts specifically described the aforesaid
amounts as ‘fee’. According to the Supreme Court it was in this hue, it had to
consider as to whether it would be treated as “income” u/s. 5 of the
Act and could be attributed as income earned in India as per section 9 of the
Act. For this purpose, section 44BB(2) had to be invoked.

 

The Supreme Court noted that
section 44BB starts with non-obstante clause, and the formula contained
therein for computation of income is to be applied irrespective of the
provisions of sections 28 to 41 and sections 43 and 43A of the Act. It was not
in dispute that Assessees were assessed under the said provision which was
applicable in the instant case. For assessment under this provision, a sum
equal to 10% of the aggregate of the amounts specified in sub-section (2) shall
be deemed to be the profits and gains of such business chargeable to tax under
the head ‘profits and gains of the business or profession’. Sub-section (2)
mentions two kinds of amounts which shall be deemed as profits and gains of the
business chargeable to tax in India. Sub-clause (a) thereof relates to amount
paid or payable to the Assessee or any person on his behalf on account of
provision of services and facilities in connection with, or supply of plant and
machinery on hire used, or to be used in the prospecting for, or extraction or
production of, mineral oils in India. Thus, according to the Supreme Court all
amounts pertaining to the aforesaid activity which are received on account of
provisions of services and facilities in connection with the said facility are
treated as profits and gains of the business.

 

This Clause clarifies that
the amount so paid shall be taxable whether these are received in India or
outside India. Clause (b) deals with amount received or deemed to be received
in India in connection with such services and facilities as stipulated therein.
Thus, whereas Clause (a) mentions the amount which is paid or payable, Clause
(b) deals with the amounts which are received or deemed to be received in
India. The Supreme Court therefore was of the opinion that in respect of amount
paid or payable under Clause (a) of sub-section (2), it was immaterial whether
these were paid in India or outside India. On the other hand, amount received
or deemed to be received have to be in India.

 

The Supreme Court held that
from the bare reading of the clauses, amount paid under the aforesaid contracts
as mobilisation fee on account of provision of services and facilities in
connection with the extraction etc. of mineral oil in India and against the
supply of plant and machinery on hire used for such extraction, Clause (a)
stood attracted. Thus, this provision contained in Section 44BB had to be read
in conjunction with sections 5 and 9 of the Act and sections 5 and 9 of the Act
could not be read in isolation.

 

The aforesaid amount paid
to the Assessees as mobilisation fee had to be treated as profits and gains of
business and, therefore,  would be
“income” as per section 5. This provision also treats this income as
earned in India, fictionally, thereby satisfying the test of section 9 of the
Act as well.

 

The Supreme Court
reiterated that the amount which was paid to the Assessees was towards
mobilisation fee. It did not mention that the same was for reimbursement of
expenses. In fact, it was a fixed amount paid which could be less or more than
the expenses incurred. Incurring of expenses, therefore, would be immaterial.
According to the Supreme Court, it was also to be borne in mind that the
contract in question was indivisible. Having regard to these facts in the
present case as per which the case of the Assessees got covered under the
aforesaid provisions, the Supreme Court did not find any merit in any of the
contentions raised by the Assessees.

 

In the batch of appeals,
before the Supreme Court there was a solitary appeal which was preferred by the
Director of Income Tax, New Delhi (Revenue) against the judgment of the High
Court of Uttarakhand. The computation of income of the Assessee was done u/s.
44BB of the Act.

 

However, the amount which
was sought to be taxed was reimbursement of cost of tools lost in hole by ONGC.
The Supreme Court held that it was thus, clear that this was not the amount
which was covered by sub-section (2) of section 44BB of the Act as ONGC had
lost certain tools belonging to the Assessee, and had compensated for the said
loss by paying the amount in question. On these facts, conclusion of the High
Court was correct. Even otherwise, the tax effect is Rs. 15,12,344/-.
Therefore, that Civil Appeal filed by the Revenue was dismissed.

 

2.  K. Lakshmanya and Company vs. Commissioner of
Income Tax and Ors. (2017) 399 ITR 657 (SC) A.Y.s:
1993-94, 1994-95.

 

Refund –
Interest on refund – Section 244A is even wider than section 244 and is not
restricted to refund being issued to the Assessee in pursuance to an order
referred to in section 240. Under this section, it is enough that the refund
becomes due under the Income-tax Act, in which case the Assessee shall, subject
to the provisions of this section, be entitled to receive simple interest.

 

The Assessee, being a
partnership firm, filed a return for assessment years 1993-94 and 1994-95 and
once the order of assessment was completed, interest under sections 234(A) to
(C) was levied.

 

Aggrieved by this levy of
interest, the Assessee filed an application before the Settlement Commission,
requesting the Commission to waive the interest on the ground that it caused
hardship to it. The Settlement Commission, by its order dated 22.03.2000,
referred to a circular of the CBDT which gave it the power to waive such interest;
and by the aforesaid order, interest was partially waived for the assessment
years in question. On an application made by the Assessee, the Assessing
Officer, by his order dated 25.04.2000 refused to grant interest on the refund
that was payable, and was not paid, within three months from the specified
date. This was done on two grounds, namely, that the provisions of section
244A  do not provide for payment of
interest on refund due on account of waiver of interest that is charged under
sections 234(A)-(C) of the Act and second, that the power assumed by the
Settlement Commission for waiver of interest, by following the CBDT circular
referred to, does not enable the Commission to provide for payment of interest
u/s. 244A.

 

An appeal that was filed
before the C.I.T. (Appeals) was allowed. This was done by referring to a
judgment of the Madras High Court in Commissioner of Income-Tax vs. Needle
Industries Pvt. Ltd. 233 ITR 370 and with reference to the CBDT circular
which enabled the Settlement Commission to waive interest. An appeal by the
Revenue to the Income-Tax Appellate Tribunal was dismissed. However, in appeal
to the High Court, by the judgment dated 09.12.2009, the High Court of
Karnataka held that, since waiver of interest was within the discretion of the
Settlement Commission, no right flowed to the Assessee to claim refund as a
matter of right under law. In the aforesaid circumstances, the judgements of
the Tribunal and C.I.T. (Appeals) were set aside and the Assessing Officer’s
order was restored.

 

The question that arose
before the Supreme Court therefore was whether the High Court of Karnataka at
Bangalore was correct in holding that the Assessee in the present case was not
entitled to interest u/s. 244A of the Income-Tax, 1961 Act, when refund arose
to it on account of interest that was partially waived by an order of the
Settlement Commission.

 

According to the Supreme
Court, a reading of the section 240 showed that refund may become due to the
Assessee, either as a result of an order passed in appeal or other proceedings
under this Act. It was clear that refund that arises as a result of an order
passed u/s. 245(D)(4) was an order passed in “other proceedings under this
Act”. Thus, it was clear that the Assessee in the present case was covered
by section 240 of the Act.

 

The Supreme Court noted
that when it comes to interest on refund, section 244, which applied to
assessment years up to and including assessment year 1989-90, makes it clear
that it would apply where a refund is due to the Assessee in pursuance of an
order referred to in section 240. It is only if the Assessing Officer does not
grant the refund within three months from the end of the month in which such
order is passed, that the Central Government shall pay to the assesses simple
interest on the amount of refund due.

 

According to the Supreme
Court, section 244A is even wider than section 244 and is not restricted to
refund being issued to the Assessee in pursuance to an order referred to in
section 240. Under this section, it is enough that the refund becomes due under
the Income-tax Act, in which case the Assessee shall, subject to the provisions
of this section, be entitled to receive simple interest.

 

The Supreme Court was of
the view that the present case would fall outside sub-clauses (a) and (aa) of
this provision and, therefore, fall within the residuary clause, namely
sub-clause (b) of section 244A.

 

The Supreme Court held that
the Madras High Court in Needle Industries Pvt. Ltd. (supra) concerned
itself with the position prior to the advent of section 244A. It found that the
expression “refund of any amount” used by section 240 and 244 would
include not only tax and penalty but interest also. It was, therefore, held
that the clear intention of Parliament is that the right to interest will
compensate the Assessee for the excess payment during the intervening period
when the Assessee did not have the benefit of use of such money paid in
whatsoever character. The Supreme Court further noted that in Sandvik Asia
Ltd. vs. CIT (2006) 280ITR 643 (SC), it had expressly approved the decision
of the Madras High Court.

 

The Supreme Court also
referred to its decision in CIT vs. HEG Ltd. (2010) 324 (331) (SC) which
considered the meaning of the expression “where refund of any amount become due
to the assessee” in section 244A(1).

 

The Supreme Court referred
to its decision in UOI vs. Tata Chemicals Ltd. (2014) 363 ITR 658 (SC)
and observed that it clearly showed that a corresponding right exists, to
refund to individuals any sum paid by them as taxes which are found to have
been wrongfully existed or believed to be, for any reason, inequitable.

 

The statutory obligation to
refund, being non discretionary, carries with it the right to interest, also
making it clear that the right to interest is parasitical. The right to claim
refund is automatic once the statutory provisions have been complied with.

 

The Supreme Court held that
of the view that the expression “due” only means that a refund
becomes due if there is an order under the Act which either reduces or waives
tax or interest. It is of no matter that the interest that is waived is
discretionary in nature, for the moment that discretion is exercised, a concomitant
right springs into being in favour of the Assessee. According to the Supreme
Court the C.I.T. (Appeals) and the ITAT were therefore correct in their view
and that consequently, the High Court was incorrect in its view that since a
discretionary power has been exercised, no concomitant right was found for
refund of interest to the Assessee.

 

The appeals were
accordingly allowed by the Supreme Court.

 

3.  Commissioner of Income Tax vs. Modipon Ltd.
(2018) 400 ITR 1 (SC)A.Y.:1993-94,
1996-97,1998-99

 

Business
expenditure – The advance deposit of central excise duty constitutes actual
payment of duty within the meaning of Section 43B and, therefore, the Assessee
is entitled to the benefit of deduction of the said amount.

 

The question that was
involved in the appeals before the Supreme Court was formulated as under:

 

“Whether the Assessee is
entitled to claim deduction under 43B of the Income Tax Act, 1961 in respect of
the excise duty paid in advance in the Personal Ledger Account (“PLA”
for short)?”

 

The Revenue urged that
though levy of excise is on manufacture of excisable goods, actual payment of
duty is at the stage of removal. The advance duty paid in the PLA is
adjusted/debited from time to time, against clearances/removal made by the
Assessee. Unless such clearances/removal are made and excise duty is debited
from the advance deposit there is no actual payment of duty so as to entitle an
Assessee to the benefit of deduction u/s. 43B of the Income-tax Act which
contemplates deduction only against actual payment as distinguished from
accrual of liability. It was urged on behalf of the Revenue that the amount in
deposit was akin to a loan and under the provisions of Central Excise Rules,
part or whole of the said amount could be refunded to the Assessee. It was
further submitted that Under Rule 21 of the Central Excise Rules, 1944, at any
time before removal, the Commissioner or the other authorities prescribed
therein may remit duty in respect of manufactured goods lost or damaged or
otherwise unfit for consumption or marketing. The amount of advance deposit,
therefore, did not represent actual payment of duty so as to entitle an
Assessee to the benefit of deduction under section 43B. Accordingly the orders
of the High Courts challenged in the appeals were liable to interference.

 

In reply, the learned
senior Counsel appearing for the Assessee has submitted that u/s. 3 of the
Central Excise Act, the event for levy of excise duty is the manufacture of
goods though the duty is to be paid at the stage of removal of the goods.
Pointing out the provisions of Rule 173G of the Central Excise Rules, 1944 it
was submitted that the advance deposit of central excise duty in a current
account is a mandatory requirement from which adjustments are made, from time to
time, against clearances effected. Though, Sub-rule (1)(A) contemplates refund
from the current account, such refund could be granted only on reasons being
recorded by the concerned authority i.e., the Commissioner on the application
filed by the Assessee. Refund is not a matter of right. The amount deposited in
the PLA is irretrievably lost to the Assessee. Payment of central excise duty
takes place at the time of deposit in the PLA, though the deposit is on the
basis of an approximation and the precise amount of duty qua the goods removed
is ascertained at the stage of removal/clearances. The said facts, according to
the learned Counsel, would not make the deposit anything less than actual
payment of duty.

 

The Supreme Court noted
that deposit of Central Excise Duty in the PLA is a statutory requirement. The
Central Excise Rules, 1944, specify a distinct procedure for payment of excise
duty leviable on manufactured goods. It is a procedure designed to bring in
orderly conduct in the matter of levy and collection of excise duty when both
manufacture and clearances are a continuous process. Debits against the advance
deposit in the PLA have to be made of amounts of excise duty payable on
excisable goods cleared during the previous fortnight. The deposit once made is
adjusted against the duty payable on removal and the balance is kept in the
account for future clearances/removal. No withdrawal from the account is
permissible except on an application to be filed before the Commissioner who is
required to record reasons for permitting an Assessee to withdraw any amount
from the PLA. Sub-rules (3), (4), (5) and (6) of Rule 173G indicates a strict
and vigorous scrutiny to be exercised by the central excise authorities with
regard to manufacture and removal of excisable goods by an Assessee. According
to the Supreme Court, the self removal scheme and payment of duty under the Act
and the Rules clearly showed that upon deposit in the PLA the amount of such
deposit stood credited to the Revenue with the Assessee having no domain over
the amount(s) deposited.

 

The Supreme Court was of
the view that the analogy of decisions in C.I.T. vs. Pandavapura Sahakara
Sakkare Karkhane Ltd. 198 ITR 690 (Kar.) and C.I.T. vs. Nizam Sugar
Factory Ltd. 253 ITR 68 (AP) would apply to the case in hand, in which, it
was held that where Assessee had no control over the amounts received, the same
could not be taxed in its hands.

The Supreme Court observed
that the Delhi High Court in the appeals arising from the orders passed by it
had also taken the view that the purpose of introduction of section 43B was to
plug a loophole in the statute which permitted deductions on an accrual basis
without the requisite obligation to deposit the tax with the State.
Resultantly, on the basis of mere book entries an Assessee was entitled to
claim deduction without actually paying the tax to the State. Having regard to
the object behind the enactment of section 43B and the preceding discussions,
the Supreme Court held that the legislative intent would be achieved by giving
benefit of deduction to an Assessee upon advance deposit of central excise duty
notwithstanding the fact that adjustments from such deposit are made on
subsequent clearances/removal effected from time to time.

 

The Supreme Court concluded
that the High Courts were justified in taking the view that the advance deposit
of central excise duty constitutes actual payment of duty within the meaning of
section 43B and, therefore, the Assessee is entitled to the benefit of deduction
of the said amount.

 

The Supreme Court dismissed
the appeals and affirmed the orders of the High Courts of Delhi and Calcutta
impugned in these appeals.

 

4. ITO
vs. Venkatesh Premises Co-op. Society Ltd. (Civil Appeal No. 2708 of 2018 dated
12.3.2018 arising from SLP(C) No. 30194/2010)

 

Principle
of mutuality – Certain receipts by cooperative societies, from its members i.e.
non-occupancy charges, transfer charges, common amenity fund charges and
certain other charges, are exempt from income tax based on the doctrine of
mutuality.

 

A common question of law
that arose for consideration in a batch of appeals before the Supreme Court was
as to whether certain receipts by cooperative societies, from its members i.e.
non-occupancy charges, transfer charges, common amenity fund charges and
certain other charges, are exempt from income tax based on the doctrine of
mutuality.

 

The challenge was based on
the premise that such receipts were in the nature of business income,
generating profits and surplus, having an element of commerciality and
therefore exigible to tax.

The assessee in one of the
appeals (Civil Appeal No.1180 of 2015 – Sea Face Park Co.Op. Housing Society
Ltd. vs. Income Tax Officer) assailed the finding that such receipts, to
the extent they were beyond the limits specified in the Government notification
dated 09.08.2001 issued u/s. 79A of the Maharashtra Cooperative Societies Act,
1960 (hereinafter referred to as ‘the Act’) was exigible to tax falling beyond
the mutuality doctrine.

 

The Supreme Court noted the
primary facts, for better appreciation from SLP (C) No.30194 of 2010 (ITO
vs. Venkatesh Premises Co-op. Society Ltd.). The assessing officer held
that receipt of non-occupancy charges by the society from its members, to the
extent that it was beyond 10% of the service charges/maintenance charges
permissible under the notification dated 09.08.2001, stands excluded from the
principle of mutuality and was taxable. The order was upheld by the
Commissioner of Income Tax (Appeals). The Income Tax Appellate Tribunal held
that the notification dated 09.08.2001 was applicable to cooperative housing
societies only and did not apply to a premises society. It further held that
the transfer fee paid by the transferee member was exigible to tax as the transferee
did not have the status of a member at the time of such payment and, therefore,
the principles of mutuality did not apply. The High Court set aside the finding
that payment by the transferee member was taxable while upholding taxability of
the receipt beyond that specified in the government notification.

 

The Supreme Court held that
the doctrine of mutuality, based on common law principles, is premised on the
theory that a person cannot make a profit from himself. An amount received from
oneself, therefore, cannot be regarded as income and taxable. Section 2(24) of
the Income-tax Act defines taxable income. The income of a cooperative society
from business is taxable u/s. 2(24)(vii) and will stand excluded from the
principle of mutuality. The essence of the principle of mutuality lies in the
commonality of the contributors and the participants who are also the
beneficiaries. The contributors to the common fund must be entitled to
participate in the surplus and the participators in the surplus are contributors
to the common fund. The law envisages a complete identity between the
contributors and the participants in this sense. The principle postulates that
what is returned is contributed by a member. Any surplus in the common fund
shall therefore not constitute income but will only be an increase in the
common fund meant to meet sudden eventualities. A common feature of mutual
organisations in general can be stated to be that the participants usually do
not have property rights to their share in the common fund, nor can they sell
their share. Cessation from membership would result in the loss of right to
participate without receiving a financial benefit from the cessation of the
membership.

 

The Supreme Court noted
that in the appeals before it, transfer charges were payable by the outgoing
member. The Supreme Court held that if for convenience, part of it was paid by
the transferee, it would not partake the nature of profit or commerciality as
the amount is appropriated only after the transferee is inducted as a member.
In the event of non-admission, the amount is returned. The moment the
transferee is inducted as a member the principles of mutuality apply. Likewise,
non-occupancy charges are levied by the society and is payable by a member who
does not himself occupy the premises but lets it out to a third person. The
charges are again utilised only for the common benefit of facilities and
amenities to the members. Contribution to the common amenity fund taken from a
member disposing property is similarly utilised for meeting sudden and regular
heavy repairs to ensure continuous and proper hazard free maintenance of the
properties of the society which ultimately enures to the enjoyment, benefit and
safety of the members. These charges are levied on the basis of resolutions
passed by the society and in consonance with its byelaws. The receipts in the
present cases are indisputably been used for mutual benefit towards maintenance
of the premises, repairs, infrastructure and provision of common amenities.

 

The Supreme Court further
held that any difference in the contributions payable by old members and fresh
inductees cannot fall foul of the law as sufficient classification exists.
Membership forming a class, the identity of the individual member not being
relevant, induction into membership automatically attracts the doctrine of
mutuality. If a Society has surplus FSI available, it is entitled to utilise
the same by making fresh construction in accordance with law. Naturally such
additional construction would entail extra charges towards maintenance,
infrastructure, common facilities and amenities. If the society first inducts
new members who are required to contribute to the common fund for availing
common facilities, and then grants only occupancy rights to them by draw of
lots, the ownership remaining with the society, the receipts cannot be
bifurcated into two segments of receipt and costs, so as to hold the former to
be outside the purview of mutuality classifying it as income of the society
with commerciality.

 

The Supreme Court with
reference to decision in The New India Cooperative Housing Society vs. State
of Maharashtra 2013 (2) MLJ 666 relied upon by the Revenue to contend that
any receipt by the society beyond that permissible in law under the
notification was not only illegal but also amounted to rendering of services
for profit attracting an element of commerciality and thus was taxable held
that the challenge by the aggrieved was to the transfer fee levied by the
society in excess of that specified in the notification, which was a completely
different cause of action having no relevance to the present controversy.

 

According to the Supreme
Court, it was not the case of the Revenue that such receipts has not been
utilized for the common benefit of those who have contributed to the funds.

 

Also, there was no reason
to take a view different from that taken by the High Court, that the notification
dated 09.08.2001 is applicable only to cooperative housing societies and has no
application to a premises society which consists of non-residential premises.

 

In the result, all appeals
preferred by the Revenue were dismissed by the Supreme Court and Civil Appeal
No.1180 of 2015 preferred by the assessee society was allowed.

Direct Taxes

fiogf49gjkf0d
88 Clarifications on Income Declaration Scheme 2016 –

Circular no. 24/2016 dated 27.6.16, Circular no. 25/2016 dated 30.6.16 and Circular no 27 dated 14 July 2016

89 Procedure for determination of fair market value of assets in prescribed cases as per Section 9(1) of the Act – Income tax (19th Amendment) Rules 2016 –

Notification no 55 dated 28.6.16

CBDT has notified detailed methods under different scenarios for determining the fair market value of the assets and income attributable to assets situated in India in case of indirect transfers referred to in Section 9(1) of the Act. The rate at which foreign currency needs to be converted, various definitions, information and documentation to be maintained as well as submitted under Section 285A of the Act and two new forms Form No. 3CT being the report to be given by the Accountant for income attributable to assets located in India and Form 49D – being information and documentation under Section 285A have been prescribed.

90 CBDT has issued a Press Release dated 6 July 2016 stating the applicability of Income Computation and Disclosure Standards from 1 April 2016.i.e. AY 2017-18 onwards.

The Ministry of Finance has issued an order dated 6 July 2016(reproduced hereunder)

S. O. 2322(E).— In exercise of the powers conferred by sub-section (2) of section 138 of the Income-tax Act, 1961 (43 of 1961), the Central Government having regard to all the relevant factors, hereby directs that no public servant shall produce before any person or authority any such document or record or any information or computerised data or part thereof as comes into his possession during the discharge of official duties in respect of a valid declaration made under ‘the Income Declaration Scheme, 2016’, contained in Chapter IX of the Finance Act, 2016 (28 of 2016.

91 [Notification No. 56/2016, F. No. 142/8/2016-TPL]

92 Scrutiny notices under Section 143(2) modified to have separate formats for Limited Scrutiny Complete Scrutiny and Manual Scrutiny – CBDT Directive dated 11 July 2016

93 CBDT Instruction for compulsory manual selection of cases for scrutiny during FY 2016- 2017 – Instruction No. 4/2016 dated 13th July 2016 (full text available on www.bcasonline.org)

94 CBDT Instructions for converting limited scrutiny to complete scrutiny case – Instruction No. 5/2016 dated 14th July 2016 (full text available on www. bcasonline.org)

95 Press Release amending the payment schedule of taxes under Income Declaration Scheme 2016 dated 14 July 2016

CBDT has revised the schedule for payment of taxes, interest and penalty as under:

(i) a minimum amount of 25% of the tax, surcharge and penalty to be paid by 30.11.2016; (ii) a further amount of 25% of the tax, surcharge and penalty to be paid by 31.3.2017; and (iii) the balance amount to be paid on or before 30.9.2017.

Glimpses Of Supreme Court Rulings

10.  Co-operative Society – Deduction u/s. 80P –
If the income of a society is falling within any one head of exemption, it has
to be exempted from tax notwithstanding that the condition of other heads of
exemption are not satisfied – A deduction would however not be admissible to a
co-operative bank – Also, where the activities of the society are in violation
of the Co-operative Societies Act, deduction cannot be allowed.

 

The Citizen
Co-operative Society Limited vs. ACIT (2017) 397 ITR 1 (SC)

 

The Assessee as
Co-operative Society had filed return of income for the Assessment Year
2009-10, for the year ending March 31, 2009 on September 30, 2009 declaring NIL
income. In the return filed, the Assessee claimed a sum of Rs. 4,26,37,081/- as
deduction u/s. 80P of the Act.

 

The Assessing
Officer held that deduction in respect of income of co-operative societies u/s.
80P of the Act was not admissible to the Appellant as the benefit of deduction,
as contemplated under the said provision was, inter alia, admissible to
those co-operative societies which carried on business of banking or providing
credit facilities to its members. On the contrary, the Appellant society was
carrying on the banking business for public at large and for all practical
purposes, it was acting like a co-operative bank governed by the Banking
Regulation Act, 1949, and its operation was not confined to its members but
outsiders as well.

 

Insofar as
disallowance of deduction claimed u/s. 80P of the Act was concerned, the CIT
(A) rejected the claim for deduction thereby upheld the order of the Assessing
Officer. While doing so, the CIT (A) followed the order of the Income Tax
Appellate Tribunal (ITAT) in the case of the Appellant itself in respect of
Assessment Years 2007-08 and 2008-09.

 

Further, appeal
to the ITAT met the same fate as ITAT also referred to its aforesaid order and
dismissed the appeal of the Appellant.

 

Undeterred, the
Appellant approached the High Court in the form of appeal u/s. 260A of the Act.
This appeal was dismissed by the High Court with the observations that there
was no illegality or infirmity in the order passed by the ITAT.

 

The Supreme
Court noted that section 80P of the Act provides for certain deduction in
respect of incomes of the co-operative societies. A co-operative society is
defined by section 2(19) of the Act. Where the gross total income of such
co-operative societies includes any income referred to in sub-section (2) of
section 80P, the sums specified in s/s. (2) are allowed as deduction in
accordance with and subject to the provisions of the said section, while
computing the total income of the Assessee. The profit exempted is the net
profit included in the total income and not the gross profit of the business.
Sub-section (2) enlists those sums which are allowed as deductions. Clause (a)
of s/s. (2) includes seven kinds of co-operative societies which are entitled
to this benefit, and in respect of the co-operative societies engaged in the
activities mentioned in those seven classes, the whole of the amount of profits
and gains of business attributable to anyone or more of such activities is
exempted from income by allowing the said income as deduction.

 

The Supreme
Court observed that in the present petition it was concerned with sub-clause
(i) of Clause (a) of sub-section (2) of section 80P, which enlisted a
co-operative society engaged in carrying on the business of banking or
providing credit facilities to its members.

 

The Supreme
Court observed that there could not be any dispute to the proposition that
section 80P of the Act was a benevolent provision which was enacted by the
Parliament in order to encourage and promote growth of co-operative sector in
the economic life of the country. It was done pursuant to declared policy of
the Government. Therefore, such a provision had to be read liberally,
reasonably and in favour of the Assessee (See-Bajaj Tempo Limited, Bombay
vs. Commissioner of Income Tax, Bombay City-III, Bombay (1992) 3 SCC 78).
It was also trite that such a provision had to be construed as to effectuate
the object of the Legislature and not to defeat it (See-Commissioner of
Income Tax, Bombay and Ors. vs. Mahindra and Mahindra Limited and Ors.
(1983) 4 SCC 392). Therefore, all those co-operative societies which fall
within the purview of section 80P of the Act are entitled to deduction in
respect of any income referred to in s/s. (2) thereof. Clause (a) of s/s. (2)
gives exemption of whole of the amount of profits and gains of business
attributable to anyone or more of such activities which are mentioned in s/s.
(2).

 

The Supreme
Court held that sub-section (i) of Clause (a) of sub-section (2), with which it
was concerned, recognised two kinds of co-operative societies, namely: (i)
those carrying on the business of banking and; (ii) those providing credit
facilities to its members.

 

The Supreme
Court referring to its decisions in the case of Kerala State Cooperative
Marketing Federation Limited and Ors. vs. Commissioner of Income Tax (1998)
5 SCC 48, and of the Punjab and Haryana High Court in the case of Commissioner
of Income Tax vs. Punjab State Co-operative Bank Ltd. (2008) 300 ITR 24
(Punjab & Haryana H.C.), observed that if the income of a society is
falling within any one head of exemption, it has to be exempted from tax
notwithstanding that the condition of other heads of exemption are not
satisfied.

 

The Supreme
Court noted that with the insertion of s/s. (4) by the Finance Act, 2006, which
was in the nature of a proviso to the aforesaid provision, it was made clear
that such a deduction would not be admissible to a co-operative bank. However,
if it was a primary agriculture credit society or a primary co-operative
agriculture and rural development bank, the deduction would still be provided.
Thus, co-operative banks were specifically excluded from the ambit of section
80P of the Act.

 

According to
the Supreme Court, if one had to go by the aforesaid definition of
‘co-operative bank’, the Appellant did not get covered thereby. It was also a
matter of common knowledge that in order to do the business of a co-operative
bank, it was imperative to have a licence from the Reserve Bank of India, which
the Appellant did not possess. The Reserve Bank of India itself had clarified
that the business of the Appellant did not amount to that of a co-operative
bank. The Appellant, therefore, would not come within the mischief of
sub-section (4) of section 80P.

 

However,
according to the Supreme Court, the main reason for disentitling the Appellant
from getting the deduction provided u/s. 80P of the Act was not s/s. (4)
thereof. What has been noticed by the Assessing Officer, after discussing in
detail the activities of the Appellant, was that the activities of the
Appellant were in violations of the provisions of the Mutually Aided Co-op
Societies Act, 1995 (MACSA) under which it is registered. It was pointed out by
the Assessing Officer that the Assessee was catering to two distinct categories
of people. The first category was that of resident members or ordinary members.
In the opinion of the Supreme Court, there may not be any difficulty as far as
this category was concerned. However, the Assessee had carved out another
category of ‘nominal members’. These were those members who were making
deposits with the Assessee for the purpose of obtaining loans, etc. and,
in fact, they are not members in real sense. Most of the business of the
Appellant was with this second category of persons who had given deposits which
were kept in Fixed Deposits with a motive to earn maximum returns. A portion of
these deposits was utilised to advance gold loans, etc. to the members
of the first category. It was found, as a matter of fact, that the depositors
and borrowers were quiet distinct. In reality, such activity of the Appellant
was that of finance business and could not be termed as co-operative society.
It was also found that the Appellant was engaged in the activity of granting
loans to general public as well. All this was done without any approval from
the Registrar of the Societies. With indulgence in such kind of activity by the
Appellant, it was remarked by the Assessing Officer that the activity of the
Appellant was in violation of the Co-operative Societies Act. Moreover, it was
a co-operative credit society which was not entitled to deduction u/s. 80P
(2)(a)(i) of the Act.

 

The Supreme
Court noted that a specific finding was also rendered that the principle of
mutuality was missing in the instant case.

 

According to
the Supreme Court, these were the findings of fact which had remained unshaken
till the stage of the High Court. Once the aforesaid aspects were taken into
consideration, the conclusion was obvious, namely, the Appellant could not be
treated as a co-operative society meant only for its members and providing
credit facilities to its members.

 

The Supreme
Court held that such a society could not claim the benefit of section 80P of
the Act. The appeal, therefore, was dismissed with costs.

 

11.  Offences and Prosecution – If there is an
attempt to evade tax of the amount less than the monetary limit prescribed in
the Circular, no prosecution should be launched.

 

Suresh
Sholapurmath and Ors. vs. Income Tax Department and Ors. (2017) 397 ITR 145
(SC)

 

The assessee
was liable to pay Rs.1465. Rs. 465 was paid but, the document was tampered with
by showing it as Rs.1465.

 

The Karnataka
High Court refused to quash the prosecution proceedings against the Appellants.
The High Court declined to follow the Circular which provided that if there is
an attempt to evade tax of less than Rs.25,000, no prosecution could be
launched. According to the High Court, this was not a case of evasion of tax
but of furnishing of false declaration and hence circular would not be of any
assistance to the assessee.

 

The Supreme
Court noted that the amount involved is small, and was paid with interest long
ago. According to the Supreme Court, the Circular dated February 7, 1992
squarely applied and, therefore, no proceedings should have been filed as the
amount was below Rs. 25,000. In view of this, the Supreme Court set aside the
judgement of the High Court and quashed the proceeding against the appellants.

 

12.  Interest on Refund – Whether an assessee is
entitled to interest u/s. 244A of the Income-tax Act, 1961 on excess self
assessment tax – The High Court could not have disagreed with the decision of a
co-ordinate Bench – Appropriate course of action would have been to refer the
matter to a larger Bench

 

Engineers
India Ltd. vs. Commissioner of Income Tax (2017) 397 ITR 16 (SC)

 

The issue
before the Supreme Court pertained to grant of interest u/s. 244A of the
Income-tax Act, 1961 for the Assessment Year 2006-07.

 

The impugned
judgment of the High Court revealed that another judgment of the Co-ordinate
Bench of the same High Court in the case of CIT vs. Sutlej Industries Ltd.
[2010] 325 ITR 331 (Delhi) was cited wherein the view taken was that in such
circumstances the Assessee would be entitled to interest u/s. 244A of the Income-tax
Act on the refund of the self-assessment tax. The High Court however did not
agree with the aforesaid view and made the following observation:

 

“Having
found the position of law as indicated above, we express, with respect, our
inability to subscribe to, or follow, the view taken by the other Division
Bench of this Court in the case of CIT vs. Sutlej Industries Ltd.”

 

The Supreme
Court held that in the impugned judgment, the Bench had differed with the
earlier view expressed by the Co-ordinate Bench. In the circumstances,
according to the Supreme Court, the appropriate course of action would have
been to refer the matter to the larger Bench.

 

The Supreme
Court noted that subsequently in the case of Sutlej Industries Ltd. vs. CIT
(I.T.A. Nos. 493 of 2003 and 120 of 2004) [2005] 272 ITR 180 (Delhi) pending
before the High Court, the High Court had referred the matter to a larger
Bench. In these circumstances, the Supreme Court set aside the impugned
judgment of the High Court and remanded the appeal to the High Court for its
decision afresh along with I.T.A. Nos. 493 of 2003 and 120 of 2004 by a larger
Bench.

 

The appeal was
disposed of accordingly.

 

13.  Non-resident – Permanent Establishment – No
part of the main business and revenue earning activity of the two American
companies was carried on through a fixed business place in India put at their
disposal – The Indian company only rendered support services which enabled the
assessees in turn to render services to their clients abroad – This outsourcing
of work to India would not give rise to a fixed place or service PE

 

ADIT vs.
E-Funds IT Solution Inc. (2017) 399 ITR 34 (SC)

 

The assesses,
e-Funds Corporation, USA [e-Funds Corp] and e-Funds IT Solutions Group Inc.,
USA [e-Funds Inc] were companies incorporated in United States of America [USA]
and were residents of the said country. They were assessed and had paid taxes
on their global income in USA. e-Funds Corp was the holding company having
almost 100% shares in IDLX Corporation, another company incorporated in USA.
IDLX Corporation held almost 100% shares in IDLX International BV, incorporated
in Netherlands and later in turn held almost 100% shares in IDLX Holding BV,
which was a subsidiary again incorporated in Netherlands. IDLX Holding BV was almost
a 100% shareholder of e-Funds International India Private Limited, a company
incorporated and resident of India [e-Funds India] IDLX International BV was
also the parent/holding company having almost 100% shares in e-Funds Inc.,
which, as noticed above, was a company incorporated in USA.

 

Both e-Funds
Inc. and e-Funds Corp. had entered into international transactions with e-Funds
India. e-Funds India being a domestic company and resident in India was taxed
on the income earned in India as well as its global income in accordance with
the provisions of the Income–tax Act. The international transactions between
the assessees and e-Funds India and the income of e-Funds India, it was
accepted, were made subject matter of arms length pricing adjudication by the
Transfer Pricing Officer [TPO] and the Assessing Officer [AO] in the returns of
income filed by e-Funds India.

 

The assessing
authority for assessment years 2000-01 to 2002-03 and 2004-05 to 2007- 08 in
the case of e-Funds Corporation, USA and for assessment years 2000-01 to
2002-03 and 2005-06 to 2007- 08 in the case of e-Funds IT Solutions Group Inc.,
USA decided that the assessees had a permanent establishment [PE] as they had a
fixed place where they carried on their own business in Delhi, and that,
consequently, Article 5 of the India U.S. Double Taxation Avoidance Agreement
of 1990 [DTAA] was attracted. Consequently, the assessees were liable to pay
tax in respect of what they earned from the aforesaid fixed place PE in India.

 

The CIT
(Appeals) dismissed the appeals of the assessees holding that Article 5 was
attracted, not only because there was a fixed place where the assessees carried
on their business, but also because they were having “service PEs” and “agency
PEs” under Article 5.

 

In an appeal to
the ITAT, the ITAT held that the CIT (Appeals) was right in holding that a case
of “fixed place PE” and “service PE” had been made out under Article 5, but
said nothing about the “agency PE” as that was not argued by the Revenue before
the ITAT. However, the ITAT, on a calculation formula different from that of
the CIT (Appeals), arrived at a nil figure of income for all the relevant
assessment years.

 

The appeal of
the assessees to the Delhi High Court proved successful [(2014) 364 ITR 256
(Delhi)] and the High Court, by an elaborate judgment, has set aside the
findings of all the authorities referred to above, and further dismissed the
cross-appeals of the Revenue.

Consequently,
the Revenue was in appeal before the Supreme Court.

 

The Supreme
Court observed that the Income-tax Act, in particular section 90 thereof, does
not speak of the concept of a PE. This is a creation only of the DTAA. By
virtue of Article 7(1) of the DTAA, the business income of companies which are
incorporated in the US will be taxable only in the US, unless it is found that
they were having PEs in India, in which event their business income, to the
extent to which it is attributable to such PEs, would be taxable in India. The
Supreme Court noted that Article 5 of the DTAA provides for three distinct
types of PEs with which it was concerned in the present case: fixed place of
business PE under Articles 5(1) and 5(2); service PE under Article 5(2) (l) and
agency PE under Article 5(4). According to the Supreme Court, specific and
detailed criteria are set out in the aforesaid provisions in order to fulfill
the conditions of these PEs existing in India. The burden of proving the fact
that a foreign assessee has a PE in India and must, therefore, suffer tax from
the business generated from such PE is initially on the Revenue.

 

In the context
of fixed place PE, on the behalf of the Revenue, it was argued that under
Article 5(1) of the DTAA, on the facts of these cases, a case of fixed place PE
has been made out. In support of this, it was, inter-alia, pointed out
that: Most of the employees are in India (In fact, the High Court records that
40% of the employees of the entire group are in India). e-Funds Corp has call
centers and software development centers only in India. e-Funds Corp is
essentially doing marketing work only and its contracts with clients are
assigned, or sub-contracted to e-Funds India. The master services agreement
between the American and the Indian entity gives complete control to the
American entity in regard to personnel employed by the Indian entity. It is
only through the proprietary database and software of e-Funds Corp, that
e-Funds India carries out its functions for e-Funds Corp. The High Court
records that the software, intangible data etc. is provided free of cost
and then states that this is irrelevant. The Corporate office of e-Funds India
houses an ‘International Division’ comprising the President’s office and a
sales team servicing e-Funds India and eFunds group entities in the United
Kingdom, South East Asia, Australia and Venezuela. The President’s office
primarily oversees operations of e-Funds India and eFunds group entities
overseas. The sales team undertakes marketing efforts for affiliate entities
also. The Transfer Pricing [TP] Report says that e-Funds India provides
management support and marketing support services to eFunds Corp group
companies outside India. Regarding supervision of personnel rendering the
services, the TP Report states that “The President’s office manages the
operations of eFunds India and eFunds group entities in UK and Australia and
accordingly, employees of these entities report to the President. The
President’s overall reporting is to EFC. Though the personnel rendering
marketing services are employees of EFI, they report to overseas group entities
to the extent that they are engaged in rendering services to such entities.”
Heavy reliance was also placed upon the Form 10 K report dtd. 31/3/2003 filed
by the e-Fund Corp for the group with the United States Securities and Exchange
Commission.

 

The Revenue’s
counsel had further submitted that on these facts, the assessees satisfy the
requirements of fixed place PE. For this, reliance was also placed on the judgment
of the Apex Court in the case of Formula One World Championship Ltd. [(2017)
394 ITR 80 (SC)] [Formula One] and contented that physically located premises
are at the disposal of the assessees with the degree of permanence required,
viz., the entire year. It was also contended that the High Court was not right
in holding that the place of management PE under Article 5(2)(a) was prima
facie made out, but since the said provision had not been invoked and requires
factual determination, the Revenue’s argument is dismissed on this score. Heavy
reliance was also placed on the MAP settlement made for the Asst. Years 2003-04
and 2004-05 by the assessees to contend that the assessees have admitted for
those years that some income is attributable to their Indian PEs and this
admission would continue to bind the assessees in all subsequent years.

 

On the other
hand, on behalf of the assessees, it was, inter-alia, contended that the
tests for determining the existence of fixed place PE have now been settled by
the Apex Court in the case Formula One (supra). These require that the
fixed place must be at the disposal of assessees, which means that the
assessees must have a right to use the premises for the purpose of his own
business and that has not been made out in the facts of this case. The TPO has
specifically held that whatever is paid under various agreements between the
assessees and the Indian company are at arm’s length pricing and this being the
case, even if fixed place PE is found, once arm’s length price is paid, the US
companies go out of the net of Indian taxation. Referring to Article 5(6) of
the DTAA, it was further contended that mere fact that a 100 per cent
subsidiary is carrying on the business in India does not by itself means that
the holding company would have a PE in India. It was also further pointed out
that ultimately there are four businesses that the assessees are engaged in
viz., ATM Management Services, Electronic Payment Management, Decision Support
and Risk Management and Global Outsourcing and Professional Services. All these
businesses are carried on outside India and the property through they are
carried out viz., ATM networks, software solutions and other hardware networks
and information technology infrastructure were all located outside India. The
activities of e-Funds India are independent business activities on which, as
has been noticed by the High Court, independent profits are made and income is
assessed to tax in India. For this, a specific reference was also made to the report
of Deloitte Haskins and Sells dated 13/3/2009, which was produced before the
CIT (A). It was further contended that MAP settlement made for the Asst Years
2003-04 and 2004-05 cannot be considered as precedent to hold that there is a
PE in subsequent years. In fact, this settlement was without prejudice to the
assessees contention that they have no PE in India and it is also clarified in
the follow-up letters that the same is not binding on subsequent years.

 

Since the
Revenue originally relied on fixed place of business PE, the Supreme Court
tackled it first. The Supreme Court observed that under Article 5(1), a PE
means a fixed place of business through which the business of an enterprise is
wholly or partly carried on. According to the Supreme Court, what is a “fixed
place of business” was no longer res integra. In Formula One’s case (supra),
it had after setting out Article 5 of the DTAA, held that the principal test,
in order to ascertain as to whether an establishment has a fixed place of
business or not, is that such physically located premises have to be ‘at the
disposal’ of the enterprise. For this purpose, it is not necessary that the
premises are owned or even rented by the enterprise. It will be sufficient if
the premises are put at the disposal of the enterprise. However, merely giving
access to such a place to the enterprise for the purposes of the project would
not suffice. The place would be treated as ‘at the disposal’ of the enterprise
when the enterprise has right to use the said place and has control thereupon.

 

Thus, it was
clear that there must exist a fixed place of business in India, which was at
the disposal of the US companies, through which they carry on their own
business. There was, in fact, no specific finding in the assessment order or
the appellate orders that applying the aforesaid tests, any fixed place of
business had been put at the disposal of these companies. The assessing
officer, CIT (Appeals) and the ITAT had essentially adopted a fundamentally
erroneous approach in saying that they were contracting with a 100% subsidiary
and were outsourcing business to such subsidiary, which resulted in the
creation of a PE. The High Court has dealt with this aspect in some detail and
the Supreme Court agreed with the findings of the High Court in this regard.

 

The Supreme
Court further held that the reliance placed by the Revenue on the United States
Securities and Exchange Commission Form 10K Report, as had been correctly
pointed out by the High Court, is also misplaced. It is clear that this report
evidently speaks of the e- Funds group of companies worldwide as a whole.

 

According to
the Supreme Court, the Deloitte’s report dated 31/03/2009 [which was produced
before the CIT(Appeals)] showed that no part of the main business and revenue
earning activity of the two American companies was carried on through a fixed
business place in India which had been put at their disposal. It was clear from
the report that the Indian company only rendered support services which enabled
the assessees in turn to render services to their clients abroad. This
outsourcing of work to India would not give rise to a fixed place PE and the
High Court judgment was, therefore, correct on this score.

 

In the context
of existence of service PE under Article 5(2)(l) of the DTAA, in addition to
some of the facts pointed for fixed place PE [including the fact of TP report
regarding supervision of personnel rendering service], it was, inter-alia,
further pointed out by Revenue’s counsel that: The Master sub-contractor
agreement between e-Funds Corp and e-Funds India discussed in the CIT(A)’s
order provides in clause 1.1(a) that : “Subcontractors personnel assigned to
work with eFunds IT or Customers located in the United States shall be directed
by eFunds IT or by Subcontractors supervisor acting at the direction of eFunds
IT. In the event Subcontractors personnel are assigned to perform such services
in India, the Subcontractor shall supervise such work, acting at the direction
of eFunds IT. eFunds IT shall be the sole judge of performance and capability
of each of subcontractors personnel and may request the removal of one or more
of Subcontractors personnel from a project covered by any statement of work as
follows.” It is submitted that the personnel engaged in providing these
services were ostensibly the employees of e-Funds India but were de facto
working under the control and supervision of eFunds Corp. In this regard,
reference was made to relevant part of the judgement in DIT vs. Morgan
Stanley and Company Inc. [(2007) 292 ITR 416 (SC)]. Furthermore, the AO in
the Assessment Order has observed that e-Funds Corp has seconded two employees
to e-Funds India and these employees worked as Sr. Director Technical Services and Country
Head-Business Development. The activities of the seconded employees go beyond
mere ‘stewardship activities’ in terms of Morgan Stanley’s case [supra].
The term ‘Other Personnel’ has to be seen in the context of the facts of this
case which show that e-Funds India was not an independent subsidiary.

 

In the context
of service PE, in addition to some of the points made out in connection with
non-existence of fixed place PE,  the
assessee’s counsel, inter alia, further contended that under Article
5(2)(l) of the DTAA, it is necessary that the foreign enterprises must provide
services to customers who are in India, which is not Revenue’s case as all
their customers exist only outside India. It was also pointed out that the
entire personnel engaged only by the Indian company and the facts that the US
companies may indirectly control such employees is only for the purpose of
protecting their own interest. The reliance was also placed on the judgment of
the Supreme Court in Morgan Stanley’s case (supra).

 

Insofar as a
service PE was concerned, the Supreme Court noted that the requirement of
Article 5(2)(l) of the DTAA was that an enterprise must furnish services
“within India” through employees or other personnel. In this regard, the
Supreme Court referred to its judgment in Morgan Stanley’s case (supra)
and noted that none of the customers of the assessees were located in India or
have received any services in India. This being the case, it was clear that the
very first ingredient contained in Article 5(2)(l) was not satisfied.

 

However, the
learned Attorney General, relying upon paragraph 42.31 of the OECD Commentary,
had argued that services have to be furnished within India, which does not mean
that they have to be furnished to customers in India. Para 42.31 of the OECD
Commentary states that “Whether or not the relevant services are furnished to a
resident of a state does not matter: what matters is that the services are
performed in the State through an individual present in that State.”

 

Based upon the
said paragraph, it was argued that in assessment year 2005-06, two employees of
the American company were seconded in India and that, therefore, it was clear
that management of the American company through these employees had obviously
taken place. The High Court, in dealing with this contention, had found it was
not known as to what functions they performed and to whom they reported and it
was also not known whether the services were performed related to services
provided to an associated enterprise in which case clause 5(2)(l)(ii) would be
applicable. According to the High Court, whether the seconded employees were
performing stewardship services or were directly involved with the working
operations was relevant. It was the case of the assessee that they were deputed
to look towards development of domestic work in India and cost of such
personnel was fully borne e-Funds India. They were working under the control
and supervision of e-Funds India. This factual assertion was not negated or
questioned by the AO.

 

The Supreme
Court agreed with the approach of the High Court in this regard. It held that
para 42.31 of the OECD Commentary does not mean that services need not be
rendered by the foreign assessees in India. If any customer is rendered a
service in India, whether resident in India or outside India, a “service PE”
would be established in India. As noticed hereinabove, no customer, resident or
otherwise, received any service in India from the assessees. All its customers
received services only in locations outside India. Only auxiliary operations
that facilitated such services were carried out in India. This being so, it was
not necessary to advert to the other ground namely, that “other personnel”
would cover personnel employed by the Indian company as well, and that the US
companies through such personnel were furnishing services in India. This being
the case, it was clear that as the very first part of Article 5(2)(l) was not
attracted, the question of going to any other part of the said Article did not
arise. It was perhaps for this reason that the AO did not give any finding on
this score.

 

The Supreme
Court agreed with the assessee’s counsel that the “agency PE” aspect of the
case need not be gone into as it was given up before the ITAT. However, the
Supreme Court was of the view that for the sake of completeness, it was
necessary to agree with the High Court, that it had never been the case of
Revenue that e-Funds India was authorised to or exercised any authority to
conclude contracts on behalf of the US company, nor was any factual foundation
laid to attract any of the said clauses contained in Article 5(4) of the DTAA.

 

Dealing with
the issue of effect of MAP settlement for the Asst. Years 2003-04 and 2004-05,
the Supreme Court referred to the relevant paras of OECD Manual on MAP and, in
particular, Best Practice No.3, relied on by the Revenue’s counsel and noted
that this would show that a competent authority should engage in discussion
with the other competent authority in a principled, fair and objective manner,
with each case being decided on its own merits. It is also specifically
observed that, where an agreement is not otherwise achievable, then both
parties should look for appropriate opportunities for compromise in order to
eliminate double taxation on the facts of the case, even though a principled
approach is important. The learned Attorney General also relied upon Best
Practice No. 1 of the said OECD Manual, which requires the publication of
mutual agreements reached that may apply to a general category of taxpayers
which would then improve guidance for the future. According to the Supreme
Court, the Best Practice No. 1 has no application on the facts of the present
case, as the agreement reached applies only to the respondent companies, and not
to any general category of taxpayers. It is clear, therefore, that the
assessee’s counsel Shri Ganesh is right in replying upon para 3.6 of the OECD
Manual, which deals with settlements which are often case and time specific and
they are not considered as precedents for the tax-payers or the tax
administration. It is very clear, therefore, that such agreement cannot be
considered as a precedent for subsequent year, and the High Court’s conclusion
on this aspect is also correct.

Note: In the above case, in the context of fixed place PE, the Court has followed internationally accepted tests confirmed by the Supreme Court in the case of Formula One (supra) and applied the same to the facts found by the High Court in this case. The judgement in Formula One’s case is digested in this column in the last month and since this case, in this respect, follows the same, it is thought fit to consider in this column in this month, which is now also reported in ITR. In the context of service PE, primarily it has relied on its earlier judgment in the case of Morgan Stanley (supra), which has been analysed in greater detail by us in this journal in the column Closements in the months of September/October, 2007. The above judgement is also primarily based on the factual findings of the High Court and also based on certain lack of findings of facts at the lower level. As such, this judgement should be read, understood and applied accordingly. For the purpose of deciding the issues raised in this case, the Court has also referred to and considered the relevant part of OECD commentaries on OECD Model as well as by learned authors Klaus Vogel & Arvind A. Skaar (on PE) and also the OECD Manual on MAP etc. _

 


Glimpses of Supreme Court Rulings

10.  Transfer of case – Where the
Income-tax/assessment file of the Assessee is transferred from one Assessing
Officer to another Assessing Officer and the two Assessing Officers are not
subordinate to the same Director General or Chief Commissioner or Commissioner
of Income-tax, u/s. 127(2)(a) of the Act an agreement between the Director
General, Chief Commissioner or Commissioner, as the case may be, of the two
jurisdictions is necessary.

Noorul Islam
Educational Trust vs. CIT (2016) 388 ITR 489 (SC)

The challenge before the
Supreme Court in the present appeal was against the order of the High Court of
Madras, Madurai Bench, dated March 20, 2015 passed in W.A. No. 98 of 2010 CIT
vs. Noorul Islam Educational Trust [2015] 375 ITR 226 (Mad) by which the
transfer of the income-tax/assessment file of the Appellant from Tamil Nadu to
Kerala as made by the jurisdictional Commissioner of Income-tax (CIT-II,
Madurai, Tamil Nadu) had been upheld.

According to the Supreme
Court, for the purpose of the appeal, it was necessary to note the provisions
of section 127(2)(a) of the Income-tax Act, 1961 (for short “the
Act”) which reads as under:

127. Power to transfer
cases.–(1) …

(2) Where the Assessing
Officer or Assessing Officers from whom the case is to be transferred and the
Assessing Officer or Assessing officers to whom the case is to be transferred
are not subordinate to the same Director General or Chief Commissioner or
Commissioner,–

(a) Where the Directors
General or Chief Commissioners or Commissioners to whom such Assessing Officers
are subordinate are in agreement, then the Director General or Chief
Commissioner or Commissioner from whose jurisdiction the case is to be
transferred may, after giving the Assessee a reasonable opportunity of
being-heard in the matter, wherever it is possible to do so, and after
recording his reasons for doing so, pass the order;

The Supreme Court held
that as the Income-tax/assessment file of the Appellant-Assessee had been
transferred from one Assessing Officer in Tamil Nadu to another Assessing
Officer in Kerala and the two Assessing Officers were not subordinate to the
same Director General or Chief Commissioner or Commissioner of Income-tax, u/s.
127(2)(a) of the Act an agreement between the Director General, Chief
Commissioner or Commissioner, as the case may be, of the two jurisdictions was necessary.

The Supreme Court noted
that the counter affidavit filed on behalf of the Revenue did not disclose that
there was any such agreement. In fact, it had been consistently and repeatedly
stated in the said counter affidavit that there was no disagreement between the
two Commissioners. The Supreme Court held that absence of disagreement could
not tantamount to agreement as visualised u/s. 127(2)(a) of the Act, which
contemplated a positive state of mind of the two jurisdictional Commissioners
of Income-tax which was conspicuously absent.

In the above
circumstances, the Supreme Court held that the transfer of the
Income-tax/assessment file of the Appellant-Assessee from the Assessing
Officer, Tamil Nadu to Assessing Officer, Kerala was not justified and/or
authorised u/s. 127(2)(a) of the Act. The order of the High Court was,
therefore, interfered with by the Supreme Court and the transfer was
accordingly set aside. The appeal was allowed in the above terms.

11.  Reassessment – Notice u/s. 147 issued on
ground that no material to show debts written off as required under provisions
of section 36 was valid.

DDIT vs. Sumitomo
Mitsui Banking Corporation (2016) 387 ITR 164 (SC)

The High Court allowed the
petition of the assessee challenging the notice dated March 30, 2010 issued
u/s. 148 of the Act seeking to reopen the assessment for assessment year
2004-05 for the reason that the assessment was sought to be reopened only on
the ground that bad debts had not been proved to have become irrecoverable
which issue had been decided by the Supreme Court in TRF Ltd. vs. CIT
[(2010) 323 of ITR 397 (SC)] against the revenue.

The Revenue challenged the
order of the High Court dated February 22, 2011 passed in Writ Petition (L) No.
140 of 2011 by which the reopening of the assessment of the Respondent-Assessee
sought to be made by issuing a notice u/s. 148 of the Income-tax Act, 1961 had
been interfered with.

The Supreme Court having regard to the fact that though the
Respondent- Assessee had disclosed that the bad debts were transferred to Kotak
Mahindra Bank Ltd. for realisation, the authority recording the reasons prior
to issuance of notice u/s. 148 of the Income-tax Act, 1961 had specifically
recorded that there was no material available on record to indicate that the
bad debts had been written off as mandatorily required u/s. 36(1)(vii) of the
Income-tax Act, 1961 as amended with effect from April 1, 1989. The Supreme
Court held that if that be so, no fault could be found with the notice issued.
Consequently, the Supreme Court allowed the appeal by setting aside the order
of the High Court and dismissing the writ petition filed by the
Respondent-Assessee challenging the said notice. The Supreme Court, however,
made it clear that it had expressed no opinion on the merits of the
reassessment, which had been made on December 24, 2010, and it would be open
for the Respondent-Assessee to urge all questions as may be open, in law, in
the event the Respondent-Assessee seeks to challenge the reassessment order
dated December 24, 2010.

12.  Offences and prosecution – The Deputy
Director of Income Tax, cannot be construed to be an authority to whom appeal
would ordinarily lie from the decisions/orders of the I.T. Os. involved in the
search proceedings so as to empower him to lodge the complaint in view of the
restrictive preconditions imposed by section 195 of the Code of Criminal
Procedure – The Supreme Court on a cumulative reading of sections 177, 178 and
179 of the Code of Criminal Procedure in particular and the inbuilt flexibility
discernible in the latter two provisions, where a single and combined search
operation had been undertaken simultaneously both at Bhopal and Aurangabad for
the same purpose, held that the alleged offence could be tried by courts
otherwise competent at both the aforementioned places.

Babita Lila & Anr v UOI (2016) 387
ITR 305

The Appellants, who are husband and
wife, were residents of both Bhopal and Aurangabad. A search operation was
conducted by the authorities under the Income-tax Act, 1961 (for short,
hereinafter referred to as “the Act”) on 28.10.2010 at both the
residences of the Appellants, in course whereof their statements were recorded
on oath u/s. 131 of the Act. In response to a query made by the authorities, it
was alleged that they made false statements denying of having any locker either
in individual names or jointly in any bank. It later transpired that they did
have a safe deposit locker with the Axis Bank (formerly known as UTI Bank) at
Aurangabad which they had also operated on 30.10.2010. The search at Aurangabad
was conducted by the Income Tax Officer, Nashik and Income Tax Officer, Dhule
and the statements of the Appellants were also recorded at Aurangabad.

Based on the revelation
that the Appellants, on the date of the search, did have one locker as
aforementioned and that their statements to the contrary were false and
misleading, a complaint was filed under provisions of the Indian Penal Code by
the Deputy Director of Income Tax (Investigation)-I, Bhopal (M.P.) on 30.5.2011
in the court of the Chief Judicial Magistrate, Bhopal, (M.P.) and the same was
registered as R.T. No. 5171 of 2011.

The Trial Court on
9.6.2011, took note of the offences imputed and issued process against the
Appellants. In doing so, the Trial Court, amongst others, noted that the search
proceedings undertaken by the authorities u/s. 132 of the Act were deemed to be
judicial proceedings in terms of section 136 and in course whereof, as alleged,
the Appellants had made false statements with regard to their locker and that
on the basis of the documents and evidence produced on behalf of the
complainant, sufficient grounds had been made out against them to proceed u/s.
191, 193, 200 of the Indian Penal Code.

The Appellants challenged
impugned this order of the Trial Court before the High Court u/s. 482 Code of
Criminal Procedure (for short hereinafter to be referred to as “the
Code”) and sought annulment thereof primarily on the ground that the
search operations having been undertaken by the I.T. O’s of Nashik and Dhule,
the complaint could not have been lodged by the Deputy Director of Income Tax
(Investigation)-I, Bhopal (M.P.) who was not the appellate authority in terms
of section 195(4) of the Code and further no part of the alleged offence having
been committed within the territorial limits of the Court of the Chief Judicial
Magistrate, Bhopal, it had no jurisdiction to either entertain the complaint or
take cognisance of the accusations. The High Court has declined to interfere in
the proceedings on either of these contentions.

Being aggrieved by the
rejection of their challenge to the initiation of their prosecution under
sections 109/191/193/196/200/420/120B/34 of the Indian Penal Code on the basis
of a complaint made by the Deputy Director of Income Tax (Investigation)-I,
Bhopal (M.P.), both on the ground of lack of competence of the complainant and
of jurisdiction of the Trial Court at Bhopal, the Appellants sought the
remedial intervention of the Supreme Court under Article 136 of the
Constitution of India.

Referring to section 195
of the Code as a whole, it has been urged on behalf of the Appellants that the
Deputy Director of Income Tax (Investigation)-I, Bhopal (M.P.), in the facts of
the case was not competent to lodge the complaint, he being not the authority
to whom appeals would ordinarily lie from the orders or actions of the I.T.
Os., Nashik and Dhule.

It was further urged on
behalf of the Appellants that having regard to the place of search, the
recording of their statements as well as of the location of the locker, no
cause of action for initiation of the criminal proceedings had arisen within
the jurisdiction of the court of the Chief Judicial Magistrate, Bhopal in terms
of sections 177 and 178 of the Code and thus the High Court had grossly erred
in deciding contrary thereto.

In refutation of the
arguments advanced on behalf of the Appellants, the learned Solicitor General
maintained that having regard to the scheme of Chapters XIII and XX and the
underlying legislative intent ascertainable therefrom, the Deputy Director of
Income Tax (Investigation)-I, Bhopal (M.P.) had the competence and jurisdiction
to lodge the complaint at Bhopal.

Vis-a-vis the competence of the court of the Chief Judicial
Magistrate, Bhopal, the learned Solicitor General insisted that as the
Appellants were the residents, both of Bhopal and Aurangabad and search
operations were conducted simultaneously at both the places, and further as
they had been filing their income tax returns at Bhopal, the Trial Court before
which the complaint had been filed, was competent to take cognisance of the
offences alleged in terms of section 178 (b) and (d) of the Code.

According to the Supreme
Court, the rival submissions stirred up two major issues pertaining to the
maintainability and adjudication of the complaint lodged before the Chief
Judicial Magistrate, Bhopal, (M.P.) by the Deputy Director, Income Tax
(Investigation)-I, Bhopal, (M.P.) in the face of the prescription of section
195(1)(b) of the Code, in particular read with the other cognate sub-sections
thereof as well as the limits of the territorial jurisdiction of the court
before which the prosecution of the Appellants had been initiated in the
context of section 177 of the Code.

The Supreme Court noted
that section 195(1)(b) of the Code, which was relevant for the instant pursuit,
prohibited taking of cognisance by a court vis-a-vis the offences
mentioned in the three Clauses (i), (ii) and (iii) except on a complaint in
writing of the Court when the offence(s) is/are alleged to have been committed
in or in relation to any proceeding before it or in respect of a document
produced or given in evidence in such a proceeding or by such officer of that
court as it may authorise in writing or by some other court to which the court
(in the proceedings before which the offence(s) has been committed) is
subordinate.

The Supreme Court held
that the search operations did constitute a proceeding under the Act before an
income tax authority and that therefore, the same was deemed to be a judicial
proceeding within the meaning inter alia of sections 193 and 196 of the
Indian Penal Code and that every income tax authority for the said purpose
would be deemed to be a civil court for the purposes of section 195. The
Supreme Court however noted that it was held that that was not an issue between
the parties.

The Supreme Court after
considering the relevant provisions and the cited judgments held that, neither
the hierarchy of the income tax authorities as listed in section 116 of the Act
nor in the notification issued u/s. 118 thereof, nor their duties, functions,
jurisdictions as prescribed by the cognate provisions, permit a deduction that
in the scheme of the legislation, the Deputy Director of Income Tax has been
conceived also to be an appellate forum to which appeals from the orders/decisions
of the I.T. Os./assessing officers would ordinarily lie within the meaning of
Section 195(4) of the Code. The Deputy Director of Income Tax (Investigation)-I
Bhopal, (M.P.), therefore could not be construed to be an authority to whom
appeal would ordinarily lie from the decisions/orders of the I.T. Os. involved
in the search proceedings in the case in hand so as to empower him to lodge the
complaint in view of the restrictive preconditions imposed by section 195 of
the Code. The complaint filed by the Deputy Director of Income Tax,
(Investigation)-I, Bhopal (M.P.), thus on an overall analysis of the facts of
the case and the law involved had to be held as incompetent.

According to the Supreme
Court, the objection on the competence of the Court of the Chief Judicial
Magistrate, Bhopal to entertain the complaint and take cognisance of the
offences alleged, though reduced to an academic exercise, required to be dealt.

The Supreme Court held
that the Appellants as assessees, had residences both at Bhopal and Aurangabad
and had been submitting their income tax returns at Bhopal. The search
operations were conducted simultaneously both at Bhopal and Aurangabad in
course whereof allegedly the Appellants, in spite of queries made, did not
disclose that they in fact did hold a locker located at Aurangabad. They in
fact denied that they held any locker, either individually or jointly.

The locker, eventually
located, though at Aurangabad, had a perceptible co-relation or nexus with the
subject matter of assessment and thus the returns filed by the Appellants at
Bhopal which in turn were within the purview of the search operations. The
search conducted simultaneously at Bhopal and Aurangabad had to be construed as
a single composite expedition with a common mission. Having regard to the
overall facts and the accusation of false statement made about the existence of
the locker in such a joint drill, it could not be deduced that in the singular
facts and circumstances, no part of the offence alleged had been committed
within the jurisdictional limits of the Chief Judicial Magistrate, Bhopal.

The Supreme Court held
that Chapter XIII of the Code sanctions the jurisdiction of the criminal courts
in inquires and trials. Whereas Section 177 of the Code stipulates the ordinary
place of inquiry and trial, Section 178 enumerates the places of inquiry or
trial. In terms of Section 179, when an act is an offence by reason of anything
which has been done and of a consequence which has ensued, the offence may be
inquired into or tried by a court within whose local jurisdiction such thing
has been done or such consequence has ensued.

The Supreme Court on a cumulative
reading of sections 177, 178 and 179 of the Code in particular and the inbuilt
flexibility discernible in the latter two provisions, held that in the
attendant facts and circumstances of the case where to repeat, a single and
combined search operation had been undertaken simultaneously both at Bhopal and
Aurangabad for the same purpose, the alleged offence could be tried by courts
otherwise competent at both the aforementioned places. To confine the
jurisdiction within the territorial limits to the court at Aurangabad would
amount to impermissible and illogical truncation of the ambit of sections 178
and 179 of the Code. The objection with regard to the competence of the Court
of the Chief Judicial Magistrate, Bhopal was hence rejected.

Thus, though the territorial
jurisdiction at the Bhopal Trial Court was held to be valid, in view of the
complainant not being competent, the proceedings were quashed by the Supreme
Court.

13.  Appeal to the High Court – Review petition
filed against the order dismissing the tax appeal on the grounds that the tax
in dispute was less than Rs.2 lakh contending that the tax effect was more than
Rs.2 lakh was dismissed by the High Court as not maintainable – Orders of the
High Court set aside holding review petition was maintainable and requesting to
decide the review petition and thereafter the appeal itself, if so required, on
the merits.

CIT vs. Automobile
Corp. of Goa (2016) 387 ITR 140 (SC)

The High Court by the
order dated August 25, 2010 has disposed of the appeal filed by the Revenue
without entering into the merits on the ground that the tax demand which formed
the subject matter of the appeal was less than Rs. 2,00,000. Thereafter, the
High Court by the order dated March 28, 2012 had dismissed the review petition
filed by the Revenue holding the same to be not maintainable against the order
passed under the provisions of section 260A of the Income-tax Act, 1961.

Before Supreme Court, an
affidavit was filed by the Revenue explaining how the notional tax effect was
far beyond the amount of Rs. 2,00,000. The Supreme Court further noted that in CIT
vs. Meghalaya Steels Ltd. [2015] 377 ITR 112 (SC), decided on August 5,
2015, a view had been taken by it that the review would be available in respect
of the orders passed u/s. 260A of the Income-tax Act, 1961.

In view of the above, the
Supreme Court allowed the appeals and set aside both the orders dated August
25, 2010 and March 28, 2012 passed by the High Court in Tax Appeal No. 7 of
2004 and Civil Application (Review) No. 26 of 2010 respectively and requested
the High Court to decide the review petition and thereafter the appeal itself,
if so required, on the merits. The Supreme Court, however, made it clear that
it had expressed no opinion on the merits of any of the contentions of the
parties.

Direct Taxes

67.  Sub-rule (3)
inserted in rule 8AA to determine the date of acquisition of capital asset
declared under the Income Declaration Scheme, 2016. – Income–tax (34th  Amendment) Rules, 2016 


Notification No. 108 dated 29th November 2016

68.  Revenue subsidies
received from the Government towards reimbursement of cost of
production/manufacture or for sale of the manufactured goods are part of
profits and gains of business derived from the Industrial Undertaking/eligible
business, and are thus, admissible for applicable deduction under Chapter VI-A
of the Act


 Circular No. 39 dated 29th
November 2016

69.  Clarifications
with respect to the permissible quantity of Gold Jewellery held by an
individual

Press Release dated 1st December 2016

70.  Procedure for the
purposes of furnishing and verification of Form 26A for removing of default of
Short Deduction and/or Non Deduction of Tax at Source

 Notification No. 11
dated 2nd December 2016

71.  Procedure for the
purposes of furnishing and verification of Form 27BA for removing of default of
Short Collection and/or Non Collection of Tax at Source

Notification No. 12 dated 8th December 2016

72.  Reopening u/s. 147
of the Act is feasible only when the Assessing Officer “has reason to
believe that any income chargeable to tax has escaped assessment” and not
merely on the basis of any reason to suspect. Mere increase in turnover,
because of use of digital means of payment or otherwise, in a particular year
cannot be a sole reason to believe that income has escaped assessment in
earlier years. Hence, Assessing Officers are advised not to reopen past assessments
merely on the ground that the current year’s turnover has increased

Circular No. 40 dated 9th December 2016

73.  Return of income
can be revised u/s. 139(5) of the Act for rectifying any omission or wrong
statement made in the original return of income and not for resorting to make
changes in the income initially declared so as to drastically alter the form,
substance and quantum of the earlier disclosed income. Any instance coming to
the notice of Income-tax Department which reflects manipulation in the amount
of income, cash-in-hand, profits etc. and fudging of accounts may necessitate
scrutiny of such cases so as to ascertain the correct income of the year and
may also attract penalty/prosecution in appropriate cases as per provision of
law. –

Press Release dated 14th December 2016

74.  Pradhan Mantri
Garib Kalyan Deposit Scheme, 2016 notified

Notification No. S.O.4061 (E) dated 16th December 2016

75.  Taxation and
Investment Regime for Pradhan Mantri Garib Kalyan Yojana Rules, 2016 notified

Notification No. 116 dated 16th December 2016

76.  Rate of deemed
profit provided u/s 44AD of 8% of Total turnover or gross reduced to  6% in respect of the amount of total turnover
or gross receipts received through banking channel/digital means for the
financial year 2016-17. Legislative amendment in this regard shall be carried
out through the Finance Bill, 2017

Announcement by the Government on 19th December,
2016

77.  Clarifications on
Indirect Transfer provisions under the 
Act-

Circular No. 41 dated 21st December 2016

78.  Up to 30 December
2016 payment towards tax, surcharge, penalty and deposit under the Pradhan
Mantri Garib Kalyan Yojana can be made in old Bank Notes of Rupees 500 and
Rupees 1000 denomination 

Press Release dated 22nd December 2016.

79.  Reporting of
transaction  for  serial no. 11 of Rule 114E(2) is required
only if  cash payment is received  for sale of goods or services in excess
of  Rupees two lakh per transaction

Press release dated 22nd December, 2016

80.  Certain
clarifications have been issued on Direct Tax Dispute Resolution Scheme, 2016-

Circular no. 42 dated 23rd December 2016

Direct Taxes

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1 CBDT clarifies on classification of income from sale of shares as capital gains or business income

– Circular No. 6/2016 dated 29.02.16

In continuation to the earlier Instruction No. 1827, dated 31st August, 1989 and Circular No. 4 of 2007 dated 15th June, 2007 further clarifications have been provided by CBDT for considering income from sale of shares as Capital gains or Business Income as under:

i) If the assessee has treated the securities in his books as stock in trade, the same should be accepted

ii) In case holding period of the securities is more than a year and the assessee wants to treat it as a Capital asset, then the AO needs to accept it provided the treatment is consistently followed by the assessee in the subsequent years.

iii) In all other cases, the earlier mentioned Instructions and Circular be considered for determination of the nature of income.

iv) These guidelines would not apply to transactions the genuineness of which are questionable.

It is further clarified that these are broad guidelines and the determination needs to be based on the facts of the case.

2 Clarification by CBDT that the provisions of DTAA between India and UK would be applicable in case of a partnership resident in either state and its income be taxed either in the hands of the entity or beneficiaries/partners

– Circular No. 02/2016 dated 25.02.2016

3 CBDT has issued an Office Memorandum for clearing the pending refunds wherein the timeline for clearance laid down in Office Memorandum dated 29.01.2016 be reduced to 15 days for notices u/s. 245 of the Act valid till 31.3.16

– Office Memorandum dated 07.03.2016

4 CBDT extends the benefit of higher monetary limits laid down in Circular 21 of 2015 dated 10.12.2015 for filing appeals to Cross Objections filed by Department before ITAT and references made to the High Court u/s. 256(1) and 256(2) of the Act

– Letter No: F.No.279/Misc./M-142/2007-ITJ (Part) dated 08.03.2016

5 CBDT clarifies on the status of the EPC consortiums when to be treated as AOP –

Circular no. 7/2016 dated 7th March 2016

Certain broad parameters are laid down for NOT treating the EPC consortiums as AOP and thereby not taxing it as a separate entity:

i) Clear independence exists between each member in terms of responsibility, resources and risk for the scope of work defined for him.
ii) Each member earns profit/loss for his scope of work though all together can share contract price at the gross level for accounting convenience.
iii) R esources in terms of men and materials used by each member are under his risk and control parameters.
iv) There is no unified control and management of the consortium and common management is for administrative convenience and co-ordination.
v) Other facts and circumstances which point out that consortium is not an AOP.

It is further clarified that this Circular shall not be applicable in cases where all or some of the members of the consortium are Associated Enterprises within the meaning of Section 92A of the Act. In such cases, the Assessing Officer will decide whether an AOP is formed or not keeping in view the relevant provisions of the Act and judicial jurisprudence on this issue.

Guidelines for Implementation of Transfer Pricing Provisions – Instruction No. 15/2015, dated 16th October, 2015 replaced by Instruction No. 3/2016 dated 10th March 2016 ( full text available on www.bcasonline.org

6 CBDT reaffirms its view point of not adopting coercive action against payees for TDS which is not deposited by the payer and directs the AO to follow the Directives issued in letter dated 01.06.2015.

–Office memorandum – no: F.No. 275/29/2014- IT (B) dated 11th March 2016

Direct Taxes

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76. Procedure, Formats and Standards for ensuring secured transmission of electronic communication for the purpose of Rule 127 r.w.s 282 notified –

Notification No. 2 dated 3rd February 2016

77. Clarification of the term ‘initial assessment year’ in section 80lA (5) of the Income-tax Act, 1961 –

Circular No. 1 dated 15th February 2016

It is clarified that the term ‘initial assessment year’ would mean the first year opted for by the assessee for claiming deduction u/s 80lA out of a slab of fifteen ( or twenty) years, as prescribed under the relevant sub-section.

78.Atal Pension Yojana (APY) notified as a Pension Scheme for the benefit of section 80CCD –

Notification No. 7 dated 19th February 2016

79. Time-limit of six months prescribed under section 154(8) of the Act is to be strictly followed by the Assessing Officer while disposing applications filed by the assessee/ deductor/collector under section 154 of the Act. –

Instruction No. 1 dated 15th February 2016

New form 9A prescribed and Rule 17 and Form 10 amended – Forms to be furnished by the charitable trust to the Income tax authorities before the due date of filing of the return of income-

Notification No. 3 dated 14th January 2016- Income-tax (1st Amendment) Rules, 2016

81. Certain technical glitches solved regarding online issuance of Certificates u/s. 195(2) and 195(3) of the Act –

TDS Instruction no. 51 dated 4.2.16

82. Procedure for adjustment of refunds in case where notice u/s. 245 of the Act has been issued–

Office Memorandum dated 29.01.2016

CBDT has stated that in cases where the tax payer has contested the demand raised by the department, the jurisdictional AO would be issued a reminder to either confirm or make appropriate changes in the demand based on the contention of the assessee. This needs to be responded by the AO within 30 days, post which CPC would issue the refund without adjustment of the demand in absence of any communication from the AO.

Direct Taxes

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60. Non-applicability of MAT provisions to FIIs/FIPs who do not have PE / place of business in India prior to 01.04.2015

Instructions no. 18/2015 dated 23rd December 2015 (full text available on www.bcasonline. org)

61. No TDS on Interest on FDRs made in the name of Registrar General of the Court or the depositor of the fund on the directions of the Court, till the matter is decided by the Court

Circular no 23/2015 dated 28th December 2015

62. Questionnaire detailing the requirements for each scrutiny to be accompanied with the Notice u/s. 143(2) of the Act to avoid any undue hardship to tax payers

Instruction no. 19/2015 dated 29th December 2015 (full text available on www.bcasonline. org)

63. Detailed clarifications issued on scope of scrutiny assessments selected under Computer Aided Scrutiny Selection – Instruction no. 20/2015 dated 29.12.15

64. CBDT has issued a Press Release making mandatory e-filing of appeals to CIT(A) for all assesses who are required to file their return electronically

65. Recording of satisfaction note in cases covered u/s. 153C/158BD of the Act

Circular no. 24/2015 dated 31.12.15

CBDT directs all the officers to follow the principles laid down by the Supreme Court in the case of CIT vs. Calcutta Knitwears 362 ITR 673 wherein it has been held that the satisfaction note needs to be in place either a) at the time of or along with the initiation of proceedings against the searched person u/s. 158BC of the Act; or (b) in the course of the assessment proceedings u/s. 158BC of the Act; or (c) immediately after the assessment proceedings are completed u/s. 158BC of the Act of the searched person.”

66. The CBDT has issued a Guidance Note dated 31.12.2015 for ensuring compliance with the reporting requirements provided in Rules 114F to 114H and Form 61B of the Rules dealing with Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS)

67. No penalty u/s. 271(1)( c) of the Act if additions made to normal income but tax determined as payable u/s. 115JB of the Act prior to 01.04.2016

Circular no. 25/2015 dated 31.12.2015

68. In light of huge default of short deduction, CBDT Issues Advisory To TDS Deductors For validating S. 197 Certification

Glimpses of Supreme Court Rulings

10 Search and seizure – The Supreme Court declined to interfere
in the order of the High Court after finding that the Assessing Officer had
examined some of the borrowers mentioned in the pronotes and they had
categorically stated that the amount advanced was 50 per cent, or less which
explanation had been accepted by the first appellate authority and confirmed by
the Tribunal and held that when all of them were carrying on same business from
the same premises, it is but natural that if any concealed income have been
found at the time of search and survey, it has to be distributed among all the
family members who were carrying on business.

CIT vs. Rekha Bai (2017) 393 ITR 22 (SC)

The assessee, an individual, was carrying on the business of
financier by giving her husband a power of attorney. On August 9, 1989, a
search was conducted under section 132 of the Income-tax Act in the premises of
the assessee and several incriminating documents were seized. The pronotes to
the value of Rs. 28,16,900, the note books containing entries of amounts
advanced and repayments received back, the details of amounts advanced to
various parties and the details of date wise interest receipts were seized.

While making the assessment, the Assessing Officer made an
addition of Rs.15,21,120, Rs.6,05,163 and Rs.10,22,082 for the three assessment
years i.e. 1988-89 to 1990-91 under the head “Income from other sources”.

The Commissioner of Income-tax (Appeals) allowed the appeals
by a common order holding that the concealed income should not be entirely
assessed in the hands of the assessee and should be divided among the assessee,
her husband, her husband’s Hindu undivided family and her son. He further held
that the face value of the pronotes cannot be taken as the amounts actually lent
and fixed the concealed income at a much lower figure.

The Tribunal held that the order of the Commissioner of
Income-tax (Appeals) was reasonable in all respects and confirmed the same.

The High Court held that there was a clear finding given by
the Tribunal that the amount reflected in the seized pronotes were inflated and
actual amount of advance made by the assessee-respondent were less than the
amounts shown in the respective pronotes. The Tribunal noted that the Revenue
had not produced any further evidence or material to show that what was stated
in the pronote was the actual amount advanced. The High Court also did not find
any error in the order of the Tribunal and their finding was that the income
computed in these cases was to be attributed to the assessee-respondent, her
husband, Hindu undivided family and her son. The High Court further held that
the authorities below rightly pointed out that it was not so probable that the
entire income was earned by the assessee-respondent at a particular assessment
year or assessment years. A reasonable conclusion was made that the income had
been earned over a period of time.

Before the Supreme Court the Learned Counsel appearing for
the Appellant Revenue submitted that the full value of the pronotes seized at
the time of survey should have been taken into account.

From the order of the first appellate authority, the Supreme
Court noted that the Assessing Officer had examined some of the borrowers
mentioned in the pro-notes and they had categorically stated that the amount
advanced was 50 per cent, or less which explanation had been accepted by the
first appellate authority and confirmed by the Tribunal.

The Supreme Court held that the Department had failed to
bring on record any material to the contrary except the seized documents which,
according to the Supreme Court, could not absolve the Department or give any
right to negate the view taken by the first appellate authority and the
Tribunal. So far as the income divided among the family members of the
Respondent-Assessee was concerned the Supreme Court noted that all of them were
carrying on same business from the same premises. Therefore, it was but natural
that if any concealed income had been found at the time of search and survey,
it had to be distributed among all the family members who were carrying on
business.

The Supreme Court accordingly dismissed the appeal of the
Revenue.

11 Search and seizure – Block Assessment – As the issue of
invalidity of the search warrant was not raised at any point of time prior to
the notice u/s. 158BD and having participated in the proceedings of assessment
initiated under Section 158BC, the information discovered in the course of the
search, if capable of generating the satisfaction for issuing a notice u/s.
158BD could not altogether become irrelevant for further action u/s. 158BD

Gunjan Girishbhai Mehta vs. Director of Investigation
(2017) 393 ITR 310 (SC)

Notice u/s. 132 of the
Income-tax Act, 1961 (the Act) was issued in the name of a dead person. The
said notice was duly received by the Petitioner as the legal heir of the dead
person. Notice of assessment u/s. 158BC of the Act was issued and in the
assessment proceedings, where the income was declared to be “nil”,
the Petitioner as the legal heir had participated. Thereafter, notice u/s.
158BD of the Act was issued to the Petitioner on the basis of information
coming to light in the course of search. Aggrieved, the Petitioner moved the
High Court and on dismissal of the writ petition, filed the special leave
petition.

The point urged before the
Supreme Court was that if the original search warrant is invalid, the
consequential action u/s. 158BD would also be invalid. The Supreme Court did
not agree with the Petitioner. The Supreme Court held that the issue of
invalidity of the search warrant was not raised at any point of time prior to
the notice u/s.158BD. In fact, the Petitioner had participated in the
proceedings of assessment initiated u/s.158BC of the Act. The information
discovered in the course of the search, if capable of generating the
satisfaction for issuing a notice u/s.158BD, could not altogether become
irrelevant for further action u/s. 158BD of the Act.

The Supreme Court further
held that the reliance placed on the decision of the High Court of Punjab and
Haryana in CIT vs. Rakesh Kumar [2009] 313 ITR 305 (P & H) against
which special leave petition [SLP(C) No. CC 3623/2009] was dismissed by it and
its decision in Asst. CIT vs. A.R. Enterprises [2013] 350 ITR 489 (SC)
was on entirely different facts.

The Supreme Court observed
that in Rakesh Kumar (supra) the challenge was to the proceedings of
assessment u/s. 158BC of the Act on the basis of a search warrant issued in the
name of a dead person. The issue in A.R. Enterprises (supra) had no
similarity to the issue in hand, namely, the validity of the proceedings u/s.
158BD of the Act. For the aforesaid reasons, according to the Supreme Court
there was no merit in the special leave petition and thus the same was
dismissed.

12 Business Expenditure – Amortisation of preliminary expenses –
The “premium amount” collected by the Company on its subscribed
issued share capital was not and could not be said to be the part of
“capital employed in the business of the Company” for the purpose of
section 35D(3)(b) of the Act and hence is not entitled to claim any deduction
in relation to the amount received towards premium from its various shareholders
on the issued shares of the Company.

Berger Paints India Ltd vs. CIT (2017) 393 ITR 113 (SC)

The Appellant, a Limited Company, was engaged in the business
of manufacture and sale of various kinds of paints. For the Assessment Year
1996-97, the Appellant (Assessee) filed their income tax return and declared
the total income at Rs. 3,64,64,527/-, which was revised to Rs. 3,58,92,771/-
and then again revised to Rs. 3,57,26,644/-.

A notice was issued by the A.O.
to the Appellant (Assessee) u/s. 143(2) of the Act which called upon the
Appellant to explain as to, on what basis the Appellant had claimed in the
return a deduction under the head “preliminary expenses” amounting to
Rs. 7,03,306/- being 2.5% of the “capital employed in the business of the
company” u/s. 35D of the Act.

In reply, the Appellant (Assessee) contended therein that it
had issued shares on a premium which, according to them, was a part of the
capital employed in their business. The Appellant, therefore, contended that it
was on this basis, it claimed the said deduction and was, therefore, entitled
to claim the same u/s. 35D of the Act.

The A.O. did not agree with
the explanation given by the Appellant. He was of the view that the expression
“capital employed in the business of the company” did not include the
“premium amount” received by the Appellant on share capital. The A.O.
accordingly calculated the allowable deduction u/s. 35D of the Act at Rs.
1,95,049/- and disallowed the remaining one by adding back to the total income
of the Appellant for taxation purpose.

The Appellant, felt
aggrieved, and filed an appeal before the Commissioner of Income Tax (Appeals).
The Commissioner was of the view that since the “capital employed”
consisted of subscribed capital, debentures and long term borrowings, any
“premium” collected by the Appellant-Company on the shares issued by
it should also be included in the said expression and be treated as the capital
contributed by the shareholders. The Commissioner also was of the view that the
share premium account, which was shown as reserve in the balance sheet of the
Company, was in the nature of the capital base of the Company and hence
deduction u/s. 35D of the Act was admissible with reference to the said amount
also. Accordingly, the Commissioner allowed the appeals, set aside the order of
A.O. and disallowance of Rs. 5,08,257/- made by the A.O. and, therefore,
deleted the said sum.

The Revenue felt aggrieved
and filed an appeal before the Tribunal. The Tribunal allowed the appeal and
reversed the view taken by the Commissioner of Income Tax (Appeals). The
Tribunal held that the premium collected by the Appellant-Company on the share capital
did not tantamount to “capital employed in the business of the
Company” within the meaning of section 35D(3) of the Act.

The Company-Assessee felt aggrieved and filed appeal u/s.
260A of the Act before the High Court. The High Court dismissed the appeal and
affirmed the order of the Tribunal.

Feeling aggrieved, the Assessee-Company filed an appeal
before the Supreme Court.

According to the Supreme Court, the short question that fell
for consideration was whether “premium” collected by the Appellant-Company
on its subscribed share capital is “capital employed in the business of
the Company” within the meaning of section 35D of the Act so as to enable
the Company to claim deduction of the said amounts as prescribed u/s. 35D of
the Act?

The Supreme Court agreed
with the view of the High Court that the capital employed in the business of
the Company is restricted to the issued share capital, debentures and long term
borrowings, and that there was no room for holding that the premium, if any,
collected by the Company on the issue of its share capital would also constitute a part of the capital employed in the business of the Company
for purposes of deduction u/s. 35D.

According to the Supreme Court also, the “premium
amount” collected by the Company on its subscribed share capital was not
and could not be said to be the part of “capital employed in the business
of the Company” for the purpose of section 35D(3)(b) of the Act and hence
the Appellant-Company was rightly held not entitled to claim any deduction in
relation to the amount received towards premium from its various shareholders
on the issued shares of the Company.

According to the Supreme Court, there was more than one
reason to hold so. First, if the intention of the Legislature were to treat the
amount of “premium” collected by the Company from its shareholders
while issuing the shares to be the part of “capital employed in the
business of the company”, then it would have been specifically said so in
the Explanation (b) of sub-section (3) of section 35D of the Act. It was,
however, not said. Second, on the other hand, non-mentioning of the words does
indicate the legislative intent that the Legislature did not intend to extend
the benefit of section 35D to such sum. Third, these two reasons were in
conformity with the view taken by it in the case of Commissioner of Income
Tax, West Bengal vs. Allahabad Bank Ltd. (1969) 2 SCC 143, wherein the
question arose as to whether an amount of Rs. 45,50,000/- received by the
Assessee (Bank) in cash as “premium” from its various shareholders on
issuing share on premium was liable to be included in their paid up capital for
the purpose of allowing the Assessee to claim rebate under Paragraph D of Part
II of the first Schedule to the Indian Finance Act 1956. The Supreme Court
after examining the issue in the context of Para D read with its Explanation
held that “share premium account” was liable to be included in the
paid up capital for the purposes of computing rebate. One of the reasons to
allow such inclusion with the paid up capital was that such inclusion was
permitted by the specific words in the Explanation. Such was, however, not the
case here.

Its conclusion was further supported by the fact that the
Companies Act provides in its Schedule V-Part II (Section 159) a Form of Annual
Return, which is required to be furnished by the Company having share capital
every year. Column III of this Form, which deals with capital structure of the
company, provides the breakup of “issued shares capital breakup”.
This column does not include in it the “premium amount collected by the
company from its shareholders on its issued share capital”. This was
indicative of the fact that such amount was not considered a part of the
capital unless it was specifically provided in the relevant section.

Further, section 78 of the Companies Act which deals with the
“issue of shares at premium and discount” requires a Company to
transfer the amount so collected as premium from the shareholders and keep the
same in a separate account called “securities premium account”. It
does not anywhere say that such amount be treated as part of capital of the
company employed in the business for one or other purpose, as the case may be,
even under the Companies Act.

The appeal was accordingly dismissed.

13 Capital Gains – Amount paid by the subsidiary to its parent
company, in a scheme of settlement between two groups of shareholders whereby
ownership of the holding company remained with the majority shareholders and
the subsidiary was transferred to the minority shareholders, could not be
charged to capital gains tax in the hands of the holding company.

CIT vs. Annamalaiar Mills (2017) 393 ITR 293 (SC)

M/s. Annamalaiar Mills (P.) Ltd., Respondent herein was a
holding company of M/s. Annamalaiar Textiles (P.) Ltd. Hundred percent shares
of M/s. Annamalaiar Textiles (P.) Ltd. were held by the Respondent-company. In
the Respondent-company, there were two groups of shareholders; the majority
shareholder called Group A was having 61.26 % shares whereas the minority
shareholders called Group B were holding 38.74 %, shares.

An agreement was entered
into between the two groups on June 24, 1985 by which Group A came to hold all
the shares in the holding company, i.e., the Respondent herein and Group B was
given 100 % shares in the subsidiary company, i.e., M/s. Annamalaiar Textiles
(P.) Ltd. However, M/s. Annamalaiar Textiles (P.) Ltd. also paid a sum of Rs.
42.45 lakh to the Respondent-company.

Proceedings under the Gift-tax Act were initiated in respect
of payment of Rs. 42.45 lakh received by the Respondent-company.

The Assessing Officer treated the amount of Rs. 42.45
lakhspaid by the M/s. Annamalaiar Textiles (P.) Ltd. to the Respondent-company
as capital gains on the footing that since both the companies were now 100
%  owned by Group A or Group B, as the
case may be, payment of Rs. 42.45 lakh was to offset valuation of the shares of
M/s. Annamalaiar Textiles (P.) Ltd.

The order of the Assessing Officer was upheld in the appeal
before the Commissioner of Income-tax (Appeals). However, the Income-tax
Appellate Tribunal, Madras, in appeal preferred by the Respondent herein
accepted the pleas put forth by the Respondent herein, set aside the assessment
and restored the matter to the Income-tax Officer so that the assessee may
approach the Central Board of Direct Taxes. The Income-tax Officer was further
directed to finalise the assessment in accordance with the directions that may
be given by the Central Board of Direct Taxes.

The matter was taken up before the High Court of Madras and
the order of the Tribunal was upheld by the Madras High Court.

The sole question which arose for
our consideration before the Supreme Court was therefore as to whether the sum
of Rs. 42.45 lakh paid by M/s. Annamalaiar Textiles (P.) Ltd. to the
Respondent-company was liable to any capital gains or not.

The Supreme Court noted that it was not in dispute that M/s.
Annamalaiar Textiles (P.) Ltd. did not pay any amount to the shareholders who
ultimately got the shares transferred in their names. The Respondent was
holding 100 percent shares of M/s. Annamalaiar Textiles (P.) Ltd., before it
was transferred to Group B. No payment was made to the shareholders belonging to
Group B and, therefore, the question of there being any capital gains at the
hands of the Respondent herein does not arise.

The
Supreme Court also noted that the transaction of payment of Rs. 42.45 lakh had
been subjected under the Gift-tax Act and the Department could not claim both
under the Gift-tax Act and also levy tax under the Income-tax Act.

In view of the above, the Supreme Court did not
find any merit in the Civil Appeal and the same was dismissed.

Direct Taxes

31.
Notification No.86/2013 has been rescinded with effect from the date of issue
of the said notification, thereby, removing Cyprus as a notified jurisdictional
area with retrospective effect from 1st November 2013. 

Circular
No.15 of 2017 dated 21st April, 2017

32.
If due tax, surcharge and penalty under PMGKY, has been received on or before
the 31st March, 2017, and deposit in the Bond Ledger Account under
the Deposit Scheme has been received on or before the 30th April,
2017, the declaration in Form No.1 under PMGKY can be filed by 10th May,
2017. 

Circular
No.14 of 2017 dated 21st April, 2017

Income
earned by an undertaking which develops, develops and operates or maintains and
operates an Industrial park/SEZ notified in accordance with the scheme framed
and notified by the Government, from letting out of premises/developed space
along with other facilities in an industrial park/SEZ is to be charged to tax
under the head ‘Profits and Gains of Business.’

Circular No. 16 of 2017 dated 25th April , 2017

33. Amendment to Rule 19AB and Form no. 10DA 

( Rule and form of report for claiming deduction u/s. 80JJAA)

Income-tax (6th Amendment), Rules, 2017 dated 3rd
April, 2017 Notification No. 26 dated 3rd April 2017.

34. Amendment to Rule 114B extending the time-limit to
provide PAN details to the Bank to 30th 
June, 2017. 

Income-tax (7th Amendment) Rules, 2017 -Notification No. 27 dated 5th
April 2017

35. Provisions of section 269ST will not apply to receipt of
cash by any person from any bank and post office.

Notification No. 28 dated 5th April 2017

36. Mandatory quoting of Aadhaar shall apply only to a person
who is eligible to obtain Aadhaar number. As per the Aadhaar Act, 2016, only a
resident individual is entitled to obtain Aadhaar. Resident as per the said Act
means an individual who has resided in India for a period or periods amounting
in all to one hundred and eighty-two days or more in the twelve months immediately
preceding the date of application for enrolment. Accordingly, the requirement
to quote Aadhaar as per section 139AA of the Income-tax Act shall not apply to
an individual who is not a resident as per the Aadhaar Act, 2016.

Press Release dated 5th April 2017

37. Insertion of Rule 17CB – Method of valuation for the
purposes of sub-section (2) of section 115TD – Income-tax (8th
Amendment) Rules, 2017

Notification No. 32 dated 21st April 2017

38. Insertion of Rule 21AD and Form 10-IB for companies
claiming  benefit u/s. 115BA- Income-tax
(9th Amendment) Rules, 2017.

Notification No. 36 dated 2nd May 2017

39. Draft rules relating to valuation of unquoted equity
share for the purposes of section 56 and section 50CA released for stakeholders
comments.

Press Release dated 5th May 2017

40. Draft Income Computation and Disclosure Standards on Real
Estate Transactions released for stakeholders comments. 

Press Release dated 12th May 2017

41. Exemption provided for certain persons from Quoting
Aadhaar/Enrolment ID

Notification No. S.O. 1513 (E) dated 11th May
2017

Direct Taxes

fiogf49gjkf0d

Rule 127 inserted to provide that service of notice, summons, requisition, order and other communication may be done by email. The Rule further provides the address at which the same can be served –

Notification No. 89 dated 2nd December 2015- Income-tax (18th Amendment) Rules, 2015

TDS on Salaries for Financial year 2015-16:

Circular No. 20 dated 2nd December 2015

CBDT increases the monetary limits for filing of appeals by the department before the ITAT and High Courts and SLP before the Supreme Court. CBDT has directed that the said instruction shall apply retrospectively to pending appeals and that all appeals below the specified tax limits should be withdrawn/ not pressed. However, appeals before the Supreme Court are to be governed by the limits operative at the time that the appeal was filed –

Circular 21 dated 10th December 2015

DTAA between India and Thailand notified-

Notification No. 88 dated 1st December 2015

The Government of India and the Government of Japan sign a Protocol for amending the existing DTAA –

PIB Press Release dated 11th December 2015

Rule 10D, 10THA, 10THB, 10THC, 10THD and Form 3CEFB amended to amend the safe harbour rules and to specify the information and documents required to be maintained by an eligible assessee. –

Notification No. 90 dated 8th December 2015- Income-tax (19th Amendment) Rules, 2015

Rule 12CB inserted and Form 64C prescribed , which is required to be furnished by the investment fund to the Income tax authorities.-

Notification No. 92 dated 11th December 2015- Income-tax (20th Amendment) Rules, 2015

Amendments to section 43B of the Act to be given effect to retrospectively in light of the Apex Court judgment in case of Alom Extrusions –

Circular no. 22/2015 dated 17.12.15

Rule 37BB amended and information for payment to non residents in Forms 15CA / 15CB and 15CC modified and simplified – Income tax (21st Amendment) Rules, 2015 dated 16.12.15 –

Glimpses of Supreme Court Rulings

14. Capital Gains – Cost of Acquisition – Value as on
1-4-1974 – High Court not to interfere with the finding of fact by the Tribunal
unless the same is palpably incorrect and therefore perverse – Assessing
Officer and Commissioner of Income Tax valued the land at Rs. 2 or 3 per sq.
yard while the Tribunal determined the value at Rs.150/- per sq. yard which
finding was reversed by the High Court.

Ashok Prapann vs. CIT (2016) 389 ITR 462 (SC)

The assessment year in question was 1989-90. The Assessee has
been subjected to payment of income-tax on capital gains accruing from land
acquisition compensation and sale of land. It was not in dispute that the land
in question was sold for Rs.150/- per sq. yard. The dispute was as to how the
cost of acquisition was to be worked out for the purposes of deduction of such
cost from the receipts so as to arrive at the correct quantum of capital gains
exigible to tax under the Income-tax Act, 1961 (for short “the Act”).
The Assessing Officer as well as the first appellate authority took into
account the declaration made in the return filed by the Assessee under the
Wealth-tax Act (Rs. 2 per square yard) in respect of the very plot of land as
the cost of acquisition. Some instances of comparable sales showing higher
value at which such transactions were made (Rs. 70 per square yard) were also
laid by the Assessee before the Assessing Officer. The same were not accepted
on the ground that such sales were subsequent in point of time, i.e., 1978-79
whereas u/s. 55(2) of the Act the crucial date for determination of the cost of
acquisition was April 1, 1974.

The learned Tribunal took the view that the comparable sales
could not altogether be ignored. Therefore, though the comparable sales were at
a higher value of Rs. 70 per square yard, the learned Tribunal thought it
proper to determine the cost of acquisition at Rs. 50 per square yard. In the
second appeal, the High Court exercising jurisdiction u/s. 260A of the Act
reversed the said finding.

The Supreme Court observed that a declaration in the return
filed by the Assessee under the Wealth-tax Act would certainly be a relevant
fact for determination of the cost of acquisition which u/s. 55(2) of the Act
to be determined by a determination of fair market value. Equally relevant for
the purposes of aforesaid determination would be the comparable sales though
slightly subsequent in point of time for which appropriate adjustments can be
made as had been made by the learned Tribunal (from Rs. 70 per square yard to
Rs. 50 per square yard). The Supreme Court held that comparable sales, if
otherwise genuine and proved, could not be shunted out from the process of
consideration of relevant materials. The same had been taken into account by
the learned Tribunal which is the last fact finding authority under the Act.
Unless such cognizance was palpably incorrect and, therefore, perverse, the
High Court should not have interfered with the order of the Tribunal. According
to the Supreme Court, the order of the High Court overlooked the aforesaid
severe limitation on the exercise of jurisdiction u/s. 260A of the Act.

The Supreme Court further noted that apart from the above, it
appeared that there was an on-going process under the Land Acquisition Act,
1894 for determination of compensation for a part of the land belonging to the
Assessee which was acquired [39 acres (approx.)]. The reference court enhanced
the compensation to Rs. 40 per square yard. The above fact, though subsequent,
would not again be altogether irrelevant for the purposes of consideration of
the entitlement of the Assessee. However, as the determination of the cost of
acquisition by the learned Tribunal was on the basis of the comparable sales
and not the compensation awarded under the Land Acquisition Act, 1894 (the
order awarding higher compensation was subsequent to the order of the learned
Tribunal) and the basis adopted was open for the learned Tribunal to consider,
the Supreme Court was of  the view that
in the facts of the present case, the High Court ought not to have interfered
with the order of the learned Tribunal.

Consequently and taking into account all the reasons stated
above, the Supreme Court allowed the appeal. The order of the High Court was
set aside and that of the learned Tribunal was restored.

15. Cost of Construction – Reference to the Department
Valuation Officer though made in 1997 was valid in view of insertion of section
142A by Finance (No.2) Act, 2014 w.r.e.f. 15-11-1972 and subsequent amendments,
as the assessment had not become final and conclusive because appeal filed by
Revenue u/s. 260A was pending before the High Court but the order of the High
Court not interfered with in view of the finding recorded by the Tribunal that
local Public Work Department rates are to be applied and adopted in place of
Central Public Works Departments rates.

CIT vs Sunita Mansingha (2017) 393 ITR 121

The proceedings for block assessment year 1997-98 were
initiated against the Respondents as a result of search conducted at the
residence of assessee u/s. 132 of the Act on 24.3.1997. The Assessing Officer inter
alia found that the assessee had half share in a farm house cum swimming
pool and she owned a residential House at 13-37, Shastri Nagar, Bhilwara. The
said properties were referred to the Departmental Valuation Officer (DVO) for
valuing the cost of construction. By a report dated 2.6.1997, the cost of farm
house was determined at Rs.23,54,200 as against Rs.5,82,600 declared as cost of
construction. The 50% difference in the cost of construction, which worked out
at Rs.8,81,300 was added to income of the assessee as income from undisclosed
sources. Similarly, an addition of Rs.12,19,145 was made on account of
undisclosed investment in cost of construction of house at Shastri Nagar as per
the report of DVO.

The Commissioner of Income-tax (Appeals) sustained the
addition to the tune of Rs.2,56,691 on account of alleged unexplained
investment in the construction of residential house at Shastri Nagar, Bhilwara.
The Tribunal deleted the entire amount added by the Assessing Officer.

A question was raised before the High Court regarding
deletion of addition on account of unexplained investment in construction of
house property on the basis of reference to Departmental Valuation Officer. The
High Court noted that no question was raised regarding deletion of addition of
Rs.8,81,300 though the same had been deleted for the same reason.

The High Court, following the decision of Supreme Court in Smt.
Amiya Bala Paul vs. CIT (2003) 262 ITR 407 (SC), held that the Assessing
Officer could not have made addition of certain amount by way of unexplained
investment in construction of immovable property namely residential house
situated at Bhilwara and farm house situated at Atun on the basis of valuation
report obtained by referring the issue to DVO, as no power existed under the
Act of making such a reference. 

The Supreme Court observed that even though the Tribunal had
held that the reference to the Departmental Valuation Officer in question was
not valid, in view of the decision of the Supreme Court in the case of Smt.
Amiya Bala Paul vs. CIT (supra), it had also held that it was a settled
principle of law that in place of Central Public Works Department rates, local
Public Works Department rates were to be applied and adopted to determine the
cost of construction.

The Supreme Court held that in view of the fact that section
142A was inserted by the Finance (No. 2) Act, 2004 (23 of 2004) w.r.e.f. 15th
November, 1972 and subsequently again substituted by the Finance Act, 2010 (14
of 2010) w.e.f. 1st July, 2010 and the Finance (No. 2) Act, 2014 (25
of 2014) w.e.f. 1st October, 2014, as the proviso to sub-section (3)
of section 142A as it existed during the relevant period, reference to the
Departmental Valuation Officer could have been made because assessment in the
present case had not become final and conclusive because the appeal preferred
by the Revenue u/s. 260A of the Income-tax Act, 1961 was pending before the
Rajasthan High Court.

However, in view of the finding recorded by the Tribunal that
the local Public Works Department rates were to be applied and adopted in place
of Central Public Works Department rates, the Supreme Court did not find any
good ground to interfere in the impugned judgment on this issue on merits. The
appeal was thus dismissed.

16. Capital or Revenue Expenditure – Interest and other
expenditure towards creation of assets is revenue expenditure and is to be
allowed as deduction in the year it is incurred though capitalized in the
books.

CIT vs. Shri Rama Multi Tech Ltd. (2017) 393 ITR 371 (SC)

For the assessment year 2000-01, the Respondent, a public
limited company, had incurred an expenditure of Rs.3,37,84,348 towards payment
of interest on loans taken and other items for setting up the industry. Even
though it had capitalised the said amount and claimed depreciation before the
assessing authority, however, in appeal, the Respondent raised additional
ground claiming deduction of the aforesaid amount on interest paid with some
other expenditure on other items connected therewith as revenue expenditure.

The Commissioner of Income-tax (Appeals) vide order dated
March 5, 2004, allowed the claim of the Respondent-Assessee only to the extent
of interest amount of Rs. 2,92,45,670 paid on loans taken by it for
establishing the industry. He, however, disallowed the other expenditures,
namely, financial charges, professional expenses, upfront fee, etc.

The Revenue, feeling aggrieved by the said allowance,
preferred an appeal before the Income-tax Appellate Tribunal which vide order
dated December 2, 2004 upheld the order of the Commissioner of Income-tax
(Appeals) in so far as it related to the allowance of the expenditure claimed
towards payment of interest and also allowed expenditure on other items connected
therewith. The High Court did not interfere in the appeal preferred by the
Revenue on the ground that the Tribunal has followed the decision of the
Gujarat High Court in the case of Deputy CIT vs. Core Healthcare Ltd.
[2001] 251 ITR 61 (Guj).

Feeling aggrieved, the Commissioner of Income-tax has
preferred appeal before the Supreme Court.

The Supreme Court noted that it had in the case of Deputy
CIT vs. Core Health Care Ltd. [2008] 298 ITR 194 (SC) had affirmed the view
taken by the Gujarat High Court.

In this view of the matter, the Supreme Court held that the
Income-tax Appellate Tribunal was justified in allowing the expenditure of Rs.
3,37,84,348 towards the interest paid on the loans taken and expenditure on
other items connected therewith for establishment of the unit, while affirming
the order of the Commissioner of Income-tax (Appeals).

Learned Counsel for the Revenue-Appellant submitted before
the Supreme Court that the Respondent cannot claim depreciation on the amount
of interest which has been allowed as revenue expenditure and therefore, the depreciation referable to such interest expenditure be reversed.

Learned Counsel for the Respondent however, submitted that
there was nothing on record to show that depreciation on this amount had been
taken by the Respondent.

The Supreme Court, in view of the aforesaid contentions,
directed that if as a fact the Respondent has taken any depreciation on the
amount of interest and other items which has been allowed as revenue
expenditure, that much depreciation should be reversed by the assessing
authority.

Subject to the aforesaid observations, the appeals were
dismissed.

17.  Capital Gains –
Slump Sale – Section 50 (2) applies to a case where any block of assets are
transferred by the Assessee but where the entire running business with assets
and liabilities is sold by the Assessee in one go, such sale could not be
considered as “short-term capital assets”.

CIT vs. Equinox Solution Pvt. Ltd. (2017) 393 ITR 566 (SC)

The Respondent-Assessee was engaged in the business of
manufacturing sheet metal components out of CRPA & OP sheds at Ahmedabad.
The Respondent decided to sell their entire running business in one go. With
this aim in view, the Respondent sold their entire running business in one go
with all its assets and liabilities on 31.12.1990 to a Company called
“Amtrex Appliances Ltd.” for Rs. 58,53,682/-.

The Respondent filed their income tax return for the
Assessment Year 1991-1992. In the return, the Respondent claimed deduction u/s.
48 (2) of the Act as it stood then by treating the sale to be in the nature of
“slump sale” of the going concern being in the nature of long term
capital gain in the hands of the Assessee.

The Assessing Officer did not accept the contention of the
Assessee in claiming deduction. According to the Assessing Officer, the case of
the Assessee was covered u/s. 50 (2) of the Act because it was in the nature of
short term capital gain as specified in section 50 (2) of the Act and hence did
not fall u/s. 48 (2) of the Act as claimed by the Assessee. The Assessing
Officer accordingly reworked the claim of the deduction treating the same to be
falling u/s. 50 (2) of the Act and framed the assessment order.

The Assessee, felt aggrieved, filed appeal before the CIT
(Appeals). The Commissioner of Appeals allowed the Assessee’s appeal insofar as
it related to the issue of deduction. He held that when it was an undisputed
fact that the Assessee has sold their entire running business in one go with
its assets and liabilities at a slump price and, therefore, the provisions of
section 50 (2) of the Act could not be applied to such sale. He held that it
was not a case of sale of any individual or one block asset which may attract
the provisions of section 50 (2) of the Act. He then examined the case of the
Assessee in the context of definition of “long term capital gain” and
“short term capital asset” and held that since the undertaking itself
is a capital asset owned by the Assessee nearly for six years and being in the
nature of long term capital asset and the same having been sold in one go as a
running concerned, it cannot be termed a “short terms capital gain”
so as to attract the provisions of section 50 (2) of the Act as was held by the
Assessing Officer. The CIT (Appeals) accordingly allowed the Assessee to claim the deduction as was claimed by them before the Assessing Officer.

The Revenue felt aggrieved of the order of the CIT (Appeal),
and filed an appeal before the Income Tax Appellate Tribunal. The Tribunal
concurred with the reasoning and the conclusion arrived at by the Commissioner
of Appeal and accordingly dismissed the Revenue’s appeal.

The Revenue, felt aggrieved of the order of the Tribunal, and
carried the matter to the High Court in further appeal u/s. 260-A of the Act.
By impugned order, the High Court dismissed the appeal holding that the appeal
does not involve any substantial question of law within the meaning of section
260-A of the Act.

It was against this order that the Revenue felt aggrieved and
carried the matter to the Supreme Court in appeal by way of special leave.

The Supreme Court held that no fault could be found in the
reasoning and the conclusion arrived at by the CIT (Appeals) in his order
which, according to the Supreme Court was rightly upheld by the Tribunal and
then by the High Court and called for no interference by it.

According to the Supreme Court, the case of the Respondent
(Assessee) did not fall within the four corners of section 50 (2) of the Act.
Section 50 (2) applies to a case where any block of assets are transferred by
the Assessee but where the entire running business with assets and liabilities
is sold by the Assessee in one go, such sale could not be considered as
“short-term capital assets”. In other words, the provisions of
section 50 (2) of the Act would apply to a case where the Assessee transfers
one or more block of assets, which he was using in thw running of his business.
Such was not the case here because in this case, the Assessee had sold the
entire business as a running concern.

The Supreme Court drew
support with the law laid down by it in Commissioner of Income Tax, Gujarat
vs. Artex Manufacturing Co. 1997 (6) SCC 437 and in Premier Automobiles
Ltd. vs. Income Tax Officer and Anr. 264 ITR 193

The Supreme Court did not find any merit in the
appeal and was accordingly dismissed.

Glimpses of Supreme Court Rulings

3.  Capital or Revenue receipt – The principle
that unless the grant-in-aid received by and assessee is utilied for
acquisition of an asset, the same must be understood to be in the nature of
revenue receipt, is not applicable to all situations – Subvention monies paid
by a parent company to its loss making Indian company are to be understood to
be payments made in order to protect capital investment of the assessee-company
and could not be treated as revenue receipts

Siemens Pub.
Communication Network P. Ltd. vs. CIT[(2017) 390 ITR 1 SC)]

The  assessee 
was engaged in the business of manufacturing digital electronic
switching systems, computer software and also software services. The return of
income for the assessment year 1999-2000 was filed declaring a loss of
Rs.9,08,30,417. In the statement of computation, the assessee had shown a sum
of Rs.21,28,40,000 as monies received from Siemens AG Germany, its principal
shareholder. In the course of the assessment proceedings the assessee explained
the said sum, as “subvention payment” from principal shareholder, made for two
reasons, namely, the company was potentially sick company, and that its
capacity to borrow had reduced substantially leading to shortage of working
capital. Siemens AG in its letter explained that as a parent company it had
agreed to infuse further capital by reimbursing the accumulated loss. The assessee
contended that the subvention monies were capital receipt and could not be
treated as income.

The Assessing Officer
rejected the contention of the assessee. The first appellate authority however
allowed the appeal holding the said monies as capital receipt. The Tribunal, in
the appeal filed by the Revenue, upheld the findings of the first appellate
authority. On a further appeal by the revenue, the High Court restored the
order of the Assessing Officer by relying on the two decisions of the Supreme
Court in Sahney Steel and Press Works Ltd vs. CIT [(1997) 228 ITR 253 (SC)]
and CIT vs. Ponni Sugars and Chemicals Ltd [(2008) 306 ITR 392 (SC)] in
which it was held that unless the grant-in-aid received by the assessee is
utilised for acquisition of an asset, the same must be understood to be in the
nature of revenue receipt.

On an appeal by the
assessee, the Supreme Court held that the understanding of the High Court that
the principle of law laid down in the aforesaid two decisions was applicable to
all situations was not correct. According to the Supreme Court, the aforesaid
view overlooked the fact that in both the above decisions the subsidies
received were in the nature of grant-in-aid from public funds and not by way of
voluntary contribution by the parent company as in the present case. The above
apart, the voluntary payments made by a parent company to its loss making
Indian company could also be understood to be payments made in order to protect
capital investment of the assessee-company. If that was so, the payments made
to the assessee-company by the parent company for the assessment year in
question could not be held to be revenue receipts. The Supreme Court approved
the decision of the Delhi High Court in CIT vs. Handicrafts and Handlooms
Export Corporation of India Ltd [(2014) 360 ITR 130 (Del)] which had taken
a similar view.

The Supreme Court allowed
the appeal setting aside the order of the High Court.

4.  Writ – Existence of alternative remedy – The
High Court was not justified in dismissing the writ petition filed by and
assessee challenging the issuance of notice u/s. 148 as not maintainable

Jeans Knit Private
Limited v. DCIT [(2017) 390 ITR 10 (SC)]

The High Courts in the
batch of cases that were before the Supreme Court had dismissed the writ
petitions preferred by the assessee challenging the issuance of notice u/s. 148
and the reasons which were recorded by the Assessing Officer for reopening the
assessment. These writ petitions were dismissed by the High Courts as not
maintainable. According to the Supreme Court, the aforesaid view taken by the
High Courts was contrary to the law laid down by the Supreme Court in Calcutta
Discount Co. Ltd. vs. ITO [(1961) 41 ITR 191 (SC)]. The Supreme Court,
therefore, set aside the impugned judgments and remitted the cases to the
respective High Courts to decide the writ petitions on merits.

The Supreme Court however clarified that it had not made any
observations on the merits of the cases, i.e. the contentions which were raised
by the assessee challenging the move of the Income-tax authorities to reopen
the assessment and that each case would be examined on its own merits keeping
in view the scope of judicial review while entertaining such matters, as laid
down by the Supreme Court in various judgments.

The Supreme Court while
coming to the aforesaid conclusion was conscious of the fact that the High
Court had referred to the judgment of the Supreme Court in CIT vs. Chhabil
Dass Agarwal [(2013) 357 ITR 357 (SC)]. According to the Supreme Court the
principle laid down in the said case did not apply to these cases.

The Supreme Court further
directed that the stay of reassessment that was granted during the pendency of
these appeals would continue till the disposal of the writ petitions before the
High Courts.

The Supreme Court allowed the appeals in the aforesaid terms.

5.  Exemption – Residential Palace – Though a
part of the residential palace is found to be in occupation of the tenant and
remaining is in occupation of the Ruler for his residence, the Ruler is
entitled to claim exemption for the whole of his residential palace u/s.
10(19A)

Maharao Bhim Singh of
Kota vs. CIT (2017) 390 ITR 532 (SC)

Principle of Res
judicata – Though the principle of res judicata does not apply to
income-tax proceedings and each assessment year is an independent year in
itself, yet, in the absence of any valid and convincing reason, Revenue should
not pursue the same issue again to higher Courts. There should be a finality
attached to the issue once it stands decided by the higher Courts on merits.

Rule of interpretation –
If two Statutes dealing with the same subject use different language, then it
is not permissible to apply the language of one Statute to other while
interpreting such Statutes.

Rule of interpretation –
Once the Assessee is able to fulfill the conditions specified in section for
claiming exemption under the Act then provisions dealing with grant of
exemption should be construed liberally because the exemptions are for the
benefit of the Assessee.

The Appellant was the
Ruler of the princely State of Kota, now a part of State of Rajasthan. He owned
extensive properties which, inter alia, included his two residential
palaces known as “Umed Bhawan Palace” and “City Palace”.
The Appellant was using Umed Bhawan Palace for his residence.

In exercise of the powers
conferred by section 60A of the Indian Income-tax Act, 1922 (XI of 1922), the
Central Government issued an order called “The Part B States (Taxation
Concessions) Order, 1950” (hereinafter referred to as “The
Order”). It was issued essentially to grant exemptions, reductions in rate
of tax and the modifications in relation to specified kinds of income earned by
the persons (Ruler and his family members) from various sources as specified
therein. The Order was published in the Gazette of India, extraordinary, on
02.12.1950.

Paragraph 15 of the Order
dealt with various kinds of exemptions. Item (iii) of Paragraph 15, provided
that the bona fide annual value of the residential palace of the Ruler of a
State which is situated within the State and is declared by the Central
Government as his inalienable ancestral property would be exempt from payment
of Income-tax.

In pursuance of the powers
conferred under item (iii) of Paragraph 15 of the Order, the Central
Government, Ministry of Finance (Revenue Division) issued a notification
bearing No. S.R.O. 1619 dated 14.05.1954 declaring the Appellant’s
aforementioned two palaces, viz., Umed Bhawan and City Palace as his official
residences (Serial No. 21 of the Table).

On 20.09.1976, the
Ministry of Defence requisitioned portion of the Umed Bhawan Palace (918.26
Acres of the land including houses and other construction standing on the land)
for their own use and realized Rs. 80,000/- as rent by invoking the provisions
of Requisition and Exhibition of Immovable Property Act, 1952. According to the
Appellant, the period for which the land was requisitioned expired in 1993
though the land still continued to remain in the occupation of the Ministry of
Defence.

A question arose in the
Appellant’s income-tax assessment proceedings regarding taxability of the
income derived by the Appellant (Assessee) from the part of the property
requisitioned by the Defence Ministry, which was a portion of the Appellant’s
official residence (Umed Bhawan Palace). The question was whether the rental
income received by the Appellant from the requisitioned property by way of rent
was taxable in his hands. In other words, the question was as to whether the
Appellant was entitled to get full benefit of the exemption granted to him u/s.
10A(19A) of the Income-tax Act, 1961 (for short, “the I.T. Act”) from
payment of income-tax or it was confined only to that portion of palace which
was in his actual occupation as residence and the rest which was in occupation
of the tenant would be subjected to payment of tax.

The Commissioner of Income
Tax (Appeals) answered the question in Appellant’s favour and held that since
the Appellant was in occupation of part of his official residence during the
assessment year in question, he was entitled to claim full benefit of the
exemption for his official residence as provided u/s. 10(19A) of the I.T. Act
notwithstanding the fact that portion of the residence was let out to the
Defence Ministry. The Revenue, felt aggrieved, carried the matter in appeal
before the Income Tax Appellate Tribunal. The Tribunal affirmed the order of
the Commissioner of Income Tax and dismissed the Revenue’s appeal. The
Tribunal, however, on an application made by the Revenue u/s. 256(1) of the
I.T. Act referred the following question of law to the High Court of Rajasthan
for answer.

“Whether on the facts and
in the circumstances of the case, the Tribunal was justified in holding that
the rental income from Umed Bhawan Palace was exempt u/s. 10(19A) of the IT
Act, 1961?”

The Division Bench of the
High Court while hearing the reference noticed cleavage of opinion on the
question referred in this case in two earlier decisions of the High Court of
Rajasthan. One was in the case of Maharawal Laxman Singh vs. C.I.T. (1986)
160 ITR 103 (Raj.) and Anr. was in Appellant’s own case, C.I.T.
vs. H.H. Maharao Bhim Singhji (1988) 173 ITR 79 (Raj.). So far as the case
of Maharwal Laxman Singh (supra) was concerned, the High Court had
answered the question in favour of the Revenue and against the Assessee,
wherein it was held that in such factual situation arising in the case, annual
value of the portion which was in the occupation of the tenant was not exempt
from payment of Income-tax and, therefore, income derived therefrom was
required to be added to the total income of the Assessee, whereas in case of
H.H. Maharao Bhim Singhji (supra), the High Court answered the question
against the Revenue and in favour of the Assessee holding therein that in such
a situation, the Assessee was entitled to claim full exemption in relation to
his palace u/s. 10(19A) of the I.T. Act notwithstanding the fact that portion
of the palace was let out to a tenant. It was held that any rental income derived
from the part of his rental property was, therefore, not liable to tax. The
Division Bench, therefore, referred the matter to the Full Bench to resolve the
conflict arising between the two decisions and answer the referred question on
merits.

The Full Bench of the High
Court answered the question against the Appellant (Assessee) and in favour of
the Revenue.

It was held that so long as the Assessee continued to remain
in occupation of his official residential palace for his own use, he would be
entitled to claim exemption available u/s. 10(19A) of the I.T. Act but when he
was found to have let out any part of his official residence and at the same
time was found to have retained its remaining portion for his own use, he
becomes disentitled to claim benefit of exemption available u/s. 10(19A) for
the entire palace. It was held that in such circumstances, he was required to
pay income-tax on the income derived by him from the portion let out in
accordance with the provisions of the I.T. Act and the benefit of exemption
remained available only to the extent of portion which was in his occupation as
residence.

The Supreme Court observed
that in order to claim exemption from payment of income-tax on the residential
palace of the Ruler u/s. 10(19A), it is necessary for the Ruler to satisfy that
first, he owns the palace as his ancestral property; second, such palace is in
his occupation as his residence; and third, the palace is declared exempt from
payment of income-tax under Paragraph 15 (iii) of the Order, 1950 by the
Central Government.

According to the Supreme
Court, where part of the residential palace is found to be in occupation of the
tenant and remaining is in occupation of the Ruler for his residence, a
question would arise as to whether in such circumstances, the Ruler is entitled
to claim exemption for the whole of his residential palace u/s. 10(19A) or such
exemption would confine only to that portion of the palace which is in his
actual occupation. In other words, whether the exemption would cease to apply
to let out portion thereby subjecting the income derived from let out portion
to payment of income-tax in the hands of the Ruler.

The Supreme Court noted that this very question was examined
by the M.P. High Court in the case of Bharatchandra Banjdeo [(1985) 154 ITR 236
(MP)] in detail. It was held that no reliance could be placed on section 5(iii)
of the Wealth Tax Act while construing section 10(19A) for the reason that the
language employed in section 5(iii) was not identical with the language of
section 10(19A) of the I.T. Act. Their Lordships distinguished the decision of
Delhi High Court rendered in the case of Mohd. Ali Khan vs. CIT (1983) 140
ITR 948 (Delhi), which arose under the Wealth Tax Act. It was held that
even if the Ruler had let out the portion of his residential palace, yet he
would continue to enjoy the exemption in respect of entire palace because it is
not possible to split the exemption in two parts, i.e., the one in his
occupation and the other in possession of the tenant.

The Supreme Court held
that in section 10(19A) of the I.T. Act, the Legislature has used the
expression “palace” for considering the grant of exemption to the
Ruler whereas on the same subject, the Legislature has used different
expression namely “any one building” in section 5(iii) of the Wealth
Tax Act. It could not ignore this distinction while interpreting section
10(19A) which, according to the Supreme Court, was significant.

The Supreme Court was of
the view that if the Legislature intended to spilt the Palace in part(s), alike
houses for taxing the subject, it would have said so by employing appropriate
language in section 10(19A) of the I.T. Act. However, no such language was
employed in section 10(19A).

The Supreme Court noted
that section 23(2) and (3), uses the expression “house or part of a
house”. Such expression does not find place in section 10(19A) of the I.T.
Act. Likewise, there is no such expression in section 23, specifically dealing
with the cases relating to “palace”. According to the Supreme Court,
this significant departure of the words in section 10(19A) of the I.T. Act and
section 23 also suggest that the Legislature did not intend to tax portion of
the “palace” by splitting it in parts.

According to the Supreme
Court, it is a settled Rule of interpretation that if two Statutes dealing with
the same subject use different language then it is not permissible to apply the
language of one Statute to other while interpreting such Statutes. Similarly,
once the Assessee is able to fulfill the conditions specified in section for
claiming exemption under the Act then provisions dealing with grant of
exemption should be construed liberally because the exemptions are for the
benefit of the Assessee.

The Supreme Court held
that the view taken by the M.P. High Court in Bharatchandra Banjdeo’s case (supra)
and the Rajasthan High Court in H.H. Maharao Bhim Singhji’s case (supra)
was a correct view.

The Supreme Court further noted that the question involved in
this case had also arisen in previous Assessment Years’ (1973-74 till 1977-78)
and was decided in Appellant’s favour when Special Leave Petition (C) No. 3764
of 2007 filed by the Revenue was dismissed by it on 25.08.2010 by affirming the
order of the Rajasthan High Court referred supra.

In such a factual
situation where the Revenue consistently lost the matter on the issue then,
according to the Supreme Court, there was no reason much less justifiable
reason for the Revenue to have pursued the same issue any more in higher
courts.

The Supreme Court held
that though the principle of res judicata does not apply to income-tax
proceedings and each assessment year is an independent year in itself, yet, in
the absence of any valid and convincing reason, there was no justification on
the part of the Revenue to have pursued the same issue again to higher Courts.
There should be a finality attached to the issue once it stands decided by the
higher Courts on merits. This principle, according to the Supreme Court,
applied to this case on all force against the Revenue. [see Radhasoami Satsang,
Saomi Bagh, Agra’s case (1992) 193 ITR 321 (SC)].

In the light of foregoing
discussion, the Supreme Court held that the reasoning and the conclusion
arrived at by the High Court in the impugned order including the view taken by
the Rajasthan High Court in Maharaval Lakshmansingh’s case (supra) did
not lay down correct principle of law whereas the view taken by the M.P. High
Court in cases of Bharatchandra Bhanjdeo (supra), Commissioner of
Income-Tax vs. Bharatchandra Bhanjdev (1989) 176 ITR 380 (MP) and H.H.
Maharao Bhim Singhji (supra) laid down correct principle of law.

The appeal was accordingly
allowed. The impugned order was set aside. As a consequence, the question
referred to the High Court in the reference proceedings out of which this
appeal arose was answered in favour of the Appellant (Assessee) and against the
Revenue.

Glimpses of Supreme Court Rulings

1.    Capital Gains – The sale of the business by the Official Liquidator as ongoing concern of the partnership firm which stands dissolved but continues the business as per court’s order pending completion of winding up could not be treated as slump sale when there is a specific and separate valuation for land and building and of machinery.   Business Income – As per the Court orders in the winding up petition, 40% of the income for the period 1.4.1994 to 20.11.1994 of the partnership firm that stood dissolved was to be retained by the successful bidder as tax component because after dissolution the same was taxed as AOP – The said income subject to tax in the hands of the successful bidder and not in the hands of the outgoing partners

Vatsala Shenoy vs. JCIT (2016) 389 ITR 519 (SC)

One S. Raghuram Prabhu started the business of manufacturing beedies in the year 1939. His brother-in-law joined him in the year 1940 and this sole proprietorship was converted into a partnership firm with the name ‘M/s. Mangalore Ganesha Beedi Works’ (hereinafter referred to as the ‘firm’). It was reconstituted thereafter from time to time and lastly on June 30, 1982. Partnership deed dated June 30, 1982 was entered between thirteen persons with the same name. Duration of this firm was five years, which period could be extended by six months. Thereafter, the affairs of the firm had to be wound up as provided in Clause 16 of the Partnership Deed. The firm was dissolved on December 06, 1987 by afflux of time after extending the life of the firm by a period of six months, as per the terms stipulated in the Partnership Deed. However, because of the difference of opinion among the erstwhile partners, the affairs of the firm could not be wound up.

Therefore, two of the partners of the firm filed a petition before the High Court under the provisions of Part X of the Companies Act, 1956 for winding up of the affairs of the firm in terms of section 583(4)(a) thereof. The said petition was registered as Company Petition No. 1 of 1988. Significantly, though the firm stood dissolved on December 06, 1987, and thereafter Company Petition No. 1 of 1988 for the winding up proceedings after dissolution was filed in the High Court, the business of the partnership firm continued because of the interim order passed by the High Court. This was because of the agreement of the partners, as stipulated in the Partnership Deed itself, providing that on dissolution, the firm was to be sold as a continuing concern to that partner(s) who could give the highest price therefor.

Considering the clauses in partnership deed, specific order dated November 05, 1988 was passed by the High Court permitting the group of partners, seven in number, who had controlling interest, to continue the business as an interim arrangement till the completion of winding up proceedings. Ultimately, the orders dated June 14, 1991 were passed in the said company petition for winding up the affairs of the firm by selling its assets as an ‘ongoing concern’. Though this order was challenged by some of the partners by filing special leave petition in Supreme Court, the same was dismissed as withdrawn in the year 1994. In this manner, orders dated June 14, 1991 became final, which had permitted the sale of the firm, as an ongoing concern, to such of its partner(s), who makes an offer of highest price. Reserve price of Rs.30 crore was also fixed thereby mandating that the price cannot be less than Rs.30 crore. The successful bidder was also required to accept further liability to pay interest @ 15% per annum towards the amount of price payable to partners from December 06, 1987 till the date of deposit. In the order dated June 14, 1991, it was also directed that the successful bidder shall deposit the offer price together with interest with the Official Liquidator within a period of sixty days of the date of acceptance of the offer.

On the aforesaid terms, these partners individually or in groups offered their bids. Bid of Association of Persons comprising three partners (hereinafter referred to as ‘AOP-3’), at Rs. 92 crore, turned out to be the highest and the same was accepted by the High Court vide order dated September 21, 1994. AOP-3 deposited this amount of Rs. 92 crore with the Official Liquidator on November 17, 1994 and with the occurrence of this event, assets of the firm were treated as having been sold to
AOP-3 on November 20, 1994. Even actual handing over of the business of the firm along with its assets by the Official Liquidator to the said AOP-3 took place on January 07, 1995.

Since the firm stood dissolved with effect from December 06, 1987, upto December 06, 1987, it is the firm which had filed the income tax returns in respect of the income which it had earned, for payment of income tax thereupon. However, as mentioned above, though the firm was dissolved, but the business continued because of the orders passed by the High Court keeping in view the provisions contained in the Partnership Deed. The income that was earned from the date of dissolution till the date of winding up and when the firm was sold to AOP-3 was assessed at the hands of dominant partners controlling the business activities (seven in number) as “Association of Persons” (AOP), meaning thereby, the income from the business of the said firm December 06, 1987 till winding up was assessed as an AOP. At the same time, these Assessees were also filing their individual returns as well.

The Assessees filed the return for the Assessment Year 1995-1996. It is in this Assessment Year the assets of the firm were sold as ongoing concern to AOP-3 on September 21, 1994. The Assessing Officer, while making the assessments, bifurcated this Assessment Year into two periods. One period from April 01, 1994 to November 20, 1994 (as AOP of the partners who had continued the business in that capacity in previous years). Second period from November 20, 1994 till March 31, 1995 (as the business was handed over to AOP-3 and the assessment was treated as that of AOP-3). While doing so, the Assessing Officer observed that the entire capital gains on the sale as a going concern of the business of the firm as well as the proportionate profits for the period April 01, 1994 to November 20, 1994, when the controlling AOP was carrying on business as computed in accordance with the order of the High Court in Company Petition No. 1 of 1988, on a notional basis a sum of Rs. 9,57,57,007 should be taxed in the hands of the firm. However, according to the Assessing Officer, to protect interests of the Revenue, the same amounts were included in the assessment of the AOP for the first period.

The income and tax computations were made separately for the two periods in the order of assessment. The Assessing Officer apportioned the consideration among the various assets comprised within the business with further splitting between short term and long term capital gains. While the aforesaid treatment was given to the assessment of the income of the firm, insofar as the Assessees as individuals (partners) were concerned, on the same date the Assessing Officer made assessment in their cases also by including therein the proportionate share from out of Rs. 92 crore (the amount of auction bid) as capital gain at their hands and bifurcated the same into long term and short term gain.

The approach adopted by the Assessing Officer was to take into consideration market value of the assets of the firm, viz. land, building and plant & machinery, which had already been evaluated by the Registered Valuers. The market value of these three assets was Rs. 21,52,90,000. Since total sale consideration at which the firm was sold was Rs. 92 crore, balance amount of Rs. 70,47,10,000 was treated as representing goodwill of the firm which was taxed as long term gain. This mode of arriving at short term and long term capital gain and taxing it accordingly by the Assessing Officer has received the stamp of approval by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, as well as the High Court.

The argument of the learned senior Counsel for the Assessees was that since it was a sale of an ongoing concern, it had to be treated as a slump sale within the meaning of section 2(42C) of the Act and, therefore, it was not permissible for the Assessing Officer to assign the amount of Rs. 92 crore into different heads of land, building and machinery and treating balance amount as goodwill. It was a capital asset as an ongoing concern which was sold at Rs. 92 crore and in the absence of provisions relating to mode of computation and deductions at the relevant time, which were inserted subsequently only with effect from April 01, 2000, as per the decision in the case of PNB Finance Limited [307 ITR 75- SC], the consideration was to be treated as capital receipt and no capital gain was payable thereon.

Second submission of the learned senior Counsel for the Assessees pertained to the payment of tax on the income which the business earned from April 01, 1994 till November 20, 1994. The learned Counsel argued that as per the orders of the High Court in the winding up petition, 40% of this income was retained by AOP-3 as a tax component because of the reason that for business income of the earlier years, after the dissolution, the same was taxed as an AOP. Therefore, the individual partners could not be taxed on the said business income in the year in question, as held in Radhasoami Satsang, Saomi Bagh, Agra vs. Commissioner of Income Tax 193 ITR 321 and Commissioner of Income Tax vs. Excel Industries Ltd. 358 ITR 295. His related submission was that in any case this amount was not received by the Assessees as it was retained by AOP-3 and, therefore, tax was not payable by the Assessees.

The Supreme Court held that on the aforesaid facts, it became clear that asset of the firm that was sold was the capital asset within the meaning of section 2(14) of the Act. Once it is held to be the “capital asset”, gain therefrom is to be treated as capital gain within the meaning of section 45 of the Act.

According to the Supreme Court, the Assessees, however, were attempting to wriggle out from payment of capital gain tax on the ground that it was a “slump sale” within the meaning of section 2(42C) of the Act and there was no mechanism at that time as to how the capital gain is to be computed in such circumstances, which was provided for the first time by Section 50B of the Act with effect from April 01, 2000. However, in the opinion of the Supreme Court this argument failed in view of the fact that the assets were put to sale after their valuation. There was a specific and separate valuation for land as well as building and also machinery. Such valuation had to be treated as that of a partnership firm which had already stood dissolved.

The Supreme Court further held that as per the definition of slump sale in section 2(42C), sale in question could be treated as slump sale only if there was no value assigned to the individual assets and liabilities in such sale. This had obviously not happened. The Supreme Court observed that not only value was assigned to individual assets, even the liabilities were taken care of when the amount of sale was apportioned among the outgoing partners. Once it was held that the sale in question was not slump sale, obviously section 50B also did not get attracted as this section contained special provision for computation of capital gains in case of slump sale. As a fortiori, the judgment in the case of PNB Finance Limited also was not applicable.

The Supreme Court, in the aforesaid scenario, held that when the Official Liquidator has distributed the amount among the nine partners, including the Assessees herein, after deducting the liability of each of the partners, the High Court had rightly held that the amount received by them was the value of net asset of the firm which would attract capital gain.

The partnership firm had dissolved and thereafter winding up proceedings were taken up in the High Court. The result of those proceedings was to sell the assets of the firm and distribute the share thereof to the erstwhile partners. Thus, the ‘transfer’ of the assets triggered the provisions of section 45 of the Act and making the capital gain subject to the payment of tax under the Act.

Insofar as argument of the Assessees that tax, if at all, should have been demanded from the partnership firm was concerned, the Supreme Court held that on the facts of this case that may not be the situation, the firm had dissolved much before the transfer of the assets of the firm and this transfer took place few years after the dissolution, that too under the orders of the High Court with clear stipulation that proceeds thereof shall be distributed among the partners. 

Insofar as the firm was concerned, after the dissolution on December 06, 1987, it had not filed any return as the same had ceased to exist. Even in the interregnum, it was the AOP which had been filing the return of income earned during the said period. In this context, the Court also noted the detailed observations of the High Court which, interalia, explained the effect of sale of business conducted by the court among the partners under clause 16 of the partnership deed as : “once the partnership is dissolved, the partners would become entitled to specific share in the assets of the firm which is proportionate to their share in sharing the profits of the firm and they are placed in the same position as the tenants in common and for the purpose of dissolution and u/s. 47 of the Indian Partnership Act, 1932…”…”.. it is clear that the order passed by the assessing authority confirmed in the first appeal and by the Income-tax Appellate Tribunal (Special Bench) holding that the appellants as erstwhile partners are liable to pay capital gain on the amount received by them towards the value of their share in the net assets of the firm are liable for capital gains u/s. 45 of the Act. The said finding is justified..”

Advert to the second argument, the Supreme Court noted that it had been argued that insofar as income of the firm in the Assessment Year in question was concerned, it could not be taxed at the hands of the Assessees. According to the Supreme Court, there was merit in this submission.

First, and pertinently, it was an admitted case that 40% of the said income was allowed by the High Court to be retained by the successful bidder (AOP-3) precisely for this very purpose. This 40% represented the tax which was to be paid on the income generated by the ongoing concern being run by the Association of Persons, as authorised by the High Court. Secondly, in the previous years, the Department had taxed the AOP and this procedure had to continue in the Assessment Year in question as well.

According to the Supreme Court, the High Court had dealt with this aspect very cursorily, without taking into consideration the aforesaid aspects. The High Court dealt with the issue as to how the business income/revenue income was to be treated/calculated, but the question of taxability at the hands of the Assessees has not been touched upon at all.

The Supreme Court allowed the appeals partly only to the extent that business income/revenue income in the Assessment Year in question was to be assessed at the hands of AOP-3, in terms of the orders of the High Court, as AOP-3 retained the tax amount from the consideration which was payable to the Assessees and it was AOP-3 which was supposed to file the return in that behalf and pay tax on the said revenue income.

Insofar as the appeals preferred by the Revenue were concerned, they arose out of the protected assessment which was made at the hands of the partnership firm. As the Supreme Court upheld the order of the Assessing Officer in respect of payment of capital gain tax by the Assessees, these appeals were rendered otiose and were disposed of as such.

Note: The above judgment is based on the peculiar facts of that case and specific provisions of the partnership deed as well as earlier orders of the High Court and the Apex Court. As such, this should be read and understood in that context.

2.    Advance Tax – In cases where receipt is by way of salary, deduction u/s. 192 is required to be made and no question of payment of advance tax could arise in such cases and thus provisions for interest for default of advance in payment of advance tax (section 234B) and for deferment of advance tax (section 234C) would have no application

Ian Peter Morris vs. ACIT (2016) 389 ITR 501 (SC)

The Appellant-Assessee along with three others had promoted a company, namely, “Log in Systems Innovations Private Limited” (the acquiree company) in the year 1990. The said company was acquired by one Synergy Credit Corporation Limited (the acquirer company). The Appellant was offered the position of executive director in the acquirer company for a gross compensation of Rs. 1,77,200 per annum. This was by a letter for an offer of appointment dated October 8, 1993. On October 15, 1993, an acquisition agreement was executed between the acquirer company and the acquiree company on a going concern basis for a total consideration of Rs. 6,00,000. On the same date, i.e., October 15, 1993, a non-compete agreement was signed between the Appellant-Assessee and the acquirer company imposing a restriction on the Appellant from carrying on any business of computer software development and marketing for a period of five years for which the Appellant-Assessee was paid a sum of Rs. 21,00,000. The question that arose in the proceedings commencing with the assessment order was whether the aforesaid amount of Rs. 21 lakh was on account of “salary” or the same was a “capital receipt”.

The Assessing Officer held it to be an addition to salary for the Assessment Year 1994-95. The Commissioner of Income-tax (Appeals) held it to be a capital receipt not exigible to tax. The Tribunal reversed the order of the first appellate authority and held it to be revenue receipt covered by the provisions of section 17(1)(iv). The Tribunal sustained the levy of interest u/s. 234B and 234C as consequential in nature. The High Court upheld the order of the Tribunal.

The Appellant-Assessee filed a Special Leave Petition before the Supreme Court. A limited notice was issued confining the scrutiny of the court to correctness of levy of interest as ordered/affirmed by the High Court.

The aforesaid limited notice, therefore, had to be understood to have concluded the issue with regard to the nature of the receipt, namely, that the same was salary.

The Supreme Court held that a perusal of the relevant provisions of Chapter XVII of the Act (Part A, B, C and F of Chapter XVII) would go to show that against salary a deduction, at the requisite rate at which income tax is to be paid by the person entitled to receive the salary, is required to be made by the employer failing which the employer is liable to pay simple interest thereon.

The provisions relating to payment of advance tax is contained in Part “C” and interest thereon in Part “F” of Chapter XVII of the Act. In cases where receipt is by way of salary, deduction u/s. 192 of the Act is required to be made. No question of payment of advance tax under Part “C” of Chapter XVII of the Act can arise in cases of receipt by way of “salary”. If that is so, Part “F” of Chapter XVII dealing with interest chargeable in certain cases (section 234B – Interest for defaults in payment of advance tax and section 234C–Interest for deferment of advance tax) would have no application to the present situation in view of the finality that has to be attached to the decision that what was received by the Appellant-Assessee under the non-compete agreement was by way of salary. The Supreme Court allowed the appeals for the aforesaid reasons. The Supreme Court set aside order of the High Court so far as the payment of interest u/s. 234B and section 234C of the Act was concerned.

Note: The above judgment should now be read with the proviso to section 209(1) inserted by the Finance Act, 2012 w. e. f 1/4/2012.

Glimpses of Supreme Court Rulings

5.  Business expenditure – Disallowance – A tax
at source is to be deducted at the time of credit of such sum to the account of
the contractor or at the time of payment thereof, whichever is earlier – One
consequence for default in compliance with these provisions provided u/s.
40(a)(ia) of the Act is that the payments made by such a person to a contractor
shall not be treated as deductible expenditure – The word ‘payable’ occurring
in section 40(a)(ia) refers not only to those cases where the amount is yet to
be paid but also covers the cases where the amount is actually paid

Palam Gas Service vs. Commissioner of
Income Tax (2017) 394 ITR 300 (SC)

The Appellant-Assessee was engaged in the
business of purchase and sale of LPG cylinders under the name and style of
Palam Gas Service at Palampur. During the course of assessment proceedings, it
was noticed by the Assessing Officer that the main contract of the Assessee for
carriage of LPG was with the Indian Oil Corporation, Baddi. The Assessee had
received the total freight payments from the IOC Baddi to the tune of Rs.
32,04,140/-. The Assessee had, in turn, got the transportation of LPG done
through three persons, namely, Bimla Devi, Sanjay Kumar and Ajay to whom he
made the freight payment amounting to Rs. 20,97,689/-.

The Assessing
Officer observed that the Assessee had made a sub-contract with the said three
persons within the meaning of section 194C of the Act and, therefore, he
was  liable  to 
deduct  tax  at source from the payment of Rs.
20,97,689/-. On account of his failure to do so, the said freight expenses were
disallowed by the Assessing Officer as per the provisions of section 40(a)(ia)
of the Act.

Against the order of the Assessing Officer,
the Assessee preferred an appeal before the Commissioner of Income Tax
(Appeals), Shimla who vide his order dated August 17, 2012 upheld the
order of the Assessing Officer.

The matter thereafter came up in appeal
before the Income Tax Appellate Tribunal which too met with the same fate.

In further appeal to the High Court u/s.
260A of the Act, the outcome remained unchanged as the High Court of Himachal
Pradesh also dismissed the appeal affirming the order of the ITAT.

The Supreme Court noted that section 40 of
the Act enumerates certain situations wherein expenditure incurred by the
Assessee, in the course of his business, will not be allowed to be deducted in
computing the income chargeable under the head ‘Profits and Gains from Business
or Profession’. One such contingency is provided in Clause (ia) of sub-section
(a) of section 40. As per Clause (ia), certain payments made, which include
amounts payable to a contractor or sub-contractor, would not be allowed as
expenditure in case the tax is deductible at source on the said payment under
Chapter XVIIB of the Act and such tax has not been deducted or, after
deduction, has not been paid during the previous year or in the subsequent year
before the expiry of the time prescribed under sub-section (1) of section 200
of the Act.

The Supreme Court further noted that in the
instant case, certain payments were made by the Appellant Assessee, in the
Assessment Year 2006-2007, but the tax at source was not deducted and deposited.
Also, as per section 194C of the Act, payments to contractors and
sub-contractors were subject to tax deduction at source. The Income Tax
Department/Revenue had, therefore, not allowed the amounts paid to the
sub-contractors as deduction while computing the income chargeable to tax at
the hands of the Assessee in the said Assessment Year.

The Supreme Court observed that section
40(a)(ia) uses the expression ‘payable’ and on that basis the question which
was raised for consideration was:

“Whether the provisions of section 40(a)(ia)
shall be attracted when the amount is not ‘payable’ to a contractor or
sub-contractor but has been actually paid?”

The Supreme Court observed that the question
was, as noted above, when the word used in section 40(a)(ia) is ‘payable’,
whether this section would cover only those contingencies where the amount is
due and still payable or it would also cover the situations where the amount is
already paid but no tax was deducted thereupon.

The Supreme Court noted that as per section
194C, it is the statutory obligation of a person, who is making payment to the
sub-contractor, to deduct tax at source at the rates specified therein. Plain
language of the section suggested that such a tax at source is to be deducted
at the time of credit of such sum to the account of the contractor or at the
time of payment thereof, whichever is earlier. Thus, tax has to be deducted in
both the contingencies, namely, when the amount is credited to the account of
the contractor or when the payment is actually made. Section 200 of the Act
imposes further obligation on the person deducting tax at source, to deposit
the same with the Central Government or as the Board directs, within the
prescribed time.

According to the Supreme Court, a conjoint reading
of these two sections would suggest that not only a person, who is paying to
the contractor, is supposed to deduct tax at source on the said payment whether
credited in the account or actual payment made, but also deposit that amount to
the credit of the Central Government within the stipulated time. The time
within which the payment is to be deposited with the Central Government is
mentioned in Rule 30(2) of the Rules.

The Supreme Court held that section
40(a)(ia) covers not only those cases where the amount is payable, but also
when it is paid. In this behalf, one has to keep in mind the purpose with which
section 40 was enacted. Once it is found that the aforesaid sections mandate a
person to deduct tax at source not only on the amounts payable but also when
the sums are actually paid to the contractor, any person who does not adhere to
this statutory obligation has to suffer the consequences which are stipulated
in the Act itself. Certain consequences of failure to deduct tax at source from
the payments made, where tax was to be deducted at source or failure to pay the
same to the credit of the Central Government, are stipulated in section 201 of
the Act. This section provides that in that contingency, such a person would be
deemed to be an Assessee in default in respect of such tax. While stipulating
this consequence, section 201 categorically states that the aforesaid sections
would be without prejudice to any other consequences which that defaulter may
incur. Other consequences are provided u/s. 40(a)(ia) of the Act, namely,
payments made by such a person to a contractor shall not be treated as
deductible expenditure. When read in this context, it is clear that section
40(a)(ia) deals with the nature of default and the consequences thereof. Default
is relatable to Chapter XVIIB (in the instant case sections 194C and 200, which
provisions are in the aforesaid Chapter). When the entire scheme of obligation
to deduct the tax at source and paying it over to the Central Government is
read holistically, it cannot be held that the word ‘payable’ occurring in
section 40(a)(ia) refers to only those cases where the amount is yet to be paid
and does not cover the cases where the amount is actually paid. If the
provision is interpreted in the manner suggested by the Appellant herein, then
even when it is found that a person, like the Appellant, has violated the
provisions of Chapter XVIIB (or specifically sections 194C and 200 in the
instant case), he would still go scot free, without suffering the consequences
of such monetary default in spite of specific provisions laying down these
consequences.

The Supreme Court accordingly dismissed the
appeal with costs.

6. 
Income – Disallowance of expenditure in relation to income not forming
part of total income – If the income in question is taxable and, therefore,
includible in the total income, the deduction of expenses incurred in relation
to such an income must be allowed, however, such deduction would not be
permissible merely on the ground that the tax on the dividend received by the
Assessee has been paid by the dividend paying company and not by the recipient
Assessee, when u/s. 10(33) of the Act, such income by way of dividend is not a
part of the total income of the recipient Assessee – In the earlier assessment
years when the Revenue had failed to establish any nexus between the
expenditure disallowed and the earning of the dividend income in question, no
disallowance could have been for assessment year 2002-03

Godrej and Boyce Manufacturing Company
Limited vs. Dy. Commissioner of Income Tax and Ors. (2017) 394 ITR 449 (SC).

For the Assessment Year 2002-2003, the
Appellant-Company filed its return declaring a total loss of Rs. 45,90,39,210/-. In the said return, it had shown income by way of dividend
from companies and income from units of mutual funds to the extent of Rs.
34,34,78,686. Dividend income to the extent of 98% of the said amount was
contributed by the Godrej group companies, whereas only 0.05% thereof amounting
to Rs.1,71,000/- came from non-Godrej group companies. A sum of Rs.66,79,000/-
constituting 1.95% of the aforesaid dividend income, came from mutual funds.
Admittedly, a substantial part of the Appellant’s investment in the group
companies was in the form of bonus shares, which did not involve any fresh
capital investment or outlay.

The other relevant fact was that on the
first day of the previous year relevant to the Assessment Year 2002-2003 i.e. 1st
April, 2001, the investment in shares and mutual funds of the Appellant
company stood at Rs. 127.19 crore whereas at the end of the previous year i.e.
as on 31st March, 2002, the investment was Rs. 125.54 crore. The
above figures would go to show that there were no fresh investments made during
the previous year relevant to the Assessment Year 2002-2003. In fact, the
investments had come down to the extent noticed above.

Furthermore, as against the investment of
Rs. 125.54 crore as on 31st March, 2002, on the said date, the
Appellant had a total of Rs. 280.64 crore by way of interest free funds in the
form of share capital (Rs. 6.55 crore) as well as Reserves and Surplus (Rs.
274.09 crore). On the other hand, as against the investment of Rs. 127.19 crore
on the first day of the previous year i.e. 1st April, 2001, the
Appellant had a total of Rs. 270.51 crore by way of interest    free  
funds   in   the   form   of   
share   capital  (Rs. 6.55 crore) and Reserves and Surplus (Rs.
263.96 crore). The above facts showed that the Appellant had sufficient
interest free funds available for the purpose of making investments.

For the Assessment Year 1998-1999, the
Appellant’s dividend income was Rs. 11,41,34,093/-. The Assessing Officer
notionally allocated Rs. 1,47,40,000/- out of the total interest expenditure of
Rs. 34,64,89,000/- as referable to the earning of the said dividend income and
had disallowed such interest expenditure and consequently reduced the exemption
available u/s. 10(33) of the Act to the net dividend. In appeal, the
Commissioner of Income Tax (Appeals) allowed exemption of the entire dividend
income on the ground that the Assessing Officer had failed to show any nexus
between the investments in shares and units of mutual funds on the one hand and
the borrowed funds on the other. The learned Income Tax Appellate Tribunal which was moved by the Revenue confirmed the
appellate order. The said order had attained finality.

For the Assessment Years 1999-2000 and
2001-2002, the issue with regard to exemption u/s. 10(33) of the Act was
similarly held in favour of the Assessee by the Commissioner of Income Tax
(Appeals) and the learned Tribunal, once again. Initially, the Assessing
Officer, in both the Assessment Years, had disallowed notionally computed
interest expenditure as being relatable to the earning of dividend income. The
said appellate order(s) had also attained finality. For the intervening
Assessment Year 2000-2001, there was no scrutiny of the Appellant’s return of
income. Consequently, the exemption for dividend income was allowed in full,
without disallowing any expenditure incurred in relation to earning such income.

However, for 
the Assessment Year 2002-2003, the 
Assessing Officer did not allow interest expenditure to the extent of
Rs. 6,92,06,000/- holding the same to be attributable    to   
earning    the    dividend   
income    of Rs. 34,34,78,686/-. The said figure of
interest expenditure disallowed was worked out from the total interest
expenditure for the year on a notional basis in the ratio of the cost of the
investments in shares and units of mutual funds to the cost of the total assets
appearing in the balance sheet. Though the aforesaid order of the Assessing
Officer was reversed by the Commissioner of Income Tax (Appeals) following the
earlier orders pertaining to the previous Assessment Years, the learned
Tribunal, in appeal, took a different view by its order dated 26th August,
2009. The learned Tribunal held that sub-sections (2) and (3) of Section 14A of
the Act (inserted by the Finance Act, 2006 with effect from 1st April,
2007) were retrospectively applicable to the Assessment Year 2002-2003 and, therefore,
the matter should be remanded to the Assessing Officer for recording his
satisfaction/findings in the light of the said sub-sections of section 14A of
the Act. This was notwithstanding the fact that the only disallowance made by
the Assessing Officer which was reversed in appeal by the Commissioner of
Income Tax (Appeals) was in respect of interest expenditure that was worked out
on a notional basis.

The High Court by the judgement dated 12th
August, 2010, inter alia, held that section 14A of the Act has to
be construed on a plain grammatical construction thereof and the said provision
is attracted in respect of dividend income referred to in section 115-O as such
income is not includible in the total income of the shareholder. Sub-sections
(2) and (3) of section 14A of the Act and Rule 8D of the Income Tax Rules, 1962
(hereinafter referred  to as
“the   Rules”)      would,  
however,    not    apply  
to    the  AY 2002-03 as the said provisions do not have
retrospective effect. Notwithstanding the above, the High Court upheld the
remand as made by the Tribunal to the AO though for a slightly different
reason. The High Court in its judgment also held that the tax paid u/s. 115-O
of the Act is an additional tax on that component of the profits of the
dividend distributing company which is distributed by way of dividends and that
the same is not a tax on dividend income of the Assessee.

Aggrieved, the Assessee filed an appeal
before the Supreme Court raising the following two questions:

(a) Irrespective of the factual position and
findings in the case of the Appellant, whether the phrase “income which
does not form part of total income under this Act” appearing in section
14A includes within its scope dividend income on shares in respect of which tax
is payable u/s. 115-O of the Act and income on units of mutual funds on which
tax is payable u/s. 115-R.

(b) Whatever be the view on the legal
aspects, whether on the facts and in the circumstances of the Appellant’s case
and bearing in mind the unanimous findings of the lower authorities over a
considerable period of time (which were accepted by the Revenue), there could
at all be any question of the provisions of section 14A in the Appellant’s
case.

The Supreme Court held that the object
behind the introduction of section 14A of the Act by the Finance Act of 2001 is
clear and unambiguous. The legislature intended to check the claim of allowance
of expenditure incurred towards earning exempted income in a situation where an
Assessee has both exempted and non-exempted income or includible and
non-includible income. While there can be no scintilla of doubt that if
the income in question is taxable and, therefore, includible in the total
income, the deduction of expenses incurred in relation to such an income must
be allowed, such deduction would not be permissible merely on the ground that
the tax on the dividend received by the Assessee has been paid by the dividend
paying company and not by the recipient Assessee, when u/s. 10(33) of the Act,
such income by way of dividend is not a part of the total income of the
recipient Assessee. A plain reading of section 14A would go to show that the
income must not be includible in the total income of the Assessee. Once the
said condition is satisfied, the expenditure incurred in earning the said
income cannot be allowed to be deducted. The section does not contemplate a
situation where even though the income is taxable in the hands of the dividend
paying company and the same to be treated as not includible in the total income
of the recipient Assessee, yet, the expenditure incurred to earn that income
must be allowed on the basis that no tax on such income has been paid by the
Assessee. Such a meaning, if ascribed to section 14A, would be plainly beyond
what the language of section 14A can be understood to reasonably convey.

The Supreme Court further held that
irrespective of the question of sub-sections (2) and (3) of section 14A being
retrospective, what could not be denied was that the requirement for attracting
the provisions of section 14A(1) of the Act was proof of the fact, that the
expenditure sought to be disallowed/deducted had actually been incurred in
earning the dividend income.

According to the Supreme Court, insofar as
the Appellant-Assessee was concerned, the issues stood concluded in its favour
in respect of the Assessment Years 1998-1999, 1999-2000 and 2001-2002. Earlier
to the introduction of sub-sections (2) and (3) of section 14A of the Act, such
a determination was required to be made by the Assessing Officer in his best
judgement. In all the aforesaid assessment years referred to above, it was held
that the Revenue had failed to establish any nexus between the expenditure
disallowed and the earning of the dividend income in question. In the appeals
arising out of the assessments made for some of the assessment years, the
aforesaid question was specifically looked into from the standpoint of the
requirements of the provisions of sub-sections (2) and (3) of section 14A of
the Act which had by then been brought into force. It is on such consideration
that findings have been recorded that the expenditure in question bore no
relation to the earning of the dividend income and hence, the Assessee was
entitled to the benefit of full exemption claimed on account of dividend
income.

The Supreme
Court held that in the aforesaid fact situation, a different view could not
have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of
section 14A of the Act read with Rule 8D of the Rules merely prescribe a
formula for determination of expenditure incurred in relation to income which
does not form part of the total income under the Act, in a situation where the
Assessing Officer is not satisfied with the claim of the Assessee. Whether such
determination is to be made on application of the formula prescribed under Rule
8D or in the best judgment of the Assessing Officer, what the law postulates is
the requirement of a satisfaction in the Assessing Officer that having regard
to the accounts of the Assessee, as placed before him, it is not possible to
generate the requisite satisfaction with regard to the correctness of the claim
of the Assessee. It is only thereafter that the provisions of section 14A(2)
and (3) read with Rule 8D of the Rules or a best judgement determination, as
earlier prevailing, would become applicable.

In the present case, there was no mention of
the reasons which had prevailed upon the Assessing Officer, while dealing with
the Assessment Year 2002-2003, to hold that the claims of the Assessee that no
expenditure was incurred to earn the dividend income could not be accepted and
why the orders of the Tribunal for the earlier Assessment Years were not
acceptable to the Assessing Officer, particularly, in the absence of any new
fact or change of circumstances. Neither any basis had been disclosed
establishing a reasonable nexus between the expenditure disallowed and the
dividend income received. That any part of the borrowings of the Assessee had
been diverted to earn tax free income despite the availability of surplus or
interest free funds available (Rs. 270.51 crore as on 1.4.2001 and Rs. 280.64
crore as on 31.3.2002) remained unproved by any material whatsoever. While it
was true that the principle of res judicata would not apply to
assessment proceedings under the Act, the need for consistency and certainty
and existence of strong and compelling reasons for a departure from a settled
position had to be spelt out which conspicuously was absent in the present
case.

In the above circumstances, the Supreme
Court held that the second question formulated must go in favour of the
Assessee and it must be held that for the Assessment Year in question i.e.
2002-2003, the Assessee was entitled to the full benefit of the claim of
exemption in relation to dividend income without any deductions.

The Supreme Court allowed the appeal and the order of the High Court was set aside subject to the conclusions, as above, on the
applicability of section 14A with regard to dividend income on which tax is
paid u/s. 115-O of the Act. _

Part A – Direct Taxes

31.  No TDS on one time lumpsum rental /lease
payment 

Circular No. 35 /2016 dated 13.10.2016

CBDT has clarified that TDS provisions will not apply in case
of  lump sum lease premium or one-time
upfront lease charges.  Since these
charges are not adjustable against periodic rent for acquisition of long-term
leasehold rights over land or any other property, they are capital in nature
and therefore cannot be connoted as rent within the meaning of section 194-1.

32.  Extension of time limit till 31.3.2017 for
the returns for AY 2012-13, 2013-14 and 2014-15 having a claim of refund and
not processed under section 143(1) i.e. non scrutiny cases  

CBDT Order u/s 119 dated 25.10.16

33.  Deduction under Chapter VIA would be eligible
on enhanced income post assessment and hence appeals should not be filed / be
withdrawn / not pressed upon

Circular No. 37/2016 dated 2.11. 2016

34. Revised DTAA between India
and Korea has entered into force from 12th September 2016 notified

Press Release dated 26th October 2016

35. Prohibition of Benami
Property Transactions Rules, 2016 notified w.e.f. 1st November
2016 

Notification no.  98/2016
and 99/2016 dated 25.10.16

36. Revised DTAA between India
and Japan 

Notification No.102/2016 dated 28.10.16

37. Instruction relating to
The Income Declaration Scheme, 2016 
dated 11th November 2016 (available on www.bcasonline.org)

38. Rules
114B and 114E amended to give effect to Demonetisation as announced by the
Government-

Income–tax (30th Amendment) Rules, 2016 dated 15th
November 2016

CBDT has amended the above Rules to include specific criteria for
specified authorities for obtaining PAN in light of the withdrawl of Rs. 500
and Rs 1000 notes from the country. 

39. Premium paid for Keyman
Insurance of a Partner of a firm is an eligible business expenditure u/s. 37 of
the Act

Circular no. 38/2016 dated 22.11.16

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

40 Om Prakash Nahar vs. ITO

[2022] 100 ITR (T) 345 (Delhi – Trib.)

ITA No.: 960 (Del) of 2021

A.Y.: 2017-18

Date of Order: 27th January, 2022

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

FACTS

The assessee was an individual. The assessee was a senior citizen, aged about 79 years old and a retired Govt. servant and had declared income of ₹19,06,400 from income from Pension and earnings from bank interest. The assessee’s case was selected under CASS for limited scrutiny to verify cash deposits during the demonetisation period.

The assessee explained that the amount of ₹63,63,000 was deposited in Bank of Baroda out of withdrawals from the same account from time to time made during the years 2014, 2015 and 2016, because of his suffering from serious illness — juvenile diabetes and old age. It has also been submitted by the assessee that he had undergone bypass surgery and operation in the past and looking to his ailment and staying alone with his wife, therefore, he has been withdrawing and keeping cash for his personal and psychological security. The AO rejected the assessee’s explanation and held that there is no substantial justification given by the assessee and accordingly, added the entire amount of ₹63,63,000 under section 69A/115BB of the Act.

Aggrieved, the assessee filed an appeal before CIT(A). The CIT(A) restricted the addition to ₹44,13,000 after holding that the cash withdrawn from the bank account from 1st April, 2016 to 9th November, 2016 for sums aggregating to ₹19,50,000 can be held to be out of money withdrawn from the bank account, which was deposited after demonetisation.

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

HELD

The ITAT observed that the assessee looking at his old age and suffering from various ailments as he had suffered a heart attack and had juvenile diabetes, for his mental security, he was in the habit of keeping huge cash with him. The ITAT also observed that the assessee had been withdrawing cash and keeping it with him after withdrawing from his bank account.

From the perusal of the history of cash withdrawals starting from the financial year 2014-15, the ITAT observed that the assessee has been regularly withdrawing huge cash amounts on various dates and there was hardly any credit balance left in his bank account. The ITAT held that the fund’s flow statement as submitted by the assessee clearly showed that each and every withdrawal has been mentioned and utilisation thereof and the money being withdrawn from the bank account. Even after household withdrawal, there was a huge amount available with the assessee in the form of cash. Under these facts and circumstances stated by the assessee, the ITAT held that it cannot be held to be improbable that the assessee did not have any availability of cash at the time of demonetisation. Further, it was never brought on record whether the assessee was carrying out any business or profession or was having income from undisclosed sources of income which can be said to be available with the assessee in the form of cash. The ITAT found the explanation of the assessee to be reasonable and plausible and preponderance of probability was in the favour of the assessee and without any adverse material, it cannot be presumed that the cash deposited by the assessee is out of his undisclosed source. Accordingly, the addition of ₹44,13,000 as sustained by the CIT (Appeals) was deleted.

The appeal of the assessee was allowed.

S. 2(14), 50C, 43CA, 2(47), 263 — Where the assessee being an owner of the land had entered into a joint development agreement (JDA) with a developer, such an agreement of transfer of possession for development of property does not constitute transfer as per the Act as to attract provisions of section 43CA and said the order could not be treated as prejudicial to the interest of revenue.

39 Emporis Properties (P.) Ltd. vs. PCIT

[2022] 100 ITR(T) 1 (Kolkata – Trib.)

ITA No.: 299 (Kol.) of 2022

A.Y.: 2014-15

Date of Order: 22nd September, 2022

S. 2(14), 50C, 43CA, 2(47), 263 — Where the assessee being an owner of the land had entered into a joint development agreement (JDA) with a developer, such an agreement of transfer of possession for development of property does not constitute transfer as per the Act as to attract provisions of section 43CA and said the order could not be treated as prejudicial to the interest of revenue.

FACTS

The assessee had entered into a joint development agreement (JDA) with a developer, wherein after the construction of the housing complex, a 55 per cent portion of the same would pertain to the assessee and the balance will pertain to the developer. In the course of the assessment, the Assessing Officer (AO) was of the primary view that the execution of JDA amounted to the transfer of the capital asset and therefore taxable as capital gains.

The assessee replied stating that there was no transfer of any capital asset on handing over possession of land to the developer. Further, it was submitted that the said land was stock-in-trade and therefore the same cannot be treated as a capital asset u/s 2(14) of the Act.

The AO accepted the said contention and did not make any additions to the total income of the assessee.

Thereafter, the Commissioner invoked his jurisdiction u/s 263 of the Act and stated that the said transaction was not examined in the light of section 43CA of the Act, making the order prejudicial to the interest of Revenue. Accordingly, the matter was set aside for the AO to ascertain the applicability of provisions of section 43CA of the Act to the JDA.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

The ITAT, on the perusal of the terms of the JDA, observed that the assessee had continued to be the owner of the property throughout the development of the property. The possession was only transferred for the development of the property.

It was also observed by the ITAT that there was no transfer / sale of the land under the JDA. Under the agreement, the developer would develop the land making it saleable and in lieu of the construction of the same, the developer will be provided a part of the stock-in-trade. Further, since the JDA cannot be considered as a transfer, the provisions of section 43CA will not have any applicability.

The ITAT held that merely, because the JDA has been registered with the municipal authorities and stamp duty has been paid on the agreement that does not attract the provisions of section 43CA of the Act.

Neither the terms and conditions of the JDA nor the registration authority has treated the JDA as transfer / conveyance.

The ITAT quashed the revision order and allowed the appeal of the assessee.