BCAJ | Bombay Chartered Accountant Journal

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

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

[2023] 456 ITR 56 (Bom)

A.Y.: 2016–17

Date of Order: 10th February, 2023

Ss. 147, 148 of ITA 1961

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

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

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

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

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

BCAJ Admin

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

61 Prem Kumar Chopra vs. ACIT

[2023] 456 ITR 8 (Del)

A.Ys.: 2015–16 and 2016–17

Date of Order: 25th May, 2023

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

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

60 Suresh Kumar Agarwal vs. UOI

[2023] 456 ITR 148 (Jhar)

A.Y.: 2013–14

Date of Order: 29th August, 2022

S. 276CC of ITA 1961

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

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

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

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

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

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

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

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

BCAJ Admin

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

59 Chincholi GururajacharVenkatesh and Satish Kumar Pandey vs. ACIT

[2023] 456 ITR 459 (Cal)

A.Y.: 2016–17

Date of Order: 16th December, 2022

S. 48 of ITA 1961

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

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

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

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

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

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

BCAJ Admin

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

58 Principal CIT vs. CEC SOMA CICI JV

[2023] 456 ITR 705 (Kar)

A.Ys.: 2011–12, 2012–13

Date of Order: 21st March, 2023

S. 37 of ITA 1961

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

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

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

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

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

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

BCAJ Admin

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

ISSUE FOR CONSIDERATION

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

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

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

ANURAG GUPTA’S CASE

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

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

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

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

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

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

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

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

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

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

AMRIT HOMES (P) LTD’S CASE

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

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

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

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

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

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

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

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

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

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

OBSERVATIONS

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

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

(a)……………..

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

Direct Taxes

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

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

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

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

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

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

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

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

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

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

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

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Direct Taxes

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

The important amendments are as under :

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Direct Taxes

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

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

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

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

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

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

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

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

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

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

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

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

9. Board issues instructions regarding non-filers

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

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

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

Sir/Madam

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

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

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

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

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

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

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

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

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

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

a) Details of return are available in AST

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

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

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

(Rohit Garg)
Deputy Secretary Government of India

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

(Rohit Garg)

Deputy Secretary Government of India

BCAJ Admin

Direct Taxes

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

Extension of time to furnish Audit Report electronically

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

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

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

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

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

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

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

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Direct Taxes

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

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

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

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

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

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

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

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BCAJ Admin

Glimpses of Supreme Court Rulings

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

[2023] 454 ITR 141 (SC)

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

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

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

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

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

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

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

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

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

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

49 ACIT, Surat vs. Kantilal Exports, Surat

[2023] 454 ITR 112 (SC)

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

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

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

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

The Appeal was, accordingly, allowed.

50 PCIT vs. R. F. Nangrani HUF

[2023] 454 ITR 426 (SC)

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

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

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

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

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

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

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

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

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

BCAJ Admin

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

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

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

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

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

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

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

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

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

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

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

Accordingly, the appeal was dismissed.

BCAJ Admin

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

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

[ITA (L) No. 24310 of 2023;

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

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

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

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

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

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

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

BCAJ Admin

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

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

[WP No. 2558 of 2023;

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

A.Y.: 2019–2020]

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

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

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

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

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

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

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

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

BCAJ Admin

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

57 Jankalyan Vinimay Pvt Ltd vs. DCIT

[2023] 455 ITR 456 (Cal.)

A.Ys.: 2011–12, 2012–13 and 2016–17;

Date of Order: 7th February, 2023

S. 220(6) of ITA 1961

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

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

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

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

BCAJ Admin

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

56 SANATH KUMAR MURALI vs. ITO

[2023] 455 ITR 370 (Kar)

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

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

55 Excel Commodity and Derivative Pvt Ltd vs. UOI

[2023] 455 ITR 341 (Cal)

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

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

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

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

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

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

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

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

BCAJ Admin

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

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

[2023] 455 ITR 512 (HP)

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

S. 2(24) of ITA 1961

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

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

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

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

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

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

BCAJ Admin

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

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

[2023] 456 ITR 34 (Del.)

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

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

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

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

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

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

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

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

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

BCAJ Admin

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

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

[2023] 455 ITR 432 (Telangana)

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

Date of Order: 2nd February, 2023

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

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

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

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

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

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

BCAJ Admin

Direct Taxes

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

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

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

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

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

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

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

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

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

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

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

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Direct Taxes

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

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

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

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

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

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

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

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

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Direct Taxes

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

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

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

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

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

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

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

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

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

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Direct Taxes

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

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

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

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

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

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

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

PAN submission during investment is mandatory.

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

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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.”

BCAJ Admin

Direct Taxes

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

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

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

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

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

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

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

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Direct Taxes

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

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

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

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

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Direct Taxes

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

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

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

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

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Direct Taxes

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

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

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

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

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

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

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

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

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Direct Taxes

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

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

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

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

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

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

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

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

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Direct Taxes

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

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

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

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

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

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

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

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

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Direct Taxes

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

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

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

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

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

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

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Direct Taxes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A.Ys.: 2018–19 & 2020–21

Date of Order: 29th August, 2023

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

FACTS

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

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

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

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

HELD

Income from IT Service

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

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

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

Income from corporate guarantee fee

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

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

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

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

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

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

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Direct Taxes

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

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

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

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

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

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

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 16^th January, 2009. Thereafter, the Assessing authority on 14^th
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 8^th 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 4^th 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.

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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. _

BCAJ Admin

Part A – Direct taxes

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

BCAJ Admin

Direct Taxes

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

BCAJ Admin

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.

BCAJ Admin

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

BCAJ Admin

Direct Taxes

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.

BCAJ Admin

Direct Taxes

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

BCAJ Admin

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. _

BCAJ Admin

Direct Taxes

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

Circular No. 7/2017 dated 27^th 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 24^thJanuary 2017
to rectify the mistake.

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

Circular No. 3/2017, dated 20^th 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

BCAJ Admin

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.

BCAJ Admin

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.

BCAJ Admin

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

BCAJ Admin

Direct Taxes

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

BCAJ Admin

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 1^st 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.

BCAJ Admin

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 17^th 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

BCAJ Admin

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 27^th
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 27^th May, 2000.

The said
information was received by the Investigation Unit, Jalandhar from SHO, GRP
Station Jalandhar on 29^th 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 3^rd June,
2000 and seized. Proceeding for assessment for the block period from 1^st
April, 1991 to 3^rdJune, 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 1^st
April, 1991 to 3^rd 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. _

BCAJ Admin

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.

BCAJ Admin

Direct Taxes

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.

BCAJ Admin

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. _

BCAJ Admin

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.

BCAJ Admin

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 (34^th Amendment) Rules, 2016

Notification No. 108 dated 29^thNovember 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 29^th
November 2016

69. Clarifications
with respect to the permissible quantity of Gold Jewellery held by an
individual

Press Release dated 1^st 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 2^nd 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 8^th 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 9^th 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 14^th December 2016

74. Pradhan Mantri
Garib Kalyan Deposit Scheme, 2016 notified

Notification No. S.O.4061 (E) dated 16^thDecember 2016

75. Taxation and
Investment Regime for Pradhan Mantri Garib Kalyan Yojana Rules, 2016 notified

Notification No. 116 dated 16^th 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 19^thDecember,
2016

77. Clarifications on
Indirect Transfer provisions under the
Act-

Circular No. 41 dated 21^st 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 22^ndDecember 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 22^ndDecember, 2016

80. Certain
clarifications have been issued on Direct Tax Dispute Resolution Scheme, 2016-

Circular no. 42 dated 23^rdDecember 2016

BCAJ Admin

Direct Taxes

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

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

BCAJ Admin

Direct Taxes

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.

BCAJ Admin

Direct Taxes

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

BCAJ Admin

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.

BCAJ Admin

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 1^stNovember 2013.

Circular
No.15 of 2017 dated 21^st April, 2017

32.
If due tax, surcharge and penalty under PMGKY, has been received on or before
the 31^st March, 2017, and deposit in the Bond Ledger Account under
the Deposit Scheme has been received on or before the 30^th April,
2017, the declaration in Form No.1 under PMGKY can be filed by 10^thMay,
2017.

Circular
No.14 of 2017 dated 21^stApril, 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 25^th April , 2017

33. Amendment to Rule 19AB and Form no. 10DA

( Rule and form of report for claiming deduction u/s. 80JJAA)

Income-tax (6^th Amendment), Rules, 2017 dated 3^rd
April, 2017 Notification No. 26 dated 3^rdApril 2017.

34. Amendment to Rule 114B extending the time-limit to
provide PAN details to the Bank to 30^thJune, 2017.

Income-tax (7^th Amendment) Rules, 2017 -Notification No. 27 dated 5^th
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 5^th 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 5^th April 2017

37. Insertion of Rule 17CB – Method of valuation for the
purposes of sub-section (2) of section 115TD – Income-tax (8^th
Amendment) Rules, 2017

Notification No. 32 dated 21^st April 2017

38. Insertion of Rule 21AD and Form 10-IB for companies
claiming benefit u/s. 115BA- Income-tax
(9^th Amendment) Rules, 2017.

Notification No. 36 dated 2^nd 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 5^th May 2017

40. Draft Income Computation and Disclosure Standards on Real
Estate Transactions released for stakeholders comments.

Press Release dated 12^th May 2017

41. Exemption provided for certain persons from Quoting
Aadhaar/Enrolment ID

Notification No. S.O. 1513 (E) dated 11^th May
2017

BCAJ Admin

Direct Taxes

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 –

BCAJ Admin

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. 15^th
November, 1972 and subsequently again substituted by the Finance Act, 2010 (14
of 2010) w.e.f. 1^st July, 2010 and the Finance (No. 2) Act, 2014 (25
of 2014) w.e.f. 1^stOctober, 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.

BCAJ Admin

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.

BCAJ Admin

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.

BCAJ Admin

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. 1^stApril, 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 31^stMarch, 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 31^st 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. 1^stApril, 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 26^thAugust,
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 1^stApril,
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 12^thAugust, 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. _

BCAJ Admin

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 12^thSeptember 2016 notified

Press Release dated 26^th October 2016

35. Prohibition of Benami
Property Transactions Rules, 2016 notified w.e.f. 1^st 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 11^th 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 15^th
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

BCAJ Admin

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.

BCAJ Admin

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.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

1.
CIT (Exemptions) vs. Jagannath
Gupta Family Trust (2019) 411 ITR 235 (SC)

Charitable purpose – The High Court allowed
the appeal mainly on one ground, namely, that one bogus donation would not
establish that the activities of the trust are not genuine – According to the
Supreme Court, the High Court had committed error in entertaining the appeal
against the remand order passed by the appellate-authority, and in quashing the
order of cancellation of registration

Jagannath Gupta Family Trust (the Trust), a
registered Trust u/s. 12AA of the Income Tax Act, 1961, (for short ‘the Act’)
and also approved u/s. 80G(5)(vi) of the Act, was created with an avowed object
of public and charitable purposes, namely, medical relief, education, any other
causes of public utility etc. The Trust is running an Engineering College.

A survey was conducted u/s. 133A of the Act,
in the premises of School of Human Genetics and Population Health (SHGPH),
Kolkata by the Investigation Wing on 27.01.2014. During the said survey the
Income-tax Department noticed a donation entry of Rs. 37,00,000/- (Rupees
Thirty-Seven Lakh) in two tranches in the months of February and March, 2013.
According to the Department, such donation given to the Trust was bogus and
sham. The donor did not actually donate such amount, such entry was shown by
receiving the amount in cash from the Trust, by retaining commission.

In view of such allegation, the Commissioner
of Income-tax (Exemptions) initiated the proceedings for cancellation of
registration and issued a show-cause notice to the Trust on 04.12.2015. The
Trust replied to the same and contested the proceedings. The main plank of the
defence was that the procedure adopted by the Department was contrary to the
principles of natural justice. It was also the case of the Trust, that though a
statement of the representative of the donor was recorded and on the said basis
proceedings were initiated for cancellation of registration, but the Trust was
not given any opportunity to cross examine such representative.

After receipt of the explanation to the
show-cause notice, alleging that the activities of the Trust were neither
genuine nor as per the objects of the trust, further alleging that the
transaction in question was only a money laundering, therefore, receipt of
donation in lieu of cash was never the object of the trust and as such it was
to be treated as ingenuine and illegal activity. It was also held that such activities
were carried out by the Trust not only in one year but in several years.

By recording the aforesaid findings, the
primary authority, by order dated 15.03.2016, in exercise of power u/s. 12AA(3)
of the Act, cancelled the registration of the Trust.

Aggrieved by the order of cancellation dated
15.03.2016, the Trust filed an appeal before the Income Tax Appellate Tribunal,
at Kolkata. The appellate authority, recorded a finding that, though the
statement of the donor was made basis for initiating proceedings for
cancellation of registration of the Trust, but the Trust was not given an
opportunity to cross-examine the representative. The appellate-authority held
that an opportunity of cross-examination of the representative of the donor was
to be given to the Trust. The appellate-authority set aside the order dated
15.03.2016 and remanded the matter for fresh consideration by primary
authority.

Aggrieved by the order of the appellate
authority dated 10.04.2017, the Trust filed an appeal, before the High Court of
Calcutta. By the impugned order, the High Court allowed the appeal by order
dated 18.09.2017 and quashed the order of cancellation of registration. The
High Court held that while it was possible that a particular donation may be
bogus or fictitious and, the Trust may be assessed to tax therefor and other
steps could be taken but the single donation which was allegedly bogus, would
not establish that the activities of the trust were not genuine and not being
carried out in accordance with the objects of the trust. It also held that if
there were multiple bogus transactions of similar kind, it may lead to
reasonable assessment for the Competent Authority to hold that the trust was
engaged in such activities which could be said to be not genuine or not in
conformity with the objects of the trust.

The Commissioner of Income tax (Exemptions),
Kolkata, aggrieved by the Order dated 18.09.2017 passed by the High Court of Calcutta filed an appeal before the Supreme Court.

The Supreme Court noted that in the
proceedings initiated for the cancellation of registration, mainly it was the
case of the Trust that proceedings for cancellation were initiated only on the ex-parte
statement of the representative of the donor, without giving any opportunity to
the Assessee. It noted that though a survey was also conducted on the Trust,
but nothing adverse was found during such survey to support the case of the
Revenue, to cancel the registration. The Supreme Court, on the perusal of the
order passed by the High Court, found that the High Court had allowed the Writ
Petition mainly on one ground, namely, that one bogus donation would not
establish that the activities of the trust are not genuine.

According to the Supreme Court, such a reason
assigned by the High Court was erroneous and ran contrary to the plain language
of section 12AA(3) of the Act. In view of the serious allegations made against
the Trust, it was a matter for consideration of the issue, after giving
opportunity as pleaded by the Trust but the High Court had committed error in
entertaining the appeal against the remand order passed by the
appellate-authority, and in quashing the order of cancellation of registration.

The Supreme
Court therefore set aside order of the High Court, but however, clarified that
it had not expressed any opinion on merits, and it was open to the Commissioner
of Income Tax (Exemptions), Kolkata to consider all the issues on its own
merit, uninfluenced by the observations made by the appellate authority, the
High Court or in this order by it.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

13.
ITO vs. Urban Improvement Trust and Ors. (2018) 409 ITR 1 (SC)

Exemption – Local
Authority – The word “Municipal Committee” occurring in clause (iii) Explanation
to section 10(20) has a definite purpose and object, namely, to cover those
bodies, which are discharging municipal functions but are not covered by the
definition of municipalities as is required to be constituted by Article 243Q
of the Constitution of India – Urban Improvement Trust constituted under the
Rajasthan Urban Improvement Act, 1959 was not covered by the definition of
Municipal Committee as contained in clause (iii) of Explanation to section
10(20) of the Act.

A notice u/s. 142(1) of the
Act dated 01.08.2005 was issued requiring the Assessee to file a return for the
assessment year 2003-2004. A reply was submitted on behalf of the Assessee that
Urban Improvement Trust-the Assessee was a municipality within the meaning of
Article 243P of the Constitution of India, hence it was not required to file an
income tax return. Assessing Officer passed an assessment order dated
28.03.2006 rejecting the contention of the Assessee that its income was
exempted u/s. 10(20). An appeal was filed by the Assessee before the
Commissioner (Appeals). Commissioner (Appeals) passed an order on 10.02.2010
holding that Assessee was a local authority within the meaning of section
10(20) of the Act. The Revenue filed an appeal before the Income Tax Appellate
Tribunal challenging the appellate order. The ITAT accepted the Revenue’s claim
that Assessee was not covered within the definition of clause (iii) of
Explanation to section 10(20). The Appellate Tribunal allowed the appeal and
restored back the matter to the Commissioner of Income Tax (Appeals) for
consideration of the other issues.

Both
the Assessee and Revenue aggrieved by the order of ITAT had filed appeals
before the High Court. The High Court decided all the appeals vide its judgment
dated 25.07.2017. High Court held the Assessee to be local authority within the
meaning of section 10(20) Explanation. After answering the above issue in
favour of the Assessee, the High court held that other issues have became
academic. Consequently, the appeals filed by the Revenue were dismissed and
that of the Assessee were allowed.

According to the Supreme
Court, the only issue which arose before it was as to whether the Urban
Improvement Trust constituted under the Rajasthan Urban Improvement Act, 1959
was a local authority within the meaning of Explanation to section 10(20) of
the I.T. Act, 1961.

The Supreme Court noted
that section 10(20) was amended by Finance Act, 2002 w.e.f. 01.04.2003. By
Finance Act, 2002, provisions of section 10(20A) were also deleted. Section
10(20A), which existed prior to amendments made by Finance Act, 2002 exempted
any income of an authority constituted in India by or under any law enacted
either for the purpose of dealing with and satisfying the need for housing
accommodation or for the purpose of planning, development or improvement of
cities, towns and villages or for both. The Rajasthan Urban Improvement Act,
1959 was enacted for the improvement of Urban Areas in Rajasthan. The Rajasthan
Urban Improvement Act, 1959 was, thus, clearly covered by Section 10(20A). It
was availing exemption u/s. 10(20A) prior to Finance Act, 2002.

According to the Supreme
Court it had to decide as to what was the consequence of deletion of section
10(20A) and further insertion of Explanation u/s. 10(20) providing for an
exhaustive definition of the word “local authority”, which was not
defined under the Act prior to Finance Act,
2002?

The Supreme Court on
perusal of the Scheme of the Rajasthan Urban Improvement Act, 1959 as well as
the Rajasthan Municipalities Act, 1959 held that the provisions of the said Act
indicated that Urban Improvement Trust undertook development in the urban area
included in municipality/municipal board. Urban Improvement Trust was not
constituted in place of the municipality/municipal board rather it undertook
the act of improvement in urban areas of a municipality/municipal board under
the Rajasthan Urban Improvement Act, 1959. It could also perform certain
limited power of the municipal board as referred to in sections 47 and 48 but
on the strength of such provision Urban Improvement Trust did not become a
municipality or municipal board.

The Supreme Court further
observed that Learned Counsel for the Assessee had not based its claim on the
basis of clause (ii) of Explanation which relates to Municipalities rather it
had confined its claim to only clause (iii). Under clause (iii) claim of the
Assessee was that it was a “Municipal Committee”. The Supreme Court, thus,
proceeded to examine as to whether the Assessee was a Municipal Committee
within the meaning of Explanation to section 10(20) or not?

The Supreme Court noted
that the word “Municipal Committee” as occurring in section 10(20)
Explanation came for consideration before it in Agricultural Produce Market
Committee Narela, Delhi vs. Commissioner of Income Tax and Anr. (2008) 305 ITR
1. In the above case, it had examined the Explanation to section 10(20) as
amended by Finance Act, 2002 and the definition of local authority contained
therein. It held that the words “Municipal Committee and District
Board” in Explanation were used out of abundant caution. In 1897, when the
General Clauses Act was enacted there existed in India Municipal Committees and
District Boards, which were discharging the municipal functions in different
parts of the country. The expression “Municipal Committee and District
Board” were included by amendments incorporated by Finance Act, 2002 to
take into its fold those Municipal Committees and District Board which are
still discharging municipal functions where no other municipalities or boards
to discharge municipal functions have been constituted.

The Supreme Court held that
the word “Municipal Committee” occurring in clause (iii) Explanation,
thus, had a definite purpose and object. Purpose and object was to cover those
bodies, which are discharging municipal functions but were not covered by the
definition of municipalities as was required to be constituted by Article 243Q
of the Constitution of India. Urban Improvement Trust constituted under the
Rajasthan Urban Improvement Act, 1959, thus, could not be held to be covered by
the definition of Municipal Committee as contained in clause (iii) of
Explanation to section 10(20) of the Act.

The Supreme Court observed
that in New Okhla Industrial Development Authority vs. Chief Commissioner of
Income Tax and Ors. (2018) 406 ITR 178, it had considered in detail the
object and purpose of section 10(20A), the object and purpose of Finance Act, 2002
amendment adding the Explanation to section 10(20) and deletion of section
10(20A).

The Supreme Court further
held that the provision of sections 47 and 48 which permits certain powers of
the municipal boards to be performed by the Trust does not transform the Trust
into a Municipal Committee. The power entrusted u/s. 47 and 48 was for limited
purpose, for purposes of carrying out the improvement by the Improvement
Trusts. Further, sections 61 to 64 which empowers levy of betterment charges,
were again in reference to and in context of carrying out improvement by the
Improvement Trust in urban areas. The Municipal Board, Kota performed its
functions, in areas where Municipal Board existed. There was no reason to
accept that Urban Improvement Trust was a Municipal Committee within the
meaning of section 10(20) Explanation clause (iii). Also, section 105, which
provides for ultimate dissolution of Trust and transfer of its assets and
liabilities to the Municipal Board, does not in any manner improve the case of
the Assessee. The provision was for different purpose and object. The above
provision did not support the contention that Improvement Trust was a Municipal
Committee as referred to in clause (iii) of Explanation to section 10 of the
Act.

The Supreme Court was,
thus, of the view that Scheme of the Rajasthan Urban Improvement Act, 1959 did
not permit acceptance of the contention of the Appellant Assessee that Urban
Improvement Trust was a Municipal Committee within the meaning of section
10(20) Explanation (iii).

According to the
Supreme Court, the High Court had based its decision on the fact that functions
carried out by the Assessee were statutory functions and it was carrying on the
functions for the benefit of the State Government for urban development. The
said reasoning could not have lead to the conclusion that it was a Municipal
Committee within the meaning of section 10(20) Explanation clause (iii). The
High Court has not adverted to the relevant facts and circumstances and without
considering the relevant aspects had arrived at erroneous conclusions.

14. Honda Siel Cars India Ltd. vs. CIT (2018)
409 ITR 42 (SC)

Capital or revenue expenditure – Lump-sum
payment of technical fee as well as continuing royalty both as capital
expenditure – Assessee is entitled to depreciation thereon

The
Supreme Court in its judgment in Honda Siel Cars India Ltd. vs. CIT [2017]
395 ITR 713 (SC) for the assessment years 1999-2000 and other years treated
the lump-sum payment of technical fee as well as continuing royalty both as
capital expenditure for the assessment years in question. On a miscellaneous
application filed by the Appellant, the Supreme Court held that since these
were capital expenditure, the applicant/Appellant would be entitled to
depreciation thereon.

15. Anil Kumar Nehru vs. ACIT Civil
Appeal No(s). 11750 of 2018; Dated:
31^st December, 2018

Appeal to the High Court – Condonation of
delay – Delay of 1662 days – The High Court should not take a technical view
and dismiss the appeal on the ground of delay when appeals for earlier
assessment years with identical issues are already pending before it

The Supreme Court noted that on the identical issue raised by the
appellant in respect of earlier assessment, the appeal was pending before the
High Court. In these circumstances, according to the Supreme Court, the High
Court should not have taken such a technical view of dismissing the appeal in
the instant case on the ground of delay, when it had to decide the question of
law between the parties in any case in respect of earlier assessment year. For
this reason, the Supreme Court, set aside the order of the High Court; condone
the delay for filing the appeal and directed the High Court to decide the
appeal on merits.

The
appeals were allowed accordingly.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

5. Pr. CIT vs. NRA Iron and Steel Pvt. Ltd. (2019) 418 ITR 449 (SC)

Notice – Service of notice – Application for recall of ex parte
order – Service of notice on authorised representative – Section 2(35) defines
‘principal officer’ which includes agent of the company and the term ‘agent’
would certainly include a power of attorney holder – No ground for recall of
judgment

An application was filed for recall of the judgment for the A.Y. 2009-10
passed by the Supreme Court on the ground that the applicant company was not
served with the notice of the SLP at its registered office, nor was a copy of
the SLP served on the applicant company.

The applicants submitted that the court notices
were sent to the earlier registered office address of the company, i.e., at
310, 3rd Floor, B-Block, International Trade Tower, Nehru Place, New Delhi.
However, on 19^th May, 2014, the company had changed its registered
office to 211, Somdutt Chambers II, 9, Bhikaji Cama Place, New Delhi 110066.

Thereafter, on 23^rd January, 2019, the registered office was
again changed to 1205, Cabin No. 1, 89 Hemkunt Chambers, Nehru Place, New
Delhi.

The applicants submitted that they learnt of the judgment dated 5^thMarch, 2019 passed by the Court from a news clipping published in The
Economic Times on 7^th March, 2019. Subsequently, the application
for recall was filed on 12^th March, 2019.

The company submitted that on an inspection of the court record it
learnt that the affidavit of dasti service filed by the Revenue
Department on 19^th December, 2018 showed an acknowledgement receipt
by Mr. Sanjeev Narayan, the chartered accountant of the applicant company, on
13^th December, 2018.

The company also placed on record the affidavit of Mr. Sanjeev Narayan
wherein he had stated that he was the authorised representative of the company
before the Income Tax authorities but was not engaged before the High Court or
the Supreme Court. He submitted that he had received service on 13^th
December, 2018 from one of the Inspectors of the Income Tax Department, but he bona
fide believed that the documents were ‘some Income Tax return documents
from Income Tax Department.’ He further submitted that he was suffering from an
advanced stage of cataract and had undergone surgery in both eyes, on 4^th
January, 2019 and 23^rd January, 2019, respectively.

The Department in its counter affidavit submitted that the dasti
notice was duly served on Mr. Narayan at his office address, in his capacity as
the authorised representative of the company who was holding a power of
attorney of the company for the A.Y. 2009-10. The POA appointed all four
partners of the firm, i.e., Mr. Mohan Lal, Advocate, Mr. Ashwani Kumar,
Chartered Accountant, Mr. Sanjeev Narayan, Chartered Accountant, and Mr.
Surender Kumar, FCA, as their counsel and authorised them to represent the
company at all stages of the proceedings. The POA executed by the company in
favour of Mr. Sanjeev Narayan was placed on record.

It was further submitted on behalf of the Revenue that even though Mr.
Narayan had stated that he underwent the cataract surgery on 4^th
January, 2019 and 23^rd January, 2019, this was much after the notice
had been served on 13^th December, 2018. Further, Mr. Narayan had
appeared before the tax authorities after the date of service on 13^thDecember,
2018, and prior to his surgery, to represent the company and its sister
concerns on the 14^th, 21^st, 28^th and 29^th
of December, 2018. In these circumstances, it was pointed out, there was no
merit in the contention raised by the company, and hence no ground was made out
to recall the judgment passed by the Supreme Court.

During oral hearing on the recall application, a submission was made by
the counsel for the company that Mr. Sanjeev Narayan was not the ‘principal
officer’ of the company and hence service could not have been effected upon
him.

* The Supreme Court noted that section 2(35) defines ‘principal
officer’, which includes agent of the company and the term ‘agent’ would
certainly include a power of attorney holder {State of Rajasthan vs.
Basant Nehata [2005 (12) SCC 77]}.

* It held that Mr. Narayan admittedly being the power of attorney holder
of the applicant (M/s. NRA Iron & Steel Pvt. Ltd.) for the A.Y. 2009-10,
was the agent of the company and hence notice could be served on him as the
agent of the company in this case.

* The Supreme Court observed that the ground taken by Mr. Narayan that
even though notice was served on 13^th December, 2018, he assumed
that they were ‘some Income Tax return documents’ lacked credibility. It was
difficult to accept that the envelope containing the dasti notice from
this Court was considered to be ‘some Income Tax return documents’. Also, the
deponent had not disclosed as to whether the envelope containing the dasti notice
was ever opened. Further, the ground urged that the chartered accountant was
suffering from an advanced stage of cataract and hence was constrained from
informing his clients, was again not worthy of credence. The dasti notice
was served on him at his office on 13^thDecember, 2018 which was
much prior to his surgery which took place on 4^th January, 2019.
Furthermore, Mr. Narayan appeared before the Income Tax authorities to
represent the company and its sister concerns on various dates prior to his
surgery, i.e., on 14^th, 21^st, 28^thand 29^thDecember, 2018.

The Supreme Court stated that keeping in view the above-mentioned facts
and circumstances, it was satisfied that the applicant company was duly served
through its authorised representative and was provided sufficient opportunities
to appear before the Court and contest the matter. The company chose to let the
matter proceed ex parte. The grounds for recall of the judgment were
therefore devoid of any merit whatsoever.

The Supreme Court dismissed the application for recall.

6. Pr CIT vs. I-Ven Interactive Limited (2019) 418 ITR 662 (SC)

Assessment – Change of address – Notice – In absence of any application
for change in address and/or change in the name of the assessee in the
Permanent Account Number database, the assessing officer would be justified in
sending the notice at the available address mentioned in the PAN database of
the assessee, more particularly when the return has been filed under e-module
scheme – Mere mentioning the new address in the return of income is not enough
– The change of address in the database of the PAN is a must

The assessee filed return of income for the A.Y.
2006-07 on 28^th November, 2006 declaring total income of Rs.
3,38,71,716. The said return was filed under the e-module scheme and thereafter
a hard copy of the same was filed on 5^th December, 2006. The return
of income was accompanied with the balance sheet and profit and loss account.
The return was processed u/s 143(1) of the Act. A notice u/s 143(2) of the Act
was issued to the assessee on 5^th October, 2007. The notice was sent
at the assessee’s address available as per the PAN database. A further
opportunity was provided to the assessee vide notice u/s 143(2) on 25^th
July, 2008. This notice was also issued at the available address as per the PAN
database. Thereafter, further notices u/s 142(1) were issued to the assessee on
23^rdJanuary, 2008, 25^th July, 2008 and 5^th
October, 2008 along with questionnaires calling for various details and were
duly served on the assessee company.

In response to the said notice, the representative
of the company appeared on 28^th November, 2008 and 4^th
December, 2008. The assessee participated in the proceedings before the AO.
However, the assessee challenged the notice under sections 143(2) and 142(1) on
the ground that the said notices were not served upon the assessee as the assessee
never received those notices and the subsequent notices served and received by
the assessee were beyond the period of limitation prescribed under proviso to
section 143(2) of the Act.

The AO vide assessment order dated 24^th
December, 2008 completed the assessment u/s 143(3) by making disallowance of
Rs. 8,91,17,643 u/s 14A, read with Rule 8 of the Rules, and computed the total
income at Rs. 5,52,45,930.

Being aggrieved by the assessment order dated 24^th
December, 2008, the assessee preferred an appeal before the learned C.I.T.
(Appeals). The C.I.T. (Appeals) allowed the appeal vide order dated 23^rd
December, 2010 holding, inter alia, that the AO completed the assessment
u/s 143(3) without assuming valid jurisdiction u/s 143(2), and therefore the
assessment framed u/s 143(3) was invalid. The C.I.T. (Appeals) observed that as
the subsequent service of notice u/s 143(2) was beyond the period of limitation
prescribed under the proviso to section 143(2) and earlier no notices
were served upon the assessee and / or received by the assessee as the same
were sent at the old address, and in the meantime the assessee changed its
address, therefore the assessment order was bad in law. The Revenue preferred
an appeal before the Income Tax Appellate Tribunal which came to be dismissed
by the I.T.A.T. vide order dated 19^th January, 2015. The orders
passed by the C.I.T. (Appeals) as well as the I.T.A.T. were confirmed by the
High Court.

Hence, the Revenue preferred an appeal before the
Supreme Court.

The Supreme Court noted at the outset that the
notice u/s 143(2) was sent by the AO to the assessee at the address as
mentioned in the PAN database on 5^thOctober, 2007 and the same was
within the time limit prescribed in the proviso to section 143(2) of the
Act.

It recorded, however, that it was the case of the
assessee that the said notice was not served as the assessee had changed its
name and address and shifted to a new address prior thereto and therefore the
said notice was not served upon the assessee, and by the time when subsequent
notices were served, notice u/s 143(2) was barred by the period prescribed in proviso
to section 143(2). Therefore, the assessment order was bad in law. It was the
case on behalf of the assessee that vide communication dated 6^th
December, 2005 the assessee had intimated to the AO about the new address and
despite this, the AO sent the notice at the old address.

The Supreme Court observed that the alleged
communication dated 6^th December, 2005 was not forthcoming. Neither
was it produced before the AO nor before the Supreme Court. In the affidavit,
too, filed in compliance with the order dated 21^st August, 2019, the
assessee has stated that the alleged communication dated 6^th
December, 2005 was not available. Thus, the assessee had failed to prove the
alleged communication of that date. The only document available was Form No. 18
filed with the ROC.

The Supreme Court held that the filing of Form-18
with the ROC could not be said to be intimation to the AO with respect to
intimation of change in address. According to the Court, it appeared that no
application was made by the assessee to change the address in the PAN database
and in the PAN database the old address continued. Therefore, in absence of any
intimation to the AO with respect to change in address, the AO was justified in
issuing the notice at the address available as per the PAN database. Hence, the
AO could not be said to have committed any error; in fact, the AO was justified
in sending the notice at the address as per the PAN database. If that was so,
the notice dated 5^th October, 2007 could be said to be within the
period prescribed in proviso to section 143(2) of the Act. Once the
notice is issued within the period prescribed as per the said proviso,
the same can be said to be sufficient compliance of section 143(2) of the Act.
And once the notice is sent within the period prescribed in the proviso
to section 143(2), in that case, the actual service of the notice upon the
assessee thereafter would be immaterial.

In a given case it may happen that though the
notice is sent within the period prescribed, the assessee may avoid actual
service of the notice till the period prescribed expired. Even in the case
relied upon by the Assessee [Asst. CIT vs. Hotel Blue Moon (2010) 321 ITR
362 (SC)], it was observed that the AO must necessarily issue notice
u/s 143(2) within the time prescribed in the proviso to section 143(2)
of the Act.

The Supreme Court, therefore, in the facts and
circumstances of the case, held that the High Court was not justified in
dismissing the appeal and confirming the orders passed by the C.I.T. (Appeals)
and the I.T.A.T. setting aside the assessment order solely on the ground that
the assessment order was bad in law on the ground that subsequent service of
notice upon the assessee u/s 143(2) was beyond the time prescribed in the
proviso to section 143(2) of the 1961 Act.

The Supreme Court, in the context of the
observations made by the High Court while concurring with the view of the
Tribunal that merely by filing of return of income with the new address it
shall be enough for the assessee to discharge its legal responsibility for
observing proper procedural steps as per the Companies Act and the Income Tax
Act is concerned, held that mere mentioning of the new address in the return of
income without specifically intimating the AO with respect to change of address
and without getting the PAN database changed, is not enough and sufficient.

In the absence of any specific intimation to the AO
with respect to change in address and / or change in the name of the assessee,
the AO would be justified in sending the notice at the available address
mentioned in the PAN database, more particularly when the return has been filed
under the e-module scheme. It is required to be noted that notices u/s 143(2)
are issued on selection of cases generated under the automated system of the
Department which picks up the address of the assessee from the database of the
PAN. Therefore, the change of address in the database of PAN is a must; in case
of change in the name of the company and / or any change in the registered
office or the corporate office, the same has to be intimated to the Registrar
of Companies in the prescribed format (Form 18) and after completing the said
requirement, the assessee is required to approach the Department with the copy
of the said document and the assessee is also required to make an application
for change of address in the Departmental database of PAN, which in the present case the assessee had failed to do.

Accordingly, the appeal was allowed by the Supreme
Court. The impugned judgment and order passed by the High Court, as well as the
orders passed by the C.I.T. (Appeals) and the I.T.A.T., were quashed and set
aside. The matter was remanded to the C.I.T. (Appeals) to consider the appeal
on merits on other grounds, in accordance with the law.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

7. New Okhla Industrial Development Authority
and Ors. vs. Commissioner of Income Tax-Appeals and Ors. (2018) 406 ITR 209
(SC)

Deduction
of tax at source – Rent – Amounts constituting annual lease rent payable to
GNOIDA, expressed in terms of percentage (e.g. 1%) of the total premium for the
duration of the lease, are rent, and therefore subject to TDS

The
Respondent Rajesh Projects (India), a private limited company engaged in the
business of real estate activities of constructing, selling residential units
etc., entered into a long-term lease for 90 years with the Greater Noida
Industrial Development Authority for Plot No. GH-07A for development and
marketing of Group Flats. As per terms of the lease deed, the company partially
paid the consideration amount for the acquisition of the plot to Greater Noida
at the time of execution of the lease deed and is also paying the balance lease
premium annually as per the terms and conditions of the lease deed.

Notice
u/s. 201/201(A) of the Income Tax Act, 1961 was issued by the Income Tax
department inquiring regarding non-deduction of tax at source under section
194-I of the Income Tax Act from the annual lease rent paid to Greater Noida.
The Respondent-company replied to the notices. The Respondents case was that it
did not deduct tax at source as it was advised by Greater Noida that it is a
Government authority, hence the tax deduction at source provisions are not
applicable. The Assessing Officer passed the order dated 31.03.2014 for the
Financial Year 2010-2011 and 2011-2012, whereby the Respondent was held as
“assessee-in-default” for non-deduction/non-deposit of TDS on account
of payment of lease rent and interest made to Greater Noida. Consequent demand
was raised against the Respondents.

Aggrieved by the order, the Respondent-company
filed an appeal before the Commissioner of Income Tax-Appeals. Respondents
prayed to stay the demand which was refused and recovery proceedings were
initiated. Aggrieved by assessment and recovery proceedings emanating
therefrom, the Respondent-company filed a Writ Petition praying for various
reliefs including the relief that Respondent-company be not treated as
“assessee-in-default” under the Income Tax Act for non-deduction/depositing
the tax at source in respect of payment of rent on lease land and in respect of
other charges paid to Greater Noida. Different other entities also filed the
writ petitions in the Delhi High Court praying for more or less the same
reliefs relating to lease rent payment and for payment of interest to Greater
Noida. All the writ petitions involving common questions of law and facts were
heard together and were allowed by the Delhi High Court.

Before the High Court, Greater Noida and the Noida authorities contended
that they are local authorities within the meaning of section 10(20) of the
Income Tax Act, 1961, hence their income is exempt from the Income Tax. It was
further contended that the interest received by them is exempt u/s. 194A(3)(iii)(f)
of the Income Tax Act and they were exempted from payment of any tax on the
interest.

The
revenue refuted the contention of Greater Noida and Noida contending that
w.e.f. 01.04.2003, the Greater Noida and Noida is not a local authority within
the meaning of section 10(20) and further they are also not entitled for the
benefit of notification issued u/s. 194A(3)(iii)(f). It was further contended
that with regard to payment of rent to the Noida and Greater Noida, the
Respondent-company was liable to deduct the tax on payment of interest, no
income-tax was deducted by the Respondent-company while paying rent to Noida
and Greater Noida, hence they are “assessee-in-default”.

The Delhi
Court held as follows:

(1)
Amounts paid as part of the lease premium in terms of the time-schedule(s) to
the Lease Deeds executed between the Petitioners and GNOIDA, or bi-annual or
annual payments for a limited/specific period towards acquisition of lease hold
rights are not subject to TDS, being capital payments;

(2)
Amounts constituting annual lease rent, expressed in terms of percentage (e.g.
1%) of the total premium for the duration of the lease, are rent, and therefore
subject to TDS. Since the Petitioners could not make the deductions due to the
insistence of GNOIDA, a direction is issued to the said authority (GNOIDA) to
comply with the provisions of law and make all payments, which would have been
otherwise part of the deductions, for the periods, in question, till end of the
date of this judgment. All payments to be made to it, henceforth, shall be
subject to TDS.

(3)
Amounts which are payable towards interest on the payment of lump sum lease
premium, in terms of the Lease which are covered by Section 194-A are covered
by the exemption u/s. 194A(3)(f) and therefore, not subjected to TDS.

(4) For
the reason mentioned in (3) above, any payment of interest accrued in favour of
GNOIDA by any Petitioner who is a bank-to the GNOIDA, towards fixed deposits,
are also exempt from TDS.

Aggrieved
by the aforesaid judgment of Delhi High Court, Greater Noida, Noida as well as
Revenue has filed appeals before the Supreme Court.

The
Supreme Court held that insofar as the appeals filed by Noida/Greater Noida
were concerned, the principal submission raised by the Appellant is applicability
of section 10(20) of the Income Tax Act. In New Okhla Industrial Development
Authority vs. Commissioner of Income Tax-Appeals and Ors., (406 ITR 178) it
had been held that Noida was not a “local authority” within the
meaning of section 10(20) of the Income Tax Act as amended by the Finance Act,
2002 w.e.f. 01.04.2003.

Insofar as
the question relating to exemption u/s. 194A(3) (iii)(f) by virtue of
notification dated 24.10.1970, i.e. the exemption of interest income of the
Noida, was concerned, in Commissioner of Income Tax (TDS) Kanpur and Anr.
vs. Canara Bank(406 ITR 161) it had been held that Noida was covered by the
notification dated 22.10.1970, and therefore the judgment of the Delhi High
Court holding that Noida/Greater Noida was entitled for the benefit of section
194A(3)(iii)(f) had to be approved. Coming to the direction of the High Court
regarding deduction of tax at source on the payment of lease rent as per
section 194-I of the Income Tax Act, 1961, the Supreme Court held that a
perusal of the Circular dated 30.01.1995 relied by Noida/Greater Noida indicate
that circular was issued on the strength of section 10(20A) and section 10(20)
as it existed at the relevant time. Section 10(20) has been amended by Finance
Act, 2002 by adding an explanation and further section 10(20A) has been omitted
w.e.f. 01.04.2003. The very basis of the circular has been knocked out by the
amendments made by Finance Act, 2002. Thus, the Circular could not be relied by
Noida/Greater Noida to contend that there was no requirement of deduction of
tax at source u/s. 194-I. Thus, deduction at source is on payment of rent u/s.
194-I, which was clearly the statutory liability of the Respondent-company. The
High Court has adjusted the equities by recording its conclusion and issuing a
direction.

In view of
what has been stated above, the Supreme Court did not find any error in the
judgment of the High Court dated 16.02.2017. In result, all the appeals were
dismissed.

8. Commissioner
of Income Tax (TDS), Kanpur and Ors. vs. Canara Bank (2018) 406 ITR 161 (SC)

Deduction
of tax at source – Payment of interests by the banks to the State Industrial
Development Authority does not require any deduction at source in terms of
section 194A(3)(iii)(f)

The New Okhla Industrial
Development Authority (NOIDA), hereinafter referred to as “Authority”
was constituted by Notification dated 17.04.1976 issued u/s. 3 of the Uttar
Pradesh Industrial Area Development Act, 1976 hereinafter referred to as
“1976 Act”. The Canara Bank, is the banker of the Authority. The Bank
made a payment of Rupees Twenty Crore Ten Lakh as interest to Authority in form
of FDs/Deposits for the financial year 2005-06. The Canara Bank, however, did
not deduct tax at source u/s. 194A of the Income Tax Act, 1961 hereinafter
referred to as “IT Act, 1961”.

Notices
were issued by the Commissioner of Income-tax (TDS) to Canara Bank asking for
information pertaining to interest paid to the Authority on its deposits.
Notices were also issued by the Commissioner of Income-tax (TDS) to the Bank
for showing cause for not deducting tax at source. A writ petition had been
filed by the NOIDA being Writ Petition No. 1338/2005 challenging the notices
issued to the Authority as well as its bankers. Assessment proceeding could not
proceed due to certain interim directions passed by the High Court in the above
writ petition. The writ petition was ultimately dismissed by the High Court on
28.02.2011 holding that the Authority was not a local authority within the
meaning of section 10(20) of IT Act, 1961 and its income was not exempt from
tax. The Assessing Officer thereafter proceeded to pass an order u/s.
201(1)/201(1A) read with section 194A of the IT Act, 1961 dated 28.02.2013.

Income Tax
Authority held that the Bank was an Assessee in default. The default was
computed and demand notice as per section 156 of the IT Act, 1961 was issued.
Penalty proceeding was also separately initiated. The Canara Bank aggrieved by
the order of the Assessing Officer dated 28.02.2013 filed an appeal before the
Commissioner of Income Tax (Appeals). Before the Commissioner, the bank relied
on Notification dated 22.10.1970 issued u/s. 194A(3) (iii)(f) of the IT Act,
1961. The Appellate Authority vide its judgment dated 02.12.2013 allowed the
appeal setting aside the order of the Assessing Officer. The Revenue aggrieved
by the judgment of the Appellate Authority filed an appeal before the Income
Tax Appellate Tribunal. The Tribunal also held that payment of interests by the
banks to the State Industrial Development Authority did not require any
deduction at source in terms of section 194A(3)(iii)(f).

The
Revenue aggrieved by the order of the Tribunal filed an appeal u/s. 260A of the
Act before the High Court. The Division Bench of the High Court vide its
judgment dated 04.04.2016 dismissed the appeal.

The
Supreme Court noted the provisions of section 194A of the IT Act, 1961and the
Notification dated 22.10.1970 issued u/s. 194A(3)(iii)(f).

According to the Supreme Court, to decide the controversy, it was
necessary to ascertain the concept of a Corporation. The Supreme Court observed
that a Corporation is an artificial being which is a legal person. It is a
body/corporate established by an Act of Parliament or a Royal Charter. It
possesses properties and rights which are conferred by the Charter constituting
it expressly or incidentally.

The
Supreme Court noted that before it, there was no issue that the Authority was
not a Corporation. It was also not contended that Authority was not a statutory
corporation. What was contended before it was that Authority having not been
established by a Central, State or Provincial Act was not covered by
Notification dated 22.10.1970 hence, not eligible for the benefit.

The
Supreme Court observed that the Appellant on the one hand submits that the
Authority has not been established by 1976 Act rather it has been established
under the 1976 Act, hence it was not covered by Notification dated 22.10.1970
whereas the Respondent submits that Authority has been established by the 1976
Act and hence, it fulfills the condition as enumerated under Notification dated
2.10.1970. Alternatively, it was submitted that words “by and under”
have been interchangeably used in the IT Act, 1961 and there was no difference,
even if, the Authority was established under the 1976 Act.

The
Supreme Court noted that section 194A(3)(iii) clauses (b), (c) and (d) refer to
expression “established”. In sub clause (b) expression used is
“established by or under a Central, State or Provincial Act”, in sub
clause (c) the expression used is “established under the Life Insurance
Corporation Act” and in sub clause (d) expression used is
“established under the Unit Trust of India Act”. The Supreme Court
held that the section thus uses both the expressions “by or under”.
According to the Supreme Court, the expression established by or under an Act
had come for consideration before it on several occasions. In Sukhdev Singh
vs. Bhagatram Sardar Singh Raghuvanshi (1975) 45 Com Cas 285 (SC), the
Court had occasion to consider the status of company incorporated under the
Companies Act. The Court held that Company incorporated is not a Company
created by the Companies Act. Again in S.S. Dhanoa vs. Muncipal Corporation,
Delhi (1981) 3 SCC 431 the Court had occasion to consider a Registered
Society which was a body/corporate. The question was as to whether the State
Body/corporate is a Corporation within the meaning of Clause Twelfth of section
21 of the Indian Penal Code (Indian Penal Code). The Court again held that
expression Corporation means a Corporation created by the legislature. Another
judgment which had occasion to consider the expression established by or under
the Act was a judgment in Dalco Engineering Private Limited vs. Satish
Prabhakar Padhye and Ors. (2010) 4 SCC 378. The Court had occasion to
examine the provision of section 2k, of the Persons with Disabilities (Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995,
specifically expression “establishment” means a Corporation
established by or under Central, Provincial or State Act. The Court held that
the phrase established by or under the Act is a standard term used in several
enactments to denote a statutory corporation established or brought into
existence by or under the statute. On Company it was held that the company is
not established under the Companies Act and an incorporated company does not
“owe” its existence to the Companies Act.

The Supreme Court reverting back to the provisions of 1976, Act observed
that the very preamble of that Act reads “an Act to provide for the
Constitution of an Authority for the development of certain areas in the State
into industrial and urban township and for masses connected through with”.

According
to the Supreme Court, the Act itself provides for constitution of an authority.
Section 2(b) of the 1976 Act defines Authority as authority constituted u/s. 3
of the Act. The Supreme Court observed that when one compares the provisions of
section 3 of 1976 Act with those of The State Financial Corporations Act, 1951,
it becomes clear that the establishment of Corporation in both the enactments
is by a notification by State Government. In the present case, notification has
been issued in exercise of power of section 3, the Authority has been
constituted.

According to the Supreme Court it having already laid down in Dalco
Engineering (supra) that establishment of various financial corporations
under State Financial Corporation Act, 1951 is establishment of a Corporation
by an Act or under an Act, the above ratio fully covers the present case and
therefore there was no doubt that the Authority have been established by the
1976 Act and it was clearly covered by the Notification dated 22.10.1970.
Further, the composition of the Authority was statutorily provided by section 3
of 1976 Act itself, hence, there was no denying that Authority had been
constituted by Act itself.

The
Supreme Court dismissed the appeal, holding that the High Court did not commit
any error in dismissing the appeal filed by the Revenue.

9. Deputy
Commissioner of Income Tax, Chennai vs. T. Jayachandran (2018) 406 ITR 1 (SC)

Income
–The Respondent had acted only as a broker and could not claim any ownership on
the sum of Rs. 14,73,91,000/- and that the receipt of money was only for the
purpose of taking demand drafts for the payment of the differential interest
payable by Indian Bank and that the assessee had actually handed over the said
money to the Bank itself, the said sum of Rs. 14,73,91,000/- could not be
termed as the income of the Respondent

The Respondent-an individual and the proprietor of Chandrakala and Company, was a stock broker
registered with the Madras Stock Exchange. He was stated to be an approved
broker of the Indian Bank. During the assessment years 1991-92, 1992-93 and
1993-94 the Respondent acted as a broker to the Indian Bank in purchase of the
securities from different financial institutions. It was
the case of the Revenue that the Indian Bank, in order to save itself from
being charged unusually high rate of interest on borrowing money from the
market, lured Public Sector Undertaking (PSUs) to make fixed term deposit with
it on higher rate of interest. The rate of interest offered to the PSUs for
making huge term deposits was to the extent of 12.75% of interest on fixed
deposits against the approved 8% rate of interest in accordance with the RBI
directions.

In order
to pay higher interest to the PSUs who made a fixed term deposit with the
Indian Bank, the bank requested the Respondent to purchase securities on its
behalf at a prescribed price which was unusually high but adequate to cover the
market price of the securities, brokerage/incidental charges to be levied by
the Respondent on these transactions, apart from covering the extra interest
payable to the PSUs. The Respondent, on the instructions of Indian Bank,
purchased securities at a particular rate quoted by the Bank and sold them to
Indian Railways Finance Corporation.

Bank of
Madura was the routing bank through which the securities were purchased and
sold to Indian Bank for which Bank of Madura charged service charges. The
Respondent was paid commission in respect of transactions done on behalf of
Indian Bank. Under instructions from Indian Bank, a portion of the amount
realised from the security transactions carried on behalf of Indian Bank was
paid by way of additional interest to certain Public Sector Undertakings (PSU)
on the deposits made with the Indian Bank and out of eight PSUs three had
confirmed the receipt of such additional interest through demand drafts.

The
Respondent filed his return of income for the Assessment Year 1991-92 declaring
his income at Rs. 4,82,83,620/-. The Assessing Officer passed assessment order
u/s. 143(3) and raised a demand for a sum of Rs. 14,73,91,000/- with regard to
the sum payable to the PSUs while holding that the Respondent has not acted as
a broker in the transactions carried out for the Indian Bank rather as an
independent dealer and that there was no overriding title in favour of the
PSU’s with regard to the additional amount earned out of the securities
transactions and it is a case of application of income after accrual and,
hence, the said amount is liable to be assessed as the income of the
Respondent.

The
Respondent, being dissatisfied with the order, preferred an Appeal before the
Commissioner for Income Tax (Appeals). Learned Commissioner of Income Tax
(Appeals), set aside the demand for additional tax while deciding the issue in
favour of the Respondent and held that the alleged additional interest payable
to the PSUs could not be considered as the income of the Respondent.

Being
aggrieved, the Revenue filed an appeal before the Income Tax Appellate Tribunal
(hereinafter referred to as ‘the Tribunal’). The Tribunal, allowed the appeal
filed by the Revenue and held that the amount received at the hands of the
Respondent which was alleged to be payable to the PSUs was the income of the
Respondent and there was no overriding title existing in favour of the PSUs so
as to cause diversion of income.

In the
meanwhile criminal proceedings were initiated with respect to the present
transactions in question against the Respondent along with others which was
decided by the CBI court.

The court,
while acquitting the Respondent had observed that the relationship between the
Indian Bank and the Respondent was that of principal-agent and with regard to
the transactions in question the Respondent acted in the capacity of a broker
and not as an individual dealer.

However, the Tribunal refused to rely on the evidence produced in the
trial court on the ground that the assessment proceedings were different from
the criminal proceedings and the evidence adduced in the trial court couldn’t
be relied to absolve the Respondent from the tax liability.

Being
aggrieved by the order of the ITAT, the Assessee filed Tax Case Appeal before
the High Court. The High Court, set aside the order of the Tribunal while
relying on the evidence given in the criminal case in this regard.

Being
aggrieved, the Revenue filed an appeal before the Supreme Court.

According
to the Supreme Court, the only point for consideration before it was whether on
the facts and circumstances of the present case the High Court was right in
holding that the alleged additional interest payable to PSUs could not be
assessed as income of the Respondent?

The
Supreme Court was of the view that the answer to the short question whether the
alleged interest payable to the PSUs could be assessed as an income of the
Respondent depended on the determination of true nature of relationship between
the Indian Bank and the Respondent with regard to the transactions in question
and the capacity in which he held the amount of Rs. 14,73,91,000/-.

As to the question of
relationship between the Indian Bank and the Respondent, the Supreme Court
observed that the normal settlement process in Government securities is that
during transaction banks make payments and deliver the securities directly to
each other. The broker’s only function is to bring the buyer and seller
together and help them to negotiate the terms for which he earns a commission
from both the parties. He does not handle either cash or securities. In this
respect, the broker functions like the broker in the interbank foreign exchange
market. The conduct of the Respondent in the transaction in question could not
be termed to be strictly within the normal course of business and the
irregularities could be noticed from the manner in which the whole transactions
were conducted. However, the same could not be basis for holding the Respondent
liable for tax with regard to the sum in question and what was required to be
seen was whether there accrued any real income to the Respondent or not.

According to the Supreme Court, it was required to be seen in what
capacity the Respondent held the said amount-independently or on behalf of the
Indian Bank. The Assessing Officer, while passing assessment order, had held
that there existed no agreement between the Respondent and the Indian Bank
about the payment of additional interest to the PSUs and there was no
overriding title in respect of the additional interest for the PSUs. However,
in the opinion of the Supreme Court, the position in this regard was very much
settled that an agreement need not be in writing but could be oral also and the
same could be inferred from the conduct of the parties.

Further, while considering the claim of the Respondent and the view of
the Assessing Officer, how the bank itself had treated the Respondent, was a
matter of relevance. The relationship between the Indian Bank and the
Respondent was very much clear by the evidence led during the criminal
proceedings. The Executive Director of the Bank had specifically spoken about
the role of the Respondent as a broker specifically engaged by the Bank for the
purchase of securities and that the Bank had included the interest money too in
the consideration paid, for the purpose of taking demand drafts in favour of
PSUs. Further, the evidence led by other bank officials pointed out that the
price of securities itself were fixed by the bank authorities and as per their
directions the Respondent had purchased the securities at the market price and
the differential amount was directed to be used for taking demand drafts from
the bank itself for paying additional interest to the PSUs. Further, the letter
dated 25.03.1994 by the Bank wherein the Bank had acknowledged the receipt of
Demand Drafts taken by the Respondent gave an unblurred picture about the
capacity of the Respondent in holding the amount in question. Consequently, the
conduct of the parties, as recorded in the criminal proceedings showing the
receipt of amount by the broker, the purpose of receipt and the demand drafts
taken by the broker at the instance of the bank were sufficient to prove the
fact that the Respondent acted as a broker to the Bank and, hence, the additional
interest payable to the PSUs could not be held to be his property or income.

According
to the Supreme Court, the income that had actually accrued to the Respondent
was taxable. What income has really occurred to be decided, not by reference to
physical receipt of income, but by the receipt of income in reality. Given the
fact that the Respondent had acted only as a broker and could not claim any
ownership on the sum of Rs. 14,73,91,000/- and that the receipt of money was
only for the purpose of taking demand drafts for the payment of the
differential interest payable by Indian Bank and that the Respondent had
actually handed over the said money to the Bank itself, the Supreme Court held
that the Respondent held the said amount
in trust to be paid to the public sector units on behalf of the Indian Bank
based on prior understanding reached with the bank at the time of sale of
securities and, hence, the said sum of Rs. 14,73,91,000/- could not be termed
as the income of the Respondent. According to the Supreme Court, the decision
rendered by the High Court therefore required no interference.

The Supreme Court dismissed
the appeal.

10. New Okhla Industrial Development Authority
vs. Chief Commissioner of Income Tax and Ors.

(2018)
406 ITR 178 (SC)

Exemption
– Local Authority – After omission of section 10(20A), only provision under
which a Body or Authority can claim exemption is section 10(20) – Local authority having been exhaustively
defined in the Explanation to section 10(20), an entity has to fall u/s. 10(20)
to claim exemption.

The
Appellant-New Okhla Industrial Development Authority (hereinafter referred to
as the “Authority”) has been constituted u/s. 3 of the U.P.
Industrial Area Development Act, 1976 (hereinafter referred to as the ‘Act,
1976’) by notification dated 17.04.1976. The Act, 1976 was enacted by State
Legislature to provide for the constitution of an Authority for the development
of certain areas in the State into industrial and urban township and for
matters connected therewith. Under the Act, 1976 various functions have been
entrusted to the Authorities. Notices u/s. 142 of the Income Tax Act dated
28.07.1998 and 08.08.1998 were issued to the Appellant. The Appellant
challenging the said notices filed writ petition contending that Appellant was
a local authority, hence, was exempted from payment of income tax u/s.10(20)
and section 10(20A) of Income Tax Act, 1961 (hereinafter referred to as
“I.T. Act, 1961).

The writ
petition was allowed by the Division Bench of the Allahabad High Court on
14.02.2000 holding that the Appellant was a local body. It was held that it is
covered by the exemption u/s. 10(20A) of I.T. Act, 1961. The Division Bench,
however, did not go into the question whether it was also exempt u/s. 10(20).

By the Constitution (74^th Amendment) Act, 1992, the
Parliament had inserted Part IXA of the Constitution providing for the
constitution of Municipalities. A notification dated 24.12.2001 was issued by
the Governor in exercise of the power under the proviso to Clause (1) of
Article 243Q of the Constitution of India specifying the Appellant to be an
“industrial township” with effect from the date of the notification
in the Official Gazette. A notice dated 29.08.2005 was issued by the Assistant
Commissioner of Income Tax to the Appellant for furnishing Income Tax Return
for the assessment year 2003-2004 and 2004-2005. Notice mentioned that after
omission of section 10(20A) w.e.f. 01.04.2003 the Authority had become taxable.
Notice u/s. 142(1) was also enclosed for the above purpose.

The
Appellant vide its letter dated 20.09.2005 replied the notice dated 29.08.2005
stating that it was a local authority and exempt from Income Tax hence notice
u/s. 142 be withdrawn. The Appellant filed a writ petition praying for quashing
the notice u/s. 142 of the Income Tax Act dated 29.08.2005. The High Court in
the writ petition decided the question “whether New Okhla Industrial
Development Authority (NOIDA) is a local authority after 01.04.2003 within the
meaning of section 10(20) of the Income Tax Act, 1961”. The Division Bench
of the High Court relying on two judgments of the Supreme Court in Agricultural
Produce Market Committee, Narela, Delhi vs. Commissioner of Income Tax and Anr.
(2008) 9 SCC 434 and Adityapur Industrial Area Development Authority vs.
Union of India and Ors. (2006) 5 SCC 100, held that after 01.03.2003 the
NOIDA is not a local authority within the meaning of section 10(20) of the I.T.
Act, 1961. The writ petition was consequently dismissed.

According
to the Supreme Court, the only issue that arose for consideration in these
appeals was as to whether the Appellant was a local authority within the
meaning of section 10(20) as amended by Finance Act, 2002 w.e.f. 01.04.2003.
According to the Supreme Court, the submissions made by the parties could be
dealt with in the following two heads:

A. The
status of the Authority by virtue of notification dated 24.12.2001 issued under
Clause (1) of Article 243Q issued by the Governor specifying New Okhla
Industrial Area to be an “industrial township”.

B. Whether
the Appellant is a local authority “within the meaning of section 10
sub-section (20) as explained in Explanation added by Finance Act, 2002.

The
Supreme Court held as under:

(A) Part
IXA of the Constitution:

The
proviso is an exception to the constitutional provisions which provide that
there shall be constituted in every State a Nagar Panchayat, a Municipal
Council and a Municipal Corporation. Exception is covered by proviso that where
an industrial township is providing municipal services the Governor having
regard to the size of the area and the municipal services either being provided
or proposed to be provided by an industrial establishment specify it to be an
industrial township.

The words
‘industrial township’ have been used in contradiction of a Nagar Panchayat, a
Municipal Council and a Municipal Corporation. The object of issuance of
notification is to relieve the mandatory requirement of constitution of a
Municipality in a State in the circumstances as mentioned in proviso but
exemption from constituting Municipality does not lead to mean that the
industrial establishment which is providing municipal services to an industrial
township is same as Municipality as defined in Article 243P(e).

Article 243P(e)
defines Municipality as an institution of self-government constituted under
Article 243Q. The word constituted used under Article 243P(e) read with Article
243Q clearly refers to the constitution in every State a Nagar Panchayat, a
Municipal Council or a Municipal Corporation. Further, the words in proviso
“a Municipality under this Clause may not be constituted” clearly
means that the words “may not be constituted” used in proviso are
clearly in contradistinction with the word constituted as used in Article
243P(e) and Article 243Q. Thus, notification under proviso to Article 243Q(1)
is not akin to constitution of Municipality. According to the Supreme Court,
industrial township as specified under notification dated 24.12.2001 is not
akin to Municipality as contemplated under Article 243Q.

B. Section
10(20) as amended by the Finance Act, 2002:

By the Finance Act, 2002 an Explanation has been added to section 10(20)
of the I.T. Act, 1961 and section 10(20A) has been omitted. Prior to Finance
Act, 2002 there being no definition of ‘local authority’ under the I.T. Act,
the provisions of section 3(31) of the General Clauses Act, 1897 were pressed
into service while interpreting the extent and meaning of local authority. The
Explanation having now contained the exhaustive definition of local authority,
the definition of local authority as contained in section 3(31) of General Clauses
Act, 1892 is no more applicable.

The
Explanatory Notes on Finance Act, 2002 clearly indicates that by Finance Act,
2002 the exemption under section 10(20) has been restricted to the Panchayats
and Municipalities as referred to in Articles 243P(d) and 243P(e). Further by
deletion of clause (20A), the income of the Housing Boards of the States and of
Development Authorities became taxable.

After
omission of section 10(20A) only provision under which a Body or Authority can
claim exemption is section 10(20). Local authority having been exhaustively
defined in the Explanation to section 10(20) an entity has to fall u/s. 10(20)
to claim exemption.

In Adityapur Industrial Area Development Authority (supra) after
considering section 10(20) as amended by the Finance Act, 2002 and consequences
of deletion of section 10(20A) it had been held that the benefit, conferred by
section 10(20-A) of the Income Tax Act, 1961 on the Assessee therein, had been
expressly taken away. Moreover, the Explanation added to section 10(20)
enumerates the “local authorities” which did not cover the Assessee
therein.

In Gujarat
Industrial Development Corporation vs. Commissioner of Income Tax, 1997 (7) SCC
17, after considering the provisions of section 10(20A) of I.T. Act it was
held that Gujarat Industrial Development Corporation was entitled for exemption
u/s. 10(20A).

The Gujarat Industrial Development Corporation was held to be entitled
for exemption u/s. 10(20A) at the time when the provision was in existence in
the statute book and after its deletion from the statute book the exemption was
no more available.

Further,
Explanation to section 10(20) uses the word ‘means’ and not the word
‘includes’. Hence, it was not possible to extend the definition of ‘local
authority’ as contained in the Explanation to section 10(20). It was also not
possible to refer to the definitions in other Acts, as the IT Act now
specifically defines ‘local authority’.

The
Supreme Court thus concluded that the Appellant was not covered by the definition
of local authority as contained in Explanation to section 10(20).

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

14. Snowtex Investment Ltd. vs.
Pr. CIT; [2019] 414 ITR 227 (SC)

Loss – Set off – Speculative transaction – The assessee having made an
admission on a statement of fact that the principal business activity was
trading in shares and securities, must bind it – The principal business of the
assessee thus not being of granting loans and advances during the assessment
year, the deeming fiction under section 73 was attracted – The provisions which
were contained in the Finance Act (No. 2) 2014 insofar as they amended the
Explanation to section 73, were not clarificatory

The appellant was registered as a non-banking financial company under
the Reserve Bank of India Act, 1934. The appellant filed its return of income
for the assessment year 2008-09 on 27^th September, 2008. By an order
dated 14^th December, 2010 the AO recorded that the principal business
activity of the assessee was trading in shares and securities. The loss from
share trading was held to be a speculation loss. The AO further held that in
view of the provisions of section 43(5)(d), activities pertaining to futures
and options could not be treated as speculative transactions. The loss from
speculation was held not to be capable of being set off against the profits
from business.

Against the AO’s order for the assessment year 2008-2009, an appeal was
filed before the CIT(A). The CIT(A) rejected the contention of the assessee
that the AO had erred in not allowing the speculation loss to be set off
against profits of trading in futures and options.

The assessee appealed against the decision of the CIT(A). The Income Tax
Appellate Tribunal, by its decision dated 6^th November, 2015 held
that the claim of the assessee for setting off the loss from share trading
should be allowed against the profits from transactions in futures and options,
since the character of the activities was similar. The ITAT held that the
assessee who was in the business of share trading had treated the entire
activity of the purchase and sale of shares, which comprised both of
delivery-based and non-delivery-based trading, as one composite business.

The Revenue appealed before the High Court which, by its judgement dated
22^ndNovember, 2016 accepted its submission. The High Court held
that the profits which had arisen from trading in futures and options were not
profits from a speculative business. Hence, the loss on trading in shares could
not be set off against the profits arising from the business of futures and
options.

On an appeal by the assessee, the Supreme Court noted that the
provisions of section 43(5) were amended by the Finance Act, 2005. Prior to the
amendment, section 43(5) defined a ‘speculative transaction’ to mean a
transaction in which a contract for the purchase or the sale of any commodity
including stocks and shares is settled otherwise than by the actual delivery or
transfer of the commodity or scripts. The impact of the amendment by the
Finance Act, 2005 was that an eligible transaction on a recognised stock
exchange in respect of trading in derivatives was deemed not to be a
speculative transaction. With effect from 1^st April, 2006 trading in
derivatives was by a deeming fiction not regarded as a speculative transaction
when it was carried out on a recognised stock exchange. The circular of the CBDT
dated 27^th February, 2006 indicated that this amendment was
occasioned by the changes which were introduced by SEBI both at the legal and
the technological level for bringing in greater transparency in the market for
derivatives.

The Supreme Court further noted that section 73 deals with losses from
speculation business. Under sub-section (1) of section 73, a loss computed in
relation to speculation business carried on by an assessee can only be set off
against the profits and gains of another speculation business. The Explanation
to section 73 contains a deeming fiction where certain businesses shall, for
the purposes of that section, be deemed to be speculation businesses. The
Explanation also carves out an exception in respect of certain specified businesses
which shall lie outside the fold of the deeming fiction. Prior to amendment of
the Explanation by the Finance (No. 2) Act, 2014 with effect from 1^st
April, 2015, the business of trading in shares carried on by a company was not
excluded from its purview. However, by the amendment which was brought into
force from 1^st April, 2015, the Explanation to section 73 further
excluded from the deeming fiction a company whose principal business was
trading in shares or banking.

The Court observed that while, on the one hand, Parliament amended
section 43(5) with effect from 1^st April, 2006 as a result of which
trading in derivatives on recognised stock exchanges fell outside the purview
of the business of speculation, a corresponding amendment to the Explanation to
section 73 in respect of trading in shares was brought in only with effect from
1^stApril, 2015.

The submission which had been urged on behalf of the appellant was that
there was no logical reason to exclude from the purview of speculation business,
trading in shares, whereas trading in derivatives was excluded, from the ambit
of section 43(5) after 1^st April, 2006.

The Supreme Court first dealt with the first submission, namely, that
the Explanation to section 73, as it stood prior to the amendment, excluded
from the deeming definition of a speculation business a situation where the
principal business of a company was granting of loans and advances.

The Court noted that there was no dispute about the fact that the
assessee was registered as an NBFC under the provisions of the Reserve Bank of
India Act, 1934. Before the Supreme Court it was urged that the principal
business was of granting of loans and advances. According to the Court, the
correctness of this aspect of the submission was not required to be determined
in the facts of the present case since the High Court had relied upon the
specific admission of the assessee that during the assessment year in question
its sole business was of dealing in shares.

The Supreme Court noted that while the assessee had given loans and
advances of Rs. 11.32 crores during the assessment year, it included
interest-free lending to the extent of Rs. 9.58 crores.

Having regard to these facts and circumstances, the specific admission
of the assessee before the AO assumed significance. According to the Supreme
Court, the assessee had made an admission on a statement of fact which must
bind it. Thus, the principal business of the assessee was not of granting loans
and advances during the assessment year. As a consequence, the
deeming fiction under section 73 was attracted. Hence, the finding of the High
Court on the first aspect could not be faulted.

So far as the second submission which was canvassed in the course of the
hearing of the appeal was concerned, the Supreme Court held that it was
difficult to hold that the provisions which were contained in the Finance Act
(No. 2) 2014 insofar as they amended the Explanation to section 73 were
clarificatory or that notwithstanding the provision by which the amendment was
brought into force with effect from 1^stApril, 2015, that it should
be given retrospective effect.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

2. Commissioner of Income Tax vs. Laxman Das
Khandelwal (2019) 416 ITR 485 (SC)

Assessment – Entire
assessment proceedings stand vitiated as the AO lacks jurisdiction in absence
of notice u/s 143(2) of the Act – The scope of the provision of section 292BB
is to make service of notice having certain infirmities to be proper and valid
if there was requisite participation on part of the assessee but the section
does not save complete absence of notice

The assessee, an
individual, was carrying on a business of brokerage. Search and seizure operation
was conducted u/s 132 of the Act on 11^th March, 2010 at his
residential premises. The assessee submitted return of income on 24^th
August, 2011, declaring total income of Rs. 9,35,130. The assessment was
completed u/s 143(3) read with section 153(D) of the Act. A sum of Rs. 9,09,110
was added on account of unexplained cash u/s 69 of the 1961 Act. Another sum of
Rs. 15,09,672 was added on account of unexplained jewellery; Rs.45,00,000 was
added on account of unexplained hundies; and Rs. 29,53,631 was added on
account of unexplained cash receipts.

Aggrieved, the assessee
filed an appeal before the Commissioner of Income Tax (Appeals). The CIT(A)
deleted an amount of Rs. 7,48,463 holding that jewellery found in locker
weighing 686.4 grams stood explained in view of Circular No. 1916 and further
deleted the addition of Rs. 29,23,98,117 out of Rs. 29,53,52,631 holding that
the correct approach would be to apply the peak formula to determine in such
transaction which comes to Rs. 29,54,514 as on 5^th March, 2010.

Aggrieved, Revenue filed
an appeal. The assessee filed cross-objection on the ground of jurisdiction of
the AO regarding non-issue of notice u/s 143(2) of the Act. The Tribunal upheld
the cross-objection and quashed the entire reassessment proceedings on the
finding that the same stood vitiated as the AO lacked jurisdiction in absence
of notice u/s 143(2) of the Act.

In an appeal arising
from the decision of the Tribunal, the issue that arose before the High Court
was the effect of absence of notice u/s 143(2) of the Act. The assessee relied
upon the decision of the Supreme Court in Assistant Commissioner of
Income Tax and Anr. vs. Hotel Blue Moon (2010) 321 ITR 362 (SC). On the
other hand, reliance was placed by the Revenue on the provisions of section
292BB of the Act to submit that the respondent having participated in the
proceedings, the defect, if any, stood completely cured.

The
High Court dismissed the appeal in view of the decision of the Supreme Court in
Hotel Blue Moon (Supra).

According to the Supreme
Court, the law on the point as regards applicability of the requirement of
notice u/s 143(2) of the Act was quite clear from the decision in the Blue
Moon case. However, the issue that needed to be considered was the
impact of section 292BB of the Act.

The Supreme Court
observed that according to section 292BB of the Act, if the assessee had
participated in the proceedings, by way of legal fiction, notice would be
deemed to be valid even if there be infractions as detailed in the said
section. The scope of the provision is to make service of notice having certain
infirmities to be proper and valid if there was requisite participation on part
of the assessee. According to the Supreme Court, the section does not save
complete absence of notice. For section 292BB to apply, the notice must have
emanated from the Department. It is only the infirmities in the manner of
service of notice that the section seeks to cure. The section is not intended
to cure complete absence of notice itself.

The
Supreme Court held that since the facts on record were clear that no notice u/s
143(2) of the Act was ever issued by the Department, the findings rendered by
the High Court and the Tribunal and the conclusion arrived at were correct.
Therefore, there was no reason to take a different view in the matter. The
appeal was, therefore, dismissed.

3. Prashanti Medical
Services and Research Foundation vs. Union of India (UOI) and Others (2019) 416
ITR 485 (SC)

Business Expenditure –
Donations to notified eligible projects and schemes – Neither the appellant nor
the assessee has any right to set up a plea of promissory estoppel
against the exercise of legislative power such as the one exercised while
inserting sub-section (7) in section 35AC of the Act, more so when it was made
applicable uniformly to all alike the appellant prospectively – No deduction
could be allowed to an assessee either for the period 2017-2018 or for any
subsequent period for any amount received by the appellant from such assessee
for their project

The appellant is a
charitable trust registered under the provisions of the Bombay Public Trust
Act, 1950. It set up a heart hospital in Ahmedabad. The project began in the
year 2014 (on 5^th May, 2014).

On
27^th September, 2014, the appellant filed an application u/s 35AC of
the Act before the National Committee for Promotion of Social and Economic
Welfare, Department of Revenue, North Block, New Delhi (‘the Committee’) for
grant of approval to their hospital project as specified in section 35AC of the
Act so as to enable any ‘assessee’ to incur expenditure by way of making
payment of any amount to the appellant for construction of their approved
hospital project and accordingly claim appropriate deduction of such payment
from their total income during the previous year. Like the appellant, several
persons, as specified in section 35AC of the Act, also made applications to the
Committee for grant of approval to their hospital projects.

A notification was
issued by the Government of India on 7^th December, 2015 mentioning
therein that the Committee has approved 28 projects as ‘eligible projects’ u/s
35AC of the Act. The name of the appellant appeared at serial No. 10 in the
said notification.

According to the
appellant, they received amounts by way of donation from several assessees
during the years 2015-2016, 2016-2017 and 2017-18. These assessees then claimed
deduction of the amounts, which they had donated for the hospital project, from
their total income.

The benefit of claiming
deduction was, however, discontinued from the assessment year 2018-2019 by
insertion of sub-section (7) in section 35AC of the Act by the Finance Act,
2016 with effect from 1^st April, 2017.

The appellant in the petition
questioned the constitutional validity of sub-section (7) of section 35AC of
the Act inter alia on the ground that once the Committee granted
approval to the appellant’s hospital project for a period of three financial years,
the same could not be withdrawn qua the appellant on the strength of
insertion of sub-section (7) in section 35AC of the Act. In other words, the
challenge was on the ground that sub-section (7) of section 35AC was
essentially prospective in nature and, therefore, it would have no application
to those projects which were approved by the Committee prior to insertion of
sub-section (7), i.e., 1^st April, 2017. The challenge was also on
the ground that the Revenue could not apply sub-section (7) retrospectively and
withdraw the benefits, whether fully or partially, which were approved to the
appellant. It was, therefore, contended that the appellant and the assessees
should be held entitled to avail the full benefit for the three financial years
in terms of the notification dated 7^th December, 2015.

The High Court, in the
impugned order, repelled the challenge and while upholding the pleas raised by
the respondent (Revenue) dismissed the appellant’s petition, which gave rise to
filing of the appeal before the Supreme Court by the appellant after obtaining
special leave from the Court.

The Supreme Court noted
that one of the main objects for which section 35AC was enacted was to allow
the assessees to claim deduction of the amount paid by them to the appellant
for their project. It observed that none of the assessees (donees), who claimed
to have paid amounts to any eligible projects, came forward complaining that
despite their donating the amount to the appellant for his project they were
denied the benefit of claiming deduction of such amount from their total income
by virtue of sub-section (7) of section 35AC of the Act during the financial
year 2017-2018.

The Supreme Court noted
that the benefit of the deduction available u/s 35AC of the Act was duly
availed of by all the assessees for two financial years, namely, 2015-2016 and
2016-2017. The dispute was confined only to the third financial year, i.e.,
2017-2018, because for that year, the assessees were not allowed to claim
deduction of the amount paid by them to the appellant on account of insertion
of sub-section (7) in section 35AC of the Act with effect from 1^st
April, 2017.

The Court was of the
view that sub-section (7) was prospective in its operation and, therefore, all
the assessees were rightly allowed to claim deduction of the amount paid by
them to eligible projects from their total income during two financial years,
namely, 2015-2016 and 2016-2017. If sub-section (7) had been retrospective in
its operation then the deduction for 2015-2016 and 2016-2017, too, would have
been disallowed.

The Supreme Court held
that a plea of promissory estoppel is not available to an assessee
against the exercise of legislative power, nor any vested right accrues to an
assessee in the matter of grant of any tax concession to him. In other words,
neither the appellant nor the assessee has any right to set up a plea of
promissory estoppel against the exercise of legislative power such as
the one exercised while inserting sub-section (7) in section 35AC of the Act,
more so when it was made applicable uniformly to all alike the appellant
prospectively.

According to the Supreme
Court no deduction could be allowed to an assessee either for the period
2017-2018 or for any subsequent period for any amount received by the appellant
from such assessee for their project.

The
Supreme Court observed that in a taxing statute, a plea based on equity or /
and hardship is not legally sustainable. The constitutional validity of any
provision and especially taxing provision cannot be struck down on such
reasoning.

The Supreme Court
dismissed the appeal finding it to be without any merit.

BCAJ Admin

Glimpses Of Supreme Court Rulings

16. Business Income – Section 28(iv) of the Act
does not apply to a case where the receipt is in the nature of cash or money –
Section 41(1) of the Act does not apply in case of a waiver of loan as it does
not amount to cessation of trading liability.

The Commissioner
vs. Mahindra and Mahindra Ltd.

(2018) 404
ITR 1 (SC)

The Respondent [assessee],
way back, decided to expand its jeep product line by including FC-150 and
FC-170 models. For this purpose, on 18.06.1964, it entered into an agreement
with Kaiser Jeep Corporation (for short ‘the KJC’) based in America wherein KJC
agreed to sell the dies, welding equipments and die models to the Assessee. The
final price of the tooling and other equipments was agreed at $6,50,000
including cost, insurance and freight (CIF). Meanwhile, the Respondent took all
the requisite approvals from the concerned Government Departments. The said
toolings and other equipments were supplied by the Kaiser Jeep Corporation
through its subsidiary Kaiser Jeep International Corporation (KJIC).

However, for the
procurement of the said toolings and other equipments, the KJC agreed to
provide loan to the Respondent at the rate of 6% interest repayable after 10
years in installments. For this purpose, the Respondent addressed a letter dated
07.06.1965 to the Reserve Bank of India (RBI) for the approval of the said loan
agreement. The RBI and the concerned Ministry approved the said loan agreement.

Later on, it was informed
to the Respondent that the American Motor Corporation (AMC) had taken over the
KJC and also agreed to waive the principal amount of loan advanced by the KJC
to the Respondent and to cancel the promissory notes as and when they got
matured. The same was communicated to the Respondent vide letter dated
17.02.1976.

On 30.06.1976 the
Respondent filed its return for the assessment year 1976-77 and shown Rs.
57,74,064/- as cessation of its liability towards the American Motor
Corporation. After perusal of the return, the Income Tax Officer (ITO)
concluded that with the waiver of the loan amount, the credit represented
income and not a liability. Accordingly, the ITO, vide order dated 03.09.1979,
held that the sum of Rs. 57,74,064/- was taxable u/s. 28 of the Act.

Being dissatisfied, the
Respondent preferred an appeal before the Commissioner of Income Tax (Appeals).
After perusal of the matter, learned CIT (Appeals), vide order dated
23.03.1981, dismissed the appeal and upheld the order of the ITO with certain
modifications.

Being aggrieved, the
Respondent as well as the Revenue preferred appeals before the Tribunal. The
Tribunal, vide order dated 16.08.1982, set aside the order passed by learned
CIT (Appeals) and decided the case in favour of the Respondent.

Being aggrieved, the
Revenue filed a Reference before the High Court at Bombay. In that Reference,
three applications were filed, one by the Assessee and rest two by the Revenue.
Vide impugned common judgment and order dated 29.01.2003, the High Court confirmed
certain findings of the Tribunal in favour of the Respondent.

On
further appeal filed by the Revenue, the Supreme Court observed that the short
point for consideration before it was whether in the present facts and
circumstances of the case the sum of Rs. 57,74,064/- due by the Respondent to
Kaiser Jeep Corporation which later on waived off by the lender constitute
taxable income of the Respondent or not?

According to the Supreme
Court, the term “loan” generally refers to borrowing something,
especially a sum of cash that is to be paid back along with the interest
decided mutually by the parties. In other terms, the debtor is under a
liability to pay back the principal amount along with the agreed rate of
interest within a stipulated time.

The Supreme Court observed
that it is a well-settled principle that creditor or his successor may exercise
their “Right of Waiver” unilaterally to absolve the debtor from his
liability to repay. After such exercise, the debtor is deemed to be absolved from
the liability of repayment of loan subject to the conditions of waiver. The
waiver may be a partly waiver i.e., waiver of part of the principal or interest
payable, or a complete waiver of both the loan as well as interest amounts.
Hence, waiver of loan by the creditor results in the debtor having extra cash
in his hand. It is receipt in the hands of the debtor/Assessee.

According to the Supreme
Court, the short but cogent issue in the instant case was whether waiver of
loan by the creditor is taxable as a perquisite u/s. 28 (iv) of the Act or
taxable as a remission of liability u/s. 41 (1) of the Act.

The Supreme Court held that
on a plain reading of section 28 (iv) of the Act, prima facie, it
appeared that for the applicability of the said provision, the income which
could be taxed should arise from the business or profession. Also, in order to
invoke the provision of section 28 (iv) of the Act, the benefit which is
received has to be in some other form rather than in the shape of money.

In the present case, it was
a matter of record that the amount of Rs. 57,74,064/- was a cash receipt due to
the waiver of loan. Therefore, the very first condition of section 28 (iv) of
the Act, which says any benefit or perquisite arising from the business shall
be in the form of benefit or perquisite other than in the shape of money, was
not satisfied in the present case. Hence, according to the Supreme Court, in no
circumstances, it could be said that the amount of Rs. 57,74,064/- could be
taxed under the provisions of section 28 (iv) of the Act.

The Supreme Court further
held that on a perusal of the provisions of section 41(1) of the Act, it was
evident that it is a sine qua non that there should be an allowance or
deduction claimed by the Assessee in any assessment for any year in respect of
loss, expenditure or trading liability incurred by the Assessee. Then,
subsequently, during any previous year, if the creditor remits or waives any such
liability, then the Assessee is liable to pay tax u/s. 41 of the Act.

The objective behind this
section was simple. It was made to ensure that the Assessee does not get away
with a double benefit once by way of deduction and another by not being taxed
on the benefit received by him in the later year with reference to deduction
allowed earlier in case of remission of such liability.

It was undisputed fact that
the Respondent had been paying interest at 6% per annum to the KJC as per the
contract, but the Assessee never claimed deduction for payment of interest u/s.
(1) (iii) of the Act. In the case at hand, learned CIT (A) relied upon section
41 (1) of the Act and held that the
Respondent had received amortisation benefit. Amortisation is an accounting
term that refers to the process of allocating the cost of an asset over a
period of time, hence, it is nothing else than depreciation.

Depreciation is a reduction
in the value of an asset over time, in particular, to wear and tear. Therefore,
the deduction claimed by the Respondent in previous assessment years was due to
the deprecation of the machine and not on the interest paid by it.

Moreover, the purchase
effected from the Kaiser Jeep Corporation was in respect of plant, machinery
and tooling equipments which were capital assets of the Respondent. The said
purchase amount had not been debited to the trading account or to the profit or
loss account in any of the assessment years.

There is difference between
‘trading liability’ and ‘other liability’. Section 41 (1) of the Act
particularly deals with the remission of trading liability. Whereas in the
instant case, waiver of loan amounted to cessation of liability other than
trading liability. Hence, according to the Supreme Court, there was no force in
the argument of the Revenue that the case of the Respondent would fall u/s. 41 (1)
of the Act.

The Supreme Court dismissed
the appeal of the Revenue.

17. Reassessment – Section 147 of the Act does
not allow the re-assessment of an income merely because of the fact that the
assessing officer has a change of opinion with regard to the interpretation of
law differently on the facts that were well within his knowledge even at the
time of assessment

Income Tax
Officer vs. TechSpan India Private Ltd. and Ors. (2018) 404 ITR 10 (SC).

TechSpan India Private Ltd.
– the Respondent, was engaged in the business of development and export of
computer softwares and human resource services. It was eligible for deduction
u/s. 10A of the Act.

On 25.10.2001, the
Respondent filed its return of income for the assessment year 2001-02 declaring
a loss of Rs. 3,31,301/-. The Respondent, while filing the return for the
aforementioned period, has declared its income from two sources, namely,
software development and human resource development but claimed expenses
commonly for both. It also claimed deduction under Section 10A of the IT Act
for the income from the software development. The said return was accepted and
accordingly intimated to the Respondent.

The return was selected for
regular assessment under Section 143(3) of the Act and a show cause notice
dated 09.03.2004 was issued to the Respondent to show cause as to why the
expenses claimed with regard to the allocation of common expenses between the
two heads, viz., software development and human resource development do not
reveal any basis for such allocation. The issue was duly contested and decided
vide order dated 29.11.2004 and the proceedings ended with a rectification of
the Assessment Order u/s. 154 of the Act while arriving at an income of Rs. 31,63,570/-
which was fully set-off against the loss brought forward and the income was
assessed as ‘Nil’ for the assessment year 2001-2002.

On 10.02.2005, a Notice was
served upon the Respondent by the Revenue for re-opening the assessment u/s.
148 on the ground that the deduction u/s. 10A of the Act has been allowed in
excess and the income escaped assessment worked out to Rs. 57,36,811/- in the
original assessment. The Respondent filed a detailed reply objecting to the
re-assessment. However, by order dated 17.08.2005, the objections were rejected
and reassessment was approved by the Revenue.

Being aggrieved, the
Respondent challenged the above said show cause notice dated 10.02.2005 as well
as the order dated 17.08.2005 before the High Court. Vide judgement and order
dated 24.02.2006, the High Court set aside the show cause notice dated
10.02.2005 as well as the re-assessment order dated 17.08.2005.

Being aggrieved, the
Revenue has filed this appeal before the Supreme Court.

According to the Supreme Court,
the only point for consideration before it was whether the re-opening of the
completed assessment was justified in the present facts and circumstances of
the case?

The Supreme Court held that
the language of section 147 makes it clear that the assessing officer certainly
has the power to re-assess any income which escaped assessment for any
assessment year subject to the provisions of sections 148 to 153. However, the
use of this power is conditional upon the fact that the assessing officer has some
reason to believe that the income has escaped assessment. The use of the words
‘reason to believe’ in section 147 has to be interpreted schematically as the
liberal interpretation of the word would have the consequence of conferring
arbitrary powers on the assessing officer who may even initiate such
re-assessment proceedings merely on his change of opinion on the basis of same
facts and circumstances which has already been considered by him during the
original assessment proceedings. Such could not be the intention of the
legislature. The said provision was incorporated in the scheme of the Act so as
to empower the Assessing Authorities to re-assess any income on the ground
which was not brought on record during the original proceedings and escaped his
knowledge; and the said fact would have material bearing on the outcome of the
relevant assessment order.

According to the Supreme
Court, section 147 of the Act does not allow the re-assessment of an income
merely because of the fact that the assessing officer has a change of opinion
with regard to the interpretation of law differently on the facts that were
well within his knowledge even at the time of assessment. Doing so would have
the effect of giving the assessing officer the power of review and section 147
confers the power to re-assess and not the power to review.

To check whether it is a
case of change of opinion or not one has to see its meaning in literal as well
as legal terms. The word change of opinion implies formulation of opinion and
then a change thereof. In terms of assessment proceedings, it means formulation
of belief by an assessing officer resulting from what he thinks on a particular
question. It is a result of understanding, experience and reflection.

There is a conceptual difference
between power to review and power to re-assess. The Assessing Officer has no
power to review; he has the power to re-assess. But re-assessment has to be
based on fulfillment of certain pre-condition and if the concept of
“change of opinion” is removed, as contended on behalf of the
Department, then, in the garb of re-opening the assessment, review would take
place.

One must treat the concept
of “change of opinion” as an in-built test to check abuse of power by
the Assessing Officer. Hence, after 1^st April, 1989, Assessing
Officer has power to re-open, provided there is “tangible material”
to come to the conclusion that there is escapement of income from assessment.
Reasons must have a live link with the formation of the belief.

Before interfering with the
proposed re-opening of the assessment on the ground that the same is based only
on a change in opinion, the court ought to verify whether the assessment
earlier made has either expressly or by necessary implication expressed an
opinion on a matter which is the basis of the alleged escapement of income that
was taxable. If the assessment order is non-speaking, cryptic or perfunctory in
nature, it may be difficult to attribute to the assessing officer any opinion
on the questions that are raised in the proposed re-assessment proceedings.

Every attempt to bring to
tax, income that has escaped assessment, cannot be absorbed by judicial
intervention on an assumed change of opinion even in cases where the order of
assessment does not address itself to a given aspect sought to be examined in
the re-assessment proceedings.

According to the Supreme
Court, the fact in controversy in this case was with regard to the deduction
u/s. 10A of the IT Act which was allegedly allowed in excess. The show cause
notice dated 10.02.2005 reflected the ground for re-assessment in the present
case, that is, the deduction allowed in excess u/s. 10A and, therefore, the
income had escaped assessment to the tune of Rs. 57,36,811. In the order in
question dated 17.08.2005, the reason purportedly given for rejecting the
objections was that the Assessee was not maintaining any separate books of
accounts for the two categories, i.e., software development and human resource
development, on which it has declared income separately.

However, a bare perusal of
notice dated 09.03.2004 which was issued in the original assessment proceedings u/s. 143 made it clear that
the point on which the re-assessment proceedings were initiated, was well
considered in the original proceedings. In fact, the very basis of issuing the
show cause notice dated 09.03.2004 was that the Assessee was not maintaining
any separate books of account for the said two categories and the details filed
did not reveal proportional allocation of common expenses made to these
categories. Even the said show cause notice suggested how proportional
allocation should be done.

All these things lead to an
unavoidable conclusion that the question as to how and to what extent deduction
should be allowed u/s. 10A of the IT Act was well considered in the original
assessment proceedings itself. Hence, initiation of the re-assessment
proceedings u/s. 147 by issuing a notice u/s. 148 merely because of the fact
that now the Assessing Officer was of the view that the deduction u/s. 10A was
allowed in excess, was based on nothing but a change of opinion on the same
facts and circumstances which were already in his knowledge even during the
original assessment proceedings.

In light of the forgoing
discussion, the Supreme Court held that impugned judgement and order of the
High Court dated 24.02.2006 did not call for any interference. The appeal was
accordingly dismissed with no order as to costs.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

1.
The Peerless General Finance
and Investment Company Ltd. vs. CIT (2019) 416 ITR 1 (SC)

Capital or revenue receipt – Deposits by
way of subscription pursuant to investment schemes made by subscribers which
have never been forfeited are capital receipts – Nature of receipt cannot be
decided only by the treatment of such subscriptions in the accounts of the
assessee

The assessee company had floated various
schemes which required subscribers to deposit certain amounts by way of
subscriptions in its hands and, depending upon the scheme in question, these
subscribed amounts at the end of the scheme were ultimately repaid with
interest. The schemes also contained forfeiture clauses as a result of which
if, midway, a certain amount was forfeited, then the said amount would
immediately become income in the hands of the assessee.

For the assessment years 1985-86 and
1986-87, the AO treated these amounts as income inasmuch as under the
accounting system followed by the assessee, these amounts were credited to the
profit and loss account for the years in question as income. The Commissioner
of Income Tax (Appeals) dismissed the appeal from the original assessment
orders and confirmed the same. The Income Tax Appellate Tribunal, on the other
hand, allowed the appeals by relying upon the judgement of this Court in Peerless
General Finance and Investment Co. Limited and Anr. vs. Reserve Bank of India,
(1992) 2 SCC 343 in which, according to the Appellate Tribunal, the
Supreme Court finally decided the question in the assessee’s own case stating
that such amounts cannot be treated to be income but are in the nature of
capital receipts. This was not only because of the interpretation of an RBI
circular of 1987, but also because, on general principles, such amounts must be
treated to be capital receipts or otherwise they would violate the provisions
of the Companies Act.

It further went through the various clauses
contained in the scheme and found that in point of fact no subscription
certificate had, in fact, been forfeited as a result of which it was clear that
there would be no income in the hands of the assessee for these two years. It
also dealt with certificates that were surrendered prior to the stated time and
stated that in such cases whatever would remain as surplus in the hands of the
assessee would be treated as income. It went on to state that there would be no
estoppel in law against the assessee making a claim that these amounts
were in the nature of capital receipts and not income, and also relied upon
certain judgements of the Supreme Court to buttress the proposition that the
Supreme Court had also held that what is the true position in law cannot be
deflected by what the assessee may or may not do in its treatment of the matter
at hand in its accounts. The appeal against the order of the Commissioner of
Income Tax (Appeals) was allowed by the Income Tax Appellate Tribunal.

In the first round, the High Court, by its
judgement dated 9^th September, 1999 stated that since no question of
law arose, the reference applications before it were dismissed.

The Supreme Court, by an order dated 3^rd
December, 2002 set aside the High Court judgement and referred the questions of
law to the High Court.

On remand, the High Court, by the impugned
judgement dated 6^th October, 2005, allowed the appeal against the
Appellate Tribunal holding that a perusal of the subscription scheme of the
company showed that since forfeiture of the amounts deposited was possible,
this amount should be treated as income and not as a capital receipt. Further,
it relied heavily upon the fact that the assessee had itself treated such amounts
as income and credited them to its profit and loss account for the years in
question and would, therefore, be estopped by the same. Referring to the
judgement of the Supreme Court in Peerless General Finance and Investment
Co. Limited (Supra), it went on to state that since the said judgement
dealt with an RBI circular of 1987, which itself was only prospective, any law
declared as to the effect of clause 12 of that circular would be prospective in
nature and would, therefore, not apply to the assessment years in question.

On an appeal by the assessee company, the
Supreme Court observed that the question raised in the appeal was as to whether
receipts of subscriptions in the hands of the assessee company for the previous
years relevant to the assessment years 1985-86 and 1986-87 should be treated as
income and not capital receipts inasmuch as the assessee has in its books of
accounts shown this sum as income.

The Supreme Court noted that the
subscriptions were received in the years in question from the public at large
under a collective investment scheme and these subscriptions were never at any
point of time forfeited. It observed that this being the case and surrendered
certificates not being the subject matter of the appeal before it, it was clear
that even on general principles deposits by way of amounts pursuant to these
investment schemes made by subscribers which have never been forfeited could
only be stated to be capital receipts.

The Supreme
Court held that while it was true that there was no direct focus of the Court
on whether subscriptions so
received were capital or revenue in nature, still the Supreme Court had also,
on general principles, held that such subscriptions would be capital receipts
and if they were treated to be income it would violate the Companies Act. It
was, therefore, incorrect to state, as had been stated by the High Court, that
the decision in Peerless General Finance and Investment Co. Limited
(Supra) must be read as not having laid down any absolute proposition
of law that all receipts of subscription at the hands of the assessee for these
years must be treated as capital receipts.

The Supreme Court reiterated that though its
focus was not directly on this, yet, a pronouncement by the Supreme Court, even
if it could not be strictly called the ratio decidendi of the judgement,
would certainly be binding on the High Court. Even otherwise, it was clear that
on general principles also such subscription could not possibly be treated as
income. In cases of this nature it would not be possible to go only by the
treatment of such subscriptions in the hands of accounts of the assessee itself.

In the circumstances, the Supreme Court set
aside the judgement of the High Court and restored that of the Income Tax
Appellate Tribunal. The appeal was allowed.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

18. Tapan Kumar Dutta vs. Commissioner of Income
Tax, West Bengal (24.04.2018) (2018) 404 ITR 28 (SC)

Search and seizure – Assessment of third person – A notice u/s.
158BD could be issued to a person with respect to whom search was not conducted
but undisclosed income was found as belonging to such person from the material
seized from the residence or business premises of the person with respect to
whom search was made u/s. 132 – Notice issued u/s. 158BC together with notice
issued on the person searched not valid – Subsequent notice u/s. 158BD was
valid

The Appellant was a partner in a
Partnership Firm by name “Nityakali Rice Mill” (in short ‘the Firm’).
On 06.11.1998, a search was conducted at the business premises of the Firm by
the Income Tax Department and several documents/books including a sum of Rs. 34
lakh were seized.

Thereafter, on 09.09.1999, a notice
was issued to the Appellant by the Assessing Officer u/s. 158BC of the Income
Tax Act, 1961 (in short ‘the IT Act’) to prepare and file a true and correct
return of his total income including the undisclosed income in respect of which
he was assessed for the block period 1989-90 to 1999-2000. On the very same
day, a separate notice u/s. 158BC was issued in the name of the said Firm by
the very same Assessing Officer. Pursuant to the same, the Appellant filed his
block return for the aforesaid period on 08.11.1999 declaring his aggregate
undisclosed income at Rs. 14 lakh.

Meanwhile, an application was filed
by the Appellant before the Additional Commissioner of Income Tax, Asansol,
praying for his intervention and issue of necessary direction to the Assessing
Officer u/s. 144A of the IT Act. On 14.08.2000, the Additional Commissioner
perused the records and directed the Assessing Officer to take appropriate
steps in order to determine the income of the Assessee. The Additional
Commissioner issued separate directions u/s. 144A of the IT Act in the cases of
Nitya Kali Rice Mill, Kartick Dutta, Shambhu Mondal and Tamal Mondal and the
Draft Assessment Order u/s. 158BC of the IT Act was sent to the Joint
Commissioner of Income Tax, Burdwan, Range-2 for approval which was returned by
the Joint Commissioner on 16.11.2000 stating that no warrant for authorisation
was issued in the names of the persons mentioned in the Draft Assessment Order.

On 20.11.2000, Block Assessment
Order was passed by the Deputy Commissioner of Income Tax stating that the
return filed in the case of the Firm should be accepted as ‘Nil’ income and
also directed to initiate proceedings against the Appellant for the assessment
of undisclosed income for the block period u/s. 158BD of the IT Act. Pursuant
to the order dated 20.11.2000, a fresh notice u/s. 158BC read with section
158BD of the IT Act was issued to the Appellant to file the block return for
the period 1989-90 to 1999-2000. Consequently, the Appellant intimated the
Assessing Officer through a letter dated 21.10.2002 that the block return has
already been filed for the aforesaid period on 08.11.1999. Further, the issue
of fresh notice does not extend the time allowed for completion of the
assessment under Chapter XIV of the IT Act.

On 29.11.2002, the Assessing
Officer passed the assessment order while assessing the undisclosed income of
the Appellant to the tune of Rs. 3,48,56,430/. Being aggrieved, the Appellant
preferred an appeal before the Commissioner of Income Tax (Appeals). Vide order
dated 18.09.2003, the Commissioner of Income Tax (Appeals) held that the
undisclosed income of the block period in the instant case should be taken in
the aggregate sum of Rs. 66,55,911/- as against Rs. 3,48,56,430/- as assessed
by the Assessing Officer.

Being aggrieved, the Appellant
preferred an Appeal before the Tribunal. At the same time, the Revenue also
went in appeal before the Tribunal. The Tribunal, vide order dated 29.04.2005,
dismissed the appeal filed by the Appellant while partly allowing the appeal
filed by the Revenue. Being aggrieved, the Appellant filed an appeal before the
High Court. Vide judgment and order dated 17.11.2005, the Division Bench had
dismissed the appeal filed by the Assessee.

Being aggrieved by the judgment and
order dated 17.11.2005, the Appellant has preferred this appeal before the
Supreme Court.

According to the Supreme Court, the
only point for consideration before it was whether in the facts and
circumstances of the present case, the issue of second (fresh) notice u/s.
158BD of the IT Act was valid or not?

The Supreme Court noted that in the
instant case, it was a matter of dispute that second notice issued on
20.11.2000 was not valid and competent since the first notice issued by the
same Assessing Officer dated 09.09.1999 u/s. 158BC was valid and the assessment
ought to be made in pursuance of that notice and, therefore, the Assessing
Officer had no authority to issue the second notice.

The Supreme Court considered the
provisions of section 158BD and observed that a notice u/s. 158BD could be
issued to a person with respect to whom search was not conducted but
undisclosed income was found as belonging to such person from the material
seized from the residence or business premises of the person with respect to
whom search was made u/s. 132.

Section 158BD speaks of the
condition that “where the Assessing Officer is satisfied that any
undisclosed income belongs to any person other than the searched person”,
which means that the Assessing Officer must have to be satisfied that any
undisclosed income belongs to any person other than the searched person.

According to the Supreme Court, in
the present case, it was not in dispute that the Assessing Officer, who was
assessing the Firm as well as the Appellant, was the same person. In other
words, the same Assessing Officer having jurisdiction over the searched person
could proceed against the present Appellant. Therefore, the present Assessing
Officer had jurisdiction to proceed against the present Appellant to make a
block assessment under Chapter XIV-B of the IT Act, in case the Assessing
Officer was prima facie satisfied that any undisclosed income belonged
to the present Appellant.

The Supreme Court held that at the
time when notice u/s. 158BC was issued by the Assessing Officer to Nitya Kali
Rice Mill, it was not necessary for the Assessing Officer to arrive at a
satisfaction that any undisclosed income belongs to Nitya Kali Rice Mill. A
search was conducted against Nitya Kali Rice Mill under section 132 of the Act.
Since the notice u/s. 158BC issued to Nitya Kali Rice Mill and the notice u/s.
158BC issued to the Appellant were on the same day i.e., on 09.09.1999, the
question of coming to a satisfaction that any undisclosed income based on
seized books of accounts or documents or assets belonged to the present
Appellant did or could not arise inasmuch as no reasonable or prudent man can
come to such satisfaction unless the seized books of accounts or documents or
assets are perused, examined and verified.

Therefore, the Assessing Officer
was right in arriving at a decision that the notice u/s. 158BC issued to the
present Appellant on 09.09.1999 did not satisfy the requirement of section
158BD of the Act. He, therefore, rightly proceeded to issue fresh notice
(second Notice) u/s. 158BD on 20.11.2000 after recording a satisfaction that
any undisclosed income based on seized books of account or document or assets
or other materials may belong to the Appellant. In fact, in the present case,
the AO had himself come to a conclusion that the notice issued u/s. 158BC on
09.09.1999 to the Assessee was not in conformity with the requirement of
section 158BD of the Act. The Assessing Officer had proceeded u/s. 158BD of the
Act not in pursuance of any direction by the Joint Commissioner but after being
satisfied that the case squarely fell within the ambit of section 158BD of the
Act.

The Supreme Court, therefore,
dismissed the appeal concluding that the High Court was right in passing the
judgment and order dated 17.11.2005.

19. Addl. Commissioner of Income Tax vs. Bharat
V. Patel (24.04.2018) (2018) 404 ITR 37 (SC)

Perquisite – The Respondent got the Stock Appreciation Rights
(SARs) and, eventually received an amount on account of its redemption prior to
01.04.2000 on which date the amendment of Finance Act, 1999 (27 of 1999) came
into force – In the absence of any express statutory provision regarding the
applicability of such amendment from retrospective effect, the said amount was
not liable to pay tax

The Respondent was employed as the
Chairman-cum-Managing Director of the (P&G) India Ltd., at the relevant
time and the said company is the subsidiary of (P&G) USA through Richardson
Vicks Inc. USA and that (P&G) USA owned controlling equity. The Respondent
was working as a salaried employee. The (P&G) USA was the company who had
issued the Stock Appreciation Rights (SARs.) to the Respondent without any
consideration from 1991 to 1996. The said SARs were redeemed on 15.10.1997 and
in lieu of that the Respondent received an amount of Rs. 6,80,40,724/- from
(P&G) USA. However, when the Respondent filed his return for the Assessment
Year:1998-99, he claimed this amount as an exemption from the ambit of Income
Tax.

The Tribunal was of the view that
the stock options are capital assets and such assets in the instant case
acquired for consideration, hence, gain arising therefrom is liable to capital
gain tax. However, the stand of the Revenue before the Tribunal was that the
amount in question is taxable as perquisite u/s. 17(2)(iii) of the Act or in
alternatively u/s. 28(iv) of the Act instead of capital gains. The High Court
also upheld the view of the Tribunal but the High Court disagreed that such
capital gains arose to the Respondent on redemption of Stock Appreciation
Rights since there was no cost of acquisition involved from the side of the
Respondent.

The Supreme Court, before examining
the case at hand, considered the meaning of the words “Perquisite”
and “Capital Gains”. According to the Supreme Court, the word “Perquisite”
in common parlance may be defined as any perk or benefit attached to an
employee or position besides salary or remuneration. Broadly speaking, these
are usually non-cash benefits given by an employer to an employee in addition
to entitled salary or remuneration. It may be said that these benefits are
generally provided by the employers in order to retain the talented employees
in the organisation. There are various instances of perquisite such as
concessional rent accommodation provided by the employer, any sum paid by an
employer in respect of an obligation which was actually payable by the employee
etc. Section 17(2) of the Act was enacted by the legislature to give the broad
view of term perquisite. On the other hand, the word ‘Capital Gains’ means a
profit from the sale of property or an investment. It may be short term or long
term depending upon the facts and circumstances of each case. This gain or
profit is charged to tax in the year in which transfer of the capital assets
takes place.

According to the Supreme Court, in
the instant case, the fundamental question which arose for its consideration
was with regard to the taxability of the amount received by the Respondent on
redemption of Stock Appreciation Rights (SARs.).

The Supreme Court noted that,
particularly, in order to bring the perquisite transferred by the employer to
the employees within the ambit of tax, legislature brought an amendment u/s. 17
of the Act by inserting clause (iiia) in section 17(2) of the Act through the
Finance Act, 1999 (27 of 1999) with effect from 01.04.2000, which was later on
omitted by the Finance Act, 2000.

According to the Supreme Court, the
intention behind the said amendment brought by the legislature was to bring the
benefits transferred by the employer to the employees as in the instant case,
within the ambit of the Income Tax Act, 1961. It was the first time when the
legislature specified the meaning of the cost for acquiring specific
securities. Only by this amendment, legislature determined what would
constitute the specific securities. By this amendment, legislature clearly
covered the direct or indirect transfer of specified securities from the
employer to the employees during or after the employment. On a perusal of the
said clause, it was evident that the case of the Respondent fell under such
clause. However, since the transaction in the instant case pertained to period
prior to 01.04.2000, hence, such transaction could not be covered under the
said Clause in the absence of an express provision of retrospective effect.

The Supreme Court did not find any
force in the argument of the Revenue that the case of the Respondent would fall
under the ambit of section 17(2)(iii) of the Act instead of section 17(2)(iiia)
of the Act. The Supreme Court held that it is a fundamental principle of law
that a receipt under the Act must be made taxable before it can be treated as
income. Courts cannot construe the law in such a way that brings an individual
within the ambit of Income Tax Act to pay tax who otherwise is not liable to
pay. In the absence of any such specific provision, if an individual is
subjected to pay tax, it would amount to the violation of his Constitutional
Right.

The Supreme Court observed that on
the point of applicability of clause (iiia) of section 17(2) of the Act, it had
settled the position in Infosys Technologies Ltd. (297 ITR 167).

The Supreme Court further held that
the High Court had rightly rejected the stand of the Revenue that the amendment
brought in by section 17(2) of the Act was clarificatory, hence, retrospective
in nature.

Further, according to the Supreme
Court Circular No. 710 dated 24.07.1995 prima facie dealt with the cases
where the employer issued shares to the employees at less than the market
price. In the instant case, the Respondent was allotted Stock Appreciation
Rights (SARs.) by the (P&G) USA which was different from the allotment of
shares. Hence, such Circular had no applicability on the instant case.
Moreover, a Circular could not be used to introduce a new tax provision in a
Statute which was otherwise absent.

On the alternate contention of the
Revenue that the case of the Respondent would come within the ambit of the
28(iv) of the IT Act, the Supreme Court held that such benefit or perquisite
should have arisen from the business activities or profession whereas in the
instant case there was nothing as such. The applicability of section 28(iv) was
confined only to the case where there was any business or profession related
transaction involved. Hence, the instant case could not be covered u/s. 28(iv)
of the Act for the purpose of tax liability.

The Supreme Court summed up by
holding that, the Respondent got the Stock Appreciation Rights (SARs) and,
eventually received an amount on account of its redemption prior to 01.04.2000
on which date the amendment of Finance Act, 1999 (27 of 1999) came into force.
In the absence of any express statutory provision regarding the applicability
of such amendment from retrospective effect, it did not find any force in the
argument of the Revenue that such amendment came into force retrospectively. It
is well established Rule of interpretation that taxing provisions shall be
construed strictly so that no person who is otherwise not liable to pay tax, be
made liable to pay tax.

20. Commissioner of Income Tax vs. Container
Corporation of India Ltd. (2018) 404 ITR
397 (SC)

Infrastructure facility – Inland Container Depots (ICDs) are
Inland Ports and subject to the provisions of the section 80IA and deduction
could be claimed for the income earned out of these Depots

Container Corporation of India Ltd.
(CONCOR)-the Respondent herein, a government Company, was engaged in the
business of handling and transportation of containerised cargo and was under
the direct administrative control of Ministry of Railways. Its operating
activities were mainly carried out at its Inland Container Depots (ICDs),
Container Freight Stations (CFSs) and Port Side Container Terminals (PSCTs)
spread all over the country.

The Respondent herein filed its
returns of income for the assessment years 2003-04 to 2005-06 claiming
deduction under various heads including deduction u/s. 80-IA of the Act.

This issue is with regard to the
deduction claimed u/s. 80-IA on the profits earned from the Inland Container
Depots (ICDs) and on rolling stocks. The claim for deduction on the profits
earned from the ICDs and further the deduction on account of rolling stocks had
been rejected by the Assessing Officer.

The Respondent herein, being aggrieved with the aforesaid order,
filed an appeal to the Commissioner of Income Tax (Appeals). Learned CIT
(Appeals), partly allowed the appeal while rejecting the deduction claimed u/s.
80-IA of the Act. Being aggrieved, the Respondent herein further preferred
appeal before the Tribunal. The Tribunal, partly allowed the appeal and held
that the deduction u/s. 80-IA could be claimed with regard to the rolling stocks
of the company but not with regard to the ICDs.

Being aggrieved, the Respondent herein challenged the same before
the High Court. The Division Bench of the High Court, allowed the appeals and
held that the Respondent herein was entitled to claim deduction on the income
earned from the ICDs for the relevant period under consideration u/s. 80-IA of
the IT Act.

Being aggrieved by the judgment and
order of the High Court, the Revenue has preferred this appeal before the
Supreme Court.

According to the Supreme Court, the
only point for consideration before it was whether in the facts and
circumstances of the case the Inland Container Depots (ICDs) under the control
of the Respondent, during the relevant period, qualified for deduction u/s.
80-IA(4) of the Act or not.

The Supreme Court noted that the
ICDs function for the benefit of exporters and importers located in industrial
centers which are situated at distance from sea ports. The purpose of
introducing them was to promote the export and import in the country as these
depots acts as a facilitator and reduce inconvenience to the person who wishes
to export or import but place of his business is situated in a land locked area
i.e., away from the sea. These depots reduce the inconvenience in import and export
in the sense that it reduces the bottlenecks that are arising out of handling
and customs formalities that are required to be done at the sea ports by
allowing the same to be done at these depots only that are situated near to
them. The term ICDs was inserted in 1983 u/s. 2(12) of the Customs Act, 1962
which defines ‘customs port’ and by the provisions of section 7(1)(aa) of the
Customs Act, 1962 power has been given to the Central Board of Excise and
Custom(CBEC) to notify which place alone to be considered as Inland Container
Depots for the unloading of imported goods and the loading of export goods by
Notification in the official Gazette.

With the purpose of boosting
country’s infrastructure and specially the transport infrastructure, the
Finance Act, 1995 which came into effect from 01.04.1996 brought an amendment
to the provisions of section 80-IA of the Act. Section 80-IA of the Act talks
about deduction in respect of profits and gains from industrial undertaking or
enterprises engaged in the infrastructure development etc. The said amendment
for the first time brought a provision under which a percentage of profits
derived from the operation of infrastructure facility was allowed a deduction
while computing the income of the Assessee. A ten years tax concession was
allowed to the enterprises in accordance with the provisions of the section
subject to fulfillment of conditions given therein, which develops, maintains
and operates any new infrastructure facility such as roads, highways,
expressways, bridges, airports, ports and rail system or any other public
facility of similar nature as notified.

The said provision gives the power
to the Board to notify certain other enterprises which can avail the benefit of
section 80-IA of the Act, which do not fall within any of the specified
categories but carries out activities of similar nature.

Further, Central Board of Direct
Taxes (CBDT), in exercise of its power u/s. 80-IA(12)(ca), vide Notification
dated 01.09.1998 notified ICDs and CFSs as infrastructure facility.

In addition to the above, the
Finance Act, 1998, which came into effect on 01.04.1999, made a change in the
definition of ‘Infrastructure facility’ as is relevant to the present case. The
words ‘Inland water ways and inland ports’ were added in the definition of
infrastructure facility. A noticeable change was further
brought by the Finance Act, 2001, which came into effect from 01.04.2002, in
the terms that the power of the Board to extend the benefit of the said
provisions to any infrastructure facility of similar nature by issuing a Notification
was taken away. The new explanation to section 80-IA(4) of the Act was
substituted by the Finance Act, 2001 which defined “infrastructure
facility”.

It was contended on behalf of the
Appellant that the High Court erred in relying on the Notification issued by
CBDT to hold that the enterprises holding ICDs are allowed to claim deductions
u/s. 80-IA of the Act. As the said power of the Board was specifically taken
away by the amendment made by Finance Act, 2001, in light of the said
amendment, the Notifications which were issued by the CBDT would cease to
operate after the Assessment Year 2002-03.

The Supreme Court held that the
aforesaid argument did not have much force as the said amendment was silent
with regard to any effect it would have upon the Notifications issued earlier
by the Board in due exercise of its power. Had it been the intention of the
legislature that the Notifications issued by the Board earlier were of no
effect after 2002-03, it would have had found a place in the said amendment. In
the absence of the same, the Supreme Court was unable to concur with learned
Senior Counsel that the Notifications which were issued in legitimate exercise
of the power conferred on the Board would cease to have effect after the
Assessment Year 2002-03.

It was also contended on behalf of
the Appellant that the High Court committed a grave error in holding ICDs as
Inland Ports. It was further contended that the ICDs were never understood to
fall in the category of ‘Inland Port’ under the scheme of the Act. The argument
in support of this contention was that if the word ‘Inland Port’, as used in
the Explanation attached to section 80-IA(4) of the Act defining
‘infrastructure facility’ included ICDs, there would have been no need for the
CBDT to separately exercise its power given. The Supreme Court held that the
Notification which was issued by the CBDT came into effect on 01.09.1998 i.e.,
the time when the term ‘Inland Port’ was not in itself inserted in the
provisions of Explanation attached to section 80-IA(4) of the Act defining the
term ‘infrastructure facility’. It was inserted through Finance Act, 1998 which
came into effect from 01.04.1999. So there seems to be no conflict within the
Notification issued by the Board and the fact that the ICDs are Inland Ports or
not.

The Supreme Court further held that
the Respondent has been held entitled for the benefit of section 80IA of the
Act much before the Finance Act, 2001 which came into force on 01.04.2002 and
exemption for the period of 10 years could not be curtailed or denied by any
subsequent amendment regarding the eligibility conditions under the period is
modified or specific provision is made that the benefit from 01.04.2002 onwards
shall only be claimed by the existing eligible units if they fulfill the new
conditions.

The Supreme Court thereafter dealt
with the issue as to whether the ICDs could be termed as Inland Ports so as to
entitle it for deduction u/s. 80-IA of the Act. The Supreme Court observed that
term port, in commercial terms, is a place where vessels are in a habit of
loading and unloading goods. The term ‘Port’ as is used in the Explanation
attached to section 80-IA(4) seems to have maritime connotation perhaps that is
the reason why the word airport is found separately in the Explanation.
Considering the nature of work that is performed at ICDs, they cannot be termed
as Ports. However, taking into consideration the fact that a part of activities
that are carried out at ports such as custom clearance are also carried out at
these ICDs, the claim of the Respondent herein could be considered within the
term ‘Inland port’ as is used in the Explanation.

The Supreme Court noted that the
term ‘Inland Port’ has been defined nowhere. But the Notification that has been
issued by the Central Board of Excise & Customs (CBEC) dated 24.04.2007 in
terms holds that considering the nature of work carried out at these ICDs they
can be termed as Inland Ports. Further, the communication dated 25.05.2009
issued on behalf of the Ministry of Commerce and Industry confirming that the
ICDs are Inland Ports, fortified the claim of the Respondent herein. The
Supreme Court held that though both the Notification and communication are not
binding on CBDT to decide whether ICDs can be termed as Inland Ports within the
meaning of section 80-IA of the Act, the Appellant herein was unable to put
forward any reasonable explanation as to why these notifications and
communication should not be relied to hold ICDs as Inland Ports. Unless shown
otherwise, it could not be held that the term ‘Inland Ports’ is used
differently u/s. 80-IA of the Act. All these facts taken together clear the
position beyond any doubt that the ICDs are Inland Ports and subject to the
provisions of the section and deduction could be claimed for the income earned
out of these Depots. However, the actual computation is to be made in
accordance with the different Notifications issued by the Customs department
with regard to different ICDs located at different places.

The Supreme Court, in view of
foregoing held that the judgment of the High Court did not call for any
interference and, hence, the appeal was accordingly dismissed.

___________________________________________________________________________________________________

Corrigendum

Namaskaar printed
on Page 5 of August, 2018 Journal was contributed by K C Narang, Chartered
Accountant and not by Mukesh Trivedi, Chartered Accountant. This inadvertent
error is regretted.

BCAJ Admin

Glimpses Of Supreme Court Rulings

10. CIT vs. Essar Teleholdings Ltd.

(2018) 401 ITR 445 (SC); 31^stJanuary, 2018

Income – Disallowance of
expenditure u/s. 14A – Rule 8D was intended to operate prospectively

The Assessee (Respondent in
appeal) filed his return of income for the assessment year 2003-2004 on
01.12.2003 declaring a loss of Rs. 69,92,67,527/-. The Assessing Officer vide
its order dated 27.03.2006 held that during the year under consideration, the
Assessee company was in receipt of both taxable and non-taxable dividend
income. Accordingly, the dividend on investment exempt u/s. 10(23G) was
considered by the A.O. for the purpose of disallowance u/s. 14A. Hence,
proportionate interest relating
to investment on
which exemption u/s. 10(23G) was available as
per the working amounted to Rs. 26 crores was disallowed u/s. 14A r.w.s.
10(23G) of the I.T. Act.

The Assessee filed an appeal,
which was partly allowed by order dated 05.03.2009. The Assessee filed an
appeal before the ITAT. The ITAT allowed the Assessee’s appeal relying on the
Bombay High Court’s judgement in Godrej and Boyce Manufacturing Co. Limited
vs. Deputy Commissioner of Income Tax, Mumbai and Anr., reported in (2010)
328 ITR 81(Bom.). The ITAT held that Rule 8D is only prospective and in the
year under consideration Rule 8D was not applicable. ITAT set aside the order
of CIT(A) and restored the issue back to the file of the Assessing Officer for de
novo adjudication without invoking the provisions of Rule 8D. Against the
order of ITAT, the revenue filed an appeal before the High Court. The High
Court following its earlier judgement of Godrej and Boyce Manufacturing Co.
Limited vs. Deputy Commissioner of Income Tax, Mumbai and Anr. (supra)
dismissed the appeal. The Commissioner of Income Tax aggrieved by the judgement
of the High Court approached the Supreme Court.

According to the Supreme
Court, the only question to be considered and answered was as to whether Rule 8D
of Income Tax Rules is prospective in operation as held by the High Court or it
is retrospective in operation and shall also be applicable in the assessment
year in question as contended by the revenue.

The Supreme Court noted that
section 14A was inserted by Finance Act, 2001 and the provisions were fully
workable without their being any mechanism provided for computing the
expenditure. Although section 14A was made effective from 01.04.1962 but proviso
was immediately inserted by Finance Act, 2002, providing that section 14A shall
not empower assessing officer either to reassess u/s. 147 or pass an order
enhancing the assessment or reducing a refund already made or otherwise
increasing the liability of the Assessees u/s.154, for any assessment year
beginning on or before 01.04.2001. Thus, all concluded transactions prior to 01.04.2001 were
made final and not allowed to be re-opened.

The Supreme Court also noted
that the memorandum of explanation explaining the provisions of Finance Act,
2006 clearly mentioned that section 14A sub-section (2) and sub-section (3)
shall be effective with effect from the assessment year 2006-07, which
according to the Supreme Court was another indicator that provision was intended
to operate prospectively.

The Supreme Court observed
that the new mode of computation was brought in place by Rule 8D. No Assessing
Officer, even in his imagination could have applied the methodology, which was
brought in place by Rule 8B. Thus, retrospective operation of Rule 8B cannot be
accepted on the strength of law laid down by this Court in CWT vs. Shravan
Kumar Swarup & Sons (1994) 210 ITR 886 (SC).

The Supreme Court further
noted that Rule 8D had again been amended by Income Tax (Fourteenth Amendment)
Rules, 2016 w.e.f. 02.06.2016, by which Rule 8D sub-rule (2) had been
substituted by a new provision.

The method for determining the
amount of expenditure brought in force w.e.f. 24.03.2008 had been given a
go-bye and a new method has been brought into force w.e.f. 02.06.2016.

According to the Supreme
Court, by interpreting the Rule 8D retrospective, there would be a conflict in
applicability of 5^th & 14^th Amendment Rules which
clearly indicated that the Rule was prospective in operation, and had been
prospectively changed by adopting another methodology.

The Supreme Court took notice
of the submission of the Assessee that it is well-settled that subordinate
legislation ordinarily is not retrospective unless there are clear indications
to the same.

The Supreme Court held that
there was no indication in Rule 8D to the effect that Rule 8D intended to apply
retrospectively.

Applying the principles of
statutory interpretation for interpreting retrospectivity of a fiscal statute
and looking into the nature and purpose of sub-section (2) and sub-section (3)
of section 14A as well as purpose and intent of Rule 8D coupled with the
explanatory notes in the Finance Bill, 2006 and the departmental understanding
as reflected by Circular dated 28.12.2006, the Supreme Court was of the opinion
that Rule 8D was intended to operate prospectively.

The appeals filed by the
Revenue were therefore dismissed by the Supreme Court.

11. CIT vs. Rajasthan and Gujarati Foundation

(2018) 402 ITR 441 (SC); 13^th
December, 2017

Income of Charitable Trust –
income of a charitable trust derived from building, plant and machinery and
furniture is to be computed in a normal commercial manner after providing for
allowance for normal depreciation and deduction thereof from gross income of
the trust – Though the amount spent on acquiring the assets is treated as
application of income in the year of acquisition, still depreciation has to be
allowed on the same in the subsequent years – Amendment in section 11(6) vide
Finance (No.2) Act of 2014 noted.

In a batch of petitions and
appeals filed by the IT Department [for various assessment years including
assessment year 2006-07 in one of the appeals in which question raised brings
out the common controversy] against the orders passed by various High Courts
granting benefit of depreciation on the assets acquired by the
Respondents-assessees, the Supreme Court noted that all the Assessees were
charitable institutions registered u/s. 12A of the IT Act. For this reason, in the
previous year to the year with which it was concerned and in which year the
depreciation was claimed, the entire expenditure incurred for acquisition of
capital assets was treated as application of income for charitable purposes
u/s. 11(1)(a) of the Act. The view taken by the AO in disallowing the
depreciation which was claimed u/s. 32 of the Act was that once the capital
expenditure was treated as application of income for charitable purposes, the
Assessees had virtually enjoyed a 100 per cent write off of the cost of assets
and, therefore, the grant of depreciation would amount to giving double benefit
to the Assessee. In most of these cases, the CIT(A) had affirmed the view, but,
the Tribunal reversed the same and the High Courts had accepted the decision of
the Tribunal thereby dismissing the appeals of the IT Department.

From the judgements of the
High Courts, the Supreme Court found that the High Courts had primarily
followed the judgment of the Bombay High Court in CIT vs. Institute of
Banking Personnel Selection (2003) 264 ITR 110 (Bom). In the said
judgement, the contention of the Department predicated on double benefit was
turned down. The Supreme Court noted the reference to the decision of the
co-ordinate bench in CIT vs. Munisuvrat Jain (1994) Tax LR 1084 (Bom)
made by the High Court, in which it was held that income of a charitable trust
derived from building, plant and machinery and furniture was liable to be
computed in a normal commercial manner to be computed u/s. 11 on commercial
principles after providing for allowance for normal depreciation and deduction
thereof from gross income of the trust. The Supreme Court also noted the
reference to another decision of the co-ordinate bench in the case of Director
of IT (Exemption) vs. Framjee Cawasjee Institute (1993) 109 CTR (Bom) 463
made by the High Court, in which the Tribunal, had taken the view that when the
ITO stated that full expenditure had been allowed in the year of acquisition of
the assets, what he really meant was that the amount spent on acquiring those
assets had been treated as ‘application of income’ of the trust in the year in
which the income was spent in acquiring those assets. This did not mean that in
computing income from those assets in subsequent years, depreciation in respect
of those assets cannot be taken into account. This view of the Tribunal had
been confirmed by the High Court in the above judgement.

The Supreme Court held that
the aforesaid view taken by the Bombay High Court correctly stated the
principles of law and there was no need to interfere with the same.

The Supreme Court observed
that most of the High Courts had taken the aforesaid view with only exception
thereto by the High Court of Kerala which had taken a contrary view in Lissie
Medical Institutions vs. CIT (2012) 348 ITR 344 (Ker).

The Supreme Court noted that
the legislature, realising that there was no specific provision in this behalf
in the IT Act, has made amendment in section 11(6) of the Act vide Finance
Act No. 2/2014 which became effective from the asst. yr. 2015-16. The Supreme
Court agreed with the Delhi High Court that the said amendment was prospective
in nature.

The Supreme Court clarified
that it follows that once Assessee is allowed depreciation, he shall be
entitled to carry forward the depreciation as well.

For the aforesaid reasons, the Supreme
Court affirmed the view taken by the High Courts in these cases and dismissed
these matters.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

12. Pr. Commissioner of Income Tax vs. A.A.
Estate Pvt. Ltd. (2019) 413 ITR 438 (SC)

Appeal to the High Court – There is
a distinction between the questions proposed by the appellant for admission of
the appeal and the questions framed by the Court – The questions proposed by
the appellant fall u/s 260-A(2)(c) of the Act, whereas the questions framed by
the High Court fall u/s 260-A(3) of the Act – The appeal is to be heard on
merits only on the questions framed by the High Court under sub-section (3) of
section 260-A of the Act as provided u/s 260-A(4) of the Act – The expression
‘such question’ referred to in sub-section (5) of section 260-A of the Act means
the questions which are framed by the High Court under sub-section (3) of
section 260-A at the time of admission of the appeal and not the one proposed
in section 260-A(2)(c) of the Act by the appellant – The respondent has a right
to argue ‘at the time of hearing’ of the appeal that the questions framed are
not involved in the appeal by taking recourse to sub-section (5) of section
260-A of the Act

In the case of the
respondent-assessee who was engaged in the business of development and building
of properties, the Assessing Officer completed the assessment u/s 143(3) read
with section 153A of the Income Tax Act, 1961 for the assessment year 2008-09
and determined the total income at Rs. 7,77,49,790.

Subsequently, the AO issued a
notice u/s 148 of the Act seeking to reopen the assessment on the basis of
information received from the ADIT (Investigation). By this notice, the AO
proposed to make an addition of Rs. 1,70,94,000 towards unaccounted sale
proceeds alleged to have been made by the assessee on the basis of one
document, which was seized by the Revenue Department in their search operation
carried out on 30^th November, 2007 in the business premises of
another assessee by name M/s Ashok Buildcom Ltd.

The assessee objected to the
issuance of the notice contending inter alia that, first, there was no
factual foundation for issue of notice; second, there was no case for any
‘escaped assessment’; and third, there was no case or ‘reason to believe’.

The AO overruled these objections
and passed a re-assessment order by adding the sum of Rs. 1,70,94,000 in the
total income of the assessee.

Aggrieved at this, the assessee
filed an appeal before the CIT (Appeals). But the appeal was dismissed and the
addition made by the AO was upheld. Still aggrieved, the assessee filed a
second appeal before the ITAT. The Tribunal allowed the appeal and set aside
the order of the CIT (Appeals).

However, the Commissioner of Income
Tax felt aggrieved and filed an appeal before the High Court u/s 260-A of the
Act. By its impugned order, the High Court dismissed the appeal and affirmed
the order of the Tribunal, giving rise to the filing of the special leave to
appeal by the Commissioner of Income Tax in the Supreme Court.

The short question which therefore
arose for consideration before the Supreme Court was whether the High Court was
justified in dismissing the appeal filed by the Commissioner of Income Tax.

According to the Supreme Court, the
case had to be remanded to the High Court for the following reasons:

First, the High Court did not
formulate any substantial question of law as was required to be framed u/s
260-A of the Act.

Second, in para 2 of the impugned
order, the High Court observed that ‘Revenue urges following questions of law
for our consideration’. However, from a reading of para 2, the two questions
set out in it were not the questions framed by the High Court as were required
to be framed u/s 260-A(3) of the Act for hearing the appeal but were the
questions urged by the appellant.

According to the Supreme Court,
there is a distinction between the questions proposed by the appellant for
admission of the appeal and the questions framed by the Court. The questions
proposed by the appellant fall u/s 260-A(2)(c) of the Act, whereas the
questions framed by the High Court fall u/s 260-A(3) of the Act. The appeal is
to be heard on merits only on the questions framed by the High Court under
sub-section (3) of section 260-A of the Act as provided u/s 260-A(4) of the
Act.

Third, if the High Court was of the
view that the appeal did not involve any substantial question of law, it should
have recorded a categorical finding to that effect saying that the questions
proposed by the appellant either do not arise in the case or / and are not
substantial questions of law so as to attract the rigor of section 260-A of the
Act for its admission and, accordingly, should have dismissed the appeal in
limine.

According to the Supreme Court,
this was not done and instead the High Court without admitting the appeal and
framing any question of law had issued notice of appeal to the assessee, heard
both the parties on the questions urged by the appellant and dismissed it.
According to the Supreme Court, the respondent had a right to argue ‘at the
time of hearing’ of the appeal that the questions framed were not involved in
the appeal and this the respondent could urge by taking recourse to sub-section
(5) of section 260-A of the Act. But this stage in this case did not arise
because the High Court neither admitted the appeal nor framed any question as
required under sub-section (3) of section 260-A of the Act. The expression
‘such question’ referred to in sub-section (5) of section 260-A of the Act
means the questions which are framed by the High Court under sub-section (3) of
section 260-A at the time of admission of the appeal and not the ones proposed
in section 260-A(2)(c) of the Act by the appellant.

The Supreme Court, therefore,
concluded that the High Court had not decided the appeal in conformity with the mandatory procedure prescribed in section 260-A of the Act.

Fourth, the High Court should have
seen that the following substantial questions of law did arise in the appeal
for being answered on their respective merits:

(i) Whether the reasons contained
in notice u/s 148 are relevant and sufficient for issuance of the said notice
dated 22^nd September, 2010?

(ii) Whether any case of escaped
assessment within the meaning of section 147 read with section 148 of the Act
for the assessment year in question is made out by the Commissioner of Income
Tax on the basis of the reasons set out in the notice?

(iii) Whether a case of presumption
as contemplated u/s 132(4A) of the Act could be drawn against the assessee on
the basis of a document (Annexure AB-1) which was seized in a search operation
carried out in the business premises of another assessee, M/s Ashok Buildcom,
by adding a sum of Rs. 1,70,94,000 for determining the total tax liability of
the respondent for the year in question as an escaped assessment so as to
enable the Department to issue notice dated 22^ndSeptember, 2010 u/s
148 of the Act to the respondent?

The Supreme Court thus remanded the
case to the High Court for deciding the appeal afresh to answer the questions
framed above on merits in accordance with the law.

13. Pr. Commissioner of Income Tax vs. Ballarpur
Industries Ltd. (2019) 413 ITR 447 (SC)

Appeal to the Appellate Tribunal –
Tribunal is the final fact-finding authority – Inconsistent findings recorded
by the Tribunal – High Court dismissed the appeal – Appeal to the Supreme Court
— Matter remanded for fresh consideration

In the case of the
respondent-assessee, a limited company, which was engaged in the business of
manufacturing of various kinds of papers, a question arose before the AO in the
assessment for assessment year 1993-94 as to what was the true nature of
payment of Rs. 3.25 crores made by the assessee to one Mr. G.R. Hada pursuant
to the compromise arrived at between the assessee company and Mr. Hada in a
civil suit filed by the latter against the company and others.

According to the assessee, Mr. Hada
and the company were the joint promoters of a company called M/s Andhra Pradesh
Rayons Limited in which Mr. Hada was holding 10.25% shares and the remaining
shares were held by other promoter shareholders in different percentages. Since
the dispute arose amongst the promoter shareholders, Mr. Hada filed a civil
suit against the assessee and other promoter shareholders on the basis of an
agreement, which was entered into amongst the promoter shareholders. In the
abovementioned suit, a compromise was arrived at between the assessee and Mr.
Hada. Pursuant to the said compromise, the assessee paid a sum of Rs. 3.25
crores to Mr. Hada.

The assessee claimed a deduction of
Rs. 3.25 crores in the assessment year in question as revenue expenditure
because, according to them, they had paid the said sum to Mr. Hada for running
their business.

The AO examined the claim in the
context of the terms of the agreement and held that the claim could not be
considered as ‘revenue expenditure’. He therefore rejected the claim.

The assessee
felt aggrieved by this order and filed an appeal to the Commissioner of Income
Tax (Appeals). However, the CIT (Appeals) confirmed the addition made by the
AO.

The assessee filed a second appeal
in the Income Tax Appellate Tribunal. The Tribunal examined the question and
allowed the appeal and directed the AO to allow the deduction of Rs. 3.25
crores as claimed by the assessee.

But now the Commissioner of Income
Tax-Revenue felt aggrieved and filed an appeal in the High Court. The High
Court dismissed the appeal, which gave rise to the filing of an appeal by way
of special leave by the Revenue in the Supreme Court.

According to the Supreme Court, the
short question which arose for its consideration was whether the High Court was
justified in dismissing the appeal filed by the Commissioner of Income Tax. The
Court held that the order of the High Court as well as the order of the
Tribunal had to be set aside and the case was required to be remanded to the
Tribunal to decide the appeal filed by the assessee afresh on merits in
accordance with law for the following reasons:

In para 26 of the order, the
Tribunal has recorded a finding, which read as under:

‘…The AO did not dispute the fact
that the expenditure related to the business of the Assessee. The CIT (A),
however, reversed the findings of the AO and held that the expenditure cannot
be considered as business expenditure. A perusal of the CIT (A)’s order can
only lead to a conclusion that the CIT (A) was of the view that the expenditure
in question was not a capital expenditure but of a revenue nature…’

The aforesaid observation of the
Tribunal, on what the AO and the CIT (Appeals) held, was not correct and rather
inconsistent with the finding of the AO. The Tribunal, therefore, had not
correctly appreciated what the AO and the CIT (Appeals) had held and what was
their reasoning which led to their respective conclusions.

Having wrongly observed about their
respective reasoning and the finding, the Tribunal proceeded to examine the
case and eventually reversed the order of CIT (Appeals). The High court did not
notice the aforesaid observation of the Tribunal and upheld the order of the
Tribunal.

According to the Supreme Court, in
such a situation like the one arising in the case and keeping in view the
question involved, the matter deserved to be remanded to the Tribunal for
deciding the appeal filed by the assessee afresh on merits, because the
Tribunal being the last Court of appeal on facts its finding on the question of
facts was of significance.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

This
feature was launched in April, 2002, to summarise the direct taxes judgments of
the highest court of the country. Although Closements carried analysis of
Supreme Court decisions, this column was started as the number of decisions on
tax matters from the Supreme Court kept increasing. Kishor Karia and Atul
Jasani, the first contributors, continue to digest important cases. The feature
covers judgments other than those covered under Closements.

16.
Ravi Agrawal vs. Union of India (UOI) and Anr. (2019) 410 ITR 399 (SC)

Special Deduction u/s. 80DD in respect of
maintenance including medical treatment of a dependant who is a person with
disability – Supreme Court urged to Union of India to have a relook into this
provision considering the hardships faced by the parent/guardian of the
disabled

A Public Interest Litigation was filed by
the Petitioner in the interest of handicapped children whose parents have taken
Jeevan Aadhar Policy from the Life Insurance Corporation of India (for short,
LIC) for the livelihood of their children.

The Petitioner pointed out that even when
the entire subscription is paid under this policy meant for handicapped
persons, this policy does not have maturity claim. The amount is payable to the
dependant only on the demise of the proposer/life assured. This was in
confirmity with the requirement of section 80DD

It was the submission of the Petitioner that
by incorporating such a provision, the Respondents are denying the benefit of
the insurance to the handicapped persons to get annuity or lump sum amount
during the lifetime of the parent/guardian of such a handicapped person,
whereas the beneficiaries of other life insurance policy are getting annuity
during the lifetime of the person who has taken insurance policy. This,
according to the Petitioner, violates the fundamental right of equality of the
handicapped person enshrined in Article 14 of the Constitution.

According to the Supreme Court, in essence,
the grievance of the Petitioner was that benefit of Jeevan Aadhar policy should
not be deferred till the death of the Assessee/life assured and it should be
allowed to be utilised for the benefit of the disabled person even during the
lifetime of the Assessee.

It was the submission of the Respondent No.
1/Union of India that the aforesaid provision was specifically provided for in
the Act keeping in view the fact that the guardians of children with disability
were always faced with the grim reality about the need for maintenance of the
disabled after the death of the primary care giver, i.e. the parent or the
guardian. Many of them would like to deposit some amount during their lifetime
in some special instrument which would ensure payment of a reasonable sum
regularly to the disabled on their death. Thus, a separate deduction from Gross
Total Income of a specified amount deposited in a year in any scheme of LIC or
any other insurer specifically framed for providing recurring or lump sum
payment for the maintenance and upkeep of a handicapped dependant after the
death of the Assessee and approved by the CBDT in this behalf was incorporated
in the statute. As the scheme was designed to, to a great extent, to assuage
the anxiety in the minds of parents/guardians of handicapped dependants about
the destiny of their wards on their death and, therefore, to allow for annuity
payments to the handicapped dependant under Jeevan Aadhar policy to commence
after a certain age of the subscriber was not possible.

Meeting the argument of the Petitioner based
on Article 14 of the Constitution of India, it is argued that the deduction
u/s. 80DD of the Act had been specifically provided for persons with
disability. This was a valid classification for providing specific regime for
this class of persons.

The Supreme Court observed that section 80DD
of the Act was a provision made by the Parliament under the Act in order to
give incentive to the persons whose dependants were persons with disability.
Incentive was to give such persons concessions in income tax by allowing
deductions of the amount specified in section 80DD of the Act in case such
parents/guardians of dependants with disability take insurance policies of the
nature specified in this provision. Purpose was to encourage these
parents/guardians to make regular payments for the benefit of dependants with
disability. In that sense, the Legislature, in its wisdom thought it
appropriate to allow deductions in respect of such contribution made by the
parent/guardian in the form of premium paid in respect of such insurance
policies. This deduction was admissible only when conditions stipulated therein
are satisfied. Insofar as insurance policy was concerned, it incorporated a condition
(which was impugned in the present writ petition) to the effect that the amount
shall not be given to the handicapped persons during the lifetime of the
parent/guardian/life assured. This was in conformity with section 80DD(2)(b) of
the Act.

According to the Supreme Court, to some
extent, the grievance of the Petitioner was justified in this behalf in the
plea that when there was a need to get these funds for the benefit of
handicapped persons, that would not be given to such a person only because of
the reason that the assured who was a parent/guardian was still alive. This
would happen even when the entire premium towards the said policy has been paid
as the policy did not have maturity claim. Thus, after making the entire
premium for number of years, i.e. during the duration of the policy, the amount
would still remain with the LIC.

However, the Supreme Court noted that the
purpose behind such a policy was altogether different. As noted from the
provisions of section 80DD as well as from the explanatory memorandum of the
Finance Bill, 1998, by which this provision was added, the purpose was to
secure the future of the persons suffering from disability, namely, after the
death of the parent/guardian. The presumption was that during his/her lifetime,
the parent/guardian would take care of his/her handicapped child.

Further, the Supreme Court observed that
such a benefit of deduction from income for the purposes of tax was admissible
subject to the conditions mentioned in section 80DD of the Act. The Legislature
had provided the condition that amount/annuity under the policy was to be
released only after the death of the person assured. This was the legislative
mandate. There was no challenge to this provision. The prayer was that section
80DD of the Act be suitably amended.

According to the Supreme Court, it could not
give a direction to the Parliament to amend or make a statutory provision in a
specified manner. The Court can only determine, in exercise of its power of
judicial review, as to whether such a provision passes the muster of the
Constitutional Scheme. Though, there was no specific prayer in this behalf, but
in the body of writ petition, argument of discrimination was raised. However,
according to the Supreme Court, the Respondents were able to successfully
demonstrate that the main provision was based on reasonable classification,
which had a valid rational behind it and there was a specific objective sought
to be achieved thereby.

The Supreme Court noted that the Petitioner
may be justified in pointing out that there could be harsh cases where
handicapped persons may need the payment on annuity or lump sum basis even
during the lifetime of their parents/guardians. For example, where guardian has
become very old but is still alive, though he may not able to earn any longer
or he may be a person who was in service and has retired from the said service
and is not having any source of income. In such cases, it may be difficult for
such a parent/guardian to take care of the medical needs of his/her disabled
child. Even when he/she has paid full premium, the handicapped person is not
able to receive any annuity only because the parent/guardian of such
handicapped person is still alive. There may be many other such situations.

However, it is for the Legislature to take
care of these aspects and to provide suitable provision by making necessary
amendments in section 80DD of the Act. In fact, the Chief Commissioner for
Persons with Disabilities has also felt that like other policy holders, Jeevan
Aadhar policy should also be allowed to mature after 55 years of age of the
proposer and the annuity amount should be disbursed through the LLCs or
National Trust.

In the aforesaid circumstances, the Supreme
Court disposed of this writ petition by urging upon Respondent No. 1 to have a
relook into this provision by taking into consideration all the aspects,
including those highlighted by it in the judgment, and explore the possibility
of making suitable amendments.

17. Commissioner of Income-tax (Exemptions) vs.
Progressive Education Society (2019) 410 ITR 370 (SC)

Appeal to the High Court – Condonation of delay – Delay of 362 days –
Delay owing to difference of opinion between two officers – Appeal filed after
taking legal oinion – Delay condoned subject to payment of costs

The Supreme Court found that the High Court
had dismissed the appeal preferred by the Appellant on the ground of delay. The
delay was of 362 days. As per the High Court, the delay was not satisfactorily
explained. The Supreme Court noted that the main cause of the delay was
difference of opinion between the two Officers and ultimately legal opinion was
taken and it was decided to file the appeal.

According to the Supreme Court, having
regard to the importance of the matter, the High Court should hear the appeal
on merits. The Supreme Court set aside the impugned order condoning the delay
in filing the appeal in the High Court subject to payment of costs of rupees
one lakh to be paid the respondent within a period of four weeks.

The Supreme Court remitted the matter to the
High Court with a direction that it shall decide the appeal on merits.

18. CIT (LTU) vs. Reliance Industries Ltd (2019) 410 ITR 466 (SC)

Business expenditure – Interest on borrowed
capital – The finding that the interest free funds available to the assessee
were sufficient to meet its investment was a finding of fact

The Supreme Court noted that the appeals
before it arose from the judgment of the Bombay High Court dated 22 and 23
August, 2017 for Assessment Years 2003-04, 2004-05, 2005-06 and 2006-07. The
High Court had passed a common order for all the Assessment Years. The appeals
by the Revenue raised the following questions:

1. Whether the High
Court is correct in holding that interest amount being interest referable to
funds given to subsidiaries is allowable as deduction u/s. 36(1)(iii) of the
Income Tax Act, 1961 (for short the Act’) when the interest would not have been
payable to banks, if funds were not provided to subsidiaries;

2. Whether on the
facts and in the circumstances of the case and in law, the High Court is
correct in upholding the Tribunal’s view that prior to insertion of
Explanation-5 to section 32 of the Act, the claim of depreciation was optional
and could not be thrust on the assessee, if it had not claimed it;

3. Whether on the
facts and in the circumstances of the case and in law, the High Court is
correct in upholding the Tribunal’s view that pre-operative expenses incurred
in connection with creation of plant & machinery in units which have not
commenced production, are revenue in nature;

4. Whether on the
facts and in the circumstances of the case and in law, the High Court is
correct in upholding the Tribunal’s view that expenditure on estimated basis
cannot be reduced from dividends for deduction u/s. 80M of the Act; and

5. Whether on the
facts and in the circumstances of the case and in law, the High Court is
correct in upholding the Tribunal’s view in sustaining the deletion of the
Transfer Pricing adjustment made to consultancy charges, especially when the
TPO had adopted the same mark up in relation to its European associate, what
the assessee itself had adopted in relation to its USA associate.

The Supreme Court held that insofar as the
first question was concerned, the issue raised was a pure question of fact. The
High Court had noted the finding of the Tribunal that the interest free funds
available to the assessee were sufficient to meet its investment. Hence, it
could be presumed that the investments were made from the interest free funds
available with the assessee. The Tribunal has also followed its own order for
Assessment Year 2002-03. In view of the above findings, the Supreme Court found
no reason to interfere with the judgment of the High Court in regard to the
first question. Accordingly, the appeals were dismissed in regard to the first
question.

The Supreme Court held that insofar as the
second question was concerned, the issue, was governed by the decision of this
Court in Plastiblends India Limited vs. Additional Commissioner of Income
Tax, Mumbai and Another (2017) 398 ITR 568 (SC). The High Court did not
have the benefit of this decision. Hence, it was appropriate that the issue be
remanded for fresh decision by the High Court bearing in mind the law laid down
in the above case. The Supreme Court kept open all the rights and contentions
of the Revenue and the assessee in regard to the applicability of the provision
for the relevant Assessment Years.

As regards, the third question pertaining to
pre- operative expenses; the fourth question pertaining to the deduction u/s.
80M of the Act; and the fifth question pertaining to transfer pricing, the
Supreme Court found that the High Court has failed to independently evaluate
the merits of the departmental appeals. Hence, the Supreme Court was of the opinion that it would be appropriate that the aforesaid
questions were considered afresh by the
High Court.

In order to facilitate a fresh exercise
being conducted in relation to the aforesaid four questions (Question Nos.2, 3,
4 and 5), the Supreme Court allowed the appeals and set aside the impugned
judgment of the High Court. The appeals were restored to the file of the High
Court for that purpose.

These appeals were accordingly disposed of.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

11.
Mahabir Industries vs. Pr. CIT (2018) 406 ITR 315 (SC)

Industrial undertaking – Deduction u/s.
80IA, 80IB and 80IC – The Assessees had started claiming and were allowed
deductions from the Assessment Years 1998-99 and 1999-2000 u/s. 80-IA and from
the Assessment Year 2000-01 to Assessment Year 2005-06 under section 80-IB of
the Act and thus were entitled to the deduction under the new provision i.e.
section 80-IC on fulfilling conditions contained in sub-section (2) of section
80-IC for the first time for the Assessment Year 2006-07

The Assessee
manufactured polythene for which it had its factory in Shimla, Himachal
Pradesh. The activity undertaken by the Assessee, an industrial undertaking,
qualified for exemption from income tax u/s. 80-IA of
the Act.

This deduction
under section 80-IA was claimed and allowed for two Assessment Years i.e.
1998-99 and 1999-2000.

Section 80-IA of the
Act was originally introduced in the year 1991 by the Finance (No. 2) Act, 1991
w.e.f. April 1, 1991. There were amendments in the section from time to time.
This section was amended by the Finance Act, 1999 w.e.f. April 1, 2000. Along
with this provision, section 80-IB was also introduced for the first time by
the same Finance Act, 1999.

From the Assessment
Year 2000-01 to Assessment Year 2005-06, the Assessee claimed deduction u/s.
80-IB.

Another provision
in the form of section 80-IC was inserted by Finance Act, 2003 w.e.f. April 1,
2004. The provisions of section 80-IC provided deduction to manufacturing units
situated in the State of Sikkim, Himachal Pradesh and Uttaranchal and
North-Eastern States. The deduction was provided to new units established in
the aforesaid States, and also to existing units in those States if substantial
expansion was carried out.

The Assessee completed substantial expansion (by investing in new plant
and machinery of value more than 50% of the value of plant and machinery
already installed as on 1 April, 2005) to the manufacturing unit situated at
Baddi, Himachal Pradesh in the Assessment Year 2006-07. In view of the
substantial expansion, the Assessee claimed deduction u/s. 80-IC @100% for
Assessment Years 2006-07 and 2007-08, which was also allowed by the Assessing
Officer (AO) after passing the order u/s. 143(3) of the Act.

However,
thereafter, deductions for the Assessment Year 2008-09 and Assessment Year
2009-2010 were rejected by the AO on the ground that this was 11^th
and 12^th year of deduction and as per section 80-IC(6), total
deductions u/s. 80-IC and section 80-IB cannot exceed the total period of ten
years. Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal
upheld the order of the AO. The High Court dismissed the appeals on the ground
that it cannot claim deduction u/s. 80-IC, 80-IB or 10C for a period exceeding
ten years.

The Assessee framed
the questions of law in the appeal before the Supreme Court:

(a) Whether the Hon’ble High Court was justified
in holding that the Petitioner was not entitled to deduction u/s. 80-IC of the
Act by virtue of provision s/s. (6), when the same was not even applicable to
the Petitioner?

(b) Whether the Hon’ble High Court was justified in
holding that the provisions of section 80-IC(6) of the Act apply to all the
undertaking claiming deduction u/s. 80-IB(4) of the Act when 80-IC(6) refers to
only those undertakings which are covered by second proviso to section
80-IB(4)?

(c) Whether the Hon’ble High Court was justified
in holding that the Petitioner is not eligible for deduction u/s. 80-IC for a
period of 10 assessment years when substantial expansion was carried out by the
Petitioner and a substantially new unit was claiming deduction u/s. 80-IC of
the Act?

(d) Whether the Hon’ble High Court was justified in
holding that the Petitioner was not entitled to deduction u/s. 80-IC of the Act
for assessment year 2008-09 and 2009-10 when the total period of deduction of
ten years was expiring after assessment year 2009-10?

The Supreme Court
noted that the High Court judgment had taken a categorical view that the moment
‘substantial expansion’ is completed as per section 80-IC(8)(ix), the statutory
definition of ‘initial assessment year’ {Section 80-IC(8)(v)} comes into play.
As a consequence, section 80-IC(3)(ii) would entitle the unit to hundred per
cent deduction for five years commencing with completion of ‘substantial
expansion’ followed by twenty-five per cent deduction for next five years i.e.
subject to maximum of ten years. According to the Supreme Court, the High
Court, thus, accepted that when the substantial expansion is done in a
particular Assessment Year and that is made during the period mentioned in
sub-section (2) of section 80-IC, not only benefit admissible u/s. 80-IC shall
get triggered, the year in which such substantial expansion is completed is to
be treated as ‘initial assessment year’. Having said so, it has put a cap of
ten years by invoking the provision of section 80-IC(6). According to the
Supreme Court, as per the provisions of sub-section (6) of section 80-IC, no
deduction is allowed to any undertaking or enterprise under that section, where
the total period of deduction inclusive of the period of deduction under that
section, or under the second proviso to sub-section (4) of section 80-IB or
u/s. 10C, as the case may be, exceeds ten assessment years. The total period of
ten years, thus, is to be counted in the following three circumstances:

(a) When the
deduction has been given u/s. 80-IC for a period of ten years, no further
deduction is admissible.

(b) When the
deduction is given under second proviso to sub-section (4) of section 80-IB.

The said second
proviso reads as under:

Provided further
that in the case of such industries in the North-Eastern Region, as may be
notified by the Central Government, the amount of deduction shall be hundred
per cent of profits and gains for a period of ten assessment years, and the
total period of deduction shall in such a case not exceed ten assessment years.

This provision
pertains to those industries which are in the North-Eastern Region.

It is again a
special provision in respect of certain industrial undertakings in
North-Eastern Region.

The Supreme Court
held that the Assessee in the instant case had not got deduction u/s. 80-IC for
a period of ten years as he started claiming deduction under this provision
w.e.f. Assessment Year 2006-07. Situation Nos. (b) and (c) mentioned above would
not apply to the Assessee as it’s undertaking/enterprise was not established in
North-Eastern Region. It was, thus, clear that the High Court had failed to
appreciate that the provisions of section 80-IC(6) of the Act state that the
total period of deduction u/s. 80-IC and section 80-IB cannot exceed ten
assessment years only if the manufacturing unit was claiming deduction under
second proviso to section 80-IB(4) of the Act i.e. units located in the
North-Eastern State.

According to the
Supreme Court, the matter could be looked into from another angle. U/s. 80-IA,
deduction is provided to such industrial undertakings or enterprises which are
engaged in infrastructure development etc., provided they fulfill the
conditions mentioned in s/s. (4) thereof. Section 80-IB makes provisions for
deduction in respect of those industrial undertakings, other than
infrastructure development undertakings, which are enumerated in the said
provision. On the other hand, the intention behind section 80-IC is to grant deduction
to the units making new investments in the State by establishing new
manufacturing unit or even to the existing manufacturing unit which carried out
substantial expansions. The purport behind the three types of deductions
specified in section 80-IA, section 80-IB and section 80-IC was, thus,
different. Section 80-IC stipulates the period for which hundred per cent
deduction is to be given and then deduction at reduced rates is to be given. If
the Assessee had earlier availed deduction u/s. 80-IA and section 80-IB, that
would be of no concern in as much as on carrying out substantial expansion, which
was carried out and completed in the Assessment Year 2006-07, the Assessee became entitled to deduction u/s. 80-IC from the initial
year. The term ‘initial year’ is referable to the year in which substantial
expansion has been completed, which legal position was stated by the High Court
itself and even accepted by the Department as it had not challenged that part
of the judgment.

The inclusion of
period for the deduction is availed u/s. 80-IA and section 80-IB, for the
purpose of counting ten years, is provided in sub-section (6) of section 80-IC
and it is limited to those industrial undertakings or enterprises which are
set-up in the North-Eastern Region. By making specific provision of this kind,
the Legislature had shown its intent, namely, where the industry is not located
in North-Eastern State, the period for which deduction is availed earlier by an
Assessee u/s. 80-IA and section 80-IB would not be reckoned for the purpose of
availing benefit of deduction u/s. 80-IC of the Act.

The Supreme Court
observed that insofar as the factum of substantial expansion of the
Assessee’s unit in the Assessment Year 2006-07 was concerned, the same was not
subject matter of any controversy in the instant case. It hads been accepted by
the Department that Assessee had carried out substantial expansion. Precisely,
for this reason, the AO had allowed deduction for Assessment Years 2006-07 and
2007-08. Therefore, issue was not as to whether there is a substantial
expansion or not. The issue was only as to how a period of ten years was to be
calculated, namely, whether those Assessment Years in respect of which
deduction u/s. 80-IA and section 80-IB was allowed were to be counted for the
purpose of giving deduction u/s. 80-IC.

The Supreme Court
was of the opinion that it was wrong on the part of the AO not to allow
deduction to the Assessee u/s. 80-IC for the Assessment Years 2008-09 and
2009-2010. As a result, the judgment of the High Court on this aspect was set
aside and the appeals were accordingly allowed.

12. CIT vs. Classic Binding Industries (2018) 407 ITR 429 (SC)

Industrial undertaking – Deduction u/s.
80IC – After availing deduction for a period of 5 years @ 100% of such profits
and gains from the ‘units’, the Assessees would be entitled to deduction for
remaining 5 Assessment Years @ 25% (or 30% where the Assessee is a company), as
the case may be, and not @ 100%.

The Assessee firm
derived income from manufacturing of printed embossed book binding cover
material of cotton in sheet form and security fiber of dual coloured
combination. The Assessee firm comprised of nine partners during the relevant
assessment year. The Assessee started its business activity/operation on 11^th
July, 2005 and initial Assessment Year for claim of deduction u/s. 80-IC of the
Act was Assessment Year 2006-07. The Assessee had already claimed deduction
u/s. 80-IC to the extent of the 100% eligible profit for five Assessment Years
2006-07 to Assessment Year 2010-11. However, it was noticed that the Assessee
firm had again claimed 100% deduction against eligible profits in the relevant
Assessment Year 2012-13 which is seventh year of production for the firm by
claiming substantial expansion in Financial Year 2010-11.

The Assessee was
asked to furnish the reasons and justification for the said claim of 100% as
against the eligible norm of 25%. The Assessee submitted its reasons for claim
stating that the Assessee fulfills all the conditions for the claim of 100%
deduction.

The Assessing
Officer found that in view of the provisions of section 80-IC of the Act
Assessee firm had already claimed deduction u/s. 80-IC of the Act at the rate
of 100% for five years from Assessment Year 2006-07 to Assessment Year 2010-11,
i.e., from the date of setting up of the industrial undertaking and in view of
the same, it would be eligible for claim of deduction @ 25% of its eligible
business profits for the remaining five years, i.e., from Assessment Year
2011-2012 to Assessment Year 2015-2016. The Assessing Officer denied the claim
of the enhanced deduction in view of the substantial expansion was claimed by
the Assessee and, accordingly, restricted the deduction to 25% of eligible
profits for the assessment year 2012-13.

On appeal, the
CIT(A) following the decision of the jurisdictional Tribunal in the case of Hycron
Electronics vs. ITO and other related cases, upheld the order of the
Assessing Officer and dismissed the appeal of the Assessee for 100% deduction.

Feeling aggrieved,
the Assessee filed further appeal before the ITAT. While observing that both
the parties agreed that the issue involved in appeals, was squarely covered
against the Assessee in view of the decision of the coordinate bench of ITAT in
the case of Hycron Electronics, dismissed the appeal by a composite order for
Assessment Years 2011-12 and Assessment Year 2012-13 by holding that Assessee
was eligible for deduction u/s. 80 of the Act @ 25% of the profit derived from
industrial undertaking for these years and not @ 100% of deduction claimed by
the Assessee.

Dissatisfied with
the aforesaid order, Assessee filed appeal u/s. 260A before the High Court of
Himachal Pradesh, Shimla raising therein substantial questions of law. The
result of other Assessees was also on almost same pattern, who filed their
respective appeals as well. The High Court decided the issue in a composite
judgment, in favour of all these Assessees. The High Court held that there was
no restriction that undertaking or enterprise established after 7^th
January, 2003 could not carry out ‘Substantial Expansion’ and could not be
carried out more than once as long as period of eligibility for claiming
deduction u/s. 80-IC of the Act.

The Supreme Court
noted the provisions of section 80IC of the Act and observed that whereas the
exemption is provided @ 100% of such profits and gains for five assessment
years commencing with the initial assessment years and, thereafter, 25% (or 30%
where the Assessee is a company) of the profits and gains for next five years.
The deduction is limited to a period of 10 years.

In this backdrop,
according to the Supreme Court, the question before it was as to whether these
Assessees, who had availed deductions @ 100% for first five years on the ground
that they had set up a manufacturing unit as prescribed under s/s. (2) of the
Act, could start claiming deductions @ 100% again for next five years as they
had undertaken “substantial expansion” during the period mentioned in
s/s. (2)?

The Supreme Court
noted that in the instant case, it was concerned with the Assessees who had
established their undertakings in the State of Himachal Pradesh. S/s. (3),
mentions the period of 10 years commencing with the initial Assessment Year.
S/s. (6) puts a cap of 10 years, which is the maximum period for which the
deduction can be allowed to any undertaking or enterprise under this section,
starting from the initial Assessment Year. Another significant feature under
s/s. (3) is that the deduction allowable is 100% of such profits and gains from
an undertaking or an enterprise for five Assessment Years commencing with the
initial Assessment Year and thereafter the deduction is allowable at 25% (or
30% where the Assessee is a company) of the profits and gains. Cumulative
reading of these provisions brings out the following aspects:

(a) Those undertakings or enterprises fulfilling
the conditions mentioned in sub-section (2) of section 80-IC become entitled to
deduction under this provision.

(b) This deduction is allowable from the initial
Assessment Year. “Initial Assessment Year” is defined in section
80-IB(14)(c) of the Act.

(c) The deduction is @ 100% of such profits and
gains for first 5 Assessment Years and thereafter a deduction is permissible @
25% (or 30% where the Assessee is a company).

(d) Total period of deduction is 10 years, which
means 100% deduction for first 5 years from the initial Assessment Year and 25%
(or 30% where the Assessee is a company) for the next 5 years.

According to the
Supreme Court, keeping in mind the aforesaid scheme and spirit behind this
provision, such a situation could not be countenanced where an Assessee is able
to secure deduction @ 100% for the entire period of 10 years. If that was
allowed it would amount to doing violence to the provisions of sub-section (3)
read with sub-section (6) of section 80-IC. A pragmatic and reasonable interpretation
of section 80-IC would be to hold that once the initial Assessment Year
commences and an Assessee, by virtue of fulfilling the conditions laid down in
sub-section (2) of Section 80-IC, starts enjoying deduction, there cannot be
another “Initial Assessment Year” for the purposes of section 80-IC
within the aforesaid period of 10 years, on the basis that it had carried
substantial expansion in its unit.

The Supreme Court
expressly stated that it was conscious of its recent judgment in Mahabir
Industries vs. Principal Commissioner of Income Tax (406 ITR 315). However,
a fine distinction needed to be noted between the two sets of cases. In Mahabir
Industries, the Assessees had availed the initial deduction under a different
provision, namely, section 80-IA of the Act, i.e. by fulfilling the conditions
mentioned in sub-section (4) of section 80-IA. Those conditions were altogether
different. Deduction in respect of profits and gains under the said provision
was admissible when these profits and gains are from industrial undertakings or
enterprises engaged in infrastructure development etc. Even this availment
started at a time when section 80-IC was not even on the statute book. Section
80-IC was inserted by the Finance Act, 2003 with effect from April 01, 2004.
The Assessees in those cases had started claiming and were allowed deductions
from the Assessment Years 1998-99 and 1999-2000 u/s. 80-IA and from the
Assessment Year 2000-01 to Assessment Year 2005-06 u/s. 80-IB of the Act. The
deduction was, thus, claimed by the Assessees in those appeals under the new
provision i.e. section 80-IC on fulfilling conditions contained in sub-section
(2) of section 80-IC for the first time for the Assessment Year 2006-07. Thus,
insofar as those cases were concerned, the initial Assessment Year u/s. 80-IC
started only from the Assessment Year 2006-07. In contrast, position here was
altogether different. These Assessees had availed deduction u/s. 80-IC alone.
Initially, they claimed the deduction on the ground that they had set up their
units in the State of Himachal Pradesh and after availing the deduction @ 100%
they wanted continuation of this rate of 100% for the next 5 years also under
the same provision on the ground that they had made substantial expansion. The
Supreme Court held that, as pointed out above, once the Assessees had started
claiming deduction u/s. 80-IC and the initial Assessment Year has commenced
within the aforesaid period of 10 years, there could not be another initial
Assessment Year thereby allowing 100% deduction for the next 5 years also when
s/s. (3), in no uncertain terms, provides for deduction @ 25% only for the next
5 years. Also, the Assessees accepted the legal position that they could not
claim deduction of more than 10 years in all u/s. 80-IC.

The Supreme Court therefore held that after
availing deduction for a period of 5 years @ 100% of such profits and gains
from the ‘units’, the Assessees would be entitled to deduction for remaining 5
Assessment Years @ 25% (or 30% where the Assessee is a company), as the case
may be, and not @ 100%. The question of law was, thus, answered in favour of
the Revenue thereby allowing all these appeals.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

4. Pr. Commissioner of Income Tax (New Delhi) vs.
Maruti Suzuki India Limited (2019) 416 ITR 613 (SC)

Assessment
– Notice to non-existing person – Despite the fact that the AO was informed of
the amalgamating company having ceased to exist as a result of the approved
scheme of amalgamation, the jurisdictional notice was issued only in its name –
The basis on which jurisdiction was invoked was fundamentally at odds with the
legal principle that the amalgamating entity ceases to exist upon the approved
scheme of amalgamation – Participation in the proceedings by the appellant in
the circumstances cannot operate as an estoppel against law – Not a
procedural violation of the nature adverted to in section 292B

The assessee was a joint
venture between Suzuki Motor Corporation and Maruti Suzuki India Limited (MSIL)
in which the shareholding was 70% and 30%, respectively. It was known upon
incorporation as Suzuki Metal India Limited. Subsequently, with effect from 8^th
June, 2005, its name was changed to Suzuki Powertrain India Limited (SPIL).

Some time later, on 28^th
November, 2012, the assessee filed its return of income for the A.Y. 2012-13
declaring an income of Rs. 212,51,51,156. The return of income was filed in the
name of SPIL (no amalgamation having taken place on the relevant date).

On 29^th
January, 2013, a scheme for amalgamation of SPIL and MSIL was approved by the
High Court with effect from 1^st April, 2012. The terms of the
approved scheme provided that all liabilities and duties of the transferor
company would stand transferred to the transferee company without any further
act or deed. On the scheme coming into effect, the transferor was to stand
dissolved without winding up. The scheme stipulated that the order of
amalgamation would not be construed as an order granting exemptions from the
payment of stamp duty or taxes or any other charges, if payable, in accordance
with the law.

Accordingly,
on 2^ndApril 2013, MSIL intimated the AO about the amalgamation. The
case was selected for scrutiny with the issuance of a notice u/s 143(2) on 26^thSeptember, 2013 followed by a notice u/s 142(1) to the amalgamating
company.

On 22^nd
January, 2016, the Transfer Pricing Officer passed an order u/s 92CA(3)
determining the Arm’s Length Price of royalty at 3% and making an adjustment of
Rs. 78.97 crores in respect of royalty paid by the assessee for the relevant
previous year.

A draft
assessment order was then passed on 11^th March, 2016 in the name of
Suzuki Powertrain India Limited (amalgamated with Maruti Suzuki India Limited).
The draft assessment order sought to increase the total income of the assessee
by Rs. 78.97 crores in accordance with the order of the TPO in order to ensure
that the international transaction with regard to the payment of royalty to the
associated enterprises is at arm’s length.

MSIL
participated in the assessment proceedings of the erstwhile amalgamating
entity, SPIL, through its authorised representatives and officers.

On 12^th
April, 2016, MSIL filed an appeal before the Dispute Resolution Panel as
successor in interest of the erstwhile SPIL, since amalgamated. Form 35A was
verified by Mr. Kenichi Ayukawa, MD and CEO of MSIL. The grounds of appeal did
not allude to the objection that the draft assessment order was passed in the
name of SPIL (amalgamated with MSIL), or that this defect would render the
assessment proceedings invalid.

The DRP, on 14^th
October, 2016, issued its order in the name of MSIL (as successor in interest
of the erstwhile SPIL, since amalgamated).

But the final assessment
order was passed on 31^stOctober, 2016 in the name of SPIL
(amalgamated with MSIL), making an addition of Rs. 78.97 crores to the total
income of the assessee. While preferring an appeal before the Tribunal, the
assessee raised the objection that the assessment proceedings were continued in
the name of the non-existent or merged entity SPIL and that the final assessment
order which was also issued in the name of a non-existent entity, would thus be
invalid.

By its decision dated 6^th
April, 2017 the Tribunal set aside the final assessment order on the ground
that it was void ab initio, having been passed in the name of a
non-existent entity by the AO. The decision of the Tribunal was affirmed in an
appeal u/s 260A by the Delhi High Court on 9^th January, 2018
following its earlier decision in the case of the assessee for the A.Y.
2011-12.

On further appeal by the Revenue,
the Supreme Court observed that while assessing the merits of the rival
submissions, it was necessary at the outset to advert to certain significant
facets of the present case:

First, the income which is
sought to be subjected to the charge of tax for A.Y. 2012-13 was the income of
the erstwhile entity (SPIL) prior to amalgamation. This was on account of a
transfer pricing addition of Rs. 78.97 crores;

Second, under the approved
scheme of amalgamation, the transferee had assumed the liabilities of the
transferor company including tax liabilities;

Third, the consequence of
the scheme of amalgamation approved u/s 394 of the Companies Act 1956 was that
the amalgamating company ceased to exist (Saraswati Industrial Syndicate
Ltd. [282 ITR 186]);

Fourth, upon the
amalgamating company ceasing to exist, it cannot be regarded as a person u/s
2(31) of the Act, 1961 against whom assessment proceedings can be initiated or
an order of assessment passed;

Fifth, a notice u/s 143(2)
was issued on 26^th September, 2013 to the amalgamating company,
SPIL, which was followed by a notice to it u/s 142(1);

Sixth, prior to the date on
which the jurisdictional notice u/s 143(2) was issued, the scheme of
amalgamation had been approved on 29^th January, 2013 by the High
Court of Delhi under the Companies Act, 1956 with effect from 1^stApril,
2012;

Seventh, the AO assumed
jurisdiction to make an assessment in pursuance of the notice u/s 143(2). The
notice was issued in the name of the amalgamating company in spite of the fact
that on 2^ndApril, 2013 the amalgamated company MSIL had addressed a
communication to the AO intimating to him the fact of the amalgamation.

According
to the Supreme Court, in the above conspectus of the facts, the initiation of
assessment proceedings against an entity which had ceased to exist was void ab
initio.

The
Court noted that in Spice Entertainment, a Division Bench of the
Delhi High Court (2012) 280 ELT 43 (Delhi) dealt with the
question as to whether an assessment in the name of a company which has been
amalgamated and has been dissolved is null and void, or whether the framing of
an assessment in the name of such company is merely a procedural defect which
can be cured. The High Court held that upon a notice u/s 143(2) being
addressed, the amalgamated company had brought the fact of the amalgamation to
the notice of the AO. Despite this, the AO did not substitute the name of the
amalgamated company and proceeded to make an assessment in the name of a
non-existent company which rendered it void. This, in the view of the High
Court, was not merely a procedural defect. Moreover, the participation by the
amalgamated company would have no effect since there could be no estoppel against law.

Following
the decision in Spice Entertainment, the Delhi High Court quashed
the assessment orders which were framed in the name of the amalgamating company
in (i) Dimension Apparels; (ii) Micron Steels; and (iii) Micra India. The Supreme
Court noted the facts in all these three cases.

The
Supreme Court further noted that a batch of civil appeals was filed before it
against the decisions of the Delhi High Court, the lead appellant being Spice
Enfotainment. On 2^nd November, 2017 the Supreme Court
dismissed the civil appeals and tagged Special Leave Petitions.

It
observed that the doctrine of merger results in the settled legal position that
the judgement of the Delhi High Court stands affirmed by the above decision in
the civil appeals.

The
Supreme Court further noted that the order of assessment in the case of the
respondent for A.Y. 2011-12 was set aside on the same ground. This resulted in
a Special Leave Petition by the Principal Commissioner of Income Tax – 6,
Delhi. The SLP was dismissed on 16^th July, 2018 in view of the order
dated 2^nd November, 2017 governing Civil Appeal No. 285 of 2014 in Spice
Enfotainment and the connected batch of cases. According to the Supreme
Court, although leave was not granted by it, reasons had been assigned by the
Supreme Court for rejecting the SLP. The law declared would attract the
applicability of Article 141 of the Constitution (Kunhayammed, 381 ITR
245).

After
considering the contention urged on behalf of the Revenue that a contrary
position emerges from the decision of the Delhi High Court in Skylight
Hospitality LLP (405 ITR 296) which was affirmed on 6^thApril,
2018 by the Supreme Court, it held that there was no conflict between the
decisions of the Supreme Court in Spice Enfotainment (dated 2^nd
November, 2017) and in Skylight Hospitality LLP (dated 6^th April,
2018).

Referring
to the provisions of section 292B of the Income-tax Act, the Supreme Court held
that in this case the notice u/s 143(2) under which jurisdiction was assumed by
the AO was issued to a non-existent company. The assessment order was issued
against the amalgamating company. This was a substantive illegality and not a
procedural violation of the nature adverted to in section 292B.

The
Supreme Court ultimately concluded that in the present case, despite the fact
that the AO was informed of the amalgamating company having ceased to exist as
a result of the approved scheme of amalgamation, the jurisdictional notice was
issued only in its name. The basis on which jurisdiction was invoked was
fundamentally at odds with the legal principle that the amalgamating entity
ceases to exist upon approval of the scheme of amalgamation. Participation in
the proceedings by the appellant in the circumstances cannot operate as an estoppel
against law. This position now holds the field in view of the judgement of a
Co-ordinate Bench which dismissed the appeal of the Revenue in Spice
Enfotainment on 2^nd November, 2017. The decision in Spice
Enfotainment had been followed in the case of the respondent while
dismissing the Special Leave Petition for A.Y. 2011-12. Thus, there was no
reason to take a different view.

For the
above reasons, the Supreme Court found no merit in the appeal and accordingly
dismissed it.

BCAJ Admin

Section 37 of the Act and Rule 9A of IT Rules, 1962 – Business expenditure – capital or revenue expenditure – Expenditure incurred on account of abandoned teleserial – Revenue expenditure

23. CIT vs. Prasad Productions; 407 ITR
541 (Mad): Date of order: 4^th April,
2018 A. Y. 2002-03

Section 37 of the Act and Rule 9A of IT
Rules, 1962 – Business expenditure – capital or revenue expenditure –
Expenditure incurred on account of abandoned teleserial – Revenue expenditure

The following question was
raised before the Madras High Court in appeal filed by the Revenue:

“Whether in the facts and
circumstances of the case, the Tribunal was right in holding that the write off
of expenditure incurred in respect of a teleserial that was abandoned could be
treated as business expenditure during the relevant assessment year, contrary
to the provisions of rule 9A of the Income-tax Rules?”

The Madras High Court
decided the appeal in favour of the assessee and held as under:

“i) The issue as to whether the cost of production of an abandoned
teleserial/feature film shall be treated as revenue expenditure or capital
expenditure has to be decided as per the circular issued by the CBDT in
Circular No. 16 of 2015 dated 06/10/2015, wherein it is stated that the cost of
production of an abandoned feature film is to be treated as revenue expenditure
and allowed as per the provisions of section 37 of the Income-tax Act, 1961.

ii) This circular was taken note of by the Division Bench of this
court in Tiruvengadam Investments Pvt. Ltd. vs. ACIT (2016) 95 CCH 24 (Mad).
Though the circular pertains to a feature film, we find that there cannot be
any distinction between teleserial and feature film as the circular deals with
the aspects regarding to the cost of production of a film. Hence, Circular No.
16 of 2015 dated 06/10/2015 has full application to the facts of the present
case.

iii) The appeal filed by the Revenue is dismissed and the substantial
question of law as framed is answered in favour of the assessee and against the
Revenue.”

BCAJ Admin

Glimpses Of Supreme Court Rulings

1.
1. Commissioner of Income Tax, Kolkata vs. Calcutta Export Company
(2018) 404 ITR 654 (SC)

Business
Expenditure – Disallowance u/s. 40(a)(ia) – The amended provision of section
40(a)(ia) of the Act should be interpreted liberally and equitable and applies
retrospectively from the date when section 40(a)(ia) was inserted i.e., with effect
from the Assessment Year 2005-2006

Calcutta Export Company, a
partnership firm, a manufacturer and exporter of casting materials, filed its
return of income for the Assessment Year 2005-06 for Rs. 4,18,17,910/-. The
case was selected for scrutiny and the assessment u/s. 143(3) of the Act was
completed on 28.12.2007. The Assessing Officer, vide order dated 12.10.2009,
disallowed the export commission charges paid by the assessee to Steel Crackers
Pvt. Ltd. amounting to Rs. 40,82,089/- while stating that the tax deducted at
source (TDS) on such commission amount on 07.07.2004, 07.09.2004 and 07.10.2004
ought to have been deposited by the assessee before the end of the previous
year i.e. 31.03.2005 to get the commission amount deducted from the total
income in terms of the provisions of section 40(a)(ia) of the Act as it stood then.
But the same was deposited on 01.08.2005, hence, the assessee could not be
allowed to claim deduction of the commission amount from the total income. The
Assessing Officer revised the total income to Rs. 4,58,99,999/- with the
requirement to pay the additional tax amount of Rs. 23,88,832/- by the
assessee.

Being aggrieved by the
order dated 12.10.2009, the assessee preferred an appeal before the
Commissioner of Income tax (Appeals). Learned CIT (Appeals), vide order dated
01.08.2011, allowed the appeal while holding that the commission amount was
eligible for deduction under the said Assessment Year.

Being aggrieved, the
Revenue preferred an appeal before the Tribunal, which came to be dismissed on
29.02.2012.

Being aggrieved by the
order dated 29.02.2012, the Revenue preferred an appeal before the High Court.
The High Court, vide judgment and order dated 03.09.2012, dismissed the appeal.

Aggrieved by the judgment
and order dated 03.09.2012, the Revenue has preferred this appeal before the
Supreme Court.

According to the Supreme
Court, the point that arose for its consideration was as to whether the
amendment made by the Finance Act, 2010 in section 40(a)(ia) of the IT Act is
retrospective in nature to apply to the present facts and circumstances of the
case.

If it is so, then the tax
duly paid by the assessee on 01.08.2005 was well in accordance with law and the
assessee is allowed to claim deduction for the tax deducted and paid to the
government, in the previous year in which the tax was deducted.

For deciding as to the
retrospective effect of the amendment made by Finance Act, 2010, the Supreme
Court noted the section as it stood before and after the amendment made through
the Finance Act, 2010 and the purpose of such insertion or amendment to the
said provisions. The Supreme Court noted that the purpose of bringing the said
amendment to the existing provision of section had been highlighted in the
memorandum explaining the provision which read as under:

“With a view to augment
compliance of TDS provisions, it is proposed to extend the provisions of the
section 40(a)(ia) to payments of interest, commission or brokerage, fee for
professional services or fee for technical services to the residents and
payments to a residential contractor or sub-contractor for carrying out any
work (including supply of labour for carrying out any work), on which tax has
not been deducted or after deduction, has not been paid before the expiry of
the time prescribed under sub-section (1) of section 200 and in accordance with
the provisions of other provisions of Chapter XVII-B”.

According to the Supreme
Court, the purpose was very much clear from the above referred explanation by
the memorandum that it came with a purpose to ensure tax compliance. The fact
that the intention of the legislature was not to punish the assessee was
further reflected from a bare reading of the provisions of section 40(a)(ia) of
the Act. It only resulted in shifting of the year in which the expenditure
could be claimed as deduction. In a case where the tax deducted at source was
duly deposited with the government within the prescribed time, the said amount
could be claimed as a deduction from the income in the previous year in which
the TDS was deducted. However, when the amount deducted in the form of TDS was
deposited with the government after the expiry of period allowed for such
deposit then the deductions could be claimed only in the previous year in which
such TDS payment was made to the government.

However, it had caused some
genuine and apparent hardship to the assessees especially in respect of tax
deducted at source in the last month of the previous year, the due date for
payment of which as per the time specified in section 200 (1) of Act was only
on 7^th of April in the next year. The assessee in such case, thus,
had a period of only seven days to pay the tax deducted at source from the
expenditure incurred in the month of March so as to avoid disallowance of the
said expenditure u/s. 40(a)(ia) of Act.

With a view to mitigate
this hardship, section 40(a)(ia) was amended by the Finance Act, 2008.

The amendments made by the
Finance Act, 2008 thus provided that no disallowance u/s. 40(a)(ia) of the Act
shall be made in respect of the expenditure incurred in the month of March if
the tax deducted at source on such expenditure had been paid before the due
date of filing of the return. The amendment was given retrospective operation
from the date of 01.04.2005 i.e., from the very date of substitution of the provision.

Therefore, the assessees
were, after the said amendment in 2008, classified in two categories namely;
one; those who have deducted that tax during the last month of the previous
year and two; those who have deducted the tax in the remaining eleven months of
the previous year. It was provided that in case of assessees falling under the
first category, no disallowance u/s. 40(a)(ia) of the Act shall be made if the
tax deducted by them during the last month of the previous year has been paid
on or before the last day of filing of return in accordance with the provisions
of section 139(1) of the Act for the said previous year. In case, the assessees
were falling under the second category, no disallowance u/s. 40(a)(ia) of Act
where the tax was deducted before the last month of the previous year and the
same was credited to the government before the expiry of the previous year.
According to the Supreme Court, the net effect was that the assessee could not
claim deduction in the previous year in which the tax was deducted and the
benefit of such deductions could be claimed in the next year only.

The
Supreme Court observed that the amendment though had addressed the concerns of
the assessees falling in the first category but with regard to the case falling
in the second category, it was still resulting into unintended consequences and
causing grave and genuine hardships to the assessees who had substantially
complied with the relevant TDS provisions by deducting the tax at source and by
paying the same to the credit of the Government before the due date of filing
of their returns u/s. 139(1) of the Act. The disability to claim deductions on
account of such lately credited sum of TDS in assessment of the previous year
in which it was deducted, was detrimental to the small traders who may not be
in a position to bear the burden of such disallowance in the present Assessment
Year.

In order to remedy this
position and to remove hardships which were being caused to the assessees
belonging to such second category, amendments were made in the provisions of
section 40(a) (ia) by the Finance Act, 2010.

Thus, the Finance Act, 2010 further relaxed the rigors of section 40(a)(ia) of
the Act to provide that all TDS made during the previous year can be deposited
with the Government by the due date of filing the return of income. The idea
was to allow additional time to the deductors to deposit the TDS so made.
However, the Memorandum explaining the provisions of the Finance Bill, 2010
expressly mentioned as follows: “This amendment is proposed to take effect
retrospectively from 1^st April, 2010 and will, accordingly, apply in
relation to the Assessment Year 2010-11 and subsequent years.”

The controversy surrounding
the above amendment was whether the amendment being curative in nature should
be applied retrospectively i.e., from the date of insertion of the provisions
of section 40(a)(ia) or to be applicable from the date of enforcement.

The Supreme Court held that
the TDS results in collection of tax and the deductor discharges dual
responsibility of collection of tax and its deposition to the government.
Strict compliance of section 40(a)(ia) may be justified keeping in view the
legislative object and purpose behind the provision but a provision of such
nature, the purpose of which is to ensure tax compliance and not to punish the
tax payer, should not be allowed to be converted into an iron rod provision
which metes out stern punishment and results in malevolent results,
disproportionate to the offending act and aim of the legislation.

Legislature can and do
experiment and intervene from time to time when they feel and notice that the
existing provision is causing and creating unintended and excessive hardships
to citizens and subject or have resulted in great inconvenience and
uncomfortable results. Obedience to law is mandatory and has to be enforced but
the magnitude of punishment must not be disproportionate by what is required
and necessary. The consequences and the injury caused, if disproportionate do
and can result in amendments which have the effect of streamlining and
correcting anomalies. As discussed above, the amendments made in 2008 and 2010
were steps in the said direction only. Legislative purpose and the object of
the said amendments were to ensure payment and deposit of TDS with the
Government.

The Supreme Court further held that a proviso which is inserted to remedy
unintended consequences and to make the provision workable, a proviso which
supplies an obvious omission in the section, is required to be read into the
section to give the section a reasonable interpretation and requires to be
treated as retrospective in operation so that a reasonable interpretation can
be given to the section as a whole.

The purpose of the
amendment made by the Finance Act, 2010 was to solve the anomalies that the
insertion of section 40(a)(ia) was causing to the bonafide tax payer.
The amendment, even if not given operation retrospectively, may not materially
be of consequence to the Revenue when the tax rates are stable and uniform or
in cases of big assessees having substantial turnover and equally huge expenses
and necessary cushion to absorb the effect. However, marginal and medium
taxpayers, who work at low gross profit rate and when expenditure which becomes
subject matter of an order u/s. 40(a)(ia) is substantial, can suffer severe
adverse consequences if the amendment made in 2010 is not given retrospective
operation i.e., from the date of substitution of the provision. Transferring or
shifting expenses to a subsequent year, in such cases, would not wipe off the
adverse effect and the financial stress. Such could not be the intention of the
legislature. Hence, the amendment made by the Finance Act, 2010 being curative
in nature was required to be given retrospective operation i.e., from the date
of insertion of the said provision.

The Supreme Court concluded
that the amended provision of section 40(a)(ia) of the Act should be
interpreted liberally and equitable and applies retrospectively from the date
when section 40(a)(ia) was inserted i.e., with effect from the Assessment Year
2005-2006 so that an assessee should not suffer unintended and deleterious
consequences beyond what the object and purpose of the provision mandates.

Since the assessee has
filed its returns on 01.08.2005 i.e., in accordance with the due date under the
provisions of section 139 Act, hence, was allowed to claim the benefit of the
amendment made by Finance Act, 2010 to the provisions of section 40(a)(ia) of
the IT Act.

2.
2. Commissioner of Income Tax vs. HCL
Technologies Ltd. (2018) 404 ITR 719 (SC)

Export of computer
software – Exemption/Deduction – If the deductions on freight,
telecommunication and insurance attributable to the delivery of computer
software u/s. 10A of the Act are allowed only in Export Turnover but not from
the Total Turnover then, it would give rise to illogical result which would
cause grave injustice to the Respondent which could have never been the
intention of the legislature – When the object of the formula is to arrive at
the profit from export business, expenses excluded from export turnover have to
be excluded from total turnover also

The Respondent – HCL
Technologies Ltd., a company registered under the Companies Act, 1956, was
engaged in the business of development and export of computer softwares and
rendering technical services.

The
Respondent had shown gross income from business at Rs. 267,01,76,529/- while
claiming deductions under section 10A of the Act to the tune of Rs.
273,45,39,379/- showing a net loss of Rs. 6,43,62,850/-. The Respondent filed
its return of income for the Assessment Year 2004-05 on 01.11.2004 declaring
the income at Rs. 91,25,68,114/-. Thereafter, on 31.03.2005, a revised return
of income for Rs. 91,16,99,060/- was filed by the Respondent which was selected
for scrutiny u/s. 143 of the Act.

The Assessing Officer, vide
order dated 28.12.2006, held that the software development charges, as claimed
by the Respondent, were nothing but in the nature of expenses incurred for
technical services provided outside India. Further, in view of the fact that it
was not purely technical services and some element of software development was
also involved in it and in the absence of such bifurcation, the Assessing
Officer estimated such expense at the rate of 40% and remaining 60% for
providing technical services by the Respondent in foreign exchange to its
offshore clients and assessed the taxable income at Rs. 137,20,34,576/- and
levied penalty to the tune of Rs. 21,81,90,239/-.

Being aggrieved, the
Respondent preferred an appeal before the Commissioner of Income Tax (Appeals).
Learned CIT (Appeals), vide order dated 09.05.2007, partly allowed the appeal
while estimating 10% as software development charge incurred for technical
services provided outside India as against 60% estimated by the Assessing
Officer.

Being aggrieved, the
Respondent as well as the Revenue, preferred cross appeals before the Tribunal.
The Tribunal, vide order dated 23.01.2009, dismissed the appeal filed by the
Revenue while allowing the appeal of the Respondent.

Being aggrieved, the
Revenue preferred an appeal before the High Court. The High Court, vide order
dated 15.12.2009, dismissed the appeal of the Revenue.

Hence, Revenue filed
appeals before the Supreme Court.

According to the Supreme Court, the only point for consideration before it was
whether in the facts and circumstances of the case, the software development
charges were to be excluded while working out the deduction admissible u/s. 10A
of the Act on the ground that such charges were relatable towards expenses
incurred on providing technical services outside India?

The Supreme Court noted
that the Respondent was engaged in the business of software development for its
customers engaged in different activities at software development centres of
the Respondent. However, in the process of such customised software
development, certain activities were required to be carried out at the sight of
customers on site, located outside India for which the employees of the
branches of the Respondent located in the country of the customers were
deployed. Moreover, after delivery of such softwares as per requirement, in
order to make it fully functional and hassle free functioning subsequent to the
delivery of softwares in many cases, there could be requirement of technical
personnel to visit the client on site. The Assessing Officer had not brought any
evidence that the Respondent was engaged in providing simply technical services
independent to software development for the client for which the expenditures
were incurred outside India in foreign currency.

The Supreme Court further
noted that the Respondent company had claimed deduction u/s. 10A as per
certificates filed on Form No. 56F. The Respondent, while computing the
deduction, had taken the same figure of export turnover as of total turnover.
The Respondent had cited various judicial cases but all these cases pertained
to deduction u/s. 80HHC.

The Supreme Court also
noted that the definition of total turnover had been defined in section 80HHC
and 80HHE of the Act and that the definition of total turnover had not been
defined u/s. 10A of the Act.

The Supreme Court held that
the definition of total turnover given u/s. 80HHC and 80HHE could not be
adopted for the purpose of section 10A as the technical meaning of total
turnover, which does not envisage the reduction of any expenses from the total
amount, is to be taken into consideration for computing the deduction u/s. 10A.
When the meaning is clear, there is no necessity of importing the meaning of
total turnover from the other provisions. If a term is defined u/s. 2 of the
Act, then the definition would be applicable to all the provisions wherein the
same term appears. As the term ‘total turnover’ has been defined in the
Explanation to section 80HHC and 80HHE, wherein it has been clearly stated that
“for the purposes of this section only”, it would be applicable only
for the purposes of that sections and not for the purpose of section 10A. If
denominator includes certain amount of certain type which numerator does not
include, the formula would render undesirable results.

In the instant case, if the
deductions on freight, telecommunication and insurance attributable to the
delivery of computer software u/s. 10A of the Act are allowed only in Export
Turnover but not from the Total Turnover then, it would give rise to
inadvertent, unlawful, meaningless and illogical result which would cause grave
injustice to the Respondent which could have never been the intention of the
legislature.

Even in common parlance,
when the object of the formula is to arrive at the profit from export business,
expenses excluded from export turnover have to be excluded from total turnover
also.

On the issue of expenses on
technical services provided outside, one has to follow the same principle of
interpretation as followed in the case of expenses of freight, telecommunication
etc., otherwise the formula of calculation would be futile. Hence, in the same
way, expenses incurred in foreign exchange for providing the technical services
outside should be allowed to excluded from the total turnover.

According to the Supreme
Court, the appeal was devoid of merits and thus was dismissed.

3. 3. Mahaveer Kumar Jain vs. Commissioner of
Income-tax (2018) 404 ITR 738 (SC)

Income-tax Act not
applicable to Sikkim till 1989 – Prize money earned in Sikkim State Lottery in
1986 – Once the assessee having paid the income tax at source in the State of
Sikkim as per the law applicable at the relevant time in Sikkim, the same
income was not taxable under the Income-tax Act, 1961

The Appellant, a resident
of Jaipur, Rajasthan, having income from business and property, won the first
prize of Rs. 20 lakhs in the 287^th Bumper Draw of the Sikkim State
Lottery held on 20.02.1986 at Gangtok organised by the Director, State Lottery,
Government of Sikkim, Gangtok. Out of Rs. 20 lakhs, the Appellant herein
received Rs. 16,20,912/- through two Demand Drafts for Rs. 8,10,000/- and Rs.
8,10,912/- each, after deduction of Rs. 2 lacs being agent’s/seller’s
commission and Rs. 1,79,088/- being Income Tax under the Sikkim State Income
Tax Rules, 1948.

The Appellant herein filed
Income Tax Return for the Assessment Year (AY) 1986-87 disclosing the income
from lottery at Rs. 20 lakhs and deducting the agent/seller commission of Rs. 2
lakhs out of the same. He claimed deduction u/s. 80TT of the Act on Rs.
20,00,000/- i.e. the gross amount of the prize money won in the lottery in
accordance with the provisions of the charging section.

On scrutiny, the Assessing
Officer (AO), vide order dated 08.01.1988, allowed the deduction u/s. 80TT of
the Act on Rs. 18 lakhs instead of Rs. 20 lakhs while holding that the
Government of Sikkim, had deducted the tax at source from the lottery amount of
Rs. 18 lakhs as Rs. 2 lakhs have been paid to the agent directly. In other
words, under the relevant provisions of section 80TT of the Act, the deduction
can be claimed only on net income out of lottery and not on the gross income.
The said order was further confirmed by the Commissioner of Income Tax,
(Appeals) vide order dated 31.10.1988.

Being aggrieved, the
present Appellant preferred an appeal before the Income Tax Appellate Tribunal
challenging the computation by the Assessing Officer (AO) of the deduction u/s.
80TT of the IT Act. The Appellant Assessee raised an additional ground before
the Tribunal claiming that the authorities below have grossly erred in law in
treating the lottery income of Sikkim Government as income under the Act.

Though the Tribunal allowed
the appeal partly vide order dated 26.02.1993 but it dismissed the objections
raised by the Appellant herein as to legality of assessment order and held that
the lottery amount is taxable under the provisions of Act.

However, at the instance of
the Appellant Assessee, the Tribunal framed certain questions under Act and
referred the same to the High Court for opinion, considering them the questions
of law fit for reference which are as under:

1. Whether on the facts and in the circumstance
of the case, the Hon’ble Tribunal was justified in holding that income from
Sikkim State Lottery is taxable under the Income Tax Act, 1961?

2. Whether in the facts and circumstances of the
case the Tribunal was justified in holding that deduction u/s. 80TT is
applicable on the net winning amount received by the Assessee and not on the
gross amount of the winning prize?

A Division
Bench of the High Court, vide judgment and order dated 10.09.2004, answered the
questions raised in affirmative.

Aggrieved
by the judgment and order dated 10.09.2004, the Appellant-Assessee preferred
appeal by way of special leave before the Supreme Court.

According
to the Supreme Court, the issue that arose for its consideration in the present
case was whether income from lottery earned is taxable under the Act especially
when such income was already taxed under the provisions of Sikkim State Income
Tax Rules, 1948. If so, whether the deduction that is to be allowed on such
income u/s. 80TT of the Act is on ‘gross income’ or on the ‘net income’.

The
Supreme Court noted that prior to 26.04.1975, Sikkim was not considered to be a
part of India. Any income accruing or arising there from would be treated as
income accruing or arising in any foreign country. However, by the 36^th
amendment to the Indian Constitution in 1975, Sikkim became part of the Indian
Union. This, amendment was effected by introducing Article 371F in the
Constitution.

According
to the Supreme Court, on a plain reading of this provisions of Article 371F, it
was clear that all laws which were in force prior to April 26, 1975, in the
territories now falling within the State of Sikkim or any part thereof were
intended to continue to be in force until altered or repealed. Therefore, the
law in force prior to the merger, continued to be applicable.

The
Income-tax Act was made applicable only by Notification made in 1989 and the
first assessment year would be 1990-91 and by the application of this Act, the
Sikkim State Income Tax Manual, 1948 stood repealed.

The
Supreme Court observed that in the present case, it was concerned with the
assessment year 1986-87, and, during this time, the Income-tax Act had not been
made applicable to the territories of Sikkim. The law corresponding to the
Income-tax Act, which immediately was in force in the relevant State was Sikkim
State Income Tax Rules, 1948. Hence, there could be two situations, first is that
the person was a resident of Sikkim during the time period of 1975-1990 and the
income accrued and received by him there only. In such a case, no question of
applicability of the Income-tax Act arises.

However,
the problem arises where the income accrues to a person from the State of
Sikkim who was not a resident of Sikkim but of some other part of India. The
question that arises is whether the provisions of the Income-tax Act are
applicable to such income and whether the same could be subjected to tax under
the said Act especially in light of the fact that the income has already been
subjected to tax under the Sikkim State Income Tax Rules, 1948.

According
to the Supreme Court, the Appellant, being a resident of Rajasthan, received
the income arising from winning of lotteries from Sikkim during the Assessment
Year in question was liable to be included in the hands of the assessee as
resident of India within the State of Rajasthan where Income-tax Act was in
force notwithstanding that the same had accrued or arisen to him at a place
where the Income-tax Act was not in force even in respect of income accruing to
him without taxable territory. Section 5 of the Income-tax Act casts a very
wide net and all incomes accruing anywhere in the world would be brought within
its ambit.

However,
in the present case, that the amount had been earned by the Appellant-Assessee
in the State of Sikkim and the amount of lottery prize was sent by the
Government of Sikkim to Jaipur on the request made by the Appellant. The
result, therefore, was that, while section 5 of the Act would not be
applicable, the existing Sikkim State Income Tax Rules, 1948 would be
applicable, since Sikkim was a part of India for the accounting year,
therefore, on the same income, two types of income-taxes could not be applied.
It was a fundamental Rule of law of taxation that, unless otherwise expressly
provided, income cannot be taxed twice.

According
to the Supreme Court, therefore, the only question remained to be decided was
whether in fact there was a specific provision for including the income earned
from the Sikkim lottery ticket prior to 01.04.1990 and after 1975, in the
income-tax return or not. The Supreme Court after going through the relevant
provisions could not find such a provision in the Act wherein a specific
provision has been made by the legislature for including such an income by an
Assessee from lottery ticket. In the absence of any such provision, according
to the Supreme Court, the Assessee in the present case could not be subjected
to double taxation. Furthermore, a taxing Statute should not be interpreted in
such a manner that its effect will be to cast a burden twice over for the
payment of tax on the taxpayer unless the language of the Statute is so
compelling that the court has no alternative than to accept it. In a case of
reasonable doubt, the construction most beneficial to the taxpayer is to be
adopted. So, it was clear enough that the income in the present case was
taxable only under one law. By virtue of Clause (k) to Article 371F of the
Constitution which starts with a non-obstante clause, it would be clear that
only the Sikkim Regulations on Income-tax would be applicable in the present
case. Therefore, the income could not be brought to tax any further by applying
the rates of the Income-tax Act.

In view of the aforementioned
discussions, the Supreme Court held that once the assessee had paid the income
tax at source in the State of Sikkim as per the law applicable at the relevant
time in Sikkim, the same income was not taxable under the Income-tax Act, 1961.
Having decided so, the other issue whether the income that is to be allowed deduction
u/s. 80TT of the IT Act is on ‘Net Income’ or ‘Gross Income’, became academic.

BCAJ Admin

Section 37 of the Act and Rule 9A of IT Rules, 1962 – Business expenditure – capital or revenue expenditure – Expenditure incurred on account of abandoned teleserial – Revenue expenditure

31.
Asianet Communications Ltd. vs. CIT; 407 ITR 706 (Mad); Date of order: 26^th June, 2017 A. Y. 2001-02

Section 37 – Business expenditure – Capital
or revenue – Amount paid as non-compete fees – No new source of income – Amount
deductible as business expenditure

The assessee was a company engaged in the business of television
broadcasting, formed in the year 1991. The assessee was managed by one of the
directors, SK and he was also the president of the company, managing all the
affairs of the company till April 1999. SK had 50% share holding and the
balance was held by a non-resident Indian, RM. SK and RM decided to part ways
and an agreement was arrived at between them by which SK agreed to sell 50% of
his shareholding to RM or to his nominees and to renounce his management of the
company. As a part of the agreement SK agreed not to compete with the business
of the assesee for a period of five years for which the company agreed to pay
him a sum of Rs. 10.5 crore during the previous year relevant to the A. Y. 2000-2001. This amount was paid to
SK in respect of a non-compete covenant, which was claimed as business
expenditure in computing the income for the same year. The claim was rejected
by the Assessing Officer.

The Commissioner
(Appeals) and the Tribunal confirmed the order of the Assessing Officer.

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

“i) Any contractual term that
imposes restraint on a contracting party from engaging in any business for a
reasonable term must be backed by consideration. Therefore, the non-compete
compensation is but a consideration paid to the party who is kept out of
competing business during the term of the contract. The non-compete
compensation from the stand point of the payee of such compensation, is paid in
anticipation that absence of a compensation from the other party to the
contract may secure a benefit to the party paying the compensation. There is no
certainty that such benefit would accrue. In other words, in spite of the fact
that a competitor is kept out of the competition, on may still suffer loss.

ii) The facts clearly disclose
that on account of the payment of non-compete fee, the assessee had not
acquired any new business, the profit making apparatus had remained the same,
the assets used to run the business remained the same and there was no new
business or new source of income, which accrued to the assessee on account of
the payment of the non-compete fee.

iii) The stand taken by the Revenue that the
assessee had ammortised expenditure spread over for the period of five years
had been found to be factually incorrect, as the assessee had not capitalised
it in its accounts, but treated it as differed revenue expenditure for a period
of five years. That apart, that issue was never raised by the Revenue before
any of the lower authorities. The amount paid under the non-compete covenant
was deductible.”

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

5. Pr. CIT vs. NRA Iron and Steel Pvt. Ltd.
(2019) 412 ITR 161 (SC)

Cash credits – Where sums of money are credited as share
capital / premium: (1) The assessee is under a legal obligation to prove the
genuineness of the transaction, the identity of the creditors and
credit-worthiness of the investors who should have the financial capacity to
make the investment in question to the satisfaction of the AO, so as to discharge
the primary onus; (2) The assessing officer is duty-bound to investigate the
credit-worthiness of the creditor / subscriber, verify the identity of the
subscribers and ascertain whether the transaction is genuine, or whether these
are bogus entries of name-lenders, and (3) If the inquiries and investigations
reveal that the identity of the creditors is dubious or doubtful, or they lack
credit-worthiness, then the genuineness of the transaction would not be
established. In such a case, the assessee would not have discharged the primary
onus contemplated by section 68 of the Act.

The assessee had filed the
original return of income for the assessment year 2009-10 on 29.09.2009
declaring a total income of Rs. 7,01,870.

A notice was issued u/s. 148 of
the Act to re-open the assessment on 13.04.2012 for the reasons recorded
therein.

The assessee filed submissions
on 23.04.2012 to the notice u/s. 148, and objections on 30.04.2012. The
objections were rejected on 13.08.2012.

The assessee company in its
return showed that money aggregating to Rs. 17,60,00,000 had been received
through share capital / premium during the financial year 2009-10 from
companies located in Mumbai, Kolkata, and Guwahati. The shares had a face value
of Rs. 10 and were subscribed by the investor companies at a premium of Rs. 190
per share.

The assessee was called upon to
furnish details of the amounts received and provide evidence to establish the
identity of the investor companies, the credit-worthiness of the subscribers
and the genuineness of the transaction.

The assessee, inter alia,
submitted that the entire share capital had been received by the assessee
through normal banking channels by account payee cheques / demand drafts and
produced documents such as income tax return acknowledgments to establish the
identity and genuineness of the transaction. It was submitted that there was no
cause to take recourse to section 68 of the Act and that the onus on the
assessee company stood fully discharged.

The A.O. had issued summons to
the representatives of the investor companies. Despite the summons having been
served, nobody appeared on behalf of any of the investor companies. The
department only received submissions through postal mail, which created a doubt
about the identity of the investor companies. In some cases, the investor
companies could not be found at the given addresses.

The A.O. independently got field
inquiries conducted with respect to the identity and credit-worthiness of the
investor companies and to examine the genuineness of the transaction. Inquiries
were made in Mumbai, Kolkata, and Guwahati where these companies were stated to
be located.

The A.O. recorded that the
inquiries in Mumbai revealed that out of the four companies in the city, two
were found to be non-existent at the address furnished.

With respect to the Kolkata
companies, the response came through postal mail only. However, nobody
appeared, nor did they produce their bank statements to substantiate the source
of the funds from which the alleged investments were made.

With respect to the Guwahati
companies, Ispat Sheet Ltd. and Novelty Traders Ltd., inquiries revealed that
they were non-existent at the given address.

The A.O. found that:

(i) None of the investor-companies which had invested amounts
ranging between Rs. 90,00,000 and Rs. 95,00,000 as share capital in the
respondent company-assessee during the A.Y. 2009-10 could justify making
investment at such a high premium of Rs. 190 per share when the face value of
the shares was only Rs. 10;

(ii) Some of the investor companies were found to be
non-existent;

(iii) Hardly any one of the companies produced bank
statements to establish the source of funds for making such a huge investment
in shares, even though they were declaring a very meagre income in their
returns;

(iv) None of the investor-companies appeared before the A.O.,
but merely sent a written response through postal mail.

The A.O. held that the
assessee had failed to discharge the onus by cogent evidence either of the credit-worthiness
of the so-called investor-companies, or the genuineness of the transaction.

As a consequence, the amount of Rs. 17,60,00,000 was added
back to the total income of the assessee for the assessment year in question.
The assessee filed an appeal before the Commissioner of Income Tax (Appeals),
New Delhi. Reliance was placed on the decision of the Delhi High Court in CIT
vs. Lovely Exports Pvt. Ltd. (2008) 299 ITR 268 (Delhi). An S.L.P,
against the said judgement was dismissed.

The Commissioner of Income
Tax (Appeals), New Delhi, vide order dated 11.04.2014 deleted the addition made
by the A.O. on the ground that the respondent had filed confirmations from the
investor companies, their income tax returns, acknowledgments with PAN numbers
and copies of their bank accounts to show that the entire amount had been paid
through normal banking channels, and hence discharged the initial onus u/s. 68
of the Act, for establishing the credibility and identity of the shareholders.

The Revenue filed an appeal before the Income Tax Appellate
Tribunal (ITAT). The ITAT dismissed the appeal and confirmed the order of the
CIT(A) vide order dated 16.10.2017 on the ground that the assessee had
discharged his primary onus to establish the identity and credit-worthiness of
the investors, especially when the investor companies had filed their returns
and were being assessed.

The Revenue filed an appeal u/s. 260A of the Act before the
Delhi High Court to challenge the order of the Tribunal. The respondent
company-assessee did not appear before the High Court. Hence, the matter
proceeded ex parte. The High Court dismissed the appeal filed by the
Revenue vide the impugned order dated 26.02.2018 and affirmed the decision of
the Tribunal on the ground that the issues raised before it were urged on facts
and the lower appellate authorities had taken sufficient care to consider the
relevant circumstances. Hence no substantial question of law arose for their
consideration.

Aggrieved by the order passed by the High Court, the Revenue
filed an S.L.P. before the Supreme Court. The assessee, however, remained
unrepresented despite notices. The matter was finally heard on 5.02.2019 when
judgement was reserved.

The Supreme Court heard the learned counsel for the Revenue
and examined the material on record. According to the Supreme Court, the issue
which arose for its determination was whether the respondent-assessee had
discharged the primary onus to establish the genuineness of the transaction
required u/s. 68 of the Act.

The Supreme Court, on reading the provisions of section 68 of
the Act, was of the view that the use of the words “any sum found credited
in the books” in section 68 of the Act indicated that the section was
widely worded and included investments made by the introduction of share
capital or share premium.

The Supreme Court observed
that it was settled law that the initial onus is on the assessee to establish
by cogent evidence the genuineness of the transaction and credit-worthiness of
the investors u/s. 68 of the Act. The court noted the decisions in CIT vs.
Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal), Kale Khan Mohammad Hanif
vs. CIT (1963) 50 ITR 1 (SC) and Roshan Di Hatti vs. CIT (1977) 107 ITR (SC),
CIT vs. Oasis Hospitalities Pvt. Ltd. (2011) 333 ITR 119 (Delhi), Shankar Ghosh
vs. ITO (1985) 23 TTJ (Cal), CIT vs. Kamdhenu Steel & Alloys Limited and
Ors. (2012) 206 Taxmann 254 (Delhi). The court observed that the
judgements cited held that the A.O. ought to conduct an independent inquiry to
verify the genuineness of the credit entries.

In the present case, the court noted that the A.O. made an
independent and detailed inquiry, including survey of the so-called investor
companies located in Mumbai, Kolkata and Guwahati to verify the
credit-worthiness of the parties, the source of funds invested and the
genuineness of the transactions. The field reports revealed that the
shareholders were either non-existent, or lacked credit-worthiness.

On the issue of unexplained credit entries / share capital,
the Supreme Court examined the judgements in Sumati Dayal vs. CIT (1995)
214 ITR 801 (SC), CIT vs. P. Mohankala (2007) 291 ITR 278, Pr. CIT vs. NDR
Promoters Pvt. Ltd. (2019) 410 ITR 379, Roshan Di Hatti vs. CIT (1992) 2 SCC
378, Nemi Chand Kothari vs. CIT (2003) 264 ITR 254 (Gau), CIT vs. N.R.
Portfolio (P) Ltd. (2014) 222 Taxman 157 (Del), CIT vs. Divine Leasing &
Financing Ltd. (2007) 158 Taxman 440, and CIT vs. Value Capital
Service (P) Ltd. (2008)307 ITR 334.

The Supreme Court held that the principles which emerge where
sums of money are credited as share capital / premium are:

1) The assessee is under a legal obligation to prove the
genuineness of the transaction, the identity of the creditors and the
credit-worthiness of the investors who should have the financial capacity to
make the investment in question, to the satisfaction of the A.O., so as to
discharge the primary onus.

2) The A.O. is duty-bound to investigate the
credit-worthiness of the creditor / subscriber, verify the identity of the
subscribers and ascertain whether the transaction is genuine, or these are
bogus entries of name-lenders.

3) If the inquiries
and investigations reveal the identities of the creditors to be dubious or
doubtful, or that they lack credit-worthiness, then the genuineness of the
transaction would not be established.

In such a case, the assessee would not have discharged the
primary onus contemplated by section 68 of the Act. In the present case, the
court observed that the A.O. had conducted detailed inquiry which revealed
that:

(i) There was no
material on record to prove, or even remotely suggest, that the share
application money was received from independent legal entities. The survey
revealed that some of the investor companies were non-existent and had no
office at the address mentioned by the assessee. For example:

a. The companies Hema Trading Co. Pvt. Ltd. and Eternity
Multi Trade Pvt. Ltd. in Mumbai were found to be non-existent at the address
given and the premises was owned by some other person.

b. The companies in Kolkata did not appear before the A.O.,
nor did they produce their bank statements to substantiate the source of the
funds from which the alleged investments were made.

c. The two companies in Guwahati, viz., Ispat Sheet Ltd. and
Novelty Traders Ltd., were found to be non-existent at the address provided.

The genuineness of the transaction was found to be completely
doubtful.

(ii) The inquiries revealed that the investor companies had
filed returns for a negligible taxable income, which showed that the investors
did not have the financial capacity to invest funds ranging between Rs.
90,00,000 and Rs. 95,00,000 in the assessment year 2009-10 for purchase of
shares at such a high premium. For example:

(a) Neha Cassettes Pvt. Ltd. Kolkata had disclosed a taxable
income of Rs. 9,744 for the A.Y. 2009-10, but had purchased shares worth Rs.
90,00,000 in the assessee company;

(b) Warner Multimedia Ltd. Kolkata filed a NIL return, but
had purchased shares worth Rs. 95,00,000 in the assessee company;

(c) Ganga Builders Ltd. Kolkata had filed a return for Rs.
5,850 but invested in shares to the tune of Rs. 90,00,000 in the assessee
company.

(iii) There was no
explanation whatsoever offered as to why the investor companies had applied for
shares of the assessee company at a high premium of Rs. 190 per share, even
though the face value of the share was Rs. 10.

(iv) Furthermore, none of
the so-called investor companies established the source of funds from which the
high share premium was invested.

(v) The mere mention of the income tax file number of an investor
was not sufficient to discharge the onus u/s. 68 of the Act.

According to the Supreme Court, the lower appellate
authorities appeared to have ignored the detailed findings of the A.O. from the
field inquiry and investigations carried out by his office. The authorities
below had erroneously held that merely because the assessee had filed all the
primary evidence the onus on the assessee stood discharged. The lower appellate
authorities failed to appreciate that the investor companies which had filed
income tax returns with a meagre or nil income, had to explain how they had
invested such huge sums of money in the assessee company. Clearly, the onus to
establish the credit-worthiness of the investor companies was not discharged.
The entire transaction seemed bogus and lacked credibility. The court /
authorities below did not even advert to the field inquiry conducted by the
A.O. which revealed that in several cases the investor companies were found to
be non-existent and the onus to establish the identity of the investor
companies was not discharged by the assessee.

The Supreme Court observed that the practice of conversion of
unaccounted money through the cloak of share capital / premium must be
subjected to careful scrutiny. This would be particularly so in the case of
private placement of shares, where a higher onus is required to be placed on
the assessee since the information is within the personal knowledge of the
assessee. The assessee is under a legal obligation to prove the receipt of
share capital / premium to the satisfaction of the A.O., failure of which would
justify addition of the said amount to the income of the assessee.

The court held that on the facts of the case, the assessee
company had clearly failed to discharge the onus required u/s. 68 of the Act
and the A.O. was justified in adding back the amounts to the assessee’s income.

The Supreme Court allowed the appeal filed by the appellant –
Revenue –and set aside the judgement of the High Court, the ITAT and the
CIT(A). The order passed by the A.O. was restored.

6. CIT vs. Gujarat
Cypromet Ltd. (2019) 412 ITR 397 (SC)

Business expenditure – Conversion of unpaid interest into
funded interest loan – Explanation 3C in clear terms provides that conversion
of interest amount into loan shall not be deemed to be regarded as “actually
paid” amount within the meaning of section 43B – Interest not allowable

The respondent-assessee
filed a return of income showing total loss of Rs. 3,76,70,656 on 31.10.2001.
The assessment order was passed on 17.03.2004 for the assessment year 2001-02.

The A.O. disallowed the
deduction claimed by the assessee with regard to payment of interest amounting
to Rs. 2,51,31,154 to the Industrial Development Bank of India. The A.O.
referred to the circular dated 16.12.1988 as well as the judgement of the
Madhya Pradesh High Court in Eicher Motors Ltd. vs. CIT (2009) 315 ITR
312 (MP). The assessee, aggrieved by the A.O.’s order, filed an appeal
before the Commissioner of Income-tax (Appeals), which was partly allowed.

An appeal was filed before
the Income-tax Appellate Tribunal against the order of the Commissioner of
Income-tax (Appeals), which was dismissed by the Income-tax Appellate Tribunal
on 24.06.1985.

Against the order of the
Income-tax Appellate Tribunal, an appeal was filed in the High Court, which was
dismissed following the decision in CIT vs. Bhagwati Autocast Ltd. (2003)
261 ITR 481 (Guj).

On an appeal by the
Revenue, the Supreme Court noted that the interest liability which accrued
during the relevant assessment year was not actually paid back by the assessee,
rather, it was sought to be adjusted in the further loan of Rs. 8 crore which
was obtained from the Industrial Development Bank of India.

The Supreme Court observed
that the judgement of the Delhi High Court relied upon by the learned counsel
for the appellant in CIT vs. M.M. Aqua Technologies Ltd. (2015) 376 ITR
498 (Del) referred to section 43B as well as Explanation 3C and held
that Explanation 3C having retrospective effect with effect from 1.04.1989
would be applicable to the year in question. The Delhi High Court in its
judgement has referred to the judgement of the Madhya Pradesh High Court in Eicher
Motors Limited (supra). In Eicher Motors, the court had noted that
Explanation 3C in clear terms provided that such conversion of interest amount
into loan shall not be deemed to be regarded as “actually paid” amount within
the meaning of section 43B. In view of a clear legislative mandate removing
this doubt and making the intention of the legislature clear in relation to
such a transaction, it was not necessary to interpret the unamended section 43B
in detail.

The court held that in the
impugned judgement, the Gujarat High Court had relied upon Bhagwati
Autocast Ltd. (supra) which was not a case covered by section 43B(d),
rather, it was a case of section 43B(a). The provisions of section 43B covered
a host of different situations. The statutory Explanation 3C inserted by the
Finance Act, 2006 was squarely applicable in the facts of the present case.
According to the Supreme Court, the attention of the High Court was not invited
to Explanation 3C. The Supreme Court was of the view that the A.O. had rightly
disallowed the deduction as claimed by the assessee. The appellate authority,
the Income-tax Appellate Tribunal and the High Court had erred in reversing the
said disallowance.

The Supreme Court, therefore, allowed the appeal. The
question of law was answered in favour of the Revenue.

7. CIT vs. Tasgaon Taluka S.S.K. Ltd. (2019) 412
ITR 420 (SC)

Business expenditure – Sugarcane purchase price paid to
the cane growers by the assessee-society more than the statutory minimum price
and determined under Clause 5A of the Control Order, 1966 – The entire / whole
amount of difference between the statutory minimum price and the state advisory
price per se could not be said to be an appropriation of profit – Only
that part / component of profit, while determining the final price worked out /
state advisory price / additional purchase price would be and / or can be said
to be an appropriation of profit

The assessee, a
co-operative society engaged in the business of production of sugarcane and
sale thereof, filed its return of income for the assessment year 1998-99
declaring NIL income. In the return, the assessee computed carry-forward loss
of Rs. 40,00,339 and unabsorbed depreciation of Rs. 1,67,26,665. The return was
processed u/s. 143(1)(a) of the Act, making adjustment of Rs. 2,02,242
relatable to section 40A(3) of the Act. Thereafter, the assessee filed a
revised return wherein business loss was shown to the tune of Rs. 3,32,42,426.

It was noticed that the price paid by the assessee to the
sugarcane growers, most of whom were its members, was in excess of what was
payable as per the Sugarcane (Control) Order, 1966.

The A.O. held that the difference between the price paid as
per Clause 3 of the Control Order, 1966 determined by the Central Government,
and the price determined by the State Government under Clause 5A of the Control
Order, 1966 (and consequently paid by the assessee to the cane growers) could
be said to be a distribution of profit, as in the price determination under
Clause 5A of the Control Order, 1966, there was an element of profit and
therefore the price paid to the cane growers determined by the State Government
was excessive and therefore it was not deductible as expenditure and was
required to be included in the income of the assessee.

Alternatively, the A.O. also held that the excess cane price
paid to the cane growers over the statutory minimum price (SMP) was
disallowable as per section 40A(2)(a) of the Act by observing that the purchase
price paid was excessive and unreasonable.

On an appeal, the
Commissioner of Income Tax (Appeals), relying upon and considering the decision
of a Special Bench, Mumbai ITAT in the case of Manjara Shetkari Sakhar
Karkhana Limited dated 19.08.2004 allowed the appeal preferred by the
assessee and held that the price actually paid for the procurement of the
sugarcane is to be allowed as business expenditure. The learned CIT(A) also
observed and held that the excess payment of cane price as fixed by the State
Government (SAP) over and above the SMP for sugarcane to members and
non-members cannot be disallowed u/s. 40A(2)(b) of the Act, despite the fact that
profit is one of the components in asserting the price. The CIT(A) observed
that just because profit is one of the components in asserting the price, it
cannot be said that profit is separately distributed in the guise of additional
price. The learned CIT(A) observed that the amount paid by the
assessee–co-operative society to the sugarcane growers is considered for the
procurement of the sugarcane and it cannot be construed to be appropriation of
profits. Consequently, the learned CIT(A) deleted the addition made by the A.O.

The learned ITAT confirmed the order passed by the learned
CIT(A), which was further confirmed by the High Court. The High Court had
dismissed the appeal preferred by the department by observing that the question
was covered by the judgement of the High Court in the case of Commissioner
of Income Tax vs. Manjara Shetkari Sahakari Sakhar Karkhana Limited,
reported in (2008) 301 I.T.R. 191 (Bom).

On further appeal by the department, the Supreme Court
observed that the short question posed before it for consideration was whether
the sugarcane purchase price paid to the cane growers by the assessee-society
more than the SMP and determined under Clause 5A of the Control Order, 1966,
could be said to be the sharing of profit / appropriation of profit or was
allowable as expenditure?

The Supreme Court noted that the entire scheme / mechanism
while determining the additional purchase price under Clause 5A had been dealt
with and considered by it in detail in the case of Maharashtra Rajya Sahakari
Sakhar Karkhana Sangh Limited (1995) Supp. (3) SCC 475. In the said
decision it was observed that the additional purchase price / SAP is paid at
the end of the season; the Bhargava Commission had recommended payment of
additional price at the end of the season on 50:50 profit sharing basis between
the growers and factories to be worked out in accordance with the 2^nd
Schedule to the Control Order, 1966; that the additional purchase price
comprises of not only the cost of cultivation, but profit as well; the price
thus being paid on recovery of cane and profits made from sale of sugar is not
minimum but optimum price which is paid to a cane grower. The additional cane
price or additional state-fixed price is paid as a matter of incentive. The
entire price structure of cane is founded on two basic factors, one, the
recovery percentage and two, the incentive for sharing profit arrived at by
working out receipt minus expenditure.

Therefore, the Supreme Court held that to the extent of the
component of profit which would be a part of the final determination of SAP and
/ or the final price / additional purchase price fixed under Clause 5A would
certainly be and / or said to be an appropriation of profit. However, at the
same time, the entire / whole amount of difference between the SMP and the SAP per
se could not be said to be an appropriation of profit. Only that part / component
of profit, while determining the final price worked out / SAP / additional
purchase price would be and / or can be said to be an appropriation of profit
and for that an exercise has to be done by the A.O. by calling upon the
assessee to produce the statement of accounts, balance sheet and the material
supplied to the State Government for the purpose of deciding / fixing the final
price / additional purchase price / SAP under Clause 5A of the Control Order,
1966. Merely because the higher price is paid to both, members and non-members,
qua the members, still the question would remain with respect to the
distribution of profit / sharing of the profit.

So far as the non-members
were concerned, the same could be dealt with and / or considered applying section
40A (2) of the Act, i.e., the A.O. on the material on record has to determine
whether the amount paid is excessive or unreasonable or not. However, this
being not the subject matter in the present appeals, the Supreme Court
restricted itself to the present appeals qua the sugarcane purchase
price paid by the society to the cane growers above the SMP determined under
Clause 3 and the difference of sugarcane purchase price between the price
determined under Clause 3 and Clause 5A of the Control Order, 1966.

The Supreme Court observed that the A.O. would have to take
into account the manner in which the business works, the modalities and manner
in which SAP / additional purchase price / final price are decided and to
determine what amount would form part of the profit and after undertaking such
an exercise whatever is the profit component is to be considered as sharing of
profit / distribution of profit and the rest of the amount is to be considered
as deductible as expenditure.

In view of the above and for the reasons stated above, the question of
law was answered accordingly, partly in favour of the department and partly in
favour of the assessee.

8. Pr. CIT vs. Yes Bank Ltd. (2019)
412 ITR 459 (SC)

Appeal to the High Court – The High Court could not have
dismissed the appeal without framing any substantial question of law as was
required to be framed u/s. 260-A of the Act though heard the appeal bipartite
and that too without deciding any issue arising in the case

The appellant is the Union of India (Income Tax Department)
and the respondent-bank is the assessee.

In the course of assessment proceedings of the
respondent-assessee (bank) for the assessment year 2007-08, a question arose as
to whether the respondent-assessee (bank) was entitled to claim deduction u/s.
35-D of the Act for the assessment year in question. In other words, the
question arose as to whether the respondent-bank was an industrial undertaking
so as to entitle them to claim deduction u/s. 35-D of the Act.

The case of the respondent was that they, being an industrial
undertaking, were entitled to claim the deduction u/s. 35-D of the Act. The
A.O. passed an order dated 31.10.2009 which gave rise to the proceedings before
the Commissioner u/s. 263 of the Act which resulted in passing of an adverse
order dated 14.11.2011 by the Commissioner.

This, in turn, gave rise to the filing of the appeal by the
respondent before the ITAT against the order of the Commissioner. By an order
dated 5.12.2014, the ITAT allowed the appeal which gave rise to filing of the
appeal by the Revenue (Income-tax Department) in the High Court u/s. 260-A of
the Act.

The High Court dismissed the appeal after hearing both the
parties, giving rise to the filing of an appeal by way of a special leave
petition before the Supreme Court. The short question that arose for
consideration before the Supreme Court was whether the High Court was justified
in dismissing the appellant’s appeal.

According to the Supreme
Court, firstly, the High Court did not frame any substantive question of law as
was required to be framed u/s. 260-A of the Act though it heard the appeal
bipartite. In other words, the High Court did not dismiss the appeal in
limine on the ground that the appeal does not involve any substantial
question of law. Secondly, the High Court dismissed the appeal without deciding
any issue arising in the case saying that it was not necessary. Thirdly, the
main issue involved in the appeal, as rightly taken note of by the High Court,
was with regard to the applicability of section 35-D of the Act to the
respondent-assessee (bank). It was, however, not decided.

The Supreme Court was of the view that the High Court should
have framed the substantive question of law on the applicability of section
35-D of the Act in addition to other questions and then should have answered
them in accordance with the law rather than to leave the question(s) undecided.

The Supreme Court noted that the issue with regard to
applicability of section 35-D of the Act to the respondent-bank was already
pending consideration before the High Court at the instance of the respondent
in one appeal.
In such a case, both the appeals should have been decided together.

According to the Supreme Court, the order of the High Court
was not legally sustainable. It therefore set aside the order of the High
Court. The appeal was accordingly remanded to the High Court for its decision
on merits in accordance with law along with another appeal, if pending, after
framing proper substantive question(s) of law arising in the case.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

2. Vijay
Industries vs. CIT (2019) 412 ITR 1 (SC)

Newly-established
industrial undertakings or hotel business in backward areas – Deduction u/s.
80HH – Prior to insertion of section 80AB from 01.04.1981 – Deduction to be out
of profits and gains without deducting therefrom depreciation and investment allowance

In the appeals before the
Supreme Court, the issue related to the interpretation to be accorded to the
provisions of section 80HH, as it existed at the relevant time, during the
Assessment Years 1979-80 and 1980-81. Section 80HH provides deduction from
income at specified rates in respect of certain industrial undertakings which
are covered by the said provision.

The Supreme Court noted the
provisions of section 80HH as it stood at the relevant time and observed that
the section grants deduction from profits and gains to an undertaking engaged
in manufacturing or in the business of a hotel. The deduction is admissible at
the rate of 20% of the profits and gains of the undertaking for 10 assessment
years. Certain conditions are to be fulfilled in order to be eligible for such
a deduction. According to the Supreme Court, the conflict in the appeals before
it was confined to one aspect, viz., 20% deduction of gross profits and gains
or net income. Whereas the Assessee wants deduction at the rate of 20% of
profits and gains, i.e., gross profits, the stand of the Income Tax Department
is that deduction at the rate of 20% is to be computed after taking into
account depreciation, unabsorbed depreciation and investment allowance.

To put it otherwise, as per
the Department, the income of the Assessee is to be computed in accordance with
the provisions contained in sections 28 to 44DB which are the provisions for
computation of “income” under the head “profits and gains of business or
profession”. Once income is arrived at after the application of the aforesaid
provisions, 20% thereof is allowable as deduction u/s. 80HH. The Assessee, on
the other hand, submits that section 80HH uses the expression “profits and
gains” which is different from “income”. Therefore, whatever profits and gains
are earned by an undertaking covered by section 80HH of the Act, 20% thereof is
admissible as deduction. As a corollary, from such profits and gains of the
industrial undertaking, depreciation or unabsorbed investment allowances, which
are the deductions admissible u/s. 32 and 32AB of the Act, cannot be taken into
consideration.

The Supreme Court noted that in the case of Motilal
Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax (2000) 9 SCC 63 it
had taken the view which was favourable to the Department. This view was
followed by the High Court in the impugned judgement thereby dismissing the
appeals of the Appellants/Assessees herein. The Assessees in the present
appeals submitted that the aforesaid view taken in the Motilal Pesticides case
was not a correct view as it ignored certain earlier judgements on this very
issue. Therefore, according to them, the Motilal Pesticides case needed a
re-look. The Division Bench of the Supreme Court, after hearing the arguments
advanced by the counsel for the parties on the aforesaid lines, noted the
conflict and passed orders dated 05.11.2014, thereby referring the matter to a
larger Bench.

The Division Bench of the
Supreme Court had noted that sub-section (1) of section 80HH allows “a
deduction from such profits and gains of an amount equal to 20% thereof” in
computing the total income of the Assessee. Thus, so far as deduction
admissible under this provision is concerned, it is from the “profits and gains”.
In this context the first question would be: what meaning is to be assigned to
the expression “profits and gains”? According to the Supreme Court, the
reference order dated 05.11.2014 rightly made a distinction between “profits
and gains” and “income”, which captured the legal position lucidly and
succinctly. The High Court noted the argument of the Assessee that the concept
“profits and gains” is a wider concept than the concept of “income”. The
profits and gains/loss are arrived at after making actual expenses incurred
from the figure of sales by the Assessee. It does not include any depreciation
and investment allowance, as admittedly these are not the expenses actually
incurred by the Assessee. However, the term “income” does take into
consideration the deductions on account of depreciation and investment
allowance. Therefore, the term profits and gains is not synonymous with the
term “income”. The High Court, however, held that it was bound by the judgement
of the Supreme Court in Motilal Pesticides (I) Pvt. Limited (supra).

In that case, the Supreme
Court set out section 80HH in para 2 and section 80M in para 3 of the
judgement. It was noticed that whereas section 80HH uses the expression
“any profits and gains derived from”, section 80M uses the expression
“any income”. Section 80M was held, in the Cloth Traders (P) Ltd.
vs. CIT (1979) 118 ITR 243 (SC), to mean that for the purpose of that
section, deduction is to be allowed on the gross total income and not on net
income. This was overruled in Distributors (Baroda) Pvt. Ltd. vs. Union of
India (1985) 155 ITR 120 (SC).

The Division Bench of the
Supreme Court, which made a reference to the larger bench, in its order dated
05.11.2014 noted that Bhagwati, J. who was party to the earlier decision in the
Cloth Traders’ case, delivered a judgement in the Distributors (Baroda) case
holding that the cloth traders’ case was obviously incorrectly decided because
the words “any income” could not possibly refer to gross total income
but referred only to “net income”. Further, the Distributors (Baroda)
case followed the judgement of this Court (the Supreme Court) in Cambay
Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC) which
decision concerned itself with section 80E of the Income-tax Act. The Supreme
Court noted that in marked contrast to the section under consideration in this
appeal, i.e. 80HH, section 80E uses the expression “total income [as
computed in accordance with the provisions of this Act]” and goes on to
speak of any profits and gains, so computed, for the purpose of deduction u/s.
80E. In the present case, the said words are conspicuous by their absence in
section 80HH even though the expression “profits and gains” is the
same expression used in section 80E.

According to the Division
Bench of the Supreme Court, therefore, the finding in paragraph 4 in Motilal
Pesticides (supra) that the language of section 80HH and section 80M is
the same was, with respect, prima facie, incorrect. Conceptually,
“any income” and “profits and gains” are different under
the Income-tax Act.

The Supreme Court also
noted that section 80M read with section 80AA and AB and section 80T which
speak of “any income” and section 28 which speaks of “income
from profits and gains”, showed that conceptually the two expressions were
understood as distinct in law.

The Division Bench of the
Supreme Court further noted that in paragraph 5 of the judgement in Motilal
Pesticides (supra), the learned senior counsel appearing for the
appellant had submitted that both Cloth Traders and Distributors (Baroda) were
cases which pertained to section 80M only and the Supreme Court had no occasion
to consider the application of section 80AB with reference to section 80HH of
the Act. The Court in repelling this contention referred to another decision in
H.H. Sir Rama Varma vs. CIT (1994) 205 ITR 433 (SC), which dealt with
the then newly-enacted section 80AA and 80AB. Both these sections again were
relatable to deductions made u/s. 80M; and section 80T with which that
judgement was concerned, also uses the expression “any income” as
opposed to “profits and gains”. According to the Division Bench of
the Supreme Court, therefore, prima facie Varma’s case again had very
little to do with the concept of “profits and gains” with which it
was concerned here.

The Supreme Court held that
reading of section 80HH along with section 80A would clearly signify that such
a deduction has to be of gross profits and gains, i.e., before computing the
income as specified in sections 30 to 43D of the Act. It was correctly pointed
out by the Division Bench in the reference order that in the Motilal Pesticides
case the Court followed the judgement rendered in the Cloth Traders (P) Ltd.
case, which was a case u/s. 80M of the Act, on the premise that the language of
section 80HH and section 80M were the same. This basis was clearly incorrect as
the language of two provisions is materially different. The judgement of
Motilal Pesticides was, therefore, erroneous. The Supreme Court overruled this
judgement.

The Supreme Court was also
unable to subscribe to the contention of the learned senior counsel for the
Revenue that section 80AB, which was inserted by Finance (No. 2) Act, 1980 with
effect from 01.04.1981 was clarificatory in nature. According to the Supreme
Court, it was a provision made with prospective effect as the very Amendment
Act said so. Therefore, it could not apply to the Assessment Years 1979-80 and
1980-81, when section 80AB was brought on the statute book after these
assessment years. This position became clear from the reading of Circular No.
281 dated 22.09.1980 issued by the Central Board of Direct Taxes itself. This
circular inter alia described the reasons for adding new section 80AA
and 80AB. It referred to the judgement in the M/s. Cloth Traders case and
mentioned that the directions specified in the aforesaid sections would be
calculated with reference to the net income as computed in accordance with the
provisions of the Act (before making any deduction under Chapter VIA) and not
with reference to the gross amount of such income, subject, however, to the
other requirements of the respective sections. Notwithstanding the same, this
circular also categorically mentioned that it will take effect from 01.04.1981.

The Supreme Court allowed
all the appeals.

3. CIT
vs. Rashtradoot (HUF) (2019) 412 ITR 17 (SC)

Appeal to
the High Court – Section 260A – The High Court could not have dismissed the
appeal after hearing both parties without having framed question(s) and
answered them by assigning reasons – Matter remanded

Income tax proceedings were
initiated against the Respondent (Assessee) on the basis of a search operation
which was carried out by the Income-tax Department in the Assessee’s premises
on 04.09.1997. This gave rise to initiation of assessment proceedings for the
block period from 01.04.1987 to 04.09.1997 (Assessment Years 1987-88 to 1996-97
and 1997-98 up to 04.09.1997) against the Assessee to determine their tax
liability as a result of search operations carried out in their premises. The
matter, out of the block assessment proceedings, reached the Tribunal (ITAT) at
the instance of the Respondent against the order of the assessing authorities.
The Tribunal, however, decided the various issues arising in the case in favour
of the Respondent (Assessee) by allowing the Respondent’s appeal, which gave
rise to filing of the appeal by the Revenue before the High Court u/s. 260A of
the Income-tax Act, 1961.

The High Court by impugned
judgement dismissed the Revenue’s appeal, which gave rise to filing of the
appeal by way of special leave by the Revenue in the Supreme Court.

According to the Supreme
Court, the High Court neither discussed nor assigned any reason in support of
its conclusion for the dismissal of the appeal. Apart from the above, the High
Court while deciding the appeal heard the learned counsel for the parties and
yet did not frame any substantial question of law arising in the case.

According
to the Supreme Court, the High Court has jurisdiction to dismiss the appeal
filed u/s. 260A of the Act on the ground that it does not involve any
substantial question of law. Such dismissal is considered as a dismissal of the appeal in limine, i.e., dismissal without issuing any
notice of appeal to the Respondent and without hearing the Respondent. The High
Court also has the jurisdiction to dismiss the appeal by answering the
question(s) framed on merits or by dismissing the appeal on the ground that the
question(s) though framed, such question(s) does/do not arise in the appeal.
The High Court, although it may not have framed any particular question at the
time of admitting the appeal along with other questions, yet it has the
jurisdiction to frame additional questions at a later stage before final
hearing of the appeal by assigning reasons as provided in proviso to section
260A (4) and section 260A (5) of the Act; and lastly, the High Court has
jurisdiction to allow the appeal but this the High Court can do only after
framing the substantial question(s) of law and hearing the Respondent by
answering the question(s) framed in the Appellant’s favour.

However, in this case, the
Supreme Court found that the High Court did not dismiss the appeal in limine
but dismissed it after hearing both the parties. In such a situation, according
to the Supreme Court, the High Court should have framed the question(s) and
answered them by assigning the reasons accordingly one way or another by
exercising powers under sub-section (4) and (5) of section 260A of the Act.

In the absence of any
discussion and/or the reasoning/ground as to why the order of ITAT does not
suffer from any illegality and why the grounds of Revenue are not acceptable
and why the appeal does not involve any substantial question(s) of law, or
though framed cannot be answered in Revenue’s favour, the Supreme Court held
that the impugned order suffered from jurisdictional errors and, therefore, was
legally unsustainable for want of compliance of the requirements of sub-section
(4) and (5) of section 260A of the Act.

The Supreme Court thus
allowed the appeal, setting aside the impugned order and remanded the case to
the High Court with a request to decide the appeal filed by the Revenue
(Commissioner of Income Tax) afresh on merits in accordance with law.

4. Kakadia Builders Pvt. Ltd. and Ors. vs. ITO (2019)
412 ITR 128 (SC)

Settlement
Commission – Waiver of interest – The Commission does not have the power to
reduce or waive interest statutorily payable u/s. 234A, 234B and 234C except to
the extent of granting relief under the circulars issued by the Board u/s. 119
of the Act – The terminal point for the levy of interest u/s. 234B would be up
to the date of the order u/s. 245D (1) and not up to the date of the order of
settlement u/s. 245D (4) – Commission cannot reopen its concluded proceedings
by invoking section 154 of the Act so as to levy interest u/s. 234B

On 19.01.1994, a search and
seizure operation was carried out in the premises of the Appellants (Assessee)
under the Income-tax Act, 1961.

During pendency of the
assessment proceedings, which were initiated for determination of the tax
liability as a result of search and seizure operation, the Appellants on
12.03.1996 and 03.09.1996 filed the settlement applications before the
Settlement Commission and offered to settle their tax matter in accordance with
the procedure provided under Chapter XIXA of the Act.

On 11.08.2000, the
Settlement Commission passed an order u/s. 245D (4) of the Act. By the said
order, the Settlement Commission made certain additions and waived interest
chargeable u/s. 234A, 234B and 234C of the Act.

The Appellants (Assessee)
felt aggrieved and filed rectification applications before the Settlement
Commission on 29.12.2000 for amending its order dated 11.08.2000. The Revenue
(Commissioner of Income-tax) also felt aggrieved by the order dated 11.08.2000
and filed a rectification application u/s. 154 of the Act before the Settlement
Commission on 26.07.2002.

By order dated 11.10.2002,
the Settlement Commission dismissed the applications filed by the Appellants
(Assessee) and partly allowed the application filed by the Respondents
(Revenue) rectifying its order dated 11.08.2000 insofar as it pertained to
waiver of interest, which was granted to the Appellants (Assessee). The
Appellants (Assessee) felt aggrieved by the order dated 11.10.2002 passed by
the Settlement Commission and filed petitions in the High Court of Gujarat.

The High Court, by order
dated 03.03.2014, allowed the petitions and set aside the order dated
11.10.2002 passed by the Settlement Commission and granted liberty to the
Revenue to follow the remedies as may be available to it against the order
passed by the Settlement Commission dated 11.08.2000.

The Revenue, therefore,
felt aggrieved and filed petitions against the order dated 11.08.2000
questioning its legality. The High Court, although in the concluding paragraph
observed that the petitions are disposed of, yet in substance it allowed the
petitions and modified the order dated 11.08.2000 of the Settlement Commission
by reversing the waiver of interest in terms of the Settlement Commission’s
directions contained in its order dated 11.10.2002.

The Appellants (Assessee)
felt aggrieved by the said order and filed the appeals by way of special leave
in the Supreme Court.

The short question which
arose for consideration in the appeals before the Supreme Court was whether the
High Court was justified in allowing the petitions and thereby was justified in
modifying the order dated 11.08.2000 passed by the Settlement Commission.

At the outset, the Supreme
Court noted that the issue involved in the appeals was governed by the law laid
down by the decision of two Constitution Benches of the Supreme Court. One was
rendered on 18.10.2001 in Commissioner of Income-tax, Mumbai vs. Anjum M.H.
Ghaswala and Ors. (2001) 252 ITR 1 (SC) and the other was rendered on
21.10.2010 in Brij Lal and Ors. vs. Commissioner of Income-tax, Jalandhar
(2010) 328 ITR 477 (SC).

So far as the decision
rendered in Ghaswala (supra) is concerned, the question involved therein
was whether the Settlement Commission constituted u/s. 245B of the Act has the
jurisdiction to reduce or waive the interest chargeable u/s. 234A, 234B and
234C of the Act while passing the order of settlement u/s. 245D of the Act.
After examining the scheme of the Act in the context of the powers of the
Settlement Commission, it was held that the Commission in exercise of its power
u/s. 245D (4) and (6), does not have the power to reduce or waive interest
statutorily payable u/s. 234A, 234B and 234C except to the extent of granting
relief under the circulars issued by the Board u/s. 119 of the Act. So far as
the decision rendered in Brijlal (supra) is concerned, the Supreme Court
examined the following three questions:

(I) Whether section 234B
applies to proceedings of the Settlement Commission under Chapter XIX-A of the
said Act?

(II) If the answer to the
above question is in the affirmative, what is the terminal point for levy of
such interest – whether such interest should be computed up to the date of the
order u/s. 245D (1), or up to the date of the order of the Commission u/s. 245D
(4)?

(III) Whether the
Settlement Commission could reopen its concluded proceedings by invoking
section 154 of the said Act so as to levy interest u/s. 234B, though it was not
so done in the original proceedings?

After examining these
questions, the Supreme Court answered the questions as under:

(1) Sections 234A, 234B and
234C are applicable to the proceedings of the Settlement Commission under
Chapter XIX-A of the Act to the extent indicated hereinabove.

(2) Consequent upon
conclusion (1), the terminal point for the levy of interest u/s. 234B would be
up to the date of the order u/s. 245D (1) and not up to the date of the order
of settlement u/s. 245D (4).

(3) The Settlement
Commission cannot reopen its concluded proceedings by invoking section 154 of
the Act so as to levy interest u/s. 234B, particularly in view of section 245I.

The Supreme Court noted
that when the Settlement Commission passed the first order on 11.08.2000
disposing of the application of the Appellants (Assessee), the issue with
regard to the powers of the Settlement Commission was not settled by any
decision of this Court. These two decisions were rendered after the Settlement
Commission passed the order in this case. Therefore, the Settlement Commission
had no occasion to examine the issue in question in the context of law laid
down by this Court in these two decisions. However, the issue in question was,
at that time, pending before the High Court in the petitions.

According to the Supreme
Court, in a situation like the one arising in the case, the High Court instead
of going into the merits of the issue, should have set aside the order dated
11.08.2000 passed by the Settlement Commission and remanded the case to the
Settlement Commission for deciding the issue relating to waiver of interest
payable u/s. 234A, 234B, and 234C of the Act afresh keeping in view the scope
and the extent of powers of the Settlement Commissioner in relation to waiver
of interest as laid down in the said two decisions.

The
Supreme Court was of the view that the High Court had committed a
jurisdictional error when it observed that they (the High Court) adopted the
directions contained in the order of the Settlement Commission dated 11.10.2002
and then went on to make the said directions as a part of the impugned order in
relation to waiver of interest. This approach of the High Court was wholly
without jurisdiction.

The High Court failed to
see that the order dated 11.10.2002 of the Settlement Commission was already
set aside by the High Court itself in the first round vide order dated
03.03.2014 in the light of law laid down by this Court in Brijlal (supra)
wherein it is laid down that the Settlement Commission has no power to pass
orders u/s. 154.

The Supreme Court allowed the appeal setting aside the impugned
order and the order dated 11.08.2000 passed by the Settlement Commission to the
extent it decided the issue in relation to waiver of interest and remanded the
case to the Settlement Commission to decide the issue relating to waiver of
interest payable by the Assessee afresh keeping in view the law laid down by
this Court in Ghaswala (supra) and Brijlal (supra) after
affording an opportunity to the parties concerned.

BCAJ Admin

Glimpses Of Supreme Court Rulings

12. Industrial
Infrastructure Development Corporation (Gwalior) M. P. Ltd. vs. CIT (2018) 403
ITR 1 (SC)

Registration
of Trusts – Commissioner of Income-tax had no power to cancel registration till
October 1, 2004 and the power conferred by the amendment was prospective –
Order of Commissioner of Income-tax passed u/s. 12A is quasi judicial in nature
and therefore section 21 of General Clauses Act has no application

The Appellant, a State
Government Undertaking, was established with a view to develop and assist the
State in the development of industrial growth centers/areas, to promote,
encourage and assist the establishment growth and development of industries in
the State of M.P.

On 10.02.1999, the
Appellant filed an application in the format prescribed u/s. 12-A of the Act to
the Commissioner of Income Tax (hereinafter referred to as “the CIT”)
for grant of registration. According to the Appellant, since they were engaged
in public utility activity which, according to them, was for a charitable
purpose u/s. 2(15) of the Act, they were entitled to claim registration as
provided u/s. 12A of the Act. Since the application for registration was
delayed in its filing, the Appellant also made an application for condonation
of delay in filing the application.

By order dated 13.04.1999,
the CIT (Gwalior) condoned the delay and granted the registration certificate
as prayed for by the Appellant. In Clause 3 of the registration certificate, it
was mentioned that the certificate is granted without prejudice to the
examination on merits of the claim of exemption after the return is filed.

On 27.11.2000, the CIT
issued a show cause notice to the Appellant stating therein as to why the
registration certificate granted to the Appellant by order dated 10.02.1999
u/s.12A of the Act be not cancelled/withdrawn. The show cause notice also set
out the factual grounds for the withdrawal of the registration certificate. The
Appellant was asked to reply the show cause notice. The Appellant accordingly
filed their reply and opposed the grounds on which the withdrawal/cancellation
of the certificate was proposed.

By order dated 29.04.2002,
the CIT did not find any substance in the stand taken by the Appellant in their
reply and accordingly cancelled/withdrawn the certificate issued to the
Appellant.

The Appellant felt
aggrieved and filed rectification application u/s.154 of the Act before the CIT
on 04.07.2002 contending therein that the order of the CIT dated 29.04.2002
cancelling/withdrawing the registration certificate contains an error apparent
and, therefore, it is required to be rectified or/and recalled. It was
contended that once the CIT grants the registration certificate u/s. 12A, he
has no power to cancel/recall the certificate granted to the Assessee.

On 20.12.2002, the CIT
rejected the application filed by the Appellant for rectification holding that
there was no error in his order cancelling the registration certificate granted
to the Appellant. In other words, the CIT held that he had the power to cancel
the certificate once granted by him and, therefore, the order for cancelling
the registration certificate is legal and proper.

Aggrieved by the said
order, the Appellant filed an appeal before the Income Tax Appellate Tribunal,
Agra Bench. By order dated 26.08.2004, the ITAT allowed the Appellant’s appeal
and set aside the order dated 29.04.2002 passed by the CIT by which he had
cancelled/withdrawn the registration certificate.

The Revenue felt aggrieved
by the order of the ITAT and filed appeal in the High Court at Gwalior Bench
u/s. 260-A of the Act. The High Court, allowed the appeal filed by the Revenue
and set aside the order passed by the ITAT and restored the order of the CIT.

The Division Bench of the
High Court placed reliance on section 21 of the General Clauses Act and held
that since there is no express power in the Act for cancelling the registration
certificate u/s. 12A of the Act and hence power to cancel can be traced from
section 21 of the General Clauses Act to support such order. In other words, in
the opinion of the High Court, section 21 is the source of power to pass
cancellation of the certification granted by the CIT when there is no express
power available u/s. 12A of the Act.

It is against this order,
the Assessee felt aggrieved and filed the appeal by way of special leave before
the Supreme Court.

According to the Supreme
Court, the main questions, that arose for its consideration in this appeal,
were four:

First, whether the CIT has
express power to cancel/withdraw/recall the registration certificate once
granted by him u/s. 12A of the Act and, if so, under which provision of the
Act?

Second, when the CIT grants
registration certificate u/s.12A of the Act to the Assessee, whether grant of
certificate is his quasi judicial function and, if so, its effect on exercise
of his power of cancellation of such grant of registration certificate?

Third, whether Section 21
of the General Clauses Act can be applied to support the order of cancellation
of the registration certificate granted by the CIT u/s. 12A of the Act, in
case, if it is held that there is no express power of cancellation of
registration certificate available to the CIT u/s. 12A of the Act? and

Fourth, what is the effect
of the amendment made in section 12AA introducing Sub-clause (3) therein by
Finance (No-2) Act 2004 w.e.f. 01.10.2004 conferring express power on the CIT
to cancel the registration certificate granted to the Assessee u/s. 12A of the
Act.

The Supreme Court held
that, the CIT had no express power of cancellation of the registration
certificate once granted by him to the Assessee u/s. 12A till 01.10.2004. It is
for the reasons that, first, there was no express provision in the Act vesting
the CIT with the power to cancel the registration certificate granted u/s. 12A
of the Act. Second, the order passed u/s. 12A by the CIT is a quasi judicial
order and being quasi judicial in nature, it could be withdrawn/recalled by the
CIT only when there was express power vested in him under the Act to do so. In
this case there was no such express power.

Indeed, the functions
exercisable by the CIT u/s. 12A are neither legislative and nor executive but
as mentioned above they are essentially quasi judicial in nature.

Third, an order of the CIT
passed u/s. 12A does not fall in the category of “orders” mentioned
in Section 21 of the General Clauses Act. The expression “order”
employed in section 21 would show that such “order” must be in the
nature of a “notification”, “rules” and “bye
laws” etc. (see – Indian National Congress (I) vs. Institute of
Social Welfare and Ors., 2002 (5) SCC 685).

In other words, the order,
which can be modified or rescinded by applying section 21, has to be either
executive or legislative in nature whereas the order, which the CIT is required
to pass u/s. 12A of the Act, is neither legislative nor an executive order but
it is a “quasi judicial order”. It is for this reason, section 21 has
no application in this case.

The general power, u/s. 21
of the General Clauses Act, to rescind a notification or order has to be
understood in the light of the subject matter, context and the effect of the
relevant provisions of the statute under which the notification or order is
issued and the power is not available after an enforceable right has accrued
under the notification or order. Moreover, section 21 has no application to
vary or amend or review a quasi judicial order. A quasi judicial order can be
generally varied or reviewed when obtained by fraud or when such power is
conferred by the Act or Rules under which it is made. (See Interpretation of
Statutes, Ninth Edition by G.P. Singh page 893).

According to the Supreme
Court, it was not in dispute that an express power was conferred on the CIT to
cancel the registration for the first time by enacting sub-section (3) in
section 12AA only with effect from 01.10.2004 by the Finance (No. 2) Act 2004
(23 of 2004) and hence such power could be exercised by the CIT only on and
after 01.10.2004, i.e., (assessment year 2004-2005), because the amendment in
question was not retrospective but was prospective in nature.

The Supreme Court allowed
the appeal setting aside the order of the High Court and restoring the order of
the ITAT, however clarifying that, the CIT would be free to exercise his power
of cancellation of registration certificate u/s. 12AA(3) of the Act in the case
at hand in accordance with law.

13. The
Director, Prasar Bharati vs. CIT (2018) 403 ITR 161 (SC)

Deduction
of tax at source – Payments made by the Appellant pursuant to the agreement in
question were in the nature of payment made by way of “commission”
and, therefore, the Appellant was under statutory obligation to deduct the
income tax at the time of credit or/and payment to the payee

The Appellant known as
“Prasar Bharati Doordarshan Kendra” functioned under the Ministry of
Information and Broadcasting, Government of India. The dispute in this case
related to the Appellant’s Regional Branch at Trivandrum.

The Appellant, in the
course of their business activities, which included the running of the TV
channel called “Doordarshan”, had been regularly telecasting
advertisements of several consumer companies.

With a view to have a
better regulation of the practice of advertising and to secure the best
advertising services for the advertisers, the Appellant entered into an
agreement with several advertising agencies. The agreement, inter alia,
provided that the Appellant would pay 15% by way of commission to the Agency.

In the assessment year
2002-2003 (01.06.2001 to 31.03.2002) and 2003-2004 (01.04.2002 to 31.03.2003),
the Appellant paid a sum of Rs. 2,56,75,165/- and Rs. 2,29,65,922/- to various
accredited Agencies, with whom they had entered into the aforementioned agreement
for telecasting the advertisements given by these Agencies relating to products
manufactured by several consumer companies. The amount was paid by the
Appellant to the Agencies towards the commission in terms of
the agreement.

The AO was of the view that
the provisions of section 194H of the Act were applicable to the payments made
by the Appellant to the Agencies because the payments were made in the nature
of “commission” as defined in Explanation appended to section 194H of
the Act. The AO held that the Appellant, therefore, committed default thereby
attracting the rigor of section 201(1) of the Act because they failed to deduct
the “tax at source” from the amount paid to various advertising
agencies during the Assessment Years in question as provided u/s.194A of the
Act.

On quantification, the AO
found that during the Assessment Year 2002-2003, the Appellant had paid a sum
of Rs. 2,56,75,165/- towards the commission to the Agencies and on this sum,
they were required to deduct tax amount to Rs. 16,34,283/- and a sum of Rs.
3,80,611/- towards interest for delayed payment u/s. 201(1-A) of the Act and
during the Assessment Year 2003-2004, the Appellant had paid a sum of Rs.
2,29,65,922/- towards the commission to the Agencies and on this sum, they were
required to deduct tax amounting to Rs. 11,15,944/- and a sum of Rs. 1,54,050/-
towards interest for delayed payment u/s. 201(1-A) of the Act.

The Appellant felt
aggrieved and filed appeals before the Commissioner of Income Tax (Appeals)-II,
Thiruvananthapuram. By order dated 04.03.2005, the Commissioner concurred with
the reasoning and conclusion arrived at by AO and accordingly dismissed the
appeals.

The Appellant felt
aggrieved and filed appeals before the Tribunal. By order dated 28.03.2007, the
Tribunal following its earlier order allowed the appeals and set aside the
orders passed by AO and CIT (Appeals).

The Revenue (Income Tax
Department), felt aggrieved by the order passed by the Tribunal, filed appeals
u/s. 260-A of the Act in the High Court. By impugned judgment, the High Court
allowed the appeals and while setting aside the Tribunal’s order restored the order of CIT (Appeals) and AO.

The High Court was of the
opinion that the provisions of section 194H were applicable to the payments made
by the Appellant to the Agencies during the period in question because the
payments made were in the nature of “commission” paid to the Agencies
as defined in Explanation appended to section 194H of the Act and since the
Appellant failed to deduct the “tax at source” while making these
payments to the Agencies in terms of the agreement in question, they committed
default of non-compliance of section 194H resulting in attracting the
provisions of section 201 of the Act.

The Appellant (Assessee)
felt aggrieved and filed appeals by way of special leave in Supreme Court.

According to the Supreme
Court, the High Court was right in holding that the provisions of section 194H
were applicable to the Appellant because the payments made by the Appellant
pursuant to the agreement in question were in the nature of payment made by way
of “commission” and, therefore, the Appellant was under statutory
obligation to deduct the income tax at the time of credit or/and payment to the
payee.

The aforementioned
conclusion of the High Court was clear from the undisputed facts emerging from
the record of the case because we notice that the agreement itself has used the
expression “commission” in all relevant clauses; Second, there is no
ambiguity in any Clause and no complaint was made to this effect by the
Appellant; Third, the terms of the agreement indicate that both the parties
intended that the amount paid by the Appellant to the agencies should be paid
by way of “commission” and it was for this reason, the parties used
the expression “commission” in the agreement; Fourth, keeping in view
the tenure and the nature of transaction, it is clear that the Appellant was
paying 15% to the agencies by way of “commission” but not under any
other head; Fifth, the transaction in question did not show that the
relationship between the Appellant and the accredited agencies was principal to
principal rather it was principal and Agent; Sixth, it was also clear that
payment of 15% was being made by the Appellant to the agencies after collecting
money from them and it was for securing more advertisements for them and to
earn more business from the advertisement agencies; Seventh, there was a Clause
in the agreement that the tax shall be deducted at source on payment of trade
discount; and lastly, the definition of expression “commission” in
the Explanation appended to Section 194H being an inclusive definition giving
wide meaning to the expression “commission”, the transaction in
question did fall under the definition of expression “commission” for
the purpose of attracting rigour of section 194H of the Act.

14. K.
Raveendranathan Nair vs. CIT (2018) 403 ITR 180 (SC)

Appeal to
the High Court – Court fees – Wherever Assessee is in appeal in the High Court
which is filed u/s. 260A of the IT Act, the court fee payable shall be the one
which was payable on the date of such assessment order – In those cases where
the Department files appeal in the High Court u/s. 260A of the IT Act, the date
on which the appellate authority set aside the judgement of the Assessing
Officer would be the relevant date for payment of court fee

The Supreme Court noted
that by amendment in the Income Tax Act, 1961 (hereinafter referred to as the
‘IT Act’) in the year 1998, section 260A was inserted providing for statutory
appeal against the orders passed by the Income Tax Appellate Tribunal. In this
very section, under sub-section (2)(b), court fees on such appeals was also
prescribed which was fixed at Rs. 2,000/-. However, sub-section (2)(b) of
section 260A prescribing the aforesaid fee was omitted by amendment carried out
in the said Act, with effect from June 01, 1999. It was presumably for the
reason that insofar as court fee payable on such appeals are concerned, which
are to be filed in the High Court, it is the State Legislature which is
competent to legislate in this behalf.

In the State of Kerala, the
law of court fee is governed by the Kerala Court Fees and Suits Valuation Act,
1959 (hereinafter referred to as the ‘1959 Act’). Section 52 thereof relates to
the fee payable in appeals. Thus, with the omission of Clause (b) of
sub-section (2) of section 260A of the IT Act, fee became payable on such
appeals as per section 52. The State Legislature thereafter amended the 1959
Act by Amendment Act of 2003 and inserted section 52A therein, which was passed
on March 06, 2003. In fact, before that an Ordinance was promulgated on October
25, 2002 which was replaced by the aforesaid Amendment Act, the Act
categorically provided that section 52A is deemed to have come into force on
October 26, 2002. As per the amended provision, viz. section 52A of the 1959
Act, the fee on memorandum of appeals against the order of the Income Tax
Appellate Tribunal or Wealth Tax Appellate Tribunal is to be paid at the rates
specified in sub-item (c) of item (iii) of Article 3 of Schedule II. This
sub-item (c) reads as under:

(c) Where such income                         One
percent of the assessed income,
     exceeds two lakh rupees                   subject to a maximum of ten
thousand rupees

It is clear from the above
that fee is now payable, where such income exceeds two lakh rupees, at the rate
of 1% of the ‘assessed income’, subject to a maximum of ten thousand rupees.

The question that arose for
consideration before the High Court in the impugned judgement, against which
the appeals arose before the Supreme Court, was payment of fee as per the
aforesaid Schedule on the appeals that are filed on or after October 26, 2002.
As per the State of Kerala, on all appeals which are filed against the order of
Income Tax Appellate Tribunal or the Wealth Tax Appellate Tribunal on or after
October 26, 2002, fee is payable as per the aforesaid amended provisions. The
Appellant herein, however, contend that in all those cases which were even
pending before the lower authorities, i.e. the Assessing Officer, Commissioner
of Income Tax (Appeals) or Income Tax Appellate Tribunal and orders were passed
even before October 01, 1998, the right to appeal had accrued with effect from
October 01, 1998 and, therefore, such cases would be governed as on the date
when the orders were passed by the lower authorities and the court fee would be
payable as per the unamended provisions. The High Court has not accepted this
plea of the Appellant and has held that any appeal ‘filed’ on or after October
26, 2002 shall be governed by section 52A of the 1959 Act.

The Supreme Court held as
under:

(i) Wherever Assessee is in
appeal in the High Court which is filed u/s. 260A of the IT Act, if the date of
assessment is prior to March 06, 2003, section 52A of the 1959 Act shall not
apply and the court fee payable shall be the one which was payable on the date
of such assessment order.

(ii) In those cases where
the Department files appeal in the High Court u/s. 260A of the IT Act, the date
on which the appellate authority set aside the judgement of the Assessing
Officer would be the relevant date for payment of court fee. If that happens to
be before March 06, 2003, then the court fee shall not be payable as per
Section 52A of the 1959 Act on such appeals.

15. B. L. Passi vs. CIT (2018) 404 ITR 19 (SC)

Royalty or
fees for technical services – The Appellant was not entitled to deduction u/s.
80-O as there was no material on record to prove the sales effected by Sumitomo
Corporation to its customers in India in respect of any product developed with
the assistance of Appellant’s information and also on as to how the service
charges payable to Appellant were computed

The Appellant filed his
return disclosing income of Rs.
57,40,360/- for the
Assessment Year (AY) 1997-98 while claiming deduction of Rs. 58,87,045/-
under Section 80-O of the Income Tax Act, 1961 (in short ‘the IT Act’) on a
gross foreign exchange receipt of Rs. 1,17,74,090/- received from Sumitomo
Corporation, Japan. Sumitomo Corporation was interested in supplying dies for
manufacturing of body parts to Indian automobile manufacturers and entered into
a contract with the Appellant under which the services of the Appellant herein
were engaged by using his specialised commercial and industrial knowledge about
the Indian automobile industry. Sumitomo Corporation also agreed to pay
remuneration at the rate of 5% of the contractual amount between Sumitomo Corporation
and its Indian customers on sales of its products so developed. The Appellant
claimed to have supplied to Sumitomo Corporation the industrial and commercial
knowledge, information about market conditions and Indian manufacturers of
automobiles and also technical assistance as required by the Corporation.

The case of the Appellant
was selected for scrutiny by the Income Tax Department, Delhi and in response
to notice u/s. 143(2) of the IT Act, the Appellant along with others attended
the assessment proceedings from time to time justifying the claim u/s. 80-O of
the IT Act. The Assessing Officer, vide order dated 27.03.2000 u/s.143(3) of
the IT Act assessed the total income at Rs. 1,18,43,060/- and determined the
sum payable by the Assessee to the tune of Rs. 43,25,960/-. Being aggrieved by
the order dated 27.03.2000, the Appellant preferred an appeal before the
Commissioner of Income Tax (Appeals). The Appellate Authority, vide order dated
20.02.2002, partly allowed the appeal and held that the Appellant is entitled
to deduction u/s. 80-O of the IT Act. Being aggrieved by the order dated
20.02.2002, the Revenue went in appeal before the Tribunal. The Tribunal, vide
order dated 10.10.2005, allowed the appeal filed by the Revenue. The Appellant
approached the High Court by filing an appeal challenging the order of the
Tribunal dated 10.10.2005 which was dismissed on 13.12.2006 by a Division Bench
of the High Court.

Aggrieved by the judgement
and order dated 13.12.2006, the Appellant filed this appeal by way of special
leave before the Supreme Court.

The Supreme Court noted
that, provisions similar to section 80-O of the Act were originally in the
former section 85-C of the Income Tax Act, 1961 which was substituted by
Finance (No. 2) Act, 1971. Section 80-O was inserted in place of section 85C
which was deleted by the Finance (No. 2) Act, 1967. While moving the bill
relevant to the Finance Act No. 2 of 1967, the then Finance Minister highlighted
the fact that fiscal encouragement needs to be given to Indian industries to
encourage them to provide technical know-how and technical services to newly
developing countries. It is also seen that the object was to encourage Indian
companies to develop technical know-how and to make it available to foreign
companies so as to augment the foreign exchange earnings of this country and
establish a reputation of Indian technical know-how for foreign countries. The
objective was to secure that the deduction under the section shall be allowed
with reference to the income which is received in convertible foreign exchange
in India or having been received in convertible foreign exchange outside India,
is brought to India by and on behalf of taxpayers in accordance with the
Foreign Exchange Regulations.

The Supreme Court in
respect to the facts of the case at hand observed that, it was evident from
record that the major information sent by the Appellant to the Sumitomo
Corporation was in the form of blue prints for the manufacture of dies for
stamping of doors. Several letters were exchanged between the parties but there
was nothing on record as to how this blue print was obtained and dispatched to
the aforesaid company. It was also evident on record that the Appellant has not
furnished the copy of the blue print which was sent to the Sumitomo Corporation
neither before the Assessing Officer nor before the Appellate authority nor
before the Tribunal. The provisions of section 80-O of the IT Act mandate the
production of document in respect of which relief has been sought. The Supreme
Court was of the opinion that therefore it had to examine whether the services
rendered in the form of blue prints and information provided by the Appellant
fell within the ambit of section 80-O of the IT Act or any of the conditions
stipulated therein in order to entitle the Assessee to claim deduction.

The blue prints made
available by the Appellant to the Corporation could be considered as technical
assistance provided by the Appellant to the Corporation in the circumstances if
the description of the blue prints was available on record. The said blue
prints were not even produced before the lower authorities. In such scenario,
when the claim of the Appellant was solely relying upon the technical
assistance rendered to the Corporation in the form of blue prints, its
unavailability created a doubt and burden of proof was on the Appellant to
prove that on the basis of those blue prints, the Corporation was able to start
up their business in India and he was paid the amount as service charge.

Further, with regard to the
remuneration to be paid to the Appellant for the services rendered, in terms of
the letter dated 25.01.1995, it had been specifically referred that the
remuneration would be payable for the commercial and industrial information
supplied only if the business plans prepared by the Appellant resulted
positively. Sumitomo Corporation would pay to PASCO International service
charges equivalent to 5% (per cent) of the contractual amount between Sumitomo
and its customers in India on sales of its products so developed. From a
perusal of the above, it was clear to the Supreme Court that the Appellant was
entitled to service charges at the rate of 5% (per cent) of the contractual
amount between Sumitomo Corporation and its customers in India on sales of its
products so developed but there was nothing on record to prove that any product
was so developed by the Sumitomo Corporation on the basis of the blue prints
supplied by the Appellant as also that the Sumitomo Corporation was able to
sell any product developed by it by using the information supplied by the
Appellant. Meaning thereby, there was no material on record to prove the sales
effected by Sumitomo Corporation to its customers in India in respect of any
product developed with the assistance of Appellant’s information and also on as
to how the service charges payable to Appellant were computed.

In view of the foregoing
discussion, the Supreme Court was of the view that in the present facts and
circumstances of the case, the services of managing agent, i.e., the Appellant,
rendered to a foreign company, were not technical services within the meaning
of section 80-O of the IT Act. The Appellant had failed to prove that he
rendered technical services to the Sumitomo Corporation and also the relevant
documents to prove the basis for alleged payment by the Corporation to him. The
letters exchanged between the parties could not be claimed for getting
deduction u/s. 80-O of the IT Act.

The Supreme Court further held
that the Appellant was a managing agent and the High Court was right in holding
the principal agent relationship between the parties and that there was no
basis for grant of deduction to the Appellant u/s. 80-O of the IT Act.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

9 Pr. Commissioner of Income Tax vs. Aarham Softronics (2019) 412 ITR 623 (SC)

Industrial
undertaking – Deduction u/s. 80-IC – Eligible to claim deduction of 100% of the
profits for first five years and thereafter at 25% of profits for next five
years – Carries out substantial expansion within ten-year period – Further
entitled to deduction of 100% of profits from the year of expansion – Total
period of deduction, however, not to exceed ten years – Classic Binding
Industries’ case (407 ITR 429) not a good law

To understand
the question of law that arose before the Supreme Court in clear terms, the
Court noted that sub-section (2) of section 80-IC applies to an undertaking or
enterprise which has, inter alia, begun or begins to manufacture or
produce any article or thing by setting up a new factory in the area specified
therein, which includes the State of Himachal Pradesh. Sub-section (3) of
section 80-IC is in two parts: in certain cases, exemption from income is
provided at the rate of 100% of such profits and gains earned from the
aforesaid undertaking or enterprise for ten assessment years commencing with
the initial assessment year. The other clause relates to another category of
undertakings or enterprises (to which the cases before it belong) where the
exemption is at the rate of 100% of profits and gains for five assessment years
commencing with the initial assessment year and, thereafter, 25% of profits and
gains. The total exemption, thus, is for a period of ten years, namely, @100%
for the first five years and @ 25% for the remaining five years.

In the cases
before the Supreme Court, all the assessees started claiming exemption @ 100%
on profits and gains and availed it for a period of five years. During this
period, these assessees carried out ‘substantial expansion’ and claimed on that
basis that they should be allowed exemption from profits and gains for another
five years @ 100% instead of 25% from the 6th to the 10th year as well. They,
however, admitted that the total period during which they were entitled to
exemption would not exceed ten years as per the mandate of sub-section (6).

In this
backdrop, the question that arose before the Supreme Court was as to whether
the assessees could again start claiming 100% exemption for the next five years
from profits and gains after availing the same for the first five years on the
ground that they had carried out substantial expansion.

The High Court
had answered the question in the affirmative and for this reason it was the
Department that had moved the Supreme Court challenging the said decision by
filing appeals.

These appeals
were heard and decided by a Division Bench of the Supreme Court by its
judgement dated 20^th August, 2018 (407 ITR 429). The judgement of
the High Court was reversed on the aforesaid issue.

But it so
happened that in some of the appeals the respondent assessees were not served
with the notice and hence remained unrepresented. Since the appeals in respect
of these assessees were decided in their absence, they filed miscellaneous
applications for recall of the order, with a prayer to decide the appeals
afresh after giving them a hearing. In view of this, by a separate order their
applications were allowed and their appeals restored. Even the Revenue had
filed a few SLPs against the common judgement of the High Court as these SLPs
were not filed earlier when a batch of appeals was decided on 20^th
August, 2018 by the Supreme Court. The Supreme Court, therefore, heard the
appeals arising out of these SLPs along with the other appeals in which the
earlier judgement rendered had been recalled.

In the judgement
dated 20^th August, 2018 the Court took the view that once ‘initial
assessment year’ starts on fulfilling the conditions laid down in sub-section
(2) of section 80-IC, there cannot be another ‘initial assessment year’ for the
purposes of section 80-IC within the aforesaid period of ten years. While doing
so, the Court referred to section 80-IB(14)(c) of the Act, on the basis of
which an opinion was formed that there cannot be another ‘initial assessment
year’ for the purposes of section 80-IC within the aforesaid period of ten
years. According to the Supreme Court, this was the apparent error which was
committed. Section 80-IB(14) starts with the words ‘for the purpose of this
section’. Thus, ‘initial assessment year’ defined therein was relatable only to
the deductions that were provided under the provisions of section 80-IB,
namely, in respect of profits and gains from certain industrial undertakings
other than infrastructure development undertakings.

Further, clause
(v) of sub-section (8) of section 80-IC provides the definition of ‘initial
assessment year’ for the purpose of section 80-IC, which was not noticed by the
Court while pronouncing the judgement in the Commissioner of Income Tax
vs. M/s Classic Binding Industries case. According to the Supreme
Court, a mistake had occurred in the Classic Binding judgement.

As per this
definition, there could be an ‘initial assessment year’, relevant to the
previous year, in any of the following contingencies: (i) The previous year in
which the undertaking or the enterprise begins to manufacture or produce
articles or things; or (ii) Commences operation; or (iii) Completes substantial
expansion. The first two events are relatable to new units whereas the third
incident would occur in respect of existing units. The benefit of section 80-IC
is, thus, admissible not only when an undertaking or enterprise sets up a new
unit and starts manufacturing or producing articles or things. The advantage of
these provisions also accrues to those existing units, if they carry out
‘substantial expansion’ of their units by investing required capital in the
assessment year relevant to the previous year. ‘Substantial expansion’ is
defined in clause (ix) of sub-section (8) of section 80-IC. As per the
aforesaid definition, an existing unit would be treated as having carried out
substantial expansion when there is an increase in the investment in the plant
and machinery by at least 50% of the book value of the plant and machinery (before
taking depreciation in any year).

The Supreme
Court noted that the assessees had initially set up new industry in the state
of Himachal Pradesh of the nature specified u/s. 80-IC of the Act. As a result,
they became entitled to avail the concession provided in the said provision.
After five years and before the expiry of ten years, the assessees had carried
out substantial expansion of their units in terms of the aforesaid definition.
Considering the definition of ‘initial assessment year’, the Court was inclined
to accept that there could be another ‘initial assessment year’ on the
fulfilment of the condition mentioned in the said definition, namely,
completion of substantial expansion of the existing unit.

According to the
Supreme Court, therefore, the moment substantial expansion takes place, another
‘initial assessment year’ gets triggered. This new event entitles that unit to
start getting deduction @ 100% of the profits and gains. However, at the same
time, a new period of ten years does not start. This is so because the total
period for which deduction could be allowed has been capped at ten years,
inasmuch as sub-section (6) in no uncertain terms stipulates that deduction
shall be not allowed for a period exceeding ten assessment years.

The Supreme
Court, having examined the scheme in the aforesaid manner, came to the
conclusion that the definition of ‘initial assessment year’ contained in clause
(v) of sub-section (8) of section 80-IC could lead to a situation where there
could be more than one ‘initial assessment year’ within the said period of ten
years.

10 Pr. Commissioner of Income Tax vs. Nokia India Pvt. Ltd. (2019) 413 ITR
146 (SC)

Appeal to the
High Court – Substantial question of law – Reassessment – High Court dismissing
the appeal holding that assessment could not be reopened on a mere change of
opinion based on explanation given by an Assessing Officer to an audit
objection in a return processed u/s. 143(1) – High Court could not have
dismissed the appeal in
limine – Question of
law arose

The
respondent-assessee filed its return of income for the assessment year
1999-2000 declaring the taxable income as ‘nil’ after setting off of business
income of Rs. 12,97,86,402 against unabsorbed business losses and depreciation.
Since book profits were nil, the assessee’s case was that no tax was payable
u/s. 115JA of the Act. The assessee filed a revised return reporting a business
income of Rs. 12,97,44,989 but still showing ‘nil’ taxable income after
claiming set-off of unabsorbed business losses. There was no scrutiny of the
return and intimation u/s. 143(1) of the Act was issued to the assessee.

Subsequently, a
notice dated 20^th September, 2004 u/s. 148 of the Act was issued
seeking to reopen the assessment. This notice was dropped on 6^th /
13^thFebruary, 2006 after the assessee raised objections. On 13^th
February, 2006 a second notice u/s. 148 of the Act was issued. The reasons
provided to the assessee on 30^th August, 2006 for the reopening were
that after examination of the records for the assessment year 1999-2000, it was
revealed that during the year the assessee made various provisions in the
return of income for gratuity, doubtful debts, warranty, obsolescence which
were in the nature of ‘unascertained liabilities’ and were not added to the
book profit. This had resulted in underassessment of income for the assessment
year in question.

The assessee
filed its objections which were rejected by the Assessing Officer (AO) by order
dated 8^th November, 2006. Subsequently, by an order dated 30^th
November, 2006 the AO disallowed 20% of foreign travel expenses to the extent
of Rs. 1,71,95,149, provision for warranty to the extent of Rs. 1,77,45,202,
FOC marketing expenses (after depreciation) to the extent of Rs. 18,41,099, as
well as disallowed 25% of provision for obsolescence of inventory to the extent
of Rs. 12,13,037 and made addition to closing stock of Rs. 29,60,347.

By his order
dated 22^nd February, 2010 the Commissioner of Income-tax (Appeals)
rejected the assessee’s arguments u/s. 148 but deleted the disallowance of 20%
of foreign travel expenses and provision for warranty, but sustained the other
issues. Aggrieved by the said order, both the Revenue and the assessee filed
appeals before the Income-tax Appellate Tribunal (ITAT).

By a common
order dated 3^rd June, 2016 the ITAT allowed the assessee’s appeal
after examining the audit objection raised qua the assessment order of
the AO and the AO’s response thereto.

The Revenue
filed an appeal to the High Court only against the allowing of the assessee’s
appeal by the ITAT. It was urged by the Revenue that since the return filed was
processed u/s. 143(1) of the Act and intimation sent, there was no occasion for
the AO to have formed an opinion in the first place. Consequently, there was no
change of opinion when he decided to reopen the assessment. The Revenue further
submitted that the AO’s reply to the audit objection did not constitute the
formation of an opinion either.

The High Court
examined the letter dated 24^thSeptember, 2003 written by the AO in
response to the audit objection and held that not only did he examine the
records but came to the conclusion that ‘there was prima facie no
evidence that the liabilities were not ascertained liabilities’. The ITAT was
therefore right in holding that the reopening was based merely on a change of
opinion. According to the High Court, no question of law arose.

The Revenue
being aggrieved by the order of the High Court dismissing their appeal in
limine, filed the appeal by way of special leave in the Supreme Court.

According to the
Supreme Court, the following substantial questions of law did arise in this
appeal filed by the Revenue (the appellant herein) u/s. 260-A of the Act in the
High Court against the order passed by the ITAT and the same should have been
framed by the High Court for deciding the appeal on merits in accordance with
law:

“1. Whether the
ITAT was justified in holding that the notice issued by the AO u/s. 148 was bad
in law when admittedly the impugned notice was issued in the case where the
assessment was made u/s. 143(1) of the Act but not u/s. 143(3) of the Act.

2. Whether the
ITAT was justified in holding that the notice issued u/s. 148 of the Act was
bad because it was based on mere change of opinion by overlooking the fact that
there was no foundation to form any such opinion.

3. When
admittedly the notice in question satisfied the requirements of section 148 of
the Act as it stood, namely, that first, it contained the facts constituting
the ‘reasons to believe’, and second, it furnished the necessary details for
assessing the escaped income of the assessee, whether the ITAT was still justified
in declaring the notice as being bad in law without taking into consideration
any of these admitted facts.

4. In case, if
the notice is held proper and legal, whether the finding recorded by the ITAT
on the merits of the case on each item, which is subject matter of the notice,
is legally sustainable?”

According to the
Supreme Court, the aforementioned four questions framed needed to be answered
by the High Court on their respective merits while deciding the appeal filed by
the Revenue (the Appellant) u/s. 260-A of the Act.

The Supreme
Court remanded the case to the High Court for answering the aforementioned
questions on merits in accordance with the law.

11 The Commissioner of
Income Tax, New Delhi vs. Ram Kishan Dass (2019) 413 ITR 337 (SC)

Special
Audit – Power of the assessing officer to extend the time for submission of
audit report – The provisions of section 142(2C), as they stood prior to the
amendment which was enacted with effect from 1^st April, 2008 by the
Finance Act, 2008 did not preclude the exercise of jurisdiction and authority
by the assessing officer to extend time for the submission of the audit report
directed under sub-section (2A), without an application by the Assessee – The
amendment was intended to remove an ambiguity and was clarificatory in nature

The Supreme
Court noted that in the batch of cases before it, the submission of the
assessees was that the assessing officer (AO) had no jurisdiction or authority
u/s. 142(2C), as it stood prior to 1^st April, 2008, to extend time
for the submission of the audit report of the auditor appointed under the
provisions of sub-section (2A). The AO, at the relevant time, was authorised to
extend time (not exceeding 180 days) from the date on which a direction under
sub-section (2A) was received by the assessee, only on an application made by
the assessee and for any good and sufficient reason. If the assessee made no
application, the AO would have no jurisdiction to extend time.

The Revenue’s
contention was that even before 1^stApril, 2008 the jurisdiction of
the AO to extend time for the submission of the audit report was not confined
to a situation in which the assessee had made an application for extension.
Consequently, the incorporation of a provision for a suo motu exercise
of power by the AO, with effect from 1^st April, 2008 by the Finance
Act, 2008 was only intended to remove an ambiguity and was clarificatory in
nature.

The Tribunal
had come to the conclusion that prior to the insertion of the expression suo
motu with effect from 1^st April, 2008 in section 142(2C), the AO
had no jurisdiction to extend time for the submission of the report of an
auditor appointed under sub-section (2A) of his own accord. As a consequence,
it was held that the assessment which was made u/s. 153A, in respect of the
assessment years in question, was barred by limitation.

A Division
Bench of the Delhi High Court had dismissed the batch of appeals filed by the
Revenue against the aforesaid order of the Income-tax Appellate Tribunal.

According to
the Supreme Court, there were two ways of looking at the situation. Firstly,
the proviso to sub-section (2C) creates a remedy for an assessee to apply for
extension where, for a good and sufficient reason, the audit report could not
be submitted. Otherwise, the assessee may face a penalty u/s. 271 apart from
being subjected to a best judgement assessment u/s. 144. By extending time at
the behest of the assessee, the AO allows the original order calling for an
audit report to be duly implemented. The creation of a remedy under the proviso
in favour of the assessee cannot be construed to detract from the authority
which vests in the AO, who has specified the time limit for the submission of
an audit report in the first instance, to extend time without an application by
the assessee.

To hold
otherwise, and to construe the proviso to sub-section (2C) as foreclosing the
authority of the AO to extend time without a request by the assessee, would
lead to an absurd consequence. The assessee would then be in control of whether
or not to seek an extension of time where the audit report has not been
finalised. Even if the auditor, for genuine reasons (not bearing on the default
of the assessee), was unable to comply with the time schedule, having regard to
the nature or complexity of the accounts, the assessee would then have a sole
and unrestricted power to determine whether an extension should be sought.

Not seeking an
extension would in effect defeat the underlying purpose and object of directing
the assessee to obtain a report of an auditor under sub-section (2A). The
legislature could not have intended this consequence. An interpretation which
would defeat the purpose underlying sub-section (2A) must be avoided. The AO
who has fixed the time in the first instance must necessarily, as an incident
of the authority to fix time, be entitled to extend time without an application
by the assessee. While extending time, the AO will be subject to the overall
ceiling of time fixed under the proviso to sub-section 2C.

Secondly, the
alternate construction of the proviso is that the expression ‘and for any good
and sufficient reason’ should be read to mean ‘or for any good and sufficient
reason’. As a matter of statutory interpretation, it is well settled that the
expression ‘and’ can, in a given context, be read as ‘or’. The contention of
the assessees opposing this construction by urging that in the context of
sub-section (2A), it has been held by the Supreme Court in Sahara India
(Firm), Lucknow vs. CIT (300 ITR 403) that the word ‘and’ is used in
the conjunctive sense would not necessarily furnish an index to how the
expression ‘and’ in the proviso to sub-section (2C) should be construed. The
interpretation of the expression must be based on the context in which it is
used. In the proviso to sub-section (2C), the expression ‘and’ is used in
connection with the grant of an extension of time and not in the context of the
formation of an opinion for ordering a special audit. The power was of a
procedural nature.

As to the
contention of the assessees that the amendment to the proviso to sub-section
(2C) by the Finance Act would indicate that the amendment was intended to be
prospective with effect from 1^st April, 2008 and, that prior to this
date, the AO had no jurisdiction to grant an extension of time, save on the
application by the assessee, the Supreme Court held that the reason for the
introduction of the amendment arose because of the element of ambiguity
inherent in the erstwhile position as it stood before 1^st April,
2008. The ambiguity was precisely on the question as to whether the AO was
precluded from granting an extension of time of his own accord merely because
the assessee was permitted to apply for an extension. Since the purpose of the
amendment was to remove this ambiguity, the Supreme Court was of the view that
by the Finance Act, Parliament essentially clarified the position as it existed
prior to the amendment.

According to
the Supreme Court, there was no substance in the submission urged on behalf of
the assessees that to adopt an interpretation which we have placed on the
provisions of section 142(2C) would enable the AO to extend the period of
limitation for making an assessment u/s. 153B. Explanation (iii) to section
153B (1), as it stood at the material time, provided for the exclusion of the
period commencing from the date on which the AO had directed the assessee to
get his accounts audited under sub-section (2A) of section 142 and ending on
the day on which the assessee is required to furnish a report under that
sub-section. The day on which the assessee is required to furnish a report of
the audit under sub-section (2A) marks the culmination of the period of
exclusion for the purpose of limitation.

Where the AO
had extended the time, the period, commencing from the date on which the audit
was ordered and ending with the date on which the assessee is required to
furnish a report, would be excluded in computing the period of limitation for
framing the assessment u/s. 153B. The principle governing the exclusion of time
remains the same. The date on which the exclusion culminates is the date which
the AO fixes originally, or on extension for submission of the report.

The Supreme Court concluded that the
provisions of section 142(2C) of the Income-tax Act, 1961 as they stood prior
to the amendment which was enacted with effect from 1^st April, 2008
by the Finance Act, 2008 did not preclude the exercise of jurisdiction and
authority by the AO to extend time for the submission of the audit report
directed under sub-section (2A), without an application by the assessee. The
amendment was intended to remove an ambiguity and was clarificatory in nature.

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