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Category: Direct Taxes

Whether amendment relating to payment of P.F., etc. by ‘due date’ of furnishing return is retrospective ? — S. 43B

Introduction :

    1.1 With a view to prevent assessees from claiming deduction in respect of statutory liabilities, etc. even when they are disputed and not paid to appropriate authority, S. 43B was introduced w.e.f. A.Y. 1984-85. The provision, effectively, provides that deduction in respect of items specified therein will be allowed only on the basis of actual payment. Though originally the provision was introduced to cover statutory liabilities within its ambit, subsequently, the scope thereof is widened from time to time to include within its net bonus and commission payment to employees as well as interest payable to financial institutions, etc. Lastly, to nullify the effect of the judgment of the Apex Court in the case of Bharat Earth Movers Ltd. (245 ITR 428), even the employers’ liability in respect of provision for leave salary has also been brought within its ambit. Unfortunately, at the initial state, the provisions are introduced in the Income-tax Act (the Act) for a specific purpose (many times justifiable) and then, the scope thereof gets widened to unrelated items even if the judiciary explains the correct effects of the provisions originally introduced. S. 43B is a classic example of this nature.

    1.2 Large number of litigations were found on the effect of provision of S. 43B and finally, an attempt was made to carry out some rationalisation in the provision by the Finance Act, 1987, which introduced the first ‘proviso’ to S.43B w.e.f. A.Y. 1988-89 (hereinafter referred to as the said ‘proviso’). This is inserted with a view to provide deduction of statutory dues, etc. at the end of the previous year if, they are actually paid by the assessee on or before the ‘due date’ applicable in his case for furnishing the return of income u/s.139(1) (hereinafter referred to as ‘due date’) in respect of previous year in which the liability to pay such dues was incurred with certain further conditions with which we are not concerned in this write-up. Accordingly, with this rationalisation, such amount of outstanding at the year end and paid by the relevant ‘due date’ became eligible for deduction under the said ‘proviso’, which was made effective from 1-4-1988. However, this ‘proviso’, at that time, did not apply to items covered (contribution to P.F., etc.) under clause (b) of S. 43B, under which the conditions for allowing deductions were most stringent. In the context of this ‘proviso’, the Apex Court in the case of Allied Motors (P) Ltd. (224 ITR 677) took the view that though the ‘proviso’ is introduced by the Finance Act, 1987 w.e.f. 1-4-1988, the same will apply retrospectively and the benefit thereof will be available even in respect of the assessment year prior to A.Y. 1988-89. The effect of this judgment was considered in this column in the May, 1997 issue of the Journal.

    1.3 Presently, S. 43B covers various items listed in clauses (a) to (f). Till the amendment was made by the Finance Act, 2003 (w.e.f. 1-4-2004), the said ‘proviso’ was applicable to all the clauses of S. 43B except clause (b) of S. 43B. Contribution to employees welfare fund (such as P.F., etc.) was governed by 2nd proviso to S. 43B, under which the payment thereof was required to be made by the due date under the relevant law, rule, etc. in the manner provided in the said 2nd proviso.

    1.4 S. 43B(b) covers the employers’ contribution to any Provident Fund (P.F.) or Superannuation Fund or Gratuity Fund or any other fund for the welfare of the employees (hereinafter referred to as contribution to employees welfare fund). As stated in Para 1.3 above, this was earlier not covered by the said ‘proviso’ and accordingly, payment covered by S. 43B (except the contribution to employees welfare funds) were eligible for deduction if the payment in respect thereof is made by the relevant ‘due date’. The Finance Act, 2003 omitted the said 2nd proviso to S. 43B and amended the said first ‘proviso’ w.e.f. 1-4-2004 and made the first ‘proviso’ also applicable to clause (b) dealing with contribution to employees welfare funds (hereinafter this amendment is referred to as Amendment of 2003). Accordingly, all the items covered in S. 43B [i.e., clauses (a) to (f)] are eligible for deduction if amount is paid by the relevant ‘due date’ even if the same is outstanding at end of the relevant year. We are concerned with the effect of this Amendment of 2003 in this write-up.

    1.5 The issue was under debate as to whether the amendment of 2003 will apply to the assessment years prior to A.Y. 2004-05 as the amendment was expressly made effective from 1-4-2004. After this amendment, various Benches of the Tribunal started taking a view that the amendment is clarificatory in nature and is applicable retrospectively even to assessment years prior to A.Y. 2004-05. For this, reliance was being placed on the judgment of the Apex Court in the case of Allied Motors (P) Ltd. referred to in Para 1.2 above. Subsequently, the Apex Court in the case of Vinay Cement Ltd. (213 CTR 268) dismissed the SLP filed by the Department against the judgment of the Gauhati High Court in the case of George Williamson (Assam) Ltd. (284 ITR 619) in a case dealing with the assessment year prior to A.Y. 2004-05, by stating that the assessee will be entitled to claim the benefit in S. 43B for that period particularly in view of the fact that he has made the contribution to P.F. before filing of the return. Many of the High Courts also took similar view that the amendment of 2003 is clarificatory in nature and is applicable to assessment years prior to A.Y. 2004-05 [Ref. : 297 ITR 320 (Del.), 313 ITR 144 (Mad.), 313 ITR 161 (Del.), 213 CTR 269 (Kar.) etc.]. However, the Bombay High Court in the case of Pamwi Tissues Limited (313 ITR 137) took a view that the said amendment of 2003 is applicable only from the A.Y. 2004-05. This was followed by the Bombay High Court in other cases also. Therefore, the debate continued and the assessees within the jurisdiction of the Bombay High Court were suffering the disallowance for the prior years in such cases.

    1.6 Recently, the Apex Court had occasion to consider the issue referred to in Para 1.5 above in the case of Alom Extrusions Ltd. and the issue is now finally resolved. Though the law is amended from the A.Y. 2004-05, in respect of the prior years, many matters are pending and are under litigation (especially in the State of Maharashtra). Therefore, it is thought fit to consider the same in this column.

CIT v. Pawmi Tissues Limited, 313 ITR 137 (Bom.)

2.1 The issue referred to in Para 1.5 above came up before the Bombay High Court in the above case at the instance of the Revenue in the context of the A.Y. 1990-91. The following question was raised before the Court (Page 138) :
 
“The substantial question of law which arises in the present appeal is regarding the correct inter-pretation of S. 43B, S. 2(24)(x) read with S. 36(1)(va) and as to the claim of deductions as claimed by the assessee in respect of the PF, EPF and ESIC contributions especially in the facts and circumstances of the case and in law.”

2.2 On behalf of the Revenue, it was contended that insofar as the provident fund dues are concerned, the amendment is made applicable from the A.Y. 2004-05. In the earlier years, the employers’ contribution to P.F. if not paid within the due date under the relevant law was not eligible for deduction. For this, reliance was placed on the judgment of the Bombay High Court in the case of Godavari (Mannar) Sahakari Sakhar Karkhana Ltd. (298 ITR 149).

2.3 On behalf of the assessee, attention was drawn to the judgment of Gauhati High Court in the case of George Williamson (Assam) Limited (supra) to contend that while considering the same issues for the A.Y. 1992-93, the issue was decided in favour of the assessee following the earlier judgments of the same High Court in other cases. It was further pointed out that the Revenue preferred Special Leave Petition (SLP) in the Supreme Court in the case reported as Vinay Cement Limited and the SLP was dismissed. Consequently, the said judgment of the Gauhati High Court in the case of George Williamson (Assam) Limited got approved. Relying on the judgment of the Apex Court in the case of Employees Welfare Association (4 SCC 187), it was pointed out that if the Supreme Court has given reasons for dismissing the SLP, that still attracts Article 14 of the Constitution and consequently, it would be a binding precedent.

2.4 After considering the contentions of both the sides, the High Court decided the issue against the assessee and allowed the appeal filed by the Revenue with the following observations [Page 139] :

“In our opinion, the dismissal of the special leave petition as held in CIT v. Vinay Cement Ltd., (2009) 313 ITR (St.) 1 cannot be said to be the law decided. In State of Orissa v. M. D. Illyas, (2006) 1 SCC 275, the Supreme Court has held that a decision is a precedent on its own facts and that for a judgment to be a precedent it must contain the three basis postulates. A finding of material facts, direct and inferential. An inferential finding of fact is the inference which the Judge draws from the direct or perceptible facts; (ii) statements of the principles of law applicable to the legal problems disclosed by the facts; and (iii) judgment based on the individual effect of the above.”

2.5 In view of the above judgment of the Bombay High Court, the view also prevailed that the said Amendment of 2003 is prospective and applicable only from the A.Y. 2004-05.

CIT v. Alom Extrusions Limited, 2009 TIOL 125 SC IT:

3.1 The issue referred to in Para 1.5 above came up for consideration before the Apex Court in a batch of civil appeals with the lead matter in the case of Alom Extrusion Ltd. For the purpose of deciding the issue, the Court noted the first and the second provisos prior to the amendment of 2003 and the said ‘proviso’ (the first proviso) after such amendment.

3.2 For the purpose of deciding the issue, the Court considered the scheme of the Act and the historical background and the object of introduction of the provisions of S. 43B. The Court also referred to the earlier amendments made in 1988 with introduction of the first and second provisos. The Court also noted further amendment made in 1989 in the second proviso dealing with the items covered in S. 43B(b) (i.e., contribution to employees welfare funds). After considering the same, the Court stated that it becomes clear that prior to the amendment of 2003, the employer was entitled to deduction only if the contribution stands credited on or before the due date given in the Provident Fund Act on account of second proviso to S. 43B. This created further difficulties and as a result of representations made by the industry, the amendment of 2003 was carried out which deleted the second proviso and also made first proviso applicable to contribution to employees welfare funds referred to in S. 43B(b).

3.3 On behalf of the Department, it was, inter alia, contended that even between 1988 and 2004, the Parliament had maintained a clear dichotomy be-tween the tax duty, etc. on one hand and contribution to employees welfare funds on the other. This dichotomy continued up to 1st April, 2004 and hence, the Parliament consciously kept that dichotomy alive up to that date by making the amendment of 2003 effective from 1-4-2004. Accordingly, the amendment of 2003 should be read as amendatory and not as curative.
 
3.4 Disagreeing with the argument of the Department, the Court stated that there is no merit in the appeals filed by the Department for various reasons such as : originally S. 43B was introduced from 1-4-1984 with certain objectives and the conditions thereof were relaxed in 1988 in the context of tax duty and other items [except for contribution to employees welfare funds covered in S. 43B(b)] to remove the hardships. This relaxation appears to have not been made applicable to contribution to employees welfare funds for the reason that the employers should not sit on the collected contributions and deprive the workmen of the rightful benefits under Social Welfare Legislations by delaying payment of contribution to welfare funds. The Court then further observed as under :

“However, as stated above, the second proviso resulted in implementation problems, which have been mentioned hereinabove, and which resulted in the enactment of Finance Act, 2003, deleting the second proviso and bringing about uniformity in the first proviso by equating tax, duty, cess and fee with contributions to welfare funds. Once this uniformity is brought about in the first proviso, then, in our view, the Finance Act, 2003, which is made applicable by the Parliament only with effect from 1st April, 2004, would become curative in nature, hence, it would apply retrospectively with effect from 1st April, 1988.”

3.5 The Court then referred to the judgment of the Apex Court in the case of Allied Motors [P] Ltd. (supra) in which the amendment made by the Finance Act, 1987 w.e.f. 1-4-1988 (referred to in Para 1.2 above) was held as retrospective in nature. After considering the said judgment , the Court finally decided the issue in favour of the assessees and held as under :

“Moreover, the judgment in Allied Motors (P) Limited (supra) is delivered by a Bench of three learned Judges, which is binding on us. Accordingly, we hold that the Finance Act, 2003, will operate retrospectively with effect from 1st April, 1988 [when the first proviso stood inserted].”

3.6 To support its conclusion, the Court also drew support from another judgment of the Apex Court in the case of J. H. Gotla (156 ITR 323) with the following observations :

“Lastly, we may point out the hardship and the invidious discrimination which would be caused to the assessee(s) if the contention of the Department is to be accepted that the Finance Act, 2003, to the above extent, operated prospectively. Take an example — in the present case, the respondents have deposited the contributions with the R.P.F.C. after 31st March (end of accounting year) but before filing of the Returns under the Income-tax Act and the date of payment falls after the due date under the Employees’ Provident Fund Act, they will be denied deduction for all times. In view of the second proviso, which stood on the statute book at the relevant time, each of such assessee(s) would not be entitled to deduction u/ s.43-B of the Act for all times. They would lose the benefit of deduction even in the year of ac-count in which they pay the contributions to the welfare funds, whereas a defaulter, who fails to pay the contribution to the welfare fund right up to 1st April, 2004, and who pays the contribution after 1st April, 2004, would get the benefit of deduction u/s.43-B of the Act. In our view, therefore, Finance Act, 2003, to the extent indicated above, should be read as retrospective. It would, therefore, operate from 1st April, 1988, when the first proviso was introduced. It is true that the Parliament has explicitly stated that the Finance Act, 2003, will operate with effect from 1st April, 2004. However, the matter before us involves the principle of construction to be placed on the provisions of Finance Act, 2003.”

Conclusion :

4.1 In view of the above judgment of the Apex Court, the amendment of 2003 referred to hereinbefore is applicable to assessment years prior to A.Y. 2004-05 also and the judgment of the Bombay High Court in the case of Pawmi Tissues Ltd. (supra) is no longer a good law.

4.2 In many cases, especially within the jurisdiction of the Bombay High Court, the assessees have suffered disallowances and the matters are pending. In such cases, the assessees will be entitled to get the benefits of such deductions.

Whether accrued interest will be nullified by subsequent modification in terms ?

Closements

Introduction :


1.1 In respect of transaction of borrowing and lending,
agreements are entered into between the parties, under which interest is payable
by the borrower to the lender and such interest becomes income of the lender in
the year of accrual under the Mercantile System of Accounting. Many a time,
assets are purchased by the assessee (purchaser) on deferred credit basis and in
such cases, generally, the terms of agreement provide for the liability to pay
interest by the purchaser on the amount outstanding from time to time. Such
interest also becomes income of the person granting such credit in the year of
accrual under the Mercantile System of Accounting.

1.2 After determining the terms of credit and liability to
pay interest, sometimes, for various commercial reasons, such terms are modified
and such modification may also include change in the effective date from which
the interest becomes payable by the concerned party. For this purpose,
especially in case of companies, appropriate resolution is passed at the
relevant time, generally before the end of the relevant year recording modified
terms and the revised effective date from which the interest becomes payable. In
all such cases, the issue arises with regard to the effect of such resolution on
the past period as well as for the future period in the context of taxability of
interest income in the hands of the company passing such resolution.

1.3 Recently, the issue referred to in Para 1.2 above, came
up for consideration before the Apex Court in the case of Sarabhai Holding P.
Ltd. This judgment throws considerable light on the issue and the same would be
a good guide for dealing with such issues. Therefore, it is thought fit to
consider the same in this column, as such issue very often arises in the
day-to-day practice.


Sarabhai Chemicals Pvt. Ltd. v. CIT,


257 ITR 355 (Guj.) :

2.1 The name of the above Company had subsequently undergone
change and the Company was then known as Sarabhai Holdings P. Ltd. In the above
case, various issues with regard to liability to pay interest u/s.215, penalty
u/s.272(2) for under-estimate of income for payment of advance tax, concealment
penalty u/s.271(1)(c), etc. had come up before the Court, with which we are not
concerned in this write-up. The main issue was with regard to accrual of
interest income and taxability thereof, which is similar to the issue referred
to in Para 1.2 above and accordingly, only relevant facts in that context are
considered here. The accounting year of the assessee was July-June. The issue
related to A.Ys. 1979-80 and 1980-81. As such, the relevant previous years were
the periods from 1-7-1977 to 30-6-1978 and 1-7-1978 to 30-6-1979 as per the
provisions of the Act at the relevant time. The assessee was following the
Mercantile System of Accounting. The relevant facts were : Under an agreement
dated 28-2-1977, the assessee had transferred (effective from that date) its
industrial undertaking of Sara-bhai Chemicals & Business Activity of Sarabhai
Company Services Division as a going concern (hereinafter referred to as the
said Unit) to its wholly-owned subsidiary, namely, Elscope (P.) Ltd.
(hereinafter referred to as the said Elscope) for an agreed consideration and,
in turn, after four months, the said Elscope had transferred the said Unit to
its subsidiary, namely, Ambalal Sarabhai Enterprises Ltd. The said agreement
dated 28-2-1977 was amended by supplementary agreement dated 4-3-1977 and the
Deed of Assignment was executed on 28-6-1977. Under the terms of the agreement,
the said Elscope was liable to pay part of the consideration when demanded by
the assessee and payment of part consideration was deferred, which was to be
paid in eight equal annual instalments on 1st October of every year beginning
from 1-10-1979 and the same was to carry simple interest @ 11% per annum on the
amount outstanding from time to time.

2.1.1 On 15th June, 1978, the said Elscope wrote to the
assessee proposing modification in terms of payment and requested, inter alia,
that the interest be charged on the deferred sale consideration from 1-7-1979
instead of from 1-3-1977. It was also proposed that certain amount will be
payable (Rs.1.84 crores) as and when the assessee demands without any interest
and part of the amount (Rs.4.70 crores) will be paid in five annual instalments
beginning from 1-3-1987, which will carry simple interest @ 11% per annum with
effect from 1-7-1979. The said Elscope also offered to secure the said amount of
Rs.4.70 crores to the satisfaction of the assessee [eventually, it seems that
Secured Debentures of the said Ambalal Sarabhai Ltd. were given as security]. On
30th June, 1978, the proposal sent by the said Elscope vide letter dated
15-6-1978 was decided to be accepted by the assessee and a resolution to that
effect was passed (hereinafter referred to as the said Resolution) in the
Meeting of the Board of Directors. The relevant portion of the said Resolution
reads as under :

“. . . the company doth hereby approve, accept and adopt
the following revised mode of payment as contained in letter No. ELSCOPE/MC
dated 15th June, 1978, received from Elscope Pvt. Ltd.”


2.1.2 The assessee company furnished Returns of Income for the A.Y. 1979-80, declaring business income of Rs.772 and for the A.Y. 1980-81, declaring loss of Rs.17,345. In these returns, the assessee had not considered the interest income from the said Elscope, on the ground that as per the revised arrangement such interest was payable by the party only from 1-7-1979. The Income-tax Officer (ITA) took a view that by the date the said Resolution [dated 30-6-1978] was passed, the interest for the whole year had already accrued to the assessee. It was further held that the assessee has relinquished the interest without any commercial consideration as the two companies were closely related and it was the case of collusion to evade tax liability. Accordingly, the ITa added the interest income of Rs.66,29,236 for the A.Y. 1979-80. Almost for similar reasons, the ITa also made an addition of Rs.55,67,750 for the A.Y. 1980-81 on account of such interest. The first Appellate Authority [CIT(A)] confirmed the action of the ITa. The CIT(A) also commented on the nature of security given by the said Elscope while revising the terms of payment of interest and pointed out that the security of bonds of Ambalal Sarabhai Enterprises Ltd. were redeemable during the year 1991 or subject to some conditions in the year 1987. Accordingly, considering its quoted market price, the same are worth about %rd of the face value. Thus, in the process, the assessee company has accepted assets worth %rd of the market price as such security.
 
2.1.3 When the matter came up in the second appeal, the Tribunal took the view that it is pertinent to note that there is no indication in the said Resolution to suggest that the revised mode of payment was effective from any date prior to 30-6-1978. Therefore, it is not a case where the income though given up during the year could not be said to accrue, the accrual of interest commenced from the beginning of the accounting year as interest accrues from day to day. Accordingly, the Tribunal rejected the contention of the assessee that no interest accrued for the accounting year relevant to the A.Y. 1979-80 and confirmed the action of the ITA as well as CIT(A) for that year. However, for the A.Y. 1980-81, the Tribunal pointed out that there was a material distinction between the facts for that year and the earlier year. This difference was caused by the said Resolution (dated 30-6-1978), under which the original agreement stood modified. Accordingly, it was held that as a result of the said Resolution, no income could be said to have accrued to the assessee for this year, as the interest was to start accruing from 1-7-1979. The Tribunal also stated that as there was no accrual of income at all, no question of relinquishment of any right to receive arises. Accordingly, the Tribunal deleted the addition made in respect of interest income for the A.Y. 1980-81.

2.2 When the matter came up before the High Court, on behalf of the assessee, it was, inter alia, contended that in view of the said Resolution, there was no accrual of interest to the assessee till 30-6-1979. It was further contended that it was open for the assessee to agree to modification of the terms of payment and substitute the original stipulation re-garding the payment of interest by fixing time, from which the interest would accrue and that was done before the end of the relevant accounting year. Alternatively, it was contended that if the interest is treated as accrued for the A.Y. 1979-80, it should be held that the income accrued was given up by the assessee for valid commercial expediency and for that purpose, reliance was placed on concept of real income. It was pointed out that the assessee had agreed to modify the terms with a view to get his dues secured. Reliance was placed on the judgments of various High Courts and the Apex Court in support of such propositions.

2.3 On behalf of the Revenue, it was, inter alia, contended that there was no commercial expediency for which interest that had already accrued could have been given up. The transaction between the parties was not a genuine transaction as the said Elscope was only made a conduit pipe as the said Elscope had transferred the said Unit to its subsidiary within a short period of four months. It was also contended that the said Resolution did not effectively change the mode of payment even for the A.Y. 1980-81 and the interest continued to accrue to the assessee under the existing mode of payment stipulated in the agreement and the deed of assignment. It was also pointed out that the said Resolution could not be given retrospective effect, because on the last day of the accounting year, the interest had already accrued and the same could not have been affected by such resolution. It was also contended that there was no reason for the said Elscope to make the proposal for modification as its subsidiary (Ambalal Sarabhai Enterprises Ltd.) had also stepped in its shoes by that time. Reliance was also placed on the judgments of various High Courts and the Apex Court in support of such propositions.

2.4 After considering the contentions raised on behalf of both the parties and various judgments on which reliance was placed, the Court proceeded to decide the issue for the A.Y. 1979-80. For this purpose, the Court noted various terms and conditions stipulated in the original agreement, the supplementary agreement and the deed of assignment. Having referred to the same, the Court observed as under (pages 391/392) :

“It would be a trite thing to say that the terms of payment of interest which were binding on the parties were those which finally came to be incorporated in the deed of assignment. Payment of interest was treated as essence of the contract and as noted above. If the instalments were not duly paid, the rate of interest was to be higher than 11% per annum and the vendee was in the event of default of payment of instalment bound to pay interest at the rate payable by the vendor to its bankers in the ordinary course of business. These terms regarding mode of payment were never disturbed until the last date of the accounting year ending on June 30, 1978 on which date the assessee passed the resolution dated June 30, 1978, ‘by which it accepted the proposal of its subsidiary Elscope sent on June IS, 1978 and substituted the mode of payment by purporting to shift the date of charging of interest by July I, 1979.”

2.5 The Court, then, noted that from the terms of various agreements, it is seen that the transaction took place with effect from 1-3-1977 and the obligation to pay interest was incorporated in such agreement in the context of such transaction. The obligation to pay interest was not a separate debt, but the debt incurred under the contract included the obligation to pay interest. Therefore, to say that no date of accrual of interest was fixed in the contract is to misconstrue the provision thereto, despite the express stipulation about the obligation to pay interest which was to be treated as the essence of the contract. When no date is specified in the transaction which incorporated an obligation of party thereto to pay interest, it obviously would mean that the date from which the interest is to be paid would be the point of time from when the obligation to pay the outstanding amount starts and that will be the date from which the creditor’s entitlement to recover interest starts.

2.6 Having made the above-referred observations, the Court finally, while deciding the issue against the assessee with regard to accrual of interest, held as under (page 393) :

“Interest accrues in most circumstances on the time basis to be determined by the amount out-standing and the rate applicable. Recognition of the revenue requires that the revenue is measurable, and that at the time of sale, it would not be unreasonable to accept ultimate collection. In the present case, in view of the categorical stipulation that interest will be payable on the deferred consideration amount in respect of the sale which became effective from March 1, 1977, the interest started accruing on that time basis from March I, 1977 determined by the amount outstanding from time to time and the rate applicable which were stipulated in clearest possible terms in the deed of assignment dated June 28,1977, and the agreements which preceded it. That what already accrued during the accounting year from July I, 1977 to June 30,1978 could not be nullified by the resolution of June 30, 1978, said to have been passed at 2.00 p.m. on that day. As held by the Supreme Court in CIT v. Shiv Prasad Janak Raj and Co. (P.) Ltd. (1996) 222 ITR 583, the concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules. In that case, it was held that waiver of interest after the expiry of the relevant accounting year only meant that the assessee was giving up the money which had accrued to it. It cannot be said that the interest amount had not accrued to the assessee.”

2.7 The Court, then, stated that now the only question remains to be examined is whether the interest that had accrued and which the assessee did not in fact receive was given up for any commercial expediency after its accrual as contended on behalf of the assessee on an alternative basis. For this, the assessee relies on the fact that the debt which was earlier unsecured became secured on such re-arrangement. After referring to the factual position in this regard, the Court stated that admittedly no security passed. The CIT(A) has admirably discussed this aspect in his order and exposed the hollowness of the assessee’s stand that it secured debt with the bonds of Ambalal Sarabhai Enterprises Ltd. According to the Court, the last-minute arrangement was made to ward off the payment of tax on interest income that had accrued to assessee during the accounting year ending 30-6-1978 (till the moment the resolution dated 30-6-1978 was passed at 2 p.m.). For this, the ground of commercial expediency was created of getting debt secured. In fact and reality, neither was there in particular security offered in the proposal, nor was there any acceptance of security. A ghost was created to hide the real object of modification of the mode of payment, which was to ward off payment of tax on interest income that already had accrued to the assessee. Accordingly, the Court confirmed the decision of the Tribunal for the A.Y. 1979-80 and upheld the addition on account of interest income made by the ITO.

2.8 The Court then noted that there was no challenge levelled against the genuineness of the said Resolution. The law permits the contracting parties to change their stipulations by mutual agreement and, therefore, there was no impediments in changing the terms of the contract. The resolution dated 30-6-1978 accepted the proposal of the said Elscope. In view of this, under the changed mode of payment adopted in it, no interest was to accrue during the accounting period from 1-7-1978 to 30-6-1979. Therefore, no interest accrued to the assessee during that period and hence, the reasoning of Tribunal for deleting the addition of such interest income for the A.Y. 1980-81 is correct. Since no interest accrued during this period, no question of relinquishment of interest for any commercial expediency arises, as you cannot relinquish the income that has not accrued at all. Accordingly, the Court decided the issue in favour of the assessee for the A.Y. 1980-81.

CIT v. Sarabhai  Holdings  P. Ltd., 307 ITR 89 (SC) :
3.1 The above-referred   judgment  of the Gujarat High Court came up before the Apex Court at the instance of the Revenue as well as the assessee. On behalf of both the parties various contentions were raised to support their case, which were similar to the contentions raised before the High Court.

3.2 After considering the factual position with regard to both the assessment years and the contentions raised by the parties, the Court, first dealt with the contention of the Revenue that the assessee was trying to avoid payment of tax on the interest by making such arrangements and in that context observed as under (page 98) :

“We cannot understand the criticism of learned senior counsel appearing on behalf of the Revenue that by resolution dated June 30, 1978, the assessee was avoiding the payment of tax on the interest which had accrued. The genuine nature of the resolution was not and could not be disputed. When we see the letter dated [une 15, 1978, and also note that the letter was complied with by Elscope in providing adequate security of the payable amount, there is nothing to dispute or suspect the genuineness of the transaction. The whole transaction would have to be viewed on that backdrop. In the commercial world, the parties are always free to vary the terms of contract. Merely because by resolution dated June 30, 1978, the assessee agreed to defer the payment of interest, that would not mean that it tried to evade the tax. What is material in tax jurisprudence is evasion of the tax, not the beneficial lawful adjustment therefor. Considering the genuine nature of the transaction based on the letter dated June 15, 1978, and the resolution dated June 30, 1978, it cannot be said that the whole transaction was in order to evade the tax.”

3.3 Having accepted the genuineness of the said Resolution and the object of the assessee, the Court confirmed the decision of the High Court for both the assessment years and held as under (page 99) :

“We agree with the High Court’s finding that the law permits the contracting parties to lawfully change their stipulations by mutual agreement and, therefore, the assessee and the vendee had no legal impediment in modifying the terms of their contract. We also agree with the further finding of the High Court that the resolution could not be given any retrospective effect so as to facilitate evasion of tax liability that had already arisen for the A.Y. 1979-80.We further agree with the High Court’s finding that it being a valid stipulation, it changed the mode of payment from the date of the resolution and, therefore, under the changed mode of payment adopted under the resolution dated June 30,1978, no interest was to accrue during the accounting period from July 1, 1978, up to June 30, 1979, and, therefore, the reasoning of the Tribunal on that count appeared to be correct as regards  the assessment  year 1980-81 is concerned. We further confirm the finding that since no interest had accrued in the accounting year July 1, 1978 to June 30,1979, there could arise no question of relinquishment of interest for any commercial expediency.”

Conclusion:

4.1 The above judgment of the Apex Court confirms the principle that generally interest accrues on day-to-day basis. The Court has also accepted the view of the High Court that the interest so accrued cannot be nullified by the resolution subsequently passed.

4.2 It seems to us that the effect of the resolution in the above case has been decided on the basis of the facts of that case. It also seems that the above principle cannot have universal application in every case dealing with the time of accrual of interest irrespective of the facts of the case. In a given case, based on the terms of agreement and/or facts and circumstances of the case, a different view may also emerge.

4.3 Though the concept of real income still holds good, the same has to be applied cautiously and in case of non-receipt of accrued interest, it may be difficult to apply when the assessee follows the Mer-cantile System of Accounting.

Withdrawal from Revaluation Reserve— Effect on ‘book profit’U/s.115jb

Closements

Introduction :

1.1 S. 115JB was introduced by the Finance Act,
2000 with effect from A.Y. 2001-02, which, in substance, provides that if the
income-tax payable on Total Income is less than 7.5% of the ‘Book Profit’ of the
Company, then the ‘Book Profit’ shall be deemed to be the Total Income of the
assessee, on which tax is payable @ 7.5% (this rate is subsequently increased
from time to time and presently the same is 18% from A.Y. 2011-12). This
position emerges on account of subsequent amendment made in S. 115JB by the
Finance Act, 2002 with retrospective effect from A.Y. 2001-02. Accordingly, in
such cases, u/s.115JB Minimum Alternative Tax (MAT) is payable by the Company.
S. 115JB is the successor of S. 115JA, which was introduced by the Finance (No.
2) Act, 1996 with effect from 1997-98 and which continued up to A.Y. 2000-01.
Originally, for the purpose of levy of MAT, S. 115J was introduced by the
Finance Act, 1987 with effect from A.Y. 1988-89, which continued up to A.Y.
1990-91.

1.2 Basically, all the abovereferred three
provisions enacted for the purpose of levy of MAT are on similar line with one
major difference that u/s.115JB MAT liability is to be worked out at 7.5% of the
‘Book Profit’ and the ‘Book Profit’ is deemed to be Total Income, whereas in the
earlier provisions, 30% of the ‘Book Profit’ was deemed to be the Total Income
in cases where the Total Income of the Company was found to be less than 30% of
its ‘Book Profit’. This and certain other differences in such provisions are not
relevant for the purpose of this write-up.

1.3 Under all the abovereferred three provisions,
one common thread is that the basis of working of ultimate tax liability is the
‘Book Profit’. In all these provisions, one common provision can be noticed that
the Company shall prepare its Profit & Loss Account for the relevant Previous
Year, in accordance with the provisions of Parts II and III of Schedule VI to
the Companies Act, 1956. In this context, the provisions of S. 115JB have been
made more stringent with which also we are not concerned in this write-up. By
and large, the profit shown in such Profit & Loss Account cannot be disturbed by
the AO in view of the judgment of the Apex Court in the case of Apollo Tyres
Ltd. (255 ITR 273). This judgment we have analysed in this column in the June,
2002 issue of this Journal.

1.4 In all the abovereferred three Sections, the
‘Book Profit’ is defined in the relevant Section. In such definition, starting
point, in each of the Section, is net profit means ‘Net Profit as shown in the
Profit & Loss Account for the relevant Previous Year’ and the definition further
specifies certain items for adjustments to increase such net profit
(‘Specified Items for Upward Adjustments’) and items for adjustments to
reduce the net profit so increased, (‘Specified Item for Downward
Adjustments’) as provided therein. One such ‘Specified Item for Downward
Adjustment’ provided in all the three provisions relates to the amount withdrawn
from any Reserve or Provision, if any such amount is credited to the Profit &
Loss Account. In S. 115JB, ‘Book Profit’ is defined in Explanation 1 to S. 115JB
(the said Explanation). In the said definition, the ‘Specified Item for
Downward Adjustment’ relating to such withdrawal from Reserve/Provision
appearing in clause (i) reads as under :


“(i) the amount withdrawn from any reserve or
provision (excluding a reserve created before the 1st day of April, 1997
otherwise than by way of a debit to the profit and loss account), if any
such amount is credited to the profit and loss account;

Provided that where this Section is
applicable to an assessee in any previous year, the amount withdrawn from
reserves created or provisions made in a previous year relevant to the
assessment year commencing on or after the 1st day of April, 1997 shall not
be reduced from the book profit unless the book profit of such year has been
increased by those reserves or provisions (out of which the said amount was
withdrawn) under this Explanation or Explanation below second
proviso to S. 115JA, as the case may be; “

Hereinafter, the above Clause is referred as
the said Clause (i), reduction with respect to the amount of
withdrawal provided in the said Clause (i) is referred to as “Exclusion
from the ‘Book Profit’ ’’ and the restriction on such exclusion provided
in the Proviso to the said Clause (i) is referred to as “Restriction on
Exclusion from the ‘Book Profit’ “.


1.5 In cases where the Company revalues its Fixed
Asset resulting into increase in the value of such assets in the books of the
Company, the increased amount is credited to Revaluation Reserve Account in
accordance with the accepted accounting principles. In view of such revaluation,
the Company is required to provide depreciation on fixed assets on the revalued
amount of such assets instead of on the basis of historical costs. At the same
time, the Company is permitted to withdraw from the Revaluation Reserve Account
differential amount of depreciation (i.e., the amount of depreciation
related to revalued amount of fixed assets). In such cases, effectively, the
amount of charge of depreciation to Profit & Loss Account equals to the
depreciation, which would have been otherwise charged on historical cost. This
is accepted accounting practice.

1.6 In the past, the issue was under debate as to whether in such cases, the amount withdrawn from Revaluation Reserve Account should be reduced from the net profit for the purpose of computing the ‘Book Profit’ by treating the same as item of “Exclusion from the ‘Book Profit’ ’’ as provided in the said Clause (i) or the same should not be so excluded as it falls in the category of “Restriction on Exclusion from the ‘Book Profit’ ’’. The Delhi High Court in the case of Indo Rama Synthetics (I) Ltd. (184 Taxman 375) has decided the issue against the assessee. However, some of the professionals still held the view that such withdrawal from the Revaluation Reserve Account should be treated as item of “Exclusion from the ‘Book Profit’ ’’, mainly on the ground that at the time of creation of Revaluation Reserve, as per the accepted accounting principles and practices, the amount of revaluation was never required to be routed through Profit & Loss Account and hence, the restriction contained in the Proviso to the said Clause (i) should not apply.

1.7 It may be noted that by virtue of the amendment made by the Finance Act, 2006 with effect from A.Y. 2007-08, a specific provisions are made in the definition of ‘Book Profit’ in S. 115JB because of which, effectively, depreciation relating revalued amount is required to be ignored.

1.8 Recently, the Apex Court had an occasion to consider the abovereferred judgment of the Delhi High Court in the case of Indo Rama Synthetics (I) Ltd. and the issue has now got settled. Though, now there is a specific provision in S. 115JB referred to in para 1.7 above, this judgment will be relevant for pending cases as well as for general principles in the context of the computation of ‘Book Profit’. Therefore, it is thought fit to consider the same in this column.

Indo Rama Synthetics (I) Ltd. v. CIT (unreported):

2.1 In the above case, the brief facts were : during the previous year ending 31-3-2000 (A.Y. 2000-01), the Company had revalued its fixed assets resulting into increase in book value of such assets by Rs.288.58 cr. During the previous year relevant to A.Y. 2001-02, in the Profit & Loss Account, a charge of depreciation was shown at Rs.127.57 cr. which was reduced by the transfer from Revaluation Reserve Account to the extent of Rs.26.12 cr. resulting in a net debit on account of depreciation at Rs.101.45 cr. The net profit as per Profit & Loss Account of the Company was Rs.18.74 cr. In the return of income, while computing ‘Book Profit’ for the purpose of MAT liability u/s.115JB, the asses-see treated the amount of Rs.26.12 cr. withdrawn from the Revaluation Reserve Account as item of “Exclusion from the ‘Book Profit’ ’’ under the said Clause (i) and accordingly, reduced the amount of profit by that amount. During the assessment proceedings, the Assessing Officer (AO) disallowed the claim of such reduction of Rs.26.12 cr. while computing the ‘Book Profit’ on the ground that the Revaluation Reserve Account was created in the A.Y. 2000-01 and this amount was not added back to the net profit for the purpose of computing the ‘Book Profit’ as provided in the said proviso to the said Clause (i) and accordingly, this amount falls in the category of “Restriction on Exclusion from the ‘Book Profit’ ’’. The assessee did not succeed in his appeals before the first Appellate Authority, ITAT as well as the High Court. Accordingly, at the instances of assessee, the issue referred to in para 1.6 above came up for consideration before the Apex Court.

2.2 Before the Apex Court, on behalf of the assessee, it was, inter alia, contended that the creation of Revaluation Reserve does not impact the Profit and Loss Account in the year of creation; such Revaluation Reserve is not a free reserve; the same is not available for distribution of profits; unlike revenue reserves, such reserve is not an appropriation of profits and the same is never debited by way of debit entry through Profit & Loss Account; the Revaluation Reserve is in the nature of adjustment entry to balance both the sides of balance sheet, etc. It was further contended that the treatment of Revaluation Reserve is governed by the Accounting Standards 10 and 6 (AS) and the Guidance Note on Treatment of Reserves Created on Revaluation of Fixed Assets (Guidance Note) issued by the Institute of Chartered Accountants of India (ICAI) and on that basis the amount of such reserve is not debited to Profit & Loss account in the year of creation and the amount of revaluation is directly credited to Revaluation Reserve Account. Since in the year of creation of such reserve, the ‘Book Profit’ suffers full tax, without being affected by creation of such reserve, in the year of withdrawal, the amount withdrawn would be liable to be reduced while computing the ‘Book Profit’. It was also pointed out that by virtue of the amendment made by the Finance Act, 2006 (referred to in para 1.7) the deprecation on historical cost would only be taken into account while computing the ‘Book Profit’ and the same is applicable from A.Y. 2007-08.

2.3 After considering the arguments raised on behalf of the assessee, the Apex Court proceeded to decide the issue and for that purpose noted the provisions of S. 115JB. The Court also referred to the historical background of the provisions relating to MAT starting from S. 115J onwards referred to in paras 1.1 and 1.4 above. The Court then stated that even in the S. 115J certain adjustments were required to be made to the net profit as shown in the Profit & Loss Account which included the re-duction of the amount of net profit by the amount withdrawn from any reserve, if any such amount is credited to the Profit & Loss Account. The Court then noted that some companies have taken advantage of this provision u/s.115J by decreasing their net profit by the amount withdrawn from the reserve created in the same year itself, though the reserve when created, had not gone to increase the ‘Book Profit’. According to the Court, such adjustments led to lowering of profits resulting in the reduction of tax liability based on the net profits. In view of this, S. 115J was amended and it was provided that the ‘Book Profit’ will be allowed to be decreased by the amount withdrawn from any reserve only in the following two cases:

“*(i) if such reserve has been created in the pre-vious year relevant to the assessment year commencing w.e.f. 1-4-1998

OR

(ii)    if the reserve so created in the previous year has gone to increase the book profit in any year when S. 115J was applicable.”

*    This should be reserve created prior to the previous year relevant to the assessment year commencing on 1-4-1988.

2.4 The Court further stated that under the ap-plicable provisions, the first step for determining the ‘Book Profit’ is that the net profit as shown in the Profit & Loss Account for the relevant year has to be increased by the items specified [Clauses (a) to (f)] in the definition (if the amount of such item is debited to Profit & Loss Account) which includes [in Clause (b)] the amount carried to any specified reserve by whatever name called. The second step is that the amount so increased has to be reduced by the items specified [Clauses (i) to (vii)] in the definition which includes [in clause (i)] an amount withdrawn from any reserve (with some exception), if any such amount is credited to the Profit & Loss Account. The Court also noted the “Restriction on Exclusion from the ‘Book Profit’ ’’ as provided in the Proviso to the said Clause (i).

2.5 The Court then noted that the following question needs consideration in this case:

“Q.: Could Rs.26,11,74,000, being the differential depreciation recouped from the revaluation reserves created during the earlier A.Y. 2000-01, be said to be credited in the P & L Account during the assessment year in question in terms of clause (i) to the explanation to S. 115JB(2)?”

2.6 Explaining the effect of the definition of ‘Book Profit’, the Court stated that the said Clause (i) mandates reduction for the amount withdrawn from the reserve earlier created if the same is credited to Profit & Loss Account. The said Clause
(i)    contemplates only those reserves which actually affect the net profit as shown in the Profit & Loss Account. The object of providing “Specified Exclusion from the ‘Book Profit’ ” is to find out true working result of the Company.

2.7 Dealing with the case of the assessee, the Court noted that the adjustment made in the Profit & Loss Account by the assessee, is as per AS and the Guidance Note of the ICAI which is in conformity with the provisions of S. 211 of the Companies Act, 1956. The Court also noted that before considering the effect of withdrawal of Rs.26.12 cr. from the Revaluation Reserve, the Company had a loss of Rs.7.38 cr. Accordingly, on account of such withdrawal from the Revaluation Reserve, the said loss has got converted into profit of Rs.18.74 cr. The said adjustment primarily is in the nature of contra adjustment in the Profit & Loss Account and it is not the case of effective credit to the Profit & Loss Account as contemplated in the said Clause (i). Credit in the Profit & Loss Account under the said Clause (i), implies the effective credit and therefore, as per the accounting principles, the contra adjustment does not at all affect any particular account. According to the Court, unless an adjustment has the effect of increasing the net profit as shown in the Profit & Loss Account the amount cannot to be said to be credited to the Profit & Loss Account. Therefore, through the amount has been literally credited to the Profit & Loss Account, in substance, there is no such credit. After taking such a view and con-sidering the object for which the MAT provisions were introduced, the Court held as under:

“….In the present case, had the assessee deducted the full depreciation from the profit before depreciation during the accounting year ending 31-3-2001, it would have shown a loss and in which event it could not have paid the dividends and, therefore, the assessee credited the amount to the extent of the additional depreciation from the revaluation reserve to present a more healthy balance sheet to its shareholders enabling the assessee possibly to pay out a good dividend. It is precisely to tax these kinds of companies that MAT provisions had been introduced. The object of MAT provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Thus, the reduction sought by the assessee under clause (i) to the explanation to S. 115JB(2) in respect of depreciation has been rightly rejected by the AO.”

2.8 Having taken the above view, the Court further stated that the matter can be examined from another angle under the said Clause (i). The assessee becomes entitled to reduce the amount withdrawn from such reserve only if at the time of creation, the reserve had gone to increase the ‘Book Profit’ u/s.115JB/115JA. From the factual position of the assessee, it is clear that neither the amount of Rs.288.58 cr. nor Rs.26.12 cr. had ever gone to increase the ‘Book Profit’ in the said year ending on 31-3-2000. As such amount has not gone to increase the ‘Book Profit’ at the time of creation of reserve, there is no question of reducing the amount transferred from such reserve to the Profit & Loss Account. Restriction contained in the Proviso comes in the way of such reduction. The Court also stated that by interplay of the balance sheet items with Profit & Loss Account items, the assessee has sought to project the loss of Rs.7.38 cr. as profit of Rs.18.73 cr.

Conclusion:

3.1 From the above judgment of the Apex Court, it is clear that in all such cases of withdrawal of the amounts from Revaluation Reserve, the assessee would not be entitled to reduce such amount under the said Clause (i) for the purpose of computing the ‘Book Profit’.

3.2 The said Clause (i) contemplates that the credit of the amount of such withdrawal to the Profit & Loss Account must be real (and not literal) and the same must in effect impact the net profit shown in the Profit & Loss Account. Under the said Clause (i), such reduction is permissible only in those cases where, at the time of creation of reserve, the ‘Book Profit’ is increased by the amount of the said reserve.

3.3 From the above judgment, it also appears that unless the assessee is in a position to show that at the time of creation of reserve the ‘Book Profit’ was increased by the amount of such reserve, the reduction under the said Clause (i) on account of withdrawal is not permissible and for this purpose, it is not relevant that at the time of creation of reserve the assessee was not required to route the amount of reserve through the Profit &    Loss Account in accordance with the accepted and settled accounting principles and practices.

3.4 The above judgment is delivered in the con-text of the provisions of S. 115JB as applicable to the A.Y. 2001-02. As mentioned in para 1.7 above, the definition of the ‘Book Profit’ in S.

115JB is further amended by the Finance Act, 2006 from the A.Y. 2007-08 and specific provisions are made for adjustments with regard to the amount of depreciation debited to the Profit & Loss Account because of which, effectively, depreciation relating to revalued amount of assets is required to be ignored and the amount withdrawn from the Revaluation Reserve Account relating to such depreciation is required to be separately deducted under clause (iib) of the said Explanation. Therefore, from the A.Y. 2007-08, in such cases, the issue may arise with regard to the treatment of the amount withdrawn in excess of the amount referred to in clause (iib), if any from the Revaluation Reserve Account and credited to the Profit & Loss Account while computing the ‘Book Profit’.

Note : The above judgment is now reported in 330 ITR 363.

TDS on Discount on Airline Tickets

Controversies

1. Issue for Consideration :



1.1 Airlines generally sell air tickets through travel
agents who are paid a commission on sale of such tickets which commission is
worked out on the basis of the minimum fares prescribed by the airlines. Tax
is deducted by the airlines on this commission u/s. 194H of the Act. Where the
tickets are provided to the travel agent by the airlines at a price below the
published fare, the difference, known as ‘discount’, or a part thereof is
retained by him while selling the tickets to the passengers, which is in
addition to the regular commission earned by him. No tax is deducted by the
Airlines on this amount retained by the travel agents. All airlines are
required to file a list of their standard fares with the Director General of
Commercial Aviation, which are called published fares. Usually tickets are
provided by airlines to travel agents at significant discounts to the
published fares and sold by the agents to their customers by passing over the
difference in full or part. Under IATA rules, the travel agents receive their
commission as a percentage of the published fares, in respect of which tax is
deducted at source by the airline under Section 194H.

1.2 S. 194 H defines ‘commission or brokerage’, vide
Explanation(i), as under :

” ‘Commission or brokerage’ includes any payment received
or receivable, directly or indirectly by a person acting on behalf of another
person for services rendered (not being professional services) or for any
services in the course of buying or selling of goods or in relation to any
transaction relating to any asset, valuable article or thing not being
securities.”

1.3 In recent years, tax authorities have sought to take a
stand that the discount from published fares given by airlines to travel
agents (which in turn is generally passed on by the travel agent to the
customer in full or part) amounts to an additional special commission, and
that TDS is deductible on this amount under Section 194H.

1.4 The issue has now reached Courts and the Bombay High
Court has held that such discount is not in the nature of brokerage or
commission and no tax is deductible thereon. The Delhi High Court has taken a
view that tax is deductible on such discount.


2. Qutar Airways’ case :


2.1 The issue came up before the Bombay High Court in the
case of CIT vs. Qutar Airways (Income Tax Appeal No.99 of 2009),
ITATOnline.org.

2.2 In this case, it had been claimed by the Revenue that
the difference between the published price and the minimum fixed commercial
price amounted to an additional special commission, and that TDS was therefore
deductible by the airline on this amount under Section 194H.

2.3 The Tribunal had granted relief to the airline,
following its earlier decision in the case of Korean Air vs. DCIT,
holding that TDS was not deductible in similar circumstances.

2.4 Before the Bombay High Court, the counsel for the
Revenue contended that it was not the Revenue’s case that the difference
between the principal price of the tickets (as published) and the minimum
fixed commercial price amounted to brokerage.

2.5 The Bombay High Court noted that though an appeal had
been preferred against the decision of the Tribunal in Korean Air’s case, the
appeal had been rejected by the High Court for non-removal of office
objections under rule 986. The Court noted that for Section 194 H to apply,
the income being paid out by the airline must be in the nature of commission
or brokerage, and must necessarily be ascertainable in the hands of the
recipient.

2.6 On the facts of the case before it, the Bombay High
Court noted that the airlines had no information about the exact rate at which
the tickets were ultimately sold by the agents, since the agents had been
given discretion to sell the tickets at any rate between the fixed minimum
commercial price and the published price. It was noted by the Court that it
would be impracticable and unreasonable to expect the airline to get feedback
from their numerous agents in respect of each ticket sold. The Court was of
the view that if the airlines had discretion to sell the tickets at a price
lower than the published price, then the permission granted to the agent to
sell it at a lower price could neither amount to commission or brokerage in
the hands of the agent. The Bombay High Court however clarified that any
amount which the agent earned over and above the fixed minimum commercial
price would naturally be income in his hands and would be taxable as such in
his hands.

2.7 The Bombay High Court therefore held that no TDS was
deductible under Section 194H in respect of such discount over the published
fares given by airlines to travel agents.


3. Singapore Airlines’ case :

3.1 The issue again recently came up before the Delhi High Court in the case of Singapore Airlines and 12 other airlines — CIT vs. Singapore Airlines Ltd. (ITA Nos.306/2005 and 123/2006).

3.2 In this case, a survey was conducted on the airlines. This revealed that supplementary commission was being paid to travel agents. The travel agent, after sale, would send the details every two weeks to an organisation Billing Settlement Plan (‘BSP’), which was an organisation approved by the International Air Transport Association, which would prepare an analysis of the billing and send it to each airline. In this analysis, this amount was shown as supplementary commission. The airlines either accounted for this as supplementary commission or incentives/deals. Some travel agents confirmed that such supplementary commission had not been passed on by them to customers. From April 2002, the procedure was changed and tickets were sold at the net price. The Department started proceedings against the airlines for non-deduction of TDS under Section 194H on such supplementary commission.

3.3 The Commissioner (Appeals) upheld the stand of the Department. The Tribunal however allowed the airline’s appeal, holding that the airline received only the net fare from the agent, that any surplus or deficit from such net fare was the profit or loss of the agent, and since such profit or loss was on account of his own efforts and on his own account, did not emanate from services rendered to the airline.

3.4 Before the Delhi High Court, on behalf of the Department it was argued that:

    i) the relationship between the assessee-airline and the travel agent was that of a principal and agent and not one of principal to principal.

    ii) the supplementary commission retained by the travel agent was not a discount as claimed by the assessee-airline since it was paid for services rendered by the travel agent in the course of buying and selling of tickets;

    iii) the submission of the assessee-airline that they had a dual/hybrid relationship with their agent, that is, insofar as the transaction which involved payment of standard commission was that of agency, while that which involved the retention of supplementary commission by the travel agent, that is, price obtained over and above the net fare, was a result of a principal-to-principal relationship ought to be rejected, for the reason that no evidence whatsoever was placed by the assessee-airline to establish that there was such a dual relationship between the parties. The Standard Format Agreement (as approved by lATA), that is, the Passenger Sales Agency (PSA) Agreement executed by the assessee airline was silent as regards any such dual relationship to which the assessee-airline had adverted to;

v) the main provision of Section 194-H included within its ambit payment by cash, cheque, draft or by any other mode. Thus retention of money by the travel agent was covered by the main provisions of Section 194H. It was not the case of the assessee-air line either before the Assessing Officer or the CIT(A) that the travel agent was required to only remit the net fare to the airlines, and this was not even a condition in the PSA Agreement. The net fare was actually arrived at by deducting from the gross fare, tax, standard commission and supplementary commission. While standard commission was fixed by lATA the supplementary commission was variable, as it was dependent on the policies of the airline vis-a-vis their agents. If net fare was the basis for the entire transaction, then there was no necessity of intervention of BSP to carry out a billing analysis, as then the amount payable by the travel agent to the assessee-airline could easily be calculated by taking into account the product of the number of tickets sold and the net fare; and

vi)     the amount of supplementary commission which had to be paid on each transaction was embedded in the deal code which was known only to the three concerned parties, that is, the assessee-airline, the travel agent and BSP.Since the assessee-airline was the person responsible for payment of supplementary commission to the travel agent, the tax could have been deducted as and when the billing analysis statement was handed over by the BSP to the airline. It was thus contended that the supplemen-tary commission fell within the ambit of the explanation to Section 194H.

3.5 On behalf of the assessee-airlines, it was argued before the Delhi High Court that:

    i) supplementary commission was only a nomenclature which finds mention in the billing analysis statement of BSP.The said supplementary commission denotes a notional figure which is the difference between the published fare less standard IATAcommission (9% or 7%). The net fare is the amount received by the assessee from its travel agents. In other words, the

supplementary commission is not a commission within the meaning of Section 194H;

    ii) supplementary commission can only be brought within the ambit of Section 194H, if it fulfils the following criteria as prescribed under the said provision-

    a. the sum received must be in the nature of income,

    b. such income must denote any payment received or receivable directly or indirectly by the payee from the payer, that is, the assessee, and

    c. the recipient should be a person acting on behalf of that another person, and that, the sum received or receivable whether directly or indirectly should be for services rendered in the course of buying and selling of goods, that is, tickets in the present case.

    iii) the Department had not been able to produce any evidence to show that the difference between the published fare and the net fare (i.e., the fare the assessee received from the travel agents) was realised by the travel agents. The difference as reduced by standard commission and taxes which is referred to as supplementary commission is only a notional figure and this cannot be termed as a commission within the meaning of Section 194H. What the assessee is entitled to receive is only the net fare. There is no right in the assessee-airline to receive the published fare from the travel agent on sale of tickets;

    iv) the notional figure of supplementary commission as appearing in the billing analysis statement of the BSP is neither income nor can it be construed as payment received or receivable, directly or indirectly by the travel agents in its capacity as the agent of the assessee-airline for any services rendered to the assessee-airline. The billing analysis statement of BSP is not a statement of account as contended by the Revenue;

    v) since there was no evidence to suggest that the difference between published fare and the net fare was actually received by the travel agent, there was no obligation on the part of the assessee-airline to deduct tax at source on such notional commission which had not been realised;

    vi) in these circumstances the provisions of Section 194H were unworkable;

    vii) the travel agents had paid tax on the said supplementary commission and hence the Revenue was precluded from raising demands on the assessee-airline.

3.6 Analysing the provisions of Section 194H, the Delhi High Court noted that the provisions of Section 194H would be attracted only if:

    i) there is a principal-agent relationship between the assessee-airline and the travel agent;

    ii) the payments made by assessee-airline to the travel agent, who is a resident is an income by way of commission;

    iii) the income by way of commission should be paid by the assessee-airline to the travel agent for services rendered by the travel agent or for any services in the course of buying or selling of goods;
 
    iv) the income by way of commission may be received or be receivable by the travel agent from the assessee-airline either directly or indirectly; and

    v) lastly, the point in time at ‘which obligation to deduct tax at source of the assessee-airline will arise only when credit of such income by way of commission is made to the account of the travel agent or when payment of income by way of commission is made by way of cash, cheque or draft or by any other mode, whichever is earlier.

3.7 Analysing the terms of the PSA agreement and the manner in which the airlines and travel agents functioned, the Delhi High Court concluded that:

    i) the travel agent acted on behalf of the airline to establish a legal relationship between an airline and a passenger, and was therefore an agent of the airline, which was his principal;

    ii) since it was undisputed that the amount received and retained by the travel agent over and above the net fare would be assessable to tax in his hands as his income, and tax had actually been paid by agents on such income, supplementary commission was ‘income’ within the meaning of Section 194H;

    iii) the supplementary commission is not a discount, on account of the fact that the payment retained by the travel agent is inextricably linked to the sale of the traffic document/ air ticket, and the travel agent does not obtain proprietary rights to the traffic documents/air tickets;

    iv) there are no two transactions, for one of which commission is paid to the agent, and the second of which is between principal to principal, but just one transaction of sale of tickets on behalf of the airline to the passenger;

    v) the amount received by the travel agent over and above the net fare is known to the airline when it receives the billing analysis made by BSP.

The Delhi High Court therefore held that the amount received and retained by the travel agent over and above the net fare was in the nature of commission, liable to deduction of TDS under Section 194H.

4. Observations:
4.1 The conclusions of the Delhi High Court are weighed by one of the facts that the travel agent is an agent of the airline and therefore all and any receipt by him represents commission in his hands, including the difference between the published fare and the net fare.

4.2 The difference between the published fare and the net fare really consists of two components – one component is that of commission as a pre-agreed percentage of the published fare, which is undoubtedly commission covered by the provisions of Section 194H. The other component is the amount not realised by the agent from the client, and therefore not paid to the airline.

4.3 To illustrate, take a situation where the published fare is Rs.50,OOO, the agent’s commission is 7% (Rs.3,500), and the agent sells the ticket to the passenger for Rs.27,500. The agent would collect Rs.27,500 from the passenger and pay Rs.24,OOO to the airline as net fare (ignoring tax), after deducting his commission of Rs.3,500. In this case, the difference between the published fare and the net fare is Rs.26,OOO, consisting of the agent’s commission of Rs.3,500 and the discount passed on to the client of Rs.22,500. This amount of Rs.22,500 is really a discount given by the airline to the passenger through its agent, the travel agent. The travel agent is therefore holding such discount of Rs.22,500 in trust for the passenger, to whom the airline has permitted him to grant such discount.

4.4 With respect to the concerned parties, it was not impressed upon the Delhi High Court that the difference between the published fare and the net fare, in fact was a discount given to the passenger by the airline through the agent and it was the airline alone, ‘which undoubtedly had proprietary rights in the tickets, till such time it was sold to the passengers and the benefit derived by the passenger was a benefit passed on by the airline and not by the agent who received it in trust for the passenger. If the difference is viewed as a discount given to the passenger routed through the agent, as was done by the Bombay High Court, the view taken by the Delhi High Court might have been quite different. As rightly appreciated by the Bombay High Court, the factual position is that the airline has merely granted a permission to the agent to sell the tickets at a lower price, which discount granted through the agent can certainly not be regarded as commission.

4.5 The issue, if any, arises only where in the above example, the travel agent pays to the airline, Rs. 23,000 and not Rs. 24,000 and in the process retains for himself an amount of Rs. 1000. It is this Rs. 1000, whose true nature has to be examined w.r.t. the provisions of s. 194H. This difference so retained may not be a commission within the meaning of Section 194H, unless it is brought within the ambit of Section 194H by proving that the sum received was in the nature of income received or receivable directly or indirectly by the payee from the payer, (that -, IS, the airlines.) and the recipient, (that is, travel agent,) should be a person acting on behalf of that another person, and that, the sum received or reeivable, whether directly or indirectly should be for services rendered in the course of buying and selling of goods, (that is, tickets in the present case). The difference cannot be termed as a commission within the meaning of Section 194H. What the airline is entitled to receive is only the net fare. There is no right in the assessee-airline to receive the published fare from the travel agent on sale of tickets. It cannot be construed as payment received or receivable, directly or indirectly, by the travel agents in its capacity as the agent of the airline for any services rendered to the airline.

4.6 Therefore, the view taken by the Bombay High Court that such discount is not liable to deduction of TDS u/s.194H seems to be the better view of the matter, as compared to the view taken by the Delhi High Court.

Monetary limit for filing of appeal by Income-tax Department

Controversies

1. Issue for consideration :


1.1 The Income-tax Department, aggrieved by an order of the
CIT(A), has the right to appeal u/s.253 to the Income-tax Appellate Tribunal and
to the High Court u/s.260A when aggrieved by an order of the Tribunal. An appeal
can also be filed before the Supreme Court with the permission of the Court
against the decision of the High Court. Every year a large number of appeals are
filed by the Income-tax Department, some of which are filed in a routine manner.
Prosecuting these appeals, filed as a matter of course, results in a huge annual
expenditure, at times exceeding the benefit derived from such prosecution.

1.2 Realising the leakage of substantial revenue and with the
intent to avoid litigation, the Government of India, in all its Revenue
Departments, has evolved a policy of refraining from filing an appeal before the
higher authorities, where the monetary effect of the contentious issues causing
grievance, in terms of tax, is less than the acceptable limit. This benevolent
policy of the Government prevents the Courts from being flooded with the cases.

1.3 In pursuance of this policy, the Central Board of Direct
Taxes issues instructions to the Income-tax authorities, directing them to avoid
filing of appeals, where the tax effect of an issue causing a grievance is less
than the monetary limit prescribed under such instructions. Presently,
Instruction No. 2 of 2005, dated October 24,2005, advises the authorities to
refrain from filing appeal before the Tribunal, w.e.f. 31-10-2005, in cases
where the tax effect of the disputed issues is Rs.2,00,000 or less and before
the High Court where such tax effect is Rs.4,00,000 or less and before the
Supreme Court where such tax effect is Rs.10,00,000 or less.

1.4 The said Circular of 2005 is issued in substitution of
the Instruction No. 1979, dated 27-3-2000 which provided that no appeal be
filed, by the Income-tax Dept. before the Tribunal in cases where the tax effect
of the disputed issues is Rs.1,00,000 or less and before the High Court where
such tax effect is Rs.2,00,000 or less and before the Supreme Court where such
tax effect is Rs.5,00,000 or less. The said Circular of 2000 was in substitution
of the Instruction No. 1903, dated 28-10-1992, wherein monetary limits of
Rs.25,000 before the Tribunal, Rs.50,000 for filing reference to the High Court
and Rs.1,50,000 for filing appeal to the Supreme Court were laid down. The said
instruction was in substitution of Instruction No. 1777, dated 4-11-1987.

1.5 It is common to come across cases where the monetary
limit, prescribed by the CBDT prevailing at the time of filing an appeal, has
undergone an upward revision before the time of the hearing of such appeal. In
such cases, the issue that often arises is about the applicability of the
upwardly revised limits, relying upon which the defending assessees contend that
the appeal by the Income-tax Department is not maintainable. The issue was
believed to be settled in favour of the taxpayers by a decision of the Bombay
High Court till recently when the validity of the said decision, in the context
of Instruction of 2005, has been doubted by another Bench of the same Court.

2. Pithwa Engg. Works’ case :


2.1 The issue first came up for consideration in the case of
CIT v. Pithwa Engineering Works, 276 ITR 519 (Bom). The Court examined
whether in deciding the maintainability of an appeal by the Income-tax
Department, the monetary limit of the tax effect, upwardly revised and
prevailing at the time of adjudicating an appeal, should be applied in
preference to the limit prevailing a the time of filing an appeal. In the said
case, at the time of filing the appeal before the High Court, the Instruction
then prevailing, provided for a monetary limit of Rs.50,000. However at the
time, when the appeal came up for hearing , this limit was revised to
Rs.2,00,000 vide Circular dated 27-3-2000.

2.2 The Court took note of its own decision in the case of
CIT v. Camco Colour Co., 254 ITR 565, where-in it was held that the
instructions issued by the Central Board of Direct Taxes, New Delhi, dated March
27,2000 were binding on the Income-tax Department. Under the said Instruction,
the monetary limit, for filing a reference to the High Court, earlier fixed at
Rs.50,000 was revised and fresh instructions were issued to file references only
in cases where the tax effect exceeded Rs.2,00,000.

2.3 The Court in the case before them observed that the said
instructions dated March 27, 2000 reflected the policy decision taken by the
Board, not to contest the orders where the tax effect was less than the amount
prescribed in the above Circular with a view to reduce litigation before the
High Courts and the Supreme Court. The Court did not find any force in the
contention of the Revenue that the said Circular was not applicable to the old
referred cases as such a contention was not taken to a logical end.

2.4 The Bombay High Court negatived the submission of the
Revenue that so far as new cases were concerned, the said Circular issued by the
Board was binding on them and in compliance with the said instructions, they did
not file references if the tax effect was less than Rs.2 lakh, however, the same
approach was not to be adopted with respect to the old referred cases where the
tax effect was less than Rs.2 lakh. The Court did not find any logic behind such
an approach. The Court held that the Circular of 2000 issued by the Board was
binding on the Revenue.

2.5 The Court further proceeded to observe that the Court
could very well take judicial notice of the fact that by passage of time money
value had gone down, the cost of litigation expenses had gone up; the assesses
on the file of the Department have increased; consequently the burden on the
Department had also increased to a tremendous extent; the corridors of the
superior Courts were choked with huge pendency of cases. The Court noted that in
the aforesaid background, the Board had rightly taken a decision not to file
references if the tax effect was less than Rs.2 lakh and the same policy needed
to be adopted by the Department even for the old matters.

2.6 Finally the Court held that the Board’s Circular dated
March 27, 2000 was very much applicable even to the old references which were
still undecided and the Income-tax Department was not justified in proceeding
with the old references, wherein the tax impact was minimal and further there
was no justification to proceed with decades old references having negligible
tax effect.

3. Chhajer Packaging’s case :


3.1 The issue recently came up for consideration, once again, before the same Bombay High Court in the case of CIT v. Chhajer Packaging and Plastics Pvt. Ltd., 300 ITR 180 (Born). In that case, the appeal was filed by the Income-tax Department prior to 24-10-2005, the date when Circular No.2 of 2005 was issue for an upward revision of the monetary limit from Rs.2,OO,OOO to Rs.4,OO,OOO.

3.2 The assessee company in that case, raised the preliminary objection, by relying upon Instruction/ Circular No.2 of 2005, dated October 242005 to plead that since the limit of appeal u/ s.260A of ‘the Act to be preferred was raised to Rs.4 lakh and as the tax effect in its case did not exceed Rs.4 lakh, the Department ought not to have pursued its appeal.

3.3 The above-stated submission of the company was opposed by the Revenue, by contending that the present appeal was filed by the Department in August, 2004, while instruction was issued only on October 24, 2005, which was prospective in nature and therefore, the appeal by the Income-tax Department did not fall within the ambit of the instruction dated October 24, 2005.

3.4 The assessee company in its turn relined upon – the judgment of the Division Bench of the High Court at Bombay, in CIT v. Pithwa Engg. Works, 276 ITR 519, wherein the Court dealt with a similar Circular dated March 27,2000, wherein financial limit for preferring appeals u/ s.260A of the Act before the High Court, was raised to Rs.2 lakh. Reliance was placed on the following observations in the penultimate paragraph (page 521) ; ” In our view, the Board’s Circular dated March 27, 2000, is very much applicable even to the old references which are still undecided” to claim that the Circular was applicable to the appeals which were still pending.

3.5 The  Bombay High Court at the  outset observed that the views of the Court in  Pithwa Engineering’s case  pertained to Circular dated March 27, 2000. Thereafter the Court referred to Instruction  No. 2/2005,  dated  October 24, 2005, paragraph 2 “In partial modification of the above  instruction, it has now been decided by the Board that appeals will henceforth be filed only in cases where the tax effect exceeds  the revised  monetary limits given  hereunder”.

3.6 Taking  into consideration the portion underlined for the purpose of emphasis, the Court held that the Revenue was justified in contending that the Circular was applicable only prospectively and that it made no reference to pending matters. On the basis of the text and considering the applicability of the Circular dated October 24, 2005, the Court declined to follow the view taken by the Court in Pithwa Engineering’ case regarding the earlier circular.

4. Observations:

4.1 The available  statistics  reveal that the number of appeals  filed by the Income-tax  Department  far outnumber  the appeals  filed by the taxpayers.  This simple statistics convey an important  and alarming fact when read with the fact that ninety  per cent of these  appeals  are decided  against  the Income-tax Department.  The emerging  conclusion  is that most of these appeals  are filed as a matter  of course,  in a routine  manner  without  application  of mind as to the viability, efficacy and the cost involved  in prosecuting these appeals. The Government  today, is the biggest litigant.

4.2  The aforesaid  facts when examined  in the light of another  equally  disturbing  fact that  the Courts today  are flooded  with the number  of cases, which if disposed  of at the present  pace,  will be adjudicated  after a scaringly long  period.

4.3  It is realisation    of these  facts and of the enormous  costs involved    therein that  the Government of India  evolved a benevolent policy  of refraining from pursuing appeals where the  tax  effect in monetary terms  was negligible. It also decided to review the prescribed monetary limits from time to time, keeping in mind the  inflation factor. This avowed  policy has been religiously  followed  by the Government  by revising  the said limits periodically.

4.4  It is this policy background   that  was  kept  in mind  by the Bombay High Court  while deciding  in Pithwa  Engineering’s   case that  the  revised  monetary limits should  be applied  at the time of adjudicating  the appeals.  This was done to promote  the said avowed  policy of avoiding  litigation  and promote the breathing  space in the corridors  of Court and was not done to defeat  the power  of an executive to provide  guidelines  for administration   of the law that it is vested  with.  This angle  of the Court, if appreciated,  will enable  the Income-tax  Department to welcome  the said decision  with open arms.

4.5 Unfortunately, in Chaajer Packaging’s case the aspects narrated in the above paragraph were not pressed as is apparent from the reading thereof or the Court was not impressed by the same, if they were brought to the attention of the Court. We are sure that had the avowed policy of the Government and the logic of the Court in Pithwa Engineering’s case been brought to the notice of the Court, the decision in Chhajer Packaging’s case could have been different.

4.6 The Bombay High Court even in Carrico Colour Co.’s case, 254 ITR 565 (Born.), much before the Pithwa Engineering’s case had applied the Circular of 2000 in deciding a reference on 26-11-2001 which was filed in 2000 and pertained to A.y. 1990-91.

4.7 With utmost respect to the Court, attention is invited to Paragraph 7 of the said instruction of 2000 which reads as ‘ This instruction will come into effect from 1st April, 2000.’ The said Circular dated 27-3-2000 was specifically made effective from a later date i.e., 1st April, 2000 and was otherwise prospective. In spite of the said Circular being specified to be prospective in its nature, the Court in Pithwa Engineering’s case had held the same to be retrospective. This fact takes away the logic supplied in Chhajer Packaging’s case wherein relying on the use of the term ‘henceforth’ in paragraph 2 of the instructions of 2005, it was held that the said instructions of 2005 were not prospective.

4.8 The Bombay High Court in our opinion should have followed its own decision in Pithwa Engineering’s case as per the law of precedent, as the facts were the same in both the cases. In case of a disagreement, the later case should have been referred to the full Bench. The said decision needs a reconsideration.

Whether Rectification Order can be passed beyond the time limit of four years ?

Closements

1.1 Under the Income-tax Act (the Act), various provisions
are made for rectification of orders passed. S. 254(2) provides for
rectification of orders passed by the Income Tax Appellate Tribunals (Tribunal).
It is provided that the Tribunal may amend its order at any time within a period
of four years from the date of the order with a view to rectifying any mistake
apparent from the report and the Tribunal shall make such amendment if the
mistake is brought to its notice by the assessee or Assessing Officer.
Accordingly, S. 254(2) enables the Tribunal to rectify its own order suo moto
or when the mistake is brought to its notice by the concerned party.


1.2 The time limit for rectifying the orders u/s. 254(2) is
four years from the date of the order. In the past, the issue had come up as to
whether the Tribunal is empowered to pass rectification order even after the
expiry of the time limit of four years, in a case where the application for the
requisite rectification is made within the specified time limit of four years.
The Rajasthan High Court in the case of Harshwardhan Chemicals and Minerals
Limited (256 ITR 767) had taken a view that if the assessee has moved the
application within the specified period of four years, the Tribunal is bound to
decide the application on merit and not on the ground of limitation, and
accordingly held that the Tribunal can pass such rectification orders even after
the expiry of the specified period of four years, if the application is moved
within the specified period of four years. However, the Madras High Court had
dissented from this view.

1.3 In view of the above-referred conflicting judgments of
the High Court, the issue was under debate as to whether the Tribunal can pass
the rectification order u/s.254(2) after the specific period of four years in a
case where the application for rectification is made within the specified period
of four years.

1.4 S. 154(7) also provides for time limit of four years from
the end of the financial year in which the order sought to be amended was
passed. This enables the Income-tax authorities to rectify their orders within
the specified time limit. S. 154(8) also provides that the Income-tax
authorities shall pass such order of rectification within six months from the
end of the month in which the application is received by it. According to the
Courts, this time limit of six months is within the overall period of time limit
of four years.

1.5 Recently the Apex Court had an occasion to consider the
issue referred to in para 1.3 above in the case of Sree Ayyanar Spinning &
Weaving Mills Limited, and the issue is now resolved. Hence, considering the
importance of the issue in day-to-day practice, it is thought fit to consider
the same in this column.


CIT v. Sree Ayyanar Spinning & Weaving Mills Limited,
296 ITR 53 (Mad.) :

2.1 In the above case, an assessment was completed for the
A.Y. 1989-90 assessing income u/s. 115J. There was some dispute with regard to
the working of Book Profit on the issue of the adjustment of earlier years’
depreciation on account of change in the method of depreciation made by the
assessee in the relevant previous year. The order was confirmed by the First
Appellate authority and the matter came up before the Tribunal. It was remanded
back to the Assessing Officer with certain directions. Again the same order was
passed by the Assessing Officer and the same was also confirmed by the First
Appellate authority. In this second round of appeal, the Tribunal confirmed the
order of the Assessing Officer and took the view that the depreciation relating
to the earlier years should not be adjusted while computing the Book Profits. If
such an adjustment is made, the profit and loss account of the year in question
would not reflect the correct picture. It seems that this order was passed by
the Tribunal on 9-12-1996.

2.2 On 2-8-2000, the assessee moved miscellaneous application
for rectification of above order of the Tribunal u/s.254(2) and raised certain
points therein. Although at the time of making such application, a judgment of
the Apex Court in the case of Apollo Tyres Limited (255 ITR 273) was not
available, relying on the said judgment, the Tribunal finally passed the
rectification order dated 31-1-2003, recalling its earlier order and
subsequently, the consequential order was passed on 12-6-2003. In substance, it
appears that the Tribunal allowed the claim of the assessee in the rectification
proceedings relying on the judgment of the Apex Court in the case of Apollo
Tyres Limited (supra).

2.3 On the above facts, the rectification order passed by the
Tribunal was questioned by the Revenue before the Madras High Court. On behalf
of the Revenue, it was, inter alia, contended that the Tribunal was not
justified in passing the rectification order u/s.254(2) after the expiry of
specified period of four years, though the application for such rectification
was moved by the assessee within the specified period of four years; S. 254(2)
specifies the time limit for passing such an order and hence such order cannot
be passed beyond that specified period. The assessee further contended that in
the case of Income-tax authorities, the rectification of mistake is governed by
S. 154 and even though S. 154(8) provides that the rectification order shall be
passed within the specified period of six months, the same shall be read into
the total period of four years provided in S. 154(7). The statute provides the
specific outer time limit and it may not be proper for the Court to go beyond
the same.

2.4 On behalf of the assessee, it was, inter alia,
contended that the Tribunal is bound to decide the application on merit and not
on the ground of limitation once the application is made within the specified
time limit of four years. For this, reliance was placed on the judgment of the
Rajasthan High Court in the case of Harshwardhan Chemicals and Minerals Limited
(supra). It was further contended that Circular No. 68, dated 17-11-1971
provides that a mistake arising as a result of subsequent interpretation of law
by the Supreme Court would constitute a mistake apparent from the record and
hence, the Tribunal was justified in relying on the judgment of the Apex Court
in the case of Apollo Tyres Limited (supra), though the said judgment was
not available at the time of passing the original order when the application for
rectification was moved.

2.5 After considering the arguments of both the sides and after referring to the provisions dealing with rectification contained in S. 254 as well as S. 154, the Court took the view that the authority is barred from passing the order of rectification be-yond the period of four years specified in S. 154(7) and likewise the Tribunal also should pass the order of rectification u/ s.254(2) only within the specified period of four years. The Court also did not agree with the view of the Rajasthan High Court in the case of Harshwardhan Chemicals and Minerals Limited (supra).

2.6 While deciding the issue in favour of the Rev-enue, the Court finally held as under (page 62) :

“…. it cannot be construed that the power of the Appellate Tribunal to rectify the mistake could be extended indefinitely beyond four years, which time is specifically spelled out by the Legislature in S. 254(2) itself for passing an order of rectification, either suo motu by the Tribunal or on application either by the assessee or by the Assess-ing Officer. The mere usage of ‘and’ between two limbs of S. 254(2) will not, in any way, enlarge the limitation prescribed for passing the order of amendment u/ s.254(2) of the Act. Consequently, any order of amendment that would be passed by the Appellate Tribunal beyond the period of four ( years would lack jurisdiction, assuming the Ap-pellate Tribunal has got a right to pass an order of rectification to rectify the mistake in the light of the subsequent interpretation of law by any Court, as per Circular No. 68, dated November 17, 1971 [see (1972) 83 ITR (ST.) 6]. Therefore, it follows that in any case of rectification, the Income-tax authorities and the Appellate Tribunal are within their power and jurisdiction to amend their respective orders u/ s.154 and u/ s.254, respectively, in the light of subsequent interpretation of law by the Courts, but such power and jurisdiction could be exercised statutorily only . within the time of four years, not beyond the period of four years.”

CIT v. Sree Ayyanar Spinning & Weaving Mills Limited, 301 ITR 434 (SC) :

3.1 The above-referred judgment of the Madras High Court came up for consideration before the Apex Court, wherein the only issue to be considered was whether the Tribunal can pass the order of rectification u/ s.254(2) beyond the specific period of four years when the application for such rectification is moved within the specified period of four years. To consider the issue, the Court noted the relevant facts and the issues raised before the High Court and the grounds on which the Tribunal had passed the order u/s.254(2). The Court also noted that in the appeal before it, the Court is not concerned with the merits of the case, i.e., reworking of computation made by the Assessing Officer. The Court also heard both the parties, wherein on behalf of the Revenue it was contended that on the facts of the c.aseof the assessee, the judgment of the Apex Court In the case of Apollo Tyres Limited (supra) was not applicable. However, the Court stated that though we have referred to the submissions of both the sides on merits, in this case, we are only conerned with the interpretation of S. 254(2) regarding the powers of the Tribunal in the matter of rectification of mistake apparent from the record.

3.2 Having clarified the issue under  consideration the Court noted  the controversy raised  on account of the rectification order  passed by the Tribunal  in response to miscellaneous applications dated 2-8-2000 filed by the assessee  and  the order  of the Tribunal dated 31-1-2003 recalling its order dated 9-12-1996. The Court also noted the conclusion of the High Court and also the fact that the High Court did not go into the merits of the case.

3.3  The Court then referred  to the provisions of S. 254(2) and  observed as under (page  432) :

“Analysing the above provisions, we are of the view that S. 254(2) is in two parts. Under the first part, the Appellate Tribunal may, at any time, within four years from the date of the order, rectify any mistake apparent from the record and amend any order passed by it U / ss.(l). Under the second part of S. 254(2), the reference is to the amendment of the order passed by the Tribunal U/ss.(l) when the mistake is brought to its notice by the assessee or the Assessing Officer. Therefore, in short, the first part of S. 254(2) refers to the suo motu exercise of the power of rectification by the Tribunal, whereas the second part refers to rectification and amendment on an application being made by the Assessing Officer or the asseSSee pointing out the mistake apparent from the record. In this case, we are concerned with the second part of S. 254(2). As stated above, the application for rectification was made within four years. The application was well within four years. It is the Tribunal which took its own time to dispose of the application. Therefore, in the circumstances, the High Court had erred in holding that the application could not have been entertained by the Tribunal beyond four years.”

3.4 The Court then referred to the judgment of the Rajasthan High Court in the case of Harshwardhan Chemicals and Minerals Limited (supra), relied on by the counsel appearing on behalf of the assessee and noted the view of the Rajasthan High Court as appearing in the head notes of the said judgment as under (page 438) :

“Once the assessee has moved the application within four years from the date of appeal, the Tribunal cannot reject that application on the ground that four years have lapsed, which includes the period of pendency of the application before the Tribunal. If the assessee has moved the application within four years from the date of the order, the Tribunal is bound to decide the application on the merits and not on the ground of limitation. S. 254(2) of the Income-tax Act, 1961, lays down that the Appellate Tribunal may at any time within four years from the date of the order rectify the mistake apparent from the record, but that does not mean that if the application is moved within the period allowed, i.e., four years, and remains pending before the Tribunal, after the expiry of four years the Tribunal can reject the application on the ground of limitation.”

3.5 Having considered the above-referred view of the Rajasthan High Court, the Court decided the is-sue in favour of the assessee and held as under (page 438) :

“We are in agreement with the view expressed by the Rajasthan High Court in the case of Harshwardhan Chemicals and Minerals Limited (2002) 256 ITR 767.

For the aforesaid reasons, we set aside the impugned judgment of the High Court and restore T.e. (A) No. 2/2004 on the file of the Madras High Court for fresh decision on the merits of the matter as indicated here in above. All contentions on the merits are expressly kept open. We express no opinion on the merits of the case whether rectification application was at all maintainable or not and whether the judgment in the case of Apollo Tyres (2002) 255 ITR 273 was or was not applicable to the facts of this case. That question will have to be gone into by the High Court in the above T.e. (A) No. 2/2004.”

Conclusion:

4.1 In view of the above judgment of the Apex Court, now it is clear that once the application for rectification is moved within the specific period of four years, the Tribunal can pass order u/ s.254(2) even if such a period has expired.

4.2 The above position will also equally apply for passing rectification order u/s.154 by the Income-tax authorities. Therefore, once such a period is expired, it would not be correct for the Income-tax authorities to take a view that it has no power to pass the rectification order u/s.154, even if the application is made within the specified period of limitation.

4.3 So far as the powers of the Income-tax authorities to rectify their order are concerned, there is also time limit of six months provided in S. 154(8). In many cases, this time limit is not observed by the authorities. Even in such cases, it would not be correct for the Income-tax authorities to later on take a stand that since specified mandatory time limit of six months has expired, they have no power to pass the requisite rectification order. With the above judgment of the Apex Court, in our view, even this position becomes clear.

4.4 Interestingly, there is also time limit for passing order for refusing or granting registration to charitable trusts, etc. u/s.12AA, wherein it is provided that every order of granting or refusing the registration under the said provision shall be passed before the expiry of six months from the end of the month in which the relevant application is received – [Refer S. 12AA (2)]. In the context of these provisions, the Special Bench of the Tribunal (Delhi) in the case of Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust [(2007) 17 SOT 281] has taken a view that if such an order u/s.12AA(2) is not passed within the specified period of six months, registration shall be deemed to have been granted.

In case of expatriate, seconded to Indian Company, liability of TDS on ‘Home Salary’ paid by the Foreign Company outside India — Sec. 192

Introduction

1.1 A person responsible for making certain payments [Payer] to a resident or a non-resident (Payee) is required to deduct tax (TDS) as provided in various provisions contained in Chapter XVIIB of the Income-Tax Act, 1961 (the Act). In the last few years, the net of TDS is substantially widened from time to time by the Government and large number of payments are now covered within those provisions. A large portion of direct tax collection is made by the Government through TDS provisions.

1.2 Out of the collections made by the Government by way of TDS, a major portion of the collection represents the TDS from salary income. Sec.192(1) provides that any person responsible for paying (Employer) any income chargeable under the head ‘Salaries’ [hereinafter referred to as Salary Income], at the time of payment, is required to deduct tax on the estimated Salary Income of the assessee (Employee) for relevant financial year as provided in the Section. Such Employee could be resident or non-resident. The only criterion is taxability of Salary Income under the Act. Such tax is required to be deducted at an average rate of Income-tax as provided in the Section. Sec.192(2) further provides that if the assessee (Employee) is employed simultaneously under more than one employer during the financial year, etc., he may furnish to the Employer referred to in Sec.192(1) such details of his Salary Income from the other employer or employers in the prescribed form (Form No.12B) and in that event, such Employer is under an obligation to take into account such details for the purpose of making deduction under Sec.192(1). The provisions contained in Sec.192(2) are regarded as optional for the assessee (Employee).

1.3 When a non-resident (say, a Foreign Company) makes payment outside India to any resident (or to non-resident in certain cases) falling within any of the provisions contained in Chapter XVIIB, then in such a case, whether such a non-resident also is required to deduct tax or not is a matter which is currently under debate on the ground as to whether such machinery provisions of the Act can be applied beyond the territories of India [i.e., on the ground of extra-territorial jurisdiction]. The Department holds the view that in such an event, even such a non-resident making payment outside India is required to deduct tax and comply with the provisions of the Act with regard to TDS. This view of the Department is also reflected in some of the Circulars issued by the CBDT [e.g., Circular No.726, dated 18.4.1995, under which certain exceptions for TDS are provided for payments made by non-residents to resident Payees, being lawyers, chartered accountants, etc.].

1.4 In many cases, a Foreign Company enters into joint venture with an Indian partner in respect of some business activities for which a company is incorporated in India jointly with the resident joint venture partner [J. V. Company or Indian Company]. Similarly, many a time, a Foreign Company incorporates a subsidiary company in India for carrying out certain business activities [Indian Company]. In such cases, many a time, such Foreign Company deputes its employees on secondment basis to such Indian Company and the expatriates so seconded remain in India for a specified period in the employment of the Indian Company (generally such expatriates also become resident in India under the Act during such a period). In such cases, the Indian Company makes payment of salary, etc. and deducts tax under Sec.192(1) in respect of such payments. At the same time, in many such cases, such expatriates seconded by the Foreign Company to the Indian Company retain their lien on their job with the Foreign Company and also continue to remain on the rolls of the Foreign Company, and, apart from the salary, etc. received from the Indian Company, they also receive the agreed remuneration outside India in foreign currency from such Foreign Company (Home Salary). In such cases, no reimbursement is made by the Indian Company in respect of such Home Salary received by the expatriates and the same is also not claimed as deduction in computing the taxable income of the Indian Company. In such cases, the issue with regard to taxability of such Home Salary in India is under debate, which has to be decided on the basis of facts and circumstances of each case. In cases where such Home Salary is related to the services rendered by such expatriates in India, the same is generally treated as taxable income in India and in such an event, further issue with regard to liability of TDS in respect of such Home Salary is also under debate. In many cases, the Department has taken a stand that since such Home Salary relates to services rendered in India, the same is deemed to have accrued or arisen in India under Sec.9(1)(ii) and accordingly, the Indian Company is liable to deduct tax under Sec.192(1), as no work is performed by such expatriates for the Foreign Company during such periods.

1.5 Recently, the Apex Court had occasion to consider the issues referred to hereinbefore in the case of Eli Lilly & Co. India Pvt. Ltd. [Civil Appeal No.5114/2007] and other cases. Therefore, the judgment of the Apex Court in this batch of cases is of great importance and hence, it is thought fit to consider the same in this column.

Eli Lilly & Co. India Pvt. Ltd. and Others —178 Taxmann 505 (SC).

2.1 In the above cases (taken up by the Apex Court together), the Home Salary was paid by a Foreign Company to its employees seconded to the Indian Company [which was also not reimbursed by’ the Indian Companies 1, no tax was deducted on such payments. The Indian Companies had deducted tax under Sec.192 in respect of Salary Income paid by them to such seconded expatriates. In some cases, the employees had filed their returns of income in India and paid taxes on the Home Salary. In some cases, it seems, initially, a stand was taken that Home Salary is not taxable in India, but it appears that subsequently such stand was given up and taxes were paid. Since a large number of cases were involved, the detailed facts in respect of each one of those cases are not available except for one case to which reference is made hereinafter. Primarily, it seems that in all cases, the Indian Companies were treated as ‘assessee-in-default’ under Sec.201 and interest was charged under Sec.201(lA) and in some cases, penalty under Sec.271C was also levied for non-deduction of tax. It seems that in all cases, the High Court had decided these issues in favour of the Indian Companies.

2.2 In the case of Mis. Eli Lilly & Co. India Pvt. Ltd. (Indian Company), the brief facts were: The Company was engaged in manufacturing and selling pharmaceutical products during the Financial Years 1992-93 to 1999-2000. The Company was a J. V. Company between Messrs. Eli Lilly Inc., Netherlands (Foreign Company) and its Indian Partner, Mis. Ranbaxy Ltd. The Foreign Company had seconded four expatriates to the Indian Company (i.e., J. V. Company) and the appointment was routed through a J. V. Board consisting of Indian Partner and the Foreign Company. Only a part of their aggregate remuneration was paid in India by the Indian Company on which tax was deducted under Sec.192(1). These expatriates, who were seconded by the Foreign Company to the J. V. Company in India, also continued to be on the rolls of the Foreign Company and they received Home Salary outside India in foreign currency from the said Foreign Company, on which no tax was deducted. A survey under Sec.133(A) was carried out and in the course of such survey, these facts were noticed. The post-survey operations revealed that those expatriates who were employed by the Indian Company (on being seconded by the Foreign Company), no work was performed by them for the Foreign Company. Based on these facts, the Assessing Officer (A.a.) found that total remuneration paid to them was only on account of services rendered in India and therefore, the same is taxable in India in terms of Sec.9(1)(ii), and accordingly subject to tax deduction under Sec.192(1) of the Act. It was the contention of the Indian Company that the Home Salary is paid by the Foreign Company to expatriates outside India, de hors the contract of employment in India. The A.a. treated the Indian Company as ‘assessee-in-default’ under Sec.201 in respect of Home Salary paid by the Foreign Company outside India and levied interest under Sec.201(lA). In the Appellate proceedings, the Tribunal and the High Court took a view that the Indian Company was not under statutory obligation to deduct tax under Sec.192 on the Home Salary paid by the Foreign Company, as it was not paid by the Indian Company and hence it is not an ‘assessee-in-default’. At the instance of the Department, the matter came up before the Apex Court and the Apex Court decided to dispose of this case as well as other cases involving similar issues together.

2.3    On behalf of the Revenue, it was submitted that Sec.192 comprises the following four elements:

i) It imposes an obligation of ‘deducting’ tax on ‘any person’ responsible for paying any income chargeable under the head ‘salary’,

ii) Clarifies that this obligation attaches itself ‘at the time of payment’, which is the temporal time-frame,

iii) The rate is to be determined on the basis of the average rate of Income-tax for the financial year, and

iv) Most importantly, the rate is to be applied ‘on the estimated income of the assessee under this head for that financial year’, i.e., for the totality of the assessable salary income of the assessee-employee.

2.3.1 On behalf of the Department, it was, inter alia, further contended that the expression ‘any person’ in Sec.192 would include any person responsible for making salary payment to an employee, whether such employee is in India or outside India or whether such payment is made in india or outside India. The only requirement is that the assessee employee must be paid in respect of services rendered in India. A reference was also made in Sec.192(2) to draw a distinction between the expressions, ‘making the payment’ and ‘making the deduction’. With this distinction, it was contended that the very fact that Sec.192(2) authorises the employee to choose one of the several persons ‘making the payment’ and not ‘making the deduction’ is an indication that the obligation under Sec.192(1) attaches to ‘any’ person, who is responsible for making payment of Salary Income and is not limited to a person, who is under an obligation to deduct tax at source. It was finally contended that Sec.192 imposes a joint and several obligation on all the persons, who are responsible for paying any Salary Income to employees in India. In the alternative, it was contended that if it is held that it is only Indian Employer who is obliged to deduct tax at source and not the foreign employer (who is directly paying to the foreign account of the employee outside India), the obligation of the Indian employer has to be interpreted co-extensively and in respect of the entire Salary Income of the employees, so long as such Salary Income of the employee arises or accrues in India or is in respect of ‘services rendered in India’.

2.3.2 With regard to the issue relating to penalty under Sec.271C, on behalf of the Department it was contended that such penalty is in the nature of civil liability. The burden of bringing the case within the exception provided in Sec.273B, namely, showing ‘reasonable cause’, is squarely on the assessee. It was pointed out that in these appeals, the assessee has pleaded bona fide misunderstanding of law, which explanation does not satisfy the test of ‘reasonable cause’ and therefore, merits rejection.

2.4 The counsel appearing on behalf of Mis. Eli Lilly & Co. India Pvt. Ltd. [i.e., an Indian Company] raised various contentions. The Indian Company (which is Employer in India) was under no obligation to deduct tax under Sec.192(1) from the Home Salary, which was admittedly not paid by it. Sec.192(1) obliges the Employer to deduct tax out of the esti-mated salary income at the time of making payment thereof. Such TDS is required on estimated income for the reason that Salary Income is liable to change during the year on account of various reasons, such as increment, pay revision, payment of bonus, D.A., valua-tion of perquisites in kind, etc. Unlike most of the other provisions, TDS is required under Sec.192(1) at the time of payment of salary, the obligation of Employer is to deduct tax qua the amount actually paid by the Employer or paid on his behalf or on his account. Sec.192(2) specifically provides that when the employee is simultaneously in employment of more than one employer, the employee has an option to file with one employer (the chosen employer), a declaration of salary earned by him in Form No.12B and in that event, such chosen em-ployer is under an obligation to deduct tax on aggregate Salary Income of the employee. In the absence of exercise of option under Sec.192(2), the obligation of each employer is confined to the amount of salary actually paid by him and there is no statutory obligation on one employer to take into account the salary paid by other employer for the purpose of TDS. The TDS provisions are in the nature of machinery provisions, which enable easy col-lection and recovery of tax and the same are independent of charging provisions which are applicable to the recipients of income, whereas the IDS provisions are applicable to the Payer of income. The obligation of IDS on the Payer is independent of assessment of income in the hands of all the expatriate employees and hence the employer is obliged to deduct tax at source only from the payment made by him or payment made on his behalf or on his account. Each employer is required to comply with the TDS obligations in respect of Salary Income paid by him and the obligation does not extend to deduct tax out of Salary Income paid by other persons, when it is not on account of or on behalf of such employer, notwithstanding the fact that such salaries may have nexus with the service of the employee with the employer (Indian Company) and may be assessable to tax in India in the hands of the recipient employee. The payment of Home Salary by the Foreign Company in Netherlands was not on behalf of or on account of the Indian Company and consequently, the Indian Company was not under a statutory obligation to deduct tax from the entire Salary Income of the expatri-ate including Home Salary, particularly when the expatriates did not exercise an option under Sec.192(2) requiring the Indian Company to deduct tax from their aggregate Salary Income. It was also pointed out that each of the expatriate employees had paid directly the tax due on the Home Salary by way of advance taxi self-assessment tax from time to time and they had also filed their returns of income in India. In view of this, there is no loss to the Revenue of the alleged default of not deducting tax on the entire Salary Income as on account of short deduction of tax and hence, even if the Indian Company is regarded as ‘assessee-in-default’ in terms of Sec.201 of the Act, the tax alleged to be in default cannot be once again recovered from the Indian Company.

2.4.1 The counsel appearing on behalf of another Indian Company [M/ s. Erection Communica-tions Pvt. Ltd.] raised various contentions.

These include contentions with regard to the issue that such TDS provisions have no extra-territorial operations. In this regard it was, inter alia, submitted: there is no provision in the Act that TDS provisions shall apply to payment made abroad by a person who is located outside India, breach of such provisions results in severe penal and criminal action and therefore, penal and criminal liability imposition by a statute on foreigners in respect of their acts and omissions committed outside India should not be inferred unless there is a clear-cut provision in the Act to that effect, applicability of TDS provisions to payment made abroad has nothing to do with the taxability of such amount in India, there are various instances where the amounts paid outside India by a foreigner are taxable in India, but such payments are not subject to TDS provisions, etc. Dealing with the provisions of Sec.192(1), it was contended that the same can be divided into two distinct parts. First part creates a legal liability to deduct tax and the second part provides for computation of the amount of tax to be deducted. On a plain and correct reading of the provisions creating liability to deduct tax, the tax is deductible only from the amount paid or payable by the Payer and he is not at all required to deduct tax in respect of the amount paid by any other person. The second part of the provision also refers to only estimated Salary Income of the employee for the whole financial year on the basis of payment made by the Payer (Employer). Other contentions raised were similar to those raised by the earlier counsel.

2.4.2 Another counsel appearing on behalf of M/ s. Mitsui & Co. Ltd. also raised similar contentions. However, his main thrust was with regard to penalty imposed under Sec.271C. It was contended that the retention/continuation payment made to expatriates in Japan by Head Office (H.O.) of the Company was not taxable in India and/ or TDS provisions are not applicable to such payments. It was further stated that the Company had presented its case before the Department to this effect. However, after consultation with CBDT, it was agreed to pay the tax and accordingly the amount of tax and interest was deposited on the understanding that there will not be any penalty proceeding. Accordingly, both in law and on facts, the Department had erred in imposing penalty. To support his legal stand with regard to non-taxability of the amount also, various contentions were raised with reference to the provisions contained in Sec.9(1)(ii) as well as the Explanation introduced by the Finance Act, 1983 (w.ef 1.4.1979) and another Explanation introduced by the Finance Act, 1999 (w.ef 1.4.2000), to ultimately contend that despite the amendment made by the Finance Act, 1983, a salary paid for ‘off-period’ was not covered in the provisions and hence another amendment was made, which is prospective in nature. In effect, it seems that an attempt was made to show that taxability of such amount was debatable. The difference between the Branch (Branch Office) on the one hand and H.O. on the other hand recognised for the purpose of implementing TDS provisions was also brought out as, in this case, the expatriates were working at the Project Office in India and were getting salary for rendering services in India and at the same time, they were also getting continuation/retention payments (Home Salary) from the H.O. in Japan.

2.4.3 The Court also noted that the other counsels appearing for various other assessees have adopted the arguments taken up by the earlier counsels.   

[To be Concluded]

Concealment Penalty — Whether Disallowed Claim For Expenditure Amounts to “Furnishing Inaccurate ‘Particulars’ ”

Closements

Introduction :


1.1 Under the Income-tax Act (the Act), to safeguard the
interest of the Revenue against non-disclosure of correct income in the return
of income furnished by the assessee, various provisions are made including the
provisions for imposition of penalty for concealment of income. A penalty
u/s.271(1) c) of the Act (‘Concealment Penalty’) can be imposed in cases where
the assessee has concealed the particulars of his income (‘Concealed Income’) or
furnished inaccurate particulars of his income (‘Furnishing Inaccurate
Particulars of Income’). The action of imposition of penalty should clearly
bring out whether the penalty is imposed on account of concealed income or for
furnishing inaccurate particulars of income.

1.2 Explanation 1 to S. 271(1) provides legal fiction
whereunder any addition or disallowance is deemed to represent the concealed
income for the purpose of levy of concealment penalty once the condition
provided in the Explanation are satisfied (hereinafter this Explanation 1 is
regarded to as the said Explanation). The said Explanation shifts the burden of
proof from the Department to the assessee as regards the concealed income. In
substance, the said Explanation provides for a deeming fiction whereunder any
addition or disallowance made to the total income is regarded as concealed
income for the purpose of levy of concealment penalty under the circumstances
mentioned therein. The said
Explanation has undergone change from time to time and the same was last
substituted by the Taxation Laws (Amendment) Act, 1975 and the same was
subsequently amended by the Taxation Laws (Amendment and Miscellaneous
Provisions) Act, 1986 w.e.f. 10-9-1986. It may also be noted that it is a
settled law that the issue of concealment of income for the purpose of imposing
concealment penalty is to be decided on the basis of the law in force at the
time of furnishing return of income.

1.3 In the context of the levy of concealment penalty,
various issues are under debate. By and large, in practice, once any claim of
expenditure made in the return of income is disallowed [or any addition is made
to the returned income], the assessing authority initiates proceedings for
imposition of concealment penalty. In most such cases, once such
disallowance/addition is confirmed by the First Appellate Authority, generally
the assessing authority imposes concealment penalty, though it is a settled
position in law that mere disallowance of expenditure or addition to income by
itself does not give rise to concealed income.

1.4 In the context of imposition of concealment penalty,
various issues are under debate. One such issue is : whether disallowance of
claim of expenditure treating the same as incorrect amounts to furnishing
inaccurate particulars of income, attracting provisions relating to concealment
penalty.

1.5 Earlier, the Apex Court in the case of Dilip N. Shroff
(291 ITR 519), inter alia, held that the order imposing such penalty is
quasi-criminal in nature and the concealment of income and furnishing inaccurate
particulars of Income, both, referred to deliberate act on the part of the
assessee. In substance, the Court expressed the view that mens rea is essential
ingredient for invoking provisions relating to concealment penalty. The Apex
Court, in this case, also made various other important observations with regard
to provisions relating to concealment penalty.

1.6 Subsequently, another Division Bench of the Apex Court,
in the context of similar provisions relating to the levy of penalty under
Central Excise Act, 1944 and the rules made thereunder (the Excise Act), had to
consider some of the views expressed in the above referred judgment of Dilip N.
Shroff (Dilip N. Shroff’s case). At the instance of this Division Bench of the
Apex Court, the relevant issue was referred to a Larger Bench (consisting of
three Judges) and that is how the Larger Bench in the case of Dharmendra
Textiles Processors (306 ITR 277) considered the effect of the judgment of the
Apex Court in the case of Dilip N. Shroff (supra). Primarily, the latter
judgment was concerned with the levy of penalty under the Excise Act. The Larger
Bench in this case (Dharmendra Textile’s case), did not agree with the view
taken in Dilip N. Shroff’s case. We have analysed this judgment in this column
in the December, 2008 issue of the Journal. In our write-up, we have expressed
the view that the judgment in Dharmendra Textile’s case overrules the judgment
of Dilip N. Shroff’s case only to the extent it holds that deliberate act on the
part of the assessee will have to be proved for the levy of concealment penalty
(i.e., mens rea is essential ingredient of the provisions) and the order
imposing such penalty is quasi-criminal in nature, but the other observations
made in Dilip N. Shroff’s case in the context of concealment penalty
u/s.271(1)(c) should continue to hold good, as the Apex Court in the case of
Dharmendra Textile’s case was neither specifically concerned with those
observations, nor with the provisions of S. 271(1) (and the Explanation thereto)
of the Act.

1.6.1 Unfortunately, subsequent to the judgment in the case
of Dharmendra Textile’s case, by and large in most cases, the Department appears
to have taken a view that once the disallowance/addition is confirmed at the
Appellate level and the final total income is higher than the returned income,
provisions relating to levy of concealment penalty get attracted.

1.6.2 In various decisions of the Tribunal, the effect of the
judgment in Dharmendra Textile’s case came up for consideration under different
circumstances and on different set of facts. In most such cases, by and large,
the different Benches of the Tribunal have not accepted the extreme stand taken
by the Department on the effect of the judgment in Dharmendra Textile’s case and
in those decisions, the effect of the said judgment is explained under different
circumstances [Ref. Gem Granite — 18 DTR 358 (Chennai), Mrs. Najma Kanchwalla —
24 DTR 369 (Mumbai), Glorious Reality (P) Ltd. — 29 SOT 292 (Mumbai), Veejay
Service Station — 22 DTR 527 (Delhi), V.I.P. Industries Ltd. — 21 DTR 153
(Mumbai), etc.]. Apart from this, the Delhi High Court in the case of Escorts
Finance Ltd. (ITA No. 1005 of 2008) also explained the effect of Dharmendra
Textile’s case. After considering the said judgment of the Apex Court, the
Punjab and Haryana High Court in the case of Haryana Warehousing Corporation
also took the view that no concealment penalty can be levied where the assessee
has made a bona fide claim of exemption by making proper and adequate disclosure
in the return of income even if the claim of such exemption is not accepted.
Even the Apex Court in the case of Rajasthan Spinning & Weaving Mills considered
the judgment in the case of Dharmaneda Textile and did not agree with the
extreme view of the Department, though in the context of the provisions under
the Excise Act.

1.6.3 A very detailed and well-reasoned decision explaining the effect of the judgment in Dharmendra Textile’s case is found in the case of Kanbay Software India [P] Ltd. — 22 DTR 481 (Pune). In this decision, various aspects of concealment penalty have been considered in detail.

1.7 Notwithstanding the above, the controversy with regard to the effect of Dharmendra Textile’s case continued. In spite of various decisions of the Apex Court and the High Courts explaining the provisions relating to concealment penalty, by and large, the Department is invoking these provisions in most cases where any disallowance of expenditure/claim of deduction or addition to income is confirmed at the Appellate level. In this scenario, the judgment of the Apex Court in Dharmendra Textile’s case gave a fillip to the existing practice, adding fuel to the fire, and the problem got aggravated, notwithstanding the subsequent development on the issue referred to hereinbefore. The Department continued to hold a view that the judgment in Dilip N. Shroff’s case is no longer a good law. On the other hand, the view held in the profession, by and large, was that the Larger Bench in the Dharmendra Textile’s case overrules the judgment in Dilip N. Shroff’s case only to the extent it holds that mens rea is essential ingredient of the provisions relating to concealment penalty and the provisions are quasicriminal in na-ture and except for this, the judgment in Dilip N. Shroff’s case is still a good law.

1.8 Recently, the Apex Court in the case of Reliance Petroproducts Pvt. Ltd. had an occasion to consider the issue referred to in para 1.7 above and hence the judgment of the Apex Court in that case becomes relevant and important in relation to the matters concerning concealment penalty. Therefore, it is thought fit to consider the same in this column.

CIT v. Reliance Petroproducts Pvt. Ltd.
— 322 ITR 158 (SC) :

2.1 The above case relates to A.Y. 2001-02. The brief facts of the said case were : The assessee had furnished return of income showing a loss of Rs.26,54,554. The assessee had claimed deduction of expenditure by way of interest (Rs.28,77,242) on borrowing for the purpose of purchase of shares of IPL by way of its business policy. The assessee did not earn any income from those shares and the Assessing Officer (AO) disallowed the claim of the said interest expenditure by invoking provision of S. 14A. Accordingly, the income was assessed at Rs.2,22,688.

2.2 In response of show-cause notice regarding concealment penalty, the assessee, inter alia, contended that all the details given in the return of income were correct and it was neither a case of concealment of income, nor a case of furnishing any inaccurate particulars of such income. It was also pointed out that the disallowance is made in the as-sessment solely on account of different view taken on the same set of facts and hence, at the most, the same could be termed as difference of opinion and not a case of concealed income or a case of furnishing inaccurate particulars of income as contemplated in provisions relating to concealment penalty. It was also pointed out that the assessee is an invest-ment company and in the earlier A.Y. (i.e., 2000-01) similar disallowance is deleted by the First Appellate Authority and that view has also been confirmed by the Appellate Tribunal. The AO did not accept the contentions of the assessee and imposed a penalty of Rs.11,37,949. The First Appellate Authority deleted the penalty and the appeal of the Department before the Appellate Tribunal also did not succeed. The High Court also confirmed the order of Appellate Tribunal. Under these circumstances, the issue with regard to the said penalty came-up before the Apex Court at the instance of the Department.

2.3 On behalf of the Department, it was, inter alia contended that the claim of interest expenditure was totally without any legal basis and was made with mala fide intentions and the claim was also not accepted by the First Appellate Authority and hence it was obvious that such claim did not have any basis. It was also pointed out that the issue of deductibility of such expenditure in the earlier year is pending before the High Court. It was further contended that otherwise also, the expenditure of interest is not eligible for deduction u/s.36(1)(iii) of the Act as under the said provision, only the amount of interest paid on capital borrowed for the purpose of business/profession could be claimed and the present case was not in respect of the capital borrowed for such purposes. Attention was also drawn to the provisions of S. 10(33) to show that expenditure incurred in relation to exempt income is not deductible. In short, the contention was that the assessee had made a claim, which was totally unacceptable in law and thereby had invited the provisions relating to concealment penalty and had exposed itself to such provisions.

2.4 On behalf of the assessee, it was, inter alia, contended that the language of the provision of concealment penalty had to be strictly construed, this being part of a taxing statute and more particularly the one providing for penalty. Accordingly, unless the wording directly covered the assessee and the factual situation therein, there could not be any penalty under the Act. It was also pointed out that there was no case of concealed income or the case of furnishing inaccurate particulars of income in the return furnished by the assessee.

2.5 After considering the contentions of both the sides, the Court proceeded to consider the issue further and after referring to the relevant provisions of the Act, the Court noted that the provisions suggest that for imposing concealment penalty, there has to be concealed income or furnishing inaccurate particulars of income. The Court then noted that the present case is not the case of concealed income and that is not the case of the Department either. On behalf of the Department, it was suggested that by making incorrect claim for the expenditure of interest, the assessee has furnished inaccurate particulars of income. Dealing with this contention, after referring to the dictionary meaning of the word ‘particulars’, the Court stated that the same used in S. 271(1)(c), would embrace the meaning of the de-tails of claim made. It is an admitted position that in the present case no information given in the return was found to be incorrect or inaccurate. It is not, as if, any statement made or any details supplied were found to be factually incorrect. Therefore, at least, prima facie, the assessee cannot be made guilty of furnishing inaccurate particulars of income. While dealing with the interpretation of the Department that ‘submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income’, the Court stated that such cannot be the interpretation of the concerned words. According to the Court, the words are plain and simple and in order to expose the assessee to concealment penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. According to the Court, by any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars of income. The Court also referred to the judgment of the Apex Court in the case of Atul Mohan Bindal (317 ITR 1), in which the Court considered the same provisions. After referring to judgment in Dharmendra Textile’s case, as also to the judgment in the case of Rajasthan Spinning and Weaving Mills (supra), the Court in that case reiterated on page 13 of the judgment that : ‘It goes without saying that for applicability of S. 271(1)(c), conditions stated therein must exist’.

2.6 After mentioning the above position in law, the Court referred to the Dilip N. Shroff’s case and stated as under (pages 164-165) :

“Therefore, it is obvious that it must be shown that the conditions u/s.271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed because that is the only document where the assessee can furnish the particulars of his in-come. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff v. Joint CIT, (2007) 6 SCC 329, this Court explained the terms ‘concealment of income’ and ‘furnishing inaccurate particulars’. The Court went on to hold therein that in order to attract the penalty u/s.271(1) (c), mens rea was necessary, as according to the Court, the word ‘inaccurate’ signified a deliberate act or omission on behalf of the assessee. It went on to hold that clause (iii) of S. 271(1)(c) provided for a discretionary jurisdiction upon the assessing authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was pointed out that the term ‘inaccurate particulars’ was not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnishing inaccurate particulars. It was further held that the Assessing Officer must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars of his income. The Court ultimately went on to hold that the element of mens rea was essential. It was only on the point of mens rea that the judgment in Dilip N. Shroff v. Joint CIT was upset”.

2.7 The Court then dealt with the judgment of Dharmendra Textile’s case and the effect thereof on Dilip N. Shroff’s case and explained as under (page

165) :

“. . . . . . The basic reason why the decision in Dilip N. Shroff v. Joint CIT was overruled by this Court in Union of India v. Dharmendra Textiles Processors, was that according to this Court the effect and dif-ference between S. 271(1)(c) and S. 276C of the Act was lost sight of in the case of Dilip N. Shroff v. Joint CIT. However, it must be pointed out that in Union of India v. Dharmendra Textile Processors, no fault was found with the reasoning in the decision in Dilip N. Shroff v. Joint CIT, where the Court explained the meaning of the terms ‘conceal’ and ‘inaccurate’. It was only the ultimate inference in Dilip N. Shroff v. Joint CIT to the effect that mens rea was an essential ingredient for the penalty u/s. 271(1)(c) that the decision in Dilip N. Shroff v. Joint CIT was overruled.”

2.8 The Court then noted that in the present case, it is not concerned with mens rea and also stated that it has seen the meaning of the word ‘particu-lars’ earlier. The Court then stated as under (pages165-166) :

“. . . . . . Reading the words in conjunction, they must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. We must hasten to add here that in this case, there is no finding that any details supplied by the assessee in its return were found to be incorrect or false. Such not being the case, there would be no question of inviting the penalty u/s.271(1)(c) of the Act. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars.”

2.9 The Court then referred to the argument based on S. 14A of the Act and the points raised and reiterated that such claim of excessive deductions, knowing that they are incorrect, amounted to concealed income. Further, the Court noted that it was tried to be argued that the falsehood in accounts can take either of two forms : (i) an item of receipt will be suppressed fraudulently or (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed. According to the Department, both types of items are to reduce the taxable income and therefore, amount to concealed income as well as furnishing of inaccurate particulars of income. Rejecting these contentions, the Court stated as under (page 166) :

“We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate, nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty u/s. 271(1)(c). If we accept the contention of the Revenue, then in case of every return where the claim made is not accepted by the Assessing Officer for any reason, the assessee will invite penalty u/s.271(1)(c). That is clearly not the intendment of the Legislature.”

2.10 The Court then also referred to the judgment of the Apex Court in the case of Sree Krishna Electricals (27 VST 249) rendered under the Tamil Nadu General Sales Tax Act in connection with the penalty proceedings wherein the authorities had found that there were some incorrect statements made in the return, though the said transactions were reflected in the accounts of the assessee. The Court then quoted the following observations from the judgment in that case (page 167) :

“So far as the question of penalty is concerned, the items which were not included in the turnover were found incorporated in the appellant’s account books. Where certain items which are not included in the turnover are disclosed in the dealer’s own account books and the assessing authorities include these items in the dealer’s turnover disallowing the exemption, penalty cannot be imposed. The penalty levied stands set aside.”

2.10.1 Referring to the above-referred observations in the context of penalty proceedings under the Sales Tax Act of Tamil Nadu, the Court stated that the situation in the present case is still better as no fault has been found with the particulars submitted by the assessee in his return. Accordingly, the Court held that the First Appellate Authority, the Tribunal and the High Court have correctly reached the conclusion and accordingly, dismissed the appeal filed by the Department as without merit.

Conclusion :
3.1 In view of the above judgment of the Apex Court, the settled position is again reiterated that mere disallowance of claim for expenditure by itself would not tantamount to furnishing inaccurate particulars of income and accordingly, in such cases no concealment penalty can be levied on that basis, notwithstanding the judgment of the Apex Court in Dharmendra Textile’s case. We hope that this principle reiterated by the Apex Court will be followed by the Department in spirit. We also hope that the Department will not initiate proceedings for the levy of concealment penalty in such cases.

3.2 From the above judgment of the Apex Court, it is now clear that the judgment of the Apex Court in Dilip No. Shroff’s case is overruled by the judgment in Dharmendra Textile’s case only to the extent it holds that the element of mens rea is essential for levy of concealment penalty and the other observations in Dilip N. Shroff’s case will continue to hold good, except perhaps the observations with regard to nature of concealment penalty.

Whether Reassement u/s.147 is Permissible on a Mere ‘Change of Opinion’

Closements

Introduction :


1.1 S. 147 authorises and permits the Assessing Officer (AO)
to assess or re-assess the income chargeable to tax, if he has reason to believe
that income for relevant years has escaped assessment. This is popularly known
as power of reassessment.

1.2 Provisions of S. 147 have been substituted by the Direct
Tax Laws (Amendment) Act, 1987 with effect from 1-4-1989 (New Provisions).
Primarily, the New Provisions confer jurisdiction to reopen the reassessment,
when the AO, for whatever reason, has ‘reason to believe’ that the income has
escaped assessment.

1.2.1 Under the New Provisions, the above-referred power of
reassessment cannot be exercised after the end of four years from the end of the
relevant assessment year in cases where the original assessment is made
u/s.143(3) or S. 147, unless in such cases, the income chargeable to tax
has escaped assessment for such assessment year by reason of failure of the
assessee to make return u/s.139 or in response to notice u/s.142(1)/148 or by
reason of failure of the assessee to disclose fully and truly all material facts
necessary for such assessment (‘failure to disclose material facts’). In this
write-up we are not concerned with this provision.

1.3 Prior to substitution of the provisions of S. 147 w.e.f.
1-4-1989 as aforesaid (i.e., New Provisions), S. 147 providing for
reassessment was divided into two separate clauses [(a) and (b)], which laid
down the circumstances under which income escaping assessment for the past
assessment years could be assessed or re-assessed (Old Provisions). Under the
Old Provisions, clause (a) empowered the AO to initiate proceedings for
re-assessment in cases where he has ‘reason to believe’ that by reason of the
omission or failure of the assessee to make return u/s.139 or by reason of the
‘failure to disclose the material facts’, the income chargeable to tax has
escaped assessment. Under clause (b) of the Old Provisions, the AO was empowered
to initiate reassessment proceedings if, in consequence of information in his
possession, he has ‘reason to believe’ that income chargeable to tax has escaped
assessment, even if there is no omission or failure on the part of the assessee
as mentioned in clause (a).

1.4 From the comparison of the Old Provisions with the New
Provisions relating to re-assessment, it would appear that to confer
jurisdiction under clause (a) of the Old Provisions, it would appear that two
conditions were required to be satisfied, namely, (i) the AO must have ‘reason
to believe’ that income chargeable to tax has escaped assessment, and (ii) such
escapement has occurred by reason of ‘failure to disclose material facts’, etc.
on the part of the assessee. On the other hand, under the New Provisions, the
existence of only first condition (i.e., ‘reason to believe’) is
sufficient to confer the jurisdiction on the AO to initiate the reassessment
proceedings (except, of course, in cases covered by the circumstances mentioned
in Para 1.2.1 above).

1.5 Various issues are under debate with regard to powers of
the AO to make reassessment under the New Provisions. In large number of cases,
reassessment proceedings are being initiated merely on account of ‘change of
opinion’ on the issues decided at the time of original assessment. In such
cases, the issue has come up before the Courts in the past as to whether, under
the New Provisions, the AO is empowered to initiate reassessment proceedings on
a mere ‘change of opinion’. By and large, the Courts have taken a view that
reassessment proceedings cannot be initiated on a mere ‘change of opinion’.
However, the issue still survives and in practice, such re-assessment
proceedings are being initiated on a mere ‘change of opinion’ by giving one
reason or the other.

1.6 Recently, the issue referred to in Para 1.5 above came up
for consideration before the Apex Court in the case of Kelvinator of India Ltd.
and the same is finally resolved by the Apex Court. Considering the importance
of the issue in day-to-day practice, it is thought fit to consider the said
judgment in this column.


CIT v. Kelvinator of India Ltd., 256 ITR 1
(Del.) — Full Bench :


2.1 In the above case, the issue referred in Para 1.5 above
was referred to the Full Bench of the Delhi High Court. In that case, the facts
were : The assessee had furnished the return of income for the A.Y. 1987-88 on
29-6-1987. The assessee had maintained guest houses at different places on which
it had incurred total expenditure of Rs.3,33,926 consisting of rent
(Rs.1,76,000), depreciation (Rs.66,441) and other expenses (Rs. 91,485). As it
did not claim deduction for these expenses, revised return was filed on
5-10-1989 along with a letter mentioning that out of the above amount of
Rs.3,33,926, the rent and depreciation should be allowed as deduction u/s.30 and
u/s.32 of the Act, relying on the judgment of the Bombay High Court in the case
of Chase Bright Ltd. (177 ITR 124). Accordingly, disallowance of the expenses
u/s.37(4) of the Act was restricted to only Rs.91,485 and the relevant order was
passed on 17-11-1989. Subsequently, notice u/s.148 was issued on 20-4-1990 for
reopening of the assessment u/s.147. Though as per the reasons recorded for
reopening, the assessment was reopened on the alleged ground of various
disallowable claims, but except for the above referred two items of
disallowances, neither any claim was disallowed, nor any addition was made on
completion of reassessment. In support of the reassessment, the AO had relied
upon the order of the CIT(A) for the A.Y. 1986-87, which was passed on 7-7-1990,
although the assessment was reopened on 2-4-1990. In the appeal filed against
the reassessment order, the CIT(A) quashed the reassessment proceedings on the
ground that it was a case of mere ‘change of opinion’ on the part of the AO as
no new fact or material was available with the AO The Appellate Tribunal also
upheld the decision of the CIT(A) and it was held that New Provisions of S. 147
are applicable in this case and it was also a case of mere ‘change of opinion’.

2.2 On the above facts, the Revenue made an application for
referring the following questions to the High Courts (para 5) :

“Whether, the Income-tax Appellate Tribunal was correct in
holding that the proceedings initiated u/s.147 of the said Act were invalid on
the ground that there was a mere ‘change of opinion’ ?”

2.3 The above-referred application was rejected by the
Tribunal and hence, at the instance of the Revenue, a petition was filed
u/s.256(2) before the Delhi High Court for direction to Tribunal for referring
the above-referred question to the High Court.

2.4 Before the High Court, the counsel appearing on behalf of the Revenue, referred to the provisions of S. 34 of the Indian Income-tax Act, 1922 (the 1922 Act) and the Old Provisions as well as the New Provisions of S. 147 of the Income-tax Act, 1961 (the Act). He also pointed out that the proviso to S. 147 under the New Provisions is in pari materia with Clause (a) of S. 147 under the Old Provisions. It was, inter alia, further contended that the ‘change of opinion’ is relevant only for the purpose of Clause (b) of S. 147 under the Old Provisions, the initiation of reassessment proceedings is permissible when it is found that the AO has passed the assessment order without any application of mind and the same can be found out from the order of assessment itself. When the order of the assessment does not contain any discussion on a particular issue, then the same may be held to have been rendered without any application of mind. It was further contended that from the reasons recorded by the AO, it is apparent that reliance has been placed upon the tax audit report which would have come within the purview of the expression ‘information’ as contemplated in 147 and hence, the re-assessment cannot be said to be illegal or without jurisdiction. For this purpose, reliance was placed on various judgments of the Courts including the judgments of the Gujarat High Court in the case of Praful Chunilal Patel (236 ITR 832) and a Delhi High Court case of Bawa Abhai Singh (253 ITR 83). It was also contended that Circular No. 549, dated 31-10-1989 issued by the CBDT (Circular No. 549) cannot be relied upon for the purpose of construction of New Provisions inasmuch as the Circular cannot override the statutory provisions.

2.5 On the other hand, on behalf of the assessee, it was, inter alia, contended that the expression ‘reason to believe’ contained in S. 147 denotes that the belief must be based on the change of fact or subsequent information or new law. Income escaping assessment must be founded upon or in consequence of any information which must come into the possession of the AO after completion of the original assessment. It was also pointed out that the said Circular No. 549 clearly shows that S. 147 was amended only to allay fear of all concerned that prior thereto an arbitrary power was conferred upon the AO and the CBDT, who has the authority to interpret the law, has issued the said Circular No. 549, which should govern the case. Reliance was also placed on various judgments of the Courts in support of contentions raised.

2.6 After considering the contentions raised on behalf of both the parties, the Court proceeded to consider the issue and for that purpose noted the provisions regarding reassessment under 1922 Act as well as the Old Provision and the New Provision under the Act. The Court also noted the said Circular No. 549. The Court then also referred to the various judgments of the Courts rendered under 1922 Act as well as the Old Provisions and the New Provisions of the Act dealing with the issue, wherein the view was taken that reassessment proceedings cannot be initiated on a mere ‘change of opinion’. Referring to the New Provisions, the Court noted the following observations (head notes) of the Delhi High Court (234 ITR 170) in the case of Jindal Photo Films Ltd. (page 13):

“The power to reopen an assessment was conferred by the Legislature not with the intention to enable the Income-tax Officer to reopen the final decision made against the Revenue in respect of questions that directly arose for decision in earlier proceedings. If that were not the legal position, it would result in placing an unrestricted power of review in the hands of the assessing authorities depending on their changing moods.”

2.7 After considering the above, the Court stated that although the referring Bench had prima facie agreed with the decision of this Court in the case of Jindal Photo Films Ltd. (supra), but doubt was sought to be raised by the Revenue in view of the decision of the Gujarat High Court in the case of Praful Chunilal Patel (supra). Accordingly, the Court considered the said judgment of the Gujarat High Court and noted that in that case it was held that the word ‘assessment’ would mean the ascertainment of the amount of taxable income and the tax payable thereon. In other words, where there is no ascertainment of amount of taxable income and the tax payable thereon, it can never be said that such income was assessed. It was further held that merely because during the assessment proceedings the relevant material was on record, it cannot be inferred that the AO must necessarily have deliberated over it and taken in to account while ascertaining the taxable income or that he had formed an opinion in respect thereof. If looking back, it appears to the AO (albeit, within four years from the end of the relevant assessment year) that particular item even though reflected on the record was not subjected to assessment and was left out while working out the taxable income earlier, that would enable him to initiate the proceedings for reassessment. After referring to this view expressed by the Gujarat High Court in that case, the Court disagreed with the same and stated as under (page 15):

“We are, with respect, unable to subscribe to the aforementioned view. If the contention of the Revenue is accepted the same, in our opinion, would confer an arbitrary power upon the Assessing Officer. The Assessing Officer who had passed the order of assessment or even his successor officer only on the slightest pre-text or otherwise would be entitled to reopen the proceeding. Assessment proceedings may be furthermore reopened more than once. It is now trite that where two interpretations are possible, that which fulfils the purpose and object of the Act should be preferred.”

2.8 The Court then also considered the judgment of the Delhi High Court in the case of Bawa Abhai Singh (supra) on which reliance was placed by the Revenue to contend that reassessment proceedings can be initiated on a mere ‘change of opinion’. The Court then noted that in that case it was held that the Old Provisions and the New Provisions are contextually different. Under the New Provisions, the only condition for initiating the reassessment proceeding is that the AO should have ‘reason to believe’ that income has escaped assessment, which belief can be reached in any manner and is not qualified by any pre-condition of faith and true disclosure of material fact by the assessee as contemplated under the Old Provisions in clause    of S. 147. Accordingly, the power to re-open the assessment under the New Provisions is much wider and can be exercised even after the assessee has disclosed fully and truly all material facts. After noting this part of the said judgment, the Court stated that it is evident that this judgment cannot be considered as an authority for the proposition that mere ‘change of opinion’ would also confer jurisdiction upon the AO to initiate reassessment proceedings as was contended on behalf of the Revenue.

2.9 Dealing with the meaning of the expression ‘reason to believe’, the Court noted the following view expressed by the Delhi High Court in the earlier referred judgment of Bawa Abhai Singh (supra), on which reliance was placed on behalf of the Revenue (page 16):

“The crucial expression is ‘reason to believe’. The expression predicates that the Assessing Officer must hold a belief?.?.?.?. by the existence of reasons for holding such a belief. In other words, it contemplates existence of reasons on which the belief is founded and not merely a belief in the existence of reasons inducing the belief. Such a belief may not be based merely on reasons but it must be founded on information. As was observed in Ganga Saran and Sons P. Ltd. v. ITO, (1981) 130 ITR 1 (SC), the expression ‘reason to believe’ is stronger than the expression ‘is satisfied’. The belief entertained by the Assessing Officer should not be irrational and arbitrary. To put it differently, it must be reasonable and must be based on reasons which are material. In S. Narayanappa v. CIT, (1967) 63 ITR 219, it was noted by the Apex Court that the expression ‘reason to believe’ in S. 147 does not mean purely a subjective satisfaction on the part of the Assessing Officer, the belief must be held in good faith; it cannot be merely a pretence. It is open to the Court to examine whether the reasons for the belief have a rational nexus or a relevant bearing to the information of the belief and are not extraneous or irrelevant for the purpose of the Section. To that limited extent, the action of the Assessing Officer in initiating proceedings u/s. 147 can be challenged in a Court of law.”

2.10 To decide the issue, the Court then further stated that it is a well-settled principle of interpretation of statute that the entire statute should be read as a whole and the same has to be considered thereafter chapter by chapter and then section by section and ultimately word by word. It is not in dispute that the AO does not have any jurisdiction to review his own order. His jurisdiction is confined to only rectification of apparent mistakes u/s.154 and the said powers cannot be exercised where the issues are debatable. According to the Court, what cannot be done directly, cannot be done indirectly by taking recourse to provisions relating to reassessment. For this, the Court observed as under (page 15):

“It is a well-settled principle of law that what cannot be done directly cannot be done indirectly. If the Income-tax Officer does not possess the power of review, he cannot be permitted to achieve the said object by taking recourse to initiating a proceeding of reassessment or by way of rectification of mistake.

2.11 The Court then considered the contention raised on behalf of the Revenue that the said Circular No. 549 cannot be considered, as the Circular cannot override the statutory provisions. In this context, the Court reiterated the settled position with regard to the binding effect of the Circular issued by the CBDT for which reference was made to the judgments of Apex Court in the cases of UCO Bank (237 ITR 889) and Anjum M. H. Ghasswalla (252 ITR 1). The Court, then, felt that if the AO is permitted to reopen the completed assessment on a mere ‘change of opinion’, then the powers of the AO become arbitrary. In this context, the Court observed as under (page 19):

“Another aspect of the matter also cannot be lost sight of. A statute conferring an arbitrary power may be held to be ultra vires Article 14 of the Constitution of India. If two interpretations are possible, the interpretation which upholds constitutionality, it is trite, should be favoured.

In the event it is held that by reason of S. 147 if the Income-tax Officer exercises his jurisdiction for initiating a proceeding for reassessment only upon a mere change of opinion, the same may be held to be unconstitutional. We are therefore of the opinion that S. 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate reassessment proceeding upon his mere change of opinion.”

2.12 While taking a view that on a mere ‘change of opinion’ reassessment proceedings cannot be initiated, even if the detailed reasons have not been recorded in the original assessment order for accepting the claim of the assessee, finally, the Court stated as under (pages 19/20):

“We also cannot accept the submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded an analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding u/s.147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of Ss.(1) of S. 143 or Ss.(3) of S. 143. When a regular order of assessment is passed in terms of the said Ss.(3) of S. 143, a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of S. 114 of the Indian Evidence Act judicial and official acts have been regularly performed. If it be held that an order which has been passed purport-edly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.”

CIT v. Kelvinator of India Ltd., 320 ITR 561 (SC):

3.1 The above-referred judgment of the Full Bench of the Delhi High Court came up for consideration before the Apex Court to decide the issue referred to in para 1.5 above.

For this purpose, the Court noted the Old Provisions as well as the New Provisions of S. 147. The Court then stated that on going through the changes made under the New Provisions, we find that for the purpose of reopening, two conditions were required to be fulfilled under the Old Provisions, but under the New Provisions they are given go by and only one condition has remained, namely, that once the AO has reason to believe that income has escaped assessment, that confers the jurisdiction for reopening. Therefore, under the New Provisions, power to reopen is much wider. However, one needs to give schematic interpretation to the words, ‘reason to believe’, failing which S. 147 would give arbitrary powers to AO to reopen assessment on the basis of a mere ‘change of opinion’. One must also keep in mind the conceptual difference between the power of review and power of reassessment. The AO has no power to power to review; he has the power to reopen. Having made these observations, the Court then held as under (pages 564/565):

“But reassessment has to be based on fulfilment of certain pre-conditions and if the concept of ‘change of opinion’ is removed, as contended on behalf of the Department, then, in the garb of reopening 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 1st April, 1989, the Assessing Officer has power to reopen, 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. Our view gets support from the changes made to S. 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, the Parliament not only deleted the words ‘reason to believe’, but also inserted the word ‘opinion’ in S. 147 of the Act. However, on receipt of representations from the companies against omission of the word ‘reason to believe’, the Parliament reintroduced the said expression and deleted the word ‘opinion’ on the ground that it would vest arbitrary powers in the Assessing Officer.”

3.2 In support of the aforesaid view, the Court also relied on the said Circular No. 549 and reproduced the following portion therefrom (page 565):

“7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression ‘reason to believe’ in S. 147. — A number of representations were received against the omission of the words ‘reason to believe’ from S. 147 and their substitution by the ‘opinion’ of the Assessing Officer. It was pointed out that the meaning of the expression, ‘reason to believe’ had been explained in a number of Court rulings in the past and was well settled and its omission from S. 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended S. 147 to reintroduce the expression ‘has reason to believe’ in place of the words ‘for reasons to be recorded by him in writing, is of the opinion’. Other provisions of the new S. 147, however, remain the same.”

Conclusion:

4.1 From the above judgment of the Apex Court, it is now clear that even under the New Provisions, reassessment proceedings cannot be initiated on a mere ‘change of opinion’. One of the major reasons for taking such a view also appears to be the fact that if the AO is permitted to reopen the assessment on a mere ‘change of opinion’, S. 147 would give arbitrary powers to the AO to reopen reassessment. Therefore, the concept of ‘change of opinion’ is treated as inbuilt test to check the abuse of power by the AO.

4.2 If the AO is permitted to reopen concluded assessment on a mere ‘change of opinion’, his power may become arbitrary and statute confirring arbitrary power may be held unconstitutional as held by the Full Bench of the Delhi High Court in the above case.

4.3 From the above judgment read with the Full Bench Judgment of the Delhi High Court, it seems that the completed assessment can be reopened only when there is a tangible material available with the AO to form a belief that taxable income has escaped assessment. The belief entertained by the AO should not be irrational and arbitrary. It must be reasonable and must be based on reasons which are material.

4.4 We may also state that if the return of income is processed u/s.143(1) without making any assessment u/s.143(3)/147, then such determination of income does not amount to ‘assessment’ [Ref. Rajesh Jhaveri Stock Broker P. Ltd., 291 ITR 500 – SC]. Therefore, in such cases, it seems that the above-referred judgment of the Apex Court may not be of any use to contest the assessment proceedings initiated u/s.147.

Whether disputed Enhanced Compensation is taxable in the year of receipt – section 45(5)

Closements

1.1 In the case of compulsory acquisition of property, in
most cases, at the initial stage, compensation is awarded [original
compensation], which is received by the person whose property is acquired
[owner]. In most such cases, there is always a dispute with regard to the
quantum of compensation originally awarded and the disputes remain in litigation
for a long time. In a large number of such cases, by and large, the owners
succeed and secure additional compensation from the Courts [Enhanced
Compensation]. Generally, in most such cases, the State continues to litigate
the quantum of Enhanced Compensation till the Apex Court and the issues get
finally resolved after a very long time. In most cases, once the Enhanced
Compensation is determined/approved by the Courts [say, the High Court], the
amount of such Enhanced Compensation is deposited with the Courts and the owners
are permitted to withdraw the same against some security [say, bank guarantee],
or even without any security, notwithstanding the fact that the disputes remain
pending before the higher courts [say, Apex Court]. In most such cases, the
dispute was with regard to the year of taxability of the Enhanced Compensation
when such disputed compensation was received by the owner on furnishing security
as the amount received is liable to be repaid, if, the higher court decides the
issue against the owner [fully or partly].

1.2 Before the introduction of Sec. 45(5) from the A.Y.
1988-89 [Pre-1988 Law], the Apex Court in the case of Hindustan Housing Land
Development Trust Limited [161 ITR 524] had taken a view that such receipt of
disputed Enhanced Compensation cannot be taxed in the year of receipt on the
grounds that the same has not accrued to the assessee as the amount awarded is
disputed by the Government in the final appeal.

1.3 To resolve the above issue, Sec. 45(5) was introduced
from the A.Y. 1988-89, which, effectively, provided that where the capital gain
arises on account of compulsory acquisition on account of transfer of such
assets for which the consideration was determined or approved by the Central
Government or the Reserve Bank of India [RBI] and the compensation or the
consideration for such transfer is enhanced or further enhanced [Enhanced
Compensation] by any court etc., the capital gain computed at the first instance
based on the original compensation [or consideration originally determined or
approved by the Central Government/RBI] is chargeable to tax in the previous
year of receipt of such Enhanced Compensation or part thereof. It is also
provided that if any such Compensation is enhanced or further enhanced by the
Court etc., then the amount of such Enhanced Compensation shall be deemed to be
income chargeable as capital gain of the previous year in which such enhanced
amount is received by the assessee [Post-1988 Law].

1.4 As mentioned earlier, in many cases, such enhanced amount
is disputed by the payer before the higher authority/court etc. and the amount
of such disputed compensation is deposited with the Court and the assessee, in
most cases, is allowed to withdraw the same on furnishing some security such as
bank guarantee etc. or even without that [Disputed Enhanced Compensation]. The
amendment of 1988 was primarily made to resolve the issue of the year of
taxability of such Disputed Enhanced Compensation. However, various Benches of
the Tribunal as well as various High Courts, even under Post-1988 Law, followed
the principle laid down in the judgment of the Apex Court in the above referred
case of Hindustan Housing & Land Development Trust Limited [hereinafter
referred to as Hindustan Housing’s case] and took the view that unless the
Enhanced Compensation is received without any embargo, leaving thereby no scope
or likelihood of returning the same, such Disputed Enhanced Compensation cannot
be taxed in the year of receipt. Some contrary views were also found on this
issue. Accordingly, by and large, in spite of the introduction of section 45(5),
the issue with regard to receipt of Disputed Enhanced Compensation continued and
was under debate.

1.5 The above issue had become very relevant from the
assessees’ point of view because if such Disputed Enhanced Compensation is taxed
in the year of receipt and subsequently, the amount of such Compensation gets
reduced on account of any order of the higher authority/court etc. and if, the
assessee is required to refund the excess amount received by him, then there was
no specific mechanism in the Income-Tax Act [the Act], whereby the effect of
such reduction in the amount of such Enhanced Compensation can be given in the
assessment of the assessee. To address this issue, the Finance Act, 2003
introduced Clause (c) in section 45(5) and section 155(16) [w.e.f. A.Y. 2004-05]
to provide that in such an event, a proper rectification will be carried out in
the assessment of relevant assessment year, in which such Disputed Enhanced
Compensation was taxed on account of the receipt thereof [Post-2003 Law].

1.6 After the amendment made in Sec.45(5) by the Finance Act, 2003, the issue referred to in Para 1.4 was considered by the Special Bench of ITAT (Delhi) in the case of Kadam Prakash – HUF [10 SOT 1] in the context of the assessment year prior to A.Y. 2004-05 under the Post-1988 Law. In this case, the Special Bench of ITAT considered the effect of amendment of 2003 and took the view that such Disputed Enhanced Compensation can be taxed in the year of receipt and the amendment of 2003 will also apply to earlier years. At that time, it was felt that perhaps the issue should now be treated as al-most settled. However, as it happens, subsequently, the Madras High Court in the case of Anil Kumar Firm [HUF] and connected appeals [289 ITR 245] had an occasion to consider the issue referred to in Para 1.4 above. In that case, even after noticing the amendment of 2003, the High Court still took the view that such Disputed Enhanced Compensation cannot be taxed in the year of receipt. On the other hand, the Kerala High Court in the case of C.P. Jacob [174 Taxman 154] took a contrary view and went a step further and held that even without the aid of amendment of 2003, the assessee is entitled to get assessment rectified, if additional compensation assessed on receipt basis is ordered to be repaid in appeal by the Court. According to the Kerala High Court, the assessee was not without remedy, if an additional compensation received through the Court would have been cancelled or reduced in further appeals by the Court and the final judgment in the matter of compensation was delivered by the Court beyond the period of limitation provided for rectification of an assessment. According to the Kerala High Court, the assessee, in such cases, is not helpless because as a last resort, the assessee can approach the High Court under Article 226 of the Constitution to redress his grievance against the judgment. Accordingly, the Kerala High Court took the view that it is clear from section 45(5) [i.e. Pre-2004 Law] that the statute provides for assessment of such capital gain in the acquisition proceedings on receipt basis and such Disputed Enhanced Compensation can be taxed in the year of receipt. Under the circumstances, the issue with regard to year of taxability of receipt of Disputed Enhanced Compensation continued.

1.7 Recently, the Apex Court had an occasion to consider the issue referred to in Para 1.6 in the case of Ghanshyam [HUF] in the context of A.Y. 1999 -2000 and other appeals under the Pre-2003 Law and the issue was decided. Considering the importance of the issue which is under debate for a long time, it is thought fit to consider this judgment in this column.

CIT vs Ghanshyam (HUF) – 315 ITR 1 (SC)

2.1 The issue referred to in Para 1.6 above came up for consideration before the Apex Court in the above case in the context of A.Y. 1999-2000. In the above case, brief facts were: The assessee’s land was acquired by Haryana Urban Development Authority (HUDA) and the issue with regard to Enhanced Compensation was in dispute and pending before the High Court. In terms of the Interim Order of the High Court, the assessee had received the Enhanced Compensation of Rs.87, 13,517 and the interest thereon of Rs.1, 47,575 during the previous year relevant to the A.Y. 1999-2000 on furnishing the requisite security. While furnishing the return of income, the assessee took the stand that as the entire amount was in dispute before the High Court in the appeal filed by the State, the amount of Enhanced Compensation received had not accrued during the year of receipt and accordingly, the receipt of such Disputed Enhanced Compensation and interest thereon was not taxable during the Asst. Year 1999-2000. The Assessing Officer [A.O.] took the view that on account of provisions of section 45 (5), the amount so received by the assessee was taxable. The First Appellate Authority accepted the claim of the assessee, relying on the judgment of the Apex Court in Hindustan Housing’s case [supra] and the Appellate Tribunal also decided the issue in favour of the assessee. When the matter came up before the Punjab and Haryana High Court, the Courts took the view that the case of the assessee is squarely covered by the judgment of the Apex Court in Hindustan Housing’s case [supra]. According to the High Court, when the State is in appeal against the order of the Enhanced Compensation and interest thereon, the receipt of such amounts is not taxable as income as the said two items are disputed by the Government in appeal. On these facts, the matter came up before the Apex Court at the instance of the Revenue along with other similar appeals.

2.2 After referring to the facts of the above case, the Court noted that the short question to be decided in this batch of Civil Appeals is as under:

“Whether the Income-tax Appellate Tribunal was right in ordering the deletion of the enhanced compensation and interest thereon from the total income of the assessee on the ground that the said two items, awarded by the reference court, were under dispute in first appeal before the High Court”.

2.3 To decide the issue, the Court referred to the definition of the term, ‘transfer’ contained in section 2(47) as well as the provisions of section 45(1). The Court also referred to the provisions contained in section 45(5) under the Pre-2003 Law as well as the Post-2003 Law. The Court also noted the provisions of section 155(16) introduced by the Finance Act, 2003 referred to in para 1.5 above. After referring to these provisions and conditions for the chargeability of the amount under the head ‘Capital Gains’, the Court stated that the Capital Gain is an artificial income. From the scheme of section 45, it is clear that Capital Gain is not an income which accrues from day- to-day during the specific period, but it arises at a fixed point of time, namely, on the date of transfer. According to the Court, Sec.45 defines Capital Gains. It makes them chargeable to tax and it allots an appropriate year for such charge and section 48 lays down the mode of computation of Capital Gains and deductions therefrom.

2.4 After referring to the basic scheme with regard to the taxation of Capital Gains, the Court referred to the historical background and reasons for which section 45(5) was inserted by the Finance Act, 1987 [w.e.f. 1.4.1988]. The Court noted that Capital Gains arising on transfer of capital asset are chargeable in the year of transfer of such asset. However, it was noticed that in cases of compulsory acquisition of assets, the additional compensation stood awarded in several stages by different appellate authorities, which necessitated rectification of the original assessment at each stage as provided in section 155(7A). It was also noticed that the repeated rectification of assessment on account of Enhanced Compensation by different courts often resulted in mistakes in computation of tax. Therefore, with a view to removing these difficulties, the Finance Act, 1987 inserted section 45 (5) for taxation of such additional compensation in the year of receipt instead of in the year of transfer of the capital asset. Accordingly, such additional compensation is treated as deemed income in the hands of the recipient, even if the actual recipient happens to be a person different from the original transferor by reason of death, etc. For this purpose, the cost of acquisition in the hands of the receiver of additional compensation is deemed to be nil. The Court also noted the insertion of section 54H by the Finance Act, 1991, which effectively provides for reckoning the time limit for making requisite investments for claiming certain exemptions from the date of receipt of such compensation, instead of from the date of transfer as provided in various sections referred to in section 54H. The Court also referred to Circular No.621 dated 19.12.1991 [195 ITR (St) 154, 171] explaining the effect of such amendments.

2.5 The Court, then summarized the overriding effect of the provisions of section 45 (5) and stated that in situations covered by section 45(5), from A.Y. 1988-89, the gain is to be dealt with as under [page 11]:

“(a)    the Capital Gain computed with reference to the compensation awarded in the first instance or, as the case may be

– the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of India is chargeable as income under the head “Capital Gains” of the previous year, in which such compensation or part thereof, or such consideration or part thereof, was first received; and the amount by which the compensation or consideration is enhanced or further enhanced by the Court, Tribunal or other authority is to be deemed to be the income chargeable under the head “Capital Gains” of the previous year in which such an amount is received by the assessee.

2.6 The Court, then, proceeded to analyse the relevant provisions of the Land Acquisition Act, 1894 [L.A. Act]. The Court noted the provisions of section 23(1) and stated that the same provide for determining the amount of compensation on the basis of market value of the land on the date of publication of the relevant notification for acquisition and other matters to be considered for determining such amount. Referring to section 23(1A), which provides for payment, in addition to the market value of the land, of an additional amount @12% per annum of such market value for a period from the date of publication of notification to the date of award of compensation by the Collector or to the date of taking possession of the land, whichever is later. According to the Court, this is provided to mitigate the hardship to the owner, who is deprived of his enjoyment by taking possession from him and using it for public purposes, because of considerable delay in making the award and offering payment thereof. This additional amount payable u/s. 23(1A) of the L.A. Act is neither interest nor solatium. It is an additional compensation, which compensates the owner of the land for the rise in price during the pendency of the acquisition proceedings. It is a measure to offset the effect of inflation and continuous rise in the value of the property. This represents the additional compensation and has to be reckoned with as part of the market value of the land, which is to be paid in every case. The Court then noted Sec. 23(2) of the L.A. Act, which, in substance, provides that the Court shall in every case award, in addition to the market value of the land, a sum of 30% of such market value in consideration of the compulsory acquisition of the land. In short, it talks about the solatium. The award of solatium as well as the payment of additional amount u/s 23(1A) are mandatory.
 

2.6.1 The Court, then, noted the provisions of section 28 and section 34, which provide for interest payable under L.A. Act. The Court then explained that section 28 applies when the amount originally awarded has been paid or deposited and when the Court awards excess amount [i.e. Enhanced Compensation]. Section 28 empowers the Court to award interest on excess amount awarded by it [i.e. Enhanced Compensation] over the compensation awarded by the Collector. The Court also stated that such Enhanced Compensation also includes additional amount payable u/s. 23(1A) and the solatium payable u/s. 23(2) of the L.A. Act. The interest on such Enhanced Compensation becomes payable u/s. 28 if, the Court awards interest under that section. Award of interest u/s. 28 is not mandatory, but is left to the discretion of the Court. section 28 does not apply to the cases of undue delay in making award for compensation; it only applies to the amount of Enhanced Compensation. The Court also noted that such interest is different from compensation as held by the Apex Court in the cases of Ramchand vs Union of India [(1994) 1 SCC 44 and Shri Vijay Cotton and Oil Mills Limited (1994) 1 SCC 262]. The Court also noted the provision for interest payable u/s. 34 of the L.A. Act, which effectively provides for payment of interest at the specified rate for delay in payment of com-pensation after taking possession of the land.

2.6.2 Having analysed the above referred provisions of the L.A. Act, the Court stated as under [pages 14-15]:

“To sum up, interest is different from compensation. However, interest paid on the excess amount under section 28 of the 1894 Act depends upon a claim by the person, whose land is acquired whereas interest under section 34 is for delay in making payment. This vital difference needs to be kept in mind in deciding this matter. Interest under section 28 is part of the amount of compensation, whereas interest under section 34 is only for delay in making payment after the compensation amount is determined. Interest under section 28 is a part of the enhanced value of the land, which is not the case in the matter of payment of interest under section 34”.

2.6.3 Finally, the Court summarised the relevant provisions of the L.A. Act as under [page 15]:

“ It is clear from a reading of section 23(1A), 23(2) as also section 28 of the 1894 Act that additional benefits are available on the market value of the acquired lands under section 23(1A) and 23(2), whereas section 28 is available in respect of the entire compensation. It was held by the Constitution Bench of the Supreme Court in Sunder vs Union of India [2001] 7 SCC 211, that “indeed the language of section 28 does not even remotely refer to market value alone and in terms, it talks of compensation or the sum equivalent thereto. Thus, interest awardable under section 28, would include within its ambit, both the market value and the statutory solatium. It would be thus evident that even the provisions of section 28 authorise the grant of interest on solatium as well”. Thus, “solatium” means an integral part of compensation, interest would be payable on it. Section 34 postulates award of interest at 9 per cent per annum from the date of taking possession only until it is paid or deposited. It is a mandatory provision. Basically section 34 provides for payment of interest for delayed payment.”

2.7 After considering and analysing the effect of the relevant provisions of the L.A. Act, the Court proceeded to consider the taxability of amount received with reference to the provisions of section 45(5) of the Act. For this purpose, the Court then noted as under [page 15]:

“ The question before this Court is: whether additional amount under section 23(1A), solatium under section 23(2), interest paid on excess compensation under section 28 and interest under section 34 of the 1894 Act could be treated as part of the compensation under section 45(5) of the 1961 Act? ”

2.8 The Court then proceeded to consider the relevance and effect of Hindustan Housing’s case on which heavy reliance was placed by the representatives of the assessees as well as by the High Court and the appellate authorities. The Court noted that in that case, after awarding the original compensation, the Enhanced Compensation was granted with interest by an award of arbitrator, against which the State Government was in appeal. Pending the appeal, the State Government deposited in the Court an additional amount of award [including interest] and the assessee was permitted to withdraw the same on furnishing the security bond for refunding the amount in the event of the said appeal of the Government being allowed. The issue of taxability of this amount in the A.Y.
 

1956-57 had come up for consideration. On these facts, the Court had taken a view that since the entire amount was in dispute in the appeal filed by the State Government, there was no absolute right to receive the amount at that stage. If the appeal was to be allowed in its entirety, right to payment of Enhanced Compensation would have fallen altogether. Accordingly, it was held that the amount so received was not income accrued to the assessee during the previous year, relevant to the A.Y. 1956-57.

2.8.1 Explaining the effect of Hindustan Housing’s case on the issue before the Court, the Court stated that the said judgment was delivered on 29th July, 1986 under the Pre-1988 Law, i.e. before the introduction of the provisions of Sec.45(5) of the Act. The Court also stated that the said judgment was delivered in the context of the Income-Tax Act, 1922 [1922 Act], when the definition of the term ‘transfer’ in section 12B did not contain a specific reference to compulsory acquisition. According to the Court, after the insertion of section 45(5), a totally new scheme stood introduced keeping in mind the compulsory acquisition, where the compensation is payable at multiple stages and the amount has been withdrawn and used by the assessee for several years pending the litigation. Accordingly, the Court took the view that the judgment of the Apex Court in Hindustan Housing’s case is not applicable to the present case.

2.9 The Court then proceeded to consider the taxability of receipt of such amount under the Post-1988 Law, independent of the judgment of the Apex Court in Hindustan Housing’s case. For this purpose, the Court referred to the provision of section 45(5) as introduced by the Finance Act, 1987 [i.e. Post-1988 Law] and noted that under the said provisions, the Enhanced Compensation is to be deemed as income of the recipient of the previous year of receipt. The Court then explained the effect of the provisions of section 45(5) and the issue to be decided by the Court in that context as under [page 17]:

“Two aspects need to be highlighted. Firstly, sec-tion 45(5) of the 1961 Act deals with transfer(s) by way of compulsory acquisition and not by way of transfers by way of sales, etc., covered by section 45(1) of the 1961 Act. Secondly, section 45(5) of the 1961 Act talks about enhanced compensation or consideration, which in terms of L.A. Act, 1894, results in payment of additional compensation.

The issue to be decided before us – what is the meaning of the words “enhanced compensation/ consideration” in section 45(5) (b) of the 1961 Act? Will it cover “interest”? These questions also bring in the concept of the year of taxability”.

2.10 The Court then again referred to the relevant provisions of the L.A. Act and the impact thereof as explained earlier [para 2.6 above]. The Court then stated as under [page 18]:

“ ….. It is equally true that section 45(5) of the 1961

Act refers to compensation. But, as discussed hereinabove, we have to go by the provisions of the 1894 Act, which awards “interest” both as an accretion in the value of the lands acquired and interest for undue delay. Interest under section 28, unlike interest under section 34, is an accretion to the value; hence, it is a part of enhanced compensation or consideration, which is not the case with interest under section 34 of the 1894 Act. So, also additional amount under section 23(1A) and solatium under section 23(2) of the 1894 Act forms part of enhanced compensation under section 45(5) (b) of the 1961 Act … ”

2.11 The Court then considered the argument on behalf of the assessee that section 45(5) (b) of the Act deals only with reworking and its object is not to convert the amount of Enhanced Compensation into deemed income in the year of the receipt. Rejecting this argument, the Court stated that an overriding provision in the form of section 45(5) was inserted in the Post-1988 Law to treat the receipt of such Disputed Enhanced Compensation as deemed income and tax the same on receipt basis. This position gets further support from the insertion of clause (c) in section 45(5) and section 155(16) by the Finance Act, 2003. While concluding that the receipt of such Disputed Enhanced Compensation is taxable in the year of receipt, the Court finally held as under [page 19]:

“… Hence, the year in which enhanced compensation is received is the year of taxability. Consequently, even in cases where pending appeal, the court/ Tribunal/authority before which appeal is pending, permits the claimant to withdraw against security or otherwise the enhanced compensation(which is in dispute), the same is liable to be taxed under section 45(5) of the 1961 Act. This is the scheme of section 45(5) and section 155(16) of the 1961 Act. We may clarify that even before the insertion of section 45(5)(c) and section 155(16) with effect from April 1, 2004, the receipt of enhanced compensation under section 45(5)(b) was taxable in the year of receipt, which is only reinforced by insertion of clause (c) because the right to receive payment under the 1894 Act is not in doubt…”

2.12 Since the Court has explained the nature of interest u/s. 28 and section 34 of the L.A. Act and drawn a distinction between the two [referred to in paras 2.6.2 and 2.6.3], the Court noted the practical difficulties which are likely to be faced in giving effect to its judgment in the old matters under consideration. In view of this, the Court also directed not to carry out re-computation on the basis of this judgment, particularly in the context of interest under two different provisions of the L.A. Act and stated under [page 19]:

“Having settled the controversy going on for the last two decades, we are of the view that in this batch of cases which relate back to the assessment years 1991-92 and 1992-93, possibly the proceedings under the Land Acquisition Act, 1894, would have ended. In a number of cases, we find that proceedings under the 1894 Act have been concluded and taxes have been paid. Therefore, by this judgment, we have settled the law but we direct that since matters are a decade old and since we are not aware of what has happened in the Land Acquisition Act proceedings in pending appeals, the recomputation on the basis of our judgment herein, particularly in the context of type of interest under section 28 vis-à-vis interest under section 34, additional compensation under section 23(1A) and solatium under section 23(2) of the 1894 Act, would be extremely difficult after all these years, will not be done ”.

Conclusion

3.1 In view of the above judgment of the Apex Court, a very old controversy with regard to the year of taxability of the receipt of Disputed Enhanced Compensation is now resolved and the same is tax-able in the year of receipt, notwithstanding the fact that the dispute with regard to the ultimate right of receiving such compensation under the L.A. Act is finally not settled. The judgment of the Apex Court in the above case also makes it clear that the above position with regard to the taxability of receipt of such compensation will apply under the Post-1988 Law and such cases will not be governed by the judgment of the Apex Court in Hindustan Housing’s case. Accordingly, the view taken in the decision of the Special Bench of ITAT in the case of Kadam Prakash [referred in Para 1.6 above] gets approved in an implied manner.

3.1.1 In the above judgment, the Apex Court has also taken a view that the term ‘Enhanced Compensation’ used in section 45(5)(b) includes the additional amount received u/s. 23(1A) as well as the amount of solatium u/s. 23(2) of the L.A. Act. Accordingly, the same will also have to be dealt with as such.

3.1.2 The Court has also distinguished the nature of interest payable under two different provisions of the L.A. Act [viz. section 28 and section 34] and taken a view that interest granted u/s 28 of the L.A. Act [unlike interest granted u/s 34 of the said Act] is an accretion to the value and hence, the same also forms part of the Enhanced Compensation or consideration referred u/s 45(5)(b). Accordingly, the same may also have to be dealt with as such.

3.1.3 On the other hand, interest granted u/s 34 of the L.A. Act will not form part of the enhanced compensation [unlike interest u/s 28 as aforesaid] and will continue to be taxed as interest. For this, useful reference may also be made to the judgment of the Apex Court in the case of Dr. Shamlal Narula [53 ITR 151].

3.1.4 In the above judgment, the Court has also directed not to make re-computation based on the judgment in these cases for stated reasons [Ref. 2.12 above]

3.2 Interestingly, the issue with regard to the year of taxability [under the Mercantile System] of interest payable in such cases had come-up before the Courts in the past. The Madras High Court in the case of T.N.K. Govindarajulu Chetty [87 ITR 22] had an occasion to consider the year of taxability of interest included in the amount fixed as compensation by the Court in a case where the property was acquired by the Government under the Requisitioned Land [Continuance of Powers] Act, 1947 under a notification issued by the Collector of Madras dated 24.5.1949. The Court had taken a view that such interest accrues year after year. This judgment of the Madras High Court is upheld by the Apex Court [165 ITR 231].

It is worth mentioning that in the earlier judgment of the Apex Court [66 ITR 465], in the same case [it appears that in the first round of litigation], the Apex Court, while rejecting the case of the assessee with regard to non-taxability of such interest altogether had stated thus : “In the case on hand, the right to interest arose by virtue of the provisions of sections 28 and 34 of the Land Acquisition Act, 1894, and the arbitrator and the High Court merely gave effect to that right in awarding interest on the amount of compensation. Interest received by the assessee was therefore properly held taxable”.

The question regarding the period of accrual of interest payable u/s 28 and 34 of the L.A. Act had come up for consideration before the Apex Court in a batch of cases and the Apex Court, in its judgment, reported as Ramabai vs C.I.T. and other cases [181 ITR 400], has taken view that this issue is concluded by the Apex Court in the case of T.N.K. Govindarajulu Chetty [165 ITR 231]. The Court specifically stated thus: “The effect of the decision, we may clarify, is that the interest cannot be taken to have accrued on the date of the order of the Court granting enhanced compensation but has to be taken as having accrued year after year from the date of delivery of possession of the lands till the date of such order.” This was the position settled by the Apex Court with regard to the point of time at which such interest accrues and taxability thereof accordingly.

Now, the Apex Court in the case of Ghanshyam [HUF] has held that the interest u/s 28 of the L.A. Act forms part of the Enhanced Compensation contemplated u/s 45(5)(b). Hence such interest on Disputed Enhanced Compensation becomes taxable in the year of receipt along with such compensation. However, no reference is found to have been made in this case of the earlier above referred judgments of the Apex Court in the cases of Govindarajulu Chetty (supra) or Ramabai and other cases (supra). It may also be noted that those earlier judgments of the Apex Court have been delivered by the benches of three judges, whereas the judgment in the case of Ghanshyam [HUF] has been delivered by the bench of two judges. This may throw open some interesting issues with regard to the character of interest u/s 28 of the L.A. Act as well as the year of taxability thereof. This also may have to be considered in the light of the amendments made for the Finance Act, 2009, referred to hereinafter.

3.3 In the context of the year of taxability of interest on compensation or on enhanced compensation, the Act is now specifically amended by the Finance Act, 2009 w.e.f. the A.Y. 2010-11 [Ref. sections 145A(b), 56(2)(viii) and 57(iv)]. Under the amended provisions, effectively, 50% of the interest received by the assessee on compensation or on Enhanced Compensation is taxable in the year of receipt. These provisions do not distinguish between the interest received u/s 28 or 34 of the L.A. Act. In fact, these provisions also do not make any reference to compulsory acquisition or to the L.A. Act. Therefore, some issues are likely to come up for consideration with regard to the applicable provisions for the taxability of such interest and in particular, in the context of interest awarded u/s 28 of the L.A. Act.

Payment to Non-Resident in Respect of Income Not Chargable to Tax — Obligation of TDS u/s.195

Closements

Introduction :

1.1 U/s.195(1) of the
Income-tax Act (the Act), any person responsible for paying (Payer) to a
Non-Resident or Foreign Company (Payee) any interest or ‘any other sum
chargeable under the provision of the Act’ (hereinafter referred to as taxable
income) is required to deduct tax at source (TDS/TAS). Such TDS is required to
be made either at the time of crediting the income to the account of the Payee
or at the time of payment thereof, whichever is earlier at the rates inforce.
The provision applies to all the Payers, including individual and HUF. The only
specific exclusion provided is in respect of payment of dividend which is exempt
by virtue of payment of Dividend Distribution Tax. Some relief is provided to
the Government, Public Sector Banks, etc. with regard to the timings of the TDS
with which we are not concerned in this write-up. The scope of the provision is
wide and therefore, the implications thereof have far-reaching effect in large
numbers of cases as the number of such payments has increased manifold with the
development of the economy and growth of cross border transactions in the last
decade — S. 195(1).

1.2 The provision is also
made that if the Payer considers that the whole of such a sum would not be
chargeable to tax in the hands of the Payee, he may make an application to the
Assessing Officer (AO) to determine the appropriate portion of such taxable
income by passing a general or special order and upon such determination, the
Payer is obliged to deduct tax only on the portion so determined — S. 195(2).

1.3 The provision is also
made that the specified recipient of such a sum can also make an application to
the AO in the prescribed form for grant of a certificate authorising him to
receive such sum without TDS and upon grant of such a certificate, the Payer is
required to make payment without TDS. These provisions are largely used by
foreign banks operating in India for receiving payments from their customers
without TDS. — S. 195(3)/(5) read with Rule 29B.

1.4 Provision for receiving
income without TDS or with TDS at a lower rate has also been made by following
appropriate procedure of making application to the AO and obtaining appropriate
certificate to that effect with which we are not concerned in this write-up — S.
197. We may clarify that the provisions relating to receipt of income without
TDS by furnishing appropriate declaration in the prescribed form (such as
15G/15H) contained in S. 197A are applicable only to Resident Payees. Therefore,
Non-Resident Payees cannot avail of this facility. In this write-up, we are also
not concerned with other exceptions provided from the operations of TDS
provisions.

1.5 The Apex Court in the
case of Transmission Corporation of A.P. LTD. (239 ITR 597) has held that the
expression ‘taxable income’ used in S. 195(1) applies to any sum payable to the
Non-Resident even if such a sum is a trading receipt in the hands of the payee,
if, the whole or part thereof is chargeable to tax under the Act. These
provisions are not only limited to the sums which are of ‘Pure Income’ nature.
Based on this judgment, it was rightly felt that in the profession as well by
the Payers of such income that the TDS is required to be made u/s.195(1) only
if, the income is chargeable to tax (partly or wholly) under the Act and in
cases where, the income itself is not chargeable to tax (Non-taxable income)
question of making any TDS should not arise. Other principles emerging from the
said judgment of the Apex Court are not considered as the same are not relevant
for this write-up. We have analysed this judgment of the Apex Court in this
column in the October, 1999 issue of this Journal.

1.6 In view of the judgment
of the Apex Court in the case of Transmission Corporation of A.P. Ltd. referred
to in para 1.5 above (hereinafter referred to as Transmission Corporation’s
case), the litigation on many issues with regard to the obligation to make TDS
should have got substantially reduced. However, the Revenue interpreted the
effect of the above judgment little differently and felt that it is not for the
assessee to decide whether the income is chargeable in the hands of the Payee or
not, and hence, the litigation on the obligation to make TDS continued, even on
such aspects.

1.7 Pending the issue
referred to para 1.6 above, S. 195(6) was introduced by the Finance Act, 2008
(with effect from 1-4-2008) providing that the Payer shall furnish the
information relating to payments of such sums in the prescribed form and manner.
For this Rule 37BB was introduced and the procedure for making remittances is
provided for which the certificate of Chartered Accountant in the prescribed
Form 15CB is required to be obtained by the Payer before making remittance to
the Payee (New Procedure for Remittance). Earlier, there was a requirement for
obtaining certificate of Chartered Accountant for making remittance to the
Non-Resident, but the same was operating under the Circulars issued by CBDT.

1.8 The effect of judgment
of the Apex Court in Transmission Corporation’s case came up for consideration
before the Karnataka High Court (320 ITR 209) in the case of M/s. Samsung
Electronics Co. Ltd. and other cases (hereinafter referred to as ‘Samsung’s
case’) in the context of obligation to make TDS in respect of payments made to
Non-Resident Payees for supply of shrinkwrapped standardised software. In this
write-up, we are not concerned with the character of payment for the supply of
such software. However, various views expressed/observations made by the
Karnataka High Court in relation to the provision of S. 195 and the obligations
of the Payer to make TDS under the same, as well as the effect of the Apex
Court’s judgment in Transmission Corporation’s case, raised large number of
practical and legal issues.

1.8.1 In Samsung’s case, the High Court expressed various views in relation to S. 195 having far-reaching implications such as: S. 195(1) is neither a provision for ascertaining the tax liability of a Non-Resident, nor for determining whether u/s.9 of the Act, any income is deemed to have accrued or arisen to Non -Resident in India; the provision applies once the payment is made to a Non-Resident; it provides limited relief from such obligation if, the payer is able to demonstrate before the AO that the entire payment does not bear the character of income, but only a part of thereof bears such character, etc. According to the Court, the question of character of income being paid to Non-Resident Payee can only be decided in the regular assessment and cannot be determined in the proceedings u/s.195 and such questions are not relevant for determining the obligation to make TDS u/s.195. According to the Court, even in the proceeding u/s.195(2), the AO cannot embark upon exercise of determining the actual tax liability and entertain the plea that income is not chargeable to tax. The question of character of income and the tax liability of Payee cannot even be considered by the Appellate Authority in appeal proceedings against the order of the AO passed u/s.201 and if so, it was also not open to the Appellate Tribunal to venture on finding an answer to vary question in the further appeal to the Tribunal as it is not a proper exercise of its appellate powers. The Payers and the profession were shocked by these views as practically it was almost impossible to comply with the obligation to make TDS in terms of these views.

1.8.2 In particular, the following findings of the High Court read with other observations made in Samsung’s case created a situation referred to in para 1.8.1. (pages 245-246):

“If one is allowed the liberty of giving a rough and crude comparison to the manner in which the provisions of S. 195 of the Act operate on a resident payer who makes payment to a non-resident recipient and if the payment bears the character of semblance of an income receipt in the hands of the non -resident recipient, then the obligation on the part of the resident payer who makes such a payment to the non-resident recipient is like a guided missile which gets itself attached to the target, the moment the resident -assessee makes payment to the non-resident recipient and there is no way of the resident payer avoiding the guided missile zeroing in on the resident payer whether by way of contending that the amount does not necessarily result in the receipt of an amount taxable as income in the hands of the non-resident recipient under the Act or even by contending that the non-resident recipient could have possibly avoided any liability for payment of tax under the Act by the overall operation of different provisions of the Act or even by the combined operation of the provisions of a Double Taxation Avoidance Agreement and the Act as is sought to be contended by the respondents in the present appeals.

The only limited way of either avoiding or warding off the guided missile is by the resident payer invoking the provisions of S. 195(2) of the Act and even here to the very limited extent of correcting an incorrect identification, an incorrect computation or to call in aid the actual determination of the tax liability of the non-resident which is in fact had been determined as part of the process of assessing the income of the non-resident and by using that as the basis for claiming a proportionate reduction in the rate at which the deduction is required to be made on the payment to the non-resident. Except for this method, there is no other way of the resident payer avoiding the obligations cast on it by the provisions of S. 195(1) of the Act and as a consequence of such default when is served with a demand notice in terms of S. 201 of the Act.

This position is the clear legal position that emerges on analysing the full effect of the provisions of S. 195 of the Act in the light of the law declared by the Supreme Court in Transmission Corporation of A.P. Ltd.’s case (1999) 239 ITR 587.”

1.8.3 Subsequently, it was expected that the CBDT will come out with some clarification to relieve the Payers from the abnormal hardship created by the above judgment but that never happened. Fortunately, the Delhi High Court in the case of Van Oord ACZ India (189 Taxman 232) and Special Bench of ITAT (Chennai) in the case of M/s. Prasad Production (125 ITD 263) took a different view on the major issue and explained the correct effect of the judgment of the Apex Court in Transmission Corporation’s case. These gave some relief to the Payers, but the issues survived due to the judgment of the Karnataka High Court in Samsung’s case.

G. E. India Technology Centre P. Ltd. v. CIT, 327 ITR 456 (SC):

2.1 The above-referred judgment of the Karnataka High Court in Samsung’s case came up for consideration before the Apex Court (in a batch of appeals filed by various assessees — reported as GE India Technology Centre P. Ltd). For the purpose of deciding the issue, the Court noted the facts of the leading case of Sonata Information Technology Ltd. In that case, the assessee was distributors of imported pre- packaged shrink-wrapped standardised software from Microsoft and other suppliers outside India. The assessee made payments for such softwares to suppliers without making TDS on the ground that such payments represent purchase price of the goods. The Income-tax Officer (TDS) (ITO), however, took the view that such payments are in the nature of royalty, as the sale of software included a licence to use the same and accordingly, the same represents income deemed to accrue or arise in India. The first Appellate Authority upheld the view of the ITO. However, the Appellate Tribunal accepted the contention of the assessee and held that such payment did not give rise to any taxable income in India and therefore, the assessee was not liable to deduct Tax At Source (TAS). When the matter came up before the Karnataka High Court at the instance of the Revenue, the contention was raised for the first time on behalf of the Revenue that unless the Payer makes an application to the ITO u/s.195(2) and has obtained permission to make for non-deduction of the TAS, it was not permissible for making payment without making deduction of TAS. This contention was accepted by the High Court for which a strong reliance was placed on the judgment of the Apex Court in Transmission Corporation’s case.

2.2 At the outset, the Court noted that the short question which arises for determination in this batch of cases, is as follows (page 458):

“whether the High Court was right in holding that the moment there is remittance the obligation to deduct tax at source (TAS) arises? Whether merely on account of such remittance to the non-resident abroad by an Indian company per se, could it be said that income chargeable to tax under the Income-tax Act, 1961 (for short ‘I.T. Act’) arises in India”

2.3 To decide the issue on hand, the Court referred to the provisions of S. 195 and in particular, also noted the New Procedure for Remittance contained in S. 195(6). The Court, then, explained the scheme of S. 195 and other relevant provisions under which the statutory obligation is imposed on the Payer to deduct tax while making payment to non-resident and the consequences of the default, if any, committed by the Payer in that respect. The Court, then, stated that the most important expression contained in S. 195 (1) is ‘chargeable under the provisions of the Act’. Therefore, a person making payment to a non-resident is not obliged to deduct tax if, such sum is not chargeable to tax under the Act. While explaining the effect of this expression, the Court further stated as under (pages 460/461):

“….It may be noted that S. 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which have an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in S. 195(1), namely, ‘chargeable under the provisions of the Act.’ It is for this reason that vide Circular No. 728, dated October 30, 1995 the Central Board of Direct Taxes has clarified that the tax deductor can take into consideration the effect of the DTAA in respect of payment of royalties and technical fees while deducting TAS….”

2.4 Proceeding further, the Court noted that S. 195(1) is in identical terms with S. 18(3B) of the 1922 Act. Under those provisions, in the case of Cooper Engg. Ltd. (68 ITR 457 — Bom.), it was pointed out that if the payment made by the resident to the non-resident does not represent taxable income in India, then no tax is required to be deducted, even if the Payer has not made any application u/s.18(3C) [similar to S. 195(2) of the Act], the Court, then, explained effect of S. 195(2) as under (page 461])?:

“….The application of S. 195(2) pre-supposes that the person responsible for making the payment to the non -resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident, but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an application to the Income-tax Officer (TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the Income- tax Officer (TDS) that the question of making an order u/s.195(2) will arise. In fact, at one point of time, there was a provision in the Income-tax Act to obtain a NOC from the Department that no tax was due. That certificate was required to be given to the RBI for making remittance. It was held in the case of Czechoslovak Ocean Shipping International Joint Stock Company v. ITO, (1971) 81 ITR 162 (Cal.) that an application for NOC cannot be said to be an application u/s.195(2) of the Act. While deciding the scope of S. 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of S. 195. Hence, apart from S. 9(1), S. 4, S. 5, S. 9, S. 90, S. 91 as well as the provisions of the DTAA are also relevant, while applying tax deduction at source provisions…..”

2.5 The Court, then, stated that the application to the ITO u/s.195(2) or u/s.195(3) is to avoid any further hassles for both residents as well as non-residents. The said provisions are of practical importance. Referring to the judgment in Transmission Corporation’s case, the Court pointed out that in that case the Apex Court has observed that the provisions of S. 195(2) is a safeguard. Based on this, the Court, then, further stated as under (pages 461/462):

“From this it follows that where a person responsible for deduction is fairly certain, then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof.”

2.6 Dealing with the contention raised on behalf of the Revenue that the moment there is remittance, the obligation to deduct TAS arises, the Court stated that if this is accepted, then we are obliterating the words ‘chargeable under the provisions of the Act’ in S. 195(1). Referring to the judgment of the Apex Court in the case of Vijay Ship Breaking Corpn. (314 ITR 309), the Court stated that the Payer is bound to deduct TAS only if, the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. Referring to the scheme of deduction of TAS contained in Chapter XVII-B, the Court stated that on analysis of various provisions contained therein, one finds the use of different expressions, however, the expression ‘sum chargeable under the provisions of the Act’ is used only in S. 195. In no other provision this expression is found. Therefore, the Court is required to give meaning and effect to the said expression. Therefore, it follows that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. S. 195 is to be read in conformity with charging provision (S. 4, S. 5 and S. 9). The Court stated that we cannot treat S. 195 to mean that the moment there is remittance, the obligation to deduct TAS arises. If such a contention is accepted, it would mean that on mere remittance income would be said to arise or accrue in India. While interpreting a Section, one has to give weightage to every word used in the Section. Again, the Act is to be read as an integrated code and one cannot read the charging Section of the Act de hors the machinery provision as held by the Apex Court in the case the Eli Lilly (312 ITR 325).

2.6.1 Explaining further, the effect of the above referred contention of the Revenue, the Court stated as under (page 463):

“….If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS, then the consequence would be that the Department would be entitled to appropriate the monies deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the Income- tax Act by which a payer can obtain refund. S. 237 read with S. 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow if the Department is right, that the law requires tax to be deducted on all payments, the payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words ‘chargeable under the provisions of the Act’ to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax….”

2.7 Dealing with another argument of the Revenue that huge seepage of the revenue can take place if the Payers are free to decide to deduct or not to deduct TAS, the Court stated that according to the Revenue, S. 195(2) is a provision requiring the Payer to give information so that the Revenue is able to keep track of the remittances made to non-residents outside India. The Court did not find any merit in this contention. For this, the Court noted that the Payer when he makes remittance, he claims a deduction or allowance of sum as an expenditure and if there is default in making TAS, such expenditure will get disallowed as provided in S. 40(a)(i). This provision ensures effective compliance of S.

195.    The Court also noted the New Procedure for Remittance introduced in the form of 195(6) with effect from 1-4-2008 and stated that it will not apply for the period under consideration. Finally, the Court took the view that there are adequate safeguards created in the Act, which would prevent the revenue leakages.

2.8 The Court, then, considered the effect of the judgment of the Apex Court in Transmission Corporation’s case and stated that the only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments, which had an element of income embedded therein. The controversy before the Court in the present cases is, therefore, quite different. In that case, it was held by the Court that if the Payer had a doubt as to the amount to be deducted as TAS, he could approach to the ITO to compute the amount on which deduction of TAS has to be made. Explaining the effect of the said judgment, as well as the effect of S. 195(2), the Court concluded as under (pages 465/466):

“…..In our view, S. 195(2) is based on the “principle of proportionality”. The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India. It is in this context that the Supreme Court stated, “If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words ‘such sum’ clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corporation case (1999) 239 ITR 587 (SC) which are put in italics have been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all ‘charge-able to tax in India’, then no TAS is required to be deducted from such payment….”

2.9 On merits of the cases on hand, the Court noted that the ITO and the First Appellate Authority have taken a view that the payment for supply of software constituted royalty, whereas the Appellate Tribunal has held otherwise and accepted the contention of the Appellant(s). However, the High Court did not go into merits of the cases. Therefore, the cases are remitted to the High Court for de novo consideration on merits.

Conclusion:

3.1 In view of the above judgment of the Apex Court, now it is the settled that if the payment is made to a non-resident, which is not a taxable income in India, then no tax is required to be deducted u/s.195.

3.2 For the above purpose, it is open to the Payer to decide whether such payment is at all chargeable to tax in India as the income of the Payee. For this purpose, the Payer can take into account the relevant provisions of the Act as well as applicable Double Tax Avoidance Agreement (DTAA). If, in the process, the Payer is fairly certain about the non-taxability, he need not deduct TAS.

3.3 In view of the above judgment of the Apex Court, for the purpose of determination taxability of the remittance being made to non-resident, it is also open to the Payer to determine the character of income in the hands of non-resident Payee.

3.4 There are adequate safeguard in the Act to prevent revenue leakages, notwithstanding the above view of the Apex Court on the provisions of S. 195.

3.5 In the above judgment, the Court has also relied on its judgment in the case of Eli Lilly & C0. India Pvt. Ltd. (312 ITR 225). In this case, the Court dealt with the liability for TDS u/s.192 in respect of ‘Home Salary’ paid by the foreign company outside India to expatiates, seconded to the Indian company. We have analysed this judgment in this column in the May/June, 2009 issues of this journal. For the effect of the same and other consequences of default for non-compliance of TDS provisions, reference may be made to the same.

Concealment Penalty — Whether mens rea is essential ?

Closements

Introduction :


1.1 S. 271(1)(c) of the Income-tax Act (the Act) provides for
levy of penalty (Concealment Penalty) in cases where the assessee has concealed
particulars of his income (‘Concealment of Income) or furnished inaccurate
particulars of such income (Furnishing Inaccurate Particulars). Explanation 1 to
S. 271(1) provides a legal fiction whereunder any addition or disallowance is
deemed to represent Concealed Income for the purpose of levy of Concealment
Penalty, provided conditions of the Explanation are satisfied. The Explanation
provides that (i) where the assessee fails to offer an explanation in respect of
any facts, material to the computation of total income or offers an explanation
for the same, which is found to be false, or (ii) where the assessee is not able
to substantiate the explanation offered by him and fails to prove that the same
is bona fide and that all the facts relating to the same and material to
the computation of his income have been disclosed by him, then the amount added
or disallowed shall be deemed to represent Concealed Income. This Explanation
shifts the burden of proof from the Department to the assessee. In substance,
the Explanation provides for a deeming fiction whereunder any addition or
disallowance made to the total income shall be regarded as Concealed Income for
the purpose of levy of Concealment Penalty under the circumstances mentioned
therein (hereinafter this Explanation 1 is referred to as the said Explanation).
The said Explanation has undergone change from time to time and the same was
last substituted by the Taxation Laws (Amendment) Act, 1975, which was
subsequently amended by the Taxation Laws (Amendment and Miscellaneous
Provisions) Act, 1986 with effect from 10-9-1986.

1.2 Various issues are under debate with regard to the
provisions relating to levy of Concealment Penalty. One such issue is with
regard to nature of this penalty and whether mens rea is essential
ingredient for invoking the provisions for imposing Concealment Penalty.

1.3 Recently in the judgment of the Apex Court in the case of
Dilip N. Shroff (291 ITR 519), it was, inter alia, held that the order
imposing such penalty is quasi-criminal in nature and ‘Concealment of Income’
and ‘Furnishing Inaccurate Particulars’, both refer to deliberate act on the
part of the assessee. In substance, the Court expressed the view that mens
rea is essential ingredient for invoking provisions relating to the
Concealment Penalty. Therefore, this became one of the major defences for the
assessee in the matter of levy of Concealment Penalty.

1.4 Subsequently, another Bench of the Apex Court while
dealing with similar provisions relating to the levy of penalty under the
Central Excise Act, 1944 and the rules made thereunder (the Excise Act),
expressed a doubt about the correctness of the judgment of the Apex Court in the
case of Dilip N. Shroff (supra) on the principle laid down therein that
for levy of such Concealment Penalty deliberate act of ‘Concealment of Income’
or ‘Furnishing Inaccurate Particulars’ on the part of the assessee is essential.
This Division Bench felt that correct position in law in this regard is laid
down in the judgment of the Apex Court in the case of Chairman, SEBI’s case
[(2006) 5 SCC 361], wherein it is held that such penalty provisions are for
breach of civil obligation and hence mens rea is not an essential
ingredient of such provisions. In short, it is held that willful concealment is
not essential for attracting such civil liabilities of penalty. Accordingly, the
issue was referred to larger Bench.

1.5 Recently, the Apex Court (larger Bench consisting of
three judges) delivered the judgment on the issue referred to paras 1.2 and 1.4
above in the case of Dharmendra Textiles Processors, disapproving the above
principle laid down by the Apex Court in the case of Dilip N. Shroff (supra).
This may have far-reaching consequences in the matter of levy of Concealment
Penalty in day-to-day practice and also in terms of litigation on the issues
relating to levy of Concealment Penalty. Therefore, it is thought fit to
consider the same in this column.


Dilip N. Shroff v. JCIT, 291 ITR 519 (SC) :

2.1 In the above case, the brief facts were: For the A.Y.
1998-99, the assessee had computed long-term capital loss of Rs.34.12 lakhs on
transfer of 1/4th interest in property at Mumbai and the same was computed by
taking Fair Market Value (FMV) of the property as on 1-4-1981 as the cost of
acquisition as provided in S. 55(2)(b) of the Act and, it seems, on that basis
Indexed Cost was determined. The FMV was determined (based on the Registered
Valuer’s Report) at Rs.2.52 crores. However, for the purpose of assessment, such
valuation was obtained from the District Valuation Officer (DVO), who had
determined such FMV at Rs.1.44 crores. This had resulted into a long-term
capital gain of Rs.3.09 crores as against long-term capital loss of Rs.34.12
lakhs computed and shown by the assessee. On these facts, Concealment Penalty of
Rs.68.78 lakhs was imposed, which was confirmed by the First Appellate authority
as well as the Appellate Tribunal. The appeal preferred by the assessee before
the High Court u/s.260A of the Act was dismissed in limine. Under this
circumstance, the issue relating to the levy of Concealment Penalty came up
before the Apex Court in the above case.

2.2 The Apex Court allowed the appeal of the assessee by
taking a view that ‘Concealment of Income’ as well as ‘Furnishing of Inaccurate
Particulars’, both refer to deliberate act on the part of the assessee and mere
omission or negligence would not constitute a deliberate act.

2.3 In the above case, the Apex Court also made the following
important observations :


(i) By reason of such concealment or furnishing inaccurate particulars alone, the assessee does not ipso facto become liable for penalty. Imposition of penalty is not automatic. Levy of penalty is not only discretionary in nature, but such discretion is required to be exercised on the part of the Assessing Officer, keeping the relevant factors in mind.

(ii) While considering the scope of the Explanation, the Court stated that if the ingredients contained in the main provisions as also the Explanation appended thereto are to be given effect to, despite deletion of the word’ deliberate’, it may not ‘be of much significance. The expression ‘conceal’ is of great importance. It signifies a deliberate act or omission on the part of the assessee. Such deliberate act must be either for the purpose of ‘Concealment of Income’ or ‘Furnishing Inaccurate Particulars’.

(iii) The term ‘inaccurate  particulars’ is not defined.
 
Furnishing of an assessment of value of the property may not by itself be furnishing of inaccurate particulars. Even if the Explanations are taken recourse to, a finding has to be arrived at having regard to clause (A) of Explanation 1 that the Assessing Officer is required to arrive at a finding that the explanation offered by an assessee, in the event he offers one, was false. He must be found to have failed to prove that such explanation is not only not bona fide but all the facts relating to the same and material to the income were not disclosed by him. Thus, apart from his explanation being not bona fide, it should have been found as of fact that he has not disclosed all the facts which were material to the computation of his income.

iv) The order imposing penalty is quasi-criminal in nature and, thus, the burden lies on the Department to establish that the assessee had concealed his income. Since the burden of proof in penalty proceedings varies from that in the assessment proceedings, a finding in an assessment proceeding that a particular receipt is income cannot automatically be adopted, though a finding in the assessment proceeding constitutes good evidence in the penalty proceedings. In the penalty proceedings, thus, the authorities must consider the matter afresh, as the question has to be considered from a different angle.

v) Before a penalty can be imposed, the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represented income, and that the assessee had consciously concealed the particulars of his income or had furnished inaccurate particulars thereof.

vi) ‘Concealment of Income’ and ‘Furnishing Inaccurate Particulars’ are different and both refer to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppressioveri or suggestiofalsi. Although it may not be very accurate or apt, but suppressioveri would amount to concealment, suggestiofalsi would amount to furnishing of inaccurate particulars.

Union of India and Others v. Dharmendra Textiles Processors and Others, 306 ITR 277 (SC) :

3.1 In the above case (as well as other cases), when it came up before another Division Bench, the question was whether the provisions of S. llAC of the Excise Act (as inserted by the Finance Act, 1996 with the intention of imposing mandatory penalty on persons who evaded payment of taxes) should be read to contain mens rea as essential ingredient, and whether there is scope of levying penalty below the prescribed minimum. The Revenue’s stand was that the said Section should be read as penalty for statutory offence and once there is a default, the authority has no discretion in the matter of imposing penalty and the authority, in such cases, was duty bound to impose penalty as prescribed. On the other hand, on behalf of the assessee reference was made to S. 271(1)(c) of the Act taking the stand that S. llAC of the Excise Act is identically worded and in a given case, it was open to the authority not to impose any penalty. Reliance was placed on the judgment of the Apex Court in the case of Dilip N. Shroff (supra). The Division Bench was of the view that the basic scheme for the imposition of Concealment Penalty under the Act and penalty u/s.llAC of the Excise Act is common, and was of the view that the law laid down in Chairman, SEBI’S case (supra) is correct and had doubted the correctness of the above principle laid down in the case of Dilip N. Shroff (supra). Accordingly, the matter was referred to Larger Bench, effectively to decide whether mens rea is essential ingredient of S. llAC of the Excise Act, and whether the authority has any discretion in the matter of levy of penalty u/s.llAC of the Excise Act, when there is a breach. We are not concerned with the issue relating to discretion of the authority as to levy or not to levy the penalty under the said S. llAC (as, in this context, there is a difference between the two provisions, particularly on account of the said Explanation) and other background of the said case in this write-up and therefore, the same is not referred to.

3.2 On behalf of the Revenue, it was, inter alia, contended that in S. 11AC of the Excise Act, no reference to any mens rea is made and this is clear from the other relevant provisions also. It was further contended that the reliance on the judgment in the case of Dilip N:Shroff (supra) is misplaced, as in that case the question relating to discretion of the authority as to levy or not to levy the penalty was not the basic issue. In fact, S. 271(1)(c) of the Act provides for some discretion and therefore, that decision has no relevance. S. nxc provides for a mandatory penalty once the breach is committed. So far as the present case is concerned, the only dispute is whether the discretion has been properly exercised, which is a question of fact. Reliance was placed on the Chairman, SEBI’s case (supra).

3.3 On behalf of the assessee, it was, inter alia, contended that the factual scenario in each case has to be examined. It was further contended that S. 271C of the Act uses the expression ‘shall be liable’, whereas S. 271B uses the expression ‘shall pay’ in support of the contention that there is a discretion to reduce the penalty. The reference, for this purpose, was also made to S. 271F and S. 272A of the Act. It was further contended that even if it is held that the Section gives the impression that the imposition of penalty is mandatory, yet there was scope for exercise of discretion as held by the Apex Court in the case of State of M.P. v. Bharat Heavy Electricals Limited, (106 STC 604). It was also contended that various degrees of culpability envisaged in S. llAC cannot be placed on the same pedestal. Certain further arguments were made with reference to S. llAC of the Excise Act and the rules made there under, with which we are not concerned in this write-up, as the same primarily may be relevant in the context of the Excise Act.

3.4 After considering the arguments of both the sides, the Court referred to the relevant provisions of the Excise Act and the rules made thereunder as well as the provisions of S. 271 and S. 271C of the Act. The Court then stated that in Chairman, SEBI’s case (supra), after referring to the statutory scheme, it was pointed out that there was a scheme attracting the imposition of penalty in that Act (SEBIAct) under different circumstance (i.e., penalty with reference to breach of civil obligation and penalty related to criminal proceedings). The Court further stated that in that case, after referring to certain provisions of the SEBI Act, the Court has held as under (pages 294/295) :

“The scheme of the SEBI Act of imposing penalty is very clear. Chapter VI-A nowhere deals with criminal offences. These defaults for failures are nothing but failures or default of statutory civil obligations provided under the Act and the Regulations made thereunder. It is pertinent to note that S. 24 of the SEBI Act deals with the criminal offences under the Act and its punishment. Therefore, the proceedings under Chapter VI-A are neither criminal nor quasi-criminal. The penalty leviable under the Chapter or under these Sections is penalty in cases of default or failure of statutory obligation or in other words breach of civil obligation. In the provisions and scheme of pen-alty under Chapter VI-A of the SEBI Act, there is no element of any criminal offence or punishment as contemplated under criminal proceedings. Therefore, there is no question of proof of intention or any mens rea by the appellants and it is not an essential element for imposing penalty under the SEBI Act and the Regulations …. “.

3.5 After referring to the view expressed by the Apex Court in Chairman, SEBl’s case (supra), the Court stated that the Apex Court in catena of decisions has held that mens rea is not an essential element of imposing penalty for breach of civil obligation. For this, the Court made reference to various decisions of the Apex Court under different statutes dealing with this issue and taking similar view. Amongst this, the Court also referred to the judgment of the Apex Court in the case of Gujarat Tranvancore Agency (171 ITR 455), in which the Court was concerned with the levy of penalty u/ s. 271(I)(a) (since omitted from A.Y. 1989-90) for failure to furnish the return of income as required u/s.139(1) of the Act. In that case, the Court compared these provisions with S. 276C of the Act dealing with prosecution in cases where the person willfully fails to furnish the return of income as required u/s. 139(1) of the Act. In that case, having referred to both these Sections, the Court has stated that “it is clear that in the former case what is intended is a civil obligation, while in the latter what is imposed is a criminal sentence”. In that case, the Court has concluded that in the proceedings u/ s.271(I)(a) of the Act, the intention of the Legislature seems to emphasis the fact of loss of revenue and to provide a remedy for such a loss, although no doubt, an element of coercion is present in the penalty. Therefore, accordingly to the Court in that case, there is nothing in S. 271(I)(a), which required that mens rea must be proved before the penalty can be levied under that provision.

3.6 Dealing with the judgment of the Apex Court, in the case of Bharat Heavy Electricals Limited (supra), on which also heavy reliance was placed on behalf of the .assessee, the Court stated that the same is not of any assistance, because the same proceeded on the basis of a concession and in any event, did not indicate the correct position in law.

3.7 The Court then referred to settled position of interpretation that the Court cannot read anything into the statutory position or stipulated condition, when the language is plain and unambiguous. The Court also referred to various decisions of the Apex Court relating to the principle of construction of statutory provisions. The Court, then, dealing with the principle of interpretation of the statute, stated as under (pages 300-301) :

“Two principles of construction – one relating to casus omissus and the other in regard to reading the statute as a whole, appear to be well settled. Under the first principle a casus omissus cannot be supplied by the Court except in the case of clear necessity, and when reason for it is found in the four corners of the statute itself but at the same time a casus omissus should not be readily inferred and for that purpose all the parts of a statute or Section must be construed together and every clause of a Section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute. This would be more so if literal construction of a particular clause leads to manifestly absurd or anomalous results which could not have been intended by the Legislature. ‘An intention to produce an unreasonable result’ said Danckwerts L.J. in Artemiou v. Procopiou, (1965) 3 All ER 539 (CA) (All ER page 544 I) ‘is not to be imputed to a statute if there is some other construction available’. Where to apply words literally would ‘defeat the obvious intention of the legislation and produce a wholly unreasonable result’, we must ‘do some violence to the words’ and so achieve that obvious intention and produce a rational construction (Per Lord Reid in Luke v. IRe, (1963) AC 557(HL) where at AC page 577 he also observed: (All Er page 664-1)’. This is not a new problem, though our standard of drafting is such (that it rarely emerges)”.

3.8 Dealing with the judgment in the case of Dilip N. Shroff (supra), the Court stated as under (page 302) :

“It is of significance to note that the conceptual and contextual difference between S. 271(I)(c) and S. 276C of the Income-tax Act was lost sight of in Dilip N. Shroff’s case (2007) 8 Scale 304 (sc)

The Explanations appended to S. 271(1)(c) of the Income-tax Act entirely indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The judgment in Dilip N. Shroff’s case (2007) 8 Scale 304 (SC) has not considered the effect and relevance of S. 276C of the Income-tax Act. The object behind the enactment of S. *272(1)(c) read with the Explanations indicates that the said section has been enacted to provide for remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution u/ s.276C of the Income-tax Act”.

should be read as 271(1)(c)

3.9 Finally, in the context of the issue under consideration, the Court took the view (so far as it is relevant for this write-up) that Dilip N. Shroff’s case was not correctly decided. In this context, the Chairman, SEBI’s case has analysed the legal position in the correct perspective. The Court then stated that the matter shall now be placed before the Division Bench to deal with the matter in the light of this decision, only so far as cases where there is challenge to the vires of the relevant provisions and rules made under the Excise Act.

Conclusion:

4.1 From the above judgment of the larger Bench of the Apex Court, it is now clear that mens rea is not an essential ingredient of the provisions dealing with Concealment Penalty u/s.271(1)(c). It is also clear that the nature of such Concealment Penalty is not quasi-criminal, but the same is for breach of civil obligation and therefore, willful concealment is not essential for levy of such penalty.

4.2 In view of the above, the cases relating to the levy of Concealment Penalty u/s.271(1)(c) will have to be decided on the basis of provisions of S. 271(1)(c) read with the Explanations (Explanation 1 in particular) to S. 271.

4.3 From the judgment of the larger Bench of the Apex Court, it seems that the same overrules the judgment of the Apex Court in the Dilip N. Shroff’s case only to the extent it holds that deliberate act on the part of the assessee will have to be proved for levy of Concealment Penalty (i.e., mens rea is essential ingredient of the provisions) and the order imposing such penalty is quasi-criminal in nature. It seems that the other observations made by the Apex Court in Dilip N. Shroff ‘s case in the context of Concealment Penalty u/s.271(1)(c) should continue to hold good, as the larger Bench of the Apex Court was not specifically concerned with those points as well as the language of the S. 271(1) (and the Explanations thereto) of the Income-tax Act.

Whether free/subsidised transport facility is liable to Fringe Benefit Tax — S. 115WB(3)

Closements

Introduction :


1.1 Finance Act, 2005 introduced new provisions relating to
Fringe Benefit Tax (FBT) with effect from A.Y. 2006-2007 by introducing New
Chapter XII-H in the Income-tax Act, 1961 (the Act). S. 115WA provides that the
additional Income-tax (referred to in the Act as FBT) shall be charged in
respect of fringe benefits provided or deemed to have been provided by an
employer to his employees during the previous year on the value of such fringe
benefits.

1.2 S. 115WB(1) defines ‘Fringe Benefit’ as any consideration
for employment provided by way of any privilege, service, facility or amenity,
directly or indirectly, by an employer, whether by way of reimbursements or
otherwise, to his employees (including former employees). The other part of the
definition contained in this sub-section is not relevant for this write-up. The
meaning of fringe benefit provided u/s.115WB(1) referred to hereinbefore is
hereinafter referred to as ‘General Fringe Benefit’.

1.3 S. 115WB(2) provides that the fringe benefit shall be
deemed to have been provided by the employer to his employee, if the employer
has in the course of his business or profession [including any activity whether
or not such activity is carried on with the object of deriving income, profits
or gain] incurred any expense on, or made any payment for, the purposes of
certain expenses enumerated therein (hereinafter the fringe benefit considered
under this sub-section is referred to as ‘Deemed Fringe Benefit’ and expenses
enumerated for this purpose are referred to as Specified Expenses).

1.4 S. 115WB(3) provides that for the purpose of Ss.(1),
the privilege, services, facility or amenity (i.e., General Fringe
Benefit) does not include perquisite in respect of which the tax is paid or
payable by the employee or any benefit or amenity in the nature of free or
subsidised transport or any such allowance provided by the employer to his
employees for the journeys by the employees from their residence to the place of
work or for returning back to the residence (here in this write-up, this
facility of transport is referred to as ‘Free/Subsidised Transport Facility)’.

1.5 The FBT is payable on the value of the Fringe Benefit
which has to be valued as provided in S. 115WC. The CBDT, in its Circular No. 8,
dated 29-8-2005 (hereafter referred to as the said Circular), has also clearly
stated that if there is no provision for method of valuing any particular fringe
benefit, even if it falls in the category of ‘General Fringe Benefit’, the same
is not liable to FBT. It may be noted that u/s.115WC (which is the only
provision which provides for method of valuing the fringe benefit), there is no
provision to compute any value of ‘General Fringe Benefit’. The computation is
provided only in respect of ‘Deemed Fringe Benefit’ and other specified fringe
benefits referred to in S. 115WB(1) with which we are not concerned in this
write-up.

1.6 Since the provisions of S. 115WB(3) which provides for
exemption from the levy of FBT are specifically made applicable to S. 115WB(1),
the issue was under debate as to whether the exemption provided therein can be
claimed in respect of ‘Deemed Fringe Benefit’ [referred in S. 115 WB(2)]. The
CBDT in the said Circular has stated that the ‘Deemed Fringe Benefit’ provided
in S. 115WB(2) expands the scope of the meaning of the term of ‘Fringe Benefit’
provided in S. 115WB(1) (i.e., ‘General Fringe Benefit’). The issue is
relevant as otherwise there is no specific provision providing method of valuing
the ‘General Fringe Benefit’ and accordingly, such fringe benefit is not subject
to FBT liability as mentioned in para 1.5 above. The Authority for Advance
Ruling (AAR) had an occasion to consider this issue in the case of R&B Falcon
(A) (P.) Ltd.

1.7 Recently, the issue referred to in para 1.6 above came up
for consideration before the Apex Court while considering the correctness of the
ruling of the AAR referred to in para 1.6 above and the issue is now settled.
This is the first judgment of the Apex Court dealing with the provisions
relating to FBT and therefore, it is thought fit to consider the same in this
column.


R & B Falcon (A) Pty. Ltd., in re


— 289 ITR 369 (AAR)

2.1 In the above case, the issue relating to scope of the
exemption provided in S. 115WB(3) came up for consideration before the AAR and
the issue referred to in para 1.6 also came up for consideration. In the above
case, the brief facts were: the applicant was non-resident company incorporated
under the laws of Australia. It was engaged in the business of providing Mobile
Offshore Drilling Rig (MODR) along with crew on a day-rate charter-hire basis to
drill offshore wells. The applicant entered into a contract in October, 2003
with ONGC for supplying MODR along with the equipments and offshore crew
(employees). The employees of the applicant worked on MODR on commuter basis.
Under this system, an employee works on MODR for 28 days (called ‘on days’),
which is then alternated by 28 days field brake (called ‘off days’), when he
stays at the place of his residence in his home countries like Australia, U.K.,
USA, etc. They are transported from their home country to the MODR in two laps-
the first is from a designated base city in the home country to a designated
city in India for which the applicant provides free air ticket of economy class
and second is from that city in India to MODR through helicopter, especially
hired by the applicant for this purpose. On completion of 28 days of duty on
MODR, they are transported back to their home country in the same manner. They
are not paid any conveyance/transport allowance.

2.2 On the above facts, the following question was raised
before the AAR :

“Whether transportation cost incurred by R & B Falcon (A)
Pty. Limited (hereinafter referred to as ‘Applicant’) in providing
transportation facility for movement of offshore employees from their
residence in home country to the place of work and back is liable to Fringe
Benefit Tax (‘FBT’) ?”


2.3 The comments of the Commissioner made to the Applicant’s application, inter alia, stated that there is no element of transportation of these employees from the place of work and back on day-to-day basis, the expenses incurred on such transportation are covered within the scope of ‘General Fringe Benefits’ u/s.115WB(1)(a) as well as within the  scope    of ‘Deemed Fringe Benefits’ u/s.115 WB(2)(F),no taxes are paid by the employees for the transportation and therefore, such expenses incurred by the employer are liable to FBT. It was also stated that the applicant has a PE in India and has been filing returns of its income u/ s.44BB of the Act.

2.4 On behalf of the applicant, it was pointed oU.t that there are three categories of employees working under the applicant (i) employees based on land who attend to the administration, etc., (ii) Indian employees working on the rig, and (iii) foreign nationals (employees) who are transported to the rig from outside India. This application relates to the third category of the employees. It was, inter alia, further contended that considering its nature, such transportation of offshore employees does not fall within the charge of FBT u/s.115WA. Further, this position is made clear by the Circular No.8 of 200 which clearly excludes such transportation of employees from the ambit of the charge of FBT. The same position is also made clear by S. 115WB(3)and the view of the Commissioner is not tenable in law. On behalf of the Revenue, it was, inter alia, contended that the employees are carried in batches to the rig and they are alternated after each period of 28 days, such employees live on the rig for 28 days while they were on work there and therefore, the place of their residence is the rig and as such no ‘Free/Subsidised Transport Facility’ as contemplated in S. 115WB(3) is involved. A reference was also made to various questions and answers contained in the said Circular  to support    its case.

2.5 After considering the contentions raised by both the sides, the AAR noted the relevant provisions contained in 115WA, 115WB and 115WC and stated that the other provisions are mainly procedural provisions which are not relevant for the question under consideration.

2.6 Considering the provisions contained in S. 115WA, the AAR noted that FBT is leviable in respect of fringe benefit provided or deemed to have been provided by an employer to his employees during the previous year. It was further noted that S. 115WB(1)refers to fringe benefit provided to the employees in consideration for the employment and S. 115WB(2)provides that if employer incurs specified expenses, the fringe benefits shall be deemed to have been provided by the employer to his employees. Then the AAR referred to relevant part of the specified expenses in clause ‘F’ (Conveyance) and ‘Q’ [tour and travel (including foreign travel)] .

The AAR further noted that the rigor of FBT leviable on the ‘General Fringe Benefit’ is to some extent mitigated by 5. 115WB(3),which is clarificatory in nature. There are two exclusions provided in this sub-section viz. (i) ‘General Fringe Benefit’ in the nature of perquisites in respect of which tax is paid or payable by the employee; and (ii) ‘Pree /Subsidised transport Facility’ provided to the employee. The AAR then stated that rationale of the first exclusion appears to be to avoid double taxation of the same ‘General Fringe Benefit’ in the nature of the perquisites.

2.7 According to the AAR, 5. 115WB(1) does not take within its fold free or concessional tickets provided by an employer to his employees for the purpose of journey outside India. A combined reading of both the sub-sections would show that the ambit of such ‘General Fringe Benefit’ would not take in its ambit’ conveyance’ , and ‘tour and travel’ (including foreign travel); otherwise the said expressions could not have been elements of the deeming provisions contained in 5s.(2). The AAR also stated that the first limb of exclusion is not applicable in this case, as it is nobody’s case that the employees have paid or are liable to pay tax on the ‘General Fringe Benefit’ in the nature of perquisites, if any. According to the AAR, the transportation expenses in question being related to employees’ journeys outside India, the same is also not covered within the ambit of second limb of exclusion contained in 115WB(3). Accordingly, the AAR took the view that such transportation expenses are liable to FBT and the same are not excluded by virtue of the provisions of 5. 115WB(3). Finally, the AAR opined as under (page 238) :

“Now it may be recalled that we have held above that 5s.(1) of 5. 115WB does not take in its fold free or concessional tickets provided by an employer to his employees for the purpose of journeys outside India, therefore, it follows that the transportation costs incurred by the applicant in bringing the offshore employees from the place of their residence outside India to the rig (in India) will not fall within the second limb of 5s.(3) of 5. 115WB.”

2.8 The AAR then proceeded to consider whether such transportation expenses would fall within the meaning of ‘conveyance’, or ‘tour or travel’ (includ-ing foreign travel)’, as contemplated in S. 115WB(2). To resolve this controversy, the AAR stated that the terms ‘residence’, ‘tour or travel’, ‘conveyance’ and ‘transport’ should be understood. They are not defined as they are not technical terms. The AAR then noted the dictionary meanings of these terms as well as the concept of residence explained in Model Convention on Income and Capital issued by the OECD in the context of the tie-breaker rule for residence. The AAR took the view that the term ‘residence’ connotes a place of abode where a person intends to dwell for considerable length of time and not a place where a person is required to stay for a short duration in connection with his duties like the stay at the rig. Accordingly, the AAR did not accept the contention of the Revenue that the place of residence of the offshore employees is the rig where they stay for doing their duties. Referring to the dictionary meaning, the AAR also stated that conveyance and transport are used many a time interchangeably and the terms tour and travel are used to denote movement from one place to another, one country to another, both for pleasure, as well as for discharging of duty. One of the meanings of tour specifically refers to ‘on an oil rig’. The AAR then stated that the provision of free ticket for travelling of employees from home country to designated city in India would fall under clause (Q) ‘tour and travel’ and journey from the chopper based in India to the rig by helicopter would fall under clause (F) – ‘Conveyance’.

2.9 Finally, while deciding the issue against the as-sessee, the AAR held as under (page 242) :

“…. It is interesting to note question No. 24 and answer thereto in the said Circular. That question deals with the case of foreign company, which sends its employees on tour to India; the answer provides that the liability to pay FBT would depend upon whether or not the company is an employer in India. A foreign company is treated as an employer in India provided it has employees. based in India; if such foreign company has no employees based in India, it is not an employer in India and is not liable to pay FBT in India. It has been pointed out above that the applicant has three categories of employees – (i) employees working on land and dealing with administration; (ii) Indian employees working on the rig, and (ill) foreign employees transported to India for the purpose of working on the rig. Therefore, the employer though a foreign company will be treated as employer in India inas-much as a section of its employees are based in India. It is worthwhile to point out that the liability of the foreign company to pay Fringe Benefit Tax on sending its employees on tour and travel to India depends on whether the foreign company is an employer in India and not whether the employees are working in India. After a careful reading of the questions and answers in the Circular it has been pointed out above that Question No. 104 relating to transportation of employees whether free or on subsidised basis for journeys from their residence to the place of work and from the place of work to their residence, refers to the residences of the employees within India and that the same position will govern sub-section (3) of 5. 115WB.”

R & B Falcon (A) (Pty.) Ltd. v. CIT, 301 ITR 309 (5C) :

3.1 The above-referred ruling of the AAR came up for consideration before the Apex Court. After referring to the facts of the case, the Court referred to the relevant provisions of Chapter XII-H. The Court also referred to the objects of the introduction of the said provisions as stated in the said Circular and noted that an employer in India is liable to FBT in respect of the value of Fringe Benefits provided by him to his employees and deemed to have been provided by him to his employees. The Court also noted from the said Circular that if there is no provision for computing the value of any particular Fringe Benefit, such Fringe Benefit, even it may fall within the 5. 115WB(1)(a) (i.e., ‘General Fringe Benefits’) is not liable to FBT.

3.2 The Court then referred to some of the questions and answers given in the said Circular. The Court noted the answer to question No. 20, in which, it is, inter alia stated that in case of Indian Company having employees based both in India as well as outside India and incurs the Specified Expenses, the value of such Fringe Benefit is determined, as a proportion of total amount of expenses incurred for identified purposes. For this purpose, such expenses attributable to operations in India should be taken into account. The Court also noted answer to question No. 21, in which, while dealing with the FBT liability of Indian Company carrying on business outside India, where none of its employees in such business is liable to pay tax in India, it is stated that the Indian Company would be liable to FBT,if its employees are based in India. Therefore, if such Indian Company does not have any employees based in India, such Company would not be liable to FBT.The Court also noted the question No. 104 with regard to FBT liability on the expenditure incurred by the employer for the purpose of providing ‘Pree /Subsidised Transport Facility’.

3.3 Having referred to the relevant provisions of the Act and some paras of the said Circular, the Court noted that in the above case, with regard to FBT liability for providing transportation and moves. ment of offshore employees from their residence and home countries outside India to the place to rig and back, the AAR has opined as under (page 524) :

“(1) The exemption  provision  contained in 5s.(3) of 5. 115WB is restricted to 5s.(1) whereas the exemption falls under the deeming provision contained in 5s.(2).

(2) Residence within the meaning of the said provision would mean residence in India and as the employees concerned are residents of the countries outside India, 5s.(3) of 5. 115WB is not applicable”

3.4 On behalf of the assessee, it was, inter alia, cone tended that the distinction between 5s.(1) and (2) is highly artificial and unless both the provisions are read into 5s.(3), the same would be rendered otiose; the Parliament has not restricted the operation of that provision only to regular employees and hence no restrictive meaning can be given to the said provisions; residence of the employees being not restricted to the territory of India, the AAR are committed serious error in taking a view that the place of residence would mean residence in India in 115WB(3);the CBDT itself, in the said Circular, has expressed view that 5s.(2) is merely in expansion of 5s.(1) and overall reading of the said Circular als indicates that the FBT is not payable in respect of the expenditure incurred by the employer for an employee who is not based in India.

3.5 On behalf of the Revenue, it was, inter alia, contended that the FBT is a new concept in terms where of any consideration for employees provided, inter alia, for facility or amenity comes within the purview of FBT liability, the tax is payable only when employer incurs specified expenses and such exemption has to be granted only on the tax leviable U/ss.(l). The terms residence, transport, etc. must be given broad meaning, which would lead to conclusion that only when employees are provided ‘Free /Subsidised Transport Facility’ on regular basis, the exemption should be granted. The Parliament has used the words’ employees’, ‘journey’ and hence the same would only mean that it should cover only the journey undertaken by the employees for regularly attending the work on periodic basis.

3.6 After considering argument on both the sides, the Court stated that the object for imposition of FBT is evident from the said Circular, which is to bring about an equity. The intention of the Parliament to tax the employer where on the one hand he deducts the expenditure for the benefit of employees and on the other hand, on the employees getting the direct or indirect benefits from such expenditure, no tax is leviable. Indisputably, Ss.(3) refers to Ss.(l) only and ex-facie, it does not have any application to the ‘Deemed Fringe Benefit’. The CBDT categorically states in answer to question No.7 that Ss.(2) provides for an expansive definition. Having noted these positions, the Court stated as under (pages ‘526/527) :

“Does it mean that Ss.(2) is merely an extension of Ss.(l) or it is an independent provision? If Ss.(2) is merely an extension of Ss.(1), Mr. Ganesh may be right, but we must notice that S. 115 WA provides for imposition of tax on expenditure incurred by the employer on providing its employees certain benefits. Those benefits which are directly provided are contained in Ss.(l). Some other benefits, however, which the employer provides to the employees by incurring any expenditure or making any payment for the purpose enumerated therein in the course of his business or profession, irrespective of the fact as to whether any such activity would be carried on a regular basis or not, e.g., entertainment would, by reason of the legal fiction created, also be deemed to have been provided by the employer for the purpose of Ss.(2). Whereas Ss.(1) envisages any amount paid to the employee by way of consideration for employment, what would be the limits thereof are only enumerated in Ss.(2). We, therefore, are of the opinion that Ss.(1) and Ss.(2), having regard to the provisions of S. 115WAas also Ss.(3) of S. 115WB must be held to be operating in different fields.”

3.7 The Court further explained the effect of the provisions of S. 115WB(3) and stated as under (page 527) :

“A statute, as is well known, must be read in its entirety. What would be the subject-matter of tax is contained in Ss.(l) and Ss.(2). 5s.(3), therefore, provides for an exemption. There cannot be any doubt or dispute that the latter part of the contents of Ss.(3) must be given its logical meaning. What is sought to be excluded must be held to be included first. If the submission of the learned Solicitor General is accepted, there would not be any provision for exclusion from payment of tax on amenity in the nature of free or subsidised transport.

Thus, when the expenditure incurred by the employer so as to enable the employee to undertake a journey from his place of residence to the place of work or either reimbursement of the amount of journey or free tickets therefor are provided by him, the same, in our opinion, would come within the purview of the term by way of reimbursement or otherwise.”

3.8 Finally while upholding the view of the AAR that ‘Deemed Fringe Benefit’ is not covered within the scope of S. 115WB(3), the Court held as under (page 528) :

“The Parliament, in introducing the concept of fringe benefits, was clear in its mind insofar as on the one hand it avoided imposition of double taxation, i.e., tax both on the hands of the employees and employers; on the other, it intended to bring succour to the employers offering some privilege, service, facility or amenity which was otherwise thought to be necessary or expedient. If any other construction is put to Ss.(l) and Ss.(3), the purpose of grant of exemption shall be defeated. If the latter part of Ss.(3) cannot be given any meaning, it will result in an anomaly or absurdity. It is also now a well-settled principle of law that the Court shall avoid such construc-tions which would render a part of the statutory provision otiose or meaningless – Visitor v. K. S. Misra, (2007) 8 SCC 593; CST v. Shri Krishna Engg. Co., (2005) 2 SCC 692.

We, therefore, are of the opinion that AAR was right in its opinion that the matters enumerated in Ss.(2) of S. 115WB are not covered by Ss.(3) thereof, and the amenity in the nature of free or subsidised transport is covered by Ss.(l).”

3.9 The Court then proceeded to consider the view of the AAR that in S. 115WB(3), after the word ‘residence’ the words ‘in India’ should be read and stated that the AAR was not correct in taking such a view. In this context, the Court further observed as under (pages 528/529) :

” …For the purpose of obtaining  the benefit of the said exemption, however, the expenditure must be incurred on the employees directly for the purposes mentioned therein, namely, they are to be provided transport from their residence to the place of work or from such place of work to the place of residence. Any expenditure incurred for any other purpose, namely, other than for their transport from their residence to the place of work or from the place of work to the place of residence would not attract the exemption provision. The assessing authority, therefore, must, in each case, would have a right to scrutinise the claim. CBDT has the requisite jurisdiction to interpret the provisions of Income-tax Act. The interpretation of CBDT being in the realm of executive construction should ordinarily be held to be binding, save and except where it violates any provisions of law or is contrary to any judgment rendered by the courts. The reason for giving effect to such executive construction is not only the same as contemporaneous which would come within the purview of the maxim temporania caste pesto, even in certain situation a representation made by an authority like Minister presenting the Bill before the Parliament may also be found bound thereby.”

3.10 The Court then stated that there is no provision in S. 115WB(3) that the employees’ residence must be based in India and therefore, provision must be given its natural meaning. Hence, it would be difficult to accept the contention that employees’ residence must be based in India for that purposes. The Court further observed as under (page 530) :

“However, it appears that the contention that such expenditure should be paid on a regular basis or what would be the effect of the words “employees’ journey” did not fall for consideration of AAR. What, therefore, is relevant would be the nature of expenses. The question as to whether the nature of travelling expenditure incurred by the appellant would attract the benefits sought to be granted by. the statute did not and could not fall for consideration of the AAR. Its opinion was sought for only on one issue. It necessarily had to confine itself to that one and no other. No material in this behalf was brought on record by the parties. Whether the payments were made to them on a regular basis or whether the expenditures incurred, which strictly come within the purview of S. 115WB or not must, therefore, be answered having regard to the materials placed on records. If any question arises as to whether the agreement entered into by and between the appellant and the employees concerned would attract, in given cases, the liability under Fringe Benefit Tax would have, thus, to be determined by the assessing authority.”

Conclusion:

4.1 From the above judgment of the Apex Court it is now clear that the exemption contained in the S. 115WB(3)is applicable only to the ‘General Fringe Benefit’ and the same cannot be extended to ‘Deemed Fringe Benefit’.

4.2 For the purpose of S. 115WB(3), the place of residence of an employee need not be in India. The provision also applies to employees having residence outside India.

4.3 This is the first judgment of the Apex Court dealing with FBT provisions and it appears that these provisions should be interpreted bearing the object for which the same are introduced, as observed by the Court. The above judgment is also useful to avoid double taxation of the same amount (i.e., in the hands of employer as well as employees).

4.4 From the above judgment it also becomes important to note that while interpreting these provisions, the views expressed in the said Circular should also be given due weightage. Likewise, the representation made by the Minister at the time of introduction of the Bill also carries a great weight.

Taxability of Fees from offshore services — post Finance Act, 2010

Article

By the time you read this Article, the Finance Bill, 2011
will be presented by the Hon’ble Finance Minister in the Parliament and probably
with minimum changes expected in the direct tax provisions in this year’s budget
on account of onset of the Direct Tax Code in the financial year 2012-2013, it
is then time to introspect on one of the most discussed and publicised amendment
of Finance Act, 2010 in section 9 of the Income-tax Act, 1961 (‘the Act’).

By the Finance Act, 2010; the Legislature retrospectively
amended the Explanation to section 9 of the Act (which was inserted retrospectively only vide the
Finance Act, 2007) to reiterate the taxability of income by way of interest,
royalty and Fees for Technical Services (‘FTS’), under the principle of ‘source
rule of taxation’. This was done with a view to reverse the findings of the Apex
Court in the cases of Ishikawajima-Harima Heavy Industries Ltd. v. DIT,
(288 ITR 408) and the Karnataka High Court in the case of Jindal Thermal
Power Company Ltd. v. DCIT (TDS), (321 ITR 31) on the issue of taxability of
FTS in India u/s.9 of the Act. The Legislature amended the language of the
Explanation to provide that situs of rendering of services was not relevant in
determining the taxability of the aforesaid income u/s.9 of the Act. The
Memorandum explaining the Finance Bill, 2010 specifically stated the intention
of the Legislature to tax the fees from technical services which are provided
from outside India as long as they are utilised in India (services
rendered from outside India are for brevity referred to as ‘offshore services’).
The aforesaid intention further got judicial recognition in the decisions of the
Income-tax Appellate Tribunal (‘the Tribunal’) of Ashapura Minechem Limited
v. ADIT, (2010) (40 DTR 42) (Tri.) and Linklaters LLP v. ITO, (42 DTR
233) (Tri).

However, on a careful reading of section 9(1)(vii) along with
the aforesaid Explanation, a question that arises for consideration is whether
the plain words of the statute in their present form support the intention of
the Legislature of ‘situs of utilisation of services’ as being condition of
paramount importance to determine the tax jurisdiction of income from offshore
services u/s.9 of the Act.

The issue has been dealt only from the perspective of
provisions of the Act and not from the perspective of Double Taxation Avoidance
Agreements entered by India with other countries.

Section 4, section 5, r.w.s. 9(1)(vii) of the Act provide for
taxability of FTS in India.

Section 9(1)(vii) of the Act by deeming fiction prescribes three rules qua the
category of the payer for determination of the tax jurisdiction of FTS in India
in the form of sub-clauses (a), (b) and (c). The concept of ‘source rule’ of
taxation was introduced in section 9 of the Act to address the difficulties
faced in taxing income in the nature of interest, royalty and FTS by the Finance
Act, 1976. Section 9(1)(vii)(b) which deals with taxation of FTS along with an
Explanation to Section 9, in its present form, is reproduced below for ready
reference:

    “(vii) income by way of fees for technical services payable by:

        (a)

        (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

        (c)

    Explanation — For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section(1) and shall be included in the total income of the non-resident, whether or not, :

        (i) the non-resident has a residence or place of business or business connection in India; or

        (ii) the non-resident has rendered services in India.”

From the aforesaid provision, one would appreciate that in
its present form, the condition of ‘utilisation of services in India’ as
determining the tax jurisdiction of fees from offshore services

cannot be found in the plain words of the statute. The condition of ‘utilisation
of services’ may be of relevance in order to test the exception as provided in
section 9(1)(vii)(b) of the Act, but cannot be read to determine the taxability
of offshore services. In other words, the ‘situs of service utilised’ can be
relevant only to fall under the exception of section 9(1)(vii)(b) and not the
main part of section 9(1)(vii)(b). Further, if the said condition was to be read even in the
main part of section 9(1)(vii)(b), then there was no requirement to separately classify the
provision in clauses (a), (b) and (c) and the language of the provision would
have been different. The condition on the touchstone of ‘source rule of
taxation’ which then determines the tax jurisdiction of fees from offshore services is discussed below.

The concept as well as the expression ‘source of income’ is
not new to the Income-tax Act, 1961. In fact, this concept even existed under
the Income-tax Act, 1922 (‘the 1922 Act’). The provisions of section 42(1) of
the 1922 Act analogous to the present provisions of section 9(1)(i) considered
‘source of income in India’ as one of the basis for determining whether income
was deemed to accrue or arise in India.

The word ‘source of income’ is not defined under the
provisions of the Act. However, the CBDT in Circular No. 3 of 2008 on
Explanatory Notes on provisions relating to Direct Taxes of the Finance Act,
2007 explained the principle of ‘source rule of taxation’ for determining tax
jurisdiction of FTS in S. 9 as to be the country where the income is earned.
The word ‘earned’, though not defined under the provisions of the Act, has
received judicial interpretation in various decisions.

The Gujarat High Court, in the case of CIT v. S. G. Pgnatale, (124 ITR 391) explained the concept of ‘income earned’ for the purpose of section 9(1)(ii) of the Act. The Court, after con-sidering the ratio of the relevant legal precedents at that point of time, explained the meaning of the word ‘earned’ in the narrower sense and in the wider sense. In the narrower sense, the word ‘earned’ refers to a place of rendering or performance of services as an ingredient to determine the ‘source of income’ and in the wider sense equated it with ‘accrued’, meaning that not only the assessee under consideration should have rendered services or otherwise, but also should have created a debt in his favour i.e., a right to receive. Thus, the wider meaning of the word ‘earned’ indicates something which is due and entitlement to a sum of money consideration for which services have been rendered or otherwise by the assessee.

Further, the principle of ‘source of income’ juxta-posed with the words ‘income earned’ has been aptly explained in the following decisions, which hold the field of taxation on ‘source of income’, even today:


    E. D. Sassoon & Co. Ltd. v. CIT, (26 ITR 27) (SC);

    CIT v. Ahmedbhai Umarbhai & Co., (18 ITR 472) (SC);

    CIT v. K.R.M.T.T. Thiagaraja Chetty & Co., (24 ITR    (SC);

   CIT of Taxation v. Kirk, (1900) AC 588 (PC);

  W. S. Try Ltd. v. Johnson (Inspector of Taxes),(1946) 1 ALL ER 532 (CA); and

 Webb v. Stenton, (1883) (11 QBD 518) (CA).

A question may then arise as to where then the condition of ‘income earned’ as intended by the Legislature can be found in the plain words of section 9(1)(vii) of the Act. The words ‘payable by’ in section 9(1)(vii) express the condition of ‘income earned’.

In the general sense, the word ‘payable’ means that which should be paid. However, the following decisions have held that the word ‘payable’ is somewhat indefinite in import and its meaning must be gathered from the context in which it occurs:

New Delhi Municipal Committee v. Kalu Ram,(1976) (3 SCC 407); and

Garden Silk Weaving Factory v. CIT, (213 ITR 10) (Guj.)

Further, the decision of Madhya Pradesh High Court in the case of CIT v. The Central India Electricity Supply Co. Ltd., (114 CTR 160) has explained the words ‘due’ and ‘payable’ in context of section 41(2) of the Act. The Court observed that the word ‘due’ has two meanings, and one of the meaning is equivalent to ‘payable’, thereby indicating that the word ‘payable’ can be read to include ‘due’ and expressing that debt or obligation to which applied has by contract or operation of law becomes immediately enforceable, thereby in other words, satisfying the twin condition of ‘income earned’ in the wider sense u/s.9(1)(vii) of the Act. This argument gets support from the fact that Explanation to section 9 of the Act has been specifically amended to provide that situs of rendering of services shall not be relevant in determining the tax jurisdiction of the income from offshore services and thereby conveying the meaning of ‘income earned’ in a wider sense. The findings of the Apex Court in E. D. Sassoon & Co. Ltd. (supra) were relied upon by the Gujarat High Court in the case of CIT v. S. G. Pgnatale, (Guj.) in order to differentiate the meaning of the word ‘earned’ in wider sense from the narrower sense.

The relevant observations of the decision of CIT v. S. G. Pgnatale, (supra) with respect to the word ‘earned’ are reproduced below, duly explaining it in the narrow sense as well as in the wider sense:

“…..17. The word ‘earned’ even though it does not appear in section 4 of the Act has been very often used in the course of the judgments…. The concept, however, cannot be divorced from that of the income accruing to the assessee.

If the income has accrued to the assessee, it is certainly earned by him, in the sense that he has contributed to its production or the parenthood of the income can be traced to him….The mere expression ‘earned’ in the sense of rendering the services, etc., by itself is of no avail.”

Thus, it is clear that according to the Supreme Court in E. D. Sassoon’s case (supra) the word ‘earned’ has two meanings. One meaning is the narrower meaning in the sense of rendering of services, etc., and the wider meaning in the sense of equating it with ‘accrued’ and treating only that income as earned by the assessee to which the assessee has contributed to its accruing or arising by rendering services or otherwise, but he must have created a debt in his favour…..?It may be pointed out that these two meanings indicated by the Supreme Court in E. D. Sassoon’s case (supra) have also been indicated in Corpus Juris Secundum, Vol. 28, p. 069 where it has been pointed out that the word ‘earned’ has been construed as meaning entitled to a sum of money under the terms of a contract, implies that wages earned are owing, and may carry the meaning of unpaid, but does not necessarily imply that they are due and payable. The term has been distinguished from ‘due’ and ‘payable’. Thus, the wider meaning of the word ‘earned’ indicates something which is due, owing and entitlement to the sum of money consideration for which services have been rendered by an assessee, is a clear concept indicated by Corpus Juris Secundum….”


So, based on the aforesaid consideration, it is possible to conclude that the word ‘payable’ in section 9(1)(vii) symbolises the condition of income ‘earned’ in the wider sense and reiterating the principle of ‘source rule of taxation’ u/s.9(1)(vii) of the Act.

In all fairness, before concluding on the condition which determines the tax jurisdiction of fees from offshore services, it would be relevant to consider the finding of the decisions of the Mumbai Tribunal as referred above of Ashapura Minechem Ltd. (supra) and Linklaters LLP v. ITO (supra).

The Tribunal in the case of Ashapura Minechem Limited ( supra) relying on the provisions of section 9 of the Act (as amended vide the Finance Act, 2010) held that the technical services of bauxite testing and preparation of reports rendered from outside India by a non- resident company shall be deemed to accrue or arise in India u/s.9(1)(vii) of the Act (and also under Article of India-China tax treaty) on the ground that the impugned services were utilised in India. On a similar analogy, fees from professional services rendered by Linklaters LLP (‘the Appellant’) to residents of India in the case of Linklaters LLP v. ITO (supra) was also held to be taxable in India as FTS under the provisions of section 5(2) r.w.s. 9(1)(vii)(b) of the Act. The Tribunal further opined that ‘situs of utilisation of service’ and ‘situs of payer’ determine the tax jurisdiction of FTS under the source rule of taxation in section 9(1)(vii) of the Act, which also finds support in the respective Memorandum explaining the provisions of the Finance Bill, 2007 and Finance Bill, 2010.

In this regard, it may be relevant to consider the decision of the Gujarat High Court in the case of CIT v. Saurashtra Cement and Chemical Industries Ltd., (101 ITR 502), wherein the Court held that a debt due to a foreigner cannot be treated as an asset or source of income in India and the interest thereon cannot be deemed to accrue or arise in India, merely because the debtor is in India, thereby upholding that situs of the payer itself cannot solely determine the tax jurisdiction of income.

Thus, ‘situs of payer’ and ‘situs of utilisation of service’ may be of relevance for the purpose of determining the applicability of exception u/s. 9(1)(vii)(b) of the Act or satisfaction of additional condition u/s.9(1)(vii)(c).

In addition, the following decisions by various judicial authorities have also upheld the principle of ‘the country where income is earned’ as the basis for determining the tax jurisdiction of income under source rule of taxation:

    Rajiv Malhotra, in re (284 ITR 564) (AAR);

    Rupajee Ratanchand and Anr. v. CIT, (28 ITR 282) (AP);

     Mansinghka Brothers Private Ltd. v. CIT, (147 ITR    (Raj.);

    C. G. Krishnaswami Naidu v. CIT, (62 ITR 686) (Mad.); and

    SAT Behwaric & Co. v. CIT, (30 ITR 151) (Raj.)

In light of the above, one may conclude that it is the principle condition of ‘income earned’ under the source rule of taxation, which determines tax jurisdiction of FTS u/s.9(1)(vii).

Further, the next important concept which requires simultaneous discussion is of whether India has a ‘territorial tax system’, ‘worldwide tax system’ or ‘mixed tax system’. The reference towards the concept of ‘territorial nexus’ was recently found in the judgments of the Mumbai Tribunal in the case of Ashapura Minechem case (supra), Linklaters LLP v. ITO (supra) and also under Memorandum explaining the provisions to Finance Bill, 2007.

There are essentially three types of tax strategies applied worldwide, which are as under?:

  •     Territorial tax system;
  •     Worldwide tax system; and
  •     Mixed tax system

Under ‘territorial tax system’ as rightly explained by the Tribunal in the aforesaid decisions, a tax-payer is responsible for paying taxes only on that part of business which he does within his home country or state. In other words, it relies only on the ‘territorial’ principle for taxing income earned inside the national borders. On the other hand, in ‘worldwide tax system’, a taxpayer is taxed by the home government on all the business that the taxpayer does worldwide. Whereas in the case of mixed tax systems, elements of both territorial and worldwide tax systems are in place.

India follows ‘mixed tax system’. Elements of worldwide tax system are found while taxing residents of India and elements of territorial tax systems are found while taxing non-residents of India. ‘Doctrine of nexus’ is considered in India for the purpose of determining tax jurisdiction of income in case of non-residents.

The ‘doctrine of nexus’ for determination of tax jurisdiction of income of non- residents in India was approved by the Supreme Court in the case of Electronics Corporation of India Ltd. (183 ITR (three-Member Bench decision) as early as in the year 1989 while rejecting the submission of extra-territorial application of the provisions of section 9(1)(vii) of the Act, which are presently being considered. The principle of ‘doctrine of nexus’ was well read down in the provisions of section 9(1)(vii) of the Act by the said judgment. However, the ingredient which shall determine such nexus was referred to the Constitution Bench of the Supreme Court in the Electronics Corporation’s case (supra), since the question was of substantial importance. It would be important to mention here that the decision of the Constitution Bench is still awaited. However, there are reports that before the matter could be placed before the Constitution Bench, the appeal was withdrawn.

Further, the law of nations generally recognises that the ‘doctrine of nexus’ involves consideration of two elements:

  •     The connection must be real and not illusory; and
  •     The liability sought to be imposed must be pertinent to the connection.

Thus, based on the aforesaid principles, the customary international law that comprehends levy of taxes by a state where there is connection between the state and the taxpayer on either of the following basis:

  •     Territorial nexus, based on domicile or residence of the taxpayer in the taxing state; or

  •     Economic nexus, based on the economic activity within, or connected with, the taxing state.

If one were to define economic nexus, in common parlance, it is regarded as part of ‘territorial nexus’. A nexus between the person or income sought to be taxed on the one side and the taxing country on the other.

Similarly, one may refer to the following Indian judicial precedents wherein time and again, the judicial authorities have upheld the ‘doctrine of nexus’ between the person or income which is subject to tax and the country imposing the tax as a pre-requisite for the purposes of taxation:

    CIT v. Eli Lilly and Co. (India) P. Ltd. and Ors., (312 ITR 225) (SC);

    Hoechst Pharmaceuticals Ltd. v. State of Bihar, (154 ITR 64) (SC);

    Mahaveer Kumar Jain v. CIT, (277 ITR 166) (Raj.) [decision following the judgment of Electronics Corporation of India Ltd. case (supra)]; and

    Worley Parsons Services Pty Ltd., In re (312 ITR 273) (AAR);

Based on the aforesaid discussion, one may conclude that the ‘doctrine of nexus’ is well recognised and is an accepted principle for the purpose of determining tax jurisdiction of in-come, more specifically in cases of taxation of non-residents in India and ‘source of income in India’ is recognised as one of the ‘doctrine of nexus’ to establish territorial nexus in India.

India, therefore, neither follows pure ‘territorial tax system’ nor pure ‘worldwide tax system’, but follows ‘mixed tax system’. So, even after looking at the issue to determine tax jurisdiction of FTS from the point of view of the ‘doctrine of nexus’, the result under this alternative also remains the same that ‘source of income’, being the necessary nexus or connection, must have a relationship with India i.e., of ‘income earned’ in India and therefore, the observations of the Mumbai Tribunal may require reconsideration.


Conclusions:

In the backdrop of the aforesaid discussions, one may conclude as under:

  •  Plain words of the statute in section 9(1)(vii) of the Act cannot be read to state that ‘situs of service utilised’ shall be of paramount importance to determine the tax jurisdiction of fees from offshore services;
  •  The principle of ‘source rule of taxation’ recognises the country where the income is earned as the basis for determining the tax jurisdiction of fees from offshore services;
  •  ‘Situs of payer’ and ‘Situs of services utilised’ are of relevance for the purpose of falling under the exception of section 9(1)(vii)(b) and satisfying the additional condition of section 9(1)(vii)(c) of the Act;
  •  Non-relevance of ‘situs of service rendered’, supports the argument that the concept of ‘income earned’ is interpreted in wider sense to determine tax jurisdiction of income from FTS u/s.9(1)(vii) of the Act;
  •  India, neither follows pure ‘territorial tax system’ nor pure ‘worldwide tax system’, but follows ‘mixed tax system’; and
  •  ‘Source of income’ is recognised under the Act as one of the basis of territorial nexus in determination of tax jurisdiction of income.

Therefore, in light of the aforesaid considerations, the general understanding of fees from offshore services being income deemed to accrue or arise in India and taxable under the domestic provisions of the Act, may require reconsideration.

Editor’s Note: Attention of the readers is invited to the recent decision of the Supreme Court of India (five member Bench) in the case of GVK Industries Ltd vs. ITO (2011-TII-03-SC-CB-INTL) in which the Court has opined on the issue of `territorial nexus’ for taxation in India.

Whether Concealment Penalty can be levied in case of reduction in loss ?

Closements

Introduction :


1.1 If the assessee has concealed particulars of his income
or furnished inaccurate particulars of such income, a penalty u/s.271(1)(c)
(Concealment Penalty) can be imposed under the Income-tax Act (the Act). The
amount of such Concealment Penalty shall not be less than 100% (or more than
300%) of the amount of tax sought to be evaded (‘the tax on concealed income’).

1.2 The expression, ‘the amount of tax sought to be evaded’ (i.e.,
‘the tax on concealed income’) is defined in Explanation 4 to S. 271(1)(c),
which, inter alia, effectively provided (before amendment w.e.f. A.Y.
2003-2004) that the same represents the difference between the tax on assessed
income and the tax on returned income (assuming that the difference between the
returned income and the assessed income is treated as concealed income). This
explanation, inter alia, also provided that when concealed income exceeds
the total income, then the tax that would have been chargeable on concealed
income as if such concealed income is the total income of the assessee, is
treated as ‘tax on concealed income’. This explanation was inserted w.e.f.
1-4-1976 (hereinafter, the same is referred to as the said Explanation).

1.3 As there was difference of opinion amongst the High
Courts on the issue that if the income disclosed in the return as well as the
income assessed is in negative (even after making certain
additions/disallowances), whether Concealment Penalty can be imposed or not. An
appropriate amendment was made to take care of such situation u/s.271(1)(c) as
well as in the said Explanation by the Finance Act, 2002 w.e.f. A.Y. 2003-2004
(hereinafter, such amended provisions are referred to as post-amendment
provisions and the earlier provisions are referred to as pre-amended
provisions). These amendments made by the Finance Act, 2002 are referred to as
Amendment of 2002. The post-amendment provisions made the position explicitly
clear that Concealment Penalty can be imposed even if income assessed is
negative and the assessee is not liable to pay any income-tax.

1.4 In the context of pre-amended provisions, the issue
referred to in para 1.3 above was decided by the Apex Court in the case of
Virtual Soft Systems Limited (289 ITR 83), wherein the Court took the view that
Concealment Penalty cannot be imposed in a case where the assessment has
resulted into loss where the assessee is not liable to pay any tax and the
Amendment of 2002 was applicable w.e.f. 1-4-2003 (i.e., A.Y. 2003-2004)
and the same is not clarificatory/declaratory in nature and hence the same is
prospective. This judgment has been considered in this column in the April, 2007
issue of the Journal.

1.5 The correctness of the judgment of the Apex Court in the
case of Virtual Soft Systems Limited (supra) was doubted by another Bench
of the Apex Court and hence the issue decided therein came up for
reconsideration before a larger Bench (three Judges) of the Apex Court in the
case of Gold Coin Health Food P. Limited, wherein the earlier judgment has been
overruled. Though this judgment will affect only the cases governed by the
pre-amended provisions (i.e., up to A.Y. 2002-03), considering its
importance and the fact that there may be many pending matters involving this
issue in respect of that period, it is thought fit to consider the same in this
column.


CIT v. Gold Coin Health Food P. Ltd.,


304 ITR 308 (SC) :

2.1 In the above case, the larger Bench of the Apex Court was
constituted to consider the correctness of the judgment of the Division Bench of
the Apex Court in the case of Virtual Soft Systems Limited (supra) and to
decide whether Concealment Penalty can be imposed in case of reduction in loss
under the pre-amended provisions. In that case, the Department had placed
reliance on Notes of Clauses relating to the Amendment of 2002 to contend that
the said amendment was clarificatory in nature and consequently it was
applicable retrospectively. This argument was rejected by the Court. Another
Division Bench, which doubted the correctness of the said judgment, noted that
the Division Bench in the case of Virtual Soft Systems Limited (supra)
had rejected this argument, but it was of the view that the true effect of the
Amendment of 2002 was not considered in that case, as it was prima facie
of the view that merely because the amendment was stated to take effect from
1-4-2003, that cannot be the ground to hold that the same did not have a
retrospective effect.

2.2 On behalf of the Department, it was, inter alia,
contended that the purpose behind making the provisions relating to Concealment
Penalty is to penalise the assessee for (a) concealing particulars of income;
and/or (b) furnishing inaccurate particulars of such income, and hence, whether
the assessee’s income was a profit or loss was really of no consequence. It was
further contended that the word ‘any’ used in the expression in addition to ‘any
tax payable’ found in the provision makes the position clear that the penalty
was in addition to any tax and even if no tax was payable, the penalty was
leviable. The Amendment of 2002 was made to clarify this position as some High
Courts took a contrary view. This was not a substantive amendment which created
penalty for the first time. Even Notes on Clauses make the position clear that
the amendment was clarificatory in nature and would apply to all assessments
even prior to A.Y. 2003-04.

2.3 On the other hand, on behalf of the assessee, it was,
inter alia, contended that the judgment in the case of Virtual Soft Systems
Limited (supra) lays down the correct principle in law and that position
was rightly noted by various High Courts, more particularly by the Punjab &
Haryana High Court in the case of Prithipal Singh and Co. (183 ITR 69) and the
Department’s appeal against this judgment was dismissed by the Apex Court (249
ITR 670). It was further contended that the Amendment of 2002 enlarged the scope
of levying Concealment Penalty and therefore, does not operate retrospectively
and is applicable only w.e.f. 1-4-2003. It was also pointed out that the
memorandum explaining the provisions of the Finance Bill, 2002 also states that
this amendment will take effect from 1-4-2003.

2.4 After considering the arguments advanced on behalf of both the parties, the Court noted that in the judgment in the case of Virtual Soft Systems Limited (supra), it was also observed that even if the statute does contain a statement to the effect that the amendment is clarificatory or declaratory, that is not the end of the matter. The Court has also to analyse the nature of the amendment to decide whether, in reality, it is clarificatory or declaratory. Hence, the date from which the amendment is made operative does not conclusively decide the issue. The Court also noted the judgment of the Apex Court in the case of Reliance Jute and Industries Limited (120ITR 921) wherein, it was observed that the law to be applied in income-tax assessments is the law in force in the assessment year, unless otherwise provided expressly or by necessary implication.

2.5 The Court then stated that it will be necessary to focus on the definition of the term ‘income’, which is inclusively defined in S. 2(24) and includes losses, i.e., negative profits. Having stated so, the Court drew support from the judgment of the Apex Court in the case of Harprasad & Co. P. Ltd. (99 ITR 118) and  observed as under    (page 313) :

“…. This Court held with reference to the charging provisions of the statute that the expression ‘income’ should be understood to include losses. The expression ‘profits and gains’ refers to positive income, whereas losses represent negative profit or in other words minus income. This aspect does not appear to have been noticed by the Bench in Virtual’s case (2007) 9 SCC 665. Reference to the order by this Court dismissing the Revenue’s Civil Appeal No. 7961 of 1996 in CIT v. Prithipal Singh and Co. is also not very important because that was in relation to the A.Y. 1970-71 when Explanation 4 to S. 271(1)(c) was not in existence. The view of this Court in Harprasad’s case leads to the irresistible conclusion that income also includes losses. Explanation 4(a) as it stood during the period April 1, 1976 to April 1, 2003 has to be considered in the background.”

2.6 The Court then stated that it appears that what the Amendment of 2002 intended was to make the position explicit, which otherwise was implied. For this, the Court noted the following recommendation of Wanchoo Committee pursuant to which a relevant portion of the said explanation was inserted w.e.f. 1-4-1976 (page 313) :

“We are not unaware that linking concealment penalty to tax sought to be evaded can, at times, lead to some anomalies. We would recommend that in cases where the concealed income is to be set off against losses incurred by an assessee under other heads of income or against losses brought forward from earlier years, and the total income thus gets reduced to a figure smaller than the concealed income or even to a minus figure, the tax sought to be evaded should be calculated as if the concealed income were the total income.”

2.7 Referring to the Circular No. 204, dated 24-7-1976, issued by the CBDT explaining the provisions along with which the said Explanation was introduced, the Court noted that in the said Circular also it is stated that even if the total income is reduced to the minus figure, ‘the tax on concealed income’ still means the tax chargeable on the concealed income as if it were the total income. The Court, then, observed as under (page 314) :

“A combined reading of the Committee’s recommendation and the Circular makes the position clear that Explanation 4(a) to S. 271(I)(c) intended to levy the penalty not only in a case where after addition of concealed income, a loss returned, after assessment becomes positive income, but also in a case where addition of concealed income reduces the returned loss and finally the assessed income is also a loss or minus figure. Therefore, even during the period between April 1, 1976 and April 1, 2003, the position was that the penalty was leviable even in a case where addition of concealed income reduces the returned loss.”

2.8 Considering the relevance of the Notes on Clauses, while interpreting the provisions on such issues, the Court stated that the same are relevant and for that drew support from the judgment of the Apex Court in the case of Yuvraj Amarinder Singh (156 ITR 525). The Court also noted the judgment of the Apex Court in the case of Poddar Cement P. Ltd. (226 ITR 625), wherein it was stated that the circumstances under which the amendment was brought in existence and consequences of the amendment will have to be taken care of while deciding the issue as to whether the amendment was clarificatory or substantive in nature and, whether it will have retrospective effect or not. The Court then referred to various judgments of the Apex Court, in which the Court has considered cardinal principle of construction that every statute is prima facie prospective, unless it is expressly or by necessary implication made to have a retrospective operation. In these judgments, it was also made clear that the presumption against retrospective operation is not applicable to declaratory statutes.

2.9 Having referred to the principles and tests to be applied to determine whether a particular amendment is to be regarded as clarificatory or substantive in nature or whether it will have retrospective effect or not, the Court finally overruled the view of the Division Bench in the case of Virtual Soft Systems Limited (supra) and held as under (page 318) :
“The above being the position, the inevitable conclusion is that Explanation 4 to S. 271(I)(c) is clarificatory and not substantive. The view expressed to the contrary in Virtual’s case (2007) 9 SCC 665 is not correct.”

Conclusion:

3.1 In view of the above judgment of the larger Bench of the Apex Court, reversing the judgment of the division bench of the Apex Court in the case of Virtual Soft Systems Limited (supra), the position now emerges is that, under the pre-amended provisions also, the Concealment Penalty can be imposed even in a case where the assessment has resulted into reduction in loss and there is no tax payable by the assessee.

3.2 From the above judgment, it also appears that for the purpose of determining the nature of amendment (i.e., whether the same is clarificatory or substantive in nature), the position as existed before the amendment and the purpose for which the amendment is made is very relevant.

‘Urban Land’ Under Wealth Tax Act

Controversies

1.
Issue for consideration :


1.1 Wealth tax is chargeable
on the assets specified in S. 2(ea) of the Wealth-tax Act. One of such assets is
an ‘urban land’, which has been defined in Explanation 1(b) of the said Section.
The definition reads as under :


” ‘Urban land’ means land
situate :



(i) in any area which is
comprised within the jurisdiction of a municipality (whether known as a
municipality, municipal corporation, notified area committee, town area
committee, town committee or by any other name) or a cantonment board and
which has a population of not less than ten thousand according to the last
preceding census of which relevant figures have been published before the
valuation date; or

(ii) in any area within
such distance, not being more than eight kilometres from the local limits of
the municipality or cantonment board referred to in sub-clause (i) as the
Central Government may, having regard to the extent of, and scope for,
urbanisation of that area and other relevant considerations, specify in this
behalf by Notification in the Official Gazette,

but does not include land
on which construction of a building is not permissible under any law for the
time being in force in the area in which such land is situated or the land
occupied by any building which has been constructed with the approval of the
appropriate authority or any unused land held by the assessee for industrial
purposes for a period of two years from the date of its acquisition by him or
any land by the assessee as stock-in-trade for a period of ten years from the
date of its acquisition by him.”

1.2 One of the exceptions
contained in the said definition excludes an urban land occupied by any building
which has been constructed with the approval of the appropriate authority or an
unused land held by the assessee for industrial purposes for a period of two
years from the sate of its acquisition.

1.3 We intend to examine
here, the liability to wealth tax in a case where the work for construction of
an industrial building has begun in pursuance of the approval by appropriate
authority, but is not completed within the period of two years or a case where
work for construction of a residential building has begun in pursuance of the
approval by appropriate authority, but is not completed. The case of the
taxpayers for exemption from levy of the wealth tax rests on the contention that
once the work of construction of a building has commenced, the structure even
though incomplete should be recognised as ‘building’ nonetheless, and in the
alternative a land on which the work of constructing a building is in progress,
ceases to be a ‘land’. It is argued that since the building is being
constructed, the same is exempt for the purpose of wealth tax in terms of the
meaning to be given to urban land more importantly on account of the objective
behind the levy of tax. The Revenue, on the other side is of the view that such
a land on which the building is under construction continues to be a land and
therefore liable to wealth tax. The conflicting decisions, available on the
subject, of the High Court highlight the importance of the issue that requires
consideration. The Karnataka and the Gujarat High Courts are of the view that
the land under discussion is liable to wealth tax, while the Kerala and Punjab &
Haryana High Courts hold that no wealth tax is chargeable once the work of
construction has begun.

2.
Giridhar G. Yadalam’s case, 325 ITR 223 (Karn.) :


2.1 Recently the Karnataka
High Court examined this issue in the case of CWT v. Girdhar G. Yadlam.
The assessee in that case was assessed in the status of a Hindu undivided family
and the assessment year in question was 2000-01. The assessee owned a plot of
land which was given to a developer for construction of residential flats in the
year 1995-96, so however the ownership of the same was retained by him as
contended by him in the income-tax proceedings. The assessee had claimed, in the
income-tax proceedings, that it had retained ownership of the land until flats
were fully constructed and possession of the assessee’s share was handed over.
It had contended that the development agreement constituted only permissive
possession for the limited purpose of construction of flats. The assessee
contended that it continued to be the owner of the land till the flats were
sold. A notice u/s.17 of the Wealth-tax Act was issued to the assessee for
bringing to tax the said land under development. On due consideration of the
facts, the Assessing Officer treated the said land as an urban land and brought
it to tax. An appeal was filed against such an order was allowed by the CWT
(Appeals) whose order was confirmed by the Tribunal following its decision in
WTA Nos. 4-5/Bang./2003, dated March 22, 2004.

2.2 Aggrieved by the order
of the Tribunal the Revenue filed an appeal before the Karnataka High Court
raising the following questions of law :


(a) Whether the Tribunal
was correct in holding that the value of properties held by the assessee at
Adugodi and Koramangala is not chargeable to wealth tax, as the same are not
urban land but land with superstructure and cannot form part of the wealth
as defined u/s.2(ea) of the Act ?

(b) Whether the
properties of the assessee cannot be brought to wealth tax assessment ?


2.3 The High Court on appreciation of the opposing contention observed that what was excluded was the land occupied by any building which had been constructed; admittedly, in the case on hand, the building was not fully constructed, but was in the process of construction and hence could not be understood as a building which had been constructed. It held that the Courts had to interpret any definition in a reasonable manner for the purpose of fulfilling the object of the Act and the Courts. It held that the term ‘constructed’ had its own meaning and would mean ‘fully constructed’ as understood in the common parlance.

2.4 The Court further observed that the Tribunal had chosen to blindly follow its earlier order, without noticing the intention of the Legislature and the specific wording in the Section and neither the owner nor the builder nor the occupant would pay any tax to the Government in terms of the Wealth-tax Act, if the order of the Tribunal was accepted. The ‘land occupied by any building which has been constructed’, should be interpreted in a manner that would fulfil the intention of the Legislature.

2.5 The Court did not approve the theory of openness of the land for the purpose of taxation accepted by the Tribunal as in its opinion the Tribunal had failed to notice the principle that each word in taxing status had its own significance for the purpose of taxation. The Court observed that the words ‘land on which the building is constructed’ had not been properly appreciated/ considered by the Tribunal.

2.6 The Court further observed that the interpretation of any word would depend upon the wording in a particular context and the object of the Act as understood in law and therefore, was not prepared to blindly accept the meaning given to the term ‘building’ in the Law Lexicon. That the use of the words ‘building constructed’ in the Act made all the difference for the purpose of interpretation.

2.7 The Court took note of its own judgment in the case of Vysya Bank Ltd. v. DCWT, 299 ITR 335 (Karn.) to buttress its findings in favour of the Revenue. It also distinguished the judgment of the Orissa High Court in CWT v. K. B. Pradhan, 130 ITR 393 (Orissa) which examined the meaning of the term ‘house’ for the propose of the Wealth-tax Act as in the said case, the Court was considering only the word ‘house’ and not ‘building constructed’ as in the case before it.

2.9 The Court further observed that it could not forget that the Parliament in its wisdom had chosen to provide an exemption only under certain circumstances which could not be extended without any legal compulsion in terms of the Act. The Court finally held that a land on which completed building stood, such land alone would qualify for exemption. The Court accordingly accepted the appeal of the Revenue.

    Apollo Tyres Ltd.’s case, 325 ITR 528 (Ker.):
3.1 The Kerala High Court was appraised of the same issue in the case of Apollo Tyres Ltd. v. CWT, 325 ITR 528 (Ker.). In that case, the assessee, a public limited company was engaged in production and sale of automotive tyres. It was allotted a plot in Gurgaon on December 29, 1995 on which it commenced construction of a commercial building in November, 1997, and completed construction of a four-storeyed building with basement and started occupying it from March 29, 2000. After completion of the construction of the building, the land and building were granted exemption from wealth tax as the said assets fell under the exempted category. However, in the course of assessment for the A.Y. 1998-99, the Wealth-tax Officer assessed the value of the land treating it as urban land u/s.2(ea) rejecting the assessee’s contention that construction of building was in progress on the valuation date, that is, March 31, 1998, and as such the land could not be treated as urban land under Explanation 1(b) to S. 2(ea) of the Act. The first Appellate Authority upheld the claim of exemption of the assessee, but the Tribunal on appeal by the Department, reversed the order of the first Appellate Authority and upheld the assessment order by relying on the decision of the Karnataka High Court in the case of CWT v. Giridhar G. Yadalam (supra).

3.2 The appellant company submitted that the exemption ceased to be available only where, after two years of acquisition, the land was continuously kept vacant without utilising it for construction of building for industrial or commercial purposes. It was highlighted that the assessee had started construction of a commercial building as on the valuation date and in the course of two years and thereafter the assessee had completed the construction of the building and had started using the building which was no longer assessed by the Wealth-tax Officer as the building qualified for exemption. It contended that commencement of construction of the building on the urban land itself was use of the building for industrial purpose.

3.3 The Revenue on the other hand contended that the intention of the Legislature in limiting the exemption for vacant land up to two years was only to ensure that if the assessee wanted to get exemption beyond two years, the assessee should have completed construction of the building in the course of two years and used the building for industrial purposes. It further contended that unless the building was constructed and put to use for industrial purpose, before the year end, the land could not be said to have been used for industrial purpose. In other words, the value of urban land could be assessed to wealth tax until completion of construction of the building and until commencement of use of such building for commercial or industrial purpose.

3.4 The Kerala High Court held that the urban land that was subjected to tax under the definition of ‘asset’ generally covered vacant land, only. It noted the fact that under the exception clause ‘the land occupied by any building which has been constructed with the approval of the appropriate authority’ was exempt from the purview of tax which according to the Court clarified that when an urban land was utilised for construction of a building with the approval of the prescribed authority, then the land ceased to be identifiable as urban land; that the section contemplated for taxing such a land on which an illegal construction was made without approval by the appropriate authority and that it was only in such a case that such land would still be treated as urban land, no matter building was constructed thereon; that however, if a building was constructed with the approval of the prescribed authority, then such land went out of the meaning of ‘urban land’.

3.5 The question according to the Kerala High Court to be considered was whether during the period of construction of the building, the urban land on which such construction was made could be assessed to wealth tax. In the Court’s view, once the land was utilised for construction purposes, the land ceased to have its identity as vacant land and it could not be independently valued. The Court pertinently noted that the building under construction whose work was in progress was not brought within the definition of ‘asset’ for the purpose of levy of wealth tax. It also noted that there was no dispute that as and when construction of the building was completed, there could be no separate assessment of urban land and the assessment was thereafter only on the value of the building, if it was not exempted from tax. The commercial building constructed by the appellant assessee, the Court noted, fell within the exemption clause as commercial building was not subjected to wealth tax. The commencement of construction in the opinion of the Court amounted to the use of the land for industrial purpose as without construction of the building the land could not be used for the purpose for which it was allotted.

3.6 For removal of doubts the Court noted that part construction and abandoning further construction would not entitle the assessee for exemption, unless the assessee eventually completed construction of the building and used the building for commercial or industrial purpose. As in the case before the Court, the assessee progressively completed construction of a four-storeyed building with basement and started using it within the course of two years from the valuation date, the assessee was entitled to exemption; that the assessee could not be expected to complete the construction of

    four-storeyed massive building in the course of two years which was the period provided in Explanation 1(b) of S. 2(ea). Keeping in mind the exemption available to productive assets, the Court felt that there was no scope for levy of tax during the period of construction of the productive asset, namely, commercial building by utilising the urban land. In other words, once the non-productive asset like urban land was converted to a productive asset like a building which qualified for exemption, then the assessee could start availing of exemption even during of conversion of such non-productive asset to productive asset. The Court confirmed the eligibility of the assessee for claim of exemption for urban land on which they were constructing a commercial building on the valuation date.

    Observations:
4.1 The present scheme of the wealth tax primarily seeks to tax an unproductive asset and leaves un-taxed an asset, which is put to a productive use. This is amply clarified by the Finance Minister’ speech and the memorandum explaining the objects behind the introduction of the new scheme of wealth tax while moving the Finance Bill, 1992. Once an asset is shown to be a not non-productive asset, it ceases to be outside the ambit of the wealth tax. The activity of construction ensures that the land in question is a ‘productive asset’ and no wealth tax can be levied on an asset which is productive.

4.2 A land on being put to construction cannot be termed as an open land and even perhaps a ‘land.’ A land is a surface of the earth and once the surface is covered, it cannot be termed as the land, leave alone the urban land.

4.3 The decision in Giridhar G. Yadalam’s case under comment was discussed by the Kerala High Court in Apollo Tyres Ltd. v. ACIT, (supra), and only thereafter the Court did not subscribe to the view that construction should have been completed within two years. The Kerala High Court found that Giridhar Yadalam’s case was inapplicable, where the assessee constructed the building in stages though the full construction took four years.

4.4 The purpose and the objective behind introduction of the provision, brought in with effect from April 1, 1995, should be kept in mind. It was for bringing to tax an unutilised open land that the provision was introduced. Once a land is admitted to be put to use for the purposes of construction, it ceased to be a chargeable land and should not be subjected to tax if the construction of the building is eventually completed and is not used a subterfuge to avoid any tax. While there is no doubt that a land that is put to use for construction within two years, is exempt for two years from tax, for the period thereafter it is no longer a virgin land, so that it is not liable to tax.

4.5 Once land is married to a superstructure, it can no longer be treated as land simpliciter. It is also not a property capable of being occupied for use and be termed as a building. A building under construction is neither vacant land, nor can it be treated as a building prior to completion as is generally understood for municipal tax. The Supreme Court in Municipal Corporation of Greater Bombay v. Polychem Limited, AIR 1974 SC 1779 with regard to municipal tax had held that unfinished building would not justify any valuation, since it cannot be treated as a building. The Madras High Court in CWT v. S. Venugopala Konar, 109 ITR 52 has held that only the amount spent on construction would be the value of the property under construction. The Karnataka High Court referred to the decision in State of Bombay v. Sardar Venkat Rao Gujar, AIR 1966 SC 991, where it was held that a building in order for it to be con-sidered as a building should have walls and a room. The Supreme Court in that case had followed the decision in Moir v. Williams, (1892) 1 QB 264.

4.6 The Gujarat High Court, in CWT v. Cadmach Machinery Co. Pvt. Ltd., 295 ITR 307 (Guj.) found that the land on which construction had started would not be treated as building, so that the land value could be included under the law u/s.40(3)(vi) of the Finance Act, 1993 differing from the decision of the Delhi High Court in CWT v. Prem Nath Mo-tors P. Ltd., 238 ITR 414. Recently, in the case of CIT v. Smt. Neena Jain, WTA Nos. 17 to 20, dated 19-2-2010, the Punjab & Haryana High Court has upheld the view that a house under construction is not liable to WT and is not an urban land.

4.7 The Cochin Bench of the Tribunal in the cases of Mathew L. Chakola v. CWT, 9 SOT 617 (Cochin) and Meera Jacob v. WTO, 14 SOT 486 (Cochin), held that once construction activity started on an urban land, the land lost its character of an urban land and was outside purview of definition of the ‘urban land’. Similarly, in Federal Bank Ltd. v. JCIT, 295 ITR (AT) 212 (Cochin), it was held by the Tribunal that once the building was under construction, the land was no longer a vacant land so as to be made liable for wealth tax u/s.2(ea) of the Wealth-tax Act.

4.8 In the said case of Meera Jacob v. WTO, 14 SOT 486 (Cochin), the Tribunal has also upheld the alternative contention of the appellant that once a land was put to construction, it ceased to be an asset liable to wealth tax, as the activity of construction ensured that the land in ques-tion was a ‘productive asset’ and no wealth tax could be levied on an asset which was productive; wealth tax was chargeable only on such assets which were not productive. For supporting this proposition, the Cochin Bench followed its own decision in the case of Federal Bank Ltd. 295 ITR (AT) 212 (Cochin). The Cochin Bench in the said decision also held that once a land was subjected to construction, it ceased to be an open land; it is only an open land that could be treated as a land; a land was a surface of the earth and once the surface was covered, it ceased to be the land, leave alone the urban land.

4.9 It is exempt primarily for the reason that land on which construction is in progress is not an asset u/s.2(ea) as it has not been so listed. A land acquired for industrial use will be exempt for two years after its acquisition provided the construction starts during the third year. Once the construction has begun, as stated, the land ceases to be chargeable to wealth tax, subject to the condition that such construction eventually leads to completion of building. It needs to be appreciated that the exemption given for a land on which construction is in progress is in relaxation of levy of wealth tax on urban land.

4.10 In the case of Vysya Bank Ltd. v. DCWT 299ITR335 (Karnataka) the Bank had entered into an agreement for purchase of property on June 17, 1978 and was put in possession of the property. The Assessing Officer ruled that the assessee had become the owner of the property and was liable to wealth tax. On an appeal by the assessee to the Court, the Karnataka High Court examined the meaning of the terms ‘assets’ and ‘urban land’ and also the judgment of the Apex Court in CWT v. Bishwanath Chatterjee, (1976), 103 ITR 536 and ultimately ruled that the Assessing Authority was not justified in including the vacant land in the net wealth of the assessee for the purpose of computation of wealth as on the valuation date for the purpose of the Wealth-tax Act.

4.11 It is relevant to note that there are no rules for valuation of a property under construction. Neither there is a provision which state that such a property should be valued merely as land.

4.12 As noted by the Kerala High Court, the better view is that the decisions of the Karnataka High Court and the Gujarat High Court need review.

Slump sale and S. 50B

Controversies

1. Issue for consideration :


1.1 S. 50B provides for taxation of capital gains arising in
a slump sale. ‘Slump sale’ has been defined by S. 2(42C) to mean transfer of one
or more undertakings as a result of sale for a lump sum consideration without
values being assigned to individual assets and liabilities in such sales other
than for the purposes of payment of stamp duty. An ‘undertaking’ has been
defined vide S. 2(19AA) to include any part or a unit or a division thereof or a
business activity as a whole.

1.2 These provisions are introduced by the Finance Act, 1999
w.e.f. 1-4-2000 to put to rest the serious doubts prevailing for long about the
taxability or otherwise of gains in slump sale of business on a going concern
basis.

1.3 The newly introduced provisions besides providing for the
taxability of such gains provide for the detailed mechanism for determination of
the period of holding and the computation of capital gains.

1.4 The doubts about the taxability of gains in slump sale
for the period up to A.Y. 1999-2000 continue to persist with the views with
equal force persisting. While some Benches of the Tribunal have favoured the
taxability, others have exempted the gains form the ambit of taxation.

1.5 As if the above-referred controversy was in-sufficient, a
new controversy has arisen about the applicability of the newly inserted
provisions to the pending assessments. A recent decision of one of the Benches
of the Tribunal has taken a view conflicting with the prevailing view that the
said provisions were prospective in nature.

2. Asea Brown Boveri Ltd.’s case :


2.1 In the case of ACIT v. Asea Brown Boveri Ltd., 110
TTJ 502 (Mum.), the Tribunal was concerned with the issue as to whether the
transaction in question was a slump sale or an itemised sale. It was also
concerned about the taxability or otherwise of the gains arising on transfer of
a business in a slump sale. Though the Tribunal in this case had held that the
impugned transaction did not amount to slump sale, it was felt necessary to deal
with the issue of taxability of profits or gains if the impugned transaction was
held to be a slump sale without prejudice to the aforesaid finding.

2.2 The Tribunal for the reasons recorded in their order held
that profit arising on slump sale was taxable, as it was possible to compute the
capital gains including the cost of acquisition in some manner and the limited
question before them was about the mode of computation to be adopted for working
out the profits/gains from the slump sale. The Tribunal noted that there were
two provisions which were relevant in this behalf : (i) the provisions of S.
50B, which were specific to the computation of capital in case of slump sales,
and (ii) the general provisions of S. 45, which were applicable in the absence
of special procedure prescribed in S. 50B.

2.3 On applicability of S. 50B, the Revenue submitted that
once the transaction was held to be a slump sale, the taxability of the profits
and gains arising on such sale had to be brought to tax u/s.50B of the IT Act,
as the said S. 50B, being a procedural and computational provision, was
retroactive in its operation and therefore should govern all the pending
proceedings. Against the contentions of the Revenue, the assessee, on the other
hand, contended that S. 50B did not have retrospective operation and hence the
taxability of profits/gains from a slump sale could not be considered u/s.50B
which Section was operative from A.Y. 2000-01, only.

2.4 The Tribunal after taking note of the several
provisions including that of S. 2(42C) and S. 2(19AA) confirmed that S. 50B had
been inserted in the IT Act by the Finance Act, 1999 w.e.f. 1st April 2000 and
was applicable w.e.f. A.Y. 2000-01, while the appeal before them related to A.Y.
1997-98 and accordingly the newly inserted provisions were not available on the
statute book for the assessment year under appeal. This fact however did not
deter the Tribunal to apply the said provisions of S. 50B, as in their opinion
the concept of slump sale which hitherto judicially recognised was now been
codified and inserted in the form of clause (42C) in S. 2 of the IT Act; that
what was earlier the judge-made law was now a codified law; the Bombay High
Court in the case of Premier Automobiles Ltd. v. ITO, 264 ITR 193 held
that the concept of slump sale initially evolved under judge-made law was
subsequently recognised by the Legislature by inserting S. 2(42C); that
insertion of the new provisions was nothing but codification of what was
hitherto judicially recognised and S. 2(42C) was nothing but declaration of the
existing law of slump sale.

2.5 The Tribunal further noted that the Court in the said
case was concerned with the A.Y. 1995-96 when S. 50B was not in existence and
still the Court accepted that profits and gains arising on slump sale were
taxable, which in the opinion of the Tribunal showed that it had always been the
law that profits and gains from slump sale were taxable; the natural corollary
to the said decision was that the provisions of S. 50B(1) declaring that any
profit or gain arising from the slump sale would be chargeable to tax as capital
gains, was merely declaratory of the law as it then existed.

2.6 The Tribunal also proceeded to answer the obvious question as to what was the necessity of en-acting S. 50B when it was merely declaratory of the existing law. The Tribunal observed that the answer to that question lay in the provisions of Ss.(2) and Ss.(3) of S. 50B, which provided for the mechanism for the computation of cost of acquisition and the cost of improvement. It noted that the absence of any statutory mode of computation of cost of acquisition/improvement, difficulties were being experienced in the computation of capital gains arising from the slump sale, which were resolved by introduction of S. 50B; the heading of S. 50B which read: “Special provision for computation of capital gains in case of slump sale” clarified that S. 50B dealt with computation of capital gains in cases of slump sale; while Ss.(l) of S. 50B declared the existing law and thus put the same beyond the pale of any doubt, Ss.(2) and Ss.(3) thereof merely laid down the machinery for computation of capital gains from slump sale.

2.7 The Tribunal  proceeded to examine whether the computational provisions in S. 50B(2) and (3), enacted to provide simplicity, uniformity and certainty, the three pillars of taxation for the computation of capital gains, were retroactive or not. In order to answer this question, the Tribunal referred to the decision of the Supreme Court in CWT v. Sharvan Kumar Swarup & Sons, 210 ITR 886 (SC), wherein it had been held that machinery provisions, which provide for the machinery for the quantification of the charge, were procedural provisions and therefore would have retroactive operation and apply to all pending proceedings. Ss.(2) and Ss.(3) of S. 50B are thus procedural provisions inasmuch as they have been enacted to quantify and thereby simplify the procedure for computation of cost of acquisition/improvement in cases of slump sale. Based on the aforesaid findings, the Tribunal held that the provisions of S. 50B(2) and (3) were machinery provisions and hence would have retroactive operation and apply to all pending matters.

2.8 In deciding the issue the Tribunal also rejected the plea of the assessee that S. 50B could not have retroactive operation as it would mean, by the same logic, that the amendments made in S. 55(2)(a) deeming the cost of acquisition of certain assets to be nil would equally have retroactive operation. The assessee for this contention had relied on CIT v. D.P. Sandu Brothers Chembur (P) Ltd., 273 ITR 1, wherein it was held that the amendments to S. 55(2)(a) -(., deeming the cost of acquisition of a tenancy right to be nil had only prospective effect and not retrospective effect. The aforesaid decision was found to be rendered in the context of the provisions of S. 55(2)(a), which deemed the cost of acquisition of tenancy right to be nil and not in the context of S. 50B(2) and (3) which merely simplified and standardised the procedure for computation of cost of acquisition/improvement in cases of slump sale.

3. Sankheya Chemicals’ case:

3.1 In Sankheya Chemicals Ltd. v. ACIT, 8 SOT 50 (Mum.), the Chemical Division of the assessee-company was sold as a going concern on 1st April, 1990 for a lump sum price of Rs.20 lakhs. The said business consisted of the leasehold rights of the land, factory building, plant and machinery and electrical installation which was transferred to the subsidiary company, along with other assets and liabilities including transfer of raw material and other licences, etc.

3.2 The same Mumbai Tribunal was inter alia asked to consider whether provisions of S. 50B were retroactive in its operation so as to bring within its net the gains of transfer of a business for a slump consideration prior to introduction of S. 50B.

3.3 Taking into consideration the facts of the case in totality, the Tribunal held that no tax was exigible to the gains arising on the transfer of the business undertaking as a going concern by the assessee-company and the gains on such transfer were not includible in the hands of the assessee as income from short-term capital gains by relying on Coromandel Fertilisers Ltd. v. DCIT, 90 ITD 344 (Hyd.). The Tribunal also noted that S. SOBof the IT Act was introduced w.e.f. 1st April 2000 and in the facts of the present case, the business undertaking was sold on 1st April 1990, i.e., prior to the introduction of the provisions of S. SOBof the IT Act.

3.4 The Mumbai Tribunal in this case noted with approval the decision of the Hyderabad Bench in the case of Coromandel Fertilizers Ltd. (supra) which held as under:  “……S. 50 and S. SOB are mutually exclusive.  In other  words,  S. 50B is attracted when  there  is a slump  sale and  S. 50 is attracted when  there is an itemised  sale. S. SOBwas not applicable  for the assessment  year  in question,  as it had no retrospective  operation.  So, the position that emerged  was that what  was transferred  by the assessee was the cement  unit as a going  concern  for a lump sum price, and so, the sale in question  was a slump  sale, and so, S. 50 was not attracted,  (para 34)…..  “

Observations:

4.1 With utmost respect for the Bench of the Tribunal delivering the decision in the case of Asea Brown Boveri’s case, it is to be noted that the Tribunal erred in not appreciating the correct ratio of the Bombay High Court’s decision in the case of Premier Automobiles Ltd. The Court in that case while deciding the appeal in favour of the assessee had nowhere directly or indirectly stated that the provisions of S. SOB were retrospective in its operation. The Coud was only asked to decide whether the transfer in the said case was a slump sale or an itemised sale. This is clear from p. 235 of the said report as under : “In this appeal, we were only required to consider whether the transaction was a slump sale and having come to the conclusion that there was a sale of business as a whole, we have to remand the matter back to the AO to compute the quantum of capital gains. For that purpose, the AO will have to decide the cost of the undertaking for the purposes of the computing capital gains that may arise on transfer. That, the AO will also be required to decide its value u/ s.55 of the IT Act. Further, the AO will be required to decide on what basis indexation should be allowed in computing the capital gains and the quantum thereof. Lastly, the AO,will be required to decide the quantum of depreciation on the block of assets. It may be mentioned that these parameters which we have mentioned are not exhaustive. They are some of the parameters under the Act.” In fact, the Court only directed the authorities to compute gains if that was possible and nothing beyond that. The Court in that case was not concerned with the issue as to whether there at all arose any taxable capital gains on slump sale.

4.2 The Tribunal itself noted with approval that in Premier Automobiles case (supra) the Court had left the issue of working out the cost of acquisition to the AO with the observations, which even the Tribunal found to be quite significant. It further ob-served that “the Hon’ble jurisdictional High Court in the aforesaid case has not excluded the applicability of the parameters prescribed in S. 50B(2) and for computing the cost of acquisition/improvements in cases of slump sale”. This observation makes it clear that the Bombay High Court nowhere confirmed the applicability of the said provisions.

4.3 Thus, contrary to what has been stated by the Tribunal, we do not find that the said decision of the Tribunal was in conformity with the decision of the Bombay High Court in Premier Automobiles case in-asmuch as the issue adjudicated by the Tribunal was never before the High Court in the said case.

4.4 The Supreme Court in Sandu Bros. (supra) was asked to examine whether the provisions of S. 55 providing for adoption of Nil cost in case of tenancy was retrospective and was applicable to assessment years prior to AY. 1995-96. The Supreme Court after analysing the facts and the law held that the said provisions had only prospective application. The issue before the Tribunal in Asea Borwn Boveri’s case was largely similar and the assessee was right in relying on the said decision to support its case that provisions of S. SOBwere not to apply retroactively.

4.5 The Tribunal itself noted that the provisions of S. SO Band Ss.(l) in particular had the effect of removing existing anomaly about the taxation of gains on slump sale. This finding of the Tribunal confirmed that the new provision created a specific charge on such gains for the first time by providing the elaborate mechanism for making the said charge effective. The definitions of the terms ‘slump sale’, ‘undertaking’ and ‘net worth’ give a fresh meaning to the understanding of the said terms and therefore make it all the more difficult to support the Tribunal’s view that the newly inserted provisions are retroactive. Even the Legislature has nowhere expressed that the provisions were clarificatory, leave alone retroactive. Neither the provisions, nor the notes on clauses and the memorandum explaining the provisions as also the Circular following the insertion make such a claim.

4.6 The issue was examined by the Hyderabad Bench in the case of Coromandel Fertilizers Ltd. (supra), which clearly held that the provisions of S. 50Bwere not retrospective or retroactive. This decision was followed by the Mumbai Bench in the Sankheya Chemicals’ case (supra), which sadly was not taken note of.

4.7 The better view is that S. SOB should be applied prospectively and not retrospectively. The issue however calls for adjudication by the Special Bench of the Tribunal in view of the cleavage of the opinions amongst the Benches.

Allowability of Broken Period Interest

Controversies

1.
Issue for consideration :


1.1 Interest on government
securities is normally payable half-yearly. When government securities are
traded, the purchaser has to pay the seller not only the purchase price of the
securities but also the interest accrued on the government securities from the
last due date of the interest till the date of purchase of the securities. This
interest from the last due date till the date of purchase/sale is referred to as
broken period interest. While the purchaser of the government securities would
pay the broken period interest, the seller would receive the broken period
interest. For a trader in government securities, including a bank, the net
position of broken period interest for the year would either be an income or an
expenditure, depending upon the quantum of government securities bought and sold
and the dates on which such transactions were effected.

1.2 In a situation where the
net broken period interest for the year is an expenditure, the issue has arisen
before the courts as to whether such broken period interest is deductible as
business expenditure. While the Bombay High Court has held that such amount of
broken period interest is an allowable deduction, the Rajasthan High Court has
taken a contrary view and held that such broken period interest cannot be
allowed as a deduction.

2.
American Express Bank’s case :


2.1 The issue first came up
before the Bombay High Court in the case of American Express International
Banking Corporation v. CIT, 258 ITR 601.

2.2 In this case, the
assessee, which was a bank, was required to maintain statutory liquidity ratio
in relation to its business in the form of government securities. It also traded
in government securities. During the year, the assessee paid Rs.7,13,627 to
sellers towards broken period interest accrued on securities till the date of
purchase by the assessee, and received Rs.4,07,288 from buyers towards broken
period interest on securities sold by it. The assessee claimed the net amount of
Rs.3,06,399 as business expenditure u/s.37.

2.3 The Assessing Officer
taxed the amount of Rs.4,07,288 received by the assessee towards broken period
interest, but denied deduction of Rs.7,13,627 broken period interest paid by the
assessee. The denial was on the ground that the expenditure was for purchase of
income-bearing assets, and was therefore a capital expenditure, which could not
be set off as expenditure against the income from such assets. The Commissioner
(Appeals) held that the amount was allowable as a deduction u/s.28. The Tribunal
upheld the order of the Commissioner (Appeals), holding that the broken period
interest of Rs.7,13,627 was allowable as a deduction.

2.4 On behalf of the
Revenue, it was argued that the government securities purchased were income
bearing assets, and that the amount spent on such purchase was capital outlay.
It was therefore argued that capital outlay on purchase of the assets could not
be set off as expenditure against income accruing from the assets purchased.
Reliance was placed on the decision of the Supreme Court in the case of
Vijaya Bank v. Additional CIT, 187 ITR 541. It was also argued that a
composite price had been paid for the purchase, consisting of interest accrued
as well as the price, and that there was no provision under the Income-tax Act
which authorised bifurcation of such a price. It was also argued that the
interest income was chargeable to tax under the head ‘Interest on Securities’,
and that therefore S. 28 could not be invoked for claiming the net interest as a
deduction.

2.5 On behalf of the
assessee, it was argued that the assessee was computing its profit from trading
in securities, which had to be computed u/s.28. To compute the correct profits,
the interest income for the period that the securities were held by the assessee
had to be recorded as its income, and it was on this basis that the net broken
period interest was claimed as a deduction. It was further argued that the
interest income in respect of such trading activity had not been taxed under the
head ‘Interest on Securities’ but under the head ‘Profits and Gains of Business
or Profession’. It was argued that the method of accounting followed by the
assessee was consistently followed by it, as well as by all other banks. It was
further argued that when the income of such broken period interest was taxed,
the payment of such broken period interest could not be disallowed.

2.6 The Bombay High Court
observed that Vijaya Bank’s case (supra) was a case where the interest on
government securities was taxable under the head ‘Interest on Securities’,
whereas the case before it was a case where the interest was taxed under the
head ‘Profits and Gains of Business or Profession’. The Bombay High Court noted
that there was no loss of revenue under the method of accounting followed by the
bank. The Bombay High Court therefore held that the broken period interest paid
by the bank was an allowable deduction in computing its business profits.

2.7 In CIT v. Citibank
NA, 264 ITR 18, the Bombay High Court has followed the view taken by it
earlier in American Express’ case.

3.
Bank of Rajasthan’s case :


3.1 The issue again recently
came up before the Rajasthan High Court in the case of CIT v. Bank of
Rajasthan Ltd., 316 ITR 391.

3.2 In this case, pertaining
to a year subsequent to deletion of the head of income ‘Interest on Securities’,
an order had been passed u/s.263 making an addition to the income returned by
the assessee-bank, representing the broken period interest paid by the bank.
This order was on the basis that such interest was not allowable as a deduction
in view of the Supreme Court decision in Vijaya Bank’s case (supra). The
Tribunal allowed the assessee’s appeal, holding that Vijaya Bank’s case did not
apply after the deletion of the head of income ‘Interest on Securities’. The
Tribunal followed the decision of the Bombay High Court in American Express
International Banking Corpo-ration’s case (supra), and quashed the order
u/s. 263.

3.3 The Rajasthan High Court considered the decision of the Supreme Court in Vijaya Bank’s case (supra), and observed that even if that decision related to deduction of interest under the head ‘Interest on Securities’, it had relied upon the English decision of the Court of Appeals in the case of CIR v. Pilcher, 31 TC 314, for the well-settled principle that outlay on the purchase of an income-bearing asset is in the nature of capital outlay and no part of the capital for laid out can be set off as expenditure against income accruing from the asset in question. It was on that reasoning that the deduction had not been allowed in that case. According to the Rajasthan High Court, the ratio of Vijaya Bank’s decision still held good even after the deletion of the head of income ‘Interest on Securities’.

3.4 The Rajasthan High Court expressed its dissent with the decision of the Bombay High Court in American Express International Banking Corporation’s case on the ground that if carried to the logical conclusion, it permitted a post-mortem of the purchase component of the asset and permitted deduction of interest element paid as business expenditure. According to the Rajasthan High Court, the Supreme Court judgment proceeded on an established legal principle deduced from previous English judgments, and could not therefore be brushed aside.

3.5 The Rajasthan High Court therefore held that the ratio of Vijaya Bank’s decision (supra) applied to the case before it, and held that the broken period interest was not deductible in computing the income of the bank.

    Observations:
4.1 The whole controversy seems to revolve around the validity and continued applicability of the Supreme Court decision in Vijaya Bank’s case (supra). It would therefore be worthwhile to consider the facts and the ratio of that decision, and the circumstances in which it was rendered.

4.2 Unfortunately, the decision of the Supreme Court is a brief one-page judgment. The decision of the Karnataka High Court from which this matter came up to the Supreme Court is however reported in Tax LR (1976) 524, from which the facts can be deduced. Also, the Bombay High Court has drawn out certain facts from the deci-sion of the Karnataka High Court as well as the Supreme Court. From the decision of the Supreme Court, it is clear that though the issue before it was with reference to taxation of interest under the head of income ‘Interest on Securities’ as well as deduction u/s.28 in computation of income under the head of income ‘Profits and Gains of Business or Profession’, the Supreme Court seems to have answered the issue only from the perspective of ‘Interest on Securities’. One significant factor that needs to be understood is that under the head ‘Profits and Gains of Business or Profession’, all expenditure incurred for the purpose of the business or profession is allowable, unless specifically prohibited, as also all losses incurred during the course of carrying on of the business or profession, unlike in the case of ‘Interest on Securities’ where only expenditure incurred for purpose of realising the interest on securities is deductible as expenditure. It was therefore perhaps on account of the restricted allowability that the Supreme Court took the view that it did in Vijaya Bank’s case.

4.3 The other aspect of Vijaya Bank’s decision, as analysed by the Bombay High Court, is that Vijaya Bank had taken over the assets and liabilities of Jayalakshmi Bank Ltd., which included the government securities and interest accrued thereon. It was such interest which was claimed as a deduction by Vijaya Bank, which had accrued to Jayalakshmi Bank prior to takeover of assets and liabilities by Vijaya Bank. On the facts, it appears therefore that such government securities were investments of Vijaya Bank, and not its stock in trade. It may however be noted that the second question raised before the Supreme Court pertained to broken period interest in case of securities purchased from the open market. The Bombay High Court does not seem to have looked at this aspect of the Supreme Court’s decision.

4.4 Where the government securities form part of a trading business, it certainly cannot be said that the amount paid for the acquisition of stock in trade is a capital outlay, as such purchases and stock form part of the circulating capital of the business. The entire purchase is on revenue account, and is an allowable expenditure of the business. Therefore, even if a view is taken that the broken period interest forms part of the purchase cost of the government securities and cannot be broken up, it would still be allowable as a revenue expenditure.

4.5 Further, as anybody familiar with the government securities market in India would be aware, the purchase price of government securities quoted on the markets does not include the interest component for the broken period. Such interest component for the broken period has to be invariably computed separately and is payable over and above and in addition to the negotiated purchase price. Given this commercial reality, to say that the broken period interest is a part of the purchase price would be incorrect. In reality, what is being paid for over and above the purchase price is the right to receive the interest accrued up to the date of the transaction. Therefore, irrespective of whether the securities are held as stock in trade or as investments, such interest paid for would have to be reduced from the total interest received subsequently on the due date, since the interest received includes the interest for which payment is made.

4.6 It is also important to note that business profits have to be computed in accordance with the method of accounting followed by the assessee. In preparing its accounts, the assessee would have to follow accounting standards applicable to it. The accounting standards applicable to in-vestments (e.g., AS-13) require that when unpaid interest has accrued before the acquisition of an interest -bearing investment and is therefore included in the price paid for the investment, the subsequent receipt of interest is allocated between pre-acquisition and post-acquisition periods; the pre-acquisition portion is deducted from cost. This supports the view that the subsequent interest receipt on the due date has to be partly adjusted against the broken period interest paid, and it is only the net amount which is really the income.

4.7 Even under the Income-tax Act, all business losses and revenue expenditure are allowable as deduction in computing business income. The payment of broken period interest on purchase of government securities held as trading assets is certainly a business expenditure, if not a busi-ness loss, and is therefore clearly an allowable deduction.

4.8 Lastly, the CBDT had clarified vide its Circular No. 599, dated 24 April 1991 [189 ITR (St) 126], that securities held by banks must be regarded as stock in trade, and that interest payments and receipts for broken period on purchase of securities must be regarded as revenue payments/receipts, and only the net interest on securities should be brought to tax as business income. Though the Circular was issued subsequent to the decision of the Supreme Court in Vijaya Bank’s case, it had not considered the ratio of that decision which was rendered on 19 September 1990. This Circular was therefore withdrawn on 31 July 1991 vide CBDT Circular No. 610 [191 ITR (St) 2]. By a subsequent Circular No. 665, dated 5 October 1993 [204 ITR (St.) 39], the CBDT clarified that the Supreme Court, in Vijaya Bank’s case, was not directly concerned with the issue whether securities form part of stock in trade or capital assets. The CBDT has clarified that whether a particular item of investment in securities constitute stock in trade or capital asset is a question of fact, and that banks are generally governed by the instructions of the Reserve Bank of India from time to time with regard to the classification of assets and also the accounting standards for investments. Assessing Officers have therefore been directed to determine the facts and circumstances of each case whether a particular security constitutes stock in trade or investment after taking into account the guidelines issued by the Reserve Bank of India. In a sense, the CBDT has also therefore indirectly accepted the fact that where the government securities are held as trading assets (stock in trade), the allowability of broken period interest as a deduction should not really be an issue.

4.9 The view taken by the Rajasthan High Court therefore does not seem to be justified, given the fact that government securities are generally held as stock in trade by banks. Therefore, the view taken by the Bombay High Court is the better view of the matter, and broken period interest should be allowed as a deduction where the securities are held as stock in trade. Even if the securities are held as investments, logically the interest income actually received includes the broken period interest paid for, and to that extent the amount received on the due date does not constitute income of the recipient.

Whether interest u/s.234A can be levied in case of delayed Return of Income even if self-assessment tax is paid before the due date ?

Closements

Introduction :

1.1 S. 234A provides for interest in case of default in furnishing return of income as provided in the Income-tax Act (the Act). S. 234A(1) effectively provides that if the return of income u/s.139(1)/(4) or in response to notice u/s.142(1) is furnished after the due date (or is not furnished), the assessee is liable to pay simple interest @ 1% for every month or part of a month for the period of delay. (In case of failure in furnishing the return of income also provision is made with which we are not concerned in this write-up.) The rate of interest was originally 2% per month, which has subsequently been reduced from time to time. Such interest is payable on the amount of tax on the total income as reduced by the advance tax, if any, paid and TDS (or TCS). Considering the issue under consideration in this write-up, it is assumed that the returned income is accepted and the amendment made by the Finance Act, 2007 with regard to granting credit for relief u/s.90, etc. is not relevant. In the context of this write-up, effectively, interest u/s.234A(1) is required to be charged on the tax on such total income as reduced by advance tax, if any, paid and TDS or TCS.

1.2 In many cases, furnishing of return of income gets delayed on the part of assessee for various reasons. However, in such cases, the assessee, in many cases, decides to pay the self-assessment tax before the due date of return of income. In such cases, the issue is under debate as to whether interest u/s.234A(1) can be charged even if the assessee has paid the full amount of tax before the due date of return by way of self-assessment tax. In short, the issue is: whether for the purpose of determining the amount of interest u/s.234A(1), tax paid by way of self-assessment before the due date of return of income can be given credit or not as there is no specific provision to grant such credit for such purpose. The Courts are divided on the issue.

1.3 Recently, the Apex Court had an occasion to consider the issue referred to in Para 1.2 above in the case of Dr. Prannoy Roy and Another and the issue got resolved. Considering the importance of the issue, it is thought fit to consider this judgment in this column.

Dr. Prannoy Roy and Another v. CIT and Another,

254 ITR 755 (Delhi) :

2.1 The above case was concerned with A.Y. 1995

96. The brief facts were: The assessee had made substantial capital gain and the return of income

was due to be filed on 31-10-1995, but such return was actually filed on 29-9-1996 (i.e., delay of about eleven months). However, the assessee has paid taxes due on 25-9-1995 (i.e., before the due date of furnishing the return of income). The return of income was accepted on 29-1-1998, but interest u/s. 234A was charged on the ground that the tax paid on 25-9-1995 cannot be reduced from the tax due on assessment for the purpose of determining the amount of tax on which interest is chargeable u/s. 234A(1). The assessee had filed revision petition u/s.264 before the Administrative Commissioner, requesting him to delete the interest u/s.234A charged by the Assessing Officer (AO). However, the Commissioner passed an order dated 9-3-1999 confirming the action of the AO on the ground that there is no provision in 234A to grant credit for self-assessment tax paid on 25-9-1995 and the interest u/s.234A compensates for the delay/default in filing return of income and not the tax. Against this order, the assessee filed the writ petition before the Delhi High Court. Accordingly, the issue referred in Para 1.2 above came up for consideration before the Delhi High Court.

2.2 For the purpose of determining the issue, the High Court referred to the provisions of S. 234A and also the historical background thereof as given in CBDT Circular No. 549, dated 31-10-1989 [182 ITR (St.) 37]. After referring to this, the Court noted that it is not in dispute that S. 234A of the Act is an amalgam of earlier S. 139(8), S. 271(1)(a) and S. 140A(3) of the Act. The said provisions mandate payability of the tax as the basis for calculation of the compensation or penalty due to the Department in case of violation.

2.3 The Court, then, considered various judgments of Courts [including the judgment of the Apex Court in the case of Central Provinces Manganese Ore Co. Ltd. (160 ITR 961), in which the Courts have taken a view that interest is compensatory in nature. The Court also noted the judgment of the Karnataka High Court in the case of Dr. S. Reddappa (234 ITR 62), wherein after considering various case laws, the Court has taken a view that it is fairly obvious that provisions of S. 234A, S. 234B and S. 234C, which replace the earlier provisions postulating payment of interest and are in pari materia with the said provisions cannot be anything except compensatory in character. The only material difference in the two sets of provisions is that while the old provisions conferred power to waive or reduce the levy of interest, the impugned provisions make the same automatic.

2.4 The Court then proceeded to consider the principles of interpretation of taxing statute and stated that it is true that the Court must interpret the provisions of the statute upon ascertaining the object of the Legislature through the medium or authoritative forms in which it is expressed. It is well-settled that the Court should, in such cases, assign its ordinary meaning. Referring to the judgment of the Apex Court in the case of Anjum M. H. Ghaswalla (251 ITR 1), the Court stated that it is well settled that for the purpose of imposition of penal interest express provision in that regard in a statute must exist. The Court, then, further observed as under (Page 763) :

“In relation to beneficent construction, the basic rules of interpretation are not to be applied where

(i) the result would be re-legislation of a provision by addition, substitution or alteration of words and violence would be done to the spirit of the provision; (ii) where the words of a provision are capable of being given only one meaning; and (iii) where there is no ambiguity in provision — where there is a doubt, however, the Court may apply the rule of beneficent construction in order to advance the object of the Act [see Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24; AIR 2001 SC 2472].

We are not unmindful that the golden rule of interpretation of a statute is that it should be read liberally.”
 
2.5 After considering the above, the Court also stated that it is equally well settled that where the statute is capable of two interpretations, the principles of just construction should be taken recourse to.

2.6 Referring to the contentions raised on behalf of the Revenue, the Court observed as under Wage 764) :

“The contention of the Revenue is that by reason of S. 234A, interest is charged for default in filing return as regards whereto it does not cease or stop with payment of taxes, whereas on the other hand, the contention of the assessee is that in a situation of this nature, where the assessee could not file a return for reasons beyond his control, he is not liable to pay interest, as thereby the Revenue does not suffer any loss inasmuch as tax, although strictly not in terms of definition of advance tax as contained in S. 208 of the Act, has been paid, but tax therefore has already been paid.

For the purpose of determining the issue, it is necessary to consider as to whether penalty and interest both were charged for failure to perform a statutory obligation. We think not. Failure to comply with the statutory provisions may lead to penal consequences. Interest, on the other hand, is payable either by way of compensation or damages. Even penal interest can be levied only in the case of a chronic defaulter.”

2.7 Referring to the Full Bench judgment of Andhra Pradesh High Court in the case of SMS Schloemann Siemeg, A.G. (254 ITR 97), the Court stated that in this judgment, the High Court has taken a view that interest is payable if the sum is due. Where the assessee is in default in making payment of the assessed amount demanded from him, he is liable to pay interest by way of compensation, but the same would not mean that although there does not exist any demand, interest would become payable. After referring to this judgment, the Court took the view that in a situation of this nature, the commonsense meaning of ‘interest’ must be applied even in S. 234A of the Act. The Court also referred to the dictionary meaning of the word ‘interest’ to show that the same is compensatory in nature. To support the view that interest cannot be charged when no tax is outstanding, the Court also relied on the judgments of the Apex Court in the cases of Shashikant Laxman Kale (185 ITR 105) and Ganesh Das Sreeram (169 ITR 221).

2.8 Dealing with the principles of imposition of penalty, the Court observed as under (Pages 766-767) :

“Penalty cannot be imposed in the absence of a clear provision. Imposition of penalty would ordinarily attract compliance with the principles of natural justice. It in certain situations would attract the principles of existence of mens rea. While a penalty is to be levied, discretionary power is ordinarily conferred on the authority. Unless such discretion is granted, the provisions may be held to be unconstitutional.”

2.9 Having referred to the above principles, the object of levying interest and the nature of interest, the Court opined that in situation of this nature, the doctrine of purposive construction must be taken recourse to. For this, the Court referred to various judgments dealing with the principle of purposive construction to support the opinion formed by the Court.

2.10 Referring to the contentions raised by the counsel on behalf of the Revenue to the effect that such payment of tax cannot be a ground for not charging interest u/s.234A and that will defeat the object and purpose u/s.234A, the Court stated that the object of S. 234A is to receive interest by way of compensation, if such was not the intention of the Legislature, it could have said so in explicit terms.

2.11 The Court then took notice of insertion of 271F w.e.f. 1-4-1999, providing for penalty for delay/default in furnishing return of income as referred to therein. The Court also noted the object of introducing this provision as explained in the memorandum explaining the insertion of the provision. Having referred to this, the Court stated that the purpose and the object of the Act is to realise the direct tax. It imposes a fiscal burden. When the statute says that an interest, which would be compensatory in nature, would be levied upon the happening of a particular event or inaction, the same by necessary implication would mean that the same can be levied on an ascertained sum. The Court then also considered the meaning of the term ‘advance tax’ in the context of this situation and observed as under (page 769):

“The interpretation clause, as is well known, is not a positive enactment. The interpretation clause also begins with the word ‘unless the context otherwise requires’. Advance tax has been defined to mean the advance tax payable in accordance with the provisions of Chapter XVII-Co Such a definition is not an exhaustive one. If the word ‘advance tax’ is given a literal meaning, the same apart from being used only for the purpose of Chapter XVII-C may be held to be tax paid in advance before its due date, i.e., tax paid before the due date. The matter might have been otherwise, had there been an exhaustive definition of the said provision. The scheme of payment of advance tax is that it will have to be paid having regard to the anticipated income on September 15, December 15 and March 15. A person, who does not pay the entire tax by way of advance tax, may deposit the balance amount of tax along his return.

In the instant case, tax has been paid although no return has been filed. The Revenue, therefore, has not suffered any monetary loss.”

2.12 Finally, the Court took the view that in this case if the doctrine of purposive construction is not applied, the same may betray the purpose and object of the Act. Otherwise, we will have to read the penal provision in 234A, which was not and could not have been the object of the law for the reasons stated hereinbefore. The Court also stated that it is further well known that in the case of a doubt or dispute, taxation statute must be liberally construed. Therefore, we are not in a position to assign stringent meaning to the words, ‘advance tax’ as contended by the learned counsel on behalf of the Revenue.

2.13 Rejecting the contention raised on behalf of the Revenue with regard to the penal nature of the provision, the Court stated as under (Page 770) :

“If a penal provision is to be read in S. 234A, the same may border on unconstitutionality, as there-for the principles of natural justice are not required to be complied with. It is also well settled that when two constructions are possible, the construction which would uphold the constitutionality of a provision, be applied. Had the Leg-islature made the amendment only for the purpose of imposition of a penalty, there was no necessity of enacting S. 271F later on.”

2.14 Finally, the Court concluded that interest would be payable only in a case where tax has not been deposited prior to the due date of filing of the income-tax return and decided the issue in favour of the assessee.

CIT v. Dr. Prannoy Roy and Another, 19 DTR 102 (SC) :

3.1 At the  instance    of the  Revenue, the  above judgment of the Delhi High Court came up for consideration before the Apex Court along with another case, wherein the same was followed.

3.2 After referring to the facts in brief and the views expressed by the High Court, the Court decided the issue in favour of the assessee and held as under (Page 103) :

“Having heard counsel on both sides, we entirely agree with the finding recorded by the High Court as also the interpretation of S. 234A of the Act as it stood at the relevant time.

Since the tax due had already been paid, which was not less than the tax payable on the returned income which was accepted, the question of levy of interest does not arise. Thus, we find no merit in this appeal and the same is dismissed.”

Conclusion:

4.1 In view of the above judgment of the Apex Court, it is clear that interest u/ s.234A is compensatory in nature and the same cannot be charged if taxes are paid before the due date of furnishing return of income even if the furnishing of return gets delayed. It is also important to note that the Apex Court has agreed with the findings as well as interpretation of the High Court with regard to S. 234A.

4.2 Recently the Gujarat High Court in the case of Roshanlal S. Jain (309 ITR 174) has taken a contrary view on the issue referred to in Para 1.2 above and has dissented from the judgment of the Delhi High Court in the case of Dr. Prannoy Roy (supra). This has not been referred to in the above case before the Apex Court. However, in view of the above judgment of the Apex Court, the judgment of the Gujarat High Court will now no longer be regarded as given.

4.3 Incidentally, it may be mentioned that while filing an appeal against the levy of interest, care should be taken to deny the liability to pay such interest, so that the issue of maintainability of appeal against such interest does not create any difficulty.

Tribunal News: PART B

Bomi  S. Billimoria    v. ACIT ITAT ‘F’ Bench, Mumbai Before  D. Manmohan (VP) and J. Sudhakar Reddy (AM)
ITA No. 2120/Mum./1998 A.Y. : 1993-94. Decided on:  30-6-2009

Counsel for assessee/revenue: Prakash Jotwani/ J. V. D. Langstieh

S. 48 – Amount received on transfer of shares under cashless option not liable to tax under the head ‘Income from Capital Gains’ since such option does not have cost of acquisition.

Per D. Manmohan :

Facts:

The assessee was an employee of Johnson & Johnson, Bombay which was a subsidiary of Johnson & Johnson, USA. Under stock option plan, the USA company granted to the assessee, on 7-12-1989, a cashless option to purchase 2500 shares of Johnson & Johnson, USA at a price of USD 57.88 per share which price was the fair market value of the stock on the day of granting the option. The Reserve Bank of India had approved the stock option scheme on the condition that there should not be any payment, either in India or abroad, for acquiring the shares.

During the previous year relevant to A.Y. 1993-94, on 13-8-1992, the assessee exercised his option to realise the value of the options under the scheme and accordingly sold 1000 shares in USA and received a sum of Rs.4,59,405 in Indian currency. After considering the amount retained in USD in EEFC Account and also the bank charges the net gain was computed at Rs.5,44,925. The assessee regarded this amount as a capital  receipt  not chargeable    to tax.

The Assessing Officer (AO) held the profit on sale of option to be chargeable either as salary or short term capital gains or as speculation profit.

The CIT(A) held that the shares obtained under the ESOP were a capital asset and as they were held for less than 3 years, the gain was assessable as short term capital gain. He rejected the argument that as there was no ‘cost of acquisition’, ‘the capital gains were not assessable.

Aggrieved, the assessee preferred an appeal to the Tribunal. The issue before the Tribunal was whether the amount received by the assessee was liable to tax under the head’ capital gains’ and if so whether there was any cost of acquisition so as to bring to tax the net receipts.

Held:

    1) As the CIT(A) had held that the shares acquired under ESOP amounted to acquisition of a capital asset one had to proceed on that premise;

    2) Since on the date of exercising the option there was no cost of acquisition of shares, in accordance with the ratio of the decision of the Apex Court in the case of B. C. Srinivasa Shetty (128 ITR 294) the gains could not be taxed;

    3) Even if it is assumed that the market value of the shares is the benefit given to the assessee, such benefit can be said to accrue to the assessee only on the date of exercise of the option. As the date of exercise of option as well as the date of sale is the same, there was no difference between the ‘deemed cost of acquisition’ and the actual price realised by assessee and thus there is no capital gain chargeable to tax.

The Tribunal allowed the appeal filed by the assessee.

2. Shree Capital Services Ltd. v. ACIT ITAT Special Bench Kolkata Before G. D. Agrawal (VP) and B. R. Mittal (JM) and C. D. Rao (AM) ITA No. 1294 (Kol.) of 2008

AY.  : 2004-05. Decided on: 31-7-2009

Counsel for assessee/revenue: Manish Sheth/ Sushil Kumar s. 43(5) – For a period prior to A. Y. 2006-07 transactions in futures and options are speculative transactions u/s.43(5) – S. 43 (5) (d) is not retrospective.

Per G. D. Agrawal :

Facts:

During the previous year relevant to A.Y. 2004-05 the assessee company, which was engaged in the business of financing and investment in shares and securities, suffered a loss of Rs.9,25,065 on account of futures and options. The Assessing Officer (Aa) treated the same as speculation loss as per S. 43(5) of the Act.

The CIT(A) confirmed the order of the Aa. Aggrieved, the assessee preferred an appeal to the Tribunal. The Special Bench (SB) of the Tribunal adjudicated two questions viz. (i) whether a transaction in derivatives falls within the meaning of ‘speculative transaction’ as provided u/s.43(5); and if the answer to the first question is in the affirmative, whether clause (d) of S. 43(5), introduced by the Finance Act, 2005 w.e.f. 1-4-2006, is clarificatory in nature and therefore retrospective in operation.

Held:

    1. Derivative is a security which derives its value from the underlying assets. When the underlying asset of any derivative is share and stock, for all practical purposes, the treatment given to such derivative should be similar to stock and securities.

    2. S. 43(5) uses the term ‘commodity’ in a very wide sense and covers ‘derivatives’.

    3. The fact that S. 43(5)(d) exempts certain derivatives from the ambit of the definition of ‘speculative transaction’ itself shows that they would otherwise have come within the term. If ‘derivatives’ are held to be not covered by the definition of ‘speculative transaction’ the amendment would be redundant.

    4. Since clause (d) of S. 43(5) does not exempt all transactions in derivatives but only the ‘eligible transactions’ on ‘recognised stock exchanges’ this clause cannot be held to be clarificatory. Further, Rules 6DDA and 6DDB which deal with ‘recognised stock exchanges’ were inserted w.e.f. 1-7-2005. Consequently, clause (d) of S. 43(5) applies to AY. 2006-07 and onwards.

The Tribunal dismissed the appeal filed by the assessee.

3. Western Coalfields Ltd. v. ACIT  ITAT Nagpur Bench
Before N. L. Dash (JM) and V. K. Gupta (AM)
IT A No. 289 and  290/N ag.l2006

AYs.  : 2002-03 and  2003-04. Decided on:  30-6-2009 Counsel for assessee/revenue: Nani Daruwala/ A K. Singh

Explanation to S. 37(1) – Penalty which is not of the nature of illegal! unlawful expenditure is not covered by the Explanation to S. 37(1).

Per V. K. Gupta :

Facts:

The assessee company was a colliery which trans-ported coal to Electricity Boards in railway wagons. Freight paid to the railways depended upon the carrying capacity of the wagons. In case the wagons were overloaded as compared to their carrying capacity, the railways charged ‘overloading charges’ at a rate which was generally six times the normal freight. The assessee’ claimed these overloading charges as a deduction on the ground that they have been incurred for a commercial purpose and were not for infraction of any law. The Assessing Officer (Aa), however, held these to be penal in nature and did not allow the same.

The CIT(A)  confirmed the  action of the AO.

Aggrieved, the assessee preferred-an appeal to the Tribunal.

Held:

The Tribunal observed that had the amounts been paid to a private carrier the same would have been allowable. The fact that the same are paid to Railways which is an institution owned by the Government, working under an Act of Parliament, the nature of overloading charges which are essentially of commercial nature cannot be characterised as of penal nature irrespective of the nomenclature given to such charges by the Railways. It held that:

    i. the substance of the matter has to be looked into and given preference over the form;

    ii. the amount was essentially of a commercial nature and incurred in the normal course of the business and was consequently allowable;

    iii. the object of Explanation 1 also supports the claim of the assessee as these expenses are not of the nature of any illegal/unlawful expenditure;

    iv. the decision of Punjab & Haryana High Court in the case of Hero Cycles Ltd. is squarely applicable.

This ground was decided in favor  of the assessee.

4. ACIT v. RPG Life Sciences Ltd. ITAT ‘C’ Bench, Mumbai Before P. M. Jagtap (AM) and V. D. Rao OM) ITA No. 1579/Mum.l2006

A.Y. : 2002-2003. Decided on:  31-8-2009
Counsel  for revenue/assessee:
Yashwant  V. Chavan/B. V. Jhaveri

S. SOB read with S. 2 (42 C) – Slump sale – Sale of one of the manufacturing divisions of the assessee
– Whether the transaction could be considered as slump sale – On the facts, Held: No.

Per P. M. Jagtap  :

Facts:

The assessee was engaged in the business of manufacturing pharmaceutical and agrochemical prod-ucts. During the year under consideration, its agro-chemical division was sold for an agreed consider-ation of Rs.72.70 crares. During the course of assessment proceedings, the assessee was asked to explain as to why the said sale be not treated as a slump sale and capital gain arising therefrom be not computed u/ s.50B. In reply, the assessee explained that it had sold the assets and liabilities of its agrochemical division by identifying the value of each and every item. In support, the break up of the agreed consideration of Rs.72.7 crore was given. The attention of the AO was drawn to the various schedules of the agreement where the fixed assets were valued item-wise by ascertaining the value of land, building, plant and machinery, furniture and fixtures and capital work-in-progress separately.

However, the assessee’s submissions were not found acceptable by the AO for reasons, amongst others, as under:

Assessee had transferred the entire undertaking as a going concern along with all existing employees.

The intention of the contracting parties was to sell the agrochemical undertaking and not the land, building, plant and machinery and furniture and fixtures and other intangible and current assets, all of which comprised the agro-chemical division separately.

The individual assets of agrochemical division I.were not separately valued but only group of assets were valued.

The valuation report valuing individual assets and/or schedules to the agreement listing out individual assets and value thereof have no relevance unless the consideration is determined on the basis of itemised value.

All the licences, old records of account books, vouchers pertaining to agrochemical business were also transferred by the assesses.

Accordingly, it was held that that the sale of the agrochemical division by the assessee was slump sale and the capital gain arising there from was chargeable to tax in its hand as per the provisions of S. SOB.

On appeal the CIT(A) accepted the stand of the assessee that sale of its agrochemical division was not a slump sale.

Held:

The Tribunal noted that as confirmed by the CIT(A) in his order – all the fixed assets as well as the current assets of agrochemical division were valued. The fixed assets were valued itemised by ascertaining the value of each and every asset separately and after adding non-compete fee of Rs.4 crores to the said value, the value of the fixed assets was worked out at Rs.54.33 crores. In a similar manner, net current assets were valued at Rs.58.38 crores and after deducting the value of net current liabilities therefrom, the total value was arrived at Rs.88.68 crores. As against the said value, the consideration finally agreed was Rs.72.70 crores and the reconciliation to explain the difference between the same was also furnished. The Revenue was not able to controvert or rebut the findings recorded by the CIT(A). Therefore, the Tribunal upheld the order of the CIT(A).

Tribunal News: PART A

1. (2009) 119 ITD 1 (Pune) Bhagwandas Associates v. ITO, Ward 5(4), Pune A.Y.: 1988-89. Dated:  28-9-2007

The mistake which is otherwise rectifiable u/s.154 cannot be adjusted at the time of giving effect to appellate order u/s.250/254 particularly when that mistake is absolutely out of context and purview of appellate order.

Facts:

The assessee claimed deduction u/s.32AB in his return for A.Y. 1988-89 based on audit report. The AO wrongly allowed deduction of higher amount and also made addition on account of sales tax refund. The Tribunal deleted the addition of sales tax refund. While giving effect to Tribunal’s order AO rectified deduction u/s.32AB to the correct figure. The CIT(A) also held that ‘rectification was consequential of giving effect to the Tribunal’s order’ and upheld the addition in favour of AO. On an appeal to Tribunal, it was held that:

    There are 2 types of orders of appellate authority. One is specific relief pertaining to specific ad-dition and the other is de novo assessment i.e. setting aside assessment and making a fresh assessment. In second case, AO has same powers as at the time of making fresh assessment.

    ‘When Tribunal sets aside the assessment and remands the case for making fresh assessment, the power of AO is confined to the subject matter of the appeal before Tribunal. He can not take up the questions which were not subject matter of appeal before the Tribunal even though no specific direction has been given by the Tribunal.’

    The contention of CIT(A) is not correct because thetquaritum of deduction u/s.32AB is not linked with the assessed income. Rather it is based on the quantum of investment. Giving effect to the Tribunal’s order can not be equated with the regular assessment order.

    Even though AO can make rectification of order u/s.154, he has exceeded his limits while giving effect to the order of the Tribunal.

    Hence, it was held that even though a mistake is rectifiable u/ s.154, it can not be adjusted while giving effect to the order of Tribunal particularly when that mistake is absolutely out of context and purview of appellate order.

2. (2009) 119 ITD 13 (Mumbai) Smarttalk (P.) Ltd. v. ITO, Ward 8(3)(2), Mumbai A.Y. : 2001-02. Dated: 31-3-2008

Assessee co., a joint venture, took bank loan guaranteed by co-venturers – Payment by one of the venturers to discharge his obligation credited by company to capital reserve. Repayment taxed u/s. 10(3) – CIT(A) upheld addition u/s.28(iv)/41(1) – Since assessee has not claimed deduction of the amount originally, repayment of loan not taxable u/s.28(iv)/41(1). Also can not be taxed u/s.10(3) as S. 10 deals with income which does not form part of total income – Additions, therefore to be deleted.

Facts:

The assessee company was a joint venture between ‘M’ (holding 49%) and ‘B’ (holding 51% of shareholding). The company took a loan of Rs.7 crores from Bank of America which was guaranteed by eo-venturers in proportion to their shareholding. The agreement also restricted the right of the asses-see to enter into any merger, acquisition or sale without prior permission of bank. In A.y. 2002-03~ ‘ASC’ took over 51% shareholding of ‘B’ and’ AW’ took over 49% shareholding of ‘M’. The company had repaid the loan to the extent of Rs.2 crores. 49% of the balance loan was repaid by ‘M’ (i.e. Rs.2.45 crores) along with outstanding interest which was credited by assessee to capital reserve. The AO taxed the same u/s.l0(3). On appeal to CIT (A), it upheld the addition u/s.28(iv)/41(1). On appeal to Tribu-nal, it applied the ratio laid down by the Bombay High Court in Mahindra & Mahindra Ltd. v. CIT, and followed by the Third Member Bench in ITO v. Ahuja Graphic Machinery Ltd., holding that waiver of loan is neither covered u/s.28(iv) nor u/s.4l(l). As the assessee has not claimed deduction of loan taken, repayment of the same by eo-venturer cannot be taxed as cessation of liability u/s.4l(l). Further, the said sum can also not be taxed u/s.lO(3) as S. 10 deals with only such incomes, which are not to be included in the total incomes of the assessee. Hence, the appeal filed by the assessee is allowed.

3. (2009) 199 ITD 15 (Agra) (Third  Member) ITO,  Range  3(1), Gwalior  v. Laxmi Narain Ramswaroop Shivhare A.Y.: 2001-02. Dated: 26-12-2008

S. 145 – A.Y. 2001-02 was the first year of business of the assessee – Aa rejected books of accounts on the ground that there were no support-ing vouchers for sales and all sales made in cash
– Applied different G.P. ratio on comparative basis – Since due to the nature of business of the assessee it is not possible to maintain proper sales bills, it cannot be said that books of accounts were defective – Therefore, books cannot be rejected and actual G.P. ratio to be considered.

Facts:

The assessee firm was engaged in the business of trading in country liquor and IMFL. The supplies of country liquor to the assessee were made through the Government warehouse on payment of duty and purchase of IMFL was made from other private parties in accordance with the permit given by the Government. The assessee got his accounts audited and furnished audit report in Form 3CD. However, he could not produce supporting vouchers in respect of sale of country liquor as the sales were recorded on the basis of daily sales records given by employees of the shops. AO rejected books of accounts on the ground that the sales were not subject to any independent evidence and applied G.P. ratio of 5% against actual G.P. ratio of 3.11%. On an appeal to CIT(A), he reduced G.P. ratio to 4%. On appeal before Tribunal, the Third Member held that:

    The AO rejected books of accounts for want of sales bills and accepted sales value declared by the assessee. Hence, he has no reason to reject books of accounts.

    The CIT(A) has reduced  G.P. ratio and has given a finding  that there was no significant defect in the books.    

    The nature of business of the assessee is such that it is not possible to maintain proper bills.

    Hence, the books of accounts can not be rejected and actual results declared by the assessee be accepted.

4. (2009) 119 ITD 49 (Ahd.) ITO, Ward-4(2),  Ahmedabad v. Krishnonics Ltd. A.Y. : 1996-97. Dated: 19-12-2007

Held  1:

Provisions of S. 2(22)(e) are not applicable when loan is advanced in the course of normal money lending business – Further, in determining ‘sub-stantial part of business’, income criteria is not relevant but objects and deployment of funds are relevant factors.

Held  2:

Foreign travelling expenses incurred for the purpose of business are allowable expenditure especially when they are proved to be incurred for the purposes of business.

Facts 1 :

The assessee company took loan of Rs.37,77,475 from ‘I’ Ltd. which was claimed to be engaged in the business of money lending. ‘I’ Ltd. also advanced the loan of Rs.1,08,099 to G Ltd. a third party not connected with any of the above parties. It was found that one of the directors of assessee was holding more than 10% of share-capital in ‘I’ Ltd. and more than 20% capital in assessee company. The AO invoked the provisions of S. 2(22)(e) on the ground that ‘I’ Ltd. derived more income from dividend than from interest income. On appeal to CIT(A), it deleted the addition. However, Revenue preferred an appeal to Tribunal. The Tribunal held that as per S. 2(22)(e)(ii) ‘substantial income’ is not the relevant criteria for determining substantial part of business but objects and deployment of funds are relevant. As money lending business was one of the six objects of assessee company and it carried on that object in preference to others it was engaged in the business of money lending and hence provisions of S. 2(22)(e) are not attracted.

Facts 2:

The assessee company claimed expenses on account of travelling of managing director to Taiwan. It was claimed that the expenditure was incurred to find out the possibility of expanding export sales and to acquaint company regarding latest automation machinery concept. The AO disallowed the expenditure on the ground that assessee did not prove it to have been incurred for the purposes of business.

The CIT(A) allowed the claim of assessee. However, department preferred an appeal to Tribunal. It was shown that as a result of the visit to Taiwan, assessee was able to make exports to Taiwan which was not contested by AO. Hence, Tribunal allowed the appeal in favour of assessee and upheld the decision of CIT(A).

5. (2009) 119 ITD 62 (Kolkata) (TM) Shanti Ram Mehta v. ACIT, Circle-3, Asansol A.Ys.: 2000-01 and 2003-04 Dated: 11-11-2008

Additions u/s.69C for unexplained expenditure cannot be made on ad hoc basis or on presumptions.

Facts:

The assessee mainly dealt in two products namely Kerosene Oil and Fertilizers. During A.Ys. 2000-01 and 2003-04, assessee made purchases from different parties. He was to bear some expenses relating to transportation charges. However, he submitted to AO that the purchases were made in bulk. Regard-ing kerosene oil it was submitted that supplying dealers redirect the Tankers to assessee’s business place hence no charges were incurred towards trans-portation. However, AO accepted the contention of assessee only in respect of Kerosene oil and added transportation charges of Rs.50,OOOon estimated basis in respect of purchase of fertilizers as they were purchased in small quantities in a day which was revealed from books of accounts. On an appeal to C!T(A), he upheld the addition. On appeal before the Tribunal, the Tribunal held that 5. 69C is applied when assessee is unable to explain the source of any expenditure however ‘the AO has to first find the evidence of incurring the expenditure. S. 69C cannot be applied on mere presumption or suspicion’. In the present case, the’ AO didn’t bring on record any evidence of incurring transportation charges. Consequently, the Tribunal deleted the addition of Rs.50,OOOalleged to have been incurred towards transportation charges.

6. 2009 TIOL 526 ITAT Mum. Livingstones Jewellery (P) Ltd. v. DCIT ITA No. 187/Mum./2007 A.Y. : 2003-04. Dated:   12-5-2009

S. 10A –  All the profits  which  have  nexus  with the  business   of  the  undertakingqualify   for deduction u/s.10A – Interest income on FDRs given by the assessee to the Bank for obtaining credit facilities has nexus with the business of the undertaking and qualifies for deduction u/s.10A.

Facts:

The assessee having its business of manufacturing and export of studded and plain jewellery of gold and platinum filed its return of income for A.Y. 2003-04 declaring total income after claiming deduction u/s.10A. Interest of Rs.9,OO,961 received on fixed deposits was netted against the interest payment of Rs.1,04,37,835 and net interest of Rs.95,36,873 was debited to its P&L account. The AO held that interest income on FDs with bank cannot be said to be derived from export of goods and merchandise. He, denied the deduction u/s.10A of this amount of interest on FDs.

The CIT(A) did not allow any relief to the assessee.

Aggrieved, assessee preferred an appeal to the Tribunal.

Held:

The expression ‘profits derived from export of articles or things or computer software’ as employed in 5s.(1) or 5s.(lA) has been given a specific meaning in 5s.(4). 5s.(4) states that the ‘profits derived from export of articles or things or computer software’ shall be the amount which bears to the ‘profits of the business of the undertaking’, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. By providing for considering the ‘profits of the business of the undertaking’, the position has been made clear that the restricted general meaning given to eligible profi ts as derived from the export of articles in 5s.(1) ha; been given a go by in 5s.(4) and the scope of the benefit has been expanded by extending to all the profits of the business carried on by the undertaking. The Tribunal noted that the wording of 5s.(4) as amended w.e.f. 1-4-2000 is on the pattern of 5. 80lA prior to its substitution w.e.f. 1-4-2000. It also noted that in the context of 5. 80IA the Arnritsar Bench of the Tribunal had in the case of Dy. CIT v. Chaman Lal & Sons, 3 50T 333 held that the benefit of deduction was available in respect of purchase and sale which was part and parcel of the business of the industrial undertaking. All the profits which have nexus with the business of the undertaking will qualify for deduction. The Tribunal noted since that the FDRs were given to obtain credit facility, interest income had nexus with the business of the undertaking and falls under the head ‘Income from Business’. It allowed the claim of deduction u/s.lOA in respect of interest income.

The appeal  filed by the assessee  was allowed.

7. 2009 TIOL 559 ITAT Mum. ITO v. P & R Automation Products Pvt. Ltd. ITA No. 2119/Mum./2007 A.Y.: 2003-04. Dated:   25-3-2009

32 – Machinery purchased and given to sister concern for manufacturing goods for the assessee, which in turn exports them, is utilised by the assessee for business – No part of depreciation can be disallowed on such machinery on the ground that spare capacity was utilised by the sister concern for manufacturing its own goods which were sold locally.

Facts:

As per the agreement entered into between the assessee and PAL (its sister concern) a CMG machine was purchased by the assessee and was installed at the factory premises of the sister concern. The sister concern was to use the machine at its premises for manufacturing goods by utilising its power, labour and other facilities and sell the goods so manufactured to the assessee at fair market price to meet the assessee’s export obligation. PAL was authorised to develop indigenous market for said products by using spare capacity. The total sales declared by PAL were Rs.2.28 crores out of which sales to the assessee were Rs.1.50 crores. 93% of the capacity of the machine had been utilised for goods sold to the assessee and spare capacity to the tune of 7% had been utilised for others. The assessee had not charged any rent or hire charges from the sister concern.

The assessee claimed depreciation on the machine on the ground that it was utilised by it for the purposes of its business. While assessing the total income of the assessee the Aa disallowed the claim of depreciation on this machine on the ground that the sister concern had also utilised the machine for manufacturing its own goods which were sold locally.
 
The CIT(A) relying upon the decision of the Madras High Court in the case of Indian Express Pvt. Ltd. 255 ITR 68 held that the assessee was entitled to deduction u/s.32 of the Act.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

The Tribunal observed that u/s.32 an assessee is entitled to deduction by way of depreciation on machinery, if it is owned by the assessee and is used for the purpose of its business. The Tribunal noted the undisputed facts viz. that the assessee had purchased the machinery and the same was provided to the sister concern essentially to manufacture goods for the assessee and supplying the same at fair market price. The Tribunal held the conditions required to be satisfied for deduction u/s.32 as having been satisfied. It stated that its view is supported by the decision of the Madras High Court in the case of Indian Express Pvt. Ltd.

The appeal  filed by the Revenue  was dismissed.

8. 2009 TIOL 550 ITAT Mum. Popatlal Fulchand v. ACIT ITA No. 358/Mum./2008 A.Y. : 2004-05. Dated:  6-5-2009

s. 22. – Property owned by individuals and used by a firm, without paying any rent, whose partners are HUFs of the individuals owning the property can be said to be used for the purposes of business by such individuals and consequently its notional income is not chargeable.

Facts:

The assessee alongwith other individuals were owners of a property which was being used by M/s. F C International, a partnership firm, whose partners were HUFs of the assessee and other individual owning the property. The HUFs were partners through the individuals owning the property. The firm did not pay any rent for the property.

The assessee was of the view that annual value of this property is not chargeable to tax since the same is being used for the purposes of his business. The Assessing Officer (Aa) was of the view that the firm is a distinct entity than its individual partners and since the property has been utilised for the purpose of the business of the firm, the benefit of S. 22 cannot be given to individual partners.

The CIT(A) upheld    the view  of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal held that the assessee was not liable to tax in respect of the notional income of the house property used by the firm for its business without paying any rent to the owners of the property. It also observed that the issue under consideration is squarely covered by the decision of the Delhi High Court in the case of Cl’T v. H. S. Singhat & Sons, 253 ITR 653 (Del.). The Tribunal allowed the appeal filed by the assessee.

Is it fair to insist on e-compliance without adequate machinery

1. Computerisation is the need of the day in all walks of life. Even various government departments are gradually (in fact, in some sectors, rapidly) thrusting e-compliance on citizens. In the context of income-tax, it all started with e-filing of Quarterly TDS Statements, then e-filing of Returns, followed bye-payment of Taxes, e-filing of remittance certificate (S. 195) and now forthcoming is e-credit of Taxes (Form 26AS). This article examines certain grievances faced by tax practitioners and taxpayers at large in the context of e-compliance under Income-tax Act, 1961.

2. E-payment  of taxes:

E-payment has been made mandatory for all corporate assessees (and those non-corporate assessees who are liable for audit u/s.44AB) w.e.f. 1-4-2008. The general difficulties faced in e-payment are:

2.1 On the NSDL website, once we click the relevant link for e-payment, a web-page appears where we have to fill up the basic information like PAN I TAN, Assessment Year, Name, Address etc. After filling all these details, we have to click to the relevant link, submit to the bank and then proceed with the e-payment gateway.

If at all in this whole process, there is any interruption due to whatever problem like power failure, internet connection failure, bank password mis-match etc., then the whole process is to be restarted from filling of the Basic data. Even otherwise, when multiple payments for different sections (TDS) are to be made; for all the challans, one has to fill up the basic data like name, address, etc. over and again. There should be a facility that once PAN I TAN is entered all the Basic data should automatically appear because it is already in the database of the department.

2.2 At present, there are only 30 banks which are authorised to accept e-payment of taxes ..This creates practical difficulties for taxpayers who are not maintaining account with these Banks. Though, in practice, certain other Banks are also accepting e-payment of taxes but since they are not authorised, ultimately they also have to route it through one of the authorised Banks. This, at times, results in de-lay in credit of tax-payments, with consequential loss of interest u/s.234A, u/s.234B, u/s.234C, u/s. 201 etc. and at times may become a cause of 40a(ia) disallowance.

3. e-filing    of quarterly TDS  statements:

3.1 Once a quarterly TDS statement is uploadedl filed with NSDL, if any corrections are to be done, deductor has to upload/file a correction statement. For this, first of all he has to give the link of fvu file of original statement. Once this is done, the original statement appears on the screen, which can be corrected and new fvu file is generated. There are instances, where the deductor has lost the original fvu file due to computer problem etc. There is no procedure to get the lost fvu file back either from NSDL web site or income tax department’s website. In such a scenario, as the correction statement can never be filed, the deductee will lose the credit for taxes?

3.2 There was a suggestion from NSDL official that, if 95% PAN compliance is not possible, the deductor should submit only those deductee records where PAN is available. As and when other PANs are obtained, correction statement should be filed. This may create 3 difficulties. Firstly, the Challan Details and Deductee Details amount will not match. Secondly, it may amount to a default on the part of deductor of not submitting the details of all tax deducted. Thirdly, filing correction statements repeatedly, is a cumbersome process, as explained in para 3.1 and also it comes at a cost every time.

4.  Form 26AS :

It is proposed that in the near future, even credit for tax deducted will be based on Form 26AS which is electronically generated by NSDL, based on data submitted by deductor. If PAN is wrongly given by deductee, it will not be reflected in his Form 26AS. The deductee will, therefore, have to request the deductor to file a correction statement. In case of large deductors, especially government departments or public sector banks, the feasibility of filing such correction statement, at the instance of a large number of deductees, is really a question mark. Admittedly, there is a facility on the NSDL website to verify PAN, but it comes at a huge cost of Rs.12,OOO. Should there be such a huge charge for statutory compliance?

5. Conclusion:
It is rightly said that change is the only constant in life and generally, change is for the better. Admittedly, even if e-compliance is for the better, the transition should be pain-free and at least in the transitional period, the system should not be faceless. There has to be a sort of ombudsman for handling these technical grievances of the taxpayer.

Section 32(1) — Depreciation is allowable on pre-operative expenses which are revenue in nature, allocated to fixed assets since the expenses were incurred on setting up fixed assets and in pre-operative period the assessee was only engaged in putting up fixed assets on rented land.

(2011) TIOL 434 ITAT-Del.Cosmic Kitchen Pvt. Ltd. v. ACIT ITA No. 5549/Del./2010 A.Y.: 2006-2007. Dated: 13-5-2011

Facts:

In
pre-operative period, the assessee had incurred expenditure of
Rs.16,93,153, which was debited under 8 heads, all of which were revenue
in nature. The assessee was not able to link any expenditure with a
particular item of fixed asset. However, since during the pre-operative
period the assessee was engaged only in putting up fixed assets on
rented land, it had capitalised this sum of Rs.16,93,153 to various
items of fixed assets in the ratio of cost of the asset to total cost.
The Assessing Officer (AO) disallowed Rs.2,70,744 being the amount of
depreciation on this sum of Rs.16,93,153 on the ground that the
expenditure incurred is revenue in nature and there is no link between
item of asset and the expenditure incurred. Aggrieved the assessee
preferred an appeal to the Tribunal.

Held:

In
view of the ratio of the decision of the Delhi High Court in CIT v. Food
Specialities Ltd., 136 ITR 203 (Del.) and also the ratio of the
decision of the Madras High Court in CIT v. Lucas-TVS Ltd., 110 ITR 346
(Mad.), the expenditure was required to be capitalised. Also the
proportionate method of allocating the expenditure to various items of
fixed assets is fair and reasonable. Accordingly, the assessee is
entitled to claim depreciation on the sum of Rs.16,93,153 being
pre-operative expenses capitalised to various items of fixed assets. The
Tribunal decided the appeal in favour of the assessee.

levitra

Foreign Exchange Regulation Act— Contravention of provisions of Act — Adjudication proceedings and criminal prosecution can be launched simultaneously — If the exoneration in the adjudication proceedings is on merits criminal prosecution on same set of facts cannot be allowed.

Foreign Exchange Regulation Act— Contravention of provisions of Act — Adjudication proceedings and criminal prosecution can be launched simultaneously — If the exoneration in the adjudication proceedings is on merits criminal prosecution on same set of facts cannot be allowed.

[Radheshyam Kejriwal v. State of West Bengal and Anr., (2011) 333 ITR 58 (SC)]

On 22nd May, 1992 various premises in the occupation of the appellant Radheshyam Kejriwal besides other persons were searched by the officers of the Enforcement Directorate. The appellant was arrested on 3rd May, 1992 by the officers of the Enforcement Directorate in exercise of the power u/s.35 of the Foreign Exchange Regulation Act, 1973 (hereinafter referred to as the ‘Act’) and released on bail on the same day. Further the appellant was summoned by the officers of the Enforcement Directorate to give evidence in exercise of the power u/s.40 of the Act and in the light thereof his statement was recorded on various dates, viz., 22nd May, 1992, March 10, 1993, March 16, 1993, 17th March, 1993 and 22nd March, 1993. On the basis of materials collected during search and from the statement of the appellant it appeared to the Enforcement Directorate that the appellant, a person resident in India, without any general or specific exemption from the Reserve Bank of India made payments amounting to Rs.24,75,000 to one Piyush Kumar Barodia in March/April, 1992 as consideration for or in association with the receipt of payment of U.S. $ 75,000 at the rate of Rs.33 per U.S. dollar by the applicant’s nominee abroad in Yugoslavia. It further appeared to the Enforcement Directorate that the transaction involved conversion of Indian currency into foreign currency at rates of exchange other than the rates for the time being authorised by the Reserve Bank of India. In the opinion of the Enforcement Directorate the act of the appellant in making the aforesaid payment of Rs.24,75,000 in Indian currency at the rate of Rs.33 per U.S. dollar against the official rate of dollar, i.e., Rs.30 per dollar (approximately), contravened the provisions of section 8(2) of the Act. Further the said payment having been made without any general or special exemption from the Reserve Bank of India, the appellant had contravened the provisions of section 9(1)(f) of the Act and accordingly rendered himself liable to imposition of penalty u/s.50 of the Act. The Enforcement Directorate was further of the opinion that by abetting in contravening the pro-visions of sections 9(1)(f)(i) and 8(2) of the Act read with the provisions of section 64(2) of the Act, the appellant had rendered himself liable for penalty u/s.50 of the Act.

Accordingly, a show-cause notice dated 7th May, 1993 was issued by the Special Director of the Directorate of Enforcement calling upon the appellant to show cause as to why adjudication proceedings as contemplated u/s.51 of the Act be not held against him for the contraventions pointed above. Show-cause notice dated 7th May, 1993 referred to above led to institution of proceedings u/s.51 of the Act (hereinafter referred to as the ‘adjudication proceedings’). The Adjudication Officer came to the conclusion that the allegation made against the appellant of contravention of the provisions of sections 8, 9(1)(f)(i) and 8(2) of the Act read with section 64(2) of the Act could not be sustained. According to the Adjudication Officer, it had not been proved beyond reasonable doubt that a sum of Rs.24,75,000 had been actually paid, since there was no documentary evidence except the statement of Shri Piyush Kumar Barodia and a retracted statement of Shri Radheshyam. Since the Enforcement Directorate had not challenged the adjudication order it had become final.

Since any person contravening the provisions of section 8 and 9 of the Act besides other provisions is liable to be prosecuted u/s.56, a notice for prosecution came to be issued on 29-12-1994. After hearing, a complaint was lodged before the Metropolitan Magistrate. The application of the appellant for dropping the prosecution inter alia on the ground that on the same allegation the adjudication proceedings have been dropped was rejected by the Metropolitan Magistrate by his order dated 2-9-1997. The criminal revision application before the Calcutta High Court was rejected by an order dated 10-8-2001.

On further appeal, the Supreme Court observed that the ratio of various decisions on the subject could be broadly stated as follows:

(i)    Adjudication proceedings and criminal prosecution can be launched simultaneously;

(ii)    Decision in adjudication proceedings is not necessary before initiating criminal prosecution.

(iii)    Adjudication proceedings and criminal proceedings are independent in nature to each other;

(iv)    The finding against the person facing prosecution in the adjudication proceeding is not binding on the proceedings for criminal prosecution;

(v)    An adjudication proceeding by the Enforcement Directorate is not a prosecution by a competent court of law to attract the provisions of Article 20(2) of the Constitution or section 300 of the Code of Criminal Procedure;

(vi)    The finding in the adjudication proceedings in favour of the person facing trial for identical violation will depend upon the nature of the finding. If the exoneration in the adjudication proceedings is on technical ground and not on the merits, prosecution may continue; and

(vii)    In case of exoneration, however, on the merits where the allegation is found to be not sustainable at all and the person held innocent, criminal prosecution on the same set of facts and circumstances cannot be allowed to continue, the underlying principle being the higher standard of proof in criminal cases.

In the opinion of the Supreme Court, therefore, the yardstick would be to judge as to whether the allegation in the adjudication proceedings as well as the proceeding for prosecution is identical and the exoneration of the person concerned in the adjudication proceeding is on the merits. In case it is found on the merits that there is no contravention of the provisions of the Act in the adjudication proceeding, the trial of the person concerned shall be in abuse of the process of the Court.

Bearing in mind the principles aforesaid, the Supreme Court proceeded to consider the case of the appellant. The Supreme Court noted that in the adjudication proceedings, on the merits the adjudicating authority had categorically held that the charges against Shri Radheshyam Kejriwal for contravening the provisions of section 9(1)(f)(i) and section 8(2) r.w.s. 64(2) of the Foreign Exchange Regulation Act, 1973 could not be sustained. The Supreme Court held that in the face of the aforesaid finding by the Enforecement Directorate in the adjudication proceedings that there is no contravention of any of the provisions of the Act, it would be unjust and an abuse of the process of the Court to permit the Enforcement Directorate to continue with the criminal prosecution. In the result, the Supreme Court by majority allowed the appeal and set aside the judgment of the learned Metropolitan Magistrate and the order affirming the same by the High Court and the appellant’s prosecution was quashed.

However, in a dissenting judgment separately delivered by P. Sathasivam J., it was held that considering the interpretation relating to sections 50, 51 and 56 by various decisions, in a statute relating to economic offences, there was no reason to restrict the scope of any provisions of the Act. These provisions ensured that no economic loss was caused by the alleged contravention by the imposition of an appropriate penalty after adjudication u/s.51 of the Act and to ensure that the tendency to violate is guarded by imposing appropriate punishment in terms of section 56 of the Act. Section 23D of the Foreign Exchange Regulation Act, 1947 had a proviso which indicated that the adjudication for the imposition of penalty should precede making of complaint in writing to the Court concerned for prosecuting the offender. The absence of a similar proviso to section 51 or to section 56 of the present 1973 Act was a clear indication that the Legislature intended to treat the two proceedings as independent of each other. There was nothing in the present Act to indicate that a finding in adjudication is binding on the Court in a prosecution u/s.56 of the Act or that the prosecution u/s.56 depends upon the result of adjudication u/s.51 of the Act. The two proceedings were independent and irrespective of the outcome of the decision u/s.50, there could not be any bar in initiating prosecution u/s.56. The scheme of the Act made it clear that the adjudication by the concerned authorities and the prosecution were distinct and separate. It was further held that no doubt, the conclusion of the adjudication, in the case on hand, the decision of the Special Director dated 18th November, 1996 may be a point for the appellant and it is for him to put forth the same before the Magistrate. Inasmuch as the FERA contains certain provisions and features which cannot be equated with the provisions of the Income-tax Act or the Customs Act and in the light of the mandate of section 56 of the FERA, it is the duty of the Criminal Court to discharge its functions vested with it and give effect to the legislative intention, particularly, in the context of the scope and object of the FERA which was enacted for the economic development of the country and augmentation of revenue. Though the Act has since been repealed and is not applicable at present, those provisions cannot be lightly interpreted taking note of the object of the Act.

In view of the above analysis and discussion, the dissenting Judge agreed with the conclusion arrived at by the Metropolitan Magistrate, Calcutta as well as the decision of the High Court.

Deductibility of ‘set-on’ amount under Payment of Bonus Act

Controversies

1. Issue for consideration :


1.1 The Payment of Bonus Act, 1965 requires an employer,
running a factory or an establishment where twenty or more workers are employed,
to pay to the employees such amount or amounts by way of bonus as prescribed
under the said Act, subject to a maximum amount prescribed therein. The amount
payable is calculated with reference to the allocable surplus to be computed in
accordance with the provisions of the Act and the rules framed thereunder.

1.2 The Act inter alia provides for setting aside an
amount, out of the allocable surplus, that is found to be in excess of the
maximum amount payable towards bonus for an year, subject to a maximum of twenty
per cent of the salary, wages, etc. Such a provision, prescribed u/s.15 of the
Act, is allowed for meeting the shortfall, if any, in any of the four years
including the fourth year. The amount so provided for becomes free at the expiry
of the four years, provided there was no shortfall in any of the said years. S.
28 of the said Act provides for punishment with fine and imprisonment for
non-compliance of the provisions of the Act.

1.3 The excess so set aside is known as ‘set-on’ amount for
which a provision is made in the books of account by debiting the profit & loss
account of the year. The issue has arisen about the deductibility of this
provision of set-on amount. The Gauhati High Court has held that the set-on
amount is allowable as deduction while several High Courts including the Bombay
High Court recently held that such an amount is not deductible.

2. India Carbon Ltd.’s case :


2.1 In India Carbon Ltd. v. CIT, 180 ITR 117 (Gau.),
the question in the reference arose as to whether bonus amounts set apart
(called ‘set-on’ amount) debited to the profit & loss account of the company
could be deducted from the income of the company or not for A.Y. 1976-77. The
assessee a company claimed deduction of two amounts, Rs.8,56,241 as bonus paid,
and Rs.7,36,915 the amount deposited in ‘set-on’ account. The former was claimed
u/s.36(1)(ii) and the latter u/s.37 of the Income-tax Act, 1961. The ITO allowed
the deduction of Rs.8,56,241 but rejected the claim for Rs.7,36,915. The
Appellate Authority allowed deduction for both the payments. The Tribunal
however overturned the decision of the Appellate Authority and rejected the
claim for deduction of the set-on amount of Rs.7,36,915. The Tribunal was not
impressed with the contention of the company that it regularly adopted the
mercantile method of accounting and the deduction in the past assessment years
was allowed to the company.

2.2 Being aggrieved by the order of the Tribunal, the company
referred the following questions for consideration of the Gauhati High Court
under Ss.(1) of S. 256, :

(i) “Whether, on the facts and in the circumstances of the
case, the Tribunal was justified in reversing the order of the AAC and
disallowing the statutory liability of bonus set-on computed according to the
provisions of the Payment of Bonus Act, 1965 ?

(ii) Whether, on the facts and in the circumstances of the
case, the Tribunal was justified in disregarding and rejecting the method of
accounting regularly employed by the appellant company ?

(iii) Whether, on the facts and in the circumstances of the
case, the Tribunal was justified in holding that bonus set-on cannot be
regarded as a liability of the year in which the computed amount should be
carried forward for being set-on in the manner prescribed under the Payment of
Bonus Act, 1965 ?”

2.3 The company contended that the set-on amount is not
prohibited to be deducted u/s. 40(a)(ii) and, therefore, such amounts were
expenditure for the business; the assessee could not utilise the amount
irretrievably and it was commercially expedient to provide for such set-on.

2.4 In reply the Revenue argued that the amount in question
was a reserve fund; the amount stood deposited in the account books of the
assessee and could be utilised by the assessee and, therefore, was not an
expenditure; such an amount, to be paid in future, could not be allowed either
u/s.28 or u/s.30 to u/s.36 or u/s.37 of the Income-tax Act.

2.5 The Gauhati High Court noted the following amongst other
things :

  • The
    Government of India in 1961 to obtain industrial peace, appointed a committee
    called the Tripartite Commission and on acceptance of the committee’s report
    on 6-12-1964, with modifications, the Government of India promulgated on
    29-5-1965, an Ordinance which was replaced by the Act No. 21 of 1965 called
    the Payment of Bonus Act, 1965, to regulate the bonus payments in the country
    with some exceptions.
     


  • The
    Act contained 40 Sections, 4 Schedules and the Rules. They provided together
    for ascertainment of gross profits, available surplus and allocable surplus
    and set out the sums to be deducted from gross profits besides the manner of
    calculation of taxes. The Act also provided for eligibility of workmen for
    bonus and for a minimum bonus to be paid and defined the limit of maximum
    bonus. Rules were provided explaining how the number of working days was to be
    reckoned.
     


  • The
    Act inter alia vide S. 15 provided for how amounts were to be carried
    forward (referred to as ‘set-on’) and when the set-on amount was to be
    utilised with the help of the Fourth Schedule. The utilised amount was called
    the ‘set-off’ amount. Register was prescribed to show the set-on and set-off
    amounts.


2.6 The Court further noted that what constituted ‘expenditure’ was a many splendoured controversy; its meaning had gained many facets and dimensions over the years in fiscal statutes and in its trail had brought to surface many fresh controversies. It referred to the decision of the Supreme Court in Indian Molasses Co. (P.) Ltd. v. CIT, 37 ITR 66, to notice that an ‘expenditure’ was that which was paid out and paid away; an amount which passed out irretrievably from the hands of the assessee was ‘expenditure’. Referring to CIT v. Malayalam Plantations Ltd., 53 ITR 140 (SC), the Court noted that the expenditure was wider in meaning and scope than when used to mean expenditure for earning profits; not all that was spent in a business could be construed as expenditure. ‘Commercial expediency’ and ‘reasonableness of expenditure’ were considered relevant for allowing a deduction, as was held in CIT v. Walchand & Co. (P.) Ltd., 65 ITR 381 (SC), and these aspects were to be looked at from the point of view of business. In Shree Sajjan Mills Ltd. v. 156 ITR 585 (SC), the Gauhati High Court noted, that contribution to the gratuity fund created for the benefit of employees in an irrevocable trust, was allowed to be deducted.

2.7 The three cases where the issue was considered under the Payment of Bonus Act, against the assessee’s claim for deduction, were noted by the Court:

  •     In Malwa Vanaspati & Chemical Co. Ltd. v. CIT, 154 ITR 655 (MP), it was held that S. 15 created a liability which was not a subsisting liability and, therefore, such amounts were held in reserve for meeting a future liability which contingent in nature, more so where the assessee did not deposit the amount with the Bonus Act authority.

  •     In Rayalaseema Mills Ltd. v. CIT, 155 ITR 19 (AP), it was held that set-on was not covered by S. 28 and S. 37 of the Income-tax Act and therefore, not an expenditure and the set-on amount was carried forward for a limited period for four years which was not the same as amounts paid to a third party, and, therefore, not loss, not a trading liability and not an expenditure.

  •     In P. K. Mohammed Pvt. Ltd. v. CIT, 162 ITR 587 (Ker.) the set-on amount was construed to be deposits made under the compulsion of a statute to satisfy a contingent liability to be paid in future.

2.8 The Gauhati High Court also noted that in three other cases, the Madras High Court had examined the issue of deductibility of an amount set aside for payment of bonus to workers independent of the Payment of Bonus Act. In CIT v. Somasundaram Mills (P.) Ltd., 95 ITR 365 (Mad.), CIT v. Anamallais Bus Transports (P.) Ltd., 99 ITR 445 (Mad.) and again in 118 ITR 739 (Mad.), it was held that the amount set aside as such for payment of bonus represented a contingent liability and could not be allowed as expenditure; the workmen did not have a right in such amounts.

2.9 The Court referred to the rule that required the statutory maintenance of registers and the columns therein. It noted that the Register ‘B’ showed set-on and set-off; that the amounts shown in columns, 3, 4 and 5 of the Fourth Schedule were amounts which were to be paid or have been paid to the employees; columns 2 to 5 in Form ‘B’ showed the amounts paid or to be paid. The Court observed that these columns, coupled with the language of S. 15 of the Act, indicated that the set-on amount could not be used or utilised by the assessee for business purposes and the amount deposited was held for the benefit of workmen; the use of words ‘utilised for the purpose of payment of bonus’ in S. 15 made this clear.

2.10 The Court posed itself a question, the answer thereto was considered crucial for deciding the issue whether a set-on amount was deductible or not. “In case such amounts were used by the assessee and the amounts were lost in the business, could a businessman be heard to contend that amounts were lost in business, there was nothing left to be paid to workmen and that as such he might be absolved from paying the bonus to workmen?”

2.11 The Court answered that the assessee could not utilise the set-on amount for business; that on making the deposit the assessee was divested of the right to invest or utilise the amount for business; the columns shown in the Fourth Schedule, Form B and the language used in the Schedule and in S. 15 of the Act indicated that the set-on amount, after it was deposited, could not be utilised; the amount was to be paid in four years. The Court was not impressed by the contention that the assessee could utilise the amount in business as the amounts set on were akin to the funds in an irrevocable trust such as referred to in Shree Sajjan Mills Ltd. v. CIT (supra) and the assessee was not an owner of the funds. The issue of deduction when viewed from the point of business as was done in CIT v. Walchand and Co. (P.) Ltd. (supra), would lead to an inevitable answer in favour of allowance of claim of the assessee.

2.12 The set-on amount could not be utilised by the assessee and had to be deposited perforce under the statute, and in that view of the matter such amount was an expenditure allowable for deduction. The Court observed that the company would be liable for punishment for fine and imprisonment u/s.28 of the Act for contravention where it utilised or used the amount. The set-on amount for the aforesaid reasons was an expenditure incurred by the assessee, and, therefore, had to be deducted.

    3. Ingersoll-Rand’s case:

3.1 In Ingersoll-Rand (India) Ltd. v. CIT, 320 ITR 513 (Bom.), the question that had been referred for consideration of the High Court at the instance of the assessee read as?: “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the set-on liability u/s.15 of the Payment of Bonus Act, amounting to Rs.24,73,865 was not allowable as a deduction in computing the total income of the assessee for the year under reference?”

3.2 The Court in the beginning took notice of the fact that S. 15(1) of the Payment of Bonus Act laid down that where for any accounting year the allocable surplus exceeded the amount of maximum bonus payable to the employees in the establishment u/s.11, then the excess should, subject to a limit of twenty per cent of the total salary or wage of the employees employed in the establishment in that accounting year, be carried forward for being set on in the succeeding accounting year and so on up to and inclusive of the fourth accounting year to be utilised for the purpose of payment of bonus.

3.3 The Court also noted that the issue of deduc-tion of set-on bonus was already considered by several High Courts and particularly, in favour of the Revenue by the Madhya Pradesh High Court in the case of Malwa Vanaspati & Chemical Co. Ltd. v. CIT, 154 ITR 655, the Andhra Pradesh High Court in Rayalaseema Mills Ltd. v. CIT, 155 ITR 19 and the Kerala High Court in P. K. Mohammed (P) Ltd. v. CIT, 162 ITR 587. It also took note of the contrary view taken by the Gauhati High Court in India Carbon Ltd. v. CIT, 180 ITR 117. The Court noted that amongst the High Courts, there were two different views, though the majority of the High Courts have taken a view that the sum in question was not an allowable deduction.

3.4 The Bombay High Court observed that in India Carbon’s case (supra) the Gauhati High Court proceeded to hold that; the assessee could not utilise the amount for business; that on making deposit it was divested of the right to invest or utilise the amount for business; the amount had to be paid in future in the course of a cycle of four years; the amount if utilised would be in contravention of the Act and punishable. On this basis it held that the amount deposited under the provisions of the Act, which could not be utilised for the purposes of business, amounted to expenditure allowable.

3.5 Attention of the Court, on behalf of the company, was drawn to the judgment of the Supreme Court in Bharat Earth Movers v. CIT, 245 ITR 428 (SC), to contend that considering the ratio of that judgment, the allocable surplus would be an allowable deduction. In that case, the company had floated a scheme for its employees for encashment of leave and created a fund by making a provision for meeting such liability under a leave reserve account which was maintained so as to provide for encashment and payment of leave and vacation leave was paid from the leave reserve. On the basis of facts, the Court held that the provision made by the appellant company for meeting the liability incurred by it and the leave encashment scheme was entitled to deduction.

3.6 The Court relying on the precedents in favour of the Revenue held that an amount set on u/s.15 of the Payment of Bonus Act was not an accrued liability, but only a provision to meet a future liability, if any, and therefore, being a contingent liability, it was not allowable as deduction. It observed that; what the assessee was required by statute to do was to keep a reserve with itself, of what was known as allocable surplus to meet a future shortfall, if any, for a period of four years; the shortfall could not be estimated with reasonable certainty, though statutorily the liability had to be incurred; the extent of the liability also could not be estimated with reasonable certainty as if there were profits to meet the bonus liability the reserve would not be expended; only in the event there were no sufficient profits would the allocable surplus be utilised to meet the liability; the amount was merely a reserve fund which the Payment of Bonus Act mandated; after the expiry of four succeeding accounting years if the amount was not utilised the assessee was free to make use of the amount; the amount to be adjusted for the subsequent year, depended therefore on the shortfall which could not be anticipated with reasonable certainty; the amount was not deducted in the hands of the assessee unless it was utilised; the deduction claimed was not an accrued liability, but only a provision u/s.15(1) of the Payment of Bonus Act to meet a future liability, if any; the Tribunal was right in law in holding that the set-on liability u/s.15 of the Payment of Bonus Act was not allowable as a deduction in computing the total income of the assessee for the year under reference.

3.7 The judgment in Bharat Earth Movers (supra) case was found by the Bombay High Court to be clearly distinguishable and, therefore, not applicable.

    4. Observations:

4.1 S. 15 of the Payment of Bonus Act reads as under:

    1) “Set-on and set-off of allocable surplus — (1) Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment u/s.11, then, the excess shall, subject to a limit of twenty per cent of the total salary or wage of the employees employed in the establishment in that accounting year, be carried forward for being set on in the succeeding accounting year and so on up to and inclusive of the fourth accounting year to be utilised for the purpose of payment of bonus in the manner illustrated in the Fourth Schedule.

    2) Where for any accounting year, there is no available surplus or the allocable surplus in respect of that year falls short of the amount of minimum bonus payable to the employees in the establishment u/s.10, and there is no amount or sufficient amount carried forward and set on U/ss.(1) which could be utilised for the purpose of payment of the minimum bonus, then, such minimum amount or the deficiency, as the case may be, shall be carried forward for being set off in the succeeding accounting year and so on up to and inclusive of the fourth accounting year in the manner illustrated in the Fourth Schedule.

    3) The principle of set-on and set-off as illustrated in the Fourth Schedule shall apply to all other cases not covered by Ss.(1) or Ss.(2) for the purpose of payment of bonus under this Act.

    4) Where in any accounting year any amount has been carried forward and set on or set off under this Section, then, in calculating bonus for the succeeding accounting year, the amount of set-on or set-off carried forward from the earliest accounting year shall first be taken into account.”

4.2 S. 28 provides for penalty for violation of any of the provisions of the Act. It reads as:

“If any person —

    a) contravenes any of the provisions of this Act or any rule made thereunder; or

    b) to whom a direction is given or a requisition is made under this Act fails to comply with the direction or requisition, he shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both.”

4.3 The primary thing that emerges out of the provisions of the Act is that the setting aside of the prescribed amount of ‘set-on’ is a statutory requirement and non-compliance thereof attracts the stringent punishment. Also emerges is the fact that the Income-tax Act does not provide for any express disallowance of the amount of ‘set-on’ un-less a view is taken that it is hit by S. 43B. It is also clear that such amount is not free for utilisation at the whims and fancies of the establishment which is rather duty bound to utilise the said amount for meeting the shortfall of any of the four years. Specific formula are provided by the Act for scientifically calculating the ‘set-on’ amount with the precision. There is nothing uncertain about the quantum of the provision. There is every possibility that the liability might emerge as had that not been anticipated, the law would not make any provision for such ‘set-on’. The sum is set aside for the labour welfare under a statutory stipulation.

4.4 The establishment is made presently liable for setting aside an amount not out of the profit, but out of the allocable surplus under a provision of law and under the mercantile system of accounting, it falls for allowance u/s.37 of the Income-tax Act. The establishment is divested of the set-on amount on creating a provision as per statute and on provision ceases to be the owner of the funds and holds thereafter as trustee or a custodian of the funds. The employees have an overriding title for the pre-scribed period of four years and the set-on money cannot be frittered away at the sweet will of the employer during the said period of four years.

4.5 For allowance of a deduction, actual parting of funds is not necessary and in any case, settlement by accounts is also an expenditure. The Supreme Court in the case of Metal Box Ltd., 73 ITR 53 held that an accrued but undischarged liability is allowable and a discounted value of a contingent liability in given circumstances be sometimes an expenditure. The Calcutta High Court in case of Electric Lamp Mfg. (India) Ltd., 165 ITR 115 (Cal.) held that a provision of a statutory liability on actuarial valuation is allowable as a deduction.

4.6 It may be true that the payment as also the quantum thereof is not certain, that fact alone should not deter the allowance of the claim for deduction. In the event the amount or part thereof was found to be not payable, the same nonetheless will be liable for taxation u/s.41 of the Act. No income escapes taxation by allowing the claim. In fact the Andhra Pradesh High Court in Rayalaseema Mills Ltd. v. CIT, 155 ITR 19 (AP) was pleased to hold that the obligation for setting on was statutory, but was confined only to the four succeeding accounting years, whereafter the assessee was free to make such use of the amount, if any, remaining, as it thinks fit. The Court accordingly confirmed that for the period of four years, the assessee was prevented from using the said funds at his will leading to a reasonable inference that the liability cannot at least be construed to be contingent and the funds set aside were not free. The said decision also noted the fact that the set-on amount could be utilised for payments in case of the need and only after the expiry of the four year period that the funds will be a part of the general revenue. The better view appears to be in favour of allowance of a set-on amount more importantly in view of provisions of S. 41 of the Act which ensures that no expenditure, that is not incurred finally, escapes taxation.

Is Syncome Formulations (I) Ltd. [292 ITR (AT) 144 (SB)(Mum.)] Still a good law ?

Article 1

I. Introduction :

1.
The calculation of deduction u/s.80HHC of the Income-tax Act itself is a complex
issue. The complexity is further increased when one attempts to calculate the
deduction u/s.80HHC of the Act for the purpose of making adjustments u/s.115JA/JB
of the Act in order to arrive at the ‘book profit’. The Special Bench in the
case of Syncome Formulations (I) Ltd. [292 ITR (AT) 144 (Mum.)] held that for
the purpose of S. 115JB, the deduction u/s.80HHC of the Act has to be calculated
with reference to the adjusted book profits and not the normal gross total
income.

2.
Recently, the Bombay High Court has rendered a decision in the case of CIT v.
Ajanta Pharma Ltd. reported at (318 ITR 252). In the said decision, the
Bombay High Court has observed at para 36, page 269 as under :

“We
have had the benefit of going through the reasoning and the orders in
Deputy CIT v. Syncome Formulations (I) Ltd.,
(2007) 292 ITR (AT) 144; (2007) 106 ITD 193 (Mum.)(SB) as also in the case of
Deputy CIT v. Govind Rubber P. Ltd., (2004) 89 ITD 457; (2004) 82 TJT 615.
It is not possible to agree with the view taken by the Benches. Those decisions
in view of these judgments stand overruled.”

3.
An attempt has been made in this article to find out as to whether; subsequent
to the decision of Bombay High Court, the ratio laid down by the Special Bench
in the case of Syncome Formulations (I) Ltd. is still valid or not, and if yes,
to what extent.

4.
Before we really go into the judgment of the Bombay High Court in the case of
Ajanta Pharma Ltd., it is imperative to closely look into the decision of the
Special Bench in the case of Syncome Formulations (I) Ltd. and also the decision
of the Division Bench of the Mumbai Tribunal in the case of Ajanta Pharma Ltd.
(21 SOT 101) which has been ultimately reversed by the Bombay High Court in the
above-referred decision. This is for the reason that according to the humble
opinion of the author, the issue involved in Syncome Formulations (I) Ltd. is
totally different than the issue involved in the case of Ajanta Pharma Ltd.


II. Issue involved in the decision
of Special Bench — Syncome Formulations (I) Ltd. :

5.
According to the provisions of S. 80HHC of the Act, the deduction provided under
that Section is to be calculated as per the formula prescribed in Ss.(3).
According to the said formula, one has to start with the ‘profit of the
business’ and make some multiplication, division, etc. in case of manufacturing
exporter to arrive at eligible amount of deduction. The Section also provides
for the formula in case of trader exporter wherein also one has to calculate the
profit of the business. The question which arose before the Special Bench is as
to what is to be taken as the ‘profit of the business’ which would further
undergo the mathematical exercise. According to the assessee, while calculating
the deduction u/s. 80HHC for the purpose of 115JA/JB, the profit of the business
should be the profit as shown in Profit and Loss Account; whereas as per the
revenue, the profit would mean profit assessable under the head ‘business
income’. Thus, the whole controversy is — What is the starting point for
calculating deduction u/s.80HHC for the purpose of S. 115JA/JB of the Act. This
issue has been resolved by the Special Bench in favour of the assessee for the
detailed reasons given in the said decision.


III. Issue involved in the decision
of Ajanta Pharma Ltd. (80 HHC) :

6.
The Bombay High Court in the case of Ajanta Pharma Ltd. was required to address
an issue as to whether the export profits to be excluded from the ‘book profits’
u/s.115JB of the Act is to be calculated after applying the restriction of S.
80HHC(1B) of the Act. In other words, whether the amount to be reduced from the
book profits should be the entire eligible amount of deduction or only the
percentage of the eligible deduction actually allowable under the Act as per S.
80HHC(1B) of the Act ? The questions of law raised before the High Court are as
under :


“1. Whether on the facts and in the circumstances of the case and in law the
ITAT was justified in approving the Order of the CIT(A) in allowing respondent
to exclude export profits for the purpose of S. 115JB at the figure other than
that allowed u/s.80HHC(1B) ?

2.   Whether in law for the purpose of calculating book profit u/s.115JB of the Income-tax Act, 1961 under Explanation 1 sub-clause (iv) the export profits to be excluded from the book profits would be the export profits allowed as a deduction u/s.80HHC after restricting the deduction as per the provisions of Ss.(1B) of S. 80HHC of the Act or the export profits calculated as per Ss.(3) and Ss.(3A) of S. 80HHC before applying the restriction contained in Ss.(1B) of S. 80HHC??”

Answering the said question, the High Court held that while computing the ‘book profits’, the quantum of deduction allowable under clause (iv) to Explanation 1 u/s.115JB of the Act will have to be restricted to actual permissible deduction as calcu-lated u/s.80HHC(1B) of the Act.

IV.    To what extent is Syncome Formulations    Ltd. still a good law??

  7.  As seen above, the question referred to the High Court was restricted to S. 80HHC(1B). The issue dealt with by the Tribunal in the case of Ajanta Pharma Ltd. was only in respect of S. 80HHC(1B) and, therefore, the High Court could not have dealt with the controversy which was there in Syncome Formulations (I) Ltd. This is further fortified by the question of law referred to before the High Court.

8.    Further, no arguments were also raised by the either parties before the Bombay High Court in respect of the controversy involved in Syncome Formulations (I) Ltd. In my opinion, something which has not been considered could never have been disapproved.

   9. The reason as to why the Bombay High Court observed that Syncome Formulations (I) Ltd. is overruled is because the Tribunal decision in the case of Ajanta Pharma Ltd. (21 SOT 101) at para 10, page 109 heavily relied upon para 59 of the decision of Syncome Formulations (I) Ltd. The reliance was limited to the controversy which was involved in Ajanta Pharma Ltd. and not the one which was involved in Syncome Formulations (I) Ltd. It is only because the Tribunal in the case of Ajanta Pharma Ltd. in one of the paragraphs, has heavily relied upon the decision of Syncome Formulations (I) Ltd., the High Court has observed that Syncome Formulations (I) Ltd. is overruled.

10.    Further, controversy involved in Syncome Formulations (I) Ltd. is resolved in favour of the assessee after strongly relying upon the Circular of CBDT [Circular No. 680, dated 21-2-1994 (206 ITR 297)]. The said Circular has neither been cited nor discussed by the Bombay High Court.
This also establishes that the controversy was totally different before the Bombay High Court. This view is made abundantly clear by the immediately following paragraphs (para 37 on page 269, 270), wherein the Bombay High Court has observed in respect of the decision of the Kerala High Court in the case of CIT v. GTN Textiles Ltd., (248 ITR 372) as under?:

“The issue before the Kerala High Court was, what is the profit that should be taken into consideration considering the accounting system that has to be followed while working out the book profits. Therefore, the judgment would be no assistance in considering the question framed for consideration. (Emphasis supplied).

 11.   From this, it is clear that the decision of the Kerala High Court which is directly on the issue dealt with Syncome Formulations (I) Ltd. has been held to be not applicable. Moreover, the Bombay High Court has not dissented from the view of the Kerala High Court.

12.    The view taken by the Special Bench is correct also in view of the fact that there are direct decisions of the High Court in the following cases supporting the stand taken by the Special Bench?:

  •     CIT v. GTN Textiles Ltd., [248 ITR 372 (Ker.)]
  •     CIT v. K. G. Denim, [180 Taxman 590 (Mad.)]
  •     Rajnikant Schenelder & Associates (P) Ltd., [302 ITR 22 (Mad.)]


13.     It is also relevant to refer the decision in the case of Sun Engineering Works Ltd. (198 ITR 297) (SC), wherein the Supreme Court has observed that a decision of the Court takes its colour from the question involved in the case in which it is rendered and while applying the decision, one must carefully try to ascertain the principles laid down by the Court and not to pick out words or a sentence from the judgments delivered from the context of the question under consideration. It was categorically held that “It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgments have to be considered in the light of the question which were before this Court.” Applying the said ratio, the observations in the case of decision of the Bombay High Court in the case of Ajanta Pharma Ltd. cannot be construed to mean that the decision of Special Bench is completely overruled.

14. (ITA No. 4155/Mum./2007) dated 9-11-2009 has accepted that the issue decided by the Bombay High Court does not entirely overrule the issue decided by the Special Bench in the case of Syncome Formulations (I) Ltd. However, the Delhi Tribunal recently in the case of ACIT v. Cosmo Ferrites Ltd., [126 TTJ 666 (Del.)] has rendered a contrary view and held that the decision in the case of Ajanta Pharma Ltd. overrules the decision of the Special Bench in Syncome Formulations (I) Ltd. However, with due respect, the author disagrees with the said views of the Delhi Tribunal for the detailed discussion made above.

    15. Construed from the discussion made above, it can be assumed that the decision of Syncome Formulations (I) Ltd. cannot be said to be entirely overruled except only to the extent of quantum of deduction. In other words, the necessary conclusion of the said discussion could be that while computing the amount of deduction as per clause (iv) to Explanation I to S. 115JB(2) of the Act, the book profits should be considered as the gross total income for the purpose of determining the eligible amount of deduction u/s.80HHC of the Act as per S. 80HHC(3)/(3A) of the Act. The provision of S. 80HHC(1B) would then be applied, as held by the Bombay High Court, to determine the quantum of deduction which will be allowed to be reduced while computing the book profits for the purpose of S. 115JB of the Act.

4. CBDT notifies norms for procedure and criteria for compulsory manual selection of cases for scrutiny during Financial Year 2014-2015 – Instruction No. 6 dated 2nd September, 2014

4. CBDT notifies norms for procedure and criteria for compulsory manual selection of cases for scrutiny during Financial Year 2014-2015 – Instruction No. 6 dated 2nd September, 2014

CBDT    extends    the    due    date    for    filing    income    tax    returns    for  assessees who are liable to tax audit u/s. 44aB of the act  –    Order    u/s.    119    of    the    Act    –    File    no:    F.No.153/53/2014-TPL    (Pt.I)    dated    26th    September    2014

 The    Board    has    extended    the    due    date    for    filing    return    of income for assessees who are subject to tax audit from 30th     September     2014     to     30th     November     2014     in     line    with the extension of obtaining the tax audit report. it has been    clarified    in    the    order    that    interest    u/s.    234A    would    be leviable.  in all other cases the due date would remain   at 30-09-14

2. Extension of due date of filing of the return of income – Order F. No. 225-268-2014-ITA.II dated 16th September, 2014

2. Extension of due date of filing of the return of income – Order F. No. 225-268-2014-ITA.II dated 16th September, 2014

Considering     the     large     scale     devastation     in     the     State    of     Jammu     and    Kashmir     due     to     heavy     rains     and     floods,    CBDT     has     extended     the     due-date     of     filing     Returns     of      Income     from     30th    September,     2014     to     30th    November, 2014,     in    cases    of     Income-tax    assessees     in     the    State    of Jammu and Kashmir.

3. Agreement for Avoidance of double taxation and Prevention of fiscal evasion with respect to taxes on income between Government of the Republic of India and the Royal Government of Bhutan enters into force on 17th July, 2014 – Notification No. 42 dated 5th September, 2014

3. Agreement for Avoidance of double taxation and Prevention of fiscal evasion with respect to taxes on income between Government of the Republic of India and the Royal Government of Bhutan enters into force on 17th July, 2014 – Notification No. 42 dated 5th September, 2014

1. Agreement for Avoidance of double taxation and Prevention of fiscal evasion with respect to taxes on income between Government of the Re-public of India and the Government of Republic of Fiji enters into force on 12th August 2014 – Notification No. 35/2014/F.No.503/11/2005/-FTD-11 dated 12th August, 2014

1. Agreement for Avoidance of double taxation and Prevention of fiscal evasion with respect to  taxes on income between Government of the Re-public of India and the Government of Republic of Fiji enters into force on 12th August 2014 – Notification No. 35/2014/F.No.503/11/2005/-FTD-11 dated 12th August, 2014

Ownership of a Part of the House and Exemption u/s. 54F

Synopsis

Section 54F, which allows exemption to an assessee from capital gains tax upon reinvestment of sale proceeds into a residential property, has been prone to litigation. A new area of controversy is now emerging with conflicting decisions rendered by various tribunals – whether part or joint ownership of a property at the time of transfer of the original asset could be construed as ownership of “one” residential property as intended under the proviso to section 54F(1). In this article, the authors discuss the conflicting tribunal judgments and their interpretation on this issue.

Issue for Consideration

An assessee, being an individual or a HUF, is exempted from payment of income tax on capital gains arising from the transfer of an asset, not being a residential house, u/s. 54F of the Income-tax Act on reinvestment of the net consideration in purchase or construction of a residential house, within the specified period. This exemption from tax is subject to fulfillment of the other conditions specified in section 54F, one of which is that the assessee should not own more than one residential house, other than the new house, on the date of transfer of the said asset. This condition prescribed by item (i) of Clause (a) of the Proviso to section 54F(1) reads as under; “Provided that nothing contained in this sub-section shall apply where – (a) the assessee, – (i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or…..”. Till assessment year 2000-01, the condition was that the assessee should not own any other residential house on the date of transfer, other than the new house.

An ownership of more than one house is fatal to the claim of exemption from tax on capital gains. The term ‘more than one residential house’ and the term ‘owns’ are not defined by section 54F or the Income-tax Act. Whether the Income-tax Department, while applying these terms, is required to establish that the assessee is the sole owner of a whole house, absolutely to the exclusion of other persons or is it sufficient if it establishes the co-ownership or joint ownership of the house or a part of the house by the assessee held together with the other persons, is the question that is being debated by the different benches of the tribunal. The issue involves the interpretation of these terms on which the different benches of the tribunal have taken conflicting stands that require due consideration. The Mumbai and the Chennai benches of the tribunal have taken a stand that the co-ownership of a house at the time of transfer does not amount to ownership of a house and is not an impediment for the claim of exemption u/s. 54F, while the Hyderabad and the Chennai benches of the tribunal have denied the benefit of section 54F in cases where the assessees have been found to be holding a share in the ownership of the house as on the date of transfer of the asset.

Rasiklal N. Satra’s Case

The issue first came up for consideration of the Mumbai bench of the tribunal in the case of Rasiklal N. Satra, 98 ITD 335. In that case, the assessee had derived capital gains of Rs. 6,68,698 for A.Y. 1998-99 on sale of shares in respect of which gains, an exemption u/s. 54F was claimed on the strength of purchase of a house at Vashi, Navi Mumbai. The AO in the course of assessment noticed that the assessee was the co-owner of a house at Sion on the date of transfer of the said shares which co-ownership was held to be in violation of one of the conditions of section 54F. The AO accordingly denied the claim of exemption, on the ground that the assessee owned another house on the date of transfer of the shares.

Before the CIT (Appeals) it was contended that a shared interest in the property did not amount to ownership of the property, a contention that was accepted by the CIT (Appeals) who allowed the claim of the assessee for exemption from tax.

In the appeal by the AO to the tribunal, the Income-tax Department contended that a share in the ownership of a house amounted to the ownership of house and as such the assessee had violated the condition in section 54F and as a result was not eligible for the claim of exemption from tax. The assessee reiterated his contention that a shared interest in the property was not equivalent to the ownership of the house. He also relied on the provisions of section 26 of the Act to contend that the joint owners were to be assessed in the status of an AOP unless the shares of the owners were definite and ascertainable. He contended that he had no definite share in the house and he could not be held to be the owner of the house.

The tribunal noted that the only issue before it was as to whether the assessee could be said to be the owner of the Sion house or not. In the context, it observed that the Legislature had used the word ‘a’ before the words ‘residential house’ which must mean a complete residential house and would not include a shared interest in a residential house; where the property was owned by more than one person, it could not be said that any one of them was the owner of the property; in such a case no individual person, of his own, could sell the entire property though no doubt, he could sell his share of interest in the property but as far as the property was considered, it would continue to be owned by co-owners; joint ownership was different from absolute ownership; in the case of a residential unit, none of the co-owners could claim that he was the owner of a residential house; ownership of a residential house meant an ownership to the exclusion of all others and where a house was jointly owned by two or more persons, none of them could be said to be the owner of that house.

The tribunal fortified its views with the judgment of the Supreme Court in the case of Seth Banarsi Dass Gupta vs. CIT, 166 ITR 833, wherein, it was held that a fractional ownership was not sufficient for claiming even fractional depreciation u/s. 32 of the Act. It observed that because of the said judgment, the Legislature had to amend the provisions of section 32 with effect from 01-04-1997 by using the expres-sion ‘owned wholly or partly’. It held that the word ‘own’ would not include a case where a residential house was partly owned by one person or partly owned by other person(s). It further observed that after the judgment of Supreme Court in the case of Seth Banarsi Dass Gupta (supra), the Legislature could have also amended the provisions of section 54F so as to include part ownership and since, the Legislature had not amended the provisions of section 54F, it had to be held that the word ‘own’ in section 54F would include only the case where a residential house was fully and wholly owned by assessee and consequently would not include a residential house owned by more than one person. In the present case, admittedly the house at Sion, Mumbai, the tribunal further noted, was purchased jointly by assessee and his wife. As it was nobody’s case that wife was a benami of assessee, as such it had to be held that assessee was not the owner of a residential house on the date of transfer of original asset. Consequently, the exemption u/s. 54F could not be denied to assessee.

Holding of a share or a part ownership in the house was not considered by the tribunal to be representing the ownership of a house for the purposes of compliance of conditions contained in the Proviso to section 54F(1) of the Act. The benefit of section 54F conferred on the assessee by the CIT (Appeals) was confirmed by the tribunal.

Apsara Bhavana Sai’s Case

The issue recently came up for consideration of the Hyderabad bench of the tribunal in Apsara Bhavana Sai’s case, 40 taxmann.com 528.

In this case, the assessee had claimed an exemption u/s. 54F in respect of long term capital gains arising from sale of shares, for A.Y. 2008-09. During the course of assessment, the AO noticed that the as-sessee owned two houses, i.e. more than one house, as she had declared income from these two houses under the head ‘Income from House Property’. He was of the opinion that the assessee had violated the condition of section 54F(1) that prohibited her from owning more than one house on the date of transfer of shares. He accordingly called upon the assessee to explain her case for the exemption.

The assessee, inter alia, claimed that one of the houses at ‘My Home Navadeep’ was held jointly by her with her husband. Relying on the decision in the case of Rasiklal N. Satra (supra), she argued that a share in a house, per se, was not equated with the ownership of the house and her co-ownership of the said house, should not be a ground for denial of benefit of section 54F to her.

The AO noted that the assessee, as a joint owner, was holding the rights of ownership over the house and could not be said to be not the owner of the property, more so where the entire rental income of the house was offered for taxation in her hands. Relying on an unreported decision of the Chennai bench of the tribunal, in the case of Dr. P. K. Vasanthi Rangrajan dated 25-07-2005 in ITA No. 1753/MDS/2004, the AO denied the exemption to the assessee. He also relied on the decision of the Gujarat High Court in the case of Chandanben Maganlal, 245 ITR 182 to support his action.

Before the CIT(A), the assessee reiterated that a share in the joint property should be regarded as a share only and not as an ownership, relying on the decisions in the cases of Rasiklal N. Satra (supra) and Seth Banarsi Dass Gupta, 166 ITR 783 (SC) where it was held that a co-owner was a person entitled to a share in the property but could not be recognised as the single owner. The decisions in the cases of Shiv Narain Chaudhary, 108 ITR 104 (All.) and in T. N. Aravinda Reddy, 120 ITR 46 (SC) were also relied upon. The assessee further contended that the decision of the tribunal in the case of Rasikal N. Satra (supra) was not contested further, and therefore, shall be considered as final. She maintained that part ownership of the house property could not be a disqualification for claiming exemption u/s. 54F as a joint ownership in a house should not be considered in counting the numeric strength of the house property as envisaged under the provisions for claiming exemption u/s. 54F. The assessee submitted that that the share in a joint ownership in the property at ‘My Home Navadeep’ should be excluded and not considered as disqualification for claiming exemption u/s. 54F of the Act.

The CIT(A) observed that;

•    admittedly the house was jointly owned by the assessee with her husband and the question, therefore, was whether the part ownership of the assessee of the said flat could be considered as ownership of the flat.

•    in the case of Dr. P. K. Vasanthi Rangarajan (supra), wherein it had been held that if an assessee owned a part of a residential property, though not fully, it amounted to owning of a residential property as envisaged in section 54F and the assessee became disqualified for exemption u/s. 54F,

•    Mumbai bench in the case of Rasiklal N. Satra (supra) had taken a view that ownership was different from absolute ownership and that none of the co-owners could claim that he was the owner of the residential house as the ownership of a residential house meant ownership to the exclusion of all others relying on the decision of the Supreme Court in the case of Seth Banarasi Dass Gupta (supra), holding that fractional ownership was not sufficient for claiming even fractional depreciation u/s. 32 of the Act.

•    the said decision in the case of Rasiklal N. Satra (supra) was not contested further,

•    the Chennai bench of the tribunal, in a later decision in the case of Asstt. CIT vs. K. Surendra Kumar in ITA No. 1324/Mds/2010 dated 12-08-2011, had followed the same decision of the Mumbai bench going against the decision of their co-ordinate bench in the case of Dr. P.K. Vasanthi Rangarajan (supra), wherein the tribunal noted that the decision of the Supreme Court in the case of Seth Banarasi Dass Gupta (supra) had not been considered in Dr. P.K.Vasanthi Rangrajan’s case, whereas the same was considered by the Mumbai bench in the case of Rasiklal N. Satra (supra).

•    the Chennai bench in the said K. Surendra Kumar ‘s case held that since in the said case the assessee was only a part owner of the two residential properties, he could not be said to be owning a residential house as required for the purpose of benefit u/s. 54F of the Act.

The CIT(A) held that as the assessee was only a part owner of the property at ‘My Home Navadeep’, in the light of the decisions of the Mumbai and Chennai benches, the assessee could not be considered as owning the said property, to the exclusion of the joint owner, i.e., her husband, so as to be called the ‘owner’ for the purpose of section 54F of the Act. The CIT(A) held that the assessee could be said to be owning only one property as on the date of sale of shares, and therefore, was eligible for deduction u/s. 54F and accordingly, decided the grounds raised by the assessee in her favour and directed the Assessing Officer to revise the computation of income.

Against the order of the CIT(Appeals), the Income tax Department filed an appeal before the tribunal wherein it was pleaded; that the CIT(A) wrongly granted deduction u/s. 54F of the Act, though the assessee was owning more than one residential house; that the assessee being partial owner of the property at ‘My Home Navdeep’ and absolute owner of the other house situated at Meenakshi Royal Court, was owning more than one house and was not entitled for deduction u/s. 54F of the Act; even fractional or partial ownership of the immovable property disentitled the assessee for claiming deduction u/s. 54F of the Act ; that the judgments relied on by the assessee were relating to granting of deduction u/s. 32 and the language used therein was entirely different from section 54F of the Income- tax Act and these judgments were not applicable to the facts of the case; that the assessee was to be treated as owning more than one residential house and she could not granted deduction u/s. 54F of the Act in view of the judg-ments in the cases of CIT vs. Ravinder Kumar Arora, 342 ITR 38(Delhi), Mrs. Kamlesh Bansal vs. ITO, 26 SOT 3 (Delhi) (URO), Madgul Udyog vs. CIT, 184 ITR 484 (Cal.)and Dy. CIT vs. Greenko Energies (P.) Ltd. in ITA Nos. 3-7/Hyd/13 dated 10.5.2013.

The tribunal, on due consideration of the material on record, observed that the exemption u/s. 54F had been granted to the assessee with a view to encourage construction of one residential house and the construction/purchase of a house other than one residential house was not covered by section 54F of the Act; that the concession provided u/s. 54F w.e.f. 01-04-2001 would not be available in a case where the assessee already owned, on the date of transfer of the original assets, more than one residential house; it was clear that emphasis had been given on owning more than one residential house by an assessee and the assessees who already owned more than one residential house on the date of transfer of the original asset, were not eligible for the concession provided u/s. 54F of the Act even if the other residential house might be either owned by the assessee wholly or partially. In other words, when any assessee who owned more than one residential in his/her own title exercising such dominion over the residential house as would enable other being excluded therefrom and having right to use and occupy the said house and/or to enjoy its usufruct in his/her own right should be deemed to be the owner of the residential house for the purpose of section 54F of the Act and that the proviso to section 54F of the Act clearly provided that no deduction shall be allowed if the assessee owned on the date of transfer of the residential asset more than one residential house.

For concluding the case in favour of the Income tax Department, the tribunal relied upon the decisions in cases of Smt. Bhavna Thanawala vs. ITO, 15 SOT 377 (Mum), Ravinder Kumar Arora vs. Asstt. CIT, 52 SOT 201(Delhi) and V. K. S. Bawa vs. Asstt. CIT, 56 ITD 232 (Delhi).

Observations

Section 54F on its original enactment by the Finance Act, 1982 disentitled an assessee for the claim of exemption from tax in a case where he owned any one other house as on the date of transfer, other than the new house. Realising the genuine difficulties faced by the assesses, a relaxation was made by the Finance Act, 2000 with insertion of the Proviso in s/s. (1) so as to enable an assessee to own one residential house as on the date of the transfer of the asset. The sum and the substance of the Proviso is that an assessee is not disentitled from claiming an exemption on account of his ownership of one house as on the date of transfer.

The issue is two dimensional. The Income-tax Department has to cross two hurdles, not one, before it can successfully deny the benefit of exemption to the assessee. One, it has to establish that the term ‘owns’ include an ownership of a ‘part ownership’ or a ‘joint or co-ownership’ of the house. Second, it has to establish that the term ‘one’ includes within its ambit ‘a fraction of one’. In our opinion, the tribunal has not considered the other equally important aspect of the condition stipulated and have emphasised the first aspect of the issue only, while deciding the issue either way.

On a reading of the said Proviso, it is evident that the legislature, unlike other provisions, has not expressly stated that the term ‘owns’, or for that matter the term ‘one residential house’, shall include a co-ownership of a part of the residential house. The Act, at many places, clearly provide that a part of a building is also included in the building. For example; Explanation (b) of section 194IA, 269UA(d)(i) and (ii), section 32, etc.. In the absence of an express provision, it is inappropriate to read the Proviso in a manner so as to include the ownership of a part of the house therein and circuitously hold that such an interpretation represents the legislative intent.

The decisions relied upon by the AO and by the Hyderabad tribunal in the cases of Chandanben Maganlal (Guj) and Ravindar Kumar Arora (Del) are the cases that involved the issue of eligibility of an assessee for exemption u/s. 54F on the strength of acquiring co-ownership rights in a new house on transfer of an asset other than a residential house. These cases, therefore, dealt with the interpretation of the main provision of s/s. (1) which employs a different language than the Proviso and are therefore distinguishable. The main provision requires ‘purchase’ of ‘a’ residential house while the Proviso restricts ownership to ‘one’ residential house. The terms employed are not only different, they are used in different context for different objective and should be interpreted in a manner that facilitates the objective and not frustrate the incentive provisions. While ‘a’ house may include a part of the house, it is very difficult, if not impossible, to state that ‘one’ includes a part of one, as well. Section 54F(1), in three places, has used different terminologies conveying the different objectives of the legislature. At one place in main sub-section (1), it has used ‘a residential house’; in the Proviso ‘one residential house’ is used in Items (a)(i) and (b) while in Items (a)(ii) and (iii) ‘any residential house’ has been used.

Section 13 of the General Clauses Act provide that ‘single’ includes ‘plural’ and the ‘plural’ includes ‘single’. It does not provide that ‘one’ includes a fraction of one. ‘One’ is a full and complete number; an integer; a whole number, complete in itself; single and integral in number, the lowest cardinal number; not capable of being substituted by a part i.e. an incomplete number.

The fact that the different benches have taken conflicting views and even the Chennai bench has taken conflicting views in two different cases clearly indicate that more than one view is available. It is by now a settled a proposition of taxation laws that a view beneficial to the assessee should be adopted in a case where two views are possible. Vegetable Products Ltd. 88 ITR 192 (SC). It is also a settled po-sition in law that an incentive provision should be liberally interpreted to facilitate the conferment of an incentive on the assessee. Bajaj Tempo Ltd. 196 ITR 188 (SC) and Strawboard 177 ITR 431 (SC).

It may be possible to hold that a co-owner or a part owner is also the owner of a house but the same may not be true while supplying a meaning to ‘one’ house. A part of a house cannot be treated as one house and ownership of a part of house cannot be considered as the ownership of one house.

A useful reference may also be made to the provisions of section 32 which expressly covers the cases of the whole or part ownership of an asset for grant of depreciation. The term ‘wholly or partly’ used before the term ‘owned’ in section 32(1) clearly convey the legislative intent of covering an asset that is partly owned for grant of depreciation. In its absence, it was not possible for a co-owner of an asset to claim the depreciation as was held in the case of Seth Banarasi Dass Gupta (Supra). In that case, a fractional share in an asset was not considered as coming within the ambit of single ownership. It was held that the test to determine a single owner was that “the ownership should be vested fully in one single name and not as joint owner or a fractional owner”.

The better view, in our considered opinion is to ignore the case of co-ownership for the purposes of application of restrictions contained in Proviso to section 54F(1) of the Income-tax Act so as to enable the claim of exemption.

88. CBDT has issued a letter to all the Chief Commissioners of income- tax clarifying certain issues and laying down important directives for smooth implementation of Safe Harbour Rules which were earlier prescribed – Letter dated 20-12-2013 F.No. 500/139/2012/FTD-1 copy available on www.bcasonline.org

88. CBDT has issued a letter to all the Chief Commissioners of income- tax clarifying certain issues and laying down important directives for smooth implementation of Safe Harbour Rules which were earlier prescribed – Letter dated 20-12-2013 F.No. 500/139/2012/FTD-1 copy available on www.bcasonline.org

87. CBDT issues instructions for relaxing the time frame prescribed u/s. proviso to s/s. 2 of Section 143(1) relating to the date of processing refunds. This would be applicable in cases where the return of income has been filed within the time frame prescribed. Refund is due to the assessee but due to technical reasons not attributable to the assessee, the return has not been processed – Instruction no 18/2013 dated 17th December 2013 (F.No. 225/196/2013-ITA -II) -copy available on www. bcasonline.org

87. CBDT issues instructions for relaxing the time frame prescribed u/s. proviso to s/s. 2 of Section 143(1) relating to the date of processing refunds. This would be applicable in cases where the return of income has been filed within the time frame prescribed. Refund is due to the assessee but due to technical reasons not attributable to the assessee, the return has not been processed – Instruction no 18/2013 dated 17th December 2013 (F.No. 225/196/2013-ITA -II) -copy available on www. bcasonline.org