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Category: Direct Taxes

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