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Category: Direct Taxes

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