BCAJ | Bombay Chartered Accountant Journal

Recovery of tax — Private Company — Recovery from the director — Non-recovery not shown to be attributable to neglect, misfeasance or breach of duty on the part of the assessee — Tax is not recoverable from Director.

47. Geeta P. Kamat vs. PCIT

[2023] 455 ITR 234 (Bom.)

A.Ys. 2008-09 and 2009-10

Date of order: 20th February, 2023

Sections 179 and 264 of ITA 1961

Recovery of tax — Private Company — Recovery from the director — Non-recovery not shown to be attributable to neglect, misfeasance or breach of duty on the part of the assessee — Tax is not recoverable from Director.

A show cause notice was issued upon the assessee u/s.179 of the Income-tax Act, 1961 (“the Act”) requiring the assessee to show cause why recovery proceedings should not be initiated upon her in her capacity as the director of Kaizen Automation Private Limited (KAPL) for the A.Ys. 2008–09 and 2009–10 due to non-recovery of taxes despite the attachment of the bank account.

In response to the show cause notice, the assessee submitted that the non-recovery of taxes could not be attributed to any gross neglect, misfeasance, breach of duty on her part in relation to the affairs of the company. The assessee contended that even though she was the director of KAPL, she neither had any control over the affairs of the company nor did she have any authority or independence to take decisions for the benefit of the company. Further, the assessee did not have any authority to sign any cheques on behalf of the company. No functional responsibility was assigned to her or her husband who was also a shareholder and director in the company.

The Assessing Officer passed the order u/s. 179 of the Act rejecting the contentions of the assessee and held that the assessee had failed to prove that she was not actively involved in the management of the company for the F.Ys. 2007–08 and 2008–09 and that there was no gross neglect misfeasance or breach of duty on the part of the assessee.

Against the said order, the assessee filed a revision application u/s. 264 of the Act which was rejected on the ground that the assessee was a director for the relevant assessment years and hence was liable.

The assessee filed a writ petition challenging the order passed u/s. 179 of the Act. The Bombay High Court, allowing the petition held as follows:

“i) If the taxes due from a private company cannot be recovered, then the same can be recovered from every person who was a director of a private company at any time during the year. Such a director can absolve himself if he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty in relation to the affairs of the company.

ii) The assessee had discharged its burden by bringing material on record to demonstrate a limited role in the company and lack of authority in the management of the company.

iii) The assessing officer had not placed any material on record to controvert the material placed on record by the assessee based on which the assessee could be held to be guilty of gross neglect misfeasance or breach of duty in regard to the affairs of the company.

iv) Theassessee having discharged the initial burden, the assessing officer had to show how the assessee could be attributed to gross neglect, misfeasance or breach of duty.

v) The order passed u/s. 179 by the assessing officer and the revision order passed u/s. 264 by the Principal Commissioner on similar grounds were unsustainable.”

BCAJ Admin

Reassessment — Condition precedent — Service of valid notice — Notice sent to secondary email id though active primary email id given in the last return — No proper service of notice — Notice and subsequent proceedings and order set aside.

46. Lok Developers vs. Dy. CIT

[2023] 455 ITR 399 (Bom.)

A.Ys. 2015-16 to 2017-18: Date of order: 15th February, 2023

Sections 144, 144B, 147, 148, 156 of ITA 1961

Reassessment — Condition precedent — Service of valid notice — Notice sent to secondary email id though active primary email id given in the last return — No proper service of notice — Notice and subsequent proceedings and order set aside.

The petitioner a registered partnership firm which was carrying on a real estate development business. Notices u/s. 148 of the Income-tax Act, 1961 for reopening of assessment was served upon the secondary email id as per the PAN Card i.e., on LOKTAX2008@REDIFFMAIL.COM, and not on the primary registered email id i.e., loktax201415@rediffmail.com. The Petitioner filed writ petitions and challenged the reassessment notices dated 28th March, 2021, for the A.Ys. 2015–16, 2016–17 and 2017-18 issued u/s. 148 of the Act, the show-cause notice for proposed variation in the draft assessment order dated 25th March, 2022 and assessment order under section 144B read with section 144, notice of demand under section 156.

The Bombay High Court framed the following questions for consideration:
“Whether subsequent proceedings initiated by the Revenue authorities for non-compliance of notice under section 148 of the Income-tax Act would be vitiated on account of notice under section 148 of the Act being served on the secondary email id registered with permanent account number (PAN) instead of the registered primary e-mail id or updated e-mail id filed with the last return of income?”

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

“i) The Assessing Officer ought to have considered the primary email id furnished by the assessee in the return filed for the A.Y. 2020–21 and had erred in issuing a notice on the secondary email id when there was a primary email id. The secondary email id had to be used as an alternative or in such circumstances when the authority was unable to effect service of any communication on the primary id. There was no prudence in issuing an email to the secondary email address. The Assessing Officer ought to have sent the notice under section 148 of the Income-tax Act, 1961 to both the primary email address and the e-mail address mentioned in the last return of income filed to pre-empt a jurisdictional error on account of valid service.

ii) The assessee was not wrong in refusing to participate in a proceeding vitiated by lack of valid service of notice. Accordingly, the notice u/s. 148 and all consequential proceedings including the notice for proposed variation in income and assessment order u/s. 144B read with section 144 were quashed and set aside. The Assessing Officer was at liberty to proceed with the assessment after issuance of fresh notice in accordance with law.”

BCAJ Admin

Reassessment — Notice u/s. 148 — Limitation — Law applicable — Effect of amendments by Finance Act, 2021 — Notice barred by limitation under un-amended provisions — Notice issued on 30th July, 2022 to reopen assessments for A.Y. 2013-14 and A.Y. 2014-15 — Not valid.

45. SumitJagdishchandra Agrawal vs. Dy. CIT

[2023] 455 ITR 216 (Guj.)

A.Ys. 2013–14 and 2014–15: Date of order: 20th March, 2023

Sections 147, 148, 148A and 149 of ITA 1961

Reassessment — Notice u/s. 148 — Limitation — Law applicable — Effect of amendments by Finance Act, 2021 — Notice barred by limitation under un-amended provisions — Notice issued on 30th July, 2022 to reopen assessments for A.Y. 2013-14 and A.Y. 2014-15 — Not valid.

In the present petitions filed under article 226 of the Constitution, the respective petitioners have called in question the notices issued by Respondent No. 2. Assessing Officer u/s. 148 of the Income-tax Act, 1961 seeking to reopen the assessment in respect of A.Ys. 2013–14 and 2014–15 and the corresponding orders u/s. 148A(d) of July 2022. The challenge is on the basis of limitation. The notices u/s. 148 of the Act were originally issued under the un-amended provisions during the period April to June 2021 and were treated as show-cause notices u/s. 148A(b) of the Act in the light of the decision of the Supreme Court in Union of India vs. Ashish Agarwal [2022] 444 ITR 1 (SC); [2023] 1 SCC 617, and thereupon, the order u/s. 148A(d) was passed in July 2022.

The Gujarat High Court allowed the writ petitions and held as under:

“i) Section 147 of the Income-tax Act, 1961, empowers the Assessing Officer to reassess the income of the assessee subject to the provisions of sections 148 to 151 of the Act in case any income chargeable to tax has escaped assessment. Section 149 deals with the time limit for notice. By the Finance Act, 2021, passed on 28th March, 2021, and made applicable with effect from 1st April, 2021, section 148A was brought into force and section 149 was also recast. The first proviso to section 149 of the Act as introduced by the Finance Act, 2021, inter alia, stipulated that no notice u/s. 148 shall be issued at any time in a case for the assessment year beginning on or before 1st day of April 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified under the provision as it stood immediately before the commencement of the Finance Act, 2021. Due to the pandemic of 2020 the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 was passed. Various notifications were issued from time to time extending the time limits prescribed u/s. 149 of the Act for issuance of reassessment notice u/s. 148. The 2020 Act is a secondary legislation. Such secondary legislation would not override the principal legislation, the Finance Act, 2021. Therefore, all original notices u/s. 148 of the Act referable to the old regime and issued between 1st April, 2021, and 30th June, 2021, which stand beyond the prescribed permissible time limit of six years from the end of A.Y. 2013–14 and A.Y. 2014–15, would be time barred.

ii) The notices u/s. 148 of the Act relatable to the A.Y. 2013–14 or the A.Y. 2014–15, as the case may be, were beyond the permissible time limit, and therefore, liable to be treated as illegal and without jurisdiction.”

BCAJ Admin

Reassessment — Notice — Charitable purpose — Registration — Law applicable — Effect of amendment of section 12A Charitable institution entitled to an exemption for assessment years prior to registration — Reassessment proceedings for earlier years cannot be initiated on account of non-registration.

44. Prem Chand Markanda SD College for Women vs. ACIT(E)

[2023] 455 ITR 329 (P&H)

A.Y. 2015-16: Date of order: 31st January, 2023

Sections 147 and 148 of ITA 1961

Reassessment — Notice — Charitable purpose — Registration — Law applicable — Effect of amendment of section 12A Charitable institution entitled to an exemption for assessment years prior to registration — Reassessment proceedings for earlier years cannot be initiated on account of non-registration.

The assessee was a society registered under the Registrar of Societies, Punjab running a college exclusively for girls since 1973. The assessee got substantial aid from the State Government in the shape of reimbursement of staff salary and therefore, prior to A.Y. 2016–17, it was entitled to blanket exemption from income tax in terms of clause (iiiab) of s.10 (23C) of the Income-tax Act, 1961.

The assessee apprehended that it may not fulfill the condition given under Rule 2BBB, which required that for institutions to be substantially financed, the percentage of government grant should not be less than 50 per cent and therefore, the assessee applied for registration u/s. 12AA on 28th March, 2016, before the competent authority. The assessee was granted registration vide order dated 30th September, 2016, which was applicable from A.Y. 2016–17 onwards until withdrawn by the Commissioner. The assessee again applied for fresh registration as per 12AB of the Act. Vide order dated
15th October, 2021, the assessee was again registered for a period of five years from A.Y. 2022–23 to A.Y. 2026–27.

Subsequently, on 16th March 2022, the assessee received a notice u/s. 148A(b) of the Act for reopening the assessment for A.Y. 2015–16 on account of bank interest and cash deposit in two of its bank accounts. In response to the notice, the assessee relied upon the third proviso to 12A(2) to contend that there was a bar to take action u/s. 147 for A.Y. preceding the year in which registration was granted. The objections were rejected vide order dated 29th March, 2022 and notice u/s. 148 of the Act was issued.

The assessee filed a writ petition challenging the notices issued under 148A(b) and section 148 of the Act. The Punjab and Haryana High Court allowed the writ petition and held as under:

“i) Once the reply filed by the assessee pursuant to the notice had been rejected without examining the third proviso to section 12A(2) relegating the assessee to the alternative remedy would not be appropriate. After issuance of notice u/s. 148A(b) objections were filed by the assessee which were dismissed. A notice u/s. 148 for reopening the assessment u/s. 147 was issued wherein no reference was made to the third proviso to section 12A.

ii) Registration of the assessee was granted and was applicable from the A.Y. 2016–17. The registration was valid for claiming the benefit under sections 11 and 12. No proceedings u/s. 147 could be initiated for the A.Y. 2015–16. Hence, the show-cause notice u/s. 148A(b), the consequent order u/s. 148A(d) and the notice u/s. 148 being contrary to the third proviso to section 12A(2) of the Act, are set aside.”

BCAJ Admin

Interest on refund — Additional Interest — Law applicable — Delay in granting refund pursuant to order of Tribunal as affirmed by the Court — Assessee is entitled to refund with interest and additional interest — Compensation awarded if process not completed within the prescribed period.

43. Bombardier Transportation India Pvt Ltd vs. DCIT

[2023] 455 ITR 278 (Guj.)

A.Y. 2005-06: Date of order: 23rd January, 2023

Sections 244 and 244A of ITA 1961

Interest on refund — Additional Interest — Law applicable — Delay in granting refund pursuant to order of Tribunal as affirmed by the Court — Assessee is entitled to refund with interest and additional interest — Compensation awarded if process not completed within the prescribed period.

The assessee filed an appeal against the order of penalty u/s 201(1) of the Income-tax Act, 1961. The CIT(A) confirmed the penalty of ₹ 97,59,312. The assessee paid an amount of ₹ 90,46,000 in the F.Y. 2006–07. The Tribunal vide order dated 17th April, 2009 quashed the penalty levied upon the assessee. The department’s appeal before the High Court was dismissed vide order dated 4th August, 2016.

The assessee filed a complaint before the CPGRAMS on 19th June, 2017 for not giving effect to the order of the Tribunal and the High Court and for non-issuance of the refund. Though the replies were received on 11th June, 2017 and 2nd August, 2017, there was no whisper on the refund. Thereafter, on 16th October, 2017, 28th February, 2018, 7th March, 2018, 12th March, 2018, 16th March, 2018, 10th April, 2018 and 11th April, 2018 yet another complaint was filed before the CPGRAMS. The assessee submitted the details for the processing of the refund. However, the refund was not granted.

In such circumstances, due to the non-action on the part of the Department despite several complaints, the assessee filed a writ petition before the Gujarat High Court and prayed that the Assessing Officer be directed to give the refund due to the assessee and the interest and additional interest u/s. 244A due to the assessee shall be paid to the assessee.

The High Court allowed the petition and held as follows:

“i) Sub-section (1) of section 244A of the Income-tax Act, 1961 provides for interest on delayed refund and sub-section (1A) inserted by the Finance Act, 2016 provides for additional interest.

ii) Two separate portals being available for day-to-day functions for the processing of returns of income and for the processing of the returns or statements of tax deducted at source could not be the reason for the court to overlook the period of five years that had been taken by the Department after the tax appeal had been decided by the court on 4th August, 2016 and there had been no further challenge by the other party. The Department was not sure of the exact outstanding demand against the assessee. Even if there had been a manual deposit prior to the online process sufficient time of five years had been taken by the Department.

iii) With regard to the refund to be returned with the interest, sub-section (1A) inserted in section 244A had to be applied prospectively for the period of delay after the introduction of the relevant statutory provision. Under sub-section (1) of section 244A the Department had to grant interest at the statutory rate and both the provisions, sections 244 and 244A, applied and the Department had to grant the refund accordingly.”

BCAJ Admin

Charitable Trusts Exemption – Application in India or Purposes in India

ISSUE FOR CONSIDERATION

Under the provisions of section 11(1)(a), a charitable or religious trust is entitled to exemption of income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India.

An issue has arisen before the courts as to whether exemption is available for such trusts in cases where income is spent outside India for the benefit of charitable purposes in India. In other words, whether for a valid exemption, the application of income is required to be made in India or it is sufficient that the purpose for which the income is applied is in India in order to be eligible for the benefit of exemption.

While the Delhi High Court has taken the view that the spending or application has to be in India, a contrary view has been taken by the Karnataka High Court, holding that the application has to be for purposes in India.

NATIONAL ASSOCIATION OF SOFTWARE AND SERVICES COMPANIES’ CASE

The issue first came up before the Delhi High Court in the case of DIT(E) vs. National Association of Software and Services Companies 345 ITR 362.

In this case, the assessee, an association of Indian software companies, had spent Rs. 38,29,535 on
events / activities in connection with an exhibition in Germany. The assessee had claimed such amount as an application of income for charitable purposes, as it was in pursuance of its objects of promotion of the Indian software industry. The Assessing Officer (AO) did not allow such amount as an application of income, on the grounds that expenditure on activities outside India was not eligible to be treated as an application of income for charitable purposes under section 11(1)(a). The Commissioner (Appeals) upheld the order of the AO.

Before the Tribunal, on behalf of the assessee, it was argued that while the AO and the CIT(A) were of the view that the expenditure should have been incurred in India in order to be eligible for exemption, it was not the case of the Revenue that the expenditure incurred was not for the purpose of the charitable activities of the assessee. The fact that the expenditure was incurred for attaining the objects of the assessee’s trust was not in dispute and the dispute centred only on the issue that the expenditure had been incurred outside India and not in India. The provisions of section 11(1)(a) envisaged the grant of exemption with respect to income applied for attaining the charitable purpose. Even though section 11(1)(a) used the word “in India”, what was intended was that the income was to be applied to such purpose in India, i.e., the purpose of the expenditure should be to attain the charitable objects in India. The expenditure need not be incurred in India and the benefit of the expenditure incurred should give the charitable benefit in India. If any expenditure was incurred even outside India to achieve the charitable objects in India, it should be allowed as application, as it had been expended for advancing charitable objects in India and for fulfilling the charitable purpose in India. The assessee was primarily looking after the interests of software development and software growth in India. The expenditure had been incurred outside India for attaining the primary objects of the assessee’s trust for the promotion and export of software for India which, needless to say, was advancement of charitable object in India and the fulfilment of charitable purpose in India.

Before the Tribunal, it was further argued on behalf of the assessee that it was the software industry in India which benefited from the expenditure incurred by the assessee on the event in Hanover, Germany. In fact, by incurring the expenditure which had compulsorily to be incurred at the event in Hanover, Germany, no other person had got any benefit whatsoever, other than the Indian software industry on whose behalf and for whom the charitable activities were carried out. Further, it was pointed out that in section 11(1)(a), the words “in India” followed the words “to such purpose” and the words used were not “applied in India”. The legislature intended that the application should be in India, it would have specifically stated so, which was conspicuous by the absence of the words “in India” after “applied”. On behalf of the assessee, reliance was placed on the decision of the Tribunal in the case of Gem & Jewellery Export Promotion Council vs. ITO 68 ITD 95 (Mum), wherein it was held that even if the expenditure was incurred outside India, but it was for the benefit of charitable purposes in India, it was an application of income for the purposes of section 11(1)(a).

The Tribunal observed that the fact the legislature had put the words “to such purposes” between “is applied” and “in India” showed that the application of income need not be in India, but that the application should result in and be for the charitable and religious purpose in India. It noted that the Revenue did not dispute that the benefit of the expenditure was derived in India. It, therefore, held that expenditure outside India was an application of income for the purposes of section 11(1)(a).

Before the Delhi High Court, on behalf of the Revenue, it was argued that the expenditure, even if it was considered as an application of income, was outside India, and the mandate of the section was that the income should be applied in India to charitable purposes. The said condition not having been satisfied, it was urged that the Tribunal was wrong in holding that expenditure incurred outside India should be considered as an application of income of the trust in India.

The Delhi High Court referred to section 4(3)(i) of the Indian Income Tax Act, 1922, and its amendment with effect from 1st April,1952. It noted the observations of the Supreme Court in the case of H E H Nizam’s Religious Endowment Trust vs. CIT 59 ITR 582, where the Court noted and contrasted the differences pre- and post-amendment. The Supreme Court observed:

“Under the said clause, trust income, irrespective of the fact whether the said purposes were within or without the taxable territories, was exempt from tax in so far as the said income was applied or finally set apart for the said purposes. Presumably, as the state did not like to forgo the revenue in favour of a charity outside the country, the amended clause described with precision the class or kind of income that is exempt thereunder so as to exclude therefrom income applied or accumulated for religious or charitable purposes without the taxable territories.”

The Delhi High Court noted that prior to 1st April, 1952, there was no difference between an application of income of the trust within and outside the taxable territories. The amendment after 1952 made a reference to application or accumulation for application of income to such religious or charitable purposes as relate to anything done within the taxable territories. Dealing with the argument on behalf of the assessee that these words clearly showed that the charitable purposes must be executed within the taxable territories, and that it was immaterial where the income was actually applied, the Delhi High Court observed that it was difficult to conceive of a situation under which the charitable purposes were executed within the taxable territories but the income of the trust was applied elsewhere in the implementation of such purposes.

According to the Delhi High Court, the position was put beyond doubt by the proviso to section 4(3)(i) of the 1922 Act, which stated that the income of the trust would stand included in its total income if it was applied to religious or charitable purposes without the taxable territories. This was indicative of the object of the main provision — in the main part it was provided that the income should be applied for religious or charitable purposes within the taxable territories and in the proviso, an exception was carved out to provide that if the income was applied outside the taxable territories, even though for religious or charitable purposes, the trust would not secure exemption from tax for such income. The Delhi High Court also noted that the provisions of section 11(1)(c) of the 1961 Act were similar to the provisions of the proviso to section 4(3)(i) of the 1922 Act, and therefore, the Supreme Court’s observations applied to section 11(1)(c) of the 1961 Act as well.

The Delhi High Court was also of the view that the interpretation canvassed on behalf of the assessee was opposed to the natural and grammatical meaning that could be ascribed to the language of the section. The Court noted that the term “income applied to such purposes in India” answers three questions which arise in the mind of the reader: apply what? applied to what? and where? According to the Court, the answer to the first question would be: apply the income of the trust, the answer to the second question would be: applied to charitable purposes, and the answer to the third question would be: applied in India. Therefore, according to the Delhi High Court, grammatically also it would be proper to understand the requirement of the provision that the income of the trust should be applied not only to charitable purposes but also applied in India to such purposes. The Delhi High Court rejected the submissions on behalf of the assessee that the words “in India” qualified only the words “such purposes” so that only the purposes were geographically confined to India, stating that that did not appear to be the natural and grammatical way of construing the provision.

The Delhi High Court also observed that if the assessee’s interpretation was correct, then section 11(1)(c) would become redundant and otiose. If the income of the trust could be applied even outside India, so long as the charitable purposes were in India, then there was no need for a trust which tended to promote international welfare in which India to apply to the CBDT for a general or special order directing that the income, to the extent to which it was applied to the promotion of international welfare outside India, should not be denied the exemption. The Delhi High Court was, therefore, of the view that the words “in India” appearing in section 11(1)(a) and the words “outside India” appearing in section 11(1)(c) qualified the word “applied” appearing in those provisions and not the words “such purposes”.

Dealing with the assessee’s argument that the Court would be changing the group of words appearing in section 11(1)(a) by displacing the words “in India” and transposing them between the words “applied” and the words “to such purposes”, redrafting the clause as “to the extent such income is applied in India to such purposes”, the Delhi High Court observed that it would make no difference to the meaning to be ascribed to the group of words. In that case, perhaps the meaning would have been brought out in still more precise or clear terms, but there were different ways of expressing the requirement that the income of the trust should be applied in India in order to get an exemption. Even assuming that the language was not sufficiently expressive of the idea, the Court should be able to set right and construe the provision in the manner in which it made sense, unless by such construction, there resulted an absurdity which could not be countenanced at all. Looking at the history of the provision, according to the Delhi High Court, it could not be said that by construing section 11(1)(a) in the manner that the requirement was that the income of the trust should be applied in India for charitable or religious purposes, it was doing any violence to the provisions nor could it be said that the Court was condoning an absurd result.

The Delhi High Court referred to various decisions of the Supreme Court and the House of Lords for the proposition that the statute should be read literally, by giving the words used by the Legislature their ordinary, natural and grammatical meaning and the construction of section 11(1)(a) by the Court was in accordance with the rules laid down in the judgments cited by it.

The Court then dealt with the assessee’s arguments that the time had now come to take a fresh look at the section. Having regard to the globalisation of commerce and the vast strides made in cross-border trade and flight of capital, it was the need of the hour to shed conservative thinking on the subject and adopt a bold and innovative approach, by dispensing with the requirement that the application of the income of the trust should be in India in order to secure exemption for the trust. On behalf of the assessee, it had been claimed that this could be achieved by construing or interpreting the section in the manner suggested on behalf of the assessee. The Delhi High Court stated that what was contended by the assessee was not without force or merit, but that the Court was required to interpret the statute as it was, and not in the manner in which it thought the law ought to be. Further, according to the Court, in the matter of exemption from tax in an all-India statute, judicial restraint, and not innovativeness or novelty, might be the proper approach to follow.

The Delhi High Court, therefore, held that since the application of income was outside India, such expenditure was not eligible to be considered for exemption of the income as an application of income for charitable purposes in India.

A similar view was taken by the Madras Bench of the Tribunal, but in a reverse situation, in the case of Bharat Kalanjali vs. ITO 30 ITD 161 (Mad). In that case, the assessee had paid travel expenses in India to an Indian travel agency to send a troupe for dance performances abroad. The tour was organised by the Government of India at the request of the foreign government. In the said case, the Tribunal held that the expression “applied to such purposes in India” referred only to the situs of the expenditure and not to the place where the purposes were carried out, and the fact that the troupe gave the performance abroad was not a disqualification for treating the amount actually spent in India as application for charitable purposes in India.

OHIO UNIVERSITY CHRIST COLLEGE’S CASE

The issue again came up before the Karnataka High Court in the case of CIT(E) vs. Ohio University Christ College 408 ITR 352.

In this case, the assessee was a charitable trust registered under section 12A. It conducted MBA programs in India in collaboration with Ohio University, USA. The assessee trust had entered into an agreement with Ohio University, USA, whereby Ohio University sent its faculty to the assessee’s premises in India for teaching purposes, for which the assessee made payment to Ohio University for providing the faculty and other support services. In terms of the agreement, the assessee was required to pay a sum of USD 9,000 per student for the 18 months duration of the course (i.e., USD 3,000 per student for a 6-month period). At the end of the year, as the payments had not yet been made, the assessee had provided for / accrued the amount in its books of account, and the actual remittance was made in the subsequent year, from India to the overseas university. The assessee had claimed application of income in respect of expenditure incurred / provided by it, which included faculty teaching charges payable to Ohio University, USA.

The AO disallowed the claim of such faculty teaching charges payable to Ohio University on the grounds that mere making of an entry could not be considered as an application of income. The income had to be applied for charitable purposes only in India, and that the assessee had not proven that the payments made to Ohio University resulted in charitable purposes in India.

The CIT(A) allowed the assessee’s claim, observing that the application should be for charitable purposes in India, and if the payment was made outside the country in furtherance of charitable purposes in India, it could be counted as an application for charitable purposes in India.

Before the Tribunal, on behalf of the Revenue, it was submitted that the assessee had only made entries in the books of accounts in the relevant periods and had not utilised or spent the amount during the year. The actual payment of the same had happened in the subsequent year only, and as such, there was no application of income during the relevant year under consideration. It was submitted that the phrase “such income is applied to such purposes in India” appearing in section 11(1)(a) of the Act connoted “actual payment”, and since it had not happened, the assessee was not entitled to treat the provision as application of income.

On behalf of the assessee, it was urged that the assessee had actually incurred the said expenditure towards faculty teaching charges payable to Ohio University, USA, and therefore, it should be considered as having been applied under section 11(1)(a). It was submitted that the AO had misdirected himself in holding that the amounts had to be actually spent in the year under consideration for it to be considered as application of income. It was submitted that even if the payment was earmarked and allocated for charitable purposes, it should be taken to be applied for charitable purposes.

It was further submitted on behalf of the assessee, in response to the inquiry / contention that merely because the payment was made outside India, it did not mean that the charitable purpose was outside India. It was submitted that the charitable activities were rendered in India and just because the payment was made to parties outside India, it did not change the fact that the charitable activities were carried out in India. Reliance was placed on the decisions of the Income Tax Appellate Tribunal in the cases of Gem & Jewellery Export Promotion Council vs. Sixth ITO 69 ITD 95 (Mum) and National Association of Software & Services Companies vs. Dy. DIT (E), 130 TTJ 377 (Delhi).

The Tribunal noted that the services had been rendered by faculty members from Ohio University as the classes were taken in Bangalore. The services had been utilised for the trust’s objectives in India, viz., of imparting higher education in India. Ohio University had also offered the income earned by it from the assessee trust to tax in India. It was therefore clear that the activities of the assessee trust were conducted in India in accordance with its objects.

As regards the payments being made out of India, the Tribunal concurred with the view of the CIT(A) that merely because the payments were made outside India, it could not be said that the charitable activities were also conducted outside the country. The Tribunal further held that the decisions of the Mumbai and Delhi Tribunals (overruled on a different point) cited before it on behalf of the assessee squarely applied to the case before it.

The Tribunal further rejected the AO’s view that a specific exemption was required from CBDT for making a claim of application of income. The Tribunal noted that the said requirement had been specified only for those trusts that had as its objects, the promotion of international welfare. In the case of the assessee, the objects of charitable activities for imparting higher education in India had already been approved by the Department while granting the registration to the assessee trust.

Further holding that the amounts debited to the income and expenditure account, which were not actually disbursed during the year but in a subsequent year, amounted to application of income during the year, the Tribunal, therefore, held that the faculty charges payable to Ohio University amounted to an application of income for charitable purposes in India.

In further appeal, the Karnataka High Court took the view that the Tribunal had rightly held that section 11(1)(a) did not employ the term “spent” but used the term “applied” and the latter term had a wider connotation. The Karnataka High Court also held that the findings of the Tribunal, relying upon the decision of the Supreme Court in the case of CIT vs. Thanthi Trust 239 ITR 502 and High Court judgments in the case of CIT vs. Trustees of H E H the Nizam’s Charitable Trust 131 ITR 479 (AP) and CIT vs. Radhaswami Satsang Sabha 25 ITR 472 (All), were correct and justified. The Karnataka High Court, therefore, upheld the view taken by the Tribunal, holding that the amount of faculty charges payable to Ohio University amounted to application of income for charitable purposes in India.

OBSERVATIONS

The Delhi High Court, in holding that for an expenditure to be qualified as an application, the expenditure should be incurred in India, has decided the matter based on a strict grammatical interpretation of the language of the section and based on the history of the section. The Karnataka High Court, though not faced with a case where the activity for which expenditure was incurred was performed outside India, has adopted a more purposive interpretation in the matter by holding that the objective of the exemption was to encourage charitable organisations to do charity in India — i.e., to benefit beneficiaries in India, and therefore, the mere fact that the amount was actually disbursed outside India should not make any difference, so long as the purpose of doing charity in India was achieved.

As regards the history of the section referred to by the Delhi High Court, by referring to the Supreme Court decision, it is to be noted that the language of section 4(3)(i) was “in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories”. This language indicates that the action of the charitable activities for which expenditure is incurred has to be within India, and not the actual payment. As regards the distinction noted by the Supreme Court before the 1952 amendment and post the 1952 amendment, the words used are “to exclude therefrom income applied or accumulated for religious or charitable purposes without the taxable territories”. The present provisions of section 11 are not as explicit to exclude an overseas payment for an expenditure incurred for the benefit made available in India.

It is important to note that one of the observations made by the Delhi High Court while analysing these observations, which seems to have partially led it to take the view that it did, was that it was difficult to conceive of a situation under which the charitable purposes were executed within the taxable territories but the income of the trust was applied elsewhere in the implementation of such purposes. The classic illustration of this is the situation which was before the Karnataka High Court — where the teaching was actually in India to Indian students but only the expenditure was remitted outside India.

An angle, though not relevant to the issue under consideration, is a confirmation by the Karnataka High Court that application could arise on accrual itself, and actual payment may take place at a later point in time. What is relevant for the issue under consideration is where the accrual of the expenditure took place — if the obligation in respect of the expenditure arose in India, due to approval of the expenditure in India and agreement to incur the expenditure in India, the mere fact that the payee is outside India should not impact the fact that application of the income was in India.

In the context of the issue of accrual and payment, the decisions noted with approval by the Karnataka High Court in the cases of Thanthi Trust (supra), H E H the Nizam’s Charitable Trust (supra), and Radhaswami Satsang Sabha (supra) all support the view that application does not necessarily mean the same thing as actually paid — the mere fact of payment outside India in the context should, therefore, not impact the fact that application is in India, particularly where the decision to incur the expenditure is taken in India, is approved and agreed upon in India and the services or goods are actually utilised for activities carried out in India for the benefit of beneficiaries in India.

In conclusion, we notice that there are two distinct situations: one where the amount is paid outside India for an overseas activity, and a second where the amount is paid outside India for an activity performed in India. In our respectful opinion, once the benefit for the payment, wherever made, is located / received / found in India, the application should be treated as eligible for exemption from tax, and the place of receipt of payment and the performance of the activity should not be an obstacle in the claim.

BCAJ Admin

Glimpses of Supreme Court Rulings

46. CIT vs. AbhisarBuildwell Pvt Ltd
(2023) 454 ITR 212 (SC)

Search and seizure — Assessment u/s 153A —Procedure – (i) In case of search under section 132 or requisition under section 132A, the AO assumes the jurisdiction for block assessment under section 153A; (ii) all pending assessments / reassessments shall stand abated; (iii) in case any incriminating material is found / unearthed, even, in case of unabated / completed assessments, the AO would assume the jurisdiction to assess or reassess the ‘total income’ taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and (iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments / unabated assessments, meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act, 1961 — however, the completed / unabated assessments can be reopened by the AO in exercise of powers under sections 147 / 148 of the Act, subject to fulfillment of the conditions as envisaged / mentioned under sections 147 / 148 of the Act and those powers are saved.

According to the Supreme Court, the question posed for its consideration was, as to whether in respect of completed assessments / unabated assessments, whether the jurisdiction of AO to make an assessment is confined to incriminating material found during the course of search under section 132 or requisition under section 132A or not, i.e., whether any addition could be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act or not.

The Supreme Court noted that it was the case on behalf of the Revenue that in case of search under section 132 or requisition under section 132A, the assessment has to be done under section 153A of the Act. The AO thereafter has the jurisdiction to pass assessment orders and to assess the ‘total income’ taking into consideration other material, even though no incriminating material is found during the search in respect of completed/unabated assessments.

The Supreme Court, at the outset, noted that various High Courts, namely, Delhi High Court, Gujarat High Court, Bombay High Court, Karnataka High Court, Orissa High Court, Calcutta High Court, Rajasthan High Court and the Kerala High Court have taken the view that no addition can be made in respect of completed / unabated assessments in absence of any incriminating material. The lead judgment was by the Delhi High Court in the case of Kabul Chawla (2016) 380 ITR 573 (Del), which had been subsequently followed and approved by the other High Courts, referred to hereinabove. One another lead judgment on the issue was the decision of the Gujarat High Court in the case of Saumya Construction (2016) 387 ITR 529 (Guj), which had been followed by the Gujarat High Court in the subsequent decisions, referred to hereinabove. Only the Allahabad High Court in the case of Principal CIT vs. MehndipurBalaji (2022) 447 ITR 517 (All) had taken a contrary view.

The Supreme Court observed that before the insertion of section 153A in the statute, the relevant provision for block assessment was under section 158BA of the Act. The erstwhile scheme of block assessment under section 158BA envisaged assessment of ‘undisclosed income’ for two reasons: firstly, there were two parallel assessments envisaged under the erstwhile regime, i.e., (i) block assessment under section 158BA to assess the ‘undisclosed income’ and (ii) regular assessment in accordance with the provisions of the Act to make assessment qua income other than undisclosed income. Secondly, the ‘undisclosed income’ was chargeable to tax at a special rate of 60 per cent under section 113, whereas income other than ‘undisclosed income’ was required to be assessed under regular assessment procedure and was taxable at the normal rate. Therefore, section 153A came to be inserted and brought into the statute. Under the section 153A regime, the legislation intended to do away with the scheme of two parallel assessments and tax the ‘undisclosed’ income also at the normal rate of tax as against any special rate. Thus, after the introduction of section 153A and in case of search, there shall be block assessment for six years. Search assessments / block assessments under section 153A are triggered by conducting a valid search under section 132. The very purpose of the search, which is a prerequisite / trigger for invoking the provisions of sections 153A / 153C is the detection of undisclosed income by undertaking extraordinary power of search and seizure, i.e., the income which cannot be detected in the ordinary course of regular assessment. Thus, the foundation for making search assessments under sections 153A / 153C can be said to be the existence of incriminating material showing undisclosed income detected as a result of the search.

According to the Supreme Court, on a plain reading of section 153A of the Act, it was evident that once a search or requisition is made, a mandate is cast upon the AO to issue a notice under section 153A to the person. The notice would require such person to furnish the return of income in respect of each assessment year falling within six assessment years immediately preceding the assessment year, relevant to the previous year in which such search is conducted or requisition is made, and assess or reassess the same.

The Supreme Court noted that as per the provisions of section 153A, in case of a search under section 132 or requisition under section 132A, the AO gets the jurisdiction to assess or reassess the ‘total income’ in respect of each assessment year falling within six assessment years. However, as per the second proviso to section 153A, the assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate. As per sub-section (2) of section 153A, if any proceeding initiated or any order of assessment or reassessment made under sub-section (1) has been annulled in appeal or any other legal proceeding, then, notwithstanding anything contained in sub-section (1) or section 153A, the assessment or reassessment relating to any assessment year which has abated under the second proviso to sub-section (1), shall stand revived with effect from the date of receipt of the order of such annulment by the CIT. Therefore, according to the Supreme Court, the intention of the legislation seemed to be that in case of search, only the pending assessment /reassessment proceedings shall abate and the AO would assume the jurisdiction to assess or reassess the ‘total income’ for the entire six years period / block assessment period. The intention did not seem to be to reopen the completed / unabated assessments, unless any incriminating material is found with respect to the concerned assessment year falling within the last six years preceding the search. The Supreme Court, therefore held that, on the true interpretation of section 153A of the Act, 1961, in case of a search under section 132 or requisition under section 132A and during the search any incriminating material is found, even in case of unabated/completed assessment, the AO would have the jurisdiction to assess or reassess the ‘total income’ taking into consideration the incriminating material collected during the search and other material which would include income declared in the returns, if any, furnished by the assessee as well as the undisclosed income. However, in case during the search no incriminating material is found, in case of completed / unabated assessment, the only remedy available to the Revenue would be to initiate the reassessment proceedings under sections 147 / 148 of the Act, subject to fulfillment of the conditions mentioned in sections 147 / 148, as in such a situation, the Revenue cannot be left with no remedy. Therefore, even in case of block assessment under section 153A in case of unabated / completed assessment and in case no incriminating material is found during the search, the power of the Revenue to have the reassessment under sections 147 / 148 of the Act has to be saved, otherwise, the Revenue would be left without a remedy.

The Supreme Court further held that if the submission on behalf of the Revenue in the case of search even where no incriminating material is found during the course of the search in case of unabated / completed assessment, the AO can assess or reassess the income / total income taking into consideration the other material, is accepted then there will be two assessment orders, which shall not be permissible under the law.

For the reasons stated hereinabove, the Supreme Court was in complete agreement with the view taken by the Delhi High Court in the case of Kabul Chawla (supra) the Gujarat High Court in the case of Saumya Construction (supra) and the decisions of the other High Courts taking the view that no addition can be made in respect of the completed assessments in absence of any incriminating material.
In view of the above and for the reasons stated above, the Supreme Court concluded as under:

(i) that in case of search under section 132 or requisition under section 132A, the AO assumes the jurisdiction for block assessment under section 153A;

(ii) all pending assessments / reassessments shall stand abated;

(iii) in case any incriminating material is found / unearthed, even, in case of unabated / completed assessments, the AO would assume the jurisdiction to assess or reassess the ‘total income taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and

(iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments / unabated assessments. This means, with respect to completed/unabated assessments, no addition can be made by the AO in the absence of any incriminating material found during the course of a search under section 132 or requisition under section 132A of the Act, 1961. However, the completed / unabated assessments can be reopened by the AO in the exercise of powers under sections 147 / 148 of the Act, subject to fulfillment of the conditions as envisaged/mentioned under sections 147 / 148 of the Act and those powers are saved.

47. Maharishi Institute of Creative Intelligence vs. CIT (E)
(2023) 454 ITR 533 (SC)

Charitable Trust — Registration under section 12A — The assessee cannot be denied the exemption in the absence of a certificate of registration, since the year 1987, i.e., from the date on which the assessee applied for registration under section 12A (when there was no requirement of issuance of a certificate of registration), it continued to avail the benefit of registration under section 12A at least up to the A.Y. 2007–08.

The assessee applied for registration under section 12A of the Act as per the provisions of law prevailing in the year 1987. Thereafter, the assessee continued to be granted the exemption under section 12A of the Act.

Till 1987 there was no requirement of issuance of any certificate of registration of section 12A. Only filing an application for registration under section 12A and processing the same by the Department was sufficient. However, in the year 1997, there was an amendment, which required the issuance of the certificate of registration under section 12A also.

Despite the above, the assessee even after 1997 continued to avail of the exemption under section 12A of the Act even post 1987 till the A.Y. 2007-08.

The AO considering the facts as in earlier years up to 2007-08 and based on the registration under section 12A in the year 1987, granted the benefit of exemption under section 12A and accordingly passed an assessment order for the A.Y. 2010-11.

The assessment order came to be taken under suomotu revision by the CIT in the exercise of powers under section 263 of the Act. The CIT set aside the assessment order on the ground that the AO mechanically granted the benefit of exemption under section 12A without in fact verifying whether any registration in favour of the assessee was issued under section 12A of the Act or not. Therefore, the CIT thought that the assessment order was against the interest of the Revenue.

In appeal, at the instance of the assessee, the Tribunal set aside the order passed by the CIT.

The order passed by the Tribunal was the subject matter of appeal before the High Court at the instance of the Revenue. Taking into consideration the amendment in the year 1997, the High Court allowed the appeal preferred by the Revenue and set aside the order passed by the Tribunal by observing that as the assessee had failed to produce the certificate of registration, the assessee was not entitled to the exemption under section 12A.

The assessee filed the review application which was dismissed.

The judgment and order passed by the High Court allowing the appeal preferred by the Revenue were the subject matter of the appeal before the Supreme Court.

The Supreme Court having heard the learned counsel appearing for respective parties noted that it was not disputed that since 1987 i.e. from the date on which the assessee applied for registration under section 12A, the assessee continued to avail the benefit of exemption under section 12A at least up to the A.Y. 2007-08. Even post-1997, the assessee continued to avail of the exemption under section 12A based on its registration in the year 1987.

In that view of the matter, the Supreme Court was of the view that the AO was justified in granting the benefit of exemption under section 12A for the A.Y. 2010-11. According to the Supreme Court, what was required to be considered was the relevant provision prevailing in the year 1987, namely, the day on which the assessee applied for the registration. At the relevant time, there was no requirement for the issuance of any certificate of registration.

The Supreme Court observed that for all these years after 1997 till the year 2007-08, the assessee continued to avail the benefit of exemption solely based on the registration in the year 1987. The Revenue and even the CIT never claimed that in the earlier years there was no certificate of registration or the registration was not granted at all. Even from the material on record, namely, a communication dated 3rd June, 2015 which was considered by the Tribunal, it was apparent that the assessee was granted registration on 22nd September, 1987. Therefore, it could not be said that there was no registration at all.

In view of the above, the Supreme Court held that the impugned judgment and order passed by the High Court was erroneous and unsustainable and was quashed and set aside. The order passed by the Tribunal was restored.

The appeal was accordingly allowed to the aforesaid extent.

BCAJ Admin

Bogus Purchase — The profit element embedded in such purchases should be added to the income of assessee — Question of fact — No substantial question of law arises.

12. PCIT – 33 vs. Synergy Infrastructures
[ITA No. 442 Of 2018, Dated: 28th June 2023. (Bom.) (HC).]

Bogus Purchase — The profit element embedded in such purchases should be added to the income of assessee — Question of fact — No substantial question of law arises.

The issue arose as to whether the ITAT is justified in confirming the action of the Ld. CIT(A) in restricting the addition to 12.5 per cent of the bogus purchase amount without appreciating the fact that assessee failed to substantiate the claim of genuineness of purchases?

The Hon’ble Court observed that there are plethora of judgments to the extent of ad hoc disallowances to be sustained with respect to the bogus purchases, what should be the percentage of the profit margin that has to be added to assessee’s income etc. Courts have held that these are issues which would require evidence to be led. Whether the purchases were bogus or parties from whom such purchases were made were bogus are essentially questions of fact.

The Court further observed that the AO in all fairness stated that the purchases by assessee, per se, are not the issue and these were not being treated as bogus. He also admits that the goods have entered into the assessee’s regular business. But AO says, assessee has not been able to give any convincing or cogent explanation as to how these goods happened to come in his possession and therefore, the purchases are not being treated as bogus or sham rather, the expenditure incurred on such purchases is treated as unexplained.

The Court held that the CIT(A) and ITAT are correct in coming to the conclusion that only the profit element embedded in such purchases should be added to the income of assessee. No substantial question of law arises for consideration revenue appeal dismissed.

shailesh.kwebmaker

Section 244A: Refund — Interest — Till actual date of payment — CPC failed to follow directions of Hon’ble Court — Contempt notice issued for non-compliance.

11. Tech Mahindra Ltd vs. DCIT, Circle 2(3)(1), Mumbai and Ors.
[WP (L) No. 5317 Of 2023
A.Y.: 2018-19; Dated: 27th June, 2023 (Bom) (HC).]

Section 244A: Refund — Interest — Till actual date of payment — CPC failed to follow directions of Hon’ble Court — Contempt notice issued for non-compliance.

The issue involved in the petition before the Hon’ble Court was seeking relief in regards to nonissuance of refund due for A.Y. 2018-2019 of Rs.153.80 crores alongwith further interest under section 244A of the Income Tax Act, 1961 (the Act) till the date of actual payment.

The Hon’ble Court observed that the Department has filed an affidavit affirmed on 26th April, 2023 in which it is admitted that a net refund of Rs. 153.80 crores plus interest under section 244A of the Act became due to be refundable to Petitioner – Assessee. It is also admitted that the Petitioner made repeated representations to the Respondent – Department. According to the Respondent, there was an outstanding demand of Rs. 266.73 crores for A.Ys. 2012-2013, 2013-2014, 2014-2015 and 2017-2018 and admittedly, a stay has been granted to petitioner by respondent vide an order dated 27th December, 2022. By the said order, an adjustment of 20 per cent of the demand against the admitted due refund of A.Y. 2018-2019 of Rs. 153.80 crores has been granted and for the balance, a stay has been granted till 31st December, 2023 or till the disposal of appeal by CIT(A), whichever event occurs earlier. The Respondent has admitted that even after such an adjustment, the Petitioner is entitled to receive a sum of Rs. 100.49 crores being the balance refund for A.Y. 2018-2019.

The Petitioner stated that after the adjustment of refund of A.Y. 2018-19 indicated above, no income tax demands are pending against the Petitioner that can be recovered by the Revenue. Accordingly, for A.Y. 2018-19, manifestly, a net amount of Rs.100.49 crores, plus interest under section 244A of the Act is due to be refunded to the Petitioner which appears to be still not released by the CPC.

The Petitioner submitted that he has neither received the due refund nor has it heard from any of the Respondents with respect to the timelines within which the said refund will be issued to the Petitioner. Moreover, more than 14 months has elapsed since the refund was determined first by Respondent No. 1.

In view of the above circumstances, the Hon’ble Court directed Respondent No. 4, i.e., Director of Income Tax, CPC, to ensure that the refund amount of Rs. 100.49 crores alongwith interest, if any, in accordance with law, is credited to petitioner’s account within one week from the date this order is uploaded.

The Court further noted that the Department counsel submitted that the Centralised Processing Centre (CPC) in Bengaluru could not see the stay granted on 27th December, 2022 in its portal, that is not reflected in the affidavit in reply filed. Respondent no.4 is the Director of Income Tax, CPC, Bengaluru who also has chosen not to file any affidavit. It was noted that by an order dated 2nd March, 2023, Respondents were directed to refund the amount to petitioner immediately alongwith interest in accordance with law. The affidavit in reply dated 26th April, 2023 has been filed admitting Rs. 100.49 crores after adjustment as payable. Still the order dated 2nd March, 2023 has not been complied with.

The Hon’ble Court observed that since the affidavit in reply has been filed after the order dated 2nd March, 2023 was passed, there has been no legal impediment to pay the refund of Rs. 100.49 crores. In view of the affidavit being filed by respondent, the stand of Department counsel that the CPC could not see the stay order was not unacceptable. In view of the Court’s order and subsequent affidavit at least after the affidavit was filed, the CPC should have refunded the money.

Therefore, the Hon’ble Court issued a notice to Respondent No. 4, Director of Income Tax, CPC, returnable on 25th July, 2023, as to why contempt proceedings should not be initiated against him. The Petition was disposed off accordingly.

shailesh.kwebmaker

Section 154(1A) & 154(7) — Rectification of mistake — Limitation period — Order giving effect to the Appellate order — Issue sought to be rectified not subject matter of appeal — Period of limitation will be reckoned from the date of original assessment order in respect of points not subjected to appellate jurisdiction.

10. PCIT – 14 vs. M/s Godrej Industries Ltd
[ITA NO. 409 OF 201
Dated: 28th June, 2023
A.Y.: 2001-02 (Bom.) (HC)]

Section 154(1A) & 154(7) — Rectification of mistake — Limitation period — Order giving effect to the Appellate order — Issue sought to be rectified not subject matter of appeal — Period of limitation will be reckoned from the date of original assessment order in respect of points not subjected to appellate jurisdiction.

The Assessee-respondent filed on 30th October, 2001, its return of income for A.Y. 2001-02 declaring income of nil, after set off of brought forward losses and depreciation and declared a book profit of Rs. 33,13,25,132. The case was selected for scrutiny and notice under section 143(2) of the Act was issued to the assessee. In the assessment order made under section 143(3) of the Act, the AO made various additions and deletions. The assessment order dated 27th February, 2004 was impugned in the appeal filed by assessee before CIT(A). By an order dated 5th October, 2004, CIT(A) partly allowed the appeal of assessee. The said order dated 5th October, 2004, was challenged by assessee in appeal filed before ITAT. The revenue also filed an appeal before ITAT against order passed by CIT(A) which came to be disposed on 30th August, 2007. ITAT disposed the appeal filed by the assessee on 5th September, 2007 by giving partial relief.

Consequent to the order of ITAT, the order giving effect to ITAT’s order was passed on 25th August, 2008 by which the AO determined the total income in accordance with the normal provisions at nil and the book profit at Rs. 33,13,25,132. The AO passed an order dated 13th April, 2009, giving effect to ITAT’s order in department’s appeal in which he determined the total income in accordance with the normal computation at nil but increased the book profit to Rs. 33,51,66,399 on account of change in deduction that he allowed under section 80HHC of the Act.

On 29th March, 2014, the AO passed an order under section 154 of the Act rectifying the order dated 13th April, 2009 and redetermined the book profit at Rs. 53,02,83,061 — as he added the provision for depreciation in the value of the long term investment as a consequence of the retrospective amendment introduced by the insertion of clause (i) to Explanation 1 below section 115JB(2) of the Act.

This was challenged by the assessee in an appeal before CIT(A). The CIT(A) allowed the assessee’s appeal by order dated 10th April, 2015 and held that the notice under section 154 seeking to rectify the error ought to have been issued by 31st March, 2008 and, therefore, the same was barred by limitation. In doing so, he followed his order for A.Y. 2005-06. The order of CIT(A) was taken in appeal by Revenue before ITAT and ITAT, by order dated 7th April, 2017 dismissed the appeal of the Revenue. The ITAT held the rectification order was passed to give effect to the retrospective amendment made by the Finance Act, 2009. The issue which was sought to be rectified was never the subject matter of the appeal either before the CIT(A) or before the ITAT. The ITAT followed its earlier order in the case of ACIT vs. M/s. Godrej Sara Lee Ltd (now amalgamated into Godrej Consumers Products Ltd) and came to the conclusion that it was not permissible for the AO to rectify the order dated 13th April, 2009 on an issue which was not the subject matter of the appeal before it.

The Revenue contended that the AO was required to determine the correct total income as per the provisions of the Act. While doing so, the AO cannot ignore the clear provisions of the Act which even though may not be arising out of ITAT’s order but are vital for the determination of the correct total income. It was further submitted that the only requirement under section 154(7) of the Act is that the amendment under section 154 should be made within four years from the financial year in which order sought to be amended is passed, and since four years has not elapsed from the date of passing the order giving effect to the ITAT’s order, the notice under section 154 of the Act is not at all barred by limitation.

The assessee contended that period of limitation under section 154(7) of the Act in respect to the points not subject matter of order under section 154 of the Act will apply from the date of original assessment order and not from the date of assessment order of the AO giving effect to appellate order. It was submitted that the period of limitation will be reckoned from the date of original assessment order in respect of points not subjected to appellate jurisdiction.

“The Hon High Court observed that the settled position is that the AO, while giving effect to the ITAT’s order cannot go beyond the directions of the ITAT and since in this case, the issue of calculation of book profit qua diminution in the value of an asset was not the subject matter of the appeal, the Revenue was not justified in contending that the order is within the time limit. Because under section 154(1A) of the Act, the AO can rectify the order in respect of a matter other than the matter which has been considered and decided by the appellate/revisional authority. In the instant case, since the issue of diminution in value of an asset for calculating book profit was not a subject matter of appeal or revision, the original order under section 143(3) of the Act dated 27th February, 2004 is the order which can be rectified by the AO and since the order passed in 2004 cannot be rectified after a period of four years, the order passed under section 154 of the Act dated 29th March, 2014 is barred by Section 154(7) of the Act.”

In the circumstances, the Revenue Appeal was dismissed.

shailesh.kwebmaker

TDS — Payments to non-residents — Failure to deduct tax at source — Order deeming payer to be “assessee-in-default” — Limitation for order — No statutory period of limitation — General principle that in absence of statutory provisions, orders must be passed within reasonable time — Writ — Power of High Court under article 226 to fix reasonable period of limitation — Limitation prescribed for deduction of tax at source on payments to residents applicable to payments to non-residents.

34. Vedanta Limited vs. Dy. CIT(International Taxation)
[2023] 454 ITR 545 (Mad)
A. Ys. 2010-11 to 2015-16
Date of order: 24th February, 2023
Section 201 of ITA 1961

TDS — Payments to non-residents — Failure to deduct tax at source — Order deeming payer to be “assessee-in-default” — Limitation for order — No statutory period of limitation — General principle that in absence of statutory provisions, orders must be passed within reasonable time — Writ — Power of High Court under article 226 to fix reasonable period of limitation — Limitation prescribed for deduction of tax at source on payments to residents applicable to payments to non-residents.

The petitioner-company is engaged in the business of mining and exploration of metals and exploration of oil and natural gas. For the F. Ys. 2009-10 to 2014-15, i.e, A. Ys. 2010-11 to 2015-16, the respondent AO passed the orders under section 201(1) of the Income-tax Act, 1961 (respectively on 31st March, 2017, 31st March, 2017, 28th March, 2019, 22nd March, 2021, 27th March, 2021 and 30th March, 2022) deeming the petitioner to be an “assessee-in-default” and levying consequential interest under section 201(1A) of the Act in respect of payments to non-residents.

In writ petitions filed by the Petitioner challenging the said orders, the High Court considered the following two questions:

“(a) Whether in the absence of limitation being prescribed for the purpose of passing orders u/s. 201(1) of the Income-tax Act, 1961 deeming a person to be an ‘assessee-in-default’ in view of failure to deduct the whole or any part of the tax in relation to payments made to a non-resident it is permissible for the court to determine the limitation for passing such orders?

(b) If the answer to the above question is in the affirmative, a further question arises as to what would constitute reasonable period for passing such orders?”

The Madras High Court held as under:
“i) It is trite law that in the absence of statutory prescription of limitation for passing an order, the order ought to be passed within a reasonable period. The authorities under the Income-tax Act, 1961 being creatures of the statute would not be able to determine this. Thus, it is for the High Court in exercise of its plenary jurisdiction under article 226 of the Constitution, to determine what would constitute reasonable time. Reasonableness forms the foundation on which courts would determine limitation in the absence of a legislative prescription for passing orders or taking action.

ii) Section 201 of the Income-tax Act, 1961, as it originally stood did not prescribe any limitation for passing an order u/s. 201 of the Act. By the Finance (No. 2) Act, 2009, with effect from April 1, 2010 sub-section (3) to section 201 of the Act was inserted thereby providing limitation for passing an order u/s. 201(1) of the Act deeming a person to be an ‘assessee-in-default’ for failure to deduct tax at source in respect of payments to residents. No limitation was however prescribed in so far as passing orders u/s. 201(1) of the Act deeming a person to be an ‘assessee-in-default’ for failure to deduct tax at source in respect of payments to non-residents.

iii) The object behind deduction of tax at source is common for payments to residents and non-residents. It is to secure the taxes or a portion thereof at the earliest. The object of tax deduction at source being common for payments both to residents and non-residents, limitation prescribed by the Legislature to pass orders u/s. 201(1) of the Act, deeming a person to be an ‘assessee-in-default’ for failure to deduct tax at source in respect of payments to residents should be applied in respect of passing orders deeming a person to be an ‘assessee-in-default’ for failure to deduct tax at source even in respect of payments to non-residents.

iv) The limitation for passing orders u/s. 201(1) of the Act deeming a person to be an ‘assessee-in-default’ for failure to deduct tax at source on payments to residents must thus be adopted and treated as constituting ‘reasonable period’ for the purpose of passing orders u/s. 201(1) of the Act deeming a person to be an ‘assessee-in-default’ for failure to deduct tax at source on payments to non-residents. The extended period of limitation of seven years would be available for passing orders u/s. 201(1) of the Act deeming a person to be an ‘assessee-in-default’ for failure to deduct taxes in respect of payments to residents. The sequitur is that the ‘reasonable period’ for passing orders u/s. 201(1) of the Act deeming a person to be an ‘assessee-in-default’ for failure to deduct taxes in respect of payments to non-residents shall also be seven years from the end of the financial year in which the payment is made or credit given with effect from 1st April, 2010.

v) As the challenge in these writ petitions were limited to the aspect of limitation which is clarified, it is left open to the petitioner to file appeals challenging the order on merits. If the petitioner raises the plea of limitation, the same shall be decided by the appellate authority in accordance with legal position clarified by this court. If the petitioner chooses to file an appeal, the time spent in these writ petitions shall stand excluded while reckoning limitation and the same shall be decided in accordance with law.”

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Search and seizure — Assessment of third person — Condition precedent — Satisfaction note by AO of searched person — Limitation where no satisfaction is recorded will be taken as year of search.

33. PCIT vs. Gali Janardhana Reddy
[2023] 454 ITR 467 (Kar)
A. Y. 2011-12
Date of order: 31st March, 2023
Sections 132, 132A, 153A and 153C of ITA 1961

Search and seizure — Assessment of third person — Condition precedent — Satisfaction note by AO of searched person — Limitation where no satisfaction is recorded will be taken as year of search.

On 25th October, 2010, a search was carried out in the case of R and others under section 132 of the Income-tax Act, 1961. During the course of search proceedings, certain incriminating materials belonging to the assessee were found and seized. Consequently, the AO of the searched person issued notice under section 153C against the assessee for the A. Ys. 2005-06 to 2010-11 and a notice under section 143(3) for the A. Y. 2011-12. Accordingly, assessments were completed.

The Tribunal set aside the assessment orders and held that there was no satisfaction recorded by the AO of the search person, which was mandatorily required for issuing a notice under section 153C.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“i) In CIT v. Gopi Apartment [2014] 365 ITR 411 (All), the Allahabad High Court observed that in the case of an assessment u/s. 153C of the Income-tax Act, 1961, there are two stages: (1) The first stage comprises a search and seizure operation u/s. 132 or proceeding u/s. 132A against a person, who may be referred to as ‘the searched person’. Based on such search and seizure, assessment proceedings are initiated against the ‘searched person’ u/s. 153A. At the time of initiation of such proceedings against the ‘searched person’ or during the assessment proceedings against him or even after the completion of the assessment proceedings against him, the Assessing Officer of such ‘searched person’, if he is satisfied, that any money, document, etc., belongs to a person other than the searched person, shall hand over such money, documents, etc., to the Assessing Officer having jurisdiction over ‘such other person’. (2) The second stage commences from the recording of such satisfaction by the Assessing Officer of the ‘searched person’ followed by handing over of all the requisite documents, etc., to the Assessing Officer of such ‘other person’, thereafter followed by issuance of the notice of the proceedings u/s. 153C read with section 153A against such ‘other person’.

ii) The initiation of proceedings against ‘such other person’ is dependent upon satisfaction being recorded. Such satisfaction may be during the search or at the time of initiation of assessment proceedings against the ‘searched person’, or even during the assessment proceedings against him or even after completion thereof but before issuance of notice to the ‘such other person’ u/s. 153C. Even in a case where the Assessing Officer of both persons is the same and assuming that no handing over of documents is required, the recording of ‘satisfaction’ is a must, as that is the foundation, upon which the subsequent proceedings against the ‘other person’ are initiated. The handing over of documents, etc., in such a case may or may not be of much relevance but the recording of satisfaction is still required and in fact it is mandatory.

iii) In terms of section 153C of the Act, reference to the date of the search under the second proviso to section 153A of the Act has to be construed as the date of handing over of assets and documents belonging to the assessee (being the person other than the one searched) to the Assessing Officer having jurisdiction to assess that assessee. Further proceedings, by virtue of section 153C(1) of the Act would have to be in accordance with section 153A of the Act and reference to the date of search would have to be construed as the reference to the date of recording of satisfaction. It would follow that the six assessment years for which assessments or reassessments could be made u/s. 153C of the Act would also have to be construed with reference to the date of handing over of assets and documents to the Assessing Officer of the assessee.

iv) The Tribunal was right in law in holding that the assessment year relevant to the financial year in which satisfaction note was recorded u/s. 153C of the Act, would be taken as the year of search for the purposes of clauses (a) and (b) of sub-section (1) of section 153A of the Act by making reference to the first proviso to sub-section (1) of section 153C. Therefore, the Tribunal was right in law in holding that no satisfaction was recorded by the Assessing Officer of the searched person and the notice issued by the Assessing Officer u/s. 153C of the Act would be taken as the year of search for the purpose of clauses (a) and (b) of sub-section (1) of section 153A. The Tribunal was right in law in setting aside the assessment order passed for the A. Y. 2011-12 under the facts and circumstances of the case holding that there was no satisfaction recorded by the Assessing Officer of the searched person in so far as section 153A in the case of the assessee.”

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Reassessment — New procedure — Condition precedent for notice of reassessment — Assessee must be furnished material on the basis of which initial notice was issued.

32. Anurag Gupta vs. ITO
[2023] 454 ITR 326 (Bom)
A. Y. 2018-19
Date of order: 13th March, 2023
Sections 148 and 148A of ITA 1961

Reassessment — New procedure — Condition precedent for notice of reassessment — Assessee must be furnished material on the basis of which initial notice was issued.

For the A. Y. 2018-19, the petitioner’s return of income was processed under section 143(1) of the Income-tax Act, 1961. Subsequently, a notice under section 148A(b) of the Act dated 8th March, 2022, was issued by the AO suggesting that income liable to tax for the A. Y. 2018-19 had escaped assessment and called upon the petitioner to show cause as to why notice under section 148 be not issued. The basis for reopening was the information, which reads as under:

“1. In your case information has been received from the credible sources that a search/survey action u/s. 132 of the Income-tax Act was carried out on February 14, 2019 on Antariksh Group. It is seen that you have purchased warehouse from BGR Construction LLP for Rs. 70,00,000 as per sale list seized and impounded during the course of search. This amount includes sale consideration of land and construction cost and the on-money received by BGR Construction LLP. As per the information, it is observed that the payments made to M/s. BGR Construction LLP are not accounted for in its regular books of account. The cash payment on account of on-money of Rs. 70,00,000 was not accounted in its books of account which is evident and the same is received in cash by M/s. BGR Construction LLP. Thus, the source of cash paid by you of Rs. 70,00,000 to BGR remains unexplained.

2. As the above information has been received from the credible sources, and this office is contemplating proceedings u/s. 148 of the Income-tax Act, 1961 in your case, you are required to submit your explanation along with appropriate documentary evidence and reconcile the above information with the Income-tax return filed by you, if any. In case, no Income-tax return has been filed by you, you may submit the reconciliation of the above information with your books of account or computation of total income. Also, this may be treated as show-cause notice u/s. 148A(b) of the Income-tax Act, 1961 and final opportunity to submit the details. In the absence of any submission or details from your side with respect to the above, it shall be presumed that you have nothing to say in the matter and the same will be dealt with as per the provisions of the Income-tax Act, 1961.”

This show-cause notice was replied by a communication dated 14th March, 2022, wherein the petitioner totally denied that there was any transaction with BGR Construction LLP and that no warehouse had been booked or payment made to the said entity. The petitioner also denied any “on-money cash transaction” with the said entity and therefore, demanded that the proceedings initiated under section 147 of the Act be dropped.

On 21st March, 2022, the AO issued a clarification in regards to the notice under section 148A(b), this time, stating therein that the petitioner had also executed a conveyance deed with Meet Spaces LLP and, therefore, the AO required the petitioner to furnish payment details regarding this deed also. No response was filed by the petitioner to this communication dated 21st March, 2022. The AO passed the order under section 148A(d) on 25th March, 2022, stated to be with the prior approval of the PCIT, Thane. In the order under section 148A(d), for the purpose of issuance of the notice under section 148 of the Act, the AO proceeds to record its satisfaction, firstly, that cash payments had been made by the assessee to BGR Construction LLP as had been confirmed by the transferee of the said entity in the statement recorded during the survey action and, secondly, that the assessee had entered into a conveyance deed as a purchaser with Meet Spaces LLP for a consideration of Rs. 10,00,000, which remained unexplained.

The Assessee filed writ petition and challenged the notice under section 148A(b) dated 8th March, 2022, the order under section 148A(d) dated 25th March, 2022 and the notice under section 148 dated 26th March, 2022. The Bombay High Court allowed the writ petition and held as under:

“i) Section 148A(b) of the Income-tax Act, 1961, envisages that the assessee must be provided not only information but also the material relied upon by the Revenue for purposes of making it possible to file a reply to the show-cause notice in terms of the section.

ii) The reassessment proceedings initiated were unsustainable on the ground of violation of the procedure prescribed u/s. 148A(b) of the Act on account of failure of the Assessing Officer to provide the requisite material which ought to have been supplied with the information in terms of the section. The order dated March 25, 2022 passed u/s. 148A(d) of the Act, and the notice u/s. 148 of the Act were liable to be quashed.”

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Educational institution — Exemption under section 10(23C)(vi) — Scope of section 10(23C)(vi) — Condition precedent for exemption — Institution should exist solely for purposes of education — Receipts and expenses outside India not covered — American trust established in India solely for educational purposes with permission granted by the Central Government — Trust in India supported by the organisation set up in USA — American organisation incurring expenses in support of Indian trust and repatriating amounts to it — Amounts received utilised for purposes of education in India — Assessee entitled to exemption under section 10(23C)(vi).

31. Laura Entwistle vs. UOI
[2023] 454 ITR 345 (Bom)
A. Ys. 2002-03 to 2005-06
Date of order: 8th March, 2023
Section 10(23C)(vi) of ITA 1961

Educational institution — Exemption under section 10(23C)(vi) — Scope of section 10(23C)(vi) — Condition precedent for exemption — Institution should exist solely for purposes of education — Receipts and expenses outside India not covered — American trust established in India solely for educational purposes with permission granted by the Central Government — Trust in India supported by the organisation set up in USA — American organisation incurring expenses in support of Indian trust and repatriating amounts to it — Amounts received utilised for purposes of education in India — Assessee entitled to exemption under section 10(23C)(vi).

The petitioners were the trustees of the American School of Bombay Education Trust. The Trust was constituted under the Indian Trusts Act, 1882, by the trust deed, as amended in July 1995 and August 2008. The Trust was set up after the embassy of the United States of America was granted specific permission by the Ministry of External Affairs, New Delhi. The Trust was set up solely for the purpose of education and not for profit. During the years relating to A. Ys. 2002-03 to 2005-06, the Trust was supported by the South Asia International and Educational Services Foundation set up in 1996 in the United States of America wholly and exclusively for charitable and educational purposes within the meaning of section 501(c)(3) of the Internal Revenue Code of the United States of America, and the primary purpose was to provide financial assistance to educational institutions as provided in its constitution. The Foundation was a non-profit organisation, subject to scrutiny by the U.S. Government and exempted from tax payment by U.S. Federal Government under section 501(c)(3) of the Internal Revenue Code. The accounts of the Foundation were subject to detailed scrutiny by the Internal Revenue Service. By an order based on the said scrutiny, the Internal Revenue Service continued to approve the Foundation as a not-for-profit Foundation under section 501(c)(3) of the Internal Revenue Code. The Foundation would incur various expenses in support of school material and freight, salaries of teachers and administrators, education grants, etc. The surplus, if any, arising from time to time was entirely repatriated to the trustees in India and, thereafter, invested by them in accordance with the provisions of section 11(5) of the Act.

The Trust filed a writ petition to set aside the order dated 27th February, 2009 passed by the Chief CIT denying exemption under section 10(23C)(vi) of the Income-tax Act, 1961 and to direct the respondents to grant the exemption to the income, in relation to the A. Ys. 2002-03 to 2005-06. The Bombay High Court allowed the petition and held as under:

“i) The Supreme Court in the case of American Hotel and Lodging Association, Educational Institute v. CBDT [2008] 301 ITR 86 (SC) noted that the threshold condition for granting approval u/s. 10(23C)(vi) of the Income-tax Act, 1961 is to ascertain that the institution exists solely for education purposes and not for profit. The conditions as stipulated in the third and the thirteenth proviso to section 10(23C) of the Act are the monitoring conditions which may be looked at by the tax authority at a later stage. The Supreme Court observed that section 10(23C)(vi) is analogous to section 10(22). To that extent, the judgments of the court as applicable to section 10(22) would equally apply to section 10(23C)(vi). With the insertion of the provisos to section 10(23C)(vi) the applicant who seeks approval has not only to show that it is an institution existing solely for educational purposes (which was also the requirement u/s. 10(22) but it has now to obtain initial approval from the prescribed authority. There is a difference between stipulation of conditions and compliance therewith. The threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardized form in terms of the first proviso. It is only if the prerequisite condition of actual existence of the educational institution is fulfilled that the question of compliance with the requirements in the provisos would arise.

ii) It is not correct to introduce the word “India” into the third proviso to section 10(23C) of the Act. The plain words of the proviso do not require the application of the entire income to be in India.

iii) The Department could be concerned only with the application of income in the hands of the Trust or the trustees once received in India. This was because the Trust or the trustees were not transferring or repatriating any money outside India to any person or entity. Furthermore, it was not the case of the Department that having received the monies in India, the Trust or the trustees had not utilized the funds in accordance with the objects for which it was founded. The Department had not substantiated their bold statement that the Trust or the trustees had not invested the surplus money in accordance with law which in any event would not be a criteria at the initial stage of approval. The Foundation was an entity which repatriated money into India and did not receive any repatriation from India. Therefore, the money earned and expenses made by the Foundation in the U. S. A. should not and not ought to concern the Income-tax Department in India. There was absolutely no requirement to certify the correctness of the accounts of the Foundation.

iv) As a matter of record, the Department had granted the Trust or the trustees exemption u/s. 10(22) and 10(23C)(vi) of the Act since the A. Ys. 1999-2000 to 2002-03 and the A. Ys. 2006-07 to 2026-27. It was therefore substantiated that the Trust only existed for educational purposes and not for profit. Once it was established that the Trust or the trustees existed to provide education and not for profit, the exemption could not be denied, for the A. Ys. 2002-03 to 2005-06.”

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Collection of tax at source — Scope of section 206C — Income from forest produce — Meaning of “forest produce” — Assessee working on sawn timber purchased from third person — Assessee not liable to collect tax at source.

30. Principal CIT(TDS) vs. Nirmal Kumar Kejriwal
[2023] 454 ITR 777 (Cal)
A. Ys. 2005-06 to 2009-10
Date of order: 2nd August, 2022
Section 206C of ITA 1961

Collection of tax at source — Scope of section 206C — Income from forest produce — Meaning of “forest produce” — Assessee working on sawn timber purchased from third person — Assessee not liable to collect tax at source.

An order was passed against the assessee under section 206C(6)/206C(7) of the Income-tax Act, 1961 on the grounds that the assessee did not collect any tax on the sale of timber obtained by any other mode other than forest lease in terms of section 206C(1) of the Act. The assessee raised objections to the order. The AO rejected the objections.

The CIT(A) held that section 206C was not applicable to the assessee. This was upheld by the Tribunal.

On appeal by the Revenue, the Calcutta High Court upheld the decision of the Tribunal and held as under:

“i) Section 206C introduced by the Finance Act, 1988 was intended to levy and collect presumptive tax in the case of trading in certain goods to remove hardship. The trades mentioned therein are alcoholic liquor for human consumption, timber obtained under a forest lease, timber obtained by any mode other than under forest lease and any other forest produce not being timber, at different rates. The object of introduction of the new provisions for working out the profits on presumptive basis was to get over the problems faced in assessing the income and recovering the tax in the case of persons trading in these items. The provisions were brought into the statute not only to estimate the profits on presumptive basis but also to collect the tax on such transactions at specified rates mentioned in section 206C of the Act. What has to be borne in mind is that, the presumptive tax is collectible on a forest produce. Therefore, the test is whether the assessee had dealt with a forest produce. Basically, forest produce is the produce grown spontaneously.

ii) If timber was being sized, sawn into logs of different dimensions and shapes in activities carried out in saw mills authorised by the Government, it would amount to a different produce. Even in respect of timbers which are procured as described in the table, if it is used in the process of manufacturing, the provisions of section 206C(1) of the Act would not be applicable due to the fact that the product ceased to be a forest produce. Section 206C was not applicable to the assessee.”

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Capital gains — Computation of capital gains — Effect of section 50C — Stamp value deemed to be full value of consideration for transfer of immovable property — Object of provision to prevent unaccounted cash transfers of capital assets — Not applicable in case of compulsory acquisition of land and buildings.

29. Principal CIT vs. Durgapur Projects Ltd
[2023] 454 ITR 367 (Cal)
A. Y. 2015-16
Date of order: 24th February, 2023
Section 50C of ITA 1961

Capital gains — Computation of capital gains — Effect of section 50C — Stamp value deemed to be full value of consideration for transfer of immovable property — Object of provision to prevent unaccounted cash transfers of capital assets — Not applicable in case of compulsory acquisition of land and buildings.

In the A. Y. 2015-16, the assessee had earned capital gain on transfer of land to the National Highways Authority of India on compulsory acquisition. The AO applied section 50C of the Income-tax Act, 1961 and added a sum of
Rs. 5,48,43,584 to the total income.

The CIT(A) and the Tribunal held that section 50C was not applicable and deleted the addition.

On appeal by the Revenue, the Calcutta High Court upheld the decision of the Tribunal and held as under:

“i) Section 50C of the Income-tax Act, 1961, was inserted by the Finance Act, 2002 with effect from April 1, 2003 for the purpose of taking the value adopted or assessed by the stamp valuation authority as the deemed full value of consideration received or accruing as a result of transfer of a capital asset being land or building or both, in case the consideration received or accruing as a result of transfer is less than such value. The object and purpose behind insertion of the provision in the Act was to curb the menace of the use of unaccounted cash in transfer of capital assets. In a case of compulsory acquisition of land by the Government there is no room for suppressing the actual consideration received on such acquisition.

ii) The Legislature has used the words and expressions in section 50C of the Act consciously to give them a restricted meaning. Hence, the term “transfer” used in section 50C has to be given a restricted meaning and it would not have a wider connotation so as to include all kinds of transfers as contemplated u/s. 2(47) of the Act. The provisions of section 50C will be applicable in cases where transfer of the capital asset has to be effected only upon payment of stamp duty. In a case of compulsory acquisition of a capital asset being land or building or both, the provisions of section 50C cannot be applied as the question of payment of stamp duty for effecting such transfer does not arise.

iii) In the instant case, the property was acquired under the provisions of the National Highways Act, 1956. The property vests by operation of the said statute and there is no requirement for payment of stamp duty in such vesting of property. As such there was no necessity for an assessment of the valuation of the property by the stamp valuation authority in the case on hand. For the reasons as aforesaid it is held that the provisions u/s. 50C of the Income-tax Act cannot be applied to the case on hand.”

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Business expenditure — Difference between contingent and ascertained expenditure — Capital or revenue expenditure — Premium payment on redemption of shares which has been quantified is revenue expenditure.

28. AdvocatesNitesh Housing Developers Pvt Ltd vs. DCIT
[2023] 454 ITR 770 (Kar.)
A.Y. 2011-12
Date of order: 2nd August, 2022
Section 37 of ITA 1961

Business expenditure — Difference between contingent and ascertained expenditure — Capital or revenue expenditure — Premium payment on redemption of shares which has been quantified is revenue expenditure.

The assessee was a private limited company engaged in the business of development of real estate and execution of engineering contracts. In September 2009, the assessee entered into a debenture subscription and share purchase agreement. The original agreement was modified under a first addendum agreement dated 15th May, 2010 where under, the option of HDFC to convert debentures to preferential shares at the time of redemption was deleted and the parties agreed that debentures shall be compulsorily converted into preference shares entitling HDFC to post internal rate of return of 25 per cent of the subscription amount. A second addendum agreement dated 12th November, 2012 was entered into between the parties whereunder, HDFC once again resumed the right to exercise the option of converting the debentures to preferential shares. For the A. Y. 2011-12, the assessee filed its original return on 30th September 2011 and revised return on 29th September, 2012. The second addendum agreement was executed on 12th November, 2012, prior to filing the revised returns. The AO held that the premium paid or payable on the redemption of preference shares would be arising out of the reserves and surplus and would constitute capital expenditure out of the accumulated surplus and therefore, it was not a revenue expenditure. He further recorded that the expenditure was contingent upon the issue of initial public offer and accordingly disallowed the expenditure of Rs. 28,83,17,552.

The CIT(A) however held that the amount was deductible. The Tribunal recorded that the premium paid on redemption of debentures is revenue expenditure and allowable proportionately during the period of debenture. Having so held, the Tribunal further recorded that the terms of the original purchase agreement may have been changed to suit the convenience of the parties and it was a “make believe” story to claim deduction. The Tribunal reversed the order of the CIT(A) and restored the order of the AO.

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

“The issuance of the debentures was not in dispute. Deduction of tax at source was also not in dispute. The Tribunal had rightly recorded the correct principle of law that premium paid on redemption of debenture is revenue expenditure. By the second addendum agreement dated November 12, 2012, the HDFC’s right to exercise the option of converting the debentures into preference shares had been restored in consonance with the original agreement. The resultant position was, the HDFC, at its option, could cause the assessee to redeem all debentures on September 20, 2012. The adverse finding recorded by the Tribunal that the parties had changed the agreement to suit their convenience and that it was a ‘make-believe’ story was not supported by any cogent reason nor material on record and therefore, was untenable. The premium payable quantified on redemption of debentures was deductible as revenue expenditure.”

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Indexation of Cost Where Cost Paid In Instalments

ISSUE FOR CONSIDERATION

In computing the long term capital gains on transfer of a capital asset, an assessee is entitled to certain deductions specified under section 48 of the Income Tax Act 1961, which provides for the mode of computation of the capital gains. This section, besides other deductions, allows deduction of indexed cost of acquisition of the asset in computing the long term capital gains. The term “indexed cost of acquisition” is defined in clause (iii) of the explanation to section 48 as:“indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 2001, whichever is later.

Generally, in the case of immovable properties which are agreed to be purchased before or during the construction period, payment for the asset is made in instalments spread over several years. Therefore, the cost of the asset is paid over several years.

The issue has arisen before the ITAT in such cases as to how the indexation of cost is to be computed – whether the entire cost is to be indexed from the year in which the asset has been agreed to be acquired, or whether the cost is to be indexed instalment wise from each year in which the part payment of the cost is made. Different benches of the Tribunal have taken conflicting views on the subject, with some holding that the indexation of the entire cost is available from the year of agreement for the acquisition of the asset, while some holding that the indexation is to be computed vis-à-vis payment of each instalment.

CHARANBIR SINGH JOLLY’S CASE

The issue first came up before the Mumbai bench of the Tribunal in the case of Charanbir Singh Jolly vs. 8th ITO 5 SOT 89.

In this case, relating to assessment year 1998-99, involving two brothers who had sold their respective houses at Powai, Mumbai during the year, the assessees had purchased their respective houses under agreements dated 31st March, 1993 but had made payments for purchase of the houses over a period of four years from July 1992 to June 1996. The assessees claimed indexation of the entire cost from the financial year 1992-93, being the year of payment of the first instalment under the agreement to purchase, in computing their long-term capital gains on sale of the houses.The AO treated the first instalment paid by the assessees as the cost of acquisition of the houses, and subsequent instalments paid as cost of improvement of the houses from time to time, allowing indexation for subsequent instalments from the respective years of payment. The result was that the total cost incurred by the assessees for acquiring the houses was not taken as the cost of acquisition for the purpose of indexation, but, on the other hand, cost was taken at static points corresponding to the instalments paid by the assessees. This resulted in a partial loss of indexation benefit to the assessees. The CIT(A) upheld the stand taken by the assessing officer.

Before the Tribunal, on behalf of the assessee, reliance was placed on the decision of the Ahmedabad bench of the Tribunal in the case of ITO vs. Smt Kashmiraben M Parikh 44 TTJ 68, for the proposition that the date of acquisition of the property was the date of booking of the property. In that case, the issue was as to whether the property was a long-term capital asset or short term capital asset, and on the basis of the date of booking, the property had been held to be a long-term capital asset. It was argued before the Mumbai bench of the Tribunal that even though that decision, technically speaking, covered the question of period of holding of property by an assessee, the date of acquisition had been accepted in that judgment, which was relevant to the question of cost of acquisition involved in the case before the Mumbai bench. Reliance was also placed on the decision of the Bombay High Court in the case of CIT vs. Hilla J B Wadia 216 ITR 376.

The Tribunal noted that the real question was what the cost of acquisition was for the purposes of section 48 – the amount of first instalment paid by the assessees, or the total amounts paid by the assessees for acquiring the properties. According to the Tribunal, every property has its own intrinsic/market value or price, irrespective of the mode of payment negotiated between the respective parties. The cost or the value of the property remained the same subject to minor variations of interest or discount factor, irrespective of the mode of payments. The cost or value of the property did not get diluted on account of the fact that the cost of acquisition was paid by instalments.

According to the Tribunal, the basic idea of bringing the principle of indexation was to give some sort of protection to the assessees from the onslaught of inflation. The effect of inflation could be measured only with reference to the total cost of acquisition of a property. The Tribunal observed that if the effect of inflation was measured with the payment of the first instalment, the whole scheme became ridiculous. The factor of inflation was not with reference to the payments made by the assessee but with reference to the value of the asset vis-à-vis the cost of acquisition of the sale consideration of the property.

The Tribunal therefore held that the cost of acquisition of the houses for the purpose of long-term capital gains computation was the total cost incurred by the assessees and not the first instalment value, and that the assessees were entitled to indexation of the entire payment made for acquisition of the properties from the date of payment of the first instalment.

A similar view was taken by the Tribunal in the cases of Lata G Rohra vs. DCIT 21 SOT 541 (Mum), Divine Holdings Pvt Ltd ITA No 6423/Mum/2008, Pooja Exports vs. ACIT ITA No 2222/Mum/2010, ACIT vs. Ramprakash Bubna ITA No 6578/Mum/2010, Renu Khurana vs. ACIT 200 ITD 130 (Del) and Nitin Parkash vs. DCIT TS-734-Tribunal-2022(Mum), holding that the assessee was entitled to indexation of the entire cost from the date of booking, which was the date of acquisition of the property.

ANURADHA MATHUR’S CASE

The issue had also come up before the Delhi bench of the Tribunal in the case of Anuradha Mathur vs. ACIT ITA No 2297/Del/2011 dated 14th March, 2014.In this case, pertaining to assessment year 2006-07, the assessee sold a residential flat during the year. Payments of the cost of this house had been made from 1989 to 1996. The assessee became a member of the society and was allotted shares in 1989. The draw for allotment of flat took place in March 1996 and possession of the flat was given in August 1997. Assessee claimed indexation of the entire cost from 1989, i.e. the year of payment of the first instalment.

The AO took the view that the assessee was entitled to indexation of cost from the year of possession, and therefore allowed indexation of the entire cost from the financial year 1997-98 only, not even w.r.t the dates of payments.

Before the CIT(A), it was submitted that indexation was to be allowed from the year in which the asset was first held by the assessee. The assessee became a member of the society in 1989, acquired shares and held an interest in allotment of the flat, being a shareholder, by way of right for making payment for the flat as determined by the society. The word ‘held’ in ordinary parlance would include a right for acquisition of the flat, which was the case of the assessee.

The CIT(A) rejected the assessee’s appeal, holding that the assessing officer was right in treating the date of possession as the date on which the house came to be vested in the control of the assessee. It was held that mere ownership of the shares did not confer the benefit to enjoy the flat, unless the flat had been physically handed over to the assessee.

Before the Tribunal, on behalf of the assessee, the meaning of the term “held” was reiterated, and it was prayed that the indexation as was claimed by the assessee be allowed. It was argued that the assessee’s interest in acquisition of the flat itself amounted to an inchoate right of holding the right of acquiring the ownership of the flat. An alternative plea was raised that if the entire cost of acquisition was regarded as not related to the date of first instalment, then, since there was no doubt that the assessee had made the payments of these amounts for the acquisition of the flat by becoming the member and shareholder of the housing development cooperative society, and the payments made by the assessee over a period of time were towards the right of holding of the flat i.e. towards the acquisition of the asset, therefore these instalments needed to be considered for suitable indexation. It was argued that appropriate indexation of such part payment towards cost of asset would be in the interest of justice.

On behalf of the Department, it was submitted before the Tribunal that the assessee had not disputed the date of allotment and the date of possession. It was amply clear that the assessee became the owner of the flat on possession, and therefore indexation had been correctly computed by the AO.

Considering the submissions, the Tribunal observed that it was inclined to uphold the order of the lower authorities to the effect that the cost of the entire flat could not be indexed from the date of the first instalment. According to the Tribunal, the meaning of the word “held” could not be extended to the part of the payment which was not even made by the assessee till that date. The Tribunal was therefore of the view that there was no case for allowing indexation of the entire cost from the date of payment of the first instalment.

However, the Tribunal found merit in the alternative plea of the assessee. It observed that there was no dispute that assessee had made part payment by way of instalments towards acquisition of the flat by becoming shareholder and member of the society through a recognised and approved method of acquiring membership of a housing cooperative society. The payment of individual instalments made by the assessee amounted to payment towards holding of an asset, which deserved to be indexed from the date of actual payment of each instalment.

The Tribunal therefore held that the long-term capital gain was to be computed by taking the indexed cost of acquisition qua the actual payment of each instalment.

A similar view has been taken by the Tribunal in the cases of Praveen Gupta vs. ACIT 137 TTJ (Del) 307, Vikas P Bajaj vs. ACIT ITA No 6120/Mum/2010, Lakshman M Charanjiva vs. ITO ITA No 28/Mum/2017, and ITO vs. Monish Kaan Tahilramani 109 taxmann.com 156 (Mum).

OBSERVATIONS

In many of the Tribunal decisions (Anuradha Mathur, Praveen Gupta and Vikas Bajaj) in which it has been held that indexation should be allowed vis-à-vis each instalment of payment made, it may be noticed that these were either cases where the assessee himself had claimed indexation of cost on the basis of payments made, or taken that as an alternative plea, since the tax authorities had been claiming that the subsequent date of possession was the date of acquisition, and not the date of booking, and therefore had been allowing indexation of the entire cost only from the date of possession, though payments were made much earlier. In these cases, the Tribunal in a sense decided the issue in favour of the claim made by the assessee.The Tribunal in the cases of Lakshman Charanjiva and Monish Tahilramani (supra) has followed the decision of the Allahabad High Court in the case of Nirmal Kumar Seth vs. CIT 17 taxmann.com 127. In that case, the assessee had been allotted a plot of land in 1982-83 by paying a nominal advance, and had paid the remaining amount in instalments over a period of years. The allotment letter was issued in 1985. While the assessee had claimed a long-term capital loss, the AO had computed a short-term capital gain. The Tribunal had held that the gain was long-term, and that indexation of cost was to be computed with reference to the date of each payment made. The claim of the assessee before the Allahabad High Court was that the full benefit of indexation of cost was not given by the Tribunal.

The Allahabad High Court upheld the view of the Tribunal that the gain was long-term in nature since the letter of allotment was issued more than three years before. The High court also confirmed the order of the Tribunal on the issue of the base year of indexation by observing that the actual amount was paid from time to time after the date of issuance of the allotment letter, which had to be considered for the purpose of indexation with reference to the date of payments. The High Court noted that the Tribunal had rightly directed to compute the indexation of the cost as per the payment schedule, and that there was nothing wrong in the Tribunal’s order, which was based on the well-established legal position as well as the CBDT Circular, which had been mentioned in the order passed by the Tribunal.

The High Court noted that tax on the long-term capital gains had already been deposited as per the computation made by the AO, in the manner claimed by the assessee and that being so, nothing survived in the appeal. On that reasoning, it declined to interfere with the Tribunal’s order. In a sense perhaps, the Allahabad High Court did not really decide the matter, as the issue was no longer found to be relevant in the case before it.

The CBDT Circular referred to in this High Court decision is Circular No 471 dated 15th October, 1986. In this Circular, in the context of acquisition of a flat under the self-financing scheme of Delhi Development Authority, the CBDT has stated:

“2. The Board had occasion to examine as to whether the acquisition of a flat by an allottee under the Self-Financing Scheme (SFS) of the D.D.A. amounts to purchase or is construction by the D.D.A. on behalf of the allottee. Under the SFS of the D.D.A., the allotment letter is issued on payment of the first instalment of the cost of construction. The allotment is final unless it is cancelled or the allottee withdraws from the scheme. The allotment is cancelled only under exceptional circumstances. The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking the delivery of possession is only a formality. If there is a failure on the part of the D.D.A. to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for recovery of possession.

3. The Board have been advised that under the above circumstances, the inference that can be drawn is that the, D.D.A. takes up the construction work on behalf of the allottee and that the transaction involved is not a sale. Under the scheme the tentative cost of construction is already determined and the D.D.A. facilitates the payment of the cost of construction in instalments subject to the condition that the allottee has to bear the increase, if any, in the cost of construction. Therefore, for the purpose of capital gains tax the cost of the new asset is the tentative cost of construction and the fact that the amount was allowed to be paid in instalments does not affect the legal position stated above. In view of these facts, it has been decided that cases of allotment of flats under the Self-Financing Scheme of the D.D.A. shall be treated as cases of construction for the purpose of capital gains.”

In fact, this CBDT Circular supports the case of the assessee, that all the instalments being paid are part of the cost of acquisition. In CIT vs. Mrs Hilla J B Wadia 216 ITR 376, the Bombay High Court, referring to the Circular, held that the CBDT confirmed that when an allotment letter was issued to an allottee under a scheme on payment of the first instalment of the cost of construction, the allotment was final unless it was cancelled. The allottee, thereupon, gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking delivery of possession is only a formality. The Board has directed that such an allotment of flat under such scheme should be treated as construction for the purpose of capital gains.

Explanation at the end of Section 48 defines the ‘indexed cost of acquisition’ vide clause(iii) as under “ ‘indexed cost of acquisition’ means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 2001 whichever is later”. The definition of indexed cost of acquisition in the Explanation to section 48 is fairly clear – indexation would be available from the first year in which the asset is held by the assessee. The definition does not refer to payments, and in many such cases, the dates of payment are quite different from the dates of acquisition. Therefore, the date of payment should not really matter for the purposes of indexation of cost of acquisition, based on the clear language of the provision. What would be relevant would be the date from which the asset can be said to be held. The issue in many cases has really been as to what is the date of first holding of the asset – the date of booking/first payment when the right to acquire the asset has been acquired, or the date of possession of the asset.

This issue in a sense has been settled by various High Courts, holding that the date of allotment would be the date of acquisition for computation of the period of holding of the immovable property. This view has been taken by the Bombay High Court in PCIT vs. Vembu Vaidyanathan 413 ITR 248, with SLP against this decision being dismissed by the Supreme Court, reported as Pr.CIT vs. Vembu Vaidyanathan 265 Taxman 535 (SC). A similar view has also been taken by the Punjab & Haryana High Court in the cases of CIT vs. Ved Prakash & Sons (HUF) 207 ITR 148, Madhu Kaul vs. CIT 363 ITR 54, and Vinod Kumar Jain vs. CIT 344 ITR 501, Delhi High Court in the case of CIT vs. K Ramakrishnan 363 ITR 59, and Madras High Court in CIT vs. S R Jeyashankar 373 ITR 120 (Mad).

Once the asset is taken to be held from the date of allotment, indexation of the entire cost would be available from that date, i.e. when the asset is first held. Besides, all instalments paid constitute part of the cost of acquisition, irrespective of when they are paid. This is also clear from the fact that when the asset is agreed to be acquired, the amount of consideration is agreed upon, with only the payment being deferred.

The scheme of taxation of capital gains is also such that what is relevant is the date of acquisition and the date of transfer of the asset – the date of payment of cost of acquisition or the date of realization of consideration are irrelevant for that purpose.

Therefore, the view taken by the Tribunal in the cases of Charanbir Singh Jolly, Lata Rohra and other similar cases, that indexation of the entire cost would be available from the date of allotment, seems to be the better view of the matter.

shailesh.kwebmaker

Glimpses of Supreme Court Rulings

41. Jagdish Transport Corporation and Ors. vs.
UOI and Ors.
(2023) 454 ITR 264 (SC)

Settlement Commission — Settlement Commission passed an order to comply with the directions of the High Court to dispose of the application on or before 31st March, 2008, after specifically observing that it was not practicable for the Commission to examine the records and investigate the case for proper Settlement and to give adequate opportunity to the applicant and the Department, as laid down in section 245D(4) of the Act — The order passed by the Settlement Commission was a nullity and could not be said to be an order in the eye of law — Matter was remitted to the Interim Board for fresh adjudication.

A search was conducted under section 132 of the Income-tax, Act, 1961 (for short “the Act”) on the business premises of the assessee firm as well as the residence of the partners.

Consequently, notices under section 153A were issued to all the assessees for the A.Ys. 1998-99 to 2004-05.

The return of income was filed by assesses under section 153A of the Act for the aforesaid assessment years.

An application under section 245C(1) of the Act was filed by the assesses before the Income Tax Settlement Commission (for short “the Settlement Commission”).

As per section 245HA, inserted by the Finance Act, 2007, the application was to be decided by the Settlement Commission on or before 31st March, 2008, failing which the proceedings before the Settlement Commission shall stand abated.

The High Court, by way of an interim order, directed the Settlement Commission to dispose of the application under section 245D of the Act by 31st March, 2008.

By order dated 31st March, 2008, the Settlement Commission disposed of the proceedings and settled the undisclosed income at Rs.59,00,000. The Settlement Commission also passed an order that theCIT/AO may take appropriate action in respect of the matters, not placed before the Commission by the applicant, as per the provisions ofsection 245F(4) of the Act.

The Settlement Commission passed the following order:

1. In the abovementioned cases, the Hon’ble High Court of Uttar Pradesh at Lucknow has passed orders dated 19th March, 2008 directing the Settlement Commission to complete the proceedings under section 245D(4) by 31st March, 2008.

2. The Rule 9 Report in this case has been received.

3. In all, the Principal Bench of the Commission has till 26th March, 2008 received more than 325 orders from various High Courts in the month of March, 2008, directing the Principal Bench to complete the cases by 31st March, 2008.

4. This would involve more than 1,500 assessments. The Settlement Commission deals with the assessments which only involve the complexity of investigation and the application is intended to prove quietus to litigation. For example, in one group of cases where 23 applications are involved, the paper book, filed before the Settlement Commission runs into 30,000 pages. It goes without saying that sufficient and proper opportunity is required to be given both to the applicant and the CIT for arriving at a proper settlement.

5. At this juncture, it is not practicable for the Commission to examine the records and investigate the case for proper settlement. Even giving adequate opportunity to the applicant and the department, as laid down in section 245(D)(4) of the Income-tax Act, 1961, is not practicable. However, to comply with the directions of the Hon’ble High Court, we hereby pass an order under section 245D(4) of the Income-tax Act, 1961, as under:

6. The undisclosed income is settled as under:

Jagdish Transport Corporation: Rs.32,00,000

Surendar Kr. Tandon: Rs.6,00,000

Sandhya Tandon: Rs.6,00,000

Kiran Tandon: Rs.7,00,000

Virender Kr. Tandon: Rs.8,00,000

Total: Rs.59,00,000

7. The CIT/AO may take such action as appropriate in respect of the matters, not placed before the Commission by the applicant, as per the provisions of section 245F(4) of IT Act, 1961.

8. Prayer for granting immunity from penalty and prosecution under all Central Acts. In view of the discussions in preceding paras, we grant immunity from prosecution and penalty under the Income-tax Act, 1961 only as regards issues arising from the application and covered by this Order.

9. Interest leviable, if any, shall be charged as per law.

10. It is settled that the amount of tax along with interest shall be paid by the applicants within 35 days from the date of receipt of intimation from the AO.

11. In view of the statutory time limit prescribed under section 245D(4A) of the Act, the Settlement Commission directs the Commissioner of Income-tax to compute the total income, income tax, interest and penalty, if any, payable as per this order and communicate to the applicant immediately along with the demand notice and challan under intimation to this office.

12. In case of failure to adhere to the scheme of payment, the immunity granted under section 245(H)(1) shall be withdrawn in terms of sub-section (1A) of the said section.

In the light of the observations made in para 7 by the Settlement Commission, the AO issued the show cause notice for re-assessment on the various transactions which are detected but were not disclosed by the Appellants before the Settlement Commission.

The show cause notice was the subject-matter of Writ Petition before the High Court. However, thereafter, during the pendency of the proceedings, the AO passed the Assessment Order, which was challenged before the High Court by way of an amendment.

The Division Bench of the High Court dismissed the writ petition on the grounds that the order passed by the Settlement Commission dated 31st March, 2008 was a nullity as the Settlement Commission itself observed that it was not practicable for the Commission to examine the records and investigate the case for proper Settlement and even giving adequate opportunity to the applicant and the Department, as laid down in section 245D(4) of the Act was not practicable.

According to the Supreme Court, considering the order passed by the Settlement Commission dated 31st March, 2008 and the manner in which the Settlement Commission disposed of the application under section 245, the High Court was justified in observing that the order passed by the Settlement Commission was a nullity and could not be said to be an order in the eye of law. The Supreme Court noted that the Settlement Commission specifically observed in para 5 of the order dated 31st March, 2008 that it was not practicable for the Commission to examine the records and investigate the case for proper Settlement and that even giving adequate opportunity to the applicant and the Department, as laid down in section 245D(4) of the Act. However, thereafter, the Settlement Commission passed an order to comply with the directions of the High Court to dispose of the application on or before 31st March, 2008. The Supreme Court was of the view that the High Court ought to have remitted the matter back to the Settlement Commission to pass a fresh order in accordance with law and on merits after following due procedure as required under section 245D(4) of the Act.

The Supreme Court therefore set aside the impugned judgment and order passed by the High Court. It set aside the subsequent assessment/re-assessment order passed by the AO, which was the subject-matter of writ petition before the High Court. It also set aside the order passed by the Settlement Commission dated 31st March, 2008 and remanded the matter to the Settlement Commission for a fresh decision.

The Supreme Court noted that the Settlement Commission has been wound up and the matters pending before the Settlement Commission are being adjudicated and decided by the Interim Board constituted under section 245AA of the Act. In view of the above position, the matter was remitted to the Interim Board with a request that the matter to be taken up expeditiously and would be preferably decided within a period of six months from the date of first hearing and a reasoned order would be passed.

42. CIT vs. Glowshine Builders & Developers Pvt Ltd
(2023) 454 ITR 249 (SC)

Capital Gains or Business Profits — Assessee engaged in the business of building and development — Sale of land — ITAT had not considered the relevant aspects/relevant factors while considering the transaction in question as stock in trade. It had also not considered the other relevant aspects which as such were required to be considered by the ITAT — The matter was remanded to the ITAT to consider the appeal afresh.

The assessee entered into an agreement dated 6th May, 2008 with one M/s Kirit City Homes Pvt Ltd. The development rights in a property at Vasai were sold for a total consideration of Rs. 15,94,06,500. As per paragraph 6 of the development agreement and as per the receipt of the deed, consideration of Rs. 15,94,06,500 was agreed and received by the assessee.

During assessment, it was noticed by the AO that the aforesaid was not disclosed while filing the return of income. The assessee did not enter the aforesaid income into his profit and loss account. It was asked to explain the transaction as it was not appearing in its profit and loss account. The agreement dated 6th May, 2008 was also furnished to the assessee along with the notice. In response, the assessee vide letter dated 4th October, 2011 stated that the transaction was duly offered to tax in A.Y. 2008-09 reflecting a consideration of Rs. 5,24,27,354. The assessee also stated that it had entered into a “rectification deed” with the said party on 30th May, 2008. By the said ratification, it was claimed that the value of the development rights was reduced from Rs. 15,94,06,500 to Rs. 5,24,27,354.

According to the AO, as the transaction was pertaining to A.Y. 2009-10, a show cause notice dated 10th October, 2011 was issued under section 142(1) requiring the assessee to explain as to why the provisions of section 50C of the I.T. Act should not be applied and why the sale proceeds should not be treated at R15,94,06,500 and taxed in A.Y. 2009-10.

The assessee replied to the same. With regard to the applicability of provision of section 50C, he stated that he had sold its stock in trade and not the assets.

The AO made the addition of R15,94,06,500 by treating the same as short term capital gains and consequently, added the same to the income for the year under consideration.

The CIT(A), Mumbai dismissed the appeal and confirmed the addition made by the AO and upheld the view of the AO to treat the transaction as income for capital gains for the AY 2009-10. The CIT(A) also discarded the submissions made by the assessee that transfer of development rights were made in F.Y. 2008-09 pursuant to the MOU dated 27th December, 2007. In the absence of proof to buttress such claim, the CIT(A) also discarded the claim of the assessee that value of the transfer of development rights was reduced from Rs. 15,94,06,500 to Rs. 5,24,27,354.

The ITAT, after examining the chart submitted by the assessee pertaining to opening and closing balance for the assessment years 1996-97 to 2007-08 held that the assessee in all these years showed inventory and expenses. Consequently, ITAT held that the assessee was engaged in the business of building and development. The ITAT further noted that the assessee showed the cost of land along with related expenditure as work in progress/inventory since 1999-2000 and the assessment orders were subsequently made under section 143(3) of the IT Act, wherein the AO accepted the nature of business of the assessee. Therefore, ITAT concluded that what was sold by the assessee was part of its inventory and not a capital asset. The ITAT also held that the assessee had reduced the sale consideration from Rs. 15,94,06,500 to Rs. 5,24,27,354 during F.Y. 2007-08 on the basis of MOU dated 27th December, 2007 and the said amount of the income had already been declared in the A.Y. 2008-09 i.e., F.Y. 2007-08 and therefore, such income could not be declared in A.Y. 2009-10 i.e., F.Y. 2008-09. The ITAT also confirmed and/or agreed with the assessee that the sale consideration was Rs. 5,24,27,354 only. Based on these findings, the ITAT reversed the findings of the AO as well as the CIT(A) and allowed the appeal by deleting the addition made by the AO of Rs. 15,94,06,500.

The High Court dismissed the appeal filed by the Revenue by holding that none of the questions proposed by the Revenue were substantial questions of law.

The Supreme Court noted that the AO treated the transaction as capital assets. ITAT had reversed the said findings and held that the transaction was stock in trade. The AO specifically recorded the findings on examining the balance sheets for the A.Y. 2006-07 to 2009-10 that there was not even a single sale during all these years and that there were negligible expenses and the transaction in question was the only transaction i.e., transfer of development rights in respect of land and consequently, it was held that the transaction was one of transfer of capital assets and not one of transfer of stock in trade. However, the ITAT after examining the opening and closing balance for the A.Y. 1996-97 to 2007-08 observed that in multiple years, inventory was shown in the balance sheet and held that the transaction in question is sale of stock in trade.

According to the Supreme Court, ITAT neither dealt with the findings given by the AO nor verified/examined the total sales made by the assessee during the relevant time and during the previous years. The Supreme Court was of the opinion that merely on the basis of recording of the inventory in the books of accounts, the transaction in question would not become stock in trade. The Supreme Court observed that it is settled position of law that in order to examine whether a particular transaction is sale of capital assets or business expense, multiple factors like frequency of trade and volume of trade, nature of transaction over the years etc., are required to be examined. According to the Supreme Court, the ITAT, without examining any of the relevant factors had confirmed that the transaction was transfer of stock in trade.

According to the Supreme Court, the High Court had also failed to appreciate that even in the event of acceptance of claim made by the assessee, including the assertion that Rs. 15,94,06,500 was shown in the tax return in the earlier AY i.e., 2008-09, the differential amount of Rs. 10,69,79,146 on account of reduction in sale consideration of development rights was to be assessed in the current year as either capital gain or business income. The Supreme Court noted that as per the claim of the assessee and the entry made and reflected in the ledger account of the assessee as on 31st March, 2008, an amount of Rs. 15,94,06,500 was paid to a third party i.e., SICCL. However, thereafter, according to the assessee there was a rectification deed dated 30th May, 2008 and the amount was reduced from Rs. 15,94,06,500 to Rs. 5,24,27,354. According to the Supreme Court, the ITAT had not even questioned the factum of refund of differential amount of Rs. 10,69,79,146 to the purchaser on account of rectification deed dated 30th May, 2008. The ITAT ought to have appreciated that the moment the receipt of amount is received and recorded in the books of accounts of the assessee unless shown to be refunded/returned, it had to be treated as income in the hands of the recipient. The ITAT has also not considered the aforesaid aspect.

The Supreme Court therefore concluded that the ITAT had not considered the relevant aspects/relevant factors while considering the transaction in question as stock in trade and had not considered the relevant aspects as above which as such were required to be considered by the ITAT, the matter was therefore required to be remanded to the ITAT to consider the appeal afresh in light of the observations made hereinabove and to take into consideration the relevant factors while considering the transaction as stock in trade or as sale of capital assets or business transaction.

Accordingly, the impugned judgment and order passed by the High Court and that of the ITAT were quashed and set aside and the matter was remitted back to the ITAT to consider the appeal afreshin accordance with law and on its own merits, while taking into consideration the observations made hereinabove and to take an appropriate decision on whether the transaction in question was the sale of capital assets or sale of stock in trade and other aspects referred hereinabove.

43. CIT vs. Paville Projects Pvt Ltd
(2023) 453 ITR 447 (SC)
Civil Appeal No. 6126 of 2021 (Arising out of SLP (C) No. 13380 of 2018)

Decided On: 6th April, 2023

Revision — Prejudicial to the interest of the Revenue — Understood in its ordinary meaning it is of wide import and is not confined to loss of tax but courts have treated loss of tax as prejudicial to the interests of the Revenue — If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it would certainly be prejudicial to the interests of the Revenue — However, only in a case where two views are possible and the Assessing Officer has adopted one view, such a decision, which might be plausible and it has resulted in loss of Revenue, such an order is not revisable under section 263.

The assessee was engaged in manufacture and export of garments, shoes, etc. It filed its income tax return for the A.Y. 2007-08 wherein it showed sale of the property/building “Paville House” for an amount of Rs. 33 crores.

The building “Paville House” was constructed by the assessee on the piece of land which was purchased in the year 1972. The said house of the company was duly reflected in the balance sheet of the company.

There had been litigation between shareholders of the Company being family members. Litigations in the Company Law Board and the High Court culminated in arbitration. In the arbitration proceedings, an interim award was passed whereby an amicable settlement termed as “family settlement” was recorded between the parties. As per the interim award, three shareholders namely, (1) Asha, (2) Nandita and (3) Nikhil were paid Rs. 10.35 crores each.

The assessee showed gains arising from sale of “Paville House” amounting to Rs. 1,21,16,695 as “long term capital gains” in the computation of their income for A.Y. 2007-08. The working computation of capital gains was accepted by the AO, whereby the cost of removing encumbrances claimed (Rs.10.33 Crores paid to three shareholders pursuant to the interim award) was taken as “cost of improvement” and the deduction was claimed to remove encumbrances on computation of capital gains. On the balance amount capital gain tax was offered and paid. The assessment was completed on 15th December, 2009 by the AO under section 143(3) of the Income-tax Act, 1961 (for short “IT Act”) accepting the “long term capital gains” as per sheet attached in computation of income.

Later, a notice dated 24th October, 2011 was issued by the CIT under section 263 of the IT Act to show cause as to why the assessment order should not be set aside.

The Commissioner vide its order dated 24th April, 2011 held that the assessment order passed under section 143(3) of the IT Act was erroneous and prejudicial to the interest of the revenue on the issue relating to deduction of Rs.31.05 Crores claimed by the assessee as cost of improvement while computing long term capital gains. The claim of the assessee that the said payment was made by them towards settlement of litigation, which according to the assessee amounted to discharge of encumbrances and required to be considered as cost of improvement, was not accepted by the Commissioner as according to him it did not fall under the definition of “cost of improvement” contained in section 55(1)(b) of the IT Act. According to the Commissioner, the expenses claimed by the assessee neither constituted expenditure that is capital in nature nor resulted in any additions or alterations that provide an enhanced value of an enduring nature to the capital asset. The Commissioner also held that the payment as contended was not made by the assessee to remove encumbrances. The Commissioner also held that provisions of sections 50A and 55(1)(b) of the IT Act were not complied with and the assessment order was not framed in consonance with the provisions of the IT Act and thus the assessment order was erroneous and prejudicial to the interest of the revenue. Consequently, the Commissioner set aside the assessment order passed by the AO with a direction to the AO to recompute the capital gains of the assessee in consonance with the provisions of the IT Act as discussed in the order.

On appeal, the ITAT relying upon the decision of this Court in the case of Malabar Industrial Co Ltd vs. CIT [(2000) 2 SCC 718: (2000) 243 ITR 83 (SC)] concluded that the Commissioner wrongly invoked the jurisdiction under section 263 of the IT Act. The ITAT also observed that there was no error on facts declared. The ITAT held that every loss of revenue as a consequence of AO’s order cannot be treated as prejudicial to the interest of the revenue, when two views were possible and AO took a view which CIT did not agree with. The ITAT also upheld the allowability of the assessee’s claim of deduction of payment made to the shareholders relying upon the decision of the Bombay High Court in CIT vs. Smt. Shakuntala Kantilal [(1991) 190 ITR 56 (Bombay)]. The ITAT relying on the Tribunal’s order (Bombay Bench) in Chemosyn Ltd vs. ACIT [2012 (25) Taxxman.com 325 (Bombay)] held that the CIT’s observation of expenditure incurred for payment of shareholders not being deductible as incorrect.

The Department’s appeal against the ITAT’s order was dismissed by the High Court wherein the High Court has confirmed the ITAT’s findings. The High Court agreed with the findings recorded by the ITAT that the claim for deduction of Rs. 31.05 crores was for ending the litigation and the litigation ended only when the building was sold and the payment was made as per the direction of the Company Law Board as well as the interim arbitral award and therefore, the same was deductible under section 55(1)(b) of the IT Act, as allowed by the AO.

On a further appeal by the Revenue, the Supreme Court observed that the assessee had heavily relied upon the decision of this Court in the case of Malabar Industrial Co Ltd (supra). In the said case it is observed and held that in order to exercise the jurisdiction under section 263(1) of the Income-tax Act, 1961 the Commissioner has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. However, if one of them is absent, recourse cannot be had to section 263(1) of the Act. The Supreme Court noted that “What can be said to be prejudicial to the interest of the Revenue” has been dealt with and considered in paragraphs 8 to 10 in the case of Malabar Industrial Co Ltd (supra). Understood in its ordinary meaning it is of wide import and is not confined to loss of tax but courts have treated loss of tax as prejudicial to the interests of the Revenue.

The Supreme Court noted that even as observed in paragraph 9 in the case of Malabar Industrial Co Ltd (supra) that the scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. It was further observed that if due to an erroneous order of the ITO, the Revenue was losing tax lawfully payable by a person, it would certainly be prejudicial to the interests of the Revenue. However, only in a case where two views were possible and the AO had adopted one view, such a decision, which might be plausible and it had resulted in loss of Revenue, such an order was not revisable under section 263.

The Supreme Court applying the law laid down in the case of Malabar Industrial Co Ltd (supra) to the facts of the case on hand and even as observed by the Commissioner, held that the order passed by the AO was erroneous as well as prejudicial to the interest of the Revenue. In the facts and circumstances of the case, it could not be said that the Commissioner exercised the jurisdiction under section 263 not vested in it. The erroneous assessment order had resulted into loss of the Revenue in the form of tax. Under the Circumstances and in the facts and circumstancesof the case narrated hereinabove, it was held that the High Court had committed a very serious error in setting aside the order passed by the Commissioner passed in exercise of powers under section 263 of the Income-tax Act, 1961.

The Supreme Court restored the order passed by the Commissioner passed in exercise of powers under section 263 of the Income-tax Act, 1961.

Note:

It is worth noting that by insertion of Explanation 2 by the Finance Act, 2015 [w.e.f. 1st June, 2015], the scope/powers of revisional jurisdiction of CIT/PCIT under section 263 is effectively widened by providing deeming fiction for treating order of the AO as ‘erroneous in so far as it is prejudicial to the interest of the revenue’ under certain circumstances.

shailesh.kwebmaker

Article 5(3) and Article 5(4) of India — Singapore DTAA — The time for the calculation of 180 days does not start and end with the date of raising the first and last invoice. It depends upon the facts of each case. Time spent on different projects cannot be aggregated to compute the time threshold merely because the client and person performing work are the same.

4. Planetcast International Pvt Ltd vs. ACIT
[TS-389-ITAT-2023(Del)]
[ITA No: 1831/1832/Del/2022 & 451/Del/2023]
A.Ys.: 2018-19, 2019-20 & 2020-21

Date of order: 18th July, 2023

Article 5(3) and Article 5(4) of India — Singapore DTAA — The time for the calculation of 180 days does not start and end with the date of raising the first and last invoice. It depends upon the facts of each case. Time spent on different projects cannot be aggregated to compute the time threshold merely because the client and person performing work are the same.

FACTS

The assessee received two orders from A (an Indian Company) for projects located in Gurugram and Bengaluru. He obtained a quote from Original Equipment Manufacturer (OEM), shared it with A and placed an order with OEM on receipt of confirmation from A. Assessee claimed that the supply of equipment is not taxable in India as the title passed outside India and fees for installation and commission is not taxable as 183 days duration threshold relevant for trigger of installation PE is not crossed. AO held that assessee’s presence constituted construction PE and supervisory PE in India. For the calculation of 183 days, AO calculated the period starting from the date of the first invoice for the supply of material to the last invoice raised. Also, both projects were treated as integrated for computing time threshold. DRP upheld AO’s order.

Being aggrieved, the assessee appealed to ITAT.

HELD

Two separate purchase orders were issued for the purchase of different types of equipment to be installed at Bengaluru and Gurugram.

Assessee did not manufacture the assets itself. Until manufacturing was complete and delivered to A, installation/commission services could not have commenced.

Accordingly, the first date of invoice for the supply of material cannot be taken as the date of commencement of installation and commissioning of services at the project site.

Two projects were independent of each other. Merely because installation at both sites was done by the same contractors, the project cannot be treated as a single project.

In any case, from the evidence submitted, installation at the Bengaluru site was completed in 46 days and at Gurugram in 87 days. Thus, in any case, the aggregate threshold of 183 days was not crossed.

shailesh.kwebmaker

Article 12 of India — USA DTAA — Provision of architectural services for construction of Statue of Unity is not taxable in India as it does not satisfy make available condition in DTAA.

3. Michael Graves Design Group Inc. vs. DCIT
[ITA No: 7683/Del/2017 & 6007/Del/2018]
A.Ys.: 2014-15 & 2015-16

Date of order: 18th July, 2023

Article 12 of India — USA DTAA — Provision of architectural services for construction of Statue of Unity is not taxable in India as it does not satisfy make available condition in DTAA.

FACTS

Assessee provided architectural design, drawing and master plan for the construction of Statue of Unity. AO held the assessee rendered technical and architectural design services which made available the technology, skill, experience, etc., and thus fell within the ambit of FIS under Article 12(4)(b) of the India-USA DTAA. DRP upheld the AO order.

Being aggrieved, the assessee appealed to ITAT.

HELD

Assessee rendered project-specific services involving creation of conceptual, aesthetic design and description of scope that would give the EPC contractor guidance for the design and execution of the project.
Design provided by the assessee was for the appearance of the project, and it was the responsibility of the EPC contractor to develop final design.
Assessee did not develop a technical design or transferred a technical plan. It only presented general conceptual designs and description to help EPC contractor visualise the project.
The design was specific for the project and cannot be applied independently. Thus, services do not satisfy make available condition.

shailesh.kwebmaker

Section 56 read with Rule 11UA of the Income Tax Rules — There was no fault in approach of assessee in considering guideline value of land and building to arrive fair value of preference shares that it would fetch in open market on valuation date and arriving at premium value for redemption of preference shares, hence addition made by TPO computing differential premium on basis of book value of assets was not sustainable.

24. Information Technology Park Ltd vs. ITO
[2022] 99 ITR (T) 633 (Bangalore – Trib.)
ITA Nos.: 1357 & 1358 (BANG.) of 2018
A.Ys.: 2009-10 & 2010-11
Date of order: 24th August, 2022

Section 56 read with Rule 11UA of the Income Tax Rules — There was no fault in approach of assessee in considering guideline value of land and building to arrive fair value of preference shares that it would fetch in open market on valuation date and arriving at premium value for redemption of preference shares, hence addition made by TPO computing differential premium on basis of book value of assets was not sustainable.

FACTS

The assessee was a public limited company incorporated in the year 1994. It was engaged in the business of developing, operating and maintaining industrial parks/Special Economic Zones. The assessee was a subsidiary of Ascendas Property Fund (India) Pvt Ltd. [APFI]. The assessee had issued 0.5 per cent redeemable non-cumulative preference shares on 6th January, 2003 and the same was subscribed by APFI. The preference shares were issued at a face value of Rs. 100 per share and were redeemable at any time after 24 months but not later than 9 months from the date of allotment. During the assessment proceedings a reference was made to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP) of the international transaction entered into by assessee with AFPI. The assessee had during the previous year relevant to A.Y. 2010-11 redeemed some of the preference shares at a premium based on the valuation done the expert valuer by adopting the Net Asset Value (NAV) method. The TPO accepted the method of valuation adopted by the assessee i.e., NAV method, but reworked the redemption value based on book value of assets. The TPO arrived at the redemption value at Rs. 286.80 per share which resulted in an adjustment of Rs. 29,95,66,000 that arose out of the difference between the redemption value adopted by the assessee and the TPO. The AO passed the final assessment order giving effect to the TP adjustment based on the letter filed by the assessee that the assessee would not be filing objections before the DRP and would prefer appeal with the CIT(Appeals).

The CIT(Appeals) held that the TP adjustment made by the TPO determining the value at which the preference shares should have been redeemed cannot be treated as income in the hands of the assessee by relying on the decision of the Bombay High Court in the case of Vodafone India Services (P.) Ltd vs. Union of India [2015] 53 taxmann.com 286/231 Taxman 645/[2014] 369 ITR 511. However, since the ALP of the share price determined by the TPO was lesser than the price determined by the assessee, the CIT(A) proposed to make addition to the extent of the same amount by treating it as deemed dividend. In this regard the CIT(Appeals) relied on the decision of the Tribunal in the case of Fidelity Business Services India (P) Ltd vs. Asstt. CIT [2017] 80 taxmann.com 230/164 ITD 270 (Bang – Trib). The assessee filed its response to the show cause notice before the CIT(Appeals) by submitting that the premium of redemption of preference shares cannot be considered as deemed dividend as per the provisions of section 2(22) of the Act and revenue authorities cannot re-characterize the transaction as deemed dividend. The assessee made detailed submissions before the CIT(Appeals) in this regard which were rejected by the CIT(Appeals) who proceeded to treat the premium on preference shares as deemed dividend. Aggrieved by the order, the assessee was in appeal before the Tribunal.

HELD

The Tribunal observed that a combined reading of the rule 11UA(1)(c)(b) with rule 11UA(1)(c)(c) can be taken to mean that for the purpose of valuation of preference shares also the immovable properties to be considered at guideline value since the value based on the guidance represents the economic and commercial value of the preference shares on the date of valuation.

The method of valuation adopted as NAV was not disputed as the TPO had also applied the same method and impugned addition had arisen only due to the value of land and building considered by the TPO for arriving at the NAV. The guideline value of land and building for the purpose of valuation of preference shares under NAV method was right. Therefore, the addition made by the TPO computing the differential premium basis the book value of assets was not sustainable. Since there cannot be any addition made towards the premium on redemption of the preference shares, the addition made by the CIT(Appeals) considering the same as deemed dividend under section.2(22)(e) also would not survive. The appeal was allowed in favour of the assessee.

shailesh.kwebmaker

Section 80-IB – Restriction on the extent of built up area of commercial space in housing project imposed by way of amendment to section 80-IB(10) w.e.f. 1st April, 2005 does not apply to housing projects approved before 1st April, 2005 even though completed after 1st April, 2005.

23. DCIT vs. Sahara India Sahkari Awas Samiti Ltd
[2022] 98 ITR (T) 634 (Delhi – Trib.)
ITA Nos.: 2481 & 2482 (Delhi) of 2011
A.Ys.: 2005-06 & 2006-07

Date of order: 19th July, 2021

Section 80-IB – Restriction on the extent of built up area of commercial space in housing project imposed by way of amendment to section 80-IB(10) w.e.f. 1st April, 2005 does not apply to housing projects approved before 1st April, 2005 even though completed after 1st April, 2005.

FACTS

The assessee was a co-operative society of Sahara India Group and was engaged in the business of development and construction of residential and commercial units. A development agreement dated 21st September, 1999 was entered into between the assessee and Sahara India Commercial Corporation Ltd, wherein the assessee appointed SICCL to construct Sahara States, Lucknow and Sahara Grace, Lucknow projects. The project map was approved on 26th March, 2003 by the Lucknow Development Authority. The assessee claimed deduction under section 80-IB (10) in the return of income filed for A.Ys. 2005-06 and 2006-07. The AO questioned claim of deduction under section 80-IB (10) on the following grounds:

a. the built up area of the shops and commercial establishments cannot exceed 5 per cent of the aggregate built up area or 2,000 sq. ft. whichever was less and the project developed by the assessee comprised of 30,300 sq. ft. of commercial establishment which exceeds the prescribed limit.

b. the assessee was to obtain a completion certificate prior to 31st March, 2008 and the assessee did not produce such certificate.

c. the assessee cannot be regarded as a developer since it was not actively involved in the development and construction works due to non-employment of capital and labor for the purpose of development and construction.
On appeal, the CIT (Appeals), allowed the claim of the assessee.

Aggrieved by the order of CIT (Appeals), the revenue filed further appeal before the Tribunal.

HELD

The Tribunal observed that so far as the first objection of the revenue was concerned that the built up area of shops and commercial establishments far exceeds the area prescribed under the statute was concerned, the issue stands settled in favour of the assessee by the decision of the Supreme Court in the case of CIT vs. Sarkar Builders [2015] 57 taxmann.com 313/232 Taxman 731/375 ITR 392 and CIT vs. Vatika Township (P.) Ltd. [2014] 49 taxmann.com 249/227 Taxman 121/367 ITR 466 wherein it had been held that restriction on extent of commercial space in housing project imposed by way of amendment to section 80-IB(10) with effect from 1st April, 2005 does not apply to housing projects approved before 1st April, 2005 even though completed after 1st April, 2005. Since, in the instant case the housing project was admittedly approved before 1st April, 2005 therefore, the first allegation of the revenue that the aggregate built up commercial area far exceeds the prescribed limit was not applicable to the assessee.So far as the second objection of the revenue was concerned, i.e., completion of the project on or before 31st March, 2008 was concerned, the assessee contended that the project was completed before 31st March, 2008 in view of the following additional evidences:-

i. Letter from Sahara India Commercial Corporation Ltd to the assessee dated 14th March, 2008.

ii. Letter from the assessee to Sahara India Commercial Corporation Ltd dated 18th March, 2008.

iii. Architect certificate dated 15th September, 2008along with the official translation.

Since these documents were never produced before the lower authorities and were filed before the Tribunal for the first time in the shape of additional evidences, therefore, Tribunal admitted the additional evidences filed in terms of rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 and restore the issue relating to completion of the project prior to 31st March, 2008 to the file of the AO for adjudication of this issue. The Tribunal held that the AO shall examine the documents and any other details that he may require and decide the issue as per fact and law after giving due opportunity of being heard to the assessee.

So far as the third allegation of the revenue that the assessee was not a developer was concerned, the Tribunal observed that condition of developer was decided and allowed in the initial years of claim, i.e., in the assessment years 2003-04 and 2004-05 which was evident from the order of the Commissioner (Appeals) for assessment year 2005-06. Therefore, same was not open for examination in subsequent year in absence of change in the factual position. Without disturbing the assessment for the initial assessment year it was not open to the revenue to make disallowance of such deduction in subsequent year by taking a contrary stand. Further, merely appointing SICCL as a contractor for development and construction of the project, cannot lead to the conclusion that the said activities were not carried on by the assessee society. Since the assessee was bearing the entire risks and responsibilities relating to the project and SICCL was appointed only to execute the project, therefore, in the light of the ratio of various decisions relied on by Counsel for the assessee, the assessee ought to be considered as a developer and cannot be denied the benefit of deduction under section 80-IB (10). So far as the allegation of the revenue that the booking application forms of the flats were addressed to the SICCL and not to the assessee and that the assessee had authorized SICCL to collect money from purchasers of flats directly on its behalf was concerned, merely because certain procedural formalities relating to collection of booking application forms and money from the buyers were delegated to SICCL, it would not render SICCL as the developer of the project since the money collected by SICCL was on behalf of the assessee only and on the authorisation of the assessee and not in its independent capacity. Therefore, delegation of certain formalities regarding collection of booking application forms and money on behalf of the assessee would not cease the assessee company as being rendered as a developer of the project.In view of the above discussion, objection Nos. 1 and 3 by the AO while denying the benefit of deduction under section 80-IB(10) are rejected since the assessee, had fulfilled the condition regarding built up area of shops and commercial establishments and the assessee was a developer. However, the third objection relating to obtaining of completion certificate prior to 31st March, 2008 was restored to the file of the AO for fresh adjudication in view of the additional evidences filed by the assessee.

shailesh.kwebmaker

Section 69A – Where cash deposited in bank by the assessee during demonetisation period was out of cash sales and realisation from trade debtors which was duly shown in books of account and AO did not point out any specific defect in books of account maintained by assessee and no inflated purchases or suppressed sales were found, such cash deposit could not be treated as unexplained money of assessee.

22. DCIT vs. Roop Fashion
[2022] 98 ITR (T) 419 (Chandigarh – Trib.)
ITA No.: 136 (CHD) of 2021
A.Y.: 2017-18
Date of order: 14th June, 2022

Section 69A – Where cash deposited in bank by the assessee during demonetisation period was out of cash sales and realisation from trade debtors which was duly shown in books of account and AO did not point out any specific defect in books of account maintained by assessee and no inflated purchases or suppressed sales were found, such cash deposit could not be treated as unexplained money of assessee.

FACTS

The AO during the course of assessment proceedings noticed that the assessee had deposited demonetised currency in its bank account. The Ld. AO asked the assessee to furnish information with necessary documentary evidences. The assessee furnished the financial monthly data and relevant documents. However, the AO held that assessee had introduced its own unaccounted money in the disguise of sale in the wake of demonetisation and he estimated the sales of the assessee and invoking the provision of section 69A made addition. The CIT (Appeals) observed that the assessee had submitted a chart which revealed that cash deposited in this year was far less than the cash deposited in the preceding years when there was no demonetisation and that the auditor had not pointed out any discrepancy in the books of account of the assessee which had not been rejected by the AO under section 145(3) and that the stock position depicted in the books of account had been accepted by the AO. Thus, CIT (Appeals) was of the view that when the sales recorded in the books of account had been accepted by the AO, the corresponding cash deposit made out of such cash sales and cash realisation from debtors could not be rejected. The CIT (Appeals) allowed the appeal of the assessee.

Aggrieved by the order of CIT (Appeals), the revenue filed further appeal before the Tribunal.

HELD

The Tribunal observed that the books of account maintained by the assessee in the regular course of its business were audited and accepted by the AO while framing the assessment through deep scrutiny under section 143(3). The AO did not point out any specific defect in the books of account maintained by the assessee, no inflated purchases or suppressed sales were found. Even the Investigation Wing asked the assessee to furnish the details which were submitted and on those details, no adverse comment was made by the Investigation Wing. It was also noticed that the assessee was having cash sales in all the years. The assessee was also having cash realised from the debtors and it was not the case of the AO that the debtors of the assessee were bogus or those were not related to the business of the assessee. The cash deposited in the bank by the assessee during the demonetisation period was out of the cash sales and the realisation from the trade debtors duly shown in the books of account which were accepted by the AO. The assessee had deposited Rs. 2,47,50,000 during the demonetisation period in the bank account. The AO accepted Rs. 1,50,00,000 as cash sale on estimated basis but no basis or method was adopted for that estimation. In other words the AO considered the aforesaid estimated sales only on the basis of surmises and conjectures which were not tenable in the eyes of law. The AO accepted the trading results and had not doubted opening stock purchase sales and closing stock as well as GP rate shown by the assessee. Therefore, the addition made by the AO on the basis of surmises and conjectures was rightly deleted by the CIT (Appeals).

In result, the appeal filed by the assessee was allowed.

shailesh.kwebmaker

Section 250, Rule 46A

21. DCIT vs. Ansaldo Caldaie Boilers India Pvt Ltd
ITA No. 1999/Chny/2019
A.Y.: 2015-16
Date of Order: 21st June, 2023
Section 250, Rule 46A

FACTS

The assessee filed its return of income for the A.Y. 2015-16 on 30th November, 2015 admitting NIL income and claiming current year loss of Rs. 7,87,45,865/-.

In the course of assessment proceedings, the AO noted that (i) the assessee has claimed a sum of Rs. 8,59,47,532 as finance cost for the year under consideration; (ii) the interest bearing funds borrowed by the assessee as on 31st March, 2015 include long term loans at Rs. 32,18,49,972 and the short term loans at Rs. 19,92,21,313 totaling to Rs. 52,10,71,285; (iii) the assessee has incurred interest expenses to the tune of Rs. 8,59,47,532 as finance cot in respect of the above borrowings and has charged off the same to profit and loss account; (v) the assessee has advanced a sum of Rs. 15,00,00,000 as advance for purchase of land for which an agreement has been entered into but no registration has been taken place and therefore, the asset has not put to use by the assessee; (vi) from the balance sheet, the AO has noted that the assessee has utilised interest bearing funds for the advance given for purchase of land.

The AO asked the assessee to show-cause as to why proportionate interest should not be disallowed under section 36(1)(iii) of the Act. After considering the submissions and examining the details furnished by the assessee, the AO held that the assessee has disguised an interest free loan to fellow subsidiary as an advance for purchase of land. As per section 36(1)(iii) of the Act, the amount of the interest paid in respect of capital borrowed for the purpose of the business or professional only shall be allowed as a deduction. However, since the assessee has claimed interest on sums advanced to fellow subsidiary which has no connection with the business of the assessee, as per section 36(1)(iii) of the Act, the AO disallowed the sum of Rs.2,47,41,586 [computed as Rs.8,59,47,532 x (Rs.15,00,00,000 / Rs.52,10,71,285] proportionate to the amounts advanced not for the purpose of business and added back to the total income. Aggrieved, assessee preferred an appeal to CIT(A) who after considering the particulars and evidences to substantiate the fact that the payment of advance of Rs. 15 crores were from the proceeds of the equity share capital, which were received from the parent company during the F.Y. 2010-11 as well as bank statements in support of assessee’s claim, allowed the ground raised by the assessee by deleting the disallowance made under section 36(1)(iii) of the Act.

Aggrieved, the Revenue preferred an appeal to the Tribunal where it submitted that the CIT(A) has deleted the disallowance under section 36(1)(iii) of the Act based on the fresh evidences furnished by the assessee during the course of appellate proceedings without affording an opportunity to the AO to verify the additional evidences submitted by the assessee which is in violation of Rule 46A of the Income Tax Rules.

HELD

The Tribunal having heard both the sides and perused the materials available on record and gone through the orders of authorities below observed that the disallowance of interest made under section 36(1)(iii) of the Act has been deleted by CIT(A) by considering the fresh evidences furnished by the assessee during the course of appellate proceedings without affording an opportunity to the AO to verify the additional evidences submitted by the assessee which is in violation of Rule 46A of the Income Tax Rules. The Tribunal set aside the order of the CIT(A) on this issue and remitted the matter back to the file of the AO to verify the additional evidences/bank statements, etc. and decide the issue afresh in accordance with law by affording an opportunity of being heard to the assessee.

shailesh.kwebmaker

Claim for deduction under section 80IC cannot be denied in a case where tax audit report as also audit report in Form 10CCB under Rule 18BBB is filed on time but the return of income is filed late.

20. Canadian Speciality Vinyls vs. ITO
TS-301-ITAT-2023 (Delhi)
A.Y.: 2015-16
Date of order: 2nd June, 2023
Section 80IC

Claim for deduction under section 80IC cannot be denied in a case where tax audit report as also audit report in Form 10CCB under Rule 18BBB is filed on time but the return of income is filed late.

FACTS

In this case the claim of the assessee for deduction under section 80IC of the Act was not allowed by the AO on the grounds that the assessee had filed the return of income beyond the due date. The assessee had filed tax audit report as also the audit report in Form 10CCB under Rule 18BBB on time.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO on the ground that the return of income was filed late.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the assessee had filed the tax audit report as also the audit report in Form No. 10CCB but it was only return of income which was filed late due to illness of the executive partner. It also noted that the CIT(A) had recorded a categorical finding that the assessee was prevented by sufficient cause in filing return of income on time.

The Tribunal further noted the ratio of the decision of the Nagpur Bench (AT e-Court, Pune) of Tribunal in the case of Krushi Vibhag Karmchari Vrund Sahakari Pat Sanstha vs. ITO (ITA No. 182/Nag./2019; A.Y.: 2009-10; Order dated 7th October, 2022) wherein the coordinate Bench of the Tribunal, after considering the provisions of section 80AC of the Act and considering the judgements of the Hon’ble Supreme Court in the case of CIT vs. GM Knitting Industries Pvt Ltd, (376 ITR 456) and PCIT vs. Wipro Ltd, 446 ITR 1 (SC) held that the Chapter III and Chapter VI-A of the Act operate in different realms and principles of Chapter III, which deals with ‘incomes which did not form part of total income’ cannot be equated with mechanism provided for deductions in Chapter VI-A which deals with ‘deductions to be made in computing the total income’. Therefore, it was held that the fulfillment of requirement for making a claim of exemption under the relevant sections of Chapter III in the return of income is mandatory, but, when it comes to the claim of a deduction, inter alia, under the relevant section of Chapter VI-A, such requirement become directory. In a case where the assessee claims deduction under Chapter VI-A of the Act, the making of a claim even after filing of return, but, before completion of the assessment proceedings and passing of assessment order meets the directory requirement of making a claim in the return of income.

The Tribunal held that even in a situation the return of income of the assessee for A.Y. 2015-16 is treated as belated return beyond the prescribed time limit provided under section 139(1) of the Act, then also, as per the judgement of the Hon’ble Supreme Court in the case of G.M. Knitting Industries Pvt Ltd (supra), which was followed by the coordinate Bench of the ITAT, Pune in the case of Krushi Vibhag Karmchari Vrund Sahakari Pat Sanstha (supra), the assessee is very well entitled to claim deduction u/s 80IC of the Act.

The Tribunal held that a logical conclusion is that the assessee is entitled to get deduction under section 80IC of the Act, as the claiming such deduction, which is part of Chapter VI-A of the Act, in the return of income filed within prescribed time limit is not mandatory but directory.

shailesh.kwebmaker

Order imposing penalty under section 270A passed in the name of deceased is void. Assessment order cannot be rectified on the basis of an order of the Apex Court which was not available on the date when the AO exercised jurisdiction under section 154.

19. UCB India Pvt Ltd vs. ACIT
TS-377-ITAT-2023 (Mum.)
A.Y.: 2011-12
Date of order: 27th June, 2023
Section 154

Order imposing penalty under section 270A passed in the name of deceased is void.

Assessment order cannot be rectified on the basis of an order of the Apex Court which was not available on the date when the AO exercised jurisdiction under section 154.

FACTS

The assessee filed return of income, for assessment year 2011-12, declaring total income of Rs. 20,81,12,869. The case was selected for scrutiny and the total income assessed vide order dated 29th January, 2016 passed under section 144C(1) r.w.s 143(3) of the Act at Rs. 36,25,23,522. In the course of assessment proceedings, the AO raised specific query regarding sales promotion expenses and allowed the deduction claimed after considering the response of the assessee and also the fact that for A.Ys. 2002-03 and 2003-04 the Tribunal, in the case of assessee, has on identical facts allowed deduction of sales promotion expenses.

Subsequently, the AO issued notices dated 18th March, 2020, 20th December, 2020, and 23rd December, 2020 seeking to rectify the order dated 29th January, 2016 The assessee challenged the proposed order on jurisdiction and also on merits. However, the AO was not convinced and he disallowed the sales promotion expenses of Rs. 11,30,18,798.

The assessee being aggrieved by the action of the AO in passing an order rectifying the order dated 29th January, 2016 passed under section 144C(1) r.w.s 143(3) of the Act, preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the Calcutta High Court has in the case of Jiyajerrao Cotton Mills [(1981) 130 ITR 710 (Cal.)] held that a debatable issue on the question or which required investigation and arguments as to facts or law to find out if there was a mistake cannot be rectified under section 154. It observed that in the present case the issue relating to allowability of sales promotion expense in the hands of the assessee was not settled in favor of the revenue.

The Tribunal observed that on one hand there was Circular No. 5 of 2012, dated 01st August, 2012 issued by CBDT which provided that the deduction for sales promotion expense in violation of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations 2002 should be disallowed, and on the other hand there are two decisions of the Tribunal in assessee’s own case. Vide common order dated 06th February, 2009, pertaining to A.Ys. 2002-03 & 2003-04 [ITA No 428 & 429/Mum/2007], the Tribunal had allowed deduction for sales promotion expenses claimed by the assessee in identical facts and circumstances. Further, vide common order dated 26th February, 2016, passed in appeals pertaining to A.Ys. 2004-05 (ITA No. 6681 & 6454/Mum/2013), 2005-06 (ITA No. 6682 & 6455/Mum/2013 (and 2007-08 (ITA No. 6558 & 6456/Mum/2013), the Tribunal had deleted the adhoc disallowance made by the AO in respect of gift articles. The AO had made disallowance by placing reliance upon the aforesaid regulations and the circular, however, the Tribunal deleted the addition by placing reliance upon the decision of the Tribunal in the case of Syncom Formulation vs. DCIT (ITA No. 6429& 6428/Mum/2012, dated 23rd December, 2015) wherein it was held that the Circular No. 5 of 2012 issued by CBDT would apply prospectively with effect from 1st August, 2012. The Tribunal held that the issue was clearly debatable on law.

The AO did not have the benefit of the judgment of Hon’ble Supreme Court in the case of Apex Laboratories Pvt Ltd [(2022) 442 ITR 1 (SC)] at the time of exercising jurisdiction as the same came much later on 22nd February, 2022.

The Tribunal was of the view that, even on facts, the issue required investigation. The Tribunal noted that in the order passed under section 154, the AO had in a table given break-up of sales promotion expenses which table had a column captioned `broad nature of expenses’. On perusal of the column ‘Broad Nature of Expenses’ of the table forming part of Paragraph 4 of the Rectification Order (which table has been reproduced in the order of the Tribunal), the Tribunal observed that it was not apparent the all the sales promotion expenses were incurred on freebies. To the contrary, the broad nature of expenses given in the table suggested that the sales promotion expenses were not in the nature of freebies such as ‘Market Research Fee’, ‘Off Supplies Puch (Sales Promotion)’, ‘Printing & Reproduct (Sales Promotion)’, and ‘Documentation Books (Promotional Expenses)’. The balance expenses, according to the Tribunal, could have included expenses on freebies. However, this was a matter of investigation as it was not apparent that the sales promotion expenses of Rs.11,30,18,796 was incurred on freebies.

The Tribunal held that the issue of allowance of sales promotion expenses (including freebies) in the hands of the assessee was debatable and required investigation and arguments on facts and in law. The Tribunal held that it cannot be said that allowance of deduction of sales promotion expenses by the AO resulting in a mistake apparent on record.

The Tribunal quashed the order passed by the AO under section 154 of the Act as being without jurisdiction.

shailesh.kwebmaker

Notice under Section 148 of The Income-Tax Act, Post Faceless Reassessment Scheme

INTRODUCTION

The provisions of the Income-tax Act, 1961 (“the Act”) dealing with the reassessment of income have undergone a change by virtue of various amendments inter-alia to sections 147 to 151A of the Act made by the Finance Act, 2021 w.e.f. 1st April 2021. The Explanatory Memorandum to the Finance Bill, 2021 states that the assessment or reassessment or re-computation of income escaping assessment, to a large extent, is information-driven, and therefore, there is a need to completely reform the system of assessment or reassessment or re-computation of income escaping assessment and the assessment of search-related cases.

The amendments made by Finance Act, 2021 were followed up by amendments made by the Finance Act, 2022 and also, to a certain extent, by amendments made by the Finance Act, 2023.

Any amendment made to the Act should normally be with a view to enlarge/curtail the scope of the provision being amended or to plug existing mischief or to make the law simpler, or to grant/take away discretion vested in an authority (which discretion Legislature believes is not being used in a manner it ought to be).

Experience, however, since the introduction of new provisions for reassessment, is that the amended provisions have brought in a flood of litigation, and much more is expected till the Apex Court settles the divergent views expressed by the High Courts.

ISSUE CONSIDERED IN THIS ARTICLE

Subsequent to coming into force of the e-Assessment of Income Escaping Assessment Scheme, 2022, notified by Notification dated 29th March, 2022 (“Faceless Reassessment Scheme”), a notice under section 148 of the Act has to be issued by the Faceless Assessing Officer (“FAO”), as is mandated by Faceless Reassessment Scheme. The issue for consideration is consequently whether all notices issued under section 148 of the Act, after coming into force of the Faceless Reassessment Scheme, by the Jurisdictional Assessing Officer (“JAO”), being contrary to the provisions of the Faceless Reassessment Scheme, are bad in law and need to be struck down?

JURISDICTIONAL CONDITIONS FOR ISSUANCE OF NOTICE UNDER SECTION 148

Under amended provisions of the Act, a notice proposing reassessment is issued under section 148 of the Act if income chargeable to tax has escaped assessment and the Assessing Officer (“AO”) has obtained prior approval of the Specified Authority to issue such notice. Approval of Specified Authority is not needed in cases where an order under section 148A(d) has been passed with the approval of the Specified Authority that it is a fit case to issue a notice under section 148. The provisions of section 148 are subject to the provisions of section 148A. Thus, the AO issuing notice under section 148 must necessarily:

(i) have information which suggests that income chargeable to tax has escaped assessment;

(ii) ensure that the provisions of section 148A have been complied with;

(iii) have the approval of the Specified Authority, where required, to issue such notice.

The notice under section 148 is to be served along with a copy of the order passed, if required, under section 148A(d) of the Act.

For the purposes of sections 148 and 148A –

(i) The expression “information which suggests that income chargeable to tax has escaped assessment” is defined in Explanation 1 to section 148;

(ii) Specified Authority has the meaning assigned to it in section 151.
Since the provisions of section 148 are subject to the provisions of section 148A, compliance with section 148A becomes a sine qua non for issuance of notice under Section 148. The trigger for reassessment is ‘information which suggests that income chargeable to tax has escaped assessment’. The information is available through Insight Portal. It is the case of the revenue that this information is in accordance with the risk management strategy formulated by the Board. It is understood that such information is linked to the PAN of the assessee and is available for viewing to the AO having jurisdiction over the PAN of the assessee i.e., JAO. Once the AO has ‘information which suggests that income chargeable to tax has escaped assessment’, section 148A requires the following –

i) with the prior approval of the Specified Authority, the AO must conduct an enquiry with respect to the information suggesting that the income chargeable to tax has escaped assessment;

ii) having made an enquiry, the AO must then provide to the assessee an opportunity of being heard by serving upon the assessee a notice requiring him to show cause as to why a notice under section 148 should not be issued on the basis of the information which suggests that income chargeable to tax has escaped assessment in his case and results of an enquiry conducted, if any, as per clause (a) of section 148A and must give the assessee material which he has in his possession. The Assessing Officer must give the assessee a minimum time of seven days to respond to the show cause notice;

iii) the AO must decide, on the basis of material available on record and also the reply of the assessee and after having provided an opportunity of being heard to the assessee, that it is a fit case to issue a notice under section 148 of the Act. This decision has to be in the form of an order under section 148A(d) of the Act, which needs to be passed with the prior approval of the Specified Authority. Order under section 148A(d) has to be passed within the time period mentioned therein.

EXCEPTIONS TO THE ABOVE PROCEDURE

The provisions of section 148A and, therefore, the above steps, are not required to be complied with in a case where a search is initiated under section 132 and also in a case where the AO is satisfied, with prior approval of PCIT or CIT, that any money, bullion, jewellery or other valuable article seized in a search under section 132 belongs to the assessee.

SANCTIONS TO BE OBTAINED

The following acts require the sanction of the Specified Authority to be obtained:
i) conduct of an enquiry on the basis of information suggesting that income chargeable to tax has escaped assessment;

ii) up to 31st March, 2022, for issuing a show cause notice to the assessee, as required by section 148A(b), as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment and results of enquiry conducted, if any, under clause (a) of section 148A;

iii) passing an order under section 148A(d) of the Act, deciding that on the basis of material available on record, including reply of the assessee, that it is a fit case for issuance of notice under section 148 of the Act;

iv) up to 31st March, 2022, for issuance of notice under section 148 of the Act in all cases;

v) from 1st April, 2022, for issuance of notice under section 148 in cases where an order under section 148A(d) is not required to be passed;

vi) in a case where, in the course of a search on any person other than the assessee, any money, bullion, jewellery or other valuable article or thing is seized and in respect of which the AO is satisfied that such money, bullion, jewellery or other valuable article of thing belongs to the assessee, and consequently provisions of section 148A are not applicable to such a case.

FACELESS ASSESSMENT OF INCOME ESCAPING ASSESSMENT – SECTION 151A

Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 has w.e.f. 1st November, 2020, inserted section 151A in the Act, captioned ‘Faceless assessment of income escaping assessment’. This section empowers Central Government to make a scheme, for the purposes of:

i) assessment, reassessment or re-computation under section 147; or

ii) issuance of notice under section 148; or
iii) conducting of enquiries or issuance of show cause notice or passing an order under section 148A; or

iv) sanction for issue of such notice under section 151.
The above powers are given to the Central Government so as to impart greater efficiency, transparency and accountability by carrying out the processes mentioned in clauses (a) to (c) of section 151A(1) of the Act.

Section 151A(2) empowers the Central Government to issue directions that any of the provisions of the Act shall not apply or shall apply with such exceptions, notifications and adaptations as may be specified in the notification. Such direction is to be issued no later than 31st March, 2022

While section 151A has been introduced w.e.f. 1st November, 2020, the amended provisions dealing with the new reassessment scheme have come into force w.e.f. 1st April, 2021. Simultaneous with the introduction of the amended provisions, section 151A has been amended by the Finance Act, 2021, to cover conducting of enquiries or issuance of show cause notice or passing of an order under section 148A.

While the section is on the statute w.e.f. 1st November, 2020, the Scheme has been framed and is effective from 29.3.2022.

Section 144B already provides for reassessment or re-computation under section 147 of the Act to be done in a faceless manner. Therefore, the Scheme makes a reference to section 144B.

Notification issued under section 151A(2) – On 29th March, 2022 a Notification No. 18/2022/F. No. 370142/16/2022-TPL(Part 1] had been issued notifying a scheme known as ‘e-Assessment of Income Escaping Assessment Scheme, 2022’ (“Faceless Reassessment Scheme”). The Faceless Reassessment Scheme has come into force with effect from the date of its publication in the Official Gazette i.e., 29th March, 2022. The scope of the Faceless Reassessment Scheme is stated in Para 3 of the said Notification dated 29th March, 2022. Para 3(b) provides that for the purpose of this Scheme, issuance of notice under section 148 of the Act shall be through automated allocation, in accordance with the risk management strategy formulated by the Board as referred to in section 148 of the Act for issuance of notice, and in a faceless manner, to the extent provided in section 144B of the Act with reference to making assessment or reassessment of total income or loss of the assessee. (Emphasis supplied)

Section 144B does not deal with the issuance of notice under section 148 or conducting of enquiries or issuance of show cause notice or passing an order under section 148A; or sanction for the issue of such notice under section 151. Therefore, the expression “to the extent provided in section 144B of the Act with reference to making assessment or reassessment of total income or loss of the assessee has to be read, only with making an assessment, reassessment or recomputation under section 147 and not with reference to other parts viz. issuance of notice under section 148; or conducting of enquiries or issuance of show cause notice or passing an order under section 148A; or sanction for the issue of such notice under section 151.

Does the scheme cover only cases covered by clause (i) of Explanation 1 to section 148 defining ‘information with the Assessing Officer which suggests that income chargeable to tax has escaped assessment’ – The Scheme states that the issuance of notice under section 148 shall be through automated allocation, in accordance with the risk management strategy formulated by the Board as referred to in section 148 for issuance of notice. Reference to risk management strategy formulated by the Board is only in clause (i) of Explanation 1 to section 148 which defines the expression ‘information with the Assessing Officer which suggests that income chargeable to tax has escaped assessment.’ Explanation 1 to section 148 has 5 clauses, each of which constitutes information with the AO which suggests that income chargeable to tax has escaped assessment. However, the Scheme covers only clause (i). In cases where the notice under section 148 is issued on the basis of clauses (ii) to (v) of Explanation 1, it is possible to take a view that such a notice cannot be issued in a faceless manner as the same is beyond the scope of the Faceless Reassessment Scheme. The cases covered by clauses (ii) to (v) of Explanation 1 to section 148 are cases where reopening is on account of:

(i) an audit objection in the case of an assessee, or

(ii) information received under an agreement referred to in section 90A, or

(iii) any information made available to the AO under the scheme notified under section 135A, or

(iv) any information which requires action in consequence of the order of a Tribunal or a Court.

ISSUES FOR CONSIDERATION

Para 3(b) of the Scheme provides that the notice under section 148 has to be issued in a faceless manner i.e., Faceless Assessing Officer will issue it. Therefore, a question which arises for consideration is whether all the notices issued under section 148 of the Act by the Jurisdictional Assessing Officer after the Scheme came into force are bad in law and, therefore can be challenged in a writ jurisdiction or otherwise.

In the alternative, is it that in view of the provisions of the Act, the Notification cannot be given effect to at all, or is it that the provisions of the Faceless Reassessment Scheme are to run concurrently with the normal provisions of the Act?

ANALYSIS OF THE ISSUE

Faceless Reassessment Scheme provides that a notice under section 148 of the Act is to be issued in a faceless manner. Therefore, the assesses are likely to challenge the notices issued under section 148 of the Act by JAO and contend that such notices are bad in law/illegal and need to be quashed since the same are not in accordance with the Faceless Reassessment Scheme, which requires notice under section 148 of the Act to be issued in a faceless manner.

Considering the recent trend of judicial decisions, it appears to be quite unlikely that the Courts will hold the notices issued by JAO to be illegal and/or without jurisdiction. The courts may try to harmoniously read the provisions of the Act and the Faceless Reassessment Scheme and may, for the following reasons, despite the Faceless Reassessment Scheme requiring a notice to be issued by FAO, hold that a notice under Section 148 issued by a JAO is to be upheld –

i) information suggesting escapement of income, which is the trigger for the commencement of reassessment proceedings, is received by JAO;

ii) the enquiry with respect to information which suggests that income chargeable to tax has escaped assessment is conducted, by JAO, with prior approval of the Specified Authority;

iii) opportunity of being heard is provided to the assessee by the JAO by issuing a SCN required to be issued pursuant to section 148A(b) of the Act;

iv) the assessee furnishes his explanation and explains the case to the JAO;

v) it is the JAO who, on the basis of information which suggests that income chargeable to tax has escaped assessment and results of the enquiry conducted by him and also after considering the replies of the assessee, takes a decision that it is a fit case, for issuance of notice under section 148 of the Act and passes an order with the prior approval of the Specified Authority;

vi) up to 31st March, 2022, issuance of notice under section 148 required prior approval of the Specified Authority. In case it is the FAO who is issuing the notice under section 148, then will it be approval of PCIT / CIT under whose jurisdiction the FAO is working who will approve the issuance of notice? If yes, then the approval for conducting an enquiry was given by PCIT / CIT under whose jurisdiction JAO works, but the approval for issuance of notice is by the PCIT/CIT under whose jurisdiction FAO works. If the answer is negative and, therefore, approval is to be obtained from the jurisdictional PCIT / CIT, then will the FAO be validly able to obtain such approval since, administratively FAO is not working under their jurisdiction?

vii) Section 148 provides that the notice under section 148 should be issued along with copy of the order under section 148A(d);

viii) from receiving of information till passing of the order under section 148A(d) it is the JAO who is satisfied that it is a fit case for issuance of notice under section 148, then can FAO issue a notice under section 148?

ix) Assuming that it is FAO who is to issue a notice under section 148, then who will be the PCIT who will sanction issuance of notice?

x) In view of the above, issuance of a notice under section 148 by FAO will only amount to being a ministerial act which is not what is envisaged by the Act.

POSSIBILITY OF HOLDING THAT JAO AND FAO HAVE CONCURRENT JURISDICTION TO ISSUE A NOTICE UNDER SECTION 148.

For the above reasons, which could be supplemented further by the courts/tribunals, the court may not strike down the notices issued by the JAOs. However, since such an interpretation may make the Scheme otiose, the Court may try and give meaning to the Scheme as well by holding that the provisions of the Act and the Scheme are to be read harmoniously. The Court may hold that both JAO and FAO have concurrent jurisdiction to issue notice under section 148 and therefore, in cases where information is with the JAO and the provisions of section 148A are complied with by the JAO, then it will be JAO who will be entitled to issue notice under section 148 and in cases where the information is with FAO and the provisions of section 148A are complied with in a faceless manner, then the notice under section 148 may be issued by FAO and sanction of Specified Authority under section 151 be obtained in a faceless manner as is provided in the Scheme.

THE SCHEME DOES NOT AMEND ANY PROVISIONS OF THE ACT, THOUGH FOR GIVING EFFECT TO THE SCHEME, SUCH AMENDMENTS COULD HAVE BEEN MADE.

Section 151A authorises the Central Government to make amendments to the provisions of the Act to the extent necessary to give effect to the Scheme. Such amendments could have been made till 31st March, 2022. The Notification dated 29th March, 2022 notifying the Faceless Reassessment Scheme does not amend any of the provisions of the Act, in the circumstances, can one say that the scheme is not to be given effect to. The Notification could have clearly amended the provisions of the Act to provide that the cases where information which suggests that income chargeable to tax has escaped assessment is with the JAO, and JAO has complied with the provisions of section 148A and has passed an order under section 148A(d), then the notice under section 148 shall be issued by JAO.

SEARCH CASES ARE ALSO COVERED BY FACELESS REASSESSMENT SCHEME.

The Scheme does not make any distinction between a search case and a non-search case. Can a notice under section 148 be issued in a faceless manner in the case of an assessee who has been subjected to an action under section 132 of the Act and in whose case even assessment is not done in a faceless manner?

THE SCOPE OF THE SCHEME IS NARROWER THAN WHAT SECTION 151A ENVISAGES.

Section 151A empowers the Central Government to make a scheme for the purposes of assessment, reassessment or re-computation under section 147 or issuance of notice under section 148 or conducting of enquiries or issuance of show cause notice or passing of order under section 148A or sanction for issue of such notice under section 151. The section does not provide for obtaining sanction for passing an order under section 148A(d).

Scope of the Scheme is provided in para 3 of the Scheme. For better appreciation of the issue, the said Para 3 of the Scheme is reproduced hereunder –

“3 Scope of the Scheme – For the purpose of this Scheme –

(a) assessment, reassessment or re-computation under section 147 of the Act, or

(b) issuance of notice under section 148 of the Actshall be through automated allocation, in accordancewith risk management strategy formulated by the Board as referred to in section 148 of the Act for issuance of notice, and in a faceless manner, to the extent provided in section 144B of the Act with reference to making assessment or reassessment of total income or loss of assessee.”

On a plain reading of para 3 of the Scheme, it is evident that the scope of the Scheme does not extend to conducting enquiries or issuing of show cause notice or passing of order under section 148A or sanction for issue of such notice under section 151.

The language of the 4 lines below clause (b) of Para 3 describing the process leaves much to be desired. The said lines are common for clauses (a) and (b), whereas the reference in these 4 lines to section 144B could be only for clause (a) and the reference to notice under section 148 is only for clause (b).

CONCLUSION

Litigation is time consuming and expensive both for the assessee as well as for the revenue, but more so for the assessee. In the circumstances, it would be desirable that a significant thought process is gone through before the schemes are formulated. Possibly, the Scheme could have been effective if there would have been corresponding amendments to the provisions of the Act and/or if the entire process of reassessment is to be implemented in a faceless manner. The Scheme ought to have been clear as to which of the functions/processes/steps are to be carried out by JAO, and which of the functions/processes/steps are to be carried out in a faceless manner. Schemes which are not well drafted often create results contrary to the legislative intent. It is desirable that suitable amendments be made at the earliest and/or steps taken to rectify the position and resolve the issues arising from the Scheme.

shailesh.kwebmaker

Section 147 r.w.s 148 – Reopening of assessment – Based on TPO report – Reference to the Transfer Pricing Officer to determine Arms’ Length Price cannot be initiated, in the absence of any proceeding pending before the AO – Reference for determination of Arms’ Length Price cannot precede the initiation of assessment proceedings.

9. PCIT – 6 vs. Kimberly Clark Lever Pvt Ltd
[ITA No. 123 Of 2018,
Dated: 7th June, 2023. (Bom.) (HC).]

Section 147 r.w.s 148 – Reopening of assessment – Based on TPO report – Reference to the Transfer Pricing Officer to determine Arms’ Length Price cannot be initiated, in the absence of any proceeding pending before the AO – Reference for determination of Arms’ Length Price cannot precede the initiation of assessment proceedings.

The assessee is engaged in the business of manufacturing diapers and sanitary napkins. It also markets consumer tissue products and had filed a return of income declaring total income at Rs.30,01,43,006 on 31st October, 2007 for the A.Y. 2007-08.

The return of income was processed under section 143(1) of the Income Tax Act, 1961 (the Act). The AO made reference under section 92CA of the Act to the Transfer Pricing Officer (TPO) on 26th October, 2009. The TPO passed an order under section 92CA(3) of the Act on 29th October, 2010 making an adjustment on account of arms’ length price of the international transaction at Rs.12,17,43,370. The AO recorded reasons for re-opening the assessment and issued notice under section 148 of the Act on 14th January, 2011. The assessee vide its letter dated 28th January 2011 objected to the notice. It was the case of the assessee that the reasons to believe income had escaped assessment was based on an invalid transfer pricing order, and hence there was no reason for re-opening the assessment on the basis of the said order of TPO. The reason why the assessee took this stand was because respondent’s return of income was processed under section 143(1) of the Act and there was no assessment proceeding pending under section 143(3) of the Act during which a reference could be made to the TPO under section 92CA of the Act. Hence, such a reference to TPO itself was invalid and any order passed by the TPO would be invalid and such an invalid order of the TPO cannot be the reason for re-opening the assessment. Admittedly, no notice under Section 143(2) of the Act had also been issued. The AO has in fact admitted that the case was not selected for scrutiny and no notice under section 143(2) of the Act was issued but in view of the findings of the TPO he has re-opened the case for the A.Y. 2007-08.

The assessee contented that where against the return of income filed by the assessee in time, no proceedings were initiated by issuing notice under section 143(2) of the Act, the reference made to the TPO by the AO under section 92CA(1) of the Act was invalid. Consequently, the order passed by the TPO under section 92CA(3) of the Act could not be the basis for recording the reasons for re-opening the assessment, i.e., initiating re-assessment proceedings. Where the AO had re-opened the assessment by merely making a reference to the order of the TPO which admittedly was passed without any jurisdiction, then there was no independent application of mind by the AO to commence the re-assessment proceedings. In the absence of the same, the assessment proceedings could not be re-opened.

The Honourable Court observed that it is judicially well settled that the belief of the AO that there has been escapement of income must be based on some material on record. There must be some material on record to enable the AO to entertain a belief that certain income chargeable to tax has escaped assessment for the relevant Assessment Year. In this case, the only material relied upon is the order of the TPO.

The issue which arose for consideration is the validity of the assessment proceedings initiated under section 147/148 of the Act. As noted earlier, admittedly reference was made to the TPO for determining the arms’ length price of the international transaction and no notice under section 143(2) of the Act was issued before making the said reference to the TPO. When no assessment proceedings were pending in relation to the relevant assessment year, the AO was precluded from making a reference to the TPO under section 92CA(1) of the Act for the purpose of computing arms’ length price in relation to the international transaction.

The entire scheme and mechanism to compute any income arising from an international transaction entered between associated enterprises is contained in Sections 92 to 92F of the Act. Section 92CA of the Act provides that where the AO considers it necessary or expedient so to do, he may refer the computation of arm’s length price in relation to an international transaction to the TPO. In such a situation, the TPO, after taking into account the material before him, pass an order in writing under section 92CA(3) of the Act determining the arms’ length price in relation to an international transaction. On receipt of this order, Section 92CA(4) of the Act requires the AO to compute the total income of the assessee in conformity with the arms’ length price so determined by the TPO. This means that the determination of the arm’s length price wherever a reference is made to him is done by the TPO under section 92CA(3) of the Act but the computation of total income having regard to the arm’s length price so determined by the TPO is required to be done by the AO under section 92CA(4) r.w.s. 92C(4) of the Act.

Therefore, the process of determination of arm’s length price is to be carried out during the course of assessment proceedings, may it be, under Sub Section (3) of Section 92C of the Act where the AO determines the arm’s length price or under Sub Sections (1) to (3) of Section 92CA of the Act, where the AO refers the determination of arm’s length price to the TPO. Reference may also be made to the provisions of section 143(3) of the Act dealing with assessment of income. In terms of clause (ii) of Sub Section 3 of Section 143 of the Act, it is prescribed that the AO shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund on any amount due to him on the basis of such assessment. It is only in the course of such assessment of total income, that the AO is obligated to compute any income arising from an international transaction of an assessee with associated enterprises, having regard to the arm’s length price.

The occasion which requires the AO to compute income from an international transaction arises only during the assessment proceedings, wherein he is determining the total income of the assessee. The Central Board of Direct Taxes (CBDT) in Instructions No. 3 dated 20th May, 2003 has also stated that a case is to be selected for scrutiny assessment before the AO may refer the computation of arm’s length price in relation to an international transaction to the TPO under Section 92CA of the Act.

Therefore, the Honourable Court upheld the proposition that an AO can make reference to the TPO under section 92CA of the Act only after selecting the case for scrutiny assessment. The instructions of CBDT are also a pointer to the legislative import that the reference to the TPO for determining the arm’s length price in relation to an international transaction is envisaged only in the course of the assessment proceedings, which is the only process known to the Act, whereby the assessment of total income is done. Therefore, the Tribunal was correct to hold that when reference was made to the TPO by the AO for determination of arm’s length price in relation to the international transaction, when no assessment proceedings were pending, was an invalid reference. Consequently, the subsequent order passed by the TPO determining the assessment to the international transaction was a nullity in law and void ab initio. In view thereof, the AO could not have relied upon an order of the TPO which is a nullity to form a belief that certain income chargeable to tax has escaped the assessment for the relevant Assessment Year.

In view of the above, the revenue’s Appeal was dismissed.

shailesh.kwebmaker

Section 263 – Revision – interest under section 244A on excess refund – where two views are possible – Order cannot be stated to be erroneous or prejudicial to interest of revenue.

8 Pr. CIT – 2 vs. Bank of Baroda
[ITA NO. 100 OF 2018,
Dated: 07/06/2023, (Bom.) (HC)]
[Arising from ITA No 3432/MUM/2014,
Bench: E Mumbai; dated: 9th November, 2016; A.Year: 2007-08 ]

Section 263 – Revision – interest under section 244A on excess refund – where two views are possible – Order cannot be stated to be erroneous or prejudicial to interest of revenue.

The Assessee had filed return of income on 30th October, 2007 for A.Y. 2007-08 declaring total income of Rs. 997,10,30,681. Subsequently, a revised return declaring an income of Rs. 615,19,97,000 was filed on 19th March, 2009. The assessment was completed under section 143(3) of the Income Tax Act, 1961 (the Act) on 23rd March, 2009 assessing total income at Rs.1904,69,88,000. The Assessee preferred an appeal and the CIT(A) vide an order dated 15th June, 2011 decided some issues in the favor of the assessee. An effect to the CIT(A) order has been given by the AO on 7th March, 2012 resulting in revised income being accepted at Rs. 968,38,10,000. This resulted in a refund of Rs. 377,95,44,631.

On verification of the records, the PCIT noticed that the AO had failed to conduct proper enquiries and examine the issues in an appropriate manner. This gave rise to an erroneous assumption in as much as in the original return the assessee had claimed a refund of Rs. 21,19,54,764 as against the claim of refund of Rs. 337,74,22,347 in the revised return. The PCIT felt that the delay in claiming enhanced refund was attributable to the assessee and accordingly interest under section 244(A) of the Act was not allowable on the refund of Rs. 125,54,67,583 for 11 months, i.e., from 1st April, 2008 to 19th March, 2009. According to the PCIT, this resulted in an excess allowance of interest of Rs. 9,81,31,689. Consequently, a notice under section 263 of the Act was issued. The Assessee appeared, made submissions and PCIT passed an order which was impugned by assessee before the ITAT. The ITAT allowed the appeal vide order dated 9th November, 2016. It followed the coordinate Bench decision on the issue in case of State Bank of India vs. DCIT (ITA No 6817&6823/M/2012, A.Y. 2001-02 and ITA No 6818 & 6824, A.Y. 2002-2003)

Sub Section (2) of Section 244(A) of the Act reads as under:

(2) If the proceedings resulting in the refund are delayed for reasons attributable to the assessee, whether wholly or in part, the period of the delay so attributable to him shall be excluded from the period for which interest is payable, and where any question arises as to the period to be excluded, it shall be decided by the Chief Commissioner or Commissioner whose decision thereon shall be final.

The Honourable Court observed that as per the provision if the proceedings resulting in the refund are delayed for the reasons attributable to the assessee, the period of delay so attributable to the assessee shall be excluded from the period for which interest is payable. The Court noted that there were no findings of the PCIT as to how the assessee delayed the proceedings that resulted in the refund or what reasons could be attributable to the assessee. It was true that assessee had initially filed return of income on 30th October, 2007, declaring total income of Rs. 997,10,30,681, and subsequently on 19th March, 2009 a revised return declaring an income of Rs. 615,19,97,000 was filed. The assessment was completed under section 143(3) of the Act on 23rd March, 2009 assessing the total income at Rs. 1904,69,88,000. Against the assessment order, the assessee preferred an appeal and the CIT(A) vide an order dated 15th June, 2011 decided some issues in favour of the assesse. In giving effect to CIT(A)’s order, the AO on 7th March, 2012 granted a refund of Rs. 377,95,44,631. Therefore it cannot be stated that proceedings resulting in the refund were delayed for reasons attributable to assessee wholly or in part.

The Court observed that, the ITAT has also, relied on a judgment in the State Bank of India vs. DCIT-2 (supra) case and come to a conclusion that the order passed by the AO was neither erroneous nor prejudicial to the interest of revenue, and the AO has allowed the amount of interest in question taking one of the possible views. The Tribunal had held that where two views are possible and the AO takes one of the possible views, the PCIT could not have exercised revisional jurisdiction under section 263 of the Act.

The Honourable Court after perusal of the ITAT order held that the entire issue is fact-based. The Tribunal having come to the factual conclusion on the basis of materials on record, decided that no question of law arises. In view of the same, the revenue’s Appeal was dismissed.

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Search and seizure — Assessment in search cases — General principles — No incriminating material found during search — Assessment completed on date of search — No additions can be made in assessment pursuant to search

27. S. M. Kamal Pasha vs. Dy. CIT
[2023] 454 ITR 157 (Kar.)
Date of order: 2nd September, 2022
Sections: 132 and 153A of ITA 1961

Search and seizure — Assessment in search cases — General principles — No incriminating material found during search — Assessment completed on date of search — No additions can be made in assessment pursuant to search.

Pursuant to a search and seizure conducted under section 132 of the Income-tax Act, 1961 in the residential premises of the assessee, the AO issued notice under section 153A. The assessee declared a total income of Rs. 99,33,890 in his return filed in response to the notice. Thereafter, the AO passed an order assessing the total income at Rs.7,92,57,600.

The Commissioner(Appeals) set aside the order passed under section 153A. The Tribunal allowed the Department’s appeal.

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

“The Tribunal was not justified in reversing the order of the Commissioner (Appeals) setting aside the order u/s. 153A when there did not exist any incriminating material found during the search u/s. 132 for issuing notice u/s. 153A. Hence the order of the Tribunal was set aside and the order of the Commissioner (Appeals) was restored.”

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Search and Seizure — Assessment of third person — Income-tax survey — Statement of assessee during survey not conclusive evidence — Author of diary based on which addition made had expired on date of search and entries not used in case of person against whom search conducted — Addition as unexplained investment in assessee’s case — Erroneous and unsustainable.

26 Dinakara Suvarna vs. DCIT
[2023] 454 ITR 21 (Kar.)
A.Ys.: 2005-06 to 2007-08
Date of order: 08th July 2022
Sections: 69B, 132, 147 and 153C of ITA 1961

Search and Seizure — Assessment of third person — Income-tax survey — Statement of assessee during survey not conclusive evidence — Author of diary based on which addition made had expired on date of search and entries not used in case of person against whom search conducted — Addition as unexplained investment in assessee’s case — Erroneous and unsustainable.

The assessee was a contractor. A search was conducted under section 132 of the Income-tax Act, 1961 in the residential premises of one AK and a diary was seized. The diary contained details of payments made by AK to the assessee. Thereafter, on 21st April, 2009, a survey action under section 133A was conducted in the business premises of the assessee, and his statement was recorded wherein the assessee agreed to offer 8 per cent additional receipts as income. However, the assessee did not file his revised return offering additional income.

On 26th March, 2010, the AO issued a notice under section 148 of the Act and called upon the assessee to show cause as to why the amount agreed to be offered to tax was not declared in the return of income. On 12th April, 2010, the assessee filed his return of income and declared the same income as filed in the original return of income. The assessee vide letter dated 30th May, 2010 objected to the reopening on the grounds that there was no reason to believe that the income chargeable to tax had escaped assessment. On 24th December, 2010, the AO passed assessment orders for the A.Ys. 2005-06 to 2007-08 making the additions.

The CIT(Appeals) partly allowed the appeals. The assessee and the Revenue preferred appeals against the said order before the Tribunal. Against the appeal preferred by the Revenue, the assessee preferred cross-objections. The Tribunal partly allowed the appeals and cross-objections filed by the assessee. The appeal preferred by the Revenue for the A.Y. 2007-08 was partly allowed and dismissed the appeals for other years.

The following questions were framed by the Karnataka High Court in the appeal filed by the assessee:

“a) Whether the Tribunal is correct in law in upholding the action of the Assessing Officer in reopening the assessment u/s. 147 of the Act for the A.Ys. 2005-06, 2006-07 and 2007-08 on the facts and circumstances of the case?

b) Whether the Tribunal erred in law in not holding that there was no reason to believe that income escaped assessment and all mandatory conditions to reopen the assessment u/s. 147 of the Act were not satisfied on the facts and circumstances of the case?

c) Whether the Tribunal was correct in law in reversing the deletion made by the Commissioner of Income-tax (Appeals) of the addition u/s. 69B in respect of alleged unexplained investments made in properties of Rs. 28,75,500 for the A.Y. 2007-08 on the facts and circumstances of the case?”

The High Court allowed the appeal and held as follows:

“i) The Tribunal had erred in upholding the reopening of the assessment u/s. 147 for the A.Ys. 2005-06, 2006-07 and 2007-08 and in holding that there was reason to believe that income had escaped assessment and all mandatory conditions to reopen the assessment were satisfied. No proceedings were initiated u/s. 153C. Thus, there was patent non-application of mind. The Assessing Officer had not recorded his satisfaction with regard to escapement of income. The assessee’s admission
during the survey u/s. 133A could not be a conclusive evidence.

ii) The Tribunal had erred in reversing the deletion made by the Commissioner (Appeals) of the addition made u/s. 69B for the A.Y. 2007-08. We have perused the order passed by the Commissioner of Income-tax (Appeals) and Income-tax Appellate Tribunal. It is held therein that the entries in the seized diary could not be relied upon because Smt. Soumya Shetty had passed away and there was no corroborating evidence. The Commissioner of Income-tax (Appeals) has held that it was travesty of justice that the relevant entry has not been used in Shri Ashok Chowta’s case but it has been used in the assessee’s case who is a third party to the proceedings. The Tribunal while reversing the finding of Commissioner of Income-tax (Appeals) has relied upon the signature of the assessee in the seized diary. Admittedly, the author of the diary had passed away. The addition has been made in the case of the assessee based on the entries in the diary but the said entries have not been used in the case of Shri Chowta. As recorded hereinabove, the Hon’ble Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. has held that admission is an important piece of evidence but it cannot be said to be conclusive. Shri Chandrashekar also placed reliance on CIT v. S. Khader Khan Son [2008] 300 ITR 157 (Mad) and contended that a statement recorded u/s. 133A of the Act is not given any evidentiary value because the officer is not authorised to administer oath and to take any sworn statement. Therefore, in view of the fact that the author of the diary had passed away and relevant entry has not been used in the case of Shri Chowta himself, reversing the findings of the Commissioner of Income-tax (Appeals) by the Income-tax Appellate Tribunal is not sustainable.”

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Search and seizure — Assessment in search cases — Effect of insertion of section 153D by Finance Act, 2007 — CBDT circular dated 12th March, 2008 and Manual of Office Procedure laying down the condition of approval of draft order of Commissioner — Circular and Manual binding on Income-tax authorities — Approval granted without application of mind — Order of assessment — Not valid.

25. ACIT Vs. Serajuddin and Co.
[2023] 454 ITR 312 (Orissa)
A. Ys.: 2009-10
Date of order: 15th March, 2023
Sections: 153A and 153D of ITA 1961.

Search and seizure — Assessment in search cases — Effect of insertion of section 153D by Finance Act, 2007 — CBDT circular dated 12th March, 2008 and Manual of Office Procedure laying down the condition of approval of draft order of Commissioner — Circular and Manual binding on Income-tax authorities — Approval granted without application of mind — Order of assessment — Not valid.

The search and seizure operation was carried out in the case of assessee and various other persons and concerns of the assessee. Subsequently, assessments were completed and orders were passed under section 143(3)/144/153A after making various additions/disallowances.

The assessment orders were challenged in appeal. One of the grounds for challenge was in respect of non-compliance with section 153D which required prior approval of the Additional Commissioner (Addl. CIT). Further, the approval had been granted in a mechanical manner without application of mind. The CIT(A) observed that a consolidated approval order given by the Addl. CIT for A.Ys. 2003-04 to 2009-10 and therefore held, partly allowing the appeal, that it was not necessary for the AO to mention the fact of approval in the body of the assessment order. The Tribunal concluded that the approval was granted without application of mind and the assessment orders were accordingly set aside.

The Orissa High Court dismissed the appeal filed by the Department and held as under:

“i) Among the changes brought about by the Finance Act, 2007 was the insertion of section 153D of the Income-tax Act, 1961. The CBDT circular dated March 12, 2008 ([2008] 299 ITR (St.) 8) refers to the various changes and, inter alia, also to the insertion of a new section 153D. Even prior to the introduction of section 153D in the Act, there was a requirement u/s. 158BG of the Act, which was substituted by the Finance Act of 1997 with retrospective effect from January 1, 1997, of the Assessing Officer having to obtain previous approval of the Joint Commissioner/Additional Commissioner by submitting a draft assessment order following a search and seizure operation.

ii) The requirement of prior approval u/s. 153D of the Act is comparable with a similar requirement u/s. 158BG of the Act. The only difference is that the latter provision occurs in Chapter XIV-B relating to “Special procedure for assessment of search cases” whereas section 153D is part of Chapter XIV. A plain reading of section 153D itself makes it abundantly clear that the legislative intent was for the Assessing Officer when he is below the rank of a Joint Commissioner, to obtain “prior approval” before he passes an assessment order or reassessment order u/s. 153A(1)(b) or 153B(2)(b) of the Act.

iii) An approval of a superior officer cannot be a mechanical exercise. While elaborate reasons need not be given, there has to be some indication that the approving authority has examined the draft orders and finds that it meets the requirement of the law. The mere repeating of the words of the statute, or mere “rubber stamping” of the letter seeking sanction by using similar words like “seen” or “approved” will not satisfy the requirement of the law. This is where the Technical Manual of Office Procedure becomes important. Although, it was in the context of section 158BG of the Act, it would equally apply to section 153D of the Act. There are three or four requirements that are mandated therein: (i) the Assessing Officer should submit the draft assessment order “well in time”; (ii) the final approval must be in writing; and (iii) the fact that approval has been obtained, should be mentioned in the body of the assessment order. The Manual is meant as a guideline to Assessing Officers. Since it was issued by the Central Board of Direct Taxes, the powers for issuing such guidelines can be traced to section 119 of the Act. The instructions under section 119 of the Act are binding on the Department.

iv) It was an admitted position that the assessment orders were totally silent about the Assessing Officer having written to the Additional Commissioner seeking his approval or of the Additional Commissioner having granted such approval. Interestingly, the assessment orders were passed on December 30, 2010 without mentioning this fact. These two orders were therefore not in compliance with the requirement spelt out in para 9 of the Manual of Official Procedure. The requirement of prior approval of the superior officer before an order of assessment or reassessment is passed pursuant to a search operation is a mandatory requirement of section 153D of the Act and such approval is not meant to be given mechanically. In the present cases such approval was granted mechanically without application of mind by the Additional Commissioner resulting in vitiating the assessment orders themselves.”

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Offences and prosecution — Sanction for prosecution — Failure to deposit tax deducted at source — Failure due to inadvertence of assessee’s official — Assessee depositing tax deducted at source with interest though after delay — Effect of Circular issued by CBDT — Prosecution orders quashed.

24. Dev Multicom Pvt Ltd & Ors vs. State of Jharkhand
[2023] 454 ITR 48 (Jharkhand):
A. Y. 2017-18
Date of order: 28th February, 2022
Sections 276B, 278B and 279(1) of ITA 1961

Offences and prosecution — Sanction for prosecution — Failure to deposit tax deducted at source — Failure due to inadvertence of assessee’s official — Assessee depositing tax deducted at source with interest though after delay — Effect of Circular issued by CBDT — Prosecution orders quashed.

The assessee had deducted tax at source. However, this tax deducted at source had been deposited with delay. The assessee paid an interest on the delay in depositing of tax deducted at source. Prosecution notices were served on the assesses and complaint was lodged stating that the assessee and its principal officer had deducted tax but failed to credit the same to the account of Central Government and therefore committed offence punishable u/s. 276B of the Income-tax Act, 1961.

The assessee filed petition to quash the complaint. The Jharkhand High Court allowed the petition and held as under:

“i) Instruction F. No. 255/339/79-IT(Inv.) dated May 28, 1980, issued by the CBDT that prosecution u/s. 276B of the Income-tax Act, 1961 shall not normally be proposed when the amount of tax deducted at source involved or the period of default is not substantial and the amount in default has also been deposited in the meantime to the credit of the Government. But no such consideration will apply to levy of interest u/s. 201(1A).

ii) The tax deducted at source in all the cases was deposited with interest by the assessees and there was no reason to proceed with the criminal proceeding after receiving the amount with interest though a delay had occurred in depositing the amount. The continuation of the proceedings would amount to an abuse of the process of the court.

iii) Apart from one or two cases, the deducted amount was not more than Rs. 50,000. While passing the sanction u/s. 279(1) the sanctioning authority had not considered the Instruction dated May 28, 1980 issued in this regard by the CBDT. Accordingly, the entire criminal proceedings and the cognizance orders in the respective cases passed by the Special Economic Offices whereby cognizance had been taken against the assessees for the offences u/s. 276B and 278B were quashed.”

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Industrial undertaking — Special deduction under section 80-IB — Condition precedent — Manufacture of article — Making of poultry feed amounts to manufacture — Assessee entitled to special deduction under section 80-IB.

23. Principal CIT vs. Shalimar Pellet Feeds Ltd
[2023] 453 ITR 547 (Cal)
A. Y. 2008-09 to 2013-14
Date of order: 22nd February, 2022
Section 80-IB of ITA 1961

Industrial undertaking — Special deduction under section 80-IB — Condition precedent — Manufacture of article — Making of poultry feed amounts to manufacture — Assessee entitled to special deduction under section 80-IB.

For the A.Y. 2008-09 to 2013-14, the assessee claimed a deduction under section 80-IB(5) of the Income-tax Act, 1961 on the grounds that the activity of manufacturing poultry feed in their factory was a manufacturing activity. The AO was of the view that there was no manufacturing done and that the assessee only mixed various products, that each one of them had an individual identity and could not be construed to be an input for manufacturing of poultry feed. The AO rejected the asessee’s claim.

The CIT (Appeals) allowed the assessee’s claim and granted deduction. The Tribunal, on the facts and on the grounds that the Central Government had notified the poultry feed industry under section 80-IB(4) affirmed the order of the CIT (Appeals).

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

“i) For the A.Ys. 2008-09, 2009-10 and 2010-11 the appeals were covered by the circular issued by the CBDT and therefore were not maintainable since they involved low tax effect.

ii) The process undertaken by the assessee in producing the poultry feed amounted to manufacture. The simple test which could be applied was to examine as to whether the individual ingredients which were mixed together to form the poultry feed could be recovered and brought back to their original position. After the process was completed, if such reversal was not possible then the final product had a distinct and separate character and identity. Though the individual ingredients were capable of being consumed by human beings, the end product, namely, the poultry feed could not be consumed by human beings. Therefore, the individual ingredients would lose their identity and get merged with the final product which was a separate product having its own identity and characteristics. Nothing contrary was shown by the Department against the factual findings recorded by the Commissioner (Appeals) after examining the process undertaken by the assessee as affirmed by the Tribunal. The Tribunal was right in confirming the order of the Commissioner (Appeals) granting deduction u/s. 80-IB for the A.Ys. 2011-12, 2012-13 and 2013-14.”

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Income — Capital or revenue receipt — Interest — Funds received for project from capital subsidy, debt and equity — Funds placed with banks during period of construction of project — Interest earned thereon capital in nature.

22. Principal CIT vs. Brahmaputra Cracker & Polymer Ltd
[2023] 454 ITR 202 (Gau):
A. Ys. 2011-12, 2014-15 and 2015-16
Date of order: 12th April, 2023
Section 4 of ITA 1961

Income — Capital or revenue receipt — Interest — Funds received for project from capital subsidy, debt and equity — Funds placed with banks during period of construction of project — Interest earned thereon capital in nature.

The assessee received a capital subsidy from the Ministry of Chemicals and Fertilizers for setting up Integrated a Petro-Chemical Complex. The assessee maintained a separate bank account for such capital subsidy and any excess amount not being utilised was temporarily parked in short-term deposits in banks and interest was earned thereupon. The assessee made these deposits in accordance with the guidelines of the Department of the Public Enterprises. Clarifications were received from the Ministry of Chemicals and Fertilizers indicating that the interest earned on the aforesaid deposits shall be treated as a part of the capital subsidy and will reduce the part of capital subsidy sought from the Government. The assessee claimed these receipts as capital receipts in the return of income. The AO treated these receipts as revenue receipts chargeable to tax.

The CIT(A) allowed the appeal of the assessee. The Tribunal dismissed the appeal of the Department.

The Gauhati High Court dismissed the appeal filed by the Department and held as under:

“Interest received by the assessee from short-term deposits made out of unutilized capital subsidy, unutilized debt funds, and unutilized equity funds received as capital during the formative years till the project was completed was rightly claimed by the assessee as capital receipts. No question of law arose.”

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Assessment — Validity — Amalgamation of companies — Fact of amalgamation intimated to Income-tax authorities — Notice and order of assessment in the name of company which had ceased to exist — Not valid.

21. Inox Wind Energy Ltd vs. Addl./Joint/Deputy/Asst. CIT/ITO
[2023] 454 ITR 162 (Guj.)
A. Y. 2018-19
Date of order: 31st January, 2023
Section: 143 of ITA 1961

Assessment — Validity — Amalgamation of companies — Fact of amalgamation intimated to Income-tax authorities — Notice and order of assessment in the name of company which had ceased to exist — Not valid.

IR was incorporated on 11th October, 2010 under the Companies Act. For the A.Y. 2018-19 the return of income was filed declaring the total income at nil. The case was selected for scrutiny and the notice under section 143(2) of the Income-tax Act, 1961, was issued on 23rd September, 2019. Pending this assessment, on 25th January, 2021, the composite scheme of arrangement between IR and GFL and the assessee-company was approved by the National Company Law Tribunal and the appointed date for the merger of IR and GFL was fixed on 1st April, 2010 and demerger of the energy business to the assessee-company was from 1st July, 2020. The scheme since came into operation from 9th February, 2021, and the jurisdictional AO received the intimation through e-mail on 10th March, 2021. The assessee informed the respondent about the sanction of the composite scheme on 31st August, 2021 and on 19th September, 2021. Notices continued to be issued in the name of erstwhile company IR, which no longer existed from 1st April, 2020. The show-cause notice-cum-draft assessment order was also issued on 23rd September, 2021. Therefore, on 25th September, 2021, once again the assessee intimated and objected to the notice. However, an order was passed under section 143(3) r.w.s.144B of the Act, assessing the income in the name of IR for the A. Y. 2018-19.

The Gujarat High Court allowed the writ petition challenging the validity of the assessment order and held as under:

i) The assessment in the name of a company which has been amalgamated and has been dissolved is null and void and framing of assessment in the name of such companies is not merely a procedural difficulty, which can be cured.

ii) The amalgamated company had already brought the facts of amalgamation to the notice of the AO and yet he chose not to substitute the name of the amalgamated company and proceeded to make the assessment in the name of a non-existing company thereby rendering it void. The assessment framed in the name of the non-existing company requires to be quashed.

iii) While disposing of this petition, as a parting note, it is being observed that this order of quashment against the non-existing company will not preclude the authorities to initiate actions, if permitted under the law against the amalgamated company.

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Section 32 read with section 263 – Where the subsidiary of the assessee company was amalgamated with it by following the purchase method, then the excess consideration paid by the assessee amalgamated company over and above the net-asset value of transferor/amalgamating company was to be treated as goodwill arising on amalgamation and same could be amortised in books of accounts of transferee company and was eligible for depreciation under section 32 (1).

18 Trivitron Healthcare (P.) Ltd. vs. PCIT
[2022] 98 ITR(T) 105 (Chennai – Trib.)
ITA No.:97 (CHNY.) OF 2021
A.Y.: 2015-16
Date of order: 24th June, 2022

Section 32 read with section 263 – Where the subsidiary of the assessee company was amalgamated with it by following the purchase method, then the excess consideration paid by the assessee amalgamated company over and above the net-asset value of transferor/amalgamating company was to be treated as goodwill arising on amalgamation and same could be amortised in books of accounts of transferee company and was eligible for depreciation under section 32 (1).

FACTS

The assessee company was engaged in the business of manufacturing diagnostic equipment. During the year, Kiran Medical System Pvt Ltd (KMSPL), which was a wholly-owned subsidiary of the assessee, had amalgamated with the assessee company and the entire assets of the amalgamating company were taken over by the assessee company. The assessee company treated the difference between net-value of assets of the amalgamating company and the value of investments in the shares of the amalgamating company, as goodwill arising on amalgamation and claimed depreciation on same as applicable to intangible assets.

The AO accepted depreciation on goodwill claimed by the assessee. Subsequently, the case was taken up for revision proceedings by the PCIT on the grounds that the AO had allowed depreciation on goodwill even though 5th proviso to section 32(1) had very clearly restricted claim of depreciation to successor company on amalgamation, as if such succession had not taken place.

Aggrieved by the order of PCIT, the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that the fifth proviso to section 32(1) was inserted by the Finance Act, 1996, to restrict the claim of aggregate deduction which was evident from memorandum of the Finance Bill of 1996. As per the same, in case of succession in business and amalgamation of companies, the predecessor of business and successor or amalgamating company and amalgamated company, as the case may be, are entitled to depreciation allowance on same assets which in aggregate cannot exceed depreciation allowance in any previous year at prescribed rates. Therefore, it was proposed to restrict aggregate deduction in respect of depreciation during a year at the prescribed rate and apportion the same allowance in the ratio of number of days for which said assets were used by them. From the memorandum explaining Finance Bill, and purpose of introduction of fifth proviso to section 32(1), it was very clear, as per which predecessor and successor in a scheme of amalgamation should not claim depreciation over and above normal depreciation allowable on a particular asset. In other words, in a scheme of amalgamation where existing assets of amalgamating company were acquired by amalgamated company, then while claiming depreciation after amalgamation, the amalgamated company can claim depreciation only on the basis of the number of days a particular asset were used by them. Therefore, the said proviso only determines the amount of depreciation to be claimed in the hands of predecessor/amalgamating company and in the hands of successor or amalgamated company only in the year of amalgamation based on date of such amalgamation. However, it did not in any way restrict claim of depreciation on assets acquired after amalgamation or during the course of amalgamation. Therefore, it was very clear from fifth proviso to section 32(1), that effectively, scope of the said proviso was narrow as could be culled out for the purpose for which said proviso was inserted in the statute as reflected in the Memorandum to the Finance Bill. To further clarify, fifth proviso to section 32(1) was restricted to assets which belong to the amalgamating company and its application would not be extended to the assets which arise in the course of amalgamation to the amalgamated company.

The intention of law was to extend the benefit available to the amalgamated company on succession and not to restrict depreciation on assets generated in the course of succession. It was very clear from the proviso that it referred to depreciation allowable to the predecessor and successor in the case of succession, and this should be understood as a reference to the assets that belong both to the predecessor and successor, and which once belonged to the predecessor company. It did not apply to the assets generated in the hands of amalgamated company for the first time, as a result of amalgamation as approved by the High Court. In considered view, the fifthproviso applied only to those assets which commonly exist between predecessor and successor, however, it did not apply to an asset which has been created or acquired after amalgamation. The creation of the new asset by virtue of amalgamation like goodwill completely go out of reckoning of said proviso and thus, basis of PCIT to invoke his jurisdiction under section 263 was incorrect.

In the instant case, there was no dispute with regards to the fact that goodwill does not exist in the books of account of the amalgamating company. Further, depreciation on goodwill claimed by assessee was first time recognised in the books of account of amalgamated company in a scheme of amalgamation approved by the High Court. As per said scheme of amalgamation, accounting treatment in the books of transferee company has been specified as per which transferee company shall account for merger in its books of account as per ‘purchase method’ of accounting prescribed under Accounting Standard-14 issued by Institute of Chartered Accountants of India (ICAI). As per AS-14 issued by the ICAI, all assets and liabilities recorded in the books of account of transferor company shall stand transferred and vested in the transferee company pursuant to scheme and shall be recorded by the transferee company at their book value. The excess of or deficit in the net-asset value of the transferee company, after reducing the aggregate face value of shares issued by the transferee company to the members of the transferor company, pursuant to the scheme and cost of investment in the books of the transferee company for the shares of transferor company held by it on the effective date, is to be either credited to the capital reserve or debited to the goodwill account, as the case may be in the books of transferee company. Such resultant goodwill, if any shall be amortised in the books of transferee company as per principles laid down in Accounting Standard-14. Therefore, from the scheme of amalgamation and Accounting Standard-14 issued by the ICAI, it is very clear that once amalgamation is in the nature of ‘purchase method’, then excess consideration paid over and above net-asset value of transferor company shall be treated as goodwill and can be amortized in the books of account of the transferee company.

In this case, net asset value of the transferor company (amalgamating company) was at Rs. 42.66 crores. Further, value of investments of transferee company i.e., in the instant case, the value investment of the assessee company in the shares of transferor company (in the present case amalgamating company) was at Rs. 114.30 crores. The value of investments held by the assessee company in the shares of amalgamating company extinguishes after amalgamation and consequently difference between the net-asset value of amalgamating company and the value of investment held by amalgamated company would become goodwill in the books of account of the transferee company. In the instant case, the difference between net-value of assets of amalgamating company and the value of investments held by amalgamated company was at Rs. 71.63 crores and the same would become goodwill in the books of account of amalgamated company. Therefore, accounting of goodwill and consequent depreciation claim on such goodwill in the books of account of the assessee company was nothing but the purchase of goodwill and, thus, the assessee had rightly claimed depreciation on said goodwill in terms of section 32(1).

In this view of the matter and considering facts and circumstances of the case, the assessment order passed by the AO under section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The PCIT had assumed jurisdiction under section 263 on the sole basis of application of 5th proviso to section 32(1), towards depreciation on goodwill. In view of the factual matrix and non-applicability of the fifth proviso to section 32(1), to the facts of the instant case, there cannot be an error in relation to the view taken by the AO while framing the original assessment. Therefore, in absence of any such error in the assessment order, assumption of jurisdiction under section 263 by the PCIT should be reckoned as invalid. Hence, the order passed by him under section 263 was quashed.

shailesh.kwebmaker

Loan – Whether A Capital Asset?

ISSUE FOR CONSIDERATION

Lending of money on interest or otherwise to other persons, on request or otherwise, in the course of business or as an investment, is normal. Some of the money so lent at times becomes bad and irrecoverable, besides inability of recovery of interest.

In such circumstances, the issue that arises for consideration is whether the loan is a capital asset within the meaning of section 2(14) of the Income tax Act. The definition includes property of any kind including the right, title and interest in property. Is loan not a property and a capital asset? Is it not an asset even under popular parlance? The case of the lender to hold it as a capital asset seems better.

The additional issue that arises is whether on recovery of loan becoming bad, whether there arises a transfer within the meaning of the term under section 2(47) of the Act. Can it be said that on write-off of the loan, there is a relinquishment or extinguishment of the asset or the right therein? Is it possible to hold that there is a transfer even where legal steps are not taken or where taken but not concluded against the lender? Will the claim of the tax payer for loss and its set-off be better in cases where a loan or a deposit or advance is exchanged for another asset or similar product or where it is assigned or transferred in the course of an amalgamation?

Is the amount invested in financial small savings instruments such as Kisan Vikas Patra a capital asset and whether on its redemption or maturity a transfer happens, entitling the investor to claim the benefit of indexation of the cost of investment?

The issues definitely are interesting and of importance, and have been presented before the courts for adjudication, resulting in conflicting views. A decade ago, the Bombay High Court held that the loss arising on the loans turning irrecoverable was not allowable under the head capital gains. A later decision of the same Court however has held that such a loss arising on assignment was allowable under the head capital gains.

CROMPTON GREAVES LTD.’S CASE

The issue had first come up for consideration of the Bombay High Court in the case of Crompton Greaves Ltd. vs. DCIT [2019] [2014] 50 taxmann.com 88.

In this case, the assessee was a company carrying on the business of manufacturing transformers, switch gears, electrical products, home appliances, etc. It was to receive amounts of Rs.17,87,31,508 and Rs. 17,25,46,484 from M/s Bharat Starch Industries Ltd and M/s JCT Ltd, respectively. Against the said dues, it had received shares worth of Rs. 60,00,000 only from M/s Bharat Starch Industries Ltd. Therefore, during the previous year relevant to the assessment year 2002-03, it had written off balance of Rs. 34,52,77,992, and claimed it as a capital loss, carried forward for set-off in subsequent years. The said write-off was in the course of schemes of arrangement, which were subsequently sanctioned by the Gujarat and Punjab and Haryana High Courts, respectively.

The AO rejected the claim of the assessee, by holding that in order to be eligible to carry forward of the capital loss, there should be a capital asset as defined in section 2(14) and the same should have been transferred in the manner as defined in section 2(47). Since, in his view, the deposits or advances given to M/s JCT Ltd. and M/s Bharat Starch Industries Ltd. written off were not capital assets nor was there any transfer, no capital loss was allowed to be carried forward to the subsequent year.

The CIT (Appeals) also held that the loss incurred by the appellant-assessee was not a capital loss in relation to the transfer of an asset. He agreed with the AO and held that the loss has been rightly determined as a capital loss.

Upon further appeal, the Tribunal concluded that it was clear that the loans were not given in the ordinary course of business. The assessee’s claim that the loan was in the form of an inter-corporate deposit, which was a case of capital asset and had been transferred, was also rejected by the Tribunal. The Tribunal found that there was no evidence to show that it was a case of an inter-corporate deposit, because before the AO, it was claimed that the loss was on account of writing off of the advances given to M/s Bharat Starch Industries Ltd and M/s JCT Ltd. There was no material to show that a case of intercorporate deposit had been made out. The loans, therefore, could not be termed or construed as capital assets.

Agreeing with the finding of the Tribunal, the High Court held that the said findings of fact rendered in the peculiar factual backdrop did not give rise to any substantial question of law. Thus, the High Court did not entertain the appeal filed by the assessee.

However, in fairness, the High Court dealt with the judgment cited before it in support of the argument that the definition of “capital asset” in section 2(14) of the Income-tax Act, 1961, was wide enough to include even an advance of money. The Bombay High Court held that the judgment of the Supreme Court in the case of Ahmed G.H. Ariff vs. CWT [1970] 76 ITR 471 (SC), was in the context of the provisions in the Wealth-tax Act, 1957. The question raised before the Supreme Court was that the right of the assessee to receive a specified share of the net income from the estate in respect of which wakf-alal-aulad has been created, was an asset assessable to wealth-tax. It was in that context that the definition of the term “asset” as defined in section 2(e) of the Wealth-tax Act, 1957, and section 6(dd) of the Transfer of Property Act were referred to. All conclusions which had been rendered by the Supreme Court, must be, therefore, read in the peculiar factual situation and circumstances. In dealing with the argument that the right claimed of the nature could not be termed as property, the Supreme Court had held that “property” was a term of the widest import and subject to any limitation which in the context was required. It signified every possible interest which a person could clearly hold and enjoy. On this basis, the High Court held that this decision of the Supreme Court was not relevant for the assessee’s case.

With respect to the decision of the Gujarat High Court in the case of CIT vs. Minor Bababhai [1981] 128 ITR 1 (Guj) which was cited before the Bombay High Court, it was held that it could not assist the assessee, because in the said case, there was no controversy that what was before the authorities was a claim in relation to capital asset. Further, it was also observed by the Court that what was argued before the lower authorities was that the loss of advance was a capital loss in relation to transfer of capital asset, and now what had been argued was that the advances were not as such but intercorporate deposits (ICDs). It was in relation to this alternative argument that the judgment of the Gujarat High Court was cited before the Court. In view of this, it was held that the said judgment was of no assistance as the issue advanced did not arise for determination and consideration of the lower authorities.

On this basis, the High Court dismissed the appeal of the assessee, by holding that it did not give rise to any substantial question of law.

SIEMENS NIXDORF INFORMATION SYSTEMSE GMBH’S CASE

The issue, thereafter, came up for consideration once again before the Bombay High Court in the case of CIT vs. Siemens Nixdorf Information Systemse GmbH [2020] 114 taxmann.com 531.

In this case, under an agreement dated 21st September, 2000, the assessee company had lent an amount of €90 lakhs to its subsidiary, Siemens Nixdorf Information Systems Ltd (SNISL). SNISL ran into serious financial troubles and it was likely to be wound up. Therefore, the assessee sold its debt of €90 lakhs receivable from SNISL to one Siemens AG. The difference between the amount which was lent to SNISL and the consideration received upon its assignment to Siemens AG was claimed as a short-term capital loss in assessment year 2002-03.

The AO disallowed the said short-term capital loss on the grounds that the amount of €90 lakhs lent by the assessee to its subsidiary SNISL was not a capital asset under section 2(14) and also that no transfer in terms of Section 2(47) had taken place on its assignment. Upon further appeal, the CIT (A) held that, although the assignment of a debt was a transfer under section 2(47) of the Act, but it was of no avail, as the loan being assigned/transferred, was not a capital asset. Thus, he confirmed the disallowance made by the AO.

On further appeal, the Tribunal held that in the absence of loan being specifically excluded from the definition of capital assets under the Act, the loan of €90 lakhs would stand covered by the meaning of the word ‘capital asset’ as defined under section 2(14) of the Act. The term ‘capital asset’ was defined under section 2(14) to mean ‘property of any kind held by an assessee, whether or not connected with his business or profession’, except those which were specifically excluded in the said section. The word ‘property’ had a wide connotation to include interest of any kind. The Tribunal placed reliance upon the decision of the Bombay High Court in the case of CWT vs. Vidur V. Patel [1995] 79 Taxman 288/215 ITR 301 rendered in the context of Wealth Tax Act, 1957 which, while considering the definition of ‘asset’, had occasion to construe the meaning of the word ‘property’. It held the word ‘property’ to include interest of every kind. In view of this, the Tribunal held that the assessee was entitled to claim short-term capital loss on assignment/transfer of the SNISL loan to Siemens AG.

1   In this case, it was held that the amount standing to the credit of the assessee in the compulsory deposit account was an 'asset' within the meaning of section 2(e) of the Wealth-tax Act.

Before the High Court, the revenue contended that the loan of €90 lakhs was not a capital asset in terms of Section 2(14) of the Act. Further, it was submitted that reliance placed upon the decision in the case of Vidur V. Patel (supra) was not proper for the reason it was rendered in the context of a different Act i.e. the Wealth Tax Act, 1957. Thus, it could not have application while dealing with the Income-tax Act.

The High Court held that section 2(14) of the Act has defined the word ‘capital asset’ very widely to mean property of any kind. Though it specifically excluded certain properties from the definition of ‘capital asset’, the revenue had not been able to point out any of the exclusion clauses being applicable to advancement of a loan. It was also not the case of the revenue that the said amount of €90 lakhs was a loan/advance in the nature of trading activity.

In so far as the reliance placed by the tribunal on the decision of Vidur V. Patel (supra) was concerned, the High Court noted that the revenue had not been able to point out any reason to understand meaning of the word ‘property’ as given in section 2(14) of the Act differently from the meaning given to it under section 2(e) of the Wealth Tax Act, 1957. The High Court disagreed with the contention of the revenue that the said decision should not be considered as relevant, merely because it was under a different Act, when both the Acts were cognate.

Further, the High Court referred to the decision in the case of Bafna Charitable Trust vs. CIT [1998] 101 Taxman 244/230 ITR 864 (Bom.)2 which was rendered in the context of capital assets as defined in section 2(14) of the Act and it was held that property was a word of widest import and signifies every possible interest which a person can hold or enjoy except those specifically excluded. On this basis, the High Court held that loan given to SNISL would be covered by the meaning of ‘capital asset’ as given under section 2(14) of the Act. The High Court declined to entertain the question of law framed in the appeal before it, on the grounds that it did not give rise to any substantial question of law.

2.  In this case, it was held that advancing of money on English mortgage could be regarded as utilisation for acquisition of another capital asset within the meaning of section 11(1A).

OBSERVATIONS

A loan or a deposit or an advance or an investment is a case of an asset for finance personnel and so it is for an accountant. It was also an asset for the purpose of the levy of wealth tax till such time it was leviable. The dictionary meaning of an asset includes any one or all of them, and so it is in popular parlance.

Capital Asset under the Income-tax Act, 1961 is defined under section 2(14) of the Act. While expressly excluding many items, it is inclusively defined to include property of any kind. Section 2(14) surely does not exclude a loan or a deposit or such other assets from its domain. In the above understanding, is it possible to contend that a loan is an asset but is not a capital asset? We think not. The term “capital” is perhaps used to isolate a trading asset from the other assets. It would not be possible to exclude an asset from section 2(14) once it is a property of any kind, unless it is one of the assets that are specifically excluded.

A loan, like many other assets or properties, is transferable or assignable; it is an actionable claim under the Transfer of Property Act; a lender can relinquish or release his rights to recover the same. All in all, it has all the characters of a capital asset.

A gain or loss arises under the Act only where a capital asset is transferred. The term “transfer” is inclusively defined in section 2(47) of the Act. An act of assignment of a loan is a transfer. In some cases, the loan becoming irrecoverable may be regarded as extinguishment or relinquishment. For this, support can be drawn from the decision of the Supreme Court in the case of CIT vs Grace Collis 248 ITR 323 (SC), where the Supreme Court, in the context of extinguishment of shares, held:

“The definition of ‘transfer’ in section 2(47) clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. One should not approve the limitation of the expression ‘extinguishment of any rights therein’ to such extinguishment on account of transfers, nor can one approve the view that the expression ‘extinguishment of any rights therein’ cannot be extended to mean extinguishment of rights independent of or otherwise than on account of transfer. To so read, the expression is to render it ineffective and its use meaningless. Therefore, the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer.”

A loan can be exchanged for any other asset, including the shares of company or a promissory note and even a new loan. A contract to exchange is governed by the Indian Contract Act or the Transfer of Property Act or other relevant statutes.

In the above understanding and settled position in law, it is appropriate to hold that a gain or loss arising on transfer of a loan, is taxable under the head capital gains and likewise, a loss arising on its transfer will be eligible for the prescribed treatment under sections 70 to 79 of the Act.

In fact, the Mumbai Tribunal, in the dissenting case of Crompton Greaves Ltd. (supra), agreed that the company could not establish that the asset in question was not an inter-corporate deposit; had the company done so, the decision may have been different. The Tribunal also observed that the treatment could have been different for a loan advanced in the course of business. Importantly, the case of the company for a claim under sections 70 to 79 was better, in as much as the assets in question (loans) were extinguished and in lieu thereof, shares of the amalgamated company were issued in the course of amalgamation of the companies under the Court’s order.

In our considered opinion, there at least was a substantial question of law that required the High Court’s consideration. It seems that the later decision of the same Court has settled the controversy in favour of the allowance of the loss on transfer of the loan or such investments.

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Section 69 read with section 44AD – Where the assessee furnished bank statements for relevant assessment year which showed that there were deposits and withdrawals of almost equal amounts from the bank account of assessee and the AO failed to give any findings regarding said withdrawals, then the assessee deserved to get benefit of telescoping and addition of entire deposits as unexplained was unjustified.

17. Smt. Sanjeet Kanwar vs. Income-tax Officer
[2022] 98 ITR(T) 12 (Amritsar – Trib.)
ITA No.:67 (ASR.) of 2019
A.Y.: 2015-16
Date of order: 30th June, 2022

Section 69 read with section 44AD – Where the assessee furnished bank statements for relevant assessment year which showed that there were deposits and withdrawals of almost equal amounts from the bank account of assessee and the AO failed to give any findings regarding said withdrawals, then the assessee deserved to get benefit of telescoping and addition of entire deposits as unexplained was unjustified.

FACTS

The return of income was filed on 3rd December, 2015 declaring a total income of Rs. 2,69,600. Subsequently, the case was selected for limited scrutiny under CASS for cash deposits in bank accounts being more than the turnover. The assessee and her husband appeared before the AO and submitted that the cash sales during the year was Rs. 8,31,625 and profit shown under section 44AD was Rs. 66,531. All the cash sales and purchases were first accounted in business cash account by the assessee and out of which the cash was deposited in the bank. The total cash deposits during the year were Rs. 8,57,000 out of which cash sales were Rs. 8,31,625. The excess amount of Rs. 25,375 was deposited out of profits earned by the assessee during the year. The Assessee submitted that the AO cannot blow hot and cold because at one hand he had accepted assessee’s returned income and on the other hand he had made addition of Rs. 8,57,000. The said amount had arisen out of cash sales of Rs. 8,31,625 and balance cash of Rs. 25,375 out of total profit shown amounting to Rs. 66,531.

The AO thereafter proceeded to frame the assessment under section 143(3) of the Act. Thereby, he made addition of Rs. 8,57,000 being the cash deposited in the bank account of the assessee.

Aggrieved against this, the assessee preferred appeal before CIT (A) who after considering the submissions and perusing the material available on record dismissed the appeal of the assessee and sustained the impugned addition. Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that the authorities ought to have given a clear finding regarding withdrawals made by the assessee during the year under consideration. Since there were debit entries in the bank statement of the assessee then the addition of entire deposits as unexplained was not justified. The assessee deserved to get the benefit of telescoping and the entire addition would not survive. The AO was directed to delete the addition.

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Section 68 – Where deposit had been made from cash balance available in the books of accounts, and the AO had not rejected the books of accounts, there was no question of treating the same as unexplained cash deposit and hence, its addition made to the assessee’s income was not justified

16. R. S. Diamonds India (P) Ltd vs. ACIT
[2022] 98 ITR(T) 505 (Mumbai – Trib.)
ITA No.: 2017 (MUM.) OF 2021
A.Y.: 2017-18
Date of order: 26th July, 2022

Section 68 – Where deposit had been made from cash balance available in the books of accounts, and the AO had not rejected the books of accounts, there was no question of treating the same as unexplained cash deposit and hence, its addition made to the assessee’s income was not justified.

FACTS

The assessee was engaged in the business of trading in diamonds. The AO noticed that the assessee had deposited a sum of Rs. 45 lakhs into its bank account during demonetisation period. In respect of the said amount, the assessee had furnished an explanation that the said amount represented cash balance available in its books of accounts which included advance received from the customers towards sale over the counter. The AO asked the assessee to provide details of customers who had given these advances. It was explained that each sale made to the customer was less than Rs. 2 lakh, and hence it had not collected complete details of the customers. The AO took the view that the assessee had failed to prove cash deposits made by it during the demonetisation period. Accordingly, he treated the cash deposits of R45 lakhs as unexplained cash deposits and assessed the same as income of the assessee under section 68 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”].

Aggrieved the assessee preferred an appeal to the Ld. CIT (A), who also confirmed the order of the AO.

Aggrieved by the order of CIT (A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that deposit made into the bank account was from out of the books of accounts and the said deposits had been duly recorded in the books of accounts which were not disputed. Reliance was placed on the judgment in the case of Lakshmi Rice Mills vs. CIT [1974] 97 ITR 258 (Patna) wherein it was held that when the books of accounts of the assessee were accepted by the revenue as genuine and cash balance shown therein was sufficient to cover high denomination notes held by the assessee then the assessee was not required to prove the source of receipt of said high denomination notes which were legal tender at that time. Reliance was also placed on the judgment in the case of ACIT vs. Hirapanna Jewellers [2021] 189 ITD 608 (Visakhapatnam – Trib.) wherein it was held that when the cash receipts represented the sales been duly offered for taxation then there was no scope for making addition under section 68 of the Act in respect of deposits made into the bank account.

Accordingly, it was held that the addition of Rs. 45 lakhs made in the hands of the assessee was not justified since the said deposits had been made from the cash balance available in the books of accounts. Consequently, the order passed by the CIT (A) on this issue was set aside and the AO was directed to delete the addition of Rs. 45 lakhs.

In result the appeal filed by the assessee was allowed.

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‘Charitable Purpose’, GPU Category- Post 2008 Amendment – Eligibility For Exemption U/S 11- Sec 2(15)- Part III

INTRODUCTION

6.1 As mentioned in Part I of this write-up [BCAJ – April, 2023], history of provisions relating to exemption for charity under the Income-tax Act, right from 1922 Act to the current Act (1961 Act) and amendments made from time- to – time affecting such exemptions for Charitable Trust/institutions [Charity/Charities]; and in particular, the insertion of the proviso [the said Proviso] to section 2(15) by the Finance Act 2008 w.e.f. 1.4.2009 (2008 Amendment) placing restrictions on carrying out Commercial Activity [referred to in Para 1.6 of Part I of this write-up] has been considered by the Supreme Court in the AUDA’s case. Similarly, judicial precedents from time-to-time under the respective provisions of the Act relating to exemptions for Charity prior to 2008 Amendment have also been considered by the Supreme Court in this case as referred to in paras 4.1 and 4.2 of Part II of this write-up [BCAJ- May, 2023]

6.2 Brief facts of six categories of assessees [referred to para 2.1 of Part I of this write-up] before the Supreme Court in cases of Ahmedabad Urban Development Authority and connected matters [AUDA’s case] and the contentions raised by each one of them before the Court as well as the arguments of the Revenue are summarized in paras 3.1 to 3.3 of Part I of this write-up.

6.3 After considering the arguments of both the sides, the legislative history of the relevant provisions and amendments therein from time-to-time, the effect of Finance Minister’s speeches at the relevant time and relevant Circulars of the CBDT as well as the prior relevant judicial precedents dealing with respective provisions at the relevant time referred to in earlier Parts I & II of this write-up, the Court dealt with the effect of 2008 Amendment (including subsequent amendments in the said Proviso). The Court also explained the effect and implications of the provisions of section 11(4) & (4A) in the light of 2008 Amendment and concluded on the interpretation of Sec 2(15) which defines “Charitable Purpose” post 2008 Amendment in the context of GPU category object with which the Court was mainly concerned. These are summarized in paras 5.1 to 5.5.3 of Part II of this write-up.

ACIT(E) VS. AHMEDABAD URBAN DEVELOPMENT AUTHORITY (449 ITR 1 -SC)

7.1 As mentioned in Para 5.1 of Part II of this write-up, the Court had divided the appeals before it into six different categories of assessees namely- (i) statutory corporations, authorities or bodies, (ii) statutory regulatory bodies/authorities, (iii) trade promotion bodies, councils, associations or organisations, (iv) non-statutory bodies, (v) state cricket associations and (vi) private trusts. The Supreme Court then proceeded to decide cases falling in each of the six categories of assessees before it.

7.2 In respect of the first category of assessees being statutory corporations, authorities or bodies, etc such as AUDA, the Court firstly held that statutory entities eligible for exemption under the erstwhile section 10(20A) prior to its deletion w.e.f. 1st April, 2003 can make a claim under section 11 r.w.s 2(15) of the Act as a GPU category charity. In this context, the Court also referred to its earlier decisions in the cases of Gujarat Industrial Development Corporation-GIDC [(1997) 227 ITR 414 (SC)] rendered in the context of section 10(20A) and Shri Ramtanu Co-op Hsg Society [(1970) 3 SCC 323 (SC) – five judge bench] and noted that in these cases the Court had taken a view that such industrial development corporations are involved in “development” and are not essentially engaged in trading and that is binding.

7.2.1 Similarly, the Court also noted its judgment in Gujarat Maritime Board [(2007) 295 ITR 561(SC) ] where the Board was earlier getting exemption under section 10(20) as Local Authority and the fact that section 10(20) was subsequently amended retrospectively to define Local Authority whereby the Gujarat Maritime Board ceased to be eligible to claim exemption under section 10(20). However, in that case also, the Court held that sections 10(20) and 11 of the Act operate in totally different spheres. Even if the Board is not considered as a Local Authority [due to this amendment], it is not precluded from obtaining registration under section 12A of the Act and claiming exemption under section 11. This was in the light of definition of the words’ Charitable Purpose’ as defined in section 2(15) which includes GPU category.

7.2.2 The Court then observed that rates, tariffs, fees, etc. as specified in the enactments and charged by statutory corporations for undertaking essential activities will not be characterised as ‘commercial receipts’. The reasons for the same were given by the Court as under [page 112]:

“….. The rationale for such exclusion would be that if such rates, fees, tariffs, etc., determined by statutes and collected for essential services, are included in the overall income as receipts as part of trade, commerce or business, the quantitative limit of 20% imposed by second proviso to Section 2(15) would be attracted thereby negating the essential general public utility object and thus driving up the costs to be borne by the ultimate user or consumer which is the general public…By way of illustration, if a corporation supplies essential food grains at cost, or a marginal mark-up, another supplies essential medicines, and a third, water, the characterization of these, as activities in the nature of business, would be self-defeating, because the overall receipts in some given cases may exceed the quantitative limit resulting in taxation and the consequent higher consideration charged from the user or consumer.”

7.2.3 In view of the above, the Court took the view that Statutory Corporations, Board, Authorities, etc.[by whatever name called] in the Housing Development, Town Planning, Industrial Development sectors are involved in advancement of object of general public utility and considered as Charities in the GPU category. Such entities may be involved in promoting public object and also in the course of pursuing their object may get involved or engaged in commercial activities. As such, it needs to be determined whether such entities are to be treated as GPU category Charities for claiming exemption. The Court also laid down certain tests [pages 118 to 120] to determine if the statutory corporations or bodies are GPU category Charities. These tests are broadly summarised herein – (i) whether state or central law or memorandum of association, etc. advances any GPU object, (ii) whether the entity is set up for furthering development or charitable object or for carrying on trade, business or commerce or service in relation thereto [i.e. Commercial Activity/Activities], (iii) rendering services or providing goods at cost or nominal mark-up, will ipso facto not be activities in the nature of Commercial Activities. However, if the amounts are significantly higher, they will be treated as receipts from Commercial Activities (iv) collection of fees, rates, etc. fixed by the statute under which the body is set up will not per se be characterised as ‘fee, cess or other consideration’ for engaging in activities in the nature of trade, commerce, etc. (v) whether statute governing the entity permits surplus or profits that can be earned and whether state has control over the corporation (vi) as long as statutory body furthers a GPU object, carrying on other activities in the nature of Commercial Activities that generate profits and the receipts from which are within the permissible limits as stated in the said Proviso to section 2(15), it will continue to be GPU category Charity.

7.3 Coming to the second category of assessees being statutory regulatory bodies/ authorities for which the sample case was of the Institute of Chartered Accountants of India (ICAI), the Court noted the relevant provisions of the Chartered Accountants Act, 1949 and held that ICAI is a Charity advancing GPU objects. In this context, the Court held as under [page 122]:

“…… As things stand, the Institute is the only body which prescribes the contents of professional education and entirely regulates the profession of Chartered Accountancy. There is no other body authorised to perform any other duties which it performs. It, therefore, clearly falls in the description of a charity advancing general public utility. Having regard to the previous discussion on the nature of charities and what constitutes activities in the ‘nature of trade, business or commerce’, the functions of the Institute ipso facto does not fall within the description of such ‘prohibited activities’. The fees charged by the Institute and the manner of its utilisation are entirely controlled by law. Furthermore, the material on record shows that the amounts received by it are not towards providing any commercial service or business but are essential for the providing of service to the society and the general public.”

7.3.1 The Court also noted that there are several other regulatory bodies that discharge functions otherwise within the domain of the State (including the one regulating professions of Cost and Work Accountants, Company Secretary, etc.). In this context, the Court further held as under [page 123]:
“…Therefore, it is held that bodies which regulate professions and are created by or under statutes which are enjoined to prescribe compulsory courses to be undergone before the individuals concerned is entitled to claim entry into the profession or vocation, and also continuously monitor the conduct of its members do not ipso facto carry on activities in the nature of trade, commerce or business, or services in relation thereto.”

7.3.1.1 The Court, however, added that if the consideration charged by regulatory entities such as annual fees, exam fees, etc. is ‘vastly or significantly higher’ than the costs incurred by the regulatory entity, the case would attract the said Proviso to section 2(15) of the Act. In this context, following observations of the Court are worth noting [page 123]:

“At the same time, this court would sound a note of caution. It is important, at times, while considering the nature of activities (which may be part of a statutory mandate) that regulatory bodies may perform, whether the kind of consideration charged is vastly or significantly higher than the costs it incurs. For instance, there can be in given situations, regulatory fees which may have to be paid annually, or the body may require candidates, or professionals to purchase and fill forms, for entry into the profession, or towards examinations. If the level of such fees or collection towards forms, brochures, or exams are significantly higher than the cost, such income would attract the mischief of proviso to Section 2(15), and would have to be within the limits prescribed by sub-clause (ii) of the proviso to Section 2(15).”

7.3.2 While deciding the matter of the Andhra Pradesh State Seeds Certification Authority and the Rajasthan State Seeds and Organic Production certification Agency [set-up under Seeds Act, 1966] also falling within the second category of assessees, the Court held that these entities tasked with the work of certification of seeds are performing regulatory function and do not engage in activities by way of trade, commerce or business, for some form of consideration.

7.4 With respect to the third category – trade promotion bodies, councils, associations or organisations, the Court at the outset stated that the predominant object test laid down in Surat Art’s case [ for this also refer to para 5.3.3 of Part II of this write-up] was in the context of section 2(15) applicable prior to the 2008 Amendment. In view of the 2008 Amendment, the Court held that the position had undergone a change and opined as follows [page 124]:

“In the opinion of this court, the change in definition in Section 2(15) and the negative phraseology – excluding from consideration, trusts or institutions which provide services in relation to trade, commerce or business, for fee or other consideration – has made a difference. Organizing meetings, disseminating information through publications, holding awareness camps and events, would be broadly covered by trade promotion. However, when a trade promotion body provides individualized or specialized services – such as conducting paid workshops, training courses, skill development courses certified by it, and hires venues which are then let out to industrial, trading or business organizations, to promote and advertise their respective businesses, the claim for GPU status needs to be scrutinised more closely. Such activities are in the nature of services “in relation to” trade, commerce or business. These activities, and the facility of consultation, or skill development courses, are meant to improve business activities, and make them more efficient. The receipts from such activities clearly are ‘fee or other consideration’ for providing service “in relation to” trade, commerce or business.”

7.4.1 After laying down the aforesaid ratio, coming to the facts of the assessee under this category – Apparel Export Promotion Council [AEPC], the Court held that its activities such as booking bulk space and renting it to individual Indian exporters, charging fees for skill development and diploma courses, market surveys and market intelligence aimed at catering to specified exporters involved an element of Commercial Activities. The Court then concluded as under [page 125]:

“In the circumstances, it cannot be said that AEPC’s functioning does not involve any element of trade, commerce or business, or service in relation thereto. Though in some instances, the recipient may be an individual business house or exporter, there is no doubt that these activities, performed by a trade body continue to be trade promotion. Therefore, they are in the “actual course of carrying on” the GPU activity. In such a case, for each year, the question would be whether the quantum from these receipts, and other such receipts are within the limit prescribed by the sub-clause (ii) to proviso to Section 2(15). If they are within the limits, AEPC would be – for that year, entitled to claim benefit as a GPU charity.”

7.5 The Court then proceeded to consider the cases of fourth category of assessees being non-statutory bodies. In respect of one such assessee – ERNET, the Court noted that it was a not-for profit society set up under the aegis of the Union Government with the objects of advancing computer communication in India, develop, design, set up and operate nationwide state of the art computer communication infrastructure, etc. After noting the activities of the assessee and also the fact that it’s project, funded through Government, support educational network and development of internet infrastructure in numerous other segments of the society, the Court felt that functions of ERNET are vital to the development of online educational and research platforms and held that its activities cannot be said to be in the nature of Commercial Activities. For this, the Court also noted that ERNET received fees to reimburse its costs and that the material on record did not suggest that its receipts were of such nature so as to be treated as fees or consideration towards business, trade or commerce.

7.5.1 In case of another assessee in this category – NIXI which was set-up under the aegis of Ministry of Information and Technology for production and growth of internet services in India, to regulate the internet traffic, act as an internet exchange, and undertake “.in” domain name registration. The Court also noted that NIXI is a not-for profit, and is barred from undertaking commercial and business activity and it charges annual membership fees of Rs. 1,000 and registration of second and third domain at Rs 500 and Rs. 250. Having regard to the findings on record and material available, an importance of country’s needs to have domestic internet exchange and other relevant facts, the Court rejected the Revenue’s contention that NIXI was involved in Commercial Activities.

7.5.2 GS1 India was another assessee in this category. GS1 codes were developed and created by GS1 international, Belgium which was not for profit under the Belgium Tax Laws. The coding system has been used worldwide and is even mandatory for some services/goods or adopted for significant advantages on account of its worldwide recognisation and acceptance. GS1 India is affiliated and was conferred exclusive rights relating to GS1 coding in India. The GS1 code provides a unique identification to a product with wide range of benefits such as facilitating tracking, tracing of the product, product recalls, detection of illegal trade, etc. The Revenue believed that GS1 India is a monopolistic organisation with an exclusive license in relation to bar coding technology which is admittedly used for fees or other consideration and it provides services mostly to business, trade, etc. On the other hand GS1 also claims that it performs important public function which enables not merely manufacturers but others involved in supplies of various articles by packaging, etc to regulate and ensure their identity.

7.5.2.1 Considering overall facts of GS1 India, the Court held that though GS1 undertakes activities in the nature of GPU, the services provided by it are in relation to trade, commerce or business. In this context, the Court opined as under [page 130]:

“In the opinion of this Court, GS1’s functions no doubt is of general public utility. However, equally the services it performs are to aid businesses manufactures, tradesmen and commercial establishments. Bar coding packaged articles and goods assists their consigners to identify them; helps manufactures, and marketing organizations (especially in the context of contemporary times, online platforms which serve as market places). The objective of GS1 is therefore, to provide service in relation to business, trade or commerce – for a fee or other consideration. It is also true, that the coding system it possesses and the facilities it provides, is capable of and perhaps is being used, by other sectors, in the welfare or public interest fields. However, in the absence of any figures, showing the contribution of GS1’s revenues from those segments, and whether it charges lower amounts, from such organizations, no inference can be drawn in that regard. The materials on record show that the coding services are used for commercial or business purposes. Having regard to these circumstances, the Court is of the opinion that the impugned judgment and order calls for interference.”

7.5.2.2 The Court also concluded that though GS1 India is involved in advancement of GPU, its services are for the benefit of trade and business, from which it receives significantly high receipts. Therefore, its claim for exemption was rejected in view of the amended provisions of section 2(15). However, with respect to claims to be made by GS1 in future, the Court observed that the same would have to be independently assessed if GS1 is able to show that it charges its customers on cost-basis or at a nominal markup.

7.6 In respect of state cricket associations falling within the fifth category, the Court firstly held that the claim of the associations will not fall within the ‘education’ limb in section 2(15) but will have to be examined under the last limb – GPU category. In this regard reference was made to the decision in Loka Shikshana Trust’s case [referred to in para 1.3.1 of Part I of this write-up] where it was held that ‘education’ would entail formal scholastic education. The Court then noted that the state associations apart from receiving amounts towards sale of entry tickets, also receive advertisement money, sponsorship fees, etc. from BCCI. The Court also noted the fact [in case of Gujarat as well as Saurashtra Cricket Associations] that the records reveal the large amount of receipts from such activities as against which the amount of expenditure is much lower leaving good amount of excess in the hands of such associations in the relevant year. The Court also observed that the activities of the cricket associations are run on business lines. It further noted that the expenses borne by the cricket associations did not disclose any significant proportion being expended towards sustained or organized coaching camps or academics. The Court also noted that broadcasting and digital media rights have yielded huge revenues to BCCI and the state associations are entitled to a share in the revenue of BCCI. The Court also noted the method adopted [auctioning such rights] by BCCI to obtain better terms, and gain bargaining leverage. The Court felt that these rights are apparently commercial.

7.6.1 Based on the above factual position, the Court directed the AO to decide the matter afresh and held as under [page 143]:

“In the light of these, the court is of the opinion that the Income-tax Appellate Tribunal – as well as the High Court fell into error in accepting at face value the submission that the amounts made over by BCCI to the cricket associations were in the nature of infrastructure subsidy. In each case, and for every year, the tax authorities are under an obligation to carefully examine and see the pattern of receipts and expenditure. Whilst doing so, the nature of rights conveyed by the BCCI to the successful bidders, in other words, the content of broadcast rights as well as the arrangement with respect to state associations (either in the form of master documents, resolutions or individual agreements with state associations) have to be examined. It goes without saying that there need not be an exact correlation or a proportionate division between the receipt and the actual expenditure. This is in line with the principle that what is an adequate consideration for something which is agreed upon by parties is a matter best left to them. These observations are not however, to be treated as final; the parties’ contentions in this regard are to be considered on their merit.”

7.7 In case of Tribune Trust, one of the assessees falling within the sixth category of private trust, the Court referred to the past litigation history of the assessee under the 1922 Act leading to the decision of Privy Council referred to in para 1.2.1 of Part I of this write-up and finding that the trust was established as Charity- GPU category and also noted the fact that the exemption was continuously allowed in this category under 1961 Act also including under section 10(23C)(iv) from assessment year 1984-85 onwards.

7.7.1 The Court then considered the facts of the case under appeal for the A.Y. 2009-10 in which the exemption was denied by the Revenue based on 2008 Amendment to section 2(15). The Punjab and Haryana High Court upheld the action of the Revenue by concluding that the income is derived by the Trust from the activities [publishing and sale of newspaper, etc.] which were based on profit motive. In doing so it had also noted that 85 per cent of the revenue of the Trust was from advertisements and interest.

7.7.1.1 Finally, the Court stated that though publication of advertisements is intrinsically linked with newspaper activity and is an activity in the course of actual carrying on of the activity towards advancement of the trust’s object, publishing advertisements is an activity in the nature of trade, commerce or business for a fee or consideration. The Court held that though the objects of the assessee trust fell within the GPU category, it would not be entitled to exemption under section 2(15) of the Act as the advertisement income received by the trust constituted business or commercial receipts and the same exceeded the limits laid down in the said Proviso to section 2(15).

7.7.2 The Court then considered the case of Shri Balaji Samaj Vikas Samiti, another assessee falling in the category of private trust wherein the assessee society was formed with the object of establishing and running a health club, arogya kendra; its object also included organization of emergency relief center, etc. Other objects included promotion of moral values, eradication of child labour, dowry, etc. The assessee had entered into arrangement with State agency to supply mid-day meals to students of primary schools in different villages through contracts entered into with some entity. Material for preparation of the mid-day meal was supplied by the Government and it was claimed that it only obtained nominal charges for mid-day meals. Registration application was rejected by the Revenue on the basis that it was involved in Commercial Activity. The Tribunal agreed with the assessee that the supply of mid-day meal did not constitute Commercial Activity and that it promoted object of GPU and directed grant of registration under section 12AA of the Act and this was affirmed by the Allahabad High Court. The Revenue had contended that assessee’s only activity for the relevant year was supply of mid-day meals which is not within its objects. The Supreme Court felt that there is no clarity with respect to whether the activity of supplying mid-day meal falls within the objects of the assessee and in the absence of this it is not possible for the Court to assess the activity in which the assessee was engaged to determine whether it falls in GPU category.

7.7.2.1 On the above facts the Court stated as under [page 147]:

“The first consideration would be whether the activity concerned was or is in any manner covered by the objects clause. Secondly, the revenue authorities should also consider the express terms of the contract or contracts entered into by the assessee with the State or its agencies. If on the basis of such contracts, the accounts disclose that the amounts paid are nominal mark-up over and above the cost incurred towards supplying the services, the activity may fall within the description of one advancing the general public utility. If on the other hand, there is a significant mark-up over the actual cost of service, the next step would be ascertain whether the quantitative limit in the proviso to section 2(15) is adhered to. It is only in the event of the trust actually carrying on an activity in the course of achieving one of its objects, and earning income which should not exceed the quantitative limit prescribed at the relevant time, that it can be said to be driven by charitable purpose.”

7.7.2.2 Despite the above, the Court ultimately decided not to interfere with the judgment of the High Court and held as under [page 147]:

“This court, in the normal circumstances, having regard to the above discussion, would have remitted the matter for consideration. However, it is apparent from the records that the tax effect is less than Rs.10 lakhs. It is apparent that the receipt from the activities in the present case did not exceed the quantitative limit of Rs.10 lakhs prescribed at the relevant time. In the circumstances, the impugned order of the High Court does not call for interference.”

8 After dealing with general interpretation of section 2(15) and cases of all the categories of assessees, the Court proceeded to give Summation of Conclusions which is worth noting.

8.1 In the context of general test to be applied under section 2(15), the Court broadly stated that the assessee pursuing object of GPU category should not engage in Commercial Activity as envisaged in the said Proviso to section 2(15). If it does so, then (i) such Commercial Activity should be connected [“actual carrying out…..” inserted w.e.f. 1st April, 2016 to the achievement of its GPU object; and (ii) receipts from such Commercial Activities should not exceed the quantitative limit provided from time to time[ currently, 20 per cent of the total receipts of the entity for the relevant previous year- w.e.f. 1st April, 2015]. Generally, charging of any amount for GPU activity, which is on cost-basis or nominally above the cost cannot be considered to be Commercial Activities as envisaged in the said Proviso. If such charges are markedly or significantly above the cost incurred by the assessee then the same would fall within the mischief of “cess, fees or any other consideration” towards the Commercial Activity. This position is clarified through illustrations [referred to in Para 5.5.2 of Part II of this write-up] by the Court which would also be relevant in this context. The Court has also summarised its conclusion on section 11(4A) of the Act and for all the six categories of assessees as well as on application of interpretation. Summation of Conclusions given by the Court deserves careful reading. However, due to space constraint and to avoid making this write-up further lengthy (which otherwise has already become lengthy extending to division in three parts, mainly on account of lengthy judgment dealing with six categories of assessees) the same is not reproduced here. The detailed Summation of Conclusions are available at pages 147 to 151 of the reported judgment which, as earlier mentioned , are worth reading to consider various implications arising out of the above judgment. In this context, useful reference may also be made to ‘Summation of Interpretation of section 2(15)’ appearing at pages 101 and 102 of the reported judgment.

CONCLUSION

9.1 The above judgment of the Supreme Court in AUDA’s case primarily deals with the effect of the said Proviso to section 2(15) [i.e. position post 2008 Amendment]. The said Proviso applies to the trust or institution [Trust] pursuing the object of GPU category. As such, this judgment should not apply to Trust pursuing only Specific Objects category such as education, medical relief, yoga, etc. [referred to by the Court as ‘per se’ category objects] and therefore, in case of Trust pursuing only object of Specific category, 2008 Amendment should not have any direct impact. In this context, the useful reference may also be made to the recent decision of the Tribunal in M.C.T.M Chidambaram Chettiar Foundation’s case [Chennai Bench- ITA Nos: 976,977,978 & 979/CHNY/2019] dated 11th January, 2023 wherein the Tribunal has also taken similar view following the judgment in AUDA’s case. In this case, mainly based on actual facts and records, the Tribunal also took the view that letting out of auditorium [located in school complex and used for its educational activities] to outsiders during some parts of the year is incidental to ‘education’ and rejected the claim of the Revenue treating this activity as pursing GPU category object. In this context, one also needs to bear in mind the views expressed by the Court in New Noble Educational Society’s case [dealing with section 10(23C)(vi)] regarding letting of premises/infrastructure by the Trust to outsiders [referred to in para 5.8.2 of Part II of write-up on that case- BCAJ February, 2023] which has not been considered by the Tribunal in this case.

9.1.1 In the context of Specific Objects category even if the said Proviso is not applicable, if Trust earns business profits it would be necessary to comply with the requirements of section 11(4A) to claim exemption under section 11. As such, the business should be incidental to the attainment of objective of the Trust [such as education, medical relief, etc]. The advantage in this category in respect of business profit could be that the limit of 20 per cent specified in the said Proviso would not be applicable. However, at the same time, it is advisable that the activity of education itself should not be carried on purely on commercial lines consistently yielding significant profit. In this context, the observations in the recent judgment of Madras High Court in the case of Mac Public Charitable Trust [(2023) 450 ITR 368] are worth noting. In this case, while dealing with the case of violation of the provisions of the Tamil Nadu Educational Institution [Protection of Collection of Capitation Fees Act, 1992 and cancellation of Registration under Income–tax Act, the High Court has elaborately discussed the concept of education with reference to various judgments and stated [page 462] that education can never be a commercial activity or a trade or a business and those in the field of education will have to constantly and consistently abide by this guiding principle. For this, the recent judgment of the Supreme Court [April, 2023] in the case of Baba Bandasingh Bahadur Education Trust [Civil Appeal No 10155 of 2013- for A.Y. 2006-07] delivered in the context of section 10(23C) (vi) should also be looked at.

9.1.2 In Specific Object category of education, the meaning of the term ‘education’ is equally relevant. The Supreme Court in LokaShikshana Trust’s case [(1975) 101 ITR 234] has given a narrower meaning of the term ‘education’ appearing in section 2(15) to say that it is process of training and developing the knowledge, skill, mind and character of students by formal schooling. As such, it means imparting formal scholastic learning in a systematic manner and the Supreme Court in its recent judgment in New Noble Education Society Trust’s case [448 ITR 592- considered in this column of BCAJ- January & February, 2023] has also followed this narrower meaning[refer para 5.5.1 of Part II of write-up on that case- BCAJ February,2023]. This meaning is also considered by the Court in AUDA’s case [at page 139- para 225] and that should be borne in mind. This should be equally applicable to the term education appearing in the definition of charitable purpose under section 2(15). For this useful reference may also be made to recent decision of Ahmedabad bench of Tribunal in the case of Gujarat Council of Science Society [ITA No 2405/AHD/2017, ITA No 260/AHD/2018 and ITA No 306/AHD/2019] vide order dtd 20/3/2023 for A.Ys 2013-14 to 2015-16. In this case, the Tribunal also took a view that prospective applicability of the judgment in New Noble’s case is only confined to cases involving the interpretation of the term “solely” and did not find any inconsistency with the same for the meaning /definition /scope of the term “education” as used in section 2(15). It may also be noted that the Bombay High Court in Laura Entwistle and Ors’s case- The Trustees of American School Bombay Education Trust [ TS- 102-HC-2023(Bom)] and the Orissa High Court in Sikhya ‘O’ Anu Sandhan’s case [TS- 04-HC-2023(Ori)] have taken a view that the judgment of the Supreme Court in New Noble’s case should operate prospectively and cannot be applied to earlier period. Of course, the issue of distinction drawn by the Ahmedabad Tribunal was not before the High Courts in these cases.

9.1.3 It is also possible that the Trust pursuing only the object of specific category, say education, may also carry out some incidental activities perceiving the same to be part of education or incidental to the imparting education. In such cases, on facts, a possibility of Revenue treating such other activity as GPU category and invoking the said Proviso can’t be ruled out. If ultimately the Revenue succeeds on this, the risk of losing total exemption under section 11 for that year remains by virtue of the provisions of section 13(8). Therefore, such Trusts will have to be cautious in this respect. Furthermore, if GPU category object is not part of its objects, some further issues may also need consideration [also refer to para 7.7.2.1 above].

9.2 In view of the ratio laid down by the Court in AUDA’s case, the meaning of `charitable purpose’ as applicable post 2008 Amendment in section 2(15) is now settled. In this regard, as stated in para 5.3.3 Part II of this write-up, the predominant object test laid down by the Supreme Court in Surat Art’s case no longer holds good post the 2008 Amendment. Likewise, `ploughing back’ of business income to `feed’ the charity is also not relevant. In this context, the expressions cess, fees, etc. [consideration] should be given purposive interpretation and accordingly, the same should be understood differently for various categories of assessees such as statutory bodies, regulatory authorities, non-statutory bodies, etc. [referred to in para 5.3.2 of Part II of this write-up]. Therefore, the Trust having GPU object will not satisfy the definition of ‘charitable purpose’ in section 2(15) in cases where such Trust carries on any activity in the nature of trade, commerce or business or any activity of rendering any service in relation thereto for consideration [i.e. Commercial Activity] even though its ‘predominant object’ is charitable in nature and even if business income from such activity is utilised to feed the charity. What is now relevant is the fact of undertaking Commercial Activity during the relevant year. However, in such an event, the Trust should ensure that it complies with the twin requirements[ w.e.f. 1st April, 2016 onwards] of relaxations provided [for earlier period also refer para 1.6 of Part I of this write-up] in the said Proviso so as to satisfy the definition of ‘charitable purpose’, namely, (i) the Commercial Activity should be undertaken in the course of actual carrying out of the GPU object [Qualitative Condition]; and (ii) the aggregate receipts from such activity do not exceed 20 per cent of the total receipts of the Trust of that previous year [Quantitative Condition]. In such cases, the Trust also needs to comply with the provisions of section 11(4A).

9.2.1 For the purpose of determining whether the Trust is carrying on any Commercial Activity, the Court has placed significant emphasis on the amount of consideration charged and has stated that generally if, the consideration charged is significantly more than the cost incurred by such Trust, that would fall in the category of consideration towards Commercial Activity and where the consideration charged is at cost or nominal mark-up on the cost incurred by the Trust it should not be regarded as towards Commercial Activity. This is the under lying broad principle for this purpose and this should be borne in mind in every case. At the same time, the fact of determination of mark-up charged is either nominal or significant is left open without any further guidance and this being highly subjective, may lead to litigation. Likewise, the Court has also not dealt with [perhaps rightly so] the meaning of ‘cost’ for this purpose and therefore, in our view, the same should be determined on the basis of generally accepted principles of commercial accounting.

9.2.2 For the above purpose, various explanatory illustrations given by the Court in the above case [referred to in para 5.5.2 of part II of this write-up] are relevant.

9.2.3 For all practical purposes, as a general rule, it is advisable to also maintain separate books of account in respect of each incidental activity carried on by the Trust pursuing any category of object [i.e. Specific, GPU or both] to meet with, wherever needed, the requirement of section 11(4A) so as to avoid possibility of any litigation on non-compliance of requirement of maintaining separate books of account contained in section 11(4A), whenever the same becomes applicable.

9.3 In view of the narrow interpretation of the term `incidental [used in provisions of section 11(4A)] made by the Court [referred to in para 5.4.3 Part II of this write-up] to claim exemption for profits of the incidental business, it would be necessary that the business activity should be conducted in the course of achieving GPU object to be regarded as incidental business activity and of course, the requirement of maintaining a separate books of account for the same also should be met to claim exemption under section 11. Interestingly, for this purpose, the Court has relied on 2008 Amendment with subsequent amendments and also stated that introduction of clause (i) in the said Proviso by amendment of 2016 is clarificatory. In this context, it is worth noting that the Supreme Court in Thanthi Trust’s case [referred to in para 1.4.2 of Part I of this write-up] while dealing with section 11(4A) has taken a view [post-1992 amendment] that business whose income is utilised by the Trust for achieving its charitable objects is surely a business which is incidental to the attainment of its objectives. The Court in AUDA’s case has distinguished this case on the ground [referred to in para 5.4.2 of Part II of this write-up] that in that case, the Court was dealing with a case of Specific Object category [education] and not GPU category object and the ratio of that case cannot be extended to cases where the Trust carries on business which is not held under trust and whose income is utilised to feed the charitable object. It is difficult to appreciate this distinction and both the judgments being of equal bench [three judges], some litigation questioning this view cannot be ruled out.

9.3.1 In the context of distinction between the provisions of section 11(4) and 11(4A), from the observations of the Court [referred to in para 5.4.1 of part II of this write-up], one may be inclined to take a view that if the business is held under trust, then the case of the assessee will fall only under section 11(4) and section 11(4A) would apply only to cases where business is not held under trust. The Court also noted that there is also difference between business held under trust and the business carried on by or on behalf of the trust. Normally, the business undertaking will be considered as held under the trust where it is settled by the donor or trust creator in the trustees. Referring to the test applied in J.K. Trust’s case [referred to in para 5.4.1 of part II of this write-up], the Court also noted that for a business to be considered as property held under trust, it should have been either acquired with the help of funds originally settled or the original fund settled upon the trust must have proximate connection with the later acquisition of the business. We may also mention that similar view is also expressed in the judgment [authored by justice R. V. Easwar] of Delhi High Court [by a bench headed by justice S. Ravindra Bhat- who has now authored the judgment in AUDA’s case] in the case of Mehta Charitable Prajnalay Trust [(2013) 357 ITR 560,572] in which Thanthi Trust’s case judgment has also been considered. It may be noted that observations of the Court [referred to in para 5.4.1] appear to be summarising the position noticed by the Court after referring to earlier judgments and may not necessarily seem to be expressing its view on such legal position. In this context, the judgment of the Supreme Court in Thanthi Trust’s case [referred to para 1.4.2 of Part I of this write-up] is worth noting wherein also business was held under trust and the Court has applied the provisions of section 11(4A).

9.4 Article 289(1) of the Constitution of India exempts property and income of a State from Union taxation. However, Article 289(2) of the Constitution permits the Union to levy taxes inter alia in respect of a trade or business of any kind carried on by, or on behalf of a State Government or any income accruing or arising in connection therewith. In view of this, judgment in AUDA’s case has held that every income of state entity is not per se exempt from tax. State controlled entities will have to evaluate whether the functions performed by them are actuated by profit motive or whether the same are in the nature of essential service provided in larger public interest. In this regard, the Court has laid down certain tests [referred to in para 7.2.3 above]. As clarified by the Court [refer para 5.3.3 of Part II of this write-up], statutory fees or amounts collected by state entities as provided in the enactments under which they have been set up will not be treated as business or commercial in nature. The same view emerges in respect of fees/cess etc. collected in terms of enacted law [by state or center] on amount collected in furtherance of activities such as education, regulation of profession etc. by regulatory authority/body.

9.5 The Revenue had filed a miscellaneous application before the Supreme Court seeking clarifications in the aforesaid decision of AUDA so as to enable it to redo the assessments in accordance with the Court’s judgment for the past and examine the eligibility on a yearly basis for the future. The Court in its order dated 3rd November, 2022 ([2022] 449 ITR 389 (SC)) disposed of the application and held that the appeals decided against the Revenue were to be treated as final. With respect to the applicability of the judgment to other years, the Court stated that the concerned authorities would apply the law declared in its judgment having regard to the facts of each such assessment year.

9.6 In view of the above judgment of the Court in AUDA’s case, the popular understanding that beneficial circular issued by the CBDT under section 119 are binding on the Revenue authorities in all cases has again come-up for questioning. In this case, the Court has opined [as stated in para 5.3 of Part II of this write-up] that such circulars are binding on the Revenue authorities if they advance a proposition within the framework of the statutory provision. However, if they are contrary to the plain words of a statute, they are not binding. Furthermore, the Court has also stated that such circulars are also not binding on the courts and the courts will have to decide the issue based on its interpretation of a relevant statute. As such, the debate will again start as to the binding effect of such circulars which are considered by the assessing officers as contrary to the plain words of the statue. It is unfortunate that on this issue, the debate keeps on resurfacing at some intervals and something needs to be positively done in this regard to finally settle the position on this issue to provide certainty.

9.7 Clause (46A) is inserted in section 10 by the Finance Act, 2023 to exempt any income arising to a body or authority or Board or Trust or Commission, not being a company, which has been established or constituted by or under a Central or State Act with one or more of purposes specified therein and is notified by the Central Government in the Official Gazette. The following purposes are specified in the said clause (i) dealing with and satisfying the need for housing accommodation; (ii) planning, development or improvement of cities, towns and villages; (iii) regulating, or regulating and developing, any activity for the benefit of the general public; or (iv) regulating any matter, for the benefit of the general public, arising out of the object for which the entity has been created. Therefore, statutory authorities /bodies, etc. can get themselves notified under this provision to avoid the potential litigation for claiming exemption under section 11 and in such cases, the above judgment in AUDA’s case will not be relevant.

9.8 Unlike the judgment of the Supreme Court in New Noble Education Society’s case [(2022) 448 ITR 598 – considered in this column in BCAJ January and February, 2023], the Court has not stated that the judgment in AUDA’s case will apply prospectively. Therefore, as per the settled position, this decision will act retrospectively and accordingly, will apply to all past cases also post 2008 Amendment. As such, post the above judgment in AUDA’s case, various benches of the Tribunal and Courts have started considering this judgment for deciding matters coming before them. Some of such cases are briefly noted herein.

9.8.1 The Supreme Court in Servants of People Society’s case [(2022) 145 taxmann.com 234 /(2023) 290 Taxman 127] vide order dated 21st October, 2022 summarily disposed of the SLP filed by the Revenue challenging the decision of the Delhi High Court [(2022) 145 taxmann.com 145] in terms of its decision in AUDA’s case by observing that the matter is fully covered by that judgment. In this case, it is worth noting that the assessee-society ran schools, medical centers and also a printing press and published a newspaper. The profits so generated were used for charitable purposes and, apparently, the activities of the assessee were not for profit motive. The Delhi High Court [seems to be for A.Ys 2010-11, 2012-13 to 2014-15] had held that the assessee was not involved in any trade, commerce or business and, therefore, the mischief of said Proviso to section 2(15) of the Act was not attracted. Interestingly, while dealing with the appeal of the Revenue in the case of the same assessee for a different assessment year [seems to be for A.Y. 2011-12 as mentioned in the High Court judgment reported in [(2022) 447 ITR 99], the Supreme Court in order dated 31st January, 2023 [(2023) 452 ITR 1-SC] noted that the Society was running schools, medical center, old age home etc. as well as printing press for publishing newspaper and further noted that the assessee society claimed exemption in respect of income from newspapers which included advertisement revenue of Rs. 9,52,57,869 and surplus of Rs.2,16,50,901. After noting these facts, the Court held that the law regarding interpretation of section 2(15) of the Act had undergone a change due to the decision in AUDA’s case for which the Court referred to its conclusion in AUDA’s case in relation to Tribune Trust’s case [referred to in para 7.7 above] and noted that in that case it was held that while advertisement is intrinsically linked with the newspaper activity which satisfies the requirement of carrying out such activity in the course of actually carrying on the activity towards advancement of object [referred to in clause (i) of the said Proviso– Qualitative Condition]but the condition of quantitative limit imposed in clause (ii) of the said Proviso has also be fulfilled. Accordingly, the Court remitted the matter to the AO for fresh consideration of the nature of receipts in the hands of the assessee and to re-examine as to whether the amounts received by the assessee qualify for exemption under section 11.

9.8.2 The Gujarat High Court in the case of GIDC [(2023) 442ITR 27] has followed the above judgment in AUDA’s case and confirm the view of the Tribunal granting the exemption to the assessee for A.Y. 2015-16. For this, the High Court has relied on the view taken by the Supreme Court in AUDA’s case[ being the first category of assessee therein] as well as on the general interpretation of the definition of ‘charitable purpose’ under section 2(15) post 2008 Amendment.

9.8.3 The Mumbai bench of Tribunal in case of The Gem & Jewellery Export Promotion Council [ITA Nos. 752/MUM/2017, 989/MUM/2019 and 2250/MUM/2019- Assessment Years 2012-13 to 2014-15] had an occasion to consider the assessee’s claim for exemption under section 11 which was denied by the AO by treating the activity of conducting exhibitions on a large scale [international as well as domestic] as Commercial Activities under the said Proviso and that was also upheld by the CIT(A).After elaborate discussion and considering the judgment of the Court in AUDA’s case[ including in relation to AEPC’s case referred to in paras 7.4 & 7.4.1 above], the Tribunal noted that the assessee had incurred a net loss from this activity of exhibitions conducted within and outside India in each year as revealed by the records. Factually, the assessee has charged consideration for conducting exhibitions/trade fairs slightly below the cost. As such, there being no mark-up on consideration charged from the exporters, in the broad principles laid down by the Court in AUDA’s case, this activity is beyond the preview of Commercial Activity as envisaged in the said Proviso and the assessee is entitled to claim exemption under GPU category objects.

9.8.3 In some cases, the Tribunal has decided the issue against the assessee following the law laid down in the above judgment in AUDA’s case such as : (i) Fernandez Foundation’s case[(2023) 199 ITD 37 – Hyd] wherein the assessee’s application for registration under section 12AA was rejected, inter alia, on the ground that the assessee was involved in activities which were in the nature of trade and provided medical facilities at market rates and, in fact, the amount charged by the assessee was far more than the amount charged by other diagnostics centers/hospitals for similar tests/ diagnostic/ treatment. The Tribunal upheld the order of CIT(E) and stated that assessee neither provided services at reasonable rate nor utilised its surplus for helping medical aid/facilities to the poor/needy persons at free of cost. Treatments were provided only to limited patients at a concessional rate which was a meagre portion of its total revenue earned. ITAT also referred to the decision of the Supreme Court in AUDA’s case and the observations made therein examining the issue of profit generated by charities engaged in GPU objects and observed that the CIT(E) was correct in holding that the assessee was charging on the basis of commercial rates from the patients and had failed to demonstrate that the charges/fee charged by it were on a reasonable markup on the cost; (ii) In Maharaja Shivchatrapati Pratishsthan’s case [(2023) 199 ITD 607], the Pune Bench of Tribunal rejected the claim of exemption under section 11 for A.Y. 2013-14 following AUDA’s case and stated that crux of the interpretation of the said Proviso to section 2(15) is to first examine the receipts of the assessee from pursuing GPU category object are on cost-to-cost basis or having a nominal profit on one hand or having a significant mark-up on cost on the other hand and the latter cases are a business activity but the former is non-business activity. Noting the fact on record that in this case the revenue from performing drama for various institutes/companies was Rs 1.96 crores and the cost for such performance was only Rs. 1.16 crores, the Tribunal took the view that profit elements in drama performance is more than 40 per cent of the gross receipts and that patently falls in the category ‘significant mark-up cases’ and hence business activity. Considering the significant margin on performing drama uniformly, the Tribunal took the view that this activity is in nature of business activity and ceases to fall within the domain of ‘chartable purpose’ as the business receipts exceeds 20 per cent of total receipts. The Tribunal also took the view that the contention of the assessee that the review petition has been filed in AUDA’s case is not relevant as that does not alter in any manner binding force of the judgment in terms of Article 141 of the Constitution of India.

9.9 As mentioned in para 7.1 above, the Court had divided the appeals before it into six categories of assessees and the Court has dealt and decided each category of assessee’s case [ as referred to in para 7.2 to 7.7.2.2 above] and also given summation of conclusions [as mentioned in para 8 above].In this concluding part of the write-up, we have only briefly dealt with the major general principles emerging from the judgment in AUDA’s case as mainly applicable to GPU categories of cases and not separately dealt with the Court’s conclusion of each category of assessees for the same reasons as stated in para 8.1 above. In all these cases, the decision of the Court is applicable for the assessment years in appeals and other year cases will have to be decided on yearly basis considering the facts in relevant year based on the law laid down by the Court in the above case.

9.10 If the exemption under section 11 is lost by the Trust in a given year on account of applicability of the said Proviso, then its taxable income now will have to be computed in accordance with the provision of section 13(10) read with section 13(11) introduced by the Finance Act, 2022 [w.e.f. 1st April, 2023] which, to an extent, brings certainly on this and give some comfort for determining tax liability. Furthermore, in our view, merely because the exemption is lost in a given year in such cases, the Registration granted to the Trust does not become liable to be cancelled.

9.11 At the time of 2008 Amendment, the possibility of an adverse view in many cases was perceived by many tax professionals as well as by some senior counsel and some trusts while claiming exemption under section 11, also started paying advance tax out of abundant caution. As such, the possibility of adverse judgment from the Supreme Court based on the clear language of the said Proviso was not ruled out. However, in this context, the judgment in the AUDA’s case seems to have gone far beyond the perception formed at that time. As such, the judgment, on an overall basis, is likely to create unending uncertainty and in large number of cases, possibly, give rise to long-drawn litigations. It was expected when this judgment was pronounced that the Government will make appropriate amendment in the said Proviso to make the law fair and reasonably workable but unfortunately, in the Finance Act, 2023 this has not been done except insertion of section 10(46A) [referred to in para 9.7 above] for the benefit of statutory authorities, etc. In the recent past, more so with the recent amendments in past few years, the feeling has started developing amongst those who are sparing time and resources for bonafide philanthropic purposes that the Charitable Trusts are, perhaps, treated in the most uncharitable manner in this respect and this is not a good sign for the nation. May be, in some cases, the Revenue may have noticed abuse of the exemption provisions. But the larger question is: is it fair to punish the entire community of charity by making such provision?

shailesh.kwebmaker

Section 127 – Transfer of case – Instructions of CBDT dated 17th September, 2008 – cogent material or reasons, for the transfer of the case should be disclosed – request for transfer of jurisdiction is not binding:

7 Kamal Varandmal Galani vs. PCIT -19
[WP (L) No. 38534 of 2022,
Dated: 20th April, 2023, (Bom) (HC)]

Section 127 – Transfer of case – Instructions of CBDT dated 17th September, 2008 – cogent material or reasons, for the transfer of the case should be disclosed – request for transfer of jurisdiction is not binding:

The Petitioner has been filing his income returns in Mumbai for the last 22 years, the last of which was filed electronically from Mumbai on 31st December, 2021 for the A.Y. 2021-22. A notice dated 24th June, 2022 came to be issued by the PCIT – 19 informing the Petitioner regarding the proposed transfer of assessment jurisdiction from the DCIT -19(3) to the DCIT Central Circle-3, Jaipur, with a view to enable a proper and co-ordinated assessment along with the assessment in the case of Veto Group, Jaipur on whom search proceedings were conducted under section 132 of the Act. The show cause notice stated that the PCIT (Central), Rajasthan vide a communication dated 16th February, 2022 had proposed for centralisation of the case of the Petitioner with Vito Group at Jaipur and, therefore, the Petitioner was asked to file his submissions in that regard.

Section 127 of the Act authorises inter alia the Principal Chief Commissioner to transfer any case from one or more AO subordinate to him to any other AO also subordinate to him, after recording reasons and after giving to the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so. Section 127(2) further envisages that where the AOs from whom the case is to be transferred and the AOs to whom the case is to be transferred are not subordinate to the same officer, then there ought to be an agreement between the Principal Commissioner or other authorities mentioned in the said sub-section exercising jurisdiction over such assessing offcers, and an Order can then be passed after recording reasons and providing the assessee a reasonable opportunity of being heard in the matter.

Objections to the transfer of jurisdiction were filed by the Petitioner, wherein, it was stated that there was no basis for transfer of the assessment jurisdiction of the Petitioner from DCIT- 19(3), Mumbai to the DCIT Central Circle-3, Jaipur as there was no material found during the search operation, which would connect the Petitioner with the Vito Group of Jaipur. It was also stated that no such search was conducted in terms of Section 132 of the Act on the premises of the Petitioner, although, a survey under section 133A of the Act was conducted in the case of M/s Landmark Hospitality Pvt Ltd in Mumbai in which the Petitioner was a Director. It was also stated that during the course of survey proceeding, statement of the Petitioner had been duly recorded and further that there was no incriminating material found during the survey proceeding so conducted, which would connect either the Petitioner or even M/s Landmark Hospitality Pvt Ltd with the Vito Group of Jaipur in whose case the search action had been conducted. It was further urged that the Petitioner had also highlighted the fact that in the show cause notice, no mention had been made as regards there being any material collected by the revenue against the Petitioner, on the basis of which, the transfer of the jurisdiction could be contemplated.

Objections raised by the Petitioner came to be decided and rejected by virtue of the Order dated 21st November, 2022.

Reply affidavit has been filed by the Respondent-revenue, wherein it is stated that the assessment jurisdiction of the Petitioner was transferred to Rajasthan for an effective investigation and meaningful assessment after fulfilling the applicable procedural and legal requirements as stated under section 127 of the Act.

The Court noted that, in the reply, there was no specific averment made that there was anything incriminating found either during the survey proceeding conducted on M/s Landmark Hospitality Pvt Ltd, of which the Petitioner was a Director, or during the search proceedings conducted on the Vito Group, which would connect either M/s Landmark Hospitality Pvt Ltd or the Petitioner to the Vito Group of Jaipur. The survey report and records prepared in regard to the survey proceedings on M/s Landmark Hospitality Pvt Ltd does reflect that there was no inventory prepared during the survey proceeding, suggesting that there was nothing incriminating found.

From the reply filed by the Respondent revenue the authorities only seem to be speculating that the incriminating documents and data found and seized/impounded ‘may relate to the assessee as well as other assesses of this group.’ The PCIT, therefore, did not appear to be in possession of any material at all, based upon which he could draw his satisfaction that the assessment jurisdiction deserved to be transferred from DCIT-19(3), Mumbai to the DCIT Central Circle-3, Jaipur and rather appears to have speculated that only because there was a search/survey conducted and a request made by the concerned PCIT (Central), Rajasthan, the jurisdiction had to be transferred following the instructions of CBDT dated 17th September, 2008. Reference to the instructions dated 17 September 2008 relied upon by the Respondent-revenue is pertinent and in particular clause (d), which is reproduced herein under:

“(d) The ADIT (Inv.) should send proposal for centralization through the Addl. DIT (Inv.) to the DIT(Inv.) who in turn should send the proposal to the CIT (C) or the CIT as mentioned in (C) above as the case may be within 30 days of initiation of search. The proposal should contain names of the cases their PANs, the designation of the present assessing officers and the present CIT charge. The list should also contain the connected cases proposed to be centralized along with reasons thereof including their relationship with the main persons of the group. The assessees not having PAN should also be included along with their addressees and territorial jurisdiction. Against each of the cases, it should be mentioned whether it is covered u/s 132(1) of 132A or 133A(1) or it is a connected case copies of the proposal should also be endorsed to the CCIT concerned from whose jurisdiction the cases are to be transferred and the DGIT(Inv.)/CCIT(C) to whose jurisdiction the cases are being transferred.”

The Court observed that the instructions make it clear that while sending a proposal for centralization, reasons had to be reflected including the relationship of the petitioner with the main persons of the group. No such sustainable reasons are forthcoming from the records except speculation connecting the Petitioner and the subject material and a request from the PCIT, Jaipur for centralisation of the case. In fact, the Deputy Commissioner of Income tax-19(3), Mumbai ought to have refused to accede to the request for centralization inasmuch as it had not received any cogent material or reasons, which would have formed a basis for the transfer of the case to the DCIT Central Circle-3, Jaipur. The Court noted that transfer of assessment jurisdiction from Mumbai to Jaipur would certainly cause inconvenience and hardship to the petitioner both in terms of money, time and resources. Therefore, the order impugned in the absence of the requisite material/reasons as the basis would be nothing but an arbitrary exercise of power and therefore liable to be set aside.

The Court held that the Order impugned passed under section 127(2) of the Act, does not at all reflect as to why it was necessary to transfer the jurisdiction from DCIT- 19(3), Mumbai to DCIT Central Circle-3, Jaipur. None of the issues raised by the Petitioner have been dealt with either in the Order dated 21st November, 2022 disposing of the objections raised by the Petitioner, much less have the same been reflected in the Order impugned under section 127(2) of the Act. The AO appears to have acted very mechanically treating the request from DCIT Central Circle-3, Jaipur, as if it was binding upon him.

The Court observed that the said request was not at all binding inasmuch as if it was so, then the agreement envisaged under section 127(1)(a) would be rendered superfluous. The agreement envisaged in terms of aforesaid section is not in the context of showing deference to a request made by a colleague or higher officer, but an agreement based upon an independent assessment of the request in the light of the reasons recorded seeking transfer of the jurisdiction. In fact, section 127(1)(b) contemplates a situation where in the event of a disagreement, the matter is referred to an officer as the Board may, by notification in the Official Gazette, authorise in that behalf. Not only this, if a request for transfer of jurisdiction was to be treated as binding, then it would have rendered otiose Section 127 to the extent the same envisages an opportunity of being heard to be provided to the Petitioner. The obligation on the part of the AO to record reasons before ordering the transfer of the case and the right of the assessee to be heard in the matter are not hollow slogans but prescribed to achieve a particular purpose and the purpose is to remove any element of arbitrariness while exercising powers under section 127 of the Act. If the request for transfer of jurisdiction was so sacrosanct as could not be refused, then the opportunity of being heard would be nothing but illusory rendering the request a foregone conclusion regarding its acceptance. Therefore, the Court was not convinced at all that the request made by the concerned officer from Jaipur, had necessarily to be allowed as per the Instructions dated 17th September, 2008.

The Order impugned was unsustainable in law and was, accordingly, set aside.

shailesh.kwebmaker

Exparte order – Stay of Demand – CBDT instructions dated 31st July, 2017 – Averment made that addition was unsustainable – PCIT to pass speaking order on the contentions raised in the application:

6 Amtek Transportation Systems Ltd vs. ACIT, Circle-1(1), New Delhi & Ors,
[WP (C). 5197 OF 2023 & CM Nos. 20269 -70 of 2023; A.Y. 2021-22.
Dated: 25th April, 2023, (Del.) (HC)]

Exparte order – Stay of Demand – CBDT instructions dated 31st July, 2017 – Averment made that addition was unsustainable – PCIT to pass speaking order on the contentions raised in the application:

An ex parte assessment order was passed on 27th December, 2022 under section 144 read with section 144B of the Act. This was followed by a demand notice dated 27th December, 2022 of Rs.129,70,09,500 for A.Y. 2021-22.

The Petitioner’s bank account was attached by virtue of an order dated 5th March, 2023 issued by the concerned authority.

The Petitioner had filed an application dated 15th March, 2023, wherein certain averments were made to set up a prima facie case for staying the demand. The aspects concerning balance of convenience and irreparable injury were also, adverted to in the application.

The department vide impugned order dated 08th April, 2023, rejected the application for stay of the operation of demand notice without any cogent reasons.

The petitioner, in terms of the impugned order dated 8th April, 2023 was directed to deposit Rs. 25,94,01,900 if it wishes to have the benefit of stay on the demand notice.

The Petitioner stated that it was unable to meet the terms of the impugned order, the demand itself was, prima facie, substantially unsustainable. It was further contented, that the value of the total assets available with the petitioner was approximately Rs. 21.91 crores, and that it has a turnover of nearly Rs. 2.15 crores. It was also contented, that the petitioner, has a negative net worth. It was emphasised, that its current liabilities, nearly, amount to Rs. 99 crores.

The Honorable High Court noted that on perusal of the order dated 8th April, 2023 it shows that the concerned authority has simply taken recourse to the CBDT instructions dated 31st July, 2017, issuing the direction that the outstanding demand will remain stayed, provided 20 per cent of the outstanding demand is deposited. Though the petitioner had indicated in its reply, that a substantial part of the addition was unsustainable.

The Court observed that the petitioner has averred in the application, that the AO has added the entire amount, which was shown as current liabilities, i.e., Rs. 99,86,14,787 on account of the fact that there was no explanation. Furthermore, expenses amounting to Rs. 71,64,71,368 have also been disallowed by the AO, on the grounds that there was no explanation. However, the Petitioner claims that these very expenses were added back by the petitioner on its own, and therefore, no explanation was required. These aspects, were inter alia referred to in the application for stay, which the concerned authority have not dealt with, while dealing with the petitioner’s application for grant of stay. If the demand was likely to get scaled down for the reasons adverted to in the petitioner’s application, these aspects will have to be taken into account by the concerned authority, while dealing with the application for stay.

The Court observed that the AO has merely gone by the CBDT instructions dated 31st July, 2017 and granted stay, on deposit of 20 per cent of the outstanding demand.

The Court referred to the Supreme Court decision in case of PCIT vs. M/s LG Electronics India Pvt Ltd (2018) 18 SCC 447 wherein it was held that the requirement to deposit 20 per cent of the demand is not cast in stone. It can be scaled down in a given set of facts.

Thus, for the aforesaid reasons, the Court set aside the order dated 8th April, 2023 The Court further directed the PCIT to carry out the de novo exercise, and take a decision on the application for stay preferred by the petitioner after granting personal hearing to the authorised representative of the petitioner. Further, the PCIT was directed to also pass a speaking order and deal with the assertions made by the Petitioner in the stay application.

The Petitioner stated that the amount lying to the credit of the petitioner in the subject bank account could be remitted to the concerned authority, subject to the debit-freeze being lifted. The Court issued a direction, to the effect that the entire amount which is available in the subject bank account shall stand remitted to the PCIT and the debit-freeze ordered by the concerned authority shall stand lifted.

shailesh.kwebmaker

Reassessment – Law applicable – Effect of amendment to sections 147 to 151 by Finance Act, 2021 and Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 – Credit Instruction No. 1 of 2022 has no binding force.

20 Rajeev Bansal vs. UOI
[2023] 453 ITR 153 (All):
A. Y.: 2013-14 to A.Y. 2017-18
Date of order: 22nd February, 2023:
Sections. 147 to 151 of ITA 1961 and Article 142 and 226 of Constitution of India

Reassessment – Law applicable – Effect of amendment to sections 147 to 151 by Finance Act, 2021 and Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 – Credit Instruction No. 1 of 2022 has no binding force.

The assessment years under challenge are A.Y. 2013-14 to A.Y. 2017-18. The dispute pertains to the issue of notice under section 148 of the Income-tax Act, 1961 after 1st April, 2021 without following the new regime of tax for reopening of assessment applicable with effect from1st April, 2021. The assessees contended that re-opening of assessment for A. Y. 2013-14 and A.Y. 2014-15 could not be done since the maximum period prescribed in the pre-amended provisions had expired on 31st March, 2021 and therefore the notices issued between 1st April, 2021 to 30th June, 2021 for AYs. 2013-14 and 2014-15 were time barred. For the AYs. 2015-16 to 2017-18, the contention raised was regarding the monetary threshold and the other requirements prescribed under the new provisions of re-opening with effect from 1st April, 2021.

Various notices were challenged before the High Courts on the basis of the above and the High Courts took the view that the re-assessment notices issued after 01.04.2021 under the pre-existing provisions by applying extension of time with the help of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 were to be quashed and further held that the assessing authorities were at liberty to initiate re-assessment proceedings in accordance with the provisions of the Act.

The matters from various High Courts travelled to the Supreme Court and the Supreme Court held that the Department should not have issued notices under the unamended provisions and the notices issued after 01.04.2021 should have been issued under the substituted provisions of section 147 to 151 of the Act. However, in order to strike a balance, the Supreme Court directed that the notices issued under the unamended provisions of the Act shall be deemed to have been issued u/s. 148A as per the substituted provisions.

Pursuant to the Supreme Court decision, the CBDT issued directions regarding implementation of the judgment of the Supreme Court. Thereafter, the Department, in pursuance of the decision of the Supreme Court and the directions issued by the CBDT issued notices providing with the material or information on the basis of which re-opening was initiated and proceeded to pass orders u/s. 148A(d) of the Act holding that notice u/s. 148 should be issued.

These orders were challenged by filing writ petitions. The Allahabad High Court framed the following two questions for deciding the issues:

“(i) Whether the reassessment proceedings initiated with the notice u/s. 148 (deemed to be notice u/s. 148A), issued between April 1, 2021 and June 30, 2021, can be conducted by giving benefit of relaxation/extension under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, (TOLA) 2020 up to March 30, 2021, and then the time limit prescribed in section 149(1)(b) (as substituted with effect from April 1, 2021) is to be counted by giving such relaxation, benefit of TOLA from March 30, 2020 onwards to the Revenue ?

(ii) Whether in respect of the proceedings where the first proviso to section 149(1)(b) is attracted, benefit of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 will be available to the Revenue, or in other words the relaxation law under Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 would govern the time frame prescribed under the first proviso to section 149 as inserted by the Finance Act, 2021, in such cases ?”

The High Court held as under:

“i) Sweeping amendments have been made in sections 147 to 151 of the Income-tax Act, 1961 by the Finance Act, 2021. The radical and reformative changes governing the procedure for reassessment proceedings in the substituted provisions are remedial and benevolent in nature. A comparison of pre and post amendment section 149 indicates that the period of notice for reassessment proceedings in the pre-amended section 149 was four years and six years. Whereas in the post-amendment section 149(1), the time limit within which notice for reassessment u/s. 148 can be issued is three years in clause (a) and can be extended upto ten years after the lapse of three years as per clause (b), but there is substantial change in the threshold requirements which have to be met by the Revenue before issuance of reassessment notice after the lapse of three years u/s. 149(1)(b). Nor has the only monetary threshold been substituted but the requirement of evidence to arrive at the opinion that the income escaped assessment has also been changed substantially. A heavy burden is cast upon the Revenue to meet the requirements of section 149(1)(b). The first proviso to section 149(1) provides that notice u/s. 148, in a case for the relevant assessment year beginning on or before April 1, 2021, cannot be issued, if such notice could not have been issued at the relevant point of time, on account of being beyond the time limit specified under the unamended provisions section 149(1)(b). The time limit in the unamended section 149(1)(b) of six years, thus, cannot be extended up to ten years under the amended section 149(1)(b), to initiate reassessment proceedings in view of the first proviso to sub-section (1) of section 149. In other words, the case for the relevant assessment year where the six year period has elapsed as per unamended 149(1)(b) cannot be reopened, after commencement of the Finance Act, 2021, with effect from April 1, 2021.

ii) The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 is an enactment to extend timelines only from April 1, 2021 onwards. Consequently, from April 1, 2021 onwards all references to issuance of notice contained in the 2020 Act must be read as reference to the substituted provisions only. In the case of Ashish Agarwal, the Supreme Court invoked its power under article 142 of the Constitution. From a careful reading of the judgment of the Supreme Court, there is no doubt that the view taken by the court in Ashok Agarwal on the legal principles and the reasoning for quashing the notices u/s. 148 of the unamended Income-tax Act, issued after April 1, 2021 had been affirmed in toto. The result is that all notices issued under the unamended Income-tax Act were deemed to have been issued u/s. 148A of the Income-tax Act as substituted by the Finance Act, 2021 and construed to be show-cause notices in terms of section 148A(b) of the Income-tax Act. The inquiry as required u/s. 148A(b) was to be completed by the officers and after passing orders in terms of section 148A(d) in respect of the assessee, notice u/s. 148 could be issued after following the procedure as required u/s. 148A. As a one time measure, the requirement of conducting an inquiry with the approval of specified authority at the stage of section 148A(a) was dispensed with.

iii) In the absence of any express saving clause, in a case where reassessment proceedings had not been initiated prior to the legislative substitution by the Finance Act, 2021, the extended time limit of unamended provisions by virtue of the 2020 Act cannot apply. In other words, the obligations upon the Revenue under clause (b) of sub-section (1) of amended section 149 cannot be relaxed. The defences available to the assessee in view of the first proviso to section 149(1) cannot be taken away. The notifications issued by the Central Government in exercise of powers u/s. 3(1) of the 2020 Act cannot infuse life in the unamended provisions of section 149 by this way. As held by the Supreme Court, all defences which may be available to the assessee including those available u/s. 149 of the Income-tax Act and all rights and contentions which may be available to the assessee and revenue under the Finance Act, 2021 shall continue to be available to assessment proceedings initiated from April 1, 2021 onwards.

iv) Clause 6.2 of the directions issued by the CBDT pursuant to the Supreme Court decision deals with the cases of the A. Ys. 2013-14 to 2017-18 and are based on the misreading of the judgment of the Supreme court. Terming reassessment notices issued on or after April 1, 2021 and ending with June 30, 2021 as “extended reassessment notices”, within the time extended by the 2020 Act and various notifications issued thereunder is an effort of the Revenue to overreach the judgment of the court in Ashok Kumar Agarwal as affirmed by the Supreme Court in Ashish Agarwal. In any case, the Central Board of Direct Taxes Instruction No. 1 of 2022 dated May 11, 2022 ([2022] 444 ITR (St.) 43), issued in exercise of its power u/s. 119 of the Income-tax Act, as per the Revenue’s own stand, is only a guiding instruction issued for effective implementation of the judgment of the Supreme Court in Ashish Agarwal. The instructions issued in the third bullet to clause 6.1 and clause 6.2 (i) and (i), being in teeth of the decision of the Supreme Court have no binding force.

v) The reassessment proceedings initiated with the notice u/s. 148 (deemed to be notice u/s. 148A), issued between April 1, 2021 and June 30, 2021, could not be conducted by giving benefit of relaxation/extension under the Taxation and Other Laws (Relaxation And Amendment of Certain Provisions) Act, 2020 up to March 30, 2021, and the time limit prescribed in section 149(1)(b) (as substituted with effect from April 1,2021) could not be counted by giving such relaxation from March 30, 2020 onwards to the Revenue.

(vi) In respect of the proceedings where the first proviso to section 149(1)(6) is attracted, the benefit of the 2020 Act would not be available to the Revenue, or in other words, the relaxation law under the 2020 Act would not govern the time frame prescribed under the first proviso to section 149 as inserted by the Finance Act, 2021, in such cases.

(vii) That the reassessment notices issued to the assessee in this bunch of writ petitions, on or after April 1, 2021 for different assessment years (the A. Ys. 2013-14 to 2017-18), had to be dealt with, accordingly, by the Revenue.”

shailesh.kwebmaker

Reassessment – Notice – Limitation – Effect of Amendment to Sections 147 to 151 by Finance Act, 2021 and Taxation and Other Laws (Relaxation and amendment of Certain provisions) Act, 2020 and notification issued under it – CBDT Instruction No. 1 of 2022 could not override provisions of law or decision of Supreme Court – Order passed under section 148A(d) and notice issued under section 148 on 26.07.2022 for A. Ys. 2013-14 and 2014-15 – Barred by limitation:

19 Keenara Industries Pvt. Ltd vs. ITO
[2023] 453 ITR 51 (Guj)
A. Ys.: 2013-14 and 2014-15
Date of order: 7th February 2023

Sections. 147 to 151 of ITA 1961 and Art. 226 of Constitution of IndiaReassessment – Notice – Limitation – Effect of Amendment to Sections 147 to 151 by Finance Act, 2021 and Taxation and Other Laws (Relaxation and amendment of Certain provisions) Act, 2020 and notification issued under it – CBDT Instruction No. 1 of 2022 could not override provisions of law or decision of Supreme Court – Order passed under section 148A(d) and notice issued under section 148 on 26.07.2022 for A. Ys. 2013-14 and 2014-15 – Barred by limitation:

During the period between 1st April, 2021 to 30th June, 2021, the Department had issued a notice under section 148 of the Income-tax Act, 1961 for A. Y. 2013-14 and A.Y. 2014-15 under the old provisions of the Act despite the fact that new regime of re-opening of provisions had come into force. This was challenged and the matter eventually travelled to the Apex Court, which vide its judgment dated 4th May, 2022 in case of Union of India & Ors. vs. Ashish Agarwal (2022) 444 ITR 1 (SC) adjudicated the issue as to the validity of such reopening notices issued across the nation and gave certain directions to the Department. Consequent to the aforesaid decision of the Supreme Court, the assessing officer issued show cause notice under section 148A(b) and supplied the relevant material on the basis of which the case was sought to be re-opened. Thereafter, on July 26, 2022, the AO passed order under section 148A(d) and issued the consequent notice under section. 148 dated 22nd July, 2022.

The assessee filed a writ petition and challenged the validity of the order under section 148A(d) and the notice under section 148 both dated 26th July, 2022. The Gujarat High Court allowed the writ petition and held as under:

“i) Under the new scheme of reassessment as contained in the Finance Act, 2021 the time limit for issuance of notices u/s. 148 of the Act under the substituted provision of section 149 of the Act have been substantially modified. Clause (a) of sub-section (1) of section 149 of the Act makes the originally prevailing four year period to three years, whereas clause (b) has extended the previously prevailing limit of six years to ten years in cases where income chargeable to tax has escaped assessment amounting to Rs. 50 lakhs or more. While enacting the Finance Act, 2021, Parliament was aware of the existing statutory laws both under the Act as amended by the Finance Act, 2021 as also the Ordinance and the 2020 Act and notification issued thereunder. However, the new scheme for reassessment which was made effective from April, 1, 2021 does not have any saving clause. The notification dated March 31, 2021 came to be issued before the amended provision of re-opening came into force and thus, the notification was applicable to the unamended provision of reopening. The unamended provisions of re-opening ceased to exist from April 1, 2021, the extension by notification could have no applicability. Notification dated April 27, 2021 was in continuity of the earlier notification dated March 31, 2021 as the unamended provisions of reopening ceased to exist on April 1, 2021. No notification can extend the limitation of the repealed Act.

ii) In Ashish Agarwal’s case, the Supreme Court, after detailed consideration of provisions of law and extensive submissions made by both the sides, held that the new provision substituted by the Finance Act, 2021 being remedial and benevolent in nature and substituted with the specific aim and protect the right and interest of the assessee as well as being in public interest, respective High Courts have rightly held that the benefit of new provisions shall be made available even in respect of the proceedings relating to the past assessment year provided u/s. 148 of the Act notice has been issued on or after April 1, 2021. The Supreme Court was in complete agreement with the view taken by various High Courts in holding so. At the same time, being concerned about the revenue being remediless as this judgment would result into absence of reassessment proceedings, the Supreme Court permitted the respective notices u/s. 148 of the Act to be deemed to have been issued u/s. 148A of the Act as substituted by the Finance Act, 2021 and to be treated as the show cause notice in terms of section 148A(b) of the Act.

iii) The test to determine the validity of notice issued after March 31, 2021 is that they should be permissible under the Finance Act, 2021. The Central Board of Direct Taxes Instructions No. 1 of 2022 dated May 11, 2022 ([2022] 444 ITR (St.) 43) surely cannot override the provisions of law or the decision of the Supreme Court.

iv) The Assessing Officer had issued the reassessment notices on or after April 1, 2021 under the erstwhile sections 148 to 151 of the Act relying on Notification No. 20 of 2021 dated March 31, 2021 ([2021] 432 ITR (ST.) 141) and Notification No. 38 of 2021 dated April 2021 dated April 27, 2021 ([2021] 434 ITR (St.) 11), which extended the applicability of those provisions as they stood on March 31, 2021 before the commencement of the Finance Act, 2021 beyond the period of March 31, 2021. Since as per the scheme prescribed under the first proviso to the amended section 149 of the Act, six years had already elapsed from the end of the relevant assessment years the notices issued u/s. 148 of the Income-tax Act, as well as the order dated July 26, 2022, passed u/s. 148A(d) for the A. Ys. 2013-14 and 2014-15 were barred by limitation.”

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Reassessment — Notice under section 148 — Sanction of prescribed authority — One of two reasons recorded already considered by Principal Commissioner in revision and proceedings dropped accepting assessee’s explanation — Sanction for notice under section 148 given without application of mind — Notice not valid: Sections 147, 148, 151 and 263 of ITA 1961: A. Y. 2012-13:

18 Godrej and Boyce Manufacturing Co Ltd vs. ACIT
[2023] 453 ITR 10 (Bom.)
A. Y.: 2012-13
Date of order 13th January, 2023
Sections. 147, 148, 151 and 263 of ITA 1961

Reassessment — Notice under section 148 — Sanction of prescribed authority — One of two reasons recorded already considered by Principal Commissioner in revision and proceedings dropped accepting assessee’s explanation — Sanction for notice under section 148 given without application of mind — Notice not valid: Sections 147, 148, 151 and 263 of ITA 1961: A. Y. 2012-13:

For the A. Y. 2012-13 the AO issued a notice under section 148 of the Income-tax Act, 1961. The assessee filed writ petition and challenged the notice. The Bombay High Court allowed the petition and held as under:

“i) The sanctioning authority u/s. 151 of the Income-tax Act, 1961 is duty bound to apply his or her mind to grant or not to grant approval to the proposal put up before him to issue notice u/s. 148 to reopen an assessment u/s. 147 to the material relied upon by the Assessing Officer for reopening the assessment. Such power cannot be exercised casually in a routine and perfunctory manner.

ii) One of the reasons recorded for reopening the assessment u/s. 147 of the Income-tax Act, 1961 being the claim for deduction of the diminution in the value of investment in a subsidiary, had already been considered by the Principal Commissioner, who in his revision order u/s. 263 had dropped the proceedings initiated accepting the reply of the assessee and rejecting the audit objection. The Principal Commissioner had accorded the approval u/s. 151 which showed non-application of mind by the Principal Commissioner while according approval for reassessment without considering all documents including his own earlier order passed dropping proceedings u/s. 263.

iii) The notice u/s. 148 and the order passed on the objections of the assessee were quashed and set aside.”

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Reassessment – Notice after four years – Sanction of prescribed authority – Limitation – Extension of time limit under provisions of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 applicable only in situations arising out of amendment by Finance Act, 2021 – Sanction not obtained from appropriate authority – Notices quashed:

17 Ambika Iron and Steel Pvt. Ltd. vs. Principal CIT
[2023] 452 ITR 285 (Ori)
Date of order: 24th January, 2022
Sections. 147, 148 and 151 of ITA 1961

Reassessment – Notice after four years – Sanction of prescribed authority – Limitation – Extension of time limit under provisions of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 applicable only in situations arising out of amendment by Finance Act, 2021 – Sanction not obtained from appropriate authority – Notices quashed:

Several notices under section 148 of the Income-tax Act, 1961 for re-opening of assessment issued prior to 1st April, 2021, that is prior to amendment by the Finance Act 2021, were issued beyond the period of four years and were time barred in terms of the first proviso to section 147 of the Act. Further, the sanction for issuing such notices was obtained from the Joint Commissioner whereas the appropriate authority to record satisfaction was the Chief Commissioner of Income-tax/Commissioner of Income-tax.

The assesses filed writ petitions challenging the validity of such notices.

The Department contended that in view of the notifications issued by the Central Government in terms of provisions of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, the said limits stood extended.

The Orissa High Court allowed the writ petitions and held as under:

“i) The contention of the Department that in view of the notifications issued by the Central Government in terms of the provisions of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 time limits stood extended was untenable since the notifications were issued to deal with the situation arising from the amendment to 1961 Act by the 2021 Act with effect from April 1, 2021 whereas the notices issued u/s. 148 under challenge were issued prior to April 1, 2021.

ii) It had been stated that the notices had been issued after obtaining the necessary satisfaction of the joint Commissioner whereas the officer authorized to accord necessary satisfaction was the Chief Commissioner or Commissioner.

iii) The notices u/s. 148 are quashed.”

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Offences and prosecution – Compounding of offences – No limitation laid down under section 279 – Power of CBDT to issue directions to Income-tax authorities for proper compounding of offences – CBDT has no power to lay down time limit – Guidelines of CBDT prescribing limitation – Not valid.

16 Footcandles Film Pvt Ltd vs. ITO
[2023] 453 ITR 402 (Bom)
A. Y.: 2010-11
Date of order 28th November, 2022

Section 279 of ITA 1961Offences and prosecution – Compounding of offences – No limitation laid down under section 279 – Power of CBDT to issue directions to Income-tax authorities for proper compounding of offences – CBDT has no power to lay down time limit – Guidelines of CBDT prescribing limitation – Not valid.

By order dated 14th January, 2020, the Magistrate Court convicted the assessee under section 248(2) of the Code of Criminal Procedure for the offence punishable under section 276B read with section 278B of the Income-tax Act, 1961 whereby the fine of Rs. 10,000 and rigorous imprisonment for one year were imposed. The assessee filed a criminal appeal before the Sessions Court which was pending adjudication. The assessee then filed application for compounding of offence under section 279(2) of the Act along with application for condonation of delay in filing of compounding application. The assessee’s request for compounding application was rejected.

The assessee filed a writ petition and challenged the order. The assessee, inter alia, contended before the High Court that provisions of section 279(2) do not impose any bar on the authorities to consider the compounding application even when the Magistrate Court had convicted the assessee and the appeal against the Magistrate Court’s order was pending before the Sessions Court. Section 279(2) allows compounding of offence either before or after the institution of proceedings and the word ‘proceedings’ encompasses all the stages of criminal proceedings.

The Department relied upon CBDT Circular No. 25 of 2019 and Circular No. 1 of 2020 to contend that the Circular provides that no application for compounding can be filed after the end of twelve months from the end of the month in which prosecution complaint has been filed and does not permit the authorities to grant such an application beyond the periods specified in the aforesaid circulars.

The Bombay High Court allowed the writ petition and held as under:

“i) Offences can be compounded under the provisions of section 279(2) of the Act. The Explanation to section 279(6) provides power to the Board to issue orders, instructions or directions under the Act to other Income-tax authorities for proper composition of offences under the section. The Explanation does not empower the Board to limit the power vested in the authority u/s. 279(2) for the purpose of considering an application for compounding of offence specified in section 279(1). The orders, instructions or directions issued by the CBDT u/s. 119 of the Act or pursuant to the power given under the Explanation will not limit the power of the authorities specified u/s. 279(2) in considering such an application, much less place fetters on the powers of such authorities in the form of a period of limitation.

ii) The guidelines contained in the CBDT guidelines dated June 14, 2019 could not curtail the powers of the authorities under the provisions of section 279(2). The guidelines in the circular of 2019 set out “Eligibility Conditions for Compounding”. The guidelines, inter alia, state that no application for compounding can be filed after the end of twelve months from the end of the month in which prosecution complaint has been filed in the Court. Guidelines further prescribe that the person seeking compounding of the offence is required to give an undertaking to withdraw any appeals that may have been filed by him relating to the offences sought to be compounded. Guidelines also contain powers to relax the time period prescribed as aforesaid and refers to situations where there is pendency of an appeal.

iii) A conjoint reading of these provisions leaves one with no manner of doubt that the condition specified regarding the time limit of twelve months is not a rule of limitation, but is only a guideline to the authority while considering the application for compounding. It in no matter takes away the jurisdiction of the authority u/s. 279(2) of the Act to consider the application for compounding on its own merits and decide it. Guidelines also provide the basis on which the application can be rejected. It prescribes the offences which are generally not to be compounded. Clause (vii) refers to offences under any law other than the direct tax laws.

iv) In the present case the assesses had categorically averred that they had not been convicted under any other law other than direct taxes laws, nor was it the case of the Revenue that the assessee had been convicted under such law other than direct taxes laws. The assessee had deposited the tax deducted at source due, though beyond time limit set down, but before any demand notice was raised or any show-cause notice was issued. The tax deducted at source was deposited along with penal interest thereon. Detailed reason for not depositing it within the time stipulated under the law had been filed in the reply to the show-cause notice issued earlier. Though the assesses had been convicted, a proceeding in the form of an appeal was pending before the sessions court, which was yet to be disposed of, and in which there was an order of suspension of sentence imposed on the second assessee.

v) Under these circumstances, the findings arrived at in the order dated June 1, 2021, that the application for compounding of offence, u/s. 279 of the Act, was filed beyond twelve months, as prescribed under the CBDT guidelines dated June 14, 2019, were contrary to the provisions of section 279(2). The authorities had failed to exercise jurisdiction vested in it while deciding the application on the merits and consideration of the grounds set out when the application for compounding of offence was filed before it. On this count, the order dated June 1, 2021 is quashed and set aside.

vi) Consequently, we remand the application, under the provisions of section 279(2) of the Income-tax Act, of the petitioners back to respondent No. 3 to consider afresh on its own merits.

vii) Respondent No. 3 shall dispose of the application of the petitioners preferably within a period of thirty days from the date of receipt of this judgment.

viii) Until disposal of the application of the petitioners for compounding of offence, under sub-section (2) of section 279 of the Income-tax Act, 1961, by respondent No. 3, the proceedings, being Criminal Appeal No. 127 of 2020, along with Criminal Miscellaneous Application No. 407 of 2020, pending before the City Sessions Court, Greater Mumbai, shall remain stayed.”

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Assessment pursuant to revision order – Appeal to the Appellate Tribunal – Pending appeal before the Appellate Tribunal against the revision order, AO issued notice for assessment pursuant to revision order – Assessee directed to co-operate with AO – But demand, if any, to be kept in abeyance till the disposal of appeal by the Tribunal.

15 Taqa Neyveli Power Co. Pvt Ltd vs. ITAT
[2023] 452 ITR 302 (Mad)
A.Y.: 2016-17
Date of order: 14th March, 2022
Section 263 of ITA 1961

Assessment pursuant to revision order – Appeal to the Appellate Tribunal – Pending appeal before the Appellate Tribunal against the revision order, AO issued notice for assessment pursuant to revision order – Assessee directed to co-operate with AO – But demand, if any, to be kept in abeyance till the disposal of appeal by the Tribunal.

For A.Y. 2016-17, the assessment order was passed under section 143(3) of the Income-tax Act, 1961. Subsequently, the Commissioner passed a revision order under section 263 of the Act. The assessee preferred an appeal before the Tribunal against the revision order. Pending appeal before the Tribunal, the AO initiated the assessment pursuant to revision order and required the assessee to furnish the submissions along with the necessary evidence/documents in respect of the findings given in the revision order.

The assessee filed a writ petition and contended that the appeal is pending before the ITAT against the order passed in revision under section 263 of the Act, since there is no provision to seek for stay of further proceedings pursuant to the order under appeal, the assessing authority has issued this communication dated 6th February, 2022. By doing this, they want to complete the proceedings, and once they complete the proceedings, they may further go ahead with issuance of demand notice. Hence, the assessee’s appeal which is pending for consideration would become infructuous and therefore, till the disposal of the appeal, the assessing authority may be precluded from proceeding further pursuant to the notice dated 6th February, 2022.

The Madras High Court disposed the writ petition with directions as under:

“i) Once an appeal has been filed against the revision order u/s. 263 wherein the date has been fixed for hearing before the Tribunal, the assessing authority could wait till such time.

ii) The assessing authority could proceed with the assessment proceedings pursuant to the date fixed for hearing before the Tribunal on the basis of the order passed by the Commissioner and the assessee should co-operate by filing reply or the documents sought for.

iii) Once the order has been passed by the assessing authority, and it is adverse to the assessee, no further proceedings, including the notice of demand should be made by the Assessing Officer till the disposal of appeal which was pending before the Tribunal and for which hearing has been fixed.

iv) Depending upon the outcome of the Tribunal order it was open to the Assessing Officer to proceed against the assessee in accordance with law.”

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Section 69A–Where the assessee had introduced capital from funds received from his relatives towards advance for purchase of property through banking channel and same was recorded in books of account and identity of person from whom amount was received was also not in doubt then provisions of section 69A could not be invoked. Section 69A r.w.s 131 – Where the assessee informed the address of a person from whom amount was received and also requested AO to summon person if there was any doubt, then addition under section 69A was not justified if summons was not issued by the AO

15 Smt. Jagmohan Kaur Bajwa vs. Income-tax Officer, Ward 3(1), Chandigarh [2022] 97 ITR(T) 149 (Chandigarh – Trib.)
ITA No.:962 (CHD.) OF 2019
A.Y.: 2014-15
Date: 23rd July, 2021

Section 69A–Where the assessee had introduced capital from funds received from his relatives towards advance for purchase of property through banking channel and same was recorded in books of account and identity of person from whom amount was received was also not in doubt then provisions of section 69A could not be invoked.

Section 69A r.w.s 131 – Where the assessee informed the address of a person from whom amount was received and also requested AO to summon person if there was any doubt, then addition under section 69A was not justified if summons was not issued by the AO

FACTS

The deceased assessee was engaged in the business of sale and purchases of houses. During the course of assessment proceedings the AO noticed that there was a substantial increase in the capital account of the assessee amounting to Rs. 1,19,44,047. The AO asked the assessee to furnish the source of increase in the capital account with supporting evidence.

The assessee submitted that he had introduced capital from the funds received from his relatives Hardev Singh (Rs. 19 lakh) and Maninder Singh Sahi S/o Hardev Singh (Rs. 99.84 lakh) through banking channels. The assessee submitted a copy of ledger, ‘advice of inward remittance from Canada’ and relevant extract from his bank statement. The AO contended that the documents submitted by the assessee did not prove the identity, creditworthiness and genuineness of the transactions. He asked the assessee to furnish the bank statement of the persons from whom the assessee received money from Canada in Indian rupees and prove the identity and creditworthiness of the persons.

The assessee submitted that Hardev Singh was a retired officer from a Government Organisation and at the time when he transferred the amount, he was residing in Canada. Singh transferred Rs.19 lakh interest free out of his personal savings and retirement fund. Maninder Singh Sahi S/o Hardev Singh, who transferred Rs.99.84 lakh during the year had well established set-up of his own. The assessee submitted before the AO that advance money was given to him with motive of making some property investment in India. But since no deal could get materialized, the advance amounting to Rs.1,18,84,046 was to be refunded. The assessee also furnished identity of both lenders and his self-declaration in the form of affidavit with details of amount received. The purpose of receipt of funds and then as to why the same could not be invested in the property because of market conditions was duly explained.

The AO accepted explanation of assessee with respect to receipt of Rs.19 lakh from Hardev Singh. However, AO made an addition under section 69A in respect of Rs.99.84 lakh received from Maninder Singh Sahi on the grounds that documentary evidence furnished for establishing identity and creditworthiness of lender were not sufficient.

On appeal, the Commissioner (Appeals) upheld the addition of R99.84 lakh made by the AO. Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that the entries relating to the advances received from Hardev Singh and his son Maninder Singh Sahi from Canada were recorded in the books of account as an advance for making the investment in the property by the said persons, and the assessee was engaged in the property business. The AO, therefore was not justified in invoking the provisions of section 69A particularly when the entries were recorded in the books of account maintained by the assessee and the explanation relating to the purpose of receiving the advances was given, identity of the person from whom amount was received was not in doubt and the entries were through banking channel. It was not the case of the AO that the assessee went to Canada and then put his money in the account of the depositor i.e. Hardev Singh and Maninder Singh Sahi which was remitted back. Therefore, the addition made by the AO and sustained by the Commissioner (Appeals) was not justified particularly when the credit of Rs. 19,00,000 in the similar circumstances from Hardev Singh had been accepted but the advance amounting to Rs. 99,84,046 received from his son Maninder Singh Sahi was doubted and added to the income of the assessee. The AO was not justified in blowing hot and cold in the same wind pipe.

The assessee informed the address of the person from whom the amount was received and also requested the AO to summon the person if there was any doubt. But the AO had not taken any step for issuance of the summons under section 131 of the Act. Therefore, the addition made by the Assessing Officer and sustained by the Commissioner (Appeals) was not justified.

The Assessing Officer did not doubt the contents of the affidavit furnished by the deceased assessee, declaration from the depositor as well as confirmation from bank. Therefore, the impugned addition made by the AO and sustained by the Commissioner (Appeals) was not justified.

The entries were made in the books of account maintained by the assessee and those were appearing in the bank account. The assessee also furnished an affidavit and the statement made therein was not doubted. Therefore, the addition made by the AO and sustained by the CIT (Appeals) was not justified. Therefore, addition of Rs. 99,84,046 made by the AO and sustained by the CIT (Appeals) was deleted.

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Claim of Additional Depreciation – Additional Issue

ISSUE FOR CONSIDERATION

An assessee is entitled to the claim of ‘additional depreciation’, in computing the total income, under the Income Tax Act. This benefit was first conferred by the insertion of clause (iia) in Section 32(1) by the Finance (No. 2), 1980 w.e.f. 1st April, 1981 which benefit was withdrawn w.e.f. 1st April, 1988. The benefit was again introduced w.e.f. 1st April, 2003 and was substituted w.e.f. 1st April, 2006 by the Finance Act, 2005.The present provision contained in clause (iia) of Section 32(1), in sum and substance, provides for the grant of a ‘further sum’ (referred to as an ‘additional depreciation’) equal to 20 per cent of the actual cost of new machinery or plant acquired and installed, on or after 1st April, 2005, by an assessee engaged in the business of manufacturing or production of any article or thing or in the business of generation, transmission or distribution of power subject to various conditions prescribed in the two provisos to the said clause.

The interpretation of the clause (iia) and the grant of additional depreciation, at any point of time, has been the subject matter of numerous controversies. One such interesting controversy is about the claim and allowance of additional depreciation under the present clause (iia) in a year subsequent to the year in which such a claim was already allowed. In other words, the claim for additional depreciation is made in a year even after such a claim was once allowed in the past.

The Kolkata bench of the Tribunal allowed such a claim while the Chennai and Mumbai benches rejected such a claim. Interestingly, the Mumbai bench first disallowed the claim but in the later decisions entertained it following the decision of the Kolkata Bench.

GLOSTER JUTE MILLS LTD.’S CASE

The issue first arose in the case of Gloster Jute Mills Ltd., before the Kolkata Bench of ITAT reported in 88 taxmann.com 738. In this case, the assessee company purchased and installed new machinery during the financial year 2005-06, i.e. on or after 1st April, 2005 and claimed additional depreciation under section 32(1)(viia) of the Act, which was allowed to the assessee for A.Y. 2006-07. The assessee company again claimed the additional depreciation for A.Y. 2007-08, which was rejected by the AO on the grounds that such an allowance was limited to the ‘new’ machineries and in the second year the machinery was no more new. The AO referred to the provision of the substituted section 32(1)(iia) which allowed the additional depreciation only to a new machinery. Referring to the dictionary, the AO observed that ‘ new’ meant something which did not exist before; now made or brought into existence for the first time. The AO held that, the assets in question were already used and depreciated, and therefore were old, and no additional depreciation was allowable for such assets as the basic qualification for such a claim was not satisfied.

The assessee company invited the attention of the Tribunal to the history of the allowance of additional depreciation by highlighting that the benefit was first conferred by insertion of clause (iia) of Section 32(1) by the Finance No. 2, 1980 w.e.f. 1st April, 1981. It was explained by the assessee company that the benefit then was explicitly allowed for the previous year in which the machinery or plant were installed or were first put to use. It was further explained to the Tribunal that the said benefit was withdrawn w.e.f. 1st April, 1988; the newly introduced provision presently did not contain any such limitation that restricted the benefit only in the year of installation or the use.

The assessee company invited attention to the now substituted provision that was introduced w.e.f 01.04.2003 by the Finance (No.2) Act, 2002 which conferred the benefit for the previous year in which the assessee began manufacturing or production or in the year of achieving the substantial expansion. It was highlighted that the newly introduced provision presently did not contain any such limitation that restricted the benefit to the year of manufacturing or production or substantial expansion.

The revenue supported its case for disallowance by reiterating the AO’s findings that the claim was allowable only in the year of acquisition of the new machinery.

The assessee company further contended that since the specific condition for the claim of additional depreciation, in one year only, has been done away with, it should be construed as the intention of the legislature, post substitution, to allow additional depreciation in subsequent years, as well. Relying on the settled position in law it was contended that a fiscal statute should be interpreted on the basis of the language used and not de hors the same. It was contended even if there was a slip, the same could be rectified only by the legislature and by an amendment only. A reference was also made to the DTC Bill, 2013 which had then proposed that the claim of additional depreciation would be allowed in the previous year in which the asset was used for the first time.

The Kolkata bench, on careful consideration of the provisions of the law and its history, confirmed that the present law before them, did not limit the allowance to the year of installation or manufacture or substantial expansion; the present law did not carry any stipulation for limiting the benefit of additional depreciation to one year only. It further noted that the case of the revenue for limiting the deduction to the year of acquisition of new machinery was not supported by the language of the provision; the condition for allowance was limited to ensuring that the machinery was new in the year of installation failing which no allowance was possible at all; however once this condition was satisfied, the claim for additional depreciation was allowable even for the year next to the year in which such an allowance was granted. It was therefore held, that the requirement of the machine being new should be a condition that should be fulfilled in the year of installation and once that was satisfied, no further compliance was called for in the year or years next to the year of installation.

This decision has been followed in the case of Graphite India Ltd., ITA No. 472 / Kol / 2012 and the latter decision is followed in the case of ACC Ltd., ITA No. 6082 / MUM / 2014. In addition, the claim was allowed in the case of Ambuja Cements Ltd., ITA No. 6375 / MUM / 2013 following these decisions.

EVEREST INDUSTRIES LTD.’S CASE

The issue also arose subsequently in the case of Everest Industries Ltd., before the Mumbai Bench of the ITAT, reported in 90 taxmann.com 330. The assessee company in this case, had acquired and installed plant and machineries in financial year 2005-06, and onwards and had claimed additional depreciation under section 32(1)(iia) @ 20 per cent of the original cost of the plant and machinery and such claims were allowed by the AO. For assessment year 2009-10, the company again claimed the benefit of additional depreciation for the said plant and machineries. The AO disallowed the claim on the ground that the allowance under section 32(1)(iia) was a one-time allowance that was allowed on the cost of the new plant and machineries, acquired and installed during the year of acquisition and installation. The AO held that the machineries acquired and put to use in the earlier years were no longer new and therefore no benefit was again allowed where the benefit of additional depreciation was already granted once in an earlier assessment year. The order of the AO was confirmed by the CIT(A).The assessee, in the appeal before the Tribunal, contended that the provisions of s.32(1)(iia), applicable to A.Y.2006-07 and onwards, were different from its predecessor provisions in as much as the new provisions did not require the installation or the use or the manufacturing or the substantial expansion in the year of the claim. It further contended that there was no bar on claiming the additional depreciation, more than once. It also contended that the machinery in question need not have been acquired in A.Y. 2009-10 and for this proposition it heavily relied on the decision of the Kolkata Bench in the case of Gloster Jute Mills Ltd. (supra).

In reply, the revenue submitted that the legislative intent was to allow additional depreciation under section 32(1)(iia) of the Act only in the year in which the new plant and machinery was acquired and installed. The revenue invited the attention to the Second Proviso of s.32(1)(iia) to highlight that the claim for depreciation was to be restricted to one half of the allowable amount in cases where the new plant and machinery was installed and used for less than 180 days. In such a case, the remaining depreciation was allowed in the next year; as was claimed by the assessees, the balance depreciation was allowed in the next following year by the courts; the amendment by the Finance Act, 2015 had made that aspect amply clear. The revenue also contended that in the past it was necessary for the legislature to have used the words ‘during the previous year’ so as to qualify numerous conditions. However, with removal of many such conditions, the use of such words became redundant as long as the condition requiring the machinery to be ‘new’ was retained; therefore there was no change in the law and the legislative intent continued to be that the allowance was a one-time benefit not intended to be enjoyed year after year.

The Mumbai bench of the Tribunal took note of the decision of the Kolkata Bench, in the case of Gloster Jute Mills Ltd. (supra) and found that the views of the said bench were, on the plain reading of the new provision in comparison to the predecessor provisions, contrary to the views canvassed by the revenue. The Mumbai bench proceeded to analyse the provisions of section 32(1) for allowance of the regular depreciation, and the concepts of the ‘user of assets’ and the ‘block of assets’.

Relying on certain decisions, it observed that the concept of user in the scheme of depreciation was required to be examined and tested only in the first year of the claim of depreciation and not thereafter, once an asset entered into the block of assets. Applying this proposition to the issue of additional depreciation, the Mumbai bench held that the additional depreciation in respect of a machinery was allowed when its identity was known; on merger of the identity, the question of allowing additional depreciation did not arise; any allowance of additional depreciation as was claimed by the assessee would necessitate maintaining a separate record for each of the asset, contrary to the concept of block of asset and the legislative intent; no provision was found for maintenance of separate records. It also held that, the retention of the term “new” confirmed that the claim was allowable only once in the year of acquisition of the asset.

The Mumbai bench approved of the contention of the revenue that the provision for restriction of the claim to 50 per cent of the allowable amount and the allowance of the balance amount in the subsequent year confirmed that the allowance was a one-time affair, not to be repeated year after year, and, to support its decision, it relied upon the Memorandum explaining the provisions of the Finance Bill, 2015 while inserting the Third Proviso to s.32(1)(iia) w.e.f 1st April, 2016; the bench noted that the said amendment was not considered by the Kolkata bench and therefore the Mumbai bench found itself unable to agree with the Kolkata bench. Accordingly, the Mumbai bench held that the claim for additional depreciation under section 32(1)(iia) was not allowable for more than one year.

OBSERVATIONS

The interesting issue, with substantial revenue implications, moves in a narrow compass. The dividing lines are sharply drawn with conflicting decisions of three benches of the Tribunal and further extenuated by three conflicting decisions of the Mumbai bench. There is no doubt that the overall quantum of depreciation cannot exceed the cost of an asset and the claim of additional depreciation is an act of advancing the relief in taxation and not enhancing it. It is also clear that the asset, on entering the block of assets, loses its identity. It is also not disputed that there is a difference between the meaning of the words ‘new’ and ‘old’; a new cannot be old and old cannot be new, both the words are mutually exclusive. It is also essential to provide a lawful meaning to the word “new” used in s.32(1)(iia); it surely cannot be held to be redundant and excessive.The law of additional depreciation has a turbulent history and has undergone important changes and therefore the legislative intent of the law can neither be gathered by its past or the subsequent amendments introduced with prospective effect, unless an amendment is made with an express intent of amending the course. It is also fair to accept that the decisions of the Courts or the Tribunal delivered in respect of unrelated issues, though under section 32(1)(iia), should not colour the understanding of the issue relating to the subject on hand.

Having noted all of this, it seems that there is no disagreement as regards the meaning of the word ‘new’; an asset to be new, has to be something which did not exist before, which is now made, which is brought into existence for the first time; it is clear that an asset that does not satisfy the test of being new can never be eligible for the claim of additional depreciation, in the first place. There is no conflict on this or there can be no conflict on this aspect of newness of the asset; the conflict is about the year in which the test of newness is to be applied. Is the test to be applied every year or is to be applied once is a question that is to be resolved. No claim would be permissible to be made more than once where it is held that the test is to be applied every year. As against that, once the test is satisfied in the year in which the claim was first made, the claims would be allowed in the following year, where it is held that a one-time satisfaction of the test is sufficient. The language of the present section, in its comparison to the language of the predecessors, does not expressly prohibit the claim in more than one year, as noted by the Kolkata bench. The decision therefore has to be gathered by the words used in law and the word ‘new’ is the only word, the meaning supplied to which would make or mar the case.

It is usual and not abnormal to apply the test in the year in which the claim is made and the test of newness may not be possible to be satisfied for the subsequent years and in that view of the matter it may not be possible for an assessee to claim the allowance year after year. However, such a claim year after year, would be possible where a view is taken that the test of newness is to be satisfied once or that even in the subsequent year the test of newness where examined should be limited to verify whether the asset in the first year of acquisition or installation and claim was new or not. The later view is difficult, but not impossible to hold, as there is no explicit restriction in the provision.

The concept of block of assets and its application to the facts of the case of repetitive claims may also cause a concern. Accepting the claim of the assessee would mean regular and substantial erosion of the written down value of the asset, year after year, which in our respectful opinion cannot be a clinching factor.

The Mumbai bench of the Tribunal in the later decision dated 7th November, 2022 has chosen to follow the decision of the Kolkata bench, maybe due to the fact that it’s own decision in case of Everest Industries Ltd. was not cited before the bench.

The latest decision of the Mumbai Tribunal dated 28th February, 2023 however has taken note of 2018 decision of the bench in Everest Industries Ltd’s case but has chosen to follow the 2022 decision of the bench, on the ground of it being the later decision of the bench.

The Chennai bench of the Tribunal was the first to address the issue in its decision dated. 4th April, 2013 in the case of CRI Pumps (P.) Ltd., 34 taxmann.com 123. In that case, the assessee company had claimed additional depreciation on certain machineries that were not acquired during the year. The Tribunal held that the machinery in question were acquired before the commencement of the year and were not new and therefore the claim for the year was not maintainable in as much as it would not be a claim for a new machinery. In this case, a reference was made by the revenue to the decision of the co-ordinate bench dated 6th January, 2012 in ITA No. 1069/ Mds / 2010 in the case of Brakes India Ltd.

It appears that we should wait for the decision of the High Court to conclude the interesting issue.

shailesh.kwebmaker

S.69A read with S.148–Where the draft sale deed of property between the assessee-company and a developer was never signed by assessee and application filed by developer before Settlement Commission admitting to having invested certain amount of unaccounted income was not provided to assessee for confrontation then the additions made by the AO in the hands of the assessee-company were to be deleted

14 Rajvee Tractors (P) Ltd vs. ACIT
[2022] 98 ITR(T) 459 (Ahmedabad – Trib.)
ITA No.: 1818 (AHD.) OF 2019
A.Y.: 2015-16
Date: 29th July, 2022

S.69A read with S.148–Where the draft sale deed of property between the assessee-company and a developer was never signed by assessee and application filed by developer before Settlement Commission admitting to having invested certain amount of unaccounted income was not provided to assessee for confrontation then the additions made by the AO in the hands of the assessee-company were to be deleted.

FACTS

The assessee was a private limited company, and was engaged in the business of tractors and spare parts. There was a survey operation under the provisions of section 133A of the Act at the business premises of the assessee on 22nd January, 2015. As a result of survey, the assessee had made certain disclosure of an income of Rs. 3,13,00,000 representing the advance received against the sale of land which was duly offered to tax in the income tax return. The property was sold by the assessee to a party namely M/s Ohm Developers for a consideration of Rs. 3,51,00,000 as recorded in the books of accounts.

There was also a survey operation under section 133A of the Act, at the premises of the M/s Ohm Developers. As a result of survey operation, a draft sale deed was found between the assessee and M/s Ohm Developers wherein the sale consideration was shown at Rs. 5,47,37,500 leading to a difference in the sale consideration of Rs. 1,96,37,500 which was alleged to be less/short reported by the assessee. The AO also found that M/s. Ohm Developers had also admitted to have invested unaccounted income of Rs. 1,96,37,500 on the purchase of the property in the application made before the Settlement Commission.

Accordingly, the AO initiated proceedings under section 148 of the Act. The assessee requested to supply copy of the application made by the M/s Ohm Developers before the Settlement Commission as well as copy of the order of the Settlement Commission. However, the AO denied to provide the same on the reasoning that these are confidential information of the third party which cannot be provided to the assessee. The AO finally held that the income of the assessee to the tune of Rs. 1,96,37,500 had escaped assessment and therefore made the addition of the same to the total income of the assessee.

Aggrieved assessee preferred an appeal to the Ld. CIT(A), who also confirmed the order of the AO.

Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that the draft sale deed in the absence of other corroborative materials cannot substitute the evidence. The Tribunal relied upon the decision of the Hon’ble Supreme Court in the case of Common Cause (A Registered Society) vs. Union of India [2017] 394 ITR 220 wherein it was held that noting on loose sheets/diary does not carry any evidentiary value under the provisions of section 34 of the Evidence Act.

The Tribunal also relied upon the decision of the Supreme Court in the case of CBI vs. V.C. Shukla [1998] 3 SCC 410 wherein it was held that entry can be made by any person against the name of any other person in any sheet, paper or computer, but the same cannot be the basis of making charges against the person whose name noted on sheet without corroborating the same.

Accordingly, the Tribunal held that the admission made by the buyer of the property before the Settlement Commission does not establish the fact that the assessee had received unaccounted consideration. The AO was directed to delete the addition made by him.

In result the appeal filed by the assessee was allowed.

shailesh.kwebmaker

Taxation of Life Insurance Policies

INTRODUCTION

Proceeds from life insurance policies (LIPs) have caught attention of the law makers in recent years. The Finance Act, 2016 amended section 194DA to increase the rate of TDS to 2% and the Finance Act, 2019 made it 5% of the “income comprised” in the life insurance policy proceeds. This started a discussion on how income from a life insurance policy could be computed and under which head of income.

Two years later the Finance Act, 2021 inserted sub-section (1B) in section 45 giving capital gains characterization for the income from Unit Linked Insurance Policies (ULIPs) and Rule 8AD was inserted.

Three years later the Finance Act, 2023 has inserted clause (xiii) in section 56(2) providing taxation of income from life insurance policies not qualifying for the benefit of section 10(10D). This article summarises some of the issues related to the taxation of proceeds from life insurance policies.

WHAT IS A LIFE INSURANCE POLICY?

Life insurance companies issue several types of policies such as pension policies, annuity plans, health policies, group policies etc. Considering the types and varieties of policies issued by the insurance companies, it would be important to first determine whether the policy qualifies as a “life insurance policy” and then apply the relevant provisions.

The provisions dealing with life insurance policy under the Act are section 10(10D), section 194DA, section 80C(3), section 80C(3A) and section 56(x)(xiii). None of these provisions give a precise definition of the term “life insurance policy”.

The term “life insurance business” is defined under the Insurance Act, 1938¹ as follows:

“(11) “life insurance business” means the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life, and any contract which is subject to payment of premiums for a term dependent on human life and shall be deemed to include—

(a) the granting of disability and double or triple indemnity accident benefits, if so provided in the contract of insurance,

(b) the granting of annuities upon human life; and

(c) the granting of superannuation allowances and benefit payable out of any fund] applicable solely to the relief and maintenance of persons engaged or who have been engaged in any particular profession, trade or employment or of the dependents of such persons;

Explanation. — For the removal of doubts, it is hereby declared that “life insurance business” shall include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment and a component of insurance issued by an insurer referred to in clause (9) of this section. “

1. Section 2(11).

One possible approach could be to treat each policy issued in the course of running “life insurance business“ as getting covered by “life insurance policy”. This is on the basis that every policy issued in the course of carrying on a “life insurance business” should be treated as a “life insurance policy”.

The problem with the approach in the preceding para is that the Income-tax Act, 1961 (“Act”) also recognises other types of policies and gives tax treatment for such policies. For example, section 10(10A) specifically deals with “pension policies”, section 80C(2)(xii) and section 80CCC deal with “annuity policy”, section 80D deals with “health insurance policy” etc.

Although the above policies are issued as a part of the “life insurance business” carried on by a life insurance company, the Act does not treat these policies as “life insurance policies” and gives different treatment. A better view could be that for a policy to qualify as a life insurance policy, it must be a policy on the life of a person. In other words, the life of a person must be an insured event i.e. on the occurrence of the death of a policyholder, the insurance company is obliged to pay the assured amount.

In this regard, the orders of the Amritsar bench of the Tribunal in the case of F.C. Sondhi & Co. (India) (P.) Ltd. vs. DCIT² and DCIT vs. J.V.Steel Traders³ need to be noted. In these cases, the assessee had claimed a deduction for premia paid on insurance policies on the basis that these policies were “Keyman Insurance Policy”, as defined in Explanation 1 to section 10(10D). The Tribunal found that the policies were essentially Unit Linked Insurance Policies (ULIP) and the predominant feature of the policy was an investment plan. A small fraction of the premium paid by the assessee was towards insurance risk and the balance was towards investment. The Tribunal held that such policies cannot be treated as “life insurance policies”, as contemplated in section 10(10D)⁴, and hence deduction for premium was not allowable. Reference was also made to CBDT Circular No. 762⁵ in this regard.

2. [2015] 64 taxmann.com 139.
3. 0ITA No. 377 (Asr)/2010.
4. Explanation 1- For the purposes of this clause, “Keyman insurance policy” means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration.
5. Dated 18-02-1998.

It would also be relevant to take note of the order of the Mumbai bench of the Tribunal in the case of Taragauri T. Doshi vs. ITO [2016] 73 taxmann.com 67 (Mumbai – Trib.) wherein the Tribunal allowed benefit of section 10(10D) for a life insurance policy issued by an American Insurance Company. The dispute in the case pertained to AY 2006-07. The definition of Unit Linked Insurance Policy inserted in the form of Explanation 3 to section 10(10D) by the Finance Act, 2021 makes a specific reference to IRDAI Regulations as well as the Insurance Act, 1938. However, it is possible to argue that this definition does not have an impact on insurance policies other than ULIPs and benefit of section 10(10D) can be availed for insurance policies issued by foreign insurance companies as well if all the conditions of section 10(10D) are satisfied.

RATIONAL FOR TAXING OR EXEMPTING LIPS

It is a settled principle that “capital receipts” are not subject to tax. The understanding or perception which prevailed for a long period of time was that the proceeds of LIPs are not subject to tax under the Act. However, disputes related to bonuses to policyholders necessitated the insertion of specific exemption in the form of section 10(10D) in the year 1991. The relevant observations in the CBDT Circular no. 621⁶ are reproduced hereunder:

“14. Payments received under an insurance policy are not treated as income and hence not taxable. However, in a recent judicial pronouncement, a distinction has been made between the sum assured under an insurance policy and further sums allocated by way of bonus under life policies with profits. The sum representing bonus has been held to be chargeable to income-tax in the year in which the bonus was declared by the Life Insurance Corporation.

14.1 Since such bonus has always been considered as payment under an insurance policy, section 10 of the Income-tax Act has been amended to exempt from income-tax the bonus declared or paid under a life insurance policy by the Life Insurance Corporation of India.

14.2 This amendment takes effect retrospectively from 1st April, 1962.”

6. Dated December 19, 1991.

Subsequently, the life insurance sector was opened for private-sector players. This not only increased the competition for Life Insurance Corporation of India, but also resulted in the availability of a variety of products to the customers. To some extent, the life insurance industry effectively also started competing with the mutual fund industry as the insurance products offered a variety of investment products. The provisions of section 10(10D) were amended from time to time to ensure that exemption was given to pure life insurance products. The following extracts from the Explanatory Memorandum to the Finance Bill, 2023 need to be noted:

“1. Clause (10D) of section 10 of the Act provides for income-tax exemption on the sum received under a life insurance policy, including bonus on such policy. There is a condition that the premium payable for any of the years during the terms of the policy should not exceed ten per cent of the actual capital sum assured.

2. It may be pertinent to note that the legislative intent of providing exemption under clause (10D) of section 10 of the Act has been to further the welfare objective by benefit to small and genuine cases of life insurance coverage. However, over the years it has been observed that several high net worth individuals are misusing the exemption provided under clause (10D) of section 10 of the Act by investing in policies having large premium contributions (as it is acting as an investment policy) and claiming exemption on the sum received under such life insurance policies.

3. In order to prevent the misuse of exemption under the said clause, Finance Act, 2021, amended clause (10D) of section 10 of the Act to, inter-alia, provide that the sum received under a ULIP (barring the sum received on death of a person), issued on or after the 01.02.2021 shall not be exempt if the amount of premium payable for any of the previous years during the term of such policy exceeds Rs 2,50,000. It was also provided that if premium is payable for more than one ULIPs, issued on or after the 01.02.2021, the exemption under the said clause shall be available only with respect to such policies where the aggregate premium does not exceed Rs 2,50,000 for any of the previous years during the term of any of the policy. Circular No. 02 of 2022 dated 19.01.2022 was issued to explain how the exemption is to be calculated when there are more than one policies.

4. After the enactment of the above amendment, while ULIPs having premium payable exceeding Rs 2,50,000/- have been excluded from the purview of clause (10D) of section 10 of the Act, all other kinds of life insurance policies are still eligible for exemption irrespective of the amount of premium payable.

5. In order to curb such misuse, it is proposed to tax income from insurance policies (other than ULIP for which provisions already exists) having premium or aggregate of premium above Rs 5,00,000 in a year. Income is proposed to be exempt if received on the death of the insured person. This income shall be taxable under the income from been claimed as deduction earlier.”

POLICIES ISSUED PRIOR TO APRIL 1, 2023

The provisions of section 56(2)(xiii) are inserted with effect from 1-4-2024 i.e. they will apply from FY 2023-24 onwards. The Explanatory Memorandum to the Finance Bill, 2023 clarifies that the proposed provision shall apply for policies issued on or after 1st April, 2023. There will not be any change in taxation for polices issued before this date.

The policies issued prior to April 1, 2023 (pre-Apr 2023 policies) will continue to be governed by the old provisions and not section 56(2)(xiii). The relevant issue then would be under which head of income the proceeds from such insurance policies be taxed if the benefit of section 10(10D) is not available. In the absence of any specific provision in section 56(2), the policyholder may decide to offer its income from LIP (not qualifying for Keyman policy) to tax either as capital gains or as income from other sources.

CAPITAL GAINS CHARACTERIZATION FOR PRE-APRIL 2023 POLICIES

For the computation of income under the head “capital gains”, the following must be satisfied:

there should be an identifiable “capital asset”
there should be a “transfer” of such capital asset
the computation machinery must work

The words “property of any kind” contained in the definition of the term “capital asset” in section 2(14) are given very wide interpretation to include various assets. A life insurance policy may be treated as a “property of any kind”. Such policies constitute a major asset for many individuals and support life of many families.

The definition of the term “transfer” has been a subject matter of several disputes and satisfaction of this definition would be most critical for capital gains characterization.

The following extract from Kanga & Palkhiwala’s Commentary⁷ needs to be noted:

“The supreme court held in Vania Silk Mills v CIT,⁸ that compensation received from an insurance company on the damage or destruction of an asset is not liable to Capital gains tax. The judgment of the court rested on three grounds:

i. When an asset is destroyed or damaged it is not possible to say that it is transferred: the words ‘the extinguishment of any rights therein’ postulate the continued existence of the corporeal property.⁹

ii. The word ‘transfer’ must be read in the context of s 45 which charges the gains arising from ‘the transfer… effected’; and so read, ‘transfer’ would include cases in which rights are extinguished either by the assessee himself or by some other agency, but not those in which the asset is merely destroyed by a natural calamity like fire or storm.¹⁰

iii. The insurance money represents compensation for the pecuniary loss suffered by the assessee and cannot be taken as ‘consideration received… as a result of the transfer’ which is the basis under s 48 for computing capital gains.”

Subsequently, sub-section (1A) and sub-section (1B) were inserted in section 45 to bring proceeds of insurance policy on account of damage or destruction of capital asset¹¹ and proceeds of ULIP respectively to tax under the head “capital gains”.

7. 13th Edition updated by Arvind P Datar, page no. 1183 and 1184, Vol 1
8. 191 ITR 647, followed in CIT v Marybing 224 ITR 589 (SC); Agnes Corera v CIT 249 ITR 317; CIT v Kanoria 247 ITR 495; CIT v Herdelia 212 ITR 68 (under s 34); Travancore Electro v CIT 214 ITR 166; CIT v EID Parry 226 ITR 836; Air India v CIT 73 Taxman 66; Union Carbide v CIT 80 Taxman 197.
9. CIT v East India 206 ITR 152 (debenture stock extinguished).
10. Darjeeling Consolidated v CIT 183 ITR 493 (machinery lying in valley after storm).
11. On account of flood, typhoon, hurricane, cyclone, earthquake, riot, accidental fire or explosion, civil disturbance, enemy action etc.

Based on the insertion of sub-section (1A) and (1B) in section 45, one may argue that the legislative intent is to tax proceeds of insurance policies under the head “Capital gains”. This article does not analyse all the nuances of the definition of “transfer”. Given that sub-section (1A) and (1B) of section 45 gives a “capital gain regime” to tax certain insurance policies, the article proceeds on the basis that the definition of “transfer” is satisfied.

The taxability is to be examined in cases where the policy proceeds are received otherwise than on the occurrence of the death of a person. This could happen when the policy matures or when the policyholder surrenders the policy before that. In terms of section 2(47)(iva), the maturity or redemption of a zero coupon bond is treated as a “transfer” and based on this, one may argue that the definition of “transfer” gets satisfied in the case of life insurance policies as well. Further, reference can also be made to the decision of the Supreme Court in the case of CIT v. Grace Collis [2001] 115 Taxman 326 (SC) where in the apex court held that the expression “extinguishment of rights therein” in the definition of “transfer” extends to mean extinguishment of rights independent of or otherwise than on account of transfer.

Insertion of sub-clause (xiii) in section 56(2) however does create some confusion, although that provision is to be applied to only post-March-2023 policies.
Taxation under the head “capital gains” could be beneficial due to the lower tax rates applicable to capital gains as well as the benefit of indexation.

COMPUTATION OF CAPITAL GAINS

The application and implications of the computation provisions can be considered on the basis of examples. It is assumed that the policyholder in these cases did not claim the benefit of section 80C for the premiums paid.

Example 1

Mr. A acquired a single premium policy on December 1, 2012. Mr. A paid a premium of Rs. 150,000. The sum assured is Rs. 6,00,000 as the policy is having predominant features of an investment product.

Mr. A receives the policy proceeds on March 31, 2022 amounting to Rs. 9,50,000.

The capital gains from the policy would be computed as follows:

Particulars	Rs.	Rs.
Full value of consideration		950,000
Cost of acquisition	150,000
Indexed cost of acquisition	150,000*295/200¹²	221,250
Capital gains		728,750

The amount of Rs. 728,750 will be treated as a long-term capital gain and will be subject to tax at the reduced rate.

12. Cost Inflation Index for the financial year 2021-22 is assumed to be 295.

Example 2

Mr. A acquired a single premium policy on December 1, 2012. Mr. A paid a premium of Rs. 150,000. The sum assured is Rs. 6,00,000 as the policy is having predominant features of an investment product.

Mr. A was in dire need of Rs. 500,000 in December 2018 and he partially surrendered his policy on December 31, 2018.

After this partial surrender, the sum assured under the policy is reduced to Rs. 250,000. Mr. A receives the policy proceeds on March 31, 2022, amounting to Rs. 4,00,000.

ANALYSIS

In this case, Mr. A receives policy proceeds on two occasions and to make the computation machinery work, the following questions need to be answered:

Is there a “transfer” of “capital asset” on both occasions (i.e. on Dec 31, 2018, and on March 22, 2022)?
Is the “capital asset” identifiable for both events?
Is the cost of acquisition available?

In this case, the capital asset is the “life insurance policy” and the question which arises is, can the part of the policy surrendered be said to be transferred? In this case, the insurance company is able to give revised or balance sum assured after the partial surrender and hence it is possible to split the capital asset as well as the cost of acquisition in two parts.

If the capital asset was a house property and part of the property was transferred, there would be a separate capital gains computation for part of the property transferred.

Capital gains computation for FY 2018-19

Particulars	Rs.	Rs.
Full value of consideration		500,000
Cost of acquisition	87,500 (Note 1)
Indexed cost of acquisition	87,500*280/200	122,500
Capital gains for FY 2018-19		377,500

Note 1: The original cost of acquisition (i.e. premium paid) is split into two parts on the basis of the sum assured (i.e. 350,000: 250,000).

The amount of Rs. 377,500 will be treated as a long-term capital gain and will be subject to tax at the reduced rate.

Capital gains computation for FY 2022-23

Particulars	Rs.	Rs.
Full value of consideration		400,000
Cost of acquisition	62,500 (Note 1)
Indexed cost of acquisition	62,500*295/200¹³	92,188
Capital gains for FY 2021-22		307,812

13. Cost Inflation Index for the financial year 2021-22 is assumed to be 295

Note 1: The original cost of acquisition (i.e. premium paid) is split into two parts on the basis of the sum assured (i.e. 350,000: 250,000).

The amount of Rs. 307,812 will be treated as a long-term capital gain and will be subject to tax at a reduced rate.

Example 3

Mr. A acquired a life insurance policy on December 1, 2012, on which he paid a premium of Rs. 75,000 each for 8 years. The insured event, i.e. death of Mr. A, did not happen and at the end of the 15th year he got a sum of Rs. 740,000.

ANALYSIS

In this case, the real issue to be addressed is, in which year did Mr. A acquire the capital asset. This question is relevant from the perspective of indexation of the cost of acquisition.

The following approaches can be considered:

A. Treat the first year as the year of acquisition of a capital asset. This is on the basis that had Mr. A died in the first year itself, the insurance company was liable to pay the sum assured.

Under this approach, the entire premium of eight years i.e. Rs. 600,000 (75,000 * 8) will get indexed with reference to the first year. This is on the basis that once the capital asset is acquired, the year in which the consideration is paid is not relevant from the perspective of indexation. Section 48, section 49 or section 55 do not categorically provide that the entire cost of acquisition must have been “actually paid” by the assessee to claim indexation. However, whether extending the benefit of second proviso to section 48 dealing with Cost Inflation Index in such cases is contrary to the rationale for the provision could be an issue.

B. Treat the first year as the year of acquisition of a capital asset. Further, each year, the capital asset gets improved. This is on the basis that although the policy is acquired in the first year unless Mr. A keeps on paying premiums year after year, he would not get the benefits of the policy.

Under this approach, the premium paid for the years 2 to 8 will be treated as a “cost of improvement” and will be indexed on the basis of the cost inflation index for the respective years.

C. One-eighth of the policy gets acquired every year.
Under this approach, the premium paid for the years 1 to 8 will be treated as “cost of acquisition” and will be indexed based on the cost inflation index for the respective years.

RULE 8AD

Sub-section (1B) of section 45 provides that the method of capital gains computation would be prescribed and Rule 8AD gives the method. This method does not give indexation benefit for capital gains arising from ULIP products. While section 48 does not specifically deny indexation benefit to ULIP products, such benefit may be denied on the basis that section 45(1B) read with Rule 8AD is a specific provision for the computation of capital gains from ULIP products, which will prevail over general provisions of section 48.

TAXATION under section 56 FOR PRE-APR 2023 POLICIES

If the proceeds of insurance policy are subject to tax in terms of section 45, the same cannot be subjected to tax under section 56. However, given that the application of section 45 could lead to lesser tax payment, the tax authorities may attempt to apply section 56. Further, section 56 may also be applied on the basis that for Post-2023 policies the Finance Act, 2023 has inserted a specific provision in section 56(2)(xiii).

Deduction for expenses

The income taxable under the head “income from other sources” is also required to be computed on net basis. Section 57 and section 58 deal with the deductibility of expenses. In this regard, the following restrictions need to be considered.

Section 57(iii) permits a deduction for any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. While premia paid would certainly qualify as “paid wholly and exclusively for the purpose of earning income”, the issue would be whether the premium can be said to be “capital expenditure”, especially in the case of a single premium policy.

Further, section 58(1)(a)(i) restricts the deduction for “personal expense” for the assessee. The argument could be that the primary purpose of the policy is to give financial support to the family members after the death of a person and hence the premium payment is in the nature of personal expense. Alternatively, this involves a dual purpose, requiring apportionment of cost.

However, it would be possible for the policyholder to rely on the observations in the Explanatory Memorandum to the Finance (no. 2) Bill, 2019, which suggests that the intention is to allow a deduction for premia paid. Further, reliance can also be placed on CBDT Circular no. 07/2003 dated 5-09-2003 which explained the provisions of the Finance Act, 2003 which replaced section 10(10D) and restricted the scope of the exemption. The Circular provides that the income accruing on non-qualifying policies (not including the premium paid by the assessee) shall become taxable. The Nagpur bench of the Tribunal has in the case of Swati Dyaneshwar Husukale vs. DCIT [2022] 143 taxmann.com 375 upheld deduction for premia.

The policyholder may be eligible and may have claimed a deduction for premia in terms of section 80C. While there does not appear to be a specific restriction, if so claimed, the deduction for premium u/s 57(iii) may result in a double deduction. Certain other issues related to deduction for premiums are described in the subsequent paragraphs.

It will be relevant to take note of the order of the Kolkata bench of the Tribunal in the case of Bishista Bagchi vs. DCIT [2022] 138 taxmann.com 419. In this case, the assessee was not entitled to claim the benefit of section 10(10D) and claimed capital gains characterisation for the income arising from a single premium policy. The tax authorities subjected the income to tax under section 56. The Tribunal allowed the capital gains characterisation claimed by the assessee. The deduction was allowed after indexation of the premium paid only to the extent it was not allowed as a deduction under section 88.

POLICIES ISSUED AFTER 31ST MARCH, 2023

The Finance Act, 2023 has inserted clause (xiii) in section 56(2) which specifically deals with the taxation of post-March 2023 policies which do not qualify for the benefit of section 10(10D). Section 56(2)(xiii) does not apply in the following situations:

When the policy qualifies as a ULIP
When the policy qualifies as a Keyman insurance policy and income from such policy is subject to tax under section 56(2)(iv)
When the benefit of exemption under section 10(10D) is available

POST-MARCH 2023 LIPs – INCOME FROM OTHER SOURCES

When section 56(2)(xiii) is applicable, the amount described in the provision shall be subject to tax under the head “Income From Other Sources”. The amount described is the sum received (including the amount allocated by way of bonus) at any time during the previous year under a life insurance policy as exceeds the aggregate of the premium paid, during the term of such life insurance policy, and not claimed as deduction under any other provision of this Act, computed in such manner as may be prescribed.

It can be observed that the manner of computation would be prescribed separately and hence it can be said that the complete tax regime is not yet declared in this regard.

Double deduction for premium

It can be observed that the words “and not claimed as deduction under any other provision of this Act” in section 56(2)(xiii) ensures that the policyholder does not get a deduction for premia more than once. The policyholder may be eligible and may have claimed a deduction for premia under section 80C. It should be noted that the deduction for premium is capped under section 80C(3) and section 80C(3A) to 20%/10% of the actual capital sum assured. Thus, it is possible that the policyholder paid the premium of Rs. 10,000 but the deduction in terms of section 80C was restricted to Rs. 6,000.

In the following circumstances, the determination of whether or not the policyholder has claimed deduction could result in difficulties:

Where the total amount paid/invested on premium, PPF, tuition fees etc. qualifying for section 80C was Rs. 300,000 and deduction was restricted to Rs. 150,000.

Where the policyholder was required to file the return of income for one or more earlier previous years but did not file it.

Where the policyholder was not required and did not file the return of income for one or more earlier previous years.

Partial surrenders

At times, it is possible for the policy holder to partially surrender an insurance policy. Example 2 above deals with such a situation. Section 56(2)(xiii) as such does not seem to be contemplating the policyholder getting money prior to maturity and application of section 56(2)(xiii) to such situations where the policyholder gets money more than once from the insurance policy could be difficult. This may be prescribed as a part of the manner of computation.

Deduction under other sections

While section 56(2)(xiii) itself facilitates deduction for premiums which could be the biggest item of expenditure, there is no restriction for claiming a deduction for other expenses under section 57, provided the related conditions are satisfied.

Where the total of premia exceeds maturity proceeds

Ordinarily, this may not happen. However, it would be interesting to understand the application of section 56(2)(xiii) to such a situation. This provision describes what is chargeable under section 56. Further, the description contained in clause (xiii) contemplates excess of the amount received from the insurance policy over the aggregate of the premia paid. If the aggregate of premia paid does not exceed the policy proceeds, then prima facie clause (xiii) does not get triggered.

POST-MARCH 2023 LIPs – CAPITAL GAINS CHARACTERIZATION?

In terms of section 56(1), income not chargeable under other heads of income shall be chargeable under the head “Income from other sources”. However, sub-section (2) of section 56 gives a list of items of income which shall be chargeable to income-tax under the head “Income from other sources”. Thus, prima facie, if the policyholder offers income from post-March 2023 LIPs to tax under the head capital gains, such treatment may be denied.

In this regard, it would be relevant to take note of the order of the Mumbai bench of the Tribunal in the case of Tata Industries Ltd [TS-935-ITAT-2022(Mum)] involving a comparable situation. Mumbai ITAT, in this case, held that since Tata Industries’ held investments in various subsidiary companies for the purpose of exercising control over such companies, which constituted business activity, the resultant income in the form of dividends was of the character of business receipts, though it is taxed under the head ‘income from other sources’ pursuant to specific provision contained in section 56(2)(i). Accordingly, ITAT held that against the foreign dividends income, the Assessee shall be entitled to: (i) set off of current year loss, (ii) set off of brought forward business losses and unabsorbed depreciation of earlier years and (iii) deduction under Section 80G from the Gross Total Income, subject to the restrictions provided in that relevant section.

IMPLICATIONS OF AMENDMENT TO SECTION 2(24)

The Finance Act, 2024 also inserts sub-clause (xviid) in section 2(24) to specifically include in the definition of “income” the income from life insurance policies referred to in section 56(2)(xiii). This is consistent with several other sub-clauses inserted in section 2(24), which correspond to the items listed in specific clauses of section 28 or section 56.

As stated in the Explanatory Memorandum to the Finance Bill, 2023, the new regime contained in section 56(2)(xiii) is applicable only to policies issued after March 31, 2023. Thus, there is no specific sub-clause in section 2(24) dealing with income from life insurance policies which are issued prior to April 1, 2023, which are not Keyman insurance policies and which do not qualify for the benefit of section 10(10D). Although income from such policies is not specifically included in the definition of income in section 2(24), it cannot be said that the amounts received from such policies cannot be treated as income. The definition given in section 2(24) is an inclusive definition.

CONCLUSION

Taxation of proceeds from life insurance policies is uncharted territory. Provisions specifically inserted in the Act for life insurance policies are new and the application of old provisions to such proceeds could also be new. The law is likely to further evolve on these issues and guidance from specific rules as well as the judiciary can be expected. This article does not attempt to give a final view on the issues but attempts to give related technical arguments.

shailesh.kwebmaker

In view of section 270A (6)(a), no penalty under section 270A can be imposed in respect of an erroneous claim made by a salaried employee who is dependent on his consultant for filing the return of income which erroneous claim is withdrawn by filing a revised computation of income and also by revising return of income of subsequent year withdrawing the excess claim.

13 Sridhar Murthy S vs. ITO
ITA No. 1175/Bang/2022 (Bangalore-Trib.)
A.Y.: 2018-19
Date of order: 28th February, 2023
Section: 270A

In view of section 270A (6)(a), no penalty under section 270A can be imposed in respect of an erroneous claim made by a salaried employee who is dependent on his consultant for filing the return of income which erroneous claim is withdrawn by filing a revised computation of income and also by revising return of income of subsequent year withdrawing the excess claim.

FACTS

The assessee, a salaried employee, filed his return of income declaring therein income under the head `salaries’ and `house property’. The AO while assessing the total income of the assessee restricted the house property loss to Rs. 4,22,012 as against Rs. 18,87,322 claimed by the assessee. The AO initiated proceedings for levy of penalty under section 270A for misreporting of income.

The case of the assessee was that the return of income was filed by a local consultant who had made an erroneous claim by aggregating the interest on housing loan in respect of two properties (one self-occupied and one let out property) and claimed it against the let out property. The loss so computed was carried forward. Upon realising the mistake, the assessee filed a revised computation in the course of assessment proceedings and also revised return of income for A.Y. 2020-21 withdrawing the excess claim of loss.

The AO levied penalty under section 270A of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended that the case of the assessee is covered by section 270A (6)(a) and it was pointed out that the Mumbai Tribunal in the case of Venkateshwearan Krishnan vs. ACIT in ITA No. 5768/Mum/2012 order dated 24th January, 2014 has, on identical facts, deleted the penalty under Section 271(1)(c) of the Act.

HELD

Section 270A(6)(a) of the Act states that when an explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered, then it cannot be a case of under reporting of income for the purpose of Section 270A of the Act. In the instant case as mentioned earlier, the assessee being a salaried employee would have been dependent on the consultant for filing his return of income. When the erroneous claim of the excess interest income against rental income by aggregating both the housing loans was pointed out, the assessee immediately filed revised computation for A.Y. 2018-19 and also filed revised return for A.Y. 2020-21 withdrawing the excess claim. The Mumbai Tribunal, on identical facts in the case of Venkateshwearan Krishnan (supra) had held that assessee’s explanation in making the incorrect claim is bona fide and deleted the penalty under section 271(1)(c) of the Act by following the judgement of the Hon’ble Apex Court in the case of Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158 (SC).

shailesh.kwebmaker

Penalty is not maintainable where AO does not pass an order accepting or rejecting an application filed by the assessee under section 270AA(4)

12. Okasi Ceramics vs. ITO
ITA No.: 779/Chny/2022 (Chennai-Trib.)
A.Y.: 2017-18
Date of order: 8th February, 2023
Sections: 270A, 270AA

Penalty is not maintainable where AO does not pass an order accepting or rejecting an application filed by the assessee under section 270AA(4)

FACTS

For A.Y. 2017-18, the assessee firm did not file its return of income for the A.Y.2017-18 within the time provided in the notice issued under section 142(1) of the Act, nor within the time allowed under section 139(4) of the Act. Therefore, the AO issued a show cause notice under section 144 of the Act and proposed to pass a best judgment assessment order on the basis of material available on record. Subsequently, the assessee filed a copy of profit and loss account and admitted business income of Rs. 10,15,730. The assessment was completed under section 144 determining the total income to be Rs. 10,15,730. The AO initiated proceedings for imposition of penalty under section 270A of the Act.

The assessee paid the tax demanded within thirty days and applied for grant of immunity under section 270AA. The AO did not dispose-off the application and proceeded to levy penalty under section 270A on the ground that the assessee has under-reported its income in consequence of misreporting. Thus, the assessee is not entitled for immunity as provided under section 270AA of the Act and levied penalty of 200 per cent of the tax sought to be evaded which worked out to Rs. 6,09,438.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the grievance of the assessee is that, the assessee filed an application in Form no. 68 and sought an immunity from the levy of penalty because the assessee has satisfied conditions prescribed under section 270AA of the Act, but the AO without disposing off application filed by the assessee in Form no. 68 has completed penalty proceedings and levied penalty under section 270A of the Act.

The Tribunal observed that when the assessee has filed an application in Form no. 68, seeking immunity from levy of penalty in terms of section 270AA of the Act, as per sub section 4 of the 270AA of the Act, the AO shall pass an order accepting or rejecting said application after giving an opportunity of hearing to the assessee. The Tribunal held that in this case, the AO did not pass an order accepting or rejecting application filed by the assessee as required under section 270AA(4) of the Act. Therefore, on this ground itself, the Tribunal can conclude that the penalty order passed by the AO under section 270A of the Act is not maintainable.

However, considering the facts and circumstances of the case, and also taking into account the totality of facts of the present case, the Tribunal deemed it appropriate to set aside the order passed by the CIT(A). The Tribunal restored the issue of levy of penalty under section 270A of the Act to the file of the AO with a direction to the AO to deal with the application filed by the assessee in Form no. 68 of the Act by passing a speaking order before levying penalty u/s. 270A of the Act.

shailesh.kwebmaker

An addition made on the basis of estimation cannot provide foundation for under-reported income for the purpose of imposition of penalty under section 270A of the Act. The penalty cannot be sustained where the only basis of the addition is the estimate made by the DVO.

11. Jaibalaji Business Corporation Pvt Ltd vs. ACIT

ITA. No.840/PUN/2022 (Pune-Trib.)
A.Y.: 2017-18
Date of order: 10th February, 2023
Section: 270A

An addition made on the basis of estimation cannot provide foundation for under-reported income for the purpose of imposition of penalty under section 270A of the Act. The penalty cannot be sustained where the only basis of the addition is the estimate made by the DVO.

FACTS

The assessee, engaged in the business of solar power generation, filed its return of income declaring total income to be Rs. Nil. The AO assessed the total income to be Rs. 2,80,07,310 by making an addition of equal amount under section 43CA. During the year under consideration, the assessee sold certain lands at a price less than stamp duty value. The AO proposed to make an addition on the basis of stamp duty value. The assessee requested for a reference to DVO. The assessee completed the assessment by taking stamp duty value of certain other properties subject to rectification on receipt of report of DVO. Thereafter, the report was received, pursuant to which the rectification order was passed under section 154 of the Act reducing the addition to Rs.7,05,000. The addition was computed by taking note of the value declared by the assessee (sic taken by the AO) at Rs. 71,83,800 and the value determined by the DVO at Rs. 78,88,800. On this basis, the AO rectified the original assessment and also imposed penalty under section 270A of the Act at Rs. 6,99,669.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that –

i) the only basis for imposition of penalty under section 270A is the making of addition under section 43CA on the strength of report of the DVO. The AO originally took certain comparable circumstances and computed the amount of addition at Rs.2.80 crores, which got reduced on the receipt of report of the DVO by Rs. 7,05,000;

ii) it is apparent from the report of the DVO that the value determined by the DVO is again an estimate, in as much as he considered certain other properties at different rates and then averaged such rates to find out the value which the property ought to have realised on the transfer;

iii) it is vivid that the difference between the value declared by the assessee and the value determined by the DVO is minimal and further the value of the DVO is on the basis of value of certain other nearby properties.

Considering the provisions of section 270A(6)(b), the Tribunal held that it is ostensible from the language of subsection (6) that an addition made on the basis of estimation cannot provide foundation for under-reported income for the purpose of imposition of penalty under section 270A of the Act. Since the only basis of the addition was the estimate made by the DVO, the Tribunal held that the penalty cannot be sustained.

shailesh.kwebmaker

Order imposing penalty under section 270A passed in the name of deceased is void.

10 Late Shri Atmaram Tukaram Karad through Legal Heir Shri Sagar Atmaram Karad v. ITO

ITA Nos.: 942 and 943/PUN/2022 (Pune-Trib.)
A.Ys.: 2017-18 and 2018-19
Date of order: 7th February, 2023
Section: 270A

Order imposing penalty under section 270A passed in the name of deceased is void.

FACTS

The assessee, a salaried individual, filed his returns of income for A.Ys. 2017-18 and 2018-19. Subsequently, a notice under section 148 was issued for each of these two years alleging that the assessee has misreported his income. Reassessments were completed and proceedings for imposition of penalty under section 270A were initiated. The assessee was represented by way of a legal representative, who filed written submissions, which fact stood recorded at para 5 of the penalty order. Eventually, the AO imposed penalty under section 270A.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that a penalty was initiated for both the years with reference to the income declared by the assessee in the returns filed pursuant to notices under section 148. This is a case in which the assessee passed away before the initiation of penalty proceedings. The legal representative, in such capacity, filed written submissions as has been categorically recorded in the penalty order itself. Still the AO passed the penalty order for both the years in the name of the deceased.

Considering the above stated observations, the Tribunal held that the penalty orders, having been passed in the name of deceased, are void ab intio. The Tribunal noted that the Bombay High Court in Rupa Shyamsundar Dhumatkar vs. ACIT and others in writ Petition No.404 of 2009, vide its judgment dated 5th April, 2019 considered a similar situation in which the assessee had died and the notice was issued in the name of Late Shyam Sundar Dhumatkar with the Legal Heir as his widow. The Bombay High Court declared such reopening of the assessment as invalid in law. Also, the Supreme Court in PCIT vs. Maruti Suzuki India Ltd [(2019) 416 ITR 613 (SC)] has dealt with a similar situation in which notice was issued in the name of an amalgamating company. The Apex Court held that after amalgamation, the amalgamating company ceased to exist and thus the notice issued was rendered void ab-initio. Their Lordships further held that participation in the proceedings by the assessee cannot operate as estoppel against law.

The Tribunal held that it is manifest that the facts and circumstances of the instant appeals are mutatis mutandis similar to those as considered by the Hon’ble Supreme Court and the Hon’ble Bombay High court in the afore-noted cases and consequently held that the penalty order passed by the AO in the name of deceased is void. The consequential impugned order upholding the penalty was set aside by the Tribunal.

shailesh.kwebmaker

[Arising out of order dated 9th February, 2022 passed by the ITAT “C” Bench Kolkata in ITA Nos. 87/Kol/2019 A.Y. 2015-2016] Section 50C: Compulsory acquisition of a capital asset being land or building or both – No room to suspect the correct valuation – the provisions of Section 50C will not be applicable:

5 PCIT, Asansol vs. M/s The Durgapur Projects Ltd
[ITAT No. 282 Of 2022, (G. A. No. 02 OF 2022)
Dated: 24th February, 2023]

[Arising out of order dated 9th February, 2022 passed by the ITAT “C” Bench Kolkata in ITA Nos. 87/Kol/2019 A.Y. 2015-2016]

Section 50C: Compulsory acquisition of a capital asset being land or building or both – No room to suspect the correct valuation – the provisions of Section 50C will not be applicable:

The Assessee filed its original return of income on 28th September, 2015declaring a loss of Rs.591,64,96,295. Subsequently revised return was filed on 16th January, 2017 declaring a loss of Rs.581,04,07,134. The case was selected for scrutiny and notices under section 143(2) and 142(1) of the Act were issued and the AO completed the assessment under section 143(3) of the Act by order dated 30th December, 2017. The AO inter alia amongst other additions added a sum of Rs. 5,48,43,584 to the total income being capital gain on transfer of land to the National Highways Authority of India (NHAI) and also initiated penalty proceedings under section 271(1)(c) of the Act;

The assessee preferred appeal before the CIT (Appeals), Durgapur. The CIT(A) held that the AO was not justified in invoking Section 50C of the Act on the land which was compulsorily acquired for NHAI and directed to re-compute the capital gains without applying Section 50C of the said Act. The revenue challenged the said order by filing the appeal before the Tribunal. The appeal was dismissed by the Tribunal.

Before the Honorable High Court the Appellant Revenue contended that the Tribunal affirmed the decision of the CIT(A) to hold that the AO was not justified in invoking Section 50C of the Act by relying upon an order passed by the Hyderabad Tribunal in ITA No. 1680, 1681/Hyd/2018 dated 27th July, 2020, without noting that the said decision cannot be applied to the facts of the case, as in the said case the assessee had not transferred therein own property consisting of land and building but had only transferred their right to receive the amount of compensation. Reliance was placed on the judgment of the Hon’ble Division Bench of the High Court of Madras in Ambattur Clothing Company Ltd vs. ACIT, 1 for the proposition that the AO was justified in treating value adopted by the stamp valuation authority as deemed sale consideration received as a result of the acquisition.

The Respondent assessee referred to Section 96 of the Right to Fair Compensation and Re-Settlement Act, 2013 and submitted that the said provision states that no income tax or stamp duty shall be levied on any award or agreement made under the said Act except under section 46 and no person claiming under any such award or agreement shall be liable to pay any fee for the copy of the same. Therefore, it is submitted that the department is not justified in levying the tax as was done by the AO. The Respondent assessee referred to Circular No. 36 of 2016 issued by the Central Board of Direct Taxes (CBDT) dated 25th October, 2016 which dealt with the taxability of compensation received by the land owners for the land acquired under the 2013 Act. It is submitted that the circular clearly states that such compensation received by the land owners on account of compulsory acquisition of land under the said provision is not taxable. Further attention was drawn to the various proceedings initiated by NHAI as also the cheques given in favour of the assessee towards payment of compensation.

The Respondent assessee placed reliance on the decision of the High Court of Rajasthan in Gopa Ram vs. Union of India and Others in Civil Writ Petition No. 12746 of 2017 dated 22th January, 2018 for the proposition that Section 24 of the Acquisition Act, 2013 has no application in the acquisition proceedings under National Highways Act, 1956.

The Honourable High Court observed that admittedly, the land in question was compulsorily acquired for the NHAI. The assessee received compensation of Rs. 4,47,17,396 from NHAI and valuation of the stamp valuation authority was Rs. 9,95,60,980.The AO adopted the full value of sale consideration under section 50C and calculated the capital gains in the hands of the assessee at Rs. 548,43,584.

The Honourable High Court observed that in the instant case the transfer of the land was not on account of the agreement between the parties, but it was the case of the compulsory acquisition under the provisions of the 2013 Act. Therefore, the transaction cannot be treated to be a transaction between two private parties where there may be room to suspect the correct valuation and the apparent sale consideration which was reflected in the sale documents. It is common knowledge that when compensation is determined by the authorities under the said Act, it is invariably lesser than the market value of the property as the determination is done in a particular manner by taking note of several factors.

This is precisely the reason that the Act provides for an appellate remedy and further remedies in case the erstwhile land owner is of the view that the compensation paid/offered was inadequate.

The Honourable High Court observed that this provision has been designed to control the transactions where the correct market value is not mentioned and there is suppression of the correct value by the parties to the transactions. As in the instant case, it is an acquisition of land by the Government by way of compulsory acquisition, the appellant department cannot be heard to say that there was suppression of the value and consequently the question of invoking Section 50C of the Act does not arise.

The case of Ambattur Clothing Company Ltd relied on by revenue has no application to the facts of the case of hand. The facts of the case are entirely different and it was not a case of any compulsory acquisition of land as in the case on the hand.

Thus, in a case of compulsory acquisition of land by the Government there is no room for suppressing the actual consideration received on such acquisition.

In cases of transactions between the private parties, quite often the actual sale consideration paid for acquiring the immovable property is more than the .sale consideration disclosed in the sale deed. With a view to curb such transactions, Section 50C of the Act was introduced so as to adopt the market value determined by the stamp duty authorities as the sale consideration for the purpose of computing capital gains under the provisions of the Income Tax Act.

The said provision therefore provides for referring the matter to the valuation officer of the revenue to determine the actual market value of the property sold and all other relevant factors which may be considered by the State Valuation Authority.

The Honourable High Court further held that the principle culled out by the Hyderabad Tribunal is a correct interpretation of the provisions of Section 50C in the case of the compulsory acquisition of land. Thus, the findings rendered by the CIT(A) as affirmed by the Tribunal on this issue do not call for any interference.

The Honourable High Court observed that for the taxability of the compensation received by the assessee for the lands compulsory acquired under the 2013 Act, it is relevant to take note of the circular issued by the CBDT dated 25th October, 2016 in Circular No. 36/2016. It was pointed out that under the existing provisions of the Income Tax Act an agricultural land which is not situated in a specified urban area is not regarded as a capital asset, and hence capital gain arising from the transfer (including compulsory acquisition) of such agricultural land is not taxable. It is further stated that Finance (No. 02) Act, 2004 inserted Section 10(37) in the Act from 1st April, 2005 to provide specific exemption to capital gains arising to an individual or a HUF from compulsory acquisition of an agricultural land situated in specified urban limited subject to fulfilment of certain conditions.

Thus, it was ordered that the compensation received from the compulsory acquisition of an agricultural land is not taxable under the Income Tax Act subject to the fulfilment of certain conditions for specified urban land.

It was further stated that the 2013 Acquisition Act came into effect from 1st January, 2014 and Section 96 inter alia provides that income tax shall not be levied on any award or agreement made except those made under section 46 of the said Act. Therefore, it was directed that compensation for compulsory acquisition of land under the 2013 Acquisition Act except those made under section 46 of the said act is exempted from the levy of income tax. Further, it was ordered that as no distinction has been made between compensation received for compulsory acquisition of agricultural land and non-agricultural land in the matter of providing exemption from income tax under 2013 Acquisition Act, the exemption provided under section 96 of the 2013 Acquisition Act is wider in scope than the tax exemption provided under the existing provisions of the Income Tax Act, 1961. It was pointed out that this aspect has created uncertainty in the matter of taxability of compensation received on compulsory acquisition of land especially those relating to acquisition of non-agricultural land.

This matter was examined by the CBDT and it was clarified that compensation received in respect of award or agreement which has been exempted from the levy of income tax under section 96 of the 2013 Acquisition Act, shall also not be taxable under provisions of the Income Tax Act, 1961 even if there is no specific provision of exemption for such compensation in the Income Tax Act, 1961. The said Circular No. 36 of 2016 would come to the aid and assistance of the assessee and the compensation received by the assessee on account of the compulsory acquisition of land under the 2013 Acquisition Act is exempt from the tax.

The Honourable Court also observed that the object and purpose behind insertion of the said provision in the Act was to curb the menace of the use of unaccounted cash in transfers of capital assets. Upon a plain and literal interpretation of the words used in Section 50C, it is amply clear that the legislature intended to take the valuation adopted by the stamp valuation authorities as the benchmark for the purpose of payment of stamp duty in respect of transfer of the capital asset as the deemed full value of consideration.

Keeping in mind the canons of interpretation and the object behind inserting the said provision, it appears that the legislature used the words and expressions in Section 50C of the Act consciously to give the same a restricted meaning. In view thereof, the term “transfer” used in Section 50C has to be given a restricted meaning and the same does not have a wider connotation so as to include all kinds of transfer as contemplated under Section 2(47) of the Act. The Court accordingly held that the provisions of Section 50C shall be applicable in cases where transfer of the capital asset has to be effected only upon payment of stamp duty.

In case of a transfer by way of compulsory acquisition, the capital asset being land or building or both vests upon the government by operation of the provisions of the relevant statute governing such acquisition proceeding and subject to the terms and conditions laid down in the said statute being followed.

In case of compulsory acquisition the transfer of property takes place by operation of law and the provisions of the Transfer of Property Act or the Indian Registration Act do not have any manner of application to such transfers. The question of payment of stamp duty also does not arise in such cases.

The Court held that in case of compulsory acquisition of a capital asset being land or building or both, the provisions of Section 50C cannot be applied as the question of payment of stamp duty for affecting such transfer does not arise.

In the instant case, the property was acquired under the provisions of the National Highways Act, 1956. The property vests by operation of the said statute and there is no requirement for payment of stamp duty in such vesting of property. As such there was no necessity for an assessment of the valuation of the property by the stamp valuation authority in the case on hand. For the reasons as aforesaid, it is held that the provisions under section 50C of the Income Tax Act cannot be applied to the case on hand.

Consequently the appeal filed by the revenue was dismissed and the substantial questions of law were answered against the revenue.

shailesh.kwebmaker

[Arising from order dated 13th April, 2011 passed by the Income Tax Appellate Tribunal, “B” Bench, Kolkata (Tribunal) in ITA No. 92/Kol/2010 A.Y.: 2005-06. ] Section 28 viz a viz 45: Development agreement – capital gain or income from business:

4 CIT, Kolkata IV vs. M/s Machino Techno Sales Ltd
[ITA no 160 of 2011 Dated: 20th February, 2023, (Cal.) (HC)][Arising from order dated 13th April, 2011 passed by the Income Tax Appellate Tribunal, “B” Bench, Kolkata (Tribunal) in ITA No. 92/Kol/2010
A.Y.: 2005-06. ]

Section 28 viz a viz 45: Development agreement – capital gain or income from business:

The appeal of the Revenue was admitted on the following substantial question of law:-

“Whether the learned Tribunal below committed substantial error of law in holding that the income, derived by way of return from a Development Agreement in favour of the owner of the land, should be treated as capital gain instead of income from business ?”

The Hon court observed that in the absence of any evidence to show that the land purchased by the assessee during 1985/1990 was intended for resale or was converted into stock-in-trade, the earnings of the assessee pursuant to a development agreement entered into with the developer could not be assessed as business income . The court observed that the Tribunal had taken into consideration the factual position which was not disputed by the revenue that the said land and factory shed was used by the assessee as its workshop and was shown as capital asset in its balance-sheet.

Further, the revenue did not dispute the fact that the purchase prices were debited by the assessee under the head ‘land account’. On 13th November, 1994 the assessee entered into a development agreement with the developer under which the assessee in exchange of the land in question was entitled to get 45 per cent of the constructed area and the remaining portion of the land and shed continued to be used by the assesse for its own workshop purchase. The Tribunal noted that no documents have been referred to by the revenue to show that the assessee had treated the asset as stock-in-trade.

On the other hand, the assessee continued to show the land as capital asset even after 1994, which fact was accepted by the department. The Tribunal had distinguished the decisions cited by the revenue by noting the facts of the case that the land was purchased by the assessee during 1985/1990 and used as capital asset for its business purposes and continued to treat the same as capital asset in the accounts. Thus, the Tribunal correctly held that there was no intention on the part of the assessee to enter into an adventure in the nature of trade to deal in the land.

The court observed that in view of the cogent reasons assigned by the Tribunal on the undisputed factual position, there were no grounds to interfere with the order passed by the Tribunal.

Accordingly, the appeal was dismissed and the substantial questions of law were answered against the revenue.

shailesh.kwebmaker

‘Charitable Purpose’, GPU Category- Post 2008 Amendment – Eligibility for Exemption under Section 11 – Section 2(15) – Part II

INTRODUCTION

4.1 As mentioned in Introduction in Part I of this write-up (BCAJ April, 2023), special provisions dealing with income derived by charitable trusts were present in section 4(3) of the Indian Income-tax Act, 1922 (“1922 Act”). The term “charitable purpose” was defined in the 1922 Act to include relief of the poor, education, medical relief and the advancement of any other object of general public utility. The last limb – ‘advancement of any other object of general public utility’ (“GPU” or “GPU category”) did not contain any conditions which restricted a charitable trust from carrying on business activities.

4.2 As mentioned in Part I of the write up, provisions dealing with charitable trusts were amended from time to time in the Income-tax Act, 1961 (“1961 Act”). As stated in Para 1.3 of Part I, the words ‘not involving the carrying on of any activity for profit’ were added in the GPU category at the time of enactment of the 1961 Act. These words were interpreted by several decisions of the Supreme Court. To reiterate in brief, the Supreme Court in Sole Trustee, Loka Shikshana Trust vs. CIT [1975] 101 ITR 234 (“Loka Shikshana Trust”) held that a GPU category charitable trust should show that its purpose is the advancement of any other object of general public utility and that such purpose does not involve the carrying on of any activity for profit. The Supreme Court in Indian Chamber of Commerce vs. CIT [1975] 101 ITR 796 (SC) (“Indian Chamber”) held that it is not sufficient that a trust has the object of general public utility but the activities of the trust should also not be for profit. The Constitutional bench of the Supreme Court in Surat Art’s case overruled its earlier decision and held that it was the object of general public utility that must not involve the carrying on of any activity for profit and not its advancement or attainment.

4.3 Further amendments, as stated in para 1.4 and 1.5 of Part I of this write up, were made in the 1961 Act from time to time. A significant amendment was made by the Finance Act, 2008 (‘2008 amendment’) whereby a proviso was added to the definition of ‘charitable purpose’ stating that advancement of any other object of general public utility shall not be a charitable purpose if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering service in relation thereto [Commercial Activity/Activities] for a cess or fee or any other consideration irrespective of the nature of use or application, or retention, of the income from such activity. The Finance Minister’s speech at the time of introduction of the 2008 amendment and the CBDT Circular explaining the provisions are referred to at para 1.8 of Part I of this write-up. Subsequently, further amendments were made from time to time specifying that the proviso introduced by the 2008 amendment would not apply if the receipts from activities in the nature of trade, commerce or business are below a specified limit.

ACIT(E) VS. AHMEDABAD URBAN DEVELOPMENT AUTHORITY
(449 ITR 1 -SC)

5.1 As stated in Part I of this write up, appeals were filed before the Supreme Court challenging the decisions of several High Courts. As mentioned in Para 2.1 of Part I, the Supreme Court in the case of ACIT(E) vs. Ahmedabad Urban Development Authority and connected matters (449 ITR 1) divided the assessee into six categories namely – (i) statutory corporations, authorities or bodies, (ii) statutory regulatory bodies/authorities, (iii) trade promotion bodies, councils, associations or organisations, (iv) non-statutory bodies, (v) state cricket associations and (vi) private trusts. The arguments of the Revenue and that of the assessees are summarised in Paras 3.1 to 3.3 Part I of this write up. After considering the contentions of both the sides, Supreme Court proceeded to decide on the issue.

5.2 At the outset, the Supreme Court set out the legislative history of the provisions and the amendments made from time to time so as to determine the intention of the law makers. The Court further observed that the speeches made in the legislature or Parliament can also be looked into for determining the rationale for the amendments. The Court then proceeded to deal with certain contentions raised by the assessees on the general principles and interpretation of the language employed in the proviso to Section 2(15)

5.3 The Court dealt with the assessee’s reliance on CBDT Circular Nos. 11 of 2008 (308 ITR 5 (St.)) and 1 of 2009 (310 ITR 42 (St.)) and the argument that considering the objectives of amendments and binding effect of the Circulars, the 2008 amendment would not affect genuine trusts but only entities operating on commercial lines where the GPU object is only a device to hide the true purpose of trade, commerce or business. The Court distinguished the decisions in the case of Navnit Lal Jhaveri, UCO Bank, etc. which were relied upon by the assessee for the binding effect of the Circular and stated as under [pages 87/88]:

“In the opinion of this court, the views expressed in Keshavji Ravji, Indian Oil Corporation and Ratan Melting and Wire Industries (though the last decision does not cite Navnit Lal Jhaveri), reflect the correct position, i.e., that circulars are binding upon departmental authorities, if they advance a proposition within the framework of the statutory provision. However, if they are contrary to the plain words of a statute, they are not binding. Furthermore, they cannot bind the courts, which have to independently interpret the statute, in their own terms. At best, in such a task, they may be considered as departmental understanding on the subject and have limited persuasive value. At the highest, they are binding on tax administrators and authorities, if they accord with and are not at odds with the statute; at the worst, if they cut down the plain meaning of a statute, or fly on the face of their express terms, they are to be ignored.”

5.3.1 While dealing with the argument of assessees’ being statutory corporations that they are agencies of the ‘State’ and the activities of such corporations cannot be characterised as motivated by profit, the Court observed that every activity resembling commerce cannot be considered per se to be exempt from Union taxation and that the crucial or determinative element is whether performance of a function is actuated by profit motive.

5.3.2 Considering the meaning of the expressions ‘fee, cess or consideration’, the Court stated that they should receive a purposive interpretation and also laid down the following guiding principles as to when a ‘fee, cess or consideration’ would or would not be treated as being towards an Commercial Activity i.e. in the nature of trade, commerce or business [pages 97/98]:

“Fee, cess and any other consideration” has to receive a purposive interpretation, in the present context. If fee or cess or such consideration is collected for the purpose of an activity, by a state department or entity, which is set up by statute, its mandate to collect such amounts cannot be treated as consideration towards trade or business. Therefore, regulatory activity, necessitating fee or cess collection in terms of enacted law, or collection of amounts in furtherance of activities such as education, regulation of profession, etc., are per se not business or commercial in nature. Likewise, statutory boards and authorities, who are under mandate to develop housing, industrial and other estates, including development of residential housing at reasonable or subsidized costs, which might entail charging higher amounts from some section of the beneficiaries, to cross-subsidize the main activity, cannot be characterized as engaging in business. The character of being ‘state’, and such corporations or bodies set up under specific laws (whether by states or the centre) would, therefore, not mean that the amounts are ‘fee’ or ‘cess’ to provide some commercial or business service. In each case, at the same time, the mere nomenclature of the consideration being a “fee” or “cess”, is not conclusive. If the fee or cess, or other consideration is to provide an essential service, in larger public interest, such as water cess or sewage cess or fee, such consideration, received by a statutory body, would not be considered “trade, commerce or business” or service in relation to those. Non-statutory bodies, on the other hand, which may mimic regulatory or development bodies – such as those which promote trade, for a section of business or industry, or are aimed at providing facilities or amenities to improve efficiencies, or platforms to a segment of business, for fee, whether charged by subscription, or specific fee, etc, may not be charitable; when they claim exemption, their cases would require further scrutiny.”

5.3.3 The Court then held that the ‘predominant test’ laid down by the Constitution bench of the Supreme Court in Surat Art’s case would cease to apply after the 2008 amendment. In this context, the Court expressed its views as under [page 101]:

“The paradigm change achieved by Section 2(15) after its amendment in 2008 and as it stands today, is that firstly a GPU charity cannot engage in any activity in the nature of trade, commerce, business or any service in relation to such activities for any consideration (including a statutory fee etc.). This is emphasized in the negative language employed by the main part of Section 2(15). Therefore, the idea of a predominant object among several other objects, is discarded. The prohibition is relieved to a limited extent, by the proviso which carves out the condition by which otherwise prohibited activities can be engaged in by GPU charities.”

In the above context, the Court further explained effect of the amendments from 2008 as under [page 108]:

“….. Thus, the test of the charity being driven by a predominant object is no longer good law. Likewise, the ambiguity with respect to the kind of activities generating profit which could feed the main object and incidental profit- making also is not good law. What instead, the definition under Section 2(15) through its proviso directs and thereby marks a departure from the previous law, is – firstly that if a GPU charity is to engage in any activity in the nature of trade, commerce or business, for consideration it should only be a part of this actual function to attain the GPU objective and, secondly – and the equally important consideration is the imposition of a quantitative standard – i.e., income (fees, cess or other consideration) derived from activity in the nature of trade, business or commerce or service in relation to these three activities, should not exceed the quantitative limit of Rs. 10,00,000 (w.e.f. 01.04.2009), Rs. 25,00,000 (w.e.f. 01.04.2012), and 20% (w.e.f. 01.04.2016) of the total receipts. Lastly, the “ploughing” back of business income to “feed” charity is an irrelevant factor – again emphasizing the prohibition from engaging in trade, commerce or business.”

5.4 The Court then noted the distinction between a case where business undertaking itself is held as a property under trust to which section 11(4) applies and a case where a trust carries on business which is governed by section 11(4A) of the Act.

5.4.1 Considering the distinction between the provisions contained in the section 11(4) and section 11(4A) and after considering certain relevant judicial precedents including its judgment in the case of J K Trust vs. CIT [(1957) 32 ITR 535 (SC)] and summarizing the position in this respect, the Court observed as under [page 105]:

“Therefore, to summarise on the legal position on this – if a property is held under trust, and such property is a business, the case would fall under section 11(4) and not under section 11(4A) of the Act. Section 11(4A) of the Act, would apply only to a case where the business is not held under trust. There is a difference between a property or business held under trust and a business carried on by or on behalf of the trust. This distinction was recognized in Surat Art Silk (supra), which observed that if a business undertaking is held under trust for a charitable purpose, the income from it would be entitled to exemption under section 11(1) of the Act.”

5.4.2 In the context of section11(4A), the Court considered the ratio of its judgment in Thanthi Trust’s case [referred to in para 1.4.2 of part- I] and noted that in the context of interpretation of section 11(4A) as amended w.e.f 1st April, 1992 [the third period referred to therein], it is stated that the provision [i. e. section 11(4A)] requires that for a business income of a trust to be exempt, the business should be incidental to the attainment of objectives of the trust or institution. While explaining the effect of this, the Court stated as under [page 107]:

“The above observations have to be understood in the light of the facts before the court. Thanthi Trust carried on newspaper business which was held under trust. The charitable object of the trust was the imparting of education – which falls under section 2(15) of the Act. The newspaper business was incidental to the attainment of the object of the trust, namely, that of imparting education. This aspect is important, because the aim of the trust was a per se charitable object, not a GPU object. The observations were therefore made, having regard to the fact that the profits of the newspaper business were utilized by the trust for achieving the object of education. In the light of such facts, the carrying on of newspaper business, could be incidental to the object of education- a per se category. The Thanthi Trust (supra) ratio therefore, cannot be extended to cases where the trust carries on business which is not held under trust and whose income is utilized to feed the charitable objects of the trust.”

5.4.3 The Court observed that section 11(4A) of the Act exempts profits and gains of business of a trust or institution provided such business is incidental to the attainment of the objectives of the trust and separate books of accounts are maintained in respect of such business. Having taken a view that the interpretation of that expression in Thanthi Trust was in the context of per se charity [i.e. specific category- education] and not for the GPU category, the Court stated that what then is the interpretation of the expression “incidental” profits, from “business” being “incidental to the attainment of the objectives” of the GPU category [which occurs in Sec 11(4A)]? In this context, interpreting the meaning of the term ‘incidental’, the Court stated as under (page 108):

“….. The proper way of reading reference to the term “incidental” in Section 11(4A) is to interpret it in the light of the sub-clause (i) of proviso to Section 2(15), i.e., that the activity in the nature of business, trade, commerce or service in relation to such activities should be conducted actually in the course of achieving the GPU object, and the income, profit or surplus or gains can then, be logically incidental. The amendment of 2016, inserting sub clause (i) to proviso to Section 2(15) was therefore clarificatory. Thus interpreted, there is no conflict between the definition of charitable purpose and the machinery part of Section 11(4A). Further, the obligation under section 11(4A) to maintain separate books of account in respect of such receipts is to ensure that the quantitative limit imposed by sub-clause (ii) to section 2(15) can be computed and ascertained in an objective manner.”

5.5 For the purpose of concluding on interpretation of definition ‘charitable purpose’ under the Act, the Court observed that charity as defined has a wider meaning where it is the object of the institution which is in focus. As such, the idea of providing services or goods at no consideration, cost or nominal consideration is not confined to the provisions of services or goods without charging anything or charging a token or a nominal amount. Referring to the judgment of Indian Chamber’s case [referred to in para 1.3.2 of part- I of this write-up], the Court also noted that a little surplus may be left over at the end of the year- the broad inhibition against making profit is a good guarantee that the carrying on of an activity is not for profit. In this context, the Court observed as under [pages 109/110]:

“Therefore, pure charity in the sense that the performance of an activity without any consideration is not envisioned under the Act. If one keeps this in mind, what section 2(15) emphasizes is that so long as a GPU’s charity’s object involves activities which also generates profits (incidental, or in other words, while actually carrying out the objectives of GPU, if some profit is generated), it can be granted exemption provided the quantitative limit (of not exceeding 20%) under second proviso to section 2(15) for receipts from such profits, is adhered to”

5.5.1 In the above context, the Court further observed as under [page 110]:

“Yet another manner of looking at the definition together with sections 10(23) and 11 is that for achieving a general public utility object, if the charity involves itself in activities, that entail charging amounts only at cost or marginal mark up over cost, and also derive some profit, the prohibition against carrying on business or service relating to business is not attracted – if the quantum of such profits do not exceed 20% of its overall receipts.”

5.5.2 The Court concluded on the interpretation of this section 2(15) by stating as under [page 110]:

“It may be useful to conclude this section on interpretation with some illustrations. The example of Gandhi Peace Foundation disseminating Mahatma Gandhi’s philosophy (in Surat Art Silk) through museums and exhibitions and publishing his works, for nominal cost, ipso facto is not business. Likewise, providing access to low-cost hostels to weaker segments of society, where the fee or charges recovered cover the costs (including administrative expenditure) plus nominal mark up; or renting marriage halls for low amounts, again with a fee meant to cover costs; or blood bank services, again with fee to cover costs, are not activities in the nature of business. Yet, when the entity concerned charges substantial amounts- over and above the cost it incurs for doing the same work, or work which is part of its object (i.e., publishing an expensive coffee table book on Gandhi, or in the case of the marriage hall, charging significant amounts from those who can afford to pay, by providing extra services, far above the cost-plus nominal markup) such activities are in the nature of trade, commerce, business or service in relation to them. In such case, the receipts from the latter kind of activities where higher amounts are charged, should not exceed the limit indicated by proviso (ii) to section 2(15).”

5.5.3 While arriving at the above conclusion, the Court further stated as under [page 111]:

“In the opinion of this court, the change intended by Parliament through the amendment of section 2(15) was sought to be emphasised and clarified by the amendment of section 10(23C) and the insertion of section 13(8). This was Parliaments’ emphatic way of saying that generally no commercial or business or trading activity ought to be engaged by GPU charities but that in the course of their functioning of carrying out activities of general public utility, they can in a limited manner do so, provided the receipts are within the limit spelt out in clause (ii) of the proviso to section 2(15).”

[To be continued]

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Search and seizure — Block assessment — Undisclosed income — Appeal to CIT (Appeals) — Failure to furnish all material in department’s possession to assessee except documents relied upon — Directions issued to CIT (Appeals).

14 Deepak Talwar vs. Dy. CIT

[2023] 452 ITR 61 (Del.)

A. Ys. 2011-12 to 2017-18

Date of order: 27th January, 2023

Sections 132, 143(3), 153A and 246A of ITA 1961

Search and seizure — Block assessment — Undisclosed income — Appeal to CIT (Appeals) — Failure to furnish all material in department’s possession to assessee except documents relied upon — Directions issued to CIT (Appeals).

Pursuant to a search, the AO passed orders under section 143(3) r.w.s.153A of the Income-tax Act, 1961 for the A. Ys. 2011-12 to 2017-18 making additions and accordingly raising demand. The assessee’s appeal under section 246A was pending before the CIT (Appeals) against such orders. The assessee requested the Department to furnish the material and information in the possession of the Department. That was not done. The assessee filed a writ petition for a direction to that effect.

The Department’s case was that since the documents were voluminous and collating them would involve a long time, the documents relied upon were furnished and if some of them were not furnished they would be furnished shortly and that in respect of the documents which were in the possession of the Department but were not relied upon, there was no legal obligation on its part to furnish them to the assessee.

The Delhi High Court directed the CIT (Appeals) to take a decision in the matter with regards to the documents which, although, in the possession of the Department had not been relied upon and before proceeding further placed on record a list of those documents, whereupon, the assessee would have an opportunity to make a submission, as to the relevance of those documents for the purposes of prosecuting the assessee’s appeal. However, the CIT (Appeals) would not pass a piecemeal order. The order would be composite and would deal with the aforesaid aspect and the merits of the appeal.

shailesh.kwebmaker

Reassessment — DTAA — Effect of section 90 — Tax residency certificate granted by another country — Binding on income-tax authorities in India — Amount not assessable in India under DTAA — Notice of reassessment in respect of such income — Not valid.

13 Blackstone Capital Partners (Singapore) Vi FDI Three Pvt Ltd vs. ACIT (International Taxation)

[2023] 452 ITR 111 (Del)

A. Y. 2016-17

Date of order: 30th January, 2023

Sections 90, 147 and 148 of ITA 1961

Reassessment — DTAA — Effect of section 90 — Tax residency certificate granted by another country — Binding on income-tax authorities in India — Amount not assessable in India under DTAA — Notice of reassessment in respect of such income — Not valid.

The petitioner- Blackstone Capital Partners (Singapore) VI FDI Three Pvt Ltd was a non-resident in India and majority of its directors were residents of Singapore. During the A. Y. 2016-17, the petitioner sold the equity shares purchased in the A. Y. 2014-15. For the A. Y. 2016-17, the petitioner filed the return of income on 29th September, 2016. In terms of the said return of income, the petitioner claimed that the gains earned by it on sale of Agile shares were not taxable in India by virtue of Article 13(4) of the Double Tax Avoidance Agreement entered into and subsisting between India and Singapore based on the Tax Residency Certificate. In its return of income, the petitioner made all the requisite disclosures with regard to the investment and sale of shares like the petitioner was a non-resident in India and majority of its directors were residents of Singapore. The petitioner’s return of income was processed under section 143(1) of the Income-tax Act, 1961 with no demand, on 8th October, 2016. On 31st March, 2021 a notice was issued to the petitioner under section 148 of the Act for the A. Y. 2016-17. The petitioner filed a return of income on 28th April, 2021 and also filed objections which were rejected.

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

“i) The core issue that arises for consideration in the present writ petition is whether the respondent-Revenue can go behind the tax residency certificate issued by the other tax jurisdiction and issue reassessment notice u/s. 147 of the Income-tax Act, 1961 to determine issues of residence status, treaty eligibility and legal ownership.

ii) The Income-tax Act, 1961, recognizes and gives effect to Double Taxation Avoidance Agreements. Section 90(2) of the Act stipulates that in case of a non-resident taxpayer with whose country India has a Double Taxation Avoidance Agreement, the provisions of the Act would apply only to the extent they are more beneficial than the provisions of such Agreement. On March 30, 1994, the CBDT issued Circular No. 682 emphasising that any resident of Mauritius deriving income from alienation of shares of an Indian company would be liable to capital gains tax only in Mauritius in accordance with Mauritius tax law and would not have any capital gains tax liability in India. This circular was a clear enunciation of the provisions contained in the Double Taxation Avoidance Agreement, which would have overriding effect over the provisions of sections 4 and 5 of the Act by virtue of section 90. The Supreme Court, in the case of UOI v. Azadi Bachaa Andalon , upheld the validity and efficacy of Circular No. 682 dated March 30, 1994 ([1994] 207 ITR (St.) 7) and Circular No. 789 dated April 13, 2000 ([2000] 243 ITR (St.) 57), issued by the CBDT. The court further held that the certificate of residence is conclusive evidence for determining the status of residence and beneficial ownership of an asset under the Double Taxation Avoidance Agreement.

iii) The assessee had a valid tax residency certificate dated February 3, 2015 from the Inland Revenue Authority of Singapore evidencing that it was a tax resident of Singapore and thereby was eligible to claim tax treaty benefits between India and Singapore. The tax residency certificate is statutorily the only evidence required to be eligible for the benefit under the Double Taxation Avoidance Agreement and the respondent’s attempt to question and go behind the tax residency certificate was wholly contrary to the Government of India’s consistent policy and repeated assurances to foreign investors. In fact, the Inland Revenue Authority of Singapore had granted the assessee the tax residency certificate after a detailed analysis of the documents, and the Indian Revenue authorities could not disregard it as that would be contrary to international law.

iv) Accordingly, the tax residency certificate issued by the other tax jurisdiction was sufficient evidence to claim treaty eligibility, residence status, legal ownership and accordingly the capital gains earned by the assessee was not liable to tax in India. No income chargeable to tax had escaped assessment and the notice of reassessment was not valid.”

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Reassessment — Notice — Initial notice issued in the name of deceased assessee — Invalid — Notice and order under section 148A(d) set aside

12. Prakash Tatoba Toraskar vs. ITO
[2023] 452 ITR 59 (Bom)
Date of order: 10th February, 2023
Sections 147, 148, 148A(b) and 148A(d)
of ITA 1961

Reassessment — Notice — Initial notice issued in the name of deceased assessee — Invalid — Notice and order under section 148A(d) set aside

The AO issued a notice under section 148 of the Income-tax Act, 1961 dated 30th June, 2021for reopening the assessment under section 147 in the name of the assessee who had died on 4th November, 2019.. Pursuant to the judgment in UOI vs. Ashish Agarwal [2022] 444 ITR 1 (SC) the AO treated the notice issued under section 148 in the name of the deceased assessee to be a show-cause notice under section 148A(b). By that time the assessee had died. The legal heir of the the deceased assessee objected and did not participate in the assessment proceedings. The AO passed an order under section 148A(d).

The legal heir filed a writ petition and challenged the reassessment proceedings and the order under section 148A(d). The Bombay High Court allowed the writ petition and held as under:

“i) Notwithstanding the objection having been taken by the legal heir of the deceased assessee, an order u/s. 148A(d) was passed on June 30, 2022. The initial notice issued u/s. 148 and the subsequent communication dated May 20, 2022 purporting to be a notice u/s. 148A(b) were in the name of the deceased assessee. The notice issued u/s. 148 against a dead person would be invalid, unless the legal representatives submit to the jurisdiction of the Assessing Officer without raising any objection.

ii) The petition is allowed. The notice dated June 30, 2021 issued u/s. 148, the communication dated May 20, 2022 purporting to be a notice u/s. 148A(b) and the order dated June 30, 2022 u/s. 148A(d) were set aside.”

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Reassessment — Notice under section 148 — Jurisdiction — Notice issued by officer who had no jurisdiction over the assessee — Notice defective and invalid — Notice and order rejecting objections of the assessee set aside.

11 Ashok Devichand Jain vs. UOI

[2023] 452 ITR 43 (Bom) A. Y.: 2012-13

Date of order: 8th March, 2022

Sections 147 and 148 of ITA 1961

Reassessment — Notice under section 148 — Jurisdiction — Notice issued by officer who had no jurisdiction over the assessee — Notice defective and invalid — Notice and order rejecting objections of the assessee set aside.

The petitioner assesee filed a writ petition challenging a notice dated 30th March, 2019 issued by the Income Tax Officer under section 148 of the Income-tax Act, 1961 for the A. Y. 2012-13 and an order passed on 18th November, 2019 rejecting the petitioner’s objection to reopening on various grounds.

The Bombay High Court allowed the writ petition and held as under:

“i) The primary ground that has been raised is that the Income-tax Officer who issued the notice u/s. 148 of the Act, had no jurisdiction to issue such notice. According to the petitioner as per CBDT Instruction No. 1 of 2011 dated January 31, 2011, where income declared/returned by any non-corporate assessee is up to Rs. 20 lakhs, then the jurisdiction will be of Income-tax Officer and where the income declared/returned by a non-corporate assessee is above Rs. 20 lakhs, the jurisdiction will be of Deputy Commissioner/Assistant Commissioner.

ii) The petitioner has filed return of income of about Rs. 64,34,663 and therefore, the jurisdiction will be that of Deputy Commissioner/Assistant Commissioner and not Income-tax Officer. Mr. Jain submitted that since notice u/s. 148 of the Act has been issued by the Income-tax Officer, and not by the Deputy Commissioner/Assistant Commissioner that is by a person who did not have any jurisdiction over the petitioner, such notice was bad on the count of having been issued by an officer who had no authority in law to issue such notice.

iii) The notice u/s. 148 of the Income-tax Act, 1961 for reopening the assessment u/s. 147 is a jurisdictional notice and any inherent defect therein is not curable.

iv) On the facts that the notice u/s. 148 having been issued by an Income-tax Officer who had no jurisdiction over the assessee had not been issued validly and without authority in law. The notice and the order rejecting the assessee’s objections were set aside.”

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International transactions — Draft assessment order — Limitation — Effect of sections 153 and 144 — Issue of directions by Commissioner has no effect on limitation — Direction of Commissioner does not extend limitation.

10 Pfizer Healthcare India Pvt Ltd vs. Dy. CIT

[2023] 452 ITR 187 (Mad)

A. Y. 2015-16

Date of order: 11th November, 2022

Sections 144, 144C and 153 of ITA 1961

International transactions — Draft assessment order — Limitation — Effect of sections 153 and 144 — Issue of directions by Commissioner has no effect on limitation — Direction of Commissioner does not extend limitation.

The assessee was engaged in the business of manufacture, research, development and export to its group entities. It had filed its return for the A. Y. 2015-16. The time limit for completion of regular assessment in terms of section 153(1) of the Act, being 21 months from the end of the relevant assessment year, was 31st December, 2017. A reference was made to the Transfer Pricing Officer, since the business of the assessee included transactions that related to entities abroad for which a proper determination of arm’s length price was to be made. There was a request by the Transfer Pricing Officer for exchange of information and a reference was made to the competent authority in terms of section 90A of the Act. The reference for exchange of information was made by the Transfer Pricing Officer on 29th October, 2018 and the last of the information sought was received by him on 27th March, 2019. The order of the Transfer Pricing Officer was passed on 24th May, 2019. The draft assessment order dated 26th July, 2019, was passed in terms of section 143(3) r.w.s 144C(1).

The assessee filed a writ petition challenging the draft assessment order. The Madras High Court allowed the writ petition and held as under:

“i) Section 92CA of the Income-tax Act, 1961, is only a machinery provision that provides for the procedure for passing of a transfer pricing order and does not constitute a prescription for computing limitation. Section 153 deals exclusively with limitation and the statutory extensions and exclusions therefrom, as set out under the Explanation thereto. Section 92CA(3A) sets out the specific time periods to be adhered to in completion of the transfer pricing proceedings and works as limitation within the period of overall limitation provided u/s. 153 for the completion of assessment. The limitations set out under sub-section (3A) of section 92CA are to be construed in the context of, and within the overall limitation provided for, u/s. 153. There is no situation contemplated that would alter the limitation set out u/s. 153C save the exclusions set out under Explanation 1 to section 153C itself. The time limits set out under sub-section (3A) of section 92CA are thus subject to the limitation prescribed u/s. 153 that can, under no circumstances, be tampered with.

ii) The second proviso to Explanation 1 to section 153 states that the period of limitation available to the Assessing Officer for making an order of assessment shall be extended to 60 days. The 60 days period, thus, must run from the date of the transfer pricing order to provide for seamless completion of assessment. The transmission of a transfer pricing order from the Transfer Pricing Officer to the Assessing Officer is an internal administrative act and cannot impact statutory limitation, which is the exclusive prerogative of section 153.

iii) Power is granted to the Joint Commissioner to issue directions u/s. 144A for completion of assessment. That provision states that the Joint Commissioner, on his own motion or on reference made to him by the Assessing Officer or assessee, may call for and examine the record of any proceedings in which the assessment is pending. If he considers that having regard to the nature of the case, amount involved or any other reason, it is necessary or expedience to issue directions for the guidance of the Assessing Officer, he may do so and such directions shall be binding upon the Assessing Officer. The issuance of the direction and the communication of such direction by the Joint Commissioner to the Assessing Officer to aid in the completion of assessment is expected to be within the overall limits provided for completion of assessment u/s. 153 and Explanation 1 thereto and nowhere is it contemplated that such reference would extend the limitation.

iv) The last of the information in this case was received by the Transfer Pricing Officer on March 27, 2019, by which time, the time for completion of regular assessment had itself long elapsed, on December 31, 2018. The order was barred by limitation.

v) In the light of the detailed discussion as above, the impugned order of assessment is held to be barred by limitation and is set aside. This writ petition is allowed.”

shailesh.kwebmaker

Union Budget Receipt Side Movement Trends of Last 20 Years

An analysis of the Abstract of Receipts side of the Union Budget reveals some very interesting macro trends impacting federalism, fiscal prudence and impact of the decisions of Ministry of Finance (both at Centre and states) leadership.

Please see the Tables below which set the stage for study and discussions. Note that the values considered for study are ‘Revised Estimates’ of the completing year, given in the Budget booklet for the upcoming year. The details are:

A) Budget Statement details of Gross Receipts.

All Values are in Rupees Crores.

Abstract of Budget Revenues — Revised Estimates (RE) for the year coming to an end.

Details	RE 2002/03	RE 2012/13	RE 2022/23	CAGR % – 20 Years
REVENUE RECEIPTS
Total Tax Revenue collection (refer Note 1 below)	221918	1038037	3043067	14.00
Calamity Contingency	-1600	-4375	-8000
Share of States	-56141	-291547	-948406	15.18
Centre – Net Tax Revenue (refer Note 2 below)	164177	742115	2086661	13.56
Non Tax Revenue (dividends, profits, receipts of union territories, others)	72759	129713	261751	6.61
Total Centre Revenue Receipts	236936	871828	2348412	12.15
Total Centre Capital Receipts	161779	564148	1842061	12.93
Draw-down of cash		-5150
Total Budget Receipts	398715	1430826	4190473	12.48

RATIOS
1. Share of states in gross tax revenue – %	25.30	28.09	31.17
2. Composition of Total Revenue Receipts
A. Centre Net Revenue Receipt	41.18%	51.87%	49.80%
B. Non Tax Revenue	18.25%	9.07%	6.25%
C. Capital Receipts	40.58%	39.43%	43.96%
3. Taxes contribution to Total Revenue Receipts
Direct Tax
Corporate Tax	44700	358874	835000	15.76
Income Tax	37300	206095	815000	16.67
Expenditure & Wealth Tax	445	866	0
Cumulative Gross Direct Taxes	82445	565835	1650000	16.16
% of Gross Direct Tax to Total Tax Collection	37.15	54.51	54.22
Direct Tax
Customs Duty	45500	164853	210000	7.95
Union Excise Duty	87383	171996	320000
Service Tax	5000	132687	1000
GST	0	0	854000
Cumulative – ED, ST, GST	92383	304683	1175000	13.56
Cumulative Indirect Tax	137883	469536	1385000	12.23
% of Gross Indirect Tax to Total Tax Collection	62.13	45.23	45.51

Details

RE 2002/03

RE 2012/13

RE 2022/23

CAGR % – 20 Years

REVENUE RECEIPTS

Total Tax Revenue collection (refer Note 1 below)

221918

1038037

3043067

14.00

Calamity Contingency

-1600

-4375

-8000

Share of States

-56141

-291547

-948406

15.18

Centre – Net Tax Revenue (refer Note 2 below)

164177

742115

2086661

13.56

Non Tax Revenue (dividends, profits, receipts of union
territories, others)

72759

129713

261751

6.61

Total Centre Revenue Receipts

236936

871828

2348412

12.15

Total Centre Capital Receipts

161779

564148

1842061

12.93

Draw-down of cash

-5150

Total Budget Receipts

398715

1430826

4190473

12.48

RATIOS

1. Share of states in gross
tax revenue – %

25.30

28.09

31.17

2. Composition of Total
Revenue Receipts

A. Centre Net Revenue Receipt

41.18%

51.87%

49.80%

B. Non Tax Revenue

18.25%

9.07%

6.25%

C. Capital Receipts

40.58%

39.43%

43.96%

3. Taxes contribution to
Total Revenue Receipts

Direct Tax

Corporate Tax

44700

358874

835000

15.76

Income Tax

37300

206095

815000

16.67

Expenditure & Wealth Tax

445

866

Cumulative Gross Direct Taxes

82445

565835

1650000

16.16

% of Gross Direct Tax to Total Tax Collection

37.15

54.51

54.22

Direct Tax

Customs Duty

45500

164853

210000

7.95

Union Excise Duty

87383

171996

320000

Service Tax

5000

132687

1000

GST

854000

Cumulative – ED, ST, GST

92383

304683

1175000

13.56

Cumulative Indirect Tax

137883

469536

1385000

12.23

% of Gross Indirect Tax to Total Tax Collection

62.13

45.23

45.51

Notes:

1. Total Tax Revenue Collection = Cumulative Gross Direct Tax Plus Cumulative Indirect Tax plus other minor tax receipts.

2. Centre –– Net Tax Revenue = Total Tax Revenue Collection minus Share of states as per agreed devolution per GST Committee and Finance Commission.

3. RE 2022/23 represents the year of receipt of GST Taxes. Cumulative Indirect Tax = Customs Duty plus Union Excise Duty plus Service Tax plus GST.

4. The above figures are taken from budget documents on a government website. Minor rounding off is ignored for the purpose of this article.

B) 20 Years Trends analysis of Union Budget Receipts side. It needs to be noted that 3 Prime Ministers were in Power at the Centre.

1. The share of states from Central Tax Collection Pool has increased over 20 years, from 25.30 per cent of Gross Tax to 31.17 per cent. This higher devolution of funds is also borne out by the Compound Annual Growth Rate percentage (CAGR %) increase in states share being higher than CAGR % increase in Total Tax Collection by the Centre. This trend is good for India’s federal polity since many crucial spending actions happen at States’ end. GST compensations for 5 years started from July 2017. It has to be seen whether this trend of States percentage share is maintained. In the personal view of the author, the answer is YES.

2. The increase in non-tax revenues is a weak link. It represents dividends, profits etc. That it’s CAGR % growth trajectory is restricted is evident since the growth percentage is just 6.61 per cent. The Central Public Sector Undertakings do not appear to be pulling their weight. It would be interesting to see what these receipts are as a percentage of Capital Invested on Govt of India Undertakings. Perhaps, that’s a separate topic but on the face of it – contrary to tax revenues, the non-tax revenues are not showing desired escalation. Also, the Customs Duty CAGR % growth is quite low, maybe because of high import tariffs in the past and duty rates adjustments under WTO requirements.

3. Gross Direct Tax Growth in CAGR% at 16.16 per cent is faster than Gross Indirect Tax growth at 12.23 per cent. This is also borne out by the percentage of Direct Tax and Indirect Tax to Total Tax Revenue collected. Direct Tax percentage collection is improving and is now higher in percentage terms than Indirect Taxes collection. Interestingly, over 20 years the Direct Tax collection percentage has improved from 37.15 per cent to 54.22 per cent. One may say that Income Tax in India is quite regressive (due to exclusion of income from agriculture) but even then, through the effective use of tax deducted at source / tax collected at source mechanism and computerization, the income tax collections have spurted.

4. It is the belief of many progressive economists that a Nation must have a superior Direct Tax collection than Indirect Tax collection, because Direct Tax is considered egalitarian and equitable since based on income levels while Indirect Tax does not consider income levels but is based on nature of Goods and Services sold. The more the shift to Direct Taxes improved collection, that nation’s tax structure is considered progressive.

5. The Capital Receipts side (mainly in the nature of Borrowings / Debt) has stayed constant over 20 years at between 39 – 44 per cent of Total Central Receipts for the relevant year. Despite almost 3 years of Covid pandemic impact, the Debt taken in India Budget workings has not gone overboard. The high infrastructure spending, the Covid impact slowdown and the Russia / Ukraine war have given India a jolt on inflation. However, we seem to be escaping the banking sector financial security issue. While India is facing a sticky core inflation (mainly imported), it is in much better shape than many other economies – facing concurrent inflation and slowdown and now banking sector instability. This is due to fiscal prudence practiced over 20 years.

6. For the purpose of taking such decadal comparatives (this is a 2 decades’ period) of Budget Receipts – it would help if some improved indexation criteria were released and implemented. The value of the Indian Rupee in 2002/03 is certainly not the same as the value in 2012/13 and 2022/23. Inflation has eaten away a lot of value. For a proper comparative of 2022/23, 2012/13 to 2002/23, an indexed value for both years compared to year 2002/03, would give a much more revealing outcome. Constant and comparative Rupee values for all 3 years 2002/03, 2012/13 and 2022/23 would make this a much more sensible comparative analysis. At indexed values (removing the effect of inflation), the comparatives of the 3 years across 2 decades would yield a much better comparative analysis since numbers value is constant.

shailesh.kwebmaker

Interest under section 201(1A) – TDS – Interest for delay in remitting tax deducted at source – No liability for interest if tax is not deductible at source.

9 Special Tahsildar, Land Acquisition (General) vs. GOI[2023] 451 ITR 484 (Ker)

Date of order: 15th September, 2022

Section 201(1A) of ITA 1961Interest under section 201(1A) – TDS – Interest for delay in remitting tax deducted at source – No liability for interest if tax is not deductible at source.

Special Tahsildar, Land Acquisition (General) paid compensation to persons from whom the land was acquired for establishing the Government Medical College and deducted tax at source from the compensation paid. The tax deducted in the month of January 2014 was paid to the credit of the Government only in the month of June 2014 and the reason for the delay was explained to be the fact that Tahsildar was deputed for election duty during the period January 2014 to May 2014 in connection with the General Elections. However, the AO levied interest under section 201(1A) of the Income-tax Act, 1961.

The Tahsildar filed a writ petition and challenged the demand for interest.

It was then contended on behalf of the Tahsildar that the liability to deduct tax and pay it to the Department is only in respect of sums for which the tax is required to be deducted at source. Since the lands which were the subject matter of acquisition were agricultural lands, which fell outside the definition of capital asset under section 2(14) of the Act, there was no question of deducting tax at source in respect of compensation paid to the land owners and therefore levy of interest under section 201(1A) was unwarranted.

The Department contended that levy of interest under section 201(1A) was statutory and the moment there was delay in payment of tax deducted, interest had to be levied.

The Kerala High Court allowed the writ petition and held as under:

“i) It is clear from a reading of section 201 of the Income-tax Act, 1961, that the liability to deduct tax arises only when it is required to be deducted under the provisions of the Act. In other words, where there is no liability to deduct tax at source, the mere fact that tax was deducted at source and paid to the Income-tax Department belatedly, cannot give rise to a claim for interest u/s. 201(1A) of the Act. Interest u/s. 201(1A) of the Act is obviously to compensate the Government for the delay in payment of taxes, which are rightfully due to the Government.

ii) Since the Department itself had refunded the amount of tax deducted at source, it could not be said at this point of time that the land in question was not agricultural land falling outside the definition of capital asset u/s. 2(14).

iii) The delay in remitting the amounts deducted as tax at source arose only on account of the fact that the Officer in question was deputed for election duty for the period from January 2014 to May 2014 in connection with the Lok Sabha Elections of 2014. Cumulatively, these facts made it clear that the levy of interest under 201(1A) was wholly unwarranted in the facts and circumstances of this case.”

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Section 115-O read with Dividend Article of DTAA – Dividend Distribution Tax (DDT) rate prescribed under section 115-O cannot be reduced to rate mentioned in Dividend Article of DTAA rate applicable to a non-resident shareholder.

20. DCIT vs. Total Oil India (Pvt) Ltd
[2023] 149 taxmann.com 332 (Mumbai-Trib.) (SB)
[ITA No: 6997/Mum/2019]
A.Y.: 2016-17
Date of order: 20th April, 2023

Section 115-O read with Dividend Article of DTAA – Dividend Distribution Tax (DDT) rate prescribed under section 115-O cannot be reduced to rate mentioned in Dividend Article of DTAA rate applicable to a non-resident shareholder.

FACTS

Taxation of dividend income under the Act has been subject to various amendments from time to time. Pre-1997, classical system of taxation was prevalent wherein the dividends were taxed in the hands of shareholders and companies declaring these dividends were required to withhold taxes on dividend income. From the year 1997 to 2020 (except for April 2002 to March 2003) the classical system was done away with and DDT regime existed. As per this regime, the company declaring dividend was made liable to pay taxes on dividends declared/distributed or paid. Consequently, such dividend income was regarded as exempt in the hands of the shareholders under the ITL. Vide Finance Act, 2020, DDT regime was abolished, and the classical system of taxation was restored.

On the judicial front, various Courts and ITAT have ruled on the DDT issue. Notably, given below are the relevant observations for the present controversy:

The SC in the case of Tata Tea⁴ held that the entirety of income distributed by the company engaged in the business of growing and manufacturing tea is dividend subject to DDT even if it is partially paid out of the exempt agricultural income of the company. A dividend distributed by a company, being a share of its profits declared as distributable among the shareholders, does not partake in the character of profits from which it reaches the hands of the shareholder. Since dividend income is not agricultural income, the same will be chargeable to tax.
Further, the SC in the case of Godrej & Boyce⁵ held that the dividend income was exempt in the hands of the shareholder and, hence, any expense in relation to such exempt income cannot be regarded as deductible. The SC held that tax incidence on dividend income was in the hands of the payer company. A domestic company is liable to pay DDT as a distinct entity and not as an agent of the shareholders. Accordingly, the income is not taxable in the hands of recipient shareholders and, thus, the same did not form part of the total income of the shareholder.
Delhi ITAT in the case of Giesecke & Devrient⁶ and Kolkata ITAT in the case of Indian Oil Petronas Pvt Ltd⁷, held that the DDT rate on dividend paid to non-resident shareholders needs to be restricted to the rates prescribed under the DTAA, if the conditions for DTAA entitlement are satisfied. The Tribunal noted that DDT is effectively a tax on dividend income, the incidence of which needs to be seen from the perspective of the recipient shareholder. Accordingly, the income tax should be charged at the lower of rate specified under the Act or DTAA for the recipient.

4    (2017) 398 ITR  260 (SC)
5    394 ITR 449 (SC),
6    [TS-522-Tribunal-2020]
7    [TS-324-Tribunal-2021(Kol)]

Later, Mumbai ITAT in the case of Total Oil India Pvt Ltd⁸ expressed its apprehensions about the correctness of the Tribunal decisions in the case of Giesecke & Devrient and Indian Oil Petronas Pvt Ltd and directed for the constitution of a Special Bench

Question for consideration before the Special Bench was:

“Where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts additional income-tax (tax on distributed profits) referred to in section 115-O of the Income-Tax Act,1961 (in short ‘the Act’), whether such additional income-tax payable by the domestic company shall be at the rate mentioned in Section 115-O of the Act or the rate of tax applicable to the non-resident shareholder(s) with reference to such dividend income”

HELD

Though dividend is an income in the hands of the shareholder, taxability need not necessarily be in the hands of the shareholder. The sovereign has the prerogative to tax the dividend, either in the hands of the recipient⁹ of the dividend or otherwise¹⁰.

Section 115-O is a complete code in itself, in so far as levy and collection of tax on distributed profits is concerned. Charge in the form of additional income tax (i.e., DDT) is created on amount declared, distributed or paid by domestic company by way of dividend. Further, DDT is a tax on “distributed profits” and not a tax on “dividend distributed”. The non-obstante nature of provision is an indication that the charge under the DDT provisions is independent and divorced from the concept of “total income” under the ITL.

DDT is liability of the company and not payment on behalf of the shareholders as DDT paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends. The fact that no further credit or deduction can be claimed by the company or by any other person also suggests that shareholder does not enter the domain of DDT. The payee’s right to recover excess taxes which are deducted/collected at source or the right of subrogation in the event when payer pays excess over and above what he/she has to pay to the payee, is absent in the entire scheme of DDT provisions under the Act.

8    (ITA No. 6997/Mum/2019)
9    Classical/progressive system
10    Simplistic system where the company which distributes the dividend is required to discharge the tax liability on the sum distributed by way of dividend as an additional income tax on the company itself and consequently such dividend income was exempt in the hands of shareholders

The SC in the case of Tata Tea Co. Ltd¹¹ did not deal with the nature of DDT, i.e., whether it is tax on the company or a tax on the shareholder. Reliance placed by the assessee on the said SC decision to suggest that DDT is a tax paid on behalf of the shareholder is not valid. The decision of SC in Tata Tea (supra) does not support that DDT is tax paid on behalf of the shareholders or that DDT is not the liability of the company. The SC, in that case, upheld the constitutional validity of DDT levy in respect of dividend paid out of that portion of profit of tea manufacturing company which is regarded as agricultural income of the company. The SC held that dividend does not bear the same character as profits from which it is paid and ruled that dividend is included within the definition of ‘income’ under the ITL.
Assessee’s reliance on the SC ruling in case of Godrej & Boyce Mfg. Co Ltd.¹² to contend that DDT is paid on behalf of the shareholder and has to be regarded as payment of liability of the shareholder, discharged by the domestic company paying DDT is also not correct. The observation of the underlying Bombay HC decision regarding the legal characteristics of DDT is that it is tax on a company paying the dividend, is chargeable to tax on its profits as a distinct taxable entity, the domestic company paying DDT does not do so on behalf of the shareholder, and nor does it act as an agent of the shareholder in paying DDT. The conclusion cannot be said to have been diluted or overruled by the SC. The SC by taking a different basis reached the same conclusion that DDT is not a tax paid by the domestic company on behalf of the shareholder.

11    [(2017) 398 ITR  260 (SC)]
12    394 ITR 449

As against above, the Bombay HC in the case of Small Industries Development Bank of India¹³ (SIDBI) held that DDT is not a tax on dividend in the shareholder’s hands but an additional income-tax payable on the company’s profits, more specifically on that part of the profits which is declared, distributed or paid by way of dividend.
Interplay of DDT and DTAA
DTAAs need to be considered from the perspective of the recipients of income, i.e., shareholders. Where DDT paid by the domestic company in India, is a tax on its income distributed and not tax paid on behalf of the shareholder, the domestic company does not enter the domain of DTAA at all.
The DTAAs should specifically provide for treaty benefit in case of DDT levied on domestic company. Illustratively, the protocol to India-Hungary DTAA has extended the treaty protection¹⁴ to DDT wherein it has been stated that when the company paying the dividends is a resident of India then tax on distributed profits shall be deemed to be taxed in the hands of shareholder and will be eligible for reduced tax rate as provided in the DTAA.
Thus, wherever the Contracting States intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA.

13    133 taxmann.com 158
14    Protocol to India-Hungary DTAA provides: “When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend”

shailesh.kwebmaker

Article 28 of India-Malaysia DTAA – Article 28 cannot be invoked if the company is having substance in the form of employees, revenue and is set up for valid business reasons; Article 12 of India-Malaysia DTAA – Sub-licensing payment to a Malaysian company for: (a) Logo Rights; (b) Advertising Privileges; (c) Promotion Activities Rights; and (d) Rights to Complimentary Tickets, in respect of the cricket matches outside India, is not in nature of royalty under Article 12 of India-Malaysia DTAA.

19. ITO vs. Total Sports & Entertainment India Pvt Ltd
[TS-145-ITAT-2023(Mum)]
[ITA No: 5717 & 6129/Mum/2016]
A.Y.: 2014-15
Date of order: 27th March, 2023

Article 28 of India-Malaysia DTAA – Article 28 cannot be invoked if the company is having substance in the form of employees, revenue and is set up for valid business reasons; Article 12 of India-Malaysia DTAA – Sub-licensing payment to a Malaysian company for: (a) Logo Rights; (b) Advertising Privileges; (c) Promotion Activities Rights; and (d) Rights to Complimentary Tickets, in respect of the cricket matches outside India, is not in nature of royalty under Article 12 of India-Malaysia DTAA.

FACTS

Assessee, an Indian company, was engaged in the business of seeking rights sponsorships for any sports and entertainment event. It is a WOS of a Cayman Islands company (Cayman Hold Co). Cayman Hold Co was a holding company of 11 companies around the world including the assessee and a Malaysia company.

Cayman Hold Co had acquired advertisement rights of the Sri Lanka National Cricket Team¹. The rights included: (a) Logo Rights; (b) Advertising Privileges; (c) Promotion Activities Rights; and (d) Rights to Complimentary Tickets. Cayman Hold Co had sub-licensed these rights to the Malaysian company which in turn further sub-licensed them to the assessee.

The Assessee monetized these rights to an Indian company and made sub-licensing payment to Malaysian company without deducting TDS.

Article 28 of India-Malaysia DTAA provides that a person shall not be entitled to its benefits if its affairs were arranged in such a manner as if the main purpose or one of the main purposes was to take the benefits of India-Malaysia DTAA. On the footing that: a) payments were in nature of royalty and b) Malaysian Company was interposed between the assessee and Cayman Hold Co to avail DTAA benefits of India-Malaysia DTAA, AO invoked Article 28 of India-Malaysia DTAA. Accordingly, AO held the assessee to be in default. CIT(A) held that Article 28 was not applicable to case of the assessee. CIT(A) bifurcated the payments in two parts in the ratio of 60:40. He considered 60 per cent of payment as advertisement charges for display of logo and content of billboard and held they were not in nature of royalty. He considered balance 40 per cent of payment as for the use of name ‘official partners’ or ‘official advertisers’ providing links on the website of the assessee and use of various items (which included photographs, etc.) of the teams for promoting products related to the assessee’s clients, and regarded them as royalty. Being aggrieved both parties appealed to ITAT.

HELD

Article 28 of India-Malaysia DTAA

After considering the following facts, the ITAT held the that Malaysian company was not a conduit or paper company set up to avail benefits under India-Malaysia DTAA.

All the senior management team members (CEO, COO, CFO, etc.) were located in Malaysia.
Rights obtained by Hold Co or other companies in the group were generally sub-licensed to the Malaysia company as the head office entity.
Practice of sub-licensing was followed for companies across world and not only for India.
Turnover of the Malaysian company was much higher than the revenue earned by it from the assessee.
The Malaysian company was in existence much prior to the Hold Co and the assessee.
Conclusion could have been different if the entire setup would have been in Cayman Islands and the Malaysian entity would have been a mere name lender in this set of transactions with no role to play.

1. Similar was the arrangement in arrangement in case of sponsorship rights of the West Indies Cricket Team.

ROYALTY TAXATION

ITAT followed Delhi HC judgment in the case of Sahara India Financial Corporation Ltd², in which it was held as follows.
Payment towards various sponsorship rights in respect of ICC tournament was not in connection with the right to use, or by way of consideration for the right to use, any of the three categories³ mentioned in Article 13 of the DTAA.
There was no transfer of, copyright or, the right to use the copyright, flowing to the assessee. Therefore, payment made by the assessee would not fall within article 13(3)(c) of the said DTAA.

2     [2010] 321 ITR 459 (Delhi)
3    (a) any patent, trademark, design or model, plan, secret formula or process;
(b) industrial, commercial or scientific equipment or information concerning industrial, commercial or scientific experience; and
(c) any copyright of literary, artistic or scientific work cinematographic films and films or tapes for radio or television broadcasting.

shailesh.kwebmaker

Important Amendments by the Finance Act, 2023

This article, divided into 4 parts, summarises key amendments carried out to the Income-tax Act, 1961 by the Finance Act, 2023. Due to space constraints, instead of dealing with all amendments, the focus is only on important amendments with a detailed analysis. This will provide the readers with more food for thought on these important amendments. – Editor

PART I | NEW Vs. OLD TAX REGIME w.e.f. AY 2024-25

DINESH S. CHAWLA I ADITI TIBREWALA

Chartered Accountants

“The old order changeth yielding place to new and God fulfils himself in many ways lest one good custom should corrupt the world”.

Lord Alfred Tennyson wrote these famous lines several decades back.

In the present context, the old order in the world of Income tax in India is changing. And it is changing very fast. The new order is here in the form of the “new tax regime”. The new regime that was brought in vide the Finance Act 2020 has already been replaced now by a newer tax regime vide Finance Act 2023.

This article aims at simplifying the newest new tax regime for readers while comparing it with the erstwhile “old” regime.

I. APPLICABILITY AND AMENDMENTS

The Indian Government has introduced an updated new tax regime that will come into effect from AY 2024-25. This new regime can be exercised by Individuals, HUF, AOP (other than co-operative societies), BOI, and AJP (Artificial Juridical Person) under Sec 115BAC.

This new regime is a departure from the erstwhile regime that has been in place for several decades.

The 5 major amendments that affect the common man are:

1. Rebate limit increased from Rs. 5 lakh to Rs. 7 lakh;

2. Tax Slabs updated to 5 slabs with new rates (as given below);

3. Standard deduction for salaried tax payers would now be available even under the new regime;

4. Reduction in the top rate of surcharge from 37% to 25%, bringing the effective tax rate to 39% as compared to the erstwhile 42.74%;

5. Leave encashment limit for non-government salaried employees enhanced to Rs. 25 lakhs.

II. NEW SLABS & RATIONALE

New Tax Regime (Default Regime, w.e.f. AY 2024-25)

As per the amended law, the new regime has become the default regime w.e.f. AY 2024-25. Any taxpayer
who wishes to continue to stay in the old tax regime will have to opt-out of the new regime. In the original avatar of the new tax regime, the situation was exactly the opposite whereby the old regime was the default regime and anyone wanting to opt for the new regime had to do so in the ITR or by way of a separate declaration in case of persons having business/professional income.

The rationale behind the tweaks in the new tax regime is that it is expected to benefit the common-man with 20% lesser tax out-flow due to lower tax rates and streamlining of the tax slabs, when compared to the old regime. The catch here is that taxpayers will have to forego many investment-based deductions and exemptions vis-à-vis the old regime except the following:

1. Standard deduction of INR 50,000 under Sec 16,

2. Transport allowance for specially abled,

3. Conveyance allowance for travelling to work,

4. Exemption on voluntary retirement under Sec 10(10C),

5. Exemption on gratuity under Sec 10(10D),

6. Exemption on leave encashment under Sec 10(10AA),

7. Interest on Home Loan under Sec 24b on let-out property,

8. Investment in Notified Pension Scheme under Sec 80CCD(2),

9. Employer’s contribution to NPS,

10. Contributions to Agni veer Corpus Fund under Sec 80CCH,

11. Deduction on Family Pension Income,

12. Gift up to INR 5,000,

13. Any allowance for travelling for employment or on transfer.

The tax slabs under the new regime under Sec 115BAC(1A) are as follows:

Total Income	Tax Rate
Up to 3 lakh	Nil
From 3 lakh to 6 lakh	5%
From 6 lakh to 9 lakh	10%
From 9 lakh to 12 lakh	15%
From 12 lakh to 15 lakh	20%
Above 15 lakh	30%

Note: Surcharge and Cess will be over and above the tax rates.

Old Tax Regime

The old regime continues to be available to the taxpayers but, as mentioned earlier, they must now opt-in to be covered under this regime. Any taxpayer who has been claiming investment-based deductions may continue to opt for this regime, and may switch back & forth between the new regime and old regime (except for persons with income chargeable under the head “Profits and Gains of Business or Profession” (PGBP) as per their choice, on a yearly basis.

The tax slabs under the old regime are as follows:
Note: Surcharge and Cess will be over and above the tax rates.

Key Differences:

One of the key differences between the new regime and the old regime is the lower tax rates under the new regime. Taxpayers will be able to save money by way of lesser tax outflow, which will come at the cost of foregoing of deductions for investment-based savings.

Under the new regime, the taxpayers will not be able to claim investment-based deductions (Sec 80C, Sec 80D, etc.,) as well as certain exemptions that were available under the old regime. This means that taxpayers will have to pay taxes on their gross income without any deductions, with few exceptions (standard deductions, etc.).

This means that taxpayers will not be able to claim deductions for investments in tax-saving instruments like PPF, NSC, tuition fees for children, life & health insurance premium etc.

Taxpayers will also not be able to claim any deductions for home loan interest payments (in case of SOP), medical expenses, and education expenses, etc.

III. BENEFITS

The new regime has several benefits for taxpayers/tax department. Here are some of the key benefits:

1. Simpler structure (from the department’s perspective): The new regime has a simpler tax structure with lower tax rates. Taxpayers will no longer have to navigate the complex system of tax slabs and deductions that was prevalent under the old tax regime.

2. Lower rates: Under the new regime, taxpayers will be able to save money on taxes as the tax slabs are wider and tax rates are lower than the old regime. This will result in more disposable income (cash availability) for taxpayers.

3. No need for documentation: Since taxpayers are not allowed to claim deductions and exemptions under the new regime, they will no longer have to keep track of various tax-saving investments and deductions.

4. No investment proofs: Under the old regime, taxpayers had to submit investment proofs to claim tax deductions. Under the new regime, taxpayers will not be required to submit any investment proofs, as they are not allowed the deductions.

5. Encourages greater tax compliance: The simpler tax structure and lower tax rates under the new regime will encourage more people to file their tax returns, which will increase the tax base for the government.

6. Higher Rebate: Full tax rebate up to Rs. 25,000 on an income up to Rs. 7 lakh under the new regime, whereas, the rebate is capped at Rs. 12,500 under the old regime up to an income of Rs. 5 lakh. Effectively NIL tax outflow for income up to Rs. 7 lakh.

7. Reduced Surcharge for Individuals: The surcharge rate on income over Rs. 5 crore has been reduced from 37% to 25%. This move will bring down their effective tax rate from 42.74% to 39%.

IV. WHAT SHOULD YOU CHOOSE?

A salaried employee has to choose between the new regime and old regime at the beginning of each Financial Year by communicating in writing to the employer. If an employee fails to do so, then the employer shall deduct tax at source (TDS) as computed under the new regime. However, once the regime (new or old) is opted, it is not clear as to whether any employer will permit an employee to change the option anytime during the year. Therefore, salaried tax payers need to be very careful about what they chose at the beginning of the year.

An Individual who is earning income chargeable under the head “Profits and Gains of Business or Profession” has the option to opt out of the new regime and choose the old regime only once in a lifetime. Once such a taxpayer opts for the old regime, then he can opt out of it only once in his lifetime. Thereafter, it would not be possible to opt back into the old regime again as long as he is earning income under the head PGBP.

WHICH SCHEME IS MORE BENEFICIAL FOR A TAXPAYER?

1. Under the old regime, taxpayers can claim deductions and exemptions to save money (cash flows) on their taxes. However, the tax rates under the old regime are significantly higher than the tax rates under the new regime.

2. Under the new regime, taxpayers will not be able to claim most deductions and exemptions. However, the tax rates are lower, which can result in lower tax outflow, especially for those with lower / no deductions.

3. Taxpayers with lower deductions may benefit from the new regime as the lower tax rates will offset the lack of deductions. On the other hand, taxpayers with significant deductions may find the old regime more beneficial.

4. The parameters to effectively evaluate and select the tax regime (new or old) shall significantly depend on the tax profile of the taxpayer. Whichever regime is more beneficial in terms of better cash flows and their immediate financial needs, the taxpayers can evaluate and get a comparison done from the following link: https://incometaxindia.gov.in/Pages/tools/115bac-tax-calculator-finance-bill-2023.aspx.

5. The above link can also be accessed by scanning the following QR Code

PART II | CHARITABLE TRUTS

GAUTAM NAYAK

Chartered Accountant

In the context of taxation of charitable trusts, there were high expectations from the budget that the rigours of the exemption provisions would be relaxed, in the backdrop of the strict interpretation given to these provisions by the recent Supreme Court decisions in the cases of New Noble Education Society vs CCIT 448 ITR 594 and ACIT vs Ahmedabad Urban Development Authority 449 ITR 1. However, such hopes were dashed to the ground, as no amendment has been made in relation to the issues decided by the Supreme Court – eligibility for exemption of educational institutions, interpretation of the proviso to section 2(15) and the concept of incidental business under section 11(4A). On the other hand, some of the amendments further tighten the noose on charitable trusts, whereby their very survival may be at stake due to small mistakes.

Exemption for Government Bodies

The availability of exemption under section 11 to various government bodies and statutory authorities and boards, was also disputed in the case before the Supreme Court of Ahmedabad Urban Development Authority (supra). While the Supreme Court decided the issue in favour of such bodies, a new section 10(46A) has now been inserted, exempting all income of notified bodies, authorities, Boards, Trusts or Commissions established or constituted by or under a Central or State Act for the purposes of dealing with and satisfying with the need for housing accommodation, planning, development or improvement of cities, towns and villages, regulating or regulating and developing any activity for the benefit of the general public, or regulating any matter for the benefit of the general public, arising out of its objects. The notification is a one-time affair, and not for a limited number of years. Once such a body is notified, its entire income would be exempt, unlike under section 10(46) where only notified incomes are exempt, irrespective of the surplus that it earns without any controversy. Under this section, there is also no restriction on carrying on of any commercial activity, as contained in section 10(46). In case exemption is claimed u/s 10(46A), no exemption can be claimed u/s 10(23C).

Time Limit for Filing Forms for Exercise of Option/Accumulation

Under Clause (2) of explanation 1 to section 11(1), a charitable organisation can opt to spend a part of its unspent income in a subsequent year, if it has not applied 85% of its income during the year. This can be done by filing Form 9A online. Under section 11(2), it can choose to accumulate such unspent income for a period of up to 5 years, by filing Form 10 online. The due date for filing both these forms was the due date specified u/s 139(1) for furnishing the return of income, which is 31st October.

This due date for filing these two forms is now being brought forward by two months, effectively to 31st August. Since this amendment is effective 1st April 2023, it would apply to all filings of such forms after this date, including those for AY 2023-24. Therefore, charitable organisations would now have to keep in mind 3 tax deadlines – 31st August for filing Form No 9A and 10, 30th September for filing audit reports in Form 10B/10BB (in the new formats), and 31st October for filing the return of income.

The ostensible reason for this change is stated in the Explanatory Memorandum to be the difficulty faced by auditors in filling in the audit report, which requires reporting of such amounts accumulated or for which option is exercised, with the audit report having to be filed a month before the due date of filing such forms. Practically, this is unlikely to have been a problem in most cases, as generally auditors would also be the tax consultants who would be filing the forms, or where they are different, would be in co-ordination with the tax consultants.

The purpose could very well have been served by making the due date for filing these forms the same as the due dates for filing the audit reports. Since the figures for accumulation or for the exercise of the option can be determined only on the preparation of the computation of income, which is possible only once the audited figures are frozen, practically the audit for charitable organisations would now have to be completed by 31st August to be able to file these 2 forms by that date.

Of course, in case these forms are filed belatedly, an application can be made to the CCIT/CIT for condonation of delay – refer to CBDT Circular No. 17 dated 11.7.2022.

A similar change is made in section 10(23C) for seeking accumulation of income.

Exemption in Cases of Updated Tax Returns

A charitable trust is entitled to exemption u/s 11 only if it files its return of income within the time stipulated in section 139. An updated tax return can be filed u/s 139(8A) even after a period of 2 years. The Finance Act 2023 has now amended section 12A(1)(b) to provide that the exemption u/s 11 would be available only if the return is filed within the time stipulated under sub-sections (1) or (4) of section 139, i.e. within the due date of filing return or within the time permitted for filing belated return. Effectively, a trust cannot now claim exemption by filing an updated tax return, unless it has filed its original return within the time limits specified in section 139(1) or 139(4).

Exemption for Replenishment of Corpus and Repayment of Borrowings

The Finance Act 2021 had introduced explanation 4 to section 11(1), which provided that application from the corpus for charitable or religious purposes was not to be treated as an application of income in the year of application, but was to be treated as an application of income in the year in which the amount was deposited back in earmarked corpus investments which were permissible modes. Similar provisions were introduced for application from borrowings, where only repayment of the borrowings would be treated as an application of income in the year of repayment.

Such treatment of recoupment of corpus or repayment of loans has now been made subject to various conditions by the Finance Act, 2023 with effect from AY 2023-24 – i) the application not having been for purposes outside India, ii) is not towards the corpus of any other registered trust, iii) has not been made in cash in excess of Rs 10,000, iv) TDS having been deducted if applicable, has been actually paid, or v) has not been for provision of a benefit to a specified person.

Further, such treatment as the application would now be permitted with effect from AY 2023-24, only if the recoupment or repayment has been within 5 years from the end of the year in which the corpus was utilised. The reason stated for this amendment is that availability of an indefinite period for the investment or depositing back to the corpus or repayment of the loan will make the implementation of the provisions quite difficult. However, this time restriction brought in by the Finance Act 2023 would create serious difficulty for trusts who undertake significant capital expenditure by borrowing or utilising the corpus. Recoupment of such large expenditure or repayment of such a large loan may well exceed 5 years, in which case the recoupment or repayment would not qualify to be treated as an application of income, though the income of that year would have been used for this purpose. Such a provision is extremely harsh and will seriously hamper large capital expenditure by charities for their objects. A longer period of around 10 years would perhaps have been more appropriate.

Besides, recoupment or repayment of any amount spent out of corpus or borrowing before 31st March 2021 would also not be eligible to be treated as an application in the year of recoupment or repayment with effect from AY 2023-24. This is to prevent a possible double deduction, as a trust may have claimed such spending as an application of income in the year of spending since there was no such prohibition in earlier years.

Similar amendments have been made in section 10(23C).

Restriction on Application by Way of Donations to Other Trusts

Hitherto, a donation to another charitable organisation by a charitable organisation was regarded as an application of income for charitable purposes. An amendment was made by the Finance Act 2017, effective AY 2018-19, by insertion of explanation 2 to section 11(1) to the effect that a donation towards the corpus of another charitable organisation shall not be treated as an application of income. The Finance Act 2023 has now further sought to discourage donations to other charitable organisations by insertion of clause (iii) to explanation 4 to section 11(1). Henceforth, any amount credited or paid to another charitable organisation, approved under clauses (iv),(v),(vi) or (via) of section 10(23C) or registered under section 12AB, shall be treated as an application for charitable purposes only to the extent of 85% of such amount credited or paid with effect from AY 2024-25.

The Explanatory Memorandum states the justification for the amendment as under:

“3.2 Instances have come to the notice that certain trusts or institutions are trying to defeat the intention of the legislature by forming multiple trusts and accumulating 15% at each layer. By forming multiple trusts and accumulating 15% at each stage, the effective application towards the charitable or religious activities is reduced significantly to a lesser percentage compared to the mandatory requirement of 85%.

3.3 In order to ensure intended application toward charitable or religious purpose, it is proposed that only 85% of the eligible donations made by a trust or institution under the first or the second regime to another trust under the first or second regime shall be treated as application only to the extent of 85% of such donation.”

From the above explanatory memorandum, it is clear that, while the section talks of payments or credits to other trusts, it would apply only to such payments or credits which are by way of donation. The restriction would not apply to medical or educational institutions claiming exemption under clause (iiiab), (iiiac), (iiiad) or (iiiae) of section 10(23C), i.e. those organisations who are wholly or substantially financed by the government or whose gross receipts do not exceed Rs 5 crore, who are not registered u/s 12AB. It will also not apply to donations to charitable organisations, who may have chosen not to be registered u/s 12AB or u/s 10(23C).

This provision would obviously apply only in a situation where the donation is being claimed as an application of income, and would not apply to cases where the donation is not so claimed, on account of it being made out of the corpus, out of past accumulations under section 11(1)(a), etc.

The important question which arises for consideration is whether the balance 15% can be claimed by way of accumulation under section 11(1)(a), or whether such amount would be taxable, not qualifying for exemption under section 11. One view of the matter is that accumulation contemplates a situation of funds being available, which are kept back for spending in the future. If the funds have already been spent, it may not be possible to accumulate such amount u/s 11(1)(a).

The other view is that the 15% amount, though donated, would still qualify for the exemption. Reference may be made to the observations of the Supreme Court in the case of Addl CIT vs A L N Rao Charitable Trust 216 ITR 697, where the Supreme Court considered the nature of accumulation under sections 11(1)(a) and 11(2), as under:

“A mere look at Section 11(1)(a) as it stood at the relevant time clearly shows that out of total income accruing to a trust in the previous year from property held by it wholly for charitable or religious purpose, to the extent the income is applied for such religious or charitable purpose, the same will get out of the tax net but so far as the income which is not so applied during the previous year is concerned at least 25% of such income or Rs.10,000/- whichever is higher, will be permitted to be accumulated for charitable or religious purpose and will also get exempted from the tax net…..If 100 per cent of the accumulated income of the previous year was to be invested under section 11(2) to get exemption from income-tax then the ceiling of 25 per cent or Rs. 10,000, whichever is higher which was available for accumulation of income of the previous year for the trust to earn exemption from income-tax as laid down by section 11(1)(a) would be rendered redundant and the said exemption provision would become otiose. Out of the accumulated income of the previous year an amount of Rs. 10,000 or 25 per cent of the total income from property, whichever is higher, is given exemption from income-tax by section 11(1)(a) itself. That exemption is unfettered and not subject to any conditions. In other words, it is an absolute exemption. If sub-section (2) is so read as suggested by the revenue, what is an absolute and unfettered exemption of accumulated income as guaranteed by section 11(1)(a) would become a restricted exemption as laid down by section 11(2). ….Therefore, if the entire income received by a trust is spent for charitable purposes in India, then it will not be taxable but if there is a saving, i.e., to say an accumulation of 25 per cent or Rs. 10,000, whichever is higher, it will not be included in the taxable income.”

Since 15% of the donation is not considered to be applied for charitable purposes, it should be capable of accumulation, as per this decision.

The first interpretation does seem to be a rather harsh interpretation and does not seem to be supported by the intention behind the amendment, as set out in the Explanatory Memorandum. The figure of 85% also seems to have been derived from the fact that the balance 15% would in any case qualify for exemption under section 11(1)(a).

Consider a situation where a trust having an income of Rs. 100 donates its entire income to other charitable trusts. Had it not spent anything at all, it would have been entitled to the exemption of Rs. 15 under section 11(1)(a). Can it then be taxed on Rs. 15 merely because it has donated its entire income to other trusts? Based on the Explanatory Memorandum rationale, what is sought to be prohibited is the trust claiming accumulation of Rs. 15, and donating Rs. 85 to other trusts, who in turn claim 15% of Rs. 85 as accumulation. A possible view, therefore, seems to be that the trust should be entitled to the 15% accumulation u/s 11(1)(a), even though it has donated its entire income.

Similar amendments have been made in section 10(23C).

Registration u/s 12AB in case of New Trusts

Where a trust has not been registered under section 12AB and is applying for fresh registration, section 12A(1)(ac)(vi) provided that such a trust would have to apply for registration at least one month prior to the commencement of the previous year relevant to the assessment year from which registration was being sought. In such cases, section 12AB(1)(c) provided that such a trust would be granted provisional registration for a period of three years. Subsequently, as per section 12A(1)(ac)(iii), the trust would have to apply for registration 6 months prior to the expiry of a period of provisional registration, or within 6 months of commencement of its activities, whichever is earlier.

The law is now being amended with effect from 1.10.2023 to divide such cases of fresh registration into 2 types – those cases where activities have already commenced before applying for registration, and those cases where activities have not commenced till the time of applying for registration. The position is unchanged for trusts where activities have not yet commenced, with application having to be made one month prior to commencement of the previous year and provisional registration being granted.

In cases where activities have commenced, and such trust has not claimed exemption u/s 11 or 12 or section 10(23C)(iv),(v),(vi) or (via) in any earlier year, such trust can directly seek regular registration by filing Form 10AB, instead of Form 10A. Such trust may be granted registration, after scrutiny by the CIT, for a period of 5 years.

Unfortunately, the problem of a new trust (which has not commenced activities) having to seek registration prior to the commencement of the previous year has not been resolved even after this amendment. Take the case of a trust set up in May 2023. This trust would not be able to get exemption for the previous year 2023-24, since it has not applied one month prior to the commencement of the previous year (by 28th February 2023), a date on which it was not even in existence.

Similar amendments have been made in respect of approvals under clauses (iv),(v),(vi) and (via) of section 10(23C).

Cancellation of Registration u/s 12AB

The Explanation to section 12AB(4) provided for specified violations for which registration could be cancelled. Rule 17A(6) provided that if Form 10A had not been duly filled in by not providing, fully or partly, or by providing false or incorrect information or documents required to be provided, etc., the CIT could cancel the registration after giving an opportunity of being heard. The Finance Act 2023 has now amended section 12AB(4) with effect from 1.4.2023 to add a situation where the application made for registration/provisional registration is not complete or contains false or incorrect information, as a specified violation, which can result in cancellation of registration under section 12AB. In a sense, prior to this amendment, the provision in rule 17A(6) was ultra vires the Act. This amendment, therefore, removes this lacuna.

This provision is however quite harsh, where, for a simple clerical mistake while filling up an online form or forgetting to attach a document, the registration of a trust may be cancelled. Cancellation of registration can have severe consequences, attracting the provisions of Tax on Accreted Income under section 115TD at the maximum marginal rate on the fair market value of the assets of the trust less the liabilities. One can understand this provision applying to a situation where a trust makes a blatantly incorrect statement to falsely obtain registration, but the manner in which this provision is worded, even genuine clerical mistakes can invite the horrors of this provision. One can only wish and hope that this provision is administered with caution and in a liberal manner, whereby it is applied only in the rarest of rare cases.

Deletion of Second and Third Provisos to section 12A(2)

The second and third provisos to section 12A(2) provided a very important protection to charitable entities which had been in existence earlier, but had not applied for registration earlier u/s 12A/12AA/12AB. When such entities made an application for registration, they could not be denied exemption u/s 11 for earlier years for which assessment proceedings were pending, or reassessment proceedings could not be initiated in respect of earlier years on the ground of non-registration of such entity. These two provisos have been deleted by the Finance Act 2023, with effect from 1.4.2023.

The ostensible reason given for such deletion, as explained in the Explanatory Memorandum, is as under:

“4.5 Second, third and fourth proviso to sub-section (2) of section 12A of the Act discussed above have become redundant after the amendment of section 12A of the Act by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020. Now the trusts and institutions under the second regime are required to apply for provisional registration before the commencement of their activities and therefore there is no need of roll back provisions provided in second and third proviso to sub-section (2) of section 12A of the Act.

4.6 With a view to rationalise the provisions, it is proposed to omit the second, third and fourth proviso to sub-section (2) of section 12A of the Act.”

The statement that these provisions have become redundant does not seem to be justified, as even now, a trust already in existence, which seeks registration for the first time, may desire such exemption for the pending assessment proceedings or protection from reassessment for earlier years. A very important protection for unregistered trusts, which was inserted with a view to encourage them to come forward for registration, has thus been eliminated.

These provisions had been inserted by the Finance (No 2) Act, 2014, which at that time, had explained the rationale as under:

“Non-application of registration for the period prior to the year of registration causes genuine hardship to charitable organisations. Due to absence of registration, tax liability gets attached even though they may otherwise be eligible for exemption and fulfil other substantive conditions. The power of condonation of delay in seeking registration is not available under the section.

In order to provide relief to such trusts and remove hardship in genuine cases, it is proposed to amend section 12A of the Act to provide that in case where a trust or institution has been granted registration under section 12AA of the Act, the benefit of sections 11 and 12 shall be available in respect of any income derived from property held under trust in any assessment proceeding for an earlier assessment year which is pending before the Assessing Officer as on the date of such registration, if the objects and activities of such trust or institution in the relevant earlier assessment year are the same as those on the basis of which such registration has been granted.

Further, it is proposed that no action for reopening of an assessment under section 147 shall be taken by the Assessing Officer in the case of such trust or institution for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not obtained the registration under section 12AA for the said assessment year.”

This amendment, therefore, seems to be on account of a change in the approach of the Government towards charitable entities, rather than on account of redundancy.

Extension of Applicability of S.115TD

Section 115TD provides for a tax on accreted income, where a trust has converted into any form not eligible for grant of registration u/s 12AB/10(23C), merged with any entity other than an entity having similar objects and registered u/s 12AB/10(23C), or failed to transfer all its assets on dissolution to any similar entity within 12 months from date of dissolution. By a deeming fiction contained in section 115TD(3), cancellation of registration u/s 12AB/10(23C), and modification of objects without obtaining fresh registration are deemed to be conversion into a form not eligible for grant of registration, and therefore attract the tax on accreted income. The tax on accreted income is at the maximum marginal rate on the fair market value of all the assets less the liabilities of the trust, on the relevant date.

The Finance Act, 2023 has now added one more situation in sub-section (3) with effect from 1.4.2023, where the trust fails to make an application for renewal of its registration u/s 12AB/10(23C) within the time specified in section 12A(1)(ac)(i),(ii) or (iii). Therefore, if a trust now fails to apply for renewal of its registration u/s 12AB at least 6 months prior to the expiry of its 5-year registration or 3-year provisional registration, the provisions of section 115TD would be attracted, and it would have to pay tax at the maximum marginal rate on the fair market value of its net assets.

This is an extremely harsh provision, whereby even a few days’ delay in making an application for renewal of registration can result in wiping out a large part of the assets of the trust. There is no provision for condonation of delay, except by making an application to the CBDT u/s 119. There is also no provision for relaxation of the provisions even if the delay is on account of a reasonable cause.

One can understand the need for such a provision in cases where the trust effectively opts out of registration by not seeking renewal at all – but a mere delay in seeking renewal of registration should not have been subjected to the applicability of section 115TD. Most charitable trusts in India are not professionally managed but are run on a part-time basis as an offshoot of social commitments felt by persons who may be engaged in employment or other vocations. To expect such absolute time discipline from them seems to reflect the Government’s intention of ensuring that only well-managed charitable organisations claim the benefit of the exemption. On the other hand, if an organisation is professionally run in order to be well managed, it would necessarily need to carry on an income-generating activity to meet its expenses, which may be treated as business attracting the proviso to section 2(15)!
Looking at the amendments in recent years and the stand taken in litigations, it appears that the Government seems to view all charitable entities with suspicion. The Government needs to adopt a clear position as regards tax exemption for charitable trusts – whether it wishes to encourage all genuine charitable trusts, which can at times reach far corners of India where even the Government machinery cannot reach, or whether it wishes to restrict the exemptions only to certain large trusts, which it monitors on a regular basis. Accordingly, given the complications introduced in the last few years, it is perhaps now time to decide whether there should be a separate tax exemption regime for small charities, just as there is a separate taxation regime for small businesses.

PART III | SELECT TDS / TCS PROVISIONS

BHAUMIK GODA | SHALIBHADRA SHAH

CHARTERED ACCOUNTANTS

Background

The purpose of TDS/TCS provisions is two-fold a) to enable the government to receive tax in advance simultaneously as the recipient receives payment b) to track a transaction which is a subject matter of taxation. In recent years, major amendments have been made in Chapter XVII of the Income-tax Act, 1961 (Act) dealing with the deduction and collection of taxes.

Finance Act 2023 is no different. Amendments are likely to have far-reaching implications.

Increase in the tax rate on Royalty & FTS for Non-residents

Amendment in brief

Erstwhile Section 115A of the Act provided that royalty & FTS income of Non-residents (NR) shall be taxable in India at the rate of 10% (plus applicable surcharge & cess). Surprisingly, at the time of passing the Finance Bill in Lok Sabha, the rate of tax on royalty & FTS has been increased from the existing 10% to 20% (plus applicable surcharge & cess). A corresponding increase in TDS rates has also been provided in Part II of the First Schedule to FA, 2023. Hence effective 1 April 2023, any payment of royalty or FTS by a resident to a non-resident will invite TDS at the rate of 20% (plus surcharge & cess) under the Act.

Implications

Increase in tax rate

There is a sharp increase in FTS/royalty rate under the Act from 10% to 20% plus cess and surcharge. The amendment does not grandfather existing agreements or arrangements. Accordingly, any payment made after 1st April 2023 will attract a higher TDS rate of 20%. In the case of net of tax arrangements, it is likely to result in additional cash outflow, especially payments made to countries where the DTAA rate provides for a rate higher than 10% (e.g. DTAA of India – USA – 15%; India-UK – 15%; India-Italy -20%). It will impact cost, profitability and project feasibility which perhaps was not factored in by parties at the time of entering the arrangement.

Treaty superiority

With the increase in tax rate from 10% to 20%, the DTAA rate which ranges from 10% to 15% is advantageous. Non-residents will rely upon DTAA benefits to reduce their tax liability in India. The FTS clause in DTAA with Singapore, USA, UK, is narrow as it includes a make-available clause. In other words, even if services are FTS under Act, it needs to be demonstrated that there is a transfer of knowledge and the recipient is enabled to perform services independently without support from the service provider. India’s DTAAs with the Philippines, Thailand etc. do not have an FTS clause. In that case, a view is possible that in the absence of PE in India, FTS payment is not taxable. In the context of royalty, India-Netherland DTAA does not have an equipment royalty clause, India-Ireland DTAA excludes aircraft leasing from the scope of royalty. Supreme Court in the case of Engineering Analysis Centre of Excellence v CIT (2021) 432 ITR 471 held that payment for shrink-wrapped software where the owner retains IP rights is not taxable under DTAA.

Treaty benefit is subject to the satisfaction of numerous qualifying conditions – both under the Act as also under DTAA. Failure to satisfy qualifying conditions will entail a higher TDS rate of 20% [apart from section 201 proceedings and payment of interest under section 201(1A)].

Section 90(4) provides that non-residents to whom DTAA applies, shall not be entitled to claim any relief under DTAA unless a certificate of his being a resident in any country outside India or specified territory outside India, is obtained by him from the Government of that country or specified territory. Ahmedabad ITAT in the case of Skaps Industries India (P.) Ltd v ITO¹ held that requirement to obtain TRC does not override tax treaty. Thus, failure to obtain TRC does not stop non-residents from availing of DTAA benefits. This decision was followed by under noted decisions². In practice, one encounters a number of situations where TRC is not available at the time of remittance – a) Transaction with Vendor is a one-off transaction and the cost of TRC outweighs the cost of services b) TRC is applied for but the Country of Residence takes time to process and issue TRC c) Vendor provides incorporation certificate, VAT certificate and states that his Country does not issue TRC d) TRC is not in the English language. In such situations, case by case call will be required to be taken. Considering the steep rate of 20%, decision-making becomes difficult if the tax liability is on the payer. In case reliance is placed on favourable decisions, the payer must maintain alternative documents which prove that the vendor is a resident of another Contracting State.

1 [2018] 94 taxmann.com 448 (Ahmedabad - Trib.)
2 Ranjit Kumar Vuppu v ITO [2021] 127 taxmann.com 105 (Hyderabad - Trib.); Sreenivasa Reddy Cheemalamarrim (TS-158-ITAT-2020)

On the DTAA front, Article 7 of MLI incorporates Principal Purpose Test (PPT) in DTAA. It provides that benefit under the DTAA shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Agreement. Similarly, India-USA DTAA has a Limitation of Benefits (LOB) clause contained in Article 24 of DTAA; Article 24 of the India-Singapore DTAA contains a Limitation Relief article requiring remittance to be made in Singapore to avail DTAA benefits. It is necessary that the recipient satisfies the stated objective and subjective conditions laid down by DTAA. From a deductor standpoint, some conditions are subjective (e.g. principal purpose of arrangement). It will be difficult to reach objective satisfaction. The payer may obtain declarations to prove that he acted in a bonafide manner.

Section 90(5) mandates NR to provide prescribed information in Form 10F. Notification No 3/2022 dated 16 July 2022 (‘Notification’) requires Form 10F to be furnished electronically and verified in the manner prescribed. NR will be required to log in to the income tax portal and submit Form 10F in digital manner. This will require NR to have PAN in India and also the authorised signatory to have a digital signature. This requirement was deferred for NR not having PAN and who is not required to obtain PAN in India till 30 September 2023³. Read simplicitor, NR having PAN in India – irrespective of the year and purpose for which PAN is obtained, needs to furnish Form 10F in digital format. Practical challenges arise as NR is not comfortable obtaining PAN in India to issue digital Form 10F. A question arises whether NR is not entitled to DTAA benefits if Form 10F is furnished in a manual format as against digital format. For the following reasons, it is arguable that the Notification requiring Form 10F in digital format is bad in law as it amounts to treaty override⁴:

Genesis of the requirement to obtain Form 10F is section 90(5) read with Rule 21AB. Rule 21AB(1) prescribes various information, which is forming part of Form 10F (e.g. Status, Nationality, TIN, Period of TRC, address). Importantly, Rule 21AB(2) provides that the assessee may not be required to provide the information or any part thereof referred to in sub-rule (1) if the information or the part thereof, as the case may be, is contained in TRC.
Thus, if the information contained in Form 10F is contained in TRC, then Form 10F is not required. Most of the TRCs contains prescribed information (the exception being Ireland and Hong Kong which does not contain address). Some information like PAN and status are India specific and accordingly, the absence of such information should not be read as mandating obtaining of Form 10F.
Section 139A read with Rule 114 / Rule 114B does not require NR to obtain PAN if income is not chargeable to tax pursuant to favourable tax treaty. AAR in under noted decisions⁵ has taken a view that the assessee is not required to file the return of income if capital gain income is exempt under India-Mauritius / India – Netherlands DTAA.
Notification requiring digital Form 10F is issued under Rule 131 which in turn is issued under section 295. Notification is not issued under section 90(5) and accordingly cannot override tax treaty.
Article 31 of the Vienna Convention provides that a treaty is to be interpreted “in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. The domestic legislature cannot override tax treaty.
In spite of section 90(4), the Tribunal has held that TRC is not mandatory if otherwise, NR can prove his residence⁶. A similar conclusion can be drawn for the Form 10F requirement.
Section 206AA prescribed a steep rate of 20% for payment made to a person not having PAN or invalid PAN. The question arose whether section 206AA overrides tax treaties. Tribunal/Court took a unanimous view⁷ that section 206AA cannot override tax treaty. In fact, Delhi High Court in Danisco India (P.) Ltd. v. Union of India [2018] 404 ITR 539 struck down the operation of section 206AA for cases involving tax treaties.
Section 206AA(7) read with Rule 37BC provides that the section is inapplicable if NR provides specified details. Details are identical to ones prescribed in Form 10F. Thus, it can be contended that the Notification mandating digitalization of Form 10F contradicts the provisions of Rule 37BC.

3 [Notification dated 12 December 2022 read with Notification dated 29 March 2022
4 Readers may refer to BCAJ – September 2022 Article – Digitalisation of Form 10F – New Barrier to Claim tax treaty?
5 Dow Agro Sciences Agricultural Products Limited [AAR No. 1123 of 2011 dated 11 January 2016] and Vanenburg Group B.V. (289 ITR 464)
6 Skaps Industries India (P.) Ltd v ITO [2018] 94 taxmann.com 448 (Ahmedabad - Trib.); Ranjit Kumar Vuppu v ITO [2021] 127 taxmann.com 105 (Hyderabad - Trib.)]
7 Infosys Ltd. v DCIT [2022] 140 taxmann.com 600 (Bangalore - Trib.); Nagarjuna Fertilizers & Chemicals Ltd. v. Asstt. CIT [2017] 78 taxmann.com 264 (Hyd.)

• Interplay with Transfer Pricing Provisions

Indian-based conglomerate makes royalty/FTS to its group companies deducting tax at DTAA rate. In the DTAA framework, this rate is subject to the rider that the concessional rate is available only to the extent of arm’s length payment. DTAAs contain following limitation clause:

“Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement”.

OECD Commentary states that excess amount shall be taxable in accordance with domestic law. From the Indian context, the excess amount shall be taxable at higher rate of 20%. Following are some illustrative instances of ongoing transfer pricing litigation that is factual and legal in nature:

Benchmarking of royalty payment
Management cross charge – the satisfaction of benefits test, service v/s shareholders function, duplicated cost, and adequate backup documents to prove the performance of the service.
Allocation of group cost – relevance to Indian companies, cost driver, appropriateness of markup charged by AEs.

In case, it is ultimately concluded (in litigation) that the Indian company has paid higher than ALP price, then the Indian company will be liable to pay tax at 20%. Thus, the transfer pricing policy adopted by Companies needs to factor in increased tax risk. The amendment is also likely to have an impact on Advance Pricing Agreement (APA). It typically takes 4-5 years to conclude APAs. Assume the Indian Company pays cost plus 10% to its German AEs. In APA it is concluded that services are low-value services and appropriate ALP is cost plus 5%. In such a case, the Indian Company will have to get an additional 5% back from German AE (secondary adjustment) and pay tax at 20% on excess 5%.

Interplay with section 206AA

Section 206AA provides that person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB shall furnish his PAN to the person responsible for deducting such tax failing which tax shall be deducted at higher of a) at the rate specified in the relevant provision of this Act b) at the rate or rates in force c) 20%.

Section 2(37A)(iii) defines ‘rates in force’ to mean rate specified in the relevant Finance Act or DTAA rate. It is judicially held that 20% rate prescribed in section 206AA need not be increased by surcharge and cess⁸. Part II to Schedule to Finance Act 2023 specifies a 20% rate which needs to be increased by the cess and a surcharge. Thus, non-submission of PAN in a situation not covered by section 206AA(7) read with Rule 37BC will entail a higher withholding rate.

8 Computer Sciences Corporation India P Ltd v ITO (2017) 77 taxmann.com 306 (Del)

NR obligation to file a return of income

Section 115A(5) provides for exemption from filing return of income to non-residents if the total income of a non-resident consists of only interest, dividend, royalty and/or FTS and the tax deducted is not less than the rate prescribed under Section 115A(1) of the Act. The royalty and FTS rate prescribed in the majority of India’s DTAA is 10%. Prior to the amendment, NRs availing DTAA benefits adopted a position that they are not required to file tax returns in India as the rate at which tax is deducted is not less than 115A rate. Due to an increase in tax rate from 10% to 20%, non-residents availing DTAA benefits will have to file income-tax returns in India.

TDS on benefit or perquisites – Section 194R

Amendment in brief

Section 194R provides that any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten percent of the value or aggregate of value of such benefit or perquisite. Explanation 2 to section 194R is inserted by Finance Act 2023 to clarify that the provisions shall apply to any benefit or perquisite whether in cash or in kind or partly in cash and partly in kind.

Implications

Prior to Explanation 2 to section 28(iv), the language of section 194R was identical to section 28(iv). Supreme Court in Mahindra & Mahindra Ltd. vs. CIT [2018] 404 ITR 1 (SC) (‘M&M) held that section 28(iv) does not cover cash benefits. Taking an analogy from it, it was possible to contend that cash benefit does not fall within section 194R. In contrast to this popular view, CBDT in Circular No 12 of 2022 mentioned that provisions of section 194R would be applicable to perquisite or benefit in cash as well. Insertion of Explanation 2 to section 194R gives legislative backing to Circular.

Transactions like performance incentives in cash, gift voucher, prepaid payment instrument like amazon cards etc. will be subject to TDS. The applicability of section 194R to transactions like bad debt and loan waiver is not clear. Section 194R requires a) deductor to ‘provide’ benefit b) benefit to arise to the recipient from business or exercise of the profession. These conditions indicate that both parties agree to the benefit being passed on from one party to another. The word ‘provide’ is used in the sense of direct benefit being passed on. The indirect or consequential benefit is not what is envisaged by the provisions. In case of bad debt, there is no benefit intended to be provided. In fact, the benefit is the consequence of a write-off. In one sense there is no benefit. A write-off is merely an accounting entry as the party would retain his right to recover. Further, there is no valuation mechanism prescribed to value the impugned benefit. Question 4 of Circular No 12 of 2022 does not deal with such a situation.

As regards loan waiver, CBDT Circular No 18 of 2022 has exempted Bank from the applicability of section 194R to loan settlement/waiver. No similar exemption is given to other similarly placed transactions (e.g. loan by NBFC, private parties, parent-subsidiary loans). The rationale for exempting the bank was to give relief to the bank as subjecting it to section 194R would lead to extra cost in addition to the haircut already suffered. It can be argued that other similarly placed assessee should also merit exemption as the legislature cannot distinguish between two similarly placed assessees.

TDS on online Gaming – Section 194BA

In recent times there has been a surge in online gaming. Hence the government proposed to introduce TDS on online gaming with effect from 1 July 2023. Section provides that any person responsible for paying to any person any income by way of winnings from online games shall deduct tax on net winnings in user account computed as per prescribed manner (yet to be prescribed). Tax on net winnings from online games is to be deducted as per rates in force (i.e., 30%+ surcharge + cess). The Section is applicable to all users including non-residents. No threshold limit is provided for TDS. TDS is to be deducted at the time of withdrawal of net winnings from the user account or at the end of the FY in case of net winnings balance in the user account.

Implications

Computation of Net winnings

The section provides for the deduction of tax on net winnings. However, the computation mechanism of TDS is yet to be prescribed. Typically, online gaming requires a user to initially deposit cash in the wallet at the time of registration. This cash deposit can be utilised for playing games. However, such cash deposits are practically non-refundable and users can only withdraw the money out of winnings. Hence a question arises whether the initial cash deposit or losses in games can be permitted to be set off against the winning balance as the section uses the word net winnings. The dictionary meaning of “net” means after adjustment or end result. Thus, the plain language of the section seems to indicate that winnings can be offset against losses. Similarly, cash deposits which are also not refundable should be permitted to be set off against the winnings and tax should be deducted only on net winnings. However, one would have to wait for the computation mechanism which shall be prescribed by the government.

TDS on interest on specified securities – Section 193

The existing clause (ix) of the proviso to Sec. 193 of the Income-tax Act, 1961 (“the Act”) prior to 1st April, 2023 provided that no tax shall be deducted on interest payable on any security issued by a company to a resident payee, where such security is in dematerialised form and is listed on a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 and the rules made thereunder. However, vide Finance Act 2023, the amendment has been made to omit the above clause with effect from 01-04-2023 and accordingly tax is required to be deducted w.e.f. 1st April, 2023 on interest payable to resident payee on such listed securities issued by a company.

In view of the above amendment and with effect from 1st April, 2023, tax will be deducted on any interest payable / paid on listed NCD held by respective investors.

Prior to the amendment, borrowers were deducting tax on interest payments to non-resident investors. Now, the tax will have to be deducted on the interest paid to resident investors. TDS will not be applicable to investors like insurance companies, mutual funds, National Pension Funds, Government, State Government who are exempt recipient under section 193, section 196, section 197(1E).

TCS on overseas remittances for overseas tour packages and other prupsoes (other than medical and education purposes) – Section 206C

TCS rate on overseas remittance is enhanced to 20% as against the existing rate of 5%. Accordingly, remittances towards overseas tour package or for any other purposes (other than remittances towards medical and educational purposes), TCS shall be collected at the rate of 20% as against earlier 5%. Further in respect of other purposes, the threshold of INR 7 lakhs has also been removed.

TCS will be applicable whenever any foreign payment is made through debit cards, credit cards and travel cards etc. without any threshold limit. This will result in a higher cash outflow for LRS remittance and overseas tour packages. Though the taxpayer will be eligible for a credit of tax collected or claim a refund by filing a return of income, it may lead to blockage of funds till the credit is availed or refund is received.

Concluding Thoughts

One important amendment which was expected by the taxpayers was an extension of the sunset date for concessional rate forming part of section 194LC/194LD. The sunset clause sets in from 1 July 2023. This will make the raising of capital in the form of ECB and other debt instruments costly.

Amendments are likely to have far-reaching implications. An inadvertent slippage is likely to be expensive. It is advisable that tax implication and consequential TDS implications are factored in at the time of entering into a transaction. It is recommended that positions adopted in the past are revalidated on a periodic basis in light of various developments.

PART IV | MUTUAL FUNDS

ANISH THACKER

Chartered Accountant

Introduction

Finance Acts in recent years have had their fair share of amendments which have focused on the financial services sector and in particular, funds, i.e., collective investment schemes. The Securities and Exchange Board of India (SEBI) has permitted various types of collective investment schemes such as Mutual Funds (MFs), Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), etc. to harness foreign and domestic investment. As these funds are set up with the specific purpose of channelizing investments into particularly designated sectors of the economy, and because these have certain peculiar features, these funds also have their own specific taxation provisions in the Income-tax Act, 1961(the Act). The taxation law as regards these funds continues to evolve with experience. Each Finance Act in recent times, therefore, has contained provisions which have amended the taxation scheme of these funds and their investors.

In this article, the key provisions of the Finance Act, 2023 that deal with Mutual Funds (for the sake of convenience, these are collectively called ‘Mutual Funds’ (admittedly loosely) for the sole purpose of this article only) have been discussed. It is submitted that the law as regards ‘Mutual Funds is still evolving, and one may well see a further amendment to the provisions of the Income-tax Act, 1961 (Act) dealing with ‘Mutual Funds’ going forward.

Amendments Impacting the Taxation of Specified Mutual Funds

The Finance Bill, 2023 (FB 2023), when it was tabled before the Parliament, on 1st February 2023, sought to introduce a deeming fiction, by way of section 50AA in the Act, to characterize the gains on transfer, redemption, or maturity of Market Linked Debentures (MLDs) as ‘short-term capital gains’ (STCG), irrespective of the period for which the MLDs are held⁹.

Such gains are to be computed by reducing the cost of acquisition of such debentures and expenses incurred in connection with the transfer. However, as these are deemed to be ‘short term’, the benefit of indexation is not available while computing such gains.

At the time of moving of the FB 2023 before the houses of the Parliament for discussion, an amendment was made to Section 50AA of the Act¹⁰ whereby it was sought to extend the scope of the special deeming provisions applicable to MLDs to a unit of a Specified Mutual Fund (SMF) purchased on or after 1 April 2023¹¹. A SMF is defined to mean a mutual fund (by whatever name called) of which not more than 35% of total proceeds are invested in the equity shares of domestic companies. The percentage of holding in equity shares of domestic companies is to be computed by using the annual average of the ‘daily averages’ of the holdings unlike in the case of Equity Oriented Funds where to construe a fund as an equity-oriented fund, to calculate the percentage of holdings in equity shares of domestic companies (at least 65%), the annual average of the ‘monthly averages’ has to be used.

9 This article does not deal with the taxation of income from MLDs.
10 The Finance Act 2023 (after incorporating the amendments at the time of moving of the Finance Bill, 2023, has received the assent of the President of India.
11 Unlike in the case of MLDs where the new tax provision applies to existing MLDs already issued, I n case of units of a specified mutual fund, the application is prospective, i.e., section 50 AA of the Act applies only to units of a specified mutual fund acquired on or after 1 April 2023.

One very important point to note here is that the ‘mutual fund’ referred to in section 50 AA of the Act is not merely a ‘mutual fund’ as is commonly understood. Unlike the provisions of section 10(23D) of the Act or section 115R thereof, where a reference can reasonably be drawn that these apply only to a mutual fund registered with the SEBI, section 50AA does not make such a reference. In fact, it uses the expression ‘by whatever name called’ when it defines the term ‘Specified Mutual Fund’ in Explanation (ii) to the said section. A question therefore arises as to what does the expression ‘Specified Mutual Fund’ as contained in this section, bring within its ambit.

The SEBI Mutual Funds Regulations, 1996 (SEBI MF Regulations) define ‘mutual fund in regulation 2 (22q) to mean a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, money market instruments, gold or gold related instruments, silver or silver related instruments, real estate assets and such other assets and instruments as may be specified by the Board from time to time

This definition only covers a trust but does not cover a fund set up as a company. Also, it is unclear as to whether a fund set up outside India is covered by the expression ‘specified mutual fund’ or not. It will thus remain to be seen and debated and indeed litigated, as to what a ‘specified mutual fund’ would include, within its fold. Unfortunately, as this addition to the scope of section 50 AA of the Act was done not at the time of tabling the FB 2023 but later, there is no mention of this in the memorandum explaining the provisions of the FB 2023, which may guide taxpayers as to what position to take in respect of funds other than SEBI registered mutual funds. The Government may therefore be requested to issue guidance in this regard to avoid ambiguity and avoid potential litigation.

Coming back to the nature of the capital gains on the transfer of the units of this specified mutual fund, these are admittedly only ‘deemed’ to be STCG. Considering the judicial precedents¹² in the context of capital gains arising on depreciable assets under a comparable provision (section 50 of the Act), it may be possible to take view that the section 50 AA of the Act merely modifies the method of computation of gains (by denying indexation benefit in case of SMF units) and does not change the ‘long term’ character of the assets mentioned in section 50AA of the Act, (MLD or SMF units) for other purposes like subjecting the gains to a lower rate of tax on long term capital gains, (section 112 of the Act) or roll over capital gains exemption (section 54F) and set off of losses. This is another area where taxpayers will need to take considered decisions on the positions to be taken in their return of income and brace themselves for a potential difference of opinion from their assessing officer (now the Faceless Assessment Centre for most).

Amendments relating to business trusts (REITs/ InvITs) and their unit holders:

Computation of certain distributions to be taxed as “other income” in the hands of business trust unit holders:

Section 115UA of the Act accords a partial ‘pass-through’ status to business trusts in terms of which certain specific incomes (i.e., interest, dividend, and rent) are taxed in the hands of the unit holders on distribution by the business trusts¹³ whereas other incomes are taxed in the hands of the business trust.

12 Illustratively, CIT v. V. S. Demo Co. Ltd (2016)(387 ITR 354)(SC), Smita Conductors v. DCIT (2015)(152 ITD 417)(Mum)
13 Comprising REITs and InvITs

From the memorandum explaining the provisions of the FB 2023, it could be inferred that the intention behind amending the scheme of taxation of business trusts and the unitholders thereof was to take care of a situation where, if a business trust received money by way of repayment of a loan from the Special Purpose Vehicle (SPV) set up to acquire the property, the same arguably, was neither taxable in the hands of the business trust nor in the hands of the unitholders. This was due to the ‘pass through’ mechanism available under the provisions of the Act as they then prevailed.

It was apprehended that the business trusts were using these repayments to distribute money to the unitholders thereby increasing the internal rate of return (IRR) to these unitholders. The said ‘return’ was however ostensibly escaping tax, from the Revenue’s viewpoint.

Accordingly, amendments were proposed to sections 2(24), 115UA and 56(2) to seek to tax the repayment of loans.

The FB 2023 proposed to introduce a new set of provisions whereby any other distributions (such as repayment of debt) by business trusts that presently do not suffer taxation either in the hands of business trust or in the hands of unit holders, will henceforth be taxed as “other income” in the hands of unit holders.

Further, where such distribution is made on redemption of units by business trusts, then the distribution received shall be reduced by the cost of acquisition of the unit(s) to the extent such cost does not exceed the distribution so received.

Stakeholders represented for reconsideration of the proposal – more particularly, in respect of the treatment of redemption proceeds as normal income instead of capital gains.

At the time of the moving of the FB 2023 for discussion, an amendment was proposed to the said section, which has now been enacted, which provides a revamped version of the new provision. The revamped provisions provide the manner of computing the distribution which is taxable as “other income” in the hands of unit holders (referred to as “specified sum”). As per this computation, the “specified sum” shall be the result of ‘A – B – C’, where:

‘A’

Aggregate sum distributed by the business trust during the current Taxable Year (TY) or past TY(s), w.r.t. the unit held by the current unit holder or the old unit holder.

However, the following sum shall not be included in ‘A’:

– Interest or dividend income from the SPV

– Rental income

– Any sum chargeable to tax in the hands of business trusts

‘B’

Issue price of the units

‘C’

Amount charged to tax under this new provision in any past TY(s).

If the result of the above is negative (i.e., where ‘B’ + ‘C’ is more than ‘A’), the “specified sum” shall be deemed to be zero.

The above computation mechanism indicates that specified sum is to be computed by taking into account the distribution made in the past Assessment Years (AY), including the distribution made to the old unit holders who were holding units prior to the current distribution date. Thus, while the levy as per the revamped provision applies prospectively w.e.f. AY 2024-25, the provision has a retroactive impact since it factors the distributions made prior to the previous year relevant to the said assessment year.

Furthermore, at the time of the movement of the FB 2023 for discussion an amendment was proposed, which now finds place in the Act, which omits the proposal of FB 2023 to reduce the cost of acquisition of units by the amount of distribution for computing “other income”. To this extent, the unitholders do get some kind of ‘relief’ (the term is used tongue in cheek, here).

The set of amendments brings forth their own interpretational issues, which can form the subject matter of another detailed article. Also, if we look at the interplay between the provisions of Double Tax Avoidance Agreements (DTAA), certain other interesting issues are likely to emerge.

Since these are not issues that affect a large number of taxpayers, these are not elaborated here. Suffice it to say that again this is not the last, one will hear on this topic.

Notified Sovereign Wealth Fund (SWF) and pension funds to be exempted from the above revamp provision:

The Act provides an exemption to notified SWF and pension funds by way of section 10(23FE), in respect of certain incomes including distribution received from business trusts.

The amended FB 2023, (this provision is now enacted) extends the exemption in respect to “other income” received by notified SWF and pension fund as per the revamped business trust taxation provisions mentioned above. For notified SWFs and pension funds therefore, the provisions discussed above will not apply and the existing exemption regime will continue to apply.

Computation of cost of acquisition of units in business trusts:

The Finance Act 2023 (at the enactment stage, this amendment was moved) introduces a provision to determine the cost of acquisition of units of a business trust. In determining the cost of acquisition any sum received by a unit holder from business trust w.r.t. such units, is to be reduced, except the following sums:

Interest or dividend income from the SPV
Rental income
Any sum not chargeable to tax in the hands of business trusts

Any sum not chargeable to tax in the hands of unit holders under revamped provision.

Furthermore, it provides that where units are received by way of transaction not considered as a transfer for capital gains, the cost of acquisition of such unit shall be computed by reducing the sum received from the business trust (as explained above), whether such sum is received before or after such transaction.

The above provision requires a reduction of all sums received from the business trust even prior to 1 April 2023, and to this extent, the provisions have a retroactive impact.

Amendments to the taxation of funds located in the International Financial Services Centre (IFSC)

Tax exemption for non-residents on distribution of income from Offshore Derivative Instruments (ODIs) issued by an IFSC Banking Unit (IBU)

The endeavor of the provision of exemption under section 10(4D) of the Act has been to provide parity in tax treatment to IFSC Funds as compared to Funds in offshore jurisdictions (of course, the overseas funds typically issue ODIs, popularly called P Notes or participatory notes to offshore investors). These notes are contracts which allow investors a synthetic exposure to income from Indian securities. To hedge the exposure that the funds take on, the funds typically hold the said securities in their own books. The same also applies to an IFSC fund including IFSC Banking units (IBUs). The discussion below is in the context of the IBUs.

Under the ODI contract, the IBU makes investments in permissible Indian securities. Such income may be taxable/ exempt in the hands of IBU as per the provisions of the ACT. The IBU would pass on such income to the ODI holders.

Presently, the income of non-residents on the transfer of ODIs entered with IBU is exempt under the Act. However, there is no similar exemption on the distribution of income to non-resident ODI holders. Resultantly, such distributed income may be taxed twice in India i.e., first when received by the IBU, and second, when the same income is distributed to non-resident ODI holders.

In order to remove double taxation, FB 2023 proposed an exemption to any income distributed on ODI entered with an IBU provided that the same is chargeable to tax in the hands of the IBU.

The condition of chargeability of such income to tax in the hands of IBU could have resulted in practical difficulties for non-residents to claim the exemption. Considering the various representations made on this aspect, the Amended FB 2023 addresses this anomaly by removing the said condition.

Non-applicability of surcharge and cess on income from securities earned by Category III AIFs and investment banking division of an Offshore Banking Unit (OBU) (i.e., “Specified Fund” as per section 10(4D) of the Act)

The Amended FB 2023 intends to remove the burden of surcharge and cess on income from securities earned by a Specified Fund. Under the Act, Specified Fund is inter alia defined to mean a Category III AIFs (which meets specified conditions) and investment banking division of an OBU (meeting specified conditions). In this context, a fact-specific evaluation may be required considering the nature of technical amendments.

The objective of the amendment appears to be to bring the taxation of Specified Funds in IFSC at par with the tax regime applicable for Fund investing from a jurisdiction with which India has a Tax Treaty.

Relocation of an off-shore Fund – Expansion of the definition of ‘Original Fund’

Presently, the Act provides for a tax-neutral relocation of offshore Funds to IFSC [i.e., assets of the Original Fund, or of its wholly owned special purpose vehicle, to a resultant Fund in IFSC] for promoting the Fund Management ecosystem in IFSC.

The definition of ‘Original Fund’ under the Act is now expanded to include:

an investment vehicle, in which Abu Dhabi Investment Authority (ADIA) is the direct or indirect sole shareholder or unit holder or beneficiary or interest holder and such investment vehicle is wholly owned and controlled, directly or indirectly, by ADIA or the Government of Abu Dhabi, or
a Fund notified by the Central Government in the Official Gazette (subject to such conditions as may be specified).

Shares issued by a private company to specified fund located in IFSC will not be subjected to angel taxation i.e., section 56(2) (viib) of the Act.

Prior to the FB 2023, shares issued by a closely held company to non-resident in excess of the company’s prescribed fair market value was not liable to tax in the hands of the closely held company issuing the shares under section 56(2)(viib) of the Act (popularly called by the media and now even more popularly called by most people as “angel tax”). Additionally, angel tax i.e., section 56(2) (viib) of the Act, did not apply with respect to (i) shares issued to a resident being a venture capital fund or a specified fund¹⁴; or (ii) shares issued by a notified start-up.

14 Being a fund established in India which has been granted a certificate of registration as Category I or II AIF and is regulated by Securities and Exchange Board of India (‘SEBI’) or IFSC Authority

FB 2023 extended the provisions of “angel tax” i.e., section 56(2)(viib) of the Act in respect of shares issued by closely held companies to non-residents also with effect from Financial Year 2023-24 i.e. Assessment Year 2024-25.
However, considering that a specified fund located in IFSC is now governed by the International Financial Services Centre Authority (Fund Management) Regulations, 2022, amended FB 2023 provides that shares issued by closely held companies to specified fund located in IFSC governed by said Regulations, 2022 will not be subject to “angel tax” i.e., section 56(2)(viib) even in its expanded avatar, would continue to be not applicable.

Conclusion

At a policy level, the importance of encouragement of collective investment, both domestic and foreign, be it from retail investors, or from private equity or institutional investors, is clearly brought out by repeated encouraging interviews given by senior Government officials to the media. Investors have also positively responded to this encouragement by looking at India’s growth trajectory and growth potential and committing significant investment in sectors where the Government has clearly felt the need for infusion of capital. The Government’s bold initiative of conceiving and developing the International Financial Services Centre has been welcomed, albeit initially with cautious optimism, but investment therein is steadily showing good progress. Investors are already dealing with unpredictable macro-economic and political situations in the recent past. In this situation, they look to the Government for a stable, certain, and unambiguous tax regime supporting the policy decision to encourage collective investment. On its part, the Government has also been giving them its full ear and trying to make the investment climate as conducive to them as possible. Some challenges, however, persist when amendments with rationalization and protection of tax base are made with retroactive effect. This creates some doubt in the minds of the investors. Also, to foster a stable and predictable tax regime, adequate guidance to taxpayers on contentious issues should be regularly published so as to encourage and incentivise tax compliance and result in a consequential increase in the tax base.

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Section145 r.w.s.68 and section 133–where the AO had not found a single defect in assessee’s books of account and enquiry made by him under section 133(6) had been properly explained by the assessee then addition made by the AO on the basis of the difference between amount reflected in books of account and in Form 26AS should be deleted.

9. Shri Jeen Mata Buildcon (P) Ltd vs. ITO

[2022] 97 ITR(T) 706 (Jaipur – Trib.)

ITA No.: 397 (JP.) of 2019

A.Y.: 2013-14

Date: 08th March, 2022

Section145 r.w.s.68 and section 133–where the AO had not found a single defect in assessee’s books of account and enquiry made by him under section 133(6) had been properly explained by the assessee then addition made by the AO on the basis of the difference between amount reflected in books of account and in Form 26AS should be deleted.

FACTS

The assessee was a company engaged in the business of labor contractor supplier with machinery under affordable housing policy for the year under consideration. The assessee company filed its return of income declaring income at Rs. 5,21,007 on 30th March, 2015 through e-filing portal and the same was processed under section 143(1) of the Income-tax Act, 1961. Later on, the case was selected for scrutiny through CASS due to the difference in turnover reflected in Form 26AS and disclosed in books of accounts. During the course of the assessment proceedings, the AO had observed that turnover declared by the assessee for the year under consideration was Rs. 67,84,050. Whereas the turnover reflected in Form 26AS was Rs. 86,62,800

Accordingly, the difference of Rs. 18,78,750/- pertaining to the contract received from M/s Sidhi Vinayak Affordable Homes was added back to the total income of the assessee. The addition was made on the basis of the confirmation received from the said party during the course of the enquiry under section 133(6) of the Income-tax Act. The said party had confirmed that the amount of Rs.18,78,750 was booked in the books of accounts.

In another case, the addition in respect of M/s Bhairav Township Pvt Ltd, the AO had observed that there was a difference between income offered and expense booked. Accordingly, the AO made an addition to the total income of the assessee to the tune of Rs. 15,23,978 being the difference between the expenses booked and income offered.

The CIT (Appeals) had confirmed these two additions made by the AO.

Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The Authorised Representative of the assessee argued that merely because there was a difference in the figures mentioned in Form 26AS and the books of accounts, there cannot be an addition to the returned income when the books of accounts of the assessee were duly audited. The AO had not found any single defect in the books of accounts that had been produced before the AO. Even the inquiry made under section 133(6) had been properly explained by the Authorised Representative of the assessee during the course of the assessment proceedings. The main contentions raised during the course of the assessment proceedings that merely because the other party had booked the expenses, cannot be the reason while making the assessment in the case of the assessee when the contract receipt got reflected in the subsequent year as per the regular method of accounting followed.

The income offered for the parties, M/s Sidhi Vinayak Affordable Homes and M/s Bhairav Township Pvt Ltd in respect of which addition was made, was almost reconciled and offered for tax in the regular books of accounts which was not rejected by the AO. Therefore, it was not required to disturb the books which had been audited by an independent auditor. Thus, the addition made for an amount of Rs. 18,78,750 and Rs. 15,23,978- totalling to Rs. 34,02,728 were deleted.

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Section 40(b) r.w.s 263–Where the assessee-firm had mentioned in its partnership deed that the partners shall be entitled to draw salary to the extent allowable under Income-tax Act but shall be drawing salary to maximum of Rs. 24 lakhs each per annum and accordingly the AO had allowed Rs. 36 lakhs of remuneration paid by assessee-firm to its three partners at the rate of Rs. 12 lakhs each under section 40(b)(v), Commissioner was not justified in invoking revisionary proceedings under section 263 on the basis that such remuneration of partners was not quantified in the partnership deed.

8. H.R. International vs. PCIT
[2022] 97 ITR(T) 129 (Amritsar – Trib.)
ITA No.:675 (ARS.) of 2019
A.Y.: 2015-16
Date of order: 19th May, 2022

Section 40(b) r.w.s 263–Where the assessee-firm had mentioned in its partnership deed that the partners shall be entitled to draw salary to the extent allowable under Income-tax Act but shall be drawing salary to maximum of Rs. 24 lakhs each per annum and accordingly the AO had allowed Rs. 36 lakhs of remuneration paid by assessee-firm to its three partners at the rate of Rs. 12 lakhs each under section 40(b)(v), Commissioner was not justified in invoking revisionary proceedings under section 263 on the basis that such remuneration of partners was not quantified in the partnership deed.

FACTS

The assessee was a partnership firm. While filing its return of income for A.Y. 2015-16, the assessee claimed partner’s remuneration under section 40(b)(v) of the Income-tax Act, 1961 to the extent of Rs. 36 lakh i.e. Rs. 12 lakh for each of its three partners. The original assessment was carried out under section 143(3). The jurisdictional PCIT initiated revisionary proceedings under section 263 of the Income-tax act, 1961. During the course of revisionary proceedings, the PCIT observed that in the partnership deed of the assessee, the partner’s remuneration was not quantified. On the basis of this observation, the PCIT concluded that the assessee was not eligible to get the benefit of section 40(b)(v) in respect of remuneration paid to its three partners and accordingly concluded the revisionary proceedings by holding that the order passed by the AO under section 143(3) was erroneous and prejudicial to the interest of revenue.

Aggrieved by the order of PCIT passed under section 263, the assessee filed further appeal before the ITAT.

HELD

It was observed by the Tribunal that section 263 had two limbs which are erroneous order and prejudicial to the interest of revenue. The assessee in its partnership deed had mentioned that the drawing power of the salary was Rs.24 lakh per annum for each partner. In fact, the salary in excess of Rs. 24 lakh will be disallowed as per section 40(b)(v) of the Income-tax Act, 1961. Accordingly, the Tribunal concluded that it cannot be said that the specific salary was not quantified. Although the assessment order had not pointed out about anything related to partnership deed, during calculation of total income, the said deed was considered and documents were within the record of the proceeding. The remuneration of Rs.12 lakh paid to each of its three partners was within the limit permissible under section 40(b)(v).

The beauty of section 40(b)(v) was that the remuneration to the partner was fully regulated by the book profit. More the book profit, more remuneration of partner will be allowed. So as per the Act, the assessee can claim more remuneration but it will be allowed subjected to provision of section 40(b)(v) of the Act depending upon its book profit.

The PCIT had, during the issuance of notice under section 263 and during the passing of the revision order under the said section, not taken cognizance of the calculation of tax and the benefit of revenue. The revision order passed under section 263 was considered and the Tribunal observed that two opinions were formed by two authorities in the question of acceptance of clause of partnership deed related to partner’s remuneration.

Consequently, it was held that the view of the Assessing Officer being a plausible view could not be considered erroneous or prejudicial to the interest of revenue. Accordingly, the order of the AO cannot be considered erroneous or prejudicial to interest of the revenue.

In result the appeal filed by the assessee was allowed.

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Sum received towards undertaking restrictive covenant of non-imparting service to any other person and not to share associated goodwill of medical practice, being in the nature of non-compete fee, is a capital receipt and not taxable as business or professional income. Non-compete fee related to profession is made taxable only w.e.f. A.Y. 2017-18 and the non-compete fee in relation to profession for period prior to A.Y. 2017-18 would be treated as capital receipt. Changing of Section from 28(va) to 28(i) without confronting the Assessee is a fatal mistake.

7. Nalini Mahajan vs. ACIT
TS-180-ITAT-2023(DEL)
A.Y.: 2014-15
Date of Order: 06th April, 2023
Sections: 28(i), 28(va)

Sum received towards undertaking restrictive covenant of non-imparting service to any other person and not to share associated goodwill of medical practice, being in the nature of non-compete fee, is a capital receipt and not taxable as business or professional income.

Non-compete fee related to profession is made taxable only w.e.f. A.Y. 2017-18 and the non-compete fee in relation to profession for period prior to A.Y. 2017-18 would be treated as capital receipt.

Changing of Section from 28(va) to 28(i) without confronting the Assessee is a fatal mistake.

FACTS

The assessee, a doctor by profession was running a clinic by the name of Mother & Child, New Delhi. On 28th October, 2012, the assessee, executed a `Service Agreement’ with Nova Pulse IVF Clinic Pvt Ltd (“the Company”) whereunder the assessee agreed to be exclusively engaged with the Company for providing her professional services. Under the agreement, the consideration was a fee for her professional services, an amount for exclusive engagement with the Company and an amount for her bringing her associated Goodwill to the Company. During the year under consideration, the assessee received a professional fee and a sum of Rs. 3.20 crore for exclusive engagement with the Company and for bringing her associated Goodwill to the Company. The AO held the sum of. Rs. 3.20 crore to be taxable under section 28(va) of the Act being the value of any benefit or perquisite arising from business or exercise of a profession.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO but held that the amount under consideration is chargeable to tax not under section 28(va) but under section 28(i) of the Act. He rejected the plea of the amount under consideration is a capital receipt.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that there is a proper agreement which provides for the non-compete fee/goodwill. The agreement has been turned down by the authorities below as it is a colorable device. This observation, the Tribunal held, is not backed by any proper reasoning. The case laws relating to the proposition is that the Revenue should only look at the agreement and not look through the binding agreements between the parties. The Tribunal further noted that the AO made addition under section 28(va) of the Act. The amendment to bring profession also, into the said clause was brought in w.e.f. A.Y. 2017- 18. Hence, non-compete fee related to profession is made taxable only w.e.f. A.Y. 2017-18 and the non-compete fee in relation to profession for period prior to A.Y. 2017-18 would be treated as capital receipt.

Furthermore, the CIT(A) has changed the section from 28(va) to section 28(i) of the Act without confronting the assessee. The Tribunal held this to be a fatal mistake. The Tribunal held that in view of the decisions of the Supreme Court in the case of Excel Industries [358 ITR 295 (SC)] and in the case of Radhasoami Satsang Saomi Bagh vs CIT [193 ITR 321 (SC)], the assessee also deserves to succeed. Also, on the principle of consistency in as much as for A.Ys. 2013-14, 2015-16 and 2016-17, the same was treated as capital receipt and the same had been accepted by the Revenue.

The Tribunal held that the sum of Rs.3.20 crore received towards undertaking restrictive covenant of non-imparting service to any other person, and not to share associated goodwill of medical practice, being in the nature of non-compete fee is a capital receipt and not taxable under the provisions of the Act. Hence, the assessment by the AO under 28(va) is not sustainable and similarly, the order of the CIT(A) whereby he changed the head from section 28(va) to section 28(i) without confronting the assessee is also not sustainable. The CIT(A)’s view that the same is taxable under the normal professional income is also not sustainable in the background of the aforesaid discussion, the agreement and the case law referred above. The Tribunal decided this ground of appeal in favour of the assessee.

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Provisions of section 68 cannot be invoked as the assessee, offering income under presumptive tax provisions, was not required to maintain books of account.

6. Sunil Gahlot vs. ITO
ITA No. 176/Jodh./2019 (Jodh.-Trib.)
A.Y.: 2015-16
Date of Order: 24th March, 2023
Sections: 44AD, 68, 115BBE

Provisions of section 68 cannot be invoked as the assessee, offering income under presumptive tax provisions, was not required to maintain books of account.

FACTS

The assessee, an individual carrying on trading activity, returned a total income of Rs.2,63,920, under section 44AD of the Act. In the course of scrutiny assessment proceedings, the AO asked the assessee to furnish details of sundry debtors and creditors. The AO made an addition of Rs. 67,743 towards unexplained opening capital balance and Rs. 28,964 for unexplained creditors.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal having noted that the assessee had opted for presumptive taxation under section 44AD of the Act held that the assessee is not required to maintain proper books of accounts. The Tribunal observed that it does not find any merit in the action of the AO calling for the details of sundry creditors and further making addition under section 68 of the Act for unexplained creditors of Rs. 28,964. Since the assessee was not required to maintain books of accounts, the Tribunal deleted the addition under made by the AO under section 68 of the Act towards unexplained sundry creditors.

As regards the addition for opening capital balance of Rs. 67,463, the Tribunal held that it failed to find any merit in the action of the AO because the minimum amount not taxable for the preceding years i.e A.Y. 2014-15 and A.Y. 2013-14 was Rs. 2.00 lakhs and the assessee filed return regularly and having regular source of income from the business and, therefore, it can safely be presumed that he had sufficient accumulated profits to explain the opening capital balance of Rs. 67,463/-. The Tribunal deleted this addition as well.

As regards application of section 115BBE, the Tribunal held that section 115BBE comes into operation only in case of income referred in sections 68/69/69A/69B/69C and 69D of the Act, which is not applicable on the issues raised in the instant case, therefore, there is no justification for invoking the provisions of Section 115BE of the Act.

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An addition made under the Black Money Act cannot be made on a protective basis under the Income-tax Act. This has been so held even though the assessment under section 10(3) of the Black Money Act had not attained finality and was subjudice.

5. DCIT vs. Ashok Kumar Singh
ITA No. 426 & 427/ Del/2022 (Delhi-Trib.)
A.Ys.: 2013-14 and 2014-15
Date of Order: 19th April, 2023
Sections : 68 and 10(3) of the Black Money Act

An addition made under the Black Money Act cannot be made on a protective basis under the Income-tax Act. This has been so held even though the assessment under section 10(3) of the Black Money Act had not attained finality and was subjudice.

FACTS

A search action was carried out on 7th April, 2016 and notices were issued and served upon the assessee. During the course of assessment proceedings certain information was available on the website of International Consortium of Investigative Journalists (ICIJ) regarding Indians having undisclosed foreign companies and assets offshore. Investigation was carried out by the Investigation Wing, Delhi. Information was also received from BVI under Information Exchange Agreement and thereafter information was also received from competent authority of Singapore.

The AO noticed that there were huge credits in the bank accounts, details whereof were received pursuant to Information Exchange Agreements. The AO, in the assessment order, mentioned that the Proceeding under the Black Money (Undisclosed Foreign Income and Assets) and imposition of Tax Act 2015 (“BM Act”) have also been initiated after examining the details / materials (including the information relating to foreign bank accounts which were not disclosed in the returns of income) by issuing notices under section 10(1) of the BM Act, and that the final orders are yet to be passed under the BM Act. The AO also stated that “But, it is also clearly understood that the same income cannot be added twice-(i) once under the Incometax Act and then (ii) in the BM Act, as a measure of abundant precaution, income is assessed protectively in the hands of the assessee under income tax act.”

Aggrieved, the assessee preferred an appeal to the CIT(A) who deleted the addition so made on protective basis.

Aggrieved, the revenue preferred an appeal to the Tribunal where the Revenue conceded that the additions made under the Black Money Act are subjudice before the first appellate authority and to safeguard the interest of revenue protective addition has been made under the IT Act.

HELD

The Tribunal held that once additions have been made under the Black Money Act, the same cannot be made under the IT Act on the same set of facts. The Tribunal held that the deletion of the addition by the CIT(A) does not call for any interference.

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Interest on delayed payment of TDS is compensatory in nature and is allowable as deduction under section 37(1) of the Act.

4. Delhi Cargo Service Centre vs. ACIT
2023 Taxscan (ITAT) 778 (Delhi – Trib.)
A.Y.: 2015-16
Date of order: 24th March, 2023
Sections: 37, 43B

Interest on delayed payment of TDS is compensatory in nature and is allowable as deduction under section 37(1) of the Act.

FACTS

The assessee, a company engaged in cargo handling services at Cargo Terminal – 2, Indira Gandhi International Airport, e-filed its return of income for A.Y. 2015-16 declaring therein a loss of Rs. 13,29,41,858. The AO passed a draft assessment order on 18th December, 2018 under section 143(3) r.w.s. 92C of the Act inter alia proposing an addition of Rs. 1,28,605 under section 43B being late payment towards statutory dues.

Aggrieved, the assessee preferred an application under section 144C(2) before the Dispute Resolution Panel (DRP) objecting to the additions proposed by the AO. Regarding disallowance of Rs.1,28,605 under section 43B, the DRP directed the Ld. AO to examine the evidence and allow to the extent supported by the evidence. The Ld. AO, however maintained the disallowance of interest of Rs. 94,662 paid on late payment of TDS and Rs.26,465 being PF arrear payments as challans in support were not filed.

The AO held that the entire amount pertained to A.Y. other than A.Y. 2015-16 and thus cannot be allowed. Liability for interest being in the nature of penalty, the AO disallowed the same under section 37(1) of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee it was contended that the liability for interest incurred by the assessee is compensatory in nature and for this proposition reliance was placed on the decision of Supreme Court in Lachmandas Mathuradas vs. CIT 254 ITR 799 (SC), decision of Hon’ble Madras High Court in Chennai Properties and Investment Ltd. vs. CIT 239 ITR 435 (Mad) and the decisions of Mumbai, Calcutta and Jaipur Benches of the Tribunal.

HELD

The Tribunal observed that the AO proposed the impugned disallowance under section 43B which allows deduction of statutory dues in the year of actual payment irrespective of the year in which the liability was incurred. The case of the assessee all along has been that the impugned interest has been paid in A.Y. 2015-16 and therefore it is an allowable deduction. However, after receipt of the direction of the DRP to verify the evidence of payment and allow the same as deduction, the AO made the impugned disallowance under section 37(1) of the Act assigning the reason that impugned interest liability is penal in nature.

The Tribunal held that the impugned disallowance for the reason assigned now is also not sustainable. It observed that an identical issue arose for consideration before Mumbai Bench of the Tribunal in M/s M L Reality vs. ACIT in ITA No. 796/Mum/2019 and the Tribunal vide its order dated 24th March, 2021 held that interest paid on late payment of TDS is compensatory in nature and is an allowable deduction under section 37(1) of the Act.

The Tribunal following the decision in M L Realty Ltd (supra) and the ratio decidendi of the decisions relied upon by the assessee decided found substance in the contentions of the assessee and decided this ground of appeal in favour of the assessee.

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‘Charitable Purpose’, GPU Category- Post 2008 Amendment – Eligibility for Exemption under Section 11- Section 2(15) – Part I

INTRODUCTION

1.1 The Indian Income-tax Act, 1922 (“1922 Act”) contained and the Income-tax Act, 1961 (“1961 Act”) contains, specific provisions to deal with income derived by a person from property held under trust wholly for charitable or religious purposes.

1.2 Section 4(3) of the 1922 Act provided that any income derived from the property held under trust or other legal obligation wholly for religious or charitable purposes shall not be included in the total income of the person receiving such income subject to fulfillment of conditions stated therein. The term “charitable purpose” was defined in the 1922 Act to include relief of the poor, education, medical relief and the advancement of any other object of general public utility. The last limb of the definition of charitable purpose– ‘advancement of any other object of general public utility’ (hereinafter referred to as “GPU” or “GPU category”) has been subject of matter of litigation and has been subjected to several amendments from time to time.

1.2.1 In the case of The Trustees of the ‘Tribune’, In re (7 ITR 415) (“Tribune”), the assessee claimed exemption under section 4(3) of the 1922 Act for the assessment year 1932 – 33 in respect of income earned by the trust which was created to maintain Tribune Press and Newspaper in an efficient condition, keeping up the liberal policy of the newspaper and devoting the surplus income in improving the said newspaper. The question before the Privy Council was as to whether the property was held under trust wholly for the GPU. The Privy Council took the view that the objects of the trust fell within the GPU category and held that the trust was entitled to exemption under section 4(3) of the 1922 Act.

1.2.2 In the case of CIT vs. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC) (“Andhra Chamber”), the Supreme Court allowed the claim of the assessee for exemption under section 4(3) of the 1922 Act for six assessment years 1948 – 49 to 1951- 52, 1953-54 and 1954-55. The Court held that the principal objects of the assessee were to promote and protect, and to aid, stimulate and promote the development of trade, commerce and industries in India, which would fall within the GPU category. The Court further held that the expression “object of general public utility” is not restricted to objects beneficial to the whole of mankind but would also cover objects beneficial to a section of the public. The Court further held that if the primary object of the assessee was GPU, the assessee would remain a charitable entity despite the presence of an incidental political object being in the nature of promotion of or opposition to legislation affecting trade, commerce or manufacture.

1.3 Upon repeal of the 1922 Act and enactment of the 1961 Act, the term “charitable purpose” is defined in section 2(15) of the 1961 Act. The words ‘not involving the carrying on of any activity for profit’ [profit making activity] were added in the GPU category. ‘Charitable purpose’ as per section 2(15) of the 1961 Act included relief of the poor, education, medical relief (Specified Categories), and the advancement of any other object of general public utility “not involving the carrying on of any activity for profit”. Subsequently, from 2009 onwards, the list of Specified Categories (with which we are not concerned in this write-up) was expanded to include preservation of environment, yoga, etc.

1.3.1 The issue before the Supreme Court in the case of Sole Trustee, LokaShikshana Trust vs. CIT [1975] 101 ITR 234 (“LokaShikshana Trust”) was whether an assessee trust set up with the object of educating people inter alia by (i) setting up and helping institutions in educating people by the spread of knowledge on matters of general interest and welfare (ii) founding and running reading rooms and libraries and keeping and conducting printing houses and publishing or aiding the publication of books, etc. (iii) supplying Kannada speaking people with an organ or organs of educated public opinion, etc. and (iv) helping similar societies and institutions; would be entitled for exemption under section 11 of the 1961 Act for the assessment year 1962- 63. At the outset, the Court held that the object of the assessee trust was not education [by adopting narrower meaning of the term education] but would fall within the GPU category. The Court rejected assessee’s argument that the newly added words ‘not involving the carrying on of any activity for profit’ in the GPU category merely qualified and affirmed the position as it was under the definition of ‘charitable purpose’ in the 1922 Act and observed that there was no necessity for the Legislature to add the new words in the definition if such was the intention. The Court observed that to fall within the GPU category it was to be shown that the purpose of the trust is the advancement of any other object of general public utility, and that such purpose does not involve profit making activity. The Court then observed that the assessee trust was engaged in the business of printing and publication of newspaper and journals which yielded profit and also noted the fact that there were no restrictions on the assessee trust for earning profits in the course of its business. The Court held that the assessee trust did not satisfy the requirement that it should be one not involving profit-making activity and, accordingly, was not entitled to exemption under section 11 of the 1961 Act.

1.3.2 In the case of Indian Chamber of Commerce vs. CIT [1975] 101 ITR 796 (SC) (“Indian Chamber”), the assessee was a company set up under section 26 of the Indian Companies Act, 1913 primarily to promote and protect Indian trade interests and other allied service operations, and to do all other things as may be conducive to the development of trade, commerce and industries or incidental to attainment of its objects. The assessee company for the assessment year 1964 – 65 earned profits from three services rendered by it – arbitration fees, fees for certificate of origin and share of profit in a firm for issue of certificates of weighment and measurement. The issue before the Supreme Court was whether carrying on of the aforesaid three activities which yielded profits involved ‘carrying on of any activity for profit’ within the meaning of section 2(15) of the 1961 Act. The Court held that an institution must confine itself to the carrying on of activities which are not for profit and that it is not enough if the object is one of general public utility. In other words, the attainment of the charitable object should not involve activities for profit. On the facts of the case, the Court denied exemption under section 11 to the assessee.

1.3.3 The interpretation of words ‘not involving the carrying on of any activity for profit’ in section 2(15) of the 1961 Act then came up before a Constitution bench of the Supreme Court in the case of ACIT vs. Surat Art Silk Cloth Manufacturers Association (1978) 121 ITR 1 (“Surat Art”). In this case, while dealing with the category of GPU, the Court laid down what came to be known as ‘pre-dominant test’. Reference may be made to para 1.6 of this column – January 2023 issue of this journal where the aforesaid decision has been explained. The Court in Surat Art’s case overruled its earlier decision in the case of Indian Chamber interpreting the words ‘not involving the carrying on of any activity for profit’ and held that it was the object of GPU that must not involve the carrying on of any activity for profit and not its advancement or attainment. The Court in Surat Art also disagreed with the observation in the case of Sole Trustee, Loka Shikshana Trust and Indian Chamber to the effect that whenever an activity yielding profit is carried on, the inference must necessarily be drawn that the activity is for profit and the charitable purpose involves the carrying on of an activity for profit in the absence of some indication to the contrary.

1.3.4 The Supreme Court followed the principles laid down in Surat Art’s case while deciding the claim for exemption under section 11 of the 1961 Act in CIT vs. Federation of Indian Chambers of Commerce & Industries [1981] 130 ITR 186 (SC)and CIT vs. Bar Council of Maharashtra [1981] 130 ITR 28 (SC).

1.4 Section 11(4) which is a part of the 1961 Act right from the time of its enactment defined the term ‘property held under trust’ to include a business undertaking. Section 13 of the 1961 Act provides certain circumstances in which exemption granted under section 11 or 12 of the Act in respect of income derived from property held under trust for charitable or religious purposes will not be available. Clause (bb) was inserted in section 13(1)by the Taxation Laws (Amendment) Act, 1975 with effect from 1st April, 1977 to provide denial of exemption in respect of any income derived from any business carried on by a charitable trust or institution for the relief of the poor, education or medical relief unless such business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution. Clause (bb) in section 13(1) of the 1961 Act was omitted by the Finance Act, 1983 with effect from 1st April, 1984.

1.4.1 The Finance Act, 1983 also made two further amendments in the 1961 Act with effect from 1st April, 1984 – (i) omission of the words ‘not involving the carrying on of any activity for profit’ in section 2(15) and (ii) insertion of clause (4A) in section 11 of the 1961 Act providing that sub-section (1), (2), (3) or (3A) of section 11 shall not apply in relation to any income being profits and gains of business unless (a) the business of a specified type is carried on by a trust set up only for public religious purposes or (b) business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the Institution and separate books of account are maintained by the trust or institution in respect of such business. Section 11(4A) which was restrictive in nature at the time of insertion was liberalized by the Finance (No. 2) Act, 1991 with effect from 1st April, 1992. Section 11(4A) now provided for two requirements – business should be incidental to the attainment of the objectives of the trust or institution and separate books of accounts are maintained in respect of such business.

1.4.2 The Supreme Court (Three Judges Bench) in the case of ACIT vs. Thanthi Trust [2001] 247 ITR 785 (SC)(“Thanthi Trust”) had adjudicated upon the assessee trust’s claim for exemption under section 11 of the 1961 Act. The business of a newspaper ‘Dina Thanthi’ was settled upon the assessee trust as a going concern. The objects of the trust were to establish the newspaper as an organ of educated public opinion. A supplementary deed was thereafter executed whereby the trust’s surplus income was to be used to establish and run schools, colleges, hostels, orphanages, establish scholarships, etc. The High Court’s decision allowing the assessee’s claim for exemption under section 11 of the 1961 Act was challenged before the Supreme Court by the tax department. The Court divided its decision into three distinct periods depending upon the law in force at the relevant time affecting the issue before it. The Court while deciding the batch of appeals for assessment years 1979 – 80 to 1983-84 (first period) denied exemption under section 11 and held that section 13(1)(bb) of the 1961 Act would apply even where a business is held under trust that is being carried on and is held as a part of corpus of the trust. The Court took the view that the business of the trust did not directly accomplish the trust’s objects of relief of the poor and education as stated in the supplementary deed and was therefore hit by section 13(1)(bb) [referred to in para 1.4.1 above]. With respect to the appeals for assessment years 1984- 85 to 1991-92 (second period), the Court denied exemption under section 11 of the 1961 Act on the basis that the requirements specified in clause (a) or clause (b)of section 11(4A) as in force [referred to in para 1.4.1 above] were not satisfied as the trust is not only for public religious purpose and exemption contained in section 11(4A)(b) does not apply to trust and it applies only to institution. Coming to the third batch of appeals for assessment years 1992-93, 1995-96 and 1996-97 (third period), the Court granted exemption under section 11 and took the view that the substituted section 11(4A) was more beneficial as compared to section 11(4A) as applicable prior to its amendment by the Finance (No. 2) Act, 1991 or as compared to section 13(1)(bb) of the 1961 Act. The Court held that the business income of a trust will be exempt if the business is incidental to the attainment of the objectives of the trust and that a business whose income is utilized by the trust for the purpose of achieving its objectives is surely a business which is incidental to the attainment of its objectives. The Court also observed that in any event, if there be any ambiguity in the language, the provisions must be construed in a manner that benefits the assessee.

1.5 Income of an authority constituted in India by or under any law enacted for the purpose of dealing with the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages was exempt under section 10(20A) of the 1961 Act which was inserted by the Finance Act, 1970 with retrospective effect from 1st April, 1962. Section 10(23) which was a part of the 1961 Act right from the enactment of the Act granted exemption to specified sports association or institutions. Both the aforesaid sections were omitted by the Finance Act, 2002 and the entities claiming exemption under these sections started making a claim for exemption under section 11 of the 1961 Act. In this regard, reference may be made to the decision of Supreme Court in CIT vs. Gujarat Maritime Board [2007] 295 ITR 561 (Gujarat Maritime Board) where it was held that the provisions of section 10(20) which exempted income of local authority and section 11 of the 1961 Act operated in totally different spheres and observed that an assessee that ceases to be a ‘local authority’ as defined in section 10(20) is not precluded from claiming exemption under section 11(1) of the 1961 Act.

1.6 Provisions of section 2(15) were amended by the Finance Act, 2008 (‘2008 amendment’) whereby a proviso was added to the definition of ‘charitable purpose’ stating that advancement of any other object of general public utility (GPU) shall not be a charitable purpose if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering service in relation thereto for a cess or fee or any other consideration [hereinafter, such activities are referred to as Commercial Activity/Activities) irrespective of the nature of use or application, or retention, of the income from such activity. The Finance Minister, in his budget speech for 2008-09 [(2008) 298 ITR (St.) 33 @ page 65] stated that genuine charitable organisations will not be affected by the 2008 amendments and that the amendment was introduced to exclude cases where some entities carrying on regular trade, commerce or business or providing services in relation thereto have sought to claim that their purpose falls under ‘charitable purpose.’ CBDT in its Circular No. 11 of 2008 dated 19th December, 2008 [(2009) 308 ITR (St.) 5] while clarifying the implications arising from the 2008 amendment stated that whether an assessee has a GPU object is a question of fact and if an assessee is engaged in any activity in the nature of trade, commerce or business, the GPU object will only be a mask or a device to hide the true purpose of trade, commerce or business. CBDT in its Circular No. 1 dated 27th March, 2009 [(2009) 310 ITR (St.) 42] explaining the 2008 amendment stated at pages 52 – 53 that it was noticed that a number of entities operating on commercial lines were claiming exemption under sections 10(23C) or 11 of the 1961 Act and that the 2008 amendments were made with a view to limiting the scope of the phrase ‘advancement of any other object of general public utility’ [i.e. GPU]. Finance Act, 2010 introduced second proviso to section 2(15) with retrospective effect from 1st April, 2009 to provide that the first proviso shall not apply if the total receipts from any activity in the nature of trade, commerce or business referred to in the first proviso does not exceed Rs. 10 lakhs in the previous year. This limit of Rs. 10 lakhs was thereafter increased to Rs. 25 lakhs by the Finance Act, 2011 with effect from 1st April, 2012. The current proviso in section 2(15) was introduced in place of the aforesaid first and the second provisos by the Finance Act, 2015 with effect from 1st April, 2016. The proviso as currently in force provides that advancement of an object of GPU shall not be a charitable purpose if it involves carrying on of any activity in the nature of trade, commerce or business, etc. for a fee or cess or any other consideration (i.e. Commercial Activity) unless (i) such an activity is undertaken in the course of actual carrying out of the advancement of any other object of GPU and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed 20 per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year.

1.7 Recently, Supreme Court in the case of CIT(E) vs. Ahmedabad Urban Development Authority and connected matters (449 ITR 1) has interpreted the last limb of the definition of charitable purpose ‘advancement of any other object of general public utility’ [i.e. GPU] and the provisos inserted by the 2008 and subsequent amendments. Therefore, it is thought fit to consider the said decision in this column. In all these matters, the Supreme Court was concerned with GPU Categories post 2008 amendments.

DIFFERENT CATEGORIES OF APPEALS BEFORE THE SUPREME COURT- BRIEF FACTS

2.1 The assessees in these batches of connected appeals before the Supreme Court were divided into six categories; namely – (i) statutory corporations, authorities or bodies, (ii) statutory regulatory bodies / authorities, (iii) trade promotion bodies, councils, associations or organizations, (iv) non-statutory bodies, (v) state cricket associations and (vi) private trusts. Brief facts of these categories are given hereinafter.

2.2 The lead matter of AUDA, which fell in the first category above, was an appeal filed by the Revenue from the decision of the Gujarat High Court in Ahmedabad Urban Development Authority vs. ACIT(E) (2017) 396 ITR 323 [AUDA]. The Gujarat High Court held that the activities of AUDA which was set up under the Town Planning Act with the object of proper development or redevelopment of urban area could not be said to be in the nature of trade, commerce or business.

2.2.1 In respect of the second category of assessee – statutory regulatory bodies/ authorities, the Delhi High Court in the case of Institute of Chartered Accountants of India vs. DGIT(E), Delhi (2013) 358 ITR 91 [ICAI] held that the assessee institute did not carry on any business, trade or commerce and that the activity of imparting education in the field of accountancy and conducting courses, providing coaching classes or undertaking campus placement interviews for a fee, etc. were activities in furtherance of its objects.

2.2.2 In one of the cases falling within the third category stated above, the Delhi High Court in the case of DIT vs. Apparel Export Promotion Council (2000) 244 ITR 736 [AEPC] dismissed the revenue’s appeal against the order of the Tribunal where the Tribunal had held that the assessee was a public charitable institution entitled to exemption under section 11 of the Act. The objects of AEPC, which was set-up in 1978, include promotion of ready-made garment export and for that to carry out various incidental activities such as providing training to instill skills in the work force, showcase the best capabilities of Indian Garment exports through the prestigious ‘Indian International Garment Fair’ organized twice a year by APEC, etc. It also provides information and market research to the Industry and carries out various related activities to assist the Industry. The tribunal had also held that as the assessee did not carry any activity for earning profit, it could not be said to be carrying on any ‘business’ as understood in common parlance.

2.2.3 In respect of a non-statutory body (fourth category) – GS1 India, the Delhi High Court in GS1 India vs. DGIT(E) (2014) 360 ITR 138 [GS1 India] took the view that the profit motive is determinative to arrive at the conclusion whether an activity is business, trade or commerce. The High Court held that the assessee was a charitable society set up under the aegis of the Union Government with the object of creating awareness and promoting study of Global standards, location numbering, etc. and a mere fact that a small contribution by way of fee was paid by beneficiaries would not convert a charitable activity into business, commerce or trade.

2.2.4 While dealing with the eligibility of a state cricket associations such as Suarashtra, Gujarat, Baroda Cricket Association, etc (fifth category), the Gujarat High Court in the case of DIT(E) vs. Gujarat Cricket Association (2019) 419 ITR 561 (GCA) held that the assessee was set up with the main and predominant object and activity to promote, regulate and control the game of cricket in the State of Gujarat. The GCA’s record revealed that large amount of receipts included income from sale of match tickets, sale of space, subsidy from BCCI, etc., as against which the amount of expenditure was much lower leaving good amount of excess of income for the relevant year. On these facts, the High Court held that the activities of the assessee were charitable in nature as the driving force of the assessee was not a desire to earn profits but to promote the game of cricket and nurture the best of the talent. Similar position was revealed from the records of Saurashtra Cricket Association.

2.2.5 In respect of the sixth category being private trusts, the Punjab & Haryana High Courts in the case of Tribune Trust vs. CIT (2017) 390 ITR 547 (Tribune) held that the assessee’s activity falls within the ambit of the words “advancement of any other object of general public utility” and that the decision of the Privy Council in assessee’s own case (referred to in para 1.2.1 above) still holds good. The High Court, however, held that as the activities of the assessee were carried on with the predominant motive of making a profit and there was nothing to show that the surplus accumulated had been ploughed back for charitable purposes, the assessee did not satisfy the definition of ‘charitable purpose’ in view of the proviso to section 2(15) of the Act.

ACIT(E) VS. AHMEDABAD URBAN DEVELOPMENT AUTHORITY (449 ITR 1 – SC)

3.1 Appeals were filed challenging the aforesaid decisions of the High Courts as well as other decisions in connected matters. Before the Supreme Court, the Revenue contended that the decisions of the Supreme Court in the case of Tribune and Andhra Chamber (referred to in paras 1.2.1& 1.2.2) were rendered in the context of the 1922 Act which did not contain any restrictions forbidding charitable entities from carrying on trade or business activities. Relying on the decisions in the cases of LokaShikshana Trust and Indian Chamber (referred to in paras 1.3.1 &1.3.2), the Revenue highlighted the change brought about by section 2(15) in the 1961 Act and the addition of the words ‘not involving the carrying on of any activity for profit’ and submitted that the intent of the Parliament in changing the law was to expressly forbid tax exemption benefit if an entity was involved in carrying on trade or business. The Revenue placed a reliance upon the speech of the Finance Minister while delivering the budget to bring out the rationale of the amendments. The Revenue also placed reliance on section 13(1)(bb) of the 1961 Act to state that only charities set up for “relief of the poor, education or medical relief” (i.e. specified categories) could claim exemption if they carried on business “in the course of actual carrying out of a primary purpose of the trust or institution” and not charities falling within GPU limb.

3.1.1 The Revenue also contended that the decision in Surat Art’s case had ignored the significance of the addition of the expression “advancement of any other object of general public utility not involving the carrying on of any activity for profit” and that Constitution Bench of the Supreme Court was wrong in laying down the ‘predominant test’. The Revenue also referred to the amendments made in 2008 onwards whereby GPU category charities were permitted to carry on activities in the nature of business up to the specified limits. The Revenue further contended that in view of the proviso to section 2(15), the Commercial Activity the proceeds from which are ploughed back into charity are also impermissible. With respect to the assessees falling within category (i) as stated in para 2.2 above – ‘statutory corporations, etc –the Revenue urged that even though such assessees may trace their origin to specific Central or State laws, they have to fulfill the restrictive conditions laid down in section 2(15) and proviso thereto.

3.2 The assessee in the lead matter, Ahmedabad Urban Development Authority [AUDA], fell within the first category referred in para 2.1 above. It was contended that it was a corporation set up and established by or under statute enacted by the State Legislature and that it did not carry out business activities. Its functions were controlled by the parent enactment under which it was created and that surplus generated was used for furthering its objectives. The assessee placed reliance on the decision in Surat Art’s case to contend that the pre-dominant objective should not be to carry on trade or business but to advance the purpose of general public utility and that surplus arising from some activity would not disentitle the entity from the benefit of tax exemption. Reliance was also placed on CBDT Circular 11 of 2008 and the Finance Minister’s speech to contend that exemption could not be denied to a genuine charitable organization. The assessee further contended that the expressions ‘trade’, ‘commerce’ or ‘business’ were interpreted to mean activities driven by profit motive and that organisations created with a view to earn profit are precluded from claiming exemption as a charitable organization. The assessee statutory corporations in the connected matters further urged that where they perform government functions and operate on a no profit – no loss basis, their activities could not be regarded as trade or business. The assessee – Karnataka Industrial Areas Development Board – also urged that it was a ‘State’ under Article 12 of the Constitution of India (Constitution) and its activities, therefore, could not be regarded as trade or business.

3.2.1 Submissions were also made to contend that the term “for a cess or fee or any other consideration” used in the proviso to section 2(15) was clearly violative of Article 14 as it failed to make a distinction between activities carried out by the State or by the instrumentalities or agencies of the State, and those carried out by commercial entities for which a consideration is charged. The assessee also pointed out that Article 289(1) of the Constitution exempts States’ property and income from Union taxation and, therefore, to permit levy of income tax on cess or fee collected by a State would violate Article 289(1) and, hence, the word “cess” or “fee” in the proviso to section 2(15) of the 1961 Act was liable to be declared unconstitutional and violative of Articles 14 and Article 289 in the context of state undertakings.

3.2.2 In respect of the second category being statutory regulatory bodies/authorities referred to in para 2.1 above, the assessee – Institute of Chartered Accountants of India [ICAI] stated that it was established under the Chartered Accountants Act, 1949 to impart formal and quality education in accounting and, thereafter, to regulate the profession of Chartered Accountancy in India and it was under the control and supervision of the Ministry of Corporate Affairs, Government of India (Corporate Ministry). The assessee submitted that surplus generated due to the fees collected from conducting coaching and revision classes was not a business or commercial activity but wholly incidental and ancillary to its objects which were to provide education and conduct examinations of the candidates enrolled for chartered accountancy courses. The assessee, therefore, submitted that separate books of account were not required to be maintained in terms of section 11(4A) read with the fifth and seventh proviso to section 10(23C) of the 1961 Act. The assessee further contended that as its activities fell within the purview of ‘education’ and not under the GPU category, it was not hit by the proviso to section 2(15) of the 1961 Act inserted by the 2008 amendment. The assessee also submitted that its activities were not driven by profits and that the word ‘profit’ should never be used for a body set up for public purposes to regulate activities in public interest.

3.2.3 In respect of the third category referred to in para 2.1 above, being trade promotion bodies, councils, associations or organizations, one of the assessees being AEPC referred to in para 2.2.2., contended that it was a non-profit organization set up with the approval of the Central Government for promotion of exports of garments from India and did not engage in any activity for profit. The assessee stated that mere earning of income and/or charging any fees is not barred by the proviso to section 2(15).

3.2.4 In respect of the fourth category referred to in para 2.1 above, being non-statutory bodies, one of the assessees, ‘GS1 India’ stated that it was registered as a society in 1996 whose administrative control vests with the Ministry of Commerce, Government of India (Corporate Ministry). The assessee urged that it was not involved in trade, commerce or business and also that the profit motive was absent. Another assessee (NIXI) falling within this category, submitted that it was a company set up under section 25 of the Companies Act, 1956 and was barred from undertaking any commercial or business activity for profit and was bound by strict licensing conditions, including prohibition on alteration in the memorandum of association, without prior consent of the government.

3.2.5 In respect of the fifth category referred to in para 2.1 above, being state cricket associations, one of the assessees Saurashtra Cricket Association submitted that it operated purely to advance its objective of promoting the sport and that it should not be considered as pursuing Commercial Activities. The assessee contended that under the proviso to section 2(15) of the 1961 Act, an organization ceases to be charitable if it undertakes an activity for a cess or a fee or other consideration. The assessee submitted that the term ‘cess’ had to be read down as non-statutory and that levy of any statutory cess or fee authorized or compelled by law, which is within the domain of the state legislature, cannot be construed as taxable. The assessee further submitted that the sport of cricket is a form of education and even if it is not considered as a field of education, it is still an object of general public utility. The assessee further submitted that selling tickets for a sport performance or match is to promote cricket and not trade.

3.2.6 In respect of the sixth category referred to in para 2.1 above, being private trusts, assessee Tribune Trust submitted that its charitable nature was upheld by the Privy Council in its decision referred to in para 1.2.1 above.

3.3 In response to the assessee’s submissions, the Revenue urged that Constitution does not provide immunity from taxation for the State if they carry on trade or business. The Revenue further submitted that one should not merely look at the objects of the trust to determine if it is for a charitable purpose but also whether the purpose of the trust is “advancement of any other object of general public utility”.

[To be continued]

shailesh.kwebmaker

Section 197: Withholding tax certificate – Non application of mind – Binding effect of the Supreme Court judgement – merely filing/pendency of the review petition will not dilute the effect of the decisions

3 Milestone Systems A/S vs.
Deputy CIT Circle Int Tax 2(2) (1) Delhi
[W.P.(C) 3639/2022, A.Y,: 2022 -23;
Dated: 14th March, 2023]

Section 197: Withholding tax certificate – Non application of mind – Binding effect of the Supreme Court judgement – merely filing/pendency of the review petition will not dilute the effect of the decisions

The petitioner is a non-resident company, incorporated under the laws of Denmark. The petitioner, admittedly, has been issued a tax residency certificate by the concerned authorities in Denmark. It is the petitioner’s case that it is in the business of providing IP Video Management Software and other video surveillance related products to entities and persons across the globe. In so far as India is concerned, the petitioner claims, that it has entered into a Distributor Partner Agreement with various companies/entities for sale of its Software. It is the petitioner’s case, that the Distributor Agreement does not confer any right of use of copyright on its partners or the end user. The petitioner claims, that all that the distributor partner acquires under the Distributor Agreement is a license to the copyrighted software. It is, therefore, the petitioner’s case, that this aspect of the matter has been considered in great detail by the Supreme Court in the judgment rendered in Engineering Analysis Center of Excellence Pvt Ltd vs. Commissioner of Income Tax & Anr 2021 SCC OnLine SC 159.

The petitioner, contends that the concerned officer, in passing the impugned order dated 19th May, 2021, has side stepped a vital issue i.e., whether or not the consideration received by the petitioner against the sale of software constituted royalty within the meaning of Section 9(1)(vi) and/or Article 13(3) of the Double Taxation Avoidance Agreement (DTAA) entered into between India and Denmark.

The department contented that while examining an application preferred under section 197 of the Act, the concerned officer is not carrying out an assessment. Therefore, the parameters which apply for assessing taxable income would not get triggered, while rendering a decision qua an application filed under the aforementioned provision. Under the provisions of Section 195, deduction of withholding tax is the rule, and issuance of a lower withholding tax certificate under Section 197 of the Act is an exception.

The Honourable Court observed that, the impugned order does not deal with the core issue which arose for consideration, and was the basis on which the application had been preferred by the petitioner under section 197 of the Act.

The Honourable Court observed that it is the petitioner’s case that the Software sold to its distributor partners under the Distributor Agreement, does not confer, either on the distributor partner or the reseller, the right to make use of the original copyright which vests in the petitioner. This plea was sought to be supported by the petitioner, by relying upon the judgment of the Supreme Court in Engineering Analysis, wherein inter alia, the Court has ruled, that consideration received on sale of copyrighted material cannot be equated with the consideration received for right to use original copyright work. Therefore, this central issue had to be dealt with by the concerned officer. Instead, as is evident on a perusal of the impugned order, the concerned officer has simply by-passed the aforementioned judgement of the Supreme Court by observing that the revenue has preferred a review petition, and that the same is pending adjudication.

The court held that as long as the judgment of the Supreme Court is in force, the concerned authority could not have side stepped the judgment, based on the fact that the review petition had been preferred. It would have been another matter, if the concerned officer had, on facts, distinguished the judgment of the Supreme Court in Engineering Analysis. That apart, the least that the concerned officer ought to have done was to, at least, broadly, look at the terms of Distributor Agreement, to ascertain as to what is the nature of right which is conferred on the distributor partner and/or the reseller.

The court observed that there is no reference whatsoever to any of the clauses of the Distributor Agreement. The concerned officer has, instead, picked up one of the remitters i.e., the distributor partners, and made observations, which to say the least, do not meet the parameters set forth in Rule 28AA of the Income Tax Rules, 1962 for estimating the income, that the petitioner may have earned in the given FY. A erroneous approach is adopted by the concerned officer.

The concerned officer was required to examine the application, in the background of the parameters set forth in Rule 28AA of the Rules. Concededly, that exercise has not been carried out.

The petitioner’s entire case is that the sum that it receives under the Distributor Agreement is not chargeable to tax. It is in that context, that the petitioner has moved an application under section 197 of the Act for being issued a certificate with “NIL” rate of withholding tax.

The Honourable Court set aside the impugned certificate and the order, with a direction to the concerned officer, to revisit the application. While doing so, the concerned officer will apply his mind, inter alia, to the terms of the Distributor Agreement, and the ratio of the judgment rendered by the Supreme Court in Engineering Analysis (supra). In this context, the provisions of Rule 28AA shall also be kept in mind. The concerned officer will not be burdened by the fact that a review petition is pending, in respect of the judgment rendered by the Supreme Court in Engineering Analysis (supra).

The writ petition was, accordingly, disposed off.

shailesh.kwebmaker

Section 179 – Recovery proceedings against the Director of the company – Taxes allegedly due from the company – gross neglect, misfeasance or breach of duty on the part of the assessee in relation to the affairs of the company not proved

1 Geeta P. Kamat vs. Principal CIT-10 & Ors.
[Writ Petition No. 3159 of 2019,
Dated: 20th February, 2023 (Bom) (HC)]

Section 179 – Recovery proceedings against the Director of the company – Taxes allegedly due from the company – gross neglect, misfeasance or breach of duty on the part of the assessee in relation to the affairs of the company not proved:

A show cause notice dated 12th January, 2017 was served upon the petitioner in terms of section 179 of the Act requiring the petitioner to show cause as to why the recovery proceedings should not be initiated against her in her capacity as a director of KAPL. The assessee company was not traceable on the available addresses and further the tax dues could not be recovered despite attachment of the bank accounts as the funds available were insufficient. An amount of Rs.1404.42 lakhs was thus sought to be recovered from the petitioner.

With a view to prove that the non-recovery of the taxes due could not be attributed to any gross neglect, misfeasance, breach of duty on her part, in relation to the affairs of the company, the petitioner took a stand that the petitioner, as a director in the company had no liberty, authorization or independence to act in a particular manner for the benefit of KAPL. She did not have any control over the company’s affairs. It was stated that the petitioner did not have any authority to sign any cheque independently or take any decision on behalf of the company nor did KAPL provide any operational control or space to the petitioner to perform her duties. It was also stated that the petitioner did not have any functional responsibility assigned to her and no one from KAPL reported to her or her husband Prakash Kamat, who was also a shareholder and a director in the company.

The petitioner’s husband, Prakash Kamat is stated to have developed a smart card-based ticketing solution for being used at various public transport organizations like BEST, Central and Western Suburban trains, etc. Trials were run successfully and an agreement was entered into between Prakash Kamat, BEST and Central Railways in 2006. The projects with BEST and Railways were to be implemented on “BOT” model and required funds to the tune of Rs. 50 to 60 crores as an initial investment. Khaleej Finance and Investment, a company registered in Bahrain (hereinafter referred to as “KFI”) agreed to make an investment in the said project subject to certain conditions, according to which a Special Purpose Vehicle was to be incorporated to carry on the said project which lead to incorporation of KAPL on 30th March, 2006. An investment was made by KFI in the said project through its Mauritius-based company “AFC System Ltd (hereinafter referred to as “AFC”)”. A joint venture agreement dated 21st June, 2006 (“JVA”), Deed of Pledge dated 21st June, 2006 (‘”DP”) along with Irrevocable Power of Attorney dated June 2006 (“IPOA”), was entered into between Prakash Kamat, the petitioner, KFI and the said company-KAPL.

The petitioner also stated and highlighted the fact that due to some differences that had cropped up with KFI since January 2009, the petitioner’s husband was removed as the Managing Director of KAPL in September 2009 along with the petitioner herein. It was also stated that while the petitioner was a director during the financial year 2007-08, since the petitioner stood removed as such director in September 2009, she could not be held liable for the liability of KAPL for the financial year 2008-09 relevant to assessment year 2009-10. It was also stated that the petitioner was not at all aware after she had been removed that there was any tax liability which was due and payable by KAPL, and therefore, it was stated that she could not have been held guilty of any gross neglect, malfeasance or breach of duty on her part in relation to the affairs of the company.

The AO by virtue of the order impugned dated 22nd December, 2017 passed under section 179 of the Act rejected the contention of the petitioner. It was held that not only had the petitioner failed to establish that she was not actively involved in the management of the company during the financial year 2007-08 and 2008-09 and further that she had failed to establish that there was no gross neglect, malfeasance or breach of duty on her part. The AO held that there was not a ‘shred of doubt’ that she was actively involved in the day-to-day affairs of the company till she was removed in September 2009. As regards the disputes between the petitioner and KFI, the AO held that it was normal to have such disputes during the working of an enterprise.

The petitioner preferred a revision petition under section 264 of the Act against the said order, which too, came to be dismissed vide order dated 18th March, 2019 simply on the ground that the petitioner was a director for the relevant assessment years and hence was liable.

The petitioner urged that the entire approach adopted by the AO in passing the order under section 179 of the Act was misplaced and the mistake was perpetuated by the revisional authority in dismissing the revision petition filed by the petitioner against the said order. It was urged that the order passed by the AO was perverse in as much as based upon the facts on record no proceedings under section 179 of the Act could have been initiated against the petitioner for the purposes of recovery from the petitioner the liability of the company for the assessment years 2007-08 and 2008-09. It was urged that the petitioner had placed enough material on record reflecting that the petitioner was not the Managing Director of the company and was not at the helm of affairs as such. She did not have any independent authority to take any decision on behalf of the company nor did she have any independent operational control. Yet, the AO proceeded to hold that the petitioner had failed to prove that there was no gross neglect, malfeasance or breach of duty on her part in relation to the affairs of the company.

The Honourable Court observed that Section 179 of the Act inter-alia envisages that where any due from a private company in respect of any income of any previous year cannot be recovered, then every person who was a director of the private company at any time during the relevant previous year, shall be jointly and severally liable for the payment of such a tax; unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. It therefore follows that if tax dues from a private company cannot be recovered then, the same can be recovered from every person who was a director of a private company at any time during the relevant previous year. However, such a director can absolve himself if he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty in relation to the affairs of the company.

The Honourable Court observed that in so far as the requirement of the first part of the section is concerned, it can be seen from the order passed under section 179 of the Act that steps were taken for recovery against the company M/s Kaizen Automation Pvt Ltd (KAPL) including attachment of its bank accounts which did not yield any results. The company is also stated to be not traceable on the addresses available with the AO, and therefore, according to the AO, the only course left was to proceed against the directors in terms of section 179 of the Act.

The stand of the petitioner is that she could not be proceeded against, in as much as there was no gross neglect, malfeasance or breach of duty on her part in relation to the affairs of the company. The AO, however, did not accept this assertion. It laid emphasis on the fact that the petitioner had actively participated in the affairs of the company at least till the date of her removal in September 2009 and proceeded to hold that the petitioner had failed to prove that there was any gross neglect, misfeasance or breach of duty on her part as regards the affairs of the company. However, in the order impugned dated 22nd December, 2017 passed under section 179 of the Act, although the AO did make a reference to various Board meetings attended by the petitioner from time to time from 2006 till 8th January, 2008, there was no material highlighted by the AO, contrary to the material on record placed by the petitioner, based upon which the petitioner could be held to be guilty of gross neglect, malfeasance or breach of duty in regard to the affairs of the company. The petitioner had brought on record material to suggest lack of financial control and decision making powers. She had a very limited role to play in the company as a director and that the entire decision making process was with the directors appointed by the investors, i.e., KFI which was the single largest shareholder of the JVC. She had sufficiently discharged the burden cast upon her in terms of section 179 to absolve herself of the liability of the company.

The Honourable Court observed that the AO appears to have applied himself more on the issue of the petitioner participating in the affairs of the company for purposes of pinning liability in terms of section 179; rather than discovering the element of ‘gross neglect’, misfeasance or ‘breach of duty’ on the part of the petitioner in relation to the affairs of the company and establishing its co-relation with non-recovery of tax dues. The petitioner, having discharged the initial burden, the AO had to show as to how the petitioner could be attributed such a gross neglect, misfeasance or breach of duty on her part.

Reliance was placed on Maganbhai Hansrajbhai Patel [2012] 211 Taxman 386 (Gujarat) and Ram Prakash Singeshwar Rungta & Ors [2015] 370 ITR 641 (Gujarat)

The Honourable Court held that in the present case, the AO has not specifically held the petitioner to be guilty of gross neglect, misfeasance or breach of duty on part in relation to the affairs of the company. Not a single incident, decision or action has been highlighted by the AO, which would be treated as an act of gross neglect, breach of duty or malfeasance which would have the remotest potential of resulting in non-recovery of tax due in future.

The order impugned dated 22nd December, 2017 as also the order dated 18th March, 2019 in revision passed was held to be unsustainable.

shailesh.kwebmaker

Search and seizure — Assessment in search cases — Cash credit — Assessment completed on the date of search — No incriminating document against the assessee found during the search — Long-term capital gains added as unexplained cash based on statement of the Managing Director of searched entity recorded under section 132(4) — Addition unsustainable.

8 Principal CIT vs. Suman Agarwal
[2023] 451 ITR 364 (Del)
A. Y.: 2011-12
Date of order: 28th July, 2022
Sections 68, 132 and 153A of ITA 1961

Search and seizure — Assessment in search cases — Cash credit — Assessment completed on the date of search — No incriminating document against the assessee found during the search — Long-term capital gains added as unexplained cash based on statement of the Managing Director of searched entity recorded under section 132(4) — Addition unsustainable.

Search and seizure operations were conducted under section 132 of the Income-tax Act, 1961 and survey operations were carried out under section 133A in the business and residential premises of one KRP and its group companies which provided bogus accommodation entries. The AO relied upon a letter and the statement recorded under section 132(4) of the Managing Director of KRP and issued a notice under section 153A against the assessee for the A. Y. 2011-12. He held that the amount of long- term capital gains claimed by the assessee in her return of income was an accommodation entry pertaining to shares of a company KGN and treated the amount as unexplained cash credit under section 68 of the Act.

The Tribunal found that there was no incriminating material against the assessee found during the search of the assessee and held that statements recorded under section 132(4) would not by themselves constitute as incriminating material in the absence of any corroborative evidence and accordingly set aside the addition made by the AO.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The Department had not placed on record any incriminating material which was found as a result of the search conducted u/s. 132. There was no reference to the company KGN in either the letter or the statement of the managing director of the company KRP in respect of which search was conducted u/s. 132(4). No other material found during the search pertaining to KGN had been placed on record.

ii) There was no infirmity in the order passed by the Tribunal setting aside the addition made u/s. 68 by the Assessing Officer. No question of law arose.”

shailesh.kwebmaker

Validity of Reassessment Proceedings

ISSUE FOR CONSIDERATION

The scope and time limits for initiation of reassessment and the procedure of reassessment underwent a significant change with effect from 1st April, 2021, due to the amendments effected through the Finance Act, 2021. Through these amendments, sections 147, 148, 149 and 151 were replaced, and a new section 148A, laying down a new procedure to be followed before issue of notice under section 148, was inserted.

Till 31st March 2021, section 149 laid down the time limit for issue of notice for reassessment as under:

“149. (1) No notice under section 148 shall be issued for the relevant assessment year,—

(a) if four years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b) or clause (c);

(b) if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year;

(c) if four years, but not more than sixteen years, have elapsed from the end of the relevant assessment year unless the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment.

Explanation.—In determining income chargeable to tax which has escaped assessment for the purposes of this sub-section, the provisions of Explanation 2 of section 147 shall apply as they apply for the purposes of that section.”

The new section 149, effective 1st April, 2021, reads as under:

“149. (1) No notice under section 148 shall be issued for the relevant assessment year,—

(a) if three years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b);

(b) if three years, but not more than ten years, have elapsed from the end of the relevant assessment year unless the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more for that year:

Provided that no notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of this section, as they stood immediately before the commencement of the Finance Act, 2021:

Provided further that the provisions of this sub-section shall not apply in a case, where a notice under section 153A, or section 153C read with section 153A, is required to be issued in relation to a search initiated under section 132 or books of account, other documents or any assets requisitioned under section 132A, on or before the 31st day of March, 2021:

Provided also that for the purposes of computing the period of limitation as per this section, the time or extended time allowed to the assessee, as per show-cause notice issued under clause (b) of section 148A or the period during which the proceeding under section 148A is stayed by an order or injunction of any court, shall be excluded:

Provided also that where immediately after the exclusion of the period referred to in the immediately preceding proviso, the period of limitation available to the Assessing Officer for passing an order under clause (d) of section 148A is less than seven days, such remaining period shall be extended to seven days and the period of limitation under this sub-section shall be deemed to be extended accordingly.

Explanation: For the purposes of clause (b) of this sub-section, “asset” shall include immovable property, being land or building or both, shares and securities, loans and advances, deposits in bank account.”

The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) was enacted to relax certain timelines and requirements, in the light of the COVID-19 pandemic and related lockdowns. Section 3(1) of that Act provided that where, any time-limit had been prescribed under a specified Act which falls during the period from 20th March, 2020 to 31st December, 2020, or such other date after 31st December, 2020, as the Central Government may notify, for the completion or compliance of such action as completion of any proceeding or passing of any order or issuance of any notice, intimation, notification, sanction or approval by any authority under the provisions of the specified Act; , and where completion or compliance of such action had not been made within such time, then the time-limit for completion or compliance of such action shall stand extended to 31st March, 2021, or such other date after 31st March, 2021, as the Central Government may notify. Pursuant to this, notifications were issued from time to time, whereby the time limits up to 31st March 2021 for issue of various notices (including notices under section 148) were extended till 30th June 2021.

Pursuant to such notifications under TOLA, a large number of notices for reassessment were issued from April to June 2021 under the old section 148 r.w.s 149. Many of these notices were challenged in writ petitions before the High Courts. Some High Courts had held that such notices issued after 31st March, 2021 under the old law were invalid, as they could only have been issued under the new law which became effective from April 2021 by following the procedure prescribed under section148A, within the timelines prescribed by section 149.

All cases were then consolidated and heard by the Supreme Court. The Supreme Court, in the case reported as Union of India vs. Ashish Agarwal 444 ITR 1, held that the notices issued under old section 148 to the respective assessees were invalid but should nonetheless be deemed to have been issued under newly inserted section 148A as substituted by the Finance Act, 2021 and treated to be show-cause notices in terms of section 148A (b). With this the Supreme court regularised the defaults of the AOs under the special powers of Article 142 of the Constitution of India. The AOs were directed to provide to the assessees the information and material relied upon by the revenue within 30 days, so that the assessees could reply to the notices within two weeks thereafter. The requirement of conducting any enquiry with the prior approval of the specified authority under section 148A(a) was dispensed with as a one-time measure vis-à-vis those notices which had been issued under the old provisions of section 148 prior to its substitution with effect from 1st April, 2021. The Supreme Court, at the same time directed that such regularised reassessment proceedings should in all cases be subjected to compliance of all the procedural requirements and the defences which might be available to the assessee under the substituted provisions of sections 147 to 151 and which may be available under the Finance Act, 2021 and in law.

Given the fact that these notices issued under old Section148 were deemed to be notices under section 148A(b), and orders under section 148A(d) were to be passed after completion of enquiry along with issue of notice under new Section 148, the issue has arisen about the applicable time limit in such cases – whether the time limits under the pre-amended section 149 apply or whether the time limits under the amended section 149 apply for issue of notice under new Section148. Accordingly, the question that has arisen for the courts is whether notices under the old Section 148 issued after 31st March. 2021, particularly for A.Ys. 2013-14 and 2014-15 and for A.Y. 2015-16 under the new section 148 pursuant to notices issued under the old section 148 are validly issued within the time prescribed in new section 149. While the Delhi High Court has taken the view that such notices were validly issued within the time extended by TOLA, the Allahabad and Gujarat High Courts have held that such notices were invalid as they were not issued within the permissible time limit prescribed under new law.

TOUCHSTONE HOLDINGS CASE

The issue first came up before the Delhi High Court in the case of Touchstone Holdings (P) Ltd vs. ITO 289 Taxman 462.

In this case, a notice under the pre-amended section 148 was issued on 29th June, 2021 for the A.Y. 2013-14 in respect of an item of purchase of shares of Rs 69.93 lakhs. Pursuant to the decision of the Supreme Court in the case of Ashish Agarwal (supra), proceedings continued under section 148A, and an order was finally passed under section 148A(d) on 20th July, 2022, with notice under the amended section 148 being issued on the same date. The assessee challenged this order and notice in a writ petition before the Delhi High Court.

Besides arguing that the assessee had no connection with the concerned transaction, on behalf of the assessee, it was argued that as per the first proviso to Section 149 of the Act (as amended by Finance Act, 2021), no notice for re-assessment could be issued for A.Y. 2013-14 as the time limit for initiating the proceedings expired on 30th March, 2020 as per the provisions of Section 149 (as it stood prior to its amendment by Finance Act, 2021). It was therefore contended that the proceedings pursuant to the notice dated 29th June, 2021 and the judgement of the Supreme Court in the case of Ashish Agarwal (supra), were time barred.

On behalf of the Revenue, it was submitted that Section 3 of TOLA applied to the pre-amended Section 149 and therefore the initial notice dated 29th June, 2021, and the proceedings taken in continuation as per the judgment of Ashish Agarwal (supra) were not time barred. Further submissions were made regarding the merits of the reassessment proceedings.

Examining the submissions on merits of the reassessment proceedings, the Delhi High Court held that these being disputed questions of fact, could not be adjudicated by it in writ proceedings. The Delhi High Court further held that the contention of the assessee that the present proceedings were time barred was not correct in the facts of the case, which pertained to A.Y. 2013-2014 and where reassessment proceedings were initiated during the time limit extended by TOLA. Examining the pre-amended provisions of Section 149, the Delhi High Court noted that the time limit for issuing notice under unamended Section 149, which was falling from 20th March, 2020 till 31st March 2021, was extended by Section 3 of TOLA read with Notification No. 20/2021 dated 31st March, 2021, and Notification No. 38/2021 dated 27th April, 2021, until 30th June, 2021.

The Delhi High Court noted that the initial notice in the proceedings before it was issued on 29th June, 2021 i.e. within extended time limit. The notice was quashed by the Delhi High Court following its judgment in Mon Mohan Kohli vs. ACIT 441 ITR 207, as the mandatory procedure of Section 148A was not followed before issuing the notice. In the judgment, the Delhi High Court had struck down Explanations A(a)(ii) and A(b) to the said notifications. However, the relevant portion of the notification, which extended the time limit for issuance of time barring reassessment notices until 30th June, 2021 was not struck down by the Court and in fact the Court categorically held at paragraph 98 that power of re-assessment that existed prior to 31st March 2021 stood extended till 30th June, 2021. The notice stood revived as a notice under section 148A(b) due to the decision of the Supreme Court in the case of Ashish Agarwal (supra).

In the view of the Delhi High Court, consequently, since the time period for issuance of reassessment notice for the A.Y. 2013-14 stood extended until 30th June, 2021, the first proviso of the amended Section 149 was not attracted in the facts of the case. Since the time limit for initiating assessment proceedings for A.Y. 2013-14 stood extended till 30th June, 2021, consequently, the reassessment notice dated 29th June, 2021, which had been issued within the extended period of limitation was not time barred.

The Delhi High Court also held that the challenge to paragraph 6.2.(i) of the CBDT Instruction No. 1/2022 dated 11th May, 2022 was not maintainable. The contention of the assessee that assessment for A.Y. 2013-14 became time barred on 31st March, 2020 was incorrect. The time period for assessment stood extended till 30th June, 2021.The initial reassessment notice for A.Y. 2013-14 had been issued to the petitioner within the said extended period of limitation. The Supreme Court had declared that the reassessment notice be deemed as a notice issued under section 148A of the Act and permitted Revenue to complete the said proceedings. The income alleged to have escaped assessment was more than Rs 50 lakhs and therefore, the rigour of Section 149 (1)(b) of the Act (as amended by the Finance Act, 2021) had been satisfied.

The Delhi High Court therefore dismissed the writ petition. This decision was subsequently followed by the Delhi High Court in the case of Kusum Gupta vs ITO 451 ITR 142.

RAJEEV BANSAL’S CASE

The issue came up again before the Allahabad High Court in the case of Rajeev Bansal vs. Union of India 147 taxmann.com 549.

A large number of writ petitions involving A.Ys. 2013-14 to 2017-18 were heard by the Allahabad High Court together. In all these cases, notice had been issued under the pre-amended section 148 between 1st April, 2021 to 30th June, 2021. Two legal issues were framed by the court, which would cover the issues involved in all the cases. These were:

(i) Whether the reassessment proceedings initiated with the notice under section 148 (deemed to be notice under section 148A), issued between 1st April, 2021 and 30th June, 2021, can be conducted by giving benefit of relaxation/extension under TOLA upto 30th March, 2021, and then the time limit prescribed in Section 149(1)(b) (as substituted w.e.f. 01st April, 2021) is to be counted by giving such relaxation benefit of TOLA from 30th March, 2020 onwards to the revenue.

(ii) Whether in respect of the proceedings where the first proviso to Section 149(1)(b) is attracted, benefit of TOLA will be available to the revenue, or in other words, the relaxation law under TOLA would govern the time frame prescribed under the first proviso to Section 149 as inserted by the Finance Act, 2021, in such cases?

For the A.Ys. 2013-14 and 2014-15, it was argued by the counsels for the assessees that the assessment for these years cannot be reopened, in as much as, maximum period of six years prescribed in pre-amendment provision of Section 149(1)(b) had expired on 31st March, 2021. No notice under section 148 could be issued in a case for the A.Y. 2013-14 and 2014-15 on or after 01st April, 2021, being time barred, on account of being beyond the time limit specified under the provisions of Section 149(1)(b) as they stood immediately before the commencement of the Finance Act 2021. For the A.Ys. 2015-16, 2016-17, 2017-18, it was contended that the monetary threshold and other requirements of the Income Tax Act in the post-amendment regime, i.e. after the commencement of the Finance Act, 2021 have to be followed. The validity of the jurisdictional notice under section 148 was thus to be tested on the touchstone of compliances or fulfilment of requirements by the revenue as per Section 149(1)(b) and the first proviso to Section 149(1) inserted by the amendment under the Finance Act 2021, w.e.f. 1st April, 2021.

The Allahabad High Court noted that it was undisputed that the notices issued under the pre-amendment section 148 were to be regarded as notices issued under section 148A(b). The High Court analysed the provisions of the pre-amended section 148, the provisions of TOLA and the notifications issued under TOLA. It also analysed the history of the litigation in this regard, commencing from its decision in the case of Ashok Kumar Agarwal vs. Union of India 131 taxmann.com 22 and ending with the Supreme Court decision in the case of Ashish Agarwal (supra). The Allahabad High Court thereafter took note of the CBDT instruction No. 1 of 2022, dated 11th May, 2022, for implementation of the judgement of the Supreme Court in Ashish Agarwal (supra).

The Allahabad High Court thereafter noted the arguments on behalf of the assessees as under:

(i) After the amendment brought by the Finance Act, 2021, new/amended provisions will apply to reassessment proceedings.

(ii) TOLA will not extend the time limit provided for initiation of reassessment proceedings under the amended Sections 147 to 151 from 1st April, 2021 onwards.

(iii) The result is that the revenue has to comply with all the requirements of the substituted/amended provisions of Sections 147 to 151A in the reassessment proceedings, initiated on or after 1st April, 2021. All compliances under the amended provisions will have to be made by the revenue.

(iv) Simultaneously, all defences under the substituted/amended provisions will be available to the assessee.

(v) About the impact of TOLA on the amendment by the Finance Act, 2021, no time extension under section 3(1) of TOLA can be granted in the time limit provided under the substituted provisions. Section 3(1) of TOLA saved only the reassessment proceeding as they existed under the unamended law.

(vi) The scheme of assessment underwent a substantial change with the enforcement of the Finance Act, 2021. The general provisions of TOLA cannot vary the requirements of the Finance Act, 2021, which is a special provision, as the special overrides general.

(vii) Reassessment notice under section 148 can be issued only upon the jurisdiction being validly assumed by the assessing authority, for which the compliances of substituted provisions of Sections 149 to 151A have to be made by the revenue.

(viii) New/amended provisions are beneficial in nature for the assessee and provide certain pre-requisite conditions/monetary threshold, etc. to be adhered to by the revenue to issue jurisdictional notice under section 148. The revenue has to meet a higher threshold to discharge a positive burden because of the substantive changes made in the new regime.

(ix) The pre-requisite conditions to issue notice under section 148 in the pre and post amendment regime demonstrate that for the reassessment notice after elapse of the period of 3 years but before 10 years from the end of the relevant assessment year, notice under section 148 cannot be issued unless the AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, represented in the form of assets, which has escaped assessment, amount to or is likely to amount to Rs.50 lakhs or more for that year.

(x) The monetary threshold for opening of assessment after elapse of three years for the period upto ten years has, thus, been put in place.

(xi) Further, first proviso to sub-section (1) of Section 149 has been placed to assert that the cases wherein notices could not have been issued within the period of six years as per clause (b) of sub-section (1) of Section 149 under the pre-amendment provision, reassessment notices cannot be issued on or after 1st April, 2021 after the commencement of the Finance Act, 2021, as such cases have become time barred.

(xii) Such cases cannot be reopened by giving an extension in the time limit by applying the provisions of TOLA.

(xiii) The Finance Act, 2021 had limited the applicability of TOLA and after amendment, the compliances/conditions under the amended provisions have to be fulfilled.

(xiv) The Apex Court in Ashish Agarwal (supra) has categorically provided that all defences available to the assessee including those under section 149 and all rights and contentions available to the concerned assessee and revenue under the Finance Act, 2021 and in law, shall continue to be available. The effect of the said observation is that the Revenue though may be able to maintain the notices issued under the unamended Section 148, as preliminary notices under section 148-A as inserted by the Finance Act, 2020, but for issuance of jurisdictional notice under section 148, the requirements of the amended Section 149 under the Finance Act, 2021 have to be fulfilled.

(xv) TOLA was enacted by the Parliament to deal with the contingency and the extension of time limit under section 3(1) of TOLA and was contemplated not to remain in perpetuity. TOLA had only substituted the limitation that was expiring. The extension under TOLA for the A.Y. 2015-16, 2016-17, 2017-18 was not permissible as the time limit for reopening of assessment proceedings for the said assessment years even under the unamended Section 149 was not expiring at the time of enforcement of the Enabling Act (TOLA 2020).

(xvi) The findings returned by the Division Bench and the Apex Court as noted above were reiterated that the relaxation granted by the Apex Court to consider Section 148 notices under the unamended Act as preliminary notices issued under Section 148A as inserted by the Finance Act, 2021, was a one time measure treating them as a bona fide mistake of the Revenue. However, it is evident from the said finding that the provisions of the Finance Act, 2021 have to be given their full effect.

(xvii) TOLA cannot infuse life into the pre-existing law to provide an extension of time to the Revenue in the time limit therein, to reopen cases for the assessment years which have become time barred under the first proviso to Section 149.

(xviii) As regards Instruction No 1 of 2022, executive instructions cannot limit or extend the scope of the Act or cannot alter the provisions of the Act. Instructions or Circular cannot impose burden on a tax payer higher than what the Act itself as a true interpretation envisages.

(xix) The direction issued in (clause 6.1, in third bullet point) that the decision of the Apex Court read with the time extension provided by TOLA, will allow extended reassessment notices to travel back in time to their original date when such notices were to be issued and then new Section 149 is to be applied at that point, is based on the wrong interpretation of the judgement of the Apex Court and the High Court. In clause 6.2 (i) of the Circular, it is provided that reassessment notices for A.Ys. 2013-14 and 2014-15 can be issued with the approval of the specified authority, if the case falls under clauses (b) of sub section (1) of Section 149 amended by the Finance Act, 2021. By issuing such instructions contained in clauses 6.1 and 6.2 of the Circular dated 11th May, 2022, the CBDT has devised a novel method to revive the reassessment proceedings which otherwise became time barred under the amended Section 149, specifically for the A.Ys. 2013-14 and 2014-15 being beyond the time limit specified under the provisions of unamended clause (b) of sub section (1) of section 149.

(xx) Reference was made to the Bombay High Court decision in Tata Communications Transformation Services Ltd vs ACIT 443 ITR 49 for the proposition that section 3(1) of TOLA does not provide that any notice issued under section 148 after 31st March, 2021 will relate back to the original date when it ought to have been issued or that the clock is stopped on 31st March, 2021 such that the provisions as existing on the said date will be applicable to notices issued thereafter, relying on the provisions of TOLA. It was observed therein that the purpose of Section 3(1) of TOLA is not to postpone or extend the applicability of the unamended provisions of the IT Act. Observations were made by the Bombay High Court therein that TOLA is not applicable for A.Y. 2015-16 or any subsequent year as the time limit to issue notice under section 148 for these assessment years was not expiring within the period for which Section 3(1) of TOLA was applicable and hence TOLA could not apply for these assessment years. As a consequence, there can be no question of extending the period of limitation for such assessment years, where the revenue could have issued notice of reassessment by complying with the requirements of the unamended provisions. In a case where the revenue did not initiate proceedings within the time limit under the unamended IT Act extended by TOLA, further extensions for inaction of the revenue cannot be granted by the notifications issued under TOLA on 31st March, 2021 or thereafter, once the amendments have been brought into place on 1st April, 2021, to extend the time limit under the unamended provisions.

On behalf of the Revenue, it was pointed out that TOLA was enacted to provide relaxation of the time limit provided in the Specified Acts, including the IT Act. Issuance of notice under section 148 as per the prescribed time limit in Section 149 was permissible until 30th June, 2021. It was argued that the notices issued on or after 1st April, 2021 under section 148, for reassessment were issued in accordance with the substituted laws and not as per the pre-existing laws and TOLA was only applied for extension in the timeline. TOLA has overriding effect over the IT Act, and will extend the time limit for issue of notice/action under the IT Act. The extension of time granted by TOLA would save all notices issued on or after 1st April, 2021.

It was claimed on behalf of the Revenue that only the time limit for various action/compliances/issuance of notices had been changed in the Finance Act, 2021. In any case, timelines remained under both the enactments, pre and post amendment. The reassessment notices would have been barred by time had there been no extension of the time limit under the IT Act by TOLA. The applicability of Explanation to Clause A(a) of the notification dated 31st March, 2021 and Explanation to clause A(b) of the notification dated 27.4.2021, may have been restricted to reassessment proceedings as in existence on 31.3.2021 and have been read down as applicable to the pre-existing Section 147 to 151-A, but the substantive provisions of extension of time for action/compliances/issuance of notice of the notifications dated 31st March, 2021 and 27th April, 2021, still survive.

It was argued that in Ashok Kumar Agarwal’s case, the explanations which provided that for the notices issued after 1st April, 2021, the time line under the pre-existing provisions would apply, had been held to be offending provisions, but the Allahabad High Court had left it open to the respective assessing authorities to initiate reassessment proceedings in accordance with the amended provisions by the Finance Act, 2021. The extension in time until 30th June, 2021 as granted by the notifications dated 31st March, 2021 and 27th April, 2021 would, thus, apply to the timeline provided under the amended provisions brought by the Finance Act, 2021.

It was submitted that when two Parliamentary Acts were on the statute book, one providing substantive provisions and procedure for initiating reassessment proceeding and the other granting extension of time for action/compliances/issuance of notices under the substantive and procedural provisions of the IT Act, a harmonious construction of both the provisions had to be made. Thus, whatever time limit was provided under the IT Act as on 1st April, 2021, the same had to be extended until 30th June, 2021 to enable the revenue to initiate and process the reassessment proceedings under section 148 as amended by the Finance Act, 2021.

It was argued that in view of the decision of the Apex Court in saving all notices issued by the revenue pan-India by treating them as notices under section 148-A of the amended provisions, all actions of the revenue subsequent to the issuance of notices under section 148-A in compliance of the directions of the Apex Court would have to be saved. The reference to the date of issuance of Section 148 notices, which were quashed by different High Courts, thus, has to be the date of notices under section 148-A of the amended provisions and extension of time, for compliances prescribed under the amended provisions, has to be granted to the revenue, accordingly. As observed by the Apex Court, when all defences remain available to the assessee, all rights of the revenue will have to be preserved/made available.

It was urged that even the Division Bench in Ashok Kumar Agarwal’s case (supra) had recognised that TOLA plainly was an enactment to extend timelines. Consequently, from 1st April, 2021 onwards, all references to issuance of notices contained in TOLA must be read as references to the substituted provisions only. The Allahabad High Court had observed that there was no difficulty in applying the pre-existing provisions to pending proceedings and then proceeded to harmonize the two laws. It was argued that giving this plain and simple meaning to TOLA, the extensions in time limit which were available to the revenue until 31st March, 2021 under TOLA, became available to the revenue after 1st April, 2021 by the Notification No.20 of 2021 dated 31st April, 2021 and the Notification No.38 dated 2th April, 2021, which had not been quashed or held invalid by the High Court or the Apex Court. Thus, extension of three months until 30th June, 2021 in the time limit provided under the IT Act, whether pre or post amendment, had to be granted. The time limit provided in the amended Section 149 of three years and 10 years had to be extended until 30th June, 2021, by virtue of the notifications issued under section 3(1) of TOLA. It was argued that the CBDT Instruction only clarifies the above position of the two provisions – that the time extension provided by TOLA will allow “extended reassessment notices” to travel back in time to their original date when such notices were to be issued, and then the new Section 149 is to be applied at that point of time.

It was submitted that based on the said logic, the “extended reassessment notices” for the A.Ys. 2013-14, 2014-15 and 2015-16 were to be dealt with by issuance of fresh notice under amended Section 148, with the approval of the specified authority, in the cases which fall under clause (b) of Section 149(1) as amended by the Finance Act, 2021. It is further clarified in the CBDT instruction that the specified authority under section 151 of the amended provisions shall be the authority prescribed under clause (ii) of that section. Similarly, for A.Y. 2016-17 and A.Y. 2017-18, fresh notice under Section 148 can be issued with the approval of the specified authority under clause (a) of amended Section 149(1), as they are within the period of three years from the end of the relevant assessment years, because of the extension of time by TOLA.

On behalf of the Revenue, reliance was placed on the decision of the Delhi High Court in the case of Touchstone Holdings (supra), which had relied on the earlier decision of the Delhi High Court in the case of Mon Mohan Kohli vs. ACIT (supra), and had held that with the declaration by the Apex Court that the reassessment notice issued on or after 1st April, 2021 shall be deemed to be the notice under section 148-A, the Revenue was permitted to complete the reassessment proceedings in accordance with the amended provisions of Section 149.

A specific query was raised by the Bench to the revenue to answer the effect of the first proviso to Section 149(1) of the amended provisions inserted by the Finance Act, 2021 which prohibits issuance of notice under section 148, in a case where it has become time barred under the unamended (pre-existing) clause (b) of Section 149(1). The answer on behalf of the revenue was that time limit of 6 years provided in clause (b) of Section 149(1) stood extended by virtue of TOLA until 31st March, 2021, and further extensions in the time limit (of six years) are to be granted under the notifications issued under section 3(1) of TOLA until 30th June, 2021. The result would be that the cases for the A.Ys. 2013-14 and 2014-15, where the period of six years had expired on 31st March, 2020 and 31st March, 2021 respectively, would not be hit by the first proviso to Section 149(1) brought by the Finance Act, 2021. The cases for these assessment years had to be evaluated and the reassessment proceedings had to be conducted for them in accordance with clause (b) of Section 149(1) as amended by the Finance Act, 2021, being beyond the period of three years but within the limitation of ten years. Similarly, for the A.Y. 2015-16, on the expiry of three years on 31st March, 2019, the extension until 30th June, 2021 is to be granted to bring the reassessment proceedings under amended clause (b) of Section 149(1). For the A.Ys. 2016-17 and 2017-18, where the period of three years had expired on 31st March, 2020 and 31st March, 2021 respectively, the extension in the time limit of three years was to be granted under TOLA and these cases would fall under the amended clause (a) of Section 149(1), being within the prescribed limit of three years until 30th June, 2021.

The Allahabad High Court noted the summary of its observations in the case of Ashok Kumar Agarwal (supra) as under:

(i) By its very nature, once a new provision has been put in place of the pre-existing provision, the earlier provision cannot survive, except for the things done or already undertaken to be done or things expressly saved to be done.

(ii) In absence of any saving clause to save pre-existing provisions, the revenue authorities could only initiate proceeding on or after 1st April, 2021, in accordance with the substituted laws and not the pre-existing laws. TOLA, that was pre-existing, confronted the IT Act as amended by the Finance Act, 2021, as it came into existence on 1st April, 2021. In both the provisions, i.e. TOLA and the Finance Act, 2021, there is absence, both of any express provision in its effort to delegate the function, to save the applicability of provisions of pre-existing Sections 147 to 151, as they existed up to 31st March, 2021.

(iii) Plainly, TOLA is an enactment to extend timelines only from 1st April, 2021 onwards. Consequently, from 1st April, 2021 onwards all references to issuance of notice contained in TOLA must be read as reference to the substituted provisions only.

(iv) There is no difficulty in applying pre-existing provisions to pending proceedings and, this is how, the laws were harmonized.

(v) For all reassessment notices which had been issued after 1st April, 2021, after the enforcement of amendment by the Finance Act, 2021, no jurisdiction has been assumed by the assessing authority against the assesses under the unamended law. No time extension could, thus, be made under section 3(1) of TOLA read with the notifications issued thereunder.

(vi) Section 3 of TOLA only speaks of saving or protecting certain proceedings from being hit by the rule of limitation. That provision also does not speak of saving any proceeding from any law that may be enacted by the Parliament, in future. The non-obstante clause of Section 3(1) of TOLA does not govern the entire scope of the said provision. It is confined to and may be employed only with reference to the second part of Section 3(1) of TOLA, i.e. to protect the proceedings already underway. The Act, thus, only protected certain proceedings that may have become time barred on 30th March, 2021 up to the date 30th June, 2021. Correspondingly, by delegated limitation incorporated by notifications, the Government may extend that time limit. That timeline alone stood extended up to 30th June, 2021.

(vii) Section 3(1) of TOLA does not itself speak of the reassessment proceeding or Section 147 or Section 148 as it existed prior to 1st April, 2021. It only provides a general relaxation of limitation granted on account of the general hardship existing upon the spread of pandemic COVID-19. After the enforcement of the Finance Act, 2021, it applies to the substituted provisions and not the pre-existing provisions.

The reference to reassessment proceedings with respect to pre-existing and new substituted provisions of Sections 147 and 148 has been introduced only by the later notifications issued under TOLA. It was concluded that in absence of any proceedings of reassessment having been initiated prior to the date 1st April, 2021, it is the amended law alone that would apply. The notifications issued by the Central Government or the CBDT Instructions could not have been issued plainly to over reach the principal legislation. Unless harmonised as such, those notifications would remain invalid.

(viii) On the submission of the revenue that practical difficulties faced by the revenue in initiation of reassessment proceedings due to onset of pandemic COVID-19 dictates that the reassessment proceedings be protected, it was noted that practicality, if any, may lead to litigation. Once the matter reaches the Court, it is the legislation and its language and the interpretation offered to that language as may primarily be decisive to govern the outcome of the proceedings. To read practicality into enacted law is dangerous.

(ix) It would be oversimplistic to ignore the provisions of, either TOLA or the Finance Act, 2021 and to read and interpret the provisions of Finance Act, 2021 as inoperative in view of the facts and circumstances arising from the spread of the pandemic Covid-19.

(x) In absence of any specific clause in the Finance Act, 2021 either to save the provisions of TOLA or the notifications issued thereunder, by no interpretative process can those notifications be given an extended run of life, beyond 31st March, 2021.

(xi) The notifications issued under TOLA may also not infuse any life into a provision that stood obliterated from the statute book w.e.f. 31st March, 2021, in as much as, the Finance Act, 2021 does not enable the Central Government to issue any notification to reactivate the pre-existing law, which has been substituted by the principal legislature. Any such exercise made by the delegate/Central government would be dehors any statutory basis.

(xii) In absence of any express saving of the pre-existing laws, the presumption drawn in favor of that saving, is plainly impermissible.

(xiii) No presumption exists by the notifications issued under TOLA that the operation of the pre-existing provisions of the Act had been extended and thereby provisions of Section 148A (introduced by the Finance Act, 2021) and other provisions had been deferred.

On these grounds, in Ashok Kumar Agarwal’s case, the Allahabad High Court had quashed the reassessment notices, leaving it open to the respective assessing authorities to initiate reassessment proceedings in accordance with the provisions of the IT Act as amended by the Finance Act, 2021 after making all compliances, as required by law.

The Allahabad High Court then summarized the Supreme Court findings in Ashish Agarwal’s case (supra) as under:

(I) By substitution of Sections 147 to 151 by the Finance Act, 2021, radical and reformative changes are made governing the procedure for reassessment proceedings. Under pre-Finance Act, 2021, the reopening was permissible for a maximum period up to 6 years and in some cases beyond even 6 years leading to uncertainty for considerable time. Therefore, the Parliament thought it fit to amend the Income Tax Act to simplify the Tax Administration, ease compliances and reduce litigation. To achieve the said object, by the Finance Act, 2021, Sections 147 to 149 and Section 151 have been substituted.

(II) Section 148(A) is a new provision, which is in the nature of a condition precedent. Introduction of Section 148A can, thus, be said to be a game changer with an aim to achieve ultimate object of simplifying the tax administration. By way of Section 148A, the procedure has now been streamlined and simplified. All safeguards are, thus, provided before issuing notice under section 148. At every stage, the prior approval of the specified authority is required, even for conducting the inquiry as per Section 148(A)(a).

(III) Substituted Section 149 is the provision governing the time limit for issuance of notice under section 148. The substituted Section 149 has reduced the permissible time limit for issuance of such a notice to three years and, only in exceptional cases, in ten years. It also provides further additional safeguards which were absent under the earlier regime pre-Finance Act, 2021.

(IV) The new provisions substituted by the Finance Act, 2021, being remedial and benevolent in nature and substituted with a specific aim and object to protect the rights and interest of the assesses as well as and the same being in public interest, the respective High Courts have rightly held that the benefit of new provisions shall be made applicable even in respect of the proceedings related to past assessment years, provided Section 148 notice has been issued after 1st April, 2021.

The Supreme Court had therefore confirmed the view taken by the High Courts, including by the Allahabad High Court in the case of Ashok Kumar Agarwal (supra). However, the Supreme Court had further observed that:

I) The judgments of several High Courts would result in no assessment proceedings at all, even if the same are permissible under the Finance Act, 2021 as per substituted Sections 147 to 151. To remedy the situation where revenue became remediless, in order to achieve the object and purpose of reassessment proceedings, it was observed that the notices under section 148 after the amendment was enforced w.e.f 1st April, 2021, were issued under the unamended Section 148, due to bonafide mistake in view of the subsequent extension of time by various notifications under TOLA.

II) The notices ought not to have been issued under the unamended Act and ought to have been issued under the substituted provisions of Sections 147 to 151 as per the Finance Act, 2021.

III) There appears to be a genuine non application of the amendments as the officers of the revenue may have been under a bona fide belief that the amendments may not yet have been enforced.

The Supreme Court therefore held that:

“Instead of quashing and setting aside the reassessment notices issued under the unamended provisions of IT Act, the High Courts ought to have passed order construing the notices issued under the unamended Act/unamended provision of the IT Act as those deemed to have been issued under Section 148(A) of the Income Tax Act, as per the new provision of Section 148(A). In that case, the revenue ought to have been permitted to proceed with the reassessment proceedings as per the substituted provisions of Sections 147 to 151 of the Income Tax Act as per the Finance Act, 2021, subject to compliance of all the procedural requirements and the defences which may be available to the assessee under the substituted provisions of Section 147 to 151 of the Income Tax Act, and which may be available under the Finance Act, 2021 and in law.”

The Allahabad High Court observed that while passing the order, it was noted by the Apex Court that there was a broad consensus on the proposed modification on behalf of the revenue and the counsels appearing on behalf of respective assessees.

The Allahabad High Court noted that in Ashok Kumar Agarwal’s case, it had held that if the Finance Act, 2021 had not made the substitution of the reassessment procedure, revenue authorities would have been within their rights to claim extension of time, under TOLA. The sweeping amendments made by the Parliament by necessary implication or implied force limited applicability of TOLA. The power to grant time extension thereunder was limited to only such reassessment proceedings as had been initiated till 31st March, 2021. It was also held that in absence of any specific clause in the Finance Act, 2021 either to save the provisions of TOLA or the Notifications issued thereunder, by no interpretative process, the notifications could be said to infuse life into a provision that stood obliterated from the Statute book w.e.f 31st March, 2021. It was held that the Finance Act, 2021 did not enable the Central Government to issue any notification to reactivate the pre-existing law, the exercises made by the delegate/Central Government would be dehors any statutory basis. It was, thus, categorically held by the Division Bench that the notifications did not insulate or save the pre-existing provisions pertaining to reassessment under the Act and that the operation of the pre-existing provisions of the Act could not be extended.

The Allahabad High Court noted that the contention of the revenue, if accepted, would create conflict of laws. The limitation under the pre-existing provisions would have to be kept alive till 30th June, 2021 with the aid of the extensions granted by the notifications issued by the Central Government, which had been read down by the Co-ordinate Division Bench in Asok Kumar Agarwal’s case. As per the Division Bench judgment, the time limit provided in unamended Section 149, could not be extended beyond 31st March, 2021, so as to render the amended provisions of Section 149 ineffective. The stand of the revenue that TOLA simply extended the period of limitation until 30th June, 2021, due to the disturbances from the spread of pandemic COVID-19, had been categorically turned down by the Division Bench in Ashok Kumar Agarwal’s case (supra) with the above observations.

The Allahabad High Court observed that there was a substantial change in the threshold/requirements which had to be met by the revenue before issuance of reassessment notice after elapse of three years under clause (b) of Section 149(1). Not only monetary threshold had been substituted but the requirement of evidence to arrive at the opinion that the income escaped assessment has also been changed substantially. A heavy burden was cast upon the revenue to meet the requirements of clause (b) of Section 149(1) for initiation of reassessment proceedings after lapse of three years.

Analysing the first proviso to Section 149(1), the Allahabad High Court observed that the time limit in clause (b) of unamended Section 149(1) of six years, thus, cannot be extended up to ten years under clause (b) of amended Section 149(1), to initiate reassessment proceeding in view of the first proviso to Section 149(1). In other words, the case for the relevant assessment year where six years period has elapsed as per unamended clause (b) of Section 149(1) cannot be reopened after commencement of the Finance Act, 2021 w.e.f. 1st April, 2021.

The view in Ashok Kumar Agarwal’s case (supra) that after 1st April, 2021, if the rule of limitation permitted, the revenue could initiate reassessment proceedings in accordance with the new law, after making adequate compliances, had been upheld by the Apex Court in Ashish Agarwal’s case (supra). According to the Allahabad High Court, in case the arguments of the revenue were accepted, the benefits provided to the assessee in the substantive provisions of clause (b) of Section 149(1) and the first proviso to Section 149 had to be ignored or deferred. The defences which may be available to the assessee under section 149 and/or which may be available under Finance Act, 2021 had to be denied.

At the first blush, the argument of the revenue seemed convincing by simplistic application of TOLA, treating it as a statute for extension in the limitation provided under the IT Act, but on a deeper scrutiny, if the argument of the revenue were accepted, it would render the first proviso to Section 149(1) ineffective until 30th June, 2021 and otiose. This view, if accepted, would result in granting extension of time limit under the unamended clause (b) of Section 149, in cases where reassessment proceedings had not been initiated during the lifetime of the unamended provisions, i.e. on or before 31st March, 2021. It would infuse life in the obliterated unamended provisions of clause (b) of Section 149(1), which was dead and removed from the Statute book w.e.f. 1st April, 2021, by extending the timeline for actions therein.

According to the Allahabad High Court, in absence of any express saving clause, in a case where reassessment proceedings had not been initiated prior to the legislative substitution by the Finance Act, 2021, the extended time limit of unamended provisions by virtue of TOLA cannot apply. In other words, the obligations upon the revenue under clause (b) of amended Section 149(1) cannot be relaxed. The defences available to the assessee in view of the first proviso to Section 149(1) could not be taken away. The notifications issued by the delegates/Central Government in exercise of powers under Section 3(1) of TOLA could not infuse life in the unamended provisions of Section 149 by this way.

The Allahabad High Court addressed the argument of the revenue that this interpretation would render TOLA otiose, though it had not been declared invalid by any court, by stating that this argument was misconceived, as the extensions in the time limit under the unamended Sections of the IT Act prior to the amendment by the Finance Act, 2021, would still be applicable to the reassessment proceedings as may have been in existence on 31st March, 2021.

Referring to the CBDT Instruction No 1 of 2022, the Allahabad High Court found that that the third bullet to clause (6.1) which stated that the Apex Court had allowed time extension provided by TOLA and the “extended reassessment notices” will travel back in time to their original date when such notices were to be issued and then Section 149 is to be applied at that point, was a surreptitious attempt to circumvent the decision of the Apex Court. The Supreme Court observations had been given in piecemeal in that bullet to give it a distorted picture. As per the Allahabad High Court, terming reassessment notices issued on or after 1st April, 2021 and ending with 30th June, 2021 as “extended reassessment notices”, within the time extended by TOLA and various notifications issued thereunder, in Para 6.1 was an effort of the revenue to overreach the judgment of that Court in Ashok Kumar Agarwal (supra) as affirmed by the Apex court in Ashish Agarwal (supra).

In any case, the Allahabad High Court observed that this instruction, as per the Revenue itself, was only a guiding instruction – the instructions in the third bullet to clause 6.1 and clauses 6.2(i) and (ii), being contrary to the decision of the Supreme Court, had no binding force.

Referring to the Delhi High Court decision in Touchstone Holdings (supra), the Allahabad High Court observed that the view taken therein was in direct conflict with the view taken by the Allahabad High Court in Ashok Kumar Agarwal (supra) affirmed by the Apex Court in Ashish Agarwal (supra). In fact, the observation in Mon Mohan Kohli (supra) by the Delhi High Court in paragraph ‘98’ that the power of reassessment that existed prior to 31st March, 2021 continued to exist till the extended period, i.e. till 3th June, 2021, and the Finance Act, 2021 had merely changed the procedure to be followed prior to issuance of notice w.e.f. 1st April, 2021, had been misread and misapplied in Touchstone (supra) by the Division Bench of the Delhi High Court. Even in Mon Mohan Kohli’s case (supra), the Delhi High Court had quashed the reassessment notices issued on or after 1st April, 2021 on the grounds that TOLA did not give power to the Central Government to extend the erstwhile Sections 147 to 151 beyond 31st March, 2021 and/or defer the operation of substituted provisions enacted by the Finance Act, 2021. In fact, in Mon Mohan Kohli’s case (supra), the Delhi High Court had concurred with the Allahabad High Court view in Ashok Kumar Agarwal’s case (supra).

The Allahabad High Court observed that it was a settled law that a taxing statute must be interpreted in the light of what was clearly expressed. It was not permissible to import provisions in a taxing statute so as to supply any assumed deficiency. In interpreting a taxing statute, equitable considerations are out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions. The court must look squarely at the words of the statute and interpret them. Taxing statute would need to be interpreted in the light of what is clearly expressed. It cannot imply anything which is not expressed. Before taxing any person it must be shown that he falls within the ambit of the charging section by clear words used in the section, and if the words are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject. There is nothing unjust in the taxpayer escaping if the letter of the law fails to catch him on account of the legislature’s failure to express itself clearly.

The Allahabad High Court therefore held that:

(i) The reassessment proceedings initiated with the notice under section 148 (deemed to be notice under section 148-A), issued between 1st April, 2021 and 30th June, 2021, could not be conducted by giving benefit of relaxation/extension under TOLA up to 30th March, 2021, and the time limit prescribed in Section 149(1)(b) (as substituted w.e.f. 01st April, 2021) cannot be counted by giving such relaxation from 30th March, 2020 onwards to the Revenue.

(ii) In respect of the proceedings where the first proviso to Section 149(1)(b) is attracted, benefit of TOLA will not be available to the revenue, or in other words, the relaxation law under TOLA would not govern the time frame prescribed under the first proviso to Section 149 as inserted by the Finance Act, 2021, in such cases.

A similar view was taken by the Gujarat High Court in the case of Keenara Industries (P) Ltd vs. ITO 147 taxmann.com 585, where the Gujarat High Court held that the reassessment notices for A.Ys. 2013-14 and 2014-15, which had become time-barred prior to 1st April, 2021 under the old regime on expiry of 6 years limitation period, could not be revived by TOLA/extension of time notification issued under TOLA. Therefore, reassessment notices for A.Ys. 2013-14 and 2014-15 could not be issued on or after 1st April, 2021 under the new regime effective from 1st April, 2021 even within the extended time-limit of 1st April, 2021 to 30th June, 2021 applicable under the TOLA Notifications.

OBSERVATIONS

In Ashish Agarwal’s case, the Supreme Court had held:

“ 8.However, at the same time, the judgments of the several High Courts would result in no reassessment proceedings at all, even if the same are permissible under the Finance Act, 2021 and as per substituted sections 147 to 151 of the IT Act. The Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated. It is true that due to a bonafide mistake and in view of subsequent extension of time vide various notifications, the Revenue issued the impugned notices under section 148 after the amendment was enforced w.e.f. 01.04.2021, under the unamended section 148. In our view the same ought not to have been issued under the unamended Act and ought to have been issued under the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021. There appears to be genuine non-application of the amendments as the officers of the Revenue may have been under a bonafide belief that the amendments may not yet have been enforced. Therefore, we are of the opinion that some leeway must be shown in that regard which the High Courts could have done so. Therefore, instead of quashing and setting aside the reassessment notices issued under the unamended provision of IT Act, the High Courts ought to have passed an order construing the notices issued under unamended Act/unamended provision of the IT Act as those deemed to have been issued under section 148A of the IT Act as per the new provision section 148A and the Revenue ought to have been permitted to proceed further with the reassessment proceedings as per the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021, subject to compliance of all the procedural requirements and the defences, which may be available to the assessee under the substituted provisions of sections 147 to 151 of the IT Act and which may be available under the Finance Act, 2021 and in law. Therefore, we propose to modify the judgments and orders passed by the respective High Courts as under:

(i) The respective impugned section 148 notices issued to the respective assessees shall be deemed to have been issued under section 148A of the IT Act as substituted by the Finance Act, 2021 and treated to be show-cause notices in terms of section 148A(b). The respective assessing officers shall within thirty days from today provide to the assessees the information and material relied upon by the Revenue so that the assessees can reply to the notices within two weeks thereafter;

(ii) The requirement of conducting any enquiry with the prior approval of the specified authority under section 148A(a) be dispensed with as a one-time measure vis-à-vis those notices which have been issued under Section 148 of the unamended Act from 01.04.2021 till date, including those which have been quashed by the High Courts;

(iii) The assessing officers shall thereafter pass an order in terms of section 148A(d) after following the due procedure as required under section 148A(b) in respect of each of the concerned assessees;

(iv) All the defences which may be available to the assessee under section 149 and/or which may be available under the Finance Act, 2021 and in law and whatever rights are available to the Assessing Officer under the Finance Act, 2021 are kept open and/or shall continue to be available and;

(iv) The present order shall substitute/modify respective judgments and orders passed by the respective High Courts quashing the similar notices issued under unamended section 148 of the IT Act irrespective of whether they have been assailed before this Court or not.”

The Supreme Court therefore held that the new law would apply, even where notices issued under old law were deemed to be valid and the AO was permitted to proceed thereunder, and while so holding, did not exclude the operation of the first proviso to new Section 149(1). On the contrary, it held that all other provisions of the new law would apply and that the defences otherwise available thereunder would be available to the assessee. Further, the Supreme Court was seized with the view taken by the different High Courts, and had agreed with their views particularly that the notices issued under the old law of s. 148, on or after, 31st March, 2021, were invalid. It only modified those decisions to the extent stated above that the notices were deemed to be issued within the time. Therefore, the Allahabad High Court rightly held that the assessee was entitled to the defence that the notices were barred by limitation due to the applicability of the first proviso to the amended section 149(1), and that its order in the case of Ashok Kumar Agarwal (supra) was modified only to the extent of the above.

As observed by the Gujarat High Court, no notification could extend the limitation of a repealed law. The Apex Court in case of Ashish Agarwal (supra) had not disturbed the findings of various High Courts to the effect that the notifications in question were ultra vires the law. The Gujarat High Court also rightly pointed out that in Touchstone Holdings’ case, the Delhi High Court proceeded on the basis that earlier notice was legal, valid and within the time frame. The Delhi High Court had gone on a premise that by virtue of observation in case of Mon Mohan Kohli (supra), the extension to time limit would survive.

Therefore, the view taken by the Allahabad and Gujarat High Courts seems to be the better view of the matter, and that in cases where the notice is barred by limitation on account of the first proviso to new section 149(1), the reassessment notices would be invalid.

shailesh.kwebmaker

Section 153 – Assessment barred by limitation – Refund of the taxes paid

2 Aricent Technologies (Holdings) Ltd vs. Assistant Commissioner Of Income Tax & Anr.
[WP (C) 13765 of 2022, AY 2007-08
Dated: 27th February, 2023, (Del.) (HC)]

Section 153 – Assessment barred by limitation – Refund of the taxes paid:

FSSL (which is now amalgamated with the petitioner company) had filed its return of income for the A.Y. 2007-08 on 26th October, 2007 declaring a total income of Rs. 17,64,76,208. The said return was picked up for scrutiny under section 143(3) of the Income Tax Act, 1961. On 27th September, 2010, the Transfer Pricing Officer passed an order proposing an addition of Rs. 8,96,40,636 on account of corporate charges. Thereafter, on 24th December, 2010, the AO passed a Draft Assessment Order proposing to assess FSSL’s income for the relevant assessment year at Rs. 2,43,55,56,670 by disallowing the project expenses to the extent of Rs. 39,15,46,619 and disallowing deduction under section 10B of the Act quantified at Rs. 177,78,93,207.

The Dispute Resolution Panel upheld the Draft Assessment Order, by its order dated 02nd August, 2011. Pursuant to the said order, the AO concluded the assessment and passed the Assessment Order dated 31st October, 2011 under section 143(3) of the Act r.w.s 144C(13) of the Act, whereby the total income of FSSL was assessed at Rs. 243,55,56,670.

Pursuant to the said assessment, a demand of Rs. 117,22,62,912 was raised. A refund of Rs. 26,01,53,355 relating to assessment year 2006-07 was outstanding and payable to FSSL. The said refund was adjusted against the demand of Rs. 117,22,62,912 raised in respect of the A.Y. 2007-08.

Aggrieved by the assessment order dated 31st October, 2011, the petitioner filed an appeal before the Income Tax Appellate Tribunal (hereafter ‘the Tribunal’). By an order dated 07th January, 2016, the Tribunal partly allowed the appeal and deleted the disallowance of the project expenses to the extent of Rs. 39,15,46,619. However, in respect of the disallowance of deduction of Rs. 1,77,78,93,207 claimed under section 10B of the Act, and the transfer pricing adjustment of corporate charges, the Tribunal set aside the Assessment Order and remanded the matter to the Transfer Pricing Officer/Assessing Officer. The question of the transfer pricing adjustment on account of corporate charges was remanded to the Transfer Pricing Officer for a de novo adjudication and the question regarding disallowance of deduction claimed under section 10B of the Act, was remanded to the AOr to decide afresh in the light of the observations made in the order.

Concededly, the AO has not passed any order pursuant to the order dated 07th January, 2016 passed by the Tribunal. In the aforesaid context, the petitioner contended that the refund due to FSSL (which is now amalgamated with the petitioner company) amounting to Rs. 26,01,53,355 be refunded to the petitioner along with applicable interest. The said claim is founded on the basis that the assessment for the A.Y. 2007-08 is now barred by limitation.

Section 153 of the Act was amended by the Finance Act, 2017 with retrospective effect from 01st June, 2016 and the provision regarding limitation for framing an assessment pursuant to any order passed inter alia under section 254 of the Act was included under sub-section (3) of Section 153 of the Act. Sub-sections (3) and (4) of the Section 153 of the Act as applicable for framing the assessment pursuant to the order dated 7th January, 2016 passed by the Tribunal read as under:

“153. (3) Notwithstanding anything contained in sub-sections (1) and (2), an order of fresh assessment in pursuance of an order under section 254 or section 263 or section 264, setting aside or cancelling an assessment, may be made at any time before the expiry of nine months from the end of the financial year in which the order under section 254 is received by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or, as the case may be, the order under section 263 or section 264 is passed by the Principal Commissioner or Commissioner.
………… ……………..
(4) Notwithstanding anything contained in sub-sections (1), (2) and (3), where a reference under sub-section (1) of section 92CA is made during the course of the proceeding for the assessment or reassessment, the period available for completion of assessment or reassessment, as the case may be, under the said sub-sections (1), (2) and (3) shall be extended by twelve months.”

Pursuant to the order dated 7th January, 2016 passed by the Tribunal, the Transfer Pricing Officer passed an order dated 24th January, 2017. However, concededly, the AO has not passed any final order.

The Honourable Court observed that in view of the above, the contention that passing fresh assessment order pursuant to the Tribunal’s order dated 07th January, 2016, is barred under the provisions to Section 153(3) and 153(4) of the Act, is merited. In view there of the contention that the income as returned by FSSL for the A.Y. 2007-08 would stand accepted. Consequently, any adjustment made for the refund due to FSSL for the A.Y. 2006-07 is not sustainable. Accordingly, the court directed that the said amount, which was due as a refund for the A.Y. 2006-07 be refunded to the petitioner along with interest as applicable within a period of eight weeks.

The court further expressed displeasure in the manner the present matter has been dealt with by the concerned officer. Despite clear directions from the Tribunal, the AO had failed to pass the assessment order within the prescribed time.

shailesh.kwebmaker

Reassessment — Notice — Validity — Transactions not disclosed in initial notice under section 148A(b) considered in order under section 148A(d) for issue of notice of reassessment — Department cannot travel beyond initial notice — Order under section 148A(d) and consequent notice under section 148 set aside.

7 Prakash Krishnavtar Bhardwaj vs. ITO
[2023] 451 ITR 424 (Chhattisgarh)
Date of order: 1st December, 2022
Sections 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Notice — Validity — Transactions not disclosed in initial notice under section 148A(b) considered in order under section 148A(d) for issue of notice of reassessment — Department cannot travel beyond initial notice — Order under section 148A(d) and consequent notice under section 148 set aside.

The assessee filed a writ petition and challenged the order under section 148A(d) of the Income-tax Act, 1961, dated 22nd July, 2022, directing the issue of notice under section 148 and the consequent notice under section 148 dated 22nd July, 2022. It was pointed out that the transaction of Rs. 14 lakhs considered by the Department in the order under section 148A(d) was not in the noticeunder section 148A(b) which is not permitted in law. It was contended that if the said Rs. 14 lakh transaction which has been considered by the Department is excluded from the proceedings then the amount would be less than Rs. 50 lakh and would therefore be outside the purview of the assessment proceedings as per the CBDT circular dated 11th May, 2022 ([2022] 444 ITR (St.) 43).

Chhattisgarh High Court allowed the writ petition and held as under:

“i) From the two notices that were issued on June 29, 2021 and on May 25, 2022, i. e., the notices initially issued u/s. 148 (old provision) and u/s. 148A(b) (new provision), the Department had not disclosed the fact that the assessee had suppressed Rs. 14 lakhs transaction which had also escaped assessment u/s. 147. In the absence of its being stated in the notice the assessment of such amount would prima facie be bad since the Department could not travel beyond the show-cause notice.

ii) Given the facts and circumstances and in view of the circular dated May 11, 2022, issued by the Central Board of Direct Taxes the order u/s. 148A(d) and the consequent notice u/s. 148 dated July 22, 2022 were unsustainable and therefore were set aside reserving the right of the Department to take appropriate recourse available in accordance with law.”

shailesh.kwebmaker

Reassessment — Notice after four years — Notice should clearly specify material not disclosed by the assessee — Expenditure on account of advertisement and sales promotion allowed by the AO after applying his mind to details furnished by the assessee — No failure on part of the assessee to disclose all material facts truly and fully — Notice under section 148 on the ground that in A. Y. 2015-16, the same has been treated as capital expenditure — Notice unsustainable.

6 Asian Paints Ltd vs. ACIT
[2023] 451 ITR 45 (Bom)
A. Y. 2014-15
Date of order: 9th January, 2023
Sections 147 and 148 of ITA 1961

Reassessment — Notice after four years — Notice should clearly specify material not disclosed by the assessee — Expenditure on account of advertisement and sales promotion allowed by the AO after applying his mind to details furnished by the assessee — No failure on part of the assessee to disclose all material facts truly and fully — Notice under section 148 on the ground that in A. Y. 2015-16, the same has been treated as capital expenditure — Notice unsustainable.

The assessee was a manufacturer and seller. It evolved a marketing strategy or scheme called “colour idea store” which envisaged a specified and designated area in the shops of the dealers for exclusive display of its products. The assessee accordingly entered into agreements with dealers as regards sharing of costs incurred for setting up of the designated area for use and display of its products but the stores continued to belong to the dealers. Such expenditure was claimed as deduction, and advertising and sales promotion expenses. For the A. Y. 2014-15, the AO accepted the assessee’s claim and passed an order under section 143(3) r.w.s. 144C(3) of the Income-tax Act, 1961. On 31st March, 2021, a notice was issued under section 148 to reopen the assessment under section 147 on the basis of assessment proceedings for the A. Y. 2015-16, in which the expenses for “colour idea store” were considered as capital expenditure on which depreciation of 10 per cent was allowed. The assessee’s objections were rejected.

The Bombay High Court allowed the writ petition filed by the assessee and held as under:

“i) During the scrutiny assessment, the Assessing Officer had sought the relevant details with regard to the advertisement and sales promotion expenses which were furnished by the assessee. The Assessing Officer had also disallowed some of the expenses which were shown in the break-up under the head “details of advertisement and sales promotion expenses” while passing the order of assessment which showed that the Assessing Officer had applied his mind to the assessee’s claim while passing the order u/s. 143(3) read with section 144C(3).

ii) The reasons for reopening the assessment did not state what material or fact was not disclosed by the assessee. Therefore, it was clear that there was a complete disclosure of all the primary material facts on the part of the assessee and there was no failure on its part to disclose fully and truly all the facts which were material and necessary for the assessment. The notice u/s. 148 did not satisfy the jurisdictional requirement of section 147 and therefore, was unsustainable and accordingly quashed.”

shailesh.kwebmaker

Penalty — Levy of penalty — Limitation — Limitation starts from date of assessment when the AO initiates penalty proceedings and not from date of sanction for penalty proceedings.

5 Principal CIT Vs. Rishikesh Buildcon Pvt Ltd and Ors.
[2023] 451 ITR 108 (Del)
A. Y. 2006-07
Date of order 17th November 2022
Section 275 of ITA 1961

Penalty — Levy of penalty — Limitation — Limitation starts from date of assessment when the AO initiates penalty proceedings and not from date of sanction for penalty proceedings.

For A. Y. 2006-07, the AO passed the assessment order on 17th December, 2008 and recorded that penalty proceedings were to be initiated. A reference was made by the AO to the prescribed authority on 18th March, 2009. The prescribed authority issued a show-cause notice to the assessee on 24th March, 2009. The penalty order was passed on 29th September, 2009.

The Tribunal held that the penalty order was passed after the expiry of the time limit laid down under section 275(1)(c) of the Income-tax Act, 1961 and accordingly set aside the penalty order.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) Where the Assessing Officer has initiated penalty proceedings in his/her assessment order, that date is to be taken as the relevant date as far as section 275(1)(c) of the Income-tax Act, 1961 is concerned.

ii) The quantum proceedings were completed by the Assessing Officer on December 17, 2008, and the Assessing Officer initiated the penalty proceedings in December, 2008. Thus, the last date by which the penalty order could have been passed was June 30, 2009. The six month period from the end of the month in which action of imposition of penalty was initiated would expire on June 30, 2009.

iii) However, in this case, admittedly, the penalty orders were passed on September 29, 2009, and therefore, the Tribunal rightly concluded that the orders were barred by limitation.”

shailesh.kwebmaker

Offences and prosecution — Willful attempt to evade tax — Failure to produce accounts and documents — Concealment of income — Failure to disclose foreign account opened in year 1991 when the assessee was 55 years of age — Admission regarding foreign bank account after investigation by the department and issue of notices and levy of penalty — Assessee cannot take the benefit of circular recommending no prosecution where the assessee is aged 70 years or more at time of offence — Prosecution justified.

4 Rajinder Kumar vs. State
[2023] 451 ITR 338 (Del)
A. Y.: 2006-07
Date of order: 16th December, 2022
Sections 271, 271(1)(b), 274, 276C(1), 276D and 277 of ITA 1961

Offences and prosecution — Willful attempt to evade tax — Failure to produce accounts and documents — Concealment of income — Failure to disclose foreign account opened in year 1991 when the assessee was 55 years of age — Admission regarding foreign bank account after investigation by the department and issue of notices and levy of penalty — Assessee cannot take the benefit of circular recommending no prosecution where the assessee is aged 70 years or more at time of offence — Prosecution justified.

In the year 2011 based on the information received from France that the assessee had opened an account in a bank in London on 20th August, 1991, a search and seizure was conducted under section 132 of the Income-tax Act, 1961 at various business premises and residence of the assessee on 23rd August, 2011. A notice under section 153A was issued to the assessee to file a return. A penalty was levied for the failure to comply with notices issued under section 142(1). The assessee filed a revised return for the A. Y. 2006-07 declaring the balance in the bank account in London as income from other sources on the basis of details provided at the time of search and assessment proceedings.

A notice under section 277, r.w.s 279(1) was issued and the assessee furnished details of payment of the entire taxes, penalties and interest. Thereafter, criminal complaints under section 276C(1)(ii) and 277 were filed against the assessee. The assessee filed an application under section 245(2) of the Code of Criminal Procedure, 1973 for discharge on the grounds that he was 80 years old citing Instruction No. 5051 dated 7th February, 1991 issued by the CBDT. The application was rejected. Against this, the assessee filed a criminal writ petition.

The Delhi High Court dismissed the writ petition and held as under:

“i) The assessee could not take benefit of Instruction No. 5051 dated February 7, 1991. He had opened the account in the bank in London on August 20, 1991 and it was only after the Government of France brought to the knowledge of the competent authorities that the assessee disclosed it in the year 2011. During the period relevant to the A. Y. 2006-07 the assessee allegedly had the maximum credit balance in his foreign bank account. The foreign account was opened in the bank in London on August 20, 1991 and was not disclosed.

ii) Taking the date of birth of the assessee, as claimed by him, as March 30, 1936, at the time of commission of offence in the year 1991 he was 55 years of age. Instruction No. 5051 dated February 7, 1991 stated that prosecution normally be not initiated against a person who has attained the age of 70 years at the time of commission of offence. Therefore, in terms of Instruction No. 5051 dated February 7, 1991, the age of the assessee had to be taken at the time of commission of offence and not when the proceedings were initiated. It was only after the notice u/s. 274 read with section 271 of the Act was issued and penalty u/s. 271(1)(b) of the Act for failure to comply with notice u/s. 142(1) of the Act was also levied on September 26, 2013 that the assessee had chosen to file a revised return on February 16, 2015. By doing so he could not evade the judicial process of law for not disclosing his correct income and foreign account since the year 1991.”

shailesh.kwebmaker

Interest under section 220(2) — Original assessment order set aside and matter remanded — Fresh assessment order — Interest payable from such fresh assessment order.

3 Principal CIT vs. AT and T Communication Services (India) Pvt Ltd
[2023] 451 ITR 92 (Del)
A. Y.: 2004-05
Date of order: 17th November, 2022
Section 220(2) of ITA 1961

Interest under section 220(2) — Original assessment order set aside and matter remanded — Fresh assessment order — Interest payable from such fresh assessment order.

The assessee is engaged in the business of network design, management, communication, connectivity services and related products. For the A. Y. 2004-05, the assessee filed its return of income on 30th October, 2004 declaring an income of Rs. 29,30,15,180. However, the income was assessed at Rs. 32,15,72,740 vide original assessment order dated 28th December, 2006. The Tribunal vide its order dated 30th September, 2014, set aside the original assessment order dated 28th December, 2006 and restored the matter to the file of the AO for determining the issue of taxability of the amounts received as brand building fund, the allowability of brand building expenses as well as a separate claim for other expenses. On 29th March, 2016 the AO reframed the assessment and passed a fresh assessment order under section 143(3) r.w.s 254 of the Act. The AO reconfirmed the disallowance of the brand expenses for a sum of Rs. 2,66,42,537 and the total income was determined as Rs. 31,96,57,720.

In the Income-tax Computation Form (ITNS 50) issued pursuant to the aforesaid assessment order, the AO levied interest under section 220(2) of the Act and raised a demand of Rs. 1,75,74,756 computed on the basis of the original assessment order dated 28th December, 2006.The Tribunal held that the interest under section 220(2) of the Act can be charged only after expiry of the period of 30 days from the date of service of demand notice issued pursuant to the fresh assessment order dated 29th March, 2016.On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) Where an issue arising out of the original assessment is restored to the file of the Assessing Officer by the higher appellate authorities, there is an extinguishment of the original demand, i. e, the demand raised under the first assessment order.

ii) Interest u/s. 220(2) of the Income-tax Act, 1961, can be levied only after expiry of the time limit prescribed in the fresh demand notice issued by the Assessing Officer in pursuance of the fresh reframed assessment order. The reframed order is the subsisting assessment order. Section 220(2) of the Act does not contemplate a levy of interest which relates back to the date of the passing of original order which was subsequently set aside by appellate authorities or applies to pendency of proceedings. This also becomes clear from Circular No. 334 dated April 3, 1982 ([1982] 135 ITR (St.) 10). Para 2.1 of the circular expressly states that if the assessment order is “set aside” by the appellate authority, no interest u/s. 220(2) of the Act can be charged pursuant to the original demand notice. No interest is payable on the demand raised by the original order when the original order of the Assessing Officer is set aside by the appellate authority and a fresh assessment order is passed.

iii) The Tribunal by order dated September 30, 2014, set aside the original assessment order dated December 28, 2006, and restored the matter to the file of the Assessing Officer for determining the issue of taxability of the amounts received as brand building fund, the allowability of brand building expenses as well as a separate claim for other expenses. On remand, the Assessing Officer on March 29, 2016 reframed the assessment and passed a fresh assessment order u/s. 143(3) of the Act read with section 254 of the Act. The Assessing Officer reconfirmed the disallowance of brand expenses.

iv) The Tribunal was right in holding that interest u/s. 220(2) of the Act could be charged only after expiry of the period of 30 days from the date of service of demand notice issued pursuant to the fresh assessment order dated March 29, 2016.”

shailesh.kwebmaker

Corporate social responsibility expenditure — Business expenditure — Amendment providing for disallowance of such expenditure — Circular issued by the CBDT stating amendment to have effect from A. Y. 2015-16 onwards — Binding on the Department — Corporate social responsibility expenditure for earlier years allowable.

2 Principal CIT vs. PEC Ltd and Anr
[2023] 451 ITR 436 (Del):
A. Ys.: 2013-14, 2014-15
Date of order: 29th November, 2022
Section 37 of ITA 1961

Corporate social responsibility expenditure — Business expenditure — Amendment providing for disallowance of such expenditure — Circular issued by the CBDT stating amendment to have effect from A. Y. 2015-16 onwards — Binding on the Department — Corporate social responsibility expenditure for earlier years allowable.

For the A.Ys. 2013-14 and 2014-15, the AO disallowed the claim of the assessees under section 37 of the Income-tax Act, 1961 of the expenses on account of corporate social responsibility endeavor undertaken by them. According to the Department, the funds utilized by the assessees to effectuate their corporate social responsibility obligations involved application of income and not an expense incurred wholly and exclusively for carrying on the business.

The Tribunal relied upon Circular No. 1 of 2015 dated 21st January, 2015 issued by the CBDT and held that the amendment brought about in section 37(1) by the way of Explanation 2 was prospective in nature and was not applicable for the A. Ys. 2013-14 and 2014-15, and accordingly deleted the disallowances.

On appeals by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) Explanation 2 was inserted in section 37 of the Income-tax Act, 1961 by the Finance (No. 2) Act, 2014 with effect from April 1, 2015. The Memorandum which was published along with the Finance (No. 2) Bill, 2014 clearly indicated that the amendment would take effect from April 1, 2015 and, accordingly, would apply in relation to A. Y. 2015-16 and subsequent years. This position is also exemplified in the circular dated January 21, 2015 ([2015] 371 ITR (St.) 22) issued by the CBDT.

ii) Circulars issued by the CBDT were binding on the Department. Therefore, the Tribunal had not erred in allowing the deduction claimed by the assessees u/s. 37 of the expenses incurred for their corporate social responsibility endeavours.”

shailesh.kwebmaker

Charitable purpose — Registration — Cancellation of registration — Condition precedent for cancellation — Registration granted after considering genuineness of the institution — Cancellation of registration on same provisions in trust deed — Not valid.

1 Sri Ramjanki Tapovan Mandir vs. CIT(Exemption)
[2023] 451 ITR 458 (Jhar)
Date of order: 3rd November, 2022
Section 12AA of ITA 1961:

Charitable purpose — Registration — Cancellation of registration — Condition precedent for cancellation — Registration granted after considering genuineness of the institution — Cancellation of registration on same provisions in trust deed — Not valid.

The assessee was registered under section 12AA of the Income-tax Act, 1961. By order dated 4th September, 2018 the CIT (Exemptions), Ranchi cancelled the registration. This was upheld by the Tribunal.

On appeal by the assessee the Jharkhand High Court framed the following substantial questions of law:

“(1) Whether the registration once granted under section 12AA of the Income-tax Act, 1961 could be cancelled on the basis of same set of provision of the trust which were examined earlier ?

(2) Whether the Income-tax authorities have the jurisdiction under section 12AA(3) of the Income-tax Act, 1961 to question the legality and propriety of the trust deed of the assessee or its inquiry is limited to the conditions stipulated under section 12AA(3) namely,—

(i) that the activities of the trust are not genuine, or

(ii) are not being carried out in accordance with the objects of the trust?

(3) Whether in the facts and circumstances of the case, the findings of the learned Income-tax Appellate Tribunal that the appellant failed to give satisfactory explanation regarding the sale proceeds which is utilized for charitable objects of the trust, is perverse?”

The High Court allowed the appeal and held as under:

“i) Section 12AA(3) of the Income-tax Act, 1961, contemplates existence of two contingencies for cancellation of the registration already granted, namely: (i) If the activities of the trust are not genuine ; or (ii) are not being carried out in accordance with the objects of the trust.

ii) The trust deed is an understanding between the author of the trust and its trustee, and, the Income-tax Department is not authorized to comment on execution of the trust deed. Once registration has been granted to a charitable trust u/s. 12AA of the Act after being satisfied about the genuineness of the activities of the trust, it cannot be cancelled on the basis of the same set of provisions of the trust which were examined earlier.

iii) It is trite law that the Tribunal cannot travel beyond the reasons recorded in the order before it and develop a complete de novo case for the Revenue, which was not the basis of the order passed by the authority.

iv) It was an admitted fact that registration u/s. 12AA of the Act was granted to assessee-trust on the basis of the trust deed dated September 20, 2005. It was further an admitted fact that in the trust deed dated September 20, 2005, it was specifically recorded, inter alia, that the lands of the trust were under threat of encroachment by local inhabitants, and, in order to save the land in question, it was felt necessary to utilize the land by giving it for development for construction of buildings and flats and the proceeds received from consideration amount were to be utilized for the purposes of the trust. On the basis of the same trust deed, the benefit of exemption u/s. 12A of the Act was granted by granting registration to the trust u/s. 12AA. However, notice was issued to the trust dated December 18, 2017 directing the trust to show cause, inter alia, as to why its registration should not be cancelled for violation of the aims and objectives mentioned in the trust deed and memorandum of association. Thereafter, the CIT (Exemptions) passed order dated September 4, 2018 cancelling the registration granted in favour of the assessee-trust.

v) The CIT(Exemptions), while cancelling the registration, went beyond the terms of the trust deed and proceeded to cancel the registration recording, inter alia, that the trust deed dated September 20, 2005 was contrary to the wishes of the founder of the trust and the earlier instruments of trust, i. e., trust deeds of the years 1948 and 1987. Thus, the CIT(Exemptions) clearly travelled beyond the scope of inquiry as contemplated u/s. 12AA(3) for declaring that the activities of the trust were not genuine. The Supreme Court, in clear terms, held that u/s. 44 of the Bihar Hindu Religious Trust Act, 1950, a religious trust has power to transfer its immovable property after taking previous sanction, and, that the deity could transfer its land for fulfilling its objectives. Thus, the finding rendered by the CIT(Exemptions) for cancellation of the registration certificate was directly contrary to the order passed by the Supreme Court in the case of the assessee-trust itself.

vi) The Tribunal had upheld the order of the CIT(Exemptions). The Tribunal despite the order of the Supreme Court, being brought to its notice, held that the activity of the trust was not genuine and bona fide, as the Pujari of the trust changed the original trust deeds and had violated the objects of the trust in transferring the property of the trust. This finding of the Tribunal was not sustainable in the eye of law. That apart, the Tribunal had clearly travelled not only beyond the show-cause notice, but, also the order passed by the CIT(Exemptions). In an earlier proceeding pertaining to the year 2013-14, the Tribunal had clearly held that the trust deeds were not relevant for allowing the benefit of exemption and the income derived from transfer of property was as per the objects of the trust. The CBDT Instruction No. 883-CBDT F. N. 180/54/72-IT (AI) dated September 24, 1975 stated that the investment of net consideration received on the transfer of a capital asset in fixed deposit with a bank for a period of six months or above would be regarded as utilization of the net consideration for acquiring another capital asset within the meaning of section 11(1A) of the Income-tax Act. Admittedly, the assessee-trust had deposited the sale proceeds in fixed deposit with the bank for a period of more than six months and, thus, it could not be said that the assessee-trust had utilised the sale proceeds contrary to the objects of the trust. The cancellation of registration was not valid.

vii) Accordingly, the instant appeal is allowed and the questions of law framed at the time of admitting the appeal are answered in the affirmative in favour of the appellant.”

shailesh.kwebmaker

Section 69A r.w.s. 115BBE and section 153A – Where cash deposits made in bank accounts of the proprietorship concern during demonetization period were routed through regular books of account of the assessee which were not rejected by AO and no incriminating material was found during the search conducted at the premises of the sister concern of the assessee to point out that she introduced her own unaccounted money in her proprietorship concern in the garb of sale to its sister concern then additions made by the AO in respect of such cash deposit were merely based on surmise and conjectures and, thus, same were to be deleted.

3 Tripta Rani vs. ACIT

[2022] 97 ITR(T) 389 (Chandigarh – Trib.)

ITA No.: 135 (CHD.) OF 2021

A.Y.: 2017-18

Date of order: 13th June, 2022

Section 69A r.w.s. 115BBE and section 153A – Where cash deposits made in bank accounts of the proprietorship concern during demonetization period were routed through regular books of account of the assessee which were not rejected by AO and no incriminating material was found during the search conducted at the premises of the sister concern of the assessee to point out that she introduced her own unaccounted money in her proprietorship concern in the garb of sale to its sister concern then additions made by the AO in respect of such cash deposit were merely based on surmise and conjectures and, thus, same were to be deleted.

FACTS

The assessee was a proprietor of two concerns namely; ‘W’ and ‘S,’ and was engaged in the business of trading of textiles. The assessee was also engaged in the purchase and sale of cloth to its sister concern one R group. A search was conducted at premises of R group under section 132(1). Consequently, notice under section 153A was issued to the assessee. Pursuant to the said notice, the assessee filed return of income which reflected same income as filed in original return.

During the assessment proceedings, the AO observed that during the demonetization period, the assessee deposited Rs. 10 lakhs and Rs. 17 lakhs in the bank accounts of her proprietorship concerns ‘W’ and ‘S’ The AO required the assessee to submit details related to cash deposits along with certified copies of bank statements. The assessee explained to the AO that the cash deposits in the bank accounts of respective proprietorship concerns were out of sales made to its sister concern ‘R’ group. However, despite such explanation, the AO held that in case of proprietorship concern ‘S’, the assessee failed to submit any satisfactory reply and thus made additions under section 69A on the grounds that the assessee introduced own unaccounted money in the garb of sales to sister concern during the demonetization period.

On appeal, the CIT (A) upheld the decision of the AO. Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that the AO had no sound reason to reject the contention of the assessee especially when the cash deposits in the bank account of ‘S’ have been routed through the regular books of account of the assessee. Even the books of account have not been rejected and the AO had accepted the sales as well as purchases and also the expenses claimed by the assessee and had only found fault with the quantum of cash deposits during the demonetization period. Thus, apparently, this impugned addition had been made without any foundation and the AO had acted on mere surmise and conjectures without duly appreciating the undisputed fact that he himself had accepted the books of account. The CIT (A) had also upheld the findings of the AO without assigning any cogent reason and he also seemed to have simply approved the addition without proper appreciation of facts. Further, on the same set of facts, the AO had accepted the cash deposit of Rs. 17 lakhs in another proprietorship concern of the assessee namely ‘W’ but had proceeded to doubt the cash deposited in the proprietorship concern ‘S’ without any cogent reason.

It was also noted by the Tribunal that the captioned case was a search case and even during the course of search no incriminating material was found which would point out towards the assessee introducing her unaccounted cash into the books of account under the garb of sales or receipts from sister concern.

Therefore, the view taken by the CIT (A) in upholding the addition of Rs. 10 lakhs was set aside by the Tribunal and the AO was directed to delete the same.

shailesh.kwebmaker

Section 80-IB r.w.s 154 and Section 143 – Where the assessee’s claim for deduction under section 80-IB was rejected for want of filing of an audit report, in view of CBDT’s Circular No. 689, dated 24th April, 1984, the AO was required to consider rectification application filed by the assessee-company since a copy of said report in Form 10CCB was uploaded by the assessee on receipt of intimation under section 143(1).

2 Satish Cold Storage vs. DCIT

[2022] 97 ITR(T) 601 (Lucknow – Trib.)

ITA Nos.: 76 & 77 (LKW.) of 2021

A.Y.: 2017-18 & 2018-19

Date of order: 25th May, 2022

Section 80-IB r.w.s 154 and Section 143 – Where the assessee’s claim for deduction under section 80-IB was rejected for want of filing of an audit report, in view of CBDT’s Circular No. 689, dated 24th April, 1984, the AO was required to consider rectification application filed by the assessee-company since a copy of said report in Form 10CCB was uploaded by the assessee on receipt of intimation under section 143(1).

FACTS

The assessee had claimed deduction under section 80-IB of the Income-tax Act, 1961. However, the auditor of the assessee omitted to upload the audit report in FORM-10CCB along with the return of income. The deduction under section 80-IB was denied in the intimation issued under section 143(1). After the receipt of intimation under section 143(1) of the Income-tax Act, 1961, the assessee uploaded the copy of audit report in FORM 10CCB and filed a rectification application under section 154 against the said intimation. The audit report was rejected by the Central Processing Unit (CPC).

Thereafter an appeal was filed before Ld. CIT (A) against the order passed by the CPC under section 154.

The CIT (A) dismissed the appeal by holding that no mistake was apparent from the record. Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that CIT (As) while rejecting the appeal, had escaped the contents of Circular No. 689 dated 24th August, 1984. which clearly directs the Officers to allow rectification under section 154 for non-filing of audit report or other evidence which could not be filed with the return of income.

The Tribunal, by relying upon the decision of the Hon’ble High Court of Karnataka in the case of Mandira D Vakharia [2001] 250 ITR 432 (Kar.), held that the assessee would be entitled to the deduction in rectification under section 154 to the extent permitted by the Board’s Circular No.669 dated 25th October, 1993 and Circular No.689 dated 24th August, 1984. The AO was not right in law in disallowing the rectification application only on the grounds that the assessee had failed to furnish the audit report along with the return of income.

shailesh.kwebmaker

Section 10 (38) r.w.s. 68 – Where the assessee claimed an exemption under section 10(38) towards long-term capital gains earned on the sale of shares alleged to be penny scrip and furnished various documentary evidences in the form of copies of contract notes, DEMAT account, details of share transactions, etc. in support of the claim, then onus casted upon assessee in terms of section 68 was discharged and therefore impugned addition made against alleged bogus LTCG was to be deleted.

1 Jatinder Kumar Jain vs. ITO

[2022] 97 ITR(T) 403 (Chandigarh – Trib.)

ITA No.: 338 (CHD) OF 2018

A.Y.: 2013-14

Date of order: 14th June, 2022

Section 10 (38) r.w.s. 68 – Where the assessee claimed an exemption under section 10(38) towards long-term capital gains earned on the sale of shares alleged to be penny scrip and furnished various documentary evidences in the form of copies of contract notes, DEMAT account, details of share transactions, etc. in support of the claim, then onus casted upon assessee in terms of section 68 was discharged and therefore impugned addition made against alleged bogus LTCG was to be deleted.

FACTS

The assessee-company had purchased shares of Maple Goods Ltd (MGL) through cheque and the identity of the broker had been furnished. Due to the order of High Court Kolkata, MGL along with Seaview Supplier Ltd (SSL) and Matrix Barter Pvt Ltd (MBL) were amalgamated and as a consequence, the assessee was allotted 7,900 shares of Access Global Ltd (AGL). Subsequently, the assessee sold these shares of AGL through a bank channel. It claimed long-term capital gain arising on sale of the said shares as exempt under section 10(38).

The AO received the report of the Investigation Wing wherein AGL had been allegedly identified as one of the penny stock companies. In the said report, it was alleged that the price of shares of AGL had been artificially rigged to create a non-genuine long-term capital gain. On the basis of the said report, The AO inferred that the assessee had allegedly earned bogus long-term capital gain on sale of shares of AGL through another alleged bogus client company, namely Ashok Kumar Kayan (AKK) and accordingly, came to conclusion that AKK had provided bogus long term capital gain to the assessee and other companies, and thus denied the assessee’s claim of exemption and made addition of the long term capital gain under section 68.

During the course of the assessment proceedings, the assessee had furnished documentary evidences which included copies of contract notes, DEMAT account, details of share transactions, contract notes giving details like trade number, trade time, contract note number, settlement number, details of service tax payment, securities transaction tax paid and the brokerage paid to the broker. It was also demonstrated by the assessee that the purchase of shares of MGL had been made through cheque in June, 2011. The assessee had also demonstrated that, subsequently, the sale proceeds from the shares of AGL were received again through banking channel. Apart from this, the assessee had also filed the judgment of the High Court ordering amalgamation of three companies MGL, SSL and MBL as a consequence to which the assessee was allotted 7,900 shares of AGL. The assessee had also furnished a copy of letter addressed to the assessee by MGL which showed the distinctive number of shares allotted to the assessee along with the certificate number and the share folio number.

The CIT(A) upheld the addition made by the AO. Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

It was observed by the Tribunal that all these documents have apparently been accepted by the lower authorities in as much as neither the AO nor the CIT (A) had pointed out any defect in these documents. The statements of various persons were recorded. But nowhere in the statements, the name of the assessee was referred to.

The assessee had demonstrated with substantial evidence before the AO that the actual purchase and sale of the shares took place, such shares had distinctive numbers, the transactions were routed through the normal banking channels and the shares had been allotted to the assessee subsequently under an order of amalgamation/merger.

The Tribunal also observed that when the AO had received the report of the Investigation Wing, he ought to have conducted an independent enquiry to examine and verify the involvement of the assessee in the alleged bogus long-term capital gain claim rather than simply and blindly following the report and the statement to make a case against the assessee.

Accordingly, the Tribunal held that since the assessee had successfully discharged the onus casted upon him in terms of section 68, the impugned addition had no feet to stand.

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Letter of Allotment and Receipt of Immovable Property

ISSUE FOR CONSIDERATION

Section 56(2) provides for the taxability of certain receipts, which inter alia include the receipt of any immovable property, either without consideration or for a consideration which is less than its stamp duty value. When taxability of such receipts was introduced for the first time vide clause (vii) of section 56(2), it was applicable only if the immovable property was received without consideration by the assessee on or after 1st October, 2009. The Finance Act, 2013 amended the provision of clause (vii) with effect from AY 2014-15, expanding its scope to cover the receipt of an immovable property for a consideration, if the consideration was lesser than the stamp duty value of the said immovable property.

The said clause (vii) of section 56(2) was applicable only to individuals and HUFs. However, thereafter, the Finance Act, 2017 made clause (vii) inapplicable to receipts after 31st March, 2017. Receipts subsequent to that date were brought to tax under clause (x) in the hands of all types of assessees. The taxability under both these clauses is subject to further conditions and several exclusions.

In the real estate market, when the immovable property is bought from a builder in a project which is underconstruction, it is a common practice that the builder will first issue a letter of allotment upon finalization of the deal and receipt of the booking amount. Thereafter, it will be followed by execution of a detailed agreement for sale and its registration. Even as per the provisions of the Real Estate (Regulation and Development) Act, 2016, it is obligatory for the promoter to enter into an agreement and to get it registered only when a sum of more than 10 per cent of the total consideration is received from the buyer. Thus, generally, the agreement for sale is not executed and registered immediately when the assessee books any property with the builder in an under-construction project and pays booking amount not exceeding 10 per cent of the total consideration.

If, in such cases, the year in which the assessee booked the property and received the letter of allotment is different from the year in which the agreement for sale has been executed and registered, then the issue arises as to in which year the assessee should be considered to have ‘received’ the immovable property. The Mumbai bench of the tribunal has considered the year in which the agreement for sale was executed as the year in which the property was effectively received by the assessee, and the Jaipur bench of the tribunal has considered the year in which the letter of allotment was issued as the year in which the property was effectively received by the assessee.

SUJAUDDIAN KASIMSAB SAYYED’S CASE

The issue first came up for consideration of the Mumbai bench of the tribunal in the case of Sujauddian Kasimsab Sayyed vs. ITO (ITA No. 5498/Mum/2018). The assessment year involved in this case was 2015-16.

In this case, the assessee had agreed to purchase flat No. 2901 on 29th Floor, C-Wing, in the building named as Metropolis, Andheri (West), Mumbai admeasuring area of 123.36 sq. m (carpet area) for a consideration of Rs. 88,30,008, whereas its stamp duty value was determined at Rs. 1,88,44,959. The assessee had originally booked this flat with M/s Housing Development & Infrastructure Ltd on 27th April, 2012 and an advance payment of Rs. 3,00,000 was also made on 27th April, 2012. The purchase deed was executed and registered on 10th September, 2014 i.e. during the year under consideration, apart from the payment of Rs. 3,00,000 at the time of booking of the flat, the assessee had made the payment of Rs. 14,66,001 till the time of execution of the agreement. The balance amount of Rs. 70,64,007 was still payable, and it was to be paid in instalments as specified in the agreement.

During the course of assessment proceedings, the AO asked the assessee to explain why the difference of Rs.1,00,14,951 (being the stamp duty value) should not be treated as income from other sources under section 56(2)(vii)(b). Not being satisfied with the reply of the assessee, the AO made the addition of such difference while passing the assessment order.

Aggrieved by the order of the AO, the assessee filed an appeal before the CIT(A). Before the CIT(A), it was contended that the assessee had booked the said flat on 27th April, 2012 on which date the letter of allotment was issued as well as the amount of Rs.3,00,000 was also paid. The copies of the allotment letter and receipt were also placed on record. On this basis, it was contended that these dates were falling in the previous year relevant to AY 2013-14, in which year the amended provisions of section 56(2)(vii)(b) were not applicable. The amendment made by the Finance Act, 2013 bringing to tax the receipt of immovable property for a consideration lesser than the stamp duty value was applicable only w.e.f. 01st April, 2014

The CIT (A) dismissed the appeal of the assessee, mainly on the ground that 27th April, 2012 could not be considered to be the date of purchase of the flat, as it was merely an allotment on that date, and the real transaction of purchase of flat had been entered on 10th September, 2014 by a registered deed. It was held that for any purchase or sale deed of immovable property to be covered under section 53A of the Transfer of Property Act, it was required to be a registered instrument enforcing civil law rights. In the absence of registration, the transaction would not fall under section 2(47)(v) of the Act. The CIT (A) placed reliance on the decisions of the tribunal in the case of Saamag Developers Pvt Ltd [TS-26-ITAT-2018(DEL) order dated 12th January, 2018] wherein it was held that registration under section 17(1A) of the Registration Act, 1908 was a pre-condition to give effect to section 53A of the Transfer of Property Act. He also relied upon the decision in Anil D. Lohana [TS-466-ITAT-2017(MUM) order dated 25th September, 2017], wherein it was held that the holding period of the property is to be reckoned from the date on which the assessee got right over the property by virtue of sale agreement.

Before the tribunal, the assessee submitted that the letter of allotment was executed with the builder on 27th April, 2012, which conferred the right to obtain conveyance of the said flat. It therefore became an asset under section 2(14) and therefore, the date of letter of allotment should be considered as the date of receipt of immovable property. Since the allottee would get title to the property on issuance of an allotment letter, and the payment of instalments would be only a consequential action upon which the delivery of possession would follow, it was claimed that the assessee was having a right in the property since 27th April, 2012 i.e. the date of allotment. Therefore, the effective date of agreement was 27th April, 2012, which pertained to A.Y. 2013-14. On this basis, it was argued that no addition should have been made in the assessment year under consideration.

The assessee relied upon the following decisions in support of his contentions –
Babulal Shambhubhai Rakholia vs. ACIT (ITA No. 338/Rjt/2017 for A.Y. 2014-15),
Sanjay Kumar Gupta vs. ACIT (ITA No. 227/JP/2018 for A.Y. 2014-15),
Anita D. Kanjani vs. ACIT (2017) 79 taxmann.com 67 (Mumbai-Trib),
DCIT vs. Deepak Shashi Bhusan Roy (2018) 96 taxmann.com 648 (Mumbai-Trib),
Pr. CIT vs. Vembu Vaidyanathan (2019) 101 taxmann.com 436 (Bombay HC) and
ACIT vs. Shri Keyur Hemant Shah (ITA No. 6710/Mum/2017 for AY 2013-14 dated 2nd April, 2019)(Mumbai ITAT).

The tribunal held that the decisions of Anita D. Kanjani, Deepak Shashi Bhusan Roy and Keyur Hemant Shah were not applicable to the case under dispute, since the issue under consideration in those cases was the period of holding of the property – whether to be reckoned from the date of issue of the letter of allotment or from the date when the agreement was executed. With respect to the decision in the case of Vembu Vaidyanathan, the tribunal held that the High Court in that case had considered the date of allotment would be the date on which the purchaser of a residential unit could be stated to have acquired the property for the purposes of section 54. In that case, the High Court had relied upon the CBDT Circular No. 471 dated 15th October, 1986 and Circular No. 672 dated 16th December, 1993 and had observed that there was nothing on record to suggest that the allotment in the construction scheme promised by the builder in that case was materially different from the terms of allotment and construction by DDA as referred to in those circulars. By observing that the issue in the case under consideration was not the allotment in construction scheme promised by the builder which is materially the same as the terms of the allotment and construction by DDA, the tribunal held that the decision in Vembu Vaidynathan was distinguishable.

The decision in Babulal Shambhubhai Rakholia was also distinguished on the grounds that, in that case, the stamp papers were purchased on or before 30th March, 2013 and the transferor as well as the transferee had put their signature on the sale deed on 30th March, 2013. It was on this basis, it was held that section 56(2)(vii)(b) would not be applicable. Similarly, the decision in Sanjay Kumar Gupta was also distinguished as in that case the assessee had claimed to have purchased the property in question vide unregistered agreement dated 28th March, 2013 and the AO considered the date of transaction as of the sale deed which was dated 26th April, 2013. Though the agreement dated 28th March, 2013 was not registered, it was attested by the notary and the payment of part of the consideration on 28th March, 2013 was duly mentioned in the sale deed dated 26th April, 2013. Under these facts, it was held in that case, that the transaction would be treated to have been completed on 28th March, 2013 as the agreement to sell dated 28th March, 2013 had not been held to be bogus.

The tribunal further held that there was no dispute that the “Agreement for Sale” was dated 10th September, 2014. The “Letter of Allotment” dated 27th April, 2012 could not be considered as the date of execution of agreement by any stretch of imagination. The immovable property was not conveyed by delivery of possession, but by a duly registered deed. Further, it was the date of execution of registered document, not the date of delivery of possession or the date of registration of document which was relevant. The tribunal relied upon the decisions in the cases of Alapati Venkataramiah vs. CIT (1965) 57 ITR 185 (SC), CIT vs. Podar Cements Pvt Ltd (1997) 226 ITR 625 (SC).

On the basis of the above, the tribunal upheld the order of the CIT (A) and dismissed the appeal of the assessee.

NAINA SARAF’S CASE

The issue, thereafter, came up for consideration of the Jaipur bench of the tribunal in Naina Saraf vs. PCIT (ITA No. 271/Jp/2020).

In this case, in the previous year relevant ot the AY 2015-16, the assessee had purchased an immovable property i.e. Flat No. 201 at Somdatt’s Landmark, Jaipur for a consideration of Rs.70,26,233 as co-owner with 50 per cent share in the said property. The stamp duty value was determined at Rs.1,03,12,220 as against the declared purchase consideration of Rs.70,26,233.

The case of the assessee was selected under CASS for the reason of “Purchase of property”. During the course of the assessment proceeding, the assessee filed registered purchase deed and other details as required by the AO. Finally, the AO after examining all the details and documents filed, accepted the return of income vide his order dated 21st December, 2017 passed under section 143(3).

Later on, the PCIT observed that the AO had failed to invoke the provisions of section 56(2)(vii)(b) with respect to the difference between the stamp duty value and the purchase consideration amounting to Rs.32,85,987, and, therefore, considered the order of the AO as erroneous and prejudicial to the interest of the revenue by passing an order under section 263 of the Act.

The assessee filed an appeal before the tribunal against the said order of the PCIT passed under section 263. Before the tribunal, the assessee not only challenged the jurisdiction of the PCIT to invoke the provisions of section 263, but also disputed the applicability of section 56(2)(vii)(b) to her case on merits. It was submitted that the assessee applied for purchase of Flat No.201 on 23.09.2006 (as mentioned in allotment letter) and paid Rs.7,26,500 on 3rd October, 2006. The seller company M/s SDB Infrastructure Pvt Ltd issued allotment letter on 06th March, 2009 to the assessee. On 11th November, 2009, by signing the allotment letter as token of acceptance, the assessee agreed to purchase the property measuring 2,150 sq ft at the rate of Rs. 3,050 per sq. ft. for a sum of Rs. 65,57,500 as per terms and conditions mentioned in the allotment letter dated 6th March, 2009. The formal agreement was exceuted and registered on 09th December, 2014. It was also submitted that the consideration of Rs.45,26,233 was already paid before 5th April, 2008 i.e. even prior to the date on which the allotment letter was issued.

On the basis of the above, the assessee contended that the purchase transaction effectively took place in AY 2010-11 itself, and not in AY 2014-15 when the actual registration took place. Therefore, the case of the assessee would be governed by the pre-amended provision of section 56(2)(vii)(b), which applied only where there was a total lack of consideration and not when there was inadequacy of purchase consideration.

Further, the assessee also challenged the denial of benefit of the first proviso to section 56(2)(vii)(b) by the PCIT, on the grounds that the date of the sale deed and the date of its registration were the same. It was contended that a bare perusal of the allotment letter showed that all the substantive terms and conditions which bound the parties, creating their respective rights and obligations were contained therein. The said allotment letter also provided for giving possession of the property within a period of 30 months from the date of allotment (except if due to some unavoidable reasons). Hence, there was an offer and acceptance by the competent parties for a lawful purpose. Thus, such allotment letter was having all the attributes of an agreement as per the provisions of the Indian Contract Act, 1872.

In so far as the PCIT’s observation that the allotment letter was provisional was concerned, it was submitted that the provisional nature of allotment was only to take care of unexpected happenings, such as changes by the sanctioning Authority or by the Architect or by the Builder, which might result in increase or decrease in the area, or absolute deletion of the apartment from the sanctioned plan. But for all intents and practical purposes, it was a complete agreement between the parties, which was even duly acted upon by both of them.

Further, the assessee contended that the relevant provision used the word ‘receives’ but did not use the word ‘purchases’ or ‘transfers’. Therefore, the legislature never contemplated the receipt of the subjected property as a complete formal transfer by way of registration of the property purchased in order to invoke section 56(2)(vii)(b)(ii). This would have had the effect of deferring the taxability, and resulted in late receipt of revenue from the taxpayer. On the contrary, by using the word ‘receives’, the legislature had advanced the taxability (provided the assesse clearly falls within the four walls of the provision as existed on the date of such receipt of the subjected property). The receipt of the property simplicitor happened in AY 2010-11, and not in the subject year i.e. AY 2014-15, where mere registration and other legal formalities were completed. The assesse’s right stood created and got vested at the time of the signing of the allotment letter itself by both the parties, on certain terms and conditions, and on specific purchase consideration. What happened later on was a mere affirmation / ratification by way of registration of the sale transaction in that year.

The tribunal perused the allotment letter and observed that it contained all the substantive terms and conditions which create the respective rights and obligations of the parties i.e. the buyer (assessee) and the seller (the builder) and bind the respective parties. The allotment letter provided detailed specification of the property, its identification and terms of the payment, providing possession of the subjected property in the stipulated period and many more. Evidently the seller (builder) had agreed to sell and the allottee buyer (assessee) had agreed to purchase the flat for an agreed price mentioned in the allotment letter. What was important was to gather the intention of the parties and not go by the nomenclature. Thus, there being the offer and acceptance by the competent parties for a lawful purpose with their free consent, the tribunal found that all the attributes of a lawful agreement were available as per provisions of the Indian Contract Act, 1872. It was also noted by the tribunal that such agreement was acted upon by the parties, and pursuant to the allotment letter, the assessee paid a substantial amount of consideration of Rs.45,26,233, as early as in the year 2008 itself. With respect to the PCIT’s observation that it was a mere provisional allotment, the tribunal held that it was a standard practice to incorporate the provision for increase or decrease in area due to unexpected happening so as to save the builder from unintended consequences. On this basis, it was concluded that the assessee had already entered into an agreement by way of allotment letter on 11th November, 2009, falling in AY 2010-11. Having said so, it was held that the law contained in section 56(2)(vii)(b) as it stood at that point of time, did not contemplate a situation of a receipt of property by the buyer for inadequate construction.

Accordingly, the tribual quashed the order of the PCIT, on the grounds that the assessment order, which was subjected to revision under section 263, was not erroneous and prejudicial to the interest of the revenue.

An identical view has been taken by the Mumbai bench of the tribunal in the case of Indu Kamlesh Jain vs. PCIT (ITA No. 843/Mum/2021) and Siraj Ahmed Jamalbhai Bora vs. ITO (ITA No. 1886/Mum/2019).

With respect to the applicability of section 43CA which has come in force with effect from A.Y. 2014-15, in cases where the allotment letters were issued prior to 1st April, 2013, diagonally opposite views have been taken by the Mumbai and Jaipur benches of the tribunal. In the case of Spenta Enterprises vs. ACIT [TS-63-ITAT-2022(Mum.)], it has been held that the provisions of section 43CA would not apply in such cases. As against this, in the case of Spytech Buildcon vs. ACIT [2021] 129 taxmann.com 175 (Jaipur – Trib.), it has been held that merely because an agreement had taken place prior to 1st April, 2013, it would not take away the transaction from the ambit of provisions of section 43CA. However, in the case of Indexone Tradecone (P) Ltd. vs. DCIT [2018] 97 taxmann.com 174 (Jaipur – Trib.), it was held that the provisions of section 43CA would not apply to a case where the agreement to sell was entered into much prior to 1st April, 2013, though the sale deed was registered after it came in force.

OBSERVATIONS

There are different stages through which a transaction of buying an immovable property passes, particularly when it has been bought from the builder in an ongoing project which is under construction and yet to be completed. These different stages can be broadly identified as under –

Allotment – When the person decides to buy a particular property and finalizes the relevant terms and conditions, the builder allots that particular property to that person by issuing a letter of allotment or a booking letter against the receipt of the booking amount. It contains the broad terms and conditions, which are the bare minimum required, such as identification of the property by its unique no., area of the property, total consideration to be paid, the time period within which the possession would be given etc. Normally, it is signed by both the parties i.e. the buyer as well as the seller.
Such an allotment letter is normally issued because it may not be feasible to execute the agreement for sale immediately. The execution of the agreement may take time due to its drafting and settlement, payment of stamp duty etc.
Agreement – After the necessary formalities are completed, the parties may thereafter proceed to execute an agreement which is popularly called as ‘agreement for sale’ and get it registered also. In order to safeguard the interest of the buyer, the relevant applicable local law may provide for restrictions on receipt of consideration in excess of certain limit, unless the necessary agreement has been executed and registered. For instance, as per the Real Estate (Regulation and Development) Act, 2016, it is obligatory for the promoter to enter into an agreement and to get it registered when a sum of more than 10 per cent of the total consideration is received from the buyer.

Possession – Upon completion of the construction, the builder hands over the possession of the property to the buyer in accordance with the terms and conditions as agreed.

The buyer is required to make the payment of the consideration as per the agreed terms throughout these stages. Normally, if the entire consideration as agreed has been paid, then the receipt of possession of the property is regarded as its deemed conveyance.

The first stage i.e. issuance of the allotment letter, may not be there in every case. But, the other two stages will normally be there in all cases, unless the property has been conveyed at the time of agreement itself and possession has also been handed over simultaneously.

Due to such multiple stages, several issues arise while applying the provisions of the Income-tax Act, some of which are listed below –

From what date should the assessee be considered as holding the property for determining whether it is short-term or long-term in accordance with the provisions of section 2(42A)?
When should the assessee be considered to have purchased or constructed the residential house for the purpose of allowing exemption under section 54 or 54F?
When should the assessee be considered to have received the property under consideration for the purpose of section 56(2)(x)? Whether the first proviso to section 56(2)(x) applies in such case and whether the stamp duty value as on the date of the allotment letter can be taken into consideration?
If the assessee is the seller, when should he be considered to have transferred the property for the purpose of attracting the charge of capital gains or business income in his hands? Whether the first proviso to section 50C is applicable in such case and whether the stamp duty value as on the date of the allotment letter can be taken into consideration?

Though the controversies exist on each of the above issues, the scope of this article is to deal with the controversy with respect to the applicability of section 56(2)(x) only. The limited issue under consideration is whether can it be said that the assessee ‘receives’ an immovable property when a letter of allotment is issued to him by the seller or he ‘receives’ it only upon the execution of the agreement for sale. Though one may contend that the assessee does not receive the property on either, and he receives it only upon receipt of the possession of the property, such issue has not been dealt by the tribunals in the cases discussed above.

The primary reason as to why the allotment letter was not considered to be receipt of the immovable property by the Mumbai bench of the tribunal in the case of Sujauddian Kasimsab Sayyed (supra) was that the allotment letter was not considered to be in the nature of an agreement equivalent to an agreement for sale, resuling into receipt of the property in the hands of the assessee. Therefore, first and foremost, it is required to be examined whether the letter of allotment or the booking letter can be considered to be an agreement and is there any material difference between the allotment letter and the agreement for sale, because of which the assessee is considered to have received the property on execution of the agreement for sale but not on issue of the allotment letter.

At the outset, it is clarified that the contents of the allotment letter and other related facts would be very relevant to decide this aspect of the matter. In this article, the attempt has been made to discuss the issues, assuming that the allotment letter contains all the important terms and conditions necessary to be agreed upon in any transaction of purchase and sale of property as per the standard practice of the industry i.e. identification of specific unit no. of the property, its area, total consideration, schedule of payment and possession, etc.

The Indian Contract Act, 1872 simply defines an agreement that is enforceable by law as a contract. It further provides that all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void. Further, it also provides that the agreement need not be in writing, unless it is required so to be in writing by any other law in force. All the essential ingredients of a contract are present in the allotment letter, and, therefore, the same needs to be considered as a contract enforceable in the eyes of law.

In the case of Manjit Singh Dhaliwal vs. JVPD Properties Pvt Ltd (No. AT006000000000017 – decision dated 12th April, 2018), the issue before the Maharashtra Real Estate Appellate Tribunal was whether the allottees who had been issued only the letter of allotment and no agreement for sale had been executed could seek relief under the RERA Act or not. While holding that the complaint of the allottees would not fall for want of agreement for sale, the tribunal observed that the letter of allotment in that case stipulated the description of the property to be purchased, description of the payment schedule, the total cost, the necessary requisite permission, obligation to complete the projects and getting clarity to the title and, therefore, the cumulative effect of it would not be short of branding it to be the terms agreed upon between the parties. It was held that the agreement is a form of contract relating to offer, acceptance, consideration, time schedule, clarity of title and as to essence of time. The allotment letter incidentally was couched in such a fashion as to incorporate all the requisite terms. Hence, the absence of an agreement for sale would not scuttle the rights of allottees.

In the case of Shikha Birla vs. Ambience Developers Pvt Ltd (IA No. 418/2008 dated 20th December, 2008), the Delhi High Court was dealing with a suit against the developer for specific performance of the contract contained in the letter of allotment, and for direction to handover possession of the concerned property. In this case, the High Court held that an understanding to enter into a legally binding agreement does not result in a legally enforceable contract, but an understanding or a bargain is legally enforceable, if execution of a further document is to effectuate the manner in which the transaction already agreed upon by the parties is to be implemented. In the former case, execution of the agreement is a condition precedent. An agreement to enter into an agreement is not executable, but in the latter case, execution of a formal document is not a condition precedent and rights and obligations of the parties come into existence. A mere reference to a future formal contract will not in law prevent a binding bargain between the parties. On the facts of that case, the High Court held that, vide the allotment letter, the terms and conditions were ascertained and certain. Nothing was left to be negotiated and settled for future. Terms were agreed and the agreement for sale on a standard format was read and understood. It was a certain and concluded bargain. It was not a case where the parties were entering into a temporary understanding, which may or may not fructify into a binding bargain, and where execution of agreement for sale was a condition precedent for creating permanent obligations. A concluded contract therefore had come into existence. Therefore, the letters of allotment, in that case, were not regarded as in the nature of an understanding which did not create an enforceable agreement in law but only an understanding between the parties to enter into an enforceable agreement in future.

The Delhi High Court in the said case also referred to the decision of the Supreme Court in the case of Poddar Cement Pvt Ltd (supra) and held that the Supreme Court had also referred to with approval the need and requirement to continuously update and construe law in accordance with changes, ground realities to make it a living enactment, in tune with the present state of affairs.

Further, the clause in the allotment letter that the allottee shall not be entitled to enforce the same in a Court of Law was regarded as void by the Delhi High Court in view of section 28 of the Contract Act, 1872, by relying upon the decision of the Supreme Court in the case of Food Corporation of India vs. New India Assurance Company Ltd reported in AIR 1994 SC 1889, wherein it was held that every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to that extent.

In the context of the Income-tax Act, 1961, the Mumbai bench of the tribunal in the case of Indogem vs. ITO (2016) 160 ITD 405 (Mum) has already examined the issue as to whether the letter of allotment could be regarded as agreement giving equivalent benefits to the assessee under the Act and the relevant portion from this decision is reproduced below:

“First point for consideration is whether there is an agreement for acquisition of property between the builder and the assessee. Agreement means set of promises forming consideration for each other. Law does not require that an agreement shall always be in writing or if reduced into writing, it shall be in a particular/specific format. As could be seen from the record, the allotment letter runs into so many clauses and, in our view, it answers the description of an agreement. When all the terms agreed upon by the parties are reduced into writing in detail, nothing more is required than formal compliance with the stamp and registration requirements. On a careful perusal of this allotment letter, we find that it contains all the details that were agreed upon by the parties, as such, by no stretch of imagination could it be said that there is no valid agreement for acquisition of the property.”

In view of the above, it appears that the view taken by the Mumbai bench of the tribunal in the subsequent decision in the case of Sujauddian Kasimsab Sayyed was contrary to what was held in the decision as referred above of the co-ordinate bench.

There can be an equally strong argument to claim that, upon issuance of the allotment letter, what is received is not the immovable property itself, but only the right to receive it in future by executing a registered agreement at a later stage or by receiving its possession. This view can be further justified on the grounds that if the allotment letter is considered to be a receipt of the immovable property, then it would result in taxing the difference in that year itself (in a case where the allotment letter has been issued subsequent to 1st April, 2013 i.e. subsequent to the amendment), irrespective of whether it has then culminated into a registered agreement or has been cancelled due to any reason. In the case of Hansa V. Gandhi vs. Deep Shankar Roy (Civil Appeal No. 4509 of 2007), the Supreme Court has held that mere letter of intent, which was subject to several conditions, would not give any right to the allottee for purchase of the flats in question, till all the conditions incorporated in the letter of intent were fulfilled by the the proposed purchasers. Further, it was also held that if the same flat has been sold to the other buyer upon non-fulfillment of the conditions of the letter of intent, then it cannot be presumed that such subsequent buyer had knowledge about the previous transaction for want of registration of the said letter of intent.

However, even if the provisions of section 56(2)(x) are invoked for taxing the difference between the stamp duty value and the actual consideration in the year in which the agreement has been executed and registered, then the benefit of the first proviso to section 56(2)(x) needs to be extended. The first proviso states that where the date of agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for this purpose. In such a case, the letter of allotment is to be considered as the agreement fixing the amount of consideration, subject to fulfillment of the other conditions. Difference of opinion may exist only with respect to the nature of rights which the buyer derives on the basis of the letter of allotment, but certainly not with respect to the fact that the letter of allotment needs to be regarded as the agreement fixing the amount of consideration.

The view that the stamp duty value as on the date of allotment letter should be preferred over the stamp duty value as on the date of registration of the agreement for sale is supported by the following decisions:-

ITO vs. Rajni D. Saini (ITA No. 7120/Mum/2018)
Sajjanraj Mehta vs. ITO (ITA No. 56/Mum/2021)
Radha Kishan Kungwani vs, ITO [2020] 120 taxmann.com 216 (Jaipur – Trib.)

That being the position, where the inadequacy of the consideration has to be judged on the basis of the difference in valuation on a date before the amended law came into force, the better view seems to be that such transactions entered into at that point of time are not intended to be covered by the subsequent amendments.

Section 56(2)(x) and its predecessor clause(vii) provides for bringing to tax the cases of inadequate consideration on receipt of an immovable property. The term ‘property’ is defined in vide clause (d) of Explanation to s.56(2)(vii) which in turn includes an immovable property and sub-clause(i) thereof defines an ‘imovable property’ to be ‘land and building or both’. There is a reasonable consistency of the judiciary in restricting the scope of the term immovable property to the cases of land and building simpliciter and not to the cases of the rights in land and building. Please see Atul G.Puranik, 132 ITD 499 (Mum) which holds that even leasehold rights in land are not the ‘land’ simpliciter. Equating the ‘land and building’ to the case of a rights under a letter of allotment, issued at the time where the premises are yet under construction, perhaps is far -fetched and avoidable. Secondly, what is required for a charge of tax, under s.56(2). to be complete is the ‘receipt’ of a property ; such a property that can be regarded as land or building. Obviously, the receipt of a right under letter of allotment would not satisfy the requirement for a valid charge of tax. Under the circumstances, it is better to hold that the provisions of s.56(2)(x) are inapplicable in the year in which an allotment letter is issued in respect of the premises under construction. The charge of tax may be attracted in the year of receipt of the premises, Yasin Moosa Godil, 52 SOT 344(Ahd.), and in that year the benefit of the Provisos(s.43CA,50C and 56(2)(x)), while determining the inadequacy shall be ascertained w.r.t the allotment letter.

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Section 148 –Reopening – beyond the period of four years – Approval for issuance of notice:

24 MA Multi-Infra Development Pvt Ltd vs.

ACIT Circle- 3(2)(1) & Ors

[Writ Petition No. 1650 of 2022,

Date of order: 09th January, 2023, (Bom.) (HC)]

Section 148 –Reopening – beyond the period of four years – Approval for issuance of notice:

The assessee challenges the notice dated 31st March, 2021 under section 148 of the Act, for the A.Y. 2015-16, inter-alia, on the ground that since the same has been issued beyond the period of four years, approval for issuance of the same ought to have been obtained from the Principal Chief Commissioner of Income-tax in terms of section 151(ii) of the Act.

The Court observed that a perusal of the notice dated 31st March, 2021 issued under section 148 of the Act by the AO shows that the same has been issued after obtaining necessary satisfaction of Additional Commissioner of Income Tax, Range (3)(2), Mumbai. As per the objections filed by the revenue, the approval was obtained from the Additional Commissioner of Income Tax, Range (3)(2), Mumbai. The said officer, it is stated, was competent to grant approval in view of the applicability of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (for the sake of convenience, hereinafter referred to as ‘the Relaxation Act’).

It is stated that in terms of the Relaxation Act, the limitation inter-alia, under provisions of sections 151(i) and 151(ii) of the Act, which were originally expiring on 31st March, 2020, stood extended to 31st March, 2021. It was, thus, urged that since the Relaxation Act had extended the period of limitation, the authority which was otherwise supposed to grant approval in regard to cases falling within the ambit of section 151(i) of the Act could have granted approval beyond the period of three years based upon the Relaxation Act.

The Court in J.M. Financial & Investment Consultancy Services (P) Ltd. vs. Assistant Commissioner of Income Tax & Ors. [Writ Petition No.1050 of 2022 dated.4th April, 2022 ] has already taken a view holding that the Relaxation Act would apply only to cases where the limitation was expiring on 31st March, 2020 and since for the A.Y. 2015-16, the limitation period was six years which was to expire only on 31st March, 2022, the said provisions would not be applicable. It was held that while the time to issue notice may have been extended but that would not amount to amending the provisions of section 151 of the Act.

The petitioner urged that the case of the petitioner fell under section 149(b), and therefore, the period of limitation of six years for issuance of notice under section 148 for the A.Y. 2015-16 would expire on 31st March, 2022. It was, therefore, urged that the case of the petitioner was squarely covered by J.M. Financial & Investment Consultancy Services (P) Ltd.

Accordingly it was held that the approval for issuance of notice under section 148 ought not have been obtained from the Additional Commissioner of Income Tax but from the authority specifically mentioned under section 151(ii) of the Act.

The notice impugned notice dated 31st March, 2021 was quashed. The petition was allowed.

shailesh.kwebmaker

Unaccounted income – Bogus Long Term Capital Gains – Concurrent finding of fact – No substantial question of law :

23 Pr. Commissioner Of Income Tax-10 vs.

M/S. Rajat Finvest & Ors[ITA NO.13 OF 2023,

Date of order: 12th January, 2023, (Del.) (HC)]

[Arising out of ITAT order dated 12th September, 2019 for A.Y. 2010-2011 [ITA 13/2023], A.Y. 2009-2010 [ITA 14/2023] and A.Y. 2008-2009 [ITA 15/2023].

Unaccounted income – Bogus Long Term Capital Gains – Concurrent finding of fact – No substantial question of law :

The respondent/assessee is in the business of trading and investing in scrips. On 7th August, 2012, a survey was carried out by the appellant/revenue in exercise of powers under section 133A of the Income-tax Act, 1961, and according to the appellant/revenue, during investigation, the fact was revealed i.e., that the respondent/assessee had introduced unaccounted income in its books of accounts in the guise of long-term capital gains (LTCG), albeit, by first investing and then selling the shares of two entities i.e., REI Agro Ltd. [in short, “REI”] and REI Six Ten Ltd [in short, “REI Six”]. The respondent/assessee, against the LTCG, had claimed exemption from tax.

It is not in dispute, that REI is a listed company, and its shares were transacted on the stock exchange. The facts also show, that during the course of the survey on 7th August, 2012, the statement of one Mr. Brij Mohan Vyas was recorded. Mr. Brij Mohan Vyas, according to the appellant/revenue, is an employee of REI Agro Group. The shares of REI were bought and sold through brokers, on instructions of one Mr. Sandeep Kumar Jhunjunwala.

The AO has relied upon the details gathered by the Investigation Wing, to conclude that the respondent/assessee had introduced its unaccounted income to purchase and sell the shares of REI. Thus, based on the information gathered by the Investigation Wing, the AO concluded, that the entire set of transactions was a ‘sham’, and that the same had been configured to give the sale and purchase of shares by the respondent/assessee a legal framework. The Assessment Order was passed pursuant to reopening of assessment of the respondent/assessee under section 148 of the Act.

The CIT(A) via order dated 29th June, 2016 partly allowed the respondent/assessee’s appeals. The appellant/revenue preferred an appeal to the Tribunal.

The Tribunal considered the matter in great detail, and came to the conclusion that the order passed by the CIT(A) had to be confirmed.

The Hon. High Court noted that both the CIT(A) and the Tribunal have returned findings of fact. The important fact was that the respondent/assessee traded in shares and the respondent had converted a part of its stock-in-trade as investment. In A.Y. 2008-09, the respondent/assessee had declared profit from trading in shares of REI, and during that very year, the said shares were transferred to opening stock and were purchased under investment portfolio.

Further the statement made by Mr. Brij Mohan Vyas on 7th August, 2012 did not reveal that REI was manipulating share prices on the stock exchange. The involvement of Mr. Sandeep Kumar Jhunjunwala, based on whose instructions Mr. Brij Mohan Vyas acted, was to the extent as to the right time when shares of REI had to be bought and sold.

The observation of the AO, that the funds which flowed from REI in the form of unsecured loans to six companies, which were located in Gujarat, were unaccounted income of the respondent/assessee, appears to be based on assumptions and/or conjectures. No material to back the conclusion arrived at by the AO.

The appellant/revenue could not have bifurcated the purchase and sale transactions. Concededly, when the shares were purchased for trading purposes in earlier years, the profits so generated were accepted, and at the point in time, when these scrips were converted into investment and sold during the Assessment Years in issue, they could not be treated as bogus transactions. The fact that shares were traded on stock exchange after paying securities transaction tax, and that money had been received through banking channels only demonstrated that they were not bogus transactions.

The Court noted that there are concurrent findings of facts returned by the CIT(A) as well as the Tribunal. The proposed questions of law by the appellant/revenue do not state that the findings returned by the Tribunal or the CIT(A) are perverse.

Thus, the appeals were, dismissed, as no substantial question of law arose for consideration.

shailesh.kwebmaker

Section 264 – Revision – amount had been taxed twice – powers under section 264 of the Act were not limited to correcting any errors committed by the authorities but also extended to errors committed by the assessee.

22 Interglobe Enterprises Pvt Ltd vs.

Pr. Commissioner of Income

Tax Delhi -4 & Ors.

[Writ Petition (L) NO. 11708 OF 2021 & CM APP. 36194 OF 2021

Date of order: 20th January, 2023, (Delhi) (HC) ]

Section 264 – Revision – amount had been taxed twice – powers under section 264 of the Act were not limited to correcting any errors committed by the authorities but also extended to errors committed by the assessee.

The controversy, in the present case, relates to the liability to pay tax on the interest received on income tax refund pertaining to the A.Ys. 2009-10 and 2010-11. The assessee had credited interest amounting to Rs. 1,61,38,250 in its books of account for the F.Y. 2013-14. This amount included a sum of Rs. 1,29,01,031 as interest on income tax refund for the A.Y. 2009-10 and Rs. 22,66,836 as interest on income tax refund for the A.Y. 2010-11. Thus, an aggregate amount of Rs. 1,51,67,867, on account of interest on income tax refund(s), was included as income for the F.Y. 2013-14. The assessee included the said amount in its return of income for the A.Y. 2014-15 and paid tax on the same.

The assessee’s return for the A.Y. 2014-15 was picked up for scrutiny and an assessment order dated 28th October, 2016 was passed under section 143(3) of the Act. There is no dispute that income, as assessed, included the said amount of Rs. 1,51,67,867 as interest on income tax refund(s) pertaining to the A.Ys. 2009-10 and 2010-11.

Thereafter, by a notice dated 15th February, 2017, issued under section 148 of the Act, the assessee’s assessment of income for the year 2012-13 was reopened. The interest on refund of tax, for the years 2009-10 and 2010-11, was sought to be included in the taxable income for the A.Y. 2012-13 on the grounds that the said interest was received during the previous year 2011-12.

The petitioner, inter alia, contended that the said amount was included in the income of the assessee for the A.Y. 2014-15 and thus, had not escaped assessment warranting any addition in the income changeable to tax for the A.Y. 2012-13. However, this contention was not accepted and the AO passed an order dated 08th December, 2017, inter alia, adding the amount of Rs. 1,51,67,867 as income for the A.Y. 2012-13.

Although the AO added the amount of Rs. 1,51,67,867 as income for the A.Y.2012-13, he did not pass any order excluding the said amount from the taxable income for the A.Y. 2014-15. Resultantly, the said amount has been taxed twice; once, as income assessed under the assessment order dated 8th December, 2017for the A.Y. 2012-13, and second, in terms of the assessment order dated 28th October, 2016 for the A.Y. 2014-15.

Whilst the appeal under section 246A of the Act was pending before the Commissioner of Income Tax (Appeals), the assessee accepted the addition of Rs. 1,51,67,867 in its income chargeable to tax in the A.Y. 2012-13 and applied under the Direct Tax Vivad Se Vishwas Act, 2020 (hereafter ‘the VSV Act’) for settlement of the dispute. The liability for the A.Y. 2012-13 has been finally settled; the petitioner has received the Form 5 and has paid the necessary tax.

Since a sum of Rs. 1,51,67,867 had been taxed twice, on 16th February, 2018, the petitioner applied for revision of the assessment pertaining to the A.Y. 2014-15. The respondent did not take any steps in regard to the said application for a period of more than 3.5 years.

The assessee filed a writ petition (being WP(C) No.8177/2021) in the Court. The said petition was disposed of by an order dated 11th August, 2021, directing the respondent to dispose of the assessee’s application dated 16th February, 2018, filed under section 264 of the Act. The assessee’s application was rejected by an order dated 04th October, 2021, which was under challenge before the High Court.

The assessee contended that the impugned order is, ex facie, erroneous as it proceeds on the basis that the issue regarding the interest amount does not form a part of the order under section 143(3) of the Act. It is contended on behalf of the assessee that the said reasoning is, ex facie, erroneous as the amount of Rs. 1,51,67,867 (Rs. 1,29,01,031 and Rs. 22,66,836) was subjected to tax for the A.Y. 2014-15 and is included in the income as assessed by the order dated 28th October, 2016, passed under section 143(3) of the Act.

The Hon. Court observed that section 264 of Act enables the Principal Commissioner or Commissioner, on its own motion or on an application made by the assessee, to call for records of any proceedings under the Act or to cause such inquiry to be made and, subject to the provisions of the Act, pass such order thereon as the Commissioner thinks fit. The only condition being that such order cannot be prejudicial to the assessee. Undisputedly, if the records for the A.Y. 2014-15 were recalled, it would reveal that the sum of Rs. 1,51,67,867, received on account of interest on income tax, was assessed as income for the previous year 2013-14 relevant to the A.Y. 2014-15. However, as stated above, the said amount was brought to tax by the Income Tax Authority in the A.Y. 2012-13. Clearly, the same amount cannot be taxed twice.

It is settled law that an assessee is liable to pay income tax only on the income that is chargeable under the Act. Merely because an assessee has offered a receipt of income in his return does not necessarily make him liable to pay tax on the said receipt, if otherwise the said income is not chargeable to tax. InCIT vs. Shelly Products: (2003) 5 SCC 461, the Supreme Court held that if the assessee had, by mistake or inadvertently, included his income or any amount, which was otherwise not chargeable to tax under the Act, the AO was required to grant the assessee necessary relief and refund any tax paid in excess.

It is also well settled that the powers conferred under section 264 of the Act are wide. In Vijay Gupta vs. Commissioner of Income Tax Delhi-XIII & Anr.: 2016 SCC OnLine Del 1961, a Co-ordinate Bench of this Court held that powers under section 264 of the Act were not limited to correcting any errors committed by the authorities but also extended to errors committed by the assessee.

As observed above, it is clear that the amount of Rs. 1,51,67,867 cannot be taxed twice. In the aforesaid view, it was apposite for the Commissioner to have revised the assessment order for the A.Y. 2014-15 in light of the reassessment order dated 08th December, 2017, whereby the amount of Rs. 1,51,67,867 was brought to tax in an earlier assessment year (A.Y. 2012-13).

In view of the above, the impugned order was set aside and the matter was remanded to the concerned Commissioner to pass the fresh order in light of the observations made above. The petition was allowed in the aforesaid terms.

shailesh.kwebmaker

Search and seizure — Assessment in search cases — Condition precedent — Prior approval of prescribed authority in respect of each assessment year — Sanction of prescribed authority for various assessees granted on single day — AO passing draft assessment order and final assessment order on same day of approval — Approval illegal and non est

87 Principal CIT vs. Subodh Agarwal

[2023] 450 ITR 526 (All)

A. Y.: 2015-16

Date of order: 12th December, 2022

Sections 132, 153A, 153D and 260A of ITA 1961

Search and seizure — Assessment in search cases — Condition precedent — Prior approval of prescribed authority in respect of each assessment year — Sanction of prescribed authority for various assessees granted on single day — AO passing draft assessment order and final assessment order on same day of approval — Approval illegal and non est

Pursuant to a search and seizure operation under section 132 of the Income-tax Act, 1961 conducted on 31st August, 2015, the assessment for the A.Y. 2015-16 was completed under section 153A/143(3) of the Act by the Deputy Commissioner of Income-tax, Central Circle-1, Kanpur, vide order dated 31st December, 2017and various additions were made.

The Tribunal set aside the order of the AO. The Tribunal found as under: The AO prepared the draft assessment order on 31st December, 2017 for the A.Y. 2015-16. The approval of the draft assessment order under section153D was given on 31st December, 2017 itself and the final assessment order was passed on the same day, i.e., on 31st December, 2017 by the AO. The Additional Commissioner of Income-tax granted approval of draft assessment orders under section 153D in 38 cases which also included the case of the assessee. The Tribunal having taken note of the said undisputed facts, came to the conclusion that it was humanly impossible for the approving authority to peruse the material based on which, the draft assessment order was passed. It was, thus, concluded that the approving authority granted approval under section 153D of the Act in a mechanical manner which vitiated the entire proceedings.

On appeal by the Revenue, the Allahabad High Court upheld the decision of the Tribunal and held as under:

“i) Section 153D of the Income-tax Act, 1961 requires that the Assessing Officer shall obtain prior approval of the Joint Commissioner in respect of “each assessment year” referred to in clause (b) of sub-section (1) of section 153A which provides for assessment in case of search u/s. 132. The requirement of approval u/s. 153D is a prerequisite to pass an order of assessment or reassessment. A conjoint reading of section 153A(1) and section 153D leaves no room for doubt that approval with respect to “each assessment year” is to be obtained by the Assessing Officer on the draft assessment order before passing the assessment order u/s. 153A. The approval of the draft assessment order being an in-built protection against any arbitrary or unjust exercise of power by the Assessing Officer, cannot be said to be a mechanical exercise, without application of independent mind by the approving authority on the material placed before him and the reasoning given in the assessment order. The prior approval of superior authority means that he should appraise the material before him and appreciate the factual and legal aspects to ascertain that the entire material has been examined by the assessing authority before preparing the draft assessment order. It is trite in law that the approval must be granted only on the basis of material available on record and the approval must reflect the application of mind to the facts on record.

ii) The Tribunal on undisputed facts had concluded that the approving authority under section 153D had exercised his power mechanically which vitiated the entire proceedings under section 153A and that it was humanly impossible for the approving authority to peruse and apply his independent mind to appraise the material in one day in respect of 38 assessees including that of the assessee based on which the draft assessment order was passed. Therefore, its conclusion was not perverse or contrary to the material on record.

iii) For the A.Y. 2015-16, the Assessing Officer had prepared the draft assessment order on December 31, 2017, the approval of the draft assessment order u/s. 153D was given on the same date and the final assessment order was also passed on the same day by the Assessing Officer. The submission of the Department that the grant of approval was an administrative exercise of power on the part of the approving authority and that the approval was in existence on the date of the passing of the assessment order and hence it could not be vitiated was a fallacy since the prior approval of superior authority meant that he had appraised the material before him so as to appreciate the factual and legal aspects to ascertain that the entire material had been examined by the assessing authority before preparing the draft assessment order. The appeal was devoid of merit. No question of law arose.”

shailesh.kwebmaker

(A) Salary — Difference between salary and professional income — Factors to be considered whether particular income constituted salary — Remuneration of doctors working in hospital — Contracts between hospital and doctors should be considered — Contracts showing relationship between hospital and doctors not of master and servant — Remuneration not taxable as salary

86 DR. Mathew Cherian vs. ACIT

[2023] 450 ITR 568 (Mad):

A.Y.: 2018-19

Date of order: 1st September, 2022

Sections 15, 28, 147, 148 and 148A of ITA 1961:

(A) Salary — Difference between salary and professional income — Factors to be considered whether particular income constituted salary — Remuneration of doctors working in hospital — Contracts between hospital and doctors should be considered — Contracts showing relationship between hospital and doctors not of master and servant — Remuneration not taxable as salary

(B) Reassessment — Notice — Law applicable — Effect of amendments w.e.f. 1st April, 2021 — Show-cause notice under section 148A and opportunity to assessee to be heard — Notice under section 148A should be based on tangible “information” — Remuneration of doctors working in hospital — Order under section 148A for issue of notice of reassessment without examining contracts between the hospital and doctors — Order under section 148A not valid

The assessee is a practicing doctor. On the basis of documents seized in the course of a survey at a hospital, and consequent inferences, the authorities came to the conclusion that (i) an employer-employee relationship was established between the assessee doctor and the hospital, (ii) the assessee was to be construed as an employee and not full time or visiting consultant, and (iii) the income returned by the doctor had to be assessed under the head “Salary” and not “professional income”. For the A.Y. 2018-19, show-cause notice was issued to the assessee (doctor) under clause (b) of section 148A of the Income-tax Act, 1961. The assessee filed replies objecting to the proposal to treat the income returned under the head “Salary” and not “Professional Income” and submitting that none of the documents found were incriminating or supported the issuance of the notices. An order was passed under section 148(d) of the Act rejecting the arguments.

The Madras High Court allowed the writ petition filed by the assessee and held as under:

“i) As on April 1, 2021, the scheme of reassessment under the Income-tax Act, 1961 law has undergone a sea change. While the provisions earlier required the officer to have “reason to believe” that there had been escapement of income from tax, what is now required is “information” that suggests escapement of income from tax. Section 148A stands activated only if the Income-tax Department is in possession of “information”, which suggests that income chargeable to tax has escaped assessment. The definition of “information” is wide and could include just about any material in the possession of the officer. However, the caveat is that such information must enable the suggestion of escapement of tax. Then again, the mandate cast upon the officer u/s. 149A(d) is that he has to decide whether it is a “fit case” for issue of a notice for reassessment, upon a study of the material in his possession, including the response of the assessee. Thus, not all information in the possession of the officer can be construed as “information” that qualifies for initiation of proceedings for reassessment, and it is only such “information” that suggests escapement and which, based upon the material in his possession, that the officer decides as “fit” to trigger reassessment, that would so qualify. The “information” in the possession of the Department must prima facie, satisfy the requirement of enabling a suggestion of escapement from tax. This is not to say that the sufficiency or adequacy of the “information” must be tested, as such an analysis would be beyond the scope of jurisdiction of the court in writ jurisdiction. However, whether at all the “information” gathered could lead to a suggestion of escapement from tax can certainly be ascertained. For the purposes of such ascertainment and to determine “fitness” to reassess, the materials gathered must be seen in the context of the allegation of tax evasion, taking assistance of decided cases to ascertain whether or not the allegation is sustainable. In the present regime of reassessments, an Assessing Officer must be able to establish proper nexus of information in his possession, with probable escapement from tax. No doubt the term used is “suggests”. That is not to say that any information, however tenuous, would suffice in this regard and it is necessary that the information has a live and robust link with the alleged escapement.

ii) There is a distinction between a contract for service and one of service, and depends on several factors. The regulations, restrictions, guidelines and control exercised in regard to logistical and administrative functions of the work force have to be considered. It is difficult to identify any establishment that does not exercise some degree of control over the administrative and logistical functioning of the workforce, be they salaried or otherwise. What is vital is that professionals discharge their professional duties and function in a free and fully independent fashion without any interference from the hospital management. Though it is expected that there would be regular quality control measures, this would not lead to the inference that there is control exercised over the discharge of professional functions. The prima facie test for determination of a master-servant relationship is the right of the master to supervise and control the work done by the servant in the matter of not just directing what work is to be done but also the manner in which he shall execute the work. Application of the test of control in the case of skilled employments to decide whether there is relationship of master-servant would be unreal and would not result in a proper conclusion. Thus the question of whether there was “right of control” by the employer would depend on the facts in each case and on the terms of the contracts between the parties.

iii) In all the cases the entity searched was the KMC hospital. The Assessing Officer had come to the conclusion that the hospital exercised total control over the doctors in regard to their timings of work, holidays, call duties based on the exigencies of work, termination, entitlement to private practice, increments and other service rules. However, the agreements between the hospital and the assessees revealed the following terms : (i) The doctors were referred to as consultants and fell within the category of visiting consultants or full time consultants, as against part-time and special category consultants who also attended the hospital. (ii) The remuneration paid was of a fixed amount along with a variable component depending on the number of patients treated, and was termed “salary”. (iii) The consultants were not entitled to any statutory service benefits such as provident fund, gratuity, bonus, medical reimbursement, insurance or leave encashment. (iv) Working hours were stipulated as 8 a. m. to 5 p. m. and the consultants were expected to be available on call in the night. (v) They were permitted a month’s vacation and leave on a case-to-case basis and depending on need. (vi) Private practice was permitted in the case of both categories, upon the satisfaction of certain conditions, such as service of two years in the hospital and other conditions. (vii) The hospital did not exercise any control, intervention or direction over the exercise of professional duties by the assessees. (viii) The assessees were wholly responsible for professional indemnity insurance and the hospital did not indemnify the doctors from any manner of claims. The intention of the parties appeared to engage in a relationship as equals. The hospital, on the one hand, and the professional, on the other, engaged in a relationship where the former provided the administrative infrastructure and facilities and the latter, the professional skill and expertise to result in a mutual rewarding result. The fact that the remuneration paid was variable, and the doctors were not entitled to any statutory benefits also pointed to the absence of an employer-employee relationship. The mere presence of rules and regulations did not lead to a conclusion of a contract of service.

iv) Rules and regulations are necessary to ensure that the workplace functions in a streamlined and disciplined fashion. Thus, the mere existence of an agreement that indicated some measure of regulation of the service of the doctors, could not lead to a conclusion that they were salaried employees. The fact that the doctors held full responsibility for their medical decisions and actions and the hospital bore no responsibility in this regard was also of paramount importance, relevant to determine the nature of the relationship as being one of equals, rather than one of master-servant. The order contained clear, categoric and conclusive findings that were adverse to the assessees. There were no disputed facts at play and rather, it was only the interpretation of admitted facts and conclusions arrived at by the officer, that were challenged. The “information” in the possession of the Revenue did not, in the light of the settled legal position lead to the conclusion that there had been escapement of tax. The order u/s. 148A was not valid.”

shailesh.kwebmaker

Reassessment — Notice under section 148 — Service of notice without signature of AO digitally or manually — Notice invalid — Consequent proceedings without jurisdiction — Notices and order issued beyond period of three years after relevant assessment year — Show-cause notice and order for issue of notice and notice for reassessment quashed and set aside

85 Prakash Krishnavtar Bhardwaj vs. ITO
[2023] 451 ITR 27 (Bom)
A Y.: 2015-16
Date of order: 9th January, 2023
Sections 147, 148, 148A(b) and 148A(d) of ITA 1961:

Reassessment — Notice under section 148 — Service of notice without signature of AO digitally or manually — Notice invalid — Consequent proceedings without jurisdiction — Notices and order issued beyond period of three years after relevant assessment year — Show-cause notice and order for issue of notice and notice for reassessment quashed and set aside

The relevant year is the A.Y. 2015-16. The assessee filed a writ petition for quashing the impugned notice under clause (b) of section 148A dated 21st March, 2022, order under clause (d) of section 148A dated 2nd April, 2022 and notice under section 148 dated 2nd April, 2022 passed by the respondents under the Income-tax Act, 1961. The Bombay High Court allowed the writ petition and held as under:

“The notice issued under section 148 of the Income-tax Act, 1961 admittedly having no signature of the Assessing Officer affixed on it, digitally or manually, was invalid, and would not vest the Assessing Officer with any further jurisdiction to proceed with the reassessment under section 147. Consequently, the Assessing Officer could not assume jurisdiction to proceed with the reassessment proceedings. The notice having been sought to be issued after three years from the end of the relevant assessment year 2015-16 any steps taken by the Assessing Officer the notice issued u/s. 148A(b) and the order passed u/s. 148A(d) were without jurisdiction and therefore, arbitrary and contrary to article 14 of the Constitution of India and consequently set aside.”

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