BCAJ | Bombay Chartered Accountant Journal

GLIMPSES OF SUPREME COURT RULINGS

Engineering Analysis Centre of Excellence Private Limited vs. The Commissioner of Income-tax and Ors. (2021) 432 ITR 471 (SC)

Royalty – Use of copyright – Resale / use of computer software – DTAA – TDS u/s 195 – The amounts paid by resident Indian end-users / distributors to non-resident computer software manufacturers / suppliers, as consideration for the resale / use of the computer software through EULAs / distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India as a result of which the persons referred to in section 195 of the Act were not liable to deduct any TDS u/s 195

The appellant, Engineering Analysis Centre of Excellence Pvt. Ltd. [‘EAC’] was a resident Indian end-user of shrink-wrapped computer software, directly imported from the USA.

For the assessment years 2001-2002 and 2002-2003, the A.O., by an order dated 15th May, 2002, after applying Article 12(3) of the Double Taxation Avoidance Agreement [‘DTAA’] between India and the USA, and upon applying section 9(1)(vi) of the IT Act, found that what was in fact transferred in the transaction between the parties was copyright which attracted payment of royalty and, thus, it was required that tax be deducted at source by the Indian importer and end-user, EAC. Since this was not done for both the assessment years, EAC was held liable to pay the amount of Rs. 1,03,54,784 that it had not deducted as TDS, along with interest u/s 201(1A) amounting to Rs. 15,76,567. The appeal before the Commissioner [‘CIT’] was dismissed by an order dated 23rd January, 2004. However, the appeal before the Tribunal [‘ITAT’] succeeded vide an order dated 25th November, 2005 in which the ITAT followed its previous order dated 18th February, 2005 passed in Samsung Electronics Co. Ltd. vs. Income Tax Officer, ITA Nos. 264-266/Bang/2002.

Revenue appealed against this order before the High Court of Karnataka. The Division Bench of the Court heard a batch of appeals and framed nine questions, of which question Nos. 8 and 9 are set out as follows:

‘8. Whether the Tribunal was correct in holding that since the assessee had purchased only a right to use the copyright, i.e., the software and not the entire copyright itself, the payment cannot be treated as royalty as per the Double Taxation Avoidance Agreement and Treaties, which [are] beneficial to the assessee and consequently section 9 of the Act should not be taken into consideration.
9. Whether the Tribunal was correct in holding that the payment partakes the character of purchase and sale of goods and therefore cannot be treated as royalty payment liable to Income Tax.’

In answering these questions, through a judgment dated 24th September, 2009, the Division Bench of the Karnataka High Court relied heavily upon the judgment of this Court in Transmission Corporation of A.P. Ltd. vs. CIT, (1999) 7 SCC 266 [‘AP Transco’] and held that since no application u/s 195(2) had been made, the resident Indian importers became liable to deduct tax at source u/s 195(1).

This view was set aside by the Supreme Court in GE India Technology Centre (P) Ltd. vs. CIT, (2010) 10 SCC 29 [‘GE Technology’] which ultimately found that the judgment of the High Court dated 24th September, 2009 had misread AP Transco (Supra). Consequently, the Supreme Court remanded the matter to the Karnataka High Court to decide on merits in the following terms:

‘Since the High Court did not go into the merits of the case on the question of payment of royalty, we hereby set aside the impugned judgment of the High Court and remit these cases to the High Court for de novo consideration of the cases on merits. The question which the High Court will answer is: whether on facts and circumstances of the case ITAT was justified in holding that the amount(s) paid by the appellant(s) to the foreign software suppliers was not “royalty” and that the same did not give rise to any “income” taxable in India and, therefore, the appellant(s) was not liable to deduct any tax at source?’

The impugned judgment of the Karnataka High Court dated 15th October, 2011, reported as CIT vs. Samsung Electronics Co. Ltd., (2012) 345 ITR 494, dealt with a whole group of appeals.

After setting out the facts in one of the appeals treated as the lead matter, namely ITA No. 2808/2005 concerning Samsung Electronics Co. Ltd., and the relevant provisions of the Income-tax Act, India’s DTAAs with USA, France and Sweden, respectively, the Karnataka High Court, on an examination of the End-User Licence Agreement [‘EULA’] involved in the transaction, found that what was sold by way of computer software included a right or interest in copyright, which thus gave rise to the payment of royalty and would be an income deemed to accrue in India u/s 9(1)(vi), requiring the deduction of tax at source.

According to the Supreme Court, the appeals before it could be grouped into four categories:
i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer.
ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users.
iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users.
iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit / equipment by foreign, non-resident suppliers to resident Indian distributors or end-users.

The Supreme Court, after considering the provisions of law and the precedents on the subject and discussing the issues involved in great detail, concluded that given the definition of royalties contained in Article 12 of the DTAAs, it is clear that there is no obligation on the persons mentioned in section 195 of the IT Act to deduct tax at source as the distribution agreements / EULAs in the facts of these cases do not create any interest or right in such distributors / end-users which would amount to the use of or right to use any copyright. The provisions contained in the IT Act [section 9(1)(vi), along with Explanations 2 and 4 thereof], which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases.

According to the Supreme Court, the answer to the question posed before it is that the amounts paid by resident Indian end-users / distributors to non-resident computer software manufacturers / suppliers, as consideration for the resale / use of the computer software through EULAs / distribution agreements, is not the payment of royalty for the use of copyright in the computer software and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 were not liable to deduct any TDS u/s 195. The answer to this question would apply to all four categories of cases enumerated above.

Notes:
(1) The above judgment deals with a batch of cases involving four categories of facts mentioned therein raising issues relating to purchase of shrink-wrapped software and Royalty Taxation, more so in the context of Tax Treaties (i.e., DTAAs). For this purpose, the Court thought it fit to take the facts in the case of EAC as a sample case.

(2) While dealing with the issues, the Court dealt with the relevant provisions of the Copyright Act, 1957 (as amended from time to time) in great detail and its effect on various aspects. The Court has also dealt with the contextual meaning of the undefined (in the Act as well as relevant DTAAs) expression ‘Copyright’ under the Copyright Act. In the context of determining whether distribution agreements / EULAs have created any interest or right in copyright under the Copyright Act in such distributors / end-users, the Court also referred to the doctrine of first sale or principle of exhaustion statutorily recognised under the Copyright Act. The Court also examined the nature of rights (non-exclusive, non-transferable licence) available to the assessees under the relevant distribution agreements / EULAs and the conclusion of the Court is based on this.

(3) The Court has also reiterated / stated various principles in the context of tax implications of such cross-border transactions such as: Liability of TDS u/s 195, principles of Tax Treaty override, effect of liability to TDS in cases where domestic law is subsequently amended [in the context of retrospective amendments made in section 9(1)(vi)], principles of interpretation of Tax Treaties and the usefulness / effect of OECD Model Commentary in that context, including India’s position on such Commentary without actually amending the DTAA to support the same, whether sale of such software is in fact the sale of physical object which contains an embedded computer programme which tantamounts to sale of goods, etc. The Court also dealt with the definition of the expression royalty contained in section 9(1)(vi) and the effect of retrospective amendments made in 2012.

(4) In the context of liability to TDS u/s 195 and relevance of DTAAs for the same, the Court relied on its earlier judgment in the case of GE India Technology (2010-327 ITR 456) and explained and distinguished its later judgment in the case of PILCOM (2020-425 ITR 312) with reference to the language of section 195, which was relevant for deciding the TDS liability in the cases before the Court. This finally puts an end to the controversy created, in our view unnecessarily, in post-PILCOM cases in the context of TDS liability u/s 195 and the relevance of DTAAs.

(5) The judgment of the Court is very lengthy, running into around 150 printed pages of ITR, including head notes running to around 12 pages. In view of this and in the context of this column, it is thought fit to briefly summarise the judgment by pointing out the issues before the Court and its final conclusion on such issues without giving an analysis of the reasons for the same and various other aspects dealt with by the Court referred to in the earlier Notes above.

(6) The judgment in the case of GE India Technology referred to in Note 4 above has been analysed by us in this Journal in the Column Closements in the December, 2010 issue of the BCAJ.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

4 M.M. Aqua Technologies Ltd. vs. Commissioner of Income Tax, Delhi [(2021) 436 ITR 582 (SC)]

Deduction – Section 43B of the Income-tax Act, 1961 – Issue of debentures in lieu of interest accrued under a rehabilitation plan, to extinguish the liability of interest altogether – No misuse of the provision of section 43B – Explanation 3C, which was meant to plug a loophole, cannot therefore be brought to the aid of Revenue on the facts of this case

On 28th November, 1996, the appellant filed a return of income declaring a loss of Rs. 1,03,18,572 for the assessment year 1996-1997. In the return, the appellant claimed a deduction of Rs. 2,84,71,384 u/s 43B based on the issue of debentures in lieu of interest accrued and payable to financial institutions. By an order dated 29th October, 1998, the A.O. rejected the appellant’s contention by holding that the issuance of debentures was not as per the original terms and conditions on which the loans were granted, and that interest was payable, holding that a subsequent change in the terms of the agreement, as they then stood, would be contrary to section 43B(d) and would render such amount ineligible for deduction.

The Commissioner of Income Tax (Appeals) allowed the appeal and held that it would not be correct to say that the issue of debentures in lieu of interest merely postponed the payment of liability. A debenture is a valuable security which is freely negotiable and openly quoted in the stock market. As the financial institutions had accepted the debentures in effective discharge of the liability for the outstanding interest which was no longer payable by the appellant, it was tantamount to actual payment for the intent of section 43B. As interest had been actually paid during the year and the payment was in accordance with the terms and conditions of the borrowings, interest of Rs. 2,84,71,384 is directed to be allowed u/s 43B.

This order was upheld in appeal by the Income Tax Appellate Tribunal which held that the payment of interest by conversion of the outstanding liability into convertible debentures is a real, substantial and effective payment, meeting the requirement of the word ‘actual’ and is not a fictional or illusory payment. The parties have understood it as an effective discharge by the assessee of the interest liability. The treatment given in the accounts as well as in their income tax assessments is in accord with the factual position.

Revenue filed an appeal against this judgment of the ITAT before the High Court. The High Court concluded, based on Explanation 3C, as follows: ‘Now, Explanation 3C, having retrospective effect from 1st April, 1989, would be applicable to the present case as it relates to A.Y. 1996-97. Explanation 3C squarely covers the issue raised in this appeal, as it negates the assessee’s contention that interest which has been converted into loan is deemed to be “actually paid”. In light of the insertion of this explanation which, as mentioned earlier, was not present at the time the impugned order was passed, the assessee cannot claim deduction u/s 43B.’

On 22nd July, 2016, the High Court dismissed the review petition filed by the assessee.

When the case went before the Supreme Court, it observed that the object of section 43B, as originally enacted, is to allow certain deductions only on actual payment. This is made clear by the non-obstante clause contained at the beginning of the provision, coupled with the deduction being allowed irrespective of the previous years in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by it. In short, a mercantile system of accounting cannot be looked at when a deduction is claimed under this section, making it clear that incurring of liability cannot allow for a deduction but only ‘actual payment’, as contrasted with incurring of a liability, can allow for a deduction. The ‘sum payable’ referred to in section 43B(d), which is applied in the present case, however, does not refer to the mode of payment (in cash or by issue of a cheque or draft), unlike proviso 2 to the said section which was omitted by the Finance Act, 2003 effective from 1st April, 2004.

The Supreme Court noted that both the CIT and the ITAT found, as a matter of fact, that as per a rehabilitation plan agreed to between the lender and the borrower, debentures were accepted by the financial institution in discharge of the debt on account of outstanding interest. This was also clear from the expression ‘in lieu of’ used in the judgment of the CIT. That this was also clear not only from the accounts produced by the assessee, but equally clear from the fact that in the assessment of ICICI Bank, for the assessment year in question, the accounts of the bank reflect the amount received by way of debentures as its business income. This being the fact situation in the present case, the Supreme Court held that it was clear that interest was ‘actually paid’ by means of issuance of debentures, which extinguished the liability to pay interest.

The Supreme Court noted that Explanation 3C, which was introduced for the ‘removal of doubts’, only made it clear that interest that remained unpaid and has been converted into a loan or borrowing shall not be deemed to have been actually paid. It observed that as per the Circular explaining Explanation 3C, at the heart of the introduction of Explanation 3C was misuse of the provisions of section 43B by not actually paying interest but converting such interest into a fresh loan. The Supreme Court noted that on the facts found in the present case, the issue of debentures by the assessee was, under a rehabilitation plan, to extinguish the liability of interest altogether. No misuse of the provision of section 43B was found by either the CIT or the ITAT. Explanation 3C, which was meant to plug a loophole, cannot, therefore, be brought to the aid of Revenue on the facts of this case.

The Court held that if there be any ambiguity in the retrospectively added Explanation 3C, at least three well-established canons of interpretation come to the rescue of the assessee in this case. First, since Explanation 3C was added in 2006 with the object of plugging a loophole, i.e., misusing section 43B by not actually paying interest but converting interest into a fresh loan, bona fide transactions of actual payments are not meant to be affected. Second, a retrospective provision in a tax act which is ‘for the removal of doubts’ cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. Third, any ambiguity in the language of Explanation 3C shall be resolved in favour of the assessee as per Cape Brandy Syndicate vs. Inland Revenue Commissioner (Supra) as followed by judgments of this Court – see Vodafone International Holdings BV vs. Union of India (2012) 6 SCC 613.

The Supreme Court held that the High Court judgment dated 18th May, 2015 was clearly in error in concluding that ‘interest’, on the facts of this case, had been converted into a loan. There was no basis for this finding; as a matter of fact, it is directly contrary to the finding on facts of the authorities below.

Consequently, the impugned judgment of the High Court was set aside and the judgment and order of the ITAT was restored. The appeals are allowed by the Supreme Court in the aforesaid terms.

5 Commissioner of Income Tax (Exemptions), Kolkata vs. Batanagar Education and Research Trust [(2021) 436 ITR 501 (SC)]

Cancellation of registration of a Trust – Sections 12AA and 80G(vi) of the Income-tax Act, 1961 – An entity which is misusing the status conferred upon it by section 12AA is not entitled to retain and enjoy said status

The Trust was registered u/s 12AA vide order dated 6th August, 2010 and was also accorded approval u/s 80G(vi).

In a survey conducted on an entity named School of Human Genetics & Population Health (SHG&PH), Kolkata u/s 133A, it was prima facie observed that the Trust was not carrying out its activities in accordance with its objects. A show cause notice was, therefore, issued by the CIT on 4th December, 2015.

In answer to the questionnaire issued by the Department, Rabindranath Lahiri, the Managing Trustee, gave answers to some of its questions as under:

‘Q. 11: Please confirm the authenticity of the above-mentioned corpus donation.

Answer: A major part of the donations that claimed exemption u/s 11(1)(d) were not genuine. The donations received in F.Ys. 2008-09, 2009-10 and 2010-11 were genuine corpus donations received either from the Trustees or persons who were close to the Trustees. In F.Ys. 2011-12 and 2012-13, a part of the donations were genuine like the earlier years. However, a major part of the donations received in these two F.Ys., viz., 2011-12 and 2012-13, shown as corpus donation were in the nature of accommodation entries to facilitate two things:

a) To procure loans from the bank we had to show substantial amount of capital reserve in our balance sheet.

b) We require funds for the expansion of our college. The fees received from the students along with genuine donations from the Trustees and their contacts were not sufficient to run the institution.

Q. 12: Why are you saying that a major part of the donations received were not genuine?

Ans: In those cases, which I admit as accommodation entries, a part of the donation received was returned back to the donors through intermediaries.

Q. 13: Who were the intermediaries and what were the modes of returning the money?

Ans: We were instructed to transfer funds through RTGS to the following seven (7) persons: 1. Santwana Syndicate, 2. P.C. Sales Corporation, 3. Kalyani Enterprises, 4. Riya Enterprises, 5. Laxmi Narayan Traders, 6. Hanuman Traders, and 7. Rani Sati Trade Pvt. Limited.

These payments were booked as capital expenditure under the head Building.

Q. 14: In response to the earlier question you have stated that you were “instructed”. Who gave you the instruction?

Ans: I can remember only one name right now, that is, Shri Gulab Pincha, Mob No. 9831015157. He was the key person for providing a large part of bogus donations received which was immediately returned back to the different parties in the guise of payments towards capital expenditure in building. We do now know any details in respect of the donors on behalf of whom Shri Gulab Pincha acted as a middle man. Shri Pincha provided us with the details of the donors, cheques of the donations, letters of corpus donations, etc. He also provided us with the names and bank account details of the seven (7) persons mentioned in Answer 13 to whom money had to be returned back through RTGS. He also collected the money receipts / 80G certifications on behalf of the donors.

Q. 19: The ledger copy for the period from 01.04.2014 to 04.09.2014 in respect of “General Fund” of your Trust having details of the donors is being shown to you to identify the bogus donations along with bogus donors.

Ans: After going through the list of the donors appearing in such ledger it is understood that the donors whose names are written in capital letters under the sub-head “Donation-13”, “Donation-I” and “Donations-II” having total amount of Rs. 6,03,07,550 are bogus and out of which Rs. 5,96,29,973 was returned back through RTGS to the above-mentioned seven (7) persons following the instructions of the mediators.’

On the basis of the material on record, the CIT came to the following conclusions:

‘a) Assessee trust has received a sum of Rs. 1,23,87,550 as bogus donation from M/s School of Human Genetics and Population Health and voluntarily offered as income. SHG&PH has admitted their bogus transactions by filing application before the Hon’ble Settlement Commission, Kolkata and through confirmation filed.

b) They have received bogus corpus donation not only from SGHG&PH but also from various parties in different years.

c) Society / Trust has grossly misused the provisions of sections 12AA and 80G(5)(vi).

d) They have violated the objects of the Trust as converting cheque received through corpus donation in cash beyond-the-objects. The Society was found to be involved in hawala activities.

e) Corpus donation received is not voluntary, merely an accommodation entry and fictitious.

f) Activities of the Trust are not genuine as well as not being carried out in accordance with its declared objects. The assessee’s case is covered within the 60th limb of section 12AA(3).

g) Even non-genuine and illegal activities carried on by the assessee through money laundering do not come within the conceptual framework of charity vis-à-vis activity of general public utility envisaged under the Income-tax Act as laid down in section 2(15).’

The CIT, therefore, invoked the provisions of section 12AA(3) and cancelled the registration granted u/s 12AA w.e.f. 1st April, 2012. Consequently, the approval granted to the Trust u/s 80G was also cancelled.

The matter was carried in appeal by the Trust by filing an appeal before the Tribunal.

After considering the entire material on record, the Tribunal concluded as under:

‘13. We have given a very careful consideration to the rival submissions. It is clear from the statements of the Secretary and Treasurer of SHG&PH that they were accepting cash and giving bogus donations. In the statement recorded in the survey conducted in its premises on 27th January, 2015, it was explained that SHG&PH’s source of income was the money received in the form of donations from corporate bodies as well as from individuals. In the said statement it was explained that there were about nine brokers who used to bring donations in the form of cheque / RTGS. The donations received would be returned by issue of cheque / RTGS in the name of companies or organisations specified by the nine brokers. SHG&PH would receive 7 or 8% of the donation amount. It was also stated that since the assessee was entitled to exemption under sections 80G and 35, their organisation was chosen by the brokers for giving donations to SHG&PH as well as for giving donations by SHG&PH. Till now, the assessee’s name did not figure in the statement recorded on 27th January, 2015. However, pursuant to the survey, proceedings for cancellation of the registration u/s 12A granted to them were initiated.

In such proceedings, Smt. Samadrita Mukherjee Sardar (in a letter dated 24th August, 2015) had given a list of donations which were given by them after getting cash of equivalent amount. It is not disputed that the name of the assessee figures in the said list and the fact that the donations paid to the assessee were against cash received from them in F.Y. 2012-13 of a sum of Rs. 1,23,87,550. Even at this stage, all admissions were by third parties and the same were not binding on the assessee.

However, in a survey conducted in the case of the assessee on 24th August, 2015, the Managing Trustee of the assessee admitted that it gave cash and got back donations. We have already extracted the statement given by the Managing Trustee. Even in the proceedings for cancellation of registration, the assessee has not taken any stand on all the evidence against it. In such circumstances, we are of the view that the conclusions drawn by the CIT(E) in the impugned order which we have extracted in the earlier part of the order are correct and call for no interference. It is clear from the evidence on record that the activities of the assessee were not genuine and hence their registration is liable to be cancelled u/s 12AA(3) and was rightly cancelled by the CIT(E). We, therefore, uphold his orders and dismiss both the appeals by the assessee.’

With this, the appeals preferred by the Trust were dismissed.

The Trust being aggrieved, filed an appeal before the High Court. By its order dated 4th July, 2018, the High Court allowed the appeal, setting aside the order of cancellation of the registration of the Trust, with the following observations:

‘On the basis of the evidence and the authorities cited before the adjudicating bodies below, we say that the respondent Revenue has not been able to establish the case so as to warrant cancellation of the registration of
the appellant Trust u/s 12AA(3). The respondent also has not been able to prove any complicity of the appellant Trust in any illegal, immoral or irregular activity of the donors.’

The Supreme Court observed that the answers given to the questionnaire by the Managing Trustee of the Trust show the extent of misuse of the status enjoyed by the Trust by virtue of registration u/s 12AA. These answers also show that donations were received by way of cheques out of which substantial money was ploughed back or returned to the donors. The facts thus clearly show that those were bogus donations and that the registration conferred upon it under sections 12AA and 80G was completely being misused by the Trust. According to the Supreme Court, an entity which is misusing the status conferred upon it by section 12AA is not entitled to retain and enjoy the said status. The authorities were, therefore, right and justified in cancelling the registration under sections 12AA and 80G.

In the opinion of the Supreme Court, the High Court completely erred in entertaining the appeal u/s 260A. It did not even attempt to deal with the answers to the questions as aforesaid and whether the conclusions drawn by the CIT and the Tribunal were in any way incorrect or invalid.

The Supreme Court, therefore, allowed the appeal of the Revenue.

Note: In the CIT’s findings quoted in the above judgment, reference to the ‘60th limb’ at (f) seems to be a typing / printing error as there is nothing like that in section 12AA(3). The finding at (f) effectively means that the case is covered within the scope of section 12AA(3).

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

2 CIT vs. Mohammed Meeran Shahul Hameed Civil Appeal No. 6204 of 2021; Date of order: 7th October, 2021

Limitation for passing order in revision u/s 263(2) – As per sub-section (2) of section 263 no order u/s 263 of the Act shall be ‘made’ after the expiry of two years from the end of the financial year in which the order sought to be revised was passed – The word used is ‘made’ and not order ‘received’ by the assessee – Once it is established that the order u/s 263 was made / passed within the period of two years from the end of the financial year in which the order sought to be revised was passed, such order cannot be said to be beyond the period of limitation prescribed u/s 263(2)

The A.O. passed an assessment order u/s 143(3) for A.Y. 2008-09 vide assessment order dated 30th December, 2010.

The Commissioner of Income Tax initiated revision proceedings u/s 263 to revise the assessment order passed by the A.O. and issued a notice to the assessee on 1st February, 2012. The assessee filed written submissions on 7th and 12th March, 2012. The Commissioner then passed an order u/s 263 on 26th March, 2012 holding that the A.O. had failed to make relevant and necessary inquiries and to make correct assessment of income after due application of mind and thus the assessment order made u/s 143(3) was held to be erroneous and prejudicial to the interest of the Revenue. The Commissioner set aside the assessment order with a direction to the A.O. to make necessary inquiries on the aspects mentioned in the order u/s 263.

The order passed by the Commissioner in exercise of powers u/s 263 was challenged by the assessee before the ITAT on 29th November, 2012, submitting that it had come to know about the revision order only when it received notice dated 6th August, 2012 u/s 143(2) r/w/s 263 from the office of the A.O. Thereafter, the assessee had requested the A.O. to furnish a copy of the order passed by the Commissioner which was supplied to him on 29th November, 2012. Before the ITAT, it was the case on behalf of the assessee that the order passed by the Commissioner was beyond the period of limitation prescribed / mentioned u/s 263(2). Vide order dated 4th April, 2013, the ITAT accepted the contention on behalf of the assessee and allowed the appeal, holding that the revision order was passed by the Commissioner beyond the period of limitation.

Aggrieved and dissatisfied with the order passed by the ITAT quashing and setting aside the revisional order passed by the Commissioner u/s 263, the Revenue preferred an appeal before the High Court.

The High Court dismissed the appeal and confirmed the order passed by ITAT holding that the order passed by the Commissioner u/s 263 was barred by limitation. The High Court held that the date on which the order was received by the assessee was the relevant date for the purpose of determining the period of limitation u/s 263(2).

Feeling aggrieved and dissatisfied with the judgment and order passed by the High Court, Revenue preferred an appeal before the Supreme Court.

According to the Supreme Court, the short question of law for consideration before it was whether the High Court was right in holding that the relevant date for the purpose of considering the period of limitation u/s 263(2) would be the date on which the order passed by the Commissioner u/s 263 was received by the assessee.

On a reading of sub-section (2) of section 263, the Supreme Court observed that as mandated by this sub-section, no order u/s 263 shall be ‘made’ after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. According to the Court, the word used is ‘made’ and not ‘received’ by the assessee. The word ‘dispatch’ is not even mentioned in section 263(2). The Supreme Court, therefore, held that once it is established that the order u/s 263 was made / passed within the period of two years from the end of the financial year in which the order sought to be revised was passed, such an order cannot be said to be beyond the period of limitation prescribed u/s 263(2). Receipt of such order by the assessee has no relevance for the purpose of counting the period of limitation provided u/s 263. In the present case, the order was made / passed by the Commissioner on 26th March, 2012 and according to the Department it was dispatched on 28th March, 2012. The relevant last date for the purpose of passing the order u/s 263, considering the fact that the assessment was for the financial year 2008-09, would be 31st March, 2012 and the order might have been received as per the assessee on 29th November, 2012. However, the date on which the order was received by the assessee was not relevant for the purpose of calculating / considering the period of limitation provided u/s 263(2).

The Supreme Court therefore concluded that the High Court had misconstrued and had misinterpreted the provision of sub-section (2) of section 263. If the interpretation made by the High Court and the ITAT was accepted, in that case it would be violating the provision of section 263(2) and adding something which is not there in the section. As observed hereinabove, the word used is ‘made’ and not the ‘receipt of the order’. Therefore, the High Court had erred in holding that the order u/s 263 passed by the Commissioner was barred by the period of limitation as provided under sub-section (2) of section 263.

NOTES
(i) In the above case, from the dates available in the judgment of the Supreme Court, it would appear that assessment order u/s 143(3) [which was revised u/s 263] was passed on 30th December, 2010 and the order u/s 263(3) was passed on 26th March, 2012 about which the assessee came to know on 6th August, 2012 and the copy of the same was supplied to him by the A.O. [while making the fresh assessment] on 29th November, 2012. All these dates are falling within a period of two years from the end of the financial year [i.e., 2010-11] in which the assessment order u/s 143(3) dated 30th December, 2010 was passed. As such, the limitation period in any case was 31st March, 2013. However, the limitation period ending date is, somehow, taken as 31st March, 2012. On verification of the ITAT order dated 4th April, 2013 also, it is noticed that these dates are the same and the ITAT had, somehow, taken the time-barring ending date as 31st March, 2012. It seems that on this basis it was held by the ITAT that the order u/s 263 is time-barred as the same was not communicated to the assessee by 31st March, 2012. It is difficult to understand this computation of limitation of time-barring period u/s 263(2) on these facts. Therefore, this judgment should be read ignoring these dates. However, the principle read down by the Supreme Court is very clear that for the purpose of computing period of limitation u/s 263(2), the relevant date is the date of passing the order u/s 263 and not the date of receipt of that order by the assessee. Therefore, this judgment makes this point very clear. The confusion about the dates referred to earlier may be ignored.

(ii) It may be noted that the Punjab & Haryana High Court in the case of A.A. Precision Machines Private Limited [(2016) 388 ITR 440] has also taken a view that for the purpose of computing such limitation period u/s 263(2), the date of passing the order u/s 263 is relevant and not the date of dispatch of that order by the Department.

3 Director of Income Tax, New Delhi vs. Mitsubishi Corporation Civil Appeal No. 1262 of 2016; Date of order: 17th September, 2021

Interest – Interest u/s 234B – Prior to financial year 2012-13, the amount of income-tax which is deductible or collectible at source can be reduced by the assessee while calculating advance tax, the assessee cannot be held to have defaulted in payment of its advance tax liability

The assessee, a non-resident company incorporated in Japan with operations in India, was engaged in carrying out trading activities in carbon, crude oil, LPG, ferrous products, industrial machinery, mineral, non-ferrous metal and products, textiles, automobiles, etc., through its liaison offices in India.

The A.O. rejected the contention of the respondent that it had no income which was taxable in India and passed assessment orders dated 24th March, 2006 for the A.Ys. 1998-99 to 2004-05, determining the income attributable to Indian operations and charging interest as per the provisions of the Act.

The assessment orders were challenged before the CIT(A), restricted to the imposition of interest u/s 234B.

The appeals were dismissed by the CIT(A) as being not maintainable.

The appeals filed by the assessee against the order of the CIT were disposed of by the ITAT on 16th November, 2007 by remanding the appeals for the A.Ys. 1998-99 to 2004-05 to the CIT(A) to be decided on merits.

On remand of the appeals for the aforesaid assessment years, the CIT(A) took note of the order passed by the ITAT on 8th August, 2008 in respect of the A.Y. 2005-06 in case of the assessee. In the said order, the ITAT had followed an earlier order passed in Motorola Inc. vs. Deputy CIT [2005] 95 ITD 269, in which the assessee was found to be not liable for payment of advance tax and for consequent interest u/s 234B as the entire income received by the assessee was such from which tax was deductible at source. However, while deciding the appeals filed by the assessee for the A.Ys. 1998-99 to 2004-05 on the merits of the issue, the CIT(A) came to the conclusion, independent of the ITAT’s order dated 8th August, 2008, that the assessee was liable to pay advance tax in terms of section 191 in case of no deduction by the payer where tax is deductible at source. Consequently, the assessee was held to be liable to pay interest u/s 234B for default in payment of advance tax. The CIT(A), therefore, dismissed the assessee’s appeals for A.Ys. 1998-99 to 2004-05.

In the appeals filed by the respondent against the order dated 10th February, 2009 of the CIT(A), the ITAT held that the issue was covered by its earlier decision dated 8th August, 2008 in the case of the assessee for the A.Y. 2005-06; the decision of the special bench of the ITAT in the case of Motorola Inc. (Supra); as well as decisions of the Uttarakhand High Court and the Bombay High Court. Reliance was placed by the ITAT on a judgment of the Uttarakhand High Court in Commissioner of Income Tax vs. Tide Water Marine International Inc. [2009] 309 ITR 85, whereby it was held that an individual assessee cannot be held liable to pay interest u/s 234B for default of the company, who had engaged or employed the assessee, to deduct tax at source while making payments to the assessee. In Director of Income Tax (International Taxation) vs. NGC Network Asia LLC [2009] 313 ITR 187, the Bombay High Court held that on failure of the payer to deduct tax at source, no interest can be imposed on the payee-assessee u/s 234B. The ITAT observed that in all the seven years under consideration, tax was liable to be deducted at source from payments made to the assessee and it had not been demonstrated that the assessee had a liability to pay advance tax, even after deduction of taxes at source. Therefore, the ITAT concluded that the assessee was not liable for payment of interest as the conditions of section 234B were not attracted. The assessee’s appeals were allowed.

The question of law framed by the High Court was whether the levy of interest u/s 234B for short deduction of tax at source is mandatory and is leviable automatically. The High Court referred to a judgment of the Uttarakhand High Court in the case of Commissioner of Income Tax and Anr. vs. Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320, a judgment of the Bombay High Court in the NGC Network Asia LLC case (Supra) and a judgment of the Madras High Court in Commissioner of Income Tax, Tamil Nadu-I, Madras vs. Madras Fertilizers Ltd. [1984] 149 ITR 703, to uphold the submission of the assessee that the tax deductible at source should be excluded from consideration while the estimate of income for the payment of advance tax is submitted. On a scrutiny of the relevant provisions of the Act, the High Court observed that interest u/s 234B cannot be imposed on an assessee for failure on the part of the payer in deducting tax at source, when section 201 provides for consequences of failure to deduct tax at source or failure to pay the tax after making deduction.

The Supreme Court on perusal of the provisions of sections 209 and 234B observed that an analysis of Clauses (a) and (d) of section 209(1) would make it clear that the assessee shall estimate his current income and income tax for payment of advance tax on the basis of rates in force in the financial year. The calculation of the advance tax is to be reduced by the amount of income tax which would be deductible or collectible at source during the said financial year. In case of failure to pay advance tax u/s 208, or where the advance tax paid by the assessee as per the provision of section 210 is less than 90% of the assessed tax, the assessee shall be liable to pay interest on the amount of shortfall from the assessed tax, according to section 234B.

The main point argued on behalf of the Revenue related to the interpretation of section 209(1)(d), with stress on the words ‘deductible or collectible at source’. The contention of the Revenue was based on the fact that an assessee, who has received any payment without the payer deducting tax on such payment, cannot be permitted to escape liability in payment of advance tax and consequent interest for such non-payment under sections 191 and 234B. It was contended that as all the assessees were fully aware of the receipt of amounts without deduction of taxes at source, they should not be allowed to then rely on section 201 to reduce their advance tax liability. In this connection, it was submitted by the Revenue that the expression ‘would be deductible or collectible’ would not include amounts which had not been deducted at the time of payment and, in fact, were paid to the assessee by the payer.

The Supreme Court stated that the primary issue before it pertained to the interpretation of section 209(1)(d) and noted that a proviso was inserted to section 209(1)(d) by the Finance Act, 2012. The Court referred to the Notes to the Memorandum explaining the provisions in the Finance Bill, 2012 in this context. It observed that the proviso is in the nature of an exception to section 209(1)(d) as an assessee, who has received any income without deduction or collection of tax, is made liable to pay advance tax in respect of such income. The amendment was brought into effect from 1st April, 2012 and was made applicable to cases of advance tax payable in the F.Y. 2012-13 and thereafter. All the appeals before the Supreme Court, however, pertained to the period prior to A.Y. 2013-14.

After noting the judicial precedents holding that subsequent legislation may be looked into to fix the proper interpretation to be put on the statutory provisions as they stood earlier, the Court observed that the dispute relating to the interpretation of the words ‘would be deductible or collectible’ in section 209(1)(d) can be resolved by referring to the proviso to section 209(1)(d) which was inserted by the Finance Act, 2012. The proviso makes it clear that the assessee cannot reduce the amounts of income paid to it by the payer without tax deduction, while computing liability for advance tax. The Memorandum explaining the provisions of the Finance Bill, 2012 provides necessary context that the amendment was warranted due to the judgments of courts, interpreting section 209(1)(d) to permit computation of advance tax by the assessee by reducing the amount of income tax which is deductible or collectible during the financial year. If the construction of the words ‘would be deductible or collectible’ as placed by the Revenue is accepted, the amendment made to section 209(1)(d) by insertion of the proviso would be meaningless and an exercise in futility. The Supreme Court, therefore, held that to give the intended effect to the proviso, section 209(1)(d) has to be understood to entitle the assessee, for all assessments prior to the financial year 2012-13, to reduce the amount of income tax which would be deductible or collectible, in computation of its advance tax liability, notwithstanding the fact that the assessee has received the full amount without deduction.

The Court further held that there was no force in the contention of the Revenue that section 234B should be read in isolation without reference to the other provisions of Chapter XVII. The liability for payment of interest as provided in section 234B is for default in payment of advance tax. While the definition of ‘assessed tax’ u/s 234B pertains to tax deducted or collected at source, the pre-conditions of section 234B, viz. liability to pay advance tax and non-payment or short payment of such tax, have to be satisfied after which interest can be levied taking into account the assessed tax. Therefore, section 209 which relates to the computation of advance tax payable by the assessee cannot be ignored while construing the contents of section 234B. As already held that prior to the F.Y. 2012-13 the amount of income tax which is deductible or collectible at source can be reduced by the assessee while calculating advance tax, the assessee cannot be held to have defaulted in payment of its advance tax liability.

The Supreme Court upheld the view adopted in the impugned judgment of the Delhi High Court in Civil Appeal No. 1262 of 2016 as well as by the Madras High Court in the Madras Fertilizers case (Supra), that the Revenue is not remediless and there are provisions in the Act enabling the Revenue to proceed against the payer who has defaulted in deducting tax at source. The Court, however, clarified that there is no doubt that the position has changed since F.Y. 2012-13 in view of the proviso to section 209(1)(d), pursuant to which if the assessee receives any amount, including the tax deductible at source on such amount, the assessee cannot reduce such tax while computing its advance tax liability.

Accordingly, the Supreme Court dismissed the appeals filed by the Revenue.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

7 Commissioner of Income Tax vs. Reliance Energy Ltd. AIR 2021 SC 2151 Civil Appeal No. 1328 of 2021 Date of order: 28th April, 2021

Deduction – Chapter VIA – Section 80-IA r/w/s 80AB – There is no limitation on deduction admissible u/s 80-IA to income under the head ‘business’ only – Section 80AB could not be read to be curtailing the width of section 80-IA – The scope of sub-section (5) of section 80-IA is limited to determination of quantum of deduction under sub-section (1) of section 80-IA by treating ‘eligible business’ as the ‘only source of income’ – Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to ‘business income’

The assessee was in the business of generation of power and also dealt with purchase and distribution of power. Its power generation unit is located at Dahanu.

For the assessment year 2002-03, the assessee filed its income-tax return on 31st October, 2002 declaring total income as ‘Nil’. The return was subsequently revised on 6th December, 2002 and thereafter on 30th March, 2004.

In respect of deduction u/s 80-IA, the assessee was asked to explain why the deduction should not be restricted to business income as had been the stand of the Revenue for A.Y. 2000-01. The assessee had revised its claim u/s 80-IA to Rs. 546,26,01,224, having admitted that there was an error in calculation of income tax depreciation.

The A.O. considered the revised claim of the assessee u/s 80-IA and determined the amount eligible for deduction under it at Rs. 492,78,60,973 against the assessee’s claim of Rs. 546,26,01,224. However, the A.O. stated in the assessment order that the actual deduction allowable shall be to the extent of ‘income from business’ as per the provisions of section 80AB. The ‘business income’ of the assessee was computed at Rs. 355,74,73,451 and the ‘gross total income’ at Rs. 397,37,70,178. Inclusion of ‘income from other sources’ of Rs. 41,62,96,727 in the ‘gross total income’ and deduction claimed under Chapter VI-A against such ‘gross total income’ was not accepted by the A.O. The A.O. also rejected the claim of the assessee for allowing deduction u/s 80-IA, along with other deductions available to the assessee, to the extent of ‘gross total income’, and restricted the deduction allowed u/s 80-IA at Rs. 354,00,75,084 by limiting the aggregate of deductions under sections 80-IA and 80-IB to the ‘business income’ of the assessee.

The A.O. further rejected the contention of the assessee that section 80AB was not applicable. It was held that section 80AB makes it clear that for the purposes of deduction in respect of certain incomes, deduction had to be given on the income of the nature specified in the relevant section and allowed against income of that nature alone. Therefore, the deduction computed u/s 80-IA could not be allowed against any source other than business.

The Appellate Authority partly allowed the appeal filed by the assessee by an order dated 23rd March, 2006 and reversed the finding of the A.O. on the issue of deduction u/s 80-IA. The Appellate Authority held that section 80AB places a ceiling on the quantum of deductions in respect of incomes contained in Part C of Chapter VI-A. Such deductions are to be computed on the net eligible income, which will be deemed to be included in the gross total income. The Appellate Authority observed that section 80AB is limited to determining the quantum of deductible income included in the gross total income. It directed the A.O. not to restrict the deduction admissible u/s 80-IA to income under the head ‘business’. The A.O. was further directed to aggregate the deduction u/s 80-IA with the other deductions available to the assessee and then to allow deductions of such aggregate amount to the extent of ‘gross total income’. The order of the Appellate Authority was affirmed by the Tribunal and also the High Court. Aggrieved, the Revenue filed an appeal before the Supreme Court.

The Supreme Court observed that the controversy in this case pertained to the deduction u/s 80-IA being allowed to the extent of ‘business income’ only.

It noted that section 80AB was inserted in the year 1981 to get over a judgment of this Court in Cloth Traders (P) Ltd. vs. Additional Commissioner of Income Tax (1986) 1 SCC 43. The CBDT Circular dated 22nd September, 1980 made it clear that the reason for introduction of section 80AB was for the deductions under Part C of Chapter VI-A to be made on the net income of the eligible business and not on the total profits from the eligible business. A plain reading of section 80AB showed that the provision pertained to determination of the quantum of deductible income in the ‘gross total income’. According to the Supreme Court, section 80AB could not be read to be curtailing the width of section 80-IA. The Court noted that section 80A(1) stipulates that in the computation of the ‘total income’ of an assessee, deductions specified in section 80C to section 80U shall be allowed from his ‘gross total income’. Sub-section (2) of section 80A provides that the aggregate amount of the deductions under Chapter VI-A shall not exceed the ‘gross total income’ of the assessee.

The Supreme Court, therefore, agreed with the Appellate Authority that section 80AB which deals with determination of deductions under Part C of Chapter VI-A is with respect only to computation of deduction on the basis of ‘net income’.

After noting the provisions of sub-sections (5) and (1) of section 80-IA, the Supreme Court observed that the import of section 80-IA is that the ‘total income’ of an assessee is computed by taking into account the allowable deduction of the profits and gains derived from the ‘eligible business’. With respect to the facts of this appeal, there was no dispute that the deduction quantified u/s 80-IA was Rs. 492,78,60,973. The said amount represented the net profit made by the assessee from the ‘eligible business’ covered under sub-section (4), i.e., from its business unit involved in the generation of power. The claim of the assessee was that in computing its ‘total income’, deductions available to it have to be set-off against the ‘gross total income’, while the Revenue contended that it was only the ‘business income’ which had to be taken into account for the purpose of setting-off the deductions under sections 80-IA and 80-IB. The ‘gross total income’ of the assessee for A.Y. 2002-03 was less than the quantum of deduction determined u/s 80-IA. The assessee contended that income from all other heads including ‘income from other sources’, in addition to ‘business income’, have to be taken into account for the purpose of allowing the deductions available to it, subject to the ceiling of ‘gross total income’. The Supreme Court agreed with the view taken by the Appellate Authority that there was no limitation on deduction admissible u/s 80-IA to income under the head ‘business’ only.

The Supreme Court further observed that the other contention of the Revenue was that sub-section (5) of section 80-IA referred to computation of quantum of deduction being limited from ‘eligible business’ by taking it as the only source of income. It was contended that the language of sub-section (5) makes it clear that deduction contemplated in sub-section (1) is only with respect to the income from ‘eligible business’ which indicates that there is a cap in sub-section (1) that the deduction cannot exceed the ‘business income’. On the other hand, the Court noted, it was the case of the assessee that sub-section (5) pertains only to determination of the quantum of deduction under sub-section (1) by treating the ‘eligible business’ as the only source of income.

The Court noted that the amount of deduction from the ‘eligible business’ computed u/s 80-IA for A.Y. 2002-03 was Rs. 492,78,60,973. There was no dispute that the said amount represented income from the ‘eligible business’ u/s 80-IA and was the only source of income for the purposes of computing deduction u/s 80-IA. The question that arose further was with reference to allowing the deduction so computed to arrive at the ‘total income’ of the assessee and that could not be determined by resorting to interpretation of sub-section (5).

The Supreme Court observed that Synco Industries Ltd. vs. Assessing Officer, Income Tax, Mumbai and Anr. (2008) 4 SCC 22 was concerned with section 80-I. Section 80-I(6), which is in pari materia to section 80-IA(5) and wherein it was held that for the purpose of calculating the deduction u/s 80-I loss sustained in other divisions or units cannot be taken into account as sub-section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income. Further, the Court concluded that section 80-I(6) dealt with actual computation of deduction, whereas section 80-I(1) dealt with the treatment to be given to such deductions in order to arrive at the total income of the assessee.

The Court further observed that in Canara Workshops (P) Ltd., Kodialball, Mangalore (1979) 3 SCC 538, the question that arose for consideration related to computation of the profits for the purpose of deduction u/s 80-E, as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80-E, as it then existed, permitted deductions in respect of profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered by the assessee in the manufacture of alloy steels. The Supreme Court was not in agreement with the submissions made by the Revenue. It was held that the profits and gains by an industry entitled to benefit u/s 80-E cannot be reduced by the loss suffered by any other industry or industries owned by the assessee.

The Supreme Court noted that in the present case there was no discussion about section 80-IA(5) by the Appellate Authority, nor by the Tribunal or the High Court. However, considering the submissions on behalf of the Revenue, and as it has a bearing on the interpretation of sub-section (1) of section 80-IA, it held that the scope of sub-section (5) of section 80-IA is limited to determination of the quantum of deduction under sub-section (1) of section 80-IA by treating ‘eligible business’ as the ‘only source of income’. Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to ‘business income’.

The Supreme Court further observed that an attempt was made by the Revenue to rely on the phrase ‘derived… from’ in section 80-IA(1) in respect of his submission that the intention of the Legislature was to give the narrowest possible construction to deduction admissible under this sub-section. According to the Supreme Court, it was not necessary to deal with this submission in view of the findings recorded above.

The Court dismissed the appeal for the aforementioned reasons qua the issue of the extent of deduction u/s 80-IA.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

1 South Indian Bank Ltd. vs. Commissioner of Income Tax [Appeal No. 9606 of 2011]

Civil Appeal No. 9606 of 2011; Civil Appeal No. 5610 of 2021 [Arising out of SLP (C) No. 32761 of 2018; Civil Appeal Nos. 9609, 9610, 9611, 9615, 9608, 9612, 9614, 9613, 9607 of 2011; and 3367 and 2963 of 2012

Date of order: 9th September, 2021

Disallowance of expenditure – Section 14A – Expenditure incurred in relation to incomes which are not includible in total income – Proportionate disallowance of interest is not warranted u/s 14A for investments made in tax-free bonds / securities (held as stock-in-trade) which yield tax-free dividend and interest to assessee banks in those situations where interest-free own funds available with the assessee exceeded their investments

1. The question of law that arose before the Supreme Court was on the interpretation of section 14A which reads as follows:

‘Whether proportionate disallowance of interest paid by the banks is called for under section 14A of Income-tax Act for investments made in tax-free bonds / securities which yield tax-free dividend and interest to assessee banks when the assessee had sufficient interest-free own funds which were more than the investments made?’

1.1 For convenience, the Supreme Court adverted to the facts from the Civil Appeal No. 9606 of 2011 (South Indian Bank Ltd. vs. CIT, Trichur) to decide the appeal.

The assessees were scheduled banks and in the course of their banking business they also engaged in the business of investments in bonds, securities and shares which earned them interests from such securities and bonds, as also dividend income on investments in shares of companies, and from units of UTI, etc., which were tax-free.

1.2 None of the assessee banks amongst the appellants maintained separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free income is earned so that disallowances could be limited to the actual expenditure incurred by the assessee.

1.3 In the absence of separate accounts for investments which earned tax-free income, the A.O. made proportionate disallowance of interest attributable to the funds invested to earn tax-free income. The A.O. worked out proportionate disallowance by referring to the average cost of deposit for the relevant year. The CIT(A) had concurred with the A.O.’s view.

1.4 The ITAT in the assessee’s appeal against the CIT(A), considered the absence of separate identifiable funds utilised by the assessee for making investments in tax-free bonds and shares but found that the assessee bank was having indivisible business and considering their nature of business, the investments made in tax-free bonds and in shares would therefore be in the nature of stock-in-trade. The ITAT then noticed that the assessee bank was having surplus funds and reserves from which investments could be made. Accordingly, it accepted the assessee’s case that investments were not made out of interest- or cost-bearing funds alone. In consequence, it was held by the ITAT that disallowance u/s 14A was not warranted in the absence of the clear identity of the funds.

The decision of the ITAT was reversed by the Kerala High Court on acceptance of the contentions advanced by the Revenue in its appeal.

2. The appellants argued before the Supreme Court that the investments made in bonds and shares should be considered to have been made out of interest-free funds which were substantially more than the investment made and therefore the interest paid by the assessee on its deposits and other borrowings should not be considered to be expenditure incurred in relation to tax-free income on bonds and shares; and as a corollary, there should be no disallowance u/s 14A. On the other hand, the counsel for Revenue referred to the reasoning of the CIT(A) and of the High Court to project its case. The contention on behalf of the assessee was rejected by the CIT(A) as also by the High Court primarily on the ground that the assessee had not kept its interest-free funds in a separate account and as such had purchased the bonds / shares from a mixed account.

3. The Supreme Court noted that section 14A was introduced by the Finance Act, 2001 with retrospective effect from 1st April, 1962. The new section was inserted in the aftermath of the judgment of this Court in the case of Rajasthan State Warehousing Corporation vs. CIT [(2000) 242 ITR 450 (SC)]. The said section provided for disallowance of expenditure incurred by the assessee in relation to income which does not form part of its total income. As such, if the assessee incurs any expenditure for earning tax-free income such as interest paid for funds borrowed, for investment in any business which earns tax-free income, the assessee is disentitled to deduction of such interest or other expenditure. Although the provision was introduced retrospectively from 1st April, 1962, the retrospective effect was neutralised by a proviso introduced later by the Finance Act, 2002 with effect from 11th May, 2001 whereunder reassessment, rectification of assessment was prohibited for any assessment year up to the assessment year 2000-01 when the proviso was introduced, without making any disallowance u/s 14A. The earlier assessments were therefore permitted to attain finality. As such, the disallowance u/s 14A was intended to cover pending assessments and for the assessment years commencing from 2001-02.

3.1 The Supreme Court noted that in the present batch of appeals before it, it was concerned with disallowances made u/s 14A for the A.Ys. commencing from 2001-02 onwards or for pending assessments.

4. The Supreme Court noted several decisions wherein it was held that in a situation where the assessee has mixed funds (made up partly of interest-free funds and partly of interest-bearing funds) and payment is made out of such mixed fund, the investment must be considered to have been made out of the interest-free fund.

4.1 In Pr. CIT vs. Bombay Dyeing and Mfg. Co. Ltd. (ITA No. 1225 of 2015), the question whether the Tribunal was justified in deleting the disallowance u/s 80M on the presumption that when the funds available to the assessee were both interest-free and loans, the investments made would be out of the interest-free funds available with the assessee, provided the interest-free funds were sufficient to meet the investments, was answered in favour of the assessee. The resultant SLP of the Revenue challenging the Bombay High Court judgment was dismissed both on merit and on delay by this Court.

4.2 In Commissioner of Income Tax (Large Taxpayer Unit) vs. Reliance Industries Ltd. [(2019) 410 ITR 466 (SC)], a Division Bench of the Supreme Court held that where there is a finding of fact that interest-free funds available to assessee were sufficient to meet its investment, it will be presumed that investments were made from such interest-free funds.

4.3 In HDFC Bank Ltd. vs. Deputy Commissioner of Income Tax [(2016) 383 ITR 529 (Bom)], the assessee was a scheduled bank and the issue therein pertained to disallowance u/s 14A. In this case, the Bombay High Court, even while remanding the case back to the Tribunal for adjudicating afresh, observed (relying on its own previous judgment in the same assessee’s case for a different assessment year) that if the assessee possesses sufficient interest-free funds as against investment in tax-free securities, then there is a presumption that investment which has been made in tax-free securities has come out of interest-free funds available with the assessee. In such a situation, section 14A would not be applicable. Similar views were expressed by other High Courts in CIT vs. Suzlon Energy Ltd. [(2013) 354 ITR 630 (Guj)], CIT vs. Microlabs Ltd. [(2016) 383 ITR 490 (Karn)] and CIT vs. Max India Ltd. [(2016) 388 ITR 81 (P&H)].

4.4 On reading of these judgments, the Supreme Court was of the opinion that the High Courts had correctly interpreted the scope of section 14A in their decisions favouring the assessees.

4.4.1 According to the Supreme Court, applying the same logic, the disallowance would be legally impermissible for the investment made by the assessees in bonds / shares using interest-free funds u/s 14A. In other words, if investments in securities are made out of common funds and the assessee has available non-interest-bearing funds larger than the investments made in tax-free securities, then in such cases disallowance u/s 14A cannot be made.

4.4.2 The Supreme Court said that the decisions in S.A. Builders vs. CIT (2007) 1 SCC 781, where this Court ruled on the issue of disallowance in relation to funds lent to a sister concern out of mixed funds and which was pending consideration before the larger bench of this Court in SLP (C) No. 14729 of 2012 titled as Addl. CIT vs. Tulip Star Hotels Ltd., were distinguishable as the factual scenario was different and therefore the issue pending before the larger Bench had no bearing on the present matters. In that case, loans were extended to a sister concern, while here the assessee banks had invested in bonds / securities.

4.4.3 According to the Supreme Court, the High Court herein had endorsed the proportionate disallowance made by the A.O. u/s 14A to the extent of investments made in tax-free bonds / securities, primarily because a separate account was not maintained by the assessee. The Supreme Court in this context observed that there was no corresponding legal obligation upon the assessee to maintain separate accounts for different types of funds held by it. In the absence of any statutory provision which compels the assessee to maintain separate accounts for different types of funds, the Revenue’s contention could not be sustained.

5. The Supreme Court then adverted to Maxopp Investment Ltd. vs. CIT [(2018) 402 ITR 640 (SC)] which also dealt with the issue of disallowance u/s 14A in cases where investments were held as stock-in-trade and referred to some of its following observations:

(i) The purpose behind section 14A in not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income.

(ii) As per section 14A(1), deduction of that expenditure is not to be allowed which has been incurred by the assessee ‘in relation to income which does not form part of the total income under this Act’. Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in the total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such expenditure would obviously be treated as not related to the income that is exempted from tax and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income.

(iii) It is to be kept in mind that in those cases where shares are held as stock-in-trade, it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. [Maxopp Investment Ltd. vs. CIT (2012) 347 ITR 272 (Del)] where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company, that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well, and as and when such dividend income is generated, that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not necessarily be the situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits.

(iv) It will be in those cases where the assessee in his return has himself apportioned but the A.O. is not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect.

6. The Supreme Court thereafter referred to another important judgment dealing with section 14A disallowance, viz., Godrej and Boyce Manufacturing Co. Ltd. vs. DCIT [(2017) 394 ITR 449(SC)]. Here, the assessee had access to adequate interest-free funds to make investments and the issue pertained to disallowance of expenditure incurred to earn dividend income, which was not forming part of the total income of the assessee. It was observed that for disallowance of expenditure incurred in earning an income it is a condition precedent that such income should not be includible in the total income of the assessee. The Supreme Court accordingly concluded that for attracting provisions of section 14A, the proof of fact regarding such expenditure being incurred for earning exempt income is necessary.

7. The Supreme Court proceeded further to examine yet another aspect of the matter. It noted that the Central Board of Direct Taxes (CBDT) had issued Circular No. 18 of 2015 dated 2nd November, 2015 which had analysed and explained that all shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments, and income arising out of those is attributable to the business of banking. This Circular came to be issued in the aftermath of CIT vs. Nawanshahar Central Co-operative Bank Ltd. [(2007) 160 Taxman 48 (SC)], wherein the Supreme Court had held that investments made by a banking concern is part of its banking business. Hence, the income earned through such investments would fall under the head Profits & Gains of business. The Punjab & Haryana High Court in the case of Pr. CIT vs. State Bank of Patiala [(2017) 393 ITR 476 (P&H)] while adverting to the CBDT Circular, concluded (correctly, according to the Supreme Court) that shares and securities held by a bank are stock-in-trade and all income received on such shares and securities must be considered to be business income. That is why section 14A would not be attracted to such income.

7.1 Reverting back to the situation, the Supreme Court observed that the Revenue in the present case was not contending that the assessee banks had held the securities for maintaining the SLR as mentioned in the Circular. In view of this position, when there was no finding that the investments of the assessee were of the related category, tax implication would not arise against the appellants from the said Circular.

8. The Supreme Court concluded that the proportionate disallowance of interest was not warranted u/s 14A for investments made in tax-free bonds / securities which yielded tax-free dividend and interest to the assessee banks in those situations where interest-free own funds available with the assessee exceeded their investments. The Supreme Court agreed with the view taken by the ITAT favouring the assessees.

8.1 The Supreme Court clarified that the above conclusion was arrived at because a nexus had not been established between expenditure disallowed and earning of exempt income. The respondents had failed to refer to any statutory provision which obligated the assessee to maintain separate accounts which might justify proportionate disallowance.

9. Finally, referring to the general expectations from tax policies / systems, the Supreme Court quoted the following words of Adam Smith in his seminal work, The Wealth of Nations:

‘The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person.’

9.1 In the above context, the Supreme Court observed as under:

‘Echoing what was said by the 18th century economist, it needs to be observed here that in taxation regime, there is no room for presumption and nothing can be taken to be implied. The tax an individual or a corporate is required to pay is a matter of planning for a taxpayer and the Government should endeavour to keep it convenient and simple to achieve maximisation of compliance. Just as the Government does not wish for avoidance of tax, equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue.’

10. In view of the foregoing discussion, the Supreme Court answered the issue framed in these appeals against the Revenue and in favour of the assessees. The appeals by the assessees were accordingly allowed with no order on costs.

Notes:
(i) The judgment of the Apex Court in the case of Maxopp Investments Ltd. (the Maxopps case) considered in the above case [referred to in para 5 above] was analysed in the BCAJ in the column Closements in the months of January and February, 2018.

(i-a) After the judgment in the Maxopps case, a debate had started as to whether in case of securities held as stock-in-trade yielding exempt income, section 14A should apply or, in view of a specific para in the Maxopps case [reproduced in our above Closements at para 7.1.1], section 14A should not apply. This para is also largely referred in the above case at para 5(iii). Post Maxopps case, the trend in the decisions largely relied on the said para to take a view that in such cases section 14A should not be invoked for making proportionate disallowance of the interest, etc. The issue generally in these cases was the interpretation / implications of the said para in such cases. The said para is now considered as the key observation in the above case [i.e., the South Indian Bank Ltd. case] in adjudicating the issue of expenditure on securities held as stock-in-trade. This issue now gets finally settled with the above judgment in the South Indian Bank Ltd. case. Of course, in case of direct expenses incurred for exempt income, different consideration may apply.

(ii) In the above case, a common question has been decided in a set of appeals involving a few banks. The Kerala High Court had decided this issue against the assessee and the Apex Court considered the South Indian Bank Ltd. case [unreported] as a lead case and considered the facts of that case to decide the common issue. As such, the facts of the case are taken as available in the judgment of the Apex Court. Some of the other cases in appeal are also unreported. It seems that the above cases related to A.Y. 2001-02 up to A.Y. 2007-08 and in these cases the provisions of section 14A(2) [read with Rule 8D] and section 14A(3) [introduced and becoming effectively applicable from A.Y. 2008-09] were effectively not applicable either because of the prior assessment years involved or due to non-recording of a requisite satisfaction as envisaged in section 14A(2).

(ii-a) In the above case, a common question [referred to in para 1 above] considered by the Apex Court was whether proportionate disallowance of interest paid by the banks is permissible u/s 14A for investments made in securities (held as stock-in-trade) yielding exempt dividend / interest income where the assessees had sufficient interest-free own funds available which were more than such investments.

(ii-b) In the appeals before the Apex Court, it was an admitted fact that the assessees did not maintain separate accounts for interest-free own funds and other funds [mixed funds] for making such investments and the investments were made from the mixed funds. However, in all cases the interest-free funds available with the assessee were more than such investments. In such cases, the real issue was whether a presumption can be made that such investments under such circumstances are to be considered as made out of own interest-free funds available with the assessee (Presumption Theory). A majority of the High Courts had decided the issue in favour of the assessees by accepting the Presumption Theory. However, the Kerala High Court was of a different view and hence the above cases came up before the Apex Court in the cases of certain banks.

(iii) The issue of applicability of Presumption Theory in such cases was largely settled in the context of the provisions of 36(i)(iii) [Ref: Reliance Industries Ltd. (410 ITR 466) and Hero Cycles Pvt. Ltd. (379 ITR 347-SC)]. However, in the context of section 14A this was considered, more so by the Revenue, as pending for final view. This may be due to the fact that in the Reliance Industries case before the Apex Court, the issue relating to section 14A disallowance was not raised, although it was decided by the High Court. In the context of section 36(i)(iii), it is also worth noting that now in the above case, the Apex Court has approved the view taken by the Bombay High Court in the case of the HDFC Bank Ltd. case [referred to in para 4.3 above]. In this case, the Bombay High Court followed its earlier decision in the case of the same assessee [(2014) 366 ITR 505 (Bom)] wherein the High Court had applied its earlier decision in the case of Reliance Utilities and Power Ltd. [(2009) 313 ITR 340 (Bom)] in which the Presumption Theory was applied in the context of disallowance u/s 36(1)(iii). As such, the judgment of the Bombay High Court in the Reliance Utilities case should be also treated as impliedly approved on this Theory in the above case.

(iii-a) In view of the above judgment, now the applicability of Presumption Theory in such cases in favour of the assessees gets settled in the context of disallowance u/s 14A. The Court has specifically held that in the absence of any statutory provisions requiring the assessee to maintain separate accounts for different types of funds, this Presumption Theory is applicable. Effectively, the Court has accepted the assessee’s proposition that in respect of payment made out of the mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a
particular investment is made, and it may not be permissible for the Revenue to make an estimation of a proportionate figure.

(iv) In the above case, the Apex Court was dealing with a specific issue referred to in para 1 above [and mentioned in above Note (ii-a)] and the Court has responded favourably to decide that disallowance of interest u/s 14A under such circumstances is unwarranted. The Court has also approved the interpretation of section 14A in the decisions of various High Courts taking similar view [as mentioned in paras 4.3 and 4.4 above] and disagreed with the view taken by the Kerala High Court on this issue. In the process, the Court has also made certain observations in the judgment. It is worth noting that it is settled principle of law that the judgment of the Court should be read as a whole and observations made therein should be considered in the light of the questions before the Court. The decision is binding authority only for what it actually decides and not from what may come to flow from some observations made therein [Ref: Sun Engineering Works (P) Ltd. (198 ITR 297 – SC); CIT vs. Sudhir J. Mulji (214 ITR 154 – Bombay High Court), etc.].

(v) In the above case, after concluding the question before the Court, the Court has also made certain significant general observations [referred to in paras 9 and 9.1 above] with regard to the tax system in the country and pointed out that it is the responsibility of the regime to design a system for which a subject can budget and plan to avoid unnecessary litigation. Even earlier, the Apex Court has made significant observations in such context in other cases (e.g., CIT vs. Arvind Narottam 173 ITR 479.) We only hope that one day the authority [which has the power to take remedial action] will appreciate such a desire coming from the highest court of the land and make the life of genuine taxpayers easy in this context. At the same time, to achieve this goal genuine efforts are also required by all other shareholders without which the common goal of certainty and substantial reduction in litigation does not seem to be feasible. Let us hope that this will happen in the near future with the joint efforts of all stakeholders.

(vi) Currently, the earlier available exemption in respect of long-term capital gain on transfer of shares as well as dividend income is done away with and major litigation for disallowance u/s 14A was due to these exemptions. In this scenario, the efficacy and impact of section 14A is substantially reduced and as such the above judgment would be of more use only in pending litigation for earlier years except for the entities like banks which continue to make such investments in tax-free securities yielding exempt interest income [and hold them as stock-in-trade] for certain reasons. As such, the practical utility of the above judgment will now be limited for the general taxpayers. Therefore, the instant euphoria created in some quarters on the implications of the judgment appears to be misplaced. In fact, this is the reason why it was thought fit by us to cover this judgment in this column instead of with a detailed analysis [like in the Maxopps case] in the column Closements.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

8 Sakthi Metal Depot vs. CIT (2021) 436 ITR 1 (SC)

Capital Gains – Depreciable assets – So long as the assessee continues business, the building forming part of the block of assets would retain its character as such, no matter one or two of the assets in one or two years not used for business purposes disentitles the assessee for depreciation for those years – There is no provision whereby a depreciable asset forming part of block of assets within the meaning of section 2(11) can cease to be part of block of assets – Gains arising from transfer of such assets are to be taxed as short-term capital gains

The assessee, a partnership firm with its principal place of business at Kochi and a branch in Mumbai, had purchased a flat at a cost of Rs. 95,000 in Mumbai for business purposes in the financial year ending 31st March, 1974. Since its purchase the flat was used as the Branch Office of the assessee and on the capitalised cost of the building (Rs. 95,000) the assessee claimed depreciation and the same was allowed until the A.Y. 1995-96. The written down value of the flat as on 31st March, 1995 was Rs. 37,175.80. However, the assessee discontinued claiming depreciation for the flat for the A.Ys. 1996-97 and 1997-98. The flat was sold during the year 1997-98, that is, in the previous year relevant to the A.Y. 1998-99 on a total sale consideration of Rs. 71 lakhs. After deducting the expenses towards brokerage and legal expenses of Rs. 3,52,000, the assessee returned profit of Rs. 67,34,210 as long-term capital gains.

However, the A.O. held that profit arising on transfer of depreciable asset is assessable as short-term capital gains u/s 50. Applying the provisions of section 50, he assessed the profit on sale of the flat as short-term capital gains. The assessee’s contention before the A.O. was that it stopped using the flat for business purposes after the A.Y. 1995-96 and thereafter the flat was treated as investment and was so shown in the balance sheet. The A.O. did not accept the assessee’s contention that the flat in Mumbai was discontinued to be used for business purposes in the two years following the A.Y. 1995-96 because, according to him, the assessee’s attempt was only to avoid payment of tax on short-term capital gains.

In the appeal filed by the assessee, the CIT (Appeals), concurred with the A.O. and held that the building being a depreciable asset and being used for business purposes, sale of the same attracts tax on short-term capital gains u/s 50.

On a second appeal filed by the assessee, the Tribunal relying solely on the entry in the balance sheet of the assessee wherein the said flat was shown as investment, held that since the item was purchased in 1974, sale of the flat is assessable as long-term capital gains.

On an appeal filed by the Revenue, the High Court reversed the order of the Tribunal holding that the building which was acquired by the assessee in 1974 and in respect of which depreciation was allowed to it as a business asset for 21 years, that is, up to the A.Y. 1995-96, still continued to be part of the business asset and depreciable asset, and the non-use would only disentitle the assessee for depreciation for two years prior to the date of sale. However, there was no provision whereby a depreciable asset forming part of the block of assets within the meaning of section 2(11) can cease to be part of the block of assets. The description of the asset by the assessee in the balance sheet as an investment asset was meaningless and was only to avoid payment of tax on short-term capital gains on the sale of the building. According to the High Court, so long as the assessee continued business, the building forming part of the block of assets would retain its character as such, no matter one or two of the assets in one or two years not being used for business purposes disentitling the assessee for depreciation for those years. Further, instead of selling the building, if the assessee started using it after two years for business purposes, the assessee could continue to claim depreciation based on the written down value available as on the date of ending of the previous year in which depreciation was allowed last.

The Supreme Court dismissed the assessee’s appeal holding that the High Court had rightly restored the findings and the addition made in the assessment order.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

6 DCIT vs. Pepsi Foods Ltd. (2021) 433 ITR 295 (SC)

Stay – Stay of recovery of demand pending disposal of appeal by the Income Tax Appellate Tribunal – The third proviso to section 254(2A) of the Income-tax Act, introduced by the Finance Act, 2008, is both arbitrary and discriminatory and therefore liable to be struck down as offending Article 14 of the Constitution of India – Consequently, the third proviso to section 254(2A) will now be read without the word ‘even’ and the words ‘is not’ after the words ‘delay in disposing of the appeal’ – Any order of stay shall stand vacated after the expiry of the period or periods mentioned in the section only if the delay in disposing of the appeal is attributable to the assessee

The respondent-assessee, an Indian company incorporated on 24th February, 1989, was engaged in the business of manufacture and sale of concentrates, fruit juices, processing of rice and trading of goods for exports. The assessee was a group company of the multinational Pepsico Inc., a company incorporated and registered in the USA. It merged with Pepsico India Holdings Pvt. Ltd. w.e.f. 1st April, 2010 in terms of a scheme of arrangement duly approved by the Punjab and Haryana High Court. On 30th September, 2008, a return of income was filed for the assessment year 2008-2009 declaring a total income of Rs. 92,54,89,822. A final assessment order was passed on 19th October, 2012 which was adverse to the assessee.

Aggrieved by this order, the assessee filed an appeal before the Income Tax Appellate Tribunal on 29th April, 2013. On 31st May, 2013 a stay of the operation of the order of the A.O. was granted by the Tribunal for a period of six months. This stay was extended till 8th January, 2014 and continued being extended until 28th May, 2014. Since the period of 365 days as provided in section 254(2A) was to end on 30th May, 2014 beyond which no further extension could be granted, the assessee, apprehending coercive action from Revenue, filed a writ petition before the Delhi High Court on 21st May, 2014 challenging the constitutional validity of the third proviso to section 254(2A). By a judgment dated 19th May, 2015, the Delhi High Court struck down that part of the third proviso to section 254(2A) which did not permit the extension of a stay order beyond 365 days even if the assessee was not responsible for delay in hearing the appeal.

The Supreme Court noted that the genesis of the stay provision contained in section 254 was in the celebrated judgment of this Court in Income Tax Officer vs. M.K. Mohammed Kunhi (1969) 2 SCR 65. In this judgment, section 254, as originally enacted, came up for consideration before this Court. After setting out section 254(1), the Supreme Court referred to Sutherland, Statutory Construction (3rd Edn., Articles 5401 and 5402) and then held that the power which has been conferred by the said section on the Appellate Tribunal with the widest possible amplitude must carry with it, by necessary implication, all powers incidental and necessary to make the exercise of such power fully effective. The Supreme Court recognised that orders of stay prevent the appeal, if ultimately successful, from being rendered nugatory or futile, and are granted only in deserving and appropriate cases.

The Supreme Court further noted that this judgment was followed for many decades, the Appellate Tribunal granting stay without being constrained by any time limit.

However, by Finance Act, 2001 (w.e.f. 1st June, 2001), two provisos were introduced to section 254(2A) to provide that where, in an appeal filed by the assessee, the Appellate Tribunal passes an order granting stay, the Tribunal shall hear and decide such appeal within 180 days from the date of passing such order granting stay, failing which the stay granted shall be vacated after the expiry of the aforesaid period.

Realising that a hard and fast provision which was directory so far as the disposal of appeal was concerned, but mandatory so far as vacation of the stay order was concerned, would lead to great hardship, the Legislature stepped in again and amended section 254(2A) vide Finance Act, 2007 (w.e.f. 1st June, 2007), to further provide that where such an appeal is not disposed of within the aforesaid period of stay, the Appellate Tribunal may extend the period of stay or pass an order of stay for a further period or periods as it thinks fit where the delay in disposing the appeal is not attributable to the assessee; however, the aggregate period of the stay originally allowed and the period or periods subsequently extended in any case shall not exceed 365 days.

The Supreme Court noted that the aforementioned provision (as amended by the Finance Act, 2007) became the subject matter of challenge before the Bombay High Court in Narang Overseas Pvt. Ltd. vs. ITAT (2007) 295 ITR 22. The Bombay High Court, after referring to the judgment in Mohammed Kunhi (Supra), held that Parliament clearly intended that such appeals should be disposed of at the earliest. However, the object was not to defeat the vested right of appeal in an assessee, whose appeal could not be disposed of not on account of any omission or failure on his part, but either the failure of the Tribunal or the acts of Revenue resulting in non-disposal of the appeal within the extended period as provided. The High Court then referred to the judgment of this Court in Commissioner of Customs & Central Excise vs. Kumar Cotton Mills (2005) 13 SCC 296, which dealt with a similar provision contained in the Central Excise Act, 1944, namely, section 35C(2A), and then held that the third proviso has to be read as a limitation on the power of the Tribunal to continue interim relief in a case where the hearing of the appeal has been delayed for acts attributable to the assessee.

Further, the Court pointed out that close on the heels of this judgment, section 254(2A) was again amended, this time by the Finance Act, 2008 (w.e.f. 1st October, 2008), to provide that the aggregate period originally allowed and the period or periods so extended or allowed shall not, in any case, exceed 365 days even if the delay in disposing of the appeal is not attributable to the assessee.

The Supreme Court also noted that the amended provision came to be considered by a Division Bench of the Delhi High Court in Commissioner of Income Tax vs. M/s Maruti Suzuki (India) Ltd. (2014) 362 ITR 215. The constitutional validity of the said provision had not been challenged, as a result of which the Delhi High Court interpreted the third proviso to section 254(2A) as follows:
(i) In view of the third proviso to section 254(2A) of the Act substituted by the Finance Act, 2008 with effect from 1st October, 2008, the Tribunal cannot extend stay beyond the period of 365 days from the date of the first order of stay.
(ii) In case default and delay is due to a lapse on the part of the Revenue, the Tribunal is at liberty to conclude hearing and decide the appeal, if there is likelihood that the third proviso to section 254(2A) would come into operation.
(iii) The third proviso to section 254(2A) does not bar or prohibit the Revenue or Departmental representative from making a statement that they would not take coercive steps to recover the impugned demand and, on such statement being made, it will be open to the Tribunal to adjourn the matter at the request of the Revenue.
(iv) An assessee can file a writ petition in the High Court pleading and asking for stay and the High Court has power and jurisdiction to grant stay and issue directions to the Tribunal as may be required. Section 254(2A) does not prohibit / bar the High Court from issuing appropriate directions, including granting stay of recovery.

The Supreme Court further noted that close upon the heels of the judgment in Maruti Suzuki (Supra), the Gujarat High Court in DCIT vs. Vodafone Essar Gujarat Ltd. (2015) 376 ITR 23, while disagreeing with the view taken in Maruti Suzuki (Supra), interpreted the third proviso to section 254(2A) and held that the extension of stay beyond the total period of 365 days from the date of grant of initial stay would always be subject to the subjective satisfaction of the learned Appellate Tribunal and on an application made by the assessee-appellant to extend stay and on being satisfied that the delay in disposing of the appeal within a period of 365 days from the date of grant of initial stay is not attributable to the appellant-assessee.

Coming to the impugned judgment in M/s Pepsi Foods Ltd. vs. ACIT (2015) 376 ITR 87, the Supreme Court noted that it dealt with the challenge to the constitutional validity of the third proviso to section 254(2A) as amended by the Finance Act, 2008. The Delhi High Court, after setting out the Bombay High Court judgment in Narang Overseas (Supra), and then referring to the previous judgment of the Delhi High Court in Maruti Suzuki (Supra), held that the assessees who, after having obtained stay orders and by their conduct delay the appeal proceedings, have been treated in the same manner in which assessees who have not, in any way, delayed the proceedings in the appeal. The two classes of assessees are distinct and cannot be clubbed together. This clubbing together has led to hostile discrimination against the assessees to whom the delay is not attributable. Therefore, the insertion of the expression – ‘even if the delay in disposing of the appeal is not attributable to the assessee’ – by virtue of the Finance Act, 2008 violates the non-discrimination Clause of Article 14 of the Constitution of India.

The object that appeals should be heard expeditiously and that assessees should not misuse the stay orders granted in their favour by adopting delaying tactics is not at all achieved by the provision as it stands. On the contrary, the clubbing together of ‘well-behaved’ assessees and those who cause delay in the appeal proceedings is itself violative of Article 14 of the Constitution and has no nexus or connection with the object sought to be achieved. The said expression introduced by the Finance Act, 2008 is, therefore, struck down as being violative of Article 14 of the Constitution of India. This would revert us to the position of law as interpreted by the Bombay High Court in Narang Overseas (Supra). Consequently, it was held that where the delay in disposing of the appeal is not attributable to the assessee, the Tribunal has the power to grant extension of stay beyond 365 days in deserving cases.

The Supreme Court, after referring to a plethora of judgments, held that there can be no doubt that the third proviso to section 254(2A), introduced by the Finance Act, 2008, would be both arbitrary and discriminatory and, therefore, liable to be struck down as offending Article 14 of the Constitution of India. First and foremost, as has correctly been held in the impugned judgment, unequals are treated equally in that no differentiation is made by the third proviso between the assessees who are responsible for delaying the proceedings and those who are not so responsible. This is a little peculiar in that the Legislature itself has made the aforesaid differentiation in the second proviso to section 254(2A), making it clear that a stay order may be extended up to a period of 365 days upon satisfaction that the delay in disposing of the appeal is not attributable to the assessee. Ordinarily, the Appellate Tribunal, where possible, is to hear and decide appeals within a period of four years from the end of the financial year in which such appeal is filed. It is only when a stay of the impugned order before the Appellate Tribunal is granted that the appeal is required to be disposed of within 365 days.

So far as the disposal of an appeal by the Appellate Tribunal is concerned, this is a directory provision. However, so far as vacation of stay on expiry of the said period is concerned, this condition becomes mandatory as far as the assessee is concerned. The object sought to be achieved by the third proviso to section 254(2A) is without doubt the speedy disposal of appeals in cases in which a stay has been granted in favour of the assessee. But such object cannot itself be discriminatory or arbitrary. Since the object of the third proviso is the automatic vacation of a stay that has been granted on the completion of 365 days, whether or not the assessee is responsible for the delay caused in hearing the appeal, such object being itself discriminatory, is liable to be struck down as violating Article 14 of the Constitution of India. Besides, the said proviso would result in the automatic vacation of a stay upon the expiry of 365 days even if the Appellate Tribunal could not take up the appeal in time for no fault of the assessee. Further, vacation of stay in favour of the Revenue would ensue even if the Revenue is itself responsible for the delay in hearing the appeal. In this sense, the said proviso is also manifestly arbitrary being a provision which is capricious, irrational and disproportionate so far as the assessee is concerned.

The Supreme Court concluded that the law laid down by the impugned judgment of the Delhi High Court in M/s Pepsi Foods Ltd. (Supra) was correct. As a consequence, the judgments of the various High Courts which followed the aforesaid declaration of law are also correct. Consequently, the third proviso to section 254(2A) will now be read without the word ‘even’ and the words ‘is not’ after the words ‘delay in disposing of the appeal’. Any order of stay shall stand vacated after the expiry of the period or periods mentioned in the section only if the delay in disposing of the appeal is attributable to the assessee.

BCAJ Admin

Scope of Reassessment Proceedings in Search Cases In The Light of CBDT Instruction No. 1 of 2023

EXECUTIVE SUMMARY

The Central Board of Direct Taxation (“CBDT”) has recently issued instruction no. 1 of 2023 dated 23rd August, 2023, (hereinafter referred to as “instruction”) in exercise of its powers under section 119 of the Income-tax Act, 1961 (“the Act”) with the object of implementing the decision of the Hon’ble Supreme Court in cases of PCIT vs. Abhisar Buildwell (P) Ltd [2023] 454 ITR 212 (SC) (hereinafter referred to as “Abhisar Buildwell”) and DCIT vs. U. K. Paints (Overseas) Ltd [2023] 454 ITR 441 (SC) (hereinafter referred to as “U K Paints”) in a uniform manner. The CBDT has taken a view that in cases where the proceedings did not abate at the time of the search, reassessment proceedings under section 147 / 148 of the Act will have to be undertaken in view of section 150 of the Act by following the procedure laid down under section 148A of the Act as inserted by Finance Act, 2021 in accordance with the law laid down by Supreme Court in case of Union of India vs. Ashish Agarwal [2022] 444 ITR 1 (SC). This article analyses the scope of the provisions of section 150 of the Act, and it is submitted that the said section is not applicable. Accordingly, the Revenue would be justified to initiate reassessment proceedings only if the time limit prescribed under section 149 of the Act is adhered to and it is submitted that any other view would mean that the CBDT instruction is not in accordance with the law and thus, invalid.

Part 1: Decision of the Supreme Court in the cases of Abhisar Buildwell (supra) and U. K. Paints (supra)

1. In the case of Abhisar Buildwell (supra), the Hon’ble Supreme Court settled the dispute on the scope of the assessments under section 153A of the Act. The question before the Hon’ble Supreme Court in the batch of several appeals was whether the Assessing Officer (hereinafter referred to as “the AO”) was justified to make additions to total income in respect of assessment / reassessment proceedings which do not abate under the second proviso to section 153A(1) of the Act.

2. The Hon’ble Supreme Court vide order dated 24th April, 2023, held that in the absence of incriminating material, the AO cannot make any addition to the total income on the basis of other material. However, the AO may initiate reassessment proceedings under section 147 / 148 of the Act subject to fulfilling the conditions prescribed in law. In cases where incriminating material is found, the Hon’ble Court held that the AO will be entitled to make additions based on incriminating material as well as other material which is available with him including the income declared in the returns.

3. Subsequently, the Revenue moved miscellaneous application no. 680 of 2023 with a request that the Hon’ble Court may clarify that the Department is entitled to initiate reassessment proceedings under section 147 / 148 read with section 150 of the Act and that the AO may be given a period of 60 days to follow the procedure prescribed under section 147 to 151 of the Act. The request made by the Revenue to clarify was denied on the grounds that the prayers sought can be said to be in the form of review which requires detailed consideration. The Supreme Court vide order dated 12th May, 2023, relegated the Revenue to file an appropriate review application [PCIT vs. Abhisar Buildwell (P) Ltd (2023) 150 taxmann.com 257 (SC)].

4. After deciding the batch of appeals in respect of the scope of assessment under section 153A of the Act, the Supreme Court in U. K. Paints (supra) was considering the scope of assessment under section 153C of the Act. The principle laid down in Abhisar Buildwell (supra) was reiterated and held that in the absence of incriminating material, additions would not be justified. It was requested before the Hon’ble Court to observe that the Revenue may be permitted to initiate reassessment proceedings under section 147 / 148 of the Act. The Court, in paragraph 3 of its order dated 25th April, 2023, observed that “it will be open for the Revenue to initiate the re-assessment proceedings in accordance with law and if it is permissible under the law”.

Part 2: Instruction No. 1 of 2023 dated 23rd August, 2023

5. The instruction issued by the CBDT in the exercise of powers under section 119 of the Act states that the judgment of the Supreme Court is required to be done in a uniform manner and directs various aspects which need to be taken into consideration.

6. Paragraph 6.1 of the instruction states that there are cases where the assessment was made based on other material and the additions have been deleted by the appellate authorities on the ground that in the absence of incriminating material, the assessment / additions cannot be made. In various cases, the orders of the appellate authorities have attained finality because the same was not challenged. In such types of cases, it is stated that no action is required to be taken under sections 147 / 148 of the Act. However, in the following cases, reassessment as per section 147 / 148 of the Act is required to be carried out:

a. Lead and tagged cases before the Supreme Court.

b. Cases which are pending at appellate levels or before AO or any tax authority.

c. Cases in which a contrary decision has been given by appellate authorities after the Supreme Court decision in Abhisar Buildwell (supra).

7. Paragraph 7 states that the AO will have to categorise the cases in two categories viz. (i) pending / abated assessment and (ii) completed / unabated assessment.

8. Directions in respect of abated assessments: Paragraph 7.1 states that in respect of assessments which have abated owing to search and if assessments under section 153A(1) of the Act are annulled in appeal or any other legal proceedings (example: if search is quashed as illegal by a competent court) then the abated assessments shall stand revived from the date of receipt of order of annulment and the AO is required to assess in accordance with section 153A(2) and 153(8) of the Act.

The directions provided in the instruction issued by the CBDT in respect of assessment which stand abated appear to be in accordance with the law.

9. Directions in respect of unabated assessments: Unabated assessments are further classified into three categories as stated above and the CBDT has provided directions in respect of each category of case.

10. The first category is in respect of the cases which were before the Hon’ble Supreme Court (lead and tagged matters). It is stated that necessary action under section 147 / 148 of the Act needs to be taken in view of section 150 of the Act. The reassessment proceedings will be subject to the procedure specified under section 148A of the Act and in accordance with the law laid down by the Supreme Court in the case of Ashish Agarwal (supra). The CBDT has also directed that the assessment shall be completed by 30th April, 2024, in view of section 153(6) of the Act.

11. The second category of cases are those where the matters are pending before the appellate authorities viz. Commissioner of Income-tax (Appeals) [hereinafter referred to as “the CIT(A)”], Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) and the Hon’ble High Courts, as the case may be. It is stated that the decision of the Supreme Court in the cases of Abhisar Buildwell (supra) and U. K. Paints (supra) are required to be brought to the notice of the respective appellate authorities. Pursuant to the disposal of such appeals, the AO may be required to act under section 147 / 148 read with section 150 of the Act in appropriate cases after complying with the procedure laid down which is in force.

12. The third category of cases is where appellate authorities have rendered the decision after the order of the Supreme Court in the case of Abhisar Buildwell (supra) and if the same is inconsistent with the decision of the Supreme Court, then necessary action may be taken to file miscellaneous application before the Tribunal or notice of motion before the Hon’ble High Court, as the case may be with a request to review the decision in line with Abhisar judgment with a prayer for condonation of delay. A suggested draft of the notice of motion / miscellaneous application is also provided. A perusal of the said draft indicates that the CBDT seems to be suggesting that a request be made before the Tribunal or the High Court (as the case may be) that the order already passed may be modified in line with the decision of the Supreme Court in case of Abhisar Buildwell.

Part 3: Point for consideration

The central point that arises pursuant to the instruction issued by the CBDT is whether the Revenue would be entitled to initiate reassessment proceedings under section 147 / 148 of the Act. Another issue that arises is whether CBDT is justified to direct filing of miscellaneous applications / notices of motion as stated in paragraph 7.2.3

Part 4: Discussion

Validity of reassessment proceedings as per section 150 of the Act

13. Reassessment proceedings under the Act are initiated upon issuance of a valid notice under section 148 of the Act. Section 149 of the Act provides that notice under section 148 of the Act cannot be issued beyond the period specified therein. Section 150(1) of the Act is an exception to the time limits prescribed under section 149 of the Act. If the conditions prescribed under section 150(1) of the Act are satisfied, notice under section 148 of the Act may be issued without the requirement to follow the time limit prescribed under section 149 of the Act. Section 150(2) of the Act is an exception to the sub-section and reinforces the time limit prescribed under section 149 of the Act to issue a notice under section 148 of the Act.

14. To appreciate the scope of section 150 of the Act, the provisions are reproduced hereunder:

“Provision for cases where assessment is in pursuance of an order on appeal, etc.

150. (1) Notwithstanding anything contained in section 149, the notice under section 148 may be issued at any time for the purpose of making an assessment or reassessment or recomputation in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference or revision or by a Court in any proceeding under any other law.

(2) The provisions of sub-section (1) shall not apply in any case where any such assessment, reassessment or recomputation as is referred to in that sub-section relates to an assessment year in respect of which an assessment, reassessment or recomputation could not have been made at the time the order which was the subject-matter of the appeal, reference or revision, as the case may be, was made by reason of any other provision limiting the time within which any action for assessment, reassessment or recomputation may be taken”.

15. The effect of section 150(1) of the Act is that a notice under section 148 of the Act may be issued at any time (notwithstanding the time limit prescribed under section 149) for the purpose of making an assessment or reassessment or recomputation. However, such notice under section 148 of the Act can be issued subject to the condition that the same is being issued in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under the Act by way of appeal, reference or revision or by a Court in any proceeding under any other law.

16. Sub-section (2) to section 150 of the Act limits the scope of sub-section (1) of section 150 which has the effect of reintroducing the time limit prescribed under section 149 of the Act. A notice under section 148 of the Act cannot be issued for an assessment year if an assessment or reassessment or recomputation of such assessment year could not have been made at the time the order which was subject matter of appeal, reference or revision, as the case may be, was made by reason of any other provision limiting the time within which any action for assessment, reassessment or recomputation may be taken.

17. To appreciate the provisions of section 150(2), let us take an example of the lead case which was before the Hon’ble Supreme Court viz. Abhisar Buildwell.

a. Assessment years before the Delhi High Court: A.Ys. 2007-08 and 2008-09
b. Limitation under section 149 to issue notice under section 148 for A.Y. 2007–08: 31st March, 2014
c. Limitation under section 149 to issue notice under section 148 for A.Y. 2008–09: 31st March, 2015
d. Date of order passed by Delhi High Court which was before the Supreme Court: 24th July, 2019

18. In the case of Abhisar Buildwell, the order which was subject matter of appeal before the Hon’ble Supreme Court was the order passed by the Hon’ble Delhi High Court dated 24th July, 2019. Assuming section 150(1) of the Act applies, pursuant to the decision of the Supreme Court, the AO would be justified to issue a notice under section 148 of the Act for the assessment years 2007-08 and 2008–09 in the case of Abhisar Buildwell only if he had the time limit to issue a notice under section 149 of the Act as on 24th July, 2019. Since the time limit to issue a notice under section 148 of the Act for the assessment years 2007–08 and 2008–09 had already expired as illustrated above, the provisions of section 150(2) of the Act would operate as a limitation upon the powers of the AO to issue the notice under section 148 of the Act.

19. In view of the above, it is submitted that the provisions of section 150(2) of the Act will have to be applied depending upon the facts and circumstances
of each case and only then the AO can be said to have the jurisdiction to issue a notice under section 148 of the Act.

20. The Revenue is aware of the legal position in respect of section 150(2) of the Act. This is evident from the fact that the miscellaneous application was filed before the Hon’ble Supreme Court for the specific prayer that the limitation provided under section 150(2) of the Act be waived. This further supports the proposition that the CBDT instruction must be read in accordance with the provisions of section 150 of the Act and the limitations which are imposed upon the AO.

21. Having discussed the scope of section 150(2) above. Let us now consider the applicability of section 150(1) of the Act.

22. Apart from the limitation imposed upon the application of section 150(1) of the Act as discussed above, there are certain additional conditions to issue a notice under section 148 of the Act. The same are discussed hereunder.

a. There must be an order passed by (i) any authority in any proceeding under the Act by way of appeal, reference, or revision or by (ii) a Court in any proceeding under any other law; and

b. The notice under section 148 of the Act is being issued in consequence of or to give effect to any finding or direction contained in such order.

23. Having set out the conditions under which section 150(1) itself may apply, it would be necessary to consider the following:

a. Whether the decision of the Supreme Court in the cases of Abhisar Buildwell (supra) or U. K. Paints (supra) can be construed as a “finding or direction” for the purpose of section 150(1) of the Act?

b. Whether the Hon’ble Supreme Court can be regarded as falling within the scope of the expression “any authority” as provided under section 150(1) of the Act?

c. Whether civil appeal / special leave petitions before the Supreme Court can be regarded as “proceeding under this Act”?

24. The CBDT is of the opinion that paragraph 14(iv) of the Supreme Court decision in the case of Abhisar Buildwell (supra) does constitute a finding / direction for the purpose of section 150(1) of the Act. To appreciate the same, the relevant paragraph 14(iv) in the case of Abhisar Buildwell (supra) is reproduced hereunder:

“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 re-opened by the AO in exercise of powers under sections 147 / 148 of the Act, subject to fulfilment of the conditions as envisaged / mentioned under sections 147 / 148 of the Act and those powers are saved”. (Emphasis supplied)

25. In the case of U. K. Paints (supra), the Supreme Court observed as under:

“3. However, so far as the prayer made on behalf of the Revenue to permit them to initiate the re-assessment proceedings is concerned, it is observed that it will be open for the Revenue to initiate the re-assessment proceedings in accordance with law and if it is permissible under the law”. (Emphasis supplied)

26. In both decisions, the Hon’ble Supreme Court has merely stated that the AO would be entitled to reopen provided the same is permissible in accordance with law.

Finding or direction for the purpose of section 150(1) of the Act

27. In the case of Rajinder Nath vs. CIT [1979] 120 ITR 14 (SC), the Supreme Court was considering the scope of the expressions “finding” and “direction”. The appellant before the Court was a partner in a partnership firm. The Assessing Officer had held that the partnership firm was the owner of the property and since the actual cost of the said property was higher than the cost debited in the books, the excess was taxed as income. On appeal, the first appellate authority had held that the property did not belong to the firm and thus, the excess could not be taxed in its hands. It was also held by the first appellate authority that the partners are owners of the said property. The first appellate authority also stated that the ITO “is free to take action” to assess the excess in the hands of the owners. The issue before the Court was whether the order of the first appellate authority can be said to constitute a finding or direction for the Assessing Officer to issue notice for reopening beyond the time limit prescribed.

In respect of the issue as to whether the order of the first appellate authority can be constituted as a finding, the Supreme Court held that a finding given in an appeal, revision or reference must be a finding necessary for the disposal of the case. It must be directly involved in the disposal of the case. In the facts of the case before the Court, it was held that all that has been recorded is the finding that the partnership firm is not the owner of the properties. It also held that the finding of the appellate authority was based on the fact that the cost was debited from the accounts of the owners. But that does not mean, without anything more, that the excess over the disclosed cost of construction constitutes concealed income of the Assessees. The finding that the excess represents their individual income requires a proper enquiry for which an opportunity must be provided.

It was also held that the expression “direction” must be an express direction necessary for the disposal of the case before the authority or the court. It must also be a direction which the authority or court is empowered to give while deciding the case before it. The Court held that the observation of the first appellate authority that the ITO “is free to take action” cannot be described as a direction. A direction by a statutory authority is an order requiring positive compliance. When it is left open to the option and discretion of the ITO whether to act, it cannot be described as a direction.

28. Applying the principle laid down in the case of Rajinder Nath (supra), it becomes clear that the relevant paragraphs of the Supreme Court decision in Abhisar Buildwell (supra) as well as U. K. Paints (supra) clearly show that the same were also in the nature of discretion and thus, it cannot be regarded as a direction.

29. Similarly, applying the principle laid down by the Supreme Court in the case of Rajinder Nath (supra), it is submitted that the scope of the appeals before the Supreme Court in the case of Abhisar Buildwell (supra) was with respect to the scope of assessment under section 153A of the Act. The Court was called upon to decide on the correctness of the additions made to total income by the Assessing Officer in the absence of any incriminating material in respect of proceedings which do not abate as of the date of search. It is therefore respectfully submitted that the observation in paragraph 14(iv) cannot be held to be a finding for the purpose of section 150(1) of the Act because the said observation was not necessary for the purpose of deciding the question which was involved in the appeals.

30. The decision of the Supreme Court in the case of Rajinder Nath (supra) has thereafter been followed in various cases. Recently, the Hon’ble Bombay High Court in the case of Pavan Morarka vs. ACIT [2022] 136 taxmann.com 2 (Bombay) has followed the principle laid down in Rajinder Nath (supra).

31. To appreciate the principle laid down by the Hon’ble Bombay High Court, it is necessary to consider the facts that were before the Hon’ble Court. In that case, the petitioner owned 50 per cent of the share capital of a company viz. Shivum Holdings Private Limited (SHPL). The petitioner also owned 25 per cent share capital in a company called P&A Estate Private Limited (P&A). SHPL held an 85 per cent interest in a partnership firm called Lotus Trading Company (LTC) and the petitioner held the balance 15 per cent in the said LTC. P&A had received a loan advanced by LTC. The said loan was advanced by LTC on behalf of SHPL. The Assessing Officer held in the case of P&A that the loan was to be regarded as deemed dividends under section 2(22)(e) of the Act. On appeal, the CIT(A) held that section 2(22)(e) of the Act does not apply because it is necessary that P&A is a shareholder of SHPL. The Tribunal affirmed the order of the CIT(A) and the order of the Tribunal was affirmed by the Hon’ble Delhi High Court [CIT vs. Ankitech (P) Ltd (2011) 340 ITR 14 (Delhi)]. In paragraph 30 of the said order, it was observed by the Delhi High Court as under:

“30. Before we part with, some comments are to be necessarily made by us. As pointed out above, it is not in dispute that the conditions stipulated in section 2(22)(e) of the Act treating the loan and advance as deemed dividends are established in these cases. Therefore, it would always be open to the revenue to take corrective measure by treating this dividends income at the hands of the shareholders and tax them accordingly. As otherwise, it would amount to escapement of income at the hands of those shareholders”. (Emphasis supplied)

On the strength of the above paragraph 30, the Revenue initiated reassessment proceedings in the case of the petitioner. The Revenue argued that paragraph 30 constituted “finding” or “direction” for the purpose of section 150 of the Act. This argument was rejected by the Hon’ble Bombay High Court which held that when it is left to the option and discretion of the Income-tax Officer, it cannot be described as a direction. Similarly, since the Hon’ble Delhi High Court was dealing with a question as to whether section 2(22)(e) applies in case of P&A, it was held that paragraph 30 cannot be regarded as a finding.

32. Further, the CBDT instruction appears to be taking a view that the observation of the Supreme Court is the ratio decidendi and thus, binding under Article 141 of the Constitution. It is submitted that the understanding of the CBDT is without appreciating the fact that the subject matter of appeal before the Supreme Court was the scope of assessment under section 153A of the Act. Ratio decidendi is something which is essential to decide the issue involved. It is submitted that the observations which have been made in paragraph 14(iv) cannot be regarded as ratio decidendi because the observation was not necessary to decide the question involved in the appeals. As held by the Hon’ble Supreme Court in the case of Mavilayi Service Co-Operative Bank Ltd vs. CIT [2021] 431 ITR 1 (SC), it is only the ratio decidendi of a judgment that is binding as a precedent and what is of essence in a decision is its ratio and not every observation found therein.

33. Even otherwise, it is submitted that the observation cannot be interpreted as if the Supreme Court has given its prior approval to initiate reassessment proceedings in the future. In each case, the AO will have to satisfy the jurisdictional preconditions which may become the subject matter of consideration. All that the Hon’ble Supreme Court has observed is that the AO can reopen in accordance with the law. It is submitted that had the Supreme Court not made any observation, even then the action of the AO would be tested in accordance with the law. In other words, dehors the observations made by the Supreme Court, the AO is not precluded from initiating reassessment proceedings if the same is otherwise valid and in accordance with the law. It is thus submitted that the observations made by the Supreme Court which has been relied upon by the Revenue cannot be regarded as ratio decidendi.

The Hon’ble Supreme Court / High Court / Tribunal cannot be regarded as “any authority” for the purpose of section 150(1) of the Act

34. As discussed above, one of the conditions based on which the AO can issue notice under section 148 of the Act irrespective of the time limit specified under section 149 of the Act is when the said notice is being issued for the purpose of making an assessment or reassessment or recomputation in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference or revision.

35. In this regard, a question that arises is as to whether the Hon’ble Supreme Court can be regarded as an “authority”. A further issue that arises is as to whether civil appeals with which the Hon’ble Supreme Court was dealing with could be regarded as “proceeding under this Act”.

36. In the case of Pavan Morarka (supra), the Hon’ble Court held that authority is defined under section 116 of the Act and the Hon’ble Delhi High Court is not among the classes of income-tax authorities for the purpose of the Act. It is submitted that on the same principle, even the Hon’ble Supreme Court cannot be regarded as falling within the scope of expression “authority”, the provisions of section 150 of the Act do not apply. Similarly, the Tribunal as well as the High Court would not fall within the scope of “authority” for the purpose of section 150 of the Act and thus, the CBDT instruction to the extent it directs that the AO may initiate reassessment proceedings by following the procedure prescribed under section 148A of the Act after disposal of appeals by the Tribunal / High Court, is invalid.

37. There is one more way in which the expression “authority” may be interpreted. Sub-section (1) provides that notice under section 148 of the Act may be issued for the purpose of assessment or reassessment in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference or revision or by a Court in any proceeding under any other law. Under section 150(1), two separate expressions are used viz. authority and Court which are separated by the word “or”. It is therefore clear from the express language itself that the scope of the expression “authority” does not include a Court and would thus, exclude the Hon’ble Supreme Court and the Hon’ble High Court.

38. In view of the above discussion, it is submitted that the Tribunal, High Court and the Supreme Court would not fall within the scope of “authority” for the purpose of section 150 of the Act.

Civil Appeals / Special Leave petitions are not proceedings under the Act

39. In the batch of appeals in the case of Abhisar Buildwell (supra) and U. K. Paints (supra), the Hon’ble Supreme Court was deciding a batch of civil appeals in its appellate jurisdiction. Originally, the Revenue had filed special leave petitions (“SLP”) under Article 136 of the Constitution which were converted into civil appeals.

40. In the case of Kunhayammed vs. State of Kerala [2000] 245 ITR 360 (SC), the Hon’ble Supreme Court has considered the scope and various stages of the appellate jurisdiction of the Supreme Court under Article 136 of the Constitution. It is observed that it is not the policy of the Court to entertain an SLP and grant leave under Article 136. It is only in certain cases where the Court may grant leave. Upon leave being granted, the SLP will be treated as an appeal, and it will register and be numbered as such. The said procedure is not under the Act but under the Supreme Court Rules which are framed under Article 145 of the Constitution.

41. It is therefore submitted that the decision of the Supreme Court is not an order from any proceeding under the Act and thus, even on this ground, section 150(1) of the Act may not be applicable. The issue may also be examined from another perspective. Section 261 of the Act provides for an appeal to the Supreme Court. However, the appeals filed by the Revenue in the case of Abhisar Buildwell (supra) were not under section 261 of the Act and thus, not a proceeding under the Act.

Scope of miscellaneous application / notice of motion

42. Paragraph 7.2.3 provides that if the Tribunal / High Court decides the appeal pending before it contrary to the decision of the Supreme Court in the case of Abhisar Buildwell (supra), then a miscellaneous application / notice of motion is suggested. In case the time limit to file a miscellaneous application / notice of motion has expired, then the same may be filed with an application for condonation.

43. It appears that in all cases, the CBDT is requesting the Tribunal/ High Court to modify the order in line with paragraph 14(iv) of the Supreme Court decision in the case of Abhisar Buildwell (supra). In other words, the CBDT has directed the AO to request the Tribunal / High Court to modify the appellate order and hold that the AO has the power to act under section 147 / 148 of the Act if the same is permissible.

44. It is submitted that the Tribunal / High Court in its appellate jurisdiction is only called upon to decide the issues which are the subject matter of the appeal. In view of the ratio of the Supreme Court in the case of Abhisar Buildwell (supra), the Tribunal / High Court is bound to decide the appeals in favor of the Assessee and against the Revenue in all assessments under section 153A of the Act where additions were made in the absence of incriminating material. The power of the AO to reopen is not and cannot be the subject matter of the appeal.

45. It is therefore respectfully submitted that any other observation made by the Tribunal / High Court in the appellate order would be beyond the subject matter of appeal. It is therefore submitted that any miscellaneous application / notice of motion to modify the appellate order and insert observations in line with paragraph 14(iv) of the Supreme Court order in the case of Abhisar Buildwell (supra) would not be maintainable. In other words, when the scope of appeal itself is limited to determine the scope of assessment under section 153A of the Act, there does not arise any question of miscellaneous application / notice of motion which is in line with the decision of the Supreme Court. In any case, if the appellate order of the Tribunal / High Court is in line with the ratio of Abhisar Buildwell (supra), no modification in such order would be permissible.

46. In view of the above, the direction issued by the CBDT in paragraph 7.2.3 of the instruction is wholly untenable, misconceived and misdirected in law.

CONCLUSION

47. It is submitted that the CBDT instruction must be read and interpreted in a manner that is not contrary to the provisions of section 150 of the Act and the settled judicial precedents which continue to hold the field. Any other view would mean that there is no time limit to issue a notice under section 148 of the Act. It is a fundamental principle of law that there must be finality to all legal proceedings. An interpretation which leads to such a result must be avoided. One must not attribute the CBDT to disregard such a fundamental principle of law.

BCAJ Admin

Glimpses of Supreme Court Rulings

13. Pr. Commissioner of Income Tax vs. Khyati Realtors Pvt. Ltd.
(2022) 447 ITR 167 (SC)

Bad and doubtful debts – For claiming deduction of a bad debt – (i) The amount of any bad debt or part thereof has to be written-off as irrecoverable in the accounts of the Assessee for the previous year; (ii) Such bad debt or part of it written-off as irrecoverable in the accounts of the Assessee cannot include any provision for bad and doubtful debts made in the accounts of the Assessee; (iii) No deduction is allowable unless the debt or part of it ‘has been taken into account in computing the income of the Assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year’, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the Assessee; and (iv) The Assessee is obliged to prove to the AO that the case satisfies the ingredients of Sections 36(1)(vii) and 36(2) of the Act.

The Assessee carried on real estate development business, trading in transferable development rights (TDR) and finance. In respect of its return of income for the A.Y. 2009-2010, the assessment was completed by the AO u/s 143(3) on 30th December, 2011. The Assessee, in the course of the assessment proceedings, contended that an amount of Rs. 10 crores was deposited with one M/s. C. Bhansali Developers Pvt. Ltd. towards acquisition of commercial premises two years prior to the assessment year in question (i.e., in 2007). It was contended that the project did not appear to make any progress, and consequently, the Assessee sought a return of the amount from the builder. However, the latter did not respond. As a result, the Assessee’s Board of Directors resolved to write off the amount as a bad debt in 2009. It was also contended that the amount could also be construed as a loan, since the Assessee had ‘financing’ as one of its objects.

The AO disallowed the sum of Rs. 10 crores claimed as a bad debt in determining its income under ‘Profits and Gains of Business or Profession’.

Aggrieved, the Assessee appealed before the Appellate Commissioner (hereinafter, “CIT (A)”).

The CIT(A) confirmed the disallowance on account of bad debts and interest.

A further appeal was preferred to the ITAT, which allowed the Assessee’s plea.

The Revenue sought an appeal to the Bombay High Court u/s 260A of the Income-tax Act. The Bombay High Court ruled that no question of law requiring a decision arose in the appeal and consequently declined to entertain the Revenue’s plea.

The Supreme Court after referring to the relevant provisions of the Act observed that income of every Assessee has to be assessed according to the statutory framework laid out in Chapter IV, Part D of the Act. That chapter deals with heads of income. Section 28 of the Act deals with the chargeability of the income to tax under the head ‘Profits and Gains of Business or Profession’. The other deductions that an Assessee can claim are elaborated u/s 36 of the Act, which opens with the phrase “the deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28”. For the purposes of computing income chargeable to tax, therefore, besides specific deductions, ‘other deductions’ enumerated in different clauses of Section 36 can be allowed by the AO. Each of the deductions must relate to the business carried out by the Assessee. If the Assessee carries on a business and writes off a debt relating to the business as irrecoverable, it would without doubt be entitled to a corresponding deduction under Clause (vii) of Sub-section (1) of Section 36 subject to the fulfilment of the conditions set forth in Sub-section (2) of Section 36 of the IT Act.

Before the amendment in 1989, the law was that even in cases where the Assessee had made only a provision in its accounts for bad debts and interest thereon, without the amount actually being debited from the Assessee’s Profit and Loss account, the Assessee could still claim deduction u/s 36(1)(vii) of the Act. W.e.f. 1st April, 1989, with the insertion of the new Explanation to Section 36(1)(vii), any bad debt written-off as irrecoverable in the account of the Assessee would not include any ‘provision’ for bad and doubtful debt made in the accounts of the Assessee. In other words, before this date, even a provision could be treated as a write off. However, after this date, the Explanation to Section 36(1)(vii) brought about a change. As a result, a mere provision for bad debt per se was not entitled to deduction u/s 36(1)(vii).

To understand the above dichotomy, one must understand ‘how to write off’. If an Assessee debits an amount of doubtful debt to the P&L Account and credits the asset account like sundry debtor’s Account, it would constitute a write off of an actual debt. However, if an Assessee debits “provision for doubtful debt” to the P&L Account and makes a corresponding credit to the “current liabilities and provisions” on the Liabilities side of the balance sheet, then it would constitute a provision for doubtful debt. In the latter case, Assessee would not be entitled to deduction from 1st April, 1989.

This position in law was recognised by the Supreme Court in Southern Technologies Ltd. vs. Joint Commissioner of Income Tax, Coimbatore (2010) 320 ITR 577 (SC).

Therefore, merely stating a bad and doubtful debt as an irrecoverable write off without the appropriate treatment in the accounts, as well as non-compliance with the conditions in Section 36(1)(vii), 36(2), and Explanation to Section 36(1)(vii) would not entitle the Assessee to claim a deduction. This position was reiterated again in Catholic Syrian Bank Ltd. vs. Commissioner of Income Tax, Thrissur (2012) 343 ITR 270 (SC).

The Supreme Court noted the ruling in T.R.F. Ltd vs. Commissioner of Income Tax, Ranchi (2010) 323 ITR 397 (SC) relied on by the Assessee. In that judgment, it had inter alia, observed that:

“4. This position in law is well-settled. After 1st April, 1989, it is not necessary for the Assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the Assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the Assessee. When bad debt occurs, the bad debt account is debited and the customer’s account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from Sundry Debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the Assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off.”

According to the Supreme Court, in the above matter of T.R.F. Ltd. (supra), it had not examined the impact of Section 36(2) and the condition of write off, in the accounts of the Assessee during the previous year. However, the judgments in Southern Technologies (supra), and Catholic Syrian Bank (supra) spelt out the conditions subject to which an Assessee could write off a bad and doubtful debt. Furthermore, Catholic Syrian Bank (supra) is by a bench of three judges, whereas the other decisions are by benches of two Judges.

According to the Supreme Court, it was evident from the above rulings of this Court, that:

“(i) The amount of any bad debt or part thereof has to be written-off as irrecoverable in the accounts of the Assessee for the previous year;

(ii) Such bad debt or part of it written-off as irrecoverable in the accounts of the Assessee cannot include any provision for bad and doubtful debts made in the accounts of the Assessee;

(iii) No deduction is allowable unless the debt or part of it “has been taken into account in computing the income of the Assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year”, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the Assessee;

(iv) The Assessee is obliged to prove to the AO that the case satisfies the ingredients of Section 36(1)(vii) as well as Section 36(2) of the Act.”

The Supreme Court noted that in the present case, the record showed that the accounts of the Assessee nowhere showed that the advance was made by it to M/s. C. Bhansali Developers Pvt. Ltd. in the ordinary course of business. Its primary argument was that the amount of Rs. 10 crores was given for the purpose of purchasing constructed premises. However, the amount was written-off on 28th March, 2009. As noted by the CIT(A), there was no material to substantiate this submission, in respect of payment of the amount, the time by which the constructed unit was to be given to it, the area agreed to be purchased, etc. Equally, in support of its other argument that the amount was given as a loan, the Assessee nowhere established the duration of the advance, the terms and conditions applicable to it, interest payable, etc. The Assessee conceded that it had received interest income for the relevant assessment year. However, it could not establish that any interest was paid (or shown to be payable in its accounts) for the sum of Rs. 10 crores. Furthermore, there was nothing on record to suggest that the requirement of the law that the bad debt was written-off as irrecoverable in the Assessee’s accounts for the previous year had been satisfied. Another reason why the amount could not have been written-off, was that the Assessee’s claim was that it was given to M/s. Bhansali Developers Pvt. Ltd. for acquiring immovable property – it therefore, was in the nature of a capital expenditure. It could not have been treated as a business expenditure.

The Supreme Court referred to its decision in A.V. Thomas and Co. Ltd., vs. The Commissioner of Income Tax [1963] 48 ITR 67 (SC) in which it was held as follows:

“16. Now, a question Under Section 10(2)(xi) can only arise if there is a bad or doubtful debt. Before a debt can become bad or doubtful it must first be a debt. What is meant by debt in this connection was laid down by Rowlatt J., in Curtis v. J. & G. Oldfield Ltd., (1925) 9 TC 319 as follows:

When the Rule speaks of a bad debt it means a debt which is a debt that would have come into the balance sheet as a trading debt in the trade that is in question and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come in to swell the profits.

17. A debt in such cases is an outstanding which if recovered would have swelled the profits. It is not money handed over to someone for purchasing a thing which that person has failed to return even though no purchase was made. In the Section a debt means something more than a mere advance. It means something which is related to business or results from it. To be claimable as a bad or doubtful debt it must first be shown as a proper debt…”

In view of the above, the Supreme Court held that the Assessee’s claim for deduction of Rs. 10 crore as a bad and doubtful debt could not have been allowed. The findings of the ITAT and the High Court, to the contrary, were therefore, insubstantial and had to be set aside.

The Supreme Court also considered the second issue raised by the Assessee relating to the admissibility of expenditure as a deduction, which does not fall within the provisions of Sections 28 to 43, and is not capital in nature, but is laid out or spent exclusively for the purpose of business u/s 37 of the Act. The Supreme Court noted that a similar provision existed under the old Income Tax Act, 1922 as in the case of provision for bad debts by Section 10(2). This aspect was considered by the Supreme Court in The Commissioner of Income Tax vs. The Mysore Sugar Co. Ltd. (1962) 46 ITR 649 (SC). The Assessee there was engaged in production of sugar. It used to advance monies to cane growers in consideration of supply of sugarcane. Due to drought, the cane growers could not repay the amounts advanced.

The Assessee claimed the outstanding to be bad debts, and sought to write them off. This was not allowed; the Income-tax Officer held the expenditure to be capital in nature. The High Court however, set aside that determination. The Supreme Court confirmed the view of the High Court. However, the Court also examined the argument whether in such eventualities, the expenditure could be claimed to be exclusively laid out for the purpose of business (under the provision corresponding to Section 37(1) of the Act). The Supreme Court had held as follows:

“7. The tax under the head “Business” is payable u/s 10 of the Income-tax Act. That Section provides by Sub-section (1) that the tax shall be payable by an Assessee under the head “profits and gains of business, etc.” in respect of the profits or gains of any business, etc. carried on by him. Under Sub-section (2), these profits or gains are computed after making certain allowances. Clause (xi) allows deduction of bad and doubtful business debts. It provides that when the Assessee’s accounts in respect of any part of his business are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the Assessee in respect of that part of the his business is deductible but not exceeding the amount actually written off as irrecoverable in the books of the Assessee. Clause (xv) allows any expenditure not included in Clauses (i) to (xiv), which is not in the nature of capital expenditure or personal expenses of the Assessee, to be deducted, if laid out or expanded wholly and exclusively for the purpose of such business, etc. The clauses expressly provided what can be deducted; but the general scheme of the Section is that profits or gains must be calculated after deducting outgoings reasonably attributable as business expenditure but so as not to deduct any portion of an expenditure of a capital nature. If an expenditure comes within any of the enumerated classes of allowances, the case can be considered under the appropriate class; but there may be an expenditure which, though not exactly covered by any of the enumerated classes, may have to be considered in finding out the true assessable profits or gains. This was laid down by the Privy Council in Commissioner of Income-tax v. Chitnavis I.L.R. (1932) IndAp 290 and has been accepted by this Court. In other words, Section 10(2) does not deal exhaustively with the deductions, which must be made to arrive at the true profits and gains.

8. To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for that was the money laid out? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstances, it is a loss of capital, but if lost in the second circumstances, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses.”

The Supreme Court observed that it was apparent in this case, it was satisfied that the disallowance of the amount, on account of bad and doubtful debt, did not preclude a claim for deduction, on the ground that the expenditure was exclusively laid out for the purpose of business. The Court applied the test of whether the expense was incurred for business, or whether it fell into the capital stream. In the facts of the case, the tests were satisfied – the expenditure was for the purpose of business, and did not fall in the capital stream.

The Supreme Court noted that the Assessee had relied on a few High Court judgments which have ruled that even if a claim for deduction u/s 36(1) is not allowed, the possibility of its exclusion u/s 37 cannot be ruled out. According to the Supreme Court, as a proposition of law, that enunciation was unexceptional, since the heads of expenditure that can be claimed as deduction are not exhaustive – which is the precise reason for the existence of Section 37. Therefore, in a given case, if the expenditure relates to business, and the claim for its treatment under other provisions are unsuccessful, application of Section 37 is per se not excluded.

The Supreme Court was however of the opinion that in the facts of the present case, the judgment in Southern Technologies (supra) on this issue (where the claim of bad and doubtful debt was disallowed) was appropriate, and applicable.

According to the Supreme Court, in view of the foregoing, the Revenue’s appeal had to succeed. The impugned judgment of the High Court and the order of ITAT were therefore set aside. The appeal was allowed, in the above terms, without order on costs.

BCAJ Admin

Glimpses of Supreme Court Rulings

Pr. Commissioner of Income Tax – I, Chandigarh vs. ABC Papers Ltd.
AIR 2022 SC 3905

12. Appeal to the High Court – Section 260A – Appeals against every decision of the ITAT shall lie only before the High Court within whose jurisdiction the AO who passed the assessment order is / was situated

The Appellant, M/s. ABC Papers Ltd., a company engaged in the manufacture of writing and printing paper, filed its income tax returns for A.Y. 2008-09, before the AO, New Delhi, on 30th September, 2008. The Deputy Commissioner of Income Tax, Circle-1(1), New Delhi, passed an assessment order dated 30th December, 2010.

Aggrieved by that order, the Assessee preferred an appeal to the Commissioner of Income Tax (Appeals) – IV, New Delhi, and by his order dated 16th February, 2012, the Commissioner allowed the appeal.

While the matter was pending appeal before the CIT (Appeals) – IV, New Delhi, a search operation u/s 132(1) of the Act was carried out on 4th May, 2011 at the office and factory of the Assessee in Chandigarh and certain places in the State of Punjab, by the Directorate of Income Tax (Investigation), Ludhiana. After the search operation, by an order dated 26th June, 2013 passed u/s 127 of the Act, the Commissioner of Income Tax (Central), Ludhiana, centralized the cases of the Assessee for the A.Ys. 2006- 07 to 2013-14 and transferred the same to Central Circle, Ghaziabad.

Against this appellate order, the Revenue carried the matter to ITAT, New Delhi. The ITAT, New Delhi, by its order dated 11th May, 2017, upheld the order of the CIT (Appeals) – IV, New Delhi, and dismissed the appeal filed by the Revenue.

Against this order of the ITAT, the Revenue filed ITA No. 517 of 2017 before the High Court of Punjab & Haryana.

In view of the above transfer u/s 127, the Deputy Commissioner of Income Tax, Central Circle, Ghaziabad, proceeded further and passed an assessment order after the search on 31st March, 2015.

Aggrieved by that order, the Assessee filed an appeal which came to be allowed by the Commissioner of Income Tax (Appeals) – IV, Kanpur, on 20th December, 2016.

Against this appellate order, the Revenue preferred an appeal to ITAT, New Delhi. As the decision of the ITAT dated 11th May, 2017 in the case of the Assessee with respect to an earlier assessment year was already available, the ITAT, New Delhi, followed the said judgment and dismissed the appeal filed by the Revenue by its order dated 1st September, 2017.

It is against this order that the Revenue filed ITA No. 130 of 2018 before the High Court of Punjab & Haryana.

Before the Revenue could file an appeal against the orders of the ITAT dated 11th May, 2017 (arising out of the original proceedings) and 1st September, 2017 (arising out of proceedings after transfer u/s 127), the cases of the Assessee were re-transferred u/s 127 of the Act to the Deputy Commissioner of Income Tax, Circle-1(1), Chandigarh, w.e.f. 13th July, 2017.

It was on the basis of the said transfer that the Revenue took a decision to file appeals, being ITA No. 517 of 2017 (against the order of the ITAT dated 11th May, 2017) and ITA No. 130 of 2018 (against the order of the ITAT dated 1st September 2017) before the High Court of Punjab & Haryana.

The High Court of Punjab & Haryana by its judgment dated 7th February, 2019, disposed of ITA No. 130 of 2018 by holding that, notwithstanding the order u/s 127 of the Act which transferred the cases of the Assessee to Chandigarh, the High Court of Punjab & Haryana would not have jurisdiction as the AO who passed the initial assessment order was situated outside the jurisdiction of the High Court. For arriving at this conclusion, the High Court followed the decision in the case of Commissioner of Income Tax vs. Motorola India Ltd. (2010) 326 ITR 156 (P&H) and Commissioner of Income Tax (Central), Gurgaon vs. Parabolic Drugs Limited (ITA No. 49 of 2012). With this view of the matter, the High Court dismissed the appeal as not maintainable. By the same judgment, the High Court also disposed of ITA No. 517 of 2017 filed by the Revenue against the decision of the ITAT, New Delhi, dated 11th May, 2017, by adopting the same logic.

Aggrieved by the decision of the High Court of Punjab & Haryana refusing to entertain the appeals against the orders of the ITAT dated 11th May, 2017 and 1st September, 2017, the Revenue filed the appeals before the Supreme Court, being Civil Appeal No. 4252 of 2022 (against the order of the High Court of Punjab & Haryana in ITA No. 517 of 2017) and Civil Appeal No. 4253 of 2022 (against the order of the High Court of Punjab & Haryana in ITA No. 130 of 2018) before the Supreme Court.

Against the very same order of the ITAT, New Delhi, dated 11th May, 2017, the Revenue had also filed an appeal, being ITA No. 515 of 2019 before the High Court of Delhi. The High Court of Delhi having noted the decision of the High Court of Punjab & Haryana dated 7th February, 2019 holding that it does not have jurisdiction, nevertheless, dismissed the appeal by its order dated 21st May, 2019 on the grounds of lack of territorial jurisdiction of the High Court of Delhi. For arriving at the conclusion that the High Court of Delhi would not have territorial jurisdiction, the decision of its own Court in the case of CIT vs. Sahara India Financial Corporation Ltd (2007) 294 ITR 363 (Del) and CIT vs. Aar Bee Industries Ltd (2013) 357 ITR 542 (SC) were relied upon. In those two decisions, the High Court of Delhi had taken a view that when an order of transfer u/s 127 of the Act is passed, the jurisdiction gets transferred to the High Court within whose jurisdiction the situs of the transferee officer is located. Aggrieved by the decision of the High Court of Delhi, the Revenue preferred appeal to the Supreme Court being, Civil Appeal No. 3480 of 2022.

The Supreme Court noted that the above referred facts clearly evidence that in the case of the very same Assessee, the High Court of Punjab & Haryana as well as the High Court of Delhi had refused to entertain the appeals on the ground that they lack territorial jurisdiction. Both the High Courts relied on decisions of their own Courts which had taken diametrically opposite perspectives.

The Supreme Court was therefore tasked to resolve the issue as to which High Court would have the jurisdiction to entertain an appeal against a decision of a Bench of the ITAT exercising jurisdiction over more than one state, particularly when case(s) of same assessment year are transferred u/s 127 of the Act.

The Supreme Court observed that Section 260A is open textual and does not specify the High Court before which an appeal u/s 260A of the Act would lie. Even Section 269 which defines ‘High Court’ merely relates the High Court in any State with the High Court for that State and further prescribes specific High Courts for each of the U.T.

According to the Supreme Court, a judicial remedy must be effective, independent and at the same time certain. Certainty of forum would involve unequivocal vesting of jurisdiction to adjudicate and determine the dispute in a named forum.

The Supreme Court noted that the issue has already fallen for consideration before a Division Bench of the High Court of Delhi way back in 1978 in the case of Seth Banarsi Dass Gupta vs. CIT (1978) 113 ITR 817 (Del). Having considered the matter in detail, the High Court of Delhi held that the “most appropriate” High Court for filing an appeal would be the one where the AO is located. The decision was followed in Suresh Desai & Associates vs. Commissioner of Income Tax (1998) 230 ITR 912 (Del) by Justice Lahoti (as he then was) and provided additional reasons in support of the same view and also in other matters which later came up before the Delhi High Court and Punjab and Haryana High Court.

However, the High Court of Delhi in the case of Sahara, took a view that upon an order of transfer u/s 127 of the Act, the case of the Assessee would get transferred “lock, stock and barrel” including the High Court. As per this decision, the High Court having jurisdiction over the situs of the transferee AO alone would have jurisdiction.

The Supreme Court noted the facts involved the case of Sahara. In that case, the assessment order was passed by the AO, Lucknow. Appeal against that order was decided by CIT (Appeals), Lucknow, and a further appeal was decided by ITAT, Lucknow. Pursuant to the ITAT order, an appeal was filed before the Lucknow Bench of the Allahabad High Court. During the pendency of this appeal, the records of the Assessee came to be transferred from Lucknow to New Delhi. Hence, an appeal came to be filed before the High Court of Delhi as well. A preliminary objection was raised that the High Court of Delhi lacks jurisdiction as the AO was situated in Lucknow. Departing from the long-standing decisions from Seth Banarasi Dass onwards, the Court rejected the contention, and held that the High Court of Delhi had the jurisdiction to entertain the appeal.

The decision in the case of Sahara was followed by a subsequent Bench of the High Court of Delhi in Aar Bee. In this case, the assessment order was passed in Jammu, an appeal against that order was decided by CIT (Appeals), Jammu, and thereafter, an appeal came to be decided by ITAT, Amritsar. Immediately after the ITAT order, the records of the Assessee came to be transferred from Jammu to New Delhi by an order u/s 127 of the Act. Hence, an appeal against the ITAT order was filed before the High Court of Delhi. When the matter came up before the High Court of Delhi, it was contended that the High Court of Delhi did not have jurisdiction to entertain the appeal in as much as the situs of the AO was in Jammu. In support, the decision of the High Court of Punjab & Haryana in Motorola, was relied upon.

Rejecting the contention, differing with Motorola and following the judgment of its own Court in Sahara, it was held the Court was unable to agree with the views expressed by the Punjab & Haryana High Court and was bound to follow the decision of its Court in Sahara.

The Supreme Court noted that Section 127 occurs in Chapter XIII of the Act which relates to Income Tax Authorities. In the same chapter, Section 116 enlists the Income Tax Authorities and Section 120 specifies the jurisdiction of such Authorities. While Section 124 specifically speaks of the jurisdiction of AOs, Section 127 enables a higher authority to transfer a ‘case’ from one AO to another AO. All these provisions in Chapter XIII only relate to the executive or administrative powers of Income Tax Authorities. According to the Supreme Court, the vesting of appellate jurisdiction has no bearing on judicial remedies provided in Chapter XX of the Act before the ITAT and the High Court. The mistake committed by the High Court was in assuming that the expression “case” in the Explanation to Sub-section 4 of Section 127 has an overarching effect and would include the proceedings pending before the ITAT as well as a High Court. This fundamental error had led the Division Bench of the High Court of Delhi to come to a conclusion that an order of transfer made u/s 127 would have the effect of transferring the case “lock, stock and barrel” not only from the jurisdiction of the ITAT, but also from that of the High Court in which the AO was located, and vest it in the High Court having jurisdiction over the transferee AO. The Supreme Court observed that this erroneous interpretation was in fact advanced before the Andhra Pradesh High Court in CIT vs. Parke Davis (India) Ltd. (1999) 239 ITR 820 (AP) as well, but it was rejected straightaway.

The Supreme Court further noted that in Sahara, the Division Bench of the High Court of Delhi sought to distinguish the two decisions of the very same High Court in Suresh Desai and Digvijay Chemicals on the ground that those cases did not involve the transfer of cases of the very same assessment year. The Supreme Court reformulated this as a proposition of law, namely, if it is the accepted principle to determine the jurisdiction of a High Court u/s 260A of the Act on the basis of the location of the AO who assessed the case, then, by the strength of the very same logic, upon transfer of a case to another AO u/s 127, the jurisdiction u/s 260A must be with the High Court in whose jurisdiction the new AO is located. A logical extension of this argument is that, once the case is transferred to an AO situated outside the jurisdiction of the existing High Court, the entire files relating to the case should now be in the possession and custody of the new AO. It could be argued that the AO who exercised the jurisdiction before its transfer will not be in a position to assist the High Court, further, he cannot implement the decision of that High Court, after it decides the question of law as he is no more the AO. The Supreme Court, stating the proposition, proceeded to deal with these arguments.

According to the Supreme Court, the binding nature of decisions of an Appellate Court established under a statute on subordinate Courts and Tribunals within the territorial jurisdiction of the State, is a larger principle involving consistency, certainty and judicial discipline, and it has a direct bearing on the Rule of law. This ‘need for order’ and consistency in decision making must inform our interpretation of judicial remedies. An important reason adopted in the case of Seth Banarasi Dass Gupta, further highlighted by Justice Lahoti in Suresh Desai, is that a decision of a High Court is binding on Subordinate Courts as well as Tribunals operating within its territorial jurisdiction. It is for this very reason that the AO, Commissioner of Appeals and the ITAT operate under the concerned High Court as one unit, for consistency and systematic development of the law. It is also important to note that the decisions of the High Court in whose jurisdiction the transferee AO is situated do not bind the Authorities or the ITAT which had passed orders before the transfer of the case has taken place. This creates an anomalous situation, as the erroneous principle adopted by the authority or the ITAT, even if corrected by the High Court outside its jurisdiction, would not be binding on them.

The legal structure under the Income-tax Act commencing with AO, the Commissioner of Appeals, ITAT and finally the High Court u/s 260A must be seen as a lineal progression of judicial remedies. Culmination of all these proceedings in question of law jurisdiction of the High Court u/s 260A of the Act is of special significance as it depicts the overarching judicial superintendence of the High Court over Tribunals and other Authorities operating within its territorial jurisdiction.

The power of transfer exercisable u/s 127 is relatable only to the jurisdiction of the Income-tax Authorities. It has no bearing on the ITAT, much less on a High Court. If the submission based on Sahara is accepted, it will have the effect of the executive having the power to determine the jurisdiction of a High Court. This can never be the intention of the Parliament. The jurisdiction of a High Court stands on its own footing by virtue of Section 260A r.w.s. 269 of the Act. While interpreting a judicial remedy, a Constitutional Court should not adopt an approach where the identity of the appellate forum would be contingent upon or vacillates subject to the exercise of some other power. Such an interpretation will clearly be against the interest of justice. Under Section 127, the authorities have the power to transfer a case either upon the request of an Assessee or for their own reasons. Though the decision u/s 127 is subject to judicial review or even an appellate scrutiny, the Supreme Court for larger reasons would avoid an interpretation that would render the appellate jurisdiction of a High Court dependent upon the executive power. As a matter of principle, transfer of a case from one judicial forum to another judicial forum, without the intervention of a Court of law is against the independence of judiciary. This is true, particularly, when such a transfer can occur in exercise of pure executive power. This is yet another reason for rejecting the interpretation adopted in the case of Sahara.

For the reasons stated above, the Supreme Court held that the decision of the Delhi High Court in Sahara and Aar Bee does not lay down the correct law and therefore, it overruled these judgments.

The Supreme Court, in conclusion, held that appeals against every decision of the ITAT shall lie only before the High Court within whose jurisdiction the AO who passed the assessment order is situated. Even if the case or cases of an Assessee are transferred in exercise of power u/s 127 of the Act, the High Court within whose jurisdiction the AO has passed the order, shall continue to exercise the jurisdiction of appeal. This principle is applicable even if the transfer is u/s 127 for the same assessment year(s).

The Supreme Court then dealt with the decisions of certain High Courts which had taken a view that the jurisdiction of the High Court must be based on the location of the ITAT. These judgments were CIT vs. Parke Davis (India) Ltd.11, CIT vs. A.B.C. India Ltd. (2003) 126 Taxman 18 (Cal), CIT vs. J.L. Marrison (India) Ltd. (2005) 272 ITR 321 (Cal), CIT vs. Akzo Nobel India Ltd. (2014) 47 Taxmann.com 372 (Cal), Pr. CIT vs. Sungard Solutions (I) Pvt. Ltd. (2019) 415 ITR 294 (Bom) and CIT vs. Shree Ganapati Rolling Mills (P) Ltd. (2013) 356 ITR 586 (Gau). The Supreme Court examined these cases in detail and found that the AOs in each of these cases were in fact not located within the territorial jurisdiction of these High Courts. For this reason, the aforesaid decisions were correct to the extent of these High Courts not exercising jurisdiction. However, while returning the files to be represented in the appropriate Court, certain observations were made stating that the appeals could be filed in the High Court which exercises territorial jurisdiction over the concerned ITAT. The Supreme Court held that these observations were only obiter. In any event they did not preclude the party from filing the appeal before the appropriate High Court where the AOs exercised jurisdiction. However, the Supreme Court reiterated for clarity and certainty that the jurisdiction of a High Court is not dependent on the location of the ITAT, as sometimes a Bench of the ITAT exercises jurisdiction over plurality of states.

For the reasons and principles that it laid down, the Supreme Court disposed of the Civil Appeals with appropriate directions.

BCAJ Admin

Glimpses of Supreme Court Rulings

11 National Petroleum Construction Company vs. Deputy Commissioner of Income Tax, Circle 2 (2), International Taxation, New Delhi & Ors. (2022) 446 ITR 382(SC)

Deduction of tax at source – Payment to non-resident – Issue of a certificate u/s 197(1) of the IT Act–Scope of enquiry and investigation in proceedings for grant of Certificate u/s 197 of the IT Act – Difference of opinion amongst the judges of Division Bench – Reference made to a larger Bench

The Appellant, National Petroleum Construction Company, was a company incorporated under the laws of the United Arab Emirates (UAE) and was a tax resident of that country. The Appellant was, inter alia, engaged in the fabrication of petroleum platforms,pipelines and other equipment, installation of petroleum platforms, submarine pipelines, onshore and offshore oil facilities and coating of pipelines.

Pursuant to different tender notices issued by the ONGC from time to time, the Appellant submitted tenders, inter alia, for installation of petroleum platforms and submarine pipelines. The tenders submitted by the Appellant were accepted, and contracts executed by and between the Appellant and ONGC. The first contract executed was between the Appellant and ONGC in the F.Y. 1996-97, corresponding to the A.Y. 1997-98.

On 28th August 2005, the Appellant was awarded a contract termed as Contract No. MR/OW/MM/NHBS4WPP for the Well Platform Project-II, hereinafter referred to as ‘LEWPP Contract’, pursuant to a global tender floated by the ONGC in July 2005. This was the third contract between the Appellant and ONGC. Later on 23rd November 2006, the Appellant entered into another contract termed as Contract No. MR/OW/MM/C-Series/03/2006, hereinafter referred to as ‘C-Series Contract’, for C-Series Project.

The scope of work as described in the “General Conditions of Contract” for LEWPP Contract and C-Series Contract included, “surveys (pre-engineering, pre-construction/pre-installation and post-installation), design, engineering, procurement, fabrication, anticorrosion and weight coating (in case of rigid pipeline), load-out, tie-down/sea fastening, tow-out/sail-out, transportation, installation, hook-up, installation of submarine pipelines, installation and hook-up of submarine cables, modifications on existing facilities, testing, pre-commissioning, commissioning of entire facilities as described in the bidding document.”

The contracts referred to above included various activities. Whilst the activities related to survey, installation and commissioning were done entirely in India, the platforms were designed, engineered and fabricated overseas – in Abu Dhabi.

The Appellant had been filing its Income Tax Returns from the A.Y. 1997-98. Its income had been computed on a presumptive basis by taxing the gross receipts related to the activities in India, less verifiable expenses at the rate of 10 per cent and the receipts pertaining to activities out of India at the rate of 1 per cent. The provisions of the Agreement for Avoidance of Double Taxation, hereinafter referred to as the “AADT”, between India and the UAE were applicable in determining the taxable income of the Appellant under the IT Act.

The Appellant adopted the said basis for computing its assessable income and filed its returns for the A.Y. 1999-2000 onwards. Accordingly, the returns filed by the Appellant for the A.Ys. 2004-05, 2005-06 and 2006-07 were processed u/s 143(1) of the IT Act. However, the returns filed by the Appellant for A.Ys. 2007-08 and 2008-09, were not accepted by the Assessing Officer, hereinafter referred to as the ‘AO’.

The AO passed a Draft Assessment Order dated 31st December 2009 for the A.Y. 2007-08 holding that the Appellant had a Fixed Place Permanent Establishment in India in the form of a Project Office in Mumbai. The AO further held that Arcadia Shipping Ltd. (ASL), an agent of the Appellant had a Permanent Establishment in India, which constituted a Dependent Agent Permanent Establishment, hereinafter referred to as “DAPE”, of the Appellant.

With regards to the Appellant’s contention that the fabricated material was sold to ONGC outside India, the AO found that the contract was a turnkey and a composite one. It was not divisible as claimed by the Appellant. Accordingly, the AO held that the entire contractual receipts, including the payments for activities performed outside India, were taxable in India. The consideration received by the Appellant for design and engineering was held to be Fees for Technical Services, hereinafter referred to as the ‘FTS’. Since the Appellant had not maintained separate books on the contract, the AO estimated the Appellant’s profit at 25 per cent of the consideration received from ONGC.

The Appellant did not accept the Draft Assessment Order and filed its objections before the Dispute Resolution Panel, hereinafter referred to as the “DRP”. The DRP held that Article 5 of the AADT provided an inclusive definition of ‘Permanent Establishment’ (PE) and that the Appellant’s Project Office constituted a PE of the Appellant in India. The DRP concurred with the AO that ASL was a DAPE of the Assessee.

The DRP observed that the pre-engineering or pre- design survey, claimed to be done by a sub-contractor employed by the Appellant, was an integral part of the contract and the time spent by the subcontractor would also constitute the time spent by the Appellant in India, in computing residence in India for over nine months during the Assessment Year, in terms of the AADT.

The DRP rejected the contention that the contract was a divisible contract and the income of the Appellant for the activities done outside India was not taxable under the IT Act.

The Appellant filed an appeal against the order of the assessment passed by the AO before the Income Tax Appellate Tribunal hereinafter referred to as the “ITAT”. The ITAT concurred with the AO and rejected the Appellant’s contention that it did not have a PE in India. The ITAT also concurred with the AO that the establishment of ASL in India was a DAPE of the Appellant.

The ITAT, however, accepted the Appellant’s contention that the contract could be segregated into offshore and onshore activities, and the Appellant’s income for the activities carried on out of India could not be attributed to its PE in India.

The ITAT rejected the Appellant’s contention that the tax payable should be computed as per the formula adopted in the preceding years, i.e. 10 per cent of the receipts attributable to activities in India, less expenses in India and 1 per cent of the receipts attributable to activities carried on overseas.

By a judgment and order dated 29th January 2016, in the appeal being ITA No. 143 of 2013, filed by the Appellant and other related appeals filed by the Revenue, the Division Bench of the High Court of Delhi concurred with the view of the ITAT that consideration for activities carried on overseas could not be attributed to the Appellant’s PE in India. The Court observed that it was not disputed that invoices raised by the Appellant specifically indicated whether the work was done outside India or in India. Thus, even though the contracts might be turnkey contracts, the value of the work done outside India was segregable.

Two contracts were concluded by and between the Appellant and ONGC, one dated 30th September 2016, hereinafter referred to as LEWPP Contract, and the other dated 7th February 2018, hereinafter referred to as the R-series Contract. The Appellant received payments for work done under the said two contracts in F.Y. 2019-20 corresponding to the A.Y. 2020-21.

By a judgment and order dated 9th May 2017 in Writ Petition (C) No. 2117 of 2017, the High Court of Delhi set aside a Certificate dated 31st January 2017 issued by the Respondent No. 1 u/s 197 of the IT Act, requiring deduction of TDS at the rate of 4 per cent on all payments made by the ONGC to the Appellant for activities out of India and within the country in respect of the contract dated 30th September 2016. The R-series Contract was executed after the judgment of the High Court dated 9th May 2017, referred to above. The High Court had no occasion to consider the R-series contract.

On or about 8th May 2019, the Appellant applied for a certificate u/s 197 of the IT Act for deduction of nil tax on payments received from ONGC for activities carried on outside India, in the F.Y. 2019-20 in relation to the aforesaid contracts.

The Respondent, Income Tax Authorities raised queries on its portal, to which the Appellant responded by a letter dated 21st May 2019 addressed to the Respondent No. 1. On further query from the Income Tax Department, the Appellant filed a reply on 13th June 2019 pointing out that no income from activities outside India could be brought to tax in India. The Appellant also submitted a table showing the similarities between the contracts forming the subject-matter of the decision of the High Court and the contracts in the year under consideration, that is, the F.Y. 2019-20.

By the said letter dated 13th June 2019, the Appellant pointed out that for over two and half months since the start of the F.Y. 2019-20, no certificates had been issued to the Appellant u/s 197 of the IT Act as a result of which the Appellant was suffering undue hardship as its cash flow was being hampered. The Appellant, therefore, requested the Respondent No. 1 to issue certificate at the earliest. On 17th June 2019, the Appellant submitted activity-wise key dates for each platform under the R-Series and LEWPP Contracts to the Respondent No. 1.

By letter dated 22nd June 2019, addressed to the Respondent No. 1, the Appellant answered further queries. However, in view of the financial crunch faced by the Appellant, the Appellant requested:

“The Applicant humbly submits that since it is facing financial hardship as the first quarter of F.Y. 2019-20 has come to an end and it is yet to have the lower withholding tax certificate, the Applicant (without prejudice to its legal position), is willing to offer a concession to have the certificate at the tax rate of 4% plus applicable surcharge and cess for the entire contractual revenues, which is in line with the recently concluded assessment proceedings for A.Y. 2016-17 in Applicant’s own case, where your goodself concluded that the entire contractual revenues were chargeable to tax u/s 44BB of the Act at an effective tax rate of 4% plus applicable surcharge and cess. In light of the above, it is our humble request to your goodself to kindly issue the certificate at your earliest convenience.”

The Appellant had contended that a certificate of nil TDS, for payments received in respect of activities outside India, should have been issued to the Appellant, in deference to decisions rendered by various appellate authorities from the A.Ys. 2007-08 to 2015-16, opining that income in respect of activities out of India was not taxable in India and as also the judgments of the Delhi High Court referred to above.

In the A.Y. 2018-19, the Respondent had followed the same approach as in the A.Y. 2017-18 and issued a certificate dated 10th April 2018 u/s 197 of the Act for nil TDS in respect of payments for activities outside India. This direction was in respect of both LEWPP Contract as well as R-Series Contract.

However, in departure from the position taken in the previous years, the Respondent No. 1 issued a certificate dated 26th June 2019 u/s 197(1) of the IT Act for the F.Y. 2019-2020 corresponding to the A.Y. 2020-2021 directing ONGC to deduct TDS at the rate of 4 per cent on receipts in respect of activities both outside and inside India.

The Appellant filed a Writ Petition under Article 226 of the Constitution of India being Writ Petition (C) No. 8527 of 2019, inter alia, challenging the said certificate dated 26th June 2019. The Writ Petition was dismissed by the High Court.

Both the judges of the Supreme Court wrote independent judgements differing form each other.

According to Hon’ble Ms. Justice Indira Banerjee, the High Court rightly held that the question of whether the Appellant had PE, could not possibly be undertaken in an enquiry for issuance of a certificate u/s 197 of the IT Act, having regard to the time-frame permissible in law for deciding an application, more so, when regular assessment had been completed in respect of the immediate preceding year and the Appellant was found to be taxable under the IT Act at 10 per cent of the contractual receipts. The Assessing Authority in that year had found that the Appellant had PE in India in the concerned Assessment Year and that the appeal of the Appellant was possibly pending disposal.

According to the leaned judge, whether the Appellant had PE or not, during the Assessment Year in question, was a disputed factual issue, which had to be determined on the basis of the scope, extent, nature and duration of activities in India. Whether project activity in India continued for a period of more than nine months, for taxability in India in terms of the AADT, was a question of fact, that had to be determined separately for each Assessment Year.

Further, it was noted that by its letter dated 22nd June 2019, referred to above, the Appellant had made a request to the Revenue for issuance of a certificate u/s 197(1) of the IT Act permitting deduction of TDS at the rate of 4 per cent plus applicable surcharge and cess, for all contractual receipts, in line with assessment proceedings for the A.Y. 2016-2017 without prejudice to its legal position, since the Appellant had been facing financial hardship and urgently required funds. On 26th June 2019, the Respondent No. 1 issued the impugned Certificate directing ONGC to deduct TDS at the rate of 4 per cent for all sums receivable in respect of activities both outside and inside India. According to the learned judge, the impugned certificate being as per the request of the Appellant, it was not open to the Appellant to make a volte-face and challenge the impugned certificate.

It was further noted that in the final assessment for one or two preceding Assessment Years, it was found that the Appellant did have PE in India and appeals were pending. Furthermore, in course of hearing, Counsel for the Revenue had handed a Draft Assessment Order, issued in respect of the Assessment Year in question, that is, 2020-21, holding that the Appellant had PE in India and was liable to tax in India under the IT Act. According to the learned judge, in any event, tax deducted at source was adjustable against the tax, if any, ultimately assessed as payable by the Assessee and any excess tax deducted was refundable with interest. Hence, interference was not warranted at this stage.

It was however clarified that any observation made by the Court or by the High Court would not influence the final assessment which has to be made in accordance with the law considering all relevant facts and circumstances or any appeal therefrom. In the event, it was found that the Appellant was not liable to tax and would be entitled to refund of TDS with interest.

After going through the judgment and the opinion formed by Justice Ms. Indira Banerjee, Hon’ble Shri Justice J.K. Maheshwari, respectfully disagreed to the conclusions as drawn therein for the following reasons.

According to the learned judge, on reading of the relevant provision and the rules, it was clear that for issuance of a certificate u/s 197 of the IT Act, an application should be made to Assessing Officer under Sub-rule (1) of Rule 28. The Assessing Officer after recording satisfaction that existing and estimated tax liability justifies the deduction of tax at lower rate or no deduction of tax as the case may be shall issue a certificate. While exercising the power to issue a certificate, the Assessing Officer is required to follow the procedure as per Sub-rule (2). He shall consider the existing and estimated tax payable on estimated income of the previous year; tax payable on the assessed or returned income of the last four years from previous year; existing liability under the IT Act; advance tax payment i.e. tax deducted and collected at source for the assessment year relevant to the previous year till the date of making application under sub-rule (1) of Rule 28. Thus, for the purpose of issuance of certificate under Chapter XVII of Section 197 of the IT Act, the procedure for determination has been prescribed to the Assessing Officer on which satisfaction may be recorded by him.

The learned judge, after considering the provisions for assessment of income concluded that, the issuance of the certificate u/s 197(1) is based on the existing and estimated tax liability after recording satisfaction by Assessing Officer following the procedure so prescribed, in rules. However, the procedure for assessment as specified in Chapter XIV of the IT Act is different.

The learned judge noted that the High Court in the impugned order relied upon the proceedings of the Revenue Department, which had been referred in para 10 of the judgment. As per the proceedings referred, the department had acknowledged the High Court order dated 29th January 2016 and said that for A.Y.s 2007-2008 to 2010-2011 there was no PE in India, but the department filed the appeal C.A. No. 8761/2016 which was pending before the Supreme Court. In para 10(7), the High Court further referred the decision of Delhi High dated 9th May, 2017 passed in W.P.(C) No. 2117/2017 and CM No. 9268/2017. The said judgment was solely on the issue of issuance of the certificate u/s 197 relating to the F.Y. 2016-2017. As per the ratio of the said judgment, it was clear that the certificate issued by the Respondent No. 1 regarding deductions of the TDS at the rate of 4 per cent on the entire payment made by the ONGC was set aside. Following the said decision, the department issued the certificate for F.Y. 2016-2017 at the rate of 4 per cent excluding surcharge and cess for inside India revenue and at the rate of 0% for outside India revenue. Further for F.Ys. 2017-2018 and 2018-2019 certificates were issued following the said decision of Delhi High Court for both type of contracts i.e. LEWPP and R-Series. Thereafter, it was recorded that assessments for A.Ys. 2015-2016 and 2016-2017 were completed with a finding that activities of the Appellant were covered u/s 44BB of the IT Act. It was further recorded that the assessment for A.Y. 2017-2018 was selected under CASS which was still pending. Thereafter, noting was made that it was difficult to bifurcate the revenue generated by onshore and offshore activities. However, the rate of deduction proposed was at the rate of 4 per cent. The relevant excerpt of note sheets further reflected that the demand of existing liability was Rs. 35.88 crores for the year 2015-16 and 2016-17 but later it was reduced to Rs. 2.67 crores out of which Rs. 2.63 crores pertained to A.Y. 2017-18 which was still under scrutiny for assessment, thus there appeared to be no existing demand.

According to the learned judge, the said note sheets of the Revenue did not reflect that Clause (i), (ii), (iii) and (iv) of Rule 28AA(2) of Rules regarding estimated and assessed liability of last four previous years; existing liability and advance tax payment i.e. deducted and collected at source till the date of submitting application had been considered for determination, and that the Assessing Officer had applied its mind prior to issuance of desired certificate.

The learned judge was of the opinion that the Delhi High Court made unreasonable attempt to distinguish previous order dated 9th May, 2017 relying on the note sheets of the revenue and tried to distinct LEWPP and R-Series contracts. According to the learned judge, on admitting the certificates at 0% tax deductions for both LEWPP and R-Series contracts for the preceding financial years, the High Court was not justified to make distinction between two types of contracts. In fact the Court ought to have seen the satisfaction recorded by the Assessing Officer after determination of the issues specified in Rule 28AA(2). The Appellant had reiterated that the terms of LEWPP contract and R-Series contract were identical while department without disputing the said facts relied upon the orders of assessment passed in previous years without bringing on record the fact of estimated liability. According to the learned judge, distinction drawn, accepting the contention of the revenue by the High Court ignoring admission of issuing certificate for both types of contracts was completely misplaced. In fact, the certificate u/s 197(1) was issued during a financial year, and on closing of the said financial year, the assessment of which would be made after submission of the return of income and documents with respect to the income from the contract of that particular year. The department may enquire about establishment of PE and income attributable to that PE in assessment proceeding but while dealing the issue of issuance of certificate u/s 197(1) relying upon said issues by the High Court is not justified. During the course of the hearing, the counsel for the Appellant handed over two orders dated 8th September, 2021 passed by Commissioner of Income Tax (Appeals) for A.Ys. 2016-2017 and 2017-2018 allowing the appeals filed by the Appellant challenging the assessment order for respective assessment year. While allowing the appeal, Commissioner of Income Tax held that the Appellant did not have PE during relevant financial year and, accordingly, the PE contract receipts were not taxable in India.

Further, the record of the case indicated that for the F.Y. 2017-18 two certificates each dated 8th June, 2017 were issued for zero TDS for the A.Y. 2018-19. Similarly, for the F.Y. 2018-19 (A.Y. 2019-20) two certificates dated 10th April, 2018 and 8th May, 2019 were issued for zero TDS. Therefore, after the order of the High Court dated 9th May, 2017, it ought to have been of relevant consideration to Assessing Officer to record satisfaction, which had not been considered by the High Court. The reply of the Appellant dated 22nd June, 2019 had been referred in the impugned order stating that the Appellant reserved its right subject to legal objections and requested for issuance of certificate at the rate of 4 per cent plus applicable surcharges and cess because of financial hardship. The said letter should not have influenced the wisdom of the Court, where the prescribed procedure under Rule 28AA had not been followed by the Assessing Officer.

According to the learned judge, since there was no change in circumstances and the situation of the Appellant in the F.Ys. 2017-2018 and 2018-2019 (A.Ys. 2018-19 and 2019-20) respectively and at the F.Y. 2019-20 in question (A.Y. 2020-21), were the same, the principle of consistency ought to be followed while considering the application u/s 197 of the IT Act.

The learned judge held that the order passed by the High Court was without considering the perspective and scope of issuance of the certificate for deduction of tax at lower rate or no deduction at tax and also without following the prescribed procedure. The High Court had wrongly distinguished the previous judgment dated 9th May, 2017 on the premises which was not tenable, and relied upon undertaking dated 22nd June, 2019 of Appellant submitted perforce.

In view of the difference of opinion between the judges, the Registry was directed to place the matter before the Hon’ble Chief Justice of India so that an appropriate Bench could be constituted to hear the case.

BCAJ Admin

Glimpses of Supreme Court Rulings

9 Wipro Ltd.
(2022) 446 ITR 1(SC)

Exemption/ deduction u/s 10B – For claiming the benefit u/s 10B(8), the twin conditions of furnishing the declaration to the AO in writing and that the same must be furnished before the due date of filing the return of income under Sub-section (1) of Section 139 of the IT Act are required to be fulfilled and/or satisfied – Both the conditions to be satisfied are mandatory – The significance of filing a declaration u/s 10B(8) could be said to be co-terminus with the filing of a return u/s 139(1), as a check has been put in place by virtue of Section 10B(5) to verify the correctness of the claim of deduction at the time of filing the return

Revised return of income – The Assessee can file a revised return in a case where there is an omission or a wrong statement – By filing the revised return of income, the Assessee cannot be permitted to substitute the original return of income filed u/s 139(1) of the IT Act – A revised return of income, u/s 139(5) cannot be filed, to withdraw the claim and subsequently to claim the carried forward or set-off of any loss

The Assessee, a 100% export-oriented unit engaged in the business of running a call centre and IT-Enabled and Remote Processing Services, filed its return of income on 31st October, 2001 for A.Y. 2001-2002, declaring a loss of Rs. 15,47,76,990 and claimed exemption u/s 10B of the IT Act. Along with the original return filed on 31st October, 2001, the Assessee annexed a note to the computation of income in which the Assessee stated that the company was a 100% export-oriented unit and entitled to claim exemption u/s 10B of the IT Act and, therefore no loss was being carried forward. Thereafter, the Assessee filed a declaration dated 24th October, 2002 before the Assessing Officer (AO) stating that the Assessee did not want to avail of the benefit u/s 10B for A.Y. 2001-02 as per Section 10B(8). The Assessee filed the revised return of income on 23rd December, 2002 wherein exemption u/s 10B of the IT Act was not claimed, and the Assessee claimed carry forward of losses.

The AO passed an order dated 31st March, 2004 rejecting the withdrawal of exemption u/s 10B, holding that the Assessee did not furnish the declaration in writing before the due date of filing of return of income, which was 31st October, 2001. Thereby, the AO made the addition in respect of the denial of the claim of carrying forward losses u/s 72.

The Assessee filed an appeal before the Commissioner of Income Tax (Appeals) (‘CIT(A)’). By order dated 19th January, 2009, the CIT(A) upheld the order passed by the AO, making addition in respect of the denial of the claim of carrying forward losses u/s 72.

Aggrieved by the order passed by the CIT(A), the Assessee filed an appeal before the ITAT. Vide order dated 25th November, 2016, the ITAT decided the issue in favour of the Assessee, stating that the declaration requirement u/s 10B(8) was filed by the Assessee before the AO before the due date of filing of return of income as per Section 139(1). ITAT allowed the Assessee’s claim for carrying forward of losses u/s 72 of the IT Act.

Feeling aggrieved and dissatisfied with the order passed by the ITAT, allowing the Assessee’s claim to carry forward losses u/s 72, the Revenue preferred an appeal before the High Court. The High Court has dismissed the said appeal.

Hence, Revenue has filed an appeal before the Supreme Court.

According to the Supreme Court, the short question which was posed for its consideration was whether, for claiming exemption u/s 10B(8) of the IT Act, the Assessee is required to fulfil the twin conditions, namely, (i) furnishing a declaration to the AO in writing that the provisions of Section 10B(8) may not be made applicable to him; and (ii) the said declaration to be furnished before the due date of filing the return of income under Sub-section (1) of Section 139 of the IT Act.

The Supreme Court noted that in the present case, the High Court, as well as the ITAT, had observed and held that for claiming the so-called exemption relief u/s 10B(8) of the IT Act, furnishing the declaration to the AO was mandatory but furnishing the same before the due date of filing the original return of income was directory. The Supreme Court observed that in the present case, when the Assessee submitted its original return of income u/s 139(1) on 31st October, 2001, which was the due date for filing of the original return of income, the Assessee specifically and clearly stated that it was a company and was a 100% export-oriented unit and entitled to claim exemption u/s 10B. Therefore, no loss was being carried forward. Along with the original return filed on 31st October, 2001, the Assessee had also annexed a note to the computation of income clearly stating as above. However, thereafter the Assessee filed the revised return of income u/s 139(5) on 23rd December, 2002 and filed a declaration u/s 10B(8), which admittedly was after the due date of filing of the original return u/s 139(1), i.e., 31st October, 2001.

According to the Supreme Court, on a plain reading of Section 10B(8) of the IT Act as it is, i.e., “where the Assessee, before the due date for furnishing the return of income under sub-section (1) of Section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of Section 10B may not be made applicable to him, the provisions of Section 10B shall not apply to him for any of the relevant assessment years”, it was evident that the wordings of Section 10B(8) are very clear and unambiguous. For claiming the benefit u/s 10B(8), the twin conditions of furnishing the declaration to the AO in writing and that the same must be furnished before the due date of filing the return of income under sub-section (1) of Section 139 of the IT Act are required to be fulfilled and/or satisfied. According to the Supreme Court, both the conditions to be satisfied were mandatory. It could not be said that one of the conditions would be mandatory and the other would be directory, where the words used for furnishing the declaration to the AO and to be furnished before the due date of filing the original return of income under sub-section (1) of Section 139 are same/similar. The Supreme Court held that in a taxing statute, the provisions are to be read as they are, and they are to be literally construed, more particularly in a case of exemption sought by an Assessee.

According to the Supreme Court, filing a revised return u/s 139(5) of the IT Act claiming carrying forward of losses subsequently would not help the Assessee. The Assessee had filed its original return u/s 139(1) and not u/s 139(3). The revised return filed by the Assessee u/s 139(5) could only substitute its original return u/s 139(1) and cannot transform it into a return u/s 139(3) to avail the benefit of carrying forward or set-off of any loss u/s 80. The Assessee can file a revised return in a case where there is an omission or a wrong statement. But a revised return of income u/s 139(5) cannot be filed to withdraw the claim and subsequently claim the carried forward or set-off of any loss. Filing a revised return u/s 139(5) and taking a contrary stand and/or claiming the exemption, which was specifically not claimed earlier while filing the original return of income, was not permissible. The Supreme Court, therefore, held that claiming benefit u/s 10B(8) and furnishing the declaration as required u/s 10B(8) in the revised return of income which was much after the due date of filing the original return of income u/s 139(1), could not mean that the Assessee had complied with the condition of furnishing the declaration before the due date of filing the original return of income u/s 139(1) of the Act.

According to the Supreme Court, even the submissions on behalf of the Assessee that (i) it was not necessary to exercise the option u/s 10B(8) of the IT Act; (ii) that even without filing the revised return of income, the Assessee could have submitted the declaration in writing to the AO during the assessment proceedings; and (iii) that filing of the declaration subsequently and may be during the assessment proceedings would have made no difference, had no substance. According to the Supreme Court, the significance of filing a declaration u/s 10B(8) could be said to be co-terminus with the filing of a return u/s 139(1), as a check has been put in place by virtue of Section 10B(5) to verify the correctness of the claim of deduction at the time of filing the return. If an Assessee claims an exemption under the Act by virtue of Section 10B, then the correctness of the claim has already been verified u/s 10B(5). Therefore, if the claim is withdrawn post the date of filing of return, the accountant’s report u/s 10B(5) would become falsified and would stand to be nullified.

The Supreme Court held that its decision in the case of G.M. Knitting Industries Pvt. Ltd. (2016) 12 SCC 272, relied upon by the learned Counsel appearing on behalf of the Assessee, was dealing with claiming an additional depreciation u/s 32(1)(ii-a) of the Act which cannot be compared with Section 10B(8) which is an exemption provision. According to the Supreme Court, as per the settled position of law, an Assessee claiming exemption has to strictly and literally comply with the exemption provisions. Therefore, the said decision did not apply to the facts of the case on hand while considering the exemption provisions. Even otherwise, Chapter III and Chapter VIA of the Act operate in different realms and the principles of Chapter III, which deals with “incomes which do not form a part of total income”, cannot be equated with the mechanism provided for deductions in Chapter VIA, which deals with “deductions to be made in computing total income”. Therefore, none of the decisions which were relied upon on behalf of the Assessee on interpretation of Chapter VIA was applicable while considering the claim u/s 10B(8) of the IT Act.

The Supreme Court held that so far as the submission on behalf of the Assessee that against the decision of the Delhi High Court in the case of Moser Baer (ITA No. 950 of 2007), a special leave petition had been dismissed as withdrawn, and the Revenue could not be permitted to take a contrary view is concerned, it had to be noted that the special leave petition against the decision of the Delhi High Court in the case of Moser Baer (supra) had been dismissed as withdrawn due to there being low tax effect and the question of law had specifically been kept open. Therefore, withdrawal of the special leave petition against the decision of the Delhi High Court in the case of Moser Baer (supra) could not be held against the Revenue.

The Supreme Court in view of the above discussion and for the reasons stated above, held that the High Court had committed a grave error in observing and holding that the requirement of furnishing a declaration u/s 10B(8) was mandatory, but the time limit within which the declaration is to be filed was not mandatory but was directory. The same was erroneous and contrary to the unambiguous language contained in Section 10B(8) of the IT Act. The Supreme Court held that for claiming the benefit u/s 10B(8), the twin conditions of furnishing a declaration before the AO and that too before the due date of filing the original return of income u/s 139(1) are to be satisfied and both are to be mandatorily complied with. Accordingly, the question of law was answered in favour of the Revenue and against the Assessee. The orders passed by the High Court as well as ITAT taking a contrary view were set aside, and it was held that the Assessee should not be entitled to the benefit u/s 10B(8) of the IT Act on non-compliance of the twin conditions as provided u/s 10B(8), as observed hereinabove. The present appeal was accordingly allowed.

10 Laljibhai Mandalia
(2022) 446 ITR 18 (SC)

Search and seizure – At the stage of search and seizure, the Court has to examine whether the reason to believe are in good faith; it cannot merely be pretence – The belief recorded must have a rational connection or a relevant bearing to the formation of the belief and should not be extraneous or irrelevant to the purpose of the section – The sufficiency or inadequacy of the reasons to believe recorded cannot be gone into while considering the validity of an act of authorisation to conduct search and seizure – Recording of reasons acts as a cushion in the event of a legal challenge being made to the satisfaction reached – Reasons enable a proper judicial assessment of the decision taken by the Revenue – However, this by itself, would not confer in the Assessee a right of inspection of the documents or to a communication of the reasons for the belief at the stage of issuing of the authorisation – Any such view would be counterproductive of the entire exercise contemplated by Section 132 of the Act – It is only at the stage of commencement of the assessment proceedings after completion of the search and seizure, if any, that the requisite material may have to be disclosed to the Assessee.

The Assessee, during the financial year 2016-17, transferred a sum of Rs. 6 crores on 1st June, 2016 and Rs. 4 crores on 21st June, 2016 to M/s. Goan Recreation Clubs Private Ltd. The Assessee secured the loan by way of a mortgage of the property forming part of Survey No. 31/1-A situated in Village Bambolim, Distt. North Goa. The Assessee became the Director of the Company on 18th May, 2016 and then ceased to be so on 23rd June, 2016. The amount of Rs. 10 crores was repaid on different dates starting from 6th October, 2016 till 31st March, 2017, and after repayment of the loan, the mortgage was released on 10th July, 2017. The Company paid interest as well. The Assessee had filed his income-tax return showing the interest income of Rs. 42,51,946, which has been taxed as well. The assessment was finalised u/s 143(3) of the Act on 2nd March, 2021.

In terms of the authorisation after recording reasons to believe in the satisfaction note, search was conducted on 10th August, 2018 at the residential premises of the Assessee which continued till 3:00 am on 11th August, 2018 in terms of Section 132 of the Act. The satisfaction note was not supplied to the Assessee.

The Assessee, in a writ petition, challenged the act of authorisation for search and seizure on the ground that it is a fishing enquiry and the conditions precedent as specified in Section 132 of the Act are not satisfied. It was the stand of the Assessee that he was looking for an avenue to invest some money and the M/s. Goan Recreation Clubs Private Ltd. was in need of finance for setting up its business and hence consequently approached the Assessee for a loan. As a security, the borrower company offered that another company would give its property to the Assessee.

In the counter-affidavit filed by the Revenue, giving the history of the transaction, it was inter alia stated that the authorized officers/ investigating officers conducted search and seizure operations at various spots across various states related to the case of Shri Sarju Sharma and other associated group of companies which had financial transactions with Shri Sarju Sharma and M/s. Goan Recreation Clubs Pvt. Ltd., Goa, and the apparent investment made by the Assessee were found to be not a judicious investment choice from the point of view of a prudent businessman as the company to which the loan was provided by the Assessee had no established business, no goodwill in the market, nor was it enlisted in any of the stock exchanges, nor did the Assessee had any financial dealings with the company previously. The quick repayment of the loan shows that the investment was not meant to earn steady interest income. The investment and nature of the transaction entered into by the Assessee were akin to the familiar modus operandi employed by the entry operators to provide an accommodation entry to bring the unaccounted black money to books for a brief period to run the business till sufficient fund is generated by running the business or some fund from any other unaccounted source comes later on. This is the angle of the investigative process underway in which the trail of the money being paid by the Assessee is being investigated.

The High Court found that none of the reasons to believe to issue authorization met the requirement of Section 132(1)(a), (b) and (c).

According to the Supreme Court, in the light of the views expressed by it in ITO vs. Seth Bros. [ITO vs. Seth Bros., [(1969) 2 SCC 324 : (1969) 74 ITR 836] and Pooran Mal [Pooran Mal vs. Director of Inspection (Investigation), [(1974) 1 SCC 345 : 1974 SCC (Tax) 114 : (1974) 93 ITR 505], the opinion expressed by the High Court was plainly incorrect. The necessity of recording reasons, despite the amendment of Rule 112(2) with effect from 1st October, 1975, had been repeatedly stressed upon by it so as to ensure accountability and responsibility in the decision-making process. The necessity of recording reasons also acts as a cushion in the event of a legal challenge being made to the satisfaction reached. Reasons enable a proper judicial assessment of the decision taken by the Revenue. However, this by itself, would not confer in the Assessee a right of inspection of the documents or to a communication of the reasons for the belief at the stage of issuing of the authorisation. Any such view would be counterproductive to the entire exercise contemplated by Section 132 of the Act. It is only at the commencement stage of the assessment proceedings after completion of the search and seizure, if any, that the requisite material may have to be disclosed to the Assessee.

According to the Supreme Court, the High Court had committed a serious error in reproducing in great detail the contents of the satisfaction note(s) containing the reasons for the satisfaction arrived at by the authorities under the Act. In the light of the above, the Supreme Court did not approve of the aforesaid part of the exercise undertaken by the High Court, which was highly premature; having the potential of conferring an undue advantage to the Assessee, thereby frustrating the endeavour of the Revenue, even if the High Court was eventually not to intervene in favour of the Assessee.

The Supreme Court observed that the detailed satisfaction note showed multiple entries in the account books of Sarju Sharma and others. The manner in which Sarju Sharma, who was either in Siliguri (West Bengal) or Goa, contacted the Assessee in Ahmedabad for a loan of Rs. 10 crores did not appear to be a normal transaction. The subsequent repayment of the mortgage and the interest income reflected in the relevant assessment year appeared to be steps taken by the Assessee to give a colour of genuineness, but the stand of the Revenue that such entry was an accommodation entry is required to be found out and also the cobweb of entries required to be unravelled, including the trail of the money paid by the Assessee.

According to the Supreme Court, the High Court, despite quoting extensively from the counter-affidavit filed by the Revenue, still returned a finding that the Court could not find any other material whatsoever insofar as the Assessee is concerned for the purpose of recording satisfaction u/s 132. The Supreme Court observed that reasons to believe are not the final conclusions which the Revenue would arrive at while framing block assessment in terms of Chapter XIV-B of the Act. The test to consider the justiciability of belief was whether such reasons were totally irrelevant or whimsical. The reply in the counter-affidavit showed that the intention of the Revenue was to un-layer the layering of money which was suspected to be done by the Assessee. The Revenue had asserted that the accommodation entry was a common modus operandi to bring the unaccounted black money to books for a brief period. The investment of Rs. 10 crores for a short period was not for earning interest income as the same was repaid in the same assessment year. The Revenue intended to investigate the fund trail of the money paid by the Assessee. Such belief was not out of hat or whimsical. The Assessee’s stand was that it was a fishing enquiry and a malafide action of the Revenue. The Revenue was specific so as to find out the genuineness of the transaction, believing that it was a mere accommodation entry.

According to the Supreme Court, there could be cases in which a search may fail, or a reasonable explanation of the documents may be forthcoming. At the stage of search and seizure, the Court has to examine whether the reason to believe is in good faith; it cannot merely be pretence. The belief recorded must have a rational connection or a relevant bearing to the formation of the belief and should not be extraneous or irrelevant to the purpose of the section. In view of the detailed reasons recorded in the satisfaction note, including the investment made by the Assessee for a brief period and that investment was alleged to be an accommodation entry, it could not be said to be such which did not satisfy the prerequisite conditions of Section 132(1) of the Act.

The Supreme Court observed that as per the Revenue, Clauses (b) & (c) of Section 132(1) were satisfied before the warrant of authorization was approved. The satisfaction note was recorded in terms of an Assessee whose jurisdictional assessing officer was in the State of West Bengal. It was the cobweb of accounts of such Assessee which were required to be unravelled. It was not unreasonable for the Revenue to apprehend that the Assessee would not respond to the summons before the Assessing Officer in the State of West Bengal. It was also alleged that such summons would lead to the disclosure of information collected by the Revenue against Sarju Sharma and his group. Therefore, it was a reasonable belief drawn by the Revenue that the Assessee shall not produce or cause to be produced any books of accounts or other documents which would be useful or relevant to the proceedings under the Act. Such belief was not based upon conjectures but on a bonafide opinion framed in the ordinary conduct of the affairs by the Assessee generally. The notice to the Assessee to appear before the Income Tax authorities in the State of West Bengal would have been sufficient notice of the material against the Company and its group to defeat the entire attempt to unearth the cobweb of the accounts by the Company and its associates.

According to the Supreme Court, even Clause (c) of Section 132(1) was satisfied. The Assessee was in possession of R10 crores, which was advanced as a loan to the Company. The Revenue wished to find out as to whether such amount was an undisclosed income which would include the sources from which such amount of R10 crores was advanced as a loan to a totally stranger person, unconnected with either the affairs of Assessee or any other link, to justify as to how a person in Ahmedabad has advanced R10 crores to the Company situated at Kolkata in West Bengal for the purpose of investment in Goa. The Revenue may fail or succeed, but that would not be a reason to interfere with the search and seizure operations at the threshold, denying an opportunity to the Revenue to unravel the mystery surrounding the investment made by the Assessee.

The Supreme Court, after referring to the judicial precedents, held that the sufficiency or inadequacy of the reasons to believe recorded could not be gone into while considering the validity of an act of authorization to conduct search and seizure. The belief recorded alone is justiciable but only while keeping in view the Wednesbury Principle of Reasonableness. Such reasonableness is not a power to act as an appellate authority over the reasons to believe recorded.

The Supreme Court restated and elaborated the principles in exercising the writ jurisdiction in the matter of search and seizure u/s 132 of the Act as follows:

i) The formation of opinion and the reasons to believe recorded is not a judicial or quasi-judicial function but administrative in character;

ii) The information must be in possession of the authorised official based on the material and the formation of opinion must be honest and bona fide. It cannot be mere pretence. Consideration of any extraneous or irrelevant material would vitiate the belief/satisfaction;

iii) The authority must have information in its possession based on which a reasonable belief can be founded that the person concerned has omitted or failed to produce books of accounts or other documents for the production of which summons or notice had been issued, or such person will not produce such books of accounts or other documents even if summons or notice is issued to him; or

iv) Such person is in possession of any money, bullion, jewellery or other valuable Article which represents either wholly or partly income or property which has not been or would not be disclosed;

v) Such reasons may have to be placed before the High Court in the event of a challenge to the formation of the belief of the competent authority, in which event the Court would be entitled to examine the reasons for the formation of the belief, though not the sufficiency or adequacy thereof. In other words, the Court will examine whether the reasons recorded are actuated by mala fides or on a mere pretence and that no extraneous or irrelevant material has been considered;

vi) Such reasons forming part of the satisfaction note are to satisfy the judicial consciousness of the Court, and any part of such satisfaction note is not to be made part of the order;

vii) The question of whether such reasons are adequate or not is not a matter for the Court to review in a writ petition. The sufficiency of the grounds which induced the competent authority to act is not a justiciable issue;

viii) The relevance of the reasons for the formation of the belief is to be tested by the judicial restraint in administrative action as the Court does not sit as a Court of appeal but merely reviews the manner in which the decision was made. The Court shall not examine the sufficiency or adequacy thereof;

ix) In terms of the explanation inserted by the Finance Act, 2017 with retrospective effect from 1st April, 1962, such reasons to believe as recorded by income-tax authorities are not required to be disclosed to any person or any authority or the Appellate Tribunal.

In view of the above, the Supreme Court found that the High Court was not justified in setting aside the authorisation of search dated 7th August, 2018. Consequently, the appeal was allowed, and the order passed by the High Court was set aside. As a consequence thereof, the Revenue was at liberty to proceed against the Assessee in accordance with the law.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

6 Gyan Chand Jain through L.R. vs. Commissioner of Income Tax
(2022) 443 ITR 241 (SC)

Penalty – Concealment of Income – Sanction by Additional Commissioner – The post of Joint Commissioner of Income Tax includes Additional Commissioner of Income Tax – Sanction valid

Appeal to High Court – Monetary limits – What is required to be considered is what was under challenge before the Tribunal as well as the High Court – The subsequent order cannot oust the jurisdiction

The assessee furnished the return of income, declaring a total income of Rs. 61,800 on 30th October, 1998. The assessment was completed u/s 143(3). Thereafter the proceedings u/s 263 were initiated. The income of the assessee, after the order passed by the Tribunal on merits pursuant to the order, passed u/s 263, was substantially enhanced to what was declared by the assessee and pursuant thereto, the penalty proceedings u/s 271(1)(c) was initiated. The Assessing Officer after seeking sanction from the Additional Commissioner of Income-tax imposed minimum penalty u/s 271(1)(c) of Rs. 29,02,743 being 100% tax on the concealed income of Rs. 97,65,209.

On an appeal, the Commissioner of Income-tax (Appeals) sustained the penalty only on the commission income of Rs. 19,93,474 and directed levy of minimum penalty on the tax sought to be evaded on the said commission income.

Aggrieved, both the Assessing Officer and the assessee preferred appeals before the Tribunal.

The Tribunal quashed the penalty order holding that the penalty imposed was without obtaining prior approval of the Joint Commissioner, and the approval was obtained from the Additional Commissioner, which was without jurisdiction and authority. The Tribunal having held so did not decide the other grounds raised on merits.

On appeal by the Revenue, the High Court quashed the order of the Tribunal, holding that on a bare perusal of the provisions and section 2(28C) r.w.s. 274(2) in particular, it was clear that “Joint Commissioner” means a person appointed to the post of Joint Commissioner of Income-tax and includes Additional Commissioner of Income-tax and therefore granting of the approval by the Additional Commissioner of Income-tax u/s 274(2)(b) of the Act on a permission sought by the Assessing Officer before imposing penalty u/s 271(1)(c) was proper and by a competent authority.

The High Court rejected the contention raised by the assessee that the appeal was not maintainable in view of Circular No. 21 dated 10th December, 2015 as the penalty involved in the appeal was less than the prescribed monetary limit of Rs. 20 lakhs, holding that the Circular was not applicable for the reason that the Revenue had assailed the penalty amount of Rs. 29,02,743 and not only the penalty reduced by the Commissioner of Income-tax (Appeals).

Being aggrieved, the assessee has preferred an appeal. Before the Supreme Court, it was contended by the assessee that in view of the order passed by the CIT(A) and resulting subsequent demand, the penalty amount was reduced to Rs. 6,00,000 (approximately). Therefore, when the tax effect would be less than Rs. 20,00,000, the appeal preferred by the Revenue before the High Court was not maintainable in view of the CBDT Circular dated 10th December, 2015. Also, submissions were made on merits on the jurisdiction of the Additional Commissioner of Income-tax.

The Supreme Court held that considering the definitions contained in Section 2(28C) r.w.s. 274(2) of the Income Tax Act, ‘Joint Commissioner’ means a person appointed to the post of Joint Commissioner of Income Tax and includes Additional Commissioner of Income Tax, and in the present case, the approval of the Additional Commissioner of Income Tax was obtained, there was no reason to interfere with the findings recorded by the High Court on merits on the powers of the Additional Commissioner to grant the approval sought by the AO for imposing penalty u/s 271(1)(c).

So far as the primary submission on behalf of the assessee that as the penalty amount was substantially reduced to Rs. 6 lakhs, and therefore the appeal before the High Court was not maintainable is concerned, the Supreme Court held that before the Tribunal, both the Revenue, as well as the assessee, preferred the appeals and the entire penalty amounting to Rs. 29,02,743 was an issue before the Tribunal as well as before the High Court. The subsequent reduction in penalty in view of the subsequent order cannot oust the jurisdiction. What is required to be considered is what was under challenge before the Tribunal as well as the High Court. The Supreme Court agreed with the view taken by the High Court.

7 Wipro Finance Ltd. vs. Commissioner of
Income Tax
(2022) 443 ITR 250 (SC)

Business expenditure – The Appellant would be justified in availing deduction of the entire amount of foreign exchange fluctuation loss suffered by it in connection with a transaction of loan borrowed for the purpose of expanding its primary business of leasing and hire purchase of capital equipment to existing Indian enterprises in terms of Section 37 of the Act

The Appellant company submitted returns of income on 29th November, 1997 for A.Y. 1997-1998, mentioning loss of income, amongst others, owing to exchange fluctuation of Rs. 1,10,53,909. After processing the return u/s 143(1)(a) of the Income Tax Act, 1961, the assessment was completed on 16th March, 2000. As against the loss declared by the Appellant due to exchange fluctuation, the assessment was concluded by positive taxable income. Against that decision, the matter was carried in appeal by the Appellant before the Commissioner of Income Tax (Appeals) and eventually, by way of appeal before the Income Tax Appellate Tribunal.

In the appeal before the ITAT, the Appellant not only claimed deduction in respect of a loss of Rs. 1,10,53,909 arising on account of exchange fluctuation, but also set up a fresh claim in respect of revenue expenses to the tune of Rs. 2,46,04,418, erroneously capitalized in the returns. The ITAT entertained this fresh claim set forth by the Appellant and recorded in its judgment that the department’s representative had no objection in that regard. Additionally, the ITAT adverted to the decision of this Court in National Thermal Power Co. Ltd. vs. Commissioner of Income Tax (1998) 229 ITR 383 in support, for entertaining fresh claim of the Appellant in exercise of powers u/s 254 of the 1961 Act. The ITAT, in the first place, reversed the finding given by CIT(A) regarding application of Section 43A of the 1961 Act. The ITAT opined that the said provision had no application to the fact situation of the present case. Having said that, it then proceeded to consider the question whether the loss suffered by the Appellant owing to exchange fluctuation can be regarded as revenue expenditure or capital expenditure incurred by the Appellant and answered the same in favour of the Appellant by holding that it would be a case of expenditure on revenue account and an allowable deduction.

The matter was carried before the High Court by the department.

The High Court vide impugned judgment has reversed the view taken by the ITAT, mainly observing that the ITAT had not recorded sufficient reasons in support of its conclusion, and in any case, the conclusion was without any basis.

The Supreme Court noted that the broad undisputed relevant facts, as could be culled out from the record were that the Appellant entered into a loan agreement with one Commonwealth Development Corporation having its registered office at England in the United Kingdom, for borrowing amount to carry on its project described in Schedule 1 to the agreement – for expanding its primary business of leasing and hire purchase of capital equipment to existing Indian enterprises.

The loan was obtained in foreign currency (5 million pounds sterling). However, while repaying the loan, due to the difference in foreign exchange rate, the Appellant had to pay a higher amount, resulting in a loss to the Appellant. The loan amount was utilised by the Appellant for financing the existing Indian enterprises for procurement of capital equipment on hire purchase or lease basis. The activity of financing by the Appellant to the existing Indian enterprises for procurement or acquisition of plant, machinery and equipment on a leasing and hire purchase basis was an independent transaction or activity being the business of the Appellant.

The Supreme Court further noted that the loan transaction between the Appellant and Commonwealth Development Corporation, was in the nature of borrowing money by the Appellant, which was necessary for carrying on its business of financing. It was not for the creation of asset of the Appellant as such or acquisition of an asset from a country outside India for the purpose of its business.

According to the Supreme Court, in such a scenario, the Appellant would be justified in availing deduction of entire expenditure or loss suffered by it in connection with such a transaction in terms of Section 37. For, the loan is wholly and exclusively used for the purpose of business of financing the existing Indian enterprises, who, in turn, had to acquire plant, machinery and equipment to be used by them. It was a different matter that they may do so because of the leasing and hire purchase agreement with the Appellant. That would be, nevertheless, an activity concerning the business of the Appellant.

The Supreme Court, in that view of the matter, concluded that the ITAT was right in answering the claim of the Appellant in the affirmative, relying on the dictum of the Supreme Court in India Cements Ltd. vs. Commissioner of Income Tax, Madras AIR 1966 SC 1053. The exposition in this decision has been elaborated in the subsequent decision of the Supreme Court in Empire Jute Co. Ltd. vs. Commissioner of Income Tax (1980) 4 SCC 25.

According to the Supreme Court, the High Court missed the relevant aspects of the analysis of the ITAT concerning the fact situation of the present case, and as a matter of fact, the High Court had not even adverted to the aforementioned reported decisions, much less its usefulness in the present case.

The Supreme Court thereafter dealt with the argument of the learned ASG that since the Appellant, in its return, had taken a conscious, explicit plea with regard to the part of the claim being ascribable to capital expenditure and partly to revenue expenditure, it was not open for the Appellant to plead for the first time before the ITAT that the entire claim must be treated as revenue expenditure. Further, it was not open to the ITAT to entertain such a fresh claim for the first time. According to the Supreme Court, this submission had to be rejected. In the first place, the ITAT was conscious about the fact that this claim was set up by the Appellant for the first time before it and was clearly inconsistent and contrary to the stand taken in the return filed by the Appellant for the concerned assessment year including the notings made by the officials of the Appellant. Yet, the ITAT entertained the claim as permissible, even though for the first time before the ITAT, in appeal u/s 254 of the 1961 Act, by relying on the dictum of this Court in National Thermal Power Co. Ltd. Further, the ITAT had also expressly recorded the no objection given by the representative of the department, allowing the Appellant to set up the fresh claim to treat the amount declared as capital expenditure in the returns (as originally filed), as revenue expenditure. As a result, the objection now taken by the department could not be countenanced.

The Supreme Court observed that the Learned ASG had placed reliance on the decision of this Court in Goetze (India) Ltd. vs. Commissioner of Income Tax [2006] 284 ITR 323 in support of the objection pressed before it that it was not open to entertaining fresh claim before the ITAT. According to him, the decision in National Thermal Power Co. Ltd. merely permitted the raising of a new ground concerning the claim already mentioned in the returns and not an inconsistent or contrary plea or a new claim. The Supreme Court was not impressed by this argument. For, the observations in the decision in Goetze (India) Ltd. itself make it amply clear that such limitation would apply to the “assessing authority”, but not impinge upon the plenary powers of the ITAT bestowed u/s 254. In other words, this decision is of no avail to the department.

The Supreme Court also dealt with the decisions of the Supreme Court in Assistant Commissioner of Income Tax, Vadodara vs. Elecon Engineering Co. Limited (2010) 322 ITR 20 relied on by the learned ASG. This decision was on the question of the application of Section 43A of the 1961 Act. According to the Supreme Court, the exposition in this decision was of no avail to the fact situation of the present case. It was for the reason that the Appellant had not acquired any asset from any country outside India for the purpose of his business.

In view of the above, the Supreme Court was of the opinion that this appeal ought to succeed. The impugned judgment and order of the High Court had to be set aside and instead, the decision of the ITAT dated 3rd June, 2004 in favour of the Appellant on the two questions examined by the High Court in the impugned judgment needed to be affirmed and restored. The Supreme Court ordered accordingly.

The Supreme Court further directed that as a result of allowing the entire claim of the Appellant to the tune of Rs. 3,56,57,727 being revenue expenditure, suitable amends would have to be effected in the final assessment order passed by the assessing officer for the concerned assessment year, thereby treating the consequential benefits such as depreciation availed by the Appellant-assessee in relation to the stated amount towards exchange fluctuation related to leased assets capitalised (being Rs. 2,46,04,418), as unavailable and non-est.

8 PCIT vs. Bajaj Herbals Pvt. Ltd.
(2022) 443 ITR 230 (SC)

Order in appeal – The Appellate Authority must pass a speaking and reasoned order after recording the submissions made on behalf of the respective parties

By the impugned order, the High Court had dismissed the appeal simply by observing that none of the questions proposed by the revenue could be termed as substantial questions of law and all the questions proposed were on factual aspects of the matter. Except for re-producing the proposed questions of law, there was no further discussion on the factual matrix of the case.

According to the Supreme Court, the impugned order passed by the High Court was a non-speaking and non-reasoned order, and even the submissions on behalf of the revenue were not recorded, the impugned order passed by the High Court dismissing the appeal was therefore unsustainable.

Under the circumstances, the Supreme Court quashed the impugned order and remanded the matter to the High Court to decide and dispose of the appeal afresh in accordance with law and on its own merits. The Supreme Court, however, observed that if the High Court is of the opinion that the proposed questions of law are not substantial questions of law and they are on factual aspects, it would be open for the High Court to consider the same in accordance with the law, but, the High Court must pass a speaking and reasoned order after recording the submissions made on behalf of the respective parties.

That man has reached
immortality who is disturbed by nothing material.

—
Swami Vivekananda

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

5 Yogesh Rashanlal Gupta vs. CBDT(2022) 442 ITR 31 (SC) Date of Order: 4th February, 2022

Income Declaration Scheme, 2016 – Declarant paying two of the three instalments on time – Application for extension of time for payments of third instalment rejected – On peculiar facts, directions issued to adjust the amounts deposited towards first two instalments while reckoning tax liability of assessee after revised assessment.

The assessee made an application under the Income Declaration Scheme, 2016 (the scheme) on 16th September, 2016 of an undisclosed income of Rs. 5,98,20,219 divided into three years, namely, 2011, 2015 and 2016. The Principal Commissioner of Income-tax by his order dated 13th October, 2016, called upon the assessee to pay Rs. 1,79,46,066 by way of tax, Rs. 44,86,517 by way of surcharge and an equivalent sum of Rs. 44,86,517 by way of penalty, in three instalments, on specified dates. The assessee deposited the amount towards the first and second instalments before due dates on 23rd November, 2016 and 31st March, 2017. The third instalment was due on 30th September, 2017. However, in the meantime, the assessee came to be arrested in a criminal case on 14th July, 2017 at Kanchipuran, Tamil Nadu. He was granted bail on 16th August, 2017 with a condition of a bond of Rs. 50 lakhs and daily appearance at 10:00 am till further orders. On 30th October, 2017, the Magistrate relaxed the condition of appearance before the court. The assessee made an application for extension of time for payment of the last instalment on 4th October, 2017 to the Department and to CBDT. The CIT, by his order dated 18th October, 2017, conveyed that he had no authority to grant any such extension of time. No reply was issued by CBDT.

The assessee challenged the order dated 18th October, 2017 passed by the Commissioner of Income-tax before the High Court by way of a writ petition. The Hon’ble Gujarat High Court, by its order dated 19th February, 2018 (403 ITR 12), requested CBDT to consider the application of the assessee for extension of time for payment of third/ last instalment.

The CBDT by its order dated 28th December, 2018 rejected the application for extension of time for payment of third instalment holding that on the facts it could not be stated that the situation was completely beyond the control of the assessee declarant.

The assessee challenged the aforesaid order dated 28th December, 2018 passed by the CBDT before the High Court by way of writ petition. The assessee, however, confined his case only to the extent of adjusting the amount already deposited by him for the relevant assessment year. The Hon’ble Gujarat High Court dismissed the petition holding that the scheme, more particularly, Section 191 thereof specifically provides that any amount of tax paid under Section 184 in pursuance of a declaration made under Section 183 shall not be refundable (432 ITR 91).

On an appeal to the Supreme Court by the assessee, the Supreme Court, on the peculiar facts and circumstances of the case, directed that the assessee declarant be given the benefit of the amounts deposited towards the first two instalments while reckoning the liability of the assessee after revised assessment. The petition was disposed of accordingly.

BCAJ Admin

Angel Tax — Amendment and Its Implications

BACKGROUND

The concept of ‘Angel Tax’, first introduced by the Finance Act of 2012, has now been around for more than a decade. The intention behind the enactment of section 56(2)(viib) of the Income Tax Act, 1961 (‘Act’) was to deter the creation of shell firms and to prevent the circulation of black money through the subscription of shares of closely held companies at unreasonably high valuations.

Prior to 1st April, 2023, the angel tax provisions were applicable only to funds raised by a closely held company from a person resident in India. The erstwhile provisions stated that, where a company, not being a company in which the public is substantially interested, receives, in any previous year, from any person being a resident, any consideration for the issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be deemed to be the income of the concerned company and will be chargeable to tax under the head Income from other Sources for the relevant financial year.

Under the proviso to the section, the following investments are excluded from the ambit of angel tax provisions:

a. Investment received by a venture capital undertaking from venture capital companies or venture capital funds (‘VCFs’) or a specified fund [Category I and Category II Alternative Investment Funds (‘AIFs’)].

b. Investment received by a company from certain classes of persons as notified under the notification¹ (The Ministry of Commerce and Industry notified companies² that would qualify the definition of ‘start-up’ as being exempt).

1 Notification No. 13/2019/F. No. 370142/5/2018-TPL (Pt.) superseded by Notification No. 30/2023/F. No. 370142/9/2023-TPL (Part-I)
2 Notification No. G.S.R. 127(E), dated 19th February, 2019 issued by the Ministry of Commerce and Industry in the Department for Promotion of Industry and Internal Trade

For the determination of fair market value (‘FMV’) of shares for the purpose of the above provisions of angel tax, the explanation to the section provided that the FMV shall be the greater of the following value:

– Determined as per prescribed method; and

– As may be substantiated by the company to the satisfaction of the income tax authorities.

Under the erstwhile rules, the “prescribed method” under Rule 11UA of Income Tax Rules, 1962 (‘ITR’) for unquoted equity shares, allowed the taxpayer, i.e., the issuing company to value its unquoted equity shares either on the basis of book value per share based on the prescribed formula or value determined by a merchant banker using Discounted Cash Flow (‘DCF’) method. In the case of unquoted shares and securities other than equity shares in a company, the fair market value was to be determined based on the price it would fetch if sold in the open market on the valuation date. The Company may obtain a report from a merchant banker or an accountant for such valuation.

Amendment to section 56(2)(viib)
The Finance Act, 2023, has amended section 56(2)(viib) to widen the net of the specific anti-avoidance rules to include non-resident investors as well. Thereby, any share premium over and above the fair market value received from non-resident investors will now be taxed in the hands of the Indian company.

While exclusions that are currently provided to domestic venture capital funds, Cat I & II AIFs and registered start-ups as per proviso to the section are permitted to continue. The Central Board of Direct Taxes (‘CBDT’) has further notified the following class or classes of persons who will be outside the purview of angel tax provisions (‘Exclusion Notification’³):

3 Notification 29/2023 dated 24th May 2023 and Notification 30/2023 dated 24th May 2023.

i. Government and government-related investors, such as central banks, sovereign wealth funds, international or multilateral organisations or agencies, including entities controlled by the government or where direct or indirect ownership of the Government is 75 per cent or more;

ii. Banks or entities involved in the insurance business where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident;

iii. Any of the following entities, which is a resident of any country or specified territory (listed in Annexure – I), and such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident:

a) entities registered with SEBI as Category-I Foreign Portfolio Investors;

b) endowment funds associated with a university, hospitals or charities;

c) pension funds created or established under the law of the foreign country or specified territory; and

d) Broad Based Pooled Investment Vehicle or fund where the number of investors in such a vehicle or fund is more than 50 and where such a fund is not a hedge fund or a fund which employs diverse or complex trading strategies.

However, vital countries, such as Singapore, Mauritius, UAE, Netherlands, Cayman Islands and BVI, from where the majority of FDI investment is received by India, are excluded from the said list of notified countries (refer to Annexure – I).

In addition to the above notification, CBDT has also extended the exemption from the angel tax provisions to a company on consideration received for issue of shares to non-resident investors on fulfilment of conditions prescribed in the said notification2 issued by the Ministry of Commerce and Industry (‘Startup Exemption’), which was earlier provided to resident investors only.

Amendment to Rule 11UA(2)

The extension of angel tax on investments made in closely held companies by non-residents made it necessary to amend Rule 11UA(2) to allow for more adaptable valuation methods in order to align with applicable pricing guidelines for foreign investments under the Foreign Exchange Management Act, which require the issue of shares by Indian companies to non-residents at a price higher than the Fair Market Value of the shares.

Introduced from 25th September, 2023, the revised rules prescribe the mechanism for computation of fair market value of unquoted equity shares as well as compulsory convertible equity shares (‘CCPS’) issued to resident and non-resident investors for the purposes of section 56(2)(viib). A closely held company will have an option to select any of the valuation methods for the purpose of valuation of unquoted shares.

Methods for valuation of unquoted equity shares

I. For Resident Investors

1. Book Value Method
The FMV of shares is to be determined based on the net worth of the company computed using book values of assets and liabilities and further subjected to prescribed adjustments.

2. Discounted Cash Flow Method (‘DCF’)
The FMV under this method is determined by calculating the present value of future cash flows generated by an investment or asset, by using an appropriate discounting rate. The FMV is to be determined by the merchant banker under this method as per the rules.

3. Benchmarking
The new regulations allow a price-matching mechanism in the following cases:

a. Where a Venture Capital undertaking receives any consideration for the issue of shares to a Venture Capital Fund, Venture Capital Company, or Specified Fund (Category I or II AIF).

b. Where a company receives any consideration for the issue of shares to a notified entity.

In the above cases, the issue price can be considered as the FMV for the issuance of shares to others, subject to adherence to the following criteria:

i. Total consideration received at above determined FMV from other investors does not exceed consideration from shares issued to the VCF, VCC, Specified Fund or notified entity as the case maybe; and

ii. The issuance of shares to other investors is within 90 days before or after the date of the issue of shares to the VCF, VCC, Specified Fund or notified entity as the case may be.

For example: Company A received a consideration of ₹30,00,000 from a notified entity on 1st January for the issue of 600 shares at ₹5,000 per share. The shares are allotted and credited to the demat account of the notified entity on 15th January. Accordingly, Company A may issue up to 600 shares at ₹5,000 to any other investor during a period from 15th October to 15th April by benchmarking to the above transaction.

II. For Non-resident Investors

In addition to the above methods in Point I, the following are the prescribed additional methods that a merchant banker may use for the valuation of unquoted equity shares for receipt of investment from non-resident investors:

4. Comparable company multiple method
Under this approach, the value of a company is determined by comparing it to a similar company in the same industry. This method relies on the premise that companies within the same industry or sector often trade at similar valuation multiples due to similar risk profiles and growth prospects. However, this is subject to case-specific adjustments to ensure the accuracy of valuation.

5. Probability weighted expected return method
The value determined under this method represents the average or expected value of shares, considering the weightage of multiple outcome-based scenarios and their associated probabilities. It provides a more comprehensive valuation approach than a single-point estimate and takes into account the uncertainty and risk associated with different potential outcomes.

6. Option pricing method
When estimating the fair market value of shares, the option pricing approach takes into account the value of the option to buy or sell the shares at a later time. The calculation of FMV is based on the supposition that the value of a share is the total of the present values of all expected future cash flows as well as the value of the option to exercise (buy or sell) the share at any time.

7. Milestone analysis method
Milestone analysis method is relevant for the valuation of companies with limited operating history. The valuation is based on the achievement of pre-agreed milestones aligned to business-specific metrics such as sales growth, user acquisition, etc., for computing the FMV of shares.

8. Replacement cost methods
The replacement cost method is a valuation method where the FMV of the shares is computed based on the cost of re-establishing the company / business. This will allow the investor to understand the worth of a particular business / company.

Valuation methods in case of valuation of CCPS

The amended rules have now introduced specific provisions for the valuation of compulsorily convertible preference shares (‘CCPS’). Further, parity has been brought in the valuation of CCPS and equity shares by permitting benchmarking of the valuation of CCPS to equity shares. Accordingly, at the option of the company, the FMV determined for unquoted equity shares (determined based on the above-mentioned prescribed approaches) can be considered as FMV of CCPS.

Further, CCPS can be independently valued based on the methods for valuation prescribed for unquoted equity shares (covered in Point I and II above for resident and non-resident investors respectively) except to the exclusion of the book value method.

Valuation methods in case of valuation of other securities

For the determination of the fair market value of preference shares other than CCPS, the valuation method continues based on the price it would fetch if sold in the open market on the valuation date. The company may obtain a report from a merchant banker or an accountant in respect of such valuation.

Summary for applicability of methods for unquoted equity shares and CCPS:

Approaches for determination of FMV	Applicable for Type of share	Type of share
Book value approach – FMV computed based on the net worth of the Company, computed based using book values of assets and liabilities and further subjected to prescribed adjustments	Resident and Non-resident	Unquoted equity share
Discounted Free Cash Flow method — FMV to be determined by a merchant banker	Resident and Non-resident	Unquoted equity share and CCPS
New valuation methods —FMV to be determined by a merchant banker through any of the below methods: • Comparable Company MultipleMethod • Probability Weighted Expected Return Method • Option Pricing Method • Milestone Analysis Method • Replacement Cost Method	Non-resident	Unquoted equity share and CCPS
Price at which shares issued to specified entities — Price at which shares issued to venture capital funds / company, specified fund or notified entities, within a period of 90 days before / after proposed share issuance — Consideration received for proposed share issuance not to exceed aggregate consideration received from venture capital fund / specified fund / notified entities	Resident and Non-resident	Unquoted equity share and CCPS

Price at which shares issued to specified entities — Price at which shares issued to venture capital funds / company, specified fund or notified entities, within a period of 90 days before / after proposed share issuance — Consideration received for proposed share issuance not to exceed aggregate consideration received from venture capital fund / specified fund / notified entities Resident and
Non-resident Unquoted equity share and CCPS

OTHER KEY CHANGES

Date of Valuation
Under the amended Rule 11UA, where the date of valuation report issued by the merchant banker is within a period of 90 days prior to the date of issue of shares, then such date at the option of assessee / company may be deemed to be the ‘valuation date’.

However, in case the assessee does not opt for a valuation date as per above, then the date on which the consideration is received by the assessee shall be the valuation date in accordance with Rule 11U(j).

Safe Harbour tolerance band
Under the amended Rule 11UA, a tolerance band of 10 per cent has been provided for both resident and non-resident investors in the case where the issue price exceeds the value determined by the valuer, but does not exceed 10 per cent of such value. In such a scenario, the issue price shall be deemed to be the fair market value of such shares. However, the tolerance band is not extended to the price-matching mechanism against shares issued to VCF, specified funds, or notified entities. The safe harbour tolerance limit is a beneficial amendment which will address practical issues brought on by currency fluctuations, bidding procedures, multiple rounds of investment and other implementation challenges.

Illustration:
M Co. is issuing 500 equity shares to Y Co. (Indian Company) of face value ₹10 each. The FMV determined as per rule 11UA (except in case of price matching mechanism) of the equity share is ₹200 per share. Based on commercial negotiations, the issue price of a share is finalised as under:

Situation A) ₹218 per share
Situation B) ₹230 per share

Situation A) Issue price of ₹218 per share is within the tolerance band of 10 per cent of the FMV arrived above. [i.e., 218 < 220 (200+10 per cent)]. Therefore, for the purpose of section 56(2)(viib), the issue price of ₹218 per share will be considered as the fair market value.

Situation B) Similarly, the issue price of ₹230 exceeds the tolerance band of ₹220 per share in the current case. Therefore, for section 56(2)(viib), the FMV of shares will be R200 per share. Accordingly, the difference of ₹30 per share will be liable to tax under the Angel Tax provisions.

SUMMARY

The extension of angel tax to non-resident investors has opened a Pandora’s box. Exclusion of a certain class of persons and extended start-up exemption to non-resident investors is a much-needed relief, and introduction of additional methods of valuation along with a price-matching mechanism and safe harbour tolerance limit is beneficial for all stakeholders.

Having said that, challenges still prevail for angel tax. Issues which are yet to be addressed include no exemption on the issue of shares pursuant to court-approved schemes, non-inclusion of vital countries in the notified list of countries from where the major FDI investment comes to India, such as Singapore, Netherlands, etc., limited valuation methods available vis-à-vis FEMA regulations, validity of report by merchant banker up to 90 days, etc.

Annexure – I

List of Countries

Sr. No.	Name of Country / Specified Territory
1	Australia
2	Austria
3	Belgium
4	Canada
5	Czech Republic
6	Denmark
7	Finland
8	France
9	Germany
10	Iceland
11	Israel
12	Italy
13	Japan
14	Korea
15	New Zealand
16	Norway
17	Russia
18	Spain
19	Sweden
20	United Kingdom
21	United States

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

4 Principal Commissioner of Income Tax (Central) – 2 vs. Mahagun Realtors (P) Ltd. Civil Appeal No. 2716 of 2022 (Arising out of Special Leave Petition (C) No. 4063 of 2020) Date of order: 5th April, 2022

Effect of amalgamation – When two companies are merged and are so joined, as to form a third company or one is absorbed into one or blended with another, the amalgamating company loses its entity – However, whether corporate death of an entity upon amalgamation per se invalidates an assessment order ordinarily cannot be determined on a bare application of Section 481 of the Companies Act, 1956 (and its equivalent in the 2013 Act), but would depend on the terms of the amalgamation and the facts of each case

The Respondent-Assessee company, Mahagun Realtors (P) Limited (hereafter variously referred to as ‘MRPL’, ‘the amalgamating company’ or the ‘transferor company’), was engaged in the development of real estate and had executed one residential project under the name ‘Mahagun Maestro’ located in Noida, Uttar Pradesh. MRPL amalgamated with Mahagun India Private Limited (hereinafter ‘MIPL’) by virtue of an order of the High Court (dated 10th September, 2007). In terms of the order and provisions of the Companies Act, 1956, the amalgamation was with effect from 1st April, 2006.

On 20th March, 2007, survey proceedings were conducted in respect of MRPL, during the course of which some discrepancies in its books of account were noticed. On 27th August, 2008, a search and seizure operation was carried out in the Mahagun group of companies, including MRPL and MIPL. During those operations, the statements of common directors of these companies were recorded, in the course of which admissions about not reflecting the true income of the said entities was made; these statements were duly recorded under provisions of the Income Tax Act, 1961 (hereafter ‘the Act’).

On 2nd March, 2009, the Revenue issued notice to MRPL to file Return of Income (ROI) for the assessment year (hereafter ‘A.Y.’) 2006-2007 u/s 153A of the Act, within 16 days. On failure by the Assessee to file the ROI, the Assessing Officer (hereafter ‘AO’) issued show-cause notice on 18th May, 2009 u/s 276CC. On 23rd May, 2009, a reply was issued to the show cause notice stating that no proceedings be initiated and that a return would be filed by 30th June, 2009. A ROI on 28th May, 2010, describing the Assessee as MRPL was filed. On 13th August, 2010, the Revenue issued notice u/s 143(2). To this, an adjournment was sought by a letter dated 27th August, 2010. In the ROI, the PAN disclosed was ‘AAECM1286B’ (concededly of MRPL); the information given about the Assessee was that its date of incorporation was 29th September, 2004 (the date of incorporation of MRPL). Under Col. 27 of the form (of ROI) to the specific query of “Business Reorganization (a)….(b) In case of amalgamated company, write the name of amalgamating company” – the reply was NOT APPLICABLE”.

The AO issued the assessment order on 11th August, 2011, assessing the income of ? 8,62,85,332 after making several additions of ? 6,47,00,972 under various heads. The assessment order showed the Assessee as ‘Mahagun Realtors Private Ltd., represented by Mahagun India Private Ltd’.

Being aggrieved, an appeal was preferred to the Commissioner of Income Tax (hereafter ‘CIT’). The Appellant’s name and particulars were as follows:

•   “M/s. Mahagun Realtors
   (Represented by Mahagun India Pvt. Ltd., after amalgamation)
   B-66, Vivek Vihar, Delhi-110095.”

The appeal was partly allowed by the CIT on 30th April, 2012. The CIT set aside some amounts brought to tax by the AO. The Revenue appealed against this order before the ITAT; simultaneously, the Assessee too, filed a cross objection to the ITAT. The Revenue’s appeal was dismissed; the Assessee’s cross objection was allowed only on a single point, i.e., that MRPL was not in existence when the assessment order was made, as it had amalgamated with MIPL.

The Revenue appealed to the High Court. The High Court, relying upon a judgment of the Supreme Court, in Principal Commissioner of Income Tax vs. Maruti Suzuki India Limited (2019) 107 taxmann.com 375 (SC) (hereafter ‘Maruti Suzuki’), dismissed the appeal.

The Revenue, therefore, appealed against that judgment.

The Supreme Court noted its other decisions on the subject in Commissioner of Income Tax, vs. Hukamchand Mohanlal 1972 (1) SCR 786, Commissioner of Income Tax vs. Amarchand Shroff 1963 Supp (1) SCR 699, Commissioner of Income Tax vs. James Anderson 1964 (6) SCR 590, Saraswati Industrial Syndicate vs. Commissioner of Income Tax Haryana, Himachal Pradesh (1990) Supp (1) SCR 332, General Radio and Appliances Co. Ltd. vs. M.A. Khader (dead) by Lrs., [1986] 2 S.C.C. 656, Marshall Sons and Co. (India) Ltd. vs. Income Tax Officer 1996 Supp (9) SCR 216, Commissioner of Income Tax vs. Spice Enfotainment Ltd. (2020) 18 SCC 353, Dalmia Power Limited and Ors. vs. The Assistant Commissioner of Income Tax, Circle 1, Trichy (2020) 14 SCC 736 and McDowell and Company Ltd. vs. Commissioner of Income Tax, Karnataka Central (2017) 13 SCC 799.

The Supreme Court noticed that there were not less than 100 instances under the Income Tax Act, wherein the event of amalgamation, the method of treatment of a particular subject matter is expressly indicated in the provisions of the Act. In some instances, amalgamation results in withdrawal of a special benefit (such as an area exemption u/s 80IA) – because it is entity or unit specific. In the case of carry forward of losses and profits, a nuanced approach has been indicated. All these provisions support the idea that the enterprise or the undertaking, and the business of the amalgamated company continues. The beneficial treatment, in the form of set-off, deductions (in proportion to the period the transferee was in existence, vis-à-vis the transfer to the transferee company); carry forward of loss, depreciation, all bear out that under the Act, (a) the business-including the rights, assets and liabilities of the transferor company do not cease, but continue as that of the transferor company; (b) by deeming fiction-through several provisions of the Act, the treatment of various issues, is such that the transferee is deemed to carry on the enterprise as that of the transferor.

According to the Supreme Court, the combined effect, therefore, of Section 394(2) of the Companies Act, 1956, Section 2(1A) and various other provisions of the Income Tax Act, is that despite amalgamation, the business, enterprise and undertaking of the transferee or amalgamated company- which ceases to exist, after amalgamation, is treated as a continuing one, and any benefits, by way of carry forward of losses (of the transferor company), depreciation, etc., are allowed to the transferee. Therefore, unlike a winding up, there is no end to the enterprise, with the entity. The enterprise, in the case of amalgamation, continues.

The Supreme Court observed that in Maruti Suzuki (supra), the scheme of amalgamation was approved on 29th January, 2013 w.e.f. 1st April, 2012, the same was intimated to the AO on 2nd April,2013, and the notice u/s 143(2) for A.Y. 2012-13 was issued to the amalgamating company on 26th September, 2013. The Court, in facts and circumstances, observed the following:

“35. In this case, the notice under Section 143(2) under which jurisdiction was assumed by the assessing officer was issued to a non-existent company. The assessment order was issued against the amalgamating company. This is a substantive illegality and not a procedural violation of the nature adverted to in Section 292B.

————– ——————

39. In the present case, despite the fact that the assessing officer was informed of the amalgamating company having ceased to exist as a result of the approved scheme of amalgamation, the jurisdictional notice was issued only in its name. The basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the amalgamating entity ceases to exist upon the approved scheme of amalgamation. Participation in the proceedings by the Appellant in the circumstances cannot operate as an estoppel against law. This position now holds the field in view of the judgment of a co-ordinate Bench of two learned Judges which dismissed the appeal of the Revenue in Spice Entertainment on 2nd November, 2017. The decision in Spice Entertainment has been followed in the case of the Respondent while dismissing the Special Leave Petition for A.Y. 2011-2012. In doing so, this Court has relied on the decision in Spice Entertainment.

40. We find no reason to take a different view. There is a value which the court must abide by in promoting the interest of certainty in tax litigation. The view which has been taken by this Court in relation to the Respondent for A.Y. 2011-12 must, in our view be adopted in respect of the present appeal which relates to A.Y. 2012-13. Not doing so will only result in uncertainty and displacement of settled expectations. There is a significant value which must attach to observing the requirement of consistency and certainty. Individual affairs are conducted and business decisions are made in the expectation of consistency, uniformity and certainty. To detract from those principles is neither expedient nor desirable.”

According to the Supreme Court, in Maruti Suzuki (supra), it undoubtedly noticed Saraswati Syndicate. Further, the judgment in Spice (supra) and other lines of decisions, culminating in the Court’s order, approving those judgments, was also noticed. Yet, the legislative change, by way of introduction of Section 2(1A), defining ‘amalgamation’ was not taken into account. Further, the tax treatment in the various provisions of the Act was not brought to the notice of the Court in the previous decisions.

The Supreme Court noted that there was no doubt that MRPL amalgamated with MIPL and ceased to exist thereafter; this was an established fact and not in contention. The Respondent has relied upon Spice and Maruti Suzuki (supra) to contend that the notice issued in the name of the amalgamating company is void and illegal. The facts of the present case, in the opinion of the Supreme Court, however, were distinguishable from the facts in Spice and Maruti Suzuki on the following bases:

Firstly, in both the relied upon cases, the Assessee had duly informed the authorities about the merger of companies and yet the assessment order was passed in the name of amalgamating/non-existent company. However, in the present case, for A.Y. 2006-07, there was no intimation by the Assessee regarding the amalgamation of the company. The ROI for the A.Y. 2006-07 first filed by the Respondent on 30th June, 2006 was in the name of MRPL. MRPL amalgamated with MIPL on 11th May, 2007, w.e.f. 1st April, 2006. In the present case, the proceedings against MRPL started on 27th August, 2008 – when a search and seizure were first conducted on the Mahagun group of companies. Notices u/s 153A and Section 143(2) were issued in the name of MRPL and the representative from MRPL corresponded with the department in the name of MRPL. On 28th May, 2010, the Assessee filed its ROI in the name of MRPL, and in the ‘Business Reorganization’ column of the form mentioned ‘not applicable’ in the amalgamation section. Though the Respondent contends they had intimated the authorities by a letter dated 22nd July, 2010, it was for A.Y. 2007-2008 and not for A.Y. 2006-07. For the A.Y. 2007-08 to 2008-2009, separate proceedings u/s 153A was initiated against MIPL, and the proceedings against MRPL for these two assessment years were quashed by the Additional CIT by order dated 30th November, 2010, as the amalgamation was disclosed. In addition, in the present case the assessment order dated 11th August, 2011 mentioned the name of both the amalgamating (MRPL) and amalgamated (MIPL) companies.

Secondly, in the cases relied upon, the amalgamated companies had participated in the proceedings before the department, and the courts held that the participation by the amalgamated company would not be regarded as estoppel. However, in the present case, the participation in proceedings was by MRPL-which held out itself as MRPL.

According to the Supreme Court, the judgments in Saraswati Syndicate and Marshall (supra) have indicated that the rights and liabilities of the transferor and transferee companies are determined by the terms of the merger. In Saraswati Syndicate, the point further made is that the corporate existence of the transferor ceases upon amalgamation.

The Supreme Court noted that the terms of the amalgamation and the assessment order passed by the Assessing Officer in which it was recorded that Mr. Amit Jain, Managing Director of Mahagun Realtors Pvt. Ltd., Mahagun Developers Ltd., Mahagun (India) Pvt. Ltd. had surrendered an amount of Rs. 16.9589 crores for A.Y. 2007-08, and that after the special audit, unaccounted receipts attributable to the Assessee for A.Y. 2005-06 amounted to Rs. 6,05,71,018.

The Supreme Court concluded that the facts of the present case were distinctive, as evident from the following sequence:

1. The original return of MRPL was filed u/s 139(1) on 30th June, 2006.

2. The order of amalgamation is dated 11th May, 2007 – but made effective from 1st April, 2006. It contains a condition – Clause 29 – whereby MRPL’s liabilities devolved on MIPL.

3. The original return of income was not revised even though the assessment proceedings were pending. The last date for filing the revised returns was 31st March, 2008, after the amalgamation order.

4. A search and seizure proceeding was conducted in respect of the Mahagun group, including MRPL and other companies:

(i) When the search and seizure of the Mahagun group took place, no indication was given about the amalgamation.

(ii) A statement made on 20th March, 2007 by Mr. Amit Jain, MRPL’s Managing Director, during statutory survey proceedings u/s 133A, unearthed discrepancies in the books of account in relation to amounts of money in MRPL’s account. The specific amount admitted was Rs. 5.072 crores in the course of the statement recorded.

(iii) The warrant was in the name of MRPL. The directors of MRPL and MIPL made a combined statement u/s 132 of the Act, on 27th August, 2008.

(iv) A total of Rs.30 crores cash, which was seized – was surrendered in relation to MRPL and other transferor companies, as well as MIPL, on 27th August, 2008, in the course of the admission when a statement was recorded u/s 132(4) of the Act, by Mr. Amit Jain.

5. Upon being issued with a notice to file returns, a return was filed in the name of MRPL on 28th May, 2010. Before that, on two dates, i.e., 22nd /27th July, 2010, letters were written on behalf of MRPL, intimating about the amalgamation, but this was for A.Y. 2007-08 (for which separate proceedings had been initiated u/s 153A) and not for A.Y. 2006-07.

6. The return specifically suppressed – and did not disclose the amalgamation (with MIPL)-as the response to Query 27(b) was ‘N.A.’.

7. The return-apart from specifically being furnished in the name of MRPL, also contained its PAN number.

8. During the assessment proceedings, there was full participation-on behalf of all transferor companies and MIPL. A special audit was directed (which is possible only after issuing notice u/s 142). Objections to the special audit were filed in respect of portions relatable to MRPL.

9. After fully participating in the proceedings, which were specifically in respect of the business of the erstwhile MRPL for the year ending 31st March, 2006, in the cross-objection before the ITAT, for the first time (in the appeal preferred by the Revenue), an additional ground was urged that the assessment order was a nullity because MRPL was not in existence.

10. Assessment order was issued-undoubtedly in relation to MRPL (shown as the Assessee, but represented by the transferee company MIPL).

11. Appeals were filed to the CIT (and a cross-objection to ITAT)-by MRPL ‘represented by MIPL’.

12. At no point in time – the earliest being at the time of search and subsequently, on receipt of the notice, was it plainly stated that MRPL was not in existence, and its business assets and liabilities, taken over by MIPL.

13. The counter affidavit filed before this Court – (dated 7th November, 2020) has been affirmed by Shri Amit Jain S/o. Shri P.K. Jain, who- is described in the affidavit as ‘Director of M/s. Mahagun Realtors(P) Ltd., R/o….’

In the light of the facts, what was overwhelmingly evident to the Supreme Court – was that the amalgamation was known to the Assessee, even at the stage when the search and seizure operations took place, as well as statements were recorded by the Revenue of the directors and managing director of the group. A return was filed pursuant to notice, which suppressed the fact of amalgamation; on the contrary, the return was of MRPL. Though that entity ceased to be in existence in law, yet, appeals were filed on its behalf before the CIT, and a cross appeal was filed before ITAT. Even the affidavit before this Court was on behalf of the director of MRPL. Furthermore, the assessment order painstakingly attributed specific amounts surrendered by MRPL, and after considering the special auditor’s report, brought specific amounts to tax in the search assessment order. That order was no doubt expressed to be of MRPL (as the Assessee) – but represented by the transferee, MIPL. All these clearly indicated that the order adopted a particular method of expressing the tax liability. The AO, on the other hand, had the option of making a common order, with MIPL as the Assessee, but containing separate parts, relating to the different transferor companies (Mahagun Developers Ltd., Mahagun Realtors Pvt. Ltd., Universal Advertising Pvt. Ltd., ADR Home Decor Pvt. Ltd.). The mere choice of the AO in issuing a separate order in respect of MRPL, in these circumstances, could not nullify it. Right from the time it was issued, and at all stages of various proceedings, the parties concerned (i.e., MIPL) treated it to be in respect of the transferee company (MIPL) by virtue of the amalgamation order and
Section 394(2). Furthermore, it would be anybody’s guess, if any refund were due, as to whether MIPL would then say that it is not entitled to it because the refund order would be issued in favour of a non-existing company (MRPL).

Having regard to all these reasons, the Supreme Court was of the opinion that in the facts of this case, the conduct of the Assessee, commencing from the date the search took place and before all forums, reflects that it consistently held itself out as the Assessee. The approach and order of the AO is, in this Court’s opinion, in consonance with the decision in Marshall & Sons (supra), which had held that: “an assessment can always be made and is supposed to be made on the Transferee Company taking into account the income of both the Transferor and Transferee Company.”

Before concluding, the Supreme Court noted and held that whether the corporate death of an entity upon amalgamation per se invalidates an assessment order ordinarily cannot be determined on a bare application of Section 481 of the Companies Act, 1956 (and its equivalent in the 2013 Act), but would depend on the terms of the amalgamation and the facts of each case.

In view of the foregoing discussion and having regard to the facts of this case, the Supreme Court held that the impugned order of the High Court could not be sustained; hence it was set aside. Since the appeal of the Revenue against the order of the CIT was not heard on merits, the matter was restored to the file of ITAT, which shall proceed to hear the parties on the merits of the appeal as well as the cross objections, on issues, other than the nullity of the assessment order, on merits. The appeal was allowed, in the above terms, without order on costs.

Note :- Finance Act, 2022 inserted Sub-Section (2A) in Sec. 170 as well as new Section 170A (w.e.f. 1st April, 2022), which deals with the procedure to be followed for assessment, re-assessment, etc. in case of succession as well as the effect of Order of Tribunal/ Court in respect of a ‘Business Reorganization’. Accordingly, while dealing with such issues relating to amalgamation etc., the effect of these new provisions also will have to be borne in mind

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

2. Union Bank of India vs. Additional Commissioner of Income Tax (TDS), Kanpur Civil Appeal Nos. 1861-1862 of 2022 (Arising out of SLP (C) Nos. 9693-9694 of 2019) Date of order: 7th March, 2022

Deduction of tax at source – Section 194A – The Appellant was not required by the provisions of Section 194A of the Income Tax Act 1961 to deduct tax at source on payments of interest made to the Agra Development Authority in view of Notification dated 22nd October, 1970 issued by the Central Government.

Before the Supreme Court, appeals arose from a judgment of a Division Bench of the High Court of Judicature at Allahabad dated 20th November, 2018. These appeals pertained to A.Ys. 2012-13 and 2013-14.

The issue which was raised in the appeals before the High Court was whether the Appellant was required by the provisions of Section 194A of the Income Tax Act 1961 to deduct tax at source on payments of interest made to the Agra Development Authority.

The Supreme Court noted that the Agra Development Authority is a statutory body constituted under the UP Urban Planning and Development Act 1973.

The Supreme Court observed that the Appellant placed reliance on the provisions of a notification dated 22nd October,1970 issued by the central government in the following terms:

“In pursuance of Sub-clause (f) of Clause (iii) of Sub-section (3) of Section 194A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notify the following for the purposes of the said Sub-clause:

(i) any corporation established by a Central, State or Provincial Act;

(ii) any company in which all the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a Corporation owned by that Bank; and

(iii) any undertaking or body, including a society registered under the Societies Registration Act, 1860 (21 of 1860), financed wholly by the Government.”

According to the Supreme Court, the issue raised in the appeals before it was covered by its judgment of a two-Judge Bench in Commissioner of Income Tax (TDS), Kanpur and Anr. vs. Canara Bank (2018) 9 SCC 322. In that case, the issue pertained to the applicability of the notification dated 22nd October, 1970 in relation to payments made by Canara Bank to the New Okhla Industrial Development Authority, an authority constituted u/s 3 of the Uttar Pradesh Industrial Area Development Act, 1976. The Bank had not deducted tax at source u/s 194-A, which led to notices being issued, resulting in consequential action. The Supreme Court, after considering the terms of the notification, held in that case that NOIDA, which had been established under the Act of 1976 was covered by the notification dated 22nd October, 1970. The Supreme Court, therefore, held that though the statute under which the Agra Development Authority has been constituted was the UP Urban Planning and Development Act 1973, the same principle which has been laid down in the judgment of the Supreme Court in Canara Bank (supra), would govern the present case.

Accordingly, the Supreme Court allowed the appeals and set aside the impugned judgment and order of the Division Bench of the High Court of Judicature at Allahabad. The orders imposing penalty u/s 271C of the Income Tax Act 1961, were consequently set aside.

3 Deputy Commissioner of Income Tax (Central), Circle 1(2) vs. M.R. Shah Logistics Pvt. Ltd. Civil Appeal No. 2453 of 2022 (Arising out of Special Leave to Appeal (C) No. 22921/2019) Date of order: 28th March, 2022

Reassessment – Notice issued u/s 148 – Original assessment u/s 143(1) – As long as there is objective tangible material (in the form of documents, relevant to the issue) the sufficiency of that material cannot dictate the validity of the notice.

Income Declaration Scheme – Immunity granted u/s 192 of the Income Declaration Scheme (IDS), introduced by Chapter IX of the Finance Act, 2016 is only to the declarant and could not extend to others.

The Assessee, a private limited company, had filed a return of income for A.Y. 2010-11 on 25th September, 2010. The return was accepted u/s 143(1) without scrutiny.

Search proceedings were conducted by the Revenue, under the Act, at the office premises of one Shirish Chandrakant Shah on 9th April, 2013 in Mumbai. During the search, several materials and documents were seized. On analysis of such documents, the Revenue was of the opinion that Shirish Chandrakant Shah was providing accommodation entries through various companies controlled and managed by him and that the Assessee was one of the beneficiaries of the business (of accommodation entries provided by Shri Shirish Shah) through bogus companies. This was based on the fact that many companies which invested amounts towards share capital on high premiums in the Assessee’s company were also controlled and managed by Shri Shirish Shah. The Assessing Officer (AO), on a consideration of these and other materials, was of the opinion that the Assessee was also a beneficiary of the accommodation entries provided by Shri Shirish Shah. Based on this opinion, the impugned notice u/s 148 of the Act to re-assess the income of the Assessee for A.Y. 2010-11 was issued on 31st March, 2017.

According to the AO, the credit of Rs. 6,25,00,000 received by the Assessee as share premium and share capital is not genuine but mere accommodation entry used to avoid tax payment, and it is the undisclosed income of the Assessee-company itself.

In the reasons recorded for the issue of the impugned notice, it was noted that a statement of the chairman of M.R. Shah Group was recorded u/s 132(4) on 18th November, 2016. In the course of that statement, he disclosed that M/s. Garg Logistics Pvt. Ltd. had declared Rs. 6.36 crores as undisclosed cash utilized for investment in the share capital of the Assessee through various companies, and that a declaration was made by Garg Logistics P. Ltd., under the Income Declaration Scheme (IDS).

The AO on investigation had found out the details of the amount invested by Garg Logistics Pvt. Ltd. in the Aseesee company, which were as under:

Name of the Investor

Amount of investment received by M R Shah
Logistics Pvt. Ltd. as per form no. 2 filed by it with ROC

Amount claimed to be paid by Garg Logistics
Pvt. Ltd. as per form no. 2 filed under IDS declaration

Sangam
Distributors Pvt. Ltd.

Rs.
20,00,000

Rs.
10,00,000

Fountain
Commerce Pvt. Ltd.

Rs.
25,00,000

NIL

Panorama
Commercial Pvt. Ltd.

NIL

Rs.
25,00,000

Sanskar
Distributors Pvt. Ltd.

Rs.
10,00,000

Rs.
20,00,000

The Assessee objected to the re-opening notice by a letter dated 29th August, 2017. The AO rejected the objections by an order dated 30th October, 2017. Aggrieved, the Assessee approached the High Court under Article 226 of the Constitution, impugning the Revenue’s action in seeking to re-open the assessment. The Revenue resisted the challenge and justified the re-opening (of assessment) notice.

By the impugned judgment, the High Court was of the opinion that the AO had no information to conclude that the disclosure by Garg Logistics was not from funds of that declarant but was in fact the unaccounted income of the Assessee. The impugned order reasoned that the AO, after recounting the background history of the Assessee and background of M.R. Logistics, shifted the burden on the Assessee to say that the share application money received by it was not its unaccounted income. This, according to the High Court, was erroneous. The impugned judgment was of the opinion that there was no tangible material or reason for the AO to reopen the assessment. The High Court also considered the scheme of Section 183 of the Finance Act, 2016, and noted that immunity was given in respect of amounts declared and brought to tax in terms of such a scheme. Therefore, the AO could not have relied upon the declaration made by Garg Logistics to so conclude. The High Court also derived strength from the circular of the CBDT dated 1st September, 2016, especially the answer to Query No. 10.

The Supreme Court observed that in the present case, the basis for reopening of assessment was not that Garg Logistics Pvt. Ltd. had declared Rs. 6,36,00,000 as undisclosed cash utilized for investment in the Assessee’s share capital. The basis for reopening the assessment, in this case, was the information from the material seized during the search in the cases of Shrish Chandrakant Shah and correlation with the return of income of the Assessee.

The Supreme Court noted that the original assessment was not completed after scrutiny but was under section 143(1) of the Act. Thus, in the present case, the returns filed by the Assessee were not examined or scrutinized; the AO issued only an intimation that it was filed.

The Supreme Court observed that the ‘reasons to believe’ (forming part of Section 147 in this case) clearly pointed to the fact that the reopening of assessment was based on information accessible by the AO; that a substantial amount of unaccounted income of promoters/ directors was introduced in the closely held companies of the Assessee group through Shirish Chandrakant Shah, alleged to be a Mumbai based accommodation entry provider through Pradeep Birewar, another accommodation entry provider based at Ahmedabad. During a search at the office premise of Shirish Chandrakant Shah (on 9th April, 2013 in Mumbai), an MS Excel sheet ‘pradeep abad’ in the Excel file ‘ac1.xls’ in a pen-drive, backed up from a removable disc folder (Bips backup 14.02.2012) was seized from the computer in that office in the form of computer back up. The AO, in the reasons recorded with the re-assessment notice stated that a comparison of data of accommodation entry provided by Shirish Chandrakant Shah through various companies controlled and managed by him and found from his office premise with the return of income of the Assessee (for A.Y. 2011-12) revealed that the latter (i.e. the Assessee) had availed one time accommodation entry from various companies controlled and managed by Shirish Chandrakant Shah. The AO also noticed that the Assessee had not proved the creditworthiness of various share applicants, who invested amounts with a high premium, in the Assessee company during A.Y. 2010-11 nor shown genuineness of such transactions.

The Supreme Court further observed that the record also revealed that Garg Logistics Pvt. Ltd. had not invested Rs. 6,36,00,000 in the Assessee company during the relevant period. The record brought out that the following entities invested in the Assessee:

Sl. No.

Name of the Allottees Companies

Amount of Investment

Amar Commercial Pvt. Ltd.

R 1,40,00,000

Fountain Commerce Pvt. Ltd.

R 25,00,000

Ganga Marketing Pvt. Ltd.

R 20,00,000

Gurukul Vinayak Put. Ltd.

R 80,00,000

Heaven Mercantile Pvt. Ltd.

R 1,00,00,000

Neelkamal Trade Link Pvt. Ltd.

R 1,50,00,000

Red Hot Mercantile Pvt. Ltd.

R 80,00,000

Sanskar Distributors Pvt. Ltd.

R 10,00,000

Sangam Distributors Pvt. Ltd.

R 20,00,000

Total

R 6,25,00,000

The Supreme Court noted that M/s. Garg Logistics filed its IDS application with a different Commissionerate, which did not share information with the AO in the present case. Mr. Pravin Chandra Agrawal, the chairman of the Assessee (M.R. Shah group), was queried regarding the capital raised with a high premium during a search and post search inquiry. He submitted details of the IDS declaration by Garg Logistics Pvt. Ltd. to say that the amounts received toward share applications were genuine transactions. According to the Supreme Court, the High Court, therefore, went wrong in holding that the department had shared confidential IDS information of Garg Logistics Pvt. Ltd. The AO had utilized the material submitted by Pravin. P. Agrawal (the Assessee’s chairman) and correlated it with the ROC data filed by the Assessee. Further, it was also apparent that the AO’s ‘reasons to believe’ did not disclose any inquiry made in relation to Garg Logistic Pvt. Ltd.’s account or declaration.

According to the Supreme Court, another aspect that should not be lost sight of is that the information or ‘tangible material’ which the AO comes by enabling the re-opening of an assessment, means that the entire assessment (for the concerned year) is at large; the Revenue would then get to examine the returns for the previous year, on a clean slate-as it were. Therefore, to hold as the High Court did, in this case, that since the Assessee may have a reasonable explanation was not a ground for quashing a notice u/s 147. As long as there is objective, tangible material (in the form of documents relevant to the issue), the sufficiency of that material cannot dictate the validity of the notice.

The Supreme Court thereafter considered the scope and effect of the Income Declaration Scheme (IDS), introduced by Chapter IX of the Finance Act, 2016. The Supreme Court noted that the objective of its provisions was to enable an Assessee to declare her (or his) suppressed undisclosed income or properties acquired through such income. It is based on voluntary disclosure of untaxed income and the Assessee acknowledging income tax liability. This disclosure is through a declaration (Section 183) to the Principal Commissioner of Income Tax within a time period, and deposits the prescribed amount towards income tax and other stipulated amounts, including the penalty. Section 192 grants limited immunity to declarants.

The Supreme Court observed that the declarant was Garg Logistic Pvt. Ltd. and not the Assessee. Section 192 affords immunity to the declarant. Therefore, the protection given was to the declarant and for a limited purpose. However, the High Court proceeded on the footing that such protection would bar the Revenue from scrutinizing the Assessee’s return, absolutely. The Supreme Court was of the opinion that quite apart from the fact that the re-opening of assessment was not based on Garg Logistic’s declaration, the fact that such an entity owned up and paid tax and penalty on amounts which it claimed were invested by it as share applicant, (though the share applicants were other companies and entities) to the Assessee in the present case, could not-by any Rule or principle inure to the Assessee’s advantage.

Therefore, after noting precedents, the Supreme Court was of the opinion that the High Court fell into error in holding that the sequitur to a declaration under the IDS can lead to immunity (from taxation) in the hands of a non-declarant.

Therefore, the Supreme Court allowed the appeal of the Revenue and set aside the impugned judgment with liberty to the AO to take steps to complete the re-assessment.

FROM
UNPUBLISHED ACCOUNTS

Extracts from
Auditor’s Report

2. ‘……..a statement on the
matters specified in paragraph 3 and 4 of the Order.

Place: Bengaluru For
X&X LLP

Date: April 13, 2022 Chartered
Accountants

(FRN:
X)

                                                                           XX
                                                                           Partner
                                                                           (Membership
No. X)
                                                                           UDIN
is not provided, as all
                                                                           that
we are left with is only
                                                                           the
DIN surrounding the
                                                                           regulation
of the profession.

_________________________

[A
BCAJ Spoof by Vinayak Pai V]

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

7 CIT vs. Reliance Telecom Limited and Ors. (2021) 133 taxmann.com 41 (SC)

Rectification of mistake – Section 254(2) – In exercise of powers under Section 254(2), the Appellate Tribunal may amend any order passed by it under Sub-section (1) of Section 254 with a view to rectifying any mistake apparent from the record – The powers under Section 254(2) are akin to Order XLVII Rule 1 Code of Civil Procedure – While considering the application under Section 254(2), the Appellate Tribunal is not required to re-visit its earlier order and to go into detail on merits – The powers under Section 254(2) of the Act are only to rectify/correct any mistake apparent from the record.

The Assessee entered into a Supply Contract dated 15th June, 2004 with Ericsson A.B. Assessee filed an application under Section 195(2) of the Act before the Assessing Officer, to make payment to the non-resident company for purchase of software without TDS. It was contended by the Assessee that it was for the purchase of software and Ericsson A.B. had no Permanent Establishment in India and in terms of the DTAA between India and Sweden & USA, the amount paid is not taxable in India.

The Assessing Officer passed an order dated 12th March, 2007 rejecting the Assessee’s application holding that the consideration for software licensing constituted under Section 9(1)(vi) of the Act and under Article 12(3) of the DTAA is liable to be taxed in India and accordingly directed the assessee to deduct tax at the rate of 10% as royalty.

The Assessee after deducting the tax appealed before the Commissioner of Income Tax (Appeals). CIT vide order dated 27th May, 2008 held in favour of the Assessee. Revenue appealed before the ITAT and by a detailed judgment and order dated 6th September, 2013, the ITAT allowed the Revenue’s appeal by relying upon the judgments/decisions of the Karnataka High Court and held that payments made for purchase of software are in the nature of royalty. Against the detailed judgment and order dated 6th September, 2013 passed by the ITAT, the Assessee filed miscellaneous application for rectification under Section 254(2) of the Act. Simultaneously, the Assessee also filed the appeal before the High Court against the ITAT order dated 6th September, 2013.

By an order dated 18th November, 2016, the ITAT allowed the Assessee’s miscellaneous application filed under Section 254(2) of the Act and recalled its original order dated 6th September, 2013. Immediately, on passing the order dated 18th November, 2016 by the ITAT recalling its earlier order dated 6th September, 2013, the Assessee withdrew the appeal preferred before the High court, which was against the original order dated 6th September, 2013.

Feeling aggrieved and dissatisfied with the order passed by the ITAT allowing the miscellaneous application under Section 254(2) of the Act and recalling its earlier order dated 6th September, 2013, the Revenue preferred writ petition before the High Court. By the impugned judgment and order, the High Court dismissed the said writ petition/s. Hence, the Revenue approached the Supreme Court.

The Supreme Court considered the order dated 18th November, 2016 passed by the ITAT allowing the miscellaneous application in exercise of powers under Section 254(2) of the Act and recalling its earlier order dated 6th September, 2013 as well as the original order passed by the ITAT dated 6th September, 2013.

Having gone through both the orders passed by the ITAT, the Supreme Court was the opinion that the order passed by the ITAT dated 18th November, 2016 recalling its earlier order dated 6th September, 2013 was beyond the scope and ambit of the powers under Section 254 of the Act. According to the Supreme Court, while allowing the application under Section 254(2) of the Act and recalling its earlier order dated 6th September, 2013, it appeared that the ITAT had re-heard the entire appeal on merits as if the ITAT was deciding the appeal against the order passed by the C.I.T. The Supreme Court observed that in exercise of powers under Section 254(2) of the Act, the Appellate Tribunal may amend any order passed by it under Sub-section (1) of Section 254 of the Act with a view to rectifying any mistake apparent from the record only. Therefore, the powers under Section 254(2) of the Act are akin to Order XLVII Rule 1 Code of Civil Procedure. According to the Supreme Court, while considering the application under Section 254(2) of the Act, the Appellate Tribunal is not required to re-visit its earlier order and to go into detail on merits. The powers under Section 254(2) of the Act are only to rectify/correct any mistake apparent from the record.

The Supreme Court noted that in the present case, a detailed order was passed by the ITAT when it passed an order on 6th September, 2013, by which the ITAT held in favour of the Revenue. According to the Supreme Court, the said order, therefore, could not have been recalled by the Appellate Tribunal in exercise of powers under Section 254(2) of the Act. If the Assessee was of the opinion that the order passed by the ITAT was erroneous, either on facts or in law, in that case, the only remedy available to the Assessee was to prefer the appeal before the High Court, which as such was already filed by the Assessee before the High Court, which the Assessee withdrew after the order passed by the ITAT dated 18th November, 2016 recalling its earlier order dated 6th September, 2013. Therefore, as such, the order passed by the ITAT recalling its earlier order dated 6th September, 2013 which has been passed in exercise of powers under Section 254(2) of the Act was beyond the scope and ambit of the powers of the Appellate Tribunal conferred under Section 254(2) of the Act. The order passed by the ITAT dated 18th November, 2016 recalling its earlier order dated 6th September, 2013, therefore, was unsustainable, which ought to have been set aside by the High Court.

The Supreme Court observed that from the impugned judgment and order passed by the High Court, it appeared that the High Court had dismissed the writ petitions by observing that (i) the Revenue itself had in detail gone into merits of the case before the ITAT and the parties filed detailed submissions based on which the ITAT passed its order recalling its earlier order; (ii) the Revenue had not contended that the ITAT had become functus officio after delivering its original order and that if it had to relook/revisit the order, it must be for limited purpose as permitted by Section 254(2); and (iii) that the merits might have been decided erroneously but ITAT had the jurisdiction and within its powers it may pass an erroneous order and that such objections had not been raised before ITAT.

According to the Supreme Court, none of the aforesaid grounds were tenable in law. Merely because the Revenue might have in detail gone into the merits of the case before the ITAT and merely because the parties might have filed detailed submissions, it did not confer jurisdiction upon the ITAT to pass the order de hors Section 254(2) of the Act. The powers under Section 254(2) of the Act are only to correct and/or rectify the mistake apparent from the record and not
beyond that.

According to the Supreme Court, even the observations that the merits might have been decided erroneously and the ITAT had jurisdiction and within its powers it may pass an order recalling its earlier order which is an erroneous order, could not be accepted. If the order passed by the ITAT was erroneous on merits, in that case, the remedy available to the Assessee was to prefer an appeal before the High Court, which in fact was filed by the Assessee before the High Court, but later on the Assessee withdrew the same in the instant case.

The Supreme Court, therefore, quashed the impugned judgment and order passed by the High Court as well as the order passed by the ITAT dated 18th November, 2016 recalling its earlier order dated 6th September, 2013 and the original orders passed by the ITAT dated 6th September, 2013 passed in the respective appeals preferred by the Revenue were restored.

However, considering the fact that the Assessee had earlier preferred appeal/s before the High Court challenging the original order passed by the ITAT dated 6th September, 2013, which the Assessee withdrew in view of the subsequent order passed by the ITAT dated 18th November, 2016 recalling its earlier order dated 6th September, 2013, the Supreme Court observed that if the Assessee/s prefers/prefer appeal/s before the High Court against the original order dated 6th September, 2013 within a period of six weeks from today, the same would be decided and disposed of in accordance with law and on its/their own merits and without raising any objection with respect to limitation.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

6 Ashwini Sahakari Rugnalaya vs. CCIT [(2021) 438 ITR 192 (SC)]

Exemption – Hospitals – Benefits in terms of section 10(23C)(via) of the Income-tax Act, 1961 are available to any hospital existing solely for philanthropic purposes and not for purposes of profit – Remuneration payable to member doctors with regard to IPD patient receipts, not being confined to the doctors performing the task – Benefit to the hospital rightly denied — Such benefit granted in earlier years cannot ipso facto entitle the assessee to the benefit in the subsequent years

By an order dated 31st March, 2005, the Chief Commissioner of Income-tax, Pune, rejected the application of the assessee-co-operative society for exemption u/s 10(23C)(via) for the assessment years 1999-2000 to 2002-2003.

The High Court dismissed the writ petition filed by the assessee challenging the aforesaid order.

According to the Supreme Court, the short question that arose for its consideration was whether the assessee was eligible for benefit u/s 10(23C)(via) for the said assessment years.

It noted that the benefits in terms of the aforesaid section are available to any hospital existing solely for philanthropic purposes and not for purposes of profit.

The Court further noted that this was the position which existed even earlier u/s 10(22A) prior to the amended provision under the Finance (No. 2) Act, 1998 with effect from 1st April, 1999. The only change made was requiring that it ‘may be approved by the prescribed authority’. According to the Court, the legislative intent of the same was to exclude some entities which were not entitled to it from availing of the benefit.

While dealing with one of the arguments of the assessee, that it had been granted benefit for ten years earlier, the Court observed that the same could not ipso facto entitle the assessee to the benefit in the relevant assessment years.

The Supreme Court observed that there was a dual reasoning permeating both the orders which sought to deny the exemption. Firstly, that remuneration had been paid from the earnings of the inpatient department (IPD) to the doctors who may not be working in that department and, secondly, that the rates being charged by the appellant were at par with other hospitals which run on commercial basis.

Insofar as the second aspect is concerned, the appellant sought to canvas before the Supreme Court that there was no basis for the same and even when information was sought in this behalf after the order was passed by the Commissioner through a letter dated 12th May, 2005, there was no response. In the counter affidavit, too, nothing has been set out in this behalf. According to the Court, if the aforesaid had been the only matter to be tested, it may have remitted the matter on account of failure to disclose the relevant information which formed the basis of that conclusion.

However, in the opinion of the Supreme Court it was not necessary for the twin reasons to exist in order to deny the benefit to the assessee. Each one of these reasons could have been sufficient.

According to the Court the most material aspect was the first one set out above and that, too, on the basis of what it perceived to be an admission of the assessee emerging from the pleadings in the writ petition filed before the High Court, the relevant paragraph Nos. 3(x) and (xi) of which were as under:

‘3(x) The scheme of the remuneration payable to the Doctors from OPD and IPD has been devised in a manner where all the Doctors are paid 50% of the receipts from the patients visiting for consultation in OPD (Out Patient Department), except consultants of minor branches where 70% of the receipts are paid to them. With regard to IPD patient receipts, the remuneration payable to member Doctors varies from 20% to 30% depending on the qualification (Super Specialists, Consultants – 30%, Non-surgical consultants having no personal nursing homes – 25%, all other doctors including surgeons and consultants having their personal nursing homes – 20%).

(xi) The 20% to 30% professional charges / remuneration payable to Doctors / Consultants as mentioned above is out of the net collection, which is worked out after deducting from the receipts of the IPD patients certain payments on account of Pathology / Radiology / OT charges, etc. However, the receipts on account of bedroom charges, injection charges, saline charges, oxygen charges, ECG charges, attendant charges, set charges are taken into account for arriving at the net collection figure and such shares (of 20% – 30% of net collection) have been paid to the consultants concerned (Physicians / Specialists / Surgeons). Thus, apart from the consultancy charges received in the OPD, the member doctors, some of whom are also Directors, have received shares from the collection made from the IPD patients by the hospital ranging from 20% to 30%.’

According to the Supreme Court, a reading of the aforesaid left no manner of doubt that while referring to the remuneration payable to member doctors with regard to IPD patient receipts, the same was not confined to the doctors performing the task.

The Supreme Court, thus, was of the view that the decision on facts made by the competent authority and as affirmed by the High Court could not be said to be perverse or having complete absence of rationality for it to interfere in the same.

However, the Supreme Court clarified that if the assessee desired to rectify the position, as emerging from the aforesaid, that would not preclude it from claiming exemptions for relevant subsequent years.

The civil appeal was dismissed accordingly.

BCAJ Admin

Glimpses of Supreme Court Rulings

Tax deducted at source (TDS) – Belated payment of TDS – Section 271C(1)(a) is applicable in case of a failure on the part of the concerned person / Assessee to “deduct” the whole of any part of the tax as required by or under the provisions of Chapter XVII-B and failure to pay the whole or any part of the tax is dealt by Section 271C(1)(b) but it does not speak about belated remittance of TDS – No penalty is leviable on belated remittance of TDS – In such cases, prosecution can be launched in appropriate cases in terms of Section 276B.

40. US Technologies International Pvt Ltd vs. CIT
(2023) 453 ITR 644 (SC)

From 1st January, 2002 to February, 2003, the Appellant – Assessee, engaged in a software development business at Techno Park, Trivandrum which employed about 700 employees, deducted tax at source (TDS) in respect of salaries, contract payments, etc., totalling Rs.1,10,41,898 for A.Y. 2003-04. In March, the Assessee remitted part of the TDS being R38,94,687 and balance of Rs.71,47,211 was remitted later. Thus, the period of delay ranged from 05 days to 10 months.

On 10th March, 2003, a survey conducted by the Revenue at Assessee’s premises noted that TDS was not deposited within the prescribed dates under Income Tax Rules (IT Rules).

On 2nd June, 2003, Income Tax Officer (ITO) vide order under section 201(1A) of the Act levied penal interest of Rs. 4,97,920 for the period of delay in remittance of TDS.

On 9th October, 2003, the ACIT issued a show cause notice proposing to levy penalty under section 271C of the amount equal to TDS. The Assessee replied to the said show cause notice vide reply dated 28th October, 2003.

On 6th November, 2003, another order under section 201(1A) was passed levying the penal interest of Rs. 22,015. On 10th November, 2003, the ACIT vide order under section 271C levied a penalty of Rs. 1,10,41,898 equivalent to the amount of TDS deducted for A.Y. 2003-04. That order of the ACIT levying the penalty under section 271C came to be confirmed by the High Court. The High Court vide impugned judgment and order dismissed the appeal preferred by the Assessee by holding that failure to deduct/remit the TDS would attract penalty under section 271C of the Act, 1961.

Further, by order(s) dated 26th September, 2013, the ACIT by way of orders under section 271C levied penalty equivalent to the amount of TDS deducted for A.Ys. 2010-11, 2011-12 and 2012-13 on the grounds that there was no good and sufficient reason for not levying the penalty.

The CIT (Appeals) dismissed the Assessees’ appeals. By common order dated 1st June, 2016, the ITAT allowed the Assessees’ appeals by holding that imposition of penalty under section 271C was unjustified and reasonable causes were established by the Assessee for remitting the TDS belatedly. By the common judgment and order the High Court allowed the Revenue’s appeals relying upon its earlier judgment.

According to the Supreme Court, the questions posed for its consideration were of belated remittance of the TDS after deducting the TDS, whether such an Assessee is liable to pay penalty under section 271C of the Act, 1961? And, as to what is the meaning and scope of the words “fails to deduct” occurring in Section 271C(1)(a) and whether an Assessee who caused delay in remittance of TDS deducted by him, can be said a person who “fails to deduct TDS”?

The Supreme Court noted that all these cases were with respect to the belated remittance of the TDS though deducted by the Assessee.

According to the Supreme Court, this was, therefore, a case of belated remittance of the TDS though deducted by the Assessee and not a case of non-deduction of TDS at all.

The Supreme Court observed that as per Section 271C(1)(a), if any person fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVIIB then such a person shall be liable to pay by way of penalty a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid.

So far as failure to pay the whole or any part of the tax is concerned, the same would be with respect to Section 271C(1)(b), which was also not the case here.

Therefore, Section 271C(1)(a) is applicable in case of a failure on the part of the concerned person/Assessee to “deduct” the whole of any part of the tax as required by or under the provisions of Chapter XVII-B. The words used in Section 271C(1)(a) are very clear and the relevant words used are “fails to deduct.” It does not speak about belated remittance of the TDS.

Therefore, on plain reading of Section 271C of the Act, 1961, the Supreme Court held that no penalty is leviable on belated remittance of the TDS after the same is deducted by the Assessee.

The Supreme Court observed that wherever the Parliament wanted to have the consequences of non-payment and/or belated remittance/payment of the TDS, the Parliament/Legislature has provided the same like in Section 201(1A) and Section 276B of the Act.

So far as the reliance placed upon the CBDT’s Circular No. 551 dated 23rd January, 1998 by Revenue, the Supreme Court observed that the said circular as such favoured the Assessee. According to the Supreme Court, on fair reading of said CBDT’s circular, it talks about the levy of penalty on failure to deduct tax at source. It also takes note of the fact that if there is any delay in remitting the tax, it will attract payment of interest under section 201(1A) of the Act and because of the gravity of the mischief involved, it may involve prosecution proceedings as well, under section 276B of the Act. If there is any omission to deduct the tax at source, it may lead to loss of Revenue and hence remedial measures have been provided by incorporating the provision to ensure that tax liability to the said extent would stand shifted to the shoulders of the party who failed to effect deduction, in the form of penalty. On deduction of tax, if there is delay in remitting the amount to Revenue, it has to be satisfied with interest as payable under section 201(1A) of the Act, besides the liability to face the prosecution proceedings, if launched in appropriate cases, in terms of Section 276B of the Act. According to the Supreme Court, even the CBDT has taken note of the fact that no penalty is envisaged under section 271C for belated remittance/payment/deposit of the TDS.

The Supreme Court quashed and set aside the order of the High Court and the question of law on interpretation of Section 271C of the Income Tax Act was answered in favour of the Assessee and against the Revenue. It was specifically observed and held that on mere belated remitting the TDS after deducting the same by the concerned person/Assessee, no penalty shall be leviable under section 271C of the Income Tax Act.

BCAJ Admin

Glimpses of Supreme Court Rulings

Reassessment – Change of the AO– Fresh notice issued under section 148 by the new incumbent – The High Court quashed the assessment as subsequent notice was barred by limitation and no reasons were recorded prior to issue of subsequent notice – Order of the High Court quashed and set aside – Section 129 of the Act permits to continue with the earlier proceedings in case of change of the AO from the stage at which the proceedings were before the earlier AO – Fresh show cause notice is not warranted and/or required to be issued by the subsequent AO

35 DCIT, New Delhi vs.
Mastech Technologies Pvt Ltd
(2022) 449 ITR 239 (SC)

The Assessee filed its return of income for the A.Y. 2008-09 declaring loss of Rs. 6,10,314 which was processed under section 143(1) of the Income Tax Act, 1961 (“the Act”).

After obtaining the prior approval of the Additional CIT for re-opening of the assessment, the AO issued a notice under section 148 of the Act on 23rd March, 2015.

At the instance of the assessee, the AO supplied the reasons for re-opening, vide letter dated 18th May, 2015. However, the earlier AO, who had issued the notice under section 148 of the Act dated 23rd March, 2015, was transferred and the new AO took charge. The subsequent AO issued another notice under section 148 of the Act on 18th January, 2016.

Again, at the request of the assessee, the subsequent AO supplied the reasons for re-opening of the assessment.

Thereafter, the AO issued the notice under section 142(1) of the Act and also issued a notice under section 143(2) of the Act on 16th February, 2016.

The AO, vide letter dated 23rd February, 2016, informed the assessee of the reasons for re-opening of the assessment for the A.Y. 2008-09.

The assessee submitted its objections to the re-opening of the assessment, vide communication/letter dated 07th March, 2016. The AO rejected the objections of the assessee to the re-opening of the assessment, vide letter/communication dated 21st March, 2016.

Thereafter, the AO passed the order of assessment under section 143(3) of the Act on 30th March, 2016 making an addition of Rs. 1,35,00,000 on account of accommodation entry and an addition of Rs. 2,43,000 on account of commission.

The assessee approached the High Court by way of writ petition challenging the re-opening of the assessment for the A.Y. 2008-09 on 1st April, 2016. The High Court passed an interim order on 1st April, 2016 that the assessment proceedings may go on but no final assessment order shall be passed, and the same shall be subject to the ultimate outcome of the final decision in the writ petition (the final assessment order was already passed on 30th March, 2016).

By the impugned judgment and order, the High Court has set aside the reopening of the assessment for the A.Y. 2008-09 mainly on the following grounds:

i) That in view of the issuance of the second notice under section 148 of the Act dated 18th January, 2016, the first notice under section 148 dated 23rd March, 2015 was given up/dropped;

ii) In view of the above, the second notice dated 18th January, 2016 was considered to be the fresh notice, and the same was barred by limitation;

iii) no reasons were recorded while reopening when the second show cause notice dated 18th January, 2016 was issued.

The High Court further observed that in the notice dated 18th January, 2016, it was not specifically mentioned that the same was in continuation of the earlier notice dated 23rd March, 2015.

The Supreme Court, on appeal by the Revenue was of the opinion that the order passed by the High Court quashing and setting aside the re-opening of the assessment for the A.Y. 2008-09 was unsustainable. Section 129 of the Act permits to continue with the earlier proceedings in case of change of the AO from the stage at which the proceedings were before the earlier AO. In that view of the matter, fresh show cause notice dated 18th January, 2016 was not at all warranted and/or required to be issued by the subsequent AO.

According to the Supreme Court, the subsequent issuance of the notice dated 18th January, 2016 could not be said to be dropping the earlier show cause notice dated 23rd March, 2015, as observed and held by the High Court. The reasons to reopen the assessment for the A.Y. 2008-09 were already furnished after the first show cause notice dated 23rd March, 2015 which ought to have been considered by the High Court.

However, the High Court sought the reasons recorded for issue of the second show cause notice dated 18th January, 2016, which was not required to be considered at all.

Therefore, the Supreme Court held that the finding recorded by the High Court that the subsequent notice dated 18th January, 2016 was barred by limitation, was unsustainable.

The Supreme Court noted that the Assessment Order was passed on the basis of the first notice dated 23rd March, 2015 and not on the basis of the notice dated 18th January, 2016.

Under the circumstances, according to the Supreme Court, the High Court had erred in quashing and setting aside the reopening of the assessment for the A.Y. 2008-09. The order passed by the High Court holding so was unsustainable and the same was quashed and set aside. However, as the assessee had not challenged the Assessment Order on merits which it ought to have challenged before the CIT(A); and the High Court had set aside the Assessment Order on the grounds that initiation of the reassessment was bad in law, the Supreme Court relegated the assessee to file an Appeal before the CIT(A) within a period of 4 weeks from the date of the order. The same was to be considered in accordance with law and on its own merits, subject to compliance of other requirements, while preferring the appeal against the Assessment Order. However, the assessee would not be able to re-agitate before the CIT(A) and/or the Appellate Authority that the reopening was bad in law.

Manufacturer of polyurethane foam – Entry 25 to the Eleventh Schedule of the IT Act –- The assessee was manufacturing ‘polyurethane foam’ [which was ultimately used for making automobile seat] and not automobile seat, and hence was not entitled to deduction under section 80IB of the Act

36 Polyflex (India) Pvt Ltd vs. CIT and Ors.
(2022) 449 ITR 244 (SC)

The assesse, at its manufacturing unit at Pune, was manufacturing ‘polyurethane foam,’ which is ultimately used as automobile seat. The assessee filed its return of income for the A.Y. 2003-04 and claimed deduction under section 80-IB of the Income Tax Act (for short, ‘IT Act’). The AO disallowed the deduction under Section 80-IB of the IT Act by observing that the nature of the business of the assessee was “manufacturer of polyurethane foam seats” which fell under entry 25 to the Eleventh Schedule of the IT Act and therefore the assessee was not entitled to deduction under section 80-IB. However, it was the case of the assessee that different sizes of polyurethane foam are used as automobile seats and therefore the end product can be said to be the automobile seat which is different than the polyurethane foam, and therefore the same does not fall under entry 25 to the Eleventh Schedule of the IT Act. However, the AO did not accept the same by observing that as ‘polyurethane foam’ is made of Polyol and Isocyanate and other components, the deduction under section 80-IB of the IT Act cannot be given to the assessee-company. This is because section 80-IB(2)(iii) states that the benefit of deduction under the said Section cannot be given if the assessee manufactures or produces any Article or thing specified in the list in the Eleventh Schedule of the IT Act.

The assessee preferred an appeal before the CIT (Appeals) against the assessment order. The CIT(A) upheld the order of the AO. It observed that the two chemicals, namely, Polyol and Isocyanate used in the manufacture of polyurethane foam seats assemblies were the basic ingredients of polyurethane foam and therefore the case would squarely fall in what is specified in the Eleventh Schedule.

Against the order of the CIT(A), the assessee filed an appeal before the ITAT. The ITAT set aside the assessment order as well as the order passed by the CIT(A) and allowed the appeal filed by the assesse. The ITAT observed that polyurethane foam was neither produced as a final product nor was an intermediate product or a by-product by the assessee. The same was used as automobile seat and does not fall within entry 25 to Eleventh Schedule of the IT Act. Therefore, the assessee was entitled to claim deduction under section 80-IB of the IT Act.

The order passed by the ITAT was set aside by the High Court, specifically observing that what was manufactured by the assessee was polyurethane foam in different sizes/designs and there was no further process undertaken by the assessee to convert it into automobile seats. Therefore, what was manufactured by the assessee was polyurethane foam falling in entry 25 to Eleventh Schedule and therefore the assessee was not entitled to deduction claimed under section 80-IB of the IT Act.

Consequently, the High Court allowed the appeal preferred by the revenue and quashed and set aside the order passed by the ITAT and restored the assessment order denying the deduction claimed under Section 80-IB of the IT Act.

According to the Supreme Court, the short question posed for its consideration was, “whether the assessee was eligible for the benefit under Section 80-IB of the IT Act?”

The Supreme Court noted that the High Court has specifically observed and held that what was manufactured and sold by the assessee was polyurethane foam manufactured by injecting two chemicals, namely, Polyol and Isocyanate. The polyurethane foam manufactured by the assessee was used as an ingredient for the manufacture of automobile seats. According to the Supreme Court, the assessee was manufacturing polyurethane foam and supplying the same in different sizes/designs to the assembly operator, which ultimately was being used for car seats. The assessee was not undertaking any further process for end product, namely, car seats. The polyurethane foam which was supplied in different designs/sizes was being used as an ingredient by others, namely, assembly operators for the car seats. Merely because the assessee was using the chemicals and ultimately what was manufactured was polyurethane foam and the same was used by assembly operators after the process of moulding as car seats, it could not be said that the end product manufactured by the assessee was car seats/automobile seats. There must be a further process to be undertaken by the very assessee in manufacturing of the car seats. No further process had been undertaken by the assessee except supplying/selling the polyurethane foam in different sizes/designs/shapes which may be ultimately used for end product by others as car seats/automobile seats.

In view of the above, the Supreme Court held that when the articles/goods manufactured by the assessee, namely, polyurethane foam was an Article classifiable in the Eleventh Schedule (Entry 25), considering Section 80-IB(2)(iii), the Assessee was not entitled to the benefit under section 80-IB of the IT Act.

The Supreme Court therefore dismissed the appeal.

Appellate jurisdiction – High Court – Section 260A -The appellate jurisdiction of the High Court under section 260A is exercisable by the High court within whose territorial jurisdiction the AO is located

37 CIT vs. Balak Capital Pvt Ltd
(2022) 449 ITR 394 (SC)

The Revenue filed an appeal before the Supreme Court against the judgement of the High Court of Punjab and Haryana which had ordered as follows in an appeal carried under section 260A of the Income Tax Act, 1961:

“5. In view of the above, this Court has no territorial jurisdiction adjudicate upon the lis over an order passed by the Assessing officer, i.e. Income Tax Officer, Ward 1(1), at Surat. Accordingly, the complete paper book of appeal including application for condonation of delay is returned to the appellant- revenue for filing before the competent court of jurisdiction in accordance with law. With regard to the cross objections, learned counsel for the respondent submits that in view of the return of the appeal, the cross objections have been rendered infructuous and be disposed of as such. Ordered accordingly.”

The Supreme Court observed that the very question fell for its consideration in the PCIT -I, Chandigarh vs. ABC Papers Ltd (2022) 9 SCC 1 case. Therein it was held that the appellate jurisdiction of the High Court under section 260A is exercisable by the High court within whose territorial jurisdiction the AO is located. It was held as follows:

“45. In conclusion, we hold that appeals against every decision of ITAT shall lie only before the High Court within whose jurisdiction the assessing officer who passed the assessment order is situated. Even if the case or cases of an assessee are transferred in exercise of power under Section 127 of the Act, the High Court within whose jurisdiction the assessing officer has passed the order, shall continue to exercise the jurisdiction of appeal. This principle is applicable even if the transfer is under Section 127 for the same assessment year(s).”

In the facts of this case, the Supreme Court noticed that by the impugned order, the High Court had precisely proceeded on the same principle. This means that the order by which the appeal has been directed to be presented before the High Court of Gujarat as the AO who passed the order was located at Surat within the State of Gujarat, was unexceptionable. Therefore, there was no reason for the Supreme Court to interfere with the impugned order.

Capital Gains – The word “Otherwise” used in Section 45(4) takes into its sweep not only the cases of dissolution but also cases of subsisting partnership wherein assets of the firm are re-valued and respective partners’ capital accounts are credited – Section 45(4) is applicable

38 CIT vs. Mansukh Dyeing and Printing Mills
(2022) 449 ITR 439 (SC)

The assessee, a partnership firm originally consisted of four partners (all brothers) engaged in the business of Dyeing and Printing, Processing, Manufacturing and Trading in Clothing. Under the Family Settlement dated 02nd May, 1991, the share of one of the existing partners-Shri M.H. Doshi having 25 per cent profit share in the firm was reduced to 12 per cent and, for his balance 13 per cent share, three new partners were admitted namely, viz., Smt Ranjan Doshi (11 per cent), Shri Prakash Doshi (1 per cent) and Shri Rajeev Doshi (1 per cent). It appears that thereafter, Shri M.H. Doshi, Shri Manohar Doshi and Shri V.H. Doshi retired from the partnership and reconstituted the partnership firm consisting of the partners namely, viz., Shri Hasmukhlal H. Doshi, Smt. Rajan H. Doshi, Shri Prakash H. Doshi and Shri Rajeev H. Doshi.

On 1st November, 1992, the firm was again reconstituted and three more partners, namely, viz., Smt Vaishali Shah (18 per cent), Smt. Bhavna Doshi (9 per cent), Smt Rupal Doshi (9 per cent) and M/s Ranjana Textile Pvt Ltd (10 per cent) were admitted as partners. The contribution of new partners was as under: (i) Smt. Vaishali Shah-
Rs.4.50 lakhs; (ii) M/s Ranjana Textiles Pvt Ltd- 2.50 lakhs; (iii) Smt. Bhavna Doshi-Rs. 2.25 lakhs; and (iv) Smt. Rupal Doshi- Rs.2.25 lakhs.

It was mentioned in the reconstituted partnership deed that two partners, namely, viz, Shri Hasmukh H. Doshi and Smt Ranjan Doshi had decided to withdraw part of their capital.

On 01st January, 1993, the assets of the firm were revalued and an amount of Rs.17.34 crores were credited to the accounts of the partners in their profit-sharing ratio. Two of the existing partners, viz., namely Shri Hasmukhlal H. Doshi and Smt. Ranjan Doshi withdrew a part of their capital which was roughly Rs.20 to Rs.25 lakhs. The new partners were immediately benefited by the credit to their capital accounts of the revaluation amount, as Rs.3.12 crores was credited to Smt. Vaishali Shah (who contributed Rs.4.50 lakhs); Rs.1.56 crores to Smt. Bhavna Doshi (who contributed Rs.2.25 lakhs); Rs.1.56 crores to Smt. Rupal Doshi (who contributed Rs.2.25 lakhs); and Rs.1.73 crores to M/s Ranjana Textiles (who contributed Rs.2.50 lakhs only).

The Respondent filed its Return of Income for the relevant assessment years. The Return of Income was filed for A.Y. 1993-1994 @ Rs.3,18,760. The same was accepted under section 143(1) of the Income Tax Act, 1961.

However, thereafter, the assessment was reopened under section 147 of the Income Tax Act by issuance of the notice under section 148. The reassessment was made under section 143(3) read with section 147 determining the total income of Rs.2,55,19,490. Addition of Rs.17,34,86,772. [amount of revaluation] was made towards short term capital gain under section 45(4) of the Income Tax Act.

As per the AO, the assessee revalued the land and building and enhanced the valuation from Rs.21,13,225 to Rs.17,56,00,000 for A.Y. 1993-1994 thereby increasing the value of the assets by Rs. 17,34,86,772. Therefore, the revaluing of the assets, and subsequently crediting it to the respective partners’ capital accounts constitutes transfer, which was liable to capital gains tax under section 45(4) of the Income Tax Act. As land and building was involved, the assessee had claimed the depreciation on building, and the AO assessed the amount of short-term capital gain under section 50.

The CIT(A) by order dated 30th July, 2004 confirmed the addition on account of Short-Term Capital Gains and held that there was a clear distribution of assets as the partners had also withdrawn amounts from the capital account. CIT(A) also observed that value of the assets of the firm which commonly belonged to all the partners of the partnership had been irrevocably transferred in their profit-sharing ratio to each partner. To the extent that the value has been assigned to each partner, the partnership has effectively relinquished its interest in the assets and such relinquishment can only be termed as transfer by relinquishment. Therefore, according to the CIT(A), conditions of Section 45(4) were satisfied and therefore, the assets to the extent of their value distributed would be deemed as income by capital gains in the hands of the assessee firm. The CIT (A) also observed that the transfer of the revalued assets had taken place during the previous year and, therefore, the liability to capital gains arose in the A.Y. 1993-1994. The CIT(A) relied upon the decision of the Bombay High Court in the case of CIT vs. A.N. Naik Associates and Ors., (2004) 265 ITR 346 (Bom.) and distinguished the decision of the Bombay High Court in the case of CIT Mumbai vs. Texspin Engg. and Mfg. Works, Mumbai, (2003) 263 ITR 345 (Bom.).

In an appeal preferred by the assessee, the ITAT by judgment and order dated 26th October, 2006 and relying upon the decision of the Supreme Court in the case of CIT, West Bengal vs. Hind Construction Ltd., (1972) 83 ITR 211 allowed the appeal and set aside the addition made by the AO towards Short Term Capital Gains. The ITAT stated that as observed and held by the Apex Court in the aforesaid decision, revaluation of the assets and crediting to partners’ account did not involve any transfer. The ITAT observed and held that the decision of the Bombay High Court in the case of A.N. Naik Associates and Ors. (supra) was not applicable and held that the decision of the Bombay High Court in the case of Texspin Engg. and Mfg. Works, Mumbai (supra) was to be applied.

Relying upon the decision of in the case of Hind Construction Ltd (supra), the High Court dismissed the appeals preferred by the Revenue. Against this, the Revenue, preferred an appeal before the Supreme Court.

According to the Supreme Court, the short question, which was posed for its consideration was the applicability of Section 45(4) of the Income Tax Act as introduced by the Finance Act, 1987.

The Supreme Court observed that the Bombay High Court in the case of A.N. Naik Associates and Ors., (supra) had an occasion to elaborately consider the word “Otherwise” used in Section 45(4). After a detailed analysis of Section 45(4), it was observed and held that the word “Otherwise” used in Section 45(4) takes into its sweep not only the cases of dissolution but also cases of subsisting partnership, wherein the partners transfer the assets in favour of a retiring/ incoming partner/s.

The Supreme Court was in complete agreement with the view taken by the Bombay High Court in the case of A.N. Naik Associates and Ors. (supra).

The Supreme Court noted that the assets of the partnership firm were revalued to increase the value by an amount of Rs.17.34 crores on 1st January, 1993 (relevant to A.Y. 1993-1994). The re-valued amount was credited to the accounts of the partners in their profit-sharing ratio. According to the Supreme Court, the credit of the assets’ revaluation amount of Rs.17.34 crores to the capital accounts of the partners could be said to be in effect distribution of the assets as some new partners which came to be inducted by introduction of small amounts of capital ranging between Rs.2.5 to Rs.4.5 lakhs, got huge credits to their capital accounts immediately after joining the partnership. This amount was available to the partners for withdrawal and in fact some of the partners withdrew the amount credited in their capital accounts. Therefore, the assets so revalued and the credit into the capital accounts of the respective partners could be said to be “transfer” falling in the category of “Otherwise” and therefore, the provisions of Section 45(4) inserted by Finance Act, 1987 w.e.f. 1st April, 1988 were applicable.

The Supreme Court was of the view that the decision in the case of Hind Construction Ltd (supra) was pre-insertion of Section 45(4) of the Income Tax Act inserted by Finance Act, 1987. Therefore, in the case of Hind Construction Ltd. (supra), it had no occasion to consider the amended/inserted Section 45(4) of the Income Tax Act. Under the circumstances, for the purpose of interpretation of newly inserted Section 45(4), the decision in the case of Hind Construction Ltd. (supra) was not of any assistance.

In view of the above, the Supreme Court quashed and set aside the orders of the ITAT and the High Court. The order passed by the AO was restored.

Notes

1. In the above case, in the subsequent year being the previous year relevant to the A.Y. 1994-95, the assessee firm was converted into limited company under Part IX of the Companies Act, 1956. In this A.Y. also similar addition was made by the AO on protective basis which was deleted by CIT (A) on the grounds that it was already assessed for the earlier A.Y. 1993-94. The Revenue did not succeed before the Tribunal as well as the High Court, mainly due to the judgment of Bombay High Court in the case of Texspin Engineering & Mfg Works. [(2003) 263 ITR 345]. The Revenue had filed appeals before the Supreme Court for both the assessment years as noted by the Supreme Court at para 2.8 [page 448 of the reported judgment]. Finally, it would appear that the Supreme Court has upheld the order of the AO for the A. Y. 1993-94.

2. In the above judgment of the Supreme Court, somehow, the view is taken that the mere act of revaluation of the assets by the firm and crediting respective partners’ capital accounts can be said to be ‘transfer’ and that would fall in the category of the words ‘otherwise’ appearing in section 45(4). This view, with due respect, is highly questionable for various reasons and also requires reconsideration. Interestingly, the Supreme Court, in the above case, noted and affirmed the view taken by the Bombay High Court in the case of A. N. Naik & Associates [(2004) 265 ITR 546] that the word ‘otherwise’ used in section 45(4) also takes in its sweep cases of subsisting partners of partnership, transferring the assets to retiring partner. It is worth noting that, in this case, the Bombay High Court apparently did not take such a view in the context of revaluation of assets. In fact, the Bombay High Court was dealing with applicability of section 45(4) in case where capital assets of the firm were transferred to retiring partner under a deed of retirement in terms of family settlement under which business and assets were to be divided. The above judgment of the Supreme Court can have far reaching implications on applicability of section 45(4) in such cases and also likely to raise some relevant issues about its correctness. However, this would be relevant up to A.Y. 2020-21 in view of amendments in the Act mentioned hereinafter.

3. It may be noted that section 45(4) which is considered and relied on by the Supreme Court in the above case has been substituted by the Finance Act, 2021 w.e.f. 1st April, 2021 and simultaneously, section 9B has also been introduced by the Finance Act, 2021, w.e.f. 1st April, 2021. Therefore, the cases of partnership firms involving revaluations, reconstitution, etc. will now be governed by the new provisions which have different languages and schemes for taxation in such cases. As such, in our view, the law declared in the above judgment should not have any bearing under the new provisions introduced by the Finance Act, 2021.

Offences and prosecution – Failure to deposit tax deducted at source – Trial Court discharged both the accused on the ground that notice was not given to Respondent No.2 as the Principal Officer of accused No.1 –Discharge affirmed by the High Court – Supreme Court set aside the order on concession by accused without going into merits

39 The Income Tax Department Vs.
Jenious Clothing Pvt Ltd & Anr.
(2022) 449 ITR 575 (SC)

Criminal complaints were filed against the Respondent-Company and one another, namely, S. Sunil V. Raheja, for the offences punishable under section 276B read with section 278B of the Act for non-remittance of the tax deducted at source.

In the complaints, accused No.2/S. Sunil V. Raheja was shown as Managing Director and was treated as the Principal Officer of the accused-Company.

The learned trial Court discharged both the accused on the grounds that notice was not given to Respondent No.2 as the Principal Officer of accused No.1.

The order of discharge has been confirmed by the High Court, by the judgment and orders passed in revision petitions.

However, before the Supreme Court, the accused agreed for setting aside the order of the trial court and to proceed further in accordance with law and on its own merits and keeping all the defences which may be available to the accused open. Accordingly, the Supreme Court ordered that trial be proceeded further to be decided and disposed of [within 12 months] by the trial court in accordance with law and on its own merits.

BCAJ Admin

Glimpses of Supreme Court Rulings

33 State Bank of India vs. ACIT
(2022) 449 ITR 192

Exemption – Leave Travel Concession – LTC is for travel within India, from one place in India to another place in India . It should be by the shortest possible route between the two destinations – The moment employees undertake travel with a foreign leg, it is not a travel within India and hence not covered under the provisions of Section 10(5) of the Act.

The Assessee, a Public Sector Bank, namely, the State Bank of India (SBI), was held to be an “Assessee in default”, for not deducting the tax at source of its employees.

These proceedings started with a Spot Verification under section 133A when it was discerned by the Revenue that some of the employees of the assessee- employer had claimed LTC even for their travel to places outside India. These employees, even though, raised a claim of their travel expenses between two points within India but had also travelled to a foreign country between these two points , thus taking a circuitous route for their destination which involved a foreign place. The matter was hence examined by the AO who was of the opinion that the amount of money received by an employee as LTC is exempted under section 10(5) of the Act, however, this exemption could not be claimed by an employee for travel outside India which had been done in this case. Therefore the assessee-employer defaulted in not deducting tax at source from this amount claimed by its employees as LTC. There were two violations of the LTC Rules, pointed out by the AO:

A. The employee did not travel only to a domestic destination but to a foreign country as well; and

B. The employees had admittedly not taken the shortest possible route between the two destinations thus the Appellant was held to be an Assessee in default by the AO.

The travel undertaken by the employees as LTC was hence in violation of Section 10(5) of the Act read with Rule 2B of the Income Tax Rules, 1962.

The order of the AO was challenged before CIT (A), which was dismissed and so was their appeal before the ITAT .

The Delhi High Court vide its order dated 13th January, 2020 dismissed the appeal filed by the Appellant and upheld the order passed by the ITAT dated 09th July, 2019, holding the Assessee-employer as an Assessee in default for the A.Y. 2013-14, for not deducting TDS of its employees. It was held that the amount received by the employees of the Assessee-employer towards their LTC claims was not eligible for the exemption as these employees had visited foreign countries, which was not permissible under the law. It was held that there was no substantial question of law in the Appeal.

The question therefore which fell for consideration of the Supreme Court was whether the Assessee was in default for not deducting tax at source while releasing payments to its employees as Leave Travel Concession (LTC) in the facts given above.

The Supreme Court after noting the provisions of law observed that they prescribe that the airfare between the two points within India will be given, and the LTC which will be given will be of the shortest route between these two places, which have to be within India. According to the Supreme Court, a conjoint reading of the provisions with the facts of this case could not sustain the argument of the Appellant that the travel of its employees was within India and no payments were made for any foreign leg involved.

The Supreme Court noted from the records that many of the employees of the Assessee had undertaken travel to Port Blair via Malaysia, Singapore or Port Blair via Bangkok, Malaysia or Rameswaram via Mauritius or Madurai via Dubai, Thailand and Port Blair via Europe, etc.

According to the Supreme Court, the contention of the Appellant that there is no specific bar under section 10(5) for a foreign travel and therefore a foreign journey could be availed as long as the starting and destination points remain within India was also without merits. According to the Supreme Court there was no ambiguity that LTC is for travel within India, from one place in India to another place in India.

According to the Supreme Court, the moment employees undertake travel with a foreign leg, it is not a travel within India and hence not covered under the provisions of Section 10(5) of the Act.

The Supreme Court rejected the second argument urged by the Appellant that payments made to these employees was of the shortest route of their actual travel.

The Supreme Court noted that a foreign travel also frustrates the basic purpose of LTC. The basic objective of the LTC scheme was to familiarise a civil servant or a Government employee to gain some perspective of the Indian culture by traveling in this vast country. It is for this reason that the Sixth Pay Commission rejected the demand of paying cash compensation in lieu of LTC and also rejected the demand of foreign travel.

The contention of Assessee that there may be a bona fide mistake by it in calculating the ‘estimated income’ was also rejected by the Supreme Court since all the relevant documents and material were before the Assessee-employer at the relevant time and the Assessee employer therefore ought to have applied his mind and deducted tax at source as it was his statutory duty, under section 192(1) of the Act.

According to the Supreme Court, there was no reason to interfere with the order passed by the Delhi High Court. The appeal was therefore dismissed.

34 Singapore Airlines Ltd. vs. CIT. Delhi and other connected appeals
(2022) 449 ITR 203 (SC)

Deduction of tax at source – Commission – The travel agents are “acting on behalf of” the airlines during the process of selling flight tickets – On the tickets sold, a 7% commission designated by the IATA is paid to the travel agent for its services as “Standard Commission” based on the price bar set by the IATA – In addition, they retain the difference between the Net Fare and the IATA Base Fare and the entire differential is characterized as a Supplementary Commission – The airlines are liable to deduct TDS under section 194H on both the amounts.

Spurred by the reintroduction of Section 194H in the IT Act by the Finance Act, 2001, the Revenue sent out notices for A.Y. 2001-02 to the air carriers operating in the country to adhere to the requirements for deduction of TDS. Upon suspecting deficiencies on the part of certain airlines in their compliance with statutory requirements under the IT Act, the Revenue carried out surveys under section 133A of the IT Act. Following the investigation, the Assessee airlines were allegedly found to have paid their respective travel agents certain amounts as Supplementary Commission on which the purported TDS that the carriers had failed to deduct was as follows:

Assessee	Supplementary Commission	Short fall in deduction of TDS
Singapore Airlines	Rs. 29,34,97,709	Rs. 2,93,49,770 (not including surcharge)
KLM Royal Dutch Airlines	Rs. 179,00,49,410	Rs. 18,25,85,040 (not including surcharge)
British Airways	Rs. 46,24,28,310	Rs. 4,71,67,688 (including surcharge)

Subsequently, successive Assessment Orders were passed holding that the airlines were Assessees in default under section 201 of the IT Act for their failure to deduct TDS from the Supplementary Commission, and the demands raised by the Revenue in respect of each of them were confirmed.

Following addition of surcharge, and interest under section 201(1A), the aggregate amount calculated as being owed to the Revenue was:

Assessee (Liability)	Surcharge + Interest	Aggregate amount
Singapore Airlines ( Rs. 2,93,49,770)	Rs. 58,700 + Rs. 21,13,224	Rs. 3,19,21,694
KLM Royal Dutch Airlines ( Rs. 18,25,85,040)	Rs. 2,24,26,580 (interest only)	Rs. 20,50,11,620
British Airways ( Rs. 4,71,67,688)	Rs. 60,08,391 (interest only)	Rs. 5,31,76,079

Penalty proceedings were directed to be initiated against all the Assessees under section 271C of the IT Act.

The Assessees filed their respective appeals before the CIT(A) against the Assessment Orders. The CIT (A) passed a common order, rejecting the appeals on merits but directing that any transactions dated prior to 01st June, 2001, the date on which Section 194H came into effect, would be excluded from the demand for TDS.

The Assessees subsequently approached ITAT. In CA No. 6964-6965 of 2015 concerning Singapore Airlines, the ITAT accepted the contentions of the Assessee and set aside the order passed against it, while holding that:

(i) The amount realized by the travel agent over and above the Net Fare owed to the air carrier is income in its own hands and is payable by the customer purchasing the ticket rather than the airline;

(ii) The “Supplementary Commission”, therefore, was income earned via proceeds from the sale of the tickets, and not a commission received from the Assessee airline;

(iii) The airline itself would have no way of knowing the price at which the travel agent eventually sold the flight tickets;

(iv) Section 194H referred to “service rendered” as the guiding principle for determining whether a payment fell within the ambit of a “Commission”. In this case, the amounts earned by the agent in addition to the Net Fare are not connected to any service rendered to the Assessee;

(v) The Revenue had erroneously and baselessly assumed that the travel agent had, in each of his dealings, realised the entire difference between the Net Fare and the Base Fare set by International Air Transport Association (“IATA”) and characterised the entire differential as a Supplementary Commission. Section 194H could not be pressed into operation on the basis of such surmises and without actual figures being proved.

The ITAT followed the same reasoning and allowed the appeals by the Assessees in the remaining Civil Appeals.

Aggrieved by the quashing of the orders, the Revenue brought separate appeals before the Delhi High Court.

A Division Bench of the High Court clubbed together various Income Tax Appeals all of which concerned tax liability for the airline industry. In the context of the applicability of Section 194H of the IT Act, the Division Bench reversed the findings of the ITAT and restored the Assessment Orders. The relevant part of the High Court judgment may be summarised as follows:

(i) The principles to be kept in mind when interpreting the application of Section 194H of the IT Act are:

a. The existence of a principal-agent relationship between the Assessee airlines and the travel agents;

b. Payments made to the travel agents in the nature of a commission;

c. The payments must be in the course of services provided for sale or purchase of goods;

d. The income received by the travel agent from the Assessees may be direct or indirect, given expansive wording of Section 194H;

e. The stage at which TDS is to be deducted is when the amounts are rendered to the accounts of the travel agents;

(ii) All the Assessees had accepted that a principal-agent relationship subsisted between them and the travel agents. The terms of the Passenger Sales Agency Agreements (“PSA”) also indicated that the actions of the agents in procuring customers were done on behalf of the airlines and not independently;

(iii) Hence, the additional income garnered by the agents was inextricably linked with the overall principal-agent relationship and the responsibilities that they were entrusted with by the Assessees;

(iv) There was no transfer in terms of title in the tickets and they remained the property of the airline companies throughout the transaction;

(v) The Assessees were only required to make the deductions under section 194H of the IT Act when the total amounts were accumulated by the BSP (Billing and Settlement Plan)

The High Court re-imposed the tag of “Assessee in default” under section 201 and the levy of interest on short fall of TDS under section 201(1A) on the Assessees.

The aggrieved Assessees therefore approached the Supreme Court.

The Supreme Court noted that within the aviation industry during the relevant period, the base fare for air tickets was set by the IATA with discretion provided to airlines to sell their tickets for a net fare lower than the Base Fare, but not higher. In essence, the IATA set the ceiling price for how much airlines may charge their customers. This formed part of the IATA’s overall responsibility of overseeing the functioning of the industry.

The air carriers were also required to provide a fare list to the Director General of Civil Aviation (“DGCA”) for approval. The prices that were rubber stamped by the DGCA may be equivalent to or lower than the Base Fare set by the IATA. Alongside setting the standard pecuniary amount for tickets, the IATA would provide blank tickets to the travel agents acting on behalf of the airlines to market and sell the travel documents. The arrangement between the airlines and the travel agents would be governed by PSAs. The draft templates for these contracts are drawn up by the IATA and entered into by various travel agents operating in the sector, with the IATA which signs on behalf of the air carriers. The PSAs set the conditions under which the travel agents carry out the aforementioned sale of flight tickets, along with other ancillary services, and the remuneration they are entitled to for these activities.

Once these tickets were sold, a 7% commission designated by the IATA would, be paid to the travel agent for its services as “Standard Commission” based on the price bar set by the IATA. This would be independent of the Net Fare quoted by the air carriers themselves. The 7 per cent commission on the Base Fare consequently triggered a requirement on the part of the airline to deduct TDS under section 194H at 10 per cent plus surcharge. The details of the amounts at which the tickets were sold would be transmitted by the travel agents to an organisation known as the Billing and Settlement Plan (“BSP”). The BSP functions under the aegis of the IATA and manages inter alia logistics vis-à-vis payments and acts as a forum for the agents and airlines to examine details pertaining to the sale of flight tickets.

The BSP stores a plethora of financial information including the net amount payable to the aviation companies, discounts, and commission payable to the agents. The system consolidated the amounts owed by each agent to various airlines following the sale of the tickets by the former. The aggregate amount accumulated in the BSP would then be transmitted to each air carrier by the IATA in a single financial transaction to smoothen the process and prevent the need to make multiple payments over time.

Within this framework, the airlines would have no control over the Actual Fare at which the travel agents would sell the tickets. While the ceiling price could not be breached, as mentioned earlier, the agents would be at liberty to set a price lower than the Base Fare pegged by the IATA, but still higher than the Net Fare demanded by the airline itself. Hence, the additional amount that the travel agents charged over and above the Net Fare that was quoted by the airline would be retained by the agent as its own income.

An illustration of how such a transaction would be carried out and the monetary gains made by the respective parties is shown below:

Base fare for
Singapore – Delhi (set by IATA)

Net fare (set by the
Airline)

Actual fare (set by
the travel agent)

Standard commission
(7 per cent of the base fare)

Supplementary
Commission (actual fare – net fare)

Rs. 1 lakh

Rs. 60,000

Rs. 80,000

7 per cent of Rs. 1 lakh = Rs. 7,000

Rs. 80,000 –

Rs. 60,000 =

Rs. 20,000

Ceiling price

Income of the assesee

Rs. 20,000 left after
payment of net fare to the assessee

Income of the travel
agent

Additional income of
the travel agent

This auxiliary amount charged on top of the Net Fare was portrayed on the BSP as a “Supplementary Commission” in the hands of the travel agent.

Thus, according to the Supreme Court, the heart of the dispute between the Assessee airlines and the Revenue in this case was the characterisation of the income earned by the agent besides the Standard Commission of 7 per cent and whether this additional portion would be subject to TDS requirements under section 194H.

According to the Supreme Court, Explanation (i) of Section 194H highlights the nature of the legal relationship that exists between two entities for payments between them to qualify as a “commission”. Consequently, it must be to determined whether the travel agents were “acting on behalf of” the airlines during the process of selling flight tickets. The Supreme Court noted that the Assessees were not disputing that a principal-agent relationship existed during the payment of the Standard Commission. The point on which the air carriers differ from the Revenue was the purported second part of the transaction i.e. when the tickets were sold to the customer and for which the travel agents earned certain amounts over and above the Net Fare set by the Assessees.

The Supreme Court noted the definition of a “principal” and an “agent” under section 182 of the Contract Act. As per the definition – an “agent” is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal”.

The Supreme Court after referring to the catena of cases elaborating on the characteristics of a contract of agency, was of the opinion that the following indicators could be used to determine whether there is some merit in the Assessees’ contentions on the bifurcation of the transaction into two parts: Firstly, whether title in the tickets, at any point, passed from the Assessees to the travel agents; Secondly, whether the sale of the flight documents by the latter was done under the pretext of being the property of the agents themselves, or of the airlines; Thirdly, whether the airline or the travel agent was liable for any breaches of the terms and conditions in the tickets, and for failure to fulfil the contractual rights that accrued to the consumer who purchased them.

The Supreme Court after perusing the PSA was of the view that several elements of a contract of agency were satisfied by numerous clauses, and the recitals. Every action taken by the travel agents was on behalf of the air carriers and the services they provide were with express prior authorisation. The airline also indemnified the travel agent for any shortcoming in the actual services of transportation, and any connected ancillary services, as it is the former that actually retains title over the travel documents and is responsible for the actual services provided to the final customer. Furthermore, the airline has the responsibility to provide full and final compensation to the travel agent for the acts it carries out under the PSA.

According to the Supreme Court, this led to an irresistible conclusion that the contract was one of agency that does not distinguish in terms of stages of the transaction involved in selling flight tickets. While Assessees had readily accepted the existence of the principal-agent relationship, their consternation had been directed at the so-called second limb of the deal that was exclusively between the agent and the customer. However, the submissions advanced in this regard were clearly not supported by the bare wording of the PSA itself. The High Court in the impugned judgment was correct in its holding that the arrangement between the agent and the purchaser was not a separate and distinct arrangement but is merely part of the package of activities undertaken pursuant to the PSA.

The Supreme Court, thereafter dealt with the submissions of the airlines that the principal-agent relationship does not cover the Supplementary Commission on the basis of arguments that are independent of the PSA. Primarily, it was contended that Supplementary Commission goes from the hands of the consumer and into the pockets of the travel agents without any intervention from the Assessees. Hence, the prerequisite of a payment on which TDS could be deducted in the first place was not fulfilled.

According to the Supreme Court, Section 194H of the IT Act, does not distinguish between direct and indirect payments. Both fall under Explanation (i) to the provision in classifying what may be called a “Commission”. The exact source of the payment was of no consequence to the requirement of deducting TDS. Even on an indirect payment stemming from the consumer, the Assessees would remain liable under the IT Act. Consequently, the contention of the airlines regarding the point of origination for the amounts did not impair the applicability of Section 194H of the IT Act.

The next point raised was regarding the practicality and feasibility of making the deductions, regardless of whether Section 194H may, in principle, cover the indirect payment to the travel agent. The Assessees had pointed out that the travel agent acts on its own volition in setting the Actual Fare for which the flight tickets are sold, and as a symptom of this, the airline itself has no knowledge whatsoever regarding how much Supplementary Commission it has drawn for itself. According to the Supreme Court, this contention was rebutted by the Revenue by highlighting the manner of operation of the BSP where financial data regarding the sale of tickets is stored. According to him, the BSP agglomerates the data from multiple transactions and transmits it twice a month, or bimonthly.

Keeping in mind the principal-agent relationship between the parties, the Supreme Court found significant merit in the arguments by the Revenue. According to the Supreme Court, the mechanics of how the airlines may utilise the BSP to discern the amounts earned as Supplementary Commission and deduct TDS accordingly was an internal mechanism that facilitates the implementation of Section 194H of the IT Act. Further, the lack of control that the airlines have over the Actual Fare charged by the travel agents over and above the Net Fare, cannot form the legal basis for the Assessees to avoid their liability.

The Supreme Court observed that notwithstanding the lack of control over the Actual Fare, the contract definitively states that “all monies” received by the agent are held as the property of the air carrier until they have been recorded on the BSP and properly gauged. Admittedly, the BSP demarcates “Supplementary Commission” under a separate heading. Hence, once the IATA makes the payment of the accumulated amounts shown on the BSP, it would be feasible for the Assessees to deduct TDS on this additional income earned by the agent.

Having held in favour of the Revenue in connection with the applicability of Section 194H of the IT Act, the remaining issue for the Supreme Court was to determine as to whether the matter has been rendered revenue neutral.

The travel agents who received the Supplementary Commission for A.Y. 2001-02, had already shown these amounts as their income. Subsequently, they had paid income tax on these sums. Therefore, it was contended that there had been no loss to the Revenue on this count.

The Supreme Court noting the precedents opined that if the recipient of income on which TDS has not been deducted, even though it was liable to such deduction under the IT Act, has already included that amount in its income and paid taxes on the same, the Assessee can no longer be proceeded against for recovery of the short fall in TDS. However, it would be open to the Revenue to seek payment of interest under section 201(1A) for the period between the date of default in deduction of TDS and the date on which the recipient actually paid income tax on the amount for which there had been a shortfall in such deduction.

In this context, as the Assessees had not provided the specifics of when the travel agents had paid their taxes on the Supplementary Commission, it was necessary to fill in these missing details and determine the amount of interest that the Assessees were liable to pay before this matter could be closed. The Supreme Court therefore remanded the matter back to the AO to flesh out these points in terms of the interest payments due for the period from the date of default to the date of payment of taxes by the agents.

The Supreme Court thereafter examined issue of the levy of penalties under section 271C of the IT Act. The Supreme Court noted that the AO had initially directed that penalty proceedings be commenced against the Assessees for the default in subtraction of TDS but this process was put in cold storage while the airlines and the revenue were contesting the primary issue of the applicability of Section 194H before various appellate forums.

The Supreme Court noted that Section 271C provides for imposition of penalties for failure to adhere to any of the provisions in Chapter XVII-B, which includes Section 194H. This provision must be r.w.s. 273B which excuses an otherwise defaulting Assessee from levy of penalties under certain circumstances.

The Supreme Court held that the liability of an airline to deduct TDS on Supplementary Commission had admittedly not been adjudicated upon by this Court when the controversy first arose in A.Y. 2001-02.

There were contradictory pronouncements by different High Courts in the ensuing years which clearly highlights the genuine and bona fide legal conundrum that was raised by the prospect of Section 194H being applied to the Supplementary Commission. Hence, there was nothing on record to show that the Assessees have not fulfilled the criteria under Section 273B of the IT Act. Though the contentions of the assessee were not accepted by the Supreme Court, there was clearly an arguable and “nascent” legal issue that required resolution by it and, hence, there was “reasonable cause” for the air carriers to have not deducted TDS at the relevant period. The logical deduction from this reasoning was that penalty proceedings against the airlines under section 271C of the IT Act had to be quashed.

BCAJ Admin

Glimpses of Supreme Court Rulings

1 PCIT vs. Matrix Clothing Pvt Ltd

(2022) 448 ITR 732,737 (SC)

Export Commission – Business Expenditure – Disallowance under section 40(a)(ia) –The foreign entity receiving the amounts were not Indian residents and subject to tax in India and that the services rendered were rendered outside India – Payments not liable to deduction of tax at source

In a Special Leave Petition filed before the Supreme Court, the following questions arose, namely, (i) losses due to foreign exchange fluctuation on export proceeds, (ii) the advance of interest-free loans to the related party, and (iii) non-deduction of tax at source on payment of export commission.

According to the Supreme Court, the first issue was covered in favor of the assessee by its decision in CIT vs. Woodward Governor India Pvt Ltd (2209) 312 ITR 254 (SC).

The Supreme Court dismissed the second issue, keeping the question of law open, as the amount involved was only Rs. 6,00,000.

So far as the third issue in respect to non-deduction of tax at source on payment of export commission was concerned, the Supreme Court noted that there were concurrent findings recorded that the foreign entity receiving the amounts were not Indian residents and subject to tax in India and that the services rendered were rendered outside India. Therefore, according to the Supreme Court, no error was committed by the High Court in deciding the issue against the Revenue.

2 PCIT vs. Tata Sons Ltd

(2022) 449 ITR 166 (SC)

Reassessment – Reasons recorded after issuance of the notice – Notice issued under section 148 of the Act was invalid

On 6th March, 2009, the AO issued a notice under section 148 of the Act seeking to re-open the assessment for A.Y. 2004-05. The Respondent contended that the reopening notice was issued much before the reasons were recorded for reopening the assessment, thus the reopening notice was without jurisdiction. However, the AO did not accept the Respondent’s contention and passed an order of assessment under section 143(3) r. w. s. 148 of the Act.

In appeal, the CIT (A) held that the reopening notice had been issued without having recorded the reasons which led the AO to form a reasonable belief that income chargeable to tax escaped assessment. He noted that reasons were recorded on 19th March, 2009 while the impugned notice issued is dated 6th March, 2009. In the above facts, the CIT (A) held the entire proceeding of reopening to assessment is vitiated as notice under section 148 of the Act is bad in law.

Being aggrieved, the Revenue filed Appeal to the Tribunal. The Tribunal specifically asked the Revenue to produce the assessment record so as to substantiate its case that impugned notice under section 148 of the Act was issued only after recording the reasons for reopening the assessment. The Revenue produced the record of assessment for A.Y. 2004-05 before the Tribunal. The Tribunal from the entries made in the assessment record produced, found an entry as regards issue of notice under section 148 dated 6th March, 2009. However, no entries prior thereto i.e. 6th March, 2009 were produced before the Tribunal, so as to establish that the reasons were recorded prior to the issue of notice dated 6th March, 2009 under section 148 of the Act. Thus, the Tribunal concluded that prior to 6th March, 2009 there was nothing in the record which would indicate that any reasons were recorded prior to the issue of notice. Therefore, in the absence of the Revenue being able to show that the reasons were recorded prior to 6th March, 2009, the Tribunal held that reopening notice was without jurisdiction.

The High Court noted that both the CIT (A) and the Tribunal had concurrently come to a finding of fact that no reasons were recorded by the AO prior to issuing the reopening notice dated 6th March, 2009. Nothing had been brought on record to suggest that the above finding of fact was perverse. Thus, the appeal did not give rise to any substantial question of law and was dismissed.

The Supreme Court dismissed the Special Leave Petition of the Revenue observing that it appeared that the reasons to reopen the assessment were recorded after issuance of notice of the reassessment notice and, therefore, it could be seen that when the notice for reassessment was issued, there was no subjective satisfaction. According to the Supreme Court, the High Court had not committed any error in setting aside the reassessment proceedings.

3 SRC Aviation Pvt Ltd vs.

ACIT (2022) 449 ITR 169 (SC)

Business Expenditure – Finding that bonus was paid in lieu of the dividend to avoid payment of dividend distribution tax – Not allowable under section 36(1)(ii) of Act

The facts in brief are that the assessee, a private limited company, of which, Arvind Chadha and Anoop Chadha are two shareholders and directors holding 50 per cent equity shares each since inception of the company.

In A.Y. 2011-2012, the company has paid bonus of Rs. 1 crore each to both the directors namely Arvind Chadha and Anoop Chadha. Similarly, in the A,Y. 2014-2015 the company paid a bonus of Rs. 1.5 crore each to both the Directors.

The AO disallowed the same relying upon section 36 (1)(ii) of the Act. The AO was inter alia of the view that bonus was paid to avoid payment of dividend distribution tax.

The CIT (A), in the appeal filed by the Assessee, vide orders dated 24th March, 2014 and 29th November, 2016 confirmed the disallowance and took a view that had the impugned bonus not been paid to these two directors, the amount would have been paid to them as dividend.

The order of the CIT (A) was challenged before the ITAT. The Tribunal also agreed with the AO and CIT (A) and upheld the order of AO and CIT(A).

Aggrieved by the order of the ITAT, the assessee challenged the order before the High Court Court.

Before the High Court, the appellant submitted that the appellant company had been paying bonus to the above working directors apart from the directors’ remuneration and the same was being allowed as deductible business expenditure and no disallowance was ever made in the past. The remuneration including bonus was paid on the basis of Board resolution for the services rendered by the aforesaid two directors. Further, the directors had declared the bonus as part of the ‘salary’ under section 15 of the Act in their returns of income and the same were accepted and assessed as such in their assessments.

The High Court noted that there were only two directors in the company. The entire amount had been paid to both of them. It was not the case of the Appellant that there had been any term of employment nor was there any case that any special services had been rendered by these two directors.

The High Court noted that the AO and CIT (A) had given a concurrent finding that the assessee had paid the bonus in lieu of the dividend and therefore, the above sum was disallowed under section 36(1)(ii) of Act. The ITAT also after considering the findings of the AO and the CIT (A) had inter alia held that the payment of bonus or commission was not allowable as deduction under section 36(1)(ii) of the Act in the hands of the assessee company. The High Court dismissed the appeals in the absence of any substantial question of law.

The Supreme Court dismissed the Special Leave Petitions observing that there was a concurrent finding of fact by the AO, CIT (Appeal) and Income Tax Appellate Tribunal, Delhi which had been duly affirmed by the High Court, disallowing the payment of bonus to the two Directors of the petitioner-company. According to the Supreme Court, no case to interfere with the impugned Order passed by the High Court of Delhi was made out.

4 ACIT vs. CEAT Ltd

(2022) 449 ITR 171 (SC)

Reassessment – Assessment sought to be re-opened beyond four years – Conditions precedent for re-opening of the assessment beyond four years were not satisfied – No allegations of suppression of material fact – Re- assessment was on change of opinion – Notice rightly quashed

Petitioner challenged the notice dated 27th March, 2019 issued under section 148 of the Income Tax Act, 1961 (the Act) for A.Y. 2012-13 and the order dated 31st October, 2019 rejecting petitioner’s objections before the High Court.

The High Court observed that since the notice issued was after expiry of four years from the end of the relevant assessment year and assessment under section 143(3) of the Act was completed, proviso to Section 147 of the Act would apply. Therefore, the Respondent has to first show that there was a failure on the part of petitioner to disclose material facts required for assessment.

The High Court after considering the reasons recorded for reopening of the assessment was of the view that the Respondent had failed to show which facts, material or otherwise has not been disclosed. Further, the reasons indicated a change of opinion which was impermissible in law. According to the High Court, the entire basis for re-opening was due to the mistake of the AO that resulted in under-assessment.

The High Court observed that the Hon’ble Apex Court in Indian & Eastern Newspaper Society vs. Commissioner of Income-tax [1979] 119 ITR 996 (SC) has held that an error discovered on a reconsideration of the same material (and no more) does not give power to the AO to re-open the assessment.

This view had been followed by a full bench of the Karnataka High Court in Dell India (P) Ltd vs. JCIT, LTU, Bangalore (2021) 432 ITR 212 (Karn).

The High Court quashed the notice issued under section 148 of the Act and allowed the writ petition.

The Supreme Court noted that it was not in dispute that the assessment was sought to be re-opened beyond four years. Therefore, all the conditions under section 148 of the Income-tax Act for re-opening the assessment beyond four years were required to be satisfied. The Supreme Court, after going through the reasons recorded for re-opening was of the opinion that the conditions precedent for re-opening of the assessment beyond four years were not satisfied. The re-assessment was on change of opinion. There were no allegations of suppression of material fact. Under the circumstances, no error had been committed by the High Court in setting aside the re-opening notice under section 148 of the Income-tax Act. The Supreme Court was in complete agreement with the view taken by the High Court. The Special Leave Petition was therefore dismissed.

5 CIT vsJai Prakash Associates Ltd.

(2022) 449 ITR 183 (SC)

Deduction of tax at source – TDS on non-convertible debentures and FDR below Rs.5,000 – No TDS is leviable – Once, there is no liability to deduct TDS, there is no question of charging any interest

The question that arose for consideration in an appeal filed before the Tribunal was – Whether charging of interest under section 201(1A) becomes time barred when action under section 201(1) is time barred despite the section not providing for limitation?

The High Court remanded the matter to the Tribunal to reconsider the question in light of decision of the Allahabad High Court in Mass Awash Pvt Ltd vs. CIT (IT) (2017) 397 ITR 305 (All). The High Court in that case held that a power conferred without limitation has to be exercised within a reasonable time but what is reasonable time would depend upon facts of each case.

The Supreme Court, however, noted that the main issue was with respect to the chargeability of TDS on non-convertible debentures and FDR below Rs.5,000/-.

The Supreme Court after going through the judgment and orders passed by the Tribunal as well as the High Court, was of the opinion that no error has been committed by the Tribunal and/or the High Court on the chargeability of TDS amount on non-convertible debentures and fixed deposit of the value less than Rs.5,000. Both, the Tribunal as well as the High Court had concurrently found that, on non-convertible debentures and fixed deposit of the value less than Rs.5,000/-, there shall not be any TDS applicable. The Supreme Court was in complete agreement with the view taken by the Tribunal as well as the High Court. Once, there is no liability to deduct TDS on non- convertible debentures and fixed deposit of the value less than Rs. 5,000/-, there was no question of charging any interest.

However, at the same time the issue whether the levy of the interest was time barred considering section 201(1)/201(1A) of the Income-tax Act, 1961 not having been dealt with and considered in High Court, the Supreme Court kept the question of law on the aforesaid open.

The Supreme Court dismissed the Special Leave Petition of the Revenue.

6 Pioneer Overseas Corporation USA (India Branch) vs. CIT (IT) (2022) 449 ITR 186 (SC)

Interest – Waiver – Merely raising the dispute before any authority could not be a ground not to levy the interest and/or waiver of interest under section 220(2A) of the Act

The assessee is the branch office of Pioneer Overseas Corporation, United States of America (“POC US?). The assessee is engaged in Contract Research Activities and cultivation of parent seeds. The assessee has been regularly filing its returns of income. Since the A.Y. 1993- 94, it has been claiming exemption by treating its entire income as agricultural income in terms of Section 10(1) r.w.s. 2(1A) of the Act. This claim was accepted by the Department for the said assessment year as for the succeeding A.Ys. 1994-95, 1995-96 and 1996-97.

While concluding the assessment for the A.Y. 1997-98 and onwards, the AO treated the entire income of the Assessee as “business income?. The AO attributed the deemed income from research activity holding the assessee to be a Permanent Establishment (“PE?) of POC US carrying on research activity in India.

The appeal filed by the assessee against the aforementioned assessment order was partly allowed by the CIT (A) by deleting 50 per cent of the addition made by the AO on account of estimated attribution of income holding inter alia that only that much profit could be attributed to the PE which was derived from the assets and activities of the PE in India.

In the further appeal filed by the assessee, the ITAT for the A.Ys, 1997-98 to 2001-02 held by its orders dated 30th November, 2009 and 24th December, 2009 that only 10 per cent of income was, therefore, to be treated as agricultural income and the balance was to be taxed as “business income?. On the issue of attribution of income on account of research activity carried out by the assessee, the ITAT remanded the matter to the AO for attribution of profits based on the transfer pricing method employed by the AO in subsequent A.Ys. 2002-03 to 2006-07.

In the remand proceedings, the AO attributed reimbursed cost plus markup of 17 per cent as appropriate arm’s length price for the research services provided by the assessee to POC US for the A.Ys. 1997-98 to 2001-02.

In the year 2005 POC US invoked the Mutual Agreement Procedure (“MAP?) under Article 27 of the India-US Double Taxation Avoidance Agreement (“DTAA?) and sought resolution of the tax matters pertaining to the assessee. Consequent upon negotiations between the Competent Authorities of the two countries, an agreement was concluded with respect to allocation of taxing rights qua the income taxable in India in the hands of the assessee branch (PE) and setting-off of the taxes paid in India by the assessee against the taxes payable in the US by POC US. On this basis, the assessment for A.Ys. 1997-98 to 2006-07 were finalized and taxes along with interest were paid by the assessee under section 220 of the Act.

By a letter dated 10th August, 2011, the MAP ruling was finalized by the US authorities by providing tax credit in the US to the Petitioner for the tax assessed in India on 90 per cent of income held to be business income. The relief was granted on double taxation in the US tax years corresponding to the Indian assessment years under consideration.

On 26th December, 2011, the Petitioner filed an application before the CIT under section 220(2A) of the Act for waiver of interest levied under section 220(2) of the Act. This was followed by a letter dated 27th April, 2012 wherein the Petitioner reiterated its request.

By the impugned order dated 6th May, 2016, the CIT dismissed the aforementioned application on the ground that no genuine hardship had been caused to the Petitioner.

The High Court, in a writ petition filed by the assessee held that no error was committed by the CIT in rejecting the assessee’s request for waiver of interest under section 220(2) of the Act. Under Section 220(2A) of the Act, the three conditions that are required to be satisfied are (i) payment of the amount towards interest under section 220(2A) of the Act should cause the Assessee “genuine hardship?; (ii) default in the payment of the amount should be due to circumstances beyond the control of the Assessee; and (iii) the Assessee should have cooperated in the proceedings for recovery of the amount.

It was urged before the Court that interest under section 220(2) of the Act was paid besides incurring costs on maintaining a bank guarantee was more than 1.5 times of the tax amount. The High Court agreed with CIT that the mere fact that the interest was 1.5 times the tax by itself does not have any relevance for determining whether the Assessee was suffering from any “genuine hardship?. According to the High Court, the fact that the Assessee is a part of “DuPont?, a global conglomerate which had in 2011 $37.96 billion in net sales and $6.253 billion as operating profit, cannot be said to be an irrelevant factor in considering whether any “genuine hardship? was undergone by the assessee. Further, in comparison to the profitability of the assessee over the years, the amount paid by it towards interest under section 220(2) of the Act was merely $0.004 billion (approx). In the circumstances, the conclusion arrived at by the CIT that no “genuine hardship? could said to have been caused to the assessee could not be said to be an erroneous exercise of discretion by the CIT. It was a plausible view to take and did not call for interference by the High Court in exercise of its extraordinary jurisdiction under Article 226 of the Constitution.

The Supreme Court noted that the issue involved in the Special Leave Petition was with respect to the waiver of interest under section 220(2A) of the Act. The appropriate competent Authority rejected the application of the assessee for waiver of interest while exercising the powers under section 220(2A) of the Act. The same had been confirmed by the High Court.

The Supreme Court noted that it is the case of the assessee that as the dispute was pending for Mutual Agreement Procedure [MAP] resolution which subsequently came to be culminated in the year 2012; the liability to pay the tax arose thereafter and therefore the assessee should be entitled to the waiver of interest under section 220(2)(A)(ii) of the Act. According to the Supreme Court, the aforesaid plea was without any substance. Merely raising the dispute before any authority could not be a ground not to levy the interest and/or waiver of interest under section 220(2A) of the Act. Otherwise, each and every assessee may raise a dispute and thereafter may contend that as the assessee was bona fidely litigating and therefore no interest shall be leviable. The Supreme Court held that under section 220(2) of the Act, the levy of simple interest on non-payment of the tax @ 1 per cent p.a. was mandatory.

The Supreme Court was in complete agreement with the view taken by the High Court. The Special Leave Petition was therefore dismissed.

BCAJ Admin

Glimpses of Supreme Court Rulings

1. Charitable Institution – Recognition under section 80G(5)(vi) – The only condition that is required to be fulfilled for seeking renewal is specified under section 80G(5)(ii) and the clauses narrated therein. The section only postulates that any income of the charitable trust may be used for charitable purpose – Whether the income is used for charitable purpose or not can checked by the assessing authority at the time of the assessment

23 DIT(E) vs. D. R. Ranka Charitable Trust(2022) 447 ITR 766 (SC)

The assessee, a charitable trust, was granted registration under section 12A of the Act on 21th July, 1986. It was also granted recognition under section 80G(5)(vi) of the Act for the years 2005-06, 2006-07 and 2007-08.

The assessee filed its returns regularly. On 1st January, 2009 the assessee filed an application for renewal under section 80G of the Act. The DIT (E) rejected the application. Aggrieved by the same, the assessee preferred an appeal before the Tribunal. The Tribunal expressed a doubt whether the assessee was entitled even for the benefit under section 12A and therefore remanded the matter.

On remand, the Commissioner passed an order on 31st August, 2009 rejecting the application for renewal of the recognition under section 80G. Aggrieved by the same, the assesse preferred an appeal before the Tribunal. The Tribunal dismissed the appeal.

The High Court observed that the Commissioner had noted that the assessee had let out the building for business purposes. According to the Commissioner, the income was not used for charitable purposes, there was absence of charitable activity and the activity of the trust was not in consonance with the objects of the Trust.

The High Court noted that it was the contention of the assessee that the condition as specified in section 80G(5)(ii) postulated that income could be used for charitable purposes and that letting out of the property was not barred by law. The assessee had used the income towards repayment of the loan borrowed in the earlier year and paid interest thereon, which was the application of the income.

The High Court held that the only condition that required to be fulfilled for seeking renewal was specified under section 80G(5)(ii) and the clauses narrated therein and none of the clauses could be said to be applicable to the facts of the present case. The section only postulates that any income derived from the charitable trust may be used for charitable purpose. According to the High Court, the Tribunal was not right in holding that the assessee was not eligible for approval under section 80G. The High Court was of the view that whether the income is used for charitable purpose or not can be checked by the assessing authority at the time of the assessment.

The Supreme Court dismissed the appeal of the Revenue holding that the High Court’s decision on the conditions to be considered for renewal of approval of the assessee under section 80G was correct.

Note: It may be noted that substantial changes have been made with regard to approval/renewal under section 80G by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020.

2. Settlement of cases–The order passed by the Settlement Commission being bereft of reasons is unsustainable, and the fact that the assessee has made payment in terms of the order passed by the Settlement Commission could not be a ground to sustain the order passed by the Settlement Commission

24 Nand Lal Srivastava Ors vs. CIT(2022) 447 ITR 769 (SC)

During search operations at different premises of assessee, certain incriminating documents were seized. Pursuant thereto the assessment was made under section 158BC(c) of Income Tax Act, 1961.

The assessee moved an application under section 245-C of the Act before the Settlement Commission. During the pendency of the proceedings before Settlement Commission, the assessee approached the High Court vide Writ Petition No. 506 of 2008 and connected matters, wherein an order was passed on 18th March, 2008 directing Settlement Commission to decide settlement application filed by assessee by 31st March, 2008.

Pursuant thereto the Commission passed an order, paras 4 and 5 of the which read as under:

“4.This would involve more than 1500 assessments. The Settlement Commission deals only with the assessments which involve complexity of investigation and the application is intended to provide quietus to litigation. For example, in one group of cases where 23 applications are involved, the paper book which has been filed before the Settlement Commission runs into thirty thousand pages. It goes without saying that sufficient and proper opportunity is required to be given both to the applicant and the Commissioner of Income Tax Department 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 245D(4) of Income Tax Act, 1961 is not practicable. However, to comply with the directions of the Hon’ble High Court, we hereby pass an order u/s 245D(4)of Income Tax Act, 1961.”

The Commission granted immunity to the assessee from prosecution and penalty under the Act and directed the assesse to make payment of tax along with interest within 35 days. The undisclosed income of the assessee was settled in the manner stated in para 6 of the order and the Income Tax Commissioner was directed to compute total income etc. in compliance of said order.

The Commissioner of Income Tax, Allahabad filed writ petitions challenging the aforesaid orders. The writ was filed on the grounds that without any hearing or looking to the record and giving opportunity to parties, the Settlement Commission, under the garb of compliance of this Court’s order, had passed orders of settlement without following the procedure prescribed in the statute i.e. it was obligatory upon the Settlement Commission to examine the record and report of the Commissioner, give opportunity to the parties, hear them and only thereafter pass an appropriate order. The entire procedure as contemplated in Section 245D(4) of the Income-tax Act, 1961 had been completely overlooked by the Settlement Commission, and, therefore, the impugned orders are patently illegal and null in the eyes of law.

The assessee contended that he had already complied with the impugned order of Settlement Commission, deposited the amount of tax as per the Settlement Order and the consequential order was also passed by the Commissioner of Income Tax. Since there was no interim order in these writ petitions, the assessee would be prejudiced in case the impugned orders are now set aside.

The High Court held that the mere fact that the orders impugned in the writ petitions had been complied with since there was no interim order, would not validate a patently illegal and bad order, which had been passed in flagrant violation of the statutory provision. It was not a case, where things could not be restored or where restitution is impossible.

According to the High Court, the manner in which the impugned orders were passed by the Settlement Commission clearly showed a complete lack of sensibility on its part. The High Court quashed the orders on 31st March, 2008 passed by the Settlement Commission.

The Supreme Court agreed with the judgment dated 25th February, 2015 of the High Court that the order passed by the Settlement Commission being bereft of reasons was unsustainable. Further the fact that the Respondent has made payment in terms of the order passed by the Settlement Commission could not be a ground to sustain the said order, being contrary to the mandate of Section 245D(4) of the Income-tax Act,1961. But the Supreme Court, however was of the view that the matter had to be remitted for fresh decision.

The Supreme Court noted that the Settlement Commission had been wound up, and the matters pending before the Settlement Commission were being adjudicated and decided by the Interim Board constituted under section 245AA of the Income-tax Act, 1961.

In view of the above position, the Supreme Court remitted the matter to the Interim Board with a request that the matter to be taken up expeditiously and should be preferably decided within a period of six months from the date of first hearing. A reasoned order would be passed.

Recording the aforesaid, the impugned judgment was partly set-aside and the appeals were allowed in the aforesaid terms. The Supreme Court however clarified that it had not made any observations or given any findings on the merits.

3 Capital or Revenue – Finding of facts by lower authorities upheld by the High Court, namely, that the amount received as compensation was of revenue nature -no interference was called for

25 Manoj B Joshi vs. 8th ITO and others (2022) 447 ITR 757 (SC)

On 10th April, 1985 the appellant entered into an agreement termed as ‘Memorandum of Understanding’ with one Mr. Dalvi, who was to acquire certain piece of land bearing Survey No. 6 of village Barave, taluka Kalyan, for construction of buildings, to be used mainly for residential purpose. Mr. Dalvi wanted to sell the flats, which he proposed to construct, to third parties on ownership basis. Said Mr. Dalvi, the developer, was short of funds to undertake this project. The appellant therefore, offered to promote a Cooperative Housing Society and there by collect funds from the proposed members of the Society. Consequently, the aforesaid MOU dated 10th April, 1985 was entered into by and between the appellant and Mr. Dalvi whereby it was agreed that Mr. Dalvi will construct the flats with the help of monies that the appellant will hand over to Mr. Dalvi after collecting the same from the prospective buyers thereof, the members of the proposed society. Mr. Dalvi will give these flats to the appellant, who in turn will allot the flats to various members of the proposed Society, which was to be named as Krushna Housing Society.

In his capacity as promoter, the appellant collected funds of Rs. 29,11,000 from prospective members of the proposed Society. The appellant says that he added an amount of Rs. 2,00,000 as his own contribution as a member of the proposed Society towards one flat and paid total Rs. 31,11,000 to Mr. Dalvi on various dates between 3rd April,1985 to 31st March,1989. It was also agreed as per the clauses of the MOU dated 10th April, 1985 that if Mr. Dalvi fails to complete the development and carry out construction as agreed, the promoters or the Society will be entitled to claim refund of the booking amount along with interest.

On account of certain legal problems, Mr. Dalvi could not honor his commitments of development and construction. Therefore, the parties entered into another agreement, also termed as Memorandum of Understanding dated 1st December, 1989 where by Mr. Dalvi agreed to refund the entire amount paid by the appellant of Rs. 31,11,000. In addition to refund of the said amount with interest by the said MOU dated 1st December, 1989 Mr. Dalvi also agreed to pay an additional amount of Rs. 29,11,000 i.e. the amount in issue, to the appellant inter-alia as a compensation for cancellation of arrangement and the so called understanding entered into between the appellant and Mr. Dalvi, in terms of an MoU dated 10th April, 1985. Accordingly, the amount in issue was paid by Mr. Dalvi to the appellant, in the F.Ys. 1996-97 and 1997-98.

In the meantime the appellant and Mr. Dalvi entered into a third agreement, called ‘Release Deed’, dated 11th June, 1997, declaring that Mr. Dalvi is released absolutely forever and from all obligations, arising under MOU dated 10th April, 1985.

The appellant filed income tax returns on 13th November, 1998 in regards to the A.Y. in issue i.e.1998-99,declaring total income of Rs. 25,48,000. Along with the returns, the appellant submitted two agreements, termed as MoUs dated 10th April, 1995 and 1st December, 1989. The appellant also submitted a copy of the Release-deed dated 11th June, 1997.

The appellant claimed that the amount in issue of Rs. 29,11,000 was an amount received by the appellant as a compensation on account of the transactions reflected by the aforesaid three documents which was not an income within the definition of section 2(24) of the Act and in the alternative, that if at all, it was a’ capital gain’. However, the authorities treated the amount in issue as income earned by the appellant as and by way of ‘income from other sources’, by rejecting the claim of the appellant. According to the High Court, the facts demonstrated that the appellant was paid the amount in issue so that no action in future could be initiated against the Developer, Mr. Dalvi, by the members of the proposed housing society for having failed to construct flats for them as was initially agreed by Mr. Dalvi. In other words, the appellant had received this amount in issue to indemnify Mr. Dalvi against any action (that too if any) that may be taken against Mr. Dalvi in future.

This amount in issue was not paid to the appellant towards any right/title/ interest that the appellant had in present in any immovable property.

The High Court held that all the three lower authorities were fully justified in treating the receipt of amount in issue of Rs. 29,11,000 by the appellant, not only as an income but also as income received by the appellant from other source as contemplated by Sections 14 r.w.s 56 of the said Act and subject the same to taxation accordingly.

The Supreme Court noted that the findings of fact recorded by the AO which had been affirmed right till the High Court, were: (i) the appellant had entered in to an MoU dated 10th April, 1985 with Shirish Dalvi, a developer who was to acquire certain pieces and parcels of the land in Village Barve, Taluka Kalyan and there upon construct residential buildings/ apartments; (ii) the appellant had collected funds from prospective members of the proposed society; (iii) these funds were transferred to Shirish Dalvi; (iv) subsequently, Shirish Dalvi faced legal problems in acquiring the land and in obtaining clear title and necessary permissions; (v) thereupon, another MoU dated 01st February, 1989 was arrived and executed between the appellant and Shirish Dalvi, pursuant to which the amount received from the proposed members was refunded to the appellant, albeit this amount has not been brought to tax as income of the appellant, but another amount of Rs. 29,11,000 received stated as a compensation by the assessee has been brought to tax as income from other sources.

According to the Supreme Court, in view of the factual background, there was no justification and reason to hold that this amount received was not taxable being a capital receipt. Whether or not the amount would be taxable as income from business or income from other sources, was not an issue and therefore was not examined and answered in the present case. The appeal was accordingly, dismissed without any order as to costs.

BCAJ Admin

Glimpses of Supreme Court Rulings

18 Deputy Commissioner of Income-tax vs. Kerala State Electricity Board (2022) 447 ITR 193 (SC)

Company – Minimum Alternate tax – Section 115JB – Provisions not applicable to the Electricity Board or similar entities totally owned by the State or Central Government

Business Expenditure – Section 43B could not be invoked in making the assessment of the liability of the appellant under the Income-tax Act with regards to the amounts collected by the appellant pursuant to the obligation cast on the appellant under section 5 of the Kerala Electricity Duty Act, 1963.

For the A.Y. 2002-03, the appellant filed returns declaring the current loss at Rs. 411,56,63,704. The returns were subsequently revised and loss reduced to Rs. 203,81,27,595. The assessment was made under section 143(3) of the Income-tax Act.

The assessing authority invoked the legal fiction under section 115JB of the Income-tax Act, which enables the Revenue to arrive at a fictitious conclusion regarding the total income of the assessee and assess the tax on such total income. Further, the assessing authority relying upon section 43B of the Income-tax Act rejected the claim of the assessee that the amount collected by the assessee from the consumer under section 5 of the Kerala Electricity Duty Act, was not the income of the assessee and consequently not eligible to tax under the provisions of the Income-tax Act.

Though, the first appellate authority accepted the submission of the assessee on the abovementioned two issues, the Tribunal by the order under appeal confirmed the views of the assessing authority in rejecting the claim of the appellant.

The High Court noted that all the three sections (sections 115J, 115JA and 115JB) created legal fictions regarding the “total income” (a defined expression under section 2(45) of the Act) of the companies. While the earlier two sections mandate the Department to make the assessment on a fictitious amount of “total income” where the actual amount of total income computed in accordance with the Income-tax Act is less than 30 per cent of the book profits of the company, section 115JB mandates the Department to resort to the fiction in those cases where the tax payable on the basis of the “total income” computed in accordance with the Income-tax Act is less than a specified percentage of the book profit. Further, sections 115JA and 115JB also stipulate a definite manner of preparing the annual accounts including the profit and loss accounts. More specifically, section 115JB stipulates that the accounting policies, and standards, etc., shall be uniform both for the purpose of Income-tax as well as for the information statutorily required to be placed before the annual general meeting conducted in accordance with section 210 of the Companies Act, 1956.

The High Court further noted that that under section 166 of the Companies Act every company is mandated to hold a general meeting in each year. Section 210 mandates that every year the board of directors of the company in the general meeting shall lay before the company a balance-sheet as at the end of the relevant period and also a profit and loss account for the period. Parts II and III of Schedule VI to the Companies Act specify the method and manner of maintaining the profit and loss account.

The High Court observed that, the appellant though, is by definition a company under the Income-tax Act, and deemed to be a company for the purpose of the Income-tax Act, by virtue of the declaration under section 80 of the Electricity (Supply) Act, it is not a company for the purpose of the Companies Act. Therefore, the appellant is not obliged to either to convene an annual general meeting or place its profit and loss account in such a general meeting. As a matter of fact, a general meeting contemplated under section 166 of the Companies Act is not possible in the case of the appellant as there are no shareholders for the appellant Board. On the other hand, under section 69 of the Electricity (Supply) Act, the appellant is obliged to keep proper accounts, including the profit and loss account, and prepare an annual statement of accounts, balance-sheet, etc., in such a form as may be prescribed by the Central Government and notified in the Official Gazette. The prescription of the rules in this regard is required to be made in consultation with the Comptroller and Auditor-General of India, and also the State Governments. Such accounts of the appellant are required to be audited by the Comptroller and Auditor-General of India or such other person duly authorised by the Comptroller and Auditor- General of India. The accounts so prepared along with the audit report is required to be laid annually before the State Legislature and also published in the prescribed manner and copies of such publication shall be made available for sale at a reasonable price, obviously for the benefit of the general public who wish to scrutinise the accounts.

The High Court looked at the legislative history and the mischief sought to be remedied by the amendment. The High Court noted the Circular No. 762 issued by CBDT ((1998) 230 ITR (St.) 12, 42).

The High Court noted that the Legislature found that the number of companies paying the marginal and also the zero-tax had grown. Such companies earned substantial book profits and paid handsome dividends to the shareholders without paying any tax to the exchequer. Such a result was achieved by these companies by taking advantage of the then existing legal position which permitted the adoption of dual accounting policies and practices, one for the purpose of computation of Income-tax and another for determining the book profits for the payment of dividends. Therefore, the amendment was made to plug the loophole in the law. However, the companies engaged in the business of generation and distribution of electricity and enterprises engaged in developing, maintaining and operating infrastructure facilities, as a matter of policy, were not brought within the purview of the amendment (section 115JA) for the reason that such a policy would promote the infrastructural development of the country.

According to the High Court, considering the background in which section 115JA is introduced into the Income-tax Act, section 115JB, being substantially similar to section 115JA, could not have a different purpose and need not be interpreted in a manner different of section 115JA.

According to the High Court, another reason for which fiction fixed under section 115JB could not be pressed into service against the appellant was that the appellant or bodies, similar to the appellant, totally owned by the Government—either State or Central— have no shareholders. Profit, if at all, made by the appellant would be for the benefit of entire body politic of the State of Kerala. In the final analysis, all taxation is meant for the welfare of the people in a Constitutional Republic. Therefore, the enquiry as to the mischief sought to be remedied by the amendment, becomes irrelevant.

Coming to the next question of whether section 43B of the Act was properly invoked, the High Court on a plain reading of section 43B opined that the only clause relevant in the context of the facts of the appellant’s case was clause (a) which deals with “any sum payable by the assessee by way of tax, duty, . . . . under any law for the time being in force”. According to the High Court, the words, “by way of tax” were relevant as they were indicative of the nature of liability. The liability to pay and the corresponding authority of the State to collect the tax (flowing from a statute) is essentially in the realm of the rights of the sovereign. Whereas the obligation of the agent to account for and pay the amounts collected by him on behalf of the principal is purely fiduciary. The nature of the obligation, continues to be fiduciary even in a case wherein the relationship of the principal and agent is created by a statute. The High Court held that that, when section 43B(a) speaks of the sum payable by way of tax, etc.; the said provision is dealing with the amounts payable to the sovereign qua sovereign, but not the amounts payable to the sovereign qua principal. Therefore, section 43B could not be invoked in making the assessment of the liability of the appellant under the Income-tax Act with regards to the amounts collected by the appellant pursuant to the obligation cast on the appellant under section 5 of the Kerala Electricity Duty Act, 1963.

The Supreme Court, after going through the circumstances on record and considering the rival submissions concluded that no interference was called for and therefore, dismissed the appeal of the Revenue.

19 Commissioner of Income-tax vs. SBI Home Finance Ltd. (2022) 447 ITR 659 (SC)

Depreciation – Leased assets – Lessee having a right to purchase the plant after the expiry of a stipulated period of time – The alleged third party interest does not affect the ownership of the lessor nor can it be doubted or disputed

A plant was being set up on the premises of M/s. Maize Products, a division of Sayaji Industries Ltd (SIL). M/s. Western Paques India Ltd. (WPIL) approached the assessee for leasing finance for the aforesaid effluent treatment and bio-gas generation plant, being set up at the premises of M/s. Maize Products of SIL. Pursuant to such an approach, the assessee itself acquired the said plant and leased out the same to WPIL upon taking symbolic possession. According to the terms of the agreement between SIL and WPIL, SIL had a right to purchase the plant after the expiry of a stipulated period of time.

The Tribunal held that the ownership of the assessee could not be established or accepted because that there was a stipulation that a third party, other than the lessee to whom the plant was leased out by the assessee, had a right to purchase.

The High Court observed that in the present case, neither SIL had claimed any right; nor WPIL. Similarly, neither SIL nor WPIL in their return had claimed depreciation for the plant. WPIL had not claimed any benefit of payment of interest on capital borrowed. On the other hand, WPIL had treated the rental paid to the assessee for the plant as revenue expenditure. If it was finance, then the assessee would be entitled to recover the principal. But in this case by reason of the agreement the assessee would not be entitled to recover any principal.

The High Court further noted from the additional paper book filed that on account of default on the part of WPIL to pay the rental, the assessee had filed a suit in the Bombay High Court in which a Receiver has been appointed. The Court Receiver had taken possession of the said plant and an undertaking had been given on behalf of SIL that it will preserve the possession carefully and execute an agency agreement with the Receiver, and will neither part with the possession nor mortgage, alienate, encumber or create any third party interest and had further undertaken to cover the said plant by insurance, etc. However, SIL had neither claimed any title or possession over the plant nor claimed depreciation in respect thereof. It had also not exercised its option to purchase.

Therefore, the High Court was of the view that in respect of the period covered by the financial year under assessment, the ownership of the assessee in respect of the plant could not be disputed for the purpose of section 32 of the Act. According to the High Court, the lessee cannot dispute the title of the lessor and the alleged third party interest does not affect the ownership of the lessor nor can it be doubted or disputed. In this case, the lessee had never claimed ownership of the plant. Thus, the alleged right of SIL to purchase the plant would in no way affect the ownership of the assessee. The ownership of the assessee was not only absolute and perfect but also apparent and real until SIL established its rights.

The High Court, therefore, held that the assessee was the owner of the plant for the purpose of section 32 and by leasing it out to WPIL the assessee had used the plant wholly for the purpose of its business, namely, for carrying on the business of leasing, and the income earned by the way of a rental of the plant was business income.

The Supreme Court dismissed the appeal after going through the relevant clauses of the agreements dated 8th December, 1993 and 30th December,1994 holding that on construing the relevant clauses, it was apparent that the Respondent assessee had become the owner of the plant and machinery and that the lease rentals in the entirety had been taxed as a revenue receipt/ income.

20 Ashok Leyland Ltd vs. CIT (2022) 447 ITR 661 (SC)

Export – Special deduction –The unabsorbed loss should not be deducted to arrive at the profits for the purposes of calculating the deduction under section 80HHC

The assessee was engaged in the manufacture and sale of chassis for medium and heavy duty commercial vehicles, engines, etc. The assessment for the year 1991-92 was originally completed under section 143(3); again after the giving effect to the order in appeal.

Subsequently, it was taken up for rectification under section 154 on the question of depreciation, as regards the lease of buses to MSRTC and Pune Municipal Transport Corporation which according to the revenue was a sale transaction. Apart from that the relief under section 80HHC, as well as the interest and commitment charges on the loan were also taken up for consideration.

As regards the claim for deduction under section 80HHC, the AO reworked the calculation.

Aggrieved by the said order, the assessee went on appeal. The Commissioner of Income-tax (Appeals) inter alia on the question of deduction under section 80HHC rejected the appeal for deduction.

The Tribunal allowed the appeal.

The revenue filed an appeal before the High Court.

One of the questions of law raised before the High Court related to deduction of unabsorbed loss to arrive profits for the purpose of calculating the deduction under section 80HHC. The Tribunal upheld the claim following CIT vs. Vegetable Products Ltd [1973] 88 ITR 192 (SC). The revenue questioned this contending that the brought forward loss should be deducted from the profits and gains of business for the purpose of working out the relief under section 80HHC.

The High Court observed that section 80A(1) describes the deductions to be computed from the gross total income. Section 80B(5) defines the total income as one computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A. Touching on the provision of section 80AB, in the case of IPCA Laboratory Ltd vs. Dy. CIT [2004] 266 ITR 521, the Supreme Court held that in computing the total income of the assessee, both profits as well as losses will have to be taken into consideration. Referring to section 80B(5) as well as to section 80AB, the Apex Court held that for the purposes of working out the relief under section 80HHC, the computation has to be made first as given under section 80AB, which means, the computation of income has to be in accordance with the provisions of the Act. Hence, before deduction under section 80HHC is considered, the assessing authority has to compute the income in accordance with the provisions of the Act. In which event, the profits and gains of income from business will have to be computed taking note of section 72A also. The Commissioner (Appeals) pointed out that the accumulated loss which were carried forward and set off under the provisions of section 72A were correctly deducted by the assessing authority before computing the deduction under section 80HHC. Hence, the computation done was in accordance with the scheme, as interpreted by the Supreme Court. The High Court did not find any justification to accept the plea of the assessee that the unabsorbed loss should not be deducted to arrive at the profits for calculating the deduction under section 80HHC. According to the High Court, the order of the Tribunal in this regard was unsustainable, and hence the question was answered in favour of the revenue.

The Supreme Court dismissed the appeal of the assessee holding that the issue raised in the appeal by the assessee was covered against them, vide its judgment in CIT vs. Shirke Construction Equipment Ltd [2007] 161 Taxman 212/291 ITR 380 (SC)/[2007] 14 SCC 787.

The appeal was dismissed without any order as to costs.

21 Director of Income-tax (Exemptions) vs. Meenakshi Amma Endowment Trust
(2022) 447 ITR 663 (SC) Charitable purpose – Registration – Application should be decided looking at the objects of the Trust in a case where activity has not commenced

The assessee trust was established by way of a trust deed dated 23rd January, 2008. The assessee sought for registration under section 12A on 31st October, 2008. The assessee was called upon to furnish certain details which were furnished. The assessee fairly indicated that they had not yet commenced any activities of the trust.Not being satisfied with this reply the Director of IT (Exemptions) refused to grant registration and, consequently, recognition under section 80G was also refused by orders dated 13th April, 2009. Aggrieved by the same the assessee approached the Tribunal challenging the order of the Director of IT (Exemptions).

The Tribunal taking into consideration the law laid down by the Division Bench this court in Sanjeevamma Hanumanthe Gowda Charitable Trust vs. DIT (Exemptions) [2006] 285 ITR 327/155 Taxman 466 (Kar.) directed the Director of Income-tax (Exemptions) to grant recognition to the trust if other conditions are satisfied. The Tribunal noted that the trust was formed on 23rd January, 2008 and within a period of nine months they had filed an application under section 12A for issuance of the registration claiming exemption. The fact that the corpus of the trust was nothing but the contribution of Rs. 1,000 by each of the trustees as corpus fund showed that the trustees were contributing the funds by themselves in a humble way and intended to commence charitable activities. The grievance of the concerned authorities seemed to be that there was no activity which could be termed as charitable as per the details furnished by the assessee, therefore, such registration could not be granted. The Tribunal was of the view that when the trust itself was formed in January, 2008, with the money available with the trust, one cannot expect them to do activity of charity immediately and because of that situation the authority could not have concluded that the trust was not intending to do any activity of charity. In such a situation the objects of the trust had to be taken into consideration by the authority and the objects of the trust could be read from the trust deed itself. In the subsequent returns filed by the trust, if the Revenue came across that factually the trust had not conducted any charitable activities, it was always open to the authorities concerned to withdraw the registration already granted or cancel the said registration under section 12AA(3) of the Act.

The High Court dismissed the appeal of the revenue holding that the conclusion arrived at by the Tribunal was just and it did not give rise to any substantial question of law.

The Supreme Court also dismissed the appeal of the Revenue in view of its judgment in Ananda Social & Educational Trust vs. CIT [2020] 426 ITR 340 (SC) which judgment had approved the view taken by the Delhi High Court in DIT vs. Foundation of Ophthalmic & Optometry Research Education Centre [2013] 355 ITR 361.

The Supreme Court however, observed that the dismissal of the appeal would not bar the AO from cancelling the registration in case he finds that the ‘charitable activity’ was not undertaken, set-up or established by the assessee.

Business income – Remission or cessation of liability – The turnover tax paid by the assessee was allowed as deduction in the assessments during the preceding assessment years and therefore, when refund is received in the assessment year 1995-96, it is income assessable under section 41(1) of the Income-tax Act

22 Ishwardas Sons vs. Commissioner of Income-tax (2022) 447 ITR 755 (SC)

The question raised before the High Court, in this appeal, was whether the Tribunal was justified in cancelling assessment of Rs. 25,27,734 being the refund of turnover tax assessed by the department during the previous year relevant for the A.Y. 1995-96.It was the case of the Revenue that the turnover tax paid by the assessee was allowed as deduction in the assessments during the preceding A.Ys. 1990-91, 1991-92 and 1992-93 and therefore, when refund is received in the relevant A.Y. 1995-96, it is income assessable under section 41(1) of the Income-tax Act.

It was the case of the assessee that the High Court in IT Appeal No. 232/2002 in assessee’s own case had held that the turnover tax recovered by the assessee and retained as a contingency deposit in their account was income assessable at their hands. Based on this judgment, the contention of the assessee was that the very same income got assessed in the year in which it is recovered from the principals.

From the orders of the Tribunal, the High Court noted that the assessee has not disputed that the deduction was allowed to it on payment of turnover tax during the A.Ys.1990-91, 1991-92 and 1992-93 as stated by the AO. However, the Tribunal had proceeded to allow the appeal by holding that by virtue of decision of High Court in another case, the refund order had not become final and so much so, it was not income of the assessee. The High Court was unable to agree with this reasoning of the Tribunal because it was not the assessee’s case that the department had filed a further appeal or claimed return of the refund amount. The High Court, therefore, reversed the order of the Tribunal. However, it was clarified that if the assessee has not claimed deduction of the turnover tax on payment basis under section 43B for 1990-91, 1991-92 and 1992-93 as stated in the order, then it would be open to the assessee to produce evidence that no deduction is claimed for payment of turnover tax for the A.Ys. 1990-91, 1991-92 and 1992-93 as stated in the assessment order and if the same is found to be a mistake, the AO would exclude the amount from assessment by rectifying the order.

Before the Supreme Court, an order of remand to the High Court was sought by the assessee but, however, the Supreme Court was not inclined to pass remit order, as the issue, in its opinion, had been correctly decided. The Supreme Court, therefore, declined to exercise its power under Article 136 of the Constitution of India and dismissed the appeal.

BCAJ Admin

Glimpses of Supreme Court Rulings

44. CIT vs. Prakash Chand Lunia
(2023) 454 ITR 61 (SC)

Business Loss — Loss of confiscation — Search was conducted by Directorate of Revenue Intelligence (DRI) officers at premises of Assessee — Recovered slabs of silver and two silver ingots were confiscated — The decision of the High Court holding that the loss on confiscation of silver by DRI official of Customs Department was business loss relying upon decision of Supreme Court in case Piara Singh is reversed as the assessee was carrying on an otherwise legitimate silver business and his business could not be said to be smuggling of the silver bars as was the case in the case of Piara Singh (supra) — Also, any loss incurred by way of an expenditure by an Assessee for any purpose which is an offence or which is prohibited by law is not deductible in terms of Explanation 1 to Section 37 of the Act.

A search was conducted by the Directorate of Revenue Intelligence (DRI) officers at the premises situated at NOIDA taken on rent by the Assessee, Shri Prakash Chand Lunia. The DRI recovered 144 slabs of silver from the premises and two silver ingots from the business premises of the Assessee at Delhi. The Assessee was arrested under section 104 of the Customs Act for committing offence punishable under Section 135 of the Customs Act. The Collector, Customs held that the Assessee Shri Prakash Chand Lunia was the owner of silver/bullion and the transaction, thereof, was not recorded in the books of accounts. The Collector of Customs, New Delhi ordered confiscation of the said 146 slabs of silver weighing 4641.962 Kilograms, valued at Rs. 3.06 Crores. The Collector Customs further imposed a personal penalty of Rs. 25 Lakhs on Shri Prakash Chand Lunia under Section 112 of the Customs Act. The Collector held that the silver under reference was of smuggled nature.

During the course of the assessment proceedings for the A.Y. 1989–90, the AO observed that the Assessee was not able to explain the nature and source of acquisition of silver of which he was held to be the owner; therefore, the deeming provisions of Section 69A of the Income-tax Act, 1961 (hereinafter, referred to as ‘the Act’) would be applicable. The investment in this regard was not found recorded in the books of accounts of the Assessee that were produced before the then AO. Accordingly, the AO passed an assessment Order and made an addition of Rs. 3,06,36,909 under section 69A of the Act.

In appeals preferred by the Assessee against the assessment order, the CIT(A) dismissed the appeal of the Assessee.

Feeling aggrieved, the Assessee preferred the appeal before the ITAT. The ITAT, Jaipur also upheld the order of the CIT(A) so far as Section 69A is concerned. However, the ITAT partly allowed the appeal of the Assessee. As regards some other minor additions, the ITAT set aside some minor other additions and remanded the matter to the AO for fresh examination.

The AO re-examined the issue and addition was made. The CIT(A) also upheld the order of the AO. The Assessee preferred the appeal against the fresh order passed by the CIT(A) before the ITAT. The ITAT, in the second round as well, upheld the order of the authorities below.

A reference was made by the ITAT to the High Court with the following questions of law:

(i) “Whether on the facts and in the circumstances of the case, the Tribunal after construing and interpreting the provisions contained in Section 69A of the Income-tax Act, 1961 was right in law, in holding that the Assessee was the owner of the 144 silver bars found at premises No. A 11 & 12, Sector – VII, Noida and two silver bars found at premises of M/s Lunia & Co. Delhi and in sustaining addition of Rs. 3,06,36,909 being unexplained investment in the hands of the Assessee under Section 69A of the Act?

(ii) If the answer to the above question is in affirmative then, whether, on the facts and in the circumstances of the case, the Tribunal was right in law in distinguishing the ratio laid down by their Lordships of the Supreme Court in the case of Piara Singh vs. CIT, 124 ITR 41 and thereby not allowing the loss on account of confiscation of silver bars?

While the reference was pending before the High Court, penalty proceedings were initiated against the Assessee. An order under Section 271(1)(c) of the Act came to be confirmed by both the CIT(A) and the ITAT. Accordingly, the Assessee filed an appeal under Section 260A of the Act against the Penalty order, before the High Court. The High Court while deciding both the cases together, qua the first question, decided in favour of the Revenue, and the same was to be added to his income as a natural consequence. However, with regard to the second question, the High Court held that loss of confiscation by the DRI official of Customs Department was business loss. While holding, the High Court relied upon the decision of the Supreme Court in the case of CIT, Patiala vs. Piara Singh reported in 124 ITR 41.

An appeal was filed before the Supreme Court against the judgment and order passed by the High Court.

According to the Supreme Court, the short question which was posed for consideration before it was whether the High Court has erred in law in allowing the Respondent – Assessee the loss of confiscation of silver bars by DRI officials as a business loss, relying upon the decision of this Court in the case of CIT Patiala vs. Piara Singh, [(1980) 124 ITR 40 – SC].

On going through the judgment and order passed by the High Court, it appeared to the Supreme Court that the High Court had simply relied upon the decision of the Supreme Court in the case of Piara Singh (supra). After going through the decision in the case of Piara Singh (supra), the Supreme Court was of the opinion that the High Court had materially erred in relying upon the decision in the case of Piara Singh (supra).

The Supreme Court noted that in the case of Piara Singh (supra), the Assessee was found to be in the business of smuggling of currency notes and to that it was found that confiscation of currency notes was a loss occasioned in pursuing his business, i.e., a loss which sprung directly from carrying on of his business and was incidental to it. Due to this, the Assessee in the said case was held to be entitled to deduction under Section 10(1) of the Income Tax Act, 1922. In view of the above fact, the Supreme Court in the case of Piara Singh (supra) distinguished its decisions in the case of Haji Aziz & Abdul Shakoor Bros. [(1961) 41 ITR 350 –SC] and the decision in the case of Soni Hinduji Kushalji & Co. [(1973) 89 ITR 112 (AP)] and did not agree with the decision of the Bombay High Court in the case of J S Parkar vs. V B Palekar, [(1974) 94 ITR 616 (Bom)]. The Supreme Court observed that in all the aforesaid three cases which were relied upon by the Revenue in the case of Piara Singh (supra), the assessees were found to be involved in legitimate businesses and not smuggling business. However, they were found to have smuggled goods contrary to law, which resulted in an infraction of law and resultant confiscation by customs authorities.

The Supreme Court noted that in the case of Haji Aziz (supra), the Assessee claimed deduction of fine paid by him for release of his dates confiscated by customs authorities, which was rejected on the ground that the amount paid by way of penalty for breach of law was not a normal business carried out by it. In the case of Soni Hinduji Kushalji (supra) and J S Parkar (supra), the customs authorities had confiscated gold from Assessees otherwise engaged in legitimate businesses. In the aforesaid two cases, the Assessee claimed the value of gold seized as a trading / business loss. It was held that the Assessees were not entitled to the deductions claimed as business loss.

In the case of Soni Hinduji (supra), the Andhra Pradesh High Court held that when a claim for deduction is made, the loss must be one that springs directly from or is incidental to the business which the Assessee carries on and not every sort or kind of loss which has absolutely no nexus or connection with his business. It was observed that confiscation of contraband gold was an action in rem and not a proceeding in personam. Thus, a proceeding in rem in the strict sense of the term is an action taken directly against the property (i.e., smuggled gold); and even if the offender is not known, the customs authorities have the power to confiscate the contraband gold.

In the case of J S Parkar (supra), the Assessee not only claimed the value of the gold confiscated as a trading loss, but also set off of the said loss against his assumed and assessed income from undisclosed sources. The value of gold was sought to be taxed under section 69/69A of the Act by the tax authorities. However, the Bombay High Court held the Assessee to be the owner of the smuggled confiscated gold and not entitled to claim value of such gold as a trading loss.

The Supreme Court noted that in the present case, the ownership of the confiscated silver bars of the Assessee was not disputed. Even on that, there were concurrent findings by all the authorities below and including the customs authorities. Therefore, the question that required consideration was as to whether the Assessee could claim the business loss of the value of the silver bar confiscated and whether the decision of this Court in the case of Piara Singh (supra) would be applicable?

To answer the aforesaid question, the Supreme Court noted that in the present case, the main business of the Assessee was dealing in silver. His business could not be said to be smuggling of the silver bars as was the case in the case of Piara Singh (supra). He was carrying on an otherwise legitimate silver business and in attempt to make larger profits, he indulged into smuggling of silver, which was an infraction of law. In that view of the matter, the decision of the Supreme Court in the case of Piara Singh (supra), which had been relied upon by the High Court while passing the impugned judgment and order, would not be applicable to the facts of the case. On the other hand, the decision of the Supreme Court in the case of Haji Aziz (1961) 41 ITR 350 (SC) and the decisions of the Andhra Pradesh High Court and the Bombay High Court, which were pressed into service by the Revenue in Piara Singh (supra), would be applicable with full force.

In view of the above, the impugned judgment and order passed by the High Court quashing and setting aside the order passed by the AO, CIT(A) and the ITAT, which rejected the claim of the Assessee to treat the silver bars confiscated by the customs authorities as business loss, and consequently allowing the same as business loss, were unsustainable and the same were quashed and set aside by the Supreme Court.

By a separate order, Justice Shri M M Sundresh, while concurring with the ultimate conclusion arrived at in overturning the decision of the High Court by Justice Shri M R Shah, gave his own reasoning on the aforesaid aspect. After considering the provisions of Section 37(1), including Explanation 1 thereto and that of Section 115BBE of the Act and after referring to the plethora of judgements on the subject, he concluded as follows:

I. The word “any expenditure” mentioned in Section 37 of the Act takes in its sweep loss occasioned in the course of business, being incidental to it.

II. As a consequence, any loss incurred by way of an expenditure by an Assessee for any purpose which is an offence or which is prohibited by law is not deductible in terms of Explanation 1 to Section 37 of the Act.
III. Such an expenditure / loss incurred for any purpose which is an offence shall not be deemed to have been incurred for the purpose of business or profession or incidental to it, and hence, no deduction can be made.

IV. A penalty or a confiscation is a proceeding in rem, and therefore, a loss in pursuance to the same is not available for deduction, regardless of the nature of business, as a penalty or confiscation cannot be said to be incidental to any business.

V. The decisions of this Court in Piara Singh (supra) and Dr T A Quereshi [(2006) 287 ITR 547- SC] do not lay down correct law in light of the decision of this Court in Haji Aziz (supra) and the insertion of Explanation 1 to Section 37.

The appeal of the Revenue, therefore, deserves to be allowed, though conscious of the fact that Section 115BBE of the Act may not have an application to the case on hand being prospective in nature.

Note:
The detailed discussion by Justice Shri M M Sundresh on subject with reference to English and Indian cases makes it a good read.

45. D N Singh vs. CIT
(2023) 454 ITR 595 (SC)

Unexplained money, etc. — Section 69A — Assessee must be found to be the owner, and he must be the owner of any money, bullion, jewellery or other valuable articles — Short delivery of bitumen by carrier — A carrier who clings on to possession not only without having a shadow of a right, but what is more, both contrary to the contract as also the law cannot be found to be the owner — No material to show that the goods short delivered were sold — Bitumen not a valuable article — Addition could not be made.

The Appellant–Assessee carried on business as carriage contractor for bitumen loaded from oil companies namely HPCL, IOCL and BPCL from Haldia. The goods were to be delivered to various divisions of the Road Construction Department of the Government of Bihar. According to the Appellant, it has been in the business for roughly three decades.

A scam was reported in the media. The scam consisted of transporters of bitumen, lifted from oil companies, misappropriating the bitumen and not delivering the quantity lifted to the various Divisions of the Road Construction Department of the Government of Bihar. The scam had its repercussion in the assessments under the Act.

By an Assessment Order dated 27th March, 1998 being passed for A.Y. 1995–96, the AO, taking note of the scam, issued ShowCause Notice dated 23rd January, 1998, alleging that the Appellant had lifted 14,507.81 metric tonnes of bitumen but delivered only 10,064.1 metric tonnes. This meant that the Appellant had not delivered 4,443 metric tonnes. The Appellant produced photocopies of challans to establish that the bitumen had been delivered. Summons was issued by the AO to the Executive Engineers and Junior Engineers. It is the case of the Appellant that all Junior Engineers, except Shri Madan Prasad and Ahia Ansari, accepted the factum of delivery of bitumen. The AO, in fact, noticed that only those Junior Engineers accepted receipt of bitumen, where the Engineer in-charge or the Executive Engineer accepted the delivery. Shri Madan Prasad denied that the signature alleged to be his, was not his signature. The AO found that the Junior Engineers denied putting stamp and took the position that if there was stamp, then, it must indicate the name of the section. The AO added a sum of Rs. 2,19,85,700 being the figure arrived at, by finding that 4,443 metric tonnes of bitumen had not been delivered. This was done by invoking Section 69A of the Act.

For the A.Y. 1996–97, the AO passed Order dated 31st March, 1999. The Appellant, in its Return, disclosed a net profit of Rs. 6,76,133. On scrutiny, the AO, again, noticing the scam and finding that while 10,300.77 metric tonnes had been lifted by the Appellant, only 8,206.25 metric tonnes had been delivered. Accordingly, it was found that 2,094.52 metric tonnes had not been delivered. On the said basis and again invoking Section 69A of the Act, a sum of Rs. 1,04,71,720.30 was added as income of the Appellant.

The Commissioner Appeals found that all Junior Engineers, except two, had accepted delivery. After finding that the addition made by the AO in respect of quantity, where Junior Engineers had accepted delivery, was untenable, the Appellate Authority ordered deletion of a sum of Rs. 2,01,14,659. This amount represented the value of 4,064.28 metric tonnes. In regard to the disputed quantity, viz., the dispute raised by Shri Madan Prasad and Ahia Ansari, Junior Engineers, the matter was remanded back for affording an opportunity for cross-examination. This Order related to the A.Y. 1995–96.

Also, for A.Y. 1996–97, the Appellate Authority found merit in the case of the Appellant that except two Junior Engineers, the others had accepted the delivery. The addition of Rs. 1,04,71,720 was ordered to be deleted.

The Revenue filed appeals before the Income-Tax Appellate Tribunal (hereinafter referred to as, ‘the ITAT’, for short) for both the Assessment Years, viz., 1995–96 and 1996–97.

In regard to the order passed by the Appellate Authority for the A.Y. 1995–96, another development took place during the pendency of the Appeal before the ITAT. By rectification Order dated 31st May, 2001, the CIT(A) set aside the addition of Rs. 2,01,14,659 with the direction to the AO that he shall issue summons to the concerned Jr. Engineers, who have received 4,064.28 metric tonnes of bitumen as per challans furnished by the Appellant, record their statement, allow the Appellant an opportunity to cross-examine them and, if necessary, refer their signatures to the handwriting experts to establish the genuineness or otherwise of such signatures. Only after carrying out these directions, any addition shall be made.

The Revenue had filed an Appeal before the ITAT for the A.Y. 1995–96. The Appellant had filed cross-objection in the said Appeal. The Appellant also filed appeal before the ITAT against the Order of Rectification passed under Section 154 of the Act. The ITAT dismissed the Appeals filed by the Revenue and the Appellant taking note of the Order of the CIT(A), passed under Section 154 of the Act, by which, the matter stood remitted back. The cross-objection came to be disposed of accordingly.

For the A.Y. 1996–97, the ITAT disposed of the Appeal filed by the Revenue and also the cross-objection filed. The Appeal filed by the Revenue was allowed. The Tribunal found that the Appellant had not disputed the lifting of the bitumen. The claim made by the Appellant that full supply was made, stood demolished, when photocopies of delivery challans were found to be false and fabricated. The Executive Engineers, it was further found, had confirmed non-delivery to the tune of 2,090.40 metric tonnes. The Commissioner Appeals, it was found, reached a wrong conclusion, as he did not address himself to the explanation offered by the Junior Engineers. It was found that all Executive Engineers of the Consignee Divisions presented a case of non-delivery before the AO. Thus, the ITAT allowed the Appeal filed by the Revenue and sustained the Order of the AO relating to addition on account of short supply of bitumen for the A.Y. 1996–97.

On an appeal to the High Court by the Appellant–Assessee for the A.Y. 1996–97, the Court, after referring to the submissions, focussed on the scope of Section 69A of the Act. The High Court found that the word “owner” has different meaning in different contexts, and when a transporter sells the goods and receives money for that not on behalf of the real owner, it became the owner for the purpose of tax. Having lifted bitumen and not supplied to the Road Construction Department to which it was to be supplied, the Appellant would be liable to pay tax on the bitumen lifted and not delivered. The High Court distinguished the judgment in Dhirajlal Haridas vs. CIT (Central), Bombay (1982) 138 ITR 570 by noting that for determining the person liable to pay tax, the test laid down by this Court was to find out the person entitled to that income. The Court also went on to distinguish the judgment in CIT vs. Amritlal Chunilal (1984) 40 CTR Bombay 387. It was found that in the said case, the Assessee, therein, was not found to be the owner whereas the ITAT found the Appellant to be the owner. The High Court agreed with the said finding. Thereafter, the High Court went on to deal with the argument that the words “other valuable articles” in Section 69A could not include “bitumen”. The argument of the Appellant which is noted is that for applying Section 69A bitumen should have some nexus with money, bullion or jewellery. It was found that any Article which has value would come under the expression “valuable article” under Article 69A and the value of such Article can be deemed to be the income of the Assessee, should the Assessee fail to offer any explanation or the explanation offered be unsatisfactory. The argument that Section 69A would not apply as the Appellant had offered an explanation was not accepted as it was found that an explanation though offered, being not accepted, would lead to the invocation of Section 69A if the explanation was not satisfactory. In other words, Section 69A applied. Lastly, in regard to the argument of the Appellant that the cost of the bitumen and not the value, thereof, was added as income, the High Court found that the Appellant did not have a case that it had sold the bitumen at the price lower than the cost. The Appellant was found to be the owner of the bitumen and the addition was sustained.

The Supreme Court noted that Section 69A may be broken down into the following essential parts:

a. The Assessee must be found to be the owner;

b. He must be the owner of any money, bullion, jewellery or other valuable articles;
c. The said articles must not be recorded in the Books of Account, if any maintained;

d. The Assessee is unable to offer an explanation regarding the nature and the source of acquiring the articles in question; or the explanation, which is offered, is found to be, in the opinion of the Officer, not satisfactory;

e. If the aforesaid conditions are satisfied, then, the value of the bullion, jewellery or other valuable Article may be deemed as the income of the financial year in which the Assessee is found to be the owner;

f. In the case of money, the money can be deemed to be the income of the financial year.

Applying the provision to the facts of the case, the Supreme Court noted that the points that arise were as follows:

I. The question would arise, as to whether the Appellant could be treated as the owner of the bitumen;

II. The further question would arise, as to whether bitumen could be treated as other valuable articles;

III. Thirdly, the question arises, as to how the value of the bitumen is to be ascertained.

As regards the first question, viz., whether the Appellant could be treated as the owner of the bitumen is concerned, it was indisputable that the Appellant was engaged as a carrier to deliver the bitumen, after having lifted the same from the Oil Companies to the various Divisions of the Road Construction Department of the Government of Bihar.

Under Section 15 of the Carriage by Road Act, 2007, which repealed the Carriers Act, 1865, if the consignee fails to take delivery of any consignment of goods within 30 days, the consignment is to be treated as unclaimed. The period of 30 days is declared inapplicable to perishable consignments, in which case, a period of 24 hours’ notice or any lesser period, as may be agreed between the consignor and the common carrier, suffices. In the case of perishable consignment, following such notice, the consignment can be sold. In a case where the goods are not perishable, if there is failure by the consignee to remove the goods after the receipt of a notice of 15 days from the carrier, the common carrier is given a right to sell the consignment without further notice. Section 15(3) enables the carrier to retain a sum equal to the freights, storage and other charges, due, including expenses incurred for the sale. The surplus from the sale proceeds is to be returned to the consigner or the consignee. Section 15(4) clothes the carrier with a right to sell in the event of failure by the consignee to make payment of the freight and other charges, at the time of taking delivery. In such cases, if the other ingredients of Section 69A are satisfied, there may be no fallacy involved if an Assessee is found to be the owner of the goods which he disposes of under the authority of law.

The Supreme Court noted that in this case, it is not the case of either party that the Appellant had become the owner of the bitumen in question in a manner authorised by law. On the other hand, the specific case of the Appellant is that the Appellant never became the owner and it remained only a carrier. However, as noticed, if it is found that there has been short delivery, this would mean that the Appellant continued in possession contrary to the terms of contract of carriage.

The Supreme Court further observed that when goods are entrusted to a common carrier, the entrustment would amount to a contract of bailment within the meaning of Section 148 of the Contract Act, 1872 when it is for being carried by road, as in this case.

According to the Supreme Court, to apply Section 69A of the Act, it is indispensable that the Officer must find that the other valuable article, inter alia, is owned by the Assessee. A bailee, who is a common carrier, is not an owner of the goods. A bailee who is a common carrier would necessarily be entrusted with the possession of the goods. The purpose of the bailment is the delivery of the goods by the common carrier to the consignee or as per the directions of the consignor. During the subsistence of the contract of carriage of goods, the bailee would not become the owner of the goods. In the case of an entrustment to the carrier otherwise than under a contract of sale of goods also, the possession of the carrier would not convert it into the owner of the goods.

The Supreme Court further noted that Section 405 of the Indian Penal Code, 1860 reads as follows:

“Whoever, being in any manner entrusted with property, or with any dominion over property, dishonestly misappropriates or converts to his own use that property, or dishonestly uses or disposes of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust, or wilfully suffers any other person so to do, commits ‘criminal breach of trust’.

Illustration (f) Under Section 405 is apposite, and it reads as follows:

Illustration f. A, a carrier, is entrusted by Z with property to be carried by land or by water. A dishonestly misappropriates the property. A has committed a criminal breach of trust.”

The Supreme Court noted the provisions of Sections 27 and 39 of the Sale of Goods Act, 1930, and observed that sale by a carrier does not pass title except when it is immunised by the conduct of the owner of the good, which would in turn estop the owner from impugning the title of the buyer.

The Supreme Court noted that in the commentary in the context of Section 69A on Sampath Iyengar’s, Law of Income Tax, it was observed it cannot be said in the case of stolen property that the thief is the owner thereof.

The Supreme Court observed that the question would arise pointedly, as to, when a common carrier refuses to deliver the consignment, and continues to possess it contrary to contract and law, and converts it into his use and presumably sells the same, as to whether he could be found to be the owner of the goods. Would he be any different from a person who commits theft and sells it claiming to be the owner. Can a thief become the owner? It would be straining the law beyond justification if the Court were to recognise a thief as the owner of the property within the meaning of Section 69A. Recognising a thief as the owner of the property would also mean that the owner of the property would cease to be recognised as the owner, which would indeed be the most startling result. While possession of a person may in appropriate cases, when there is no explanation forthcoming about the source and quality of his possession, justify an
AO finding him to be the owner, when the facts are known that the carrier is not the owner and somebody else is the owner, then to describe him as the owner may produce results which are most illegal apart from being unjust.

After considering the other relevant laws and various judgment of the Supreme Court dealing with the meaning of “owner” in the context of different provisions of the Income-tax Act, 1961 and applying various test considered therein, the Supreme Court, in this context, summarised its findings as under:

1. Appellant as a carrier was entrusted with the goods.

2. The possession of the Appellant began as a bailee.

3. Proceeding further on the basis that instead of delivering the goods, the Appellant did not deliver the goods to the concerned divisions of the department in the State of Bihar.

4. Ownership of the goods in question by no stretch of imagination stood vested at any point of time in the Appellant.

5. Property would pass from the consignor to the consignee on the basis of the principles which are declared in the Sale of Goods Act. It is inconceivable that any of those provisions would countenance passing of property in the goods to the Appellant who was a mere carrier of the goods.

6. Section 405 of the Indian Penal Code makes it an offence for a person entrusted with property, which includes goods entrusted to a carrier, being misappropriated or dishonestly being converted to the use of the carrier. A specific illustration under Section 405 makes it abundantly clear that any such act by a carrier attracts the offence under Section 405. The Supreme Court in other words would have to allow the commission of an offence by the Appellant in the process of finding that the Appellant is the owner of the goods. In other words, proceeding on the basis that there was short delivery of the goods by the Appellant, inevitably, the Supreme Court must find that the act was not a mere omission or a mistake but a deliberate act by a carrier involving it in the commission of an offence Under Section 405. In other words, the Court must necessarily find that the Appellant continued to possess the bitumen and misappropriated. It is in this state that the AO would have to find that the Appellant by the deliberate act of short delivering the goods and continuing with the possession of the goods not only contrary to the contract but also to the law of the land, both in the Carriers Act 1865 and breaking the penal law as well, the Appellant must be treated as the owner.

7. Under Section 54 of Transfer of Property Act, a carrier who clings on to possession not only without having a shadow of a right, but what is more, both contrary to the contract as also the law cannot be found to be the owner.

8. The possession of the carrier who deliberately refuses to act under the contract but contrary to it, is not only wrongful, but more importantly, makes it a case where the possession itself is without any right with the carrier to justify his possession.

9. Recognising any right with the carrier in law would involve negation of the right of the actual owner, which if the property in the goods under the contract has passed on to the consignee is the consignee and if not the consignor.

The Supreme Court found that the Appellant was bereft of any of the rights or powers associated with ownership of property.

Approaching the issue from another angle, the Supreme Court observed that the rationale of the Revenue involves ownership of the bitumen being ascribed to the Appellant based on possession of the bitumen contrary to the contract of carriage and with the intention to misappropriate the same, which further involves the sale of the bitumen for which there is no material as such. But proceeding on the basis that such a sale also took place, even than what is important is, the requirement in Section 69A that the AO must find that the Assessee is the owner of the bitumen. According to the Supreme Court, in the facts, the Appellant could not be found to be the owner. The Appellant could not be said to be in possession in his own right, accepting the case of the Revenue that there was short delivery. The Appellant did not possess the power of alienation. The right over the bitumen as an owner at no point of time could have been claimed by the Appellant. The possession of the Appellant at best was a shade better than that of a thief as the possession had its origin under a contract of bailment. Hence, the Supreme Court held that the AO acted illegally in holding that one Appellant was the ‘owner’ and on the said basis made the addition.

The Supreme Court, thereafter, referred to the Principles of Ejusdem Generis and Noscitur a Sociis, which are Rules of construction and observed that when it comes to value, it is noticed that in the definition of the word “valuable” in Black’s Law Dictionary, it is defined as “worth a good price; having a financial or market value”. The word “valuable” has been defined again as an adjective and as meaning worth a great deal of money in the Concise Oxford Dictionary. Valuable, therefore, cannot be understood as anything which has any value. The intention of the law-giver in introducing Section 69A was to get at income which has not been reflected in the books of account but found to belong to the Assessee. Not only it must belong to the Assessee, but it must be other valuable articles. The Supreme Court considered few examples to illustrate the point. Let us take the case of an Assessee who is found to be the owner of 50 mobile phones, each having a market value of Rs. 2 Lakhs each. The value of such articles each having a price of Rs. 2 Lakhs would amount to a sum of Rs. 1 Crore. Let us take another example where the Assessee is found to be the owner of 25 highly expensive cameras. Could it be said that despite having a good price or worth a great deal of money, they would stand excluded from the purview of Section 69A. On the other hand, let us take an example where a person is found to be in possession of 500 tender coconuts. They would have a value and even be marketable but it may be wholly inapposite to describe the 500 tender coconuts as valuable articles. It goes both to the marketability, as also the fact that it may not be described as worth a ‘good’ price. Each case must be decided with reference to the facts to find out that while articles or movables worth a great deal of money or worth a good price are comprehended articles which may not command any such price must stand excluded from the ambit of the words “other valuable articles”. The concept of ‘other valuable articles’ may evolve with the arrival in the market of articles, which can be treated as other valuable articles on satisfying the other tests.

Bitumen is defined in the Concise Oxford English Dictionary as “a black viscous mixture of hydrocarbons obtained naturally or as a residue from petroleum distillation, used for road surfacing and roofing”. Bitumen appears to be a residual product in the petroleum refineries, and it is usually used in road construction, which is also probabalised by the fact that the Appellant was to deliver the bitumen to the Road Construction Department of the State. Bitumen is sold in bulk ordinarily. The Supreme Court noted that in the Assessment Order, the Officer has proceeded to take R4,999.58 per metric ton as taken in the AG Report on bitumen scam. Thus, it is that the cost of bitumen for 2,094.52 metric ton has been arrived at as Rs. 1,04,71,720.30. This would mean that for a kilogram of bitumen, the price would be only Rs 5 in 1995–96 (F.Y.).

Bitumen may be found in small quantities or large quantities. If the ‘article’ is to be found ‘valuable’, then in small quantity, it must not just have some value but it must be ‘worth a good price’ {See Black’s Law Dictionary (supra)} or ‘worth a great deal of money’ {See Concise Oxford Dictionary (supra)} and not that it has ‘value’. Section 69A would then stand attracted. But if to treat it as ‘valuable article’, it requires ownership in large quantity, in the sense that by multiplying the value in large quantity, a ‘good price’ or ‘great deal of money’ is arrived at then it would not be valuable article. Thus, the Supreme Court concluded that ‘bitumen’ as such could not be treated as a ‘valuable article’.

In view of these findings, the Supreme Court did not deal with other points. The appeals were allowed. The impugned judgment was stand set aside and though on different grounds, the order by the Commissioner Appeals deleting the addition made on the aforesaid basis was restored.

Shri Hrishikesh Roy, J. agreed with judgement of Shri K M Joseph J. that for the purposes of Section 69A, –the deeming effect of the provision will only apply if the Assessee is the owner of the impugned goods. Secondly, for any Article to be considered as ‘valuable article’ Under Section 69A, it must be intrinsically costly, and it will not be regarded as valuable if huge mass of a non-precious and common place Article is taken into account, for imputing high value and added his reasoning to justify his opinion.

Section 69A provides as a Rule of evidence that for the deeming effect to apply, the Assessee must be the owner of money, bullion, jewellery and other valuable articles on which he is unable to offer a satisfactory explanation. Someone having mere possession and without legal ownership or title over the goods will not be covered within the ambit of Section 69A. In the present case, the Assessee was certainly not the owner of the bitumen — but was the carrier who was supplying goods from the consignor – oil marketing companies to the consignee – Road Construction Department. Notably, due to short delivery of goods, the possession of the Assessee was unlawful. The inevitable conclusion, therefore, is that the Assessee is not the owner, for the purposes of Section 69A.

For purpose of Section 69A of Income-tax Act, 1961, an ‘article’ shall be considered ‘valuable’ if the concerned Article is a high-priced Article commanding a premium price. As a corollary, an ordinary ‘article’ cannot be bracketed in the same category as the other high-priced articles like bullion, gold, jewellery mentioned in Section 69A by attributing high value to the run-of-the-mill article, only on the strength of its bulk quantity. To put it in another way, it is not the ownership of huge volume of some low cost ordinary Article but precious gold and the likes that would attract the implication of deemed income under Section 69A.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

1 Kerala State Beverages Manufacturing & Marketing Corporation Ltd. vs. The Assistant Commissioner of Income Tax

(2022) 440 ITR 492 (SC)

Disallowance under section 40(a)(iib) of the Income-tax Act, 1961 – The gallonage fee, licence fee and shop rental (kist) with respect to FL-9 and FL-1 licences granted to the State Govt. Undertakings would squarely fall within the purview of Section 40(a)(iib) of the Income-tax Act, 1961 – The surcharge on sales tax and turnover tax, is not a fee or charge coming within the scope of Section 40(a)(iib)(A) or 40(a)(iib)(B), as such same is not an amount which can be disallowed under the said provision.

For A.Y. 2014-2015, the Deputy Commissioner of Income Tax finalised the Appellant’s income assessment u/s 143(3) of the Income-tax Act, 1961 vide Assessment Order dated 14th December, 2016. The Principal Commissioner of Income Tax exercised the power of revision as contemplated u/s 263 of the Act and set aside the order of assessment on the ground that same is erroneous and is prejudicial to the interest of the revenue, to the extent it failed to disallow the debits made in the Profit & Loss Account of the Assessee, with respect to the amount of surcharge on sales tax and turnover tax paid to the State Government, which ought to have been disallowed u/s 40(a)(iib). Against the order of the Principal Commissioner, Income Tax, dated 25th September, 2018, the Appellant filed an appeal before the Income Tax Appellate Tribunal.

With respect to A.Y. 2015-2016, assessment against the Appellant was completed u/s 143(3) by the Assistant Commissioner of Income Tax vide order of assessment dated 28th December, 2017. Debits contained in the Profit & Loss Account of the Appellant with respect to payment of gallonage fee, licence fee, shop rental (kist) and surcharge on sales tax, amounting to a total sum of Rs. 811,90,88,115 were disallowed u/s 40(a)(iib). Aggrieved by the said order, Appellant filed an appeal before the Commissioner of Income Tax (Appeals), which was dismissed. The Appellant carried the matter by way of a second appeal before the Tribunal.

The Tribunal dismissed the appeals by a common order dated 12th March, 2019. The Appellant thereafter filed a miscellaneous application on the ground that the Tribunal had failed to consider the issue agitated against the disallowance of the surcharge on sales tax. The said miscellaneous application was allowed by recalling earlier order dated 12th March, 2019 and a fresh order was passed on 11th October, 2019, finding the issue against the Appellant and dismissing the appeal.

Aggrieved by the aforesaid three orders, the Appellant filed Income Tax Appeals before the High Court, which were disposed of by the common impugned order. In the common impugned order passed by the High Court, the question of law raised, was answered partly in favour of the Assessee/Appellant and partly in favour of the revenue.

On further appeal by the Assessee/Appellant as well as by the Revenue, the Supreme Court observed that, while it is the case of the Assessee/Appellant that the gallonage fees, licence fee, and shop rental (kist) for FL-9 licence and FL-1 licence, the surcharge on sales tax and turnover tax do not fall within the purview of the abovesaid amended section, the case of the Revenue is that all the aforesaid amounts are covered under section 40(a)(iib) as such, such amounts are not deductible for computation of income, for A.Ys. 2014-2015 and 2015-2016.

The Supreme Court noted that during the A.Ys. 2014-2015 and 2015-2016 the Appellant was holding FL-9 and FL-1 licences to deal in wholesale and retail of Indian Made Foreign Liquor (IMFL) and Foreign Made Foreign Liquor (FMFL) granted by the Excise Department. FL-9 licence was issued to deal in wholesale liquor, which they were selling to FL-1, FL-3, FL-4, 4A, FL-11, FL-12 licence holders. The FL-1 licence was for the sale of foreign liquor in sealed bottles, without the privilege of consumption within the premises. The gallonage fee is payable under Section 18A of the Kerala Abkari Act and Rule 15A of the Foreign Liquor Rules. The Appellant was the only licence holder for the relevant years so far as FL-9 licence to deal in wholesale, and so far as FL-1 licences are concerned, it was also granted to one other State owned Undertaking, i.e., Kerala State Co-operatives Consumers’ Federation Ltd. By interpreting the word ‘exclusively’ as worded in Section 40(a)(iib)(A) of the Act, the High Court in the impugned order has held that the levy of gallonage fee, licence fee and shop rental (kist) with respect to FL-9 licences granted to the Appellant will clearly fall within the purview of Section 40(a)(iib) and the amounts paid in this regard is liable to be disallowed. At the same time, the amount of gallonage fee, licence fee and shop rental (kist) paid with respect to FL-1 licences granted in favour of the Appellant for retail business; the High Court has held that it is not an exclusive levy, as such disallowance made with respect to the same cannot be sustained. Regarding surcharge on sales tax and turnover tax, it is held that same is not a ‘fee’ or ‘charge’ within the meaning of Section 40(a)(iib) as such same is not an amount that can be disallowed under the said provision.

The Supreme Court noted that section 40 of the Income-tax Act, 1961 is a provision that deals with the amounts which are not deductible while computing the income chargeable under the head ‘Profits and gains of business or profession’. Section 40 of the Act is amended in 2013, and 40(a)(iib) is inserted by Amending Act 17 of 2013, which has come into force from 1st April, 2014. In terms of Article 289 of the Constitution of India, the property and income of a State shall be exempt from Union taxation. Therefore, in terms of Article 289, the Union is prevented from taxing the States on its income and property. It is the constitutional protection granted to the States in terms of the abovesaid Article. This protection has led the States in shifting income/profits from the State Government Undertakings into Consolidated Fund of the respective States to have protection under Article 289. In the instant case, the KSBC, a State Government Undertaking, is a company like any other commercial entity, which is engaged in the business and trade like any other business entity for the purpose of wholesale and retail business in liquor. As much as these kinds of undertakings are under the States control, the total shareholding or in some cases majority of shareholding is held by States. As such, they exercise control over it and shift the profits by appropriating the whole of the surplus or a part of it to the Government by way of fees, taxes or similar such appropriations. From the relevant Memorandum to the Finance Act, 2013 and underlying object for amendment of Income-tax Act by Act 17 of 2013, by which Section 40(a)(iib)(A)(B) is inserted, it is clear that the said amendment is made to plug the possible diversion or shifting of profits from these undertakings into State’s treasury. In view of Section 40(a)(iib) of the Act, any amount, as indicated, which is levied exclusively on the State-owned undertaking (KSBC in the instant case), cannot be claimed as a deduction in the books of State-owned undertaking. Thus, the same is liable to income tax.

The Supreme Court observed that in the instant case, the gallonage fee, licence fee, shop rental (kist), surcharge and turnover tax are the amounts of which Assessee claims that they are not attracted by Section 40(a)(iib) of the Act. On the other hand, it is the case of the Respondent/revenue that all the said components attract the ingredients of Section 40(a)(iib)(A) or Section 40(a)(iib)(B), as such, they are not deductible. Broadly these levies can be divided into three categories. Gallonage fee, licence fee and shop rental (kist) are in the nature of fee imposed under the Abkari Act of 1902. These are the fees payable for the licences issued under FL-9 and FL-1. In the impugned order, the High Court has held that the gallonage fee, licence fee and shop rental (kist) with respect to FL-9 licence are not deductible, as it is an exclusive levy on the Corporation. Further a distinction is drawn from FL-1 licence from FL-9 licence, to apply Section 40(a)(iib), only on the ground that, FL-1 licences are issued not only to the Appellant/KSBC but also issued to one other Government Undertaking, i.e., Kerala State Co-operatives Consumers’ Federation Ltd. The High Court has held that as there is no other player holding licences under FL-9 like KSBC as such the word ‘exclusivity’ used in Section 40(a)(iib) attract such amounts. At the same time only on the ground that FL-1 licences are issued not only to the KSBC but also to Kerala State Co-operatives Consumers’ Federation Ltd., High Court has held that exclusivity is lost so as to apply the provision u/s 40(a)(iib). If the amended provision under Section 40(a) (iib) is to be read in the manner, as interpreted by the High Court, it will literally defeat the very purpose and intention behind the amendment. The aspect of exclusivity under Section 40(a)(iib) is not to be considered with a narrow interpretation, which will defeat the very intention of Legislature, only on the ground that there is yet another player, namely, Kerala State Co-operatives Consumers’ Federation Ltd. which is also granted licence under FL-1. The aspect of ‘exclusivity’ under Section 40(a)(iib) has to be viewed from the nature of undertaking on which levy is imposed and not on the number of undertakings on which the levy is imposed. If this aspect of exclusivity is viewed from the nature of the undertaking, in this particular case, both KSBC and Kerala State Co-operatives Consumers’ Federation Ltd. are undertakings of the State of Kerala; therefore, the levy is an exclusive levy on the State Government Undertakings. Thus, any other interpretation would defeat the very object behind the amendment to Income-tax Act, 1961.

The Supreme Court held that once the State Government Undertaking takes licence, the statutory levies referred above are on the Government Undertaking because it is granted licences. Therefore, the finding of the High Court that gallonage fee, licence fee and shop rental (kist) so far as FL-1 licences are concerned, is not attracted by Section 40(a)(iib), cannot be accepted and such finding of the High Court runs contrary to object and intention behind the legislation.

Further, the contention that because another State Government Undertaking, i.e., Kerala State Co-operatives Consumers’ Federation Ltd., was also granted licences during the relevant years, exclusivity mentioned in Section 40(a)(iib) is lost, also cannot be accepted, for the reason that exclusivity is to be considered with reference to nature of the licence and not on the number of State-owned Undertakings.

Regarding the surcharge on sales tax, the Supreme Court noted that the High Court had held in favour of KSBC and against the revenue. The reasoning of the High Court was that surcharge on sales tax is a tax, and Section 40(a) (iib) does not contemplate ‘tax’ and a surcharge on sales tax is not a ‘fee’ or a ‘charge’. Therefore, High Court was of the view that the surcharge levied on KSBC does not attract Section 40(a)(iib) of the Act.

According to the Supreme Court, the ‘fee’ or ‘charge’ as mentioned in Section 40(a)(iib) is clear in terms, and that will take in only ‘fee’ or ‘charge’ as mentioned therein or any fee or charge by whatever name called, but cannot cover tax or surcharge on tax and such taxes are outside the scope and ambit of Section 40(a)(iib)(A) and Section 40(a)(iib)(B) of the Act. The surcharge which is imposed on KSBC is under Section 3(1) of the KST Act.

According to the Supreme Court, a reading of preamble and Section 3(1) of the KST Act make it abundantly clear that the surcharge on sales tax levied by the said Act is nothing but an increase of the basic sales tax levied u/s 5(1) of the KGST Act, as such the surcharge is nothing but a sales tax. It is also settled legal position that a surcharge on a tax is nothing but the enhancement of the tax (K. Srinivasan 1972(4) SCC 526 and Sarojini Tea Co. Ltd. (1992) 2 SCC 156).

So far as the turnover tax was concerned, the Supreme Court noted that such tax was imposed not only on KSBC in terms of Section 5(1)(b) of the KGST Act, but it is imposed on various other retail dealers specified u/s 5(2) of the said Act. According to the Supreme Court, turnover tax is also a tax and the very same reason which have been assigned above for surcharge would equally apply to the turnover tax also. As such, turnover tax was also outside the purview of Section 40(a) (iib)(A) and 40(a)(iib)(B).

For the aforesaid reasons, the Supreme Court held that the gallonage fee, licence fee and shop rental (kist) with respect to FL-9 and FL-1 licences granted to the Appellant would squarely fall within the purview of Section 40(a)(iib) of the Income-tax Act, 1961. The surcharge on sales tax and turnover tax is not a fee or charge coming within the scope of Section 40(a)(iib)(A) or 40(a)(iib)(B), as such same is not an amount which can be disallowed under the said provision.

Accordingly, the civil appeal filed by the Assessee was dismissed, and the civil appeals filed by the revenue were partly allowed to the extent indicated above. As a result, the assessments completed against the Assessee with respect to A.Ys. 2014-2015 and 2015-2016 were set aside. The assessing officer was directed to pass revised orders after computing the liability according to the directions as indicated above.

BCAJ Admin

Section 9 r.w. Article 13 of India-Mauritius DTAA – Where Mauritius company had acquired CCPS prior to 1.4.2017 but they were converted into equity shares after said date, without there being any substantial change in rights of the assessee, LTCG derived from the sale of such equity shares were within the ambit of Article 13(4) of India-Mauritius DTAA, and hence, was exempt from tax in India.

7. Sarva Capital LLC vs. ACIT

[2023] 153 taxmann.com 618 (Delhi-Trib.)

ITA No.: 2289/Del./2022

A.Ys.: 2019–20

Date of Order: 10th August, 2023

Section 9 r.w. Article 13 of India-Mauritius DTAA – Where Mauritius company had acquired CCPS prior to 1.4.2017 but they were converted into equity shares after said date, without there being any substantial change in rights of the assessee, LTCG derived from the sale of such equity shares were within the ambit of Article 13(4) of India-Mauritius DTAA, and hence, was exempt from tax in India.

FACTS

The assessee was a tax resident of Mauritius. It was incorporated with the objective of investing in India in education, agriculture, healthcare, microfinance institutions and other financial services sectors. Mauritius tax authority had granted TRC to the assessee. The assessee had invested in CCPS of ‘V’ prior to 1st April, 2017. CCPS were converted into equity shares of ‘V’ as per the terms of their issue without there being any substantial change in the rights of the assessee. The conversion resulted in only a qualitative change in the nature of the rights of the shares but did not alter voting or other rights of the assessee.

The assessee sold the shares during the A.Y. 2019–20 and earned long-term capital gain (“LTCG”) from the same. The assessee claimed LTCG as exempt in terms of Article 13(4) of India-Mauritius DTAA. Subsequently, it revised its return and offered LTCG to tax in terms of Article 13(3B) of India-Mauritius DTAA.

AO denied the benefit of DTAA to the assessee and brought to tax, the entire LTCG under the IT Act.

HELD

(i) Valid TRC bars AO from questioning tax residency:

• The assessee was granted TRC by Mauritius Tax Authority. It is well settled that if an assessee is holding a valid TRC, the AO in India cannot go behind such TRC to question the tax residency of the assessee and deny benefits of DTAA.

• ITAT placed reliance on UOI vs. AzadiBachaoAndolan1 to support its view that DTAA benefit cannot be denied even if Mauritius does not levy capital gains tax.

• AO’s allegations that the assessee, (a) was set up for tax avoidance purposes through treaty shopping, (b) was a conduit company and there was an absence of commercial rationale or substance behind the setting up of the assessee were not supported by any material / evidence.

(ii) CCPS acquired prior to 1st April, 2017, converted to equity shares after that date:

• Since the assessee had acquired CCPS prior to 1st April, 2017, LTCG derived from the sale of equity shares after the conversion of CCPS was covered under Article 13(4) of India-Mauritius DTAA and not under Article 13(3A) or 13(3B) of India-Mauritius DTAA.

• Therefore, in terms of Article 13(4) of India-Mauritius DTAA, LTCG was taxable only in the country of residence of the assessee (i.e., Mauritius).

• A perusal of Article 13(3A) of India-Mauritius DTAA shows that the expression therein is ‘gains from the alienation of shares’. The term ‘shares’ has been used in a broader sense and will cover within its ambit all shares, including preference shares.

• Initially, the assessee had claimed LTCG as exempt in terms of Article 13(4) of India-Mauritius DTAA. Subsequently, it revised its return and offered LTCG to tax in terms of Article 13(3B) of India-Mauritius DTAA. However, that would not preclude the assessee from claiming benefit under Article 13(4) if LTCG were clearly within the ambit of Article 13(4) of India-Mauritius DTAA

BCAJ Admin

Section 54B — Where assessee claimed capital gains arising on sale of agricultural land as exempted u/s 54B on purchase of another agricultural land, since the assessee had furnished all sales documents viz., agreement to sell and purchase, receipt, possession letter, GPA and affidavit, along with a copy of the return filed by the land owner, from whom new land was purchased, wherein she had declared capital gains arising from the sale of its land to assessee, the benefit of exemption u/s 54B was allowable.

34. ITO vs. Babita Gupta

[2022] 100 ITR(T) 252 (Delhi – Trib.)

ITA No.: 5313 (Delhi) of 2019

A.Y.: 2014–15

Date of Order: 18th October, 2022

Section 54B — Where assessee claimed capital gains arising on sale of agricultural land as exempted u/s 54B on purchase of another agricultural land, since the assessee had furnished all sales documents viz., agreement to sell and purchase, receipt, possession letter, GPA and affidavit, along with a copy of the return filed by the land owner, from whom new land was purchased, wherein she had declared capital gains arising from the sale of its land to assessee, the benefit of exemption u/s 54B was allowable.

FACTS

In the course of assessment proceedings, the AO noticed that the assessee had sold agricultural land measuring 8 bighas situated in the Revenue Estate of Bakkarvala Village, Delhi for a consideration of ₹8,76,56,250 and claimed long-term capital gain of ₹8,48,80,881 as deduction u/s 54B of the Act. The assessee submitted the documentary evidences such as the copy of the agreement to sell, to purchase the agricultural land in the year 2000, copy of General Power of Attorney, copy of possession letter, affidavit of Shri Kali Ram Ganga Bishan (HUF) in proof of purchase of land by the assessee and copy of sale deed, dated 7th November, 2013, executed in the name of Pearls Life Style Developers (P) Ltd [Old Agricultural Land] and copy of the sale deed, dated 15th November, 2013, for the purchase of new agricultural land from Smt. Sumitra Devi Gupta, copy of General Power of Attorney, copy of possession letter, affidavit of Smt. Sumitra Devi Gupta in proof of purchase of land by the assessee[New Agricultural Land].

The AO while completing the assessment u/s 143(3) of the Act accepted the first transaction i.e., the sale of Old Agricultural land as genuine and fulfilled all the criteria and the second transaction i.e., the purchase of New Agricultural Land was not accepted on the ground that this transaction was made through General Power of Attorney only to claim deduction u/s 54B of the Act.

Aggrieved by the order of AO, the assessee filed an appeal before CIT(A). The CIT(A) considering the submissions of the assessee, the evidence furnished before him and following the decision of the Hon’ble Delhi High Court in the case of CIT vs. Ram Gopal [2015] 55 taxmann.com 536/230 Taxman 205/372 ITR 498 allowed deduction u/s 54B of the Act as claimed by the assessee.

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

HELD

The ITAT observed that the assessee immediately upon receiving the payments (through the banking channel) on account of sale consideration in respect of old agricultural land the assessee had invested the whole of the sale consideration received in respect of her old agricultural land towards the purchase of new agricultural land. Since the assessee had purchased the new agricultural land by investing the whole of the sale consideration in respect of the old agricultural land within the next few days, she had become eligible and entitled to claim the deduction / exemption u/s 54B of the Act, and accordingly, the assessee had claimed the deduction / exemption u/s 54B in her ITR filed for A.Y. 2014–15, which was denied by the AO.

The Tribunal observed that the AO accepted the transactions pertaining to old agricultural land and disbelieved the transaction of purchase of agricultural land from Smt. Sumitra Devi Gupta made by the assessee during the assessment year under consideration for the reason that there was no mutation in the Revenue Records and the purchaser of the property, Smt. Sumitra Devi Gupta, did not respond to the notice issued u/s 133(6) of the Act.

The ITAT further observed that in the course of appellate proceedings, the assessee had furnished the Return of Income filed by Smt. Sumitra Devi Gupta from whom the land was purchased by assessee, wherein the capital gain was declared by Smt. Sumitra Devi Gupta in her return of income for the A.Y. 2014–15.

The ITAT relied on the decision of the Delhi High Court in the case of Ram Gopal (supra) wherein it was observed that the Hon’ble Supreme Court’s decision in the case of Suraj Lamp & Industries (P) Ltd (340 ITR 1 SC) is of no consequence because the Hon’ble Apex Court had dealt with whether a sale or transfer based upon confirming a GPA amounted to sale / conveyance but the Hon’ble Apex Court did not consider and had no occasion to deal with section 2(14) and section 2(47) of the Act in the context of a claim of acquisition of rights of property and interest in a capital asset for the purpose of Income-tax Act, 1961. Applying the principles of this decision, the ITAT held that there was no infirmity in the order passed by the CIT(A) in allowing the exemption claimed u/s 54B of the Act as claimed by the assessee.

In the result, the appeal filed by the revenue was dismissed.

BCAJ Admin

Section 4 — Where pursuant to search upon assessee-company, an addition was made merely on the basis of statements recorded of ex-employees and where no incriminating material was recovered from premises of assessee, impugned addition made without giving assessee opportunity to cross-examine said ex-employees and dealers was unjustified. The department had failed to follow the cardinal principle of providing adequate opportunity for rebuttal of evidence being sought to be relied upon.

33. DSG Papers (P) Ltd vs. ACIT/DCIT

[2022] 99 ITR(T) 241 (Chandigarh – Trib.)

ITA No.: 82 to 86 (Chd.) of 2022

A.Ys.: 2013–14 to 2017–18

Date of Order: 29th July, 2022

Section 4 — Where pursuant to search upon assessee-company, an addition was made merely on the basis of statements recorded of ex-employees and where no incriminating material was recovered from premises of assessee, impugned addition made without giving assessee opportunity to cross-examine said ex-employees and dealers was unjustified. The department had failed to follow the cardinal principle of providing adequate opportunity for rebuttal of evidence being sought to be relied upon.

FACTS

The assessee-company was engaged in the business of manufacturing paper and paper products. For the A.Y. 2013–14, the assessee company’s case was selected for scrutiny proceedings u/s 143(3) and was completed on 20th March, 2016, at the returned income. Subsequently, the PCIT, Patiala set aside the assessment order and directed the Assessing Officer (AO) to pass a fresh assessment order vide order u/s 263, dated 31st August, 2017. The assessment subsequent to the revisionary proceedings was completed on 26th December, 2018, wherein the income of the assessee company as per the original assessment order passed u/s 143(3) on 20th March, 2016, was confirmed.

Meanwhile, there was a search and seizure operation on 5th August, 2016, on the business premises of the assessee-company, and the search was also conducted on Shri Sanjay Dhawan, an ex-president of the assessee company as well as three-four dealers of the assessee company and some ex-employees of the assessee company. During the course of the search at the residential premises of Shri Sanjay Dhawan, parallel invoices of goods manufactured and sold by the assessee-company were allegedly recovered. The evidence of undervaluation of sales was allegedly in the form of statements of third parties recorded u/s 14 of the Central Excise Act, 1944. There was also allegedly evidence of unaccounted sales and undervaluation of accounted sales made to third parties in the form of e-mail communication between the assessee-company and third parties. The information was passed on by the Intelligence Wing of GST to the Income-tax Department that the assessee-company had been allegedly suppressing its turnover by way of not accounting for the sales by under-invoicing the sales. Relying upon the said information and the said statements, the AO had initiated the reassessment proceedings u/s 147.

During the course of reassessment proceedings, the assessee-company had specifically requested to cross-examine the persons on whose statements the AO had relied. However, the AO brushed aside the request of the assessee for the opportunity to cross-examine these persons by simply observing that since the assessee had no explanation to offer, there was no requirement for giving any such opportunity. The AO proceeded to reject the books of account maintained by the assessee-company u/s 145(3) of the Act and, thereafter, proceeded to complete the assessment after making an addition of ₹31,40,021 on account of additional net profit by applying the net profit rate of 4.42 per cent. The alleged undisclosed sales for the year were computed at ₹3,62,60,331.

Aggrieved, the assessee-company filed an appeal before CIT(A). The CIT(A) upheld the action of the AO in rejecting the books of account but gave partial relief with respect to additional net profit by holding that the average net profit rate of 3.64 per cent was to be applied rather than 4.42 per cent.

Aggrieved, the assessee-company filed an appeal before the ITAT.

HELD

The ITAT had observed that it was an undisputed fact that during the course of search proceedings conducted by the Central Excise Authorities, neither at the premises of the assessee-company nor from any other premises, any other evidence with regard to undisclosed sales was found except for the invoices recovered from the residence of Shri Sanjay Dhawan and the impugned additions on account of the undisclosed / additional net profit on alleged unaccounted sales have been made only on the basis of invoices recovered from the residence of Shri Sanjay Dhawan.

The ITAT also observed that it was an undisputed fact that the assessee-company had specifically requested the AO to provide an opportunity to it to cross-examine these persons but such an opportunity was not granted. The ITAT further observed the following:

i. the assessee–company had demonstrated with ample evidence that Shri Sanjay Dhawan was a disgruntled employee of the company whose intentions were to put the assessee-company into unnecessary financial trouble and litigation,

ii. that the allegation that the unrecorded goods were being transported by vehicles owned by the assessee-company is incorrect in as much as it was physically impossible for the same vehicle to have delivered goods at two different stations within a short span of time on the same day, when time is required not only for movement of goods from one station to another but time is also required for loading and unloading of goods,

iii. that the statement of one of the ex-employees was in contradiction to the statement of Shri Sanjay Dhawan and the Income-tax authorities had relied on both, which does not hold good.

The ITAT observed that the denial of cross-examination by the Income-tax authorities has a significant bearing on the final outcome of this batch of appeals for the simple reason that the AO has relied upon those statements which had been recorded at the back of the assessee and the assessee was not given any opportunity to effectively rebut. The department had failed to follow the cardinal principle of providing adequate opportunity for rebuttal of evidence being sought to be relied upon. The ITAT had relied on the following decisions:

i. Andaman Timber Industries vs. CCE [2015] 62 taxmann.com 3/52 GST 355 (SC),

ii. CIT vs. Rajesh Kumar [2008] 172 Taxman 74/306 ITR 27 (Delhi.),

iii. CIT vs. Dharam Pal Prem Chand Ltd [2008] 167 Taxman 168 / [2007] 295 ITR 105 (Delhi HC),

iv. Prakash Chand Nahta vs. CIT [2008] 170 Taxman 520 / 301 ITR 134 (Madhya Pradesh HC).

The ITAT held that in the absence of such cross-examination having been allowed to the assessee-company and also in view of no incriminating material having been recovered from any of the premises searched; coupled with the fact that the assessee-company had filed an FIR against Shri Sanjay Dhawan and the statement of ex-employee itself stated that the parallel invoices used to be destroyed after the delivery of the consignments, the Income-tax authorities should not have placed complete reliance without any corroborative evidence on such statements.

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

BCAJ Admin

Income from the business of consultancy qua stamp duty and registration would not be liable for taxation u/s 44ADA. The action of the assessee in offering profits of such business u/s 44AD was upheld.

32. Vishnu DattatrayaPonkshe vs. CPC

ITA No.: 1570/Mum./2023

A.Y.: 2017–18

Date of Order: 29th August, 2023

Sections: 44AD, 44ADA

Income from the business of consultancy qua stamp duty and registration would not be liable for taxation u/s 44ADA. The action of the assessee in offering profits of such business u/s 44AD was upheld.

FACTS

The Assessee e-filed its return of income declaring income, u/s 44AD of the Act, @8 per cent on receipts of ₹8,30,800 from the business of consultancy qua stamp duty and registration. The amount of ₹8,30,800 included the receipt of ₹4,81,280 on which TDS was deducted u/s 194J of the Act (fees for professional and technical services), and therefore, the AO / CPC added the income @50 per cent u/s 44 ADA of the Act, which resulted in making the addition of ₹2,40,640.

Aggrieved, the Assessee preferred an appeal to CIT(A), who by taking into consideration that all the deductors are big corporates and deducted tax u/s 194J of the Act, construed that the receipts of ₹4,81,280 related to professional and technical services and are covered u/s 44ADA of the Act and, therefore, taxable @50 per cent. The Commissioner ultimately computed the total income of the Assessee to the tune of ₹2,68,640 (₹2,40,640 + ₹27,982 @8 per cent of ₹3,49,500) and restricted the income of ₹3,49,500 u/s 139(1) of the Act to the tune of ₹2,68,602 only.

HELD

The Tribunal observed that the amount of ₹4,81,280 on which TDS was deducted u/s 194J of the Act, in fact, is part of the total receipt of ₹8,30,800 on which the Assessee has declared income @8 per cent u/s 44AD. However, both the authorities below applied the provisions of section 44ADA of the Act, which deals with persons carrying on legal, medical, engineering or architectural profession or profession of accountancy, technical consultancy or interior decoration or any other profession as is notified by the Board in the official gazette. The Tribunal noted that, admittedly, the Assessee is just a 10th/matriculation passed and does not have any qualification to act as a legal, medical, engineering or architectural professional or professional accountancy or technical consultancy of interior decoration or any other profession as is notified by the Board in the official gazette, as prescribed u/s 44AA of the Act.

The Tribunal held that the Assessee’s case does not fall under the provisions of section 44ADA of the Act. It deleted the addition of R2,40,640 sustained by the Commissioner.

BCAJ Admin

Where valuation, as done by a registered valuer, vide a valuation report furnished by the assessee is rejected, the AO should refer the valuation to Departmental Valuation Officer (DVO).

31. ND’s Art World Pvt Ltd vs. ACIT

ITA No.: 6850/Mum./2019

A.Y.: 2016–17

Date of Order: 23rd August, 2023

Sections: 56(2)(viib), Rule 11UA

Where valuation, as done by a registered valuer, vide a valuation report furnished by the assessee is rejected, the AO should refer the valuation to Departmental Valuation Officer (DVO).

FACTS

The assessee, a company engaged in the business of art direction, set construction, studio and equipment hire, filed its return of income on 17th October, 2016, declaring a total income of ₹8,41,17,500. The Assessing Officer (AO) vide order passed u/s 143(3) of the Act determined the total income at ₹23,68,86,730 by making various additions / disallowances.

During the year under consideration, the assessee had issued 1,780 shares of a face value of ₹10 at a premium of ₹98,280 per share. On perusal of the financials called for, the AO noticed that the assessee had in the financial year relevant to A.Y. 2015–16 revalued upwards the assets held by the assessee and had created a revaluation reserve. The immovable assets in the balance sheet pertained to land situated at Karjat along with the other assets, buildings, sets, etc., which were shown at WDV. Should the assessee while computing the book value of the assets for determining the fair market value of the shares consider the book value or should it be a revalued amount which is not reduced by the upward revaluation of the assets. The AO held that the assessee has increased the value of the assets in the previous year by creating an upward revaluation, and as a result, has determined the higher price per share. The AO stated that the valuer had not considered the prevailing stamp duty value at the time of the valuation of the land and building of the assessee and had not specified as to what methodology or reference was made to substantiate the value of the assets. According to the AO, the valuer has merely arrived at the market value of the land at ₹6,500 per square feet without considering the value of the land, current market price and various other criteria and has also not made a comparable analysis of nearby land sold during that period. The AO stated that the valuer has not justified the charging of an additional premium in his report and has merely increased the value of the sets and buildings which are depreciable assets, the value of which does not increase over a period of time. A similar observation was made by the AO on the value of the vehicles, plant and machinery, office equipment, etc., which are properties subject to depreciation. The AO held that the assessee has failed to substantiate the increase in the value. The AO further stated that the Rule 11UA specifies that the revaluation of the assets is not to be considered for the calculation of the share premium.

The AO calculated the fair market value of the shares after removing the revaluation value of the assets and arrived at the share price of ₹17,815 per share as against the assessee’s determination of the value per share amounting to ₹80,465. He made an addition to the difference of share premium of ₹80,465 per share aggregating to ₹14,33,27,700 u/s 56(2)(viib) of the Act on the grounds that the premium value under Rule 11UA cannot be taken using the revaluation of the assets, thereby recomputing the premium value at ₹17,815 per share as against the assessee’s valuation of ₹98,280 per share.

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 where it was contended, on behalf of the assessee, that theassessee would not be covered u/s 56(2)(viib) of the Act for the reason that the shares were transferred only amongst the family members of the assessee, and the assessee is a company. So then how can it have relatives? And even otherwise, neither the AO nor the CIT(A) has referred the matter to the DVO for the purpose of determining the valuation of the assets. It was submitted that Rule 11UA does not mention that the revaluation reserve is to be reduced and that only Rule 11UAA inserted w.e.f. 1st April, 2018, lays down the Rules for valuation and that Rule 11UAA was not applicable to the assessee for the impugned year. Reliance was placed on the decision of the coordinate bench in the case of DCIT vs. Pali Fabrics Pvt. Ltd. [2019] 110 taxmann.com 310 (Mum)(Trib).

HELD

The Tribunal noted that the DR contended that AO had challenged the validity of the valuation report and that the AO is entitled with the power of the valuer and can determine the value himself. Without prejudice, he stated that this issue may be remanded to the file of the AO for determining the valuation after referring the same to the DVO. The DR relied on the decision of the Delhi Tribunal in the case of Agro Portfolio Pvt Ltd vs. ITO [(2018) 94 taxmann.com 112 (Del Trib)].

The Tribunal observed that the difference of share premium was added u/s 56(2)(viib) of the Act since the AO has rejected the valuation determined by the assessee as per the valuation report submitted by the assessee vide letter, dated 13th December, 2018. The AO further has failed to accept the valuation report of the assessee for the reason that the valuer has not adopted any methodology or reference for the purpose of calculation of the land value without considering the factors such as value of the land as per stamp authority, land market price, location factors and the value at which the neighbouring lands were sold during that period, etc. It is observed from the said fact that the AO has not referred the said matter for valuation to the DVO while he has merely rejected the valuation report submitted by the assessee. The Tribunal found it pertinent to point out that the lower authorities have failed to exercise the option of referring the matter to the DVO for the purpose of valuation of the assets which are very much within the purview of the jurisdiction of the lower authorities.

The Tribunal considered it fit to remand this issue back to the file of the AO for the purpose of valuation of the assets by referring the same to the DVO and to consider the said issue in light of the valuation report of the DVO.

BCAJ Admin

Provisions of section 56(2)(vii)(c) are not applicable on receipt of bonus shares / bonus units.

30. DCIT vs. Smt. Aruna Chandhok

ITA No.: 387/Del./2021

A.Y.: 2015–16

Date of Order: 5th September, 2023

Sections: 56(2)(vii)(c)

Provisions of section 56(2)(vii)(c) are not applicable on receipt of bonus shares / bonus units.

FACTS

The assessee, an individual, filed her return of income for the A.Y. 2015–16 on 16th October, 2015, declaring income under the head salary, house property, capital gains and other sources.

In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had, during the previous year relevant to the assessment year under consideration, received bonus shares and bonus units from Tech Mahindra Ltd. and JM Arbitrage Advantage Fund – Bonus options. The assessee was given a show cause as to why the value of these bonus shares and bonus units should not be added u/s 56(2)(vii)(c) of the Act. The assessee submitted that the provisions of section 56(2)(vii)(c) are not applicable to bonus shares / bonus units as these are received on capitalisation of profits. The value of the shares would remain the same, and there would be no increase in the wealth of the shareholders on account of bonus shares and his percentage of holding the shares in the company remains constant. Pursuant to bonus shares and bonus units, the share / unit gets divided in the same proportion for all the shareholders. There would be no receipt of any property by the shareholder and what is received is only split shares out of her own holding. Reliance was placed on the decision of the Supreme Court in the case of CIT vs. General Insurance Corporation Ltd [286 ITR 232 (SC)], which held that the issuance of bonus shares by a company does not result in any inflow of fresh funds and nothing comes to the shareholders. It was also submitted that the market price of any share after the bonus issue gets reduced almost in proportion to the bonus issue, and hence, there would be no increase in the market value of shares held by the assessee pursuant to the bonus issue. The overall wealth of a shareholder post-bonus or pre-bonus remains the same. Hence, the assessee received no additional benefit or income on the allotment of bonus shares, because it is only a split of his total rights in the wealth of a company, which remains the same even after the bonus issue.

The AO did not accept the contentions made by the assessee and taxed ₹36,10,63,656 u/s 56(2)(vii)(c) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who distinguished the decisions relied upon by the AO and relied on the decision of the Delhi Tribunal, dated 27th January, 2017, in the case of Meenu Satija vs. PCIT. The CIT(A) held that the AO had misread the judgment of the Bangalore Bench of the Tribunal in the case of Dr Rajan Pai.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD
The Tribunal held that bonus shares are issued on capitalisation of existing reserves of the company. It noted that the AO had not disputed that the overall wealth of the shareholder post-bonus or pre-bonus remains the same. Having held so, the Tribunal observed that it was wrong on the part of the AO to invoke section 56(2)(vii)(c) on the grounds that there is a double benefit derived by the assessee due to the bonus shares. The Tribunal noted that the issue is covered by the ratio of the decision of the Karnataka High Court in the case of PCIT vs. Dr. Ranjan Pai in ITA No. 501 of 2016, dated 15th December, 2020. The Tribunal held that the CIT(A) had rightly appreciated the contentions of the assessee.

The Tribunal not finding any infirmity in the order of the CIT(A) dismissed the grounds of appeal filed by the revenue and upheld the relief granted by the CIT(A) to the assessee.

BCAJ Admin

Section 68 of the Act — Long term capital gain treated by AO as unexplained cash credit.

18. Principal Commissioner of Income Tax – 31 vs. Indravadan Jain, HUF

[Income Tax Appeal No. 454 OF 2018; Dated: 12th July, 2023; A.Y.: 2005-06; (Bom.) (HC)]

Section 68 of the Act — Long term capital gain treated by AO as unexplained cash credit.

Assessee had shown sale proceeds of shares in scrip RamkrishnaFincap Ltd (RFL) as long-term capital gain and claimed exemption under the Act. The Respondent had claimed to have purchased this scrip at ₹3.12 per share in the year 2003 and sold the same in the year 2005 for ₹155.04 per share. It was AO’s case that investigation revealed that the scrip was a penny stock and the capital gain declared was held to be accommodation entries. A broker BasantPeriwal & Co. (the said broker) through whom these transactions have been effected had appeared and it was evident that the broker had indulged in the price manipulation through a synchronised and cross-deal in the scrip of RFL. SEBI had also passed an order regarding irregularities and synchronised trades carried out in the scrip of RFL by the said broker. In view thereof, the Assessee’s case was reopened under Section 148 of the Act.

The AO did not accept the Respondent’s claim of long-term capital gain and added the same to the Assessee’s income under Section 68 of the Act. While allowing the appeal filed by the Assessee, the CIT[A] deleted the addition made under Section 68 of the Act.

The Tribunal while dismissing the appeals filed by the Revenue observed on facts that these shares were purchased by the Assessee on the floor of the Stock Exchange and not from the said broker, deliveries were taken, contract notes were issued and shares were also sold on the floor of Stock Exchange.

The Honourable High Court observed that the CIT[A] and ITAT had observed that the AO himself has stated that SEBI had conducted an independent enquiry in the case of the said broker and in the scrip of RFL, through whom the Assessee had made the said transaction, and it was conclusively proved that it was the said broker who had inflated the price of the said scrip in RFL. The lower authorities also did not find anything wrong in the Assessee doing only one transaction with the said broker in the scrip of RFL. The lower authorities concluded that the Assessee brought 3000 shares of RFL, on the floor of the Kolkata Stock Exchange through a registered share broker. In pursuance of the purchase of shares, the said broker had raised an invoice and the purchase price was paid by cheque and the Assessee’s bank account has been debited. The shares were also transferred into the Assessee’sDemat Account where it remained for more than one year. After a period of one year, the shares were sold by the said broker on various dates in the Kolkata Stock Exchange. Pursuant to the sale of shares, the said broker had also issued contract notes cum bill for the sale, and these contract notes and bills were made available during the course of Appellate proceedings. On the sale of shares, the Assessee effected delivery of shares by way of Demat instructions slip and also received payment from the Kolkata Stock Exchange. The cheque was deposited in the Assessee’s bank account. In view thereof, it was found that there was no reason to add the capital gains as unexplained cash credit under Section 68 of the Act. The ITAT therefore, rightly concluded that there was no merit in the appeal. In view thereof, the Appeal of Revenue was dismissed.

BCAJ Admin

Section 37: Business expenditure — Commission payment — Wholly and exclusively for the purpose of the business — Revenue cannot sit in judgment over the assessee to come to a conclusion on how much payment should be made for the services received by the Assessee.

16. The Indian Hume Pipe Co. Ltd Construction House vs. Commissioner of Income Tax, Central II
[ITXA No. 744 OF 2002; Dated: 31st August, 2023; (Bom.) (HC)]

Section 37: Business expenditure — Commission payment — Wholly and exclusively for the purpose of the business — Revenue cannot sit in judgment over the assessee to come to a conclusion on how much payment should be made for the services received by the Assessee.

The Appellant-Assessee is a limited company listed on the stock exchange and is engaged mainly in the business of manufacturing and sale of R.C.C. Pipes, Steel Pipes etc., which are required for water supply and drainage systems. In the course of the assessment proceedings, the Appellant filed details of commission paid amounting to Rs. 26,90,104. The Appellant also filed copies of the agreements with the aforesaid parties and justified the allowability of the commission payment as business expenditure incurred in the course of its business. The Assessing Officer disallowed a sum of Rs. 22,89,941 on account of commission payment claimed as a deduction by the Appellant-Assessee.

The Assessing Officer disallowed the whole amount with respect to some parties and balance parties; the Assessing Officer allowed only 1/3rd as deductible expenditure and disallowed balance 2/3rd on the ground that the entire payment cannot be considered as laid out wholly and exclusively for the purpose of the business because neither the Appellant nor the recipients of commission could show that orders were procured with their assistance.

The Commissioner of the Income Tax (Appeals) disposed of the said appeal. With respect to ground relating to the disallowance of commission payment, the Commissioner (Appeals) followed his own order for the A.Y. 1985-86 and allowed the whole of the amount which was disallowed by the Assessing Officer, that is, Rs. 22,89,941.

Being aggrieved by the aforesaid order, the Respondent-Revenue filed an appeal to the Tribunal. The Tribunal disposed of the said appeal relating to the commission payment, and the Tribunal restricted disallowances to 2/3rd of the total commission. With respect to one party, the Tribunal directed to give relief of 1/3rd of the amount and with respect to other remaining parties, the Tribunal confirmed the disallowance made by the Assessing Officer on the ground that the Appellant-Assessee did not furnish any evidence in support of services rendered by these commission agents. The Tribunal further observed that there should have been a lot of correspondence between the Appellant-Assessee and the recipient of commission and in the absence of any evidence in this regard, the disallowance made by the Assessing Officer was justified. Being aggrieved by the Tribunal’s order, the Appellant-Assessee filed the appeal on a substantial question of law before the Hon. High Court.

The Appellant-Assessee consolidated appeals for A.Ys. 1986-87, 1987-88 and 1988-89 against common order passed by the Income Tax Appellate Tribunal, dated 18th January, 2002, was admitted on the following substantial question of law:

“Whether on the facts and in the circumstances of the case, the Appellate Tribunal’s conclusion that the commission agents had not rendered services to the Appellant company to warrant payment of commission is based on relevant and valid material and is sustainable in law?”

The Appellant-Assessee further contended that the commission agents are not related to the Appellant and further they have also produced the commission agreements with these agents in the course of the assessment proceedings. The payments have been made through a banking channel and there is no allegation that payments made to the commission agent have come back to the Appellant. The Appellant further submitted that the nature of services is such that there would not be any documentary evidence in support thereof.

The Respondent-Revenue contended that the Appellant-Assessee has failed to furnish any evidence to show that services have been rendered and therefore, the Assessing Officer was justified in disallowing the commission. The Respondent also brought to the notice of the Court Explanation 1 to Section 37(1) of the Act which was introduced by the Finance No. 2 Act of 1998 with retrospective w.e.f. 1st April, 1962. However, he fairly submitted that in the present appeal, the case of the Revenue is not based on Explanation.

The Hon. High Court held that the Assessing Officer, with respect to 4 parties, disallowed 2/3rd of the commission payment on the ground that the Appellant-Assessee could not furnish evidence about the services having been rendered. With respect to 3 parties, the AO disallowed the whole of the commission payment on the ground that they were acting as sub-contractors to the Appellant-Assessee and therefore no question arises to make payment of commission to these parties. With respect to 1, there was a discrepancy in the figures paid by the Appellant-Assessee and confirmed by the recipient and therefore the full amount was disallowed. The said disallowance was fully deleted by the First Appellate Authority. The Hon. Court observed that the Assessing Officer and the Tribunal both have not fully disallowed the commission payment but as partly allowed (1/3rd) and partly disallowed (2/3rd). If that be so, then the lower authorities have accepted the rendering of service by the commission agent and it is only on that basis that 1/3rd came to be allowed by the Assessing Officer and the Tribunal. The Court observed that the services are either rendered or not rendered and the Assessing Officer and the Tribunal having allowed partly the commission payment clearly indicate that both the authorities have accepted that the services have been rendered. The part disallowance confirmed by the Tribunal and the Assessing Officer would then amount to the Revenue venturing into the quantum of payment whether the commission payment was reasonable for rendering the services, which course of action, in the facts of the present case, is not permissible under the Act because the transaction is between unrelated parties. It is a settled position that the Revenue cannot sit in judgment over the assessee to come to a conclusion on how much payment should be made for the services received by the Appellant-Assessee. Therefore, the Tribunal was not justified in confirming the disallowance of 2/3rd as made by the Assessing Officer and allowing the relief of only 1/3rd of the expenses.

The Court further noted that there was no allegation made in the assessment order of any flow back of the commission payment by the commission agent to the Appellant-Assessee. The commission agents had confirmed the receipt of the commission. The payments had been made through banking channels. Therefore, even on this account, the genuineness of the payment cannot be doubted.

The AO and the Tribunal were not justified in bifurcating the commission payment between the work done for assisting in getting the tender and the follow up action for obtaining the payment. The agreement has to be read as a whole and merely because the payment of the commission is deferred in tranches, it could not be said that partly the payments are justified and partly are not justified. The action of the Assessing Officer and the Tribunal on this account would amount to rewriting of the agency agreement which is not permissible. Therefore, the finding of the officer and the Tribunal for disallowing part of the commission payment on the above basis was also not justified.

The Court further observed that the Appellant-Assessee was in the business, which inter alia involves
contracts / works awarded by the public sector/government, which necessitates the Appellant to apply for various tenders issued by the public sector co. / government across the country. To apply for such public tenders the Appellant is required to engage the services of agents. As per the commission agency agreement, the services rendered by the commission agent are for supplying information for working out the tender and to give information about the competitive tenders. The said agreement further requires the commission agent to keep the Appellant-Assessee informed about various clarifications required by the companies who floated the tenders. The role of the commission agent does not stop at this, but if the Appellant-Assessee gets the contract, then the commission agent has to follow up with these corporations for realising the payments on account of bills raised by the Appellant-Assessee. It is for such composite services to be rendered by the commission agent that the Appellant-Assessee makes payment of the commission.

The Court observed that merely because the contracts awarded to the Appellant are by Government / Public Corporations does not mean that the Appellant-Assessee cannot obtain services of the commission agents to assist them in the tendering process and for the follow-up action for recovery of the money. For the Appellant, it is fully a commercial activity and engaging expert/specialised services is under a written contract entered between the commission agents and the Appellant. It was not the case of the Revenue that there is any legal prohibition for the Appellant-Assessee to avail services of such commission agents. It was also not the case of the Revenue that these commission agents within the meaning of the Act are entities/persons related to the Appellant-Assessee and/or they are government employees. Therefore, it was the business prerogative of the Appellant-Assessee as to whose services they should engage in the course of its business and on what terms and conditions. Most significantly, the fact that the Assessing Officer and the Tribunal have allowed part of the commission payment for the purpose of business also indicates that the Revenue has accepted the services rendered and this part of expenditure in that regard was held to be allowable. There cannot be a contradictory course of action as the Revenue needs to be consistent.

It was true that it is for the Assessing Officer to decide, whether, any commission paid by the Appellant-Assessee to his agents is wholly or exclusively for the purpose of his business and the mere fact that the Appellant-Assessee establishes the existence of an agreement between him and his agent and the fact of actual payment, the discretion of an officer to consider, whether such expenditure was made exclusively for the purpose of the business is not taken away. The expenditure incurred must be for commercial expediency. However, in applying for the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, the reasonableness of the expenditure has to be judged from the businessman’s point of view and not from the Revenue’s perspective. In view thereof, the appeal of the Assessee was allowed.

BCAJ Admin

Section: 276B r.w.s 278B of the Act — Offence and prosecution — Prosecution to be at the instance of Chief Commissioner / Commissioner (Compounding of Offences) — Whether there is no limitation provided under sub-section (2) of section 279 for submission or consideration of compounding application.

17. Sofitel Realty LLP vs. Income Tax Officer (TDS) – Ward 2(2)(4)

[WP (L) No. 14574 OF 2023

Dated: 18th July, 2023; (Bom.) (HC)]

Section: 276B r.w.s 278B of the Act — Offence and prosecution — Prosecution to be at the instance of Chief Commissioner / Commissioner (Compounding of Offences) — Whether there is no limitation provided under sub-section (2) of section 279 for submission or consideration of compounding application.

The Petitioner, a Limited Liability Partnership firm, for the period of A.Y. 2009-2010, for various reasons did not deposit the TDS amount that it had deducted with the income tax authorities. Petitioner deposited those TDS amounts on or about 23rd March, 2010 beyond the time provided for deposit. This was before Petitioners even received a show cause notice from the department. Thus there was no outstanding amount of TDS.

Petitioner and its partners received the show cause notice, dated 30th November, 2011 calling upon Petitioners to show cause as to why prosecution against them be not lodged for an offence under Section 276B read with Section 278B of the Act. On 26th March, 2012, Petitioners filed a compounding application, dated 5th March, 2012, (first application) in the prescribed format. As the Petitioners failed to deposit the compounding fees in time, therefore, the Petitioner’s application, dated
5th March, 2012, came to be rejected.

On 26th August, 2013, PCIT passed a sanction order for initiation of prosecution against Petitioners. A complaint was filed before the Metropolitan Magistrate, 38th Court at Esplanade under Section 276B read with Section 278B of the Act. On 14th July, 2014, Petitioner no.1 paid the entire compounding fees of ₹7,39,984/- as was indicated by the department. On 8th October, 2015, Petitioner filed a fresh compounding application (second application) and also agreed to pay any further or additional compounding fees as may be directed. Almost three years later, on 21st September, 2018, the Petitioner received a letter, dated 17th September, 2018, annexing the copy of the order, dated 17th July, 2013. The Petitioner addressed a letter requesting the department to provide a copy of the order passed in the second application. In response, the Petitioner received a letter, dated 13th April, 2023.

In the affidavit in reply filed through one Shashi Shekhar Singh, Income Tax Officer (TDS)-2(2)(4) Mumbai, affirmed on 7th July, 2023, it is stated that compounding application, dated 8th October, 2015, is barred by limitation of time as per the compounding guidelines, dated 23rd December, 2014 issued by CBDT. In paragraph 8(vii), it is provided that in respect of offences for which complaint had been filed with competent court 12 months prior to the receipt of the application for compounding, such offences generally not be compounded. According to the affiant, since a complaint had been filed on 20th August, 2013, and the fresh compounding application, dated 8th October, 2015, was beyond the period of 12 months, the application is null and void.

The Honourable Court observed that it is not for the Income Tax Officer to decide the compounding application. Section 279(2) of the Act provides that any offence under chapter XXII of the Act may, either before or after the institution of proceedings, be compounded by the Principal Chief Commissioner of Income Tax or Commissioner of Income Tax or Principal Director General of Income Tax or Director General. The Income Tax Officer has no power to even state that the application is null and void.

There is no limitation provided under sub-section (2) of Section 279 of the Act for submission or consideration of the compounding application. What is relied upon by the Income Tax Officer is the Guidelines issued by the Central Board of Direct Taxes (CBDT). CBDT by the Guidelines cannot provide for limitation nor can it restrict the operation of sub-section (2) of Section 279 of the Act. The Guidelines are subordinate to the principal Act or Rules, it cannot override or restrict the application of specific provisions enacted by the legislature. The Guidelines cannot travel beyond the scope of the powers conferred by the Act or the Rules. It cannot contain instructions or directions curtailing a statutory provision by prescribing the period of limitation where none is provided by either the Act or the rules framed thereunder. Moreover, the explanation merely explains the main section and is not meant to carve out a particular exception to the contents of the main Section. The Court observed that just because the first application was rejected for default, does not mean the second application should be rejected.

The Court further observed that the compounding application cannot be rejected on the grounds of delay in filing the application. Moreover, there is also no restriction on the number of applications that could be filed. The only requirement under sub-section (2) of Section 279 of the Act is that the complaint filed should be still pending.

The Court directed the compounding application to be disposed of within eight weeks, the proceedings pending before the Additional Chief Metropolitan Magistrate, 38th Court, Mumbai shall remain stayed until the department disposes of the Petitioner’s compounding application, dated 8th October, 2015.

BCAJ Admin

Revision — Powers of Commissioner — Bonafide mistake by assessee including exempt income in the computation of income — Time for filing revised return barred — No restriction on the power of Commissioner to grant relief — Orders rejecting applications of the assessee for revision unsustainable — Matter remanded to Commissioner for reconsideration.

50. Ena Chaudhuri vs. ACIT

[2023] 455 ITR 284 (Cal.)

A.Ys. 2007–08 and 2008–09

Date of order: 18th January, 2023

Section 264 of ITA 1961

Revision — Powers of Commissioner — Bonafide mistake by assessee including exempt income in the computation of income — Time for filing revised return barred — No restriction on the power of Commissioner to grant relief — Orders rejecting applications of the assessee for revision unsustainable — Matter remanded to Commissioner for reconsideration.

For the A.Ys. 2007–08 and 2008–09 the assessee inadvertently offered to tax exempted income relating to dividend and long-term capital gains and realized this only upon receipt of the order passed u/s. 143(1) of the Income-tax Act, 1961. Since the filing of the original return itself was delayed she could not file a revised return u/s. 139(5) for claiming a deduction of the exempted income and therefore, she filed revision applications u/s. 264 before the Commissioner. The Commissioner held that since the orders passed u/s. 143(1) were not erroneous, that since the original returns of income were filed beyond the specified dates the assessee was debarred from filing revised returns and dismissed the revision applications.

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

“i) On the facts, the Commissioner had committed an error in law in dismissing the revision applications of the assessee filed u/s. 264 by refusing to consider on the merits the claim of the assessee that the income in question was exempted from tax and not liable to tax and was included in her return as taxable income due to a bona fide mistake and which she could not rectify by filing revised return since original return itself was belatedly filed and that she had no other remedy except filing of revision applications u/s. 264.

ii) The Commissioner while refusing to consider the claim of the assessee had misinterpreted Goetze (India) Ltd and also the scope of jurisdiction conferred upon him u/s. 264 by equating it with that of the jurisdiction of the Assessing Officer in considering the claim of any allowance or deduction claimed by an assessee in the return of income or without filing any revised return.

iii) The orders of the Commissioner u/s. 264 rejecting the revision applications of the assessee for the A.Ys. 2007–08 and 2008–09 were unsustainable and accordingly set aside. The matters were remanded back to the Commissioner for reconsideration.”

BCAJ Admin

Recovery of tax — Stay of demand — Application for stay pleading financial hardship — Plea should be considered and speaking order passed thereon.

49. Tungabhadra Minerals Pvt Ltd vs. Dy. CIT
[2023] 455 ITR 311 (Bom.)
A.Y. 2008–09: Date of order: 30th September, 2022

Recovery of tax — Stay of demand — Application for stay pleading financial hardship — Plea should be considered and speaking order passed thereon.

Pursuant to search and seizure against the assessee u/s. 132 of the Income-tax Act, 1961, the assessment for A.Y. 2008-09 was completed u/s. 143(3) r.w.s. 153A of the Act after making an addition of R264.59 crores and consequently demand of R239.54 crores was raised. The assessment order was challenged in an appeal before the CIT(A) which was pending.

The assessee filed a stay application on 30th July, 2021 requesting for a stay of demand on the ground that the assessment order was bad and illegal. The assessee also pleaded financial difficulty. The assessing officer rejected the assessee’s application for stay of demand vide order dated 11th August, 2021 without assigning any reasons.

The assessee made an application before the Principal Commissioner largely on the grounds of financial stringency. However, vide order dated 17th November, 2021, the Principal Commissioner did not accept the plea of the assessee and directed the assessee to make payment of 10 per cent of the demand on or before 15th December, 2021. While passing the order, the Principal Commissioner did not deal with the assessee’s request for a stay on the basis of financial distress. Therefore, the assessee once again on 6th December, 2021 filed application before the Principal Commissioner categorically pointing out financial stringency and prayed for stay of demand. The application was once again rejected by the Principal Commissioner vide his order dated 29th December, 2021 and concluded that 10 per cent of the tax was required to be paid by the assessee.

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

“i) In an application for stay of demand, the aspect of financial hardship is one of the grounds which is required to be considered by the authority concerned and the authority concerned should briefly indicate whether the assessee is financially sound and viable to deposit the amount or the apprehension of the Revenue of non-recovery later is correct warranting deposit.

ii) In the assessee’s application dated 30th July, 2021 the assessee had asserted a categorical case of financial hardship. However, the Assessing Officer rejected the assessee’s application for stay of the demand, without assigning any reasons. The assessee approached the Principal Commissioner praying for the stay of the demand, reiterating the specific grounds in that regard contending that the Assessing Officer had not applied his mind to the aspect of financial stringency. However, the fate of the petition before the Principal Commissioner was not different. Although other issues on the merits had been considered by the Principal Commissioner, there were no reasons in the context of financial hardship, in both the orders passed by the Principal Commissioner being orders dated 11th August, 2021 and an order dated 29th December, 2021. Both orders were not valid.

iii) The Principal Commissioner of Income-tax is directed to hear the petitioner(s) on the stay application on the specific plea of the petitioner in regard to financial stringency and after granting an opportunity of hearing to the petitioner(s), pass an appropriate order on such issue. Let such exercise be undertaken as expeditiously as possible and in any case within two months from today.

iv) In the meantime, till a fresh decision on such an issue is taken, the impugned demands in question, relevant to these petitions, shall not be acted upon by the respondents.”

BCAJ Admin

Recovery of tax — Interest for failure to pay tax — Waiver of interest — Effect of 220(2A) — Advance tax paid in time but mistakenly in the name and PAN of minor son — Amount credited to assessee’s account — Assessee co-operating in inquiry relating to assessment and recovery proceedings — Assessee entitled to complete waiver of interest.

48. FuaadMusvee vs. Principal CIT

[2023] 455 ITR 243 (Mad.)

A.Ys. 2009-10 and 2011-12

Date of order: 9th February, 2023

Section 220(2A) of ITA 1961

Recovery of tax — Interest for failure to pay tax — Waiver of interest — Effect of 220(2A) — Advance tax paid in time but mistakenly in the name and PAN of minor son — Amount credited to assessee’s account — Assessee co-operating in inquiry relating to assessment and recovery proceedings — Assessee entitled to complete waiver of interest.

The assessee, an individual, filed his returns of income for A.Y. 2009-10 declaring a total income of ₹88,37,380 and for A.Y. 2011-12 declaring a total income of ₹87,10,242. In the return of income, the assessee included the income of his minor son as per the provisions of section 64 of the Act. However, out of abundant caution, the assessee also filed the return of his minor son separately. The advance tax on the minor’s income was paid under the PAN of the minor son. The assessee, in his return of income, claimed credit of taxes paid of ₹21,27,450 and ₹25,41,037 which included the advance tax paid and tax deducted at source on account of the minor son also.

The return was processed u/s.143(1) of the Income-tax Act, 1961 and demand was raised since the credit for advance tax paid by the assessee in the PAN of the minor son was not granted. The assessee was informed that credit cannot be given for the amount paid under a different PAN and was asked to file a rectification application u/s. 154 of the Act.

However, since the assessee had paid the tax amounts, the assessee claimed a waiver of tax amounts and a total waiver of interest of ₹12,20,380 and ₹8,15,179 u/s. 220(2) of the Act for the period 29th December, 2012 to 25th November, 2018 as the assessee had paid the tax in 2011 itself, albeit under the PAN of the minor son. It was the contention of the assessee that since the amount was with the Department for all these years, there was no basis for the demand of interest. The Principal Commissioner, vide order dated 31st March, 2022 granted only a 20 per cent waiver of interest and directed the assessee to pay the balance of 80 per cent.

Aggrieved by the order of the Principal Commissioner, the assessee filed a writ petition before the Madras High Court. The High Court allowed the writ petition and held as follows:

“i) There was no lapse on the part of the assessee in the payment of his taxes and he had not committed any default; the taxes deposited under the assessee’s minor son’s account were duly credited to the assessee’s account immediately on the date of remittance. The petitioner had certainly suffered genuine hardship for no fault of his. Hence, interest could not be levied u/s. 220(2) of the Act when the advance taxes were in fact paid on time though mistakenly in the assessee’s minor son’s permanent account number.

ii) It was also not the case of the Department that the assessee did not cooperate in any enquiry relating to the assessment or any proceedings for recovery of the amount due from him. The Principal Commissioner had granted a partial waiver of interest to the assessee at 20 per cent without giving any reason as to how he arrived at that rate. There was no finding given by the Principal Commissioner that the assessee had not satisfied the three conditions required for waiver of interest u/s. 220(2A). He ought to have granted full waiver of the interest to the assessee, but, instead, erroneously had granted only a 20 per cent. waiver by non-speaking orders.”

BCAJ Admin

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.

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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.”

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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.

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[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.

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‘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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