BCAJ | Bombay Chartered Accountant Journal

Once a statutory provision provides explicitly that the Tribunal can only grant a stay subject to a deposit of not less than 20 per cent of the disputed demand, or furnishing of security thereof, it is not open to the Tribunal to grant a stay in violation of these basic statutory provisions.

Law itself visualizes that the payment of 20 per cent of the disputed demands, impugned in the appeal before the Tribunal, cannot be viewed as a condition precedent for grant of stay by the Tribunal, in as much as when the applicant “furnishes security of equal amount in respect thereof”, the Tribunal can exercise its powers of granting a stay.

47. Hindustan Lever Ltd. vs. DCIT
SA No. 116/Mum/2022 in ITA 2125/Mum./2022
(Mumbai-Trib.)
A.Y.: 2018-19
Date of order: 26th September, 2022
Section: 254(2A)

Once a statutory provision provides explicitly that the Tribunal can only grant a stay subject to a deposit of not less than 20 per cent of the disputed demand, or furnishing of security thereof, it is not open to the Tribunal to grant a stay in violation of these basic statutory provisions.

Law itself visualizes that the payment of 20 per cent of the disputed demands, impugned in the appeal before the Tribunal, cannot be viewed as a condition precedent for grant of stay by the Tribunal, in as much as when the applicant “furnishes security of equal amount in respect thereof”, the Tribunal can exercise its powers of granting a stay.

FACTS

By this stay application, the assessee sought a stay on the collection/recovery of the income-tax and interest demands aggregating to Rs. 172.47 crore raised by the AO in framing an assessment u/s 143(3) r.w.s. 144C(13) of the Act for the A.Y. 2018-19, which order has been impugned in an appeal before the Tribunal and out of which the assessee made not even a partial payment.

HELD

The Tribunal, after considering the decision of the Supreme Court in I.T.O. vs. M. K. Mohd. Kunhi [(1969) 71 ITR 815 (SC)], and the provisions of section 254(2A) as also the principle of harmonious construction as explained in the Principles of Statutory Interpretation by Justice G P Singh, held –

i) the Hon’ble Supreme Court’s inferring the Tribunal’s power to grant the stay, in the absence of specific statutory authority to that effect, is one thing, and the Tribunal’s dealing with a power statutorily recognised, even if implicitly, is quite another thing;

ii) once a statutory provision specifically provides that the Tribunal can only grant a stay subject to a deposit of not less than 20 per cent of the disputed demand, or furnishing of security thereof, it is not open to the Tribunal to grant a stay in violation of these basic statutory provisions;

iii) the powers of the Tribunal u/s 254(1) to grant a stay cannot be so interpreted to make the first proviso to Section 254(2A) redundant;

iv) if it is held that the Tribunal’s power of granting a stay, even after the enactment of the first proviso to Section 254(2A) remains unfettered in as much as a stay can indeed be granted even in clear disharmony with the statutory conditions set out under the first proviso to section 254(2A), the requirement with respect to the partial payment of demand or furnishing of security in relation thereof will thus be redundant;

v) the law as it stood at the point of time when Mohd. Kunhi’s judgment was delivered has undergone a significant change vis-à-vis the position prevailing as of now, and, therefore, the observations made by the Hon’ble SC are now to be read in the light of the subsequent enactment of the law;

vi) when the statute does not give the powers to the Tribunal to grant a blanket stay, nor the Hon’ble Courts above hold so, it cannot be open to the Tribunal to hold that the Tribunal can grant a blanket stay – clearly contrary to the scheme of the law as visualised under the first proviso to section 254(2A);

vii) no matter how fair, just or desirable it is to grant such a blanket stay, we have to live with this reality;

viii) an institution like this Tribunal, which is itself a creature of the Income-tax Act, 1961, has to perform its functions within the limitations that the Income-tax Act, 1961 has imposed on its functioning;

ix) law itself visualizes that the payment of 20 per cent of the disputed demands, impugned in the appeal before the Tribunal, cannot be viewed as a condition precedent for the grant of stay by the Tribunal in as much as when the applicant “furnishes security of equal amount in respect thereof”, the Tribunal can exercise its powers of granting stay; and

x) the issues of the reasonableness of the nature of security cannot be at the unfettered discretion of the AO, and it must meet judicial scrutiny as and when required.

Following the decision of the Bombay High Court in the case of Grasim India Ltd. Vs. DCIT [(2021) 126 taxmann.com 106 (Bom.)], the Tribunal granted a stay on collection/recovery of the disputed demand of Rs. 172.47 crore on the condition that the assessee shall provide a reasonable security for an amount of Rs. 35 crore or more, within two weeks from the date of receipt of this order.

It further held that in case the AO is not satisfied with the security offered by the assessee, the AO shall pass a detailed speaking order setting out his position on the issue and give a two-week notice to the assessee before initiating any coercive recovery proceedings. The assessee can pursue appropriate legal remedies, if so advised, against the stand of the AO.

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No adjustment can be made u/s 115JB in respect of interest on income-tax refund, which as per consistent practice, was not credited to the profit & loss account but was reduced from advance income-tax paid under ‘loans and advances’

46. Reliance Industries Ltd. vs. ACIT
[2022] 143 taxmann.com 194 (Mumbai – Trib.)
A.Y.: 2016-17
Date of order: 14th October, 2022
Sections: 244A, 115JB

No adjustment can be made u/s 115JB in respect of interest on income-tax refund, which as per consistent practice, was not credited to the profit & loss account but was reduced from advance income-tax paid under ‘loans and advances’.

FACTS

For the year under consideration, the assessee, in its return, offered interest income on an income tax refund of Rs. 266,45,06,765, following the Special Bench decision in Avada Trading Company (Pvt) Ltd vs. ACIT (100 ITD 131). The interest income on the income tax refund was revised to Rs. 265,38,24,122 due to orders passed subsequently.

During the assessment proceedings, the assessee was asked to show cause as to why interest on income tax refund ought not to be added to book profit u/s 115JB of the Act. In reply, the assessee submitted that there was no certainty with the quantum of interest on income tax refund, as the assessee as well as the Department are in appeal on multiple issues before the appellate forums. Thus, no finality has been reached with respect to the assessment. Therefore, interest on the income tax refund was not credited to the profit and loss account as per the policy consistently followed by the assessee. The assessee further submitted that, once the financial statements have been prepared under the Companies Act following the accounting policies and accounting standards, the book profit needs to be computed as per the profit and loss account since the financial statements cannot thereafter be altered for making adjustments.

The AO disagreed with the submissions of the assessee and held that once the income tax refund has been issued,and the same is accounted in the books though not in the profit and loss account directly, the same ought to be considered while working out the book profits as per the provisions of section 115 JB. Accordingly, the interest on income tax refund determined at Rs. 266,45,06,765 was added, inter-alia, for the computation of book profit u/s115 JB.

Aggrieved, the assessee preferred an appeal to CIT(A), who dismissed the appeal filed by the assessee on this issue and held that when the assessee has credited the refund, it should have been credited to the correct account and routed through the profit and loss account.

Aggrieved, the assessee preferred an appeal to the Tribunal contending that any adjustment to book profits can only be made in respect of items provided in Explanation 1 to Section 115JB(1) of the Act.

HELD

The Tribunal noted that the amount of interest on incometax refund has been reduced by the assessee from advance income-tax shown under the head `loans and advances’. However, while filing the return of income, the said interest has been offered to tax under the normal provisions of the Act. Having noted the decision of the Supreme Court in the case of Apollo Tyres Ltd. vs. CIT [(2002) 255 ITR 273 (SC)], the Tribunal held that once the assessee’s accounts have been maintained in accordance with the Companies Act, and the same have also been scrutinised and audited by the statutory auditor, in the absence of any material to negate these facts, the AO. has limited power u/s 115JB of the Act to adjust to book profit only in respect of the items provided in Explanation 1 to section 115 JB (1) of the Act.

As regards to the submission of ld. DR that the information regarding interest on income tax refund not being included in the profit and loss account has not been disclosed by the assessee in its annual accounts, and thus could not be said to be approved in the AGM or filed with the ROC and other statutory authorities, the Tribunal held that it observed no evidence being brought on record to the effect that due to such non-disclosure, the accounts of the assessee were not maintained as per the provisions of Companies Act and other relevant rules and regulations. It also noted that no such objection by the statutory auditor or ROC or other statutory authority had been brought to its notice.

The Tribunal held that there is no dispute on the fact that the assessee has offered interest on an income tax refund to tax while filing its return of income, and the same has also been assessed under the standard provisions of the Act. The Tribunal found no merit in addition to interest on income tax refund for computing the book profit u/s 115 JB of the Act. The Tribunal directed the AO to delete the same.

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Stay of demand – open to the tax authorities to grant stay against recovery of demand on deposit of a lesser amount than 20 per cent of the disputed demand, pending disposal of appeal

19. Dr. B L Kapur Memorial Hospital vs. CIT (TDS)
W.P.(C) 16287 & 16288 of 2022 (Del)(HC)
Date of order: 25th November, 2022
A.Ys.: 2013-14 and 2014-15

Stay of demand – open to the tax authorities to grant stay against recovery of demand on deposit of a lesser amount than 20 per cent of the disputed demand, pending disposal of appeal

The petitioner/assessee challenged the orders dated 6th September, 2022 and 7th November, 2022, rejecting the applications filed by the petitioner and directing the petitioner to make payment to the extent of 20 per cent of the total tax demand arising u/s 201(1) of the Income Tax Act, 1961, for A.Ys. 2013-14 and 2014-15.

The petitioner states that respondent No. 2 (AO) passed orders dated 30th March, 2021 u/s 201(1)/201(1A) of the Act holding the petitioner to be an ‘assessee-in-default’ for short deduction of tax at source and total tax liability was computed at Rs. 16,47,35,035 and Rs. 20,09,39,099 for A.Ys. 2013-14 and 2014-15, respectively. Aggrieved by the orders, the petitioner filed appeals before CIT(A) along with an application seeking stay on the recovery of demand.

The petitioner states that the respondent No. 2 (AO) passed the orders dated 6th September, 2022, whereby the stay applications filed by the petitioner were dismissed in a non-speaking manner and the petitioner was directed to pay 20 per cent of the disputed demand. The petitioner filed applications dated 20th September, 2022, before respondent No.3 for review of the stay orders dated 6th September, 2022. He, however, states that the impugned orders dated 7th November, 2022 were passed rejecting the stay applications of the petitioner without dealing with the contentions raised by the petitioner.

The petitioner further states that respondents while disposing of the petitioner’s applications have failed to appreciate that the condition under the impugned Office Memorandum dated 31st July, 2017, read with the Office Memorandum dated 29th February, 2016, stating that, “the assessing officer shall grant stay of demand till disposal of the first appeal on payment of twenty per cent of the disputed demand”, is merely directory in nature and not mandatory. In support, it relied on the decision of the Supreme Court in Pr. CIT vs. LG Electronics India (P) Ltd., 303 CTR 649 (SC), wherein it has been held that it is open to the tax authorities, on the facts of individual cases, to grant a stay against the recovery of demand on a deposit of a lesser amount than 20 per cent of the disputed demand, pending disposal of the appeal.

The Hon. Court observed that the requirement of payment of 20 per cent of disputed tax demand is not a pre-requisite for putting in abeyance recovery of demand pending first appeal in all cases. The said pre-condition of deposit of 20 per cent of the demand can be relaxed in appropriate cases. Even the Office Memorandum dated 29th February, 2016 gives instances like where an addition on the same issue has been deleted by the appellate authorities in the previous years or where the decision of the Supreme Court or jurisdictional High Court is in favour of the assessee. The Supreme Court in the case of PCIT vs. M/s LG Electronics India Pvt. Ltd. (supra) held that tax authorities are eligible to grant a stay on deposit of amounts lesser than 20 per cent of the disputed demand in the facts and circumstances of a case.

The Court held that, the impugned orders are nonreasoned orders. Neither the AO nor the Commissioner of Income Tax have either dealt with the contentions and submissions advanced by the petitioner nor considered the three basic principles i.e. the prima facie case, balance of convenience and irreparable injury while deciding the stay application.

Consequently, the impugned orders and notices were set aside and the matters are remanded back to the respondent No.1- Commissioner of Income Tax for fresh adjudication in the application for stay after granting a personal hearing to the petitioner. No coercive action shall be taken by the respondents against the petitioner in pursuance to the demands arising from the impugned orders.

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Business expenditure – Corporate Social Responsibility (CSR) – Explanation 2 was inserted in Section 37 by Finance (No.2) Act, 2004 w.e.f. 1st April, 2015.

Pr. CIT – 7 vs. PEC Ltd.
ITA No. 268, 269 & 270 of 2022 (Delhi HC)
Date of order: 29th October, 2022
A.Ys.: 2013-14 to 2014-15
Section: 37 of ITA, 1961

Business expenditure – Corporate Social Responsibility (CSR) – Explanation 2 was inserted in Section 37 by Finance (No.2) Act, 2004 w.e.f. 1st April, 2015.

A common question of law arose for consideration in the appeals:“Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal [hereafter referred to as “Tribunal”] erred in allowing deduction of expenses undertaken under the Corporate Social Responsibility (CSR) endeavour under Section 37 of the Income Tax Act, 1961 [in short “Act”]?”

The expenses incurred by the two assessees in the A.Ys. 2013-14 to 2014-15 were disallowed by the AO in each of the assessment years detailed out hereunder:

Assessment Year

Amount of CSR expenditure

2013-2014

Rs. 3,79,19,732

2014-201

Rs. 5,32,92,063

2013-2014

Rs. 6,44,00,000

The Revenue contended that the assessees could have claimed a deduction u/s 37 of the Act only if all the conditions prescribed in the said provision were fulfilled. According to Revenue, the expenditure qua which deduction is claimed was not incurred wholly and exclusively for the purposes of carrying on the business or profession. It was the department’s contention that the funds utilized by the assessee to effectuate its CSR obligation involved the application of income and not an expense which had been incurred wholly and exclusively for the purposes of carrying on business.

In support of this plea, the department relied upon the amendment in Section 37(1) by insertion of Explanation 2. It was contented that Explanation 2 appended to subsection (1) of Section 37 is clarificatory in nature and, therefore, would be applicable qua the assessment years in issue concerning each of the respondents/assessees.

The Income Tax Appellate Tribunal had relied upon Circular No.1 dated 21st January, 2015 to reach a conclusion that the amendment brought about in Section 37(1) of the Act by way of Explanation 2 would not operate vis-à-vis the assessment years in issue.

The Hon’ble High Court referred and relied on the relevant parts of Section 37(1) and observed that a plain reading of the aforesaid extract of Section 37 would show that in order to claim deduction u/s 37, the expenditure incurred should be one that:

(i) D oes not fall in any of the provisions referred to therein, i.e. Sections 30 to 36.

(ii) S hould not be in the nature of a capital expenditure or personal expenses of the assessee.

(iii) And lastly, the expenditure should have been laid out or expended wholly or exclusively for the purposes of business or profession.

According to the Hon’ble Court, if these conditions are met, the expense incurred can be deducted while computing the income chargeable under the head ‘profits and gains of business or profession’.

In the instant case, the assessee has sought to seek the deduction of amounts spent to progress its CSR obligation and sought deduction against the income chargeable under the head ‘profits and gains of business or profession’. The Tribunal has opined that Explanation 2 inserted in Section 37(1) was prospective and therefore was not applicable in the assessment years in issue. It is required to be noted, that Explanation 2 was inserted in Section 37 via Finance (No.2) Act, 2004 w.e.f. 1st April, 2015. Furthermore, the Court noticed that, the memorandum published along with Finance (No.2) Bill 2014 clearly indicated that the amendment would take effect from 1st April, 2015 and, accordingly, would apply in relation to A.Y. 2015-2016 and the subsequent years.

This was plainly evident upon perusal of the extract from the memorandum:

“The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.”

This position was also exemplified in the circular dated 21st May, 2015 issued by the Central Board of Direct Taxes (CBDT). The relevant extract of the said circular is extracted hereafter:

“13.3 The provisions of section 37(1) of the Income-tax Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Income- tax Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, said section 37 has been amended to clarify that for the purposes of sub-section (1) of section 37 any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under said section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Income-tax Act shall be allowed as deduction under those sections subject to fulfilment of conditions, if any, specified therein.

13.4 Applicability:- This amendment takes effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.”

Thus, the Court observed that, if there was any doubt, the same has been removed both by the memorandum issued along with the Finance Bill, as well as the aforementioned circular issued by the CBDT.

Therefore, the contention of appellant/Revenue cannot be accepted. The appeals were accordingly disposed off.

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Search and seizure — Assessment of undisclosed income — Notice u/s 153A should be based on material seized u/s 132 or documents requisitioned u/s 132A.

71. Underwater Services Co. Ltd. and Anr. vs. ACIT
[2022] 448 ITR 691 (Bom.)
A.Y.: 2012-13
Date of order: 21st October, 2021
Sections: 132, 132A and 153A of ITA, 1961

Search and seizure — Assessment of undisclosed income — Notice u/s 153A should be based on material seized u/s 132 or documents requisitioned u/s 132A.

The assessee filed a writ petition and challenged the validity of the notice dated 29th November, 2018 issued u/s 153A of the Income-tax Act, 1961 on the grounds that the notice has been issued without jurisdiction. The assessee-petitioner contended that there is no incriminating material in possession of the AO and any notice u/s 153A can be issued only on the basis of incriminating material discovered during the course of the search.

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

“i) Although section 153A of the Income-tax Act, 1961, does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the Assessing Officer which can be related to the evidence found, it does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material.

ii) Obviously, an assessment has to be made u/s. 153A only on the basis of seized material. Issuance of a showcause notice is the preliminary step which is required to be undertaken. The purpose of a show-cause notice is to enable a party to effectively deal with the case made out by the respondent. Section 153A provides that an assessment has to be made under the section only on the basis of the seized material, and hence the notice should mention whether the seized material was u/s. 132 or books of account, other documents or any assets requisitioned u/s. 132A.

iii) The Department did not indicate in its notice what were the seized material u/s. 132 or books of account or other documents or any assets requisitioned u/s. 132A. The notice was bereft of any material. The Department had not mentioned in the notice the basis for issuing the notice u/s. 153A so that the assessee could comply with it as prescribed. The notice issued u/s. 153A was not valid.”

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Search and seizure — Assessment of undisclosed income — Meaning of “books of account” — Loose sheets and diaries do not constitute books of account — Assessment based only on evidence available in loose sheets and diaries — Not valid.

70. Sunil Kumar Sharma and Anr. vs. Dy. CIT
[2022] 448 ITR 485 (Kar.)
A.Ys.: 2012-13 to 2018-19
Date of order: 12th August, 2022
Sections: 127, 132 and 153C of ITA, 1961

Search and seizure — Assessment of undisclosed income — Meaning of “books of account” — Loose sheets and diaries do not constitute books of account — Assessment based only on evidence available in loose sheets and diaries — Not valid.

A search was conducted at the premises of the assessee and similar search also took place at premises of one R at New Delhi. During the search at the premises of R, certain diaries and entries relating to the affairs of the assessee were recovered and statements of both the assessee and R, came to be recorded. Notices were issued to the assessee u/s 153C of the Income-tax Act, 1961.

The assessee filed a writ petition and challenged the notice. The Karnataka High Court allowed the writ petition and held as under:

“i) S ection 132 of the Income-tax Act, 1961, enables seizure of books of account. “Book” ordinarily means a collection of sheets of paper or other material, blank, written, or printed, fastened or bound together so as to form a material whole. Loose sheets or scraps of paper cannot be termed ”book” for they can be easily detached and replaced. Section 34 of the Evidence Act, 1872 provides that entries in book of account, regularly kept in the course of business, are relevant whenever they refer to a matter into which the court has to inquire but such statements shall not alone be sufficient evidence to charge any person with liability. It is established in law that a sheet of paper containing typed entries and in loose form, not shown to form part of the books of account regularly maintained by the assessee or his business entities, do not constitute material evidence.

ii) The action taken by the Department against the assessee based on the material contained in the diaries and loose sheets were contrary to the law. In that view the notices issued u/s. 153C of the Act, based on the loose sheets and diaries were contrary to law, and are required to be set aside.”

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Reassessment — Powers of AO — Power to assess other income not mentioned in notice of reassessment — Power can be exercised only if notice is valid — Notice found to be invalid on basis of reasons given in it — Other income cannot be assessed on basis of invalid notice.

69. CIT(Exemption) vs. B. P. Poddar Foundation for
Education
[2022] 448 ITR 695 (Cal.)
A.Y.: 2009-10
Date of order: 13th September, 2022
Sections: 147 and 148 of ITA, 1961

Reassessment — Powers of AO — Power to assess other income not mentioned in notice of reassessment — Power can be exercised only if notice is valid — Notice found to be invalid on basis of reasons given in it — Other income cannot be assessed on basis of invalid notice.

For the A.Y. 2009-10, the scrutiny assessment order u/s 143(3) of the Income-tax Act, 1961 was passed on 1st March, 2011. Subsequently, pursuant to a survey u/s 133A, the assessment was reopened by issuing notice u/s 148 dated 13th March, 2016 for the reasons recorded that certain deposits of Rs. 59,42,709 represented income escaping assessment. In the reassessment order, the said amount was added as undisclosed income. Also, an amount of Rs. 3,65,97,000 was added as undisclosed income. Further, after taking into consideration the statements recorded from various persons who are said to have given donations for securing admission to professional colleges, the AO held that the assessee is not carrying out its activities as per the objects of the trust. Accordingly, the amount said to have been received as donation was added back to the income of the assessee u/s 69A.

The Commissioner (Appeals) deleted the addition of Rs. 59,42,709 but upheld the other additions. After taking note of the factual position, more particularly, that the addition of Rs. 59,42,709 which was made in the reassessment proceedings having been deleted by the Commissioner of Income-tax (Appeals), the Tribunal held that the reassessment on the heads which were not part of the reasons recorded for the reopening of the assessment is not sustainable. The Tribunal placed reliance on the decision of the Bombay High Court in CIT vs. Jet Airways (I.) Ltd. [2011] 331 ITR 236 (Bom) and the decision of the Delhi High Court in Ranbaxy Laboratories Ltd. vs. CIT [2011] 336 ITR 136 (Delhi). On the above grounds the appeal filed by the assessee was allowed.

Following questions were raised before the Calcutta High Court in the appeal filed by the Revenue:

“(i) Whether on the facts and circumstances as well as in law the Income-tax Appellate Tribunal was correct in law in holding that the other additions made in the order under section 147/143(3) of the Income-tax Act, 1961, which were not part of the reasons recorded for reopening the assessment were not sustainable in the eyes of law even after insertion of Explanation 3 to section 147 of the Act by the Finance (No. 2) Act, 2009 when the addition was made by the Assessing Officer on the ground of reopening?

(ii) Whether on the facts and circumstances of the case the learned Income-tax Appellate Tribunal correctly interpreted the decision reported in the case of CIT v. Jet Airways (I.) Ltd. reported in [2011] 331 ITR 236 (Bom) and Ranbaxy Laboratories Ltd. v. CIT reported in [2011] 336 ITR 136 (Delhi) on facts in the instant case?”

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

“i) S ection 147 of the Income-tax Act, 1961, postulates that upon the formation of a reason to believe that income chargeable to tax has escaped assessment for any assessment year, the Assessing Officer may assess or reassess such income. After the insertion of Explanation 3 to section 147 of the Act even if the issue was not one of the reasons recorded while reopening the assessment, the Assessing Officer has power to assess other income which comes to his notice subsequently, in the course of the proceedings u/s. 147 of the Act. The two parts of the section which have been joined with the words “and also”, and cannot be read as conjunctive but have to be read as disjunctive. Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. Section 147 has this effect that the Assessing Officer has to assess or reassess the income (“such income”) which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, if after issuing a notice u/s. 148, he accepts the contention of the assessee and holds that the inome which he has initially formed a reason to believe had escaped assessment, has, as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice u/s. 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.

ii) An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory.

iii) The basis of issuing notice u/s. 148 was on a wrong assumption of fact that the assessee had invested money with specified persons. The solitary reason recorded by the Assessing Officer for reopening of the assessment was deleted by the Commissioner (Appeals) and in such circumstances, the assessment under the other heads done by the Assessing Officer which were not shown as reasons for reopening was illegal.

iv) In the result, the appeal filed by the Revenue is dismissed and the substantial questions of law are answered against the Revenue.”

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Corpus Donations – Recent Developments

INTRODUCTION

The taxation of charitable trusts has been the subject matter of discussions among professionals, in various fora. Tax issues of charitable and religious trusts, which evoked limited interest earlier, have attained significant importance. In the past two or three decades, charitable trusts which were treated with indulgence by the administrators, and lenience by the judicial fora, are looked upon with a certain degree of suspicion. A major reason for this is the use of charitable trusts as vehicles of tax planning. This has resulted in a number of legislative amendments, both procedural and substantive, culminating with the two recent decisions of the Supreme Court in October 2022.

Income of charitable trusts enjoys exemption on the basis of application thereof, subject to various conditions enshrined in the law. Some of these conditions, particularly the one as regards application, do not apply to contributions received by such institutions as “Corpus.” It is for this reason that this term has been the subject matter of legislative and judicial examination.

This article intends to examine the provisions of the Income Tax Act (hereinafter referred to as the Act), in regard to various issues governing the receipt of contributions to the corpus, their investment, utilisation and the tax impact of various actions concerning these aspects.

MEANING OF THE TERM CORPUS/RELEVANT PROVISIONS IN THE ACT

The term is not defined in the act or any other tax statute. The word corpus is based on the Latin word “body”, indicating a degree of permanence or long-lasting form. In common parlance, the word corpus means a principal or capital sum as opposed to income or revenue.

The following provisions of the Act that are relevant in the context of “corpus” are discussed below:

(a) Section 2(24) (iia)

(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of section 10 or by an electoral trust.

The above is the definition as it stands today. The definition underwent an amendment by the Direct Tax Laws (Amendment) Act 1987 with effect from 1st April 1989 which added the following words “not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution”. These words were deleted by the Direct Tax Laws Amendment Act 1989 with effect from the same date.

CORPUS DONATIONS WHETHER A CAPITAL RECEIPT?

Whether a corpus donation can partake the character of income or whether it is of a capital nature has been the subject matter of judicial scrutiny.

The definition inserted by the Finance Act, 1972 with effect from 1st April 1973 gave legislative support to the proposition that a donation towards the corpus would be capital in nature and therefore need not be tested for exemption u/s 11. As mentioned earlier, the definition underwent an amendment from 1st April, 1989 and the definition as it stands today treats all voluntary contributions, whether with a specific direction or otherwise, as income. Many tribunal decisions have even after the amendment taken a view that the receipt of a corpus donation is of a capital nature, and therefore not exigible to tax irrespective of application /investment thereof. {ITO (Exemptions) Ward 2 Pune vs Serum Institute of India Research foundation 169 ITD 271 (Pune)} and {Bank of India Retired Employees Medical assistance Trust 96 taxmann.com 274 (Mum)}. A similar view has been taken by the Delhi High Court in the case of Director Income Tax vs. Basanti Devi & Shri Chakhan Lal Garg Education Trust 77 CCH 1213 (Del). Shri Nani Palkhivala, in his commentary “The law & Practice of Income Tax” has also taken the view that the mere fact of amendment of section 2(24) by Direct Tax Laws (Amendment) Act 1987 does not change the situation that such donations are capital receipts. The decisions referred to above hold that since the receipt is a capital receipt, even if a charitable institution is not registered u/s 12A, the same is not liable to tax. There are certain contrary decisions as well. {Veeravel Trust vs ITO 129 taxmann.com 358 (Chennai)}. If one takes a view that corpus donations are capital in nature, they will fall outside the ambit of income. Therefore, once the identity of the donor is established and the fact that it is with a specific direction that it is towards corpus is established, the receipt need not be tested for exemption for it will fall outside the scope of sections 4 and 5. Section 11(1)(d) will then have to be treated as having been enacted only for abundant caution.

CORPUS DONATION EXEMPT INCOME – THE OTHER VIEW

While section 11(1)(d), treats corpus donations as income, section 12 (1) provides as follows

“12.(1) Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.”

In R.B.Shreeram Religious and Charitable Trust 172 ITR 373, the Bombay High Court held that voluntary contributions other than those with a specific direction that they shall form corpus of the trust would be in the nature of income even without the amendment to section 2 (24), which came into force from 1st April, 1972. This decision was approved by the Supreme Court in 233 ITR 53. How does one reconcile section 2(24)(iia), (post amendment in 1989) section 11(1)(d) and section 12(1)? A conservative interpretation would be that all voluntary contributions are in the nature of income. Sections 11 to 13 are virtually a code in themselves. Once a trust is entitled to the benefit of sections 11 and 12 having obtained registration u/s 12A, corpus donations would be exempt subject to the compliance of the conditions provided. If the trust is not registered u/s 12A, such corpus donations would not enjoy exemption. Once one accepts the power of the legislature to define income, even corpus donations which are voluntary contributions received by a charitable or religious institution will have to be treated as income. Considering the current status of jurisprudence, the author is of the view that it may be appropriate to take the more conservative view.

While trusts which are registered u/s 12A will enjoy exemption in respect of corpus donations, subject to conditions which we will analyse later in the article, those not so registered will have to meet the challenge of section 56(2)(x) as well. Voluntary contributions of property without consideration will be chargeable under the head ?income from other sources’. However, section 56 will come into play only if the receipt is in the nature of “income”. If one is able to establish that the receipt is capital in nature, section 56 itself will not trigger.

(b) Section 11(1)(d)

11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—

(d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution [subject to the condition that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus].

The words “subject to the condition that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus” as appearing in the above definition have been inserted by Finance Act, 2021 w.e.f. 1st April, 1922.

WHEN WILL A DONATION BE TREATED AS A CORPUS DONATION

Section 11(1)(d), reproduced above lays down that the following conditions that need to be satisfied:

(1) the contribution is voluntary

(2) it is made with a specific direction that it shall form part of the corpus

(3) the said contribution is invested or deposited in one or more of the forms or modes specified in subsection (5), maintained specifically for such corpus

The words “specific direction” have been the subject matter of controversy. The real question is whether such a direction can be inferred from conduct of the donor and other attendant circumstances, or it has to be in writing.

It needs to be appreciated that a corpus donation, to enjoy exemption, does not require an application at all, at any point in time. It has therefore a hallowed status, in ascertaining the quantum of exemption to which the assessee trust is entitled. From the A.Y. 2022-23, apart from the specific direction of the donor, what has to be established is that the voluntary contribution is invested in modes u/s 11(5), maintained specifically for the said purpose.

The specific direction referred to in the provision must emanate from the donor. Merely the issue of receipt by the donee, stating that the voluntary contribution has been received towards the corpus would not be sufficient, though there are certain rulings in the assessee’s favour in that context. Further, since the said specific direction should be capable of verification by the assessing authority while granting the exemption u/s 11(1)(d), it must be in writing and must be from an identified donor.

In a particular case it was urged that where two boxes, one without any writing/description and the other labelled as “corpus donations”, were placed before a deity, the action of the donor placing his offerings in the corpus box as in preference to the other one which had no description should be treated as a specific direction. The tribunal did not accept the proposition. {Shri Digamber Naya Mandir vs ADIT 70 ITD 121 (Cal)}. The author is of the view, that such a direction based on circumstantial evidence would not be sufficient to treat the said donation as a corpus donation as the donor was not capable of identification and consequently his direction was also not verifiable. The Karnataka High Court in DIT vs Ramakrishna Seva Ashram 357 ITR 731, did take a view that the law does not provide that specific direction should be in writing and that the conduct of the trust and attendant circumstances should suffice to establish that the donation is a corpus donation. With utmost respect, it is difficult to accept that in the current scene of jurisprudence in regard to charitable trusts, this decision will hold the field. It would be advisable to tread with circumspection, and in the absence of a direction in writing, there would be a heavy burden on the trust to establish that attendant circumstances are so compelling that the donation cannot be anything other than a corpus donation.

The question of whether such a contribution should be tested for it being an anonymous donation in terms of section 115BBC will depend on whether the receiving trust is charitable, charitable and religious, or purely religious, as well as the quantum thereof. However, since anonymous donations are not the subject matter of this article, that is not being discussed here.

The law requires only a specific direction that the voluntary contribution should form part of the corpus. There is no requirement or condition that the donor should specify the purpose for which the donation is to be spent or utilised. {JCIT Vs Bhaktavatsalam Memorial Trust 54 taxmann.com 248 (Chennai)} Obviously the purpose must fall within the objects of the institution for if it does not fulfill that parameter, both the receipt and the utilisation would violate the charter of the trust itself. It is however not necessary that the purpose has to be utilisation for a capital expenditure though normally that is what is contemplated. The nomenclature of the corpus also does not matter. For example, contributions to building funds would satisfy the contribution being towards the corpus.

Another issue that often arises is whether if the corpus is invested and interest is earned, does such interest partake the character of the corpus itself? In other words, would the direction extend to the accretion by way of interest or other return on investment during the period that the corpus remains unutilised? Corpus donations have a hallowed status in the taxation of charitable trusts. Therefore, unless the intent of the donor is to cover such interest or return on investment, the specific direction would not apply to such interest or return. It would be the income of the institution and entitled to exemption on the basis of application. If, however, there is a specific direction by the donor to the effect that the interest would partake the character of his contribution during the period that it remains unutilised then it must be added to the corpus. {CIT (Exemptions)vs Mata Amrithanandmayi Math 85 taxmann.com 261(Ker), SLP rejected by the Supreme Court in 94 taxmann.com 82}

An interesting question that arises whether, if the trustees do not adhere to the conditions stipulated by the donor, what would be the effect? In the absence of any specific provision in that regard, it is difficult to treat the amount in respect of which the infringement arises as “income”. {CIT vs Sri Durga Nimishamba Trust 18 taxmann.com 173 (Kar)} The consequences of such infringement, which may arise under other statutes is a separate matter altogether. For example, the trustees may be liable for an action under the Maharashtra Public Trusts Act for having violated the directions of the donor. In fact, the Income Tax Act contemplates utilisation of the corpus for the other objects of the trust. This will be apparent from an analysis of explanation 4 to section 11(1), which appears later in this article.

The Finance Act, 2021 added another condition from A.Y. 2022-23. The amendment requires the corpus donation to be invested in modes specified u/s 11(5), maintained specifically for that purpose. A number of issues arise on account of this amendment. These are:

(a) since the donation has to be “invested” does the law contemplate spending only the interest or income accrued thereon or can the corpus itself be spent?

(b) What is the position in regard to the corpus donations received prior to the amendment coming into force and which have already been partially / fully utilised

Since the amendment imposes a condition for claim of exemption, it would apply only prospectively, and ought not to affect corpus donations received in a period prior to the coming into force of the amendment.

In view of the author, the law does not bar on the spending of the corpus as long as the same is as per the directions of the donor. In fact, a corpus can also be spent for revenue purposes. {ITO vs Abhilash Kumari Public Charitable Trust 28 TTJ 523(Del)}. Therefore, the mandate to invest the amount would apply only to that amount that remains unspent after a reasonable lapse of time from the receipt of the corpus donation. To apply the law reasonably and harmoniously, it would be advisable to maintain a separate bank account in which corpus donations could be deposited. One view of the matter is that as long as the investments in the modes specified in section 11(5) are equal to or more than the unspent corpus donations, the condition is complied with. However, that may not satisfy the words “maintained specifically for such corpus”. The intent seems to be that the corpus donation is invested in identified earmarked investments. Obviously, there would be a time gap between the receipt and the actual investment. The words “maintained specifically for such corpus” seem to indicate the requirement of a specific action by the trust to comply with the mandate. Ideally, the satisfaction of the mandate should be tested at the commencement and at the end of the previous year. If the earmarked investments are equal to or more than the unspent corpus donations the law should be treated as having been complied with.

While it is true that the law does not require utilisation of a corpus, if it remains unutilised and invested for long periods without any foreseeable plan of trustees to utilise the same, it is possible that a trust is visited with some penal/adversarial action, say revocation of 10(23C) recognition or cancellation of 12A registration. It must be remembered that, while interpreting an exemption provision, a purposive interpretation has to be made. While unspent corpus contributions for valid reasons should not result in any adverse consequences, trustees would do well to remember that the absence of a requirement to utilise does not give them a carte blanche to keep the money invested without utilisation for charitable objects.

(c) Explanation 2 to section 11(1)

Explanation 2.—Any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1, to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 or other trust or institution registered under section 12AA or section 12AB, as the case may be, being contribution with a specific direction that it shall form part of the corpus], *shall not be treated as application of income for charitable or religious purposes.

• Emphasis Supplied

The law contemplates an exemption of income to the extent of application. It is probably for this purpose that the lawmakers have provided that, donations to another trust with the direction that the same shall form corpus of the donee trust, shall not be treated as application of income by the donor.

This amendment is in consonance with the spirit of the section. In the absence of this explanation, it would have been possible for the donor trust to receive voluntary contributions for which the donor may enjoy tax relief u/s 80G. Such contributions could then be contributed/donated to another trust towards its corpus. In the hands of the donor trust, the requirement of application would be satisfied while in the hands of the donee trust, there is no condition that the receipt would have to be utilised for charitable objects. This would then frustrate the grant of the exemption itself.

(d) Explanation 3A to Section 11(1)

Explanation 3A.—For the purposes of this sub-section, where the property held under a trust or institution includes any temple, mosque, gurdwara, church or other place notified under clause (b) of sub-section (2) of section 80G, any sum received by such trust or institution as voluntary contribution for the purpose of renovation or repair of such temple, mosque, gurdwara, church or other place, may, at its option, be treated by such trust or institution as forming part of the corpus of the trust or the institution, subject to the condition that the trust or the institution,—

(a) applies such corpus only for the purpose for which the voluntary contribution was made;

(b) does not apply such corpus for making contribution or donation to any person;

(c) maintains such corpus as separately identifiable; and

(d) invests or deposits such corpus in the forms and modes specified under sub-section (5) of section 11.

(e) Explanation 4 to section 11(1)

[Explanation 4.— For the purposes of determining the amount of application under clause (a) or clause (b),—

(i) application for charitable or religious purposes from the corpus as referred to in clause (d) of this sub-section, shall not be treated as application of income for charitable or religious purposes:

Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the amount, or part thereof, is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus, from the income of that year and to the extent of such investment or deposit;

This explanation has probably been inserted to take care of situations where notified religious places are undergoing reconstruction or major renovation. Trusts which carry out these projects of reconstruction/renovation may not find it feasible to spend or apply the donations within a period of five years, which is the maximum time for which income other than corpus donations can be accumulated. {Section 11(2)}. In the absence of this provision, the unutilised or unapplied donations would have been the subject matter of tax on the conclusion of five years from the year in which the contributions were received. This explanation takes care of this difficulty, and such religious institutions would be able to undertake long-term projects of renovation / reconstruction.

(e) Explanation 4

The scheme of the exemption u/s 10(23C) and section 11 is that income of a charitable/religious institution to the extent that it is applied for the objects enjoys exemption. An accumulation without fetter to the extent of 15 per cent, and an accumulation beyond that subject to certain conditions {for a period of five years in terms of section 11(2)}, is what is permissible. The exception to this requirement of application is in regard to corpus donations which are entirely exempt under section 11(1)(d), as corpus donations. Since such donations enjoy a blanket exemption, their utilisation cannot be claimed as application against other income. There were certain judicial rulings which had held that such a claim was possible. {JCIT vs Divya Jyoti Trust Tejas Eye Hospital 137 taxmann.com 472 (Ahd)} These rulings were clearly against the intent of the law. At the same time, there is no specific consequence provided for the utilisation of a corpus donation for the other objects of the trust. (Objects other than those specified by the corpus donor). In fact, a charitable institution may face a situation where, in the absence of non-corpus voluntary contributions, it would have to dip into its corpus fund to take care of a rainy day. This situation was faced by many institutions during the Covid -19 period.

The explanation inserted from A.Y. 2022-23, takes care of such eventualities. It provides that any expenditure from corpus donations, would not be treated as application. This would result in a depletion of the corpus fund itself. Consequently, in a subsequent year, in which regular voluntary contributions received are utilised for restoring the corpus, such restoration is to be treated as application of income. This is a welcome provision and takes care of unintended difficulties which a trust would otherwise have to face.

CONCLUSION

The subject of corpus donations is an interesting subject. They have a special place in the law in as much as while being included as income, they have no restriction as to the period of utilisation. They therefore operate as a mode through which, charitable trusts can undertake long-term projects without any risk of their exemption being affected. While accounting for, investing and utilising corpus donations, all the stakeholders of charitable institutions must ensure that they adhere to the spirit of the law and not only its letter. If this happens, probably the manner in which charitable trusts are perceived by the lawmakers and the administrators of the law will undergo a change.

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Reassessment — Notice — Change of law — New procedure — Show-cause notice — Mandatory condition — Foundational allegation in respect of share transactions missing in show-cause notice — Cannot be incorporated by issuing supplementary notice

68. Catchy Prop-Build Pvt. Ltd. vs. ACIT
[2022] 448 ITR 671 (Del.)
A.Y.: 2018-19
Date of order: 17th October, 2022
Sections: 147, 148, 148A(b) and 148A(d) of ITA, 1961

Reassessment — Notice — Change of law — New procedure — Show-cause notice — Mandatory condition — Foundational allegation in respect of share transactions missing in show-cause notice — Cannot be incorporated by issuing supplementary notice.

A writ petition was filed by the assessee challenging the show-cause notice dated 16th March, 2022 issued u/s 148A(b) of the Income- tax Act, 1961, the order passed u/s 148A(d) and the notice issued u/s 148 (both dated 31st March, 2022) for A.Y. 2018-19 on the grounds that the show-cause notice had been issued in violation of the provisions of section 148A(b), since it merely mentioned the transaction entered into by the assessee of purchase and sale of shares undertaken by it but did not contain any allegation of escapement of income for A.Y. 2018-19. The Delhi High Court allowed the writ petition and held as under:

“i) In the notice issued u/s. 148A(b), the assessee was never asked to explain the source of funds that were used by the entity that had amalgamated with the assessee to purchase the shares of another entity. The show-cause notice issued under section 148A(b), the order passed u/s. 148A(d) and the notice issued u/s. 148 for the A.Y. 2018-19 were quashed.

ii) If the foundational allegation was missing in the show-cause notice issued u/s. 148A(b), it could not be incorporated by issuing a supplementary notice.

iii) However, if the law permitted, the Department was at liberty or take further steps in the matter. If and when such steps were taken and if the assessee had a grievance it was at liberty to seek remedies in accordance with law.”

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Reassessment — Notice u/s 148 — Validity — Condition precedent for notice — Notice should be issued by the AO who has jurisdiction over assessee.

67. Charu K. Bagadia vs. ACIT
[2022] 448 ITR 563 (Mad.)
A.Y.: 2011-12
Date of order: 27th June, 2022
Sections: 147 and 148 of ITA, 1961

Reassessment — Notice u/s 148 — Validity — Condition precedent for notice — Notice should be issued by the AO who has jurisdiction over assessee.

The appellant-assessee’s return of income for the A.Y. 2011-12 was processed u/s 143(1) of the Income-tax Act, 1961. Thereafter, after five years, she received a notice dated 28th March, 2018 issued by the first respondent u/s 148 for reassessment. In response, she submitted a reply dated 26th April, 2018 stating that the first respondent has no jurisdiction to issue such a notice u/s 148 of the Act and therefore, she requested that the reassessment proceedings be dropped. Subsequently, the first respondent transferred the files pertaining to the appellant to the second respondent. Thereafter, the second respondent continued the reassessment proceedings by issuing a notice dated 14th December, 2018 u/s 143(2) r.w.s. 129, directing the appellant to appear and file return of income to the notice u/s 148 of the Act along with supportive documents.

The Appellant filed a writ petition and challenged the validity of notices. The Single Judge of the Madras High Court dismissed the writ petition (Charu K. Bagadia vs. Asst. CIT (No. 1) [2022] 448 ITR 560 (Mad)). The Division Bench allowed the appeal and held as under:

“i) At the outset, be it noted, it is settled law that “a jurisdiction can neither be waived nor created even by consent and even by submitting to jurisdiction, an assessee cannot confer upon any jurisdictional authority, something which he lacked inherently”. The said ratio squarely applies to the case on hand.

ii) Notice u/s. 148 of the Income-tax Act, 1961, is mandatory to reopen an assessment and reassess the income of the assessee and such a notice should have been issued by the competent Assessing Officer, who has jurisdiction. The jurisdictional Assessing Officer, who records the reasons for reopening the assessment as contemplated under sub-section (2) of section 148, has to issue notice u/s. 148(1). Only then, would such a notice issued u/s. 148(1) be a valid notice. The officer recording the reasons u/s. 148(2) of the Act and the officer issuing the notice u/s. 148(1) has to be the same person. Section 129 is applicable when in the same jurisdiction, there is a change of incumbent and one Assessing Officer is succeeded by another; and when once the initiation of reassessment proceedings is held to be invalid, whatever follows thereafter must also, necessarily be invalid.

iii) The first respondent who recorded the reasons for reopening the assessment u/s. 148(2), had no jurisdiction over the assessee, to issue notice dated March 28, 2018 u/s. 148(1). Though the files pertaining to the reassessment proceedings of the assessee were transferred, the second respondent had no authority to continue the reassessment proceedings u/s. 129 and hence, the notice dated December 14, 2018 issued by him was also invalid. The invalid notices so issued vitiated the entire reassessment proceedings initiated against the assessee. The notices and the consequent proceedings were invalid.”

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Income — Computation of income — Disallowance of expenditure incurred on exempt income — Amendment providing for disallowance even if assessee has not earned exempt income — Amendment not retrospective — Not applicable for A.Y.: 2013-14 — Tribunal deleting disallowance on ground assessee had not earned exempt income — Proper.

66. Principal CIT vs. Era Infrastructure (India) Ltd.
[2022] 448 ITR 674 (Del.)
A.Y.: 2013-14
Date of order: 20th July, 2022
Section: 14A of ITA,1961

Income — Computation of income — Disallowance of expenditure incurred on exempt income — Amendment providing for disallowance even if assessee has not earned exempt income — Amendment not retrospective — Not applicable for A.Y.: 2013-14 — Tribunal deleting disallowance on ground assessee had not earned exempt income — Proper.

The Tribunal deleted the disallowance made by the AO under rule 8D of the Income-tax Rules, 1962 r.w.s. 14A of the Income-tax Act, 1961 holding that no disallowance u/s 14A could be made if the assessee had not earned any exempt income.

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

“i) The Memorandum Explaining the Provisions of the Finance Bill, 2022 ([2022] 440 ITR (St.) 226) explicitly stipulates that the amendment made to section 14A of the Income-tax Act, 1961 will take effect from April 1, 2022 and will apply in relation to the A Y. 2022-23 and subsequent assessment years. The amendment of section 14A which is “for 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.

ii) The Tribunal had not erred in deleting the disallowance made by the Assessing Officer under rule 8D read with section 14A. Though the judgment followed by the Tribunal had been challenged and was pending adjudication before the Supreme Court, there had been no stay of the judgment till date. The order passed in the appeal should abide by the final decision of the Supreme Court in the special leave petition.”

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Export — Loss — Set off — Scope of section 10B — Section 10B provides for deduction and not exemption — Loss sustained in unit covered by section 10B can be set off against other business income.

65. Principal CIT vs. Sandvik Asia Pvt. Ltd.
[2022] 449 ITR 312 (Bom.)
A.Y.: 2005-06
Date of order: 8th September, 2022
Section: 10B of ITA, 1961

Export — Loss — Set off — Scope of section 10B — Section 10B provides for deduction and not exemption — Loss sustained in unit covered by section 10B can be set off against other business income.

The assessee-company was a part of the S group being a subsidiary of S Sweden, which was the holding company of the assessee. For A.Y. 2005-06, the assessee had made a provision for finished goods obsolescence of Rs. 19,52,000. However, this amount was disallowed by the AO, who held that the closing inventory had to be valued either at cost price or at market price. In its return of income, the assessee adjusted the loss of its newly set up export-oriented unit against the profits earned by its other units. In the return of income the assessee claimed that it had made a payment of Rs. 4,41,44,973 on account of management services to S Sweden. The AO referred the matter to the Transfer Pricing Officer (TPO). The TPO, however, was of the view that there was no evidence with regard to the receipt of services by the assessee and, therefore, made an adjustment of Rs. 4.41 crores. The Commissioner, held, based upon the additional evidence that the management services were rendered to the assessee. The AO accordingly deleted the addition of Rs. 4,41,44,973 based on the transfer pricing adjustment made by the TPO.

The Tribunal, in the appeal filed by the Revenue, upheld the order of the Commissioner. The Tribunal allowed the set off of losses claimed by the assessee.

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

“i) After the substitution of section 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of profits and gains derived by a 100 per cent. export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. There is no provision in section 10B by which a prohibition has been introduced by the Legislature on setting off a loss sustained from one source falling under the head of profits and gains of business against income from any other source under the same head. On the other hand, there is intrinsic material in section 10B to indicate that such a prohibition was not within the contemplation of the Legislature.

ii) A reading of the clauses of the agreement made it quite clear that the management services could be rendered by all or any of the S companies and such operations would be on behalf of S Sweden. The Tribunal committed no error in deciding the issue in favour of the assessee especially when the management service fees received by S Sweden had been taxed by the Assessing Officer in charge of assessment of S Sweden, as provider of such services.

iii) The Commissioner (Appeals) deleted the addition of Rs. 19,52,000 made by the Assessing Officer on account of closing stock of obsolete inventory, and this was upheld by the Tribunal following its order passed in the case of the assessee for the A.Y. 2004-05. The appeal preferred by the Department against the order of the Tribunal for the A.Y.2004-05 was dismissed on the ground that the assessee had been consistently following the method of evaluating the stock which had been accepted by the Department. No different view could be taken on an issue arising between the same parties, which had already been raised and rejected by the court, although for a different assessment year, when there was no change in the factual or legal matrix of the case.

iv) The Tribunal was right in allowing set off of the losses suffered by the newly set up export oriented unit against its other business income.”

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Business expenditure — Disallowance u/s 40(a) (ia) — Payments liable to deduction of tax at source — Scope of section 40 — Amount paid to non-resident for technical services — Amount not debited to profit and loss account and not claimed as deduction in computing business income — Amount could not be disallowed.

64. Principal CIT vs. Linde India Ltd.
[2022] 448 ITR 682 (Cal.)
A.Y.: 2007-08
Date of order: 5th September, 2022
Section 40(a)(ia) of ITA, 1961

Business expenditure — Disallowance u/s 40(a) (ia) — Payments liable to deduction of tax at source — Scope of section 40 — Amount paid to non-resident for technical services — Amount not debited to profit and loss account and not claimed as deduction in computing business income — Amount could not be disallowed.

The assessee-company is engaged in the business of manufacture and sale of various industrial and mechanical gases, cryogenic and non-cryo- genic plants and vessels. A show-cause notice was issued to the assessee alleging that tax was not deducted at source in terms of the provisions of section 40(a)(ia) of the Income-tax Act, 1961 in respect of the advances as on 31st March, 2007 for import of capital goods. In reply to the show-cause notice, the assessee contended that the said advances was made towards import of capital goods on free on board (FOB) basis at foreign sea ports, leading to transfer of title to the goods outside India, and hence there is no income chargeable to tax in India and therefore the provisions of section 195 of the Act are not attracted. It was also contended that such advances to suppliers had also not been charged to the profit and loss account for the relevant assessment year. The AO completed the assessment u/s 143(3) by an order dated 30th December, 2010. The AO made disallowances aggregating to Rs. 72,89,71,972 u/s 40(a)(ia).

The Commissioner (Appeals) deleted the addition. The Tribunal upheld the decision of the Commissioner (Appeals) and held that no disallowance could be made u/s 40(a)(i)/40(a)(ia).

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

“i) An amount can be deducted in computing the business or professional income by taking away the amount from the total profits and gains of such business and profession. While preparing the profit and loss account of a business or profession an amount can be deducted from the professional or business income by debiting the profit and loss account prepared in connection with such profession or business with such amount. Such amount may also be deducted while computing the profits and gains of business or profession for the purpose of arriving at the business or professional income chargeable to tax. Therefore, if the disputed amount is neither debited from the profit and loss account of the business or profession nor has been deducted while computing the profits and gains of business or profession, section 40 of the Act does not come into operation as such amount cannot be said to have been deducted in computing the income chargeable under such head. Therefore, if an assessee has paid any amount on account of fees for technical services outside India or in India to a non-resident but has not debited such amount to the profit and loss account and has also not claimed it as deduction in computing the income chargeable under the head “Profits and gains of business or profession”, no disallowance in respect thereof can be made by invoking the provisions of section 40(a)(ia) of the Act.

ii) D uring the course of assessment proceedings the assessee-company had filed complete details of work-in-progress and the party-wise details. The first appellate authority specifically held that the payment of Rs. 84,40,14,000 which was a part of capital advance and appearing in the capital work-in-progress included a sum of Rs. 72,33,40,648 made to L and there was a payment of Rs. 56,31,324 to the German company appearing under the head “Loans and advance”. The sum of Rs. 72,33,40,648 was part of the capital work-in-progress and not charged to the profit and loss account and the sum of Rs. 56,38,324 was shown in the balance-sheet under the head “Loans and advance” and such amount was also not charged to the profit and loss account. The first appellate authority was justified in deleting the disallowance made by the Assessing Officer invoking the provisions of section 40(a)(i) and the Tribunal was justified in affirming it.”

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Adjustment u/s 143(1) in Respect of Employees’ Contribution to Welfare Funds

ISSUE FOR CONSIDERATION

Under section 2(24)(x) of the Income-tax Act, 1961, any sum received by an employer from his employees as contributions to any provident fund, superannuation fund, ESIC fund or any other employees’ welfare fund is in the first place taxable as income of the employer. The employer can thereafter claim a deduction of such amount from his income under section 36(1)(va) or section 57(ia), if the amount is credited by him to the employee’s account on or before the due date. For this purpose, “due date” has been defined as the date by which the employer is required to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order, notification, or any standing order, award, contract of service, or otherwise.

Various High Courts, including the Bombay High Court in the case of CIT vs. Ghatge Patil Transports 368 ITR 749, had interpreted this provision to be on par with section 43B, which applies with respect to employer’s contribution to these welfare funds, and held that so long as such employees’ contributions were paid before the due date of filing the income tax return under section 139(1), as required by section 43B, such employees’ contributions were also allowable as a deduction even where the deposits were made outside the time limits provided by the respective welfare statutes.

On 12th October, 2022, this controversy as applicable to assessments up to AY 2020-21, is resolved by the Supreme Court in the case of Checkmate Services (P) Ltd vs. CIT 448 ITR 518, where the Supreme Court held that there was a marked difference between employer’s contribution and employee’s contribution held in trust by the employer and that for the purposes of section 36(1)(va), the payment had to be made before the due date applicable under the relevant Act applies to the contribution for an effective claim under the Income-tax Act.

An Explanation 2 to section 36(1)(va) has also been inserted by the Finance Act, 2021 with effect from A.Y. 2021-22, clarifying for removal of doubts, that the provisions of section 43B shall not apply and shall be deemed to never have applied for the purposes of determining the “due date” under section 36(1)(va). In spite of the amendment, interpreting the language of the amendment, the benches of the Tribunal have taken a view, prior to 12th October, 2022, that such amendment applied prospectively from A.Y. 2021-22, and not to earlier years and with that the disallowance where made was deleted.

In the meanwhile, prior to the Supreme Court judgment in Checkmate Services’ case (supra), even for assessment years prior to A.Y. 2021-22, adjustments were being made, by the AO(CPC), under section 143(1)(a) in respect of the payments made after the due date under the respective Act but before the due date of filing of the return of income, based on disclosures of payments made in the tax audit report furnished under section 44AB. In fact, in some of the cases, it has been held that no disallowance was possible while issuing an intimation u/s 143(1) simply on the basis of the tax audit report.

While processing the return of income, section 143(1)(a) permits adjustments of, amongst others:

(i) …………………………….;

(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;

(iii) ………;

(iv) Disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return;

(v) ……………..

Till Checkmate Services decision (supra), the benches of the Tribunal had generally been taking a view that such an adjustment leading to the disallowance of the claim was not permissible u/s 143(1)(a), since the question of allowance or otherwise was a debatable one, in view of the various High Courts and Tribunal decisions.

The issues have arisen recently before the Tribunal, as to whether, (a) taking into account the subsequent Supreme Court decision in Checkmate Services (supra), such adjustments made u/s 143(1)(a) prior to the Supreme Court decision in Checkmate Services case, for disallowing the employees’ contribution u/s 36(1)(va) where payments were made by the employer after the due date under the respective Acts but before the due date of filing of the return of income, could have been validly made (b) will the ratio of the decision would apply only where the order is passed u/s143(3) and will not apply to the cases of the adjustment being made in issuing intimation u/s143(1) which will continue to be not permissible and (c) the adjustment will be possible based on the reporting by the tax auditor. While the Pune, Panaji, Chennai and Bangalore benches of the Tribunal have held that such adjustment u/s 143(1) by AO(CPC) for disallowing the claim was valid, the Mumbai bench of the Tribunal has held that such an adjustment could have been made u/s 143(3) only prior to the Supreme Court decision in Checkmate Services case. Further, the Pune bench of the Tribunal held that the adjustment in issuing the intimation by disallowing the claim based on the tax audit report was permissible for the AO, many other benches including the Mumbai and Hyderabad held that such an adjustment simply based on such a report was not permissible. Once again the Mumbai bench has observed that the ratio of the decision in Checkmate’s case was applicable only for disallowance of the claim where an assessment was completed u/s143(3), the Pune bench has not made any such distinction in upholding the disallowance made while issuing the intimation u/s143(1).

CEMETILE INDUSTRIES’ CASE

The issue came up before the Pune bench of the Tribunal in the case of Cemetile Industries vs. ITO 220 TTJ (Pune) 801, and many assessees. The assessment years involved in these cases were from A.Y. 2017-18 to AY 2020-21.

In this lead case, relating to A.Y. 2018-19, the tax audit report filed by the assessee highlighted the due dates of payment to the relevant funds under the respective Acts relating to employees’ share, and the dates by which the amounts were deposited by the assessee after such due dates but before the filing of the return u/s 139(1). The assessee was of the view that such payments before the due date as per section 139(1) amounted to sufficient compliance in terms of section 43B and were not disallowable in issuing the intimation u/s143(1).

The return of the assessee was processed u/s 143(1), making disallowance u/s 36(1)(va) of Rs 3,40,347, on the ground that the amount received by the assessee from its employees as a contribution to Employees Provident Fund, ESIC, etc was not credited to the employees’ accounts on or before the due date prescribed under the respective Acts. The assessee applied for rectification under section 154, which was rejected. The Commissioner (Appeals) also rejected the assessee’s appeal.

Before the Tribunal, the Department contended that the disallowance was called for because of the per se late deposit of the employees’ share beyond the due date under the respective Act, and that section 43B was of no assistance in view of the decision of the Supreme Court.

The Tribunal analysed the provisions of sections 2(24)(x) and 36(1)(va). It observed that it was axiomatic that the deposit of the employees’ share of the relevant funds before the due dates under the respective Acts was sine qua non for claiming the deduction and if the contribution of the employees to the relevant funds was not deposited by the employer before the due date under the respective Acts, then the deduction u/s 36(1)(va) was lost notwithstanding the fact that the share of the employees had been deposited by the due date of filing the return of income as per section 43B.

The Tribunal referring to the assessee’s reliance on section 43B for claiming deduction noted that the main provision of section 43B, providing for the deduction of employer’s contribution to such funds only on an actual payment basis, had been relaxed by the proviso so as to enable the deduction even if the payment was made before the due date of furnishing the return of income u/s 139(1) for that year. The assessee’s claim was that the deduction became available in the light of section 36(1)(va) r.w.s. 43B on depositing the employees’ share in the relevant funds before the due date under section 139(1). The tribunal observed that the said position was earlier accepted by some of the High Courts, holding that the deduction was to be allowed once the assessee deposited the employees’ share in the relevant funds before the date of filing of return under section 139(1) even though the payments were made outside of the time provided under the respective Acts. The courts had allowed the deduction on the analogy of treating the employee’s share as having the same character as that of the employer’s share, becoming deductible under section 36(1)(va) read in the light of section 43B(b).

The tribunal thereafter took note of the Supreme Court’s decision, in Checkmate Services P Ltd & Ors vs. CIT & Ors, 448 ITR 518, and observed that the apex court had threadbare considered the issue and had drawn a distinction between the parameters for allowing deduction of employer’s share and employee’s share for contribution in the relevant funds. It had been held by the court that the contribution by the employees to the relevant funds was the employer’s income u/s 2(24)(x), but the deduction for the same could be allowed only if such amount was deposited in the employee’s account in the relevant funds before the date stipulated under the respective Acts. Thereby, the tribunal noted that the earlier view taken by some of the High Courts in allowing deduction even where the amount was deposited in the employee’s account before the time allowed under section 139(1), got overturned by the apex court. The tribunal observed that the net effect of this Supreme Court judgment was that the deduction under section 36(1)(va) could be allowed only if the employee’s share in the relevant funds was deposited by the employer before the due date stipulated in the respective Acts and further that the due date under section 139(1) was alien for the purpose of deduction of such contribution.

The tribunal noted that the enunciation of law by the Supreme Court was always declaratory having effect and application ab initio, being from the date of insertion of the provision unless a judgment was categorically made prospectively applicable; the judgment would apply equally to the disallowance under section 36(1)(va) in all earlier years as well as for the assessments completed under section 143(3). It was however pointed out by the assessee that the appeals before the tribunal involved disallowance made under section 143(1) and as such no prima facie adjustment could be made in the intimation issued under section 143(1), unless the case was covered within the specific four corners of the provision, and it was stressed that the action of the AO in making the disallowance did not fall in any of the clauses of section 143(1).

The Tribunal then noted that the assessees as well as the Department were in agreement that the case of payment and its disallowance could be considered only as falling under either clause (ii) or under clause (iv) of section 143(1).

The Tribunal then noted that none of the first three clauses of explanation (a), was attracted to the facts of the case before it.

The Tribunal then proceeded to examine the provisions of clause (iv) of section 143(1)(a), which provided for disallowance of expenditure or increase in income indicated in the audit report but not taken into account in computing the total income in the return. The words “or increase in income” in the above provision were inserted with effect from the assessment year 2021-22 by the Finance Act 2021 and therefore did not apply to the assessment years in the cases before the tribunal.

The Tribunal, therefore, went on to ascertain if the disallowance made under section 36(1)(va) in the intimation under section 143(1)(a) could be construed as a disallowance of expenditure indicated in the audit report not taken into account in computing the total income in the return. The tribunal thereafter went on to examine the reporting of such payments in clause 20(b) of the tax audit report. It noted that the due date for payment had been reported (in one case as 15th July, 2017), and the actual date for payment had been reported as a later date (in that case as 20th July, 2017). Therefore, according to the tribunal, it was manifest that the audit report clearly pointed out that as against the due date of payment of the employee’s share in the relevant funds of 15th July, 2017 for deduction under section 36(1)(va), the actual payment was delayed and deposited on 20th July, 2017.

The tribunal noted that for disallowance under sub-clause (iv) of section 143(1)(a), the legislature had used the expression ‘indicated in the audit report’. According to the tribunal, the word ‘indicated’ was wider in amplitude than the word ‘reported’, which enveloped both direct and indirect reporting. Even if there was some indication of disallowance in the audit report, which was short of direct reporting of the disallowance, according to the tribunal, the case got covered within the purview of the provision warranting the disallowance. However, the tribunal expressed the view that the indication must be clear and not vague. As per the tribunal, if the indication gave a clear picture of the violation of a provision, there could be no escape from disallowance.

Examining the facts of the case, the tribunal observed that it was clear from the mandate of section 36(1)(va) that the employee’s share in the relevant funds must be deposited before the due date under the respective Acts. If the audit report mentioned the due date of payment and also the actual date of payment with specific reference in clause 20(b) – Details of contributions received from employees for various funds as referred to in section 36(1)(va), it was an apparent indication of the disallowance of expenditure under section 36(1)(va) in the audit report in a case where the actual date of payment was beyond the due date. The tribunal observed that though the audit report clearly indicated that there was a delay in the deposit of the employees’ share in the relevant funds, which was in contravention of the prescription of section 36(1)(va), the assessee chose not to offer the disallowance in computing the total income in the return, which rightly called for the disallowance in terms of section 143(1)(a).

The tribunal rejected the assessee’s argument that this was a case of increase in income, which was applicable only from the A.Y. 2021-22 and not for the relevant assessment year, on the ground that the two limbs, “disallowance of expenditure” and “increase in income” were independent of each other, and that the indication in the audit report for “increase in income” should be qua some item of income, and not increase of income because of the disallowance of expenditure. If this argument were to be accepted that even a disallowance of expenditure amounted to an increase in income, then the amendment with effect from the A.Y. 2021-22 would be redundant. According to the tribunal, interpretation had to be given to the statutory provisions in such a manner that no part of the Act was rendered nugatory.

Looking at the provisions of the tax audit report, the tribunal observed that the column giving details of the amounts received from employees indicates an increase in income if the assessee does not take the sum in computing total income, while the columns giving details of due date for payment and the actual date of payment indicate disallowance of expenditure suo moto disallowance in computing total income. In the case, before it the AO did not make adjustments for non-offering of the sums received from employees but made the adjustment for disallowance of expenditure with the remarks that “amount debited to the profit and loss account to the extent of disallowance under section 36 due to non-fulfillment of conditions specified in relevant clauses”. Therefore, according to the tribunal, it was evident that it was a case of disallowance of expenditure and not an increase in income. Further, the entire challenge by the assessee throughout had been to the disallowance of expenditure made by the AO. The assessee’s argument all along before the appellate authorities had been that the shelter of section 43B was available and disallowance could not be made because such payment was made before the due date under section 139(1).

The tribunal also rejected the assessee’s argument that the assessee did not claim any deduction in the profit and loss account of the amount under consideration and hence no deduction could have been made, holding that the deduction made from the salary had been claimed as a deduction by way of gross salary, which had been debited to the profit and loss account.

The Tribunal, therefore, upheld the adjustment made under section 143(1)(a) by disallowance of late deposit of employees’ share to the relevant funds prescribed under the respective Acts.

A similar view has also been taken by the Chennai, Bangalore and Panaji benches of the tribunal, in the cases of Electrical India vs. Addl DIT 220 TTJ (Chennai) 813, Legacy Global Projects (P) Ltd vs. ADIT 144 taxmann.com 4 (Bang), and Gurunath Yashwant Amathe vs. ADIT TS-7318-ITAT-2022(PANAJI)-O [ITA No 64/PAN/2022 dated 5th December, 2022].

P R PACKAGING SERVICE’S CASE

The issue came up again recently before the Mumbai bench of the tribunal in the case of P R Packaging Service vs. ACIT, TS-961-ITAT-2022(Mum) [ITA No 2376/Mum/2022 dated 7th December, 2022].

The assessee for the assessment year 2019-20 had remitted the employees’ contribution to the provident fund beyond the due date prescribed under the Provident Fund Act but had remitted the same before the due date of filing the return of income under section 139(1). The fact of remittance made by the assessee with delay had been reported by the tax auditor in the tax audit report. Such amount was disallowed under section 143(1), while processing the return of income.

The Tribunal, on perusal of the tax audit report, noted the tax auditor had merely mentioned the due date for remittance of provident fund as per the provident fund Act and the actual date of payment made by the assessee. According to the tribunal, the tax auditor had not even contemplated disallowance of the employees’ contribution to the provident fund wherever it was paid beyond the due date prescribed under the provident fund Act. It was merely a recording of facts and a mere statement made by the tax auditor in his audit report.

The CPC Bangalore had taken up this data from the tax audit report and sought to disallow the amount of delayed payment while processing the return under section 143(1), apparently by applying the provisions of section 143(1)(a)(iv).

Analysing the provisions of section 143(1)(a)(iv), the tribunal observed that it was very clear that this clause would come into operation when the tax auditor had suggested a disallowance of expense, but such disallowance had not been carried out by the assessee while filing the return of income. As per the tribunal, the tax auditor had not stated that the employees’ contribution to the provident fund was disallowable wherever it was remitted beyond the due date under that Act. Hence, according to the tribunal, CPC Bangalore was not correct in disallowing the employees’ contribution to the provident fund while processing the return under section 143(1), as it did not fall within the ambit of prima facie adjustments.

The tribunal further relied to a great extent upon the observations of the Mumbai bench of the tribunal in the case of Kalpesh Synthetics Pvt Ltd vs. DCIT 195 ITD 142, where the tribunal had examined in detail the scope of the adjustments permissible under section 143(1)(a), and in particular, the disallowance under section 36(1)(va) in such situations where the payments were made before the due date under section 139(1), and whether the reporting in the tax audit report could be the basis of such disallowance.

The tribunal observed that it was conscious of the recent Supreme Court decision in Checkmate Services (supra), where the issue had been decided on merits. It however observed that such a decision was rendered in the context where the assessment was framed under section 143(3), and not under section 143(1)(a).

Therefore, the tribunal deleted the addition made with respect to employees’ contribution to the provident fund made under section 143(1)(a).

OBSERVATIONS

Adjustment should be possible u/s143(1)(a) while issuing any intimation under s.143(1) after 12th October 2022 in respect of the amounts remaining to be paid by the due dates prescribed under the respective Acts for payment of the welfare dues contributed by the employees even though paid by the due dates of the filing of the return of income .under s. 139(1) of the Income-tax Act. After the Supreme Court decision in the case of Checkmate Services (supra), there should be no debate that the delayed payment of employee contributions to such funds after due dates under the respective Acts is disallowable under section 36(1)(va), even if such payment is made before the due date under section 139(1). In that view of the matter, the observation of the Mumbai bench of the Tribunal that the ratio of the decision of the apex court was applicable only to the assessments made under s. 143(3), in our respectful opinion, requires reconsideration.

The issue however continues to be relevant where such adjustment is made under section 143(1)(a), before the decision of the Supreme Court, at which point of time the matter was debatable, given the decisions of various High Courts.

Can an adjustment by way of a disallowance which was debatable at the relevant point of time that it was made, be held to be permissible under s.143(1), because of a subsequent Supreme Court decision which settles the debate on the disallowance? In other words, has the disallowability of the expenditure to be seen as per the legal position taken by the Courts as prevailing at the time of making the adjustment, or at the point of time when the appeal against the adjustment is being decided? Can it be held that the issue was never debatable in as much as the law declared subsequently by the decision of the apex court was always the law and, therefore, any adjustment if made before the decision should be considered in consonance with the law.

The Supreme Court, in the case of DCIT vs. Raghuvir Synthetics Ltd 394 ITR 1, has held that the decision of the jurisdictional High Court is binding, the issue is therefore not debatable in relation to assessees within that jurisdiction and therefore held that the adjustment could be made u/s 143(1)(a) (as it stood for AY 1994-95, when the law permitted adjustment of prima facie disallowances) in respect of such assessees. This would therefore indicate that at the time of making the adjustment, the law prevalent in the relevant High Court jurisdiction on the date of making the adjustment has to be considered.

However, the fact remains that on a ruling given by the Supreme Court on the issue, overruling the relevant High Court decision, the legal position is as if the relevant High Court ruling had never been in existence. In Southern Industrial Corporation vs. CIT 258 ITR 481, the Madras High Court held that when a statutory provision is interpreted by the Apex Court in a manner different from the interpretation made in the earlier decisions by a smaller Bench, ( or by the lower court) the order which does not conform to the law laid down by the larger Bench in the later decision, the later decision would constitute the law of the land and is to be regarded as the law as it always was, unless declared by the Court itself to be prospective in operation. Besides, it is also well settled law that a decision of the Supreme Court on an issue can form the basis for rectification of a mistake apparent from the record under section 154. This being the position, can an adjustment be held to be invalid based on a then prevalent decision of the jurisdictional High Court, which has ceased to exist after the Supreme Court ruling?

The enunciation of law by the Supreme Court is always declaratory having effect and application ab initio, being from the date of insertion of the provision, unless a judgement is categorically made prospectively applicable; the judgement as observed by the Pune bench would apply equally to the disallowance under section 36(1)(va) in all earlier years as well as for the assessments completed under section 143(3).

The better view of the matter, though unfair to the assessee who did not have the benefit of the Supreme Court ruling when he filed his return, seems to be that of the Pune, Chennai, Panaji and Bangalore benches of the Tribunal, that such subsequent Supreme Court decision validates the prior adjustment made, as the Supreme Court enunciates the law as it always stood. The appellate authorities should not be precluded from extending its powers to give effect to the subsequent decision of the apex court in adjudicating the appeal before them.

It is possible to hold that the appeals before the tribunal involved disallowance made under section 143(1) and as such no prima facie adjustment could be made in the intimation issued under section 143(1), unless the case was covered within the specific four corners of the provision and that the action of the AO in making the disallowance did not fall in any of the clauses of section 143(1). To meet such a contention, an alternative way of confirming the abovementioned better view and putting the said view beyond doubt is by rectifying or revising or reassessing the income wherever otherwise permissible in law and is within the prescribed time or by the appellate authorities exercising its enhancement powers while adjudicating the appeal.

The other issue is whether any disallowance of expenditure under sub-clause (iv) of clause (a) of sub-section (1) of s.143 on the basis of the words “indicated in the audit report” would include a conclusion drawn from facts given in the audit report, or would cover only express disallowance identified by the auditor in the tax audit report and whether the tax audit report observations can at all be the basis for adjustment u/s 143(1). The observations of the Mumbai bench of the Tribunal, in Kalpesh Synthetics case (supra) in this regard are summarized as under:

The precise and proximate reason for disallowance is the inputs based on the tax audit report.
Can the observations in a tax audit report, by themselves, be justification enough for any disallowance of expenditure under the Act?
Section 143(1)(a)(iv) specifically calls for an adjustment in respect of “disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return”.
It does suggest that when a tax auditor indicates a disallowance in the tax audit report, for this indication alone, the expense must be disallowed while processing under section 143(1) by the CPC.
The tax auditor is an independent person though appointed by the assessee.
The fact remains that the tax auditor is a third party, and his opinions cannot bind the auditee in any manner.
The audit observations are seldom taken as an accepted position by the auditee.
They are mere opinions and at best these opinions flag the issues which are required to be considered by the stakeholders.
On such a fine point of law, considering the conflicting views of the courts, these audit reports are inherently even less relevant.
Audit report requires reporting of a factual position rather than expressing an opinion about the legal implication of that position.
Assuming the finality of the observations by an auditee with, the audit observations, is too unrealistic and incompatible with the very conceptual foundation of independence of an auditor.
Elevating the status of the observations of a tax auditor to a level above that of the Hon’ble Courts seems incongruous and is clearly unsustainable in law.
It is for the Hon’ble Constitutional Courts to take a call on the vires of this provision, and the tribunal is nevertheless required to interpret the provision in a manner to give it a sensible and workable interpretation.
When the opinion expressed by the tax auditor is contrary to the correct legal position, the tax audit report has to make way for the correct legal position.
Under Article 141 of the Constitution of India, the law laid down by the Hon’ble Supreme Court unquestionably binds all. East India Commercial Co. Ltd. vs. Collector of Customs 1962 taxmann.com 5
On a combined reading of articles 215, 226, and 227 It would be anomalous to suggest that a Tribunal over which the High Court has superintendence can ignore the law declared by that Court and start proceedings in direct violation of it.
It is implicit that all the Tribunals subject to courts’ supervision should conform to the law laid down by it.
The views expressed by the tax auditor, cannot be reason enough to disregard the binding views of the jurisdictional High Court. To that extent, the provisions of section 143(1)(a)(iv) must be read down.
What essentially follows is that the adjustments under section 143(1)(a) in respect of “disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return” is to be read as, for example, subject to the rider “except in a situation in which the audit report has taken a stand contrary to the law laid down by Hon’ble Courts above”.
It is also important to bear in mind the fact that what constitutes jurisdictional High Court will essentially depend upon the location of the jurisdictional Assessing Officer.
What a tax auditor states in his report are his opinion and his opinion cannot bind the auditee at all. It is not even an expression of opinion about the allowability of deduction or otherwise; it is just a factual report about the fact of payments and the fact of the due date as per the Explanation to section 36(1)(va).
It cannot, therefore, be said that the reporting of payment beyond this due date in the tax audit report constituted “disallowance of expenditure indicated in the audit report but not taking into account in the computation of total income in the return” as is sine qua non for disallowance of section 143(1)(a)(iv).
When the due date under Explanation to section 36(1)(va) is judicially held to be not decisive for determining the disallowance in the computation of total income, there is no good reason to proceed on the basis that the payments having been made after this due date is “indicative” of the disallowance of expenditure in question.
While preparing the tax audit report, the auditor is expected to report the information as per the provisions of the Act, and the tax auditor has done that, but that information ceases to be relevant because, in terms of the law laid down by Hon’ble Courts, the said disallowance does not come into play when the payment is made well before the due date of filing the income tax return under section 139(1).

In contrast, it is important to reiterate in a summarized manner the observations of the Pune bench of the Tribunal in the context of the reporting of such payments in clause 20(b) of the tax audit report.

Where an auditor reported that the due date for payment was 15th July, 2017 and the actual date for payment had been reported as a later date (in that case as 20th July, 2017, it was manifest that the audit report clearly pointed out that as against the due date of payment of the employee’s share in the relevant funds of 15th July, 2017 for deduction under section 36(1)(va), the actual payment was delayed and deposited on 20th July, 2017.
That for disallowance under sub-clause (iv) of section 143(1)(a), the legislature had used the expression ‘indicated in the audit report’ and the word ‘indicated’ was wider in amplitude than the word ‘reported’, which enveloped both direct and indirect reporting.
Even if there was some indication of disallowance in the audit report, which was short of direct reporting of the disallowance, the case got covered within the purview of the provision warranting the disallowance.
However, the indication must be clear and not vague. If the indication gave a clear picture of the violation of a provision, there could be no escape from disallowance.
If the audit report mentioned the due date of payment and also the actual date of payment with specific reference in clause 20(b) – Details of contributions received from employees for various funds as referred to in section 36(1)(va), it was an apparent indication of the disallowance of expenditure under section 36(1)(va) in the audit report in a case where the actual date of payment was beyond the due date.
Though the audit report clearly indicated that there was a delay in the deposit of the employees’ share in the relevant funds, which was in contravention of the prescription of section 36(1)(va), the assessee chose not to offer the disallowance in computing the total income in the return, which rightly called for the disallowance in terms of section 143(1)(a).

Sub-clause(iv) in express words requires an AO(CPC) to disallow the amount of expenditure that is indicated in the tax audit report and is not taken into account in computing the total income in the return. Without questioning the wisdom of the law passed by the legislature, we wish to limit our views to understanding what is truly stated by the legislature by understanding the legal import of the words ‘indicated in the tax audit report’. Does the term require that for the disallowance to happen an auditor should expressly state that the amount referred to in his report is disallowable by expressing his opinion or the requirement of the tax audit report is to report by identifying the amount and thereafter it is for the AO to disallow the same? A comprehensive reading of the sub-clause(iv), in our opinion, indicates an action on the part of the AO to act by first ascertaining whether the assessee has taken into account the tax audit report in computing the total income in the return and if not only thereafter to apply the sub-clause and proceed to adjust the returned income. In our opinion, the auditor is not required to give his opinion on whether the amount reported is disallowable or not and which is rightful for the reason that the power of the AO to assess the final income is not taken away by entrusting the same to the auditor. There is no automatic disallowance possible. The role of the auditor is therefore limited to indicating the subject matter of the audit under the respective clause of the tax audit report. The dictionary meaning of the term ‘indicate’ is to point out; show, be a sign of, give a reading or state briefly. In the context of the placement, it is very difficult to hold that the term is recommendatory, more so, where the authority to disallow is strictly resting with the AO. The sum and substance of the views are that the term ‘indicated’ is limited to reporting of the quantum and is not even recommendatory of the disallowance. In other words, the reporting by the tax auditor is not a compulsion for the assessee or the AO to disallow the amount and it is only when the assessee had not suo moto disallowed the amount, the AO will use his power to act on such information.

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Whether Belated Deposit of Employees’ Contribution to PF/ESI is Deductible? – Section 36(1)(va)

INTRODUCTION

1.1 Legislations such as The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, The Employees’ Provident Funds Scheme, 1952 [EPF Act], The Employees’ State Insurance Act, 1948 [ESI Act], The Employees’ State Insurance (Central) Regulations, 1950, etc. require an employer to contribute certain sums to the Fund [PF or ESI] created in accordance with such legislations. The contribution to be made under these legislations consists of two parts – (i) the employer’s contribution and (ii) the employee’s contribution which is deducted from the wages payable to the employee.

1.2 With respect to the employer’s contribution, section 36(1)(iv) of the Act grants a deduction in respect of any sum paid by the assessee as an employer by way of contribution towards a recognized provident fund or an approved superannuation fund. This provision has been part of the Act from the beginning.

1.3 The Finance Act, 1983 w.e.f. 1st April, 1984 introduced section 43B to provide that certain deductions are allowed only on actual payment. In short, it provides that the items covered under this section cannot be claimed as a deduction on an accrual basis. This provision contains a non- obstante clause and accordingly overrides other provisions of the Act. This section was amended from time to time to expand the scope thereof and also for various other reasons. Presently, section 43B covers items listed in clauses (a) to (g).

1.4 Section 2(24)(x) of the Income-tax Act, 1961 (‘the Act’) provides that any sum received by an assessee from his employees as a contribution to employees’ welfare funds (such as PF, ESI etc.) shall be treated as income of the assessee employer. Section 36(1)(va) of the Act allows deduction of such sums to which section 2(24)(x) applies if it is credited to the employee’s account in the relevant fund on or before the due date as defined in Explanation 1 to section 36(1)(va), which inter alia provides that the due date for this purpose is the date by which the assessee is required as an employer to credit an employees’ contribution to the employee’s account in the relevant fund under the respective legislations etc. Both these provisions were introduced by the Finance Act, 1987 w.e.f. 1st April, 1988.

1.5 In the context of this write-up, some amendments made in the past in section 43B are worth noting. The Finance Act, 1987 introduced two provisos in section 43B w.e.f. 1st April, 1988. The first proviso, at the time of introduction, provided that the provisions of section 43B would not apply to any sum payable by the way of tax, duty, cess or fee which is actually paid by the assessee on or before the due date for furnishing his Return of Income u/s 139(1) for that year. The second proviso to section 43B [hereinafter referred to as the said Second Proviso] provided that no deduction in respect of any sum payable by an assessee employer by way of contribution to any provident or superannuation or gratuity or any other fund for the welfare of employees shall be allowed unless such sum has actually been paid during the previous year on or before the due date defined in the Explanation to section 36(1)(va).

1.5.1. The said Second Proviso was substituted by the Finance Act, 1989 to make the condition more rigorous with which we are not concerned in this write-up. The first proviso to section 43B (as subsequently amended before 2003) granting relief for permitting payment up to the applicable due date of furnishing the Return of Income was applicable to all the items listed in section 43B, except to the contribution to welfare funds (such as PF, etc.) which was governed by the said Second Proviso and accordingly, this had no benefit of relaxation provided in the first proviso to section 43B (referred to hereinbefore) for making payments up to the applicable due date of furnishing the Return of Income. This position prevailed till the amendments were made by the Finance Act, 2003 (w.e.f. 1st April, 2004) omitting the said Second Proviso and extending the benefit of relaxation provided in the first proviso for making such payment up to the applicable due date of furnishing the Return of Income also to contribution to PF, etc. (covered in section 43B(b)). For this, consequential amendment was also made in the first proviso which was made applicable to all the items listed in Section 43B w.e.f. 1st April, 2004 (hereinafter, this amended first proviso is referred to as the said First Proviso).As such, with these amendments, all the items listed in section 43B (including items listed in section 43B(b)) got covered by the relaxation provided in the said First Proviso to section 43B (hereinafter, these amendments are referred to as Amendment of 2003).

1.5.2 After the above amendments were made, but prior to the Amendment of 2003, the debate had started as to whether the relaxation granted in Section 43B by the introduction of the original first proviso to section 43B referred to in para 1.5 above (not applicable to the items covered in section 43B(b)) is clarificatory in nature and should apply to assessment years prior to A.Y. 1988-89. This issue was finally settled by the Supreme Court in Allied Motors (P) Ltd. [(1997) 224 ITR 677 –SC], and the Supreme Court, in that case, took the view that the benefit of that first proviso will apply retrospectively and will also be available for the assessment years prior to A.Y.1988-89.

1.5.3 After the deletion of the said Second Proviso to section 43B and extending the benefit of relaxation provided in the said First Proviso to section 43B to all the items listed in section 43B (including items covered in section 43B(b) such as contribution to PF, etc.) by the Amendment of 2003, the issue came-up before the various benches of Tribunal and High Courts that whether the Amendment of 2003 should be considered as clarificatory and on that ground should be applied to the assessment years prior to A.Y. 2004-05 to the items covered in section 43B (b) (contribution to welfare funds such as PF, etc.) even if such contributions are belatedly deposited in the relevant Fund so long as such payments are made on or before the applicable due date of furnishing the Return of income.

1.5.4 The Apex Court in the case of Vinay Cement Ltd. (213 CTR 268) dismissed the SLP filed by the Department against the judgment of the Gauhati High Court in the case of George Williamson (Assam) Ltd. (284 ITR 619) in a case dealing with the assessment year prior to A.Y. 2004-05, by stating that the assessee will be entitled to claim the benefit in section 43B for that period also particularly in view of the fact that he has made the contribution to P.F. before filing of the return. Thereafter, the issue referred to in para 1.5.3 finally came-up before the Supreme Court in the case of Alom Extrusions Ltd. [2009] 319 ITR 306 and the Supreme Court settled the issue by taking a view that the Amendment of 2003, omitting the said Second Proviso to Section 43B is clarificatory in nature and should apply retrospectively to the assessment years prior to A.Y. 2004-05. For this, the Court also relied on its judgment of Allied Motors (P) Ltd referred to in para 1.5.2.

1.5.5 The Supreme Court judgment in the case of Allied Motors (P) Ltd. referred to para 1.5.2 above was considered and analysed in this feature in the May 1997 issue of BCAJ. Similarly, the judgment of Alom Extrusions Ltd. referred to in para 1.5.4 above was also considered and analysed in this feature in the January 2010 issue of BCAJ.

1.6 In view of the deletion of the said Second Proviso and consequential amendment in the first proviso (referred to in para 1.5.2 above) by the Amendment of 2003, a further issue also arose as to whether an assessee is entitled to a deduction u/s 36(1)(va) r.w.s. 43B of the Act in respect of employees’ contributions which have been deposited in the Funds created under the respective legislations after the due dates prescribed therein. This issue had given rise to considerable litigation and was a subject matter of dispute before different authorities/High Courts. Many High Courts such as the Bombay High Courts in CIT-4, Mumbai vs. Hindustan Organics Chemicals Ltd. [2014] 366 ITR 1 and in CIT vs. Ghatge Patil Transports Ltd. [2014] 368 ITR 749, Delhi High Court in CIT vs. Dharmendra Sharma [2008] 297 ITR 320 and CIT vs. AIMIL Ltd. [2010] 321 ITR 508, Karnataka High Court in CIT vs. Spectrum Consultants India (P.) Ltd. [2013] 215 Taxman 597 and CIT vs. Magus Customers Dialog (P.) Ltd.[2015] 231 Taxman 379, Uttarakhand High Court in CIT vs. Kichha Sugar Co. Ltd.[2013] 356 ITR 351, Patna High Court in Bihar State Warehousing Corporation Ltd. vs. CIT-1 [2016] 386 ITR 410, Calcutta High Court in CIT-1 vs. Vijay Shree Ltd. [2014] 43 taxmann.com 396, Rajasthan High Court in CIT vs. State Bank of Bikaner & Jaipur [2014] 363 ITR 70, etc. decided the issue in favour of the assessee. In these cases, the High Courts have largely relied on the judgment of the Supreme Court in Alom Extrusions Ltd (supra) without appreciating the fact that this judgment dealt with the case of employers’ contribution to PF, etc. and omission of the said Second Proviso to section 43B by the Amendment of 2003 should not affect the cases of employees’ contribution which is governed by section 36(1)(va). On the other hand, some High Courts such as the Gujarat High Court in CIT-II vs. Gujarat State Road Transport Corporation [2014] 366 ITR 170 (Gujarat) and CIT-I vs. Checkmate Services P. Ltd. (Tax Appeal No. 680 of 2014), Kerala High Court in CIT vs. Merchem Ltd. [2015] 378 ITR 443, etc. had decided the issue against the assessee and held that employees’ contribution in such cases will be governed only by the provisions of section 36(1)(va) which requires the payment of employees’ contribution strictly within the due date prescribed under the respective legislation and section 43B had no application to employees’ contribution.

1.7 Recently, this issue of allowability of claim for deduction of belated deposit of employees’ contribution referred to in para 1.6 above came-up before the Supreme Court in the case of Checkmate Services (P.) Ltd. (and other cases), and the Supreme Court has now settled this dispute and therefore, it is thought fit to consider in this feature.

CIT VS. DHARMENDRA SHARMA [2008] 297 ITR 320 (DEL.)

2.1 As mentioned in para 1.6 above, the Delhi High Court took the view in favour of the assessee. In this case, the Delhi High Court was concerned with the issue as to whether deduction was allowable in respect of delayed payments of employees’ contribution to PF and ESI, which were paid within 2 to 4 days after the grace period provided, but before filing the return of income. The Delhi High Court held that the decision of the Supreme Court in the case of Vinay Cement Ltd. (supra) was applicable to the facts of the case and dismissed the Revenue’s appeal holding that no substantial question of law arises. This decision was followed by the Delhi High Court in CIT vs. P.M. Electronics Ltd. [2009] 313 ITR 161 (Delhi).

CIT VS. AIMIL LTD. [2010] 321 ITR 508 (DEL.)

2.1.1 In this case, the Revenue contended before the Delhi High Court that a distinction is to be made between an employer’s contribution and the employee’s contribution. The Revenue urged that the employees’ contribution which is recovered from the employees’ salaries/wages is in the nature of trust money in the hands of the assessee employer. The Act, accordingly, provides for treating it as income when the assessee employer receives the employees’ contribution and enables the assessee employer to claim deduction only on actual payment by the due date specified in the Explanation below section 36(1)(va) i.e. as per the dates specified under the respective welfare legislations. This argument of the Revenue also did not find favour with the Delhi High Court, and it held that the assessee can claim deduction if the actual payment is made before the return of income is filed in view of the principle laid down by the Supreme Court in Vinay Cement Ltd.’s case. The Court further noted that the EPF Act as well as the ESI Act permits an employer to make the deposit with some delays, subject to payment of interest on delayed payment and levy of penalties.

CIT-II VS. GUJARAT STATE ROAD TRANSPORT CORPORATION [2014] 366 ITR 170 (GUJ.)

3.1 As stated in para 1.6 above, the Gujarat High Court took a contrary view in favour of the Revenue. In this case, the Gujarat High Court observed that the deletion of the said Second Proviso and the effect of the said First Proviso as amended by the Amendment of 2003 is required to be confined to section 43B alone and that deletion of the said Second Proviso cannot be made applicable with respect to section 36(1)(va). The Court further observed that there was no amendment in section 36(1)(va) and that the Explanation to section 36(1)(va) was also not deleted and is required to be complied with. The Court also noted the introduction of Section 2(24)(x), referred to in para 1.4 above, which had also remained unaffected by the Amendment of 2003. Accordingly, the assessee shall not be entitled to a deduction in respect of employees’ contribution received unless the assessee has credited the said sum to the employees’ accounts in the relevant fund or funds on or before the due date mentioned in the Explanation to section 36(1)(va). The Gujarat High Court further held that the decision in the case of Alom Extrusions Ltd. (supra) would not be applicable to the facts of the case and stated as under (page 183):

“…….In the said case before Alom Extrusions Ltd., the controversy was whether the amendment in section 43B of the Act, vide Finance Act, 2003 would operate retrospectively w.e.f. 1/4/1988 or not. It is also required to be noted that in the case before the Hon’ble Supreme Court, the controversy was with respect to employers’ contribution as per section 43(B)(b) of the Act and not with respect to employees’ contribution under section 36(1)(va). Before the Hon’ble Supreme Court in the case of Alom Extrusions Ltd. (supra) the Hon’ble Supreme Court had no occasion to consider deduction under section 36(1)(va) of the Act and with respect to employees’ contribution. As stated above, the only controversy before the Hon’ble Supreme Court was with respect to amendment (deletion) of the Second Proviso to section 43(B) of the Income Tax Act, 1961 by the Finance Act, 1963 operates w.e.f. 1/4/2004 or whether it operates retrospectively w.e.f. 1/4/1988. Under the circumstances, the learned tribunal has committed an error in relying upon the decision of the Hon’ble Supreme Court in the case of Alom Extrusions Ltd. (supra) while passing the impugned judgment and order and deleting disallowance of the respective sums being employees’ contribution to PF Account / ESI Account, which were made by the AO while considering the proviso to section section 36(1) (va) of the Income Tax Act.”

3.2 The above decision was followed by the Gujarat High Court in the case of CIT- I vs. Checkmate Services P. Ltd. (Tax Appeal No. 680 of 2014) while dealing with the same issues of belated deposit of employees’ contribution to PF and ESI for A.Y. 2009-10, and the disallowance made by the AO in this respect was upheld by the High Court reversing the decision of the Tribunal which had decided the issue in favour of the assessee.

CHECKMATE SERVICES (P.) LTD. VS. CIT-1 [2022] 448 ITR 518 (SC)

4.1 The issued referred to in para 1.6 above with regard to deductibility of employees’ contribution to PF and ESI in cases where the same were paid after the due date prescribed under the relevant legislations and regulations came up before the Supreme Court in various cases and it was agreed to treat the judgment of the Gujarat High Court in the case of Checkmate Services (P.) Ltd. (referred to in para 3.2 above) as the lead case for convenience. The Court also noted that in these cases, in the years under consideration, the AO had taken a view that the appellant assessees had belatedly deposited their employees’ contribution towards the PF & ESI, considering the due dates under the relevant legislations and regulations. Consequently, the AO had disallowed such belated payment of employees’ contribution u/s 36(1)(va) r.w.s. 2(24)(x).

4.2 Before the Supreme Court, on behalf of various assesses, different counsels had appeared (hereinafter referred to as the assessee) and had raised various contentions to support the case of the assessee for securing the deductions in respect of such belated deposit of employees’ contribution. These inter alia include: the assessee placed reliance on the decision of the Supreme Court in the case of Alom Extrusions (supra). It was also urged that under the respective welfare legislations the employer was liable to make a composite payment comprising of the employer’s contribution as well as the contribution collected from the employees. Accordingly, the term “sum payable by the assessee as an employer by way of contribution” in section 43B(b) meant both the employer’s contribution as well as the employees’ contribution. The assessee further submitted that the explanation to section 36(1)(va) and the said Second Proviso were brought in together. Therefore, the deletion of the said Second Proviso was intended to give relief to the assesses. It was also urged that the non-obstante clause in section 43B would override other provisions including section 36(1)(va).

4.2.1 The assessee further submitted that sections 2(24)(x) and 36(1)(va) contemplated the amount which was received from its employees as contributions and not any sum which was deducted by the employer assessee from the payments made to employees. It was also urged that ‘received’ and ‘deducted’ are two different terms and cannot be used interchangeably. It was also contended that if the employer assessee deposits the employees’ contribution after the due date prescribed under the respective legislation it is subject to fine or other adverse consequences under that legislation and that the assessee should not be subjected to disallowance under the Act so long as employees’ contribution has been deposited before the applicable due date for furnishing the Return of Income. It was also prayed that the Court should adopt an interpretation that would be pragmatic and in consonance with fairness.

4.3 On behalf of the Revenue it was pointed out that the case of Alom Extrusions Ltd. (supra) was with respect to the employer’s contribution to PF account as opposed to employees’ contribution in the present case. It was also pointed out that the Act differentiated between employer’s contribution to which section 43B applied and employees’ contribution where section 36(1)(va) applied and both these provisions operated in different fields with respect to different contributions and, therefore, section 43B was inapplicable and could not override section 36(1)(va). Based on this, the Revenue contended that the said Second Proviso applied only to employer’s contribution as section 2(24)(x) and 36(1)(va) were still retained. The employees’ contribution stood on a different footing as it was deducted from employees’ salary and was in the nature of deemed income of the assessee as specifically indicated in section 2(24)(x).

4.3.1 The Revenue further contended that the Explanation to section 36(1)(va) which contained the definition of ‘due date’ was clear and if the employer did not deposit the contribution to the respective funds, he would not be entitled to deduction in respect of such sums. It was also submitted that a contribution deducted from the employee’s salary and deposited by the employer could not be termed as employer’s contribution.

4.4 After considering the rival contentions, the Supreme Court proceeded to decide the issue. For this purpose, the Court considered and noted the different relevant provisions/amendments made at different points of time. The Court also noted the fact that when section 36 (i)(va) was introduced, the provisions of Section 36(i)(iv) and 43B were already there on the Statute. The Court also noted that for the purpose of section 36(1)(va), the ‘due date’ is specially defined in the Explanation. The Court also noted the time limit provided for deposit of such contribution under the relevant legislations (EPF/ESI). The Court also noted the fact that the grace period of five days was allowed under the PF Scheme and discontinuance thereof by the Circular dated 8th October, 2016 under the said legislation. The Court also considered the reasons for introduction of section 36(i)(va) as mentioned in the Finance Minister’s speech at the relevant time.

4.5 The Court then stated that the employer’s contribution and the employee’s contribution stand on a different footing as evident from the intention of the Parliament. The Court also noted that the deduction in respect of employer’s contribution to recognized provident fund, etc. is the subject matter of Section 36(iv). Sections 36(1)(va) and 2(24)(x), which deal with employees’ contribution, were introduced by the Finance Act, 1987. With respect to these amendments, the Court stated as under (paras 32 and 33):

“…….This is a significant amendment, because Parliament intended that amounts not earned by the assessee, but received by it, – whether in the form of deductions, or otherwise, as receipts, were to be treated as income. The inclusion of a class of receipt, i.e., amounts received (or deducted from the employees) were to be part of the employer/assessee’s income. Since these amounts were not receipts that belonged to the assessee, but were held by it, as trustees, as it were, Section 36(1)(va) was inserted specifically to ensure that if these receipts were deposited in the EPF/ESI accounts of the employees concerned, they could be treated as deductions. Section 36(1)(va) was hedged with the condition that the amounts/receipts had to be deposited by the employer, with the EPF/ESI, on or before the due date. The last expression “due date” was dealt with in the explanation as the date by which such amounts had to be credited by the employer, in the concerned enactments such as EPF/ESI Acts. Importantly, such a condition (i.e., depositing the amount on or before the due date) has not been enacted in relation to the employer’s contribution (i.e., Section 36(1)(iv)).

33. The significance of this is that Parliament treated contributions under Section 36(1)(va) differently from those under Section 36(1)(iv)………”

4.6 The Supreme Court further observed that the essential character of an employees’ contribution was that it is a part of the employees’ income held in trust by the employer which is underlined by the condition that it has to be deposited on or before the due date. The distinction between employer’s contribution and the employee’s contribution was explained by the Supreme Court as under (para 53):

“The distinction between an employer’s contribution which is its primary liability under law – in terms of Section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers’ income, and the later retains its character as an income (albeit deemed), by virtue of Section 2(24)(x) – unless the conditions spelt by Explanation to Section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts – the employer’s liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees’ income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B.”

Dealing with the argument of the assessee with regard to the effect of non-obstante clause, the Court held that the non-obstante clause in section 43B would not override the employer’s obligation to deposit the amounts retained or deducted from the employee’s income on or before the due date under respective legislations. In this respect the Court stated that (para54):

“ ……… The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees’ contributions- which are deducted from their income. They are not part of the assessee employer’s income, nor are they heads of deduction per se in the form of statutory pay out. They are others’ income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date……”

4.8 The Court also considered the effect of the judgment of the Supreme Court in the case of Alom Extrusions Ltd. (supra) on the issue under consideration as the assessee as well as various High Courts (deciding the issue in favour of the assessee) had largely relied on the same. For this, the Court referred to various findings given in that judgment and noted that the same was concerned with employer’s contribution. Finally, considering the issue on hand, the Court in this respect stated as under (para 45):

“A reading of the judgment in Alom Extrusions, would reveal that this court, did not consider Sections 2(24)(x) and 36(1)(va). Furthermore, the separate provisions in Section 36(1) for employers’ contribution and employees’ contribution, too went unnoticed……”

4.9 Considering the principles of interpretations, the Supreme Court observed that the general principle is that the taxing statutes are to be construed strictly, and that there is no room for equitable considerations. Further, one of the rules of interpretation of a tax statute is that if a deduction or exemption is available on compliance with certain conditions, the conditions are to be strictly complied with. For this, the Court referred to its various earlier decisions. As such, the prayer of the assessee to adopt an interpretation that would be pragmatic and in consonance with fairness did not find favour with the Supreme Court.

4.10 The Supreme Court concluded that employees’ contribution would be allowed as deduction only if payments are made before the due dates prescribed under the respective legislations and accordingly, dismissed the appeals of various assessees against the judgments of High Courts which had decided the issue against the assessees. As such, the judgments of all the High Courts (such as Bombay High Court etc.) referred to in para 1.6 above, in which the issue was decided in favour of the assessee, are no longer good law.

CONCLUSION

5.1 In view of the above judgment of the Supreme Court, the issue referred to in para 1.6 above now stands settled that an assessee employer is eligible to claim a deduction of employees’ contribution only if he deposits such contribution on or before the due date specified in the respective legislations. The provisions of section 43B would have no applicability in so far as employees’ contribution is concerned and, accordingly, if the employees’ contribution is deposited beyond the due date specified in respective legislations but on or before the applicable due date of furnishing Return of Income, the same will still be subjected to disallowance.

5.2 The assessee employers should ensure that each monthly payment of employees’ contributions is deposited as per the respective due dates. The deposit of such contribution for a particular month, if delayed by say even by few days will also be subjected to disallowance under the Act. In such cases, that would be a permanent loss of the deduction.

5.3 It is worth noting that the Court in the above case was concerned with the cases of admitted delay in case of employees’ contribution to PF, etc., beyond the due date provided in the Explanation (presently, Explanation 1 to section 36(1)(va)) and was not concerned with the determination of the due date in these cases. Therefore, in each case such due date will have to be determined first under the said Explanation which defines the ‘due date’ as the date by which such contribution is required to be credited to the employee’s account under the relevant fund under “any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise”. As such, the due date for this purpose will have to be determined on this basis considering the facts of each case. In the context of the issue raised before the Supreme Court in the above cases (regarding delay in deposit of employees’ contribution towards PF and ESI), the Court has held that such due date will have to be as per the respective legislations. As such, the emerging principle is that the due date for this purpose will have to be determined only on the basis of exhaustive definition of ‘due date’ given in the Explanation to section 36(1)(va) and the provisions of section 43B have no application to the cases of employees’ contribution.

5.4 The Finance Act, 2021 introduced Explanation 2 in section 36(1)(va) of the Act w.e.f. 1st April, 2021, clarifying that the provisions of section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the “due date” u/s 36(1)(va). The Finance Act, 2021, also introduced Explanation 5 in section 43B w.e.f. 1st April, 2021, clarifying that the provisions of section 43B shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any of his employees to which the provisions of section 2(24)(x) apply. The Delhi High Court in the case of Pr. CIT vs. TV Today Network Ltd. [2022] 141 taxmann.com 275 (Delhi) held that these amendments made by the Finance Act, 2021 are prospective in nature and would take effect from 1st April, 2021.

5.5 The Supreme Court in the case of ACIT vs. Saurashtra Kutch Stock Exchange Ltd. [2008] 305 ITR 227 (SC) has observed that it is a well-settled principle that a judicial decision acts retrospectively and that Judges do not make law, they only discover or find the correct law. Accordingly, the ratio laid down by the Supreme Court in Checkmate Services (P.) Ltd. with respect to the deductibility of employees’ contribution would apply even for the past assessment years, and the decision of Delhi High Court in TV Today Network (supra) with respect to the prospective application of the amendments by the Finance Act, 2021 would lose its significance. In our view, considering the nature of details required to be given in clause 20(b) of Form No 3CD for the purpose of Tax Audit u/s 44AB, the above judgment dated 12th October, 2022 should not have any direct impact on this reporting requirement.

5.5.1 As the above judgment of the Supreme Court will affect past assessment years also (pending/completed/ in litigation), the liability to pay interest (unless waived, more so in the jurisdictions of High Courts [referred to in para 1.6 above], where the issue was decided in favour of the assessee) is also likely to arise for the past years in many cases. In our view, for the past years, the question of penalty u/s 271(1)(c)/ 270A should not arise as a large number of High Courts had decided the issue in favour of the assessee, more so in the jurisdictions of such High Courts. Knowing how the Department functions in levy of such penalty, especially at the ground level, it would be just and fair for the CBDT to issue general instructions to not levy this penalty in such cases to avoid fruitless litigations on the penalty issue.

5.6 Literally construed, it would appear that the judgment in the above case is correct. The liberal approach adopted by many High Courts (referred to in para1.6 above) has not found favour with the Supreme Court in the above case and the Court applied the principle of strict construction while interpreting taxing statute and interpreted the provisions of section 36(1)(va) on that basis, more so because of the historical background of various amendments made in this respect including in section 43B revealing that even the intention of the Parliament in enacting section 36(1)(va) dealing with employees’ contribution to the PF, etc. is to treat employer’s and employee’s contribution towards PF etc. differently under the Act.

5.7 The possible debate in this respect could be whether the judgment is fair and just. While fairness and justice are not relevant for interpreting a taxing statute as held by courts from time to time in the past, they also are not enemies of taxing statute. One way of looking at the above judgment is that it is fair and just, as Revenue would like to believe, on the ground that the employers having retained the money of the employees, as a trustee, cannot delay the deposit thereof in the relevant fund beyond the prescribed/ specified period. Ideally, this could be true, but the larger question is: is it correct, or even in the national interest, to draft and interpret such laws bearing in mind the ideal situation (which, in practice, is nothing but a myth) as this ignores the ground reality of the way in which the business affairs are run, more so by small and medium business entities in this country. The business entities have to comply with numerous laws and regulations in this country and face the music from officials administering such laws and regulations, apart from running their business and dealing with business-related issues on a day-to-day basis. To comply with the requirements of such laws and regulations of the kind in question, business entities have to depend on lower staff, and some unintended mistakes do take place in real-life situations. No human being can claim that he is perfect. Apart from this, there could be many unforeseen contingencies (such as loss of power or internet connectivity, fire, etc.) leading to such delays. As such, the business entities should not be penalized with permanent disallowance even in such cases of bona fide and/or short delay (even of 1 day in this case), more so without considering reasons for the delay. We should also not forget that the Revenue Department also keeps on making many mistakes of such nature day in and day out while administering the taxing statute, and even the Courts have often pointed out this fact, of course, by and large, without any consequences. If we genuinely desire to make the tax laws fair and just to the extent possible (to achieve the proclaimed goal of achieving ‘ease of doing business’ in real terms), the Act in this regard should be amended to provide (possibly, with retrospective effect) that if such belated payments are made within a reasonable time (say, 6 months), then the deduction should be allowed in the year of actual payment so that such cases do not suffer permanent disallowance. Such an amendment would meet the ends of justice and could be a step forward in reducing the ‘trust deficit’ between the taxpaying community and the tax administration.

5.8 Of course, a larger debate still remains on whether the Government, as a policy, should use the Income-tax Act for compliance with other laws or that should be left to the provisions contained in other laws under which the consequences are already provided for this kind of default. If we genuinely desire to have workable simplified tax laws (and to achieve the goal of ‘ease of doing business’ in the real sense), this debate is absolutely necessary. Let us hope that one day the Government will start thinking of such a debate for a policy decision on issues like this for appropriate decision.

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Offence and prosecution – Failure to furnish return of income – delay of 72 days in filing of return as requisite documents were not supplied to him despite being demanded – no whisper of evasion of income-tax – cognizance taken by Trial Court for offence of tax evasion u/s 276CC was ex facie erroneous.

17. Ashish Agarwal vs. Income-tax Department
[2022] 143 taxmann.com 322 (Rajasthan)
Date of order: 4th August, 2022
Sections: 276CC, r.w.s. 279 of the ITA, 1961

Offence and prosecution – Failure to furnish return of income – delay of 72 days in filing of return as requisite documents were not supplied to him despite being demanded – no whisper of evasion of income-tax – cognizance taken by Trial Court for offence of tax evasion u/s 276CC was ex facie erroneous.

The petitioner was an assessee under the Income-tax Act, 1961. A search and seizure was conducted at the petitioner’s business and residential premises on 24th February, 2016, in furtherance whereof, a notice u/s 153-A of the Act, requiring him to file return of income-tax within 30 days came to be issued.

It is the case of the petitioner that on receipt of the notice, he had sent a letter dated 28th July, 2016 and requested the Dy. Commissioner, Income-tax to provide copies of the statements recorded during the course of the search and other relevant documents so that a return as demanded u/s 153-A can be filed. Later on, the petitioner filed the return of income.

The Commissioner, Income-tax (Central), thereafter issued a show cause notice (SCN) dated 28th February, 2019 u/s 279(1) and asked him why not prosecution u/s 276-CC of the Act, for failure to file return of Income-tax in time be launched against him.

In response to the SCN, the petitioner filed a reply and explained the delay of 72 days inter alia contending that there was no intentional delay in filing the return and he was prevented by sufficient cause, as the requisite documents were not supplied to him despite being demanded. It was also stated that the demand of tax is meagre. And hence, the prosecution sanction be not granted.

The petitioner received summons issued by the Additional Chief Metropolitan Magistrate, Jodhpur Metro (hereinafter referred to as ‘the trial Court’) requiring the petitioner to appear on 28th May, 2022.

On an inquiry being made, the petitioner came to know that the trial Court had taken cognizance of offence u/s 276-CC prima facie finding it to be a case made out against the petitioner.

The petitioner has assailed the aforesaid order dated 21st February, 2018, whereby cognizance has been taken against him so also the proceedings pending before the trial Court.

The Hon. High Court observed that a simple look at the complaint filed by the respondent-Income-tax Department leaves no room for ambiguity that the Department wanted the petitioner’s prosecution u/s 276-CC(ii), as is evident from the caption of the application. If the application is read, it is apparent that the Income-tax Department had desired petitioner’s prosecution for 72 days delay in filing the return. There is not even a whisper of evasion of income-tax, whereas the Id. trial Court, claiming to have perused the record, has observed that the accused (petitioner herein) has not filed his return of income for 2013-14 and has evaded income-tax.

The Court held that the order of the cognizance shows a clear misreading of the complaint and the same suffers from manifest error of law, for which it is liable to be quashed and set aside.

The Court further observed that the petitioner ought to have preferred a revision petition u/s 397 of the Code but then, considering that the petitioner and his group has filed about 80 petitions of identical nature, relegating the petitioners to file revision petition(s), that too when the order impugned suffers from palpable error of law and facts, would lead to multiplicity of litigation and passing of dockets from the High Court to the Revisional Court.

In view of the discrepancy and considering that not only the notice issued to the petitioner before granting prosecution sanction, even the complaint filed by the Department alleges delay in filing return, while eliciting prosecution u/s 276-CC (ii), thus the cognizance, which has been taken for evasion of tax is ex-facie erroneous and deserves to be quashed and set aside.

The Court observed that the order granting prosecution sanction has neither been challenged in the present petition nor can the same be permitted to be questioned before the Court in its jurisdiction u/s 482 of the Code. Because, the act of granting prosecution sanction is an administrative or statutory exercise of powers.

The cognizance order in each of the case was quashed and set aside.

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Search and seizure — Release of seized assets — Unexplained investment — Gold jewellery seized from third party — Findings of fact recorded by Commissioner (Appeals) that purchase of gold by assessee duly substantiated by evidence and finding attaining finality — Seized gold to be released to assessee.

63. Rakeshkumar Babulal Agarwal vs. Principal CIT[2022] 448 ITR 133 (Guj.)
A.Y.: 2018-19
Date of order: 7th March, 2022
Ss. 69, 132, 143(3) and 153C of ITA,1961

Search and seizure — Release of seized assets — Unexplained investment — Gold jewellery seized from third party — Findings of fact recorded by Commissioner (Appeals) that purchase of gold by assessee duly substantiated by evidence and finding attaining finality — Seized gold to be released to assessee.

The assessee carried on business in gold jewellery. Pursuant to a search carried out in the case of one S u/s 132 of the Income-tax Act, 1961, and in the case of one P, the gold jewellery received through courier by the assessee as consignee was also seized by the Department. The AO passed an assessment order against the assessee u/s 143(3) r.w.s.153C for A.Y.2018-19 making an addition on account of unexplained investment u/s 69 of the value of seized gold jewelry received through courier by the assessee as consignee. The assessee stated he had purchased the gold from P.

The Commissioner (Appeals) on the facts found that the assessee had purchased the gold from P and the payment was made through banking channels, that the purchases were recorded in the assessee’s books of account, and that though P in his statement had denied any transactions with the assessee, the assessee had provided the necessary supporting documents and had duly recorded the purchases in the books of account. The Commissioner (Appeals) held that such purchases were not held to be inflated or bogus by the AO and no disallowance was warranted and deleted the protective addition made by the AO. However, the Department refused to release the seized gold jewelry.

The Gujarat High Court allowed the writ petition to release the seized gold jewelry and held as under:

“i) In view of the findings recorded by the Commissioner (Appeals) on the facts that the assessee had purchased gold from P and had made payment through the banking channels and since this finding of fact had attained finality since the Department had not challenged the order passed by the Commissioner (Appeals) before the Tribunal the contention of the assessee that he had purchased the gold in question from P and had also accounted for it in his books of account was accepted.

ii) Therefore, the Department could not withhold the seized gold jewelry and had to release it. The Principal Commissioner should accord approval for the release of seized gold jewellery to the assessee at the earliest.”

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Reassessment — Notice — Death of assessee brought to knowledge of the assessing authorities — Reassessment proceedings and passing of assessment order against deceased assessee without issuing notice to legal heir of assessee — Notice and consequent assessment order invalid and unsustainable.

62. Shobha Mehta (through legal heir Sh. Kanhaya Lal Mehta) vs. ACIT
[2022] 448 ITR 25 (Raj.)
A.Y.: 2015-16
Date of order: 15th September, 2022
Ss. 147 and 148 of ITA, 1961

Reassessment — Notice — Death of assessee brought to knowledge of the assessing authorities — Reassessment proceedings and passing of assessment order against deceased assessee without issuing notice to legal heir of assessee — Notice and consequent assessment order invalid and unsustainable.

Notice u/s 148 of the Income-tax Act, 1961, issued by the Assistant Commissioner and the consequent assessment order u/s 147 r.w.s.144 was challenged by the legal heir of the deceased assessee on the ground that the order was passed against the deceased assessee and was addressed to the legal heir of the assessee but no prior notice of the reopening of the assessment proceedings had been given to the legal heir.

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

“The plea of the assessing authorities that they were not intimated regarding the death of the assessee was factually incorrect. The original assessment order for the A.Y.2015-16 u/s.143(3) indicated that the Deputy Commissioner had been intimated regarding the death of the assessee and had been passed taking into account the fact that the assessee had expired. Notice of reassessment u/s. 148 was issued to the assessee who had expired about six years back. No notice whatsoever was issued to the legal representative of the assessee before undertaking the reassessment proceedings. Therefore, the reassessment and the assessment order u/s. 147 read with section 144 having been passed against the deceased assessee were invalid and unsustainable.”

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Reassessment — Jurisdiction — Condition precedent — Approval of prescribed authority — Recording satisfaction with signature of prescribed authority mandatory — Prescribed authority’s digitally signed approval obtained after issue of notice without recording of satisfaction — AO had no jurisdiction at point of time of issue of notice — Notice without jurisdiction and invalid — Notice and subsequent reassessment proceedings quashed.

61. Vikas Gupta vs. UOI
[2022] 448 ITR 1 (All.)
A.Ys.: 2013-14, 2014-15, 2015-16
Date of order: 8th September, 2022
Ss. 147, 148, 151 and 282A of ITA,1961

Reassessment — Jurisdiction — Condition precedent — Approval of prescribed authority — Recording satisfaction with signature of prescribed authority mandatory — Prescribed authority’s digitally signed approval obtained after issue of notice without recording of satisfaction — AO had no jurisdiction at point of time of issue of notice — Notice without jurisdiction and invalid — Notice and subsequent reassessment proceedings quashed.

In a batch of writ petitions before the Allahabad High Court, the admitted facts were that on the basis of an unsigned alleged digital approval u/s 151 of the Income-tax Act, 1961, the AO issued notices to the assessees u/s 148. The point of time when the aforesaid approval u/s 151 was signed is subsequent to the issuance of notices by the AO u/s 148.

The Allahabad High Court held as under:

“i) According to the provisions of section 151 of the Income-tax Act, 1961 an Assessing Officer gets jurisdiction to issue notice to an assessee u/s. 148 to reopen the assessment u/s. 147 after the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is satisfied on the reasons recorded by the Assessing Officer that it is a fit case for issuing such notice. Section 151 specifically provides for the recording of satisfaction by the prescribed authority, on the reasons recorded by the Assessing Officer that it is a fit case for the issue of notice u/s. 148. Unless such satisfaction is recorded, the Assessing Officer does not get jurisdiction to issue notice u/s. 148. A satisfaction, to be a valid satisfaction u/s. 151 has to be recorded by the prescribed authority under his signature on application of mind and not mechanically.

ii) The first and foremost condition under sub-section (1) of section 282A is that notice or other document to be issued by any Income-tax authority shall be signed by that authority. The word “and” has been used in sub-section (1), in a conjunctive sense meaning thereby that such notice or other document has first to be signed by the authority and thereafter it may be issued either in paper form or may be communicated in electronic form by that authority. The expression “shall be signed” used in section 282A(1) makes the signing of the notice or other document by that authority a mandatory requirement. It is not a ministerial act or an empty formality which can be dispensed with. Therefore, a notice or other document as referred to in section 282A(1) will take legal effect only after it is signed by that authority, whether physically or digitally. The usage of the word “shall” makes it a mandatory requirement.

iii) In the facts of the case, no valid satisfaction was recorded by the prescribed authority u/s. 151 when the Assessing Officer issued the notices to the assessee u/s. 148. Subsequent to issuance of the notices by the Assessing Officer, the satisfaction u/s. 151 was digitally signed by the prescribed authority. Therefore, at the point of time when the Assessing Officer issued notices u/s. 148 he did not have the jurisdiction to issue the notices. Consequently, the notices issued by the Assessing Officer were without jurisdiction. The notices issued u/s. 148 and the reassessment orders u/s. 147, if any, passed by the Assessing Officer and all consequential proceedings were quashed. The concerned authority was at liberty to initiate proceedings, if still permissible, strictly in accordance with law and on due observance of the relevant provisions of the Act and the Rules framed thereunder.”

shailesh.kwebmaker

Housing project — Special deduction — Whether assessee owner or developer — Approvals granted in name of assessee and taxes related to land paid by assessee — Tribunal granting special deduction on analysis of facts and applying correct principles to facts — Proper.

60. CIT vs. Abode Builders
[2022] 448 ITR 262 (Bom.)
A.Y.: 2007-08
Date of order: 16th February, 2022
S. 80-IB(10) of ITA,1961

Housing project — Special deduction — Whether assessee owner or developer — Approvals granted in name of assessee and taxes related to land paid by assessee — Tribunal granting special deduction on analysis of facts and applying correct principles to facts — Proper.

The assessee was a developer and builder. For the A.Y. 2007-08, the AO disallowed the assessee’s claim u/s 80-IB(10) of the Income-tax Act, 1961 on the grounds that (a) the assessee was not the owner of the land on which the project was constructed; (b) the assessee not having invested in the construction activity or done construction, could not be considered as a developer; and (c) the project was approved and commenced before the stipulated date of 1st October, 1998.

The Commissioner (Appeals) allowed the assessee’s claim for deduction, and this was affirmed by the Tribunal.

The Bombay High Court dismissed the appeal filed by the Revenue and held as under:

“i) The Assessing Officer had not disputed the findings of fact of the Tribunal that the assessee had through one of its partners been involved in the project from the beginning with the signing of the principal agreement and primary acquisition of the development rights for the land in question, that the intimation of disapproval issued by the Municipal Corporation and the commencement certificate were in the name of the assessee, that all taxes related to the land were paid by the assessee from the year 1998 onwards and that the assessee had even made payment for the development rights.

ii) Unless the assessee had any role in the development of the project, the joint venture partner would not agree to share 50 per cent of the profit in the project with the assessee. The assessee had submitted the original plan to the concerned authorities on November 7, 1996 for which the intimation of disapproval was granted in the year 1997, and therefore, even if a subsequent intimation of disapproval had been obtained in terms of the Explanation to section 80-IB(10) where the approval for the concerned project was given more than once, the date of final approval would be the operative date of approval.

iii) The Tribunal had found that the project, as completed, was different from the project for which initial approval had been obtained. The life of the intimation of disapproval once granted under the Maharashtra Regional Town Planning Act, 1966 was four years. The original lay-out plan had become invalid after January 7, 2001. The assessee had applied for intimation of disapproval for the second time on November 22, 2001 and was granted permission on July 21, 2002. The Tribunal had concluded on the facts which were not disputed that the second project proposal was only for three buildings as against the four for which the permission was sought earlier and intimation of disapproval for different buildings were granted on different dates and therefore the project for which permission was granted was not the same as that for which the intimation of disapproval had lapsed in the year 2001. When the facts and circumstances had been properly analysed and the correct test was applied to decide the issues no question of law arose.”

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Exemption u/s 10(10AA) — Encashed earned leave by employees — Scope of section 10(10AA) — Complete exemption for employees of Central Government or State Government — Meaning of Government employee — Tamil Nadu Agricultural University — Completely funded by State Government and under its complete control — Retired employees of Tamil Nadu Agricultural University — Entitled to complete exemption in respect of encashed earned leave.

59. Dr. P. Balasubramanian and Ors. vs. CCIT(TDS)
[2022] 448 ITR 318 (Mad.)
Date of order: 10th August, 2022
Ss.10(10AA) of ITA,1961

Exemption u/s 10(10AA) — Encashed earned leave by employees — Scope of section 10(10AA) — Complete exemption for employees of Central Government or State Government — Meaning of Government employee — Tamil Nadu Agricultural University — Completely funded by State Government and under its complete control — Retired employees of Tamil Nadu Agricultural University — Entitled to complete exemption in respect of encashed earned leave.

The petitioners are employees of the Tamil Nadu Agricultural University. The employees had retired from service in 2017, and at the time of retirement, had been granted a surrender of leave salary. An objection was raised by the local fund audit on the grounds that tax ought to have been deducted under the provisions of the Income-tax Act, 1961. Thus, the University sought clarification from the local fund audit as well as from the Income-tax Department.

The petitioners challenged the audit objections issued by the local fund audit calling upon the petitioners to remit the Income-tax on surrender of leave salary on the grounds that tax has not been deducted at source in terms of the Income-tax Act, 1961.

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

“i) Section 10(10AA) of the Income-tax Act, 1961, deals with exemption on encashed earned leave by employees. Section 10(10AA) has two limbs or clauses. Clause (i) deals with the tax treatment of surrender of leave salary at the time of retirement of Central/State Government employee and states that the entire amount will stand exempt from the levy of Income-tax. Clause (ii) states that surrender of leave salary paid to any other employee, barring Central and State Government employees, is subject to a pecuniary limit as prescribed.

ii) The Tamil Nadu Agricultural University is a university that is constituted under a State Act. Section 7 of the Tamil Nadu Agricultural University Act, 1971 provides for an unfettered right of the State to inspect and conduct enquiry into the management of the university, its various activities including teaching, the work conducted by the university, conduct of examinations as well as person or persons who are connected with the administration or finances of the university, by the State. The power exercised by the State Government in the functioning and management of the university is unbridled. The Governor of Tamil Nadu is, in terms of section 9 of the Act, the Chancellor of the University. The funding of the university is entirely at the behest of the State Government. Hence the Tamil Nadu Agricultural University is a part of the State and employees of the Tamil Nadu Agricultural University are Government servants, entitled to the benefit of exemption u/s. 10(10AA)(i) of the Act.

iii) Accordingly, the circular dated February 17, 2015 and consequent communications dated October 30, 2018, March 19, 2019 and November 14, 2016 issued to the petitioners, employees of the Tamil Nadu Agricultural University, by the University, were contrary to law and liable to be set aside.

iv) To be noted that the petitioners are direct employees of the University, and not employees of allied institutions or constituent colleges and the ratio of this decision will apply only to those employees who are under the direct employment of the University per se.”

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Location of Source of Income in Case of Exports

ISSUE FOR CONSIDERATION

Section 9 deems certain incomes to have accrued or arisen in India, thereby making a non-resident liable to tax in India on such income. Clauses (vi) and (vii) of section 9(1) deal with the taxability of income by way of royalty and fees for technical services respectively. As per these clauses, royalty and fees for technical services are deemed to have accrued or arisen in India under the following cases:

a) If they are payable by the Government.

b) If they are payable by a person who is a resident. However, if the properties for which the royalty is payable or the services for which fees are payable are utilized by the resident payer for the purposes of his business or profession carried on by him outside India or for the purposes of making or earning any income from any source outside India then this deeming fiction is not applicable.

c) If they are payable by a person who is a non-resident but only when the properties for which the royalty is payable or the services for which fees are payable are utilized by the non-resident payer for the purposes of his business or profession carried on by him in India or for the purposes of making or earning any income from any source in India.

In the case of export sales, residents need to avail various types of services from non-residents, and the corresponding consideration payable for such services may be characterized as royalty or fees for technical services, as defined in sub-sections (vi) and (vii) respectively of section 9(1). Often, the issue arises in such a case as to whether it can be said that the source of income with respect to export sales is situated outside India and, therefore, such royalty or fees for technical cannot be deemed to have accrued or arisen in India due to the exception provided in sub-clause (b) of clauses (vi) or (vii) of section 9(1). The Madras High Court has taken a view in favour of the assessee by holding that royalty payable on export sales falls under this exception. As against this, the Delhi High Court has taken a view against the assessee by holding that testing fee payable for products to be exported does not fall under this exception as the source of income of the resident payer was situated in India.

AKTIENGESELLSCHAFT KUHNLE KOPP’S CASE

The issue first came up for consideration before the Madras High Court in the case of CIT vs. Aktiengesellschaft Kuhnle Kopp and Kausch W. Germany by BHEL [2003] 262 ITR 513 (Mad). The assessment years involved in this case were 1978-79 to 1982-83. In this case, the assessee was a German company, which had entered into a collaboration agreement with BHEL, an Indian company. By the virtue of this agreement, the assessee had received a a royalty on the export sales made by BHEL. The asseessee claimed that the amount received as royalty was not liable to tax in India. The AO did not accept the claim and completed the assessment taxing the royalty in the hands of the assessee.

The assessee challenged the assessment order before the Commissioner (Appeals), who confirmed the assessment order. Upon further appeal, the Tribunal set aside the assessment and restored the same to the AO to consider the question whether the amount of royalty received was exempt under the Double Taxation Avoidance Agreement (“DTAA”). The AO, once again, completed the assessment bringing the royalty received by the assessee to tax and the same was upheld by the Commissioner (Appeals). In the second round of appeal, the Tribunal held that the royalty payable on export sales could not have been regarded as income deemed to have accrued in India within the meaning of section 9(1)(vi) of the Act. The Tribunal, therefore, held that the royalty on export sales is not taxable. It was this order of the Tribunal which was the subject-matter of the reference before the High Court.

With regard to the taxability of royalty, which was payable on export sales, the High Court held that it was paid out of the export sales and hence, the source of royalty was the sales outside India. Therefore, it could not be deemed to have accrued or arisen in India, though it was paid by a resident in India. Since the source for royalty was from the source situated outside India, the royalty payable on export sales was not taxable in India. On this basis, the High Court upheld the order of the tribunal.

HAVELLS INDIA LTD.’S CASE

The issue, thereafter, came up for consideration of the Delhi High Court in CIT vs. Havells India Ltd. [2013] 352 ITR 376 (Del).

In this case, for A.Y. 2005-06, the assessee paid testing fees of Rs. 14,71,095 to M/s. CSA International, Chicago, Illinois, USA for the purpose of obtaining witness testing of AC contractor as a part of the CB report and KEMA certification. During the course of the assessment proceedings, the AO observed that the assessee had not deducted tax at source u/s 195 of the Act from the amount paid to the US Company and, accordingly, he proposed to disallow the payment by invoking section 40(a)(i). The assessee claimed that the testing was carried out by the US Company outside India, that no income arose or accrued to the US Company in India and, therefore the assessee did not deduct any tax from the amount paid. The AO did not agree with the assesse’s contentions. He held that the amount paid represented fees for technical services rendered by the US Company to the assessee within the meaning of Explanation 2 to Section 9(1)(vii)(b) of the Act, since the testing of the equipment was a highly specialised job of technical nature. The AO also referred to Article 12(4)(b) of the DTAA entered into between India and USA and observed that the payment was also covered under the said article as “fees for included services” as defined therein. According to the AO, the testing report and certification represented technical services which made available technical knowledge, experience and skill to the assessee, because they were utilized in the manufacture and sale of the products in the business of the assessee.

On this basis, the AO disallowed it u/s 40(a)(i) of the Act. Upon further appeal, the CIT (A) agreed with the view of the AO and he further supported it by relying on the decision of the Kerala High Court in Cochin Refineries Ltd. vs. CIT, (1996) 222 ITR 354.

Before the tribunal, the assessee raised the following contentions –

Since the assessee was engaged in the export of goods outside India, the fees for technical services under consideration were paid for the purpose of making or earning income from a source outside India. Thus, it was excluded from the purview of taxability in India due to an exception provided in sub-clause (b) of clause (vii) of section 9(1).

The authorities have erred in holding that the technical report and certification were utilized in the manufacture and sale of the assessee’s products in the assessee’s business in India.

The concerned certification was not required for selling the products in India and it only enabled selling of products in the European Union. Thus, the authorities were wrong in saying that the technical services were utilised by the assessee for its business in India.

In any case, in order to tax the fees for included services in India under Article 12(4)(b) of the DTAA, mere rendering of technical services was not sufficient, and it was necessary that such services should have resulted in ‘making available’ the technical knowledge, experience and skill to the assessee, which was not the case.

On the basis of the aforesaid arguments, the tribunal recorded the following findings –

The certification obtained by the assessee from the US Company was for enabling the export of its products.

The authorities below had not been able to bring anything on record to support their stand that the service of testing and certification had been applied by the assessee for its manufacturing activity within India.

The assessee had been able to show that the testing and certification were necessary for the export of its products, and that these were actually utilised for such export, and were not utilised for the business activities of production in India. The assessee has thus discharged its burden, whereas the Revenue has not been able to show to the contrary, and they had not denied that the utilisation of the testing and certification was in respect of the exports.

In view of these findings, the Tribunal accepted the contention of the assessee that the technical services were utilised for the purpose of making or earning income from a source outside India and was therefore covered by the second exception made in Section 9(1)(vii)(b).

Before the High Court, the assessee reiterated its contentions and also relied upon the decision of the Madras High Court in the case of Aktiengesellschaft Kuhnle Kopp (supra). The High Court observed that this judgement of the Madras High Court certainly was supporting the contentions of the assessee. However, the High Court referred to the earlier decision of the Madras High Court in the case of CIT vs. Anglo French Textiles Ltd. (1993) 199 ITR 785 and observed that it appeared that this earlier decision had not been brought to the notice of the division bench which decided the later case.

In the case of Anglo French Textiles Ltd. (supra), the assessee was a company incorporated under the French laws which were applicable to possessions in Pondicherry in India. It had a textile mill in Pondicherry and its activity consisted in the manufacture of yarn and textiles as well as export of textiles from Pondicherry. The entire business operations were confined to the territory of Pondicherry. After the merger of Pondicherry with India in August, 1962, the Income-tax Act was extended to Pondicherry w. e. f. 1st April, 1963 Till then, the French law relating to income tax was in force in Pondicherry. During the period when the French tax law was in force, the assessee surrendered certain raw cotton import and machinery import entitlements and received payments from the Textile Commissioner (Bombay). The question arose as to the taxability of the income referable to the import entitlements.

While the Income-tax department took the stand that the income accrued to the assessee in India and was therefore taxable under the Act, the assessee claimed that the receipts were in Pondicherry, and since the exports were made from Pondicherry, the income accrued or arose to the assessee in the territory of Pondicherry, which was outside the purview of the Act.

The Madras High Court observed that the import entitlements arose out of the export activity which was carried on by the assessee only in Pondicherry, that no part of the manufacturing or selling activity of the assessee was carried on outside Pondicherry, that the import entitlements were relatable only to the export performance which took place in Pondicherry, and that on the fulfillment of the export activity, a right to receive the export incentive accrued in favour of the assessee in the territory of Pondicherry.

The argument of the department was that the incentive was quantified and sent from Bombay from the office of the Textile Commissioner and, therefore, the income arose within the taxable territories. This argument was rejected by the Madras High Court by holding that “the right to receive the import entitlements arose when the export commitment was fulfilled by the assessee in Pondicherry, though such amount was subsequently ascertained or quantified”.

It was also argued on behalf of the Revenue before the High Court that the import entitlement should be regarded as a source of income in the taxable territories, and u/s 9(1) of the Act, the income arising out of the encashment of the import entitlements should be deemed to accrue or arise in the taxable territories. This argument was also rejected by the High Court on the ground that source of income should be looked at from a practical viewpoint, and not merely as an abstract legal concept.

Applying this earlier judgement of the Madras High Court in the case of Anglo French Textiles Ltd. (supra), the Delhi High Court held that the export activity having taken place or having been fulfilled in India, the source of income was located in India and not outside. The mere fact that the export proceeds emanated from persons situated outside India did not constitute them as the source of income. The export contracts obviously were concluded in India and the assessee’s products were sent outside India under such contracts. The manufacturing activity was located in India. The source of income was created at the moment when the export contracts were concluded in India. Thereafter the goods were exported in pursuance of the contract, and the export proceeds were sent by the importer and were received in India.

The importer of the assessee’s products was no doubt situated outside India, but he could not be regarded as a source of income. The receipt of the sale proceeds emanated from him from outside India. He was, therefore, only the source of the monies received. The income component of the monies or the export receipts was located or situated only in India. Thus, on this basis, the High Court drew a distinction between the source of the income and the source of the receipt of the income. In order to fall within the second exception provided in Section 9(1)(vii)(b) of the Act, the source of the income, and not the receipt, should be situated outside India.

On this basis, the Delhi High Court held that since the source of income from the export sales could not be said to be located or situated outside India, the case of the assessee could not be brought under the second exception provided in section 9(1)(vii)(b).

Further, the Delhi High Court also rejected the contention raised by assessee that the income arose not only from the manufacturing activity but also arose because of the sales of the products, and if necessary, a bifurcation of the income should be made on this basis, and that portion of the income which was attributable to the export sales should qualify for the second exception. The High Court relied upon the observations of the Supreme Court in the case of CIT vs. Ahmedbhai Umarbhai, (1950) 18 ITR 472 (SC) that the place where the source of income was located might not necessarily be the place where the income also accrues and held that this question was not material in the present case, because they were concerned only with the question as to where the source was located.

As far as the issue of taxability under the DTAA was concerned, the High Court restored it to the tribunal to decide, as it had not considered this issue on account of the view it took regarding the taxability of the fees for technical services under the Act.

The Madras High Court in a later decision in the case of Regen Powertech (P) Ltd. vs. DCIT [2019] 110 taxmann.com 55 (Madras) has agreed with the view of the Delhi High Court in Havells India Ltd. (supra).

OBSERVATIONS

The primary issue for consideration is the place where the source of income can be said to be located when a resident exports goods outside India. Whether the source of income in such case can be considered to have been located outside India because it arises from the export of goods outside India and it is received from a person situated outside India?

In order to address this issue, it is first imperative to understand the meaning of the term ‘source of income’. The Judicial Committee in Rhodesia Metals Ltd. vs. Commissioner of Income Tax, (1941) 9 ITR (Suppl.) 45, observed that a “source” means not a legal concept but one which a practical man would regard as a real source of income. The observations of the Judicial Committee (supra) as to what is a source of income have been approved by the Supreme Court in CIT vs. Lady Kanchanbai [1970] 77 ITR 123.

The Allahabad High Court has explained the meaning of source of income in the case of Seth Shiv Prasad vs. CIT, (1972) 84 ITR 15 (All.), in the following words –

“A source of income, therefore, may be described as the spring or fount from which a clearly defined channel of income flows. It is that which by its nature and incidents constitutes a distinct and separate origin of income, capable of consideration as such in isolation from other sources of income, and which by the manner of dealing adopted by the assessee can be treated so.”

Thus, the source of income needs to be understood from the perspective of the person who is earning that income. It is something from which the income flows to him. In view of these guidelines, what needs to be considered is whether it is the activity that generates the income which needs to be considered as the source of that income or whether it is the person from whom the income flows that needs to be considered as the source of that income. If the activity generating the income is regarded as the source of income, then the place at which that activity has been carried on would be regarded as the place where the source of that income is situated. However, if the person from whom the income has been received is regarded as the source of income, then the place where that person is located would be regarded as the place where the source of that income is situated.

Normally, it should be the activity generating the income which should be considered as the source of income. The income is earned by the person through the activitiy which he carries on and in which he employs his resources. The receipt of the income and the person from whom it is received are merely the offshoots of the activity carried on by the person. The receipt of the income is merely a final step within the activity, and that by itself should not be considered to be the source of income disregarding the whole of the activity. Similarly, in case of export sales, the customer situated in a foreigh country to whom the goods have been sold and from whom the sale consideration is received should not be regarded as the source of income, disregarding the fact that the origin of the export sales is the business which has been carried on from India.

Further, if the other person with whom the activity has been carried on and from whom the income has been received is considered to be the source of income, then the same activity will result into multiple sources of income, merely because it has been carried on with multiple persons. For example, consider a case of a person who is engaged in a business involving domestic sales as well as export sales, and that too to different countries. In such a case, it will be illogical to consider every person to whom or every geographical segment to which the sales have been made as a separate and distinct source of income.

It is true that every part of the activity contributes to the income which is being earned from that activity. So, as a result, it can be said that income accrues partly from the sales and partly from the other business functions which are involved. As a corollary, if the sales are made outside India, then the part of that income which is attributable to sales is also accruing outside India. But, here, we are concerned with the source of income and not the accrual of income.

A distinction has been drawn between the source of income and the accrual of income by the Supreme Court in the case of CIT vs. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472. It has been held that the income may accrue or arise at the place of the source or may accrue or arise elsewhere. Thus, merely because the income needs to be considered as partly accruing outside India to the extent it is attributable to the export sales, the source of income per se cannot be considered to be located outside India. This aspect has also been considered by the Delhi High Court in its decision.

Consider a case where the income is earned from the exploitation of an asset, e.g., income earned from renting of an immovable property. In such a case, merely because the person to whom the property has been leased out is situated outside India and the rent is also received from him outside India, it will be illogical to conclude that the source of income is situated outside India. As the location of the asset in case of asset-based income is the material factor to decide where the source of income is located, the location of the actitiy in case of activity-based income is the material factor to decide where the source of income is located.

In the following cases, a view similar to the view of the Delhi High Court in the case of Havells India Ltd. (supra) has been taken by holding that the source does not refer to the person who makes the payment, but it refers to the activity which gives rise to the income-

Asia Satellite Telecommunications Co. Ltd. vs. DCIT (2003) 85 ITD 478

International Hotel Licesnsing Co. In re (2007) 288 ITR 534 (AAR)

South West Mining Ltd. In re (2005) 278 ITR 233 (AAR)

Dorf Ketal Chemicals LLC vs. DCIT (2018) 92 taxmann.com 222 (Mumbai – Trib.)

Infosys Ltd. vs. DCIT (2022) 140 taxmann.com 600 (Bangalore – Trib.)

International Management Group (UK) Ltd. vs. ACIT (2016) 162 ITD 219 (Del)

In PrCIT vs. Motif India Infotech (P) Ltd 409 ITR 178, the Gujarat High Court held that in a case where technical services were provided by a supplier to overseas customers of a software company directly outside India, the fees for technical services was paid by the assessee for the purpose of making or earning any income from any source outside India, and clearly, the source of income, namely the assessee’s customers, were the foreign based companies. In this case, the assessee had certain contracts for rendering outsourcing services in Philippines. For rendering such services, it had availed services of a Philippines company. Therefore, the services had been rendered outside India. The Gujarat High Court distinguished the Delhi High Court decision in Havell’s case, stating that the facts were different. Perhaps, in the case before the Gujarat High Court, the fact that the services were performed outside India for the overseas customers, which services also had to be physically performed outside India, had a direct bearing on the matter.

In view of the above, the better view seems to be the one adopted by the Delhi High Court that the source of income cannot be considered to be located outside India solely on the basis that the income is derived from export of goods outside India.

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Estimate of income — Accounting — Rejection of accounts — Estimate should be fair — Local knowledge and circumstances of assessee should be taken into consideration — Modification of estimate of AO by Tribunal based on material on record — Justified — No question of law arose.

58. Principal CIT vs. Smart Value Products and Services Ltd
[2022] 448 ITR 145 (HP)
A.Y.: 2009-10
Date of order: 28th March, 2022
S. 11 of ITA, 1961

Estimate of income — Accounting — Rejection of accounts — Estimate should be fair — Local knowledge and circumstances of assessee should be taken into consideration — Modification of estimate of AO by Tribunal based on material on record — Justified — No question of law arose.

In the return of income for the A.Y.2009-10, the assessee had declared gross turnover to the tune of Rs. 91,90,10,669 and net profit to the tune of Rs. 1,06,69,510. Thus, the net profit rate was 1.16 per cent. The AO rejected the accounts. The AO prepared the trading account and the gross profit of the assessee came out to be Rs. 36,39,54,887 against sales of Rs. 71,24,69,335 and, as a result, the gross profit rate came to 51.8 per cent. Consequently, an addition of Rs. 14.48 crores was made by the AO.

Since in the subsequent years, the Revenue Department accepted the net profit rate in the case of the assessee at 2.53 per cent and 2.99 per cent, therefore, the Commissioner (Appeals) applied the average of the net profit of assessed income of the subsequent two years for the purpose of determining the profit of the assessee. This was upheld by the Tribunal.

The Himachal Pradesh High Court dismissed the appeal filed by the Revenue and held as under:

“i) Section 145 of the Income-tax Act, 1961 empowers the Assessing Officer to reject the books of account of the assessee if he finds them defective. The estimate of income made in consequence should be fair. The Assessing Officer should not act dishonestly or vindictively or capriciously. History, knowledge of previous returns, local knowledge, circumstances of the assessee are to be considered to arrive at a fair and proper estimation.

ii) The appellate authority as well as the Tribunal had carefully gone through the record of the case and had found that the Assessing Officer had computed the month wise and quarter wise trading account for enhancing the gross profit. The Assessing Officer had failed to consider the genuine purchases and sales made by the assessee, which had been duly entered in the books of account. The nature of business carried on by the assessee was also not considered by the Assessing Officer. The assessee was receiving goods throughout the year from different warehouses, through bills or challans. Lump-sum payments were made to the different suppliers throughout the year. All the records, i.e., books of account, sales and purchase vouchers had been fully produced by the assessee.

iii) In the subsequent assessment years, the Assessing Officer had passed the orders u/s. 143(3) of the Act in respect of the same business activities of the assessee, which gave rise to net profit of 2.53 per cent. and 2.99 per cent. In the facts and circumstances of the case, the Tribunal had rightly dismissed the appeal filed by the Revenue.”

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(A) Double taxation avoidance — Deduction of tax at source — Effect of section 90 — Provisions of DTAA applicable wherever more beneficial to assessee — Contract between Indian company and American company — Provisions of DTAA more beneficial for purposes of deduction of tax at source — Provisions of DTAA applicable — Definition in DTAA of technical services more beneficial to assessee — Tax not deductible at source as payment to American company by way of reimbursement of employees of American company seconded to it.
(B) Deduction of tax at source — Certificate for deduction at lower rate or nil deduction — Difference between sections 195 and 197 — Application u/s 195 to be made by person making payment.

57. Flipkart Internet Pvt. Ltd. vs. Dy. CIT(IT)
[2022] 448 ITR 268 (Kar.)
A.Y.: 2020-21
Date of order: 24th June, 2022
Ss. 90, 195 and 197 of ITA, 1961 and
Art.12 of India-US DTAA

(A) Double taxation avoidance — Deduction of tax at source — Effect of section 90 — Provisions of DTAA applicable wherever more beneficial to assessee — Contract between Indian company and American company — Provisions of DTAA more beneficial for purposes of deduction of tax at source — Provisions of DTAA applicable — Definition in DTAA of technical services more beneficial to assessee — Tax not deductible at source as payment to American company by way of reimbursement of employees of American company seconded to it.

(B) Deduction of tax at source — Certificate for deduction at lower rate or nil deduction — Difference between sections 195 and 197 — Application u/s 195 to be made by person making payment.

The assessee was engaged in the business of providing information technology solutions and support services for the e-commerce industry. In the course of its business, the assessee made payments in the nature of ‘pure reimbursements’ to W of USA for the A.Y. 2020-21 and requested the Department for issuance of a ‘certificate of no deduction of tax at source’. The payment of salaries to the deputed expatriate employees was made by W for administrative convenience and the assessee made reimbursements to W. With respect to such payments, the assessee applied for a certificate u/s 195 of the Income-tax Act, 1961. W and F of Singapore had entered into an inter-company master services agreement dated 28th May, 2019 for the secondment of employees and provision of services. In terms of the master services agreement (MSA), either of the parties or its affiliates could use the seconded employees, and the party placing the secondees would invoice the compensation and the wage cost of secondees incurred in the home country. The MSA had two distinct parts: (i) relating to the provision of services and (ii) the secondment of employees. In terms of the MSA, W seconded four employees to the assessee and entered into a ‘global assignment arrangement’ with the seconded employees, which provided that the seconded employees would work for the benefit of the assessee. In response to the invoices raised by W as regards the payments made towards salaries of the seconded employees, the assessee intended to make payments to W and in that context, made an application u/s 195(2) requesting for permission to remit the cost-to-cost reimbursements to be made without deduction of tax at source. The application was rejected.

The Karnataka High Court allowed the writ petition filed by the assessee challenging the order of rejection and held as under:

“i) Section 90(2) of the Income-tax Act, 1961, provides that where the Central Government has entered into an agreement with a country outside India for the purpose of granting relief of tax or for avoidance of double taxation in relation to the assessee, the provisions of the Act would apply to the extent they are more beneficial to the assessee. The Supreme Court in Engineering Analysis Centre Of Excellence Pvt. Ltd. v. CIT [2021] 432 ITR 471 (SC) has clarified that where the provisions of the “Double Taxation Avoidance Agreement” are more beneficial than the provisions of the Act, it is the Agreement that should be treated as the law that requires to be followed and applied.

ii) Section 195 of the Act deals with deduction of tax in cases where payment is to be made to a non-resident. Section 195(2) and section 197 of the Act are in the nature of safeguards for the assessee and are to be invoked to avoid consequences of a finding eventually after assessment that the payer ought to have made deduction and in such case, it would be open to treat the assessee as “an assessee-in-default” in terms of section 201 of the Act, leading to prosecution being initiated under section 276B against the payer and disallowance of expenses u/s. 40(a)(ia) of the Act.

iii) The recourse to section 195(2) was perfectly in consonance with the object of section 195. It was maintainable.

iv) Article 12(1) of Double Taxation Avoidance Agreement between India and the United States of America provides for taxation of royalties and fees for included services arising in a contracting State and paid to a resident of the other contracting State. Further, article 12(2) provides that royalties and fees for included services may also be taxed in the contracting State in which they arise. “Fees for included services” is defined in article 12(4). Section 195(2) of the Act, placed an obligation on the assessee to make deduction of tax under sub-section (1) where payment of any sum chargeable under this Act was being made to a non-resident. The words “chargeable under this Act” if read in conjunction with provisions of article 12(4) of the Double Taxation Avoidance Agreement and the obligation u/s. 195(2), it becomes clear that the definition of “fees for included services” under article 12(4) was more beneficial to the assessee in so far as its obligation to deduct the tax was concerned. Accordingly, article 12(4) was to be applied to determine the liability to deduct tax.

v) In terms of article 12(4)(b) for the purpose of construing fees for included services, it is necessary that the rendering of technical or consultancy services must make available technical knowledge, experience, skill, know-how or processes. Further, it may also consist of development and transfer of a technical plan or technical design. It is not a mere rendering of technical or consultancy services, but the requirement of make available in terms of article 12(4)(b) that has to be fulfilled. The master services agreement, if subjected to scrutiny as regards the aspect of secondment did not reveal the satisfaction of the requirement of “make available” which is a sine qua non for being fees for included services. The fact that the employees seconded has the requisite experience, skill or training capable of completing the services contemplated in secondment by itself was insufficient to treat it as fees for included services de hors the satisfaction of the “make available” clause. The “make available” requirement that is mandated under article 12(4) granted benefit to the assessee and accordingly, the question of falling back on the provisions of section 9 of the Act did not arise. On this score alone, the conclusion in the order of the payment for the service falling within the description u/s. 9 of the Act as “deemed income”, had to be rejected. The only order that could now be passed was of one granting “nil tax deduction at source”.”

The court clarified that the finding as regards to the deduction of tax at source u/s 195 of the Act is tentative and the question of liability of the recipient was to be decided subsequently. Accordingly, there was no question of prejudice to the Revenue at the stage of the section 195 order.

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(A) Appeal to High Court — Powers of High Court — Has power to consider question of jurisdiction even if not raised before Tribunal.
(B) Penalty u/s 271(1)(c) — Concealment of income or furnishing inaccurate particulars thereof — Notice — Validity — Notice must clearly specify nature of offence — Notice which is vague is not valid.

56. Ganga Iron and Steel Trading Co. vs. CIT
[2022] 447 ITR 743 (Bom.)
Date of order: 22nd December, 2021
Ss. 260A and 271(1)(c) of ITA,1961

(A) Appeal to High Court — Powers of High Court — Has power to consider question of jurisdiction even if not raised before Tribunal.

(B) Penalty u/s 271(1)(c) — Concealment of income or furnishing inaccurate particulars thereof — Notice — Validity — Notice must clearly specify nature of offence — Notice which is vague is not valid.

Penalty u/s 271(1)(c) of the Income-tax Act, 1961, imposed by the AO, was upheld by the Tribunal. In the appeal before the High Court, the assessee raised the following question of jurisdiction for the first time:

“Whether the show-cause notice dated February 12, 2008 issued to the appellant without indicating that there was concealment of particulars of income or furnishing of incorrect particulars of such income would vitiate the penalty proceedings or whether such notice as issued can be held to be valid?”

The Bombay High Court admitted the question, decided the case in favour of the assessee and held as under:

“i) An appeal u/s. 260A can be entertained by the High Court on the issue of jurisdiction even if that issue was not raised before the Appellate Tribunal.

ii) A penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee’s favour. Assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other’s defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness.

iii) In the show-cause notice dated February 12, 2008, the Assistant Commissioner was not clear as to whether there was concealment of particulars of income or whether the assessee had furnished inaccurate particulars of income. Issuance of such show-cause notice without specifying whether the assessee had concealed particulars of his income or had furnished inaccurate particulars of the same had resulted in vitiating the show-cause notice. The notice was not valid.”

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45. Subsidy in the nature of remission of sales tax given to promote industries is capital in nature and not chargeable to tax. Further, a subsidy under a retention pricing scheme is eligible for deduction u/s 80IB of the Act.

Tata Chemicals Ltd vs. Deputy Commissioner of Income-tax
[2022] 95 ITR(T) 134 (Mumbai – Trib.)
ITA No.: 2439(MUM) of 2011
A.Y.: 2003-04
Date of order: 16th February, 2022
Sections: 4, 80IB

45. Subsidy in the nature of remission of sales tax given to promote industries is capital in nature and not chargeable to tax. Further, a subsidy under a retention pricing scheme is eligible for deduction u/s 80IB of the Act.

FACTS

During the captioned A.Y. the assessee company merged with a corporate entity. The assessee did not claim a deduction u/s 80IB of the Act in the revised return pursuant to the merger but reserved the right to claim it during the assessment proceedings.

During the assessment proceedings, the AO taxed the sales tax incentive considering the same as a revenue item and held that the fertilizer subsidy was not eligible for deduction u/s 80(IB).

Aggrieved, the assessee filed an appeal before the CIT(A). However, the assessee’s appeal was dismissed on the following grounds:

Sales tax incentive scheme does not have a direct nexus with the activities of the industrial unit.

Fertilizer subsidy provided by the government as price concession was not income from the industrial undertaking and therefore not eligible for deduction u/s 80(IB).

Aggrieved, the assessee filed further appeal before the ITAT.

HELD

While deliberating on the sales tax incentive scheme, the ITAT relied on the Apex Court decision in CIT vs. Ponni Sugars & Chemicals Ltd. 306 ITR 392, wherein it was held that the object behind the subsidy determines the nature of the subsidy/incentive. Further, the form of granting the subsidy was immaterial. Thus, it was held that the sales tax incentive money received was capital in nature and hence not subject to tax.

On the subsidy of fertilizers, the ITAT observed that the same was under price retention scheme i.e. the Government decides the Maximum Retail Price (MRP) and pays the difference between the cost of fertilizers and the decided MRP to the assessee in the form of a subsidy. Further, it was held that the aforesaid subsidy was allowed as a deduction u/s 80IB of the Act by the Apex Court decision in CIT vs. Meghalaya Steels Ltd.38 ITR 17 (SC).

Accordingly, the ITAT allowed the appeal of the assessee.

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44. Amended provisions of section 56(2)(vii)(b) of the Act cannot be applied retrospectively.

Rajib Rathindra Saha. vs. Income-tax Officer (International Taxation)
[2022] 95 ITR(T) 216 (Mumbai – Trib.)
ITA No.: 7352 (Mum.) of 2019
A.Y.: 2014-15
Date of order: 21st February, 2022
Section: 56(2)(vii)(b)

44. Amended provisions of section 56(2)(vii)(b) of the Act cannot be applied retrospectively.

FACTS

The assessee, an individual, paid earnest money for the purchase of an immovable property in 2010. The assessee executed the agreement to purchase the said property on 31st March, 2013 and paid the stamp duty on 18th March, 2013. The property was actually registered on 2nd April, 2014.

In the course of assessment proceedings for A.Y. 2014-15, the AO pointed out the fact that the stamp duty valuation on the date of registration was higher than the cost of acquisition of the property. Accordingly, the said difference was bought to tax u/s 56(2)(vii)(b) of the Act, as amended vide Finance Act, 2013. The assessee requested the AO to refer the matter to the departmental valuation officer (DVO), but the same was rejected and an order was passed making an addition of the difference between the stamp duty value and the cost of acquisition.

Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) referred the matter to DVO and directed the AO to re-compute the income of the assessee accordingly.

Aggrieved, the assessee filed further appeal before the ITAT.

HELD

The assessee submitted that the agreement of the property was executed and stamp duty was paid on 31st March, 2013 i.e. during A.Y. 2013-14.

Prior to the amendment, where any immovable property was received without consideration and the stamp duty value of which exceeded Rs. 50,000 the stamp duty value of such property would be charged to tax. The Finance Act, 2013 introduced an amendment to section 56(2)(vii)(b), according to which the difference between the stamp duty value and the consideration paid became taxable in the hands of the purchaser.

Since the said amendment to section 56(2)(vii)(b) was applicable from A.Y. 2014-15, the said provision could not be applied to the assessee. Reliance was placed on the decision of the Ranchi Bench of Tribunal in Bajrang Lal Naredi vs. ITO [IT Appeal No. 327 (Ran.) of 2018, dated 2-1-2020].

An alternate contention was raised by the assessee, wherein it was stated that the DVO has erred in valuing the property on 31st March, 2013 as against 2010, when the earnest money was paid by the assessee.

The Departmental Representative submitted that since the property was actually registered during A.Y. 2014-15, the amended provisions were applicable in the present case.

The ITAT held that the registration of the agreement was a compliance of a legal requirement under the Registration Act, 1908 and accordingly, was not relevant while deciding the date of purchase of the property.

Accordingly, the ITAT allowed the appeal of the assessee and deleted the addition u/s 56(2)(vii)(b) on the basis that the agreement of purchase of property was executed during A.Y. 2013-14, and thus the amended section 56(2)(vii)(b) of the Act, being applicable w.e.f. 1st April, 2014, could not be made applicable to the assessee.

Further, the actual registration of property was a procedural formality as a consequence of the execution of agreement and hence not relevant to ascertain the date of purchase of the property.

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43. Where the land of the assessee was situated beyond 5 km from the nearest Municipal Corporation, as per Notification No. SO 9447, dated 6th January, 1994 issued for Chenglepet Municipality, the land was agricultural land and hence out of ambit of ‘capital asset’ as defined u/s 2(14).

Mohideen Sharif Inayathulla Sharif vs. Income-tax officer
[2022] 95 ITR(T) 345 (Chennai – Trib.)
ITA No.: 658 (Chny) of 2020
A.Y.: 2011-12
Date: 7th March, 2022
Sections: 2(14), 45

43. Where the land of the assessee was situated beyond 5 km from the nearest Municipal Corporation, as per Notification No. SO 9447, dated 6th January, 1994 issued for Chenglepet Municipality, the land was agricultural land and hence out of ambit of ‘capital asset’ as defined u/s 2(14).

FACTS

The assessee sold certain land in his village and did not offer any capital gains on the sale on the grounds that it was an agricultural land. A copy of Google maps was submitted by the assesse to establish that land was located beyond 5 km from the nearest Municipal Corporation. Further, the certificate issued by Village Administrative Officer was furnished by the assessee in support of his claim.

Reliance was also placed by the assessee on the notification No. SO 9447 dated 6th January, 1994, wherein it was stated that the distance for Chenglepet Municipality was 5 Km.

The AO contended that the definition of agricultural land was applicable w.e.f. 1st April, 2014 and prior to the amendment the distance was 8 km and not 5 km from Municipal Corporation. Accordingly, long term capital gains were computed by the AO.

Aggrieved, the assessee filed an appeal before the CIT(A), however, the appeal of the assessee was dismissed. Aggrieved, the assessee filed further appeal before the ITAT.

HELD

The ITAT observed that the factual considerations with respect to the location of the land and the certificate issued by the Village Administrative Officer were undisputed.

Based on the submissions of the assesse, the ITAT concurred with the view of the assessee. The ITAT ruled that the Notification No. SO 9447, dated 6th January, 1994 issued for Chenglepet Municipality has also been accepted by the CIT(A) and accordingly, the relevant area will be 5 km and not 8 km. Moreover, the ITAT observed that the fact that the revenue records still show the impugned land as agricultural land was not rebutted by the AO.

Accordingly, the ITAT allowed the appeal of the assessee and deleted the additions made.

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42. Where the identity of the shareholders has been established, no addition could be made u/s 68 with respect to the increase in share capital and share premium.

Greensaphire Infratech (P.) Ltd. vs. Income-tax Officer
[2022] 95 ITR(T) 464 (Amritsar – Trib.)
ITA No.:213 (ASR.) of 2017
A.Y.: 2012-13
Date of order: 23rd December, 2021
Section: 68

42. Where the identity of the shareholders has been established, no addition could be made u/s 68 with respect to the increase in share capital and share premium.

FACTS

The assessee company during the year under consideration had issued shares to five individuals and two body corporates by way of share capital and share premium.

In the course of assessment proceedings, the AO called for certain details about the issue of share capital. The assessee furnished certain explanations with respect to the details of shares issued. Not being satisfied with the identity and genuineness of the allottees, the AO invoked section 68 of the Act and treated the issue of share capital and premium as income of the assessee.

Aggrieved, the assessee filed an appeal before the CIT(A), however, the appeal of the assessee was dismissed. Aggrieved, the assessee filed further appeal before the ITAT.

HELD

The assessee submitted that the transaction was carried out through normal banking channels and the identity of subscribers to the company had been established through various documents namely, the financial statements, PANs of the allottees, the Memorandum of Association and Form No. 23AC filed by the corporate allottees and ledger confirmations from the parties.

The assessee also submitted that once the identity of parties has been established, the onus to prove the genuineness of the transaction lies with the Revenue. Reliance was placed on the ruling of the Apex Court in Pr. CIT vs. Paradise Inland Shipping (P.) Ltd. [2018] 93 taxmann.com 84.

Reliance was also placed on the ruling of the Bombay High Court in CIT vs. Gagandeep Infrastructure Ltd. [2017] 394 ITR 680 and the ruling in ITO vs. Arogya Bharti Health Park (P.) Ltd. [IT Appeal No. 2943 (Mum.) of 2014, dated 17th October, 2018, wherein it was held that the amendment to section 68 of the Act, vide Finance Act, 2012 was prospective in nature and applicable from A.Y. 2013-14 onwards. Accordingly, the same will not apply to the impugned A.Y. 2012-13. It was also observed in the aforesaid ruling, that no addition could be made in the hands of the assessee but addition, if any, could be made only in the hands of the allottees of such shares.

Further, it was submitted by the assessee that issue of shares being a capital transaction, cannot be considered as income in its hands. Reliance was placed on the following decisions in this regard:

G.S. Homes and Hotels (P.) Ltd. vs. Dy. CIT 387 ITR 126

Vodafone India Services (P.) Ltd. vs. Union of India [2014] 368 ITR 1 (Bom.)

Pr. CIT vs. Apeak Infotech [2017] 397 ITR 148

The ITAT considered the above decisions and concurred with the view of the assessee company, stating that the assessee had furnished voluminous documents to establish the identity of the shareholders. Further, the ITAT held that the share capital and share premium, being transactions on ‘capital account’, cannot be considered as income of the assessee.

Accordingly, the ITAT allowed the appeal of the assessee and deleted the addition u/s 68 of the Act.

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41. Interest granted u/s 244A cannot be withdrawn by the AO in an order passed u/s 154 by holding that the proceedings resulting in refund were delayed for reasons attributable to the assessee.

Grasim Industries Ltd. vs. DCIT
TS-813-ITAT-2022(Mum.)
A.Y.: 2007-08
Date of order :18th October, 2022
Section: 244A

41. Interest granted u/s 244A cannot be withdrawn by the AO in an order passed u/s 154 by holding that the proceedings resulting in refund were delayed for reasons attributable to the assessee.

FACTS

In the course of appellate proceedings before the Tribunal, in an appeal preferred by the assessee, the assessee raised an additional ground with regard to the amount suo moto disallowed by the assessee u/s 14A. The additional ground so raised was allowed by the Tribunal. The AO upon passing an order dated 16th May, 2016 to give effect to the order of the Tribunal, worked out the amount of refund due to be Rs. 54,52,12,250 which included interest of Rs. 21,25,91,553 which was granted from 1st April, 2007.

Subsequently, the AO passed an order u/s 154 withdrawing the interest granted u/s 244A to the extent attributable to the refund arising as a result of additional ground being raised by the assessee on the grounds that the delay in granting refund is due to assessee’s raising additional ground in respect of suo moto disallowance u/s 14A. He held that the case of the assessee is squarely covered by section 244A(2) of the Act.

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 on behalf of the assessee it was contended that the issue in appeal is covered in favour of the assessee by co-ordinate bench decision in the case of DBS Bank Ltd. vs. DDIT [(2016) 157 ITD 476 (Mum.)].

HELD

What is essential for declining interest to the assessee u/s 244A(2) is that the delay in refund must be on account of reasons attributable to the assessee, and where there is a dispute about the period for which interest is to be declined, the Chief Commissioner or Commissioner must take a call, in favour of the AO’s stand, on the same. The Tribunal observed that none of these conditions are satisfied on the facts of this case. Just because an assessee has raised a claim by way of an additional ground of appeal before the Tribunal, it does not necessarily mean that the delay is attributable to the assessee – this delayed claim could be on account of subsequent legislative or judicial developments, or on account of other factors beyond the control of the assessee. This exercise of ascertaining the reasons of delay is an inherently subjective exercise, and well beyond the limited scope of mistake apparent on record on which no two views are possible. In any case, there is no adjudication by the Chief Commissioner or the Commissioner on the period to be excluded – something hotly contested by the assessee. The Tribunal held that unless that adjudication is done, the denial of interest u/s 244A cannot reach finality, and, for this reason also, it was held that the impugned order does not meet with the approval of the Tribunal.

The ground of appeal filed by the assessee was allowed.

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40. Where the assessee had paid indirectly higher tax than actually liable, it shows that there was no malafide intention on the part of the assessee and the Department had no revenue loss. Since there is no revenue loss to the Department, therefore, there is no question of levying penalty on the assessee.

Bagaria Trade Impex vs. ACIT
ITA No. 310/Jp./2022
A.Y.: 2017-18
Date of order: 27th September, 2022
Section: 270A

40. Where the assessee had paid indirectly higher tax than actually liable, it shows that there was no malafide intention on the part of the assessee and the Department had no revenue loss. Since there is no revenue loss to the Department, therefore, there is no question of levying penalty on the assessee.

FACTS

The assessee firm filed its return of income declaring therein a total income of Rs. 95,48,815. While assessing the total income of the assessee an addition of Rs. 1,84,650 was made to the returned total income on account of interest income short declared in the return of income.

During the previous year relevant to assessment year under consideration the assessee in its return of income declared interest income of Rs. 16,61,850 (13,46,850 + 3,15,000). As per Form No. 26AS, the assessee’s interest income was Rs. 18,46,500 (14,96,500 + 3,50,000). Thus, the AO held that the assessee had declared less interest income.

In the course of assessment proceedings when this fact came to the knowledge of the assessee, the assessee vide its letter dated 31st July, 2019 stated that it is willing to pay tax on this amount and requested the AO to adjust the amount of refund due to it. It was mentioned that the assessee had, in its return of income, considered net amount of interest income instead of considering the gross amount.

The AO levied penalty u/s 270A of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the levy of penalty.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that it is undisputed fact that the amount of TDS was not claimed by the assessee and the assessee made a self-declaration of this fact. Therefore, it cannot be said that there was a misrepresentation or suppression of facts on the part of the assessee. The Tribunal noted that the assessee had not claimed credit for TDS which appears to be a bonafide mistake as the CA of the assessee was not able to detect this fact during the audit. The Tribunal observed that the assessee had short stated its interest income by Rs. 1,84,650 and had not claimed TDS credit of Rs. 1,84,650. Tax on income short stated worked out to Rs, 57,057 while tax which remained with the Revenue amounted to Rs. 1,84,650. Considering this fact the Tribunal concluded that assessee had paid indirectly higher tax than actually liable which goes to show that there was no malafide intention on the part of the assessee and the Department had no revenue loss. The Tribunal held that since there is no revenue loss to the department, therefore, there is no question of levying penalty upon the assessee. The Tribunal held that the levy of penalty was not justified and therefore it deleted the same.

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39. In case the assessee’s prayer on facts is not to be accepted, a reasonable opportunity of being heard is to be granted putting the issue to the notice of the assessee.

Surinder Kumar Malhotra vs. ITO
ITA No. 240/Chd./2020
A.Y.: 2011-12
Date of order: 9th September, 2022
Section: 54F

39. In case the assessee’s prayer on facts is not to be accepted, a reasonable opportunity of being heard is to be granted putting the issue to the notice of the assessee.

FACTS

The present appeal was filed by the assessee, for A.Y. 2011-12, being aggrieved by the order dated 11th March, 2022 passed by NFAC, Delhi acting as First Appellate Authority. The assessee was inter alia aggrieved by the CIT(A) confirming the disallowance of claim of deduction under section 54F of the Act by ignoring the applicable judicial precedents including the jurisdictional High Court of Punjab and Haryana.

The claim of the assessee was disallowed on the grounds that the sale proceeds have been applied for acquiring two separate properties. The assessee had in statement of facts pleaded that these were adjoining properties and may be treated as a single unit in terms of various decisions available.

The CIT(A) dismissed the appeal on the legal issue and in para 6 of his order stated that the assessee has not argued anything further.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noticed and drew the attention of the DR to the statement of facts recorded by the CIT(A) on page 2 of the impugned order where it is claimed that two adjoining houses were purchased hence the claim was allowable. The Tribunal referred to the grounds of appeal filed before the CIT(A) and also to the statement of facts wherein it was clearly mentioned that the assessee is a senior citizen who has purchased two adjoining residential houses through two sale deeds dated 7th December, 2010 and 21st March, 2011.

The Tribunal observed that:

(i) the CIT(A) has completely ignored the facts pleaded on record;

(ii) the assessee no doubt has purchased two separate residential houses, however, it is also a fact that consistently the assessee who is a senior citizen has pleaded in writing, which is on record that these were adjoining residential houses, hence, constituted one single unit. No finding has been given by tax authorities on this claim; and

(iii) legal position on two adjoining flats constituting a single residential unit is well settled.

The Tribunal recorded its painful dissatisfaction and disappointment in the passing of the order by the authorities and set aside the order back to the file of the AO for factual verification of facts by accepting the prayer of the DR that the matter needs verification at the end of the AO. The Tribunal also directed that in case the prayer of the assessee on facts is not accepted, a reasonable opportunity of being heard be granted putting the issue to the notice of the assessee.

The Tribunal observed that – “The obdurate attitude of ignoring the written pleadings on record is most unfortunate. Unfortunately such arbitrary orders reek of a backlog of colonial mind set. It needs to be kept in mind that the Tax Authorities are acting as servants of the Government of India. Hence are expected to be live and alert to the citizens for whom and on whose behalf, the functionaries of the State act. In the blind race of showing high disposal the careless ignoring of facts pleaded causes unaccounted harm to the reputation and fairness of the Tax Administration. It erodes the trust and faith of the citizens in the fairness of the functioning of the tax administration. It not only causes harassment to the citizens but also reflects on the arbitrary functioning of the tax administration. Such a reputation and record should not be created.”

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38. MA filed on the ground that the Revenue has filed an appeal u/s 260A of the Act with the Bombay High Court in the case on which reliance was placed while deciding the appeal and also in view of subsequent SC order dismissed.

DCIT vs. Cipla Ltd.
MA No. 177/Mum./2022 in
ITA No. 1219/Mum./2018
A.Y.: 2010-11
Date of order: 19th September, 2022
Section: 254

38. MA filed on the ground that the Revenue has filed an appeal u/s 260A of the Act with the Bombay High Court in the case on which reliance was placed while deciding the appeal and also in view of subsequent SC order dismissed.

FACTS

The appeal of the assessee against the order of lower authorities disallowing claim u/s 37(1) was allowed by the Tribunal vide order dated 20th September, 2021 by relying on the decision of the jurisdictional bench of the Tribunal in Aristro Pharmaceuticals Pvt. Ltd. vs. ACIT.

Subsequently, the Revenue preferred this MA before the Tribunal on the grounds that the revenue has filed an appeal against the order of the Tribunal in Aristro Pharmaceuticals Pvt. Ltd. (supra) before the Bombay High Court, which appeal is pending and also that the Supreme Court in the case of Apex Laboratories vs. DCIT LTU [135 taxmann.com 286 (SC)] has, on identical facts, upheld the disallowance u/s 37(1) of the Act.

HELD

The Tribunal noted that the sole dispute of the Revenue is that the order of Hon’ble Tribunal in Aristro Pharmaceuticals Pvt. Ltd. (supra) relied upon while deciding the appeal of the assessee was not accepted by the Revenue and further an appeal u/s 260A of the Act has been filed before the Hon’ble Bombay High Court, and is pending. Also, on similar issue, The Supreme Court has passed an order in the case of Apex Laboratories (supra) on 22nd February, 2022.

The Tribunal observed that while deciding the appeal of the assessee it had relied upon an order of the co-ordinate bench in respect of allowability of sales promotion expenses.

The Tribunal held that provisions of section 254(2) are envisaged for the rectification of the mistake apparent from the record but not to review the order. If submissions made on behalf of the revenue are accepted it would amount to review of the order which is not within the purview of section 254(2) of the Act.

The Tribunal dismissed the miscellaneous application filed by the Revenue.

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Immunity from Penalty for Under-Reporting and from Initiation of Proceedings for Prosecution – Section 270AA

BACKGROUND

With a view to introduce objectivity, clarity and certainty, the Finance Bill, 2016 proposed a levy of penalty for under-reporting of income in lieu of penalty for concealment of particulars of income or furnishing inaccurate particulars of income. W.e.f. Assessment Year 2017-18, in respect of additions which are made to total income, penalty is leviable u/s 270A if there is under-reporting of income.

Under section 270A, penalty is levied at 50 per cent of tax for under-reporting of income and at 200 per cent of tax for under-reporting in consequence of misreporting. Of course, levy of penalty u/s 270A has to be in accordance with the provisions of section 270A.

Section 276C, providing for prosecution for wilful attempt to evade tax, etc., has been amended by the Finance Act, 2016 w.e.f. 1st April, 2017 to cover a situation where a person under-reports his income and tax on under-reported income exceeds Rs. 2,500,000.

Since, provisions of section 270A are enacted in a manner that in most cases, where there is an addition to the total income, penalty proceedings u/s 270A will certainly be initiated and barring situations covered by sub-section (6) of section 270A, penalty will also be levied. The Legislature, with a view to avoid litigation, has simultaneously introduced section 270AA to provide for grant of immunity from penalty u/s 270A and from initiation of proceedings u/s 276C and section 276CC.

IMMUNITY GRANTED BY SECTION 270AA

The Finance Act, 2016 has, w.e.f. 1st April, 2017, introduced section 270AA, which provides for immunity. The Delhi High Court in Schneider Electric South East Asia (HQ) Pte. Ltd. vs. ACIT [WP(C) 5111/2022; Order dated 28th March, 2022, has held that the avowed legislative intent of section 270AA is to encourage/incentivize a taxpayer to (i) fast-track settlement of issue, (ii) recover tax demand; and (iii) reduce protracted litigation.

Section 270AA achieves this objective by granting immunity from penalty u/s 270A and from initiation of proceedings u/s 276C and section 276CC, in case the assessee chooses not to prefer an appeal to CIT(A) against the order of assessment or reassessment u/s 143(3) or 147, as the case may be, and also pays the amount of tax along with interest within the period mentioned in the notice of demand.

Section 270AA has six sub-sections. It has not been amended since its introduction.

In this article, for brevity sake,

i) ‘immunity from imposition of penalty u/s 270A and initiation of proceedings u/s 276C or section 276CC’ is referred to as ‘IP&IPP’;

ii) an application by the assessee made u/s 270AA(1) for grant of IP&IPP is referred to as ‘application u/s 270AA’;

iii) the order of assessment or reassessment u/s 143(3) or 147, as the case may be, in which the proceedings for imposition of penalty u/s 270A are initiated and qua which immunity is sought by an assessee is referred to as ‘the relevant assessment order’;

iv) under-reporting in consequence of misreporting or under-reporting in circumstances mentioned in sub-section (9) of section 270A is referred to as ‘misreporting’; and

v) Income-tax Act, 1961 has been referred to as ‘Act’.

BRIEF OVERVIEW OF SECTION 270AA

An assessee may make an application, for grant of IP&IPP, to the AO, if the assessee cumulatively satisfies the following conditions –

(a) the tax and interest payable as per the order of assessment or reassessment u/s 143(3) or section 147, as the case may be, has been paid;

(b) such tax and interest has been paid within the period specified in such notice of demand;

The application for grant of IP&IPP needs to be made within a period of one month from the end of the month in which the relevant assessment order has been received. The application is to be made in the prescribed form i.e. Form No. 68 and needs to be verified in the manner stated in Rule 129. [Sub-section (2)]

The AO shall grant immunity if all the conditions specified in sub-section (1) are satisfied and if the proceedings for penalty have not been initiated in circumstances mentioned in sub-section (9). However, such an immunity shall be granted only after expiry of the time period for filing of appeal as mentioned in section 249(2)(b) [i.e. time for filing an appeal to the CIT(A) against the relevant assessment order] [sub-section (3)]

Within a period of one month from the end of the month in which the application is received by him, the AO shall pass an order accepting or rejecting such application. Order rejecting application shall be passed only after the assessee has been given an opportunity of being heard. [sub-section (4)]

The order made under sub-section (4) shall be final. [Sub-section (5)]

Where an order is passed under sub-section (4) accepting the application, neither an appeal to CIT(A) u/s 246A, nor the revision application u/s 264 shall be admissible against the relevant assessment order. [sub-section (6)]

SCOPE OF IMMUNITY

The immunity granted u/s 270AA is from imposition of penalty u/s 270AA and for initiation of proceedings u/s 276C or section 276CC.

Immunity granted u/s 270AA will be only for IP&IPP and not from imposition of penalty under other sections such as 271AAB, 271AAC, etc., though penalty under such other provisions may be initiated in the relevant assessment order itself.

CONDITIONS PRECEDENT FOR APPLICABILITY OF SECTION 270AA

An application u/s 270AA can be made only upon cumulative satisfaction of the conditions mentioned in sub-section (1) – see conditions mentioned at (a) to (c) in the para captioned `Brief overview of section 270AA’.

Sub-section (1) does not debar or prohibit an assessee from making an application even when penalty has been initiated for misreporting.

The application for immunity can be made only if the proceedings for imposition of penalty u/s 270A have been initiated through an order of assessment or reassessment u/s 143(3) or section 147, as the case may be, of the Act.

In a case where an assessment is made u/s 143(3) pursuant to the directions of DRP, it would still be an assessment u/s 143(3) and therefore an assessee will be entitled to make an application u/s 270AA.

In a case where search is initiated after 31st March, 2021, assessment of total income will be vide an order passed u/s 147 of the Act and therefore, it would be possible to make an application u/s 270AA in such cases.

Orders passed u/s 143(3) r.w.s. 254; section 143(3) r.w.s. 260; 143(3) r.w.s. 263 and 143(3) r.w.s. 264 which result in an increase in quantum of assessed income/reduction in amount of assessed loss and consequential initiation of proceedings u/s 270A, upon assessments being set aside by revisional / appellate authority as also orders passed to give effect to the directions of appellate authorities, will also qualify for making an application for grant of immunity u/s 270AA. The following reasons may be considered to support this proposition –

i) Sections 143, 144 and 147 are the only sections under which an assessment can be made;

ii) Section 270AA refers to `order of assessment’ and not ‘order of regular assessment’;

iii) The Bombay High Court has in Caltex Oil Refining (India) Ltd. vs. CIT [(1975) 202 ITR 375], held that “For these reasons, the impugned order of assessment passed by the ITO pursuant to the directions of the appellate authorities with a view to giving effect to the directions contained therein was an order of assessment within the meaning of section 143 or section 144 ….”

iv) The Madras High Court in Rayon Traders (P.) Ltd. vs. ITO [(1980) 126 ITR 135] has held that “An order passed by the ITO to give effect to an appellate order would itself be an order under section 143(3).”

v) Where the appellate authority’s order necessitates a re-computation e.g., when it holds that a particular receipt is not income from business but is a capital gain, the AO has to pass an order under this section (refers to section 143) making a proper calculation and issue a notice of demand [Law & Practice of Income-tax, 11th Edition by Arvind P. Datar; Volume II – page 2521 commentary on section 143];

vi) The order itself mentions that it is passed u/s 143(3) though it is followed by ‘read with …..’;

vii) Contextual interpretation requires that these orders would be regarded as ‘order of assessment u/s 143(3)’ for the purpose of section 270AA;

There can be hardly any arguments against the above stated proposition except contending that it is an order passed u/s 143(3) read with some other provision.

To avoid any litigation on this issue and to achieve the avowed object with which section 270AA is enacted, it is advisable that the matter be clarified by the Board.

An interesting issue will arise in cases where an assessment made u/s 143(3) without making any addition to returned income is sought to be revised for rectifying a mistake apparent on record after giving notice to the assessee and such rectification results in an increase in assessed income and also initiation of proceedings for levy of penalty u/s 270A. In such a case while the penalty is initiated in the course of rectification proceedings, the assessment is still u/s 143(3), and all that the order passed u/s 154 does is to change the amount of total income assessed u/s 143(3) by rectifying the mistake therein and consequently the amount of tax and interest payable will also undergo a change and a fresh notice of demand will be issued. It appears that the assessee, in such a case also, will be entitled to make an application for grant of immunity u/s 270AA if the assessee pays the amount of tax and interest as per the notice of demand issued along with order passed u/s 154 and such tax and interest is paid within the time mentioned in such notice of demand and the assessee does not prefer an appeal against the addition made via an order passed u/s 154. It is submitted that it would not be proper to deny the immunity on the ground that the proceedings for imposition of penalty have been initiated via an order which is not passed u/s 143(3) or section 147. The language of sub-section (1) is that ‘the tax and interest payable as per the order of assessment under section 143(3) has been paid within the period specified in the notice of demand’. The tax and interest payable pursuant to an order passed u/s 154 only rectifies the amount of tax and interest payable computed in the order of assessment u/s 143(3). Even going by the avowed intent of the legislature it appears that an application in such cases should be maintainable. In a case where the assessment made u/s 143(3) by making additions to returned income is sought to be rectified and against such assessment the assessee had applied for and was granted immunity, it appears that the assessee will be entitled to immunity since, as has been mentioned, order u/s 154 only amends the amount of assessed income in the assessment order passed u/s 143(3). However, if against the assessment u/s 143(3) the assessee had preferred an appeal to CIT(A) and such an assessment is rectified by passing an order u/s 154 the assessee may not qualify for making an application u/s 270AA.

The application for grant of immunity cannot be made where the proceedings for levy of penalty u/s 270A have been initiated by CIT(A) or CIT or PCIT.

Normally, the time period granted to pay the demand is thirty days. However, if the time mentioned in the notice of demand is less than thirty days, then the amount of tax and interest payable as per notice of demand will have to be paid within such shorter period as is mentioned in the notice of demand if the assessee desires to make an application for grant of IP&IPP.

If there is an apparent mistake in the calculation of the amount mentioned in the notice of demand accompanying the relevant assessment order, the assessee may choose to make an application for rectification u/s 154 of the Act. In the event that the rectification application is not disposed of before the expiry of the time period within which the application for grant of IP&IPP needs to be made, then the assessee will have to make the payment of amount demanded (though incorrect in his opinion) since pendency of rectification application cannot be taken up as a plea for making an application u/s 270AA(1) for grant of IP&IPP beyond the period mentioned in section 270AA(1).

It is not the requirement for making an application u/s 270AA that there should necessarily be some amount of tax and interest payable as per the relevant assessment order. Therefore, even in cases where the amount of demand as per the relevant assessment order is Nil (e.g. loss cases), subject to satisfaction of other conditions, an assessee can make an application u/s 270AA.

The CBDT has clarified that an immunity application by the assessee will not amount to acquiescence of the issue under consideration, for earlier years where a similar issue may have been raised and may be litigated by the assessee, and authorities will not take any adverse view in the prior year/s – Circular No. 5 of 2018, dated 16th August, 2018.

TIME WITHIN WHICH APPLICATION NEEDS TO BE MADE

The application for grant of immunity needs to be made within a period of one month from the end of the month in which the relevant assessment order is received by the assessee [Section 270A(2)].

Section 249(2)(b) provides that the time available for filing an appeal to the CIT(A), against the relevant order, if the same is appealable to CIT(A), is 30 days from the date following the date of service of notice of demand. Consequent to introduction of section 270AA, second proviso has been inserted to section 249(2)(b) to exclude the period beginning from the date on which the application u/s 270AA is made to the date on which the order rejecting the application is served on the assessee. Therefore, in a case where the application u/s 270AA is rejected and the assessee upon rejection of the application chooses to file an appeal to CIT(A), then the second proviso to section 249(2)(b) will come to the rescue of the assessee to exclude the period mentioned therein. However, the benefit of the second proviso will be available to the assessee only if he has filed an application u/s 270AA before the expiry of the time period for filing an appeal. In cases where the application u/s 270AA is made after the expiry of the time period of filing the appeal to CIT(A), the appeal of the assessee will be belated and the assessee will need to make an application to the CIT(A) seeking condonation of delay which application may or may not be allowed by CIT(A). This is illustrated by the following example–

Suppose, an assessee receives an assessment order passed u/s 143(3) on 10th December, 2022, wherein penalty u/s 270A has been initiated and the assessee is eligible to make an application u/s 270AA, then the assessee can make an application u/s 270AA till 31st January, 2023. The time period for filing an appeal against this assessment order is 9th January, 2023. If the assessee files his application u/s 270AA on say 2nd January, 2023 then in the event that the application of the assessee is rejected by passing an order u/s 270AA(4) on 14th February, 2023, then for computing the time period available for filing an appeal to CIT(A), the period from 2nd January, 2023 to 9th January, 2023 will need to be excluded and assessee will still have eight days from 14th February, 2023 (being the date of service of order u/s 270AA(4)) to file an appeal to the CIT(A). However, if the above fact pattern is modified only to the extent that the assessee chooses to file an application u/s 270AA on 14th January, 2023, then upon rejection of such application the assessee does not have any time available to file an appeal to the CIT(A), as there is no period which can be excluded from the time available u/s 249(2)(b). In this case, the assessee will need to make an application for condonation of delay in filing an appeal and will be at the mercy of CIT(A) for condoning the delay or otherwise.

Therefore, it is advisable to file an application u/s 270AA by a date such that in case the application u/s 270AA is rejected, then the assessee still has some time available to file an appeal to CIT(A).

TO WHOM IS THE APPLICATION REQUIRED TO BE MADE, FORM OF APPLICATION – PHYSICAL OR ELECTRONIC? FORM OF APPLICATION AND VERIFICATION THEREOF

The application u/s 270AA for grant of IP&IPP needs to be made to the AO [section 270AA(1)]. The application needs to be made to the Jurisdictional Assessing Officer (JAO) in all cases i.e. even in cases where the assessment was completed in a faceless manner u/s 143(3) r.w.s.144B.

The application u/s 270AA needs to be made in Form No. 68. The Form seeks basic details from the assessee. Form No. 68 has a declaration to be signed by the person verifying the said form. The declaration is to the effect that no appeal has been filed against the relevant assessment order and that no appeal shall be filed till the expiry of the time period mentioned in section 270AA(4) i.e. the period within which the AO is mandated to pass an order accepting or rejecting the application made by an assessee u/s 270AA.

Form No. 68 is to be filed electronically on the income-tax portal. On the portal, Form 68 is available at the tab e-File>Income Tax Forms>File Income Tax Forms>Persons not dependent on any Source of Income (source of income not relevant)>Penalties Imposable (Form 68)(Form of Application under section 270AA(2) of the Income-tax Act, 1961). Presently, immunity is granted by the JAO. The JAO who is holding charge of the case of the assessee can be known from the income-tax portal.

ACTION EXPECTED OF AO UPON RECEIVING THE APPLICATION

The AO, upon verification that all the conditions mentioned in sub-section (1) are cumulatively satisfied and also that the penalty has not been initiated for misreporting, shall grant immunity after expiry of the period for filing an appeal u/s 249(2)(b) [Section 270A(3)]. In other words, upon a cumulative satisfaction of the conditions, granting of immunity is mandatory.

The AO is not required to obtain approval of any higher authority for granting IP&IPP.

In the case of GE Capital US Holdings Inc vs. DCIT [WP No. (C) – 1646 /2022; Order dated 28th January, 2022, the Petitioner approached the Delhi High Court to issue a writ declaring Section 270AA(3) as ultra vires the Constitution of India or suitably read it down to exclude cases wherein the AO has denied immunity without ex-facie making out a case of misreporting of income. The Court observed that in the facts of the case before it – (i) the SCN did not particularize as to on what basis it is alleged against the Petitioner that he has resorted to either under-reporting or misreporting of income; and (ii) there was no finding even in the assessment order that the Petitioner had either resorted to under-reporting or misreporting. The Court has issued notice to the Department and till the next hearing has stayed the operation of the order passed u/s 270AA(4) and directed the AO not to proceed with imposition of penalty u/s 270A.

TIME PERIOD WITHIN WHICH AO IS REQUIRED TO PASS AN ORDER ON THE APPLICATION OF THE ASSESSEE FOR GRANT OF IP&IPP

While sub-section (3) casts a mandate on the AO to grant immunity upon satisfaction of the conditions mentioned in the previous paragraph, sub-section (4) provides that the AO shall within a period of one month from the end of the month in which an application has been received for grant of IP&IPP, pass an order accepting or rejecting such application. Proviso to sub-section (4) provides that an order rejecting application for grant of IP&IPP shall be passed only after the assessee has been given an opportunity of being heard.

Except in cases where penalty u/s 270A has been initiated for misreporting, it is not clear as to whether there could be any other reason as well for which application for grant of IP&IPP can be rejected by the AO. This is on the assumption that the assessee has satisfied conditions precedent stated in sub-section (1) of section 270AA.

While the outer limit for passing an order accepting or rejecting an application has been provided for in section 270AA(4) namely, one month from the end of the month in which the application for grant of immunity has been received, the AO will have to ensure that such an order is passed only after expiry of the period mentioned in section 249(2)(b) for filing an appeal to CIT(A).

A question arises as to what is the purpose of sub-section (4) since sub-section (3) clearly provides that the AO shall grant IP&IPP. One way to harmoniously interpret the provisions of these two sub-sections would be that in cases where conditions mentioned in sub-section (3) are satisfied, it is mandatory for the AO to grant immunity whereas in cases where conditions mentioned in sub-section (3) are not satisfied, it is discretionary on the part of the AO to grant immunity. This would be one way to reconcile the provisions of the two sub-sections, and it would in certain cases appear that such an interpretation would advance the intention of the legislature to avoid litigation. For example, take a case where the under-reporting of income is Rs. 10.05 crore, of which Rs. 5 lakh is on account of misreporting, whereas the balance Rs. 10 crore is for under-reporting simplicitor and the assessee applies for grant of immunity by paying the amount of tax and interest within the time mentioned in the notice of demand and does not file an appeal against such an order. If one were to interpret the provisions of sub-section (3), it would appear that the AO is not under a mandate to grant immunity but sub-section (4) possibly grants him a discretion to pass an order accepting or rejecting the application for grant of IP&IPP. This view can also be supported by the fact that if the initiation of penalty for misreporting was a disqualification, it would have been mentioned as a condition precedent in sub-section (1) that penalty should not have been initiated in the circumstances mentioned in sub-section (9) of section 270A of the Act. As on date, this view has not been tested before the judiciary. In case the AO chooses to reject the application then, of course, he will need to grant an opportunity of being heard to the assessee.

Also, it appears that in a case where the assessee has made an application for grant of IP&IPP and the AO is of the view that the penalty u/s 270A has been initiated in the circumstances mentioned in sub-section (9) of section 270A, then he may grant an opportunity to the assessee. The assessee, in response, may show cause as to how his case is not covered by the circumstances mentioned in sub-section (9), in case the AO is convinced with the submissions/ contentions of the assessee, he may pass an order granting immunity. Sub-section (4) is a statutory recognition of the principle of natural justice.

The Delhi High Court in the case of Schenider Electric South East Asia (HQ) PTE Ltd. [WP No. 5111/2022 & C.M. Nos. 15165-15166/2022; Order dated 28th March, 2022] was dealing with the case of a Petitioner whose application for grant of immunity was rejected by passing an order u/s 270AA(4) on the ground that the case of the Petitioner did not fall within the scope and ambit of section 270AA. The Court observed the show cause notice initiating the penalty proceedings did not specify the limb whether “under-reporting” or “misreporting”. The Court held that in the absence of particulars as to which limb of section 270A is attracted and how the ingredients of sub-section (9) of section 270A are satisfied, the mere reference to the word “misreporting” in the assessment order to deny immunity from imposition of penalty and prosecution makes the impugned order passed u/s 270AA(4) manifestly arbitrary. The Court set aside the order passed by the AO u/s 270AA(4) and directed the AO to grant immunity to the Petitioner.

To the similar effect is the ratio of the decision of the Delhi High Court in the case of Prem Brothers Infrastructure LLP vs. National Faceless Assessment Centre [WP No. (C) – 7092/2022; Order dated 31st May, 2022].

CONSEQUENCES OF AO NOT PASSING AN ORDER WITHIN THE TIME PERIOD MENTIONED IN SUB-SECTION (4) OF SECTION 270AA

The Delhi High Court in the case of Ultimate Infratech Pvt. Ltd. vs. National Faceless Assessment Centre, Delhi High Court – WP (C) 6305/2022 & CM Applns. 18990-18991/2022; Order dated 20th April, 2022] was dealing with the case of an assessee who filed a Writ Petition challenging the order levying penalty u/s 270A and also sought immunity from imposition of penalty u/s 270A of the Act in respect of income assessed vide assessment order for A.Y. 2017-18. The assessment of total income was completed by reducing the returned loss. There was no demand raised on completion of the assessment. The assessee filed an application u/s 270AA for grant of IP&IPP. No order was passed, within the statutory time period, to dispose of the application filed by the assessee. Penalty was imposed on the assessee on the ground that no order granting immunity was passed by the JAO within the statutory time period. The Court observed that the statutory scheme for grant of immunity is based on satisfaction of three fundamental conditions, namely, (i) payment of tax demand, (ii) non-institution of appeal, and (iii) initiation of penalty on account of under-reporting of income and not on account of misreporting of income. The Court noted that all the conditions had been satisfied. The Court held that in a case where an assessee files an application for grant of immunity within the time period mentioned in sub-section (2) of section 270AA and the AO does not pass an order under sub-section (4) of section 270AA within the time period mentioned therein, the assessee cannot be prejudiced by the inaction of the AO in passing an order u/s 270AA within the statutory time limit, as it is settled law that no prejudice can be caused to any assessee on account of delay / default on the part of the Revenue

ORDER REJECTING THE APPLICATION OF THE ASSESSEE FOR GRANT OF IP&IPP – WHETHER APPEALABLE?

Sub-section (5) of section 270A clearly provides that the order passed u/s 270A(4) shall be final. In other words, an order rejecting the application u/s 270AA is not appealable. The only option to the assessee who wishes to challenge the order rejecting the application u/s 270AA would be to invoke a writ jurisdiction. Since there is no alternate remedy available, the revenue will not be able to oppose the writ petition of the assessee on the ground that there is an alternate remedy which ought to be exercised instead of invoking the writ jurisdiction.

The Bombay High Court in a Writ Petition filed by Haren Textiles Private Limited, [WP No. 1100 of 2021; Order dated 8th September, 2021], was dealing with the case of an assessee who filed a revision application before PCIT against the action of the AO. The PCIT rejected the revision application filed by the assessee on the ground that sub-section (6) of section 270AA specifically prohibits revisionary proceedings u/s 264 of the Act against the order passed by the AO u/s 270AA(4) of the Act. The Bombay High Court while deciding the Writ Petition challenging this order of the PCIT, agreed with the contention made on behalf of the assessee that there is no such prohibition or bar as has been held by the PCIT.

The Court held that what is provided in sub-section (6) is that when an assessee makes an application under sub-section (1) of section 270AA and such an application has been accepted under sub-section (4) of section 270AA, the assessee cannot file an appeal u/s 246A or an application for revision u/s 264 against the order of assessment or reassessment passed under sub-section (3) of section 143 or section 147. This, according to the Court, does not provide any bar or prohibition against the assessee challenging an order passed by the AO, rejecting its application made under sub-section (1) of section 270AA. The Court observed that the application before PCIT was an order of rejection passed by the ACIT of an application filed by the assessee under sub-section (1) of section 270AA seeking grant of immunity from imposition of penalty and initiation of proceedings u/s 276C of section 276CC. The Court held that the PCIT was not correct in rejecting the application on the ground that there is a bar under sub-section (6) of section 270AA in filing such application. The Court set aside the order passed by PCIT u/s 264 of the Act.

It is humbly submitted that the court, in this case, has not considered the provisions of sub-section (5) of section 270AA which provide that the order passed under sub-section (4) of section 270AA shall be final. Had the provisions of sub-section (5) been considered, probably the decision may have been otherwise.

CONSEQUENCES OF THE AO PASSING AN ORDER DISPOSING APPLICATION OF THE ASSESSEE FOR GRANT OF IP&IPP

In case an order is passed accepting the application, then the assessee will get immunity from imposition of penalty u/s 270A and from initiation of proceedings u/s 276C or section 276CC. Also, against the relevant assessment order, the assessee will not be able to file either an appeal to CIT(A) or a revision application to the CIT. However, in cases where an appeal against the relevant assessment order lies to the Tribunal, the assessee will be able to challenge the relevant assessment order in an appeal to the Tribunal, notwithstanding the fact that immunity has been granted, e.g. in cases where the relevant assessment order has been passed by the AO pursuant to the directions of Dispute Resolution Panel (DRP).

However, if an order is passed u/s 270AA(4) rejecting the application of the assessee for grant of immunity, the assessee will be free to file an appeal to the CIT(A) or a revision application to CIT against the relevant assessment order.

Normally, an application u/s 270AA will be rejected on the ground that the penalty u/s 270A has been initiated in the circumstances mentioned in sub-section (9) thereof. In order to avoid the possibility of the revenue contending at appellate stage or while imposing penalty u/s 270A, that the position that penalty has been initiated in circumstances mentioned in sub-section (9) of section 270A has become final by virtue of an order passed u/s 270AA(4) and the assessee has not challenged such an order, it is advisable that upon receipt of the order rejecting the application for grant of immunity, if the assessee chooses not to file a writ petition against such rejection, the assessee should write a letter to the AO placing on record the fact that he does not agree with the order of rejection and his not filing a writ petition does not mean his acquiescence to the reasons given for rejection of the application u/s 270AA.

The Hon’ble Delhi High Court has in the case of Ultimate Infratech Pvt. Ltd. vs. National Faceless Assessment Centre, Delhi High Court – WP (C) 6305/2022 & CM Applns. 18990-18991/2022; Order dated 20th April, 2022, has held that “it is only in cases where proceedings for levy of penalty have been initiated on account of alleged misreporting of income that an assessee is prohibited from applying and availing the benefit of immunity from penalty and prosecution under section 270AA.”

SOME OBSERVATIONS

i) Immunity u/s 270AA is from initiation of proceedings u/s 276C and section 276CC. However, if before an assessee makes an application u/s 270AA, if proceedings u/s 276C or 276CC have already been initiated, then it appears that the assessee will be able to avail only immunity from penalty under section 270A.

ii) Before making an application for grant of immunity, assessee is required to pay the entire amount of tax and interest payable as per the relevant assessment order within the period mentioned in the notice of demand. In case the application is rejected, the entire demand would stand paid and the assessee would be in an appeal before CIT(A), whereas had the assessee chosen not to apply for grant of immunity, the assessee would have, as per CBDT Circular, applied for and obtained a stay in respect of 80 per cent of the demand.

iii) Till the date of filing an application u/s 270AA, the assessee should not have filed an appeal against the relevant assessment order. However, if the assessee has, upon receipt of the relevant assessment order, filed a revision application to CIT u/s 264, he is not disqualified from making an application. However, once an order is passed accepting the application for grant of IP&PP, then such a revision application already filed will no longer be maintainable in view of section 270AA(6).

iv) There is no provision to withdraw the immunity once granted by passing an order u/s 270AA(4).

v) There is no bar on assessee making an application under section 154 for rectification of the relevant assessment order even after an order is passed u/s 270AA(4) accepting the application of the assessee for grant of immunity.

CONCLUSION

Section 270AA is a salutary provision and if implemented in the spirit with which it is enacted, it would go a long way to reduce litigation and collect taxes and interest. While section 270AA grants IP&IPP, it makes the relevant assessment order not appealable in its entirety. The additions made in the relevant assessment order may be such as would attract penalty / penalties leviable under provisions other than section 270A. This may work as a disincentive to an assessee who is otherwise considering to apply for immunity and accept the additions which attract penalty u/s 270A. Also, in fairness, a provision should be made that in the event that the application u/s 270AA is rejected and the assessee chooses to file an appeal, the amount of tax and interest paid by him in excess of 20 per cent of the amount demanded will be refunded within a period of 30 days from the date of order rejecting the application for grant of immunity. This is on the premise that had the assessee not opted to make an application for immunity but directly preferred an appeal against the relevant assessment order, he would have got a stay of demand in excess of 20 per cent. It is advisable that the difficulties mentioned above and may be other difficulties which the author has not noticed be ironed out by issuing a clarification.

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Statement recorded – peak credit calculated by the tax authorities – assessee offered the same and paid taxes – Department wanted to bifurcate the disclosed amount in two A.Ys – tax rate in both the A.Ys is the same and there is no loss to the revenue

Pr. CIT – Central-02 vs. Shri Krishan Lal Madhok
ITA No. 229 of 2022
Date of order: 16th September, 2022 Delhi High Court
16 [Arising from the order dated 3rd August, 2021
passed by the ITAT in ITA No. 3917/Del./2017
& 6268/Del./2017 and ITA No. 6648/Del/2017 & ITA No 6269 /Del./2017]
A.Ys.: 2006-07 and 2007-08

16. Statement recorded – peak credit calculated by the tax authorities – assessee offered the same and paid taxes – Department wanted to bifurcate the disclosed amount in two A.Ys – tax rate in both the A.Ys is the same and there is no loss to the revenue

The assessee’s statement was recorded wherein he offered certain income for taxation. The assessee honoured his statement and offered Rs. 2,23,68,000 in his return of income for A.Y. 2007-08 and paid taxes thereon. There is no dispute that the peak credit was calculated by the tax authorities and at the behest of the tax authorities the assessee offered the same in his income for A.Y. 2007-08 and paid taxes thereon.

The Department wanted to bifurcate the disclosed amount in two A.Ys when the tax rate in both the A.Ys is the same and there is no loss to the Revenue.

The ITAT did not find any merit in bifurcating the income in two A.Ys when the assessee has paid taxes in A.Y. 2007- 08.

Before the Hon. High Court, the Revenue contended that the ITAT has erred in deleting the addition of Rs. 2,05,50,545 and Rs. 18,58,311 u/s 69 of the Act, on account of peak balance pertaining to A.Y.2006-07 and A.Y. 2007-08 respectively, in the bank account maintained by the assessee with HSBC, Geneva. The Revenue contented that the ITAT has erred in holding that there is no loss to the Revenue as the assessee has shown the said income for A.Y. 2007-08 and paid taxes on such undisclosed income. The Revenue contented that the ITAT has erred in holding that the issue of bifurcating the undisclosed amount in two A.Ys. i.e. A.Ys. 2006-07 and 2007-08 does not arise for the reasons that the tax rates in both the assessment years are the same. It was submitted that the ITAT acted contrary to the settled position of law that income of any particular year has to be taxed in the year in which said income accrues/is received, relying upon the judgment of the Supreme Court in Commissioner of Income Tax vs. British Paints India Ltd., AIR 1991 SC 1338.

The Assessee contended that the sole basis for the addition is the admission in the statement recorded u/s 132(4) of the Act and the alleged sheets received from the French government under DTAC. He pointed out that the Additional Chief Metropolitan Magistrate has vide order dated 28th June, 2021 discharged the assessee u/s 276C and 277 of the Act.

The Court held that even assuming that the statement of the assessee is paramount and sacrosanct, then also there is no denial by the Revenue authorities that the assessee has honoured his statement and offered Rs. 2,23,68,000 in his return of income for A.Y. 2007–08 and has paid taxes thereon.

Further, the peak credit had been calculated by the tax authorities and at the behest of the tax authorities, the assessee had offered the amount calculated by them in his income for A.Y.2007–08 and paid taxes thereon, which return of income has been accepted by the Revenue.

Since the tax rate in both the A.Ys. i.e. 2006-07 and 2007- 08 was same, the court held that if the present appeals are allowed and an amount of Rs. 2,05,50,545 is added to the assessee’s income in A.Y. 2006-07, it would amount to double taxation, inasmuch as, the said amount is admittedly a part of the amount of Rs. 2,23,68,000 offered to taxation in A.Y. 2007-08. The Hon Court referred to the decision in case of PCIT(Central) vs. Krishan Kumar Modi, 2021 SCC OnLine Del 3335.

With respect to the reliance placed on the judgment in British Paints India Ltd. (supra), the Court observed that the same has no application to the facts of this case, as the said observations were made by the Supreme Court while rejecting a method of accounting adopted by the assessee which has the effect of masking the profits earned in the relevant year; artificially shifting profits to next year and thus, making it difficult for revenue to assess the profits in the relevant year and thereafter.

The amount offered for by assessee for taxation is also not in dispute. The dispute has arisen only with respect to the relevant assessment year. However, the ITAT has held that the said amount was declared at the behest of the Revenue and the calculation of the peak credit was also at the behest of the tax authorities. There was no challenge to the said finding of the ITAT in the grounds of appeal.

Accordingly, no substantial question of law arose for consideration in the peculiar facts of the case and the appeal was dismissed.

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Disallowance u/s 14A – dividend income – from an overseas company in Oman – no tax is payable on the said dividend in Oman and India – Total income – Section 14A would not be attracted

Pr. CIT – Central-1 vs. IFFCO Ltd.
ITA No. 390 of 2022
Date of order: 11th October, 2022
15 Delhi High Court
[Arising out of ITAT order dated 6th January,
2021 in ITA No.7367/DEL/2017] A.Y.: 2007-08

15. Disallowance u/s 14A – dividend income – from an overseas company in Oman – no tax is payable on the said dividend in Oman and India – Total income – Section 14A would not be attracted

The Assessee received dividend income of Rs. 113.86 crores from OMIFCO-OMAN, an overseas company in Oman, no tax was payable on the said dividend in Oman and India, as tax sparing credit of notional tax on the dividend is allowed under Article 25 of the Indo-Oman DTAA. The Revenue contended that the assessee is effectively not paying any tax on the said income either in the source country or in India and thus, dividend income for all purposes is exempted from tax. It was stated that the ITAT has erred in restricting the disallowance to the tune of Rs. 74.26 lakhs as against Rs. 9.10 crores disallowance made by the AO u/s 14A read with Rule 8D of the Act after excluding the investment in OMIFCO-Oman.

The Hon. Court held that in view of section 14A(1) of the Act, no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. As per section 2(45) of the Act, “total income” means the total amount of income referred to in section 5, computed in the manner laid down in the Act. Therefore, section 14A of the Act pertains to disallowance of deduction in respect of income which does not form a part of the total income. Since the dividend received by the assessee from OMIFCO, Oman is chargeable to tax in India under the head “Income from other sources” and forms a part of the total income, the same is included in taxable income in the computation of income filed by the assessee. However, rebate of tax has been allowed to the assessee from the total taxes in terms of Section 90(2) of the Act read with Article 25 of the Indo-Oman, DTAA and thus, the dividend earned can be said to be in the nature of excluded income and, therefore, the provisions of Section 14A would not be attracted in this case.

The Hon. Court relied on the case of CIT vs. M/s Kribhco [2012] 349 ITR 618 (Delhi) wherein it has been held that provisions of Section 14A are inapplicable as far as deductions, which are permissible and allowed under Chapter VIA are concerned.

In view of the aforesaid the appeal was dismissed.

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Refund — Interest on refund — Interest paid by the assessee u/s 234D(2) and section 220(2) — Reduction in income on recomputation — Interest claimed by assessee does not tantamount to “interest on interest” — Substantive right of assessee and obligation of department to grant interest.

Principal CIT vs. Punjab and Sind Bank
[2022] 447 ITR 289 (Del.)
A.Y.: 2001-02
Date of order: 4th August, 2022
Sections: 220(2), 234D(2), 244A(1)(b) of ITA, 1961

55. Refund — Interest on refund — Interest paid by the assessee u/s 234D(2) and section 220(2) — Reduction in income on recomputation — Interest claimed by assessee does not tantamount to “interest on interest” — Substantive right of assessee and obligation of department to grant interest.

For A.Y.2001-02, the assessee had paid the demand of interest u/s 234D(2) and section 220(2) of the Income- tax Act, 1961. Upon subsequent recomputation of the income on rectification, the taxable income was reduced. Consequently, the assessee was entitled to a refund of sum deposited as interest u/s 234D(2) and u/s 220(2). The claim was rejected by the AO.

The Commissioner (Appeals) held that the claim of “interest” by the assessee for the refund amounted to “interest on interest” which was beyond the scope of section 244A and dismissed the appeal. The Tribunal held that the assessee was entitled to interest u/s 244A(1)(b) on the sum refunded to the assessee on recomputation as a result of the reduction in its income.

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

i) The assessee had been found entitled to refund of amount deposited by it upon recomputation by the Department and interest thereon was liable to be paid u/s. 244A(1)(b).

ii) The contention of the Department that since the refunded amount was deposited by the assessee towards “interest” due to the Department any award of interest on the refund would amount to “interest on interest” was factually incorrect. The refund u/s 234D(2) and section 220(2) was not “interest” in the hands of the assessee, i.e., the recipient. The refund did not bear the character of “interest” either in the hands of the assessee, i.e., the payee or in the hands of the Department, i.e., the payer. The payment of refund by the Department to the assessee admittedly did not satisfy either of the twin conditions set out in the definition of “interest” in section 2(28A) and it was therefore not interest. The sum directed to be refunded to the assessee was a debt in the hands of the Department and therefore to term “payment of this debt” as “interest” was fallacious. It was on the payment of this debt that the assessee demanded that the Department was liable to pay interest for the period that it had retained the money. The assessee therefore, sought interest on the debt owed to it by the Department and not “interest on interest”.

iii) The Department had not disputed that the payment of interest by the assessee u/s. 234D(2) and section 220(2) was in pursuance of the demand raised and which demand subsequently had been found to be incorrect and the money had become due and payable by it to the assessee. There was no substance in the contention of the Department that the present appeal must await the decision of the larger Bench in Preeti N. Aggarwala v. Chief CIT [2017] 394 ITR 557 (Delhi).

iv) There was no infirmity in the order of the Tribunal granting interest u/s. 244A(1)(b) on the sum refunded to the assessee on recomputation of income. No question of law arose.”

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Reassessment — Notice u/s 148 — Validity — Law applicable — effect of sections 148A and 149 — Notice after three years — No evidence that income which had escaped assessment exceeded Rs. 50 lakhs — Notice not valid

Abdul Majeed vs. ITO [2022] 447 ITR 698 (Raj.)
A.Y.: 2015-16
Date of order: 29th June, 2022
Sections: 148, 148A and 149 of ITA,1961

54. Reassessment — Notice u/s 148 — Validity — Law applicable — effect of sections 148A and 149 — Notice after three years — No evidence that income which had escaped assessment exceeded Rs. 50 lakhs — Notice not valid

On 15th March, 2022, the AO issued notice under clause (b) of section 148A of the Income-tax Act, 1961 proposing to reassess the income of A.Y.2015-16 u/s 147. The notice was sent along with the details of the cash deposits in the account of the assessee maintained with the Corporation Bank, which according to the notice disclosed deposit of a total amount of Rs. 52,75,000. Replying to the said notice, the petitioner-assessee stated that the initiation of proceedings on the basis that the cash deposits during the relevant financial year are Rs. 52,75,000 is factually incorrect and according to the petitioner-assessee, the total amount of cash deposit in his bank account in the Bank was only Rs. 19,39,000. The petitioner- assessee, to satisfy the authority that the total cash deposits in that particular financial year were only Rs. 19,39,000, also annexed along with the reply, complete bank statement of transactions done during the financial year in question. However, the AO passed an order for issuance of notice u/s 148 on 29th March, 2022.

The assessee filed a writ petition and challenged both the orders. The Rajasthan High Court allowed the writ petition and held as under:

“i) On a conjoint reading of the provisions contained in section 148A of the Act and what has been provided u/s. 149 of the Act, it is vividly clear that in order to initiate proceedings u/s. 148A of the Act, it is not enough that in a case where notice is proposed to be issued u/s. 148 of the Act after three years have elapsed from the end of the relevant assessment year that there should exist material available on record to reach the conclusion that some income chargeable to tax has escaped assessment, but the amount should be more than Rs. 50 lakhs.

ii) Undisputedly this was a case where more than three years had elapsed from the end of the relevant assessment year. In that case, in order to initiate proceeding u/s. 148 of the Act, it was not only required to be shown that some income chargeable to tax had escaped assessment, but also that it amounted to or was likely to amount to Rs. 50 lakhs or more than for that year. The material available on record did not show any cash deposits more than what was asserted by the assessee, which was far less than the amount as stated in the notice u/s. 148A(d) of the Act. However, the officer had proceeded to hold that there may be one or more accounts in the Corporation Bank in his name or permanent account number. It was on this surmise, bereft of any material on record that the authority seemed to justify its action and order dated March 29, 2022. The material available on record before the authority did not disclose any cash deposit or any other transactions which could be said to have escaped assessment, which was more than Rs. 50 lakhs. The order and proceedings were unsustainable in law.”

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Housing project — Special deduction u/s 80-IB(10) — Projects comprising eligible and ineligible units — Assessee can be given special deduction proportionate to units fulfilling conditions laid down in section 80-IB(10)

Principal CIT vs. Kumar Builders Consortium [2022] 447 ITR 44 (Bom.)
A.Y.: 2011-12
Date of order: 18th July, 2022 Section: 80-IB(10) of ITA, 1961

53. Housing project — Special deduction u/s 80-IB(10) — Projects comprising eligible and ineligible units — Assessee can be given special deduction proportionate to units fulfilling conditions laid down in section 80-IB(10)

The assessee developed residential projects. On the question whether the Tribunal was justified in allowing the assessee’s claim to deduction u/s 80-IB (10) of the Income-tax Act, 1961 on pro rata basis in respect of eligible flats though the assessee did not comply with the limit on built-up area prescribed under this section in respect of few flats in two of its projects, the Bombay High Court held as under:

“i) Section 80-IB(10) does not support the interpretation that even if a single flat in a housing project is found to exceed the permissible maximum built-up area of 1500 sq.ft., the assessee would lose its right to claim the benefit of deduction in respect of the entire housing project u/s.80-IB(10). Clause (c) of section 80-IB(10) only qualifies an eligible residential unit and no more and if there is such a residential unit, which conforms to the requirement as to size in a housing project, all other conditions being fulfilled, the benefit of deduction cannot be denied in regard to such residential unit. Section 80- IB(10) nowhere even remotely aims to deny the benefit of deduction in regard to a residential unit, which otherwise conforms to the requirement of size at the cost of an ineligible residential unit with a built-up area of more than 1500 sq.ft.

ii) Therefore, the Tribunal was right in directing the Assessing Officer to compute the pro rata deduction u/s. 80-IB(10) in regard to the eligible residential units of the assessee’s projects need not be interfered with.”

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Charitable purpose — Exemption u/s 11 — Rule of consistency — Exemption consistently granted in earlier assessment years — Concurrent findings by appellate authorities that no change in activities of assessee and no activity carried out with profit motive — Supervision or monitoring of activities by donor not sufficient to hold that any profit motive is involved — Grant of benefit of exemption by tribunal proper

CIT vs. Professional Assistance For Development Action
[2022] 447 ITR 103 (Del.)
A.Y.: 2011-12
Date of order: 15th July, 2022 Section: 11 of ITA, 1961

52. Charitable purpose — Exemption u/s 11 — Rule of consistency — Exemption consistently granted in earlier assessment years — Concurrent findings by appellate authorities that no change in activities of assessee and no activity carried out with profit motive — Supervision or monitoring of activities by donor not sufficient to hold that any profit motive is involved — Grant of benefit of exemption by tribunal proper

The assessee was engaged in activities for the upliftment of the poor, providing training and skill development in rural areas in the backward districts of certain states and got grants from the Central and State Governments and donations from various organisations. The assessee was allowed the benefit of exemption u/s 11 of the Income-tax Act, 1961 continuously up to A.Y. 2010-11. For the A. Y. 2011-12, the AO denied the exemption invoking the proviso to section 2(15).

The Commissioner (Appeals) allowed the exemption u/s 11 with all consequential benefits. The Tribunal found that the AO did not bring on record any evidence which suggested that the activities of the assessee were carried out with a profit motive and that in A.Ys. 2009-10 and 2010-11, the AO had held that the assessee was engaged in providing relief to the poor within the meaning of section 2(15). The Tribunal following the rule of consistency dismissed the appeal of the Department.

On further appeal by the Department, the Delhi High Court upheld the decision of the Tribunal and held as under:

“The Department could not controvert the fact that the assessee had not charged any fee from clients except the cost of the project actually incurred. Even in the sanction letter of grant to the assessee, there was mention of supervision or monitoring of activities by the donor, but that in itself was not sufficient to hold that any profit motive was involved. The Tribunal’s holding that it was normal that a donor would want to verify whether the grants had been incurred for the intended purpose did not in any manner establish that the activities of the assessee was business activity. No question of law arose.”

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Business expenditure — Disallowance u/s 40(a) (ia) — Deduction of tax at source — Remuneration paid to the director of the assessee — Shortfall in tax deducted at source — No disallowance can be made — Proper course of action is to invoke section 201

Principal CIT vs. Future First Info Services Pvt. Ltd.
[2022] 447 ITR 299 (Del.)
A.Y.: 2009-10
Date of order: 14th July, 2022
Sections: 37, 40(a)(ia), 197(1), 201 of ITA, 1961

51. Business expenditure — Disallowance u/s 40(a) (ia) — Deduction of tax at source — Remuneration paid to the director of the assessee — Shortfall in tax deducted at source — No disallowance can be made — Proper course of action is to invoke section 201

For A.Y. 2009-10, the AO made a disallowance u/s 40(a) (ia) of the Income-tax Act, 1961 on the grounds that the assessee had made a short deduction of tax on the remuneration paid to its director in violation of section 197(1).

Both the Commissioner (Appeals) and the Tribunal gave concurrent findings that the higher salary paid to the assessee’s director was accepted as remuneration by the AO during the scrutiny assessment in the subsequent assessment year and that the AO did not bring any evidence or material for making disallowance u/s 40A(2)(b) and deleted the disallowance u/s 40(a)(ia). The Tribunal upheld the decision of the Commissioner (Appeals) and held that the AO, without any reason or material facts, had arbitrarily disallowed 50 per cent of the remuneration of the director without giving cogent reasons to conclude that the remuneration paid was not commensurate with the market value of the services rendered by the director.

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

“There was short deduction of tax at source, disallowance could not be made u/s. 40(a)(ia) and the correct course of action would have been to invoke the provisions of section 201. No question of law arose.”

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Business expenditure — Compensation — Capital or revenue expenditure — Assessee owner of hotel managed by third party under agreement — Compensation paid towards termination of agreement to receive back possession of building and furniture and fixtures — Expenditure arising out of business — No acquisition of new capital asset — Allowable revenue expenditure

Principal CIT vs. Elel Hotels and Investments Ltd. [2022] 447 ITR 92 (Del.)
Date of order: 31st May, 2022 Section: 37 of ITA, 1961

50. Business expenditure — Compensation — Capital or revenue expenditure — Assessee owner of hotel managed by third party under agreement — Compensation paid towards termination of agreement to receive back possession of building and furniture and fixtures — Expenditure arising out of business — No acquisition of new capital asset — Allowable revenue expenditure

The assessee was the owner of a hotel in Mumbai which was initially being managed by ITC Ltd. under a hotel operator agreement effective from 1986. In 1993, the hotel was severely damaged as a result of bomb blasts during the riots in Mumbai. Thereafter, disputes and differences arose between the assessee and ITC Ltd. with respect to responsibility to repair and restore the damaged portion and other consequential issues. The assessee went into litigation with ITC Ltd. Ultimately, the assessee terminated the operator-cum-management agreement with ITC Ltd. and paid a sum of Rs. 43.10 crores during A.Y. 2006-07 to ITC Ltd. which in turn handed over vacant and peaceful possession of the hotel property. On the question whether the amount of Rs. 30.86 crores paid by the assessee out of the total amount of Rs. 43.10 crores was capital or revenue expenditure u/s 37 of the Income-tax Act, 1961 the Delhi High Court held as under:

“i) The compensation paid by the assessee had arisen out of business necessity and was revenue expenditure u/s. 37. There had been no addition of capital asset of enduring nature in the hands of the assessee and after the payment of the amount there had been no change in the capital structure of the assessee. It had paid the amount to get back possession of its own asset which had been given on licence basis under the hotel operator agreement and not for acquisition of an asset that the assessee did not already own or possess.

ii) The expenditure was to facilitate its business and trading operations. The expenditure was revenue. No question of law arose.”

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Bad debt — Writing off — Condition precedent — Assessee must arrive at bona fide decision that the debt not recoverable — Legal action taken by assessee in winding up proceedings against debtor lessee company — Assessee’s decision to write off debt in view of amended section 36(1)(vii) — Commercial expediency — Allowable — Change in method of accounting by assessee irrelevant

L. K. P. Merchant Financing Ltd. vs Dy. CIT [2022] 447 ITR 507 (Bom.)
A.Y.: 1991-92
Date of order: 18th July, 2022 Sections: 36(1)(vii), 36(2) of ITA, 1961

49. Bad debt — Writing off — Condition precedent — Assessee must arrive at bona fide decision that the debt not recoverable — Legal action taken by assessee in winding up proceedings against debtor lessee company — Assessee’s decision to write off debt in view of amended section 36(1)(vii) — Commercial expediency — Allowable — Change in method of accounting by assessee irrelevant

The assessee was a NBFC engaged in the business of lease finance. It entered into a lease agreement with a company, the lessee, of lease of certain equipment for which, it had already made payments to the suppliers. It received one instalment of lease rental from the lessee which defaulted in further instalments. The assessee following the mercantile system of accounting had offered these incomes totaling to Rs. 23.62 lakhs in A.Ys. 1987- 88, 1988-89 and 1989-90. In view of the dispute with the lessee, the assessee filed a winding up petition against the lessee in the Bombay High Court. For A.Y.1991-92 in the reassessment proceedings u/s 147, the AO held that according to the mercantile system of accounting followed by the assessee, the accrued lease incomes were taxable in the respective years and disallowed the written off bad debt on the ground that the write off was premature.

The Commissioner (Appeals) directed the AO to allow deduction of an amount of R20.69 lakhs to be written off by the assessee for A.Y. 1991-92. The Tribunal held that even if the claim of the assessee in respect of bad debt was correct, it could not be considered since the assessee had accounted for lease rentals and had also claimed depreciation and reversed the order of the Commissioner (Appeals).

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

“i) Once a business decision has been taken by the assessee to write off a debt as a bad debt in its books of account and the decision is bona fide, it should be sufficient to allow the claim of the assessee. The method of accounting has no relevance to the issue.

ii) The written off lease rental amount had not been reversed from the income entry in Schedule-16. Writing off of the bad debt was in accordance with the provisions of section 36(1)(vii). The Commissioner (Appeals) had recorded in his order that the lessee company had become a sick company. Obviously, the prospects of recovery of lease rentals were quite bleak and the assessee considering that the debt could not be recovered in the foreseeable future had decided to write off a debt of Rs.20.69 lakhs as bad debt during the previous year relevant to the A.Y.1991-92. The assessee had taken a business decision to write off the debt as a bad debt.

iii) The reversal of lease rentals of Rs. 20.69 lakhs, might be a change of the method of accounting by the assessee from mercantile to cash and might even be a breach of the accounting principles but it was not a requirement of section 36(1)(vii) for allowing a debt as a bad debt. A prudent practice had been adopted by a limited company of informing its shareholders about the remote possibility of recovery of the amounts and the decision to reverse and that it would be accounted for as and when received. The order of the Tribunal was set aside and the Assessing Officer was directed to allow the claim of bad debt of Rs. 20.69 lakhs.”

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Advance tax — Interest — Income earned from abroad — Settlement of case — Levy of interest by Settlement Commission on shortfall of advance tax due on income earned abroad by assessee on which tax not deducted — Assessee not liable to pay interest

John Baptist Lasrado vs. ITSC [2022] 447 ITR 231 (Mad.)
A.Ys.: 1996-97 to 2005-06
Date of order: 27th November, 2017 Sections: 234A, 234B, 245D(4) of ITA,1961

48. Advance tax — Interest — Income earned from abroad — Settlement of case — Levy of interest by Settlement Commission on shortfall of advance tax due on income earned abroad by assessee on which tax not deducted — Assessee not liable to pay interest

The assessee was an employee of a multinational company. For the salary received in India, tax was deducted at source by the employer. With regard to the salary received by him outside India the employer did not deduct tax at source. The sale proceeds of shares held by the assessee outside India were credited in his bank account abroad. For A.Ys. 1996-97 to 2005-06, the assessee had filed his returns of income not disclosing only the income earned abroad. The assessee filed an application u/s 245C before the Settlement Commission wherein he offered all the income earned abroad in A.Ys. 1996-97 to 2005-06. The Settlement Commission passed an order u/s 245D(4) and granted the assessee immunity from penalty and prosecution but charged interest u/s 234B on the excess of the tax assessed over the advance tax paid for all the assessment years. The Settlement Commission rejected the assessee’s miscellaneous petition against the levy of interest holding that where the person responsible for paying salary in foreign currency was a non-resident and hence not responsible u/s 192, the assessee was liable to pay advance tax u/s 208 r.w.s. 209 since the assessee was in receipt of income from deposits abroad which were not liable for deduction of tax and hence, the assessee could not have excluded tax on these while computing the advance tax liability. The Settlement Commission held that the interest u/s 234B and u/s 201(1A) were for two types of defaults and that it could not be held that there was any double levy for the same default.

On a writ petition filed by the assessee the Madras High Court held as under:

“i) For the purposes of section 234B of the Income-tax Act, 1961 the question would be as to whether the assessee, who is the payee, had any role in deducting or collecting the tax, if the answer to this question is in the negative and it was not the duty of the assessee, the question of payment of interest would not arise as the assessee cannot be treated to be an “assessee-in-default”.

ii) The employer abroad had paid the interest u/s 201(1A) and tax having already been remitted it could not be recovered from the assessee once again. The assessee was not liable for payment of interest under section 234B in respect of the salary income earned by him outside India. In respect of any other income the Assessing Officer could proceed to levy interest in accordance with law. The order charging interest was set aside.”

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Despite violation of conditions for grant of exemption on conversion of proprietary concern into a company, transfer of goodwill ‘at cost’ will not be taxable.

DCIT vs. Univercell Telecommunications India Pvt. Ltd.
TS-721-ITAT-2022 (Chennai) A.Y.: 2009-10
Date of order: 7th September, 2022 Sections: 45, 47, 47A

37. Despite violation of conditions for grant of exemption on conversion of proprietary concern into a company, transfer of goodwill `at cost’ will not be taxable.

FACTS

The assessee company came into existence as a result of conversion of M/s Univercell Telecommunications, a proprietary concern of Mr. Satish Babu into a company on 28th September, 2005. Transfer of assets and liabilities of proprietary concern to the assessee has been treated as exempt u/s 47(xiv) of the Act. In the course of assessment proceedings, the AO noticed that as a result of transfer of shareholding by Mr. Satish Babu within a period of five years from the date of conversion, the conditions prescribed have been violated. The AO invoked section 47A of the Act and assessed the difference between the assets and liabilities of the assessee company as long term capital gain and added it to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) and contended that assuming that the provisions of section 47A are triggered because of violation of conditions prescribed in section 47(xiv) there is still no liability to capital gains tax because the difference between assets and liabilities has been determined by the AO by excluding cost incurred for brand value and if the same is considered as per books of the proprietary concern then there will be no capital gains pursuant to conversion of proprietary concern into a private limited company. The CIT(A) held that there was no capital gains on transfer of goodwill at book value, because, if you consider the cost incurred by the assessee for creation of goodwill, then, the capital gains on transfer of said goodwill become ‘nil’ and thus, deleted the additions made by the AO.

Aggrieved, Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted that it is an undisputed fact that when proprietary concern was converted into a Pvt. Ltd. Co., conditions of section 47(xiv)(b) of the Act, have been satisfied. However, at later date, Mr. Satish Babu has transferred 16.67 per cent of his shareholding to Mr. Shankar S.Nathan on 10th October, 2018 i.e. within five years from the date of transfer of proprietary concern into the assessee company and thus, breached the conditions prescribed u/s 47(xiv)(b) of the Act, i.e. retaining not less than 50 per cent of the shares of successor company for a period of five years from the date of transfer of proprietary concern. It held that:

(i) the assessee is hit by provisions of Section 47A(3) of the Act, and as per the said provision, if certain conditions are violated, then, exemption granted u/s 47(xiv)(b) of the Act, needs to be withdrawn for the impugned assessment year. It also held that even after invoking the provisions of Sec 47A(3) of the Act, there cannot be any liability of capital gains on conversion of proprietary business into Pvt. Ltd. Co., because, the assessee has transferred all assets and liabilities of erstwhile proprietorship into a Pvt. Ltd. Co., on book value including so called goodwill of Rs. 3.47 Crs. considered by the AO for taxation;

(ii) it observed that as per the details filed by the assessee, the goodwill considered by the AO is not self-generated but created by the erstwhile proprietary concern before assets and liabilities have been transferred to Pvt. Ltd. Co., which is evident from the fact that the assessee has filed necessary details of expenditure incurred for generation/creation of goodwill in the books of accounts of proprietary concern; and

(iii) even if you invoke the provisions of section 47A(3), to withdraw exemption granted u/s 47(xiv)(b), but, in principle there cannot be any capital gains on transfer of goodwill, because, the said goodwill is not self-generated or created on account of conversion of proprietary concern into a Pvt. Ltd. Co., but acquired by incurring cost. If you consider cost incurred by the assessee for acquiring goodwill, then, capital gains on transfer of said goodwill would come to ‘nil’ amount.

The Tribunal found no fault with the findings of CIT(A) and dismissed the appeal filed by the Revenue.

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Indexation has to be granted with effect from the previous year in which the allotment was made even though the payment has been made in instalments in later years

Nitin Prakash vs. DCIT TS-734-ITAT-2022 (Mum.) A.Y.: 2011-12
Date of order: 22nd August, 2022 Section: 48

36. Indexation has to be granted with effect from the previous year in which the allotment was made even though the payment has been made in instalments in later years.

FACTS

The assessee had purchased four residential flats in a building i.e. Ashok Towers, Tower-B, Parel, Mumbai in September, 2004. The assessee paid Rs. 9,58,000 at the time of booking of the flats in June, 2004 and 10 per cent of the total consideration i.e. Rs. 19,17,700 in October, 2004. The balance amount was paid as per the schedule provided by the builder. The registered agreement for sale of flats was executed on 31st December, 2008. During the period relevant to the assessment year under appeal, the assessee vide registered agreement dated 13th August, 2010 sold the flats. For the purpose of computation of ‘long term capital gain’ the assessee claimed indexation on purchase price of Rs. 2,03,36,000 from the F.Y. 2004-05 i.e. the year in which the assessee had booked the flat. The assessee computed indexed cost of acquisition at Rs. 3,01,22,700. The AO rejected the assessee’s computation of indexed cost and applied indexation as and when the installments were paid by the assessee i.e. on the basis of year of payment of installments.

Aggrieved, the assessee preferred an appeal before CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the short issue before it is, whether the benefit of indexation on the installments paid for the flat should be allowed from the date of allotment of flat i.e. the F.Y. 2004-05 or the assessee is eligible for the benefit of indexation on payment of instalments in the year of actual payment. The Tribunal noted that there is no dispute regarding the date of payment of instalments, and the fact that the flats sold by the assessee during the period relevant to the assessment year under appeal is a long-term capital asset. The dispute is only with regard to computation of indexation.

The Tribunal noted the ratio of the following decisions on which reliance was placed on behalf of the assessee

(i) Lata G. Rohra vs. DCIT, 21 SOT 541(Mum);

(ii) Divine Holdings Pvt. Ltd., ITA No.6423/Mum/2008;

(iii) M/s. Pooja Exports, ITA No.2222/Mum/2010;

(iv) Mr. Ramprakash Bubna, ITA No. 6578/Mum/2010

and observed that no contrary decision was brought to its notice by the Revenue.

In the light of the aforesaid decisions, the Tribunal held that the assessee is entitled to the benefit of indexation on the total cost of acquisition from the year of allotment of flat dehorns the fact that the assessee has paid instalments over a period of time subsequent to the date of allotment.

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Amendment to section 269SS, made by the Finance Act, 2015, to include “specified advances” within its scope w.e.f. 1st June, 2015 is prospective and applies to transactions entered by the assessee w.e.f. 1st June, 2015

35. ACIT vs. Ruhil Developers Pvt. Ltd. TS-702-ITAT-2022 (Delhi)
A.Y.: 2013-14
Date of order: 30th August, 2022 Sections: 269SS, 271D

Amendment to section 269SS, made by the Finance Act, 2015, to include “specified advances” within its scope w.e.f. 1st June, 2015 is prospective and applies to transactions entered by the assessee w.e.f. 1st June, 2015.

FACTS

A search was conducted on 17th December, 2013 in the case of the assessee. In the course of search, Mr. Neeraj Ruhil, Director of the assessee admitted in a statement recorded u/s 132(4) that entries of Rs. 5.30 crores in the books of the assessee company on account of advances were not genuine, and that the same was undisclosed income of the assessee company which has been introduced in the books. However, in the return of income filed u/s 153A, this amount was not offered for taxation.

In the course of assessment proceedings, the assessee was asked to furnish a list of persons from whom assessee claimed to have received advances in cash. In response, the assessee furnished a list of 18 persons. Notices u/s 133(6) were issued to all the parties mentioned in the list provided by the assessee. Summons was issued to 18 parties and the assessee was asked to produce the parties who have not responded to summons. Of the 18 parties only two responded and their statement was recorded. The Assessing Officer (AO) held that these two parties did not have creditworthiness to advance huge amounts claimed to have been received by the assessee from them. The entire sum of Rs. 5.30 crores was added to the income of the assessee u/s 68. Thereafter, a notice for levying penalty u/s 271D was issued to the assessee company. The assessee company in its response stated that it has received advances during the period from 1st April, 2012 to 17th December, 2013 and that during this period the provisions of section 269SS did not apply to receipt of advance for transfer of immovable property.

The AO relying on the decision in the case of Parayil Balan Nair vs. CIT [63 taxmann 26 (Kerala HC)] and CIT vs. Shyam Corporation [Civil Application No. 293/2013 – Gujarat High Court] held that assessee accepted cash advances of Rs. 5.30 crores in contravention of provisions of section 269SS and levied a penalty u/s 271D of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who deleted the penalty on the ground that the amount has been treated as undisclosed income of the assessee.

Aggrieved, Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal upon going through the provisions of section 269SS as was in force in A.Y. 2013-14 held that the word “advance” has not been mentioned in the provisions of the Act. The Tribunal then proceeded to analyse the meaning of “loan” and “deposit” and held that “advances are given for specified purchases in lieu of immediate or subsequent transfer of goods & services and settled fully after conclusion of the transactions. The loan is a debt instrument whereas the advance is a credit instrument on the part of the recipient.” It held that upto 1st June, 2015, section 269SS applied only to “loans” and “deposits” and it is only w.e.f. 1st June, 2015 that “any specified sum” has been brought within the ambit of section 269SS. The earlier provisions could not envisage the utilization of provisions of Section 269SS for the “advances” taken or accepted. This mischief has been addressed w.e.f. 1st June, 2015 only by adding the words “any specified sum.” The Tribunal held that since the amendment to the provisions of Section 269SS has been brought w.e.f. 1st June, 2015 with regard to the “advances” received in relation to transfer of immovable property, and since the appeal pertains to the A.Y. 2013-14 and since the amendment is not retrospective in operation, the appeal of the Revenue is liable to be dismissed.

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Additional grounds filed by the assessee before the CIT(A) need to be adjudicated by him even though such grounds have been rejected by the PCIT earlier in revisionary proceedings

34. Granda Investments & Finance Pvt. Ltd. (formerly Granda Energy Systems Pvt. Ltd.) vs. DCIT
TS-693-ITAT-2022 (Mum.) A.Y.: 2011-12
Date of order: 25th August, 2022 Sections: 251, 264

Additional grounds filed by the assessee before the CIT(A) need to be adjudicated by him even though such grounds have been rejected by the PCIT earlier in revisionary proceedings.

FACTS

During the previous year relevant to the assessment year under consideration, the assessee, a private limited company engaged in the business of facilitating foreign consultancy and business, earned income by way of interest and capital gains.

The assessee, along with three individuals, were promoters of WMI Cranes Ltd. and amongst the four of them (promoters) held the entire paid-up capital of WMI Cranes Ltd. The assessee held 123,800 equity shares of WMI Cranes Ltd. constituting 12.38 per cent of its total equity share capital. Pursuant to a Share Purchase and Subscription Agreement dated 11th October, 2010 entered into by the assessee and three individuals with M/s Konecranes & Finance Corporation, the promoters agreed to sell 48.25 per cent of the total paid-up and issued capital of WMI Cranes Ltd. to Konecranes & Finance Corporation initially at Rs. 302,012.31 per share amounting to Rs. 155 crore. The assessee consented to sell 75,000 out of 123,800 shares held by it. M/s Konecranes also subscribed for additional 56,000 equity shares in order to increase its shareholding in the company to 51 per cent. As per the terms of the agreement, of the total consideration of Rs. 155 crores, a sum of Rs. 30 crores was to be credited to the escrow account which wouldoperate as per escrow agreement entered into between the promoters, the purchaser M/s Konecranes and the escrow agent. Past liabilities, if any, would be discharged out of the amount lying in escrow and balance, if any, would be paid to promoters.

In the return of income, the assessee computed capital gains by considering the sale consideration to be Rs. 155 crores (i.e. inclusive of Rs. 30 crores deposited in the escrow account). Subsequent to the sale of shares, the purchaser i.e. Konecranes directed the escrow agent to make certain statutory payments and other liabilities which arose prior to sale of shares and an amount of Rs. 9.17 crores was paid on various dates from the escrow account. The assessee contended that this Rs. 9.17 crores ought not to have been considered as part of full value of consideration for computing capital gains. This ground was raised by the assessee before PCIT in an application u/s 264 of the Act on the grounds that the amount withdrawn from the escrow account cannot at any time reach the coffers of the promoters and consequently the amount withdrawn from the escrow account results in reduction of consideration and also the capital gains. The PCIT rejected the application on the ground that there is no express provision in the Act to reduce the returned income and the same cannot be done indirectly by invoking the provisions of section 264 of the Act.

On denial of the relief applied for, the assessee preferred an additional ground in an appeal filed by it before CIT(A). The CIT(A) called for a remand report from the AO and dismissed the additional ground on the grounds that since the assessee has taken additional ground for reducing returned income before PCIT u/s 264 which was rejected, therefore the same cannot be again taken before CIT(A) and therefore he held that he did not have jurisdiction to adjudicate such additional ground of appeal.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal held that the CIT(A) has erred in not deciding the ground of appeal filed as additional ground before him by the assessee which ought to have been decided on merits. It held that the CIT(A) is not barred from deciding this ground of appeal on merits in spite of the fact that section 264 application was rejected by the PCIT. The Tribunal directed the CIT(A) to consider this ground of appeal on merits and adjudicate the issue pertaining to the reduction of capital gain. It remanded the matter back to the CIT(A) for deciding this issue on merits.

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New Provisions for Filing an Updated Return of Income

BACKGROUND

In this year’s Budget, the provisions of Section 139 of the Income-tax Act have been amended effective from 1st April, 2022. The effect of this amendment is that an assessee can file a revised or updated return within two years of the end of the relevant assessment year. In Paras 121 and 122 of the Budget Speech delivered by the Finance Minister on 1st February, 2022, it is stated as under:

“121. India is growing at an accelerated pace and people are undertaking multiple financial transactions. The Income tax Department has established a robust frame work of reporting of tax payer’s transactions. In this context, some taxpayers may realise that they have committed omissions or mistakes in correctly estimating their income for tax payment. To provide an opportunity to correct such errors, I am proposing a new provision permitting taxpayers to file an Updated Return on payment of additional tax. This Updated Return can be filed within two years from the end of the relevant assessment year.

122. Presently, if the department finds out that some income has been missed out by the assessee, it goes through a lengthy process of adjudication. Instead, with this proposal now, there will be a trust reposed in the taxpayers that will enable the assessee herself to declare the income that she may have missed out earlier while filing her return. Full details of the proposal are given in the Finance Bill. It is an affirmative step in the direction of Voluntary tax Compliance.”

Reading the amendments in the Income-tax Act, it will be noticed that several conditions are attached to these provisions. In this Article, the new provisions for filing revised or updated returns of income are discussed.

FILING RETURN OF INCOME

Section 139(1) of the Income-tax Act provides that the assessee, depending on the nature of his income, has to file his returns before the due date i.e. 31st July (Non-Audit cases), 31st October (Audit cases) and 30th November (Transfer Pricing Audit cases). If an assessee has not filed his return before the due date, he can file the same on or before 31st December u/s 139(4). Earlier, this time limit was up to 31st March. If the assessee has filed his return of income before the due date, he can revise the return u/s 139(5) on, or before 31st December. Earlier this was possible on or before 31st March. In a case where the assessee was entitled to claim refund of tax, prior to 1st September, 2019, he could apply for the refund within one year from the end of the assessment year. This time has also been curtailed, and an application for a refund can be made u/s 239 by filing the Return of Income as provided in Section 139.

FILING AN UPDATED RETURN OF INCOME

The Finance Act, 2022 has amended Section 139 by inserting sub-section (8A) w.e.f. 1st April, 2022. This section permits the filing of a revised return u/s 139(4) or an updated return u/s 139(5) within 2 years after the expiry of the relevant assessment year. Such a Return is to be filed in Form ITR U. The assessee has to follow the procedure laid down by new Rule 12AC notified by CBDT on 29th April, 2022. However, there are several conditions attached to this facility. These conditions are as under:

(i) The revised or updated return should not be a loss return;

(ii) It should not have the effect of reducing the tax liability as determined in the returns already filed u/s 139;

(iii) It should not result in claiming a refund of tax or increasing the refund of tax;

(iv) If a revised or updated return is already furnished earlier for that year. In other words, a revised or an updated return for any year can be furnished only once u/s 139(8A);

(v) If any assessment, reassessment, re-computation or revision of income is pending or has been completed for that assessment year. This means that if the case is taken up for scrutiny and notice u/s 142(1), or 143(2) is issued, the revised or updated return cannot be filed;

(vi) The AO has information in his possession about the assessee for that year under the specified Acts, and the same has been communicated to the assessee. These Acts are (a) Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976, (b) Prohibition of Benami Property Transaction Act, 1988, (c) Prevention of Money-Laundering Act, 2002 and (d) Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015;

(vii) Where information for that year has been received under the agreement referred to in section 90 or 90A (under DTAA) in respect of the assessee and is communicated to him;

(viii) Where any prosecution proceedings under Chapter XXII have been initiated in the case of the assessee for that year;

(ix) The assessee is such a person or belongs to such a class of persons as may be notified by CBDT;

(x) Where Search or Survey proceedings are initiated u/s 132, 132A or 133A (other than TDS/TCS Survey) the updated return cannot be filed for the relevant assessment year and any preceding assessment year;

(xi) However, in the following cases, the revised or updated return can be filed by the assessee:

(a) If the assessee has furnished a return showing loss, he can furnish an updated return if such a return shows income. This will mean that if the loss is reduced, the revised or updated return cannot be filed.

(b) If any carried forward loss, unabsorbed depreciation, or carried forward tax credit u/s 115JAA/115JD is to be reduced as a result of furnishing an updated return.

The above revised or updated return can be filed within 24 months of the end of the relevant assessment year. Where such a revised or updated return is filed, the AO has to pass an assessment order within 9 months of the end of the financial year in which such return is filed.

ADDITIONAL TAX PAYABLE

The tax, interest, and fees for the updated return is payable as under where no return was filed u/s139.

(i) Tax payable as per the updated return after the deduction of Advance tax, TDS/TCS, Relief u/s 89, 90, 90A or 91 and tax credit u/s 115 JAA or 115JD.

(ii) Interest for delay in filing return u/s 234A, 234B and 234C.

(iii) Fees payable for delay in filing return u/s 234F.

Where the return u/s 139 is already filed and the updated revised return is furnished to correct any error in the original return, the balance tax after deducting taxes already paid shall be payable. Interest is also payable on the difference in tax u/s 234A, 234B and 234C.

Apart from the above, additional tax is also payable for filing revised or updated return of income as stated below:

(i) If the revised or updated return is filed within 12 months from the end of the assessment year for which time for filing the return u/s 139(4) or 139(5) has expired, 25 per cent of the aggregate tax and interest is to be paid.

(ii) If the revised or updated return is filed after 12 months, but within 24 months from the end of the assessment year as stated above, 50 per cent of the aggregate tax and interest is to be paid.

For the above purpose, section 140B is added from 1st April, 2022. Consequential amendments are made in Sections 144, 153 and 276CC.

TO SUM UP

From the above discussion, it is evident that there are several conditions attached to the new provision for filing revised or updated returns of income. In cases where scrutiny assessment has been taken up or in search and survey cases, the advantage of this new provision cannot be taken. Further, if the revised or updated return shows a loss or reduces the tax liability, the advantage of the new provision cannot be taken. If a loss return is filed in time, any mistake noticed later on which reduces the loss, the advantage of the new provision cannot be taken by filing a revised return.

The way the new provision, giving the facility of filing revised or updated return of income is made, shows that this facility can be used only if additional tax is payable. Thus, if an assessee has forgotten to claim any relief due to him, he cannot take advantage of this new provision. In particular, if an assessee has an income below the taxable limit, and is entitled to claim a refund of tax deducted at source, the advantage of this new provision cannot be taken if he later finds that he has not claimed a refund for TDS from certain income. From Paras 121 and 122 of the Budget Speech, an impression was created that this provision will benefit the assessee also. However, the manner in which the amendments are made shows that the new provision is made for the benefit of the Tax Department, and collection of additional tax.

The only advantage to the assessee is that he will not be liable to a penalty or prosecution if he files the revised or updated return of income under new provision of section 139(8A) and pays additional tax and interest.

shailesh.kwebmaker

Charitable Trusts – Recent Amendments Pertaining to Books of Accounts and Other Documents – Part 2

[Part – I of this article was published in October, 2022 BCAJ. In this concluding part, the author has analysed the remaining provisions in detail.]

The following records are also required to be maintained:

Rule 17AA(1)(d)(iv)(Text)

Record of the following, out of the income of the person of any previous year preceding the current previous year, namely:-

(I)
application out of the income accumulated or set apart containing
details of the year of accumulation, amount of application during the
previous year out of such accumulation, name and address of the person
to whom any credit or payment is made and the object for which such
application is made;

(II)   application out of the deemed
application of income referred to in clause (2) of Explanation 1 of
sub-section (1)   of section 11 of the Act, for any preceding previous
year, containing details of the year of deemed application, amount of
application during the previous year out of such deemed application,
name and address of the person to whom any credit or payment is made and
the object for which such application is made;

(III)
application, other than the application referred to in Item (I) and
Item (II), out of income accumulated during any preceding previous year
containing details of the year of accumulation, amount of application
during the previous year out of such accumulation, name and address of
the person to whom any credit or payment is made and the object for
which such application is made;

(IV)   money invested or deposited in the forms and modes specified in sub-section (5) of section 11 of the Act;

(V)   money invested or deposited in the forms and modes other than those specified in subsection (5) of section 11 of the Act;

Analysis

This sub-clause requires details of application out of the income of any previous year preceding the current previous year.
Ordinarily, this would be the income exempt up to 15 per cent u/s
11(1)(a) or the income of preceding years accumulated u/s 11(2).

It
appears that the main purpose behind seeking these details is to
ascertain the amount of application which is not allowable u/s 11(1).

Application out of the deemed application of income referred to in explanation 1(2) of section 11(1) [item (ii)]

Ordinarily,
the details of credit balance in income and expenditure accounts are
not maintained year-wise. The assessee may now have to split up the
credit balance in income and expenditure year-wise based on the accounts
of preceding years, and then consider their utilization. In such a
case, the assessee may also have to record the basis on which the
amounts have been quantified. To illustrate, the credit balance in the
income and expenditure account as on 31st March, 2022 is Rs. 86 lakhs,
which can be regarded as composed as follows:

In the above case, the amount of Rs. 40 lakhs is regarded to have come out of the F.Y. 2020-21.

Also, see the analysis of Rule 17AA(1)(d)(iii)- ‘Out of previous year’ published on page 25 of October BCAJ.

Application other than the application referred in Item (I) and Item (II), [Item (III)]

Although not explicitly stated, this Item appears to apply to the application to be made within five years u/s11(2).

Money invested or deposited in permissible modes u/s 11(5); [Item (IV)]

The comments in Money invested or deposited in permissible modes of section 11(5) on Page 28 of October BCAJ apply to this para.

Money invested or deposited in impermissible modes [Item (V)]

The comments in Money invested or deposited in non- permissible modes on Page 28 of October BCAJ apply to this para.

Rule 17AA(1)(d)(v)(Text)

Record of voluntary contribution made with a specific direction that they shall form Part of the corpus, in respect of-

(I)
the contribution received during the previous year containing details
of the name of the donor, address, permanent account number (if
available) and Aadhaar number (if available);

(II) application
out of such voluntary contribution referred to in Item (I) containing
details of the amount of application, name and address of the person to
whom any credit or payment is made and the object for which such
application is made;

(III) the amount credited or paid towards
corpus to any fund or institution or trust or any university or other
educational institution or any hospital or other medical institution
referred to in subclause (iv) or sub-clause (v) or sub-clause (vi) or
sub-clause (via) of clause (23C) of section 10 of the Act or other trust
or institution registered under section 12AB of the Act, out of such
voluntary contribution received during the previous year containing
details of their name, address, permanent account number and the object
for which such credit or payment is made;

(IV) the
forms and modes specified in sub-section (5) of section 11 of the Act in
which such voluntary contribution, received during the previous year,
is invested or deposited;

(V)   the Money invested or deposited
in the forms and modes other than those specified in subsection (5) of
section 11 of the Act in which such voluntary contribution, received
during the previous year, is invested or deposited;

(VI)
application out of such voluntary contribution, received during any
previous year preceding the previous year, containing details of the
amount of application, name and address of the person to whom any credit
or payment is made and the object for which such application is made;

(VII)
The amount credited or paid towards corpus to any fund or institution
or trust or any university or other educational institution or any
hospital or other medical institution referred to in subclause (iv) or
sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of
section 10 of the Act or other trust or institution registered under
section 12AB of the Act, out of such voluntary contribution received
during any year preceding the previous year, containing details of their
name, address, permanent account number and the object for which such
credit or payment is made;

(VIII)   the forms and modes
specified in sub-section (5) of section 11 of the Act in which such
voluntary contribution, received during any previous year preceding the
previous year, is invested or deposited;

(IX)   The Money
invested or deposited in the forms and modes other than those specified
in subsection (5) of section 11 of the Act in which such voluntary
contribution, received during any previous year preceding the previous
year, is invested or deposited;

(X) The amount invested or
redeposited in such voluntary contribution (which was applied during any
preceding previous year and not claimed as application), including
details of the forms and modes specified in sub-section (5) of section
11 in which such voluntary contribution is invested or deposited;

Analysis

This
sub-clause requires details of receipts of corpus donations and their
utilization. Courts have held that the specific direction can be
inferred in many cases [e.g., when the donation is received to meet the
cost of a building [CIT vs. Sthanakvasi Vardhman Vanik Jain Sangh,
(2003) 260 ITR 366 (Guj); ACIT vs. Chaudhary Raghubir Singh Educational
& Charitable Trust, (2012) 28 taxmann.com 272 (Del)]. This aspect may have to be borne while preparing the details.

Application out of voluntary contribution referred to in Item (I) [Item (II)]

To
avoid any overlap between details under Item (II) and Item (III), the
details under this Item may be restricted to contributions other than
those covered under Item (III), that is, application towards corpus of
specified institutions.

Application out of such voluntary corpus contribution received during any previous year preceding the previous year [Item (VI)]

This item requires maintenance of application details out of corpus received during any previous year preceding the previous year.

Permissible
investments in which such voluntary contribution, received during any
previous year preceding the previous year, is made [Item (VIII)]

This item requires details of permissible investments u/s 11(5) out of corpus received during any previous year preceding the previous year.

The comments in Money invested or deposited in permissible modes of section 11(5) on Page 28 of October BCAJ apply to this para.

Non-permissible
investments made from voluntary corpus contribution received during any
previous year preceding the previous year [Item (IX)]

This item requires details of investments/deposits in impermissible modes out of corpus received during any previous year preceding the previous year.

The comments in the Money invested or deposited in non-permissible modes on Page 28 of October BCAJ apply to this para.

Amount invested or deposited back into corpus [Item (X)]

The
details are required only in respect of such investments or deposits
back into the corpus which satisfies the following conditions:

The voluntary contribution towards corpus was received in any preceding previous year;

Such voluntary contribution was applied during any preceding previous year;

Such application was not claimed as such application during any preceding previous year.

Rule 17AA(1)(d)(viii)[Text]

record
of contribution received for renovation or repair of the temple,
mosque, gurdwara, church or other place notified under clause (b) of
sub-section (2) of section 80G, which is being treated as corpus as
referred in Explanation 1A to the third proviso to clause (23C) of
section 10 or Explanation 3A to sub-section (1) of section 11, in
respect of:

(I)   the contribution received during the previous
year containing details of the name of the donor, address, permanent
account number (if available) and Aadhaar number (if available);

(II)
contribution received during any previous year preceding the previous
year, treated as corpus during the previous year, containing details of
name of the donor, address, permanent account number (if available) and
Aadhaar number (if available);

(III)   application out of such
voluntary contribution referred to in Item (I) and Item (II) containing
details of the amount of application, name and address of the person to
whom any credit or payment is made and the object for which such
application is made;

(IV)   the amount credited or paid towards
corpus to any fund or institution or trust or any university or other
educational institution or any hospital or other medical institution
referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or
sub-clause (via) of clause (23C) of section 10 of the Act or other trust
or institution registered under section 12AB of the Act, out of such
voluntary contribution received during the previous year containing
details of their name, address, permanent account number and the object
for which such credit or payment is made;

(V) the forms and modes specified in sub-section (5) of section 11 of the Act in which such corpus, received during the previous year, is invested or deposited;

(VI)
the Money invested or deposited in the forms and modes other than
those specified in subsection (5) of section 11 of the Act in which such
corpus, received during the previous year, is invested or deposited;

(VII)
application out of such corpus, received during any previous year
preceding the previous year, containing details of the amount of
application, name and address of the person to whom any credit or
payment is made and the object for which such application is made;

(VIII)
the amount credited or paid towards corpus to any fund or institution
or trust or any university or other educational institution or any
hospital or other medical institution referred to in subclause (iv) or
sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of
section 10 of the Act or other trust or institution registered under
section 12AB of the Act, out of such voluntary contribution received
during any year preceding the previous year, containing details of their
name, address, permanent account number and the object for which such
credit or payment is made;

(IX) the forms and modes specified
in sub-section (5) of section 11 of the Act in which such corpus,
received during any previous year preceding the previous year, is
invested or deposited; Money invested or deposited in the forms and
modes other than those specified in sub- section (5) of section 11 of
the Act in which such corpus, received during any previous year
preceding the previous year, is invested or deposited;

Analysis

This
sub-clause refers to contributions received by a temple, etc. It
requires details pursuant to Explanation 3A and 3B to section 11(1).

Contribution received during the previous year [Item (I)]

This Item appears to require details of all contributions, whether corpus or otherwise.

Permissible modes in which corpus received during the previous year is invested or deposited [Item (V)]

The details under this Item are partially sought under Item II to rule 17AA(1)(d)(ii).

The comments in Money invested or deposited in permissible modes of section 11(5) on Page 28 of October BCAJ apply to this para.

Non-permissible modes in which corpus received during the previous year is invested or deposited [Item (VI)]

The details under this Item are partially sought under Item II to rule 17AA(1)(d)(ii).

The comments in Money invested or deposited in non- permissible modes on Page 28 of October BCAJ apply to this para.

Rule 17AA(1)(d)(vii)[Text]

record of loans and borrowings,-

(I)
containing information regarding amount and date of loan or borrowing,
amount and date of repayment, name of the person from whom loan taken,
address of lender, permanent account number and Aadhaar number (if
available) of the lender;

(II)   application out of such loan or
borrowing containing details of amount of application, name and address
of the person to whom any credit or payment is made and the object for
which such application is made;

(III)   application out of such
loan or borrowing, received during any previous year preceding the
previous year, containing details of amount of application, name and
address of the person to whom any credit or payment is made;

(IV)
repayment of such loan or borrowing (which was applied during any
preceding previous year and not claimed as application) during the
previous year;

Analysis

This sub-clause refers to
loans and borrowings by the assessee. Generally, it requires details
pursuant to Explanation 4(ii) to section 11(1).

The sub-clause requires details of loans and borrowings but not advances received.

Information regarding the amount and date of loan or borrowing [Item (I)]

A confirmation from the lender is not required under this Item. However, the assessee should keep it on record.

Application out of such loan or borrowing [Item (II)]

While
the details in respect of any credit or payment out of loans/borrowings
are required under this Item, in view of Explanation to section 11, the
amount credited to a person’s account will not be allowed as an
application of income unless it is paid.

Application out of such loan or borrowing, received during any previous year preceding the previous year [Item (III)]

This Item does not require details of the object for which such an application is made.

Repayment
of such loan or borrowing (which was applied during any preceding
previous year and not claimed as application) during the previous year [Item (IV)]

This Item requires maintenance of details of repayment of loans/borrowings, which satisfy the following conditions:

The loan/borrowing was effected in the year preceding the previous year;

Such loan/borrowing is repaid during the previous year;

The loan/borrowing was applied during any preceding previous year;

The loan/borrowing was not claimed as an application during any preceding previous year.

To
illustrate, suppose Rs. 1 crore was borrowed in the F.Y. 2021-22 and
Rs. 60 lakhs was applied during the said year but not claimed as
application. In this situation, for F.Y. 2022-23, the rule requires
details of Rs. 60 lakhs and not the other Rs. 40 lakhs not applied
during the previous year.

Rule 17AA(1)(d)(viii)[Text]

record of properties held by the assessee, with respect to the following, namely, –

(I) immovable properties containing details of,

(i) nature, address of the properties, cost of acquisition of the asset, registration documents of the asset;

(ii) transfer of such properties, the net consideration utilized in acquiring the new capital asset;

(II) movable properties, including details of the nature and cost of acquisition of the asset;

Analysis

This
clause requires details of all properties of the assessee. Some details
are also required by Item II in Rule 17AA(1)(d)(ii). (Also refer Part I
of this article)

Immovable Properties [item (I)]

The term “immovable property” is defined in the explanation to section 11(5) as follows:

“Immovable
property” does not include any machinery or plant (other than machinery
or plant installed in a building for the convenient occupation of the
building) even though attached to, or permanently fastened to, anything
attached to the earth;

The definition is negative, hence some
elements of the following definition of “immovable property” in section
3(26) of the General Clauses Act, 1897 may become applicable:

“immovable
property” shall include land, benefits to arise out of the land, and
things attached to the earth, or permanently fastened to anything
attached to the earth;

The Item does not differentiate
between properties acquired as investment and properties acquired for
the purpose of activity of the assessee. Thus, land and building on
which a school is situated is required to be recorded.

Courts have held that tenancy
rights are immovable property of the tenant. [Jagannath Govind Shetty
vs. Javantilal Purshottamdas Patel, AIR 1980 Guj 41; Lal & Co. And
Anr. Vs. A.R. Chadha And Ors., ILR 1970 Delhi 202; Kanhaiya Lal v. Satya
Narain Pandey, AIR 1965 All 496]. Thus, tenancy rights are also immovable properties whose details are required to be recorded.

The
rule does not require details of sale consideration, expenditure in
relation to transfer, etc. However, it is advisable that such details
are also recorded.

Movable Properties [item (II)]

The term “moveable properties” is defined in section 2(36) of the General Clauses Act, 1897 as “property of every description, except immovable property.”

Thus,
all properties including plant and machinery, furniture and fixtures,
investments, cash and bank balance, book debt, loans and advances, and
inventory are also movable properties!

The rule does not
distinguish between movable property as investment or as capital asset
or otherwise in connection with the activities. Hence, for an assessee
running an institution such as a hospital, every piece of equipment,
furniture etc. is a movable property and its details are required!!

Details of all assets, whether existing on 31st March or not, are required to be recorded!!

Rule 17AA(1)(d)(ix)[Text]

record of specified persons, as referred to in sub-section
(3) of section 13 of the Act,-

(I) containing details of their name, address, permanent account number and Aadhaar number (if available);

(II)
transactions undertaken by the fund or institution or trust or any
university or other educational institution or any hospital or other
medical institution with specified persons as referred to in sub-section
(3) of section 13 of the Act containing details of date and amount of
such transaction, nature of the transaction and documents to the effect
that such transaction is, directly or indirectly, not for the benefit of
such specified person;

Analysis

This clause requires
details of “interested parties” u/s 13(3) and the transactions with
them. Its details are required pursuant to section 12(2), 13(1)(c),
13(2) and 13(4) of the Act.

Interested parties [Item (I)]

The record will have to be updated, if the interested parties change during the year, e.g.

person makes a voluntary contribution of more than Rs. 50,000 during the year and becomes an interested party u/s 13(3)(b).

there is a change in the trustees.

A
substantial contributor is an interested party and includes any person
who has contributed Rs. 50,000 or above in aggregate to an assessee. To
illustrate, if a person has donated Rs. 5,000 per year from 1980 to
1990, he became a ‘substantial contributor’ from financial year 1990-91
onwards and his details are required to be maintained!!

Transactions [Item (II)]

Section
13(2) generally requires comparison with arm’s length price to
determine whether the benefit is granted to an interested party or not.
However, this sub-clause does not specifically require co-relation with
arm’s length price.

The assessee will need to give reference to
documents showing that no benefit is given to the interested party. For
this purpose, different transactions will require other documents. To
illustrate:

in case of remuneration to an interested party,
evidence regarding his educational qualifications or experience in the
relevant field or amount paid by the assessee to a non-interested person
for similar work, etc., may be required.

In case of a sale
transaction, a document showing the price at which it has been sold to
other parties or the evidence regarding the market price of the product,
etc., may be required.

Rule 17AA(1)(d)(x)[Text]

Any other documents containing any other relevant information. [Rule 17AA(1)(d)(x)]

Analysis

This
is a very subjective requirement: it means that the assessee has to
determine whether any other document contains any “relevant information”
and, if so, maintain it. Now, the maintenance of documents is
mandatory. Hence, if the AO believes that any other document not
maintained by the assessee has “relevant information”, then he can hold that the assessee has not maintained the prescribed documents !! This is too wide a discretion given to AOs.

Rule 17AA(2)[Text]

The
books of accounts and other documents specified in sub-rule (1) may be
kept in written form, electronic form, digital form, or as printouts of
data stored in electronic form, digital form, or any other form of
electromagnetic data storage device.

Analysis

This
requirement reproduces the definition of “books of accounts” in section
2(12A). Under this provision, documents must also be maintained in
written or electronic form.

It appears that a combination of print and handwritten books of account/document is also permitted.

Rule 17AA(3)[Text]

The
books of account and other documents specified in sub-rule (1) shall be
kept and maintained by the fund or institution or trust or any
university or other educational institution or any hospital or other
medical institution at its registered office:

Provided
that all or any of the books of account and other documents as referred
to in sub-rule (1) may be kept at such other place in India as the
management may decide by way of a resolution and where such a resolution
is passed, the fund or institution or trust or any university or other
educational institution or any hospital or other medical institution
shall, within seven days thereof, intimate the jurisdictional Assessing
Officer in writing giving the full address of that other place and such
intimation shall be duly signed and verified by the person who is
authorized to verify the return of income u/s 140 of the Act, as
applicable to the assessee.

Analysis

The books of
accounts and documents have to be maintained at the registered office.
Under the Companies Act 2013 (“CA 2013”), the books of account and other
records have to be kept at the registered office [s.128(1)]. Under the
Central Goods and Services Tax Act, 2017 (“the CGST Act”), the accounts
and records have to be kept at the principal office mentioned in the
certificate of
registration. [s.35(1)].

A company incorporated
under CA 2013 must have a registered office [s.12(1)]. In case of a
trust or a society registered under Societies Registration Act, 1860
there is no such statutory requirement. Since the Rules and the Act do
not define a registered office, such entities can designate any office
as a registered office. However, it should be the same as the office
specified in Form 10A/10B (application for registration) and in ITR-7.

Place where the books of accounts on electronic platform are maintained

The
Guidance Note on Tax Audit u/s 44AB of the Act, A.Y.2022-23 issued by
the Institute of Chartered Accountants of India, states as follows:

In
case, where books of account are maintained and generated through the
computer system, the auditor should obtain from the assessee the details
of the address of the place where the server is located or the
principal place of the business/head office or registered office by
whatever name called and mention the same accordingly in clause 11(b).
Where the books of account are stored on the cloud or online, IP address
(unique) of the same may be reported. (page 72).

Exception

The
books of accounts and documents may be maintained at a place other than
the registered office if the following conditions are satisfied:

The other place is in India;

The management decides by way of a resolution as to where the books/documents will be kept;

An intimation is sent in writing to the jurisdictional AO giving the full address of that other place;

the intimation is duly signed and verified by the person authorized to verify the return of income u/s 140;

the assessee intimates the AO within 7 days of the resolution.

A similar provision is found in section 128 of the CA 2013.

The
books of accounts may be kept at some other “place” which should be
construed to mean places, applying the principle in section 13 of the
General Clauses Act, 1897 that singular includes plural.

The
proviso provides that “any or all” the books of account may be kept at
other places. Hence, the books/documents may be kept partially at one
place and partially at some other place or places.

Intimate

The assessee shall “intimate” the AO. Dictionaries explain the term as follows:

(i) To make known; formally to notify

[Legal Glossary 2015 by Govt of India, page 225]

(ii) to make known especially publicly or formally:

[https://www.merriam-webster.com]

Thus,
“intimate” means “make known”; in other words, the AO should know that
the resolution has been passed, and such knowledge should be conveyed to
him within seven days of the passing of the resolution. The assessee
may not be able to argue that it has posted the intimation within seven
days of passing of the resolution and hence there is no default, even if
the intimation has not reached the AO.

No particular format is provided for the intimation.

A
similar requirement to keep books of account/other documents at the
registered office is not found in the Act for other profit
organizations.

Suppose the books/documents are temporarily
shifted elsewhere, say, for audit or for compilation of details to be
furnished to the AO, or to be presented to the GST authorities, etc. It
appears that such temporary movement does not mean that the books of
accounts/documents have not been kept and maintained at the registered
office or the designated place.

Rule 17AA(4)[Text]

“The
books of account and other documents specified in sub-rule (1) shall be
kept and maintained for a period of ten years from the end of the
relevant assessment year:

Provided that where the assessment in
relation to any assessment year has been reopened under section 147 of
the Act within the period specified in section 149 of the Act, the books
of account and other documents which were kept and maintained at the
time of reopening of the assessment shall continue to be so kept and
maintained till the assessment so reopened has become final.”

Analysis

The
books of account/documents must be kept for 10 years from the end of
the relevant assessment year (11 years from the end of the relevant
financial year). The corresponding requirement under the CA 2013 and
CGST Act 2017 is 8 financial years¹ and 72 months² from the due date of furnishing the annual return pertaining to the account records.

The period of 10 years corresponds with the maximum reassessment period u/s 149.

The
expression “final” would, perhaps, mean when neither the assessee or
the tax department challenges the reassessment any further and the AO
has passed the final order giving effect to the order by the Appellate
Authority.

The books of accounts/documents kept and maintained at
the time of reopening of the assessment shall continue to be kept and
maintained. On a literal interpretation, all books of accounts/documents
have to be kept and maintained whether or not they have bearing on the
matter under reassessment.

The proviso does not have
retrospective applicability; hence, it should apply only to books of
accounts/ documents prepared after the Rule has come into force. To
illustrate, suppose the assessment for F.Y. 2021-22 is reopened in F.Y.
2025-26 and is not final as on 31st March, 2032. In this case, the
proviso does not apply since the Rule itself is not applicable and
hence, the books of accounts/document need not be kept and maintained
till the reassessment is final. On the other hand, the books for the
year 2022-23 are required to be maintained up to end of 2032-33. Suppose
the assessment for the A.Y. 2023-24 is reopened in F.Y. 2027-28, and it
is not final till 31st March, 2033. Then the books of
accounts/documents for the said year must be maintained till the
reassessment becomes final.

1 Section 128(5)
2 Section 36

Consequences if the books of accounts/documents are not maintained for 10 years

Section
12A(1)(b) does not state that the books of accounts/documents shall be
maintained for such period “as may be prescribed”; in the absence of
these words, it is not clear whether the expression “in such form and
manner” used in the said provision and as explained below covers the
period for which the books/documents ought to be maintained.

The words “in manner and form” were construed by Lord Campbell, C. J. in Acraman vs. Herniman. (1881) 16 QB 998: 117 ER 1164
as referring only to “the mode in which the thing is to be done” and
not the time for doing it. This construction put by Lord Campbell on the
words “in manner and form” was accepted in Abraham vs. Sales Tax Officer, AIR 1964 Ker 131 (FR) and Murli Dhar vs. Sales Tax Officer. AIR 1965 All 483. [K. M. Chopra & Co. vs. ACS, AIR 1967 MP 124, (1967) 19 STC 46 (MP)]

…. in Stroud’s Dictionary it is stated that the words ‘manner and
form’ refer only “to the mode in which the thing is to be done [Dr. Sri Jachani Rashtreeya Seva Peetha vs. State of Karnataka, AIR 2000 Kar. 91]

“Manner” means “method or mode or style” (see Webster’s International Dictionary) [Rama Shankar vs. Official Liquidator, Jwala Bank Ltd. [(1956) 26 Comp. Cas. 126 (All.)]

If
books of accounts/documents are not maintained after, say, 5 years,
there is no provision for any taxation in the sixth year; at the same
time, a reassessment can be made only in accordance with the conditions
in section 149. Hence, if a reassessment cannot be initiated, then it
could be argued that the non-maintenance of books of accounts/documents
for a period of 10 years cannot result in any adverse impact on the
income of the relevant year, notwithstanding the default under Rule
17AA(4).

It is now well settled that the legislature does not compel performance of impossibility (Life Insurance Corporation of India vs. CIT, (1996) 219 ITR 410 (SC)).
Hence, if the books of accounts and records are destroyed or mutilated
on account of causes beyond the control of the assessee, say a fire,
floods, etc., then it cannot be said that the assessee has not kept the
prescribed books in the prescribed form and manner.

CONCLUSION

The
tightening of reporting requirements of charitable institutions by the
tax department is aimed at higher transparency and avoiding
mis-utilization. However, Rule 17AA is very wide with overlapping
requirements. This will adversely impact small charitable institutions.
Further, the requirements are open to multiple interpretations, and any
difference of opinion between the assessee and the AO may result in
denial of exemption, which is too harsh a punishment, more so because
there is no express provision for giving the assessee an opportunity to
rectify the defect. Considering these, the CBDT may reconsider and
revise the rules.

[Author acknowledges assistance from Adv.
Aditya Bhatt, CA Kausar Sheikh, CA Chirag Wadhwa and CA Arati Pai in
writing this Article]

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Section 148A – Reopening of assessment – Notice u/s 148A(b) – Firm Dissolved – duly intimated the department – Transaction duly recorded in proprietorship concern – Matter remanded for fresh consideration

Sanjay Gupta vs. Union Of India & Ors.
W.P.(C) 13712/2022
Date of order: 22nd September, 2022
Delhi High Court
A.Ys.: 2015-16, 2017-18 & 2018-19

Section 148A – Reopening of assessment – Notice u/s 148A(b) – Firm Dissolved – duly intimated the department – Transaction duly recorded in proprietorship concern – Matter remanded for fresh consideration

The Present writ petition has been filed challenging the notice issued u/s 148, 148A(b) and orders passed u/s148A(d) of the Act.

The Petitioner stated that the impugned notices are without jurisdiction as the same have been issued in the name of a non-existent partnership firm – Railton Electronics. He states that the Petitioner, during the reassessment proceedings, duly informed the department vide replies dated 23rd March, 2022 and 19th January, 2022 that the partnership firm being M/s Railton Electronics having PAN Number AANFR1676E was dissolved as per the Deed of Dissolution dated 1st April, 2013 and thereafter, the firm was taken over by the Petitioner as a sole proprietor.

The Petitioner stated that as per the letter obtained from the erstwhile partnership firm’s bank, the partnership firm’s bank account was closed on 19th July, 2013 itself. He contends that the Railton Electronics is now maintaining a proprietorship account opened on 25th July, 2013. In support of his contention, he relied upon the certificates issued by the Petitioner’s banker.

The Petitioner emphasises that the alleged transactions mentioned in the notices issued u/s 148A(b) of the Act are duly accounted for in the return of the sole proprietorship. He pointed out that there has been a scrutiny assessment in the account of the sole proprietorship firm in the name of the sole proprietor, Mr. Sanjay Gupta.

The Hon. Court, upon consideration of the above factual position, sets aside the orders dated 9th April, 2022 passed u/s 148A(d) of the Act for A.Ys. 2018-19 and 2015-16, the notices issued u/s 148 and directs the Petitioner to file supplementary replies before the Assessing Officer (AO) clearly stating that the transactions referred to in the notices issued u/s 148A(b) of the Act have been duly accounted for in the account of the sole proprietorship firm, and have been offered to tax. Along with the replies, the Petitioner shall enclose all the relevant documents including certificates issued by Canara Bank, income tax returns, bank statements as well as the assessment orders passed in the name of a sole proprietorship for the said assessment years, within two weeks. The AO was directed to pass fresh orders u/s 148A(d) of the Act within a period of four weeks thereafter.

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S. 260A – Additional grounds of appeal raised before High court – Revision order u/s 263 passed in case of dead person – Matter remanded

Bimal vs. Pala (Legal heir of Late Smt. Ranjana Pala) vs. ACIT – 26(2)
ITA No. 517 of 2018
Date of order: 16th September, 2022
Bombay High Court
[Arising from Mumbai ITAT order dated 17th March, 2017 – Bench “B” ITA No. 2735/Mum/2016 – A.Y.: 1996-97]

S. 260A – Additional grounds of appeal raised before High court – Revision order u/s 263 passed in case of dead person – Matter remanded

The appeal was filed u/s 260A of the Income Tax Act, 1961. The Appellant stated that one of the grounds which ought to have been taken, but was not taken before the Tribunal, was regarding the death of Ms. Ranjana Pala, on 22nd January, 2016, which was material to the case inasmuch as the order dated 16th March, 2016, came to be passed by the Principal Commissioner of Income Tax, after the death of the said assessee. It was stated that even in the present memo of appeal, this question has not been raised and, therefore, learned Counsel for the Appellant has tendered a schedule of amendment seeking to incorporate, the following:

“28AA Whether the order dated 16-03-2016 passed by the Respondent No. 2 under Section 263 of the Act in the case of “Ms. Ranjana Pala” who had passed away on 22-01-2016 was against non-existent person and hence illegal and bad in law?”

The aforesaid prayer made by the learned Counsel for the Appellant was allowed by the court. The Hon. Court observed that the assessee, Ms. Ranjana Pala, had expired on 22nd January, 2016, at Singapore. A copy of the death certifcate issued by the authorities at Singapore which was on record, confirms this fact. According to the certificate, the deceased assessee passed away on 22nd January, 2016, in the Mount Alizabeth Hospital, Singapore. It is stated that the factum of the death of the deceased assessee was brought to the notice of the Principal Commissioner of Income Tax, vide communication dated 7th March, 2016, which was not only acknowledged by hand receipt but also got reflected in the order dated 16th March, 2016 passed u/s 263 of the Act by the Principal Commissioner of Income Tax. It is thus stated that having the full knowledge about the factum of the death of the deceased assessee, the authority had proceeded to pass an order against a dead person, which was thus a nullity in law.

The Hon. Court observed that since the issue which is now sought to be raised before this Court in the appeal, was not an issue which was raised or agitated before the Tribunal, but nevertheless has a direct bearing on the controversy, therefore the Hon. Court deemed it necessary to remand the matter to the Tribunal for a fresh consideration on the above limited issue, keeping all other issues, which have been raised in the present memo of appeal, open.

Accordingly the appeal was disposed.

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S. 68 – Identity, creditworthiness and genuineness of the transactions of purchases – Concurrent finding of the fact recorded by both the authorities- sales and purchase transactions, transfer pricing report at arm’s length and book results declared accepted – No substantial question of law arises for consideration

Pr. Commissioner of Income Tax vs. M/s Attire Designers Pvt. Ltd.
ITA 344 of 2022
Date of order: 20th September, 2022
A.Y.: 2014-15
Delhi High Court
[Arising from Delhi ITAT order dated
29th November, 2021 in ITA 5224/Del./2017]

S. 68 – Identity, creditworthiness and genuineness of the transactions of purchases – Concurrent finding of the fact recorded by both the authorities- sales and purchase transactions, transfer pricing report at arm’s length and book results declared accepted – No substantial question of law arises for consideration

The Assessing Officer (AO) treated the credit balance of the associate parties relating to purchase made by the assessee as non-genuine.

Before the CIT(A) the assessee furnished the details of the payments of outstanding balance as on 31st March, 2014 along with confirmation for fair and proper disposal of the appeal. The assessee submitted details of parties as well as details of the transaction made with said parties during the Financial Year under consideration mentioned in transfer pricing report in Form 3CEB as well as transfer pricing study, which was submitted by assessee before the AO.

The CIT(A) noted that the said transactions of purchases were at arm’s length price and no adverse finding was brought on record by the AO who never doubted the purchases made by the assessee during the year which includes purchases made from sundry creditors, sale made by assessee during year and the book result declared by the assessee for the financial year under consideration.

During the appellate proceedings, the CIT(A) also observed that the sundry creditors have purchased goods during the year under consideration from different parties, and out of the said purchases, they have sold goods to the assessee company and as per general business practice, goods were purchased on credit basis and therefore, the allegation of AO that the financial statement of the sundry creditors do not support their creditworthiness, is not based on proper appreciation of the facts. The CIT(A) also perused the details of sale, purchase, trade payables and trade receivables for the financial year under consideration of the said sundry creditors and came to the conclusion that there are corresponding purchases against sales declared by them for the financial year under consideration, and there are also trade payables outstanding as on 31st March, 2014, which shows that the said companies also have trade payable against purchases of goods, therefore, the allegation made by the AO that such companies do not have creditworthiness to enter into large scale transaction of sale and purchase is factually incorrect. The CIT(A) held that once the AO has accepted sales and purchase transactions, transfer pricing report at arm’s length and book results declared by the Appellant, he is not justified in treating the credit balance of associate parties relating to sales to the assessee as non-genuine without bringing any adverse material on record. The identity, creditworthiness and genuineness of the transactions of purchases made by the assessee from sundry creditors is proved .

The ITAT upheld the findings of the CIT(A) and dismissed the appeal of the Revenue relying on the judgment of the Delhi High Court in the case of Commissioner of Income Tax vs. Ritu Anurag Aggarwal [2010] 2 taxmann.com 134 (Delhi).

The Hon. High Court observed that both the Appellate Authorities below have recorded concurrent findings of the fact on the issues.

The Hon. High Court relied on the Supreme Court decisions in the case of Ram Kumar Aggarwal & Anr. vs. Thawar Das (through LRs), (1999) 7 SCC 303, which reiterated that u/s 100 of the Code of Civil Procedure, the jurisdiction of the High Court to interfere with the orders passed by the Courts below is confined to hearing on substantial question of law and interference with finding of the fact is not warranted if it involves re-appreciation of evidence. Further, the Supreme Court in State of Haryana & Ors. vs. Khalsa Motor Lid & Ors., (1990) 4 SCC 659 held that the High Court was not justified in law in reversing, in second appeal, the concurrent findings of the fact recorded by both the Courts below. The Supreme Court in Hero Vinoth (Minor) vs. Seshammal, (2006) 5 SCC 545 also held that “in a case where from a given set of circumstances two inferences of fact are possible, the one drawn by the lower appellate court will not be interfered by the High Court in second appeal. Adopting any other approach is not permissible.”

It has also held that there is a difference between a ‘question of law’ and a ‘substantial question of law’. Consequently, the Hon. Court held that no substantial question of law arises for consideration in the present appeal and accordingly the same was dismissed.

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Reassessment — (A) Notice after four years — Condition precedent — Notice based on information during survey of third party that assessee beneficiary of contract with surveyed party — Reasons recorded for reopening assessment not mentioning information withheld by assessee or any new material found by assessing authority — Assessee disclosing all material facts fully and truly — Reasons cannot be improved upon or supplemented — Notice and order rejecting objections of assessee set aside

(B) Principles of natural justice — Failure to provide assessee copies of judgments relied upon by AO — Violation of principles of natural justice — Notice and order rejecting objections of assessee set aside

47 Patel Engineering Ltd. vs. Dy. CIT
[2022] 446 ITR 728 (Bom.)
A.Y.: 2012-13
Date of order: 25th January, 2022
Ss. 133A, 147 and 148 of ITA, 1961

Reassessment — (A) Notice after four years — Condition precedent — Notice based on information during survey of third party that assessee beneficiary of contract with surveyed party — Reasons recorded for reopening assessment not mentioning information withheld by assessee or any new material found by assessing authority — Assessee disclosing all material facts fully and truly — Reasons cannot be improved upon or supplemented — Notice and order rejecting objections of assessee set aside

(B) Principles of natural justice — Failure to provide assessee copies of judgments relied upon by AO — Violation of principles of natural justice — Notice and order rejecting objections of assessee set aside

For the A.Y. 2012-13, in response to the notice u/s 142(1) r.w.s. 129 of the Income-tax Act, 1961, the assessee furnished the details required by the Assessing Officer which included the receipt of Rs. 14,92,47,452 from SECPL and submitted that the amount was declared as income. Thereafter, the assessment order u/s 143(3) was passed. After four years the Assessing Officer issued a notice against the assessee u/s 148 to reopen the assessment u/s 147 on the ground that according to a survey conducted u/s 133A on SECPL, the assessee had received a contract for an amount of Rs. 24,22,57,252. The objections raised by the assessee were rejected.

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

“i) The reopening of assessment having been proposed after expiry of four years from the relevant A.Y. 2012-13 and since the assessment was completed u/s. 143(3) the proviso to section 147 applied. The onus was on the Department to disclose what was the material fact that the assessee had failed to disclose truly and fully. The reasons recorded for reopening did not disclose anywhere that there was failure on the part of the assessee to disclose fully and truly all material facts. The Assessing Officer had not even stated whether the assessee had executed the contract and received any income.

ii) The survey on SECPL had been conducted before the assessment order was passed against the assessee for the A.Y. 2012-13. Therefore, the Assessing Officer should have been aware of any such information but still chose not to raise it during the assessment proceedings and had not verified the facts with the data available with him and simply on the basis of information received from the Deputy Director had issued the notice to the assessee. Therefore the condition precedent for reopening the assessment u/s. 147 that mandated that it was exclusively the satisfaction of the assessing authority based on some direct, correct and relevant material had not been satisfied. To the reasons recorded, the Department has not annexed the information received by them. To the extent of not furnishing to the assessee the information received from the Deputy Director with the reasons recorded the action of the Department was in breach of the orders of the court in Sabh Infrastructure Ltd. vs. Asst. CIT [2017] 398 ITR 198 (Delhi).

iii) The reasons recorded for reopening could not be improved upon or supplemented. In the order disposing of the assessee’s objections, the Assessing Officer had relied upon various judgments of which copies were not provided nor were they brought to the notice of the assessee before the order rejecting the objections was passed so that the assessee could have suitably dealt with those judgments or orders. Therefore, there was breach of principles of natural justice by the Assessing Officer, who as a quasi-judicial authority had an obligation to adhere strictly to the principles of natural justice. He had also gone beyond the reasons recorded for reopening inasmuch as according to him no bank statements or works contract receipts were required or submitted during the original assessment proceedings based on which the actual amount and the nature and genuineness of the work done by the assessee for SECPL could have been verified.

iv) In the circumstances, the petition is allowed in terms of prayer clause (a). (i.e., notice u/s. 148 and the order rejecting objections were quashed).”

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Reassessment — Notice u/s 148 — Limitation — Law applicable — Effect of amendments with effect from 1st April, 2021 and CBDT Circular dated 11th May, 2022

46 Ajay Bhandari vs. UOI
[2022] 446 ITR 699 (All.)
A.Y.: 2014-15
Date of order: 17th May, 2022
Ss. 147 and 148 of ITA, 1961

Reassessment — Notice u/s 148 — Limitation — Law applicable — Effect of amendments with effect from 1st April, 2021 and CBDT Circular dated 11th May, 2022

For the A.Y. 2014-15 a notice u/s 148 of the Income-tax Act, 1961 was issued on 1st April, 2021. The recorded reasons read as under:

“I have reason to believe that an income to the tune of Rs. 2,63,324 has escaped assessment for the aforesaid year.”

The reassessment order dated 31st March, 2022 was passed u/s 147 r.w.s. 144B of the Act, 1961. The assessee filed writ petition and challenged the notice and the reassessment order.

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

“i) Section 147 of the Income-tax Act, 1961, as it existed till March 31, 2021, empowers the Assessing Officer to assess or reassess or recompute the loss or depreciation allowance or any other allowance, as the case may be, for the assessment year in the case of an assessee if he has reason to believe that income chargeable to tax has escaped assessment, subject to the provisions of sections 148 to 153. A precondition to initiate proceedings under section 147 is the issuance of notice under section 148. Thus, notice under section 148 is jurisdictional notice. Section 149 provides the time limit for issuance of notice under section 148. The time limit is provided under the unamended provisions (as existing till March 31, 2021) and the amended provisions (effective from April 1, 2021) as amended by the Finance Act, 2021. According to clauses 6.2 and 7.1 of the Board’s Circular dated May 11, 2022 ([2022] 444 ITR (St.) 43), if a case does not fall under clause (b) of sub-section (1) of section 149 of the Act for the assessment years 2013-14, 2014-15 and 2015-16 (where the income of an assessee escaping assessment to tax is less than Rs.50,00,000) and notice has not been issued within limitation under the unamended provisions of section 149, then proceedings under the amended provisions cannot be initiated.

ii) The notice u/s 148 of the Act issued on April 1, 2021 for the A.Y. 2014-15 and the notice dated January 13, 2022 u/s. 144 of the Act and the reassessment order dated January 13, 2022 u/s. 147 read with section 144B of the Act for the A.Y. 2014-15 were liable to be quashed.”

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Reassessment — Notice u/s 148 — Limitation — Doctrine of substantial compliance —Mere signing of notice is not sufficient — Date of issue would be date on which notice was served on assessee — Notice dated 31st March, 2018 served on assessee through e-mail on 18th April, 2018 for A.Y. 2011-12 — Notice barred by limitation — Order and notice set aside

45 Parveen Amin Bhathara vs. ITO
[2022] 446 ITR 201 (Mad.)
A.Y.: 2011-12
Date of order: 27th June, 2022
Ss. 147, 148 and 149 of ITA, 1961

Reassessment — Notice u/s 148 — Limitation — Doctrine of substantial compliance —Mere signing of notice is not sufficient — Date of issue would be date on which notice was served on assessee — Notice dated 31st March, 2018 served on assessee through e-mail on 18th April, 2018 for A.Y. 2011-12 — Notice barred by limitation — Order and notice set aside

On 18th April, 2018, the assessee writ petitioner received an e-mail from the Assessing Officer with a notice u/s 148 of the Income-tax Act, 1961 dated 31st March, 2018, proposing to reopen the assessment for the A.Y. 2011-12. The Assessee filed a writ petition and challenged the notice on the ground that the notice has been issued and served on 18th April, 2018, the date on which the limitation period of six years for reopening the assessment, came to an end.

The Single Judge Bench of the Madras High Court dismissed the writ petition by observing that it was sufficient if the notice u/s 148 of the Act had been signed and issued by the authority and that the delay in receiving the documents would not provide any ground for quashing the entire proceedings.

The Division Bench allowed the appeal filed by the assessee and held as under:

“i) U/s. 149 of the Income-tax Act, 1961 the issuance of notice u/s. 148 for reopening the assessment u/s. 147 is complete only when it is issued in the manner as prescribed u/s. 282 read with rule 127 of the Income-tax Rules, 1962 prescribing the mode of service of notice under the Act. The signing of notice would not amount to issuance of notice as contemplated u/s 149 of the Act. The requirement of issuance of notice u/s 149 is not mere signing of the notice u/s. 148, but it has to be sent to the proper person within the end of the relevant assessment year.

ii) The notice u/s. 148 for reopening the assessment was not sent to the assessee within the time stipulated u/s 149 and hence, the reassessment proceedings initiated u/s 147 were vitiated. The notice dated 31/03/2018 issued by the Assessing Officer was served on the assessee through e-mail, only on 18/04/2018. Though the Department produced the relevant pages of the notice server book maintained by it to show that the notice dated 31/03/2018 was within the limitation period, it only disclosed that the notice dated March 31/03/2018 was returned on 06/04/2018. The order on the writ petition and the notice issued u/s. 148 were set aside.”

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Offences and prosecution — Wilful attempt to evade tax — Application for compounding of offences — Limitation — Show-cause notice issued for rejection of compounding of offences on ground of bar of limitation relying on circular issued by CBDT — Circular cannot override statutory provision — Authority to consider assessee’s application

44 G. P. Engineering Works Kachhwa vs. UOI
[2022] 446 ITR 563 (All.)
A.Y.: 1990-91
Date of order: 8th February, 2022
Ss. 276C, 277, 278B and 279(2) of ITA, 1961

Offences and prosecution — Wilful attempt to evade tax — Application for compounding of offences — Limitation — Show-cause notice issued for rejection of compounding of offences on ground of bar of limitation relying on circular issued by CBDT — Circular cannot override statutory provision — Authority to consider assessee’s application

A criminal case was filed against the assessee u/s 276C(1) read with sections 277 and 278B of the Income-tax Act, 1961 on the ground of wilful attempt to evade tax relating to the A.Y. 1990-91. The assessee filed an application for compounding of the offences before the Chief Commissioner who issued a show-cause notice for rejecting the application relying upon the Board’s Circular F. No. 285/08/2014-IT (Inv.V)/147 dated 14th June, 2019.

The Allahabad High Court allowed the writ petition filed by the assessee and held as under:

“i) In terms of sub-section (2) of section 279 of the Income-tax Act, 1961 any offence under Chapter XXII of the Act may be compounded by the authorised officer either before or after the institution of the criminal proceedings. No limitation for submission or consideration of compounding application has been provided under sub-section (2) of section 279 of the Act. Therefore, the CBDT by a circular can neither provide limitation for the purposes of sub-section (2) nor restrict the operation of the sub-section in purported exercise of its power to issue circulars under the Explanation appended to section 279(2).

ii) A circular is subordinate to the principal Act or Rules, and cannot override or restrict the application of specific provisions enacted by Legislature. It cannot travel beyond the scope of the powers conferred by the Act or the Rules. Circulars containing instructions or directions cannot curtail a statutory provision by prescribing a period of limitation where none has been provided by either the Act or the Rules. The authority to issue instructions or directions by the Board stems from the Explanation appended to section 279(2). 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 object of an Explanation to a statutory provision has been elaborated by the Supreme Court.

iii) A specific limitation has been provided by para 7(ii) of the compounding guidelines in the Board’s Circular F. No. 285/08/2014-IT (Inv.V)/147 dated June 14, 2019 in purported exercise of power under the Explanation to section 279(2). The Explanation merely enables the Board to issue instructions or directions to other Income-tax authorities for the proper composition of offences under that section. The instructions or directions may prescribe the methodology and manner of composition of offences to clarify any obscurity or vagueness in the main provisions to make it consistent with the dominant object of bringing closure to such cases which may be pending interminably in the court system. Such instructions or directions that are prescribed by the Explanation cannot take away a statutory right of an assessee or set at naught the working of the provision of compounding of offence.

iv) On the facts and circumstances and the provisions of sub-section (2) of section 279 the compounding application of the assessee could not be rejected by the Income-tax authority concerned on the ground of delay in filing the application. It was not disputed by the respondents in the court or in the show-cause notice that the criminal case in question was still pending. The Income-tax authority was to consider the compounding application of the assessee in accordance with law.”

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International transactions — Reference to TPO — (A) Limitation — Reference made to TPO beyond period of limitation — All further proceedings in furtherance of reference bad in law (B) Jurisdiction — Reference made to TPO beyond period of limitation — Participation of assessee in proceedings not a bar to challenging jurisdiction (C) Writ — Maintainability — Reference to TPO — Limitation — Question of limitation is legal plea and can be raised at any stage — Existence of alternate remedy not bar — Writ will issue

43 Virtusa Consulting Services Pvt. Ltd. vs. DRP
[2022] 446 ITR 454 (Mad.)
A.Y.: 2006-07
Date of order: 9th June, 2022
Ss. 92CA, 92CA(1) and 153(1) of ITA, 1961

International transactions — Reference to TPO — (A) Limitation — Reference made to TPO beyond period of limitation — All further proceedings in furtherance of reference bad in law (B) Jurisdiction — Reference made to TPO beyond period of limitation — Participation of assessee in proceedings not a bar to challenging jurisdiction (C) Writ — Maintainability — Reference to TPO — Limitation — Question of limitation is legal plea and can be raised at any stage — Existence of alternate remedy not bar — Writ will issue

The assessee was in the business of software development and rendered services to its wholly owned subsidiaries outside India and unrelated third party customers. For the A.Y. 2006-07, the Assessing Officer passed an assessment order dated 14th March, 2008 and refund was granted on 28th March, 2008. Subsequently, pursuant to proceedings of the Commissioner dated 25th August, 2008, the Additional Commissioner issued a notice dated 4th September, 2008 u/s 143(2) of the Income-tax Act, 1961 against the assessee. The assessee furnished its books of account, including forms 3CA and 3CD in terms of section 44AB. It was found that the assessee had entered into international transactions exceeding Rs. 15 crores with its sister concern and on approval dated 18th November, 2008 u/s 92CA of the Act, the Additional Commissioner made a reference to the Transfer Pricing Officer u/s 92CA(1). The Additional Commissioner sent a communication dated 27th February, 2009 informing the assessee about the reference to the Transfer Pricing Officer and requested it to furnish the annual reports for the previous three years and a copy of the computation of total income. The assessee sent a reply dated 12th May, 2009 with the documents sought for and after conducting enquiries, the Additional Commissioner passed a draft assessment order dated 31st December, 2009. Thereafter, the assessee filed its objections before the Dispute Resolution Panel and the Assessing Officer. Before the Dispute Resolution Panel, the assessee also raised an objection with regard to limitation. However, the Dispute Resolution Panel dismissed the objections by an order dated 24th September, 2010.

Challenging both the orders of the Additional Commissioner and the Dispute Resolution Panel, the assessee filed a writ petition. The writ petition was dismissed by the Single Judge Bench of the Madras High Court holding that the Dispute Resolution Panel had rightly overruled the objections raised for the first time by the assessee regarding the limitation to proceed with the assessment. Therefore, the assessee could not challenge the jurisdiction of the Additional Commissioner’s reference to the Transfer Pricing Officer after 31st December, 2008.

The Division Bench allowed the appeal filed by the assessee and held as under:

“i) Though the provision of section 92B of the Income-tax Act, 1961 does not state as to when a reference is to be made u/s 92CA(1) to the Transfer Pricing Officer after an international transaction is found, section 153 would make it explicit that the reference is to be made during the course of the assessment proceedings before the expiry of the period to pass an assessment order. Thereafter, the Transfer Pricing Officer after considering the documents submitted by the assessee is to pass an order u/s 92CA(3). Section 92CA(3A) stipulates that this order has to be passed before the expiry of 60 days prior to the date on which the period of limitation u/s. 153 expires. According to section 153 no order of assessment can be passed at any time after the expiry of 21 months. Section 92CA(4) stipulates that the Assessing Officer has to pass a draft assessment order in conformity with the order of the Transfer Pricing Officer and the assessee has an option either to file acceptance of the variation of the assessment or file objections to any such variation with the Dispute Resolution Panel and also the Assessing Officer u/s 144C(2). In terms of sub-section (12), the Dispute Resolution Panel has no authority to issue any directions under sub-section (5) from the end of the month in which the draft assessment order is passed and not from the date when the assessee submits the objections. Sub-section (13) of section 144C provides that upon receipt of directions issued under sub-section (5) the Assessing Officer shall in conformity with the directions complete the assessment proceedings within one month from the end of the month in which the directions are received. Under the proviso to section 92CA(3A) if the time limit for the Transfer Pricing Officer to pass an order is less than 60 days, the remaining period shall be extended to 60 days. This implies that not only is the time frame mandatory but also the Transfer Pricing Officer has to pass an order within 60 days. Further, the extension in the proviso also automatically extends the period of assessment to 60 days under the second proviso to section 153. But for the reference u/s 92CA(1) to the Transfer Pricing Officer, the time limit for completing the assessment would only be 21 months from the end of the assessment year. It is only if a reference to the Transfer Pricing Officer has been made during the course of assessment and is pending, that the Department gets another 12 months in terms of the second proviso to section 153(1) and u/s 153(4) after amendment. Therefore, section 153(1) and its first two provisos provide that no order of assessment can be passed after 21 months and the extended period of limitation to pass an assessment order within a further period of 12 months or in other words within 33 months from the end of assessment year, applies only when a reference u/s. 92CA(1) is made during the course of assessment proceedings. The different timelines to be adhered to by the Transfer Pricing Officer, by the Assessing Officer to pass a draft order, by the assessee to file their objections, by the Dispute Resolution Panel to issue directions and by the Assessing Officer to pass the final order, would commence only on a reference to the Transfer Pricing Officer and not otherwise. The period of 33 months is to pass the final order of assessment after the directions from the Dispute Resolution Panel.

ii) The proviso to section 153(1) inserted by amendment in Finance Act, 2006 altering the original time limit from 24 months to 21 months with effect from June 1, 2006 and the second proviso inserted by the Finance Act, 2007, extending the time for completion of assessment, when a reference has been made to the Transfer Pricing Officer, during the course of assessment proceedings have to be read in tandem and together. Section 153 was repealed and substituted with effect from June 1, 2016, where, under section 153(1) it is clearly mentioned that the period of assessment is 21 months and u/s 153(4) that in case of reference u/s 92CA(1) during the course of assessment proceedings, the period of assessment would be extended by twelve months clarifying the mischief caused on account of the interpretation adopted by the officials.

iii) The writ petitions were maintainable and alternative remedy would not operate as a bar. The question of limitation was a legal plea which went to the root of authority or jurisdiction. There was no dispute on the facts about the date on which the reference was made or when the order was passed. The interpretation of the provision to be adjudicated is a pure question of law.

iv) The extension had to be made before the expiry of the time limit prescribed for original assessment was applicable because the second proviso uses the words “and during the course of the proceeding for assessment”. The first two provisos to section 153(1) lay down that the time limit to pass the original assessment order is 21 months and when a reference to the Transfer Pricing Officer is made during the course of such proceedings, the time limit would be 33 months and that if no reference is made within the period provided for assessment, no reference can be made subsequently since the Assessing Officer becomes functus officio. The words used in section 153 are very clear as they lay down that “no order of assessment shall be made”. The order in the writ petition was to be set aside.

v) Concurrence was obtained from the Commissioner before December 31, 2008 would not be of any assistance to the Department as indisputably the reference to the Transfer Pricing Officer was made only on February 17, 2009. The proceedings would commence only when a reference is made to the Transfer Pricing Officer, which cannot be beyond the period provided u/s 153(1) and the first proviso thereunder. From the undisputed dates and events it was clear that not only was the reference to the Transfer Pricing Officer made after the period of expiry of the period of limitation to pass assessment orders, but also that the Assessing Officer had failed to pass final assessment orders in time. The limitation to pass the original assessment order ended on December 31, 2008 being 21 months from the end of the A.Y. 2006-07, i.e., March 31, 2007. Then the last date for the Assessing Officer to pass the final assessment order would end on December 31, 2009, even considering the extension by 12 months. The order of the Dispute Resolution Panel itself was passed only on September 24, 2010 much beyond the permissible period. The Department though on the one hand contended that the reference could be made within 24 months, on the other contended that the extended period would be 9 months. If such contention was accepted, it would mean that the overall time to pass the assessment order in a case of reference to the Transfer Pricing Officer, would be 36 months and not 33 months, which was not the intention of the Legislature. The amendments brought into the Act would then turn redundant.

vi) According to the timeline, when the time given to the Dispute Resolution Panel itself was 9 months from the date of the draft assessment order to complete the assessment and then a further time of one month to the Assessing Officer to complete the assessment from the end of the month in which the direction was received, it could not be said that the total additional time was 9 months and the provisos to section 153(1) had no connection. If the time limits provided to the Transfer Pricing Officer to pass an order and for the assessee to submit its objections in terms of section 144C(2) were also considered with the time period for the Dispute Resolution Panel and the Assessing Officer, the extended period was 12 months and not 9 months. When one proviso provides a time limit and when another proviso extends such time under certain circumstances, it cannot be held that the provisos are independent. Therefore, when the extended time provided for the Department was 12 months it could not be contended that it was only 9 months since the reference was not made in time. Since the reference to the Transfer Pricing Officer had been made after the permissible period, the timeline had been missed by the Department at every stage. Therefore, as a sequitur, all further proceedings, in furtherance thereof were also bad.”

shailesh.kwebmaker

CBDT — Condonation of delay — Delay in filing application before Board — Circular dated 9th June, 2015 prescribing limitation period of six years — Cannot have retrospective effect on pending application filed prior to date of issue of circular — Order rejecting application on basis of circular set aside — Matter remanded to Board

42 R. Ramakrishnan vs. CBDT
[2022] 446 ITR 308 (Kar.)
A.Y.: 2003-04
Date of order: 7th April, 2022
S. 119(2)(b) of ITA, 1961

CBDT — Condonation of delay — Delay in filing application before Board — Circular dated 9th June, 2015 prescribing limitation period of six years — Cannot have retrospective effect on pending application filed prior to date of issue of circular — Order rejecting application on basis of circular set aside — Matter remanded to Board

The assessee filed a nil return for the A.Y. 2003-04 claiming exemption of capital gains u/s 54EC of the Income-tax Act, 1961 arising on sale of its property on 3rd August, 2002 having invested Rs. 25 lakhs in specific bonds on 5th February, 2003. The Assessing Officer was of the view that the investment should have been made on or before 3rd February, 2003 and denied the benefit of section 54EC. Thereafter, the assessee filed a revision petition u/s 264 before the Commissioner challenging the levy of tax on capital gains with a prayer to condone the delay of two days in investing Rs. 25 lakhs in bonds contending that he was in Australia at that time and accordingly, there was a short delay for advising the remittance towards the bond.

The Commissioner declined to condone the delay of two days in making the investment in specified bonds. The assessee filed an application on 24th May, 2011 before the CBDT to direct the Assessing Officer to consider the application u/s 154 and grant appropriate relief. The Board by an order dated 13th December, 2017 rejected the application. The writ petition challenging this order was dismissed by the Single Judge Bench of the Karnataka High Court mainly referring to clause 8 of the Board’s circular dated 9th June, 2015 which stated that the circular would cover all such applications and claims for condonation of delay u/s 119(2)(b) pending as on the date of issue of the circular.

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

“i) The CBDT considered the application filed by the assessee u/s. 119(2)(b) on May 24, 2011 before issuance of the circular dated June 9, 2015 it would not have been rejected on the ground of delay, i. e., beyond the period of six years as specified in the Circular. No provisions of the Act and Rules prescribe the period of limitation for filing the application u/s. 119(2)(b) and it was only by virtue of such circular that the period of limitation of six years had been prescribed for the first time. Though the validity of the circular was not challenged directly by the assessee, that applicability of the circular was the main issue before the court and if the matter was perceived from the angle of delay caused in adjudicating the application filed on May 24, 2011 before the Circular dated June 9, 2015 came into force, the resultant effect would be different.

ii) The assessee should not suffer where no default was committed by him in submitting the application u/s. 119(2)(b) on May 24, 2011, i.e., when there was no period of limitation prescribed. No application could be denied on technical grounds. The application was not disposed of within a reasonable period. The order in the writ petition was set aside and the matter was remanded to the Board for reconsideration of the application and to take an appropriate decision on the merits in accordance with law.”

shailesh.kwebmaker

Retention in Escrow Account – Liability to Capital Gains

ISSUE FOR CONSIDERATION

In most merger and acquisition transactions involving sale of a business or controlling interest in a company, a certain part of the sale consideration is not directly paid to the seller but is kept aside to meet certain contingencies which may arise in the next few years, such as contingent liabilities. This amount is retained in an escrow account with an escrow agent, with instructions as to how the amount is to be utilized and paid out to the seller, depending upon the happening of certain events. Similar contingent payments may prevail in ordinary non-merger cases, too.

An Escrow Arrangement is a monetary instrument whereby a third-party, i.e. an Escrow Agent, holds liquid assets for the benefit of two parties who have entered into an exchange/transaction, and disburses the liquid assets upon the fulfilment of a specific set of obligations on the part of both the parties under a contract i.e. on happening or non-happening of the contingent event.

The issue has arisen before the courts whether, in a situation where the monies kept in escrow are not released to the seller, pending the contingency, at all or released in a year subsequent to the year of transfer of the capital asset, the amount until certain obligations or conditions are fulfilled, would form a part of the consideration accruing or arising to the seller on transfer of the capital asset in the year of transfer of the asset for the purposes of computing the capital gains on transfer of the asset. While the Madras High Court has held that such an amount, so held in escrow, forms a part of the sale consideration for computing the capital gains; the Bombay High Court has held that such an amount cannot be included in the full value of consideration for computing the capital gains in the year of transfer of the capital asset.

CARBORUNDUM UNIVERSAL’S CASE

The issue first came up for the Madras High Court in the case of Carborundum Universal Ltd vs. ACIT 283 Taxmann 312.

In this case, the assessee sold an Electrocast Refractories Plant on a slump sale basis to another company for a total consideration of Rs. 31.14 crore. Out of the total consideration, an amount of Rs. 3.25 crore was deposited in an escrow account by the purchaser to meet any contingent liabilities. The assessee disclosed a long-term capital gain of Rs. 23.58 crore, taking the sale consideration at Rs. 27.89 crore instead of Rs. 31.14 crore.

The Assessing Officer noted that while it had sold the plant for a total sale consideration of Rs. 31.14 crore, it had considered only Rs. 27.89 crore as the consideration for computation of long-term capital gain and asked the assessee to show cause as to why Rs. 31.14 crore should not be considered for computation of long-term capital gains. The assessee explained that the difference between the consideration taken for computation of capital gains and that for which the plant was sold was an account of the fact that an amount of Rs. 3.25 crore was kept in an escrow account to meet any contingent liabilities.

The Assessing Officer recomputed the capital gains taking the consideration as Rs. 31.14 crore, on the grounds that the amount of Rs. 3.25 crore kept in escrow account would only constitute an application of income, and that the full consideration of Rs. 31.14 crore had accrued to the assessee immediately on the execution of the agreement for sale.

In first appeal, the Commissioner (Appeals) noted that the amount in the escrow account had been kept by the purchaser to indemnify against breach of warranty or other losses or on account of further litigation as a result of non-compliance to the conditions of the agreement by the assessee. The Commissioner (Appeals) therefore was of the view that the sum retained in the escrow account had not accrued to the assessee in the year under consideration. He therefore held that amount of Rs. 3.25 crore kept in escrow account had neither been received or accrued by/to the assessee during the year, and since the said amount had been subsequently received by the assessee after the stipulated period of agreement, it had been offered to tax by the assessee under the head capital gains in the year of its receipt. Therefore, holding that the Assessing Officer was not justified in taxing the amount in the year under consideration, the Commissioner (Appeals) deleted the addition of Rs. 3.25 crore.

Before the Tribunal, on behalf of the Revenue, it was contended that the amount kept in escrow account represented application of income and keeping the amount in escrow account was only a formality, as the entire amount of Rs. 3.25 crore had been received without any deduction towards claims/warranties, and had been offered to tax in a subsequent year.

The Tribunal, after examining the Business Sale Agreement, held that, the agreement had given legally enforceable rights to the parties with respect to the transfer of undertaking, the assessee had a right to receive the lump-sum consideration upon effecting the sale in the previous year, and there was effective conveyance of the capital asset to the transferee. The Tribunal further noted that the monies kept in the escrow account were for meeting claims that may arise on a future date, and that the interest which accrued on the sums retained in the escrow account had been agreed to be belonging to the seller, i.e., the assessee, and had to be paid to the assessee as per the instructions in the escrow account. Therefore, the Tribunal held that the assessee always had a right to receive the sums kept in the escrow account. Though they were to be quantified after a specified period, they did not change the agreed lump-sum sale consideration finalized based on the agreement between the parties. Therefore, the quantification of deductions to be made from the sums lying in the escrow account would not postpone the charge of such income which was deemed to be taxed in the year of transfer.

The Tribunal rejected the argument of the assessee that the entire sale consideration was not received during the relevant year and could not be deemed as income of that year, holding that it was sufficient if, in the relevant year, profits had risen out of sale of capital assets, i.e. when the assessee had a right to receive the profits in the year under consideration, it would attract liability to capital gains tax. According to the Tribunal, it was not necessary that the whole amount of lump-sum consideration should have been received by the assessee in the previous year, and whatever the parties did subsequent to that year would have no bearing on the liability to tax as deemed income of the year under consideration. Reliance was placed by the Tribunal on the Madras High Court decision in the case of TV Sundaram Iyengar and Sons Ltd vs. CIT 37 ITR 26, while upholding the order of the Assessing Officer.

Before the Madras High Court, on behalf of the assessee, attention was drawn to the Business Sale Agreement, and in particular, covenant No. 14 dealing with indemnities for other losses and covenant No. 15 dealing with retention sum for indemnities. The attention of the Court was also drawn to a second supplementary agrement where there was a reference to a charge of theft of electricity and demand raised by the State Electricity Board from the purchaser of the asset. These facts demonstrated that the intention behind retention of a certain sum in escrow account was to meet liabilities which may be fastened on to the purchaser on conclusion of the sale transaction.

On behalf of the assessee, reliance was placed on the following decisions:

• The Bombay High Court decision in the case of CIT vs. Hemal Raju Shete 239 Taxman 176, which was a case where certain amounts were set apart to meet contingent liabilities, and it was held that this amount was neither received nor accrued in favour of the assessee.

• The Supreme Court decision in the case of CIT vs. Hindustan Housing & Land Development Trust Ltd 161 ITR 524, where a similar view was taken.

• The Madras High Court decision in the case of PPN Power Generating Co (P) Ltd vs. CIT 275 Taxman 143 in support of the alternative submission that in the subsequent year the amount had been offered for taxation.

• The Gujarat High Court decision in the case of Anup Engineering Ltd vs. CIT 247 ITR 457.

• Cases of CIT vs. Ignifluid Boilers (I) Ltd 283 ITR 295 (Mad), CIT vs. Associated Cables (P) Ltd 286 ITR 596 (Bom), DIT(IT) vs. Ballast Nedam International 215 Taxman 254 (Guj), and Amarshiv Construction (P) Ltd vs. Dy CIT 367 ITR 659 (Guj), in the context of treatment of retention money withheld by the contractee.

On behalf of the Revenue, before the Madras High Court, it was argued that the Tribunal order was well considered and the factual aspects thoroughly analyzed. It was clearly brought out by the Tribunal on the facts that the retention money kept in the escrow account had accrued in favour of the assessee in the year under consideration. It was pointed out that the entire amount of Rs. 3.25 crore retained in the escrow account had been received by the assessee and offered for taxation in a subsequent year, with no deduction towards claims/warranties from the amount kept in escrow account. Attention was also drawn to the provisions of section 48, with the submission that if either the full value of the consideration had been received by the assessee during the year or it had accrued, that alone would be sufficient, and the subsequent act of the assessee and the purchaser by creating an escrow account would not change the character of receipt of the consideration.

Referring to the various clauses of the Business Sale Agreement, it was submitted that the facts clearly demonstrated that the amount retained in the escrow account, which was a subsequent arrangement between the parties, would have no impact for the purpose of computation of capital gains on the total sale consideration fixed under the agreement. On behalf of the Revenue, reliance was placed on the following decisions:

• The Supreme Court decision in the case of CIT vs. Attilli N Rao 252 ITR 880 in the context of full price realised for the purpose of computation of capital gains.

• CIT vs. N M A Mohammed Haniffa 247 ITR 66 (Mad).

• CIT vs. George Henderson and Co Ltd 66 ITR 622 (SC).

• CIT vs. Smt Nilofer I Singh 309 ITR 233 (Del).

• Smt D Zeenath vs. ITO 413 ITR 258 (Mad).

The decisions relied upon by the Revenue were rebutted by the assessee’s counsel, that all those were cases relating to mortgage, and that the agreement between the assessee and the purchaser clearly showed that the retention money was neither received nor accrued in favour of the assessee during the relevant year.

The Madras High Court examined the provisions of the Business Sale Agreement and noted that the retention amount had been retained for the purpose of ensuring that sufficient funds would be available to indemnify the purchaser against any damages or losses arising from indemnification for breach of warranty, indemnification for other losses, unpaid accounts receivables, and other obligations to pay or reimburse the purchaser as provided under the agreement. It noted that admittedly, no indemnification had to be given under either of the four heads, and the entire amount was received by the assessee without any deduction and was offered for taxation by the assessee in the subsequent year. The High Court noted that the Commissioner (Appeals) had not specifically examined as to whether the entire amount of Rs. 3.25 crore had been received by the assessee without any deduction and offered for taxation, but had solely proceeded on the basis that the escrow account had been opened and amount retained as retention money to be utilized by the purchaser for indemnification or breach of warranty for any other losses. On this basis, the Commissioner (Appeals) had concluded that the retention sum retained in the escrow account had not accrued to the assessee during the relevant year.

According to the Madras High Court, the Terms and Conditions of the Business Sale Agreement were vivid and clear, the total sale consideration having been clearly mentioned. After fixing the full and final sale consideration, the parties mutually agreed to retain a specified quantum of money in an escrow account to meet any one of the exigencies as mentioned in the agreement. Therefore, according to the High Court, for all purposes, the entire sale consideration had accrued in favour of the assessee during the year under consideration. Possession of the asset was also handed over by the assessee. Besides, no deductions were made from the escrow account and the entire amount was received by the assessee and offered to tax.

According to the Madras High Court, the purchaser, retaining a particular amount of money in the escrow account could not take away the amount from the purview of full consideration received or accruing in favour of the assessee for the purpose of computation of capital gains u/s 48. Besides the assessee had received the entire amount of Rs. 3.25 crore without any deduction. The right of the assessee over the amount retained in the escrow account had not been disputed. The Madras High Court observed that assuming certain payoffs were to be made from the retention money, that would not in any manner alter the full and total consideration received by the assessee pursuant to the business sale agreement. Given the factual position, according to the Madras High Court, undoubtedly the entire sale consideration had accrued in favour of the assessee during the relevant assessment year and, assuming that certain payment had been made from the amount retained in the escrow account, it would not change or in any manner reduce the sale consideration.

The Madras High Court therefore upheld the order of the Tribunal, holding the assessee liable to capital gains tax during the relevant year on the entire sale consideration as per the agreement.

DINESH VAZIRANI’S CASE

The issue again recently came up before the Bombay High Court in the case of Dinesh Vazirani vs. Pr CIT 445 ITR 110.

In this case, the assessee, who was a promoter of a company, agreed to sell shares of the company held by him along with other promoters for a total consideration of Rs. 155 crore. The Share Purchase Agreement (SPA) provided for specific promoter indemnification obligations. To meet such promoter indemnification obligations, the SPA provided that out of the sale consideration of Rs. 155 crore, Rs. 30 crore would be kept in escrow. If there was no liability as contemplated under the specific promoter indemnification obligations within a particular period, the amount of Rs. 30 crore would be released by the escrow agent to the seller promoters. A separate escrow agreement was entered into between the sellers, the buyers and the escrow agent.

The assessee filed his return of income in July, 2011 by computing capital gains on his proportion of the total sale consideration of Rs. 155 crore, including the amount kept in escrow, which had not been paid out but was still parked in the escrow account till the time the return was filed. The assessment was selected for scrutiny, and an assessment order was passed u/s 143(3) on 15th January, 2014 accepting the returned income.

Subsequent to the passing of such assessment order, certain statutory and other liabilities arose in the company amounting to Rs. 9.17 crore relatable to the period prior to the sale of the shares. This amount of Rs. 9.17 crore was withdrawn by the company from the escrow account, and therefore the assessee received a lesser amount from the escrow account.

The assessee thereafter filed a revision petition u/s 264 with the Commissioner, stating that the assessment had already been completed taxing the capital gains at higher amount on the basis of sale consideration of Rs. 155 crore without reducing the consideration by Rs. 9.17 crore. It was claimed that since the amount of Rs. 9.17 crore had been withdrawn by the company from the escrow account, what the assessee received was lesser than that mentioned in the return of income, and therefore the capital gain needed to be recomputed by reducing the proportionate amount deducted from the escrow account. It was pointed out that since the withdrawal from the escrow account happened after the completion of assessment proceedings, it was not possible for the assessee to make such a claim before the Assessing Officer or file a revised return. The assessee therefore requested the Commissioner to reduce the long-term capital gains by the proportionate amount withdrawn by the company from the escrow account of Rs. 9.17 crore.

The Commissioner rejected the revision petition on the ground that, from the sale price as specified in the agreement, only cost of acquisition, cost of improvement or expenditure incurred exclusively in connection with the transfer could be reduced in computing the capital gains, and that the agreement between the seller and buyer for meeting certain contingent liability which may arise subsequent to the transfer could not be considered for reduction from the consideration. The Commissioner further held that in the absence of a specific provision by which an assessee could reduce the returned income filed by him voluntarily, the same could not be permitted indirectly by resorting to provisions of section 264. The Commissioner relied on the proviso to section 240, which stated that if an assessment was annulled, the refund would not be granted to the extent of tax paid on the returned income. According to the Commissioner, this showed that the income returned by an assessee was sacrosanct and could not be disturbed, and even an annulment of the assessment would not impact the suo moto tax paid on the returned income. The Commissioner further was of the view that the contingent liability paid out of escrow account did not have the effect of reducing the amount receivable by the promoters as per the agreement.

The assessee filed a writ petition before the Bombay High Court against such order of the Commissioner rejecting the revision petition.

The Bombay High Court held that the order passed by the Commissioner was not correct and quashed the order. It observed that the Commissioner had failed to understand that the amount of Rs. 9.17 crore was neither received by the promoters nor accrued to the promoters, as this amount was transferred directly to the escrow account and was withdrawn from the escrow account. In the view of the High Court, when the amount had not been received by or accrued to the promoters, it could not be taken as the full value of consideration in computing capital gains from the transfer of shares of the company.

The Bombay High Court observed that the Commissioner had not understood the true intent and content of the SPA, and not appreciated that the purchase price as defined in the agreement was not an absolute amount, as it was subject to certain liabilities which might arise to the promoters on account of certain subsequent events. According to the Bombay High Court, the full value of consideration for computing capital gains would be the amount ultimately received by the promoters after the adjustments on account of the liabilities from the escrow account as mentioned in the agreement.

The Bombay High Court referred to the observations of the Supreme Court in CIT vs. Shoorji Vallabhdas & Co 46 ITR 144, where the Supreme Court had held that income or gain is chargeable to tax on the basis of the real income earned by an assessee, unless specific provisions provide to the contrary. The Bombay High Court noted that in the case before it, the real income (capital gain) would be computed only by taking into account the real sale consideration, i.e., sale consideration after reducing the amount withdrawn from the escrow account.

The Bombay High Court observed that the Commissioner had proceeded on an erroneous understanding that the arrangement between the seller and buyer which resulted in some contingent liability that arose subsequent to the transfer could not be reduced from the sale consideration as per section 48. As per the High Court, the liability was contemplated in the SPA itself, and had to be taken into account to determine the full value of consideration. If the sale consideration specified in the agreement was along with certain liability, then the value of consideration for the purpose of computing capital gains u/s 48 was the consideration specified in the agreement as reduced by the liability. In the view of the High Court, it was incorrect to say that the subsequent contingent liability did not come within any of the items of reduction, because the full value of the consideration u/s 48 would be the amount arrived at after reducing the liabilities from the purchase price mentioned in the agreement. Even if the contingent liability was to be regarded as a subsequent event, then also, it ought to be taken into consideration in determining the capital gain chargeable u/s 45.

The Bombay High Court expressed its disagreement with the Commissioner on his statement that the contingent liability paid out of escrow account did not affect the amount receivable as per the agreement for the purposes of computing capital gains u/s 48. As per the High Court, the Commissioner failed to understand or appreciate that the promoters had received only the net amount of Rs. 145.83 crore, i.e., Rs. 155 crore less Rs. 9.17 crore, and that such reduced amount should be taken as full value of consideration for computing capital gains u/s 48.

The Bombay High Court also rejected the Commissioner’s argument that the assessee’s returned income could not be reduced by filing a revision petition u/s 264. According to the High Court, section 264 had been introduced to factor in such situation as the assessee’s case, because if income did not result at all, there could not be a tax, even though in bookkeeping, an entry was made for hypothetical income which did not materialise. Section 264 did not restrict the scope of power of the Commissioner to restrict a relief to assessee only up to the returned income. Where the income can be said not to have resulted at all, there was obviously neither accrual nor receipt of income, even though an entry may have been made in the books and account. Therefore, the Commissioner ought to have directed the Assessing Officer to recompute the income as per the provisions of the Act, irrespective of whether the computation resulted in income being less than the returned income. The Bombay High Court stated that it was the obligation of the Revenue to tax an assessee on the income chargeable to tax under the Act, and if higher income was offered to tax, then it was the duty of the Revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee.

The Bombay High Court therefore held that the capital gain was to be computed only on the net amount actually received by the assessee, and that he was entitled to refund of the excess taxes paid by him on the returned capital gains.

OBSERVATIONS

Section 45(1) provides that any capital gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to tax under the head “Capital Gains” and shall be deemed to be the income of the previous year in which the transfer took place. Undoubtedly, in both these cases, discussed herein, there was no dispute about the year of transfer or the amount of consideration. The consideration had been agreed upon, and the payment was made by the purchaser. The issue was really whether the amount retained with the escrow agent was retained on behalf of the seller, or was consideration withheld on behalf of the purchaser, and whether the amount so kept in escrow could be reduced from the full value of consideration and the taxable capital gains.

While the Madras High Court has taken the view that the amount retained in the escrow account was received by and accrued to the assessee, the Bombay High Court has taken the view that such amount in escrow cannot be said to have been received by or accrued to the assessee. To understand the tax effect of an escrow arrangement, it is necessary to understand the legal implications of such an arrangement.

The Bombay High Court, in the case of Hira Mistan vs. Rustom Jamshedji Noble & Others 2000 (1) BomCR 716, has observed:

“An escrow has been held to be a document deposited with the third person to be delivered to the person purporting to be benefited by it upon the performance of some condition, the fulfillment of which is only to bring the contract into existence… Escrow has also been explained as an intended Deed after sealing and any signature required for execution as a deed, be delivered as an escrow, that is as a simple writing which is not to become the deed of the party expressed to be bound by it until some condition has been performed. Escrow has also been defined to mean that where an instrument is delivered to take effect on the happening of a specified event or upon condition that it is not to be operative until some condition is performed then pending the happening of that event or the performance of the condition the instrument is called an escrow.”

The Bombay High Court, in Jeweltouch (India) Pvt. Ltd. vs. Naheed Hafeez Quraishi And Ors 2008 (3) BomCR 217, has observed:

“When parties to an agreement or the executants of a document place the agreement or, as the case may be, the document in escrow, parties intend that pending the fulfillment of certain conditions which they stipulate, the document will be held in custody by the person with whom it is placed. Notwithstanding the execution of the agreement or the execution of the document, the act of placing the instrument in escrow evinces an intent that the document would continue to lie in escrow until a condition which is precedent to the enforceability of the document comes to exist. The instrument becomes valid and enforceable in law only upon the due fulfillment of a prerequisite and often the parties may stipulate the due satisfaction of a named person on the fulfillment of the condition. An Escrow agent may be appointed by the parties as the person who will determine whether a promise or condition has been fulfilled so as to warrant the release of the document from escrow. In Wharton’s Law Lexicon, the effect of an escrow is stated thus: Escrow, a writing under seal delivered to a third person, to be delivered by him to the person whom it purports to benefit upon some condition. Upon the performance of the condition it becomes an absolute deed; but if the condition be not performed, it never becomes a deed. It is not delivered as a deed, but as an escrow, i.e. a scrowl, or writing which is not to take effect as a deed till the condition be performed.”

In Halsbury the effect of the delivery of a document as escrow is explained thus:

“1334. Effect of delivery as escrow. When a sealed writing is delivered as an escrow it cannot take effect as a deed pending the performance of the condition subject to which it was so delivered, and if that condition is not performed the writing remains entirely inoperative. If, therefore, a sealed writing delivered as an escrow comes, pending the performance of the condition and without the consent, fault, or negligence of the party who so delivered it, into the possession of the party intended to benefit, it has no effect either in his hands or in the hands of any purchaser from him; for until fulfillment of the condition it is not, and never has been, the deed of the party who so delivered it. When a sealed writing has been delivered as an escrow to await the performance of some condition, it takes effect as a deed (without any further delivery) immediately the condition is fulfilled, and the rule is that its delivery as a deed will, if necessary, relate back to the time of its delivery as an escrow; but the relation back does not have the effect of validating a notice to quit given at a time when the fee simple was not vested in the person giving it.”

While these views are in the context of a document placed in escrow, the views might help to understand the impact of money placed in escrow also and may impact the final computation of capital gains until such time consideration payable attains finality based on the fulfillment of the conditions of the escrow . However, once the conditions are fulfilled, the payment would relate back to the date when the payment was deposited with the escrow agent. In substance therefore, the escrow agent is holding the amount on behalf of the seller, but the funds are released only after fulfilment of the conditions of escrow.

If one examines the facts of the two cases discussed, in the case before the Madras High Court, there was no deduction or reduction from the amount placed in escrow, and therefore the question of amendment of the consideration did not arise at all. Since capital gains is chargeable in the year of transfer, the Madras High Court held that the entire capital gain, including amount placed in escrow was taxable in that year itself.

The facts before the Bombay High Court were that there was actually a deduction from the amount placed in escrow, and the amount of consideration therefore underwent a change. The amount withdrawn from the escrow account was ultimately never received as income by the seller as the amount was returned to the buyer. The issue before the Bombay High Court was whether a revision of the assessment order was possible in view of the facts, which arose due to subsequent events impacting the taxable capital gains. It was in that context that the High Court took the view that the real income had to be considered, and not a notional income.

Viewed in this light, there is no conflict between the decisions of the two Courts. Both have rightly decided the cases before them on the merits of the cases before them. In one case, the fact was that the amount eventually was paid in full to the seller as was agreed while in the other case, a part of the agreed consideration, though paid, was returned to the buyer. Therefore, deferment of the liability to capital gains tax was not intended nor was it suggested by the Bombay High Court, and what was suggested was the downward revision of the consideration that was offered for taxation.

Therefore, to take the view that the amount placed in escrow should be taxable if and only when released from escrow on fulfillment of the conditions does not appear to be the attractive position in law.

The moot question that arises in such circumstances is as to what should be the manner of correction of the capital gains offered for taxation when the consideration so offered subsequently undergoes a change, as per the conditions provided in the sale agreement itself. The assessment of the capital gains legally cannot be held back, as that would take away the time bound finality of an assessment. There is presently no provision in law that permits the deferment of taxation to the later year on receipt of the amount released from the escrow account. No transfer in law can be said to have taken place in such later year, and the charge of capital gains would fail in that later year for want of transfer required for application of s. 45.

The only possibility therefore is that while the income be offered in the year of transfer based on the agreed consideration, without factoring in the events subsequent to the filing of the return, which have modified the actual consideration, the assessee can, as per the law applicable today, only take recourse to the existing provisions for filing a revised return (which time is generally inadequate after the reduced time limits),or for filing a revision petition with the Commissioner u/s 264, which time is also inadequate in many cases to revise the claim.

It is therefore essential that the law take cognizance of the difficulty arising on account of the subsequent revision of the consideration being redefined due to subsequent events by permitting rectification, revision or fresh claim without affecting the primary liability of offering the full value of consideration. This may be made possible by amending section 155 to permit rectification, by adding to the many existing situations therein, requiring the assessee to demonstrate the contingency actually happened, resulting in amendment of the consideration.

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S. 271(1)(c) – The Assessee had wrongly claimed a long-term capital loss in respect of a property which had been gifted by him to his son. Since the amount of capital loss had duly been disclosed in the computation of income and the Assessee had also accepted at the time of assessment proceedings it had considered gift made to son as a transfer by mistake, and there was no concealment of any material fact by the Assessee and thus, levy of penalty u/s 271(1)(c) was not justified.

33 Pawan Garg vs. Assistant Commissioner of Income-tax
[2022] 94 ITR(T) 159 (Chandigarh -Trib.)
ITA No.: 1475(CHD) of 2018
A.Y.: 2014-15
Date of order: 17th January, 2022

S. 271(1)(c) – The Assessee had wrongly claimed a long-term capital loss in respect of a property which had been gifted by him to his son. Since the amount of capital loss had duly been disclosed in the computation of income and the Assessee had also accepted at the time of assessment proceedings it had considered gift made to son as a transfer by mistake, and there was no concealment of any material fact by the Assessee and thus, levy of penalty u/s 271(1)(c) was not justified.

FACTS

The Assessee is a partner in a firm engaged in the dyeing and finishing of textile yarn. The return of income was filed declaring an income of Rs. 8,11,800. The Assessee had claimed Long Term Capital Loss at 20 per cent amounting to Rs. 7,14,554 in respect of a property gifted by him to his son Shri Akhilesh Garg on 20th July, 2013. The Assessee was asked by the Assessing Officer to explain as to why this loss, which had wrongly been claimed, may not be disallowed. In response, the Assessee accepted that there was a mistake due to some typographical error and, therefore, the amount was added to the income of the Assessee. Subsequently, the impugned penalty was imposed on the said addition.

Aggrieved, the Assessee filed an appeal challenging the levy of penalty before the CIT(A). However, the appeal was dismissed. Aggrieved, the Assessee filed further appeal before the ITAT.

HELD

The Assessee submitted that no penalty was imposable as he had only made a wrong claim and not a false claim inasmuch as all the facts were before the Assessing Officer at the time of assessment proceedings, and for the reason that all the figures were duly reflected in the computation of income. It was also submitted that the mistake had occurred due to some error at the end of the Chartered Accountant who had filed the return of income and that the Assessee should not be burdened with the penalty as it was a genuine mistake.

The ITAT observed that the mistake was noticed by the Assessing Officer during the course of assessment proceedings, and on being confronted on the issue, the Assessee surrendered the Long Term Capital Loss. It also observed that the amount of capital loss has been duly mentioned in the computation of income. Therefore, it finds that there is no concealment of any material fact by the Assessee. It can be said that the claim made with respect to the Long Term Capital Loss was an incorrect claim or a wrong claim but it was not a false claim by any measure inasmuch as there was only a mistake in the legal sense that the gift made by the Assessee to the son was considered as a transfer in the computation of income and the resultant figure was shown as a capital loss. It was also a fact on record that the Assessee had accepted the same at the time of assessment proceedings.

The ITAT held that it is not a case where the particulars of income in relation to which the penalty has been levied were either incorrect or were concealed. The amount of capital loss has duly been disclosed in the computation of income and, therefore, it cannot be said to be a case of the Assessee attempting to make a false claim. The ITAT held that it was a bonafide mistake on the part of the Assessee and it would not attract levy of penalty as all the particulars of income were duly disclosed. The appeal of the Assessee was allowed.

The ITAT placed reliance on the following decisions while deciding the matter:

1. CIT vs. Reliance Petroproducts Pvt. Ltd. [2012] 322 ITR 158

2. Price Waterhouse Coopers Pvt. Ltd vs. CIT [2011] 348 ITR 306.

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S. 36(1)(iii) – Where interest free funds had been lent by the Assessee to its wholly owned subsidiary for business, no disallowance of interest will be made u/s 36(1)(iii) of the Act.

32 Moonrock Hospitality (P.) Ltd vs. Assistant Commissioner of Income-tax
[2022] 94 ITR(T) 185 (Delhi – Trib.)
ITA No.: 5895 (Delhi) of 2019
A.Y.: 2016-17
Date of order: 22nd September, 2021

S. 36(1)(iii) – Where interest free funds had been lent by the Assessee to its wholly owned subsidiary for business, no disallowance of interest will be made u/s 36(1)(iii) of the Act.

FACTS

The Assessee company had investments in wholly owned subsidiaries, and had also advanced loans to these companies out of borrowed funds. During the A.Y., the Asssessee company had advanced an interest free loan to one of its wholly owned subsidiaries. Based on the same, the Assessee was asked to explain as to why no disallowance of interest expenses should be made as per section 36(1)(iii) of the Act.

The Assessee furnished an explanation stating that the said funds were advanced for the purpose of business. Not satisfied with the same, the Assessing Officer contended that the said arrangement was a diversion of interest bearing funds towards interest free advances to related parties. A disallowance of interest at 9 per cent (being the rate of interest on loans taken by the Assessee) on such interest free deposits was made u/s 36(1)(iii) of the Act.

Aggrieved, the Assessee filed an appeal before the CIT(A), however, the appeal was dismissed. Aggrieved, the assessee filed further appeal before the ITAT.

HELD

The Assessee submitted that the said loans had been advanced to its wholly owned subsidiary for business. A reference was drawn to the Object Clause of the Memorandum of Association of the Assessee wherein the object was to establish or promote or concur in establishing or promote any company for the purpose of acquiring all or any of the properties, rights and liabilities of such an entity.

Reliance was placed on the ruling of the Delhi High Court in CIT vs. Tulip Star Hotels Ltd. [2011] 16 taxmann.com 335/[2012] 204 Taxman 11 (Mag.)/[2011] 338 ITR 482, wherein it was held that where an Assessee engaged in the business of hotels, an advanced loan to its subsidiary to gain control over other hotel, interest paid on borrowed capital was allowable u/s 36(1)(iii) of the Act

Further, reliance was also placed on the Supreme Court ruling in Hero Cycles (P.) Ltd. vs. CIT (Central) [2015] 63 taxmann.com 308/[2016] 236 Taxman 447/[2015] 379 ITR 347, wherein it was decided that once a nexus between expenditure and purpose of business is established, the Revenue cannot step into the shoes of the businessman to decide how much is reasonable expenditure having regard to circumstances of case.

The ITAT considered the above decisions and concurred with the view of the Assessee company stating that where interest free advances made to a wholly owned subsidiary, no disallowance of interest paid on borrowed fund could be made. Further the ITAT also observed that once a nexus between the expenditure and the business of the subsidiary is established, no disallowance of interest paid on borrowed funds could be made.

Accordingly, the ITAT allowed the appeal of the Assessee and deleted the disallowance of interest u/s 36(1)(iii) of the Act.

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Addition made due to wrong reporting in return of income deleted in an appeal against rectification order. Revised return held not necessary.

31 Heidrick and Struggles Inc. vs. DCIT
TS-679-ITAT-2022 (DEL.)
A.Y.: 2018-19
Date of order: 26th August, 2022
Sections: 139(5), 154

Addition made due to wrong reporting in return of income deleted in an appeal against rectification order. Revised return held not necessary.

FACTS

The Assessee, a tax resident of USA, filed its return of income declaring total income of Rs. 23,60,54,860 and claiming a refund of Rs. 53,56,620. The return of income was processed by CPC, vide order dated 14th June, 2019, and a demand of Rs. 80,58,000 was raised for the reason that service income is taxable at 40 per cent plus applicable surcharge and cess and consequential interest u/s 234B and 234C was levied.

Against the order dated 14th June, 2019, the Assessee filed a rectification application which was disposed of vide order dated 22nd August, 2019, passed by CPC, raising a demand of Rs. 2,78,10,114. This demand arose as service income was held to be taxable at 40 per cent and TDS credit of Rs. 2,78,10,114 was denied. The Assessee filed one more rectification application on 15th October, 2019. The CPC vide its order dated 24th October, 2019 raised a demand of Rs. 1,06,73,750 by taxing service receipts of Rs. 2,84,40,475 at 40 per cent along with applicable surcharge and cess and denied TDS credit of Rs. 22,54,771.

Aggrieved, the Assessee preferred an appeal to CIT(A), who without going into the merits of the case, dismissed the appeal holding that the relief could have been claimed by filing revised return of income.

Aggrieved, the Assessee preferred an appeal to the Tribunal where on behalf of the revenue it was contended that the demand has been raised considering the details furnished by the Assessee in the form of return of income. Therefore, the Assessee cannot find fault with processing the order or rectification order passed. The Assessee ought to have claimed relief sought by filing revised return of income for which statutory time limit has expired. The relief now sought by the Assessee was not found in the return of income. Therefore, CIT(A) was right in holding against the Assessee.

HELD

The Tribunal noted that the Assessee has claimed a service income of Rs. 2,84,40,475 received from Heidrick and Struggles Pvt. Ltd. to be taxable as Other Sources. As per India US Tax Treaty, service rendered by the Assessee did not satisfy ‘make available clause’ of India US Treaty. Also, in the case of a group concern of the Assessee, for A.Y. 2018-19, CPC made a similar adjustment i.e. it taxed service receipt at 40 per cent. The said Assessee preferred rectification application which was allowed. The Tribunal held that it is not in dispute that as per India US Tax Treaty the impugned income is not chargeable to tax as per Article 12.

The Tribunal noted CBDT Circular No. 14 and also that the Calcutta Bench of the Tribunal has in the case of Madhabi Nag vs. ACIT [ITA No. 512/Kol/215] held that the revenue authorities ought not to have rejected rectification application u/s 154 on the ground that the Assessee has not filed revised return of income. Further, in the case of CIT vs. Bharat General Reinsurance Co. Ltd. 81 ITR 303 (Delhi), the High Court held that merely because the Assessee wrongly included the income in its return for a particular assessment year it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year.

The Tribunal held that the addition had been made only due to wrong reporting of income by the Assessee and the same cannot be sustained. The Tribunal held that the CIT(A) has committed an error in dismissing the appeal filed by the Assessee.

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Interest granted u/s 244A(2) cannot be withdrawn by passing a rectification order u/s 154 when PCCIT / CCIT / PCIT / CIT has not decided exclusion of period for interest.

30 Otis Elevator Company (India) Ltd. vs. DCIT
[2022] 141 taxmann.com 391 (Mum. – Trib.)
A.Y.: 2010-11
Date of order: 18th August, 2022
Section: 244A(2)

Interest granted u/s 244A(2) cannot be withdrawn by passing a rectification order u/s 154 when PCCIT / CCIT / PCIT / CIT has not decided exclusion of period for interest.

FACTS

The assessment was finalized u/s 143(3) on 4th February, 2014. Subsequently, however, the Assessing Officer (AO) withdrew the interest granted u/s 244A(2) on the ground that “it is undisputed fact that in the income tax return filed u/s 139(1) on 30th September, 2010, the TDS claim was Rs. 10,62,11,325 which was enhanced to Rs. 13,70,80,237 by filing revised return on 29th March, 2012” and “thus, the delay was on the part of the Assessee to make correct claim of refund”. The interest payment of Rs. 43,71,038 was thus withdrawn, disregarding the plea of the Assessee that on merits such a claim could not have been declined, and, in any event, such a withdrawal of interest is beyond what is permissible u/s 154. The assessee carried the matter in appeal but without any success. The assessee is in second appeal before us.

HELD

The Tribunal observed that the dispute between the Assessee and the revenue was whether or not the Assessee is responsible for delay in refund. It noted that the guidance to deal with such situations is provided in 244A(2) which inter alia provides that “where any question arises about the period to be excluded (for which interest is to be declined), it shall be decided by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, whose decision thereon shall be final”. The Tribunal held that, therefore, the final call about the period to be excluded for grant of interest is to be taken by the higher authority and that exercise is admittedly not done in the present case. Referring to the observations in a co-ordinate bench decision in the case of DBS Bank Ltd. vs. DDIT [(2016) 157 ITD 476 (Mum)] wherein it has inter alia been held that:

(i) The delay in making of the claim by itself, without anything else, cannot lead to the conclusion that the delay is attributed to the Assessee.

(ii) Even if the interest u/s 244A could be declined for this period on merits, not declining the interest u/s 244A could not be treated as a mistake apparent on record within the inherently limited scope of Section 154.

(iii) When a question arises as to the period for which such interest under section 244A is to be excluded, this is to be decided by the Commissioner or the Chief Commissioner.

The Tribunal found itself in agreement with the views of the co-ordinate bench and following the same upheld the plea of the Assessee to the extent that given the limited scope of section 154 for rectification of mistakes apparent on record and given the fact that the period to be excluded for grant of interest has not yet been taken a call on by the PCCIT/CCIT/PCIT or the CIT, the impugned withdrawal of interest u/s 244A(2) is beyond the scope of rectification of mistake u/s 154.

The Tribunal set aside the order of rectification passed by the AO u/s 154 of the Act.

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Advances received by an Assessee landlord who has converted land into stock-in-trade, following project completion method, are not taxable on receipt basis.

29 ACIT vs. Suratchandra B. Thakkar (HUF)
TS-648-ITAT-2022 (Mumbai)
A.Y.s: 2006-07 to 2008-09
Date of order: 12th August, 2022
Section: 28

Advances received by an Assessee landlord who has converted land into stock-in-trade, following project completion method, are not taxable on receipt basis.

FACTS

The assessee was a 25 per cent owner of a land in respect of which development agreement was entered into with K. Raheja Universal Pvt. Ltd. Under the terms of the Development Agreement, the land owners and developers were to share sale proceeds in the ratio of 45.5 per cent and 54.5 per cent respectively. The Assessee had a 25 per cent share in land, and was entitled to 25 per cent of 45.5 per cent share receivable by the land owners. The project consisted of construction of four towers of which two were completed in previous year relevant to A.Y. 2008-09 and two were completed in previous year relevant to A.Y. 2009-10.

The Assessee received advances of Rs. 1,78,68,399, Rs. 96,04,258 and Rs. 2,77,19,807 against sale of flats in A.Ys. 2006-07, 2007-08 and 2008-09 respectively. However, no income was offered on the ground that the Assessee was following the project completion method of accounting, and entire income was declared in A.Ys. 2008-09 and 2009-10 on completion of the project, receipt of occupancy certificate and execution of conveyance deed in favour of buyers.

According to the Assessing Officer (AO), as the entire cost of construction was being met by the developer, the project did not require any contribution from the Assessee. Therefore, the advances received became final and certain. The AO also observed that the Assessee had not shown any work-in-progress in the balance sheet. Also, since there was no risk attached to the Assessee, the advances, according to the AO, became income in the year of their receipt.

Aggrieved, the Assessee preferred an appeal to CIT(A) who allowed the appeal filed by the Assessee and held that the land was not transferred by the land owners to the developers till the completion of construction and therefore entire risk of the project remained with the land owners including the Assessee.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the Assessee has already paid tax on advances received in A.Ys. 2008-09 and 2009-10. The Tribunal concurred with the following findings of the CIT(A):

(i) Since the land in question was treated as stock-in-trade by the Assessee in its books of account, transfer of the same was not liable to be taxed as capital gain.

(ii) The Supreme Court, in the case of Seshasayee Steel Pvt. Ltd. 115 taxmann.com 5 (SC), held that executing a development agreement granting permission to start advertising, selling and construction and permitting to execute sale agreement to a developer does not amount to granting possession u/s 53A of the Transfer of Property Act.

(iii) Possession of land has been handed over to the prospective buyers consequent to the conveyance in favour of co-operative society of flat owners.

(iv) The assessee was regularly and consistently following completed contract method.

(v) In case of the developer also, the completed contract method has been accepted by the revenue.

The Tribunal did not find any error in the finding of the CIT(A) in upholding the project completion method or the completed contract method followed by the Assessee for declaring the income from the project under reference.

The Tribunal dismissed the appeal filed by the revenue for all the three years.

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Proviso to section 43CA providing for tolerance limit of 10 per cent, being beneficial in nature, is retrospective.

28 Sai Bhargavanath Infra vs. ACIT
TS-658-ITAT-2022 (Pune)
A.Y.: 2014-15
Date of order: 17th August, 2022
Section: 43CA

Proviso to section 43CA providing for tolerance limit of 10 per cent, being beneficial in nature, is retrospective.

FACTS
The Assessee, a builder and developer, filed its return of income for A.Y. 2015-16 declaring therein a total income of Rs. 47,17,490. The Assessing Officer (AO) while assessing the total income of the assessee made an addition of Rs. 19,58,875 u/s 43CA of the Act, being difference between sale value of the flats sold and their stamp duty value.

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 contended that the stamp duty value was at an uniform rate without taking into consideration the peculiar features of a particular property. It was also contended that the difference of Rs. 19,58,875 was less than 10 per cent and therefore, not required to be added. For this proposition reliance was placed on the decision of Pune Tribunal in IT No. 923/Pun/2019 for A.Y. 2016-17, order dated 4th August, 2022 and also on the Assessee’s own case in ITA No. 2417/Pun/2017 for A.Y. 2014-15, the Tribunal on the very similar issue had remanded the matter back to the file of the AO for fresh consideration.

HELD
The Tribunal noted the proviso to section 43CA which provides for a tolerance limit of 10 per cent has been introduced by the Finance Act, 2020 w.e.f. 1st April, 2021 and that the assessment year under consideration is before the date when the amendment took place and therefore, the question is whether the proviso can apply to assessment years prior to its introduction as well.

The Tribunal observed that the decision of the Pune Bench in ITA No. 2417/Pun/2017 for A.Y. 2014-15 (supra) on which reliance has been placed by the Assessee has held the proviso to be retrospective but in the said decision reliance has been placed on the decision of Mumbai Bench of the Tribunal in the case of Maria Fernandes Cheryl vs. ITO (2021) 187 ITD 738 (Mum) which relates to section 50C of the Act. On behalf of the Assessee it was submitted that section 43CA and section 50C of the Act are pari materia provisions and therefore, holding of retrospective application of section 50C is even applicable making retrospective application to section 43CA of the Act as well. The Tribunal observed that the AR was unable to place on record any direct decision where first proviso to section 43CA has been held to be retrospective.

The Tribunal noted that the judgment of the full bench of the Apex Court in the case of CIT vs. Vatika Township Pvt. Ltd. (2014) 367 ITR 466 (SC) has held that if any liability has to be fastened with the Assessee taxpayer retrospectively then the statute and the provision must spell out specifically regarding such retrospective applicability. However, if the provision is beneficial for the Assessee, in view of the welfare legislation spirit imbibed in the Income-tax Act, such a beneficial provision can be applied in a retrospective manner. The Tribunal examined the insertion of the first proviso to section 43CA in the light of the ratio of the decision of the Apex Court in Vatika Township (supra) and held the intent of the legislature is to provide relief to the Assessee in case such difference is less than 10 per cent which has been brought into effect from 1st April, 2021 thereby providing benefit to the Assessee. This being the beneficial provision therefore will even have retrospective effect and would apply to the present A.Y. 2015-16.

The Tribunal observed that Pune Bench of the Tribunal in Shri Dinar Umeshkumar More vs. ITO [ITA No. 1503/PUN/2015 for A.Y. 2011-12 dated 25th January, 2019] has considering the proposition of applicability of a beneficial provision in light of Hon’ble Apex Court decision in the case of Vatika Township Pvt. Ltd. (supra) has held that if a fresh benefit is provided by the Parliament in an existing provision, then such an amendment should be given retrospective effect.

The Tribunal allowed the ground of appeal by holding that the first proviso to section 43CA has retrospective effect.

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Charitable Trusts – Recent Amendments Pertaining to Books of Accounts and Other Documents – Part I

INTRODUCTION

Section
12A(1)(b) of the Income-tax Act 1961 (“the Act”) has been amended by
the Finance Act, 2022 w.e.f the assessment year 2023-24 to provide that a
charitable institution claiming exemption u/s 11 and 12 shall keep and
maintain books of account and other documents (“books of
account/documents”) in such form and manner and at such place, as may be
provided by rules.

BRIEF ANALYSIS OF THE SECTION

(a)
On a literal reading, even a solitary point of difference between the
assessee and the Assessing Officer (“AO”) as to whether prescribed
books/documents are maintained or whether they are maintained at the
prescribed place or whether they are maintained in the prescribed form
or in the prescribed manner can result in denial of exemption u/s 11/12
and taxation u/s 13(10). On the other hand, it has been held that “when
there is general and substantive compliance with the provisions of a
rule, it is sufficient.” [CIT vs. Leroy Somer and Controls India (P.)
Ltd., (2014) 360 ITR 532 (Del), cited in Worlds Window Impex (India) (P.) Ltd. vs. ACIT, (2016) 69 taxmann.com 406 (Del.-Trib.)]

Also see:

• Arvind Bhartiya Vidhyalya Samiti vs. ACIT, (2008) 115 TTJ 351 (Jaipur)

• CIT vs. Tarnetar Corporation, (2014) 362 ITR 174 (Guj)

• CIT vs. Sawyer’s Asia Ltd., (1980) 122 ITR 259 (Bom)

• CIT vs. Harit Synthetic Fabrics (P.) Ltd., (1986) 162 ITR 640 (Bom)

Applying
the principle, it could be argued that if there is substantial
compliance with the prescribed rule, then exemption u/s 11 cannot be
denied. Further, it is also a moot point as to whether it could be
argued that having regard to the onerous consequences, the AO should
give an opportunity to the assessee to make good the deficiency and only
if the assessee fails to do so that the AO should deny the exemption
u/s 11.

(b) While books of account should be maintained
regularly as a good practice, there is no provision requiring the other
documents/records to be maintained contemporaneously. Also, there is no
provision prohibiting correction in the records.

RULE 17AA

The
CBDT has notified Rule 17AA (“the Rule”) specifying the books of
accounts and other documents to be maintained by a charitable
institution. [Notification No. 94/2022 dated 10th August, 2022 under the Income-tax (24th Amendment) Rules, 2022]

This article analyses the said Rule, which contains more than 50 requirements.

Brief analysis of the Rule as a whole

The
Rule requires record keeping of various receipts/payments in respect of
which, Courts/Tribunal could have taken different views and hence,
there could be a controversy as to their scope. To illustrate, the Rule
requires records of application of income outside India. For this
purpose, Courts/Tribunal are divided on what constitutes the application
of income “outside India”. Thus, in such cases, if the assessee adopts a
favourable interpretation based on a judicial precedent which is not
accepted by the tax department, the AO may hold that proper documents
have not been maintained. To mitigate this exposure, it is advisable
that the assessee keeps notes explaining why it has considered or not
considered a particular receipt/payment under the relevant Rule. Such
notes may be kept along with the record to which it is applicable.
Difficulty may arise if a subsequent ruling of the Courts/Tribunal takes
a view different from what has been adopted hitherto by the assessee in
maintaining the records. In such circumstances, the assessee may
continue the old practice with a note that the interpretation based on
the judgment has not been followed by it. In the alternative, the
assessee could maintain specified information with a note that it is
maintained without prejudice to its claim to the contrary.

Difference between amount as per records and as per computation of income for return of income: whether permissible?

Suppose
the assessee has maintained records on a particular basis, but for the
return of income, he is advised to adopt a different basis favourable to
him. For the following reasons, it appears that the assessee can adopt
such different basis:

• If a particular income is not
taxable under the Income-tax Act, it cannot be taxed on the basis of
estoppel or any other equitable doctrine. [CIT vs. V. Mr. P. Firm, Muar,
(1965) 56 ITR 67 (SC); Taparia Tools Ltd. vs. JCIT, (2015) 7 SCC 540]. Hence, the assessee is not estopped from offering correct income instead of the income as per the documents maintained by him.

• The AO is duty bound to guide the assessee and compute the correct income. See

• CBDT Circular No. 14 of 1955.

• CIT vs. Mahalaxmi Sugar Mills Co. Ltd., (1986) 27 Taxman 267 (SC).

If
the AO is duty bound to assess the correct income, surely, he is duty
bound to accept the right of the assessee to offer correct income
contrary to what is ascertained on the basis of the documents maintained
by him.

• It is now well settled that an additional ground not raised before the AO can be raised before CIT(A) [Jute Corporation of India Ltd vs. CIT, (1991) taxmann.com 30 (SC)] and subject to fulfillment of conditions, a claim could be made for the first time before the Tribunal [see National
Thermal Power Co. Ltd. vs. CIT, (1998) 229 ITR 383 (SC), Ahmedabad
Electricity Co. Ltd. vs. CIT, (1993) 199 ITR 351 (Bom)].

If
claim could be made for the first time before appellate authorities,
there is no reason why a claim contrary to documents/records maintained
may not be made in the return of income.

Date from which the Rule is applicable

The Rule has “come into force from the date of their publication in the Official Gazette”,
that is, 10th August, 2022. Since the Rule will be in force on the
first day of the A.Y. 2023-24, it may be contended that it is applicable
throughout the relevant previous year, that is, 1st April, 2022 to 31st
March, 2023. In other words, the books/documents are required to be
maintained for the entire period from 1st April, 2022. It could be
argued for the following reasons, that the Rule cannot apply to the
period prior to 10th August, 2022:

• Section 295(4) provides
that a rule cannot have retrospective effect unless it is permitted
expressly or by necessary implication. In the instant case, the Rule
expressly mentions that it shall come into force from the date of
publication in the Official Gazette; in view of this express statement,
it appears that the condition for a Rule having a retrospective effect
is not satisfied by Rule 17AA.

• The Supreme Court has observed as follows:

• every
statute is prima facie prospective unless it is expressly or by
necessary implication made to have retrospective operations. [CIT vs.
Essar Teleholdings Ltd., (2018) 90 taxmann.com 2 (SC)] (in the context of rule 8D of the Income-tax Rules);

•
… one established rule is that unless a contrary intention appears, a
legislation is presumed not to be intended to have a retrospective
operation. The idea behind the rule is that a current law should govern
current activities. Law passed today cannot apply to the events of the
past. If we do something today, we do it keeping in view the law of
today and in force and not tomorrow’s backward adjustment of it. [CIT vs. Vatika Township P. Ltd., (2014) 367 ITR 466 (SC)].

In view of the above, the Rule cannot be said to require maintenance of books/documents for the period up to 10th August, 2022.

•
It appears that whenever a rule has to have a retrospective effect, it
clearly states that it shall come into force from a prior date.
Further, the Explanatory Memorandum in Notification dated 30th June,
2020 containing the Income-tax (15th Amendment) Rules, 2020 and
Notification dated 29th December, 2021 containing the Income-tax (35th
Amendment) Rules, 2021 also mention that the relevant rules have a
retrospective effect. It is pertinent that no such reference is made in
Rule 17AA. Further, the Rule explicitly states that it shall come into
force from the date of publication of Gazette; if it was to have
retrospective effect, it would have clearly stated 1st April, 2022.

Section
44AA(3) provides that the Board may prescribe the books of account and
other documents to be kept and maintained, the particulars to be
contained therein and the form and the manner in which and the place at
which they shall be kept and maintained. On the other hand, section
12A(b)(i) reads as follows:

(i) the books of account and other
documents have been kept and maintained in such form and manner and at
such place, as may be prescribed;

Thus, unlike section
44AA(3), section 12A(b)(i) does not provide for books/documents or the
particulars to be contained therein to be prescribed. It is a moot point
as to whether to the extent Rule 17AA requires the said details, it
conflicts with the section.

It may be noted that the Memorandum to Finance Bill 2022 reads as follows:
“However,
there is no specific provision under the Act providing for the books of
accounts to be maintained by such trusts or institutions…”.

Thus,
the Memorandum suggests that the amendment would list the books of
accounts to be maintained. However, an Explanatory Memorandum is usually
‘not an accurate guide of the final Act’, [Shashikant Laxman Kale vs. UOI, (1990) 185 ITR 104 (SC); Also see Associated Cement Co. Ltd. vs. CIT, (1994) 210 ITR 69 (Bom)]. Hence, it could be argued that a mere statement in Memorandum cannot override the Act.

The clauses of the Rule are now analysed, after reproducing the relevant text.

Rule 17AA(1)(a)(Text)

“Books of account and other documents to be kept and maintained—

(1)
Every fund or institution or trust or any university or other
educational institution or any hospital or other medical institution
which is required to keep and maintain books of account and other
documents under clause (a) of the tenth proviso to clause (23C) of
section 10 of the Act or sub-clause (i) of clause (b) of sub-section (1)
of section 12A of the Act shall keep and maintain the following,
namely:-

(a)   books of account, including the following, namely….”

(i)   cash book;

(ii)   ledger;

(iii)   journal;

(iv)
copies of bills, whether machine numbered or otherwise serially
numbered, wherever such bills are issued by the assessee, and copies or
counterfoils of machine numbered or otherwise serially numbered receipts
issued by the assessee;

(v)   original bills wherever issued to the person and receipts in respect of payments made by the person;

(vi)
any other book that may be required to be maintained in order to give a
true and fair view of the state of the affairs of the person and
explain the transactions effected;

Analysis

Clause
(a), on a literal reading, is an inclusive provision which means that it
includes not only the specified books of accounts but also any other
book which is understood in normal accounting parlance as books of
account. This makes the definition highly subjective (what is “books of
accounts” in normal parlance?) and may result in litigation. For
instance, there could be a case where the assessee may have maintained
the books specified in Rule 17AA(1)(a). However, the AO may be of the
view that the assessee has not maintained certain other books/documents
which are not specifically mentioned but which, in his opinion, are
books of account in normal parlance and are necessary.

As against the above, it could be argued that the definition is exhaustive, on the basis of the following reasons:

• The Supreme Court has observed that “it is possible that in some context the word “includes” might import that the enumeration in exhaustive”. [Smt. Ujjam Bai vs. State of Uttar Pradesh, AIR 1962 SC 1621].

•
Rule 17AA(a)(vi) is a residuary clause which requires any “other” book
to give a true and fair view. The use of the expression “any other”
suggests that the list is exhaustive.

• The clause uses the expression “namely” and it has been held that “… use
of the expression ‘namely’, … followed by the description of goods is
usually exhaustive unless there are strong indications to the contrary”. [Mahindra Engineering and Chemical Products Ltd. vs. UOI, (1992) 1 SCR 254 (SC)].

Diaries or bundles of sheets are not books of account.

A mere collection of sheets or diaries cannot be regarded as books of account.

Please see:

•
A book which merely contains entries of items of which no account is
made at any time, is not a “book of account” in a commercial sense. [Sheraton Apparels vs. ACIT, (2002) 256 ITR 20 (Bom)]

•
A book of account… must have the characteristic of being fool-proof.
A bundle of sheets detachable and replaceable at a moment’s pleasure
can hardly be characterized as a book of account. [Zenna Sorabji vs. Mirabelle Hotel Co. Pvt. Ltd., AIR 1981 Bom 446]

Bills and receipts in respect of income [Rule 17AA(1)(a)(iv)]

This sub-clause refers to income of the assessee.

Paraphrasing, books of account include:

• copies of bills issued by the assessee where the bills have to be machine numbered or serially numbered; and

•
copies of receipts or counterfoils of receipts issued by the assessee
where the receipts or counterfoils, as the case may be, have to be
machine numbered or serially numbered.

The expression “bills issued by the assessee” is wide enough to include bills.

•   in respect of sale of capital assets;
•   arising in the course of business or otherwise; and
•   not paid by the counterparty.

“Receipts” include those in respect of

• payment received against sale of goods/services by the charitable institution; and

• donations received.

In
the context, the expression “wherever” means in any case or in any
circumstances in which a bill is issued; in other words, books of
account include only those bills which are issued: it does not mean that
the assessee should always issue bills.

Bill

The expression ‘bill’ is an itemized account of the separate cost of goods sold, services rendered, or work done: Invoice
[Webster’s Seventh New Collegiate Dictionary, page 84]. In the context
of this sub-clause, ‘bill’ means an invoice for goods sold or services
rendered, or work done and should include a cash memo [see CST vs. Krishna Brick Field, (1985) 58 STC 336 (All)].

Original bills and receipts [Rule 17AA(1)(a)(v)]

In
the previous sub-clause, it is stated that books of account include
copies of bills issued by “the assessee” whereas this sub-clause
requires original bills issued to “the person”; it appears that the word
“person” here refers to the assessee himself and not a third party.
With this interpretation, the preceding sub-clause and this sub-clause
become complementary to each other: one covering income/receipts and
other covering expenditure/payments.

The term “payment bills” and
“receipts” are wide enough to cover revenue expenditure and capital
expenditure. On a literal reading, even bills for purchase of
investments, such as debentures, are covered.

Any other book in order to give a true and fair view and explain the transactions effected [Rule 17AA(1)(a)(vi)]

This
requirement is similar to the requirement in section 128(1) of the
Companies Act 2013. However, Rule 6F, prescribing books for
professionals, does not have such a requirement.

Rule 17AA(1)(b)(Text)

Books of account, as referred in clause (a), for business undertaking referred in sub-section (4) of section 11 of the Act.

Analysis

This
clause requires books of accounts for a business undertaking referred
to in section 11(4). It requires separate books of accounts for every
business undertaking owned by the assessee.

The term “business undertaking” is not defined in the Act.

“Business” is defined in section 2(13) as includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture;

Business ordinarily involves profit motive. See:

• DIT(E) vs. Gujarat Cricket Association, (2019) 419 ITR 561 (Guj)

• CIT(E) vs. India Habitat Centre, (2020) (1) TMI 21 – Delhi HC,

• DIT(E) vs. Shree Nashik Panchvati Panjrapole, (2017) 81 taxmann.com 375 (Bom)]

The terms “undertaking/industrial undertaking” have been judicially explained as follows:

•
the existence of all the facilities including factory buildings,
plant, machinery, godowns and things which are incidental to the
carrying on of manufacture or production, all of which when taken
together are capable of being regarded as an industrial undertaking [CIT vs. Premier Cotton Mills Ltd., (1999) 240 ITR 434 (Mad)].

• ‘Undertaking’ in common parlance means an ‘enterprise’, ‘venture’ and ‘engagement’. (Websters Dictionary). [P. Alikunju vs. CIT, (1987) 166 ITR 804 (Ker)].

Hence,
the expression “business undertaking” should mean an enterprise with
various assets and which is carried on with profit motive.

The
books of account are required to be maintained in order to be eligible
to claim an exemption u/s 11 [section 12A(1)]. If the business is such
that proviso to section 2(15) applies then there is no question of
obtaining the benefit of section 11 and maintaining the books is
irrelevant. However, on a literal reading, books of accounts are
required for every business undertaking, whether or not the profits of
the business undertaking are exempt under proviso to section 2(15).

The provision applies whether or not the profits of the business undertaking are exempt u/s 11(4A).

All
business undertakings irrespective of the object, that is, whether in
the course of medical relief or education or yoga or advancement of
general public utility, are covered by the clause.

Rule 17AA(1)(c)(Text)

Books
of account, as referred in clause (a), for business carried on by the
assessee other than the business undertaking referred in sub-section (4)
of section 11 of the Act; [Rule 17AA(1)(c)].

Analysis

On
a plain reading, it refers to a business which is not carried on
through an undertaking. To illustrate, a one-off adventure in the nature
of trade could be regarded as a business; however, it may not be
carried on through an undertaking. The clause requires separate books of
accounts for such a business. Even in this case, it appears that the
profit motive ought to be there before the activity can be regarded as a
business.

The provision requires separate books of accounts for every business of the assessee.

On a literal reading, the provision covers all businesses:

(a) whether or not the profits of the business are exempt under proviso to section 2(15) or u/s 11(4A); and

(b) irrespective of the object pursuant to which the business is set up.

Rule 17AA(1)(d)(i)(Text)

(d) other documents for maintaining

(i) record of all the projects and institutions run by the person containing details of their name, address and objectives;

Analysis

This clause refers to “other documents”, which term has been explained by High Court as follows:

The
authorities can require production of accounts and other documents. The
words “other documents” in the section are vague and indefinite. Under
the Rules of construction of statutes, where general words follow
particular words, the general words will have to be construed in the
light of particular words. … the ejusdem generis Rule. Therefore, “other
documents” will be in the nature of account books, bill books etc.,
that have some relation to the accounts and not any correspondence etc. [P. K. Adimoolam Chettiar, In Re (1957) 8 STC 741 (Mad.)].

Applying
the principle, it appears that the provision enables the CBDT to
prescribe only those documents having some relation to books of account
and not any other correspondence, paper, documents etc.

The term “document” is defined in section 3(18) of the General Clauses Act, 1897 as follows:
…
“document”
shall include any matter written, expressed or described upon any
substance by means of letters, figures or marks, or by more than one of
those means which is intended to be used, or which may be used, for the
purpose or recording that matter.

Projects and institutions

The requirements under this sub-clause are perhaps, pursuant to section 2(15), section 11(4) and section 11(4A).

Project

The
term ‘project’ is neither defined in the Act nor used in section 11 to
section 13. In ITR – 7, the details of projects are required, although
even in the ITR the term is not explained. In the absence of a clear
definition, there could be conflicting views between the assessee and
the tax department as to what constitutes a ‘project’.

According to the dictionary, a project means ‘A
set of activities intended to produce a specific output, which has a
definite beginning and end. The activities are interrelated and must be
brought together in a particular order, based on precedence
relationships between the different activities. Examples of projects
include the building of the Channel Tunnel and the design of a computer
system for an ambulance service. Projects are usually based on bringing
together teams of specialists within relatively temporary management
structures. Project management techniques are increasingly being used to
manage such tasks as the introduction of total quality management
within organizations. [Oxford’s Dictionary of Business and Management, pages 423 and 424].

Every project undertaken will have to be included since there is no de minimus clause.

Institution

Section 2(24)(iia) covers ‘institution’ established wholly or partly for charitable purposes.

The term “institution” has not been defined in the Act. It has been judicially explained as follows:
In
the Oxford English Dictionary, Volume V at page 354, the word
“institution” is defined to mean “an establishment, organisation, or
association, instituted for the promotion of some object, especially one
of public or general utility, religious, charitable, educational, etc.”
[CIT
vs. Sindhu Vidya Mandal Trust, (1983) 142 ITR 633 (Guj); Mangilal
Gotawat Charitable Trust vs. CIT, (1985) 20 Taxman 207 (Kar)].

The term would include schools, colleges, hospitals, etc.

Rule 17AA(1)(d)(ii)(Text)

record of income of the person during the previous year, in respect of, –

(I)
voluntary contribution containing details of name of the donor,
address, permanent account number (if available) and Aadhaar number (if
available);

(II)   income from property held under trust referred to under section 11 of the Act along with list of such properties;

(III)
income of fund or institution or trust or any university or other
educational institution or any hospital or other medical institution
other than the contribution referred in items (I) and (II);

Analysis

This
sub-clause requires maintenance of record of income during the previous
year. It applies only in the case of “income” and not receipts not
constituting income.

Voluntary contribution containing details of name of the donor, etc. [Item (I)]

The
requirement under this item is pursuant to section 11(1), including
section 11(1)(d) and section 115BBC (anonymous donations).

PAN and Aadhar number are to be recorded if available. Hence, they are not mandatory.

The
requirement regarding the name and address of donors also applies to a
religious trust, which gets donations in its donation box. In such
circumstances, obviously, it will not be possible for the Trust to
maintain such details and it should suffice if the assessee mentions
this fact. It may be noted that even section 115BBC, which deals with
anonymous donations, does not apply to a wholly religious trust.

The
requirement covers contributions in kind. Now, strictly speaking,
offerings in kind in a temple constitute voluntary contribution and
hence income (see CBDT Circular No. 580 dated 14th September, 1990).
There is no de minimis clause and to take an extreme example, all offerings made in a temple such as coconuts, pedhas,
etc. also constitute income whose details have to be recorded!
Similarly, record for donation of even rupees ten have to be collated!

Details of all voluntary contributions, corpus as well as non-corpus, are required.

It
appears that the documents supporting these details are not required to
be maintained; to illustrate, a photocopy of the Aadhar card is not
required to be maintained.

Income from property held under trust along with list of such properties; [Item (II)]

Section
12(1) provides that voluntary contributions (other than corpus
donations) shall, for the purposes of section 11, be deemed to be
“income derived from property held under trust”. On the other hand, this
item refers to “income from property held under trust”. Again,
voluntary contributions are already covered by Item I. Hence, for the
purpose of this item, the expression “income from property held under
trust” does not include voluntary contributions.

The term ‘property held under trust’ is very wide and includes:

(a) income earned by it in the course of carrying out its objects.

(b) assets acquired out of such income referred to in (i) above or out of donations received by it. [ACIT vs. Etawah District Exhibition and Cattle Fair Association, (1978) 1978 CTR 166 (All)]

Thus,
even an FD is ‘property held under trust’. Any change, such as
withdrawal of FD, would require alteration in the ‘list of such
properties’.

Property held under trust includes assets invested u/s 11(2).

The requirement under this item is also partially repeated in the following clause/sub-clause/item:

• (d)(iii)(VI)

• (d)(iv)(IV)/(V)

• (d)(v)(VI)/(VII)

Income other than the contribution referred in Items (I) and (II); [Item III]

The
requirement in this Item applies to all institutions including
religious trusts, which get donations in their donation box. It will
include anonymous donations.

Rule 17AA(1)(d)(iii)(Text)

(iii) record of the following, out of the income of the person during the previous year, namely:

(I)
application of income, in India, containing details of amount of
application, name and address of the person to whom any credit or
payment is made and the object for which such application is made;

(II)
amount credited or paid to any fund or institution or trust or any
university or other educational institution or any hospital or other
medical institution referred to in sub-clause (iv) or sub-clause (v) or
sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 of the
Act or other trust or institution registered under section 12AB of the
Act, containing details of their name, address, permanent account number
and the object for which such credit or payment is made;

(III)
application of income outside India containing details of amount of
application, name and address of the person to whom any credit or
payment is made and the object for which such application is made;

(IV)
deemed application of income referred in clause (2) of Explanation 1
of sub-section (1) of section 11 of the Act containing details of the
reason for availing such deemed application;

(V)   income
accumulated or set apart as per the provisions of the Explanation 3 to
the third proviso to clause (23C) of section 10 or sub-section (2) of
section 11 of the Act which has not been applied or deemed to be applied
containing details of the purpose for which such income has been
accumulated;

(VI)   money invested or deposited in the forms and modes specified in sub-section (5) of section 11 of the Act;

(VII)
money invested or deposited in the forms and modes other than those
specified in subsection (5) of section 11 of the Act;

Analysis

The
requirement under this item is pursuant to section 11(1), Explanation
1(2), Explanation 2, 3, 4 to section 11(1), 11(2), 11(5), etc.

Its main purpose is to identify the amount of application of income which is allowable u/s 11(1)(a).

Out of “income of the previous year”

It appears that for this purpose income excludes “corpus donations” received by the assessee and treated as exempt u/s 11(1)(d).

The
expression “income of the previous year”, used in this clause can lead
to computational issues. To illustrate, if a payment is made on 1st
April, is it out of the income of the previous year? Again, in the case
of mixed funds (income for the year as well as accumulated income,
corpus donations, borrowing, etc.), how to determine which fund has been
applied? Three principles set out by judgments are explained below:

• In Siddaramanna Charities Trust vs. CIT [(1974) 96 ITR 275 (Mys)],
donation was made by the assesse on the first day of the accounting
year; The Court noticed that during the relevant previous year, there
was a profit and the sum donated was less than the amount of the
profits. It was also not shown that the said amount was paid out of the
capital account. Hence, it was held that the said donation was
application of income of the previous year, although when the donation
was given on the first day there was no profit of the previous year.

• In Infosys Science Foundation vs. ITO(E), TS-453-ITAT-2018(Bang),
it has been held that once income is accumulated u/s 11(2) [say, in
year 1], the assessee can claim that application of income in year 2
should be split into two: initially, the application should first be
considered as having been made out of the accumulation of year 1 and
only the remainder should be considered as an application of income of
year 2. In this case, both the accumulation of unutilized income of year
1 u/s 11(2) as well as the income of year 2 were deployed in the form
of fixed deposits in bank, which were renewed and reinvested and it was
not possible to link the identity of the deposits with either one of the
accumulations or the current income.

• For the purposes of other sections, the Supreme Court has held as follows:

•
Where interest-free own funds available with the assessee exceeded its
investments in tax-free securities; investments would be presumed to be
made out of assessee’s own funds, and proportionate disallowance was
not warranted u/s 14A although separate accounts were not maintained by
the assessee for investments and other expenditure incurred for earning
tax-free income [South Indian Bank Ltd. vs. CIT, (2021) 130 taxmann.com 178 (SC)].

•
If interest-free funds available to the assessee were sufficient to
meet its investment in subsidiaries, the assessee’s claim for deduction
was justified [CIT vs. Reliance Industries Ltd., (2019), 102 taxmann.com 52 (SC)].

The above judgments could be relevant in ascertaining whether the application is “out of income of the previous year” or not.

It
appears that what is required is that the assessee should choose a
reasonable method of determining the source from which the application
is made and follow it uniformly.

Application of income in India [Item (I)]

This item requires maintenance of details of the application.

The
term ‘application of income’ is very wide and includes, expenditure on
salaries, administrative expenses, establishment expenses, donations to
other institutions, capital expenditure, etc.

Every payment is a
different and separate application. Thus, a voucher for even a payment
of Rs. 10 (for say, conveyance) shall have to be recorded separately.

The Rule requires details of the “amount” of application, which term has been judicially explained by Courts as follows:

•
…from the point of view of linguistics, the words “sum” and “amount”
are synonyms. But under the Income Tax Act, each of the words “sum”,
“amount”, “income” and “payment” have different connotations. [T. Rajkumar vs. UOI, 2016 (4) TMI 593 – Madras High Court]

•
The word “amount” is used here in a wider sense than usual and that it
includes the total quantity of the debtor’s liabilities in cash or in
kind. Consequently, the payment of these “amounts” can also be either in
cash or in kind. [Shridhar Krishnarao vs. Narayan Namaji, AIR 1939 Nag 227]

Thus,
the Item may require details of the amount of application in kind also.
To illustrate, if a hospital receives an ambulance as a non-corpus
donation, then the value of the ambulance is to be regarded as income of
the hospital and if it is used for the purposes of the hospital,
simultaneously the same amount is be regarded as application of income
[see CBDT Circular No. 580 dated 14th September, 1990)]. In such a
circumstance, the details of the ambulance will have to be recorded
under this item.

If an assessee is constructing a building, he
will have to maintain details of every payment made for purchase of
cement, sand, bricks, iron and steel, etc. and daily payment to
contractor!!!

Every TDS from payment is a separate application and hence, will have to be separately recorded.

If
more than one payment is made to a person for the same object, then it
appears that all the payments during the previous year to such person
can be aggregated.

Explanation 2 to section 11(1) provides that a
“corpus donation” to another specified institution shall not be treated
as application of income. Similarly, Explanation 3 provides cash
payments or payments without deduction of tax at source will be
partially disallowable and not treated as application. Whether these
Explanations have to be considered in recording the details? It appears
that the requirement of the Rule is complete record keeping. It should
not be affected by the tax treatment of expenses in the computation of
income. Hence, it may be advisable to consider all such payments as
application of income with due disclosure by way of note.

Amount credited or paid to any other Trust etc. [Item (II)]

Explanation to section 11(2) uses the same language, that is, amount credited or paid to any other trust.
However,
such payments are not required to be recorded under this item. This is
because what is required is amount paid or credited out of the income of
the previous year, whereas Explanation to section 11(2) covers any
amount credited or paid to a charitable institution out of “accumulated
income of preceding years”: such payments are required to be recorded
under Rule 17AA(1)(d)(iv)(III).

The details of all
payments/credits to the specified institution are required, irrespective
of whether the payment is towards corpus of the payee or not.

Application of income outside India [Item (III)]

There
is a huge controversy on what constitutes application of income outside
India. The purpose is to identify the amount of application which is
not to be considered for exemption of income u/s 11(1)(a).

Deemed application of income referred in Explanation 1(2) to section 11(1) [Item (IV)]

An
assessee can decide whether to opt for deemed application of income or
not only after the finalization of accounts and computation of taxable
income. Hence, this record cannot be maintained contemporaneously during
the year but only after the amount of deemed application is determined.

The
item requires details of reasons for availing of deemed application.
Explanation 1(2) to section 11(1) provides that the option may be
availed “(i) for the reason that the whole or any part of the income
has not been received during that year, or (ii) for any other reason”.

It appears that the assessee need not give precise reasons but cite the aforesaid provision to justify the option availed of.

Income accumulated or set apart u/s 11(2) [Item (V)]

This
amount can also be recorded only after the end of the previous year
when the amount of income accumulated u/s 11(2) is determined.

Money invested or deposited in permissible modes of section 11(5) [Item (VI)]

If
a fixed deposit is placed during the year and it matures before 31st
March, is it required to be recorded under this provision? On a literal
reading, record has to be maintained for each and every investment or
deposit, whether continuing at the end of the year or not.

It appears that income for this purpose does not include corpus donations received during the year.

The details under this item are partially sought also under Rule 17AA(1)(d)(ii)(II).

Money invested or deposited in non-permissible modes [Item (VII)]

In
this case also, each and every investment or deposit in non-permissible
mode is required to be reported. This is because section 13(1)(d)
provides that income is not exempt to the extent of investment or
deposit in non-permissible mode.

[Some other interesting issues of this amendment will be discussed by the Author in part – II of this Article.]

[Author
acknowledges assistance from Adv. Aditya Bhatt, CA Kausar Sheikh, CA
Chirag Wadhwa and CA Arati Pai in writing this Article.]

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S. 148A(d) – Reopening of assessment – Impugned SCN as well as the impugned order u/s 148A(d) of the Act are based on distinct and separate grounds – Information referred in SCN not provided to Assessee

11 Best Buildwell Private Limited vs. Income Tax Officer, Circle 4 (2), Delhi & Anr.
W.P.(C) 11338/2022
Date of order: 1st August, 2022
Delhi High Court

S. 148A(d) – Reopening of assessment – Impugned SCN as well as the impugned order u/s 148A(d) of the Act are based on distinct and separate grounds – Information referred in SCN not provided to Assessee

The petitioner challenged the order dated 30th March, 2022 passed u/s 148A(d) and notice dated 31st March, 2022 issued u/s 148 as well as show cause notice (SCN) dated 16th March, 2022 issued u/s 148A(b) for A.Y. 2018-19.

The petitioner states that the petitioner had filed its return of income for A.Y. 2018-19 declaring an income of Rs. 6,32,45,180 and a loss of Rs. 74,36,185. He states that the case of the petitioner was picked up for scrutiny, and after examination of all the submissions of the petitioner, an assessment order dated 27th April, 2021 u/s 143(3) r.w.s 144B was passed assessing the income of the petitioner at Rs. 6,41,76,500. He points out that one of the points for selecting the petitioner’s case for scrutiny was ‘Business Purchases’, and after analysing the documents submitted by the petitioner, no additions were made by the Assessing Officer on account of business purchases.

The petitioner states that the impugned SCN dated 16th March, 2022 issued u/s 148A(b) did not provide any information and/or details regarding the income that has been alleged to have escaped assessment. He states that the petitioner filed a response to the impugned SCN dated 16th March, 2022, specifically requesting the respondent to provide the details of the transaction and vendors from whom the petitioner had made purchases and raised invoices which respondent No.1 considered bogus. He further states that respondent No.1 failed to consider the fact that the petitioner had made purchases from vendors who were registered under GST and had claimed an input tax credit of GST on the purchases made from them as per statement 2A reflected on the GST portal based on the invoices raised by the vendors. He points out that the credit claimed by the petitioner has not been rejected.

The petitioner states that the impugned order dated 30th March, 2022 u/s 148A(d) merely relies on an alleged report prepared against the assessee company. He emphasises that no such report was ever furnished to the petitioner.

On behalf of the respondents, it was stated that notice u/s 148A(b) had been issued in the present instance as the petitioner’s ITR and GST Data did not reconcile. He also states that the analysis of GST information of third parties reveals substantial routing of funds by way of bogus purchases.

In rejoinder, the petitioner states that the impugned order passed u/s 148A(d) does not refer to any lack of reconciliation between the ITR and GST data of the petitioner. He also states that no GST information showing substantial routing of funds was ever furnished to the petitioner.

The Court observed that the impugned SCN, as well as the impugned order u/s 148A(d), are based on distinct and separate grounds.

The SCN primarily states that “it is seen that the petitioner has made purchases from certain non-filers”. However, no details or any information about these entities was provided to the petitioner. It is not understood as to how the petitioner was to know which of the entities it dealt with were filers or non-filers!

Further, the impugned order states that a report was prepared against the petitioner-company, which concludes that the assessee had shown bogus purchases from bogus entities to suppress the profit of the company and reduce the tax liability from 2015-16 to 2020-21. However, no such report which forms the basis for the ‘information’ on which the assessment was proposed to be reopened had been provided to the petitioner. In fact, there are no specific allegations in the SCN to which the petitioner could file a reply.

Keeping in view the aforesaid, the impugned order dated 30th March, 2022 passed u/s 148A(d) and notice dated 31st March, 2022 issued u/s 148 are quashed, and the respondents are given liberty to furnish additional materials in support of the allegations made in the SCN dated 16th March, 2022 within three weeks including reports, if any. Thereafter, the AO shall decide the matter in accordance with the law. The writ petition was disposed.

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S. 148A r.w.s. 149 – Reopening of assessment – A.Y. 2014-15 – Effect of SC Judgement in case of Ashish Agarwal dated 4th May, 2022 and Board’s Circular dated 11th May, 2022 – Where the income of an assessee escaping assessment to tax is less than Rs. 50,00,000 – Reopening not justified

10 Ajay Bhandari vs. Union of India & 3 Ors.
Writ Tax No. 347 of 2022
Date of order: 17th May, 2022
Allahabad High Court

S. 148A r.w.s. 149 – Reopening of assessment – A.Y. 2014-15 – Effect of SC Judgement in case of Ashish Agarwal dated 4th May, 2022 and Board’s Circular dated 11th May, 2022 – Where the income of an assessee escaping assessment to tax is less than Rs. 50,00,000 – Reopening not justified

The impugned notice u/s 148 of the Income Tax Act, 1961, for A.Y. 2014-15 was issued to the petitioner by respondent no. 3 on 1st April, 2021. The “reasons to believe” recorded by respondent no. 3 for issuing the impugned notice, read as under:

“I have reason to believe that an income to the tune of Rs. 2,63,324 has escaped assessment for the aforesaid year”.

The reassessment order dated 31st March, 2022 has been passed by respondent no. 4, i.e. National Faceless Assessment Centre, Delhi u/s 147 r.w.s.144B.

The Additional Solicitor General (ASG) of India relied on the judgement of Hon’ble Supreme Court under Article 142 of the Constitution of India in Civil Appeal No. 3005 of 2022 (Union of India and others vs. Ashish Agarwal) decided on 4th May, 2022 and reported in 2022 SCC OnLine SC 543 and submitted that the notices issued after 1st April, 2021 u/s 148 are liable to be treated as notices u/s 148A of the Act, 1961 as substituted by the Finance Act, 2021.

He further relied on Instruction being F.No 279/Misc./M-51/2022-ITJ, Ministry of Finance, Department of Revenue, CBDT, ITJ Section dated 11th May, 2022, paragraph 7.1 of the aforesaid instruction and stated that the notices u/s 148 relating to A.Ys. 2013-14, 2014-15 and 2015-16 shall not attract the judgement of Hon’ble Supreme Court in the case of Ashish Agarwal (supra). Lastly, the ASG submitted that since the notice was issued on 1st April, 2021 for A.Y. 2014-15, therefore, it shall be covered by a Division Bench’s judgement of this Court in the case of Daujee Abhushan Bhandar Pvt. Ltd. vs. Union of India and 2 others (Writ Tax No. 78 of 2022) decided on 10th March, 2022.

The petitioner referring to paragraphs 23 and 25 of the judgement of the Hon’ble Supreme Court in the case of Ashish Agarwal (supra) submitted that the impugned notice u/s 148 issued by respondent no. 3 is wholly without jurisdiction inasmuch as jurisdiction cannot be assumed after the expiry of the limitation period. He further submits that conferment of jurisdiction is essentially an act of the legislature, and the jurisdiction cannot be conferred by any circular or even by Court orders. He submits that even under the amended provisions, which have no application on facts of the present case, impugned notice u/s 148 would be without jurisdiction and barred by limitation inasmuch as for A.Y. 2014-15, the limitation under the amended provisions of sections 148A and 149 had expired on 31st March, 2018 inasmuch as the allegation of evaded income is Rs. 2,63,324 which has been provided to be read as Rs. 26,33,324 by notice dated 17th March, 2022 u/s 142(1), which is much below Rs. 50 Lacs.

The Hon. Court observed the judgment of Hon’ble Supreme Court in the case of Ashish Agarwal (supra) and Circular F.No 279/Misc./M-51/2022-ITJ, dated 11th May, 2022 issued by the Ministry of Finance, Department of Revenue, CBDT, ITJ Section, New Delhi. Section 147, as it existed till 31st March, 2021, empowers the Assessing Officer to assess or reassess or recompute loss or depreciation allowance or any other allowance, as the case may be, for the concerned assessment year in the case of an assessee if he has reason to believe that income chargeable to tax has escaped assessment, subject to the provisions of sections 148 to 153. A pre-condition to initiate proceedings u/s 147 is the issuance of notice u/s 148. Thus, notice u/s 148 is a jurisdictional notice. Section 149 provides a time limit for issuance of notice u/s 148. The time limit is provided under the unamended provisions (existed till 31st March, 2021) and the amended provisions (effective from 1st April, 2021) as amended by the Finance Act, 2021.

The judgment of Hon’ble Supreme Court under Article 142 of the Constitution of India, in the case of Ashish Agarwal (supra) has been explained for implementation/clarified by Instruction No.01/2022 being F.No 279/Misc./M-51/2022-ITJ, dated 11th May, 2022 issued by the Ministry of Finance, Department of Revenue, CBDT, ITJ Section, New Delhi, in exercise of powers u/s 119.

The ASG has made a statement before the Court, that as per Clause-7.1 of the Board’s circular dated 11th May, 2022, the notices u/s 148 relating to A.Ys. 2013-14, 2014-15 and 2015-16, shall not attract the judgment of Hon’ble Supreme Court in the case of Ashish Agarwal (supra) and the impugned notice u/s 148 issued on 1st April, 2021 for A.Y 2014-15 is, therefore, clearly barred by limitation and consequently without jurisdiction. Therefore, in view of the admission made by the learned ASG on behalf of the respondents, all other questions, including the question of conferment of jurisdiction etc., are left open and not dealt with by the Hon. Court.

The Court further observed that as per clauses 6.2 and 7.1 of the Board’s Circular dated 11th May, 2022, if a case does not fall under clause (b) of sub-section (i) of section 149 for the A.Ys. 2013-14, 2014-15 and 2015-16 (where the income of an assessee escaping assessment to tax is less than Rs. 50,00,000) and notice has not been issued within limitation under the unamended provisions of section 149, then proceedings under the amended provisions cannot be initiated.

The impugned notice u/s 148 of the Act, 1961 issued on 1st April, 2021 for A.Y. 2014-15 and the impugned notice dated 13th January, 2022 u/s 144 and the reassessment order dated 13th January, 2022 u/s 147 r.w.s 144B for A.Y. 2014-15 passed were quashed. The writ petition was allowed.

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Transfer of case — Notice — Both assessee and firm wherein assessee was partner assessed in Mumbai — Pending of case before additional chief metropolitan magistrate in Bengaluru could not be reason for transfer of assessee’s assessment from Mumbai — Order transferring case quashed and set aside

41 Divesh Prakashchand Jain vs. Principal CIT
[2022] 445 ITR 496 (Bom.)
Date of order: 1st December, 2021
S.127(2) of ITA, 1961

Transfer of case — Notice — Both assessee and firm wherein assessee was partner assessed in Mumbai — Pending of case before additional chief metropolitan magistrate in Bengaluru could not be reason for transfer of assessee’s assessment from Mumbai — Order transferring case quashed and set aside

The assessee was a partner in a firm, SSJ, which manufactured and sold gold ornaments having its principal place of business in Mumbai. The firm had a branch in Bengaluru. The assessee stated that he had sent samples of jewellery to Bengaluru to be displayed to customers and two of his employees were intercepted by the Bengaluru police and gold jewellery belonging to the firm was found on them and investigations commenced and a case before the Additional Chief Metropolitan Magistrate, Bengaluru was pending. The Deputy Director of Income-tax (Investigation) Bengaluru was a respondent in the pending case. The Principal Commissioner issued a show-cause notice u/s 127(2) of the Income-tax Act, 1961 and transferred the assessee’s case to Bengaluru for completing the assessment proceedings.

The Bombay High Court allowed the writ petition filed by the assessee challenging the order of transfer and held as under:

“i) The pendency of a case before the Additional Chief Metropolitan Magistrate could not be accepted as reason for transfer of the assessee’s assessment from Mumbai to Bengaluru. Though the assessee was given a show-cause notice u/s. 127(2) and personal hearing was granted before passing the order for transfer of the case the reasons recorded in the order were subject to judicial scrutiny and must be reasonable.

ii) The assessee was assessed in Mumbai and the firm of which the assessee was a partner was also assessed in Mumbai. In the order, the Principal Commissioner had only narrated the facts but had not given any reasons why in the facts and circumstances, the assessee’s case had to be transferred to Bengaluru. The order of transfer was quashed and set aside.

iii) The assessee was to fully co-operate with the authorities in Bengaluru, provide all the required documents for the purpose of investigation or assessment and also appear for recording his statement in Bengaluru or Mumbai as and when called for (subject to giving a reasonable notice in advance of the date and time to be present) and co-operate in every possible way with the Bengaluru Office of the Department.”

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Disallowance u/s 14A Where No Exempt Income and Effect of Explanation

ISSUE FOR CONSIDERATION

S.14A, introduced by the Finance Act, 2001, provides for disallowance with retrospective effect from 1st April, 1962 of an expenditure incurred in relation to income which does not form part of the total income under the Income-Tax Act. The expenditure to be disallowed is required to be determined in accordance with Rule 8D of the Income-Tax Rules provided the AO, having regard to the accounts, is not satisfied with the correctness of the claim of the assessee, including the claim that no expenditure has been incurred in relation to an exempt income.

The provision of s.14A r.w. Rule 8D has been the subject matter of unabated litigation since its introduction, which continues despite various amendments made thereafter. The subjects of litigation involve a variety of reasons and many of them have reached the Apex Court. One such subject is about the possibility of disallowance in a case where the assessee has not earned any exempt income during the year for which expenditure is incurred.

Applying the law prior to the recent insertion of the Explanation and the non-obstante clause in s. 14A, the Delhi High Court in the case of Cheminvest Ltd., 61 taxmann.com 118, ruled that no disallowance could be made u/s 14A if no exempt income had been earned during the year. The Supreme Court has dismissed the SLP against the Madras High Court ruling that s.14A could not be invoked where no exempt income was earned by the assessee in the relevant assessment year. Chettinad Logistics (P) Ltd., 95 taxmann.com 250 (SC).

The legislature, for undoing the impact of the law laid down by the Supreme Court, has introduced an Explanation to s.14A by the Finance Act, 2022, w.e.f 1st April, 2022. The said Explanation reads as under: “Explanation-For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.”

The Explanatory Memorandum to the Finance Bill, 2022, relevant parts, reads as:

“4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.

5. This amendment will take effect from 1st April, 2022.”

Simultaneously a non-obstante clause is introduced in s. 14A(1) which reads as: Notwithstanding anything contained to the contrary in the Act, for the purposes of ………………” The Explanatory Memorandum, relevant parts, read as:

“6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.

7. This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years”.

Ironically, an amendment made to settle a raging controversy has itself become the cause of another fresh controversy. An issue has arisen whether the Explanation now inserted, is prospective in its nature and therefore would apply to A.Y. 2022-23 onwards or would apply retrospectively to cover at least the pending assessments and appeals. While the Mumbai Bench of the Tribunal, has held the Explanation to be prospective in its application, the Guwahati Bench of the Tribunal has held the same to be retrospective in nature and has applied the same in adjudicating an appeal before it for A.Y. 2009-10 and onwards. The Delhi High Court, however, has in a cryptic order recently held the Explanation to be prospective. The Guwahati Bench has passed a detailed order for holding the Explanation to be retrospective for a variety of reasons which are required to be noted and may require examination by the Courts to arrive at a final conclusion on the subject.

BAJAJ CAPITAL VENTURES (P) LTD.’S CASE

The issue first came up for consideration of the Mumbai bench of the ITAT in the case of ACIT vs. Bajaj Capital Ventures (P.) Ltd. 140 taxmann.com 1. In the cross appeals filed, one of the grounds raised by the assessee company was “On the facts and in the circumstances of the case and in law, the respondent prays that no disallowance ought to be made in absence of earning of any exempt income.”

During the course of the scrutiny assessment proceedings, it was noticed that the assessee was holding investments in shares, which were for the purpose of earning dividend income, but no disallowance was made u/s 14A for expenses incurred to earn this tax exempt income. The AO disallowed an amount of Rs. 11,87,85,293 under rule 8D r.w. Section 14A. Aggrieved, the assessee carried the matter in appeal before the CIT(A), who restricted the disallowance to Rs. 9,87,978, as was claimed by the assessee, with observations, inter alia, as follows:

6.2 I have considered the assessment order and the submission of the appellant. The issue regarding applicability of section 14A read with rules 8D of the Income Tax Rules,1962 has been the subject matter of incessant litigation on almost every issue, involved, i.e. whether a disallowance can be made when no exempt income has been earned during the year, whether the satisfaction has been correctly recorded by the AO regarding the correctness of the claim and in respect of such expenditure incurred in relation to exempt income, whether share application money is to be considered as investment, whether investment in subsidiary company or joint ventures can be said to be made with a view of earn exempt income etc. In the present case the admitted fact is that no dividend income or any other exempt income has been earned during the year under consideration. The present legal position established by the Delhi High Court in the case of Cheminvest Ltd. (61 taxmann.com 118), which has also been relied upon by the appellant, is that no disallowance can be made if no exempt income has been earned during the year. Recently, in the case of Commissioner of Income Tax, (Central) 1 v. Chettined Logistics (P) Ltd. [(2018) 95 taxmann 250 (SC)1, the Hon’ble Supreme Court have dismissed the SLP against High Court ruling that section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year. The ITAT Mumbai [jurisdictional ITAT] has recently in the case of ACIT v. Essel Utilities Distribution re affirmed the same.”

On further appeals by the assessee and the revenue, to the Tribunal, the bench on due consideration of the rival contentions and facts, passed the following order in light of the applicable legal position;

“7. We find that there is no dispute about the fact that the assessee did not have any tax exempt income during the relevant previous year and that the period before us pertains to the period prior to insertion of Explanation to section 14A. In this view of the matter, and in the light of consistent stand by co-ordinate benches, following Hon’ble Delhi High Court’s judgment in the case of Cheminvest Ltd v. CIT [(2015) 61 taxmann.com 118 (Del)], we uphold the plea of the assessee that no disallowance under section 14A was and in the circumstances of the case. The plea of the Assessing Officer is thus rejected. As regards the disallowance of Rs. 9,87,978/- it is sustained on the basis of computation given in the alternative plea of the assessee, but given the fact that the basic plea of non-disallowance itself was to be upheld, there was no occasion to consider the computation given in the alternative plea. This disallowance of Rs. 9,87,978/- must also be deleted.

8. In view of the above discussions, we hold that no disallowance under section 14A was justified on the facts, and the remaining disallowance of Rs. 9,87,978/- must be deleted. Ordered, accordingly.

9. In the result, appeal of the Assessing Officer is dismissed and appeal of the assessee is allowed. Pronounced in the open court today on the 29th day of June, 2022.”

It is clear from the reading of the order that the bench did notice that the period involved in appeal pertained to a period for which the Explanation inserted by the Finance Act, 2022 was not applicable and in view of the same had thought it fit to not to invoke application of the Explanation on the understanding that the said Explanation had no retrospective application, though this part has not been expressly noted in the body of the order.

The catch words by Taxmann read as: “The assessee did not have any tax exempt income during the relevant previous year (P.Y. 2016-17/A.Y. 2017-18) which pertains to the period prior to insertion of Explanation to section 14A (by Finance Act, 2022 w.e.f. 1st April,). As the new Explanation applies with effect from A.Y. 2022-23 and does not even have limited retrospective effect even to proceedings for past assessment years pending on 1st April, 2022, no disallowance u/s 14A shall apply in the absence of any tax-free income in the relevant assessment year prior to A.Y. 2022-23.”

WILLIAMSON FINANCIAL SERVICES LTD.’S CASE

Back to back, the issue came up again in the case of ACIT vs. Williamson Financial Services Ltd. 140 taxmann.com 164 (Guwahati – Trib.) relating to the A.Ys. 2009-10 and 2012-13 to 2014-15. In assessing the income for A.Y 2013-14, the AO noted that the assessee during the year had earned an exempt dividend income of Rs. 3,70,80,750 on the investments made by the company. He also noticed that the own funds of the company were not sufficient to meet the investments in question and therefore, applied the provisions of s.14A read with Rule 8D and computed the expenditure relatable to the exempt dividend income at Rs. 10,62,10,110. Since the assessee in its computation of income had suo moto disallowed an amount of Rs. 2,25,48,285 on account of expenditure relatable to the tax exempt dividend income earned by it, the AO disallowed the balance amount of Rs. 8,36,61,625 and added back the same to the income and computed the taxable income accordingly.

Being aggrieved by the same, the company filed an appeal before the CIT(A) who, relying upon the decision in the case of Moderate Leasing and Capital Services Private Limited ITA 102/(2018) dated 31/01/2018, held that the disallowance u/s 14A could not exceed the total tax exempt income earned during the year. He accordingly restricted the disallowance to the extent of exempt income earned by the company.

Being aggrieved by the above action of the CIT(A), the revenue has appealed to the ITAT. The Revenue contested the decision of the CIT (Appeals) on the ground that he was not justified in facts as well as in law in restricting the disallowance u/s 14A to the extent of income claimed exempt for the assessment year under consideration.

The Revenue invited the attention to the newly inserted Explanation to s. 14A to submit that it had now been clarified that notwithstanding anything to the contrary contained in the Act, the provisions of s.14A should apply and be deemed to have always applied in a case where the income, not forming part of the total income had not accrued or arisen or had not been received during the year and the expenditure had been incurred during the year in relation to such income. It was contended that the Explanation was declaratory and clarificatory in nature, therefore, the same would apply with retrospective effect, and that the action of the CIT(A) in restricting the disallowance to the extent of exempt income earned by the assessee was not as per the mandate of the amended law.

The Revenue supported its contentions with the following submissions:

The CBDT Circular No. 5/2014 dated 11th February, 2014, had clarified that disallowance of the expenditure would take place even where the taxpayer in a particular year had not earned any exempt income.

Ignoring the circular, the Courts had held that where there was no exempt income during the year, no disallowance u/s 14A of the Act could be made. Such an interpretation by the Courts, ignoring the expressed intent stated in the circular, in the opinion of the legislature was not in line with its intent and defeated the legislative intent of s.14A of the Act.

In order to make the intention of the legislation clear and to make it free from misinterpretation and to give effect to the CBDT’s Circular No. S/2014 dated 11th February, 2014, the Legislature had made two changes to s. 14A through the Finance Act, 2022, which are (a). Insertion of non-obstante clause by way of substitution and, (b). Insertion of an Explanation to reinforce, by way of clarification, the intents of the CBDT’s Circular No.05/2014 dated 11th February, 2014.

The main objective to insert a non-obstante clause in sub-section (1) of s.14A which read as “Notwithstanding anything to the contrary contained in this Act, for the purpose of…” was to overcome the observations made in the case of Redington (India) Ltd vs. Addl.CIT, 392 ITR 633, 640 (Mad), wherein it was observed that an assessment in terms of the Act was specific to an assessment year and related previous year as per s.4 r.w.s. 5 of the Act. The Madras High Court in that case had further held that any contrary intention, if there was, would have been expressly stated in s.14A and in its absence, the language of s. 14A should be read in the context such that it advanced the scheme of the Act rather than distort it. Such interpretation of the Court had made the Circular No.05/2014 dated 11th February, 2014 infructuous. To address the misunderstanding, the legislature had inserted the Explanation to clarify its intentions.

The Explanation inserted contained another non-obstante clause, to overcome the past judicial observations and it was clarified the intention of the legislature that the Explanation should always be deemed to have been in s.14A for disallowance of any claim for deduction against expenditure incurred to earn an exempt income, irrespective of the fact whether or not any income was earned in the same financial year.

Further, in general parlance, whenever a clarificatory amendment with the use of words such as “for the removal of doubts”, and “shall be deemed always to have meant” etc. was made, the amendment was to have a retrospective effect, even if it was made effective prospectively.

Circular No 5/2014 dated 11th February, 2014 was still in force, and for invoking disallowance u/s 14A of the Act, it was not material that the assessee should have earned such exempt income during the financial year under consideration.

The decision of the CIT(A) holding that the disallowance u/s 14A read with Rule 8D could not exceed the income claimed exempt appeared to be perverse.

In reply, on behalf of the assesse, it was submitted that the Explanation to s. 14A introduced vide the Finance Act 2022, was prospective in nature and could not be applied to the pending appeals, and that the law settled prior to the insertion of the Explanation, holding that the disallowance of expenditure u/s 14A could not exceed the exempt income earned by the assessee during the year, alone should apply. It was further contended that:

Even after the issue of the CBDT Circular No. 5/2014 dated 11th February, 2014, the Courts held that when there was no exempt income, then disallowance u/s 14A was unwarranted, following a simple rule that when there was no exempt income, there was no necessity to disallow the expenditure. CIT vs. Corrtech Energy Pvt. Ltd., 223 Taxman 130 (Guj); CIT vs. Holcim India Pvt. Ltd., 57 taxmann.com 28 (Del); Marg Ltd vs. CIT,120 taxmann.com 84 (Madras).

The Delhi High Court, in the case of CIT vs. Moderate Leasing and Capital Services Pvt. Ltd in ITA 102/2018 order dated 31/01/2018 had held that disallowance u/s 14A should not exceed the exempt income itself. The SLP filed by the Revenue was dismissed by the Supreme Court of India Special Leave Petition (Civil) Diary No(s). 38584/2018 dated 19/11/2018.

The Guwahati bench of the ITAT, in deciding the issues in favour of the Revenue on due consideration of the contentions of the opposite parties, observed as under:

In determining the effective date of the application of an amendment, prospective or retrospective, the date from which the amendment was made operative did not conclusively decide the question of its effective date of application.

The Court had to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether an amendment was clarificatory or substantive.

An amendment which was clarificatory was regarded by the Courts as being retrospective in nature and its application would date back to the date of introduction of the original statutory provision which it sought to amend. Clarificatory amendment was an expression of intent which the Legislature had always intended to hold the field with retrospective effect.

A clarificatory amendment might be introduced in certain cases to set at rest divergent views expressed in decided cases on the true effect of a statutory provision.

Where the Legislature expressed its intent, by declaring the law as clarificatory, it was regarded as being declaratory of the law as it always stood and was therefore, construed to be retrospective.

A perusal of the Explanation revealed that it started with the words “For the removal of doubts, it is hereby clarified ……”. Then the wording in the body of the provision expressly stated: “…..the provisions of this section shall apply and shall be deemed to have always applied……”

The opening words of the Explanation revealed in an unambiguous manner that the said provision was clarificatory and had been inserted for removal of doubts. Further, as provided in the Memorandum explaining the provision, the Explanation had been inserted to make the intention clear and to make it free from any misinterpretation.

The said Explanation being clarificatory in nature was inserted for the purpose of removal of doubts and to make the intention of the legislature clear and free from misinterpretation and thus the same, obviously, would operate retrospectively.

Any contrary interpretation holding that the said Explanation shall operate prospectively would render the words “shall apply and shall be deemed to have always applied” as redundant and meaningless, which was not the intention of the legislature.

The Explanation did not propose to levy any new taxes upon the assessee but it only purported to clarify the intention of the legislature that actual earning or not earning of the exempt income was not the condition precedent for making the disallowance of the expenditure incurred to earn an exempt income.

The legal position was declared by the Supreme Court in the case of Walfort Share & Stock Brokers Pvt. Ltd., 326 ITR 1 (SC), that the expenses allowed could only be those incurred for earning the taxable income; that the basic principle of the taxation was to tax the net income and on the same analogy, the exemption was also in respect of net income.

The Supreme Court in the case of CIT vs. Rajendra Prasad Moody 115 ITR 519 had held that even if there was no income, the expenditure was allowable. Income included loss, as was held by the Supreme Court in the case of CIT vs. Harprasad & Co. P Ltd. 99 ITR 118, and as such only the net income was taxable, i.e. gross income minus expenditure, and as such the net income might be a loss also.

Since the earning of positive net income was not a condition precedent for claiming deduction of expenditure, on the same analogy, the earning of exempt income was also not a condition precedent for attracting a disallowance of expenditure incurred to earn exempt income. This position had only been reiterated and clarified by the Explanation to s.14A, so as to remove the doubts and to make clear the intention of the legislature and to make the provision of s. 14A free from any other interpretation. Therefore, it could not be said that the Explanation proposed or saddled any fresh liability on the assessee.

The contention of the assessee that the Explanation applied only to those cases where no exempt income had been earned at all and that the said Explanation was not applicable to cases where the assessee had earned some exempt income was not acceptable; such a proposition might place different assessees in inequitable position. In such a scenario, in a case where an assessee did not earn any exempt income, he might suffer disallowance as per the formula prescribed under Rule 8D, whereas, in a case where an assessee earned some meagre exempt income, the disallowance in his case would be restricted to such meagre exempt income and the assessee having no exempt income, would have to suffer more disallowance than the assessee having meagre exempt income. Even otherwise, the Explanation sought to clarify the position that the disallowance of expenditure relatable to exempt income was not dependent upon actual earning of any exempt income.

The legal position that the AO must first record satisfaction as to the correctness of the claim of the assessee in respect of expenditure incurred in relation to exempt income before invoking rule 8D for disallowance of expenditure u/s 14A continued to apply and should still be adhered to and the aforesaid Explanation introduced vide Finance Act 2022 did not in any manner change that position. There was no change of the legal position even after introduction of the Explanation.

The Guwahati bench of the tribunal in conclusion held that the:

Explanation to s. 14A, inserted by Finance Act, 2022 w.e.f. 1st April, 2022, shall apply retrospectively even for periods prior to 1st April, 2022.

Disallowance of expenditure incurred in relation to exempt income shall apply in terms of the Explanation even in those cases where assessee has earned no exempt income during the relevant assessment year.

Application of the amendment shall not be restricted to those cases where assessee had earned some exempt income which was less than expenditure incurred in relation to exempt income.

The disallowance could not be limited to the amount of exempt income of an year.

The decision of the Mumbai bench of the Tribunal in the case of ACIT vs. Bajaj Capital Ventures (P.) Ltd. (supra), holding a contrary view that the Explanation to s.14A inserted w.e.f. 1st April, 2022 has no retrospective applicability, was not expressly considered by the bench as the same might not have been cited by the assessee.

OBSERVATIONS

Section 14A of the Act was introduced in 2001, with retrospective effect from the year 1962, to state that no deduction shall be granted towards an expenditure incurred in relation to an income which does not form part of the Total Income. The method for identifying the expenditure incurred is prescribed under Rule 8D of the Income-tax Rules,1962. Further, by the Finance Act, 2006, sub-sections (2) and (3) have been inserted w.e.f. 1st April, 2007.

A Proviso was inserted earlier by the Finance Act of 2002 with retrospective effect from 11th May, 2001. It reads: “Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001”.

The CBDT has issued a Circular No. 5 dated 11th February, 2014, clarifying that Rule 8D r.w.s. 14A provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. The circular noted that still some Courts had taken a view that if there was no exempt income during a year, no disallowance u/s 14A could be made for that year. The Circular had stated that such an interpretation by the Courts was not in line with the intention of the legislature.

Over the years, disputes have arisen in respect of the issue whether disallowance u/s 14A can be made in cases where no exempt income has accrued, arisen or received by the assessee during an assessment year. From its inception, the applicability of this provision has always been a subject matter of litigation and one such point that has been oft-debated is regarding the disallowance of expenditure in the absence of exempt income. In 2009, a Delhi Special Bench of the Tribunal in Cheminvest Ltd. vs. CIT, 121 ITD 318, took a view that when an expenditure is incurred in relation to an exempt income, irrespective of the fact whether any exempt income was earned by the assessee or not, disallowance should be made, a position that has not been found acceptable to the Courts, including the Apex Court.

An interesting part is noticed on reading of the Explanatory Memorandum to the Finance Bill, 2022 which clarifies that the Explanation has been inserted in s. 14A w.e.f. 1st April, 2022, while the non-obstante clause in sub- section (1) of s. 14A has been inserted w.e.f A.Y. 2022-23. This inconsistent approach has led one to wonder whether the insertion of the Explanation is prospective and is applicable to A.Y. 2022-23 and onwards, while the amendment in s.14A(1) made applicable w.e.f. 1st April, 2022 has a retrospective applicability to pending proceedings on 1st April, 2022.

The amendment, by insertion of non-obstante clause in sub-section (1), is expressly made effective from 1st April, 2022; whereas in respect of the Explanation, as noted vide paragraph 5 of the Memorandum, it is written that the amendment will take effect on 1st April, 2022 and will accordingly apply in relation to A.Y. 2022-23 and subsequent assessment years.

The Explanation inserted in the section is worded as: ‘Section 14A shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the financial year and the expenditure has been incurred in relation to such exempt income.’ The provision seems to apply to past transactions as well, but the Memorandum makes it effective from A.Y. 2022-23 only.

Whether the provisions of s. 14A will have a retroactive application? Will the Explanation apply retrospectively even where the same has been expressly made affective from A.Y. 2022-23? Can the Explanatory Memorandum override the language of the law amended? Can there be a mistake in the Memorandum and if yes, can it be overlooked? Can it be said that the amendment in s. 14A by the Finance Act, 2022 by inserting an Explanation to s. 14A alters the position of law adversely for the assessee and hence, such an amendment cannot be held to be retrospective in nature? These are the questions that have arisen in a short span that have a serious impact on the adjudication of the assessments and appeals, and may lead to rectification, revision and reopening of the completed assessments.

The Delhi High Court, in the case of Moderate Leasing and Capital Services Pvt. Ltd in ITA 102/2018 dated 31/01/2018 held that disallowance u/s 14A should not exceed the exempt income itself; the SLP filed by the Revenue against this judgment was dismissed by the Supreme Court of India Special Leave Petition (Civil) Diary No(s). 38584/2018 dated 19/11/2018. Can such a finality be disturbed and reversed by the Explanation now inserted, even where the Explanation is not introduced with retrospective effect?

A proviso to s.14A inserted by the Finance Act, 2002, with retrospective effect from 11th May, 2001, prohibits an AO from reassessing an income u/s 147 or passing an order enhancing the assessment or reducing the refund u/s 154 for any assessment year up to 2001-02. No such express prohibition is provided for in respect of the application of the Explanation in question.

The CBDT vide Circular No. No. 5/2014, dated 11th February, 2014, had clarified the stand of the Government of India that the expenditure, where claimed, would be liable for disallowance even where the assessee has not earned any taxable income for the year. The Courts, in deciding the issue, have not followed the mandate of the Circular.

The incidental issue that has come up is about the application of Explanation to cases where some exempt income is earned during the year. It is argued that the Explanation would have no application in such cases in as much as the Explanation can apply only to cases where no exempt income has accrued or arisen or been received during the year.

It is important to appreciate the true nature of the Explanation; does it supply an obvious omission or does it clear up the doubts as to the meaning of the previous law. If yes, it could be considered as declaratory or curative and its retrospective operation is generally intended. Venkateshwara Hatcheries Ltd., 237 ITR 174 (SC). The other aspect that has to be considered in deciding the effective date of application is to determine whether the amendment levies a tax with retrospective effect; if yes, it’s retrospective application should be given only if the amendment is made expressly retrospective and not otherwise. Retrospectivity, in such a case, cannot be presumed. Thirdly, an amendment which divests an assessee of a vested right should be applied retrospectively with great discretion even where such an amendment is made expressly retrospective.

An explanatory, declaratory, curative or clarificatory amendment is considered by Courts to be retrospective. Allied Motors, 224 ITR 677 (SC). This is true so far as there prevailed a doubt or ambiguity and the amendment is made to remove the ambiguity and provide clarity. However, an amendment could not be retrospective even where it is labeled as clarificatory and for removal of doubts where there is otherwise no ambiguity or doubt. Vatika Township P. Ltd., 367 ITR 490 (SC). In provisions that are procedural in nature, it is not difficult to presume retrospective application. Even in such case the retrospectivity would be limited to the express intention. National Agricultural, 260 ITR 548 (SC).

Article 20 of the Constitution imposes two limitations on the retrospective applicability. Firstly, an act cannot be declared to be an offence for the first time with retrospective effect, and secondly, a higher penalty cannot be inflicted with retrospective effect.

A declaratory act is intended to remove doubts regarding the law; the purpose usually is to remove a doubt as to the meaning of an existing law or to correct a construction by Courts considered erroneous by the legislature. Insertion of an Explanation where intended to supply an obvious omission or clear up doubts as to the true meaning of the Act is usually retrospective. However, in the absence of the clear words indicating that the amendment is declaratory it would not be so construed when the pre-amended provision was clear and unambiguous. A curative amendment is generally considered to be retrospective in its operation. Lastly, the substance of the amendment is more important than its form. Agriculture Market Committee, 337 ITR 299 (AP) and Brij Mohan, 120 ITR 1 (SC).

The sum and substance emerging from the above discussion is that an amendment in law is retrospective when it is so provided and it is prospective when it is not so provided in express terms. Even a declaratory or a clarificatory amendment requires an express intention to make it retrospective. In other words, there is no presumption for an amendment to be considered as retrospective in nature, unless the amendment is procedural in nature.

The power of the legislature to make a retrospective amendment is not in question here. It is a settled position that an amendment can be made by the legislature with retrospective effect and when so made, it would always be presumed to have been made w.e.f. the date specified in the amendment, and would be enforced by the authorities in applying the law as amended. In many cases of amendments, it may be necessary to examine the scheme of the Income-Tax Act prevailing prior to the amendment and also subsequent to the amendments. Vijayawada Bottling Co. Ltd., 356 ITR 625 (AP).

The issue under consideration as noted is more complex or different; the Explanation inserted in s.14A is expressly made to be effective from 1st April, 2022 and is intended to apply to A.Y. 2022-23, onwards. Under the circumstances, on a first blush it would be correct to concur with the decisions of the Mumbai Bench and of the Delhi High Court, but for the fact that these decisions have not considered the intention of the legislature behind the amendment in detail, which is expressed in so many words in the Explanatory Memorandum. Importantly, they have not considered the express language of the Explanation, which reads as ‘the provisions of this section shall apply and shall be deemed to have always applied’.

The challenge here is to resolve the conflict that is posed on account of two contrasting expressions and terms used in the Explanation and in the Explanatory Memorandum. The Explanation in clear words provides for a retrospective application, while the Explanatory Memorandum applies the amendment prospectively. In such circumstances, the issue for consideration is whether the effect should be given to the express language of the Explanation or to the Explanatory Memorandum for determining the date of its application. The Guwahati Bench, is of the view that in such circumstances the Court should examine the true legislative intent instead of simply being swayed by the express mention of the effective date and assessment year in the Explanatory Memorandum. For this, the Bench has relied upon the decision in the case of Godrej & Boyce, Mfg. Co. Ltd., 328 ITR 81 (Bom.). The view that is canvased is that the mention of the date or the year in the Explanatory Memorandum is not sacrosanct or conclusive of the retrospective nature or otherwise of the amendment.

The Bombay High Court, in the case of Godrej & Boyce, Mfg. Co. Ltd., (supra.), relying on several decisions of the Supreme Court, had held that in determining the effective date of applying an amendment, the date from which the amendment was made operative did not conclusively decide the question and the Court has to examine the scheme of the statute prevailing prior to and subsequent to the amendment to determine whether an amendment was clarificatory or substantive and further, if it was clarificatory, it could be given a retrospective effect, and if it was substantive, it should be prospectively applied.

It further held that a clarificatory amendment was an expression of intent which the legislature had always intended to hold the field; such an amendment might be introduced in certain cases to set at rest divergent views expressed in decided cases on the true effect of a statutory provision. The Court accordingly held a legislative intent when clarified was to be regarded as declaratory of the law as it always stood and therefore be construed as retrospective provided the amendment did not bring about a substantive change in legal rights and obligations of the parties.

The Guwahati Bench of the Tribunal, taking a leaf from the above referred decision in the case of Godrej & Boyce, Mfg. Co. Ltd., 328 ITR 81 (Bom.), held that simply because the Explanatory Memorandum provided that the Explanation would apply from A.Y. 2022-23, the Explanation did not become prospective in nature and the adjudicating authorities were required to examine the true legislative intent for deciding the effective date of application of an amendment.

The Delhi High Court however, in the case of Pr CIT vs. ERA Infrastructure (India). Ltd. 327 CTR (Del) 489, has, in a cryptic order, recently held the Explanation to be prospective, holding that the amendment cannot be held to be retrospective if it changes the law as it earlier stood.

In our considered opinion, the effective date of application specified by the Explanatory Memorandum may not be taken as sacrosanct and final in all cases, unless the amendment has the effect of adversely disturbing the rights and obligations of the parties with retrospective effect. In other words, an attempt should be made by the Courts to determine independently the effective date of application where the law has been amended for removal of doubts or is expressly provided to be declaratory or clarificatory. In the case of the Explanation, on a bare reading of the language thereof, it is gathered that in express language it is provided that the amendment should always be read as if the same was always there by use of words ”the provisions of this section shall apply and shall be deemed to have always applied”. It is therefore, very respectfully noted that the Courts were required to examine whether the Explanation in question was retrospective or not without being summarily swayed by the effective date specified in the Explanatory Memorandum for holding that the amendment was prospective in nature and would not apply to assessment years up to A.Y. 2021-22. Having said that, it is fair to await the final view of the highest Court that is obtained on due consideration of the views expressed here. The situation is unique and demands discretion for conclusive views of the Apex Court.

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TDS — Compensation received on acquisition of land for public project under an agreement — Provisions of s. 96 of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 providing that no income-tax or duty shall be levied on any award or agreement made under Act except u/s 46 — Assessee not specific person u/s 46 — Compensation received by assessee not liable to deduction of tax at source — Deductor to file correction statement of tax deducted — Department to process statement — Tax deducted at source to be refunded accordingly

40 Seema Jagdish Patil vs. National Hi-Speed Rail Corporation Ltd. and Ors
[2022] 445 ITR 382 (Bom.)
Date of order: 9th June, 2022
Ss. 139, 194-IC, 194L, 200(3) proviso, 200A(d) and 237 of ITA, 1961 and ss. 46, 96 of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013

TDS — Compensation received on acquisition of land for public project under an agreement — Provisions of s. 96 of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 providing that no income-tax or duty shall be levied on any award or agreement made under Act except u/s 46 — Assessee not specific person u/s 46 — Compensation received by assessee not liable to deduction of tax at source — Deductor to file correction statement of tax deducted — Department to process statement — Tax deducted at source to be refunded accordingly

NHRCL acquired the land of the assessee purportedly under an agreement and deducted tax at source from the compensation paid. Thereafter, a supplementary deed was entered into between the assessee, and NHRCL under which some additional amount was paid to the assessee and tax was deducted from that part of the compensation also. The assessee requested NHRCL to reverse the tax deducted on the ground that no tax was deductible. NHRCL replied that tax exemption did not apply to the compensation on the land acquired from the assessee and that the tax deducted from the payment made to the assessee was duly deposited with the Department. According to the assessee, her income was exempted from tax, and she could not fill Schedule TDS-2 and hence could not make an application u/s 199 of the Income-tax Act, 1961 read with rule 37BA(3)(i)
of the Income-tax Rules, 1962 whereas according to NHRCL the assessee had to file a return and claim the refund.

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

“i) The CBDT under Circular No. 36 of 2016, dated October 25, 2016 ([2016] 388 ITR (St.) 48) has clarified that “the matter has been examined by the Board and it is hereafter clarified that compensation received in respect of award or agreement which has been exempted from levy of Income-tax by section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 shall not be taxable under the provisions of the Income-tax Act, 1961”. It also recognizes acquisition by award or agreement. Section 96 of the 2013 Act unequivocally provides that no Income-tax or duty shall be levied on any award or agreement made under the Act except u/s. 46 of the 2013 Act which applies to the specified persons. Specified person includes any person other than (i) appropriate Government (ii) Government company (iii) association of persons or trust or society as registered under the Societies Registration Act, wholly or partially aided by the appropriate Government or controlled by the appropriate Government.

ii) The proviso to section 200(3) of the 1961 Act provides that the person may also deliver to the prescribed authority the correction statement for rectification of any mistake in the statement delivered under the sub-section in such form and verified in such manner as may be verified by the authority. Clause (d) of sub-section (1) of section 200A of the 1961 Act, inter alia, provides for determination of the sum payable by or the amount of refund due to the deductor.

iii) The income received by the assessee on account of the property acquired by NHRCL by private negotiations and sale deed was exempted from tax. According to the public notice issued for acquisition of land through direct purchase and private negotiations by the office of the Sub-Divisional Officer for implementing the project, while purchasing the land directly for the project the compensation would be fixed by giving 25 per cent. enhanced amount of the total compensation being calculated for the land concerned in terms of the provisions of sections 26 to 33 and Schedule I to the 2013 Act. Undisputedly, the land was acquired for a public project. A policy decision had been taken by the State Government under its Government Resolution dated May 12, 2015 for acquiring the property by private negotiations and purchases for implementation of public project. The methodology was also provided. The computation of compensation had to be under the provisions of the 2013 Act which was introduced to expedite the acquisition for the implementation of the project. If the parties would not agree with the negotiations and direct purchase, then compulsory acquisition under the provisions of the 2013 Act had to be resorted to. The 2013 Act also recognised the acquisition through an agreement. NHRCL was not a specified person within the meaning of section 46 of the 2013 Act and the provisions of the section would not be attracted. Therefore, since the exemption u/s. 96 of the 2013 Act would apply and no tax can be levied on the amount of compensation NHRCL should not have deducted tax from the amount of compensation paid to the assessee.

iv) It was not possible for the court to arrive at a conclusion as to whether the assessee was required to file return or not. NHRCL had already deducted tax which it ought not to have been deducted. Therefore, (i) NHRCL should file a correction statement as provided under the proviso to sub-section (3) of section 200 of the 1961 Act to the effect that the tax deducted by it was not liable to be deducted, (ii) the Department shall process the statement including the correction statement that might be filed u/s. 200A more particularly clause (d) thereof and (iii) the parties should thereafter take steps for refund of the amount in accordance with the provisions of the 1961 Act and the 1962 Rules.”

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Survey — Impounding of documents — Retention of such documents — Effect of s. 131 — Retention beyond fifteen days only after approval of higher authority named in provision — Decision should be communicated to assessee

39 Muthukoya T. vs CIT
[2022] 445 ITR 450 (Ker.)
A.Ys.: 2007-08 to 2011-12
Date of order: 18th May, 2022
S. 131 of ITA, 1961

Survey — Impounding of documents — Retention of such documents — Effect of s. 131 — Retention beyond fifteen days only after approval of higher authority named in provision — Decision should be communicated to assessee

As part of Income-tax survey operations, the petitioner’s premises was inspected on 17th February, 2010, and on issuing summons to him to produce books of account and other original documents, the petitioner produced various documents which were impounded u/s 131(3) of the Income-tax Act, 1961. Subsequently, the petitioner filed his returns and cleared the entire Income-tax dues in 2010 itself. However, the authorities did not return the original documents impounded by them. The petitioner, therefore, filed a writ petition requesting a direction for returning the documents. It was pleaded that despite the request for the return of the original document of title, the respondents have, under one pretext or the other, delayed returning the document. The petitioner also asserted that the respondents had informed that they misplaced the documents and that the same would be returned after tracing it out. According to the petitioner, the respondents cannot hold on to the documents indefinitely and that such an action is illegal and contrary to the principles of equality enshrined under article 14 of the Constitution of India.

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

“i) U/s. 131(3) of the Income-tax Act, 1961, the documents impounded can be retained in the custody of the Income-tax Department beyond 15 days only after obtaining the approval of the Principal Chief Commissioner or other officers named in the sub-section. Apart from obtaining orders of approval from the officers to retain the documents, there is an added obligation upon the Department to communicate the orders to the assessee to enable retention of documents beyond the period specified in the said sub-section.

ii) Documents impounded u/s. 131 had been retained beyond the period of fifteen days. No approval had been obtained by the Department from any of the officers mentioned in section 131(3) of the Act. Therefore, the respondents could not under any circumstances retain the documents of title of the assessee.

iii) In view of the above, the respondents have acted illegally and with material irregularity in retaining the documents of title belonging to the petitioner. Accordingly, the respondents are directed to return the original sale deed bearing No. 3561 of 2008 executed before the Sub-Registrar’s office, Ernakulam to the petitioner within an outer period of 30 days from the date of receipt of a copy of this judgment.”

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Reassessment — Notice u/s 148 — Limitation — Law applicable — Constitutional validity of provisions — Effect of enactment of s. 148A with effect from 01/04/2021 — Notifications extending time limit for notices u/s 148 up to 30/06/2021 — Notifications not valid — Notice u/s 148 issued on 30/06/2021 — Not valid

38 Mohammed Mustafa vs. ITO
[2022] 445 ITR 608 (Kar.)
A.Y.: 2016-17
Date of order: 18th April, 2022
Ss. 148 and 148A of ITA,1961

Reassessment — Notice u/s 148 — Limitation — Law applicable — Constitutional validity of provisions — Effect of enactment of s. 148A with effect from 01/04/2021 — Notifications extending time limit for notices u/s 148 up to 30/06/2021 — Notifications not valid — Notice u/s 148 issued on 30/06/2021 — Not valid

The petitioner filed the return of income for A.Y. 2016-17 on 30th July, 2016 and declared a total income of Rs. 7,84,730. The petitioner thereafter received a notice dated 30th June, 2021 u/s 148 of the Income-tax Act, 1961 for A.Y. 2016-17.

The petitioner assessee filed a writ petition and challenged the validity of the notice. The Karnataka High Court allowed the writ petition and held as under:

“i) It is a cardinal principle of law that the law which has to be applied is the law in force in the assessment year unless otherwise provided expressly or by necessary implication. When the statute vests certain power in an authority to be exercised in a particular manner, the authority is required to exercise such power only in the manner provided therein.

ii) Substitution of a provision results in repeal of the earlier provision and its replacement by the new provision. Substitution thus combines repeal and fresh enactment. Therefore, the amended provisions of section 148A of the Income-tax Act, 1961 would apply in respect of notices issued with effect from April 1, 2021 and the erstwhile provisions of sections 147 to 151 of the Act, cannot be resorted to as, they have been repealed by the amending Act, viz., the 2020 Act. Even otherwise, no saving clause has been provided in the Act for saving the erstwhile provisions of sections 147 to 151 of the Act.

iii) The CBDT issued Notification No. 20 of 2021 dated March 31, 2021 ([2021] 432 ITR (St.) 141) and extended the time limit for issue of notice u/s. 148 of the Act from March 31, 2021 to April 30, 2021. Another Notification No. 38 of 2021 dated April 27, 2021 ([2021] 434 ITR (St.) 11) was issued u/s. 3(1) of the Act by the Central Government, by which time limit for issuance of notice u/s. 148 of the 1961 Act was further extended from April 30, 2021 to June 30, 2021.

iv) The notifications dated March 30, 2021 and April 27, 2021, are clearly beyond the authority delegated to the Central Government under the 2020 Act to issue notifications extending time limits for various actions and compliances. By means of the Explanations, the Central Government extended the operation of sections 148, 149 and 151 prior to their amendment by the Finance Act, 2021 and sought to revive the non-existent provisions which is clearly beyond its authority. Therefore, the Explanations contained in the notifications dated March 30, 2021 and April 27, 2021 are liable to be struck down as ultra vires the 2020 Act.

v) The validity of a notice has to be adjudged on the basis of law as existing on the date of notice. The notice u/s. 148 dated June 30, 2021 was invalid and had to be struck down. The notice was not valid.”

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Offences and prosecution — Wilful attempt to evade tax — Presumption of culpable mental state u/s 278E — Self-assessment return filed — Delay in paying tax — Tax and interest thereon paid before complaint filed — Prosecution malicious and invalid

37 Mrs. Noorjahan and Ors. vs. Dy. CIT
[2022] 445 ITR 17 (Mad.)
A.Y.: 2017-18
Date of order: 26th April, 2022
Ss. 276C and 278E of ITA, 1961

Offences and prosecution — Wilful attempt to evade tax — Presumption of culpable mental state u/s 278E — Self-assessment return filed — Delay in paying tax — Tax and interest thereon paid before complaint filed — Prosecution malicious and invalid

M/s. AMK Solutions Pvt. Limited is the assessee. For A.Y. 2017-18, the assessee company filed a return of income on 31st October, 2017. However, the tax admitted to be payable was not remitted by the assessee along with the return, which is the requirement of the law u/s 140A of the Income-tax Act, 1961. Thereafter, after a delay of 4½ months, the assessee remitted a sum of Rs. 6,85,462 towards the tax and interest payable. However, the Income-tax Department filed complaints against the assessee company and the directors for prosecution for offences u/s 276C(2), alleging that the petitioners have wilfully attempted to evade payment of Income-tax for A.Y. 2017-18.

The assessee company and the directors filed criminal writ petitions challenging the validity of complaints and requesting discharge. It was pointed out that the tax payable by the petitioners for A.Y. 2017-18 was paid well before the issuance of show-cause notice, and the same was intimated to the authorities. Without applying mind and not considering the payment of tax with interest, sanction to prosecute was granted, and the private complaint came to be filed suppressing the factum of tax payment much prior to sanction to prosecute. That, there is a lack of ingredients to prosecute the petitioners u/s 276C(2), besides suppression of fact and non-application of mind. The Madras High Court allowed the writ petitions and held as under:

“i) Wilful attempt to evade any tax, penalty or interest chargeable or imposable u/s. 276C of the Income-tax Act, 1961, is a positive act on the part of the assessee which is required to be proved to bring home the charge against the assessee. A “culpable mental state” which can be presumed u/s. 278E of the Act would come into play only in a prosecution for any offence which requires a culpable mental state on the part of the assessee. Section 278E of the Act is really a rule of evidence regarding existence of mens rea by drawing a presumption though rebuttable. That does not mean that the presumption would apply even in a case wherein the basic requirements constituting the offence are not disclosed. More particularly, when the tax is paid much before the process for prosecution is set into motion. The presumption can be applied only when the basic ingredients which would constitute any offence under the Act are disclosed. Then alone would the rule of evidence u/s. 278E of the Act regarding rebuttable presumption as to existence of culpable mental state on the part of accused come into play.

ii) There was no concealment of any source of income or taxable item, inclusion of a circumstance aimed to evade tax or furnishing of inaccurate particulars regarding any assessment or payment of tax. What was involved was only a failure on the part of the assessee to pay the tax in time, which was later on paid after 4½ months along with interest payable. So, it would not fall under the mischief of section 276C of the Act, which requires an attempt to evade tax and such attempt must be wilful. If the intention (culpable mental state) of the assessees was to evade tax or attempt to evade tax, they would not have filed the returns in time disclosing the income and the tax liable to be paid. They would not have remitted the tax payable with interest without waiting for the authorities to make demand or notice for prosecution. Thus, except a delay of 4½ months in payment of tax, there was no tax evasion or attempt to evade the payment of tax.

iii) To invoke the deeming provision, there should be a default in payment of tax in true sense. The Principal Commissioner who had accorded sanction on March 14, 2019 had not considered the payment of tax with interest by the assessee on February 15, 2018. Further the Principal Commissioner had conspicuously omitted to record the fact of payment of tax with interest except to record that the tax was not paid within time. Thus, the suppression of material facts, intentional suggestion of falsehood and non-application of mind went to show that this was a malicious prosecution initiated by the Income-tax authorities by abusing the power. When the mala fides were patently manifested, the assessees need not be forced to undergo the ordeal of trial. The complaint was quashed.”

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Income from other sources — Deductions — Scope of s. 57(iii) — Not necessary that expenses should have resulted in income — Sufficient if nexus is established between expenses and income

36 West Palm Developments LLP vs. ACIT
[2022] 445 ITR 511 (Kar.)
A.Y.: 2009-10
Date of order: 19th November, 2021
S. 57(iii) of ITA, 1961

Income from other sources — Deductions — Scope of s. 57(iii) — Not necessary that expenses should have resulted in income — Sufficient if nexus is established between expenses and income

The assessee was engaged in development and purchased, sold, constructed and leased properties. The assessee was sanctioned a loan on 26th September, 2008 for a sum of Rs. 35 crores from the Union Bank of India. The assessee paid a sum of Rs. 33,50,00,000 to P as an advance towards the purchase of properties by cheques dated 30th September, 2008 and 13th October, 2008. However, because of adverse market conditions, the assessee withdrew from the transaction and requested P to refund the earnest money. P refunded the earnest money by cheques dated 23rd October, 2008 and 29th October, 2008. The assessee thereafter lent money to other shareholders and made inter-corporate deposits to the tune of Rs. 35,62,450 for which total interest earned was to the extent of Rs. 2,02,52,131 as against the interest of Rs. 2,84,47,557 paid on loans. The assessee filed the return of income for A.Y. 2009-10, declaring income of Rs. 5,34,23,338 after claiming a loss of Rs. 81,95,426 under the head “Income from other sources”, which was arrived at after reducing the interest payable on the loan of Rs. 2,84,47,557 against the interest income of Rs. 2,02,52,131 earned from inter-corporate deposits and loans to shareholders u/s 57(iii) of the Act. The Assessing Officer disallowed the claim for deduction/set-off of the loss of Rs. 81,95,426.

The Commissioner (Appeals) upheld the order. The Tribunal dismissed the assessee’s appeal.

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

“i) Section 57(iii) of the Income-tax Act, 1961, mandates that income chargeable under the head “Income from other sources” shall be computed after making a deduction of 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. Section 57(iii) of the Act does not require that the expenditure incurred is deductible only if the expenditure has resulted in actual income. As long as the purpose of incurring expenditure is to earn income, the expenditure would have to be allowed as a deduction u/s. 57(iii) of the Act. U/s. 57(iii) of the Act a nexus between the expenditure and income has to be established.

ii) On the facts and circumstances of the case, the assessee was entitled to deduction u/s. 57(iii) of the Act. In any case, the Tribunal exceeded its jurisdiction in disallowing the entire interest expenditure as the power of the Tribunal was limited to passing an order in respect of subject matter of the appeal.”

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Capital gains — Transfer — Law applicable — Effect of amendment of Transfer of Property Act in 2001 — Agreement for sale of property which is not registered — No transfer of property within meaning of s. 2(47) of Income-tax Act — No liability to pay capital gains tax

35 Principal CIT vs. Shelter Project Ltd.
[2022] 445 ITR 291 (Cal.)
A.Y.: 2009-10
Date of order: 4th February, 2022
S. 2(47) of ITA, 1961 and s. 53A of Transfer of Property Act, 1882

Capital gains — Transfer — Law applicable — Effect of amendment of Transfer of Property Act in 2001 — Agreement for sale of property which is not registered — No transfer of property within meaning of s. 2(47) of Income-tax Act — No liability to pay capital gains tax

Pursuant to an unregistered agreement, possession of the property was handed over by the assessee to a company engaged in developing housing projects wholly owned by the State of West Bengal. The question before the Assessing Officer (AO) was as to whether this amounted to transfer u/s 2(47)(v) of the Income-tax Act, 1961 and whether capital gain tax was attracted? The AO held that the transaction amounted to transfer and assessed capital gains to tax.

The Tribunal took note of the factual position and, more particularly, that the case arose much after the amendment to section 53A of the Transfer of Property Act which was amended by the Amendment Act, 2001, which stipulates that if an agreement like a joint development agreement is not registered, then it shall have no effect in law for the purposes of section 53A of the Transfer of Property Act. Accordingly, the assessee’s appeal was allowed, and the addition was deleted.

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

“i) The Transfer of Property Act, 1882 was amended by the Registration and Other Related Laws (Amendment) Act, 2001 which stipulates that if an agreement such as a joint development agreement is not registered, it shall have no effect in law for the purposes of section 53A of the 1882 Act. The Supreme Court in CIT vs. BALBIR SINGH MAINI [2017] 398 ITR 531 (SC), held that in order to qualify as a “transfer” of a capital asset u/s. 2(47)(v) of the Income-tax Act, 1961 there must be a ”contract” which can be enforced in law u/s. 53A of the 1882 Act. The expression “of the nature referred to in section 53A” in section 2(47)(v) was used by the Legislature ever since sub-clause (v) was inserted by the Finance Act of 1987, with effect from April 1, 1988. All that is meant by this expression is to refer to the ingredients of applicability of section 53A to the contracts mentioned therein. This expression cannot be stretched to refer to an amendment that was made years later in 2001, so as to then say that though registration of a contract is required by the 2001 Act, yet the aforesaid expression “of the nature referred to in section 53A” would somehow refer only to the nature of contract mentioned in section 53A, which would then in turn not require registration. There is no contract in the eye of law in force u/s. 53A after 2001 unless the contract is registered.

ii) Since the development agreement was not registered, it would have no effect in law for the purposes of section 53A which bodily stood incorporated in section 2(47)(v) of the Income-tax Act, 1961. Thus, the Tribunal was right in allowing the assessee’s appeal and granting the relief sought for, namely deletion of the addition to income of the consideration received on transfer of land for development.”

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Late payment charges and service tax do not attract TDS and consequently payment of these amounts without deduction of tax at source does not attract provisions of s.40(a)(ia).

27 Prithvi Outdoor Publicity LLP vs. CIT(A)
ITA No. 1013/Ahd./2019 (Ahd.-Trib.)
A.Y.: 2013-14
Date of order: 29th June, 2022
Section: 40(a)(ia)

Late payment charges and service tax do not attract TDS and consequently payment of these amounts without deduction of tax at source does not attract provisions of s.40(a)(ia).

FACTS
The Assessee incurred advertisement expenditure and made a payment of Rs. 2,27,56,222 to Andhra Pradesh Road Transport Corporation (APRTC). Out of Rs. 2,27,56,222, the Assessee deducted TDS on Rs. 2,17,08,097 and balance Rs. 10,48,125 was paid without deduction of tax. Payment of Rs. 10,48,125 on which no tax was deducted comprised Rs. 9,77,429 paid towards late fees and the balance of Rs. 1,16,155 towards service tax. The Assessee contended that since there is no provision to deduct tax on late fees and service tax, the said amount could not be disallowed u/s 40(a)(ia). Further, since the amount was penal in nature, no tax could be deducted on the same. Lastly, the Assessee contended that the recipient, i.e. APRTC, had included the said payment of Rs. 10,48,125 in its income and offered the same for tax; no disallowance could be made u/s 40(a)(ia).

The Assessing Officer, however, invoked the provisions of s.40(a)(ia) with respect to the payment of Rs. 10,48,125 made without deduction of tax at source.

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 held that the TDS provisions did not apply to late fees and service tax, and therefore disallowance u/s 40(a)(ia) could not be made.

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Conditions imposed by CIT, at the time of registration, with respect to conduct of the trust and circumstances in which registration can be cancelled, vacated by the Tribunal on the ground that the scheme of law does not visualise these conditions being part of the scheme of registration being granted to the applicant trust.

26 Bai Navajbai Tata Zoroastrian Girls School vs. CIT(E)
[2022] 141 taxmann.com 62 (Mum.-Trib.)
A.Ys.: 2022-23 to 2026-27
Date of order: 29th July, 2022
Section: 12A

Conditions imposed by CIT, at the time of registration, with respect to conduct of the trust and circumstances in which registration can be cancelled, vacated by the Tribunal on the ground that the scheme of law does not visualise these conditions being part of the scheme of registration being granted to the applicant trust.

FACTS
The Assessee is a charitable trust who had applied for registration u/s 12A of the Income-tax Act, 1961 (“the Act”). The CIT granted registration to the Assessee u/s 12A subject to certain conditions. That is, while passing the order granting registration to the Assessee, the CIT imposed certain conditions, which, inter alia, are as follows:

The Trust/Institution should quote the PAN in all its communications with the Department.

The registration does not automatically confer any right on the donors to claim deduction u/s 80G.

No change in the terms of Trust Deed/Memorandum of Association shall be effected without the due procedure of law, and its intimation shall be given immediately to the Office of the Jurisdictional Commissioner of Income Tax. The registering authority reserves the right to consider whether any such alteration in objects would be consistent with the definition of “charitable purpose” under the Act and in conformity with the requirement of continuity of registration.

The Trust/ Society/Non-Profit Company shall maintain accounts regularly and get these accounts audited in accordance with the provisions of s.12A(1)(b) of the Act.

Separate accounts in respect of profits and gains of business incidental to attainment of objects shall be maintained in compliance with s.11(4A) of the Act.

All public money received including for Corpus or any contribution shall be routed through a bank account whose number shall be communicated to the Office of the Jurisdictional Commissioner of Income Tax.

The Assessee observed that all the conditions imposed in the order granting registration were the conditions which formed the reasons for which registration of the trusts is cancelled, and therefore the conditions were not valid. The Assessee challenged the said order of the Commissioner on the ground that the provisions of the Act do not provide for conditional registration u/s 12A, and in the absence of such provision under the Act, the Commissioner was not justified in imposing conditions upon the Assessee.

HELD

On appeal, the Tribunal held as follows:

The finding regarding the objects of the trust and the genuineness of the trust’s activities cannot be conditional.

The expression “compliance of the requirements under item (B), of sub-clause (i) (i.e. the compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects)” is applicable to conditions precedent, say for example obtaining under FCRA which is under process, the Commissioner may grant registration subject to FCRA registration being obtained by the Assessee.

The conditions which the Commissioner imposed had the sanction of the law. That is, irrespective of such conditions being imposed by the Commissioner, the conditions found place in the law and the conditions imposed by the Commissioner could not be said to have the force of the law.

The Commissioner has a limited role, and can call for documents or information or make inquiries. The Commissioner cannot decide how and for what reasons the registration has to be cancelled, that too at the time of registration. The Commissioner, therefore, could not have supplemented the conditions by laying down conditions at the time of granting the registration.

Conditions attached to registration must be tested on the scheme of law, and the conditions imposed by the Commissioner did not find the force of law.

The observations of the Commissioner regarding the conduct of the Assessee trust could not be construed as legally binding in the sense that non-compliance with such guidance will not have any consequence beyond what is stated under the provisions of the Act. Further, the Tribunal also held that the implications of not doing what is set out in the conditions imposed by the Commissioner would not remain confined to the cancellation of registration when the law stipulates much harsher consequences.

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Intricate Issues in Tax Audit

INTRODUCTION
Since the provision for audit u/s 44AB of the Income-tax Act was introduced in 1984, it has occupied centre stage of activity for many CAs in practice. Popularly, it is referred to as Tax Audit. After nearly four decades, while the original provisions and forms may look simple, the task of conducting a tax audit has always been complex. While in earlier years, the complexities revolved around getting the client to prepare proper financial statements from manually maintained accounting records, today, the challenge is getting the client to compile the voluminous details before auditing and reporting these in the complex online utilities.

Before we get into some of the issues one has to tackle while forming a view and reporting on the same; it is important to understand the objective behind the introduction of Tax Audit. The scope and effect of section 44AB were explained by the CBDT in Circular No. 387, dated 6th July, 1984 [(1985) 152 ITR St. 11] in para 17, as under:

“17.2 A proper audit for tax purposes would ensure that the books of accounts and other records are properly maintained, that they faithfully reflect the income of the taxpayer and claims of deduction are correctly made by him. Such audit would also help in checking fraudulent practices. It can also facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities and considerably saving the time of assessing officers in carrying out routine verifications, like checking correctness of totals and verifying whether purchases and sales are properly vouched or not. The time of the assessing officers thus saved could be utilised for attending to more important investigational aspects of a case.”

The reporting complexities have been continuously increasing over the years, and it is evident from the fact that after the introduction of the forms in 1984, the first major change in reporting happened in 1999, after almost 15 years. The changes in the law and forms have become more frequent thereafter. At times, the reporting requirements travel beyond mere furnishing of particulars. The most glaring example is clause 30C(a), which requires the auditor to report on whether the assessee has entered into an impermissible avoidance arrangement.

The Institute of Chartered Accountants’ of India has been providing guidance to the members in the form of Guidance Notes and other pronouncements from time to time. The 2022 revised edition of The Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961 – A.Y. 2022-23 (the GN) has been recently published.

We may turn our attention to some of the important matters when it comes to reporting in Form Nos. 3CA / 3CB / 3CD.

REPORTING CONSIDERATIONS
As per section 145, an assessee has an option to follow cash or mercantile system of accounting. Under clause 13(a) of Form 3CD, the assessee has to state the method of accounting it follows. As stated in para 11.6 of the GN, Accounting Standards (AS) also apply to financial statements audited u/s 44AB, and members should examine compliance with mandatory Accounting Standards when conducting such audits. Further, as per para 13.9 of the GN, normal Audit Procedures will also apply to a person who is not required by or under any other law to get his accounts audited. Where in the case of an assessee, the law does not prescribe any specific format or requirements for the preparation and presentation of financial statements, the ICAI has recently published ‘Technical Guide on Financial Statements of Non-Corporate Entities’ and ‘Technical Guide on Financial Statements of Limited Liability Partnerships’.

The following matters need to be kept in mind while furnishing an audit report, especially under Form No. 3CB:

(a) Assessee’s responsibility and Tax Auditor’s responsibility paragraphs have to be included at appropriate places in both Form No. 3CA and Form No. 3CB, as the case may be. The illustrations of the same are given in para 13.11 of the GN.

(b) If an assessee follows the cash system of accounting in accordance with section 145, then the said fact must be mentioned in Form No. 3CB while drawing attention to the notes included in the financial statements, if any.

(c) In case the financial statements of an assessee are otherwise not required to be prepared or presented in any particular format by any law, and if the ‘Technical Guide on Financial Statements of Non-Corporate Entities’ or ‘Technical Guide on Financial Statements of Limited Liability Partnerships’, as applicable, is not followed, then the said fact should be included as an observation.

PAYMENT OR RECEIPT LESS THAN 5% IN CASH IN CASE OF ELIGIBLE ASSESSEE COVERED BY SECTION 44AD
With effect from A.Y. 2020-21, a proviso was inserted to section 44AB(a), whereby a relaxation from getting accounts audited was provided to certain assessees. Thus, an assessee, having sales, turnover or gross receipts below Rs. 10 crores, whose aggregate of all receipts or payments in cash (including non account-payee cheques / bank drafts) does not exceed five per cent of the sales, turnover or gross receipts, is not required to get its accounts audited u/s 44AB(a).

U/s 44AD(4) if an eligible assessee, who has declared profit for any earlier year in accordance with section 44AD, chooses to declare profit less than that prescribed in section 44AD(1) in any of the succeeding 5 years and his income exceeds the maximum amount which is not chargeable to tax, then he is liable to get his accounts audited u/s 44AB(e) r.w.s. 44AD(5).

The issue that arises for consideration is whether the benefit provided in the proviso to section 44AB(a) would also apply to assessees covered u/s 44AB(e). The objective of increasing the said limit, as stated, was to reduce the compliance burden on small and medium enterprises. Even the Finance Minister, in her speech, had said – “In order to reduce the compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, I propose to raise by five times (in Finance Act raised to Rs. 10 crores) the turnover threshold for audit ….”.

However, the stated object of the amendment and law ultimately introduced in this regard are at variance. It does not appear to encompass eligible assessees covered u/s 44AD by not extending the said proviso to section 44AB(e). Thus, reference to small retailers, traders, and shopkeepers in the Finance Minister’s speech is rendered meaningless, as they are the ones who are actually covered as eligible assessees u/s 44AD.

TURNOVER FROM SPECULATIVE TRANSACTIONS AND DERIVATIVES, FUTURES & OPTIONS
Determination of turnover or gross receipts from Speculative Transactions as well as from Derivatives, Futures & Options has been a subject matter of many lengthy discussions. The GN has dealt with the subject and provided the following guidance in paras 5.14(a) and (b) for determination of turnover for applicability of section 44AB. In either case, the determination would be as under:

(a) Speculative Transactions: These are transactions in respect of commodities, shares or stocks etc., that are ultimately settled otherwise than by actual delivery. In such cases, transactions are recognised in the books of account on net basis of difference earned or loss incurred. According to the GN, the sum total of such differences earned or loss incurred, i.e. total of both the positives and negatives has to be taken into consideration for determination of turnover.

(b) Derivatives, Futures & Options: These transactions are also settled, on or before the strike date, without actual delivery of the stocks or commodities involved. In such cases, the total of all favourable and unfavourable outcomes should be taken into consideration for determining turnover along with the premium received on the sale of options (unless included in determining net profit from transaction). The GN also states that differences on reverse trades would also form part of the turnover.

INTEREST AND REMUNERATION RECEIVED BY A PARTNER IN A FIRM
The applicability of provisions of section 44AB to receipt of interest and remuneration by a partner in a firm has been a matter of some litigation in the context of levy of penalty u/s 271B. There have been judgements of the ITAT both in favour and against. This issue came up before the Hon. Bombay High Court recently in Perizad Zorabian Irani vs. Principal CIT [(2022) 139 taxmann.com 164 (Bombay)] wherein it is held that:

“Where assessee was only a partner in a partnership firm and was not carrying on any business independently, remuneration received by assessee from said partnership firm could not be treated as gross receipts of assessee and, accordingly, assessee was justified in not getting her accounts audited under section 44AB with respect to such remuneration.”

In coming to the above conclusion, the High Court relied on the judgement of Hon. Madras High Court in Anandkumar vs. ACIT [(2021) 430 ITR 391 (Mad)]. The case before the Madras High Court was of an assessee who had declared presumptive income u/s 44AD at 8% of the remuneration and interest earned from the partnership firm. The Assessing Officer had disallowed the claim of benefit u/s 44AD while holding that the assessee was not carrying on business independently but as a partner in the firm, and receipts on account of remuneration and interest from firms cannot be construed as gross receipts as mentioned in section 44AD.

Thus, two important points emerge from the above discussion:

(a) Remuneration and Interest in excess of Rs. 1 crore would not make a partner of a firm liable to tax audit u/s 44AB, and

(b) Benefit of section 44AD is not available in respect of remuneration and interest received by a partner from a partnership firm.

INCOME COMPUTATION AND DISCLOSURE STANDARDS (ICDS)
Reporting under this clause assumes great significance as, most of the time, assessees are not fully aware of the said standards. Two important matters to note from an auditor’s perspective are:

(i) If financial statements are prepared and presented by following the Accounting Standards, as discussed in Reporting Considerations herein before, then there might be some items of adjustments under ICDS and accordingly need reporting under clause 13 of Form No. 3CD, and

(ii) If the ICDS are followed in the preparation and presentation of financial statements, especially in the case of non-corporate assessees or LLPs, then there would be a need for qualifications in Form No. 3CB, where the Accounting Standards are not followed.

Generally, one will have to take into consideration the following important items, amongst others, in respect of the following ICDS:

ICDS	Subject	Matters for consideration
ICDS – I	Accounting Policies	• Impact of changes in accounting policies • Marked to market profit / losses
ICDS – II	Valuation of Inventories	• Inclusive vs. Exclusive • Borrowing Costs • Time value of money • Clause 14(b)
ICDS – IV	Revenue Recognition	• Performance Obligations • Provision for sales returns
ICDS – V	Tangible Fixed Assets	• Borrowing Cost • Forex gain / loss treatment • Clause 18
ICDS – VI	Effects of Changes in Foreign Exchange Rates	• Cash flow hedges • Marked to market profit / losses
ICDS – VIII	Securities	• Average cost vs. Bucket Approach
ICDS – IX	Borrowing Costs	• Inventories • Fixed Assets

ICDS

Subject

Matters for consideration

ICDS – I

Accounting Policies

• Impact of changes in accounting policies

• Marked to market profit / losses

ICDS – II

Valuation of Inventories

• Inclusive vs. Exclusive

• Borrowing Costs

• Time value of money

• Clause 14(b)

ICDS – IV

Revenue Recognition

• Performance Obligations

• Provision for sales returns

ICDS – V

Tangible Fixed Assets

• Borrowing Cost

• Forex gain / loss treatment

• Clause 18

ICDS – VI

Effects of Changes in Foreign Exchange
Rates

• Cash flow hedges

• Marked to market profit / losses

ICDS – VIII

Securities

• Average cost vs. Bucket Approach

ICDS – IX

Borrowing Costs

• Inventories

• Fixed Assets

Some of the above matters are covered for reporting under other clauses also. At times such multiple reporting results in further adjustments in the intimations received u/s 143(1).

1. Certain adjustments in respect of inventories relating to taxes, duties etc., are reported, as per ICDS II, under clause 13(e), as well as in clause 14(b) for reporting deviation from section 145A. When intimation u/s 143(1) is received, it is noticed that there are double additions made if the same item is reported in two different clauses as per the reporting requirements. It is difficult to prescribe any particular method of reporting in such a matter. However, one may take a practical view and report such adjustments in clause 14(b) as it is directly arising from the provision of law rather than under clause 13(e), which comes from the requirement of delegated legislation in the form of ICDS. Of course, whatever manner of reporting is adopted by the assessee, it would be prudent to disclose the same in para 3 of Form No. 3CA or para 5 of the Form No. 3CB, as the case may be.

2. In cases of proprietary concerns, along with business affairs, many times other personal details are also reported in the financial statements. If the proprietor is following the mercantile system of accounting and is also earning some other incomes, which are credited directly to the capital account, then clause 13(d) is attracted. It may be remembered that ICDS also apply to the computation of income under the head ‘Income from Other Sources’. Clause 13(d) is attracted if any adjustments are required to be made to the profit or loss for complying with ICDS. The scope of ICDS also extends to the recognition of revenue arising from the use by others of the person’s resources yielding interest, royalties or dividends. Similarly, under clause 16, amounts not credited to the profit and loss account are required to be reported. Under clause (d) of the said clause, ‘any other item of income’ is to be reported.

This particular reporting has been causing some problems again in intimations received where the said amount, though declared as income from other sources, is added to business income.

To deal with such a problem, the correct course of action would be to segregate personal financial affairs from business affairs. However, where such segregation is not possible for some good reasons, then probably the assessee may have to make a choice of reporting or not reporting the same. The auditor, in turn, would have to disclose such fact as a qualification under clause 5 of Form No. 3CB if not reported. If reported, then probably, an explanation would need to be included at the appropriate place, probably along with other documents that are uploaded along with the financial statements.

One may face such situations in respect of other items also. As an auditor, it may be a good practice to disclose such fact/s in clause 3 of Form No. 3CA or clause 5 of Form No. 3CB, as the case may be. Such disclosure may simply be an observation or a qualification, also at times depending on the facts and circumstances of a given case.

CHANGES IN PARTNERSHIP
In clause 9(b), in respect of Partnership Firms or Association of Persons, changes in the partnership or members or in their profit-sharing ratio are required to be reported. There has been a major change in provisions of section 45(4) w.e.f. 1st April, 2021. Any profits or gains arising from receipt of money or capital asset by a partner because of reconstitution of partnership firm is chargeable to tax, and such tax has to be paid by the firm.

While there is no separate reporting required in Form 3CD of such gains, one will have to take the above into account to ensure that due payment or provision for tax is made in the books of account. In such cases, the assessee may have taken legal opinions on some of the issues. If reliance is placed on the same, then necessary audit procedures as also disclosure, if additionally required, may be discussed with the assessee. One would also need to examine the valuation reports in respect of some of the assets that may have been obtained for the determination of amounts payable to any partner on account of reconstitution. Also, the assessee needs to obtain Form No. 5C, where applicable, to determine the nature of capital gains and carried forward cost of assets retained by the firm.

IMPERMISSIBLE AVOIDANCE ARRANGEMENT (IAA)
Clause 30C requires reporting of impermissible avoidance arrangement entered into by the assessee during the previous year under consideration. Reporting under this clause was deferred to 1st April, 2022.

Chapter X-A deals with provisions of General Anti-Avoidance Rules (GAAR) contained in sections 95 to 102. The intent, as per the Explanatory Memorandum of provisions of GAAR is to target the camouflaged transactions and determine tax by determining transactions on the basis of substance rather than form. GAAR applies to transactions entered into after 1st April, 2017. There are elaborate procedures for a transaction to be declared an IAA. For an arrangement to be declared as IAA, its main purpose should be to obtain a tax benefit and should satisfy one or more conditions of section 96, which are as under:

it creates rights / obligations which are not ordinarily created between persons dealing at arm’s length,

it results, directly or indirectly, in misuse or abuse of the provisions of the Act,

it lacks commercial substance or is deemed to lack commercial substance, by virtue of fiction created by section 97, or

is entered into or is carried out, by means, or in a manner, which may not be ordinarily employed for bona fide purposes.

There are elaborate steps laid down where a matter travels from Assessing Officer to the CIT or PCIT and to the Approving Panel. The CIT or the PCIT may declare the transaction as IAA if the assessee does not respond to show cause notice. In case the assessee objects to such a treatment, then the matter is referred to the Approving Panel, which may or may not hold the transaction to be IAA.

As per Rule 10U, GAAR is not applicable in certain specified cases thereunder.

Thus, there are various complexities involved in determining whether a transaction is an IAA. It involves determining parties who are to be treated as one and the same person, calculation of tax benefit obtained and if the same is more than Rs. 3 crores and access to records of some or all of the connected parties. This will involve substantial uncertainty, impossibility of computing overall tax effect and involvement of substantial subjectivity. The very fact that, even for administrative purposes, such an elaborate system from AO to Approving Panel is put in place, is a pointer to the difficulties involved. It is well-nigh impossible for a Tax Auditor to come to a conclusion on such a matter. In any case, the first step of furnishing the details under this clause rests on the assessee. Thus, in view of the difficulties arising on account of uncertainty and subjectivity, an auditor would hardly ever be able to come to a true and correct view of the matter. Accordingly, a Tax Auditor should include a disclaimer in respect of reporting under this clause as per para 56.14 of the GN with necessary modification.

The GN also suggests inquiring about pending matters relating to IAA or declaration of any transaction as IAA in respect of any of the earlier years and reporting the facts relating to the same.

THE BREAK-UP OF TOTAL EXPENDITURE AND GST
Clause 44, in pursuance of the information exchange collaboration initiated between CBIC and CBDT, was inserted on 20th July, 2018, but kept in abeyance for reporting prior to 1st April, 2022. While the ultimate objective of this clause is not clear, it appears to be in the nature of data collation for the purposes of GST. It requires reporting of the break-up of expenditure of entities registered or not registered under GST in the following manner:

1. Total amount of expenditure incurred during the year (Column 2)

2. Expenditure in respect of entities registered under GST:

a. Relating to goods or services exempt from GST (Column 3)

b. Relating to entities falling under composition scheme (Column 4)

c. Relating to other registered entities (Column 5)

d. Total payment to registered entities (Column 6)

3. Expenditure relating to entities not registered under GST (Column 7)

The first question that arises for the purpose of reporting under this clause is what is the ambit or scope of the term “expenditure”? Oxford dictionary defines it as “the act of spending or using money; an amount of money spent”. It appears that all the expenditures as reported in the Profit and Loss Statement may have to be bifurcated for the purpose of reporting at clause 44. However, there might be certain exclusions or inclusions that may have to be taken care of:

1. Provisions and allowances (e.g., provisions for doubtful debts) are not expenditure and therefore, will have to be excluded.

2. Depreciation and amortisation, not being in the nature of expenditure, will also have to be excluded.

3. Capital Expenditure shall also be treated as expenditure and requires to be reported.

4. Prepaid expenditure incurred in the current year but forming part of the expenditure of the subsequent year will have to be added and conversely, prepaid expenditure of previous year forming part of the expenditure of current year will have to be reduced.

Once the total expenditure incurred during the year is derived under column 2, this requires bifurcation into expenditure in respect of entities registered under GST and those not registered under GST. The expenditure in respect of registered entities requires further bifurcation into exempt goods or services, relating to entities under the composition scheme and those relating to other registered entities.

As per section 2(47) of CGST Act, 2017, exempt supply means “supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt and includes non-taxable supply”. Exempt supplies shall include the supply of goods or services that have been exempted by way of notification (e.g., interest) or subjected to a nil rate of tax by way of notification. It shall also include supplies which are currently outside the levy of GST, such as petrol, diesel and liquor.

Activities or transactions that are treated as neither supply of goods nor a supply of services under Schedule III do not fall within the ambit of exempt supplies. Thus, expenditure in respect of such activities may have to be reported under the residuary category at column 5, in case of registered entities, or column 7 in case of unregistered entities. However, Para 82.3 of GN states that such activities need not be reported under this clause.

The details of expenses under the reverse charge mechanism (i.e., RCM where the recipient is liable to pay tax) are also required to be reported. In the case of RCM expenses from registered entities, these shall form part of expenditure relating to other registered dealers under column 5. In the case of RCM expenses from unregistered dealers, it shall be reportable under expenditure relating to entities not registered in column 7.

The critical issue here is what should be the source of such details required to be reported under this clause, as currently, there is no return or form in GST that requires mandatory reporting with respect to all expenditures. The reporting in respect of supplies from entities under the composition scheme in Table 16 of Form GSTR-9 (Annual Return) is currently optional up to F.Y. 2021-22. Table 14 of Form GSTR-9C (Reconciliation Statement), which requires expenditure head-wise reporting of Input Tax credit availed, is also optional up to F.Y. 2021-22. Reporting in respect of inward supplies from composition entities and exempt inward supplies is also required in Table 5 of GSTR-3B. However, most taxpayers are not able to report it on a monthly basis.

An inward supplies register, if available, consisting of all the expenditures incurred for the year could be considered as the basis for compiling vendor-wise expense details. Additionally, internal data for vendor master may have to be analysed to obtain details of entities registered under the composition scheme, registered entities, and unregistered entities. All the entries not charged with GST may be analysed to obtain details pertaining to exempt supplies, those pertaining to composition entities and those pertaining to unregistered entities.

The reporting is not required head-wise or vendor-wise. However, it is advisable to separately report revenue and capital expenditure. It is also advisable to maintain detailed head-wise and vendor-wise details as, typically, it may expected to be called for during scrutiny.

GSTR-2A (a statement containing details of inward supplies) may also be considered for reporting details in respect of registered entities. Owing to the dynamic nature of the statement and further requirement of reconciling the same with the books, it may not give desired and accurate details. The details in respect of composition entities and unregistered entities will also have to be separately compiled as these shall not be available from GSTR-2A.

Reporting under clause 44 involves an elaborate exercise, and all the details may not be available in most of the cases. In most cases, it may not be true and correct as required for the purpose of reporting. Therefore, it may be necessary to consider adequate disclosures along with notes, partial disclaimers, and in an appropriate circumstance, a complete disclaimer on reporting in this clause.

CONCLUSION
In this article, some intricate contemporary matters have been touched upon. However, there are some evergreen issues that keep on springing some surprises during the conduct of the audit and teach us something new. While many things have become easy on account of technology, there are matters which also add to our difficulties in terms of submission of data, maintenance and preserving of audit records and, of course, not the least, the challenges posed by the portal at times.

Two things that one has come to realise about tax audit, after practicing for some decades:

Assessees and Tax Auditors adapt to reporting on many intricate issues and settle with the same in a couple of years, and

When the issues are settled, the law comes up with something new and more complex requirements to be reported.

The tax audit reporting is, therefore, never finally settled, adding to the woes of taxpayers and tax auditors.

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S. 254(2) – Rectification of mistake apparent on record – ITAT –- Not following coordinate bench decision in assessee’s own case

8 Omega Investments and Properties Ltd. vs. Commissioner of Income Tax- 3
[Income Tax Appeal No. 127 of 2021 & W.P. No. 1217 of 2020 (Bombay High Court); Arising out of ITA No. 868/M/2016 order of Mumbai Tribunal dated 9th April, 2018 and Third Member decision of Mumbai ITAT MA No. 282/Mum/2018 order dated 13th November, 2019]
Date of order: 7th June, 2022
A.Y.: 2007-08

S. 254(2) – Rectification of mistake apparent on record – ITAT –- Not following coordinate bench decision in assessee’s own case

The Assessee had undertaken a Slum Rehabilitation Project at Parel, Mumbai namely ‘Kingston Tower’. According to the Assessee, the project was initially approved by the Slum Rehabilitation Authority on 7th October, 2002. However, due to F.S.I. related issues, the Assessee filed an amended plan which was approved subsequently. A Letter of Intent for approval was issued on 16th April, 2004 and an amended intimation of approval for the project was issued on 4th June, 2004. The Assessee had filed a return of income for A.Y. 2007-08 declaring a total income of Rs. 22,050. The Assessee had claimed deduction u/s 80-IB(10) of Rs. 2,05,33,831. The assessment was completed on 15th May, 2009, and the deduction under particular provisions were granted. Subsequently, the case for A.Y. 2007-08 was reopened u/s 148 vide notice dated 17th December, 2012, and an order was passed by the AO on 7th March, 2014 against which the Assessee filed an Appeal before the CIT (Appeals), which was allowed by the CIT (Appeals) by order dated 30th November, 2015. The Revenue filed an Appeal before the Appellate Tribunal which was allowed by the impugned order dated 9th April, 2018. After the order was passed, the Assessee filed a rectification application on 17th April, 2018 u/s 254 (2). The rectification application was rejected by order dated 29th November, 2019.

Against the order of the Tribunal dated 9th April, 2018, the Assessee has filed the Income Tax Appeal No. 127 of 2021, and against the order rejecting the Rectification Application dated 29th November, 2019, the Assessee has filed Writ Petition No. 1217 of 2020.

The Hon. Court observed that before the Tribunal, the Assessee had made reference to the orders passed in favour of the Assessee for A.Ys. 2009-10 and 2010-11, in which it was held that the approval was given to the Assessee’s project on 4th June, 2004, which being beyond the relevant date of 1st April, 2004, as per the provisions u/s 80-IB(10), the Assessee was entitled to the benefit of the said provisions. The Tribunal in the impugned order sought to distinguish the earlier orders passed by the Tribunal for A.Ys. 2009-10 and 2010-11 on the ground that the Tribunal and the Commissioner of Income Tax (Appeals), in respect of A.Ys. 2009-10 and 2010-11 had proceeded on erroneous factual premise as regards the relevant date when the correct date of approval of the project was 7th November, 2002, and this error goes to the root of the matter. Having observed so, the Tribunal held that it would not be bound by the order passed by itself in respect of Assessee’s own case for A.Ys. 2009-10 and 2010-11. It also relied upon the decision of the Tribunal in the case of Bhavya Construction vs. ACIT – (2017) 77Taxmann.com 66 (Mum.-Tri.). Accordingly by the impugned order, the Tribunal allowed the Appeal.

In the rectification application, the Assessee, sought to point out that in respect of A.Y. 2009-10, the decision of the Tribunal holding in favour of the Assessee, but the view of the Tribunal for A.Y. 2009-10 (ITA No. 997/M/2013) was approved by this Court by dismissing the appeal filed by the Revenue ITA No. 159 of 2015 by the order dated 25th July, 2017. The Assessee also sought to point out that the decision of the Tribunal in the case of Bhavya Constructions vs. ACIT, this Court by order dated 30th January, 2020 in Income Tax Appeal No. 1009 of 2017 had set aside the same and remanded the matter to the Tribunal for a fresh hearing. However, the Tribunal did not consider the rectification application and dismissed the same.

The Assessee contends that if the Tribunal wanted to differ from the earlier view, the matter ought to have been referred to the Larger Bench. The Assessee contends that the date of approval of the project referred to in the earlier order was not a mistake or oversight but it was a specific finding on the issue and simpliciter taking a different view was improper on the part of the Tribunal. The Assessee also contends that when the fact that the orders of Tribunal for A.Ys. 2009-10 and 2010-11 were confirmed by this Court was pointed out, it ought to have been taken into consideration and the application for rectification was, without any reasons, erroneously rejected. Apart from this position, the learned Counsel for the Assessee has also placed on record a copy of the order passed by this Court in Income Tax Appeal No. 265 of 2017 in respect of the Assessee’s own case for A.Y. 2010-11. The Revenue supported both the impugned orders.

The Hon. Court observed that the Tribunal has proceeded on the premise that there was an error in the orders passed by the Tribunal for A.Ys. 2009-10 and 2010-11 in respect of the Assessee’s case which goes to the root of the matter, and therefore, the Tribunal is entitled to take a different view. However the fact that the orders passed by the Tribunal for the A.Ys. 2009-10 and 2010-11 were challenged by the Revenue by filing appeals in this Court, and they were dismissed, confirming the findings rendered therein was the material aspect which ought to have been considered by the Tribunal. If it was missed out when the Tribunal passed the impugned order dated 9th April, 2018 when it was sought to be placed on record through rectification application at that time, the Tribunal should have considered the implications of the order. The order passed by this Court in respect of A.Y. 2010-11 has been rendered thereafter on 9th April, 2018. Even the order setting aside the decision in the case of Bhavya Construction Co. and remanded the proceedings to the Tribunal was rendered on 30th January, 2020.

Therefore, on the aspect of what will be the relevant date in the facts of the Assessee’s case, the orders passed by this Court dismissing the Revenue’s appeals would be relevant and the implication of the same ought to be considered by the Tribunal before deciding whether the Assessee is entitled to the benefit of provisions u/s 80-IB(10) in respect of the relevant assessment year.

In these circumstances the Hon. Court held that the impugned order passed by the Tribunal dated 9th April, 2018 is required to be quashed and set aside. The appeal filed by the Revenue being ITA No. 868/ Mum/2016 is required to be restored and considered on its own merits after considering the documents/orders sought to be placed on record through rectification application.

The appeal and Writ Petition were accordingly disposed.

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Natural Justice – opportunity of hearing – Personal hearing through video conferencing denied – Matter Remanded

7 LKP Securities Ltd. vs. The Deputy Commissioner of Income Tax Circle-4(3)(1)g & Ors.
[Writ Petition No. 2076 – 2077 of 2022, Bombay High Court]
Date of order: 4th July, 2022

Natural Justice – opportunity of hearing – Personal hearing through video conferencing denied – Matter Remanded

The Petitioner submits that in the course of reassessment proceeding on 23rd March, 2022, petitioner sought to make further submissions, and also submitted a request for personal hearing through video conferencing. It was found that e-proceedings had been closed on 21st March, 2022. The Petitioner informed the Respondent of this grievance vide communication dated 24th March, 2022, and also attached further submission dated 23rd March, 2022 with the said communication. Despite the same, the Respondent has gone ahead and passed the assessment order dated 30th March, 2022 without considering the request for personal hearing or the further submissions. It was submitted that the matter be remanded back, so that an assessment order can be passed after considering the further submissions and after hearing the Petitioner.

The Court observed from paragraph 11 of the assessment order dated 30th March, 2022 for A.Y. 2016-2017, that since the case was getting time barred the assessment order came to be passed on the basis of material available with the department. Paragraph 11 of the said order is quoted as under:

“11. Subsequently the assessee opted for video conference through JAO regarding which letter was uploaded by the JAO on 25.03.2022. In response the VC was scheduled on 28.03.2022 at 2.30 p.m. However during the VC conducted for the A.Y. 2017-18 scheduled at 12.45 p.m. in assessee’s own case the A/R of the assessee requested to take up the case for the A.Y. 2016-17 alongwith A.Y. 2017- 18 since the issue for both the years are similar and as such VC scheduled for 2016-17 was cancelled. In the course of Video conference the A/r of the assessee requested to stay the proceeding for A.Y. 2016-17 as they would be filing writ before the Hon’ble High Court. In response the A/R of the assessee was asked to upload the interim order of the Hon’ble High Court on or before 29.03.2022 to stay the proceedings. However the A/R of the assessee requested they would upload the interim order by 3.00 p.m. on 30.03.2022 but no such order was filed till 4.00 P.M. of 30.03.2022. Since the case is getting barred by limitation the case is disposed off on the basis of material available with the department.”

The Hon. Court observed that the assessment order has come to be passed without considering the further submissions or hearing the Petitioner. It was observed that similar assessment order has also been passed for A.Y. 2017-2018.

The Revenue fairly submitted that in several such matters, the Court has remanded the matters for fresh consideration in view of the provisions of Section 144B of the Act 1961.

Held: Set aside the assessment orders dated 30th March, 2022 for A.Ys. 2016-2017 and 2017-2018, and remanded the matters back to the Respondent for de novo consideration after granting an opportunity of personal hearing and, after taking into account the further submissions that the Petitioner may make, pass appropriate orders in accordance with law within four weeks.

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TDS — Payment to non-resident — Assessee not person responsible for making payment to non-resident — No obligation to deduct tax at source

34 Ingram Micro Inc. vs. ITO(IT)
[2022] 444 ITR 568 (Bom.)
Date of order: 26th February, 2022
S. 195 of ITA, 1961

TDS — Payment to non-resident — Assessee not person responsible for making payment to non-resident — No obligation to deduct tax at source

The assessee was a company incorporated in the USA and was engaged in the business of distribution of technology products. The assessee had worldwide operations. IMAHI, a company incorporated in the USA, and a subsidiary of the assessee, held indirectly a wholly owned subsidiary in India, IMIPL. In 2004, IMAHI acquired the shares of THL, a company incorporated in Bermuda, from its existing shareholders. The assessee’s role in this transaction was that it guaranteed the payment of the sale consideration by IMAHI under the share purchase agreement to the sellers, i.e., the existing shareholders of THL. The guarantee never came to be invoked because IMAHI discharged its obligation under the share purchase agreement to the sellers, and accordingly, the assessee stood discharged of its obligations as a guarantor under the share purchase agreement. The Assessing Officer initiated proceedings u/s 201 of the Income-tax Act, 1961 to treat the assessee as an assessee-in-default for failure to deduct tax on the payment for the purchase of shares of THL.

The Bombay High Court allowed the writ petition filed by the assessee challenging the said proceedings and held as under:

“i) Section 195 of the Income-tax Act, 1961, mandates “any person responsible for paying to a non-resident” any sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, to deduct Income-tax thereon at the rates in force.

ii) The share purchase agreement showed that the assessee was the guarantor of the payment to be made by IMAHI and not the purchaser. The purchaser himself could not be the guarantor also and that itself indicated that the assessee was not the purchaser of the shares of THL. The Assessing Officer had also not produced any evidence or referred to any document to even indicate that the assessee had paid any amount or could be even regarded as the person responsible for paying any sum to a non-resident (or a foreign company) chargeable under the provisions of the Act.

iii) As section 195 is applicable only to a person who is responsible for paying to deduct tax at the time of credit to the account of the payee or at the time of payment and the assessee did not make any payment to THL, there was no obligation on the assessee to deduct tax at source. The notice u/s. 201 was not valid.”

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

33 CIT(Exemption) vs.
Karnataka State Students Welfare Fund
[2022] 444 ITR 436 (Kar.)
A.Y.: 2012-13
Date of order: 30th November, 2021
S. 12A of ITA, 1961

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

The assessee is a trust eligible for exemption u/s 11 of the Income-tax Act, 1961. For the A.Y. 2012-13, reassessment order u/s 143(3) r.w.s 148 of the Act came to be passed, whereby the Assessing Officer held that the assessee had not applied the income for charitable purposes as required u/s 11 and 12 from 2014-15 onwards (i.e., after 23rd September, 2014. A survey revealed that the assessee has accumulated huge income and was claiming exemption under the Act without obtaining registration u/s 12AA.

The Tribunal allowed the appeal and quashed the reassessment order holding that the same is bad in law for violating the second and third proviso to s.12A(2) of the Act.

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

“i) The provisions of section 12A of the Income-tax Act, 1961, before amendment by the Finance (No. 2) Act, 2014, provided that a trust or an institution can claim exemption under sections 11 and 12 only after registration u/s. 12AA of the Act has been granted. In case of trusts or institutions which apply for registration after 1st June, 2007, the registration shall be effective only prospectively. Non-application of registration for the period prior to the year of registration caused genuine hardship to charitable organisations. Due to absence of registration, tax liability was fastened even though they may otherwise be eligible for exemption and fulfil other substantive conditions. However, the power of condonation of delay in seeking registration was not available.

ii) In order to provide relief to such trusts and remove hardship in genuine cases, section 12A of the Act was amended to provide that in a case where a trust or institution has been granted registration u/s. 12AA of the Act, the benefit of sections 11 and 12 of the Act shall be available in respect of any income derived from property held under trust in any assessment proceeding for an earlier assessment year which is pending before the Assessing Officer as on the date of such registration, if the objects and activities of such trust or institution in the relevant earlier assessment year are the same as those on the basis of which such registration has been granted. Further, that no action for reopening of an assessment u/s. 147 of the Act shall be taken by the Assessing Officer in the case of such trust or institution for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not been obtained the registration u/s. 12AA for the said assessment year. However, these benefits would not be available in the case of any trust or institution which at any time had applied for registration and it was refused u/s. 12AA of the Act or a registration once granted was cancelled. This was the clarification regarding the amendment issued by the Central Board of Direct Taxes in Circular No. 1 of 2015 ([2015] 371 ITR (St.) 22).

iii) The only reason for reopening of the assessment was the absence of registration u/s. 12A of the Act. Further, the assessee had not filed return of income for the assessment year in question. A finding had been recorded on the facts of the case by the Tribunal on this aspect and the allegation that the assessee was claiming deductions u/s. 11 and 12 of the Act was held to be against the facts available on record. Hence the reassessment was not valid.”

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Reassessment — Death of assessee — Notice of reassessment — Condition precedent for reassessment — Valid notice — Notice of reassessment issued in the name of a person who had died — Objection to notice by legal representative — Mistake in notice not curable by s. 292B — Notice not valid

32 Kanubhai Dhirubhai Patel (legal representative of late Dhirubhai Sambhubhai) vs. ITO
[2022] 444 ITR 405 (Guj.)
A.Y.: 2015-16
Date of order: 14th February, 2022
Ss. 147, 148, 292B of ITA, 1961

Reassessment — Death of assessee — Notice of reassessment — Condition precedent for reassessment — Valid notice — Notice of reassessment issued in the name of a person who had died — Objection to notice by legal representative — Mistake in notice not curable by s. 292B — Notice not valid

The writ applicant is an individual assessee and the son of one Dhirubhai Shambhubhai Malviya (“the deceased”). The said Dhirubhai Shambhubhai Malviya expired on 22nd November, 2020. The Assessing Officer issued a notice dated 31st March, 2021 u/s 148 of the Income-tax Act, 1961, calling upon the deceased assessee to file a return of income for the A.Y. 2015-16. The writ applicant, being the son of the deceased assessee, filed a reply dated 10th April, 2021 specifically drawing the attention of the Assessing Officer about the death of the original assessee, and had further requested to drop the proceedings as such notice will have no legal sanctity in the eye of law. The writ applicant again submitted a reply dated 15th December, 2021 reiterating that the notice had been issued in the name of the deceased assessee, and requested that the proceedings be dropped. Despite the aforesaid fact being drawn to the attention of the respondent-authority, the Assessing Officer further issued a notice u/s 142(1) dated 17th December, 2021 again addressed to the deceased assessee.

In such circumstances, the writ applicant challenged the notice and the reassessment proceedings by filing a writ petition. The Gujarat High Court allowed the writ petition and held as under:

“i) Section 292B of the Income-tax Act, 1961, inter alia, provides that no notice issued in pursuance of any of the provisions of the Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such notice if such notice, summons is in substance and effect in conformity with or according to the intent and purpose of the Act.

ii) A notice u/s. 148 of the Act is a jurisdictional notice, and existence of a valid notice u/s. 148 is a condition precedent for exercise of jurisdiction by the Assessing Officer to assess or reassess u/s. 147 of the Act. The want of a valid notice affects the jurisdiction of the Assessing Officer to proceed with the assessment and thus, affects the validity of the proceedings for assessment or reassessment. A notice issued u/s. 148 of the Act against a dead person is invalid, unless the legal representative submits to the jurisdiction of the Assessing Officer without raising any objection. Therefore, where the legal representative does not waive his right to a notice u/s. 148 of the Act, it cannot be said that the notice issued against the dead person is in conformity with or according to the intent and purpose of the Act which requires issuance of notice to the assessee, whereupon the Assessing Officer assumes jurisdiction u/s. 147 of the Act and consequently, the provisions of section 292B of the Act would not be attracted. There is a distinction between clause (a) of sub-section (2) of section 159 and clause (b) of sub-section (2) of section 159 of the Act. Clause (b) of sub-section (2) of section 159 permits initiation of proceedings. Clause (b) of sub-section (2) of section 159 of the Act provides that any proceeding which could have been taken against the deceased if he had survived may be taken against the legal representative. A proceeding u/s. 147 of the Act for reopening the assessment is initiated by issuance of notice u/s. 148 of the Act, and as a necessary corollary, therefore, for taking a proceeding under that section against the legal representative, necessary notice u/s. 148 of the Act would be required to be issued to him. In view of the provisions of section 159(2)(b) of the Act, it is permissible for the Assessing Officer to issue a fresh notice u/s. 148 of the Act against the legal representative, provided that it is not barred by limitation, he, however, cannot continue the proceedings on the basis of an invalid notice issued u/s. 148 of the Act to the assessee who is dead.

iii) The petitioner had not surrendered to the jurisdiction of the Assessing Officer by submitting a return in response to the notices nor had the jurisdictional Assessing Officer issued notice upon the petitioner as legal representative representing the estate of the deceased assessee. The notice of reassessment was not valid.”

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Charitable purpose — Exemption u/s 11 — Voluntary contributions towards corpus fund used for purchase of land — Allowable as application of income to charitable purpose

31 CIT(Exemption) vs. Om Prakash Jindal Gramin Jan Kalyan Sansthan
[2022] 444 ITR 498 (Del)
A.Y.: 2010-11
Date of order: 26th April, 2022
S. 11(1)(d) of ITA, 1961

Charitable purpose — Exemption u/s 11 — Voluntary contributions towards corpus fund used for purchase of land — Allowable as application of income to charitable purpose

After the transfer of the corpus fund of Rs. 19 crores to general reserves, the assessee-trust purchased land worth Rs. 5,27,45,958 and donated Rs. 13.4 crores to another trust. The Assessing Officer made an addition of Rs. 19 crores as additional income.

The Commissioner (Appeals) set aside the addition on the ground that exemption on corpus donation was allowable for the purchase of land, as it was a purchase of a capital asset. The Tribunal affirmed the order of the Commissioner (Appeals) allowing utilisation of corpus fund of Rs. 19 crores as application of income u/s 11(1)(d) of the Income-tax Act, 1961.

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

“i) There was no ground of appeal either before the Tribunal or before the court challenging the concurrent finding of the Commissioner (Appeals) and the Tribunal that the substance of the transaction was that the corpus fund had been utilised for the purchase of a capital asset.

ii) The court was in agreement with the findings of the Commissioner (Appeals) and the Tribunal that the substance of the transaction must prevail over the form and, if required, the Department must examine the nature of the transaction. No question of law arose.”

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(A) Capital gains — Full value of consideration — Deductions — Consideration on sale of shares including sum held in escrow account offered to tax — Assessee receiving reduced sum from escrow account after completion of assessment — Whole amount credited in book not taxable as capital gains — Only actual amount received taxable — Assessee entitled to refund of excess tax paid
(B) Revision — Powers of Commissioner — Application by assessee for revision of order — Power of Principal Commissioner not restricted to allowing relief only up to returned income — Recomputation of income can be directed irrespective of whether recomputation results in income less than returned income — S. 240 not applicable to assessee

30 Dinesh Vazirani vs. Principal CIT
[2022] 445 ITR 110 (Bom.)
A.Y.: 2011-12
Date of order: 8th April, 2022
Ss. 45, 48, 240 and 264 of ITA, 1961

(A) Capital gains — Full value of consideration — Deductions — Consideration on sale of shares including sum held in escrow account offered to tax — Assessee receiving reduced sum from escrow account after completion of assessment — Whole amount credited in book not taxable as capital gains — Only actual amount received taxable — Assessee entitled to refund of excess tax paid

(B) Revision — Powers of Commissioner — Application by assessee for revision of order — Power of Principal Commissioner not restricted to allowing relief only up to returned income — Recomputation of income can be directed irrespective of whether recomputation results in income less than returned income — S. 240 not applicable to assessee

For the A.Y. 2011-12, the assessee computed the capital gains on the sale of shares considering the proportion of the total consideration, which included the escrow amount which had not been received by the time returns were filed but were received by the promoters but were still parked in the escrow account. The income declared by the assessee was accepted in the scrutiny assessment. The assessee stated that subsequent to the sale of the shares, certain statutory and other liabilities arose for the period prior to the sale of the shares, and according to the agreement, a certain amount was withdrawn from the escrow account, and it did not receive the amount. The assessee filed an application u/s 264 before the Principal Commissioner and submitted that the capital gains were to be recomputed accordingly, reducing the proportionate amount from the amount deducted from the escrow account and that an application u/s 264 was filed since the assessment had been completed by the time the amount was deducted from the escrow account. The Principal Commissioner rejected the assessee’s application.

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

“i) Section 264 of the Income-tax Act, 1961 does not restrict the scope of powers of the Principal Commissioner to restrict relief to an assessee only to the returned income. Where the income can be said not to have resulted at all, there is neither accrual nor receipt of income even though an entry might, in certain circumstances, have been made in the books of account.

ii) It is the obligation of the Department to tax an assessee on the income chargeable to tax under the Act but if higher income is offered to tax, it is the duty of the Department to compute the correct income and grant the refund of taxes erroneously paid by the assessee. There is no provision in the Act which provides, if the assessed income is less than the returned income, the refund of the excess tax paid by the assessee would not be granted to the assessee. If the returned income shows a higher tax liability than what is actually chargeable under the Act, then the assessee is entitled to refund of excess tax paid by it.

iii) Capital gains was computed u/s. 48 of the Act by reducing from the full value of consideration received or accrued as a result of transfer of capital asset, cost of acquisition, cost of improvement and cost of transfer. The real income (capital gains) could be computed only by taking into account the real sale consideration, i.e., sale consideration after reducing the amount withdrawn from the escrow account. The amount was neither received nor accrued since it was transferred directly to the escrow account and was withdrawn from the escrow account.

iv) When the amount had not been received or accrued it could not be taken as full value of consideration in computing the capital gains from the transfer of the shares of the assessee. The purchase price as defined in the agreement was not an absolute amount as it was subject to certain liabilities which might have arisen on account of certain subsequent events. The full value of consideration for computing capital gains would be the amount which was ultimately received after the adjustments on account of the liabilities from the escrow account as mentioned in the agreement. The liability as contemplated in the agreement should be taken into account to determine the full value of consideration. Therefore, if the sale consideration specified in the agreement was along with certain liability, then the full value of consideration for the purpose of computing capital gains under section 48 of the Act was the consideration specified in the agreement as reduced by the liability. The full value of consideration u/s. 48 would be the amount arrived at after reducing the liabilities from the purchase price mentioned in the agreement. Even if the contingent liability was to be regarded as a subsequent event, it ought to be taken into consideration in determining the capital gains chargeable u/s. 45. Such reduced amount should be taken as the full value of consideration for computing the capital gains u/s. 48.

v) If income did not result at all, there could not be a tax, even though in book keeping, an entry was made about hypothetical income which did not materialize. Therefore, the Principal Commissioner ought to have directed the Assessing Officer to recompute the assessee’s income irrespective of whether the computation would result in income being less than the returned income.

vi) Reliance by the Principal Commissioner on the provisions of section 240 to hold that he had no power to reduce the returned income was erroneous because the circumstances provided in the proviso to section 240 did not exist. The proviso to section 240 only provides that in case of annulment of assessment, refund of tax paid by the assessee according to the return of income could not be granted to the assessee. The only thing that was sacrosanct was that an assessee was liable to pay only such amount which was legally due under the Act and nothing more. Therefore, the assessee was entitled to refund of excess tax paid on the excess capital gains.”

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Assessment — Draft assessment order — Procedure u/s 144B — Mandatory — Failure to issue draft assessment order — Final assessment order not valid

29 Enviro Control Pvt. Ltd. vs. NEAC
[2022] 445 ITR 119 (Guj)
A.Y.: 2018-19
Date of order: 29th March, 2022
S. 144B of ITA, 1961

Assessment — Draft assessment order — Procedure u/s 144B — Mandatory — Failure to issue draft assessment order — Final assessment order not valid

For the A.Y. 2018-19, the assessee had furnished all necessary details, including the details pertaining to the quantification of the claim to deduction u/s 80-IA of the Income-tax Act, 1961, in response to the notices u/s 142(1). Thereafter, without issuing any further or specific show-cause notice or draft assessment order, the National e-Assessment Centre passed the assessment order u/s 143(3) r.w.s. 144B.

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

“i) Section 144B of the Income-tax Act, 1961 lays down a procedure for assessment under the Faceless Assessment Scheme and needs to be scrupulously followed. If any action is in disregard of the statutory provisions it is open to the court to overrule the objection of alternative remedy available to the assessee.

ii) It was not just a question of giving an opportunity of hearing and for that purpose, the assessee should have the draft assessment order in his hands but, with the introduction of section 144B , a procedure had been laid down which needed to be scrupulously followed. The assessment order was quashed and set aside.

iii) The matter was remitted to the National e-Assessment Centre to undertake proceedings in accordance with the provisions of section 144B, to issue a fresh notice-cum-draft assessment order for the assessee to respond to and afford an opportunity of hearing to the assessee in accordance with the procedure as prescribed u/s. 144B.”

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Ss. 132 – Where a hard disk was seized from business premises of assessee, but, no corroborative documents were found to establish that information concerning certain expenditure derived from the hard disk was true and correct, no addition had been made

25 Assistant Commissioner of Income-tax vs.
Lepro Herbals (P) Ltd
[(2022) 94 ITR(T) 225 (Delhi – Trib.)]
ITA No.: 111(DELHI) of 2016
A.Y.: 2010-11; Date of order: 18th February, 2022

Ss. 132 – Where a hard disk was seized from business premises of assessee, but, no corroborative documents were found to establish that information concerning certain expenditure derived from the hard disk was true and correct, no addition had been made

FACTS
A Search u/s 132(1) of the Act was carried out at the premises of the assessee company, a manufacturer of herbal drugs. A hard disk was seized from the office premises during the search. The assessing officer (AO) considered certain figures of sales and purchases retrieved from the hard disk and concluded the assessment by making certain additions.

The contentions of the assessee that the hard disk consisted of personal data and the financial figures contained therein were only estimates that were not considered by the AO.

Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) deleted the additions on the ground that the additions have been made solely based on the hard disk data without any supporting or corroborative evidence. Aggrieved, the Revenue preferred an appeal before the ITAT.

HELD
The AO contended that the figures of sales and purchases derived from the pen drive reflected a true picture of the profitability of the assessee. But, the ITAT observed that no discrepancy in the books of accounts had been pointed out by the AO.

The ITAT noted that no further enquiries, in addition to the reliance placed on the hard disk data, have been carried out to establish that the expenditure mentioned in the seized document is true and correct. It was observed that identical queries were raised in the case of the assessee during previous A.Ys., but no addition had been made to that effect. The printouts of the hard disk of such previous years had the words ‘Forecast’ mentioned. Accordingly, following the principle of consistency and in the absence of any corroborative evidence, the ITAT upheld the Order passed by the CIT(A) and dismissed the appeal of Revenue.

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S. 23 – Where House Property was let out for monthly rentals along with a refundable security deposit, and the assessing officer takes a view that such a deposit is in lieu of reduced rent, no notional addition could be made to rental income where the assessee had furnished evidence to show that municipal value was much less than rental income.

24 MLL Logistics (P.) Ltd. vs. Assistant Commissioner of Income-tax
[2022] 93 ITR(T) 513 (Mumbai -Trib.)
ITA No.: 164 (MUM) of 2019
A.Y.: 2013-14; Date of order: 18th November, 2021

S. 23 – Where House Property was let out for monthly rentals along with a refundable security deposit, and the assessing officer takes a view that such a deposit is in lieu of reduced rent, no notional addition could be made to rental income where the assessee had furnished evidence to show that municipal value was much less than rental income.

FACTS
The assessee company had declared income from house property. On perusal of the rent agreement, it was noticed that the rentals were Rs. 50,000 p.m. Further, the licensee deposited a refundable deposit of Rs. 5 crore with the assessee. Based on the same, the assessing officer (AO) took a view that the refundable deposit had been given in lieu of reduced rent of the house property. The AO questioned the rationale of the refundable deposit and made a notional addition of 10 % of the refundable deposit to the rental income.

Aggrieved, the assessee filed an appeal before the CIT(A), however, the appeal of the assessee was dismissed. Aggrieved, the assessee filed further appeal before the ITAT.

HELD
The assessee submitted that he has actually received Rs. 50,000 p.m. towards rent as per the rent agreement. Further, the assessee stated that even though he has received interest free security deposit, notional rent cannot be computed based on such interest free security deposit. Evidences were also furnished by the assessee to show that the actual rent was higher than the rateable value determined by Mumbai Municipal Corporation for the property.

The ITAT observed that the AO has computed notional rent at 10% of the security deposit received by the assessee. To justify such determination, the assessing officer had conducted an enquiry u/s 133(6) of the Income-tax Act, 1961 (Act) to establish that the market value of the rent is higher than what the assessee has offered. However, no concrete evidence had been brought by the AO to establish this assertion.

The ITAT held that the AO cannot determine the notional rent based on estimation or guess work. The ITAT remarked that if the rateable value is correctly determined under the municipal laws, the same is to be considered as the Annual Letting Value u/s 23 of the Act. Accordingly, the ITAT deleted the notional addition made to the rental income.

The ITAT placed reliance on the following decisions while deciding the matter:

1. J.K. Investors (Bom.) Ltd. vs. Dy. CIT [2000] 74 ITD 274 (Mum. – Trib.)

2. CIT vs. Tip Top Typography [2015] 228 Taxman 244 (Mag.)/[2014] 48 taxmann.com 191/368 ITR330 (Bom.)

3. CIT vs. Moni Kumar Subba [2011] 10 taxmann.com 195/199 Taxman 301/333 ITR 38 (Delhi)

4. Owais M. Hussain vs. ITO [IT Appeal No. 4320 (Mum.) of 2016, dated 11-5-2018]

5. Pankaj Wadhwa vs. ITO [2019] 101 taxmann.com 161/174 ITD 479 (Mum. – Trib.)

6. Marg Ltd. vs. CIT [2020] 120 taxmann.com 84/275 Taxman 502 (Mad.)

7. Maxopp Investment Ltd. vs. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 ITR 640 (SC)

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Appeal filed by a company, struck off by the time it was taken up for hearing, is maintainable

23 Dwarka Portfolio Pvt. Ltd. vs. ACIT
TS-499-ITAT-2022 (Delhi)
A.Y.: 2014-15; Date of order: 27th May, 2022
Sections: 179, 226

Appeal filed by a company, struck off by the time it was taken up for hearing, is maintainable

FACTS
In this case, the assessee challenged the order passed by CIT(A) confirming the action of the Assessing Officer (AO) in adding a sum of Rs. 18,00,00,000 to the total income of the assessee u/s 68.

At the time of hearing before the Tribunal, on behalf of the revenue it was contended that the name of the assessee company has been struck off by notification no. ROC/Delhi/248(5)/STK-7/10587 dated 8th March, 2019 of Registrar of Companies NCT of Delhi and Haryana, and consequently the appeal filed by the assessee has become infructuous and prayed that the appeal be dismissed as not maintainable.

On behalf of the assessee, it was contended that the appeal could not be dismissed as ‘not maintainable’ merely because of striking off. Reliance was placed on the decision of the Supreme Court in the case of CIT vs. Gopal Shri Scrips Pvt. Ltd. 2019(3) TMI 703 SC and various provisions of the Companies Act, 2013 and Income-tax Act, 1961.

The Tribunal passed an interlocutory order deciding the maintainability of the appeal.

HELD
The Tribunal noted that there is no dispute that the name of the assessee company has been struck-off u/s 248(1) of the Companies Act. The Tribunal also noted the provisions of s. 248 of the Companies Act dealing with striking off of the companies and its effects as mentioned in s. 250 of the Companies Act. It noted that-

i) Once the company is struck-off, it shall be deemed to have been cancelled from such date except for the purpose of realizing the amount due to the company and for the payment and discharge of the liabilities or obligation of the company. Further, even after striking off of a company, the liability, if any, of the Director, Manager or Other Officers, exercising any power of management and of every member of the company shall continue and may be enforced as if the company had not been dissolved;

ii) As per s. 248(6) of the Companies Act, it is the duty of the Registrar to make provision for discharging the liability of the company before passing an order for striking off u/s 248(5) of the Companies Act. If there is any tax due from the struck-off company, the Department can invoke s. 226(3) of the Income-tax Act for satisfying such tax demands;

iii) As per s. 179 of the Income-tax Act, if the tax due from a private company in respect of any income of any previous year cannot be recovered, then every person who was a Director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such taxes unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the company;

iv) When it comes to recovery of tax from struck-off company, the Department can invoke s. 226(3) or s. 179 subject to satisfaction of conditions stated therein. The Department can invoke both 226(3) and 179 simultaneously for which there is no bar;

v) If the proceedings pending before the Court or Tribunal (regarding the determination of quantum of tax / liability for paying tax) are dismissed for having become infructuous without adjudicating the actual taxes due or the liability of the assessee to pay such tax in the manner known to the Law and based on such dismissal of the proceedings if the Revenue proceeds for the recovery of `such tax due’, the rights of the Directors of the Company will be seriously jeopardised and the same will amount to a denial of rights guaranteed under the Law;

vi) If the request of the Revenue is acceded to, then, on the one hand, the appeal will be dismissed as infructuous, and on the other hand, the Revenue will initiate proceedings u/s 179 of the Income-tax Act and that too without even adjudicating in the manner prescribed under the Law on the ‘quantum of actual tax due’ or ‘liability to pay tax’, in such event great injustice will be caused, which cannot be permitted;

vii) When the Revenue Department has not foregone the right to recover the tax due or written-off the demand on the ground of assessee Company being struck-off by ROC, the right of the assessee to determine the tax liability in due process of law cannot be denied by dismissing the appeal pending before us;

viii) Further, in a case where the CIT(A) deletes the addition made by the AO, and if the Revenue files an appeal before the Tribunal, even in a case where the Revenue is having a water tight case on merit, by dismissing the appeal for having become infructuous will also result in the non-adjudication of the actual tax due by the assessee and the Revenue cannot recover the actual tax dues from the assessee. In such events, the Department of Revenue will be left with no remedy, which is contrary to the root principle of law ‘Ubi Jus Ibi Remedium’.

Having noted the above, the Tribunal observed that the moot question is whether the Tribunal can proceed with the appeal filed by the struck down company or filed by the Revenue against struck down company? In other words, whether the struck-off company can be treated as alive / operating / existing for the purpose of adjudication of the tax arrears and the consequence order by which the recovery proceedings are triggered by the Revenue.

The Tribunal observed that in the case of Gopal Scrips Pvt. Ltd. (supra), the Revenue was having a grievance against the Order of the Rajasthan High Court in dismissing the appeal for having become infructuous on the ground that the assessee company was struck-off. The Apex Court has set aside the order of Rajasthan High Court and directed to decide the appeal on merit. Ironically, the very same department is seeking to dismiss the appeal as infructuous since the assessee company is struck-off. The Department cannot have such a double standard.

The Tribunal held that though the name of the assessee company has been struck off u/s 248 of the Companies Act, in view of sub-sections (6) and (7) of section 248 and section 250 of the Companies Act, the certificate of incorporation issued to the assessee company cannot be treated as cancelled for the purpose of realizing the amount due to the company and for payment or discharge of the liability or obligations of the company, the appeal filed by the struck-off assessee company or appeal filed by the revenue against the struck-off company are maintainable. The Tribunal held that the appeal filed by the assessee company is maintainable and the same has to be decided on merits and directed the office to list the appeal before the regular bench for hearing.

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In a case where flat booked by the assessee (original flat) could not be constructed and the assessee, in lieu of the original flat, was allotted another flat (alternate flat) which was also under construction, the difference between stamp duty value of the alternate flat and the consideration is not chargeable to tax u/s 56(2)(vii)

22 ITO (International Taxation) vs.
Mrs. Sanika Avadhoot
TS-450-ITAT-2022 (Mum.)
A.Y.: 2016-17; Date of order: 9th May, 2022
Section: 56(2)(vii)

In a case where flat booked by the assessee (original flat) could not be constructed and the assessee, in lieu of the original flat, was allotted another flat (alternate flat) which was also under construction, the difference between stamp duty value of the alternate flat and the consideration is not chargeable to tax u/s 56(2)(vii)

FACTS
The assessee filed return of income declaring total income of Rs. 1,11,640. During the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee has executed an agreement for purchase of flat no. A3-3405 for a consideration of Rs. 5,62,28,500, whereas the stamp duty value of the same is Rs. 8,05,06,000. The assessee was asked to show cause why the difference between the stamp duty value and consideration be not taxed u/s 56(2)(vii).

The assessee explained that on 24th September, 2010, the assessee booked flat no. 4707 with India Bulls Sky Suites. Because of height restrictions, the booking was cancelled and shifted to flat no. 3907 in the same project on 14th November, 2013. Since the construction of this flat could not be materialized, the assessee was allotted a flat in another project by the name Sky Forest without any change in the terms of the purchase. However, a formal agreement for the flat finally allotted was entered into on 4th May, 2015. There was no change in purchase price fixed for allotment in 2010.

The AO was of the view that the assessee acquired new flat no. A-3-3405 in lieu of transfer of right and paid a consideration of Rs. 5,62,28,500 for a flat whose stamp duty is Rs. 8,05,06,000. He added the difference of Rs. 2,42,77,400 to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A), who deleted the addition.

Aggrieved, the revenue preferred an appeal to the Tribunal where on behalf of the assessee, it was stated that in F.Y. 2010-11, the assessee made a booking for the purchase of residential premises to be constructed by India Bulls Sky Forest in the project India Bulls Sky Suites against Flat No 4707 admeasuring 3,302 sq. ft. and an amount of Rs. 72,11,834 was paid by the assessee as booking amount. Subsequently, on 21st October, 2010, the assessee paid an amount of Rs. 4,23,18,166, and on 22nd November, 2011 Rs. 12,75,398 was paid totalling Rs. 5,08,05,398. Subsequently, vide letter dated 14th November, 2013, the developer informed the assessee of its inability to construct and provided alternative residential premises Unit 3907, measuring 3,341 sq. ft. Under such circumstances, the assessee threatened the developer for specific performance to provide the residential premises or will initiate criminal proceedings against them. Thereafter, with a view to avoid litigation, both the parties agreed on alternative residential premises being unit no. A3-3405 to be constructed by India Bulls Sky Forests. It was also submitted that the stamp duty value of constructed unit A3-3405 in 2010 was Rs. 2,60,91,806. The agreement registered was nothing but a ratification of the pre-existing agreement which dated back to principal agreement of 2010. It was the same contract with only constructed premises being replaced, and there was no new agreement and earlier payment formed part of the consideration for the registered agreement. The AO treated the shifting of flat as a transfer and taxed the difference between stamp duty value and amount paid as income u/s 56(2)(vii). If AO treated the same as transfer of rights to receive residential property originally allotted against A3-3405 being replaced by new flat 3907 in IndiaBulls Sky Suites, then it falls under the definition of transfer u/s 2(47), and the assessee is eligible for deduction u/s 54F.

HELD
The Tribunal observed that these facts demonstrate that it was the same booking which dated back to 24th September, 2010, and the assessee had not made any extra payment. The Tribunal held that the CIT(A) had clearly elaborated in his findings that when the developer failed to provide the original flat, then it had offered another flat in the building, which was to be constructed on a future date. When the assessee booked the flat, that property was not existing, and it was a property to be constructed in future. The CIT(A) has explained in detail that if such transactions are treated as transfer by notionally assigning the value, then the benefit of indexation and benefit of section 54, etc., will need to be given to the assessee. The Tribunal did not find any infirmity in the decision of the CIT(A). It dismissed the appeal filed by the revenue.

Compiler’s Note: Though this decision is rendered in the context of section 56(2)(vii), it appears that the ratio of this decision would apply to provisions of section 56(2)(x) as well.

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ALLOWABILITY OF PROVISION FOR SALES RETURNS

ISSUE FOR CONSIDERATION

When goods are sold by a business, in most cases, the business also has a policy permitting customers to return the goods under certain circumstances. Though the actual sales returns may take place after the end of the year, many companies following the mercantile system of accounting, choose to follow a conservative policy for recognition of income arising from sales during the year, by making a provision for sales returns in respect of sales made during the year in the year of sale itself. The provision may be based either on the actual sales returns made in respect of such sales subsequent to the year-end till the date of finalisation of accounts, or may be based on an estimate of the likely sales returns based on past trends. Such provisions are authorized by accounting principles and at times are mandated in accounting for sales revenue.

The issue of allowability of deduction for such provision in the year in which such provision is made has arisen before the different benches of the Tribunal. While the Mumbai bench of the Tribunal has taken a view that such provision for sales returns is an allowable deduction, in the year of sales itself, recently the Bangalore bench of the Tribunal has taken a contrary view, holding that deduction of such provision is not allowable in the year in which it is made i.e, the year of sales.

BAYER BIOSCIENCE’S CASE
The issue first came up before the Mumbai bench of the Tribunal in the case of Bayer Bio Science Pvt Ltd vs. Addl CIT in an unreported decision in ITA 7123/Mum/2011 dated 8th February, 2012, relating to A.Y. 2006-07.

In this case, the assessee made a provision for sales return of Rs. 2,00,53,988 in respect of sales made during F.Y. 2005-06, which had been returned by customers in the subsequent F.Y. 2006-07 before finalization of the accounts and claimed such provision as a deduction in computing the income for A.Y. 2006-07.

The Assessing Officer (AO) took the view that since the sales returns had actually been made in the subsequent year, they should have been accounted for in the subsequent year. Accordingly, he disallowed the provision made by the assessee for sales return. The assessee did not succeed before the Dispute Resolution Panel in respect of such disallowance, and therefore preferred an appeal to the Tribunal on this issue, along with other issues.

The Tribunal examined the provisions of section 145 as it then stood. It noted that while that section laid down that business income had to be computed in accordance with the cash or mercantile system of accounting as regularly employed by the assessee, there was a rider to this section that the Central Government may notify accounting standards and the applicable accounting standards would have to be followed by the assessee in applying the method of accounting followed by it.

The Tribunal noted that two accounting standards had been notified in this regard vide notification no. 9949 dated 25th January, 1996. One of these accounting standards (AS-I, Disclosure of Accounting Policies) provided that:

“the major considerations governing the selection and application of accounting policies are the following, namely:–

(i) Prudence – Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.”

This approach required all anticipated losses to be taken into account in computation of income taxable under the head “Profits and Gains of Business or Profession”. The Tribunal noted that unlike under the pre-amended section 145 (prior to A.Y. 1997-1998), there was no enabling provision which permitted the AO to tinker with the profits computed in accordance with the method of accounting so employed u/s 145. The Tribunal took note of the fact that it was not even the AO’s case that the mandatory accounting standards had not been followed.

The Tribunal observed that besides this analysis of section 145, even on first principles, deduction in respect of anticipated losses as a measure of prudent accounting principles, could not be declined. According to the Tribunal, it was only elementary that the accountancy principle of conservatism, which had been duly recognized by the courts, mandated that anticipated losses were to be provided for in the computation of income, and anticipated profits were not to be taken into account till the profits actually arose.

As per the Tribunal, an anticipated loss, even if it might not have crystallised in the relevant previous year, was to be allowed as a deduction in the computation of business profits. The Tribunal noted that there was no dispute that goods sold had been returned in the subsequent year, and that fact was known before the date of finalization of accounts. Therefore, in the view of the Tribunal, there was no point in first taking into account income on sales, which never reached finality, and then accounting for loss on sales return in the subsequent year, in which the actual sales return took place.

The Tribunal therefore allowed the assessee’s appeal, holding that the approach of the assessee was in consonance with well settled accountancy principles, and accordingly deleted the disallowance.

This decision was followed by the Tribunal in subsequent years in DCIT vs. Bayer Bioscience P Ltd ITA Nos 5388/Mum/2009 and 2685/Del/2009 dated 21st April, 2016, and in the case of DCIT vs. Cengage Learning India Pvt Ltd ITA No 830/Del/2013 dated 10th April, 2017. A similar view was also taken by the Delhi Bench of the Tribunal favouring allowability of deduction of such provision for sales returns in the year of sales, in the case of Inditex Trent Retail India (P) Ltd vs. Addl CIT 95 ITR (T) 102, a case relating to A.Y. 2014-15. In this case, the Tribunal held that the provision was governed by AS 29 issued by ICAI, and it required recognition as there existed an obligation resulting from past event and a probability of outflow of resources required to settle the obligation.

HERBALIFE INTERNATIONAL INDIA’S CASE

The issue came up recently before the Bangalore bench of the Tribunal in the case of Herbalife International India Pvt Ltd vs. ACIT TS-126-ITAT-2022.

In this case, the assessee had made a provision for sales returns for the 3 financial years 2012-13 to 2014-15 corresponding to assessment years A.Ys. 2013-14, 2014-15 and 2015-16, and claimed such provision as a deduction. The AO disallowed such deduction, and such disallowance was confirmed by the CIT (Appeals), in the first appeal.

Before the tribunal, on behalf of the assessee, it was submitted that sales returns were a regular feature in its line of business, and had been consistently accepted by the assessee over a period of time. The accounting policy followed by the assessee for revenue recognition in this regard had been disclosed in the notes to the accounts, and had been consistently followed by the assessee over the years.

It was clarified that the provision for sales return had been made in accordance with the Accounting Standard (AS) 9 – Revenue Recognition, issued by ICAI which mandated that when the uncertainty relating to collectability arises subsequent to the time of sale or rendering of service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. Attention was also drawn to paragraph 14 of AS 9, which provided in relation to disclosure of revenue that, in addition to the disclosures required by AS 1 – Disclosure of Accounting Policies, an enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties.

Attention was also drawn to the opinion of ICAI Expert Advisory Committee dated 10th October, 2011 which had noted that “The company should recognise a provision in respect of sales returns at the best estimate of the loss expected to be incurred by the company in respect of such returns including any estimated incremental costs that would be necessary to resell the goods expected to be returned, on the basis of past experience and other relevant factors.”

It was submitted on behalf of the assessee that the estimate of sales return could be made adopting different approaches namely, sales return after the balance sheet date can be tracked to the date of closing accounts finally, or estimated by simple tracking the returns year wise for past years and adopting the percentage on current sales for the provision, or estimated in the manner made by the company; the company had followed the method of estimating sales in the pipeline by assigning weights to each month sales, based on the proximity of that month to the end of the financial year, and applying the percentage of sales returns experience of the past years to such sales in the pipeline, to arrive at the provision for sales return required at the end of the year. Adjustment was made in respect of the opening provision and the actual returns during the year, and the differential amount required for the provision for sales return was debited to the P&L Account.

It was emphasised that the estimate made and provisions made had proved accurate up to 90% in the company’s case i.e., utilisation by way of actual refunds for sales returns out of the provisions made during the period, which was therefore more than a fair estimate, and was a scientific estimate.

It was explained that conceptually, in the company’s case, the closing balance in provision for sales returns account could be described as the estimated amount (based on immediate past experience) of refund towards sales return in near future (next year) period that company was expecting out of current year’s sales revenue. The company made the necessary provision from P&L Account to ensure this closing balance for meeting its obligations from sales revenue recognised during each year. The data provided proved clearly the consistent basis adopted for recognising estimated sales return with more than reasonable accuracy. As the utilisation numbers indicated in the provision movement indicated that the provision was at actuals, no separate adjustment for excess provision, if any, would be necessitated.

It was argued that all parameters indicated by the Supreme Court while dealing with accounting for similar aspects, like warranty provisions, were fully satisfied. Hence, it was submitted that the company’s claim for deduction of provision made in each year deserved to be accepted on the basis of the above facts.

Reliance was placed on behalf of the assessee on the decisions of the tribunal in the cases of Bayer Bioscience (supra) and Cengage Learning (supra), which had held that provision for sales return in consonance of well-settled accountancy principles needed to be allowed and no disallowance was called, for provision for sales return. It was submitted that the decision of the tribunal in the case of Nike India Pvt Ltd vs. ACIT IT(TP)A No 739/Bang/2017 dated 14th October, 2020 was incorrect, as there was no reference to relevant aspects such as AS 9, issued by ICAI, on accounting of provision for sales return, with reference only being made to AS 29 – Provisions, Contingent Liabilities and Contingent Assets, and earlier decisions of the tribunal in the cases of Bayer Bioscience (supra) and Cengage Learning (supra) not having been considered in this decision.

It was further submitted that the provision for sales returns was made on a scientific basis, and was consistently followed by the company from A.Y. 2010-11 onwards, with no additions being made by the AO till A.Y. 2012-13. A reference was also invited to the CIT (Appeals) order for A.Y. 2015-16, where the alternate claim made by the company to allow the excess utilization of such provision was also rejected. It was argued that on the one hand, the Department did not want to allow the provision for sales returns in the year of creation, and on the other hand, where the utilisation of provision was higher, it wanted to deny the benefit on hyper technicalities, without appreciating the settled principle of law, that the principle of consistency needed to be followed.

An alternative prayer was made on behalf of the assessee that in case the provision was held to be not allowable, the utilisation of the provision by actual refunds made towards sales return in respective years should be allowed since the amounts were refunded to third parties at actuals during the relevant year.

On behalf of the Department, it was submitted that the assessee’s method for arriving at the amounts to be added to the provision for sales return had been found to be not scientific or reasonable. Various alleged defects in the method followed by the assessee were pointed out on behalf of the Department. Reliance was placed on the decision of the Bangalore bench of the tribunal in the case of Nike India Pvt Ltd (supra). It was therefore submitted that the action of the AO in disallowing the provision of sales return was to be upheld.

The tribunal noted that the assessee had taken support of AS 29, which explained that a provision should be recognised when:

an enterprise had a present obligation as a result of past event;

it was probable that an outflow of resources embodying economic benefit would be required to settle the obligation, and

a reliable estimate could be made of the amount of the obligation.

The tribunal noted that there should exist a “present obligation” as a result of “past event”. It questioned whether provision for sales returns could fall under the category of present obligation as a result of past event. According to the tribunal, the present obligation as a result of past event contemplated that there had occurred some event in the past, and the same would give rise to some obligation of the assessee, and further the said obligation should exist as on the balance sheet date. Further, the prudence principle in accounting concepts mandates that an assessee should provide for all known losses and expenses, even though the exact quantum of loss/expense was not known.

According to the tribunal, the facts in the case before it were different. The assessee had effected sale of products, and accordingly recognised revenue arising on such sales. On effecting the sales, the contract had already been concluded. Sales returns was another separate event, even though it had connection with the sales, i.e., the very same product already sold by the assessee was being returned. By making provision for sales returns, what the assessee sought to do was to derecognise the revenue recognised by it earlier. Therefore, sales returns were reduced from the sales in the P&L Account.

As per the tribunal, there should not be any dispute that the past event in the case before it was sales, and not sales returns. When there was no past event, the question of present obligation out of such past event did not arise. Therefore, the tribunal was of the view that the provision for sales return did not represent the present obligation arising as a result of past event, but was an expected obligation that might arise as a result of a future event.

The tribunal observed that the sales return expected after the balance sheet date was an event occurring after the balance sheet date. As per the tribunal, AS 4 – Contingencies and Events Occurring after the Balance Sheet Date, actually governed this situation. It observed that a careful perusal of AS 4 showed that the adjustment on account of contingencies and events occurring after the balance sheet date should relate to the contingencies and conditions existing as on the balance sheet date. As per the tribunal, the contract of sale was concluded when the goods were supplied to the customers, and the sales return was a separate event, which was not a contingency or any condition existing at the balance sheet date.

Further, the tribunal noted that sales and sales returns actually represented receipt and issue of goods, and therefore had an impact on the physical stock of goods. Hence, when there was sales return, there would be increase in physical stock of goods, and the physical stock should accordingly be increased when an entry is made for sales return. According to the tribunal, making provision for expected sales return would not result in cost on receipt of goods and increase of closing stock, which was against accounting principles.

The Tribunal further examined the deductibility of the provision for sales returns u/s 37(1). It noted that what was deductible under that section was an expenditure laid out or expended wholly and exclusively for the purposes of business. Since the sales returns actually represented derecognition of revenue already recognised earlier, and there was corresponding receipt of goods on such sales return, as per the Tribunal, it did not qualify as an expenditure. According to the tribunal, provision for sales returns was therefore not allowable u/s 37(1).

Referring to the Mumbai and Delhi tribunal decisions of Bayer Bioscience (supra) and Cengage Learning (supra), relied upon by the assessee, the Tribunal observed that in those cases, the bench did not refer to the provisions of AS 4 and AS 29, and did not consider another important point that sales return should result in corresponding receipt of goods, which would result in increase of closing stock. The Bangalore bench of the Tribunal therefore chose to follow the logic and detailed reasoning that it had undertaken, rather than those earlier decisions of the tribunal referred to by the assessee.

The Tribunal, therefore, held that the provision for sales returns was not allowable as a deduction under the provisions of the Income-tax Act. As regards the alternate ground of the assessee to allow the provision in the subsequent year in which the returns took place, the Tribunal observed that while computing disallowance on account of provision for sales return, the AO considered only the net closing provision or closing provision less opening provision, and allowed the utilisation amount in each assessment year under consideration. It meant that the AO allowed the actual sales returns made in each assessment year under consideration, and therefore the question of any further deduction did not arise.

OBSERVATIONS

The Bangalore Tribunal has relied on its own interpretation of the Accounting Standards, ignoring the views of the Expert Advisory Committee of ICAI in this regard. The ICAI Expert Advisory Committee in its Query No 14 dated 10th October, 2011, on Accounting for Sales Returns (Compendium of Opinion, Vol XXXI, page 101) has opined as under:

“10. However, the Committee notes from the Facts of the Case that in the extant case, there is a right of return by the franchisees (refer paragraph 6 above). The existence of such right would create a present obligation on the company. In this context, the Committee notes the definition of the term ‘provision’ as defined in paragraph 10 of Accounting Standard (AS) 29, Provisions, Contingent Liabilities and Contingent Assets notified under Companies (Accounting Standards) Rules, which provides as follows:

‘A provision is a liability which can be measured only by using a substantial degree of estimation.

A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.’

The Committee is of the view that since obligation in respect of sales return can be estimated reliably on the basis of past experience and other relevant factors such as fashion trends, etc. in the extant case, a provision in respect of sales returns should be recognised. The provision should be measured as the best estimate of the loss expected to be incurred by the company in respect of such returns including any estimated incremental cost that would be necessary to resell the goods expected to be returned.”

“11. The company should recognise a provision in respect of sales returns at the best estimate of the loss expected to be incurred by the company in respect of such returns including any estimated incremental cost that would be necessary to resell the goods expected to be returned, on the basis of past experience and other relevant factors as discussed in paragraph 10 above. Necessary adjustments to the provision should be made for actual sales return after the balance sheet date up to the date of approval of financial statements. Such provision should also be reviewed at each balance sheet date and if necessary, should be adjusted to reflect the current best estimate.”

From the above EAC opinion, it is clear that the past event is the sale, which gives rise to the obligation to take back the goods, with a resultant loss of profit in relation to the goods returned. The sales return is, therefore, clearly linked with the initial sale. Also, a reliable estimate can be made of the goods likely to be returned. Accounting for sales returns, in the year of sales, is therefore a ‘provision’ as contemplated by AS 29. The interpretation by the Bangalore Tribunal that the sale and the sales returns are two separate transactions, and that therefore there is no past event in relation to the sales return, does not seem to be the correct understanding of AS 29.

Further, the Bangalore Tribunal seems to have assumed that a provision is being made for the gross value of the sales returns, and not for the loss of profit or additional cost to be incurred on account of the sales returns, when it observed that the sales returns increases the closing stock. From the EAC’s opinion, again, it is clear that only the loss expected to be incurred is to be provided for. In the Bayer Bioscience’s case also, it was clear that only the loss on account of sales returns was the issue under consideration, and not the entire value of sales returns. The factual position if not clear in Herbalife’s case, could have been inquired in to ensure that, the total value of expected sales returns was provided, in accordance with AS 29, only to the extent of the expected loss on account of such anticipated returns.

While the decisions of the Mumbai and Delhi benches of the Tribunal seem to have focused mainly on the provisions of the Income- tax Act and the Accounting Standards notified under that law to arrive at their conclusions, the Bangalore bench seems to have relied mainly on Accounting Standards issued by ICAI. For all the years under consideration in all these appeals, the provisions of law were identical, in that till A.Y. 2015-16, the 2 accounting standards notified u/s 145 were applicable. These two IT Accounting Standards modify the method of accounting followed u/s 145, and therefore, to that extent supersede normal accounting standards, to the extent that they are in conflict with those standards, for the purposes of taxation of business income. The other normal accounting standards would also continue to apply, to the extent that no accounting standards have been issued u/s 145, which cover those issues or are in conflict with those. This aspect does not seem to have been considered by the Bangalore bench in Herbalife’s case, which relied primarily on the ICAI Accounting Standards.

The new Income Computation and Disclosure Standards (ICDS) notified u/s 145(2), which became effective only from A.Y. 2017-18, also effectively modify the normal accounting standards in so far as taxation of income is concerned, to the extent that they are in conflict with normal accounting standards.

For certain large companies, the provisions of Ind AS 37 notified by the Ministry of Corporate Affairs, now apply in place of AS 29. The provisions of Ind AS 37 are similar to those of AS 29, and in fact contain greater clarity. Appendix F to Ind AS 37 gives examples of applicability of the Ind AS, by recognition of a provision. Example 4 therein reads as under:

Example 4 Refunds policy

A retail store has a policy of refunding purchases by dissatisfied customers, even though it is under no legal obligation to do so. Its policy of making refunds is generally known.

Present obligation as a result of a past obligating event – The obligating event is the sale of the product, which gives rise to a constructive obligation because the conduct of the store has created a valid expectation on the part of its customers that the store will refund purchases.

An outflow of resources embodying economic benefits in settlement – Probable, a proportion of goods are returned for refund (see paragraph 24).

Conclusion – A provision is recognised for the best estimate of the costs of refunds (see paragraph 10 (the definition of a constructive obligation), 14, 17 and 24).

From Ind AS 37, it is absolutely clear that a provision for loss due to future sales returns is required to be made under Ind AS. In fact, Ind AS simply amplifies the view which always was under the AS and which was explained by the EAC.

With effect from A.Y. 2017-18, the provisions of ICDS apply, and modify the accounting under normal accounting method. ICDS X relating to provisions, contingent liabilities and contingent assets would apply in such a situation. This ICDS is similar to AS 29 read with Ind AS 37, and requires a provision to be recognized when:

(a) a person has a present obligation as a result of a past event;

(b) it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; and

Therefore, even under ICDS, a provision for loss due to sales returns is required to be made, and would therefore be an allowable deduction.

In so far as the allowability of deduction of such a provision u/s 37(1) is concerned, the question does not arise at all, as the computation of business income, including all business losses, is u/s 28 itself. The loss on account of sales returns is therefore to be considered u/s 28 itself.

It is a settled position in law that a deduction otherwise admissible in law should not be tweaked by the assessing authorities simply because in their view the claim was allowable in a later year or that the revenue was to be recognized in an earlier year, or simply because in their opinion it fell for allowance or recognition in a different year as long as the treatment of the assessee was in accordance with generally accepted accounting principles and the rate of taxation was uniform. Nagri Mills Ltd. 33 ITR 681 (Bom.), Millenium Estates, 93 taxmann.com 41 (Bom.), Vishnu Industrial Gas Ltd. ITR 228 of 1988(Delhi) and Excel Industries Ltd. 358 ITR 295 (SC).

shailesh.kwebmaker

S. 245 – Adjustment of refund – Intimation to assessee – Must

9 Greatship (India) Limited One International Centre vs. Assistant Commissioner of Income Tax – 5(1)(1) & Others
[Writ Petition No. 1476 of 2022
(Bombay High Court)]
Date of order: 18th July, 2022

S. 245 – Adjustment of refund – Intimation to assessee – Must

The petitioner challenges the action of respondent revenue of adjustment in the refund of Rs. 2,22,89,942 for A.Y. 2008-09 arising as consequence and effect of the order of the Income Tax Appellate Tribunal against the alleged outstanding demands for A.Ys. 2014-15 and 2015-16.

The case set up is that Rs. 61,64,649 as refund for A.Y. 2008-09 came to be adjusted for A.Y. 2014-15, which came to the petitioner’s knowledge on 17th November, 2021, when the petitioner downloaded Form 26AS for A.Y. 2014-15, where ‘Part C’ provided details of tax paid (other than TDS/TCS).

The petitioner’s case further is that an amount of R1,61,25,293 came to be adjusted illegally by the respondent No. 2 from the refund determined in favour of the petitioner upon giving effect to the tribunal’s order for A.Y. 2008-09 against the alleged outstanding demand for A.Y. 2015-16. Knowledge of this illegal adjustment was also stated to have been acquired by the petitioner on 17th November, 2021 when the petitioner downloaded Form No. 26AS.

The petitioner urged that the action of Revenue in making adjustments of the refund due was illegal inasmuch as no intimation was given to the petitioner as was the requirement in terms of section 245.

The Hon. Court observed that the reply affidavit of Revenue does not specifically state as to whether before making such an adjustment, the petitioner had been given prior intimation in terms of section 245.

Section 245 envisages that when a refund is found to be due to any person under any of the provisions of the Act, the Revenue can set off/adjust the amount to be refunded or any part of that amount against the sum which remains payable under the Act by the person to whom the refund is due after giving an intimation in writing to such person of the action proposed to be taken under this section.

The Court observed that giving of prior intimation u/s 245 was mandatory. The purpose of giving prior intimation u/s 245 was to enable a party to point out factual errors or some further developments, for example, that there was a stay of the demand or that there was a Supreme Court’s decision covering the demand which is the subject matter of a pending appeal which would not warrant an adjustment of the refund against the pending demand. It was also held that where a party raises such issues in response to the intimation the officer of the Revenue exercising powers u/s 245, must record reasons why the objection was not sustainable and also communicate it to the said party, and that this would ensure that the power of adjustment u/s 245 is not exercised arbitrarily.

In the present case there was no prior intimation u/s 245 has remained unrebutted as no proof of any such prior intimation was placed on record by the Revenue.

The Hon. Court held that the impugned action of respondent No.2 in making adjustments of the amount of Rs. 61,64,649 and Rs. 2,22,89,942 for A.Y. 2008-09 against the alleged outstanding demands for A.Ys. 2014-15 and 2015-16 is bad and illegal, and accordingly, quashed.

shailesh.kwebmaker

For determining interest u/s 244A, refund already granted has to be first adjusted against interest component

21 DCIT vs. MSM Satellite (Singapore) Pte Ltd
TS-480-ITAT-2022 (Mum.)
A.Ys.: 2006-07 to 2008-09;
Date of order: 9th June, 2022
Section: 244A

For determining interest u/s 244A, refund already granted has to be first adjusted against interest component

FACTS
In the first round of proceedings, the Tribunal granted relief to the assessee. The Assessing Officer (AO) passed an order giving effect to the order of the Tribunal and determined the amount of refund payable to the assessee. Aggrieved by the short grant of refund, the assessee preferred an appeal to the CIT(A). The CIT(A) directed the AO to re-compute the interest granted u/s 244A by first adjusting the refund already granted to the assessee against the interest component and the balance, if any, towards the tax component of the refund due.

Aggrieved by the order of the CIT(A), the revenue preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the present case is not a case where interest on interest due was claimed by the assessee. The issue arising in the present case is regarding the correct computation of the refund. As per the Revenue, while computing the refund and interest thereon u/s 244A, the refund already granted to the assessee should be adjusted against the tax component. However, as per the assessee, the refund already granted to the assessee should be adjusted against the interest component and balance, if any, towards the component of refund due.

The Tribunal held that the issue arising in the present appeals is settled in favour of the assessee by the decisions of the co-ordinate bench in the case of Union Bank of India vs. ACIT [(2017) 162 ITD 142 (Mum.)] and in Grasim Industries Ltd. vs. CIT [(2021) 23 taxmann.com 31 (Mum.)]. The Tribunal dismissed the grounds raised by the Revenue.

shailesh.kwebmaker

Proceedings u/s 263 of the Act cannot be initiated merely for non-initiation of proceedings for levy of penalty u/s 270A

20 Coimbatore Vaiyapuri Maathesh vs. ITO
TS-488-ITAT-2022 (Chennai)
A.Y.: 2017-18; Date of order: 17th March, 2022
Sections: 263, 270A

Proceedings u/s 263 of the Act cannot be initiated merely for non-initiation of proceedings for levy of penalty u/s 270A

FACTS
For A.Y. 2017-18, the assessee filed his return of income declaring a total income of Rs. 4,84,300. The Assessing Officer (AO) assessed the total income u/s 143(3) to be Rs. 81,67,948 by making an addition of Rs. 29,09,000 for unexplained money u/s 69A, and disallowing the cost of improvement of Rs. 47,74,648 claimed while computing capital gains.

The Principal Commissioner of Income-tax (PCIT) issued a show cause notice (SCN) to the assessee asking the assessee to show cause why the assessment order should not be revised u/s 263 as the same has been passed with omission to initiate penalty proceedings u/s 270A in respect of disallowance of the claim made while computing capital gains.

In response to the SCN issued, the assessee submitted that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue since there is no satisfaction/finding recorded by the AO with regard to underreporting or misreporting as required by law.

The PCIT, not being satisfied with the explanation of the assessee held that the assessment order passed by the AO with omission to initiate penalty proceedings u/s 270A, is erroneous in so far as prejudicial to the interest of the revenue, set aside the assessment order with a direction to the AO to re-do the assessment order after verification of issues discussed in 263 proceedings.

Aggrieved by the order passed by the PCIT, the assessee preferred an appeal to the Tribunal and contended that although the AO has made additions towards disallowance of capital gains but he has chosen not to initiate penalty proceedings u/s 270A because he has not arrived at satisfaction to the effect that there is an underreporting or misreporting of income as contemplated u/s 270A. Therefore, on the issue of non-initiation of penalty proceedings, the PCIT cannot assume jurisdiction and revise the assessment order. For this proposition, reliance was placed on the decision of the Madras High Court in the case of CIT vs. Chennai Metro Rail Ltd. [(2018) 92 taxmann.com 329].

HELD
The Tribunal noted that the AO had disallowed the cost of improvement on the ground that the assessee has not submitted supporting documentary evidence to substantiate his claim towards the cost of improvement. Except for this, there is no observation of unsustainability of the claim made by the assessee towards the cost of improvement. The Tribunal understood this to mean that although the AO has made an addition towards the cost of improvement, he has chosen not to initiate penalty proceedings u/s 270A because prima facie, there is no material with the AO to allege that there is an underreporting or misreporting of income. The Tribunal also noted that PCIT has relied upon the decision of Allahabad High Court in CIT vs. Surendra Prasad Aggarwal [(2005) 275 ITR 113 (All.)], where the court has held that revisionary power can be exercised for initiation of penalty proceedings.

The Tribunal found that although the Allahabad High Court in Surendra Prasad Aggarwal (supra) upheld 263 order passed by PCIT for initiation of penalty proceedings, the jurisdictional High Court in CIT vs. Chennai Metro Rail Ltd (supra) has taken a contrary view after considering the decision of the Allahabad High Court in Surendra Prasad Aggarwal (supra) and held that in the absence of any findings in the assessment order regarding underreporting or misreporting of income, the PCIT cannot revise assessment order to initiate penalty proceedings.

The Tribunal held that the PCIT erred in invoking revisional proceedings u/s 263 because the AO has chosen not to initiate penalty proceedings. The Tribunal quashed the revision order passed by the PCIT u/s 263.

shailesh.kwebmaker

RECENT AMENDMENTS FOR TAX DEDUCTION AND TAX COLLECTION AT SOURCE

1. BACKGROUND
The scope for Tax Deduction
at Source (TDS) and Tax Collection at Source (TCS) has been enlarged in
the last three Budgets presented by our Finance Minister, Smt. Nirmala
Sitharaman, in 2020, 2021 and 2022. Various Sections of the Income-tax
Act (Act) dealing with TDS and TCS have been amended, and some new
sections are added for this purpose. All these amendments have increased
the compliance burden on taxpayers. In this article, the various
amendments made in the Act in the last three years are discussed.

2. SECTION 192: TDS FROM SALARIES
Finance Act, 2020, amended this Section, effective from A.Y.2021-22 (F.Y.2020-21).
Section 17(2)(vi) of the Act provides for taxation of the value of any
specified securities or sweat equity shares (ESOP) allotted to any
employee by the employer as a perquisite. The employer must deduct tax
at source on such perquisite at the time of exercise of option u/s 192.

To
ease the burden of Start-Ups, the amendments in this Section provide
that a company which is an eligible start-up u/s 80IAC will have to
deduct tax at source on such income within 14 days (i) after the expiry
of 48 months from the end of the relevant assessment year, or (ii) from
the date of sale of such ESOP shares by the employee or (iii) from the
date on which the employee who received the ESOP benefit ceases to be an
employee of the company, whichever is earlier. For this purpose, the
tax rates in force of the financial year in which the said shares (ESOP)
were allotted or transferred are to be considered. By this amendment,
the employee’s liability to pay tax on such perquisite and deduction of
tax on the same is deferred as stated above. Consequential amendments
are also made in Sections 140A (Self-Assessment Tax), 156 (Notice of
Demand) and 191 (Direct payment of Tax).

3. SECTION 194: TDS FROM DIVIDENDS
i)
Up to 31st March, 2020, domestic companies declaring / distributing
dividends to shareholders were required to pay Dividend Distribution Tax
(DDT) u/s 115-O of the Act at the rate of 15% plus applicable surcharge
and cess. Consequently, Section 10(34) granted an exemption to dividend
income in the hands of the shareholder. This provision in Section 115-0
for payment of DDT by the company and exemption of dividend in hands of
the shareholder has been deleted by the F.A. 2020 effective from 01.04.2020.

ii) Section 194 is amended from 01.04.2020
to provide that if the dividend paid by a domestic company to a
Resident Shareholder exceeds Rs 5,000 in a Financial Year, tax at the
rate of 10% shall be deducted at source. The rate of TDS in the case of a
Non-Resident Shareholder shall by 20% as provided u/s 195.

iii) Finance Act, 2021, has further amended this Section, effective from 01.04.2020,
to provide that TDS provision shall not apply to dividend credited or
paid to (a) A Business Trust i.e., Infrastructure Investment Trust or
Real Estate Investment Trust by a Special Purpose Vehicle or (b) Any
other notified person.

4. SECTION 194A: TDS FROM INTEREST INCOME
4.1 This Section deals with TDS from Interest Income. This section is amended by the F.A. 2020, effective from 01.04.2020.
Prior to this date, a Co-operative Society was not required to deduct
tax at source from interest payment in the following cases.

i) Interest payment by a Co-operative Society (Other than a Co-Operative Bank) to its members.

ii) Interest payment by a Co-operative Society to any other Co-operative Society.

iii)
Interest payment on deposits with a Primary Agricultural Credit Society
or Primary Credit Society or a Co-operative Land Mortgage Bank.

iv)
Interest payment on deposits (Other than time deposits) with a
Co-operative Society (Other than Societies mentioned in (iii) above)
engaged in the business of banking.

Under the amendments made in Section 194A effective from 01.04.2020,
the above exemptions have been modified, and a Co-Operative Society
shall be required to deduct tax at source in all the above cases at the
rates in force if the following conditions are satisfied.

a) The
total sales, gross receipts or turnover of the Co-operative Society
exceed Rs 50 Cr. during the immediately preceding financial year, and

b)
The amount of interest, or the aggregate of the amounts of such
interest payment during the financial year, is more than Rs 50,000 in
case the payee is a Senior Citizen (Age of 60 years or more) or more
than Rs 40,000 in other cases.

4.2 i) It may be noted that Section 10(12) is amended by the F.A. 2021, effective from 01.04.2022.
By this amendment, interest credited to the account of an employee in
his account in a recognized Provident Fund is now taxable in respect of
his contribution in excess of Rs 2.50 Lakhs in a financial year. The
method of calculating such interest is provided in Rule 9D inserted in
the Income-tax Rules, effective from 01.04.2022. In this Rule, it
is provided that the Employees’ PF Trust will maintain a separate
account for each employee under the heading ‘Taxable Contribution
Account’ and credit his contribution, which is in excess of Rs 2.50
Lakhs during the F.Y. 2021-22 and each of the subsequent years. Interest accrued on this excess contribution shall be credited to this account.

ii)
The Ministry of Labour and Employment, Government of India, has issued
Circular No. WSU/6(1) 2019/Income tax / Part I (E – 33306) dated 5th
April, 2022. In this circular, it is stated that interest credited to
the employee’s account in the ‘Taxable Contribution Account’ as provided
in Rule 9D of the Income-tax Rules shall be subject to TDS u/s 194A at
10%. If PAN is not linked with the PF Account of the employee, the rate
of TDS will be 20%. If the total amount of such interest is less than Rs
500 in any Finance Year, this TDS provision will not apply. This tax
will have to be deducted by Trustees of Employees’ PF Trust and
deposited with the Government when it is credited or paid, whichever is
earlier.

5. SECTION 194C: PAYMENTS TO CONTRACTORS
This section is amended by the F.A. 2020 effective from 01.04.2020.
Prior to the amendment, the term “Work” was defined in the section to
include manufacturing or supplying a product according to the
requirement or specification of a customer by using material purchased
from such customer. Now, this term “Work” will also include material
purchased from the Associate of such Customer. For this purpose, the
term “Associate” means a person specified u/s 40A(2)(b).

6. SECTION 194 – IA: TDS FROM PAYMENT FOR TRANSACTION IN IMMOVABLE PROPERTY
This
Section requires that, if the consideration for the transaction is Rs
50 Lakhs or more, the buyer shall deduct tax at the rate of 1% of the
consideration for the transfer of immovable property. Effective from
01.04.2022, this Section is amended by the F.A. 2022 to provide that tax
at 1% is to be deducted from the amount determined for the Stamp Duty
Valuation if that amount is higher than the consideration. If the
consideration for transfer and the Stamp Duty Valuation is less than Rs
50 Lakhs, then no tax is required to be deducted.

7. SECTION 194J: TDS FROM FEES FOR PROFESSIONAL OR TECHNICAL SERVICES
This section is amended by the F.A. 2020, effective from 01.04.2020.
The rate for TDS has been reduced from 10% to 2% in respect of Fees for
Technical Services. The rate of TDS for Professional Fees continues at 10%.

8. SECTION 194K: TDS FROM INCOME FROM MUTUAL FUND
This is a new Section inserted by the F.A. 2020, effective from 01.04.2020.
It provides that income distributed by a Mutual Fund to a Resident unit
holder in excess of R5,000 in a financial year will be subject to TDS
at the rate of 10%. In the case of a Non-Resident Unit holder, the rate
of TDS is 20% u/s 196A. Prior to 1.4.2020, a Mutual Fund was
required to pay tax at the time of distribution of income u/s 195R and
the Unit Holder was granted exemption u/s 10(35).

9. SECTION 194LBA: TDS FROM INCOME DISTRIBUTED BY A BUSINESS TRUST
This section has been amended by the F.A. 2020, effective from 01.04.2020,
to provide that in respect of income distributed by a Business Trust to
a resident unit holder, being dividend received or receivable from a
Special Purpose Vehicle, the tax shall be deducted at source at the rate
of 10%. In respect of a non-resident unit holder, the rate for TDS is
20% on such dividend income.

10. SECTION 194LC: TDS FROM INTEREST FROM INDIAN COMPANY
This section is amended by F.A. 2020, effective from 01.04.2020.
The eligibility of borrowing under a loan agreement or by issue of long
term bonds for concessional rate of TDS under this section has now been
extended from 30.06.2020 to 30.06.2023. Further, Section 194LC(2) has
now been amended to include interest on monies borrowed by an Indian
Company from a source outside India by issue of Long Term Bonds or Rupee
Denominated Bonds between 01.04.2020 and 30.06.2023, which are listed
on a recognized Stock Exchange in any International Financial Services
Center (IFSC). In such a case, the rate of TDS will be 4% (as against 5%
in other cases).

11. SECTION 194LD: TDS FROM CERTAIN BONDS AND GOVERNMENT SECURITIES
This section is amended by the F.A. 2020, effective from 01.04.2020.
This amendment is made to cover interest payable from 01.06.2013 to
30.06.2023 by a person to an FII or a Qualified Foreign Investor on
Rupee Denominated Bonds of an Indian Company or Government Security u/s
194LD. Further, now interest at specified rate on Municipal Debt
Securities issued between 01.04.2020 to 30.06.2023 will also be covered
under the provisions of this Section. The rate for TDS is 5% in such
cases.

12. SECTION 194N: TDS FROM PAYMENT IN CASH
Section
194N was inserted, effective from 01.09.2019, by the Finance (No.2)
Act, 2019. This Section provided that a Banking Company, Co-operative
Bank or a Post Office shall deduct tax at source at 2% in respect of
cash withdrawn by any account holder from one or more accounts with such
Bank / Post office in excess of Rs 1 Cr. in a financial year.

Now, the above Section has been replaced by a new Section 194N by the F.A. 2020, effective from 01.07.2020. This new Section provides as under:

i) The provision relating to TDS at 2% on cash withdrawals exceeding Rs 1 Cr. as stated above is continued. However, w.e.f. 01.07.2020,
if the account holder in the Bank / Post Office has not filed returns
of income for all the three assessment years relevant to the three
previous years, for which the time for filing such return of income u/s
139(1) has expired, the rate of TDS will be as under:

a) 2% of
cash withdrawal from all accounts with a Bank or Post Office in excess
of R 20 Lakhs but not exceeding Rs 1 Cr. in a financial year.

b) 5% of cash withdrawal from all accounts with a Bank or Post Office in excess of Rs 1 Cr. in a financial year.

ii)
This TDS provision applies to all persons, i.e., Individuals, HUF, AOP,
Firms, LLP, Companies etc., engaged in business or profession and to
all persons having bank accounts for personal purposes.

iii) The
Central Government has been authorized to notify, in consultation with
RBI, that in the case of any account holder, the above provisions may
not apply or tax may be deducted at a reduced rate if the account holder
satisfies the conditions specified in the notification.

iv) This
Section does not apply to cash withdrawals by any Government, Bank,
Co-operative Bank, Post Office, Banking Correspondent, White Label ATM
Operators and such other persons as may be notified by the Central
Government in consultation with RBI if such person satisfies the
conditions specified in the notification. Such notification may provide
that the TDS may be at reduced rates or at “Nil” rate.

v) This
provision is made to discourage cash withdrawals from Banks and promote
the digital economy. It may be noted that u/s 198, it is provided that
the tax deducted u/s 194N will not be treated as income of the assessee.
If the amount of this TDS is not treated as income of the assessee,
credit for tax deducted at source u/s 194N will not be available to the
assessee u/s 199 read with Rule 37BA. If such credit is not given, this
will be an additional tax burden on the assessee.

13. SECTION 194-O: TDS FROM PAYMENT BY E-COMMERCE OPERATOR TO E-COMMERCE PARTICIPANT
New Section 194-O has been inserted by the F.A. 2020, effective from 01.04.2020.
Existing Section 206AA has been amended from the same date. Section
194-O provides that the TDS provisions will apply to E-commerce
operators. The effect of this provision is as under:

i) The two
terms used in the Section are defined to mean (a) “e-commerce operator”
is a person who owns, operates or manages digital or electronic facility
or platform for electronic commerce and (b) “e-commerce participant” is
a person resident in India selling goods or providing services or both,
including digital products, through digital or electronic facility or
platform for electronic commerce. For this purpose, the services will
include fees for professional services and fees for technical services.

ii)
An e-commerce operator facilitating the sale of goods or provision of
services of an e-commerce participant through its digital electronic
facility or platform is now required to deduct tax at source at the rate
of 1% of the payment of the gross amount of sales or services or both
to the e-commerce participant.

iii) No tax is required to be
deducted if the payment is made to an e-commerce participant who is an
Individual or HUF if the payment during the financial year is less than
Rs 5 Lakhs and the e-commerce participant has furnished PAN or Aadhar Card
Number.

iv) Further, in the case of an e-commerce operator who
is required to deduct tax at source as stated in (ii) above or in case
stated in (iii) above, there will be no obligation to deduct tax under
any provisions of chapter XVII-B in respect of the above transactions.
However, this exemption will not apply to any amount received by an
e-commerce operator for hosting advertisements or providing any other
services which are not in connection with sale of goods or services.

v)
If the e-commerce participant does not furnish PAN or Aadhar Card
Number, the rate for TDS u/s 206AA will be 5% instead of 1%. This is
provided in the amended Section 206AA.

vi) It is also provided
that CBDT, with the approval of the Central Government, may issue
guidelines for the purpose of removing any difficulty that may arise in
giving effect to provisions of Section 194-O.

14. SECTION 194-P: TDS IN CASES OF SPECIFIED SENIOR CITIZENS
This is a new section inserted by F.A. 2021, from 01.04.2021.
Since the section deals with TDS and provides for relaxation from
filing Return of Income by Senior Citizens it will apply for the F.Y. 2021-2022 (A.Y. 2022-23).
This section grants exemption from filing of Return of Income by Senior
Citizens (age of 75 years or more). For this purpose, the following
conditions should be complied with:

i) Such Senior Citizen should have only pension Income.

ii) Such Senior Citizen may also have interest income from the same specified Bank in which he /she is receiving the pension.

iii) Such Senior Citizen will be required to furnish a declaration in the prescribed manner to the specified Bank.

In
the case of the Senior Citizen to whom the section applies, the
specified bank shall, after giving effect to the deductions allowable
under Chapter VIA and the Rebate allowable u/s 87A, compute the total
income and tax payable by such Senior Citizen for the relevant
assessment year and deduct income tax on such total income based on
applicable rates.

It may be noted that the above exemption from
filing return of income will not be available if such Senior Citizen has
Income from House Property, Business, Profession, Capital gains, and
Interest income from any other Bank or any person, Dividend etc.
Considering the conditions imposed in the Section, very few Senior
Citizens will be able to get benefit of this section.

15. SECTION 194-Q: TDS FROM PAYMENT FOR PURCHASE OF GOODS
This is a new section inserted by the F.A. 2021, effective from 01.07.2021.
Last year, section 206C(IH) was inserted to provide for the collection
of tax at source (TCS) by the seller of goods of the aggregate value
exceeding Rs 50 Lakhs at the rate of 0.1% of the value of goods
purchased by the purchaser. The new section 194Q applies to an assessee
whose total sales, gross receipts or turnover from business exceeds Rs 10
Cr. in the immediately preceding financial year. Further, this provision
will apply if the aggregate value of goods purchased in the financial
year exceeds Rs 50 Lakhs. In such a case, tax at the rate of 0.1% of the
amount in excess of Rs 50 Lacs is required to be deducted at source.
This provision will not apply if the tax is required to be deducted or
collected under any other provisions of the Act, other than TCS on the
sale of goods as provided in section 206C(IH). It is also provided that
if the buyer deducts tax on the purchase of goods under this section,
the seller will not be required to collect tax u/s 206C(IH). In other
words, if section 194Q, as well as section 206C(IH) applies to any
transaction, TDS provision u/s 194Q will apply and TCS provision u/s
206C (IH) will not apply except in the case of advance received by the
seller against sales. In case the seller does not have PAN, the
applicable rate of TDS will be 5%. A consequential amendment is made in
section 206AA. It may be noted that the term “Goods” has not been
defined in sections 194Q or 206C (IH). If we rely on the definition
under the Sale of Goods Act, 1930, it will mean movable assets.
Therefore, immovable property will not be considered “Goods”.

16. SECTION 194-R: TDS FROM BENEFIT OR PERQUISITES
i) This is a new Section which has been inserted by the F.A. 2022 and comes into force from 01.07.2022. The
section provides that tax shall be deducted at source at the rate of
10% of the value of the benefit or perquisite arising from business or
profession if the value of such benefit or perquisite in a financial
year exceeds Rs 20,000.

ii) The provisions of this Section are
not applicable to an Individual or HUF whose Sales, Gross Receipts or
Turnover does not exceed Rs 1 Cr. in the case of business or Rs 50 Lakhs
in the case of profession during the immediately preceding financial
year.

iii) The section also provides that if the benefit or
perquisite is wholly in kind or partly in kind and partly in cash and
the cash portion is not sufficient to meet the TDS amount, then the
person providing such benefit or perquisite shall ensure that tax is
paid in respect of the value of the benefit or perquisite before
releasing such benefit or perquisite.

iv) In the Memorandum
explaining the provisions of the Finance Bill, 2022, it is clarified
that Section 194R is added to cover cases where value of any benefit or
perquisite arising from any business or profession is chargeable to tax
u/s 28(iv) of the Act. It is also provided that the Central Government
shall issue guidelines to remove any difficulty that may arise in the
implementation of this section.

v) It may be noted that CBDT has
issued a Circular No. 12 of 2022. This Circular provides Guidelines for
the removal of difficulties arising from implementation of this section.
This Circular explains the transactions to which this section applies.
Briefly stated, the position about the following transactions will be as
under:

a) The section applies to any benefit or perquisite
provided to a person if such benefit or perquisite is taxable in the
hands of the recipient. However, the tax deductor is not required to
verify whether such benefit or perquisite is taxable in the hands of the
recipient u/s 28(iv).

b) If the benefit or perquisite is in the form of a Capital Asset, tax is required to be deducted under this section.

c)
This section will not apply to Sales Discount, Cash Discount and Rebate
on sales given by the assessee. However, if free samples are given or
if an incentive is given only to selected persons in the form of TV,
Computer, Gold Coin, Mobile Phone, Free Tickets for Travel etc., the
provisions of this section will apply.

d) If the benefit of use
of assets of ABC Co. Ltd., is given free of cost to BCD Co. Ltd or its
directors, employees or their relatives, ABC Co. Ltd., will have to
deduct tax under this section.

e) The valuation of the benefit or perquisite given in kind is to be made at fair market value.

The
above Circular deals with many other cases in which tax is either to be
deducted or not to be deducted under this section. Therefore, the
person liable to deduct tax at source will have to carefully study the
guidelines in the Circular before giving any benefit or perquisite to a
third person.

17. SECTION 194-S: TDS FROM TRANSFER OF VIRTUAL DIGITAL ASSET (VDA)
i) This is a new section inserted by the F.A. 2022 which comes into force on 01.07.2022.
The section provides that any person paying to a resident consideration
for transfer of any Virtual Digital Asset (VDA) shall deduct tax at 1%
of such sum. In a case where the consideration for transfer of VDA is
(a) wholly in kind or in exchange of another VDA, where there is no
payment in cash or (b) partly in cash and partly in kind but the part in
cash is not sufficient to meet the liability of TDS in respect of whole
of such transfer, the payer shall ensure that tax is paid in respect of
such consideration before releasing the consideration. However, this
TDS provision does not apply if such consideration does not exceed Rs
10,000 in a financial year.

ii) Section 194-S defines the term
“Specified Person” to mean any person (i) being an Individual or a HUF,
whose total sales, gross receipts or turnover from business or
profession does not exceed Rs 1 Cr. in case of business or Rs 50 Lakhs
in the case of profession, during the immediately preceding financial
year in which such VDA is transferred or (ii) being an Individual or a
HUF who does not have income under the head “Profits and Gains of
Business or Profession”.

iii) In the case of a Specified Person –

a)
The provisions of Section 203A relating to Tax Deduction and
Collection Account Number and 206AB relating to Special Provision for
TDS for non-filers of Income-tax Return will not apply.

b) If the
value or the aggregate value of such consideration for VDA does not
exceed Rs 50,000 during the financial year, no tax is required to be
deducted.

iv) In the case of a transaction to which Sections
194-O and 194-S are applicable, then tax is to be deducted u/s 194-S and
not under Section 194-O.

(v) The CBDT has issued certain
Guidelines by its Circular No. 13 of 2022 dated 22nd June, 2022 for
removal of difficulties under this Section. Briefly stated this Circular
states as under:

a) These guidelines apply only in cases where the transfer of VDA is taking place on or through an Exchange.

b)
When the transfer of VDA is taking place on or through an Exchange and
payment is made by the purchaser to the Exchange directly, or through a
Broker, the tax should be deducted by the Exchange. The Circular also
explains the circumstances under which tax is required to be deducted by
the Broker. The terms “Exchange” and “Broker” are defined in the
Circular.

c) When VDA-‘X’ is exchanged by the seller against
VDA–‘Y’ owned by the buyer, TDS provisions apply to both the seller and
the buyer. The Circular explains the mechanism for deduction of tax at
source when such transfer takes place directly or through the Exchange.

d)
It is clarified that when tax is deducted u/s 194-S, no tax is required
to deducted u/s 194-Q dealing with TDS from payment for purchase of
goods.

e) For TDS under this section, the consideration for VDA
is to be computed excluding GST and charges levied by the deductor for
rendering service.

f) The circular also explains the TDS
provisions relating to VDA in the form of questions and answers which a
person dealing in VDA will have to study before deducting tax at source
u/s 194-S.

(vi) CBDT has also issued another Circular No. 14 of
2022 on 28th June, 2022 explaining how the provisions of this Section
will apply when the transfer of VDA takes place for consideration in
cash or kind otherwise than through an Exchange.

18. SECTION 196-C: TDS FROM FOREIGN CURRENCY BONDS OR SHARES
This
section dealing with TDS from interest or dividend in respect of Bonds
or GDRs purchased by a Non-Resident in Foreign Currency has been amended
by the F.A. 2020, effective from 01.04.2020. Under the amended Section, TDS at 10% is now deductible from interest or dividend paid to the Non-Resident.

19. SECTION 196-D: TDS FROM INCOME OF FII FROM SECURITIES
i)
This section deals with TDS from income in respect of securities held
by an FII. By amendment of the Section by the F.A. 2020, effective from 01.04.2020, it is provided that Dividend paid to FII or FPI will be subject to TDS at the rate of 20%.

ii)
As stated above, this section provides for TDS at the rate of 20% on
income of FIIs from securities referred to in section 115AD(1)(a), other
than interest u/s 194LD. Due to this specific rate of 20%, the benefit
of lower rate under the applicable DTAA was not available. To give this
benefit to FIIs, the section has now been amended by the F.A. 2021,
effective from 01.04.2021, and it is now provided that in the
case of any FII, to whom DTAA applies, the tax shall be deducted under
this section at the rate of 20% or the rate as per the applicable DTAA,
whichever is lower. The FII must produce the ‘Tax Residency Certificate’
to get this benefit.

20. SECTIONS 206 AB AND 206 CCA: TDS/TCS FROM NON-FILERS OF ITR
i)
At present, sections 206AA and 206CC provide for TDS and TCS at higher
rates if the PAN is not furnished by the person to whom payment is made
or the person from whom the amount is received. Now, two new sections
206AB and 206CCA are inserted by the F.A. 2021 effective from 01.07.2021
for TDS and TCS at higher rates if the specified person from whom tax
is to be deducted or the tax is to be collected has not filed the return
of income for the two preceding years. These two new sections will
apply, notwithstanding anything contained in any other provisions of the
Act, where tax is required to be deducted or collected under Chapter
XVII-B or Chapter XVIIBB. However, these provisions will not apply to
TDS provisions under sections 192 and 192A (salary), 194B and 194BB
(winnings from lottery, crossword puzzle and horse races), 194LBC
(Income from investment in securitization Trust) or 194N (Payment of
certain amount in cash by Banks etc.).

ii) For the above purpose,
“specified person” is defined to mean (a) a person who has not filed
return of income for both the two immediately preceding years in which
tax is required to be deducted / collected, (b) the time limit to file
the Return of income for the above years u/s 139(1) has expired, (c)
aggregate of TDS/TCS exceeds Rs 50,000 in each of the two preceding
years an (d) the specified person shall not include a non-resident who
does not have a PE in India.

iii) The higher rate for TDS/TCS provided in the above sections is to be worked out as under:

a) TDS Rate: Higher of (a) Twice the rate specified in the relevant section or (b) Twice the Rate or Rates in force or (c) The rate of 5%.

b) TCS Rate: Higher of (a) Twice the Rate specified in the relevant section or (b) The rate of 5%.

iv)
It is further provided that if the provisions of section 206AA (for
TDS) or section 206CC (for TCS) are applicable to the specified person
in addition to section 206AB (for TDS) or section 206CCA (for TCS), the
higher of the two rates provided in the above sections will apply.

v)
For the convenience of the deductor and collector of tax, CBDT vide
Circular No. 11 of 2021 dated 21st June, 2021 has clarified the steps
taken to ease the compliance burden of the deductor/collector by launch
of new functionality ‘Compliance Check for sections 206AB and 260CCA’
through the reporting portal of the Income-tax department. The Deductor
or Collector using this functionality can get the information about the
specified person as to whether he has filed the return of income for the
preceding two years. It is also possible for the dedutor or collector
to obtain a declaration from the specified person as to whether he has
filed the return of income for the preceding two years, and if so on
what dates.

vi) These two sections are further amended by the F.A. 2022, effective from 01.04.2022. It
is now provided the TDS/TCS at higher rates in such cases will not
apply to cases under sections 194IA, 194IB and 194M where the payer is
not required to obtain TAN. Further, the test of non-filing the
Income-tax Returns under Sections 206AB / 206CCA has now been reduced
from two preceding years to one preceding year.

21. SECTION 206C: TCS FROM CERTAIN TRADING TRANSACTIONS
This
Section dealing with collection of tax at source (TCS) has been amended
by the F.A. 2020, effective from 01.10.2020. Hitherto, this provision
for TCS applied in respect of specified businesses. Under this
provision, a seller is required to collect tax from the buyer of certain
goods at the specified rates. The amendment of this Section, effective
from 01.10.2020, extends the net of TCS u/s 206C (1G) and (1H) to other
transactions as under:

i) An Authorized Dealer, who is authorized
by RBI to deal in foreign exchange or foreign security, receiving Rs. 7
lakhs or more from any person, in a financial year, for remittance out
of India under Liberalized Remittance Scheme (LRS), is liable to collect
TCS at 5% from the person remitting such amount. Thus, LRS remittance
upto Rs. 7 Lakhs in a financial year will not be liable for this TCS. If
the remitter does not provide PAN or Aadhar Card Number, the rate of
TCS will be 10% u/s 206CC.

ii) In the above case, if the
remittance in excess of Rs. 7 Lakhs is by a person who is remitting the
foreign exchange out of education loan obtained from a Financial
Institution, as defined in Section 80E, the rate of TCS will be 0.5%. If
the remitter does not furnish PAN or Aadhar Card No. the rate of TCS
will be 5% u/s 206CC.

iii) The seller of an overseas tour
programme package, who receives any amount from a buyer of such package,
is liable to collect TCS at 5% from such buyer. It may be noted that
the TCS provision will apply in this case even if the amount is less
than Rs. 7 Lakhs. If the buyer does not provide PAN or Aadhar Card No.
the rate for TCS will be 10% u/s 206CC.

iv) It may be noted that the above provisions for TCS do not apply in following cases:

a) An amount in respect of which the sum has been collected by the seller.

b)
If the buyer is liable to deduct tax at source under any other
provisions of the Act. This will mean that for remittance for
professional fees, commission, fees for technical services etc., from
which tax is to be deducted at source, this section will not apply.

c)
If the remitter is the Central Government, State Government, Embassy,
High Commission, Legation, Commission, Consulate, Trade Representation
of a Foreign State, Local Authority or any person in respect of whom
Central Government has issued notification.

v) Section 206C(1H), which comes into force on 01.10.2020
provides that a seller of goods is liable to collect TCS at the rate of
0.1% on receipt of consideration from the buyer of goods, other than
goods covered by Section 206C(1), (1F) or (1G). This TCS provision will
apply only in respect of the consideration in excess or Rs 50 Lakhs in
the financial year. If the buyer does not provide PAN or Aadhar Card
No., the rate of TCS will be 1%. If the buyer is liable to deduct tax at
source from the seller on the goods purchased and made such deduction,
this provision for TCS will not apply.

vi) It may be noted that the above Section 206C (1H) does not apply in the following cases:

a)
If the buyer is the Central Government, State Government, Embassy, High
Commission, Legation, Commission, Consulate, Trade Representation of a
Foreign State, Local Authority, person importing goods into India or any
other person as the Central Government may notify.

b) If the
seller is a person whose sales, turnover or gross receipts from the
business in the preceding financial year does not exceed Rs. 10 Cr.

vii)
The CBDT, with the approval of the Central Government, may issue
guidelines for removing any difficulty that may arise in giving effect
to the above provisions.

22. OBLIGATION TO DEDUCT OR COLLECT TAX AT SOURCE
Hitherto,
the obligation to comply with the provisions of Sections 194A, 194C,
194H, 194I, 194J or 206C for TDS/TCS was on Individuals or HUF whose
total sales or gross receipts or turnover from business or profession
exceeded the monetary limits specified in Section 44AB during he
immediately preceding financial year. The above Sections are now amended
by F.A. 2020, effective from 01.04.2020, to provide that above
TDS / TCS provisions will apply to an individual or HUF whose total
sales or gross receipts or turnover from business or profession exceed
Rs 1 Cr. in the case of business or Rs 50 Lakhs in the case of
profession. Thus, every individual or HUF carrying on business will have
to comply with the above TDS/TCS provisions even if he is not liable to
get his accounts audited u/s 44AB.

23. TO SUM UP
i)
From the above amendments, it is evident that the net for TDS and TCS
has now been widened and even transactions which do not result in
income, are now covered under these provisions. Individuals and HUF
carrying on business and not covered by Tax Audit u/s 44AB will now be
covered by TDS and TCS provision. In particular, persons remitting
foreign exchange exceeding Rs 7 Lakhs under LRS of RBI, will have to pay
tax u/s 206C. This tax will be considered as payment of tax by the
remitter u/s 206C(4), and he can claim credit for such tax u/s 206C(4)
read with Rule 37-1.

ii) It may be noted that the Government
issued a Press Note on 13th May, 2020 providing certain relief during
the COVID-19 pandemic. By this Press Note, it announced that TDS/TCS
under sections 193 to 194-O and 206C will be reduced by 25% during the
period 14.05.2020 to 31.03.2021. This reduction is given only in respect
of TDS/TCS from payments or receipts from Residents. This concession is
not in respect of TDS from salaries or TDS from Non-Residents and
TDS/TCS under sections 260AA or 206CC.

iii) There are about 65
sections in the Income-tax Act dealing with the obligations relating to
TDS and TCS. These sections include certain procedural provisions which
the taxpayer has to comply with. With the above amendments made in the
last 3 years, the provisions relating to TDS/TCS have become more
complex. Every person will have to be very careful while making any
payment, purchase or sale in the course of his business, profession or
other activities, and he will have to first ascertain whether any of the
provisions for TDS/TCS are applicable. In case of non-compliance with
these provisions, he will have to face many penal consequences. Even
Chartered Accountants conducting Tax Audit u/s 44AB will have to verify
and report whether the entity under audit has correctly deducted tax or
not under the above sections.

shailesh.kwebmaker

DISCLOSURE OF FOREIGN ASSETS AND INCOME IN THE INCOME-TAX RETURN

ENABLING PROVISION

Section 139 of the Income-tax Act, 1961 (“the IT Act”) deals with the filing of return of income. Sub-section (1) to section 139, inter alia, provides that every person whose total income exceeds the maximum amount not chargeable to tax shall file a return of income in the prescribed form and in the prescribed manner before the due date of filing of return of income.

The fourth proviso to section 139(1) provides that a person being a resident, other than a not ordinarily resident, who is not required to file return of income u/s 139(1) shall still be required to file a return of income if he satisfies any of the conditions mentioned in clauses (a) and (b) of the fourth proviso. The said clauses (a) and (b) under the fourth proviso broadly deal with the holding of any asset or being the beneficiary of any asset located outside India.

Therefore, any resident person who holds any asset located outside India or is a beneficiary of any asset located outside India shall be required to file a return of income u/s 139(1) even if the total income of such person does not exceed the prescribed limits. The conditions given under clauses (a) and (b) of the fourth proviso regarding the holding of any asset or being the beneficiary of any asset located outside India are dealt with in greater detail in subsequent paragraphs.

WHO IS REQUIRED TO REPORT?

The fourth proviso expressly provides that every person being a ‘resident’, other than not ordinarily resident in India within the meaning of section 6(6) of the IT Act, shall be required to file a return if he satisfies the prescribed conditions. Thus, the provision applies only to a ‘resident person’. Persons who are either not-ordinarily resident or non-residents are not covered under the fourth proviso to section 139(1).

Further, section 2(31) of the IT Act defines a person to include an Individual, HUF, Company, Firm, AOP or BOI, Local Authority and every artificial juridical person who does not fall in either of the specified categories. Therefore, the requirement of reporting foreign assets and income will apply to all such resident persons.

An illustrative list of persons who may get covered and require reporting are:

Non-residents who have become residents in India and have purchased/obtained assets outside India while they were non-residents in India;

Individuals who have invested funds outside India under the Liberalised Remittance Scheme (LRS);

Individuals who have invested outside India through ODI route;

Individuals employed with the Indian arm of a multi-national group, who have received ESOPs of the parent company outside India;

Individuals who are employed with the Indian Parent Company and have signing authority in the bank accounts of the foreign subsidiary companies;

Individuals who own foreign assets by way of gift/inheritance;

Foreign expats coming to India permanently and becoming residents in India;

Individuals who have for the first time shifted outside India for employment;

Companies who are subject to transfer pricing provisions; and

Companies having foreign branch/es.

WHEN IS REPORTING REQUIRED?

Clause (a) of the fourth proviso reads as follows:

“holds, as a beneficial owner or otherwise, any asset, (including any financial interest in any entity) located outside India or has signing authority in any account located outside India”

Thus, if a resident person, at any time during the previous year:

– holds any asset, whether as a beneficial owner or otherwise; or

– holds any financial interest in any entity; or

– has signing authority in any account

located outside India, then such resident person is required to file a return of income even if the total income of such resident person does not exceed the maximum amount not chargeable to tax.

There is an exception to the aforesaid requirement which has been provided under the fifth proviso. As per the fifth proviso to section 139(1), the said requirement shall not apply to an individual, being a beneficiary of any asset located outside India and income arising from such asset is includible in the total income of the person referred to in the abovementioned clause (a).

Clause (b) of the fourth proviso reads as follows:

“Is a beneficiary of any asset (including any financial interest in any entity) located outside India”

Thus, if a resident person is a beneficiary of any asset located outside India or is a beneficiary of financial interest in any entity located outside India, then the resident person is required to file a return of income, even if his total income does not exceed the maximum amount not chargeable to tax.

Explanation 4 defines the term ‘beneficial owner’ in respect of an asset to mean “an individual” who has provided directly or indirectly consideration for the asset for the immediate or future benefit, direct or indirect, of himself or any other person.

It is important to note that the definition of the term beneficial owner in respect of an asset specifically refers to an individual as against the term resident person. Therefore, it raises a question as to whether the condition of holding the asset as a beneficial owner applies only in respect of an Individual and not all the other categories of persons given u/s 2(31) of the IT Act!

Similarly, Explanation 5 to section 139 of the IT Act defines the term ‘beneficiary’ in respect of an asset to mean “an individual” who derives benefit from the asset during the previous year and the consideration for such asset has been provided by any person other than such beneficiary.

Interestingly, the ITR Form Nos. 5, 6 and 7 which are prescribed for other categories of persons provide for reporting under Schedule FA.

Therefore, this mismatch of the requirement under the provisions of the IT Act and the requirement under the ITR Forms raises a larger issue as to whether the ITR Forms can go beyond what is provided in the provisions of the IT Act and require the assessee to comply with the requirement of disclosure and reporting of foreign assets and income?

Be that as it may, the reporting requirement under Schedule FA is only a disclosure requirement; all categories of resident persons must ensure due compliance of the requirement to avoid the adverse consequences under the IT Act and Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“BMA”).

WHAT IS THE PERIOD FOR WHICH SUCH REPORTING IS REQUIRED TO BE MADE?

From A.Y. 2022-23, the ITR Forms for A.Y. 2022-23 require the reporting of foreign assets to be made if the same were held by the resident person at any time during the calendar year ending on 31st December, 2021.

It is important to note that under the fourth proviso to 139(1), the applicability is triggered if the foreign asset is held by the resident person ‘at any time during the previous year’, whereas the reporting which is to be done is only in respect of the foreign assets held ‘at any time during the calendar year ending on 31st December, 2021’. For example, a resident individual opens an account with a bank in Singapore in February, 2022 for the first time. In such a case, he will be required to file a return of income even if his total income during the previous year does not exceed the maximum amount not chargeable to tax. However, will he be required to report the foreign bank account balance in Singapore in the ROI filed for A.Y. 2022-23? The answer would be in the negative since the ITR form states that the reporting is required to be done for the foreign asset held at any time during the calendar year ending on 31st December, 2021. Though the resident individual held the asset during the previous year 2021-22, since the ITR Form categorically states that the requirement of disclosing is in respect of the calendar year ending on 31st December, 2021, the resident individual will not be required to report the balance of the foreign bank account held by him in Singapore.

Suppose an ordinarily resident individual purchases certain shares of a USA-based company in January, 2021. Since January, 2021 falls within the calendar year ending 31st December, 2021, the same will have to be reported in the return for A.Y. 2022-23. This is despite the fact the said purchase of shares would have been reported by such an individual in his return of income for A.Y. 2021-22. Further, if the shares purchased in January, 2021 are sold in February, 2021, the same will still have to be reported even though the assessee did not hold the shares during the previous year 2021-22 relevant to A.Y. 2022-23. Due care will have to be taken in such cases as the resident individual may not even be required to file his return of income since he did not hold the foreign asset during the previous year! Extending the example further, if the resident individual makes a further purchase of shares of USA-based company in January, 2022, the same will not be reported even though the same falls within the previous year relevant to A.Y. 2022-23. However, the gains from the sale of the said shares (purchased in January, 2022) before 31st March, 2022, if any, will have to be offered as income for A.Y. 2022-23 on accrual basis. Further, if the total income of such an individual does not exceed the maximum amount not chargeable to tax, he will still be required to file the return of income under the fourth proviso to section 139(1) of the Act.

The period of reporting (relevant for A.Y. 2022-23) can be summarised with the help of the following table under different scenarios:

Sr. No.	Scenario	Falls in P.Y. 2021-22?	Falls in calendar year ending 31^st December, 2021?	Required to file ROI under the fourth proviso to section 139(1) for A.Y. 2022-23?¹	Required to disclose in the ROI for A.Y. 2022-23?
1	Foreign Asset held before January, 2021	No	No	No	No
2	Foreign Asset held between January, 2021 to March, 2021?²	No	Yes	No	Yes
3	Foreign Asset held between April, 2021 to December, 2021	Yes	Yes	Yes	Yes
4	Foreign Asset held between January, 2022 to March, 2022	Yes	No	Yes	No
5	Foreign Asset held after March, 2022	No	No	No	No

1 This column deals with only those cases where the resident person holds the foreign asset during the previous year, but is otherwise not required to file his return of income u/s 139(1) of the IT Act.
2 This results in a peculiar situation due to the inconsistency between the fourth proviso and the ITR Form. However, in such a situation, it is ideal to file the return of income and also disclose and report the foreign asset even if there is no requirement to file the Return of Income as per the fourth proviso to section 139(1) so as to avoid any penalties for non-disclosure and other severe consequences under the IT Act and BMA.

IN WHICH CURRENCY IS THE REPORTING REQUIRED TO BE DONE?
All the amounts are required to be reported in Indian currency³.

WHAT IS THE RATE OF EXCHANGE TO BE USED?
The rate of exchange for conversion of the balances / amounts for the purpose of reporting in Indian currency is to be done by adopting the ‘telegraphic transfer buying rate’ (“TTBR”) of the foreign currency on the closing date⁴.

For the purpose of reporting peak balance, the TTBR on the date of the peak balance should be adopted, and for reporting the value of the investment, the TTBR on the date of investment shall be adopted for conversion into Indian currency⁵.

A question arises as to what will be the ‘closing date’ in a case where the foreign asset is purchased and sold before the end of the calendar year? In such a case, the date on which the asset is disposed may be taken as the closing date for the purpose of conversion of balance / amount.

3 As per Instructions to ITR Forms for A.Y. 2021-22. Instructions to ITR Forms for A.Y. 2022-23 have not been issued.
4 Instructions to ITR Forms for A.Y. 2021-22. Instructions to ITR Forms for A.Y. 2022-23 have not been issued.
5 Instructions to ITR Forms for A.Y. 2021-22. Instructions to ITR Forms for A.Y. 2022-23 have not been issued.

WHAT IS REQUIRED TO BE REPORTED?
Details of foreign assets and income from a source outside India are required to be reported under Schedule FA in the ITR Form. Schedule FA consists of reporting under 9 Tables as follows:

A1 – Details of Foreign Depository Accounts (including any beneficial interest):

What is to be reported?

Remarks:

In case of joint holders in a depository account, it must be ensured that both the joint holders report the details in their respective ITRs. Further, the entire balance should be reported and not the proportionate share.

In case of foreign bank accounts which have multiple currencies – separate account numbers allocated to each currency account must be reported.

A2 – Details of Foreign Custodial Accounts (including any beneficial interest):

What is to be reported?

A3 – Details of Foreign Equity and Debt Interest (including any beneficial interest):

What is to be reported?

Remarks:

Foreign Equity would generally cover investments in equity shares, preference shares, or any other shares.

Debt Interest would generally cover debentures, bonds and notes.

Investment in units of mutual funds and government securities will have to be reported under this part.

ESOPs granted to a resident employee of a foreign company and which have not vested or which are pending allotment may be reported with a note⁶ explaining that the interest is not ‘held’ until the satisfaction of the conditions and the disclosure is being made out of abundant caution.

Proceeds from the sale or redemption of investment during the period will be reported twice, i.e. under Table A2 (since there is a requirement to specify the nature of the amount credited in the Foreign Custodial Account) as well as under this Table.

6 In case of electronic return, there is no provision for filing notes to the return separately. However, this may be done by way of filing a letter to the jurisdictional Assessing Officer.

A4 – Details of Foreign Cash Value Insurance Contract or Annuity Contract (including any beneficial interest):

What is to be reported?

Remarks:

Reporting under this clause to cover inter alia, the following:

– Insurance obtained by resident individual while he was a non-resident.

– Insurance contracts entered by a non-resident outside India where the resident person is a beneficiary.

Only cash value insurance contracts are covered. Therefore, insurance contracts such as term life insurance, general insurance contracts are not required to be reported.

B – Details of Financial Interest in any Entity (including any beneficial interest):

What is to be reported?

Remarks:

Indian Companies having Subsidiaries and Step-down Subsidiaries should ensure that reporting is made in case of shares held by the Indian Company in its Step-down Subsidiaries.

If the Indian Holding/Parent Company has, say, 50 subsidiaries and 45 sub-subsidiaries, the details, though voluminous, in respect of all the subsidiaries must be given.

Financial interest⁷ would include the following:

Where the resident assessee is the owner of record or holder of legal title of any financial account, irrespective of whether he is the beneficiary or not.

ii. The owner of record or holder of a legal title of any financial interest is one of the following:

– an agent, nominee, attorney or a person acting in some other capacity on behalf of the resident assessee with respect to the entity;

– a corporation in which the resident assessee owns, directly or indirectly, any share or voting power;

– a partnership in which the resident assessee owns, directly or indirectly, an interest in partnership profits or an interest in partnership capital;

– a trust of which the resident assessee has beneficial or ownership interest; and

– any other entity in which the resident assessee owns, directly or indirectly, any voting power or equity interest or assets or interest in profits.

7 Instructions to ITR Form No. 2 for A.Y. 2021-22. Instructions to ITR Forms for A.Y. 2022-23 have not been issued.

C – Details of Immovable Property (including any beneficial interest):

What is to be reported?

Remarks:

Reporting under this table to cover, inter alia, the following:

– Immovable Property acquired by resident person while he was residing outside India.

– Immovable property held by expat employees.

– Guest house/Flat/Apartment/Bungalow purchased by the Indian Company outside India for the stay of Directors when on official visit outside India.

– Immovable property held pursuant to a gift/will.

Cost of immovable property acquired under a gift or will should be reported as per section 49 of the IT Act, i.e. at cost to the previous owner.

In case of purchase of under construction property, the same should be disclosed with a suitable note⁸.

In case of rental income from the immovable property, the amount under the column ‘income derived from the property’ and the amount of income offered in the return of income will differ due to the reporting requirement being for the calendar year 31st December, 2021.

8 In case of electronic return, there is no provision for filing notes to the return separately. However, this may be done by way of filing a letter to the jurisdictional Assessing Officer

D – Details of any other Capital Asset (including any beneficial interest):

What is to be reported?

Remarks:

Reporting under this part will inter alia include reporting of other assets such as bullions, cars, jewellery, jets, yacht, leasehold rights in land, etc.

Foreign Branch of an Indian Company is an extension of the head office and does not have its own legal existence. Therefore, the assets acquired by the foreign branch should be reported under this Part.

E – Details of accounts in which the resident person has signing authority (including any beneficial interest) and which has not been included in Part A to D above:

What is to be reported?

Remarks:

Reporting under this table to cover, inter alia, the following:

Bank accounts where the resident person is a signatory.

Bank account of companies of which resident individual is an employee and authorised signatory.

Bank accounts where the resident person is a joint holder.

F – Details of trusts created under the laws of a country outside India in which the resident person is a trustee, beneficiary or settlor:

What is to be reported?

Remarks:

If the trust is revocable, the income taxable in India in the hands of the Settlor should be disclosed.

If the trust is indeterminate, one will have to make the disclosure and report the details irrespective of whether the income is taxable in India.

The amount under the column ‘income derived’ will differ from the amount of income offered in the return of income.

G – Details of any other income derived from any source outside India which is not included in A to F above and income under the head business or profession:

Common observations in respect of all the above Tables

Since the reporting is for the calendar year ending 31st December, 2021, and the income accrued and offered for tax in the return of income is for the previous year 2021-22, the amount reported under Schedule FA and the amount offered as income in the return of income will not match;

Disclosure and reporting requirements should be complied with irrespective of whether the Foreign Income or Income from Foreign Asset is taxable during the assessment year.

WHAT ARE THE CONSEQUENCES OF NON-REPORTING?

Consequences under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“BMA”)

Tax

Undisclosed foreign income and asset are chargeable to tax at the rate of 30% of such undisclosed foreign income and asset.

Further, the income included in the total undisclosed foreign income and asset under the BMA shall not form part of the total income under the IT Act. The provisions of IT Act and BMA are mutually exclusive.

Penalty

Section 41 of the BMA deals with a penalty in relation to undisclosed foreign income and asset. As per section 41, a penalty of a sum equal to 3 times the amount of tax computed has been prescribed.

Section 42 of the BMA deals with a penalty for failure to furnish a return in relation to foreign income and asset. As per section 42 of the BMA, if a person fails to file the return of income in contravention to fourth proviso to section 139(1) of the Act, then the AO has the power to levy a penalty of Rs. 10 lakhs. The only exception being in respect of an asset being one or more bank accounts having an aggregate balance which does not exceed Rs. 5 lakh at any time during the previous year.

Section 43 of the BMA deals with a penalty for failure to furnish in return of income, an information or inaccurate particulars about foreign asset or foreign income. The penalty prescribed under the said section for the default is Rs. 10 lakhs, with the only exception being a case of an asset, being one or more bank accounts having an aggregate balance which does not exceed
Rs. 5 lakhs.

Prosecution

Section 49 of the BMA deals with punishment for failure to furnish a return in relation to foreign income and asset. The punishment prescribed is rigorous imprisonment for a term ranging from 6 months to 7 years and with a fine in case of willful failure to furnish return of income required to be furnished u/s 139(1).

In addition to the above consequences, non-disclosure of foreign assets and income could also attract penal consequences under the IT Act.

RECENT JUDICIAL VIEWS ON REPORTING OF FOREIGN ASSETS AND INCOME

[2022] 216 TTJ 905 (Mum.-Trib) Addl. CIT vs. Leena Gandhi Tiwari

A mere non-disclosure of a foreign asset in the IT return, by itself, is not a valid reason for a penalty under the Black Money Act.

The use of the expression “may” in section 43 of the BMA signifies that the penalty is not to be imposed in all cases of lapses and that there is no cause and effect relationship simpliciter between the lapse and the penalty. Imposition of penalty under s. 43 is at the discretion of the AO, but the manner in which this discretion is to be exercised has to meet well-settled tests of judicious conduct by even quasi-judicial authorities.

[2021] 193 ITD 141 (Mum.-Trib.) Rashesh Manhar Bhansali vs. Addl. CIT

It was inter alia, held that the point of time for taxation of undisclosed foreign asset under BMA is the point in time when such an asset comes to the notice of the Government and it is immaterial whether the said asset existed at the time of taxation or for that purpose even at the time when BMA came into existence.

CONCLUDING REMARK

A flurry of summons is being issued, wherein thousands of assesses have been caught for non-compliance with the disclosure requirements. It is time now that the reporting of foreign assets and income be undertaken with the utmost care, lest one face the stringent penal consequences under the IT Act and the BMA.

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S. 263 – Revision – Notice – the opportunity of hearing – distinguished Apex court decision in case of “CIT v/s. Amitabh Bachchan [2016] 384 ITR 200 (SC)”

6 Pr. Commissioner of Income Tax – 16 vs. M/s. Universal Music India Pvt. Ltd [Income Tax Appeal No. 238 OF 2018; Date of order: 19th April, 2022 (Bombay High Court)]

S. 263 – Revision – Notice – the opportunity of hearing – distinguished Apex court decision in case of “CIT v/s. Amitabh Bachchan [2016] 384 ITR 200 (SC)”

The Respondent had filed a return of income on 27th October, 2010 declaring income of ‘Nil’ for A.Y. 2009-2010. Subsequently, an assessment was completed under section 143(3) of the Act. Thereafter, notice under section 263 was issued by CIT on two issues, namely,

(a) disallowance of Fringe Benefit Tax (FBT) paid of Rs. 10,72,532/- included in miscellaneous expenses and not allowed by the Assessing Officer and

(b) provision of Rs. 1,40,98,685/- in respect of slow moving and obsolete inventories.

The CIT directed Assessing Officer by an order dated 20th March, 2013 to make enquiry and examine the two issues and a third issue being particulars of payments made to persons specified under Section 40A(2)(b) of the Act of Rs. 7,00,22,680 allowed in the assessment order. The assessment order was set aside on this issue and to be examined afresh.

Aggrieved by the order dated 20th March, 2013 passed by CIT, Assessee filed an Appeal before ITAT. ITAT by an order dated 27th April, 2016 allowed the Appeal of the Assessee.

On the issue of payments made to persons specified under Section 40A(2)(b) of the Act, the ITAT gave a finding of fact that no such issue was ever raised by CIT in the notice served upon the assessee and the assessee was not even confronted by the CIT before passing the Order dated 20th March, 2013. ITAT concluded that the said ground therefore cannot form the basis for revision of the assessment order under Section 263 of the Act. It is only this finding of ITAT which is impugned in the Appeal. On the other two points, revenue has accepted the findings of ITAT that the Order under Section 263 was not warranted.

The Dept. submitted that Apex Court in its judgment dated 11th May, 2016 (after the impugned order was pronounced by ITAT) in Commissioner of Income-Tax, Mumbai vs. Amitabh Bachchan [2016] 384 ITR 200 (SC), has held that the provisions of Section 263 does not warrant any notice to be issued and what is required is only to give the assessee an opportunity of being heard before reaching his decision and not before commencing the enquiry. Therefore it was submitted that, the ITAT has erred in setting aside the Order of CIT on this issue.

The Hon. High Court observed that it is true that the Apex Court in Amitabh Bachchan (supra) has held, all that CIT is required to do before reaching his decision and not before commencing the enquiry, CIT must give the assessee an opportunity of being heard. It is true that the judgment also says no notice is required to be issued. But in the case at hand, there is a finding of fact by the ITAT that no show cause notice was issued and no issue was ever raised by the CIT regarding payments made to persons specified under Section 40A(2)(b) of the Act before reaching his decision in the Order dated 20th March, 2013. If that was not correct, certainly the Order of the CIT would have mentioned that an opportunity was given and in any case, if there were any minutes or notings in the file, revenue would have produced those details before the ITAT.

In Amitabh Bachchan (supra), the Apex Court came to a finding that ITAT had not even recorded any findings that in the course of the suo motu revisional proceedings opportunity of hearing was not offered to the assessee and that the assessee was denied an opportunity to contest the facts on the basis of which the CIT had come to its conclusions as recorded in his Order under Section 263 of the Act.

In the present case, there is a finding by the Tribunal, as noted earlier, that no issue was raised by the CIT in respect of particulars of payment made to persons specified under Section 40A(2)(b) of the Act and even the show cause notice is silent about that.

In view of the same, the Hon. Court dismissed the appeal of the Department.

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Section 264 – Revision Application – Re-computation of capital gain due to subsequent event – Duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee

5 Dinesh Vazirani vs. The Principal Commissioner of Income Tax-7 [Writ Petition No. 2475 Of 2015; Date of order: 8th April, 2022 (Bombay High Court)]

Section 264 – Revision Application – Re-computation of capital gain due to subsequent event – Duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee

The Petitioner is an individual and resident of India. The Petitioner, along with two other individuals, and one company (collectively referred to as Promoters) was the promoter of a company by the name WMI Cranes Ltd (the Company). Petitioner held 2,35,900 equity shares out of 9,99,920 issued and paid up share capital of the company of Rs.10 each. Promoters entered into Share Subscription and Purchase Agreement (SPA) dated 11th October, 2010 with M/s Kone cranes Finance Corporation (Purchasers). Under the agreement, promoters agreed to sell 51% of the paid up and issued equity share capital of the company to the purchasers. Between the promoters, they held collectively 100% issued and paid up share capital of the company.

Simultaneously with SPA, the promoters and purchasers entered into second share purchase agreement (Second SPA) for the transfer of the remaining equity shares held by the promoters upon satisfaction of certain conditions under Second SPA so that at a future point of time, purchasers will hold 100% of the issued and paid up equity share capital of the company. SPA provided for a value of Rs. 155,00,00,000 as consideration to be paid to the promoters which effectively was working out to about Rs. 3212.31 per share. SPA also provided that out of Rs. 155,00,00,000 that was payable as sale consideration, a sum of Rs. 30,00,00,000 would be kept in escrow, based on which a separate escrow agreement was entered into between promoters, purchasers and the escrow agent. At the time of closure of the deal, promoters received Rs. 125,00,00,000 as sale consideration and the shares were transferred. Balance Rs. 30,00,00,000 was kept in escrow account. SPA provided for specific promoter indemnification obligations and it provides that if there is no liability as contemplated under the specific promoter indemnification obligations within a particular period, this amount of Rs. 30,00,00,000 would be released by the escrow agent to the promoters. SPA provides for escrow arrangement. The escrow account was to be in force for two years from the closing date.

Petitioner/Assessee filed his return of income for A.Y. 2011-2012 on 29th July, 2011 declaring income of Rs. 22,51,60,130. The return of income included Rs. 20,98,08,685 as long term capital gains on the sale of shares of the company. The capital gains was computed by Petitioner taking into account the proportion of the total consideration of Rs. 155,00,00,000, including the escrow amount of Rs. 30,00,00,000, which had not, by the time returns were filed, received by the promoters but still parked in the escrow account. The assessment was completed under section 143(3) of the Act and an order dated 15th January, 2014 was passed accepting total income as declared by the Petitioner.

It is Petitioner’s case and which has not been disputed that subsequent to the sale of the shares of the company, certain statutory and other liabilities arose in the company which was about Rs. 9,17,04,240, for the period prior to the sale of the shares. As per the agreement, this amount was withdrawn from the escrow account and promoters, therefore, did not receive this amount of Rs. 9,17,04,240.

As assessment had already been completed taxing the capital gains at higher amount on the basis of sale consideration of Rs. 155,00,00,000 and without reducing the consideration by Rs. 9,17,04,240, Petitioner/Assessee made an application to PCIT under section 264 of the Act. Petitioner submitted that the amount of Rs. 9,17,04,240 has been withdrawn by the company from the escrow account and, therefore, what petitioner received was lesser than what was mentioned in the return of income and, therefore, the capital gains needs to be recomputed reducing the proportionate amount from the amount deducted from the escrow account. Petitioner also pointed out that the application was being made under Section 264 of the Act because the withdrawal of the amount from the escrow account happened after the assessment proceedings for A.Y. 2011-2012 was completed and it was not possible for Petitioner to make such a claim before the assessing officer or even file revised returns. Petitioner, therefore, requested respondent no. 1 to reduce the long-term capital gains by Rs. 1,31,44,274 and further prayed for directions to the assessing officer to refund the excess tax paid. Petitioner also explained that the amount from the escrow account was never going to be recovered by the promoters under any circumstances and this resulted in reduction in the total realisation towards sale of company.

The PCIT by an order dated 13th February, 2015 passed under section 264 of the Act rejected Petitioner’s application holding:

(a) The Petitioner was entitled to receive consideration at Rs. 3,213.31 per share as per the purchase price defined in the agreement. From the said amount, only cost of acquisition, cost of improvement or expenditure incurred exclusively in connection with the transfer can be reduced to compute capital gains. The agreement between the seller and buyer for meeting certain contingent liability which may arise subsequent to the transfer cannot be considered for reduction from the consideration received i.e, at the rate of Rs. 3,213.31 per share in computing capital gains under Section 48 of the Act.

(b further held that in the absence of specific provision by which an assessee can reduce returned income filed by it voluntarily, the same cannot be permitted indirectly by resorting to provisions of Section 264 of the Act. PCIT further relied on the proviso to Section 240 of the Act which states that if an assessment is annulled the refund will not be granted to the extent of tax paid on the returned income. PCIT held that this shows that income returned by an assessee is sacrosanct and cannot be disturbed and even annulment of the assessment would not have impacted the suo motu tax paid on the return income.

(c) The contingent liability paid out of escrow account does not have the effect on “amount receivable” by the promoters as per the agreement which remains at Rs. 3,213.31 per share.

Aggrieved by the order the Petitioner filed Writ Petition before Hon. High Court.

The Hon. High Court held that the PCIT had erred in holding that the proportionate amount of Rs.9,17,04,240 withdrawn from the escrow account should not be reduced in computing capital gains of the petitioner. Capital gains is computed under Section 48 of the Act by reducing from the full value of consideration received or accrued as a result of transfer of capital asset, cost of acquisition, cost of improvement and cost of transfer. PCIT has erred in stating that only the cost of acquisition, cost of improvement and cost of transfer can be deducted from full consideration and, therefore, Petitioner is not entitled to the proportionate reduction. PCIT has failed to understand that the amount of Rs. 9,17,04,240 was neither received by the promoters nor accrued to the promoters, as the said amount was transferred directly to the escrow account and was withdrawn from the escrow account. When the amount has not been received or accrued to the promoters, the same cannot be taken as full value of consideration in computing capital gains from the transfer of the shares of the company.

The Hon. Court observed that PCIT had not understood the true intent and the content of the SPA. PCIT had not appreciated that the purchase price as defined in the agreement was not an absolute amount as the same was subject to certain liabilities which might arise to the promoters on account of certain subsequent events. The full value of consideration for computing capital gains, will be the amount which was ultimately received by the promoters after the adjustments on account of the liabilities from the escrow account as mentioned in the agreement.

PCIT had gone wrong in not appreciating that income or gain is chargeable to tax under the Act on the basis of the real income earned by an assessee, unless specific provisions provide to the contrary.

In the present case, the real income (capital gain) can be computed only by taking into account the real sale consideration, i.e., sale consideration after reducing the amount withdrawn from the escrow account. PCIT had proceeded on an erroneous understanding that the arrangement between the seller and buyer which results in some contingent liability that arises subsequently to the transfer, cannot be reduced from the sale consideration as per Section 48 of the Act. This is because the liability is contemplated in SPA itself and certainly the same should be taken into account to determine the full value of consideration. Therefore, if sale consideration specified in the agreement is along with certain liability, then the full value of consideration for the purpose of computing capital gains under Section 48 of the Act is the consideration specified in the agreement as reduced by the liability. PCIT observation that from the sale consideration only cost of acquisition, cost of improvement and cost of transfer can be reduced and the subsequent contingent liability does not come within any of the items of the reduction and the same cannot be reduced, is erroneous because full value of consideration under Section 48 would be the amount arrived at after reducing the liabilities from the purchase price mentioned in the agreement. Even if the contingent liability is to be regarded as subsequent event, then also the same ought to be taken into consideration in determining capital gain chargeable under Section 45 of the Act.

The Hon. Court did not agree with the findings of PCIT that the contingent liability paid out of escrow account does not affect the amount receivable as per the agreement for the purpose of computation of capital gains under Section 48 of the Act. Such reduced amount should be taken as full value of consideration for computing capital gains under Section 48 of the Act.

The Hon. Court further held that the assessee could file revised return of income within the prescribed period, to reduce the returned income or increase the returned income. Petitioner filed an application under Section 264 because the assessment under Section 143 had been completed by the time the amount of Rs. 9,17,04,240 was deducted from the escrow account. Section 264 of the Act, has been introduced to factor in such situation because if income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about hypothetical income which does not materialize. Section 264 of the Act does not restrict the scope of power of respondent no. 1 to restrict a relief to an assessee only up to the returned income. Where the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income even though an entry that might, in certain circumstances, have been made in the books of account. Therefore, PCIT ought to have directed the Assessing Officer to recompute income as per the provisions of the Act, irrespective of whether the computation results in income being less than returned income. It is the obligation of the revenue to tax an assessee on the income chargeable to tax under the Act and if higher income is offered to tax, then it is the duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee.

The court further observed that reliance by PCIT on the provisions of Section 240 of the Act to hold that there is no power on respondent no.1 to reduce the returned income, is fraught with error because the circumstances provided in the provisio to Section 240 indisputably do not exist in the present case. Provisio to Section 240 provides that in case of annulment of assessment, refund of tax paid by the assessee as per the return of income cannot be granted to the assessee, which is not the case at hand. There is no provision in the Act which provides, if ultimately assessed income is less than the returned income, the refund of the excess tax paid by the assessee would not be granted to such assessee. As regards the stand of PCIT that the income returned by petitioner is sacrosanct and cannot be disturbed, the only thing that is sacrosanct is that an assessee can be asked to pay only such amount of tax which is legally due under the Act and nothing more. If returned income shows a higher tax liability than what is actually chargeable under the Act, then the assessee is entitled to a refund of excess tax paid by it.

The order dated 13th February, 2015 passed by PCIT was quashed and set aside. The petitioner be entitled to refund of excess tax paid on the excess capital gains shown earlier. The Assessing Officer was directed to pass fresh assessment order on the basis that the capital gains on the transfer of the shares of the company should be computed after reducing proportionate amount withdrawn from the escrow account from the full value of the consideration and allow the refund of additional tax paid with interest.

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