BCAJ | Bombay Chartered Accountant Journal

Period of limitation — Legislative powers — Delegated legislation — CBDT — Reassessment — Notice u/s 148 — Limitation — Extension of period of limitation to period beyond 31-3-2021 — Explanations by notifications traversing beyond parent Act — Extension of period of limitation through notifications not valid — Notices issued barred by limitation

17 Tata Communications Transformation Services Ltd. vs. ACIT [2022] 443 ITR 49 (Bom.) Date of order: 29th March, 2022 Ss. 147 and 151 of ITA, 1961

Period of limitation — Legislative powers — Delegated legislation — CBDT — Reassessment — Notice u/s 148 — Limitation — Extension of period of limitation to period beyond 31-3-2021 — Explanations by notifications traversing beyond parent Act — Extension of period of limitation through notifications not valid — Notices issued barred by limitation

A bunch of writ petitions filed by various assessees to challenge the initiation of reassessment proceedings u/s 147 of the Income-tax Act, 1961 by issuing notices u/s 148 for different assessment years were taken up by the Bombay High Court for hearing together as the issues were common. All notices in these petitions were issued after 1st April, 2021; however, under the Act’s provisions, as it existed before 1st April, 2021. The High Court held as under:

“i) U/s. 147 as amended by the Finance Act, 2021 the new period of limitation provided is three years unless the income chargeable to tax, which has escaped assessment, amounts to or is likely to amount Rs. 50 lakhs or more in which case, the limitation period for issuing notice u/s. 148 would be ten years from the end of the relevant assessment year.

ii) The Notes on Clauses to the Finance Bill, 2021 clearly at every stage provide that the Bill proposes to substitute the existing provisions of 148 of the Income-tax Act, 1961. The original provisions upon their substitution stood repealed for all purposes and had no existence after introduction of the substituting provisions. Section 6 of the General Clauses Act, 1897 provides, inter alia, that where the State Act or Central Act or regulation repeals any enactment then unless a different intention appears, repeal shall not revive anything not in force or existing at the time at which the repeal takes effect or affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder. Under the circumstances after substitution unless there is any intention discernible in the scheme of the statute either pre-existing or newly introduced, the substituted provisions would not survive.

iii) The concept of income chargeable to tax escaping assessment on account of failure on the part of the assessee to disclose truly or fully all material facts is no longer relevant. Elaborate provisions are made u/s. 148A introduced by the Finance Act, 2021 enabling the Assessing Officer to make enquiry with respect to material suggesting that income has escaped assessment, issuance of notice to the assessee calling upon why notice u/s. 148 should not be issued and passing an order considering the material available on record including the response of the assessee if made while deciding whether the case is fit for issuing notice u/s. 148. There is absolutely no indication in all these provisions which would suggest that the Legislature intended that the new scheme of reopening of assessments would be applicable only to the period post 1st April, 2021. In the absence of any such indication all notices which are issued after 1st April, 2021 have to be in accordance with such provisions. There is no indication whatsoever in the scheme of statutory provisions suggesting that the past provisions would continue to apply even after the substitution for the assessment periods prior to substitution and there are only strong indications to the contrary. The time limits for issuing notice u/s. 148 have been modified under substituted section 149. Clause (a) of sub-section (1) of section 149 reduces such period to three years instead of the originally prevailing four years under normal circumstances. Clause (b) extends the upper limit of six years previously prevailing to ten years in cases where income chargeable to tax which has escaped assessment amounts to or is likely to amount to R50 lakhs or more.

iv) Sub-section (1) of section 149 contracts as well as expands the time limit for issuing notice u/s. 148 depending on the question whether the case falls under clause (a) or clause (b). In this context the first proviso to section 149(1) provides that no notice u/s. 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st April, 2021 if such notice could not have been issued at that time on account of being beyond the period of limitation specified under the provisions of clause (b) of sub-section (1) of section 149 as they stood immediately before the commencement of the Finance Act, 2021. According to this proviso therefore, no notice u/s. 148 would be issued for the past assessment years by resorting to the larger period of limitation prescribed in the newly substituted clause (b) of section 149(1). This would indicate that the notice that would be issued after 1st April, 2021 would be in terms of the substituted section 149(1) but without breaching the upper time limit provided in the original section 149(1) which stood substituted. This aspect has also been highlighted in the Memorandum Explaining the proposed Provisions in the Finance Bill. The inescapable conclusion is that for any action of issuance of notice u/s. 148 after 1st April, 2021 the newly introduced provisions under the Finance Act, 2021 would apply. Mere extension of time limits for issuing notice u/s. 148 would not change this position that obtains in law. Under no circumstances can the extended period available in clause (b) of sub-section (1) of section 149 which is now ten years instead of six years earlier available with the Revenue, be pressed in service for reopening assessments for the past period.

v) Under sub-section (1) of section 3 of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 while extending the time limits for taking action and making compliances under the specified Acts up to 31st December, 2020 the only power vested with the Central Government was to extend the time further by issuing a notification. As a piece of delegated legislation the notifications issued in exercise of such powers, have to be within the confines of such powers. Issuing any Explanation touching the provisions of the 1961 Act is not part of this delegation. The CBDT while issuing Notification No. 20, dated 31st March, 2021 ([2021] 432 ITR (St.) 141) and Notification No. 38, dated 27th April, 2021 ([2021] 434 ITR (St.) 11) introduced an Explanation by way of clarification that for the purposes of issuance of notice u/s. 148 under the time limits specified in section 149 or 151, the provisions as they stood as on 31st March, 2021 before commencement of the Finance Act, 2021 shall apply. This plainly exceeded its jurisdiction as a subordinate legislation. The subordinate legislation could not have travelled beyond the powers vested in the Government of India by the parent Act. Even otherwise the Explanation in the guise of clarification cannot change the very basis of the statutory provisions. If the plain meaning of the statutory provision and its interpretation are clear, by adopting a position different in an Explanation and describing it to be clarificatory, the subordinate legislation cannot be permitted to amend the provisions of the parent Act. Accordingly, such Explanations are unconstitutional and are to be declared as invalid.

vi) The provisions of sections 147 to 151 of the 1961 Act were substituted with effect from 1st April, 2021 by the 2021 Act and a new section 148A was inserted with effect from April 2021. Accordingly, the unamended provisions of sections 148 to 151 of the 1961 Act cease to have legal effect after 31st March, 2021 and the substituted provisions of sections 148 to 151 of the 1961 Act have binding force from 1st April, 2021. In the absence of a savings clause there is no legal device by which a repealed set of provisions can be applied and a set of provisions on the statute book (in force) can be ignored. The validity of a notice issued u/s. 148 of the 1961 Act must be judged on the basis of the law existing on the date on which such notice is issued. The provisions of sections 147 to 151 of the 1961 Act are procedural laws and accordingly, the provisions as existing on the date of the notice issued u/s. 148 of the 1961 Act would be applicable.

vii) The word “notwithstanding” creating the non obstante clause, does not govern the entire scope of section 3(1) of the 2020 Act. It is confined to and may be employed only with reference to the second part of section 3(1) of the 2020 Act, i.e., to protect the proceedings already under way. There is nothing in the language of that provision to admit a wider or sweeping application to be given to that clause to serve a purpose not contemplated under that provision and the enactment, wherein it appears. The 2020 Act only protected certain proceedings that might have become time barred on 20th March, 2020, up to 30th June, 2021. Correspondingly, by delegated legislation incorporated by the Central Government, it may extend that time limit. That time limit alone stood extended up to 30th June, 2021. In the absence of any specific delegation, to allow the delegate of Parliament, to indefinitely extend such limitation, would be to allow the validity of the enacted law of the 2021 Act to be defeated by the delegate of Parliament. Section 3(1) of the 2020 Act does not itself speak of reassessment proceeding or of section 147 or section 148 of the 1961 Act as it existed prior to 1st April, 2021. It only provides a general relaxation of limitation granted on account of general hardship existing upon the spread of pandemic. After enforcement of the 2021 Act, it applies to the substituted provisions and not the pre-existing provisions. Reference to reassessment proceedings with respect to pre-existing and now substituted provisions of sections 147 and 148 of the 1961 Act has been introduced only by the later notifications issued under the Act.

viii) A notice issued u/s. 148 of the 1961 Act which had become time barred prior to 1st April, 2021 under the then prevailing provisions would not be revived by virtue of the application of section 149(1)(b) effective from 1st April, 2021. All the notices issued to the assessees were issued after 1st April, 2021 without following the procedure contained in section 148A of the Act and were therefore invalid. No jurisdiction had been assumed by the assessing authority against any of the assessees under the unamended law. Hence, no time extension could be made u/s. 3(1) of the 2020 Act, read with the notifications issued thereunder. The submission of the Department that the provisions of section 3(1) of the 2020 Act gave overriding effect to that Act and therefore saved the provisions as they existed under the unamended law could not be accepted and that saving could arise only if jurisdiction had been validly assumed before 1st April, 2021.

ix) Section 3(1) of the 2020 Act does not speak of saving any provision of law but only speaks of saving or protecting certain proceedings from being hit by the rule of limitation. That provision also does not speak of saving any proceeding from any law that may be enacted by Parliament in future. Unless specifically enabled under any law and unless that burden had been discharged by the Department, the further submission of the Department that practicality dictates that the reassessment proceedings be protected was unacceptable. Once the matter reaches court, it is the legislation and its language, and the interpretation offered to that language as may primarily be decisive that governs the outcome of the proceeding. To read practicality into an enacted law is dangerous and it would involve legislation by the court, an exercise which the court would tread away from. In the absence of any proceeding of reassessment having been initiated prior to 1st April, 2021, it was the amended law alone that would apply. The delegate, i.e., Central Government or the Central Board of Direct Taxes could not have issued Notification No. 20, dated 31st March, 2021 and Notification No. 38, dated 27th, April, 2021 to overreach the principal legislation and therefore, were invalid.”

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Income Declaration Scheme, 2016 — Adjustment of advance tax towards tax, surcharge and penalty on income declared — No reason to distinguish between tax deducted at source and advance tax for purpose of credit — Assessee entitled to credit of advance tax paid pertaining to assessment years for which declaration filed — Principal Commissioner to issue certificate as required by rule 4(5) of Income Declaration Scheme Rules, 2016

16 Tata Capital Financial Services Ltd vs. ACIT [2022] 443 ITR 148 (Bom.) A.Ys.: 2011-12 to 2014-15 Date of order: 2nd February, 2022 Ss. 139, 199, 210 and 219 of ITA, 1961

Income Declaration Scheme, 2016 — Adjustment of advance tax towards tax, surcharge and penalty on income declared — No reason to distinguish between tax deducted at source and advance tax for purpose of credit — Assessee entitled to credit of advance tax paid pertaining to assessment years for which declaration filed — Principal Commissioner to issue certificate as required by rule 4(5) of Income Declaration Scheme Rules, 2016

The assessee did not file returns of income for the A.Ys. 2011-12 to 2014-15. The assessee filed a declaration under the Income Declaration Scheme, 2016 u/s 183 of the Finance Act, 2016 and declared undisclosed income for those four assessment years. There were certain mistakes in such forms. On receipt of a notice u/s 148 of the Income-tax Act, 1961, the assessee filed a revised declaration. The Principal Commissioner did not issue the certificate as required by rule 4(5) of the Income Declaration Scheme Rules, 2016 in respect of the income declared by the assessee under the scheme after accepting the declaration. The Principal Commissioner held that the assessee was not entitled to an adjustment of the advance tax towards tax, surcharge and penalty payable in respect of the undisclosed income declared on the grounds that only 60.21 per cent of the total amount due under the scheme had been received and that under the scheme, there was no provision for such adjustment.

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

“i) Section 199 of the Income-tax Act, 1961 provides for credit for tax deducted. Sub-section (1) of section 199 declares that any deduction made in accordance with the provisions of Chapter XVIII of the Act and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made. Section 219 provides that an assessee who pays advance tax shall be entitled to credit therefor in the regular assessment. From a conjoint reading of sections 199 and 219, it becomes clear that in the matter of credit, the tax deducted at source and advance tax stand on the same footing. As there is no ground to make a distinction between the tax deducted at source and advance tax for the purpose of credit, there is no reason not to equate an advance tax with tax deducted at source for the purpose of the Income Declaration Scheme, 2016. If the tax deducted at source is entitled to credit, a fortiori advance tax must get the same dispensation.

ii) The provisions of sections 184 and 185 of the Finance Act, 2016 incorporating the Scheme, begin with a non obstante clause. However, the overriding effect of sections 184 and 185 is confined to the rate at which the tax is to be imposed on the undisclosed income, surcharge to be paid thereon and the penalty. The advance payment made by the declarant retains the character of tax.

iii) The assessee was entitled to adjustment of advance tax paid towards tax, surcharge and penalty in respect of the undisclosed income declared under the Scheme. It was not the case of the Principal Commissioner that the advance tax paid by the assessee was not relatable to the income for the relevant assessment years for which the assessee had disclosed income. If the advance tax payment was not apportionable towards any other liability, there was no justifiable reason to deprive the assessee of credit for such amount against the liability under the Scheme. The Principal Commissioner was to issue the certificate as required by rule 4(5) of the 2016 Rules upon the assessee’s complying with all the requirements under the Scheme.”

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Business expenditure — Meaning of expression “wholly and exclusively” in s. 37 — No compelling reason for incurring particular expenditure — Expenditure benefitting third person — Finding by Tribunal that expenditure had been incurred for purposes of business — Expenditure deductible

15 Principal CIT vs. South Canara District Central Co-Operative Bank Ltd. [2022] 442 ITR 338 (Kar.) A.Y.: 2012-13 Date of order: 14th December, 2021 S. 37 of ITA, 1961

Business expenditure — Meaning of expression “wholly and exclusively” in s. 37 — No compelling reason for incurring particular expenditure — Expenditure benefitting third person — Finding by Tribunal that expenditure had been incurred for purposes of business — Expenditure deductible

For the A.Y. 2012-13, the assessee incurred an expenditure made towards Navodaya Grama Vikasa Charitable Trust with a description “animator salary” under the directions of their controlling authority, i.e., NABARD. The Assessing Officer disallowed the expenditure.

On extensive analysis of the factual aspects, the Tribunal concluded that though the assessee was promoting the formation of self-help groups in the districts of Dakshina Kannada and Udupi, loans were given to such self-help groups for home industries like candle-making, soap-making and similar other activities, and the income generated by such self-help groups came back to the assessee as deposits. The commercial exigency being established u/s 37(1), the expenditure was allowed as deduction.

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

“i) In Sasoon J. David And Co. P. Ltd. vs. CIT [1979] 118 ITR 261 (SC) it had been observed that the expression “wholly and exclusively” used in section 10(2)(xv) of the Indian Income-tax Act, 1922 does not mean “necessarily”. Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity but if it is incurred for promoting the business and to earn profits, the assessee can claim deduction. The fact that somebody other than the assessee is also benefitted by the expenditure does not come in the way of its being allowed by way of deduction.

ii) The Commissioner (Appeals) as well as the Tribunal had analysed the factual aspects in the background of the legal principles, which could not by any stretch of imagination be held to be perverse or arbitrary. More over, these factual aspects recorded by the fact finding authorities could not be interfered with. Accordingly the expenditure was deductible for the A.Y. 2012-13.”

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POINT OF TAXABILITY – SECTION 56(2)(viib)

ISSUE FOR CONSIDERATION

Section 56(2)(viib) provides for taxability of the consideration received by a closely held company for issue of shares to the extent it exceeds the fair market value of the shares. It is applicable when such a company is issuing shares at a premium.

In cases where the share application money is received in one year, but the shares have been allotted in another year, the issue has arisen as to whether this provision is applicable in the year of receipt of the share application money or in the year of allotment of the shares. While the Delhi, Bengaluru and Mumbai benches of the Tribunal have taken a view that it is applicable in the year in which the shares have been finally allotted, the Kolkata bench of the Tribunal has taken a view that it is applicable in the year in which the consideration for issue of shares is received.

CIMEX LAND AND HOUSING (P.) LTD.’S CASE

The issue had first come up for consideration of the Delhi bench of the Tribunal in the case of Cimex Land and Housing (P.) Ltd. vs. ITO [2019] 104 taxmann.com 240.

In this case, the assessee company had received the share application money from V. L. Estate Pvt. Ltd. as follows –

A.Y.	No. of shares	Face value	Premium per share	Total share application money
2012-13	50,375	R10	R790	R4,03,00,000
2013-14	5,000	R10	R790	R40,00,000
2015-16	24,625	R10	R790	R1,97,00,000
TOTAL		R6,40,00,000

A.Y.

No. of shares

Face value

Premium per
share

Total share
application money

2012-13

50,375

R10

R790

R4,03,00,000

2013-14

5,000

R10

R790

R40,00,000

2015-16

24,625

R10

R790

R1,97,00,000

TOTAL

R6,40,00,000

As against the share application money received as aforesaid, the shares were allotted only in F.Y. 2014-15 relevant to A.Y. 2015-16. The assessee’s case for A.Y. 2015-16 was selected for the assessment for verification of large share premium received during the year. During the course of the assessment proceedings, the Assessing Officer took a stand that he had a right to examine the basis on which share premium was received with respect to all the shares which were allotted during the year. The Assessing Officer took a view that the share application money could be returned back without allotting shares, and examination of basis of share premium could be verified only in the year when shares were allotted. The Assessing Officer also disregarded the valuation report of the registered valuer dated 5th April, 2011, on the ground that it was not in accordance with the valuation method as prescribed in Rule 11UA.

Since the assessee company did not provide any justification for the allotment of shares at a premium during the year under consideration along with the valuation in accordance with the prescribed method, the Assessing Officer added the amount of Rs. 6.32 crore u/s 56(2)(viib) as income from other sources. The CIT(A) also confirmed this addition.

Before the tribunal, the assessee reiterated that only Rs. 1.97 crores was received during the year under consideration as share application money for 24,625 shares, and the balance amounts were received in earlier assessment years, which could not be brought to tax u/s 56(2)(viib) for the year under consideration. On the other hand, the revenue contended that since, in the A.Ys. 2012-2013 and 2013-14, only share application money was received and no shares were allotted, the question of examining the case from the perspective of applicability of section 56(2)(viib) did not arise in those assessment years.

The tribunal held that though the provisions of Section 56(2)(viib) referred to the consideration for issue of shares received in any previous year and the amount of Rs. 4.43 crore was not received during the year under consideration, it could not be said that the assessee was not liable to justify the share premium supported by the valuation report as mentioned in Rule 11UA. Since the shares were not allotted in the years in which the share application money was received, the applicability of section 56(2)(viib) could not have been examined by the Assessing Officer in those years.

Since the entire transaction had crystallised during the year under consideration, which also included determination of the share premium of Rs. 790 per share, it was required to be examined during the year under consideration only. Accordingly, the Tribunal restored the matter back to the Assessing Officer, with a direction to examine the justification of share premium as per the procedure prescribed under Rules 11U and 11UA of the IT Rules, and to decide the issue afresh, after giving a reasonable opportunity of being heard to the assessee.

A similar view has been adopted by the different benches of the tribunal in the following cases:

• Taaq Music Pvt. Ltd. vs. ITO – ITA No. 161/Bang/2020 dated 28th September, 2020

• Medicon Leather (P) Ltd. vs. ACIT – [2022] 135 taxmann.com 165 (Bangalore – Trib.)

• Impact RetailTech Fund Pvt. Ltd. vs. ITO – ITA No. 2050/Mum/2018 dated 5th March, 2021

DIACH CHEMICALS & PIGMENTS PVT. LTD.’S CASE

The issue, thereafter, came up for consideration before the Kolkata bench of the tribunal in the case of ACIT vs. Diach Chemicals & Pigments Pvt. Ltd. [TS-355-ITAT-2019(Kol)].

In this case, the assessee issued and allotted 10,60,000 equity shares of Rs. 10 face value at a premium of Rs. 90 per share during the previous year 2012-13 relevant to A.Y. 2013-14. However, the consideration for issue of these shares was received in the preceding year i.e. previous year 2011-12 relevant to A.Y. 2012-13. During the course of the assessment for A.Y. 2013-14, the assessing officer found that the fair market value of the shares was Rs. 41.38 only and, accordingly, asked the assessee as to why the provisions of section 56(2)(viib) should not be invoked.

In reply, the assessee submitted that the applicability of provisions of section 56(2)(viib) did not arise, as the relevant provision came into force only with effect from A.Y. 2013-14, and the consideration for issue of shares was received in A.Y. 2012-13, and not in the assessment year under consideration.

The assessing officer did not accept the submissions of the assessee and held the consideration for shares was to be treated as received in the year of allotment of the shares i.e. the year under consideration, and added an amount of Rs. 61,69,200 [(100-41.38) X 10,60,000] to the total income of the assessee.

The CIT (A) deleted this addition made by the Assessing Officer by holding that the connotation of the meaning ‘received in any previous year’ used in section 56(viib) would be in respect of the year of receipt and not the year of allotment. The shares were allotted in F.Y. 2013-14 but the share application monies were received in the F.Y. 2012-13. According to the CIT(A), the provisions of section 56(2)(viib) were to be construed with respect to the year in which consideration was received and not the year in which the allotment of shares was made.

Before the tribunal, the revenue contended that the valuation of shares could be made only when the transaction had been fully completed and apportionment between share capital and share premium had fully crystallised. As the transaction of issue of shares got completed in the year under consideration when the shares were allotted, the taxability with respect to the actual value at which the shares had been allotted and the value of shares as per the valuation norms was required to be examined. It was also pointed out that if the transaction was taxed in the year of receipt of share application money, then it would result in absurdity if the share application money is refunded in the subsequent year without any allotment of shares.

As against that, the assessee contended that the provisions of section 56(2)(viib) were not applicable as there was no receipt of consideration in the year under consideration.

The Tribunal held that the provisions of section 56(2)(viib) could not be applied in A.Y. 2013-14 on the basis that the shares were allotted in that year. It was for the reason that the shares were applied in A.Y. 2012-13 as per the terms and conditions settled in that year. On that basis, the Tribunal confirmed the order of the CIT (A) deleting the addition.

OBSERVATIONS
The relevant provision of section 56(2) is reproduced below for better understanding of the issue under consideration –

56. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely:

(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares.

The taxability under the aforesaid provision arises if the following conditions are satisfied:

• The assessee is a closely held company i.e. a company in which the public are not substantially interested.

• Such company has received the consideration for issue of shares exceeding the face value of such shares i.e. the shares have been issued at a premium.

• The consideration so received exceeds the fair market value of the shares issued.

If the above mentioned conditions are satisfied, then the excess of consideration over the fair market value of the shares becomes chargeable to tax under the head income from other sources. The Explanation to clause (viib) provides the manner in which the fair market value of shares needs to be determined for this purpose.

The issue under consideration lies in a narrow compass i.e. whether the taxability under this provision gets triggered at the moment when the share application money is received irrespective of the fact that the shares have been allotted at a later date. This issue becomes more relevant in a case where the receipt of share application money and the allotment of shares fall in different assessment years.

When the company receives the share application money, technically speaking, what it receives is the advance against the issue of shares and not the consideration for issue of shares. This advance is then appropriated towards the consideration for issue of shares at the time when the shares are actually allotted to the applicant. This aspect has been well explained in the case of Impact RetailTech Fund Pvt. Ltd. vs. ITO (supra) as under –

The receipt of consideration for issue of shares to mean the proceeds for exchange of ownership for the value. The term consideration means “something in return” i.e. “Quid Pro Quo”. The receipt is exchanged with the ownership in the company.

The consideration means the promise of the assessee to issue shares against the advances received. In our view, the receipt of advances are a liability and will never take the character of the ownership until it is converted into share capital. The assessee can never enjoy the receipt of money from the investor until the ownership for the money received is not passed on i.e. by allotment of shares. The receipt of consideration during the previous year means the year in which the ownership or allotment of shares are passed on to the allottee in exchange for the investment of money.

The tax authorities interpretation that when the receipt of money and mere agreement for allotment of shares without actual allotment of shares will make the consideration complete as per the contractual laws. In our view, unless and until the event of allotment of shares takes place, the assessee cannot become the owner of the funds invested in the company. The event of allotment will change the colour of funds received by the assessee from liability to the ownership.

The provision of clause (viib) which is under consideration has been inserted by the Finance Act, 2012 as a measure to prevent generation and circulation of unaccounted money. The objective of introducing such a provision as it appears is to tax the share premium received against issue of shares at a value which exceeds the fair market value of the shares. The share application money gets converted into share premium only when the shares are issued. Also, the quantum of share premium gets crystallised finally only when the shares are issued. Even if the amount of share application money is received on the basis of the proposal to issue shares at premium, it is only tentative at that point in time, and becomes final only when it is converted into share premium by issuing shares. Therefore, even considering the objective of the provision, the right stage at which the taxability should be determined is at the time when the shares are issued and not at the time when the share application money is received.

If the income is taxed at the time of receipt of the share application money disregarding the allotment of shares, correspondingly then, the excess amount received from every applicant of shares would become taxable irrespective of whether the shares have been actually issued or not. The only way to overcome such an absurdity is to apply the provision only in respect of the share application money which has been converted into share capital by issuing the shares to the applicant, and this can happen only at the time when the shares have been issued to the applicant.

Further, clause (a) of the Explanation which provides for the determination of fair market value also supports this view. This clause reads as under –

Explanation—For the purposes of this clause,—

(a) the fair market value of the shares shall be the value—

(i) as may be determined in accordance with such method as may be prescribed; or

(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature,

whichever is higher;

The sub-clause (ii) refers to the value of the shares as on the date of issue of shares. Therefore, the computation of the fair market value would also fail in a case where only the share application money is received and the shares have not been issued.

The better view, in our considered opinion, is that the provisions of section 56(2)(viib) can be invoked only when the shares are issued and not prior to that, as held by Delhi, Bengaluru and Mumbai benches of the Tribunal.

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Powers of Commissioner (Appeals) are co-terminus with powers of Assessing Officer and that he is empowered to call for any details or documents which he deems necessary for proper adjudication of issue

14 ITO (TDS) vs. Tata Teleservices Ltd. [[2021] 92 ITR(T) 87 (Delhi – Trib.)] ITA Nos.:1685 & 1686 (DEL.) of 2017 A.Y.: 2008-09 and 2009-10; Date of order: 27th September, 2021

Powers of Commissioner (Appeals) are co-terminus with powers of Assessing Officer and that he is empowered to call for any details or documents which he deems necessary for proper adjudication of issue

FACTS
It was seen that no proper opportunity was given to the assessee to justify its case of non deduction of tax at source and ground was raised before the Ld. CIT(A) for violation of principles of natural justice by the assessee. The assessee had submitted additional evidence before the Ld. CIT(A) in the aforesaid matter. The Ld. CIT(A) had accepted the said evidence, without taking recourse to Rule 46A of the Income-tax Rules. The revenue filed an appeal before the ITAT on the ground that the CIT(A) erred to admit the additional evidence produced by the assessee before him in contravention of Rule 46A(3) of the Income-tax Rules, 1962, in as much as no opportunity was given to the Assessing Officer to examine the correctness of the additional evidence produced by the assessee before the CIT(A).

HELD
The ITAT observed that the assessee had raised the ground of violation of principles of natural justice before the CIT(A) since no proper opportunity was given to the assessee to justify its case. The assessee did not make any application for admitting additional evidences before the CIT(A).

The CIT(A) examined the various documents available on record in exercise of his powers u/s 250(4). He opined that the Assessing Officer had failed to provide proper opportunity to the assessee. The ITAT held that, in such circumstances, the CIT(A) had acted well within his power to adjudicate the issues after calling for necessary information and details and it cannot be said that there was any violation of rule 46A of the Income-tax Rules. It is trite that the First Appellate Authority has powers which are co-terminus with the powers of the Assessing Officer and that he is empowered to call for any details or documents which he deems it necessary for the proper adjudication of the issue and there is no requirement under the law for granting any further opportunity to the Assessing Officer in terms of section 250(4) in such cases.

On the basis, the appeal filed by the department was dismissed.

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Where Assessing Officer failed to bring evidences to support his finding that assessee was involved in rigging price of shares held by her so as to get an undue benefit of exemption u/s 10(38), transactions of sale and purchase of such shares by assessee through recognized stock exchange could not be treated as bogus so as to make additions under Section 68

13 Mrs. Neeta Bothra vs. ITO [[2021] 92 ITR(T) 450 (Chennai – Trib.)] ITA Nos.: 2507 & 2508 (CHNY.) of 2018 A.Ys.: 2012-13 and 2013-14, Date of order: 8th September, 2021

Where Assessing Officer failed to bring evidences to support his finding that assessee was involved in rigging price of shares held by her so as to get an undue benefit of exemption u/s 10(38), transactions of sale and purchase of such shares by assessee through recognized stock exchange could not be treated as bogus so as to make additions under Section 68

FACTS
Assessee purchased and sold shares of M/s. Tuni Textile Mills Limited (hereinafter referred to as ‘TTML’). She earned Long Term Capital Gains on the said transaction which was claimed exempt u/s 10(38) of the Act. The Assessing Officer held the transaction to be bogus and added the entire sale consideration u/s 68 of the Act for the reason that TTML was named as a penny stock in the report prepared by investigation wing of the Department and that though the assessee had sold the shares at a higher price in the market, the financials of TTML did not justify such a price rise in a short period of just two years. Aggrieved, the assessee filed appeal before the CIT(A). However, CIT(A) also decided the appeal against the assessee mainly on the basis of mere circumstantial evidences like:

(i) The broker through which assessee carried out the transaction was previously charged by SEBI under the relevant law for being found guilty of violating regulatory requirements.

(ii) The assessee, based in Chennai, carried out the lone instant transaction through a broker in Ahmadabad.

(iii) Shares of TTML have been specifically named as penny stocks by investigation wing of the Department.

(iv) Assessee was not able to explain how a company having negligible financial strength had split its equity shares in the ratio of 1:10 and further, failed to explain how price of shares were quoted at a record 9,400% growth rate in a short span of two years.

Therefore, the CIT(A) opined that mere furnishing certain evidences like broker notes, bank statements, etc is not sufficient to prove genuineness of transaction, when other circumstantial evidences show that transaction of share trading is not genuine.

Aggrieved, the assessee preferred appeal before the ITAT.

HELD
The ITAT observed that the fact of purchase and sale of the shares being through Recognized Stock Exchange was not disputed. However, both the Assessing Officer as well as CIT(A) had proceeded predominantly on the basis of analysis of financial statements of TTML. Even though the fact that the financial statements of TTML did not paint a very rosy picture coupled with the fact that TTML was a penny stock was brought to notice by both the lower authorities, the said facts alone are not sufficient to draw adverse inference against the assessee, unless the AO linked transactions of the assessee to organized racket of artificial increase in share price. It further observed that though the broker may be engaged in fraudulent activities, whether the assessee was a part of those activities was to be seen. There was no evidence on record to show that assessee was part of the organized racket of rigging price of shares in the market. The findings of the Assessing Officer was purely based on suspicion and surmises.

It stated that the Assessing Officer predominantly relied on the theory of human behaviour and preponderance of probabilities for the reason that the assessee was never involved in purchase and sale of shares and the instant transaction in question was the only one. However, the said fact was found to be erroneous by the ITAT.

Therefore, the ITAT concluded that unless the Assessing Officer brings certain evidences to support his finding that the assessee was also involved in rigging share price to get undue benefit of exemption u/s 10(38) of the Act, the transactions of sale and purchase of shares through recognized stock exchange could not be treated as unexplained cash credit u/s 68 of the Act.

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Adjustment u/s 143(1)(a) without adjustment is legally invalid

12 Arham Pumps vs. DCIT [TS-355-ITAT-2022(Ahd)] A.Y.: 2018-19; Date of order: 27th April, 2022 Section: 143(1)(a)

Adjustment u/s 143(1)(a) without adjustment is legally invalid

FACTS
For A.Y. 2018-19, assessee firm filed its return of income declaring therein a total income of Rs. 26,03,941. The said return was processed by CPC under section 143(1) and a sum of Rs. 28,16,680 was determined to be the total income, thereby making an addition of Rs. 2,10,743 to the returned total income on account of late payment of employees contribution to PF and ESIC which were disallowed u/s 36(1)(va) of the Act.

Aggrieved, assessee preferred an appeal to CIT(A), which appeal was migrated to NFAC as per CBDT notification. NFAC gave two opportunities to the assessee and upon not receiving any response decided the matter, against the assessee, based on documents and materials on record.

HELD
The Tribunal noted that the NFAC, in its order, has dealt with the matter very elaborately and has upheld the addition by following the decision of jurisdictional High Court in Gujarat State Road Transport Corporation 41 taxmann.com 100 (Guj.) and Suzlon Energy Ltd. (2020) 115 taxmann.com 340 (Guj.).

It also noted that in the intimation there is no description/explanation/note as to why such disallowance or addition is being made by CPC in 143(1) proceedings. The Tribunal having gone through the provisions of section 143(1) of the Act and the proviso thereto held that a return can be processed u/s 143(1) by making only six types of adjustments. The first proviso to section 143(1)(a) makes it very clear that no such adjustment shall be made unless an intimation has been given to the assessee of such adjustment either in writing or in an electronic mode. In this case, no intimation was given to the assessee either in writing or in electronic mode.

The Tribunal held that CPC had not followed the first proviso to section 143(1)(a). Also, NFAC order is silent about the intimation to the assessee. The Tribunal held that since the intimation is against first proviso to section 143(1)(a), the entire 143(1) proceedings are invalid in law.

It observed that NFAC has not looked into the fundamental principle of “audi alteram partem” which has been provided to the assessee as per 1st proviso to section 143(1)(a) but has proceeded with the case on merits and also confirmed the addition made by the CPC. It held that NFAC erred in conducting the faceless appeal proceedings in a mechanical manner without application of mind. The Tribunal quashed the intimation issued by the CPC and allowed the appeal filed by the assessee.

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Proviso to section 201(1) inserted by the Finance (No. 2) Act, 2019 is retrospective as it removes statutory anomaly over sums paid to non-residents

11 Shree Balaji Concepts vs. ITO, International Taxation [TS-393-ITAT-2022(PAN)] A.Y.: 2012-13; Date of order: 13th May, 2022 Sections: 201(1) and 201(1A)

Proviso to section 201(1) inserted by the Finance (No. 2) Act, 2019 is retrospective as it removes statutory anomaly over sums paid to non-residents

FACTS
The assessee purchased an immovable property from Elrice D’Souza and his wife for a consideration of R10 crore. However, it did not deduct tax at source as was required u/s 195 of the Act. The Assessing Officer (AO) held the assessee to be an assessee in default and levied a tax of Rs.2,26,60,000 u/s 201(1) and interest of Rs. 1,22,36,400 u/s 201(1A) of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the payees in the instant case having filed their return of income and disclosed the consideration in their respective returns and have duly complied with the amended provisions of section 201[1] of the Act, which has been inserted in Finance [No. 2] Act, 2019.

After considering the decisions as relied upon by the appellant for the proposition that any provision which has been inserted with an object to remove any difficulty or anomaly, then the said provision has to be given retrospective effect:

(a) Celltick Mobile Media Pvt. Ltd. vs. DCIT (2021) 127 taxmann.com 598 (Mumbai-Trib.);

(b) CIT vs. Ansal Land Mark Township Pvt. Ltd. (2015) 61 taxmann.com 45 (Delhi);

(c) CIT vs. Calcutta Export Company [2018] 93 taxmann.com 51 (SC);

(d) DCIT vs. Ananda Marakala (2014) 48 taxmann.com 402 (Bangalore-Trib.).

The Tribunal held that the said proviso to section 201(1) wherein the benefit has also been extended to the payments made to non-residents is meant for removal of anomaly, is required to be given with retrospective effect.

The Tribunal held that the appellant assessee cannot be held as an assessee in default as per proviso to section 201(1) of the Act, in view of the amended provisions of section 201(1) of the Act, being inserted in Finance (No. 2) Act, 2019.

The Tribunal deleted the demand raised by the AO and confirmed by the CIT(A) u/s 201(1) of the Act of Rs. 2,26,60,000.

As regards the sum of Rs. 1,22,36,400 levied as interest u/s 201(1A) of the Act, the Tribunal noted that the said property was sold by the appellant on 17th September, 2011 and the return of income by the two payees have been filed on 30th July, 2012. Thus, interest amount u/s 201(1A) of the Act has to be calculated for the period 7th October, 2011 to 30th July, 2012 being the date of filing of the return by the two payees.

The Tribunal directed the AO, to re-compute the interest u/s 201(1A) of the Act, for the period 7th October, 2011 to 30th July, 2012 till the date of filing of the return by the two payees.

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Section 56(2)(vii)(c) does not apply to bonus shares received by an assessee

10 JCIT vs. Bhanu Chopra [TS-388-ITAT-2022 (DEL)] A.Y.: 2015-16; Date of order: 29th April, 2022 Section: 56(2)(vii)

Section 56(2)(vii)(c) does not apply to bonus shares received by an assessee

FACTS
For A.Y. 2015-16, assessee filed a return of income declaring a total income of R31,99,25,740. While assessing the total income, the Assessing Officer (AO) computed FMV of bonus shares of HCL Technologies in terms of Rule 11UA to be R47,21,93,975 and consequently added this amount to the total income of the assessee by applying the provisions of section 56(2)(vii)(c) of the Act.

The AO observed that the taxable event is receipt of property without consideration or for a consideration which is less than its FMV. According to the AO, the assessee received property in the form of bonus shares and therefore the FMV of the same is taxable u/s 56(2)(vii)(c) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who deleted the addition made by the AO.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the CIT(A) has –

(i) while controverting the findings of the AO and coming to the conclusion that provisions of section
56(2)(vii)(c) are not applicable to the case of the assessee has followed the decision of the Apex Court in CIT vs. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 (SC);

(ii) while deciding the issue he has also relied upon the decision in the case of Dr. Rajan vs. Department of Income Tax (ITA No. 1290/Bang/2015) wherein, the judgment referred above of the Apex Court in the case of the CIT vs. Dalmia Investment Co Ltd (supra) was also relied upon by the Tribunal and in the case of Sudhir Menon HUF vs. ACIT (ITA No. 4887/Mum/2013) wherein, it was clearly held by the Tribunal that allotment of bonus shares cannot be considered as received for an inadequate consideration and therefore, it is not taxable as income from other sources u/s 56(2)(vii)(c) of the Act;

(iii) held that the issue of bonus share is by capitalization of its profit by the issuing company and when the bonus shares are received it is not something which has been received free or for a lesser FMV. Consideration has flown out from the holder of the shares may be unknown to him/her, which is reflected in the depression in the intrinsic value of the original shares held by him/her.

The Tribunal held that –

(i) even the CBDT vide Circular No. 06/2014 dated 11th February, 2014 has clarified that bonus units at the time of issue would not be subjected to additional income tax u/s 115R of the Act, since issue of bonus units is not akin to distribution of income by way of dividend. This may be inferred from provisions of section 55 of the Act which prescribed that “cost of acquisition” of bonus units shall be treated as Nil for purposes of computation of capital gains tax;

(ii) further, the CBDT vide Circular No. 717 dated 14th August, 1995 has clarified that “in order to overcome the problem of complexity, a simple method has been laid down for computing of cost of acquisition of bonus shares. For the sake of clarity and simplicity, the cost of bonus shares is to be taken as “Nil? while the cost of original shares is to be taken as the amount paid to acquire them. This procedure will also be applicable to any other security where a bonus issue has been made;

(iii) the issue under consideration has been elaborately considered by the Tribunal in various cases such as Rajan Pai Bangalore vs. Department of Income Tax and Sudhir Menon HUF (supra) and even by the Apex Court in the case of CIT vs. Dalmia Investment Co. Ltd. (supra) as relied upon by the CIT(A) while holding that the provisions of section 56(2)(vii)(c) of the Act are not applicable to the bonus shares;

(iv) there is neither any material nor any reason to controvert the findings of the CIT(A).

The Tribunal dismissed the appeal filed by the revenue.

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DEDUCTIBILITY OF EXPENDITURE INCURRED BY PHARMACEUTICAL COMPANIES FOR PROVIDING FREEBIES TO MEDICAL PRACTITIONERS UNDER SECTION 37 (Part 1)

INTRODUCTION

1.1 Section 37 of the Income-tax Act, 1961 (‘the Act’) grants deduction of any expenditure incurred wholly and exclusively for the purposes of an assessee’s business or profession while determining the income chargeable under the head ‘Profits and gains of business or profession’ provided such expenditure is not of the nature referred to in sections 30 to 36 and is not a capital or a personal expense of the assessee.

1.2 An Explanation (now renumbered as Explanation 1) was inserted by the Finance (No. 2) Act, 1998 in section 37 with retrospective effect from 1st April,1962 [herein after referred to as the said Explanation] to deny deduction or allowance of any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law and to clarify that such expenditure shall not be deemed to have been incurred for the purpose of business or profession.

1.3 Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (hereinafter referred to as “MCI Regulations”) prescribe a code of conduct and ethics that are to be adhered to by a medical practitioner. These Regulations prohibit a medical practitioner from aiding, abetting or committing any unethical acts specified in Clause 6. Some of the instances specified in Clause 6 of the MCI Regulations which are treated as unethical include: soliciting of patients; giving, soliciting, receiving or offering to give, solicit or receive any gift, gratuity, commission or bonus in consideration of or return for the referring; and recommending or procuring of any patient for any treatment.

1.4 MCI Regulations were amended and published in the Official Gazette on 14th December, 2009 whereby Clause 6.8 was added to the MCI Regulations prescribing a code of conduct to be adhered to by doctors and professional association of doctors in their relationship with pharmaceutical and allied health sector industry. Clause 6.8 prohibits medical practitioners from accepting from any pharmaceutical or allied health care industry any emoluments in the form of inter alia gifts, travel facilities for vacation or for attending conferences/seminars, hospitality like hotel accommodation, cash or monetary grants. Any act in violation of the aforesaid MCI Regulation could result in sanctions against the medical practitioners ranging from ‘censure’ to removal from the Indian Medical Register or State Medical Register for periods prescribed therein.

1.5 Thereafter, Central Board of Direct Taxes (‘CBDT’) vide its Circular No. 5/2012 dated 1st August, 2012 [hereinafter referred to as the said Circular] clarified that any expense incurred by pharmaceutical and allied health sector industries for distribution of freebies to medical practitioners in violation of the provisions of MCI Regulations shall be inadmissible as deduction u/s 37(1) being an expense prohibited by law.

1.6 In the course of their business, pharmaceutical companies incur expenditure for bearing travel or conference expenses of medical practitioners or giving incentives, gifts and free samples to medical practitioners to create awareness about their products or to increase the sale of their products. Such expenditure being wholly and exclusively for the purpose of business is claimed as a deduction u/s 37 by the pharmaceutical companies. The issue, however, arose as to whether incurring of such expenditure was for an offence or was prohibited by law so as to fall within the scope of the said Explanation, thereby resulting in a denial of deduction of such expenditure. This issue has given rise to considerable litigation and was a subject matter of dispute before different authorities/courts, more so with the issuance of the said Circular by the CBDT.

1.7 Recently, this issue of allowability of claim for deduction of freebies came up before the Supreme Court in the case of Apex Laboratories (P) Ltd. vs. DCIT (2022) 442 ITR 1(SC) which now largely settles this dispute and, therefore it is thought fit to consider in this feature.

CIT VS. KAP SCAN AND DIAGNOSTIC CENTRE P. LTD. (2002) 344 ITR 476 (P&H)

2. In the above case, the brief facts were the assessee was doing the business of CT scan, ultrasound and X-rays and return of income for A.Y. 1997-98 was filed, declaring a loss. The assessee had claimed a deduction of Rs 3,68,400 towards commission stated to have been paid to the practising doctors who referred the patients for various tests. This was disallowed by the Assessing Officer (AO). The claim of such deduction was allowed by the first Appellate Authority. The Tribunal dismissed the further appeal of the Revenue, holding that the commission paid to the doctors was allowable expenditure being a trade practice. As such, at the instance of the Revenue, the issue of deductibility of such commission came up before the High Court.

2.1 Before the High Court, on behalf of the assessee, it was inter alia contended that giving such commission to private doctors for referring the patients for various tests was a trade practice that could not be regarded as illegal. Therefore, the same cannot be disallowed even under the said Explanation inserted by the Finance (No. 2) Act, 1998 with retrospective effect. For this, reliance was placed on the decision of the Allahabad High Court in the case of Pt. Vishwanath Sharma [(2009) 316 ITR 419]. It was further contended that the Revenue had not shown/proved/argued that such commission was an illegal practice. It was also contended that the question of inadmissibility of this deduction u/s 37 was never raised before the Tribunal and hence cannot be raised now for the first time. It seems that this contention was meant to say that this was never raised based on the said Explanation before the Tribunal.

Apart from this, reliance was also placed on the judgment of the Supreme Court in the case of Dr. T. A. Quereshi [(2006) 287 ITR 547] and judgments of High Courts in support of the contentions raised.

It would appear that nobody had appeared for the Revenue.

3. After hearing the assessee’s counsel, the Court noted that the issue was regarding the deductibility of commission paid by the assessee to the Doctors for having referred the business to its diagnostic center. As such, it cannot be said that the point regarding section 37(1) of the Act was never raised earlier though it was only under the said provision.

3.1 For the purpose of considering the other contentions raised on behalf of the assessee, the Court referred to the provisions of Section 37 and the said Explanation as well as the CBDT Circular No 772 dated 23rd December,1998 explaining the reasons for the introduction of the said Explanation and observed as under:

“It, thus, emerges that an assessee would not be entitled to deduction of payments made in contravention of law. Similarly, payments which are opposed to public policy being in the nature of unlawful consideration cannot equally be recognized. It cannot be held that businessmen are entitled to conduct their business even contrary to law and claim deductions of payments as business expenditure, notwithstanding that such payments are illegal or opposed to public policy or have pernicious consequences to the society as a whole.”

3.2 The Court then noted the relevant portion of the MCI Regulations contained in Regulation 6.4 which in substance provides that no physician shall give, solicit, receive or offer to give, solicit or receive any gift, gratuity, commission or bonus in consideration of or return for referring any patient for medical treatment. Having noted this Regulation, the Court stated as under:

“If demanding of such commission was bad, paying it was equally bad. Both were privies to a wrong. Therefore, such commission paid to private doctors was opposed to public policy and should be discouraged. The payment of commission by the assessee for referring patients to it cannot by any stretch of imagination be accepted to be legal or as per public policy. Undoubtedly, it is not a fair practice and has to be termed as against the public policy.”

3.2.1 The Court also noted that Section 23 of the Contract Act equates an agreement or contract opposed to public policy with an agreement or contract forbidden by law.

3.3 Dealing with the judgment of the Supreme Court relied on by the assessee, the Court, while distinguishing the same, stated as under:

“The judgments relied upon by the assessee cannot be of any assistance to the assessee as they are prior to insertion of the Explanation to sub-section (1) of section 37 of the Act. Reference may also be made to the apex court judgment in Dr. T.A. Quereshi’s case [2006] 287 ITR 547 (SC) on which reliance has been placed by the learned counsel for the assessee. The hon’ble Supreme Court in that case was seized of the matter where heroin forming part of the stock of the assessee’s trade was confiscated by the State authorities and the assessee claimed the same to be an allowable deduction. The hon’ble Supreme Court held that seizure and confiscation of such stock-in-trade has to be allowed as a business loss and Explanation to section 37 has nothing to do as that was not a case of business expenditure. Since the present case is not a case of business loss but of business expenditure, that judgment is distinguishable and does not help the assessee.”

3.4 The Court also referred to the judgment of the Allahabad High Court in the case of Pt. Vishwanath Sharma (supra), in which the issue relating to the commission paid to Government doctors for prescribing certain medicines to patients was held as contravening public policy, and the same is inadmissible as a deduction. In this context, the Court stated that no distinction could be made in respect of Government doctors and private doctors.

3.5 Finally, the Court concluded as under:

“Thus, the commission paid to private doctors for referring patients for diagnosis could not be allowed as a business expenditure. The amount which can be allowed as business expenditure has to be legitimate and not unlawful and against public policy.”

CONFEDERATION OF INDIAN PHARMACEUTICAL INDUSTRY VS. CENTRAL BOARD OF DIRECT TAXES (2013) 353 ITR 388 (HP)

4.1 CBDT Circular No. 5/2012 dated 1st August, 2012 [referred to in para 1.5 above] was challenged by the Confederation of Indian Pharmaceutical Industry in a petition filed before the Himachal Pradesh High Court.

4.2 High Court observed that the MCI Regulations was a salutary regulation in the interest of the patients and the general public in light of increasing complaints that the medical practitioners did not prescribe generic medicines but only branded medicines in lieu of gifts and other freebies which were given by pharmaceutical industries.

4.3 High Court rejected the petitioner’s submission that the Circular goes beyond the scope of section 37 and observed as under:

“Shri Vishal Mohan, Advocate, on behalf of the petitioner contends that the circular goes beyond the section itself. We are not in agreement with this submission. The explanation to Section 37(1) makes it clear that any expenditure incurred by an assessee for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession. The sum and substance of the circular is also the same.”

4.4 High Court while upholding the validity of the CBDT Circular concluded as under:

“Therefore, if the assessee satisfies the assessing authority that the expenditure is not in violation of the regulations framed by the medical council then it may legitimately claim a deduction, but it is for the assessee to satisfy the assessing officer that the expense is not in violation of the Medical Council Regulations referred to above.”

MAX HOSPITAL VS. MCI (WP (C) 1334/2013) (DELHI HIGH COURT)

5.1 In this case, the Petitioner filed a writ petition challenging certain observations made against it by the Ethics Committee of the Medical Council of India while deciding an appeal for medical negligence filed against doctors working in the Petitioner’s hospital. Ethics Committee found the doctors to be negligent. Further, the Committee also strongly recommended that the concerned authorities take necessary action on the hospital administration for poor care and infrastructure facilities.

5.2 Before the Court, Petitioner urged that the MCI Regulations and the Ethics Committee of the MCI acting under the MCI Regulations had no jurisdiction to pass any direction or judgment on the infrastructure of any hospital.

5.3 The Medical Council of India filed an affidavit before the Court stating as under:

“That the jurisdiction of MCI is limited only to take action against the registered medical professionals under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (hereinafter the ‘Ethics Regulations’) and has no jurisdiction to pass any order affecting rights/interests of any Hospital, therefore the MCI could not have passed and has not passed, any order against the petitioner which can be assailed before this Hon’ble Court in writ jurisdiction.”

5.4 High Court taking note of this affidavit quashed the adverse observations made by the Committee and concluded as under:

“It is clearly admitted by the Respondent that it has no jurisdiction to pass any order against the Petitioner hospital under the 2002 Regulations. In fact, it is stated that it has not passed any order against the Petitioner hospital. Thus, I need not go into the question whether the adequate infrastructure facilities for appropriate post-operative care were infact in existence or not in the Petitioner hospital and whether the principles of natural justice had been followed or not while passing the impugned order. Suffice it to say that the observations dated 27.10.2012 made by the Ethics Committee do reflect upon the infrastructure facilities available in the Petitioner hospital and since it had no jurisdiction to go into the same, the observations were uncalled for and cannot be sustained.”

DCIT VS. PHL PHARMA (P) LTD. (2017) 163 ITD 10 (MUM)

6.1 In this case, the brief facts were that the assessee was a pharmaceutical company engaged in the business of providing pharma marketing consultancy and detailing services to develop a mass market for pharma products.

6.2 During the year under consideration, the assessee had incurred certain expenditure claimed by it as deduction u/s 37 of the Act. This expenditure included: (i) expenditure for holding national level seminars/ lectures/ knowledge upgrade courses on new medical research and drugs and inviting doctors to participate in it, (ii) subscription of costly journals, information books, etc., (iii) sponsoring travel and accommodation expenses of doctors for important conferences, (iv) giving to doctors in India small value gift articles such as diaries, pen sets, injection boxes, calendars, table weights, postcard holders, stationery items, etc., containing the logo of the assessee and the name of the medicine advertised to maintain brand memory, and (v) cost of samples distributed through various agents to doctors to prove the efficacy of the drug and to establish the trust of the doctors on quality of drugs.

6.3 Tribunal observed that the Medical Council Regulations applied only to medical practitioners and not to pharmaceutical companies or allied health care sectors. It further noted that the department had not brought anything on record to show that the MCI regulation is meant for the pharmaceutical companies in any manner.

Tribunal also thereafter referred to the decision of the Delhi High Court in Max Hospital vs. MCI (supra) where the Medical Council of India had admitted that action under the MCI Regulations could be taken only against the medical practitioners and not against any hospital or any health care sector. Tribunal observed that once the Medical Council regulation did not have any jurisdiction over pharmaceutical companies, the pharmaceutical companies cannot be said to have committed any offence or violated law by incurring expenditure for sales promotion, giving gifts or distributing free samples to doctors. Consequently, the said Explanation will not disentitle a pharmaceutical company from claiming such expenditure. Tribunal further held that the CBDT Circular had enlarged the scope and applicability of the Medical Council Regulations by making it applicable to the pharmaceutical companies without any enabling provisions under the Income-tax law or the MCI Regulations.

6.4 While dealing with the facts of the case, the Tribunal also held as under [para 10 – page 28]:

“….All the gift articles, as pointed out by the assessee before the authorities below and also before us are very cheap and low cost articles which bears the name of assessee and it is purely for the promotion of its product, brand reminder, etc. These articles cannot be reckoned as freebies given to the doctors. Even the free sample of medicine is only to prove the efficacy and to establish the trust of the doctors on the quality of the drugs. This again cannot be reckoned as freebies given to the doctors but for promotion of its products. The pharmaceutical company, which is engaged in manufacturing and marketing of pharmaceutical products, can promote its sale and brand only by arranging seminars, conferences and thereby creating awareness amongst doctors about the new research in the medical field and therapeutic areas, etc. Every day there are new developments taking place around the world in the area of medicine and therapeutic, hence in order to provide correct diagnosis and treatment of the patients, it is imperative that the doctors should keep themselves updated with the latest developments in the medicine and the main object of such conferences and seminars is to update the doctors of the latest developments, which is beneficial to the doctors in treating the patients as well as the pharmaceutical companies. Further as pointed out and concluded by the learned CIT(A) there is no violation by the assessee in so far as giving any kind of freebies to the medical practitioners. Thus, such kind of expenditures by a pharmaceutical companies are purely for business purpose which has to be allowed as business expenditure and is not impaired by EXPLANATION 1 to section 37(1).”

6.5 While concluding in favour of the assessee, Tribunal also dealt with and distinguished the Himachal Pradesh and Punjab & Haryana High Court’s decisions in the cases of Confederation of Indian Pharmaceutical Industry and Kap Scan & Diagnostic Centre (P) Ltd. relied on by the department. Tribunal noted that the High Court in Confederation’s case while upholding the validity of the said Circular, had also observed that an assessee may claim a deduction of expenditure if it satisfies the assessing authority that the expenditure was not in violation of the MCI Regulations. While dealing with Kap Scan’s case, the Tribunal observed that the High Court, in that case, had held that payment of commission was wrong and was opposed to public policy. Therefore, the ratio of that decision could not be applied to the facts of the present case – there was no violation of any law or anything opposed to public policy in the present case.

6.6 The decision in PHL Pharma’s case was thereafter followed by several benches of the Tribunal and the expenditure claimed by pharmaceutical companies was allowed as a deduction u/s 37 of the Act.

DCIT VS. MACLEODS PHARMACEUTICALS LTD. (2022) 192 ITD 513 (MUM)

7.1 Mumbai bench of the Tribunal in the case of Macleods Pharmaceuticals Ltd. expressed its reservations on the correctness of the decision in PHL Pharma’s case and recommended the constitution of a special bench of three or more members to decide the following question:

“Whether an item of expenditure on account of freebies to medical professionals, which is hit by rule 6.8.1 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002- as amended from time to time, read with section 20A of the Indian Medical Council Act 1956, can be allowed as a deduction under section 37(1) of the Income-tax Act, 1961 read with Explanation thereto, in the hands of the pharmaceutical companies?”

7.2 While making a reference to the special bench, Tribunal, in this case, observed that the interpretation of Explanation to section 37(1) assigned in the CBDT Circular 5/2012 was held to be a correct legal interpretation by the Himachal Pradesh High Court in Confederation of Indian Pharmaceutical Industry’s case. Tribunal rejected the assessee’s submission that the Delhi High Court in Max Hospital’s case had consciously departed from the view taken in Confederation’s case and observed that both the decisions dealt with different issues. Tribunal further observed that as medical professionals cannot lawfully accept freebies in view of the MCI Regulations, any expenditure incurred for giving such freebies is for a ‘purpose which is prohibited by law’, thereby attracting the said Explanation in the hands of pharmaceutical companies. The Tribunal also noted the P&H High Court’s decision in Kap Scan’s case and observed that extending freebies by pharmaceutical companies is wholly illegal and opposed to public policy. Given the above observations, Tribunal was of the view that the ratio laid down in PHL Pharma’s case required reconsideration by a larger bench of the Tribunal.

APEX LABORATORIES (P) LTD. VS. DCIT LTU (MADRAS HIGH COURT) – TAX CASE APPEAL NO. 723 OF 2018

8.1 Assessee, a pharmaceutical company, incurred expenses for distributing gifts and freebies to medical practitioners. According to the assessee, such expenditure was incurred purely for advertising and creating awareness about its manufactured product ‘Zincovit’.

8.2 The assessee’s claim for such expenditure for the A.Y. 2010-11 was rejected by the AO and the Commissioner of Income-tax (Appeals) (‘CIT(A)’). In an appeal preferred by the assessee to the Tribunal against the order of the CIT(A), the Tribunal observed that once the act of receiving gifts or freebies is treated as being unethical and against public policy, the act of giving gifts by pharmaceutical companies or doing such acts to induce doctors to violate the MCI Regulations would also be unethical. Tribunal held that expenditure incurred by the assessee which violated the MCl Regulations is not an allowable expenditure and is hit by the said Explanation. Consequently, Tribunal disallowed the expenditure incurred by the assessee after the MCI Regulations came into force, i.e. 14th December, 2009.

8.2.1 In this case, the Tribunal relied on the judgment of the Himachal Pradesh High Court in the case of the Confederation of Indian Pharmaceutical Industry (supra) and the said Circular of CBDT. In this case, the details of the expenditure incurred by the assessee are not available. However, while deciding this case, the Tribunal also relied on and quoted the relevant part of the order of the Co-ordinate Bench in the assessee’s own case (maybe of earlier year) in which reference to the nature of such expenditure is available. The same mainly consisted of refrigerators, LCD TVs, laptops, gold coins etc. These were stated to be intended to disseminate information to medical practitioners and from them to the ultimate consumers. It was claimed in that year that these expenses are essentially advertisement expenses for creating awareness and to promote sales. It was also explained that its product ‘Zincovit’ is a healthcare supplement and not a pharmaceutical product. In that year, the Tribunal had taken the view that such expenses are hit by the MCI Regulations, prohibiting the distribution of gifts to doctors and medical practitioners. As such, one may presume that even in this case for the A.Y. 2010-11, the nature of expenditure incurred by the assessee may be the same.

8.3 When the matter came up before the High Court at the instance of the assessee, the High Court dismissed the assessee’s appeal holding that no substantial question of law arose in the present case. The Court decided as under:

“… we find that no substantial question of law arises for our consideration in the present case as the findings of facts of the Appellate Authority below are based on relevant Regulations and Amendment thereafter and the expenditure on such items prior to the Amendment have already been allowed in favour of the Assessee and they have been disallowed after 14.12.2009. We find no error in the order passed by the Tribunal.”

[To be continued in Part II]

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Provisions of Section 56(2)(vii)(c) are not applicable to rights shares issued in case there was no disproportionate allotment by the company and if the transaction was a genuine one, without any intention of tax evasion or tax abuse

9 ITO vs. Rajeev Ratanlal Tulshyan [2021] 92 ITR(T) 332 (Mumbai – Trib.) [ITA No.: 5748 (MUM.) of 2017 Cross Objection No. 118 (Mum.) of 2018 A.Y.: 2014-15; Date of order: 1st October, 2021

Provisions of Section 56(2)(vii)(c) are not applicable to rights shares issued in case there was no disproportionate allotment by the company and if the transaction was a genuine one, without any intention of tax evasion or tax abuse

FACTS
Assessee, a resident individual, was allotted rights shares of a company. In assessment, it was alleged that consideration being less than Fair Market Value (FMV), the difference between the FMV and consideration paid by the assessee would be taxable u/s 56(2)(vii). In the course of appeal, the assessee submitted that the shares were offered on right basis by the company on a proportionate basis to all existing shareholders. The assessee subscribed to the rights issue only to the extent of proportionate offer and no further. He also drew attention to CBDT Circular No. 5 of 2010 dated 3rd June, 2010 which provided that the newly introduced provisions of section 56(2)(vii) were anti-abuse measures. Similarly, CBDT Circular No. 1 of 2011 provided that these provisions were introduced as a counter evasion mechanism to prevent the laundering of unaccounted income. The provisions were intended to extend the tax net to such transactions in kind. The intent was not to tax the transactions entered into in the normal course of business and trade, the profits of which are taxable
under specific head of income. The assessee, inter-alia, relied on the decision of Mumbai Tribunal in Sudhir Menon HUF vs. Asst. CIT [2014] 45 taxmann.com 176/148 ITD 260 (Mum.) wherein it was held that in case of proportionate allotment of shares, there would be no taxability u/s 56(2)(vii)(c). He also submitted that, as held in Dy. CIT vs. Dr. Rajan Pai [IT Appeal No. 1290 (Bang.) of 2015, dated 29-4-2016], since the Gift tax Act was not applicable to issue of shares, the provisions of section 56(2) would not apply to transaction of nature stated above. He also relied on the decision of Hon’ble Supreme Court in Khoday Distilleries Ltd. vs. CIT [2009] 176 Taxman 142/[2008] 307 ITR 312, which held that shares [thus, property, as stipulated in Section 56(2)(vii)] comes into existence only on allotment. However, at
the same time, it was admitted by the assessee that similar argument was rejected by Mumbai Tribunal in Sudhir Menon HUF (supra) wherein the bench held that though allotment of shares is not to be regarded as transfer but since the assessee is receiving property in the form of shares, the provisions of section 56(2)(vii) would apply.

The CIT(A) upheld the addition, however, restricted the same to the extent of gain in value on account of disproportionate allotment of shares to the assessee. Aggrieved, the revenue filed appeal with the ITAT for the amount of addition not sustained by the CIT(A), while the assessee filed cross objection as regards the amount of addition sustained by the CIT(A).

HELD
The ITAT observed that there was a fallacy in the conclusion of the lower authorities that the allotment was disproportionate and skewed in favour of the assessee in that the rights offer made on two occasions during the year in the same proportion to all existing shareholders. It was only because few of the other shareholders did not exercise their right that the assessee’s shareholding in the company increased; there was no disproportionate allotment. Therefore, the ratio of decision in Sudhir Menon (supra) would be applicable.

It also considered the decision of the coordinate bench of Mumbai Tribunal in Asstt. CIT vs. Subodh Menon [2019] 103 taxmann.com 15/175 ITD 449 which, applying the ratio held in Sudhir Menon (supra), held that the provisions of section 56(2)(vii) did not apply to bona fide business transaction. The CBDT Circular No. 1/2011 dated 6th April, 2011 explaining the provision of section 56(2)(vii) specifically stated that the section was inserted as a counter evasion mechanism to prevent money laundering of unaccounted income. In paragraph 13.4 thereof, it is stated that “the intention was not to tax transactions carried out in the normal course of business or trade, the profit of which are taxable under the specific head of income”. Therefore, the aforesaid transactions, carried out in normal course of business, would not attract the rigors of provisions of section 56(2)(vii).

The ITAT, on perusal of orders of lower authorities, did not find any allegations of tax evasion or abuse by the assessee. The transactions were ordinary transactions of issue of rights shares to existing shareholders in proportion to their existing shareholding and therefore, no abuse or tax evasion was found to be made by the assessee.

The ITAT also took into consideration Circular No. 03/2019 dated 21st January, 2019 wherein it was mentioned, inter alia, that intent of introducing the provisions was anti-abusive measures still remain intact, and there is no reason to depart from the understanding that the provisions were counter evasion mechanism to prevent the laundering of unaccounted income. Therefore, the same does not apply to a genuine issue of shares to existing shareholders. The position was also duly supported by the decision of Bangalore Tribunal in Dr. Rajan Pai (supra) which is further affirmed by the Hon’ble Karnataka High Court in Pr. CIT vs. Dr. Rajan Pai IT Appeal No. 501 of 2016, dated 15-12-2020.

On these grounds, the ITAT deleted the addition made by the A.O. and dismissed the appeal filed by revenue and allowed the cross-objections filed by the assessee.

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Sec. 36(1)(va): Contribution deposited by assessee-employer after the due date prescribed in Sec. 36(1)(va) but before the due date of filing return u/s 139(1) was allowed as a deduction until A.Y. 2020-21 since the amendment to Sec. 36(1)(va) brought by Finance Act, 2021 is prospective and not retrospective

8 Digiqal Solution Services (P.) Ltd. vs. ACIT [2021] 92 ITR(T) 404 (Chandigarh – Trib.) ITA No.: 176 (Chd.) of 2021 A.Y.: 2019-20; Date of order: 4th October, 2021

Sec. 36(1)(va): Contribution deposited by assessee-employer after the due date prescribed in Sec. 36(1)(va) but before the due date of filing return u/s 139(1) was allowed as a deduction until A.Y. 2020-21 since the amendment to Sec. 36(1)(va) brought by Finance Act, 2021 is prospective and not retrospective

FACTS
Addition of employees’ contribution to ESI and PF deposited beyond the due date prescribed in Section 36(1)(va), but before the due date of filing return of income u/s 139(1) was made to the assessee’s income in the intimation u/s 143(1). Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) held that the said amendment though effected by the Finance Act, 2021 but when read in the background of the decision of the Hon’ble Apex Court in the case of Allied Motors (P.) Ltd. vs. CIT (1997) 91 taxmann.com 205 / 224 ITR 677, the intention of Legislature set out through memorandum through the Finance Act while introducing the Explanations to section made it clear that the said amendments would apply to all pending matters as on date. The CIT(A) thus upheld the addition. Aggrieved, the assessee filed a further appeal before the Tribunal.

HELD
The ITAT considered the following decisions rendered by co-ordinate benches of the ITAT:

• ValueMomentum Software Services (P.) Ltd. vs. Dy. CIT [ITA No. 2197 (Hyd.) of 2017]

• Hotel Surya vs. Dy. CIT [ITA Nos. 133 & 134 (Chd.) of 2021]

• Insta Exhibition (P.) Ltd. vs. Addl. CIT [ITA No. 6941 (Delhi) of 2017]

• Crescent Roadways (P.) Ltd. vs. Dy. CIT [ITA No. 1952 (Hyd.) of 2018]

These decisions held that the amendment to Section 36(1)(va) and Section 43B of the Act effected by the Finance Act, 2021 are applicable prospectively, reading from the Notes on Clauses at the time of introduction of the Finance Act, 2021, specifically stating the amendment being applicable in relation to A.Y. 2021-22 and subsequent years.

It also considered the following decisions of jurisdictional High Court holding that employee’s contribution to ESI & PF is allowable if paid by the due date of filing return of income u/s 139(1) of the Act:

• CIT vs. Nuchem Ltd. [ITA No. 323 of 2009]
• CIT vs. Hemla Embroidery Mills (P.) Ltd. [2013] 37 taxmann.com 160/217 Taxman 207 (Mag.)/ [2014] 366 ITR 167 (Punj. & Har.)

Following these High court decisions and ITAT decisions, the ITAT allowed the assessee’s claim of deduction and set aside the order of CIT(A).

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ITRs and Appeal forms of only individuals and Companies can be signed by a valid power of attorney holder in certain circumstances. Other categories of assessees (e.g. HUF/Firm) do not have this `privilege’ u/s 140 read with Rule 45(3) / 47(1) The benefit of the general rule that if a person can do some work personally, he can get it done through his Power of Attorney holder also is not intended to be extended to all categories of assessees

7 Bangalore Electricity Supply Co. Ltd. vs. DCIT [137 taxmann.com 287 (Bangalore – Trib.)] A.Y.: 2008-09; Date of order : 7th April, 2022 Section: 140

ITRs and Appeal forms of only individuals and Companies can be signed by a valid power of attorney holder in certain circumstances. Other categories of assessees (e.g. HUF/Firm) do not have this `privilege’ u/s 140 read with Rule 45(3) / 47(1)

The benefit of the general rule that if a person can do some work personally, he can get it done through his Power of Attorney holder also is not intended to be extended to all categories of assessees

FACTS
The appeal filed in this case was found by the Tribunal, at the time of hearing on 6th March, 2022, to be defective on the ground that the appeal was not signed by the competent authority and it was signed by the General Manager (CT&GST), BESCOM. The Tribunal asked the AR of the assessee to cure the defect by 16th March, 2022. On 16th March, 2022, none appeared on behalf of the assessee and therefore the Tribunal proceeded to decide the appeal by hearing the DR.

The Tribunal noted that the focus in the present appeal is to decide whether the appeal filed is invalid or defective.

HELD
On going through the provisions of section 140, the Tribunal noted that clauses (a) and (c) contain the provisions for the signing of return by a valid power of attorney holder while other clauses do not have such a provision. Thus, there is a clear line of demarcation between the classes of assessees, who, in certain circumstances, can get their returns signed and verified by the holder of a valid PoA, in which case such PoA is required to be attached to the return and, on the other hand, the classes of assessees who do not enjoy such privilege.

It held that it is not permissible for a non-privileged assessee to issue PoA and get his return filed through the holder of a PoA. It is true that in common parlance if a person can do some work personally, he can get it done through his PoA holder also. But section 140 has made separate categories of assesses, and the said general rule has been made applicable only to some of them and not all. It is obvious that the intention of the Legislature is not to extend this general rule to all the classes of the assessees. If that had been the situation, then there was no need of inserting proviso to clauses (a) and (c) only but a general provision would have been attached as extending to all the classes of assessees.

From the language of section 140, it can be easily noticed that only the returns of individuals and companies can be signed by a valid Power of Attorney holder in the specified circumstances and the other categories of the assessee are not entitled to this privilege.

The Tribunal noted that the provisions of section 140(c) had been amended w.e.f. 1st April, 2020 where it was stated that the return could be filed by any other person as may be prescribed for this purpose. It observed that even if this amendment is held to be applicable retrospectively also, it is not clear whether the General Manager (CT&GST), BESCOM, was holding a valid PoA from the assessee company to verify the appeal of the assessee even as provided u/s 140(c). Since this information was not available on the record, the Tribunal dismissed the appeal.

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Taxable loss cannot be set off against income exempt from tax under Chapter III. Short term capital loss arising on sale of shares cannot be set off against long term capital gains arising from the sale of shares, which are exempt u/s 10(38)

6 Mrs. Sikha Sanjaya Sharma vs. DCIT [137 taxmann.com 214 (Ahmedabad – Trib.)] A.Y.: 2016-17; Date of order: 13th April, 2022 Sections: 10(38), 70, 74

Taxable loss cannot be set off against income exempt from tax under Chapter III. Short term capital loss arising on sale of shares cannot be set off against long term capital gains arising from the sale of shares, which are exempt u/s 10(38)

FACTS
The assessee, an individual, filed her return of income declaring a total income of Rs 17,25,67,630 and claimed carry forward of long term capital loss (in respect of transactions on which STT was not paid) of Rs. 15,41,625 and also a short term capital loss of Rs. 5,06,74,578. The assessee also claimed long term capital gain (in respect of transactions on which STT was paid) of Rs. 2,62,06,472 to be exempt u/s 10(38).

The Assessing Officer (AO) completed the assessment u/s 143(3) by accepting the returned income but reduced the claim of carry forward of loss by setting off exempt long term capital gain of Rs. 2,62,06,472 against long term capital loss (in respect of transactions on which STT was not paid) of Rs. 15,41,625 and also a short term capital loss of Rs. 5,06,74,578. Therefore, the AO reduced the quantum of losses claimed to be carried forward by the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A), who relying on the decision of the Mumbai Bench of the Tribunal in the case of Raptakos Brett & Co. Ltd. In ITA No. 3317/Mum./2009 & 1692/Mum./2010 dated 10.6.2015 and of the Gujarat High Court in the case of Kishorbhai Bhikhabhai Virani vs. ACIT [(2014) 367 ITR 261] upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the short controversy before it is whether the assessee was legally correct in claiming carry forward of full amount of losses without setting off such losses against long term capital gain exempted u/s 10(38). To resolve the controversy, the Tribunal noted the scheme of the Act and analysed the decisions relied upon, on behalf of the assessee. It noted that the CIT(A) has dismissed the claim of the assessee by relying upon the decision of the Gujarat High Court, in the case of Kishorbhai Bhikhabhai Virani (supra) and the AR appearing on behalf of the assessee has relied upon this decision to support the claim of the assessee. The Tribunal observed that the Hon’ble Court has held that the exempted long term capital loss u/s 10(38) does not enter into the computation of total income. Therefore such loss cannot be set off against taxable income. Likewise the exempted LTCG u/s 10(38) does not enter into the computation of total income and therefore a taxable loss cannot be set off against such income. The Tribunal held the reliance of CIT(A) on this decision to be totally misplaced. It held that the decision was in favour of the assessee.

As regards the decision of the Mumbai Bench of the Tribunal in the case of Raptakos Brett & Co. Ltd. (supra), the Tribunal observed that the Tribunal, in this case, was persuaded to follow the decision of the Calcutta High Court in preference to the decision of the Gujarat High Court in the case of Kishorbhai Bhikhabhai Virani (supra). The Tribunal found itself bound by the decision of the jurisdictional High Court.

The Tribunal held that the assessee has rightly claimed the carry forward of Long Term Capital Loss (STT not paid) of Rs. 15,41,625 and Short Term Capital Loss of Rs. 5,06,74,578 without setting off against the exempted long term capital gain (STT paid) of Rs. 2,62,06,472 u/s 10(38).

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S. 271(1)(c) – Penalty – concealment of income – inaccurate particulars of income – mistake committed in calculation

4 The Commissioner of Income Tax, International Taxation-1 vs. Ashutosh Bhatt [Income Tax Appeal No.1424 of 2017; Date of order: 11th April, 2022 (Bombay High Court)]

S. 271(1)(c) – Penalty – concealment of income – inaccurate particulars of income – mistake committed in calculation

The assessee was an individual and non-resident so far as the assessment year under consideration was concerned. For A.Y. 2007-2008, the assessee had filed return of income on 31st July, 2007 declaring total income of R8,31,287. Thereafter the assessee revised his income and further offered an income of R1,76,68,508. A notice u/s 148 was issued thereafter on 29th March, 2012 as a consequence of which, the assessment was finalized u/s 143(3) r.w.s 147. Assessment order dated 21st March, 2013 came to be passed where total income was assessed at R1,85,69,800, which is the same amount as was declared by the assessee originally, plus the income revised subsequently.

Later, the Assessing Officer held the assessee guilty of concealment of income within the meaning of section 271(1)(c ) of the Act and levied a penalty of 200% of the tax sought to be levied on the amount of R1,76,68,508 which was declared subsequent to the filing of original return of income. Consequently, a penalty of R1,17,82,234 has been levied.

The CIT(A), vide order dated 26th March, 2014, deleted the entire penalty levied by the A.O. on the ground that the assessee has suo-moto and voluntarily offered additional income to tax and that the income which was offered for tax by the assessee in the revised returns of income was in any case, not chargeable to tax in India. Against the said decision, the Revenue filed an appeal before the Tribunal.

Subsequently, CIT (A) issued a notice u/s 148 of the Act on 10th November, 2014 requiring the assessee to show cause as to why earlier order passed by him on 26th March, 2014 to be not amended as it was passed without taking note of the fact that assessee had made supplementary affidavit declaring additional income of R1,03,49,908 which according to CIT(A) was not voluntary because summons dated 29th September, 2011 by ADIT (Inv) Unit-II(3), Mumbai had been issued u/s 131. CIT (A) rejected the reply of the assessee, and by an order dated 8th December, 2014, amended his earlier order dated 26th March, 2014 and upheld the levy of penalty to the extent it related to the additional income of R1,03,49,908 disclosed by the assessee in his second revisional declaration. Against that order, an appeal was preferred by the assessee before the Tribunal and Revenue also filed cross appeal to the extent of CIT(A) not adding R73,18,600 declared in the first revised declaration.

The Tribunal, after hearing the parties, dismissed the original appeal filed by Revenue and cross-appeal filed by Revenue and upheld the appeal filed by the assessee.

The Hon. Court observed that indisputable fact that during the period when the assessee was non-resident, from A.Y. 2000-2001 to the year in question, the assessee was in employment with a U.S. Company and was resident of United States of America. During that time, he had set up a business and was beneficial owner of a Company Jonah Worldwide Limited (JWL) and beneficiary of a Foundation, namely, Selinos Foundation (SF), both set up in Mauritius in 2003. Both these entities were non-residents as far as it is relevant for the purpose of the Act and did not have any source of income in India.

In the year 2011, the assessee decided to settle down in India and, after returning to India, filed an affidavit dated 7th September, 2011 offering to tax income of R73,18,600 being peak balance lying in the accounts of these two entities JWL and SF and for this purpose filed revised return on 20th September, 2011. Immediately thereafter, the assessee realised that he had committed a mistake in calculating the peak balance lying in bank accounts held by these two entities JWL and SF and, therefore, made a supplementary affidavit on 7th November, 2011 offering to tax additional income of R1,03,49,908. Consequent thereto, second revised return dated 15th November, 2011 was filed showing total additional income of Rs. 1,76,68,508 on account of funds lying in the bank accounts held by JWL and SF with HSBC Bank, Zurich. After receiving notice u/s 148 of the Act, as noted earlier, the Assessing Officer finalized assessment u/s 143 r.w.s 147 by accepting income as per revised return without making any further addition or raising any fresh demand. Even additional income assessed at R1,76,68,508 was exactly the same as returned by the assessee in the revised returns.

The Tribunal found that the second affidavit of 7th November, 2011 declaring an additional amount of Rs 1,03,49,908 due to a mistake in calculating bank peak balance was filed not because of any issue of summons and declaration, but was purely because of the mistake committed in the earlier calculation. The Tribunal came to a finding of fact that Revenue had no information of any undisclosed income in the hands of the assessee except the declarations made by the assessee. What also impressed the Tribunal was that at no stage it was the case of the Revenue that the funds that were lying in the bank accounts held by the two entities (JWL and SF) with HSBC Bank, Zurich could have been brought to tax in India. These monies have been offered to tax in India because the assessee made voluntary declarations, and considering that aspect, the Tribunal felt that levy of penalty u/s 271(1)(c ) of the Act was not justified.

The Hon. Court observed that the Tribunal has not committed any perversity or applied incorrect principles to the given facts. When the facts and circumstances are properly analysed, and the correct test is applied to decide the issue at hand, then, no substantial question of law arises for consideration. The appeal was dismissed.

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Sec 68 – unsecured loans – Enquiry conducted by AO – identity and creditworthiness of the creditors and the genuineness of transaction established

3 The Principal Commissioner of Income Tax-25 vs. Aarhat Investments [Income Tax Appeal No. 156 of 2018; A.Y. 2009-10; Date of order: 25th March, 2022 (Bombay High Court)]

Sec 68 – unsecured loans – Enquiry conducted by AO – identity and creditworthiness of the creditors and the genuineness of transaction established

The assessee received a sum of R7,00,00,000 from Wall Street Capital Markets Pvt. Ltd., a sum of R6,50,00,000 from Novel Finvest Pvt. Ltd., a sum of R5,07,68,100 from one Ganesh Barter Pvt. Ltd. and a sum of R13,50,00,000 from one Asian Finance Services. Admittedly, the amount of R7,00,00,000 received from Wall Street was repaid in the same year. Likewise, the amount received from Novel Finvest was also repaid in the same year. So also in the case of Asian Finance Services. In the case of Ganesh Barter, there was an amount outstanding at the close of the assessment year. There seems to be no issue regarding the amount received and paid back to Asian Finance Services.

The Ld. Assessing Officer had added the remaining three amounts mentioned above u/s 68 of the Act, on the basis that substantial amounts have been received by the assessee as unsecured loans and without being charged any interest. Therefore, the Assessing Officer had proceeded on the assumption that this must be the assessee’s own money circulated through the three entities mentioned above.

The Commissioner of Income Tax (Appeals), in regards to the amount received from Wall Street and Novel Finvest, set aside the order of the Assessing Officer. The CIT(A), as regards the amount from Ganesh Barter, did not interfere with the order of the Assessing Officer.

The Revenue, as well as the Assessee, carried the matter in appeal to Income Tax Appellate Tribunal (ITAT), and ITAT disposed of both the appeals by order pronounced on 30th November, 2016. The Revenue’s appeal was dismissed, and the assessee’s appeal was allowed.

The ITAT upheld the finding of CIT(A) with regard to the amounts received from Wall Street and Novel Finvest and set aside the order of CIT(A) as regards Ganesh Barter. The ITAT observed the factual position as noted by CIT(A) as well as that the amounts received from Wall Street and Novel Finvest were repaid during the year itself; that there was no dispute that the transactions were through banking channels and both these parties were assessed to income tax. Even their identity was not in dispute. The ITAT held that Section 68 of the Act casts the onus on the assessee to explain the nature and source of the credit appearing in the books of account. It can be discharged if the assessee is able to establish the identity and creditworthiness of the creditors and the genuineness of the transaction. The ITAT also observed that the Assessing Officer had issued commissions of enquiry u/s 131(1)(d) of the Act to the Investigating Wing in response to the independent enquiries made by the Assessing Officer wherein statements of the Director of Wall Street and Novel Finvest have been recorded, and nobody has disputed the transactions were in the nature of loans per se. The CIT (A) as well as ITAT were also satisfied with the creditworthiness of these two parties.

As regards Ganesh Barter, there was a credit balance outstanding as on 31st March, 2009. The Assessing Officer had accepted the identity of the creditor but was not satisfied with the credit worthiness of the creditor and the genuineness of the transaction. On the other hand, the CIT(A) was also satisfied with the creditworthiness of the creditor but was not satisfied with the genuineness of transaction. Hence, he had not interfered with the findings of the Assessing Officer so far as Ganesh Barter was concerned. The ITAT concluded that the implied view emanating from the order of CIT (A) that a transaction is to be held as not genuine if money is not returned when the purpose for which it was given was not achieved, would be simply based on suspicion and without properly evaluating the genuineness of transactions.

The Hon. High Court agreed with the conclusions of ITAT that just because in the end of the year money was yet to be repaid means the transaction itself has to be doubted is not correct particularly, when explanation rendered by the assessee has not been found to be false.

The Hon. High Court held that the ITAT has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, no substantial questions of law arises for consideration. The appeal was dismissed.

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Revision — Limitation — Original assessment u/s 143(3) on 28/12/2006 and reassessment on 30/12/2011 — Order of revision u/s 163 on 26/03/2014 in respect of issue concluded in original assessment — Barred by limitation

14 CIT vs. Indian Overseas Bank [2022] 441 ITR 689 (Mad) A.Y.: 2004-05 Date of order: 10th August, 2021 Ss.143, 147 and 263 of ITA, 1961

Revision — Limitation — Original assessment u/s 143(3) on 28/12/2006 and reassessment on 30/12/2011 — Order of revision u/s 163 on 26/03/2014 in respect of issue concluded in original assessment — Barred by limitation

For the A.Y. 2004-05, the assessment was completed u/s 143(3) of the Income-tax Act 1961 by order dated 28th December, 2006. Thereafter, the assessment was reopened concerning certain investments and prior period expenses of Rs. 93,04,142. The assessee submitted their reply. Thereafter, the assessment was completed by an order dated 30th December, 2011 u/s 143(3) r.w.s.147 of the Act. After taking into consideration the reply given by the assessee, the Assessing Officer held that no disallowance was required to be made in respect of the prior period expenses. In other words, the explanation offered by the assessee was found to be satisfactory by the Assessing Officer.

Thereafter, the Commissioner of Income-tax initiated proceedings u/s 263(1) of the Act proposing to revise the reassessment order dated 30th December, 2011 and claiming that the claim for deduction of business loss of R72.75 crores have been wrongly allowed in the assessment order. The assessee objected to the exercise of power u/s 263(1) on the ground of limitation as well as on the merits. However, by an order dated 26th March, 2014, the objections raised by the assessee were rejected by the Commissioner of Income-tax, the reassessment order dated 30th December 2011 was set aside, and the matter was sent back to the Assessing Officer for de novo consideration regarding the claim of business loss of
R72.75 crores.

The Tribunal allowed the assesse’s appeal and set aside the revision order passed by the Commissioner.

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

“i) Where an assessment has been reopened u/s. 147 of the Income-tax Act, 1961 in relation to a particular ground or in relation to certain specified grounds and subsequent to the passing of the order of reassessment, the jurisdiction u/s. 263 of the Act is sought to be exercised with reference to issues which do not form the subject of the reopening of the assessment or the order of reassessment, the period of limitation provided for in sub-section (2) of section 263 of the Act would commence from the date of the order of original assessment and not from the date on which the order of reassessment has been passed. The order of assessment cannot be regarded as being subsumed within the order of reassessment in respect of those items which do not form part of the order of reassessment.

ii) The original assessment was completed u/s. 143(3) of the Act by order dated 28/12/2006. The reassessment was completed by order dated 30/12/2011. The reasons for reopening u/s. 147 of the Act were only two and the issue, on which, the Commissioner issued notice u/s. 263 pertained to a claim of business loss which was not one of the issues in the reassessment proceedings, but was an issue, which was raised by the Assessing Officer in the original assessment u/s. 143(3) of the Act, in which, a show-cause notice was issued, the assessee submitted its explanation and thereafter, the assessment was completed. The proceedings u/s. 263 of the Act ought to have commenced before March 31, 2009. Therefore, the proceedings were barred by limitation.

iii) For the above reasons, the tax case appeal is dismissed and the substantial questions of law framed are answered against the Revenue.”

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Reassessment — Notice u/s 148 — Validity: (i) New provisions inserted w.e.f 1st April, 2021 prescribing conditions for issue of notice for reassessment after that date — Provisions apply to all notices issued after that date for earlier periods — Notices for periods prior to 1st April, 2021 issued without compliance with conditions prescribed under new provision — Notices not valid; (ii) Limitation — Change of law — Explanations to notifications having effect of extending time limits prescribed under Act — Not valid; Notices quashed

13 Sudesh Taneja vs. ITO [2022] 442 ITR 289 (Raj) A. Y.: 2013-14
Date of order: 27th January, 2022 Ss. 147, 148, 148A and 151 of ITA 1961 and Notification Nos. 20 (S. O. No. 1432(E)) dated 31/03/2021 [1] and 38 (S. O. No. 1703(E)) dated 27-4-2021 [2]

Reassessment — Notice u/s 148 — Validity: (i) New provisions inserted w.e.f 1st April, 2021 prescribing conditions for issue of notice for reassessment after that date — Provisions apply to all notices issued after that date for earlier periods — Notices for periods prior to 1st April, 2021 issued without compliance with conditions prescribed under new provision — Notices not valid; (ii) Limitation — Change of law — Explanations to notifications having effect of extending time limits prescribed under Act — Not valid; Notices quashed

For the A.Y. 2013-14, notices u/s 148 of the Income-tax Act, 1961 were issued after 1st April, 2021 without following the mandatory procedure prescribed u/s 148A by the Finance Act, 2021. The validity of the notices was challenged by filing writ petitions in the Rajasthan High Court. It was also contended that the notices were barred by limitation.

The Rajasthan High Court quashed the notices and held as under:

“i) The substituted sections 147, 148, 149 and 151 of the Income-tax Act, 1961 pertaining to reopening of assessment u/s. 147 came into force on 1st April, 2021. The time limits for issuing notice for reassessment have been changed. The concept of income chargeable to tax escaping assessment on account of failure on the part of the assessee to disclose truly or fully all material facts is no longer relevant. Elaborate provisions are made u/s. 148A of the Act enabling the Assessing Officer to make enquiry with respect to material suggesting that income has escaped assessment, issue notice to the assessee calling upon him to show cause why notice u/s. 148 should not be issued and pass an order considering the material available on record including the response of the assessee if made while deciding whether the case is fit for issuing notice u/s. 148. There is no indication in all these provisions which would suggest that the Legislature intended that the new scheme of reopening of assessments would be applicable only to periods post 1st April, 2021. In the absence of any such indication all notices which are issued after 1st April, 2021 have to be in accordance with such provisions. There is no indication whatsoever in the scheme of statutory provisions suggesting that the past provisions would continue to apply even after the substitution, for the assessment periods prior to substitution, but there are strong indications to the contrary.

ii) Time limits for issuing notice have been modified under substituted section 149. The first proviso to section 149(1) provides that no notice u/s. 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st April, 2021 if such notice could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of section 149 as they stood immediately before the commencement of the Finance Act, 2021. Therefore, under this proviso no notice under section 148 would be issued for the past assessment years by resorting to the larger period of limitation prescribed in newly substituted clause (b) of section 149(1). This would indicate that the notice that would be issued after 1st April, 2021 would be in terms of the substituted section 149(1) but without breaching the upper time limit provided in the original section 149(1) which stood substituted. For any action of issuance of notice u/s. 148 after 1st April, 2021 the newly introduced provisions under the Finance Act, 2021 would apply. Mere extension of time limits for issuing notice u/s. 148 would not change this position that obtains in law. Under no circumstances can the extended period available in clause (b) of sub-section (1) of section 149 which now stands at 10 years instead of 6 years earlier available with the Revenue, be pressed in service for reopening assessments for past periods. A notice which has become time barred prior to 1st April, 2021 according to the then prevailing provisions, would not be revived by virtue of the application of section 149(1)(b) effective from 1st April, 2021.

iii) Under the new scheme of section 148A, the Assessing Officer has to first provide an opportunity to the assessee to show cause why notice u/s. 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment. Though clause (b) of section 148A does not so specify, since the notice calls upon the assessee to show cause why assessment should not be reopened on the basis of information which suggests that income chargeable to tax has escaped assessment, the requirement of furnishing such information to the assessee is in-built in the provision. Therefore, the assessee has an opportunity to oppose even the issuance of notice u/s. 148 and he could legitimately expect that the Assessing Officer provides him the information which according to him suggests that income chargeable to tax has escaped assessment. The Assessing Officer has a duty to decide whether it is a fit case for issuing notice u/s. 148 of the Act. Such decision has to be taken on the basis of material available on record and the reply of the assessee, if any filed. The decision has to be taken within the time prescribed.

iv) The limitation period had expired prior to 1st April, 2021 and therefore, all the notices issued after 1st April, 2021 for reopening the assessments having been issued without following the procedure contained in section 148A were invalid. The reassessment notices issued under the erstwhile section 148 were to be quashed.

v) If the plain meaning of the statutory provision and its interpretation are clear, by adopting a position different in an Explanation and describing it to be clarificatory, the subordinate legislation cannot be permitted to amend the provisions of the parent Act. Accordingly, the Explanations contained in the circulars dated 31st March, 2021 and 27th April, 2021 issued by the CBDT are unconstitutional and declared invalid.”

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Reassessment — Notice u/s 148 — Validity — Law applicable — Effect of amendments to sections 147 to 151 by Finance Act, 2021 — Notice of reassessment under unamended law after 01/04/2021 — Not valid

12 Vellore Institute of Technology vs. CBDT [2022] 442 ITR 233 (Mad) Date of order: 4th February, 2022 Ss.147 and 148 of ITA, 1961

Reassessment — Notice u/s 148 — Validity — Law applicable — Effect of amendments to sections 147 to 151 by Finance Act, 2021 — Notice of reassessment under unamended law after 01/04/2021 — Not valid

The validity of notices issued after 1st April, 2021 u/s 148 of the Income-tax Act, 1961 for reopening the assessment under the unamended provisions was challenged before the Madras High Court. The High Court held as under:

“i) A reassessment proceeding emanating from a simple show-cause notice must arise only upon jurisdiction being validly assumed by the assessing authority. Till such time as jurisdiction is validly assumed by the assessing authority, evidenced by issuance of the jurisdictional notice u/s. 148 of the Act, no reassessment proceeding may ever be said to be pending before the assessing authority.

ii) It is settled law that the law prevailing on the date of issuance of the notice u/s. 148 has to be applied. On 1st April, by virtue of the plain effect of section 1(2)(a) of the Finance Act, 2021, the provisions of sections 147, 148, 149, 151 (as those provisions existed up to March 31, 2021), stood substituted, along with a new provision enacted by way of section 148A of that Act. In the absence of any saving clause, to save the pre-existing (and now substituted) provisions, the Revenue authorities could only initiate reassessment proceedings on or after 1st April, 2021, in accordance with the substituted law and not the pre-existing laws. Had the intention of the Legislature been to keep the erstwhile provisions alive, it would have introduced the new provisions with effect from 1st July, 2021, which has not been done. Accordingly, the notices relating to any assessment year issued u/s. 148 on or after 1st April, 2021 have to comply with the provisions of sections 147, 148, 148A, 149 and 151 of the Act, as specifically substituted by the Finance Act, 2021 with effect from 1st April, 2021.

iii) Consequently, the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 and notifications issued thereunder can only change the time-lines applicable to the issuance of a section 148 notice, but they cannot change the statutory provisions applicable thereto which are required to be strictly complied with. Further, just as the Executive cannot legislate, it cannot impede the implementation of law made by the Legislature. Explanations A(a)(ii)/A(b) to the Notifications dated 31st March, 2021 and 27th April, 2021 are ultra vires the 2020 Act, and are therefore, bad in law and null and void.

iv) The reassessment notices u/s. 148 of the Act issued on or after 1st April, 2021 had to be set aside having been issued in reference to the unamended provisions and the Explanations would be applicable to reassessment proceedings if initiated on or prior to 31st March, 2021, but it would be with liberty to the assessing authorities to initiate reassessment proceedings in accordance with the provisions of the 1961 Act, as amended by the Finance Act, 2021, after making all the compliances as required by law, if limitation for it survived.”

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Offences and prosecution — Willful evasion of tax — Self assessment — Default in payment of tax on time — Assessee paying tax demand in instalments — No mala fide intention to evade tax — Willful attempt cannot be inferred merely on failure to pay tax on time — Prosecution quashed

11 S. P. Velayutham vs. ACIT [2022] 442 ITR 74 (Mad) A. Y.: 2013-14 Date of order: 28th January, 2022 Ss. 140A and 276C(2) of ITA, 1961

Offences and prosecution — Willful evasion of tax — Self assessment — Default in payment of tax on time — Assessee paying tax demand in instalments — No mala fide intention to evade tax — Willful attempt cannot be inferred merely on failure to pay tax on time — Prosecution quashed

An order of attachment of the immovable property u/s 226 of the Income-tax Act, 1961 was passed by the Department towards the remaining tax dues of the assessee since the assessee did not pay the entire tax demand. Prosecution was launched against the assessee u/s 276C(2) on the ground that the assessee did not pay the entire tax demand. It was stated in the complaint that the reason given in the reply for non-payment of tax was general in nature, and loss in business could not be an excuse for evading tax.

The Madras High Court allowed the revision petition filed by the assessee and held as under:

“i) To prosecute an assessee u/s. 276C of the Income-tax Act, 1961 there must be a wilful attempt on the part of the assessee to evade payment of any tax, penalty or interest. The Explanation to section 276C makes it clear that the evasion shall include a case where a person makes any false entry or statement in the books of account or other document or omission to make any entry in the books of account or other documents or any other circumstances which will have the effect of enabling the assessee to evade tax or penalty or interest chargeable or imposable under the Act or the payment thereof.

ii) “Wilful attempt” cannot be inferred merely on failure to pay the tax in time without any intention or deliberate attempt to avoid tax in totality or without any mens rea to avoid the payment.

iii) Sub-section (3) of section 140A makes it very clear that in the event of failure to pay tax the assessee shall be deemed to be in default. The word “wilful attempt to evade tax” is absent in section 140A(3) . If mere default in payment of tax in time is to be construed as a wilful attempt to evade tax the Legislature would have included the words “wilful attempt to evade tax” in sub-section (3) of section 140A which are absent. Therefore, mere default in payment of tax in time cannot be imported to prosecute for wilful attempt to evade tax. The penal provision has to be strictly construed. Only if the circumstances and the conduct of the accused show the wilful attempt in any manner whatsoever to evade tax or to evade payment of any tax, penalty or interest, can prosecution be launched.

iv) On the facts and the nature of the complaint there was no intention or wilful attempt made by the assessee to evade the payment of tax. Though the Explanation to section 276C is an inclusive one it was not the case of the Department that the assessee had made any false entry in the statements or documents or omitted to make any such entry in the books of account or other document or acted in any other manner to avoid payment of tax. The assessee had expressed his inability and mere failure to pay a portion of the tax could not be construed to mean that he had wilfully attempted to evade the payment of tax. When the return had been properly accepted and the assessment was also confirmed, mere default in payment of taxes unless such default arose out of any of the circumstances, which had an effect of the assessee to defeat the payment, the words “wilful attempt” employed in the provision could not be imported to mere failure to pay the tax.

v) From the inception there was no suppression and even in the reply to the notice the assessee had clearly stated the circumstances which had forced him to such default. If the intention of the assessee to evade the payment of tax was present from the very inception, he would not have made further payments. The statements filed by the Department also indicated that he had continuously paid the taxes in instalments. The assessee’s conduct itself showed that there was no wilful attempt to evade the payment of tax. The payment of tax in instalments probabilised his reply given to the notice but had not been considered by the Department. The criminal proceedings were quashed.”

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Industrial undertaking — Special deduction u/s 80-IA — Rule of consistency — Assessee carrying out operation and maintenance of multi-purpose berth in port — Deduction granted by appellate authorities on facts in first assessment year and order attaining finality — Deduction could not be disallowed for subsequent assessment years when there was no change in circumstances — Letter issued and agreement with port authorities would satisfy requirement

10 Principal ClT vs. T. M. International Logistic Ltd. [2022] 442 ITR 87 (Cal) A.Ys: 2004-05 and 2005-06 Date of order: 20th January, 2022 S.80-IA of ITA, 1961

Industrial undertaking — Special deduction u/s 80-IA — Rule of consistency — Assessee carrying out operation and maintenance of multi-purpose berth in port — Deduction granted by appellate authorities on facts in first assessment year and order attaining finality — Deduction could not be disallowed for subsequent assessment years when there was no change in circumstances — Letter issued and agreement with port authorities would satisfy requirement

The assessee was in the business of terminal port operation and maintenance. For the A.Ys. 2004-05 and 2005-06, the assessee filed the return of income and claimed deduction u/s 80-IA of the Income-tax Act, 1961. The Assessing Officer rejected the claim on the ground that the assessee was operating and maintaining a multi purpose-berth and did not operate a port. The assessee submitted a letter issued by the port authorities stating that the berth at the dock complex had been allotted to the assessee on a leave and licence basis for thirty years, and it had the exclusive licence to equip, construct, finance, operate, manage, maintain and replace the project facilities and services. The Assessing Officer held that the letter had no significance regarding the deduction claimed u/s 80-IA and that no details were furnished in respect of the arrangement for the construction of the berth either on build-operate-transfer (BOT) or build-operate-lease-transfer (BOLT) basis and transfer of the berth to the port authorities.

The Commissioner (Appeals) held that the assessee was entitled to deduction u/s 80-IA. The Tribunal affirmed the orders.

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

“i) The Commissioner (Appeals) for the A.Y. 2003-04 which was the first year in the period of ten years had on examination of the facts allowed the deduction u/s. 80-IA and his order was confirmed by the Tribunal. The Assessing Officer had also given effect to such order. There was nothing on record to show that there was any change in the situation.

ii) The letter from the port authorities and the agreement which were produced by the assessee were to be treated as a certificate issued by the port authorities and would satisfy the requirement in Circular No. 10 of 2005, dated December 16, 2005 ([2006] 280 ITR (St.) 1) issued by the Central Board of Direct Taxes. The Tribunal had rightly rejected the Department’s appeal and confirmed the order passed by the Commissioner (Appeals) allowing deduction u/s. 80-IA to the assessee.”

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Chit fund: (i) Method of accounting — Change in method of accounting from mercantile system of accounting to completed contract method — Profits accounted for chit discount on completed contract method — Result revenue neutral — Assessee’s method of computing justified; (ii) Business expenditure — Advertisement expenditure — Expenses incurred not on particular series of chit alone but for promotion and running of business — Allowable as revenue expenditure in year in which expenses incurred

9 Shriram Chits and Investments (P.) Ltd. vs. ACIT [2022] 442 ITR 54 (Mad) A.Ys.: 1987-88 to 1995-96 and 1999-2000 Date of order: 30th August, 2012 Ss. 37 and 145 of ITA, 1961

Chit fund: (i) Method of accounting — Change in method of accounting from mercantile system of accounting to completed contract method — Profits accounted for chit discount on completed contract method — Result revenue neutral — Assessee’s method of computing justified; (ii) Business expenditure — Advertisement expenditure — Expenses incurred not on particular series of chit alone but for promotion and running of business — Allowable as revenue expenditure in year in which expenses incurred

The assessee was in chit business. Till 31st December, 1985, in respect of the method of accounting u/s 145 of the Income-tax Act, 1961, the assessee followed the mercantile accounting system regarding the commission earned by it in its capacity as foreman, conducting the chit activity. However, thereafter, the assessee changed the method to the completed contract method of accounting, and the commission earned was accounted for on the completion of each series of chits. The Department did not accept the change of the accounting method on the ground that on the date the auction was conducted, the right of the assessee to receive the commission in the capacity as foreman accrued, and consequently, the assessee was not entitled to wait for the completion of each chit period, as there was no accrual of income at the end of each term.

The Commissioner (Appeals) upheld the order of the assessing authority. The Tribunal held that the remuneration or commission of the foreman accrued at the end of chit draw and that, therefore, the assessee’s commission had to be related to and determined based on every auction and not to be postponed to the completion period and dismissed the assessee’s appeal.

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

“i) A reading of the rights of the subscribers and responsibilities of the chit fund as foreman in the provisions of the Chit Funds Act, 1982 shows that the duty is cast on the foreman to conduct the chit to a duration assured and in the event of any default of payment of any one of the instalments, the foreman has the responsibility to make good that loss. At the end of the chit period, the subscriber is assured of the amount for which he participated in the scheme. In the background of the provisions of sections 21 to 28 of the 1982 Act read in the context of the definition of “discount” and “dividend”, on every auction, the discount that is arrived at is taken for the purpose of meeting the expenses of running the chit. The expenses normally include all expenses apart from the commission payable to the foreman, and the dividends that are payable to the subscribers, are normally carried to the end of the chit period. Every chit is an independent transaction containing a series of activities to be undertaken during the course of the transaction. Even though the discount and commission are recognised with the conduct of auction every month, yet, with all the load mounted on the discount, the uncertainties in the payment of subscriptions and the commitments that the assessee has to discharge under the 1982 Act, the revenue recognition, as a business proposition becomes determinable only at the end of the particular chit transaction.

ii) While in the proportionate completion method, revenue is recognised proportionately by referring to the performance of each act, the possibility of revenue recognition in the proportionate completion method being a fairly determinable one, in the completed services contract method, the difficulty in determining the revenue arises by reason of the significant nature of the services yet to be performed in relation to the transaction that normally, the revenue recognition is taken to the end of the performance. Therefore, even while adopting the proportionate completion method, where there is every possibility of identifying the revenue vis-a-vis the extent of services completed, there is a line of caution stated that when there is a better method available to assess the better performance, it may be adopted to the straight line basis for ascertaining the income. However, when the services yet to be performed are so significant in relation to the transaction, difficulty arises in recognising the revenue in the performed services. Therefore, in contrast to the proportionate completion method, necessarily, revenue recognition is postponed till the completion of the services of the contract. Under clause 9, “Basis for revenue recognition”, it is stated that so long as there is uncertainty on the ultimate collection, revenue is not normally recognised along with rendering of services. Even though payment may be made in instalments, when the consideration is not determinable within reasonable limits, recognition of revenue is postponed. Accounting Standards 9 and 7 both speak in one voice at least as regards the proportionate completion method, the completion contract method and both these methods aim at the methodology for arriving at the revenue recognition with a certain degree of certainty, taking into consideration, the significance of the services performed and to be performed in relation to the particular transaction.

iii) Section 21(1)(b) of the 1982 Act provides for entitlement to receive commission, remuneration or for meeting the expenditure of running the chit at a rate not more than 5 per cent. Therefore, at a given point of time, a foreman cannot, with any certainty, assert that his commission be paid irrespective of the expenses that he may have to incur for the conduct of the transaction. In the computation of income on the completed contract basis, the exercise would be seen as revenue neutral. Under the 1982 Act, the discount is the sum of money which is set apart under the chit agreement to meet the expenses of running the chit. This also has to take note of the default among the different classes of subscribers.

iv) While there may be a certainty as to the dividend received every month for purpose of assessment on accrual basis, as far as a company running the chit business is concerned, the dividend and the discount can properly be ascertained only at the completion of the transaction and not in the midway. Given the significant nature of the services yet to be performed in relation to the chit series, till the series come to an end, it is difficult to assess with any certainty, the amount that would be properly called as income for the purpose of assessment. “Discount” as defined under section 2(g) of the 1982 Act means the money set apart under the chit agreement to meet the expenses of running the chit or for distribution among the subscribers or for both. Dividend is the share of the subscriber in the amount of discount available for reasonable distribution among the subscribers at each instalment of the chit.

v) Given the rights of the subscriber, when section 21 of the 1982 Act provides for 5 per cent of the chit amount to be given to the assessee as foreman which was stated therein as commission, remuneration or for meeting the expenses of running the chits, and when the dividend to the assessee as foreman had to come only from out of the discount, the Department was not justified in contending that the assessee could not adopt the completed contract method for income recognition. The assessee was justified in adopting the completed contract method to arrive at the real income.

vi) The assessee’s expenditure was related both to the administrative costs and to the advertisement costs. The expenses could not be viewed as relatable to the particular series alone, but as relating to the running of the business and were revenue expenditure of the relevant assessment year in which it was incurred. The fact that the advertisement referred to the beginning of a new series, per se, would not mean that it was relatable to the conduct of the business of the assessee in general. The advertisement was more in the nature of information as to the business of the assessee and for its promotion.

vii) The plea of the Department that the change in the method of accounting was not bona fide was taken without any material. Except for the issue on mutuality relating to the A. Ys. 1988-89 to 1995-96 and 1999-2000 the findings of the Tribunal to the extent regarding the method of accounting were set aside.”

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THE FINANCE ACT, 2022

1. BACKGROUND

Finance
Minister Smt. Nirmala Sitharaman presented her fourth regular Budget in
Parliament on 1st February,2022. In her Budget speech, she emphasised
four priorities, namely (i) PM Gatishakti, (ii) inclusive development,
(iii) productivity enhancement & investment, sunrise opportunities,
energy transition and climate action and (iv) financing of investments.
The Finance Minister has given a detailed explanation of the measures
that the Government proposes to take in the coming years.

The Finance Minister has also introduced the Finance Bill, 2022, containing 84 sections amending various sections of the Income-tax Act. Before the passage of the Bill, 39 amendments to the Bill were
introduced in Parliament. The Parliament passed the Bill with the
amendments on 29th March, 2022. The Finance Act, 2022, has received the
assent of the President on 30th March, 2022. By this Act, several
amendments are made to the Income-tax Act, increasing the burden of
compliance for tax payers. However, there are some amendments which will
give some relief to taxpayers. Contrary to the Government’s declared
policy , there are some amendments that will have retrospective effect.
In this article, some of the important amendments in the Income tax-Act
(Act) are discussed.

2. RATES OF TAXES FOR A.Y. 2023-24

2.1
There are no changes in the slabs and the rates for an Individual, HUF,
AOP and BOI. The tax rates remain unchanged in the case of a Firm
(including LLP), Co-operative Society and Local Authority. In the case
of a Domestic Company, the tax rate remains the same at 25% if a
company’s total turnover or gross receipts for F.Y. 2020-21 was less
than R400 Crore. In the case of other larger companies, the tax rate
will be 30%. The rate of 4% of the tax for ‘Health and Education Cess’
will continue for all assessees. Apart from what is stated in Para 2.2,
the rates of surcharge are the same as in earlier years.

2.2 It
may be noted that some relief in rates of surcharge is given in A.Y.
2023-24 (F.Y. 2022-23). The revised rates of surcharge are as under:

(i) Individual, HUF, AOP / BOI
There
is no change in the surcharge rates on slab rates in A.Y. 2023-24.
However, the surcharge on income taxable under sections 111A, 112, and
112A and dividend income will not exceed 15%.

(ii) AOP (having corporate members only)
In
the case of AOP having only corporate members, the rate of surcharge
will be 7% if the income exceeds R1 crore but does not exceed R10
crores. The rate of surcharge will be 12% if the income exceeds R10
crores.

(iii) Co-operative Societies
The rate of
surcharge is reduced for A.Y. 2023-24 to 7% if the income is more than
R1 crore, but less than R10 crore. In respect of income exceeding R10
crore, the rate of surcharge is unchanged at 12%.

2.3. Alternate Minimum Tax
In
the case of co-operative societies, the Alternate Minimum Tax (AMT)
payable u/s 115JC is reduced from 18.5% to 15% from A.Y. 2023-24 (F.Y.
2022-23).

3. TAX DEDUCTION AND COLLECTION AT SOURCE (TDS AND TCS)

3.1 Section 194-IA:
This section is amended w.e.f. 1st April, 2022 – tax at 1% is to be
deducted on higher of stamp duty value or the transaction value. When
the consideration and stamp duty valuation is less than R50 Lakhs, no
tax is required to be deducted.

3.2 Section 194R: (i) This new section comes into force from 1st April, 2022.
It provides that tax shall be deducted at source at 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 R20,000.

(ii) The provisions of this section are not applicable to an
Individual or HUF whose sales, gross receipts or turnover does not
exceed R1 crore in the case of business or R50 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 the value of any benefit or perquisite arising from
any business or profession is chargeable to tax u/s 28(iv). Therefore,
this new TDS provision will apply only when the value of the benefit or
perquisite is chargeable to tax in the hands of the person engaged in
the business or profession u/s 28(iv). It is also provided that the
Central Government shall issue guidelines to remove any difficulty that
may arise in implementing this section.

3.3 Section 194-S: (i) This is a new section which will come into force on 1st July, 2022
– which 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 the 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 R10,000
in the financial year.

(ii) Section 194-S defines the term
‘Specified Person’ to mean a person being an Individual or a HUF, whose
total sales, gross receipts or turnover from business or profession does
not exceed R1 crore in case of business or R50 Lakhs in the case of
profession, during the financial year immediately preceding year in
which such VDA is transferred or being Individual or a HUF who does not
have income under the head ‘Profits and Gains of Business or
Profession’. In the case of a Specified Person –

(a) The
provisions of section 203A relating to Tax Deduction and Collection
Account Number and section 206AB relating to special provision for TDS
for non-filers of Income-tax returns 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.

(iii) 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 u/s 194-O.

3.4 Sections 206AB and 206CCA: These
sections deal with a higher rate of TDS and TCS in cases where the payee
has not filed his Income-tax returns for two preceding years and in
whose case aggregate TDS/TCS exceeds R50,000. At present, section 206AB
is not applicable in respect of TDS under sections 192, 192A, 194B,
194BB, 194BL and 194N. By amendment, effective from 1st April, 2022,
it is now provided that TDS/TCS at higher rates in such cases will not
apply u/s 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 been now reduced from two preceding years to
one preceding year.

4. DEDUCTIONS

4.1 Section 80CCD: At
present, the deduction for employer’s contribution to National Pension
Scheme (NPS) is allowed to the extent of 14% of the salary in the case
of Central Government employees. For others, the deduction is restricted
to 10% of the salary. In order to give benefit to State Government
employees, section 80CCD(2) is amended with retrospective effect from A.Y. 2020-21 (F.Y. 2019-20).
By this amendment, the State Government employees will now get a
deduction for employer’s contribution to NPS to the extent of 14% with
retrospective effect.

4.2 Section 80DD: At present, a
deduction is allowed in respect of the contribution to a prescribed
scheme for maintenance of a dependent disabled person if such scheme
provides for payment of the annuity or lump sum to such dependent person
in the event of death of the assessee contributing to the scheme, i.e.
the parent or guardian. This section is amended effective from A.Y. 2023-24 (F.Y. 2022-23)
to allow a deduction for such contribution even where the scheme
provides for payment of annuity or lump sum to the disabled dependent
when the assessee contributor has attained the age of 60 years or more
and the deposit to such scheme has been discontinued. It is also
provided by the amendment that such receipt of annuity or lump sum by
the disabled dependent shall not result in the contribution made by the
assessee to the scheme taxable.

4.3 Section 80-IAC: At
present, an eligible start-up incorporated on or after 1st April, 2016
but before 1st April, 2022, is entitled to claim an exemption of profits
for three consecutive assessment years out of ten years from the year
of incorporation. For this purpose, the conditions laid down in this
section should be complied. This section is now amended to provide that
the above benefit will be available to a start-up company incorporated
on or before 31st March, 2023.

4.4 Section 80LA: This
section provides for specified deduction in respect of income arising
from the transfer of an ‘aircraft’ leased by a unit in International
Financial Services Centre (IFSC) if the unit has commenced operation on
or before 31st March, 2024. The amendment of this section has extended
this benefit to a ‘ship’ effective A.Y. 2023-24 (F.Y. 2022-23).

5. CHARITABLE TRUSTS AND INSTITUTIONS
Significant
amendments were made in the procedural provisions relating to
Charitable Trusts and Institutions in sections 10(23C), 12A and 12AA of
the Income-tax Act by Finance Acts 2020 and 2021. A new section 12AB was
added to the Income-tax Act. This year, far-reaching amendments are
made in sections 10(23C), 11 and 13 dealing with Specified Universities,
Educational Institutions, Hospital etc. (herein referred to as
‘Institutions’) and Charitable and Religious Trusts (herein referred to
as ‘Charitable Trusts’). These amendments are as under:

5.1 Institutions Claiming Exemptions u/s 10(23C)
Section
10(23C) of the Act provides for exemption to a Specified University,
Educational Institutions, Hospitals etc., (Institutions). This section
is amended as under:

(i) Section 10(23C)(v) grants exemption to
an approved Public Charitable or Religious Trusts. It is now provided
that if any such Trust includes any temple, mosque, gurudwara, church or
other notified place and the Trust has received any voluntary
contribution for the purpose of renovation or repair of these places of
worship, the Trust will have option to treat such contribution as part
of the Corpus of the Trust. It is also provided that this Corpus amount
shall be used only for this specified purpose and the amount not
utilized shall be invested in specified investments listed in section
11(5) of the Act. It is also provided that if any of the above
conditions are violated, the amount will be considered as income of the
Trust for the year in which such violation takes place. This provision
will come into force from A.Y. 2021-22 (F.Y. 2020-21).

It may be noted that a similar provision is added, effective A.Y. 2021-22 (F.Y. 2020-21), in section 11 in respect of Charitable or Religious Trusts claiming exemption u/s 11.

(ii)
At present, an Institution claiming exemption u/ 10(23C) must utilise
85% of its income every year. If this is not possible, it can accumulate
the unutilised income within 5 years. However, there is no provision
for any procedure to be followed for such accumulation. The amendment to
section 10(23C), effective from A.Y. 2023-24 (F.Y. 2022-23),
now provides that the Institution should apply to the Assessing Officer
(AO) in the prescribed form before the due date for filing the return
of income for accumulation of unutilised income within 5 years. The
Institution must state the purpose for which the income is being
accumulated. By this amendment, the provisions of section 10(23c) are
brought in line with section 11 of the Act.

(iii) At present,
section 10(23C) provides for an audit of accounts of the Institution. By
amendment, it is now provided that, effective from A.Y. 2023-24 (F.Y. 2022-23),
the Institution shall maintain its accounts in such manner and at such
place as may be prescribed by the Rules. Such accounts will have to be
audited by a CA, and a report in the prescribed form will have to be
given by him.

(iv) Section 10(23C) is also amended by replacing
the existing proviso XV to give very wide powers to the Principal CIT to
cancel approval or provisional approval given to the Institution for
claiming exemption. If the Principal CIT comes to know about specified
violations by the Institution, he can conduct an inquiry, and after
giving an opportunity to the Institution, cancel the approval or
provisional approval. The term ‘specified violations” is defined in this
amendment.

(v) By another amendment to section 10 (23C), effective from A.Y. 2023-24 (F.Y. 2022-23), it is provided that the Institution shall file their returns of income by the due date specified in section 139(4C).

(vi)
A new Proviso XXI is added in section 10(23C) to provide that if any
benefit is given to persons mentioned in section 13(3), i.e., author of
the Institution, Trustees or their related persons, such benefit shall
be deemed to be the income of the Institution. This will mean that if a
relative of a trustee is given free education in the educational
Institution, the value of such benefit will be considered as income of
the Institution. In this case, the tax will be charged at 30% plus
applicable surcharge and cess u/s 115BBI.

(vii) It may be noted that section 56(2)(x) has been amended from A.Y. 2023-24 (F.Y. 2022-23)
to provide that if the Author, Trustees or their related persons as
mentioned in section 13(3) receive any unreasonable benefit from the
Institution or Charitable Trust exempt under sections 10(23C) or 11, the
value of such benefit will be taxable as ‘Income from Other Sources’.

(viii)
At present, the provisions of section 115TD apply to a Charitable or
Religious Trust registered u/s 12AA or 12AB. Now, effective from A.Y. 2023-24 (F.Y. 2022-23), the
provisions of section 115TD will apply to any University, Educational
Institution, Hospital etc., claiming exemption u/s 10(23C) also. Section
115TD provides that if the Institution loses exemption u/s 10(23C) due
to cancellation of its approval or due to conversion into a
non-charitable organization or other reasons, the market value of all
its assets, after deduction of liabilities, will be liable to tax at 30%
plus applicable surcharge and cess.

5.2 Charitable Trusts claiming exemption u/s 11

Sections
11, 12 and 13 of the Act provide exemption to Charitable Trusts
(Including Religious Trusts), registered u/s 12A, 12AA or 12AB. Some
amendments are made in these and other sections as stated below:

(i)
As stated above, if a Charitable Trust owns any temple, mosque,
gurudwara, church etc., it can treat any contribution received for
repairs or renovation of such place of worship as corpus donation. This
amount should be used for the specified purpose. The unutilized amount
should be invested as provided in section 11(5). This provision will
come into force from A.Y. 2021-22 (F.Y. 2020-21).

(ii)
At present, if a Charitable Trust is not able to utilise 85% of its
income in a particular year, it can apply to the AO for permission for
the accumulation of such income for 5 Years. If any amount out of such
accumulated income is not utilised for the objects of the Trust up to
the end of the 6th year, it is taxable as income in the sixth year. This
provision has now been amended, effective from A.Y. 2023-24 (F.Y. 2022-23),
to provide that if the entire amount of the accumulated income is not
utilised up to the end of the 5th Year, the unutilised amount will be
considered as income of the fifth year and will become taxable in that
year.

(iii) If a Charitable Trust is maintaining accounts on an accrual basis of accounting, it is now provided that any
part of the income which is applied to the objects of the Trust, the
same will be considered as application for the objects of the Trust only
if it is actually paid in that year. If paid in a subsequent year,
it will be considered as application of income in the subsequent year.
This amendment will come into force from A.Y. 2022-23 (F.Y. 2021-22).

(iv)
Section 13 deals with the circumstances in which exemption under
section 11 can be denied to Charitable Trusts. At present, if any income
or property of the Trust is utilised for the benefit of the Author,
trustee or related persons stated in section 13(3), the exemption is
denied to the Trust. Now, effective from A.Y. 2023-24 (F.Y. 2022-23),
this section is amended to provide that only that part of the income
which is relatable to the unreasonable benefit allowed to the related
person will be subjected to tax in the hands of the Charitable Trust.
This tax will be payable at 30% plus applicable surcharge and cess.

(v)
At present, section 13(1)(d) provides that if any funds of the
Charitable Trust are not invested in the manner provided in section
11(5), the Trust will not get exemption u/s 11. This section is now
amended, effective from A.Y. 2023-24 (F.Y. 2022-23), to
provide that the exemption will be denied only in respect of the income
from such prohibited investments. Tax on such income will be chargeable
at 30% plus applicable surcharge and cess.

(vi) Section 12A has been amended, effective from A.Y. 2023-24 (F.Y. 2022-23),
to provide that the Charitable Trust shall maintain its accounts in the
manner as may be prescribed by Rules. These accounts will have to be
audited by a Chartered Accountant.

(vii) In line with the
amendment in section 10(23c) proviso XV, very wide powers are now given,
by amending section 12AB (4), to the Principal CIT to cancel
registration given to a Charitable Trust for claiming exemption. If the
Principal CIT comes to know about specified violations by the Charitable
Trust, he can conduct an inquiry and after giving opportunity to the
Trust, cancel its registration. The term ‘Specified Violations’ is
defined by this amendment.

5.3 Special Rate of Tax
A new section 115BBI has been added, effective from A.Y. 2023-24 (F.Y. 2022-23),
for charging tax at 30% plus applicable surcharge and cess. This rate
of tax will apply to registered Charitable Trusts, Religious Trusts,
Educational Institutions, Hospitals etc., in respect of the following
specified income:

(i) Income accumulated in excess of 15% of the income where such accumulation is not allowed.

(ii)
Where the income accumulated by the Charitable Trust or Institution is
not utilised within the permitted period and is deemed to be the income
of the year when such period expires.

(iii) Income which is not
exempt u/s 10(23c) or section 11 by virtue of the provisions of section
13(1)(d). This will include the value of benefit given to related
persons, income from Investments made otherwise then what is provided in
section 11(5) etc.

(iv) Income which is not excluded from the
total income of a Charitable Trust u/s 13(1) (c). This refers to the
value of benefits given to related persons.

(v) Income which is
not excluded from the total income of a Charitable Trust u/s 11(1) (c).
This refers to income of the Trust applied to objects of the Trust
outside India.

5.4 New Provisions for Levy of Penalty

New
section 271 AAE is added in the Income-tax Act for levy of penalty on
Charitable Trusts and Institutions claiming exemption under sections
10(23C) or 11. This penalty relates to benefits given by the Charitable
Trusts or Institutions to related persons. The new section provides that
If an Institution claiming exemption u/s 10(23C) or a Charitable Trust
claiming exemption u/s 11 gives an unreasonable benefit to the Author of
the Trust, Trustee or other related persons in violation of proviso XXI
of section 10(23C) or section 13(1) (c), the AO can levy penalty on the
Trust or Institution as under:

(i) 100% of the aggregate amount
of income applied for the benefit of the related persons where the
violation is noticed for the first time.

(ii) 200% of the aggregate amount of such income where the violation is noticed again in the subsequent year.

6. INCOME FROM BUSINESS OR PROFESSION

6.1 Section 14A:
At present, expenditure incurred in relation to exempt income is not
allowed as a deduction. There was a controversy as to whether section
14A would apply when there was no income from a particular investment.
This section is now amended effective from A.Y. 2022-23 (F.Y. 2021-22)
to clarify that the disallowance under this section can be made even in
a case where no exempt income had accrued or was received, and
expenditure was incurred. It is also clarified that the provisions of
section 14A will apply notwithstanding anything to the contrary
contained in the Income-tax Act.

6.2 Section 35 (1A):
Section 35 allows deduction of expenditure on scientific research. Under
section 35(1A), such deduction is denied under certain circumstances.
This section is now amended effective from A.Y. 2021-22 (F.Y. 2020-21) to
provide that the donor will not be allowed a deduction in respect of
the donation for research u/s 35 if the donee has not filed a statement
of donations before the specified authorities.

6.3 Section 17: This section is amended effective from A.Y. 2020-21 (F.Y. 2019-20) to
provide that any sum paid by the employer in respect of any expenditure
actually incurred by the employee on medical treatment of the employee
or any of his family members for treatment relating to COVID-19 shall
not be regarded as taxable perquisite. This will be subject to such
conditions as may be notified by the Central Government.

6.4 Section 37(1): At
present, Explanation 1 to section 37(1) provides that any expenditure
incurred for any purpose which is an offence or which is prohibited by
law shall not be allowed as a deduction while computing income under the
head ‘Profits and Gains of Business or Profession’. Now Explanation – 3
is added from A.Y. 2022-23 (F.Y. 2021-22) to clarify that the following types of expenses shall not be allowed while computing the business income of the assessee:

(i)
Expenditure incurred for any purpose which is an offence under, or
which is prohibited by, any law in India or outside India, or

(ii)
Any benefit or perquisite provided to a person, whether or not for
carrying on business or profession, where its acceptance is in violation
of any law or rule or regulation or guidelines governing the conduct of
such person, or

(iii) Expenditure incurred to compound an
offence under any law, in India or outside India. It may be noted that
this amendment may affect the benefits or perquisites provided by
pharmaceutical companies to medical professionals. If any benefit or
perquisite is received by a medical professional from a pharmaceutical
company, the same is taxable as the income of the medical professional
u/s 28 (iv). This will now suffer TDS at 10% of the value of such
benefit or perquisite under new section 194R. Further, it will be
difficult to find out whether a particular benefit is prohibited by law
in a foreign country.

6.5 Section 40(a) (ii): (i) Tax
levied on ‘Profits and Gains of Business or Profession’ is not allowed
as a deduction under this section. In the case of Sesa Goa Ltd vs. JCIT 117 taxmann.com 96,
the Bombay High Court held that the term ‘tax’ will not include ‘cess’
levied on tax. A similar view was taken by the Rajasthan High Court.
This section is now amended retrospectively effective from A.Y. 2005-06 (F.Y. 2004-05),
and it is now provided that the term ‘tax’ shall include any surcharge
or cess on such tax. Thus, no deduction will be allowable for ‘cess’ on
the basis of the above High Court decisions.

(ii) It may be noted
that section 155 has been amended from 1st April, 2022 to provide for
the amendment of the computation of income/loss in a case where
surcharge or cess has been claimed and allowed as a deduction in
computing total income. This amendment is as under:

(a) If the
assessee has claimed the deduction for surcharge or cess as business
expenditure, the AO can rectify the computation of income or loss u/s
154. He can also treat this deduction as under-reported income u/s
270A(3) and levy a penalty under that section. For this purpose, the
limitation period of 4 years u/s 154 shall be counted from 31st March
2022. This will mean that such a rectification order can be passed on or
before 31st March, 2026.

(b) However, if the
assessee makes an application to the AO in the prescribed form and
within the prescribed time, requesting for recomputation of the income
by excluding the above claim for deduction of surcharge or cess and pays
the amount due thereon within the specified time, no penalty under
section 270A will be levied. It appears that interest will also be
payable with the tax.

(iii) This is a retrospective legislation.
The claim for deduction of surcharge or cess may have been made by some
assessees in view of the High Court decision. To levy a penalty u/s 270A
for such a claim made in earlier years is a very harsh provision.

6.6 Section 43B:
This section provides that interest payable on an existing loan or
borrowing from Financial Institutions shall be allowed only in the year
of actual payment. The Supreme Court, in the case of M.M. Aqua Technologies Ltd. vs. CIT reported in 436 ITR 582
held that the interest payable in such a case can be considered to have
been actually paid if the liability to pay interest is converted into
debentures. The Explanation 3C, 3CA and 3CD of section 43B have been
amended from A.Y. 2023-24 (F.Y. 2022-23) to provide that
if such interest payable is converted into debenture or any other
instrument, by which the liability to pay is deferred to a future date,
it shall not be considered as actual payment.

6.7 Section 50: This section was amended by the Finance Act, 2021, from A.Y. 2021-22 (F.Y. 2020-21). Now, an explanation is added from A.Y. 2021-22 to
clarify that reduction of the amount of goodwill of a business or
profession from the ‘block of assets’ as provided in section 43(6) (c)
(ii) (B) shall be deemed to be transfer of goodwill.

6.8 Section 79A:
At present, there is no restriction on the set-off of any loss or
unabsorbed depreciation against undisclosed income detected during a
search or survey proceedings under sections 132, 132A or 133A (other
than 133A (2A)). Now, a new section 79A is added from the A.Y. 2022-23 (F.Y. 2021-22)
to provide that any loss, either of the current year or brought forward
loss or unabsorbed depreciation, cannot be adjusted against the
undisclosed income, which is defined as under:

(i) Any income of
the relevant year or any entry in the books of accounts or other
documents or transactions detected during a search, requisition or
survey, which has not been recorded in the books of accounts or has not
been disclosed to the Principal Chief CIT, Chief CIT, Principal CIT or
CIT before the date of search, requisition or survey, or

(ii) Any
expenditure recorded in the books of accounts or other documents are
found to be false and would not have been detected but for the search,
requisition or survey.

7. TAXATION OF VIRTUAL DIGITAL ASSETS
In
this year’s Budget, no ban has been imposed on dealing in
cryptocurrencies or other similar digital currencies. In para III of the
budget speech, the Finance Minister has stated that “Introduction of
Central Bank Digital Currency (CBDC) will give a big boost to digital
economy. Digital Currency will also lead to a more efficient and cheaper
management system. It is, therefore, proposed to introduce Digital
Rupee, using blockchain and other technologies, to be issued by the
Reserve Bank of India starting 2022-23”.

Further, in Para 131 of
the Budget Speech, the Finance Minister has stated that “There has been a
phenomenal increase in transactions in virtual digital assets. The
magnitude and frequency of these transactions have made it imperative to
provide for a specific tax regime. Accordingly, for taxation of virtual
digital assets, I propose to provide that any income from transfer of
any virtual digital assets shall be taxed at the rate of 30 per cent”.

To implement this decision the following amendments are made in various sections of the Income-tax Act effective A.Y. 2023-24 (F.Y. 2022-23).

7.1 Section 2(47A): This
is a new section which defines the term ‘Virtual Digital Asset’ (VDA)
to mean any information or code or number or token (other than an Indian
currency or a foreign currency) generated through cryptographic means
in or otherwise, by whatever name called, providing a digital
representation of value exchanged with or without consideration with the
promise or representation of having inherent value, or functions as a
store of value or a unit of account including its use in any financial
transaction or investment, but not limited to investment scheme, and can
be transferred, stored or traded electronically. This definition also
includes non-fungible tokens or any other token of a similar nature. It
also includes any other digital asset that may be notified by the
Central Government. This definition comes into force from 1st April,
2022.

7.2 Section 115BBH: This is a new section which comes into force from A.Y. 2023-24. It provides as under:

(i)
Where the total income of an assessee includes any income from transfer
of VDA, income tax on such income is payable at 30% plus a surcharge
and cess. It may be noted that in this provision, no distinction is made
between income from transfer VDA in the course of trading or VDA held
as a capital asset. However, it is clarified that the definition of the
term ‘transfer’ in section 2(47) shall apply whether VDA is a capital
asset or not.

(ii) No deduction in respect of any expenditure
(other than the cost of acquisition) or allowance or set-off of any loss
shall be allowed to the assessee under any provision of the Income-tax
Act in computing income from transfer of such VDA.

(iii) No
set-off of loss from the transfer of the VDA shall be allowed against
income computed under any provision of the Income-tax Act, and such loss
shall not be allowed to be carried forward.

7.3 Section 56(2)(x): Gift
of VDA received by a non-relative will be taxable u/s 56(2) (x) as
‘Income from Other Sources’. If a person receives a gift of VDA of the
aggregate market value exceeding R50,000 or VDA is transferred to him
for a consideration where the difference between the consideration paid
and its market value is more than R50,000, tax will be payable by him as
provided in section 56(2) (x). Amendment in section 56(2) (x) provides
that the expression ‘property’ includes ‘VDA’. The CBDT will have to
frame rules for the determination of market value of VDA for the
purposes of section 56(2) (x).

7.4 Section 194-S: This is a
new section which provides for deduction of TDS @1% from the
consideration for VDA. The provisions of this section are discussed in
Para 3.3 above. This provision comes into force on 1st July, 2022.

7.5 General: In
the Memorandum explaining the provisions of the Finance Bill, 2022, it
is stated that “Virtual digital assets have gained tremendous popularity
in recent times and the volumes of trading in such digital assets has
increased substantially. Further, a market is emerging where payment for
transfer of virtual digital assets can be made through another such
asset. Accordingly, a new scheme to provide for taxation of such virtual
digital assets has been proposed in the Bill”.

Reading the above amendments, some issues arise for consideration.

(i)
The new provisions do not clarify as to under which head the income
from transfer of VDA will be taxable i.e. whether it is ‘Income from
Business’ or ‘Capital Gains’ or ‘Income from Other Sources’.

(ii)
A transfer of VDA in exchange for another VDA is liable to tax. It is
not clear how the market value of the VDA received in exchange will be
determined. The Central Government will have to frame Rules for this
purpose.

(iii) VDA is defined u/s 2(47 A) and this definition
comes into force on 1st April, 2022. A question will arise as to whether
income from transfer of similar VDA prior to 1st April, 2022 will be
taxable and if so whether it will be considered as a ‘Capital Asset’ as
defined in section 2(14). Under this definition, ‘Capital Asset’ means
“property of any kind held by an assessee, whether or not connected with
his business or profession”.

(iv) If income arising from
transfer VDA before 1st April, 2022 is considered taxable, a question
will arise whether the loss in such transactions will be allowed to be
adjusted against other income and carried forward loss will be allowed
to be adjusted against income in subsequent years.

We will have to wait for some clarification from CBDT on all the above issues.

8. CAPITAL GAINS

8.1 Section 2(42C): This
section defines ‘slump sale’. Finance Act, 2021, had widened this
definition to cover a case of transfer of an undertaking ‘by any means’,
which till then was restricted to a case of transfer ‘as a result of
the sale’. There was some doubt about the interpretation of this
provision. Therefore, this definition is now amended from A.Y. 2021-22 (F.Y. 2020-21)
to substitute the word ‘sales’ by the word ‘transfer’. Thus, the
definition now covers a case of transfer of any undertaking by means of a
lump sum consideration without assigning individual values to assets
and liabilities for such transfer.

8.2 Surcharge on Capital Gains: As
stated in Para 2.2 above, a surcharge on tax on long-term capital gains
u/s 111A, 112 and 112 A in the case of Individual, HUF, AOP, BOI etc.
will not exceed 15% of tax from the A.Y. 2023-24 (F.Y. 2022-23).

9. INCOME FROM OTHER SOURCES

9.1 Section 56(2)(x): According
to the Government’s declared policy, amount received by a person for
medical treatment of COVID -19 illness should not be made liable to any
tax. Therefore, section 56(2) (x) has been amended to provide as under:

(i)
Any sum of money received by an Individual from any person in respect
of the medical treatment of himself or any member of his family for any
illness related to COVID -19, to the extent of the expenditure actually
incurred will not be taxable.

(ii) Any amount received by a
member of the family of a deceased person from the employer of the
deceased person will not be taxable.

(iii) An amount up to R10
lakhs received from any person by a member of the family of the deceased
person, whether the cause of death of such person was illness related
to COVID -19 will not be taxable. However, such amount should be
received within 12 months of the date of the death, and such other
conditions as may be notified by the Central Government are satisfied.

It
may be noted that for the purpose of (ii) and (iii), the word ‘family’
is given the meaning as defined in section 10(5). This word will,
therefore, mean (a) the spouse, (b) children of the individual and (c)
parents, brothers and sisters of the Individual or any of them who is
wholly or mainly dependent on the Individual.

The above amendments are made from A.Y. 2020-21 (F.Y. 2019-20)

9.2 Section 68: This
section provides that any sum credited in the books of the assessee
shall be considered as income if the assessee does not offer an
explanation about the nature and source of such sum. Even if the
explanation is offered by the assessee, but the AO is of the opinion
that the explanation offered by the assessee is not to his satisfaction,
the AO can treat such sum as income of the assessee. This section is
amended from A.Y. 2023-24 (F.Y. 2022-23). The amendment
now provides that where the amount received by the assessee consists of
loan or borrowing or otherwise, by whatever name called, the assessee
will have to give a satisfactory explanation to the AO about the source
from which the person in whose name the amount is credited obtained the
money. In other words, the assessee will now have to prove the source of
funds in the hands of the lender. However, this provision will not
apply if the amount is credited in the name of a Venture Capital Company
or a Venture Capital Fund.

It may be noted that this new
provision will create many practical difficulties for the assessee. If
the lender does not co-operate and share the details of the source of
his funds, the assessee borrower will suffer. Further, it is not clear
whether this new provision will apply to borrowings made on or after 1st
April, 2022 or to old borrowing also. There is also no clarity on
whether the assessee will have to prove the source of funds borrowed
from a Financial Institution, Banks or Co-operative Societies etc.

9.3 Dividend from Foreign Company:
At present, dividend income earned by an Indian Company from a Foreign
Company in which it holds 26% or more of the equity share capital is
taxed at the concessional rate of 15%. This provision is contained in
section 115BBD. By amendment of this section from A.Y. 2023-24 (F.Y. 2022-23),
this concession is withdrawn from 1st April, 2022. Thus, such dividends
will be taxed at the normal rate of 30%. However, the Indian Company
will be able to take benefit of deduction u/s 80M if it declares a
dividend out of such dividend from the Foreign Company.

10. ASSESSMENT AND REASSESSMENT OF INCOME

10.1 In the Finance Act, 2021, new
provisions were made for the procedure to be followed for assessment or
reassessment of income including that in the case of a search or
requisition. Sections 147, 148 and 149 were substituted and a new
section 148A was added from 1st April, 2021. The following amendments
are made in these provisions from A.Y. 2022-23 (F.Y. 2021-22):

10.2 Section 132 and 132B
dealing with search and requisition are amended to include reference to
the assessment, reassessment or re-computation under sections 14(3),
144 or 147 in addition to assessment under section 153A.

10.3 Explanation 1
to Section 148 lists items considered as information about income
escaping assessment. Following changes are made in this list:

(i)
One of the item relates to the final objection raised by C&AG. Now
the requirement is that if any ‘Audit Objection’ states that the
assessment for a particular year is not made in accordance with the
provisions of the Income-tax Act, it will become information, and the AO
can issue notice based on such information.

(ii) The scope of the ‘information’ is now extended to the following items:

(a) Any information received under an agreement referred to in section 90 or 90A.

(b)
Any information made available to the AO under the scheme notified u/s
135A, providing for the collection of information in a faceless manner.

10.4 Explanation 2 to
section 148 deals with information with the AO about escapement of
income in cases of search, survey etc. The following changes are made in
these provisions:

(i) Information about any function, ceremony
or event obtained in a survey u/s 133A (5) can now be used for reopening
an assessment u/s 148. This will include any marriage or similar
function.

(ii) The deeming fiction that Explanation 2 to section
148 was applicable for 3 assessment years immediately preceding the
relevant year has been removed.

10.5 The requirement of obtaining approval of any Specified Authority by the AO is modified as under:

(i)
If the AO has passed the order u/s 148A(d) to the effect that it is a
fit case for the issue of notice u/s 148, he is not required to take the
approval of the Specified Authority before issuing a notice u/s 148.

(ii) For serving a show-cause notice on the assessee u/s 148A(b), no approval of the Specified Authority is required.

(iii)
A new section 148B is inserted, providing that the AO below the rank of
Joint Commissioner is required to take the approval of Additional
Commissioner, Additional Director, Joint Commissioner or Joint Director
before passing an order of assessment or reassessment or re-computation
in respect of an assessment year to which Explanation 2 to section 148
applies.

10.6 Section 149(1)(b): This section provides for
extended time limit of 10 years for issuance of notice u/s 148. This
extended time limit applies where the AO has in his possession books of
accounts, documents or evidence to reveal that income represented in the
form of asset which has escaped assessment is of R50 Lakhs or more.
This provision is now amended to provide that the income escaping
assessment should be represented in the form of (a) an asset, (b)
expenditure in respect of a transaction or in relation to an event or
occasion or (c) An entry or entries in the books of account.

Further,
the words ‘for that year’ has been omitted. Thus, the threshold limit
of R50 Lakhs or more need not be satisfied for each assessment year for
which notice u/s 148 is to be issued.

10.7 Section 149(1A):
A new sub-section (IA) is added in section 149 to provide that, in case
investment in such asset or expenditure in relation to such event or
occasion has been made or incurred in more than one year within the 10
years period, a notice u/s 148 can be issued for every such assessment
year.

10.8 Section 148A: It is now provided that the
procedure for issue of a notice under this section will not apply where
the AO has received any information under the scheme notified u/s 135A.

10.9 It is now provided, effective from 1st April, 2021, that restriction in section 149(1) for issuance of a notice u/s 148 for A.Y. 2021-22 or
any earlier year, if such notice could not have been issued at that
time on account of being beyond the time limit as specified in section
149(1)(b) as it stood before 1st April, 2021, shall also apply to notice
under sections 153A or 153C.

10.10 Section 153: This section, dealing with the time limit for completing an assessment, has been amended from 1st April, 2021.
It is now provided that the assessment for the A.Y. 2020-21 (F.Y.
2019-20) should be completed by 30th September, 2022 (within 18 months
of the end of the assessment year).

10.11 Section 153A:
Explanation 1 to this section provides for excluding the period to be
excluded for limitation. This section is now amended from 1st April, 2021
to provide for the exclusion of the period (not exceeding 180 days)
commencing from the date on which search is initiated u/s 132 or
requisition is made u/s 132A to the date on which the books of account,
documents, money, bullion, jewellery or other valuable articles seized
or requisitioned are handed over to AO having jurisdiction over the
assessee. A similar amendment is made in section 153B.

10.12 Section 153B: The time limit for completing assessment u/s 153A relating to search cases have now been removed from 1st April, 2021. In all cases where a search is made on or after 1st April, 2021,
the assessment will be made under sections 143, 144 or 147. Time limit
provided for such assessments will apply. However, in a case where the
last authorization for search or requisition u/s 132/132A was executed
in F.Y. 2020-21, or books/documents/assets seized were handed over to
the AO in F.Y. 2020-21, the assessment in such case for the A.Y. 2021-22
can be made on or before 30th September, 2022.

10.13 Section 271 AAB: This
section provides for the levy of penalty at a lower rate in search
cases if the specified conditions are complied. One of the conditions is
that the assessee should have paid tax on undisclosed income and filed
the return of income declaring the undisclosed income before the
specified date. The definition of ‘specified date’ is now amended from 1st April, 2021 to include the date on which the period specified in the notice u/s 148 expires.

11. FACELESS ASSESSMENTS SCHEME

11.1
Section 92CA deals with the provisions for reference to the Transfer
Pricing Officer. Section 144C deals with reference to Dispute Resolution
Panel. Section 253 deals with the procedure for filing appeals before
ITA Tribunal. Under these sections, power is given to notify a scheme
for faceless procedure for assessments and appeals before 31st March,
2022. Similarly, u/s 255 dealing with the procedure for disposal of
appeals before the ITA Tribunal, the notification for a faceless hearing
can be issued before 31st March, 2023. In all these sections,
amendments are made, and the above time limit for issue of notification
for faceless procedure is now extended up to 31st March, 2024.

11.2 Section 144B dealing with the procedure for faceless assessments has been amended from 1st April, 2022.
The faceless assessment scheme has come into force on 1st April, 2021.
Some amendments are made in section 144B, modifying the procedure under
the scheme. In brief, these amendments are as under:

(i) At
present, the scheme applies to assessments under sections 143(2) and
144. Now, it will also apply to assessments, reassessments and
recomputation u/s 147.

(ii) At present, the time limit for a
reply to a notice u/s 143(2) is 15 days from the receipt of notice. This
time limit is removed. Now, the time limit will be stated in the notice
u/s 143(2).

(iii) The concept of Regional Faceless Assessment Centre is done away with.

(iv)
It is now specified that the Assessment Unit can seek the assistance of
the Technical Unit for (a) determination of Arm’s Length Price, (b)
valuation of property, (c) withdrawal of registration and (d) approval,
exemption or any other matter.

(v) The procedure for Assessment
Unit (AU) preparing the draft assessment order and revising the same on
getting comments has been done away with. Now, AU has to state in
writing if no variations are proposed to the returned income. If
variations are proposed a show-cause notice is to be issued to the
assessee. On receipt of the response from the assessee, the National
Assessment Centre shall direct the AU to prepare a draft order, or it
can assign the matter to the Review Unit.

(vi) After receiving
the suggestions from the Review Unit, the National Assessment Centre has
to assign the case to the same AU which had prepared the draft order.
In the old scheme, the case had to be assigned to another AU. To this
extent, the new provision that the matter goes back to the original AU
which made the draft order is a welcome change.

(vii) In the old
scheme, there was no provision for referring the case for special audit
u/s 142(2A). Now, it is provided that if AU is of the opinion that
considering the complexity of the case, it is necessary to get special
audit done, it can refer the matter to the National Assessment Centre.

(viii)
Under the old scheme, a request for a personal hearing through video
conferencing could be granted only if the Chief Commissioner or Director
General approved the same. This provision is now amended and it is
provided that if the request for personal hearing is made by the
assessee, the Income tax Authority of the concerned Unit has to allow
the same through video conferencing. This is a welcome provision.

(ix)
At present, section 144B(9) provides that the assessment shall be
considered non-est if the same is not made in accordance with the
procedure laid down u/s 144B. This provision is now deleted with retrospective effect from 1st April, 2021. This is very unfair. It removes the safeguard, which ensured that the department would follow the procedure u/s 144B.

(x)
At present, section 144B(10) provides that the function of the
verification unit can be assigned to another verification unit. This
sub-section is now deleted from 1st April, 2022.

12. TO SUM UP

12.1
Contrary to the declared policy of the present government, there are
more than a dozen amendments in the Income-tax Act which have
retrospective effect. In particular, the amendment to disallow surcharge
and cess while computing business income is retrospective and applies
from A.Y. 2005-06. Further, such a claim made by an assessee based on
the High Court decision will be subject to a levy of penalty if the
assessee does not recompute the total income for that year and pay the
tax within the specified time. It is not clear whether interest on the
tax due will be payable. The AO is given time up to 31st March, 2026 to
pass the rectification order u/s 154 and levy penalty u/s 270A. Such
type of retrospective amendment is very harsh and may not stand judicial
scrutiny.

12.2 It is true that there is no increase in the rates
of taxes, and some relief is given to specific entities in the matter
of rates of surcharge. The only new tax levied is on Virtual Digital
Assets (VDA). This is a new type of asset, and some issues will arise
while computing the income from transactions relating to VDAs. The CBDT
will have to clarify issues relating to the valuation and reporting of
transactions.

12.3 Significant amendments were made in the
Finance Act 2020 and 2021 in the provisions relating to Charitable
Trusts and Institutions claiming exemption u/s 10(23c) and 11. This
year, some further amendments are made to these provisions. Some of
these amendments are beneficial to Charitable Trusts and Institutions.
However, the manner in which the amendments are worded creates a lot of
confusion. It is necessary that a separate chapter is devoted in the
Income-tax Act, and all provisions of sections 10(23c), 11, 12, 12A,
12AA, 12AB, 13 etc., dealing with exemption to these Trusts and
Institutions are put under one heading. This chapter should deal with
rate of tax, interest, penalty etc., payable by such Trusts and
Institutions. This will enable the person dealing with Public Trusts and
Institutions to know their rights and obligations.

12.4 The
scope for deduction of tax at source (TDS) has been extended to two more
items. New section 194-R has been added, and TDS provisions will now
apply to the value of benefit or perquisite given to a person engaged in
business or profession. Further, under the new section 194-S, the TDS
provisions apply to the transfer of VDA. These provisions will increase
the compliance burden of assessees.

12.5 Significant amendments
are made in the provisions relating to computation of ‘Income from
Business or Profession’. Now, expenditure incurred in relation to exempt
income will be disallowed even if no exempt income is received.
Further, the value of any benefit or perquisite provided to a person
where acceptance of such benefit or perquisite is prohibited by any law,
rule or guidelines governing the conduct of such person will be
disallowed. This will affect most of the pharmaceutical and other
companies providing such benefits or perquisites to their agents or
dealers.

12.6 Another damaging provision introduced by new
section 79A relates to denial of adjustment of current years or carried
forward loss or unabsorbed depreciation against specified undisclosed
income. This provision comes into force from A.Y. 2022-23 (F.Y.
2021-22).

12.7 The amendment to section 68, putting the burden of
proving the source of the money in the hands of the person from whom
funds are borrowed is another amendment that will increase the
compliance burden of the assessees. Now assessees will have to maintain
evidence about the source of funds in the hands of the lender. This is
going to be difficult.

12.8 A new provision is made in section
139 (8A), allowing the assessee to file a belated return of income
within 24 months after the end of the specified time limit for filing a
revised return. There are several conditions attached to this provision.
Further, interest, fees for late filing, and additional tax is payable.
Reading these conditions, it is evident that such belated return cannot
be filed to claim any relief in tax. Thus, very few persons will be
able to take advantage of this provision.

12.9 Taking an overall
view of the amendments made in the Income-tax Act this year, one can
take the view that it is a mixed bag. There are some retrospective
amendments which are very harsh. There are some amendments which are
with a view to give some relief to assessees but they are attached with
several conditions. In this effort, the Income-tax Act has become more
complex, and the Government’ declared objective to simplify the tax laws
is not achieved.

(This article summarises key direct tax
provisions. Because of the extensive amendments, provisions related to
updated returns, penalties and prosecution, IFSC, appeals and revisions,
and certain other amendments are excluded due to space constraints –
Editor)

shailesh.kwebmaker

Where revenue had been duly informed about dissolution of trust and still chose to continue proceeding on dissolved entity which was no more in existence, such trust was a substantive illegality and not a procedural violation of nature adverted to in section 292B

5 Varnika RPG Trust vs. PCIT
[2021] 91 ITR(T) 1 (Delhi-Trib.)
ITA No.: 451 to 453 (Delhi) of 2021
A.Y.: 2016-17;
Date of order: 9th September, 2021

Where revenue had been duly informed about dissolution of trust and still chose to continue proceeding on dissolved entity which was no more in existence, such trust was a substantive illegality and not a procedural violation of nature adverted to in section 292B

FACTS
Assessee trust was formed for the sole benefit of the settlor’s minor grand-daughter.

As per the trust deed, all the trust property including accumulation of yearly income along with the rights of ownership, use, possession and dispossession, were to vest with the granddaughter on attaining majority or on 31st March 2015, whichever was later and the term of the trust would expire on such date. The beneficiary attained majority on 3rd September, 2015 (i.e. A.Y. 2016-17).

Regular Assessment was completed u/s 143(3) in the year 2018 wherein it was brought on record that the trust stood dissolved from 3rd September, 2015 on account of granddaughter attaining majority. However, the PCIT on 15th March, 2021 initiated the revisionary proceedings u/s 263 against the assessee trust and revised the assessment order. The assessee contended that the order passed by the PCIT was invalid as the said trust was not in existence as on the date of initiating such revisionary proceedings.

HELD
The ITAT held that the trust was in existence only upto A.Y. 2016-17 and that the revenue had been duly informed about the dissolution of trust; but still the PCIT chose to continue the proceeding on the dissolved entity which was no more in existence. Hence, impugned order passed by the PCIT u/s 263 in the name of the dissolved trust was a substantive illegality and not a procedural violation of the nature adverted to in section 292B. It therefore held that the order passed on non-existent entity was a nullity.

In arriving at the conclusion, the ITAT applied the ratio of the judgment in Pr. CIT vs. Maruti Suzuki India Ltd. [2019] 107 taxmann.com 375/265 Taxman 515/416 ITR 613 (SC).

shailesh.kwebmaker

Proviso to section 68 inserted vide Finance Act, 2012 requiring the Assessee to prove source in respect of share premium money; operates prospectively from A.Y. 2013-14. Merely because the lender parties did not respond to summons/notices of the Assessing Officer; that cannot be sole ground to make addition u/s 68 when otherwise the documentary evidences were duly produced by the Assessee

4 AdhoiVyapar (P.) Ltd. vs. ITO
[2021] 91 ITR(T) 582 (Mumbai-Trib.)
ITA No.: 7308 to 7311 (MUM.) of 2019
A.Ys.: 2009-10 to 2012-13;
Date of order: 1st October, 2021

Proviso to section 68 inserted vide Finance Act, 2012 requiring the Assessee to prove source in respect of share premium money; operates prospectively from A.Y. 2013-14. Merely because the lender parties did not respond to summons/notices of the Assessing Officer; that cannot be sole ground to make addition u/s 68 when otherwise the documentary evidences were duly produced by the Assessee

FACTS
Assessee-company received share application money from various parties. As evidence, the assessee furnished various documents like share application form, PAN Card, confirmation from share-applicants regarding investment, relevant pages of bank passbook/statement, income-tax acknowledgement for the year, statement of income, financials for the relevant year and letter of allotment. It also submitted copies of Board Resolution, Memorandum and Articles of Association in case of corporate applicants. The assessee summarized the net worth position of all the share-applicants which substantiated that all the entities had sufficient net worth to make the investment in the assessee-company and were filing their ITRs since past several years ranging from 5 to 15 years.

Because few of the applicants failed to respond to summons u/s 131, the Assessing Officer concluded that the receipts shown by the assessee were accommodation entry in the garb of share capital /share premium and made addition u/s 68. It also alleged that commission payments must have been made for the same and made some addition u/s 69C also. The CIT(A) upheld the said addition.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD
The ITAT allowed the assessee’s appeal on the following grounds:

The ITAT observed that the shareholder entities had sufficient net worth to invest in the assessee-company. It was also observed that there was no immediate cash deposits before making investment in the assessee company.

As regards attendance of summons u/s 131, the ITAT concluded that the assessee does not have any legal power to enforce the attendance of the share-applicants.

The ITAT also remarked that as the said year was the first year of operation, it was difficult to presume that the assessee generated unaccounted money in the first year itself and routed the same in the garb of share-application money.

Therefore, on the above grounds, the ITAT concluded that assessee had discharged the initial onus of proving these transactions in terms of the requirements of Section 68 and the onus had shifted on Assessing Officer to dislodge the assessee’s documentary evidences and bring on record cogent material to substantiate his adverse allegations. The additions made could not be sustained merely on the basis of suspicion, conjectures and surmises.

The proviso to Section 68 as inserted vide the Finance Act, 2012 requiring the assessee to substantiate the source of share application/premium money was applicable only from A.Y. 2013-14, and the same is not retrospective in nature. Therefore, the assessee was not even otherwise obligated to prove the source of share application money in the years under consideration which is A.Ys. 2009-10 to 2012-13.

Thus, the addition made u/s 68 was deleted. Consequently, the addition made u/s 69C was also deleted.

shailesh.kwebmaker

Where source of funds is clearly established, clubbing provisions do not apply

3 Abhay Kumar Mittal vs. DCIT
[TS-152-ITAT-2022 (Delhi)]
A.Y.: 2013-14; Date of order: 8th February, 2022
Sections: 10(13A), 64

Where source of funds is clearly established, clubbing provisions do not apply

FACTS
The assessee, an individual, in his return of income, claimed exemption of HRA in respect of rent of Rs. 5,34,000 paid by him to his wife. The Assessing Officer (AO), in the course of assessment proceedings, asked the assessee to explain the capacity of the assessee’s wife to purchase the property giving details of sources of funds for the same. The assessee explained that the property was worth Rs. 1.15 crore of which amount of Rs. 87.50 was funded by the assessee himself, and the balance was invested out of her own sources. The AO noticed that the assessee’s wife, in fact, had no independent source of income to make the investment in FDRs and a major share of Rs. 87.50 lakh was funded by the assessee. The AO held that rental income earned by the assessee’s wife is liable to be clubbed in the hands of the assessee since the investment to have purchased the property was made by her without having an independent source of income. The AO clubbed the rental income of Rs. 5,34,000 after allowing deduction u/s 24 and made an addition of Rs. 3,73,800 in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO by holding that the contention that the investment has been made by her out of her independent source is not acceptable. He relied on the income summary statement of the assessee’s wife for A.Ys. 2001-02 and 2003-04 wherein she had shown income from profession of Rs. 57,400 and Rs. 1,48,900 respectively. He also relied on total income shown in ITR filed from A.Ys. 2001-02 to 2012-13.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal found that the assessee’s wife, who has low returned income, had received a loan from the assessee, which has been repaid by her from the redemption of mutual funds and liquidation of fixed deposits. It held that there is no bar on the part of the assessee to extend a loan from his known sources to his wife. Similarly, there is no bar on the assessee’s wife to repay the loan from her own mutual funds and fixed deposits. The assessee has paid house rent and the recipient, wife of the assessee, declared the same under the head `income from house property’ in her returns which has been accepted by the revenue. It held that the observations of the CIT(A) that the assessee’s wife has got meagre income hence she cannot afford to purchase a house was found to be not acceptable as the source for the purchase of the house in her hands are proved and never doubted. It also held that the contention of the CIT(A) that the husband cannot pay rent to the wife is devoid of any legal implication supporting any such contention. The Tribunal allowed the appeal filed by the assessee.

shailesh.kwebmaker

For the purpose of section 54, it is the date of possession which should be taken as the date of purchase and not the date of registration of agreement for sale

2 Raj Easow vs. ITO
[TS-155-ITAT-2022 (Mum.)]
A.Y.: 2015-16; Date of order: 8th March, 2022
Section: 54

For the purpose of section 54, it is the date of possession which should be taken as the date of purchase and not the date of registration of agreement for sale

FACTS
In May 2011, the assessee, along with his wife booked a residential flat (Flat No 203) in an under construction building named `Bankston’ at Thane (a new house) for a consideration of Rs. 1,40,51,500. In December 2012, the assessee made majority payments to the builders by availing a mortgage/housing loan. Thereafter, on 21st May, 2014, the assessee and his wife, being co-owners holding 50% share, sold a residential house (original house) and utilised the sale proceeds for making repayment of housing loan taken for new house.

In the return of income for A.Y. 2015-16, the assessee claimed a long-term capital gain of Rs. 79,92,015 arising on transfer of original asset as a deduction u/s 54 of the Act. According to the Assessing Officer (AO), the new house was purchased on 15th February, 2012 being the date on which the agreement for sale dated 7th February, 2012 was registered. Since this date was 2 years and 3 months prior to the date of sale of the original house The AO denied the benefit of deduction u/s 54 on the ground that the assessee has not purchased a new residential house within a period specified in section 54, which is one year before or two years after the date of sale of the original asset.

Aggrieved, the assessee preferred an appeal to CIT(A), who moving on the premise that the date of registration of agreement for sale is to be considered as the date of purchase of new residential house, decided the appeal against the assessee holding that purchase of the property was beyond the specified period of 2 years. The CIT(A) also rejected the alternative argument that since the property being purchased was under construction, the benefit of section 54 of the Act can be extended to the assessee by treating the transaction as a case of ‘construction’ and not ‘purchase’ and since the construction was completed and possession of new house taken on 2nd April, 2016, which date is within 3 years from the date of original asset.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal, having noted that the AO and CIT(A) have taken 15th February, 2011, the date of registration of agreement for sale as the date of purchase, proceeded to examine the nature of this agreement and its terms. It observed that the said agreement is not a sale / conveyance deed but only an agreement for sale entered into between the builders who have agreed to sell to the assessee a flat in a multi-storied building. It also observed that when the agreement for sale was registered, the multi-storied building was not yet constructed and the obligation of the assessee to make the payment is linked to construction. The agreement was required to be registered and was governed by provisions of MOFA. Having noted the provisions of section 4 of MOFA and clause 53 of the agreement for sale, held that the purchaser is put in possession only as a licensee and to that extent, the assessee acquired an interest in the premises on entering into possession. Since by that date the assessee has already paid entire/majority of consideration for purchase, it held that the assessee has on the date of taking possession purchased the property for the purposes of section 54 of the Act as has been held by the Bombay High Court in CIT vs. Smt Beena K. Jain 217 ITR 363. The Tribunal held that the date on which possession is taken by the assessee (i.e. 2nd April, 2016) should be taken as the date of purchase. The requirement of section 54 is that the assessee should purchase a residential house within the specified period, and the source of funds is quite irrelevant. Since the date of purchase falls within 2 years from the date of sale of original house it held that the assessee is entitled to benefit of deduction u/s 54. It observed that the alternate contention of the assessee that the benefit of section 54 be granted to the assessee by treating the transaction as a case of construction is now academic and does not require consideration.

shailesh.kwebmaker

On maturity of life insurance policy, where section 10(10D) does not apply, it is only net income which is chargeable to tax

1 Sandeep Modi vs. DCIT
[TS-184-ITAT-2022 (Kol.)]
A.Y.: 2017-18; Date of order: 4th March, 2022
Sections: 10(10D), 56

On maturity of life insurance policy, where section 10(10D) does not apply, it is only net income which is chargeable to tax

FACTS
The assessee, an individual, took a single premium life insurance policy from SBI Life Insurance Co. Ltd., paying a premium of Rs. 10,00,000. The policy was to mature after three years. No deduction was claimed u/s 80C. During the previous year relevant to the assessment year under consideration, on the maturity of the policy, the assessee received a sum of Rs. 13,09,000 and included a sum of Rs. 3,09,000 in his total income under the head `Income from Other Sources’.

When the return of income was processed by CPC, a sum of Rs. 10,00,000 was added to the total income under the head Income from Other Sources. Aggrieved, the assessee preferred an application for rectification u/s 154 of the Act. The assessee’s application was rejected without giving any specific reason for rejection.

Aggrieved, the assessee preferred an appeal to CIT(A), who confirmed the action of the CPC in enhancing the total income by Rs. 10,00,000, which according to the assessee, was premium paid by the assessee to SBI Life Insurance Co. Ltd.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that since SBI deducted 1% TDS on the entire receipt of Rs. 13,09,000, the CPC, while processing the return of income found that out of Rs. 13,09,000 received by the assessee, only Rs. 3,09,000 has been offered for taxation and, therefore, the balance of Rs. 10,00,000 was added as income of the assessee. It also noted that vide the Finance Bill, 2019, while increasing the TDS rate from 1% to 5% the problem has been taken note of. “…… Several concerns have been expressed that deducting tax on gross amount creates difficulties to an assessee who otherwise has to pay tax on net income (i.e. after deducting the amount of insurance premium paid by him from the total sum received). From the point of view of tax administration as well, it is preferable to deduct tax on net income so that income as per TDS return of the deductor can be matched automatically with the return of the income filed by the assessee. The person who is paying a sum to a resident under a life insurance policy is aware of the amount of insurance premium paid by the assessee.”

The Tribunal, upon noting the above-stated observations as well as taking note of the contention of the assessee that the addition of Rs. 10,00,000 tantamounts to double taxation and also the fact that the assessee had neither availed any deduction u/s 80C of the Act in respect of premium paid to SBI nor claimed any deduction u/s 10(10D) of the Act and offered Rs. 3,09,000 for tax in his return of income held that the addition made by the AO is not warranted.

shailesh.kwebmaker

S. 264 – Revision – Maintainability – Error / Mistake committed by assessee – Application maintainable

2 Hapag Lloyd India Pvt. Ltd. vs. Principal Commissioner of Income-Tax, Mumbai – 5;
[W.P. No. 2322 of 2021;
Date of order: 9th February, 2022
(Bombay High Court)]

S. 264 – Revision – Maintainability – Error / Mistake committed by assessee – Application maintainable

The Petitioner is a private limited company. It is a successor of United Arab Shipping Agency India Company Pvt. Limited (‘UASAC’), which amalgamated with the Petitioner with effect from 1st April, 2019, pursuant to an order by National Company Law Tribunal. The UASAC, the predecessor company, had distributed a dividend of Rs. 10,16,75,641 to its holding company, United Arab Shipping Company Limited, a company incorporated under the laws of Kuwait. The UASAC paid Dividend Distributed Tax (‘DDT’) at 16.91% (including surcharge and cess), aggregating to Rs. 2,06,99,127. A return of income for A.Y. 2016 – 2017 was filed by UASAC on 30th November, 2016. A revised return of income was filed on 23rd December, 2016.

In the original as well as revised return, the benefit of Article 10 of India – Kuwait DTAA was, however, not claimed. Under the said article, the dividend distributed during F.Y. 2015–2016, was taxable at 10%. The Petitioner was, thus, entitled to a refund of Rs. 84,61,650, being the excess tax paid. The Petitioner thus preferred an application u/s 264 of the Act before Pr.CIT / Respondent no. 1.

By the impugned order, Pr. CIT rejected the application as untenable primarily on the ground that the UASAC had not made a claim for the return of excess DDT at the time of filing original return of income as well as the revised return of income. Consequently, the assessment order u/s 143(3) was passed on 18th December, 2018. Thus, there was no apparent error on the record in the said assessment order which warranted exercise of jurisdiction u/s 264 of the Act.

The Petitioner has invoked the writ jurisdiction on the ground that Pr.CIT has completely misconstrued the scope of jurisdiction u/s 264. This incorrect approach of Pr.CIT has resulted in an unjustified refusal to exercise the jurisdiction vested in him by Section 264 of the Act.

The Petitioner submitted that Pr.CIT committed a grave error in law in holding that an application u/s 264 was not maintainable when the assessee had not made a claim for refund of excess tax paid in the original return. The Petitioner submitted that the view of Pr.CIT that, for the exercise of jurisdiction u/s 264 of the Act, the order impugned ought to be apparently erroneous, is completely misconceived. Under Section 264 of the Act, the Commissioner is empowered to call for the record of any proceeding and make an inquiry or cause an inquiry to be made and thereafter pass such order, as he thinks fit, but not being one prejudicial to the assessee. The scope is thus not restricted to correction of error apparent on the face of the record.

In opposition to this, the Respondent sought to justify the impugned order on the premise that the refund was not claimed in the original as well as revised return and thus the order passed u/s 143(3) by the Assessing Officer, which was sought to be revised cannot be said to be prejudicial to the assessee and, therefore, Respondent was well within his rights in refusing to exercise the revisional jurisdiction.

The Hon. Court observed that on the perusal of the aforesaid reasons, it becomes evident that two factors weighed with Respondent no. 1. First, the assessee had not claimed a refund in the original and revised return and, thus, there was no error in the assessment order passed u/s 143(3) on 18th December, 2018. Second, Respondent no. 1 was of the view that the jurisdiction u/s 264 was confined to correct the order, which is found to be apparently erroneous.

The Court observed that the Respondent no. 1 was justified in recording that the assessee had not claimed a refund of excess tax paid by it in the original and revised return. However, Respondent no. 1 committed an error in constricting the scope of revisional jurisdiction in the backdrop of the said undisputed factual position. In fact, the very foundation of the application u/s 264 was that the assessee had inadvertently failed to claim the benefit of Article 10 of the India – Kuwait DTAA, under which the dividend distribution was taxed at a lower rate. The Court held that the approach of Respondent no. 1 in refusing to exercise the jurisdiction u/s 264, on the premise that it can be lawfully exercised only where such a refund was claimed and considered by the Assessing Officer is neither borne out by the text of Section 264 nor the construction put thereon by the precedents.

The aforesaid reasoning indicates that Respondent no. 1 failed to appreciate the distinction between revisional and review jurisdiction. The principles which govern the exercise of review were sought to be unjustifiably imported to the exercise of power u/s 264 and thereby imposing limitations which do not exist on exercise of such power. Undoubtedly, revisional jurisdiction is not as wide as an appellate jurisdiction. At the same time, revisional jurisdiction cannot be confused with the power of review, which by its very nature is limited. The Division Bench Judgment of this Court in the case of Geekay Security Services (P) Ltd. vs. Deputy Commissioner of Income Tax, Circle – 3(1)(2) [2019] 101 taxmann.com 192 (Bombay) wherein the Court considered an identical question as to whether the revisional authority was justified in rejecting the revision application solely on the ground that the applicant had not claimed the benefit in the original return. Section 264 does not limit the power to correct errors committed by the sub-ordinate authorities and could even be exercised where errors are committed by the assessee and there is nothing in Section 264 which places any restriction on the Commissioner’s revisional power to give relief to the assessee in a case where assessee detects mistakes after the assessment is completed.

The Court held that since Pr.CIT / Respondent no. 1 has not considered the revision application on merits, matter was remitted back to Pr.CIT for de novo consideration on merits.

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S. 80IB (10) – Housing Project – commencement of development of residential project – Date of approval/ sanction – Developer – Eligibility

1 Commissioner of Income Tax-24 vs. Abode Builders;
[Income Tax Appeal No. 2020 of 2017;
Date of order : 16th February, 2022
(Bombay High Court)]

S. 80IB (10) – Housing Project – commencement of development of residential project – Date of approval/ sanction – Developer – Eligibility

Assessee Firm is a developer and builder who developed a residential project called ‘Trans Residency’ on a piece of land admeasuring 12,540 sq. metres in the Andheri Area of Mumbai. The assessee firm entered into a Joint Venture Agreement with another concern M/s. Vaman Estate to develop the property vide agreement dated 28th August, 2001. The residential project ‘Trans Residency’ has 7 wings in Building No. I (A to G) and 3 wings in building No. III (A to C). The construction activity was undertaken for Wings E & F first, and residential units were sold before 31st March, 2005. The project for E & F Wing was completed in 2005 and profits were offered for tax (deduction u/s 80IB was claimed on the same) in the return of income filed for A.Y. 2005-06, while the rest of the project was completed in March, 2007, and proceeds on sale of residential units was shown in the return of income filed for A.Y. 2007-08. The return of income was filed on 19th October, 2007, declaring a total income of Rs. 18,16,656. The only addition was made on account of disallowance of claim u/s 80IB(10) of the Income Tax Act, 1961, amounting to Rs. 17,94,05,681.

The Assessing Officer (AO) scrutinized the assessee’s claim keeping in view two major criteria having a direct bearing on the legitimacy of the claim. The AO observed that the land on which the Trans Residency Project had been built was not owned by the assessee but by Malad Satguru Sadan CHS Ltd. and that the Conveyance Deed for the said land had been executed in the name of the society in pursuance to the directions of the High Court vide Consent Decree passed on 18th July, 1995. The AO also noted that the assessee had been engaged as a ‘developer’ by the Malad Sadguru Sadan CHS and has made payment on behalf of the society. Based on this, the AO concluded that the assessee was not the owner of the said land. Then the AO proceeded to examine whether the assessee could be considered as a developer. The AO observed that the assessee entered into a Joint Venture Agreement with M/s. Vaman Estate on 28th August, 2001 and observed that as per the agreement, the development and construction of the building was to be done by M/s. Vaman Estate at its own cost, and both the parties were to share the gross sale proceeds in the ratio of 50:50. The AO concluded that the assessee did not incur any expenditure on the project, nor did he do any construction activity, and the proceeds from the project were its net profit. The AO observed that once the Joint Venture Agreement was entered into, the status of the assessee changed from that of a ‘developer’ to that of a ‘facilitator’. The AO, thus, observed that the assessee was neither ‘the owner’ nor ‘the Developer’ of the property, and accordingly, the assessee was not eligible for claiming deduction u/s 80IB(10).

A supplementary agreement had been executed between the assessee and M/s. Vaman Estate on 14th March, 2005. Based on various clauses of both the above-mentioned agreements, the AO concluded that the BMC had given sanction to the Plan submitted by the assessee through letter dated 21st September, 1996. He observed that the Explanation to section 80IB(10) of the Act stipulated that where the approval for the concerned project was given more than once, the date of initial approval would be the operative date of approval. Thus, the assessee was not eligible to claim deduction u/s 80IB(10). Accordingly, the AO rejected the assessee’s claim of deduction u/s 80IB(10) of the Act amounting to Rs. 17,94,05,681. The assessment was completed u/s 143(3) of the Act on 24th December, 2009, assessing the total income at Rs. 18,12,22,340.

The Respondent-Assessee firm challenged this order before the Commissioner of Income Tax (Appeals). The CIT (Appeals) allowed the claim of deduction under section 80IB(10) of the Act. Aggrieved by this order of CIT (Appeals), Revenue preferred an appeal before the Income Tax Appellate Tribunal, Mumbai (‘ITAT’). The ITAT dismissed the appeal by an order dated 26th August, 2016.

The Hon. Court observed that the Revenue had originally raised three points, namely, (a) lack of ownership of land on which the project was constructed; (b) Assessee not having invested in the construction activity or done construction, could not be considered as a developer; and (c) Project was approved and commenced before the stipulated date of 1st October,1998. On these three grounds, the claim of the assessee under section 80IB(10) of the Act was denied by the Assessing Officer.

The Court observed that as regards the first issue regarding the ownership of the land, though it was raised before the ITAT, has not been raised in this present appeal. The ITAT has given a finding of fact which is not disputed inasmuch as the ITAT has observed that Respondent through, its partner one Liaq Ahmed, has been involved in the project right from the beginning with the signing of the Principal Agreement and primary acquisition of the development rights for the land in question. The AO has not even disputed that Intimation of Disapproval (‘IOD’) issued by the Municipal Corporation was in the name of assessee. So also the Commencement Certificate (CC). It is also noted that all tax related to the land in question were paid by the assessee from 1998 onwards. It is also noted that assessee has even made payment for the development rights. What the AO has missed out is unless the Respondent had any role in the development of the project, the joint venture partner would not agree to share 50% profit in the project with the assessee. Therefore, on this issue, the Court agreed with the findings of ITAT.

As regards the other objection that the project was commenced much before the stipulated date of 1st October, 1998, it was argued that the assessee had submitted the original Plan to the concerned authorities on 7th November, 1996 for which the IOD was granted in 1997, and therefore, even if a subsequent IOD has been obtained, as per the Explanation to section 80IB(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.

The Court further observed that the ITAT has once again come to a finding of fact that the project, as completed, was different from the project for which initial approval had been obtained. It is true that the original plan which was submitted and for which IOD was granted was in 1997. The life of the IOD once granted as per the Maharashtra Regional Town Planning Act, 1966 is four years. This finding has not been disputed by the Revenue. The original Lay-out Plan became invalid after 7th January, 2001. The assessee applied for IOD for the second time on 22nd November, 2001 and was granted permission on 21st July, 2002. The ITAT has come to a conclusion on facts, which is also not disputed, that the second project proposal was for only three buildings as against the four for which the permission was sought earlier, and IOD for different buildings was granted on different dates. The ITAT has concluded that, therefore the project for which permission was granted on 24th July, 2002 was not the same as that, for which the IOD lapsed in 2001.

The Court held that Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed, and correct test is applied to decide the issue at hand, then, no substantial question of law arises in the matter. The appeal was accordingly dismissed.

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Settlement of cases — Interest u/s 220(2) — Order of Commissioner (Appeals) directing AO to withdraw investment allowance granted u/s 32A set aside by Tribunal — Order passed by Settlement Commission reducing interest u/s 220(2) — Need not be interfered with

8 UOI vs. Dodsal Ltd.
[2022] 441 ITR 47 (Bom)
A.Y.: 1989-90; Date of order: 9th December, 2021
Ss. 32A, 156, 220(2), 245D(4) of ITA, 1961

Settlement of cases — Interest u/s 220(2) — Order of Commissioner (Appeals) directing AO to withdraw investment allowance granted u/s 32A set aside by Tribunal — Order passed by Settlement Commission reducing interest u/s 220(2) — Need not be interfered with

For the A. Y. 1989-90, the Assessing Officer passed an order u/s 143(3) of the Income-tax Act, 1961. The assessment order was rectified u/s 154 on 27th July, 1992 revising the total income after allowance of set-off of unabsorbed investment allowance brought forward from the A.Ys. 1986-87, 1987-88 and 1988-89. The assessee made an application u/s 245C before the Settlement Commission, which passed an order u/s 245D(4). The Assessing Officer gave effect to the order u/s 245D(4) and also calculated the interest payable u/s 220(2). The quantum of interest was rectified, and a revised order was passed. The assessee sought rectification of the order passed by the Settlement Commission on the ground that since the order u/s 245D(4) was silent on the point of charging interest u/s 220(2), it should be considered to have been waived. The Settlement Commission held that it did not consider it to be a good case for waiver of interest chargeable u/s 220(2). However, regarding the method of charging of interest, the Settlement Commission directed the Assessing Officer to take the income as determined by him in his order dated 27th July, 1992, adjust it in accordance with its order u/s 245D(4), but without withdrawing the benefit of set-off of brought forward investment allowance u/s 32A. The Department filed an application contending that the Settlement Commission could not have granted the assessee the benefit of set-off of brought forward investment allowance. The Settlement Commission rejected the application filed by the Department.

The Bombay High Court dismissed the writ petition filed by the Department and held as under:

“i) The language used in sub-section (2) of section 220 of the Income-tax Act, 1961 is that the interest on demand is payable by the assessee for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned in sub-section (1) and ending with the day on which the amount is paid. Accordingly, the first proviso to sub-section (2) of section 220 provides that where as a result of an appellate order, the amount on which interest was payable under this section is reduced, the interest shall be reduced accordingly. Therefore, the effect of the first proviso to sub-section (2) of section 220 will be that the amount on which the interest is payable under sub-section (2) of section 220 will get modified according to the appellate order. There can be variation in charging interest if ultimately due to the result of the appellate order, the liability to pay the original amount on which interest is levied u/s. 220 ceases, and accordingly, the assessee needs to be given the benefit of reduction in interest resulting in reduced payment of interest.

ii) According to the proviso to sub-section (2) of section 220, once the amount on which interest was charged got extinguished the liability of the assessee to pay interest on such amount would also be extinguished. The order of the Commissioner (Appeals) directing the Assessing Officer to withdraw the investment allowance granted u/s. 32A was set aside by the Tribunal. Therefore, interference with the orders passed by the Settlement Commission reducing the liability of the assessee to pay interest u/s. 220(2) would result in directing the assessee to pay interest on an amount which had been extinguished and consequently would result in miscarriage of justice.

iii) The power under article 226 of the Constitution of India needs to be exercised to prevent miscarriage of justice. It will be exercised only in furtherance of interest of justice and not merely on the making out of a legal point.

iv) Therefore, we refuse to interfere in the exercise of power under article 226 of the Constitution of India in its extraordinary discretionary jurisdiction. The petition stands dismissed.”

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Return of income — Revised return — Delay in filing revised return since sanction from National Company Law Board for demerger was received after expiry of time limit for filing revised return — Rejection of revised return not valid

7 Deep Industries Ltd. vs. Dy. CIT
[2022] 441 ITR 307 (Guj)
A.Y.: 2018-19;
Date of order: 29th September, 2021
S. 139(5) of ITA, 1961

Return of income — Revised return — Delay in filing revised return since sanction from National Company Law Board for demerger was received after expiry of time limit for filing revised return — Rejection of revised return not valid

The company DIL had its business of oil and gas exploration and production and oil and gas services. It decided to demerge its oil and gas services business, and a scheme of arrangement was formulated and a company application was moved before the National Company Law Tribunal. The scheme of arrangement was sanctioned on 17th March, 2020, and the appointed date was 1st April, 2017. The certified copy of the scheme was received on 20th May, 2020, and it was filed with the Registrar of Companies on 20th June, 2020.

DIL had filed the original return of income for the A.Y. 2018-19 on 30th March, 2019. On the sanction of the scheme being effective from 1st April, 2017 the erstwhile DIL’s assets, liabilities, incomes, etc., were deemed to be that of the resulting company, the assessee. However, the time for filing the revised return for the A.Y. 2018-19 had lapsed, and there was no mechanism to file it online. The assessee raised a grievance on the income tax portal on 26th June, 2020 through the e-Nivaran facility. Thereafter, it physically filed the revised return along with the letter dated 28th July, 2020, explaining the cause of revision. The Deputy Commissioner rejected the revised return of income filed by the assessee and passed an assessment order on a protective basis making an addition.

The Gujarat High Court allowed the writ petition filed by the assessee and held as under:

“i) Once there was no response to the grievance raised on the Income-tax portal, the assessee had physically filed the revised return on 28th July, 2020. The Department therefore ought to have considered the physical filing of the revised return.

ii) Resultantly, the assessment which has been finalized shall need to be quashed permitting the respondent to process considering the revised return which has been filed by the petitioner. If it is not filed in an electronic manner as has been reflected in the affidavit-in-reply, he should be permitted to do that by a specific order and granting him reasonable time of minimum one week to so do it. Otherwise, his physical copy which he has dispatched shall be taken into consideration.

iii) As a parting note the court needs to make a mention that the matter has travelled to this court only because the revised return was not permitted beyond the prescribed time limit as set under section 139(5) of the Act. Thus, the apex court in the case of Dalmia Power Ltd. vs. Asst. CIT [2020] 420 ITR 339 (SC) has categorically held and observed that section 119 of the Income-tax Act in such matters also would not be applicable and therefore, when the respondents are desirous of operating in the regimes of electronic mode and faceless assessment, it shall need to improvise the software and allow the revised return more particularly, when the law has been made quite clear by virtue of the direction of the apex court. Let care be taken in improvising the software wherever necessary since its limitations have tendency to swell the court litigation. The petitioner could have been saved from this ordeal, had such a care taken to permit the revised return in an electronic mode once the direction of the National Company Law Tribunal (NCLT) was communicated along with the decision of the apex court.”

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Reassessment — Notice u/s 148 after four years — Condition precedent — Failure by assessee to disclose material facts necessary for assessment — Notice not stating which fact had not been disclosed — Mere statement that there had been failure to disclose material facts is not sufficient — All documents and details submitted by assessee during original assessment and examined by TPO and original order passed by AO thereafter — No failure on part of assessee to disclose material facts fully and truly — Notice and reassessment on change of opinion — Impermissible

6 Skoda Auto Volkswagen India Pvt. Ltd. vs. ACIT
[2022] 441 ITR 74 (Bom)
A.Y.: 2004-05; Date of order: 4th December, 2021
Ss. 92CA(3), 143(3), 147, 148 of ITA, 1961

Reassessment — Notice u/s 148 after four years — Condition precedent — Failure by assessee to disclose material facts necessary for assessment — Notice not stating which fact had not been disclosed — Mere statement that there had been failure to disclose material facts is not sufficient — All documents and details submitted by assessee during original assessment and examined by TPO and original order passed by AO thereafter — No failure on part of assessee to disclose material facts fully and truly — Notice and reassessment on change of opinion — Impermissible

For the A.Y. 2004-05, the Assessing Officer issued a notice u/s 148 of the Income-tax Act, 1961 after four years for reopening the assessment u/s 147. The reasons recorded stated that on verification of the records it was found that the assessee had capitalized an amount paid towards lump sum payment of technical know-how fees and claimed depreciation but had calculated the operating loss considering the actual payment of technical know-how fees instead of only the depreciation as claimed by the assessee, that therefore, the working profit calculated by the assessee was not correct and that the arm’s length price calculated was short by Rs. 116.20 crores and hence such amount had escaped assessment within the meaning of section 147. The assessee filed objections to the reopening. Before the objections were disposed of, various further notices were issued.

The assessee filed a writ petition and challenged the reopening. An ad interim stay was granted till the next date of hearing. However, when the stay did not get extended, reassessment was completed, and an order was passed pursuant to the order passed by the Transfer Pricing Officer on a reference made u/s 92CA(1). The Bombay High Court allowed the writ petition and held as under:

“i) The reasons recorded for reopening were based on a change of opinion which was not permissible. The proviso to section 147 applied and the Assessing Officer had to make out a case that income chargeable to tax had escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. The reasons recorded did not indicate which were those material facts that the assessee had failed to truly and fully disclose.

ii) The assessee had in its annual report mentioned the technical know-how fee, royalty and technical assistance fee that it had paid and had also filed form 3CEB in which it had disclosed the details and description of the international transactions in respect of technical know-how and patents and regarding the royalty paid and lump-sum fees paid for the technical services. Before the original order was passed u/s. 92CA(3), the Transfer Pricing Officer also had raised all these queries and had considered the royalty, technical know-how fees paid. The assessee had not only filed its account books and other evidence but those had been considered by the Transfer Pricing Officer whose order also had been considered by the Assessing Officer while passing the original order u/s. 143(3). Therefore, there could be nothing which had not been truly and fully disclosed.

iii) The contention of the Department that Explanation 1 to section 147 provided that production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence should have been discovered by the Assessing Officer was no defence, was not tenable. The notice issued u/s. 148 and the reassessment order were quashed and set aside.”

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Non-resident — Income deemed to accrue or arise in India — Royalty — Meaning of “royalty” — Transfer authorising transferee to use licensed software — No transfer of copyright — Amount received cannot be termed royalty

5 EY Global Services Ltd. vs. ACIT
[2022] 441 ITR 54 (Del)
Date of order: 9th December, 2021
S. 9 of ITA, 1961

Non-resident — Income deemed to accrue or arise in India — Royalty — Meaning of “royalty” — Transfer authorising transferee to use licensed software — No transfer of copyright — Amount received cannot be termed royalty

EYGBS was an Indian company that provided back-office support and data processing services. It entered into an agreement with the EYGSL (UK) whereby it received ‘right to benefit from the deliverables and/or services’ from the UK company. The Authority for Advance Rulings held that the amount received was assessable as royalty in India.

The assessee company filed a writ petition and challenged the ruling. The Delhi High Court allowed the writ petition and held as under:

“a) In Engg. Analysis Centre of Excellence P. Ltd. vs. CIT [2021] 432 ITR 471 (SC), the Supreme Court observed that the definition of royalty that is contained in Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961 would make it clear that there has to be a transfer of “all or any rights” which includes the grant of a licence in respect of any copyright in a literary work. The expression “including the granting of a licence” in clause (v) of Explanation 2 to section 9(1)(vi) of the Act, would necessarily mean a licence in which transfer is made of an interest in rights “in respect of” copyright, namely, that there is a parting with of an interest in any of the rights mentioned in section 14(b) read with section 14(a) of the Copyright Act, 1957.

(i) Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts.

(ii) Copyright is an intangible, incorporeal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner.

(iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the other acts mentioned in section 14 of the Copyright Act.

(iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the “licensed” computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise.

(v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act.

(vi) The right to reproduce and the right to use computer software are distinct and separate rights.

b) For the payment received by the UK company from EYGBS to be taxed as “royalty”, it is essential to show a transfer of copyright in the software to do any of the acts mentioned in section 14 of the Copyright Act, 1957. A licence conferring no proprietary interest on the licensee, does not entail parting with the copyright. Where the core of a transaction is to authorise the end-user to have access to and make use of the licenced software over which the licensee has no exclusive rights, no copyright is parted with and therefore, the payment received cannot be termed as “royalty”.

c) EYGBS, in terms of the service agreement and the memorandum of understanding, merely received the right to use the software procured by the UK company from third-party vendors. The consideration paid for the use thereof therefore, could not be termed “royalty”. The rights acquired by the UK company from the third-party software vendors were not relevant. What was relevant was the agreement between the UK company and EYGBS. As the agreement did not create any right to transfer the copyright in the software, the payment would not fall within the ambit of the term “royalty”.

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Income — Income or capital — Investment of funds before commencement of operation in fixed deposits and mutual funds as per directive of Government — Income generated to be utilised for purposes of business of company — Income not revenue receipt

4 ClT vs. Bangalore Metro Rail Corporation Ltd.
[2022] 441 ITR 113 (Kar)
A.Ys: 2007-08 and 2008-09;
Date of order: 23rd November, 2021
S. 4 of ITA, 1961

Income — Income or capital — Investment of funds before commencement of operation in fixed deposits and mutual funds as per directive of Government — Income generated to be utilised for purposes of business of company — Income not revenue receipt

The assessee was a company incorporated under the Companies Act, 1956 and was a wholly-owned undertaking of the Government of Karnataka. It was established with the approval of Government of India to implement a rail-based mass rapid transit system in five years in five stages. The project’s cost was to be financed by both the Union and the State Governments. The assessee had received funds during the A.Y. 2007-08 which were not immediately required for execution of the project and these were invested in fixed deposits and mutual funds. As a result, interest and dividends were received. The assessee contended that the dividend income on mutual funds received from State Bank of India and Unit Trust of India was exempt u/s 10(35) of the Income-tax Act, 1961. Apart from this, the assessee also claimed a short-term loss of Rs. 5,02,05,005 arising out of redemption of units with a mutual fund. The Assessing Officer rejecting the contention of the assessee and brought the income of Rs. 10,30,48,755 that was earned by the company through deposits to tax.

The Tribunal held that the amount was not taxable.

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

“It was apparent that the unutilized funds of the project, before the commencement of the functional operation of the project, was invested by the assessee in fixed deposits and mutual funds as per the directions of the Government. A perusal of the Government order dated 25th March, 2008, it was clear that the income generated out of earlier release of State Government for its project would have to be converted into State’s equity towards the project and could not be counted as income of the assessee. Thus, there was no profit motive as the entire funds entrusted and the interest accrued therefrom had to be utilized only for the purpose of the scheme. Thus, it had to be capitalized and could not be considered as revenue receipts.”

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Charitable purpose — Exemption u/s 11:- (i) Charitable institution engaged in imparting education — Effect of proviso to s. 2(15) and CBDT circular No. 11 of 2008 [1] — Surplus income generated by educational activities — Would not affect entitlement to exemption u/s 11; (ii) Effect of s. 13 — Disqualification for exemption — Charitable institution running educational institution — Alleged excess of remuneration to employees — Revenue has no power to interfere — Exemption could not be denied

3 CIT(Exemption) vs. Krupanidhi Education Trust
[2022] 441 ITR 154 (Kar)
A.Ys.: 2009-10 and 2010-11;
Date of order: 20th September, 2021
Ss. 2(15), 11 & 13 of ITA, 1961

Charitable purpose — Exemption u/s 11:- (i) Charitable institution engaged in imparting education — Effect of proviso to s. 2(15) and CBDT circular No. 11 of 2008 [1] — Surplus income generated by educational activities — Would not affect entitlement to exemption u/s 11; (ii) Effect of s. 13 — Disqualification for exemption — Charitable institution running educational institution — Alleged excess of remuneration to employees — Revenue has no power to interfere — Exemption could not be denied

The assessee-trust ran various institutions in Bangalore offering degrees and training in various academic courses and was granted registration u/s 12A of the Income-tax Act, 1961. The Assessing Officer held that the assessee had violated the provisions of section 13(1)(c) of the Act and therefore, the assessee was not entitled to claim exemption u/s 11, 12 and 13 of the Act. The two trustees were being paid remuneration or salary not proportionate to the pay scales of a professor and administrative officer, respectively. The Assessing Officer completed the assessment for the A.Ys. 2009-10 and 2010-11 u/s 143(3) of the Act by order dated 30th December, 2011 denying the exemption u/s 11 of the Act and making certain additions.

The Commissioner (Appeals) and the Tribunal held that the assessee was entitled to exemption.

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

“i) Under Circular No. 11 of 2008 dated 19th December, 2008 ([2009] 308 ITR (St.) 5) issued by the CBDT having regard to the proviso inserted to section 2(15) amended by the Finance Act, 2008 wherein, it has been clarified that the newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i. e., relief of the poor, education and medical relief. Consequently, where the object of trust or institution is relief to the poor, education or medical relief, it will constitute “charitable purpose” even if it incidentally involves in carrying of commercial activities.

ii) The Revenue cannot sit in the armchair of an assessee and decide the pattern of working, methodology to be adopted for administration of an educational trust including the payment structure of salary or remuneration to be paid to the professors or administrative staff. In other words, the Department cannot manage or control the managerial affairs of the educational trust. These aspects would not come within the purview of the authorities to decide the Income-tax liability merely on suspicion that the assessee is claiming huge expenditure to get the corresponding benefits of allowable deductions.

iii) The Assessing Officer merely on surmises and conjectures had come to the conclusion that the salary and remuneration paid to the two trustees was highly excessive and not proportionate to the services rendered by them. The Department cannot regulate the management of the assessee-trust. Indeed, the salary or remuneration paid to the trustees were duly accounted and reflected in their returns as income. Merely on imagination, exemption u/s. 11 of the Act could not be denied.

iv) Hence, the substantial question of law deserves to be answered against the Revenue and in favour of the assessee.”

shailesh.kwebmaker

Business expenditure — Disallowance — Expenses prohibited in law — CBDT Circular No. 5 dated 1st August, 2012 disallowing expenses in providing free gifts or facilities to medical practitioners by pharmaceutical and allied health sector industry — Circular not applicable retrospectively — Expenses deductible for earlier years

2 Principal CIT vs. Goldline Pharmaceuticals Pvt. Ltd.
[2022] 441 ITR 543 (Bom)
A.Y.: 2010-11; Date of order: 14th January, 2022
S. 37(1) of ITA, 1961

Business expenditure — Disallowance — Expenses prohibited in law — CBDT Circular No. 5 dated 1st August, 2012 disallowing expenses in providing free gifts or facilities to medical practitioners by pharmaceutical and allied health sector industry — Circular not applicable retrospectively — Expenses deductible for earlier years

The assessee manufactured and traded in medicines. For the A.Y. 2010-11, the assessee claimed deduction u/s 37 of the Income-tax Act of expenditure incurred towards tour and travel expenses of medical practitioners to enable them to attend conferences held in different parts of the world. The Assessing Officer applied CBDT Circular No. 5 of 2012 and disallowed proportionate expenditure.

The Tribunal allowed the assessee’s claim and held that the disallowance of expenditure on the basis of Board’s Circular No. 5 of 2012, dated 1st August, 2012 was without merit.

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

“i) Under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 as amended on 10th December, 2009 the Medical Council of India imposed a prohibition on medical practitioners and their professional associations from taking any gift, travel facility, hospitality, cash or monetary grant from pharmaceutical and allied health sector industries. According to Circular No. 5 of 2012, dated 1st August, 2012 ([2012] 346 ITR (St.) 95) issued by the CBDT claim of any expense incurred in providing the aforesaid or similar freebees in violation of the provisions of the said regulations were held inadmissible u/s. 37(1) of the Income-tax Act, 1961 being an expense prohibited in law. It was further stated that such disallowance would be made in the hands of such pharmaceutical or allied health sector industries or other assessee which had provided such freebees.

ii) The Board’s Circular No. 5 of 2012, dated 1st August, 2012 could not have been applied retrospectively to the A.Y. 2010-11. The circular imposed a new kind of imparity and therefore, the Tribunal had consistently held that the Board’s Circular No. 5 of 2012 would not have any retrospective effect but would operate prospectively from 1st August, 2012. These decisions of the Tribunal were not assailed before the High Court. The Tribunal was justified in deleting the disallowance and its order need not be interfered with.”

shailesh.kwebmaker

Business expenditure — Capital or revenue expenditure — Capital work-in-progress written off — Salary and professional fees expenditure incurred in respect of projects abandoned to conserve cash flow — Revenue expenditure

1 Principal CIT vs. Rediff.Com India Ltd.

[2022] 441 ITR 195 (Bom)
Date of order: 29th September, 2021
S. 37 of ITA, 1961

Business expenditure — Capital or revenue expenditure — Capital work-in-progress written off — Salary and professional fees expenditure incurred in respect of projects abandoned to conserve cash flow — Revenue expenditure

The assessee abandoned some of its incomplete website projects, which were not expected to pay back. The assessee wrote off expenses on account of capital work-in-progress pertaining to such abandoned projects and claimed deduction thereof as revenue expenditure u/s 37 of the Income-tax Act, 1961. The Assessing Officer held that the expenditure was incurred for creating new projects and represented capital assets of its business that were to yield enduring benefit and that by claiming such expenditure under the head ‘capital work-in-progress’, the assessee itself had admitted that those expenses were capital in nature and disallowed the assessee’s claim of writing off ‘capital work-in-progress’.

The Tribunal held that the expenses incurred were in connection with the existing business and were of routine nature, such as salary and professional fees, and that the expenses were revenue in nature and allowed the assessee’s claim.

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

“The Tribunal’s view that if an expenditure was incurred for doing the business in a more convenient and profitable manner and had not resulted in bringing any new asset into existence, such expenditure was allowable business expenditure u/s. 37 was correct. The expenditure incurred was on salary and professional fees which was revenue in nature and did not bring into existence any new asset. There was no perversity or application of incorrect principles in its order. No question of law arose.”

shailesh.kwebmaker

EXTENDING THE SCOPE OF REASSESSMENT

ISSUES FOR CONSIDERATION

Section 147, applicable up to 31^st March, 2021, empowers an Assessing Officer (AO) to assess or reassesses the income in respect of any issue which has escaped assessment and which has come to his notice subsequent to the recording of reasons and the issue of a notice u/s 148, in the course of reassessment proceedings. The relevant part of the said section reads as under:

‘If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or re-compute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned.’

Section 147, effective from 1^st April, 2021, has dispensed with the condition of ‘reason to believe’. Instead, a new provision in the form of section 148A has been introduced to provide for compliance of a set of four conditions by an AO before issuing any notice u/s 148. The Explanation thereto empowers the AO to reassess an income in respect of an issue for which the four conditions of s. 148A has not been complied with.

This Explanation is materially the same as Explanation 3 of s. 147 applicable w.e.f. 1^stApril, 2021, with a change that reference to ‘reasons recorded’ is substituted by ‘compliance of s.148A of the Act’.

Explanation 3 to s. 147 was added w.r.e.f. 1st April, 1989 by Finance (No. 2) Act, 2009 for providing that the reassessment would be valid even where the reasons recorded did not include an issue that has escaped assessment. The said Explanation reads as under:

‘For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.’

On the insertion of Explanation 3 to s. 147 by the Finance (No.2) Act, 2009, the then-existing conflict between various decisions of the Courts regarding the expansion of the subject matter of reassessment beyond the reasons recorded, had been rested in cases where some addition or disallowance or variation was made in respect of the subject matter for which the reasons were recorded. Apparently, the provisions, old or new, permit an AO to expand or extend the proceedings to a subject not covered either by notice u/s 148A or the reasons recorded for reopening an assessment.

An interesting issue, however arisen in cases where no addition or disallowance or variation is made in the order of reassessment in respect of the subject matter of the notice u/s 148A or the reasons recorded but all the same the addition or disallowance or variation is made in respect of a subject matter not covered by such notice or the reasons. At the same time, even after insertion of Explanation 3, the issue that remained open was about the power of the AO to travel beyond the reasons recorded, where no addition or disallowance or variation was made in respect of the subject matter recorded in the reasons for reopening.

Conflicting decisions of the courts are available on the subject. The Bombay and the Delhi High Courts have held that where no addition or disallowance or variation was made in respect of the subject matter of the reasons recorded, then, in such a case, the AO could not have extended the scope of reassessment beyond the reasons recorded. The Punjab & Haryana and Karnataka High Courts have, as against the above, held that it was possible for the AO to travel beyond the subject matter of the reasons recorded while reassessing the income.

It is felt that the conflict would apply to the old as well as the new provisions, requiring us to take notice of the conflict.

JET AIRWAYS (I) LTD.’S CASE
The issue arose in the case of CIT vs. Jet Airways (I) Ltd., 195 Taxman 117 (Bom.). In the said case, pertaining to A.Ys. 1994-1995 and 1995-1996, the revenue had raised the following substantial question of law in appeal u/s. 260A for consideration of the Bombay High Court.

“Where upon the issuance of a notice under section 148 of the Income-tax Act, 1961 read with section 147, the Assessing Officer does not assess or, as the case may be reassess the income which he has reason to believe had escaped assessment and which formed the basis of a notice under section 148, is it open to the Assessing Officer to assess or reassess independently any other income, which does not form the subject-matter of the notice?”

The revenue in appeal urged that even if, during the course of assessment or, as the case might be a reassessment, the AO did not assess or reassess the income which he had reason to believe had escaped assessment and which formed the subject matter of a notice u/s 148(2), it was nonetheless open to him to assess any other income which, during the course of the proceedings was brought to his notice as having escaped assessment. It contended that the use of the words ‘and also’ clearly permitted an AO to make addition on an issue, even where no addition was made in respect of the issues for which the reasons were recorded and on the basis of which the assessment was reopened. It submitted that the language of the section was clear to reach such a conclusion. The words were non-conjunctive, and the two parts could operate independently of each other.

The assessee in response contended that the words “and also” in s. 147 postulated that the AO might assess or reassess the income for which he had reason to believe had escaped assessment together with any other income chargeable to tax which had escaped assessment and which came to his notice during the course of the proceedings; unless the AO assessed the income with reference to which he had formed a reason to believe, it was not open to him to assess or reassess any other income chargeable to tax which had escaped assessment and which came to his notice subsequently in the course of the proceedings.

It was clear to the Court, applying the first principle of interpretation for interpreting the section as it stood, and on the basis of precedents on the subject, without adding or deducting from the words used by Parliament, that upon the formation of a reason to believe u/s 147 and following the issuance of a notice u/s 148, the AO had the power to assess or reassess the income, that he had reason to believe had escaped assessment and also any other income chargeable to tax; that the words “and also” could not be ignored; the interpretation which the Court placed on the provision should not result in diluting the effect of those words or rendering any part of the language used by Parliament otiose; Parliament having used the words “assess or reassess such income and also any other income chargeable to tax which has escaped assessment”, the words “and also” could not be read as being in the alternative. On the contrary, the correct interpretation would be to regard those words as being conjunctive and cumulative; that Parliament had not used the word “or” and that it did not rest content by merely using the word “and” it followed it with the word “also” clearly suggesting that the words had been used together and in conjunction.

The Court, after hearing the rival contentions, upheld the decision of the Tribunal in favour of assessee for the reasons recorded in Para 16 and 17 of its order as under:

‘This interpretation will no longer hold the field after the insertion of Explanation 3 by the Finance Act (No. 2) of 2009. However, Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. 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. 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 under section 148, he accepted the contention of the assessee and holds that the income 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 under section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.

We have………. The words “and also” are used in a cumulative and conjunctive sense. To read these words as being in the alternative would be to rewrite the language used by Parliament. Our view has been supported by the background which led to the insertion of Explanation 3 to section 147. Parliament must be regarded as being aware of the interpretation that was placed on the words “and also” by the Rajasthan High Court in Shri Ram Singh’s case (supra). Parliament has not taken away the basis of that decision. While it is open to Parliament, having regard to the plenitude of its legislative powers to do so, the provisions of section 147(1) as they stood after the amendment of 1-4-1989 continue to hold the field.’

The AO, the Court noted, upon the formation of a reason to believe u/s 147 and the issuance of a notice u/s 148(2), must assess or reassess: (i) ‘such income’; and also (ii) any other income chargeable to tax which had escaped assessment and which came to his notice subsequently in the course of the proceedings under the section. The words ‘such income’ refers to the income chargeable to tax which had escaped assessment, and in respect of which the AO had formed a reason to believe that it had escaped assessment. The language used by the Parliament was indicative of the position that the assessment or reassessment must be in respect of the income in respect of which he had formed a reason to believe that it had escaped assessment and also in respect of any other income which came to his notice subsequently during the course of the proceedings as having escaped assessment. If the income, the escapement of which was the basis of the formation of the reason to believe, was not assessed or reassessed, it would not be open to the AO to independently assess only that income which came to his notice subsequently in the course of the proceedings under the section as having escaped assessment.

The Court observed that the Parliament when it enacted the provisions of s. 147 w.e.f. 1st April, 1989, clearly stipulated that the AO had to assess or reassess the income that he had reason to believe had escaped assessment and any other income chargeable to tax that came to his notice during the proceedings. In the absence of the assessment or reassessment of the former, he could not independently assess the latter.

The Court in deciding the issue, in favour of the contentions of the assessee that it was not possible to make an addition in respect of an issue that was not recorded in the reasons for reopening, in cases where no addition was made in respect of the subject matter of reasons recorded, referred to the decisions in the cases of Vipan Khanna vs. CIT, 255 ITR 220 (Punj. & Har.); Travancore Cements Ltd. vs. Asstt. CIT 305 ITR 170 (Ker.); CIT vs. Sun Engg. Works (P.) Ltd., 198 ITR 297 (SC); V. Jaganmohan Rao vs. CIT, 75 ITR 373 (SC); CIT vs. Shri Ram Singh, 306 ITR 343 (Raj.); and CIT vs. Atlas Cycle Industries, 180 ITR 319 (Punj. & Har.).

N. GOVINDARAJU’S CASE
The issue again arose before the Karnataka High Court in the case of N. Govindaraju vs. ITO, 60 taxmann.com 333 (Karn.). In the said case for A.Y. 2004-05, the assessee, in its appeal against the order of Tribunal, approached the Court with the following substantial questions of law:

• Whether the Tribunal was correct in upholding reassessment proceedings, when the reason recorded for re-opening of assessment under S. 147 of Act itself does not survive.

• Whether the Tribunal was correct in upholding levy of tax on a different issue, which was not a subject matter for re-opening the assessment and moreover the reason recorded for the re-opening of the assessment itself does not survive.

• Whether the Tribunal was justified in law in passing an order without application of mind as to the determination of the fair market value as on 1.4.1981 by not taking into consideration the material on record and the valuation report filed by the appellant and consequently passed a perverse order on the facts and circumstance of the case.

• Whether the Tribunal was justified in law in not allowing a sum of Rs. 3,75,000/- being expenditure incurred wholly and exclusively in connection with the transfer more so when the payments are through banking channels, and consequently passed a perverse order on the facts and circumstance of the case.

On behalf of the assessee, in the appeal, it was contended before the Court that an order u/s 147 of the Act had to be in consonance with the reasons given for which notice u/s 148 had been issued, and once it was found that no tax could be levied for the reasons given in the notice for reopening the assessment, independent assessment or reassessment on other issues would not be permissible, even if subsequently, in the course of such proceedings, some other income chargeable to tax had been found to have escaped assessment. It was further submitted that the reason for which notice was given had to survive. It was only thereafter that ‘any other income’ which was found to have escaped assessment could be assessed or reassessed in such proceeding. Hence, the reopening of assessment should first be valid (which could be only when reason for reopening survived) and once the reopening was valid, then the entire case could be reassessed on all grounds or issues. That was to say, if reopening was valid and reassessment could be made for such reason, then only the AO could proceed further; if the AO could proceed further even without the reason for reopening surviving, it could lead to fishing and roving enquiry and would give unfettered powers to him.

On behalf of the revenue, it was contended that under the old s. 147 (as it stood prior to 1989), grounds or items for which no reasons had been recorded could not be opened, and because of conflicting decisions of the High Courts, the provisions of the said section had been clarified to include or cover any other income chargeable to tax which might have escaped assessment, and for which reasons might not have been recorded before giving the notice. That the said s. 147 was in two parts, which had to be read independently, and the phrase “such income” in the first part was with regard to which reasons had been recorded, and the phrase “any other income” in the second part was with regard to where no reasons were recorded in the notice and had come to notice of the AO during the course of the proceedings. Accordingly, both being independent, once the satisfaction in the notice was found sufficient, the addition could be made on all grounds, i.e., for which reason had been recorded and also for which no reason had been recorded, and all that was necessary was that during the course of the proceedings u/s 147, income chargeable to tax must be found to have escaped assessment relying on Explanation 3 to s. 147 which was inserted by Finance Act, 2009 w.e.f. 1st April, 1989.

The Karnataka High Court on hearing rival contentions observed and held as under:

• From a plain reading of s. 147 of the Act, it was clear that its latter part provides that ‘any other income’ chargeable to tax which has escaped assessment and which had come to the notice of the AO subsequently in the course of the proceedings, could also be taxed.

• The two parts of the section have been joined by the words ‘and also’ and the Court has to consider whether ‘and also’ would be conjunctive, or the second part has to be treated as independent of the first part. If the words were held to be conjunctive, then certainly the assessment or reassessment of ‘any other income’ which was chargeable to tax and had escaped assessment, could not be made where the original issue did not survive.

• The purpose of the provisions of Chapter XV was to bring to tax the entire taxable income of the assessee, and in doing so, where the AO had reason to believe that some income chargeable to tax had escaped assessment, he might assess or reassess such income. Since the purpose was to tax all such income which had escaped assessment, besides ‘such income’ for which he had reason to believe to have escaped assessment, it would be open to him to also independently assess or reassess any other income which did not form the subject matter of notice.

• While interpreting the provisions of s. 147, different High Courts have held differently, i.e., some have held that the second part of s. 147 was to be read in conjunction with the first part, and some have held that the second part was to be read independently. To clarify the same, in 1989, the legislature brought in suitable amendments in sections 147 and 148 of the Act, which was with the object to enhance the power of the AO, and not to help the assessee.

• Explanation 3 was inserted in s. 147 by Finance (No. 2) Act, 2009 w.e.f 1st April, 1989. By the said Explanation, which was merely clarificatory in nature, it had been clearly provided that the AO might assess or reassess the income in respect of any issue, which had escaped assessment, and where such issue came to his notice subsequently in the course of the proceedings, notwithstanding that the reasons for such issue had not been included in the reasons recorded under sub-section (2) of s. 148. Insertion of this Explanation could not be but for the benefit of the Revenue, and not the assessee.

• It was clear that in the phrase ‘and also’ which joined the first and second parts of the section, ‘and’ was conjunctive which was to join the first part with the second part, but ‘also’ was for the second part and was disjunctive; it segregated the first part from the second. Thus, on a comprehensive reading of the entire section, the phrase ‘and also’ could not be said to be conjunctive.

• It was thus clear that once the satisfaction of reasons for the notice was found sufficient, i.e., if the notice u/s 148(2) was found to be valid, then addition could be made on all grounds or issues (with regard to ‘any other income’ also) which might come to the notice of the AO subsequently during the course of proceedings u/s 147, even though the reason for notice for ‘such income’ which might have escaped assessment, did not survive.

• If there was ambiguity in the main provision of the enactment, it could be clarified by inserting an Explanation to the section of the Act which had been done in the case. Section 147 of the Act was interpreted differently by different High Courts, i.e., whether the second part of the section was independent of the first part, or not. To clarify the same, Explanation 3 was inserted by which it had been clarified that the AO could assess the income in respect of any issue which had escaped assessment and also ‘any other income’ (of the second part of s. 147) which came to his notice subsequently during the course of the proceedings under the section.

• After the insertion of Explanation 3 to s. 147, it was clear that the use of the phrase “and also” between the first and the second parts of the section was not conjunctive and assessment of ‘any other income’ (of the second part) could be made independent of the first part (relating to ‘such income’ for which reasons were given in notice u/s 148), notwithstanding that the reasons for such issue (‘any other income’) had not been given in the reasons recorded u/s 148(2).

• The view of the Court was in agreement with the view taken by the Punjab & Haryana High Court in the cases of Majinder Singh Kang 344 ITR 348 and Mehak Finvest 52 taxmann.com 51.

• Considering the provision of s. 147 as well as its Explanation 3, and also keeping in view that s. 147 was for the benefit of the Revenue and not the assessee and was aimed at garnering the escaped income of the assessee (namely Sun Engineering) and also keeping in view that it was the constitutional obligation of every assessee to disclose his total income on which it was to pay tax, the two parts of s. 147 (one relating to ‘such income’ and the other to ‘any other income’) were to be read independently. The phrase ‘such income’ used in the first part of s. 147 was with regard to which reasons have been recorded u/s 148(2) of the Act, and the phrase ‘any other income’ used in the second part of the section was with regard to income where no reasons have been recorded before issuing notice and which has come to the notice of the AO subsequently during the course of the proceedings, which could be assessed independent of the first part, even when no addition could be made with regard to ‘such income’, but the notice on the basis of which proceedings had commenced was found to be valid.

• It was true that where the foundation did not survive, then the structure could not remain. Meaning thereby, if notice had no sufficient reason or was invalid, no proceedings could be initiated. But the same could be checked at the initial stage by challenging the notice. If the notice was challenged and found to be valid, or where the notice was not at all challenged, then, in either case, it could not be said that the notice was invalid. As such, if the notice was valid, then the foundation remains and, the proceedings on the basis of such notice could go on. We might only reiterate here that once the proceedings had been initiated on a valid notice, it became the duty of the AO to levy tax on the entire income (including ‘any other income’) which might have escaped assessment and came to his notice during the course of the proceedings initiated u/s 147 of the Act.

The Karnataka High Court found it unable to persuade itself, with due respect, to follow the decisions in the cases of Ranbaxy Laboratories Ltd. vs. CIT, 336 ITR 136 (Bom.), CIT vs. Adhunik Niryat Ispat Ltd., 63 DTR 212 (Del.) and CIT vs. Mohmed Juned Dadani, 355 ITR 172 (Guj.), and proceeded to hold that it was permissible for an AO to make addition in respect of an issue noticed during the course of assessment even where no addition was made in respect of the issues for which the assessment was reopened by recording the reasons at the time of issue of notice u/s 148 of the Act.

OBSERVATIONS
One of the controversies about expanding the scope of reopened assessment, about the permission to travel beyond the subject matter of reasons recorded for reopening or otherwise, has been sought to be set to rest by insertion of Explanation 3 w.r.e.f 1st April, 1989. The other controversy, relating to AO’s power to make addition or disallowance or variation in cases where no addition or disallowance or variation is made on the subjects recorded in the reasons, continues to be relevant and live. This unresolved issue involves an appreciation of different schools of interpretation of the language used in the section and also of the legislative intent behind it. Very forceful, intense and valid contentions are made by both the schools of interpretation, which are backed by the decisions of the different High Courts. Even an amendment, that too with retrospective effect, has not been able to resolve the conflict. The best solution is to await the final word of wisdom from the Supreme Court.

The issue, in our considered opinion, would continue to be relevant even under the new scheme of reopening and reassessment made effective from 1st April, 2021. The new scheme retains an Explanation that empowers an AO to travel beyond the subject matter of ‘information’ received by an AO, and also the need for compliance of the four conditions of s. 148A of the Act. The Explanation to s. 147 might permit an AO to cover an issue even where ‘no information’ is received by him as per s. 148 of the Act.

The ‘reason to believe’ that any income chargeable to tax has escaped assessment, was one aspect of the matter. If such reason existed, the AO could undoubtedly assess or reassess such income, for which there was such ‘reason to believe’ that income chargeable to tax has escaped assessment. This is the first part of the section, and up to this extent, there is no dispute. The issues as noted however were in respect of two aspects; one was whether the AO was permitted to rope in an issue for which reasons were not recorded. There were conflicting decisions of the Courts on this aspect which conflict was set at rest by the insertion of Explanation 3. The other issue was and is about the power of the AO to make an addition in respect of an additional issue, not recorded in the reasons, even where no addition is made in respect of the main issue recorded in the reasons. It is this second issue that has remained open and unresolved, even after insertion of Explanation in s. 147 and on which conflicting decisions of the Courts are noted.

It is the latter part of the s. 147 and not the Explanation 3 that is to be interpreted, which is as to whether the second part relating to ‘any other income’ is to be read in conjunction with the first part (relating to ‘such income’) or not. If it is to be read in conjunction, then without there being any addition made with regard to ‘such income’ (for which reason had been given in the notice for reopening the assessment), the second part cannot be invoked. But if it is not to be read in conjunction, the second part can be invoked independently, even without reason for the first part surviving, permitting an AO to make addition even where no addition is made in respect of the main issue for which reasons are recorded.

The effect of Explanation 3, inserted by the Finance (No. 2) Act, 2009 as is understood by one school of interpretation is that even though the notice issued u/s 148 containing the reasons for reopening the assessment does not contain a reference to a particular issue with reference to which income has escaped assessment, yet the AO may assess or reassess the income in respect of any issue which has escaped assessment, when such issue comes to his notice subsequently in the course of the proceedings. The reasons for the insertion of Explanation 3 are to be found in the memorandum explaining the provisions of the Finance (No. 2) Bill, 2009.

The memorandum states that some of the Courts have held that the AO has to restrict the reassessment proceedings only to issues in respect of which reasons have been recorded for reopening the assessment, and that it is not open to him to touch upon any other issue for which no reasons have been recorded. This interpretation was regarded by the Parliament as being contrary to the legislative intent. Hence, Explanation 3 came to be inserted to provide that the AO may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings u/s 147, though the reasons for such issue have not been included in the reasons recorded in the notice u/s 148(2).

The effect of s. 147, as it now stands, after the amendment of 2009, can, therefore, be summarised as follows : (i) the Assessing Officer must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year; (ii) upon the formation of that belief and before he proceeds to make an assessment, reassessment or recomputation, the AO has to serve a notice on the assessee under sub-section (1) of s. 148; (iii) the AO may assess or reassess such income, which he has reason to believe, has escaped assessment and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section; and (iv) though the notice u/s 148(2) does not include a particular issue with respect to which income has escaped assessment, yet he may nonetheless, assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section.

Insertion of ‘Explanation’ in a section of an Act is for a different purpose than the insertion of a ‘Proviso’. ‘Explanation’ gives a reason or justification and explains the contents of the main section, whereas ‘Proviso’ puts a condition on the contents of the main section or qualifies the same. ‘Proviso’ is generally intended to restrain the enacting clause, whereas ‘Explanation’ explains or clarifies the main section. Meaning thereby, ‘Proviso’ limits the scope of the enactment as it puts a condition, whereas ‘Explanation’ clarifies the enactment as it explains and is useful for settling a matter of controversy.

Having noted that the issue on hand needs to be resolved by a decision of the Supreme Court at the earliest, in our opinion, the decisions of the High Courts in favour of the assessee represent a better view and the decisions of the High Courts holding a contrary view are based on considerations, the following of which require rethinking, for the reasons noted in italics:

• One of the grounds on which the Courts rested their decisions was that the assessee was given an opportunity to challenge the notice along with the reasons for reopening, both of which were held to be valid and the reopening proceedings were therefore validly initiated and with such initiation there would be no question of assessment of either ‘such income’ of the first part of s. 147 or ‘any other income’ of its second part. The courts, with respect, did not appreciate the fact that on the lapse of the reasons recorded, once no addition was made on such reasons, the notice and the proceedings were rendered invalid. The courts also ignored that the assessee had no opportunity to contest the validity of the notice on the reason subsequently added by the AO, and importantly, the proceedings might lead to fishing and roving inquiry.

• The Courts further held that as long as the proceedings had been initiated on the basis of a valid notice, it became the duty of the AO to levy tax on the entire income, which may have escaped assessment during the assessment year. With great respect, if this were to be true, there was no need for having amended the law to expressly provide the AO with the power to expand the scope of reassessment to add an issue or issues beyond the issues covered by the recorded reasons. The scope of the reassessment is limited to the issues recorded in reasons, and a special power was needed to rope in an additional issue without which the AO is not empowered to travel beyond the recorded reasons.

• The Courts admitted that where the words ‘and also’ was to be treated as conjunctive, then certainly, if the reason to believe was there for a particular ground or issue with regard to escaped income which had to be assessed or reassessed, and such ground was not found or did not survive, then the assessment or reassessment of ‘any other income’ which was chargeable to tax and has escaped assessment, could not be made. However, after having done so, for some not very comprehensive reasons, they proceeded to hold that the words were not to be read in conjunction and therefore, the second part could be invoked independently even without reason for the first part surviving.

• The Courts held that the purpose of the scheme was to tax all such income which had escaped assessment, besides ‘such income’ for which he had reason to believe to have escaped assessment and, based on such findings, the Courts held that it would be open to the AO to also independently assess or reassess any other income which did not form the subject matter of notice. With respect, this understanding of the courts might hold true in the case of regular assessment, but are surely not so in cases of reassessment, where the power of the AO to reassess an income for which he had valid reasons and which reasons were duly recorded. In the absence of such compliance, it was not possible to hold that his power was all-encompassing.

• The Courts further held that the insertion of the Explanation could not be but for the benefit of the revenue and not the assessee. This understanding based on the judgement of the Supreme Court in Sun Engineering’s case, might be true in the context of the scope of the reopening but cannot be applied to understand the implication of the written law and the Explanation thereto. In any case, taking a legal view on the language of the provision cannot be termed to be beneficial to the assesssee; rather the courts are bound to take a view that is correct in law, irrespective of the party on which the benefit is conferred; such benefit, even where conferred, is intended by the express language used by the parliament. In any case, the decision of the Supreme Court is capable of a different interpretation, as has been recently found by the Karnataka High Court in a decision in the case of The Karnataka State Co-Operative Apex Bank Limited vs. DCIT 130 taxmann.com 114. (Refer Controversy Feature of BCAJ, March, 2022)

• The Courts further held that the word ‘and’ used in the phrase ‘and also’ was conjunctive, which was used to join the first part with the second part, but the word ‘also’ was only for the second part and would be disjunctive; it segregated the first part from the second and thus, upon reading the full section, the phrase ‘and also’ could not be said to be conjunctive. With utmost respect, we find such a circuitous interpretation not tenable and strange and not found to have any precedent.

• The Courts held that the insertion of Explanation 3 to s. 147 did not in any manner override the main section and had been added with no other purpose than to explain or clarify the main section so as to also bring in ‘any other income’ (of the second part of s. 147) within the ambit of tax, which might have escaped assessment, and came to the notice of the AO subsequently during the course of the proceedings. Circular 5 of 2010 issued by the CBDT also made this position clear. There was no conflict between the main s. 147 and its Explanation 3. This Explanation had been inserted only to clarify the main section and not curtail its scope. Insertion of Explanation 3 was thus clarificatory and was for the benefit of the revenue and not the assessee. We do not think that there is any dispute about the purpose of Explanation and its clarificatory nature. What is disagreeable is the use of the Explanation to prove a point that is not borne out of the Explanation or the Memorandum explaining the object behind its insertion. The language and the memorandum explain that the objective of the Explanation was to clarify that an issue, the subject matter of which was not recorded in the reasons, could be taken up by the AO in reassessment if noticed by him. Nowhere it is clarified that an additional issue could be taken up even where the main issue did not survive. Secondly, the reliance on the circular to prove a complex legal point was avoidable. Thirdly, to hold that the clarification was for the benefit of the revenue is unacceptable.

• Lastly, the Court held that If there was ambiguity in the main provision of the enactment, it could be clarified by insertion of an Explanation to the main section of the Act. The same had been done in the instant case. Section 147 was interpreted differently by different High Courts, i.e., whether the second part of the section was independent of the first part or not. To clarify the same, Explanation 3 was inserted by which it had been clarified that the AO could assess the income in respect of any issue which had escaped assessment and also ‘any other income’ (of the second part of s. 147) which came to his notice subsequently during the course of the proceedings under the section. Again there is no dispute in this understanding of the purpose of insertion of Explanation and its meaning. The difficulty is where one reads it in a manner to hold that the Explanation also permitted to make addition in respect of an additional issue even where the main issues do not survive, and thereby rendering the proceedings otiose. With respect, the language of the Explanation and its objective, as explained, nowhere bears this understanding of the courts. As explained earlier, there were two controversies, and the Explanation clarified the legislative stand only in respect of one of them, namely, to cover an additional issue even where the reason for such issue was not recorded. The other controversy being considered here had and has remained unaddressed.

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S. 195 – Deduction at source – Non-resident – Lower deduction of tax – Indexation – Binding precedent – Order of Tribunal is binding on lower Authorities – Capital gains – Cost of acquisition of the property in the hands of seller is deemed to be the cost for which the said property was acquired by previous owner – Excess tax paid by the Petitioner was directed to be refunded with interest.

12 Rohan Developers Pvt. Ltd. vs. ITO (IT) (Bom.)(HC); [W.P No. 1005 of 2008; Date of order: 6th January, 2022 (Bombay High Court)]

S. 195 – Deduction at source – Non-resident – Lower deduction of tax – Indexation – Binding precedent – Order of Tribunal is binding on lower Authorities – Capital gains – Cost of acquisition of the property in the hands of seller is deemed to be the cost for which the said property was acquired by previous owner – Excess tax paid by the Petitioner was directed to be refunded with interest.

Petitioner filed an application under Section 195(2) of the Act requesting him to issue a low tax rate Certificate for Deduction of Tax at Source in respect of consideration for the purchase of immovable property from the seller. According to the Petitioner, the cost of acquisition under Section 49(1)(ii) of the Act in the hands of the seller is deemed to be the cost for which the said property was acquired by Late Mrs. Dolly Jehangir Gazdar. It is also Petitioner’s case that under clauses (29A) and (42A) of Section 2, the period of holding of late Mrs. Dolly Jehangir Gazdar, Mrs. Rhoda Rustom Framjee and Mr. Rustom Framjee is also to be included in the period of holding of the seller for ascertaining whether the said property is held by him as a short-term capital asset or as a long-term capital asset. Therefore, in its application under Section 195(2) of the Act, Petitioner annexed a copy of the draft computation of long-term capital gains of the seller in respect of the transfer of the said property. While computing the capital gains, the Petitioner took the benefit of the option provided in the provisions of Section 55(2)(b)(ii) of the Act, which provides that where a capital asset became the property of the assessee by any of the modes specified in Section 49(1) of the Act and the capital asset became the property of the previous owner before the 1st day of April 1981, cost of acquisition means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April 1981 at the option of the assessee. Based on the scheme of the Act as is provided in Section 49(1)(ii), clauses (29A) and (42A) of Section 2 and Section 55(2)(b)(ii) of the Act, Petitioner claimed that indexation of the cost of acquisition under the second proviso to Section 48 should be available from the financial year 1981- 82. The Petitioner relied on the Judgement of Special Bench in the case of DCIT vs. Manjula J. Shah (2009) 126 TTJ 145 (SB) (Mum.)(Trib). The application for lower tax was rejected. The Petitioner paid the tax under protest and filed the writ for rejection of application for lower rate of tax.

The Court held that the mere fact that the order of the appellate authority is not acceptable to the department or is the subject matter of an appeal cannot be a ground for not following it unless its operation has been suspended by a competent Court. This has been reiterated by this Court in its order Karanja Terminal & Logistic Private Limited vs. CIT (WP No. 1397 of 2020 dated 31st January, 2022) (Bom.)(HC).

The Court noted that the above decision of ITAT Spl Bench had been affirmed by the Bombay High Court; therefore, the issue is now settled in favour of the Petitioner and therefore directed the department to accept the computation of the capital gains after taking into consideration the index cost and cost of the previous owner. The Court following the Apex Court in Union of India vs. Tata Chemicals Limited [2014] 363 ITR 658 (SC) also directed the revenue to pay interest under Section 244A(1)(b) of the Act for the period from the date of payment of tax, i.e., 7th January, 2011 till date.

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Revision — (i) Powers of Commissioner — Reassessment — Order of AO dropping reassessment proceedings after issuance of notice and considering assessee’s objections — Order of AO not administrative order — No jurisdiction in Commissioner to examine correctness of decision taken by AO; (ii) Export — Exemption — Disqualification where shareholding of assessee changes — Documents showing shareholding pattern in assessee continued to be same and share transfers were without beneficial interest — AO dropping reopening proceedings — Finding that shares transferred only to comply with legal requirements and beneficial ownership never transferred — Revision not sustainable

47 CIT vs. Barry-Wehmiller International Resources (P.) Ltd. [2021] 440 ITR 403 (Mad) A.Y.: 2001-02; Date of order: 3rd August, 2021 Ss.10A(9), 147, 148 & 263 of ITA, 1961

Revision — (i) Powers of Commissioner — Reassessment — Order of AO dropping reassessment proceedings after issuance of notice and considering assessee’s objections — Order of AO not administrative order — No jurisdiction in Commissioner to examine correctness of decision taken by AO; (ii) Export — Exemption — Disqualification where shareholding of assessee changes — Documents showing shareholding pattern in assessee continued to be same and share transfers were without beneficial interest — AO dropping reopening proceedings — Finding that shares transferred only to comply with legal requirements and beneficial ownership never transferred — Revision not sustainable

For the A.Y. 2001-02 the assessment of the assessee was reopened. After receiving the response from the assessee, the Assessing Officer dropped the proceedings holding that there was no change in the beneficial shareholding of the company in terms of section 10A(9) of the of the Income-tax Act, 1961 . The Commissioner after examining the records issued notice u/s 263 proposing to revise the order dropping the reassessment proceedings because the Assessing Officer failed to appreciate that the beneficial shareholding of the company had changed with the acquisition of shares in M Inc., U.S.A. company, which owned 100 per cent shares of a Mauritius company, which was the holding company of the assessee.

The Tribunal allowed the assessee’s appeal.

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

“i) The Commissioner had no jurisdiction to invoke his power u/s. 263 of the Act to examine the correctness of the decision taken by the Assessing Officer dropping the reopening proceedings after issuance of notice u/s. 148 of the Act and after considering the objections filed by the assessee.

ii) The U.S.A. company had addressed the Registrar of Companies in Chennai conveying its no objection to the change of name. The assessee had explained its organisational structure stating that 100 per cent. of the equity capital of MWS was held by MAPL, a company incorporated in Mauritius, that the shareholding pattern in the assessee continued to be the same, that all the shares in the assessee were held by MAPL, Mauritius and that during 2000-01, no share transfers occurred, that only 2 shares were transferred to BW Inc., USA in March 2002 and that too without beneficial interest in the shares and that MAPL continued to hold the beneficial interest in the shares. This was duly supported by necessary records. These facts were taken note of and the Assessing Officer had dropped the reopening proceedings. Thus, it was on an opinion formed by the Assessing Officer and after being satisfied that there was no case made out for reopening and after recording that the ownership or beneficial interest of the assessee had not changed and continued to be with the Mauritius company and therefore, section 10A(9) of the Act was not attracted and accordingly, proceedings under section 147 of the Act were dropped.

iii) The Tribunal was right in coming to the conclusion that the shares were transferred only to comply with the legal requirements and the beneficial ownership was never transferred. Hence, the order passed by the Tribunal did not call for any interference.”

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Recovery of tax — Provisional attachment u/s 281B — Condition precedent for attachment — Authority must form opinion on basis of tangible material that it is necessary to do so for protecting interest of government revenue and that assessee not likely to fulfil demand if raised — Order merely stating likelihood of huge liability being raised and necessary to provisionally attach fixed deposit of assessee — Cryptic, unreasoned, non-speaking and laconic — Specific assertion by assessee that it owned immovable property of substantial value — Apprehension that assessee might not make payment unfounded and without any basis — Orders liable to be quashed

46 Indian Minerals and Granite Co. vs. Dy. CIT [2021] 440 ITR 292 (Karn) Date of order: 12th August,2021 S. 281B of ITA, 1961

Recovery of tax — Provisional attachment u/s 281B — Condition precedent for attachment — Authority must form opinion on basis of tangible material that it is necessary to do so for protecting interest of government revenue and that assessee not likely to fulfil demand if raised — Order merely stating likelihood of huge liability being raised and necessary to provisionally attach fixed deposit of assessee — Cryptic, unreasoned, non-speaking and laconic — Specific assertion by assessee that it owned immovable property of substantial value — Apprehension that assessee might not make payment unfounded and without any basis — Orders liable to be quashed

Pursuant to the search said to have been conducted by the respondents in respect of the petitioner-assessees u/s 132 of the said Act of 1961, assessment proceedings were initiated u/s 153A by the Assessing Officer. During the course of the said proceedings, Assessing Officer passed orders u/s 281B, thereby provisionally attaching the fixed deposits of the petitioners.

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

“i) Mere apprehension on the part of the Department that huge tax demands are likely to be raised on completion of the assessment is not sufficient for the purpose of passing a provisional order of attachment. Having regard to the fact that the provisional attachment order of a property of a taxable person including the bank account of such person is draconian in nature and the conditions which are prescribed by the statute for the valid exercise of power must be strictly fulfilled, the exercise of power for order of provisional attachment must necessarily be preceded by formation of an opinion by the authorities that it is necessary to do so for the purpose of protecting the interest of Government revenue. Before an order of provisional attachment is passed, the Commissioner must form an opinion on the basis of tangible material available for attachment that the assessee is not likely to fulfil the demand for payment of tax and it is therefore necessary to do so for the purpose of protecting the interest of the Government revenue. In addition, before passing the provisional attachment order, it is also incumbent upon the authorities to come to a conclusion based on tangible material that without attaching the provisional attachment, it is not possible in the facts of the given case to protect the revenue and that the provisional attachment order is completely warranted for the purpose of protecting the Government revenue.

ii) Except for merely stating that since there was a likelihood of huge tax payments to be raised on completion of assessment and that for the purpose of protecting the revenue, it was necessary to provisionally attach the fixed deposit of the assessee, the other mandatory requirements and preconditions had neither been complied with nor fulfilled or followed prior to passing the order. In view of the fact that the orders were cryptic, unreasoned, non-speaking and laconic, they deserved to be quashed.

iii) In the light of the undisputed fact that the proceedings u/s. 153A of the Act had already been initiated coupled with the fact that section 281 of the Act contemplates that any alienation of any property belonging to the assessee would be null and void, in addition to the specific assertion made by the assessee that it owned and possessed immovable property to the tune of more than Rs. 300 crores, the apprehension of the Department that in the event huge tax payments were to be raised as against the assessee, the assessee might not make payment thereof thus causing loss to the Revenue, was clearly unfounded and without any basis.

iv) The impugned orders dated 26th March, 2021 passed by respondent No. 1 are hereby quashed.”

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Reassessment — Notice — Sanction of prescribed authority — To be obtained prior to issue of notice — Approval granted after issue of notice — No valid explanation by cogent material that physical approval was granted before issuance of notice — Approval saying merely “yes, I am satisfied” — Non-application of mind on part of specified authority — Notice not valid

45 Svitzer Hazira Pvt. Ltd. vs. ACIT [2021] 441 ITR 19 (Bom) A.Y.: 2014-15; Date of order: 21st December, 2021 Ss. 147, 148 & 151 of ITA, 1961

Reassessment — Notice — Sanction of prescribed authority — To be obtained prior to issue of notice — Approval granted after issue of notice — No valid explanation by cogent material that physical approval was granted before issuance of notice — Approval saying merely “yes, I am satisfied” — Non-application of mind on part of specified authority — Notice not valid

For the A.Y. 2014-15, the Assessing Officer digitally issued a notice u/s 148 of the Income-tax Act, 1961 against the assessee and furnished the reasons for reopening. The notice was uploaded at 2.40 p.m. on 31st March, 2019 on the portal under the digital signature of the Assessing Officer and the copy of the approval u/s 151 was signed at 2.55 p.m. on 31st March, 2019 by the specified authority.

The assessee filed a writ petition and challenged the validity of notice on the ground that the notice u/s 148 was issued without prior sanction u/s 151 and that sanction had been granted without application of mind by the specified authority. The Bombay High Court allowed the writ petition and held as under:

“i) Prior approval of the superior officer as contemplated by section 151 of the Income-tax Act, 1961 operates as a shield against arbitrary exercise by the Assessing Officer of the power conferred on him u/ss. 147 and 148. The power to grant prior approval has been conferred on the superior officer so that the superior officer shall examine the reasons, material or grounds and adjudicate whether they are sufficient and adequate to the formation of necessary belief on the part of the Assessing Officer. Therefore, it is necessary for the superior officer to apply his mind and record his reasons howsoever brief so that the Assessing Officer’s belief is well reasoned and bona fide.

ii) The remark on the part of the superior authority must indicate application of mind by giving reasons for prior approval. The expression “no notice shall be issued” cannot be construed to mean post facto approval. The expression “no notice shall be issued” reflects the intention of the Legislature to indicate that prior approval is the sine qua non before issuance of notice u/s. 148. The sanction to be granted by the authority u/s. 151 has to be prior in point of time of issuance of notice u/s. 148.

iii) There was no prior sanction granted u/s. 151 by the Joint Commissioner before issuance of notice u/s. 148. Therefore, the jurisdictional condition of complying with section 151 was not satisfied. The explanation furnished in the order disposing of the objections of the assessee by the Assessing Officer that initially physical approval was granted and thereafter online approval was granted was not supported by any material on record. In the absence of valid explanation by cogent material the explanation in the order disposing of the objections of the assessee by the Assessing Officer that physical approval was granted before issuance of notice under section 148 could not be accepted.

iv) In his order of sanction, the Joint Commissioner had merely recorded his approval as “Yes, I am satisfied”. There was non-application of mind on the part of the Joint Commissioner while granting sanction u/s. 151.”

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Reassessment — (i) Notice u/s 148 — Conditions precedent — New tangible material to show that income has escaped assessment and reason to believe — Notice on ground that assessee did not offer to tax interest and bonus received on surrender of life insurance policy before maturity — Original assessment without scrutiny not relevant — Reopening of assessment unsustainable; (ii) Exemption — Receipt of interest and bonus on surrender of life insurance policy before maturity — Conditions stipulated u/s 10(10D) — Department to prima facie establish which condition was not fulfilled by assessee — Assessee not receiving from insurer under contract of annuity plan — Provision of s. 80CCC(2) not applicable

44 Ami Ashish Shah vs. ITO [2021] 440 ITR 417 (Guj) A.Y.: 2012-13; Date of order: 22nd March, 2021 Ss.143(1), 147, 148, 10(10D) & 80CCC(2) of ITA, 1961

Reassessment — (i) Notice u/s 148 — Conditions precedent — New tangible material to show that income has escaped assessment and reason to believe — Notice on ground that assessee did not offer to tax interest and bonus received on surrender of life insurance policy before maturity — Original assessment without scrutiny not relevant — Reopening of assessment unsustainable; (ii) Exemption — Receipt of interest and bonus on surrender of life insurance policy before maturity — Conditions stipulated u/s 10(10D) — Department to prima facie establish which condition was not fulfilled by assessee — Assessee not receiving from insurer under contract of annuity plan — Provision of s. 80CCC(2) not applicable

The assessee, a non-resident individual, for the A.Y. 2012-13, declared income from house property. After a period of four years, the Assessing Officer issued a notice u/s148 of the Income-tax Act, 1961 to reopen u/s 147, the assessment made u/s 143(1) and recorded reasons that information was received from the Deputy Director (Investigation) to the effect that the assessee had obtained a life insurance policy on 28th June, 2006 on payment of an annual premium up to the F.Y. 2010-11, that the total amount paid by the assessee was Rs. 50 lakhs and the sum assured was Rs. 50 lakhs and the date of the last premium was 28th June, 2020, that the assessee surrendered the policy prematurely on 15th April, 2011 and received the surrender value which included an amount of accretion on account of interest and bonus on the credit of the assessee in the policy fund and that the assessee did not offer the accretion value to tax which resulted in income escaping assessment. The assessee raised objections on the grounds that any sum received under life insurance, including the sum allocated by way of bonus on life insurance policies did not form part of total income u/s 10(10D) if it did not fall under Exception sub-clauses (a) to (d) provided under such section and that the provisions of section 80CCC(2) was not applicable as he did not claim deduction u/s 80CCC(1) in his return. The objections were rejected.

The Gujarat High Court allowed the writ petition filed by the assessee and held as under:

“i) Even where the proceedings u/s. 147 of the Income-tax Act, 1961 are sought to be initiated with reference to an intimation u/s. 143(1), the ingredients of section 147 are required to be fulfilled. Therefore, such an assessment cannot be reopened unless some new or fresh tangible material comes into the possession of the Assessing Officer, subsequent to the intimation u/s. 143(1) and there should exist “reason to believe” that income chargeable to tax has escaped assessment. According to the Explanatory Notes on the provisions of the Direct Tax Laws (Amendment) Act, 1987, contained in Circular No. 549, dated 31st October, 1989, issued by the CBDT no distinction u/s. 147 is contemplated between a scrutiny assessment u/s. 143(3) and the assessment u/s. 143(1) and tangible material is necessary to reopen even an assessment made without scrutiny.

ii) Reference to section 80CCC(2) by the Department was misconceived for two reasons: first, section 80CCC dealt with annuity plans whereas the assessee’s case was concerned with life insurance policy; secondly, section 80CCC(2) made any sum received by the assessee from the insurer towards contract for any annuity plan, taxable, provided premium paid for such plan was claimed as allowable deduction u/s. 80CCC(1) . There was no such averment or findings that the amount of premium paid by the assessee had been claimed and allowed as deduction u/s. 80CCC(1). According to section 10(10D) as on 1st April, 2021 as applicable for the A.Y. 2012-13, all that was required for an insurance policy to meet the requirements of section 10(10D) were that: (i) it should be a life insurance policy; (ii) it should be taken by the assessee on his/her life, and (iii) for insurance policies issued after 1st April, 2003, premium payable for any of the years during the term of the policy should not exceed 20 per cent. of the actual capital sum assured. Once these criteria were fulfilled, any sum received under such life insurance policy including bonus (accretions over and above the premiums paid) was exempt income. This amount was nothing, but, bonus, which was otherwise covered u/s. 10(10D). However, for this amount to be taxable, the Department had to prima facie indicate as to which of the conditions of section 10(10D) were not fulfilled or how the amount in question was not exempted under this section. Hence, in the absence of any new tangible material in the possession of the Assessing Officer, subsequent to the intimation u/s. 143(1), the reopening u/s. 147 was unsustainable.”

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Penalty — Concealment of income — Search proceedings and income-tax survey — Subsequent addition to income returned — Returns accepted — No concealment of income — Penalty could not be levied

43 Principal ClT vs. Shreedhar Associates [2021] 440 ITR 547 (Guj) A.Y.: 2013-14; Date of order: 14th September, 2021 S. 271 of ITA, 1961

Penalty — Concealment of income — Search proceedings and income-tax survey — Subsequent addition to income returned — Returns accepted — No concealment of income — Penalty could not be levied

The assessee, a partnership firm was involved in the business of real estate development and construction, where it had come out with a scheme “Shreedhar Residency” in the first year 2012-13. The survey u/s 133A of the Income-tax Act, 1961 was conducted on 9th January, 2013 as a part of search operations in Rashmikant Bhatt Group along with other assessees belonging to the very group. The total disclosure was made of Rs. 20 crores, of which Rs. 3.80 crores was of the assessee firm. This was offered as an additional income of a year under survey and the return which was filed by the assessee for the A.Y. 2013-14 on 29th September, 2013. The total income disclosed and declared was Rs. 4,26,92,360 which was inclusive of the said sum of Rs. 3.80 crores. The assessment order was passed u/s 143(3) on 28th December, 2015 without any addition, whereby the return filed by the assessee was accepted. However, the Assessing Officer had initiated the penalty proceedings u/s 271(1)(c) on the ground of concealment. The stand of the assessee is that the amount of Rs. 3.80 crores cannot be treated as concealed income since the same had been declared in the return filed by the assessee. This was not accepted by the Assessing Officer and a penalty was imposed u/s 271(1)(c) at the rate of 100 per cent tax on the income to the tune of Rs. 3.80 crores.

The Commissioner (Appeals) cancelled the penalty. The Tribunal concurred with the Commissioner (Appeals).

On appeal by the Revenue, the following question was raised.

“Whether in the facts and circumstances of the case, the learned Income-tax Appellate Tribunal has erred in law and on fact in deleting the penalty levied u/s. 271(1)(c) of the Income-tax Act, 1961, amounting to Rs. 1,18,00,000 despite the fact that penalty was levied on admitted net undisclosed income of Rs. 3.80 crores received as ‘on money’, which was unearthed based on diary found and impounded by Investigation Wing during survey proceedings and also admitted by one of the partners in the statement recorded u/s. 131(1A) of the Act and the said ‘on money’ income was not accounted for in the regular books of account of the assessee on the date of survey?”

The Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) The Income-tax survey had taken place on 9th January, 2013 as a part of search operation of the entire group and out of additional Rs. 20 crores disclosed, Rs. 3.80 crores was attributed to the assessee-firm. The return was filed u/s. 139 of the Income-tax Act, 1961 by the assessee for the A.Y. 2013-14 on 29th September, 2013, which was about eight months after the survey which was conducted. The books of account were not closed and it was not a case of any revised return being filed by the assessee. In such circumstances, the Assessing Officer also had not added any other income as the amount of Rs. 3.80 crores had already been declared in the return itself.

ii) There was no concealment of income and hence penalty could not be imposed.”

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Method of accounting — Assessee a builder and developer and not construction contractor — AS 7 applicable only in case of contractors — Assessee adopting completed contract method for A.Y. 2006-07 — No income offered in subsequent A.Y. 2007-08 — Result revenue neutral

42 CIT vs. Varun Developers [2021] 440 ITR 354 (Karn) A.Ys.: 2006-07 and 2007-08; Date of order: 8th February, 2021 Ss.80-IB(10), 145 of ITA, 1961

Method of accounting — Assessee a builder and developer and not construction contractor — AS 7 applicable only in case of contractors — Assessee adopting completed contract method for A.Y. 2006-07 — No income offered in subsequent A.Y. 2007-08 — Result revenue neutral

The assessee was a builder and developer and not a construction contractor simpliciter. Assessee adopted completed contract method for the A.Y. 2006-07 onwards. Following the said method the assessee did not offer any income for the A.Y. 2007-08. The Assessing Officer rejected the assessee’s claim and made addition applying the percentage completion method.

The Tribunal allowed the assessee’s claim.

In appeal by the Revenue, the following question was raised before the High Court.

“Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the income of the assessee from project ‘Mantri Sarovar’ has to be computed for the A.Y. 2006-07 on the basis of ‘Project completion method’ without appreciating that as per AS-7 and AS-9, the assessee has to follow percentage completion method as the assessee is a builder and developer?”

The Karnataka High Court upheld the decision of the Tribunal and held as under:

“i) U/s. 145(1) of the Act, the income chargeable under the head “Profits and gains of business” shall be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee. The general provision was subject to accounting standards that the Central Government may notify.

ii) The assessee was a builder and developer and not a construction contractor simpliciter. Accounting Standard 7, titled construction contracts, was applicable only in case of contractors and did not apply to the case of developers and builders as evident from the opinion rendered by the expert advisory committee of the Institute of Chartered Accountants of India. No income from the project was offered for the A.Y. 2007-08 on the basis of the project completion method and either method of accounting finally would lead to the same results in terms of profits and therefore, was revenue neutral.

iii) The substantial question of law is answered against the Revenue and in favour of the assessee.”

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Business expenditure — Capital or revenue expenditure — Tests — Ware-house business — Expenditure incurred to raise floor level of existing godown to avoid damage to goods and to retain customers — No new asset created — Expenditure incurred for carrying on and conducting business and forming integral part of profit-earning process — Deductible revenue expenditure

41 Jetha Properties Pvt. Ltd. vs. CIT [2021] 440 ITR 524 (Bom) A.Y.: 1991-92; Date of order: 9th December, 2021 S. 37 of ITA, 1961

Business expenditure — Capital or revenue expenditure — Tests — Ware-house business — Expenditure incurred to raise floor level of existing godown to avoid damage to goods and to retain customers — No new asset created — Expenditure incurred for carrying on and conducting business and forming integral part of profit-earning process — Deductible revenue expenditure

The assessee was a warehouse keeper. Due to flooding during the rains, when the customer’s goods which were clothing material manufactured for export got damaged the customer cautioned the assessee that if no remedial measure was taken it would have to change its business arrangement with the assessee. Therefore, the assessee raised the floor height to preserve the goods of its customers. Thereafter, the customer raised the warehousing charges from Rs. 1.20 per sq. ft. per week to Rs. 1.50 per sq. ft. per week.

On the question whether the expenditure incurred by the assessee for raising the floor height was revenue expenditure as claimed by the assessee or capital expenditure as claimed by the Department, the Bombay High Court held as under:

“i) The test to be applied whether an expenditure is revenue expenditure or not depends on whether the expenditure is related to the carrying on or conduct of the business and is an integral part of the profit-earning process. If the expenditure is so connected with the carrying on of the business that it may be regarded as an integral part of the profit-earning process, the expenditure cannot be treated as a capital expenditure but is revenue expenditure.

ii) The expenditure was incurred by the assessee wholly and solely to ensure that the existing business with the customer, which offered attractive returns to it was continued uninterrupted. The expenditure incurred by the assessee had direct relation to the business with the customer because the assessee had also received corresponding increased compensation from the customer. The expenditure did not bring into existence any new asset. There was a benefit by way of continuing business with the customer or increase in compensation from the customer. The assessee had achieved both these objectives by incurring the expenditure. The assessee had satisfactorily explained that the expenditure was for the purpose of conducting its business and increase in profit. The expenditure so incurred was related to the carrying on or conducting of warehouse business of the assessee and hence, it was as an integral part of the profit-earning process. The expenditure, therefore, could not be treated as capital expenditure but should be treated as revenue expenditure.”

shailesh.kwebmaker

Assessment — Faceless assessment — Grant of personal hearing where there is variation of income and requested by assessee — Failure to grant personal hearing requested by assessee on passing of draft assessment order — Assessment order and consequential demand and penalty notices set aside — Matter remanded to AO to grant personal hearing through video conferencing

40 Civitech Developers Pvt. Ltd. vs. ACIT [2021] 440 ITR 398 (Del) A.Y.: 2018-19; Date of order: 22nd July, 2021 Ss. 143(3), 144B(7) of ITA, 1961

Assessment — Faceless assessment — Grant of personal hearing where there is variation of income and requested by assessee — Failure to grant personal hearing requested by assessee on passing of draft assessment order — Assessment order and consequential demand and penalty notices set aside — Matter remanded to AO to grant personal hearing through video conferencing

The assessee was in real estate business. For the A.Y. 2018-19, a notice was issued against the assessee proposing to make addition to its income. The assessee filed a response and sought personal hearing through video conferencing. Another notice was served with the draft assessment order reducing the addition in response to which the assessee filed a detailed reply with documents and again sought a personal hearing through video conferencing to explain the issues which were complex in nature to the Assessing Officer in correct perspective with the layout plan, the disputed land and the towers which were incomplete. However, no personal hearing was allowed and assessment order was passed u/s 143(3) read with section 144B of the Income-tax Act, 1961 enhancing the income and consequential demand and penalty notices were issued.

The Delhi High Court allowed the writ petition filed by the assessee and held as under:

“Section 144B(7) of the Income-tax Act, 1961 provides an opportunity for a personal hearing, if requested by the assessee. As the option to opt for personal hearing was not enabled, the assessee due to technical glitches could not request for personal hearing on the e-portal. Consequently, it could not be said that the assessee did not opt for personal hearing. Therefore, the assessment order passed u/s. 143(3) read with section 144B and the consequential demand and penalty notices were set aside.”

The matter was remanded back to the Assessing Officer to grant an opportunity of personal hearing to the assessee through video conferencing.

shailesh.kwebmaker

Method of valuation of shares adopted by the assessee could be challenged by Assessing Officer only if it was not a recognized method of valuation as per Rule 11UA(2)

30 Him Agri Fesh (P.) Ltd. vs. ITO [2021] 90 ITR(T) 95 (Amritsar – Trib.) ITA No.: 224 (Asr.) of 2018 A.Y.: 2014-15 Date of order: 7th July, 2021

Method of valuation of shares adopted by the assessee could be challenged by Assessing Officer only if it was not a recognized method of valuation as per Rule 11UA(2)

FACTS
In the course of assessment proceedings, the Assessing Officer doubted the quantum of the premium received on the issue of shares.

During the course of assessment proceedings, though the Assessing Officer asked the assessee to file a certificate as per Rule 11UA but, the assessee had submitted that Rule 11UA was not applicable to the case of the assessee.

Since the assessee failed to comply with provisions of Rule 11UA, the Assessing Officer calculated the Fair Market Value and made an addition on that basis, u/s 56(2)(viib). The CIT (A) dismissed the assessee’s appeal.

Consequently, the assessee filed an appeal before the ITAT.

HELD
The ITAT observed that during the course of assessment proceedings, the assessee was not able to submit the report as made by the Chartered Accountant as per Discounted Cash Flow (DCF) method due to the negligence of the counsel. However, it had filed the copy of the said valuation report with the CIT(A) but the same was neither considered by her nor any comment was given on the same.

The ITAT was of the opinion that once the assessee had opted for valuation of shares under Rule 11 UA by following the DCF method, then it was not open for the assessing officer or the CIT(A) to adopt a different method of valuation, for determining the fair market value. As per Rule 11UA, the choice is given to the assessee and not to the assessing officer. The assessing officer is duty-bound to examine the working of the DCF method but has no right to change the method of calculating the fair market value of the shares. Once an assessee had exercised its option of opting for the DCF method, then the said method is required to be applied; however that the assessing officer has the power to review the calculations and correct adoption of the parameters applied by the assessee for the purpose of arriving at valuation of the shares by applying the DCF method.

It held that the law has specifically conferred an option upon the assessee that for the purpose of section 56(2)(viib) of the Act, an assessee can adopt any of the methods mentioned u/r 11UA(2). Therefore, in the instant case also, the assessee was free to choose any of the methods mentioned u/r 11UA(2). The method of valuation could be challenged by the Assessing Officer only if it was not a recognized method of valuation (as per Rule 11UA(2)) since the very purpose of certification of DCF valuation by a merchant banker or (at the relevant time) by a chartered accountant was to ensure that the valuation is fair and reasonable.

Since, in the instant case, the CIT (A) had not examined the method adopted by the assessee, the same could not be rejected. On this reasoning, the matter was remanded back to the file of the Assessing Officer with a direction to consider the report filed by the assessee.

It was also directed that the Assessing Officer was bound by the decision rendered in the case of Innoviti Payment Solutions (P.) Ltd. vs. ITO [2019] 102 taxmann.com 59/175 ITD 10 (Bang. – Trib.) wherein it was held that the AO can scrutinize the valuation report and if the AO is not satisfied with the explanation of the assessee, he has to record the reasons and basis for not accepting the valuation report submitted by the assessee and only thereafter- he can adopt his own valuation or obtain fresh valuation report from an independent valuer and confront the assessee. But he has no power to change the method of valuation opted by the assessee if it is one of the methods recognised u/r 11UA(2).

shailesh.kwebmaker

Expenditure incurred on a new project of starting a hotel chain for expansion of an existing business of real estate development and financing was to be considered as expenditure for the purpose of carrying on existing business and thus allowable as revenue expenditure u/s 37(1)

29 ITO vs. Blue Coast Infrastructure Development Ltd. [2021] 90 ITR(T) 294 (Chandigarh – Trib.) ITA No.: 143 (Chd) of 2019 A.Y.: 2013-14 Date of order: 23rd July, 2021

Expenditure incurred on a new project of starting a hotel chain for expansion of an existing business of real estate development and financing was to be considered as expenditure for the purpose of carrying on existing business and thus allowable as revenue expenditure u/s 37(1)

FACTS
Assessee-company was engaged in the business of real estate development and financing. It expanded its business into starting a hotel chain. It incurred certain expenses like professional fees in connection with the said project and claimed the same u/s 37 of the Act. However, the Assessing Officer disallowed the same. The CIT (A) deleted the disallowance on the grounds that the business of the assessee was in existence and the expenses were incurred in connection with the expansion of business.

Aggrieved, the revenue filed appeal to the ITAT.

HELD
The ITAT dismissed the revenue’s appeal on the following grounds:

The ITAT observed that the CIT (A) had made findings that the assessee’s business was an existing business, whose expansion was under consideration and expenses for the same were incurred. There was no change in management, and there was interlacing of funds, and the genuineness of the expenses was not doubted. The expenses incurred were in the same line of the existing business of the assessee.

The ITAT held that the decision of the CIT (A) was based on the ratio laid down by the Delhi High Court in CIT vs. SRF Ltd. [2015] 59 taxmann.com 180/232 Taxman 727/372 ITR 425, the Mumbai ITAT in Reliance Footprint Ltd. vs. Asstt. CIT [2014] 41 taxmann.com 553/63 SOT 124 (URO) as also in decision of the co-ordinate bench in DSM Sinochem Pharmaceuticals India (P) Ltd. vs. Dy. CIT [2017] 82 taxmann.com 316 (CHD – Trib.).

In Sinochem Pharmaceuticals (supra), the ITAT relied on Calcutta High Court decision in Kesoram Industries & Cotton Mills Ltd. [1992] 196 ITR 845 (Cal.), wherein it was held that if the expenses are incurred in connection with the setting up of a new business, such expenses will be on capital account but where the setting up does not amount to starting of a new business but expansion or extension of the business already being carried on by the assessee, expenses in connection with such expansion or extension of the business must be held to be deductible as revenue expenses. In that case, the expenditure was not related to the setting up a new factory; it pertained to exploring the feasibility of expanding or extending the existing business by setting up a new factory in the same line of business. Thus, since there was an expansion or extension of the existing business of the assessee, the same was to be considered as revenue expenditure.

To conclude, since the CIT (A) relied on the cases referred to above including the decision of co-ordinate bench, the ITAT upheld the findings of the CIT (A) and dismissed the appeal of the revenue.

shailesh.kwebmaker

FRESH CLAIM IN A RETURN FILED IN RESPONSE TO A NOTICE ISSUED UNDER SECTION 148

ISSUE FOR CONSIDERATION

In Volume 53 of BCAJ (January, 2022), we covered the issue of the validity of a fresh claim, made otherwise than by way of revising the return of income. Such fresh claim can be in respect of any deduction, exemption etc., which has not been claimed in the return of income already filed. Yet another facet of this controversy is sought to be addressed here. When it is found that an income chargeable to tax has escaped the assessment, the Assessing Officer is empowered to reopen the case and reassess the income under Section 147. In such cases, the assessee has to be served with a notice u/s 148 requiring him to furnish his return of income. The question that frequently arises, for consideration of the courts, is as to whether the assessee can furnish a return of income in response to the notice issued u/s 148, declaring an income lesser than what has already been declared/assessed prior to issuance of the notice by making a fresh claim for an allowance or deduction therein.

In the case of CIT vs. Sun Engineering Works (P) Ltd. 198 ITR 297, the Supreme Court held that it was not open to the assessee to seek a review of the concluded item, unconnected with the escapement of income, in the reassessment proceeding. Following this decision, several High Courts, including the Madras, Bombay and Calcutta High Courts, have taken the view that the income returned in response to the notice issued u/s 148 cannot be lesser than the amount of income originally declared/assessed. However, recently, the Karnataka High Court has taken a contrary view on the issue after considering the Supreme Court’s decision in the case of Sun Engineering Works (P) Ltd. (supra).

SATYAMANGALAM AGRICULTURAL PRODUCER’S CO-OPERATIVE MARKETING SOCIETY LTD.’S CASE

The issue had earlier come up for consideration of the Madras high court in the case of Satyamangalam Agricultural Producer’s Co-operative Marketing Society Ltd. vs. ITO 40 taxmann.com 45.

The assessment years involved in this case were 1997-98, 1998-99 and 1999-2000. The assessee was dealing with the marketing of agricultural produce of members, sale of liquor and consumer goods. It had filed its returns of income for the assessment years under consideration and the returns filed were also processed u/s 143(1)(a). Later, the Assessing Officer issued notices u/s 148 on noticing that deduction u/s 80P was wrongly claimed regarding income derived from the sale of liquor. In response to the notices issued u/s 148, the assessee society filed returns of income wherein it also claimed deduction u/s 80P(2)(d) in respect of its interest income on investments with co-operative banks, which was not claimed in filing the first return of income. This being a fresh claim made by the assessee in the returns filed in response to the notice issued u/s 148, it was rejected by the Assessing Officer by relying on the decision of the Supreme Court in the case of Sun Engineering Works (P) Ltd. (supra).

The Commissioner (Appeals), as well as the ITAT, confirmed the Assessing Officer’s order. Before the High Court, the assessee contended that the claim made in response to the notice u/s 148 could not have been rejected at the threshold itself since it was never assessed earlier and their returns only processed u/s 143(1); since the proceedings were completed u/s 143(1), the claims made were never considered initially; the assessments to be made u/s 147 were required to be considered as the regular assessments under which such claims could have been made. The assessee relied upon the decision of the Supreme Court in the case ITO vs. K.L. Srihari (HUF) 250 ITR 193.

The High Court held that when there was no dispute that the claim made by the assessee about the interest income on investment was not made in the original return, and only a fresh claim was made for the first time in the return filed in pursuance of notice u/s 148, such fresh claims could not be allowed as the proceedings u/s 147 were for the benefit of the Revenue. The High Court relied upon the decision of the Supreme Court in the case of Sun Engineering Works (P) Ltd. (supra) and decided the issue against the assessee.

A similar view has been taken by the High Courts in the following cases –

• CIT vs. Caixa Economica De Goa 210 ITR 719 (Bom)

• K. Sudhakar S. Shanbhag vs. ITO 241 ITR 865 (Bom)

• CIT vs. Keshoram Industries Ltd. 144 Taxman 1 (Calcutta)

THE KARNATAKA STATE CO-OPERATIVE APEX BANK LTD.’S CASE

The issue, recently, came up for consideration before the Karnataka High Court in the case of The Karnataka State Co-Operative Apex Bank Limited vs. DCIT 130 taxmann.com 114.

In this case, for A.Y. 2007-08, the assessee had filed its return of income on 31st October,2007, declaring a total income of Rs. 40,77,27,150. No assessment u/s 143(3) was made for that year. The Assessing Officer issued a notice u/s 148 on 31st March, 2012. The assessee filed the return of income in response to the aforesaid notice on 13th September, 2012 and declared a lower income of Rs. 32,56,61,835 claiming a loss on sale of securities to the extent of Rs. 8,28,65,052, not claimed in the first return of income. Thereafter, the Assessing Officer passed an order u/s 143(3) r.w.s 147 determining the assessee’s income at Rs. 51,71,70,670 and made the following additions:

a) disallowance of contributions made to funds – Rs. 10,86,43,782; and

b) denial of set-off of loss claimed on sale of securities – Rs. 8,28,65,052.

The CIT (A) as well as tribunal did not grant relief regarding the additional claim of loss made by the assessee on account of the sale of securities on the ground that the aforesaid additional claim was not made in the original assessment proceeding. The assessee preferred the further appeal before the High Court raising the following substantial questions of law –

1) Whether the Tribunal is right in applying the ratio of the decision of the Hon’ble Supreme Court in CIT vs. Sun Engineering (P.) Ltd. 198 ITR 297 (SC) and holding that concluded issue in the original proceeding cannot be reagitated in reassessment proceedings even though the case of the appellant is distinguishable inasmuch as there was no original assessment proceedings on the facts and circumstances of the case?

2) Whether the Tribunal was justified in law in not appreciating that the notice u/s 148 of the Act was issued to “assess” the income and thus all contentions in law remained open for the appellant to agitate by filling a return in response to the notice u/s 148 of the Act on the facts and circumstances of the case?

3) Whether the Tribunal is justified in law in holding that the appellant is not entitled to make additional claim of loss incurred of Rs. 8,28,65,052/- in the reassessment proceedings under section 147 of the Act on the facts and circumstances of the case?

4) Whether the Tribunal is right in not holding that the appellant is entitled to the additional claim of actual loss incurred of Rs. 8,28,65,052/- on account of sale of government securities on the facts and circumstances of the case?

Before the High Court, the assessee submitted that there was no original assessment for the same assessment year, and only an intimation u/s 143(1) was issued to the assessee. The said intimation u/s 143(1) was not an order of assessment as held by the Supreme Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P.) Ltd. 291 ITR 500. Therefore, the issue of loss on sale of securities was not considered by the Assessing Officer and has not reached finality. The assessee also urged that the decision of the Supreme Court in the case of Sun Engineering Works (P) Ltd. (supra) should not be applied in its case on the ground that in that case the original order of assessment had attained finality and, therefore, it was held that the assessee could not agitate the issues in reassessment proceedings. Further, reliance was placed on the decision of the Supreme Court in the case of V. Jagan Mohan Rao vs. CIT & Excess Profit Tax 75 ITR 373 in which it was held that the original assessment got effaced upon issuance of notice of reassessment and the subsequent assessment proceedings has to be done afresh. The assessee also relied upon the decisions of the Supreme Court in ITO vs. Mewalal Dwarka Prasad 176 ITR 529 (SC) and ITO vs. K.L. Sri Hari (HUF) 250 ITR 193 (SC) as well as on the decisions of the Karnataka High Court in CIT vs. Mysore Iron & Steel Ltd. 157 ITR 531, Nitesh Bera (HUF) vs. Dy. CIT [IT Appeal No. 585 of 2016, dated 17th February, 2021] and CIT vs. Avasarala Automation Ltd. [Writ Appeal Nos. 1411-1413 of 2004, dated 5th April, 2005].

On the other hand, the revenue relied upon the decision of the Supreme Court in the case of Sun Engineering Works (P.) Ltd. (supra) and argued that it still held the field. It was submitted that Section 148 of the Act provided a remedy to the revenue and not to the assessee. If the assessee discovered any omission or any wrong statement in the original return filed after the time limit to revise u/s 139(5) expired, the only remedy which was available to the assessee was to file a return and to seek condonation of delay in filing the return u/s 119 where the time for completion of assessment was not over.

The High Court referred to the decision of a three-judge bench of the Supreme Court in the case of V Jagan Mohan Rao (supra) wherein it was held that when there was a reassessment or assessment u/s 147, the original assessment proceeding, if any, got effaced and the reassessment or assessment has to be done afresh. The High Court also referred to the decision of the Supreme Court in the case of Mewalal Dwarka Prasad (supra) in which it was held that once proceeding u/s 148 of the Act was initiated, the original order of assessment got effaced. The court noted that in Sun Engineering Works (P.) Ltd. (supra), it was held that in a proceeding for reassessment, the issues forming part of the original assessment could not be agitated, whereas, in Mewalal Dwarka Prasad (supra), it was held that once proceeding u/s 148 was initiated, original order of assessment got effaced.

The High Court further referred to the decision of the Supreme Court in the case of K.L. Srihari (HUF) (supra), in which the matter was referred to a three judges bench considering divergence of view so taken in the earlier cases. The relevant portion from the decision of the Supreme Court as reproduced in its order by the Karnataka High Court is as follows –

1. By order dated 19th November, 1996, these special leave petitions have been directed to be placed before the three-judge Bench because it was felt that dissonant views have been expressed by different Benches of this court on the scope and effect of reopening of an assessment under section 147 of the Income-tax Act, 1961. It has been pointed out before us that the matter has earlier been considered by a Bench of three judges in V. Jagan Mohan Rao vs. CIT and EPT and the observations in the said case came up for consideration before two judges’ Benches of this court in ITO vs. Mewalal Dwarka Prasad [1989] 176 ITR 529 and in CIT vs. Sun Engineering Works (P.) Ltd. [1992] 198 ITR 297 and that there is a difference in the views expressed in said later judgments.

2. We have heard Shri Ranbir Chandra, learned counsel appearing for the petitioners, and Shri Harish N. Salve, learned senior counsel appearing for the respondents. We have also perused the original assessment order dated 19th March, 1983, as well as the subsequent assessment order that was passed on 16th July, 1987, after the reopening of the assessment under section 147. On a consideration of the order dated 16th, July, 1987, we are satisfied that the said assessment order makes a fresh assessment of the entire income of the respondent-assessee and the High Court was, in our opinion, right in proceeding on the basis that the earlier assessment order had been effaced by the subsequent order. In these circumstances, we do not consider it necessary to go into the question that is raised and the same is left open. The special leave petitions are accordingly dismissed.

In view of the above, the High Court held that, in the case of the assessee, there was no original assessment order and it was only an intimation u/s 143(1), which could not be treated to be an order in view of the decision of the Supreme Court in the case of Rajesh Jhaveri (supra). Therefore, the proceeding u/s 148 was the first assessment and the same could have been done after taking into consideration all the claims of the assessee including the one made in filing the return in response to the notice u/s 148. It was held that the decision rendered by the Supreme Court in Sun Engineering Works (P.) Ltd. had no application to the fact of the case. It was also held that even if an intimation u/s 143(1) was considered to be an order of assessment, in the subsequent reassessment proceedings, the original assessment proceeding got effaced and the Assessing Officer was required to conduct the proceedings de novo and to consider the fresh claim of the assessee.

Accordingly, the High Court decided the issue in favour of the assessee and remitted the matter to the Assessing Officer for adjudication of the fresh claim made by the assessee in its return filed in response to the notice issued u/s 148.

OBSERVATIONS
The scope of assessment in a case where a notice is issued u/s 148 is governed by section 147 which provides as under (as it existed prior to its substitution by the Finance Act, 2021) –

If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year).

In Sun Engineering Works (P.) Ltd.’s case (supra), the Supreme Court held that the reference to ‘such income’ here would mean the income chargeable to tax which has escaped assessment as referred in the initial part of the section and, therefore, the scope of assessment u/s 147 is limited only to the income which has escaped the assessment for which the proceeding has been initiated by issuing notice u/s 148. The only other income other than such escaped income which also can be included is any other escaped income which comes to the notice of the Assessing Officer subsequently in the course of the proceeding and which is not forming part of the reasons recorded for the issuance of notice u/s 148.

In the case of V. Jaganmohan Rao (supra), the Supreme Court was dealing with the case wherein the assessment was reopened with regard to the escaped income which accrued to the assessee as a result of the decision of the Privy Council in a dispute related to title of the property. While finally assessing the income, the Assessing Officer not only taxed such escaped income accruing as a result of the decision of the Privy Council but also assessed the other portion of the income which accrued to the assessee in accordance with the judgement of the High Court. The assessee contested it on the ground that at the time when the original order of assessment was passed, the ITO could have legitimately assessed the other income which was due to be assessed as per the judgment of the High Court and that there was, therefore, an escapement only to the extent of the income accruing as a result of the decision of the Privy Council. It is in this context, the Supreme Court held as under –

Section 34 in terms states that once the Income-tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under section 22(2) and may proceed to assess or reassess such income, profits or gains. It is, therefore, manifest that once assessment is reopened by issuing a notice under sub-section (2) of section 22 the previous under-assessment is set aside and the whole assessment proceedings start afresh. When once valid proceedings are started under section 34(1)(b) the Income-tax Officer had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year (emphasis supplied).

Subsequent to this decision of the Supreme Court in the case of V. Jaganmohan Rao, several High Courts took the view that the assessee can seek relief even during the course of the reassessment proceeding by relying on the Supreme Court’s observation that the whole assessment proceeding would start afresh in case of reassessment. Later, this issue of whether the assessee can claim reliefs to his benefit during the course of the reassessment proceeding reached the Supreme Court in the case of Sun Engineering Works (P.) Ltd. (supra) in which it was held as under –

37. The principle laid down by this Court in V. Jaganmohan Rao’s case (supra) therefore, is only to the extent that once an assessment is validly reopened by issuance of notice under section 32(2) of the 1922 Act (corresponding to section 148 of the 1961 Act), the previous under-assessment is set aside and the ITO has the jurisdiction and duty to levy tax on the entire income that had escaped assessment during the previous year. What is set aside is, thus, only the previous under-assessment and not the original assessment proceedings. ………..The judgment in V. Jaganmohan Roa’s case (supra), therefore, cannot be read to imply as laying down that in the reassessment proceedings validly initiated the assessee can seek reopening of the whole assessment and claim credit in respect of items finally concluded in the original assessment. The assessee cannot claim recomputation of the income or redoing of an assessment and be allowed a claim which he either failed to make or which was otherwise rejected at the time of original assessment which has since acquired finality. Of course, in the reassessment proceedings it is open to an assessee to show that the income alleged to have escaped assessment has in truth and in fact not escaped assessment but that the same had been shown under some inappropriate head in the original return, but to read the judgment in V. Jaganmohan Roa’s case (supra) as if laying down that reassessment wipes out the original assessment and that reassessment is not only confined to ‘escaped assessment’ or ‘under-assessment’ but to the entire assessment for the year and start the assessment proceedings de novo giving right to an assessee to reagitate matters which he had lost during the original assessment proceeding, which had acquired finality, is not only erroneous but also against the phraseology of section 147 and the object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court.

38. …..

39. As a result of the aforesaid discussion we find that in proceedings under section 147 the ITO may bring to charge items of income which had escaped assessment other than or in addition to that item or items which have led to the issuance of notice under section 148 and where reassessment is made under section 147 in respect of income which has escaped tax, the ITO’s jurisdiction is confined to only such income which has escaped tax or has been under-assessed and does not extend to revising, reopening or reconsidering the whole assessment or permitting the assessee to reagitate questions which had been decided in the original assessment proceedings. It is only the under-assessment which is set aside and not the entire assessment when reassessment proceedings are initiated (emphasis supplied). The ITO cannot make an order of reassessment inconsistent with the original order of assessment in respect of matters which are not the subject matter of proceedings under section 147. An assessee cannot resist validly initiated reassessment proceedings under this section merely by showing that other income which had been assessed originally was at too high a figure except in cases under section 152(2). The words ‘such income’ in section 147 clearly refer to the income which is chargeable to tax but has ‘escaped assessment’ and the ITO’s jurisdiction under the section is confined only to such income which has escaped assessment.

Keeping in view the object and purpose of the proceedings under section 147 which are for the benefit of the revenue and not an assessee, an assessee cannot be permitted to convert the reassessment proceedings as his appeal or revision, in disguise, and seek relief in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless relatable to ‘escaped income’, and reagitate the concluded matters. Even in cases where the claims of the assessee during the course of reassessment proceedings related to the escaped assessment are accepted, still the allowance of such claims has to be limited to the extent to which they reduce the income to that originally assessed. The income for purposes of ‘reassessment’ cannot be reduced beyond the income originally assessed.

The Karnataka High Court, in the case of The Karnataka State Co-operative Apex Bank Ltd. (supra), observed that divergent views had been taken by the Supreme Court in these two cases i.e. Sun Engineering Works (P.) Ltd. (supra) and Mewalal Dwarka Prasad (supra). The High Court also by referring to the decisions of the Supreme Court in the case of V. Jagmohan Rao, Mewalal Dwarka Prasad and K.L. Srihari (HUF) (supra) observed that once proceeding u/s 148 was initiated, the original order of assessment got effaced.

In the case of Mewalal Dwarka Prasad (supra), the notice u/s 148 was issued for income escaping the assessment w.r.t three different cash credit entries in the assessee’s books during the year. When the assessee challenged the validity of the notice before the High Court, the High Court upheld its validity but only with respect to one of the cash credit entries, and for the balance two entries, the notice was held to be invalid. The revenue disputed these findings and argued that the High Court should not have examined the tenability of the assessee’s contention with regard to the other two transactions and that aspect should have been left to be considered by the ITO while making the reassessment as it was open to the ITO to examine not only the three items referred to in the notice but also whatever came within the legitimate ambit of an assessment proceeding. In this context, the Supreme Court held that it was not for the High Court to examine the validity of the notice u/s 148 regarding the two items if the High Court concluded that the notice was valid at least in respect of the remaining item. Whether the ITO, while making his reassessment, would take into account the other two items should have been left to be considered by the ITO in the fresh assessment proceeding.

In our respectful submission, in the case of Mewalal Dwarka Prasad (supra), the Supreme Court had dealt with the limited issue about whether the High Court should have considered the validity of notice on the basis of the other items of income when it was held to be valid at least for one of the items of escaped income. In this context, the Supreme Court referred to the decisions of several High Courts and also to its own decision in the case of V. Jaganmohan Rao wherein it was held that when a notice is issued u/s 148 based on a certain item of income that had escaped assessment, it is permissible for the income-tax authorities to include other items in the assessment, in addition to the item which had initiated and resulted in issuance notice u/s 148. As far as the decision of the Supreme Court in the case of K.L. Srihari (HUF) (supra) is concerned, in its final order dated 25th March, 1998, a reference has been made to its earlier order dated 19th November, 1996 (in the same case) whereby the SLPs have been directed to be placed before the three-judges bench on the ground that dissonant views have been expressed in the cases of Sun Engineering Works (P.) Ltd. and Mewalal Dwarka Prasad.

The Calcutta High Court in the case of Keshoram Industries Ltd. (supra) has considered the impact of the Supreme Court’s decision in the case of K.L. Srihari (HUF) (supra) and held as under:

8. True as contended by Mr. Khaitan in ITO vs. K.L. Srihari (HUF) [2001] 250 ITR 193 (SC), a three-judges Bench considered the following judgments:

(1) CIT vs. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 2971 (SC);
(2) ITO vs. Mewalal Dwarka Prasad [1989] 176 ITR 529 (SC); and
(3) V. Jaganmohan Rao vs. CIT and CEPT [1970] 75 ITR 373 (SC).

but observed that:

“In these circumstances we do not consider it necessary to go into the question that is raised and the same is left open…”. (p. 194)…………..

12. Having heard learned counsel for the respective parties, we are respectfully of the view that in ITO vs. K.L. Srihari (HUF) 250 ITR 193, the Supreme Court did not consider it necessary to go into the views expressed by different Benches of the Supreme Court on the scope and effect of reopening of an assessment under section 147 of the Income-tax Act. We, respectfully, are, therefore, of the view that the judgment of the Supreme Court in CIT vs. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 2971 has neither been dissented from nor overruled.

13. No doubt as contended by Mr. Khaitan, the judgment in CIT vs. Sun Engg. Works (P.) Ltd.[1992] 198 ITR 297 1 (SC), is a two-judges Bench judgment. By the said judgment, the three-judges Bench judgment in V. Jaganmohan Rao vs. CIT/CEPT [1970] 75 ITR 373 (SC), has not been and could not have been overruled. As noticed supra, the Supreme Court in CIT vs. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 2971 has explained the principle laid down in V. Jaganmohan Rao vs. CIT/CEPT[1970] 75 ITR 373 (SC).

The decision of the Karnataka High Court has thrown open some very pertinent and interesting issues, some of which are listed hereunder:

• Whether an assessment made u/s 143(3) r.w.s 147 is a fresh assessment or re-assessment where it is made in pursuance of an intimation u/s 143(1) or where no assessment was made.

• Whether there was any conflict of views between the four decisions of the Supreme Court referred to and analyzed by the Karnataka High Court.

• Whether the three decisions of the Supreme Court, other than the decision in the case of Sun Engineering Works (supra), held that the original assessments which were made got effaced and therefore an altogether fresh assessment is to be made as per the provisions of law.

• Whether the decision in Supreme Court, being the latest in line, and delivered by the larger bench of three judges, could be said to have laid down the law permitting an assessee to make a fresh claim, when the court confirmed the decision of the Karnataka High Court, 197 ITR 694, which had held that the interest levied u/s 139(8) and 217 in original assessment was required to be deleted.

• Whether the proceedings for re-assessment are necessary for the benefit of revenue.

• Whether the purpose and objective of the Income Tax Act are to levy tax on real income whenever assessed under the Act.

The decision of the Karnataka High Court, by opening a new possibility for the taxpayers, has thrown a serious challenge for the revenue. It would be better for the Supreme Court to examine the issue afresh and reconcile its views in the four decisions rendered by it, over a period of time, preferably by constituting a larger bench.

shailesh.kwebmaker

S. 179 r.w.s. 264 – Non speaking order – without any reasons – Orders set aside

11 Bhavesh Mohan Lakhwani vs. Pr. Commissioner of Income Tax-12 & Anr; [W.P. No. 560 of 2021; Date of order: 31st January, 2022 (Bombay High Court)]

S. 179 r.w.s. 264 – Non speaking order – without any reasons – Orders set aside

The Petitioner had challenged the order dated 3rd March, 2020 passed by the Pr. CIT u/s 264 of the Act rejecting the Petitioner’s Application filed u/s 264. The Petitioner had filed an application u/s 264 of the Act before Pr.CIT challenging the order u/s 179 of the Act dated 28th September, 2018 passed by the Assessing Officer, against the Petitioner for recovery of tax demand of Rs. 2,77,01,520 arising out of the assessment of M/s. Laxmi Realty & Advisory Pvt Ltd. The Petitioner being one of the directors of the said M/s. Laxmi Realty & Advisory Pvt Ltd during the relevant A.Y. 2015-16, therefore the Assessing officer had initiated and passed order u/s 179 of the Act against the Petitioner for recovery of tax demand of the said company.

The Hon. Court observed that both the orders under Section 179(1) and Section 264 of the said Act are without giving any reasons. In the order passed u/s 179(1), the Income Tax Officer simply says that there was a reply received from Petitioner, but the same is not being accepted. In the order passed under Section 264 of the said Act, the Principal Commissioner of Income Tax has not even dealt with the submissions made by the Petitioner.

In the circumstances, the Hon. Court set aside both the orders, i.e., the order dated 27th February, 2020, passed under Section 264 of the said Act and the order dated 28th September, 2018, passed under Section 179(1).

The Hon. Court further directed that the Assessing Officer consider afresh the response filed by Petitioner and pass an order under Section 179(1) of the said Act in accordance with law and before any order is passed, the Petitioner shall be given a personal hearing, and notice of personal hearing shall be communicated to Petitioner at least two weeks in advance. If the Assessing Officer wishes to rely on any judgments or order passed by any Court or Tribunal, he shall provide a copy thereof to the Petitioner and allow him an opportunity to deal with those judgments or distinguish those judgments and those submissions of the Petitioner shall also be dealt with in the order.

shailesh.kwebmaker

Section 43CA does not apply in a situation where allotment letters are issued and part payments received prior to 1st April, 2013

28 Spenta Enterprises vs. ACIT [TS-63-ITAT-2022(Mum.)] A.Y.: 2014-15; Date of order: 27th January, 2022 Section: 43CA

Section 43CA does not apply in a situation where allotment letters are issued and part payments received prior to 1st April, 2013

FACTS
In the course of assessment proceedings of the assessee, carrying on the business of builders, developers and realtors, the Assessing Officer (AO) noted that there was a difference between agreement value and market value in respect of some of the properties. He issued a show cause to the assessee. In response, the assessee submitted that only in two cases the stamp duty value on the date of allotment was in excess of their respective agreement values. He further submitted that since allotment letters were issued and initial amounts received prior to coming into force of section 43CA, the provisions of section 43CA did not apply even to these two cases. To substantiate, the assessee submitted ledger copies of the buyer’s accounts and bank statements showing receipt of initial amounts from the buyer. The assessee also relied upon the decision of the Mumbai Tribunal in the case of Krishna Enterprises vs. ACIT.

The AO, not being convinced by the submissions made by the assessee, added a sum of Rs. 8,26,329 to the total income of the assessee under section 43CA.

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

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted the twin contentions of the assessee, namely that since section 43CA was introduced w.e.f. 1st April, 2013 and the agreements under consideration were entered into prior to 1st April, 2013; the provisions of section 43CA do not apply and because the difference between the ready reckoner rate and sale consideration was only 5%, the same needs to be ignored on the touchstone of the decision of the Mumbai Tribunal in the case of Krishna Enterprises vs. ACIT. The Tribunal held that the assessee succeeds on both the counts. The Tribunal set aside the orders of the authorities below and decided the issue in favour of the assessee.

shailesh.kwebmaker

Sum accepted as a loan, which is found correct in principle, could not be treated as an amount received since there is a pre-condition of its return to be made to the creditor party. The fact that the creditor company’s name is subsequently struck off is contrary to the factual position in the impugned year

27 ITO vs. Hajeebu Venkata Seeta [TS-50-ITAT-2022(Hyd.)] A.Y.: 2009-10; Date of order: 5th January, 2022 Section: 56

Sum accepted as a loan, which is found correct in principle, could not be treated as an amount received since there is a pre-condition of its return to be made to the creditor party. The fact that the creditor company’s name is subsequently struck off is contrary to the factual position in the impugned year

FACTS
During the previous year relevant to the assessment year under consideration, the assessee received a sum of Rs. 2,84,00,000 from Synchron Infotech Pvt. Ltd. The amount so received was paid to Legend Infra Homes Pvt. Ltd. The purpose of the transactions was to purchase property from Legend Infra Homes Pvt. Ltd. by Synchron Infotech Pvt. Ltd.

This position was confirmed by bank transactions and copies of ledger account in the books of Synchron Infotech Pvt. Ltd., Legend Infra Homes Pvt. Ltd. and the assessee. The entry in the case of the assessee is that the relevant sum was given to Legend Infra “towards advance for purchase of property on behalf of Synchron”. The ledger account of Legend Infra Homes Ltd. reflected the relevant sums as advances towards the purchase of property on behalf of Synchron and not in the name of the assessee.

The Assessing Officer held this sum of Rs. 2,84,00,000 to be taxable u/s 56(2)(vi) of the Act and added it to the assessee’s total income. He also observed that the name of Synchron Infotech Pvt. Ltd. had been struck off.

Aggrieved, the assessee preferred an appeal to CIT(A), who allowed the appeal filed by the assessee and held that the sum of Rs. 2,84,00,000 received by the assessee is not without consideration, and consequently, section 56(2)(vi) of the Act does not apply.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD
The Tribunal observed that the AO had not invoked section 68 of the Act in order to treat the impugned sums as unexplained cash credit on account of the assessee’s failure to prove the identity, genuineness and creditworthiness of all the parties therein. The Tribunal held that a loan sum accepted as correct in principle could not be treated as an amount received since there is a pre-condition of its return to be made to the creditor party. The Tribunal rejected the arguments on behalf of the revenue and confirmed the action of CIT(A).

shailesh.kwebmaker

FUNGIBILITY OF DIRECT TAX AND INDIRECT TAX FOR INDIVIDUAL INCOME TAXPAYERS AND INCOME TAX RETURNS FILERS

Kindly refer to my article – ‘India’s Macro-Economic & Financial Problems and Some Macro-Level Solutions’, published in September, 2021 BCAJ. Some professional colleagues and friends have opined that Fungibility of Direct and Indirect Taxes is never possible. No country in the World to their knowledge has such a facility given multiple difficulties etc. I accept their worthy views with a caveat that some country has to start. Why cannot India take the lead in this matter?

Others stated that my suggestion in the article is a solution that is self-defeating. The country loses out on Tax Revenues – Direct and Indirect and nobody gains in this matter. Please see the workings later.

My listing of benefits of tax fungibility is as under (from the above-published article):
1) Possibility of increased Income Tax Returns being filed by Individuals to claim the GST refund.
2) Widening of GST net due to individual income taxpayer asking for GST invoice.
3) The individual taxpayer MUST FEEL rewarded for filing income tax returns. Ultimately, Income Tax has always been a sensitive topic, and one must make the Tax Payer feel rewarded.

So far as individual income taxpayers are concerned, Indirect Tax is apparently unfair for B2C transactions (Business-to-Consumer). In B2B transactions, the business receiving goods and services is able to take an input tax credit of the same for its business and tax payment. While in B2C, this facility is not available. My proposal is aimed at making it
available.

Working:
By the working below, I wish to dispel this argument of Revenue Loss or no net increase in Tax Revenues. Note that this is only applicable to Individual Taxpayers filing ITRs 1 – 4.

Case: Individual ‘A’ (based on the old tax regime of income tax)

Total annual income

Rs 22.00 lakhs

Taxable annual income

Rs 20.00 lakhs

Income tax payable

(@ 21% tax rate (slab computation)

Rs 4.20 lakhs

Income available for annual spending (2-3)

Rs 15.80 lakhs

Amount spent

(assuming 80% spend on goods and services
and balance 20% savings)

Rs 12.64 lakhs

GST invoices available

(on 80% of total purchases)

Rs 10.10 lakhs

Value of purchases

GST paid on purchases

(at 15% average GST rate)

Rs 8.80 lakhs

Rs 1.30 lakhs

When filing the Income Tax Return, the individual taxpayer MUST show the amount of GST paid Rs 1.30 lakhs and claim an applicable Income Tax Refund. It is my view that even a 100% GST setoff will not impact Income Tax Revenues but will increase Income Tax Returns filings and add to GST revenues.

Note: Lower the value and percentage of GST Invoices, lower the GST set off against income tax payable. Individual purchasers/Buyers will insist on GST Invoices.

MECHANISM
To all those who already have PAN Cards and are filing any of the above 4 types of Income Tax Returns, the Income Tax office can send out a special code that is linked to the assessee’s PAN Card Number.

Those who have not filed their returns in the past MUST do so for availing GST setoff /refund and make an application to the Income Tax Authorities for the special code.

Every time a GST invoice is collected this special code must get referenced and scanned. That is the responsibility of the purchaser to show his special code card which the seller will scan and link with the GST Invoice. This can be done with safeguards and conditions that are easy to fulfill such as payment via debit/credit card/UPI/Electronic mode and even a threshold per transaction to start with.

Through the above referenced individual code, the Income Tax authorities must capture the GST paid by the individual as they are capturing the other Income and TDS thereon.

This collated information about sellers giving GST invoice details should also go to the GST authorities. They can then find out who is filing GST Returns and who is not. Is the GST paid by the seller in line with the Sales
Invoice details given by the purchaser? An App or other modes of technology for this purpose could also come in handy.

As stated by me in the September, 2021 BCAJ article, the Revenue authorities must do some original thinking. There is a possible solution which MOST IMPORTANTLY favours the individual income tax payer. This must not be refrigerated but be worked on for 2023-24 implementation.

The key issue we are facing is the issue of Equity for the individual income taxpayer. Already, with Agriculture income out of ambit of the Income Tax Act, there is a high sense of frustration that large landowners and wealthy agriculturists are conveniently excluded.

Note: The author wishes to thank the members of the BCAJ Editorial team for value-added interventions to the article.

shailesh.kwebmaker

S. 148 – Reopening of assessment – Within 4 years – original assessment completed u/s. 143(3) – Change of opinion on the same set of facts – Not permissible

10 M/s. Gemstar Construction Pvt. Ltd. vs. Union of India & 3 Ors. [W.P. No 1005 of 2008; Date of order: 6th January, 2022 (Bombay High Court)]

S. 148 – Reopening of assessment – Within 4 years – original assessment completed u/s. 143(3) – Change of opinion on the same set of facts – Not permissible

The petitioner challenged the notice dated 12th December, 2007 issued u/s 148 of the Act, on the ground, inter-alia, that respondents are relying on the same material to take a different view. The Assessing Officer had passed the assessment order dated 17th March, 2005, and conclusively took one view. Therefore, it could not be open to reopen the assessment based on the very same material with a view to take another view.

The reasons for issuing notice u/s 148 is contained in a communication dated 27th December, 2007 and the same reads as under:-
“On close scrutiny of the assessment record, it is observed that the assessee company has claimed deduction u/s. 80IB(10) as it is engaged in the development and building approved housing project. Contrary to the provisions of the statute, the housing project includes shops. As a result, the company is not entitled to deduction u/s. 80IB(10). In the light of the aforesaid fact that I have reason to believe that the granting of deduction u/s. 80IB(10) of Rs.1,42,50,816/- has resulted escapement of income within the meaning of Section 147.”

In the assessment order itself, it was recorded that a show-cause notice was issued on 17th January, 2005 requiring the assessee to substantiate the claim of deduction. In paragraph 7.1 of the assessment order, it was recorded that the petitioner has filed detailed submissions vide letter dated 10th March, 2005 and has shown cause as to why it was entitled to the claim of deduction under section 80IB(10).

It is settled law that the Assessment Officer has no power to review an assessment that has been concluded. The Assessing Officer, before he passed the assessment order, had in his possession all primary facts necessary for assessment and then he made the original assessment. When the primary facts necessary for assessment are fully and truly disclosed, the Assessing Officer is not entitled to a change of opinion to commence proceedings for reassessment. Where on consideration of the material on record, one view is conclusively taken by the Assessing Officer, it would not be open to reopen the assessment based on the very same material with a view to take another view.

The Court observed that this is not a case where the assessment is sought to be reopened on the reasonable belief that income had escaped the assessment on account. This is a case wherein the assessment is sought to be reopened on account of change of opinion of the Assessing Officer about the manner of computation of deduction under section 80IB(10) of the Act.

The Court was satisfied that not only material facts were disclosed to the petitioner truly and fully, but they were carefully scrutinized, and figures of income, as well as deduction, were viewed carefully by the Assessing Officer.

In the circumstances, the petition was allowed and the notice under section 148 of the Act, dated 12th December, 2007, was quashed.

shailesh.kwebmaker

S. 148 – Reopening of assessment – Non-application of mind by AO while recording the reasons – Non-application of mind by PCIT while granting approval u/s. 151 of the Act – CBDT directed to train their officers

9 Sharvah Multitrade Company Private Limited. v/s. Income Tax Officer Ward 4(3)(1) & Anr; [W.P. No. 3581 of 2021; Date of order: 20th December, 2021; A.Y.: 2015-16 (Bombay High Court)]

S. 148 – Reopening of assessment – Non-application of mind by AO while recording the reasons – Non-application of mind by PCIT while granting approval u/s. 151 of the Act – CBDT directed to train their officers

The Petitioner had challenged the issuance of notice for A.Y. 2015-2016 dated 31st March, 2021 issued u/s 148 of the Act, and the order rejecting the objections dated 23rd July, 2021.

The assessment had been completed u/s 143(3) of the said Act on 28th September, 2017. The Petitioner submitted that the reasons recorded for reopening indicate total non-application of mind in as much as in the tabular form, it is stated that Sharvah Multitrade Company Private Limited for F.Y. 2014-15 had been a beneficiary through fund trail of Rs. 3.72 Crores. Then again, it is mentioned that the above mentioned bogus entities managed, controlled and operated by M/s. Sharvah Multitrade Company Private Limited for providing bogus accommodation entries, hence, all the transactions entered into between the above-mentioned entities and the assessee/beneficiary are bogus accommodation entries in nature.

The Court observed how can a company provide bogus entry to itself. Sharvah Multitrade Company Private Limited is alleged to be a beneficiary identified through fund trail, and its PAN number is shown to be AAQCS2595H. Petitioner, who is the assessee, is also Sharvah Multitrade Company Private Limited, and its PAN number is AAQCS2595H. Therefore, this clearly shows total non-application of mind by the Assessing Officer Mr. Suryavanshi. His statement in the reasons “…………… and after careful application of mind ……..” is risible. Thus there was total non-application of mind by the A.O. while recording the reasons.

The Court further observed that there had been total non-application of mind while filing the affidavit in reply to the petition by the same officer – Mr. Shailendra Damodar Suryavanshi, Income Tax Officer, Ward 4(3)(1), Mumbai. In the affidavit in reply, the same Mr. Suryavanshi states, “as Annexure – 2 is the copy of the approval u/s 151 of the Act ”. There was no annexure – 1 mentioned anywhere. Moreover, in the affidavit filed in the Court, even this annexure was missing. This further displayed total non-application of mind by this officer.

The Department Counsel tendered a copy of the approval u/s 151 of the said Act, which he had in his file where it says “In view of reasons recorded, I am satisfied that it is a fit case to issue notice u/s 148 ”. PCIT, Mumbai Anil Kumar, signed this.

The Court observed that if this PCIT only read the reasons recorded, he would have raised a query about how can an entity provide bogus entry to itself. That shows total non-application of mind by the said Mr. Anil Kumar as well.

The Court further observed that one Vijay Kumar Soni, Range 4(3), Mumbai, has recommended a grant of approval. That shows non-application of mind even by this Vijay Kumar Soni. The Court wondered whether the officers of respondents ever bothered to read the papers before writing the reasons or recommending for approval or while granting approval.

The Court observed that in the objections filed by petitioner vide its letter dated 10th May, 2021, the petitioner raised these points and alleged lack of application of mind. The said Mr. Suryavanshi while rejecting the objections, by an order dated 23rd July 2021, first of all, makes a false statement that “the assessee’s above submissions and objections have been carefully considered and the same are dealt with as under ” but he does not deal with the objection of the assessee of lack of application of mind. The said Mr. Suryavanshi is totally silent about the objections raised on non-application of mind.

In view of the above, the Court allowed the petition and quashed the impugned reassessment proceedings for A.Y. 2015-16 as wholly without jurisdiction, illegal, arbitrary, and liable to be quashed.

A copy of this order was directed to be sent to the Chairman, CBDT, to formulate a scheme whereby the officers are trained on how to apply their minds and what all points should be kept in mind while recording the reasons. The Chairman, CBDT, may also advise the concerned Commissioners not to grant approval u/s 151 of the said Act mechanically but after considering the reasons carefully and scrutinizing the same.

shailesh.kwebmaker

TDS — Credit for — Assessee an airline pilot and employee of airline company — Company deducting tax at source but not paying it into government account — Assessee cannot be denied credit for tax deducted at source

39 Kartik Vijaysinh Sonavane vs. Dy. CIT [2021] 440 ITR 11 (Guj) A.Ys.: 2009-10 and 2011-12; Date of order 15th November, 2021 S. 205 of ITA, 1961

TDS — Credit for — Assessee an airline pilot and employee of airline company — Company deducting tax at source but not paying it into government account — Assessee cannot be denied credit for tax deducted at source

The assessee was a pilot by profession and an airline company employee. The company deducted tax at source of Rs. 7,20,100 and Rs. 8,70,757 for the A. Ys. 2009-10 and 2011-12 respectively in his case but did not deposit it in the Central Government account. The assessee was denied credit for the tax deducted at source and recovery notices for tax with interest were raised against the assessee.

The Gujarat High Court allowed the writ petition filed by the assessee and held as under:

“The Department was precluded from denying the assessee the benefit of the tax deducted at source by the employer during the relevant financial years. Credit shall be given to the assessee and if in the interregnum any recovery or adjustment was made by the Department, the assessee shall be entitled to the refund thereof with the statutory interest, within eight weeks.”

shailesh.kwebmaker

TDS — Commission — Expenses incurred on doctors by assessee, a pharmaceutical company — Doctors not legally bound to prescribe medicines suggested by assessee — No principal-agent relationship — Payments cannot be construed as commission — No liability to deduct tax at source

38 ClT(TDS) vs. INTAS Pharmaceuticals Ltd. [2021] 439 ITR 692 (Guj) A.Ys.: 2011-12 to 2013-14; Date of order: 11th August, 2021 S. 194H of ITA, 1961

TDS — Commission — Expenses incurred on doctors by assessee, a pharmaceutical company — Doctors not legally bound to prescribe medicines suggested by assessee — No principal-agent relationship — Payments cannot be construed as commission — No liability to deduct tax at source

The assessee was a pharmaceutical company. Pursuant to a survey u/s 133A of the Income-tax Act, 1961 carried out at the premises of the assessee, e-mails and other correspondences that ensued between the sales executive and the general manager, seized during the survey operations, suggested that the doctors had acted as the agents of the assessee, by prescribing the medicines of the assessee over a period of time, and therefore, the expenses incurred by the assessee on the doctors towards taxi fares, air fares, etc., for attending regional conferences or scientific conferences were required to be treated as commission received or receivable as contemplated u/s 194H. The Assessing Officer treated the assessee as an assessee-in-default u/s 201(1) for non-deduction of tax at source u/s 194H of the Act on such payments.

The Commissioner (Appeals) restricted the addition to expenditure incurred on the doctors under various heads and held that the expenses incurred on other stakeholders did not fall within the definition of the term commission. Both the Department and the assessee filed appeals before the Tribunal. The Tribunal partly allowed the assessee’s appeals and dismissed the appeals filed by the Department.

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

“i) According to the provisions contained in section 194H of the Income-tax Act, 1961 and the Explanation to the section, any payment received or receivable by a person for rendering medical services is excluded from the purview of section 194H. The Explanation to section 194H cannot be interpreted so widely as to include any payment receivable, directly or indirectly for services in the course of buying or selling goods.

ii) In the absence of an element of agency between the assessee and the doctors, the provisions of section 194H could not be invoked. The doctors were not bound to prescribe the medicines as suggested by the assessee. There was no legal compulsion on the part of the doctors to prescribe a particular medicine suggested by the assessee, and therefore, the doctors had not acted as the agents of the assessee.

iii) There was no illegality or infirmity in the order of the Tribunal in holding that the expenditure incurred on the doctors could not be classified as commission. No question of law arose.”

shailesh.kwebmaker

TDS — Commission to insurance agent — Scope of S. 194D — Arrangement for foreign travel of agents — Expenses paid directly to service providers — Tax not deductible at source on payments to service providers

37 CIT vs. SBI Life Insurance Company Ltd. [2021] 439 ITR 566 (Bom) Date of order: 22nd October, 2021 S. 194D of ITA, 1961

TDS — Commission to insurance agent — Scope of S. 194D — Arrangement for foreign travel of agents — Expenses paid directly to service providers — Tax not deductible at source on payments to service providers

The assessee respondent is engaged in the business of underwriting life insurance policies. The assessee’s business comprises of individual life and group business. The Assessing Officer noticed that the assessee had incurred foreign travel expenses for its agents who were working for soliciting or procuring insurance business for the assessee and opined that foreign travel expenses incurred by the assessee on its agents were covered under the words “income by way of remuneration or reward whether by way of commission or otherwise” used in section 194D of the Income-tax Act, 1961. Since the assessee had not deducted tax at source, the Assessing Officer treated the assessee as an assessee in default.

The order was set aside by the Commissioner (Appeals) and this was affirmed by the Tribunal.

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

“i) U/s 194D the obligation to deduct is on the person who is paying and the deduction to be made at the time of making such payment.

ii) Factually and admittedly no amount had been paid to the agents by the assessee as a reimbursement of expenses incurred by the agent on foreign travel. The assessee had made arrangement for foreign travel for all the agents and paid expenses directly to those service providers. Therefore, as no amount was paid to the agents by the respondent, the obligation to deduct Income-tax thereon at source also would not arise.”

shailesh.kwebmaker

Reassessment — Notice u/s 148 — Validity — Assessment not finalised in pursuance of return of income — Notice u/s 148 issued before issuing notice u/s 143(2) for assessment u/s 143(3) — Impermissible

36 Loku Ram Malik vs. CIT [2021] 440 ITR 159 (Raj) A.Y.: 1999-00; Date of order: 3rd May, 2017 Ss. ss. 143, 143(2), 143(3) & 148 of ITA, 1961

Reassessment — Notice u/s 148 — Validity — Assessment not finalised in pursuance of return of income — Notice u/s 148 issued before issuing notice u/s 143(2) for assessment u/s 143(3) — Impermissible

The assessee showed the investment in a plot of land at a certain value in his return of income filed on 6th December, 1999. The Assessing Officer processed the return u/s 143(1)(a) of the Income-tax Act, 1961 on 11th August, 2000. Thereafter, the assessee revised the balance sheet and profit and loss account on 16th August, 2000 enhancing the investment in such property. The Assessing Officer issued a notice u/s 148 on 14th September, 2000, based on the revised balance sheet filed by the assessee and then issued a notice u/s 143(2) on 3rd October, 2000.

In appeal, the assessee challenged the validity of the notice u/s. 148. The Tribunal upheld the issuance of notice u/s 148 though the Assessing Officer could have issued a notice u/s 143(2) to make the regular assessment u/s 143(3).

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

“i) The order u/s 143(1)(a) was confirmed on 11th August, 2000 when the return was filed and the notice u/s 148 came to be issued before the assessment could have been done.

ii) The Tribunal had committed an error in upholding the notice issued u/s 148.”

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Reassessment — Notice after four years — Condition precedent — Notice not specifying failure to disclose any material facts truly and fully by assessee — Notice and subsequent order invalid

35 Coca-Cola India P. Ltd. vs. Dy. CIT [2021] 440 ITR 20 (Bom) A.Y.: 1998-99; Date of order: 21st September, 2021 Ss. 147 & 148 of ITA, 1961

Reassessment — Notice after four years — Condition precedent — Notice not specifying failure to disclose any material facts truly and fully by assessee — Notice and subsequent order invalid

For the A.Y. 1998-99, the assessee filed a second revised return declaring a loss as a result of demerger of its bottling division. The Deputy Commissioner issued notices u/s 143(2) and 142(1) of the Income-tax Act, 1961 along with a questionnaire. The assessee furnished the reasons for filing the revised returns of income and provided clarifications in response to the various queries raised and the balance sheet and the profit and loss account. Thereafter, the Deputy Commissioner passed an order dated 30th March, 2001 u/s 143(3), computing the assessee’s total income at nil after setting off earlier years’ losses. Aggrieved by certain disallowances made by the Deputy Commissioner, the assessee filed an appeal before the Commissioner (Appeals). The Commissioner, by an order u/s 263 directed the Deputy Commissioner to pass a fresh assessment order after considering the issues identified in his order. Thereafter, an order u/s 143(3) read with section 263 was passed. After the expiry of four years, the Deputy Commissioner issued a notice u/s 148 to reopen the assessment u/s 147.

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

“i) According to the proviso to section 148 of the Income-tax Act, if the notice is issued to reopen the assessment u/s 147 after the expiry of four years from the relevant assessment year, it will be time barred unless the assessee had failed to disclose material facts that were necessary for the assessment of that A.Y. and if there is no failure to disclose, it would render the notice issued as being without jurisdiction.

ii) The reasons recorded for reopening of the assessment did not state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of the assessment year 1998-99. The notice issued u/s 148 after a period of four years for reopening the assessment u/s 147 and the consequential order passed were quashed and set aside.”

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Reassessment — Notice after four years — Condition precedent — Notice issued on basis of information received subsequent to search and seizure of another party — Nexus between undisclosed loan activity of searched party and assessee not established — Notice and consequential assessment order quashed and set aside

34 Peninsula Land Ltd. vs. ACIT [2021] 439 ITR 582 (Bom) A.Y.: 2012-13; Date of order: 25th October, 2021 Ss. 132, 147 & 148 of ITA, 1961

Reassessment — Notice after four years — Condition precedent — Notice issued on basis of information received subsequent to search and seizure of another party — Nexus between undisclosed loan activity of searched party and assessee not established — Notice and consequential assessment order quashed and set aside

For the A.Y. 2012-13, an order u/s 143(3) read with section 153A of the Income-tax Act, 1961 was passed on 30th December, 2016 against the assessee. After a period of four years, the Assessing Officer issued a notice u/s 148 dated 30th March, 2019 for reopening the assessment u/s 147 of the Act. He recorded reasons that information was received from the Deputy Director that a search and seizure operation was conducted u/s 132 in the case of an entity EE and based on the statement recorded of the partner of EE and documentary evidence found in the search, an undisclosed activity of money lending and borrowing in unaccounted cash was found being operated at the premises of EE, that the assessee had indulged in lending of cash loan and the amount of Rs. 30 lakhs had escaped assessment within the meaning of section 147. Consequent reassessment order was passed on 5th September, 2019.

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

“i) Under the substituted section 147 of the Income-tax Act, 1961 if the Assessing Officer has reason to believe that income has escaped assessment that is enough to confer jurisdiction to reopen the assessment. But the Assessing Officer has no power to review an assessment which has been concluded. After a period of four years even if the Assessing Officer has some tangible material to come to the conclusion that there is an escapement of income from assessment, he cannot exercise the power to reopen unless he discloses what was the material fact which was not truly and fully disclosed by the assessee.

ii) The reasons for the reopening of assessment have to be tested or examined only on the basis of the reasons recorded at the time of issuing a notice u/s 148 seeking to reopen the assessment. These reasons to believe cannot be improved upon or supplemented much less substituted by affidavit or oral submissions. The reasons for reopening an assessment should be those of the Assessing Officer alone who is issuing the notice and he cannot act on the dictates of any another person in issuing the notice. The tangible material upon the basis of which the Assessing Officer entertains reason to believe that income chargeable to tax has escaped assessment can come to him from any source, but the reasons for the reopening have to be only of the Assessing Officer issuing the notice.

iii) In the reasons for the reopening, the Assessing Officer had not stated anywhere that one BS was an employee of the assessee. Further, he did not even disclose when the search and seizure u/s 132 was carried out in the case of the entity EE, whether it was before the assessment order dated 30th December, 2016 against the assessee was passed or afterwards. The reasons for reopening were absolutely silent on how the search and seizure on EE or the statement referred to or relied upon in the reasons recorded had any connection with the assessee.

iv) The notice dated 30th March, 2019 issued u/s 148 and the subsequent order dated 5th September, 2019 passed were without jurisdiction and hence, quashed and set aside. Any consequent notice or demand, if issued, was also quashed and set aside.”

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Perquisite — Exceptions — Treatment of prescribed ailment in approved hospital — Application for approval filed by hospital before outbreak of Covid-19 pandemic — Renewal denied on ground that State Government Authority had revoked approval granted to assessee for treating Covid-19 patients — Order of Principal CIT rejecting application unsustainable

33 Park Health Systems Pvt. Ltd. vs. Principal CIT [2021] 439 ITR 643 (Telangana) Date of order: 28th September, 2021 S. 17(2)(viii) Proviso (II)(B) of ITA, 1961

Perquisite — Exceptions — Treatment of prescribed ailment in approved hospital — Application for approval filed by hospital before outbreak of Covid-19 pandemic — Renewal denied on ground that State Government Authority had revoked approval granted to assessee for treating Covid-19 patients — Order of Principal CIT rejecting application unsustainable

The assessee was a hospital, and it was granted approval by the Principal Chief Commissioner under proviso (ii)(b) to section 17(2)(viii) of the Income-tax Act, 1961 initially in the year 2011-12, with each renewal being valid for three years and the last of the renewal granted being valid till 21st March, 2020. The assessee made an application on 13th January, 2020 seeking renewal of approval granted two months prior to the expiry of the validity period of the existing approval granted. While the application was pending for renewal of approval, the Covid-19 pandemic struck and the assessee was granted approval by the State Government Department of Public Health and Family Welfare for providing treatment for Covid-19 patients. Thereafter, based on complaints, the State Government Medical and Health Officer, on 3rd August, 2020 revoked the permission granted to the assessee. The assessee submitted its explanation and sought for recalling the revocation order. While the explanation offered by the assessee was under consideration by the State authorities, the second respondent issued a notice dated 12th October, 2020 calling upon the assessee to show cause why the cancellation order of the State Government should not be considered for deciding the application for recognition under proviso (ii)(b) to section 17(2)(viii). The assessee submitted in its letter to the Principal Chief Commissioner that when it made the application for renewal of approval, there was no Covid-19 pandemic outbreak, that the State Government Department of Public Health and Family Welfare revoked the permission for Covid-19 treatment only and not for other medical treatments, that the State authority’s action was based on misinformation and baseless propaganda made by the media without taking into consideration the actual facts, that the assessee was under the process of getting permission again for Covid-19 treatment from the State Government Department of Public Health and Family Welfare and requested to grant the renewal of application under proviso (ii)(b) to section 17(2)(viii). The Principal Chief Commissioner rejected the application for renewal of approval by an order dated 19th October, 2020.

On a writ petition challenging the order, the Telangana High Court allowed the writ petition and held as under:

“i) The order rejecting the renewal of approval under proviso (ii)(b) to section 17(2)(viii) had been passed by the Principal Chief Commissioner by traversing beyond the notice and was in violation of principles of natural justice causing prejudice to the assessee. The order read with the notice showed that it was passed as a chain reaction to the order of the State Government, which dealt with determination of corona virus disease as a respiratory disease and it was a prescribed disease under clause (a) of sub-rule (2) of rule 3A of the Income-tax Rules, 1962.

ii) The order indicated that it had taken into consideration various issues which had not been mentioned in the notice issued to the assessee. The only ground mentioned in the notice was with regard to the State Government revoking the mandate given for covid treatment, whereas the order, apart from dealing with the revocation of mandate for covid treatment by the State Government, also dealt with other aspects as to the nature of the corona virus disease being a respiratory disease and the assessee having resorted to excessive, exorbitant and unconscionable pricing being a misconduct or an offence, without putting the assessee on notice of the allegations and to offer its explanation. The claim of the Principal Chief Commissioner that Covid-19 treatment was a respiratory disease was not backed by any material or scientific data. Since the notice issued relied only on the revocation of permission for providing medical treatment for Covid-19 by the State Government, and the revocation having been lifted by the State authority by proceedings dated 13th September, 2020 and the assessee was permitted to provide treatment for Covid-19 patients, the very basis of the notice dated 12th October, 2020 issued was removed.

iii) The order rejecting the renewal of approval granted under proviso (ii)(b) to section 17(2)(viii) was unsustainable.”

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CONTROVERSIES

ISSUE FOR CONSIDERATION

Charitable institutions generally receive donations (voluntary contributions) from various donors for carrying out their charitable activities. Earlier, till A.Y. 1972-73, section 12(1) provided that voluntary contributions would not be included in income, while section 12(2) provided that voluntary contributions from another trust referred to in section 11, would be deemed to be income from property held in trust for charitable purposes. These voluntary contributions now fall within the definition of ‘income’ by virtue of insertion of section 2(24)(iia) of the Income Tax Act, 1961, with effect from A.Y. 1973-74. Such contributions (other than corpus donations) are also deemed to be income from property held under trust for charitable purposes, by virtue of section 12(1) of the Act, since A.Y. 1973-74. The exemption under section 11 of a charitable trust, registered under section 12A/12AA (now section 12AB), is therefore now computed by considering such voluntary contributions and adjusting the same by the application and accumulation of income, for charitable purposes, by applying the various sub-sections of section 11.

At times, charitable institutions receive grants from other institutions or persons, Indian or foreign, Government or non-government, with the condition that such grants are to be utilised only for specific purposes (“tied-up grants”). In most such cases, there is also a stipulation that in case the tied-up grants are not used for the specified purposes within a specific period of time, the unutilised amounts are to be refunded to the grantor of the aid.

The issues in the context of taxation have arisen before the courts as to whether such tied-up grants could be termed as voluntary contributions and whether, where not utilized during the year, are income of the recipient institution, as the same are to be refunded and represent a liability to be discharged in the future. While the Bombay High Court has taken the view that such grants are voluntary contributions, the Delhi High Court has taken the view that such receipts are not voluntary contributions and are liabilities and not in the nature of income of the recipient institution. A similar view has been taken by the Gujarat High court following the Delhi High court decision.

GEM & JEWELLERY EXPORT PROMOTION COUNCIL’S CASE
The issue had first come up before the Bombay High Court in the case of CIT vs. Gem & Jewellery Export Promotion Council 143 ITR 579.

In this case relating to A.Y. 1967-68, the assessee was a company set up for the advancement of an object of general public utility, i.e., to support, protect, maintain, increase and promote exports of gems and jewellery, including pearls, precious and semi-precious stones, diamonds, synthetic stones, imitation jewellery, gold and non-gold jewellery and articles thereof, whose income was applied only for charitable purposes as defined in section 2(15).

The assessee received grants-in-aid from the Government of India for meeting the expenditure on specified projects. Some of the conditions on which those grants-in-aid were given were the following:
1. The funds should be kept with the State Bank of India, the total expenditure should not be more than the expenditure approved by the Central Government for each project; separate accounts should be kept for Code and non-Code projects and the accounts were to be audited by chartered accountants approved by the Government.
2. Any amount unspent was to be surrendered to the Government by the end of the financial year unless allowed to be adjusted against next year’s grant.
3. The grant should be spent upon the object for which it had been sanctioned. The assets acquired wholly or substantially out of grant-in-aid would not, without prior sanction of the Central Government, be disposed of, encumbered or utilised for purposes other than those for which the grant was sanctioned.

At that point of time, relying on section 12(1), which provided that any income derived from voluntary contributions applicable solely to charitable or religious purposes would not be includible in the total income, the assessee claimed that the grants-in-aid were in the nature of voluntary contributions, and were therefore not taxable, whether spent or not. The assessing officer taxed such unspent grants-in-aid, allowing accumulation of 25% of such amount.

In first appeal, the assessee’s claim was allowed, holding that such grants-in-aid were not taxable, being voluntary contributions. Before the Tribunal, the Department argued that the grants-in-aid could not be considered as voluntary contribution for the purpose of section 12(1), having regard to the fact that the grants were made subject to conditions mentioned above. The Tribunal confirmed the first appellate order, holding that the amounts given by the Government were voluntary contributions and were not in the nature of any price paid for any benefit or privilege, nor were they for any consideration. According to the Tribunal, the conditions imposed by the Government did not change the nature of the payment, which was initially a voluntary contribution.

Before the Bombay High Court, on behalf of the revenue, it was argued that while making contributions, the Government imposed certain conditions and having regard to the fact that the conditions governed the grants, the grants could not be considered to be a donation or a voluntary contribution or, in other words, it was not a pure and simple gift by the Government.

The Bombay High Court observed that it was well known that grants-in-aid were made by the Government to provide certain institutions with sufficient funds to carry on their charitable activities. The institutions or associations to which the grant was made had no right to ask for the grant. It was solely within the discretion of the Government to make grants to institutions of a charitable nature. The Government did not expect any return for the grants given by it to such institutions. There was nothing which was required to be done by these institutions for the Government, which can be considered as a consideration for the grant.

The Bombay High Court noted the meaning of the words ‘voluntarily contributed’ as held in Society of Writers to the Signet vs. CIR 2 TC 257, as “the meaning of the word ‘voluntary’ is ‘money gifted voluntarily contributed in the sense of being gratuitously given’.” The Bombay High Court held that the conditions attached to the grant did not affect the voluntary nature of the contribution. The conditions were merely intended to see that the amounts were properly utilised, and therefore did not detract from the voluntary nature of the grant.

The Bombay High Court accordingly held that the grants-in-aid were voluntary contributions, and were exempt under section 12(1), as it then stood.

SOCIETY FOR DEVELOPMENT ALTERNATIVES’ CASE
The issue again came up before the Delhi High Court in the case of DIT vs. Society for Development Alternatives 205 Taxman 373 (Del).

In this case, relating to A.Y. 2006-07 and 2007-08, the assessee was a society, which was registered under Section 12A and Section 80G. It was undertaking activities relating to research, development and dissemination of (i) Technologies for fulfillment of basic needs of rural households (ii) Solutions for regeneration of natural resources and the environment and (iii) Community based institution strengthening methods to improve access to for the poor.

It had received grants for specific purposes/projects from the government, non-government, foreign institutions etc. These grants were to be spent as per the terms and conditions of the project grant. The amount, which remained unspent at the end of the year, got spilled over to the next year and was treated as unspent grant. The Assessing Officer treated such unspent grants as income of the assessee, invoking the provisions of section 12(1). This section then provided that any voluntary contributions received by a trust created wholly for charitable or religious purposes (other than corpus donations) were, for purposes of section 11, deemed to be income from property held under trust wholly for charitable or religious purposes.

The Commissioner (Appeals) deleted the addition, noting that:
1. The amounts were received/sanctioned for a specific purpose/project to be utilized over a particular period.
2. The utilisation of the said grants was monitored by the funding agencies who sent persons for inspection and also appointed independent auditors to verify the utilisation of funds as settled terms.
3. The assessee had to submit inter/final progress/work completion reports along with evidences to the funding agencies from time to time.
4. The agreements also included a term that separate audited accounts for the project would be maintained.
5. The unutilised amount had to be refunded back to the funding agencies in most of the cases.
6. All the terms and conditions had to be simultaneously complied with, otherwise the grants would be withdrawn.
7. The assessee had to utilise the funds as per the terms and conditions of the grant. If it failed to utilise the grants for the purpose for which grant was sanctioned, the amount was recovered by the funding agency.

The Commissioner (Appeals) was therefore of the view that the assessee was not free to use the funds voluntarily as per its sweet will and, thus, these were not voluntary contributions as per Section 12. He concluded that these were tied-up grants, where the appellant acted as a custodian of the funds given by the funding agency to channelise the same in a particular direction. The Tribunal upheld the order passed by the Commissioner (Appeals).

The Delhi High Court agreed with the findings of the Tribunal, holding that these were not voluntary contributions, and were therefore not income under section 12(1).

A similar view has been taken by the Gujarat High Court in the case of DIT(E) vs. Gujarat State Council for Blood Transfusion, 221 Taxman 126, for AY 2009-10, holding that the grant received from the State Government was not income of the trust for the purposes of section 11.

OBSERVATIONS
Though both the Bombay and Delhi High Court decisions were decided in favour of the assessee and held that the tied-up grants were not taxable, since the law in both the years was different, the ratio of these decisions is opposite to that of each other – while the Bombay High Court has held that tied-up grants are ‘voluntary contributions’, the Delhi High Court has taken the view that these tied-up grants are not ‘voluntary contributions’.

The Bombay High Court, in examining whether the tied-up grants were voluntary contributions or not, looked at the receipt from the perspective of the grantor – was the grant voluntary, or was it for some consideration, and held that since it was voluntary from the viewpoint of the donor, the receipt was a voluntary contribution; and applying the then applicable law, it held that voluntary contributions were not income, as the definition of ‘income’ at the relevant time did not include voluntary contributions. The Bombay High Court did not have to consider the subsequent amendment, under which such amounts were independently in the nature of income.

The law presently applicable provides that a ‘voluntary contribution’ is an income, and hence it has become necessary to examine whether a tied-up grant, not spent by the year end or not accumulated, is a voluntary contribution, more so where it is attached with the condition of refunding the unspent amount. Following the Bombay High Court, the receipt is a voluntary contribution, and once so accepted, the same has to be subjected to the rules of application and accumulation. In contrast, where the Delhi High court is followed, the receipt in the first place shall not be construed as a voluntary contribution and would not be subjected to the rules of application and accumulation.

In order for a receipt to be regarded as a voluntary contribution and for it to bear the character of income, the recipient has to have some element of domain over the receipt – the freedom to apply such income as it desires. If the recipient has to necessarily spend the receipt as per the directions of the grantor, and under the supervision of the donor, it has no control over such spending and over such amounts. Such receipts should be considered as held in trust for the grantor and when spent, the expenditure be held to be the expenditure of the grantor, and not that of the recipient trust, which disburses the amounts. Besides, where the unspent amount is refundable, it is a liability and cannot be regarded as income at all.

The Hyderabad bench of the Tribunal has therefore held, in the case of Nirmal Agricultural Society vs. ITO 71 ITD 152, that ‘The grants which are for specific purposes do not belong to the assessee-society. Such grants do not form corpus of the assessee or its income. Those grants are not donations to the assessee so as to bring them under the purview of section 12 of the Act. Voluntary contributions covered by section 12 are those contributions freely available to the assessee without any stipulation which the assessee could utilise towards its objectives according to its own discretion and judgment. Tied-up grants for a specified purpose would only mean that the assessee, which is a voluntary organisation, has agreed to act as a trustee of a special fund granted by Bread for the World with the result that it need not be pooled or integrated with the assessee’s normal income or corpus. In this case, the assessee is acting as an independent trustee for that grant, just as same trustee can act as a trustee of more than one trust. Tied-up amounts need not, therefore, be treated as amounts which are required to be considered for assessment, for ascertaining the amount expended or the amount to be accumulated.’

According to the Tribunal, such unspent grants should be shown as a liability, and the expenditure incurred for the specified purposes adjusted against such liability, and not be treated as the expenses of the assessee. Only any non-refundable credit balance in the liability account of the grantor would be treated as income in the year in which such non-refundable balance was ascertained.

A similar view has been taken by the Mumbai bench of the Tribunal in the case of NEIA Trust v ADIT ITA No 5818-5819/Mum/2015 dated 24th December 2019 (A.Y. 2011-12 and 2012-13), where the Tribunal has held:
‘upon perusal of stated terms & conditions, it could not be said that the funds received by the assessee were not in the nature of voluntary contributions rather they were more in the nature of specific grants on certain terms and conditions and liable to be refunded, in case the same were not utilized for specific purposes. It is trite law that entries in the books of accounts would not be determinative of the true nature / character of the transactions and the same could not be held to be conclusive. Therefore, the mere fact that the assessee credited the receipts as corpus contribution, in our considered opinion, would not make much difference and would not alter the true nature of the stated receipts. The said funds / receipts, as stated earlier, were more in the nature of specific grants and represent liability for the assessee and liable to be refunded in case of non-utilization.’

The Hyderabad Bench decision in Nirmal Agricultural Society’s case has also been followed by the Tribunal in the cases of Handloom Export Promotion Council vs. ADIT 62 taxmann.com 288 (Chennai) and JB Education Society vs. ACIT 55 taxmann.com 322 (Hyd).

Besides, in the cases of various Government Corporations set up to implement Government policies, grants received from the Government by such corporations have been held not to constitute income of the Corporation, since the Corporation acts as an agency of the Government in spending for the Government schemes. The funds therefore really belong to the Government, until such time as the funds are spent. This view has been taken by the High Courts in the following cases:
• CIT vs. Karnataka Urban Infrastructure Development and Finance Corpn. 284 ITR 582 (Kar.)
• Karnataka Municipal Data Society vs. ITO 76 taxmann.com 167 (Kar)

The position may be slightly different in case of grants from the Government and a few specified bodies, with effect from A.Y. 2016-17. Clause (xviii) of section 2(24) has been inserted in the definition of ‘income’, which provides for taxation of grants from the Central Government, State Government, any authority, body or agency as income. Such grants would therefore be taxable as income of the recipient trust, and the fact anymore may or may not be material that the receipt is not a voluntary contribution. This inserted provision in any case would not apply to grants received from other non-governmental organisations.

In case the Government tied-up grant is refundable if not spent, can it be regarded as income at all post insertion of clause (xviii)? One way to minimize the harm on the possible application of clause (xviii) of section 2(24) could be to tax such unspent receipts in the year in which the fact of the non-utilisation is final; even in such a case, a possibility of claiming deduction for the refund of unspent amount should be explored. Alternatively, in that year, the expenditure, where incurred, should be treated as an application of income. The other possible view is that clause (xviii) applies only to recipient persons, other than charitable organisations, to whom the specific provisions of clause (iia) of section 2(24) applies, rather than generally applying the provisions of clause (xviii) to all and sundry.

The better view therefore seems to be that of the Delhi and Gujarat High Courts, that tied-up grants are not voluntary contributions and/or income of the recipient institution.

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Book profits — Company — Provision for bad and doubtful debts — Corresponding amount reduced from loans and advances on assets side of balance sheet and at end of year loans and advances shown net of provision for bad debts — Provision not to be added in computation of book profits

32 Principal CIT. vs. Narmada Chematur Petrochemicals Ltd. [2021] 439 ITR 761 (Guj) A.Y.: 2004-05; Date of order: 14th July, 2021 S. 115JB of ITA, 1961

Book profits — Company — Provision for bad and doubtful debts — Corresponding amount reduced from loans and advances on assets side of balance sheet and at end of year loans and advances shown net of provision for bad debts — Provision not to be added in computation of book profits

The assessee claimed deduction u/s 80HHC of the Income-tax Act, 1961 and after setting off unabsorbed loss and depreciation of the preceding years, the assessee filed a nil return for the A.Y. 2004-05 and declared the book profits under the provisions of section 115JB. The Assessing Officer made various disallowances in his order u/s 143(3).

The Commissioner (Appeals) deleted the addition made on account of bad and doubtful debts holding that the provision for bad and doubtful debt was not a provision for a liability but for diminution in value of assets and therefore, clause (c) of the Explanation to section 115JB would not be applicable. The assessee and the Department filed appeals before the Tribunal. The Tribunal held that since the assessee had simultaneously obliterated the provision from its accounts by reducing the corresponding amount from the loans and advances on the assets side of the balance-sheet and consequently, at the end of the year shown the loans and advances on the assets side of the balance sheet as net of the provision for bad debts, it would amount to a write-off and such actual write-off would not be hit by clause (i) of the Explanation to section 115JB.

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

“The Tribunal was right in deleting the addition on account of the provision for bad and doubtful debts in the computation of the book profits for computation of minimum alternate tax liability in the light of clause (i) of the Explanation to section 115JB. No question of law arose.”

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Exemption u/s 54 was available even if the new residential property was purchased in the joint names of assessee, her daughter and son in law

26 ITO vs. Smt. Rachna Arora [2021] 90 ITR(T) 575 (Chandigarh – Trib.) ITA No.: 1112 (Chd) of 2019 A.Y.: 2015-16 Date of Order: 31st March, 2021

Exemption u/s 54 was available even if the new residential property was purchased in the joint names of assessee, her daughter and son in law

FACTS
Assessee sold a residential property and invested entire amount on purchase of a new residential property in joint names of assessee with her daughter and son in law and claimed exemption under Section 54. Assessing Officer held that assessee was entitled for claim of exemption only to extent of her share in new residential property.

The CIT (A) allowed the assessee’s appeal.

Consequently, the revenue filed an appeal before the ITAT.

HELD
The ITAT confirmed the order passed by the CIT(A) and dismissed the revenue’s appeal on the following grounds:

The CIT(A) had followed the ratio contained in the decision of Jurisdictional High Court in the case of CIT vs. Dinesh Verma 2015 233 Taxman 409 (Punj. & Har.)

The Hon’ble High Court in the case of Dinesh Verma (supra) held that the assessee would be entitled to the benefit of exemption u/s 54B only on the amount invested by him after the sale of his original property and not on the amount invested by his wife jointly in the same property. The high court also held that the plain reading of provisions of section 54 of the Act indicated that in order to claim the benefit of exemption u/s 54, the assessee should, invest the capital gain arising out of sale of residential property in purchase of another residential property within stipulated time. Nothing contained in Section 54 precluded the assessee to claim the exemption in case the property was purchased jointly with close family members, who are not strangers or unconnected to her provided the assessee invested the entire amount of Long Term Capital Gain.

Based on the principle, he held that in the instant case, since the entire investment is made by the assessee herself, albeit in joint names with daughter and son-in-law, the assessee is entitled to exemption u/s 54. The ITAT also observed that the Ld. DR was neither able to controvert the facts of the present case as noted by the CIT(A) nor had he pointed out how the decision in the case of Dinesh Verma (supra) was applicable against the assessee in the facts of the present case.

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A society formed with the primary object of construction of chambers for its members and their allotment is eligible to be registered u/s 12AA since the objects amount to advancement of object of general public utility within the meaning of Section 2(15) of the Income Tax Act

25 Building Committee (Society) Barnala vs. CIT (Exemption) [2021] 89 ITR(T) 1 (Chandigarh – Trib.) ITA No.: 1295 (Chd) of 2019 Date of Order: 18th May, 2021

A society formed with the primary object of construction of chambers for its members and their allotment is eligible to be registered u/s 12AA since the objects amount to advancement of object of general public utility within the meaning of Section 2(15) of the Income Tax Act

FACTS
Assessee-society applied for registration u/s 12AA. However, the CIT (Exemption) rejected the application of the assessee inter alia holding that genuineness of the activities of the assessee could not be established; and that the assessee had not incurred any expenditure for activities of general public importance. Main ground for rejecting the application was that purpose for which the society was formed was for the benefit of specific group of professionals which does not come within the purview of ‘advancement of object of general public utility’ under Section 2(15) of the Act.

Aggrieved, the assessee filed appeal to the ITAT.

HELD
The ITAT analysed the case on hand in the context of provisions of Section 2(15) which define ‘charitable purpose’ and Section 12AA which provide for grant of registration.

The ITAT observed that the bye-laws of the society provided that society was established for the welfare, construction and allotment of chambers in the District Court Complex, Barnala for the members of District Bar Association, Barnala. It further provided that all the incomes/earnings would be solely utilized and applied towards the promotion of its aims and objectives only as set forth in the memorandum of association, and that the society will work on no profit and no loss basis. Bye-laws also provided social welfare activities such as growing of trees for environments, de-addiction drug campaign, welfare of girl child, and also provide legal awareness among the general public.

The CIT (Exemptions) proceeded only on the basis that since the society was formed for construction of building for members, benefits thereof only restricted to the members, and not to the general public at large and failed to comprehend the role of Bar Association in judicial dispensation. Attainment of justice for all the parties of the case and the society at large is the main object of our judicial system.

The Bench and Bar were the essential partners in judicial dispensation, and therefore, considering the importance of Bar Association in every adjudicating body, particular space was being earmarked and maintained for Bar Association and for litigants. Thus, since working space for professionals was an integral part of infrastructure for judicial dispensation, the ITAT held that the CIT (Exemptions) was wrong in rejecting the assessee’s application u/s 12AA, disregarding the bye-laws and not considering the object of the assessee from a larger perspective.

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Since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR. TDR receipts cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project

24 DBS Realty vs. ACIT [TS-1096-ITAT-2021(Mum)] A.Ys.: 2010-11 and 2011-12; Date of order: 24th November, 2021 Section: 28

Since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR. TDR receipts cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project

FACTS
The assessee, a partnership firm, engaged in the business of real estate development entered into an agreement with the Slum Rehabilitation Authority (SRA) to develop a project over a plot of land spread over 31.9 acres. The said plot of land was purchased by the assessee for a consideration of Rs. 44.21 crore and handed over to SRA as per SRA scheme. As per the terms of the agreement with SRA, the assessee was to develop the SRA project at its own cost. In return of the land surrendered to SRA and the project cost to be incurred the assessee was granted Land TDR of 93,623 sq. mts. and construction TDR of 4,78,527 sq. mts.

Since the assessee was required to fund the entire cost of the project itself, the TDR granted to the assessee in a phased manner was sold from time to time to incur the cost of the project. In the process, the assessee received various amounts aggregating to about Rs. 304 crore in financial years 2009-10 to 2013-14.

In the course of assessment proceedings for the assessment year under consideration, the Assessing Officer (AO) called upon the assessee to explain why the amount received from the sale of TDR should not be treated as income of the assessee in respective assessment years. In response, the assessee submitted that since it is following percentage completion method for recognising the revenue from the SRA project and since 25% of the total estimated project is not completed till date, TDR income cannot be treated as income but has to be shown as current liability.

The AO did not accept the contentions of the assessee and held that the amount received by the assessee from sale of TDR has to be added to the income of the assessee in the respective assessment years.

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

Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that-

(i) sale of TDR is integrally connected to the SRA project, hence, cannot be considered in isolation;

(ii) since SRA is not funding the project, the assessee has to incur the cost of project by utilizing the amount received from sale of TDR;

(iii) the very idea of granting TDR to the assessee is for enabling it to finance the project;

(iv) since the project is not complete even to the extent of 25%, no amount is taxable, much less, the amount received from sale of TDR, that too, without looking at the corresponding cost incurred by the assessee.

HELD
The Tribunal noted that the issue for its consideration is whether the amount received by the assessee from the sale of TDR granted in respect of the SRA project is taxable in the year of receipt or the assessee’s method of revenue recognition following percentage of completion method is acceptable. It also noted that the assessee has received certain amount from the sale of TDR in A.Ys. 2012-13 and 2013-14 as well.

While completing the assessment, the AO accepted the method of accounting followed by the assessee. However, PCIT held the assessment orders to be erroneous and prejudicial to the interest of the revenue since AO failed to tax the amount received by the assessee from the sale of TDR. While setting aside the assessments, the PCIT directed the AO to assess the amounts received from the sale of TDR.

However, while deciding the assessee’s appeals challenging the aforesaid direction of PCIT, the Tribunal held that percentage completion method followed by the assessee is a well-recognised method as per ICAI guidelines and judicial precedents; the sale of TDR cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project; the assessee was under obligation to complete the project as per the agreement; the TDR was granted to provide finance to the assessee to complete the project. Thus, the assessee’s income from TDR cannot be considered independently without taking the corresponding expenses, more so when the TDR receipts are directly linked to execution of the project. Since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR.

Since the project has been stalled due to dispute and litigations and the assessee has not been able to complete the project, the bench observed that though assessee has earned income from sale of TDR, however, no income from SRA project, as yet, has been offered to tax. It also observed that the Tribunal has in appeals against orders passed under Section 263 has recorded findings touching upon the merits of the issue, which indeed, are favourable to the assessee and the said order of the Tribunal was not available before the AO or CIT(A) the applicability of the said order to the facts of the case needs to be examined. The Tribunal set aside the order of CIT(A) and restored the issue to the file of the AO for fresh adjudication after examining the applicability of the order of the Tribunal for A.Ys. 2012-13 and 2013-14.

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Where premises were let along with furniture and fixture and rent for furniture and fixtures has been bifurcated by the assessee, deduction under Section 24(a) held to be allowable even for rent of furniture and fixture, etc Reimbursement of member’s share of contribution for repairing the entire society building held to be not taxable as it has no income element in it

23 Lewis Family Trust vs. ITO [TS-1121-ITAT-2021(Mum)] A.Y.: 2012-13 ; Date of order: 30th November, 2021 Sections: 23, 24

Where premises were let along with furniture and fixture and rent for furniture and fixtures has been bifurcated by the assessee, deduction under Section 24(a) held to be allowable even for rent of furniture and fixture, etc

Reimbursement of member’s share of contribution for repairing the entire society building held to be not taxable as it has no income element in it

FACTS I
The assessee, in its return of income, declared rental income of Rs 57,56,998 under the head `Income from House Property’ and claimed deduction under Section 24(a) of the Act. The Assessing Officer (AO) on perusal of the leave and license agreement, found that the assessee trust had let out premises along with furniture, fixtures and decoration, air-conditioning, etc, and the rent for furniture and fixtures has been separately bifurcated by the assessee. The AO held that rent of premises amounting to Rs. 34,54,199 is only taxable under the head `income from house property’ and deduction under Section 24(a) allowable in respect thereof and rent of furniture, fixtures, etc amounting to Rs. 23,02,799 would get taxed under the head `income from other sources’ and therefore, standard deduction @ 30% thereon would not be allowable.

Aggrieved, the assessee preferred an appeal to CIT(A) where it contended that the total rent has been bifurcated into rent for premises and hire charges for furniture, fixtures, etc. only for the purpose of enabling property tax charged by MCGM at a lower amount and there was no intention to defraud the income-tax department; furniture is attached with the property and cannot be removed without damaging the wall or the floor; and that without furniture rent cannot be equivalent to the amount agreed upon. The CIT(A) confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

FACTS II
During the previous year relevant to the assessment year under consideration, the assessee made a payment of Rs. 4,45,266 towards members’ share of contribution for repairing the entire society building. This payment was made by account payee cheque through regular banking channels by the assessee to the housing society. Since repairs costs were to be borne by the tenant, the assessee got a sum of Rs. 4,45,266 reimbursed from the lessee bank. The AO taxed this sum of Rs. 4,45,266 under the head `income from other sources’.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD I
The Tribunal noted that the assessee had received composite rent from its tenant State Bank of Patiala. The lessee bank had treated the entire payment of rental and hire charges as the composite payment and had charged tax at source in terms of Ssection 194I of the Act. It observed that this aspect is not a relevant consideration for determining the taxability of rental under the head of income in the hands of the assessee. However, it noted that for A.Y. 2010-11, the AO, in order giving effect to order of CIT(A), had accepted the stand of the assessee vide his order dated 19th March, 2014 and in scrutiny assessments framed for A.Ys. 2016-17 and 2018-19 also the stand of the assessee has been accepted. Applying the principle laid down by the Apex Court in Radhasoami Satsang [193 ITR 321 (SC)], namely that the revenue cannot take a divergent stand for one particular year, ignoring the rule of consistency, the Tribunal allowed this ground of appeal filed by the assessee.

HELD II
The Tribunal held that since the assessee had merely got the reimbursement of the amount paid by it to the society, there is no income element in it. Hence, it held that the reimbursement received by the assessee cannot be taxed under the head `income from other sources’.

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CSR expenses, if given by way of donation to a trust eligible for 80G deduction, can be claimed under Section 80G. Restriction under Explanation 2 Section 37 does not apply to claim under section 80G

22 Naik Seafoods Pvt. Ltd. vs. PCIT [TS-1157-ITAT-2021(Mum)] A.Y.: 2016-17; Date of order: 26th November, 2021 Sections: 37, 80G, 263

CSR expenses, if given by way of donation to a trust eligible for 80G deduction, can be claimed under Section 80G. Restriction under Explanation 2 Section 37 does not apply to claim under section 80G

FACTS
During the previous year relevant to the assessment year under consideration, assessee company in its computation of total income disallowed a sum of Rs. 2.80 lakh being CSR expenses debited to Profit & Loss Account but claimed the same under Section 80G. While assessing assessee’s total income under Section 143(3) of the Act, the Assessing Officer (AO) did not disallow the claim so made under Section 80G.

The PCIT issued a show-cause notice to the assessee interalia observing that claim of Rs. 1.40 lakh has been made under Section 80G regarding CSR expenses of Rs. 2.80 lakh. CSR expenses are the assessee’s responsibility as per the Companies Act, 2013, and if it is spent through other trusts, then also, as per Rule 4(2) of CSR Rules, it is spent on behalf of the assessee. Therefore, the assessee cannot give a donation of CSR expenses even if it is given to a trust eligible for an 80G deduction. Hence, the same is not allowable. Failure of AO to consider CSR expense as disallowable as rendered the assessment order erroneous in so far as it is prejudicial to the interest of the revenue.

In response, the assessee made its submission (the submission made by the assessee to the PCIT on this issue is not reproduced in the order of the tribunal). However, the PCIT rejected the submission by holding that since both CSR expense and 80G donations are two different modes of ensuring fund for public welfare, treating the same expense under two different heads would defeat the very purpose of it. In the budget memorandum as well, the legislative intent was to ensure that companies with certain strong financials make the expenditure towards this purpose and by allowing deduction, the Government would be subsidizing one-third of it by way of revenue foregone thereon and hence the same was required to be disallowed in the assessment. Failure of the AO to examine the CSR expense as disallowable expense and to examine disallowance of deduction under Section 80G rendered the order erroneous and prejudicial to the interest of the revenue. He set aside the order of the AO with a direction to the AO to examine the above aspects with regard to allowability of deduction claimed under Section 80G as per law and frame a fresh assessment after affording an opportunity to the assessee of being heard.

Aggrieved, the assessee preferred an appeal to the Tribunal where relying on the decisions of the Bangalore Bench of the Tribunal in the case of FNF India Pvt. Ltd. vs. ACIT in ITA No. 1565/Bang./2019 dated 5th January, 2021 and Goldman Sachs Services Pvt. Ltd. vs. JCIT in ITA(TP) No. 2355/Bang./2019 it supported the action of the AO by contending that Explanation 2 under Section 37 is restricted to Section 37 only and nothing more and since the Explanation has been inserted below Section 37, it can be invoked only when expenditure is claimed as deduction as being for the purpose of business under Section 37 of the Act. Since the assessee has not claimed the said expenditure under Section 37 but has claimed it under Section 80G and the Act nowhere states that expenditure disallowed in terms of Explanation 2 to Section
37 cannot be allowed by way of deduction in terms of Section 80G.

HELD
The Tribunal noted that the Bangalore bench of the Tribunal in FNF India Pvt. Ltd. vs. ACIT (supra) while deciding the issue of deduction under Section 80G relating to donations which is part of CSR has remitted the issue to the AO to verify the additions necessary to claim deduction under Section 80G of the Act with a clear direction to the AO. Since in the present case the AO himself allowed the deduction under Section 80G, as claimed by the assessee, and the issue is debatable issue and the AO has taken one of the possible view, the Tribunal held that PCIT cannot invoke the provisions of Section 263 of the Act in order to bring on record his possible view.

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DOES TRANSFER OF EQUITY SHARES UNDER OFFER FOR SALE (OFS) DURING THE PROCESS OF LISTING TRIGGER ANY CAPITAL GAINS?

The calendar year 2021 was a blockbuster year for Indian primary markets, with 63 companies collectively garnering Rs. 1.2 lakh crore through initial public offerings. The Indian primary market witnessed the largest and most subscribed public offers in this period. A large part of public offering was by way of Offer For Sale (OFS), i.e. promoters offloading (selling) their stake in companies to financial institutions / public. What follows the transfer of equity shares is the determination of capital gains income and income-tax liability thereon.

Finance Act, 2018 brought a paradigm shift in taxation of long-term capital gains arising from the transfer of equity shares and equity-oriented mutual funds. Finance Act, 2018 withdrew the exemption granted on long-term capital gains arising on transfer of equity shares and equity-oriented mutual funds. With the withdrawal of exemption, special provisions in the form of Sections 112A and 55(2)(ac) of the Income Tax Act, 1961 (‘the Act’) were inserted to determine capital gains income.

This article seeks to examine capital gains tax liability arising from the transfer of equity shares under an OFS in an IPO process under the new taxation regime.

BRIEF BACKGROUND OF THE PROVISIONS
Section 112A of the Act provides for a tax rate of 10% in case where (a) total income includes income chargeable under the head capital gains (b) capital gains arising from the transfer of long-term capital asset being equity shares (c) securities transaction tax is paid on acquisition and transfer of those equity shares1.

Section 55(2)(ac) of the Act provides a special mechanism for computation of cost of acquisition in respect of assets covered by Section 112A. Cost of acquisition of equity shares acquired prior to 1st February, 2018 is higher of (a) or (b) below:

(A) Cost of acquisition of an asset.
(B) Lower of:

1. Fair market value of the asset as on 31st January, 2018, and
2. Full value of consideration received or accruing on the transfer of equity shares.

The essence of the insertion of Section 55(2)(ac) is to provide grandfathering in respect of gains up to 31st January, 2018 regarding equity shares. This is with a rider that adopting fair market value does not result in the generation of loss.

1 Section 112A(4) of the act provides relief
from payment of securities transaction tax on acquisition of shares in respect
of certain transaction covered by Notification No. 60/2018 Dated 1^st
October, 2018.

CASE UNDER EXAMINATION AND ANALYSIS

Mr. A, an individual, is the promoter of A Ltd. Mr. A had subscribed to equity shares of A Ltd. on 1st April, 2011 when the company was unlisted at their face value of Rs. 10. Since then, Mr. A has been holding these equity shares as a capital asset. Mr. A decides to sell the equity shares under the IPO process as an offer for sale at Rs. 1,000 per share in February, 2022. The question to be examined is: what should be the cost of acquisition of the shares, and how should one compute the capital gains?

In this case, the transfer of shares is covered by Section 112A of the Act since (a) total income of Mr. A includes income chargeable under the head ‘capital gains’; (b) capital gains arise from the transfer of long-term capital asset2 being equity shares; (c) in terms of Section 98 (entry no. 6) r.w.s. 97(13)(aa) of Finance (No.2) Act, 2004, Mr. A is required to pay securities transaction tax on the transfer of equity shares; (d) the requirement of payment of securities transaction tax on acquisition of equity shares is relieved in terms of Notification No. 60/2018 dated 1st October, 20183 as shares were acquired when equity shares of A Ltd. were not listed on a recognised stock exchange.

The provisions of Section 112A cover the case on hand and therefore the cost of acquisition of equity shares shall be determined in terms of Section 55(2)(ac), which requires identification of three components, namely cost of acquisition, fair market value as on 31st January, 2018 and full value of consideration. In the facts of the case, the cost of acquisition of each equity share is Rs. 10, and the full value of consideration accruing on the transfer of each share is Rs. 1,000. What remains for determination is the fair market value of the asset as on 31st January, 2018 to compute the cost of acquisition under Section 55(2)(ac).

Before determining the fair market value of equity shares as on 31st January 2018, one may refer to Section 97(13)(aa) of Finance (No. 2) Act, 2004, which provides that sale of unlisted equity shares under an OFS to the public in an initial public offer and where such shares are subsequently listed on recognised stock exchange shall be considered as taxable securities transaction and securities transaction tax is leviable on the same.

From the above, it is pertinent to note that when the equity shares are transferred under an OFS, such shares are unlisted and are listed on a recognised stock exchange only subsequent to the transfer. Further, the practical experience of applying for shares under an IPO suggests that consideration for equity shares is paid, and equity shares are credited to the purchaser’s account, prior to the date of listing of equity shares on a recognised stock exchange. This also corroborates that when the promoter transfers the equity shares under an OFS, such shares are still unlisted.

2 Equity
shares held by Mr. A qualifies as ‘long-term capital asset’ as equity shares
are held for a period exceeding 12 months.

3 Notification
No. 60/2018/F. No.370142/9/2017-TPL.

Determination of fair market value of equity shares as on 31st January, 2018

Clause (a) of Explanation to Section 55(2)(ac) of the Act provides a methodology for the determination of fair market value.

Sub-clause (i) of clause (a) of Explanation to Section 55(2)(ac) provides that where equity shares are listed on a recognised stock exchange as on 31st January, 2018, the highest price prevailing on the recognised stock exchange shall be the fair market value. In the present case, shares will only be listed post the IPO in February, 2022 (i.e. Equity shares were not listed on a recognised stock exchange as on 31st January, 2018). Accordingly, the case is not covered by said sub-clause.

Sub-clause (ii) of clause (a) of Explanation to Section 55(2)(ac) does not apply to the present case as the subject matter of transfer is equity shares and not units of equity-oriented mutual fund/business trust.

Sub-clause (iii) of clause (a) of explanation to Section 55(2)(ac) provides that where equity shares are not listed on any recognised stock exchange as on 31st January, 2018, but listed as on the date of transfer, the fair market value of equity shares shall be the indexed cost of acquisition up to F.Y. 2017-18.

The literal reading of sub-clause (iii) of clause (a) of Explanation to Section 55(2)(ac) of the Act suggests that the case of Mr. A will not be covered by said sub-clause as equity shares are not listed as on the date of transfer.

Considering the above, an important issue arises that when the fair market value of an asset cannot be determined basis the methodology provided in clause (a) of Explanation to Section 55(2)(ac), what shall be the impact of the same?

TAX AUTHORITIES MAY PUT FORTH FOLLOWING ARGUMENTS
With the withdrawal of exemption under Section 10(38) of the Act, the intent of insertion of Section 55(2)(ac) of the Act is to provide grandfathering of gains on equity shares up to 31st January, 2018. The legislature, in its wisdom, may provide the grandfathering in any manner.

In respect of equity shares, which are not listed on a recognised stock exchange as on 31st January, 2018, legislature has provided for the benefit of indexation in terms of sub-clause (iii) of clause (a) of Explanation to Section 55(2)(ac) of the Act.
In the case under consideration, Mr. A’s equity shares were unlisted as on 31st January, 2018 and the transfer of shares took place subsequently. And although the equity shares held by Mr. A were not listed as on the date of transfer, considering the legislative intent, the case of Mr. A shall be covered by sub-clause (iii) of clause (a) of Explanation to Section 55(2)(ac) of the Act. Accordingly, capital gains computation does not fail. In this regard, reference may be made to Supreme Court (‘SC’) ruling in the case of CIT vs. J. H. Gotla [1985] 156 ITR 323. In this case, the taxpayer had suffered a significant business loss in the earlier assessment years, which were carried forward. The taxpayer gifted certain oil mill machinery to his wife. A partnership firm was floated where the wife and minor children were partners. Income earned by wife and minor children from the firm was clubbed in the hands of the taxpayer, who claimed set-off of clubbed income against the business losses carried forward. Tax authorities denied such set off on the ground that for setting off losses business was required to be carried on by taxpayer and in this case, business was carried out by the firm and not the taxpayer. SC allowed the set-off of losses in the hands of the taxpayer against the clubbed income and made the following observations on interpretation of the law:

“Now where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the legislature, the Court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the legislature from the language used. If the purpose of a particular provision is easily discernible from the whole scheme of the act which, in the present case, was to counteract, the effect of the transfer of assets so far as computation of income of the assessee was concerned, then bearing that purpose in mind, the intention should be found out from the language used by the legislature and if strict literal, construction leads to an absurd result, i.e., result not intended to be subserved by the object of the legislation found out in the manner indicated above, then if other construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain so always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction.”

In the present case, legislative intent for providing grandfathering benefit in respect of equity shares which are not listed as on 31st January, 2018 and transferred subsequently can be gathered from the language employed in sub-clause (iii) of clause (a) of Explanation to Section 55(2)(ac) of the Act and accordingly, the said sub-clause covers the case of Mr. A.

AS AGAINST THE ABOVE, THE TAXPAYER MAY SUBMIT AS UNDER
The computation of capital gains is carried out in terms of Section 48 of the Act. The computation of capital gains begins with the determination of full value of consideration which is reduced by (a) expenditure incurred wholly and exclusively in connection with transfer, (b) cost of acquisition of capital asset, and (c) cost of improvement of a capital asset. Accordingly, the before mentioned are four important elements of computing capital gains.

Section 55(2) of the Act provides for the determination of the cost of acquisition of capital assets for the purpose of Sections 48 and 49 of the act. Section 55(2)(ac) is a special provision for determining the cost of acquisition in certain specified cases. Unlike Section 55(2)(b) of the act4, Section 55(2)(ac) of the Act is not optional. Once the taxpayer’s case is covered by provisions of Section 55(2)(ac), the cost of acquisition of a specified asset has to be determined under that Section.

Clause (a) of Explanation to Section 55(2)(ac) defines the term ‘fair market value’ in an exhaustive manner, and accordingly, no other methodology can be read into Section 55(2)(ac) of the Act to determine the fair market value.

In order to determine the cost of acquisition under Section 55(2)(ac), one of the important components is the fair market value of the asset as on 31st January, 2018. In the absence of a determination of the same, the exercise of determination of cost of acquisition under Section 55(2)(ac) of the Act cannot be completed.

The SC, in the case of CIT vs. B. C. Srinivasa Setty [1981]128 ITR 2945, held that since the cost of acquisition of self-generated goodwill cannot be conceived, the computation of capital gains fails. On failure of computation provision, it was held that such asset is not covered by Section 45 of the Act and hence not subjected to capital gains. Similarly, in the case of Sunil Siddharth Bhai vs. CIT [1985] 156 ITR 509 (SC)6, where the taxpayer had contributed capital asset to a partnership firm, it was held that full value of consideration accruing or arising on transfer of capital asset cannot be determined and accordingly such asset is beyond the scope of capital gains chapter. Also, in the case of PNB Finance Ltd. vs. CIT [2008] 307 ITR 757, on the transfer of undertaking by the taxpayer pursuant to the nationalisation of the bank, SC held that undertaking comprises of various capital assets and in the absence of determination of cost of acquisition of undertaking, the charge fails and accordingly, capital gains cannot be charged.

4 Section
55(2)(b) of the act provides an option to taxpayer to either adopt the actual
cost of acquisition or fair market value as on 1st April, 2001 where capital
asset is acquired prior to 1st April, 2001.

5 Rendered
prior to insertion of Section 55(2)(a) of the Act.

6 Rendered
prior to insertion of Section 45(3) of the Act.

Reference may also be made SC ruling in case of Govind Saran Ganga Saran vs. CST [1985] 155 ITR 144 rendered under Bengal Finance (Sales Tax) Act, 1941 (‘Sales Tax Act’) as applied to the Union Territory of Delhi. The case revolved around the interpretation of Sections 14 and 15 of the Sales Tax Act. Cotton yarn was classified as one of the goods of special importance in inter-state trade or commerce as envisaged by Section 14 of the Sales Tax Act. Section 15 of the Sales Tax Act provided that sales tax on goods of special importance should not exceed a specified rate and further that they should not be taxed at more than one stage. The issue arose because the stage itself had not been clearly specified, and accordingly, it was not clear at what stage the sales tax shall be levied. The Financial Commissioner held that in the absence of any stage, there was a lacuna in the law and consequently, cotton yarn could not be taxed under the sales tax regime. The Delhi High Court reversed the decision of the Financial Commissioner. However, SC held that the single point at which the tax may be imposed must be a definite ascertainable point, and in the absence of the same, tax shall not be levied. While rendering the ruling, SC has made the following observations which are worth quoting:

“The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity.”

The SC ruling in the case of Govind Saran Ganga Saran (supra) has been approved by Constitution Bench of SC in case of CIT vs. Vatika Township (P.) Ltd. [2014] 367 ITR 466. In the facts of the case, the measure or value to which the rate will be applied is uncertain in the absence of determination of cost of acquisition, and accordingly, a levy will be fatal.

The cardinal principles of interpreting tax statutes centre around the observations of Rowlatt J. In the case of Cape Brandy Syndicate vs. Inland Revenue Commissioner [1921] 1 KB 64, which has virtually become the locus classicus. In the opinion of Rowlatt J.:
“. . . . . . . . . in a Taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”8

AUTHOR’S VIEW
Considering that: (a) in terms of a literal reading, fair market value of equity shares as on 31st January 2018 cannot be determined, (b) computation provision and charging provision both together form an integrated code, and on the failure of computation provision, charge fails, (c) judicial precedents holding that uncertainty or vagueness in legislative scheme lead to the levy becoming invalid, and (d) requirement of taxing provisions to be construed in terms of language employed only, in the view of the author, the taxpayer stands on a firm footing that in the absence of a determination of the fair market value of equity shares as on 31st January, 2018 in terms of methodology supplied in Section 55(2)(ac) of the act, cost of acquisition of equity shares cannot be determined. In the absence of a determination of the cost of acquisition, the computation mechanism fails. Accordingly, one may vehemently urge that the equity shares transferred under the OFS are beyond the capital gains chapter.

One may also note that the issue discussed herein may not be restricted in its applicability to promoters transferring their equity shares under an offer for sale. It may equally apply to private equity players, institutions, financial investors, individuals etc., who have either subscribed to the shares of an unlisted company or have purchased the shares of an unlisted company from the market and are selling the shares under an offer for sale.

One shall note that courts may be slow in adopting a position of total failure of charge and transfer of capital asset falling beyond the provisions capital gains chapter. Further, considering the impact of the position stated above, one may expect high-rise litigation.

[The views expressed by author are personal. One may adopt any position in consultation with advisors.]

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8 The above passage has been quoted with approval in several SC rulings. Illustratively, refer PCIT vs. Aarham Softronics [2019] 412 ITR 623 (SC), CIT vs. Yokogawa India Ltd. [2017] 391 ITR 274 (SC), Orissa State Warehousing vs. CIT [1999] 237 ITR 589 (SC), Smt. Tarulata Shyam vs. CIT [1977] 108 ITR 345 (SC), Sole Trustee, Loka Shikshana Trust [1975] 101 ITR 234 (SC), CIT vs. Ajax Products Ltd. [1965] 55 ITR 741 (SC), CIT vs. Shahzada Nand and Sons [1966] 66 ITR 392 (SC).

shailesh.kwebmaker

THE GHOST OF B.C. SRINIVASA SETTY IS NOT YET EXORCISED IN INDIA

In this article, the taxability of capital gains arising on the transfer of internally generated goodwill and other intangible assets has been deliberated upon. We have also discussed whether the ratio laid down by the Hon’ble Supreme Court in CIT vs. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) still holds the field in the case of self-generated goodwill and other internally generated intangible assets. Before we do so, it would be relevant to understand briefly the history of past litigation on this issue and the series of judicial amendments made.

DECISION IN B.C. SRINIVASA SETTY’S CASE AND INSERTION OF SECTION 55(2)(a)
The question as to whether ‘goodwill’ generated in a newly commenced business can be described as an ‘asset’ for the purposes of Section 45 came for consideration before a 3-judge bench of the hon’ble supreme court in the case of B.C. Srinivasa Setty’s case (supra).

While concluding that the self-generated goodwill was undoubtedly an asset of the business, the court, however held that self-generated goodwill was not an asset within the contemplation under Section 45.

The court took note of the provisions relating to capital gains and laid down the important principle that the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply, it is evident that such a case was not intended to fall within the charging section. The court observed that Section 48(ii) required deduction of the cost of acquisition from the full value of consideration in computing the capital gains chargeable under Section 45. Thus, the court held that what is contemplated under the provisions of Section 45 and 48 is an asset for which it is possible to envisage a cost of acquisition. Taking note of the fact that in case of goodwill of a new business acquired by way of generation, no cost element can be identified or envisaged, the court reached the conclusion that the goodwill of a new business, though an asset could not be regarded as an asset within the contemplation of the charge under Section 45.

In paragraph 12 of the said judgement, the court has observed that in the case of internally generated goodwill, it is not possible to determine the date when it comes into existence. It has been observed that the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains. It has been held that the ‘cost of acquisition’ mentioned in Section 48 implies a date of acquisition.

To overcome the above decision in B.C. Srinivasa Setty’s case (supra), Section 55(2)(a) was inserted vide Finance Act, 1987 with effect from 1st April, 1988. The said section originally contained two clauses. Clause (i) dealt with capital asset being goodwill of a business acquired by purchase from a previous owner, and clause (ii) dealt with the residual clause.

However, a reading of the memorandum to Finance Bill, 1987 would indicate that the amendment sought to deal with two classes of goodwill being – a) purchased goodwill and b) self-generated goodwill.

Section 55(2)(a)(ii), which dealt with the latter, i.e. self-generated goodwill, provided that for the purposes of Sections 49 and 50, the cost of acquisition of such self-generated goodwill would be taken to be nil.

The said section has been amended from time to time to include various classes of intangible assets.

PERIOD OF HOLDING AND LEVY OF TAX IN CASE OF SELF-GENERATED GOODWILL AND INTERNALLY GENERATED INTANGIBLE ASSETS

As discussed earlier, in order to overcome the decision in B.C. Srinivasa Setty’s (case), Section 55(2)(a)(ii) [currently Section 55(2)(a)(iii)] was inserted to deem the ‘cost of acquisition’ of the self-generated goodwill and other classes of internally generated intangible assets to be nil.

However, while making such an amendment, the legislature has not made any amendment to the provisions of the act to provide for the manner of computation of the period of holding in case of such assets.

As discussed earlier, it was observed by the Supreme Court that the date of acquisition in case of self-generated goodwill cannot be determined. The court has also observed that the date of acquisition is a material factor in applying the computation provisions relating to capital gains. It has also been held that the ‘cost of acquisition’ mentioned in Section 48 implies a date of acquisition.

The date of acquisition is a material factor in applying computation provisions considering that 2nd proviso to Section 48 replaces the ‘cost of acquisition’ in Section 48(ii) with ‘indexed cost of acquisition’ in case of gains arising from transfer of a long-term capital asset. The determination of whether a capital asset is a long-term capital asset would entail the determination of the period of holding in the hands of the assessee, which would, in turn, require the date of acquisition. Since the date of acquisition in the case of self-generated goodwill cannot be determined, the computation under Section 48 would not be possible.

By providing that the cost of acquisition in case of self-generated goodwill and other internally generated intangible assets as referred to in Section 55(2)(a) would be nil, the legislature may overcome the issue relating to the benefit of indexation under 2nd proviso to Section 48. However, this is not the end of the matter.

It would be pertinent to note that once the capital gains under Section 48 are computed and the charge under Section 45 is attracted, the tax payable on such capital gains would have to be determined based on whether such capital gain is a ‘short-term capital gain’ under Section 2(42B) or a ‘long-term capital gain’ under Section 2(29B). This exercise would, in turn, involve the determination of whether the capital asset is a ‘short-term capital asset’ under Section 2(42a) or a ‘long-term capital asset’ under Section 2(29AA).

A combined reading of sub Sections 42A, 42B, 29AA and 29B of Section 2 would indicate the following:

• The period of holding of a capital asset will have to be determined in the hands of the assessee. In determining the same one will have to reckon the actual period for which the capital asset has been held by the assessee.

• Having determined the period of holding in respect of the capital asset in the hands of an assessee, one will have to examine whether the capital asset would fall within the definition of ‘short-term capital asset’ under Section 2(42A) read with the provisos thereto based on such period of holding.

• If such capital asset meets the definition of ‘short-term capital asset’, the gain arising from the transfer of the same would amount to short-term capital gain by virtue of Section 2(42B).

• If such capital asset does not meet the definition of ‘short-term capital asset’ under section 2(42A), it will become a ‘long-term capital asset’ by virtue of Section 2(29AA). Thus, in order to invoke the residuary provision of Section 2(29AA), such a capital asset must clearly not be a ‘short-term capital asset’ within the meaning of Section 2(29AA). Thus, where it cannot be conclusively concluded that a capital asset is not a ‘short-term capital asset’, it cannot, by virtue of the residuary provision under Section 2(29aa), become a ‘long-term capital asset’.

• This is clear from the fact that ‘long-term capital asset’ has been defined to mean a capital asset that is not a ‘short-term capital asset‘. Firstly, the use of the word ‘means’ in Section 2(29AA) indicates that the definition given under Section 2(29aa) to the term ‘long-term capital asset’ is exhaustive. In this regard, reliance is placed on Kasilingam vs. P.S.G. College of Technology [1995] SUPP 2 SCC 348 (SC), wherein it has been held that the use of the term ‘means’ indicates that the definition is a hard and fast definition. Secondly, Section 2(29AA) defines a ‘long-term capital asset’ to mean a capital asset which is not a short-term capital asset. Thus, only where a capital asset is conclusively found not to be a ‘short-term capital asset’ within the meaning contemplation of Section 2(42A), it would fall within the purview of Section 2(29AA), and any gain arising from the transfer of the same would be a ‘long-term capital gain’ by virtue of Section 2(29B).

Since the period of holding of self-generated goodwill and other internally generated intangible assets cannot be determined, it would not be possible to conclusively rule out that such capital assets are not ‘short-term capital assets’ under Section 2(42A). Resultantly, such assets cannot be ‘long-term capital assets’. As a result, it would not be possible to determine whether the capital gains arising from the transfer of such assets are ‘short-term capital gains’ or ‘long-term capital gains’.

A fortiori, the applicable tax rates in respect of such capital gains cannot be determined as the nature of capital gains is unknown.

It may be noted that the impossibility in determination of the period of holding would further impact an assessee who acquires it from such previous owner who generated the goodwill or other intangible assets, under any of modes provided in clauses (i) through (iv) of Section 49(1).

In such case, by virtue of explanation 1(b) to Section 2(42A), in determining the period of holding in the hands of such assessee, the period of holding of the previous owner is required to be included. Since, the period of holding in the hands of the previous owner cannot be determined, the period of holding in the hands of the assessee would also be
indeterminate.

Can one argue that where the period of holding in the case of the previous owner is indeterminate, such period will have to be ignored for the purposes of explanation 1(b) to Section 2(42A)? However, such a view is clearly contrary to the mandate of the said explanation which provides that the period of holding of the previous owner ‘shall be included’.

Such being the case, it would also not be possible to determine the tax rates applicable to an assessee who acquires self-generated goodwill or internally generated intangible assets under the modes mentioned in Section 49(1)(i) to (iv), upon subsequent transfer of such assets by him. In Govind Saran Ganga Saran vs. CST, 1985 SUPP SCC 205 : 1985 SCC (Tax) 447 at page 209:

‘6. The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity.’

From the above extract, it can be observed that there are four components of tax:

•   The first component is the character of the imposition,
•   The second is the person on whom the levy is imposed,
•   The third is the rate at which tax is imposed, and
•   The fourth is the value to which the rate is applied for computing tax liability.

Further, the court has held that if there is any ambiguity in any of the above four concepts, the levy would fail.

In the following cases, the ratio laid down in Govind Saran Ganga Saran’s case (supra) has been followed:

•   CIT vs. Infosys Technologies Ltd. [2008] 297 ITR 167 (SC) (para 6);
•   CIT vs. Vatika Township (P.) Ltd. [2014] 367 ITR 466 (SC) (para 39);
•   Commissioner of Customs (Import) vs. Dilip Kumar & Co. [2018] 95 taxmann.com 327 (SC) (para 42);
•   CIT vs. Govind Saran Ganga Saran [2013] 352 ITR 113 (Karnataka) (para 15);
•   CIT vs. Punalur Paper Mills Ltd. [2019] 111 taxmann.com 50 (Kerala) (para 9).

Thus, it is clear that the rate of tax is one of the important components of tax and any uncertainty in the legislative scheme in defining it will be fatal to the levy.
Thus, in case of self-generated goodwill and other intangible assets, the charge under Section 45 in respect of capital gains upon transfer of the same would fail as the rate of tax cannot be determined. The charge would fail not only in respect of the assessee who acquired it through self-generation but also another assessee who acquires it from the former under modes provided in Section 49(1).

COMPARISON WITH SECTION 45(4) AS RECAST BY FINANCE ACT, 2021
Section 45(4), as inserted by Finance Act, 2021 with effect from 1st April, 2021, creates a charge in respect of profits or gains arising from a receipt of any money or capital asset or both by a specified person from a specified entity in connection with the reconstitution of such specified entity. It also provides the formula for the determination of such profits
or gains.

The said section provides that such profits or gains shall be chargeable to income tax as income of such specified entity under the head ‘capital gains’ and shall be deemed to be the income of such specified entity of the previous year in which the specified person received such money or capital asset or both.

It may be noted that in a given case, a specified person may receive two or more capital assets from the specified entity, comprising of a combination of short-term and long capital assets. In such a case, it would not be possible to apportion the aggregate profits or gains between short-term and long-term capital gains as no such mechanism has been provided in Section 45(4).

Further, there may be cases where only cash is received by the specified person from the specified entity. In such case, there is no transfer of a capital asset (be it long-term or short-term) by the specified entity to the specified person.

However, irrespective of the above situations, the entire profit or gain as determined by applying the provisions of Section 45(4) would be chargeable to tax in the hands of the specified entity under the head ‘capital gains’.

Thus, Section 45(4) is indifferent to whether there is actually a transfer of a capital asset, let alone whether such capital asset is long-term or short-term. Likewise, it is indifferent to the classification of the gains as ‘short-term capital gains’ or ‘long-term capital gains’. The trigger point in Section 45(4), unlike Section 45(1), is not the transfer of a short-term or long-term capital asset, but is rather the receipt of any money or capital asset or both by a specified person from a specified entity in connection with the reconstitution of such specified entity.

Further, Section 45(4), unlike Section 45(1), provides the mechanism for the computation of the profits and gains. The said computation is independent of the existence of any capital asset or, if it existed, the nature of such capital asset (i.e. short-term or long-term), unlike the computation under Section 48.

At this juncture, the question that would arise is what rate of tax would apply to the capital gains under Section 45(4). This is for the reason that the tax rate is dependent on the classification of the gains as ‘short-term capital gains’ or ‘long-term capital gains’ as discussed earlier.

According to the authors, the normal tax rates applicable to the assessee as per the first schedule to the relevant finance act would be applicable. This would be similar to the case of short-term capital gains other than those referred to in Section 111A.

A reference may be made to Section 2(1) of the Finance Act, 2021. The said Section, subject to exceptions under Sections 2(2) and 2(3) of the said Act, provides for charge of income-tax at the rates specified in part I of the first schedule. In other words, the tax rates mentioned in Section 2(1) read with part I of the first schedule of the Finance Act, 2021 would generally apply for computing the tax chargeable subject to the exceptions provided in Sections 2(2) and 2(3) of the said Act. One of the exceptions under Section 2(3) of the Finance Act, 2021 is with respect to cases falling under Chapter XII of the Income Tax Act where the said Chapter prescribes a rate. In such a case, the rate provided in the said Chapter would be applicable and not the rates provided in Part I of First Schedule to the Finance Act, 2021.

It may be noted that Section 111A, falling within Chapter XII, deals with short-term capital gains arising from transfer of certain capital assets and provides the rate of tax in respect of the same. Sections 112 and 112A deal with long-term capital gains and provide the tax rates in respect of the same. However, with regard to short-term capital gains other than those covered under Section 111A, no rate of tax is provided either in Chapter XII or any other provisions of the Income Tax Act. Thus, by virtue of Section 2(1) read with Section 2(3) of the Finance Act, 2021, with respect to such short-term capital gains, the rates provided in Part I of First Schedule to Finance Act, 2021 would apply.

The capital gains under Section 45(4) are not covered by Sections 111A, 112 and 112A. Such gains, therefore, form part of normal income and would suffer normal rates of tax as provided in Part I of First Schedule to Finance Act, 2021.

From the above, it can be observed that wherever the legislature has sought to do away with the requirement of the classification of the gains as short-term or long-term, it has done so.

However, the above would not apply in the case of self-generated goodwill and other internally generated intangible assets. Unless the period of holding of these assets is found, it cannot be determined whether they are ‘long-term capital assets’ or ‘short-term capital assets’ and the gains arising from the transfer thereof as short-term capital gain or long-term capital gain. In the absence of such determination, it would not be known whether such gain would fall under Section 112 and hence covered by Section 2(3) of the Finance Act. Unless its case is conclusively excluded from Section 2(3) of the Finance Act, Section 2(1), which provides for the normal rate cannot be pressed into service. Thus, the determination of the correct rate of tax becomes impossible, thereby frustrating the very levy.

CONCLUSION
Based on the foregoing analysis, it would not be unreasonable to take a stand that the charge under Section 45 and the subsequent levy of tax in respect of capital gains arising from transfer of capital assets, being self-generated goodwill and other intangible assets, would fail, despite the amendment under Section 55(2)(a). Thus, it would not be wrong to state that the ratio laid down by the Hon’ble Supreme Court in the case of B.C. Srinivasa Setty’s case (supra) is still good law, and the same continues to hold the field.

shailesh.kwebmaker

Reopening of assessment – Within 4 years – Regular assessment completed u/s 143(3) after verifying the issue – Changing of opinion – Reopening bad in law

8 Conopco Inc. vs. UOI & Anr. [W.P. No. 7388 of 2008; Date of order: 17th December, 2021; A.Y.: 2004-05 (Bombay High Court)]

Reopening of assessment – Within 4 years – Regular assessment completed u/s 143(3) after verifying the issue – Changing of opinion – Reopening bad in law

The petitioner / assessee challenged the notice dated 13th March, 2008 issued u/s 148 and the order dated 14th October, 2008 passed by the A.O. rejecting its objections to the proposed reopening of the assessment.

The petitioner was issued 420,000 shares of Rs. 10 each in Ponds (India) Limited at the time of its incorporation in 1977. It was allotted a further 159,250 equity shares of Rs. 10 each by way of a rights issue at Rs. 90 per share in 1987. Further, 51,39,75,000 equity shares of Rs. 1 each were issued by way of bonus shares from time to time. Upon merger of Ponds (India) Ltd. with Hindustan Lever Ltd. and thereafter, the petitioner was holding 6,00,86,250 shares of Rs. 1 each of Hindustan Lever Ltd.

It filed a return of income for the A.Y. 2004-2005 on 14th October, 2004 declaring long-term capital gain of Rs. 10,108,653,163. It paid Rs. 1,010,865,316 as tax on long-term capital gain @ 10% as per the proviso to section 112 and surcharge of Rs. 25,271,633 @ 2.5%.

During the course of assessment proceedings, the petitioner vide letter dated 10th November, 2006 answered the questions raised by respondent No. 2 as to why the rate of tax on capital gains in its case should be computed @ 10% and the applicability of the first proviso to section 48. The petitioner submitted a without-prejudice working of capital gains without considering the benefit of the first proviso to section 48. The A.O. thereafter passed an assessment order dated 15th November, 2006 computing the income of the petitioner after accepting its contentions.

Thereafter, the petitioner received the impugned notice dated 13th March, 2008 proposing to reassess its income for A.Y. 2004-2005 on the alleged belief that its income had escaped assessment within the meaning of section 147.

The Court observed that in the reasons for reopening provided by the A.O. vide a letter dated 11th September, 2008, the main contentions of the A.O. were (i) the petitioner admitted to the working of capital gains without considering the benefit of the first proviso to section 48; and (ii) tax had to be calculated @ 20% against 10% determined while passing the assessment order.

It is settled law that before a proceeding u/s 148 can be validly initiated certain preconditions which are jurisdictional have to be complied with. One such condition is that the A.O. must have reason to believe that income chargeable to tax has escaped assessment and such reasons must be recorded in writing prior to the initiation of the proceedings. The second condition is that reassessment must not be based merely on change of opinion by a succeeding A.O. from the view taken by his predecessor.

The Court held that both these conditions have not been complied with. In the reasons recorded, the A.O. has opined that the rate of tax to be applied to the capital gains that arose to the petitioner was 20% in terms of section 112(1)(c) and not 10% as was determined whilst passing the order u/s 143(3).

Further, the Court observed that the A.O. had examined all the relevant provisions of the Act, including sections 48 and 112, and completed the assessment by applying the rate of income tax as per the proviso to section 112(1). It was also clear from the reasons that during the assessment proceedings the A.O. had asked why capital gain should not be taxed @ 20% as provided u/s 112(1)(c)(ii) and in response the petitioner vide letter dated 10th November, 2006 had submitted an explanation and revised (without prejudice) the working of the capital gain without considering the benefit of the first proviso to section 48. It was also clear from the reasoning given by respondent No. 2 that the issue now sought to be raised in the purported reassessment proceedings was very much examined by the A.O. and he had completed the assessment proceedings after giving due consideration to the submissions made by the petitioner.

Therefore, the reassessment proceedings are initiated purely on change of opinion with regard to the rate of tax payable by the petitioner on the long-term capital gain made by it on the sale of shares of Hindustan Lever Ltd. The issue of applicability of the first proviso to section 48 as well as the rate of tax u/s 112 were discussed and considered at the time of the said assessment proceedings u/s 143(3).

The Court further observed that the reasons of reopening the assessment have to be based / examined only on the basis of reasons recorded at the time of issuing a notice u/s 148 seeking to reopen the assessment. These reasons cannot be improved upon and / or supplemented, much less substituted, by an affidavit and / or oral submissions.

Once a query has been raised by the A.O. through the assessment proceeding and the assessee has responded to that query, it would necessarily follow that the A.O. has accepted the petitioner’s submissions so as not to deal with that issue in the assessment year. Even if the assessment order passed u/s 143(3) does not reflect any consideration of the issue, it must follow that no opinion was formed by the A.O. in the regular assessment proceedings. It is also settled law that once all the material was placed before the A.O. and he chose not to refer to the deduction / claim which was being allowed in the assessment order, it could not be contended that the A.O. had not applied his mind while passing the assessment order.

When a query has been raised, as has been done in this case, with regard to a particular issue during regular assessment proceedings, it must follow that the A.O. had applied his mind and taken a view in the matter as is reflected in the assessment order. It is clear that once a query has been raised in the assessment proceedings with regard to the rate at which capital gains should be taxed u/s 112(1)(c)(ii) and the petitioner has responded to the query to the satisfaction of the A.O. as is evident from the facts in the assessment order dated 15th November, 2006, he accepts the petitioner’s submissions as to why taxation should be only 10% u/s 112 read with section 148, it must follow that there is due application of mind by the A.O. to the issue raised. Non-rejection of the explanation in the assessment order would amount to the A.O. accepting the view of the petitioner, thus taking a view / forming an opinion. Where on consideration of the material on record one view is conclusively taken by the A.O., it would not be open to reopen the assessment based on the very same material with a view to take another view.

Accordingly, the petition was allowed.

shailesh.kwebmaker

Waiver of interest – Charged u/s 215 –The phrase ‘regular assessment’ means first order / original assessment

7 Bennett Coleman & Co. Ltd. vs. Dy. CIT & Ors. [ITA No. 100 of 2002; Date of order: 20th December, 2021; A.Y.: 1985-86; (Bombay High Court)] [Arising out of ITAT order dated 30th August, 2001]

Waiver of interest – Charged u/s 215 –The phrase ‘regular assessment’ means first order / original assessment

On 4th September, 1985, the applicant filed its return of income for A.Y. 1985-86 disclosing a total income of Rs. 1,53,41,650. The A.O. passed an assessment order dated 28th March, 1988 u/s 143(3) and, after making various additions and disallowances, assessed a total income of Rs. 2,74,47,780. In the assessment order, he inter alia directed interest to be charged u/s 215. He levied interest of Rs. 13,67,999 u/s 215 vide the computation sheet.

Aggrieved by the action of the A.O. in charging interest u/s 215, the appellant filed an application dated 8th July, 1988 for waiver of interest u/s 215(4) read with Rule 40 of the Income-tax Rules, 1962 (the Rules). The DCIT passed an order dated 20th March, 1989 under Rule 40(1) holding that the delay in finalisation of the assessment was not attributable to the appellant and waived the interest u/s 215 beyond one year of the filing of the return of income. The DCIT accordingly recalculated the interest chargeable u/s 215 at Rs. 4,13,630 and waived the balance of Rs. 4,40,020.

The appellant received a show cause notice dated 6th March, 1990 u/s 263 from the Commissioner of Income-tax (CIT). It filed its objections by a letter dated 26th March, 1990 objecting to the proposed action. The CIT then passed an order dated 30th March, 1990 u/s 263 setting aside the assessment in its entirety with directions to the A.O. to reframe the assessment after proper verification and application of mind.

In compliance with this order u/s 263, the A.O. passed a fresh assessment order dated 9th March, 1992 u/s 143(3) r.w.s. 263. The A.O. gave effect to the order dated 30th March, 1990 by making certain additions and disallowances and computed the income of the appellant at Rs. 4,04,37,692. There was no direction in the said order regarding the charging of interest u/s 215. However, in the computation sheet annexed to the said order, interest of Rs. 23,91,413 u/s 215 had been charged. The A.O. had also charged interest u/s 139(8).

Aggrieved by the various additions and disallowances made and the interest under sections 215 and 139(8) levied by the A.O., the appellant filed an appeal before the CIT (Appeals). The said appeal was disposed of vide an order dated 28th September, 1992 holding that interest could not be charged under sections 215 or 139(8) unless it has been charged earlier or it falls within the meaning of sections 215(3) or 139(8)(b).

Being aggrieved by the order of the CIT (Appeals) with regard to the issue of levy of interest u/s 215, the A.O. filed an appeal before the Tribunal. While challenging the said order, the A.O. accepted that part of the order of the Commissioner (Appeals) which deleted the levy of interest u/s 139(8) and confined the appeal to the deletion of interest u/s 215(6). The Tribunal restored the interest levied by the A.O. by way of the computation sheet annexed to the said order.

It was contended on behalf of the appellant that the phrase ‘regular assessment’ in the ITA has been used in no other sense than the first order of assessment passed under sections 143 or 144 and any consequential order passed by the Income-tax Officer giving effect to subsequent orders passed by a higher authority cannot be treated as regular assessment. It was further submitted that in the regular assessment there was no direction to charge interest u/s 215 and therefore interest cannot be charged in the reassessment order.

The Department fairly accepted that the word ‘regular assessment’ needs to be interpreted as the original assessment. However, it was submitted that if the appellant was seeking waiver of interest, it was required to file a new application for waiver after the order of reassessment and in the absence of such application the Tribunal was justified in restoring the order of the A.O. directing the appellant to pay interest as per section 215.

The High Court observed that section 215 makes it clear that the assessee is required to pay interest where he has paid advance tax less than 75% of the assessed tax; the assessee is required to pay simple interest @ 15% p.a. from the first day of April following the financial year up to the date of regular assessment.

The Supreme Court has summed up in the case of Modi Industries Ltd. and Others vs. Commissioner of Income-Tax and Another ([1995] 216 ITR 759) by saying that the expression ‘regular assessment’ has been used in the ITA in no other sense than the first order of assessment under sections 143 or 144. Any consequential order passed by the ITO to give effect to an order passed by the higher authority cannot be treated as a regular assessment.

The Court observed that for A.Y. 1985-86, in the regular assessment proceeding completed on 28th March, 1988, the total income was determined at Rs. 2,74,47,780 and interest u/s 215 amounting to Rs. 13,67,999 was charged. In the facts of the case, since the interest u/s 215 was charged in the regular assessment order, the A.O. had the power to charge interest u/s 215 while carrying out the reassessment.

Further, the Court observed that section 215(4) empowers the A.O. to waive or reduce the amount of interest chargeable u/s 215 under circumstances prescribed in Rule 40 of the Income-tax Rules, 1962. One such prescribed circumstance is:
(1) When without any laches or delay on the part of assessee, the assessment is completed more than one year after the submission of the return; or…….

Finally, the Court observed that the order of the Dy. CIT, Bombay dated 20th March, 1989 held that the delay in finalisation of assessment is not attributable to the assessee and therefore it is not liable to pay interest u/s 215 beyond the period of one year from the date of filing of the return. Accordingly, the appellant was held to be liable to pay an amount of Rs. 4,40,020. The order of the Dy. CIT had not been challenged by the Revenue or the appellant, with the result that the said order attained finality. In the absence of a challenge to the order under Rule 40(1), the appellant is not entitled to the benefit of the judgment of the Division Bench of this Court in the case of CIT vs. Bennett Coleman & Co. Ltd. (217 ITR 216). Therefore, the appellant is not entitled to waiver of interest for a period of one year. The appellant is entitled to the benefit of the order dated 20th March, 1989 passed under Rule 40(1) only to the extent stated therein.

Therefore, it was held that the appellant was liable to pay an amount of Rs. 4,13,630as per the order dated 20th March, 1989.

shailesh.kwebmaker

Vivad se Vishwas Scheme – Declaration – Condition precedent – Appeal should be pending on specified date – Application for condonation of delay in filing appeal filed before specified date and pending before Commissioner (Appeals) – Communication from Commissioner (Appeals) of NFAC asking assessee to furnish ground-wise submissions in appeal – Implies delay condoned – Order of rejection set aside

31 Stride Multitrade Pvt. Ltd. vs. ACIT [2021] 439 ITR 141 (Bom) A.Y.: 2017-18;
Date of order: 21st September, 2021 S. 246A of ITA, 1961; Ss. 2(1)(a)(i), 2(1)(a)(n) of Direct Tax Vivad se Vishwas Act, 2020

Vivad se Vishwas Scheme – Declaration – Condition precedent – Appeal should be pending on specified date – Application for condonation of delay in filing appeal filed before specified date and pending before Commissioner (Appeals) – Communication from Commissioner (Appeals) of NFAC asking assessee to furnish ground-wise submissions in appeal – Implies delay condoned – Order of rejection set aside

For the A.Y. 2017-18, the assessee declared loss in its return of income. An assessment order was passed u/s. 144. The assessee filed an appeal u/s 246A before the Commissioner (Appeals) with an application for condonation of delay of 19 days in filing the appeal. Thereafter, the assessee received a communication from the Commissioner (Appeals) of the National Faceless Appeal Centre inquiring whether the assessee wished to opt for the Vivad se Vishwas Scheme or would contest the appeal. The assessee admittedly made its declaration in form 1 on 21st January, 2021, within the specified date of 31st January, 2020 u/s 2(1)(a)(n) of the 2020 Act. The Principal Commissioner rejected the declaration of the assessee under the 2020 Act on the ground that there was no order condoning the delay in filing the appeal before the Commissioner (Appeals).

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

‘i) Section 2(1)(a)(i) of the Direct Tax Vivad se Vishwas Act, 2020 provides that a person in whose case an appeal or a writ petition or special leave petition has been filed either by himself or by Income-tax authority or by both, before an appellate forum and such appeal or petition is pending as on the specified date is entitled to make a declaration under the Act. The specified date u/s 2(1)(a)(n) of the 2020 Act is 31st January, 2020. Where the time limit for filing of appeal has expired
before 31st January, 2020 but an appeal with an application for condonation of delay is filed before the date of the Circular, i.e., 4th December 2020 [2020] 429 ITR (St.) 1, issued by the Central Board of Direct Taxes such appeal will be deemed to be pending as on 31st January, 2020.

ii) The communication dated 20th January, 2021 from the Commissioner (Appeals) asking the assessee to furnish ground-wise written submissions on the grounds of appeal itself would mean that the delay had been condoned by the Commissioner (Appeals). Therefore, it was incorrect for the Principal Commissioner to state that there was no order condoning the delay and hence, reject the declaration of the assessee under the 2020 Act.

iii) The time limit to file appeal had expired on 18th January, 2020 and the condonation of delay application was filed on 6th February, 2020, before 4th December, 2020, the date of the Board’s Circular. The appeal would be pending as required under the 2020 Act. The order of rejection of the assessee’s declaration under the 2020 Act was bad in law and accordingly set aside. The Principal Commissioner was directed to process the forms filed by the assessee under the provisions of the 2020 Act.’

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Search and seizure – Assessment of third person – Absence of any incriminating documents or evidence against assessee discovered during course of search – Jurisdiction to assess third person could not be assumed

30 Principal CIT vs. S.R. Trust [2021] 438 ITR 506 (Mad) A.Ys.: 2009-10 to 2015-16; Date of order: 24th November, 2020 Ss. 132 and 153C of ITA, 1961

Search and seizure – Assessment of third person – Absence of any incriminating documents or evidence against assessee discovered during course of search – Jurisdiction to assess third person could not be assumed

The assessee was a charitable trust. A search was conducted u/s 132 of one SG who was a doctor and managing trustee of the assessee which established and administered a hospital. Simultaneously, a search action was conducted in the case of one TJ who
supplied medical and surgical equipment and other accessories to the hospital run by the assessee. Pursuant to the search, the Department was of the prima facie view that funds were siphoned off through TJ allegedly resorting to huge inflation of expenses through salaries paid to staff members by transfer of funds to the bank accounts of the employees as if salaries were paid to them. Based on the seized documents, a notice u/s 153C was issued for the A.Ys. 2009-10 to 2015-16 against the assessee. An order u/s 143(3) read with section 153C was passed.

The Commissioner (Appeals) and the Tribunal found that TJ did not admit that money was paid back to the managing trustee of the assessee-trust, that the materials seized did not indicate any inflation of purchase by the assessee and that the deposits in the bank account of the managing trustee of the assessee stood explained. The Commissioner (Appeals) and the Tribunal held that there was no material brought on record to prove the nexus between withdrawal of the amount from the bank account of TJ and the deposits made in the bank accounts of the managing trustee of the assessee.

The appeal filed by the Department was dismissed by the Madras High Court. The High Court held as under:

‘i) The Tribunal was right in holding that the A.O. ought not to have assumed jurisdiction u/s 153C. In proceedings u/s 153C, in the absence of any incriminating documents or evidence discovered during the course of search u/s 132 in the case of searched person against the assessee, the jurisdiction under the provisions of section 153C could not be assumed. The Commissioner (Appeals) had allowed the appeals filed by the assessee as confirmed by the Tribunal.’

ii) The order of the Tribunal was confirmed. No question of law arose.

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Reassessment – Notice u/s 148 – Query raised with regard to a particular issue during regular assessment implies A.O. has applied his mind – Reassessment on change of opinion – Impermissible

29 Principal CIT vs. EPC Industries Ltd. [2021] 439 ITR 210 (Bom) A.Y.: 2007-08; Date of order: 26th October, 2021 Ss. 147, 148 of ITA, 1961

Reassessment – Notice u/s 148 – Query raised with regard to a particular issue during regular assessment implies A.O. has applied his mind – Reassessment on change of opinion – Impermissible

For the A.Y. 2007-08, the A.O. issued a notice u/s 148 to reopen the assessment u/s 147 on the ground that the assessee had claimed deduction for depreciation on the assets acquired with the bank loan, which the bank had written off under a one-time settlement as bad debts and the write-back by the assessee was to be treated as income. The assessee’s objections were rejected. In the reassessment order the A.O. brought to tax the waiver of principal amount of bank loan as income of the assessee u/s 41(1) / 28(iv).

The Tribunal held that the assessment was reopened based on information which was already on record and no new tangible material was brought on record to suggest escapement of income in respect of waiver of loan on one time settlement by the bank which was claimed by the assessee as deduction. The Tribunal allowed the assessee’s appeal.

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

‘i) The reason to believe that any income chargeable to tax had escaped assessment u/s 147 has to arise not on account of a mere change of opinion but on the basis of some tangible material. Once there was a query raised with regard to a particular issue during the regular assessment proceedings, it must follow that the A.O. had applied his mind and taken a view in the matter as reflected in the assessment order.

ii) A query was raised by the A.O. in the original assessment in respect of the waiver of loan on account of the one-time settlement with the bank and the assessee had filed a detailed submission as to why the principal amount waived by the bank on account of the one-time settlement was not taxable. Reassessment on a change of opinion was impermissible. No question of law arose.’

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CLAIM FOR RELIEF OF REBATE OUTSIDE REVISED RETURN OF INCOME

ISSUE FOR CONSIDERATION
It is usual to come across cases where an assessee, in filing the return of income, fails to make a claim for relief on account of a rebate or deduction or exemption and also overlooks the filing of the revised return within the time prescribed u/s 139(5). His attempt to remedy the mistake by staking a claim for relief before the A.O. or the CIT(A) afresh is usually dismissed by the authority. At times, even the appellate Tribunal or the courts have not appreciated the bypassing of the statutory remedy entrusted u/s 139(5), more so after the decision of the Supreme Court in the case of Goetze (India) Ltd., 284 ITR 323 was delivered, a decision interpreted by the authorities and at times by the Courts to have laid down the law that requires an assessee to stake a fresh claim, not made while filing the return of income, only by revising the return within the prescribed time.

Several Benches of the Tribunal and the Courts, after due consideration of the said decision of the Apex Court, have permitted the assessee to stake a fresh claim, which claim was not made while filing the return of income or by revising the same in time, either by filing an application during the course of the assessment or, at the least, while adjudicating the appeal. At a time when it appeared that the law was reasonably settled on the subject, the recent decision of the Kerala High Court has warned the assessee that the last word on the subject has not yet been said. It held that the claim for relief, not made vide a return, revised or otherwise, could not be made before the A.O. or even before the appellate authorities.

RAGHAVAN NAIR’S CASE
The issue recently came up for the consideration of the Kerala High Court in the case of Raghavan Nair, 402 ITR 400. The assessee had received a certain sum of money during F.Y. 2014-15 pertaining to A.Y. 2015-16 by way of compensation for land acquired from him for a Government project. The assessee offered the receipt for taxation in filing the return of income under the head capital gains. During the course of the scrutiny assessment, the assessee claimed that the compensation received was not taxable in the light of section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. The assessee requested for the relief vide a letter which was denied by the A.O., against which the assessee filed a writ petition before the Court.

The Court noted that the assessee, when he was made to understand that he had no liability to pay tax on capital gains, could not file a revised return since the time for filing the revised return had expired by the time he came to know that there was no such liability to pay tax.

At the hearing, the Court held that it was the duty of the A.O. to refrain from assessing an income even if the same had been included by mistake by the assessee in his return of income filed. The Court held that the decision of the Supreme Court was not applicable to the facts of the case by explaining the implication of the decision of the Apex Court as: ‘The question that arose in Goetze (India) Ltd.’s case (Supra) was whether an assessee could make a claim for deduction other than by filing a revised return. As noted above, the question in the case on hand is whether the A.O. is precluded from considering an objection as to his authority to make an assessment u/s 143 merely for the reason that the petitioner has included in his return an amount which is exempted from payment of tax and that he could not file a revised return to rectify the said mistake in the return. The decision of the Apex Court in the Goetze case has, therefore, no application to the facts of the present case.’

The High Court held that this was a clear case where the A.O. had penalised the assessee for having paid tax on an income which was not exigible to tax. It noted that in the light of the mandate under article 265 of the Constitution, no tax should be levied or collected except by authority of law. The Court relied on the observations of the Apex Court in the case of Shelly Products 129 Taxman 271:

‘We cannot lose sight of the fact that the failure or inability of the Revenue to frame a fresh assessment should not place the assessee in a more disadvantageous position than in what he would have been if a fresh assessment was made. In a case where an assessee chooses to deposit by way of abundant caution advance tax or self-assessment tax which is in excess of his liability on the basis of the return furnished, or there is any arithmetical error or inaccuracy, it is open to him to claim refund of the excess tax paid in the course of the assessment proceeding. He can certainly make such a claim also before the authority concerned calculating the refund. Similarly, if he has by mistake or inadvertence or on account of ignorance, included in his income any amount which is exempted from payment of Income-Tax, or is not income within the contemplation of law, he may likewise bring this to the notice of the assessing authority, which if satisfied, may grant him relief and refund the tax paid in excess, if any. Such matters can be brought to the notice of the authority concerned in a case when refund is due and payable, and the authority, on being satisfied, shall grant appropriate relief. In cases governed by section 240 of the Act, an obligation is cast upon the Revenue to refund the amount to the assessee without his having to make any claim in that behalf. In appropriate cases, therefore, it is open to the assessee to bring facts to the notice of the authority concerned on the basis of the return furnished, which may have a bearing on the quantum of the refund, such as those the assessee could have urged u/s 237 of the Act. The authority, for the limited purpose of calculating the amount to be refunded u/s 240 of the Act, may take all such facts into consideration and calculate the amount to be refunded. So viewed, an assessee will not be placed in a more disadvantageous position than what he would have been, had an assessment been made in accordance with law.’

Accordingly, the Court held that the A.O. should not have taxed the income that was not liable to tax even where the assessee had offered such an income for taxation and had not filed the revised return of income.

PARAGON BIOMEDICAL INDIA (P) LTD.’S CASE
The issue recently again came before the Kerala High Court in the case of Paragon Biomedical India (P) Ltd. 438 ITR 227 (Ker). In this case, the assessee had claimed a deduction u/s 10B which was disallowed by the A.O. In the appeal to the CIT(A), the assessee modified the claim for deduction from section 10B to section 10A, which was allowed by the CIT(A). On appeal by the Revenue, the Tribunal held that the CIT(A) was justified in allowing the alternative claim of deduction u/s 10A and confirmed the order of the Commissioner (Appeals) that permitted the assessee to claim the deduction under a different provision of law than the one that was applied for while filing the return of income.

On further appeal, the High Court, however, reversed the order of the Tribunal and held the order to be contrary to the principles laid down by the Apex Court in the cases of Goetze (India) Ltd. (Supra) and Ramakrishna Deo 35 ITR 312. In the light of the said decisions, the High Court termed the orders of the CIT(A) and the Tribunal as both illegal and untenable. The Court, in deciding the case, found that the decisions in the cases of National Thermal Power Co. Ltd. 229 ITR 383 (SC) and Goetze did not conflict with each other, as NTPC’s decision did not in any way relate to the power of the A.O. to entertain a claim for deduction otherwise than by filing a revised return.

OBSERVATIONS
Article 265 of the Constitution of India provides that any retention of tax collected, which is not otherwise payable, would be illegal and unconstitutional. Retaining the mandate of the Constitution, the Board vide Circular 14(XL-35) dated 11th July, 1955 reiterated that the taxing authority cannot collect or retain tax that is not authorised by law and further that it was the duty of the assessing authority to ensure that a relief allowable to an assessee in law shall be allowed to him even where such a claim is not made by him in filing the return of income.

An A.O. has been vested with the power to assess the total income and in doing so he has wide powers to bring to tax any income, whether or not disclosed in the return of income. He also has the powers to rectify any mistakes. The Board has invested in him the power to grant the reliefs and rebates that an assessee is entitled to but has failed to claim while filing the return of income. [CBDT Circular No. 14 dated 11th July, 1955]. This Circular is relied upon by the Courts to hold that an A.O. is duty-bound to grant such reliefs and rebates that an assessee is entitled to, based on the records available, even where not claimed by the assessee in filing the return of income or otherwise.

Section 139(5) provides for filing of a revised return of income in cases where the return furnished contains any omission or any wrong statement within the prescribed time independent of the powers and the duties of the A.O. It was a largely settled understanding that an assessee could make a claim for a relief or rebate, during the course of assessment, by filing a petition without filing a revised return of income even after the time of filing such return has expired. The Apex Court, however, in one of the decisions (Goetze), held that a rebate or a relief can be claimed by an assessee only by filing of a revised return of income. This decision has posed various challenges, some of which are:

• Whether an A.O. can entertain a petition outside of the revised return and allow a relief claimed by the assessee.
• Whether an A.O. is duty-bound to allow a relief even where not claimed in the return filed by the assessee where no petition or revised return is filed.
• Whether an A.O. is bound to allow such a relief where the material for such relief is available on his records though no petition or revised return is filed.
• Whether an A.O. is required to allow a petition for a modified claim for relief, which was otherwise claimed differently in the return of income filed, without insisting on the revised return of income.
• Whether an appellate authority, being CIT(A) or the Tribunal, can entertain a petition for a relief not claimed or allowed in any of the above situations.

Section 143, as noted above, has invested the A.O. with wide powers in assessing the total income and bringing to tax the true or real income of the assessee, whether or not disclosed in the return of income, even where no return has been filed by an assessee. Sections 250(5) and 251(1) have invested a CIT(A) with powers that are consistently held by the Courts to be coterminus with the powers of an A.O.; he can do everything that an A.O. could have done and has all those powers which an A.O. has, besides the power of enhancement of an income that has not been brought to tax by the A.O. in the course of adjudicating an appeal, subject to a limitation in respect of the new source of income. The appellate Tribunal is vested with powers u/s 254(1) that are held to be wide enough to include entertaining a claim for the first time, subject to certain limitations.

By now it is the settled position in law that the appellate authorities have the power to entertain a new or a fresh claim for relief made by the assessee for the first time before them subject to providing an opportunity to the A.O. to put up his case. This is clear from the reference to the following important decisions:

The Supreme Court in the case of Jute Corporation of India Ltd., 187 ITR 688 dealt with a case where the assessee, during the pendency of its appeal before the AAC, raised an additional ground claiming deduction of certain amount on account of liability of disputed purchase tax, not claimed while filing the return of income. The AAC permitted the assessee to raise the additional ground and after hearing the ITO, accepted the assessee’s claim and allowed the deduction. However, the Tribunal held that the AAC had no jurisdiction to entertain the additional ground or to grant relief to the assessee on a ground which had not been raised before the ITO. On appeal to the Supreme Court, the Court, following its decision in the case of Kanpur Coal Syndicate, 53 ITR 225, delivered by a Bench of three judges and dissenting from its later decision in the case of Gurjaragraveurs (P) Ltd., 111 ITR 1 delivered by a Bench of two judges, held as under:

‘The Act does not contain any express provision debarring an assessee from raising an additional ground in appeal and there is no provision in the Act placing restriction on the power of the appellate authority in entertaining an additional ground in appeal. In the absence of any statutory provision, the general principle relating to the amplitude of the appellate authority’s power being coterminous with that of the initial authority should normally be applicable. If the tax liability of the assessee is admitted and if the ITO is afforded an opportunity of hearing by the appellate authority in allowing the assessee’s claim for deduction on the settled view of law, there appears to be no good reason to curtail the powers of the appellate authority u/s 251(1)(a). Even otherwise an appellate authority while hearing an appeal against the order of a subordinate authority has all the powers which the original authority may have in deciding the question before it, subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There appeared to be no good reason to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO.’

The Supreme Court in the case of Nirbheram Deluram, 91 Taxman 181 (SC) held that the first appellant authority could modify an assessment on a ground not raised before an A.O. following Jute Corporation of India Ltd.’s case (Supra) which had held that the first appellate authority could permit an additional ground not raised before the A.O.

The Kerala High Court, in the case of V. Subhramoniya Iyer, 113 ITR 685, held that the first appellate authority had the power to substitute the order of an A.O. with his own order and the Gujarat High Court in the case of Ahmedabad Crucible Co., 206 ITR 574 held that the powers of the first appellate authority extended beyond the subject matter of assessment, which powers were held to include the power to make an addition on a ground not considered by the A.O.

The Supreme Court in the National Thermal Power Corporation case (Supra) confirmed the judicial view that in cases where a non-taxable receipt was taxed or a permissible deduction was denied, there was no reason why the assessee should be prevented from raising the claim before the second appellate authority for the first time, so long as the relevant facts were on record pertaining to the claim. This condition of the availability of the evidence on records is also waived where the fresh issue relates to the moot question of law or goes to the root of the appeal. Even otherwise, the courts are liberal in upholding the powers of the second appellate authorities generally to entertain a lawful claim.

This understanding and the contours of law are not sought to be disturbed even by the decision of the Apex Court delivered in the Goetze case, which rather confirmed that the said decision was independent of the powers of the appellate authorities. In fact, the appellate authorities regularly entertained a fresh claim by relying on the said decision. It is this settled position of law, even post-Goetze, that is sought to be disturbed by the recent Kerala High Court decision in the case of Paragon Biomedical (Supra) when holding that the claim made before the A.O., outside the revised return of income, was not entertainable. Even when the CIT(A) entertained and allowed such a claim, the said claim was found to be not permissible in law by the Court.

And even prior to the decision of the Kerala High Court, the Madras High Court in the case of Shriram Investments Ltd. (TCA No. 344 of 2005) and the Chennai Bench of the Tribunal in the case of Litostroj, 54 SOT 37 (URO) following the said Madras High Court decision, had held that relief could have been claimed only by filing a revised return of income.

We are of the considered opinion that the position in law settled by the series of Supreme Court decisions permitting the assessee to raise a new or a fresh claim before the appellate authorities is nowhere unsettled by the decision in Paragon Biomedical and a few other cases. In fact, had these decisions of the Supreme Court been cited before the High Court, the decision of the Court would surely have been otherwise. The case before the Kerala High Court was not represented by the assessee before the Court and the representative of the Revenue seems to have failed to bring these cases to the notice of the Court. [Please see Pruthvi Stock Brokers Ltd., 23 taxmann.com 23 (Bom); Kotak Mahindra Bank Ltd., 130 taxmann.com 352 (Kar); Ajay G. Piramal Foundation, 228 Taxman 332 (Del).]

The real issue of the assessee’s power to claim a relief or a rebate outside of a revised return of income, under a petition to the A.O. during the course of assessment, appears to have been soft-pedalled by the Courts either by holding that the A.O. was duty-bound, under the Circular No. 14 of 1955, to allow the relief on his own based on records available, as was done in the cases of Sesa Goa Ltd., 117 taxmann.com 548 (Bom) or CMS Securitas, 82 taxmann.com 319 (Mum) or Perlos, ITA No. 1037/Madras/2013, to name a few, and alternatively by holding that the claim for relief, made outside the revised return before the A.O. was not a new or a fresh claim but was a modified claim based on a mistaken provision of law or the quantum or the failure to claim a relief for which the reports and other material were available on record, as was held in the cases of Malayala Manorama, 409 ITR 358 (Ker), Ramco Engineering, 332 ITR 306 (P&H), Influence, 55 taxmann.com 192 (Del), Shri Balaji Sago Agro, 53 SOT 15 (Mad), Perlos, ITA No. 1037/Madras/2013 and also in Raghavan Nair (Supra), 402 ITR 400 by the same Kerala High Court. [Please also see Sam Global, 360 ITR 682 (Del), Jai Parabolic, 306 ITR 42 (Del), Natraj Stationery, 312 ITR 22 (Del) and Rose Services, 326 ITR 100 (Del).]

A fresh claim for relief is different from a revised claim for relief. In cases where a claim has been made while filing the return of income and is modified or is enhanced or is made under a different provision of the law, the case can be classified as a case of a revised claim, and not a fresh claim. The outcome can be different in cases where the evidence in support of the fresh claim is available on record, from cases where such evidence is not available on record.

The issue of an assessee’s right to claim a relief or a rebate, outside the revised return of income post Goetze, has been addressed directly in the case of CMS Securitas Ltd., 82 taxmann.com 319 by the Mumbai Bench of the Tribunal in favour of the assessee, while the Chennai Bench of the Tribunal in the case of Litostroj, 54 SOT 37 (URO), following an unreported decision of the Madras High Court in the case of Shriram Investments Ltd. [T.C. (A) No. 344 of 2005, dated 16th June, 2011] restored the matter to the file of the A.O. to verify the facts, instead of upholding the power of the CIT(A) to entertain a fresh claim.

In Goetze the question raised in the appeal by the assessee related to whether the assessee could make a claim for deduction other than by filing a revised return by way of a letter before the A.O. The deduction was disallowed by the A.O. on the ground that there was no provision under the Act to make an amendment in the return of income by an application at the assessment stage without revising the return. In the appeal, the assessee had relied upon the decision in the case of National Thermal Power Co. Ltd. (Supra) to contend that it was open to the assessee to raise the points of law even before the appellate Tribunal. The Court noted that the said decision dealt with the power of the Tribunal to entertain a claim where the facts relating to the law were available on record, and that it did not in any way relate to the power of the A.O. to entertain a claim for deduction otherwise than by filing a revised return; and that the NTPC decision could not be relied upon to allow the claim before the A.O. outside the revised return of income. The appeal of the assessee was dismissed by clarifying that the issue in the case was limited to the power of the assessing authority and did not impinge on the power of the appellate Tribunal u/s 254.

The better view therefore is that the appellate authority certainly has the right to consider a fresh or revised claim made by the assessee in appeal, and certainly so in respect of a claim made for which the relevant facts are already on record.

Besides the issue under consideration w.r.t. section 139(5), the issues regularly arise where a fresh claim is sought to be made while filing the return in response to a notice u/s 153A / 153C, abated or not, or section 148, or where such a claim is sought to be made in a revision application u/s 264 or by filing rectification u/s 154 or on application u/s 119(2)(b).

A fresh claim was held to be permissible in the return filed in response to notice u/s 153A / 153C in case of abated assessment [JSW Steel Ltd., 422 ITR 71 (Bom), B.G. Shirke Construction Technology (P) Ltd., 79 taxmann.com 306 (Bom)] and where assessment was unabated and incriminating documents were found for that year [Sheth Developers (P) Ltd., 210 Taxman 208 (Mag)(Bom), Neeraj Jindal, 393 ITR 1 (Del), Kirit Dahyabhai Patel, 80 taxmann.com 162 (Guj), Shrikant Mohta, 414 ITR 270 (Cal)]. In contrast, the courts in a few other cases have held that the assessee is not permitted to stake such a fresh claim that was not made in the return filed u/s 139.

In the context of the return of income filed in response to a notice u/s 148, it was held that a fresh claim was not permissible in the cases of Caixa Economica De Goa, 210 ITR 719 (Bom), Satyamangalam Agricultural Producer’s Co-operative Marketing Society Ltd.,357 ITR 347 (Mad) and K. Sudhakar S. Shanbhag, 241 ITR 865 (Bom).

In contrast, a fresh claim was held to be permissible in filing a revision application u/s 264. [Vijay Gupta, 386 ITR 643 (Del), Assam Roofing Ltd., 43 taxmann.com 316 (Gau), S.R. Koshti, 276 ITR 165 (Guj), Sharp Tools, 421 ITR 90 (Mad), Shri Hingulambika Co-operative Housing Society Ltd. 81 taxmann.com 157 (Kar), Agarwal Yuva Mandal, 395 ITR 502 (Ker), EBR Enterprises, 415 ITR 139 (Bom), Kewal Krishan Jain, 42 taxmann.com 84 (P&H).]

In the cases of Curewel (India) Ltd., 269 Taxman 397 (Del) it was held permissible to place a fresh claim while an assessment is being made afresh in pursuance of an order setting aside the original order of assessment. But see also Saheli Synthetics (P) Ltd., 302 ITR 126 (Guj).

In filing an application for rectification u/s 154, it was held permissible to file a fresh claim [Nagaraj & Co. (P) Ltd., 425 ITR 412 (Mad), Anchor Pressings (P) Ltd., 161 ITR 159 (SC), Gujarat State Seeds Corpn. Ltd., 370 ITR 666 (Guj) and NHPC Ltd., 399 ITR 275 (P&H).]

An assessee who has missed making a claim in the return of income, may explore the possibility of filing an application to the CBDT u/s 119(2)(b) for permitting the filing of a revised return of income after the expiry of the time u/s 139(5). [Mrs. Leena R. Phadnis,387 ITR 721 (Bom), Mahalakshmi Co-operative Bank Ltd., 358 ITR 23 (Kar) and Labh Singh, 111 taxmann.com 53 (HP).]

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Section 23 – Annual Letting Value of house property is to be determined on the basis of municipal rateable value

4 Anand J. Jain vs. DCIT Amarjit Singh (J.M.) and Manoj Kumar Aggarwal (A.M.) ITA No.: 6716/Mum/2018 A.Y.: 2015-16 Date of order: 18th January, 2021 Counsel for Assessee / Revenue: Anuj Kishnadwala / Michael Jerald

Section 23 – Annual Letting Value of house property is to be determined on the basis of municipal rateable value

FACTS
During the previous year relevant to the assessment year under consideration, the assessee owned 19 flats at Central Garden Complex out of which seven were lying vacant whereas the remaining were let out. The assessee, in his return of income, offered an aggregate income of Rs. 1.26 lakhs on the basis of municipal rateable value (MRV). The A.O., applying the provisions of section 23(1)(a), opined that the annual letting value (ALV) shall be deemed to be the sum for which the property might reasonably be expected to be let out from year to year. Therefore, the municipal value was not to be taken as the ALV of the property. He applied the average rate per square metre at which the other 12 flats were let out by the assessee and worked out the ALV at Rs. 64.57 lakhs; after reducing municipal taxes and statutory deductions, he added a differential sum of Rs. 42.57 lakhs to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it relied upon a favourable decision of the Bombay High Court in the case of CIT vs. Tip Top Typography (48 taxmann.com 191) and also on the favourable orders of the Tribunal in its own case for A.Ys. 2009-10 and 2010-11 wherein the A.O. was directed to adopt the municipal rateable value as the ALV of the vacant flats held by the assessee. It was also mentioned that the predecessor CIT(A) has taken a similar view for A.Ys. 2012-13 to 2014-15. The CIT(A) distinguished the facts of the year under consideration by noticing that out of 19 flats, 12 were actually let out and that in the earlier years the A.O. did not make proper inquiry to estimate the rental income, but since this year 12 flats were actually let out, the same would give a clear indication of the rate at which the property might reasonably be expected to be let out. He confirmed the estimation made by the A.O.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noticed that the issue of determination of ALV was a subject matter of cross-appeals for A.Ys. 2013-14 and 2014-15 before the Tribunal in the assessee’s own case vide ITA No. 6836/Mum/2017 & Others, order dated 27th February, 2019 wherein the bench took note of the earlier decision of the Tribunal in A.Y. 2012-13 in ITA Nos. 3887 & 3665/Mum/2017. In the decision for A.Y. 2012-13, the co-ordinate bench after considering the relevant provisions of the Act and also following the decision of the Bombay High Court in Tip Top Typography [(2014) 368 ITR 330] and also Moni Kumar Subba [(2011) 333 ITR 38], upheld the determination of ALV on the basis of the municipal rateable value.

The Tribunal observed that it is the consistent view of the Tribunal in all the earlier years that municipal rateable value was to be taken as the annual rental value. There is nothing on record to show that any of the aforesaid adjudications has been reversed in any manner. The Tribunal held that the distinction of facts as made by the CIT(A) was not to be accepted. Following the consistent view of the Tribunal in earlier years in the assessee’s own case, the Tribunal directed the A.O. to adopt the municipal rateable value as the annual letting value. This ground of appeal filed by the assessee was allowed.

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Sections 45, 48 – Extinguishment of assessee’s right in flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly compensation received upon extinguishment of rights falls under the head ‘capital gain’

3 Shailendra Bhandari vs. ACIT Rajesh Kumar (A.M.) and Amarjit Singh (J.M.) ITA No.: 6528/Mum/2018 A.Y.: 2015-16 Date of order: 21st January, 2021 Counsel for Assessee / Revenue: Porus Kaka / T.S. Khalsa

Sections 45, 48 – Extinguishment of assessee’s right in flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly compensation received upon extinguishment of rights falls under the head ‘capital gain’

FACTS
During the year under consideration the assessee cancelled an agreement entered into for purchase of a flat and received Rs. 2,50,00,000 as compensation along with refund of money already paid towards purchase of the flat amounting to Rs. 10,75,99,999. The said flat was booked by the assessee, as confirmed by the builder, vide a letter of intent dated 9th February, 2010 wherein the terms and conditions for the purchase of the property were duly mentioned. The letter of intent had to be cancelled as the sellers were not allowed to raise the building height up to the level on which the flats were to be constructed. The assessee, after giving various reminders and legal notices to the builders, succeeded in getting a compensation of Rs. 2,50,00,000 along with refund of money already paid, as evidenced by a letter dated 29th March, 2014.

These rights were transferred to the assessee by three persons, viz., Ms Vibha Hemant Mehta, Mrs. Anuja Badal Mittal and Mr. Sunny Ramesh Bijlani, who were shareholders in Kunal Corporation Pvt. Ltd. which was the owner of the plot and was to construct the building after obtaining necessary permissions from the Government authorities.

The A.O. held that the asset for which the letter of intent was issued in favour of the assessee did not exist on the date 9th February, 2010 when the letter of intent was issued by the assessee. The assessee has merely made a deposit with the developers which is refundable to the assessee along with compensation subject to certain terms and conditions. The A.O. also held that when an asset does not exist it is not a capital asset and therefore the assessee is not entitled to claim capital gain on the same. He rejected the claim of the assessee.

Instead of the long-term capital loss of Rs. 3,37,09,596 claimed by the assessee, the A.O. taxed Rs. 2,50,00,000 as income from other sources by holding that the said receipt is not from transfer of capital assets.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the A.O.

The aggrieved assessee preferred an appeal to the Tribunal where on behalf of the Revenue it was contended that the letter of intent issued by the builder for the purpose of allotment of flat, which was not in existence on the date of execution of the letter of intent as well as on the date of execution of the letter of intent and also not on the date of cancellation of the said letter of intent, is not an agreement. Since the seller has not followed the provisions of MOFA which are applicable in the state of Maharashtra, the letter of intent cannot be treated as having created any interest, right, or title in a capital asset in favour of the assessee.

HELD
The Tribunal held that the provisions of MOFA cannot regulate the taxability of any income in the form of long-term capital gain / loss which may arise from the cancellation of any letter of intent / agreement which is not registered. The Tribunal held that the assessee has rightly calculated the long-term capital loss upon cancellation of the letter of intent dated 9th February, 2010. It observed that the case of the assessee finds support from the decision of the jurisdictional High Court in the case of CIT vs. Vijay Flexible Containers [(1980) 48 taxman 86 (Bom)] and it is also squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of ACIT vs. Ashwin S. Bhalekar ITA No. 6822/M/2016 A.Y. 2012-13 wherein the Tribunal has held that the extinguishment of the assessee’s right in a flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly held that the compensation received upon extinguishment of a right which was held for more than three years falls under the head ‘capital gain’ u/s 45. Following these decisions, the Tribunal set aside the order of the CIT(A) and directed the A.O. to allow the claim of the assessee on account of long-term capital loss.

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Extension for conducting special audit u/s 142(2A) cannot be granted by CIT, only the A.O. can grant such extension – Assessment concluded after such extended limitation period shall be considered as void ab initio

15 [2020] 82 ITR (Trib) 399 (Del) ACIT vs. Soul Space Projects Ltd. ITA Nos.: 193 & 1849/Del/2015 A.Ys.: 2007-08 & 2008-09 Date of order: 3rd June, 2020

Extension for conducting special audit u/s 142(2A) cannot be granted by CIT, only the A.O. can grant such extension – Assessment concluded after such extended limitation period shall be considered as void ab initio

FACTS
During assessment proceedings, the A.O. arrived at the conclusion that it was necessary to conduct a special audit u/s 142(2A) of the books of accounts of the assessee. The assessee raised objections to the proposed special audit and the A.O., after rejecting the objections and with the approval of the CIT, ordered a special audit in accordance with the provisions of section 142(2A). Thereafter, the Special Auditor requested for extension of time period and the A.O. forwarded this request to the CIT. The CIT granted extension of time. The assessments were completed after limitation period on account of the extension granted for special audit.

The assessment orders were challenged before the CIT(A) which provided relief to the assessee on merits. The orders of the CIT(A) were challenged by the Revenue before the Tribunal and the assessee filed cross-objections raising the issue of limitation in completing the assessment.

Before the Tribunal, the assessee argued that as per the proviso to section 142(2A) it was only the A.O. who had the power to extend the time period for conducting the audit; hence, the extension granted by the CIT was legally invalid. It was argued that the exercise of the statutory power of an authority at the discretion of another authority vitiates the proceedings.

On the other hand, the Department contended that the A.O. had applied his mind and was satisfied that the matter required extension; however, the extension application was forwarded only for the administrative approval of the CIT; even otherwise, since the CIT was the approving authority for special audit, therefore his involvement for extension of time as per the proviso was inherent. The Revenue argued that since on a substantial basis the requirement of the proviso to section 142(2A) was met, just on account of administrative approval of the CIT for sanctioning the extension, it should not vitiate the extension of time for the special audit.

HELD
The issue before the Tribunal was whether or not the action of the CIT in granting an extension for a further period u/s 142(2A) was legally valid.

The Tribunal held that the proviso to section 142(2A) clearly provides that the A.O. shall extend the said time period if the conditions as mentioned in the said proviso are satisfied. While the initial direction is to be given with the approval of the CCIT / CIT, however, for extension it is only the A.O. who has to take a decision for extension, the sole power to extend vests only with him.

There was no need for the higher authorities to be involved in the issue of extension. It may be an administrative phenomenon to inform the CIT about the extension, but statutorily that power is vested with the A.O.

The Tribunal held that the statutory powers vested with one specified authority cannot be exercised by another authority unless and until the statute provides for the same. The statute has accorded implementation of various provisions to specified authorities which cannot be interchanged. A power which has been given to a specified authority has to be discharged only by him and substitution of that authority by any other officer, even of higher rank, cannot legalise the said order / action.

Accordingly, it was held that the extension given by the CIT was beyond the powers vested as per the statute and therefore the assessment completed after the due date was void ab initio.

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Section 147 – Reopening of assessment – A.O. to provide complete reasons as recorded by him to the assessee and not merely an extract of reasons

14 [2020] 82 ITR(T) 235 (Del) Wimco Seedlings Ltd. vs. Joint CIT ITA Nos.: 2755 to 2757 (Delhi) of 2002 A.Ys.: 1989-90 to 1991-92 Date of order: 22nd June, 2020

Section 147 – Reopening of assessment – A.O. to provide complete reasons as recorded by him to the assessee and not merely an extract of reasons

FACTS
The assessee was a company engaged in the business of providing consultancy services in the field of agricultural forestry plants by undertaking research and development (R&D) activities. The A.O. had initiated reassessment proceedings u/s 147 for A.Ys. 1989-90 to 1991-92 and passed the order u/s 143(3) r.w.s. 147. These orders were challenged by the assessee and the matter went up to the Delhi High Court which remanded the appeals to the ITAT for a fresh adjudication on all issues, including on the aspect of reassessment.

In the remanded appeals, the assessee had challenged the reopening of the assessment proceedings u/s 147 for A.Ys. 1989-90 to 1991-92 on various grounds wherein the first ground of appeal was that the reasons provided by the A.O. in the course of reassessment proceedings and the reasons filed by the Department before the Delhi High Court were different.

HELD
One of the disputes arising in this case was whether while initiating reassessment proceedings the A.O. is supposed to provide complete details of reasons recorded and not merely a few extracts of the said reasons so that the assessee can prepare its defence effectively against the proposed reopening of the assessment. It was held that in all circumstances the A.O. is supposed to provide the complete reasons recorded for reopening of the assessment to facilitate the assessee to raise appropriate objections to the reopening. It cannot be the case of the Revenue that it gives a few extracts of the reasons to the assessee to defend it and when cornered before the higher authorities, the Revenue comes out with the detailed reasons recorded by the A.O. The reasons produced before the High Court were quite different from the reasons provided to the assessee and hence the ITAT held the reassessment proceedings to be invalid and quashed the assessment orders.

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Section 56(2)(vii) r.w.s. 2(14) – The term ‘property’ has been defined to mean capital asset, namely, immovable property being land or building or both and hence where immovable property does not fall in the definition of capital asset, it will not be subject to the provisions of section 56(2)(vii)

13 [2020] 82 ITR (T) 522 (Jai) Prem Chand Jain vs. Asst. CIT ITA No.: 98 (JP) of 2019 A.Y.: 2014-15 Date of order: 8th June, 2020

Section 56(2)(vii) r.w.s. 2(14) – The term ‘property’ has been defined to mean capital asset, namely, immovable property being land or building or both and hence where immovable property does not fall in the definition of capital asset, it will not be subject to the provisions of section 56(2)(vii)

FACTS

The assessee had purchased two plots of land during the year claiming these to be agricultural land. The sale consideration as per the respective sale deeds was Rs. 5,50,000 and their stamp duty value [SDV] as determined by the Stamp Duty Authority amounted to Rs. 8,53,636; therefore, there was a difference to the tune of Rs. 3,03,636. The A.O. invoked the provisions of section 56(2)(vii)(b) and held that agricultural land falls within the definition of property and, thus, added the differential amount under the head other sources. The CIT(A) upheld the addition. Consequently, the assessee filed an appeal before the ITAT.

HELD
The dispute in this case was whether agricultural land was to be included in the definition of immovable property and whether it was covered by the provisions of section 56(2)(vii)(b). It was the contention of the Department that there was no express exclusion provided for agricultural land from the operation of section 56(2)(vii). But it was submitted on behalf of the assessee that vide the Finance Act, 2010 in clause (d) in the Explanation, in the opening portion, for the word ‘means—‘ the words ‘means the following capital asset of the assessee, namely:—’ were substituted with retrospective effect from 1st October, 2009. It was further submitted that the substitution of the words ‘means’ for the words ‘means the following capital asset of the assessee, namely’ made the intention of the Legislature very clear, that henceforth the deeming provision of 56(2)(vii)(b) would apply in case of those nine specified assets, if and only if they were capital assets.

The ITAT referred to the provisions of clause (d) of the Explanation to section 56(2)(vii) where the term ‘property’ was defined to mean capital asset of the assessee, namely, immovable property being land or building or both. Hence, the ITAT held that if the agricultural land purchased by the assessee did not fall in the definition of capital asset u/s 2(14), they cannot be considered as property for the purpose of section 56(2)(vii)(b). The ITAT remanded the matter to the A.O. to determine whether or not the agriculture land so acquired falls in the definition of capital asset. It was further concluded that where it is determined by the A.O. that the agricultural land so acquired doesn’t fall in the definition of capital asset, the difference in the SDV and the sales consideration cannot be brought to tax under the provisions of section 56(2)(vii)(b) and relief should be granted to the assessee.

Further, it was also held that where the assessee had objected to the adoption of SDV as against the sale consideration, the matter should be referred by the A.O. to the Departmental Valuation Officer [DVO] for determination of fair market value.

Editorial Note:
In ITO vs. Trilok Chand Sain [2019] 101 taxmann.com 391/174 ITD 729 (Jaipur-Trib), the Tribunal had upheld the applicability of section 56(2)(vii) to the purchase of agricultural land. The decision in Trilok Chand Sain was not referred to by the ITAT in the above case. However, in another decision in Yogesh Maheshwari vs. DCIT [2021] 125 taxmann.com 273 (Jaipur-Trib), the ITAT, after considering the decision of co-ordinate benches at Pune in Mubarak Gafur Korabu vs. ITO [2020] 117 taxmann.com 828 (Pune-Trib) and at Jaipur in ITO vs. Trilok Chand Sain (Supra) and this decision held that if the agricultural land purchased by the assessee is not a capital asset, the provisions of section 56(2)(vii)(b) are not applicable.

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Section 56(2)(viib) – Issue of shares at face value to shareholders of amalgamating company, in pursuance of scheme is outside the ambit of section 56(2)(viib)

12 126 taxmann.com 192 DCIT Circle 3(1) vs. Ozone India Ltd. IT Appeal No. 2081 (Ahd) of 2018 A.Y.: 2013-14 Date of order: 27th January, 2021

Section 56(2)(viib) – Issue of shares at face value to shareholders of amalgamating company, in pursuance of scheme is outside the ambit of section 56(2)(viib)

FACTS
The assessee company was amalgamated with another company (KEPL) and in the process all the assets (except land) and all the liabilities of KEPL were taken in the books of the assessee at book value. Land parcels were taken at revalued price. The excess value of net assets vis-à-vis corresponding value of shares issued towards consideration for amalgamation was thus credited in the books of the assessee company as ‘capital reserve’.

The A.O. observed that the assessee received assets worth Rs. 60.26 crores and liabilities worth Rs. 6.05 crores of the amalgamating company, i.e., KEPL. Thus, the assessee received net assets worth Rs. 54.21 crores against the corresponding issue of shares having face value of Rs. 15 crores to the shareholders of KEPL. The A.O. taxed the excess net assets worth Rs. 39.21 crores received on account of amalgamation and credited as capital reserve of the amalgamated company, as being excess consideration for issue of its shares under the provisions of section 56(2)(viib). On appeal to the CIT(A), he held that the provisions of section 56(2)(viib) were not applicable and reversed the additions made by the A.O. Aggrieved, the Revenue preferred an appeal with the Tribunal.

HELD
The issue of shares at ‘face value’ by the amalgamated company (assessee) to the shareholders of the amalgamating company in pursuance of the scheme of amalgamation legally recognised in the Court of Law is outside the ambit of section 56(2)(viib). Section 56(2)(viib) creates a deeming fiction to imagine and fictionally convert a capital receipt into revenue income and its application should be restricted to the underlying purpose. Further, section 56(2)(viib), when read in conjunction with the Memorandum of Explanation to the Finance Bill, 2012 and CBDT Circular No. 3/2012 dated 12th June, 2012, is to be seen as a measure to tax hefty or excessive share premium received by private companies on issue of shares without carrying underlying value to support such premium.

Thus, the provisions of section 56(viib) would not be applicable where the assessee company has admittedly not charged any premium at all and the shares were issued at face value.

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Section 28 – Loss arising on capital reduction by a subsidiary company in whose shares investment was made for purpose of business of assessee, for setting up supply chain system and manufacturing units in global market, is a business loss

11 TS-189 ITAT-2021 (Ahd) DCIT vs. GHCL ITA Nos.: 1120/Ahd/2017 & CO 29/Ahd/2018 A.Y.: 2012-13 Date of order: 5th March, 2021

Section 28 – Loss arising on capital reduction by a subsidiary company in whose shares investment was made for purpose of business of assessee, for setting up supply chain system and manufacturing units in global market, is a business loss

FACTS
The assessee invested in the share capital of its subsidiary, namely, Indian Britain BV consisting of 2,285 shares @ Euro 100 each in A.Y. 2006-07. During the year under consideration, the said subsidiary reduced its share capital due to heavy losses. Consequently, the number of shares of the assessee company was reduced to 1,85,644 from 2,21,586 shares acquired in A.Y. 2006-07. Due to the aforesaid capital reduction, the assessee company incurred a loss of Rs. 99.89 crores on investment made in the equity shares of Indian Britain BV. The assessee claimed long-term capital loss of Rs. 157,97,38,428. In the course of assessment proceedings, it revised its claim of loss to Rs. 99,89,96,245 and claimed that loss on account of capital reduction be allowed as a business loss while computing income chargeable to tax under the head ‘profits and gains from business and profession’ on the ground that investment in the subsidiary was made for the purpose of business of the assessee company for setting up of a supply chain system and manufacturing units in the global market, i.e., overseas.

The assessee submitted that it was incorporated in 1983 and started its soda ash manufacturing in Gujarat in 1988. It entered the textile business in 2001. The entire investment in the wholly-owned subsidiary Indian Britain BV was made by the assessee acquiring global units of a soda ash manufacturing and textile business chain as a measure of commercial expediency to further its business objective. In its desire for expansion in the overseas market, the assessee looked for various acquisitions of home textile businesses in the U.S. and retail chains in the U.K. In this effort at expansion, after setting up of the Vapi home textile plant it showed that Indian products can be sold in the U.S. and the U.K. and, as such, India could become the processing hub for home furnishing textile items.

The A.O. rejected the claim made by the assessee in the course of the assessment proceedings by relying on the decision of the Supreme Court in Goetze (India) Ltd. vs. CIT (157 taxman 1).

Aggrieved, the assessee preferred an appeal to the CIT(A) who adjudicated the issue in favour of the assessee.

HELD
The Tribunal observed that it has adjudicated the issue determining the nature of transaction relating to business loss of acquiring of Rosebys Retail chain in the appeal of the Revenue vide ITA No. 976/Ahd/2014 for A.Y. 2009-10 wherein business loss allowed by the DRP in favour of the assessee was sustained on the ground that the assessee had acquired Rosebys Operation Ltd. to expand its textile business operation globally based on a study carried out by KSA Tech Pak, a renowned global consultant.

The Tribunal observed that:

(i) it is an undisputed fact that the assessee acquired S.C. Bega UPSAM (renamed as GHCL UPSAM Ltd.) in Romania for soda ash manufacturing and similarly acquired Rosebys U.K. Ltd. in the U.K. and Ban River Inc. in the U.S. to expand its home textile business as the company was having plants for textile manufacturing at Madurai and Vapi. The purpose of investment in the subsidiaries was to expand its business globally. After such acquisition, the sales and export shot up substantially and international concerns started taking the company’s products even after reduction in shares and liquidation of the subsidiary Indian Britain B.V. The assessee had explained its business expansion by making investment in a subsidiary company in Netherland from a commercial angle;

(ii) before the CIT(A), the assessee made a detailed submission demonstrating that loss claimed on account of investment in shares of the wholly-owned subsidiary company was a business loss. The assessee gave a detailed submission pointing out that there was recession in Europe and the U.S. Due to continued financial difficulty and other diverse factors, its subsidiaries incurred huge losses and became sick units. The assessee submitted to the CIT(A) that due to huge loss, its subsidiary company, Indian Britain BV passed a resolution to reduce its share capital of Euro 1,85,64,400 (1,85,644 shares) to 1,85,45,835.60 (1,85,644 shares) out of 2,21,586 shares so that such amount can be set off against the accumulated deposit. This resulted in loss amounting to Rs. 99,89,96,245 due to reduction in the value of the share of its subsidiary company.

The Tribunal held that the assessee has made investments in the subsidiary company for business development out of commercial expediency and thus on reduction of capital of the said subsidiary the loss incurred in the value of shares was in the nature of business loss. In the light of the facts and findings reported in the decision of the CIT(A), the Tribunal did not find any infirmity in the decision of the CIT(A) in allowing the losses on reduction in value of shares on investment in the subsidiary company as business losses in the hand of the assessee company. This ground of the appeal of the Revenue was dismissed.

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Section 115JB – Provision made for Corporate Social Responsibility, in accordance with the guidelines issued by the Department of Public Enterprises, constitutes an unascertained liability and needs to be added back while computing ‘book profits’ when how the amount is to be spent has neither been determined nor specified by the assessee

10 TS-205 ITAT-2021 Delhi Pawan Hans Ltd. vs. DCIT A.Y.: 2014-15 Date of order: 18th March, 2021

Section 115JB – Provision made for Corporate Social Responsibility, in accordance with the guidelines issued by the Department of Public Enterprises, constitutes an unascertained liability and needs to be added back while computing ‘book profits’ when how the amount is to be spent has neither been determined nor specified by the assessee

FACTS
The assessee, a public sector undertaking, filed its return of income for A.Y. 2014-15 declaring its total income to be a loss of Rs. 1,89,90,55,165 and paying taxes u/s 115JB on a declared book profit of Rs. 66,18,51,561. In the course of assessment proceedings, the A.O. noticed that the assessee has created a provision for Corporate Social Responsibility (CSR) in its books of accounts. The A.O. held that the said provision was an unascertained liability as the assessee had only created the provision but where the amount was to be spent was unascertained. He rejected the assessee’s contention that the provision had been created on the basis of the guidelines issued by the Department of Public Enterprises (DPE) which the assessee was bound to follow. The A.O. disallowed the sum of Rs. 35,09,480 being provision of CSR u/s 115JB considering it as an unascertained liability.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. who, while holding the disallowance to be justified, noted that the guidelines issued by the DPE were not the determinative factor to decide the allowability of the provisions.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The essential question before the Tribunal was whether or not the provision for CSR as made by the assessee amounting to Rs. 35,09,480 can be considered as an ascertained liability. The Tribunal noted that the assessee has made the impugned provision in terms of the calculation provided as per the DPE guidelines. However, although the amount to be provided towards meeting the liability of the CSR expenditure has been quantified in accordance with the said guidelines, how the amount is to be spent has neither been determined nor specified by the assessee. Considering the meaning of the word ‘ascertained’ as explained by dictionaries, the Tribunal held that, at best, it is just an amount which has been set aside for being spent towards CSR but without any further certainty of its end-use. Thus, it cannot be said that the liability is an ascertained liability. The decisions relied upon on behalf of the assessee were held to be distinguishable on facts as in those cases the nature / mode of expenditure ear-marked for CSR spending was very much determined and specified, i.e., the nature / mode of expenditure was ‘ascertained’. The Tribunal dismissed the ground of appeal filed by the assessee.

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Section 263 – A non est order cannot be erroneous and prejudicial to the interest of the Revenue – Assessment order passed without jurisdiction is bad in law and needs to be quashed – Order passed u/s 263 revising such an order is also bad in law

9 2021 (3) TMI 1008-ITAT Delhi Shahi Exports Pvt. Ltd. vs. PCIT ITA Nos.: 2170/Del/2017 & 2171/Del/2017 A.Y.: 2008-09 Date of order: 24th March, 2021

Section 263 – A non est order cannot be erroneous and prejudicial to the interest of the Revenue – Assessment order passed without jurisdiction is bad in law and needs to be quashed – Order passed u/s 263 revising such an order is also bad in law

FACTS
In both the appeals filed by the assessee, it raised an additional ground challenging the jurisdiction of the PCIT to review and revise the order passed by the A.O. u/s 153C which assessment order itself was illegal and bad in law due to invalid assumption of jurisdiction as contemplated u/s 153A/153C.

For A.Y. 2008-09, the A.O. on 30th March, 2015 framed an order u/s 153A read with sections 153C and 143(3) wherein the additions made while assessing the total income u/s 143(3) were repeated and consequently the total income assessed was the same as that assessed earlier in an order passed u/s 143(3).

The PCIT invoked provisions of section 263 and set aside the assessment order dated 30th March, 2015 on the ground that after the merger of Sarla Fabrics Pvt. Ltd. with Shahi Exports Pvt. Ltd. whatever additions were made in the hands of Sarla Fabrics Pvt. Ltd. were to be assessed in the hands of Shahi Exports Pvt. Ltd.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that since the income assessed in an assessment framed u/s 153A read with sections 153C and 143(3) was the same as that assessed earlier in an order passed u/s 143(3), the additions made had no link with incriminating material found at the time of the search. The Tribunal noted the ratio of the decision of the Delhi High Court in the case of CIT vs. Kabul Chawla in 380 ITR 573. In view of the ratio of the decision of the Apex Court in the case of Singhad Technical Educational Society (397 ITR 344) holding that in the absence of any incriminating material no jurisdiction can be assumed by the A.O. u/s 153C, the Tribunal quashed the assessment framed u/s 153C by holding it to be without jurisdiction and, therefore, bad in law.

In view of the decision of the Supreme Court in the case of Kiran Singh & others vs. Chaman Paswan & Ors. [(1955) 1 SCR 117] holding that the decree passed by a Court without jurisdiction is a nullity, the Tribunal held that the assumption of jurisdiction u/s 263 in respect of an assessment which is non est is also bad in law as a non est order cannot be erroneous and prejudicial to the interest of the Revenue.

The Tribunal quashed the order framed u/s 263 on the principle of sublato fundamento cadit opus, meaning that in case the foundation is removed, the super structure falls. In this case, since the foundation, i.e., the order u/s 153C has been removed, the super structure, i.e., the order u/s 263, must fall.

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Section 68 – Once the total turnover of the assessee is much more than the total cash deposit in the bank account, no addition is called for on account of unexplained cash deposit in said account

8. 2021 (3) TMI 1012-ITAT Delhi Virendra Kumar vs. ITO ITA No.: 9901/Del/2019
A.Y.: 2011-12 Date of order: 24th March, 2021

Section 68 – Once the total turnover of the assessee is much more than the total cash deposit in the bank account, no addition is called for on account of unexplained cash deposit in said account

FACTS
The assessee is an individual who derives his income from wholesale business. The assessment for A.Y. 2011-12 was reopened on the basis of information that he had deposited Rs. 12,07,200 in cash in his savings bank account with ICICI Bank Ltd. during the F.Y. 2010-11. In response to the said notice u/s 148, the assessee furnished his return of income on 16th October, 2018 declaring the total income at Rs. 1,57,440. In the course of reassessment proceedings, the A.O. asked the assessee to explain the source of deposit. He observed that cash from different places like Delhi, Jaipur and Narnaul was deposited in the account. In the absence of any satisfactory explanation, the A.O. held that the assessee has no valid and genuine explanation with regard to the cash deposit of Rs. 8,57,200 after giving benefit of Rs. 3,50,000.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it was contended that full details were given before the A.O., stating that most of the cash deposit was from sale receipts and an amount of Rs. 3,50,000 was taken from his brother. The complete break-up of the cash deposit in the account was filed before the A.O. and, therefore, the addition made by the A.O. was not justified. The CIT(A), after considering the remand report of the A.O. and the rejoinder of the assessee to the remand report, sustained an addition of Rs. 3,62,000 being cash deposit of Rs. 3,16,000 at Jaipur, Rs. 15,000 at Jamnagar and Rs. 36,000 at Delhi, holding the same to be not out of regular sale.

The aggrieved assessee then preferred an appeal to the Tribunal where it was contended that he has declared gross receipt of Rs. 19,25,140 and has offered income u/s 44AD by applying the net profit rate of 8.16%. Therefore, once the gross receipts are accepted and not disputed and such gross receipt is much more than the total deposits in the bank accounts, no addition is called for merely by stating that the deposits are not out of sale proceeds.

HELD
The Tribunal noted that:
(i) The A.O. accepted an amount of Rs. 3,50,000 received by the assessee as gift from his brother and made an addition of Rs. 8,57,200 on the ground that the assessee could not successfully discharge his onus by providing evidence in support of the cash deposits;
(ii) Of the addition of Rs. 8,57,200 made by the CIT(A), it has already given relief to the extent of Rs. 4,90,200 and the Revenue is not in appeal before the Tribunal;
(iii) The CIT(A) sustained the addition of Rs. 3,67,000 on the ground that the assessee could not substantiate with evidence of sales the cash deposits made at Jamnagar, Delhi and Jaipur;
(iv) The assessee did furnish explanations about the deposits made at Jamnagar and Jaipur.

The Tribunal held that once the total turnover of the assessee is much more than the total cash deposit in the bank account (in this case sales is 227% of the cash deposit), no addition is called for on account of unexplained cash deposit in the bank account. The explanation of the assessee appears to be reasonable. The Tribunal held that the CIT(A) is not justified in sustaining the addition of Rs. 3,67,000, it set aside the order of the CIT(A) and directed the A.O. to delete the addition.

shailesh.kwebmaker

CHANGES IN PARTNERSHIP TAXATION IN CASE OF CAPITAL GAIN BY FINANCE ACT, 2021

A. INTRODUCTION
In the case of partnership, there may be transfer of capital asset by a partner to a firm or vice versa. Section 45(3) deals with transfer of a capital asset by a partner to a firm; before its substitution by the Finance Act, 2021, section 45(4) dealt with transfer by way of distribution of a capital asset by a firm to a partner on dissolution or otherwise. These provisions were inserted with effect from 1st April, 1988 to provide for full value of consideration in respect of the aforesaid transfer of capital assets between firm and partner.

While the aforesaid sections apply to even AOPs and BOIs, for the purpose of this article reference is made only to firm and partners.

When a partner’s account is settled on retirement or dissolution, he may be given one or more of the following;

(a) Cash, (b) Capital asset, (c) Stocks.

The aforesaid provisions dealt with transfer of capital asset in the limited circumstances provided thereunder.These sections generated a lot of controversies and have given rise to a number of court rulings. A prominent issue is, when a partner upon retirement or dissolution takes home more cash than his capital account balance at the time of retirement, whether he or the firm is liable to pay any tax. The courts are almost unanimous in holding that mere payment of cash would not give rise to any taxable capital gains either in the hands of the firm or in the hands of the partner. It has been held that what he gets is in settlement of his account and nothing more.

B. FINANCE ACT, 2021
The changes proposed in the Finance Bill, 2021 by way of substitution of section 45(4) and insertion of section 45(4A) were not carried through. The Finance Act, 2021 discarded the proposed changes but seeks to change the scheme of taxation of capital gain in the following manner:

(a) Existing section 45(3) is retained,
(b) Existing section 45(4) is replaced by a new sub-section,
(c) New section 9B is introduced,
(d) New clause (iii) is added to section 48.

The new scheme, through the combination of sections 45(4) and 9B, provides for taxation in the hands of the firm in the case of receipt of capital asset or stock-in-trade or cash (or a combination of two or more of them) by the partner on reconstitution or dissolution of the firm. Section 48(iii) seeks to mitigate the impact of double taxation.

Sections 9B and 45(4) apply to receipts by partner from the firm on or after 1st April, 2020 in connection with dissolution / reconstitution. A question arises as to whether these sections apply to such receipts in connection with dissolution / reconstitution which took place prior to 1st April, 2020. The literal interpretation suggests that the date of receipt being critical, the date of dissolution / reconstitution is immaterial as long as the receipt is in connection with dissolution / reconstitution. One possible counter to this interpretation is that the erstwhile section 45(4) dealt with distribution of capital asset on dissolution or otherwise of the firm and it held the field till 31st March, 2020. Section 9B deals with receipt in connection with reconstitution or dissolution, while substituted section 45(4) deals with receipt in connection with reconstitution. One could notice some overlap between erstwhile section 45(4) and section 9B insofar as receipt of capital asset on dissolution is concerned.

On the basis of this reasoning, it is not unreasonable to expect that new provisions should be considered as applicable only when both the dissolution / reconstitution and receipt have taken place on or after 1st April, 2021. One more reason for this interpretation could be that once dissolution / reconstitution has taken place prior to 1st April, 2021, respective rights arising from such dissolution / reconstitution crystallised on the date of such dissolution / reconstitution. Any receipt thereafter is only in relation to such rights which crystallised before the effective date of the new provisions.

C. SECTION 9B
The Finance Bill, 2021 did not propose section 9B. It rather proposed a substitution of existing section 45(4) and insertion of new section 45(4A). However, while enacting the Finance Act, 2021, section 9B is introduced.

Explanation (ii) to section 9B defines ‘specified entity’ as a firm or other association of persons or body of individuals (not being a company or a co-operative society). Explanation (iii) defines ‘specified person’ as a person who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year. For the sake of convenience, in this article, specified entity is referred to as a firm and specified person is referred to as a partner.

Section 9B(1) provides that where a partner receives, during the previous year, any capital asset or stock-in-trade or both from a firm in connection with the dissolution or reconstitution of such firm, the firm shall be deemed to have transferred such capital asset or stock-in-trade, or both, as the case may be, to the partner in the year in which such capital asset or stock-in-trade or both are received by the partner.

Section 9B(2) provides that any profits and gains arising from such deemed transfer of capital asset or stock-in-trade, or both, as the case may be, by the firm shall be deemed to be the income of such firm of the previous year in which such capital asset or stock-in-trade or both were received by the partner. Such income shall be chargeable to income-tax as income of such firm under the head ‘Profits and gains of business or profession’ or under the head ‘Capital gains’ in accordance with the provisions of this Act.

As per section 9B(3), fair market value of the capital asset or stock-in-trade, or both, on the date of its receipt by the partner shall be deemed to be the full value of the consideration received or accruing as a result of such deemed transfer of the capital asset or stock-in-trade, or both, by the firm.

As per Explanation (i), reconstitution of the firm means, where
(a) one or more of its partners of firm ceases to be partners; or
(b) one or more new partners are admitted in such firm in such circumstances that one or more of the persons who were partners of the firm, before the change, continue as partner or partners after the change; or
(c) all the partners, as the case may be, of such firm continue with a change in their respective share or in the shares of some of them.

D. SALIENT FEATURES OF SECTION 9B
The purpose of placing section 9B outside the heads of income appears to be to avoid replication of charging and computation provisions under both heads of income, i.e., profits and gains from business or profession, and capital gains.

Section 9B would apply when a partner receives during the previous year any capital asset / stock-in-trade or both from a firm in connection with dissolution or reconstitution of firm.

Upon such receipt, the firm shall be deemed to have transferred such capital asset / stock-in-trade or both to the partner in the year of receipt of the same by the partner.

The business profits or capital gains arising from aforesaid deemed transfer shall be chargeable under the respective heads of income. Fair market value (FMV) of capital asset / stock-in-trade or both on the date of receipt shall be deemed to be the full value consideration (FVC) for determination of the business profits / capital gain.

Reconstitution would include the case of admission / retirement / change in profit-sharing ratio.

E. CERTAIN ISSUES ASSOCIATED WITH SECTION 9B
Section 9B(2) deems the profits and gains on deemed transfer of capital asset or stock-in-trade as the income of the firm in the year of receipt of asset by the partner. If receipts by one or more partners spread over to more than one year, the taxability thereof on the firm follows suit.

In the case of dissolved firm, it is interesting to note how the above fiction works when the partners receive the assets in the years subsequent to the year of dissolution. While there is a fiction to deem such receipt as a transfer by firm, there is no fiction to deem that the firm is not dissolved. In such a situation, whether the machinery provision of section 189(1) which permits the A.O. to proceed to assess the firm as if it is not dissolved, applies or not is a debatable issue.

The fair market value of the allotted asset shall be deemed to be the full value of consideration. For this purpose, the balance in the capital account of the partner is not relevant.

Section 9B does not as such provide for prescription of the rules for determination of the FMV. Therefore, recourse has to be had to section 2(22B) which defines FMV. Special provisions like sections 43CA and 50C do not apply in a case covered by section 9B.

The business profit arising u/s 9B, though chargeable under the head ‘profits and gains from business or profession’, does not fall u/s 28. Therefore, section 29 which provides that ‘the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D’ may not apply. This is for the reason that section 29 refers only to income referred to in section 28. Therefore, business profits may have to be computed on commercial principles, without recourse to the aforesaid provisions providing any allowance or disallowance.

Unlike in the case of section 29 which refers only to section 28, section 48 refers to the head ‘capital gains’. Therefore, capital gains arising from section 9B will have to be computed after considering section 48. Therefore, the cost of acquisition, cost of improvement, their indexation and incidental transfer expenditure will be available as deduction.

While section 45 is saved by sections 54 to 54GB, there is no such saving provision in section 9B. Therefore, whether a firm is eligible for exemption u/s 54EC, etc., in respect of capital gains arising u/s 9B is an open question. While on a stricter note such exemption is not available, on a liberal note one may contend that exemption should be available if related conditions are fulfilled. Proponents of a stricter interpretation may argue that exemption u/s 54EC is inconceivable as there is no inflow in terms of actual consideration for satisfying the requirement of rollover. The proponents of a liberal interpretation may counter such contention by pointing out that deeming fiction requires logical extension and rollover sections do not require rupee-to-rupee mapping. If the liberal theory is accepted, the date of receipt being deemed to be the date of transfer, is relevant for reckoning the time limit irrespective of the date of change in constitution or dissolution.

F. SECTION 45(4)
Section 45(4) as it stood before substitution by Finance Act, 2021 read as follows:
‘(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.’

The substituted section 45(4) by the Finance Act, 2021 reads as follows:
‘(4) Notwithstanding anything contained in sub-section (1), where a specified person receives during the previous year any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity, then any profits or gains arising from receipt of such money by the specified person shall be chargeable to income-tax as income of such specified entity under the head “capital gains” and shall be deemed to be the income of such specified entity of the previous year in which such money or capital asset or both were received by the specified person, and notwithstanding anything to the contrary contained in this Act, such profits or gains shall be determined in accordance with the following formula, namely:…’

The following table depicts some key differences between the two provisions:

Earlier section 45(4)	Substituted section 45(4)
It would apply to transfer of capital asset by a partner on the dissolution of a firm	It would apply upon receipt of capital asset or money or both by a partner *in connection with reconstitution of a firm*
Profits and gains arising from transfer are chargeable to tax as the income of firm	Profits and gains arising from such receipt by partner are chargeable to tax as income of the firm
Chargeable to tax in the PY in which the transfer took place	Such profits and gains chargeable to tax as income is deemed to be the income of the firm in the PY in which money or capital asset or both is received by partner
Capital gains are computed u/s 48	Capital gains are computed as per the formula provided therein notwithstanding anything to the contrary contained in the Act
FMV of the asset on the date of transfer shall be deemed to be the FVC	Formula does not provide for any full value of consideration However, aggregate of amount of money received and fair market value of capital asset received on the date of receipt constitutes consideration
Cost of acquisition, cost of improvement and incidental expenditure upon transfer are reduced from FVC	Amount of capital account balance of partner in the books of firm at the time of reconstitution is reduced from the above aggregate amount
Benefit of indexation is available	There is no element of cost of acquisition and cost of improvement, hence no indexation

Earlier
section 45(4)

Substituted
section 45(4)

It would apply to transfer of capital asset by a partner on
the dissolution of a firm

It would apply upon receipt of capital asset or money or both by
a partner in connection with reconstitution of a firm

Profits and gains arising from transfer are chargeable to tax as
the income of firm

Profits and gains arising from such receipt by partner are
chargeable to tax as income of the firm

Chargeable to tax in the PY in which the transfer took place

Such profits and gains chargeable to tax as income is deemed to
be the income of the firm in the PY in which money or capital asset or both
is received by partner

Capital gains are computed
u/s 48

Capital gains are computed as per the formula provided therein
notwithstanding anything to the contrary contained in the Act

FMV of the asset on the date of transfer shall be deemed to be
the FVC

Formula does not provide for any full value of consideration

However, aggregate of amount of money received and fair market
value of capital asset received on the date of receipt constitutes
consideration

Cost of acquisition, cost of improvement and incidental
expenditure upon transfer are reduced from FVC

Amount of capital account balance of partner in the books of
firm at the time of reconstitution is reduced from the above aggregate amount

Benefit of indexation is available

There is no element of cost of acquisition and cost of
improvement, hence no indexation

G. SALIENT FEATURES OF SECTION 45(4)
Section 45(4) would apply when a partner receives during the previous year any money or capital asset or both from a firm in connection with the reconstitution of a firm.

Any profits and gains arising from such receipt shall be chargeable in the hands of the firm under the head ‘capital gains’.

Such capital gain shall be deemed to be chargeable to tax in the previous year of receipt of such money or capital or both by the partner.

Reconstitution is defined in the same manner as is defined u/s 9B.

H. COMPUTATION OF CAPITAL GAIN U/S 45(4)
Capital gain shall be computed u/s 45(4) as per the formula provided therein, i.e., A=B+C-D.

The capital gain is computed by considering the following components:
B = Amount of cash received by the partner,
C = Amount of FMV of capital asset received by the partner,
D = Amount of capital account balance of a partner in the books of the firm at the time of its reconstitution.

The difference between capital account balance on the date of receipt and aggregate of cash received and FMV of capital asset received constitutes capital gains in the hands of the firm.

I. CORRIGENDUM TO SECTION 45(4)
On 22nd March, 2021, the Finance Ministry sent a notice of amendments to the Lok Sabha, wherein section 45(4) as proposed in the Bill was substituted completely by a new section 45(4). The newly-proposed section 45(4) had the words ‘…any profits or gains arising from receipt of such money by the specified person…’

On 23rd March, 2021, the Lok Sabha approved the Bill as amended by notice of amendments dated 22nd March, 2021. The Presidential Assent to the Bill was given on 28th March, 2021. The Finance (No. 13) Act, of 2021 was notified on 28th March, 2021. The Notified Finance (No. 13) Act, of 2021 carried Section 45(4) with the aforesaid words.

Two corrigenda were issued on 6th April, 2021 and 15th April, 2021. In the first corrigendum, for the words ‘…from receipt of such money by’, the words ‘…from such receipt by…’ were substituted. While it is not known as to the exact content of section 45(4) as approved by the Lok Sabha, on the basis of Notified Finance (No. 13) Act, of 2021 it can be inferred that the Lok Sabha has approved the Bill which carried section 45(4) as stated in the notice of amendments dated 22nd March, 2021.

The aforesaid substitution is not just correcting a clerical error, but it has substantial implications. The originally introduced words would have confined the scope of section 45(4) only to receipt of money, whereas the substituted words would extend it not only to receipt of money but also to receipt of capital asset.

Unless an Amendment Act is enacted, substituted words by a corrigendum having the effect of amending a law passed by the Parliament may be open to challenge on the ground of overreach by the executive.

J. COMPARISON BETWEEN SECTION 9B AND SECTION 45(4)
The following table compares above two provisions;

Section 9B	Section 45(4)
It would apply upon receipt of capital asset or stock-in-trade or both by a partner from the firm on the dissolution or reconstitution of a firm	It would apply upon receipt of capital asset or cash or both by a partner from the firm in connection with reconstitution of the firm
Allotment of stock-in-trade is covered	Allotment of stock-in-trade is not covered
For the purpose of computation u/s 9B, FMV is deemed to be FVC and computation would be in accordance with Chapter IV-C or D, i.e., ‘Profits and gains of business or profession’ or ‘Capital gains’	Computation mechanism is given u/s 45(4) in the form of formula

Section
9B

Section
45(4)

It would apply upon receipt of capital asset or stock-in-trade
or both by a partner from the firm on the dissolution or reconstitution of a
firm

It would apply upon receipt of capital asset or cash or both by
a partner from the firm in connection with reconstitution of the firm

Allotment of stock-in-trade is covered

Allotment of stock-in-trade is not covered

For the purpose of computation u/s 9B, FMV is deemed to be FVC
and computation would be in accordance with Chapter IV-C or D, i.e., ‘Profits
and gains of business or profession’ or ‘Capital gains’

Computation mechanism is given u/s 45(4) in the form of formula

The following table summarises the applicability of the above two sections:

	Section 9B	Section 45(4)
Reconstitution	Yes	Yes
Dissolution	Yes	No
Cash to partner	No	Yes
Capital asset to partner	Yes	Yes
Stock-in-trade to partner	Yes	No

Section
9B

Section
45(4)

Reconstitution

Yes

Dissolution

Yes

Cash to partner

Yes

Capital asset to partner

Yes

Stock-in-trade to partner

Yes

K. DOUBLE TAXATION AND ITS MITIGATION
As may be seen from a close reading of sections 9B and 45(4), in the event of receipt of capital asset by a partner from a firm in connection with its reconstitution, the firm is liable to tax under both section 9B and section 45(4).

Explanation 2 to section 45(4) clarifies that when a capital asset is received by a partner from a firm in connection with the reconstitution of such firm, the provisions of section 45(4) shall operate in addition to the provisions of section 9B and the taxation under the said provisions thereof shall be worked out independently.

Therefore, it is a clear case where double taxation is explicitly intended or provided for. Where Parliament in its wisdom chooses to explicitly provide for double taxation, it has a plenary power to do so.

In this regard, reliance is placed on the following decisions:

Jain Bros vs. Union of India [1970] 77 ITR 107 (SC);

Laxmipat Singhania vs. CIT [1969] 72 ITR 291 (SC);

CIT vs. Manilal Dhanji [1962] 44 ITR 876 (SC);

Escorts Limited vs. UOI [1993] 199 ITR 43 (SC); and

Mahaveer Kumar Jain vs. CIT [2018] 404 ITR 738 (SC).

Thus, while double taxation cannot be inferred or implied, the same can be explicitly provided for.

Thus, it is a clear case of Parliament wanting to apply both sections in case of receipt of capital asset by a partner in connection with the reconstitution of a firm.

Section 48 is also amended by Finance Act, 2021 where Clause (iii) is inserted which reads as follows:
‘(iii) in case of value of any money or capital asset received by a specified person from a specified entity referred to in sub-section (4) of section 45, the amount chargeable to income-tax as income of such specified entity under that sub-section which is attributable to the capital asset being transferred by the specified entity, calculated in the prescribed manner:’

Section 48(iii) provides that the amount chargeable to tax u/s 45(4) to the extent attributable to the capital asset being transferred by a firm shall be reduced from the FVC of a capital asset being transferred by a firm. Such reduction, however, needs to be calculated in the prescribed manner. The rules in this regard are awaited. These provisions are applicable for PY 2020-21 and the rules were not out as on 1st April, 2021. Therefore, such rules when notified will have to be made retrospective so as to be applicable to PY 2020-21. If the retrospective application of rules causes prejudice to the taxpayer, the same may be open to challenge in terms of section 295(4).

As noted earlier, section 45(4) applies when a partner receives capital asset or money or both from a firm in connection with its reconstitution. If a partner receives capital asset with or without money, capital gain attributable to such receipt of capital asset will not be available for relief u/s 48(iii). This is for the obvious reason that the subject capital asset having already been given to a partner, could not be subsequently transferred by the firm to any other person. Upon allotment to a partner, the capital asset concerned ceases to exist with the firm.

However, if a firm is liable to tax on transfer of money with or without capital asset to the partner in connection with reconstitution of a firm, the capital gain on such transfer of money chargeable u/s 45(4) would be available for relief u/s 48(iii). This relief is given on the premise that when cash is paid to the retiring partner on reconstitution, the same may be attributed wholly or partly to the revaluation of one or more capital assets which are retained by the firm. Subsequently, when a firm transfers such revalued capital asset, it would be liable to pay tax on capital gain. In such a case, capital gain may include the revalued portion on which the firm would have discharged tax u/s 45(4). This will result in double taxation. In order to mitigate such double taxation, it is provided that capital gains already charged to tax u/s 45(4) to the extent attributable to the capital asset that is being transferred by a firm would be allowed as deduction u/s 48(iii).

It is interesting to note that section 48(iii) may also apply in a situation where both sections 9B and 45(4) are applied simultaneously in the same previous year.

As stated earlier, section 8 applies not only to capital gain chargeable u/s 45, but to any capital gains chargeable under the head ‘capital gain’. As section 9B provides for capital gains to be chargeable to tax under the head ‘capital gain’, section 48 is applicable to the capital gain covered u/s 9B as well.

While computing the capital gain chargeable u/s 9B read with section 48, capital gain chargeable u/s 45(4) to the extent attributable to the capital asset dealt with by section 9B would be reduced from the FVC determined u/s 9B(3). Section 48 does not provide for determination of the FVC. It only provides for deductions from the same. Therefore, there is no disharmony between section 9B(3) and deduction u/s 48(iii).

L. CERTAIN OTHER ISSUES OF SECTION 45(4)
What is the meaning of receipt of money? Whether receipt of money includes constructive receipt by way of credit to account? A mere credit to the account of the partner cannot be equated with the receipt of money. Upon reconstitution, certain sum may be credited to a partner’s account which is allowed to remain in the firm. In such case, it cannot be said that he received money from the firm upon a mere credit. However, when the amount so credited is withdrawn by him, section 45(4) is attracted. The answer could be different if the ratio of Raghav Reddy in 44 ITR 760 SC is applied to such credit unless such ratio is distinguished on the basis of Toshiku in 125 ITR 525 SC.

Whether receipt of rural agricultural land covered: As rural agricultural land is not a capital asset, section 45(4) is not attracted.

Receipt by legal heirs of deceased partner: Section 45(4) would apply to receipt by a partner from the firm. A receipt by the legal heir of the deceased partner cannot be regarded as receipt by the partner. Therefore, section 45(4) is not applicable.

Would capital balance include balances in current account and loan of partners: While the balance in current account could be appropriately called as part of capital balance, the same may not be so in the case of loan by partners.

Is proportionate share of reserves to be considered as part of capital: Credit balance in the profit and loss account or balances in the reserves should be credited to partners’ accounts before dissolution / reconstitution. In any case, payment from such credit / reserves cannot be regarded as payment in connection with dissolution / reconstitution.

How to compute if there is negative capital balance: A negative balance in the capital account represents money due by the partner to the firm. If such balance is not made good by him on dissolution / reconstitution, it amounts to a waiver which may in turn amount to payment of cash in the light of the ratio in Mahindra and Mahindra 404 ITR 1 SC.

M. WHEN GOODWILL IS TRANSFERRED
If goodwill, being a capital asset, is transferred to a partner, sections 45(4) and 9B as discussed earlier would apply. This is so irrespective of whether the goodwill is self-generated or acquired.

If goodwill is self-generated, in terms of section 55(2)(a) and section 55(1)(a) the cost of acquisition and cost of improvement shall be deemed to be nil.

If goodwill is purchased for a consideration, newly-introduced proviso to section 55(2)(a) would apply. This proviso provides that the actual cost of goodwill shall be reduced by the depreciation allowed up to A.Y. 2020-21.

Provisions of section 50 along with the newly-introduced proviso to section 50(2) may not apply in view of the fact that sections 45(4) and 9B are special provisions.

Additionally, upon such transfer, if no consideration is received or is accrued, provisions of section 50 may not operate unless the fiction of section 9B(3) is read into section 50. In any case, section 45(4) does not have any such fiction.

ACKNOWLEDGEMENTS: The author acknowledges the inputs from Mr. S. Ramasubramanian and Mr. H. Padam Chand Khincha and the support of Mrs. Sushma Ravindra for the purposes of this analysis.

shailesh.kwebmaker

JDA STRUCTURING: A 360-DEGREE VIEW

“When a subject is multidimensional, a different approach is necessary. Instead of a series of standalone articles on the topic, a single article covering important aspects of the subject (JDA here) and have domain experts comment on each aspect of the subject was deemed worthwhile. The uniqueness of the article is in its subject coverage from the standpoint of each of the four perspectives: accounting, direct and indirect taxes and general and property law at once. This has resulted in an integrated piece where each facet is at once analysed from each of the four perspectives. Sunil Gabhawalla, CA, conceptualised the content and format of this article and shared the outline with three other domain experts. Through the medium of video calls, each one of them shared his perspectives on a number of touch-points outlined by Sunil. These were eventually compiled into this article. Ameet Hariani, advocate and solicitor, covered the Legal side; Pradip Kapasi, CA, covered the Direct tax aspects; Sudhir Soni, CA, covered Accounting aspects; and Sunil took on the Indirect taxation aspects. Thus, the article is a ‘joint development’ by all of them! – Editor”

Joint development of real estate – A win-win for both landowner and developer?

In today’s scenario, joint development is the preferred mode of development of urban land. A joint development agreement (JDA) is beneficial for both the landowner as well as the developer. It is a win-win situation for both. Conceptually, the resources and the efforts of the landowner and the developer are combined together so as to bring out the maximum productive result post-construction.

What are the possible risk factors?

Having said so, real estate development is spread over quite a few years and is fraught with risks as diverse as price risk (the expected market price of the developed property at the end of the project not commensurate with the expectations), regulatory risk (frequent changes in development regulations at the local level), tax risk (significant lack of clarity on the tax implications of the present law as well as the risk of possible amendments therein before the project completion), business risk (inability of the landowner / developer to fulfil the commitments resulting in either substantial losses or disputes), financial risk (inability to match the regular cash outflows till the time the project becomes self-sustaining) and so on. Like many other businesses, there are risks involved in real estate development in general and joint development projects in particular.

Why this article?

It is not only the diversity of the risks but also the interplay of these risks which makes the entire subject complex and also results in varying models or transaction structures between the landowner and the developer for the joint development of the real estate project. This article attempts to draw upon the experiences of the respective domain experts to apprise the readers of the complex interplay of the risk factors which go into the structuring of the joint development agreements and provide a holistic view of this complex topic. It aims to introduce the nuances and niceties across multiple domains but is not intended to be an exhaustive treatise on the topic.

What are the possible transaction structures?

Well, there are choices galore. Each joint development agreement is customised to suit the specific needs of the stakeholders. While in most of these structures the landowner would pool in the development rights in the property already held by him, the developer would undertake development obligations and compensate the landowner either in the form of money or developed area (either fixed or variable, again either upfront or in instalments). Within this broad conceptual definition of the ‘deliverables’ by the respective stakeholders, a multitude of factors and a complex interplay between them will determine the ‘terms and conditions’ and, therefore, the essence of the joint development agreement. Without diluting the specificity of each joint development agreement, one may compartmentalise the scenarios into a few baskets as listed below:

1. Outright sale of land / grant of development rights by the landowner to the developer against a fixed monetary consideration either paid upfront or in deferred instalments over the project period.
2. Grant of development rights by the landowner to the developer against sharing of gross revenue earned by the developer from the sale of the project.
3. Grant of development rights by the landowner to the developer against sharing of net profits earned by the developer from the project.
4. Grant of development rights by the landowner to the developer against sharing of area developed by the developer in a pre-determined ratio.

How does one choose an appropriate structure?

Well, this is the million-dollar question. The experts spent a considerable amount of time brainstorming this question and identifying various parameters which will help in choosing an appropriate structure.

From the landowners’ perspective, the structure could be determined based on the fine balancing of the timing of the transfer of legal title in the property from the landowner and the timing of the flow of consideration to him. Throw in the subjective metrics of the risk-taking ability of the stakeholders and the level of comfort that the landowner and the developer have with each other in terms of the extent of trust and / or mistrust, and the entire equation starts becoming fuzzy. To add to the fizz, compliance obligations under regulations like RERA and restrictions under FEMA could also act as show-stoppers.

Ameet Hariani says, ‘For example, under RERA it is the promoter’s obligation to obtain title insurance of the real estate project. The relevant section of RERA, among other things, requires a promoter to obtain all such insurances as may be notified by the appropriate Government, including in respect of the title of the land and building forming the real estate project and in respect of the construction of the said project. Since both the landowner as well as the developer will be classified as promoters, it would be prudent for parties entering into a JDA to specify which party (among the “promoters”) will be responsible for obtaining the title insurance for the project.’

In some transaction structures, tax obligations (both direct tax as well as indirect tax – GST and, not to forget, stamp duty) could act as the final nail in the coffin. For example, the upfront exposure towards payment of stamp duty and income-tax coupled with the ab initio parting of the title may rule out the possibility of an outright sale of land by the landowner against deferred consideration from the developer. As stated by Ameet Hariani, ‘From a legal perspective, legal rights should be retained by the landowner till the performance by the developer of the developer’s obligations. Only then should legal rights be transferred.’

While stamp duty is a duty on the execution of the document and could be paid by either of the parties, Ameet Hariani has this to say, ‘So far as stamp duty implications are concerned, normally these are borne by the developer. All documents relating to immovable property should be registered and consequently the quantum of stamp duty is an important determinant to be worked out.’

The above factors are relevant from the developer’s perspective as well. However, many more aspects become relevant. While the landowner would like to protect and retain his title in the property to the last possible milestone, for the developer a restricted right in the land could present significant constraints in financing the project, especially if he is dependent on funding from banks. Ameet Hariani has a word of advice, ‘Legally speaking, agreements for development rights are significantly different from those for sale of land. Courts have held that some types of development agreements cannot be specifically enforced. The key is to ensure that the development agreements that are executed should be capable of being specifically enforced.’ More importantly, the marketability of the project to the end customer / investor depends significantly on the buyer taking a loan from the bank. Therefore, the customer’s and the customer’s lending institution’s perception of the transaction structure and the clarity of the title of land become very important factors.

Hence, Ameet Hariani warns, ‘Financial institutions normally will not give finance in respect of the development agreement unless there is a specific clause in the development agreement entitling the developer to raise finance on the property; and the developer must also have the right to also mortgage the developer’s proportionate share in the land. This often makes the landowner extremely uncomfortable, especially because the landowner’s contribution, i.e., the land comes into the “hotchpotch” almost immediately. This is a matter that is often debated strongly while financing the development agreement’. The local development regulations and restrictions may also play an important part. ‘Is the plot size economically viable? Is there some arbitrage available due to an adjacent plot of land also available for development? Does the development fit within the overall vision of the developer?’ These are some questions which occupy the mind-space of the developer.

Is there one dominant parameter determining the transaction structure?

With such a high level of subjectivity and associated complexity, the discussion amongst the panel of experts tried to focus on identifying whether there was one dominant factor for determining the transaction structure. ‘Cash, Cash and Cash’ was the vocal emphasis factor from the experts. Let’s see what Ameet Hariani has to say: ‘The essential part of the transaction is the cash flow requirement of the landowners. Based on this, all the other issues can be structured.’

Sudhir Soni concurs: ‘The commercial considerations are largely dependent on the cash flow requirements of the developer and the landowner. Grant of development rights against sharing of revenue or developed area are the more prevalent JDA structures and there is not much difference in the business context. Grant of development rights against share of net profits is rare. The commercial considerations for a landowner to select between an area share or revenue share arrangement also depend on the cash flow requirements and taxation implications.’

There is a financial facet other than cash which is equally important – the timing of revenue recognition. Says Ameet Hariani, ‘So far as the developer’s requirements are concerned, since revenues can now only be recognised effectively upon the Occupation Certificate being obtained, and keeping the RERA perspective in mind, the speed of completion of the project is of paramount importance. This is especially true so far as listed developers are concerned.’

Practically, joint development arrangements have specific performance clauses for both the parties and will not allow a mid-way exit to either party. However, the future is uncertain. What if a developer runs out of cash mid-way and needs to exit and bring in another developer? Ameet Hariani opines, ‘Normally, a landowner would be uncomfortable to have a provision whereby development rights can be transferred / assigned without the landowner’s consent. It will be a very rare case where such right is allowed to the developer. There is a high likelihood of litigation where there is a transfer of rights proposed to a third party developer by the current developer’.

The litigation risk is not only at the developer’s end but also at the landowner’s end. Ameet Hariani continues, ‘Also, in the event the landowner wants the developer to exit and wants to appoint a new developer, once again there is a high likelihood of litigation.’ But Ameet Hariani has a golden piece of advice suggesting the incorporation of an arbitration clause in the agreement. ‘Earlier, there was a debate as to whether developer agreements could be made subject to arbitration or not. Recent judgments read with the amendments to the Specific Relief Act and the Arbitration Act have now clarified the position significantly and a well-drafted arbitration clause would be key to ensure protection for both the parties’, he says.

But new transaction structures are emerging

While the discussion was around the traditional options of transaction structuring, the experts did agree that the scenario is fluid and specific situations may suggest the evolution of new transaction structures. While income-tax and stamp duty outflows act as a deterrent to the transaction structure of an outright sale of land, the grant of development rights could possibly be a subject matter of GST. There appears to be a notification which obliges the developer to pay GST on acquisition of development rights (under reverse charge) and another notification which obliges him to also pay GST on the area allotted to the landowner (under forward charge). Much to the chagrin of the developer, the valuation of such a barter transaction is far away from business reality and input tax credits (ITC) are also not allowed. Perhaps the only sigh of relief is that the substantial cash outflow on this account is deferred till the date of receipt of the completion certificate.

But wait! Weren’t transactions in immovable property expected to be outside the purview of GST? ‘Though there is a strong case to argue that such transactions should not be subjected to GST, there are conflicting interpretations on this front and the lower judicial forums are divided. One therefore has to wait for the Supreme Court to provide a final stand on this aspect,’ says Sunil Gabhawalla. Unluckily, businesses can’t wait and the stakes involved are phenomenal. The industry therefore tries to adapt and innovate newer transaction structures which are perhaps more tax-efficient.

Welcome the new concept of ‘Development Management Agreement’ wherein the developer acts as a project manager or a consultant to the landowner in developing the identified real estate. Suitable clauses are inserted to ensure that the developer and the landowner appropriate the profits of the venture in the manner desired. Essentially, this concept turns the entire relationship topsy-turvy and the key challenge is to ensure that the developer has a suitable title in the property while under development. ‘Safeguarding the developer’s rights and title in the property being developed becomes the most important aspect in this structure. Further, the brand value of the developer and past experience of other landowners with the developer is crucial for the landowner to make a choice as to which developer the landowner will go with,’ says Ameet Hariani.

It’s not really new for a tax aspect to be an important determinant for deciding a transaction structure. In case of corporate-owned properties put up for redevelopment, it is not uncommon to explore the route of demerger or slump sale and seek the associated benefits under the income-tax law. Pradip Kapasi says, ‘In case of demerger, the transfer of land by the demerged company to the resulting company would be tax-neutral provided the provisions of section 2(19AA) and sections 47(vib) and 47(vic) are complied with. No tax on transfer would be payable by the company or the shareholders. The cost of the land in the hands of the resulting company would be the same as was its cost in the hands of the demerged company’. Sunil Gabhawalla supports this approach, ‘GST is not payable on a transaction of transfer of business under a scheme of demerger’.

Well, the devil lies in the details. The provisions referred to above effectively require continuity of shareholding to the extent of at least 75%. This may not be possible in all cases. There comes up another option, of slump sale. Pradip Kapasi suggests, ‘The provisions of section 2(42C) r/w/s 2(19AA) and section 50B would apply on transfer of land as a part of the undertaking. No separate gains will be computed in respect of land. The company, however, would be taxed on the gains arising on transfer of the business undertaking in a slump sale. The amendments of 2021 in sections 2(42C) and 50B would have to be considered in computing the capital gains in the hands of the assignor company’. Effectively, income-tax becomes due on slump sale. What happens to GST? Sunil Gabhawalla opines, ‘There is an exemption from payment of GST.’

While such exotic products and arrangements may exist and appeal to many, there would always be takers for the plain vanilla example. The essential business case is that of the landowner and the developer coming together to jointly develop the property. A simple transaction structure could be to recognise the same as a joint venture, as an unincorporated association of persons. In fact, this is a risk parameter always at the back of the mind of any tax consultant. A less litigative route would be to grant such concept a legal recognition by entering into a partnership. To limit the liability of the stakeholders, the LLP / private limited company route can be considered. What could be the tax consequences of introduction of land into the entity?

Pradip Kapasi has this to say, ‘In such an event, of introduction in the partnership firm or LLP, provisions of section 45(3) of the Income-tax Act would be attracted and the landlord’s income under the head capital gains would be computed as per section 45(3) read with or without applying the provisions of section 50C. The profit / loss on subsequent development by the SPV would be computed under the head profits and gains of business and profession. In computing the income of the SPV, a deduction for the cost of land would be allowed on adoption of the value at which the account of the partner introducing the land is credited’. Would such introduction of land into the partnership have any GST implications? ‘Apparently, no, since such transactions are structured as in the nature of supply of land per se’, says Sunil Gabhawalla. He further comments, ‘If the transaction is structured as an introduction of a development right in the partnership firm, things can be different and reverse charge mechanism as explained earlier could be triggered’.

The next steps

Having dabbled with the possible transaction structures with an overall understanding of the complex factors at play in determining the possible transaction structures, we now proceed to dive into the accounting and tax issues in some of these specific structures. Since the landowner and the developer would be distinct legal entities, the discussion can be undertaken from both the perspectives separately.

Landowner’s perspective

Fundamentally different direct tax outcomes arise depending on whether the land or the development rights are contributed by the landowner as an investor or as a business venture.

Landowner as an investor
Essentially, in case the immovable property is held as an investor, it would be treated as a capital asset and the transfer of the capital asset or any rights therein would attract income-tax in the year of transfer itself under the head ‘capital gains’. While a concessional long-term capital gains tax rate and the benefits of reinvestment may be available, in order to curb the menace of tax evasion the Government prescribes that the value of consideration will be at least equivalent to the stamp duty valuation. This provision can become a spoilsport especially in situations where the ready reckoner values prescribed by the Government are not in alignment with the ground-level reality. However, Pradip Kapasi offers some consolation. While the said provisions would apply with full force to transactions of outright sale of land, the application of section 50C to grant of development rights transferred could be a matter of debate. But is the minor tax advantage (if at all) so derived really worth it? Remember the jigsaw puzzle of GST discussed above. But again, someone said that GST applies only on supplies
made in the course or furtherance of business. Did we not start this paragraph with the assumption that the landowner is an investor and is not undertaking a business venture?

Sunil Gabhawalla agrees with this thought process but at the same time cautions that the term ‘business’ is defined differently under the GST law and the income-tax law. He adds, ‘The valuation based on ready reckoner may be prescribed under income-tax law, but the same does not apply to GST where either the transaction value or equivalent market value become the key criteria’. Sudhir Soni endorses this thought from the accounting perspective as well, ‘The ready reckoner value will not necessarily be the fair value for accounting. The valuation for accounting purposes will be either based on the fair value of the entire land parcel received by the developer [or] based on the standalone selling price of constructed property given by the developer’.

In many cases, both the developer as well as the landowner wish to share the risks and rewards of the price fluctuations and also align cash flows. Accordingly, the consideration for the grant of development is both deferred as well as variable – either by way of share of gross revenue or share of profits, or sharing of area being developed. In cases where the landowner does not receive the money upfront and is keen on deferring the taxation to a future point of time, is it possible? The views of Pradip Kapasi are very clear, ‘Provision in agreement or deed for deferred payment or even possession may not help in deferring the year of taxation’. In the case of sharing of gross revenue, he further cautions that the fact of uncertainty of the quantum of ‘full value of consideration’ and its time of realisation may be impending factors but may not be conclusive for computation of capital gains, unless ‘arising’ of profits and gains on transfer itself is questioned. There could be debatable issues about the year of taxation of overflow or the underflow of consideration.

How does one really question or defer the timing of ‘arising’ of profits and gains on transfer? Without committing to the conclusiveness of the end position, which would be based on multiplicity of factors, Pradip Kapasi has a ray of hope to offer. In his words, ‘The cases where either the profit or developed area is shared could be differentiated on the ground that the landlord here has agreed to share the net profits of a business and therefore has actively joined hands to carry on a business activity for sharing of profits of such business. In such circumstances, his “share of profits” could arise as and when it accrues to the business’.

But tax law is full of caveats and provisos. Pradip Kapasi further warns, ‘There is a possibility that the landowner’s association with the developer here could be viewed as constituting an AOP and his action or treatment could activate the provisions of section 45(2) dealing with conversion of capital asset into stock-in-trade and / or the provisions of section 45(3) for introduction of capital asset into an AOP. In case of application of section 45(2) and / or 45(3), there would arise capital gains in the hands of the landlord and would be subjected to tax as per the respective provisions. The surplus, if any, could be the business profits; however, where the transactions are viewed as constituting an AOP, he would be receiving a share in the net profits of the AOP and the share of profit received from the AOP would be computed as per provisions of sections 67B, 86 and 110 of the Income-tax Act’.

Phew, that’s a barrage of cryptic sections to talk about! Let’s keep our fingers crossed and assume that the landlord survives this allegation of the transaction being treated as an AOP. The battle is then nearly won. Pradip Kapasi continues, ‘Where no profits and gains are brought to tax in the year of grant of development rights under the head “capital gains”, the capital gains can be held to have arisen in the year of receipt of the ready flats, where the gains would be computed by reducing the COA (cost of acquisition) of land from the SDV (stamp duty value) of the flats received. Further, if the transaction is structured such that no capital gains tax is levied in the year of receipt of ready flats, the capital gains may be taxed in the year of sale of the flats allotted by the developer’. He further warns about some practical difficulties in this stand being taken; ‘where the landlord on receipt of flats does not sell them but lets them out, difficulties may arise for bringing to tax the notional gains in the hands of the landlord’.

In case all this mumbo-jumbo has dumbed your senses, a landlord who is an individual or HUF may consider the possibility of entering into a ‘specified agreement’ prescribed u/s 45(5A) that involves the payment of consideration in kind, with or without cash consideration in part, for grant of development rights. Under the circumstances, the capital gains on execution of the development agreement shall stand deferred to the year of issue of the completion certificate of the project or part thereof where the full value of consideration for the purpose of computation of capital gains would be taken as the aggregate of the cash consideration and the stamp duty value of his share of area in the project in kind on the date of the issue of the completion certificate. This assumed concession is made available on compliance of the strict conditions including ensuring that the landlord does not transfer his share in the project prior to the date of issue of the completion certificate. Subsequent sale of the premises received under the agreement would be governed as per the provisions of section 45 r/w/s 48.

That’s too much of income-tax. Let’s divert our attention to GST. As a welcome change, Sunil Gabhawalla has a bit of advice for the landowners entering into joint development agreements after 1st April, 2019, ‘Sit back and relax. As stated earlier, the burden of paying the tax on supply of development rights has been transferred to the developer’. What happens when the landowner resells the developed area allotted to him under the area-sharing agreement? Sunil Gabhawalla adds, ‘If the developed area is sold after the receipt of the completion certificate, there is no tax. If the developed area is sold while the property is under construction, the landowner can argue that he is not constructing any area and therefore he is not liable for payment of GST. Remember, the GST on the area allotted to the landowner would also be paid by the developer’.

But life in GST cannot be so simple, right? Nestled in the by-lanes of a condition to a Rate Notification disentitling a developer from claiming input tax credit (ITC) for residential projects is an innocent-looking sentence which permits the landowner to claim ITC on units resold by him if he pays at least equivalent output tax on the units so resold. Sunil Gabhawalla says, ‘Well, the legal tenability of such a position can be questioned. But in tax laws, with the risk of litigation and retrospective amendments, the writing on the wall is that the boss is always right. If the landowner opts to fall in line, he would require a registration and would be paying additional GST on the difference between the tax charged to him and that which he charges to the end buyer. While this also brings commercial parity vis-à-vis the buyers for landowner’s inventory and the developer’s inventory, it could also result in some cash flow issue if not structured appropriately.’

In a nutshell, therefore, the key tax issue bothering the landowner in case of joint development agreements is not really GST but the upfront liability towards a substantial capital gains tax irrespective of actual cash realisation.

Landowner as a businessman
Will things change if the land is held as stock-in-trade? Actually, yes, and substantially. As a businessman, the landowner forfeits his entitlement of concessional long-term capital gains tax rate. But that pain comes with commensurate gain – the tax is attracted not when the transfer takes place but at a point of time when the income accrues in relation to such land. Says Pradip Kapasi, ‘The point of accrual of income is likely to arise on acquisition of an enforceable right to receive the income with reasonable certainty of realisation. The method of accounting and sections 145 and 28 may also play a vital role here. Provisions of ICDS and Guidance Note, where applicable, would apply’. Welcome to the wonderland of accounting and its impact on taxation!

Sudhir Soni says, ‘There may be alternatives. If it is treated as a capital gain, the amounts received as revenue share will be accumulated as advance and recognised at the end of the project, on giving possession. If it is treated as a business, at each reporting date apply percentage of completion to the extent of its share’. But is it really that simple? Well, the situation is fluid and the conflict is nicely summarised by Pradip Kapasi, ‘The fact that there was a “transfer” would not be a material factor in deciding the year of taxation. At the same time, the deferment of receipt may not be the sole factor for delaying the taxation where the enforceability of realisation is reasonably certain’.

Pradip Kapasi further cautions, ‘The provisions of section 43CA may play a spoilsport by introducing a deeming fiction for quantifying the revenue receipts.’ He has an additional word of advice. He suggests the preference of variable consideration models like gross revenue sharing, profit sharing or area sharing over the fixed consideration model. To quote him, ‘The case of the landlord here to defer the year of taxation could be better unless an income can be said to have accrued as per section 28 r/w/s 145, ICDS, where applicable, and Guidance Note of 2012’.

As usual, he has a few words of caution: firstly, ‘There is a possibility that the development rights held by the landlord are considered as a capital asset within the meaning of section 2(14) by treating such rights as a sub-specie of the land owned by him. In such case, a challenge may arise on the income-tax front where transfer of such
rights to the developer is subjected to taxation in the year of transfer itself. This possibility, however remote, could not be ignored though the better view is that even this sub-specie is a part of this stock-in–trade’; and secondly, ‘The possibility of treating the association with the developer as an AOP is not altogether ruled out especially in view of the amendment of 2002 for insertion of Explanation of section 2(31) dealing with the definition of “person” w.e.f. 1st April, 2002. In such an event, though remote, issues can arise in application of the provisions of section 45 to 55, particularly of sections 45(2), 45(3), 50C and 50D.’ Again, a plethora of sections to study and analyse. Well, that’s for the homework of the readers.

What happens on the GST front if the landowner is a businessman? Sunil Gabhawalla reiterates, ‘Sit back and relax if the development agreement is entered into after 1st April, 2019’. But what happens in cases where the development agreement is prior to that date? ‘I’m afraid, definitive answers are elusive. Whether transfer of development rights is liable for GST or not is itself a subject matter of debate. The issues of valuation and the timing of payment of tax are also not settled. We may need a separate article to deal with this,’ he adds.

Is Development Management Agreement a panacea for the landowner?
The concept of Development Management Agreement (DMA) has already been explained earlier. A quick sum and substance recap of the transaction structure would help us appreciate that the appointment of a development manager by the landowner vide a DMA would tantamount to the landowner donning the hat of a real estate developer and the development manager acting as a mere service provider. It will effectively mean that the landowner is the real estate developer who is developing a real estate project in his own land parcel. While this model offers significant respite in the GST outflow on development rights and also avoids the stretched interpretation of barter and consequent GST on free units allotted to existing members for self-consumption (remember, a redevelopment agreement entered into by a co-operative society is a sub-specie of a development agreement), it also helps the landowner in deferring the income-tax liability to a subsequent stage due to his becoming a businessman.

In the words of Pradip Kapasi, ‘In this case, the appointment of a Development Consultant under a DMA would itself be treated as a business decision in most of the cases. The appointment would signal the undertaking of an enterprise by the landlord on a systematic and continuous basis, constituting a business. Such an appointment would not be regarded as a “transfer” of capital asset and no capital gains tax would be payable on account of such an appointment. The first effect of such a decision would be to invite the application of section 45(2) providing for conversion or treatment of a capital asset into stock-in-trade and as a consequence lead to computation of capital gains that would be chargeable in the year of transfer of the stock-in-trade being developed. The market value of the land on such happening would be treated as the cost of the stock-in-trade and the rest would be governed by the computation of Profits and Gains of Business and Profession r/w/s 145, ICDS and Guidance Note’.

But is all hunky-dory as far as GST is concerned? Sunil Gabhawalla cautions, ‘While there is a respite in taxation for the landowner, it may be important to note that the developer relegates himself to the position of a contractor rather than a developer. This would disentitle him from claiming the concessional tax rate of 5% for developers and instead he would be liable for the general tax rate of 18% on the value of the services provided by him. However, this higher rate of tax comes with the eligibility towards claiming input tax credit.’

Developer’s perspective
Well, that was a lot of discussion from the point of view of the landowner. What happens at the developer’s end? Pradip Kapasi has a very simple and affirmative answer on this front. ‘The payment agreed to be made towards the development rights / land acquisition to the landowner would constitute a business expenditure that will be allowed to be deducted against the sale proceeds of the developed area, and if not sold by the yearend, would form the stock-in-trade and would be reflected in the books of accounts as its carrying cost’.

But what happens if the payment towards the development rights is deferred like in gross revenue sharing arrangements? ‘The net receipts subject to his method of accounting would be taxed in respective years of sale and / or realisation. The carrying cost of the stock would be represented by the amount of direct expenditure incurred by him excluding the notional cost of acquiring DR. In the alternative, the payment to be made to the landlord would constitute a business expenditure that will be allowed to be deducted against the gross sale proceeds, and if remaining to be sold by the yearend, would form part of the stock-in-trade and would be reflected in the books of accounts as its carrying cost’, says Pradip Kapasi.

In case of profit-sharing arrangements, however, he cautions about the risk of constitution of an AOP and the associated perils of sections 67B, 86 and 110. He is also afraid that the land cost may not be available as a deduction to the AOP. How does one deal with area-sharing agreements? Pradip Kapasi responds, ‘The net receipts of the balance area coming to the share of the developer would be taxed in respective years of sale and / or realisation where the cost of construction of all the flats would be allowed to be deducted as business expenditure. The carrying cost of the stock could be represented by the amount of direct expenditure incurred by him excluding the notional cost of acquiring DR. In the alternative, the payment to be made to the landlord in kind would constitute a business expenditure that will be allowed to be deducted against the gross sale proceeds, and if remaining unsold by the yearend, would form a part of the stock-in-trade and would be reflected in the books of accounts as its carrying cost.’

The clear essence of the above discussion is that the accounting treatment is important. But depending on certain criteria, enterprises are required to follow either IGAAP or Ind AS. Let us check out what Sudhir Soni has to say. ‘While there is very limited guidance available under IGAAP for accounting of joint development agreements, the cost that is incurred by the developer towards construction of the entire project is treated as cost towards earning the revenue from sale to the developer’s customers. Accordingly, in case of area share for landowner there is no separate accounting and in case of revenue share to landowner it is accounted through the balance sheet. Elaborate guidance is, however, available under Ind AS 115’.

He adds, ‘The JDA is a contract for specific performance and does not have a cancellation clause. For projects executed through joint development arrangements, it is evaluated that the arrangement with land owners are contracts with customers. The transaction is treated as if the developer is buying land from the landowner and selling the constructed area to the landowner. This results in a “grossing” of revenue and land cost, which is a difference from the accounting under Indian GAAP.’ Whether such a difference in accounting treatment will have any ramifications under the income-tax or GST law, only time will tell.

Having treated the transaction as a barter, there comes the issue of accounting for such a transaction. Sudhir Soni says, ‘For real estate projects executed through JDA not being jointly controlled operations, wherein the landowner provides land and the developer undertakes the development work on such land and agrees to transfer certain percentage of constructed area / revenue proceeds to the landowner, the revenue from the development and transfer of agreed share of constructed area / revenue proceeds in exchange of such development rights / land is accounted on gross basis. Revenue is recognised over time (JDA being specific performance arrangements) using input method, on the basis of the inputs to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation. The gross accounting at fair value for asset in form of land inventory (subsequently recognised as land cost over time basis stage of project completion) and the corresponding liability to the landowner (subsequently recognised as revenue over time basis stage of project completion) may be accounted on signing of JDA, but in practice the accounting is done on the launch of the project, considering the time gap between the signing of the JDA and the actual launch of the project. The developer’s commitments under the JDA, which is executed and pending completion of its performance obligation, are disclosed in the financial statements.’

Further, ‘For real estate projects executed through a JDA being jointly controlled operations, which provide for joint control to the contracting parties for the relevant activities, the respective parties would be required to account for the assets, liabilities, revenues and expenses relating to their interest in such jointly controlled JDA.’

Now comes the next accounting issue of measurement of fair value for such a barter. Sudhir Soni says, ‘The fair value for the gross accounting of JDA is the market value of land received by the developer or based on the standalone selling price of the share of constructed property given by the developer. In case the same cannot be obtained reliably, the fair value is then measured at the fair value of construction services provided by the developer to the landowner’. Well, but the valuation provisions under GST are different. Sunil Gabhawalla agrees and says that each domain will have to be independently respected.

The bottom line, it seems, is that the direct tax consequences for the developer will closely follow the generally accepted accounting principles for determination of net profit for a year. But are things equally simple in GST? Not really. Sunil Gabhawalla shares his inputs. ‘Unless the developer in essence constitutes a contractor, all new residential projects attract 5% GST on the sale proceeds of the units sold while under construction. Even area allotted to the landowner attracts this 5% GST on the equivalent market value of the units allotted to the landowner. Affordable housing projects enjoy a concessional tax rate of 1%. However, no input tax credit is available to the developer’.

But wait a minute! This is not all. A plethora of reverse charge mechanism Notifications require the developer to pay tax on the expenses incurred by him. For example, the proportionate value of the development rights acquired by him from the landowner is liable to GST in the hands of the developer at the time of receipt of the occupation certificate. As Sunil Gabhawalla adds, ‘It may make sense for the developer to procure goods and services from registered dealers only since another Notification requires the developer to pay GST on reverse charge if the procurement from unregistered dealers exceeds 20%. Notably, no tolerance limit has been provided for procurement of cement, where reverse charge mechanism triggers from the first rupee of procurement from unregistered dealers.’

Summing up
This article was an attempt to apprise the readers of the nuances of this complex topic. All experts agreed that the tax efficiencies of each structure over the other would be determined largely by the available circumstances and the needs of the parties. No structure, in such an understanding, is superior to other structures, nor inferior to any.

shailesh.kwebmaker

PREMIUM RECEIVED BY LANDLORD ON TRANSFER OF TENANCY RIGHTS – CAPITAL OR REVENUE?

ISSUE FOR DISCUSSION

A person acquiring the right to use an immovable property on a month-to-month basis without acquiring the ownership right is known as the tenant and the person continuing to be the owner of the property is known as the landlord. The monthly compensation paid for the use of the property is known as the rent. Various States in India have tenancy laws, whereby tenants are protected from eviction by the landlord from premises in which they are tenants. The rights so acquired by the person to use the property are known as tenancy rights. These rights may be acquired for a consideration known as salami or premium, though many States prohibit payment of such consideration.

On the other hand, many States permit the transfer of tenancy rights by the tenant for a consideration with the consent of the landlord, who may consent to the transfer on receipt of a payment or even without it. These tenancy rights are recognised by the tax laws as capital assets of the tenant and accordingly the gains if any on their transfer are taxed under the head capital gains. Section 55 provides that the cost of acquisition of the tenancy is to be taken as Nil unless paid for, in which case the cost would be the one that is paid for acquiring the tenancy. Tenancy rights when acquired for a fixed period under a written instrument are known as leasehold rights. Acquisition of a license to use the property, although similar to lease or tenancy, is not the same.

An interesting issue has arisen as to the manner of taxation of the receipt by the landlord for consenting to such transfer of tenancy – whether it is capital in nature and therefore not taxable or taxable as capital gains, or whether it is revenue in nature and taxable as income. There have been conflicting decisions of the Mumbai Bench of the Tribunal on this issue. The taxation of such receipt under the provisions of section 56(2)(x) is another aspect that requires consideration.

THE VINOD V. CHHAPIA CASE
The issue came up before the Mumbai Bench of the Tribunal in the case of Vinod V. Chhapia vs. ITO (2013) 31 taxmann.com 415.

In this case, the assessee was a HUF which owned an immovable property. Part of the property was let out to a tenant since 1962 and part of the property was occupied by the members of the HUF. The tenant expired in 1986 and the tenancy rights were inherited by her daughter.

A tripartite agreement was entered into between the daughter, new tenants and the landlord for surrender of tenancy by the daughter and grant of tenancy by the landlord in favour of the new tenants. The daughter surrendered her tenancy rights in favour of the landlord to facilitate renting of the property to the new tenants. The incoming tenants paid an amount of Rs. 14.74 lakhs to the daughter and an amount of Rs. 7.26 lakhs to the assessee-landlord simultaneously. The assessee accepted the surrender of tenancy rights and possession of the property and received the amount from the new tenants as consideration for granting the new tenants monthly tenancy of the flat.

The assessee invested the amount of Rs. 7.26 lakhs in bonds issued by NABARD, treated the amount received from the new tenants as capital gains and claimed exemption u/s 54EC.

During assessment proceedings, the assessee claimed that the amount was received towards surrender of a right, which was part of the bundle of rights owned by the assessee in respect of the property. The assessee claimed that the receipt of the consideration of Rs. 7.26 lakhs was for the extinguishment of the rights and therefore was capital gains eligible for exemption u/s 54EC. Various decisions were cited by the assessee in support of the proposition that the amount received on surrender of tenancy rights was a capital receipt, which was taxable under the head ‘capital gains’.

But the A.O. brought out the distinction between transfer of tenancy rights vis-à-vis surrender of tenancy rights. According to him, the receipt by the landlord was for consenting to a transfer of the right of residence by the existing tenant to the new tenants. He sought to support this view by the fact of payment of consideration by the new tenants to both the original tenant and the landlord. The A.O. distinguished the judgments cited before him, since all of those related to surrender of tenancy rights.

According to the A.O., the outgoing tenant (the daughter) surrendered (transferred) the tenancy rights in favour of the new tenants and not to the assessee-landlord. He held that the amount of Rs. 7.26 lakhs was received by him from the new tenants for consenting to the transfer of tenancy to the new tenants, and not for surrender of tenancy, and was therefore not a capital receipt. The A.O. therefore taxed the amount of Rs. 7.26 lakhs as income of the assessee under the head ‘income from other sources’, rejecting the claim of exemption u/s 54EC.

Before the Commissioner (Appeals), the assessee submitted that consent of the landlord was mandatory for the new tenants to enjoy the right of residence. Thus, by consenting, the assessee gave up (transferred) some of the rights out of the bundle of rights attached to the said property, a capital asset. Reliance was placed on the Supreme Court decision in the case of CIT vs. D.P. Sandu Bros. Chembur (P) Ltd. 273 ITR 1 and on the Bombay High Court decision in the case of Cadell Weaving Mill Co. (P) Limited vs. CIT 249 ITR 265, for the proposition that the amount received on surrender of tenancy rights is a capital receipt taxable under the head ‘capital gains’, and not ‘income from other sources’.

The Commissioner (Appeals) rejected the appeal, confirming the order of the A.O. and held that the assessee continued to hold the ownership rights even after the new tenants entered the house and that the outgoing tenant transferred the tenancy rights to the new tenants. The assessee merely gave its consent for such transfer, for which it received the sum of Rs. 7.26 lakhs which could not be termed as a receipt for surrender of tenancy rights. Had it amounted to a surrender of tenancy rights in favour of the landlord, the consideration would have been paid by the landlord to the outgoing tenant. Therefore, it was a case of encashment of the power of consent for transfer of the tenancy rights to the new tenants. The Commissioner (Appeals) next observed that if the new tenants further transferred the property to some other tenant, the assessee would be entitled to receive a similar amount and the ownership rights of the property would continue to vest with the assessee.

Before the Tribunal, on behalf of the assessee it was submitted that the rights attached to an immovable property constituted a bundle of rights. Exploitation of these rights gives rise to capital gains. Without the surrender of tenancy rights by the original tenant to the assessee, the assessee could not have consented to the transfer of residence in favour of the new tenant. Therefore the consideration received by the assessee was for surrender of tenancy rights, which was a capital receipt, taxable as capital gains.

Attention was drawn by the assessee to the tripartite agreement between the assessee, the original tenant and the new tenants, which mentioned that the original tenant was the sole owner of the tenancy rights and she surrendered the flat to the landlord including the tenancy rights.

On behalf of the Revenue it was argued that normally in the case of surrender of tenancy rights the tenant would receive the consideration from the landlord for surrender of the same. In the case before the Tribunal, the landlord did not pay the consideration to the original tenant, but it was the new tenants who paid the consideration to the original tenant. Further, the assessee continued to hold the right of ownership of the property and tenancy rights were transferred from the old tenant to the new tenants. It was therefore submitted that the amount was rightly taxed as ‘income from other sources.’

The Tribunal noted that all the decisions cited before it, whether by the assessee or by the Revenue, were in the context of undisputed surrender of tenancy rights and were therefore distinguishable on facts. Analysing the facts of the case, the Tribunal was of the view that the consideration paid by the new tenants was for consent of the landlord for the transfer of tenancy rights between the new and old tenants and the amount of Rs. 7.26 lakhs was the consideration for consent. According to the Tribunal, generally in matters of tenancy rights disputes it is the tenant who gets the financial benefit, which flows from the pockets of the landlord in lieu of surrender of the tenancy rights by the tenant, and the landlord does not receive any amount. Therefore, according to the Tribunal, the settled law relating to taxation of a receipt on surrender of tenancy rights would not apply in the case before it.

The Tribunal also examined whether the assessee actually received all the rights over the property, including the tenancy rights. It noted the clause in the agreement which indicated that the existing tenant surrendered the tenancy rights along with the property to the assessee. It questioned the need for the existing tenant to be a signatory to the agreement giving the property on monthly rent to the new tenants and the need for a tripartite agreement. According to the Tribunal, letting of the property to the new tenant was a matter of agreement between the landlord and the new tenant.

Noting that the monthly rental and rental advance were nominal, the Tribunal was of the view that the sum of Rs. 7.26 lakhs paid to the landlord by the new tenant was consideration for the consent. As per the Tribunal, the receipt was for the consent for transfer by the old tenant to the new tenants, for a consideration of Rs. 14.48 lakhs and there was a need for the consent of the landlord. The Tribunal accordingly held that there was no transfer of any capital asset by the landlord to the new tenants and that the sum of Rs. 7.26 lakhs was neither a capital receipt nor a rental receipt.

The Tribunal also noted that there was no time gap between the vacation of the property by the old tenant and grant of rental rights to the new tenants. There was continuity of renting of the property and there was no evidence to infer that the house was in the vacant possession of the assessee even after the alleged end of the tenancy of the old tenant. Therefore, the assessee never got the property in vacant condition. Hence the Tribunal held that the amount received was consideration for consent, it did not involve any transfer of capital rights attached to the property, and it constituted a windfall gain to the assessee, which was taxable under the head ‘income from other sources’.

NEW PIECE GOODS BAZAR CO. LTD. CASE
The issue again came up before the Mumbai Bench of the Tribunal in the case of Jt. CIT vs. New Piece Goods Bazar Co. Ltd., ITA No. 6983/Mum/2012 dated 25th May, 2016.

In this case, the assessee was the owner of several shops in the cloth market which were given on rent to different tenants. Every year, some tenants transferred the possession of shops to new tenants, with the consent of the assessee, who was the owner of the shops. In consideration of giving its consent to the transfer of possession of the shops from old tenants to the new tenants, the assessee was receiving a certain premium from the old tenants.

Earlier, the receipt of premium by the assessee was shown as income under the head ‘capital gains’. During the relevant year also, certain old tenants transferred their possessory rights of the rental shops to the new tenants with the consent of the assessee. In consideration of giving consent for such transfer of possessory rights, the assessee received a premium of Rs. 1,15,50,000 from the old tenants. The assessee treated such amount as income from ‘capital gains’ and claimed exemption from taxation of a part thereof u/s 54EC.

The A.O. held that the assessee was the owner of the shops, the old tenants had transferred the tenancy rights in favour of the new tenants along with rights of possession and the assessee remained the owner of the shops as before. Consequently, there was no transfer of the capital assets, being shops, as even after the transfer of tenancy rights the assessee continued to remain the owner of the shops. According to the A.O., while the transfer of tenancy rights indisputably resulted in capital gains, such capital gains would be taxable in the hands of the outgoing tenants and could not be taxed as the capital gains of the assessee. The A.O. therefore held that the amount received by the assessee as premium was taxable in the hands of the assessee as ‘income from other sources’ and not as ‘capital gains’, and that the assessee was therefore not entitled to exemption u/s 54EC.

In an appeal before the Commissioner (Appeals), the assessee submitted that in earlier and subsequent years also, a similar amount was offered to tax as capital gains and was accepted by the Income-tax Department. It was further argued that tenancy rights was undoubtedly a capital asset under the law and therefore any gains arising from the transfer of such rights had to be assessed under the head ‘capital gains’.

The Commissioner (Appeals) noted that a right was a bundle of benefits embedded in some asset or independent thereof. Capital asset meant property of any kind held by an assessee. Therefore, a right, whether or not attached to any asset, was also a property. The old tenant could transfer the possessory rights of the shops only with the consent of the landlord. According to the Commissioner (Appeals), such right of consent was a property in the hands of the assessee. Since that right or property was connected to the capital asset, i.e., shops, therefore such a right of consent was also a capital asset in the hands of the assessee which was more or less similar to a tenancy right, which was also a capital asset.

The Commissioner (Appeals) therefore held that on giving consent to change in the possession of rented premises from an old tenant to a new tenant, there was a transfer of capital asset. He, therefore, held that such receipt was liable to tax as capital gains and the assessee was entitled to exemption u/s 54EC.

On appeal by the Revenue, the Tribunal expressed its agreement with the observations of the Commissioner (Appeals) that the assessee acquired a bundle of rights (ownership) with respect to the shops. These rights included, inter alia, the right of grant of tenancy. The term ‘capital asset’ was defined in the widest possible manner in section 2(14) and had been curtailed only to the extent of exclusions given in the said section, including stock-in-trade and personal effects. The asset under consideration clearly did not fall within the above exclusions. The bundle of rights acquired by the assessee was undoubtedly valuable in terms of money.

On the above reasoning, the Tribunal held that the tenancy rights formed part of a capital asset in the hands of the assessee and therefore any gains arising therefrom would be assessable under the head ‘capital gains’, eligible for deduction u/s 54EC.

In Sujaysingh P. Bobade (HUF) vs. ITO (2016) 158 ITD 125 (Mum) a similar view was taken that the amount received by the landlord was a capital receipt, subject to tax as capital gains. However, in that case the appeal was against an order of revision passed u/s 263 and the landlord had received the amount from the new tenants for allotment of tenancy rights under tenancy agreements.

A similar view has also been taken by the Tribunal in the case of ITO vs. Dr. Vasant J. Rath Trust, ITA No. 844/Mum/2014 dated 29th February, 2016 wherein the old tenants had surrendered their tenancy rights to the landlord without receiving any consideration and the landlord directly entered into tenancy agreements with the six new tenants on receipt of consideration for grant of tenancy rights.

OBSERVATIONS
Any property, especially immovable property, comprises of a bundle of rights where each such right is a capital asset capable of being transferred by the owner for an independent consideration to different persons. Ownership of the land and / or building is the classic case of owning such a bundle of rights. The right to grant tenancy flows from such a bundle. The Supreme Court in the case of A.R. Krishnamurthy, 176 ITR 417, in the context of the ownership of a mine, held that the mining rights were a part of the mine and were capable of being held as an independent asset and therefore of being transferred independent of the ownership of the mine. It held that the grant of the lease to mine the asset or the mining rights resulted in the transfer of a capital asset, negating the case of the assessee that there was no transfer of capital asset on grant of the mining rights where the ownership of the mine continued with the assessee. The court also rejected the contention that there was no cost of acquisition of such rights or the cost could not be attributed to such rights.

Receipt of a salami or premium by a landlord from a tenant for grant of tenancy rights in an immovable property owned by him is a capital receipt and not a revenue receipt [Durga Das Khanna vs. CIT 72 ITR 796 followed by the Bombay and the Calcutta High Courts in CIT vs. Ratilal Tarachand Mehta 110 ITR 71 and CIT vs. Anderson Wright & Co. 200 ITR 596, respectively]. The Courts held that unless such a receipt is proved to be in the nature of rent or advance rent, it could not be taxed under the Act as revenue income.

The Supreme Court, in the case of CIT vs. Panbari Tea Co. Ltd. 57 ITR 422 held that a premium received on parting with the lessor’s interest was a capital receipt and the rent receipt was revenue in nature:

‘When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties.’

The amount received for giving consent is certainly not an advance rent. Can the giving of a consent in relation to user of a capital asset amount to a revenue receipt, even where it is assumed, though not right, that there is no transfer of the capital asset itself (in this case, tenancy rights) by the landlord? The character of a receipt depends upon its relation with the capital asset. For a receipt to be considered as income, it should be a receipt that is of revenue in nature. Normally, the amount received for use of an asset, such as rent, is revenue in nature and is income. However, that logic may not apply to all receipts in relation to a capital asset. Again, for a receipt to be a capital receipt it is not necessary that there should be a transfer of a capital asset or a diminution in value of a capital asset. Transfer of a capital asset is only necessary in order to subject a capital receipt to tax as capital gains.

When a landlord gives his consent for transfer of a tenancy, in substance, he is consenting to grant of the possessory rights to a new tenant. Therefore, he is giving up his possessory rights over the premises in favour of a new tenant. This can be viewed as a right in respect of the premises being agreed to be foregone for the future as well.

Another way of examining the matter is whether the receipt is in relation to a capital asset. The right to consent to a new tenant is also a right associated with the ownership of the immovable property. It is therefore part of the bundle of rights which constitute the immovable property. The exercise of such right in favour of the incoming tenant amounts to exercise of a capital right, the compensation for which would necessarily be capital in nature.

Therefore, the better view of the matter is that the premium received by the landlord for according his consent to transfer of tenancy rights is a capital receipt, subject at best to capital gains tax, and is not a revenue income.

The connected important issue is whether there is any cost of acquiring / holding such a right in the hands of the landlord. Can a part of the cost of acquiring the immovable property be attributed to the cost of the tenancy rights and be claimed and allowed as deduction in computing the capital gains? In our considered opinion, yes, such cost though difficult to ascertain is not an impossible task and should be determined on commercial consideration and be allowed in computing the capital gains arising on grant of the consent to transfer the tenancy rights or for creation of such rights.

Once it is held that the receipt is in the nature of a capital receipt that is liable to tax in the hands of the landlord under the head capital gains, the question of applicability of section 56(2)(x) should not arise. In any case, the receipt, in our opinion, is for a lawful consideration and cannot be subjected to the provisions of this provision that should not have had any place in the Income-tax Act.

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Vivad se Vishwas sections 2(1)(o) and 9(a)(ii) – Prosecution – Pending prosecution for assessment year in question on an issue unrelated to tax arrears – Holding that an assessee would not be eligible to file a declaration would defeat very purport and object of Vivad se Vishwas Act – Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of Vivad se Vishwas Act

3 Macrotech Developers Ltd. vs. Pr. Commissioner of Income Tax [Writ Appeal No. 79 of 2021, date of order: 25th March, 2021 (Bombay High Court)]

Vivad se Vishwas sections 2(1)(o) and 9(a)(ii) – Prosecution – Pending prosecution for assessment year in question on an issue unrelated to tax arrears – Holding that an assessee would not be eligible to file a declaration would defeat very purport and object of Vivad se Vishwas Act – Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of Vivad se Vishwas Act

The assessee is a public limited company engaged in the business of land development and construction of real estate properties. Initially, Shreeniwas Cotton Mills Private Limited (‘Cotton Mills’ for short) was a subsidiary of the assessee company. Subsequently, it was merged with the assessee company on the strength of the amalgamation scheme sanctioned vide order dated 7th June, 2019 passed by the National Company Law Tribunal, Mumbai Bench. The merger had taken place with effect from 1st April, 2018. However, the pending tax demand against the cotton mills under the Act continued in the name of the cotton mills since migration of the permanent account number of the cotton mills to the permanent account number of the assessee company had not taken place. Therefore, it is pleaded that the tax demand of the cotton mills should be construed to be that of the assessee company and reference to the assessee company would mean and include the assessee company as well as the cotton mills.

For the A.Y. 2015-16, the assessee had filed return of income u/s 139(1) disclosing total income of Rs. 2,05,71,01,650. The self-assessment income tax payable on the returned income as per section 115JB was Rs. 69,92,08,851. At the time of filing of the return, an amount of Rs. 27,34,77,755 was shown to have been paid by way of tax deducted at source. The balance of the self-assessment tax of Rs. 42,57,31,096 (Rs.69,92,08,851 less Rs. 27,34,77,755) with interest thereon under sections 234A, 234B and 234C aggregating to Rs. 12,36,74,855 (totalling Rs. 54,94,05,951) was paid by the assessee after the due date for filing of the return.

The Pr. CIT issued notice to the assessee on 19th September, 2017 to show cause as to why prosecution should not be initiated against it u/s 276-C(2) for alleged wilful attempt to evade tax on account of delayed payment of the balance amount of the self-assessment tax. The assessee in its reply denying the allegations, made a request to the Pr. CIT to withdraw the show cause notice. The assessee did not apply for compounding u/s 279(2).

In the meanwhile, on 17th December, 2017, the A.O. passed the assessment order for the A.Y. 2015-16 u/s 143(3). In this order, he disallowed certain expenses claimed by the assessee towards workmen’s compensation and other related expenses. After disallowing such claim, the A.O. computed the tax liability of the assessee at Rs. 61.75 crores, inclusive of interest.

When the aforesaid assessment order was challenged by the assessee, the Commissioner (Appeals) dismissed it and upheld the assessment order vide order dated 27th December, 2018.

Aggrieved by this order, the assessee preferred further appeal before the ITAT which is pending before the Tribunal for final hearing.

While the appeal of the assessee was pending before the Tribunal, the Central Government enacted the Direct Tax Vivad se Vishwas Act, 2020 which came into force on and from 17th March, 2020. The primary objective of this Act is to reduce pending tax litigations pertaining to direct taxes and in the process grant considerable relief to the eligible declarants while at the same time generating substantial revenue for the Government.

Circular No. 9 of 2020 dated 22nd April, 2020 was issued whereby certain clarifications were given in the form of questions and answers. The Central Government vide a Notification dated 18th March, 2020 has made the Vivad se Vishwas Rules.

With a view to settling the pending tax demand, the assessee submitted a declaration in terms of the Vivad se Vishwas Act on 23rd September, 2020 in the name of the cotton mills in respect of the tax dues for the A.Y. 2015-16 which is the subject matter of the appeal pending before the Tribunal.

While the assessee’s declaration dated 23rd September, 2020 was pending, it came to know that the Pr. CIT had passed an order on 3rd May, 2019 authorising the Joint Commissioner of Tax (OSD) to initiate criminal prosecution against the cotton mills and its directors by filing a complaint before the competent magistrate in respect of the delayed payment of self-assessment tax for the A.Y. 2015-16. On the basis of such sanction, the Income-tax Department filed a criminal complaint under section 276-C(2) r/w/s 278B before the 38th Metropolitan Magistrate’s Court at Ballard Pier. However, no progress has taken place in the said criminal case.

The impugned Circular No. 21/2020 dated 4th December, 2020 was issued giving further clarifications in respect of the Vivad se Vishwas Act. Question No. 73 contained therein is: when in the case of a taxpayer prosecution has been initiated for the A.Y. 2012-13 with respect to an issue which is not in appeal, would he be eligible to file declaration for issues which are in appeal for the said assessment year and in respect of which prosecution has not been launched? The answer given to this is that ineligibility to file declaration relates to an assessment year in respect of which prosecution has been instituted on or before the date of declaration. Since for the A.Y. 2012-13 prosecution has already been instituted, the taxpayer would not be eligible to file a declaration for the said assessment year even on issues not relating to prosecution.

It is the grievance of the assessee company that on the basis of the answer given to Question No. 73 its declaration would be rejected since the declaration pertains to the A.Y. 2015-16 and prosecution has been launched against it for delayed payment of self-assessment tax for the A.Y. 2015-16. It is in this context that the assessee approached the High Court by a writ petition seeking the reliefs as indicated above.

The High Court held that the exclusion referred to in section 9(a)(ii) is in respect of tax arrears relating to an assessment year in respect of which prosecution has been instituted on or before the date of filing of declaration. Thus, what section 9(a)(ii) postulates is that the provisions of the Vivad se Vishwas Act would not apply in respect of tax arrears relating to an assessment year in respect of which prosecution has been instituted on or before the date of filing of declaration. Therefore, the prosecution must be in respect of tax arrears relating to an A.Y. The Court was of the view that there is no ambiguity insofar as the intent of the provision is concerned and a statute must be construed according to the intention of the Legislature and that the Courts should act upon the true intention of the Legislature while applying and interpreting the law. Therefore, what section 9(a)(ii) stipulates is that the provisions of the Vivad se Vishwas Act shall not apply in the case of a declarant in whose case a prosecution has been instituted in respect of tax arrears relating to an assessment year on or before the date of filing of declaration. The prosecution has to be in respect of tax arrears which naturally is relatable to an assessment year.

The Court observed that a look at clauses (b) to (e) of section (9) shows that there is a clear demarcation in section 9 of the Act inasmuch as the exclusions provided under clause (a) are in respect of tax arrears, whereas in clauses (b) to (e) the thrust is on the person who is either in detention or facing prosecution under the special enactments mentioned therein. Therefore, if we read clauses (b) to (e) of section 9, it would be apparent that such categories of persons would not be eligible to file a declaration under the Vivad se Vishwas Act in view of their exclusion in terms of section 9(b) to (e).

Apart from this, the Court observed that under the scheme of the Act and the purpose of the Rules as a whole, the basic thrust is on settlement in respect of tax arrears. Under section 9 certain categories of assessees are excluded from availing the benefit of the Vivad se Vishwas Act. While those persons who are facing prosecution under serious charges or those who are in detention as mentioned in clauses (b) to (e) are excluded, the exclusion under clause (a) is in respect of tax arrears which is further circumscribed by sub-clause (ii) to the extent that if prosecution has been instituted in respect of tax arrears of the declarant relating to an A.Y. on or before the date of filing of declaration, he would not be entitled to apply under the Vivad se Vishwas Act. Now, tax arrears has a definite connotation under the Vivad se Vishwas Act in terms of section 2(1)(o) which has to be read together with sections 2(f) to 2(j).

Further, the High Court held that to say that the ineligibility u/s 9(a)(ii) relates to an assessment year and if for that assessment year a prosecution has been instituted, then the taxpayer would not be eligible to file declaration for the said A.Y. even on issues not relating to prosecution, would not only be illogical and irrational but would be in complete deviation from section 9(a)(ii) of the Act. Such an interpretation would do violence to the plain language of the statute and, therefore, cannot be accepted. On a literal interpretation or by adopting a purposive interpretation of section 9(a)(ii), the only exclusion visualised under the said provision is pendency of a prosecution in respect of tax arrears relatable to an assessment year as on the date of filing of declaration and not pendency of a prosecution in respect of an A.Y. on any issue. The debarment must be in respect of the tax arrears as defined u/s 2(1)(o) of the Vivad se Vishwas Act. Therefore, to hold that an assessee would not be eligible to file a declaration because there is a pending prosecution for the A.Y. in question on an issue unrelated to tax arrears would defeat the very purport and object of the Act. Such an interpretation which abridges the scope of settlement as contemplated under the Act cannot, therefore, be accepted.

Insofar as the prosecution against the petitioner is concerned, the same has been initiated u/s 276C(2) because of the delayed payment of the balance amount of the self-assessment tax. Such delayed payment cannot be construed to be a tax arrear within the meaning of section 2(1)(o). Therefore, such a prosecution cannot be said to be in respect of tax arrears. Since such a prosecution is pending which is relatable to the A.Y, 2015-16, it would be in complete defiance of logic to debar the petitioner from filing a declaration for settlement of tax arrears for the said A.Y. which is pending in appeal before the Tribunal.

Considering the above, the clarification given by way of answer to Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of the Vivad se Vishwas Act and, therefore, the same would stand to be set aside and quashed. The declaration of the petitioner dated 23rd September, 2020 was directed to be decided by the Pr. CIT in conformity with the provisions of the Vivad se Vishwas Act dehors the answer given to Question No. 73 which was set aside and quashed. The writ petition was allowed.

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Business expenditure – Section 37(1) of ITA, 1961 – Where assessee company, engaged in business of construction and sale of residential and commercial building complexes, sold a building which was under construction at time of sale and incurred expenditure for completing its construction during financial year subsequent to sale of building, such expenditure was liable for deduction u/s 37(1)

17. CIT vs. Oberon Edifices & Estates (P) Ltd.; [2019] 110 taxmann.com 305 (Ker.) Date of order: 5th September, 2019 A.Y.: 2009-10

Business expenditure – Section 37(1) of ITA, 1961 – Where assessee company, engaged in business of construction and sale of residential and commercial building complexes, sold a building which was under construction at time of sale and incurred expenditure for completing its construction during financial year subsequent to sale of building, such expenditure was liable for deduction u/s 37(1)

The assessee was a company engaged in the business of construction and sale of residential and commercial building complexes. During the A.Y. 2009-10 the assessee sold a portion of the mall building being constructed by it. The construction of the building was not complete at that time. The assessee incurred expenditure during the financial years 2009-10 and 2010-11 for completing the construction and claimed it as deduction. The AO disallowed the same.

The Commissioner (Appeals) held that in a situation where at the time of assessment the building remains incomplete, estimated future expenditure to be incurred was also considered along with the expenditure already incurred and was taken as cost relatable to the total saleable area, i.e., saleable area already built and the saleable area to be built in future, for arriving at the estimated cost of construction per square foot (sq. ft.). Therefore, the contentions of the assessee were accepted and it was held that the AO was not justified in not taking the value of building work-in-progress during the financial years 2009-10 and 2010-11 for working out the cost per sq. ft.

It was directed that the cost per sq. ft. would be taken as total expenditure incurred in construction, divided by the total saleable area, for the purpose of working out the profit from the sale of commercial area. The Tribunal upheld the decision of the Commissioner (Appeals).

The Revenue filed an appeal before the High Court and contended that the claim for deduction of future expenses made by the assessee could not be allowed. It contended that there was a distinction between the amount spent to pay off an actual liability and a liability that would be incurred in future which was only contingent. It was contended that the former was deductible but not the latter.

The Kerala High Court upheld the decision of the Tribunal and held as under:

‘(i) The dispute raised by the Revenue is only with regard to the deduction claimed by the assessee in respect of the expenses incurred in future, that is, after the sale of the building, during the subsequent financial years, and not in respect of the expenses incurred by it during the relevant financial year. Section 37 is a residuary section for allowability of business expenditure.

(ii) The expression “profits and gains” has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom –whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. It is the meaning of the word “profits” in relation to any trade or business. Whether there be such a thing as profit or gain can only be ascertained by setting against the receipts the expenditure or obligations to which they have given rise.

(iii) “Expenditure” is not necessarily confined to the money which has been actually paid out and it covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. It also covers a liability which the assessee has incurred in praesenti although it is payable in futuro.

(iv) In order to claim deduction of business expenditure, it is not necessary that the amount has been actually paid or expended during the relevant accounting year itself and it is sufficient that the liability for payment had incurred or accrued during the relevant accounting year and the actual payment of amount or discharge of liability may occur in future and what is crucial is the accrual of liability for payment or expenditure during the relevant accounting year. But a contingent liability that may arise in future cannot be treated as expenditure. Thus, the substantial question of law is answered in favour of the assessee and against the Revenue.’

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Section 44AD – Eligible assessee engaged in an eligible business – Partner of firm – Not carrying on business independently – Not applicable

6. Anandkumar vs. Asst. CIT Tax, Circle-2, Salem [Tax Case Appeal No. 388 of 2019; 23rd December, 2020; Madras High Court] [‘A’ Bench, Chennai in I.T.A. No. 573/CHNY/2018; A.Y.: 2012-13; ITAT order dated 30th January, 2019]

Section 44AD – Eligible assessee engaged in an eligible business – Partner of firm – Not carrying on business independently – Not applicable

The assessee is an individual, a partner in M/s Kumbakonam Jewellers, M/s ANS Gupta & Sons and M/s ANS Gupta Jewellers. The assessee filed his return of income for the A.Y. under consideration admitting a total income of Rs. 43,53,066. The assessment was finalised u/s 143(3) by an order dated 3rd March, 2015 disallowing the claim made by the assessee u/s 44AD. While filing the return, the assessee had applied the presumptive rate of tax at 8% u/s 44AD and returned Rs. 4,68,240 as income from the remuneration and interest received from the partnership firm. The A.O. did not agree with the assessee and opined that section 44AD is available only for an eligible assessee engaged in an eligible business and that the assessee was not carrying on business independently but was only a partner in the firm. Further, the assessee did not have any turnover and receipts of account of remuneration and interest from the firms cannot be construed as gross receipts mentioned in section 44AD.

On appeal, the CIT (Appeals), Salem dismissed the same by order dated 22nd December, 2017. The Tribunal also dismissed the assessee’s appeal.

The Hon. High Court observed that section 44AD is a special provision for computing profits and gains of business on presumptive basis which was introduced in the Act with effect from 1993. At the outset, it needs to be noted that section 44AD is a special provision and it carves out an exception in respect of certain businesses, and from clause (b)(ii) of the Explanation u/s 44AD which prescribes the limit of Rs. 2 crores as total turnover or gross receipts, it is a clear indication that this provision is meant for small businesses. Further, section 44AD(1) commences with a non-obstante clause and states that notwithstanding anything to the contrary contained in sections 28 to 43C in the case of an eligible assessee engaged in an eligible business, a presumptive rate of tax at 8% can be adopted. One more important aspect is that 8% is computed on the basis of the total turnover or gross receipts of the assessee. Therefore, four important aspects to be noted in section 44AD are that the assessee who claims such a benefit of the presumptive rate of tax should an eligible assessee as defined in clause (a) of the Explanation to section 44AD, he should be engaged in an eligible business as defined in clause (b) of section 44AD and 8% of the presumptive rate of tax is computed on the total turnover or gross receipts. Therefore, to avail the benefit of such provision, the assessee has to necessarily satisfy the A.O. that he comes within the framework of section 44AD.

The assessee’s case is that he has received the remuneration and interest from the partnership firm and according to him this remuneration and interest received are gross receipts, and they being less than Rs. 1 crore arising from an eligible business, he is entitled to claim the benefit of the presumptive rate of tax. Further, the assessee’s contention is that he is an eligible assessee and the remuneration and interest received from the partnership firm being gross receipts from an eligible business, the A.O. ought to have allowed the benefit u/s 44AD.

The Revenue submitted that the assessee is not doing any business, but the firm is carrying on business in which the assessee is a partner and therefore the condition that it should arise from an eligible business is not satisfied. In the Statement issued by the ICAI, it has been stated that the word ‘turnover’ for the purpose of the clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise, whereas in the case of the assessee neither has he performed any sales nor rendered any services but merely received remuneration and interest from the firm and the partnership firm has already debited the remuneration and interest in their profit and loss account, and therefore it cannot be taken as turnover or gross receipts.

The assessee should be able to satisfy the four main criteria mentioned in sub-section (1) of section 44AD r/w Explanations (a) and (b) in the said provision. Therefore, the assessee should establish that he is an eligible assessee engaged in an eligible business and such business should have a total turnover or a gross receipt. Admittedly, the assessee who is an individual in the instant case, is not carrying on any business. Therefore, the remuneration and interest received by the assessee from the partnership firm cannot be termed to be the turnover of the assessee (individual). Similarly, it will also not qualify for gross receipts.

Admittedly, the assessee has not done any sales nor rendered any services but has been receiving remuneration and interest from the partnership firms which amount has already been debited in the profit and loss account of the firms. Therefore, the Revenue was right in the contention that remuneration and interest cannot be treated as gross receipts.

The Court noted that the Tribunal observed that the intention of section 40(b) is that the partner should not be disentitled from claiming reasonable remuneration where he is a working partner and should not be denied reasonable interest on the capital invested by him in a firm and these changes if not made in the accounts of the firm, then the pro-rata profits of the firm would be higher resulting in higher tax for the firm. Therefore, the payments have to be construed indirectly as a type of distribution of profits of a firm or otherwise the firm would have been taxed. Therefore, the Tribunal observed that the Legislature in its wisdom chose such remuneration and interest to be a part of profits from business or profession and that can never translate into gross receipts or turnover of a business of being a partner in a firm. The Tribunal took note of the position prior to the substitution of section 44AD by the Finance (No. 2) Act, 2009 with effect from 1st April, 2011. Prior to the said substitution, this provision allowed the application of presumptive tax rate only for the business of civil construction or supply of labour for civil construction. By virtue of the substitution, the applicability of presumptive rate of tax was expanded to include any business which had turnover or gross receipts of less than Rs. 1 crore. The Tribunal noted the Explanatory notes to the provisions of the Finance (No. 2) Act, 2009 vide Circular No. 5/2010 dated 3rd June, 2010 wherein the CBDT had explained why the scope of the said provision was enlarged.

The Court observed that section 44ADA is a special provision for computing profits and gains of profession on presumptive basis and uses the expression ‘Total gross receipts’. As already seen in section 44AD, the words used are ‘total turnover’ or ‘gross receipts’ and it pre-supposes that it pertains to a sales turnover and no other meaning can be given to the said words and if so done, the purpose of introducing section 44AD would stand defeated. That apart, the position becomes much clearer if we take note of sub-section (2) of section 44AD which states that any deduction allowable under the provisions of sections 30 to 38 for the purpose of sub-section (1) be deemed to have been already given full effect to and no further deduction under those sections shall be allowed. Thus, conspicuously section 28(v) has not been included in sub-section (2) of section 44AD which deals with any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by a partner of a firm from such firm.

Thus, the Tribunal rightly rejected the plea raised by the assessee and confirmed the order passed by the CIT(A) and the A.O. The appeal filed by the assessee was accordingly dismissed.

It is my great hope someday, to see science and decision makers rediscover what the ancients have always known. Namely that our highest currency is respect

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Income from undisclosed sources – Bogus purchases – A.O. disallowing entire purchases – Estimation by Commissioner (Appeals) of profit element embedded in purchases at 17.5% affirmed by Tribunal based on facts – Justified

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Housing project – Special deduction – Sections 80-IB(10) and 80-IB(10)(c) – Eligibility for deduction – Condition precedent – Single approval from local authority for development and construction of residential units more than and less than 1,500 sq. ft. in area – Development permission which includes residential units more than 1,500 sq. ft. irrelevant for deciding eligibility for deduction – Assessee entitled to deduction

39. Principal CIT vs. Pratham Developers [2020] 429 ITR 114 (Guj.) Date of order: 2nd March, 2020 A.Y.: 2010-11

Housing project – Special deduction – Sections 80-IB(10) and 80-IB(10)(c) – Eligibility for deduction – Condition precedent – Single approval from local authority for development and construction of residential units more than and less than 1,500 sq. ft. in area – Development permission which includes residential units more than 1,500 sq. ft. irrelevant for deciding eligibility for deduction – Assessee entitled to deduction

The assessee developed housing projects. It claimed deduction u/s 80-IB(10) in respect of five projects. The A.O. found that one of the projects was undertaken
on land introduced by the partners. He held that the assessee was not the sole owner of the land on which the housing project was constructed and disallowed the deduction. In respect of another project PV, the A.O. held that out of the layout plan for 158 residential units, 55 residential units were of built-up areas of 2,199 sq. ft. which exceeded the prescribed built-up area of 1,500 sq. ft. as envisaged u/s 80-IB(10)(c). Accordingly, the A.O. disallowed the deduction claimed by the assessee u/s 80-IB(10).

The Commissioner (Appeals) found that all the residential units developed by the assessee under the scheme PV were below the prescribed built-up area of 1,500 sq. ft., that as regards the 55 residential units the development agreement entered into between the land owners and its associate concern showed that the scheme was developed by its associate concern and that they did not form part of the housing project developed by the assessee. The Commissioner (Appeals) held, on the facts that the assessee was a separate concern which fulfilled the conditions prescribed u/s 80-IB(10), that the project which consisted of the 55 residential units was a separate project developed by another assessee, and that the assessee was entitled to deduction u/s 80-IB(10) in respect of the 103 residential units in the project which fulfilled the criteria prescribed as to the size of the plot, and the built-up area of each residential unit being of less than 1,500 sq. ft. The Tribunal affirmed the order passed by the Commissioner (Appeals).

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

‘i) The condition laid down u/s 80-IB(10)(c) was fulfilled when the assessee claimed the deduction with respect to the residential units, which had built-up area less than 1,500 sq. ft. Under section 80-IB(10) there was no provision requiring the assessee to obtain a commencement certificate from the local authority for development and construction of the residential units having more than 1,500 sq. ft. area. Therefore, whether such development permission included the area for the residential units which were more than 1,500 sq. ft. would not be relevant for deciding the eligibility for deduction u/s 80-IB(10).

ii) In view of the concurrent findings of fact arrived at by the Commissioner (Appeals) and the Tribunal, there was no legal infirmity in their orders allowing the deduction u/s 80-IB(10).’

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Export – Exemption u/s 10A – Effect of section 10A and notification of CBDT issued u/s 10A – Assessee providing human resources services – Entitled to deduction u/s 10A

38. CIT vs. NTT Data Global Advisory Services Pvt. Ltd. [2020] 429 ITR 546 (Karn.) Date of order: 12th November, 2020 A.Y.: 2007-08

Export – Exemption u/s 10A – Effect of section 10A and notification of CBDT issued u/s 10A – Assessee providing human resources services – Entitled to deduction u/s 10A

The assessee is a private limited company and is in the business of software development and professional services. For the A.Y. 2007-08 the assessee claimed deduction u/s 10A. The A.O. recomputed the deduction u/s 10A by reducing the recruitment fee from the export turnover.

The Commissioner held that income from human resource services is not eligible for deduction u/s 10A and accepted the alternative plea to tax only net income from the business of manpower supply. The Tribunal held that transmitting the data of qualified information technology personnel is human resource services and information technology-enabled services. Accordingly, the appeal preferred by the assessee was allowed.

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

‘i) The expression “computer software” has been defined in Explanation 2 to section 10A and means even any customised electronic data or any product or service of a similar nature as may be notified by the Board. Thus, the Legislature has empowered the Board to notify the products or services of similar nature which would be covered under clause (b) and treated as “customised electronic data” and also, “any product or service of similar nature”. The Board has issued a notification dated 26th September, 2000 which admittedly contains human resources as well as information technology-enabled products or services.

ii) The role of the assessee company was to create an electronic database of qualified personnel and transmit data through electronic means to the client. The Commissioner (Appeals) had found that the assessee was in the business of supply of manpower from India to its foreign clients after their recruitment in India. Thus, irrespective of whether or not the assessee provided training to its employees or to the employees who were recruited by its clients, since the assessee was engaged in providing human resource services, its case was squarely covered by notification dated 26th September, 2000. Therefore, the assessee was entitled to the benefit of deduction u/s 10A.’

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Export – Exemption u/s 10A – (i) Conditions precedent for claiming exemption u/s 10A – Separate accounts need not be maintained – Undertaking starting manufacture on or after 1st April, 1995 must have 75% of sales attributed to export; (ii) Sub-contractors giving software support to assessee on basis of foreign inward remittance – Claim by sub-contractors would not affect assessee’s claim u/s 10A

37. CIT (LTU) vs. V. IBM Global Services India Pvt. Ltd. [2020] 429 ITR 386 (Karn.) Date of order: 3rd November, 2020 A.Y.: 2000-01

Export – Exemption u/s 10A – (i) Conditions precedent for claiming exemption u/s 10A – Separate accounts need not be maintained – Undertaking starting manufacture on or after 1st April, 1995 must have 75% of sales attributed to export; (ii) Sub-contractors giving software support to assessee on basis of foreign inward remittance – Claim by sub-contractors would not affect assessee’s claim u/s 10A

The assessee was in the business of export of software solutions and maintenance services. For the A.Y. 2000-01, the assessee claimed exemption u/s 10A. The A.O., inter alia, held that the assessee had a software technology park unit as well as other units and all overhead expenses had been charged in relation to the other unit and no expenditure was claimed in respect of the software technology park unit for which exemption u/s 10A had been claimed. He also held that the assessee had not fulfilled the stipulations laid down in the Software Technology Parks of India Scheme or the conditions laid down by the Reserve Bank of India regarding maintenance of separate accounts and other conditions and, therefore, the assessee was not entitled to exemption u/s 10A. He further held that the audit report did not exclude payment made to sub-contractors or other expenses incurred abroad. He held that the turnover brought into the country was 56.056% which was below 75% as stipulated u/s 10A. Accordingly, he disallowed the exemption u/s 10A.

The Commissioner (Appeals) allowed the appeal partly. The Tribunal dismissed the appeal preferred by the Revenue and allowed the appeal preferred by the assessee in part.

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

‘i) Section 10A is a special provision in respect of newly-established undertakings in free trade zones. The exemption is dependent on fulfilment of the conditions mentioned in sub-section (2). Sub-section (2) does not contain any requirement with regard to maintenance of separate accounts. Wherever the Legislature intended to incorporate the requirement of maintenance of either separate accounts or separate books of accounts, it has expressly said so. The requirement of maintenance of separate accounts has been provided in the STPI registration scheme and no consequences for non-compliance therewith have been prescribed. Therefore, the requirement is directory.

ii) From a perusal of section 10A(2)(ia) it is evident that it applies to an undertaking which begins to manufacture or produce any article or thing on or after 1st April, 1995 and whose exports of such articles or things are not less than 75% of the total sales thereof during the previous year. Thus, the total export has to be not less than 75% of the total sales.

iii) The A.O. in his remand report to the Commissioner (Appeals) had stated that the assessee had been able to bifurcate the software technology park receipts, section 80HHE receipts and domestic receipts. The direct expenses relating to domestic receipts and export receipts had also been segregated and direct expenses of export turnover were apportioned on the basis of the percentage of turnover of the software technology park unit and section 80HHE receipts.

iv) The Commissioner (Appeals) had concluded that since the assessee had identified the turnover relating to the software technology park units and there was a reasonable basis for quantifying direct and indirect expenses pertaining to the software technology park units, the income pertaining to the software technology park units and therefore, exemption u/s 10A could be worked out. The Tribunal had held that the assessee had units spread over various parts of the country and even abroad, and hence the only plausible method of reasonably allocating the overhead expenses was by relating them to the turnover. The Tribunal had upheld the order to the extent of Rs. 68,72,88,748 holding this to be a reasonable figure. These concurrent findings of fact were based on meticulous appreciation of evidence on record. The Tribunal had rightly held that the allocation of the overhead expenses had to be made on the basis of the turnover.

v) The Commissioner (Appeals) had held that the sub-contractors had given software support activity to the assessee and not to the customers of the assessee. The employees of the sub-contractors operated from the software technology park unit itself and the sub-contractors had claimed exemption u/s 10A on the basis of the foreign inward remittance certificate, which had no bearing with regard to the assessee’s claim to exemption u/s 10A. The question of double deduction did not arise.

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Disallowance of expenditure relating to exempt income – Section 14A r/w/r 8D of ITR, 1962 – Condition precedent for disallowance – Proximate relationship between expenditure and exempt income – Onus to establish such proximity on Department – A.O. must give a clear finding with reference to the assessee’s accounts how expenditure related to exempt income

36. CIT vs. Sociedade De Fomento Industrial Pvt. Ltd. (No. 2) [2020] 429 ITR 358 (Bom.) Date of order: 6th November, 2020

Disallowance of expenditure relating to exempt income – Section 14A r/w/r 8D of ITR, 1962 – Condition precedent for disallowance – Proximate relationship between expenditure and exempt income – Onus to establish such proximity on Department – A.O. must give a clear finding with reference to the assessee’s accounts how expenditure related to exempt income

The assessee was a miner and exporter of mineral ores. For the A.Y. 2009-10 the A.O. computed disallowance u/s 14A read with rule 8D at 0.5% on the average investment. He rejected the assessee’s claim that it did not incur any expenditure to earn the dividend income, that it invested the surplus funds through bankers and other financial institutions and all the forms were filled up by them, and that it only issued cheques. He was of the view that without devoting time and without analysing the nature of the investment, the assessee could not have invested in the mutual funds.

The Commissioner (Appeals) partly allowed the appeal. The Tribunal allowed the assessee’s appeal and deleted the disallowances.

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

‘i) Section 14A inserted by the Finance Act, 2001 with retrospective effect from 1st April, 1962 aims to disallow expenditure incurred in relation to income which did not form part of the total income and has to be read with Rule 8D of the Income-tax Rules, 1962 which provides the method of calculation of the disallowance. Section 14A statutorily recognises the principle that tax is leviable only on the net income. The profits and gains of business or profession are taxed after deducting expenditure from income. In that regard, there is no need for the assessee to establish a one-to-one correlation between income and expenditure. Rule 8D provides the methods for determining the amount of expenditure in relation to income not includible in the total income and comes into play once an expenditure falls within the mischief of section 14A.

ii) The onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. The application of section 14A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. Though the expenditure u/s 14A includes both direct and indirect expenditure, that expenditure must have a proximate relationship with the exempted income. Before rejecting the disallowance computed by the assessee, the A.O. must give a clear finding with reference to the assessee’s accounts as to how the other expenditure claimed by the assessee out of the non-exempt income is related to the exempt income. There must be a proximate relationship between the expenditure and the exempt income and only then would a disallowance have to be effected.

iii) The Tribunal was right in deleting the additions made by the A.O. u/s 14A read with rule 8D. The Tribunal had found that the A.O. had only discussed the provisions of section 14A(1) but had not justified how the expenditure incurred by the assessee during the relevant year related to the income not forming part of its total income and had straightaway applied Rule 8D. There must be a proximate relationship between the expenditure and the exempt income and only then would a disallowance have to be effected. There was no valid reason to interfere with the Tribunal’s well-reasoned order.’

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