Direct Taxes Archives

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FACTS

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

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

Aggrieved, Revenue preferred an appeal to the Tribunal.

HELD

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

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

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

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

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

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

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

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

FACTS

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

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

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

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

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

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

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

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

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

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

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

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

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

FACTS

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

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

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

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

Aggrieved, Revenue preferred an appeal to the Tribunal.

HELD

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

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

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

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

FACTS

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

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

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

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

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

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New Provisions for Filing an Updated Return of Income

BACKGROUND

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

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

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

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

FILING RETURN OF INCOME

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

FILING AN UPDATED RETURN OF INCOME

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ADDITIONAL TAX PAYABLE

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

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

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

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

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

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

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

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

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

TO SUM UP

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

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

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

shailesh.kwebmaker

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

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

The following records are also required to be maintained:

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Such voluntary contribution was applied during any preceding previous year;

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

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

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

record of loans and borrowings,-

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

(II)   application out of such loan or
borrowing containing details of amount of application, name and address
of the person to whom any credit or payment is made and the object for
which such application is made;

(III)   application out of such
loan or borrowing, received during any previous year preceding the
previous year, containing details of amount of application, name and
address of the person to whom any credit or payment is made;

(IV)
repayment of such loan or borrowing (which was applied during any
preceding previous year and not claimed as application) during the
previous year;

Analysis

This sub-clause refers to
loans and borrowings by the assessee. Generally, it requires details
pursuant to Explanation 4(ii) to section 11(1).

The sub-clause requires details of loans and borrowings but not advances received.

Information regarding the amount and date of loan or borrowing [Item (I)]

A confirmation from the lender is not required under this Item. However, the assessee should keep it on record.

Application out of such loan or borrowing [Item (II)]

While
the details in respect of any credit or payment out of loans/borrowings
are required under this Item, in view of Explanation to section 11, the
amount credited to a person’s account will not be allowed as an
application of income unless it is paid.

Application out of such loan or borrowing, received during any previous year preceding the previous year [Item (III)]

This Item does not require details of the object for which such an application is made.

Repayment
of such loan or borrowing (which was applied during any preceding
previous year and not claimed as application) during the previous year [Item (IV)]

This Item requires maintenance of details of repayment of loans/borrowings, which satisfy the following conditions:

The loan/borrowing was effected in the year preceding the previous year;

Such loan/borrowing is repaid during the previous year;

The loan/borrowing was applied during any preceding previous year;

The loan/borrowing was not claimed as an application during any preceding previous year.

To
illustrate, suppose Rs. 1 crore was borrowed in the F.Y. 2021-22 and
Rs. 60 lakhs was applied during the said year but not claimed as
application. In this situation, for F.Y. 2022-23, the rule requires
details of Rs. 60 lakhs and not the other Rs. 40 lakhs not applied
during the previous year.

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

record of properties held by the assessee, with respect to the following, namely, –

(I) immovable properties containing details of,

(i) nature, address of the properties, cost of acquisition of the asset, registration documents of the asset;

(ii) transfer of such properties, the net consideration utilized in acquiring the new capital asset;

(II) movable properties, including details of the nature and cost of acquisition of the asset;

Analysis

This
clause requires details of all properties of the assessee. Some details
are also required by Item II in Rule 17AA(1)(d)(ii). (Also refer Part I
of this article)

Immovable Properties [item (I)]

The term “immovable property” is defined in the explanation to section 11(5) as follows:

“Immovable
property” does not include any machinery or plant (other than machinery
or plant installed in a building for the convenient occupation of the
building) even though attached to, or permanently fastened to, anything
attached to the earth;

The definition is negative, hence some
elements of the following definition of “immovable property” in section
3(26) of the General Clauses Act, 1897 may become applicable:

“immovable
property” shall include land, benefits to arise out of the land, and
things attached to the earth, or permanently fastened to anything
attached to the earth;

The Item does not differentiate
between properties acquired as investment and properties acquired for
the purpose of activity of the assessee. Thus, land and building on
which a school is situated is required to be recorded.

Courts have held that tenancy
rights are immovable property of the tenant. [Jagannath Govind Shetty
vs. Javantilal Purshottamdas Patel, AIR 1980 Guj 41; Lal & Co. And
Anr. Vs. A.R. Chadha And Ors., ILR 1970 Delhi 202; Kanhaiya Lal v. Satya
Narain Pandey, AIR 1965 All 496]. Thus, tenancy rights are also immovable properties whose details are required to be recorded.

The
rule does not require details of sale consideration, expenditure in
relation to transfer, etc. However, it is advisable that such details
are also recorded.

Movable Properties [item (II)]

The term “moveable properties” is defined in section 2(36) of the General Clauses Act, 1897 as “property of every description, except immovable property.”

Thus,
all properties including plant and machinery, furniture and fixtures,
investments, cash and bank balance, book debt, loans and advances, and
inventory are also movable properties!

The rule does not
distinguish between movable property as investment or as capital asset
or otherwise in connection with the activities. Hence, for an assessee
running an institution such as a hospital, every piece of equipment,
furniture etc. is a movable property and its details are required!!

Details of all assets, whether existing on 31st March or not, are required to be recorded!!

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

record of specified persons, as referred to in sub-section
(3) of section 13 of the Act,-

(I) containing details of their name, address, permanent account number and Aadhaar number (if available);

(II)
transactions undertaken by the fund or institution or trust or any
university or other educational institution or any hospital or other
medical institution with specified persons as referred to in sub-section
(3) of section 13 of the Act containing details of date and amount of
such transaction, nature of the transaction and documents to the effect
that such transaction is, directly or indirectly, not for the benefit of
such specified person;

Analysis

This clause requires
details of “interested parties” u/s 13(3) and the transactions with
them. Its details are required pursuant to section 12(2), 13(1)(c),
13(2) and 13(4) of the Act.

Interested parties [Item (I)]

The record will have to be updated, if the interested parties change during the year, e.g.

person makes a voluntary contribution of more than Rs. 50,000 during the year and becomes an interested party u/s 13(3)(b).

there is a change in the trustees.

A
substantial contributor is an interested party and includes any person
who has contributed Rs. 50,000 or above in aggregate to an assessee. To
illustrate, if a person has donated Rs. 5,000 per year from 1980 to
1990, he became a ‘substantial contributor’ from financial year 1990-91
onwards and his details are required to be maintained!!

Transactions [Item (II)]

Section
13(2) generally requires comparison with arm’s length price to
determine whether the benefit is granted to an interested party or not.
However, this sub-clause does not specifically require co-relation with
arm’s length price.

The assessee will need to give reference to
documents showing that no benefit is given to the interested party. For
this purpose, different transactions will require other documents. To
illustrate:

in case of remuneration to an interested party,
evidence regarding his educational qualifications or experience in the
relevant field or amount paid by the assessee to a non-interested person
for similar work, etc., may be required.

In case of a sale
transaction, a document showing the price at which it has been sold to
other parties or the evidence regarding the market price of the product,
etc., may be required.

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

Any other documents containing any other relevant information. [Rule 17AA(1)(d)(x)]

Analysis

This
is a very subjective requirement: it means that the assessee has to
determine whether any other document contains any “relevant information”
and, if so, maintain it. Now, the maintenance of documents is
mandatory. Hence, if the AO believes that any other document not
maintained by the assessee has “relevant information”, then he can hold that the assessee has not maintained the prescribed documents !! This is too wide a discretion given to AOs.

Rule 17AA(2)[Text]

The
books of accounts and other documents specified in sub-rule (1) may be
kept in written form, electronic form, digital form, or as printouts of
data stored in electronic form, digital form, or any other form of
electromagnetic data storage device.

Analysis

This
requirement reproduces the definition of “books of accounts” in section
2(12A). Under this provision, documents must also be maintained in
written or electronic form.

It appears that a combination of print and handwritten books of account/document is also permitted.

Rule 17AA(3)[Text]

The
books of account and other documents specified in sub-rule (1) shall be
kept and maintained by the fund or institution or trust or any
university or other educational institution or any hospital or other
medical institution at its registered office:

Provided
that all or any of the books of account and other documents as referred
to in sub-rule (1) may be kept at such other place in India as the
management may decide by way of a resolution and where such a resolution
is passed, the fund or institution or trust or any university or other
educational institution or any hospital or other medical institution
shall, within seven days thereof, intimate the jurisdictional Assessing
Officer in writing giving the full address of that other place and such
intimation shall be duly signed and verified by the person who is
authorized to verify the return of income u/s 140 of the Act, as
applicable to the assessee.

Analysis

The books of
accounts and documents have to be maintained at the registered office.
Under the Companies Act 2013 (“CA 2013”), the books of account and other
records have to be kept at the registered office [s.128(1)]. Under the
Central Goods and Services Tax Act, 2017 (“the CGST Act”), the accounts
and records have to be kept at the principal office mentioned in the
certificate of
registration. [s.35(1)].

A company incorporated
under CA 2013 must have a registered office [s.12(1)]. In case of a
trust or a society registered under Societies Registration Act, 1860
there is no such statutory requirement. Since the Rules and the Act do
not define a registered office, such entities can designate any office
as a registered office. However, it should be the same as the office
specified in Form 10A/10B (application for registration) and in ITR-7.

Place where the books of accounts on electronic platform are maintained

The
Guidance Note on Tax Audit u/s 44AB of the Act, A.Y.2022-23 issued by
the Institute of Chartered Accountants of India, states as follows:

In
case, where books of account are maintained and generated through the
computer system, the auditor should obtain from the assessee the details
of the address of the place where the server is located or the
principal place of the business/head office or registered office by
whatever name called and mention the same accordingly in clause 11(b).
Where the books of account are stored on the cloud or online, IP address
(unique) of the same may be reported. (page 72).

Exception

The
books of accounts and documents may be maintained at a place other than
the registered office if the following conditions are satisfied:

The other place is in India;

The management decides by way of a resolution as to where the books/documents will be kept;

An intimation is sent in writing to the jurisdictional AO giving the full address of that other place;

the intimation is duly signed and verified by the person authorized to verify the return of income u/s 140;

the assessee intimates the AO within 7 days of the resolution.

A similar provision is found in section 128 of the CA 2013.

The
books of accounts may be kept at some other “place” which should be
construed to mean places, applying the principle in section 13 of the
General Clauses Act, 1897 that singular includes plural.

The
proviso provides that “any or all” the books of account may be kept at
other places. Hence, the books/documents may be kept partially at one
place and partially at some other place or places.

Intimate

The assessee shall “intimate” the AO. Dictionaries explain the term as follows:

(i) To make known; formally to notify

[Legal Glossary 2015 by Govt of India, page 225]

(ii) to make known especially publicly or formally:

[https://www.merriam-webster.com]

Thus,
“intimate” means “make known”; in other words, the AO should know that
the resolution has been passed, and such knowledge should be conveyed to
him within seven days of the passing of the resolution. The assessee
may not be able to argue that it has posted the intimation within seven
days of passing of the resolution and hence there is no default, even if
the intimation has not reached the AO.

No particular format is provided for the intimation.

A
similar requirement to keep books of account/other documents at the
registered office is not found in the Act for other profit
organizations.

Suppose the books/documents are temporarily
shifted elsewhere, say, for audit or for compilation of details to be
furnished to the AO, or to be presented to the GST authorities, etc. It
appears that such temporary movement does not mean that the books of
accounts/documents have not been kept and maintained at the registered
office or the designated place.

Rule 17AA(4)[Text]

“The
books of account and other documents specified in sub-rule (1) shall be
kept and maintained for a period of ten years from the end of the
relevant assessment year:

Provided that where the assessment in
relation to any assessment year has been reopened under section 147 of
the Act within the period specified in section 149 of the Act, the books
of account and other documents which were kept and maintained at the
time of reopening of the assessment shall continue to be so kept and
maintained till the assessment so reopened has become final.”

Analysis

The
books of account/documents must be kept for 10 years from the end of
the relevant assessment year (11 years from the end of the relevant
financial year). The corresponding requirement under the CA 2013 and
CGST Act 2017 is 8 financial years¹ and 72 months² from the due date of furnishing the annual return pertaining to the account records.

The period of 10 years corresponds with the maximum reassessment period u/s 149.

The
expression “final” would, perhaps, mean when neither the assessee or
the tax department challenges the reassessment any further and the AO
has passed the final order giving effect to the order by the Appellate
Authority.

The books of accounts/documents kept and maintained at
the time of reopening of the assessment shall continue to be kept and
maintained. On a literal interpretation, all books of accounts/documents
have to be kept and maintained whether or not they have bearing on the
matter under reassessment.

The proviso does not have
retrospective applicability; hence, it should apply only to books of
accounts/ documents prepared after the Rule has come into force. To
illustrate, suppose the assessment for F.Y. 2021-22 is reopened in F.Y.
2025-26 and is not final as on 31st March, 2032. In this case, the
proviso does not apply since the Rule itself is not applicable and
hence, the books of accounts/document need not be kept and maintained
till the reassessment is final. On the other hand, the books for the
year 2022-23 are required to be maintained up to end of 2032-33. Suppose
the assessment for the A.Y. 2023-24 is reopened in F.Y. 2027-28, and it
is not final till 31st March, 2033. Then the books of
accounts/documents for the said year must be maintained till the
reassessment becomes final.

1 Section 128(5)
2 Section 36

Consequences if the books of accounts/documents are not maintained for 10 years

Section
12A(1)(b) does not state that the books of accounts/documents shall be
maintained for such period “as may be prescribed”; in the absence of
these words, it is not clear whether the expression “in such form and
manner” used in the said provision and as explained below covers the
period for which the books/documents ought to be maintained.

The words “in manner and form” were construed by Lord Campbell, C. J. in Acraman vs. Herniman. (1881) 16 QB 998: 117 ER 1164
as referring only to “the mode in which the thing is to be done” and
not the time for doing it. This construction put by Lord Campbell on the
words “in manner and form” was accepted in Abraham vs. Sales Tax Officer, AIR 1964 Ker 131 (FR) and Murli Dhar vs. Sales Tax Officer. AIR 1965 All 483. [K. M. Chopra & Co. vs. ACS, AIR 1967 MP 124, (1967) 19 STC 46 (MP)]

…. in Stroud’s Dictionary it is stated that the words ‘manner and
form’ refer only “to the mode in which the thing is to be done [Dr. Sri Jachani Rashtreeya Seva Peetha vs. State of Karnataka, AIR 2000 Kar. 91]

“Manner” means “method or mode or style” (see Webster’s International Dictionary) [Rama Shankar vs. Official Liquidator, Jwala Bank Ltd. [(1956) 26 Comp. Cas. 126 (All.)]

If
books of accounts/documents are not maintained after, say, 5 years,
there is no provision for any taxation in the sixth year; at the same
time, a reassessment can be made only in accordance with the conditions
in section 149. Hence, if a reassessment cannot be initiated, then it
could be argued that the non-maintenance of books of accounts/documents
for a period of 10 years cannot result in any adverse impact on the
income of the relevant year, notwithstanding the default under Rule
17AA(4).

It is now well settled that the legislature does not compel performance of impossibility (Life Insurance Corporation of India vs. CIT, (1996) 219 ITR 410 (SC)).
Hence, if the books of accounts and records are destroyed or mutilated
on account of causes beyond the control of the assessee, say a fire,
floods, etc., then it cannot be said that the assessee has not kept the
prescribed books in the prescribed form and manner.

CONCLUSION

The
tightening of reporting requirements of charitable institutions by the
tax department is aimed at higher transparency and avoiding
mis-utilization. However, Rule 17AA is very wide with overlapping
requirements. This will adversely impact small charitable institutions.
Further, the requirements are open to multiple interpretations, and any
difference of opinion between the assessee and the AO may result in
denial of exemption, which is too harsh a punishment, more so because
there is no express provision for giving the assessee an opportunity to
rectify the defect. Considering these, the CBDT may reconsider and
revise the rules.

[Author acknowledges assistance from Adv.
Aditya Bhatt, CA Kausar Sheikh, CA Chirag Wadhwa and CA Arati Pai in
writing this Article]

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Section 148A – Reopening of assessment – Notice u/s 148A(b) – Firm Dissolved – duly intimated the department – Transaction duly recorded in proprietorship concern – Matter remanded for fresh consideration

Sanjay Gupta vs. Union Of India & Ors.
W.P.(C) 13712/2022
Date of order: 22nd September, 2022
Delhi High Court
A.Ys.: 2015-16, 2017-18 & 2018-19

Section 148A – Reopening of assessment – Notice u/s 148A(b) – Firm Dissolved – duly intimated the department – Transaction duly recorded in proprietorship concern – Matter remanded for fresh consideration

The Present writ petition has been filed challenging the notice issued u/s 148, 148A(b) and orders passed u/s148A(d) of the Act.

The Petitioner stated that the impugned notices are without jurisdiction as the same have been issued in the name of a non-existent partnership firm – Railton Electronics. He states that the Petitioner, during the reassessment proceedings, duly informed the department vide replies dated 23rd March, 2022 and 19th January, 2022 that the partnership firm being M/s Railton Electronics having PAN Number AANFR1676E was dissolved as per the Deed of Dissolution dated 1st April, 2013 and thereafter, the firm was taken over by the Petitioner as a sole proprietor.

The Petitioner stated that as per the letter obtained from the erstwhile partnership firm’s bank, the partnership firm’s bank account was closed on 19th July, 2013 itself. He contends that the Railton Electronics is now maintaining a proprietorship account opened on 25th July, 2013. In support of his contention, he relied upon the certificates issued by the Petitioner’s banker.

The Petitioner emphasises that the alleged transactions mentioned in the notices issued u/s 148A(b) of the Act are duly accounted for in the return of the sole proprietorship. He pointed out that there has been a scrutiny assessment in the account of the sole proprietorship firm in the name of the sole proprietor, Mr. Sanjay Gupta.

The Hon. Court, upon consideration of the above factual position, sets aside the orders dated 9th April, 2022 passed u/s 148A(d) of the Act for A.Ys. 2018-19 and 2015-16, the notices issued u/s 148 and directs the Petitioner to file supplementary replies before the Assessing Officer (AO) clearly stating that the transactions referred to in the notices issued u/s 148A(b) of the Act have been duly accounted for in the account of the sole proprietorship firm, and have been offered to tax. Along with the replies, the Petitioner shall enclose all the relevant documents including certificates issued by Canara Bank, income tax returns, bank statements as well as the assessment orders passed in the name of a sole proprietorship for the said assessment years, within two weeks. The AO was directed to pass fresh orders u/s 148A(d) of the Act within a period of four weeks thereafter.

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S. 260A – Additional grounds of appeal raised before High court – Revision order u/s 263 passed in case of dead person – Matter remanded

Bimal vs. Pala (Legal heir of Late Smt. Ranjana Pala) vs. ACIT – 26(2)
ITA No. 517 of 2018
Date of order: 16th September, 2022
Bombay High Court
[Arising from Mumbai ITAT order dated 17th March, 2017 – Bench “B” ITA No. 2735/Mum/2016 – A.Y.: 1996-97]

S. 260A – Additional grounds of appeal raised before High court – Revision order u/s 263 passed in case of dead person – Matter remanded

The appeal was filed u/s 260A of the Income Tax Act, 1961. The Appellant stated that one of the grounds which ought to have been taken, but was not taken before the Tribunal, was regarding the death of Ms. Ranjana Pala, on 22nd January, 2016, which was material to the case inasmuch as the order dated 16th March, 2016, came to be passed by the Principal Commissioner of Income Tax, after the death of the said assessee. It was stated that even in the present memo of appeal, this question has not been raised and, therefore, learned Counsel for the Appellant has tendered a schedule of amendment seeking to incorporate, the following:

“28AA Whether the order dated 16-03-2016 passed by the Respondent No. 2 under Section 263 of the Act in the case of “Ms. Ranjana Pala” who had passed away on 22-01-2016 was against non-existent person and hence illegal and bad in law?”

The aforesaid prayer made by the learned Counsel for the Appellant was allowed by the court. The Hon. Court observed that the assessee, Ms. Ranjana Pala, had expired on 22nd January, 2016, at Singapore. A copy of the death certifcate issued by the authorities at Singapore which was on record, confirms this fact. According to the certificate, the deceased assessee passed away on 22nd January, 2016, in the Mount Alizabeth Hospital, Singapore. It is stated that the factum of the death of the deceased assessee was brought to the notice of the Principal Commissioner of Income Tax, vide communication dated 7th March, 2016, which was not only acknowledged by hand receipt but also got reflected in the order dated 16th March, 2016 passed u/s 263 of the Act by the Principal Commissioner of Income Tax. It is thus stated that having the full knowledge about the factum of the death of the deceased assessee, the authority had proceeded to pass an order against a dead person, which was thus a nullity in law.

The Hon. Court observed that since the issue which is now sought to be raised before this Court in the appeal, was not an issue which was raised or agitated before the Tribunal, but nevertheless has a direct bearing on the controversy, therefore the Hon. Court deemed it necessary to remand the matter to the Tribunal for a fresh consideration on the above limited issue, keeping all other issues, which have been raised in the present memo of appeal, open.

Accordingly the appeal was disposed.

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S. 68 – Identity, creditworthiness and genuineness of the transactions of purchases – Concurrent finding of the fact recorded by both the authorities- sales and purchase transactions, transfer pricing report at arm’s length and book results declared accepted – No substantial question of law arises for consideration

Pr. Commissioner of Income Tax vs. M/s Attire Designers Pvt. Ltd.
ITA 344 of 2022
Date of order: 20th September, 2022
A.Y.: 2014-15
Delhi High Court
[Arising from Delhi ITAT order dated
29th November, 2021 in ITA 5224/Del./2017]

S. 68 – Identity, creditworthiness and genuineness of the transactions of purchases – Concurrent finding of the fact recorded by both the authorities- sales and purchase transactions, transfer pricing report at arm’s length and book results declared accepted – No substantial question of law arises for consideration

The Assessing Officer (AO) treated the credit balance of the associate parties relating to purchase made by the assessee as non-genuine.

Before the CIT(A) the assessee furnished the details of the payments of outstanding balance as on 31st March, 2014 along with confirmation for fair and proper disposal of the appeal. The assessee submitted details of parties as well as details of the transaction made with said parties during the Financial Year under consideration mentioned in transfer pricing report in Form 3CEB as well as transfer pricing study, which was submitted by assessee before the AO.

The CIT(A) noted that the said transactions of purchases were at arm’s length price and no adverse finding was brought on record by the AO who never doubted the purchases made by the assessee during the year which includes purchases made from sundry creditors, sale made by assessee during year and the book result declared by the assessee for the financial year under consideration.

During the appellate proceedings, the CIT(A) also observed that the sundry creditors have purchased goods during the year under consideration from different parties, and out of the said purchases, they have sold goods to the assessee company and as per general business practice, goods were purchased on credit basis and therefore, the allegation of AO that the financial statement of the sundry creditors do not support their creditworthiness, is not based on proper appreciation of the facts. The CIT(A) also perused the details of sale, purchase, trade payables and trade receivables for the financial year under consideration of the said sundry creditors and came to the conclusion that there are corresponding purchases against sales declared by them for the financial year under consideration, and there are also trade payables outstanding as on 31st March, 2014, which shows that the said companies also have trade payable against purchases of goods, therefore, the allegation made by the AO that such companies do not have creditworthiness to enter into large scale transaction of sale and purchase is factually incorrect. The CIT(A) held that once the AO has accepted sales and purchase transactions, transfer pricing report at arm’s length and book results declared by the Appellant, he is not justified in treating the credit balance of associate parties relating to sales to the assessee as non-genuine without bringing any adverse material on record. The identity, creditworthiness and genuineness of the transactions of purchases made by the assessee from sundry creditors is proved .

The ITAT upheld the findings of the CIT(A) and dismissed the appeal of the Revenue relying on the judgment of the Delhi High Court in the case of Commissioner of Income Tax vs. Ritu Anurag Aggarwal [2010] 2 taxmann.com 134 (Delhi).

The Hon. High Court observed that both the Appellate Authorities below have recorded concurrent findings of the fact on the issues.

The Hon. High Court relied on the Supreme Court decisions in the case of Ram Kumar Aggarwal & Anr. vs. Thawar Das (through LRs), (1999) 7 SCC 303, which reiterated that u/s 100 of the Code of Civil Procedure, the jurisdiction of the High Court to interfere with the orders passed by the Courts below is confined to hearing on substantial question of law and interference with finding of the fact is not warranted if it involves re-appreciation of evidence. Further, the Supreme Court in State of Haryana & Ors. vs. Khalsa Motor Lid & Ors., (1990) 4 SCC 659 held that the High Court was not justified in law in reversing, in second appeal, the concurrent findings of the fact recorded by both the Courts below. The Supreme Court in Hero Vinoth (Minor) vs. Seshammal, (2006) 5 SCC 545 also held that “in a case where from a given set of circumstances two inferences of fact are possible, the one drawn by the lower appellate court will not be interfered by the High Court in second appeal. Adopting any other approach is not permissible.”

It has also held that there is a difference between a ‘question of law’ and a ‘substantial question of law’. Consequently, the Hon. Court held that no substantial question of law arises for consideration in the present appeal and accordingly the same was dismissed.

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Reassessment — (A) Notice after four years — Condition precedent — Notice based on information during survey of third party that assessee beneficiary of contract with surveyed party — Reasons recorded for reopening assessment not mentioning information withheld by assessee or any new material found by assessing authority — Assessee disclosing all material facts fully and truly — Reasons cannot be improved upon or supplemented — Notice and order rejecting objections of assessee set aside

(B) Principles of natural justice — Failure to provide assessee copies of judgments relied upon by AO — Violation of principles of natural justice — Notice and order rejecting objections of assessee set aside

47 Patel Engineering Ltd. vs. Dy. CIT
[2022] 446 ITR 728 (Bom.)
A.Y.: 2012-13
Date of order: 25th January, 2022
Ss. 133A, 147 and 148 of ITA, 1961

Reassessment — (A) Notice after four years — Condition precedent — Notice based on information during survey of third party that assessee beneficiary of contract with surveyed party — Reasons recorded for reopening assessment not mentioning information withheld by assessee or any new material found by assessing authority — Assessee disclosing all material facts fully and truly — Reasons cannot be improved upon or supplemented — Notice and order rejecting objections of assessee set aside

(B) Principles of natural justice — Failure to provide assessee copies of judgments relied upon by AO — Violation of principles of natural justice — Notice and order rejecting objections of assessee set aside

For the A.Y. 2012-13, in response to the notice u/s 142(1) r.w.s. 129 of the Income-tax Act, 1961, the assessee furnished the details required by the Assessing Officer which included the receipt of Rs. 14,92,47,452 from SECPL and submitted that the amount was declared as income. Thereafter, the assessment order u/s 143(3) was passed. After four years the Assessing Officer issued a notice against the assessee u/s 148 to reopen the assessment u/s 147 on the ground that according to a survey conducted u/s 133A on SECPL, the assessee had received a contract for an amount of Rs. 24,22,57,252. The objections raised by the assessee were rejected.

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

“i) The reopening of assessment having been proposed after expiry of four years from the relevant A.Y. 2012-13 and since the assessment was completed u/s. 143(3) the proviso to section 147 applied. The onus was on the Department to disclose what was the material fact that the assessee had failed to disclose truly and fully. The reasons recorded for reopening did not disclose anywhere that there was failure on the part of the assessee to disclose fully and truly all material facts. The Assessing Officer had not even stated whether the assessee had executed the contract and received any income.

ii) The survey on SECPL had been conducted before the assessment order was passed against the assessee for the A.Y. 2012-13. Therefore, the Assessing Officer should have been aware of any such information but still chose not to raise it during the assessment proceedings and had not verified the facts with the data available with him and simply on the basis of information received from the Deputy Director had issued the notice to the assessee. Therefore the condition precedent for reopening the assessment u/s. 147 that mandated that it was exclusively the satisfaction of the assessing authority based on some direct, correct and relevant material had not been satisfied. To the reasons recorded, the Department has not annexed the information received by them. To the extent of not furnishing to the assessee the information received from the Deputy Director with the reasons recorded the action of the Department was in breach of the orders of the court in Sabh Infrastructure Ltd. vs. Asst. CIT [2017] 398 ITR 198 (Delhi).

iii) The reasons recorded for reopening could not be improved upon or supplemented. In the order disposing of the assessee’s objections, the Assessing Officer had relied upon various judgments of which copies were not provided nor were they brought to the notice of the assessee before the order rejecting the objections was passed so that the assessee could have suitably dealt with those judgments or orders. Therefore, there was breach of principles of natural justice by the Assessing Officer, who as a quasi-judicial authority had an obligation to adhere strictly to the principles of natural justice. He had also gone beyond the reasons recorded for reopening inasmuch as according to him no bank statements or works contract receipts were required or submitted during the original assessment proceedings based on which the actual amount and the nature and genuineness of the work done by the assessee for SECPL could have been verified.

iv) In the circumstances, the petition is allowed in terms of prayer clause (a). (i.e., notice u/s. 148 and the order rejecting objections were quashed).”

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Reassessment — Notice u/s 148 — Limitation — Law applicable — Effect of amendments with effect from 1st April, 2021 and CBDT Circular dated 11th May, 2022

46 Ajay Bhandari vs. UOI
[2022] 446 ITR 699 (All.)
A.Y.: 2014-15
Date of order: 17th May, 2022
Ss. 147 and 148 of ITA, 1961

Reassessment — Notice u/s 148 — Limitation — Law applicable — Effect of amendments with effect from 1st April, 2021 and CBDT Circular dated 11th May, 2022

For the A.Y. 2014-15 a notice u/s 148 of the Income-tax Act, 1961 was issued on 1st April, 2021. The recorded reasons read as under:

“I have reason to believe that an income to the tune of Rs. 2,63,324 has escaped assessment for the aforesaid year.”

The reassessment order dated 31st March, 2022 was passed u/s 147 r.w.s. 144B of the Act, 1961. The assessee filed writ petition and challenged the notice and the reassessment order.

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

“i) Section 147 of the Income-tax Act, 1961, as it existed till March 31, 2021, empowers the Assessing Officer to assess or reassess or recompute the loss or depreciation allowance or any other allowance, as the case may be, for the assessment year in the case of an assessee if he has reason to believe that income chargeable to tax has escaped assessment, subject to the provisions of sections 148 to 153. A precondition to initiate proceedings under section 147 is the issuance of notice under section 148. Thus, notice under section 148 is jurisdictional notice. Section 149 provides the time limit for issuance of notice under section 148. The time limit is provided under the unamended provisions (as existing till March 31, 2021) and the amended provisions (effective from April 1, 2021) as amended by the Finance Act, 2021. According to clauses 6.2 and 7.1 of the Board’s Circular dated May 11, 2022 ([2022] 444 ITR (St.) 43), if a case does not fall under clause (b) of sub-section (1) of section 149 of the Act for the assessment years 2013-14, 2014-15 and 2015-16 (where the income of an assessee escaping assessment to tax is less than Rs.50,00,000) and notice has not been issued within limitation under the unamended provisions of section 149, then proceedings under the amended provisions cannot be initiated.

ii) The notice u/s 148 of the Act issued on April 1, 2021 for the A.Y. 2014-15 and the notice dated January 13, 2022 u/s. 144 of the Act and the reassessment order dated January 13, 2022 u/s. 147 read with section 144B of the Act for the A.Y. 2014-15 were liable to be quashed.”

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Reassessment — Notice u/s 148 — Limitation — Doctrine of substantial compliance —Mere signing of notice is not sufficient — Date of issue would be date on which notice was served on assessee — Notice dated 31st March, 2018 served on assessee through e-mail on 18th April, 2018 for A.Y. 2011-12 — Notice barred by limitation — Order and notice set aside

45 Parveen Amin Bhathara vs. ITO
[2022] 446 ITR 201 (Mad.)
A.Y.: 2011-12
Date of order: 27th June, 2022
Ss. 147, 148 and 149 of ITA, 1961

Reassessment — Notice u/s 148 — Limitation — Doctrine of substantial compliance —Mere signing of notice is not sufficient — Date of issue would be date on which notice was served on assessee — Notice dated 31st March, 2018 served on assessee through e-mail on 18th April, 2018 for A.Y. 2011-12 — Notice barred by limitation — Order and notice set aside

On 18th April, 2018, the assessee writ petitioner received an e-mail from the Assessing Officer with a notice u/s 148 of the Income-tax Act, 1961 dated 31st March, 2018, proposing to reopen the assessment for the A.Y. 2011-12. The Assessee filed a writ petition and challenged the notice on the ground that the notice has been issued and served on 18th April, 2018, the date on which the limitation period of six years for reopening the assessment, came to an end.

The Single Judge Bench of the Madras High Court dismissed the writ petition by observing that it was sufficient if the notice u/s 148 of the Act had been signed and issued by the authority and that the delay in receiving the documents would not provide any ground for quashing the entire proceedings.

The Division Bench allowed the appeal filed by the assessee and held as under:

“i) U/s. 149 of the Income-tax Act, 1961 the issuance of notice u/s. 148 for reopening the assessment u/s. 147 is complete only when it is issued in the manner as prescribed u/s. 282 read with rule 127 of the Income-tax Rules, 1962 prescribing the mode of service of notice under the Act. The signing of notice would not amount to issuance of notice as contemplated u/s 149 of the Act. The requirement of issuance of notice u/s 149 is not mere signing of the notice u/s. 148, but it has to be sent to the proper person within the end of the relevant assessment year.

ii) The notice u/s. 148 for reopening the assessment was not sent to the assessee within the time stipulated u/s 149 and hence, the reassessment proceedings initiated u/s 147 were vitiated. The notice dated 31/03/2018 issued by the Assessing Officer was served on the assessee through e-mail, only on 18/04/2018. Though the Department produced the relevant pages of the notice server book maintained by it to show that the notice dated 31/03/2018 was within the limitation period, it only disclosed that the notice dated March 31/03/2018 was returned on 06/04/2018. The order on the writ petition and the notice issued u/s. 148 were set aside.”

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Offences and prosecution — Wilful attempt to evade tax — Application for compounding of offences — Limitation — Show-cause notice issued for rejection of compounding of offences on ground of bar of limitation relying on circular issued by CBDT — Circular cannot override statutory provision — Authority to consider assessee’s application

44 G. P. Engineering Works Kachhwa vs. UOI
[2022] 446 ITR 563 (All.)
A.Y.: 1990-91
Date of order: 8th February, 2022
Ss. 276C, 277, 278B and 279(2) of ITA, 1961

Offences and prosecution — Wilful attempt to evade tax — Application for compounding of offences — Limitation — Show-cause notice issued for rejection of compounding of offences on ground of bar of limitation relying on circular issued by CBDT — Circular cannot override statutory provision — Authority to consider assessee’s application

A criminal case was filed against the assessee u/s 276C(1) read with sections 277 and 278B of the Income-tax Act, 1961 on the ground of wilful attempt to evade tax relating to the A.Y. 1990-91. The assessee filed an application for compounding of the offences before the Chief Commissioner who issued a show-cause notice for rejecting the application relying upon the Board’s Circular F. No. 285/08/2014-IT (Inv.V)/147 dated 14th June, 2019.

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

“i) In terms of sub-section (2) of section 279 of the Income-tax Act, 1961 any offence under Chapter XXII of the Act may be compounded by the authorised officer either before or after the institution of the criminal proceedings. No limitation for submission or consideration of compounding application has been provided under sub-section (2) of section 279 of the Act. Therefore, the CBDT by a circular can neither provide limitation for the purposes of sub-section (2) nor restrict the operation of the sub-section in purported exercise of its power to issue circulars under the Explanation appended to section 279(2).

ii) A circular is subordinate to the principal Act or Rules, and cannot override or restrict the application of specific provisions enacted by Legislature. It cannot travel beyond the scope of the powers conferred by the Act or the Rules. Circulars containing instructions or directions cannot curtail a statutory provision by prescribing a period of limitation where none has been provided by either the Act or the Rules. The authority to issue instructions or directions by the Board stems from the Explanation appended to section 279(2). The Explanation merely explains the main section and is not meant to carve out a particular exception to the contents of the main section. The object of an Explanation to a statutory provision has been elaborated by the Supreme Court.

iii) A specific limitation has been provided by para 7(ii) of the compounding guidelines in the Board’s Circular F. No. 285/08/2014-IT (Inv.V)/147 dated June 14, 2019 in purported exercise of power under the Explanation to section 279(2). The Explanation merely enables the Board to issue instructions or directions to other Income-tax authorities for the proper composition of offences under that section. The instructions or directions may prescribe the methodology and manner of composition of offences to clarify any obscurity or vagueness in the main provisions to make it consistent with the dominant object of bringing closure to such cases which may be pending interminably in the court system. Such instructions or directions that are prescribed by the Explanation cannot take away a statutory right of an assessee or set at naught the working of the provision of compounding of offence.

iv) On the facts and circumstances and the provisions of sub-section (2) of section 279 the compounding application of the assessee could not be rejected by the Income-tax authority concerned on the ground of delay in filing the application. It was not disputed by the respondents in the court or in the show-cause notice that the criminal case in question was still pending. The Income-tax authority was to consider the compounding application of the assessee in accordance with law.”

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International transactions — Reference to TPO — (A) Limitation — Reference made to TPO beyond period of limitation — All further proceedings in furtherance of reference bad in law (B) Jurisdiction — Reference made to TPO beyond period of limitation — Participation of assessee in proceedings not a bar to challenging jurisdiction (C) Writ — Maintainability — Reference to TPO — Limitation — Question of limitation is legal plea and can be raised at any stage — Existence of alternate remedy not bar — Writ will issue

43 Virtusa Consulting Services Pvt. Ltd. vs. DRP
[2022] 446 ITR 454 (Mad.)
A.Y.: 2006-07
Date of order: 9th June, 2022
Ss. 92CA, 92CA(1) and 153(1) of ITA, 1961

International transactions — Reference to TPO — (A) Limitation — Reference made to TPO beyond period of limitation — All further proceedings in furtherance of reference bad in law (B) Jurisdiction — Reference made to TPO beyond period of limitation — Participation of assessee in proceedings not a bar to challenging jurisdiction (C) Writ — Maintainability — Reference to TPO — Limitation — Question of limitation is legal plea and can be raised at any stage — Existence of alternate remedy not bar — Writ will issue

The assessee was in the business of software development and rendered services to its wholly owned subsidiaries outside India and unrelated third party customers. For the A.Y. 2006-07, the Assessing Officer passed an assessment order dated 14th March, 2008 and refund was granted on 28th March, 2008. Subsequently, pursuant to proceedings of the Commissioner dated 25th August, 2008, the Additional Commissioner issued a notice dated 4th September, 2008 u/s 143(2) of the Income-tax Act, 1961 against the assessee. The assessee furnished its books of account, including forms 3CA and 3CD in terms of section 44AB. It was found that the assessee had entered into international transactions exceeding Rs. 15 crores with its sister concern and on approval dated 18th November, 2008 u/s 92CA of the Act, the Additional Commissioner made a reference to the Transfer Pricing Officer u/s 92CA(1). The Additional Commissioner sent a communication dated 27th February, 2009 informing the assessee about the reference to the Transfer Pricing Officer and requested it to furnish the annual reports for the previous three years and a copy of the computation of total income. The assessee sent a reply dated 12th May, 2009 with the documents sought for and after conducting enquiries, the Additional Commissioner passed a draft assessment order dated 31st December, 2009. Thereafter, the assessee filed its objections before the Dispute Resolution Panel and the Assessing Officer. Before the Dispute Resolution Panel, the assessee also raised an objection with regard to limitation. However, the Dispute Resolution Panel dismissed the objections by an order dated 24th September, 2010.

Challenging both the orders of the Additional Commissioner and the Dispute Resolution Panel, the assessee filed a writ petition. The writ petition was dismissed by the Single Judge Bench of the Madras High Court holding that the Dispute Resolution Panel had rightly overruled the objections raised for the first time by the assessee regarding the limitation to proceed with the assessment. Therefore, the assessee could not challenge the jurisdiction of the Additional Commissioner’s reference to the Transfer Pricing Officer after 31st December, 2008.

The Division Bench allowed the appeal filed by the assessee and held as under:

“i) Though the provision of section 92B of the Income-tax Act, 1961 does not state as to when a reference is to be made u/s 92CA(1) to the Transfer Pricing Officer after an international transaction is found, section 153 would make it explicit that the reference is to be made during the course of the assessment proceedings before the expiry of the period to pass an assessment order. Thereafter, the Transfer Pricing Officer after considering the documents submitted by the assessee is to pass an order u/s 92CA(3). Section 92CA(3A) stipulates that this order has to be passed before the expiry of 60 days prior to the date on which the period of limitation u/s. 153 expires. According to section 153 no order of assessment can be passed at any time after the expiry of 21 months. Section 92CA(4) stipulates that the Assessing Officer has to pass a draft assessment order in conformity with the order of the Transfer Pricing Officer and the assessee has an option either to file acceptance of the variation of the assessment or file objections to any such variation with the Dispute Resolution Panel and also the Assessing Officer u/s 144C(2). In terms of sub-section (12), the Dispute Resolution Panel has no authority to issue any directions under sub-section (5) from the end of the month in which the draft assessment order is passed and not from the date when the assessee submits the objections. Sub-section (13) of section 144C provides that upon receipt of directions issued under sub-section (5) the Assessing Officer shall in conformity with the directions complete the assessment proceedings within one month from the end of the month in which the directions are received. Under the proviso to section 92CA(3A) if the time limit for the Transfer Pricing Officer to pass an order is less than 60 days, the remaining period shall be extended to 60 days. This implies that not only is the time frame mandatory but also the Transfer Pricing Officer has to pass an order within 60 days. Further, the extension in the proviso also automatically extends the period of assessment to 60 days under the second proviso to section 153. But for the reference u/s 92CA(1) to the Transfer Pricing Officer, the time limit for completing the assessment would only be 21 months from the end of the assessment year. It is only if a reference to the Transfer Pricing Officer has been made during the course of assessment and is pending, that the Department gets another 12 months in terms of the second proviso to section 153(1) and u/s 153(4) after amendment. Therefore, section 153(1) and its first two provisos provide that no order of assessment can be passed after 21 months and the extended period of limitation to pass an assessment order within a further period of 12 months or in other words within 33 months from the end of assessment year, applies only when a reference u/s. 92CA(1) is made during the course of assessment proceedings. The different timelines to be adhered to by the Transfer Pricing Officer, by the Assessing Officer to pass a draft order, by the assessee to file their objections, by the Dispute Resolution Panel to issue directions and by the Assessing Officer to pass the final order, would commence only on a reference to the Transfer Pricing Officer and not otherwise. The period of 33 months is to pass the final order of assessment after the directions from the Dispute Resolution Panel.

ii) The proviso to section 153(1) inserted by amendment in Finance Act, 2006 altering the original time limit from 24 months to 21 months with effect from June 1, 2006 and the second proviso inserted by the Finance Act, 2007, extending the time for completion of assessment, when a reference has been made to the Transfer Pricing Officer, during the course of assessment proceedings have to be read in tandem and together. Section 153 was repealed and substituted with effect from June 1, 2016, where, under section 153(1) it is clearly mentioned that the period of assessment is 21 months and u/s 153(4) that in case of reference u/s 92CA(1) during the course of assessment proceedings, the period of assessment would be extended by twelve months clarifying the mischief caused on account of the interpretation adopted by the officials.

iii) The writ petitions were maintainable and alternative remedy would not operate as a bar. The question of limitation was a legal plea which went to the root of authority or jurisdiction. There was no dispute on the facts about the date on which the reference was made or when the order was passed. The interpretation of the provision to be adjudicated is a pure question of law.

iv) The extension had to be made before the expiry of the time limit prescribed for original assessment was applicable because the second proviso uses the words “and during the course of the proceeding for assessment”. The first two provisos to section 153(1) lay down that the time limit to pass the original assessment order is 21 months and when a reference to the Transfer Pricing Officer is made during the course of such proceedings, the time limit would be 33 months and that if no reference is made within the period provided for assessment, no reference can be made subsequently since the Assessing Officer becomes functus officio. The words used in section 153 are very clear as they lay down that “no order of assessment shall be made”. The order in the writ petition was to be set aside.

v) Concurrence was obtained from the Commissioner before December 31, 2008 would not be of any assistance to the Department as indisputably the reference to the Transfer Pricing Officer was made only on February 17, 2009. The proceedings would commence only when a reference is made to the Transfer Pricing Officer, which cannot be beyond the period provided u/s 153(1) and the first proviso thereunder. From the undisputed dates and events it was clear that not only was the reference to the Transfer Pricing Officer made after the period of expiry of the period of limitation to pass assessment orders, but also that the Assessing Officer had failed to pass final assessment orders in time. The limitation to pass the original assessment order ended on December 31, 2008 being 21 months from the end of the A.Y. 2006-07, i.e., March 31, 2007. Then the last date for the Assessing Officer to pass the final assessment order would end on December 31, 2009, even considering the extension by 12 months. The order of the Dispute Resolution Panel itself was passed only on September 24, 2010 much beyond the permissible period. The Department though on the one hand contended that the reference could be made within 24 months, on the other contended that the extended period would be 9 months. If such contention was accepted, it would mean that the overall time to pass the assessment order in a case of reference to the Transfer Pricing Officer, would be 36 months and not 33 months, which was not the intention of the Legislature. The amendments brought into the Act would then turn redundant.

vi) According to the timeline, when the time given to the Dispute Resolution Panel itself was 9 months from the date of the draft assessment order to complete the assessment and then a further time of one month to the Assessing Officer to complete the assessment from the end of the month in which the direction was received, it could not be said that the total additional time was 9 months and the provisos to section 153(1) had no connection. If the time limits provided to the Transfer Pricing Officer to pass an order and for the assessee to submit its objections in terms of section 144C(2) were also considered with the time period for the Dispute Resolution Panel and the Assessing Officer, the extended period was 12 months and not 9 months. When one proviso provides a time limit and when another proviso extends such time under certain circumstances, it cannot be held that the provisos are independent. Therefore, when the extended time provided for the Department was 12 months it could not be contended that it was only 9 months since the reference was not made in time. Since the reference to the Transfer Pricing Officer had been made after the permissible period, the timeline had been missed by the Department at every stage. Therefore, as a sequitur, all further proceedings, in furtherance thereof were also bad.”

shailesh.kwebmaker

CBDT — Condonation of delay — Delay in filing application before Board — Circular dated 9th June, 2015 prescribing limitation period of six years — Cannot have retrospective effect on pending application filed prior to date of issue of circular — Order rejecting application on basis of circular set aside — Matter remanded to Board

42 R. Ramakrishnan vs. CBDT
[2022] 446 ITR 308 (Kar.)
A.Y.: 2003-04
Date of order: 7th April, 2022
S. 119(2)(b) of ITA, 1961

CBDT — Condonation of delay — Delay in filing application before Board — Circular dated 9th June, 2015 prescribing limitation period of six years — Cannot have retrospective effect on pending application filed prior to date of issue of circular — Order rejecting application on basis of circular set aside — Matter remanded to Board

The assessee filed a nil return for the A.Y. 2003-04 claiming exemption of capital gains u/s 54EC of the Income-tax Act, 1961 arising on sale of its property on 3rd August, 2002 having invested Rs. 25 lakhs in specific bonds on 5th February, 2003. The Assessing Officer was of the view that the investment should have been made on or before 3rd February, 2003 and denied the benefit of section 54EC. Thereafter, the assessee filed a revision petition u/s 264 before the Commissioner challenging the levy of tax on capital gains with a prayer to condone the delay of two days in investing Rs. 25 lakhs in bonds contending that he was in Australia at that time and accordingly, there was a short delay for advising the remittance towards the bond.

The Commissioner declined to condone the delay of two days in making the investment in specified bonds. The assessee filed an application on 24th May, 2011 before the CBDT to direct the Assessing Officer to consider the application u/s 154 and grant appropriate relief. The Board by an order dated 13th December, 2017 rejected the application. The writ petition challenging this order was dismissed by the Single Judge Bench of the Karnataka High Court mainly referring to clause 8 of the Board’s circular dated 9th June, 2015 which stated that the circular would cover all such applications and claims for condonation of delay u/s 119(2)(b) pending as on the date of issue of the circular.

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

“i) The CBDT considered the application filed by the assessee u/s. 119(2)(b) on May 24, 2011 before issuance of the circular dated June 9, 2015 it would not have been rejected on the ground of delay, i. e., beyond the period of six years as specified in the Circular. No provisions of the Act and Rules prescribe the period of limitation for filing the application u/s. 119(2)(b) and it was only by virtue of such circular that the period of limitation of six years had been prescribed for the first time. Though the validity of the circular was not challenged directly by the assessee, that applicability of the circular was the main issue before the court and if the matter was perceived from the angle of delay caused in adjudicating the application filed on May 24, 2011 before the Circular dated June 9, 2015 came into force, the resultant effect would be different.

ii) The assessee should not suffer where no default was committed by him in submitting the application u/s. 119(2)(b) on May 24, 2011, i.e., when there was no period of limitation prescribed. No application could be denied on technical grounds. The application was not disposed of within a reasonable period. The order in the writ petition was set aside and the matter was remanded to the Board for reconsideration of the application and to take an appropriate decision on the merits in accordance with law.”

shailesh.kwebmaker

Retention in Escrow Account – Liability to Capital Gains

ISSUE FOR CONSIDERATION

In most merger and acquisition transactions involving sale of a business or controlling interest in a company, a certain part of the sale consideration is not directly paid to the seller but is kept aside to meet certain contingencies which may arise in the next few years, such as contingent liabilities. This amount is retained in an escrow account with an escrow agent, with instructions as to how the amount is to be utilized and paid out to the seller, depending upon the happening of certain events. Similar contingent payments may prevail in ordinary non-merger cases, too.

An Escrow Arrangement is a monetary instrument whereby a third-party, i.e. an Escrow Agent, holds liquid assets for the benefit of two parties who have entered into an exchange/transaction, and disburses the liquid assets upon the fulfilment of a specific set of obligations on the part of both the parties under a contract i.e. on happening or non-happening of the contingent event.

The issue has arisen before the courts whether, in a situation where the monies kept in escrow are not released to the seller, pending the contingency, at all or released in a year subsequent to the year of transfer of the capital asset, the amount until certain obligations or conditions are fulfilled, would form a part of the consideration accruing or arising to the seller on transfer of the capital asset in the year of transfer of the asset for the purposes of computing the capital gains on transfer of the asset. While the Madras High Court has held that such an amount, so held in escrow, forms a part of the sale consideration for computing the capital gains; the Bombay High Court has held that such an amount cannot be included in the full value of consideration for computing the capital gains in the year of transfer of the capital asset.

CARBORUNDUM UNIVERSAL’S CASE

The issue first came up for the Madras High Court in the case of Carborundum Universal Ltd vs. ACIT 283 Taxmann 312.

In this case, the assessee sold an Electrocast Refractories Plant on a slump sale basis to another company for a total consideration of Rs. 31.14 crore. Out of the total consideration, an amount of Rs. 3.25 crore was deposited in an escrow account by the purchaser to meet any contingent liabilities. The assessee disclosed a long-term capital gain of Rs. 23.58 crore, taking the sale consideration at Rs. 27.89 crore instead of Rs. 31.14 crore.

The Assessing Officer noted that while it had sold the plant for a total sale consideration of Rs. 31.14 crore, it had considered only Rs. 27.89 crore as the consideration for computation of long-term capital gain and asked the assessee to show cause as to why Rs. 31.14 crore should not be considered for computation of long-term capital gains. The assessee explained that the difference between the consideration taken for computation of capital gains and that for which the plant was sold was an account of the fact that an amount of Rs. 3.25 crore was kept in an escrow account to meet any contingent liabilities.

The Assessing Officer recomputed the capital gains taking the consideration as Rs. 31.14 crore, on the grounds that the amount of Rs. 3.25 crore kept in escrow account would only constitute an application of income, and that the full consideration of Rs. 31.14 crore had accrued to the assessee immediately on the execution of the agreement for sale.

In first appeal, the Commissioner (Appeals) noted that the amount in the escrow account had been kept by the purchaser to indemnify against breach of warranty or other losses or on account of further litigation as a result of non-compliance to the conditions of the agreement by the assessee. The Commissioner (Appeals) therefore was of the view that the sum retained in the escrow account had not accrued to the assessee in the year under consideration. He therefore held that amount of Rs. 3.25 crore kept in escrow account had neither been received or accrued by/to the assessee during the year, and since the said amount had been subsequently received by the assessee after the stipulated period of agreement, it had been offered to tax by the assessee under the head capital gains in the year of its receipt. Therefore, holding that the Assessing Officer was not justified in taxing the amount in the year under consideration, the Commissioner (Appeals) deleted the addition of Rs. 3.25 crore.

Before the Tribunal, on behalf of the Revenue, it was contended that the amount kept in escrow account represented application of income and keeping the amount in escrow account was only a formality, as the entire amount of Rs. 3.25 crore had been received without any deduction towards claims/warranties, and had been offered to tax in a subsequent year.

The Tribunal, after examining the Business Sale Agreement, held that, the agreement had given legally enforceable rights to the parties with respect to the transfer of undertaking, the assessee had a right to receive the lump-sum consideration upon effecting the sale in the previous year, and there was effective conveyance of the capital asset to the transferee. The Tribunal further noted that the monies kept in the escrow account were for meeting claims that may arise on a future date, and that the interest which accrued on the sums retained in the escrow account had been agreed to be belonging to the seller, i.e., the assessee, and had to be paid to the assessee as per the instructions in the escrow account. Therefore, the Tribunal held that the assessee always had a right to receive the sums kept in the escrow account. Though they were to be quantified after a specified period, they did not change the agreed lump-sum sale consideration finalized based on the agreement between the parties. Therefore, the quantification of deductions to be made from the sums lying in the escrow account would not postpone the charge of such income which was deemed to be taxed in the year of transfer.

The Tribunal rejected the argument of the assessee that the entire sale consideration was not received during the relevant year and could not be deemed as income of that year, holding that it was sufficient if, in the relevant year, profits had risen out of sale of capital assets, i.e. when the assessee had a right to receive the profits in the year under consideration, it would attract liability to capital gains tax. According to the Tribunal, it was not necessary that the whole amount of lump-sum consideration should have been received by the assessee in the previous year, and whatever the parties did subsequent to that year would have no bearing on the liability to tax as deemed income of the year under consideration. Reliance was placed by the Tribunal on the Madras High Court decision in the case of TV Sundaram Iyengar and Sons Ltd vs. CIT 37 ITR 26, while upholding the order of the Assessing Officer.

Before the Madras High Court, on behalf of the assessee, attention was drawn to the Business Sale Agreement, and in particular, covenant No. 14 dealing with indemnities for other losses and covenant No. 15 dealing with retention sum for indemnities. The attention of the Court was also drawn to a second supplementary agrement where there was a reference to a charge of theft of electricity and demand raised by the State Electricity Board from the purchaser of the asset. These facts demonstrated that the intention behind retention of a certain sum in escrow account was to meet liabilities which may be fastened on to the purchaser on conclusion of the sale transaction.

On behalf of the assessee, reliance was placed on the following decisions:

• The Bombay High Court decision in the case of CIT vs. Hemal Raju Shete 239 Taxman 176, which was a case where certain amounts were set apart to meet contingent liabilities, and it was held that this amount was neither received nor accrued in favour of the assessee.

• The Supreme Court decision in the case of CIT vs. Hindustan Housing & Land Development Trust Ltd 161 ITR 524, where a similar view was taken.

• The Madras High Court decision in the case of PPN Power Generating Co (P) Ltd vs. CIT 275 Taxman 143 in support of the alternative submission that in the subsequent year the amount had been offered for taxation.

• The Gujarat High Court decision in the case of Anup Engineering Ltd vs. CIT 247 ITR 457.

• Cases of CIT vs. Ignifluid Boilers (I) Ltd 283 ITR 295 (Mad), CIT vs. Associated Cables (P) Ltd 286 ITR 596 (Bom), DIT(IT) vs. Ballast Nedam International 215 Taxman 254 (Guj), and Amarshiv Construction (P) Ltd vs. Dy CIT 367 ITR 659 (Guj), in the context of treatment of retention money withheld by the contractee.

On behalf of the Revenue, before the Madras High Court, it was argued that the Tribunal order was well considered and the factual aspects thoroughly analyzed. It was clearly brought out by the Tribunal on the facts that the retention money kept in the escrow account had accrued in favour of the assessee in the year under consideration. It was pointed out that the entire amount of Rs. 3.25 crore retained in the escrow account had been received by the assessee and offered for taxation in a subsequent year, with no deduction towards claims/warranties from the amount kept in escrow account. Attention was also drawn to the provisions of section 48, with the submission that if either the full value of the consideration had been received by the assessee during the year or it had accrued, that alone would be sufficient, and the subsequent act of the assessee and the purchaser by creating an escrow account would not change the character of receipt of the consideration.

Referring to the various clauses of the Business Sale Agreement, it was submitted that the facts clearly demonstrated that the amount retained in the escrow account, which was a subsequent arrangement between the parties, would have no impact for the purpose of computation of capital gains on the total sale consideration fixed under the agreement. On behalf of the Revenue, reliance was placed on the following decisions:

• The Supreme Court decision in the case of CIT vs. Attilli N Rao 252 ITR 880 in the context of full price realised for the purpose of computation of capital gains.

• CIT vs. N M A Mohammed Haniffa 247 ITR 66 (Mad).

• CIT vs. George Henderson and Co Ltd 66 ITR 622 (SC).

• CIT vs. Smt Nilofer I Singh 309 ITR 233 (Del).

• Smt D Zeenath vs. ITO 413 ITR 258 (Mad).

The decisions relied upon by the Revenue were rebutted by the assessee’s counsel, that all those were cases relating to mortgage, and that the agreement between the assessee and the purchaser clearly showed that the retention money was neither received nor accrued in favour of the assessee during the relevant year.

The Madras High Court examined the provisions of the Business Sale Agreement and noted that the retention amount had been retained for the purpose of ensuring that sufficient funds would be available to indemnify the purchaser against any damages or losses arising from indemnification for breach of warranty, indemnification for other losses, unpaid accounts receivables, and other obligations to pay or reimburse the purchaser as provided under the agreement. It noted that admittedly, no indemnification had to be given under either of the four heads, and the entire amount was received by the assessee without any deduction and was offered for taxation by the assessee in the subsequent year. The High Court noted that the Commissioner (Appeals) had not specifically examined as to whether the entire amount of Rs. 3.25 crore had been received by the assessee without any deduction and offered for taxation, but had solely proceeded on the basis that the escrow account had been opened and amount retained as retention money to be utilized by the purchaser for indemnification or breach of warranty for any other losses. On this basis, the Commissioner (Appeals) had concluded that the retention sum retained in the escrow account had not accrued to the assessee during the relevant year.

According to the Madras High Court, the Terms and Conditions of the Business Sale Agreement were vivid and clear, the total sale consideration having been clearly mentioned. After fixing the full and final sale consideration, the parties mutually agreed to retain a specified quantum of money in an escrow account to meet any one of the exigencies as mentioned in the agreement. Therefore, according to the High Court, for all purposes, the entire sale consideration had accrued in favour of the assessee during the year under consideration. Possession of the asset was also handed over by the assessee. Besides, no deductions were made from the escrow account and the entire amount was received by the assessee and offered to tax.

According to the Madras High Court, the purchaser, retaining a particular amount of money in the escrow account could not take away the amount from the purview of full consideration received or accruing in favour of the assessee for the purpose of computation of capital gains u/s 48. Besides the assessee had received the entire amount of Rs. 3.25 crore without any deduction. The right of the assessee over the amount retained in the escrow account had not been disputed. The Madras High Court observed that assuming certain payoffs were to be made from the retention money, that would not in any manner alter the full and total consideration received by the assessee pursuant to the business sale agreement. Given the factual position, according to the Madras High Court, undoubtedly the entire sale consideration had accrued in favour of the assessee during the relevant assessment year and, assuming that certain payment had been made from the amount retained in the escrow account, it would not change or in any manner reduce the sale consideration.

The Madras High Court therefore upheld the order of the Tribunal, holding the assessee liable to capital gains tax during the relevant year on the entire sale consideration as per the agreement.

DINESH VAZIRANI’S CASE

The issue again recently came up before the Bombay High Court in the case of Dinesh Vazirani vs. Pr CIT 445 ITR 110.

In this case, the assessee, who was a promoter of a company, agreed to sell shares of the company held by him along with other promoters for a total consideration of Rs. 155 crore. The Share Purchase Agreement (SPA) provided for specific promoter indemnification obligations. To meet such promoter indemnification obligations, the SPA provided that out of the sale consideration of Rs. 155 crore, Rs. 30 crore would be kept in escrow. If there was no liability as contemplated under the specific promoter indemnification obligations within a particular period, the amount of Rs. 30 crore would be released by the escrow agent to the seller promoters. A separate escrow agreement was entered into between the sellers, the buyers and the escrow agent.

The assessee filed his return of income in July, 2011 by computing capital gains on his proportion of the total sale consideration of Rs. 155 crore, including the amount kept in escrow, which had not been paid out but was still parked in the escrow account till the time the return was filed. The assessment was selected for scrutiny, and an assessment order was passed u/s 143(3) on 15th January, 2014 accepting the returned income.

Subsequent to the passing of such assessment order, certain statutory and other liabilities arose in the company amounting to Rs. 9.17 crore relatable to the period prior to the sale of the shares. This amount of Rs. 9.17 crore was withdrawn by the company from the escrow account, and therefore the assessee received a lesser amount from the escrow account.

The assessee thereafter filed a revision petition u/s 264 with the Commissioner, stating that the assessment had already been completed taxing the capital gains at higher amount on the basis of sale consideration of Rs. 155 crore without reducing the consideration by Rs. 9.17 crore. It was claimed that since the amount of Rs. 9.17 crore had been withdrawn by the company from the escrow account, what the assessee received was lesser than that mentioned in the return of income, and therefore the capital gain needed to be recomputed by reducing the proportionate amount deducted from the escrow account. It was pointed out that since the withdrawal from the escrow account happened after the completion of assessment proceedings, it was not possible for the assessee to make such a claim before the Assessing Officer or file a revised return. The assessee therefore requested the Commissioner to reduce the long-term capital gains by the proportionate amount withdrawn by the company from the escrow account of Rs. 9.17 crore.

The Commissioner rejected the revision petition on the ground that, from the sale price as specified in the agreement, only cost of acquisition, cost of improvement or expenditure incurred exclusively in connection with the transfer could be reduced in computing the capital gains, and that the agreement between the seller and buyer for meeting certain contingent liability which may arise subsequent to the transfer could not be considered for reduction from the consideration. The Commissioner further held that in the absence of a specific provision by which an assessee could reduce the returned income filed by him voluntarily, the same could not be permitted indirectly by resorting to provisions of section 264. The Commissioner relied on the proviso to section 240, which stated that if an assessment was annulled, the refund would not be granted to the extent of tax paid on the returned income. According to the Commissioner, this showed that the income returned by an assessee was sacrosanct and could not be disturbed, and even an annulment of the assessment would not impact the suo moto tax paid on the returned income. The Commissioner further was of the view that the contingent liability paid out of escrow account did not have the effect of reducing the amount receivable by the promoters as per the agreement.

The assessee filed a writ petition before the Bombay High Court against such order of the Commissioner rejecting the revision petition.

The Bombay High Court held that the order passed by the Commissioner was not correct and quashed the order. It observed that the Commissioner had failed to understand that the amount of Rs. 9.17 crore was neither received by the promoters nor accrued to the promoters, as this amount was transferred directly to the escrow account and was withdrawn from the escrow account. In the view of the High Court, when the amount had not been received by or accrued to the promoters, it could not be taken as the full value of consideration in computing capital gains from the transfer of shares of the company.

The Bombay High Court observed that the Commissioner had not understood the true intent and content of the SPA, and not appreciated that the purchase price as defined in the agreement was not an absolute amount, as it was subject to certain liabilities which might arise to the promoters on account of certain subsequent events. According to the Bombay High Court, the full value of consideration for computing capital gains would be the amount ultimately received by the promoters after the adjustments on account of the liabilities from the escrow account as mentioned in the agreement.

The Bombay High Court referred to the observations of the Supreme Court in CIT vs. Shoorji Vallabhdas & Co 46 ITR 144, where the Supreme Court had held that income or gain is chargeable to tax on the basis of the real income earned by an assessee, unless specific provisions provide to the contrary. The Bombay High Court noted that in the case before it, the real income (capital gain) would be computed only by taking into account the real sale consideration, i.e., sale consideration after reducing the amount withdrawn from the escrow account.

The Bombay High Court observed that the Commissioner had proceeded on an erroneous understanding that the arrangement between the seller and buyer which resulted in some contingent liability that arose subsequent to the transfer could not be reduced from the sale consideration as per section 48. As per the High Court, the liability was contemplated in the SPA itself, and had to be taken into account to determine the full value of consideration. If the sale consideration specified in the agreement was along with certain liability, then the value of consideration for the purpose of computing capital gains u/s 48 was the consideration specified in the agreement as reduced by the liability. In the view of the High Court, it was incorrect to say that the subsequent contingent liability did not come within any of the items of reduction, because the full value of the consideration u/s 48 would be the amount arrived at after reducing the liabilities from the purchase price mentioned in the agreement. Even if the contingent liability was to be regarded as a subsequent event, then also, it ought to be taken into consideration in determining the capital gain chargeable u/s 45.

The Bombay High Court expressed its disagreement with the Commissioner on his statement that the contingent liability paid out of escrow account did not affect the amount receivable as per the agreement for the purposes of computing capital gains u/s 48. As per the High Court, the Commissioner failed to understand or appreciate that the promoters had received only the net amount of Rs. 145.83 crore, i.e., Rs. 155 crore less Rs. 9.17 crore, and that such reduced amount should be taken as full value of consideration for computing capital gains u/s 48.

The Bombay High Court also rejected the Commissioner’s argument that the assessee’s returned income could not be reduced by filing a revision petition u/s 264. According to the High Court, section 264 had been introduced to factor in such situation as the assessee’s case, because if income did not result at all, there could not be a tax, even though in bookkeeping, an entry was made for hypothetical income which did not materialise. Section 264 did not restrict the scope of power of the Commissioner to restrict a relief to assessee only up to the returned income. Where the income can be said not to have resulted at all, there was obviously neither accrual nor receipt of income, even though an entry may have been made in the books and account. Therefore, the Commissioner ought to have directed the Assessing Officer to recompute the income as per the provisions of the Act, irrespective of whether the computation resulted in income being less than the returned income. The Bombay High Court stated that it was the obligation of the Revenue to tax an assessee on the income chargeable to tax under the Act, and if higher income was offered to tax, then it was the duty of the Revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee.

The Bombay High Court therefore held that the capital gain was to be computed only on the net amount actually received by the assessee, and that he was entitled to refund of the excess taxes paid by him on the returned capital gains.

OBSERVATIONS

Section 45(1) provides that any capital gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to tax under the head “Capital Gains” and shall be deemed to be the income of the previous year in which the transfer took place. Undoubtedly, in both these cases, discussed herein, there was no dispute about the year of transfer or the amount of consideration. The consideration had been agreed upon, and the payment was made by the purchaser. The issue was really whether the amount retained with the escrow agent was retained on behalf of the seller, or was consideration withheld on behalf of the purchaser, and whether the amount so kept in escrow could be reduced from the full value of consideration and the taxable capital gains.

While the Madras High Court has taken the view that the amount retained in the escrow account was received by and accrued to the assessee, the Bombay High Court has taken the view that such amount in escrow cannot be said to have been received by or accrued to the assessee. To understand the tax effect of an escrow arrangement, it is necessary to understand the legal implications of such an arrangement.

The Bombay High Court, in the case of Hira Mistan vs. Rustom Jamshedji Noble & Others 2000 (1) BomCR 716, has observed:

“An escrow has been held to be a document deposited with the third person to be delivered to the person purporting to be benefited by it upon the performance of some condition, the fulfillment of which is only to bring the contract into existence… Escrow has also been explained as an intended Deed after sealing and any signature required for execution as a deed, be delivered as an escrow, that is as a simple writing which is not to become the deed of the party expressed to be bound by it until some condition has been performed. Escrow has also been defined to mean that where an instrument is delivered to take effect on the happening of a specified event or upon condition that it is not to be operative until some condition is performed then pending the happening of that event or the performance of the condition the instrument is called an escrow.”

The Bombay High Court, in Jeweltouch (India) Pvt. Ltd. vs. Naheed Hafeez Quraishi And Ors 2008 (3) BomCR 217, has observed:

“When parties to an agreement or the executants of a document place the agreement or, as the case may be, the document in escrow, parties intend that pending the fulfillment of certain conditions which they stipulate, the document will be held in custody by the person with whom it is placed. Notwithstanding the execution of the agreement or the execution of the document, the act of placing the instrument in escrow evinces an intent that the document would continue to lie in escrow until a condition which is precedent to the enforceability of the document comes to exist. The instrument becomes valid and enforceable in law only upon the due fulfillment of a prerequisite and often the parties may stipulate the due satisfaction of a named person on the fulfillment of the condition. An Escrow agent may be appointed by the parties as the person who will determine whether a promise or condition has been fulfilled so as to warrant the release of the document from escrow. In Wharton’s Law Lexicon, the effect of an escrow is stated thus: Escrow, a writing under seal delivered to a third person, to be delivered by him to the person whom it purports to benefit upon some condition. Upon the performance of the condition it becomes an absolute deed; but if the condition be not performed, it never becomes a deed. It is not delivered as a deed, but as an escrow, i.e. a scrowl, or writing which is not to take effect as a deed till the condition be performed.”

In Halsbury the effect of the delivery of a document as escrow is explained thus:

“1334. Effect of delivery as escrow. When a sealed writing is delivered as an escrow it cannot take effect as a deed pending the performance of the condition subject to which it was so delivered, and if that condition is not performed the writing remains entirely inoperative. If, therefore, a sealed writing delivered as an escrow comes, pending the performance of the condition and without the consent, fault, or negligence of the party who so delivered it, into the possession of the party intended to benefit, it has no effect either in his hands or in the hands of any purchaser from him; for until fulfillment of the condition it is not, and never has been, the deed of the party who so delivered it. When a sealed writing has been delivered as an escrow to await the performance of some condition, it takes effect as a deed (without any further delivery) immediately the condition is fulfilled, and the rule is that its delivery as a deed will, if necessary, relate back to the time of its delivery as an escrow; but the relation back does not have the effect of validating a notice to quit given at a time when the fee simple was not vested in the person giving it.”

While these views are in the context of a document placed in escrow, the views might help to understand the impact of money placed in escrow also and may impact the final computation of capital gains until such time consideration payable attains finality based on the fulfillment of the conditions of the escrow . However, once the conditions are fulfilled, the payment would relate back to the date when the payment was deposited with the escrow agent. In substance therefore, the escrow agent is holding the amount on behalf of the seller, but the funds are released only after fulfilment of the conditions of escrow.

If one examines the facts of the two cases discussed, in the case before the Madras High Court, there was no deduction or reduction from the amount placed in escrow, and therefore the question of amendment of the consideration did not arise at all. Since capital gains is chargeable in the year of transfer, the Madras High Court held that the entire capital gain, including amount placed in escrow was taxable in that year itself.

The facts before the Bombay High Court were that there was actually a deduction from the amount placed in escrow, and the amount of consideration therefore underwent a change. The amount withdrawn from the escrow account was ultimately never received as income by the seller as the amount was returned to the buyer. The issue before the Bombay High Court was whether a revision of the assessment order was possible in view of the facts, which arose due to subsequent events impacting the taxable capital gains. It was in that context that the High Court took the view that the real income had to be considered, and not a notional income.

Viewed in this light, there is no conflict between the decisions of the two Courts. Both have rightly decided the cases before them on the merits of the cases before them. In one case, the fact was that the amount eventually was paid in full to the seller as was agreed while in the other case, a part of the agreed consideration, though paid, was returned to the buyer. Therefore, deferment of the liability to capital gains tax was not intended nor was it suggested by the Bombay High Court, and what was suggested was the downward revision of the consideration that was offered for taxation.

Therefore, to take the view that the amount placed in escrow should be taxable if and only when released from escrow on fulfillment of the conditions does not appear to be the attractive position in law.

The moot question that arises in such circumstances is as to what should be the manner of correction of the capital gains offered for taxation when the consideration so offered subsequently undergoes a change, as per the conditions provided in the sale agreement itself. The assessment of the capital gains legally cannot be held back, as that would take away the time bound finality of an assessment. There is presently no provision in law that permits the deferment of taxation to the later year on receipt of the amount released from the escrow account. No transfer in law can be said to have taken place in such later year, and the charge of capital gains would fail in that later year for want of transfer required for application of s. 45.

The only possibility therefore is that while the income be offered in the year of transfer based on the agreed consideration, without factoring in the events subsequent to the filing of the return, which have modified the actual consideration, the assessee can, as per the law applicable today, only take recourse to the existing provisions for filing a revised return (which time is generally inadequate after the reduced time limits),or for filing a revision petition with the Commissioner u/s 264, which time is also inadequate in many cases to revise the claim.

It is therefore essential that the law take cognizance of the difficulty arising on account of the subsequent revision of the consideration being redefined due to subsequent events by permitting rectification, revision or fresh claim without affecting the primary liability of offering the full value of consideration. This may be made possible by amending section 155 to permit rectification, by adding to the many existing situations therein, requiring the assessee to demonstrate the contingency actually happened, resulting in amendment of the consideration.

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S. 271(1)(c) – The Assessee had wrongly claimed a long-term capital loss in respect of a property which had been gifted by him to his son. Since the amount of capital loss had duly been disclosed in the computation of income and the Assessee had also accepted at the time of assessment proceedings it had considered gift made to son as a transfer by mistake, and there was no concealment of any material fact by the Assessee and thus, levy of penalty u/s 271(1)(c) was not justified.

33 Pawan Garg vs. Assistant Commissioner of Income-tax
[2022] 94 ITR(T) 159 (Chandigarh -Trib.)
ITA No.: 1475(CHD) of 2018
A.Y.: 2014-15
Date of order: 17th January, 2022

S. 271(1)(c) – The Assessee had wrongly claimed a long-term capital loss in respect of a property which had been gifted by him to his son. Since the amount of capital loss had duly been disclosed in the computation of income and the Assessee had also accepted at the time of assessment proceedings it had considered gift made to son as a transfer by mistake, and there was no concealment of any material fact by the Assessee and thus, levy of penalty u/s 271(1)(c) was not justified.

FACTS

The Assessee is a partner in a firm engaged in the dyeing and finishing of textile yarn. The return of income was filed declaring an income of Rs. 8,11,800. The Assessee had claimed Long Term Capital Loss at 20 per cent amounting to Rs. 7,14,554 in respect of a property gifted by him to his son Shri Akhilesh Garg on 20th July, 2013. The Assessee was asked by the Assessing Officer to explain as to why this loss, which had wrongly been claimed, may not be disallowed. In response, the Assessee accepted that there was a mistake due to some typographical error and, therefore, the amount was added to the income of the Assessee. Subsequently, the impugned penalty was imposed on the said addition.

Aggrieved, the Assessee filed an appeal challenging the levy of penalty before the CIT(A). However, the appeal was dismissed. Aggrieved, the Assessee filed further appeal before the ITAT.

HELD

The Assessee submitted that no penalty was imposable as he had only made a wrong claim and not a false claim inasmuch as all the facts were before the Assessing Officer at the time of assessment proceedings, and for the reason that all the figures were duly reflected in the computation of income. It was also submitted that the mistake had occurred due to some error at the end of the Chartered Accountant who had filed the return of income and that the Assessee should not be burdened with the penalty as it was a genuine mistake.

The ITAT observed that the mistake was noticed by the Assessing Officer during the course of assessment proceedings, and on being confronted on the issue, the Assessee surrendered the Long Term Capital Loss. It also observed that the amount of capital loss has been duly mentioned in the computation of income. Therefore, it finds that there is no concealment of any material fact by the Assessee. It can be said that the claim made with respect to the Long Term Capital Loss was an incorrect claim or a wrong claim but it was not a false claim by any measure inasmuch as there was only a mistake in the legal sense that the gift made by the Assessee to the son was considered as a transfer in the computation of income and the resultant figure was shown as a capital loss. It was also a fact on record that the Assessee had accepted the same at the time of assessment proceedings.

The ITAT held that it is not a case where the particulars of income in relation to which the penalty has been levied were either incorrect or were concealed. The amount of capital loss has duly been disclosed in the computation of income and, therefore, it cannot be said to be a case of the Assessee attempting to make a false claim. The ITAT held that it was a bonafide mistake on the part of the Assessee and it would not attract levy of penalty as all the particulars of income were duly disclosed. The appeal of the Assessee was allowed.

The ITAT placed reliance on the following decisions while deciding the matter:

1. CIT vs. Reliance Petroproducts Pvt. Ltd. [2012] 322 ITR 158

2. Price Waterhouse Coopers Pvt. Ltd vs. CIT [2011] 348 ITR 306.

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S. 36(1)(iii) – Where interest free funds had been lent by the Assessee to its wholly owned subsidiary for business, no disallowance of interest will be made u/s 36(1)(iii) of the Act.

32 Moonrock Hospitality (P.) Ltd vs. Assistant Commissioner of Income-tax
[2022] 94 ITR(T) 185 (Delhi – Trib.)
ITA No.: 5895 (Delhi) of 2019
A.Y.: 2016-17
Date of order: 22nd September, 2021

S. 36(1)(iii) – Where interest free funds had been lent by the Assessee to its wholly owned subsidiary for business, no disallowance of interest will be made u/s 36(1)(iii) of the Act.

FACTS

The Assessee company had investments in wholly owned subsidiaries, and had also advanced loans to these companies out of borrowed funds. During the A.Y., the Asssessee company had advanced an interest free loan to one of its wholly owned subsidiaries. Based on the same, the Assessee was asked to explain as to why no disallowance of interest expenses should be made as per section 36(1)(iii) of the Act.

The Assessee furnished an explanation stating that the said funds were advanced for the purpose of business. Not satisfied with the same, the Assessing Officer contended that the said arrangement was a diversion of interest bearing funds towards interest free advances to related parties. A disallowance of interest at 9 per cent (being the rate of interest on loans taken by the Assessee) on such interest free deposits was made u/s 36(1)(iii) of the Act.

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

HELD

The Assessee submitted that the said loans had been advanced to its wholly owned subsidiary for business. A reference was drawn to the Object Clause of the Memorandum of Association of the Assessee wherein the object was to establish or promote or concur in establishing or promote any company for the purpose of acquiring all or any of the properties, rights and liabilities of such an entity.

Reliance was placed on the ruling of the Delhi High Court in CIT vs. Tulip Star Hotels Ltd. [2011] 16 taxmann.com 335/[2012] 204 Taxman 11 (Mag.)/[2011] 338 ITR 482, wherein it was held that where an Assessee engaged in the business of hotels, an advanced loan to its subsidiary to gain control over other hotel, interest paid on borrowed capital was allowable u/s 36(1)(iii) of the Act

Further, reliance was also placed on the Supreme Court ruling in Hero Cycles (P.) Ltd. vs. CIT (Central) [2015] 63 taxmann.com 308/[2016] 236 Taxman 447/[2015] 379 ITR 347, wherein it was decided that once a nexus between expenditure and purpose of business is established, the Revenue cannot step into the shoes of the businessman to decide how much is reasonable expenditure having regard to circumstances of case.

The ITAT considered the above decisions and concurred with the view of the Assessee company stating that where interest free advances made to a wholly owned subsidiary, no disallowance of interest paid on borrowed fund could be made. Further the ITAT also observed that once a nexus between the expenditure and the business of the subsidiary is established, no disallowance of interest paid on borrowed funds could be made.

Accordingly, the ITAT allowed the appeal of the Assessee and deleted the disallowance of interest u/s 36(1)(iii) of the Act.

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Addition made due to wrong reporting in return of income deleted in an appeal against rectification order. Revised return held not necessary.

31 Heidrick and Struggles Inc. vs. DCIT
TS-679-ITAT-2022 (DEL.)
A.Y.: 2018-19
Date of order: 26th August, 2022
Sections: 139(5), 154

Addition made due to wrong reporting in return of income deleted in an appeal against rectification order. Revised return held not necessary.

FACTS

The Assessee, a tax resident of USA, filed its return of income declaring total income of Rs. 23,60,54,860 and claiming a refund of Rs. 53,56,620. The return of income was processed by CPC, vide order dated 14th June, 2019, and a demand of Rs. 80,58,000 was raised for the reason that service income is taxable at 40 per cent plus applicable surcharge and cess and consequential interest u/s 234B and 234C was levied.

Against the order dated 14th June, 2019, the Assessee filed a rectification application which was disposed of vide order dated 22nd August, 2019, passed by CPC, raising a demand of Rs. 2,78,10,114. This demand arose as service income was held to be taxable at 40 per cent and TDS credit of Rs. 2,78,10,114 was denied. The Assessee filed one more rectification application on 15th October, 2019. The CPC vide its order dated 24th October, 2019 raised a demand of Rs. 1,06,73,750 by taxing service receipts of Rs. 2,84,40,475 at 40 per cent along with applicable surcharge and cess and denied TDS credit of Rs. 22,54,771.

Aggrieved, the Assessee preferred an appeal to CIT(A), who without going into the merits of the case, dismissed the appeal holding that the relief could have been claimed by filing revised return of income.

Aggrieved, the Assessee preferred an appeal to the Tribunal where on behalf of the revenue it was contended that the demand has been raised considering the details furnished by the Assessee in the form of return of income. Therefore, the Assessee cannot find fault with processing the order or rectification order passed. The Assessee ought to have claimed relief sought by filing revised return of income for which statutory time limit has expired. The relief now sought by the Assessee was not found in the return of income. Therefore, CIT(A) was right in holding against the Assessee.

HELD

The Tribunal noted that the Assessee has claimed a service income of Rs. 2,84,40,475 received from Heidrick and Struggles Pvt. Ltd. to be taxable as Other Sources. As per India US Tax Treaty, service rendered by the Assessee did not satisfy ‘make available clause’ of India US Treaty. Also, in the case of a group concern of the Assessee, for A.Y. 2018-19, CPC made a similar adjustment i.e. it taxed service receipt at 40 per cent. The said Assessee preferred rectification application which was allowed. The Tribunal held that it is not in dispute that as per India US Tax Treaty the impugned income is not chargeable to tax as per Article 12.

The Tribunal noted CBDT Circular No. 14 and also that the Calcutta Bench of the Tribunal has in the case of Madhabi Nag vs. ACIT [ITA No. 512/Kol/215] held that the revenue authorities ought not to have rejected rectification application u/s 154 on the ground that the Assessee has not filed revised return of income. Further, in the case of CIT vs. Bharat General Reinsurance Co. Ltd. 81 ITR 303 (Delhi), the High Court held that merely because the Assessee wrongly included the income in its return for a particular assessment year it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year.

The Tribunal held that the addition had been made only due to wrong reporting of income by the Assessee and the same cannot be sustained. The Tribunal held that the CIT(A) has committed an error in dismissing the appeal filed by the Assessee.

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Interest granted u/s 244A(2) cannot be withdrawn by passing a rectification order u/s 154 when PCCIT / CCIT / PCIT / CIT has not decided exclusion of period for interest.

30 Otis Elevator Company (India) Ltd. vs. DCIT
[2022] 141 taxmann.com 391 (Mum. – Trib.)
A.Y.: 2010-11
Date of order: 18th August, 2022
Section: 244A(2)

Interest granted u/s 244A(2) cannot be withdrawn by passing a rectification order u/s 154 when PCCIT / CCIT / PCIT / CIT has not decided exclusion of period for interest.

FACTS

The assessment was finalized u/s 143(3) on 4th February, 2014. Subsequently, however, the Assessing Officer (AO) withdrew the interest granted u/s 244A(2) on the ground that “it is undisputed fact that in the income tax return filed u/s 139(1) on 30th September, 2010, the TDS claim was Rs. 10,62,11,325 which was enhanced to Rs. 13,70,80,237 by filing revised return on 29th March, 2012” and “thus, the delay was on the part of the Assessee to make correct claim of refund”. The interest payment of Rs. 43,71,038 was thus withdrawn, disregarding the plea of the Assessee that on merits such a claim could not have been declined, and, in any event, such a withdrawal of interest is beyond what is permissible u/s 154. The assessee carried the matter in appeal but without any success. The assessee is in second appeal before us.

HELD

The Tribunal observed that the dispute between the Assessee and the revenue was whether or not the Assessee is responsible for delay in refund. It noted that the guidance to deal with such situations is provided in 244A(2) which inter alia provides that “where any question arises about the period to be excluded (for which interest is to be declined), it shall be decided by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, whose decision thereon shall be final”. The Tribunal held that, therefore, the final call about the period to be excluded for grant of interest is to be taken by the higher authority and that exercise is admittedly not done in the present case. Referring to the observations in a co-ordinate bench decision in the case of DBS Bank Ltd. vs. DDIT [(2016) 157 ITD 476 (Mum)] wherein it has inter alia been held that:

(i) The delay in making of the claim by itself, without anything else, cannot lead to the conclusion that the delay is attributed to the Assessee.

(ii) Even if the interest u/s 244A could be declined for this period on merits, not declining the interest u/s 244A could not be treated as a mistake apparent on record within the inherently limited scope of Section 154.

(iii) When a question arises as to the period for which such interest under section 244A is to be excluded, this is to be decided by the Commissioner or the Chief Commissioner.

The Tribunal found itself in agreement with the views of the co-ordinate bench and following the same upheld the plea of the Assessee to the extent that given the limited scope of section 154 for rectification of mistakes apparent on record and given the fact that the period to be excluded for grant of interest has not yet been taken a call on by the PCCIT/CCIT/PCIT or the CIT, the impugned withdrawal of interest u/s 244A(2) is beyond the scope of rectification of mistake u/s 154.

The Tribunal set aside the order of rectification passed by the AO u/s 154 of the Act.

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Advances received by an Assessee landlord who has converted land into stock-in-trade, following project completion method, are not taxable on receipt basis.

29 ACIT vs. Suratchandra B. Thakkar (HUF)
TS-648-ITAT-2022 (Mumbai)
A.Y.s: 2006-07 to 2008-09
Date of order: 12th August, 2022
Section: 28

Advances received by an Assessee landlord who has converted land into stock-in-trade, following project completion method, are not taxable on receipt basis.

FACTS

The assessee was a 25 per cent owner of a land in respect of which development agreement was entered into with K. Raheja Universal Pvt. Ltd. Under the terms of the Development Agreement, the land owners and developers were to share sale proceeds in the ratio of 45.5 per cent and 54.5 per cent respectively. The Assessee had a 25 per cent share in land, and was entitled to 25 per cent of 45.5 per cent share receivable by the land owners. The project consisted of construction of four towers of which two were completed in previous year relevant to A.Y. 2008-09 and two were completed in previous year relevant to A.Y. 2009-10.

The Assessee received advances of Rs. 1,78,68,399, Rs. 96,04,258 and Rs. 2,77,19,807 against sale of flats in A.Ys. 2006-07, 2007-08 and 2008-09 respectively. However, no income was offered on the ground that the Assessee was following the project completion method of accounting, and entire income was declared in A.Ys. 2008-09 and 2009-10 on completion of the project, receipt of occupancy certificate and execution of conveyance deed in favour of buyers.

According to the Assessing Officer (AO), as the entire cost of construction was being met by the developer, the project did not require any contribution from the Assessee. Therefore, the advances received became final and certain. The AO also observed that the Assessee had not shown any work-in-progress in the balance sheet. Also, since there was no risk attached to the Assessee, the advances, according to the AO, became income in the year of their receipt.

Aggrieved, the Assessee preferred an appeal to CIT(A) who allowed the appeal filed by the Assessee and held that the land was not transferred by the land owners to the developers till the completion of construction and therefore entire risk of the project remained with the land owners including the Assessee.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the Assessee has already paid tax on advances received in A.Ys. 2008-09 and 2009-10. The Tribunal concurred with the following findings of the CIT(A):

(i) Since the land in question was treated as stock-in-trade by the Assessee in its books of account, transfer of the same was not liable to be taxed as capital gain.

(ii) The Supreme Court, in the case of Seshasayee Steel Pvt. Ltd. 115 taxmann.com 5 (SC), held that executing a development agreement granting permission to start advertising, selling and construction and permitting to execute sale agreement to a developer does not amount to granting possession u/s 53A of the Transfer of Property Act.

(iii) Possession of land has been handed over to the prospective buyers consequent to the conveyance in favour of co-operative society of flat owners.

(iv) The assessee was regularly and consistently following completed contract method.

(v) In case of the developer also, the completed contract method has been accepted by the revenue.

The Tribunal did not find any error in the finding of the CIT(A) in upholding the project completion method or the completed contract method followed by the Assessee for declaring the income from the project under reference.

The Tribunal dismissed the appeal filed by the revenue for all the three years.

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Proviso to section 43CA providing for tolerance limit of 10 per cent, being beneficial in nature, is retrospective.

28 Sai Bhargavanath Infra vs. ACIT
TS-658-ITAT-2022 (Pune)
A.Y.: 2014-15
Date of order: 17th August, 2022
Section: 43CA

Proviso to section 43CA providing for tolerance limit of 10 per cent, being beneficial in nature, is retrospective.

FACTS
The Assessee, a builder and developer, filed its return of income for A.Y. 2015-16 declaring therein a total income of Rs. 47,17,490. The Assessing Officer (AO) while assessing the total income of the assessee made an addition of Rs. 19,58,875 u/s 43CA of the Act, being difference between sale value of the flats sold and their stamp duty value.

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

Aggrieved, the Assessee preferred an appeal to the Tribunal where it contended that the stamp duty value was at an uniform rate without taking into consideration the peculiar features of a particular property. It was also contended that the difference of Rs. 19,58,875 was less than 10 per cent and therefore, not required to be added. For this proposition reliance was placed on the decision of Pune Tribunal in IT No. 923/Pun/2019 for A.Y. 2016-17, order dated 4th August, 2022 and also on the Assessee’s own case in ITA No. 2417/Pun/2017 for A.Y. 2014-15, the Tribunal on the very similar issue had remanded the matter back to the file of the AO for fresh consideration.

HELD
The Tribunal noted the proviso to section 43CA which provides for a tolerance limit of 10 per cent has been introduced by the Finance Act, 2020 w.e.f. 1st April, 2021 and that the assessment year under consideration is before the date when the amendment took place and therefore, the question is whether the proviso can apply to assessment years prior to its introduction as well.

The Tribunal observed that the decision of the Pune Bench in ITA No. 2417/Pun/2017 for A.Y. 2014-15 (supra) on which reliance has been placed by the Assessee has held the proviso to be retrospective but in the said decision reliance has been placed on the decision of Mumbai Bench of the Tribunal in the case of Maria Fernandes Cheryl vs. ITO (2021) 187 ITD 738 (Mum) which relates to section 50C of the Act. On behalf of the Assessee it was submitted that section 43CA and section 50C of the Act are pari materia provisions and therefore, holding of retrospective application of section 50C is even applicable making retrospective application to section 43CA of the Act as well. The Tribunal observed that the AR was unable to place on record any direct decision where first proviso to section 43CA has been held to be retrospective.

The Tribunal noted that the judgment of the full bench of the Apex Court in the case of CIT vs. Vatika Township Pvt. Ltd. (2014) 367 ITR 466 (SC) has held that if any liability has to be fastened with the Assessee taxpayer retrospectively then the statute and the provision must spell out specifically regarding such retrospective applicability. However, if the provision is beneficial for the Assessee, in view of the welfare legislation spirit imbibed in the Income-tax Act, such a beneficial provision can be applied in a retrospective manner. The Tribunal examined the insertion of the first proviso to section 43CA in the light of the ratio of the decision of the Apex Court in Vatika Township (supra) and held the intent of the legislature is to provide relief to the Assessee in case such difference is less than 10 per cent which has been brought into effect from 1st April, 2021 thereby providing benefit to the Assessee. This being the beneficial provision therefore will even have retrospective effect and would apply to the present A.Y. 2015-16.

The Tribunal observed that Pune Bench of the Tribunal in Shri Dinar Umeshkumar More vs. ITO [ITA No. 1503/PUN/2015 for A.Y. 2011-12 dated 25th January, 2019] has considering the proposition of applicability of a beneficial provision in light of Hon’ble Apex Court decision in the case of Vatika Township Pvt. Ltd. (supra) has held that if a fresh benefit is provided by the Parliament in an existing provision, then such an amendment should be given retrospective effect.

The Tribunal allowed the ground of appeal by holding that the first proviso to section 43CA has retrospective effect.

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

INTRODUCTION

Section
12A(1)(b) of the Income-tax Act 1961 (“the Act”) has been amended by
the Finance Act, 2022 w.e.f the assessment year 2023-24 to provide that a
charitable institution claiming exemption u/s 11 and 12 shall keep and
maintain books of account and other documents (“books of
account/documents”) in such form and manner and at such place, as may be
provided by rules.

BRIEF ANALYSIS OF THE SECTION

(a)
On a literal reading, even a solitary point of difference between the
assessee and the Assessing Officer (“AO”) as to whether prescribed
books/documents are maintained or whether they are maintained at the
prescribed place or whether they are maintained in the prescribed form
or in the prescribed manner can result in denial of exemption u/s 11/12
and taxation u/s 13(10). On the other hand, it has been held that “when
there is general and substantive compliance with the provisions of a
rule, it is sufficient.” [CIT vs. Leroy Somer and Controls India (P.)
Ltd., (2014) 360 ITR 532 (Del), cited in Worlds Window Impex (India) (P.) Ltd. vs. ACIT, (2016) 69 taxmann.com 406 (Del.-Trib.)]

Also see:

• Arvind Bhartiya Vidhyalya Samiti vs. ACIT, (2008) 115 TTJ 351 (Jaipur)

• CIT vs. Tarnetar Corporation, (2014) 362 ITR 174 (Guj)

• CIT vs. Sawyer’s Asia Ltd., (1980) 122 ITR 259 (Bom)

• CIT vs. Harit Synthetic Fabrics (P.) Ltd., (1986) 162 ITR 640 (Bom)

Applying
the principle, it could be argued that if there is substantial
compliance with the prescribed rule, then exemption u/s 11 cannot be
denied. Further, it is also a moot point as to whether it could be
argued that having regard to the onerous consequences, the AO should
give an opportunity to the assessee to make good the deficiency and only
if the assessee fails to do so that the AO should deny the exemption
u/s 11.

(b) While books of account should be maintained
regularly as a good practice, there is no provision requiring the other
documents/records to be maintained contemporaneously. Also, there is no
provision prohibiting correction in the records.

RULE 17AA

The
CBDT has notified Rule 17AA (“the Rule”) specifying the books of
accounts and other documents to be maintained by a charitable
institution. [Notification No. 94/2022 dated 10th August, 2022 under the Income-tax (24th Amendment) Rules, 2022]

This article analyses the said Rule, which contains more than 50 requirements.

Brief analysis of the Rule as a whole

The
Rule requires record keeping of various receipts/payments in respect of
which, Courts/Tribunal could have taken different views and hence,
there could be a controversy as to their scope. To illustrate, the Rule
requires records of application of income outside India. For this
purpose, Courts/Tribunal are divided on what constitutes the application
of income “outside India”. Thus, in such cases, if the assessee adopts a
favourable interpretation based on a judicial precedent which is not
accepted by the tax department, the AO may hold that proper documents
have not been maintained. To mitigate this exposure, it is advisable
that the assessee keeps notes explaining why it has considered or not
considered a particular receipt/payment under the relevant Rule. Such
notes may be kept along with the record to which it is applicable.
Difficulty may arise if a subsequent ruling of the Courts/Tribunal takes
a view different from what has been adopted hitherto by the assessee in
maintaining the records. In such circumstances, the assessee may
continue the old practice with a note that the interpretation based on
the judgment has not been followed by it. In the alternative, the
assessee could maintain specified information with a note that it is
maintained without prejudice to its claim to the contrary.

Difference between amount as per records and as per computation of income for return of income: whether permissible?

Suppose
the assessee has maintained records on a particular basis, but for the
return of income, he is advised to adopt a different basis favourable to
him. For the following reasons, it appears that the assessee can adopt
such different basis:

• If a particular income is not
taxable under the Income-tax Act, it cannot be taxed on the basis of
estoppel or any other equitable doctrine. [CIT vs. V. Mr. P. Firm, Muar,
(1965) 56 ITR 67 (SC); Taparia Tools Ltd. vs. JCIT, (2015) 7 SCC 540]. Hence, the assessee is not estopped from offering correct income instead of the income as per the documents maintained by him.

• The AO is duty bound to guide the assessee and compute the correct income. See

• CBDT Circular No. 14 of 1955.

• CIT vs. Mahalaxmi Sugar Mills Co. Ltd., (1986) 27 Taxman 267 (SC).

If
the AO is duty bound to assess the correct income, surely, he is duty
bound to accept the right of the assessee to offer correct income
contrary to what is ascertained on the basis of the documents maintained
by him.

• It is now well settled that an additional ground not raised before the AO can be raised before CIT(A) [Jute Corporation of India Ltd vs. CIT, (1991) taxmann.com 30 (SC)] and subject to fulfillment of conditions, a claim could be made for the first time before the Tribunal [see National
Thermal Power Co. Ltd. vs. CIT, (1998) 229 ITR 383 (SC), Ahmedabad
Electricity Co. Ltd. vs. CIT, (1993) 199 ITR 351 (Bom)].

If
claim could be made for the first time before appellate authorities,
there is no reason why a claim contrary to documents/records maintained
may not be made in the return of income.

Date from which the Rule is applicable

The Rule has “come into force from the date of their publication in the Official Gazette”,
that is, 10th August, 2022. Since the Rule will be in force on the
first day of the A.Y. 2023-24, it may be contended that it is applicable
throughout the relevant previous year, that is, 1st April, 2022 to 31st
March, 2023. In other words, the books/documents are required to be
maintained for the entire period from 1st April, 2022. It could be
argued for the following reasons, that the Rule cannot apply to the
period prior to 10th August, 2022:

• Section 295(4) provides
that a rule cannot have retrospective effect unless it is permitted
expressly or by necessary implication. In the instant case, the Rule
expressly mentions that it shall come into force from the date of
publication in the Official Gazette; in view of this express statement,
it appears that the condition for a Rule having a retrospective effect
is not satisfied by Rule 17AA.

• The Supreme Court has observed as follows:

• every
statute is prima facie prospective unless it is expressly or by
necessary implication made to have retrospective operations. [CIT vs.
Essar Teleholdings Ltd., (2018) 90 taxmann.com 2 (SC)] (in the context of rule 8D of the Income-tax Rules);

•
… one established rule is that unless a contrary intention appears, a
legislation is presumed not to be intended to have a retrospective
operation. The idea behind the rule is that a current law should govern
current activities. Law passed today cannot apply to the events of the
past. If we do something today, we do it keeping in view the law of
today and in force and not tomorrow’s backward adjustment of it. [CIT vs. Vatika Township P. Ltd., (2014) 367 ITR 466 (SC)].

In view of the above, the Rule cannot be said to require maintenance of books/documents for the period up to 10th August, 2022.

•
It appears that whenever a rule has to have a retrospective effect, it
clearly states that it shall come into force from a prior date.
Further, the Explanatory Memorandum in Notification dated 30th June,
2020 containing the Income-tax (15th Amendment) Rules, 2020 and
Notification dated 29th December, 2021 containing the Income-tax (35th
Amendment) Rules, 2021 also mention that the relevant rules have a
retrospective effect. It is pertinent that no such reference is made in
Rule 17AA. Further, the Rule explicitly states that it shall come into
force from the date of publication of Gazette; if it was to have
retrospective effect, it would have clearly stated 1st April, 2022.

Section
44AA(3) provides that the Board may prescribe the books of account and
other documents to be kept and maintained, the particulars to be
contained therein and the form and the manner in which and the place at
which they shall be kept and maintained. On the other hand, section
12A(b)(i) reads as follows:

(i) the books of account and other
documents have been kept and maintained in such form and manner and at
such place, as may be prescribed;

Thus, unlike section
44AA(3), section 12A(b)(i) does not provide for books/documents or the
particulars to be contained therein to be prescribed. It is a moot point
as to whether to the extent Rule 17AA requires the said details, it
conflicts with the section.

It may be noted that the Memorandum to Finance Bill 2022 reads as follows:
“However,
there is no specific provision under the Act providing for the books of
accounts to be maintained by such trusts or institutions…”.

Thus,
the Memorandum suggests that the amendment would list the books of
accounts to be maintained. However, an Explanatory Memorandum is usually
‘not an accurate guide of the final Act’, [Shashikant Laxman Kale vs. UOI, (1990) 185 ITR 104 (SC); Also see Associated Cement Co. Ltd. vs. CIT, (1994) 210 ITR 69 (Bom)]. Hence, it could be argued that a mere statement in Memorandum cannot override the Act.

The clauses of the Rule are now analysed, after reproducing the relevant text.

Rule 17AA(1)(a)(Text)

“Books of account and other documents to be kept and maintained—

(1)
Every fund or institution or trust or any university or other
educational institution or any hospital or other medical institution
which is required to keep and maintain books of account and other
documents under clause (a) of the tenth proviso to clause (23C) of
section 10 of the Act or sub-clause (i) of clause (b) of sub-section (1)
of section 12A of the Act shall keep and maintain the following,
namely:-

(a)   books of account, including the following, namely….”

(i)   cash book;

(ii)   ledger;

(iii)   journal;

(iv)
copies of bills, whether machine numbered or otherwise serially
numbered, wherever such bills are issued by the assessee, and copies or
counterfoils of machine numbered or otherwise serially numbered receipts
issued by the assessee;

(v)   original bills wherever issued to the person and receipts in respect of payments made by the person;

(vi)
any other book that may be required to be maintained in order to give a
true and fair view of the state of the affairs of the person and
explain the transactions effected;

Analysis

Clause
(a), on a literal reading, is an inclusive provision which means that it
includes not only the specified books of accounts but also any other
book which is understood in normal accounting parlance as books of
account. This makes the definition highly subjective (what is “books of
accounts” in normal parlance?) and may result in litigation. For
instance, there could be a case where the assessee may have maintained
the books specified in Rule 17AA(1)(a). However, the AO may be of the
view that the assessee has not maintained certain other books/documents
which are not specifically mentioned but which, in his opinion, are
books of account in normal parlance and are necessary.

As against the above, it could be argued that the definition is exhaustive, on the basis of the following reasons:

• The Supreme Court has observed that “it is possible that in some context the word “includes” might import that the enumeration in exhaustive”. [Smt. Ujjam Bai vs. State of Uttar Pradesh, AIR 1962 SC 1621].

•
Rule 17AA(a)(vi) is a residuary clause which requires any “other” book
to give a true and fair view. The use of the expression “any other”
suggests that the list is exhaustive.

• The clause uses the expression “namely” and it has been held that “… use
of the expression ‘namely’, … followed by the description of goods is
usually exhaustive unless there are strong indications to the contrary”. [Mahindra Engineering and Chemical Products Ltd. vs. UOI, (1992) 1 SCR 254 (SC)].

Diaries or bundles of sheets are not books of account.

A mere collection of sheets or diaries cannot be regarded as books of account.

Please see:

•
A book which merely contains entries of items of which no account is
made at any time, is not a “book of account” in a commercial sense. [Sheraton Apparels vs. ACIT, (2002) 256 ITR 20 (Bom)]

•
A book of account… must have the characteristic of being fool-proof.
A bundle of sheets detachable and replaceable at a moment’s pleasure
can hardly be characterized as a book of account. [Zenna Sorabji vs. Mirabelle Hotel Co. Pvt. Ltd., AIR 1981 Bom 446]

Bills and receipts in respect of income [Rule 17AA(1)(a)(iv)]

This sub-clause refers to income of the assessee.

Paraphrasing, books of account include:

• copies of bills issued by the assessee where the bills have to be machine numbered or serially numbered; and

•
copies of receipts or counterfoils of receipts issued by the assessee
where the receipts or counterfoils, as the case may be, have to be
machine numbered or serially numbered.

The expression “bills issued by the assessee” is wide enough to include bills.

•   in respect of sale of capital assets;
•   arising in the course of business or otherwise; and
•   not paid by the counterparty.

“Receipts” include those in respect of

• payment received against sale of goods/services by the charitable institution; and

• donations received.

In
the context, the expression “wherever” means in any case or in any
circumstances in which a bill is issued; in other words, books of
account include only those bills which are issued: it does not mean that
the assessee should always issue bills.

Bill

The expression ‘bill’ is an itemized account of the separate cost of goods sold, services rendered, or work done: Invoice
[Webster’s Seventh New Collegiate Dictionary, page 84]. In the context
of this sub-clause, ‘bill’ means an invoice for goods sold or services
rendered, or work done and should include a cash memo [see CST vs. Krishna Brick Field, (1985) 58 STC 336 (All)].

Original bills and receipts [Rule 17AA(1)(a)(v)]

In
the previous sub-clause, it is stated that books of account include
copies of bills issued by “the assessee” whereas this sub-clause
requires original bills issued to “the person”; it appears that the word
“person” here refers to the assessee himself and not a third party.
With this interpretation, the preceding sub-clause and this sub-clause
become complementary to each other: one covering income/receipts and
other covering expenditure/payments.

The term “payment bills” and
“receipts” are wide enough to cover revenue expenditure and capital
expenditure. On a literal reading, even bills for purchase of
investments, such as debentures, are covered.

Any other book in order to give a true and fair view and explain the transactions effected [Rule 17AA(1)(a)(vi)]

This
requirement is similar to the requirement in section 128(1) of the
Companies Act 2013. However, Rule 6F, prescribing books for
professionals, does not have such a requirement.

Rule 17AA(1)(b)(Text)

Books of account, as referred in clause (a), for business undertaking referred in sub-section (4) of section 11 of the Act.

Analysis

This
clause requires books of accounts for a business undertaking referred
to in section 11(4). It requires separate books of accounts for every
business undertaking owned by the assessee.

The term “business undertaking” is not defined in the Act.

“Business” is defined in section 2(13) as includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture;

Business ordinarily involves profit motive. See:

• DIT(E) vs. Gujarat Cricket Association, (2019) 419 ITR 561 (Guj)

• CIT(E) vs. India Habitat Centre, (2020) (1) TMI 21 – Delhi HC,

• DIT(E) vs. Shree Nashik Panchvati Panjrapole, (2017) 81 taxmann.com 375 (Bom)]

The terms “undertaking/industrial undertaking” have been judicially explained as follows:

•
the existence of all the facilities including factory buildings,
plant, machinery, godowns and things which are incidental to the
carrying on of manufacture or production, all of which when taken
together are capable of being regarded as an industrial undertaking [CIT vs. Premier Cotton Mills Ltd., (1999) 240 ITR 434 (Mad)].

• ‘Undertaking’ in common parlance means an ‘enterprise’, ‘venture’ and ‘engagement’. (Websters Dictionary). [P. Alikunju vs. CIT, (1987) 166 ITR 804 (Ker)].

Hence,
the expression “business undertaking” should mean an enterprise with
various assets and which is carried on with profit motive.

The
books of account are required to be maintained in order to be eligible
to claim an exemption u/s 11 [section 12A(1)]. If the business is such
that proviso to section 2(15) applies then there is no question of
obtaining the benefit of section 11 and maintaining the books is
irrelevant. However, on a literal reading, books of accounts are
required for every business undertaking, whether or not the profits of
the business undertaking are exempt under proviso to section 2(15).

The provision applies whether or not the profits of the business undertaking are exempt u/s 11(4A).

All
business undertakings irrespective of the object, that is, whether in
the course of medical relief or education or yoga or advancement of
general public utility, are covered by the clause.

Rule 17AA(1)(c)(Text)

Books
of account, as referred in clause (a), for business carried on by the
assessee other than the business undertaking referred in sub-section (4)
of section 11 of the Act; [Rule 17AA(1)(c)].

Analysis

On
a plain reading, it refers to a business which is not carried on
through an undertaking. To illustrate, a one-off adventure in the nature
of trade could be regarded as a business; however, it may not be
carried on through an undertaking. The clause requires separate books of
accounts for such a business. Even in this case, it appears that the
profit motive ought to be there before the activity can be regarded as a
business.

The provision requires separate books of accounts for every business of the assessee.

On a literal reading, the provision covers all businesses:

(a) whether or not the profits of the business are exempt under proviso to section 2(15) or u/s 11(4A); and

(b) irrespective of the object pursuant to which the business is set up.

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

(d) other documents for maintaining

(i) record of all the projects and institutions run by the person containing details of their name, address and objectives;

Analysis

This clause refers to “other documents”, which term has been explained by High Court as follows:

The
authorities can require production of accounts and other documents. The
words “other documents” in the section are vague and indefinite. Under
the Rules of construction of statutes, where general words follow
particular words, the general words will have to be construed in the
light of particular words. … the ejusdem generis Rule. Therefore, “other
documents” will be in the nature of account books, bill books etc.,
that have some relation to the accounts and not any correspondence etc. [P. K. Adimoolam Chettiar, In Re (1957) 8 STC 741 (Mad.)].

Applying
the principle, it appears that the provision enables the CBDT to
prescribe only those documents having some relation to books of account
and not any other correspondence, paper, documents etc.

The term “document” is defined in section 3(18) of the General Clauses Act, 1897 as follows:
…
“document”
shall include any matter written, expressed or described upon any
substance by means of letters, figures or marks, or by more than one of
those means which is intended to be used, or which may be used, for the
purpose or recording that matter.

Projects and institutions

The requirements under this sub-clause are perhaps, pursuant to section 2(15), section 11(4) and section 11(4A).

Project

The
term ‘project’ is neither defined in the Act nor used in section 11 to
section 13. In ITR – 7, the details of projects are required, although
even in the ITR the term is not explained. In the absence of a clear
definition, there could be conflicting views between the assessee and
the tax department as to what constitutes a ‘project’.

According to the dictionary, a project means ‘A
set of activities intended to produce a specific output, which has a
definite beginning and end. The activities are interrelated and must be
brought together in a particular order, based on precedence
relationships between the different activities. Examples of projects
include the building of the Channel Tunnel and the design of a computer
system for an ambulance service. Projects are usually based on bringing
together teams of specialists within relatively temporary management
structures. Project management techniques are increasingly being used to
manage such tasks as the introduction of total quality management
within organizations. [Oxford’s Dictionary of Business and Management, pages 423 and 424].

Every project undertaken will have to be included since there is no de minimus clause.

Institution

Section 2(24)(iia) covers ‘institution’ established wholly or partly for charitable purposes.

The term “institution” has not been defined in the Act. It has been judicially explained as follows:
In
the Oxford English Dictionary, Volume V at page 354, the word
“institution” is defined to mean “an establishment, organisation, or
association, instituted for the promotion of some object, especially one
of public or general utility, religious, charitable, educational, etc.”
[CIT
vs. Sindhu Vidya Mandal Trust, (1983) 142 ITR 633 (Guj); Mangilal
Gotawat Charitable Trust vs. CIT, (1985) 20 Taxman 207 (Kar)].

The term would include schools, colleges, hospitals, etc.

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

record of income of the person during the previous year, in respect of, –

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

(II)   income from property held under trust referred to under section 11 of the Act along with list of such properties;

(III)
income of fund or institution or trust or any university or other
educational institution or any hospital or other medical institution
other than the contribution referred in items (I) and (II);

Analysis

This
sub-clause requires maintenance of record of income during the previous
year. It applies only in the case of “income” and not receipts not
constituting income.

Voluntary contribution containing details of name of the donor, etc. [Item (I)]

The
requirement under this item is pursuant to section 11(1), including
section 11(1)(d) and section 115BBC (anonymous donations).

PAN and Aadhar number are to be recorded if available. Hence, they are not mandatory.

The
requirement regarding the name and address of donors also applies to a
religious trust, which gets donations in its donation box. In such
circumstances, obviously, it will not be possible for the Trust to
maintain such details and it should suffice if the assessee mentions
this fact. It may be noted that even section 115BBC, which deals with
anonymous donations, does not apply to a wholly religious trust.

The
requirement covers contributions in kind. Now, strictly speaking,
offerings in kind in a temple constitute voluntary contribution and
hence income (see CBDT Circular No. 580 dated 14th September, 1990).
There is no de minimis clause and to take an extreme example, all offerings made in a temple such as coconuts, pedhas,
etc. also constitute income whose details have to be recorded!
Similarly, record for donation of even rupees ten have to be collated!

Details of all voluntary contributions, corpus as well as non-corpus, are required.

It
appears that the documents supporting these details are not required to
be maintained; to illustrate, a photocopy of the Aadhar card is not
required to be maintained.

Income from property held under trust along with list of such properties; [Item (II)]

Section
12(1) provides that voluntary contributions (other than corpus
donations) shall, for the purposes of section 11, be deemed to be
“income derived from property held under trust”. On the other hand, this
item refers to “income from property held under trust”. Again,
voluntary contributions are already covered by Item I. Hence, for the
purpose of this item, the expression “income from property held under
trust” does not include voluntary contributions.

The term ‘property held under trust’ is very wide and includes:

(a) income earned by it in the course of carrying out its objects.

(b) assets acquired out of such income referred to in (i) above or out of donations received by it. [ACIT vs. Etawah District Exhibition and Cattle Fair Association, (1978) 1978 CTR 166 (All)]

Thus,
even an FD is ‘property held under trust’. Any change, such as
withdrawal of FD, would require alteration in the ‘list of such
properties’.

Property held under trust includes assets invested u/s 11(2).

The requirement under this item is also partially repeated in the following clause/sub-clause/item:

• (d)(iii)(VI)

• (d)(iv)(IV)/(V)

• (d)(v)(VI)/(VII)

Income other than the contribution referred in Items (I) and (II); [Item III]

The
requirement in this Item applies to all institutions including
religious trusts, which get donations in their donation box. It will
include anonymous donations.

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

(iii) record of the following, out of the income of the person during the previous year, namely:

(I)
application of income, in India, containing details of amount of
application, name and address of the person to whom any credit or
payment is made and the object for which such application is made;

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

(III)
application of income outside India containing details of amount of
application, name and address of the person to whom any credit or
payment is made and the object for which such application is made;

(IV)
deemed application of income referred in clause (2) of Explanation 1
of sub-section (1) of section 11 of the Act containing details of the
reason for availing such deemed application;

(V)   income
accumulated or set apart as per the provisions of the Explanation 3 to
the third proviso to clause (23C) of section 10 or sub-section (2) of
section 11 of the Act which has not been applied or deemed to be applied
containing details of the purpose for which such income has been
accumulated;

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

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

Analysis

The
requirement under this item is pursuant to section 11(1), Explanation
1(2), Explanation 2, 3, 4 to section 11(1), 11(2), 11(5), etc.

Its main purpose is to identify the amount of application of income which is allowable u/s 11(1)(a).

Out of “income of the previous year”

It appears that for this purpose income excludes “corpus donations” received by the assessee and treated as exempt u/s 11(1)(d).

The
expression “income of the previous year”, used in this clause can lead
to computational issues. To illustrate, if a payment is made on 1st
April, is it out of the income of the previous year? Again, in the case
of mixed funds (income for the year as well as accumulated income,
corpus donations, borrowing, etc.), how to determine which fund has been
applied? Three principles set out by judgments are explained below:

• In Siddaramanna Charities Trust vs. CIT [(1974) 96 ITR 275 (Mys)],
donation was made by the assesse on the first day of the accounting
year; The Court noticed that during the relevant previous year, there
was a profit and the sum donated was less than the amount of the
profits. It was also not shown that the said amount was paid out of the
capital account. Hence, it was held that the said donation was
application of income of the previous year, although when the donation
was given on the first day there was no profit of the previous year.

• In Infosys Science Foundation vs. ITO(E), TS-453-ITAT-2018(Bang),
it has been held that once income is accumulated u/s 11(2) [say, in
year 1], the assessee can claim that application of income in year 2
should be split into two: initially, the application should first be
considered as having been made out of the accumulation of year 1 and
only the remainder should be considered as an application of income of
year 2. In this case, both the accumulation of unutilized income of year
1 u/s 11(2) as well as the income of year 2 were deployed in the form
of fixed deposits in bank, which were renewed and reinvested and it was
not possible to link the identity of the deposits with either one of the
accumulations or the current income.

• For the purposes of other sections, the Supreme Court has held as follows:

•
Where interest-free own funds available with the assessee exceeded its
investments in tax-free securities; investments would be presumed to be
made out of assessee’s own funds, and proportionate disallowance was
not warranted u/s 14A although separate accounts were not maintained by
the assessee for investments and other expenditure incurred for earning
tax-free income [South Indian Bank Ltd. vs. CIT, (2021) 130 taxmann.com 178 (SC)].

•
If interest-free funds available to the assessee were sufficient to
meet its investment in subsidiaries, the assessee’s claim for deduction
was justified [CIT vs. Reliance Industries Ltd., (2019), 102 taxmann.com 52 (SC)].

The above judgments could be relevant in ascertaining whether the application is “out of income of the previous year” or not.

It
appears that what is required is that the assessee should choose a
reasonable method of determining the source from which the application
is made and follow it uniformly.

Application of income in India [Item (I)]

This item requires maintenance of details of the application.

The
term ‘application of income’ is very wide and includes, expenditure on
salaries, administrative expenses, establishment expenses, donations to
other institutions, capital expenditure, etc.

Every payment is a
different and separate application. Thus, a voucher for even a payment
of Rs. 10 (for say, conveyance) shall have to be recorded separately.

The Rule requires details of the “amount” of application, which term has been judicially explained by Courts as follows:

•
…from the point of view of linguistics, the words “sum” and “amount”
are synonyms. But under the Income Tax Act, each of the words “sum”,
“amount”, “income” and “payment” have different connotations. [T. Rajkumar vs. UOI, 2016 (4) TMI 593 – Madras High Court]

•
The word “amount” is used here in a wider sense than usual and that it
includes the total quantity of the debtor’s liabilities in cash or in
kind. Consequently, the payment of these “amounts” can also be either in
cash or in kind. [Shridhar Krishnarao vs. Narayan Namaji, AIR 1939 Nag 227]

Thus,
the Item may require details of the amount of application in kind also.
To illustrate, if a hospital receives an ambulance as a non-corpus
donation, then the value of the ambulance is to be regarded as income of
the hospital and if it is used for the purposes of the hospital,
simultaneously the same amount is be regarded as application of income
[see CBDT Circular No. 580 dated 14th September, 1990)]. In such a
circumstance, the details of the ambulance will have to be recorded
under this item.

If an assessee is constructing a building, he
will have to maintain details of every payment made for purchase of
cement, sand, bricks, iron and steel, etc. and daily payment to
contractor!!!

Every TDS from payment is a separate application and hence, will have to be separately recorded.

If
more than one payment is made to a person for the same object, then it
appears that all the payments during the previous year to such person
can be aggregated.

Explanation 2 to section 11(1) provides that a
“corpus donation” to another specified institution shall not be treated
as application of income. Similarly, Explanation 3 provides cash
payments or payments without deduction of tax at source will be
partially disallowable and not treated as application. Whether these
Explanations have to be considered in recording the details? It appears
that the requirement of the Rule is complete record keeping. It should
not be affected by the tax treatment of expenses in the computation of
income. Hence, it may be advisable to consider all such payments as
application of income with due disclosure by way of note.

Amount credited or paid to any other Trust etc. [Item (II)]

Explanation to section 11(2) uses the same language, that is, amount credited or paid to any other trust.
However,
such payments are not required to be recorded under this item. This is
because what is required is amount paid or credited out of the income of
the previous year, whereas Explanation to section 11(2) covers any
amount credited or paid to a charitable institution out of “accumulated
income of preceding years”: such payments are required to be recorded
under Rule 17AA(1)(d)(iv)(III).

The details of all
payments/credits to the specified institution are required, irrespective
of whether the payment is towards corpus of the payee or not.

Application of income outside India [Item (III)]

There
is a huge controversy on what constitutes application of income outside
India. The purpose is to identify the amount of application which is
not to be considered for exemption of income u/s 11(1)(a).

Deemed application of income referred in Explanation 1(2) to section 11(1) [Item (IV)]

An
assessee can decide whether to opt for deemed application of income or
not only after the finalization of accounts and computation of taxable
income. Hence, this record cannot be maintained contemporaneously during
the year but only after the amount of deemed application is determined.

The
item requires details of reasons for availing of deemed application.
Explanation 1(2) to section 11(1) provides that the option may be
availed “(i) for the reason that the whole or any part of the income
has not been received during that year, or (ii) for any other reason”.

It appears that the assessee need not give precise reasons but cite the aforesaid provision to justify the option availed of.

Income accumulated or set apart u/s 11(2) [Item (V)]

This
amount can also be recorded only after the end of the previous year
when the amount of income accumulated u/s 11(2) is determined.

Money invested or deposited in permissible modes of section 11(5) [Item (VI)]

If
a fixed deposit is placed during the year and it matures before 31st
March, is it required to be recorded under this provision? On a literal
reading, record has to be maintained for each and every investment or
deposit, whether continuing at the end of the year or not.

It appears that income for this purpose does not include corpus donations received during the year.

The details under this item are partially sought also under Rule 17AA(1)(d)(ii)(II).

Money invested or deposited in non-permissible modes [Item (VII)]

In
this case also, each and every investment or deposit in non-permissible
mode is required to be reported. This is because section 13(1)(d)
provides that income is not exempt to the extent of investment or
deposit in non-permissible mode.

[Some other interesting issues of this amendment will be discussed by the Author in part – II of this Article.]

[Author
acknowledges assistance from Adv. Aditya Bhatt, CA Kausar Sheikh, CA
Chirag Wadhwa and CA Arati Pai in writing this Article.]

shailesh.kwebmaker

S. 148A(d) – Reopening of assessment – Impugned SCN as well as the impugned order u/s 148A(d) of the Act are based on distinct and separate grounds – Information referred in SCN not provided to Assessee

11 Best Buildwell Private Limited vs. Income Tax Officer, Circle 4 (2), Delhi & Anr.
W.P.(C) 11338/2022
Date of order: 1st August, 2022
Delhi High Court

S. 148A(d) – Reopening of assessment – Impugned SCN as well as the impugned order u/s 148A(d) of the Act are based on distinct and separate grounds – Information referred in SCN not provided to Assessee

The petitioner challenged the order dated 30th March, 2022 passed u/s 148A(d) and notice dated 31st March, 2022 issued u/s 148 as well as show cause notice (SCN) dated 16th March, 2022 issued u/s 148A(b) for A.Y. 2018-19.

The petitioner states that the petitioner had filed its return of income for A.Y. 2018-19 declaring an income of Rs. 6,32,45,180 and a loss of Rs. 74,36,185. He states that the case of the petitioner was picked up for scrutiny, and after examination of all the submissions of the petitioner, an assessment order dated 27th April, 2021 u/s 143(3) r.w.s 144B was passed assessing the income of the petitioner at Rs. 6,41,76,500. He points out that one of the points for selecting the petitioner’s case for scrutiny was ‘Business Purchases’, and after analysing the documents submitted by the petitioner, no additions were made by the Assessing Officer on account of business purchases.

The petitioner states that the impugned SCN dated 16th March, 2022 issued u/s 148A(b) did not provide any information and/or details regarding the income that has been alleged to have escaped assessment. He states that the petitioner filed a response to the impugned SCN dated 16th March, 2022, specifically requesting the respondent to provide the details of the transaction and vendors from whom the petitioner had made purchases and raised invoices which respondent No.1 considered bogus. He further states that respondent No.1 failed to consider the fact that the petitioner had made purchases from vendors who were registered under GST and had claimed an input tax credit of GST on the purchases made from them as per statement 2A reflected on the GST portal based on the invoices raised by the vendors. He points out that the credit claimed by the petitioner has not been rejected.

The petitioner states that the impugned order dated 30th March, 2022 u/s 148A(d) merely relies on an alleged report prepared against the assessee company. He emphasises that no such report was ever furnished to the petitioner.

On behalf of the respondents, it was stated that notice u/s 148A(b) had been issued in the present instance as the petitioner’s ITR and GST Data did not reconcile. He also states that the analysis of GST information of third parties reveals substantial routing of funds by way of bogus purchases.

In rejoinder, the petitioner states that the impugned order passed u/s 148A(d) does not refer to any lack of reconciliation between the ITR and GST data of the petitioner. He also states that no GST information showing substantial routing of funds was ever furnished to the petitioner.

The Court observed that the impugned SCN, as well as the impugned order u/s 148A(d), are based on distinct and separate grounds.

The SCN primarily states that “it is seen that the petitioner has made purchases from certain non-filers”. However, no details or any information about these entities was provided to the petitioner. It is not understood as to how the petitioner was to know which of the entities it dealt with were filers or non-filers!

Further, the impugned order states that a report was prepared against the petitioner-company, which concludes that the assessee had shown bogus purchases from bogus entities to suppress the profit of the company and reduce the tax liability from 2015-16 to 2020-21. However, no such report which forms the basis for the ‘information’ on which the assessment was proposed to be reopened had been provided to the petitioner. In fact, there are no specific allegations in the SCN to which the petitioner could file a reply.

Keeping in view the aforesaid, the impugned order dated 30th March, 2022 passed u/s 148A(d) and notice dated 31st March, 2022 issued u/s 148 are quashed, and the respondents are given liberty to furnish additional materials in support of the allegations made in the SCN dated 16th March, 2022 within three weeks including reports, if any. Thereafter, the AO shall decide the matter in accordance with the law. The writ petition was disposed.

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S. 148A r.w.s. 149 – Reopening of assessment – A.Y. 2014-15 – Effect of SC Judgement in case of Ashish Agarwal dated 4th May, 2022 and Board’s Circular dated 11th May, 2022 – Where the income of an assessee escaping assessment to tax is less than Rs. 50,00,000 – Reopening not justified

10 Ajay Bhandari vs. Union of India & 3 Ors.
Writ Tax No. 347 of 2022
Date of order: 17th May, 2022
Allahabad High Court

S. 148A r.w.s. 149 – Reopening of assessment – A.Y. 2014-15 – Effect of SC Judgement in case of Ashish Agarwal dated 4th May, 2022 and Board’s Circular dated 11th May, 2022 – Where the income of an assessee escaping assessment to tax is less than Rs. 50,00,000 – Reopening not justified

The impugned notice u/s 148 of the Income Tax Act, 1961, for A.Y. 2014-15 was issued to the petitioner by respondent no. 3 on 1st April, 2021. The “reasons to believe” recorded by respondent no. 3 for issuing the impugned notice, read as under:

“I have reason to believe that an income to the tune of Rs. 2,63,324 has escaped assessment for the aforesaid year”.

The reassessment order dated 31st March, 2022 has been passed by respondent no. 4, i.e. National Faceless Assessment Centre, Delhi u/s 147 r.w.s.144B.

The Additional Solicitor General (ASG) of India relied on the judgement of Hon’ble Supreme Court under Article 142 of the Constitution of India in Civil Appeal No. 3005 of 2022 (Union of India and others vs. Ashish Agarwal) decided on 4th May, 2022 and reported in 2022 SCC OnLine SC 543 and submitted that the notices issued after 1st April, 2021 u/s 148 are liable to be treated as notices u/s 148A of the Act, 1961 as substituted by the Finance Act, 2021.

He further relied on Instruction being F.No 279/Misc./M-51/2022-ITJ, Ministry of Finance, Department of Revenue, CBDT, ITJ Section dated 11th May, 2022, paragraph 7.1 of the aforesaid instruction and stated that the notices u/s 148 relating to A.Ys. 2013-14, 2014-15 and 2015-16 shall not attract the judgement of Hon’ble Supreme Court in the case of Ashish Agarwal (supra). Lastly, the ASG submitted that since the notice was issued on 1st April, 2021 for A.Y. 2014-15, therefore, it shall be covered by a Division Bench’s judgement of this Court in the case of Daujee Abhushan Bhandar Pvt. Ltd. vs. Union of India and 2 others (Writ Tax No. 78 of 2022) decided on 10th March, 2022.

The petitioner referring to paragraphs 23 and 25 of the judgement of the Hon’ble Supreme Court in the case of Ashish Agarwal (supra) submitted that the impugned notice u/s 148 issued by respondent no. 3 is wholly without jurisdiction inasmuch as jurisdiction cannot be assumed after the expiry of the limitation period. He further submits that conferment of jurisdiction is essentially an act of the legislature, and the jurisdiction cannot be conferred by any circular or even by Court orders. He submits that even under the amended provisions, which have no application on facts of the present case, impugned notice u/s 148 would be without jurisdiction and barred by limitation inasmuch as for A.Y. 2014-15, the limitation under the amended provisions of sections 148A and 149 had expired on 31st March, 2018 inasmuch as the allegation of evaded income is Rs. 2,63,324 which has been provided to be read as Rs. 26,33,324 by notice dated 17th March, 2022 u/s 142(1), which is much below Rs. 50 Lacs.

The Hon. Court observed the judgment of Hon’ble Supreme Court in the case of Ashish Agarwal (supra) and Circular F.No 279/Misc./M-51/2022-ITJ, dated 11th May, 2022 issued by the Ministry of Finance, Department of Revenue, CBDT, ITJ Section, New Delhi. Section 147, as it existed till 31st March, 2021, empowers the Assessing Officer to assess or reassess or recompute loss or depreciation allowance or any other allowance, as the case may be, for the concerned assessment year in the case of an assessee if he has reason to believe that income chargeable to tax has escaped assessment, subject to the provisions of sections 148 to 153. A pre-condition to initiate proceedings u/s 147 is the issuance of notice u/s 148. Thus, notice u/s 148 is a jurisdictional notice. Section 149 provides a time limit for issuance of notice u/s 148. The time limit is provided under the unamended provisions (existed till 31st March, 2021) and the amended provisions (effective from 1st April, 2021) as amended by the Finance Act, 2021.

The judgment of Hon’ble Supreme Court under Article 142 of the Constitution of India, in the case of Ashish Agarwal (supra) has been explained for implementation/clarified by Instruction No.01/2022 being F.No 279/Misc./M-51/2022-ITJ, dated 11th May, 2022 issued by the Ministry of Finance, Department of Revenue, CBDT, ITJ Section, New Delhi, in exercise of powers u/s 119.

The ASG has made a statement before the Court, that as per Clause-7.1 of the Board’s circular dated 11th May, 2022, the notices u/s 148 relating to A.Ys. 2013-14, 2014-15 and 2015-16, shall not attract the judgment of Hon’ble Supreme Court in the case of Ashish Agarwal (supra) and the impugned notice u/s 148 issued on 1st April, 2021 for A.Y 2014-15 is, therefore, clearly barred by limitation and consequently without jurisdiction. Therefore, in view of the admission made by the learned ASG on behalf of the respondents, all other questions, including the question of conferment of jurisdiction etc., are left open and not dealt with by the Hon. Court.

The Court further observed that as per clauses 6.2 and 7.1 of the Board’s Circular dated 11th May, 2022, if a case does not fall under clause (b) of sub-section (i) of section 149 for the A.Ys. 2013-14, 2014-15 and 2015-16 (where the income of an assessee escaping assessment to tax is less than Rs. 50,00,000) and notice has not been issued within limitation under the unamended provisions of section 149, then proceedings under the amended provisions cannot be initiated.

The impugned notice u/s 148 of the Act, 1961 issued on 1st April, 2021 for A.Y. 2014-15 and the impugned notice dated 13th January, 2022 u/s 144 and the reassessment order dated 13th January, 2022 u/s 147 r.w.s 144B for A.Y. 2014-15 passed were quashed. The writ petition was allowed.

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Transfer of case — Notice — Both assessee and firm wherein assessee was partner assessed in Mumbai — Pending of case before additional chief metropolitan magistrate in Bengaluru could not be reason for transfer of assessee’s assessment from Mumbai — Order transferring case quashed and set aside

41 Divesh Prakashchand Jain vs. Principal CIT
[2022] 445 ITR 496 (Bom.)
Date of order: 1st December, 2021
S.127(2) of ITA, 1961

Transfer of case — Notice — Both assessee and firm wherein assessee was partner assessed in Mumbai — Pending of case before additional chief metropolitan magistrate in Bengaluru could not be reason for transfer of assessee’s assessment from Mumbai — Order transferring case quashed and set aside

The assessee was a partner in a firm, SSJ, which manufactured and sold gold ornaments having its principal place of business in Mumbai. The firm had a branch in Bengaluru. The assessee stated that he had sent samples of jewellery to Bengaluru to be displayed to customers and two of his employees were intercepted by the Bengaluru police and gold jewellery belonging to the firm was found on them and investigations commenced and a case before the Additional Chief Metropolitan Magistrate, Bengaluru was pending. The Deputy Director of Income-tax (Investigation) Bengaluru was a respondent in the pending case. The Principal Commissioner issued a show-cause notice u/s 127(2) of the Income-tax Act, 1961 and transferred the assessee’s case to Bengaluru for completing the assessment proceedings.

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

“i) The pendency of a case before the Additional Chief Metropolitan Magistrate could not be accepted as reason for transfer of the assessee’s assessment from Mumbai to Bengaluru. Though the assessee was given a show-cause notice u/s. 127(2) and personal hearing was granted before passing the order for transfer of the case the reasons recorded in the order were subject to judicial scrutiny and must be reasonable.

ii) The assessee was assessed in Mumbai and the firm of which the assessee was a partner was also assessed in Mumbai. In the order, the Principal Commissioner had only narrated the facts but had not given any reasons why in the facts and circumstances, the assessee’s case had to be transferred to Bengaluru. The order of transfer was quashed and set aside.

iii) The assessee was to fully co-operate with the authorities in Bengaluru, provide all the required documents for the purpose of investigation or assessment and also appear for recording his statement in Bengaluru or Mumbai as and when called for (subject to giving a reasonable notice in advance of the date and time to be present) and co-operate in every possible way with the Bengaluru Office of the Department.”

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Disallowance u/s 14A Where No Exempt Income and Effect of Explanation

ISSUE FOR CONSIDERATION

S.14A, introduced by the Finance Act, 2001, provides for disallowance with retrospective effect from 1st April, 1962 of an expenditure incurred in relation to income which does not form part of the total income under the Income-Tax Act. The expenditure to be disallowed is required to be determined in accordance with Rule 8D of the Income-Tax Rules provided the AO, having regard to the accounts, is not satisfied with the correctness of the claim of the assessee, including the claim that no expenditure has been incurred in relation to an exempt income.

The provision of s.14A r.w. Rule 8D has been the subject matter of unabated litigation since its introduction, which continues despite various amendments made thereafter. The subjects of litigation involve a variety of reasons and many of them have reached the Apex Court. One such subject is about the possibility of disallowance in a case where the assessee has not earned any exempt income during the year for which expenditure is incurred.

Applying the law prior to the recent insertion of the Explanation and the non-obstante clause in s. 14A, the Delhi High Court in the case of Cheminvest Ltd., 61 taxmann.com 118, ruled that no disallowance could be made u/s 14A if no exempt income had been earned during the year. The Supreme Court has dismissed the SLP against the Madras High Court ruling that s.14A could not be invoked where no exempt income was earned by the assessee in the relevant assessment year. Chettinad Logistics (P) Ltd., 95 taxmann.com 250 (SC).

The legislature, for undoing the impact of the law laid down by the Supreme Court, has introduced an Explanation to s.14A by the Finance Act, 2022, w.e.f 1st April, 2022. The said Explanation reads as under: “Explanation-For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.”

The Explanatory Memorandum to the Finance Bill, 2022, relevant parts, reads as:

“4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.

5. This amendment will take effect from 1st April, 2022.”

Simultaneously a non-obstante clause is introduced in s. 14A(1) which reads as: Notwithstanding anything contained to the contrary in the Act, for the purposes of ………………” The Explanatory Memorandum, relevant parts, read as:

“6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.

7. This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years”.

Ironically, an amendment made to settle a raging controversy has itself become the cause of another fresh controversy. An issue has arisen whether the Explanation now inserted, is prospective in its nature and therefore would apply to A.Y. 2022-23 onwards or would apply retrospectively to cover at least the pending assessments and appeals. While the Mumbai Bench of the Tribunal, has held the Explanation to be prospective in its application, the Guwahati Bench of the Tribunal has held the same to be retrospective in nature and has applied the same in adjudicating an appeal before it for A.Y. 2009-10 and onwards. The Delhi High Court, however, has in a cryptic order recently held the Explanation to be prospective. The Guwahati Bench has passed a detailed order for holding the Explanation to be retrospective for a variety of reasons which are required to be noted and may require examination by the Courts to arrive at a final conclusion on the subject.

BAJAJ CAPITAL VENTURES (P) LTD.’S CASE

The issue first came up for consideration of the Mumbai bench of the ITAT in the case of ACIT vs. Bajaj Capital Ventures (P.) Ltd. 140 taxmann.com 1. In the cross appeals filed, one of the grounds raised by the assessee company was “On the facts and in the circumstances of the case and in law, the respondent prays that no disallowance ought to be made in absence of earning of any exempt income.”

During the course of the scrutiny assessment proceedings, it was noticed that the assessee was holding investments in shares, which were for the purpose of earning dividend income, but no disallowance was made u/s 14A for expenses incurred to earn this tax exempt income. The AO disallowed an amount of Rs. 11,87,85,293 under rule 8D r.w. Section 14A. Aggrieved, the assessee carried the matter in appeal before the CIT(A), who restricted the disallowance to Rs. 9,87,978, as was claimed by the assessee, with observations, inter alia, as follows:

6.2 I have considered the assessment order and the submission of the appellant. The issue regarding applicability of section 14A read with rules 8D of the Income Tax Rules,1962 has been the subject matter of incessant litigation on almost every issue, involved, i.e. whether a disallowance can be made when no exempt income has been earned during the year, whether the satisfaction has been correctly recorded by the AO regarding the correctness of the claim and in respect of such expenditure incurred in relation to exempt income, whether share application money is to be considered as investment, whether investment in subsidiary company or joint ventures can be said to be made with a view of earn exempt income etc. In the present case the admitted fact is that no dividend income or any other exempt income has been earned during the year under consideration. The present legal position established by the Delhi High Court in the case of Cheminvest Ltd. (61 taxmann.com 118), which has also been relied upon by the appellant, is that no disallowance can be made if no exempt income has been earned during the year. Recently, in the case of Commissioner of Income Tax, (Central) 1 v. Chettined Logistics (P) Ltd. [(2018) 95 taxmann 250 (SC)1, the Hon’ble Supreme Court have dismissed the SLP against High Court ruling that section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year. The ITAT Mumbai [jurisdictional ITAT] has recently in the case of ACIT v. Essel Utilities Distribution re affirmed the same.”

On further appeals by the assessee and the revenue, to the Tribunal, the bench on due consideration of the rival contentions and facts, passed the following order in light of the applicable legal position;

“7. We find that there is no dispute about the fact that the assessee did not have any tax exempt income during the relevant previous year and that the period before us pertains to the period prior to insertion of Explanation to section 14A. In this view of the matter, and in the light of consistent stand by co-ordinate benches, following Hon’ble Delhi High Court’s judgment in the case of Cheminvest Ltd v. CIT [(2015) 61 taxmann.com 118 (Del)], we uphold the plea of the assessee that no disallowance under section 14A was and in the circumstances of the case. The plea of the Assessing Officer is thus rejected. As regards the disallowance of Rs. 9,87,978/- it is sustained on the basis of computation given in the alternative plea of the assessee, but given the fact that the basic plea of non-disallowance itself was to be upheld, there was no occasion to consider the computation given in the alternative plea. This disallowance of Rs. 9,87,978/- must also be deleted.

8. In view of the above discussions, we hold that no disallowance under section 14A was justified on the facts, and the remaining disallowance of Rs. 9,87,978/- must be deleted. Ordered, accordingly.

9. In the result, appeal of the Assessing Officer is dismissed and appeal of the assessee is allowed. Pronounced in the open court today on the 29th day of June, 2022.”

It is clear from the reading of the order that the bench did notice that the period involved in appeal pertained to a period for which the Explanation inserted by the Finance Act, 2022 was not applicable and in view of the same had thought it fit to not to invoke application of the Explanation on the understanding that the said Explanation had no retrospective application, though this part has not been expressly noted in the body of the order.

The catch words by Taxmann read as: “The assessee did not have any tax exempt income during the relevant previous year (P.Y. 2016-17/A.Y. 2017-18) which pertains to the period prior to insertion of Explanation to section 14A (by Finance Act, 2022 w.e.f. 1st April,). As the new Explanation applies with effect from A.Y. 2022-23 and does not even have limited retrospective effect even to proceedings for past assessment years pending on 1st April, 2022, no disallowance u/s 14A shall apply in the absence of any tax-free income in the relevant assessment year prior to A.Y. 2022-23.”

WILLIAMSON FINANCIAL SERVICES LTD.’S CASE

Back to back, the issue came up again in the case of ACIT vs. Williamson Financial Services Ltd. 140 taxmann.com 164 (Guwahati – Trib.) relating to the A.Ys. 2009-10 and 2012-13 to 2014-15. In assessing the income for A.Y 2013-14, the AO noted that the assessee during the year had earned an exempt dividend income of Rs. 3,70,80,750 on the investments made by the company. He also noticed that the own funds of the company were not sufficient to meet the investments in question and therefore, applied the provisions of s.14A read with Rule 8D and computed the expenditure relatable to the exempt dividend income at Rs. 10,62,10,110. Since the assessee in its computation of income had suo moto disallowed an amount of Rs. 2,25,48,285 on account of expenditure relatable to the tax exempt dividend income earned by it, the AO disallowed the balance amount of Rs. 8,36,61,625 and added back the same to the income and computed the taxable income accordingly.

Being aggrieved by the same, the company filed an appeal before the CIT(A) who, relying upon the decision in the case of Moderate Leasing and Capital Services Private Limited ITA 102/(2018) dated 31/01/2018, held that the disallowance u/s 14A could not exceed the total tax exempt income earned during the year. He accordingly restricted the disallowance to the extent of exempt income earned by the company.

Being aggrieved by the above action of the CIT(A), the revenue has appealed to the ITAT. The Revenue contested the decision of the CIT (Appeals) on the ground that he was not justified in facts as well as in law in restricting the disallowance u/s 14A to the extent of income claimed exempt for the assessment year under consideration.

The Revenue invited the attention to the newly inserted Explanation to s. 14A to submit that it had now been clarified that notwithstanding anything to the contrary contained in the Act, the provisions of s.14A should apply and be deemed to have always applied in a case where the income, not forming part of the total income had not accrued or arisen or had not been received during the year and the expenditure had been incurred during the year in relation to such income. It was contended that the Explanation was declaratory and clarificatory in nature, therefore, the same would apply with retrospective effect, and that the action of the CIT(A) in restricting the disallowance to the extent of exempt income earned by the assessee was not as per the mandate of the amended law.

The Revenue supported its contentions with the following submissions:

The CBDT Circular No. 5/2014 dated 11th February, 2014, had clarified that disallowance of the expenditure would take place even where the taxpayer in a particular year had not earned any exempt income.

Ignoring the circular, the Courts had held that where there was no exempt income during the year, no disallowance u/s 14A of the Act could be made. Such an interpretation by the Courts, ignoring the expressed intent stated in the circular, in the opinion of the legislature was not in line with its intent and defeated the legislative intent of s.14A of the Act.

In order to make the intention of the legislation clear and to make it free from misinterpretation and to give effect to the CBDT’s Circular No. S/2014 dated 11th February, 2014, the Legislature had made two changes to s. 14A through the Finance Act, 2022, which are (a). Insertion of non-obstante clause by way of substitution and, (b). Insertion of an Explanation to reinforce, by way of clarification, the intents of the CBDT’s Circular No.05/2014 dated 11th February, 2014.

The main objective to insert a non-obstante clause in sub-section (1) of s.14A which read as “Notwithstanding anything to the contrary contained in this Act, for the purpose of…” was to overcome the observations made in the case of Redington (India) Ltd vs. Addl.CIT, 392 ITR 633, 640 (Mad), wherein it was observed that an assessment in terms of the Act was specific to an assessment year and related previous year as per s.4 r.w.s. 5 of the Act. The Madras High Court in that case had further held that any contrary intention, if there was, would have been expressly stated in s.14A and in its absence, the language of s. 14A should be read in the context such that it advanced the scheme of the Act rather than distort it. Such interpretation of the Court had made the Circular No.05/2014 dated 11th February, 2014 infructuous. To address the misunderstanding, the legislature had inserted the Explanation to clarify its intentions.

The Explanation inserted contained another non-obstante clause, to overcome the past judicial observations and it was clarified the intention of the legislature that the Explanation should always be deemed to have been in s.14A for disallowance of any claim for deduction against expenditure incurred to earn an exempt income, irrespective of the fact whether or not any income was earned in the same financial year.

Further, in general parlance, whenever a clarificatory amendment with the use of words such as “for the removal of doubts”, and “shall be deemed always to have meant” etc. was made, the amendment was to have a retrospective effect, even if it was made effective prospectively.

Circular No 5/2014 dated 11th February, 2014 was still in force, and for invoking disallowance u/s 14A of the Act, it was not material that the assessee should have earned such exempt income during the financial year under consideration.

The decision of the CIT(A) holding that the disallowance u/s 14A read with Rule 8D could not exceed the income claimed exempt appeared to be perverse.

In reply, on behalf of the assesse, it was submitted that the Explanation to s. 14A introduced vide the Finance Act 2022, was prospective in nature and could not be applied to the pending appeals, and that the law settled prior to the insertion of the Explanation, holding that the disallowance of expenditure u/s 14A could not exceed the exempt income earned by the assessee during the year, alone should apply. It was further contended that:

Even after the issue of the CBDT Circular No. 5/2014 dated 11th February, 2014, the Courts held that when there was no exempt income, then disallowance u/s 14A was unwarranted, following a simple rule that when there was no exempt income, there was no necessity to disallow the expenditure. CIT vs. Corrtech Energy Pvt. Ltd., 223 Taxman 130 (Guj); CIT vs. Holcim India Pvt. Ltd., 57 taxmann.com 28 (Del); Marg Ltd vs. CIT,120 taxmann.com 84 (Madras).

The Delhi High Court, in the case of CIT vs. Moderate Leasing and Capital Services Pvt. Ltd in ITA 102/2018 order dated 31/01/2018 had held that disallowance u/s 14A should not exceed the exempt income itself. The SLP filed by the Revenue was dismissed by the Supreme Court of India Special Leave Petition (Civil) Diary No(s). 38584/2018 dated 19/11/2018.

The Guwahati bench of the ITAT, in deciding the issues in favour of the Revenue on due consideration of the contentions of the opposite parties, observed as under:

In determining the effective date of the application of an amendment, prospective or retrospective, the date from which the amendment was made operative did not conclusively decide the question of its effective date of application.

The Court had to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether an amendment was clarificatory or substantive.

An amendment which was clarificatory was regarded by the Courts as being retrospective in nature and its application would date back to the date of introduction of the original statutory provision which it sought to amend. Clarificatory amendment was an expression of intent which the Legislature had always intended to hold the field with retrospective effect.

A clarificatory amendment might be introduced in certain cases to set at rest divergent views expressed in decided cases on the true effect of a statutory provision.

Where the Legislature expressed its intent, by declaring the law as clarificatory, it was regarded as being declaratory of the law as it always stood and was therefore, construed to be retrospective.

A perusal of the Explanation revealed that it started with the words “For the removal of doubts, it is hereby clarified ……”. Then the wording in the body of the provision expressly stated: “…..the provisions of this section shall apply and shall be deemed to have always applied……”

The opening words of the Explanation revealed in an unambiguous manner that the said provision was clarificatory and had been inserted for removal of doubts. Further, as provided in the Memorandum explaining the provision, the Explanation had been inserted to make the intention clear and to make it free from any misinterpretation.

The said Explanation being clarificatory in nature was inserted for the purpose of removal of doubts and to make the intention of the legislature clear and free from misinterpretation and thus the same, obviously, would operate retrospectively.

Any contrary interpretation holding that the said Explanation shall operate prospectively would render the words “shall apply and shall be deemed to have always applied” as redundant and meaningless, which was not the intention of the legislature.

The Explanation did not propose to levy any new taxes upon the assessee but it only purported to clarify the intention of the legislature that actual earning or not earning of the exempt income was not the condition precedent for making the disallowance of the expenditure incurred to earn an exempt income.

The legal position was declared by the Supreme Court in the case of Walfort Share & Stock Brokers Pvt. Ltd., 326 ITR 1 (SC), that the expenses allowed could only be those incurred for earning the taxable income; that the basic principle of the taxation was to tax the net income and on the same analogy, the exemption was also in respect of net income.

The Supreme Court in the case of CIT vs. Rajendra Prasad Moody 115 ITR 519 had held that even if there was no income, the expenditure was allowable. Income included loss, as was held by the Supreme Court in the case of CIT vs. Harprasad & Co. P Ltd. 99 ITR 118, and as such only the net income was taxable, i.e. gross income minus expenditure, and as such the net income might be a loss also.

Since the earning of positive net income was not a condition precedent for claiming deduction of expenditure, on the same analogy, the earning of exempt income was also not a condition precedent for attracting a disallowance of expenditure incurred to earn exempt income. This position had only been reiterated and clarified by the Explanation to s.14A, so as to remove the doubts and to make clear the intention of the legislature and to make the provision of s. 14A free from any other interpretation. Therefore, it could not be said that the Explanation proposed or saddled any fresh liability on the assessee.

The contention of the assessee that the Explanation applied only to those cases where no exempt income had been earned at all and that the said Explanation was not applicable to cases where the assessee had earned some exempt income was not acceptable; such a proposition might place different assessees in inequitable position. In such a scenario, in a case where an assessee did not earn any exempt income, he might suffer disallowance as per the formula prescribed under Rule 8D, whereas, in a case where an assessee earned some meagre exempt income, the disallowance in his case would be restricted to such meagre exempt income and the assessee having no exempt income, would have to suffer more disallowance than the assessee having meagre exempt income. Even otherwise, the Explanation sought to clarify the position that the disallowance of expenditure relatable to exempt income was not dependent upon actual earning of any exempt income.

The legal position that the AO must first record satisfaction as to the correctness of the claim of the assessee in respect of expenditure incurred in relation to exempt income before invoking rule 8D for disallowance of expenditure u/s 14A continued to apply and should still be adhered to and the aforesaid Explanation introduced vide Finance Act 2022 did not in any manner change that position. There was no change of the legal position even after introduction of the Explanation.

The Guwahati bench of the tribunal in conclusion held that the:

Explanation to s. 14A, inserted by Finance Act, 2022 w.e.f. 1st April, 2022, shall apply retrospectively even for periods prior to 1st April, 2022.

Disallowance of expenditure incurred in relation to exempt income shall apply in terms of the Explanation even in those cases where assessee has earned no exempt income during the relevant assessment year.

Application of the amendment shall not be restricted to those cases where assessee had earned some exempt income which was less than expenditure incurred in relation to exempt income.

The disallowance could not be limited to the amount of exempt income of an year.

The decision of the Mumbai bench of the Tribunal in the case of ACIT vs. Bajaj Capital Ventures (P.) Ltd. (supra), holding a contrary view that the Explanation to s.14A inserted w.e.f. 1st April, 2022 has no retrospective applicability, was not expressly considered by the bench as the same might not have been cited by the assessee.

OBSERVATIONS

Section 14A of the Act was introduced in 2001, with retrospective effect from the year 1962, to state that no deduction shall be granted towards an expenditure incurred in relation to an income which does not form part of the Total Income. The method for identifying the expenditure incurred is prescribed under Rule 8D of the Income-tax Rules,1962. Further, by the Finance Act, 2006, sub-sections (2) and (3) have been inserted w.e.f. 1st April, 2007.

A Proviso was inserted earlier by the Finance Act of 2002 with retrospective effect from 11th May, 2001. It reads: “Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001”.

The CBDT has issued a Circular No. 5 dated 11th February, 2014, clarifying that Rule 8D r.w.s. 14A provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. The circular noted that still some Courts had taken a view that if there was no exempt income during a year, no disallowance u/s 14A could be made for that year. The Circular had stated that such an interpretation by the Courts was not in line with the intention of the legislature.

Over the years, disputes have arisen in respect of the issue whether disallowance u/s 14A can be made in cases where no exempt income has accrued, arisen or received by the assessee during an assessment year. From its inception, the applicability of this provision has always been a subject matter of litigation and one such point that has been oft-debated is regarding the disallowance of expenditure in the absence of exempt income. In 2009, a Delhi Special Bench of the Tribunal in Cheminvest Ltd. vs. CIT, 121 ITD 318, took a view that when an expenditure is incurred in relation to an exempt income, irrespective of the fact whether any exempt income was earned by the assessee or not, disallowance should be made, a position that has not been found acceptable to the Courts, including the Apex Court.

An interesting part is noticed on reading of the Explanatory Memorandum to the Finance Bill, 2022 which clarifies that the Explanation has been inserted in s. 14A w.e.f. 1st April, 2022, while the non-obstante clause in sub- section (1) of s. 14A has been inserted w.e.f A.Y. 2022-23. This inconsistent approach has led one to wonder whether the insertion of the Explanation is prospective and is applicable to A.Y. 2022-23 and onwards, while the amendment in s.14A(1) made applicable w.e.f. 1st April, 2022 has a retrospective applicability to pending proceedings on 1st April, 2022.

The amendment, by insertion of non-obstante clause in sub-section (1), is expressly made effective from 1st April, 2022; whereas in respect of the Explanation, as noted vide paragraph 5 of the Memorandum, it is written that the amendment will take effect on 1st April, 2022 and will accordingly apply in relation to A.Y. 2022-23 and subsequent assessment years.

The Explanation inserted in the section is worded as: ‘Section 14A shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the financial year and the expenditure has been incurred in relation to such exempt income.’ The provision seems to apply to past transactions as well, but the Memorandum makes it effective from A.Y. 2022-23 only.

Whether the provisions of s. 14A will have a retroactive application? Will the Explanation apply retrospectively even where the same has been expressly made affective from A.Y. 2022-23? Can the Explanatory Memorandum override the language of the law amended? Can there be a mistake in the Memorandum and if yes, can it be overlooked? Can it be said that the amendment in s. 14A by the Finance Act, 2022 by inserting an Explanation to s. 14A alters the position of law adversely for the assessee and hence, such an amendment cannot be held to be retrospective in nature? These are the questions that have arisen in a short span that have a serious impact on the adjudication of the assessments and appeals, and may lead to rectification, revision and reopening of the completed assessments.

The Delhi High Court, in the case of Moderate Leasing and Capital Services Pvt. Ltd in ITA 102/2018 dated 31/01/2018 held that disallowance u/s 14A should not exceed the exempt income itself; the SLP filed by the Revenue against this judgment was dismissed by the Supreme Court of India Special Leave Petition (Civil) Diary No(s). 38584/2018 dated 19/11/2018. Can such a finality be disturbed and reversed by the Explanation now inserted, even where the Explanation is not introduced with retrospective effect?

A proviso to s.14A inserted by the Finance Act, 2002, with retrospective effect from 11th May, 2001, prohibits an AO from reassessing an income u/s 147 or passing an order enhancing the assessment or reducing the refund u/s 154 for any assessment year up to 2001-02. No such express prohibition is provided for in respect of the application of the Explanation in question.

The CBDT vide Circular No. No. 5/2014, dated 11th February, 2014, had clarified the stand of the Government of India that the expenditure, where claimed, would be liable for disallowance even where the assessee has not earned any taxable income for the year. The Courts, in deciding the issue, have not followed the mandate of the Circular.

The incidental issue that has come up is about the application of Explanation to cases where some exempt income is earned during the year. It is argued that the Explanation would have no application in such cases in as much as the Explanation can apply only to cases where no exempt income has accrued or arisen or been received during the year.

It is important to appreciate the true nature of the Explanation; does it supply an obvious omission or does it clear up the doubts as to the meaning of the previous law. If yes, it could be considered as declaratory or curative and its retrospective operation is generally intended. Venkateshwara Hatcheries Ltd., 237 ITR 174 (SC). The other aspect that has to be considered in deciding the effective date of application is to determine whether the amendment levies a tax with retrospective effect; if yes, it’s retrospective application should be given only if the amendment is made expressly retrospective and not otherwise. Retrospectivity, in such a case, cannot be presumed. Thirdly, an amendment which divests an assessee of a vested right should be applied retrospectively with great discretion even where such an amendment is made expressly retrospective.

An explanatory, declaratory, curative or clarificatory amendment is considered by Courts to be retrospective. Allied Motors, 224 ITR 677 (SC). This is true so far as there prevailed a doubt or ambiguity and the amendment is made to remove the ambiguity and provide clarity. However, an amendment could not be retrospective even where it is labeled as clarificatory and for removal of doubts where there is otherwise no ambiguity or doubt. Vatika Township P. Ltd., 367 ITR 490 (SC). In provisions that are procedural in nature, it is not difficult to presume retrospective application. Even in such case the retrospectivity would be limited to the express intention. National Agricultural, 260 ITR 548 (SC).

Article 20 of the Constitution imposes two limitations on the retrospective applicability. Firstly, an act cannot be declared to be an offence for the first time with retrospective effect, and secondly, a higher penalty cannot be inflicted with retrospective effect.

A declaratory act is intended to remove doubts regarding the law; the purpose usually is to remove a doubt as to the meaning of an existing law or to correct a construction by Courts considered erroneous by the legislature. Insertion of an Explanation where intended to supply an obvious omission or clear up doubts as to the true meaning of the Act is usually retrospective. However, in the absence of the clear words indicating that the amendment is declaratory it would not be so construed when the pre-amended provision was clear and unambiguous. A curative amendment is generally considered to be retrospective in its operation. Lastly, the substance of the amendment is more important than its form. Agriculture Market Committee, 337 ITR 299 (AP) and Brij Mohan, 120 ITR 1 (SC).

The sum and substance emerging from the above discussion is that an amendment in law is retrospective when it is so provided and it is prospective when it is not so provided in express terms. Even a declaratory or a clarificatory amendment requires an express intention to make it retrospective. In other words, there is no presumption for an amendment to be considered as retrospective in nature, unless the amendment is procedural in nature.

The power of the legislature to make a retrospective amendment is not in question here. It is a settled position that an amendment can be made by the legislature with retrospective effect and when so made, it would always be presumed to have been made w.e.f. the date specified in the amendment, and would be enforced by the authorities in applying the law as amended. In many cases of amendments, it may be necessary to examine the scheme of the Income-Tax Act prevailing prior to the amendment and also subsequent to the amendments. Vijayawada Bottling Co. Ltd., 356 ITR 625 (AP).

The issue under consideration as noted is more complex or different; the Explanation inserted in s.14A is expressly made to be effective from 1st April, 2022 and is intended to apply to A.Y. 2022-23, onwards. Under the circumstances, on a first blush it would be correct to concur with the decisions of the Mumbai Bench and of the Delhi High Court, but for the fact that these decisions have not considered the intention of the legislature behind the amendment in detail, which is expressed in so many words in the Explanatory Memorandum. Importantly, they have not considered the express language of the Explanation, which reads as ‘the provisions of this section shall apply and shall be deemed to have always applied’.

The challenge here is to resolve the conflict that is posed on account of two contrasting expressions and terms used in the Explanation and in the Explanatory Memorandum. The Explanation in clear words provides for a retrospective application, while the Explanatory Memorandum applies the amendment prospectively. In such circumstances, the issue for consideration is whether the effect should be given to the express language of the Explanation or to the Explanatory Memorandum for determining the date of its application. The Guwahati Bench, is of the view that in such circumstances the Court should examine the true legislative intent instead of simply being swayed by the express mention of the effective date and assessment year in the Explanatory Memorandum. For this, the Bench has relied upon the decision in the case of Godrej & Boyce, Mfg. Co. Ltd., 328 ITR 81 (Bom.). The view that is canvased is that the mention of the date or the year in the Explanatory Memorandum is not sacrosanct or conclusive of the retrospective nature or otherwise of the amendment.

The Bombay High Court, in the case of Godrej & Boyce, Mfg. Co. Ltd., (supra.), relying on several decisions of the Supreme Court, had held that in determining the effective date of applying an amendment, the date from which the amendment was made operative did not conclusively decide the question and the Court has to examine the scheme of the statute prevailing prior to and subsequent to the amendment to determine whether an amendment was clarificatory or substantive and further, if it was clarificatory, it could be given a retrospective effect, and if it was substantive, it should be prospectively applied.

It further held that a clarificatory amendment was an expression of intent which the legislature had always intended to hold the field; such an amendment might be introduced in certain cases to set at rest divergent views expressed in decided cases on the true effect of a statutory provision. The Court accordingly held a legislative intent when clarified was to be regarded as declaratory of the law as it always stood and therefore be construed as retrospective provided the amendment did not bring about a substantive change in legal rights and obligations of the parties.

The Guwahati Bench of the Tribunal, taking a leaf from the above referred decision in the case of Godrej & Boyce, Mfg. Co. Ltd., 328 ITR 81 (Bom.), held that simply because the Explanatory Memorandum provided that the Explanation would apply from A.Y. 2022-23, the Explanation did not become prospective in nature and the adjudicating authorities were required to examine the true legislative intent for deciding the effective date of application of an amendment.

The Delhi High Court however, in the case of Pr CIT vs. ERA Infrastructure (India). Ltd. 327 CTR (Del) 489, has, in a cryptic order, recently held the Explanation to be prospective, holding that the amendment cannot be held to be retrospective if it changes the law as it earlier stood.

In our considered opinion, the effective date of application specified by the Explanatory Memorandum may not be taken as sacrosanct and final in all cases, unless the amendment has the effect of adversely disturbing the rights and obligations of the parties with retrospective effect. In other words, an attempt should be made by the Courts to determine independently the effective date of application where the law has been amended for removal of doubts or is expressly provided to be declaratory or clarificatory. In the case of the Explanation, on a bare reading of the language thereof, it is gathered that in express language it is provided that the amendment should always be read as if the same was always there by use of words ”the provisions of this section shall apply and shall be deemed to have always applied”. It is therefore, very respectfully noted that the Courts were required to examine whether the Explanation in question was retrospective or not without being summarily swayed by the effective date specified in the Explanatory Memorandum for holding that the amendment was prospective in nature and would not apply to assessment years up to A.Y. 2021-22. Having said that, it is fair to await the final view of the highest Court that is obtained on due consideration of the views expressed here. The situation is unique and demands discretion for conclusive views of the Apex Court.

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TDS — Compensation received on acquisition of land for public project under an agreement — Provisions of s. 96 of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 providing that no income-tax or duty shall be levied on any award or agreement made under Act except u/s 46 — Assessee not specific person u/s 46 — Compensation received by assessee not liable to deduction of tax at source — Deductor to file correction statement of tax deducted — Department to process statement — Tax deducted at source to be refunded accordingly

40 Seema Jagdish Patil vs. National Hi-Speed Rail Corporation Ltd. and Ors
[2022] 445 ITR 382 (Bom.)
Date of order: 9th June, 2022
Ss. 139, 194-IC, 194L, 200(3) proviso, 200A(d) and 237 of ITA, 1961 and ss. 46, 96 of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013

TDS — Compensation received on acquisition of land for public project under an agreement — Provisions of s. 96 of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 providing that no income-tax or duty shall be levied on any award or agreement made under Act except u/s 46 — Assessee not specific person u/s 46 — Compensation received by assessee not liable to deduction of tax at source — Deductor to file correction statement of tax deducted — Department to process statement — Tax deducted at source to be refunded accordingly

NHRCL acquired the land of the assessee purportedly under an agreement and deducted tax at source from the compensation paid. Thereafter, a supplementary deed was entered into between the assessee, and NHRCL under which some additional amount was paid to the assessee and tax was deducted from that part of the compensation also. The assessee requested NHRCL to reverse the tax deducted on the ground that no tax was deductible. NHRCL replied that tax exemption did not apply to the compensation on the land acquired from the assessee and that the tax deducted from the payment made to the assessee was duly deposited with the Department. According to the assessee, her income was exempted from tax, and she could not fill Schedule TDS-2 and hence could not make an application u/s 199 of the Income-tax Act, 1961 read with rule 37BA(3)(i)
of the Income-tax Rules, 1962 whereas according to NHRCL the assessee had to file a return and claim the refund.

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

“i) The CBDT under Circular No. 36 of 2016, dated October 25, 2016 ([2016] 388 ITR (St.) 48) has clarified that “the matter has been examined by the Board and it is hereafter clarified that compensation received in respect of award or agreement which has been exempted from levy of Income-tax by section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 shall not be taxable under the provisions of the Income-tax Act, 1961”. It also recognizes acquisition by award or agreement. Section 96 of the 2013 Act unequivocally provides that no Income-tax or duty shall be levied on any award or agreement made under the Act except u/s. 46 of the 2013 Act which applies to the specified persons. Specified person includes any person other than (i) appropriate Government (ii) Government company (iii) association of persons or trust or society as registered under the Societies Registration Act, wholly or partially aided by the appropriate Government or controlled by the appropriate Government.

ii) The proviso to section 200(3) of the 1961 Act provides that the person may also deliver to the prescribed authority the correction statement for rectification of any mistake in the statement delivered under the sub-section in such form and verified in such manner as may be verified by the authority. Clause (d) of sub-section (1) of section 200A of the 1961 Act, inter alia, provides for determination of the sum payable by or the amount of refund due to the deductor.

iii) The income received by the assessee on account of the property acquired by NHRCL by private negotiations and sale deed was exempted from tax. According to the public notice issued for acquisition of land through direct purchase and private negotiations by the office of the Sub-Divisional Officer for implementing the project, while purchasing the land directly for the project the compensation would be fixed by giving 25 per cent. enhanced amount of the total compensation being calculated for the land concerned in terms of the provisions of sections 26 to 33 and Schedule I to the 2013 Act. Undisputedly, the land was acquired for a public project. A policy decision had been taken by the State Government under its Government Resolution dated May 12, 2015 for acquiring the property by private negotiations and purchases for implementation of public project. The methodology was also provided. The computation of compensation had to be under the provisions of the 2013 Act which was introduced to expedite the acquisition for the implementation of the project. If the parties would not agree with the negotiations and direct purchase, then compulsory acquisition under the provisions of the 2013 Act had to be resorted to. The 2013 Act also recognised the acquisition through an agreement. NHRCL was not a specified person within the meaning of section 46 of the 2013 Act and the provisions of the section would not be attracted. Therefore, since the exemption u/s. 96 of the 2013 Act would apply and no tax can be levied on the amount of compensation NHRCL should not have deducted tax from the amount of compensation paid to the assessee.

iv) It was not possible for the court to arrive at a conclusion as to whether the assessee was required to file return or not. NHRCL had already deducted tax which it ought not to have been deducted. Therefore, (i) NHRCL should file a correction statement as provided under the proviso to sub-section (3) of section 200 of the 1961 Act to the effect that the tax deducted by it was not liable to be deducted, (ii) the Department shall process the statement including the correction statement that might be filed u/s. 200A more particularly clause (d) thereof and (iii) the parties should thereafter take steps for refund of the amount in accordance with the provisions of the 1961 Act and the 1962 Rules.”

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Survey — Impounding of documents — Retention of such documents — Effect of s. 131 — Retention beyond fifteen days only after approval of higher authority named in provision — Decision should be communicated to assessee

39 Muthukoya T. vs CIT
[2022] 445 ITR 450 (Ker.)
A.Ys.: 2007-08 to 2011-12
Date of order: 18th May, 2022
S. 131 of ITA, 1961

Survey — Impounding of documents — Retention of such documents — Effect of s. 131 — Retention beyond fifteen days only after approval of higher authority named in provision — Decision should be communicated to assessee

As part of Income-tax survey operations, the petitioner’s premises was inspected on 17th February, 2010, and on issuing summons to him to produce books of account and other original documents, the petitioner produced various documents which were impounded u/s 131(3) of the Income-tax Act, 1961. Subsequently, the petitioner filed his returns and cleared the entire Income-tax dues in 2010 itself. However, the authorities did not return the original documents impounded by them. The petitioner, therefore, filed a writ petition requesting a direction for returning the documents. It was pleaded that despite the request for the return of the original document of title, the respondents have, under one pretext or the other, delayed returning the document. The petitioner also asserted that the respondents had informed that they misplaced the documents and that the same would be returned after tracing it out. According to the petitioner, the respondents cannot hold on to the documents indefinitely and that such an action is illegal and contrary to the principles of equality enshrined under article 14 of the Constitution of India.

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

“i) U/s. 131(3) of the Income-tax Act, 1961, the documents impounded can be retained in the custody of the Income-tax Department beyond 15 days only after obtaining the approval of the Principal Chief Commissioner or other officers named in the sub-section. Apart from obtaining orders of approval from the officers to retain the documents, there is an added obligation upon the Department to communicate the orders to the assessee to enable retention of documents beyond the period specified in the said sub-section.

ii) Documents impounded u/s. 131 had been retained beyond the period of fifteen days. No approval had been obtained by the Department from any of the officers mentioned in section 131(3) of the Act. Therefore, the respondents could not under any circumstances retain the documents of title of the assessee.

iii) In view of the above, the respondents have acted illegally and with material irregularity in retaining the documents of title belonging to the petitioner. Accordingly, the respondents are directed to return the original sale deed bearing No. 3561 of 2008 executed before the Sub-Registrar’s office, Ernakulam to the petitioner within an outer period of 30 days from the date of receipt of a copy of this judgment.”

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Reassessment — Notice u/s 148 — Limitation — Law applicable — Constitutional validity of provisions — Effect of enactment of s. 148A with effect from 01/04/2021 — Notifications extending time limit for notices u/s 148 up to 30/06/2021 — Notifications not valid — Notice u/s 148 issued on 30/06/2021 — Not valid

38 Mohammed Mustafa vs. ITO
[2022] 445 ITR 608 (Kar.)
A.Y.: 2016-17
Date of order: 18th April, 2022
Ss. 148 and 148A of ITA,1961

Reassessment — Notice u/s 148 — Limitation — Law applicable — Constitutional validity of provisions — Effect of enactment of s. 148A with effect from 01/04/2021 — Notifications extending time limit for notices u/s 148 up to 30/06/2021 — Notifications not valid — Notice u/s 148 issued on 30/06/2021 — Not valid

The petitioner filed the return of income for A.Y. 2016-17 on 30th July, 2016 and declared a total income of Rs. 7,84,730. The petitioner thereafter received a notice dated 30th June, 2021 u/s 148 of the Income-tax Act, 1961 for A.Y. 2016-17.

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

“i) It is a cardinal principle of law that the law which has to be applied is the law in force in the assessment year unless otherwise provided expressly or by necessary implication. When the statute vests certain power in an authority to be exercised in a particular manner, the authority is required to exercise such power only in the manner provided therein.

ii) Substitution of a provision results in repeal of the earlier provision and its replacement by the new provision. Substitution thus combines repeal and fresh enactment. Therefore, the amended provisions of section 148A of the Income-tax Act, 1961 would apply in respect of notices issued with effect from April 1, 2021 and the erstwhile provisions of sections 147 to 151 of the Act, cannot be resorted to as, they have been repealed by the amending Act, viz., the 2020 Act. Even otherwise, no saving clause has been provided in the Act for saving the erstwhile provisions of sections 147 to 151 of the Act.

iii) The CBDT issued Notification No. 20 of 2021 dated March 31, 2021 ([2021] 432 ITR (St.) 141) and extended the time limit for issue of notice u/s. 148 of the Act from March 31, 2021 to April 30, 2021. Another Notification No. 38 of 2021 dated April 27, 2021 ([2021] 434 ITR (St.) 11) was issued u/s. 3(1) of the Act by the Central Government, by which time limit for issuance of notice u/s. 148 of the 1961 Act was further extended from April 30, 2021 to June 30, 2021.

iv) The notifications dated March 30, 2021 and April 27, 2021, are clearly beyond the authority delegated to the Central Government under the 2020 Act to issue notifications extending time limits for various actions and compliances. By means of the Explanations, the Central Government extended the operation of sections 148, 149 and 151 prior to their amendment by the Finance Act, 2021 and sought to revive the non-existent provisions which is clearly beyond its authority. Therefore, the Explanations contained in the notifications dated March 30, 2021 and April 27, 2021 are liable to be struck down as ultra vires the 2020 Act.

v) The validity of a notice has to be adjudged on the basis of law as existing on the date of notice. The notice u/s. 148 dated June 30, 2021 was invalid and had to be struck down. The notice was not valid.”

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Offences and prosecution — Wilful attempt to evade tax — Presumption of culpable mental state u/s 278E — Self-assessment return filed — Delay in paying tax — Tax and interest thereon paid before complaint filed — Prosecution malicious and invalid

37 Mrs. Noorjahan and Ors. vs. Dy. CIT
[2022] 445 ITR 17 (Mad.)
A.Y.: 2017-18
Date of order: 26th April, 2022
Ss. 276C and 278E of ITA, 1961

Offences and prosecution — Wilful attempt to evade tax — Presumption of culpable mental state u/s 278E — Self-assessment return filed — Delay in paying tax — Tax and interest thereon paid before complaint filed — Prosecution malicious and invalid

M/s. AMK Solutions Pvt. Limited is the assessee. For A.Y. 2017-18, the assessee company filed a return of income on 31st October, 2017. However, the tax admitted to be payable was not remitted by the assessee along with the return, which is the requirement of the law u/s 140A of the Income-tax Act, 1961. Thereafter, after a delay of 4½ months, the assessee remitted a sum of Rs. 6,85,462 towards the tax and interest payable. However, the Income-tax Department filed complaints against the assessee company and the directors for prosecution for offences u/s 276C(2), alleging that the petitioners have wilfully attempted to evade payment of Income-tax for A.Y. 2017-18.

The assessee company and the directors filed criminal writ petitions challenging the validity of complaints and requesting discharge. It was pointed out that the tax payable by the petitioners for A.Y. 2017-18 was paid well before the issuance of show-cause notice, and the same was intimated to the authorities. Without applying mind and not considering the payment of tax with interest, sanction to prosecute was granted, and the private complaint came to be filed suppressing the factum of tax payment much prior to sanction to prosecute. That, there is a lack of ingredients to prosecute the petitioners u/s 276C(2), besides suppression of fact and non-application of mind. The Madras High Court allowed the writ petitions and held as under:

“i) Wilful attempt to evade any tax, penalty or interest chargeable or imposable u/s. 276C of the Income-tax Act, 1961, is a positive act on the part of the assessee which is required to be proved to bring home the charge against the assessee. A “culpable mental state” which can be presumed u/s. 278E of the Act would come into play only in a prosecution for any offence which requires a culpable mental state on the part of the assessee. Section 278E of the Act is really a rule of evidence regarding existence of mens rea by drawing a presumption though rebuttable. That does not mean that the presumption would apply even in a case wherein the basic requirements constituting the offence are not disclosed. More particularly, when the tax is paid much before the process for prosecution is set into motion. The presumption can be applied only when the basic ingredients which would constitute any offence under the Act are disclosed. Then alone would the rule of evidence u/s. 278E of the Act regarding rebuttable presumption as to existence of culpable mental state on the part of accused come into play.

ii) There was no concealment of any source of income or taxable item, inclusion of a circumstance aimed to evade tax or furnishing of inaccurate particulars regarding any assessment or payment of tax. What was involved was only a failure on the part of the assessee to pay the tax in time, which was later on paid after 4½ months along with interest payable. So, it would not fall under the mischief of section 276C of the Act, which requires an attempt to evade tax and such attempt must be wilful. If the intention (culpable mental state) of the assessees was to evade tax or attempt to evade tax, they would not have filed the returns in time disclosing the income and the tax liable to be paid. They would not have remitted the tax payable with interest without waiting for the authorities to make demand or notice for prosecution. Thus, except a delay of 4½ months in payment of tax, there was no tax evasion or attempt to evade the payment of tax.

iii) To invoke the deeming provision, there should be a default in payment of tax in true sense. The Principal Commissioner who had accorded sanction on March 14, 2019 had not considered the payment of tax with interest by the assessee on February 15, 2018. Further the Principal Commissioner had conspicuously omitted to record the fact of payment of tax with interest except to record that the tax was not paid within time. Thus, the suppression of material facts, intentional suggestion of falsehood and non-application of mind went to show that this was a malicious prosecution initiated by the Income-tax authorities by abusing the power. When the mala fides were patently manifested, the assessees need not be forced to undergo the ordeal of trial. The complaint was quashed.”

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Income from other sources — Deductions — Scope of s. 57(iii) — Not necessary that expenses should have resulted in income — Sufficient if nexus is established between expenses and income

36 West Palm Developments LLP vs. ACIT
[2022] 445 ITR 511 (Kar.)
A.Y.: 2009-10
Date of order: 19th November, 2021
S. 57(iii) of ITA, 1961

Income from other sources — Deductions — Scope of s. 57(iii) — Not necessary that expenses should have resulted in income — Sufficient if nexus is established between expenses and income

The assessee was engaged in development and purchased, sold, constructed and leased properties. The assessee was sanctioned a loan on 26th September, 2008 for a sum of Rs. 35 crores from the Union Bank of India. The assessee paid a sum of Rs. 33,50,00,000 to P as an advance towards the purchase of properties by cheques dated 30th September, 2008 and 13th October, 2008. However, because of adverse market conditions, the assessee withdrew from the transaction and requested P to refund the earnest money. P refunded the earnest money by cheques dated 23rd October, 2008 and 29th October, 2008. The assessee thereafter lent money to other shareholders and made inter-corporate deposits to the tune of Rs. 35,62,450 for which total interest earned was to the extent of Rs. 2,02,52,131 as against the interest of Rs. 2,84,47,557 paid on loans. The assessee filed the return of income for A.Y. 2009-10, declaring income of Rs. 5,34,23,338 after claiming a loss of Rs. 81,95,426 under the head “Income from other sources”, which was arrived at after reducing the interest payable on the loan of Rs. 2,84,47,557 against the interest income of Rs. 2,02,52,131 earned from inter-corporate deposits and loans to shareholders u/s 57(iii) of the Act. The Assessing Officer disallowed the claim for deduction/set-off of the loss of Rs. 81,95,426.

The Commissioner (Appeals) upheld the order. The Tribunal dismissed the assessee’s appeal.

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

“i) Section 57(iii) of the Income-tax Act, 1961, mandates that income chargeable under the head “Income from other sources” shall be computed after making a deduction of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. Section 57(iii) of the Act does not require that the expenditure incurred is deductible only if the expenditure has resulted in actual income. As long as the purpose of incurring expenditure is to earn income, the expenditure would have to be allowed as a deduction u/s. 57(iii) of the Act. U/s. 57(iii) of the Act a nexus between the expenditure and income has to be established.

ii) On the facts and circumstances of the case, the assessee was entitled to deduction u/s. 57(iii) of the Act. In any case, the Tribunal exceeded its jurisdiction in disallowing the entire interest expenditure as the power of the Tribunal was limited to passing an order in respect of subject matter of the appeal.”

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Capital gains — Transfer — Law applicable — Effect of amendment of Transfer of Property Act in 2001 — Agreement for sale of property which is not registered — No transfer of property within meaning of s. 2(47) of Income-tax Act — No liability to pay capital gains tax

35 Principal CIT vs. Shelter Project Ltd.
[2022] 445 ITR 291 (Cal.)
A.Y.: 2009-10
Date of order: 4th February, 2022
S. 2(47) of ITA, 1961 and s. 53A of Transfer of Property Act, 1882

Capital gains — Transfer — Law applicable — Effect of amendment of Transfer of Property Act in 2001 — Agreement for sale of property which is not registered — No transfer of property within meaning of s. 2(47) of Income-tax Act — No liability to pay capital gains tax

Pursuant to an unregistered agreement, possession of the property was handed over by the assessee to a company engaged in developing housing projects wholly owned by the State of West Bengal. The question before the Assessing Officer (AO) was as to whether this amounted to transfer u/s 2(47)(v) of the Income-tax Act, 1961 and whether capital gain tax was attracted? The AO held that the transaction amounted to transfer and assessed capital gains to tax.

The Tribunal took note of the factual position and, more particularly, that the case arose much after the amendment to section 53A of the Transfer of Property Act which was amended by the Amendment Act, 2001, which stipulates that if an agreement like a joint development agreement is not registered, then it shall have no effect in law for the purposes of section 53A of the Transfer of Property Act. Accordingly, the assessee’s appeal was allowed, and the addition was deleted.

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

“i) The Transfer of Property Act, 1882 was amended by the Registration and Other Related Laws (Amendment) Act, 2001 which stipulates that if an agreement such as a joint development agreement is not registered, it shall have no effect in law for the purposes of section 53A of the 1882 Act. The Supreme Court in CIT vs. BALBIR SINGH MAINI [2017] 398 ITR 531 (SC), held that in order to qualify as a “transfer” of a capital asset u/s. 2(47)(v) of the Income-tax Act, 1961 there must be a ”contract” which can be enforced in law u/s. 53A of the 1882 Act. The expression “of the nature referred to in section 53A” in section 2(47)(v) was used by the Legislature ever since sub-clause (v) was inserted by the Finance Act of 1987, with effect from April 1, 1988. All that is meant by this expression is to refer to the ingredients of applicability of section 53A to the contracts mentioned therein. This expression cannot be stretched to refer to an amendment that was made years later in 2001, so as to then say that though registration of a contract is required by the 2001 Act, yet the aforesaid expression “of the nature referred to in section 53A” would somehow refer only to the nature of contract mentioned in section 53A, which would then in turn not require registration. There is no contract in the eye of law in force u/s. 53A after 2001 unless the contract is registered.

ii) Since the development agreement was not registered, it would have no effect in law for the purposes of section 53A which bodily stood incorporated in section 2(47)(v) of the Income-tax Act, 1961. Thus, the Tribunal was right in allowing the assessee’s appeal and granting the relief sought for, namely deletion of the addition to income of the consideration received on transfer of land for development.”

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Late payment charges and service tax do not attract TDS and consequently payment of these amounts without deduction of tax at source does not attract provisions of s.40(a)(ia).

27 Prithvi Outdoor Publicity LLP vs. CIT(A)
ITA No. 1013/Ahd./2019 (Ahd.-Trib.)
A.Y.: 2013-14
Date of order: 29th June, 2022
Section: 40(a)(ia)

Late payment charges and service tax do not attract TDS and consequently payment of these amounts without deduction of tax at source does not attract provisions of s.40(a)(ia).

FACTS
The Assessee incurred advertisement expenditure and made a payment of Rs. 2,27,56,222 to Andhra Pradesh Road Transport Corporation (APRTC). Out of Rs. 2,27,56,222, the Assessee deducted TDS on Rs. 2,17,08,097 and balance Rs. 10,48,125 was paid without deduction of tax. Payment of Rs. 10,48,125 on which no tax was deducted comprised Rs. 9,77,429 paid towards late fees and the balance of Rs. 1,16,155 towards service tax. The Assessee contended that since there is no provision to deduct tax on late fees and service tax, the said amount could not be disallowed u/s 40(a)(ia). Further, since the amount was penal in nature, no tax could be deducted on the same. Lastly, the Assessee contended that the recipient, i.e. APRTC, had included the said payment of Rs. 10,48,125 in its income and offered the same for tax; no disallowance could be made u/s 40(a)(ia).

The Assessing Officer, however, invoked the provisions of s.40(a)(ia) with respect to the payment of Rs. 10,48,125 made without deduction of tax at source.

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

Aggrieved, the Assessee preferred an appeal to the Tribunal.

HELD
The Tribunal held that the TDS provisions did not apply to late fees and service tax, and therefore disallowance u/s 40(a)(ia) could not be made.

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Conditions imposed by CIT, at the time of registration, with respect to conduct of the trust and circumstances in which registration can be cancelled, vacated by the Tribunal on the ground that the scheme of law does not visualise these conditions being part of the scheme of registration being granted to the applicant trust.

26 Bai Navajbai Tata Zoroastrian Girls School vs. CIT(E)
[2022] 141 taxmann.com 62 (Mum.-Trib.)
A.Ys.: 2022-23 to 2026-27
Date of order: 29th July, 2022
Section: 12A

Conditions imposed by CIT, at the time of registration, with respect to conduct of the trust and circumstances in which registration can be cancelled, vacated by the Tribunal on the ground that the scheme of law does not visualise these conditions being part of the scheme of registration being granted to the applicant trust.

FACTS
The Assessee is a charitable trust who had applied for registration u/s 12A of the Income-tax Act, 1961 (“the Act”). The CIT granted registration to the Assessee u/s 12A subject to certain conditions. That is, while passing the order granting registration to the Assessee, the CIT imposed certain conditions, which, inter alia, are as follows:

The Trust/Institution should quote the PAN in all its communications with the Department.

The registration does not automatically confer any right on the donors to claim deduction u/s 80G.

No change in the terms of Trust Deed/Memorandum of Association shall be effected without the due procedure of law, and its intimation shall be given immediately to the Office of the Jurisdictional Commissioner of Income Tax. The registering authority reserves the right to consider whether any such alteration in objects would be consistent with the definition of “charitable purpose” under the Act and in conformity with the requirement of continuity of registration.

The Trust/ Society/Non-Profit Company shall maintain accounts regularly and get these accounts audited in accordance with the provisions of s.12A(1)(b) of the Act.

Separate accounts in respect of profits and gains of business incidental to attainment of objects shall be maintained in compliance with s.11(4A) of the Act.

All public money received including for Corpus or any contribution shall be routed through a bank account whose number shall be communicated to the Office of the Jurisdictional Commissioner of Income Tax.

The Assessee observed that all the conditions imposed in the order granting registration were the conditions which formed the reasons for which registration of the trusts is cancelled, and therefore the conditions were not valid. The Assessee challenged the said order of the Commissioner on the ground that the provisions of the Act do not provide for conditional registration u/s 12A, and in the absence of such provision under the Act, the Commissioner was not justified in imposing conditions upon the Assessee.

HELD

On appeal, the Tribunal held as follows:

The finding regarding the objects of the trust and the genuineness of the trust’s activities cannot be conditional.

The expression “compliance of the requirements under item (B), of sub-clause (i) (i.e. the compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects)” is applicable to conditions precedent, say for example obtaining under FCRA which is under process, the Commissioner may grant registration subject to FCRA registration being obtained by the Assessee.

The conditions which the Commissioner imposed had the sanction of the law. That is, irrespective of such conditions being imposed by the Commissioner, the conditions found place in the law and the conditions imposed by the Commissioner could not be said to have the force of the law.

The Commissioner has a limited role, and can call for documents or information or make inquiries. The Commissioner cannot decide how and for what reasons the registration has to be cancelled, that too at the time of registration. The Commissioner, therefore, could not have supplemented the conditions by laying down conditions at the time of granting the registration.

Conditions attached to registration must be tested on the scheme of law, and the conditions imposed by the Commissioner did not find the force of law.

The observations of the Commissioner regarding the conduct of the Assessee trust could not be construed as legally binding in the sense that non-compliance with such guidance will not have any consequence beyond what is stated under the provisions of the Act. Further, the Tribunal also held that the implications of not doing what is set out in the conditions imposed by the Commissioner would not remain confined to the cancellation of registration when the law stipulates much harsher consequences.

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Intricate Issues in Tax Audit

INTRODUCTION
Since the provision for audit u/s 44AB of the Income-tax Act was introduced in 1984, it has occupied centre stage of activity for many CAs in practice. Popularly, it is referred to as Tax Audit. After nearly four decades, while the original provisions and forms may look simple, the task of conducting a tax audit has always been complex. While in earlier years, the complexities revolved around getting the client to prepare proper financial statements from manually maintained accounting records, today, the challenge is getting the client to compile the voluminous details before auditing and reporting these in the complex online utilities.

Before we get into some of the issues one has to tackle while forming a view and reporting on the same; it is important to understand the objective behind the introduction of Tax Audit. The scope and effect of section 44AB were explained by the CBDT in Circular No. 387, dated 6th July, 1984 [(1985) 152 ITR St. 11] in para 17, as under:

“17.2 A proper audit for tax purposes would ensure that the books of accounts and other records are properly maintained, that they faithfully reflect the income of the taxpayer and claims of deduction are correctly made by him. Such audit would also help in checking fraudulent practices. It can also facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities and considerably saving the time of assessing officers in carrying out routine verifications, like checking correctness of totals and verifying whether purchases and sales are properly vouched or not. The time of the assessing officers thus saved could be utilised for attending to more important investigational aspects of a case.”

The reporting complexities have been continuously increasing over the years, and it is evident from the fact that after the introduction of the forms in 1984, the first major change in reporting happened in 1999, after almost 15 years. The changes in the law and forms have become more frequent thereafter. At times, the reporting requirements travel beyond mere furnishing of particulars. The most glaring example is clause 30C(a), which requires the auditor to report on whether the assessee has entered into an impermissible avoidance arrangement.

The Institute of Chartered Accountants’ of India has been providing guidance to the members in the form of Guidance Notes and other pronouncements from time to time. The 2022 revised edition of The Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961 – A.Y. 2022-23 (the GN) has been recently published.

We may turn our attention to some of the important matters when it comes to reporting in Form Nos. 3CA / 3CB / 3CD.

REPORTING CONSIDERATIONS
As per section 145, an assessee has an option to follow cash or mercantile system of accounting. Under clause 13(a) of Form 3CD, the assessee has to state the method of accounting it follows. As stated in para 11.6 of the GN, Accounting Standards (AS) also apply to financial statements audited u/s 44AB, and members should examine compliance with mandatory Accounting Standards when conducting such audits. Further, as per para 13.9 of the GN, normal Audit Procedures will also apply to a person who is not required by or under any other law to get his accounts audited. Where in the case of an assessee, the law does not prescribe any specific format or requirements for the preparation and presentation of financial statements, the ICAI has recently published ‘Technical Guide on Financial Statements of Non-Corporate Entities’ and ‘Technical Guide on Financial Statements of Limited Liability Partnerships’.

The following matters need to be kept in mind while furnishing an audit report, especially under Form No. 3CB:

(a) Assessee’s responsibility and Tax Auditor’s responsibility paragraphs have to be included at appropriate places in both Form No. 3CA and Form No. 3CB, as the case may be. The illustrations of the same are given in para 13.11 of the GN.

(b) If an assessee follows the cash system of accounting in accordance with section 145, then the said fact must be mentioned in Form No. 3CB while drawing attention to the notes included in the financial statements, if any.

(c) In case the financial statements of an assessee are otherwise not required to be prepared or presented in any particular format by any law, and if the ‘Technical Guide on Financial Statements of Non-Corporate Entities’ or ‘Technical Guide on Financial Statements of Limited Liability Partnerships’, as applicable, is not followed, then the said fact should be included as an observation.

PAYMENT OR RECEIPT LESS THAN 5% IN CASH IN CASE OF ELIGIBLE ASSESSEE COVERED BY SECTION 44AD
With effect from A.Y. 2020-21, a proviso was inserted to section 44AB(a), whereby a relaxation from getting accounts audited was provided to certain assessees. Thus, an assessee, having sales, turnover or gross receipts below Rs. 10 crores, whose aggregate of all receipts or payments in cash (including non account-payee cheques / bank drafts) does not exceed five per cent of the sales, turnover or gross receipts, is not required to get its accounts audited u/s 44AB(a).

U/s 44AD(4) if an eligible assessee, who has declared profit for any earlier year in accordance with section 44AD, chooses to declare profit less than that prescribed in section 44AD(1) in any of the succeeding 5 years and his income exceeds the maximum amount which is not chargeable to tax, then he is liable to get his accounts audited u/s 44AB(e) r.w.s. 44AD(5).

The issue that arises for consideration is whether the benefit provided in the proviso to section 44AB(a) would also apply to assessees covered u/s 44AB(e). The objective of increasing the said limit, as stated, was to reduce the compliance burden on small and medium enterprises. Even the Finance Minister, in her speech, had said – “In order to reduce the compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, I propose to raise by five times (in Finance Act raised to Rs. 10 crores) the turnover threshold for audit ….”.

However, the stated object of the amendment and law ultimately introduced in this regard are at variance. It does not appear to encompass eligible assessees covered u/s 44AD by not extending the said proviso to section 44AB(e). Thus, reference to small retailers, traders, and shopkeepers in the Finance Minister’s speech is rendered meaningless, as they are the ones who are actually covered as eligible assessees u/s 44AD.

TURNOVER FROM SPECULATIVE TRANSACTIONS AND DERIVATIVES, FUTURES & OPTIONS
Determination of turnover or gross receipts from Speculative Transactions as well as from Derivatives, Futures & Options has been a subject matter of many lengthy discussions. The GN has dealt with the subject and provided the following guidance in paras 5.14(a) and (b) for determination of turnover for applicability of section 44AB. In either case, the determination would be as under:

(a) Speculative Transactions: These are transactions in respect of commodities, shares or stocks etc., that are ultimately settled otherwise than by actual delivery. In such cases, transactions are recognised in the books of account on net basis of difference earned or loss incurred. According to the GN, the sum total of such differences earned or loss incurred, i.e. total of both the positives and negatives has to be taken into consideration for determination of turnover.

(b) Derivatives, Futures & Options: These transactions are also settled, on or before the strike date, without actual delivery of the stocks or commodities involved. In such cases, the total of all favourable and unfavourable outcomes should be taken into consideration for determining turnover along with the premium received on the sale of options (unless included in determining net profit from transaction). The GN also states that differences on reverse trades would also form part of the turnover.

INTEREST AND REMUNERATION RECEIVED BY A PARTNER IN A FIRM
The applicability of provisions of section 44AB to receipt of interest and remuneration by a partner in a firm has been a matter of some litigation in the context of levy of penalty u/s 271B. There have been judgements of the ITAT both in favour and against. This issue came up before the Hon. Bombay High Court recently in Perizad Zorabian Irani vs. Principal CIT [(2022) 139 taxmann.com 164 (Bombay)] wherein it is held that:

“Where assessee was only a partner in a partnership firm and was not carrying on any business independently, remuneration received by assessee from said partnership firm could not be treated as gross receipts of assessee and, accordingly, assessee was justified in not getting her accounts audited under section 44AB with respect to such remuneration.”

In coming to the above conclusion, the High Court relied on the judgement of Hon. Madras High Court in Anandkumar vs. ACIT [(2021) 430 ITR 391 (Mad)]. The case before the Madras High Court was of an assessee who had declared presumptive income u/s 44AD at 8% of the remuneration and interest earned from the partnership firm. The Assessing Officer had disallowed the claim of benefit u/s 44AD while holding that the assessee was not carrying on business independently but as a partner in the firm, and receipts on account of remuneration and interest from firms cannot be construed as gross receipts as mentioned in section 44AD.

Thus, two important points emerge from the above discussion:

(a) Remuneration and Interest in excess of Rs. 1 crore would not make a partner of a firm liable to tax audit u/s 44AB, and

(b) Benefit of section 44AD is not available in respect of remuneration and interest received by a partner from a partnership firm.

INCOME COMPUTATION AND DISCLOSURE STANDARDS (ICDS)
Reporting under this clause assumes great significance as, most of the time, assessees are not fully aware of the said standards. Two important matters to note from an auditor’s perspective are:

(i) If financial statements are prepared and presented by following the Accounting Standards, as discussed in Reporting Considerations herein before, then there might be some items of adjustments under ICDS and accordingly need reporting under clause 13 of Form No. 3CD, and

(ii) If the ICDS are followed in the preparation and presentation of financial statements, especially in the case of non-corporate assessees or LLPs, then there would be a need for qualifications in Form No. 3CB, where the Accounting Standards are not followed.

Generally, one will have to take into consideration the following important items, amongst others, in respect of the following ICDS:

ICDS	Subject	Matters for consideration
ICDS – I	Accounting Policies	• Impact of changes in accounting policies • Marked to market profit / losses
ICDS – II	Valuation of Inventories	• Inclusive vs. Exclusive • Borrowing Costs • Time value of money • Clause 14(b)
ICDS – IV	Revenue Recognition	• Performance Obligations • Provision for sales returns
ICDS – V	Tangible Fixed Assets	• Borrowing Cost • Forex gain / loss treatment • Clause 18
ICDS – VI	Effects of Changes in Foreign Exchange Rates	• Cash flow hedges • Marked to market profit / losses
ICDS – VIII	Securities	• Average cost vs. Bucket Approach
ICDS – IX	Borrowing Costs	• Inventories • Fixed Assets

ICDS

Subject

Matters for consideration

ICDS – I

Accounting Policies

• Impact of changes in accounting policies

• Marked to market profit / losses

ICDS – II

Valuation of Inventories

• Inclusive vs. Exclusive

• Borrowing Costs

• Time value of money

• Clause 14(b)

ICDS – IV

Revenue Recognition

• Performance Obligations

• Provision for sales returns

ICDS – V

Tangible Fixed Assets

• Borrowing Cost

• Forex gain / loss treatment

• Clause 18

ICDS – VI

Effects of Changes in Foreign Exchange
Rates

• Cash flow hedges

• Marked to market profit / losses

ICDS – VIII

Securities

• Average cost vs. Bucket Approach

ICDS – IX

Borrowing Costs

• Inventories

• Fixed Assets

Some of the above matters are covered for reporting under other clauses also. At times such multiple reporting results in further adjustments in the intimations received u/s 143(1).

1. Certain adjustments in respect of inventories relating to taxes, duties etc., are reported, as per ICDS II, under clause 13(e), as well as in clause 14(b) for reporting deviation from section 145A. When intimation u/s 143(1) is received, it is noticed that there are double additions made if the same item is reported in two different clauses as per the reporting requirements. It is difficult to prescribe any particular method of reporting in such a matter. However, one may take a practical view and report such adjustments in clause 14(b) as it is directly arising from the provision of law rather than under clause 13(e), which comes from the requirement of delegated legislation in the form of ICDS. Of course, whatever manner of reporting is adopted by the assessee, it would be prudent to disclose the same in para 3 of Form No. 3CA or para 5 of the Form No. 3CB, as the case may be.

2. In cases of proprietary concerns, along with business affairs, many times other personal details are also reported in the financial statements. If the proprietor is following the mercantile system of accounting and is also earning some other incomes, which are credited directly to the capital account, then clause 13(d) is attracted. It may be remembered that ICDS also apply to the computation of income under the head ‘Income from Other Sources’. Clause 13(d) is attracted if any adjustments are required to be made to the profit or loss for complying with ICDS. The scope of ICDS also extends to the recognition of revenue arising from the use by others of the person’s resources yielding interest, royalties or dividends. Similarly, under clause 16, amounts not credited to the profit and loss account are required to be reported. Under clause (d) of the said clause, ‘any other item of income’ is to be reported.

This particular reporting has been causing some problems again in intimations received where the said amount, though declared as income from other sources, is added to business income.

To deal with such a problem, the correct course of action would be to segregate personal financial affairs from business affairs. However, where such segregation is not possible for some good reasons, then probably the assessee may have to make a choice of reporting or not reporting the same. The auditor, in turn, would have to disclose such fact as a qualification under clause 5 of Form No. 3CB if not reported. If reported, then probably, an explanation would need to be included at the appropriate place, probably along with other documents that are uploaded along with the financial statements.

One may face such situations in respect of other items also. As an auditor, it may be a good practice to disclose such fact/s in clause 3 of Form No. 3CA or clause 5 of Form No. 3CB, as the case may be. Such disclosure may simply be an observation or a qualification, also at times depending on the facts and circumstances of a given case.

CHANGES IN PARTNERSHIP
In clause 9(b), in respect of Partnership Firms or Association of Persons, changes in the partnership or members or in their profit-sharing ratio are required to be reported. There has been a major change in provisions of section 45(4) w.e.f. 1st April, 2021. Any profits or gains arising from receipt of money or capital asset by a partner because of reconstitution of partnership firm is chargeable to tax, and such tax has to be paid by the firm.

While there is no separate reporting required in Form 3CD of such gains, one will have to take the above into account to ensure that due payment or provision for tax is made in the books of account. In such cases, the assessee may have taken legal opinions on some of the issues. If reliance is placed on the same, then necessary audit procedures as also disclosure, if additionally required, may be discussed with the assessee. One would also need to examine the valuation reports in respect of some of the assets that may have been obtained for the determination of amounts payable to any partner on account of reconstitution. Also, the assessee needs to obtain Form No. 5C, where applicable, to determine the nature of capital gains and carried forward cost of assets retained by the firm.

IMPERMISSIBLE AVOIDANCE ARRANGEMENT (IAA)
Clause 30C requires reporting of impermissible avoidance arrangement entered into by the assessee during the previous year under consideration. Reporting under this clause was deferred to 1st April, 2022.

Chapter X-A deals with provisions of General Anti-Avoidance Rules (GAAR) contained in sections 95 to 102. The intent, as per the Explanatory Memorandum of provisions of GAAR is to target the camouflaged transactions and determine tax by determining transactions on the basis of substance rather than form. GAAR applies to transactions entered into after 1st April, 2017. There are elaborate procedures for a transaction to be declared an IAA. For an arrangement to be declared as IAA, its main purpose should be to obtain a tax benefit and should satisfy one or more conditions of section 96, which are as under:

it creates rights / obligations which are not ordinarily created between persons dealing at arm’s length,

it results, directly or indirectly, in misuse or abuse of the provisions of the Act,

it lacks commercial substance or is deemed to lack commercial substance, by virtue of fiction created by section 97, or

is entered into or is carried out, by means, or in a manner, which may not be ordinarily employed for bona fide purposes.

There are elaborate steps laid down where a matter travels from Assessing Officer to the CIT or PCIT and to the Approving Panel. The CIT or the PCIT may declare the transaction as IAA if the assessee does not respond to show cause notice. In case the assessee objects to such a treatment, then the matter is referred to the Approving Panel, which may or may not hold the transaction to be IAA.

As per Rule 10U, GAAR is not applicable in certain specified cases thereunder.

Thus, there are various complexities involved in determining whether a transaction is an IAA. It involves determining parties who are to be treated as one and the same person, calculation of tax benefit obtained and if the same is more than Rs. 3 crores and access to records of some or all of the connected parties. This will involve substantial uncertainty, impossibility of computing overall tax effect and involvement of substantial subjectivity. The very fact that, even for administrative purposes, such an elaborate system from AO to Approving Panel is put in place, is a pointer to the difficulties involved. It is well-nigh impossible for a Tax Auditor to come to a conclusion on such a matter. In any case, the first step of furnishing the details under this clause rests on the assessee. Thus, in view of the difficulties arising on account of uncertainty and subjectivity, an auditor would hardly ever be able to come to a true and correct view of the matter. Accordingly, a Tax Auditor should include a disclaimer in respect of reporting under this clause as per para 56.14 of the GN with necessary modification.

The GN also suggests inquiring about pending matters relating to IAA or declaration of any transaction as IAA in respect of any of the earlier years and reporting the facts relating to the same.

THE BREAK-UP OF TOTAL EXPENDITURE AND GST
Clause 44, in pursuance of the information exchange collaboration initiated between CBIC and CBDT, was inserted on 20th July, 2018, but kept in abeyance for reporting prior to 1st April, 2022. While the ultimate objective of this clause is not clear, it appears to be in the nature of data collation for the purposes of GST. It requires reporting of the break-up of expenditure of entities registered or not registered under GST in the following manner:

1. Total amount of expenditure incurred during the year (Column 2)

2. Expenditure in respect of entities registered under GST:

a. Relating to goods or services exempt from GST (Column 3)

b. Relating to entities falling under composition scheme (Column 4)

c. Relating to other registered entities (Column 5)

d. Total payment to registered entities (Column 6)

3. Expenditure relating to entities not registered under GST (Column 7)

The first question that arises for the purpose of reporting under this clause is what is the ambit or scope of the term “expenditure”? Oxford dictionary defines it as “the act of spending or using money; an amount of money spent”. It appears that all the expenditures as reported in the Profit and Loss Statement may have to be bifurcated for the purpose of reporting at clause 44. However, there might be certain exclusions or inclusions that may have to be taken care of:

1. Provisions and allowances (e.g., provisions for doubtful debts) are not expenditure and therefore, will have to be excluded.

2. Depreciation and amortisation, not being in the nature of expenditure, will also have to be excluded.

3. Capital Expenditure shall also be treated as expenditure and requires to be reported.

4. Prepaid expenditure incurred in the current year but forming part of the expenditure of the subsequent year will have to be added and conversely, prepaid expenditure of previous year forming part of the expenditure of current year will have to be reduced.

Once the total expenditure incurred during the year is derived under column 2, this requires bifurcation into expenditure in respect of entities registered under GST and those not registered under GST. The expenditure in respect of registered entities requires further bifurcation into exempt goods or services, relating to entities under the composition scheme and those relating to other registered entities.

As per section 2(47) of CGST Act, 2017, exempt supply means “supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt and includes non-taxable supply”. Exempt supplies shall include the supply of goods or services that have been exempted by way of notification (e.g., interest) or subjected to a nil rate of tax by way of notification. It shall also include supplies which are currently outside the levy of GST, such as petrol, diesel and liquor.

Activities or transactions that are treated as neither supply of goods nor a supply of services under Schedule III do not fall within the ambit of exempt supplies. Thus, expenditure in respect of such activities may have to be reported under the residuary category at column 5, in case of registered entities, or column 7 in case of unregistered entities. However, Para 82.3 of GN states that such activities need not be reported under this clause.

The details of expenses under the reverse charge mechanism (i.e., RCM where the recipient is liable to pay tax) are also required to be reported. In the case of RCM expenses from registered entities, these shall form part of expenditure relating to other registered dealers under column 5. In the case of RCM expenses from unregistered dealers, it shall be reportable under expenditure relating to entities not registered in column 7.

The critical issue here is what should be the source of such details required to be reported under this clause, as currently, there is no return or form in GST that requires mandatory reporting with respect to all expenditures. The reporting in respect of supplies from entities under the composition scheme in Table 16 of Form GSTR-9 (Annual Return) is currently optional up to F.Y. 2021-22. Table 14 of Form GSTR-9C (Reconciliation Statement), which requires expenditure head-wise reporting of Input Tax credit availed, is also optional up to F.Y. 2021-22. Reporting in respect of inward supplies from composition entities and exempt inward supplies is also required in Table 5 of GSTR-3B. However, most taxpayers are not able to report it on a monthly basis.

An inward supplies register, if available, consisting of all the expenditures incurred for the year could be considered as the basis for compiling vendor-wise expense details. Additionally, internal data for vendor master may have to be analysed to obtain details of entities registered under the composition scheme, registered entities, and unregistered entities. All the entries not charged with GST may be analysed to obtain details pertaining to exempt supplies, those pertaining to composition entities and those pertaining to unregistered entities.

The reporting is not required head-wise or vendor-wise. However, it is advisable to separately report revenue and capital expenditure. It is also advisable to maintain detailed head-wise and vendor-wise details as, typically, it may expected to be called for during scrutiny.

GSTR-2A (a statement containing details of inward supplies) may also be considered for reporting details in respect of registered entities. Owing to the dynamic nature of the statement and further requirement of reconciling the same with the books, it may not give desired and accurate details. The details in respect of composition entities and unregistered entities will also have to be separately compiled as these shall not be available from GSTR-2A.

Reporting under clause 44 involves an elaborate exercise, and all the details may not be available in most of the cases. In most cases, it may not be true and correct as required for the purpose of reporting. Therefore, it may be necessary to consider adequate disclosures along with notes, partial disclaimers, and in an appropriate circumstance, a complete disclaimer on reporting in this clause.

CONCLUSION
In this article, some intricate contemporary matters have been touched upon. However, there are some evergreen issues that keep on springing some surprises during the conduct of the audit and teach us something new. While many things have become easy on account of technology, there are matters which also add to our difficulties in terms of submission of data, maintenance and preserving of audit records and, of course, not the least, the challenges posed by the portal at times.

Two things that one has come to realise about tax audit, after practicing for some decades:

Assessees and Tax Auditors adapt to reporting on many intricate issues and settle with the same in a couple of years, and

When the issues are settled, the law comes up with something new and more complex requirements to be reported.

The tax audit reporting is, therefore, never finally settled, adding to the woes of taxpayers and tax auditors.

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S. 254(2) – Rectification of mistake apparent on record – ITAT –- Not following coordinate bench decision in assessee’s own case

8 Omega Investments and Properties Ltd. vs. Commissioner of Income Tax- 3
[Income Tax Appeal No. 127 of 2021 & W.P. No. 1217 of 2020 (Bombay High Court); Arising out of ITA No. 868/M/2016 order of Mumbai Tribunal dated 9th April, 2018 and Third Member decision of Mumbai ITAT MA No. 282/Mum/2018 order dated 13th November, 2019]
Date of order: 7th June, 2022
A.Y.: 2007-08

S. 254(2) – Rectification of mistake apparent on record – ITAT –- Not following coordinate bench decision in assessee’s own case

The Assessee had undertaken a Slum Rehabilitation Project at Parel, Mumbai namely ‘Kingston Tower’. According to the Assessee, the project was initially approved by the Slum Rehabilitation Authority on 7th October, 2002. However, due to F.S.I. related issues, the Assessee filed an amended plan which was approved subsequently. A Letter of Intent for approval was issued on 16th April, 2004 and an amended intimation of approval for the project was issued on 4th June, 2004. The Assessee had filed a return of income for A.Y. 2007-08 declaring a total income of Rs. 22,050. The Assessee had claimed deduction u/s 80-IB(10) of Rs. 2,05,33,831. The assessment was completed on 15th May, 2009, and the deduction under particular provisions were granted. Subsequently, the case for A.Y. 2007-08 was reopened u/s 148 vide notice dated 17th December, 2012, and an order was passed by the AO on 7th March, 2014 against which the Assessee filed an Appeal before the CIT (Appeals), which was allowed by the CIT (Appeals) by order dated 30th November, 2015. The Revenue filed an Appeal before the Appellate Tribunal which was allowed by the impugned order dated 9th April, 2018. After the order was passed, the Assessee filed a rectification application on 17th April, 2018 u/s 254 (2). The rectification application was rejected by order dated 29th November, 2019.

Against the order of the Tribunal dated 9th April, 2018, the Assessee has filed the Income Tax Appeal No. 127 of 2021, and against the order rejecting the Rectification Application dated 29th November, 2019, the Assessee has filed Writ Petition No. 1217 of 2020.

The Hon. Court observed that before the Tribunal, the Assessee had made reference to the orders passed in favour of the Assessee for A.Ys. 2009-10 and 2010-11, in which it was held that the approval was given to the Assessee’s project on 4th June, 2004, which being beyond the relevant date of 1st April, 2004, as per the provisions u/s 80-IB(10), the Assessee was entitled to the benefit of the said provisions. The Tribunal in the impugned order sought to distinguish the earlier orders passed by the Tribunal for A.Ys. 2009-10 and 2010-11 on the ground that the Tribunal and the Commissioner of Income Tax (Appeals), in respect of A.Ys. 2009-10 and 2010-11 had proceeded on erroneous factual premise as regards the relevant date when the correct date of approval of the project was 7th November, 2002, and this error goes to the root of the matter. Having observed so, the Tribunal held that it would not be bound by the order passed by itself in respect of Assessee’s own case for A.Ys. 2009-10 and 2010-11. It also relied upon the decision of the Tribunal in the case of Bhavya Construction vs. ACIT – (2017) 77Taxmann.com 66 (Mum.-Tri.). Accordingly by the impugned order, the Tribunal allowed the Appeal.

In the rectification application, the Assessee, sought to point out that in respect of A.Y. 2009-10, the decision of the Tribunal holding in favour of the Assessee, but the view of the Tribunal for A.Y. 2009-10 (ITA No. 997/M/2013) was approved by this Court by dismissing the appeal filed by the Revenue ITA No. 159 of 2015 by the order dated 25th July, 2017. The Assessee also sought to point out that the decision of the Tribunal in the case of Bhavya Constructions vs. ACIT, this Court by order dated 30th January, 2020 in Income Tax Appeal No. 1009 of 2017 had set aside the same and remanded the matter to the Tribunal for a fresh hearing. However, the Tribunal did not consider the rectification application and dismissed the same.

The Assessee contends that if the Tribunal wanted to differ from the earlier view, the matter ought to have been referred to the Larger Bench. The Assessee contends that the date of approval of the project referred to in the earlier order was not a mistake or oversight but it was a specific finding on the issue and simpliciter taking a different view was improper on the part of the Tribunal. The Assessee also contends that when the fact that the orders of Tribunal for A.Ys. 2009-10 and 2010-11 were confirmed by this Court was pointed out, it ought to have been taken into consideration and the application for rectification was, without any reasons, erroneously rejected. Apart from this position, the learned Counsel for the Assessee has also placed on record a copy of the order passed by this Court in Income Tax Appeal No. 265 of 2017 in respect of the Assessee’s own case for A.Y. 2010-11. The Revenue supported both the impugned orders.

The Hon. Court observed that the Tribunal has proceeded on the premise that there was an error in the orders passed by the Tribunal for A.Ys. 2009-10 and 2010-11 in respect of the Assessee’s case which goes to the root of the matter, and therefore, the Tribunal is entitled to take a different view. However the fact that the orders passed by the Tribunal for the A.Ys. 2009-10 and 2010-11 were challenged by the Revenue by filing appeals in this Court, and they were dismissed, confirming the findings rendered therein was the material aspect which ought to have been considered by the Tribunal. If it was missed out when the Tribunal passed the impugned order dated 9th April, 2018 when it was sought to be placed on record through rectification application at that time, the Tribunal should have considered the implications of the order. The order passed by this Court in respect of A.Y. 2010-11 has been rendered thereafter on 9th April, 2018. Even the order setting aside the decision in the case of Bhavya Construction Co. and remanded the proceedings to the Tribunal was rendered on 30th January, 2020.

Therefore, on the aspect of what will be the relevant date in the facts of the Assessee’s case, the orders passed by this Court dismissing the Revenue’s appeals would be relevant and the implication of the same ought to be considered by the Tribunal before deciding whether the Assessee is entitled to the benefit of provisions u/s 80-IB(10) in respect of the relevant assessment year.

In these circumstances the Hon. Court held that the impugned order passed by the Tribunal dated 9th April, 2018 is required to be quashed and set aside. The appeal filed by the Revenue being ITA No. 868/ Mum/2016 is required to be restored and considered on its own merits after considering the documents/orders sought to be placed on record through rectification application.

The appeal and Writ Petition were accordingly disposed.

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Natural Justice – opportunity of hearing – Personal hearing through video conferencing denied – Matter Remanded

7 LKP Securities Ltd. vs. The Deputy Commissioner of Income Tax Circle-4(3)(1)g & Ors.
[Writ Petition No. 2076 – 2077 of 2022, Bombay High Court]
Date of order: 4th July, 2022

Natural Justice – opportunity of hearing – Personal hearing through video conferencing denied – Matter Remanded

The Petitioner submits that in the course of reassessment proceeding on 23rd March, 2022, petitioner sought to make further submissions, and also submitted a request for personal hearing through video conferencing. It was found that e-proceedings had been closed on 21st March, 2022. The Petitioner informed the Respondent of this grievance vide communication dated 24th March, 2022, and also attached further submission dated 23rd March, 2022 with the said communication. Despite the same, the Respondent has gone ahead and passed the assessment order dated 30th March, 2022 without considering the request for personal hearing or the further submissions. It was submitted that the matter be remanded back, so that an assessment order can be passed after considering the further submissions and after hearing the Petitioner.

The Court observed from paragraph 11 of the assessment order dated 30th March, 2022 for A.Y. 2016-2017, that since the case was getting time barred the assessment order came to be passed on the basis of material available with the department. Paragraph 11 of the said order is quoted as under:

“11. Subsequently the assessee opted for video conference through JAO regarding which letter was uploaded by the JAO on 25.03.2022. In response the VC was scheduled on 28.03.2022 at 2.30 p.m. However during the VC conducted for the A.Y. 2017-18 scheduled at 12.45 p.m. in assessee’s own case the A/R of the assessee requested to take up the case for the A.Y. 2016-17 alongwith A.Y. 2017- 18 since the issue for both the years are similar and as such VC scheduled for 2016-17 was cancelled. In the course of Video conference the A/r of the assessee requested to stay the proceeding for A.Y. 2016-17 as they would be filing writ before the Hon’ble High Court. In response the A/R of the assessee was asked to upload the interim order of the Hon’ble High Court on or before 29.03.2022 to stay the proceedings. However the A/R of the assessee requested they would upload the interim order by 3.00 p.m. on 30.03.2022 but no such order was filed till 4.00 P.M. of 30.03.2022. Since the case is getting barred by limitation the case is disposed off on the basis of material available with the department.”

The Hon. Court observed that the assessment order has come to be passed without considering the further submissions or hearing the Petitioner. It was observed that similar assessment order has also been passed for A.Y. 2017-2018.

The Revenue fairly submitted that in several such matters, the Court has remanded the matters for fresh consideration in view of the provisions of Section 144B of the Act 1961.

Held: Set aside the assessment orders dated 30th March, 2022 for A.Ys. 2016-2017 and 2017-2018, and remanded the matters back to the Respondent for de novo consideration after granting an opportunity of personal hearing and, after taking into account the further submissions that the Petitioner may make, pass appropriate orders in accordance with law within four weeks.

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TDS — Payment to non-resident — Assessee not person responsible for making payment to non-resident — No obligation to deduct tax at source

34 Ingram Micro Inc. vs. ITO(IT)
[2022] 444 ITR 568 (Bom.)
Date of order: 26th February, 2022
S. 195 of ITA, 1961

TDS — Payment to non-resident — Assessee not person responsible for making payment to non-resident — No obligation to deduct tax at source

The assessee was a company incorporated in the USA and was engaged in the business of distribution of technology products. The assessee had worldwide operations. IMAHI, a company incorporated in the USA, and a subsidiary of the assessee, held indirectly a wholly owned subsidiary in India, IMIPL. In 2004, IMAHI acquired the shares of THL, a company incorporated in Bermuda, from its existing shareholders. The assessee’s role in this transaction was that it guaranteed the payment of the sale consideration by IMAHI under the share purchase agreement to the sellers, i.e., the existing shareholders of THL. The guarantee never came to be invoked because IMAHI discharged its obligation under the share purchase agreement to the sellers, and accordingly, the assessee stood discharged of its obligations as a guarantor under the share purchase agreement. The Assessing Officer initiated proceedings u/s 201 of the Income-tax Act, 1961 to treat the assessee as an assessee-in-default for failure to deduct tax on the payment for the purchase of shares of THL.

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

“i) Section 195 of the Income-tax Act, 1961, mandates “any person responsible for paying to a non-resident” any sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, to deduct Income-tax thereon at the rates in force.

ii) The share purchase agreement showed that the assessee was the guarantor of the payment to be made by IMAHI and not the purchaser. The purchaser himself could not be the guarantor also and that itself indicated that the assessee was not the purchaser of the shares of THL. The Assessing Officer had also not produced any evidence or referred to any document to even indicate that the assessee had paid any amount or could be even regarded as the person responsible for paying any sum to a non-resident (or a foreign company) chargeable under the provisions of the Act.

iii) As section 195 is applicable only to a person who is responsible for paying to deduct tax at the time of credit to the account of the payee or at the time of payment and the assessee did not make any payment to THL, there was no obligation on the assessee to deduct tax at source. The notice u/s. 201 was not valid.”

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

33 CIT(Exemption) vs.
Karnataka State Students Welfare Fund
[2022] 444 ITR 436 (Kar.)
A.Y.: 2012-13
Date of order: 30th November, 2021
S. 12A of ITA, 1961

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

The assessee is a trust eligible for exemption u/s 11 of the Income-tax Act, 1961. For the A.Y. 2012-13, reassessment order u/s 143(3) r.w.s 148 of the Act came to be passed, whereby the Assessing Officer held that the assessee had not applied the income for charitable purposes as required u/s 11 and 12 from 2014-15 onwards (i.e., after 23rd September, 2014. A survey revealed that the assessee has accumulated huge income and was claiming exemption under the Act without obtaining registration u/s 12AA.

The Tribunal allowed the appeal and quashed the reassessment order holding that the same is bad in law for violating the second and third proviso to s.12A(2) of the Act.

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

“i) The provisions of section 12A of the Income-tax Act, 1961, before amendment by the Finance (No. 2) Act, 2014, provided that a trust or an institution can claim exemption under sections 11 and 12 only after registration u/s. 12AA of the Act has been granted. In case of trusts or institutions which apply for registration after 1st June, 2007, the registration shall be effective only prospectively. Non-application of registration for the period prior to the year of registration caused genuine hardship to charitable organisations. Due to absence of registration, tax liability was fastened even though they may otherwise be eligible for exemption and fulfil other substantive conditions. However, the power of condonation of delay in seeking registration was not available.

ii) In order to provide relief to such trusts and remove hardship in genuine cases, section 12A of the Act was amended to provide that in a case where a trust or institution has been granted registration u/s. 12AA of the Act, the benefit of sections 11 and 12 of the Act shall be available in respect of any income derived from property held under trust in any assessment proceeding for an earlier assessment year which is pending before the Assessing Officer as on the date of such registration, if the objects and activities of such trust or institution in the relevant earlier assessment year are the same as those on the basis of which such registration has been granted. Further, that no action for reopening of an assessment u/s. 147 of the Act shall be taken by the Assessing Officer in the case of such trust or institution for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not been obtained the registration u/s. 12AA for the said assessment year. However, these benefits would not be available in the case of any trust or institution which at any time had applied for registration and it was refused u/s. 12AA of the Act or a registration once granted was cancelled. This was the clarification regarding the amendment issued by the Central Board of Direct Taxes in Circular No. 1 of 2015 ([2015] 371 ITR (St.) 22).

iii) The only reason for reopening of the assessment was the absence of registration u/s. 12A of the Act. Further, the assessee had not filed return of income for the assessment year in question. A finding had been recorded on the facts of the case by the Tribunal on this aspect and the allegation that the assessee was claiming deductions u/s. 11 and 12 of the Act was held to be against the facts available on record. Hence the reassessment was not valid.”

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Reassessment — Death of assessee — Notice of reassessment — Condition precedent for reassessment — Valid notice — Notice of reassessment issued in the name of a person who had died — Objection to notice by legal representative — Mistake in notice not curable by s. 292B — Notice not valid

32 Kanubhai Dhirubhai Patel (legal representative of late Dhirubhai Sambhubhai) vs. ITO
[2022] 444 ITR 405 (Guj.)
A.Y.: 2015-16
Date of order: 14th February, 2022
Ss. 147, 148, 292B of ITA, 1961

Reassessment — Death of assessee — Notice of reassessment — Condition precedent for reassessment — Valid notice — Notice of reassessment issued in the name of a person who had died — Objection to notice by legal representative — Mistake in notice not curable by s. 292B — Notice not valid

The writ applicant is an individual assessee and the son of one Dhirubhai Shambhubhai Malviya (“the deceased”). The said Dhirubhai Shambhubhai Malviya expired on 22nd November, 2020. The Assessing Officer issued a notice dated 31st March, 2021 u/s 148 of the Income-tax Act, 1961, calling upon the deceased assessee to file a return of income for the A.Y. 2015-16. The writ applicant, being the son of the deceased assessee, filed a reply dated 10th April, 2021 specifically drawing the attention of the Assessing Officer about the death of the original assessee, and had further requested to drop the proceedings as such notice will have no legal sanctity in the eye of law. The writ applicant again submitted a reply dated 15th December, 2021 reiterating that the notice had been issued in the name of the deceased assessee, and requested that the proceedings be dropped. Despite the aforesaid fact being drawn to the attention of the respondent-authority, the Assessing Officer further issued a notice u/s 142(1) dated 17th December, 2021 again addressed to the deceased assessee.

In such circumstances, the writ applicant challenged the notice and the reassessment proceedings by filing a writ petition. The Gujarat High Court allowed the writ petition and held as under:

“i) Section 292B of the Income-tax Act, 1961, inter alia, provides that no notice issued in pursuance of any of the provisions of the Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such notice if such notice, summons is in substance and effect in conformity with or according to the intent and purpose of the Act.

ii) A notice u/s. 148 of the Act is a jurisdictional notice, and existence of a valid notice u/s. 148 is a condition precedent for exercise of jurisdiction by the Assessing Officer to assess or reassess u/s. 147 of the Act. The want of a valid notice affects the jurisdiction of the Assessing Officer to proceed with the assessment and thus, affects the validity of the proceedings for assessment or reassessment. A notice issued u/s. 148 of the Act against a dead person is invalid, unless the legal representative submits to the jurisdiction of the Assessing Officer without raising any objection. Therefore, where the legal representative does not waive his right to a notice u/s. 148 of the Act, it cannot be said that the notice issued against the dead person is in conformity with or according to the intent and purpose of the Act which requires issuance of notice to the assessee, whereupon the Assessing Officer assumes jurisdiction u/s. 147 of the Act and consequently, the provisions of section 292B of the Act would not be attracted. There is a distinction between clause (a) of sub-section (2) of section 159 and clause (b) of sub-section (2) of section 159 of the Act. Clause (b) of sub-section (2) of section 159 permits initiation of proceedings. Clause (b) of sub-section (2) of section 159 of the Act provides that any proceeding which could have been taken against the deceased if he had survived may be taken against the legal representative. A proceeding u/s. 147 of the Act for reopening the assessment is initiated by issuance of notice u/s. 148 of the Act, and as a necessary corollary, therefore, for taking a proceeding under that section against the legal representative, necessary notice u/s. 148 of the Act would be required to be issued to him. In view of the provisions of section 159(2)(b) of the Act, it is permissible for the Assessing Officer to issue a fresh notice u/s. 148 of the Act against the legal representative, provided that it is not barred by limitation, he, however, cannot continue the proceedings on the basis of an invalid notice issued u/s. 148 of the Act to the assessee who is dead.

iii) The petitioner had not surrendered to the jurisdiction of the Assessing Officer by submitting a return in response to the notices nor had the jurisdictional Assessing Officer issued notice upon the petitioner as legal representative representing the estate of the deceased assessee. The notice of reassessment was not valid.”

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Charitable purpose — Exemption u/s 11 — Voluntary contributions towards corpus fund used for purchase of land — Allowable as application of income to charitable purpose

31 CIT(Exemption) vs. Om Prakash Jindal Gramin Jan Kalyan Sansthan
[2022] 444 ITR 498 (Del)
A.Y.: 2010-11
Date of order: 26th April, 2022
S. 11(1)(d) of ITA, 1961

Charitable purpose — Exemption u/s 11 — Voluntary contributions towards corpus fund used for purchase of land — Allowable as application of income to charitable purpose

After the transfer of the corpus fund of Rs. 19 crores to general reserves, the assessee-trust purchased land worth Rs. 5,27,45,958 and donated Rs. 13.4 crores to another trust. The Assessing Officer made an addition of Rs. 19 crores as additional income.

The Commissioner (Appeals) set aside the addition on the ground that exemption on corpus donation was allowable for the purchase of land, as it was a purchase of a capital asset. The Tribunal affirmed the order of the Commissioner (Appeals) allowing utilisation of corpus fund of Rs. 19 crores as application of income u/s 11(1)(d) of the Income-tax Act, 1961.

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

“i) There was no ground of appeal either before the Tribunal or before the court challenging the concurrent finding of the Commissioner (Appeals) and the Tribunal that the substance of the transaction was that the corpus fund had been utilised for the purchase of a capital asset.

ii) The court was in agreement with the findings of the Commissioner (Appeals) and the Tribunal that the substance of the transaction must prevail over the form and, if required, the Department must examine the nature of the transaction. No question of law arose.”

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(A) Capital gains — Full value of consideration — Deductions — Consideration on sale of shares including sum held in escrow account offered to tax — Assessee receiving reduced sum from escrow account after completion of assessment — Whole amount credited in book not taxable as capital gains — Only actual amount received taxable — Assessee entitled to refund of excess tax paid
(B) Revision — Powers of Commissioner — Application by assessee for revision of order — Power of Principal Commissioner not restricted to allowing relief only up to returned income — Recomputation of income can be directed irrespective of whether recomputation results in income less than returned income — S. 240 not applicable to assessee

30 Dinesh Vazirani vs. Principal CIT
[2022] 445 ITR 110 (Bom.)
A.Y.: 2011-12
Date of order: 8th April, 2022
Ss. 45, 48, 240 and 264 of ITA, 1961

(A) Capital gains — Full value of consideration — Deductions — Consideration on sale of shares including sum held in escrow account offered to tax — Assessee receiving reduced sum from escrow account after completion of assessment — Whole amount credited in book not taxable as capital gains — Only actual amount received taxable — Assessee entitled to refund of excess tax paid

(B) Revision — Powers of Commissioner — Application by assessee for revision of order — Power of Principal Commissioner not restricted to allowing relief only up to returned income — Recomputation of income can be directed irrespective of whether recomputation results in income less than returned income — S. 240 not applicable to assessee

For the A.Y. 2011-12, the assessee computed the capital gains on the sale of shares considering the proportion of the total consideration, which included the escrow amount which had not been received by the time returns were filed but were received by the promoters but were still parked in the escrow account. The income declared by the assessee was accepted in the scrutiny assessment. The assessee stated that subsequent to the sale of the shares, certain statutory and other liabilities arose for the period prior to the sale of the shares, and according to the agreement, a certain amount was withdrawn from the escrow account, and it did not receive the amount. The assessee filed an application u/s 264 before the Principal Commissioner and submitted that the capital gains were to be recomputed accordingly, reducing the proportionate amount from the amount deducted from the escrow account and that an application u/s 264 was filed since the assessment had been completed by the time the amount was deducted from the escrow account. The Principal Commissioner rejected the assessee’s application.

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

“i) Section 264 of the Income-tax Act, 1961 does not restrict the scope of powers of the Principal Commissioner to restrict relief to an assessee only to the returned income. Where the income can be said not to have resulted at all, there is neither accrual nor receipt of income even though an entry might, in certain circumstances, have been made in the books of account.

ii) It is the obligation of the Department to tax an assessee on the income chargeable to tax under the Act but if higher income is offered to tax, it is the duty of the Department to compute the correct income and grant the refund of taxes erroneously paid by the assessee. There is no provision in the Act which provides, if the assessed income is less than the returned income, the refund of the excess tax paid by the assessee would not be granted to the assessee. If the returned income shows a higher tax liability than what is actually chargeable under the Act, then the assessee is entitled to refund of excess tax paid by it.

iii) Capital gains was computed u/s. 48 of the Act by reducing from the full value of consideration received or accrued as a result of transfer of capital asset, cost of acquisition, cost of improvement and cost of transfer. The real income (capital gains) could be computed only by taking into account the real sale consideration, i.e., sale consideration after reducing the amount withdrawn from the escrow account. The amount was neither received nor accrued since it was transferred directly to the escrow account and was withdrawn from the escrow account.

iv) When the amount had not been received or accrued it could not be taken as full value of consideration in computing the capital gains from the transfer of the shares of the assessee. The purchase price as defined in the agreement was not an absolute amount as it was subject to certain liabilities which might have arisen on account of certain subsequent events. The full value of consideration for computing capital gains would be the amount which was ultimately received after the adjustments on account of the liabilities from the escrow account as mentioned in the agreement. The liability as contemplated in the agreement should be taken into account to determine the full value of consideration. Therefore, if the sale consideration specified in the agreement was along with certain liability, then the full value of consideration for the purpose of computing capital gains under section 48 of the Act was the consideration specified in the agreement as reduced by the liability. The full value of consideration u/s. 48 would be the amount arrived at after reducing the liabilities from the purchase price mentioned in the agreement. Even if the contingent liability was to be regarded as a subsequent event, it ought to be taken into consideration in determining the capital gains chargeable u/s. 45. Such reduced amount should be taken as the full value of consideration for computing the capital gains u/s. 48.

v) If income did not result at all, there could not be a tax, even though in book keeping, an entry was made about hypothetical income which did not materialize. Therefore, the Principal Commissioner ought to have directed the Assessing Officer to recompute the assessee’s income irrespective of whether the computation would result in income being less than the returned income.

vi) Reliance by the Principal Commissioner on the provisions of section 240 to hold that he had no power to reduce the returned income was erroneous because the circumstances provided in the proviso to section 240 did not exist. The proviso to section 240 only provides that in case of annulment of assessment, refund of tax paid by the assessee according to the return of income could not be granted to the assessee. The only thing that was sacrosanct was that an assessee was liable to pay only such amount which was legally due under the Act and nothing more. Therefore, the assessee was entitled to refund of excess tax paid on the excess capital gains.”

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Assessment — Draft assessment order — Procedure u/s 144B — Mandatory — Failure to issue draft assessment order — Final assessment order not valid

29 Enviro Control Pvt. Ltd. vs. NEAC
[2022] 445 ITR 119 (Guj)
A.Y.: 2018-19
Date of order: 29th March, 2022
S. 144B of ITA, 1961

Assessment — Draft assessment order — Procedure u/s 144B — Mandatory — Failure to issue draft assessment order — Final assessment order not valid

For the A.Y. 2018-19, the assessee had furnished all necessary details, including the details pertaining to the quantification of the claim to deduction u/s 80-IA of the Income-tax Act, 1961, in response to the notices u/s 142(1). Thereafter, without issuing any further or specific show-cause notice or draft assessment order, the National e-Assessment Centre passed the assessment order u/s 143(3) r.w.s. 144B.

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

“i) Section 144B of the Income-tax Act, 1961 lays down a procedure for assessment under the Faceless Assessment Scheme and needs to be scrupulously followed. If any action is in disregard of the statutory provisions it is open to the court to overrule the objection of alternative remedy available to the assessee.

ii) It was not just a question of giving an opportunity of hearing and for that purpose, the assessee should have the draft assessment order in his hands but, with the introduction of section 144B , a procedure had been laid down which needed to be scrupulously followed. The assessment order was quashed and set aside.

iii) The matter was remitted to the National e-Assessment Centre to undertake proceedings in accordance with the provisions of section 144B, to issue a fresh notice-cum-draft assessment order for the assessee to respond to and afford an opportunity of hearing to the assessee in accordance with the procedure as prescribed u/s. 144B.”

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Ss. 132 – Where a hard disk was seized from business premises of assessee, but, no corroborative documents were found to establish that information concerning certain expenditure derived from the hard disk was true and correct, no addition had been made

25 Assistant Commissioner of Income-tax vs.
Lepro Herbals (P) Ltd
[(2022) 94 ITR(T) 225 (Delhi – Trib.)]
ITA No.: 111(DELHI) of 2016
A.Y.: 2010-11; Date of order: 18th February, 2022

Ss. 132 – Where a hard disk was seized from business premises of assessee, but, no corroborative documents were found to establish that information concerning certain expenditure derived from the hard disk was true and correct, no addition had been made

FACTS
A Search u/s 132(1) of the Act was carried out at the premises of the assessee company, a manufacturer of herbal drugs. A hard disk was seized from the office premises during the search. The assessing officer (AO) considered certain figures of sales and purchases retrieved from the hard disk and concluded the assessment by making certain additions.

The contentions of the assessee that the hard disk consisted of personal data and the financial figures contained therein were only estimates that were not considered by the AO.

Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) deleted the additions on the ground that the additions have been made solely based on the hard disk data without any supporting or corroborative evidence. Aggrieved, the Revenue preferred an appeal before the ITAT.

HELD
The AO contended that the figures of sales and purchases derived from the pen drive reflected a true picture of the profitability of the assessee. But, the ITAT observed that no discrepancy in the books of accounts had been pointed out by the AO.

The ITAT noted that no further enquiries, in addition to the reliance placed on the hard disk data, have been carried out to establish that the expenditure mentioned in the seized document is true and correct. It was observed that identical queries were raised in the case of the assessee during previous A.Ys., but no addition had been made to that effect. The printouts of the hard disk of such previous years had the words ‘Forecast’ mentioned. Accordingly, following the principle of consistency and in the absence of any corroborative evidence, the ITAT upheld the Order passed by the CIT(A) and dismissed the appeal of Revenue.

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S. 23 – Where House Property was let out for monthly rentals along with a refundable security deposit, and the assessing officer takes a view that such a deposit is in lieu of reduced rent, no notional addition could be made to rental income where the assessee had furnished evidence to show that municipal value was much less than rental income.

24 MLL Logistics (P.) Ltd. vs. Assistant Commissioner of Income-tax
[2022] 93 ITR(T) 513 (Mumbai -Trib.)
ITA No.: 164 (MUM) of 2019
A.Y.: 2013-14; Date of order: 18th November, 2021

S. 23 – Where House Property was let out for monthly rentals along with a refundable security deposit, and the assessing officer takes a view that such a deposit is in lieu of reduced rent, no notional addition could be made to rental income where the assessee had furnished evidence to show that municipal value was much less than rental income.

FACTS
The assessee company had declared income from house property. On perusal of the rent agreement, it was noticed that the rentals were Rs. 50,000 p.m. Further, the licensee deposited a refundable deposit of Rs. 5 crore with the assessee. Based on the same, the assessing officer (AO) took a view that the refundable deposit had been given in lieu of reduced rent of the house property. The AO questioned the rationale of the refundable deposit and made a notional addition of 10 % of the refundable deposit to the rental income.

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

HELD
The assessee submitted that he has actually received Rs. 50,000 p.m. towards rent as per the rent agreement. Further, the assessee stated that even though he has received interest free security deposit, notional rent cannot be computed based on such interest free security deposit. Evidences were also furnished by the assessee to show that the actual rent was higher than the rateable value determined by Mumbai Municipal Corporation for the property.

The ITAT observed that the AO has computed notional rent at 10% of the security deposit received by the assessee. To justify such determination, the assessing officer had conducted an enquiry u/s 133(6) of the Income-tax Act, 1961 (Act) to establish that the market value of the rent is higher than what the assessee has offered. However, no concrete evidence had been brought by the AO to establish this assertion.

The ITAT held that the AO cannot determine the notional rent based on estimation or guess work. The ITAT remarked that if the rateable value is correctly determined under the municipal laws, the same is to be considered as the Annual Letting Value u/s 23 of the Act. Accordingly, the ITAT deleted the notional addition made to the rental income.

The ITAT placed reliance on the following decisions while deciding the matter:

1. J.K. Investors (Bom.) Ltd. vs. Dy. CIT [2000] 74 ITD 274 (Mum. – Trib.)

2. CIT vs. Tip Top Typography [2015] 228 Taxman 244 (Mag.)/[2014] 48 taxmann.com 191/368 ITR330 (Bom.)

3. CIT vs. Moni Kumar Subba [2011] 10 taxmann.com 195/199 Taxman 301/333 ITR 38 (Delhi)

4. Owais M. Hussain vs. ITO [IT Appeal No. 4320 (Mum.) of 2016, dated 11-5-2018]

5. Pankaj Wadhwa vs. ITO [2019] 101 taxmann.com 161/174 ITD 479 (Mum. – Trib.)

6. Marg Ltd. vs. CIT [2020] 120 taxmann.com 84/275 Taxman 502 (Mad.)

7. Maxopp Investment Ltd. vs. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 ITR 640 (SC)

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Appeal filed by a company, struck off by the time it was taken up for hearing, is maintainable

23 Dwarka Portfolio Pvt. Ltd. vs. ACIT
TS-499-ITAT-2022 (Delhi)
A.Y.: 2014-15; Date of order: 27th May, 2022
Sections: 179, 226

Appeal filed by a company, struck off by the time it was taken up for hearing, is maintainable

FACTS
In this case, the assessee challenged the order passed by CIT(A) confirming the action of the Assessing Officer (AO) in adding a sum of Rs. 18,00,00,000 to the total income of the assessee u/s 68.

At the time of hearing before the Tribunal, on behalf of the revenue it was contended that the name of the assessee company has been struck off by notification no. ROC/Delhi/248(5)/STK-7/10587 dated 8th March, 2019 of Registrar of Companies NCT of Delhi and Haryana, and consequently the appeal filed by the assessee has become infructuous and prayed that the appeal be dismissed as not maintainable.

On behalf of the assessee, it was contended that the appeal could not be dismissed as ‘not maintainable’ merely because of striking off. Reliance was placed on the decision of the Supreme Court in the case of CIT vs. Gopal Shri Scrips Pvt. Ltd. 2019(3) TMI 703 SC and various provisions of the Companies Act, 2013 and Income-tax Act, 1961.

The Tribunal passed an interlocutory order deciding the maintainability of the appeal.

HELD
The Tribunal noted that there is no dispute that the name of the assessee company has been struck-off u/s 248(1) of the Companies Act. The Tribunal also noted the provisions of s. 248 of the Companies Act dealing with striking off of the companies and its effects as mentioned in s. 250 of the Companies Act. It noted that-

i) Once the company is struck-off, it shall be deemed to have been cancelled from such date except for the purpose of realizing the amount due to the company and for the payment and discharge of the liabilities or obligation of the company. Further, even after striking off of a company, the liability, if any, of the Director, Manager or Other Officers, exercising any power of management and of every member of the company shall continue and may be enforced as if the company had not been dissolved;

ii) As per s. 248(6) of the Companies Act, it is the duty of the Registrar to make provision for discharging the liability of the company before passing an order for striking off u/s 248(5) of the Companies Act. If there is any tax due from the struck-off company, the Department can invoke s. 226(3) of the Income-tax Act for satisfying such tax demands;

iii) As per s. 179 of the Income-tax Act, if the tax due from a private company in respect of any income of any previous year cannot be recovered, then every person who was a Director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such taxes unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the company;

iv) When it comes to recovery of tax from struck-off company, the Department can invoke s. 226(3) or s. 179 subject to satisfaction of conditions stated therein. The Department can invoke both 226(3) and 179 simultaneously for which there is no bar;

v) If the proceedings pending before the Court or Tribunal (regarding the determination of quantum of tax / liability for paying tax) are dismissed for having become infructuous without adjudicating the actual taxes due or the liability of the assessee to pay such tax in the manner known to the Law and based on such dismissal of the proceedings if the Revenue proceeds for the recovery of `such tax due’, the rights of the Directors of the Company will be seriously jeopardised and the same will amount to a denial of rights guaranteed under the Law;

vi) If the request of the Revenue is acceded to, then, on the one hand, the appeal will be dismissed as infructuous, and on the other hand, the Revenue will initiate proceedings u/s 179 of the Income-tax Act and that too without even adjudicating in the manner prescribed under the Law on the ‘quantum of actual tax due’ or ‘liability to pay tax’, in such event great injustice will be caused, which cannot be permitted;

vii) When the Revenue Department has not foregone the right to recover the tax due or written-off the demand on the ground of assessee Company being struck-off by ROC, the right of the assessee to determine the tax liability in due process of law cannot be denied by dismissing the appeal pending before us;

viii) Further, in a case where the CIT(A) deletes the addition made by the AO, and if the Revenue files an appeal before the Tribunal, even in a case where the Revenue is having a water tight case on merit, by dismissing the appeal for having become infructuous will also result in the non-adjudication of the actual tax due by the assessee and the Revenue cannot recover the actual tax dues from the assessee. In such events, the Department of Revenue will be left with no remedy, which is contrary to the root principle of law ‘Ubi Jus Ibi Remedium’.

Having noted the above, the Tribunal observed that the moot question is whether the Tribunal can proceed with the appeal filed by the struck down company or filed by the Revenue against struck down company? In other words, whether the struck-off company can be treated as alive / operating / existing for the purpose of adjudication of the tax arrears and the consequence order by which the recovery proceedings are triggered by the Revenue.

The Tribunal observed that in the case of Gopal Scrips Pvt. Ltd. (supra), the Revenue was having a grievance against the Order of the Rajasthan High Court in dismissing the appeal for having become infructuous on the ground that the assessee company was struck-off. The Apex Court has set aside the order of Rajasthan High Court and directed to decide the appeal on merit. Ironically, the very same department is seeking to dismiss the appeal as infructuous since the assessee company is struck-off. The Department cannot have such a double standard.

The Tribunal held that though the name of the assessee company has been struck off u/s 248 of the Companies Act, in view of sub-sections (6) and (7) of section 248 and section 250 of the Companies Act, the certificate of incorporation issued to the assessee company cannot be treated as cancelled for the purpose of realizing the amount due to the company and for payment or discharge of the liability or obligations of the company, the appeal filed by the struck-off assessee company or appeal filed by the revenue against the struck-off company are maintainable. The Tribunal held that the appeal filed by the assessee company is maintainable and the same has to be decided on merits and directed the office to list the appeal before the regular bench for hearing.

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In a case where flat booked by the assessee (original flat) could not be constructed and the assessee, in lieu of the original flat, was allotted another flat (alternate flat) which was also under construction, the difference between stamp duty value of the alternate flat and the consideration is not chargeable to tax u/s 56(2)(vii)

22 ITO (International Taxation) vs.
Mrs. Sanika Avadhoot
TS-450-ITAT-2022 (Mum.)
A.Y.: 2016-17; Date of order: 9th May, 2022
Section: 56(2)(vii)

In a case where flat booked by the assessee (original flat) could not be constructed and the assessee, in lieu of the original flat, was allotted another flat (alternate flat) which was also under construction, the difference between stamp duty value of the alternate flat and the consideration is not chargeable to tax u/s 56(2)(vii)

FACTS
The assessee filed return of income declaring total income of Rs. 1,11,640. During the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee has executed an agreement for purchase of flat no. A3-3405 for a consideration of Rs. 5,62,28,500, whereas the stamp duty value of the same is Rs. 8,05,06,000. The assessee was asked to show cause why the difference between the stamp duty value and consideration be not taxed u/s 56(2)(vii).

The assessee explained that on 24th September, 2010, the assessee booked flat no. 4707 with India Bulls Sky Suites. Because of height restrictions, the booking was cancelled and shifted to flat no. 3907 in the same project on 14th November, 2013. Since the construction of this flat could not be materialized, the assessee was allotted a flat in another project by the name Sky Forest without any change in the terms of the purchase. However, a formal agreement for the flat finally allotted was entered into on 4th May, 2015. There was no change in purchase price fixed for allotment in 2010.

The AO was of the view that the assessee acquired new flat no. A-3-3405 in lieu of transfer of right and paid a consideration of Rs. 5,62,28,500 for a flat whose stamp duty is Rs. 8,05,06,000. He added the difference of Rs. 2,42,77,400 to the total income of the assessee.

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

Aggrieved, the revenue preferred an appeal to the Tribunal where on behalf of the assessee, it was stated that in F.Y. 2010-11, the assessee made a booking for the purchase of residential premises to be constructed by India Bulls Sky Forest in the project India Bulls Sky Suites against Flat No 4707 admeasuring 3,302 sq. ft. and an amount of Rs. 72,11,834 was paid by the assessee as booking amount. Subsequently, on 21st October, 2010, the assessee paid an amount of Rs. 4,23,18,166, and on 22nd November, 2011 Rs. 12,75,398 was paid totalling Rs. 5,08,05,398. Subsequently, vide letter dated 14th November, 2013, the developer informed the assessee of its inability to construct and provided alternative residential premises Unit 3907, measuring 3,341 sq. ft. Under such circumstances, the assessee threatened the developer for specific performance to provide the residential premises or will initiate criminal proceedings against them. Thereafter, with a view to avoid litigation, both the parties agreed on alternative residential premises being unit no. A3-3405 to be constructed by India Bulls Sky Forests. It was also submitted that the stamp duty value of constructed unit A3-3405 in 2010 was Rs. 2,60,91,806. The agreement registered was nothing but a ratification of the pre-existing agreement which dated back to principal agreement of 2010. It was the same contract with only constructed premises being replaced, and there was no new agreement and earlier payment formed part of the consideration for the registered agreement. The AO treated the shifting of flat as a transfer and taxed the difference between stamp duty value and amount paid as income u/s 56(2)(vii). If AO treated the same as transfer of rights to receive residential property originally allotted against A3-3405 being replaced by new flat 3907 in IndiaBulls Sky Suites, then it falls under the definition of transfer u/s 2(47), and the assessee is eligible for deduction u/s 54F.

HELD
The Tribunal observed that these facts demonstrate that it was the same booking which dated back to 24th September, 2010, and the assessee had not made any extra payment. The Tribunal held that the CIT(A) had clearly elaborated in his findings that when the developer failed to provide the original flat, then it had offered another flat in the building, which was to be constructed on a future date. When the assessee booked the flat, that property was not existing, and it was a property to be constructed in future. The CIT(A) has explained in detail that if such transactions are treated as transfer by notionally assigning the value, then the benefit of indexation and benefit of section 54, etc., will need to be given to the assessee. The Tribunal did not find any infirmity in the decision of the CIT(A). It dismissed the appeal filed by the revenue.

Compiler’s Note: Though this decision is rendered in the context of section 56(2)(vii), it appears that the ratio of this decision would apply to provisions of section 56(2)(x) as well.

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ALLOWABILITY OF PROVISION FOR SALES RETURNS

ISSUE FOR CONSIDERATION

When goods are sold by a business, in most cases, the business also has a policy permitting customers to return the goods under certain circumstances. Though the actual sales returns may take place after the end of the year, many companies following the mercantile system of accounting, choose to follow a conservative policy for recognition of income arising from sales during the year, by making a provision for sales returns in respect of sales made during the year in the year of sale itself. The provision may be based either on the actual sales returns made in respect of such sales subsequent to the year-end till the date of finalisation of accounts, or may be based on an estimate of the likely sales returns based on past trends. Such provisions are authorized by accounting principles and at times are mandated in accounting for sales revenue.

The issue of allowability of deduction for such provision in the year in which such provision is made has arisen before the different benches of the Tribunal. While the Mumbai bench of the Tribunal has taken a view that such provision for sales returns is an allowable deduction, in the year of sales itself, recently the Bangalore bench of the Tribunal has taken a contrary view, holding that deduction of such provision is not allowable in the year in which it is made i.e, the year of sales.

BAYER BIOSCIENCE’S CASE
The issue first came up before the Mumbai bench of the Tribunal in the case of Bayer Bio Science Pvt Ltd vs. Addl CIT in an unreported decision in ITA 7123/Mum/2011 dated 8th February, 2012, relating to A.Y. 2006-07.

In this case, the assessee made a provision for sales return of Rs. 2,00,53,988 in respect of sales made during F.Y. 2005-06, which had been returned by customers in the subsequent F.Y. 2006-07 before finalization of the accounts and claimed such provision as a deduction in computing the income for A.Y. 2006-07.

The Assessing Officer (AO) took the view that since the sales returns had actually been made in the subsequent year, they should have been accounted for in the subsequent year. Accordingly, he disallowed the provision made by the assessee for sales return. The assessee did not succeed before the Dispute Resolution Panel in respect of such disallowance, and therefore preferred an appeal to the Tribunal on this issue, along with other issues.

The Tribunal examined the provisions of section 145 as it then stood. It noted that while that section laid down that business income had to be computed in accordance with the cash or mercantile system of accounting as regularly employed by the assessee, there was a rider to this section that the Central Government may notify accounting standards and the applicable accounting standards would have to be followed by the assessee in applying the method of accounting followed by it.

The Tribunal noted that two accounting standards had been notified in this regard vide notification no. 9949 dated 25th January, 1996. One of these accounting standards (AS-I, Disclosure of Accounting Policies) provided that:

“the major considerations governing the selection and application of accounting policies are the following, namely:–

(i) Prudence – Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.”

This approach required all anticipated losses to be taken into account in computation of income taxable under the head “Profits and Gains of Business or Profession”. The Tribunal noted that unlike under the pre-amended section 145 (prior to A.Y. 1997-1998), there was no enabling provision which permitted the AO to tinker with the profits computed in accordance with the method of accounting so employed u/s 145. The Tribunal took note of the fact that it was not even the AO’s case that the mandatory accounting standards had not been followed.

The Tribunal observed that besides this analysis of section 145, even on first principles, deduction in respect of anticipated losses as a measure of prudent accounting principles, could not be declined. According to the Tribunal, it was only elementary that the accountancy principle of conservatism, which had been duly recognized by the courts, mandated that anticipated losses were to be provided for in the computation of income, and anticipated profits were not to be taken into account till the profits actually arose.

As per the Tribunal, an anticipated loss, even if it might not have crystallised in the relevant previous year, was to be allowed as a deduction in the computation of business profits. The Tribunal noted that there was no dispute that goods sold had been returned in the subsequent year, and that fact was known before the date of finalization of accounts. Therefore, in the view of the Tribunal, there was no point in first taking into account income on sales, which never reached finality, and then accounting for loss on sales return in the subsequent year, in which the actual sales return took place.

The Tribunal therefore allowed the assessee’s appeal, holding that the approach of the assessee was in consonance with well settled accountancy principles, and accordingly deleted the disallowance.

This decision was followed by the Tribunal in subsequent years in DCIT vs. Bayer Bioscience P Ltd ITA Nos 5388/Mum/2009 and 2685/Del/2009 dated 21st April, 2016, and in the case of DCIT vs. Cengage Learning India Pvt Ltd ITA No 830/Del/2013 dated 10th April, 2017. A similar view was also taken by the Delhi Bench of the Tribunal favouring allowability of deduction of such provision for sales returns in the year of sales, in the case of Inditex Trent Retail India (P) Ltd vs. Addl CIT 95 ITR (T) 102, a case relating to A.Y. 2014-15. In this case, the Tribunal held that the provision was governed by AS 29 issued by ICAI, and it required recognition as there existed an obligation resulting from past event and a probability of outflow of resources required to settle the obligation.

HERBALIFE INTERNATIONAL INDIA’S CASE

The issue came up recently before the Bangalore bench of the Tribunal in the case of Herbalife International India Pvt Ltd vs. ACIT TS-126-ITAT-2022.

In this case, the assessee had made a provision for sales returns for the 3 financial years 2012-13 to 2014-15 corresponding to assessment years A.Ys. 2013-14, 2014-15 and 2015-16, and claimed such provision as a deduction. The AO disallowed such deduction, and such disallowance was confirmed by the CIT (Appeals), in the first appeal.

Before the tribunal, on behalf of the assessee, it was submitted that sales returns were a regular feature in its line of business, and had been consistently accepted by the assessee over a period of time. The accounting policy followed by the assessee for revenue recognition in this regard had been disclosed in the notes to the accounts, and had been consistently followed by the assessee over the years.

It was clarified that the provision for sales return had been made in accordance with the Accounting Standard (AS) 9 – Revenue Recognition, issued by ICAI which mandated that when the uncertainty relating to collectability arises subsequent to the time of sale or rendering of service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. Attention was also drawn to paragraph 14 of AS 9, which provided in relation to disclosure of revenue that, in addition to the disclosures required by AS 1 – Disclosure of Accounting Policies, an enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties.

Attention was also drawn to the opinion of ICAI Expert Advisory Committee dated 10th October, 2011 which had noted that “The company should recognise a provision in respect of sales returns at the best estimate of the loss expected to be incurred by the company in respect of such returns including any estimated incremental costs that would be necessary to resell the goods expected to be returned, on the basis of past experience and other relevant factors.”

It was submitted on behalf of the assessee that the estimate of sales return could be made adopting different approaches namely, sales return after the balance sheet date can be tracked to the date of closing accounts finally, or estimated by simple tracking the returns year wise for past years and adopting the percentage on current sales for the provision, or estimated in the manner made by the company; the company had followed the method of estimating sales in the pipeline by assigning weights to each month sales, based on the proximity of that month to the end of the financial year, and applying the percentage of sales returns experience of the past years to such sales in the pipeline, to arrive at the provision for sales return required at the end of the year. Adjustment was made in respect of the opening provision and the actual returns during the year, and the differential amount required for the provision for sales return was debited to the P&L Account.

It was emphasised that the estimate made and provisions made had proved accurate up to 90% in the company’s case i.e., utilisation by way of actual refunds for sales returns out of the provisions made during the period, which was therefore more than a fair estimate, and was a scientific estimate.

It was explained that conceptually, in the company’s case, the closing balance in provision for sales returns account could be described as the estimated amount (based on immediate past experience) of refund towards sales return in near future (next year) period that company was expecting out of current year’s sales revenue. The company made the necessary provision from P&L Account to ensure this closing balance for meeting its obligations from sales revenue recognised during each year. The data provided proved clearly the consistent basis adopted for recognising estimated sales return with more than reasonable accuracy. As the utilisation numbers indicated in the provision movement indicated that the provision was at actuals, no separate adjustment for excess provision, if any, would be necessitated.

It was argued that all parameters indicated by the Supreme Court while dealing with accounting for similar aspects, like warranty provisions, were fully satisfied. Hence, it was submitted that the company’s claim for deduction of provision made in each year deserved to be accepted on the basis of the above facts.

Reliance was placed on behalf of the assessee on the decisions of the tribunal in the cases of Bayer Bioscience (supra) and Cengage Learning (supra), which had held that provision for sales return in consonance of well-settled accountancy principles needed to be allowed and no disallowance was called, for provision for sales return. It was submitted that the decision of the tribunal in the case of Nike India Pvt Ltd vs. ACIT IT(TP)A No 739/Bang/2017 dated 14th October, 2020 was incorrect, as there was no reference to relevant aspects such as AS 9, issued by ICAI, on accounting of provision for sales return, with reference only being made to AS 29 – Provisions, Contingent Liabilities and Contingent Assets, and earlier decisions of the tribunal in the cases of Bayer Bioscience (supra) and Cengage Learning (supra) not having been considered in this decision.

It was further submitted that the provision for sales returns was made on a scientific basis, and was consistently followed by the company from A.Y. 2010-11 onwards, with no additions being made by the AO till A.Y. 2012-13. A reference was also invited to the CIT (Appeals) order for A.Y. 2015-16, where the alternate claim made by the company to allow the excess utilization of such provision was also rejected. It was argued that on the one hand, the Department did not want to allow the provision for sales returns in the year of creation, and on the other hand, where the utilisation of provision was higher, it wanted to deny the benefit on hyper technicalities, without appreciating the settled principle of law, that the principle of consistency needed to be followed.

An alternative prayer was made on behalf of the assessee that in case the provision was held to be not allowable, the utilisation of the provision by actual refunds made towards sales return in respective years should be allowed since the amounts were refunded to third parties at actuals during the relevant year.

On behalf of the Department, it was submitted that the assessee’s method for arriving at the amounts to be added to the provision for sales return had been found to be not scientific or reasonable. Various alleged defects in the method followed by the assessee were pointed out on behalf of the Department. Reliance was placed on the decision of the Bangalore bench of the tribunal in the case of Nike India Pvt Ltd (supra). It was therefore submitted that the action of the AO in disallowing the provision of sales return was to be upheld.

The tribunal noted that the assessee had taken support of AS 29, which explained that a provision should be recognised when:

an enterprise had a present obligation as a result of past event;

it was probable that an outflow of resources embodying economic benefit would be required to settle the obligation, and

a reliable estimate could be made of the amount of the obligation.

The tribunal noted that there should exist a “present obligation” as a result of “past event”. It questioned whether provision for sales returns could fall under the category of present obligation as a result of past event. According to the tribunal, the present obligation as a result of past event contemplated that there had occurred some event in the past, and the same would give rise to some obligation of the assessee, and further the said obligation should exist as on the balance sheet date. Further, the prudence principle in accounting concepts mandates that an assessee should provide for all known losses and expenses, even though the exact quantum of loss/expense was not known.

According to the tribunal, the facts in the case before it were different. The assessee had effected sale of products, and accordingly recognised revenue arising on such sales. On effecting the sales, the contract had already been concluded. Sales returns was another separate event, even though it had connection with the sales, i.e., the very same product already sold by the assessee was being returned. By making provision for sales returns, what the assessee sought to do was to derecognise the revenue recognised by it earlier. Therefore, sales returns were reduced from the sales in the P&L Account.

As per the tribunal, there should not be any dispute that the past event in the case before it was sales, and not sales returns. When there was no past event, the question of present obligation out of such past event did not arise. Therefore, the tribunal was of the view that the provision for sales return did not represent the present obligation arising as a result of past event, but was an expected obligation that might arise as a result of a future event.

The tribunal observed that the sales return expected after the balance sheet date was an event occurring after the balance sheet date. As per the tribunal, AS 4 – Contingencies and Events Occurring after the Balance Sheet Date, actually governed this situation. It observed that a careful perusal of AS 4 showed that the adjustment on account of contingencies and events occurring after the balance sheet date should relate to the contingencies and conditions existing as on the balance sheet date. As per the tribunal, the contract of sale was concluded when the goods were supplied to the customers, and the sales return was a separate event, which was not a contingency or any condition existing at the balance sheet date.

Further, the tribunal noted that sales and sales returns actually represented receipt and issue of goods, and therefore had an impact on the physical stock of goods. Hence, when there was sales return, there would be increase in physical stock of goods, and the physical stock should accordingly be increased when an entry is made for sales return. According to the tribunal, making provision for expected sales return would not result in cost on receipt of goods and increase of closing stock, which was against accounting principles.

The Tribunal further examined the deductibility of the provision for sales returns u/s 37(1). It noted that what was deductible under that section was an expenditure laid out or expended wholly and exclusively for the purposes of business. Since the sales returns actually represented derecognition of revenue already recognised earlier, and there was corresponding receipt of goods on such sales return, as per the Tribunal, it did not qualify as an expenditure. According to the tribunal, provision for sales returns was therefore not allowable u/s 37(1).

Referring to the Mumbai and Delhi tribunal decisions of Bayer Bioscience (supra) and Cengage Learning (supra), relied upon by the assessee, the Tribunal observed that in those cases, the bench did not refer to the provisions of AS 4 and AS 29, and did not consider another important point that sales return should result in corresponding receipt of goods, which would result in increase of closing stock. The Bangalore bench of the Tribunal therefore chose to follow the logic and detailed reasoning that it had undertaken, rather than those earlier decisions of the tribunal referred to by the assessee.

The Tribunal, therefore, held that the provision for sales returns was not allowable as a deduction under the provisions of the Income-tax Act. As regards the alternate ground of the assessee to allow the provision in the subsequent year in which the returns took place, the Tribunal observed that while computing disallowance on account of provision for sales return, the AO considered only the net closing provision or closing provision less opening provision, and allowed the utilisation amount in each assessment year under consideration. It meant that the AO allowed the actual sales returns made in each assessment year under consideration, and therefore the question of any further deduction did not arise.

OBSERVATIONS

The Bangalore Tribunal has relied on its own interpretation of the Accounting Standards, ignoring the views of the Expert Advisory Committee of ICAI in this regard. The ICAI Expert Advisory Committee in its Query No 14 dated 10th October, 2011, on Accounting for Sales Returns (Compendium of Opinion, Vol XXXI, page 101) has opined as under:

“10. However, the Committee notes from the Facts of the Case that in the extant case, there is a right of return by the franchisees (refer paragraph 6 above). The existence of such right would create a present obligation on the company. In this context, the Committee notes the definition of the term ‘provision’ as defined in paragraph 10 of Accounting Standard (AS) 29, Provisions, Contingent Liabilities and Contingent Assets notified under Companies (Accounting Standards) Rules, which provides as follows:

‘A provision is a liability which can be measured only by using a substantial degree of estimation.

A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.’

The Committee is of the view that since obligation in respect of sales return can be estimated reliably on the basis of past experience and other relevant factors such as fashion trends, etc. in the extant case, a provision in respect of sales returns should be recognised. The provision should be measured as the best estimate of the loss expected to be incurred by the company in respect of such returns including any estimated incremental cost that would be necessary to resell the goods expected to be returned.”

“11. The company should recognise a provision in respect of sales returns at the best estimate of the loss expected to be incurred by the company in respect of such returns including any estimated incremental cost that would be necessary to resell the goods expected to be returned, on the basis of past experience and other relevant factors as discussed in paragraph 10 above. Necessary adjustments to the provision should be made for actual sales return after the balance sheet date up to the date of approval of financial statements. Such provision should also be reviewed at each balance sheet date and if necessary, should be adjusted to reflect the current best estimate.”

From the above EAC opinion, it is clear that the past event is the sale, which gives rise to the obligation to take back the goods, with a resultant loss of profit in relation to the goods returned. The sales return is, therefore, clearly linked with the initial sale. Also, a reliable estimate can be made of the goods likely to be returned. Accounting for sales returns, in the year of sales, is therefore a ‘provision’ as contemplated by AS 29. The interpretation by the Bangalore Tribunal that the sale and the sales returns are two separate transactions, and that therefore there is no past event in relation to the sales return, does not seem to be the correct understanding of AS 29.

Further, the Bangalore Tribunal seems to have assumed that a provision is being made for the gross value of the sales returns, and not for the loss of profit or additional cost to be incurred on account of the sales returns, when it observed that the sales returns increases the closing stock. From the EAC’s opinion, again, it is clear that only the loss expected to be incurred is to be provided for. In the Bayer Bioscience’s case also, it was clear that only the loss on account of sales returns was the issue under consideration, and not the entire value of sales returns. The factual position if not clear in Herbalife’s case, could have been inquired in to ensure that, the total value of expected sales returns was provided, in accordance with AS 29, only to the extent of the expected loss on account of such anticipated returns.

While the decisions of the Mumbai and Delhi benches of the Tribunal seem to have focused mainly on the provisions of the Income- tax Act and the Accounting Standards notified under that law to arrive at their conclusions, the Bangalore bench seems to have relied mainly on Accounting Standards issued by ICAI. For all the years under consideration in all these appeals, the provisions of law were identical, in that till A.Y. 2015-16, the 2 accounting standards notified u/s 145 were applicable. These two IT Accounting Standards modify the method of accounting followed u/s 145, and therefore, to that extent supersede normal accounting standards, to the extent that they are in conflict with those standards, for the purposes of taxation of business income. The other normal accounting standards would also continue to apply, to the extent that no accounting standards have been issued u/s 145, which cover those issues or are in conflict with those. This aspect does not seem to have been considered by the Bangalore bench in Herbalife’s case, which relied primarily on the ICAI Accounting Standards.

The new Income Computation and Disclosure Standards (ICDS) notified u/s 145(2), which became effective only from A.Y. 2017-18, also effectively modify the normal accounting standards in so far as taxation of income is concerned, to the extent that they are in conflict with normal accounting standards.

For certain large companies, the provisions of Ind AS 37 notified by the Ministry of Corporate Affairs, now apply in place of AS 29. The provisions of Ind AS 37 are similar to those of AS 29, and in fact contain greater clarity. Appendix F to Ind AS 37 gives examples of applicability of the Ind AS, by recognition of a provision. Example 4 therein reads as under:

Example 4 Refunds policy

A retail store has a policy of refunding purchases by dissatisfied customers, even though it is under no legal obligation to do so. Its policy of making refunds is generally known.

Present obligation as a result of a past obligating event – The obligating event is the sale of the product, which gives rise to a constructive obligation because the conduct of the store has created a valid expectation on the part of its customers that the store will refund purchases.

An outflow of resources embodying economic benefits in settlement – Probable, a proportion of goods are returned for refund (see paragraph 24).

Conclusion – A provision is recognised for the best estimate of the costs of refunds (see paragraph 10 (the definition of a constructive obligation), 14, 17 and 24).

From Ind AS 37, it is absolutely clear that a provision for loss due to future sales returns is required to be made under Ind AS. In fact, Ind AS simply amplifies the view which always was under the AS and which was explained by the EAC.

With effect from A.Y. 2017-18, the provisions of ICDS apply, and modify the accounting under normal accounting method. ICDS X relating to provisions, contingent liabilities and contingent assets would apply in such a situation. This ICDS is similar to AS 29 read with Ind AS 37, and requires a provision to be recognized when:

(a) a person has a present obligation as a result of a past event;

(b) it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; and

Therefore, even under ICDS, a provision for loss due to sales returns is required to be made, and would therefore be an allowable deduction.

In so far as the allowability of deduction of such a provision u/s 37(1) is concerned, the question does not arise at all, as the computation of business income, including all business losses, is u/s 28 itself. The loss on account of sales returns is therefore to be considered u/s 28 itself.

It is a settled position in law that a deduction otherwise admissible in law should not be tweaked by the assessing authorities simply because in their view the claim was allowable in a later year or that the revenue was to be recognized in an earlier year, or simply because in their opinion it fell for allowance or recognition in a different year as long as the treatment of the assessee was in accordance with generally accepted accounting principles and the rate of taxation was uniform. Nagri Mills Ltd. 33 ITR 681 (Bom.), Millenium Estates, 93 taxmann.com 41 (Bom.), Vishnu Industrial Gas Ltd. ITR 228 of 1988(Delhi) and Excel Industries Ltd. 358 ITR 295 (SC).

shailesh.kwebmaker

S. 245 – Adjustment of refund – Intimation to assessee – Must

9 Greatship (India) Limited One International Centre vs. Assistant Commissioner of Income Tax – 5(1)(1) & Others
[Writ Petition No. 1476 of 2022
(Bombay High Court)]
Date of order: 18th July, 2022

S. 245 – Adjustment of refund – Intimation to assessee – Must

The petitioner challenges the action of respondent revenue of adjustment in the refund of Rs. 2,22,89,942 for A.Y. 2008-09 arising as consequence and effect of the order of the Income Tax Appellate Tribunal against the alleged outstanding demands for A.Ys. 2014-15 and 2015-16.

The case set up is that Rs. 61,64,649 as refund for A.Y. 2008-09 came to be adjusted for A.Y. 2014-15, which came to the petitioner’s knowledge on 17th November, 2021, when the petitioner downloaded Form 26AS for A.Y. 2014-15, where ‘Part C’ provided details of tax paid (other than TDS/TCS).

The petitioner’s case further is that an amount of R1,61,25,293 came to be adjusted illegally by the respondent No. 2 from the refund determined in favour of the petitioner upon giving effect to the tribunal’s order for A.Y. 2008-09 against the alleged outstanding demand for A.Y. 2015-16. Knowledge of this illegal adjustment was also stated to have been acquired by the petitioner on 17th November, 2021 when the petitioner downloaded Form No. 26AS.

The petitioner urged that the action of Revenue in making adjustments of the refund due was illegal inasmuch as no intimation was given to the petitioner as was the requirement in terms of section 245.

The Hon. Court observed that the reply affidavit of Revenue does not specifically state as to whether before making such an adjustment, the petitioner had been given prior intimation in terms of section 245.

Section 245 envisages that when a refund is found to be due to any person under any of the provisions of the Act, the Revenue can set off/adjust the amount to be refunded or any part of that amount against the sum which remains payable under the Act by the person to whom the refund is due after giving an intimation in writing to such person of the action proposed to be taken under this section.

The Court observed that giving of prior intimation u/s 245 was mandatory. The purpose of giving prior intimation u/s 245 was to enable a party to point out factual errors or some further developments, for example, that there was a stay of the demand or that there was a Supreme Court’s decision covering the demand which is the subject matter of a pending appeal which would not warrant an adjustment of the refund against the pending demand. It was also held that where a party raises such issues in response to the intimation the officer of the Revenue exercising powers u/s 245, must record reasons why the objection was not sustainable and also communicate it to the said party, and that this would ensure that the power of adjustment u/s 245 is not exercised arbitrarily.

In the present case there was no prior intimation u/s 245 has remained unrebutted as no proof of any such prior intimation was placed on record by the Revenue.

The Hon. Court held that the impugned action of respondent No.2 in making adjustments of the amount of Rs. 61,64,649 and Rs. 2,22,89,942 for A.Y. 2008-09 against the alleged outstanding demands for A.Ys. 2014-15 and 2015-16 is bad and illegal, and accordingly, quashed.

shailesh.kwebmaker

For determining interest u/s 244A, refund already granted has to be first adjusted against interest component

21 DCIT vs. MSM Satellite (Singapore) Pte Ltd
TS-480-ITAT-2022 (Mum.)
A.Ys.: 2006-07 to 2008-09;
Date of order: 9th June, 2022
Section: 244A

For determining interest u/s 244A, refund already granted has to be first adjusted against interest component

FACTS
In the first round of proceedings, the Tribunal granted relief to the assessee. The Assessing Officer (AO) passed an order giving effect to the order of the Tribunal and determined the amount of refund payable to the assessee. Aggrieved by the short grant of refund, the assessee preferred an appeal to the CIT(A). The CIT(A) directed the AO to re-compute the interest granted u/s 244A by first adjusting the refund already granted to the assessee against the interest component and the balance, if any, towards the tax component of the refund due.

Aggrieved by the order of the CIT(A), the revenue preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the present case is not a case where interest on interest due was claimed by the assessee. The issue arising in the present case is regarding the correct computation of the refund. As per the Revenue, while computing the refund and interest thereon u/s 244A, the refund already granted to the assessee should be adjusted against the tax component. However, as per the assessee, the refund already granted to the assessee should be adjusted against the interest component and balance, if any, towards the component of refund due.

The Tribunal held that the issue arising in the present appeals is settled in favour of the assessee by the decisions of the co-ordinate bench in the case of Union Bank of India vs. ACIT [(2017) 162 ITD 142 (Mum.)] and in Grasim Industries Ltd. vs. CIT [(2021) 23 taxmann.com 31 (Mum.)]. The Tribunal dismissed the grounds raised by the Revenue.

shailesh.kwebmaker

Proceedings u/s 263 of the Act cannot be initiated merely for non-initiation of proceedings for levy of penalty u/s 270A

20 Coimbatore Vaiyapuri Maathesh vs. ITO
TS-488-ITAT-2022 (Chennai)
A.Y.: 2017-18; Date of order: 17th March, 2022
Sections: 263, 270A

Proceedings u/s 263 of the Act cannot be initiated merely for non-initiation of proceedings for levy of penalty u/s 270A

FACTS
For A.Y. 2017-18, the assessee filed his return of income declaring a total income of Rs. 4,84,300. The Assessing Officer (AO) assessed the total income u/s 143(3) to be Rs. 81,67,948 by making an addition of Rs. 29,09,000 for unexplained money u/s 69A, and disallowing the cost of improvement of Rs. 47,74,648 claimed while computing capital gains.

The Principal Commissioner of Income-tax (PCIT) issued a show cause notice (SCN) to the assessee asking the assessee to show cause why the assessment order should not be revised u/s 263 as the same has been passed with omission to initiate penalty proceedings u/s 270A in respect of disallowance of the claim made while computing capital gains.

In response to the SCN issued, the assessee submitted that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue since there is no satisfaction/finding recorded by the AO with regard to underreporting or misreporting as required by law.

The PCIT, not being satisfied with the explanation of the assessee held that the assessment order passed by the AO with omission to initiate penalty proceedings u/s 270A, is erroneous in so far as prejudicial to the interest of the revenue, set aside the assessment order with a direction to the AO to re-do the assessment order after verification of issues discussed in 263 proceedings.

Aggrieved by the order passed by the PCIT, the assessee preferred an appeal to the Tribunal and contended that although the AO has made additions towards disallowance of capital gains but he has chosen not to initiate penalty proceedings u/s 270A because he has not arrived at satisfaction to the effect that there is an underreporting or misreporting of income as contemplated u/s 270A. Therefore, on the issue of non-initiation of penalty proceedings, the PCIT cannot assume jurisdiction and revise the assessment order. For this proposition, reliance was placed on the decision of the Madras High Court in the case of CIT vs. Chennai Metro Rail Ltd. [(2018) 92 taxmann.com 329].

HELD
The Tribunal noted that the AO had disallowed the cost of improvement on the ground that the assessee has not submitted supporting documentary evidence to substantiate his claim towards the cost of improvement. Except for this, there is no observation of unsustainability of the claim made by the assessee towards the cost of improvement. The Tribunal understood this to mean that although the AO has made an addition towards the cost of improvement, he has chosen not to initiate penalty proceedings u/s 270A because prima facie, there is no material with the AO to allege that there is an underreporting or misreporting of income. The Tribunal also noted that PCIT has relied upon the decision of Allahabad High Court in CIT vs. Surendra Prasad Aggarwal [(2005) 275 ITR 113 (All.)], where the court has held that revisionary power can be exercised for initiation of penalty proceedings.

The Tribunal found that although the Allahabad High Court in Surendra Prasad Aggarwal (supra) upheld 263 order passed by PCIT for initiation of penalty proceedings, the jurisdictional High Court in CIT vs. Chennai Metro Rail Ltd (supra) has taken a contrary view after considering the decision of the Allahabad High Court in Surendra Prasad Aggarwal (supra) and held that in the absence of any findings in the assessment order regarding underreporting or misreporting of income, the PCIT cannot revise assessment order to initiate penalty proceedings.

The Tribunal held that the PCIT erred in invoking revisional proceedings u/s 263 because the AO has chosen not to initiate penalty proceedings. The Tribunal quashed the revision order passed by the PCIT u/s 263.

shailesh.kwebmaker

RECENT AMENDMENTS FOR TAX DEDUCTION AND TAX COLLECTION AT SOURCE

1. BACKGROUND
The scope for Tax Deduction
at Source (TDS) and Tax Collection at Source (TCS) has been enlarged in
the last three Budgets presented by our Finance Minister, Smt. Nirmala
Sitharaman, in 2020, 2021 and 2022. Various Sections of the Income-tax
Act (Act) dealing with TDS and TCS have been amended, and some new
sections are added for this purpose. All these amendments have increased
the compliance burden on taxpayers. In this article, the various
amendments made in the Act in the last three years are discussed.

2. SECTION 192: TDS FROM SALARIES
Finance Act, 2020, amended this Section, effective from A.Y.2021-22 (F.Y.2020-21).
Section 17(2)(vi) of the Act provides for taxation of the value of any
specified securities or sweat equity shares (ESOP) allotted to any
employee by the employer as a perquisite. The employer must deduct tax
at source on such perquisite at the time of exercise of option u/s 192.

To
ease the burden of Start-Ups, the amendments in this Section provide
that a company which is an eligible start-up u/s 80IAC will have to
deduct tax at source on such income within 14 days (i) after the expiry
of 48 months from the end of the relevant assessment year, or (ii) from
the date of sale of such ESOP shares by the employee or (iii) from the
date on which the employee who received the ESOP benefit ceases to be an
employee of the company, whichever is earlier. For this purpose, the
tax rates in force of the financial year in which the said shares (ESOP)
were allotted or transferred are to be considered. By this amendment,
the employee’s liability to pay tax on such perquisite and deduction of
tax on the same is deferred as stated above. Consequential amendments
are also made in Sections 140A (Self-Assessment Tax), 156 (Notice of
Demand) and 191 (Direct payment of Tax).

3. SECTION 194: TDS FROM DIVIDENDS
i)
Up to 31st March, 2020, domestic companies declaring / distributing
dividends to shareholders were required to pay Dividend Distribution Tax
(DDT) u/s 115-O of the Act at the rate of 15% plus applicable surcharge
and cess. Consequently, Section 10(34) granted an exemption to dividend
income in the hands of the shareholder. This provision in Section 115-0
for payment of DDT by the company and exemption of dividend in hands of
the shareholder has been deleted by the F.A. 2020 effective from 01.04.2020.

ii) Section 194 is amended from 01.04.2020
to provide that if the dividend paid by a domestic company to a
Resident Shareholder exceeds Rs 5,000 in a Financial Year, tax at the
rate of 10% shall be deducted at source. The rate of TDS in the case of a
Non-Resident Shareholder shall by 20% as provided u/s 195.

iii) Finance Act, 2021, has further amended this Section, effective from 01.04.2020,
to provide that TDS provision shall not apply to dividend credited or
paid to (a) A Business Trust i.e., Infrastructure Investment Trust or
Real Estate Investment Trust by a Special Purpose Vehicle or (b) Any
other notified person.

4. SECTION 194A: TDS FROM INTEREST INCOME
4.1 This Section deals with TDS from Interest Income. This section is amended by the F.A. 2020, effective from 01.04.2020.
Prior to this date, a Co-operative Society was not required to deduct
tax at source from interest payment in the following cases.

i) Interest payment by a Co-operative Society (Other than a Co-Operative Bank) to its members.

ii) Interest payment by a Co-operative Society to any other Co-operative Society.

iii)
Interest payment on deposits with a Primary Agricultural Credit Society
or Primary Credit Society or a Co-operative Land Mortgage Bank.

iv)
Interest payment on deposits (Other than time deposits) with a
Co-operative Society (Other than Societies mentioned in (iii) above)
engaged in the business of banking.

Under the amendments made in Section 194A effective from 01.04.2020,
the above exemptions have been modified, and a Co-Operative Society
shall be required to deduct tax at source in all the above cases at the
rates in force if the following conditions are satisfied.

a) The
total sales, gross receipts or turnover of the Co-operative Society
exceed Rs 50 Cr. during the immediately preceding financial year, and

b)
The amount of interest, or the aggregate of the amounts of such
interest payment during the financial year, is more than Rs 50,000 in
case the payee is a Senior Citizen (Age of 60 years or more) or more
than Rs 40,000 in other cases.

4.2 i) It may be noted that Section 10(12) is amended by the F.A. 2021, effective from 01.04.2022.
By this amendment, interest credited to the account of an employee in
his account in a recognized Provident Fund is now taxable in respect of
his contribution in excess of Rs 2.50 Lakhs in a financial year. The
method of calculating such interest is provided in Rule 9D inserted in
the Income-tax Rules, effective from 01.04.2022. In this Rule, it
is provided that the Employees’ PF Trust will maintain a separate
account for each employee under the heading ‘Taxable Contribution
Account’ and credit his contribution, which is in excess of Rs 2.50
Lakhs during the F.Y. 2021-22 and each of the subsequent years. Interest accrued on this excess contribution shall be credited to this account.

ii)
The Ministry of Labour and Employment, Government of India, has issued
Circular No. WSU/6(1) 2019/Income tax / Part I (E – 33306) dated 5th
April, 2022. In this circular, it is stated that interest credited to
the employee’s account in the ‘Taxable Contribution Account’ as provided
in Rule 9D of the Income-tax Rules shall be subject to TDS u/s 194A at
10%. If PAN is not linked with the PF Account of the employee, the rate
of TDS will be 20%. If the total amount of such interest is less than Rs
500 in any Finance Year, this TDS provision will not apply. This tax
will have to be deducted by Trustees of Employees’ PF Trust and
deposited with the Government when it is credited or paid, whichever is
earlier.

5. SECTION 194C: PAYMENTS TO CONTRACTORS
This section is amended by the F.A. 2020 effective from 01.04.2020.
Prior to the amendment, the term “Work” was defined in the section to
include manufacturing or supplying a product according to the
requirement or specification of a customer by using material purchased
from such customer. Now, this term “Work” will also include material
purchased from the Associate of such Customer. For this purpose, the
term “Associate” means a person specified u/s 40A(2)(b).

6. SECTION 194 – IA: TDS FROM PAYMENT FOR TRANSACTION IN IMMOVABLE PROPERTY
This
Section requires that, if the consideration for the transaction is Rs
50 Lakhs or more, the buyer shall deduct tax at the rate of 1% of the
consideration for the transfer of immovable property. Effective from
01.04.2022, this Section is amended by the F.A. 2022 to provide that tax
at 1% is to be deducted from the amount determined for the Stamp Duty
Valuation if that amount is higher than the consideration. If the
consideration for transfer and the Stamp Duty Valuation is less than Rs
50 Lakhs, then no tax is required to be deducted.

7. SECTION 194J: TDS FROM FEES FOR PROFESSIONAL OR TECHNICAL SERVICES
This section is amended by the F.A. 2020, effective from 01.04.2020.
The rate for TDS has been reduced from 10% to 2% in respect of Fees for
Technical Services. The rate of TDS for Professional Fees continues at 10%.

8. SECTION 194K: TDS FROM INCOME FROM MUTUAL FUND
This is a new Section inserted by the F.A. 2020, effective from 01.04.2020.
It provides that income distributed by a Mutual Fund to a Resident unit
holder in excess of R5,000 in a financial year will be subject to TDS
at the rate of 10%. In the case of a Non-Resident Unit holder, the rate
of TDS is 20% u/s 196A. Prior to 1.4.2020, a Mutual Fund was
required to pay tax at the time of distribution of income u/s 195R and
the Unit Holder was granted exemption u/s 10(35).

9. SECTION 194LBA: TDS FROM INCOME DISTRIBUTED BY A BUSINESS TRUST
This section has been amended by the F.A. 2020, effective from 01.04.2020,
to provide that in respect of income distributed by a Business Trust to
a resident unit holder, being dividend received or receivable from a
Special Purpose Vehicle, the tax shall be deducted at source at the rate
of 10%. In respect of a non-resident unit holder, the rate for TDS is
20% on such dividend income.

10. SECTION 194LC: TDS FROM INTEREST FROM INDIAN COMPANY
This section is amended by F.A. 2020, effective from 01.04.2020.
The eligibility of borrowing under a loan agreement or by issue of long
term bonds for concessional rate of TDS under this section has now been
extended from 30.06.2020 to 30.06.2023. Further, Section 194LC(2) has
now been amended to include interest on monies borrowed by an Indian
Company from a source outside India by issue of Long Term Bonds or Rupee
Denominated Bonds between 01.04.2020 and 30.06.2023, which are listed
on a recognized Stock Exchange in any International Financial Services
Center (IFSC). In such a case, the rate of TDS will be 4% (as against 5%
in other cases).

11. SECTION 194LD: TDS FROM CERTAIN BONDS AND GOVERNMENT SECURITIES
This section is amended by the F.A. 2020, effective from 01.04.2020.
This amendment is made to cover interest payable from 01.06.2013 to
30.06.2023 by a person to an FII or a Qualified Foreign Investor on
Rupee Denominated Bonds of an Indian Company or Government Security u/s
194LD. Further, now interest at specified rate on Municipal Debt
Securities issued between 01.04.2020 to 30.06.2023 will also be covered
under the provisions of this Section. The rate for TDS is 5% in such
cases.

12. SECTION 194N: TDS FROM PAYMENT IN CASH
Section
194N was inserted, effective from 01.09.2019, by the Finance (No.2)
Act, 2019. This Section provided that a Banking Company, Co-operative
Bank or a Post Office shall deduct tax at source at 2% in respect of
cash withdrawn by any account holder from one or more accounts with such
Bank / Post office in excess of Rs 1 Cr. in a financial year.

Now, the above Section has been replaced by a new Section 194N by the F.A. 2020, effective from 01.07.2020. This new Section provides as under:

i) The provision relating to TDS at 2% on cash withdrawals exceeding Rs 1 Cr. as stated above is continued. However, w.e.f. 01.07.2020,
if the account holder in the Bank / Post Office has not filed returns
of income for all the three assessment years relevant to the three
previous years, for which the time for filing such return of income u/s
139(1) has expired, the rate of TDS will be as under:

a) 2% of
cash withdrawal from all accounts with a Bank or Post Office in excess
of R 20 Lakhs but not exceeding Rs 1 Cr. in a financial year.

b) 5% of cash withdrawal from all accounts with a Bank or Post Office in excess of Rs 1 Cr. in a financial year.

ii)
This TDS provision applies to all persons, i.e., Individuals, HUF, AOP,
Firms, LLP, Companies etc., engaged in business or profession and to
all persons having bank accounts for personal purposes.

iii) The
Central Government has been authorized to notify, in consultation with
RBI, that in the case of any account holder, the above provisions may
not apply or tax may be deducted at a reduced rate if the account holder
satisfies the conditions specified in the notification.

iv) This
Section does not apply to cash withdrawals by any Government, Bank,
Co-operative Bank, Post Office, Banking Correspondent, White Label ATM
Operators and such other persons as may be notified by the Central
Government in consultation with RBI if such person satisfies the
conditions specified in the notification. Such notification may provide
that the TDS may be at reduced rates or at “Nil” rate.

v) This
provision is made to discourage cash withdrawals from Banks and promote
the digital economy. It may be noted that u/s 198, it is provided that
the tax deducted u/s 194N will not be treated as income of the assessee.
If the amount of this TDS is not treated as income of the assessee,
credit for tax deducted at source u/s 194N will not be available to the
assessee u/s 199 read with Rule 37BA. If such credit is not given, this
will be an additional tax burden on the assessee.

13. SECTION 194-O: TDS FROM PAYMENT BY E-COMMERCE OPERATOR TO E-COMMERCE PARTICIPANT
New Section 194-O has been inserted by the F.A. 2020, effective from 01.04.2020.
Existing Section 206AA has been amended from the same date. Section
194-O provides that the TDS provisions will apply to E-commerce
operators. The effect of this provision is as under:

i) The two
terms used in the Section are defined to mean (a) “e-commerce operator”
is a person who owns, operates or manages digital or electronic facility
or platform for electronic commerce and (b) “e-commerce participant” is
a person resident in India selling goods or providing services or both,
including digital products, through digital or electronic facility or
platform for electronic commerce. For this purpose, the services will
include fees for professional services and fees for technical services.

ii)
An e-commerce operator facilitating the sale of goods or provision of
services of an e-commerce participant through its digital electronic
facility or platform is now required to deduct tax at source at the rate
of 1% of the payment of the gross amount of sales or services or both
to the e-commerce participant.

iii) No tax is required to be
deducted if the payment is made to an e-commerce participant who is an
Individual or HUF if the payment during the financial year is less than
Rs 5 Lakhs and the e-commerce participant has furnished PAN or Aadhar Card
Number.

iv) Further, in the case of an e-commerce operator who
is required to deduct tax at source as stated in (ii) above or in case
stated in (iii) above, there will be no obligation to deduct tax under
any provisions of chapter XVII-B in respect of the above transactions.
However, this exemption will not apply to any amount received by an
e-commerce operator for hosting advertisements or providing any other
services which are not in connection with sale of goods or services.

v)
If the e-commerce participant does not furnish PAN or Aadhar Card
Number, the rate for TDS u/s 206AA will be 5% instead of 1%. This is
provided in the amended Section 206AA.

vi) It is also provided
that CBDT, with the approval of the Central Government, may issue
guidelines for the purpose of removing any difficulty that may arise in
giving effect to provisions of Section 194-O.

14. SECTION 194-P: TDS IN CASES OF SPECIFIED SENIOR CITIZENS
This is a new section inserted by F.A. 2021, from 01.04.2021.
Since the section deals with TDS and provides for relaxation from
filing Return of Income by Senior Citizens it will apply for the F.Y. 2021-2022 (A.Y. 2022-23).
This section grants exemption from filing of Return of Income by Senior
Citizens (age of 75 years or more). For this purpose, the following
conditions should be complied with:

i) Such Senior Citizen should have only pension Income.

ii) Such Senior Citizen may also have interest income from the same specified Bank in which he /she is receiving the pension.

iii) Such Senior Citizen will be required to furnish a declaration in the prescribed manner to the specified Bank.

In
the case of the Senior Citizen to whom the section applies, the
specified bank shall, after giving effect to the deductions allowable
under Chapter VIA and the Rebate allowable u/s 87A, compute the total
income and tax payable by such Senior Citizen for the relevant
assessment year and deduct income tax on such total income based on
applicable rates.

It may be noted that the above exemption from
filing return of income will not be available if such Senior Citizen has
Income from House Property, Business, Profession, Capital gains, and
Interest income from any other Bank or any person, Dividend etc.
Considering the conditions imposed in the Section, very few Senior
Citizens will be able to get benefit of this section.

15. SECTION 194-Q: TDS FROM PAYMENT FOR PURCHASE OF GOODS
This is a new section inserted by the F.A. 2021, effective from 01.07.2021.
Last year, section 206C(IH) was inserted to provide for the collection
of tax at source (TCS) by the seller of goods of the aggregate value
exceeding Rs 50 Lakhs at the rate of 0.1% of the value of goods
purchased by the purchaser. The new section 194Q applies to an assessee
whose total sales, gross receipts or turnover from business exceeds Rs 10
Cr. in the immediately preceding financial year. Further, this provision
will apply if the aggregate value of goods purchased in the financial
year exceeds Rs 50 Lakhs. In such a case, tax at the rate of 0.1% of the
amount in excess of Rs 50 Lacs is required to be deducted at source.
This provision will not apply if the tax is required to be deducted or
collected under any other provisions of the Act, other than TCS on the
sale of goods as provided in section 206C(IH). It is also provided that
if the buyer deducts tax on the purchase of goods under this section,
the seller will not be required to collect tax u/s 206C(IH). In other
words, if section 194Q, as well as section 206C(IH) applies to any
transaction, TDS provision u/s 194Q will apply and TCS provision u/s
206C (IH) will not apply except in the case of advance received by the
seller against sales. In case the seller does not have PAN, the
applicable rate of TDS will be 5%. A consequential amendment is made in
section 206AA. It may be noted that the term “Goods” has not been
defined in sections 194Q or 206C (IH). If we rely on the definition
under the Sale of Goods Act, 1930, it will mean movable assets.
Therefore, immovable property will not be considered “Goods”.

16. SECTION 194-R: TDS FROM BENEFIT OR PERQUISITES
i) This is a new Section which has been inserted by the F.A. 2022 and comes into force from 01.07.2022. The
section provides that tax shall be deducted at source at the rate of
10% of the value of the benefit or perquisite arising from business or
profession if the value of such benefit or perquisite in a financial
year exceeds Rs 20,000.

ii) The provisions of this Section are
not applicable to an Individual or HUF whose Sales, Gross Receipts or
Turnover does not exceed Rs 1 Cr. in the case of business or Rs 50 Lakhs
in the case of profession during the immediately preceding financial
year.

iii) The section also provides that if the benefit or
perquisite is wholly in kind or partly in kind and partly in cash and
the cash portion is not sufficient to meet the TDS amount, then the
person providing such benefit or perquisite shall ensure that tax is
paid in respect of the value of the benefit or perquisite before
releasing such benefit or perquisite.

iv) In the Memorandum
explaining the provisions of the Finance Bill, 2022, it is clarified
that Section 194R is added to cover cases where value of any benefit or
perquisite arising from any business or profession is chargeable to tax
u/s 28(iv) of the Act. It is also provided that the Central Government
shall issue guidelines to remove any difficulty that may arise in the
implementation of this section.

v) It may be noted that CBDT has
issued a Circular No. 12 of 2022. This Circular provides Guidelines for
the removal of difficulties arising from implementation of this section.
This Circular explains the transactions to which this section applies.
Briefly stated, the position about the following transactions will be as
under:

a) The section applies to any benefit or perquisite
provided to a person if such benefit or perquisite is taxable in the
hands of the recipient. However, the tax deductor is not required to
verify whether such benefit or perquisite is taxable in the hands of the
recipient u/s 28(iv).

b) If the benefit or perquisite is in the form of a Capital Asset, tax is required to be deducted under this section.

c)
This section will not apply to Sales Discount, Cash Discount and Rebate
on sales given by the assessee. However, if free samples are given or
if an incentive is given only to selected persons in the form of TV,
Computer, Gold Coin, Mobile Phone, Free Tickets for Travel etc., the
provisions of this section will apply.

d) If the benefit of use
of assets of ABC Co. Ltd., is given free of cost to BCD Co. Ltd or its
directors, employees or their relatives, ABC Co. Ltd., will have to
deduct tax under this section.

e) The valuation of the benefit or perquisite given in kind is to be made at fair market value.

The
above Circular deals with many other cases in which tax is either to be
deducted or not to be deducted under this section. Therefore, the
person liable to deduct tax at source will have to carefully study the
guidelines in the Circular before giving any benefit or perquisite to a
third person.

17. SECTION 194-S: TDS FROM TRANSFER OF VIRTUAL DIGITAL ASSET (VDA)
i) This is a new section inserted by the F.A. 2022 which comes into force on 01.07.2022.
The section provides that any person paying to a resident consideration
for transfer of any Virtual Digital Asset (VDA) shall deduct tax at 1%
of such sum. In a case where the consideration for transfer of VDA is
(a) wholly in kind or in exchange of another VDA, where there is no
payment in cash or (b) partly in cash and partly in kind but the part in
cash is not sufficient to meet the liability of TDS in respect of whole
of such transfer, the payer shall ensure that tax is paid in respect of
such consideration before releasing the consideration. However, this
TDS provision does not apply if such consideration does not exceed Rs
10,000 in a financial year.

ii) Section 194-S defines the term
“Specified Person” to mean any person (i) being an Individual or a HUF,
whose total sales, gross receipts or turnover from business or
profession does not exceed Rs 1 Cr. in case of business or Rs 50 Lakhs
in the case of profession, during the immediately preceding financial
year in which such VDA is transferred or (ii) being an Individual or a
HUF who does not have income under the head “Profits and Gains of
Business or Profession”.

iii) In the case of a Specified Person –

a)
The provisions of Section 203A relating to Tax Deduction and
Collection Account Number and 206AB relating to Special Provision for
TDS for non-filers of Income-tax Return will not apply.

b) If the
value or the aggregate value of such consideration for VDA does not
exceed Rs 50,000 during the financial year, no tax is required to be
deducted.

iv) In the case of a transaction to which Sections
194-O and 194-S are applicable, then tax is to be deducted u/s 194-S and
not under Section 194-O.

(v) The CBDT has issued certain
Guidelines by its Circular No. 13 of 2022 dated 22nd June, 2022 for
removal of difficulties under this Section. Briefly stated this Circular
states as under:

a) These guidelines apply only in cases where the transfer of VDA is taking place on or through an Exchange.

b)
When the transfer of VDA is taking place on or through an Exchange and
payment is made by the purchaser to the Exchange directly, or through a
Broker, the tax should be deducted by the Exchange. The Circular also
explains the circumstances under which tax is required to be deducted by
the Broker. The terms “Exchange” and “Broker” are defined in the
Circular.

c) When VDA-‘X’ is exchanged by the seller against
VDA–‘Y’ owned by the buyer, TDS provisions apply to both the seller and
the buyer. The Circular explains the mechanism for deduction of tax at
source when such transfer takes place directly or through the Exchange.

d)
It is clarified that when tax is deducted u/s 194-S, no tax is required
to deducted u/s 194-Q dealing with TDS from payment for purchase of
goods.

e) For TDS under this section, the consideration for VDA
is to be computed excluding GST and charges levied by the deductor for
rendering service.

f) The circular also explains the TDS
provisions relating to VDA in the form of questions and answers which a
person dealing in VDA will have to study before deducting tax at source
u/s 194-S.

(vi) CBDT has also issued another Circular No. 14 of
2022 on 28th June, 2022 explaining how the provisions of this Section
will apply when the transfer of VDA takes place for consideration in
cash or kind otherwise than through an Exchange.

18. SECTION 196-C: TDS FROM FOREIGN CURRENCY BONDS OR SHARES
This
section dealing with TDS from interest or dividend in respect of Bonds
or GDRs purchased by a Non-Resident in Foreign Currency has been amended
by the F.A. 2020, effective from 01.04.2020. Under the amended Section, TDS at 10% is now deductible from interest or dividend paid to the Non-Resident.

19. SECTION 196-D: TDS FROM INCOME OF FII FROM SECURITIES
i)
This section deals with TDS from income in respect of securities held
by an FII. By amendment of the Section by the F.A. 2020, effective from 01.04.2020, it is provided that Dividend paid to FII or FPI will be subject to TDS at the rate of 20%.

ii)
As stated above, this section provides for TDS at the rate of 20% on
income of FIIs from securities referred to in section 115AD(1)(a), other
than interest u/s 194LD. Due to this specific rate of 20%, the benefit
of lower rate under the applicable DTAA was not available. To give this
benefit to FIIs, the section has now been amended by the F.A. 2021,
effective from 01.04.2021, and it is now provided that in the
case of any FII, to whom DTAA applies, the tax shall be deducted under
this section at the rate of 20% or the rate as per the applicable DTAA,
whichever is lower. The FII must produce the ‘Tax Residency Certificate’
to get this benefit.

20. SECTIONS 206 AB AND 206 CCA: TDS/TCS FROM NON-FILERS OF ITR
i)
At present, sections 206AA and 206CC provide for TDS and TCS at higher
rates if the PAN is not furnished by the person to whom payment is made
or the person from whom the amount is received. Now, two new sections
206AB and 206CCA are inserted by the F.A. 2021 effective from 01.07.2021
for TDS and TCS at higher rates if the specified person from whom tax
is to be deducted or the tax is to be collected has not filed the return
of income for the two preceding years. These two new sections will
apply, notwithstanding anything contained in any other provisions of the
Act, where tax is required to be deducted or collected under Chapter
XVII-B or Chapter XVIIBB. However, these provisions will not apply to
TDS provisions under sections 192 and 192A (salary), 194B and 194BB
(winnings from lottery, crossword puzzle and horse races), 194LBC
(Income from investment in securitization Trust) or 194N (Payment of
certain amount in cash by Banks etc.).

ii) For the above purpose,
“specified person” is defined to mean (a) a person who has not filed
return of income for both the two immediately preceding years in which
tax is required to be deducted / collected, (b) the time limit to file
the Return of income for the above years u/s 139(1) has expired, (c)
aggregate of TDS/TCS exceeds Rs 50,000 in each of the two preceding
years an (d) the specified person shall not include a non-resident who
does not have a PE in India.

iii) The higher rate for TDS/TCS provided in the above sections is to be worked out as under:

a) TDS Rate: Higher of (a) Twice the rate specified in the relevant section or (b) Twice the Rate or Rates in force or (c) The rate of 5%.

b) TCS Rate: Higher of (a) Twice the Rate specified in the relevant section or (b) The rate of 5%.

iv)
It is further provided that if the provisions of section 206AA (for
TDS) or section 206CC (for TCS) are applicable to the specified person
in addition to section 206AB (for TDS) or section 206CCA (for TCS), the
higher of the two rates provided in the above sections will apply.

v)
For the convenience of the deductor and collector of tax, CBDT vide
Circular No. 11 of 2021 dated 21st June, 2021 has clarified the steps
taken to ease the compliance burden of the deductor/collector by launch
of new functionality ‘Compliance Check for sections 206AB and 260CCA’
through the reporting portal of the Income-tax department. The Deductor
or Collector using this functionality can get the information about the
specified person as to whether he has filed the return of income for the
preceding two years. It is also possible for the dedutor or collector
to obtain a declaration from the specified person as to whether he has
filed the return of income for the preceding two years, and if so on
what dates.

vi) These two sections are further amended by the F.A. 2022, effective from 01.04.2022. It
is now provided the TDS/TCS at higher rates in such cases will not
apply to cases under sections 194IA, 194IB and 194M where the payer is
not required to obtain TAN. Further, the test of non-filing the
Income-tax Returns under Sections 206AB / 206CCA has now been reduced
from two preceding years to one preceding year.

21. SECTION 206C: TCS FROM CERTAIN TRADING TRANSACTIONS
This
Section dealing with collection of tax at source (TCS) has been amended
by the F.A. 2020, effective from 01.10.2020. Hitherto, this provision
for TCS applied in respect of specified businesses. Under this
provision, a seller is required to collect tax from the buyer of certain
goods at the specified rates. The amendment of this Section, effective
from 01.10.2020, extends the net of TCS u/s 206C (1G) and (1H) to other
transactions as under:

i) An Authorized Dealer, who is authorized
by RBI to deal in foreign exchange or foreign security, receiving Rs. 7
lakhs or more from any person, in a financial year, for remittance out
of India under Liberalized Remittance Scheme (LRS), is liable to collect
TCS at 5% from the person remitting such amount. Thus, LRS remittance
upto Rs. 7 Lakhs in a financial year will not be liable for this TCS. If
the remitter does not provide PAN or Aadhar Card Number, the rate of
TCS will be 10% u/s 206CC.

ii) In the above case, if the
remittance in excess of Rs. 7 Lakhs is by a person who is remitting the
foreign exchange out of education loan obtained from a Financial
Institution, as defined in Section 80E, the rate of TCS will be 0.5%. If
the remitter does not furnish PAN or Aadhar Card No. the rate of TCS
will be 5% u/s 206CC.

iii) The seller of an overseas tour
programme package, who receives any amount from a buyer of such package,
is liable to collect TCS at 5% from such buyer. It may be noted that
the TCS provision will apply in this case even if the amount is less
than Rs. 7 Lakhs. If the buyer does not provide PAN or Aadhar Card No.
the rate for TCS will be 10% u/s 206CC.

iv) It may be noted that the above provisions for TCS do not apply in following cases:

a) An amount in respect of which the sum has been collected by the seller.

b)
If the buyer is liable to deduct tax at source under any other
provisions of the Act. This will mean that for remittance for
professional fees, commission, fees for technical services etc., from
which tax is to be deducted at source, this section will not apply.

c)
If the remitter is the Central Government, State Government, Embassy,
High Commission, Legation, Commission, Consulate, Trade Representation
of a Foreign State, Local Authority or any person in respect of whom
Central Government has issued notification.

v) Section 206C(1H), which comes into force on 01.10.2020
provides that a seller of goods is liable to collect TCS at the rate of
0.1% on receipt of consideration from the buyer of goods, other than
goods covered by Section 206C(1), (1F) or (1G). This TCS provision will
apply only in respect of the consideration in excess or Rs 50 Lakhs in
the financial year. If the buyer does not provide PAN or Aadhar Card
No., the rate of TCS will be 1%. If the buyer is liable to deduct tax at
source from the seller on the goods purchased and made such deduction,
this provision for TCS will not apply.

vi) It may be noted that the above Section 206C (1H) does not apply in the following cases:

a)
If the buyer is the Central Government, State Government, Embassy, High
Commission, Legation, Commission, Consulate, Trade Representation of a
Foreign State, Local Authority, person importing goods into India or any
other person as the Central Government may notify.

b) If the
seller is a person whose sales, turnover or gross receipts from the
business in the preceding financial year does not exceed Rs. 10 Cr.

vii)
The CBDT, with the approval of the Central Government, may issue
guidelines for removing any difficulty that may arise in giving effect
to the above provisions.

22. OBLIGATION TO DEDUCT OR COLLECT TAX AT SOURCE
Hitherto,
the obligation to comply with the provisions of Sections 194A, 194C,
194H, 194I, 194J or 206C for TDS/TCS was on Individuals or HUF whose
total sales or gross receipts or turnover from business or profession
exceeded the monetary limits specified in Section 44AB during he
immediately preceding financial year. The above Sections are now amended
by F.A. 2020, effective from 01.04.2020, to provide that above
TDS / TCS provisions will apply to an individual or HUF whose total
sales or gross receipts or turnover from business or profession exceed
Rs 1 Cr. in the case of business or Rs 50 Lakhs in the case of
profession. Thus, every individual or HUF carrying on business will have
to comply with the above TDS/TCS provisions even if he is not liable to
get his accounts audited u/s 44AB.

23. TO SUM UP
i)
From the above amendments, it is evident that the net for TDS and TCS
has now been widened and even transactions which do not result in
income, are now covered under these provisions. Individuals and HUF
carrying on business and not covered by Tax Audit u/s 44AB will now be
covered by TDS and TCS provision. In particular, persons remitting
foreign exchange exceeding Rs 7 Lakhs under LRS of RBI, will have to pay
tax u/s 206C. This tax will be considered as payment of tax by the
remitter u/s 206C(4), and he can claim credit for such tax u/s 206C(4)
read with Rule 37-1.

ii) It may be noted that the Government
issued a Press Note on 13th May, 2020 providing certain relief during
the COVID-19 pandemic. By this Press Note, it announced that TDS/TCS
under sections 193 to 194-O and 206C will be reduced by 25% during the
period 14.05.2020 to 31.03.2021. This reduction is given only in respect
of TDS/TCS from payments or receipts from Residents. This concession is
not in respect of TDS from salaries or TDS from Non-Residents and
TDS/TCS under sections 260AA or 206CC.

iii) There are about 65
sections in the Income-tax Act dealing with the obligations relating to
TDS and TCS. These sections include certain procedural provisions which
the taxpayer has to comply with. With the above amendments made in the
last 3 years, the provisions relating to TDS/TCS have become more
complex. Every person will have to be very careful while making any
payment, purchase or sale in the course of his business, profession or
other activities, and he will have to first ascertain whether any of the
provisions for TDS/TCS are applicable. In case of non-compliance with
these provisions, he will have to face many penal consequences. Even
Chartered Accountants conducting Tax Audit u/s 44AB will have to verify
and report whether the entity under audit has correctly deducted tax or
not under the above sections.

shailesh.kwebmaker

DISCLOSURE OF FOREIGN ASSETS AND INCOME IN THE INCOME-TAX RETURN

ENABLING PROVISION

Section 139 of the Income-tax Act, 1961 (“the IT Act”) deals with the filing of return of income. Sub-section (1) to section 139, inter alia, provides that every person whose total income exceeds the maximum amount not chargeable to tax shall file a return of income in the prescribed form and in the prescribed manner before the due date of filing of return of income.

The fourth proviso to section 139(1) provides that a person being a resident, other than a not ordinarily resident, who is not required to file return of income u/s 139(1) shall still be required to file a return of income if he satisfies any of the conditions mentioned in clauses (a) and (b) of the fourth proviso. The said clauses (a) and (b) under the fourth proviso broadly deal with the holding of any asset or being the beneficiary of any asset located outside India.

Therefore, any resident person who holds any asset located outside India or is a beneficiary of any asset located outside India shall be required to file a return of income u/s 139(1) even if the total income of such person does not exceed the prescribed limits. The conditions given under clauses (a) and (b) of the fourth proviso regarding the holding of any asset or being the beneficiary of any asset located outside India are dealt with in greater detail in subsequent paragraphs.

WHO IS REQUIRED TO REPORT?

The fourth proviso expressly provides that every person being a ‘resident’, other than not ordinarily resident in India within the meaning of section 6(6) of the IT Act, shall be required to file a return if he satisfies the prescribed conditions. Thus, the provision applies only to a ‘resident person’. Persons who are either not-ordinarily resident or non-residents are not covered under the fourth proviso to section 139(1).

Further, section 2(31) of the IT Act defines a person to include an Individual, HUF, Company, Firm, AOP or BOI, Local Authority and every artificial juridical person who does not fall in either of the specified categories. Therefore, the requirement of reporting foreign assets and income will apply to all such resident persons.

An illustrative list of persons who may get covered and require reporting are:

Non-residents who have become residents in India and have purchased/obtained assets outside India while they were non-residents in India;

Individuals who have invested funds outside India under the Liberalised Remittance Scheme (LRS);

Individuals who have invested outside India through ODI route;

Individuals employed with the Indian arm of a multi-national group, who have received ESOPs of the parent company outside India;

Individuals who are employed with the Indian Parent Company and have signing authority in the bank accounts of the foreign subsidiary companies;

Individuals who own foreign assets by way of gift/inheritance;

Foreign expats coming to India permanently and becoming residents in India;

Individuals who have for the first time shifted outside India for employment;

Companies who are subject to transfer pricing provisions; and

Companies having foreign branch/es.

WHEN IS REPORTING REQUIRED?

Clause (a) of the fourth proviso reads as follows:

“holds, as a beneficial owner or otherwise, any asset, (including any financial interest in any entity) located outside India or has signing authority in any account located outside India”

Thus, if a resident person, at any time during the previous year:

– holds any asset, whether as a beneficial owner or otherwise; or

– holds any financial interest in any entity; or

– has signing authority in any account

located outside India, then such resident person is required to file a return of income even if the total income of such resident person does not exceed the maximum amount not chargeable to tax.

There is an exception to the aforesaid requirement which has been provided under the fifth proviso. As per the fifth proviso to section 139(1), the said requirement shall not apply to an individual, being a beneficiary of any asset located outside India and income arising from such asset is includible in the total income of the person referred to in the abovementioned clause (a).

Clause (b) of the fourth proviso reads as follows:

“Is a beneficiary of any asset (including any financial interest in any entity) located outside India”

Thus, if a resident person is a beneficiary of any asset located outside India or is a beneficiary of financial interest in any entity located outside India, then the resident person is required to file a return of income, even if his total income does not exceed the maximum amount not chargeable to tax.

Explanation 4 defines the term ‘beneficial owner’ in respect of an asset to mean “an individual” who has provided directly or indirectly consideration for the asset for the immediate or future benefit, direct or indirect, of himself or any other person.

It is important to note that the definition of the term beneficial owner in respect of an asset specifically refers to an individual as against the term resident person. Therefore, it raises a question as to whether the condition of holding the asset as a beneficial owner applies only in respect of an Individual and not all the other categories of persons given u/s 2(31) of the IT Act!

Similarly, Explanation 5 to section 139 of the IT Act defines the term ‘beneficiary’ in respect of an asset to mean “an individual” who derives benefit from the asset during the previous year and the consideration for such asset has been provided by any person other than such beneficiary.

Interestingly, the ITR Form Nos. 5, 6 and 7 which are prescribed for other categories of persons provide for reporting under Schedule FA.

Therefore, this mismatch of the requirement under the provisions of the IT Act and the requirement under the ITR Forms raises a larger issue as to whether the ITR Forms can go beyond what is provided in the provisions of the IT Act and require the assessee to comply with the requirement of disclosure and reporting of foreign assets and income?

Be that as it may, the reporting requirement under Schedule FA is only a disclosure requirement; all categories of resident persons must ensure due compliance of the requirement to avoid the adverse consequences under the IT Act and Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“BMA”).

WHAT IS THE PERIOD FOR WHICH SUCH REPORTING IS REQUIRED TO BE MADE?

From A.Y. 2022-23, the ITR Forms for A.Y. 2022-23 require the reporting of foreign assets to be made if the same were held by the resident person at any time during the calendar year ending on 31st December, 2021.

It is important to note that under the fourth proviso to 139(1), the applicability is triggered if the foreign asset is held by the resident person ‘at any time during the previous year’, whereas the reporting which is to be done is only in respect of the foreign assets held ‘at any time during the calendar year ending on 31st December, 2021’. For example, a resident individual opens an account with a bank in Singapore in February, 2022 for the first time. In such a case, he will be required to file a return of income even if his total income during the previous year does not exceed the maximum amount not chargeable to tax. However, will he be required to report the foreign bank account balance in Singapore in the ROI filed for A.Y. 2022-23? The answer would be in the negative since the ITR form states that the reporting is required to be done for the foreign asset held at any time during the calendar year ending on 31st December, 2021. Though the resident individual held the asset during the previous year 2021-22, since the ITR Form categorically states that the requirement of disclosing is in respect of the calendar year ending on 31st December, 2021, the resident individual will not be required to report the balance of the foreign bank account held by him in Singapore.

Suppose an ordinarily resident individual purchases certain shares of a USA-based company in January, 2021. Since January, 2021 falls within the calendar year ending 31st December, 2021, the same will have to be reported in the return for A.Y. 2022-23. This is despite the fact the said purchase of shares would have been reported by such an individual in his return of income for A.Y. 2021-22. Further, if the shares purchased in January, 2021 are sold in February, 2021, the same will still have to be reported even though the assessee did not hold the shares during the previous year 2021-22 relevant to A.Y. 2022-23. Due care will have to be taken in such cases as the resident individual may not even be required to file his return of income since he did not hold the foreign asset during the previous year! Extending the example further, if the resident individual makes a further purchase of shares of USA-based company in January, 2022, the same will not be reported even though the same falls within the previous year relevant to A.Y. 2022-23. However, the gains from the sale of the said shares (purchased in January, 2022) before 31st March, 2022, if any, will have to be offered as income for A.Y. 2022-23 on accrual basis. Further, if the total income of such an individual does not exceed the maximum amount not chargeable to tax, he will still be required to file the return of income under the fourth proviso to section 139(1) of the Act.

The period of reporting (relevant for A.Y. 2022-23) can be summarised with the help of the following table under different scenarios:

Sr. No.	Scenario	Falls in P.Y. 2021-22?	Falls in calendar year ending 31^st December, 2021?	Required to file ROI under the fourth proviso to section 139(1) for A.Y. 2022-23?¹	Required to disclose in the ROI for A.Y. 2022-23?
1	Foreign Asset held before January, 2021	No	No	No	No
2	Foreign Asset held between January, 2021 to March, 2021?²	No	Yes	No	Yes
3	Foreign Asset held between April, 2021 to December, 2021	Yes	Yes	Yes	Yes
4	Foreign Asset held between January, 2022 to March, 2022	Yes	No	Yes	No
5	Foreign Asset held after March, 2022	No	No	No	No

1 This column deals with only those cases where the resident person holds the foreign asset during the previous year, but is otherwise not required to file his return of income u/s 139(1) of the IT Act.
2 This results in a peculiar situation due to the inconsistency between the fourth proviso and the ITR Form. However, in such a situation, it is ideal to file the return of income and also disclose and report the foreign asset even if there is no requirement to file the Return of Income as per the fourth proviso to section 139(1) so as to avoid any penalties for non-disclosure and other severe consequences under the IT Act and BMA.

IN WHICH CURRENCY IS THE REPORTING REQUIRED TO BE DONE?
All the amounts are required to be reported in Indian currency³.

WHAT IS THE RATE OF EXCHANGE TO BE USED?
The rate of exchange for conversion of the balances / amounts for the purpose of reporting in Indian currency is to be done by adopting the ‘telegraphic transfer buying rate’ (“TTBR”) of the foreign currency on the closing date⁴.

For the purpose of reporting peak balance, the TTBR on the date of the peak balance should be adopted, and for reporting the value of the investment, the TTBR on the date of investment shall be adopted for conversion into Indian currency⁵.

A question arises as to what will be the ‘closing date’ in a case where the foreign asset is purchased and sold before the end of the calendar year? In such a case, the date on which the asset is disposed may be taken as the closing date for the purpose of conversion of balance / amount.

3 As per Instructions to ITR Forms for A.Y. 2021-22. Instructions to ITR Forms for A.Y. 2022-23 have not been issued.
4 Instructions to ITR Forms for A.Y. 2021-22. Instructions to ITR Forms for A.Y. 2022-23 have not been issued.
5 Instructions to ITR Forms for A.Y. 2021-22. Instructions to ITR Forms for A.Y. 2022-23 have not been issued.

WHAT IS REQUIRED TO BE REPORTED?
Details of foreign assets and income from a source outside India are required to be reported under Schedule FA in the ITR Form. Schedule FA consists of reporting under 9 Tables as follows:

A1 – Details of Foreign Depository Accounts (including any beneficial interest):

What is to be reported?

Remarks:

In case of joint holders in a depository account, it must be ensured that both the joint holders report the details in their respective ITRs. Further, the entire balance should be reported and not the proportionate share.

In case of foreign bank accounts which have multiple currencies – separate account numbers allocated to each currency account must be reported.

A2 – Details of Foreign Custodial Accounts (including any beneficial interest):

What is to be reported?

A3 – Details of Foreign Equity and Debt Interest (including any beneficial interest):

What is to be reported?

Remarks:

Foreign Equity would generally cover investments in equity shares, preference shares, or any other shares.

Debt Interest would generally cover debentures, bonds and notes.

Investment in units of mutual funds and government securities will have to be reported under this part.

ESOPs granted to a resident employee of a foreign company and which have not vested or which are pending allotment may be reported with a note⁶ explaining that the interest is not ‘held’ until the satisfaction of the conditions and the disclosure is being made out of abundant caution.

Proceeds from the sale or redemption of investment during the period will be reported twice, i.e. under Table A2 (since there is a requirement to specify the nature of the amount credited in the Foreign Custodial Account) as well as under this Table.

6 In case of electronic return, there is no provision for filing notes to the return separately. However, this may be done by way of filing a letter to the jurisdictional Assessing Officer.

A4 – Details of Foreign Cash Value Insurance Contract or Annuity Contract (including any beneficial interest):

What is to be reported?

Remarks:

Reporting under this clause to cover inter alia, the following:

– Insurance obtained by resident individual while he was a non-resident.

– Insurance contracts entered by a non-resident outside India where the resident person is a beneficiary.

Only cash value insurance contracts are covered. Therefore, insurance contracts such as term life insurance, general insurance contracts are not required to be reported.

B – Details of Financial Interest in any Entity (including any beneficial interest):

What is to be reported?

Remarks:

Indian Companies having Subsidiaries and Step-down Subsidiaries should ensure that reporting is made in case of shares held by the Indian Company in its Step-down Subsidiaries.

If the Indian Holding/Parent Company has, say, 50 subsidiaries and 45 sub-subsidiaries, the details, though voluminous, in respect of all the subsidiaries must be given.

Financial interest⁷ would include the following:

Where the resident assessee is the owner of record or holder of legal title of any financial account, irrespective of whether he is the beneficiary or not.

ii. The owner of record or holder of a legal title of any financial interest is one of the following:

– an agent, nominee, attorney or a person acting in some other capacity on behalf of the resident assessee with respect to the entity;

– a corporation in which the resident assessee owns, directly or indirectly, any share or voting power;

– a partnership in which the resident assessee owns, directly or indirectly, an interest in partnership profits or an interest in partnership capital;

– a trust of which the resident assessee has beneficial or ownership interest; and

– any other entity in which the resident assessee owns, directly or indirectly, any voting power or equity interest or assets or interest in profits.

7 Instructions to ITR Form No. 2 for A.Y. 2021-22. Instructions to ITR Forms for A.Y. 2022-23 have not been issued.

C – Details of Immovable Property (including any beneficial interest):

What is to be reported?

Remarks:

Reporting under this table to cover, inter alia, the following:

– Immovable Property acquired by resident person while he was residing outside India.

– Immovable property held by expat employees.

– Guest house/Flat/Apartment/Bungalow purchased by the Indian Company outside India for the stay of Directors when on official visit outside India.

– Immovable property held pursuant to a gift/will.

Cost of immovable property acquired under a gift or will should be reported as per section 49 of the IT Act, i.e. at cost to the previous owner.

In case of purchase of under construction property, the same should be disclosed with a suitable note⁸.

In case of rental income from the immovable property, the amount under the column ‘income derived from the property’ and the amount of income offered in the return of income will differ due to the reporting requirement being for the calendar year 31st December, 2021.

8 In case of electronic return, there is no provision for filing notes to the return separately. However, this may be done by way of filing a letter to the jurisdictional Assessing Officer

D – Details of any other Capital Asset (including any beneficial interest):

What is to be reported?

Remarks:

Reporting under this part will inter alia include reporting of other assets such as bullions, cars, jewellery, jets, yacht, leasehold rights in land, etc.

Foreign Branch of an Indian Company is an extension of the head office and does not have its own legal existence. Therefore, the assets acquired by the foreign branch should be reported under this Part.

E – Details of accounts in which the resident person has signing authority (including any beneficial interest) and which has not been included in Part A to D above:

What is to be reported?

Remarks:

Reporting under this table to cover, inter alia, the following:

Bank accounts where the resident person is a signatory.

Bank account of companies of which resident individual is an employee and authorised signatory.

Bank accounts where the resident person is a joint holder.

F – Details of trusts created under the laws of a country outside India in which the resident person is a trustee, beneficiary or settlor:

What is to be reported?

Remarks:

If the trust is revocable, the income taxable in India in the hands of the Settlor should be disclosed.

If the trust is indeterminate, one will have to make the disclosure and report the details irrespective of whether the income is taxable in India.

The amount under the column ‘income derived’ will differ from the amount of income offered in the return of income.

G – Details of any other income derived from any source outside India which is not included in A to F above and income under the head business or profession:

Common observations in respect of all the above Tables

Since the reporting is for the calendar year ending 31st December, 2021, and the income accrued and offered for tax in the return of income is for the previous year 2021-22, the amount reported under Schedule FA and the amount offered as income in the return of income will not match;

Disclosure and reporting requirements should be complied with irrespective of whether the Foreign Income or Income from Foreign Asset is taxable during the assessment year.

WHAT ARE THE CONSEQUENCES OF NON-REPORTING?

Consequences under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“BMA”)

Tax

Undisclosed foreign income and asset are chargeable to tax at the rate of 30% of such undisclosed foreign income and asset.

Further, the income included in the total undisclosed foreign income and asset under the BMA shall not form part of the total income under the IT Act. The provisions of IT Act and BMA are mutually exclusive.

Penalty

Section 41 of the BMA deals with a penalty in relation to undisclosed foreign income and asset. As per section 41, a penalty of a sum equal to 3 times the amount of tax computed has been prescribed.

Section 42 of the BMA deals with a penalty for failure to furnish a return in relation to foreign income and asset. As per section 42 of the BMA, if a person fails to file the return of income in contravention to fourth proviso to section 139(1) of the Act, then the AO has the power to levy a penalty of Rs. 10 lakhs. The only exception being in respect of an asset being one or more bank accounts having an aggregate balance which does not exceed Rs. 5 lakh at any time during the previous year.

Section 43 of the BMA deals with a penalty for failure to furnish in return of income, an information or inaccurate particulars about foreign asset or foreign income. The penalty prescribed under the said section for the default is Rs. 10 lakhs, with the only exception being a case of an asset, being one or more bank accounts having an aggregate balance which does not exceed
Rs. 5 lakhs.

Prosecution

Section 49 of the BMA deals with punishment for failure to furnish a return in relation to foreign income and asset. The punishment prescribed is rigorous imprisonment for a term ranging from 6 months to 7 years and with a fine in case of willful failure to furnish return of income required to be furnished u/s 139(1).

In addition to the above consequences, non-disclosure of foreign assets and income could also attract penal consequences under the IT Act.

RECENT JUDICIAL VIEWS ON REPORTING OF FOREIGN ASSETS AND INCOME

[2022] 216 TTJ 905 (Mum.-Trib) Addl. CIT vs. Leena Gandhi Tiwari

A mere non-disclosure of a foreign asset in the IT return, by itself, is not a valid reason for a penalty under the Black Money Act.

The use of the expression “may” in section 43 of the BMA signifies that the penalty is not to be imposed in all cases of lapses and that there is no cause and effect relationship simpliciter between the lapse and the penalty. Imposition of penalty under s. 43 is at the discretion of the AO, but the manner in which this discretion is to be exercised has to meet well-settled tests of judicious conduct by even quasi-judicial authorities.

[2021] 193 ITD 141 (Mum.-Trib.) Rashesh Manhar Bhansali vs. Addl. CIT

It was inter alia, held that the point of time for taxation of undisclosed foreign asset under BMA is the point in time when such an asset comes to the notice of the Government and it is immaterial whether the said asset existed at the time of taxation or for that purpose even at the time when BMA came into existence.

CONCLUDING REMARK

A flurry of summons is being issued, wherein thousands of assesses have been caught for non-compliance with the disclosure requirements. It is time now that the reporting of foreign assets and income be undertaken with the utmost care, lest one face the stringent penal consequences under the IT Act and the BMA.

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S. 263 – Revision – Notice – the opportunity of hearing – distinguished Apex court decision in case of “CIT v/s. Amitabh Bachchan [2016] 384 ITR 200 (SC)”

6 Pr. Commissioner of Income Tax – 16 vs. M/s. Universal Music India Pvt. Ltd [Income Tax Appeal No. 238 OF 2018; Date of order: 19th April, 2022 (Bombay High Court)]

S. 263 – Revision – Notice – the opportunity of hearing – distinguished Apex court decision in case of “CIT v/s. Amitabh Bachchan [2016] 384 ITR 200 (SC)”

The Respondent had filed a return of income on 27th October, 2010 declaring income of ‘Nil’ for A.Y. 2009-2010. Subsequently, an assessment was completed under section 143(3) of the Act. Thereafter, notice under section 263 was issued by CIT on two issues, namely,

(a) disallowance of Fringe Benefit Tax (FBT) paid of Rs. 10,72,532/- included in miscellaneous expenses and not allowed by the Assessing Officer and

(b) provision of Rs. 1,40,98,685/- in respect of slow moving and obsolete inventories.

The CIT directed Assessing Officer by an order dated 20th March, 2013 to make enquiry and examine the two issues and a third issue being particulars of payments made to persons specified under Section 40A(2)(b) of the Act of Rs. 7,00,22,680 allowed in the assessment order. The assessment order was set aside on this issue and to be examined afresh.

Aggrieved by the order dated 20th March, 2013 passed by CIT, Assessee filed an Appeal before ITAT. ITAT by an order dated 27th April, 2016 allowed the Appeal of the Assessee.

On the issue of payments made to persons specified under Section 40A(2)(b) of the Act, the ITAT gave a finding of fact that no such issue was ever raised by CIT in the notice served upon the assessee and the assessee was not even confronted by the CIT before passing the Order dated 20th March, 2013. ITAT concluded that the said ground therefore cannot form the basis for revision of the assessment order under Section 263 of the Act. It is only this finding of ITAT which is impugned in the Appeal. On the other two points, revenue has accepted the findings of ITAT that the Order under Section 263 was not warranted.

The Dept. submitted that Apex Court in its judgment dated 11th May, 2016 (after the impugned order was pronounced by ITAT) in Commissioner of Income-Tax, Mumbai vs. Amitabh Bachchan [2016] 384 ITR 200 (SC), has held that the provisions of Section 263 does not warrant any notice to be issued and what is required is only to give the assessee an opportunity of being heard before reaching his decision and not before commencing the enquiry. Therefore it was submitted that, the ITAT has erred in setting aside the Order of CIT on this issue.

The Hon. High Court observed that it is true that the Apex Court in Amitabh Bachchan (supra) has held, all that CIT is required to do before reaching his decision and not before commencing the enquiry, CIT must give the assessee an opportunity of being heard. It is true that the judgment also says no notice is required to be issued. But in the case at hand, there is a finding of fact by the ITAT that no show cause notice was issued and no issue was ever raised by the CIT regarding payments made to persons specified under Section 40A(2)(b) of the Act before reaching his decision in the Order dated 20th March, 2013. If that was not correct, certainly the Order of the CIT would have mentioned that an opportunity was given and in any case, if there were any minutes or notings in the file, revenue would have produced those details before the ITAT.

In Amitabh Bachchan (supra), the Apex Court came to a finding that ITAT had not even recorded any findings that in the course of the suo motu revisional proceedings opportunity of hearing was not offered to the assessee and that the assessee was denied an opportunity to contest the facts on the basis of which the CIT had come to its conclusions as recorded in his Order under Section 263 of the Act.

In the present case, there is a finding by the Tribunal, as noted earlier, that no issue was raised by the CIT in respect of particulars of payment made to persons specified under Section 40A(2)(b) of the Act and even the show cause notice is silent about that.

In view of the same, the Hon. Court dismissed the appeal of the Department.

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Section 264 – Revision Application – Re-computation of capital gain due to subsequent event – Duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee

5 Dinesh Vazirani vs. The Principal Commissioner of Income Tax-7 [Writ Petition No. 2475 Of 2015; Date of order: 8th April, 2022 (Bombay High Court)]

Section 264 – Revision Application – Re-computation of capital gain due to subsequent event – Duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee

The Petitioner is an individual and resident of India. The Petitioner, along with two other individuals, and one company (collectively referred to as Promoters) was the promoter of a company by the name WMI Cranes Ltd (the Company). Petitioner held 2,35,900 equity shares out of 9,99,920 issued and paid up share capital of the company of Rs.10 each. Promoters entered into Share Subscription and Purchase Agreement (SPA) dated 11th October, 2010 with M/s Kone cranes Finance Corporation (Purchasers). Under the agreement, promoters agreed to sell 51% of the paid up and issued equity share capital of the company to the purchasers. Between the promoters, they held collectively 100% issued and paid up share capital of the company.

Simultaneously with SPA, the promoters and purchasers entered into second share purchase agreement (Second SPA) for the transfer of the remaining equity shares held by the promoters upon satisfaction of certain conditions under Second SPA so that at a future point of time, purchasers will hold 100% of the issued and paid up equity share capital of the company. SPA provided for a value of Rs. 155,00,00,000 as consideration to be paid to the promoters which effectively was working out to about Rs. 3212.31 per share. SPA also provided that out of Rs. 155,00,00,000 that was payable as sale consideration, a sum of Rs. 30,00,00,000 would be kept in escrow, based on which a separate escrow agreement was entered into between promoters, purchasers and the escrow agent. At the time of closure of the deal, promoters received Rs. 125,00,00,000 as sale consideration and the shares were transferred. Balance Rs. 30,00,00,000 was kept in escrow account. SPA provided for specific promoter indemnification obligations and it provides that if there is no liability as contemplated under the specific promoter indemnification obligations within a particular period, this amount of Rs. 30,00,00,000 would be released by the escrow agent to the promoters. SPA provides for escrow arrangement. The escrow account was to be in force for two years from the closing date.

Petitioner/Assessee filed his return of income for A.Y. 2011-2012 on 29th July, 2011 declaring income of Rs. 22,51,60,130. The return of income included Rs. 20,98,08,685 as long term capital gains on the sale of shares of the company. The capital gains was computed by Petitioner taking into account the proportion of the total consideration of Rs. 155,00,00,000, including the escrow amount of Rs. 30,00,00,000, which had not, by the time returns were filed, received by the promoters but still parked in the escrow account. The assessment was completed under section 143(3) of the Act and an order dated 15th January, 2014 was passed accepting total income as declared by the Petitioner.

It is Petitioner’s case and which has not been disputed that subsequent to the sale of the shares of the company, certain statutory and other liabilities arose in the company which was about Rs. 9,17,04,240, for the period prior to the sale of the shares. As per the agreement, this amount was withdrawn from the escrow account and promoters, therefore, did not receive this amount of Rs. 9,17,04,240.

As assessment had already been completed taxing the capital gains at higher amount on the basis of sale consideration of Rs. 155,00,00,000 and without reducing the consideration by Rs. 9,17,04,240, Petitioner/Assessee made an application to PCIT under section 264 of the Act. Petitioner submitted that the amount of Rs. 9,17,04,240 has been withdrawn by the company from the escrow account and, therefore, what petitioner received was lesser than what was mentioned in the return of income and, therefore, the capital gains needs to be recomputed reducing the proportionate amount from the amount deducted from the escrow account. Petitioner also pointed out that the application was being made under Section 264 of the Act because the withdrawal of the amount from the escrow account happened after the assessment proceedings for A.Y. 2011-2012 was completed and it was not possible for Petitioner to make such a claim before the assessing officer or even file revised returns. Petitioner, therefore, requested respondent no. 1 to reduce the long-term capital gains by Rs. 1,31,44,274 and further prayed for directions to the assessing officer to refund the excess tax paid. Petitioner also explained that the amount from the escrow account was never going to be recovered by the promoters under any circumstances and this resulted in reduction in the total realisation towards sale of company.

The PCIT by an order dated 13th February, 2015 passed under section 264 of the Act rejected Petitioner’s application holding:

(a) The Petitioner was entitled to receive consideration at Rs. 3,213.31 per share as per the purchase price defined in the agreement. From the said amount, only cost of acquisition, cost of improvement or expenditure incurred exclusively in connection with the transfer can be reduced to compute capital gains. The agreement between the seller and buyer for meeting certain contingent liability which may arise subsequent to the transfer cannot be considered for reduction from the consideration received i.e, at the rate of Rs. 3,213.31 per share in computing capital gains under Section 48 of the Act.

(b further held that in the absence of specific provision by which an assessee can reduce returned income filed by it voluntarily, the same cannot be permitted indirectly by resorting to provisions of Section 264 of the Act. PCIT further relied on the proviso to Section 240 of the Act which states that if an assessment is annulled the refund will not be granted to the extent of tax paid on the returned income. PCIT held that this shows that income returned by an assessee is sacrosanct and cannot be disturbed and even annulment of the assessment would not have impacted the suo motu tax paid on the return income.

(c) The contingent liability paid out of escrow account does not have the effect on “amount receivable” by the promoters as per the agreement which remains at Rs. 3,213.31 per share.

Aggrieved by the order the Petitioner filed Writ Petition before Hon. High Court.

The Hon. High Court held that the PCIT had erred in holding that the proportionate amount of Rs.9,17,04,240 withdrawn from the escrow account should not be reduced in computing capital gains of the petitioner. Capital gains is computed under Section 48 of the Act by reducing from the full value of consideration received or accrued as a result of transfer of capital asset, cost of acquisition, cost of improvement and cost of transfer. PCIT has erred in stating that only the cost of acquisition, cost of improvement and cost of transfer can be deducted from full consideration and, therefore, Petitioner is not entitled to the proportionate reduction. PCIT has failed to understand that the amount of Rs. 9,17,04,240 was neither received by the promoters nor accrued to the promoters, as the said amount was transferred directly to the escrow account and was withdrawn from the escrow account. When the amount has not been received or accrued to the promoters, the same cannot be taken as full value of consideration in computing capital gains from the transfer of the shares of the company.

The Hon. Court observed that PCIT had not understood the true intent and the content of the SPA. PCIT had not appreciated that the purchase price as defined in the agreement was not an absolute amount as the same was subject to certain liabilities which might arise to the promoters on account of certain subsequent events. The full value of consideration for computing capital gains, will be the amount which was ultimately received by the promoters after the adjustments on account of the liabilities from the escrow account as mentioned in the agreement.

PCIT had gone wrong in not appreciating that income or gain is chargeable to tax under the Act on the basis of the real income earned by an assessee, unless specific provisions provide to the contrary.

In the present case, the real income (capital gain) can be computed only by taking into account the real sale consideration, i.e., sale consideration after reducing the amount withdrawn from the escrow account. PCIT had proceeded on an erroneous understanding that the arrangement between the seller and buyer which results in some contingent liability that arises subsequently to the transfer, cannot be reduced from the sale consideration as per Section 48 of the Act. This is because the liability is contemplated in SPA itself and certainly the same should be taken into account to determine the full value of consideration. Therefore, if sale consideration specified in the agreement is along with certain liability, then the full value of consideration for the purpose of computing capital gains under Section 48 of the Act is the consideration specified in the agreement as reduced by the liability. PCIT observation that from the sale consideration only cost of acquisition, cost of improvement and cost of transfer can be reduced and the subsequent contingent liability does not come within any of the items of the reduction and the same cannot be reduced, is erroneous because full value of consideration under Section 48 would be the amount arrived at after reducing the liabilities from the purchase price mentioned in the agreement. Even if the contingent liability is to be regarded as subsequent event, then also the same ought to be taken into consideration in determining capital gain chargeable under Section 45 of the Act.

The Hon. Court did not agree with the findings of PCIT that the contingent liability paid out of escrow account does not affect the amount receivable as per the agreement for the purpose of computation of capital gains under Section 48 of the Act. Such reduced amount should be taken as full value of consideration for computing capital gains under Section 48 of the Act.

The Hon. Court further held that the assessee could file revised return of income within the prescribed period, to reduce the returned income or increase the returned income. Petitioner filed an application under Section 264 because the assessment under Section 143 had been completed by the time the amount of Rs. 9,17,04,240 was deducted from the escrow account. Section 264 of the Act, has been introduced to factor in such situation because if income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about hypothetical income which does not materialize. Section 264 of the Act does not restrict the scope of power of respondent no. 1 to restrict a relief to an assessee only up to the returned income. Where the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income even though an entry that might, in certain circumstances, have been made in the books of account. Therefore, PCIT ought to have directed the Assessing Officer to recompute income as per the provisions of the Act, irrespective of whether the computation results in income being less than returned income. It is the obligation of the revenue to tax an assessee on the income chargeable to tax under the Act and if higher income is offered to tax, then it is the duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee.

The court further observed that reliance by PCIT on the provisions of Section 240 of the Act to hold that there is no power on respondent no.1 to reduce the returned income, is fraught with error because the circumstances provided in the provisio to Section 240 indisputably do not exist in the present case. Provisio to Section 240 provides that in case of annulment of assessment, refund of tax paid by the assessee as per the return of income cannot be granted to the assessee, which is not the case at hand. There is no provision in the Act which provides, if ultimately assessed income is less than the returned income, the refund of the excess tax paid by the assessee would not be granted to such assessee. As regards the stand of PCIT that the income returned by petitioner is sacrosanct and cannot be disturbed, the only thing that is sacrosanct is that an assessee can be asked to pay only such amount of tax which is legally due under the Act and nothing more. If returned income shows a higher tax liability than what is actually chargeable under the Act, then the assessee is entitled to a refund of excess tax paid by it.

The order dated 13th February, 2015 passed by PCIT was quashed and set aside. The petitioner be entitled to refund of excess tax paid on the excess capital gains shown earlier. The Assessing Officer was directed to pass fresh assessment order on the basis that the capital gains on the transfer of the shares of the company should be computed after reducing proportionate amount withdrawn from the escrow account from the full value of the consideration and allow the refund of additional tax paid with interest.

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TDS — Certificate for non-deduction — Non-resident — DTAA —Lease of aircraft under agreement entered into in year 2016 — Assessee granted certificate for nil withholding tax for five years on the basis of agreement — Direction to withhold tax at 10 per cent On the basis of survey in case of group company for F.Y. 2021-22 — Unsustainable

28 Celestial Aviation Trading 64 Ltd vs. ITO(International Taxation) [2022] 443 ITR 441 (Del) A. Y.: 2021-22 Date of order: 12th November, 2021 S. 197 of ITA 1961: R. 28AA of IT Rules, 1962: Arts. 8 and 12 of DTAA between India and Ireland

TDS — Certificate for non-deduction — Non-resident — DTAA —Lease of aircraft under agreement entered into in year 2016 — Assessee granted certificate for nil withholding tax for five years on the basis of agreement — Direction to withhold tax at 10 per cent On the basis of survey in case of group company for F.Y. 2021-22 — Unsustainable

The assessee was a tax resident of Ireland and was in the business of aircraft leasing. On 21st October, 2016, the assessee entered into an agreement with a company AIL for lease of an aircraft for a period of 12 years. For the F.Ys. 2016-17 to 2020-21, the assessee made applications u/s. 197 of the Income-tax Act, 1961 for “nil” rate of withholding tax in respect of the lease rentals on the ground that under articles 8 and 12 of the DTAA between India and Ireland they were liable to pay tax only in Ireland. The Assessing Officer allowed the assessee to receive considerations from AIL without any tax deducted at source. For the F.Y. 2021-22, the assessee filed an application before the Income-tax Officer (International Taxation) requesting for issuance of “nil” withholding tax certificate or order in respect of the estimated consideration receivable from AIL under the agreement on a similar basis as before. However, the ITO issued an order prescribing 10 per cent as the withholding tax rate.

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

“i) The aspects which the Assessing Officer was obliged to take into consideration, while considering an application u/s. 197 had not been adverted to. The reasons proceeded only on the basis of any liability of another company IGL in the group on which survey was carried out and which was alleged to have evaded tax which might or might not be fastened upon the assessee. That by itself could not be a justification for denying the “nil” rate certificates to the assessee. The order was unsustainable and accordingly, quashed and set aside. The matter was remanded back to the Assessing Officer.

ii) In the interim period, the assessee was entitled to avail of the “nil” rate of withholding tax, as had been the position in the past several years consistently. Since the aircraft in question was leased to AIL for a period of 12 years, the interests of the Revenue was sufficiently protected in any eventuality of the assessee being found liable to payment of taxes, interest or penalty.”

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Revision — Limitation — Assessee filing and pursuing appeal mistakenly under section 248 resulting in delay in filing revision petition — Revision petition in time if the period spent in prosecuting appeal excluded — Matter remanded to Commissioner

27 KLJ Organic Ltd vs. CIT (IT) [2022] 444 ITR 62 (Del) A.Y.: 2018-19 Date of order: 18th February, 2022 Ss. 248 and 264 of ITA 1961 and S. 14 of Limitation Act, 1963

Revision — Limitation — Assessee filing and pursuing appeal mistakenly under section 248 resulting in delay in filing revision petition — Revision petition in time if the period spent in prosecuting appeal excluded — Matter remanded to Commissioner

For the A.Y. 2018-19, the Commissioner (International Taxation) rejected the revision petition filed by the assessee under section 264 of the Income-tax Act, 1961 due to the delay in filing the petition.

The assessee filed a writ petition submitting that under a bona fide mistake of law and relying on the earlier orders passed by the Income-tax Officer and the Commissioner (Appeals) in its favour on the similar issue, it had filed and pursued an appeal u/s. 248 under the belief that the order was appealable and hence the delay.

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

“If the time spent by the assessee in prosecuting the appeal u/s. 248 was excluded, the revision petition filed u/s. 264 would be within the limitation period. On the facts section 14 of the Limitation Act, 1963, was attracted and the assessee was entitled to exclusion of time spent in prosecuting the proceeding bona fide in a court without jurisdiction. The matter was remanded to the Commissioner (International Transactions) to decide on the merits.”

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Reassessment — Notice — Limitation — Exception where reassessment to give effect to order of Tribunal — Assessment not made for giving effect to any appellate order — No finding or recording of reason that income has escaped assessment on account of failure of assessee to disclose truly and fully all material facts — Notice and order rejecting objections unsustainable

26 Sea Sagar Construction Co. vs. ITO [2022] 444 ITR 385 (Bom) A.Ys.: 2001-02 to 2003-04 Date of order: 6th May, 2022 Ss. 147, 148, 149 and 150 of ITA, 1961

Reassessment — Notice — Limitation — Exception where reassessment to give effect to order of Tribunal — Assessment not made for giving effect to any appellate order — No finding or recording of reason that income has escaped assessment on account of failure of assessee to disclose truly and fully all material facts — Notice and order rejecting objections unsustainable

The assessee was in the construction business. The contractor from whom the assessee took over two projects followed the completed contract method of accounting. The Assessing Officer was of the view that a part of the income from the project should be assessed to tax based on the percentage completion method and reopened the assessments for the A.Ys. 2001-02, 2002-03 and 2003-04 u/s. 147 of the Income-tax Act, 1961 by issue of notice u/s. 148 dated 19th January, 2012. The objections filed by the assessee were rejected.

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

“i) There was no specific finding that income chargeable to tax had escaped assessment for the A.Ys. 2001-02, 2002-03 and 2003-04 nor was there a direction to the Assessing Officer to initiate reassessment proceedings u/s. 147 by issuing notices u/s. 148. On the contrary, the Tribunal had recorded specific findings that following the project completion method the assessee had offered income in respect of the project in the A.Y. 2003-04 which had been accepted by the Department. Once income was taxed in the A.Y. 2003-04 on the completion of the project, there could not be any question of taxing the same amount in the earlier years by applying a particular percentage on the amount of work-in-progress shown in the balance-sheet. Even assuming that the observations of the Tribunal could be stated to be a finding or a direction u/s. 150, still in view of the proviso to section 147, the reopening was not valid.

ii) From the observations of the Tribunal in its order there was some confusion with respect to whether the project completed in the A.Y. 2003-04 was the same project which was shown as work-in-progress in the A.Y. 2000-01 and thereafter, restoring the matter to the Assessing Officer for the limited purpose of ascertaining whether the two projects referred to in the assessment order of the A.Y. 2000-01 were part of the project completed in the A.Y. 2003-04 and offered for taxation in that year. This could not be stated to be either a finding or a direction as contemplated u/s. 150.

iii) There was nothing in the reasons recorded for reopening of the assessments to indicate that there was any escapement of income due to failure on the part of the assessee to truly and fully disclose material facts. Even otherwise after the order of the Tribunal was passed in the first round of litigation the Assessing Officer had passed a fresh assessment order making certain additions. An appeal was filed against the such order, which had been allowed during the pendency of these petitions. The Commissioner (Appeals) had held that considering the purpose for which the matter had been remanded by the Tribunal to the Assessing Officer, and the assessee’s explanation to the confusion in figures over which the matter was set aside and also the assessee’s proving the fact that there was no other project under work-in-progress in any of these assessment years except assignment of the development of sale to the societies, there was no justification in going beyond the directions of the Tribunal. The Tribunal had held that the Department had failed to bring on record any cogent incriminating material to controvert the contention of the assesse and had confirmed the order of the Commissioner (Appeals).

iv) Therefore, on the facts and circumstances, the notices issued u/s. 148 for the A.Ys. years 2001-02, 2002-03 and 2003-04 and the orders rejecting the objections raised by the assessee were unsustainable and hence quashed.”

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Reassessment — Notice — Limitation — Effect of sections 149, 282 and 282A — Date of issue of notice — Date when digitally signed notice is entered in computer

25 Daujee Abhushan Bhandar Pvt. Ltd vs. UOI [2022] 444 ITR 41 (All) A. Y.: 2013-14 Date of order: 10th March, 2022 Ss. 148, 149, 282 and 282A of ITA, 1961

Reassessment — Notice — Limitation — Effect of sections 149, 282 and 282A — Date of issue of notice — Date when digitally signed notice is entered in computer

The petitioner is a regular assessee. For the A.Y. 2013-14, the assessment was completed. Subsequently, the assessment was sought to be reopened. For this purpose, a notice under section 148 of the Income-tax Act, 1961 was digitally signed by the assessing authority on 31st March, 2021. It was sent to the assessee through e-mail and the e-mail was received by the petitioner on his registered e-mail id on 6th April, 2021. The petitioner filed objections before the assessing authority. One of the objections raised by the petitioner was that the notice is time-barred and thus without jurisdiction as it was issued on 6th April, 2021 whereas the limitation for issuing notice under Section 148 read with Section 149 of the Act, 1961 expired on 31st March, 2021. The objection was rejected by the assessing authority holding that since the notice was digitally signed on 31st March, 2021, therefore, it shall be deemed to have been issued within time, i.e., on 31st March, 2021.

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

“i) Sub-section (1) of section 149 of the Income-tax Act, 1961, starts with a prohibitory words that “no notice u/s. 148 shall be issued for the relevant assessment year after expiry of the period as provided in sub-clauses (a), (b) and (c)”, section 282 of the Act provides for mode of service of notices. Section 282A provides for authentication of notices and other documents by signing it. Sub-section (1) of section 282A uses the word “signed” and “issued in paper form” or “communicated in electronic form by that authority in accordance with such procedure as may be prescribed”. Thus, signing of notice and issuance or communication thereof have been recognised as different acts. The issuance of notice and other documents would take place when the e-mail is issued from the designated e-mail address of the concerned Income-tax authority. Therefore after a notice is digitally signed and when it is entered by the Income-tax authority in the computer resource outside his control, i.e., the control of the originator then that point of time would be the time of issuance of notice.

ii) Thus, considering the provisions of sections 282 and 282A of the Act, 1961 and the provisions of section 13 of the Information Technology Act, 2000 and the meaning of the word “issue” firstly the notice shall be signed by the assessing authority and then it has to be issued either in paper form or be communicated in electronic form by delivering or transmitting the copy thereof to the person therein named by the modes provided in section 282 which includes transmitting in the form of electronic record. Section 13(1) of the 2000 Act provides that unless otherwise agreed, the dispatch of an electronic record occurs when it enters into computer resources outside the control of the originator. Thus, the point of time when a digitally signed notice in the form of electronic record is entered in computer resources outside the control of the originator, i. e., the assessing authority that shall be the date and time of issuance of notice u/s. 148 read with section 149.

iii) The notice u/s. 148 of the Act for the A.Y. 2013-14 was digitally signed by the assessing authority on 31st March, 2021. It was sent to the assessee through e-mail and the e-mail was undisputedly received by the assessee on its registered e-mail id on 6th April, 2021. The limitation for issuing notice u/s. 148 read with section 149 of the Act, 1961 was up to 31st March, 2021 for the A.Y. 2013-14. Since, the notice u/s. 148 of the Act, 1961 was issued to the assessee on April 6, 2021 the notice u/s. 148 of the Act, 1961 was time barred. Consequently, the impugned notice is quashed.”

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HRA EXEMPTION FOR RENT PAID TO WIFE OR MOTHER

ISSUE FOR CONSIDERATION

An employee who is in receipt of House Rent Allowance (HRA) from his employer, and who incurs expenditure by way of rent on residential accommodation occupied by him, is entitled to claim an exemption of the HRA to the extent prescribed by rule 2A. By virtue of the explanation to Section 10(13A), the assessee is not entitled to such exemption if:

(a) the residential accommodation so occupied is owned by the assessee himself, or

(b) the assessee has not actually incurred any expenditure by way of rent on such accommodation occupied by him.

At times, it may so happen that the accommodation in which the employee is residing is owned by a close relative, either wife or a parent, who also resides in the same accommodation along with the assessee. The issue has arisen before the Tribunals as to whether the assessee is entitled to exemption for HRA under section 10(13A) in such circumstances, more so when the expenditure on rent is not adequately evidenced.

While the Ahmedabad and Delhi benches of the Tribunal has taken the view that an assessee cannot be denied the exemption under such circumstances, the Mumbai bench of the Tribunal has taken a contrary view, holding that the assessee was not entitled to the benefit of the exemption in such a case.

BAJRANG PRASAD RAMDHARANI’S CASE
The issue first came up before the Ahmedabad bench of the Tribunal in the case of Bajrang Prasad Ramdharani vs. ACIT 60 SOT 66 (Ahd)(URO).

In this case, the assessee had paid rent to his wife during the year, and claimed exemption under section 10(13A) of Rs 1,11,168 for House Rent Allowance. The Assessing Officer disallowed the assessee’s claim for exemption on the ground that the assessee had not given details of payment and evidences, and also on the basis that the assessee and his wife were living together. According to the Assessing Officer, the claim of payment of rent was just to avoid taxes, and to reduce the tax liability.

In first appeal, the assessee filed the requisite details and evidence before the Commissioner (Appeals). In the remand report sought by the Commissioner (Appeals) from the Assessing Officer, the Assessing Officer had commented that it was not ascertainable whether the assessee stayed at his wife’s house or at his own house, owned by him, which he had claimed exempt as self-occupied under Section 24. The Commissioner (Appeals) noted that the rent was paid by the assessee as a tenant to his wife, who was the landlord, and that the landlord and tenant were living together in the same house property. According to the Commissioner (Appeals), the very fact that they were staying together indicated that the whole arrangement was in the nature of a colourable device. The Commissioner (Appeals) therefore confirmed the disallowance of the HRA exemption.

Before the Tribunal, on behalf of the assessee, it was argued that a bare reading of the provision would make it amply clear that the assessee was entitled to exemption under Section 10(13A). It was pointed out that requisite details and evidences had been filed before the Commissioner (Appeals), who had called for a remand report from the Assessing Officer. It was submitted that the reasoning given by the Assessing Officer and the Commissioner (Appeals) in disallowing the exemption were different. Therefore, it was claimed that the authorities below grossly erred in not allowing the exemption.

On behalf of the revenue, reliance was placed on the orders of the lower authorities. It was pointed out that the Assessing Officer, in the remand report, had submitted that the assessee had claimed the house owned by him as self-occupied, and therefore disallowance of the assessee’s claim was justified.

The Tribunal noted that the Assessing Officer and the Commissioner (Appeals) had disallowed the claim of the assessee on the ground that the assessee and his wife were living together, and not on the ground that in the return of income, the house owned by the assessee was declared as self-occupied. There was only a mention of it in the remand report, where the Assessing Officer had commented that it was not ascertainable whether the assessee stayed at his wife’s house or at his own house which he claimed as self-occupied. Under these circumstances, according to the Tribunal, it only had to examine whether the assessee was entitled to the exemption under section 10(13A) or not.

The Tribunal analysed the provisions of section 10(13A). It pointed out that the exemption was not allowable in case the residential accommodation was owned by the assessee, or the assessee had not actually incurred expenditure on payment of rent in respect of the residential accommodation occupied by him.

It noted that the Assessing Officer had given a finding of fact that the assessee and his wife were living together as a family. Therefore, it could be inferred that the house owned by the assessee’s wife was occupied by the assessee also. The assessee had submitted rent receipts showing payments made by way of bank transfer.

Therefore, according to the Tribunal, the assessee had fulfilled the twin requirements of the provision; i.e. occupation of the house and payment of rent. The Tribunal therefore held that the assessee was entitled to the exemption under section 10(13A).

A similar case had come up recently before the Delhi bench of the Tribunal in the case of Abhay Kumar Mittal vs. DCIT 136 taxmann.com 78, where the Assessing officer had clubbed the rent paid by the assessee to his wife with the income of the assessee, on the ground that the property was purchased by the wife mainly out of funds borrowed from the assessee. The Commissioner (Appeals), besides confirming the addition, also disallowed exemption on HRA on such rent paid by the assessee to his wife. The facts were that the wife was a qualified medical practitioner, who had repaid the loan later by liquidating her investments.

The Tribunal noted in that case, that the assessee had paid house rent, and the wife had declared such income under the head “Income from House Property” in her returns of income. There was no bar on the assessee extending a loan to his wife from his known sources of income. The Tribunal expressly held that that the Commissioner (Appeals)’s contention that the husband cannot pay rent to his wife was devoid of any legal implication supporting any such contention, and therefore allowed HRA exemption to the assessee.

MEENA VASWANI’S CASE
The issue came up again before the Mumbai bench of the Tribunal in the case of Meena Vaswani vs. ACIT 164 ITD 120.

In this case, the assessee was a Chartered Accountant, working as a Senior Finance and Accounts Executive with a listed company. She had claimed exemption for HRA received from her employer under section 10(13A) of Rs 2,52,040 for A.Y. 2010-11 towards rent paid to her mother for a flat in Neha Apartments, owned by her mother. She also had a self-occupied property, a flat in Tropicana, in respect of which she claimed a loss on account of interest on housing loan of Rs 13,888, and deduction under section 80C for repayment of housing loan.

During the course of assessment proceedings under section 143(3), in October 2012, the Assessing Officer asked the assessee to show cause as to why HRA claimed as exempt should not be added to her income, and brought to tax.

The assessee submitted that she had paid a rent of Rs 31,500 per month to her mother in cash for her house in Neha Apartments, and was therefore entitled to the exemption.

The Assessing Officer observed that in her return of income, the assessee had shown her residential address as Tropicana. The same address appeared on her ration card as well as her bank account. The Assessing Officer noted that the assessee was claiming loss from self-occupied property, as well as claiming exemption under section 10(13A). The assessee was asked to furnish leave and licence agreement with respect to the Neha Apartments property taken on rent, and to explain the need for hiring a house property when another house property owned by the assessee was claimed as self-occupied.

The assessee submitted that while she had a self-occupied property at Tropicana jointly held with her husband, she had to live in her mother’s house at Neha Apartments, and pay her rent for her day-to-day living cost. She had no option but to live with her mother at Neha Apartments as her mother was a sick and single old lady. She paid rent so that none of the other siblings would raise any objection on her staying in Neha Apartments. It was claimed that her living in a rented premises was a purely family matter. Since the transaction was between daughter and mother, no formal agreement was executed. Rent receipts were however collected as evidence of payment of rent for income tax purposes. The assessee therefore claimed that she was entitled to the exemption under section 10(13A) for the HRA.

An inspector was deputed to make an enquiry to verify the assessee’s claim that she was living with her mother at Neha Apartments, and paying rent to her. The Inspector visited the Neha Apartments premises, and issued a summons to the mother, who was present there.

In his report, the Inspector noted that:

1. The mother was staying in the 1 Bedroom-Hall-Kitchen premises at Neha Apartments.

2. She had 3 daughters, of whom one daughter Vimla, who was unmarried, was staying in the flat with her mother.

3. Another daughter, the assessee, was staying with her husband and daughter at Tropicana.

4. The third daughter, Kamla, was staying at Thane.

The Inspector also visited the Tropicana premises, which was a walk of just five minutes away from Neha Apartments, and confirmed that the assessee was living there for the last many years with her husband and daughter. These facts were also confirmed with the watchmen and secretaries of the two societies.

The Assessing Officer observed that:

1. The assessee had herself submitted that she was living with her husband, who was also a Chartered Accountant, and a daughter, and that most of her household expenses were taken care of by her husband. There were not many withdrawals for household expenses, except payment of mobile bills.

2. The mother lived with her unmarried daughter in Neha Apartments, and not with the assessee.

3. The assessee could not produce the mother for examination before him, nor did the mother file any further details subsequent to the summons.

4. The mother had not filed any returns of income for the last six assessment years. In March 2013, subsequent to the enquiries made, a return of income of the mother was filed for the relevant year under assessment.

5. The mother was in receipt of pension income, and rental income ought to have been offered to tax by her, which was not done till enquiries were made.

6. There was no leave and licence agreement, or any other proof of stay by the assessee with her mother, and hence genuineness of payment of rent was not established.

The Assessing Officer therefore concluded that the assessee was neither staying in her mother’s flat, nor paying any rent to her, and therefore disallowed the assessee’s claim of exemption of HRA under section 10(13A).

Before the Commissioner (Appeals), the assessee submitted that:

1. Her unmarried sister, Vimla, did not stay with her mother, since she had her own ownership flat in another suburb.

2. The assessee had shifted to Tropicana during the previous year relevant to A.Y. 2013-14, from which year no HRA exemption was claimed.

3. The payment of rent pertained to A.Y. 2010-11, whereas the Inspector visited the premises in March 2013.

4. The statement of the watchman could not be relied upon, since the watchman changed every month.

5. The statement of the Secretaries of the two societies could not be treated as evidence, since the secretaries were neither authorized to keep constant watch on the movements of any members residing in or moving out, nor could their statements for past events be considered as evidence.

6. Even the Inspector did not record the statement of the mother during his visit.

It was therefore argued that the conclusions drawn by the Inspector were based on conjectures and surmise, and that no adverse inference could be drawn against the assessee without any supporting documentary evidence. It was claimed that the rent receipts were valid documentary evidence in support of the assessee’s claim for exemption of HRA under section 10(13A).

The Commissioner (Appeals) rejected the assessee’s claim that her unmarried sister was not staying with her mother as she had her own flat in another suburb, and that the assessee shifted to Tropicana in A.Y. 2013-14, on the ground that these were self-serving statements not supported by any evidence on record. The Commissioner (Appeals) placed reliance on the Inspector’s Report and the statements of Secretaries and Watchmen on the two societies, since they could not be rebutted by the assessee. Noting that no pressing need was shown by the assessee for living in a small flat with her mother while leaving her bigger flat (which was just five minutes walk away) with her family, the Commissioner (Appeals) held that the assessee failed to establish that she was staying with her mother and paying rent to her, and dismissed the assesee’s appeal.

Before the Tribunal, on behalf of the assessee, affidavits of the assessee and her mother were filed, stating the whole facts. Reiterating the facts as stated at the lower levels, and that the assessee’s mother was an old and sick lady, it was claimed that the assessee stayed with her mother, and had genuinely paid her rent.

On behalf of the Department, it was argued that the rent of Rs 31,500 per month being paid to mother was shown only to take exemption of HRA under section 10(13A). Rents were stated to have been paid in cash, and drawings from the bank account were minimal, as it was admitted that the household expenses were met by the husband. No leave and licence agreement was produced. There was no independent evidence of the assessee’s staying with her mother, and no intimation was given to the society about such stay. The mother had not filed her returns of income, and filed one return only after enquiries were made. The ration cards, bank statements and return of income showed Tropicana as the assessee’s place of residence, and not Neha Apartments. The Tropicana premises was shown as self-occupied property in the return of income. There was no evidence to support the fact that the unmarried sister Vimla was residing in her flat in another suburb. The mother did not respond to summons served on her, but had now filed an affidavit before the Tribunal. It was urged that such affidavit filed after four years should be rejected as it was filed before the Tribunal for the first time.

In the assessee’s rejoinder to the Tribunal, it was pointed out that there was no bar to payment of rent in cash. There was no requirement in law to inform the society about the assessee’s staying with her mother. Further, it was argued that even with the meagre pension and rent, the mother’s income was below the taxable limit, and she had no obligation to file her return of income. Further, no evidence had been asked for by the lower authorities to prove that the unmarried sister lived in her own property in another suburb.

The Tribunal analysed the facts of the case before it, including the Inspector’s Report. It noted that the assessee could not produce proof of cash withdrawals from her bank account to substantiate payments of rent made to her mother in cash. It observed that the affidavits filed by the assessee and her mother before it constituted additional evidences, for which no application was made for admission under rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. The facts stated in the affidavits had already been stated before the lower authorities.

The Tribunal observed that the rent receipts prepared by the assessee’s mother did not inspire confidence, as the assessee was not able to substantiate the source of the cash payments. According to the Tribunal, there were no other evidences available which related to the period when the transaction of hiring of the premises in the normal course was progressing. The Tribunal observed that the evidences at the time of transactions which are normal are relevant and cogent evidence to substantiate the assessee’s contentions. These facts are especially in the knowledge of the assessee, and the burden was on the assessee to bring out these evidences to substantiate her contentions that the rent paid was genuine.

The Tribunal noted that the assessee did not come forward with any evidence to substantiate her contentions, except rent receipts, which were not backed by any known sources of cash, as cash was not withdrawn from the bank. The Tribunal referred to Section 106 of The Indian Evidence Act, 1872, which provides that when any fact is especially within the knowledge of any person, the burden of proving that fact is upon him. Further, Section 6 of that Act provides that facts which, though not in issue, are so connected with a fact in issue so as to form part of the same transaction, are relevant, whether they occurred at the same time and place or at different times and places.

According to the Tribunal, the doctrine of res gestae would set in. The assessee could not produce any evidence arising in the normal course of happening of transaction of hiring of premises to prove that transaction of hiring of premises was genuine and was happening during the period. According to the Tribunal, no cogent evidence was brought on record which could substantiate that the assessee had taken the Neha Apartments premises on rent from her mother, as no evidence of her actually staying at the premises were brought on record. According to the Tribunal, the assessee was actually staying in her own flat in Tropicana, as per various evidences, which was also in consonance with normal human conduct of married Indian woman living with her husband and daughter in their own house.

The Tribunal noted that, even on the touchstone of preponderance of human probabilities, it was quite improbable that the assessee, a married lady, would leave her husband and daughter and start living with her mother at another flat just five minutes walk away, and pay a huge rent per month. According to the Tribunal, it was a different matter that the assessee may look after her sick and old mother by frequent visits, but this theory of rent as set out by the assessee did not inspire confidence, keeping in view the evidence produced before the Tribunal. The Tribunal observed that it was also probable that the assessee may have contributed towards looking after her old and ailing mother out of her salary, but that was not sufficient to claim exemption under section 10(13A).

Looking at the factual matrix, the Tribunal was of the considered view that the whole arrangement of rent payment by the assessee to her mother was a sham transaction, which was undertaken by the assessee with sole intention to claim exemption of HRA under section 10(13A) in order to reduce her tax liability. The Tribunal therefore held that exemption under section 10(13A) could not be allowed to the assessee.

OBSERVATIONS
If one examines the language of the explanation to Section 10(13A), it is clear that so long as the assessee has actually paid rent in respect of the premises occupied by him, and so long as the premises does not belong to the assessee himself, the benefit of exemption for HRA under section 10(13A) cannot be denied to him. There is no express prohibition on the premises being owned by a close relative, so long as rent is genuinely paid to that relative. As rightly pointed out by the Delhi bench of the Tribunal, there was no prohibition in law prohibiting payment of rent to the wife (or a close relative).

There is also no express prohibition on such landlord also occupying the premises along with the assessee, as his close relative. It is only that the assessee necessarily has to occupy the premises for his residence.

If one looks at the facts of Meena Vaswani’s case, the decision of the Tribunal was based on two important facts which the assessee was unable to prove with the help of contemporaneous evidence – the fact that she actually occupied the premises, and the fact that she had actually paid rent. Therefore, clause (b) of the explanation to Section 10(13A) was clearly attracted in that case, leading to the loss of exemption.

Therefore, the view taken by the Ahmedabad and Delhi benches of the Tribunal seems to be the better view, and that exemption for HRA would be available under section 10(13A) even if rent is paid to the wife or a close relative, who stays along with the assessee.

In any case, in case the property belongs to the wife or other close relative, who continues to reside therein along with the assessee who pays the rent, one needs to keep in mind that the matter may certainly invite closer inspection by the tax authorities as to whether such letting on rent is genuine, or just a sham, as in the case before the Mumbai bench of the Tribunal.

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Offences and prosecution — Condition precedent for prosecution — Wilful attempt to evade tax — Prosecution for failure to file the return of income — Payment of tax with interest by assessee acknowledged by Deputy Commissioner — No willful evasion of tax — Prosecution quashed

24 Inland Builders Pvt. Ltd vs. Dy. CIT [2022] 443 ITR 270 (Mad) A.Y.: 2014-15 Date of order: 25th August, 2021 Ss. 276C(2) and 276CC of ITA, 1961

Offences and prosecution — Condition precedent for prosecution — Wilful attempt to evade tax — Prosecution for failure to file the return of income — Payment of tax with interest by assessee acknowledged by Deputy Commissioner — No willful evasion of tax — Prosecution quashed

A complaint was filed against the assessee under section 276CC and 276C(2) of the Income-tax Act, 1961 on 5th October, 2017 on the ground that the assessee’s return for the A.Y. 2014-15 was defective for non-payment of self-assessment tax under section 140A before furnishing the return of income. The assessee submitted that the entire dues were paid with interest and furnished the details of payments. The final payment was made on 19th March, 2018.

The assessee filed a criminal writ petition for quashing the criminal proceedings and pointed out the entire tax dues have been paid with interest. The Madras High court allowed the petition and held as under:

“The offences alleged were only technical offences and there was no material to show that there was any deliberate and conscious evasion of tax on the part of the assessee. It had paid the entire amount of tax with interest and this was confirmed by the Deputy Commissioner. Therefore, the criminal proceedings were quashed.”

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Charitable purpose — Exemption — Disqualification where property of assessee made available for benefit of specified persons for inadequate consideration — Valuation of rent — Property of assessee let on rent in lieu of corpus donations — Burden to prove inadequacy of rent is on Department — Finding by Tribunal that rent received by assessee exceeded valuation adopted by Municipal Corporation for purpose of levying house tax — Deletion of addition by Tribunal not perverse

23 CIT(Exemption) vs. Hamdard National Foundation (India) [2022] 443 ITR 348 (Del) A.Ys.: 2007-08 to 2010-11 Date of order: 16th February, 2022 Ss. 11, 12, 13(2)(b) and 13(3) of ITA, 1961

Charitable purpose — Exemption — Disqualification where property of assessee made available for benefit of specified persons for inadequate consideration — Valuation of rent — Property of assessee let on rent in lieu of corpus donations — Burden to prove inadequacy of rent is on Department — Finding by Tribunal that rent received by assessee exceeded valuation adopted by Municipal Corporation for purpose of levying house tax — Deletion of addition by Tribunal not perverse

For the A.Y. 2007-08, the AO felt that the assessee had offered substantial concession in rent to the wakf and had let out two properties at a much lower rate as compared to the market rate in lieu of voluntary and corpus donations and therefore, invoked Section 13(2)(b) and Section 13(3) of the Income-tax Act, 1961 and denied exemption under section 11 and 12.

The Commissioner (Appeals) allowed the appeals of the assessee for the A.Ys. 2008-09 and 2010-11 but rejected the appeal for the assessment year 2009-10. For all the assessment years the Tribunal held that there was no justification for invoking the provisions of Section 13(2)(b) read with Section 13(3) by the Assessing Officer and allowed the assessee’s appeals.

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

“i) Though strictly speaking res judicata does not apply to Income-tax proceedings as each assessment year is a separate unit, in the absence of any material change justifying the Department to take a different view of the matter, the position of fact accepted by the Department over a period of time should not be allowed to be reopened unless the Department is able to establish compelling reasons for a departure from the settled position.

ii) U/s. 13(2)(b) of the Income-tax Act, 1961 the burden of showing that the consideration or rent charged by the assessee was not “adequate” is on the Department. Unless the price or rent was such as to shock the conscience of the court and to hold that it cannot be the reasonable consideration at all, it would not be possible to hold that the transaction is otherwise bereft of adequate consideration. It is necessary for the Assessing Officer to show that the property has been made available for the use of any person referred to in sub-section (3) of section 13 otherwise than for adequate consideration. In order to determine the consideration or rent, the context of the facts of the particular case need to be appreciated. For determining adequate consideration or rent, however, market rent or rate is not the sole yardstick but other circumstances also need to be considered.

iii) There was no perversity in the findings of the Tribunal that the Department had failed to bring on record any cogent evidence to show that the rent received by the assessee, in the facts of the case, was inadequate, that the material collected from the internet and the estate agents could not be termed as a corroborative piece of evidence and that the rent received by the assessee had exceeded the valuation adopted by the Municipal Corporation for the purpose of levying house tax.

iv) The contention of the Department that the Tribunal had failed to disclose the basis on which it arrived at the quantum of the standard rent could not be accepted in the absence of any determination to the contrary being even pleaded by the Department. Security deposit may be one of the factors to be taken into consideration by the Assessing Officer for coming to a conclusion if the rent was “adequate”, but it cannot be a sole determinative factor. The Assessing Officer except for relying upon the opinion as to rent from property broker firms and websites had not made any independent inquiry on the adequacy of the rent being charged by the assessee from the wakf and on the age and condition of the building of the assessee. It was not denied by the Department that the other property was not even ready during the A.Y. 2008-09 and was lying vacant. In the absence of any such inquiry by the Assessing Officer, the invocation of section 13(2)(b) was rightly rejected by the Tribunal. No question of law arose.

v) The Tribunal while considering appeals for various assessment years had concurred with the view taken by the Commissioner (Appeals) for the A.Y. 2008-09 and had placed reliance on that order taking reasoning therefrom. Therefore, the Tribunal had not erred in adopting the approach while considering the appeal for the A.Y. 2007-08.”

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Charitable purposes — Charitable trust — Exemption under section 11 — Meaning of education in section 2(15) — Dissemination of knowledge through museum or science parks constitutes education — Company formed by Government of India for establishing museum and science parks — Company setting up a museum for Reserve Bank of India and Municipal Corporation — Not activities for profit — Company entitled to exemption under section 11

22 Creative Museum Designers vs. ITO(Exemption) [2022] 443 ITR 173 (Cal) A.Ys.: 2013-14 to 2015-16 Date of order: 10th February, 2022 Ss. 2(15) and 11 of ITA, 1961

Charitable purposes — Charitable trust — Exemption under section 11 — Meaning of education in section 2(15) — Dissemination of knowledge through museum or science parks constitutes education — Company formed by Government of India for establishing museum and science parks — Company setting up a museum for Reserve Bank of India and Municipal Corporation — Not activities for profit — Company entitled to exemption under section 11

The assessee was a company registered under section 25 of the Companies Act, 1956 and was formed by the National Council of Science Museum, Ministry of Culture, GOI. The Council was formed by the Government of India for the dissemination of science and development of scientific temperament to the public and to ensure development of society and the country as well. The council established the assessee-company under section 25 of the Companies Act, 1956 whose very nature was charitable and its purpose is dissemination of knowledge to the Indian society. The assessee was engaged in the design and development of knowledge centres like science museums, planetariums, and other knowledge dissemination centres. The Reserve Bank of India proposed to establish a museum and financial literary centre in Kolkata to explain the development of the monetary system and to exhibit its collection of “artefacts’. There was a similar project conceived by the Surat Municipal Corporation. The RBI museums and financial literacy centre, were completed by the assessee with state-of-the-art facilities interactive galleries, trained professionals and handed over to the Reserve Bank of India on 17th September, 2018. On similar lines, Surat Municipal Corporation had awarded the task of establishing five galleries on textiles, astronomy, space, polar science and children learning activities, to educate the general public about the history of the development of textiles, study of astronomy through the ages, understanding space travel, understanding Earth’s poles and children’s interactive gallery. The assessee completed the project and handed it over to the Surat Municipal Corporation which threw it open to the public.

For the A.Ys. 2013-14, 2014-15, and 2015-16 the assessee claimed exemption under section 11 of the Income-tax Act, 1961 on the surplus which had been generated from these activities. The exemption was denied by the Assessing Officer, Commissioner (Appeals) and the Tribunal.

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

“i) The term “education” occurring of section 2(15) of the Income-tax Act, 1961, cannot be restricted to formal school or college education. The dissemination of knowledge through a museum or science park would undoubtedly fall within the meaning of “education”. Museums function as places for conservation research, education and entertainment for the general public. Thus, indisputably a museum is a place of informal and free choice education and learning. Museums offer educational experience in diverse fields, to be cherished and enjoyed. To reduce a “Master” curator to a contractor, is to belittle their role in preserving heritage. A museum is not constructed but conceived and developed. The object behind establishing a science centre is undoubtedly in public interest to educate the general public in an easy and attractive manner. To develop in young minds a love towards science, history, astronomy and various subjects also to educate the general public who might not have had formal education owing to circumstances beyond their control. To conceptualise a museum is a serious matter.

ii) The assessee had disseminated knowledge in the process of establishing the facilities for the RBI and the Surat Municipal Corporation. The assessee was a not-for-profit organisation but public utility company and the activities of the company for which it had been established would undoubtedly show that the company by establishing knowledge parks, engaged in imparting education and also undertook advancement of other aspects of general public utility to fall within the definition of charitable purpose as defined u/s. 2(15). The assessee was entitled to exemption u/s. 11.”

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Section 254: The Tribunal has jurisdiction to admit the additional grounds filed by the assessee to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee

19 ACIT vs. PC Jewellers Ltd [[2022] 93 ITR(T) 244(Delhi- Trib.)] ITA No.: 6649 & 6650 (DELHI) OF 2017 CONo. 68 & 74 (DELHI) OF 2020 A.Y.: 2013-14 & 2014-15; Date of order: 7th December, 2021

Section 254: The Tribunal has jurisdiction to admit the additional grounds filed by the assessee to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee

FACTS
In respect of the appeal filed before the ITAT by the department, the assessee had filed its cross objections and had raised additional grounds in the cross-objections. Admission of the additional grounds was opposed in principle by the Learned Departmental Representative.

HELD
The ITAT followed the judgment of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd vs. CIT[1998] 97 Taxman 358/229 ITR 383 and admitted the additional ground filed by the assessee.

The Hon’ble Apex court in the abovementioned case considered that the purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. The Hon’ble Apex Court also considered that the Tribunal will have the discretion to allow or not allow a new ground to be raised. There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). It was held that the Tribunal has jurisdiction to examine a question of law having a bearing on the tax liability of the assessee, although not raised earlier, which arises from the facts as found by the authorities below, in order to correctly assess the tax liability of an assessee.

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Section 68: When the assessee has been able to prove the identity of the Investor, its creditworthiness and genuineness of the transaction in the matter, there is no justification for the authorities to make or confirm the addition against the assessee under section 68 of the I.T. Act, 1961

18 Ancon Chemplast (P.) Ltd vs. ITO, Ward-2(4) [[2022] 93 ITR(T) 167(Delhi – Trib.)] ITA No.: 3562(DELHI) OF 2021 A.Y.: 2010-11; Date of order: 30th April, 2021

Section 68: When the assessee has been able to prove the identity of the Investor, its creditworthiness and genuineness of the transaction in the matter, there is no justification for the authorities to make or confirm the addition against the assessee under section 68 of the I.T. Act, 1961

FACTS
The assessee company issued shares at fair market value of Rs. 50 as per audited financial statements of the assessee company. The assessee received from one investor company M/s Prraneta Industries Ltd [Now known as Aadhar Venture India Ltd], a sum of Rs. 45 lakhs in three transactions dated 18.06.2009. Information in this case was received and perusal of the information revealed that the said Investor Company is one of the conduit company which is controlled and managed by ShriShirish C. Shah for the purpose of providing accommodation entries. The statement of Shri Omprakash Khandelwal, Promoter of the Company was recorded where he admitted to provide accommodation entries of the Investor Companies after charging Commission at the rate of 1.8%. Therefore, reasons were recorded and the Ld. A.O. initiated
the reassessment proceedings under section 147 of the Act.

To substantiate the facts that the assessee had received genuine share capital/premium, the assessee filed before A.O. documentary evidences such as copy of the confirmation, ITR Acknowledgement, copy of Board Resolution, copy of share application along with Share Application Form, copy of Master Data, Certificate of Incorporation and evidence in respect of listing of shares at BSE of Investor Company along with ITR and balance-sheet of the Investor. The assessee also submitted that Shri Omprakash Khandelwal, Director of the Investor Company retracted from his statement, and therefore there was no case of reopening its assessment on the basis of such statement.

The A.O. considering the modus operandi of these persons and did not accept the explanation of assessee to have received genuine share capital and made addition of Rs. 45 lakhs under section 68 of the I.T. Act and also made addition of Rs. 90,000 on account of Commission. Aggrieved, the assessee filed an appeal before the CIT(A), however, the appeal of the assessee was dismissed. Aggrieved, the assessee filed further appeal before the Tribunal.

HELD
The ITAT observed that the Investor Company was assessed to tax and was a listed public limited company, therefore, its identity was not in dispute. The assessee had also proved creditworthiness of the Investor Company and that entire transaction had taken place through a banking channel, therefore, genuineness of the transaction in the matter was also not in dispute. The assessee also explained before A.O. that Shri Shirish C. Shah was neither Director nor shareholder of the Investor Company. The A.O. had not brought any evidence on record to dispute the above explanation of the assessee. Therefore, the assessee had been able to prove the identity of the Investor, its creditworthiness and genuineness of the transaction in the matter.

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

i. INS Finance & Investment (P.) Ltd [IT Appeal No. 9266 (Delhi) of 2019, dated 29th October, 2020]

ii. Pr. CIT vs. M/s Bharat Securities (P.) Ltd (ITAT – Indore Bench later confirmed in Pr. CIT vs. M/s Bharat Securities (P.) Ltd [2020] 113 taxmann.com 32/268 Taxman 394 (SC)

These decisions considered identical issue on identical facts on account of share capital/premium received from M/s Prraneta Industries Ltd through Shri Shirish C. Shah based on his statement and statement of Shri Omprakash Khandelwal. This issue of receipt of share capital/premium was examined in detail by the Indore Bench of the Tribunal as well as Hon’ble Delhi Bench of the Tribunal and the addition on merits had been deleted.

The Order of the Indore Bench of ITAT was confirmed by the Hon’ble Madhya Pradesh High Court and ultimately, the SLP of the Department was dismissed confirming the Order of the Hon’ble Madhya Pradesh High Court.

Following these ITAT decisions, the ITAT did not find any justification to sustain the addition of Rs. 45 lakhs under section 68 of the I.T. Act, 1961 and addition of Rs. 90,000 under section 69C of the I.T. Act and deleted the addition of Rs. 45,90,000.

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Where under a joint venture agreement shares were issued to a resident venture and a non-resident venture at a differential price and the AO has not disputed or questioned the financial, technical and professional credentials of the venturists for entering into the joint ventures agreement, addition cannot be made under section 56(2)(viib) by disregarding the method of valuation adopted by the assessee

17 DCIT vs. Mais India Medical Devices (P.) Ltd [[2022] 139 taxmann.com 94 (Delhi-Trib.)] A.Y.: 2014-15; Date of order: 31st May, 2022 Section: 56(2)(viib), Rule 11UA

Where under a joint venture agreement shares were issued to a resident venture and a non-resident venture at a differential price and the AO has not disputed or questioned the financial, technical and professional credentials of the venturists for entering into the joint ventures agreement, addition cannot be made under section 56(2)(viib) by disregarding the method of valuation adopted by the assessee

FACTS
The assessee company was incorporated on 01.03.2012 on the basis of joint venture agreement between M/s Sysmech Industries LLP, a resident and M/s Demas Company, a non-resident. Both the joint venture partners agreed to contribute to the project cost of the assessee company in the ratio of 60 and 40 while keeping share holding ratio 50:50.

On the basis of valuation of equity shares at Rs. 59.99 per share following the DCF method assessee issued shares to non-resident shareholder at the rate of Rs. 60 per share after necessary compliances under FEMA etc. However, shares to the resident shareholder were issued at Rs. 40 per share.

The assessee filed return of income declaring loss of Rs. 2,97,79,141 and the case was picked up for limited scrutiny to furnish the various details including the share valuation as computed under Rule – 11UA of the Income Tax Rules, 1962.

Since the assessee company had suffered a loss in the previous assessment year, the Assessing Officer (AO) rejected the valuation of shares under DCF and made an addition, equivalent to the amount of premium charged from resident shareholder for allotment of shares to the Indian entity Sysmech Industries LLP, under section 56(2)(viib) in the hands of assessee.

Aggrieved, assessee preferred an appeal to the CIT(A) who set aside the order passed by the AO by making an observation that as projected in the report of prescribed expert there has been marked improvement in the profit margins of the company in subsequent years and thus upholding the valuation done by the chartered accountant of the assessee on DCF Method.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the AO rejected the share valuation as computed under Rule 11UA for the reason that the shares were issued to a resident shareholder for a price which was lower than the price at which shares were allotted to non-resident shareholder and also for the reason that, according to the AO, DCF method could not be applied since the assessee company had suffered a loss in the previous assessment year.

According to the Tribunal, difference in the share price as issued to the resident company and that to the non-resident company was in furtherance of the clauses of joint venture agreement. The discounted factor has occurred due to difference in the share of capital contribution to the project cost. However, in the case in hand the AO without considering the relevant clauses of joint ventures agreement presumed that as there was difference in the valuation of share for resident and non-resident entity, the valuation given by prescribed expert is liable to be rejected.

The Tribunal relying on the decision of the Supreme Court in Duncans Industries Ltd vs. State of UP 2000 ECR 19 held that question of valuation is basically a question of fact. Thus, where the law by virtue of Section 56(2)(viib) read with Rule 11UA (2)(b) makes the prescribed expert’s report admissible as evidence, then without discrediting it on facts, the valuation of shares cannot be rejected. It noted that the AO has not disputed or questioned the financial, technical and professional credentials of the venturists for entering into the joint ventures agreement. The AO without disputing the details of projects, revenue expected, costs projected has discredited the prescribed expert’s report which is admissible in evidence for valuation of shares and to determine fair market value.

The Tribunal dismissed the appeal filed by the revenue.

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There is no prohibition for the NRI for accepting gifts from relatives. In the absence of any prohibition, no adverse inference can be drawn against the assessee based on the prevailing system in society Merely the difference in the time between the cash deposited in the bank vis-à-vis cash received as gift cannot authorise the revenue authorities to draw inferences against the assessee until and unless some documentary evidences are brought on record contrary to the contentions of the assessee

16 Atul H Patel vs. ITO [TS-348-ITAT-2022(Ahd.)] A.Y.: 2012-13; Date of order: 29th April, 2022 Section: 68

There is no prohibition for the NRI for accepting gifts from relatives. In the absence of any prohibition, no adverse inference can be drawn against the assessee based on the prevailing system in society

Merely the difference in the time between the cash deposited in the bank vis-à-vis cash received as gift cannot authorise the revenue authorities to draw inferences against the assessee until and unless some documentary evidences are brought on record contrary to the contentions of the assessee

FACTS
During the year under consideration, a sum of Rs. 11,44,000 was deposited, in cash, in the bank account of the assessee, a non-resident Indian, residing at Auckland, New Zealand since 2003. The Assessing Officer (AO) treated the same as cash credit under section 68 and added the same to the total income of the assessee.

Aggrieved, assessee preferred an appeal to CIT(A) where he stated that he accepted gift of Rs. 6.44 lakh and Rs. 5 lakh from his father and brother which was used by him for purchasing a property in Vadodra. According to the assessee, his father and brother were engaged in agricultural activity on the land held by them in their personal capacity as well as on land belonging to others and were able to generate annual agricultural income of Rs. 23 lakh approx. The assessee produced cash book, bank book, 7/12 extract and gift deed.

The CIT(A) called for a remand report from the AO wherein the AO mentioned that the date of deposit of cash in bank account of assessee was before the date of gift as mentioned in the gift declaration. Thus, he contended that source of cash deposited cannot be out of gift amount. The assessee, in response, submitted that there was a typographical error in the gift declaration. 7th October, 2011 was inadvertently typed as 27th October, 2011.

The CIT(A) held that the assessee is a very unusual and wealthy NRI who has accepted a gift from his father and brother who are claimed to be agriculturists. According to him, the donors do not have sufficient resources and capacity to gift wealthy assessee. Also, there was a contradiction in the gift deed. Therefore, CIT(A) confirmed the order of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
As regards the mismatch of the time in the amount of cash deposits in the bank out of the gift received by the assessee, the Tribunal held that it was the revenue who doubted that the cash deposit is not out of the amount of gift received by the assessee. It held that the assessee has discharged his onus by submitting the details (including revised gift deed) that the cash was deposited out of the gift amount. Now the onus shifts upon the revenue to disprove the contention of the assessee based on documentary evidence. The Tribunal observed that no contrary evidence has been brought on record by the revenue suggesting that the amount of cash deposit is not out of the gift amount. It held that merely the difference in time between the cash deposited in the bank vis-à-vis cash received as gift cannot authorise the revenue authorities to draw inferences against the assessee until and unless some documentary evidences are brought on record contrary to the arguments of the assessee.

The Tribunal observed that admittedly it is very unusual that a wealthy NRI accepts a gift from his father and brother. Generally, the practice is different in society. As such NRIs give gifts to relatives. The Tribunal held that it found no prohibition for NRI for accepting gifts from relatives. In the absence of any prohibition, no adverse inference can be drawn against the assessee based on the prevailing system in society.

It also noted that assessee has furnished sufficient documentary evidence of his father and brother to justify the income in their hands from agricultural activity. But none of the authority below has made any cross verification from the concerned parties in order to bring out the truth on the surface. It held that AO before drawing any adverse inference against the assessee, should have cross verified from the donors by issuing notice under section 133(6) / 131 of the Act. The Tribunal held that no adverse inference can be drawn against the assessee by holding that the amount of cash deposited by the assessee in his bank represents the unexplained cash credit under section 68 of the Act.

The Tribunal set aside the order passed by the CIT(A) and directed the AO to delete the addition made by him.

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Non-compete fees does not qualify for depreciation under section 32 since an owner thereof has a right in personam and not a right in rem

15 Sagar Ratna Restaurants Pvt. Ltd vs. ACIT [TS-325-ITAT-2022(DEL)] A.Y.: 2014-15; Date of order: 31st March, 2022 Section: 32

Non-compete fees does not qualify for depreciation under section 32 since an owner thereof has a right in personam and not a right in rem

FACTS
For Assessment Year 2014-15, assessee filed a return of income declaring a loss of Rs. 23,12,53,397. While assessing the total income, the Assessing Officer (AO) noticed that the assessee has claimed Rs. 1,94,33,166 as depreciation on non-compete fees. Since the AO was of the view that non-compete fee is not an intangible asset as per Section 32(1)(ii) and Explanation thereto, he asked the assessee to show cause why the same should not be disallowed. The AO following the ratio of the decision of Delhi High Court in Sharp Business Systems vs. CIT [(2012) 211 Taxman 567 (Del)] disallowed the claim of depreciation on non-compete fees.

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 that by an agreement entered in June 2011 the assessee acquired a restaurant in the name and style of Sagar Ratna. As per the terms of the agreement, the transferor had transferred all its rights, copyrights, trademarks, etc. in respect of the restaurant Sagar Ratna. The payment made by the assessee towards non-compete fee to the transferor was treated by the assessee as a capital expenditure and depreciation was claimed thereon for A.Y. 2012-13 and 2013-14 which was allowed.

The contention of the assessee that the claim be allowed on the ground that it has been allowed in the earlier years was rejected on the ground that in earlier years the authorities did not have the benefit of ratio laid down by jurisdictional high court in the case of Sharp Business System (supra).

The Tribunal noted that the Delhi High Court in Sharp Business System (supra) while dealing with an identical issue has come to a conclusion that non-compete fee though is an intangible asset it is unlike the items mentioned in Section 32(1)(ii) where an owner can exercise rights against the world at large and which rights can be traded or transferred. In case of non-compete fees the advantage is restricted only against the seller. Therefore, it is not a right in rem but a right in personam. The Tribunal mentioned that it is conscious of the fact that some other non-jurisdictional High Courts have held that non-compete fee is an intangible asset coming within the ambit of Section 32(1)(ii) of the Act and have allowed depreciation thereon, however, the Tribunal was bound to follow the decision of the jurisdictional High Court.

The Tribunal dismissed the appeal filed by the assessee.

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RECENT AMENDMENTS IN TAXATION OF CHARITABLE TRUSTS

BACKGROUND

There have been significant amendments in the provisions of the Income-tax Act (Act) relating to taxation of Charitable Trusts. Our Finance Minister, Smt. Nirmala Sitharaman, started this process when she presented the Union Budget on 1st February, 2020. Since then, in her successive Budgets presented in 2021 and 2022, many significant amendments have been made. All these amendments have increased the compliance burden of the Charitable Trusts. In this Article, Public Charitable Trusts and Public Religious Trusts claiming exemption under sections 11, 12 and 13 of the Act are referred to as “Charitable Trusts”. Further, Universities, Educational Institutions, Hospitals etc., claiming exemption under section 10 (23 C) of the Act, are referred to as “Institutions”. Some of the important amendments made in the taxation provisions relating to Charitable Trusts and Institutions are discussed in this article.

REGISTRATION OF TRUSTS
Before the recent amendments, Institutions claiming exemption under section 10(23C) of the Act were required to get approval from the designated authority (Principal Commissioner or a Commissioner of Income-tax). The procedure for this was provided in section 10(23C). The approval, once granted, was operative until cancelled by the designated authority. For other Charitable Trusts, the procedure for registration was provided in section 12AA. Registration, once granted, continued until it was cancelled by the designated authority. The Charitable Trusts and other Institutions were entitled to get approval under section 80G from the designated authority. This approval under section 80G was valid until cancelled by the designated authority. On the strength of the certificate under section 80G the donor to the Charitable Trust or other Institutions could claim a deduction in the computation of his income for the whole or 50% of the donations as provided in section 80G. The Finance Act, 2020 has amended sections 10(23C), 11, 12A, 12AA and 80G and inserted section 12AB to completely change the procedure for registration of Trusts. These provisions are discussed below.

1. NEW PROCEDURE FOR REGISTRATION
(i) A new section 12AB is inserted effective from 1st October, 2020. This section specifies the new procedure for registration of Charitable Trusts. Similarly, section 10(23C) is also amended and a similar procedure, as stated in section 12AB, has been provided. All the existing Charitable Trusts and other Institutions registered under section 10(23C) or 12AA will have to apply for fresh registration under the new provisions of section 10(23C) / 12AB within 3 months i.e. on or before 31st December, 2020. By CBDT Circular No. 16 dated 29th August, 2021, this date was extended up to 31st March, 2022. The fresh registration will be granted for 5 years. Thereafter, all Institutions / Trusts claiming exemption under section 10(23C)/11, will have to apply for renewal of registration every 5 years. For this purpose, the application for registration is to be made in Form No. 10A. The application for renewal of registration is to be made in Form No. 10AB.

(ii) Existing Charitable Trusts and Institutions have to apply for fresh registration under section 12AB or 10(23C) on or before 31st March, 2022. The designated authority will grant registration under section 12AB or 10(23C) for 5 Years. This order is to be passed within 3 months from the end of the month in which application is made. Six months before the expiry of the above period of 5 years, the Trusts/Institutions will have to again apply to the designated authority
for renewal of Registration which will be granted for a period of 5 years. This order has to be passed by the designated authority within six months from the end of the month when the application for renewal is made.

(iii) For new Charitable Trusts or Institutions the following procedure is to be followed:

(a) The application for registration in the prescribed form (Form No. 10AB) should be made to the designated authority at least one month prior to the commencement of the previous year relevant to the assessment year from which the registration is sought.

(b) In such a case, the designated authority will grant provisional registration for a period of 3 assessment years. The order for provisional registration is to be passed by the designated authority within one month from the last date of the month in which the application for registration is made.

(c) Where such provisional registration is granted for 3 years, the Trust/Institution will have to apply for renewal of registration in Form No. 10AB at least 6 months prior to expiry of the period of the provisional registration or within 6 months of commencement of its activities, whichever is earlier. In this case, designated authority has to pass order within 6 months from the end of the month in which application is made. In such a case, renewal of Registration will be granted for 5 years.

(iv) Section 11(7) is amended to provide that the registration of the Trust under section 12A/12AA will become inoperative from the date on which the trust is approved under section 10(23C)/10(46) or on 1st June, 2020 whichever is later. In such a case, the trust can apply once to make such registration operative under section 12AB. For this purpose, the application for making registration operative under section 12AB will have to be made at least 6 months prior to the commencement of the assessment year from which the registration is sought. The designated authority will have to pass the order within 6 months from the end of the month in which application is made. On making such registration operative, the approval under section 10(23C)/10(46) shall cease to have effect. Effectively, a trust now has to choose between registration under section 10(23C)/10(46) and section 12AB.

(v) Where a Trust or Institution has made modifications in its objects and such modifications do not conform with the conditions of registration, application should be made to the designated authority within 30 days from the date of such modifications.

(vi) Where the application for renewal of registration is made, as stated above, the designated authority has power to call for such documents or information from the Trust / Institution or make such inquiry in order to satisfy about (a) the genuineness of the Trust / Institution and (b) the compliance with requirements of any other applicable law for achieving the objects of the Trust or institution. After satisfying himself, the designated authority will grant renewal of registration for 5 years or reject the application after giving hearing to the trustees. If the application is rejected, the Trust or Institution can file an appeal before ITA Tribunal within 60 days. The designated authority also has power to cancel the registration of any Trust or Institution under section 12AB on the same lines as provided in the existing section 12AA. All applications for Registration pending before the designated authority as on 1st April, 2021 will be considered as applications made under the new provisions of section 10(23C)/12AB.

1.1 Section 80G(5)
Proviso to Section 80G(5)(vi) is added from 1st October, 2020. Prior to this date, certificate granted under section 80G was valid until it was cancelled. Now, this provision is deleted and a new procedure is introduced. Briefly stated, this procedure is as under.

(i) Where the trust/institution holds a certificate under section 80G, it will have to make a fresh application in the prescribed form (Form No. 10A) for a new certificate under that section on or before 31st March, 2022. In such a case, the designated authority will give a fresh certificate which will be valid for 5 years. The designated authority has to pass the order within 3 months from the last date of the month in which the application is made.

(ii) For renewal of the above certificate, application in Form 10AB will have to be made at least 6 months before the date of expiry of such certificate. The designated authority has to pass the order within 6 months from the last date of the month in which the application is made.

(iii) In a new case, the application for a certificate under section 80G will be required to be filed at least one month prior to commencement of the previous year relevant to the assessment year for which the approval is sought. In such a case, the designated authority will give provisional approval for 3 years. The designated Authority has to pass the order within one month from the last date of the month in which the application is made. In such a case, the application is to be filed in Form No. 10AB. By CBDT Circular No. 8 of 31st March, 2022, the date for filing such an application in Form 10AB is extended to 30th September, 2022.

(iv) In a case where provisional approval is given, an application for renewal will have to be made in Form No. 10AB at least 6 months prior to the expiry of the period of provisional approval or within 6 months of commencement of the activities by the trust/ institution whichever is earlier. In this case, the designated authority has to pass the order within six months from the last date of the month in which application is made.

In case of renewal of approval, as stated in (ii) and (iv) above, the designated authority shall call for such documents or information or make such inquiries as he thinks necessary in order to satisfy that the activities of the trust/institution are genuine and that all conditions specified at the time of grant of registration earlier have been complied with. After he is satisfied, he shall renew the certificate under section 80G. If he is not so satisfied, he can reject the application after giving a hearing to the trustees. The trust/institution can file an appeal to ITAT within 60 days if the approval under section 80G is rejected.

1.2 Section 80G(5)(viii) and (ix)
(i) Clauses (viii) and (ix) are added in Section 80G(5) from 1st April, 2021 to provide that every trust/institution holding section 80G certificate will be required to file with the prescribed Income-tax Authority particulars of all donors in the prescribed Form No. 10BD on or before 31st May following the Financial Year in which Donation is received. The first such statement had to be filed for the F.Y. 2021-22. The trust/institution also has to issue a certificate in the prescribed Form No. 10BE to the donor about the donations received by the trust/institution. Such certificates are generated from the Income-tax portal after filing the Form 10BD. The donor will get deduction under section 80G only if the trust/institution has filed the required statement with the Income-tax Authority and issued the above certificate to the donor. In the event of failure to file the above statement or issue the above certificate to the donor within the prescribed time, the trust / institution will be liable to pay a fee of Rs. 200 per day for the period of delay under new section 234G. This fee shall not exceed the amount in respect of which the failure has occurred. Further, a penalty of Rs. 10,000 (minimum), which may extend to Rs. 1 Lakh (Maximum), may also be levied for the failure to file details of donors or issue a certificate to donors under the new section 271K.

(ii) It may be noted that the above provisions for filing particulars of donors and issue of a certificate to donors will apply to donations for scientific research to an association or company under section 35(1)(ii)(iia) or (iii). These sections are also amended. Provisions for levy of fee or penalty for failure to comply with these provisions will also apply to the Company or Association, which received donations under section 35. As stated earlier, the donor will not get a deduction for donations as provided in section 80GG if the donee company or association has not filed the particulars of donors or not issued the certificate for donation.

(iii) Further, there is no provision for filing an appeal before CIT(A) or ITAT against the levy of fee under section 234G.

1.3 Audit Report
Sections 12A and 10(23C) are amended, effective from 1st April, 2020 to provide that the Audit Reports in Form 10B or 10BB for A.Y. 2020-21 (F.Y. 2019-20) and subsequent years shall be filed with the tax authorities one month before the due date for filing the return of income

1.4 Corpus Donation To Charitable Trust or Institutions
(i) A Corpus donation given by an Institution claiming exemption under section 10 (23C) to a similar institution claiming exemption under that section was not considered as application of income under that section. By an amendment of this section, effective from 1st April, 2020, the scope of this provision is enlarged and a Corpus Donation given by such an institution to a Charitable Trust registered under section 12A, 12AA or 12AB will not be considered as application of income under section 10(23C).

(ii) Similarly, section 11, provided that Corpus Donation given by a Charitable Trust to another Charitable Trust registered under section 12A or 12AA was not considered as an application of income. This section is also amended, effective from 1st April, 2020, to provide that Corpus Donation by a Charitable Trust to an Institution approved under section 10(23C) will not be considered as application of income.

(iii) It may be noted that Section 10(23C) is amended, effective from 1st April, 2020, to provide that, subject to the above exceptions, any Corpus Donation received by an Institution approved under that section will not be considered as income. This provision is similar to the existing provisions in sections 11 and 12.

2. AMENDMENTS MADE BY THE FINANCE ACT, 2021:
The Finance Act, 2021, has further amended the provisions relating to Charitable Trusts and Institutions claiming exemption under section 10(23C) and 11. These amendments are as under:

2.1 Enhancement In The Limit Of Receipts Under Section 10(23C)
At present, an Education Institution or Hospital etc, as referred to in section 10 (23C) (iiiad) and (iiiae) is not taxable if the aggregate annual receipts of such institution does not exceed Rs. 1 Crore. If this limit is exceeded, the institution is required to obtain approval under section 10(23C) (vi) or (via). This section is amended, effective from F.Y. 2021-22 (A.Y. 2022-23), to provide that the above exemption can be claimed if the aggregate annual receipts of a person from all such Institutions does not exceed Rs. 5 Crore.

2.2 Accounting Of Corpus Donation and Borrowed Funds
Hitherto, Corpus Donations received by a Charitable Trust or Institution Claiming exemption under section 10(23C) or 11 are not treated as Income and hence exempt from tax. No conditions are attached with reference to the utilization of this amount. These sections are amended effective from 1st April, 2021 as under:-

(a) Corpus Donation received by a charitable trust or institution will have to be invested or deposited in the specified mode of investment such as in Bank deposit or other specified investments as stated in section 11(5). Further, they should be earmarked separately as Corpus Investment or Deposit.

(b) Any amount withdrawn from the above Corpus Investment or Deposit and utilised for the objects of the Trust will not be considered as application of income for the objects of the trust or institution for claiming exemption. Therefore, if a Charitable trust withdraws Rs. 5 Lakhs from the investments in which Corpus Donation is deposited and utilizes the same for giving relief to poor persons affected by floods, this amount will not be counted for calculating 85% of income required to be spent for the objects of the Trust.

(c) If the Trust deposits back the said amount in the Corpus Investments in the same year or any subsequent year from its other normal income, such amount will be considered as application of income for the objects of the trust in the year in which such amount is reinvested.

(d) It is also provided that if the Charitable Trust or Institution borrows money to meet its requirement of funds, the amount utilised for the objects of the Trust or Institution, out of such borrowed funds, will not be considered as application of income for the objects of the Trust or Institution. When the borrowed monies are repaid, such repayment will be considered as application of income for the objects of the Trust or Institution.

(e) It will be noted that the above amendments will raise some issues relating to accounting of Corpus Donations and Borrowed Funds. The Trusts and Institutions will have to open a separate bank account for Corpus donations and Borrowed Funds and will have to keep a separate track of these Funds.

2.3 Set Off of Deficit of Earlier Years
One more amendment affecting the Charitable Trusts or institutions is very damaging. It is provided that if the trust or institution has incurred expenditure on the objects of the trust in excess of its income in any year, the deficit representing such excess expenditure will not be allowed to be adjusted against the income of the subsequent year. Hitherto, such adjustment was allowed in view of several judicial decisions, which are now overruled by this amendment. In view of this provision, accumulated excess expenditure of earlier years incurred upto 31st March, 2021 will not be available for set-off against the income of F.Y. 2021-22 and subsequent years.

3. AMENDMENTS MADE BY THE FINANCE ACT, 2022
Significant amendments are made in Sections 10(23C),11,12 and 13 of the Income-tax Act by the Finance Act, 2022. These amendments are as under:

3.1 Institutions Claiming Exemptions Under Section 10(23C)
Section 10(23C) granting exemption to specified Institutions is amended as under:

(i) Section 10(23C)(v) grants exemption to an approved Public Charitable or Religious Trust. 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 renovation or repair of these places of worship, the Trust will have an option to treat such contribution as part of the Corpus of the Trust. There is no requirement of a specific direction towards corpus from the donor for such donations. It is also provided that this Corpus amount shall be used only for this specified purpose, and the amount not utilised 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 is applicable 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 Section11 in respect of Charitable or Religious Trusts claiming exemption under Section 11 of the Act.

(ii) At present, an Institution claiming exemption under Section 10(23C) is required to utilize 85% of its income every year. If this is not possible, it can accumulate the unutilised income for the next 5 years and utilise the same during that period. However, there is no provision for any procedure to be followed for such accumulation. The amendment of Section 10(23C), effective from A.Y. 2023-24 (F.Y. 2022-23), now provides that the Institution should apply to the A.O. in the prescribed form before the due date for filing the Return of Income for accumulation of unutilised income within 5 years. The Institution has to state the purpose for which the Income is being accumulated. By this amendment, the provisions of Section 10(23C) are brought in line with the provisions of Section 11(2) of the Act.

(iii) At present, Section 10(23C) provides for an audit of accounts of the Institution. By amendment of this Section, 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. A similar amendment is made in section 12A. Such accounts will have to be audited by a Chartered Accountant, 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 inquiry and after giving opportunity to the Institution cancel the Approval or Provisional Approval. The term “Specified Violations” is defined in this amendment.

(v) By another amendment of Section 10(23C), effective from A.Y. 2023-24 (F.Y. 2022-23), it is provided that the Institution shall file its Return 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, tax will be charged at the rate of 30% plus applicable surcharge and Cess under Section 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 under Section 12AA or 12AB. Now, effective from A.Y. 2023-24 (F.Y. 2022-23), the provisions of Section 115TD will also apply to any Institution, claiming exemption under Section 10(23C). Section 115TD provides that if the Institution loses exemption under section 10(23C) due to cancellation of its approval or conversion into non-charitable organization for other reasons the market value of all its assets, after deduction of liabilities, will be liable to tax at the maximum marginal rate.

3.2 Charitable Trusts Claiming Exemption Under Section 11
Sections 11, 12 and 13 of the Act provide for exemption to Charitable Trusts (including Religious Trusts) registered Under Section 12A, 12AA or 12AB of the Act. Some amendments are made in these and other sections as stated below:

At present, if a Charitable Trust is not able to utilize 85% of its income in a particular year, it can apply to the A.O. for permission for accumulation of such income for 5 years. If any amount out of such accumulated income is not utilised for the objects of the Trust upto 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.

If a Charitable Trust is maintaining accounts on 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 paid in that year. If it is paid in a subsequent year, it will be considered as application of income in the subsequent year. A similar amendment is made in Section 10 (23C) of the Act.This amendment will come into force from A.Y. 2022-23 (F.Y. 2021-22).

Section 13 deals with the circumstances in which exemption under Section 11 can be denied to the Charitable Trusts. Currently, 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 the rate of 30% plus applicable surcharge and cess under section 115BBI.

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 under Section 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 to the extent of such prohibited investments. Tax on such income will be chargeable at 30% plus applicable surcharge and Cess.

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 an opportunity to the Trust cancel its Registration. The term “Specified Violations” is defined by this amendment.

3.3 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 the rate of 30% plus applicable Surcharge and Cess. This rate of tax will apply to Registered Charitable Trusts, Religious Trust, Institutions, etc., claiming exemption under Section 10(23C) and 11 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 of 5 years and is deemed to be the income of the year when such period expires.

(iii) Income which is not exempt under Section 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 than what is provided in Section 11(5) etc.

(iv) Income which is not excluded from the Total income of a Charitable Trust under Section 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 under Section 11(1) (c). This refers to income of the Trust applied to objects of the Trust outside India.

3.4 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 under Section 10(23C) or a Charitable Trust claiming exemption under Section 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 A.O. 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.

4. TO SUM UP
4.1 The provisions granting exemption to Charitable Trusts and Institutions are made complex by the above amendments made by three Finance Acts passed in 2020, 2021 and 2022. When the present Government is propagating ease of doing business and ease of living, it has made the life of such Trustees more difficult. The effect of these amendments will be that there will be no ease of doing Charities. In particular, smaller Charitable Trusts and Institutions will find it difficult to comply with these procedural and other requirements. The compliance burden, including cost of compliance, will considerably increase. The Trustees of Charitable Trusts and Institutions are rendering honorary service. To put such onerous burden on such persons is not at all justified. If the Government wants to keep a track on the activities of such Trusts, these new provisions relating to renewal of Registration, renewal of Section 80G Certificates etc., should have been made applicable to Trusts having net worth exceeding Rs. 5 Crore or Trusts receiving donations of more than Rs. 1 Crore every year. Further, the provisions for filing details of Donors and giving Certificates to Donors in the prescribed form should have been made mandatory only if the aggregate donation from a Donor exceeds Rs. 5 Lakhs in a year.

4.2 Some of the amendments made by the Finance Act, 2022 are beneficial to the Charitable Trusts and Institutions. However, the manner in which the amendments are worded creates a lot of confusion. To simplify these provisions, it is now necessary that a separate Chapter is devoted in the Income-tax Act and all provisions of Sections 10(23C), 11, 12,12A, 12AA, 13 etc., dealing with exemption to these Trusts and Institutions are put under one heading. This Chapter should deal with the provisions for Registration, Exemption, Taxable Income, Rate of Tax, Interest, Penalty etc., applicable to such Trusts and Institutions. This will enable persons dealing with Charitable Trusts and Institutions to know their rights and obligations.

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DEDUCTIBILITY OF EXPENDITURE INCURRED BY PHARMACEUTICAL COMPANIES FOR PROVIDING FREEBIES TO MEDICAL PRACTITIONERS UNDER SECTION 37 (Part 2)

INTRODUCTION

9.1 As mentioned in para 1.2 of Part I of this write-up (BCAJ May, 2022), the said Explanation to section 37(1) provides for disallowance of certain expenses. These are popularly known as illegal/prohibited expenses. As further mentioned in para 1.3 of Part I of this write-up, the MCI Regulations prohibit medical practitioners from aiding, abetting or committing any unethical acts specified in Clause 6 which, inter-alia, include receiving any gift, gratuity, commission etc. for referring, recommending or procuring of any patient for any treatment. The scope of this prohibition was expanded on 14th December, 2009 by inserting Clause 6.8 which, in substance, provided further restrictions prohibiting medical practitioners from accepting from any Pharmaceutical or Allied Health Care Industry (hereinafter referred to as Pharma Companies) any emoluments in the form of travel facility for vacation or for attending conferences/seminars, certain hospitality etc. (popularly known as freebies) referred to in para 1.4 of Part I of this write-up. The CBDT issued a Circular dated 1st August, 2012, clarifying that expenses incurred by Pharma Companies for distribution of freebies to medical practitioners violate the provisions of MCI Regulations and should be disallowed under the said Explanation to Section 37(1). The validity of this Circular was upheld by the Himachal Pradesh High Court (Confederation of Indian Pharma Industry’s case), as mentioned in para 4 of Part I of this write-up. As discussed in Part I of this write-up, Punjab & Haryana High Court (KAP Scan’s case) and Madras High Court (Apex Laboratory’s case) had upheld the disallowance of such expenses. The Mumbai bench of the Tribunal (PHL Pharma’s case – discussed in para 6 of Part I of this write-up) had taken a view that the MCI Regulations are not applicable to Pharma Companies, and based on that decided the issue in the favour of the assessee after considering the judgments of Punjab & Haryana High Court as well as Himachal Pradesh High Court. For this, the Tribunal also relied on the decision of Delhi High Court (Max Hospital’s case referred to in para 5 of Part I of this write-up) in which the MCI had filed an affidavit that it has no jurisdiction to pass any order against the Hospital and its jurisdiction is only confined to medical practitioners. Subsequently, the correctness of this decision of the Tribunal was doubted by one bench of Mumbai Tribunal (Macleod’s case), and it had recommended the constitution of a larger bench to decide the issue, as mentioned in para 7 of Part I of this write-up.

9.2 As discussed in para 8 of Part-I of this write-up, the Madras High Court in Apex Laboratories (P) Ltd. vs. DCIT LTU (Tax Case Appeal no. 723 of 2018) upheld the order of the Income-tax Appellate Tribunal (Tribunal) which had disallowed the assessee’s claim for deduction for A.Y. 2010-11 with regard to expenditure incurred for giving gifts/ freebies to doctors holding that such expenditure resulted in violation of the MCI Regulations and was hit by the said Explanation to section 37(1) of the Income-tax Act 1961 (‘the Act’).

APEX LABORATORIES (P) LTD. VS. DCIT LTU (2022) 442 ITR 1 (SC)

10.1 The correctness of the above referred Madras High Court judgment came up for decision before the Supreme Court at the instance of the assessee.

10.2 Before the Supreme Court, the assessee submitted that the MCI Regulations were enforceable only against the medical practitioners and prohibited doctors from accepting freebies. However, the MCI Regulations did not bind the pharmaceutical companies, nor did it expressly prohibit the pharmaceutical companies from giving freebies to doctors. The assessee, in this regard, placed reliance on the decision of the Delhi High Court in Max Hospital’s case and Rajasthan High Court in Dr. Anil Gupta vs. Addl. CIT [IT Appeal No. 485 of 2008] and submitted that as these decisions were accepted and were not further challenged in appeal, it was not open to re-consider the present issue in the assessee’s case.

10.2.1 The assessee also placed reliance on the Supreme Court decision in the case of Dr. T.A. Quereshi vs. CIT [(2006) 287 ITR 547] and on the Madhya Pradesh High Court decision in CIT vs. Khemchand Motilal Jain Tobacco Products (P) Ltd. [(2012) 340 ITR 99] to urge that the Revenue could not deny a tax benefit because of the ‘nature’ of expenditure. It was further submitted that the Memorandum explaining the provisions of the Finance (No. 2) Bill, 1998 and CBDT Circular No. 772 dated 23rd December, 1998 stated that the said Explanation to section 37(1) was introduced to disallow taxpayers from claiming “protection money, extortion, hafta, bribes, etc.” as business expenditure which showed that the intention of the Parliament was to bring only the ‘illegal’ activities which were treated as an ‘offence’ under the relevant statutes within the ambit of the said Explanation. It was submitted that as the Income-tax Act was not a social reform statute, it ought to be strictly interpreted more so when the act of giving gifts by a pharmaceutical company was not treated as ‘illegal’ by any statute.

10.2.2 The assessee also submitted that the CBDT circular No. 5/2012 dated 1st August, 2012 clarifying that any expense incurred by Pharma Companies for distribution of freebies to medical practitioners in violation of the provisions of MCI Regulations shall not be allowed as deduction u/s 37(1) of the Act; enlarged the scope of the MCI Regulations which was beyond its scope. In any case, it was urged that the CBDT circular could apply only ‘prospectively’ from the date of its publication on 1st August, 2012 and not ‘retrospectively’ from the date of publication of the MCI Regulations on 14th December, 2009.

10.3 On the other hand, the Revenue argued that the act of giving gifts by Pharma Companies to doctors was ‘prohibited by law’ being specifically covered by the MCI Regulations even though the same may not be classified as an ‘offence’ under any statute. Accordingly, the same would fall within the scope of the said Explanation to section 37(1). Revenue further submitted that the intention of the Legislature was to disincentivize the practice of giving gifts and freebies in exchange of doctors’ prescribing expensive branded medication as against generic ones, thereby burdening patients with unnecessary cost. Such an act of accepting gifts in lieu of prescribing a pharmaceutical companies’ medicine clearly amounted to professional misconduct on the doctors’ part and also had a direct bearing on public policy.

10.3.1 The Revenue further contended that in the present case, the medical practitioners were provided expensive gifts such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops etc. to promote its product which clearly constituted professional misconduct. It was also contended that scope of MCI Regulations was not limited to a finite list of instances of professional misconduct but was broad enough to cover those instances not specifically enumerated as well.

10.3.2 The Revenue also placed reliance on the Punjab & Haryana High Court’s decision in the case of Kap Scan & Diagnostic Centre (P) Ltd. [(2012) 344 ITR 476] and the decision of the Himachal Pradesh High Court in Confederation of Indian Pharmaceutical Industry [(2013) 353 ITR 388].

10.4 After considering the rival contentions, the Supreme Court proceeded to decide the issue. The Court first referred to the provisions contained in the said Explanation to section 37(1) dealing with disallowance of illegal/prohibited expenses and stated that it restricts the allowance of deduction in respect of any expenditure for ‘any purpose which is an offence or which is prohibited by law’. The Court also dealt with the meaning of the words ‘offence’ as well as ‘prohibited by law’ and stated as under [Pg. 16]:

“…It is therefore clear that Explanation 1 contains within its ambit all such activities which are illegal/prohibited by law and/or punishable”

10.4.1 The Court also referred to the provisions contained in MCI Regulations Clause 6.8 as well as the fact that the MCI Regulations also provide the corresponding punishment for violation thereof by medical practitioners and noted that acceptance of freebies given by Pharma Companies was clearly an offence on the part of the medical practitioner which was punishable in accordance with the provisions of the MCI Regulations.

10.4.2 While referring to the view taken by the Tribunal in P.H.L. Pharma’s case that the MCI Regulations were inapplicable to Pharma Companies and the assessee’s contention that the scope of the said Explanation was restricted only to ‘protection money, extortion, hafta, bribes etc.’, the Court opined as under [Pg.19]:

“This Court is of the opinion that such a narrow interpretation of Expln. 1 to s.37(1) defeats the purpose for which it was inserted, i.e., to disallow an assessee from claiming a tax benefit for its participation in an illegal activity. Though the Memorandum to the Finance Bill, 1998 elucidated the ambit of Expln. 1 to include “protection money, extortion, Hafta, bribes, etc.”, yet, ipso facto, by no means is the embargo envisaged restricted to those examples. It is but logical that when acceptance of freebies is punishable by the MCI (the range of penalties and sanction extending to ban imposed on the medical practitioner), pharmaceutical companies cannot be granted the tax benefit for providing such freebies, and thereby (actively and with full knowledge) enabling the commission of the act which attracts such opprobrium.”

10.4.3 In the context of contention of the non-applicability of MCI Regulations to Pharma Companies and deductibility of such expenses (i.e. freebies etc.) in their assessments, the Court also referred to the judgment of the constitution bench in the case of P.V. Narasimha Rao [(1998) 4 SCC 626] delivered in the context of the Prevention of Corruption Act (P.C.Act), where the contention was rejected that P.C. Act only punished (prior to the 2018 amendment) the bribe-taker who was a public servant, and not the bribe-giver. In this regard, the Court held as under [Pg.21]:

“Even if Apex’s contention were to be accepted – that it did not indulge in any illegal activity by committing an offence, as there was no corresponding penal provision in the 2002 Regulations applicable to it – there is no doubt that its actions fell within the purview of “prohibited by law” in Explanation 1 to Section37(1).

Furthermore, if the statutory limitations imposed by the 2002 Regulations are kept in mind, Explanation (1) to Section 37(1) of the IT Act and the insertion of Section 20A of the Medical Council Act, 1956 (which serves as parent provision for the regulations), what is discernible is that the statutory regime requiring that a thing be done in a certain manner, also implies (even in the absence of any express terms), that the other forms of doing it are impermissible.”

10.4.4 Considering the expected approach of the Courts in the matters involving issues relating to immoral or illegal acts, the Court observed as under [Pgs. 22/23]:

“It is also a settled principle of law that no Court will lend its aid to a party that roots its cause of action in an immoral or illegal act (ex dolomalo non oritur action) meaning that none should be allowed to profit from any wrongdoing coupled with the fact that statutory regimes should be coherent and not self-defeating. Doctors and pharmacists being complementary and supplementary to each other in the medical profession, a comprehensive view must be adopted to regulate their conduct in view of the contemporary statutory regimes and regulations. Therefore, denial of the tax benefit cannot be construed as penalizing the assessee pharmaceutical company. Only its participation in what is plainly an action prohibited by law, precludes the assessee from claiming it as a deductible expenditure.”

10.4.5 Considering the relationship between medical practitioners and their patients and, in that context, explaining the effects of distributing such freebies to the medical practitioners on society in general, the Court observed as under [Pg. 23]:

“This Court also notices that medical practitioners have a quasi-fiduciary relationship with their patients. A doctor’s prescription is considered the final word on the medication to be availed by the patient, even if the cost of such medication is unaffordable or barely within the economic reach of the patient – such is the level of trust reposed in doctors. Therefore, it is a matter of great public importance and concern, when it is demonstrated that a doctor’s prescription can be manipulated, and driven by the motive to avail the freebies offered to them by pharmaceutical companies, ranging from gifts such as gold coins, fridges and LCD TVs to funding international trips for vacations or to attend medical conferences. These freebies are technically not ‘free’ – the cost of supplying such freebies is usually factored into the drug, driving prices up, thus creating a perpetual publicly injurious cycle…….”

10.4.6 In the above context, the Court also noted that the threat of prescribing medication that is significantly marked-up, over effective generic counterparts in lieu of such a quid pro quo exchange was also taken cognizance of by the Parliamentary Standing Committee on Health and Family Welfare as well as other studies in this regard. In this regard, the Court further stated that the High Court decisions in the case of Kap Scan & Diagnostic Centre (P) Ltd. and Confederation of Indian Pharmaceutical Industry (supra) had correctly referred to the importance of public policy while deciding the issue before it.

10.4.7 The Court also held that agreement between the pharmaceutical companies and the medical practitioners in gifting freebies for boosting sales of prescription drugs was violative of section 23 of the Contract Act, 1872, which provides that the consideration or object of an agreement shall be unlawful if the Court regards it as immoral or opposed to public policy, in which event, the agreement shall be treated as void.

10.4.8 With respect to the date of applicability of the CBDT Circular No. 5/2012, the Court stated that as the Circular was clarificatory in nature, the same would take effect from the date of implementation of the MCI Regulations i.e. 14th December, 2009.

10.4.9 The Court distinguished the decisions relied upon by the assessee. With respect to Dr. T.A. Quereshi’s decision, the Court stated that the same dealt with a case of business ‘loss’ and not business ‘expenditure’. Khemchand Motilal Jain Tobacco Products (P) Ltd.’s decision was distinguished as the assessee in that case was not a willful participant in the commission of an offence or activity prohibited by law whereas Pharma Companies misused a legislative gap to actively perpetuate the commission of an offence.

10.4.10 The Supreme Court also rejected the assessee’s plea that the taxing statutes had to be construed strictly and observed as under [Pg. 28]:

“Thus, pharmaceutical companies’ gifting freebies to doctors, etc. is clearly “prohibited by law”, and not allowed to be claimed as a deduction under s. 37(1). Doing so would wholly undermine public policy. The well-established principle of interpretation of taxing statutes that they need to be interpreted strictly cannot sustain when it results in an absurdity contrary to the intentions of the Parliament…..”

10.4.11 While dismissing the appeal of the assessee, and deciding the issue in favour of the Revenue, the Court finally concluded as under [Pgs. 30 & 31]:

“ In the present case too, the incentives (or “freebies”) given by Apex, to the doctors, had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine. Those sanctions are mandated by law, as they are embodied in the code of conduct and ethics, which are normative, and have a legally binding effect. The conceded participation of the assessee – i.e., the provider or donor- was plainly prohibited, as far as their receipt by the medical practitioners was concerned. That medical practitioners were forbidden from accepting such gifts, or “freebies” was no less a prohibition on the part of their giver, or donor, i.e., Apex.”

CONCLUSION

11.1 In view of the above judgment of the Supreme Court, the issue now stands fairly settled that any expenditure incurred by a Pharma Company for giving gifts/ freebies to medical practitioners in violation of MCI Regulations falls within the ambit of the said Explanation, and will not be allowed as deduction u/s 37 of the Act. Further, such claim of expenditure will be disallowed from the date of publication of the MCI Regulations i.e. 14th December, 2009 and that the CBDT Circular dated 1st August, 2012 is merely clarificatory and would also take effect from 14th December, 2009. In view of this, the view taken by the Tribunal in many cases that this Circular will apply prospectively and approved by the Bombay High Court in Goldline Pharmaceutical’s case [(2022)441 ITR 543] would no longer hold good. In light of the Supreme Court decision, the reference to Special bench by the Tribunal in the case of Macleods Pharmaceutical’s case (supra) will be rendered infructuous.

11.2 The above judgment in Apex Laboratories’ case was followed by the Calcutta High Court in the case of Peerless Hospitex Hospital and Research Center Ltd. vs. Pr. CIT [(2022) 137 taxmann.com 359 (Calcutta)]. In this case, the assessee was engaged in the business of running a multi-speciality hospital. It had claimed deduction in respect of fee paid to doctors for referring patients to the assessee’s hospital which was allowed during the course of original assessment proceedings. The Assessing Officer issued a notice u/s 148 of the Act, after 4 years [A.Ys. 2011-12 & 2012-13] seeking to disallow the said expenditure on the basis that the expense was prohibited by law and was therefore disallowable as per Explanation 1 to section 37(1). Following the above judgment of the Supreme Court and after giving detailed reasonings, the High Court held that such expenses are not deductible. The High Court also noted that no such provisions restricting Pharma Companies is made in the law and expressed a wish that the Central and State governments take note of this legislative gap and make appropriate law to penalize them also for participating in such activities. Finally, the High Court, on the facts of the case of the assessee, also took the view that re-opening on the same material is a mere change of opinion and quashed the notices issued u/s 148 as conditions for issuance of such notices were not met in this case.

11.3 While upholding the disallowance of expenditure on such freebies, the Supreme Court also referred to the legal position that technically, MCI Regulations are not applicable to the Pharma Companies making them punishable for resultant violation on the part of medical practitioners. According to the Court, the expenditure is hit by provisions of the said Explanation 1 to section 37(1). It appears that the only consequence (apart from the corporate governance issue, if any, more so as such acts of the assessee are also held as being opposed to public policy) for the Pharma Companies for such acts will be to suffer disallowance in their tax assessments. As such, the tax cost will be the extra cost for the Pharma Companies for the past as well as for the future in such cases. The Supreme Court rightly noted [refer para 10.4.5 above] that such freebies are really not free, and the cost thereof is usually factored in the cost of drugs price. In future, in the absence of any specific provision for punishment, some Pharma Companies may follow this practice for this tax-cost also, further driving prices up. If this happens, the poor patients may have to bear this additional cost also and that would be a sad day. Perhaps, the Calcutta High Court may have expected the Government to take note of this legislative gap keeping such unintended consequences in mind.

11.4 Since the Court has upheld the disallowance in the hands of Pharma Companies for its participations in such activities leading to violations of MCI Regulations by the medical practitioners, the effect of this judgment will not necessarily be limited to Pharma Companies and may extend to other sectors/situations also wherever such practices/participation is found.

11.5 While dealing with the provisions of the taxing statute, the normal rule is to apply the principle of ‘strict interpretation’. The Supreme Court in this case has rejected the contention of the assessee for applying such a rule in this case and stated that this principle cannot sustain when it results in an absurdity contrary to the intention of the Parliament [refer para 10.4.10 above].

11.6 In the cases of Pharma Companies distributing freebies to medical practitioners [as well as in other similar cases], the law is now made clear by the Supreme Court and therefore, in such cases, the same is covered within the ambit of Explanation 1 [Pre – 2022 amendment], and accordingly, it should apply even to earlier years. In view of this, the Tax Auditors of Pharma Companies etc. will have to be extremely cautious while reporting on particulars contained in clause 21(a) of Form No. 3CD for A.Y. 2022-23 also, more so with the 2022 amendment.

11.7 The question of disallowance of expenditure arises in cases where it is found that such expenditure is in violation of some provisions of law etc. treating the same as illegal/ prohibited expense as envisaged in the said Explanation 1 to section 37(1) [read with the effect of amendment by Finance Act, 2022, at least from the A.Y. 2022-23]. If the expenditure is not found to be in such violation in the hands of the recipient, the issue of disallowance in the hands of the Pharma Companies should not arise. The Supreme Court has rejected the view of non-applicability of the said Explanation 1 to section 37(1) taken by the Tribunal in PHL Pharma’s case [refer para 10.4.2 above] on the ground that such narrow interpretation based on the non-applicability of MCI Regulations to Pharma Companies, is not correct. However, interestingly, the Tribunal in that case, has further given finding of facts [refer para 6.4 of Part I of this write-up] with regard to the nature of various expenses incurred by the assessee in that case. The issue would arise that whether such findings could be considered as the Tribunal taking the view that, on facts, such expenses do not result in any violation of MCI Regulations in the hands of the recipients. The Revenue may look at this finding to show that the Tribunal only clarified that these are primarily business expenses eligible for deduction u/s 37(1), and observation that they are purely business expenditure and is not impaired by the said Explanation 1 to section 37(1) is generic, considering the context of such observations.

11.7.1 It also seems to us that every expenditure incurred by the Pharma Companies for certain distribution/providing facilities to medical practitioners should not necessarily be regarded as violating MCI Regulations resulting into disallowance thereof as illegal/prohibited expenses. As such, when normal medical conferences/seminars are organized by Pharma Companies, more so if organized domestically, purely for educational/knowledge spreading purposes amongst the medical practitioners, the expenditure for the same, ipso facto, should not necessarily be considered as illegal / prohibited expenses resulting into disallowance. In this respect, the reference [in para 10.4.5 above] of ‘funding of international trips for vacation or to attend medical conferences’ by the Supreme Court will have to be read in context and should not be construed in the manner that expenditure for all medical conferences now falls into this prohibited category, more so when they are domestically held. It also seems that the distribution of free samples by the Pharma Companies to the medical practitioners in the normal course of business to prove the efficacy of the product should also not be viewed as falling into this prohibited category. Of course, all these are subject to a caveat that freebies granted under the guise of seminar/ conferences etc., to medical practitioners can always be questioned for this purpose. Ultimately, the assessee has to satisfy the authority that the expenditure is not in violation of the MCI Regulations as held by the Himachal Pradesh High Court [refer para 4.4 of Part I of this write-up] in Confederation of Indian Pharma Industry’s case. This judgment is approved by the Supreme Court in the above case.

11.8 Finance Act, 2022 has inserted Explanation 3 in section 37 of the Act with effect from 1st April, 2022 to clarify that the expression “expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law” used in Explanation 1 to section 37 shall include and be deemed to have always included inter-alia any expenditure incurred by an assessee to provide any benefit or perquisite in any form to a person whether or not carrying on business or exercising profession where acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guideline which governs the conduct of such person. The new Explanation 3 also specifically expands the scope of the existing provision contained in Explanation 1 to include violation of foreign laws. Considering the language of the amendment of the Finance Act, 2022, the debate is on as to whether this extended scope of illegal/ prohibited expense will apply retrospectively or only from the A.Y. 2022-23. The majority view prevailing in the profession seems to be that the same should apply prospectively, though the Revenue may contend otherwise. As such, the litigation for the past years on the applicability of this expanded scope also cannot be ruled out.

11.9 While the issue of taxability of such freebies for recipients was not before the Supreme Court in the above case, the CBDT in its said Circular dated 1st August, 2012, in para 4, has also clarified that the value of freebies enjoyed by the medical practitioners is also taxable as business income or income from other sources, as the case may be, depending on facts of each case and Assessing Officers have been asked to examine the same in cases of such medical practitioners etc, and take an appropriate action. It may also be noted that for this purpose, it is not relevant whether the receipts of such benefits violates the MCI Regulations or not. In view of this, more so with the provisions of section 28(iv), the Tax Auditors will also have to be extremely cautious while reporting on particulars contained in clause 16 of Form No. 3CD. This will make the task of Tax Auditors more difficult as practically, hardly it may be feasible for the Tax Auditors to find about the receipt of such benefit/ perquisite by the assessee unless the assessee himself declares the same.

11.10 It is also worth noting that the Finance Act, 2022 also inserted new section 194R [w.e.f. 1st July, 2022] which provides for deduction of tax at source (TDS) in respect of any benefit or perquisite provided to a resident and therefore, that also will have to be considered by the assessee and Tax Auditors from the next year i.e., A.Y. 2023-24. Of course, this may help the Tax Auditors of recipients of such benefits to find out the instances of receipts of any such benefit or perquisite.

11.11 The larger and the most relevant issue which may still need consideration: is it fair to leave the determination of the violations of all such laws/regulations etc. to the Assessing Officer by interpreting these laws/regulations etc.? Is he really equipped to carry out this difficult task?

One thing seems certain that we are again heading for long drawn litigations on these provisions, more so in post-2022 amendment era. We do not know for whose benefit? Perhaps, one more bonanza for the profession?

shailesh.kwebmaker

Revision — Powers of Commissioner u/s 264 — Commissioner can give relief to an assessee who has committed mistake

21 Hapag Lloyd India Pvt. Ltd vs. Principal CIT [2022] 443 ITR 168 (Bom.) A. Y.: 2016-17 Date of order: 9th February, 2022 S. 264 of ITA, 1961

Revision — Powers of Commissioner u/s 264 — Commissioner can give relief to an assessee who has committed mistake

The petitioner is a private limited company. The assessee was entitled to the benefit of article 10 of the India – Kuwait Double Taxation Avoidance Agreement. However, for the A.Y. 2016-17, the assessee, by mistake, did not claim the said benefit both in the original return and the revised return. After passing of the assessment order u/s 143(3), the assessee realized the mistake and found that the assessee had paid an excess tax of Rs.84,61,650. The assessee, therefore, made an application to the Principal Commissioner of Income Tax u/s 264 requesting to revise the assessment order, correct the mistake and direct the Assessing Officer to grant a refund of the said amount of Rs.84,61,650.

The Principal Commissioner of Income Tax rejected the application, holding it to be untenable primarily on the ground that the assessee had not claimed at the time of filing the original return of income and the revised return of income. The Principal Commissioner held that there was no apparent error on the record in the said assessment order, which warranted exercise of jurisdiction u/s 264.

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

“i) Section 264 of the Income-tax Act, 1961, does not limit the power of the Commissioner to correct errors committed by the sub-ordinate authorities and can even be exercised where errors are committed by the assessee. 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 the assessee detects mistakes after the assessment is completed.

ii) 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 Double Taxation Avoidance Agreement between India and Kuwait, under which the dividend distribution was taxed at a lower rate. The Commissioner had the power to consider the claim u/s. 264. The rejection of the application for revision was not valid.

iii) The impugned order dated 31st March, 2021 stands quashed and set aside. The revision application stands restored to the file of respondent No. 1 and remitted back for de novo consideration.”

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Revision — Powers of Commissioner u/s 263 — Declaration under Income Declaration Scheme, 2016 — Declaration accepted and consequent assessment — Such assessment cannot be set aside in proceedings u/s 263

20 Principal CIT vs. Manju Osatwal [2022] 443 ITR 107 (Cal.) A. Y.: 2014-15 Date of order: 11th February, 2022 S. 263 of ITA, 1961 and Income Declaration Scheme, 2016

Revision — Powers of Commissioner u/s 263 — Declaration under Income Declaration Scheme, 2016 — Declaration accepted and consequent assessment — Such assessment cannot be set aside in proceedings u/s 263

The assessee is an individual. For the A.Y. 2014-15, the assessment was completed u/s 143(3) of the Income-tax Act, 1961 by an order dated 6th May, 2016. After the assessment was completed, the assessee availed of the benefit of the Income Declaration Scheme, 2016 (IDS). The Principal Commissioner accepted the declaration.

Thereafter, the Principal Commissioner invoked the provisions of section 263 and passed an order revising the assessment order. The Tribunal quashed the revision order holding it to be without jurisdiction.

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

“i) The Income Declaration Scheme, 2016 was introduced by Chapter IX of the Finance Act, 2016 ([2016] 384 ITR (St.) 1). Chapter IX of the Finance Act, 2016 is a complete code by itself. It provides an opportunity to an assessee to offer income, which was not disclosed earlier, to tax. Chapter IX provides for a special procedure for disclosure and charging income to tax. It lays down the procedure for disclosure of such income ; the rate of Income-tax and the penalty to be levied thereupon and the manner of making such payment. Under the Scheme the competent authority has been vested with the power to accept the declaration made by the assessee and such power to be exercised only upon being satisfied with such disclosure. It is also open to such authority not to accept such declaration. But once accepted, it attains finality. The scheme does not empower or authorise the competent authority to reopen or revise a decision taken on such declaration. It is well settled that a statutory authority has to function within the limits of the jurisdiction vested with him under the statute. Thus, once the declaration is accepted by the Principal Commissioner such authority is estopped from taking any steps which would in effect amount to reopening or revising the decision already taken on such declaration.

ii) The Principal Commissioner had invoked his power u/s. 263 in respect of an item of income which was declared in terms of the Scheme. All particulars were available before the Principal Commissioner in respect of such income and the Principal Commissioner upon being satisfied, had accepted such declaration. All materials were available before the Principal Commissioner when the declaration made u/s. 183 of the Finance Act, 2016 were considered and accepted. Therefore, the assumption of jurisdiction by the Principal Commissioner u/s. 263 of the Act was wholly without jurisdiction.”

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Recovery of tax:— (i) Provisional attachment of property — Effect of s. 281B — Power of provisional attachment must not be exercised in an arbitrary manner — Revenue must prove that an order of provisional attachment was justified — Recovery proceedings against assignee of partner’s share in firm — Provisional attachment of property of firm — Not valid; (ii) Firm — Assignment of share of partner to third person — Difference between assignment of share and formation of sub-partnership — Recovery proceedings against assignee — Provisional attachment of property of firm — Not valid

19 Raghunandan Enterprise vs. ACIT [2022] 442 ITR 460 (Guj.) A.Ys.: 2014-15 to 2019-20 Date of order: 7th February, 2022 S. 281B of ITA, 1961

Recovery of tax:— (i) Provisional attachment of property — Effect of s. 281B — Power of provisional attachment must not be exercised in an arbitrary manner — Revenue must prove that an order of provisional attachment was justified — Recovery proceedings against assignee of partner’s share in firm — Provisional attachment of property of firm — Not valid; (ii) Firm — Assignment of share of partner to third person — Difference between assignment of share and formation of sub-partnership — Recovery proceedings against assignee — Provisional attachment of property of firm — Not valid

In proceedings against an individual AS, to whom one of the partners of the assessee-firm had assigned part of her interest in the firm, property standing in the name of the assessee-firm was provisionally attached on the ground that AS had paid cash consideration to the partner and thereby, derived 2.5 per cent share in the profit from the partner.

On a writ petition to quash the order of provisional attachment, the Gujarat High Court held as under:

“i) A plain reading of section 281B of the Income-tax Act, 1961 would make it clear that it provides for provisional attachment of property belonging to the assessee for a period of six months from the date of such attachment unless extended, but excluding the period of stay of assessment proceedings, if any. These are drastic powers permitting the Assessing Officer to attach any property of an assessee even before the completion of assessment or reassessment. These powers are thus in the nature of attachment before judgment. They have provisional applicability and in terms of sub-section (2) of section 281B of the Act, a limited life. Such powers must, therefore, be exercised in appropriate cases for proper reasons. Such powers cannot be exercised merely by repeating the phraseology used in the section and recording the opinion of the officer passing such order that he was satisfied for the purpose of protecting the interests of the Revenue, it was necessary so to do.

ii) The plain language of the provisions of section 281B is plain and simple. It provides for the attachment of the property of the assessee only and of no one else.

iii) A fine distinction was drawn by the Supreme Court in the case of Sunil J. Kinariwala [2003] 259 ITR 10 (SC) between a case where a partner of a firm assigns his or her share in favour of a third person and a case where a partner constitutes a sub-partnership with his or her share in the main partnership. Whereas in the former case, in view of section 29(1) of the Partnership Act, the assignee gets no right or interest in the main partnership except to receive that part of the profits of the firm referable to the assignment and to the assets in the event of dissolution of the firm, in the latter case, the sub-partnership acquires a special interest in the main partnership.

iv) The case on hand indisputably was not one of a sub-partnership though in view of section 29(1) of the Partnership Act, AS as an assignee may become entitled to receive the assigned share in the profits from the firm, not as a sub-partner because no sub-partnership came into existence, but as an assignee to the share of profit of the assignor-partner. The subject land not being the property of AS, was not open to provisional attachment. Even if the Department’s case that there was some interest of AS involved in the land in question, that would not make the subject land of the ownership of AS. The provisional attachment of the subject land u/s. 281B of the Act at the instance of the Revenue was not sustainable in law.

v) For all the forgoing reasons, this writ-application succeeds and is hereby allowed. The impugned order of provisional attachment dated 29th May, 2021 to the extent it includes the subject land, is hereby quashed and set aside. If on the basis of the provisional attachment order, any entries have been mutated in the revenue records, the same shall now also stand corrected.”

shailesh.kwebmaker

Reassessment — Notice u/s 148:— (i) Duty of AO — Consideration of assessee’s objections to reopening of assessment is not mechanical ritual but quasi-judicial function — Order disposing of objections should deal with each objection and give proper reasons for conclusions — AO is bound to provide documents requested by assessee — Matter remanded to AO; (i) Recording of reasons — Reasons recorded furnished to assessee containing omission and was not actual reasons submitted to competent authority for approval — Matter remanded to AO with directions

18 Tata Capital Financial Services Ltd vs. ACIT [2022] 443 ITR 127 (Bom.) A.Y.: 2013-14 Date of order: 15th February, 2022 Ss. 147, 148 and 151(1) of ITA, 1961

Reassessment — Notice u/s 148:— (i) Duty of AO — Consideration of assessee’s objections to reopening of assessment is not mechanical ritual but quasi-judicial function — Order disposing of objections should deal with each objection and give proper reasons for conclusions — AO is bound to provide documents requested by assessee — Matter remanded to AO; (i) Recording of reasons — Reasons recorded furnished to assessee containing omission and was not actual reasons submitted to competent authority for approval — Matter remanded to AO with directions

The assessee was a non-banking financial company. In compliance with clause 3(2) of the Reserve Bank of India Act, 1934, the assessee recognised the income from non-performing assets only when it was realized and did not offer it to tax on an accrual basis but on actual receipt basis. For the A.Y. 2013-14, the assessee received a notice u/s 148 of the Income-tax Act, 1961 stating that there were reasons to believe that income chargeable to tax for the assessment year had escaped assessment within the meaning of section 147. The assessee filed its objections. Thereafter, the assessee was furnished the reasons recorded for reopening the assessment. In its objections to the reopening, the assessee also requested the Assessing Officer to provide photocopies of documents evidencing the request sent by the Assessing Officer to the competent authority for obtaining approval u/s 151(1) and documents evidencing the approval. The Assessing Officer rejected the objections raised by the assessee without referring to any of the objections raised or judgments cited by the assessee.

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

“i) The exercise of considering the assessee’s objections to the reopening of an assessment u/s. 147 of the Income-tax Act, 1961 is not a mechanical ritual but a quasi-judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. The Assessing Officer is duty bound to provide all the documents requested by the assessee and his reluctance to provide those documents only would make the court draw adverse inference against the department.

ii) The Assessing Officer was duty bound to deal with all the submissions made by the assessee in its objections raised for reopening of the assessment u/s. 147 and not just brush aside uncomfortable objections. The Assessing Officer instead of providing the requested documents had dismissed the assessee’s request stating that it was an administrative matter and all correspondence had been made through the system. There was omission in reasons recorded furnished to the assessee and these were not the actual reasons submitted to the competent authority for approval u/s. 151 to issue notice u/s. 148.

iii) The order rejecting the assessee’s objections for reopening the assessment was quashed and set aside. The matter was remanded for de novo consideration. The Assessing Officer was directed to grant a personal hearing to the assessee and provide the assessee with a list of judgments and orders of the court or Tribunal relied on by him to enable the assessee to deal with or distinguish those judgments or orders in the personal hearing. The court also directed that the Assessing Officer should also consider all the earlier submissions of the assessee while considering the assessee’s objections and give proper reasons for his conclusion.”

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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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