Direct Taxes Archives

‘Charitable Purpose’, GPU Category- Post 2008 Amendment – Eligibility for Exemption under Section 11- Section 2(15) – Part I

INTRODUCTION

1.1 The Indian Income-tax Act, 1922 (“1922 Act”) contained and the Income-tax Act, 1961 (“1961 Act”) contains, specific provisions to deal with income derived by a person from property held under trust wholly for charitable or religious purposes.

1.2 Section 4(3) of the 1922 Act provided that any income derived from the property held under trust or other legal obligation wholly for religious or charitable purposes shall not be included in the total income of the person receiving such income subject to fulfillment of conditions stated therein. The term “charitable purpose” was defined in the 1922 Act to include relief of the poor, education, medical relief and the advancement of any other object of general public utility. The last limb of the definition of charitable purpose– ‘advancement of any other object of general public utility’ (hereinafter referred to as “GPU” or “GPU category”) has been subject of matter of litigation and has been subjected to several amendments from time to time.

1.2.1 In the case of The Trustees of the ‘Tribune’, In re (7 ITR 415) (“Tribune”), the assessee claimed exemption under section 4(3) of the 1922 Act for the assessment year 1932 – 33 in respect of income earned by the trust which was created to maintain Tribune Press and Newspaper in an efficient condition, keeping up the liberal policy of the newspaper and devoting the surplus income in improving the said newspaper. The question before the Privy Council was as to whether the property was held under trust wholly for the GPU. The Privy Council took the view that the objects of the trust fell within the GPU category and held that the trust was entitled to exemption under section 4(3) of the 1922 Act.

1.2.2 In the case of CIT vs. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC) (“Andhra Chamber”), the Supreme Court allowed the claim of the assessee for exemption under section 4(3) of the 1922 Act for six assessment years 1948 – 49 to 1951- 52, 1953-54 and 1954-55. The Court held that the principal objects of the assessee were to promote and protect, and to aid, stimulate and promote the development of trade, commerce and industries in India, which would fall within the GPU category. The Court further held that the expression “object of general public utility” is not restricted to objects beneficial to the whole of mankind but would also cover objects beneficial to a section of the public. The Court further held that if the primary object of the assessee was GPU, the assessee would remain a charitable entity despite the presence of an incidental political object being in the nature of promotion of or opposition to legislation affecting trade, commerce or manufacture.

1.3 Upon repeal of the 1922 Act and enactment of the 1961 Act, the term “charitable purpose” is defined in section 2(15) of the 1961 Act. The words ‘not involving the carrying on of any activity for profit’ [profit making activity] were added in the GPU category. ‘Charitable purpose’ as per section 2(15) of the 1961 Act included relief of the poor, education, medical relief (Specified Categories), and the advancement of any other object of general public utility “not involving the carrying on of any activity for profit”. Subsequently, from 2009 onwards, the list of Specified Categories (with which we are not concerned in this write-up) was expanded to include preservation of environment, yoga, etc.

1.3.1 The issue before the Supreme Court in the case of Sole Trustee, LokaShikshana Trust vs. CIT [1975] 101 ITR 234 (“LokaShikshana Trust”) was whether an assessee trust set up with the object of educating people inter alia by (i) setting up and helping institutions in educating people by the spread of knowledge on matters of general interest and welfare (ii) founding and running reading rooms and libraries and keeping and conducting printing houses and publishing or aiding the publication of books, etc. (iii) supplying Kannada speaking people with an organ or organs of educated public opinion, etc. and (iv) helping similar societies and institutions; would be entitled for exemption under section 11 of the 1961 Act for the assessment year 1962- 63. At the outset, the Court held that the object of the assessee trust was not education [by adopting narrower meaning of the term education] but would fall within the GPU category. The Court rejected assessee’s argument that the newly added words ‘not involving the carrying on of any activity for profit’ in the GPU category merely qualified and affirmed the position as it was under the definition of ‘charitable purpose’ in the 1922 Act and observed that there was no necessity for the Legislature to add the new words in the definition if such was the intention. The Court observed that to fall within the GPU category it was to be shown that the purpose of the trust is the advancement of any other object of general public utility, and that such purpose does not involve profit making activity. The Court then observed that the assessee trust was engaged in the business of printing and publication of newspaper and journals which yielded profit and also noted the fact that there were no restrictions on the assessee trust for earning profits in the course of its business. The Court held that the assessee trust did not satisfy the requirement that it should be one not involving profit-making activity and, accordingly, was not entitled to exemption under section 11 of the 1961 Act.

1.3.2 In the case of Indian Chamber of Commerce vs. CIT [1975] 101 ITR 796 (SC) (“Indian Chamber”), the assessee was a company set up under section 26 of the Indian Companies Act, 1913 primarily to promote and protect Indian trade interests and other allied service operations, and to do all other things as may be conducive to the development of trade, commerce and industries or incidental to attainment of its objects. The assessee company for the assessment year 1964 – 65 earned profits from three services rendered by it – arbitration fees, fees for certificate of origin and share of profit in a firm for issue of certificates of weighment and measurement. The issue before the Supreme Court was whether carrying on of the aforesaid three activities which yielded profits involved ‘carrying on of any activity for profit’ within the meaning of section 2(15) of the 1961 Act. The Court held that an institution must confine itself to the carrying on of activities which are not for profit and that it is not enough if the object is one of general public utility. In other words, the attainment of the charitable object should not involve activities for profit. On the facts of the case, the Court denied exemption under section 11 to the assessee.

1.3.3 The interpretation of words ‘not involving the carrying on of any activity for profit’ in section 2(15) of the 1961 Act then came up before a Constitution bench of the Supreme Court in the case of ACIT vs. Surat Art Silk Cloth Manufacturers Association (1978) 121 ITR 1 (“Surat Art”). In this case, while dealing with the category of GPU, the Court laid down what came to be known as ‘pre-dominant test’. Reference may be made to para 1.6 of this column – January 2023 issue of this journal where the aforesaid decision has been explained. The Court in Surat Art’s case overruled its earlier decision in the case of Indian Chamber interpreting the words ‘not involving the carrying on of any activity for profit’ and held that it was the object of GPU that must not involve the carrying on of any activity for profit and not its advancement or attainment. The Court in Surat Art also disagreed with the observation in the case of Sole Trustee, Loka Shikshana Trust and Indian Chamber to the effect that whenever an activity yielding profit is carried on, the inference must necessarily be drawn that the activity is for profit and the charitable purpose involves the carrying on of an activity for profit in the absence of some indication to the contrary.

1.3.4 The Supreme Court followed the principles laid down in Surat Art’s case while deciding the claim for exemption under section 11 of the 1961 Act in CIT vs. Federation of Indian Chambers of Commerce & Industries [1981] 130 ITR 186 (SC)and CIT vs. Bar Council of Maharashtra [1981] 130 ITR 28 (SC).

1.4 Section 11(4) which is a part of the 1961 Act right from the time of its enactment defined the term ‘property held under trust’ to include a business undertaking. Section 13 of the 1961 Act provides certain circumstances in which exemption granted under section 11 or 12 of the Act in respect of income derived from property held under trust for charitable or religious purposes will not be available. Clause (bb) was inserted in section 13(1)by the Taxation Laws (Amendment) Act, 1975 with effect from 1st April, 1977 to provide denial of exemption in respect of any income derived from any business carried on by a charitable trust or institution for the relief of the poor, education or medical relief unless such business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution. Clause (bb) in section 13(1) of the 1961 Act was omitted by the Finance Act, 1983 with effect from 1st April, 1984.

1.4.1 The Finance Act, 1983 also made two further amendments in the 1961 Act with effect from 1st April, 1984 – (i) omission of the words ‘not involving the carrying on of any activity for profit’ in section 2(15) and (ii) insertion of clause (4A) in section 11 of the 1961 Act providing that sub-section (1), (2), (3) or (3A) of section 11 shall not apply in relation to any income being profits and gains of business unless (a) the business of a specified type is carried on by a trust set up only for public religious purposes or (b) business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the Institution and separate books of account are maintained by the trust or institution in respect of such business. Section 11(4A) which was restrictive in nature at the time of insertion was liberalized by the Finance (No. 2) Act, 1991 with effect from 1st April, 1992. Section 11(4A) now provided for two requirements – business should be incidental to the attainment of the objectives of the trust or institution and separate books of accounts are maintained in respect of such business.

1.4.2 The Supreme Court (Three Judges Bench) in the case of ACIT vs. Thanthi Trust [2001] 247 ITR 785 (SC)(“Thanthi Trust”) had adjudicated upon the assessee trust’s claim for exemption under section 11 of the 1961 Act. The business of a newspaper ‘Dina Thanthi’ was settled upon the assessee trust as a going concern. The objects of the trust were to establish the newspaper as an organ of educated public opinion. A supplementary deed was thereafter executed whereby the trust’s surplus income was to be used to establish and run schools, colleges, hostels, orphanages, establish scholarships, etc. The High Court’s decision allowing the assessee’s claim for exemption under section 11 of the 1961 Act was challenged before the Supreme Court by the tax department. The Court divided its decision into three distinct periods depending upon the law in force at the relevant time affecting the issue before it. The Court while deciding the batch of appeals for assessment years 1979 – 80 to 1983-84 (first period) denied exemption under section 11 and held that section 13(1)(bb) of the 1961 Act would apply even where a business is held under trust that is being carried on and is held as a part of corpus of the trust. The Court took the view that the business of the trust did not directly accomplish the trust’s objects of relief of the poor and education as stated in the supplementary deed and was therefore hit by section 13(1)(bb) [referred to in para 1.4.1 above]. With respect to the appeals for assessment years 1984- 85 to 1991-92 (second period), the Court denied exemption under section 11 of the 1961 Act on the basis that the requirements specified in clause (a) or clause (b)of section 11(4A) as in force [referred to in para 1.4.1 above] were not satisfied as the trust is not only for public religious purpose and exemption contained in section 11(4A)(b) does not apply to trust and it applies only to institution. Coming to the third batch of appeals for assessment years 1992-93, 1995-96 and 1996-97 (third period), the Court granted exemption under section 11 and took the view that the substituted section 11(4A) was more beneficial as compared to section 11(4A) as applicable prior to its amendment by the Finance (No. 2) Act, 1991 or as compared to section 13(1)(bb) of the 1961 Act. The Court held that the business income of a trust will be exempt if the business is incidental to the attainment of the objectives of the trust and that a business whose income is utilized by the trust for the purpose of achieving its objectives is surely a business which is incidental to the attainment of its objectives. The Court also observed that in any event, if there be any ambiguity in the language, the provisions must be construed in a manner that benefits the assessee.

1.5 Income of an authority constituted in India by or under any law enacted for the purpose of dealing with the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages was exempt under section 10(20A) of the 1961 Act which was inserted by the Finance Act, 1970 with retrospective effect from 1st April, 1962. Section 10(23) which was a part of the 1961 Act right from the enactment of the Act granted exemption to specified sports association or institutions. Both the aforesaid sections were omitted by the Finance Act, 2002 and the entities claiming exemption under these sections started making a claim for exemption under section 11 of the 1961 Act. In this regard, reference may be made to the decision of Supreme Court in CIT vs. Gujarat Maritime Board [2007] 295 ITR 561 (Gujarat Maritime Board) where it was held that the provisions of section 10(20) which exempted income of local authority and section 11 of the 1961 Act operated in totally different spheres and observed that an assessee that ceases to be a ‘local authority’ as defined in section 10(20) is not precluded from claiming exemption under section 11(1) of the 1961 Act.

1.6 Provisions of section 2(15) were amended by the Finance Act, 2008 (‘2008 amendment’) whereby a proviso was added to the definition of ‘charitable purpose’ stating that advancement of any other object of general public utility (GPU) shall not be a charitable purpose if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering service in relation thereto for a cess or fee or any other consideration [hereinafter, such activities are referred to as Commercial Activity/Activities) irrespective of the nature of use or application, or retention, of the income from such activity. The Finance Minister, in his budget speech for 2008-09 [(2008) 298 ITR (St.) 33 @ page 65] stated that genuine charitable organisations will not be affected by the 2008 amendments and that the amendment was introduced to exclude cases where some entities carrying on regular trade, commerce or business or providing services in relation thereto have sought to claim that their purpose falls under ‘charitable purpose.’ CBDT in its Circular No. 11 of 2008 dated 19th December, 2008 [(2009) 308 ITR (St.) 5] while clarifying the implications arising from the 2008 amendment stated that whether an assessee has a GPU object is a question of fact and if an assessee is engaged in any activity in the nature of trade, commerce or business, the GPU object will only be a mask or a device to hide the true purpose of trade, commerce or business. CBDT in its Circular No. 1 dated 27th March, 2009 [(2009) 310 ITR (St.) 42] explaining the 2008 amendment stated at pages 52 – 53 that it was noticed that a number of entities operating on commercial lines were claiming exemption under sections 10(23C) or 11 of the 1961 Act and that the 2008 amendments were made with a view to limiting the scope of the phrase ‘advancement of any other object of general public utility’ [i.e. GPU]. Finance Act, 2010 introduced second proviso to section 2(15) with retrospective effect from 1st April, 2009 to provide that the first proviso shall not apply if the total receipts from any activity in the nature of trade, commerce or business referred to in the first proviso does not exceed Rs. 10 lakhs in the previous year. This limit of Rs. 10 lakhs was thereafter increased to Rs. 25 lakhs by the Finance Act, 2011 with effect from 1st April, 2012. The current proviso in section 2(15) was introduced in place of the aforesaid first and the second provisos by the Finance Act, 2015 with effect from 1st April, 2016. The proviso as currently in force provides that advancement of an object of GPU shall not be a charitable purpose if it involves carrying on of any activity in the nature of trade, commerce or business, etc. for a fee or cess or any other consideration (i.e. Commercial Activity) unless (i) such an activity is undertaken in the course of actual carrying out of the advancement of any other object of GPU and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed 20 per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year.

1.7 Recently, Supreme Court in the case of CIT(E) vs. Ahmedabad Urban Development Authority and connected matters (449 ITR 1) has interpreted the last limb of the definition of charitable purpose ‘advancement of any other object of general public utility’ [i.e. GPU] and the provisos inserted by the 2008 and subsequent amendments. Therefore, it is thought fit to consider the said decision in this column. In all these matters, the Supreme Court was concerned with GPU Categories post 2008 amendments.

DIFFERENT CATEGORIES OF APPEALS BEFORE THE SUPREME COURT- BRIEF FACTS

2.1 The assessees in these batches of connected appeals before the Supreme Court were divided into six categories; namely – (i) statutory corporations, authorities or bodies, (ii) statutory regulatory bodies / authorities, (iii) trade promotion bodies, councils, associations or organizations, (iv) non-statutory bodies, (v) state cricket associations and (vi) private trusts. Brief facts of these categories are given hereinafter.

2.2 The lead matter of AUDA, which fell in the first category above, was an appeal filed by the Revenue from the decision of the Gujarat High Court in Ahmedabad Urban Development Authority vs. ACIT(E) (2017) 396 ITR 323 [AUDA]. The Gujarat High Court held that the activities of AUDA which was set up under the Town Planning Act with the object of proper development or redevelopment of urban area could not be said to be in the nature of trade, commerce or business.

2.2.1 In respect of the second category of assessee – statutory regulatory bodies/ authorities, the Delhi High Court in the case of Institute of Chartered Accountants of India vs. DGIT(E), Delhi (2013) 358 ITR 91 [ICAI] held that the assessee institute did not carry on any business, trade or commerce and that the activity of imparting education in the field of accountancy and conducting courses, providing coaching classes or undertaking campus placement interviews for a fee, etc. were activities in furtherance of its objects.

2.2.2 In one of the cases falling within the third category stated above, the Delhi High Court in the case of DIT vs. Apparel Export Promotion Council (2000) 244 ITR 736 [AEPC] dismissed the revenue’s appeal against the order of the Tribunal where the Tribunal had held that the assessee was a public charitable institution entitled to exemption under section 11 of the Act. The objects of AEPC, which was set-up in 1978, include promotion of ready-made garment export and for that to carry out various incidental activities such as providing training to instill skills in the work force, showcase the best capabilities of Indian Garment exports through the prestigious ‘Indian International Garment Fair’ organized twice a year by APEC, etc. It also provides information and market research to the Industry and carries out various related activities to assist the Industry. The tribunal had also held that as the assessee did not carry any activity for earning profit, it could not be said to be carrying on any ‘business’ as understood in common parlance.

2.2.3 In respect of a non-statutory body (fourth category) – GS1 India, the Delhi High Court in GS1 India vs. DGIT(E) (2014) 360 ITR 138 [GS1 India] took the view that the profit motive is determinative to arrive at the conclusion whether an activity is business, trade or commerce. The High Court held that the assessee was a charitable society set up under the aegis of the Union Government with the object of creating awareness and promoting study of Global standards, location numbering, etc. and a mere fact that a small contribution by way of fee was paid by beneficiaries would not convert a charitable activity into business, commerce or trade.

2.2.4 While dealing with the eligibility of a state cricket associations such as Suarashtra, Gujarat, Baroda Cricket Association, etc (fifth category), the Gujarat High Court in the case of DIT(E) vs. Gujarat Cricket Association (2019) 419 ITR 561 (GCA) held that the assessee was set up with the main and predominant object and activity to promote, regulate and control the game of cricket in the State of Gujarat. The GCA’s record revealed that large amount of receipts included income from sale of match tickets, sale of space, subsidy from BCCI, etc., as against which the amount of expenditure was much lower leaving good amount of excess of income for the relevant year. On these facts, the High Court held that the activities of the assessee were charitable in nature as the driving force of the assessee was not a desire to earn profits but to promote the game of cricket and nurture the best of the talent. Similar position was revealed from the records of Saurashtra Cricket Association.

2.2.5 In respect of the sixth category being private trusts, the Punjab & Haryana High Courts in the case of Tribune Trust vs. CIT (2017) 390 ITR 547 (Tribune) held that the assessee’s activity falls within the ambit of the words “advancement of any other object of general public utility” and that the decision of the Privy Council in assessee’s own case (referred to in para 1.2.1 above) still holds good. The High Court, however, held that as the activities of the assessee were carried on with the predominant motive of making a profit and there was nothing to show that the surplus accumulated had been ploughed back for charitable purposes, the assessee did not satisfy the definition of ‘charitable purpose’ in view of the proviso to section 2(15) of the Act.

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

3.1 Appeals were filed challenging the aforesaid decisions of the High Courts as well as other decisions in connected matters. Before the Supreme Court, the Revenue contended that the decisions of the Supreme Court in the case of Tribune and Andhra Chamber (referred to in paras 1.2.1& 1.2.2) were rendered in the context of the 1922 Act which did not contain any restrictions forbidding charitable entities from carrying on trade or business activities. Relying on the decisions in the cases of LokaShikshana Trust and Indian Chamber (referred to in paras 1.3.1 &1.3.2), the Revenue highlighted the change brought about by section 2(15) in the 1961 Act and the addition of the words ‘not involving the carrying on of any activity for profit’ and submitted that the intent of the Parliament in changing the law was to expressly forbid tax exemption benefit if an entity was involved in carrying on trade or business. The Revenue placed a reliance upon the speech of the Finance Minister while delivering the budget to bring out the rationale of the amendments. The Revenue also placed reliance on section 13(1)(bb) of the 1961 Act to state that only charities set up for “relief of the poor, education or medical relief” (i.e. specified categories) could claim exemption if they carried on business “in the course of actual carrying out of a primary purpose of the trust or institution” and not charities falling within GPU limb.

3.1.1 The Revenue also contended that the decision in Surat Art’s case had ignored the significance of the addition of the expression “advancement of any other object of general public utility not involving the carrying on of any activity for profit” and that Constitution Bench of the Supreme Court was wrong in laying down the ‘predominant test’. The Revenue also referred to the amendments made in 2008 onwards whereby GPU category charities were permitted to carry on activities in the nature of business up to the specified limits. The Revenue further contended that in view of the proviso to section 2(15), the Commercial Activity the proceeds from which are ploughed back into charity are also impermissible. With respect to the assessees falling within category (i) as stated in para 2.2 above – ‘statutory corporations, etc –the Revenue urged that even though such assessees may trace their origin to specific Central or State laws, they have to fulfill the restrictive conditions laid down in section 2(15) and proviso thereto.

3.2 The assessee in the lead matter, Ahmedabad Urban Development Authority [AUDA], fell within the first category referred in para 2.1 above. It was contended that it was a corporation set up and established by or under statute enacted by the State Legislature and that it did not carry out business activities. Its functions were controlled by the parent enactment under which it was created and that surplus generated was used for furthering its objectives. The assessee placed reliance on the decision in Surat Art’s case to contend that the pre-dominant objective should not be to carry on trade or business but to advance the purpose of general public utility and that surplus arising from some activity would not disentitle the entity from the benefit of tax exemption. Reliance was also placed on CBDT Circular 11 of 2008 and the Finance Minister’s speech to contend that exemption could not be denied to a genuine charitable organization. The assessee further contended that the expressions ‘trade’, ‘commerce’ or ‘business’ were interpreted to mean activities driven by profit motive and that organisations created with a view to earn profit are precluded from claiming exemption as a charitable organization. The assessee statutory corporations in the connected matters further urged that where they perform government functions and operate on a no profit – no loss basis, their activities could not be regarded as trade or business. The assessee – Karnataka Industrial Areas Development Board – also urged that it was a ‘State’ under Article 12 of the Constitution of India (Constitution) and its activities, therefore, could not be regarded as trade or business.

3.2.1 Submissions were also made to contend that the term “for a cess or fee or any other consideration” used in the proviso to section 2(15) was clearly violative of Article 14 as it failed to make a distinction between activities carried out by the State or by the instrumentalities or agencies of the State, and those carried out by commercial entities for which a consideration is charged. The assessee also pointed out that Article 289(1) of the Constitution exempts States’ property and income from Union taxation and, therefore, to permit levy of income tax on cess or fee collected by a State would violate Article 289(1) and, hence, the word “cess” or “fee” in the proviso to section 2(15) of the 1961 Act was liable to be declared unconstitutional and violative of Articles 14 and Article 289 in the context of state undertakings.

3.2.2 In respect of the second category being statutory regulatory bodies/authorities referred to in para 2.1 above, the assessee – Institute of Chartered Accountants of India [ICAI] stated that it was established under the Chartered Accountants Act, 1949 to impart formal and quality education in accounting and, thereafter, to regulate the profession of Chartered Accountancy in India and it was under the control and supervision of the Ministry of Corporate Affairs, Government of India (Corporate Ministry). The assessee submitted that surplus generated due to the fees collected from conducting coaching and revision classes was not a business or commercial activity but wholly incidental and ancillary to its objects which were to provide education and conduct examinations of the candidates enrolled for chartered accountancy courses. The assessee, therefore, submitted that separate books of account were not required to be maintained in terms of section 11(4A) read with the fifth and seventh proviso to section 10(23C) of the 1961 Act. The assessee further contended that as its activities fell within the purview of ‘education’ and not under the GPU category, it was not hit by the proviso to section 2(15) of the 1961 Act inserted by the 2008 amendment. The assessee also submitted that its activities were not driven by profits and that the word ‘profit’ should never be used for a body set up for public purposes to regulate activities in public interest.

3.2.3 In respect of the third category referred to in para 2.1 above, being trade promotion bodies, councils, associations or organizations, one of the assessees being AEPC referred to in para 2.2.2., contended that it was a non-profit organization set up with the approval of the Central Government for promotion of exports of garments from India and did not engage in any activity for profit. The assessee stated that mere earning of income and/or charging any fees is not barred by the proviso to section 2(15).

3.2.4 In respect of the fourth category referred to in para 2.1 above, being non-statutory bodies, one of the assessees, ‘GS1 India’ stated that it was registered as a society in 1996 whose administrative control vests with the Ministry of Commerce, Government of India (Corporate Ministry). The assessee urged that it was not involved in trade, commerce or business and also that the profit motive was absent. Another assessee (NIXI) falling within this category, submitted that it was a company set up under section 25 of the Companies Act, 1956 and was barred from undertaking any commercial or business activity for profit and was bound by strict licensing conditions, including prohibition on alteration in the memorandum of association, without prior consent of the government.

3.2.5 In respect of the fifth category referred to in para 2.1 above, being state cricket associations, one of the assessees Saurashtra Cricket Association submitted that it operated purely to advance its objective of promoting the sport and that it should not be considered as pursuing Commercial Activities. The assessee contended that under the proviso to section 2(15) of the 1961 Act, an organization ceases to be charitable if it undertakes an activity for a cess or a fee or other consideration. The assessee submitted that the term ‘cess’ had to be read down as non-statutory and that levy of any statutory cess or fee authorized or compelled by law, which is within the domain of the state legislature, cannot be construed as taxable. The assessee further submitted that the sport of cricket is a form of education and even if it is not considered as a field of education, it is still an object of general public utility. The assessee further submitted that selling tickets for a sport performance or match is to promote cricket and not trade.

3.2.6 In respect of the sixth category referred to in para 2.1 above, being private trusts, assessee Tribune Trust submitted that its charitable nature was upheld by the Privy Council in its decision referred to in para 1.2.1 above.

3.3 In response to the assessee’s submissions, the Revenue urged that Constitution does not provide immunity from taxation for the State if they carry on trade or business. The Revenue further submitted that one should not merely look at the objects of the trust to determine if it is for a charitable purpose but also whether the purpose of the trust is “advancement of any other object of general public utility”.

[To be continued]

shailesh.kwebmaker

Section 197: Withholding tax certificate – Non application of mind – Binding effect of the Supreme Court judgement – merely filing/pendency of the review petition will not dilute the effect of the decisions

3 Milestone Systems A/S vs.
Deputy CIT Circle Int Tax 2(2) (1) Delhi
[W.P.(C) 3639/2022, A.Y,: 2022 -23;
Dated: 14th March, 2023]

Section 197: Withholding tax certificate – Non application of mind – Binding effect of the Supreme Court judgement – merely filing/pendency of the review petition will not dilute the effect of the decisions

The petitioner is a non-resident company, incorporated under the laws of Denmark. The petitioner, admittedly, has been issued a tax residency certificate by the concerned authorities in Denmark. It is the petitioner’s case that it is in the business of providing IP Video Management Software and other video surveillance related products to entities and persons across the globe. In so far as India is concerned, the petitioner claims, that it has entered into a Distributor Partner Agreement with various companies/entities for sale of its Software. It is the petitioner’s case, that the Distributor Agreement does not confer any right of use of copyright on its partners or the end user. The petitioner claims, that all that the distributor partner acquires under the Distributor Agreement is a license to the copyrighted software. It is, therefore, the petitioner’s case, that this aspect of the matter has been considered in great detail by the Supreme Court in the judgment rendered in Engineering Analysis Center of Excellence Pvt Ltd vs. Commissioner of Income Tax & Anr 2021 SCC OnLine SC 159.

The petitioner, contends that the concerned officer, in passing the impugned order dated 19th May, 2021, has side stepped a vital issue i.e., whether or not the consideration received by the petitioner against the sale of software constituted royalty within the meaning of Section 9(1)(vi) and/or Article 13(3) of the Double Taxation Avoidance Agreement (DTAA) entered into between India and Denmark.

The department contented that while examining an application preferred under section 197 of the Act, the concerned officer is not carrying out an assessment. Therefore, the parameters which apply for assessing taxable income would not get triggered, while rendering a decision qua an application filed under the aforementioned provision. Under the provisions of Section 195, deduction of withholding tax is the rule, and issuance of a lower withholding tax certificate under Section 197 of the Act is an exception.

The Honourable Court observed that, the impugned order does not deal with the core issue which arose for consideration, and was the basis on which the application had been preferred by the petitioner under section 197 of the Act.

The Honourable Court observed that it is the petitioner’s case that the Software sold to its distributor partners under the Distributor Agreement, does not confer, either on the distributor partner or the reseller, the right to make use of the original copyright which vests in the petitioner. This plea was sought to be supported by the petitioner, by relying upon the judgment of the Supreme Court in Engineering Analysis, wherein inter alia, the Court has ruled, that consideration received on sale of copyrighted material cannot be equated with the consideration received for right to use original copyright work. Therefore, this central issue had to be dealt with by the concerned officer. Instead, as is evident on a perusal of the impugned order, the concerned officer has simply by-passed the aforementioned judgement of the Supreme Court by observing that the revenue has preferred a review petition, and that the same is pending adjudication.

The court held that as long as the judgment of the Supreme Court is in force, the concerned authority could not have side stepped the judgment, based on the fact that the review petition had been preferred. It would have been another matter, if the concerned officer had, on facts, distinguished the judgment of the Supreme Court in Engineering Analysis. That apart, the least that the concerned officer ought to have done was to, at least, broadly, look at the terms of Distributor Agreement, to ascertain as to what is the nature of right which is conferred on the distributor partner and/or the reseller.

The court observed that there is no reference whatsoever to any of the clauses of the Distributor Agreement. The concerned officer has, instead, picked up one of the remitters i.e., the distributor partners, and made observations, which to say the least, do not meet the parameters set forth in Rule 28AA of the Income Tax Rules, 1962 for estimating the income, that the petitioner may have earned in the given FY. A erroneous approach is adopted by the concerned officer.

The concerned officer was required to examine the application, in the background of the parameters set forth in Rule 28AA of the Rules. Concededly, that exercise has not been carried out.

The petitioner’s entire case is that the sum that it receives under the Distributor Agreement is not chargeable to tax. It is in that context, that the petitioner has moved an application under section 197 of the Act for being issued a certificate with “NIL” rate of withholding tax.

The Honourable Court set aside the impugned certificate and the order, with a direction to the concerned officer, to revisit the application. While doing so, the concerned officer will apply his mind, inter alia, to the terms of the Distributor Agreement, and the ratio of the judgment rendered by the Supreme Court in Engineering Analysis (supra). In this context, the provisions of Rule 28AA shall also be kept in mind. The concerned officer will not be burdened by the fact that a review petition is pending, in respect of the judgment rendered by the Supreme Court in Engineering Analysis (supra).

The writ petition was, accordingly, disposed off.

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Section 179 – Recovery proceedings against the Director of the company – Taxes allegedly due from the company – gross neglect, misfeasance or breach of duty on the part of the assessee in relation to the affairs of the company not proved

1 Geeta P. Kamat vs. Principal CIT-10 & Ors.
[Writ Petition No. 3159 of 2019,
Dated: 20th February, 2023 (Bom) (HC)]

Section 179 – Recovery proceedings against the Director of the company – Taxes allegedly due from the company – gross neglect, misfeasance or breach of duty on the part of the assessee in relation to the affairs of the company not proved:

A show cause notice dated 12th January, 2017 was served upon the petitioner in terms of section 179 of the Act requiring the petitioner to show cause as to why the recovery proceedings should not be initiated against her in her capacity as a director of KAPL. The assessee company was not traceable on the available addresses and further the tax dues could not be recovered despite attachment of the bank accounts as the funds available were insufficient. An amount of Rs.1404.42 lakhs was thus sought to be recovered from the petitioner.

With a view to prove that the non-recovery of the taxes due could not be attributed to any gross neglect, misfeasance, breach of duty on her part, in relation to the affairs of the company, the petitioner took a stand that the petitioner, as a director in the company had no liberty, authorization or independence to act in a particular manner for the benefit of KAPL. She did not have any control over the company’s affairs. It was stated that the petitioner did not have any authority to sign any cheque independently or take any decision on behalf of the company nor did KAPL provide any operational control or space to the petitioner to perform her duties. It was also stated that the petitioner did not have any functional responsibility assigned to her and no one from KAPL reported to her or her husband Prakash Kamat, who was also a shareholder and a director in the company.

The petitioner’s husband, Prakash Kamat is stated to have developed a smart card-based ticketing solution for being used at various public transport organizations like BEST, Central and Western Suburban trains, etc. Trials were run successfully and an agreement was entered into between Prakash Kamat, BEST and Central Railways in 2006. The projects with BEST and Railways were to be implemented on “BOT” model and required funds to the tune of Rs. 50 to 60 crores as an initial investment. Khaleej Finance and Investment, a company registered in Bahrain (hereinafter referred to as “KFI”) agreed to make an investment in the said project subject to certain conditions, according to which a Special Purpose Vehicle was to be incorporated to carry on the said project which lead to incorporation of KAPL on 30th March, 2006. An investment was made by KFI in the said project through its Mauritius-based company “AFC System Ltd (hereinafter referred to as “AFC”)”. A joint venture agreement dated 21st June, 2006 (“JVA”), Deed of Pledge dated 21st June, 2006 (‘”DP”) along with Irrevocable Power of Attorney dated June 2006 (“IPOA”), was entered into between Prakash Kamat, the petitioner, KFI and the said company-KAPL.

The petitioner also stated and highlighted the fact that due to some differences that had cropped up with KFI since January 2009, the petitioner’s husband was removed as the Managing Director of KAPL in September 2009 along with the petitioner herein. It was also stated that while the petitioner was a director during the financial year 2007-08, since the petitioner stood removed as such director in September 2009, she could not be held liable for the liability of KAPL for the financial year 2008-09 relevant to assessment year 2009-10. It was also stated that the petitioner was not at all aware after she had been removed that there was any tax liability which was due and payable by KAPL, and therefore, it was stated that she could not have been held guilty of any gross neglect, malfeasance or breach of duty on her part in relation to the affairs of the company.

The AO by virtue of the order impugned dated 22nd December, 2017 passed under section 179 of the Act rejected the contention of the petitioner. It was held that not only had the petitioner failed to establish that she was not actively involved in the management of the company during the financial year 2007-08 and 2008-09 and further that she had failed to establish that there was no gross neglect, malfeasance or breach of duty on her part. The AO held that there was not a ‘shred of doubt’ that she was actively involved in the day-to-day affairs of the company till she was removed in September 2009. As regards the disputes between the petitioner and KFI, the AO held that it was normal to have such disputes during the working of an enterprise.

The petitioner preferred a revision petition under section 264 of the Act against the said order, which too, came to be dismissed vide order dated 18th March, 2019 simply on the ground that the petitioner was a director for the relevant assessment years and hence was liable.

The petitioner urged that the entire approach adopted by the AO in passing the order under section 179 of the Act was misplaced and the mistake was perpetuated by the revisional authority in dismissing the revision petition filed by the petitioner against the said order. It was urged that the order passed by the AO was perverse in as much as based upon the facts on record no proceedings under section 179 of the Act could have been initiated against the petitioner for the purposes of recovery from the petitioner the liability of the company for the assessment years 2007-08 and 2008-09. It was urged that the petitioner had placed enough material on record reflecting that the petitioner was not the Managing Director of the company and was not at the helm of affairs as such. She did not have any independent authority to take any decision on behalf of the company nor did she have any independent operational control. Yet, the AO proceeded to hold that the petitioner had failed to prove that there was no gross neglect, malfeasance or breach of duty on her part in relation to the affairs of the company.

The Honourable Court observed that Section 179 of the Act inter-alia envisages that where any due from a private company in respect of any income of any previous year cannot be recovered, then every person who was a director of the private company at any time during the relevant previous year, shall be jointly and severally liable for the payment of such a tax; unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. It therefore follows that if tax dues from a private company cannot be recovered then, the same can be recovered from every person who was a director of a private company at any time during the relevant previous year. However, such a director can absolve himself if he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty in relation to the affairs of the company.

The Honourable Court observed that in so far as the requirement of the first part of the section is concerned, it can be seen from the order passed under section 179 of the Act that steps were taken for recovery against the company M/s Kaizen Automation Pvt Ltd (KAPL) including attachment of its bank accounts which did not yield any results. The company is also stated to be not traceable on the addresses available with the AO, and therefore, according to the AO, the only course left was to proceed against the directors in terms of section 179 of the Act.

The stand of the petitioner is that she could not be proceeded against, in as much as there was no gross neglect, malfeasance or breach of duty on her part in relation to the affairs of the company. The AO, however, did not accept this assertion. It laid emphasis on the fact that the petitioner had actively participated in the affairs of the company at least till the date of her removal in September 2009 and proceeded to hold that the petitioner had failed to prove that there was any gross neglect, misfeasance or breach of duty on her part as regards the affairs of the company. However, in the order impugned dated 22nd December, 2017 passed under section 179 of the Act, although the AO did make a reference to various Board meetings attended by the petitioner from time to time from 2006 till 8th January, 2008, there was no material highlighted by the AO, contrary to the material on record placed by the petitioner, based upon which the petitioner could be held to be guilty of gross neglect, malfeasance or breach of duty in regard to the affairs of the company. The petitioner had brought on record material to suggest lack of financial control and decision making powers. She had a very limited role to play in the company as a director and that the entire decision making process was with the directors appointed by the investors, i.e., KFI which was the single largest shareholder of the JVC. She had sufficiently discharged the burden cast upon her in terms of section 179 to absolve herself of the liability of the company.

The Honourable Court observed that the AO appears to have applied himself more on the issue of the petitioner participating in the affairs of the company for purposes of pinning liability in terms of section 179; rather than discovering the element of ‘gross neglect’, misfeasance or ‘breach of duty’ on the part of the petitioner in relation to the affairs of the company and establishing its co-relation with non-recovery of tax dues. The petitioner, having discharged the initial burden, the AO had to show as to how the petitioner could be attributed such a gross neglect, misfeasance or breach of duty on her part.

Reliance was placed on Maganbhai Hansrajbhai Patel [2012] 211 Taxman 386 (Gujarat) and Ram Prakash Singeshwar Rungta & Ors [2015] 370 ITR 641 (Gujarat)

The Honourable Court held that in the present case, the AO has not specifically held the petitioner to be guilty of gross neglect, misfeasance or breach of duty on part in relation to the affairs of the company. Not a single incident, decision or action has been highlighted by the AO, which would be treated as an act of gross neglect, breach of duty or malfeasance which would have the remotest potential of resulting in non-recovery of tax due in future.

The order impugned dated 22nd December, 2017 as also the order dated 18th March, 2019 in revision passed was held to be unsustainable.

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Search and seizure — Assessment in search cases — Cash credit — Assessment completed on the date of search — No incriminating document against the assessee found during the search — Long-term capital gains added as unexplained cash based on statement of the Managing Director of searched entity recorded under section 132(4) — Addition unsustainable.

8 Principal CIT vs. Suman Agarwal
[2023] 451 ITR 364 (Del)
A. Y.: 2011-12
Date of order: 28th July, 2022
Sections 68, 132 and 153A of ITA 1961

Search and seizure — Assessment in search cases — Cash credit — Assessment completed on the date of search — No incriminating document against the assessee found during the search — Long-term capital gains added as unexplained cash based on statement of the Managing Director of searched entity recorded under section 132(4) — Addition unsustainable.

Search and seizure operations were conducted under section 132 of the Income-tax Act, 1961 and survey operations were carried out under section 133A in the business and residential premises of one KRP and its group companies which provided bogus accommodation entries. The AO relied upon a letter and the statement recorded under section 132(4) of the Managing Director of KRP and issued a notice under section 153A against the assessee for the A. Y. 2011-12. He held that the amount of long- term capital gains claimed by the assessee in her return of income was an accommodation entry pertaining to shares of a company KGN and treated the amount as unexplained cash credit under section 68 of the Act.

The Tribunal found that there was no incriminating material against the assessee found during the search of the assessee and held that statements recorded under section 132(4) would not by themselves constitute as incriminating material in the absence of any corroborative evidence and accordingly set aside the addition made by the AO.

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

“i) The Department had not placed on record any incriminating material which was found as a result of the search conducted u/s. 132. There was no reference to the company KGN in either the letter or the statement of the managing director of the company KRP in respect of which search was conducted u/s. 132(4). No other material found during the search pertaining to KGN had been placed on record.

ii) There was no infirmity in the order passed by the Tribunal setting aside the addition made u/s. 68 by the Assessing Officer. No question of law arose.”

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Validity of Reassessment Proceedings

ISSUE FOR CONSIDERATION

The scope and time limits for initiation of reassessment and the procedure of reassessment underwent a significant change with effect from 1st April, 2021, due to the amendments effected through the Finance Act, 2021. Through these amendments, sections 147, 148, 149 and 151 were replaced, and a new section 148A, laying down a new procedure to be followed before issue of notice under section 148, was inserted.

Till 31st March 2021, section 149 laid down the time limit for issue of notice for reassessment as under:

“149. (1) No notice under section 148 shall be issued for the relevant assessment year,—

(a) if four years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b) or clause (c);

(b) if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year;

(c) if four years, but not more than sixteen years, have elapsed from the end of the relevant assessment year unless the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment.

Explanation.—In determining income chargeable to tax which has escaped assessment for the purposes of this sub-section, the provisions of Explanation 2 of section 147 shall apply as they apply for the purposes of that section.”

The new section 149, effective 1st April, 2021, reads as under:

“149. (1) No notice under section 148 shall be issued for the relevant assessment year,—

(a) if three years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b);

(b) if three years, but not more than ten years, have elapsed from the end of the relevant assessment year unless the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more for that year:

Provided that no notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of this section, as they stood immediately before the commencement of the Finance Act, 2021:

Provided further that the provisions of this sub-section shall not apply in a case, where a notice under section 153A, or section 153C read with section 153A, is required to be issued in relation to a search initiated under section 132 or books of account, other documents or any assets requisitioned under section 132A, on or before the 31st day of March, 2021:

Provided also that for the purposes of computing the period of limitation as per this section, the time or extended time allowed to the assessee, as per show-cause notice issued under clause (b) of section 148A or the period during which the proceeding under section 148A is stayed by an order or injunction of any court, shall be excluded:

Provided also that where immediately after the exclusion of the period referred to in the immediately preceding proviso, the period of limitation available to the Assessing Officer for passing an order under clause (d) of section 148A is less than seven days, such remaining period shall be extended to seven days and the period of limitation under this sub-section shall be deemed to be extended accordingly.

Explanation: For the purposes of clause (b) of this sub-section, “asset” shall include immovable property, being land or building or both, shares and securities, loans and advances, deposits in bank account.”

The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) was enacted to relax certain timelines and requirements, in the light of the COVID-19 pandemic and related lockdowns. Section 3(1) of that Act provided that where, any time-limit had been prescribed under a specified Act which falls during the period from 20th March, 2020 to 31st December, 2020, or such other date after 31st December, 2020, as the Central Government may notify, for the completion or compliance of such action as completion of any proceeding or passing of any order or issuance of any notice, intimation, notification, sanction or approval by any authority under the provisions of the specified Act; , and where completion or compliance of such action had not been made within such time, then the time-limit for completion or compliance of such action shall stand extended to 31st March, 2021, or such other date after 31st March, 2021, as the Central Government may notify. Pursuant to this, notifications were issued from time to time, whereby the time limits up to 31st March 2021 for issue of various notices (including notices under section 148) were extended till 30th June 2021.

Pursuant to such notifications under TOLA, a large number of notices for reassessment were issued from April to June 2021 under the old section 148 r.w.s 149. Many of these notices were challenged in writ petitions before the High Courts. Some High Courts had held that such notices issued after 31st March, 2021 under the old law were invalid, as they could only have been issued under the new law which became effective from April 2021 by following the procedure prescribed under section148A, within the timelines prescribed by section 149.

All cases were then consolidated and heard by the Supreme Court. The Supreme Court, in the case reported as Union of India vs. Ashish Agarwal 444 ITR 1, held that the notices issued under old section 148 to the respective assessees were invalid but should nonetheless be deemed to have been issued under newly inserted section 148A as substituted by the Finance Act, 2021 and treated to be show-cause notices in terms of section 148A (b). With this the Supreme court regularised the defaults of the AOs under the special powers of Article 142 of the Constitution of India. The AOs were directed to provide to the assessees the information and material relied upon by the revenue within 30 days, so that the assessees could reply to the notices within two weeks thereafter. The requirement of conducting any enquiry with the prior approval of the specified authority under section 148A(a) was dispensed with as a one-time measure vis-à-vis those notices which had been issued under the old provisions of section 148 prior to its substitution with effect from 1st April, 2021. The Supreme Court, at the same time directed that such regularised reassessment proceedings should in all cases be subjected to compliance of all the procedural requirements and the defences which might be available to the assessee under the substituted provisions of sections 147 to 151 and which may be available under the Finance Act, 2021 and in law.

Given the fact that these notices issued under old Section148 were deemed to be notices under section 148A(b), and orders under section 148A(d) were to be passed after completion of enquiry along with issue of notice under new Section 148, the issue has arisen about the applicable time limit in such cases – whether the time limits under the pre-amended section 149 apply or whether the time limits under the amended section 149 apply for issue of notice under new Section148. Accordingly, the question that has arisen for the courts is whether notices under the old Section 148 issued after 31st March. 2021, particularly for A.Ys. 2013-14 and 2014-15 and for A.Y. 2015-16 under the new section 148 pursuant to notices issued under the old section 148 are validly issued within the time prescribed in new section 149. While the Delhi High Court has taken the view that such notices were validly issued within the time extended by TOLA, the Allahabad and Gujarat High Courts have held that such notices were invalid as they were not issued within the permissible time limit prescribed under new law.

TOUCHSTONE HOLDINGS CASE

The issue first came up before the Delhi High Court in the case of Touchstone Holdings (P) Ltd vs. ITO 289 Taxman 462.

In this case, a notice under the pre-amended section 148 was issued on 29th June, 2021 for the A.Y. 2013-14 in respect of an item of purchase of shares of Rs 69.93 lakhs. Pursuant to the decision of the Supreme Court in the case of Ashish Agarwal (supra), proceedings continued under section 148A, and an order was finally passed under section 148A(d) on 20th July, 2022, with notice under the amended section 148 being issued on the same date. The assessee challenged this order and notice in a writ petition before the Delhi High Court.

Besides arguing that the assessee had no connection with the concerned transaction, on behalf of the assessee, it was argued that as per the first proviso to Section 149 of the Act (as amended by Finance Act, 2021), no notice for re-assessment could be issued for A.Y. 2013-14 as the time limit for initiating the proceedings expired on 30th March, 2020 as per the provisions of Section 149 (as it stood prior to its amendment by Finance Act, 2021). It was therefore contended that the proceedings pursuant to the notice dated 29th June, 2021 and the judgement of the Supreme Court in the case of Ashish Agarwal (supra), were time barred.

On behalf of the Revenue, it was submitted that Section 3 of TOLA applied to the pre-amended Section 149 and therefore the initial notice dated 29th June, 2021, and the proceedings taken in continuation as per the judgment of Ashish Agarwal (supra) were not time barred. Further submissions were made regarding the merits of the reassessment proceedings.

Examining the submissions on merits of the reassessment proceedings, the Delhi High Court held that these being disputed questions of fact, could not be adjudicated by it in writ proceedings. The Delhi High Court further held that the contention of the assessee that the present proceedings were time barred was not correct in the facts of the case, which pertained to A.Y. 2013-2014 and where reassessment proceedings were initiated during the time limit extended by TOLA. Examining the pre-amended provisions of Section 149, the Delhi High Court noted that the time limit for issuing notice under unamended Section 149, which was falling from 20th March, 2020 till 31st March 2021, was extended by Section 3 of TOLA read with Notification No. 20/2021 dated 31st March, 2021, and Notification No. 38/2021 dated 27th April, 2021, until 30th June, 2021.

The Delhi High Court noted that the initial notice in the proceedings before it was issued on 29th June, 2021 i.e. within extended time limit. The notice was quashed by the Delhi High Court following its judgment in Mon Mohan Kohli vs. ACIT 441 ITR 207, as the mandatory procedure of Section 148A was not followed before issuing the notice. In the judgment, the Delhi High Court had struck down Explanations A(a)(ii) and A(b) to the said notifications. However, the relevant portion of the notification, which extended the time limit for issuance of time barring reassessment notices until 30th June, 2021 was not struck down by the Court and in fact the Court categorically held at paragraph 98 that power of re-assessment that existed prior to 31st March 2021 stood extended till 30th June, 2021. The notice stood revived as a notice under section 148A(b) due to the decision of the Supreme Court in the case of Ashish Agarwal (supra).

In the view of the Delhi High Court, consequently, since the time period for issuance of reassessment notice for the A.Y. 2013-14 stood extended until 30th June, 2021, the first proviso of the amended Section 149 was not attracted in the facts of the case. Since the time limit for initiating assessment proceedings for A.Y. 2013-14 stood extended till 30th June, 2021, consequently, the reassessment notice dated 29th June, 2021, which had been issued within the extended period of limitation was not time barred.

The Delhi High Court also held that the challenge to paragraph 6.2.(i) of the CBDT Instruction No. 1/2022 dated 11th May, 2022 was not maintainable. The contention of the assessee that assessment for A.Y. 2013-14 became time barred on 31st March, 2020 was incorrect. The time period for assessment stood extended till 30th June, 2021.The initial reassessment notice for A.Y. 2013-14 had been issued to the petitioner within the said extended period of limitation. The Supreme Court had declared that the reassessment notice be deemed as a notice issued under section 148A of the Act and permitted Revenue to complete the said proceedings. The income alleged to have escaped assessment was more than Rs 50 lakhs and therefore, the rigour of Section 149 (1)(b) of the Act (as amended by the Finance Act, 2021) had been satisfied.

The Delhi High Court therefore dismissed the writ petition. This decision was subsequently followed by the Delhi High Court in the case of Kusum Gupta vs ITO 451 ITR 142.

RAJEEV BANSAL’S CASE

The issue came up again before the Allahabad High Court in the case of Rajeev Bansal vs. Union of India 147 taxmann.com 549.

A large number of writ petitions involving A.Ys. 2013-14 to 2017-18 were heard by the Allahabad High Court together. In all these cases, notice had been issued under the pre-amended section 148 between 1st April, 2021 to 30th June, 2021. Two legal issues were framed by the court, which would cover the issues involved in all the cases. These were:

(i) Whether the reassessment proceedings initiated with the notice under section 148 (deemed to be notice under section 148A), issued between 1st April, 2021 and 30th June, 2021, can be conducted by giving benefit of relaxation/extension under TOLA upto 30th March, 2021, and then the time limit prescribed in Section 149(1)(b) (as substituted w.e.f. 01st April, 2021) is to be counted by giving such relaxation benefit of TOLA from 30th March, 2020 onwards to the revenue.

(ii) Whether in respect of the proceedings where the first proviso to Section 149(1)(b) is attracted, benefit of TOLA will be available to the revenue, or in other words, the relaxation law under TOLA would govern the time frame prescribed under the first proviso to Section 149 as inserted by the Finance Act, 2021, in such cases?

For the A.Ys. 2013-14 and 2014-15, it was argued by the counsels for the assessees that the assessment for these years cannot be reopened, in as much as, maximum period of six years prescribed in pre-amendment provision of Section 149(1)(b) had expired on 31st March, 2021. No notice under section 148 could be issued in a case for the A.Y. 2013-14 and 2014-15 on or after 01st April, 2021, being time barred, on account of being beyond the time limit specified under the provisions of Section 149(1)(b) as they stood immediately before the commencement of the Finance Act 2021. For the A.Ys. 2015-16, 2016-17, 2017-18, it was contended that the monetary threshold and other requirements of the Income Tax Act in the post-amendment regime, i.e. after the commencement of the Finance Act, 2021 have to be followed. The validity of the jurisdictional notice under section 148 was thus to be tested on the touchstone of compliances or fulfilment of requirements by the revenue as per Section 149(1)(b) and the first proviso to Section 149(1) inserted by the amendment under the Finance Act 2021, w.e.f. 1st April, 2021.

The Allahabad High Court noted that it was undisputed that the notices issued under the pre-amendment section 148 were to be regarded as notices issued under section 148A(b). The High Court analysed the provisions of the pre-amended section 148, the provisions of TOLA and the notifications issued under TOLA. It also analysed the history of the litigation in this regard, commencing from its decision in the case of Ashok Kumar Agarwal vs. Union of India 131 taxmann.com 22 and ending with the Supreme Court decision in the case of Ashish Agarwal (supra). The Allahabad High Court thereafter took note of the CBDT instruction No. 1 of 2022, dated 11th May, 2022, for implementation of the judgement of the Supreme Court in Ashish Agarwal (supra).

The Allahabad High Court thereafter noted the arguments on behalf of the assessees as under:

(i) After the amendment brought by the Finance Act, 2021, new/amended provisions will apply to reassessment proceedings.

(ii) TOLA will not extend the time limit provided for initiation of reassessment proceedings under the amended Sections 147 to 151 from 1st April, 2021 onwards.

(iii) The result is that the revenue has to comply with all the requirements of the substituted/amended provisions of Sections 147 to 151A in the reassessment proceedings, initiated on or after 1st April, 2021. All compliances under the amended provisions will have to be made by the revenue.

(iv) Simultaneously, all defences under the substituted/amended provisions will be available to the assessee.

(v) About the impact of TOLA on the amendment by the Finance Act, 2021, no time extension under section 3(1) of TOLA can be granted in the time limit provided under the substituted provisions. Section 3(1) of TOLA saved only the reassessment proceeding as they existed under the unamended law.

(vi) The scheme of assessment underwent a substantial change with the enforcement of the Finance Act, 2021. The general provisions of TOLA cannot vary the requirements of the Finance Act, 2021, which is a special provision, as the special overrides general.

(vii) Reassessment notice under section 148 can be issued only upon the jurisdiction being validly assumed by the assessing authority, for which the compliances of substituted provisions of Sections 149 to 151A have to be made by the revenue.

(viii) New/amended provisions are beneficial in nature for the assessee and provide certain pre-requisite conditions/monetary threshold, etc. to be adhered to by the revenue to issue jurisdictional notice under section 148. The revenue has to meet a higher threshold to discharge a positive burden because of the substantive changes made in the new regime.

(ix) The pre-requisite conditions to issue notice under section 148 in the pre and post amendment regime demonstrate that for the reassessment notice after elapse of the period of 3 years but before 10 years from the end of the relevant assessment year, notice under section 148 cannot be issued unless the AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, represented in the form of assets, which has escaped assessment, amount to or is likely to amount to Rs.50 lakhs or more for that year.

(x) The monetary threshold for opening of assessment after elapse of three years for the period upto ten years has, thus, been put in place.

(xi) Further, first proviso to sub-section (1) of Section 149 has been placed to assert that the cases wherein notices could not have been issued within the period of six years as per clause (b) of sub-section (1) of Section 149 under the pre-amendment provision, reassessment notices cannot be issued on or after 1st April, 2021 after the commencement of the Finance Act, 2021, as such cases have become time barred.

(xii) Such cases cannot be reopened by giving an extension in the time limit by applying the provisions of TOLA.

(xiii) The Finance Act, 2021 had limited the applicability of TOLA and after amendment, the compliances/conditions under the amended provisions have to be fulfilled.

(xiv) The Apex Court in Ashish Agarwal (supra) has categorically provided that all defences available to the assessee including those under section 149 and all rights and contentions available to the concerned assessee and revenue under the Finance Act, 2021 and in law, shall continue to be available. The effect of the said observation is that the Revenue though may be able to maintain the notices issued under the unamended Section 148, as preliminary notices under section 148-A as inserted by the Finance Act, 2020, but for issuance of jurisdictional notice under section 148, the requirements of the amended Section 149 under the Finance Act, 2021 have to be fulfilled.

(xv) TOLA was enacted by the Parliament to deal with the contingency and the extension of time limit under section 3(1) of TOLA and was contemplated not to remain in perpetuity. TOLA had only substituted the limitation that was expiring. The extension under TOLA for the A.Y. 2015-16, 2016-17, 2017-18 was not permissible as the time limit for reopening of assessment proceedings for the said assessment years even under the unamended Section 149 was not expiring at the time of enforcement of the Enabling Act (TOLA 2020).

(xvi) The findings returned by the Division Bench and the Apex Court as noted above were reiterated that the relaxation granted by the Apex Court to consider Section 148 notices under the unamended Act as preliminary notices issued under Section 148A as inserted by the Finance Act, 2021, was a one time measure treating them as a bona fide mistake of the Revenue. However, it is evident from the said finding that the provisions of the Finance Act, 2021 have to be given their full effect.

(xvii) TOLA cannot infuse life into the pre-existing law to provide an extension of time to the Revenue in the time limit therein, to reopen cases for the assessment years which have become time barred under the first proviso to Section 149.

(xviii) As regards Instruction No 1 of 2022, executive instructions cannot limit or extend the scope of the Act or cannot alter the provisions of the Act. Instructions or Circular cannot impose burden on a tax payer higher than what the Act itself as a true interpretation envisages.

(xix) The direction issued in (clause 6.1, in third bullet point) that the decision of the Apex Court read with the time extension provided by TOLA, will allow extended reassessment notices to travel back in time to their original date when such notices were to be issued and then new Section 149 is to be applied at that point, is based on the wrong interpretation of the judgement of the Apex Court and the High Court. In clause 6.2 (i) of the Circular, it is provided that reassessment notices for A.Ys. 2013-14 and 2014-15 can be issued with the approval of the specified authority, if the case falls under clauses (b) of sub section (1) of Section 149 amended by the Finance Act, 2021. By issuing such instructions contained in clauses 6.1 and 6.2 of the Circular dated 11th May, 2022, the CBDT has devised a novel method to revive the reassessment proceedings which otherwise became time barred under the amended Section 149, specifically for the A.Ys. 2013-14 and 2014-15 being beyond the time limit specified under the provisions of unamended clause (b) of sub section (1) of section 149.

(xx) Reference was made to the Bombay High Court decision in Tata Communications Transformation Services Ltd vs ACIT 443 ITR 49 for the proposition that section 3(1) of TOLA does not provide that any notice issued under section 148 after 31st March, 2021 will relate back to the original date when it ought to have been issued or that the clock is stopped on 31st March, 2021 such that the provisions as existing on the said date will be applicable to notices issued thereafter, relying on the provisions of TOLA. It was observed therein that the purpose of Section 3(1) of TOLA is not to postpone or extend the applicability of the unamended provisions of the IT Act. Observations were made by the Bombay High Court therein that TOLA is not applicable for A.Y. 2015-16 or any subsequent year as the time limit to issue notice under section 148 for these assessment years was not expiring within the period for which Section 3(1) of TOLA was applicable and hence TOLA could not apply for these assessment years. As a consequence, there can be no question of extending the period of limitation for such assessment years, where the revenue could have issued notice of reassessment by complying with the requirements of the unamended provisions. In a case where the revenue did not initiate proceedings within the time limit under the unamended IT Act extended by TOLA, further extensions for inaction of the revenue cannot be granted by the notifications issued under TOLA on 31st March, 2021 or thereafter, once the amendments have been brought into place on 1st April, 2021, to extend the time limit under the unamended provisions.

On behalf of the Revenue, it was pointed out that TOLA was enacted to provide relaxation of the time limit provided in the Specified Acts, including the IT Act. Issuance of notice under section 148 as per the prescribed time limit in Section 149 was permissible until 30th June, 2021. It was argued that the notices issued on or after 1st April, 2021 under section 148, for reassessment were issued in accordance with the substituted laws and not as per the pre-existing laws and TOLA was only applied for extension in the timeline. TOLA has overriding effect over the IT Act, and will extend the time limit for issue of notice/action under the IT Act. The extension of time granted by TOLA would save all notices issued on or after 1st April, 2021.

It was claimed on behalf of the Revenue that only the time limit for various action/compliances/issuance of notices had been changed in the Finance Act, 2021. In any case, timelines remained under both the enactments, pre and post amendment. The reassessment notices would have been barred by time had there been no extension of the time limit under the IT Act by TOLA. The applicability of Explanation to Clause A(a) of the notification dated 31st March, 2021 and Explanation to clause A(b) of the notification dated 27.4.2021, may have been restricted to reassessment proceedings as in existence on 31.3.2021 and have been read down as applicable to the pre-existing Section 147 to 151-A, but the substantive provisions of extension of time for action/compliances/issuance of notice of the notifications dated 31st March, 2021 and 27th April, 2021, still survive.

It was argued that in Ashok Kumar Agarwal’s case, the explanations which provided that for the notices issued after 1st April, 2021, the time line under the pre-existing provisions would apply, had been held to be offending provisions, but the Allahabad High Court had left it open to the respective assessing authorities to initiate reassessment proceedings in accordance with the amended provisions by the Finance Act, 2021. The extension in time until 30th June, 2021 as granted by the notifications dated 31st March, 2021 and 27th April, 2021 would, thus, apply to the timeline provided under the amended provisions brought by the Finance Act, 2021.

It was submitted that when two Parliamentary Acts were on the statute book, one providing substantive provisions and procedure for initiating reassessment proceeding and the other granting extension of time for action/compliances/issuance of notices under the substantive and procedural provisions of the IT Act, a harmonious construction of both the provisions had to be made. Thus, whatever time limit was provided under the IT Act as on 1st April, 2021, the same had to be extended until 30th June, 2021 to enable the revenue to initiate and process the reassessment proceedings under section 148 as amended by the Finance Act, 2021.

It was argued that in view of the decision of the Apex Court in saving all notices issued by the revenue pan-India by treating them as notices under section 148-A of the amended provisions, all actions of the revenue subsequent to the issuance of notices under section 148-A in compliance of the directions of the Apex Court would have to be saved. The reference to the date of issuance of Section 148 notices, which were quashed by different High Courts, thus, has to be the date of notices under section 148-A of the amended provisions and extension of time, for compliances prescribed under the amended provisions, has to be granted to the revenue, accordingly. As observed by the Apex Court, when all defences remain available to the assessee, all rights of the revenue will have to be preserved/made available.

It was urged that even the Division Bench in Ashok Kumar Agarwal’s case (supra) had recognised that TOLA plainly was an enactment to extend timelines. Consequently, from 1st April, 2021 onwards, all references to issuance of notices contained in TOLA must be read as references to the substituted provisions only. The Allahabad High Court had observed that there was no difficulty in applying the pre-existing provisions to pending proceedings and then proceeded to harmonize the two laws. It was argued that giving this plain and simple meaning to TOLA, the extensions in time limit which were available to the revenue until 31st March, 2021 under TOLA, became available to the revenue after 1st April, 2021 by the Notification No.20 of 2021 dated 31st April, 2021 and the Notification No.38 dated 2th April, 2021, which had not been quashed or held invalid by the High Court or the Apex Court. Thus, extension of three months until 30th June, 2021 in the time limit provided under the IT Act, whether pre or post amendment, had to be granted. The time limit provided in the amended Section 149 of three years and 10 years had to be extended until 30th June, 2021, by virtue of the notifications issued under section 3(1) of TOLA. It was argued that the CBDT Instruction only clarifies the above position of the two provisions – that the time extension provided by TOLA will allow “extended reassessment notices” to travel back in time to their original date when such notices were to be issued, and then the new Section 149 is to be applied at that point of time.

It was submitted that based on the said logic, the “extended reassessment notices” for the A.Ys. 2013-14, 2014-15 and 2015-16 were to be dealt with by issuance of fresh notice under amended Section 148, with the approval of the specified authority, in the cases which fall under clause (b) of Section 149(1) as amended by the Finance Act, 2021. It is further clarified in the CBDT instruction that the specified authority under section 151 of the amended provisions shall be the authority prescribed under clause (ii) of that section. Similarly, for A.Y. 2016-17 and A.Y. 2017-18, fresh notice under Section 148 can be issued with the approval of the specified authority under clause (a) of amended Section 149(1), as they are within the period of three years from the end of the relevant assessment years, because of the extension of time by TOLA.

On behalf of the Revenue, reliance was placed on the decision of the Delhi High Court in the case of Touchstone Holdings (supra), which had relied on the earlier decision of the Delhi High Court in the case of Mon Mohan Kohli vs. ACIT (supra), and had held that with the declaration by the Apex Court that the reassessment notice issued on or after 1st April, 2021 shall be deemed to be the notice under section 148-A, the Revenue was permitted to complete the reassessment proceedings in accordance with the amended provisions of Section 149.

A specific query was raised by the Bench to the revenue to answer the effect of the first proviso to Section 149(1) of the amended provisions inserted by the Finance Act, 2021 which prohibits issuance of notice under section 148, in a case where it has become time barred under the unamended (pre-existing) clause (b) of Section 149(1). The answer on behalf of the revenue was that time limit of 6 years provided in clause (b) of Section 149(1) stood extended by virtue of TOLA until 31st March, 2021, and further extensions in the time limit (of six years) are to be granted under the notifications issued under section 3(1) of TOLA until 30th June, 2021. The result would be that the cases for the A.Ys. 2013-14 and 2014-15, where the period of six years had expired on 31st March, 2020 and 31st March, 2021 respectively, would not be hit by the first proviso to Section 149(1) brought by the Finance Act, 2021. The cases for these assessment years had to be evaluated and the reassessment proceedings had to be conducted for them in accordance with clause (b) of Section 149(1) as amended by the Finance Act, 2021, being beyond the period of three years but within the limitation of ten years. Similarly, for the A.Y. 2015-16, on the expiry of three years on 31st March, 2019, the extension until 30th June, 2021 is to be granted to bring the reassessment proceedings under amended clause (b) of Section 149(1). For the A.Ys. 2016-17 and 2017-18, where the period of three years had expired on 31st March, 2020 and 31st March, 2021 respectively, the extension in the time limit of three years was to be granted under TOLA and these cases would fall under the amended clause (a) of Section 149(1), being within the prescribed limit of three years until 30th June, 2021.

The Allahabad High Court noted the summary of its observations in the case of Ashok Kumar Agarwal (supra) as under:

(i) By its very nature, once a new provision has been put in place of the pre-existing provision, the earlier provision cannot survive, except for the things done or already undertaken to be done or things expressly saved to be done.

(ii) In absence of any saving clause to save pre-existing provisions, the revenue authorities could only initiate proceeding on or after 1st April, 2021, in accordance with the substituted laws and not the pre-existing laws. TOLA, that was pre-existing, confronted the IT Act as amended by the Finance Act, 2021, as it came into existence on 1st April, 2021. In both the provisions, i.e. TOLA and the Finance Act, 2021, there is absence, both of any express provision in its effort to delegate the function, to save the applicability of provisions of pre-existing Sections 147 to 151, as they existed up to 31st March, 2021.

(iii) Plainly, TOLA is an enactment to extend timelines only from 1st April, 2021 onwards. Consequently, from 1st April, 2021 onwards all references to issuance of notice contained in TOLA must be read as reference to the substituted provisions only.

(iv) There is no difficulty in applying pre-existing provisions to pending proceedings and, this is how, the laws were harmonized.

(v) For all reassessment notices which had been issued after 1st April, 2021, after the enforcement of amendment by the Finance Act, 2021, no jurisdiction has been assumed by the assessing authority against the assesses under the unamended law. No time extension could, thus, be made under section 3(1) of TOLA read with the notifications issued thereunder.

(vi) Section 3 of TOLA only speaks of saving or protecting certain proceedings from being hit by the rule of limitation. That provision also does not speak of saving any proceeding from any law that may be enacted by the Parliament, in future. The non-obstante clause of Section 3(1) of TOLA does not govern the entire scope of the said provision. It is confined to and may be employed only with reference to the second part of Section 3(1) of TOLA, i.e. to protect the proceedings already underway. The Act, thus, only protected certain proceedings that may have become time barred on 30th March, 2021 up to the date 30th June, 2021. Correspondingly, by delegated limitation incorporated by notifications, the Government may extend that time limit. That timeline alone stood extended up to 30th June, 2021.

(vii) Section 3(1) of TOLA does not itself speak of the reassessment proceeding or Section 147 or Section 148 as it existed prior to 1st April, 2021. It only provides a general relaxation of limitation granted on account of the general hardship existing upon the spread of pandemic COVID-19. After the enforcement of the Finance Act, 2021, it applies to the substituted provisions and not the pre-existing provisions.

The reference to reassessment proceedings with respect to pre-existing and new substituted provisions of Sections 147 and 148 has been introduced only by the later notifications issued under TOLA. It was concluded that in absence of any proceedings of reassessment having been initiated prior to the date 1st April, 2021, it is the amended law alone that would apply. The notifications issued by the Central Government or the CBDT Instructions could not have been issued plainly to over reach the principal legislation. Unless harmonised as such, those notifications would remain invalid.

(viii) On the submission of the revenue that practical difficulties faced by the revenue in initiation of reassessment proceedings due to onset of pandemic COVID-19 dictates that the reassessment proceedings be protected, it was noted that practicality, if any, may lead to litigation. Once the matter reaches the Court, it is the legislation and its language and the interpretation offered to that language as may primarily be decisive to govern the outcome of the proceedings. To read practicality into enacted law is dangerous.

(ix) It would be oversimplistic to ignore the provisions of, either TOLA or the Finance Act, 2021 and to read and interpret the provisions of Finance Act, 2021 as inoperative in view of the facts and circumstances arising from the spread of the pandemic Covid-19.

(x) In absence of any specific clause in the Finance Act, 2021 either to save the provisions of TOLA or the notifications issued thereunder, by no interpretative process can those notifications be given an extended run of life, beyond 31st March, 2021.

(xi) The notifications issued under TOLA may also not infuse any life into a provision that stood obliterated from the statute book w.e.f. 31st March, 2021, in as much as, the Finance Act, 2021 does not enable the Central Government to issue any notification to reactivate the pre-existing law, which has been substituted by the principal legislature. Any such exercise made by the delegate/Central government would be dehors any statutory basis.

(xii) In absence of any express saving of the pre-existing laws, the presumption drawn in favor of that saving, is plainly impermissible.

(xiii) No presumption exists by the notifications issued under TOLA that the operation of the pre-existing provisions of the Act had been extended and thereby provisions of Section 148A (introduced by the Finance Act, 2021) and other provisions had been deferred.

On these grounds, in Ashok Kumar Agarwal’s case, the Allahabad High Court had quashed the reassessment notices, leaving it open to the respective assessing authorities to initiate reassessment proceedings in accordance with the provisions of the IT Act as amended by the Finance Act, 2021 after making all compliances, as required by law.

The Allahabad High Court then summarized the Supreme Court findings in Ashish Agarwal’s case (supra) as under:

(I) By substitution of Sections 147 to 151 by the Finance Act, 2021, radical and reformative changes are made governing the procedure for reassessment proceedings. Under pre-Finance Act, 2021, the reopening was permissible for a maximum period up to 6 years and in some cases beyond even 6 years leading to uncertainty for considerable time. Therefore, the Parliament thought it fit to amend the Income Tax Act to simplify the Tax Administration, ease compliances and reduce litigation. To achieve the said object, by the Finance Act, 2021, Sections 147 to 149 and Section 151 have been substituted.

(II) Section 148(A) is a new provision, which is in the nature of a condition precedent. Introduction of Section 148A can, thus, be said to be a game changer with an aim to achieve ultimate object of simplifying the tax administration. By way of Section 148A, the procedure has now been streamlined and simplified. All safeguards are, thus, provided before issuing notice under section 148. At every stage, the prior approval of the specified authority is required, even for conducting the inquiry as per Section 148(A)(a).

(III) Substituted Section 149 is the provision governing the time limit for issuance of notice under section 148. The substituted Section 149 has reduced the permissible time limit for issuance of such a notice to three years and, only in exceptional cases, in ten years. It also provides further additional safeguards which were absent under the earlier regime pre-Finance Act, 2021.

(IV) The new provisions substituted by the Finance Act, 2021, being remedial and benevolent in nature and substituted with a specific aim and object to protect the rights and interest of the assesses as well as and the same being in public interest, the respective High Courts have rightly held that the benefit of new provisions shall be made applicable even in respect of the proceedings related to past assessment years, provided Section 148 notice has been issued after 1st April, 2021.

The Supreme Court had therefore confirmed the view taken by the High Courts, including by the Allahabad High Court in the case of Ashok Kumar Agarwal (supra). However, the Supreme Court had further observed that:

I) The judgments of several High Courts would result in no assessment proceedings at all, even if the same are permissible under the Finance Act, 2021 as per substituted Sections 147 to 151. To remedy the situation where revenue became remediless, in order to achieve the object and purpose of reassessment proceedings, it was observed that the notices under section 148 after the amendment was enforced w.e.f 1st April, 2021, were issued under the unamended Section 148, due to bonafide mistake in view of the subsequent extension of time by various notifications under TOLA.

II) The notices ought not to have been issued under the unamended Act and ought to have been issued under the substituted provisions of Sections 147 to 151 as per the Finance Act, 2021.

III) There appears to be a genuine non application of the amendments as the officers of the revenue may have been under a bona fide belief that the amendments may not yet have been enforced.

The Supreme Court therefore held that:

“Instead of quashing and setting aside the reassessment notices issued under the unamended provisions of IT Act, the High Courts ought to have passed order construing the notices issued under the unamended Act/unamended provision of the IT Act as those deemed to have been issued under Section 148(A) of the Income Tax Act, as per the new provision of Section 148(A). In that case, the revenue ought to have been permitted to proceed with the reassessment proceedings as per the substituted provisions of Sections 147 to 151 of the Income Tax Act as per the Finance Act, 2021, subject to compliance of all the procedural requirements and the defences which may be available to the assessee under the substituted provisions of Section 147 to 151 of the Income Tax Act, and which may be available under the Finance Act, 2021 and in law.”

The Allahabad High Court observed that while passing the order, it was noted by the Apex Court that there was a broad consensus on the proposed modification on behalf of the revenue and the counsels appearing on behalf of respective assessees.

The Allahabad High Court noted that in Ashok Kumar Agarwal’s case, it had held that if the Finance Act, 2021 had not made the substitution of the reassessment procedure, revenue authorities would have been within their rights to claim extension of time, under TOLA. The sweeping amendments made by the Parliament by necessary implication or implied force limited applicability of TOLA. The power to grant time extension thereunder was limited to only such reassessment proceedings as had been initiated till 31st March, 2021. It was also held that in absence of any specific clause in the Finance Act, 2021 either to save the provisions of TOLA or the Notifications issued thereunder, by no interpretative process, the notifications could be said to infuse life into a provision that stood obliterated from the Statute book w.e.f 31st March, 2021. It was held that the Finance Act, 2021 did not enable the Central Government to issue any notification to reactivate the pre-existing law, the exercises made by the delegate/Central Government would be dehors any statutory basis. It was, thus, categorically held by the Division Bench that the notifications did not insulate or save the pre-existing provisions pertaining to reassessment under the Act and that the operation of the pre-existing provisions of the Act could not be extended.

The Allahabad High Court noted that the contention of the revenue, if accepted, would create conflict of laws. The limitation under the pre-existing provisions would have to be kept alive till 30th June, 2021 with the aid of the extensions granted by the notifications issued by the Central Government, which had been read down by the Co-ordinate Division Bench in Asok Kumar Agarwal’s case. As per the Division Bench judgment, the time limit provided in unamended Section 149, could not be extended beyond 31st March, 2021, so as to render the amended provisions of Section 149 ineffective. The stand of the revenue that TOLA simply extended the period of limitation until 30th June, 2021, due to the disturbances from the spread of pandemic COVID-19, had been categorically turned down by the Division Bench in Ashok Kumar Agarwal’s case (supra) with the above observations.

The Allahabad High Court observed that there was a substantial change in the threshold/requirements which had to be met by the revenue before issuance of reassessment notice after elapse of three years under clause (b) of Section 149(1). Not only monetary threshold had been substituted but the requirement of evidence to arrive at the opinion that the income escaped assessment has also been changed substantially. A heavy burden was cast upon the revenue to meet the requirements of clause (b) of Section 149(1) for initiation of reassessment proceedings after lapse of three years.

Analysing the first proviso to Section 149(1), the Allahabad High Court observed that the time limit in clause (b) of unamended Section 149(1) of six years, thus, cannot be extended up to ten years under clause (b) of amended Section 149(1), to initiate reassessment proceeding in view of the first proviso to Section 149(1). In other words, the case for the relevant assessment year where six years period has elapsed as per unamended clause (b) of Section 149(1) cannot be reopened after commencement of the Finance Act, 2021 w.e.f. 1st April, 2021.

The view in Ashok Kumar Agarwal’s case (supra) that after 1st April, 2021, if the rule of limitation permitted, the revenue could initiate reassessment proceedings in accordance with the new law, after making adequate compliances, had been upheld by the Apex Court in Ashish Agarwal’s case (supra). According to the Allahabad High Court, in case the arguments of the revenue were accepted, the benefits provided to the assessee in the substantive provisions of clause (b) of Section 149(1) and the first proviso to Section 149 had to be ignored or deferred. The defences which may be available to the assessee under section 149 and/or which may be available under Finance Act, 2021 had to be denied.

At the first blush, the argument of the revenue seemed convincing by simplistic application of TOLA, treating it as a statute for extension in the limitation provided under the IT Act, but on a deeper scrutiny, if the argument of the revenue were accepted, it would render the first proviso to Section 149(1) ineffective until 30th June, 2021 and otiose. This view, if accepted, would result in granting extension of time limit under the unamended clause (b) of Section 149, in cases where reassessment proceedings had not been initiated during the lifetime of the unamended provisions, i.e. on or before 31st March, 2021. It would infuse life in the obliterated unamended provisions of clause (b) of Section 149(1), which was dead and removed from the Statute book w.e.f. 1st April, 2021, by extending the timeline for actions therein.

According to the Allahabad High Court, in absence of any express saving clause, in a case where reassessment proceedings had not been initiated prior to the legislative substitution by the Finance Act, 2021, the extended time limit of unamended provisions by virtue of TOLA cannot apply. In other words, the obligations upon the revenue under clause (b) of amended Section 149(1) cannot be relaxed. The defences available to the assessee in view of the first proviso to Section 149(1) could not be taken away. The notifications issued by the delegates/Central Government in exercise of powers under Section 3(1) of TOLA could not infuse life in the unamended provisions of Section 149 by this way.

The Allahabad High Court addressed the argument of the revenue that this interpretation would render TOLA otiose, though it had not been declared invalid by any court, by stating that this argument was misconceived, as the extensions in the time limit under the unamended Sections of the IT Act prior to the amendment by the Finance Act, 2021, would still be applicable to the reassessment proceedings as may have been in existence on 31st March, 2021.

Referring to the CBDT Instruction No 1 of 2022, the Allahabad High Court found that that the third bullet to clause (6.1) which stated that the Apex Court had allowed time extension provided by TOLA and the “extended reassessment notices” will travel back in time to their original date when such notices were to be issued and then Section 149 is to be applied at that point, was a surreptitious attempt to circumvent the decision of the Apex Court. The Supreme Court observations had been given in piecemeal in that bullet to give it a distorted picture. As per the Allahabad High Court, terming reassessment notices issued on or after 1st April, 2021 and ending with 30th June, 2021 as “extended reassessment notices”, within the time extended by TOLA and various notifications issued thereunder, in Para 6.1 was an effort of the revenue to overreach the judgment of that Court in Ashok Kumar Agarwal (supra) as affirmed by the Apex court in Ashish Agarwal (supra).

In any case, the Allahabad High Court observed that this instruction, as per the Revenue itself, was only a guiding instruction – the instructions in the third bullet to clause 6.1 and clauses 6.2(i) and (ii), being contrary to the decision of the Supreme Court, had no binding force.

Referring to the Delhi High Court decision in Touchstone Holdings (supra), the Allahabad High Court observed that the view taken therein was in direct conflict with the view taken by the Allahabad High Court in Ashok Kumar Agarwal (supra) affirmed by the Apex Court in Ashish Agarwal (supra). In fact, the observation in Mon Mohan Kohli (supra) by the Delhi High Court in paragraph ‘98’ that the power of reassessment that existed prior to 31st March, 2021 continued to exist till the extended period, i.e. till 3th June, 2021, and the Finance Act, 2021 had merely changed the procedure to be followed prior to issuance of notice w.e.f. 1st April, 2021, had been misread and misapplied in Touchstone (supra) by the Division Bench of the Delhi High Court. Even in Mon Mohan Kohli’s case (supra), the Delhi High Court had quashed the reassessment notices issued on or after 1st April, 2021 on the grounds that TOLA did not give power to the Central Government to extend the erstwhile Sections 147 to 151 beyond 31st March, 2021 and/or defer the operation of substituted provisions enacted by the Finance Act, 2021. In fact, in Mon Mohan Kohli’s case (supra), the Delhi High Court had concurred with the Allahabad High Court view in Ashok Kumar Agarwal’s case (supra).

The Allahabad High Court observed that it was a settled law that a taxing statute must be interpreted in the light of what was clearly expressed. It was not permissible to import provisions in a taxing statute so as to supply any assumed deficiency. In interpreting a taxing statute, equitable considerations are out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions. The court must look squarely at the words of the statute and interpret them. Taxing statute would need to be interpreted in the light of what is clearly expressed. It cannot imply anything which is not expressed. Before taxing any person it must be shown that he falls within the ambit of the charging section by clear words used in the section, and if the words are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject. There is nothing unjust in the taxpayer escaping if the letter of the law fails to catch him on account of the legislature’s failure to express itself clearly.

The Allahabad High Court therefore held that:

(i) The reassessment proceedings initiated with the notice under section 148 (deemed to be notice under section 148-A), issued between 1st April, 2021 and 30th June, 2021, could not be conducted by giving benefit of relaxation/extension under TOLA up to 30th March, 2021, and the time limit prescribed in Section 149(1)(b) (as substituted w.e.f. 01st April, 2021) cannot be counted by giving such relaxation from 30th March, 2020 onwards to the Revenue.

(ii) In respect of the proceedings where the first proviso to Section 149(1)(b) is attracted, benefit of TOLA will not be available to the revenue, or in other words, the relaxation law under TOLA would not govern the time frame prescribed under the first proviso to Section 149 as inserted by the Finance Act, 2021, in such cases.

A similar view was taken by the Gujarat High Court in the case of Keenara Industries (P) Ltd vs. ITO 147 taxmann.com 585, where the Gujarat High Court held that the reassessment notices for A.Ys. 2013-14 and 2014-15, which had become time-barred prior to 1st April, 2021 under the old regime on expiry of 6 years limitation period, could not be revived by TOLA/extension of time notification issued under TOLA. Therefore, reassessment notices for A.Ys. 2013-14 and 2014-15 could not be issued on or after 1st April, 2021 under the new regime effective from 1st April, 2021 even within the extended time-limit of 1st April, 2021 to 30th June, 2021 applicable under the TOLA Notifications.

OBSERVATIONS

In Ashish Agarwal’s case, the Supreme Court had held:

“ 8.However, at the same time, the judgments of the several High Courts would result in no reassessment proceedings at all, even if the same are permissible under the Finance Act, 2021 and as per substituted sections 147 to 151 of the IT Act. The Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated. It is true that due to a bonafide mistake and in view of subsequent extension of time vide various notifications, the Revenue issued the impugned notices under section 148 after the amendment was enforced w.e.f. 01.04.2021, under the unamended section 148. In our view the same ought not to have been issued under the unamended Act and ought to have been issued under the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021. There appears to be genuine non-application of the amendments as the officers of the Revenue may have been under a bonafide belief that the amendments may not yet have been enforced. Therefore, we are of the opinion that some leeway must be shown in that regard which the High Courts could have done so. Therefore, instead of quashing and setting aside the reassessment notices issued under the unamended provision of IT Act, the High Courts ought to have passed an order construing the notices issued under unamended Act/unamended provision of the IT Act as those deemed to have been issued under section 148A of the IT Act as per the new provision section 148A and the Revenue ought to have been permitted to proceed further with the reassessment proceedings as per the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021, subject to compliance of all the procedural requirements and the defences, which may be available to the assessee under the substituted provisions of sections 147 to 151 of the IT Act and which may be available under the Finance Act, 2021 and in law. Therefore, we propose to modify the judgments and orders passed by the respective High Courts as under:

(i) The respective impugned section 148 notices issued to the respective assessees shall be deemed to have been issued under section 148A of the IT Act as substituted by the Finance Act, 2021 and treated to be show-cause notices in terms of section 148A(b). The respective assessing officers shall within thirty days from today provide to the assessees the information and material relied upon by the Revenue so that the assessees can reply to the notices within two weeks thereafter;

(ii) The requirement of conducting any enquiry with the prior approval of the specified authority under section 148A(a) be dispensed with as a one-time measure vis-à-vis those notices which have been issued under Section 148 of the unamended Act from 01.04.2021 till date, including those which have been quashed by the High Courts;

(iii) The assessing officers shall thereafter pass an order in terms of section 148A(d) after following the due procedure as required under section 148A(b) in respect of each of the concerned assessees;

(iv) All the defences which may be available to the assessee under section 149 and/or which may be available under the Finance Act, 2021 and in law and whatever rights are available to the Assessing Officer under the Finance Act, 2021 are kept open and/or shall continue to be available and;

(iv) The present order shall substitute/modify respective judgments and orders passed by the respective High Courts quashing the similar notices issued under unamended section 148 of the IT Act irrespective of whether they have been assailed before this Court or not.”

The Supreme Court therefore held that the new law would apply, even where notices issued under old law were deemed to be valid and the AO was permitted to proceed thereunder, and while so holding, did not exclude the operation of the first proviso to new Section 149(1). On the contrary, it held that all other provisions of the new law would apply and that the defences otherwise available thereunder would be available to the assessee. Further, the Supreme Court was seized with the view taken by the different High Courts, and had agreed with their views particularly that the notices issued under the old law of s. 148, on or after, 31st March, 2021, were invalid. It only modified those decisions to the extent stated above that the notices were deemed to be issued within the time. Therefore, the Allahabad High Court rightly held that the assessee was entitled to the defence that the notices were barred by limitation due to the applicability of the first proviso to the amended section 149(1), and that its order in the case of Ashok Kumar Agarwal (supra) was modified only to the extent of the above.

As observed by the Gujarat High Court, no notification could extend the limitation of a repealed law. The Apex Court in case of Ashish Agarwal (supra) had not disturbed the findings of various High Courts to the effect that the notifications in question were ultra vires the law. The Gujarat High Court also rightly pointed out that in Touchstone Holdings’ case, the Delhi High Court proceeded on the basis that earlier notice was legal, valid and within the time frame. The Delhi High Court had gone on a premise that by virtue of observation in case of Mon Mohan Kohli (supra), the extension to time limit would survive.

Therefore, the view taken by the Allahabad and Gujarat High Courts seems to be the better view of the matter, and that in cases where the notice is barred by limitation on account of the first proviso to new section 149(1), the reassessment notices would be invalid.

shailesh.kwebmaker

Section 153 – Assessment barred by limitation – Refund of the taxes paid

2 Aricent Technologies (Holdings) Ltd vs. Assistant Commissioner Of Income Tax & Anr.
[WP (C) 13765 of 2022, AY 2007-08
Dated: 27th February, 2023, (Del.) (HC)]

Section 153 – Assessment barred by limitation – Refund of the taxes paid:

FSSL (which is now amalgamated with the petitioner company) had filed its return of income for the A.Y. 2007-08 on 26th October, 2007 declaring a total income of Rs. 17,64,76,208. The said return was picked up for scrutiny under section 143(3) of the Income Tax Act, 1961. On 27th September, 2010, the Transfer Pricing Officer passed an order proposing an addition of Rs. 8,96,40,636 on account of corporate charges. Thereafter, on 24th December, 2010, the AO passed a Draft Assessment Order proposing to assess FSSL’s income for the relevant assessment year at Rs. 2,43,55,56,670 by disallowing the project expenses to the extent of Rs. 39,15,46,619 and disallowing deduction under section 10B of the Act quantified at Rs. 177,78,93,207.

The Dispute Resolution Panel upheld the Draft Assessment Order, by its order dated 02nd August, 2011. Pursuant to the said order, the AO concluded the assessment and passed the Assessment Order dated 31st October, 2011 under section 143(3) of the Act r.w.s 144C(13) of the Act, whereby the total income of FSSL was assessed at Rs. 243,55,56,670.

Pursuant to the said assessment, a demand of Rs. 117,22,62,912 was raised. A refund of Rs. 26,01,53,355 relating to assessment year 2006-07 was outstanding and payable to FSSL. The said refund was adjusted against the demand of Rs. 117,22,62,912 raised in respect of the A.Y. 2007-08.

Aggrieved by the assessment order dated 31st October, 2011, the petitioner filed an appeal before the Income Tax Appellate Tribunal (hereafter ‘the Tribunal’). By an order dated 07th January, 2016, the Tribunal partly allowed the appeal and deleted the disallowance of the project expenses to the extent of Rs. 39,15,46,619. However, in respect of the disallowance of deduction of Rs. 1,77,78,93,207 claimed under section 10B of the Act, and the transfer pricing adjustment of corporate charges, the Tribunal set aside the Assessment Order and remanded the matter to the Transfer Pricing Officer/Assessing Officer. The question of the transfer pricing adjustment on account of corporate charges was remanded to the Transfer Pricing Officer for a de novo adjudication and the question regarding disallowance of deduction claimed under section 10B of the Act, was remanded to the AOr to decide afresh in the light of the observations made in the order.

Concededly, the AO has not passed any order pursuant to the order dated 07th January, 2016 passed by the Tribunal. In the aforesaid context, the petitioner contended that the refund due to FSSL (which is now amalgamated with the petitioner company) amounting to Rs. 26,01,53,355 be refunded to the petitioner along with applicable interest. The said claim is founded on the basis that the assessment for the A.Y. 2007-08 is now barred by limitation.

Section 153 of the Act was amended by the Finance Act, 2017 with retrospective effect from 01st June, 2016 and the provision regarding limitation for framing an assessment pursuant to any order passed inter alia under section 254 of the Act was included under sub-section (3) of Section 153 of the Act. Sub-sections (3) and (4) of the Section 153 of the Act as applicable for framing the assessment pursuant to the order dated 7th January, 2016 passed by the Tribunal read as under:

“153. (3) Notwithstanding anything contained in sub-sections (1) and (2), an order of fresh assessment in pursuance of an order under section 254 or section 263 or section 264, setting aside or cancelling an assessment, may be made at any time before the expiry of nine months from the end of the financial year in which the order under section 254 is received by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or, as the case may be, the order under section 263 or section 264 is passed by the Principal Commissioner or Commissioner.
………… ……………..
(4) Notwithstanding anything contained in sub-sections (1), (2) and (3), where a reference under sub-section (1) of section 92CA is made during the course of the proceeding for the assessment or reassessment, the period available for completion of assessment or reassessment, as the case may be, under the said sub-sections (1), (2) and (3) shall be extended by twelve months.”

Pursuant to the order dated 7th January, 2016 passed by the Tribunal, the Transfer Pricing Officer passed an order dated 24th January, 2017. However, concededly, the AO has not passed any final order.

The Honourable Court observed that in view of the above, the contention that passing fresh assessment order pursuant to the Tribunal’s order dated 07th January, 2016, is barred under the provisions to Section 153(3) and 153(4) of the Act, is merited. In view there of the contention that the income as returned by FSSL for the A.Y. 2007-08 would stand accepted. Consequently, any adjustment made for the refund due to FSSL for the A.Y. 2006-07 is not sustainable. Accordingly, the court directed that the said amount, which was due as a refund for the A.Y. 2006-07 be refunded to the petitioner along with interest as applicable within a period of eight weeks.

The court further expressed displeasure in the manner the present matter has been dealt with by the concerned officer. Despite clear directions from the Tribunal, the AO had failed to pass the assessment order within the prescribed time.

shailesh.kwebmaker

Reassessment — Notice — Validity — Transactions not disclosed in initial notice under section 148A(b) considered in order under section 148A(d) for issue of notice of reassessment — Department cannot travel beyond initial notice — Order under section 148A(d) and consequent notice under section 148 set aside.

7 Prakash Krishnavtar Bhardwaj vs. ITO
[2023] 451 ITR 424 (Chhattisgarh)
Date of order: 1st December, 2022
Sections 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Notice — Validity — Transactions not disclosed in initial notice under section 148A(b) considered in order under section 148A(d) for issue of notice of reassessment — Department cannot travel beyond initial notice — Order under section 148A(d) and consequent notice under section 148 set aside.

The assessee filed a writ petition and challenged the order under section 148A(d) of the Income-tax Act, 1961, dated 22nd July, 2022, directing the issue of notice under section 148 and the consequent notice under section 148 dated 22nd July, 2022. It was pointed out that the transaction of Rs. 14 lakhs considered by the Department in the order under section 148A(d) was not in the noticeunder section 148A(b) which is not permitted in law. It was contended that if the said Rs. 14 lakh transaction which has been considered by the Department is excluded from the proceedings then the amount would be less than Rs. 50 lakh and would therefore be outside the purview of the assessment proceedings as per the CBDT circular dated 11th May, 2022 ([2022] 444 ITR (St.) 43).

Chhattisgarh High Court allowed the writ petition and held as under:

“i) From the two notices that were issued on June 29, 2021 and on May 25, 2022, i. e., the notices initially issued u/s. 148 (old provision) and u/s. 148A(b) (new provision), the Department had not disclosed the fact that the assessee had suppressed Rs. 14 lakhs transaction which had also escaped assessment u/s. 147. In the absence of its being stated in the notice the assessment of such amount would prima facie be bad since the Department could not travel beyond the show-cause notice.

ii) Given the facts and circumstances and in view of the circular dated May 11, 2022, issued by the Central Board of Direct Taxes the order u/s. 148A(d) and the consequent notice u/s. 148 dated July 22, 2022 were unsustainable and therefore were set aside reserving the right of the Department to take appropriate recourse available in accordance with law.”

shailesh.kwebmaker

Reassessment — Notice after four years — Notice should clearly specify material not disclosed by the assessee — Expenditure on account of advertisement and sales promotion allowed by the AO after applying his mind to details furnished by the assessee — No failure on part of the assessee to disclose all material facts truly and fully — Notice under section 148 on the ground that in A. Y. 2015-16, the same has been treated as capital expenditure — Notice unsustainable.

6 Asian Paints Ltd vs. ACIT
[2023] 451 ITR 45 (Bom)
A. Y. 2014-15
Date of order: 9th January, 2023
Sections 147 and 148 of ITA 1961

Reassessment — Notice after four years — Notice should clearly specify material not disclosed by the assessee — Expenditure on account of advertisement and sales promotion allowed by the AO after applying his mind to details furnished by the assessee — No failure on part of the assessee to disclose all material facts truly and fully — Notice under section 148 on the ground that in A. Y. 2015-16, the same has been treated as capital expenditure — Notice unsustainable.

The assessee was a manufacturer and seller. It evolved a marketing strategy or scheme called “colour idea store” which envisaged a specified and designated area in the shops of the dealers for exclusive display of its products. The assessee accordingly entered into agreements with dealers as regards sharing of costs incurred for setting up of the designated area for use and display of its products but the stores continued to belong to the dealers. Such expenditure was claimed as deduction, and advertising and sales promotion expenses. For the A. Y. 2014-15, the AO accepted the assessee’s claim and passed an order under section 143(3) r.w.s. 144C(3) of the Income-tax Act, 1961. On 31st March, 2021, a notice was issued under section 148 to reopen the assessment under section 147 on the basis of assessment proceedings for the A. Y. 2015-16, in which the expenses for “colour idea store” were considered as capital expenditure on which depreciation of 10 per cent was allowed. The assessee’s objections were rejected.

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

“i) During the scrutiny assessment, the Assessing Officer had sought the relevant details with regard to the advertisement and sales promotion expenses which were furnished by the assessee. The Assessing Officer had also disallowed some of the expenses which were shown in the break-up under the head “details of advertisement and sales promotion expenses” while passing the order of assessment which showed that the Assessing Officer had applied his mind to the assessee’s claim while passing the order u/s. 143(3) read with section 144C(3).

ii) The reasons for reopening the assessment did not state what material or fact was not disclosed by the assessee. Therefore, it was clear that there was a complete disclosure of all the primary material facts on the part of the assessee and there was no failure on its part to disclose fully and truly all the facts which were material and necessary for the assessment. The notice u/s. 148 did not satisfy the jurisdictional requirement of section 147 and therefore, was unsustainable and accordingly quashed.”

shailesh.kwebmaker

Penalty — Levy of penalty — Limitation — Limitation starts from date of assessment when the AO initiates penalty proceedings and not from date of sanction for penalty proceedings.

5 Principal CIT Vs. Rishikesh Buildcon Pvt Ltd and Ors.
[2023] 451 ITR 108 (Del)
A. Y. 2006-07
Date of order 17th November 2022
Section 275 of ITA 1961

Penalty — Levy of penalty — Limitation — Limitation starts from date of assessment when the AO initiates penalty proceedings and not from date of sanction for penalty proceedings.

For A. Y. 2006-07, the AO passed the assessment order on 17th December, 2008 and recorded that penalty proceedings were to be initiated. A reference was made by the AO to the prescribed authority on 18th March, 2009. The prescribed authority issued a show-cause notice to the assessee on 24th March, 2009. The penalty order was passed on 29th September, 2009.

The Tribunal held that the penalty order was passed after the expiry of the time limit laid down under section 275(1)(c) of the Income-tax Act, 1961 and accordingly set aside the penalty order.

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

“i) Where the Assessing Officer has initiated penalty proceedings in his/her assessment order, that date is to be taken as the relevant date as far as section 275(1)(c) of the Income-tax Act, 1961 is concerned.

ii) The quantum proceedings were completed by the Assessing Officer on December 17, 2008, and the Assessing Officer initiated the penalty proceedings in December, 2008. Thus, the last date by which the penalty order could have been passed was June 30, 2009. The six month period from the end of the month in which action of imposition of penalty was initiated would expire on June 30, 2009.

iii) However, in this case, admittedly, the penalty orders were passed on September 29, 2009, and therefore, the Tribunal rightly concluded that the orders were barred by limitation.”

shailesh.kwebmaker

Offences and prosecution — Willful attempt to evade tax — Failure to produce accounts and documents — Concealment of income — Failure to disclose foreign account opened in year 1991 when the assessee was 55 years of age — Admission regarding foreign bank account after investigation by the department and issue of notices and levy of penalty — Assessee cannot take the benefit of circular recommending no prosecution where the assessee is aged 70 years or more at time of offence — Prosecution justified.

4 Rajinder Kumar vs. State
[2023] 451 ITR 338 (Del)
A. Y.: 2006-07
Date of order: 16th December, 2022
Sections 271, 271(1)(b), 274, 276C(1), 276D and 277 of ITA 1961

Offences and prosecution — Willful attempt to evade tax — Failure to produce accounts and documents — Concealment of income — Failure to disclose foreign account opened in year 1991 when the assessee was 55 years of age — Admission regarding foreign bank account after investigation by the department and issue of notices and levy of penalty — Assessee cannot take the benefit of circular recommending no prosecution where the assessee is aged 70 years or more at time of offence — Prosecution justified.

In the year 2011 based on the information received from France that the assessee had opened an account in a bank in London on 20th August, 1991, a search and seizure was conducted under section 132 of the Income-tax Act, 1961 at various business premises and residence of the assessee on 23rd August, 2011. A notice under section 153A was issued to the assessee to file a return. A penalty was levied for the failure to comply with notices issued under section 142(1). The assessee filed a revised return for the A. Y. 2006-07 declaring the balance in the bank account in London as income from other sources on the basis of details provided at the time of search and assessment proceedings.

A notice under section 277, r.w.s 279(1) was issued and the assessee furnished details of payment of the entire taxes, penalties and interest. Thereafter, criminal complaints under section 276C(1)(ii) and 277 were filed against the assessee. The assessee filed an application under section 245(2) of the Code of Criminal Procedure, 1973 for discharge on the grounds that he was 80 years old citing Instruction No. 5051 dated 7th February, 1991 issued by the CBDT. The application was rejected. Against this, the assessee filed a criminal writ petition.

The Delhi High Court dismissed the writ petition and held as under:

“i) The assessee could not take benefit of Instruction No. 5051 dated February 7, 1991. He had opened the account in the bank in London on August 20, 1991 and it was only after the Government of France brought to the knowledge of the competent authorities that the assessee disclosed it in the year 2011. During the period relevant to the A. Y. 2006-07 the assessee allegedly had the maximum credit balance in his foreign bank account. The foreign account was opened in the bank in London on August 20, 1991 and was not disclosed.

ii) Taking the date of birth of the assessee, as claimed by him, as March 30, 1936, at the time of commission of offence in the year 1991 he was 55 years of age. Instruction No. 5051 dated February 7, 1991 stated that prosecution normally be not initiated against a person who has attained the age of 70 years at the time of commission of offence. Therefore, in terms of Instruction No. 5051 dated February 7, 1991, the age of the assessee had to be taken at the time of commission of offence and not when the proceedings were initiated. It was only after the notice u/s. 274 read with section 271 of the Act was issued and penalty u/s. 271(1)(b) of the Act for failure to comply with notice u/s. 142(1) of the Act was also levied on September 26, 2013 that the assessee had chosen to file a revised return on February 16, 2015. By doing so he could not evade the judicial process of law for not disclosing his correct income and foreign account since the year 1991.”

shailesh.kwebmaker

Interest under section 220(2) — Original assessment order set aside and matter remanded — Fresh assessment order — Interest payable from such fresh assessment order.

3 Principal CIT vs. AT and T Communication Services (India) Pvt Ltd
[2023] 451 ITR 92 (Del)
A. Y.: 2004-05
Date of order: 17th November, 2022
Section 220(2) of ITA 1961

Interest under section 220(2) — Original assessment order set aside and matter remanded — Fresh assessment order — Interest payable from such fresh assessment order.

The assessee is engaged in the business of network design, management, communication, connectivity services and related products. For the A. Y. 2004-05, the assessee filed its return of income on 30th October, 2004 declaring an income of Rs. 29,30,15,180. However, the income was assessed at Rs. 32,15,72,740 vide original assessment order dated 28th December, 2006. The Tribunal vide its order dated 30th September, 2014, set aside the original assessment order dated 28th December, 2006 and restored the matter to the file of the AO for determining the issue of taxability of the amounts received as brand building fund, the allowability of brand building expenses as well as a separate claim for other expenses. On 29th March, 2016 the AO reframed the assessment and passed a fresh assessment order under section 143(3) r.w.s 254 of the Act. The AO reconfirmed the disallowance of the brand expenses for a sum of Rs. 2,66,42,537 and the total income was determined as Rs. 31,96,57,720.

In the Income-tax Computation Form (ITNS 50) issued pursuant to the aforesaid assessment order, the AO levied interest under section 220(2) of the Act and raised a demand of Rs. 1,75,74,756 computed on the basis of the original assessment order dated 28th December, 2006.The Tribunal held that the interest under section 220(2) of the Act can be charged only after expiry of the period of 30 days from the date of service of demand notice issued pursuant to the fresh assessment order dated 29th March, 2016.On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) Where an issue arising out of the original assessment is restored to the file of the Assessing Officer by the higher appellate authorities, there is an extinguishment of the original demand, i. e, the demand raised under the first assessment order.

ii) Interest u/s. 220(2) of the Income-tax Act, 1961, can be levied only after expiry of the time limit prescribed in the fresh demand notice issued by the Assessing Officer in pursuance of the fresh reframed assessment order. The reframed order is the subsisting assessment order. Section 220(2) of the Act does not contemplate a levy of interest which relates back to the date of the passing of original order which was subsequently set aside by appellate authorities or applies to pendency of proceedings. This also becomes clear from Circular No. 334 dated April 3, 1982 ([1982] 135 ITR (St.) 10). Para 2.1 of the circular expressly states that if the assessment order is “set aside” by the appellate authority, no interest u/s. 220(2) of the Act can be charged pursuant to the original demand notice. No interest is payable on the demand raised by the original order when the original order of the Assessing Officer is set aside by the appellate authority and a fresh assessment order is passed.

iii) The Tribunal by order dated September 30, 2014, set aside the original assessment order dated December 28, 2006, and restored the matter to the file of the Assessing Officer for determining the issue of taxability of the amounts received as brand building fund, the allowability of brand building expenses as well as a separate claim for other expenses. On remand, the Assessing Officer on March 29, 2016 reframed the assessment and passed a fresh assessment order u/s. 143(3) of the Act read with section 254 of the Act. The Assessing Officer reconfirmed the disallowance of brand expenses.

iv) The Tribunal was right in holding that interest u/s. 220(2) of the Act could be charged only after expiry of the period of 30 days from the date of service of demand notice issued pursuant to the fresh assessment order dated March 29, 2016.”

shailesh.kwebmaker

Corporate social responsibility expenditure — Business expenditure — Amendment providing for disallowance of such expenditure — Circular issued by the CBDT stating amendment to have effect from A. Y. 2015-16 onwards — Binding on the Department — Corporate social responsibility expenditure for earlier years allowable.

2 Principal CIT vs. PEC Ltd and Anr
[2023] 451 ITR 436 (Del):
A. Ys.: 2013-14, 2014-15
Date of order: 29th November, 2022
Section 37 of ITA 1961

Corporate social responsibility expenditure — Business expenditure — Amendment providing for disallowance of such expenditure — Circular issued by the CBDT stating amendment to have effect from A. Y. 2015-16 onwards — Binding on the Department — Corporate social responsibility expenditure for earlier years allowable.

For the A.Ys. 2013-14 and 2014-15, the AO disallowed the claim of the assessees under section 37 of the Income-tax Act, 1961 of the expenses on account of corporate social responsibility endeavor undertaken by them. According to the Department, the funds utilized by the assessees to effectuate their corporate social responsibility obligations involved application of income and not an expense incurred wholly and exclusively for carrying on the business.

The Tribunal relied upon Circular No. 1 of 2015 dated 21st January, 2015 issued by the CBDT and held that the amendment brought about in section 37(1) by the way of Explanation 2 was prospective in nature and was not applicable for the A. Ys. 2013-14 and 2014-15, and accordingly deleted the disallowances.

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

“i) Explanation 2 was inserted in section 37 of the Income-tax Act, 1961 by the Finance (No. 2) Act, 2014 with effect from April 1, 2015. The Memorandum which was published along with the Finance (No. 2) Bill, 2014 clearly indicated that the amendment would take effect from April 1, 2015 and, accordingly, would apply in relation to A. Y. 2015-16 and subsequent years. This position is also exemplified in the circular dated January 21, 2015 ([2015] 371 ITR (St.) 22) issued by the CBDT.

ii) Circulars issued by the CBDT were binding on the Department. Therefore, the Tribunal had not erred in allowing the deduction claimed by the assessees u/s. 37 of the expenses incurred for their corporate social responsibility endeavours.”

shailesh.kwebmaker

Charitable purpose — Registration — Cancellation of registration — Condition precedent for cancellation — Registration granted after considering genuineness of the institution — Cancellation of registration on same provisions in trust deed — Not valid.

1 Sri Ramjanki Tapovan Mandir vs. CIT(Exemption)
[2023] 451 ITR 458 (Jhar)
Date of order: 3rd November, 2022
Section 12AA of ITA 1961:

Charitable purpose — Registration — Cancellation of registration — Condition precedent for cancellation — Registration granted after considering genuineness of the institution — Cancellation of registration on same provisions in trust deed — Not valid.

The assessee was registered under section 12AA of the Income-tax Act, 1961. By order dated 4th September, 2018 the CIT (Exemptions), Ranchi cancelled the registration. This was upheld by the Tribunal.

On appeal by the assessee the Jharkhand High Court framed the following substantial questions of law:

“(1) Whether the registration once granted under section 12AA of the Income-tax Act, 1961 could be cancelled on the basis of same set of provision of the trust which were examined earlier ?

(2) Whether the Income-tax authorities have the jurisdiction under section 12AA(3) of the Income-tax Act, 1961 to question the legality and propriety of the trust deed of the assessee or its inquiry is limited to the conditions stipulated under section 12AA(3) namely,—

(i) that the activities of the trust are not genuine, or

(ii) are not being carried out in accordance with the objects of the trust?

(3) Whether in the facts and circumstances of the case, the findings of the learned Income-tax Appellate Tribunal that the appellant failed to give satisfactory explanation regarding the sale proceeds which is utilized for charitable objects of the trust, is perverse?”

The High Court allowed the appeal and held as under:

“i) Section 12AA(3) of the Income-tax Act, 1961, contemplates existence of two contingencies for cancellation of the registration already granted, namely: (i) If the activities of the trust are not genuine ; or (ii) are not being carried out in accordance with the objects of the trust.

ii) The trust deed is an understanding between the author of the trust and its trustee, and, the Income-tax Department is not authorized to comment on execution of the trust deed. Once registration has been granted to a charitable trust u/s. 12AA of the Act after being satisfied about the genuineness of the activities of the trust, it cannot be cancelled on the basis of the same set of provisions of the trust which were examined earlier.

iii) It is trite law that the Tribunal cannot travel beyond the reasons recorded in the order before it and develop a complete de novo case for the Revenue, which was not the basis of the order passed by the authority.

iv) It was an admitted fact that registration u/s. 12AA of the Act was granted to assessee-trust on the basis of the trust deed dated September 20, 2005. It was further an admitted fact that in the trust deed dated September 20, 2005, it was specifically recorded, inter alia, that the lands of the trust were under threat of encroachment by local inhabitants, and, in order to save the land in question, it was felt necessary to utilize the land by giving it for development for construction of buildings and flats and the proceeds received from consideration amount were to be utilized for the purposes of the trust. On the basis of the same trust deed, the benefit of exemption u/s. 12A of the Act was granted by granting registration to the trust u/s. 12AA. However, notice was issued to the trust dated December 18, 2017 directing the trust to show cause, inter alia, as to why its registration should not be cancelled for violation of the aims and objectives mentioned in the trust deed and memorandum of association. Thereafter, the CIT (Exemptions) passed order dated September 4, 2018 cancelling the registration granted in favour of the assessee-trust.

v) The CIT(Exemptions), while cancelling the registration, went beyond the terms of the trust deed and proceeded to cancel the registration recording, inter alia, that the trust deed dated September 20, 2005 was contrary to the wishes of the founder of the trust and the earlier instruments of trust, i. e., trust deeds of the years 1948 and 1987. Thus, the CIT(Exemptions) clearly travelled beyond the scope of inquiry as contemplated u/s. 12AA(3) for declaring that the activities of the trust were not genuine. The Supreme Court, in clear terms, held that u/s. 44 of the Bihar Hindu Religious Trust Act, 1950, a religious trust has power to transfer its immovable property after taking previous sanction, and, that the deity could transfer its land for fulfilling its objectives. Thus, the finding rendered by the CIT(Exemptions) for cancellation of the registration certificate was directly contrary to the order passed by the Supreme Court in the case of the assessee-trust itself.

vi) The Tribunal had upheld the order of the CIT(Exemptions). The Tribunal despite the order of the Supreme Court, being brought to its notice, held that the activity of the trust was not genuine and bona fide, as the Pujari of the trust changed the original trust deeds and had violated the objects of the trust in transferring the property of the trust. This finding of the Tribunal was not sustainable in the eye of law. That apart, the Tribunal had clearly travelled not only beyond the show-cause notice, but, also the order passed by the CIT(Exemptions). In an earlier proceeding pertaining to the year 2013-14, the Tribunal had clearly held that the trust deeds were not relevant for allowing the benefit of exemption and the income derived from transfer of property was as per the objects of the trust. The CBDT Instruction No. 883-CBDT F. N. 180/54/72-IT (AI) dated September 24, 1975 stated that the investment of net consideration received on the transfer of a capital asset in fixed deposit with a bank for a period of six months or above would be regarded as utilization of the net consideration for acquiring another capital asset within the meaning of section 11(1A) of the Income-tax Act. Admittedly, the assessee-trust had deposited the sale proceeds in fixed deposit with the bank for a period of more than six months and, thus, it could not be said that the assessee-trust had utilised the sale proceeds contrary to the objects of the trust. The cancellation of registration was not valid.

vii) Accordingly, the instant appeal is allowed and the questions of law framed at the time of admitting the appeal are answered in the affirmative in favour of the appellant.”

shailesh.kwebmaker

Section 69A r.w.s. 115BBE and section 153A – Where cash deposits made in bank accounts of the proprietorship concern during demonetization period were routed through regular books of account of the assessee which were not rejected by AO and no incriminating material was found during the search conducted at the premises of the sister concern of the assessee to point out that she introduced her own unaccounted money in her proprietorship concern in the garb of sale to its sister concern then additions made by the AO in respect of such cash deposit were merely based on surmise and conjectures and, thus, same were to be deleted.

3 Tripta Rani vs. ACIT

[2022] 97 ITR(T) 389 (Chandigarh – Trib.)

ITA No.: 135 (CHD.) OF 2021

A.Y.: 2017-18

Date of order: 13th June, 2022

Section 69A r.w.s. 115BBE and section 153A – Where cash deposits made in bank accounts of the proprietorship concern during demonetization period were routed through regular books of account of the assessee which were not rejected by AO and no incriminating material was found during the search conducted at the premises of the sister concern of the assessee to point out that she introduced her own unaccounted money in her proprietorship concern in the garb of sale to its sister concern then additions made by the AO in respect of such cash deposit were merely based on surmise and conjectures and, thus, same were to be deleted.

FACTS

The assessee was a proprietor of two concerns namely; ‘W’ and ‘S,’ and was engaged in the business of trading of textiles. The assessee was also engaged in the purchase and sale of cloth to its sister concern one R group. A search was conducted at premises of R group under section 132(1). Consequently, notice under section 153A was issued to the assessee. Pursuant to the said notice, the assessee filed return of income which reflected same income as filed in original return.

During the assessment proceedings, the AO observed that during the demonetization period, the assessee deposited Rs. 10 lakhs and Rs. 17 lakhs in the bank accounts of her proprietorship concerns ‘W’ and ‘S’ The AO required the assessee to submit details related to cash deposits along with certified copies of bank statements. The assessee explained to the AO that the cash deposits in the bank accounts of respective proprietorship concerns were out of sales made to its sister concern ‘R’ group. However, despite such explanation, the AO held that in case of proprietorship concern ‘S’, the assessee failed to submit any satisfactory reply and thus made additions under section 69A on the grounds that the assessee introduced own unaccounted money in the garb of sales to sister concern during the demonetization period.

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

HELD

The Tribunal observed that the AO had no sound reason to reject the contention of the assessee especially when the cash deposits in the bank account of ‘S’ have been routed through the regular books of account of the assessee. Even the books of account have not been rejected and the AO had accepted the sales as well as purchases and also the expenses claimed by the assessee and had only found fault with the quantum of cash deposits during the demonetization period. Thus, apparently, this impugned addition had been made without any foundation and the AO had acted on mere surmise and conjectures without duly appreciating the undisputed fact that he himself had accepted the books of account. The CIT (A) had also upheld the findings of the AO without assigning any cogent reason and he also seemed to have simply approved the addition without proper appreciation of facts. Further, on the same set of facts, the AO had accepted the cash deposit of Rs. 17 lakhs in another proprietorship concern of the assessee namely ‘W’ but had proceeded to doubt the cash deposited in the proprietorship concern ‘S’ without any cogent reason.

It was also noted by the Tribunal that the captioned case was a search case and even during the course of search no incriminating material was found which would point out towards the assessee introducing her unaccounted cash into the books of account under the garb of sales or receipts from sister concern.

Therefore, the view taken by the CIT (A) in upholding the addition of Rs. 10 lakhs was set aside by the Tribunal and the AO was directed to delete the same.

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Section 80-IB r.w.s 154 and Section 143 – Where the assessee’s claim for deduction under section 80-IB was rejected for want of filing of an audit report, in view of CBDT’s Circular No. 689, dated 24th April, 1984, the AO was required to consider rectification application filed by the assessee-company since a copy of said report in Form 10CCB was uploaded by the assessee on receipt of intimation under section 143(1).

2 Satish Cold Storage vs. DCIT

[2022] 97 ITR(T) 601 (Lucknow – Trib.)

ITA Nos.: 76 & 77 (LKW.) of 2021

A.Y.: 2017-18 & 2018-19

Date of order: 25th May, 2022

Section 80-IB r.w.s 154 and Section 143 – Where the assessee’s claim for deduction under section 80-IB was rejected for want of filing of an audit report, in view of CBDT’s Circular No. 689, dated 24th April, 1984, the AO was required to consider rectification application filed by the assessee-company since a copy of said report in Form 10CCB was uploaded by the assessee on receipt of intimation under section 143(1).

FACTS

The assessee had claimed deduction under section 80-IB of the Income-tax Act, 1961. However, the auditor of the assessee omitted to upload the audit report in FORM-10CCB along with the return of income. The deduction under section 80-IB was denied in the intimation issued under section 143(1). After the receipt of intimation under section 143(1) of the Income-tax Act, 1961, the assessee uploaded the copy of audit report in FORM 10CCB and filed a rectification application under section 154 against the said intimation. The audit report was rejected by the Central Processing Unit (CPC).

Thereafter an appeal was filed before Ld. CIT (A) against the order passed by the CPC under section 154.

The CIT (A) dismissed the appeal by holding that no mistake was apparent from the record. Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that CIT (As) while rejecting the appeal, had escaped the contents of Circular No. 689 dated 24th August, 1984. which clearly directs the Officers to allow rectification under section 154 for non-filing of audit report or other evidence which could not be filed with the return of income.

The Tribunal, by relying upon the decision of the Hon’ble High Court of Karnataka in the case of Mandira D Vakharia [2001] 250 ITR 432 (Kar.), held that the assessee would be entitled to the deduction in rectification under section 154 to the extent permitted by the Board’s Circular No.669 dated 25th October, 1993 and Circular No.689 dated 24th August, 1984. The AO was not right in law in disallowing the rectification application only on the grounds that the assessee had failed to furnish the audit report along with the return of income.

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Section 10 (38) r.w.s. 68 – Where the assessee claimed an exemption under section 10(38) towards long-term capital gains earned on the sale of shares alleged to be penny scrip and furnished various documentary evidences in the form of copies of contract notes, DEMAT account, details of share transactions, etc. in support of the claim, then onus casted upon assessee in terms of section 68 was discharged and therefore impugned addition made against alleged bogus LTCG was to be deleted.

1 Jatinder Kumar Jain vs. ITO

[2022] 97 ITR(T) 403 (Chandigarh – Trib.)

ITA No.: 338 (CHD) OF 2018

A.Y.: 2013-14

Date of order: 14th June, 2022

Section 10 (38) r.w.s. 68 – Where the assessee claimed an exemption under section 10(38) towards long-term capital gains earned on the sale of shares alleged to be penny scrip and furnished various documentary evidences in the form of copies of contract notes, DEMAT account, details of share transactions, etc. in support of the claim, then onus casted upon assessee in terms of section 68 was discharged and therefore impugned addition made against alleged bogus LTCG was to be deleted.

FACTS

The assessee-company had purchased shares of Maple Goods Ltd (MGL) through cheque and the identity of the broker had been furnished. Due to the order of High Court Kolkata, MGL along with Seaview Supplier Ltd (SSL) and Matrix Barter Pvt Ltd (MBL) were amalgamated and as a consequence, the assessee was allotted 7,900 shares of Access Global Ltd (AGL). Subsequently, the assessee sold these shares of AGL through a bank channel. It claimed long-term capital gain arising on sale of the said shares as exempt under section 10(38).

The AO received the report of the Investigation Wing wherein AGL had been allegedly identified as one of the penny stock companies. In the said report, it was alleged that the price of shares of AGL had been artificially rigged to create a non-genuine long-term capital gain. On the basis of the said report, The AO inferred that the assessee had allegedly earned bogus long-term capital gain on sale of shares of AGL through another alleged bogus client company, namely Ashok Kumar Kayan (AKK) and accordingly, came to conclusion that AKK had provided bogus long term capital gain to the assessee and other companies, and thus denied the assessee’s claim of exemption and made addition of the long term capital gain under section 68.

During the course of the assessment proceedings, the assessee had furnished documentary evidences which included copies of contract notes, DEMAT account, details of share transactions, contract notes giving details like trade number, trade time, contract note number, settlement number, details of service tax payment, securities transaction tax paid and the brokerage paid to the broker. It was also demonstrated by the assessee that the purchase of shares of MGL had been made through cheque in June, 2011. The assessee had also demonstrated that, subsequently, the sale proceeds from the shares of AGL were received again through banking channel. Apart from this, the assessee had also filed the judgment of the High Court ordering amalgamation of three companies MGL, SSL and MBL as a consequence to which the assessee was allotted 7,900 shares of AGL. The assessee had also furnished a copy of letter addressed to the assessee by MGL which showed the distinctive number of shares allotted to the assessee along with the certificate number and the share folio number.

The CIT(A) upheld the addition made by the AO. Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

It was observed by the Tribunal that all these documents have apparently been accepted by the lower authorities in as much as neither the AO nor the CIT (A) had pointed out any defect in these documents. The statements of various persons were recorded. But nowhere in the statements, the name of the assessee was referred to.

The assessee had demonstrated with substantial evidence before the AO that the actual purchase and sale of the shares took place, such shares had distinctive numbers, the transactions were routed through the normal banking channels and the shares had been allotted to the assessee subsequently under an order of amalgamation/merger.

The Tribunal also observed that when the AO had received the report of the Investigation Wing, he ought to have conducted an independent enquiry to examine and verify the involvement of the assessee in the alleged bogus long-term capital gain claim rather than simply and blindly following the report and the statement to make a case against the assessee.

Accordingly, the Tribunal held that since the assessee had successfully discharged the onus casted upon him in terms of section 68, the impugned addition had no feet to stand.

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Letter of Allotment and Receipt of Immovable Property

ISSUE FOR CONSIDERATION

Section 56(2) provides for the taxability of certain receipts, which inter alia include the receipt of any immovable property, either without consideration or for a consideration which is less than its stamp duty value. When taxability of such receipts was introduced for the first time vide clause (vii) of section 56(2), it was applicable only if the immovable property was received without consideration by the assessee on or after 1st October, 2009. The Finance Act, 2013 amended the provision of clause (vii) with effect from AY 2014-15, expanding its scope to cover the receipt of an immovable property for a consideration, if the consideration was lesser than the stamp duty value of the said immovable property.

The said clause (vii) of section 56(2) was applicable only to individuals and HUFs. However, thereafter, the Finance Act, 2017 made clause (vii) inapplicable to receipts after 31st March, 2017. Receipts subsequent to that date were brought to tax under clause (x) in the hands of all types of assessees. The taxability under both these clauses is subject to further conditions and several exclusions.

In the real estate market, when the immovable property is bought from a builder in a project which is underconstruction, it is a common practice that the builder will first issue a letter of allotment upon finalization of the deal and receipt of the booking amount. Thereafter, it will be followed by execution of a detailed agreement for sale and its registration. Even as per the provisions of the Real Estate (Regulation and Development) Act, 2016, it is obligatory for the promoter to enter into an agreement and to get it registered only when a sum of more than 10 per cent of the total consideration is received from the buyer. Thus, generally, the agreement for sale is not executed and registered immediately when the assessee books any property with the builder in an under-construction project and pays booking amount not exceeding 10 per cent of the total consideration.

If, in such cases, the year in which the assessee booked the property and received the letter of allotment is different from the year in which the agreement for sale has been executed and registered, then the issue arises as to in which year the assessee should be considered to have ‘received’ the immovable property. The Mumbai bench of the tribunal has considered the year in which the agreement for sale was executed as the year in which the property was effectively received by the assessee, and the Jaipur bench of the tribunal has considered the year in which the letter of allotment was issued as the year in which the property was effectively received by the assessee.

SUJAUDDIAN KASIMSAB SAYYED’S CASE

The issue first came up for consideration of the Mumbai bench of the tribunal in the case of Sujauddian Kasimsab Sayyed vs. ITO (ITA No. 5498/Mum/2018). The assessment year involved in this case was 2015-16.

In this case, the assessee had agreed to purchase flat No. 2901 on 29th Floor, C-Wing, in the building named as Metropolis, Andheri (West), Mumbai admeasuring area of 123.36 sq. m (carpet area) for a consideration of Rs. 88,30,008, whereas its stamp duty value was determined at Rs. 1,88,44,959. The assessee had originally booked this flat with M/s Housing Development & Infrastructure Ltd on 27th April, 2012 and an advance payment of Rs. 3,00,000 was also made on 27th April, 2012. The purchase deed was executed and registered on 10th September, 2014 i.e. during the year under consideration, apart from the payment of Rs. 3,00,000 at the time of booking of the flat, the assessee had made the payment of Rs. 14,66,001 till the time of execution of the agreement. The balance amount of Rs. 70,64,007 was still payable, and it was to be paid in instalments as specified in the agreement.

During the course of assessment proceedings, the AO asked the assessee to explain why the difference of Rs.1,00,14,951 (being the stamp duty value) should not be treated as income from other sources under section 56(2)(vii)(b). Not being satisfied with the reply of the assessee, the AO made the addition of such difference while passing the assessment order.

Aggrieved by the order of the AO, the assessee filed an appeal before the CIT(A). Before the CIT(A), it was contended that the assessee had booked the said flat on 27th April, 2012 on which date the letter of allotment was issued as well as the amount of Rs.3,00,000 was also paid. The copies of the allotment letter and receipt were also placed on record. On this basis, it was contended that these dates were falling in the previous year relevant to AY 2013-14, in which year the amended provisions of section 56(2)(vii)(b) were not applicable. The amendment made by the Finance Act, 2013 bringing to tax the receipt of immovable property for a consideration lesser than the stamp duty value was applicable only w.e.f. 01st April, 2014

The CIT (A) dismissed the appeal of the assessee, mainly on the ground that 27th April, 2012 could not be considered to be the date of purchase of the flat, as it was merely an allotment on that date, and the real transaction of purchase of flat had been entered on 10th September, 2014 by a registered deed. It was held that for any purchase or sale deed of immovable property to be covered under section 53A of the Transfer of Property Act, it was required to be a registered instrument enforcing civil law rights. In the absence of registration, the transaction would not fall under section 2(47)(v) of the Act. The CIT (A) placed reliance on the decisions of the tribunal in the case of Saamag Developers Pvt Ltd [TS-26-ITAT-2018(DEL) order dated 12th January, 2018] wherein it was held that registration under section 17(1A) of the Registration Act, 1908 was a pre-condition to give effect to section 53A of the Transfer of Property Act. He also relied upon the decision in Anil D. Lohana [TS-466-ITAT-2017(MUM) order dated 25th September, 2017], wherein it was held that the holding period of the property is to be reckoned from the date on which the assessee got right over the property by virtue of sale agreement.

Before the tribunal, the assessee submitted that the letter of allotment was executed with the builder on 27th April, 2012, which conferred the right to obtain conveyance of the said flat. It therefore became an asset under section 2(14) and therefore, the date of letter of allotment should be considered as the date of receipt of immovable property. Since the allottee would get title to the property on issuance of an allotment letter, and the payment of instalments would be only a consequential action upon which the delivery of possession would follow, it was claimed that the assessee was having a right in the property since 27th April, 2012 i.e. the date of allotment. Therefore, the effective date of agreement was 27th April, 2012, which pertained to A.Y. 2013-14. On this basis, it was argued that no addition should have been made in the assessment year under consideration.

The assessee relied upon the following decisions in support of his contentions –
Babulal Shambhubhai Rakholia vs. ACIT (ITA No. 338/Rjt/2017 for A.Y. 2014-15),
Sanjay Kumar Gupta vs. ACIT (ITA No. 227/JP/2018 for A.Y. 2014-15),
Anita D. Kanjani vs. ACIT (2017) 79 taxmann.com 67 (Mumbai-Trib),
DCIT vs. Deepak Shashi Bhusan Roy (2018) 96 taxmann.com 648 (Mumbai-Trib),
Pr. CIT vs. Vembu Vaidyanathan (2019) 101 taxmann.com 436 (Bombay HC) and
ACIT vs. Shri Keyur Hemant Shah (ITA No. 6710/Mum/2017 for AY 2013-14 dated 2nd April, 2019)(Mumbai ITAT).

The tribunal held that the decisions of Anita D. Kanjani, Deepak Shashi Bhusan Roy and Keyur Hemant Shah were not applicable to the case under dispute, since the issue under consideration in those cases was the period of holding of the property – whether to be reckoned from the date of issue of the letter of allotment or from the date when the agreement was executed. With respect to the decision in the case of Vembu Vaidyanathan, the tribunal held that the High Court in that case had considered the date of allotment would be the date on which the purchaser of a residential unit could be stated to have acquired the property for the purposes of section 54. In that case, the High Court had relied upon the CBDT Circular No. 471 dated 15th October, 1986 and Circular No. 672 dated 16th December, 1993 and had observed that there was nothing on record to suggest that the allotment in the construction scheme promised by the builder in that case was materially different from the terms of allotment and construction by DDA as referred to in those circulars. By observing that the issue in the case under consideration was not the allotment in construction scheme promised by the builder which is materially the same as the terms of the allotment and construction by DDA, the tribunal held that the decision in Vembu Vaidynathan was distinguishable.

The decision in Babulal Shambhubhai Rakholia was also distinguished on the grounds that, in that case, the stamp papers were purchased on or before 30th March, 2013 and the transferor as well as the transferee had put their signature on the sale deed on 30th March, 2013. It was on this basis, it was held that section 56(2)(vii)(b) would not be applicable. Similarly, the decision in Sanjay Kumar Gupta was also distinguished as in that case the assessee had claimed to have purchased the property in question vide unregistered agreement dated 28th March, 2013 and the AO considered the date of transaction as of the sale deed which was dated 26th April, 2013. Though the agreement dated 28th March, 2013 was not registered, it was attested by the notary and the payment of part of the consideration on 28th March, 2013 was duly mentioned in the sale deed dated 26th April, 2013. Under these facts, it was held in that case, that the transaction would be treated to have been completed on 28th March, 2013 as the agreement to sell dated 28th March, 2013 had not been held to be bogus.

The tribunal further held that there was no dispute that the “Agreement for Sale” was dated 10th September, 2014. The “Letter of Allotment” dated 27th April, 2012 could not be considered as the date of execution of agreement by any stretch of imagination. The immovable property was not conveyed by delivery of possession, but by a duly registered deed. Further, it was the date of execution of registered document, not the date of delivery of possession or the date of registration of document which was relevant. The tribunal relied upon the decisions in the cases of Alapati Venkataramiah vs. CIT (1965) 57 ITR 185 (SC), CIT vs. Podar Cements Pvt Ltd (1997) 226 ITR 625 (SC).

On the basis of the above, the tribunal upheld the order of the CIT (A) and dismissed the appeal of the assessee.

NAINA SARAF’S CASE

The issue, thereafter, came up for consideration of the Jaipur bench of the tribunal in Naina Saraf vs. PCIT (ITA No. 271/Jp/2020).

In this case, in the previous year relevant ot the AY 2015-16, the assessee had purchased an immovable property i.e. Flat No. 201 at Somdatt’s Landmark, Jaipur for a consideration of Rs.70,26,233 as co-owner with 50 per cent share in the said property. The stamp duty value was determined at Rs.1,03,12,220 as against the declared purchase consideration of Rs.70,26,233.

The case of the assessee was selected under CASS for the reason of “Purchase of property”. During the course of the assessment proceeding, the assessee filed registered purchase deed and other details as required by the AO. Finally, the AO after examining all the details and documents filed, accepted the return of income vide his order dated 21st December, 2017 passed under section 143(3).

Later on, the PCIT observed that the AO had failed to invoke the provisions of section 56(2)(vii)(b) with respect to the difference between the stamp duty value and the purchase consideration amounting to Rs.32,85,987, and, therefore, considered the order of the AO as erroneous and prejudicial to the interest of the revenue by passing an order under section 263 of the Act.

The assessee filed an appeal before the tribunal against the said order of the PCIT passed under section 263. Before the tribunal, the assessee not only challenged the jurisdiction of the PCIT to invoke the provisions of section 263, but also disputed the applicability of section 56(2)(vii)(b) to her case on merits. It was submitted that the assessee applied for purchase of Flat No.201 on 23.09.2006 (as mentioned in allotment letter) and paid Rs.7,26,500 on 3rd October, 2006. The seller company M/s SDB Infrastructure Pvt Ltd issued allotment letter on 06th March, 2009 to the assessee. On 11th November, 2009, by signing the allotment letter as token of acceptance, the assessee agreed to purchase the property measuring 2,150 sq ft at the rate of Rs. 3,050 per sq. ft. for a sum of Rs. 65,57,500 as per terms and conditions mentioned in the allotment letter dated 6th March, 2009. The formal agreement was exceuted and registered on 09th December, 2014. It was also submitted that the consideration of Rs.45,26,233 was already paid before 5th April, 2008 i.e. even prior to the date on which the allotment letter was issued.

On the basis of the above, the assessee contended that the purchase transaction effectively took place in AY 2010-11 itself, and not in AY 2014-15 when the actual registration took place. Therefore, the case of the assessee would be governed by the pre-amended provision of section 56(2)(vii)(b), which applied only where there was a total lack of consideration and not when there was inadequacy of purchase consideration.

Further, the assessee also challenged the denial of benefit of the first proviso to section 56(2)(vii)(b) by the PCIT, on the grounds that the date of the sale deed and the date of its registration were the same. It was contended that a bare perusal of the allotment letter showed that all the substantive terms and conditions which bound the parties, creating their respective rights and obligations were contained therein. The said allotment letter also provided for giving possession of the property within a period of 30 months from the date of allotment (except if due to some unavoidable reasons). Hence, there was an offer and acceptance by the competent parties for a lawful purpose. Thus, such allotment letter was having all the attributes of an agreement as per the provisions of the Indian Contract Act, 1872.

In so far as the PCIT’s observation that the allotment letter was provisional was concerned, it was submitted that the provisional nature of allotment was only to take care of unexpected happenings, such as changes by the sanctioning Authority or by the Architect or by the Builder, which might result in increase or decrease in the area, or absolute deletion of the apartment from the sanctioned plan. But for all intents and practical purposes, it was a complete agreement between the parties, which was even duly acted upon by both of them.

Further, the assessee contended that the relevant provision used the word ‘receives’ but did not use the word ‘purchases’ or ‘transfers’. Therefore, the legislature never contemplated the receipt of the subjected property as a complete formal transfer by way of registration of the property purchased in order to invoke section 56(2)(vii)(b)(ii). This would have had the effect of deferring the taxability, and resulted in late receipt of revenue from the taxpayer. On the contrary, by using the word ‘receives’, the legislature had advanced the taxability (provided the assesse clearly falls within the four walls of the provision as existed on the date of such receipt of the subjected property). The receipt of the property simplicitor happened in AY 2010-11, and not in the subject year i.e. AY 2014-15, where mere registration and other legal formalities were completed. The assesse’s right stood created and got vested at the time of the signing of the allotment letter itself by both the parties, on certain terms and conditions, and on specific purchase consideration. What happened later on was a mere affirmation / ratification by way of registration of the sale transaction in that year.

The tribunal perused the allotment letter and observed that it contained all the substantive terms and conditions which create the respective rights and obligations of the parties i.e. the buyer (assessee) and the seller (the builder) and bind the respective parties. The allotment letter provided detailed specification of the property, its identification and terms of the payment, providing possession of the subjected property in the stipulated period and many more. Evidently the seller (builder) had agreed to sell and the allottee buyer (assessee) had agreed to purchase the flat for an agreed price mentioned in the allotment letter. What was important was to gather the intention of the parties and not go by the nomenclature. Thus, there being the offer and acceptance by the competent parties for a lawful purpose with their free consent, the tribunal found that all the attributes of a lawful agreement were available as per provisions of the Indian Contract Act, 1872. It was also noted by the tribunal that such agreement was acted upon by the parties, and pursuant to the allotment letter, the assessee paid a substantial amount of consideration of Rs.45,26,233, as early as in the year 2008 itself. With respect to the PCIT’s observation that it was a mere provisional allotment, the tribunal held that it was a standard practice to incorporate the provision for increase or decrease in area due to unexpected happening so as to save the builder from unintended consequences. On this basis, it was concluded that the assessee had already entered into an agreement by way of allotment letter on 11th November, 2009, falling in AY 2010-11. Having said so, it was held that the law contained in section 56(2)(vii)(b) as it stood at that point of time, did not contemplate a situation of a receipt of property by the buyer for inadequate construction.

Accordingly, the tribual quashed the order of the PCIT, on the grounds that the assessment order, which was subjected to revision under section 263, was not erroneous and prejudicial to the interest of the revenue.

An identical view has been taken by the Mumbai bench of the tribunal in the case of Indu Kamlesh Jain vs. PCIT (ITA No. 843/Mum/2021) and Siraj Ahmed Jamalbhai Bora vs. ITO (ITA No. 1886/Mum/2019).

With respect to the applicability of section 43CA which has come in force with effect from A.Y. 2014-15, in cases where the allotment letters were issued prior to 1st April, 2013, diagonally opposite views have been taken by the Mumbai and Jaipur benches of the tribunal. In the case of Spenta Enterprises vs. ACIT [TS-63-ITAT-2022(Mum.)], it has been held that the provisions of section 43CA would not apply in such cases. As against this, in the case of Spytech Buildcon vs. ACIT [2021] 129 taxmann.com 175 (Jaipur – Trib.), it has been held that merely because an agreement had taken place prior to 1st April, 2013, it would not take away the transaction from the ambit of provisions of section 43CA. However, in the case of Indexone Tradecone (P) Ltd. vs. DCIT [2018] 97 taxmann.com 174 (Jaipur – Trib.), it was held that the provisions of section 43CA would not apply to a case where the agreement to sell was entered into much prior to 1st April, 2013, though the sale deed was registered after it came in force.

OBSERVATIONS

There are different stages through which a transaction of buying an immovable property passes, particularly when it has been bought from the builder in an ongoing project which is under construction and yet to be completed. These different stages can be broadly identified as under –

Allotment – When the person decides to buy a particular property and finalizes the relevant terms and conditions, the builder allots that particular property to that person by issuing a letter of allotment or a booking letter against the receipt of the booking amount. It contains the broad terms and conditions, which are the bare minimum required, such as identification of the property by its unique no., area of the property, total consideration to be paid, the time period within which the possession would be given etc. Normally, it is signed by both the parties i.e. the buyer as well as the seller.
Such an allotment letter is normally issued because it may not be feasible to execute the agreement for sale immediately. The execution of the agreement may take time due to its drafting and settlement, payment of stamp duty etc.
Agreement – After the necessary formalities are completed, the parties may thereafter proceed to execute an agreement which is popularly called as ‘agreement for sale’ and get it registered also. In order to safeguard the interest of the buyer, the relevant applicable local law may provide for restrictions on receipt of consideration in excess of certain limit, unless the necessary agreement has been executed and registered. For instance, as per the Real Estate (Regulation and Development) Act, 2016, it is obligatory for the promoter to enter into an agreement and to get it registered when a sum of more than 10 per cent of the total consideration is received from the buyer.

Possession – Upon completion of the construction, the builder hands over the possession of the property to the buyer in accordance with the terms and conditions as agreed.

The buyer is required to make the payment of the consideration as per the agreed terms throughout these stages. Normally, if the entire consideration as agreed has been paid, then the receipt of possession of the property is regarded as its deemed conveyance.

The first stage i.e. issuance of the allotment letter, may not be there in every case. But, the other two stages will normally be there in all cases, unless the property has been conveyed at the time of agreement itself and possession has also been handed over simultaneously.

Due to such multiple stages, several issues arise while applying the provisions of the Income-tax Act, some of which are listed below –

From what date should the assessee be considered as holding the property for determining whether it is short-term or long-term in accordance with the provisions of section 2(42A)?
When should the assessee be considered to have purchased or constructed the residential house for the purpose of allowing exemption under section 54 or 54F?
When should the assessee be considered to have received the property under consideration for the purpose of section 56(2)(x)? Whether the first proviso to section 56(2)(x) applies in such case and whether the stamp duty value as on the date of the allotment letter can be taken into consideration?
If the assessee is the seller, when should he be considered to have transferred the property for the purpose of attracting the charge of capital gains or business income in his hands? Whether the first proviso to section 50C is applicable in such case and whether the stamp duty value as on the date of the allotment letter can be taken into consideration?

Though the controversies exist on each of the above issues, the scope of this article is to deal with the controversy with respect to the applicability of section 56(2)(x) only. The limited issue under consideration is whether can it be said that the assessee ‘receives’ an immovable property when a letter of allotment is issued to him by the seller or he ‘receives’ it only upon the execution of the agreement for sale. Though one may contend that the assessee does not receive the property on either, and he receives it only upon receipt of the possession of the property, such issue has not been dealt by the tribunals in the cases discussed above.

The primary reason as to why the allotment letter was not considered to be receipt of the immovable property by the Mumbai bench of the tribunal in the case of Sujauddian Kasimsab Sayyed (supra) was that the allotment letter was not considered to be in the nature of an agreement equivalent to an agreement for sale, resuling into receipt of the property in the hands of the assessee. Therefore, first and foremost, it is required to be examined whether the letter of allotment or the booking letter can be considered to be an agreement and is there any material difference between the allotment letter and the agreement for sale, because of which the assessee is considered to have received the property on execution of the agreement for sale but not on issue of the allotment letter.

At the outset, it is clarified that the contents of the allotment letter and other related facts would be very relevant to decide this aspect of the matter. In this article, the attempt has been made to discuss the issues, assuming that the allotment letter contains all the important terms and conditions necessary to be agreed upon in any transaction of purchase and sale of property as per the standard practice of the industry i.e. identification of specific unit no. of the property, its area, total consideration, schedule of payment and possession, etc.

The Indian Contract Act, 1872 simply defines an agreement that is enforceable by law as a contract. It further provides that all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void. Further, it also provides that the agreement need not be in writing, unless it is required so to be in writing by any other law in force. All the essential ingredients of a contract are present in the allotment letter, and, therefore, the same needs to be considered as a contract enforceable in the eyes of law.

In the case of Manjit Singh Dhaliwal vs. JVPD Properties Pvt Ltd (No. AT006000000000017 – decision dated 12th April, 2018), the issue before the Maharashtra Real Estate Appellate Tribunal was whether the allottees who had been issued only the letter of allotment and no agreement for sale had been executed could seek relief under the RERA Act or not. While holding that the complaint of the allottees would not fall for want of agreement for sale, the tribunal observed that the letter of allotment in that case stipulated the description of the property to be purchased, description of the payment schedule, the total cost, the necessary requisite permission, obligation to complete the projects and getting clarity to the title and, therefore, the cumulative effect of it would not be short of branding it to be the terms agreed upon between the parties. It was held that the agreement is a form of contract relating to offer, acceptance, consideration, time schedule, clarity of title and as to essence of time. The allotment letter incidentally was couched in such a fashion as to incorporate all the requisite terms. Hence, the absence of an agreement for sale would not scuttle the rights of allottees.

In the case of Shikha Birla vs. Ambience Developers Pvt Ltd (IA No. 418/2008 dated 20th December, 2008), the Delhi High Court was dealing with a suit against the developer for specific performance of the contract contained in the letter of allotment, and for direction to handover possession of the concerned property. In this case, the High Court held that an understanding to enter into a legally binding agreement does not result in a legally enforceable contract, but an understanding or a bargain is legally enforceable, if execution of a further document is to effectuate the manner in which the transaction already agreed upon by the parties is to be implemented. In the former case, execution of the agreement is a condition precedent. An agreement to enter into an agreement is not executable, but in the latter case, execution of a formal document is not a condition precedent and rights and obligations of the parties come into existence. A mere reference to a future formal contract will not in law prevent a binding bargain between the parties. On the facts of that case, the High Court held that, vide the allotment letter, the terms and conditions were ascertained and certain. Nothing was left to be negotiated and settled for future. Terms were agreed and the agreement for sale on a standard format was read and understood. It was a certain and concluded bargain. It was not a case where the parties were entering into a temporary understanding, which may or may not fructify into a binding bargain, and where execution of agreement for sale was a condition precedent for creating permanent obligations. A concluded contract therefore had come into existence. Therefore, the letters of allotment, in that case, were not regarded as in the nature of an understanding which did not create an enforceable agreement in law but only an understanding between the parties to enter into an enforceable agreement in future.

The Delhi High Court in the said case also referred to the decision of the Supreme Court in the case of Poddar Cement Pvt Ltd (supra) and held that the Supreme Court had also referred to with approval the need and requirement to continuously update and construe law in accordance with changes, ground realities to make it a living enactment, in tune with the present state of affairs.

Further, the clause in the allotment letter that the allottee shall not be entitled to enforce the same in a Court of Law was regarded as void by the Delhi High Court in view of section 28 of the Contract Act, 1872, by relying upon the decision of the Supreme Court in the case of Food Corporation of India vs. New India Assurance Company Ltd reported in AIR 1994 SC 1889, wherein it was held that every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to that extent.

In the context of the Income-tax Act, 1961, the Mumbai bench of the tribunal in the case of Indogem vs. ITO (2016) 160 ITD 405 (Mum) has already examined the issue as to whether the letter of allotment could be regarded as agreement giving equivalent benefits to the assessee under the Act and the relevant portion from this decision is reproduced below:

“First point for consideration is whether there is an agreement for acquisition of property between the builder and the assessee. Agreement means set of promises forming consideration for each other. Law does not require that an agreement shall always be in writing or if reduced into writing, it shall be in a particular/specific format. As could be seen from the record, the allotment letter runs into so many clauses and, in our view, it answers the description of an agreement. When all the terms agreed upon by the parties are reduced into writing in detail, nothing more is required than formal compliance with the stamp and registration requirements. On a careful perusal of this allotment letter, we find that it contains all the details that were agreed upon by the parties, as such, by no stretch of imagination could it be said that there is no valid agreement for acquisition of the property.”

In view of the above, it appears that the view taken by the Mumbai bench of the tribunal in the subsequent decision in the case of Sujauddian Kasimsab Sayyed was contrary to what was held in the decision as referred above of the co-ordinate bench.

There can be an equally strong argument to claim that, upon issuance of the allotment letter, what is received is not the immovable property itself, but only the right to receive it in future by executing a registered agreement at a later stage or by receiving its possession. This view can be further justified on the grounds that if the allotment letter is considered to be a receipt of the immovable property, then it would result in taxing the difference in that year itself (in a case where the allotment letter has been issued subsequent to 1st April, 2013 i.e. subsequent to the amendment), irrespective of whether it has then culminated into a registered agreement or has been cancelled due to any reason. In the case of Hansa V. Gandhi vs. Deep Shankar Roy (Civil Appeal No. 4509 of 2007), the Supreme Court has held that mere letter of intent, which was subject to several conditions, would not give any right to the allottee for purchase of the flats in question, till all the conditions incorporated in the letter of intent were fulfilled by the the proposed purchasers. Further, it was also held that if the same flat has been sold to the other buyer upon non-fulfillment of the conditions of the letter of intent, then it cannot be presumed that such subsequent buyer had knowledge about the previous transaction for want of registration of the said letter of intent.

However, even if the provisions of section 56(2)(x) are invoked for taxing the difference between the stamp duty value and the actual consideration in the year in which the agreement has been executed and registered, then the benefit of the first proviso to section 56(2)(x) needs to be extended. The first proviso states that where the date of agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for this purpose. In such a case, the letter of allotment is to be considered as the agreement fixing the amount of consideration, subject to fulfillment of the other conditions. Difference of opinion may exist only with respect to the nature of rights which the buyer derives on the basis of the letter of allotment, but certainly not with respect to the fact that the letter of allotment needs to be regarded as the agreement fixing the amount of consideration.

The view that the stamp duty value as on the date of allotment letter should be preferred over the stamp duty value as on the date of registration of the agreement for sale is supported by the following decisions:-

ITO vs. Rajni D. Saini (ITA No. 7120/Mum/2018)
Sajjanraj Mehta vs. ITO (ITA No. 56/Mum/2021)
Radha Kishan Kungwani vs, ITO [2020] 120 taxmann.com 216 (Jaipur – Trib.)

That being the position, where the inadequacy of the consideration has to be judged on the basis of the difference in valuation on a date before the amended law came into force, the better view seems to be that such transactions entered into at that point of time are not intended to be covered by the subsequent amendments.

Section 56(2)(x) and its predecessor clause(vii) provides for bringing to tax the cases of inadequate consideration on receipt of an immovable property. The term ‘property’ is defined in vide clause (d) of Explanation to s.56(2)(vii) which in turn includes an immovable property and sub-clause(i) thereof defines an ‘imovable property’ to be ‘land and building or both’. There is a reasonable consistency of the judiciary in restricting the scope of the term immovable property to the cases of land and building simpliciter and not to the cases of the rights in land and building. Please see Atul G.Puranik, 132 ITD 499 (Mum) which holds that even leasehold rights in land are not the ‘land’ simpliciter. Equating the ‘land and building’ to the case of a rights under a letter of allotment, issued at the time where the premises are yet under construction, perhaps is far -fetched and avoidable. Secondly, what is required for a charge of tax, under s.56(2). to be complete is the ‘receipt’ of a property ; such a property that can be regarded as land or building. Obviously, the receipt of a right under letter of allotment would not satisfy the requirement for a valid charge of tax. Under the circumstances, it is better to hold that the provisions of s.56(2)(x) are inapplicable in the year in which an allotment letter is issued in respect of the premises under construction. The charge of tax may be attracted in the year of receipt of the premises, Yasin Moosa Godil, 52 SOT 344(Ahd.), and in that year the benefit of the Provisos(s.43CA,50C and 56(2)(x)), while determining the inadequacy shall be ascertained w.r.t the allotment letter.

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Section 148 –Reopening – beyond the period of four years – Approval for issuance of notice:

24 MA Multi-Infra Development Pvt Ltd vs.

ACIT Circle- 3(2)(1) & Ors

[Writ Petition No. 1650 of 2022,

Date of order: 09th January, 2023, (Bom.) (HC)]

Section 148 –Reopening – beyond the period of four years – Approval for issuance of notice:

The assessee challenges the notice dated 31st March, 2021 under section 148 of the Act, for the A.Y. 2015-16, inter-alia, on the ground that since the same has been issued beyond the period of four years, approval for issuance of the same ought to have been obtained from the Principal Chief Commissioner of Income-tax in terms of section 151(ii) of the Act.

The Court observed that a perusal of the notice dated 31st March, 2021 issued under section 148 of the Act by the AO shows that the same has been issued after obtaining necessary satisfaction of Additional Commissioner of Income Tax, Range (3)(2), Mumbai. As per the objections filed by the revenue, the approval was obtained from the Additional Commissioner of Income Tax, Range (3)(2), Mumbai. The said officer, it is stated, was competent to grant approval in view of the applicability of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (for the sake of convenience, hereinafter referred to as ‘the Relaxation Act’).

It is stated that in terms of the Relaxation Act, the limitation inter-alia, under provisions of sections 151(i) and 151(ii) of the Act, which were originally expiring on 31st March, 2020, stood extended to 31st March, 2021. It was, thus, urged that since the Relaxation Act had extended the period of limitation, the authority which was otherwise supposed to grant approval in regard to cases falling within the ambit of section 151(i) of the Act could have granted approval beyond the period of three years based upon the Relaxation Act.

The Court in J.M. Financial & Investment Consultancy Services (P) Ltd. vs. Assistant Commissioner of Income Tax & Ors. [Writ Petition No.1050 of 2022 dated.4th April, 2022 ] has already taken a view holding that the Relaxation Act would apply only to cases where the limitation was expiring on 31st March, 2020 and since for the A.Y. 2015-16, the limitation period was six years which was to expire only on 31st March, 2022, the said provisions would not be applicable. It was held that while the time to issue notice may have been extended but that would not amount to amending the provisions of section 151 of the Act.

The petitioner urged that the case of the petitioner fell under section 149(b), and therefore, the period of limitation of six years for issuance of notice under section 148 for the A.Y. 2015-16 would expire on 31st March, 2022. It was, therefore, urged that the case of the petitioner was squarely covered by J.M. Financial & Investment Consultancy Services (P) Ltd.

Accordingly it was held that the approval for issuance of notice under section 148 ought not have been obtained from the Additional Commissioner of Income Tax but from the authority specifically mentioned under section 151(ii) of the Act.

The notice impugned notice dated 31st March, 2021 was quashed. The petition was allowed.

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Unaccounted income – Bogus Long Term Capital Gains – Concurrent finding of fact – No substantial question of law :

23 Pr. Commissioner Of Income Tax-10 vs.

M/S. Rajat Finvest & Ors[ITA NO.13 OF 2023,

Date of order: 12th January, 2023, (Del.) (HC)]

[Arising out of ITAT order dated 12th September, 2019 for A.Y. 2010-2011 [ITA 13/2023], A.Y. 2009-2010 [ITA 14/2023] and A.Y. 2008-2009 [ITA 15/2023].

Unaccounted income – Bogus Long Term Capital Gains – Concurrent finding of fact – No substantial question of law :

The respondent/assessee is in the business of trading and investing in scrips. On 7th August, 2012, a survey was carried out by the appellant/revenue in exercise of powers under section 133A of the Income-tax Act, 1961, and according to the appellant/revenue, during investigation, the fact was revealed i.e., that the respondent/assessee had introduced unaccounted income in its books of accounts in the guise of long-term capital gains (LTCG), albeit, by first investing and then selling the shares of two entities i.e., REI Agro Ltd. [in short, “REI”] and REI Six Ten Ltd [in short, “REI Six”]. The respondent/assessee, against the LTCG, had claimed exemption from tax.

It is not in dispute, that REI is a listed company, and its shares were transacted on the stock exchange. The facts also show, that during the course of the survey on 7th August, 2012, the statement of one Mr. Brij Mohan Vyas was recorded. Mr. Brij Mohan Vyas, according to the appellant/revenue, is an employee of REI Agro Group. The shares of REI were bought and sold through brokers, on instructions of one Mr. Sandeep Kumar Jhunjunwala.

The AO has relied upon the details gathered by the Investigation Wing, to conclude that the respondent/assessee had introduced its unaccounted income to purchase and sell the shares of REI. Thus, based on the information gathered by the Investigation Wing, the AO concluded, that the entire set of transactions was a ‘sham’, and that the same had been configured to give the sale and purchase of shares by the respondent/assessee a legal framework. The Assessment Order was passed pursuant to reopening of assessment of the respondent/assessee under section 148 of the Act.

The CIT(A) via order dated 29th June, 2016 partly allowed the respondent/assessee’s appeals. The appellant/revenue preferred an appeal to the Tribunal.

The Tribunal considered the matter in great detail, and came to the conclusion that the order passed by the CIT(A) had to be confirmed.

The Hon. High Court noted that both the CIT(A) and the Tribunal have returned findings of fact. The important fact was that the respondent/assessee traded in shares and the respondent had converted a part of its stock-in-trade as investment. In A.Y. 2008-09, the respondent/assessee had declared profit from trading in shares of REI, and during that very year, the said shares were transferred to opening stock and were purchased under investment portfolio.

Further the statement made by Mr. Brij Mohan Vyas on 7th August, 2012 did not reveal that REI was manipulating share prices on the stock exchange. The involvement of Mr. Sandeep Kumar Jhunjunwala, based on whose instructions Mr. Brij Mohan Vyas acted, was to the extent as to the right time when shares of REI had to be bought and sold.

The observation of the AO, that the funds which flowed from REI in the form of unsecured loans to six companies, which were located in Gujarat, were unaccounted income of the respondent/assessee, appears to be based on assumptions and/or conjectures. No material to back the conclusion arrived at by the AO.

The appellant/revenue could not have bifurcated the purchase and sale transactions. Concededly, when the shares were purchased for trading purposes in earlier years, the profits so generated were accepted, and at the point in time, when these scrips were converted into investment and sold during the Assessment Years in issue, they could not be treated as bogus transactions. The fact that shares were traded on stock exchange after paying securities transaction tax, and that money had been received through banking channels only demonstrated that they were not bogus transactions.

The Court noted that there are concurrent findings of facts returned by the CIT(A) as well as the Tribunal. The proposed questions of law by the appellant/revenue do not state that the findings returned by the Tribunal or the CIT(A) are perverse.

Thus, the appeals were, dismissed, as no substantial question of law arose for consideration.

shailesh.kwebmaker

Section 264 – Revision – amount had been taxed twice – powers under section 264 of the Act were not limited to correcting any errors committed by the authorities but also extended to errors committed by the assessee.

22 Interglobe Enterprises Pvt Ltd vs.

Pr. Commissioner of Income

Tax Delhi -4 & Ors.

[Writ Petition (L) NO. 11708 OF 2021 & CM APP. 36194 OF 2021

Date of order: 20th January, 2023, (Delhi) (HC) ]

Section 264 – Revision – amount had been taxed twice – powers under section 264 of the Act were not limited to correcting any errors committed by the authorities but also extended to errors committed by the assessee.

The controversy, in the present case, relates to the liability to pay tax on the interest received on income tax refund pertaining to the A.Ys. 2009-10 and 2010-11. The assessee had credited interest amounting to Rs. 1,61,38,250 in its books of account for the F.Y. 2013-14. This amount included a sum of Rs. 1,29,01,031 as interest on income tax refund for the A.Y. 2009-10 and Rs. 22,66,836 as interest on income tax refund for the A.Y. 2010-11. Thus, an aggregate amount of Rs. 1,51,67,867, on account of interest on income tax refund(s), was included as income for the F.Y. 2013-14. The assessee included the said amount in its return of income for the A.Y. 2014-15 and paid tax on the same.

The assessee’s return for the A.Y. 2014-15 was picked up for scrutiny and an assessment order dated 28th October, 2016 was passed under section 143(3) of the Act. There is no dispute that income, as assessed, included the said amount of Rs. 1,51,67,867 as interest on income tax refund(s) pertaining to the A.Ys. 2009-10 and 2010-11.

Thereafter, by a notice dated 15th February, 2017, issued under section 148 of the Act, the assessee’s assessment of income for the year 2012-13 was reopened. The interest on refund of tax, for the years 2009-10 and 2010-11, was sought to be included in the taxable income for the A.Y. 2012-13 on the grounds that the said interest was received during the previous year 2011-12.

The petitioner, inter alia, contended that the said amount was included in the income of the assessee for the A.Y. 2014-15 and thus, had not escaped assessment warranting any addition in the income changeable to tax for the A.Y. 2012-13. However, this contention was not accepted and the AO passed an order dated 08th December, 2017, inter alia, adding the amount of Rs. 1,51,67,867 as income for the A.Y. 2012-13.

Although the AO added the amount of Rs. 1,51,67,867 as income for the A.Y.2012-13, he did not pass any order excluding the said amount from the taxable income for the A.Y. 2014-15. Resultantly, the said amount has been taxed twice; once, as income assessed under the assessment order dated 8th December, 2017for the A.Y. 2012-13, and second, in terms of the assessment order dated 28th October, 2016 for the A.Y. 2014-15.

Whilst the appeal under section 246A of the Act was pending before the Commissioner of Income Tax (Appeals), the assessee accepted the addition of Rs. 1,51,67,867 in its income chargeable to tax in the A.Y. 2012-13 and applied under the Direct Tax Vivad Se Vishwas Act, 2020 (hereafter ‘the VSV Act’) for settlement of the dispute. The liability for the A.Y. 2012-13 has been finally settled; the petitioner has received the Form 5 and has paid the necessary tax.

Since a sum of Rs. 1,51,67,867 had been taxed twice, on 16th February, 2018, the petitioner applied for revision of the assessment pertaining to the A.Y. 2014-15. The respondent did not take any steps in regard to the said application for a period of more than 3.5 years.

The assessee filed a writ petition (being WP(C) No.8177/2021) in the Court. The said petition was disposed of by an order dated 11th August, 2021, directing the respondent to dispose of the assessee’s application dated 16th February, 2018, filed under section 264 of the Act. The assessee’s application was rejected by an order dated 04th October, 2021, which was under challenge before the High Court.

The assessee contended that the impugned order is, ex facie, erroneous as it proceeds on the basis that the issue regarding the interest amount does not form a part of the order under section 143(3) of the Act. It is contended on behalf of the assessee that the said reasoning is, ex facie, erroneous as the amount of Rs. 1,51,67,867 (Rs. 1,29,01,031 and Rs. 22,66,836) was subjected to tax for the A.Y. 2014-15 and is included in the income as assessed by the order dated 28th October, 2016, passed under section 143(3) of the Act.

The Hon. Court observed that section 264 of Act enables the Principal Commissioner or Commissioner, on its own motion or on an application made by the assessee, to call for records of any proceedings under the Act or to cause such inquiry to be made and, subject to the provisions of the Act, pass such order thereon as the Commissioner thinks fit. The only condition being that such order cannot be prejudicial to the assessee. Undisputedly, if the records for the A.Y. 2014-15 were recalled, it would reveal that the sum of Rs. 1,51,67,867, received on account of interest on income tax, was assessed as income for the previous year 2013-14 relevant to the A.Y. 2014-15. However, as stated above, the said amount was brought to tax by the Income Tax Authority in the A.Y. 2012-13. Clearly, the same amount cannot be taxed twice.

It is settled law that an assessee is liable to pay income tax only on the income that is chargeable under the Act. Merely because an assessee has offered a receipt of income in his return does not necessarily make him liable to pay tax on the said receipt, if otherwise the said income is not chargeable to tax. InCIT vs. Shelly Products: (2003) 5 SCC 461, the Supreme Court held that if the assessee had, by mistake or inadvertently, included his income or any amount, which was otherwise not chargeable to tax under the Act, the AO was required to grant the assessee necessary relief and refund any tax paid in excess.

It is also well settled that the powers conferred under section 264 of the Act are wide. In Vijay Gupta vs. Commissioner of Income Tax Delhi-XIII & Anr.: 2016 SCC OnLine Del 1961, a Co-ordinate Bench of this Court held that powers under section 264 of the Act were not limited to correcting any errors committed by the authorities but also extended to errors committed by the assessee.

As observed above, it is clear that the amount of Rs. 1,51,67,867 cannot be taxed twice. In the aforesaid view, it was apposite for the Commissioner to have revised the assessment order for the A.Y. 2014-15 in light of the reassessment order dated 08th December, 2017, whereby the amount of Rs. 1,51,67,867 was brought to tax in an earlier assessment year (A.Y. 2012-13).

In view of the above, the impugned order was set aside and the matter was remanded to the concerned Commissioner to pass the fresh order in light of the observations made above. The petition was allowed in the aforesaid terms.

shailesh.kwebmaker

Search and seizure — Assessment in search cases — Condition precedent — Prior approval of prescribed authority in respect of each assessment year — Sanction of prescribed authority for various assessees granted on single day — AO passing draft assessment order and final assessment order on same day of approval — Approval illegal and non est

87 Principal CIT vs. Subodh Agarwal

[2023] 450 ITR 526 (All)

A. Y.: 2015-16

Date of order: 12th December, 2022

Sections 132, 153A, 153D and 260A of ITA 1961

Search and seizure — Assessment in search cases — Condition precedent — Prior approval of prescribed authority in respect of each assessment year — Sanction of prescribed authority for various assessees granted on single day — AO passing draft assessment order and final assessment order on same day of approval — Approval illegal and non est

Pursuant to a search and seizure operation under section 132 of the Income-tax Act, 1961 conducted on 31st August, 2015, the assessment for the A.Y. 2015-16 was completed under section 153A/143(3) of the Act by the Deputy Commissioner of Income-tax, Central Circle-1, Kanpur, vide order dated 31st December, 2017and various additions were made.

The Tribunal set aside the order of the AO. The Tribunal found as under: The AO prepared the draft assessment order on 31st December, 2017 for the A.Y. 2015-16. The approval of the draft assessment order under section153D was given on 31st December, 2017 itself and the final assessment order was passed on the same day, i.e., on 31st December, 2017 by the AO. The Additional Commissioner of Income-tax granted approval of draft assessment orders under section 153D in 38 cases which also included the case of the assessee. The Tribunal having taken note of the said undisputed facts, came to the conclusion that it was humanly impossible for the approving authority to peruse the material based on which, the draft assessment order was passed. It was, thus, concluded that the approving authority granted approval under section 153D of the Act in a mechanical manner which vitiated the entire proceedings.

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

“i) Section 153D of the Income-tax Act, 1961 requires that the Assessing Officer shall obtain prior approval of the Joint Commissioner in respect of “each assessment year” referred to in clause (b) of sub-section (1) of section 153A which provides for assessment in case of search u/s. 132. The requirement of approval u/s. 153D is a prerequisite to pass an order of assessment or reassessment. A conjoint reading of section 153A(1) and section 153D leaves no room for doubt that approval with respect to “each assessment year” is to be obtained by the Assessing Officer on the draft assessment order before passing the assessment order u/s. 153A. The approval of the draft assessment order being an in-built protection against any arbitrary or unjust exercise of power by the Assessing Officer, cannot be said to be a mechanical exercise, without application of independent mind by the approving authority on the material placed before him and the reasoning given in the assessment order. The prior approval of superior authority means that he should appraise the material before him and appreciate the factual and legal aspects to ascertain that the entire material has been examined by the assessing authority before preparing the draft assessment order. It is trite in law that the approval must be granted only on the basis of material available on record and the approval must reflect the application of mind to the facts on record.

ii) The Tribunal on undisputed facts had concluded that the approving authority under section 153D had exercised his power mechanically which vitiated the entire proceedings under section 153A and that it was humanly impossible for the approving authority to peruse and apply his independent mind to appraise the material in one day in respect of 38 assessees including that of the assessee based on which the draft assessment order was passed. Therefore, its conclusion was not perverse or contrary to the material on record.

iii) For the A.Y. 2015-16, the Assessing Officer had prepared the draft assessment order on December 31, 2017, the approval of the draft assessment order u/s. 153D was given on the same date and the final assessment order was also passed on the same day by the Assessing Officer. The submission of the Department that the grant of approval was an administrative exercise of power on the part of the approving authority and that the approval was in existence on the date of the passing of the assessment order and hence it could not be vitiated was a fallacy since the prior approval of superior authority meant that he had appraised the material before him so as to appreciate the factual and legal aspects to ascertain that the entire material had been examined by the assessing authority before preparing the draft assessment order. The appeal was devoid of merit. No question of law arose.”

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(A) Salary — Difference between salary and professional income — Factors to be considered whether particular income constituted salary — Remuneration of doctors working in hospital — Contracts between hospital and doctors should be considered — Contracts showing relationship between hospital and doctors not of master and servant — Remuneration not taxable as salary

86 DR. Mathew Cherian vs. ACIT

[2023] 450 ITR 568 (Mad):

A.Y.: 2018-19

Date of order: 1st September, 2022

Sections 15, 28, 147, 148 and 148A of ITA 1961:

(A) Salary — Difference between salary and professional income — Factors to be considered whether particular income constituted salary — Remuneration of doctors working in hospital — Contracts between hospital and doctors should be considered — Contracts showing relationship between hospital and doctors not of master and servant — Remuneration not taxable as salary

(B) Reassessment — Notice — Law applicable — Effect of amendments w.e.f. 1st April, 2021 — Show-cause notice under section 148A and opportunity to assessee to be heard — Notice under section 148A should be based on tangible “information” — Remuneration of doctors working in hospital — Order under section 148A for issue of notice of reassessment without examining contracts between the hospital and doctors — Order under section 148A not valid

The assessee is a practicing doctor. On the basis of documents seized in the course of a survey at a hospital, and consequent inferences, the authorities came to the conclusion that (i) an employer-employee relationship was established between the assessee doctor and the hospital, (ii) the assessee was to be construed as an employee and not full time or visiting consultant, and (iii) the income returned by the doctor had to be assessed under the head “Salary” and not “professional income”. For the A.Y. 2018-19, show-cause notice was issued to the assessee (doctor) under clause (b) of section 148A of the Income-tax Act, 1961. The assessee filed replies objecting to the proposal to treat the income returned under the head “Salary” and not “Professional Income” and submitting that none of the documents found were incriminating or supported the issuance of the notices. An order was passed under section 148(d) of the Act rejecting the arguments.

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

“i) As on April 1, 2021, the scheme of reassessment under the Income-tax Act, 1961 law has undergone a sea change. While the provisions earlier required the officer to have “reason to believe” that there had been escapement of income from tax, what is now required is “information” that suggests escapement of income from tax. Section 148A stands activated only if the Income-tax Department is in possession of “information”, which suggests that income chargeable to tax has escaped assessment. The definition of “information” is wide and could include just about any material in the possession of the officer. However, the caveat is that such information must enable the suggestion of escapement of tax. Then again, the mandate cast upon the officer u/s. 149A(d) is that he has to decide whether it is a “fit case” for issue of a notice for reassessment, upon a study of the material in his possession, including the response of the assessee. Thus, not all information in the possession of the officer can be construed as “information” that qualifies for initiation of proceedings for reassessment, and it is only such “information” that suggests escapement and which, based upon the material in his possession, that the officer decides as “fit” to trigger reassessment, that would so qualify. The “information” in the possession of the Department must prima facie, satisfy the requirement of enabling a suggestion of escapement from tax. This is not to say that the sufficiency or adequacy of the “information” must be tested, as such an analysis would be beyond the scope of jurisdiction of the court in writ jurisdiction. However, whether at all the “information” gathered could lead to a suggestion of escapement from tax can certainly be ascertained. For the purposes of such ascertainment and to determine “fitness” to reassess, the materials gathered must be seen in the context of the allegation of tax evasion, taking assistance of decided cases to ascertain whether or not the allegation is sustainable. In the present regime of reassessments, an Assessing Officer must be able to establish proper nexus of information in his possession, with probable escapement from tax. No doubt the term used is “suggests”. That is not to say that any information, however tenuous, would suffice in this regard and it is necessary that the information has a live and robust link with the alleged escapement.

ii) There is a distinction between a contract for service and one of service, and depends on several factors. The regulations, restrictions, guidelines and control exercised in regard to logistical and administrative functions of the work force have to be considered. It is difficult to identify any establishment that does not exercise some degree of control over the administrative and logistical functioning of the workforce, be they salaried or otherwise. What is vital is that professionals discharge their professional duties and function in a free and fully independent fashion without any interference from the hospital management. Though it is expected that there would be regular quality control measures, this would not lead to the inference that there is control exercised over the discharge of professional functions. The prima facie test for determination of a master-servant relationship is the right of the master to supervise and control the work done by the servant in the matter of not just directing what work is to be done but also the manner in which he shall execute the work. Application of the test of control in the case of skilled employments to decide whether there is relationship of master-servant would be unreal and would not result in a proper conclusion. Thus the question of whether there was “right of control” by the employer would depend on the facts in each case and on the terms of the contracts between the parties.

iii) In all the cases the entity searched was the KMC hospital. The Assessing Officer had come to the conclusion that the hospital exercised total control over the doctors in regard to their timings of work, holidays, call duties based on the exigencies of work, termination, entitlement to private practice, increments and other service rules. However, the agreements between the hospital and the assessees revealed the following terms : (i) The doctors were referred to as consultants and fell within the category of visiting consultants or full time consultants, as against part-time and special category consultants who also attended the hospital. (ii) The remuneration paid was of a fixed amount along with a variable component depending on the number of patients treated, and was termed “salary”. (iii) The consultants were not entitled to any statutory service benefits such as provident fund, gratuity, bonus, medical reimbursement, insurance or leave encashment. (iv) Working hours were stipulated as 8 a. m. to 5 p. m. and the consultants were expected to be available on call in the night. (v) They were permitted a month’s vacation and leave on a case-to-case basis and depending on need. (vi) Private practice was permitted in the case of both categories, upon the satisfaction of certain conditions, such as service of two years in the hospital and other conditions. (vii) The hospital did not exercise any control, intervention or direction over the exercise of professional duties by the assessees. (viii) The assessees were wholly responsible for professional indemnity insurance and the hospital did not indemnify the doctors from any manner of claims. The intention of the parties appeared to engage in a relationship as equals. The hospital, on the one hand, and the professional, on the other, engaged in a relationship where the former provided the administrative infrastructure and facilities and the latter, the professional skill and expertise to result in a mutual rewarding result. The fact that the remuneration paid was variable, and the doctors were not entitled to any statutory benefits also pointed to the absence of an employer-employee relationship. The mere presence of rules and regulations did not lead to a conclusion of a contract of service.

iv) Rules and regulations are necessary to ensure that the workplace functions in a streamlined and disciplined fashion. Thus, the mere existence of an agreement that indicated some measure of regulation of the service of the doctors, could not lead to a conclusion that they were salaried employees. The fact that the doctors held full responsibility for their medical decisions and actions and the hospital bore no responsibility in this regard was also of paramount importance, relevant to determine the nature of the relationship as being one of equals, rather than one of master-servant. The order contained clear, categoric and conclusive findings that were adverse to the assessees. There were no disputed facts at play and rather, it was only the interpretation of admitted facts and conclusions arrived at by the officer, that were challenged. The “information” in the possession of the Revenue did not, in the light of the settled legal position lead to the conclusion that there had been escapement of tax. The order u/s. 148A was not valid.”

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Reassessment — Notice under section 148 — Service of notice without signature of AO digitally or manually — Notice invalid — Consequent proceedings without jurisdiction — Notices and order issued beyond period of three years after relevant assessment year — Show-cause notice and order for issue of notice and notice for reassessment quashed and set aside

85 Prakash Krishnavtar Bhardwaj vs. ITO
[2023] 451 ITR 27 (Bom)
A Y.: 2015-16
Date of order: 9th January, 2023
Sections 147, 148, 148A(b) and 148A(d) of ITA 1961:

Reassessment — Notice under section 148 — Service of notice without signature of AO digitally or manually — Notice invalid — Consequent proceedings without jurisdiction — Notices and order issued beyond period of three years after relevant assessment year — Show-cause notice and order for issue of notice and notice for reassessment quashed and set aside

The relevant year is the A.Y. 2015-16. The assessee filed a writ petition for quashing the impugned notice under clause (b) of section 148A dated 21st March, 2022, order under clause (d) of section 148A dated 2nd April, 2022 and notice under section 148 dated 2nd April, 2022 passed by the respondents under the Income-tax Act, 1961. The Bombay High Court allowed the writ petition and held as under:

“The notice issued under section 148 of the Income-tax Act, 1961 admittedly having no signature of the Assessing Officer affixed on it, digitally or manually, was invalid, and would not vest the Assessing Officer with any further jurisdiction to proceed with the reassessment under section 147. Consequently, the Assessing Officer could not assume jurisdiction to proceed with the reassessment proceedings. The notice having been sought to be issued after three years from the end of the relevant assessment year 2015-16 any steps taken by the Assessing Officer the notice issued u/s. 148A(b) and the order passed u/s. 148A(d) were without jurisdiction and therefore, arbitrary and contrary to article 14 of the Constitution of India and consequently set aside.”

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Refund — Tax deposited by the assessee in compliance with order of Tribunal — Fresh assessment not made and becoming time-barred — Assessee entitled to refund of amount with statutory interest deducting admitted tax liability

84 BMW India Pvt Ltd vs. Dy. CIT

[2023] 450 ITR 695 (P&H)

A. Y.: 2009-10

Date of order: 5th July, 2022

Section 237 of ITA 1961

Refund — Tax deposited by the assessee in compliance with order of Tribunal — Fresh assessment not made and becoming time-barred — Assessee entitled to refund of amount with statutory interest deducting admitted tax liability

For the A.Y. 2009-10, the assessee filed an appeal before the Tribunal against the order under section 143(3) of the Income-tax Act, 1961. The Tribunal stayed the order subject to the condition that the assessee deposited an amount of Rs. 10 crores in two instalments and remanded the matter back for fresh assessment. The assessee complied with the order and deposited the amount. The issue with respect to the depreciation amount disallowed was not raised and was conceded by the assessee. According to the remand order dated 21st February, 2014 the authorities were required to pass fresh order before 31st March, 2017.

The assessee filed a writ petition claiming refund of Rs. 10 crores after deduction of tax liability on the admitted depreciation disallowance on the ground that the assessment proceedings had become time-barred. The Punjab and Haryana High Court allowed the writ petition and held as under:

“The assessee was entitled to refund of the excess amount deposited by it after deduction of the tax liability against the disallowance of depreciation which stood admitted by the assessee before the Tribunal with the statutory interest on the refund amount for the period starting from April 1, 2017 till the date of actual payment.”

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Infrastructure facility — Special deduction under section 80-IA(4)(iii) of ITA 1961 — Construction of technology park — Finding recorded by the Tribunal in earlier assessment years that the assessee had not leased more than 50 per cent of area to single lessee — Notification to be issued by CBDT is only a formality once approval is granted by Government — Order of Tribunal deleting disallowance need not be interfered with

83 Principal CIT vs. Prasad Technology Park Pvt Ltd

[2023] 450 ITR 564 (Karn)

A. Y.: 2014-15

Date of order: 17th October, 2022:

Section 80-IA(4)(iii) of ITA 1961

Infrastructure facility — Special deduction under section 80-IA(4)(iii) of ITA 1961 — Construction of technology park — Finding recorded by the Tribunal in earlier assessment years that the assessee had not leased more than 50 per cent of area to single lessee — Notification to be issued by CBDT is only a formality once approval is granted by Government — Order of Tribunal deleting disallowance need not be interfered with

The assessee constructed and set up a technology park. For the A.Y. 2014-15, the AO disallowed its claim for deduction under section 80-IA(4)(iii) of the Income-tax Act, 1961 on the grounds that the assessee had leased out more than 50 per cent of the allocable industrial area to a single lessee which was in contravention of the Industrial Park Scheme, 2002.

The Commissioner (Appeals) allowed the assessee’s appeal following the order in the assessee’s own case for the A.Ys. 2007-08 and 2008-09 and his order was upheld by the Tribunal.

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

“i) The Tribunal was correct in holding that the assessee was entitled to deduction under section 80-IA(4)(iii) and that the notification issued by the CBDT was only a formality once the approval was granted by the Government. For the A. Y. 2008-09 in the assessee’s own case the Tribunal had called for a remand report by the Commissioner (Appeals) and recorded a finding that the assessee had not leased out more than 50 per cent of the total area in favour of any one of the lessees. Based on that finding, the Tribunal had allowed the assessee’s appeal.

ii) The questions of law are answered in favour of the assessee and against the Revenue.”

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Income — Accrual of income — Time of accrual — Retention money — Payment contingent on satisfactory completion of contract — Accrued only after obligations under contract were fulfilled — Cannot be taxed in year of receipt

81 Principal CIT vs. EMC Ltd

[2023] 450 ITR 691 (Cal)

A. Y.: 2014-15

Date of order: 25th July, 2022

Section 4 of Income-tax Act, 1961

Income — Accrual of income — Time of accrual — Retention money — Payment contingent on satisfactory completion of contract — Accrued only after obligations under contract were fulfilled — Cannot be taxed in year of receipt

The assessee was a contractor. For the A.Y. 2014-15, since the contractee had deducted tax under section 194C of the Income-tax Act, 1961 and the assessee followed the mercantile system of accounting, the AO treated the retention money withheld by the contractee as income in accordance with the terms of contract.

The Commissioner (Appeals) held that the retention money was to be excluded from the income in the A.Y. 2014-15 but the tax deducted at source claimed by the assessee relatable to such retention money was to be allowed in the year in which the assessee declared the retention money as its income. The Tribunal held that the right to receive the retention money accrued only after the obligations under the contract were fulfilled and the assessee had no vested right to receive in the A.Y. 2014-15, and that therefore, it could not be taxed as income of the assessee in the year in which it was retained.

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

“i) The Commissioner (Appeals) and the Tribunal on consideration of the undisputed facts had applied the correct legal position and had granted relief to the assessee holding that the retention money of Rs. 142.53 crores did not arise in the relevant A.Y. 2014-15. The Department had not made out any ground to interfere with the order passed by the Tribunal.

ii) Accordingly, the appeal filed by the Revenue is dismissed and the substantial questions of law are answered against the Revenue.”

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Business deduction — Loss — Loss on forward contracts for foreign exchange — Transactions to hedge against risk of foreign exchange fluctuations falling within exceptions of proviso (a) to section 43(5) — Loss not speculative and to be allowed

80 Principal CIT vs. Simon India Ltd

[2023] 450 ITR 316 (Del)

A. Y.: 2009-10

Date of order: 2nd December, 2022

Sections 37(1) and 43(5) proviso (A) of ITA 1961

Business deduction — Loss — Loss on forward contracts for foreign exchange — Transactions to hedge against risk of foreign exchange fluctuations falling within exceptions of proviso (a) to section 43(5) — Loss not speculative and to be allowed

The assessee provided engineering consultancy and related services such as engineering designing, construction and commissioning of plants and installations. For the A.Y. 2009-10, the AO was of the view that the loss on forward contracts claimed by the assessee was a speculative loss under section 43(5) and was liable to be disallowed in terms of the CBDT Instruction No. 3 of 2010, dated 23rd March, 2010. He held that since the forward contracts had not matured, the losses were required to be considered as notional losses and accordingly made a disallowance.

The Commissioner (Appeals) set aside the disallowance. The Tribunal held that the loss on account of forward contracts was allowable under section 37(1) and was covered as a hedging transaction under proviso (a) to section 43(5).

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

“i) In terms of the CBDT Instruction No. 3 of 2010, dated March 23, 2010 Assessing Officers were instructed to examine the “marked to market” losses. The instruction explained “marked to market” as a concept where financial instruments are valued at market rate to report their actual value on the date of reporting. Such “marked to market” losses represent notional losses and are required to be added back for the purposes of computing taxable income under the Income-tax Act, 1961. The CBDT also instructed Assessing Officers to examine whether such transactions were speculative transactions where losses on account of foreign exchange derivative transactions arise on actual transaction. However, it is well settled that the CBDT instructions and circulars which are contrary to law are not binding.

ii) In CIT v. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC) the Supreme Court referred to Accounting Standard-11 in terms of which exchange rate differences arising on foreign currency transactions are to be recognized as income or expenses in the period in which they arise, except in cases of exchange differences arising on repayment of liabilities for acquiring fixed assets.

iii) The forward contracts were entered into by the assessee to hedge against foreign exchange fluctuations resulting from inflows and outflows in respect of the underlying contracts for provisions of consultancy and project management. Concededly, the assessee did not deal in foreign exchange. The transactions fell within the exceptions of proviso (a) to section 43(5). There was no allegation that the assessee had not been following the system of accounting consistently. The assessee had stated that it was reinstating its debtors and creditors in connection with execution of contracts entered into with foreign entities on the basis of the value of the foreign exchange. Therefore, the loss on account of forward contracts would require to be recognized as well. The assessee computed its income by taking into account the foreign exchange value as it stood on the due date.

iv) The orders of the Commissioner (Appeals) and the Tribunal that the loss, on account of forward contracts could not be considered as speculative and that the Assessing Officer had erred in disallowing it were not erroneous. No question of law arose.”

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Article 13(4A) of India – Singapore tax treaty – Tax authorities cannot go behind TRC issued by Singapore tax authorities. Gain on sale of shares acquired prior to 1st April, 2017 is not taxable in India.

18 Reverse Age Health Services Pte Ltd vs. DCIT
[TS-67-ITAT-2023(Del)]
[ITA No: 1867/Del/2022]
A.Y.: 2018-19
Date of order: 19th February, 2023

Article 13(4A) of India – Singapore tax treaty – Tax authorities cannot go behind TRC issued by Singapore tax authorities. Gain on sale of shares acquired prior to 1st April, 2017 is not taxable in India.

FACTS

The assessee, a tax resident of Singapore, sold shares of an Indian Company (ICO). It claimed a refund of TDS on the grounds that capital gain income is not taxable in India as per Article 13 of India – Singapore DTAA3. AO denied benefit under Article 13(4A) of the India – Singapore DTAA on the grounds that the assessee had no economic or commercial substance and that it was a “shell” or a “conduit” company as per Article 3(1) of protocol to India-Singapore DTAA4. DRP upheld AO’s order.

Being aggrieved, the assessee filed an appeal to ITAT.

HELD

ITAT placed reliance on Delhi High Court decision in the case of Black Stone Capital Partners5 which held that Indian tax authorities cannot go behind TRC issued by Singapore tax authorities.

ITAT took note of the following facts and documents and granted benefit of capital gains exemption under Article 13 of DTAA.

The assessee furnished TRC for relevant year issued by Singapore Tax authorities.

Two of the shareholders of assessee were also tax residents of Singapore.

Audited financial statements, return of income filed and tax assessment orders by Singapore Tax Authority.

GAAR provisions are not applicable as the tax on the gains was less than Rs 3 crores6 as also the fact that investment was made prior to 1st April, 2017 which is grandfathered7.

3 Shares
were acquired by the assessee prior to 31st March, 2017. As per Article 13(4A)
gains from the alienation of shares acquired before 1st April, 2017 in a
company which is a resident of a Contracting State shall be taxable only in the
Contracting State in which the alienator is a resident.

4 Article
24A(1) of amended India- Singapore DTAA

5 W.P.(C)
2562/2022 decided on 30.01.2023

6 Rule
11U(1)(a)

7 Rule 11U(1)(d)

shailesh.kwebmaker

Article 12 of India – Singapore tax treaty – Uplinking and Playout Services are not royalty or FTS

17 Adore Technologies (P) Ltd vs. ACIT

[ITA No: 702/Del/2021]

A.Y.: 2017-18

Date of order: 19th December, 2022

Article 12 of India – Singapore tax treaty – Uplinking and Playout Services are not royalty or FTS

FACTS

The assessee, a tax resident of Singapore provides satellite-based telecommunication services. He earned income from disaster recovery uplinking and playout services¹. The AO held that the disaster recovery uplinking service of the assessee is nothing but a part of a process wherein signals are taken from the playout equipment and sent to the satellite for broadcasting them to cable operators/direct to home operators. The AO relied on Explanation 6 to section 9(1)(vi) to assess the remittance as process royalty. Further, playout services were held to be inextricably linked with uplinking services and were taxable as FTS under Act and DTAA. DRP upheld order of AO. Being aggrieved, the assessee appealed to ITAT.

1 Uplinking service is a process wherein
signals are taken from the playout equipment and sent to the satellite for
broadcasting them to cable operators / direct to home operators. The disaster
recovery playout service involves provision of uninterrupted availability of
the playout service at a predetermined level.

HELD

Up-linking services

The term ‘process’ in definition of royalty under the treaty has been used in the context of’ know-how’ and intellectual property.

Royalty in relation to ‘use of a process’ envisages that the payer must use the ‘process’ on its own and bear the risk of its exploitation. If the ‘process’ is used by the service provider himself, and he bears the risk of exploitation or liabilities for the use, then service provider makes his own entrepreneurial use of the process.

Considering the following facts, ITAT held that income cannot be considered as royalty.

Satellite-based telecommunication services provided by the assessee are standard services. There is no ‘know how’ or ‘intellectual property’ involved.

Services do not envisage granting the use of, or the right to use any technology or process to the customers.

The assessee is responsible for maintaining the continuity of the service using its own equipment and facilities since the possession and control of equipment is with the assessee.

Customers are merely availing a service from the assessee and are not bearing any risk with respect to exploitation of the assessee’s equipment involved in the provision of such service.

Explanation 6 to section 9(1)(vi) of the Act is not applicable for interpretation of definition of royalty under DTAA. Reliance was placed on undernoted decisions².

2 New Skies Satellite BV ((382 ITR 114) and NEO Sports Broadcast Pvt Ltd. (264 Taxmann.com 323)

PLAYOUT SERVICES

Playout service involves broadcasting and/ or transmission of channels by the assessee for its customers, without any involvement in decision-making with respect to the playlists and the content being broadcasted. The assessee does not have a right to edit, mix, modify, remove or delete any content or part thereof as provided by the customer.

Services are not in nature of FTS as envisaged under Article 12(4)(a) of the DTAA as they are not ancillary or subsidiary to disaster recovery uplinking and allied services.

Services also do not make available any technical knowledge, experience, skill, knowhow, or process or consist of the development and transfer of any technical plan or technical design.

The taxpayer is accordingly not chargeable to tax in respect of entirety of its income towards uplinking and playout services.

shailesh.kwebmaker

Article 13 of India – UK DTAA – Where payment for use of the software is not taxable, services intricately and inextricably associated with use of software are also not taxable.

16 TSYS Card Tech Ltd vs. DCIT

[TS-36-ITAT-2023(Del)]

[ITA No: 2006/Del/2022]

A.Y.: 2019-20

Date of order: 24th January, 2023

Article 13 of India – UK DTAA – Where payment for use of the software is not taxable, services intricately and inextricably associated with use of software are also not taxable.

FACTS

The assessee, a tax resident of the UK, earned income from the sale of software licenses, provision of implementation services, enhancement services, annual maintenance services and consultancy services. The assessee relying upon provisions of the DTAA claimed income was not taxable in India.

AO taxed income as royalty and FTS under provisions of Act as also the DTAA. DRP, following decision of Supreme Court in Engineering Analysis Centre of Excellence (P) Ltd. vs. CIT [2021] 281 Taxman 19, ruled that payment for software license is not taxable in India. However, the implementation services, enhancement services, annual maintenance services and consultancy services, as per request of Indian customers, were held to be separate from software license, and were taxable under the Act and Article 13 of DTAA. It appears from the observations of the ITAT that AO and DRP merely relied upon the words “Make Available” found in the agreement with Indian customers to hold that make available clause stood satisfied under Article 13 of treaty. Being aggrieved, assessee filed an appeal to ITAT. Dispute before ITAT only related to services income earned by the assessee.

HELD

Services like training and updates are in connection with utilization of the base software licenses. As software income is not taxable, training and related activities concerned with utilization and installation cannot be taxed as FTS.

Mere use of ‘make available’ in agreement does not satisfy the requirement of Article 13(4)(c) in DTAA. Burden is on tax authorities to satisfy that requirement of make available clause are satisfied.

shailesh.kwebmaker

S.68 read with S.153A –When cash deposited post-demonetization by assessee was out of cash sales which had been accepted by Sales Tax/VAT Department and not doubted by the AO and when there was sufficient stock available with the assessee to make cash sales then the said fact was sufficient to explain the deposit of cash in the bank account and could not have been treated as undisclosed income of assessee and accordingly, impugned addition made by the AO was not justified.

63 Smt. Charu Aggarwal

[2022] 96 ITR(T) 66 (Chandigarh – Trib.)

ITA No.:310 & 311 (CHD.) OF 2021

A.Y.: 2017-18

Date of order: 25th March, 2022

S.68 read with S.153A –When cash deposited post-demonetization by assessee was out of cash sales which had been accepted by Sales Tax/VAT Department and not doubted by the AO and when there was sufficient stock available with the assessee to make cash sales then the said fact was sufficient to explain the deposit of cash in the bank account and could not have been treated as undisclosed income of assessee and accordingly, impugned addition made by the AO was not justified.

FACTS-I

The assessee was a limited liability partnership engaged in the business of resale of jewellery, diamond and other related items. A search operation was conducted in the K group of cases. Notice under section 153A was issued to the assessee and in response to the notice, the assessee filed its return of income declaring an income of Rs. 22.53 lakhs.

During the course of assessment proceedings the AO observed that the assessee had deposited Rs. 2.90 crores post-demonetization in its account and that during the course of search, books of account and sales bill books relating to the demonetization period and pre-demonetization period were verified which revealed that the assessee was maintaining its books of account in the computer of its accountant. The AO further observed that on examination of the digital data it was noticed that there were two sets of books of account, i.e., one in the computer of the accountant and another in the pen drive of the accountant. On comparison of the two accounts it was found that there was a difference in the sale figures for the month of October, 2016 as cash sales were increased in one set of books of account. The statement of the accountant was recorded during the course of search wherein he admitted that he had changed the sale figures of October, 2016 by increasing cash sales after demonetization to generate cash in hand in the books of account. The AO asked the assessee to furnish documentary evidence regarding the source of the cash deposits in its bank accounts, but did not find merit in the submission of the assessee and made an addition of Rs. 2.19 crores.

On appeal, the Commissioner (Appeals) after considering the submissions of the assessee allowed relief of Rs. 15 lakhs and sustained the addition of Rs. 2.05 crores by observing that the net profit of 1.57 per cent had been declared by the assessee in the books of account and that the profit had already been disclosed on the sales of Rs. 2.19 crores which was added by the AO.

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

HELD-I

The Tribunal noticed that the assessee was maintaining the sales bills which were recorded in the regular books of account maintained in regular course of business by the assessee. No discrepancy was found in the quantitative details of the stock reflected in the stock register. In the instant case when there was a search at the premises of the assessee on 12th April, 2017, no discrepancy in respect of cash or stock was found which was evident from the assessment order dated 27th March, 2019 for the succeeding A.Y. 2018-19 wherein the addition of Rs. 1.02 lakhs only was made on account of difference in the stock in various items, which was negligible. The assessee was also filing regular returns with the VAT Department, copies of which were placed in the assessee’s compilation. In those VAT Returns also no difference/defect was pointed out which clearly showed that the stock available with the assessee in the form of opening stock and purchases had been accepted by the Department as well as the VAT Department. The Tribunal opined that the amount received by the assessee from the customer after selling the goods/jewellery out of the accepted stock (opening stock and purchases) cannot be considered as the income outside the books of account.

On the other hand, the Department had not brought any material on record to substantiate that the amount received by the assessee by selling the jewellery/goods out of the opening stock and the purchases was utilized elsewhere and not for depositing in the Bank account.

Furthermore, the opening stock, purchases & sales and closing stock declared by the assessee has not been doubted. The sales were made by the assessee out of the opening stock and purchases and the resultant closing stock has been accepted. The sales had not been disturbed either by the AO or by the sales tax/VAT Department and even there was no difference in the quantum figures of the stock at the time of search on 12th April, 2017. Therefore, the sales made by the assessee out of the existing stock were sufficient to explain the deposit of cash (obtained from realization of the sales) in the bank account and cannot be treated as undisclosed income of the assessee.

Accordingly, the impugned addition made by the AO and sustained by the Commissioner (Appeals) was not justified and therefore the same is liable to be deleted.

S.142A –When difference between valuation shown by the assessee and estimated by DVO was less than 10 per cent then the AO was not justified in substantiating the valuation determined by DVO in respect of cost shown by the assessee.

FACTS-II

During the course of assessment proceeding the AO confronted the assessee with the difference in the cost of construction of showroom as estimated by the departmental valuer and as shown by the assessee in the books of account. The AO came to conclusion that there was a difference in the valuation to the tune of Rs. 18.72 lakhs and accordingly made an addition of 7.97 lakhs in the hands of the assessee and the remaining addition of Rs. 10.75 lakhs in the hands of the other co-owner.

On appeal, the Commissioner (Appeals) sustained the addition made by the Assessing Officer.

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

HELD-II

It was submitted by the assessee that he had asked for the benefit of 10 to 15 per cent on account of self-supervision but the valuation officer had given a benefit of only 3.75 per cent and even the valuation officer applied the Central Public Works Department (CPWD) rates instead of local Public Works Department (PWD) rates. The CPWD rates were higher than the PWD rates. The contention of the assessee was based on a well settled principle of law that in the place of the CPWD rates, the local PWD rates were to be applied and adopted to determine the cost of construction which was pronounced by the Apex Court in the case of CIT vs. Sunita Mansingha [2017] 393 ITR 121.

Accordingly, the Tribunal, keeping in view the ratio laid down by the Apex Court in the aforesaid case, observed that the Valuation Officer ought to have applied the local PWD rates instead of CPWD rates which were on the higher side.

Further, it was also observed that on the similar issue, various Benches of the Tribunal have taken a consistent view that when the difference in valuation shown by the assessee and estimated by the DVO is less than 10 per cent then the AO was not justified in substantiating the valuation determined by the DVO in respect of cost shown by the assessee.

Consequently, it was held that the impugned addition made by the AO and sustained by the Commissioner (Appeals) on account of difference in the valuation as determined by the DVO and shown by the assessee in its regular books of account was liable to be deleted.

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S.10(38) –Where the assessee furnished all details to the AO with regards to long term capital gain arising from sale of shares on which securities transaction tax was paid, the the AO cannot deny exemption claimed under section 10(38) in respect of the said long term capital gain.

62 Mukesh Nanubhai Desai vs. ACIT
[2022] 96 ITR(T) 258 (Surat – Trib.)
ITA No.:781 (SRT) OF 2018
A.Y.: 2012-13
Date of order: 6th May, 2021

S.10(38) –Where the assessee furnished all details to the AO with regards to long term capital gain arising from sale of shares on which securities transaction tax was paid, the the AO cannot deny exemption claimed under section 10(38) in respect of the said long term capital gain.

FACTS-I

During the year under consideration, the assessee being an individual earned long term capital gain from sale of shares on which securities transaction tax was paid by him and claimed it as exempt under section 10(38). During the course of the assessment proceedings, the exemption was denied and the long-term capital gain was added to the total income of the assessee.

During the course of the first appellant proceedings, the AO furnished his remand report stating therein that contract notice/ledger accounts furnished by the assessee though matched with the data furnished by the stock exchange, it was however discovered that the directors of the broker companies, through whom the assessee undertook transaction of sale of shares, were banned by SEBI for market manipulation. Therefore, the AO derived a conclusion that the said companies did not have potential that the assessee could earn enormous capital gain.

On the basis of the same, the Commissioner (Appeals) held that although the basis for making the addition did not survive but there was a probability that allotment of shares and their eventual sale was a pre-planned scheme to convert unaccounted income into exempt income and accordingly the additions made by the AO were upheld. Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD-I

The assessee contended that he had, during the course of the assessment proceedings as well as first appellate proceedings furnished all the documentary evidences in support of his claim of exemption such as books of accounts showing the credit of sale considerations of shares and details of various scrips of the shares with their date of purchase and its sales. It was also stated by the assessee that the purchase of the shares was accepted in the assessment completed for earlier years under section 143(3).

Despite production of documentary evidences by the assessee, the AO denied the exemption claimed under section 10(38) on the grounds that the Director of one of the broker companies was banned from trading by SEBI for market manipulation during the Initial Public Offer. The AO also stated that the director of the other broker company was also banned from trading by SEBI for market manipulation through artificially increasing the sale price and concluded that both the companies were not having potential so as to allow the assessee to earn enormous capital gain.

It was observed by the Tribunal that once it is accepted by the AO in his remand report that all the transactions of the assessee reflected in the contract notice/ledger accounts furnished by the assessee are matching with the data furnished by the stock exchange and the Commissioner (Appeals) had also taken a view that the basis for making addition did not survive, then addition cannot be sustained.

Further, in respect of the allegations of the AO with regard to ban from trading imposed upon the directors of the broker companies, the Tribunal had observed that the assessee had purchased shares much prior to the orders of SEBI. Accordingly, there was no live link between the order of the SEBI and the transactions by way of sale of shares undertaken by the assessee. Such an order of SEBI cannot be read against the assessee in the absence of anti-corroborative evidence.

Accordingly, the addition of long-term capital gain made to the total income of the assessee was deleted by the Tribunal.

S.10(2A) – Where assessee had furnished complete details of firm, details of partners with their PAN, copy of returns of firm with computation of income then assessee could not be denied exemption claimed under section 10(2A) in respect of income by way of share of profit received from firm.

FACTS-II

The assessee was a partner in a firm. He had received certain amount of income as remuneration, interest and share of profit from firm. The assessee had claimed exemption in respect of share of profit received from the firm under section 10(2A).The AO clubbed this exempt income with the LTCG and denied exemption in respect of the share of profit received from firm. On appeal, the Commissioner (Appeals) also upheld the same.

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

HELD-II

The assessee submitted that in the computation of income he had claimed exemption under section 10(2A) in respect of income by way of share of profit received from firm.

The Tribunal observed that the AO instead of examining the facts and the evidences furnished by the assessee, clubbed this income with the exempt long term capital gain claimed by the assessee. The Commissioner (Appeals) also upheld the action of the AO.

The Tribunal noted that the income by way of share of profit received from the firm is separate and independent income component earned by the assessee which is claimed as exempt under section 10(2A).

The Tribunal held that the AO ought to have examined the documentary evidences furnished by the assessee in support of his claim for exemption such as return of income of firm, details of partners, and their PAN. If the AO would have examined these evidences then the exemption under section 10(2A) would not have been denied.

Accordingly, the addition made to the total income of the assessee to the extent of income by way of share of profit received from firm stands deleted.

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Income — Capital or revenue receipt — Race club — Membership fees received from members — Capital receipt

82 Principal CIT vs. Royal Western India Turf Club Ltd

[2023] 450 ITR 707 (Bom)

A. Y. 2009-10

Date of order: 22nd December, 2021

Section 4 of ITA 1961

Income — Capital or revenue receipt — Race club — Membership fees received from members — Capital receipt

The assessee ran a race course. It received membership fees from its members. For the A. Y. 2009-10, the AO disallowed the amount credited by the assessee as general reserve and claimed to be capital receipt, by treating it as revenue receipt.

The Commissioner (Appeals) held it to be capital receipt. The Tribunal held that from the date of incorporation of the assessee in the year 1925 onwards, the entrance fees received from the members of the assessee were treated as capital in nature and majority of these orders were passed under section 143(3) of the Income-tax Act, 1961 and relying on the judgment in CIT vs. Diners Business Services Pvt Ltd [2003] 263 ITR 1 (Bom) held that any sum paid by a member to acquire the rights of a club was a capital receipt.

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

“The Tribunal had not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances were properly analysed and correct test was applied to decide the issue at hand, no question of law arose.”

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Assessment order passed in the name of non-existing entity is null and void ab initio. The decision of SC in Mahagun Realtors (P.) Ltd cannot be interpreted to mean that even in a case where factum of amalgamation was put to the notice of the AO, still the assessment made in the name of amalgamating company i.e. non-existing company is valid in law.

61 DCIT vs. Barclays Global Service Centre Pvt Ltd (formerly Barclays Shared Services Pvt Ltd)

[TS-29-ITAT-2023(PUN)]

A.Y.: 2014-15

Date of Order: 2nd January, 2023

Assessment order passed in the name of non-existing entity is null and void ab initio. The decision of SC in Mahagun Realtors (P.) Ltd cannot be interpreted to mean that even in a case where factum of amalgamation was put to the notice of the AO, still the assessment made in the name of amalgamating company i.e. non-existing company is valid in law.

FACTS

The assessee company, engaged in the business of providing Information Technology Enabled Services (ITES) to Barclays Bank PIc, United Kingdom (BBPLC) and its affiliates, filed its return of income for the A.Y. 2014-15 declaring a total income of Rs. 1,13,02,89,902 after claiming deduction under section 10AA of the Income-tax Act, 1961 (‘the Act’). The appellant company also reported international transactions entered with its AEs. On noticing the international transactions, the AO referred the matter to the Transfer Pricing Officer (‘TPO’) for the purpose of benchmarking the international transactions. The TPO vide order dated 30th October, 2017 suggested the TP adjustment of Rs. 95,88,72,618/-. On receipt of the draft assessment order, the appellant had not chosen to file objection before the DRP and the final assessment order dated 20th March, 2018 was passed by the AO after making disallowance of the excess deduction claimed under section 10AA amounting to Rs. 8,92,33,721.

Aggrieved, assessee preferred an appeal to CIT(A) where it interalia contended that the assessment is null and void as the assessment order is passed in the name of non-existing entity i.e. M/s Barclays Shared Services Pvt Ltd instead of Barclays Global Service Centre Pvt Ltd. The CIT(A) had dismissed the said ground i.e. challenging the very validity of the assessment on the grounds that when the notice under section 143(2) was issued, the amalgamating company was very much in existence. On merits, the issue was decided partly in favour of the assessee.

Aggrieved, by the relief granted on merits, the revenue preferred an appeal to the Tribunal and assessee filed cross objections being aggrieved by the validity of the assessment made in the name of amalgamating company i.e. M/s Barclays Shared Services Pvt Ltd which was a non-existing entity.

HELD

The Tribunal noted that the assessee company Barclays Shared Services Pvt Ltd was amalgamated with Barclays Technology Centre India Pvt Ltd vide order dated 2nd November, 2017 passed by NCLT. The appointed date for amalgamation was 1st April, 2017 but became effective only on filing of Form INC-28 along with prescribed fee before the Registrar of Companies. The return of income was filed in the name of amalgamating company as the process of amalgamation was not complete. During the course of assessment proceedings under consideration, the assessee company had brought to notice of the AO that the fact of amalgamation vide letter dated 15th December, 2017 along with copies of the amalgamation scheme dated 26th December, 2017. In-spite of this, the AO passed the assessment order in the name of amalgamating company.

The Tribunal observed that the issue that arises for its consideration is whether or not an assessment order passed in the name of amalgamating company i.e. non-existing company, is valid in the eyes of law. Despite knowing very well that the amalgamating company was not in existence at the time of passing the assessment order, still the AO had chosen to pass an assessment order in the name of the amalgamating company i.e. Barclays Shared Services Pvt Ltd.

The Tribunal held that the ratio that can be discerned from the decision of the Supreme Court in PCIT vs. Maruti Suzuki India Ltd. [416 ITR 613 (SC)] is that consequent upon the amalgamation, the amalgamating company ceases to exist, therefore, it cannot be regarded as a “person”. The assessment proceedings against an entity which had ceased to exist were void ab initio. The fact that the assessee had participated in the assessment proceedings cannot operate as an estoppel against law.

The Tribunal also noted the ratio of the decision of the Jurisdictional High Court in the case of Teleperformance Global Services Pvt. Ltd. vs. ACIT [435 ITR 725 (Bom.)]; Alok Knit Exports Ltd. vs. DCIT [446 ITR 748 (Bombay)] and Vahanvati Consultants (P.) Ltd. vs. ACIT [448 ITR 258 (Bom.)].

The Tribunal having noted that the decision of the Apex Court in PCIT vs. Mahagun Realtors (P.) Ltd. [443 ITR 194 (SC)] was rendered in the peculiar facts of that case held that this decision is not an authority of proposition, that an assessment can be made in the name of non-existing entity, even though the AO was put on notice of factum of amalgamation.

In the present case, since the fact of amalgamation was brought to the notice of the AO, the ratio of the decision of the Apex Court in Mahagun Realtors (P) Ltd. will not apply. Therefore, the Tribunal held the assessment order passed by the AO in the name of non-existing entity to be null and void ab initio and quashed the assessment order. Cross objections filed by the assessee were allowed.

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Where the assessee mentioned residential status in original return as resident in India and in return filed under section 153A mentioned residential status as Non-resident which was uncontroverted fact, then merely mentioning the residential status as resident in original return of income, does not make the assessee a resident in India. Once the assessee is a non-resident then income or deposit in foreign bank account is not taxable in India

60 Ananya Ajay Mittal vs. DCIT

ITA Nos. 6949 & 6950/Mum/2019 and

576/Mum/2021

A.Ys: 2010-11 to 2012-13

Date of Order: 29th December, 2022

Where the assessee mentioned residential status in original return as resident in India and in return filed under section 153A mentioned residential status as Non-resident which was uncontroverted fact, then merely mentioning the residential status as resident in original return of income, does not make the assessee a resident in India.

Once the assessee is a non-resident then income or deposit in foreign bank account is not taxable in India

FACTS

The assessee in previous year relevant to A.Y. 2008-09 went to the US for studies. A search and seizure action was carried out in the case of the assessee’s father when during the course of search certain documents containing details of foreign bank account of Ananya Mittal. This foreign bank account was not declared by the assessee in the return of the income filed by him. In the course of post search assessment proceedings it was submitted by the assessee before the AO that the assessee was in the US for his post-graduation was to stay in there for four years. As a student pursuing studies in the US, it was mandatory for him to open a bank account in the country. All expenses of the assessee in USA were exclusively borne by a family friend of Mittal family, Dr. Prakash Sampath based in the USA. The assessee being a non-resident has not maintained records of his foreign bank account.

The AO held that the contention that assessee is a non-resident is an after thought since in the original return of income residential status has been stated as `resident’. It is only that this foreign bank account has been detected in the course of search that the assessee in the return of income filed in response to notice issued under section 153A has stated the residential status to be non-resident. However, the AO in the assessment order did mention the number of days the assessee was outside India. The AO taxed the entire credit of Rs.3,20,133 reflected in foreign bank account u/s 68 by holding that gift from family friend did not fall under section 56(2)(v) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) confirmed the action of the AO on the grounds that the assessee had not explained the source of deposits in foreign bank account which was unearthed during the course of search and details of which were obtained by AO through Foreign Tax and Tax Research (FTTR).

Aggrieved, the assessee preferred an appeal to the Tribunal. The Tribunal decided the appeal of the assessee for A.Y. 2010-11 and 2011-12 vide order dated 23rd March, 2022 wherein additions made on certain credits in foreign bank account were confirmed. The assessee filed Miscellaneous Application (MA) and pointed out that an important fact that the assessee is a non-resident and therefore no addition could have been made has been omitted to be considered. The Tribunal recalled the earlier order.

HELD

The Tribunal noted that before CIT(A) the issue that assessee was a non-resident was specifically raised and CIT(A) has not refuted this submission of the assessee. The Tribunal also noted that the assessee was a non-resident which fact has not been refuted by either of the lower authorities. The Tribunal held that merely mentioning the status as resident in the original return of income does not make the assessee a resident in India. The present assessment was under section 153A of the Act and the assessee had in the return filed in response to notice issued under section 153A mentioned the residential status as non-resident. The AO in the assessment order has also stated the status to be non-resident. Therefore, this cannot be a ground for treating the assessee as a resident. Once the assessee is non-resident, then income or deposit in the foreign bank account of the assessee who is not resident in India cannot be taxed in India. Therefore, on this ground the entire additions cannot be sustained.

This ground of appeal filed by the assessee was allowed.

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Provisions of section 115JC are applicable to projects approved before the introduction of the section 115JC.

59 DCIT vs. Vikram Developers and Promoters

TS-21-ITAT-2023(PUN)

ITA No. 608/Pune/2020

A.Y.: 2014-15

Date of Order: 10th, January, 2023

Provisions of section 115JC are applicable to projects approved before the introduction of the section 115JC.

FACTS

The assessee, a non-corporate entity, filed its return of income wherein it claimed deduction under section 80IB(10). In the return of income filed, the assessee did not give effect to the provisions of section 115JC. In the course of assessment proceedings, the AO held that the provisions of section 115JC which have been introduced w.e.f. 1st April, 2013 are applicable to the case of the assessee and accordingly the assessee is liable to pay taxes under 115JC for the year under consideration. Accordingly, the AO worked out the Adjusted Total Income and taxed it in accordance with the provisions of section 115JC of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) and contended that the Pune Bench of the Tribunal has in the assessee’s own case, for the assessment year 2013-14, decided the issue in favour of the assessee. The CIT(A), relying on the said order of the Tribunal, decided the issue in favor of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the recent decision of the co-ordinate bench in the case of Yash Associates [ITA.No.159/ PUN./2018 & C.O.No.1/PUN./2022 decided on 5th August, 2022 goes against the assessee. The Tribunal quoted the ratio of the decision in this case where considering the fact that section 115JC starts with a non-obstante clause and section 115JC(2)(i) stipulates adjustment(s) in an assessee’s total income “as increased by deductions claimed, if any, under any section (other than section 80P) included in Chapter VI-A under the heading C – Deduction in respect of certain incomes” and held that very clearly it is not the approval or completion of the residential project but the deduction claim only which has to be added under section 115JC(2)(i) of the Act. The Tribunal adopted stricter interpretation in light of the non-obstante provision and rejected the assessee’s contentions as per of decisions of the apex court in CIT vs. Calcutta Knitwears, Ludhiana [(2014) 6 SCC 444 (SC)], CCE vs. Dilip Kumar [(2018) 9 SCC 1 (SC) (FB)] and PCIT vs. Wipro Ltd [(2022) 140 taxmann.com 223 (SC)].

The Tribunal held that the co-ordinate bench deciding the case of the assessee in an earlier assessment year did not examine the ambit and scope of section 115JC of the Act so as to form a binding precedent in line with CIT vs. B. R. Constructions [(1993) 202 ITR 222 (AP)]. The Tribunal adopting the stricter interpretation held that the provisions of section 115JC would apply to the case of the assessee. The appeal filed by the Revenue was allowed.

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Mere non-furnishing of the declaration by the deductee to the deductor in terms of proviso to Rule 37BA(2) cannot be reason to deny credit to the person in whose hands income is included.

58 Anil Ratanlal Bohra vs. ACIT
2023 (1) TMI 862 – ITAT PUNE
ITA No. 675/Pune/2022
A.Y.: 2021-22
Date of Order: 19th January, 2023

Mere non-furnishing of the declaration by the deductee to the deductor in terms of proviso to Rule 37BA(2) cannot be reason to deny credit to the person in whose hands income is included.

FACTS

Assessee, an individual, filed his return of income wherein he interalia claimed credit for TDS of Rs.2,80,456 being proportionate amount deducted at source by State Bank of India from the interest on fixed deposits placed by his wife with the State Bank of India. This amount of Rs.2,80,456 was in respect of interest attributable to fixed deposits which were placed by the wife of the assessee with State Bank of India out of the funds gifted by the assessee to her. Accordingly, in terms of section 64 of the Act, the income thereon was includible in total income of the assessee. The assessee included such income in the return of income and also claimed corresponding credit.

The CPC, in intimation denied credit of TDS claimed since the same was not reflected in Form No. 26AS of the assessee.

Aggrieved, the assessee filed an appeal to CIT(A) who held that the provisions of Rule 37BA(2) were not complied with and as a result, the assessee was not entitled to the credit for deduction of tax at source.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted the provisions of section 199 and observed that sub-Rule (2) of Rule 37BA is significant for deciding the appeal.

It noted that a careful perusal of sub-rule (2) indicates that where the income, on which tax has been deducted at source, is assessable in the hands of a person other than deductee, then credit for the proportionate tax deducted at source shall be given to such other person and not the deductee. The proviso to sub-rule (2) provides for deductee filing a declaration with the deductor giving particulars of the other person to whom credit is to be given. On receipt of such declaration, the deductor shall issue certificate for the deduction of tax at source in the name of such other person.

The crux of section 199 read with Rule 37BA(2) is that if the income, on which tax has been deducted at source, is chargeable to tax in the hands of the recipient, then credit for such tax will be allowed to such recipient. If, however, the income is fully or partly chargeable to tax in the hands of some other person because of the operation of any provision, like section 64 in the extant case, the proportionate credit for tax deducted at source should be allowed to such other person who is chargeable to tax in respect of such income, notwithstanding the fact that he is not the recipient of income.

It is with a view to regularise the allowing of credit for tax deducted at source to the person other than recipient of income, that the proviso to Rule 37BA(2) has been enshrined necessitating the furnishing of particulars of such other person by the recipient for enabling the deductor to issue TDS certificate in the name of the other person. The proviso to Rule 37BA(2) is just a procedural aspect of giving effect to the mandate of section 199 for allowing credit to the other person in whose hands the income is chargeable to tax.

One needs to draw a line of distinction between substantive provision [section 199 read with Rule 37BA(2) without proviso] and the procedural provision [proviso to Rule 37BA(2)]. Non compliance of a procedural provision, which is otherwise directory in nature, cannot disturb the writ of a substantive provision.

The Tribunal held that merely because the assessee’s wife did not furnish declaration to the bank in terms of proviso to Rule 37BA(2), the amount of tax deducted at source, which is otherwise with the Department, cannot be allowed to remain with it eternally without allowing any corresponding credit to the person who has been subjected to tax in respect of such income. As the substantive provision of section 199 talks of granting credit for tax deducted at source to the other person, who is lawfully taxable in respect of such income, we are satisfied that the matching credit for tax deducted at source must also be allowed to him.

The Tribunal held that the credit for Rs. 2,80,656 actually deducted on interest income of Rs. 37.42 lakh be allowed to the assessee who has been taxed on such income.

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What is applicable for TDS should also be applicable for TCS and merely because there is no Rule identical to Rule 37BA(2)(i) of the Rules with reference to TCS provisions, it cannot be the basis for the Revenue to deny the legitimate claim for credit of TCS made by an assessee

57 Hotel Ashok Garden vs. ITO

ITA Nos. 12 to 15 / Bang./2023

A.Ys.: 2016-17 to 2019-20

Date of Order: 6th February, 2023

What is applicable for TDS should also be applicable for TCS and merely because there is no Rule identical to Rule 37BA(2)(i) of the Rules with reference to TCS provisions, it cannot be the basis for the Revenue to deny the legitimate claim for credit of TCS made by an assessee.

FACTS

The assessee, a firm, engaged in the business of liquor bar and restaurant, claimed credit of TCS paid at the time of purchase of liquor in each of the four assessment years under consideration. The TCS certificate was in the name of Raju Shetty, a partner of the assesse firm, who held the license in the business of selling liquor. Since Raju Shetty held the license, the Karnataka State Beverages Corporation Ltd, (KSBCL) from whom liquor was purchased issued the certificate of TCS in the name of Raju Shetty but the credit wherefor was claimed by the assessee firm in the return of income filed by it.

In an intimation, the credit for TCS claimed by the assessee firm was denied. The assessee filed an application for rectification under section 154 of the Income tax Act, 1961 (Act) contending that the credit ought to be granted to the assessee firm. Along with the application, indemnity of the partner, Raju Shetty was also furnished. The AO rejected the application.

Aggrieved, the assessee preferred an appeal to CIT(A) who dismissed the appeal interalia on the grounds that this is a debatable issue which could not have been rectified under section 154 of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee, reliance was placed on the decision of the Jaipur Bench of the Tribunal in the case of Jai Ambey Wines vs. ACIT, order dated 11th January, 2017 where an identical issue came up for consideration with regard to the claim of TCS in the hands of the partnership firm when the licence stands in the name of the partners. The Tribunal after considering the statutory provisions held that the assessee firm should be given credit for TCS made in the hands of the partner.

The common issue in these four appeals was as to whether the lower authorities were justified in not granting credit for TCS as claimed by the assessee.

HELD

The Tribunal noted the ratio of the decision of the co-ordinate bench in the case of Jai Ambey Wines (supra). As regards the decision of the CIT(A) that the issue under consideration could not have been decided in an application under section 154 of the Act, the Tribunal held that if the ultimate conclusion on an application under section 154 of the Act can only be one particular conclusion, then even if in reaching that conclusion, analysis has to be done then it can (sic cannot) be said that the issue is debatable which cannot be done in proceedings under section 154 of the Act. The Tribunal held that the conclusion in the present case can only be one namely, that one person alone is entitled to claim credit for TCS and it is only the assessee who has claimed credit for TCS and not the licencee. In such circumstances, the application under section 154 of the Act ought to have been entertained by the Revenue. The Tribunal held that the assessee is entitled to claim credit for TCS when it is only the assessee who has claimed credit for TCS and not the licencee. In such circumstances, the application under section 154 of the Act ought to have been entertained by the Revenue.It also observed that the very basis of the decision of the Jaipur Bench of ITAT in the case of Jai Ambey Wines (supra) is based on the facts that what is applicable for TDS should also be applicable for TCS and merely because there is no Rule identical to Rule 37BA(2)(i) of the Rules with reference to TCS provisions, it cannot be the basis for the Revenue to deny the legitimate claim for credit of TCS made by an assessee.

The Tribunal allowed the appeal filed by the assessee and directed the AO to grant credit for TCS to the assessee.

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Eligibility of Educational Institutions to Claim Exemption under Section 10(23C) of the Income-Tax Act – Part II

INTRODUCTION

4.1 As mentioned in paras 1.2 and 1.3 of Part I of this write-up (BCAJ January 2023), section 10(22) of the Income-tax Act, 1961 (‘the Act’) provided an exemption for any income of a university or other educational institution existing ‘solely’ for educational purposes and not for profit [hereinafter referred to as Educational Institution]. The Finance (No. 2) Act, 1998 while omitting section 10(22) of the Act, inter alia introduced clauses(iiiab), (iiiad), and (vi) in section 10(23C) of the Act providing similar exemptions for Educational Institutions and also introduced various provisos providing requirements for approval, prescribing the procedure for dealing with application for such an approval [Basic Conditions] and making other provisions such as application of income, accumulation of income, investment of funds, etc. [Monitoring Conditions] which are mainly applicable to Educational Institutions covered by only section 10(23)(vi) with which we are concerned in this write-up as mentioned in paras 1.3 and 1.4 of Part 1 . The interpretation of these provisions and the term ‘solely’ had given rise to considerable litigation and was a subject matter of dispute before different authorities/ courts.

4.2 As mentioned in Part I (paras 1.5 to 1.9), the Supreme Court in its several decisions has from time to time laid down the law on the meaning of ‘education’, the applicability of the ‘predominant test’ in the context of section 2(15), the entitlement of exemption under section 10(22), etc. To recall this in brief, the Supreme Court in Sole Trustee, Loka Shikshana Trust vs. CIT (1975) 101 ITR 234 (Loka Shikshana’s case) held that the term ‘education’ in section 2(15), was not used in a wide and extended sense which would result in every acquisition of knowledge to constitute education but it covered systematic schooling or training given to students that results in developing knowledge, skill, mind and character of students by normal schooling or training given to students that results in developing knowledge, skill mind and character of students by normal schooling. Constitution bench of the Supreme Court in the case of ACIT vs. Surat Art Silk Cloth Manufacturers Association (1978) 121 ITR 1 (Surat Art Silk’s case) laid down what came to be known as the ‘predominant test’ in the context of section 2(15). Supreme Court held that if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust from being a valid charity for the purpose of claiming exemption. Supreme Court in Aditanar Educational Institution vs. ACIT (1997) 224 ITR 310 (Aditanar Institution’s case) allowed the assessee’s claim for exemption under section 10(22) as the assessee was set up with the sole purpose of imparting education at the levels of colleges and schools. The Supreme Court in American Hotel & Lodging Association, Educational Institute vs. CBDT (2008) 301 ITR 86 (American Hotel Association’s case), followed Surat Art Silk’s decision and held that the predominant object is to determine whether the assessee exists solely for education and not to earn profit. The Supreme Court in the Queen’s Educational Society vs. CIT (2015) 372 ITR 699 (Queen’s Society’s case) placing reliance on earlier decisions in Surat Art Silk’s, Aditanar Institution’s and American Hotel Association’s cases allowed exemption under section 10(23C)(iiiad) and held that the educational society exists solely for educational purposes and not for profit where surplus made by the educational society is ploughed back for educational purposes.

4.3 As discussed in para 2 of Part I, Andhra Pradesh High Court [A. P. High Court] in New Noble Educational Society vs. CCIT (2011) 334 ITR 303 (New Noble’s case) held that the term ‘solely’ means exclusively and not primarily. The High Court took the view that an educational institution, for being entitled to exemption under section 10(23C)(vi), must exist solely for educational purposes and must not have any other non-educational objects in its memorandum. However, if the primary or dominant purpose of an institution is “educational”, another ancillary or incidental object to the primary or dominant purpose would not disentitle the institution from the benefit of section 10(23C)(vi). As discussed in para 3 of Part I, A. P. High Court in R. R. M. Educational Society vs. CCIT (2011) 339 ITR 323 (AP) [RRM’s case] followed its decision in the New Noble’s case and held that the main or primary object of an institution must be ‘education’ and presence of any other object which is not integral to or connected with education will disentitle the assessee from benefit under section 10(23C)(vi). The Court also took the view that the Authority has no power to condone the delay in making application for approval under section 10(23)(vi).

NEW NOBLE EDUCATIONAL SOCIETY VS. CCIT (2022) 448 ITR 598 (SC)

5.1 The above two judgments of the A. P. High Court (along with other cases from the same High Court) came-up before the Supreme Court at the instance of the assessees on the issue of grant of approval under section 10(23)(vi).

5.2 Before the Supreme Court, the assessee, interalia, contended that while the High Court was right in considering the memorandum of association, rules or constitution of the trust, the literal interpretation by the High Court of the expression ‘solely’ in section 10(23C)(vi) was not correct and urged that there was no bar or restriction on trusts engaged in activities other than education from claiming exemption under section 10(23C)(vi) if the motive of such trusts was not to earn profit. It was further submitted that its objects other than education were charitable in nature and, therefore, the Commissioner (Authority) erred in denying approval. Further, the fact that the assessee had non-educational objects [other charitable objects] would not mean that it ceased to be an institution existing ‘solely’ for educational purposes. The assessee also urged that the term ‘solely’ was in relation to the institution’s motive to not function for making profit and not in relation to the objects of the institution. The assessee also submitted that the conditions prescribed in the subsequent provisos to section 10(23C) such as manner of utilization of surplus, etc. [i.e. Monitoring Conditions] were not relevant at the stage of considering application for approval under section 10(23C) and that such considerations could be gone into only during the course of assessments.

5.2.1 The assessee placed reliance on decisions of the Supreme Court in American Hotel and Association’s case, Queen’s Society’s case, Aditanar Institution’s case, etc. to submit that the test for determination was whether the ‘principal’ or ‘main’ activity was education and not whether some profits were incidentally earned.

5.2.2 With respect to registration under the state laws such as the A. P. Charities Act, the assessee contended that the Act was a complete code in itself and did not prescribe any condition for obtaining approvals under any state laws before becoming eligible for grant of approval under section 10(23C).

5.3 On the other hand, the Revenue submitted that the role of charitable institutions in imparting education was vital and important, and for deciding the issue of granting tax exemption under the Act to Educational Institutions, the term ‘education’ as a charitable purpose could not be given an enlarged meaning. The Revenue also urged that education could not be regarded as a business activity either under the Constitution of India or under the Act and any commercialisation of education would result in loss of benefit of tax exemption otherwise available to a charitable trust. The Revenue distinguished the decisions cited and relied upon by the assessee.

5.4 After considering the rival contentions and referring to relevant provisions of the Act, the Supreme Court proceeded to decide the relevant issues and noted that following three issues require resolutions [page 624] :-

“The issues which require resolution in these cases are firstly, the correct meaning of the term ‘solely’ in Section 10 (23C) (vi) which exempts income of “university or other educational institution existing solely for educational purposes and not for purposes of profit”. Secondly, the proper manner in considering any gains, surpluses or profits, when such receipts accrue to an educational institution, i.e., their treatment for the purposes of assessment, and thirdly, in addition to the claim of a given institution to exemption on the ground that it actually exists to impart education, in law, whether the concerned tax authorities require satisfaction of any other conditions, such as registration of charitable institutions, under local or state laws.”

5.5 After noting the importance of education, the Court, however, stated that the term ‘education’ in the context of the Act meant imparting formal scholastic learning and that the broad meaning of ‘education’ did not apply. In this context, the Court noted that what is “education” in the context of the Act, was explained by the Supreme Court in Loka Shikshana’s case (Supra) in following terms [page 623] :-

“5. The sense in which the word ‘education’ has been used in section 2(15) is the systematic instruction, schooling or training given to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. The word ‘education’ has not been used in that wide and extended sense, according to which every acquisition of further knowledge constitutes education. According to this wide and extended sense, travelling is education, because as a result of travelling you acquire fresh knowledge. Likewise, if you read newspapers and magazines, see pictures, visit art galleries, museums and zoos, you thereby add to your knowledge….All this in a way is education in the great school of life. But that is not the sense in which the word ‘education’ is used in clause (15) of section 2. What education connotes in that clause is the process of training and developing the knowledge, skill, mind and character of students by formal schooling.”

5.5.1 Referring to the above, the Court further stated as under [page 623] :-

“Thus, education i.e., imparting formal scholastic learning, is what the IT Act provides for under the head of “charitable” purposes, under Section 2 (15).”

5.6 With respect to the ‘predominant test’ evolved in Surat Art Silk’s case, the Court noted that the decision in that case was not rendered in the context of an Educational Institution but in the context of a charity which had the object of advancement of general public utility. Having noted this factual position, the Court stated as under [page 626] :-

“It is thus evident that the seeds of the ‘predominant object’ test was evolved for the first time in Surat Art (supra). Noticeably, however, Surat Art (supra) was rendered in the context of a body claiming to be a charity, as it had advancement of general public utility for its objects. It was not rendered in the context of an educational institution, which at that stage was covered by Section 10 (22). In that sense, the court had no occasion to deal with the term ‘educational institution, existing solely for educational purposes and not for purposes of profit’. Therefore, the application of the ‘predominant object’ test was clearly inapt in the context of charities set up for advancing education. It is important to highlight this aspect at this stage itself, because the enunciation of ‘predominant object’ test in Surat Art (supra) crept into the interpretation of ‘existing solely for educational purposes’, which occurred then in Section 10 (22) and now in Section 10 (23C).”

5.7 While interpreting the main provision in section 10(23C) and the meaning of the term ‘solely’ used therein, the Court also considered as to whether a wider meaning is to be given to the main provision in view of the seventh proviso to section 10(23C) which exempts business profits if the business is incidental to the attainment of the trust’s objectives and separate books of account are maintained by it in respect of such business. In this context, the Court observed as under [page 637] :

“The basic provision granting exemption, thus enjoins that the institution should exist ‘solely for educational purposes and not for purposes of profit’. This requirement is categorical. While construing this essential requirement, the proviso, which carves out the exception, so to say, to a limited extent, cannot be looked into. The expression ‘solely’ has been interpreted, as noticed previously, by other judgments as the ‘dominant / predominant /primary/ main’ object. The plain and grammatical meaning of the term ‘sole’ or ‘solely’ however, is ‘only’ or ‘exclusively’. P. Ramanath Aiyar’s Advanced Law Lexicon explains the term as, “‘Solely’ means exclusively and not primarily”. The Cambridge Dictionary defines ‘solely’ to be, “Only and not involving anyone or anything else”. The synonyms for ‘solely’ are “alone, independently, single-handed, single-handedly, singly, unaided, unassisted” and its antonyms are “inclusively, collectively, cooperatively, conjointly etc.””

5.7.1 The Court rejected the assessee’s argument that one has to look at the ‘predominant object’ for which the trust or educational institution is set up for determining its eligibility for approval under section 10(23C). The Court then stated that the term ‘solely’ is not the same as ‘predominant/ mainly’ and, therefore, the Educational Institution must necessarily have all its objects aimed at imparting or facilitating education. The Court then distinguished the decision in Surat Art Silk’s case and while deciding the main issue, explained the meaning of the term ‘Solely’ used in section 10(23C) as follows [pages 637/638] :-

“The term ‘solely’ means to the exclusion of all others. None of the previous decisions – especially American Hotel (supra) or Queens Education Society (supra) – explored the true meaning of the expression ‘solely’. Instead, what is clear from the previous discussion is that the applicable test enunciated in Surat Art (supra) i.e., the ‘predominant object’ test was applied unquestioningly in cases relating to charitable institutions claiming to impart education. The obvious error in the opinion of this court which led the previous decisions in American Hotel (supra) and in Queens Education Society (supra) was that Surat Art (supra) was decided in the context of a society that did not claim to impart education. It claimed charitable status as an institution set up to advance objects of general public utility. The Surat Art (supra) decision picked the first among the several objects (some of them being clearly trading or commercial objects) as the ‘predominant’ object which had to be considered while judging the association’s claim for exemption. The approach and reasoning applicable to charitable organizations set up for advancement of objects of general public utility are entirely different from charities set up or established for the object of imparting education. In the case of the latter, the basis of exemption is Section 10(23C) (iiiab), (iiiad) and (vi). In all these provisions, the positive condition ‘solely for educational purposes’ and the negative injunction ‘and not for purposes of profit’ loom large as compulsive mandates, necessary for exemption. The expression ‘solely’ is therefore important. Thus, in the opinion of this court, a trust, university or other institution imparting education, as the case may be, should necessarily have all its objects aimed at imparting or facilitating education. Having regard to the plain and unambiguous terms of the statute and the substantive provisions which deal with exemption, there cannot be any other interpretation.”

5.7.2 For the purpose of taking above literal view, the Court also made reference to its earlier decisions including the decision of the Constitution bench of the Supreme Court in the case of Commissioner of Customs (Import), Mumbai vs. Dilip Kumar and Co. (2018) 9 SCC 1 where it was held that taxing statutes are to be construed in terms of their plain language. The Supreme Court observed that aids to interpretation can be used to discern the true meaning only in cases of ambiguity and that where the statute is clear, the legislation has to be given effect in its own terms.

5.8 With respect to the seventh proviso to section 10(23C) of the Act, the Court observed as under [page 641] :-

“……The interpretation of Section 10 (23C) therefore, is that the trust or educational institution must solely exist for the object it professes (in this case, education, or educational activity only), and not for profit. The seventh proviso however carves an exception to this rule,and permits the trust or institution to record (or earn) profits, provided the ‘business’ which has to be read as the education or educational activity – and nothing other than that – is incidental to the attainment of its objectives (i.e., the objectives of, or relating to, education).”

5.8.1 Furthermore, dealing with the provisions contained in the seventh proviso permitting incidental business activities, the Court stated that the underline objective of the seventh proviso to section 10(23C), and section 11(4A) are identical and will have to be read in the light of main provision which spells out the conditions for exemptions under section 10(23C). According to the Court, the same conditions would apply equally to other sub-clauses of section 10(23C) that deal with education, medical institution, hospitals, etc.

5.8.2 Interpreting the meaning of the expression “incidental” business activity in the context of the seventh proviso, the Court explained as under [page 646] : “What then is `incidental’ business activity in relation to education? Imparting education through schools, colleges and other such institutions would be per se charity. Apart from that there could be activities incidental to providing education. One example is of text books. This court in a previous ruling in Assam State Text Book Production & Publication Corporation Ltd. v. CIT has held that dealing in text books is part of a larger educational activity. The court was concerned with State established institutions that published and sold text books. It was held that if an institution facilitated learning of its pupils by sourcing and providing text books, such activity would be `incidental’ to education. Similarly, if a school or other educational institution ran its own buses and provided bus facilities to transport children, that too would be an activity incidental to education. There can be similar instances such as providing summer camps for pupils’ special educational courses, such as relating to computers etc. which may benefit its pupils in their pursuit of learning.

However, where institutions provide their premises or infrastructure to other entities, trusts, societies etc. for the purposes of conducting workshops, seminars or even educational courses (which the concerned trust is not actually imparting) and outsiders are permitted to enroll in such seminars, workshops, courses etc. then the income derived from such activity cannot be characterised as part of education or “incidental” to the imparting education. Such income can properly fall under the heads of income.”

5.9 After discussing the judicial precedents dealing with cases of Educational Institutions, the Court noted the emerging position flowing from the same and stated that it is evident that this court has spelt out the following to be considered by the Revenue, when trusts or societies apply for registration or approval on the ground that they are engaged in or involved in education [pages 636/637] :

“ (i) The society or trust may not directly run the school imparting education. Instead, it may be instrumental in setting up schools or colleges imparting education. As long as the sole object of the society or trust is to impart education, the fact that it does not do so itself, but its colleges or schools do so, does not result in rejection of its claim. (Aditanar (supra)).

(ii) To determine whether an institution is engaging in education or not, the court has to consider its objects (Aditanar (supra)).

(iii) The applicant institution should be engaged in imparting education, if it claims to be part of an entity or university engaged in education. This condition was propounded in Oxford University (supra) where the applicant was a publisher, part of the Oxford University established in the U.K. The assessee did not engage in imparting education, but only in publishing books, periodicals, etc., for profit. Therefore, the court by its majority opinion held that the mere fact that it was part of a university (incorporated or set up abroad) did not entitle it to claim exemption on the ground that it was imparting education in India.

(iv) The judgment in American Hotel (supra) states that to discern whether the applicant’s claim for exemption can be allowed, the ‘‘predominant object’’ has to be considered. It was also held that the stage of examining whether and to what extent profits were generated and how they were utilised was not essential at the time of grant of approval, but rather formed part of the monitoring mechanism.

(v) Queen’s Educational Society (supra) approved and applied the ‘‘predominant object’’ test (which extensively quoted Surat Art (supra) and applied it with approval). The court also held that the mere fact that substantial surpluses or profits were generated could not be a bar for rejecting the application for approval under section 10(23C)(vi) of the IT Act.”

5.10 The Court overruled the decisions in the cases of American Hotel Association and Queen’s Society as they dealt with the meaning of the term ‘solely’ and held as under [page 642] :

“In the light of the above discussion, this court is of the opinion that the interpretation adopted by the judgments in American Hotel (supra) as well as Queens Education Society (supra) as to the meaning of the expression ‘solely’ are erroneous. The trust or educational institution, which seeks approval or exemption, should solely be concerned with education, or education related activities. If, incidentally, while carrying on those objectives, the trust earns profits, it has to maintain separate books of account. It is only in those circumstances that ‘business’ income can be permitted- provided, as stated earlier, that the activity is education, or relating to education. The judgment in American Hotel (supra) as well as Queens Education Society (supra) do not state the correct law, and are accordingly overruled.”

5.11 In respect of the nature of powers vested in the Commissioner / Authority to call for documents and verify the income of the trust at the time of granting approval under section 10(23C), the Court held as under [page 647] :

“ …….From the pointed reference to ‘audited annual accounts’ as one of the heads of information which can be legitimately called or requisitioned for consideration at the stage of approval of an application, the inference is clear: the Commissioner or the concerned authority’s hands are not tied in any manner whatsoever. The observations to the contrary in American Hotel (supra) appear to have overlooked the discretion vested in the Commissioner or the relevant authority to look into past history of accounts, and to discern whether the applicant was engaged in fact, ‘solely’ in education. American Hotel (supra) excluded altogether inquiry into the accounts by stating that such accounts may not be available. Those observations in the opinion of the court assume that only newly set up societies, trusts, or institutions may apply for exemption. Whilst the statute potentially applies to newly created organizations, institutions or trusts, it equally applies to existing institutions, societies or trust, which may seek exemption at a later point. At the same time, this court is also of the opinion that the Commissioner or the concerned authority, while considering an application for approval and the further material called for (including audited statements), should confine the inquiry ordinarily to the nature of the income earned and whether it is for education or education related objects of the society (or trust). If the surplus or profits are generated in the hands of the assessee applicant in the imparting of education or related activities, disproportionate weight ought not be given to surpluses or profits, provided they are incidental. At the stage of registration or approval therefore focus is on the activity and not the proportion of income. If the income generating activity is intrinsically part of education, the Commissioner or other authority may not on that basis alone reject the application.”

5.12 While considering the effect of state laws requiring registration of charitable institutions, the Court noted that the charitable objects defined by the A.P. Charities Act are parimateria with the Income-tax Act. The Court then noted that the charitable institutions are mandatorily required to obtain registration under the AP Charities Act and that such local Acts provide a regulatory framework by which the charitable institutions are constantly monitored. With respect to the impact of such local laws while deciding application for approval under section 10(23C), the Court took the view as under [page 645] :

“In view of the above discussion, it is held that charitable institutions and societies, which may be regulated by other state laws, have to comply with them- just as in the case of laws regulating education (at all levels). Compliance with or registration under those laws, are also a relevant consideration which can legitimately weigh with the Commissioner or other concerned authority, while deciding applications for approval under Section 10 (23C).”

5.13 The Court specifically mentioned that approval under section 10(23C) in RRM’s case was denied, interalia, on the grounds that it was not merely imparting education but also was running hostels. In this context, the Court clarified as under [pages 646/647] :

“ ……It is clarified that providing hostel facilities to pupils would be an activity incidental to imparting education. It is unclear from the record whether R.R.M. Educational Society was providing hostel facility to its students or to others as well. If the institution provided hostel and allied facilities (such as catering etc.) only to its students, that activity would clearly be “incidental” to the objective of imparting education.”

5.13.1 With respect to the time limit for making application for approval, the Court noted that the trust or societies are required to apply for registration or approval within a specified time and there is no provision to extend such time limit for the concerned year. The Court did not find fault with the decision of the High Court in refusing to interfere with the decision of Authority rejecting the approval when the institution made application beyond the specified time.

5.14 After discussing the legal position, and the earlier position based on Judicial precedents, the Court summarized it’s conclusions as follows (page 647 & 648) :-

“a. It is held that the requirement of the charitable institution, society or trust etc., to “solely” engage itself in education or educational activities, and not engage in any activity of profit, means that such institutions cannot have objects which are unrelated to education. In other words, all objects of the society, trust etc., must relate to imparting education or be in relation to educational activities.

b. Where the objective of the institution appears to be profit-oriented, such institutions would not be entitled to approval under section 10(23C) of the IT Act. At the same time, where surplus accrues in a given year or set of years per se, it is not a bar, provided such surplus is generated in the course of providing education or educational activities.

c. The seventh proviso to section 10(23C), as well as section 11(4A) refer to profits which may be ‘incidentally’ generated or earned by the charitable institution. In the present case, the same is applicable only to those institutions which impart education or are engaged in activities connected to education.

d. The reference to “business” and “profits” in the seventh proviso to section 10(23C) and section 11(4A) merely means that the profits of business which is “incidental” to educational activity – as explained in the earlier part of the judgment, i.e., relating to education such as sale of text books, providing school bus facilities, hostel facilities, etc.

e. The reasoning and conclusions in American Hotel (supra) and Queen’s Education Society (supra) so far as they pertain to the interpretation of expression “solely” are hereby disapproved. The judgments are accordingly overruled to that extent.

f. While considering applications for approval under section 10(23C), the Commissioner or the concerned authority as the case may be under the second proviso is not bound to examine only the objects of the institution. To ascertain the genuineness of the institution and the manner of its functioning, the Commissioner or other authority is free to call for the audited accounts or other such documents for recording satisfaction where the society, trust or institution genuinely seeks to achieve the objects which it professes. The observations made in American Hotel (supra) suggest that the Commissioner could not call for the records and that the examination of such accounts would be at the stage of assessment. Whilst that reasoning undoubtedly applies to newly set up charities, trusts, etc. the proviso under section 10(23C) is not confined to newly set up trusts – it also applies to existing ones. The Commissioner or other authority is not in any manner constrained from examining accounts and other related documents to see the pattern of income and expenditure.

g. It is held that wherever registration of trust or charities is obligatory under state or local laws, the concerned trust, society, other institution etc., seeking approval under section 10(23C) should also comply with provisions of such State laws. This would enable the Commissioner or concerned authority to ascertain the genuineness of the trust, society, etc. This reasoning is reinforced by the recent insertion of another proviso of Section 10(23C) with effect from April 1,2021.”

5.15 After summarizing its conclusions referred to in para 5.14 above, the Court, in context of importance of education as charity in the society in general, further observed as under [page 648] :

“ In a knowledge based, information driven society, true wealth is education – and access to it. Every social order accommodates, and even cherishes, charitable endeavour, since it is impelled by the desire to give back, what one has taken or benefitted from society. Our Constitution reflects a value which equates education with charity. That it is to be treated as neither business, trade, nor commerce, has been declared by one of the most authoritative pronouncements of this court in T.M.A Pai Foundation (supra). The interpretation of education being the “sole” object of every trust or organization which seeks to propagate it, through this decision, accords with the constitutional understanding and, what is more, maintains its pristine and unsullied nature.”

5.16 Finally, the Court stated that its decision would operate prospectively in the larger interests of the society and observed as under [page 649] :

“……This court is further of the opinion that since the present judgment has departed from the previous rulings regarding the meaning of the term ‘solely’, in order to avoid disruption, and to give time to institutions likely to be affected to make appropriate changes and adjustments, it would be in the larger interests of society that the present judgment operates hereafter. As a result, it is hereby directed that the law declared in the present judgment shall operate prospectively. The appeals are hereby dismissed, without order on costs.”

CONCLUSION

6.1 In view of the above judgment of the Supreme Court, the issue now stands settled that for obtaining benefit of section 10(23C), the Educational Institution must exist solely and exclusively for educational purposes and education-related activities and should not have any other objects unrelated to education in its Memorandum/ Trust deed even though the same are charitable in nature. In other words, mere existence of object unrelated to education in the Memorandum/ Trust Deed will result in denial of benefit under section 10(23C). In view of this, most of the Educational Institutions claiming exemptions under section 10(23C)(vi) are likely to be affected as they will have some or the other charitable objects not related to education in their Memorandum/ Trust Deed and if they desire to continue to claim exemption under section 10(23C)(vi), they will have to amend their Trust Deed, etc. at the earliest to fall in line with the law declared in the above judgment .

6.1.1 In cases where Educational Institution desires to amend it’s Trust Deed, etc. to fall in line with the law laid down by the Court in the above case, the question of effective date of such amendment may also become relevant. In this context, the reference may be made to para 3.6 of Part 1 of this write-up where the A. P. High Court, while dealing with RRM’s case, has dealt with this issue in the context of provisions of A.P. Registration Act.

6.1.2 Similar problem is also likely to be faced by Educational Institutions governed by section 10(23C) (iiiab)/(iiiad) in the context of the interpretation of the term ‘solely’, though such institutions are not required to seek any approval and follow other requirements mentioned in various provisos which are not applicable to such institutions as mentioned in para 1.4 of Part I of this write-up.

6.1.3 In view of the above situation resulted from the judgment of the Supreme Court literally interpreting the term ‘solely’, in all fairness, the relevant provisions should be amended in the coming Budget on 1st February, 2023 mainly to replace the word ‘solely’ by the word ‘pre-dominantly’. Of course, while amending the provisions on this line, appropriate precautions can be taken, if necessary, to avoid the possibility of any abuse.

6.2 It is a well settled principle that a judicial decision acts retrospectively and that Judges do not make law, they only discover or find the correct law. However, the Court in this case [refer para 5.16 above] has made its decision applicable prospectively to avoid disruption and give time to the affected Educational institutions to make appropriate changes and adjustments. Therefore, an institution which has other objects unrelated to education may consider amending its objects to retrain only object of education and education related objects [which are incidental to the main object of education] so as to claim the benefit of section 10(23C)(iiiab) / (iiiad) / (vi) of the Act.

6.2.1 With respect to prospective applicability of the above judgement and the time given by the Court to trusts/institutions to amend their objects, a question that arises is the date from which the judgment dtd. 19th October, 2022 will come into operation – i.e. whether it will apply from (i) 19th October, 2022 or (ii) from financial year beginning 1st April, 2023 or any other date. Considering the object for which the Court has granted concession by giving the above judgment prospective effect, the better view seems to be that the same should not apply before the Financial Year commencing from 1st April, 2023. It is desirable that the Government should come out with an appropriate clarification for this fixing reasonable time limit at the earliest to avoid anxiety in the minds of the persons looking after the affairs of such Educational Institutions and also to avoid unnecessary fruitless litigation on issues like this.

6.3 As stated in para 5.13.1 above, the Court noted that the trust or societies are required to apply for requisite approval under section 10(23C)(vi) within a specified time and there is no provision to extend such time limit for the concerned year. It may be interesting to note whether High Courts, while exercising their extraordinary jurisdiction under Article 226 of the Constitution of India, will grant some relief in this to entertain belated applications in deserving cases where such applications could not be filed within the specified time due to genuine difficulties /circumstances beyond the control of the Educational Institution.

6.4 Considering the implications of the above judgment for Educational Institutions claiming exemptions under section 10(23C), it appears that these provisions in the present form are hardly workable and of any use. Therefore, such institutions [particularly, those claiming exemption under section 10(23C)(vi) ] may prefer to switch over to regime of section 11 exemption, which under the current circumstances may be considered to be more beneficial. For this useful reference may be made to provisions of section 11(7) together with proviso and section 12(A)(1)(ac). It is also worth noting that for section 11 regime of exemption, definition of Charitable purpose given in section 2(15) also specifically includes object of ‘education’ and proviso to section 2 (15) is relevant only in the cases of object of ‘advancement of any other object of general public utility’.

6.5 As stated in para 5.12 above, Educational Institutions may be required to be registered under the relevant State Laws [in New Noble’s case this was A. P. Charities Act] and the same is also a relevant consideration (though not a pre-requisite) for the Authority to decide the applications for approval under section 10(23)(vi). It seems that if such registration is not obtained, the Authority may grant approval subject to condition of obtaining such registration. Furthermore, it should be noted that need for compliance of such requirements of any other laws, for the time being in force [which should include such State Laws], as are material for achieving the objectives of the Educational Institutions has now been specifically incorporated in the 2nd proviso to section 10(23C) by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 [T.L.A.Act, 2020] w.e.f. 1st April, 2021.

6.6 It is also worth noting that the Court has effectively followed Loka Shikhasan’s case in the context of meaning of the term ‘education’ to adopt a narrower meaning of the same i.e. ‘imparting formal scholastic learning. As such for the purpose of exemption under the Act, the term ‘education’ may have to be understood accordingly [refer paras 5.5 and 5.5.1 above].

6.7 In the context of exception carved out with regard to business income in the 7th proviso to section 10(23C) [similar to section11(4A) ], the Court has given narrower meaning of these provisions. It has also given examples of incidental business activity in relation to Educational Institutions such as facilitating learning of its pupils by sourcing and providing textbooks, running its own buses and providing bus facility to transport children, etc. for which reference may be made to para 5.8.2 above. It is also worth noting that in the context of hostel facility provided by the educational institutions, the Court appears to have taken a view that the hostel and allied facilities (such as catering, etc.) provided only to its students would fall within the category of ‘incidental to the objective of importing education’ For this, findings of the Court given in RRM’s case [referred to in para 5.13 above] should be carefully read and its possible implications properly understood in the context of facts of each case.

6.8 As mentioned in para 5.10 above, the Court has overruled it’s earlier decision in the cases of American Hotel Association and Queen’s Society in so far as they dealt with the meaning of the term ‘Solely’ . Therefore, these earlier decisions are overruled only to this extent. Except for this, the earlier position summarised by the Court [referred to in para 5.9 above] should continue to hold good for dealing with the application for approval under section10(23C)(vi).

6.8.1. In the context of the powers of the Authority, while dealing with such applications for approval, the Court has explained the effect of the judgment in American Hotel Association’s case [refer para 5.11 above] and in this context, the position should change only in context of application of approval made by the existing entities as explained by the Court [refer to in para 5.11 above]. As such in case of a new entity applying for such an approval, it would appear that only Basic Conditions may have to be looked at and Monitoring Conditions, such as utilisation of income etc. [referred to in para 4.1 above], may be considered at the time of assessment. Furthermore, in this context, the amendments made by the TLA Act, 2020 w.e.f. 1st April, 2021 widening the scope such powers should also be borne in mind.

6.9 It would also appear that the objective of the Educational Institutions should not be profit oriented. However, at the same time, where surplus accrues in a given year or set of years per se, is not to be considered as a restrain for claiming exemption so long as the same is generated in the course of providing education/ educational activities.

6.10 Recently, the Hyderabad Bench of Tribunal in the case of Fernandez Foundation [TS-950-ITAT-2022 (Hyd)] by order dated 9th December, 2022 has, inter alia, also considered and relied on the above judgment of the Supreme Court while confirming the order of CIT (E) rejecting the application of the assessee for approval under section 10(23C)(vi).

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Section 279 (2) of the Act – Section 276B, r.w.s. 278B –compounding of offence – Application filed after conviction – guidelines for compounding offence – cannot override the provisions of the statute i.e. Section 279

21 Footcandles Film Pvt Ltd vs. Income-tax Officer – TDS – 1 & Ors

[Writ Petition No.429 of 2022

Date of order: 28th November, 2022 (Bom) (HC)]

Section 279 (2) of the Act – Section 276B, r.w.s. 278B –compounding of offence – Application filed after conviction – guidelines for compounding offence – cannot override the provisions of the statute i.e. Section 279:

The Writ Petition, filed under Article 226 of the Constitution of India, impugns the order, under the provisions of sub-section (2) of Section 279 of the Income- tax Act, 1961, dated 1st June, 2021, passed by respondent no.3- Chief Commissioner of Income Tax (TDS), Mumbai, whereby an application filed by the petitioners for compounding of an offence committed, under section 276B, r.w.s. 287B of the Income-tax Act, 1961 during the F.Y. 2009-10 relevant to the A.Y. 2010-11, was rejected.

The case of the petitioner no. 2 is that for the relevant F.Y. 2009-10, the petitioner no.1-company deducted income tax to the tune of Rs. 25,02,336/- from the salaries of its employees, under the provisions of Section 192 of the Act, but had failed to deposit the tax so deducted to the credit of the Central Government within the time prescribed under section 200 r.w.s. 204 of the Act. The petitioners claim that this situation arose due to the accumulated losses and delays in receiving tax refund from the respondent no.1 during the period 1st April, 2009 to 31st March, 2010.

It is further the case of the petitioners that, subsequently, on 2nd September, 2010, petitioner no.1-company voluntarily deposited the entire amount of tax deducted at source due, along with statutory interest liability thereon, with respondent no.1 without any prior notice of default or demand from the said respondent. However, the petitioner no.1-company subsequently received a show cause notice dated 18th October, 2011, calling upon it to show cause as to why prosecution should not be launched for offences committed under section 276B, r.w.s. 278B, of the Act for failure to deposit tax deducted to the credit of the Central Government, within the statutory timeframe. The said show cause notice also required the petitioner no.1 to nominate its Principal Officer for that purpose. Petitioner no.1 replied to the show cause notice on 24th October, 2011 and 16th November, 2011, attributing accumulated losses, cash crunch and delay in receiving tax refund from respondent no.1 as reasons for their inability and delay in discharging the tax deduction liability. Petitioner no.1 further stated in the reply that the entire liability, along with interest on the delayed payment, had already been deposited by petitioner no.1 voluntarily, before any demand was made. Thereafter, upon hearing petitioner no.1-company, the respondent no.2 issued sanction letter dated 10th March, 2014, granting sanction for prosecution against petitioner no.1-company and its Principal Officer- petitioner no.2 herein, pursuant to which, on 11th March, 2014, respondent no.1 lodged a Criminal Complaint bearing No.75/SW/2014 against the petitioners before the 38th Court of Additional Chief Metropolitan Magistrate, Ballard Pier, Mumbai alleging offence punishable under section 276B, r.w.s. 278B, of the Act.

It is further the case of the petitioners that the said criminal case was tried and by order dated 14th January, 2020, the learned Magistrate convicted the petitioners, under section 248(2) of the Code of Criminal Procedure, for the offence punishable under section 278B, r.w.s. 276B of the Income-tax Act, whereby both the petitioners were sentenced to pay the fine of Rs.10,000/- each and imposed a sentence of rigorous imprisonment for one year on petitioner no.2.

Aggrieved by this Judgment and Order of the Additional Chief Metropolitan Magistrate, convicting the petitioners, Criminal Appeal No.127 of 2020 was filed on 5th February 2020 before the City Sessions Court at Greater Mumbai. Along with the Criminal Appeal, Criminal Miscellaneous Application No.407 of 2020, for stay and suspension of sentence, was filed before the same court and the sentence was suspended by order dated 7th February, 2020. Since then, the criminal appeal is pending adjudication before the Sessions Court.

In this set of facts, the application, under the provisions of Section 279(2) of the Income-tax Act, came to be filed on 5th February, 2020 for compounding of offence before respondent no.3. Along with this application, the petitioners have also filed an application for condonation of delay, if any, in filing the application for compounding of offence. It is stated by the petitioners that the application under section 279(2) of the Act was rejected by the impugned order dated 1st June, 2021, which is now challenged before the court.

The respondents opposing the petition have relied upon the CBDT Circulars No.25/2019 and 01/2020, which deal with the procedure set down by the Board for consideration of applications for compounding of offences under the provisions of Section 279 of the Income-tax Act.

The petitioner contended that the provisions of Section 279(2) do not impose any fetters on respondent no.3 from considering the petitioners’ application for compounding of offence, even when the Court of Metropolitan Magistrate had convicted the petitioners and during pendency of an appeal before the Sessions Court. It is further contended that plain reading of the provisions of sub-section (2) of Section 279 allows compounding of offence either before or after the institution of proceedings and the word “proceedings” encompasses all stages of the criminal proceedings i.e. to say before the Magistrate and even after the Magistrate has convicted the concerned party or when the proceedings are pending before the Sessions Court in appeal.

The Petitioner contended that the Circulars of the CBDT, relied upon by respondent no.3 while rejecting the application for compounding of offence, which provides that the application for compounding of offence is required to be filed within twelve months from the end of the month in which the complaint was filed, cannot operate as a rule of limitation since the same cannot override the provisions of the statute i.e. Section 279 of the Income-tax Act.

The petitioners relied upon the following decisions:-

(i) Sports Infratech (P) Ltd vs. Deputy Commissioner of Income-tax (HQRS) (2017) 78 taxmann.com 44 (Delhi)

(ii) Vikram Singh vs. Union of India (2017) 80 taxmann.com 371 (Delhi)

(iii) Government of India, Ministry of Finance, Department of Revenue (Central Board of Direct Taxes) vs. R. Inbavalli (2017) 84 taxmann.com 105 (Madras)

(iv) K.V. Produce and Ors. vs. Commissioner of Income-Tax and Anr. (1992) 196 ITR 293 (Kerala)

The Petitioner contended that the CBDT Guidelines for Compounding of Offences under Direct Tax Laws, 2019, dated 14th June, 2019, more specifically contained in paragraph 8.1(vii), made the petitioners ineligible for compounding the offences notwithstanding the fact that the provisions of the statute contained in Section 279 of the Income-tax Act, 1961 do not provide for any rule of limitation.

The Hon’ble Court observed that in Sports Infratech (P) Ltd (Supra), a Division Bench of the Delhi High Court was considering the provisions of the Board’s Guidelines dated 3rd December, 2014. In that case, an application for compounding came to be rejected on the grounds that the petitioner did not fulfil the eligibility criteria for consideration of its case for compounding. The Delhi High Court has concluded that the condition in the guidelines, no doubt, is important but cannot be the only determining factor for deciding an application under section 279(2) of the Act. It further held that the authority, while exercising jurisdiction under this provision, was also required to consider the objective facts in the application before it.

In Vikram Singh (Supra), another Division Bench of the Delhi High Court considered the provisions of the Circular dated 23rd December, 2014 issued by the CBDT and, more specifically, the guidelines contained in para 8(vii), which provides that offences committed by a person for which complaint was filed by the Department with the competent court twelve months prior to receipt of the application for compounding was generally not to be compounded. While considering the import of such a clause in the circular, it has held as under :“The Circular dated 23rd December 2014 does not stipulate a limitation period for filing the application for compounding. What the said circular sets out in para 8 are “Offences generally not to be compounded”. In this, one of the categories, which is mentioned in sub-clause (vii), is : “Offences committed by a person for which complaint was filed with the competent court 12 months prior to receipt of the application for compounding”.

“The above clause is not one prescribing a period of limitation for filing an application for compounding. It gives a discretion to the competent authority to reject an application for compounding on certain grounds. Again, it does not mean that every application, which involves an offence committed by a person, for which the complaint was filed to the competent court 12 months prior to the receipt of the application for compounding, will without anything further, be rejected. In other words, resort cannot be had to para 8 of the circular to prescribe a period of limitation for filing an application for compounding. For instance, if there is an application for compounding, in a case which has been pending trial for, let us say 5 years, it will still have to be considered by the authority irrespective of the fact that it may have been filed within ten years after the complaint was first filed. Understandably, there is no limitation period for considering the application for compounding. The grounds on which an application may be considered, should not be confused with the limitation for filing such an application.”

A similar provision, as has been dealt with by the Delhi High Court, contained in the Circular dated 23rd December, 2014 is found in para 7(ii) of the Circular dated 14th June, 2019, which is applicable to the present case. The provisions of para 7(ii) of 2019 Circular would be required to be read with the provisions of para 9.1 of that circular, which provides for relaxation in cases where an application is filed beyond twelve months referred to in paragraph 7(ii), specially when there is a pendency of an appeal or at any stage of the proceedings.

In R. Inbavalli (Supra), a Division Bench of the Madras High Court was dealing with the CBDT Guidelines dated 16th May, 2008, wherein an application for compounding was rejected on the grounds that it was not a deserving case as parameters of para 7.2 of those guidelines had not been adhered to. In that case, it was argued by the Revenue that wherever conviction order has been passed by the competent court, it would fall under the category of cases not to be compounded and though a discretionary power was given under clause 7.2 of the guidelines for grant of approval for compounding of an offence in a suitable and deserving case, such discretion could not be exercised in favor of the assessee when the assessee had been convicted. In that case also, an appeal was pending against the order of conviction before the higher court when the application for compounding of offence was made to the party.

In the face of these facts, the Madras High Court, considering the provisions of the Guidelines dated 16th May, 2008, has held as under :“Therefore, the mere pendency of the appeal against the conviction, in our view, could no longer be a reason for refusing the consideration for compounding of offence within the meaning of clause 4.4(f) of the guidelines dated 16.05.2008.”

The Explanation to sub-section (6) of Section 279, provides power to the Board to issue orders, instructions or directions under the Act to other income tax authorities for proper composition of offences under the section. The Explanation does not empower the Board to limit the power vested in the authority under section 279(2) for the purpose of considering an application for compounding of offence specified in section 279(1).

The Hon’ble Court observed that the orders, instructions or directions issued by the CBDT under section 119 of the Act or pursuant to the power given under the Explanation will not limit the powers of the authorities specified under section 279(2) in considering such an application, much less place fetters on the powers of such authorities in the form of a period of limitation. Therefore, the guidelines contained in the CBDT Guidelines dated 14th June, 2019 could not curtail the power vested in Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General under the provisions of section 279(2) of the Income-tTax Act.

Thus, the Hon’ble High court held that to the extent CBDT Guidelines dated 14th June, 2019 creates a limitation on the time, within which application under section 279(2) of the Income-tax Act is required to be filed, is of no consequence and does not take away jurisdiction of respondent no.3 or the other authorities, referred to in sub-section (2) of Section 279, from entertaining an application for compounding of offence at any time during the pendency of the proceedings, be they before the Magistrate or on conviction of the petitioners, in an appeal before the Sessions Court. As long as a proceeding, as referred to in sub-section (1), is pending, an application for compounding of offence would be maintainable under sub-section (2) of Section 279 and will have to be dealt with by the authorities on its own merits.

The Guidelines/Circular of 2019 sets out “Eligibility Conditions for Compounding” the condition specified in clause 7(ii) is not a rule of limitation, but is only a guideline to the authority while considering the application for compounding. It does not take away the jurisdiction of the authority under section 279(2) of the Act to consider the application for compounding on its own merits and decide the same.

The court further observed that this was a classic case for consideration by respondent no.3 for compounding of offence, inasmuch as petitioner no.1- company has deposited the TDS due, though beyond time-limit set down, but before any demand notice was raised or any show cause notice was issued. The Tax Deducted at Source was deposited along with penal interest thereon. A reply setting out detailed reasons for not depositing the same within the time stipulated under the law had been filed in reply to the show cause notice issued earlier. Though the petitioners had been convicted, a proceeding in the form of an appeal is pending before the Sessions Court, which is yet to be disposed of, and in which there is an order of suspension of sentence imposed on petitioner no.2 is operating.

Under these circumstances, the impugned order dated 1st June, 2021, that the application for compounding of offence, under section 279 of the Income-tax Act, was filed beyond twelve months, as prescribed under the CBDT Guidelines dated 14th June, 2019, are contrary to the provisions of sub-section (2) of Section 279. The impugned order dated 1st June, 2021 be quashed and set aside.

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Section 143(3), r.w.s 144B – Show Cause Notice – two days’ time to file response – violated the mandate of Circular dated 3rd August, 2022 – reasonable opportunity of filing a response should be provided – minimum of seven days period.

20 CS & Sons, vs. The National Faceless Assessment Centre, Delhi & Ors

Writ Petition (l) No. 32925 of 2022

Date of order: 8th December, 2022 (Bom)(HC)

Section 143(3), r.w.s 144B – Show Cause Notice – two days’ time to file response – violated the mandate of Circular dated 3rd August, 2022 – reasonable opportunity of filing a response should be provided – minimum of seven days period.

The petitioner challenged the order of assessment dated 18th September, 2022, passed under section 143(3), r.w.s. 144B, of the Income-tax Act, 1961, relevant to the A.Y. 2020-21 primarily on the grounds that the show cause notice dated 13th September, 2022, issued in terms of section 144B sub-section (6), clause (vii) of the Act, did not provide to the petitioner a reasonable opportunity of filing a response to the said show cause notice. It is stated that the show cause notice came to be issued on 13th September, 2022, which was signed by the concerned AO at 6:44 p.m. on the same day and was received by the petitioner at 6:50 p.m. on the same day i.e. 13th September, 2022. It is further stated that the show cause notice required the petitioner to file its response by 15th September, 2022 by 11:00 a.m., thereby giving the petitioner less than two days’ time to file the response. It is further stated that considering the issues involved, the time made available to the petitioner being not enough, yet the petitioner tried to upload its reply on 16th September, 2022, which could not be so uploaded because the portal had been closed. It is further stated that the petitioner accordingly registered its grievance on the official portal and also uploaded along with the said grievance its objections to the proposed variation on 16th September, 2022. Thereafter, the assessment order is stated to have been passed on 18th September, 2022.

The petitioner states that since the objections to the Show Cause notice dated 13th September, 2022 were already available on the system of the respondents, the same could have been considered while passing the order of assessment, which came to be issued at a subsequent point of time. In any case, it is urged that, the AO had violated the mandate of the circular dated 3rd August, 2022, in particular Clause N.1.3.1 thereof, which prescribes a minimum of seven days period that is required to be given in such types of cases.

The respondents contended that Clause N.1.3.2 does give enough powers to the AO to curtail the period of seven days in certain cases, keeping in view the limitation date for completing the assessment.

The Hon’ble Court observed that the time made available to the petitioner to file its response to the show cause notice was quite inadequate and illusory and therefore, the principles of natural justice can be said to have been violated in the case of the petitioner.

The Hon’ble Court allowed the petition and the matter was remanded back to the AO, to consider the objections to the Show Cause notice dated 13th September, 2022, which shall be filed within two weeks for which the system be enabled accordingly.

The Petitioner was also given an opportunity of being heard in terms of Section 144(6)(vii) of the Income-tax Act, and thereafter AO shall proceed to pass appropriate orders in accordance with the law.

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Reassessment — Notice after four years — Condition precedent — Failure on part of the assessee to disclose fully and truly — Assessee disclosing all material facts in response to notices — Reasons recorded not specifying material that the assessee had failed to disclose — Notice issued on erroneous factual basis — Mere reproduction of statutory provisions do not suffice — Notice and order rejecting assessee’s objections quashed and set aside

79 Rajeshwar Land Developers Pvt Ltd vs. ITO

[2022] 450 ITR 108 (Bom)

A Y.: 2013-14

Date of order: 13th June, 2022

Sections: 142(1), 143(2), 147 and 148 of ITA 1961

Reassessment — Notice after four years — Condition precedent — Failure on part of the assessee to disclose fully and truly — Assessee disclosing all material facts in response to notices — Reasons recorded not specifying material that the assessee had failed to disclose — Notice issued on erroneous factual basis — Mere reproduction of statutory provisions do not suffice — Notice and order rejecting assessee’s objections quashed and set aside

For the A. Y. 2013-14, the AO issued a notice under section 148 of the Income-tax Act, 1961 to reopen the assessment on the ground that the assessee had claimed excess deduction of Rs. 7,44,36,332 on account of other expenses which were required to be disallowed as details of expenses in annexure amounted to only Rs. 12,71,375. The assessee filed objections and submitted that the AO had overlooked the second page of Note 15 in the return of income wherein the details of the amount of Rs. 7,44,36,332 were mentioned and the break up given. The assessee’s objections were rejected.

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

“i) During the original scrutiny assessment the Assessing Officer had looked at all the documents on record and had stated so in the assessment order. The assessee had submitted details of all expenses, a list of creditors and details of purchasers in response to the notices u/s. 142(1) and 143(2). The details such as steel purchase, electrical materials, plumbing, labour charges, etc., were provided in detail. Even the queries in respect of other expenses, unsecured loans were furnished. In the assessment order also, it was stated that the reply, details, clarifications and explanation filed by the assessee were considered.

ii) Therefore, the reasons given ought to have specified the failure on the part of the assessee to disclose fully and truly all material facts. It was not enough to reproduce the language of the statutory provision. The reasons did not give any particulars as to the failure on the part of the assessee. It was nowhere stated that the second page of Note-15 was not part of the assessment record. Furthermore, it was not explained as to how the second page came to be missed. Even when this fact was stated by the assessee, while disposing of the objections, the Assessing Officer did not state that the second page of the note was not available.

iii) The notice for reopening of the assessment and the order rejecting the assessee’s objections were on an erroneous factual ground without looking at the relevant page. Since the foundation for reopening the assessment on the facts was erroneous, apart from various other legal challenges that arose, the notice and consequent order were quashed and set aside.”

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Reassessment — Notice under section 148 — Limitation — Notice for A. Y. 2013-14 sent by e-mail and received by the assessee on 1st April, 2021 — Notice issued beyond time limit — Not valid

78 Mohan Lal Santwani vs. UOI

[2022] 449 ITR 476 (All)

A. Y.: 2013-14

Date of order: 25th April, 2022

Sections: 147, 148 and 149 of ITA 1961

Reassessment — Notice under section 148 — Limitation — Notice for A. Y. 2013-14 sent by e-mail and received by the assessee on 1st April, 2021 — Notice issued beyond time limit — Not valid

For the A. Y. 2013-14 a notice under section 148 was sent by the Department by e-mail. The e-mail was received by the assessee on 1st April, 2021. The assessee filed a writ petition and challenged the validity of the notice.

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

“i) The principles of judicial discipline and propriety and binding precedent, are as follows :

(a) Judicial discipline and propriety are the two significant facets of administration of justice. The principles of judicial discipline require that orders of the higher appellate authorities are followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not “acceptable” to the Department, in itself an objectionable phrase, or that is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessees and chaos in administration of tax laws.

(b) Just as judgments and orders of the Supreme Court have to be faithfully obeyed and carried out throughout the territory of India under article 141 of the Constitution, so should be judgments and orders of the High Court by all inferior courts and tribunals subject to supervisory jurisdiction within the State under articles 226 and 227 of the Constitution.

(c) If an officer under the Income-tax Act, 1961 refuses to carry out the clear and unambiguous direction in a judgment passed by the Supreme Court or High Court or the Income-tax Appellate Tribunal, in effect, it is denial of justice and is destructive of one of the basic principles in the administration of justice based on hierarchy of courts.

(d) Unless there is a stay obtained by the authorities under the Income-tax Act, 1961 from a higher forum, the mere fact of filing an appeal or special leave petition will not entitle the authority not to comply with the order of the High Court. Even though the authority may have filed an appeal or special leave petition, where it either could not obtain a stay or the stay is refused, the order of the High Court must be complied with. Mere filing of an appeal or special leave petition against the judgment or order of the High Court does not result in the assailed judgment or order becoming inoperative and unworthy of being complied with.

ii) It was evident that the notice u/s. 148 of the Income-tax Act, 1961 for the A. Y. 2013-14 was issued to the assessee on April 1, 2021, whereas the limitation of issuing the notice expired on March 31, 2021. Thus, notice u/s. 148 of the Act was time barred and consequently it was without jurisdiction. The notice cannot be sustained and is hereby quashed. Consequently, the order dated March 19, 2022 and the reassessment order dated March 29, 2022 for the A. Y. 2013-14 can also not be sustained and are hereby quashed inasmuch as, the jurisdictional notice itself was without jurisdiction.”

[It was directed that the Revenue shall ensure that the date and time of triggering of e-mail for issuing notices and orders are reflected in the online portal relating to the concerned assessees.]

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Rectification of mistake — Mistake apparent from record — Set-off of loss — Opinion of audit party on manner of set-off of loss — Opinion on a point of law — Not a mistake apparent from record — No reassessment proceedings could also have been permissible — Rectification order set aside

77 Ambarnuj Finance and Investment Pvt Ltd vs. Dy CIT

[2022] 450 ITR 40 (Del)

A. Y.: 2017-18

Date of order: 2nd November, 2022

Section: 154 of ITA 1961

Rectification of mistake — Mistake apparent from record — Set-off of loss — Opinion of audit party on manner of set-off of loss — Opinion on a point of law — Not a mistake apparent from record — No reassessment proceedings could also have been permissible — Rectification order set aside:

The assessee filed a writ petition challenging the rectification order passed under section 154 of the Income-tax Act, 1961 dated 15th February, 2021, passed by the Deputy Commissioner during the pendency of the assessee’s application for settlement of disputed tax under the Direct Tax Vivad Se Vishwas Act, 2020 and also seeking a direction to reconsider its application for settlement of disputed tax under the 2020 Act for the A. Y. 2017-18.

The Delhi High Court held as under:

“i) There was no mistake apparent in the computation of income in the assessment order dated December 21, 2019, within the meaning of section 154 of the 1961 Act which could have been a subject matter of rectification. The objection raised by the audit party was not a mistake apparent from the record, which could be corrected u/s. 154 of the 1961 Act, but an opinion in law on the manner in which set-off of business losses was to be permitted. The legal opinion of the audit party was at variance with the opinion of the Assessing Officer, who determined that it was permissible to add as income, the amount arising from disallowed bad debt resulting in reduction of loss, while passing the original assessment order. Therefore, there were two different legal opinions available on record with respect to the sequence of set off giving rise to a debatable issue. There was no legal error in the method of computation made in the original assessment order dated December 21, 2019. The Assessing Officer acting upon the audit party’s objection had set off the loss as claimed by the assessee in its original return, first against the other heads of income and then taxed the amount of disallowed bad debt as a stand alone addition to the returned income. This was contrary to facts as the amount of the disallowed bad debt had to be added to the income of the assessee to arrive at the net income or net loss and was not chargeable to tax as a separate head of income as was sought to be done.

ii) The objection raised by the audit party on the sequence of set-off of losses was an opinion on law and no reassessment proceedings could also have been permissible. The Assessing Officer himself was not of the independent opinion that the original assessment order passed by him on December 21, 2019, was erroneous in law and there was no new or fresh material before him except the opinion of the audit party. The objection raised by the audit party was in regard to the law which on the facts was debatable could not have formed the basis for passing a rectification order under section 154 of the 1961 Act. Therefore, the rectification order was set aside.”

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Payment of Taxes Pending Appeal before Tribunal

ISSUE FOR CONSIDERATION

The tax demanded vide a notice under section 156, issued in pursuance of an order of assessment, is required to be paid within 30 days of the demand. A provision is made under section 220 for a stay of the recovery proceeding in deserving cases on an application to the AO in cases where an appeal is filed before CIT(A) against the assessment order. A similar provision is made under section 253(7) in cases where an appeal is filed before the Appellate Tribunal. No specific criteria have been laid down by section 220(6) or section 253(7) for the grant of stay, and the decision to stay the demand or otherwise is left to the discretion of the AO or the Tribunal. The Courts have held from time to time that a demand for tax should be stayed on satisfaction of troika of conditions which are financial stringency, prima facie case or high-pitched assessment and the possibility of success in appeal, and lastly the balance of convenience.

The CBDT, under the Ministry of Finance, has issued guidelines, addressed to the AO, for stay of the recovery proceeding in the circumstances specified in the guidelines issued from time to time. The Board has advised the AO to stay the recovery proceeding in cases of financial difficulties and also in cases of high pitched assessment, and in cases where the issue in appeal is covered in favor of assessee by the order of Courts, where an appeal has been filed by the assessee, and is pending for hearing and/or disposal by the CIT(A), provided, as per the latest guidelines of 2017, the assessee has paid 20 per cent of the taxes due, till the disposal of the first appeal.

The taxes due become payable in full on disposal of the first appeal against the assessee even where a second appeal is preferred before the Appellate Tribunal. The assessee, however, has an option to apply under section 254(7) to the Tribunal for a stay of the demand and recovery proceedings, and the Tribunal is empowered to stay the proceedings at its discretion, on being satisfied of the presence of the troika of the conditions. The Finance Act, 2020 has amended the First Proviso to sub-section (2A) of section 254 under which the Tribunal is empowered to stay the recovery proceedings on application under section 253(7) of the Act. The amendment provides that the Tribunal may pass an order of stay subject to the condition that the assessee deposits not less than 20 per cent of the amount of tax, interest, fee, penalty, or any other sum or, in the alternative, the assessee furnishes security of an equal amount. No such statutory restriction is provided in the Act on the powers of the CIT(A) or AO while entertaining an application for stay of the demand.

The tax demand arising out of the high-pitched assessment poses a serious challenge for the assessee, more so, where there is a financial difficulty or no liquidity of funds. The High Courts and even the Tribunal in such cases, on the touchstone of the troika of conditions, has ordered for complete stay of the proceedings without payment of 20 per cent of the taxes demanded.

Post the amendment of 2020, a difficulty is faced by the assessee and also by the Tribunal in granting a stay of demand where the assessee is unable to pay 20 per cent of the outstanding taxes demanded or to make an arrangement for security of the payment. The issue was first examined in the year 2020, immediately post amendment, by the Mumbai Bench of the Tribunal, which had found merit in the case of the assessee for grant of interim stay without payment of taxes and had referred the matter to the special bench of the Tribunal, keeping in mind the express provisions of the amendment of 2020.

Recently, the Mumbai Tribunal held that no application for stay under section 253(7) could be entertained without a payment of 20 per cent of the taxes demanded in view of the amendment of 2020 in the Act. The decision has raised serious concerns for the assessees and also in respect of the powers of the AO, CIT, CIT(A) and of the Courts, besides the Tribunal, to stay the recovery proceedings, even in the cases of serious hardship or where the issue is otherwise decided by the courts in favour of the assessee in other years, without payment of 20 per cent of the taxes demanded. With the latest decision of the Mumbai Bench of the Tribunal, delivered in the context of the first Proviso to section 254(2A), taking a view against the stay of the demand, the issue requires consideration in light of the independent powers of the AO and the other authorities, and also inherent powers of the Tribunal and those of the Courts.

HINDUSTAN LEVER’S CASE

The power of the Tribunal and its limitation, post amendment of 2020, was directly examined in the case of Hindustan Lever Ltd v/s. DCIT, 197 ITD 802 (Mum). In this case, an application for the stay of recovery proceedings, for A.Y. 2018-19, of the demand aggregating to Rs. 172.48 crore was made. The demand was raised under an assessment order passed under section 143(3) of the Act, against which an appeal was filed before the Tribunal and was pending for hearing. No payment or partial payment was made towards the tax demanded by the assessee.

The applicant company stated that its case on merits was covered by the decisions in its own case for the preceding previous year, on most of the grounds in appeal, and therefore it was not required to make any payment. It also stated that it was not in a position to make any payment. In applying for the blanket stay of the demand, it expressed that it was not required to make a payment and did not intend to make it.

In the context of the amendment in the first proviso to section 245(2A), requiring payment of 20 per cent of the taxes demanded, the applicant drew the attention of the Tribunal to the provisions of section 254(1) which empowered the Tribunal to pass such orders as it thought fit. The applicant also heavily relied on the decision of the Supreme Court in the case of M. K. Mohd.Kunhi,71 ITR 815, where the court held that the Tribunal had inherent powers of granting a stay on the recovery of disputed tax demand in fit and deserving cases, and the said powers were ancillary and incidental to the powers of disposing of an appeal. It further argued that the powers under section 254(1) could not be curtailed or diluted or narrowed down by the proviso to section 254(2A), which had no bearing on the powers of the Tribunal under section 254(1).

It was next highlighted that several co-ordinate benches of the Tribunal had granted a blanket stay of the recovery proceedings, post amendment, in fit and deserving cases. A reference was made to the guidelines of the CBDT which permitted the stay of demand in cases where an appeal was pending before the first appellate authority, and also to the cases where the issues in appeal were decided in favor of the assessee in other years by the courts. The applicant also highlighted that the High Courts in many cases have stayed the recovery proceedings, even in the cases where appeals were pending before the Tribunal.

In contrast, the Revenue brought to the attention of the Tribunal the inherent limitation imposed on the Tribunal by the first proviso to section 254(2A), which required the Tribunal to insist on payment of 20 per cent of the outstanding disputed tax. The attention of the Tribunal was invited to the amendment of 2020 to contend that the Tribunal had no power to grant a blanket stay.

The Tribunal, on due consideration of the rival contentions, observed and held as under;

The Tribunal had the power to grant a stay of demand under the powers of section 254(1) itself, which powers were incidental or ancillary to its appellate jurisdiction.
It noted with the approval the decision of the Supreme Court in Mohd.Kunhi‘s case (Supra), which had held that even in the absence of power to stay available to an AO under section 220(6), in cases of first appeal, the Tribunal had an inherent power to stay the demand once it assumed the appellate jurisdiction, provided the power was not used in a routine manner.
The position stated by the Supreme Court was changed by the amendment of 2020 and post amendment, no stay could be granted by the Tribunal without insisting on payment of 20 per cent of tax outstanding.
There was a difference between reading the power to stay the proceeding, when there was no express power to do so, and the case where there was an express statutory prohibition to grant a stay, unless a payment of 20 per cent of tax was made.
Reading and retaining the power to stay, post amendment of 2020, would render the amendment and its condition for payment otiose.
The Tribunal has no power to construct a provision that would make an express provision redundant.
The powers of the Tribunal should be gathered by harmonious reading of sections 254(1) and 2A) of the Act in a manner that did not destroy one of the provisions.
Granting a stay, post amendment, without payment would be a clear disharmony with the statutory condition of payment.
The law laid down in Mohd. Kunhi’s case stood modified in view of the amendment of 2020.
No courts have held that the Tribunal has the powers to stay the recovery proceedings, post the insertion of the amendment in sections 254(2A) of the Act, to permit the Tribunal to grant a stay without payment of taxes.

Having so held that it does not have the power to stay the demand, without payment of 20 per cent of the taxes, the Tribunal allowed the application for stay on assurance of the applicant that it would provide a security for the payment of outstanding tax demanded of an equal amount and directed the AO to stay the recovery proceeding on being satisfied that a security of an equal amount was furnished by the applicant which was an alternative permitted under the amendment of 2020.

TATA EDUCATION AND DEVELOPMENT TRUST

The issue first arose in the case of Tata Education and Development Trust vs. ACIT, 183 ITD 883 (Mum), for A.Ys.: 2011-12 and 2012-13.

In this case, involving stay applications, the assessee applicant was a public charitable trust registered under the Bombay Public Trust Act, 1950 as also as a charitable institution under section 12A of the Act. The assessee had returned NIL income, after claiming the amounts remitted to educational universities outside India as application of income under section 11(1)(c). This claim was disallowed by the AO on the grounds that the requisite approval of the CBDT for such remittance was not taken. The assessee challenged the orders of the assessment in appeal before the CIT(A) and, pending the disposal of the appeals, the assessee obtained the orders of approval for remittance by the CBDT. Based on the same, while the AO rectified the assessment orders, the same were ignored by the CIT(A) in adjudicating the appeal resulting in the disallowance and demand for taxes being upheld. The assesseee Trust challenged the order of the CIT(A) before the Tribunal and sought a stay on collection / recovery of the amount of tax and interest, etc., aggregating to Rs. 88.84 crore for the A.Y. 2011-12 and aggregating to Rs. 10.91 crore for the A.Y. 2012-13, in respect of the assessment orders under section 143(3) r.w.s. 250 of the Income-Tax Act, 1961, which were contested in appeal before the Tribunal.

The assesee submitted that its case was very strong on merits. It submitted that it was not open to the CIT(A), in any case, to question the wisdom of the CBDT, and that on passing the order of rectification by the AO himself, the appeals had become infructuous, and that there was a very strong prima facie case, and very good chances to succeed in appeals before the Tribunal. It was thus urged that the assessee had a reasonably good case in appeal, that there was no apprehension to the interests of the revenue by waiting till outcome of the appeal, and that therefore, the balance of convenience was in favour of the demands being stayed till the outcome of the appeals.

It was explained that the amendment in the first Proviso to Section 254(2A) vide Finance Act, 2020, was only directory, not mandatory, in nature, and it did not curtail the powers of the Tribunal; it was submitted that any other interpretation would result in unsurmountable practical difficulties. With examples, it was explained to the Tribunal that taking a different view would require the payment of the mandated tax even in cases where the issue has been squarely decided in favor of the assessee in its own case for a different year by the High Court or the Supreme Court or a case where the Tribunal or the High Court had decided the issue in the assessee’s favor and the Department had preferred an appeal before the higher court just to keep the matter alive. It was also explained that the view that the provision was mandatory in nature and would result in a situation which was completely arbitrary, unconstitutional and contrary to the well settled scheme of law.

On the other hand, the Revenue submitted that so far as the merits of the case was concerned, there was a good chance for the Revenue to support the appellate order, in as much as the AO could not have subjected the contentious issue to rectification proceedings, and, in any case, presently the appeals were not being argued on merits, and, therefore, it was not really material whether the assessee had a good case or not. It was pointed out that no case had been made out for the paucity of funds, and that, in any case, in view of the amendment to the first proviso to Section 254 (2A), the assessee was required to pay at least 20 per cent of the disputed demand raised on the assessee. The Memorandum explaining the provisions of the Finance Bill, 2020 specifically stated that the condition was inserted for payment of 20 per cent of tax and was mandatory. It was submitted that the intention of the legislature was very clear and unambiguous, that the assessee had to pay at least 20per cent of demand for a stay of the balance amount of tax demanded.

On due consideration of the contentions of the rival parties, the Tribunal granted an interim stay of the demand to remain in operation till the time the stay applications were finally adjudicated by the Special bench of the Tribunal, to which the applications were referred to for the final adjudication by the division bench of the Tribunal, by observing that there were two very significant aspects of the whole controversy- first, with respect to the legal impact, if any, of the amendment in first proviso to Section 254(2A) on the powers of the Tribunal, under section 254(1) to grant stay; and, second, if this amendment was held to have any impact on the powers of the Tribunal under section 254(1),- (a) whether the amendment was directory in nature, or was mandatory in nature; (b) whether the said amendment affected the cases in which appeals were filed prior to the date on which the amendment came into force; (c) whether, with respect to the manner in which, and nature of which, security was to be offered by the assessee under first proviso to Section 254(2A), what were the broad considerations and in what reasonable manner such a discretion must essentially be exercised, while granting the stay by the Tribunal.

While recommending the stay applications for consideration of the special bench, the Tribunal observed as under; “We are of the considered view that these issues are of vital importance to all the stakeholders all over the country, and in our considered understanding, on such important pan India issues of far reaching consequence, it is desirable to have the benefit of arguments from stakeholders in different part of the country. We are also mindful of the fact, as learned Departmental Representative so thoughtfully suggests, the issues coming up for consideration in these stay applications involve larger questions on which well-considered call is required to be taken by the bench. Considering all these factors, we deem it fit and proper to refer the instant Stay Applications to the Hon’ble President of Income Tax Appellate Tribunal for consideration of constitution of a larger bench and to frame the questions for the consideration by such a larger bench, under section 255(3) of the Income Tax Act, 1961.”

The Tribunal granted an interim stay on collection/ recovery of the aggregate amounts of tax and interest, etc, amounting to Rs. 88.84 crores and Rs. 10.91crores for the A.Ys. 2011-12 and 2012-13 respectively, on the condition of giving an undertaking to not to dispose of the investments of a value equivalent to the amount of tax demanded.

DR. B. L. KAPUR MEMORIAL HOSPITAL’S CASE

The issue of stay recently came up for consideration of the Delhi High Court in the case of Dr. B L Kapur Memorial Hospital vs. CIT, (2022) 11 DEL CK 0160, Civil Writ Petition No. 16287, 16288 Of 2022. In this case, the writ petitions were filed before the High Court, challenging the orders dated 6th September, 2022 and 7th November, 2022, rejecting the applications filed by the petitioner assessee and directing the assessee to make a payment to the extent of 20 per cent of the total tax demand arising under section 201(1) of the Income Tax Act, 1961, for the A.Ys. 2013-14 and 2014-15.

The AO had passed orders dated 30th March, 2021 under Section 201(1) / 201(1A) of the Act holding the assessee to be an ‘assessee-in-default’ for short deduction of tax at source of Rs. 16.47 crores and Rs. 20.09 crores for A.Ys. 2013-14 and 2014-15, respectively. Aggrieved by the orders, the assessee had filed appeals, along with an application seeking a stay on the recovery of demand.

The stay applications filed by the assessee were dismissed in a non-speaking manner and the assessee was directed to pay 20 per cent of the disputed demand. The review petitions filed by the assessee were also rejected without dealing with the contentions raised by the petitioner assessee. It was explained to the authorities and the Court that the assessee hospital had executed contracts for service, and not contract of service with its consultant doctors, and the consultant doctors had paid their tax dues, and as such no tax was payable by the assessee hospital as per the first proviso to Section 201 of the Act, which however was summarily ignored by the authorities.

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

In reply, the Revenue contended that the consultant doctors of the assessee hospital were not allowed to work in any other hospital; consequently, the consultant doctors had executed a contract of service and not a contract for service and that the first proviso to Section 201 was not attracted to the cases of the assessee.

Having heard the parties and having perused the two Office Memoranda in question, the Court held that the requirement of payment of 20 per cent of the disputed tax demand was not a pre-requisite for putting in abeyance the recovery of demand pending first appeal in all cases; the said pre- condition of deposit of 20 per cent of the demand could be relaxed in appropriate cases; even the Office Memorandum dated 29th February, 2016, gave instances like where addition on the same issue had been deleted by the appellate authorities in the previous years or where the decision of the Supreme Court or jurisdictional High Court was in favour of the assessee where a demand could be stayed; the Supreme Court in the case of PCIT vs. M/s LG Electronics India Pvt. Ltd. (Supra) had held that the tax authorities were eligible to grant a stay on the deposit of amounts lesser than 20 per cent of the disputed demand in the facts and circumstances of a case.

Having held so, the court noted that the impugned orders were non-reasoned orders and neither the AO nor the Commissioner of Income Tax had dealt with the contentions and submissions advanced by the assessee nor had they considered the three basic principles i.e. the prima facie case, balance of convenience and irreparable injury, while deciding the stay application.

Consequently, the orders and notices were set aside, and the matters were remanded back to the Commissioner of Income Tax for fresh adjudication of the application for stay, with a direction to grant a personal hearing to the assessee.

BHUPENDRA MURJI SHAH’S CASE

The issue of the stay of demand had arisen before the Bombay High Court in the case of Bhupendra Murji Shah vs. DCIT 423 ITR 300, before the amendment of 2020. In this case, the assessee petitioner had filed an appeal against the assessment orders demanding the sum of Rs. 11,15,99,897 for A.Y. 2015-2016 and a similar amount for A.Y. 2016-17, which were not paid. He had, in the meanwhile, filed appeals before the CIT (A), and had approached the AO, pending the appeals, with an application termed as a request for stay of the demand for taxes.

The applications for stay were dismissed and the petitioner assessee was ordered to pay 20 per cent of the outstanding amount as prescribed in Office Memorandum dated 29th February, 2016, and produce the challan and seek stay of demand again, failing which collection and recovery would continue, and the appeal would be heard on payment of taxes.

The Court observed that the right of appeal vested in the petitioner assessee by virtue of the statute should not be rendered illusory and nugatory by such communication from the Revenue. The Court was concerned with the mistaken understanding of the authorities that on failure of the assesseee to pay the 20 per cent of the tax demanded, the petitioner might not have an opportunity to even argue his appeals on merits, or that the appeals would become infructuous, if the demand was enforced and executed during the pendency. The court observed that the right to seek protection against collection and recovery, pending appeals, by making an application for stay could not be defeated and frustrated, as doing so would be against the mandate of law.

In the circumstances, the Court directed the appellate authority to conclude the hearing of the appeals as expeditiously as possible and, during pendency of the appeals, the petitioner should not be called upon to make payment of any sum, much less to the extent of 20 per cent of the demand or claim outstanding. The Court noted that, in ordinary circumstances, it would have relegated the petitioner to the remedy of making an application for stay before the Commissioner (Appeals), and thereafter left it to the Commissioner (Appeals) to take an appropriate decision thereon. However, since the appeals were being held back, the order for stay was passed by the Court, which order could not be treated as a precedent for all cases of this nature. The Court directed that during the pendency of the appeals, the petitioner should not dispose of or create any third party right in respect of his movable assets and properties, subject however, with the permission to use assets and properties in the ordinary and normal course of business.

OBSERVATIONS

No revenue law could be held to be equitous, fair and judicious without the provision for the right to challenge the order of the authorities appointed under the law before the same authorities or the higher or the superior authorities. This understanding of law equally applies to the tax demands arising out of the orders passed by these authorities. A statute for levy of tax, duty, cess, fee or any other revenue by the government should ideally provide for the right to challenge any order, and the demands arising out of such orders. In cases where the remedies are not expressly provided for in these statutes, they may be read into the statute. This power to challenge, however could be subjected to specific condition incorporated in the statute itself, provided compliance of such condition is possible under the circumstances of each case, Secondly the power to read the right to challenge, and even to insist for relaxation of condition, should be entertained in cases wherein the order in question is prima facie not tenable in law; where it is passed in violation of the tenets of law touching the existence of a judicious system of law. It is on this sound understanding that the courts have regularly and liberally stayed the recovery proceedings, and, in doing so, the courts have, over the period, laid down certain conditions known as troika of conditions, which conditions have so far acted as a lighthouse in the matters of staying the recovery proceedings.

The condition for payment of a certain percentage of the tax demand has been prescribed by the Board in Office Memoranda of 2016 and 2017, without in any manner withdrawing the power of the AO, Additional CIT, CIT, PCIT and CCIT to stay the recovery of taxes in fit and deserving cases on satisfaction of the conditions otherwise prescribed in the past from 1969 onwards.

It is significant to note that this power to grant a stay has not been subjected to any express statutory condition for any of the authorities, other than in respect of the Tribunal. An express condition is provided by the legislature only in respect of the Tribunal’s power to stay the proceedings, by amending section 254(2A) providing for the payment of 20 per cent of the tax due before a stay is granted by it. This has created a highly anomalous situation wherein the authorities lower than the Tribunal have the discretion to grant a blanket stay, while the Tribunal’s power is limited to grant of stay for 80 per cent of tax demand only.

It should be just and fair for the Tribunal to examine the condition of the assessee, and use its inherent power to grant a stay of demand in full, on being satisfied that the assessee otherwise has complied with the conditions for the grant of stay, and its case is fit and deserving. Taking any other view might mean that the Tribunal has necessarily to grant the stay once the stipulated condition is satisfied by payment of 20 per cent of tax demanded, even where the case of the assessee otherwise does not deserve a stay.

An assessee will be advised to move the Court for a grant of a complete stay of demand, in cases where the Tribunal has rejected the stay application only on the grounds that the assessee has failed to pay 20 per cent of the demand. The High Court is not shackled by any provision of the law, express or otherwise, in granting the complete stay of the recovery proceeding for 100 per cent of the tax demanded.

The issue was first examined by the Tribunal in the case of Tata Education & Development Trust, (supra) and the Tribunal by an order dated 17th June, 2020 granted an interim stay of the demand of taxes and referred the issue to the Special Bench on the grounds that the issue was of greater importance with wider application on the national level and it was appropriate to refer the matter to the special bench. The said reference since than was withdrawn by the Tribunal on adjudication of the appeals in favour of the Trust, leading to cancellation of the tax demands. The time has come for the Tribunal to make or approve of another reference to the Special Bench to set the issue at rest.

It is a settled position that any Court, including the Tribunal, while interpreting a statutory provision, cannot interpret it so as to render the provision unworkable and contrary to the settled law. In the context of the Third Proviso of the same section 254 (2A), providing for a limitation on the period of stay granted prohibiting the extension of the stay and /or vacation of the stay, even where the assessee was not in default, the Bombay High Court in the case of Narang Overseas Pvt Ltd vs. ITAT, 295 ITR 22 held that the third proviso to Section 254 (2A) was directory in nature; that the proviso could not be read to mean or that a construction be given for holding that the power to grant interim relief was denuded, even where acts attributable for delay were not of assessee but of revenue or of Tribunal itself. It was held that the power of the Tribunal to grant stay or interim relief, being inherent or incidental, was not overridden by the language of the proviso to section 254 (2A).

The Supreme Court, in the case of DCIT vs. Pepsi Foods Ltd 433 ITR 295, has approved the decision of the Bombay High Court in Narang Overseas (supra), holding as under:

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

The Punjab & Haryana High Court in the case of PML Industries Ltd vs,Vs CCE (2013) SCC OnLine P&H 4440, in the context of a similar condition under the Central Excise Act, held that such a condition was directory and not mandatory, and that the Tribunal, in appropriate circumstances, could extend the period of stay beyond 180 days. Likewise, the amendment to Section 254(2A) by the Finance Act, 2020, in the first Proviso should be read as directory and not mandatory in nature.

Reading the condition for payment of 20 per cent as mandatory for admission of appeal, would cause serious harm to the right of the appeal vested in the assessee. The right of appeal is a creation of a statute, and such right of appeal cannot be circumscribed by the conditions imposed by the Legislature as well. In Hoosein Kasam Dada (India) Ltd. vs. State of Madhya Pradesh AIR 1953 SC 221, the Supreme Court held that a provision which is calculated to deprive the appellant of the unfettered right of appeal cannot be regarded as a mere alteration in procedure. It was held that in truth such provisions whittle down the right itself and cannot be regarded as a mere rule of procedure.

The Tribunal has the power to grant a stay and even to award costs; a direct appeal lies to the High Court against its order and the Tribunal is entitled to try a person for contempt under the Contempt of Courts Act, 1979. It has all the trappings of a Court, and its powers are similar to the power of an appellate Court under the Code of Civil Procedure. As such the powers of the Tribunal are widest possible, and should authorize it to interpret the provisions of law and supply meaning to the amendments including the implication of the amendment to first Proviso to section 254 (2A) of the Act. It has the powers to pass such orders as it thinks fit under section 254(1), which powers should include the power to stay the demand for taxes payable out of the assessment order in appeal before it. This power is an inherent power, independent of the power under section 254(2A) of the Act, and such inherent power under section 254(1) is not scuttled or curtailed or limited by the provisions of section 254(2A) or its Provisos. There is nothing in section 254(2A) to overwrite or even limit the powers of the Tribunal conferred under section 254(1) of the Act. Chitra Devi Soni, 313 ITR 174 (Raj.). The powers of the Tribunal include all the powers which are conferred upon the CIT(A) by section 251 which should include the power to grant stay in fit and deserving cases. Hukumchand, 63 ITR 233 (SC).

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Income — Income deemed to accrue or arise in India — Fees for technical services — Technical services do not include construction, assembly and design — Contract for design, manufacture and supply of passengers rolling stock including training of personnel — Dominant purpose of contract was supply of passenger rolling stock — Training of personnel ancillary — Amount received under contract could not be deemed to accrue or arise in India:

76 CIT vs. Bangalore Metro Rail Corporation Ltd [2022] 449 ITR 431 (Karn)
A. Y.: 2011-12
Date of order: 30th June, 2022
Section: 9(1)(vii) of ITA 1961:

Income — Income deemed to accrue or arise in India — Fees for technical services — Technical services do not include construction, assembly and design — Contract for design, manufacture and supply of passengers rolling stock including training of personnel — Dominant purpose of contract was supply of passenger rolling stock — Training of personnel ancillary — Amount received under contract could not be deemed to accrue or arise in India:

The assessee entered into a contract with a consortium consisting of BEML, H, MC and ME, of which, BEML was the consortium leader, for design manufacture, supply, testing and commissioning of passenger rolling stock, including training of personnel and supply of spares and operation. The total cost of the contract was Rs. 1672.50 crores. The Department conducted a survey under section 133A of the Income-tax Act, 1961 and observed that a sum of Rs. 182 crores had been paid by the assessee to the consortium. The Department was of the view that the assessee ought to have deducted tax at source before making the payment. Accordingly, a show-cause notice dated 27th December, 2011was issued calling upon the assessee to show cause why it should not be treated “as an assessee-in-default” under section 201(1) of the Act for not deducting tax at source and remitting it to the Government. The assessee submitted its reply contending, inter alia, that the contract was one for supply of coaches and other activities such as design, testing, commissioning and training were only incidental to achieving the dominant object and therefore, it would constitute a sale of goods and hence, the provisions of section 194C or section 194J would not apply. It also contended that the assessee was not aware how the consortium partners had utilized the 10 per cent. of the contract amount given as “mobilisation amount”. The AO, not being satisfied with the assessee’s reply, treated it as ”an assessee-in-default” and levied tax and interest thereon under section 201(1A) of the Act.

The Tribunal allowed the assessee’s appeals.

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

“i) A careful perusal of Explanation 2 to section 9(1)(vii) of the Income-tax Act, 1961 shows that fees for technical services do not include construction, assembly and mining operation, etc.

ii) The contract was one for designing, manufacturing, supply, testing, commissioning of passenger rolling stock and training personnel. The total contract was for Rs. 1,672.50 crores whereas, the training component was about Rs. 19 crores. All cheques had been issued in favour of BEML. Firstly, the Revenue had taken a specific stand before the Tribunal that the contract was a composite contract. Secondly, the dominant purpose of the contract was for supply of rolling stocks and the cost towards service component was almost negligible. Thirdly, the word “assembly” must include the manufacture or assembly of rolling stock by BEML, being the consortium leader. Fourthly, the entire payment had been made in favour of BEML. Fifthly, the Revenue had not raised any objection with regard to payment of 90 per cent. of the project costs, so far as deduction u/s. 194J was concerned.

iii) For these reasons the questions raised by the Revenue were not substantial questions for consideration. The tax and interest thereon levied u/s. 201(1A) were not valid.”

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Charitable purpose — Exemption under section 11 — Effect of s13 — Transactions between trustee and related party — Diversion of income of charitable institution must be proven for application of s.13 — No evidence of diversion of funds — Exemption could not be denied to the charitable institution

75 CIT(Exemption) vs. Shri Ramdoot Prasad Sewa Samiti Trust

[2022] 450 ITR 288 (Raj)

A. Y.: 2012-13

Date of order: 8th December, 2022

Sections: 11 and 13 of ITA 1961

Charitable purpose — Exemption under section 11 — Effect of s13 — Transactions between trustee and related party — Diversion of income of charitable institution must be proven for application of s.13 — No evidence of diversion of funds — Exemption could not be denied to the charitable institution

The respondent-assessee is a trust registeredunder section 12AA of the Income-tax Act, 1961. The assessee had claimed exemption under section 11 of the Act for the A. Y. 2012-13. The AO noticed that the assessee had made total purchases of raw materials worth Rs. 12.24 crores (rounded off) out of which purchases of Rs. 9 crores were made from Pawansut Trading Company Pvt Ltd. Upon further scrutiny it was found that the one Kishorepuri Ji Maharaj was the main trustee of the assessee-trust and also the director of the said company and from whom purchases worth 75 per cent. were made. The AO was of the opinion that such substantial purchases made from a related party had to be at arm’s length. The AO thereupon referred to section 13 of the Act and without any further discussion concluded that the assessee-trust has made purchases on unreasonable rates from Pawansut Trading Pvt Ltd, New Delhi who is person specified under section 13(3). The AO held that the management of the trust has used the property of the trust for their personal benefits without justification which attracts the provisions of section 13(1)(c)(ii) r.w.s. 13(2)(g) of the Act as such the assessee is not eligible to claim exemption under sections 11 and 12 of the Act.

The Commissioner (Appeals) called for the remand report and thereafter deleted the disallowance by observing that the rates of purchase by the assessee from the related party were same as with unrelated party. Further, there were no findings in the assessment order on the basis of which additions were made except that purchases have been made from the related party. The appellant has also proved that such purchases were made at the same rate as paid to unrelated party. The Tribunal confirmed the view of the Commissioner (Appeals).

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

“i) Clause (g) would be applicable in a case where any income or property of a trust or institution is diverted during the previous year in favour of any person referred to in sub-section (3). Sub-section (3) in turn relates to persons or institutions which are closely related such as the author of the trust or the founder of the institution, any trustee of the trust or manager of the institution etc. Clause (g) would apply where any income or property of the trust or institution is “diverted” during the previous year in favour of any person referred to in sub-section (3). The crux of this provision is diversion of income. Mere transaction of sale and purchase between two related persons would not be covered under the expression “diversion” of income. Diversion of income would arise when the transaction is not at arm’s length and the sale or purchase price is artificially inflated so as to cause undue advantage to other person and divert the income.

ii) The assessee and P Ltd. were entities covered under sub-section (3) of section 13. However, the Assessing Officer never examined whether the transactions between the assessee and the company were at arm’s length. He merely referred to statutory provisions and without further discussion came to the conclusion that disallowance had to be made. The Commissioner (Appeals) not only criticised this approach of the Assessing Officer but also independently examined whether the transaction was at arm’s length. It was found that the rate paid to the related person was the same as paid to the unrelated party.

iii) The Tribunal confirmed this view and correctly so. On the facts and in the circumstances of the case and in law the Tribunal was correct in allowing exemption u/s. 11 of the Act, to the assessee.”

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Capital or revenue receipt — Interest — Interest earned from fixed deposits of unutilised foreign external commercial borrowing loans during period of construction — Interest received was capital receipt

74 Principal CIT vs. Triumph Realty Pvt Ltd (No. 1)[2022] 450 ITR 271 (Del)

A. Y.: 2012-13

Date of order: 31st March, 2022

Capital or revenue receipt — Interest — Interest earned from fixed deposits of unutilised foreign external commercial borrowing loans during period of construction — Interest received was capital receipt

The assessee availed foreign external commercial borrowings of Rs. 82.37 crores for the purpose of acquisition of a capital asset, i. e., renovation and refurbishment of hotel acquired by the assessee under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. The entire loan was disbursed in a single tranch in the A. Y. 2012-13 and during this year, the assessee could utilise only Rs. 33.70 crores. Therefore, the assessee had temporarily made fixed deposits of the external commercial borrowing funds till utilisation for fixed asset or capital expenditure. The assessee had paid interest of Rs. 13.38 crores on the borrowings and had earned interest of Rs. 4.03 crores on the fixed deposits. The net interest of Rs. 9.35 crores was added to the preoperative expenditure pending capitalization.

The Tribunal allowed the capitalisation of interest on fixed deposit receipts earned during the period of construction.

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

“The Tribunal had not erred in allowing the capitalisation of interest on fixed deposits earned during the period of construction by the assessee. No question of law arose.”

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Business expenditure — Deduction only on actual payment — Electricity duty — Assessee, a licensee following mercantile system of accounting — Merely an agency to collect electricity duty from consumers and to pay it to State Government — Provisions of section 43B not applicable

73 Principal CIT vs. Dakshin Haryana Bijli Vitran Nigam Ltd

[2022] 449 ITR 605 (P&H)

A. Y.: 2008-09

Date of order: 3rd August, 2022

Section: 43B of ITA 1961

Business expenditure — Deduction only on actual payment — Electricity duty — Assessee, a licensee following mercantile system of accounting — Merely an agency to collect electricity duty from consumers and to pay it to State Government — Provisions of section 43B not applicable

The assessee was a licensee under the Electricity Act, 2003 and distributed power in the State of Haryana. For the A. Y. 2008-09, the AO made a disallowance with respect to the electricity duty under section 43B of the 1961 Act.

The Commissioner (Appeals) and the Tribunal deleted the disallowance.

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

“i) Under section 43B(a) of the Income-tax Act, 1961 a deduction otherwise allowable under the Act in respect of any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of the previous year in which such sum is actually paid by him. Section 43B contains a non obstante clause. It was inserted by Finance Act, 1983 with an intent to curb the malpractice at the hands of certain taxpayers, who claimed statutory liability as a deduction without discharging it and pleaded the mercantile system of accounting as a defence.

ii) The liability to pay electricity duty lies on the consumer and it is to be paid to the State Government. Section 4 of the Punjab Electricity (Duty) Act, 1958 casts a duty on the licensee to collect the electricity duty from the consumers and to pay it to the State Government. The licensee is only a collecting agency.

iii) The contention of the Department that section 43B of the 1961 Act would be attracted merely for the reason that the assessee followed the mercantile system of accounting was rejected. The Department was required to show that the electricity duty was payable by the assessee. There was no such provision contained in the 1958 Act which showed that the liability to pay the electricity duty was upon the assessee. Rather section 4 of the 1958 Act read with the provisions contained in the Punjab Electricity (Duty) Rules, 1958 made it clear that the assessee was merely an agency assigned with a statutory function to collect electricity duty from the consumers and to pay it to the State Government. Therefore, the provisions of section 43B of the 1961 Act would not be applicable to the assessee.”

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Assessment — International transactions — Proceedings under section 144C mandatory — Draft assessment order proposing variations to returned income must be submitted to DRP — Order of remand — Order passed on remand must also be submitted to DRP — Failure to do so is an incurable defect

72 Principal CIT vs. Appollo Tyres Ltd

[2022] 449 ITR 398 (Ker)

A. Y.: 2009-10

Date of order: 23rd September, 2021

Section: 144C of ITA 1961

Assessment — International transactions — Proceedings under section 144C mandatory — Draft assessment order proposing variations to returned income must be submitted to DRP — Order of remand — Order passed on remand must also be submitted to DRP — Failure to do so is an incurable defect

For the A. Y. 2009-10, for determination of the arm’s length price of the assessee’s international transactions, a reference was made to the Transfer Pricing Officer under section 92CA of the Income-tax Act, 1961. The AO served on the assessee the draft assessment order under section 144C(1) of the Act. The assessee filed objections to the draft assessment order under section 144C of the Act upon which the Dispute Resolution Panel(DRP) issued directions to the AO. The AO passed a final assessment order against which the assessee appealed before the Tribunal. The Tribunal allowed the appeal in part and remitted the matter to the AO for fresh assessment on the issues referred to the AO. The AO thereupon passed a revised final assessment order under section 144C of the Act. The assessee filed an appeal before the Commissioner (Appeals) against the revised final assessment order who allowed the appeal in part. Against this order the Department filed an appeal to the Tribunal while the assessee filed cross objections questioning the legality and propriety of the revised final assessment order of the AO. The Tribunal dismissed the Department’s appeal and allowed the assessee’s cross objections.

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

“i) In cases to which section 92CA of the Income-tax Act, 1961 is attracted, the assessment could be completed only by following the procedure u/s. 144C of the Act. At the first instance the Assessing Officer u/s. 144C(1) forwards a draft of the proposed order of assessment known as draft order to the assessee, in the event the Assessing Officer proposes a variation to the income return which is prejudicial to the assessee. The assessee u/s. 144C(2) has the option within 30 days to accept the variation or file objections to the proposed draft variation of the Assessing Officer. The issues at divergence being proposed variation and objections of the assessee are made over to the Dispute Resolution Panel (DRP) u/s. 144C(15). The DRP follows the procedure stipulated by section 144C(5) to (12) and finally issues directions to the Assessing Officer. The directions of the DRP are binding on the Assessing Officer and the final assessment order is issued by the Assessing Officer in terms of the DRP directives. The Assessing Officer does not have jurisdiction to make a revised final assessment order without recourse to the DRP. The omission in redoing the procedure u/s. 144C is not a curable defect. Once there is a clear order of setting aside of an assessment order with the requirement of the Assessing Officer/Transfer Pricing Officer to undertake a fresh exercise of determining the arm’s length price, the failure to pass a draft assessment order, would violate section 144C(1) of the Act result. This is not a curable defect in terms of section 292B of the Act.

ii) The requirement of redoing the same procedure upon remand to the Assessing Officer u/s. 144C is mandatory and omission in following the procedure is an incurable defect. Hence the order was not valid. The filing of appeal before the Commissioner (Appeals) could not be treated as a waiver of an objection available to the assessee in this behalf u/s. 144C. Section 253(1)(d) provides for appeal only when order has been made u/s. 143(3) read with section 144C of the Act.

iii) For the above reasons and the discussion the questions are answered in favour of the assessee and against the Revenue.”

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Article 4 of India – Singapore tax treaty – Tie Breaker in case of individual breaks in favor of Singapore since the assessee stayed in a rental house with his family in Singapore. The Indian house was rented and the assessee paid tax on Singapore income.

15 Sameer Malhotra vs. ACIT
[2023] 146 taxmann.com 158 (Delhi – Trib.)
[ITA No: 4040/Del/2019]
A.Y.: 2015-16
Date of order: 28th December, 2022

Article 4 of India – Singapore tax treaty – Tie Breaker in case of individual breaks in favor of Singapore since the assessee stayed in a rental house with his family in Singapore. The Indian house was rented and the assessee paid tax on Singapore income.

FACTS

The assessee received salary income from the Indian Company (ICO) for the period 1st April, 2014 to 25th November, 2014 and from Singapore Company (Sing Co) from 15th December, 2015 to 31st March, 2015. The assessee did not offer salary received from Sing Co to tax in India on the basis that under India-Singapore DTAA he was a resident of Singapore. The AO held that the assessee was a resident of India under Act as he was physically present in India for more than 182 days. Further, the assessee was an Indian resident even under the tie-breaker test of the DTAA. CIT(A) upheld the order of the AO. Being aggrieved, assessee appealed to Tribunal.

HELD

The assessee shifted with his family to Singapore, stayed there for the whole of the remaining period in the relevant assessment year and earned the income while serving in Singapore itself.

The assessee had an apartment on rent in Singapore, obtained a Singapore driving license, had overseas Bank Account, showed Singapore as his country of residence in various official forms and even paid taxes in Singapore while working from there.

With respect to tie-breaker test the Tribunal held that:

Permanent Home – The permanence of home can be determined on qualitative and quantitative basis. Although the assessee owned a home in India, it was not available to him as it was rented out by him.

Centre of Vital Interests Test: The CIT(A) held that the centre of vital interests of the asssessee was in India and not in Singapore, as the majority of the savings, investments and personal bank accounts are in India. However, the assessee worked in Singapore during the period under consideration and stayed there along with his family for the purpose of earning income. Thus, his personal and economic relations remained in Singapore only.

Habitual Abode: Habitual abode does not mean the place of permanent residence, but in fact it means the place where one normally resides. Since the assessee had an apartment on rent in Singapore and resided therein only, he had a habitual abode in Singapore.

Based on above, it was held that assessee was a tax resident of Singapore. Accordingly, as per Article 15(1) of the India-Singapore DTAA, which states that remuneration derived by a resident of a contracting state in respect of an employment shall be taxable only in that State unless the employment is exercised in the other contracting state, the assessee’s income earned in Singapore was held to be non-taxable in India.

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Article 5 of India-Switzerland DTAA – Liaison Office (LO) does not constitute PE as long as it is adhering to the approval conditions imposed by RBI

14 S.R Technics Switzerland Ltd vs. ACIT (International Taxation)

[ITA No: 6616/Mum/2018]

A.Y.: 2015-16

Date of order: 25th November, 2022

Article 5 of India-Switzerland DTAA – Liaison Office (LO) does not constitute PE as long as it is adhering to the approval conditions imposed by RBI

FACTS

Assessee, a Swiss Company was engaged in the maintenance, repair and overhaul for aircrafts, engines and components. It had a subsidiary company in Switzerland (Swiss Sub Co). Swiss Sub Co had set up a LO in India. The AO alleged that the said LO constituted the PE of the assessee in India. The assessee appealed to the DRP. The DRP upheld the order of the AO. Being aggrieved, the assessee appealed to the Tribunal.

HELD

Tribunal took note of following factual aspects:

Employees of the LO do not negotiate, finalize or discuss contractual aspects including pricing with the assessee’s customers.
Employees of LO are acting as a communication link between the assessee and customers.
The LO did not carry any activity, beyond that permitted by the RBI
LO did not have any infrastructure, facilities or stock of goods to carry out maintenance activities or render services.
Staff was not of seniority who can negotiate with the customers, sign and finalize the contracts
Activities carried by LO are preparatory and auxiliary in nature. RBI accepted the functioning of the LO indicating that the LO could not carry on any business or trading activity.

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When the AO had himself observed that the undisclosed income surrendered by the assessee, during survey, was nothing but the accumulation of the profit which it had been systematically enjoying, then, drawing of a view to the contrary and holding the same as not being sourced out of latter’s business but having been sourced from its income from undisclosed sources within the meaning of Section 69 of the Act is beyond comprehension.

56 Kulkarni & Sahu Buildcon Pvt Ltd vs. DCIT

TS-969-ITAT-2022 (Rajkot)

A.Y.: 2012-13

Date of Order: 12th December, 2022

Section: 69

When the AO had himself observed that the undisclosed income surrendered by the assessee, during survey, was nothing but the accumulation of the profit which it had been systematically enjoying, then, drawing of a view to the contrary and holding the same as not being sourced out of latter’s business but having been sourced from its income from undisclosed sources within the meaning of Section 69 of the Act is beyond comprehension.

FACTS

The assessee company, engaged in the business of civil construction, e-filed its return of income declaring an income of Rs. 1,32,56,660. In the course of assessment proceedings the assessee was asked to explain the excess WIP of Rs. 30,71,500 as also excess stock of building material which included shuttering material of Rs. 24,60,000 unearthed by the survey team in the course of survey proceedings conducted on 2nd November 2011.

The assessee had surrendered, in the course of survey proceedings, the sum of Rs. 55,31,500 which sum was credited to its Trading Account. The (AO contended that the same was not separately offered in computation of income. The AO was of the view that as the excess stock or unexplained investment or cash surrendered during the course of survey operations was nothing but the accumulation of the profits of the assessee, which it had been systematically enjoying, and hence on being detected was surrendered in the course of survey operation as undisclosed income, thus, the same was liable to be assessed as the assessee’s undisclosed income against which no deduction for any expenditure would be allowable.

The AO excluded the amount of the undisclosed income surrendered by the assessee from its declared net profit and brought the same to tax separately as its income under the head “business income” under section 69 of the Act. The claim of depreciation on shuttering material was also denied by the AO.

Aggrieved, assessee preferred an appeal to CIT(A) which was dismissed.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the AO while framing the assessment had categorically observed that the excess stock or unexplained investment or cash surrendered during the course of survey operation was nothing but the accumulation of the profit which the assessee had been systematically enjoying and was detected during the survey action and surrendered as its undisclosed income. The Tribunal held that the aforesaid observation of the AO in a way relates the amount surrendered by the assessee during the course of survey operation to the accumulated profit which the assessee had been systematically enjoying and thus, by no means could solely be related to the year under consideration.

The Tribunal was of the view that the aforesaid observation of the AO finds support from the judgement of the Hon’ble Supreme Court in the case of Anantharam Veerasingaiah & Co. vs. Commissioner of Income Tax [(1980) 123 ITR 457 (SC)] wherein it was observed by the Supreme Court that secret profits or undisclosed income of an assessee earned in an earlier assessment year may constitute a fund, even though concealed, from which the assessee may draw subsequently for meeting expenditure or introducing amounts in his account books.

The Tribunal observed that it is unable to comprehend that when the AO had himself observed that the excess stock or undisclosed investment or cash surrendered during the course of survey operation was nothing but the accumulation of profits which the assessee had been systematically enjoying and the difference was detected during the course of survey operation, therefore, on what basis a contrary view was taken by him to justify the treating of the same as the investment made by the assessee from its unexplained sources.

The Tribunal held that that the undisclosed income of Rs. 55,31,500 surrendered by the assessee during the course of survey operation had rightly been offered to tax by the assessee under the head “business income”, and in light of the clearly established source of the corresponding investment the same could not have been held to be the deemed income of the assessee under section 69 of the Act. Our aforesaid conviction is all the more fortified by the order of the Tribunal in the case of M/s Shree Sita Udyog vs. DCIT & Ors, Bhilai in ITA No. 249 to 255/RPR/2017, dated 22nd July, 2022 wherein, involving identical facts, it was observed by the Tribunal that the amount surrendered by the assessee qua the investment in the excess stock was liable to be taxed under the head “business income” and not under the head “income from other sources.”

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Authorities directed to correct the demand raised due to deposit of TDS by the assessee vide a wrong challan.

55 WorldQuant Research (India) Pvt Ltd vs.
CIT, National Faceless Appeal Centre
TS-963-ITAT-2022 (Mumbai)
A.Y.: 2021-22
Date of Order: 13th December, 2022

Authorities directed to correct the demand raised due to deposit of TDS by the assessee vide a wrong challan.

FACTS

Aggrieved by the demand, the assessee raised on account of short payment of TDS under section 195 of the Act due to error in depositing TDS under wrong challan.

During the year under consideration, the assessee paid a dividend to a non-resident shareholder and deducted tax under section 195 of the Act. However, while depositing the amount of TDS, the assessee deposited the taxes vide challan no. 280 which is applicable for payment of advance tax, self-assessment tax, tax on regular assessment, tax on distributed income to unit holders, etc. The assessee ought to have correctly deposited the taxes vide challan no. 281 which is applicable for taxes deducted at source. The relevant TDS return was filed by the assessee on 31st March, 2021.

Upon noticing the error of having deposited the amount of TDS vide an incorrect challan the assessee filed a letter with DCIT-15(3)(1) as well as with DCIT-TDS (OSD) requesting to consider the deposit of taxes on dividend under challan no. 281 though erroneously deposited vide challan no. 280. However, vide Intimation dated 5th April, 2021 issued under section 200A/206CB for Q2 a demand of Rs. 2,95,78,630 was raised on account of short payment of taxes.

Aggrieved, the assessee preferred an appeal to CIT(A) who after taking note of the letters filed by the assessee held that the assessee has simply requested both the AO (including TDS) to treat the tax paid through challan No. 280 as tax paid as TDS, however, has not made any formal request for correction of challan from 280 to 281 with the AO (TDS). He further held that the AO (TDS) only after receipt of a formal request for change/correction in challan No. from 280 to 281, can act within the time limit prescribed as per the notification. The CIT(A) dismissed the appeal filed by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal where during the course of the hearing, on behalf of the assessee, the Tribunal’s attention was drawn to a letter dated 12th August, 2022 filed before DCIT–TDS [OSD TDS Circle 2(3)] praying for correction of challan. In the said letter reference has also been made to an e-mail dated 12th April, 2021, to DCIT TDS praying for rectification of challan.

HELD

During the course of the hearing, upon the direction of the Tribunal to the Revenue to update the Tribunal about the status of the applications filed by the assessee, the DR filed an e-mail informing the Bench that the DCIT-TDS(OSD) has escalated the issue to CPC-TDS.

The Tribunal held that the assessee has pursued this matter with the concerned authorities and not only requested to consider the deposit of taxes on dividends by the company but has also prayed for correction of the challan from challan No. 280 to challan No. 281. It observed that from the copy of the e-mail dated 6th December, 2022, filed by the learned DR, the Tribunal found that the office of DCIT (OSD) TDS has escalated the issue to CPC – TDS for either necessitating the required changes in the challan from the backend or enabling the system to allow the TDS–AO to do the same from his login at TRACES AO – Portal.

Therefore, the Tribunal directed the concerned authority to make every possible endeavour of carrying out the necessary correction in the challan within a period of 2 months from the date of receipt of this order and grant the relief to the assessee as per law.

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Theatre owner is not liable to deduct tax at source on convenience fee charged by BookMyShow to the end customer and retained by it.

54 Srinivas Rudrappa. vs. ITO

TS-1026-ITAT-2022 (Bang.-Trib.)

A.Y.: 2013-14 & 2014-15

Date of Order: 2nd December, 2022

Section: 194H, 201, 201(1A)

Theatre owner is not liable to deduct tax at source on convenience fee charged by BookMyShow to the end customer and retained by it.

FACTS

The assessee, a proprietor of a theatre, was engaged in the business of exhibition of films. A survey under section 133A was conducted in the business premises of M/s Bigtree engaged in providing services through their online platform BookMyShow, facilitating booking of cinema tickets by providing an online ticketing platform for customers and sale of cinema tickets, food and beverages coupons, and events through its website www.bookmyshow.com.

In the case of cinema owners, when the end customers booked cinema tickets through the BookMyShow portal and made the payment to Bigtree, the payment was raised towards ticket cost along with convenience fees that were charged over and above the ticket charges. The ticket cost was remitted by Bigtree to the cinema owners after deducting TDS while it retained the convenience fee which constituted revenue in the hands of Bigtree.

The AO was of the opinion that the convenience fee retained by Bigtree was in lieu of commission/service charges payable by the cinema owner (assessee) and amounts to constructive payment made by the cinema owner (assessee) to Bigtree. The AO was of the opinion that the tax should be deducted at source under section 194H of the Act. He issued a show cause to the assessee, asking why the assessee should not be treated as `assessee-in-default’ as per provisions of sections 201 and 201(1A) of the Act.

In response, the assessee submitted that it is not availing services of Bigtree for sale of online cinema tickets, but has permitted Bigtree to list assessee’s cinema tickets on the Bigtree platform. The assessee also submitted that, the relationship between the assessee and Bigtree is of principal-to-principal, and, therefore, the conditions laid down in section 194H do not stand satisfied.

The AO held that the assessee was liable to deduct tax at source on the amount of convenience fee retained by Bigtree. He rejected the contention that the assessee is giving permission to Bigtree to list assessee’ cinemas tickets on the Bigtree’s platform and is not availing services from Bigtree for booking the tickets.

Aggrieved, the assessee preferred an appeal to CIT(A) who dismissed the appeal filed by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal interalia on merits.

HELD

The Tribunal went through the agreement and observed that Bigtree was facilitating the end customer for booking cinema tickets for which a transaction/convenience fee was charged from him. Further, as Bigtree was making a payment to the assessee after deducting the transaction/convenience fee and there was no occasion for the assessee to deduct tax at source and also that Bigtree was acting on behalf of the end customer and not the assessee. The Tribunal noted that in the present case, no expenditure is claimed by the assessee in respect of any payments alleged to be in the nature of commission / service fee.

The Tribunal also noted that there was no non-compete clause wherein a complete/partial control of Bigtree by the assessee could be established. Bigtree on its online platform sells tickets of other / many theatre owners apart from the assessee. For example if the theatre has a total 200 seats, if in the event no tickets are sold by the Bigtree, there is no penalty that is levied on Bigtree. It is totally the discretion of the customers to use Bigtree for booking the tickets. The agreement of the assessee with Bigtree is a non-exclusive agreement for selling cinema tickets of the assessee through its platform. The only income earned by the Bigtree is the convenience fee that it collects from the customers/movie viewers. Even there are no discount given by the assessee to the Bigtree on account of the tickets purchased by the customer from their platform.

The Tribunal held that the transaction/service fee collected by Bigtree from the end customers was actually the margin charged from the end customers for provision of such services. Also, the fact that the end customer paid service tax on such additional/convenience fee and no service tax was charged on the ticket charges. This, according to the Tribunal, established that the assessee did not cast any obligation on Bigtree to sell tickets on its platform.

The Tribunal was of the opinion that one aspect which needs to be considered is the situation where tickets are liable to be refunded. The Tribunal raised a question that if the theatre owner was not able to start/play the movie who would be liable to refund the ticket price – Bigtree or the theatre owner? This issue needs to be ascertained and risk analysed.

The Tribunal directed the AO to carry out the necessary verification and consider the claim of the assessee in accordance with law.

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Conundrum on Section 45(4) – Pre- and Post-SC Ruling in the case of Mansukh Dyeing

BACKGROUND

The general concept of a partnership, firmly established by law, is that a firm is not an ‘entity’ or ‘person’ in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. In other words, a firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership.

Prior to the insertion of section 45(4), it was a judicially well-settled position that cash/capital assets received by the partner on retirement or dissolution of the partnership firm neither resulted in the transfer of any asset from the perspective of the firm nor resulted in transfer of partnership interest from the perspective of partners¹. The judicial decisions were rendered on the premise that (a) a partnership firm is not a distinct legal entity (b) a partnership firm has no separate rights of its own in the partnership assets (c) the firm’s property or firm’s assets are property or assets in which all partners have a joint or common interest (d) distribution of asset or property by the firm to its partners is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm’s rights in the partnership assets (e) what a partner receives on retirement/dissolution is nothing but the realisation of pre-existing right and that does not result in any transfer.

In addition to the above, statutory exemption was provided under section 47(ii) on capital gains in the hands of a partnership firm on the distribution of capital assets on the dissolution of a firm.

1. See Supreme Court (‘SC’) rulings in case of CIT v Dewas Cine Corporation [1968] 68 ITR 240, Malabar Fisheries Co v CIT [1979] 120 ITR 49 from the perspective of firm and Sunil Siddharthbhai v CIT [1985] 156 ITR 509, Addl. CIT v Mohanbhai Pamabhai [1987] 165 ITR 166, Tribuvandas G Patel v CIT [1999] 236 ITR 511, CIT v. R. Lingamullu Raghukumar [2001] 247 ITR 801 (SC) from the perspective of partners

Insertion of Section 45(4) to the Income-tax Act, 1961 (“Act”):

Section 45(4) was introduced vide Finance Act, 1987 with effect from 1 April 1988 and is as under:

“The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.”

Upon insertion of section 45(4), vide Finance Act, 1987, s. 47(ii) was omitted. There was, however, no amendment made to the definition of ‘transfer’ in s. 2(47).

Explanatory Memorandum (‘EM’) to Finance Bill, 1987 explained the intent of legislature behind the insertion of section 45(4) which provided that there should be a distribution of capital asset by a firm to trigger section 45(4)². CBDT Circular No. 495 dated 22 September 1987 explaining the provisions of the Finance Act, 1987 provided the following rationale for insertion of section 45(4):

“24.3 Conversion of partnership assets into individual assets on dissolution or otherwise also forms part of the same scheme of tax avoidance. Accordingly, the Finance Act, 1987 has inserted new sub-section (4) in section 45 of the Income-tax Act, 1961. The effect is that profits and gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise shall be chargeable as the firm’s income in the previous year in which the transfer took place and for the purposes of computation of capital gains the fair market value of the asset on the date of transfer shall be deemed to be the full value of the consideration received or accrued as a result of the transfer.”

2. Refer para 36 of EM to Finance Bill, 1987

Controversies arisen under section 45(4):

Insertion of section 45(4) gave rise to its fair share of controversies and resulted in litigation. By and large, prior to the SC ruling in the case of Mansukh Dyeing and Printing Mills [2022] 145 taxmann.com 151, controversies arose on interpretation of section 45(4) which were the subject matter of judicial scrutiny can be summed up as under:

Provisions of section 45(4) are triggered where the firm distributes capital asset on dissolution of a firm. Such will be the position even where no amendment is carried out to the definition of ‘transfer’ contained in section 2(47)³.
Provisions of section 45(4) are not triggered where the firm settles the retiring partner in cash including by taking into account the balance credited on revaluation of a capital asset⁴.
Provisions of section 45(4) are triggered where a firm distributes capital to a retiring partner during the subsistence of the firm. Such will be the position even where no amendment is carried out to the definition of ‘transfer’ contained in section 2(47)⁵.
However, there were two stray decisions on the subject. One is that of Madhya Pradesh HC ruling in the case of CIT v Moped and Machines [2006] 281 ITR 52 wherein HC held that to trigger section 45(4), it is essential that there must be a transfer of capital asset and in absence of an amendment to the definition of the term ‘transfer’ contained in section 2(47), there cannot be a charge under section 45(4). Second is that of Madras HC ruling in the case of National Company v ACIT [2019] 263 Taxman 511 wherein HC held that provisions of section 45(4) are not triggered where a subsisting firm distributes capital asset to a retiring partner. Strangely, Revenue has not preferred an appeal before SC against both these rulings.

3. CIT v Vijayalakshmi Metal Industries [2002] 256 ITR 540 (Madras), M/s Suvardhan v CIT [2006] 287 ITR 404 (Karnataka HC), CIT v Southern Tubes [2008] 326 ITR 216 (Kerala HC), CIT v Kumbazha Tourist Home [2010] 328 ITR 600 (Kerala HC), ITO v Pradeep Agencies [Tax Appeal No. 309 and 310 of 2004, order dated 10 December 2014] (Bombay HC)
4. CIT v R.K. Industries [Income Tax Appeal No. 773 of 2004) (Bombay HC, order dated 3 October 2007), CIT v Little & Co [Income Tax Appeal No. 4920 of 2010, order dated 1 August 2011] (Bombay HC), CIT v Dynamic Enterprises [2014] 359 ITR 83 (Karnataka Full Bench), PCIT v Electroplast Engineers [2019] 263 Taxman 120 (Bombay HC)
5. CIT v Rangavi Realtors / CIT v A N Naik & Associates [2004] 265 ITR 346 (Bombay HC)

Discussion on Bombay HC ruling in case of Rangavi Realtors (supra) and A N Naik Associates (supra):

In these two cases before Bombay HC, pursuant to a family settlement, the business carried on by the firm was distributed to the partner on retirement. The firm was reconstituted by the retirement of existing partners and the admission of new partners. One of the contentions put forth before HC by the taxpayer was whether the charge would fail under section 45(4) in absence of an amendment to section 2(47). As regards this contention, Bombay HC leaned in favour of the interpretation that section 45(4) created an effective charge without it being necessary to amend the definition of transfer in section 2(47). Relevant extracts from the Bombay HC ruling are hereunder:

“23. Considering this clause as earlier contained in section 47, it meant that the distribution of capital assets on the dissolution of a firm, etc., were not regarded as “transfer”. The Finance Act, 1987, with effect from April 1, 1988, omitted this clause, the effect of which is that distribution of capital assets on the dissolution of a firm would henceforth be regarded as “transfer”. Therefore, instead of amending section 2(47), the amendment was carried out by the Finance Act, 1987, by omitting section 47(ii), the result of which is that distribution of capital assets on the dissolution of a firm would be regarded as “transfer”. Therefore, the contention that it would not amount to a transfer has to be rejected. It is now clear that when the asset is transferred to a partner, that falls within the expression “otherwise” and the rights of the other partners in that asset of the partnership are extinguished. That was also the position earlier but considering that on retirement the partner only got his share, it was held that there was no extinguishment of right. Considering the amendment, there is clearly a transfer and if, there be a transfer, it would be subject to capital gains tax.”

One more contention dealt with by the Bombay High Court was with regard to the controversy of whether the expression “otherwise” qualifies the transfer of a capital asset or whether it qualifies dissolution. Dealing with this controversy, Bombay HC observed as under:

“21. The expression “otherwise” in our opinion, has not to be read ejusdem generis with the expression, “dissolution of a firm or body or association of persons”. The expression “otherwise” has to be read with the words “transfer of capital assets” by way of distribution of capital assets. If so read, it becomes clear that even when a firm is in existence and there is a transfer of capital assets it comes within the expression “otherwise” as the object of the Amending Act was to remove the loophole which existed whereby capital gain tax was not chargeable. In our opinion, therefore, when the asset of the partnership is transferred to a retiring partner the partnership which is assessable to tax ceases to have a right or its right in the property stands extinguished in favour of the partner to whom it is transferred. If so read, it will further the object and the purpose and intent of the amendment of section 45. Once, that be the case, we will have to hold that the transfer of assets of the partnership to the retiring partners would amount to the transfer of the capital assets in the nature of capital gains and business profits which is chargeable to tax under section 45(4) of the Income-tax Act. We will, therefore, have to answer question No. 3 by holding that the word “otherwise” takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner.”

It may be noted that against the Bombay HC ruling, taxpayers had filed SLP⁶ before SC and the same was granted. On grant of SLP, appeals were converted into Civil Appeals.

6. Civil Appeal No. 6255 of 2004 and Civil Appeal No. 6256 of 2004

Surprising SC ruling in the case of Mansukh Dyeing (supra):

In the case of Mansukh Dyeing (supra), SC was concerned with appeals for A.Y. 1993-94 and 1994-95. In this case, the revaluation of capital assets was carried out in A.Y. 1993-94 and corresponding credit was given to the Partners’ Capital Account (A/c). The total amount of revaluation was Rs. 17.34 crore. Amount to the extent of Rs. 20-25 lacs were withdrawn by the partners either during A.Y. 1993-94 or A.Y. 1994-95. Further, there was a conversion of the partnership firm into a company under Part IX of the Companies Act, 1956 in A.Y. 1994-95. However, not much information is available about conversion.

While concluding the assessment for A.Y. 1993-94, the assessing officer taxed the amount of Rs. 17.34 Cr. as being assessable to tax under section 45(4) by considering that the process of revaluation together with the credit of revaluation amount to the accounts of the partners attracted section 45(4) of the Act. Mumbai Tribunal [ITA No. 5998 & 5999/Mum/2002, order dated 26 October 2006] and Bombay HC [[2013] 219 Taxman 91 (Mag.)] deleted the additions on the ground that in the absence of distribution of capital asset to a partner, section 45(4) was not triggered. SC, however, upheld the addition made under section 45(4) for AY 1993-94 and thereby restored the order of the assessing officer. Relevant extracts from SC ruling at para 7.5 are as under:

“7.5 In the present case, the assets of the partnership firm were revalued to increase the value by an amount of Rs. 17.34 crores on 01.01.1993 (relevant to A.Y. 1993-1994) and the revalued amount was credited to the accounts of the partners in their profit-sharing ratio and the credit of the assets’ revaluation amount to the capital accounts of the partners can be said to be in effect distribution of the assets valued at Rs. 17.34 crores to the partners and that during the years, some new partners came to be inducted by introduction of small amounts of capital ranging between Rs. 2.5 to 4.5 lakhs and the said newly inducted partners had huge credits to their capital accounts immediately after joining the partnership, which amount was available to the partners for withdrawal and in fact some of the partners withdrew the amount credited in their capital accounts. Therefore, the assets so revalued and the credit into the capital accounts of the respective partners can be said to be “transfer” and which fall in the category of “OTHERWISE” and therefore, the provision of Section 45(4) inserted by Finance Act, 1987 w.e.f. 01.04.1988 shall be applicable”

In terms of the SC ruling revaluation of capital asset coupled with credit of such amount to Partners’ Capital A/c would ‘in effect’ result in the distribution of asset and such can be considered as ‘transfer’ under the category ‘otherwise’. Consequently, provisions of section 45(4) are triggered.

Considering the rationale of the SC ruling, provisions of erstwhile section 45(4) are triggered merely on the revaluation of a capital asset even where the actual distribution of that asset has not taken place.

Questions to ponder on post SC ruling in case of Mansukh Dyeing (supra):

Explanatory Memorandum (EM) to the Finance Bill, 1987 and CBDT Circular No. 495 require the distribution of a capital asset to trigger provisions of section 45(4). Accordingly, can it be suggested that the SC ruling in the case of Mansukh Dyeing (supra) (which neither refers to EM to Finance Bill, 1987 nor CBDT Circular) is against the Legislative intent and thereby not laying down the correct law? It may be noted that Circulars are binding on Court. Once SC has interpreted the law, such interpretation becomes binding and if such interpretation is against the EM/Circular, such EM/Circular may not be regarded as placing correct interpretation of the law – refer the SC rulings in the cases of CCE v. Ratan Melting & Wire Industries [2008] 17 STT 103, and ACIT v Ahmedabad Urban Development Authority [2022] 143 taxmann.com 278.
At para 7.6 of the ruling in case of Mansukh Dyeing (supra), SC has completely agreed with the Bombay HC ruling in the case of A N Naik Associates (supra). To reiterate, the Bombay HC ruling was delivered in the factual background that the firm had transferred capital asset (business undertaking) in favour of a retiring partner. If one refers to various observations from Bombay HC ruling in case of A N Naik Associates (supra), it has been held that transfer of capital asset by a firm to its partner results in the extinguishment of a capital asset and hence there is a transfer which falls within the term ‘otherwise’. Absent distribution of capital asset by firm (as it was in case of Mansukh Dyeing (supra)), there cannot be transfer. In view of the same, there is a conflict between para 7.5 and 7.6 of SC ruling which is irreconcilable.
Whether revaluation of stock-in-trade may also trigger section 45(4) in the light of the SC ruling in the case of Mansukh Dyeing (supra)? Taxability of stock in trade is not governed by the capital gains chapter and section 45(4) cannot be triggered on revaluation of stock in trade. Further, the head of income ‘Profits and gains from business or profession’ does not contain a provision similar to section 45(4) and hence no amount can be brought to tax under the head ‘Profits and gains from business or profession’. Additionally, one may rely on the SC ruling in the case of Chainrup Sampatram v CIT [1953] 24 ITR 581 to urge that valuation of stock cannot be ‘source of profit’ and hence revaluation of stock in trade cannot trigger section 45(4).
Whether the revaluation of a capital asset which is credited to Revaluation Reserve A/c (and not to Partner’s Capital A/c) triggers section 45(4) in the light of SC ruling in case of Mansukh Dyeing (supra)? At para 7.5 of SC ruling, it is held that revaluation of capital asset coupled with credit to Partners’ A/c is regarded as ‘in effect’ distribution of a capital asset. Absent credit to Partners’ A/c, there is, arguably, no distribution of capital asset and hence section 45(4) is not triggered.
In view of SC ruling Mansukh Dyeing (supra), where a firm carries out ‘downward revaluation’ (i.e., devaluation) of a capital asset and the same is debited to Partners’ Capital A/c, can capital loss be granted to the firm? Arguably, when section 45(4) refers to profits or gains, it includes losses – see CIT v Harprasad & Co (P) Ltd. [1975] 99 ITR 118 (SC), CIT v Sati Oil Udyog Ltd. [2015] 372 ITR 746 (SC). Accordingly, downward revaluation coupled with a debit to Partner’s Capital A/c results in an effective distribution of a capital asset for section 45(4) per ratio of SC ruling in the case of Mansukh Dyeing (supra). The capital loss so computed is incurred by the firm.
Consider a case where the firm carries out revaluation of a capital asset and credits the same to Partners’ Capital A/c which resulted in the trigger of section 45(4). In view of the SC ruling in Mansukh Dyeing (supra), as and when a firm transfers a capital asset to a third party, whether capital gains arise in the hands of a firm? If yes, whether amount considered in computing gains under section 45(4) be allowed as the cost of acquisition? Though not free from doubt, the firm may contend that once the distribution of capital asset has taken place, no capital gains arise on the transfer of capital asset to a third party. In case capital gain is again taxed in the hands of the firm, arguably, the amount considered in computing under section 45(4) shall be available as a cost to the firm. Any other view will result in double taxation, and such cannot be an intent of the Legislature – see Escorts Ltd. v Union of India [1993] 199 ITR 43 (SC), CIT v Hico Products (P) Ltd [2001] 247 ITR 797 (SC).
Consider a case where Mr. A, Mr. B and Mr. C are partners of a partnership firm. Mr. C decides to retire from the firm. No revaluation of partnership asset is carried out in the books of the partnership firm. However, the partnership deed provides that the outgoing partner’s dues shall be settled at fair value. An independent valuer carries out the valuation of partnership assets and thereby determines the share of Mr. C in the partnership. The amount determined to be payable to Mr. C is more than the amount standing in his Capital A/c. Accordingly, the excess amount (difference between the fair value of Mr. C’s share in partnership and the amount standing in the capital A/c of Mr. C) is debited to continuing partners’ capital A/c (capital A/cs of Mr. A, and Mr. B) and credited to Mr. C’s capital A/c. Further, Mr. C retires by withdrawing cash from the partnership firm. In such a case, even post SC ruling in case of Mansukh Dyeing (supra), in absence of revaluation of capital asset in the books of accounts coupled with no credit to the retiring Partner’s Capital A/c, it is arguable that provisions of section 45(4) are not triggered.

Does SC ruling in the case of Mansukh Dyeing (supra) suffer from ‘per incuriam’?

As mentioned above, assesses have filed SLP before the SC against the Bombay HC ruling in the case of Rangavi Realtors (supra) and A N Naik Associates (supra), and the same have been granted.

In the case of M/s Suvardhan v. CIT [2006] 287 ITR 404, the Karnataka HC upheld that the charge under section 45(4) would be attracted to a case of distribution of a capital asset by the partnership firm on its dissolution. HC rejected assessee’s argument that a charge would fail in absence of an amendment to the definition of ‘transfer’ contained in section 2(47). While concluding, Karnataka HC relied on the Bombay HC decision in the case of A.N. Naik Associates (supra) on the scope of section 45(4). While rendering the decision, Karnataka HC made the following observations:

“A reading of the said provision would show that the profits or gains arising from transfer of capital assets by way of distribution of capital assets on dissolution of a firm shall be chargeable to tax as income of the firm in the light of transfer that has taken place. Transfer has been defined under section 2(47) of the Act. What is contended before us that if section 2(47) read with section 45(4), there is no transfer at all, and if there is any transfer, it is not by the assessee but by the retiring partner. Therefore, according to Sri Parthasarathi, orders are bad in law. To consider this aspect of the matter, we have to notice section 47 of the Income-tax Act. Section 47 is a special provision which would say as to which are the transactions not regarded as transfer. A reading of the said section 47 of the Act would show that several transactions were considered as no-transfer for the purpose of section 45 of the Act.

On the other hand, as rightly pointed out by Sri Seshachala, learned counsel for the Department, a similar question was considered by the Bombay High Court in the case of CIT v. A.N. Naik Associates [2004] 265 ITR 3462. In the said judgment, Bombay High Court has noticed the effect of Act of 1987. After noticing, the Bombay High Court has ruled that section 45 of the Income-tax Act is a charging section. Bombay High Court further ruled that:

“…From a reading of sub-section (4) to attract capital gains tax what would be required would be as under: (1) transfer of capital asset by way of distribution of capital assets: (a) on account of dissolution of a firm; (b) or other association of persons; (c) or body of individuals; (d) or otherwise; the gains shall be chargeable to tax as the income of the firm, association, or body of persons. The expression ‘otherwise’ has to be read with the words ‘transfer of capital assets’. If so read, it becomes clear that even when a firm is in existence and there is a transfer of capital assets it comes within the expression ‘otherwise’. The word ‘otherwise’ takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets to a retiring partner….” (p. 347)

Bombay High Court has noticed section 2(47) and thereafter ruled reading as under:

“…The Finance Act, 1987, with effect from April 1, 1988, omitted this clause, instead of amending section 2(47), the effect of which is that distribution of capital assets on the dissolution of a firm would be regarded as transfer….” (p. 347)

9. We are in respectful agreement with the judgment of the Bombay High Court. When the Parliament in its wisdom has chosen to remove a provision, which provided ‘no transfer’, there is no need for any further amendment to section 2(47) of the Act as argued before us. In our view, despite no amendment to section 2(47), in the light of removal of Clause (ii) to section 47, transaction certainly would call for tax at the hands of the authorities.”

Further, in the case of Davangere Maganur Bassappa v ITO [2010] 325 ITR 139, Karnataka HC was concerned with a case where the taxpayer firm was dissolved, and assets of the firm were distributed to partners. The taxpayer firm contended that no capital gains were triggered in the hands of the firm. Karnataka HC, relying on its earlier ruling in the case of M/s Suvardhan (supra), held that the taxpayer firm was liable to pay capital gains tax under section 45(4).

Against the Karnataka HC in the case of M/s Suvardhan (supra), Special Leave to Petition (SLP) was preferred by the taxpayer before SC7. SC granted Special Leave Petition, vide order dated 5 January 2007, on the ground that SLP has already been granted in the case of A N Naik (supra) and the Karnataka HC relied upon the Bombay HC ruling in the case of A N Naik Associates (supra) while passing the order. Similarly, against the Karnataka HC in the case of Davangere Maganur Bassappa (supra), the taxpayer filed SLP before SC8. SC granted SLP, vide order dated 29 March 2010, on the ground that SLP was granted in the case of M/s Suvardhan (supra). On granting the SLP, both the appeals in case of M/s Suvardhan and Davangere Maganur Bassappa were converted into Civil Appeal No. 98/2007 and 2961/2010 respectively before SC.

7. SLP (Civil) No. 21078 of 2006
8. SLP (Civil) No. 8446 of 2010

Post grant of SLP, four cases viz. Rangavi Realtors (supra), A N Naik Associates (supra), M/s Suvardhan (supra) and Davangere Maganur Bassappa (supra) were placed before Three Judge Bench. Taxpayers in the cases of Rangavi Realtors (supra) and A N Naik Associates (supra) withdrew their appeals and consequently, Civil Appeals were dismissed. Hence, no ratio was laid down by Court in their cases. In the cases of M/s Suvardhan (supra) and Davangere Maganur Bassappa (supra), SC dismissed the Civil Appeals without assigning any specific reasons. It must be noted that M/s Suvardhan (supra) and Davangere Maganur Bassappa (supra) do not deal with the mere dismissal of SLP. In these cases SLPs were granted, but resultant Civil Appeals were dismissed. Considering the same, one may rely on the following observations from SC ruling in the case of Kunhayammad v State of Kerala [2000] 245 ITR 360 (as approved by Khoday Distilleries Ltd. v. Sri Mahadeshwara Sahakara Sakkare Karkhane Ltd. [2019] 4 SCC 376) to contend that once the order is passed by SC, doctrine of merger is applicable, and order of HC becomes the order of SC.

“Once a special leave petition has been granted, the doors for the exercise of appellate jurisdiction of this Court have been let open. The order impugned before the Supreme Court becomes an order appealed against. Any order passed thereafter would be an appellate order and would attract the applicability of doctrine of merger. It would not make a difference whether the order is one of reversal or of modification or of dismissal affirming the order appealed against. It would also not make any difference if the order is a speaking or non- speaking one. Whenever this Court has felt inclined to apply its mind to the merits of the order put in issue before it though it may be inclined to affirm the same, it is customary with this Court to grant leave to appeal and thereafter dismiss the appeal itself (and not merely the petition for special leave) though at times the orders granting leave to appeal and dismissing the appeal are contained in the same order and at times the orders are quite brief. Nevertheless, the order shows the exercise of appellate jurisdiction and therein the merits of the order impugned having been subjected to judicial scrutiny of this Court

We may look at the issue from another angle. The Supreme Court cannot and does not reverse or modify the decree or order appealed against while deciding a petition for special leave to appeal. What is impugned before the Supreme Court can be reversed or modified only after granting leave to appeal and then assuming appellate jurisdiction over it. If the order impugned before the Supreme Court cannot be reversed or modified at the SLP stage obviously that order cannot also be affirmed at the SLP stage.”

Relying on the above, one may contend that order passed by Karnataka HC in the cases of M/s Suvardhan (supra) and Davangere Maganur Bassappa (supra) achieved finality and thereby order passed by Karnataka HC stood merged with order of SC. Judicial discipline requires that the decision of a Larger Bench must be followed by Bench with a lower quorum – refer to Union of India v Raghubir Singh (Dead) [1989] 2 SCC 754 (Constitution Bench) and Trimurthi Fragrances (P) Ltd. v Govt. of NCT of Delhi [TS-729-SC-2022] (Constitution Bench). Accordingly, a question that may arise is whether observations made by Karnataka HC as regards the requirement of transfer of a capital asset by way of distribution of capital assets to trigger provisions of section 45(4) are approved by SC? If yes, since the earlier ruling was rendered by Three Judges’ Bench, will the same not become binding on a Two Judge Bench in the case of Mansukh Dyeing (supra)? Further, will it mean that the ruling rendered in the case of Mansukh Dyeing (supra) without referring to a Larger Bench ruling in the case of M/s Suvardhan (supra) and hence suffers from ‘per incuriam’?

Since we are purely treading on a legal issue, one shall remain guided by Senior Counsel.

Is there a possibility that SC may examine/re-examine the ratio laid down in the case of Mansukh Dyeing (supra) in near future?

In the case of Hemlata S Shetty v ACIT [ITA No.1514/Mum/2010 and ITA No. 6513/Mum/2011, order dated 1 December 2015), Mumbai Tribunal was concerned with a case of money received by a partner on his retirement from the firm. In this case, the taxpayer had contributed Rs. 52.5 lacs as capital on being admitted as a partner on 16 September 2005. Subsequently, the partnership firm acquired immovable property in 2006 which was held as stock in trade and not as capital asset. From the facts, it appears that, immediately, post-acquisition of immovable property, revaluation was carried out and revaluation was credited to Partner’s Capital A/c. On 27 March 2006, the taxpayer retired from the partnership firm and received a sum of Rs. 30.88 Crores. The source of money for the discharge of the amount payable to the partner on his retirement was not known. Tax authorities sought to bring the difference between the amount received on retirement and the amount contributed by the tax taxpayer as capital gains. Tribunal, relying on various judicial precedents, held that the amount received on the retirement of a partner does not result in transfer and hence no capital gains are chargeable in the hands of the taxpayer. Against the Tribunal ruling, Revenue preferred an appeal before Bombay HC [reported in PCIT v Hemlata S Shetty [2019] 262 Taxman 324]. Bombay HC held that the amount received by the partner on retirement is not taxable in her hands and further held that capital gains liability (if any) can arise in the hands of the partnership firm.

Against the Bombay HC ruling, Revenue preferred SLP before SC – [SLP (C) No. 21474/2019]. This matter came up for hearing before SC on 10 November 2022. While hearing the matter, Counsels appearing for parties informed SC that a similar matter was heard by a co-ordinate bench [SLP (Civil) No. 3099/2014 – which is a matter of Mansukh Dyeing (supra)]. Accordingly, the case of Hemlata S Shetty before SC was parked in view of the pendency of the final Judgement of Mansukh Dyeing (supra). As the SC has, now, delivered the ruling in case of Mansukh Dyeing (supra), it is likely that SC may refer to the ruling while disposing of SLP in the case of Hemlata S. Shetty (supra) which is scheduled to be heard on 15 February 2023. Interested parties may keep a close watch on this proceeding before SC.

Whether ratio laid down by SC in case of Mansukh Dyeing (supra) has bearing on section 9B and / or substituted section 45(4)?

Vide Finance Act, 2021, with effect from AY 2021-22, section 9B was inserted and section 45(4) was substituted. Section 9B(1) provides that where a specified person (partner) receives a capital asset or stock in trade in connection with the dissolution or reconstitution of a specified entity (firm) then the firm shall be deemed to have transferred capital asset or stock in trade to partner. Substituted provisions of section 45(4) are triggered where a specified person (partner) receives during the previous year any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity.

An important question that may arise is that under the new regime where revaluation of capital asset and/or stock in trade is carried out and same is credited to Partner’s Capital / Current A/c, provisions of section 9B or section 45(4) are triggered⁹? In terms of SC ruling in the case of Mansukh Dyeing (supra) may urge that on revaluation of capital asset coupled with credit to Partner’s capital A/c is regarded as transfer. Relying on the SC ruling, tax authorities may urge that once there is a transfer of a capital asset, the asset cannot remain in a vacuum. The recipient of an asset has to exist, and the partner can only be the recipient. Accordingly, on revaluation, there is effective receipt of capital asset/stock in trade by a partner which triggers provisions of section 9B. Since section 45(4) is also triggered on a receipt basis, for similar reasons, there is a trigger of substituted section 45(4) also.

9. For the purpose of present analysis, we have proceeded on the assumption that revaluation and credit to the account of partners’ is along with reconstitution or dissolution of firm. It may be noted that mere revaluation of asset which is not coupled with reconstitution / dissolution, there is neither trigger of section 45(4) nor section 9B

For the following reasons, in view of author, revaluation of capital asset/stock in trade and credit to partner’s capital account does not trigger section 9B and section 45(4).

The dictionary meaning of the term ‘receipt’ means ‘to take into possession’, ‘conferred’, ‘have delivered’, ‘given’, ‘paid’, ‘take in’, ‘hold’ etc. On revaluation of capital asset and/or stock in trade, revalued asset remains within the coffers of a firm, and it is not the possession of the partner or conferred/given / paid to the partner. Absent receipt by the partner, there is no trigger of section 9B.
Section 9B and substituted section 45(4) are worded differently from erstwhile section 45(4). Under the old provision, in terms of sequence, distribution had to follow, and such distribution was deemed to be a transfer. In the amended provision, in terms of sequence, there should be a receipt of an asset by a partner and such receipt will be considered to be a transfer. Hence, before alleging that there is a transfer, there is an onus to establish that there is a receipt of an asset by the partners. The onus is to first establish that the act of revaluation results automatically in a receipt. The expression “distribution” does not appear in section 9B / 45(4). SC ruling in the case of Mansukh Dyeing (supra) that revaluation could amount to distribution cannot be applied in a case where there is no reference to the expression “distribution”.
Section 45(5)(b) uses the term ‘received’ for the purpose of taxing the enhanced compensation received on compulsory acquisition of an asset. In the context of section 45(5), reference may be made to the Karnataka HC ruling in the case of CCIT v Smt. Shantavva [2004] 267 ITR 67. In this case, the taxpayer received the amount of enhanced compensation in pursuance of an interim order which was subject to a final order. HC held that the amount received pursuant to the interim order cannot be considered as amount received for the purpose of section 45(5)(b). HC held that, ‘received’ shall mean ‘receipts of the amount pursuant to a vested right or enforceable decree’. In case of revaluation of an asset, the partner does not get any vested / binding right to demand the asset from the firm. During the subsistence of a firm, what all partners can demand is their share of profit and nothing beyond that. Additionally, as held by SC in the case of Sunil Siddharthbhai v CIT [1985] 156 ITR 509, the value of the partnership interest depends upon the future transactions of the partnership and the value of the partnership interest may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. Accordingly, artificial credit on revaluation cannot be considered as a receipt in the hands of partners.
Where a partner receives any capital asset or stock in trade from the firm in connection with dissolution or reconstitution, section 9B(1) creates a fiction that there is deemed transfer of a capital asset or stock in trade by the firm to partner. Perhaps the fiction is created to overcome the past SC rulings¹⁰ wherein it was held that the distribution of an asset by the firm to its partners does not result in any transfer. The opening para of section 9B(2) provides that any profits and gains arising from deemed transfer shall be an income of the firm. Section 9B(2) creates a charge of income in the hands of the firm. In order to create a charge in the hands of the firm, there shall be profits and gains in the hands of the firm – see opening para of section 9B(2). There is no fiction created under section 9B to provide that deemed transfer results in deemed profits or deemed gains in the hands of firm. It is a well-settled principle that deeming fiction shall be construed strictly and cannot be extended beyond the purpose for which it is created – see State Bank of India v D. Hanumantha Rao [1998] 6 SCC 183 (SC), CIT v V S Dempo Company Ltd. [2016] 387 ITR 354 (SC). Accordingly, to trigger section 9B(2) there shall be commercial profits or gains. On mere revaluation, no profits or gains are derived by the firm – see CIT v Hind Construction Ltd. [1972] 83 ITR 211, Sanjeev Woollen Mills v CIT [2005] 279 ITR 434 (SC). The firm stands where it was. Further, it is a well-settled principle that one cannot earn income out of oneself – see Sir Kikabhai Premchand v CIT [1953] 24 ITR 506 (SC). Accordingly, it may also be urged that the firm cannot earn profits or gains out of itself to trigger provisions of section 9B(2).
On close scrutiny, a charge under section 45(4) is triggered where any profits and gains arising from the receipt of a capital asset or money in the hands of a partner. Section 45(4) seems to deem two aspects (a) profits and gains arising from receipt of a capital asset or money in the hands of a partner as income of the firm and (b) year of taxation to be the year of receipt of a capital asset or stock in trade. Like, section 9B, section 45(4) does not deem that receipt of a capital asset or money results in profits or gains in the hands of a partner. Accordingly, to trigger section 45(4) there shall be commercial profits or gains. Mere revaluation of the asset of the firm and credit to the account of the partner does not result in any commercial profits or gains in the hands of a partner. Partners’ interest in the firm remains the same with or without revaluation. The economic wealth of the partner would depend upon the inherent value of his share in the firm irrespective of whether revaluation is carried out or not. Mere revaluation cannot change the economic wealth or standing of a partner. Even where the partner was to assign his stake in the firm to a third party, he would have derived the same value, which he would derive irrespective of whether the revaluation of an asset was carried out by the firm or not. Absent commercial profit or gains, provisions of section 45(4) cannot be triggered.
Mere revaluation of an asset, even when there is no reconstitution will automatically result in the receipt of assets by partners without attracting any charge in absence of dissolution or reconstitution. Having already received the asset at some stage, there would be no further receipt possible in as much as the same asset cannot be received twice.

10. Dewas Cine Corporation (supra), Malabar Fisheries Co (supra)

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Reopening of Assessments under section 147 with effect from 1st April 2021

1. INTRODUCTION

The law applicable to the reopening of assessments is enshrined in sections 147 to 151. That law was changed by the Finance Act 2021 with effect from 1st April 2021.

The objective for the change is explained in the Explanatory Memorandum explaining the provisions of the Finance Bill 2021:

There is a need to completely reform the system of assessment or reassessment or re-computation of income escaping assessment and the assessment of search related cases. The Bill proposes a completely new procedure of assessment of such cases. It is expected that the new system would result in less litigation and would provide ease of doing business to taxpayers.

This Article discusses –

(i) Change in the law of reopening of assessments by the Finance Act 2021 with effect from 1st April 2021.

(ii) The consequences of the aforesaid change in the law.

(iii) Judgement of Hon. Supreme Court in UOI vs Ashish Agarwal (2022) 444 ITR 1 (SC)

(iv) How should the assessee reply to notices issued by the Assessing Officer under section 148A(b)?

(v) When should the assessee challenge, in a Writ Petition before the High Court, the order passed by the Assessing Officer under section 148A(d) as well as the notice issued by the Assessing Officer under section 148?

2. CHANGE IN LAW WITH EFFECT FROM 1ST APRIL 2021

With effect from 1st April 2021 the Finance Act 2021 changed the law applicable to reopening of assessments under section 147 read with sections 148 to 151. The New Scheme of reopening is based on the procedure laid down by the Hon. Supreme Court in GKN Driveshaft (India) Ltd vs ITO¹ . In that case the Hon. Supreme Court held that on issuance of the notice under the erstwhile section 148 the assessee should file a return of income in response to such notice and seek reasons recorded by the Assessing Officer (AO) for issuing such notice. The AO is bound to furnish reasons to the assessee within a reasonable time. On receipt of the reasons, the assessee is entitled to file objections to the issuance of notice under section, 148 and the AO is bound to dispose of the objections by passing a speaking order. Only after following this procedure, the AO could proceed with the reassessment. This procedure, prescribed by the Hon. Supreme Court under the Old Law (applicable up to 31st March 2021), has now been incorporated in the New Law (applicable from 1st April 2021).

1. (2003) 259 ITR 19 (SC)

3. COMPARISON OF THE LAW

APPLICABLE UP TO 31ST MARCH 2021 (OLD LAW) AND THE LAW APPLICABLE FROM 1ST APRIL 2021 (NEW LAW)

The salient features of the Old Law and the New Law are highlighted in the table below –

Section	Old Law up to31^stMarch, 2021	New Law from1^st April, 2021 inserted by Finance Act, 2021
147: Income escaping assessment	• Under the Old Law, before initiating proceedings to reopen the assessment, the Assessing Officer (AO) had to record ‘reasons to believe’ that income had escaped assessment.• On the basis of those reasons, the AO was required to form a belief that there is escapement of income and therefore action is required under section 147.	• Under the New Law, section 147 does not use the phrase reason to believe that any income has escaped assessment but rather states if any income has escaped assessment.• So, now the reason to believe that any income has escaped assessment is not necessary.• Rather there is a requirement of having prescribed information (as defined in Explanation 1 to
		section 148²) suggesting that income has escaped assessment.
148 (2): Issue of notice where income has escaped assessment	• Under the old section 148 the AO was only required to record reasons for reopening before issuing notice under section 148.• Courts interpreted the phrase ‘reason to believe’ to lay down several legal principles to prevent abuse of power by the AO. [Refer CIT vs Kelvinator of India Limited (2010) 320 ITR 561 (SC)].	• New section 148 provides that no notice can be issued unless there is information (as defined in Explanation 1 to section 148³) which suggests that income has escaped assessment.
Explanation 1 to Section 148	Did not exist under the Old Law	• Under the New Law the AO can issue a notice under section 148 only when the AO has information which suggests that the income has escaped assessment.• The statutory definition of ‘information which suggests that the income has escaped assessment’ is provided in Explanation 1 to section 148⁴.Note: In Explanation 1 to section 148 any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time – this means information received by the AO from the Insight Portal of the Department.
Explanation 2 to Section 148	Did not exist under the Old Law	• Explanation 2 to section 148 lays down that in cases of search, survey and requisition, initiated or made on or after 1st April 2021, the AO shall be deemed to have information which suggests that income chargeable to tax has escaped assessment.• So, in cases of search, survey and requisition, NO information as defined in Explanation 1 to section 148 is required by the AO to issue notice under section 148.
148A: Conducting inquiry and providing opportunity before issue of notice under section 148	Did not exist under the Old Law	• Under the New Law before issuing notice under section 148 the AO has to follow the procedure prescribed under section 148A and pass an order under section 148A (d).Thus, under section 148A, the AO has to –(1) Conduct enquiry with respect to information which suggests that income chargeable to tax has escaped assessment. Such enquiry is to be conducted with the prior approval of the Specified Authority as prescribed in section 151. [Section 148A (a)]
		(2) Issue a notice upon the assessee to show cause why notice under section 148 should not be issued on basis of information which suggests that income chargeable to tax has escaped assessment and enquiry conducted under section 148A (a). The AO must provide time of minimum 7 days
		and maximum 30 days to the assessee to respond to the show-cause notice.This provision provides opportunity of being heard to the assessee before issue of notice under section 148. [Section 148A (b)](3) Consider the reply of the assessee to the show-cause notice. [Section 148A (c)](4) Decide on the basis of material available on record and reply of the assessee by passing an order within one month of the assessee’s reply whether or not it is a fit case for issuing notice under section 148 with the prior approval of the Specified Authority as prescribed in section 151.The AO has to consider the reply of the assessee, in response to the show-cause notice under section 148A (b), before passing an order under section 148A (d). [Section 148A (d)]
149 (1): Time limit for issuing notice under section 148	*Under the Old Law –* • General cases: 4 years • Where income escaping assessment more than 1 lakh: 6 years • Where there was undisclosed Foreign Asset (including Financial Interest): 16 years.	*Under the New Law –* • General cases: 3 years • Where likely escapement of income in the form of asset/expense/entry is more than Rs. 50 lakhs: 10 years [the term “asset” is defined in the Explanation to section 149 (1)⁵] • No separate category for undisclosed Foreign Asset
151: Sanction for issue of notice	• If four years have elapsed from the end of the relevant assessment year,	• If three years or less than three years have elapsed from the end of the relevant
	then the AO had to take approval/sanction of PCCIT or CCIT or PCIT or CIT for issuing notice under section 148.• If less than four years have elapsed from the end of the relevant assessment year, then the AO himself had to be a JCIT. Otherwise, the AO had to take approval/sanction of JCIT for issuing notice under section 148.	assessment year, then the AO has to take approval/sanction of PCIT or PDIT or CIT or DIT for the purposes of conducting enquiries, issuing show-cause notice and passing order under section 148A, and for issuing notice under section 148.• If, however, more than three years have elapsed from the end of the relevant assessment year, then the AO has to take approval/sanction of PCCIT or PDGIT or CCIT or DGIT for the aforesaid purposes.

2. For statutory definition of the phrase ‘information which suggests that the income has escaped assessment’ please refer to Point 7.2 of Para 7
3. Ibid
4. Ibid
5. For discussion on the condition term ‘likely escapement of income in the form of asset/expense/entry is more than 50 lakhs’ please refer to Point 7.3 of Para 7

4. TIME LIMIT FOR COMPLETING THE REASSESSMENT UNDER THE NEW LAW

Section 153 (2): No order of assessment, reassessment or recomputation shall be made under section 147 after the expiry of nine months from the end of the financial year in which the notice under section 148 was served:

Provided that where the notice under section 148 is served on or after the 1st day of April, 2019, the provisions of this sub-section shall have an effect, as if for the words “nine months”, the words “twelve months” had been substituted.

5. JUDGMENT OF HON. SUPREME COURT IN UOI VS ASHISH AGARWAL (2022) 444 ITR 1 (SC)

Following the CBDT clarification by way of Explanations to the Notifications dated 31st March, 2021 and 27th April, 2021 issued under The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA), the AOs across the Country issued several reassessment notices under section 148 as per the Old Law even after 1st April 2021 (not complying with the procedural safeguards introduced in New Law by the Finance Act 2021).
This raised an interesting question: Whether, in view of TOLA, the Old Law or the New Law should apply to 148 notices issued from 1st April 2021 to 30th June 2021?
On Writ Petitions filed by the assessee, the High Courts of Allahabad⁶, Delhi⁷, Rajasthan⁸, Calcutta⁹, Madras¹⁰, and Bombay¹¹, over the course of several decisions, quashed the 148 notices issued by the AOs from 1st April 2021 to 30th June 2021 under the Old Law. The High Courts held that once the Finance Act 2021 came into force on 1st April 2021, the Old Law ceased to exist and the same could not be revived through a Notification of the CBDT under TOLA.
The Department filed appeals before the Hon. Supreme Court against the common judgment of the Allahabad High Court in Ashok Kumar Agarwal vs Union of India¹² (which directed the quashing of 148 notices issued from 1st April 2021 to 30th June 2021).
In UOI vs Ashish Agarwal (supra) the Hon. Supreme Court favourably allowed the Department’s appeals.
The Hon. Supreme Court held –
We are in complete agreement with the view taken by the various High Courts in holding that the New Law should apply on or after 1st April 2021 for reopening of even the past assessment years.
However, at the same time, the judgments of several High Courts would result in no reassessment proceedings at all, even if the same is permissible under the Finance Act 2021 and as per amended sections 147 to 151 of the IT Act. The Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated.
Thus, the Hon. Supreme Court allowed an opportunity to the Department to continue with the reassessment proceedings initiated under the Old Law by following the procedure prescribed under the New Law.
The CBDT issued Instruction No. 01/2022, Dated 11th May 2022 interpreting the Judgement of Hon. Supreme Court in UOI vs Ashish Agarwal (supra) and issuing instructions to the AOs for completion of the reopened assessments.

6. Ashok Kumar Agarwal vs UOI [2021] 439 ITR 1 (Allahabad HC)
7. Man Mohan Kohli vs ACIT [2022] 441 ITR 207 (Delhi HC)
8. Bpip Infra Pvt. Ltd. vs Income Tax Officer & Others [2021] 133 taxmann.com 48 (Rajasthan HC); Sudesh Taneja vs ITO [2022] 135 taxmann.com 5 (Rajasthan HC)
9. Manoj Jain vs UOI [2022] 134 taxmann.com 173 (Calcutta HC)
10. Vellore Institute of Technology vs CBDT 2022] 135 taxmann.com 285 (Madras HC)
11. Tata Communications Transformation Services vs ACIT [2022] 137 taxmann.com 2 (Bombay HC)
12. 2021] 439 ITR 1 (Allahabad HC)

The AOs passed order under section 148A (d) after ostensibly considering replies of the assessee to notice under section 148A (b), in accordance with the Judgement of Hon. Supreme Court in UOI vs Ashish Agarwal (supra). However, in several cases such replies were not properly considered by the AOs.

Due to defects in the order passed by the AOs under section 148A (d) the assessees have filed Writ Petitions before various High Courts challenging the order passed by the AOs under section 148A (d) as well as the notice issued by the AOs under section 148.

These Writ Petitions are yet to be disposed of by the High Courts.

This has given rise to the second round of litigation as in view of the assessee the Department has failed to give effect to judgment of Hon. Supreme Court in UOI vs Ashish Agarwal (supra) in the right spirit.

6. THE JUDGMENT OF THE HON. SUPREME COURT IN UOI VS ASHISH AGARWAL (SUPRA) AND THE CBDT INSTRUCTION NO. 01/2022, DATED 11TH MAY 2022 ARE NOW NOT RELEVANT

The judgment of the Hon. Supreme Court in UOI vs Ashish Agarwal (supra) and the CBDT Instruction No. 01/2022, Dated 11th May 2022 were applicable to notices under section 148 issued by the AOs during the period 1st April 2021 to 30th June 2021. But for notices issued under section 148A (b), and under section 148, from 1st July 2021 onwards the judgment of the Hon. Supreme Court in UOI vs Ashish Agarwal (supra) and the CBDT Instruction No. 01/2022, dated 11th May 2022 are no longer relevant. For notices issued 1st July 2021 onwards we need to, without relying on UOI vs Ashish Agarwal (supra) and the CBDT Instruction No. 01/2022, dated 11th May 2022, check (action points related to new notices are discussed below) whether the notices meet the requirements of the New Law.

The action points related to new notices issued by the AOs under section 148, under the New Law, are discussed below.

7. WHAT SHOULD YOU DO IF YOU NOW RECEIVE NOTICE UNDER SECTION 148A (B) UNDER THE NEW LAW?

Reassessment notices issued under section 148 on or after 1st July 2022 have to be as per the New Law. So, before issuing notice under section 148 under the New Law notice under section 148A (b) must first be issued by the AO.

Upon receipt of notice under section 148A (b), you must check the following points.

Point 7.1: Whether the Notice is pertaining to AY 2016-17 and subsequent years?

Although, under the New Law, the Department can reopen assessments up to ten years from the end of the relevant assessment year, by virtue of the first Proviso to the new section 149 –

No notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if a notice under section 148 could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of this section as it stood immediately before the commencement of the Finance Act 2021.

By virtue of this Proviso, reopening of assessment for any assessment year prior to AY 2016-17 would be time-barred and bad in law. That is because under the Old Law assessment could be reopened up to six years where the income escaping assessment was one lakh rupees or more (and where there was no undisclosed Foreign Asset). For AY 2015-16 and earlier years more than six years have already elapsed on 31st March 2022. So, under the New Law, the notices under section 148 read with section 148A (b) have to be now in relation to AY 2016-17 and later years.

Point 7.2: Whether the information provided by the AO along with the Notice under section 148A (b) suggest that income has escaped assessment?

Explanation 1 to Section 148 defines ‘information which suggests that income has escaped assessment’. We should check whether the information provided by the AO along with the notice under section 148A (b) meets the said definition.

Explanation 1 to section 148

For the purposes of this section and section 148A, the information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment means –

(i) any information in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time; or

[Note: Information in accordance with the ‘risk management strategy formulated by the Board’ means information available on the Insight Portal of the Department and received by the AO from the Insight Portal.]

(ii) any audit objection to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act; or

(iii) any information received under an agreement referred to in section 90 or section 90A of the Act; or

(iv) any information made available to the Assessing Officer under the scheme notified under section 135A;
or

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

Point 7.3: Whether the concerned AY is within 3 years, or beyond 3 years (but within 10 years) from the end of the relevant assessment year sought to be reopened?

As per section 149 (1), no notice under section 148 shall be issued beyond three years from the end of the relevant assessment year unless the AO has in his or her possession books of account or other documents or evidence which reveal that the income chargeable to tax is represented in the form of:

(a) an asset,

(b) expenditure in respect of a transaction or in relation to an event or occasion; or

(c) an entry or entries in the books of account,
and the amount of income which has escaped assessment amounts to or likely to amount to fifty lakh rupees or more.

As per Explanation to section 149(1), “asset” shall include immovable property, being land or building or both, shares and securities, loans and advances and deposits in bank account.

Further, as per section 149 (1A), where the income chargeable to tax represented in the form of an asset or expenditure has escaped assessment, and the investment in such asset or expenditure, in relation to an event or occasion, has been made or incurred, in more than one previous year relevant to the relevant assessment years, notice under section 148 shall be issued for every such assessment year.

Point 7.4: Whether the Notice is issued with the prior approval of the Specified Authority as laid down in section 151?

Sanctioning Authority under section 151 is –

(i) Where three or less than three years have elapsed from the end of the relevant assessment year: Principal Commissioner or Principal Director or Commissioner or Director

(ii) Where more than three years have elapsed from the end of the relevant assessment year: Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General

Sanction by an unauthorized authority would render the approval bad in law. When the statue authorizes a specific officer to accord approval for issuing notice under section 148, then it is for that officer only, to accord approval and not for any other officer even superior in rank¹³.

13. (i) CIT (Central-1) vs Aquatic Remedies (P.) Ltd. [2020] 113 taxmann.com 451 (SC); (ii) Ghanshyam K Khabrani vs ACIT 2012 (3) TMI 266 (Bombay HC); (iii) Reliable Finhold Ltd vs Union of India [2015] 54 taxman.com 318 (Allahabad HC); (iv) Dr. Shashi Kant Garg vs CIT (2006) 285 ITR 158 / [2006] 152 Taxman 308 (Allahabad HC); (v) Sardar Balbir Singh vs Income Tax Officer [2015] 61 taxmann.com 320 (ITAT Lucknow)

Point 7.5: Whether sanction is obtained by the AO prior to issuance of Notice?

The AO must bring on record documents to demonstrate that he or she had obtained the sanction of the appropriate authority before issuing notice under section 148 or 148A. If the AO issues the notice for reopening the assessment before obtaining the sanction, the reopening proceeding is void ab initio.

Point 7.6: Whether a period of at least seven days has been provided to the assessee to respond to the Notice?

There have been instances where less than seven days have been given to the assessee to respond to the notice issued under section 148A (b). This results in a violation of the procedure laid down by law.

Violation of the Principles of Natural Justice is not a curable defect in appeal¹⁴. Lack of opportunity before the AO cannot be rectified by the Appellate Authority by giving such opportunity.

14 Tin Box Co. vs CIT (2001) 249 ITR 216 (SC)

7A Raise objections in reply to the Notice, file a robust reply, and seek an opportunity of a personal hearing.

On checking the notice under section 148A (b), if you find any defects and shortcomings highlighted above, you must raise objections to the notice in your reply. Further, you should file a detailed submission on the merits of your case and ask the AO to provide an opportunity of a personal hearing before the AO passes the order under section 148A (d). Filing of robust submission at the first stage i.e., reply to notice under section 148A (b) will help the assessee before the High Court (in case of a Writ Petition) or in appellate proceedings subsequent to completion of reassessment proceedings.

8. WHAT SHOULD YOU DO WHEN YOU NOW RECEIVE AN ORDER UNDER SECTION 148A (D) ALONG WITH NOTICE UNDER SECTION 148 UNDER THE NEW LAW?

On the basis of material available on record, including the reply of the assessee, the AO has to pass an order under section 148A (d), with the prior approval of the Specified Authority, within one month from the end of the month in which the reply of the assessee is received by the AO.

Upon receipt of an order under section 148A (d) you must check the following points.
Point

8.1: Whether Notice under section 148 has been served along with the Order under section 148A(d)

As per amended section 148 of the Act, under the New Law, the AO has to serve a notice under section 148 along with a copy of the order passed under section 148A (d).

Point 8.2: Whether in the order passed under section 148A (d) the AO has recorded a finding of income escaping assessment on the basis of “information” which suggests that income has escaped assessment?

When no finding of escapement of income is recorded in the order passed under section 148A (d) on basis of “information” as defined in Explanation 1 to section 148, but on some other ground, then the order under section 148A (d) will be invalid.

The Hon’ble Bombay High Court in the case of CIT vs Jet Airways (I) Ltd¹⁵ held, under the Old Law, that if after issuing a notice under section 148 of the Act, the AO accepts the contention of the assessee and holds that income, for which he had initially formed a reason to believe had escaped assessment, has, as a matter of fact, not escaped assessment, it is not open to him to independently assess some other income; if he intends to do so, a fresh notice under section 148 of the Act would be necessary, the legality of which would be tested in event of a challenge by the assessee.

15. [2011] 331 ITR 236 (Bombay HC)

Point 8.3: Whether the AO has passed a detailed speaking Order under section 148A(d) after considering the reply of the assessee?

It is a well-settled law that the AO has to pass a speaking order disposing of the objections of the assessee. If the order is without dealing with the contentions and issues raised by the assessee in its reply to the notice under section 148A(b), then such an order would not be in accordance with the law. Such an order can be challenged in Writ Petition before the High Court.

Point 8.4: Whether the Order passed by the AO has the sanction of the Specified Authority?

Please refer to Point 7.4 above.

Point 8.5: Whether the Order is passed by the AO within one month?

The AO must pass an order under section 148A (d) within one month from the end of the month in which the reply of the assessee, in response to the notice under section 148A(b), is received by the AO.

Where the order under section 148A(d) is passed after a period of one month, such an order would be considered time barred and bad in law. Such an order can be challenged in Writ Petition before the High Court.

Point 8.6: Whether the information on the basis of which assessment is reopened was furnished to the AO during the original assessment?

[Please refer to Paragraph 5. Power to Review and Change of Opinion above]

Point 8.7: Whether your case is a search or search-related case?

No notice under section 148A is required for search cases, search-connected matters, cases where information has been obtained pursuant to a search, and cases where information has been received under section 135A of the Act.

Point 8.8: Whether the AO has followed the procedure prescribed under section 148A in a survey case?

As stated above in Point 13, Section 148A will not be attracted in certain cases, including search cases. Further, Explanation 2 to Sec. 148 lays down that in cases of search, survey and requisition, initiated or made on or after 1st April 2021, the AO shall be deemed to have information that suggests that income chargeable to tax has escaped assessment. So, in cases of search, survey, and requisition, no information as defined in Explanation 1 to Sec. 148 is required by the AO to issue a notice under section 148.

However, the due procedure prescribed under section 148A needs to be followed in section 133A survey cases before issuing notice under section 148 – please refer to the Proviso to Section 148.

Therefore, in survey cases, section 148A of the Act is attracted and the AO has to issue a notice under section 148A (b) and pass an order under section 148A (d) in survey cases.

Point 8.9: Whether Opportunity of a personal hearing has been granted?

If the assessee asks for a personal hearing in response to the notice issued under section 148A (b), then the AO must grant the opportunity of a personal hearing. If the AO has not granted the opportunity of personal hearing despite the assessee asking for it, then the principle of natural justice is vitiated.

8A Filing Return of Income

Pursuant to the order under section 148A(d), the AO shall serve the assessee with a notice under section 148 asking the assessee to file the return of Income. In response, the assessee should file a return of income. The assessee can challenge the order under section 148A(d) as well as the notice under section 148, by filing a Writ Petition before the High Court, either before or after the filing of the return of income in response to notice under section 148. Filing of return of income does not cause any prejudice to the filing of Writ Petition.

Note: Penalty – As per section 270A(2)(c) of the Act, a person shall be considered to have under-reported his income, if the income reassessed is greater than the income assessed or reassessed immediately before such reassessment. Therefore, disclosing of income in the return in compliance with section 148 of the Act may not help during penalty proceedings.

9. When should you file a Writ Petition before the High Court?

Where you find, while checking Points 1 to 15 mentioned above, that there is any lapse or violation, then you can file a Writ Petition on receipt of the notice under section 148 of the Act along with an Order under section 148A(d) of the Act.

You may, however, note that a Writ Petition before the High Court, under Article 226 of the Constitution of India, is different from an appeal before the High Court under section 260A of the Act. One cannot file the Writ Petition in a routine manner when an alternative remedy is available.

If you choose not to file a Writ Petition but to go ahead with the reassessment (under the Faceless Assessment Regime), then you will have to go for the regular route of appeal to CIT (Appeals), ITAT, High Court and Supreme Court.

10 CONCLUSION

The New Law mandates that the AO shall carry out the procedure prescribed under section 148A before issuing a notice under section 148. Only after carrying out that procedure (conducting an enquiry, issuing a show-cause notice, considering the assessee’s reply to the show-cause notice and passing a speaking order whether it is a fit case for issuing notice under section 148) the AO can issue a notice under section 148 and reopen an assessment.

Further, the AO must have in his or her possession ‘information which suggests that income has escaped assessment’ as defined in Explanation 1 to section 148. Without such statutorily defined information, the AO cannot issue a notice under section 148 and reopen an assessment.

Also, if more than three years have elapsed from the end of the relevant assessment year then the AO can issue notice under section 148 only when the AO has in his or her possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of (i) an asset (immovable property, being land or building or both, shares and securities, loans and advances and deposits in bank account); or (ii) expenditure in respect of a transaction or in relation to an event or occasion; or (iii) an entry or entries in the books of account, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more.

For passing an order under section 148A (d) the AO has to obtain prior sanction or approval of appropriate authority specified in section 151.

The assessee should take note of these changes and check that the statutory procedure is followed by the AO for reopening the assessment. If the AO fails to follow such procedure, and if there are shortcomings and defects in the show-cause notice issued by the AO under section 148A (b) and in the order passed by the AO under section 148A (d), then the assessee should challenge the notice issued by the AO under section 148, by filing a Writ Petition before the High Court.

Let us hope that the AOs follow the new procedure in the right spirit so that unnecessary reopening of past assessments is prevented, and the taxpayers are spared the brunt of costly litigation.

shailesh.kwebmaker

Section 263 — Revision — Erroneous and prejudicial to the interest of revenue where two views are possible — Assessment Order cannot be said to be erroneous.

15. Principal Commissioner of Income Tax-12 vs. American Spring & Pressing Works Pvt Ltd,
[ITA No. 682 OF 2018, Dated: 2nd August, 2023; AY: 2011-12 (Bom.) (HC).]

Section 263 — Revision — Erroneous and prejudicial to the interest of revenue where two views are possible — Assessment Order cannot be said to be erroneous.

Assessee was engaged in the business of manufacture and sale of agricultural equipment and development of real estate and hotel business. The assessment for 2011–12 was completed on 13th March, 2014 under Section 143(3) of the Act determining the total income of Assessee at Rs. 3.29 crores. This was revised by Principal CIT under Section 263 of the Act by holding that the order passed by the Assessing Officer was erroneous and prejudicial to the interest of revenue. Respondent challenged validity of revision order passed by Principal CIT.

The ITAT held that the Principal CIT could not have invoked the jurisdiction of revision for proceedings under Section 263 of the Act.

The Honourable Court observed that the scope of revision proceedings under Section 263 of the Act has been dealt by this Court in Grasim Industries Ltd vs. CIT (321 ITR 92). In Grasim Industries (supra), wherein the Court held that where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as erroneous order prejudicial to the interest of Revenue, unless the view taken by the Income Tax Officer is unsustainable in law. The ITAT also considered the judgment of the Bombay High Court in Gabriel India Ltd. (203 ITR 108), on the question is to when an order can be termed as erroneous. The ITAT came to a finding that the Principal CIT could not have invoked jurisdiction under Section 263 of the Act.

The Honourable Court observed that the ITAT came to a finding of fact that Assessing Officer has taken a possible view in the matter, and there is nothing to indicate that the Assessing Officer has applied the provisions in an incorrect way. Since the view taken by the Assessing Officer is a possible view, the Principal CIT has assumed jurisdiction under Section 263 of the Act without properly complying with the mandate of Section 263 of the Act. The Principal CIT has failed to show that the Assessment Order was erroneous, causing prejudice to the Revenue. The finding of the ITAT that the Principal CIT could not have exercised its jurisdiction under Section 263 of the Act has not been even challenged. The court held that since the finding of ITAT has not been challenged, it is not permissible to go into the merits of the case as decided by the Assessing Officer. Therefore, no substantial questions of law arises. Appeal dismissed.

shailesh.kwebmaker

Section 245HA — Settlement Commission — paying additional tax and interest on the income disclosed — Additional tax had to be calculated and paid by the Petitioner on such application.

14. Mahesh Gupta HUF vs. Income Tax Settlement Commission
[WP No. 947 Of 2009, Dated: 14th July, 2023. (Bom.) (HC).]

Section 245HA — Settlement Commission — paying additional tax and interest on the income disclosed — Additional tax had to be calculated and paid by the Petitioner on such application.

The Petitioner challenged an Order dated 11th January, 2008 passed by Settlement Commission, under Section 245HA of the Income-tax Act, 1961 holding that the Applications filed by the Petitioner under Section 245-C of the Act had abated due to short payment of taxes as required by the 245D of the Act.

A survey action under Section 133-A of the Act was conducted at the office premises of the Petitioner. The possession of various documents was taken by the survey party from both the places and statements of various persons were recorded.

The Petitioner filed an Application dated 17th May, 2006, under Section 245-C of the Act, for the Assessment Years 2002–03, 2003–04 and 2004–05. By the said Application, the Petitioner disclosed additional income and the tax on the additional income. The Commissioner of Income Tax-XIV, Mumbai, forwarded his Report dated 17th July, 2006 in the prescribed proforma under Section 245D(1) of the Act for the Assessment Years 2002–03 to 2004–05.

The said Application of the Petitioner was admitted by Settlement Commission by an Order dated 30th November, 2006. The said Order directed the Petitioner, in accordance with the provisions of sub-section (2A) of Section 245-D of the Act, to pay the additional amount of income tax payable on the income disclosed in the Application within 35 days of the receipt of the said Order and to furnish proof of such payments.

The Petitioner paid the tax as calculated by it on the total income as originally and additionally disclosed by it, and informed about the same. The Petitioner annexed to the said letter a Statement showing the tax liability on the additional income offered by the Petitioner in the Settlement Application for Assessment Years 2002–03 to 2004-05 and also challans demonstrating payment of the tax. Further, the Petitioner also made an Application dated 22nd March, 2007 to Respondent No.1, under Section 245-C of the Act, in respect of Assessment Year 2005-06. The Petitioner disclosed an additional income of Rs. 34,19,586/- and tax payable thereon of Rs. 12,22,386/.

By his letter dated 14th August, 2007, the Petitioner once again informed about the taxes paid by him on the additional income disclosed by him in the Application.

The Settlement Commission fixed the hearing of Petitioner’s Application for settlement on 11th December, 2007, and directed the Petitioner and Department to exchange requisite working / calculation of additional tax and interest liability for the Assessment Years 2002–03 to 2005–06 and thereafter prepare a reconciliation statement, if any, so that the matter could be recorded within shortest time on 19th December, 2007. Pursuant thereto, the Petitioner, by his letter dated 14th December, 2007, submitted details of calculation of additional tax and interest payable on the additional income disclosed by the Petitioner. The statements and challans annexed to the said letter show that the Petitioner had paid the taxes for all the Assessment Years, i.e., 2002–03 to 2005–06 as per the Petitioner’s Applications on or before 30th July, 2007.

By a letter dated 18th December, 2007, department gave the details of tax and interest payable by the Petitioner for the Assessment Years 2002–03 to 2005–06 showing short payment of taxes.

On 19th December, 2007, the Petitioner submitted that he had paid taxes as per his own calculation, that he was willing to pay the difference in tax, if any, that may be directed by Settlement Commission, and that if there was any shortfall, department had authority under Section 245D(2D) of the Act to recover the amount due from the Petitioner, but the application of the Petitioner cannot abate on the ground of alleged shortfall in payment of taxes and interest. The Petitioner submitted that this was more particularly so when the Petitioner had, in January, 2007, informed department about the tax payable by the Petitioner and the taxes paid and department had never informed the Petitioner till 17th December, 2007 about the alleged short fall in payment of taxes and interest on the additional income disclosed by the Petitioner.

However, the Settlement Commission, by its Order dated 11th January, 2008, held that the proceedings arising out of the two Applications of the Petitioner had abated in accordance with the provisions of Section 245HA (1)(ii) of the Act. Hence, the AO was directed to dispose of the cases in accordance with the provisions of sub-sections (2), (3) and (4) of Section 245HA of the Act.

The Petitioner filed the present Writ Petition before the Honourable High Court. The main submission was based on the provisions of Section 245D(2D) of the Act. It was submitted that, under the provisions of Section 245D (2D) of the Act, an application filed under sub-section (1) of Section 245C of the Act had to be allowed to be further proceeded with, if the additional tax on the income disclosed in such an application and the interest thereon is paid on or before 31st July, 2007.

It was submitted that, by the Order dated 30th November, 2006, Respondent No.1 had directed that the Petitioner shall within 35 days of the receipt of the Order pay additional amount of tax payable on the income disclosed in the application. It must mean that the additional tax had to be calculated and paid by the Petitioner. If the taxes and interest as calculated by the Petitioner are paid, there could not be any default in payment of taxes and interest. If, according to Settlement Commission, there was a shortfall, it was incumbent on the part of the department to inform the Petitioner about the alleged shortfall. Without any such intimation to the Petitioner, it could not be stated that there was a shortfall in payment of tax and interest.

It was submitted that, in these circumstances, the Petitioner had complied with the provisions of Section 245D(2D) of the Act and, therefore, the Applications of the Petitioner under Section 245C(1) of the Act ought to have been allowed to proceed further.

The Honourable Court further held that the provisions of Section 245D(2D) of the Act require that for an Application made under sub-section (1) of Section 245C of the Act to be allowed to be further proceeded with, the additional tax on the income disclosed in such application and the interest thereon had to be paid on or before 31st July, 2007. Sub-section (2D) says “….unless the additional tax on the income disclosed in such application and the interest thereon, is … paid on or before 31st July, 2007”. Therefore, what has to be paid before 31st July, 2007 is the additional amount of tax on the income disclosed ‘in such application’ and the interest thereon. Therefore, what has to be paid before 31st July, 2007 is the amount of income tax disclosed in the application and nothing more.

In the present case, the Petitioner paid the additional tax and interest on the income disclosed by him in his Applications for Assessment Years 2002–2003 up to 2005-2006 before 31st July, 2007, as per his calculations. On or before 31st July, 2007, the department did not give any intimation to the Petitioner that there was any short fall in the tax and interest paid by the Petitioner as per the income disclosed in his Applications. Much later, it was only by letter dated 18th December, 2007, that department intimated to the Petitioner what, according to them, was the correct tax and interest to be paid by the Petitioner.

Held that the Petitioner had complied with the provisions of Section 245D(2D) of the Act by paying the additional tax and interest on the income disclosed by him in his Applications before 31st July, 2007 as per his calculations, as required by Section 245D(2D) of the Act, and that is what was required of the Petitioner. Therefore, his Applications have to be allowed to be further proceeded with. This is more so, as, at no point of time prior to 31st July, 2007, the department intimated to the Petitioner that the taxes and interest paid by him on the additional income disclosed by him in his Applications were not correct. According to the Honourable Court, it is absurd to interpret the provisions of Section 245D(2D) as suggested by department. How is one expected to know before 31st July, 2007, the figure disclosed only in December 2007.

In these circumstances, the Order dated 11th January, 2008, which holds that the proceedings arising out of the two Applications filed by the Petitioner had abated in accordance with provisions of Section 245HA(1)(ii) of the Act, is erroneous and contrary to the provisions of Section 245D(2D) of the Act.

For the aforesaid reasons, the said Order dated 11th January, 2008 was quashed and set aside.

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Section 119(2) — Application for carried forward of losses made to CBDT — Unreasoned Order passed rejecting the application — Reasons cannot be supplemented — Remanded for reconsideration.

13. ATV Projects India Ltd, vs. The Central Board of Direct Taxes & Ors.
[WP NO. 1241 OF 2020, Dated: 17th July, 2023, (Bom.) (HC)]

Section 119(2) — Application for carried forward of losses made to CBDT — Unreasoned Order passed rejecting the application — Reasons cannot be supplemented — Remanded for reconsideration.

Petitioner had filed application under Section 119 (2)(a)/(b) of Income-tax Act, 1961, before CBDT, for carry forward losses of Assessment Years 1998–99 to 2004–05 amounting to Rs.159.87 crores for further period.

The background of the case is that the Petitioner was incorporated on or about 26th February, 1987 and was engaged in the business of executing turnkey projects. After seven or eight years of operation, Petitioner suffered severe losses due to non-availability of working capital funds from the bank and also due to non-recovery from debtors. Due to the mounting loss, Petitioner filed a Reference with the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act,1985 (SICA). Petitioner was declared sick by BIFR on 21st April, 1999 and IDBI was appointed the operating agency for the purpose of formulating a scheme.

Petitioner filed a Draft Rehabilitation Scheme (DRS) before the BIFR. Petitioner having settled and paid 27 out of 28 secured lenders, BIFR directed Petitioner to file an updated DRS and IDBI the operating agency was directed to call for joint meeting of all lenders. An updated DRS was filed with IDBI. IDBI filed a fully tied up DRS with BIFR along with its recommendation. In DRS, Petitioner had also sought relief and concession from the Income Tax Department for allowance of the determined carried forward accumulated business loss of about Rs. 159.87 crores.

In view of repeal of SICA in year 2016, the application before BIFR got abated. Petitioner filed an application with CBDT under Section 119(2)(a)/(b) of the Act, showing the hardship caused due to repeal of SICA and carry forward of losses lapsed. This application came to be rejected by an order dated 2nd March, 2020 wherein no discussion / reasons were provided as to why the application was rejected.

The Honourable Court observed that reasons cannot be supplemented by the affidavit in reply. Reasons should be found in the impugned order itself. CBDT has not articulated as to why it cannot grant relief prayed for by the Petitioner. Reasons introduce clarity in an order. The Court further observed that order howsoever brief, should indicate an application of mind all the more when the same can be further challenged. Reasons substitute subjectivity by objectivity.

Therefore, the order dated 2nd March, 2020 was quashed and matter was remanded back to the CBDT to pass a reasoned order dealing with every submission made by Petitioner and also give a personal hearing to Petitioner.

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Search and Seizure — Assessment in search cases — Undisclosed Income — Penalty — Change of Law — New Provision specially dealing with penalty in search cases — No incriminating document seized during search — Penalty could be imposed only under section 271AAB and not under section 271(1)(c).

42. Pr. CIT vs. Jai Maa Jagdamba Flour Pvt Ltd
[2023] 455 ITR 74 (Jharkhand)
A.Y. 2014–15: Date of order: 21st February, 2023
Sections 153A, 271(1)(c) and 271AAB of ITA 1961.

Search and Seizure — Assessment in search cases — Undisclosed Income — Penalty — Change of Law — New Provision specially dealing with penalty in search cases — No incriminating document seized during search — Penalty could be imposed only under section 271AAB and not under section 271(1)(c).

Search and seizure operation was carried out on one J group on 3rd September, 2014. Assessee was one of the members of the J Group. During the course of search, no incriminating material was found in the case of assessee. Pursuant to the search, the AO issued a notice under section 153A of the Income-tax Act, 1961, and required the assessee to file its return of income. Initially, the assessee filed its return, declaring a loss. However, subsequently, the AO confronted the assessee with audited financial statements, the assessee revised its return of income and declared profit. The AO, therefore, imposed penalty under section 271(1)(c) of the Act for concealing the particulars of its income, and furnishing inaccurate particulars of such income.

On appeal, the CIT(A) allowed the appeal of the assessee on the ground that penalty can be imposed upon the assessee under section 271AAB and not under section 271(1)(c) of the Act. The Tribunal upheld the view of the CIT(A).

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

“i) According to section 271AAB of the Income-tax Act, 1961, where a search u/s. 132(1) was initiated on or after July 1, 2012, penalty is leviable on the undisclosed income at the rate and conditions specified u/s. 271AAB(1) for the specified previous year. The section also defines the term “undisclosed income” and “specified previous year” and starts with non obstante clause and excludes the applicability of section 271(1)(c), if the undisclosed income pertains to the specified previous year.

ii) Since the search was conducted on September 3, 2014, i. e., after July 1, 2012 the assessee’s case was covered by section 271AAB and the Assessing Officer should have initiated proceedings and levied penalty u/s. 271AAB(1)(c) and not u/s. 271(1)(c). On the date of search the due date to furnish the return for the A. Y. 2014-15 had not expired and the assessee had furnished the return on November 30, 2014. The assessee had not admitted any income in the statement recorded u/s. 132(4) nor had paid any taxes on the admitted income. Therefore, the case of the assessee was not governed by section 271AAB(1)(a) or (b) but fell u/s. 271AAB(1)(c) where the minimum penalty prescribed is 30 per cent. and maximum penalty is 90 per cent. of undisclosed income. Whether incriminating document was found or not was immaterial since the law mandated that the penalty if any should have been levied u/s. 271AAB. There was no infirmity in the order of the Tribunal affirming the order of the Commissioner (Appeals).”

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Recovery of tax — Stay of demand — Factors to be considered — Assessee having strong prima facie case — Assessment at a high-pitched rate — Demand causing undue financial hardship to the assessee — Stay ordered.

41. BHIL Employees Welfare Fund No. 4 vs. ITO
[2023] 455 ITR 130 (Bom)
A.Y. 2017–18: Date of order: 7th January, 2023
Sections 69 and 220 of ITA 1961.

Recovery of tax — Stay of demand — Factors to be considered — Assessee having strong prima facie case — Assessment at a high-pitched rate — Demand causing undue financial hardship to the assessee — Stay ordered.

The assessee was formerly formed for the benefit of the employees of the erstwhile Bajaj Auto Limited. The assessee was formerly known as “Bajaj Auto Employees Welfare Fund No. 4” and was allotted PAN in the status of a Firm. As per the scheme of demerger approved by the Court, the automobile business was transferred to Bajaj Auto Limited and finance was transferred to Bajaj Finserv Limited with effect from 31st March, 2007, and Bajaj Auto Limited’s name was changed to Bajaj Holdings and Investment Limited (“BHIL”) on 5th March, 2008. Pursuant to the scheme of demerger, the name of Bajaj Auto Welfare Employees Fund was changed to BHIL Employees Welfare Fund No. 4 as per trust deed dated 16th February, 2015, and on application, the assessee was allotted PAN with the status of Trust.

On 31st March, 2021, the AO issued notice under section 148 of the Income-tax Act, 1961 under the old name and PAN of the assessee on the ground that the assessee failed to file income tax return. Thereafter, notices were issued under section 142(1) under the old name and PAN of the assessee calling for various details. In December 2021, the assessee filed a response, stating inter alia that the Income-tax Utility did not allow the assessee to select any status other than the Firm on account of which the assessee was not able to file the return of income. Further, the assessee submitted that even if the assessment was re-opened, the re-opening should be conducted in the new PAN and not the old one. Thereafter, further notices were issued by the Department against which the assessee responded its inability to file the return of income due to technical difficulties. The assessment was completed ex-parte and the assessment order was passed under section 144 r.w.s. 144B and 147 of the Act and demand of Rs. 9,62,39,316 was raised.

Against the order of assessment, the assessee filed appeal before the CIT(A) and also filed application for stay of entire demand before Respondent No. 1. The assessee’s application for stay was granted subject to fulfilment of conditions, inter alia that 20 per cent of the demand be paid within 15 days. On application for stay of demand before the Respondent No. 2 for A.Ys. 2014–15 and A.Y. 2017–18, the stay of demand was granted for A.Y. 2017–18 on the condition that the assessee has to pay 10 per cent of the disputed demand. However, meanwhile, Respondent No. 1 addressed a letter to the assessee calling upon the assessee to pay 20 per cent of the demand and was informed that the failure to make the payment would result in penalty under section 221 of the Act. The assessee filed application for stay of demand before the CIT(A) and requested for early hearing of the appeal.

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

“i) In the case of UTI Mutual Fund (supra) this Court held that in considering whether a stay of demand should be granted, the Court is duty bound to consider not merely the issue of financial hardship if any, but also whether a strong prima facie case is made out and serious triable issues are raised that would warrant a dispensation of deposit. It was further held that calling upon petitioner to deposit, would itself occasion undue hardship where a strong prima facie case has been made out. We are of the opinion that the respondents have failed to consider the ratio of the judgment in its true letter and spirit inasmuch as respondents called upon the petitioner to deposit 10% of the demand when the petitioner had a strong prima facie case. In our view, the deposit would itself occasion undue hardship to the petitioner who are Trust created for the purpose of benefiting the employees.

ii) In the case of Humuza Consultants (supra) this Court has held that where a prima facie case in favour of the petitioner was found and it appeared that the assessment was high pitched, a stay was granted with regard to the impugned demand notices. In this case too it appears that the petitioner would have a strong prima facie case and they would not be liable to pay such a high demand if their assessment was considered in their capacity/status of a Trust as against the status of a Firm.

iii) We are in agreement with the legal propositions enunciated in the aforesaid three judgments of this Court and are bound by it and do not propose to take a different view. Accordingly, we are of the opinion that both the matters deserve to be remanded back with a direction that the Respondents to consider the Petitioner’s application under their status as a Trust and try to dispose of the matter preferably within a period of 4 months from the date of this order. No coercive steps shall be taken against the assessee for the recovery of the demand in pursuance of the impugned notice dated 30th March 2022.”

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Reassessment — Validity — Proper procedure to be followed — Reasons for notice and satisfaction note for approval not furnished to assessee — Documents relied on for issue of notice not furnished to assessee — Order of reassessment Not Valid.

40. Sahebrao Deshmukh Co-op Bank Ltd vs ACIT
[2023] 455 ITR 92 (Bom.)
A.Y. 2013–14: Date of order: 10th February, 2023
Sections 147 and 148 of ITA 1961.

Reassessment — Validity — Proper procedure to be followed — Reasons for notice and satisfaction note for approval not furnished to assessee — Documents relied on for issue of notice not furnished to assessee — Order of reassessment Not Valid.

The AO issued notice under section 148 of the Income-tax Act, 1961, dated 31st March, 2021, for re-opening of assessment for the A.Y. 2013–14. The AO claimed that the notice was being issued after obtaining necessary satisfaction of the PCIT. Thereafter, on 26th January, 2022, the AO issued notice under section 142(1) of the Act, calling upon the assessee to furnish the accounts and documents. In response to the said notice as also the notice dated 31st March, 2021, issued under section 148 of the Act, the assessee filed its reply on 27th January, 2022, and requested the AO to furnish a copy of reasons recorded for re-opening of assessment. On the same day, the assessee also filed its return of income. The AO, vide notice dated 5th February, 2022, provided the reasons recorded for re-opening. As per the reasons recorded, a survey was conducted under section 133A on 14th December, 2016, at the premises of Shri Shripal Vora at Bhavnagar and unaccounted cash was seized from the premises. From the statements on oath recorded under section 131 of the Act, it was revealed that the assessee was involved in the business of providing accommodation entry and charging commission at the rate of 2.75 per cent of the transaction. On receipt of reasons recorded, the assessee, vide letter dated 21st February, 2022, requested the AO to provide satisfaction note of the PCIT, whose approval had been obtained for issuing the notice under section 148 of the Act. There was no reply from the AO on this and on 24th February, 2022, the AO fixed a hearing without providing the documents requested by the assessee. On 28th February, 2022, the assessee once again requested for details called for earlier and requested for virtual hearing through video conference. Thereafter, various communications were exchanged between the assessee and the AO and the AO passed the order dated 31st March, 2022 and held that an amount of Rs. 2 Crores had escaped assessment.

The assessee filed writ petition and challenged the notices and the order of reassessment. The Bombay High Court allowed the writ petition and held as under:

“i) The Assessing Officer was duty bound to issue, with the notice u/s. 148 of the Act, the reasons which formed the basis for reopening of assessment, the satisfaction note and order of the Principal Commissioner, who granted approval to issuance of the notice with the note of the Assessing Officer in support of his request for approval, the appraisal report from the Deputy Director of Income-tax (Investigation) and the statements of V at Bhavnagar, recorded under section 131 in the search and seizure of the premises of S Ltd, which were referred to in the notice.

ii) None of these documents was sent to the assessee in compliance with the general directions issued by the court. The Assessing Officer had rejected the request of the assessee for furnishing all these documents without assigning any reasons for such rejection or dealing with the specific objections and the request made by the assessee in its order. Despite specific request for a personal hearing by the assessee before passing the assessment order, the Assessing Officer had neither granted it nor dealt with the request but had gone ahead and passed the assessment order without hearing the assessee.

iii) The Assessing Officer had acted in contravention of the provisions of article 14 of the Constitution of India. Consequently, the order dated 31st March, 2021 issued u/s. 148 of the Act, the order rejecting the objections to reopening dated 22nd March, 2022, the assessment order dated March 31, 2022, the notice of demand dated
31st March, 2022 issued u/s. 156 of the Act, and the penalty notice dated 31st March, 2022 issued u/s. 271(1)(c) of the Act, were quashed and set aside.

iv) The matter was remanded back to the Assessing Officer with specific direction to provide the assessee with the satisfaction note of the Principal Commissioner of Income-tax, granting approval for issue of notice and all other documents and material which formed the basis of reasons recorded by the Assessing Officer for issuing notice u/s. 148 of the Act and after giving opportunity to the assessee proceed to pass order.”

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Reassessment — Notice under section 148 — Limitation — Law applicable — Effect of amendments made by Finance Act, 2021 — Notice bared by limitation under unamended provisions — Notice issued on 30th June, 2021 to reopen assessment for A.Y. 2014–15 — Not valid.

39. Sunny Rashikbhai Laheri vs. ITO
[2023] 455 ITR 35 (Guj):
A.Y. 2014–15: Date of order: 21st March, 2023
Sections 148, 148A and 149 of ITA 1961.

Reassessment — Notice under section 148 — Limitation — Law applicable — Effect of amendments made by Finance Act, 2021 — Notice bared by limitation under unamended provisions — Notice issued on 30th June, 2021 to reopen assessment for A.Y. 2014–15 — Not valid.

For the A.Y. 2014–15, a notice under section 148 (unamended) of the Income-tax Act, 1961 was originally issued on 30th June, 2021. The said notice was treated as show-cause notice under section 148A(b) of the Act in the light of the decision of the Supreme Court in Union of India vs. Ashish Agarwal [2022] 444 ITR 1 (SC); and thereupon, the order under section 148A(d) was passed on 21st July, 2022. Consequential notice under section 148, dated 21st July, 2022 was also issued.

The assessee filed writ petition and challenged the order under section 148A(d), dated 21st July, 2022 and the notices under section 148. The Gujarat High Court allowed the writ petition and held as under:

“i)   By the Finance Act, 2021, passed on March 28, 2021, and made applicable with effect from 1st April, 2021, section 148A of the Income-tax Act, 1961, was brought into force. It relates to conducting of inquiry and providing opportunity to the assessee before notice under section 148 of the Act could be issued. Along with substitution of new section 148A, section 149 of the Act was also recast by the Legislature. Section 149 as it stood immediately before commencement of the Finance Act, 2021, that is before 1st April, 2021 in the old regime, inter alia, provided for time limit for notice. It stated, inter alia, that no notice under section 148 shall be issued for the relevant assessment year, as per clause (b), if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax, which has escaped assessment, amounts to or is likely to amount to one lakh rupees or more for that year. In other words, limitation of six years from the end of the relevant assessment year operated as the time limit in the old regime for issuance of notice under section 148 beyond which period, it was not competent for the Assessing Officer to issue notice for reassessment.

ii)   This embargo continues in the new regime also. In view of the pandemic of March 2020 the Taxation and Other Laws (Relaxation and Amendment of Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 was passed. Various notifications were issued from time to time extending the time line prescribed under section 149. The 2020 Act is a secondary legislation. It would not override the principal legislation the Finance Act, 2021. Hence, all original notices under section 148 of the Act referable to the old regime and issued between 1st April, 2021 and June 30, 2021 would stand beyond the prescribed permissible time limit of six years from the end of the A.Y. 2013-14 and the A.Y. 2014-15. Therefore, all such notices relating to the A.Y. 2013-14 or the A. Y. 2014-15 would be time barred as per the provisions of the Act as applicable in the old regime prior to 1st April, 2021. Furthermore, these notices cannot be issued as per the amended provision of the Act.

iii)   The notice dated 30th June, 2021 issued by the Assessing Officer under section 148 of the Act, seeking to reopen the assessment in respect of A.Y. 2014-15, and the order dated 21st July, 2022 passed by the respondent under section 148A(d) of the Act, and all consequential actions, as may have been taken, were quashed and set aside.”

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Deduction of tax at source — Recovery of demand — Bar against direct demand on assessee — Employer deducted tax at source from assessee’s salary but not paid into Government account — Assessee cannot be denied credit for tax deducted at source — Assessee is entitled to refund with interest of amount if any adjusted towards demand.

38. Milan Arvindbhai Patel vs. ACIT
[2023] 455 ITR 82 (Guj.)
A.Ys. 2010–11 to 2012–13: Date of order: 13th February, 2023
Sections 156, 205, 226 and 237 of ITA 1961.

Deduction of tax at source — Recovery of demand — Bar against direct demand on assessee — Employer deducted tax at source from assessee’s salary but not paid into Government account — Assessee cannot be denied credit for tax deducted at source — Assessee is entitled to refund with interest of amount if any adjusted towards demand.

The assessee was a pilot working with Kingfisher Airlines. The assessee received notice from the AO seeking recovery of outstanding demand of Rs. 19,40,707 for A.Y. 2011–12 and Rs. 25,12,913 for A.Y. 2012–13. In fact, the assessee was eligible for a refund of Rs. 45,570 for A.Y. 2012–13. However, since the amount deducted as TDS had not been deposited by the Airlines to the Central Government, the assessee’s claim for credit of TDS was denied. As a result, demand was raised along with interest.

The assessee filed a writ petition seeking to cancel the outstanding demands under section 156 of the Income-tax Act, 1961, to quash the recovery notices under section 226, and to recover the unpaid tax deducted at source from the assessee’s employer and refund under section 237 of the amount which was adjusted against the outstanding demands for the A.Ys. 2010–11, 2011–12 and 2012–13. The Gujarat High Court allowed the writ petition and held as under:

“i) Section 205 of the Income-tax Act, 1961 provides that when tax is deductible at source, the assessee shall not be called upon to pay the tax himself to the extent to which the tax has been deducted from that income. Its applicability is not dependent upon the credit for tax deducted being given under section 199.

ii) The Department could not deny the assessee the benefit of tax deducted at source by the employer from his salary during the relevant financial years. Credit for tax deducted at source should be given to the assessee and if in the interregnum any recovery or adjustment was made by the Department, the assessee was entitled to the refund with statutory interest.”

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Business expenditure — Capital or revenue expenditure — Corporate social responsibility expenditure — Amendment providing for disallowance of — Not retrospective — Expenditure in discharge of assessee’s obligation as mandated by law — Utilisation of funds by recipient irrelevant — Corporate social responsibility expenditure incurred by assessee for earlier years allowable.

37. Principal CIT vs. Steel Authority of India Ltd
[2023] 455 ITR 139 (Del)
Date of order: 6th January, 2023
Section 37(1) of ITA 1961

Business expenditure — Capital or revenue expenditure — Corporate social responsibility expenditure — Amendment providing for disallowance of — Not retrospective — Expenditure in discharge of assessee’s obligation as mandated by law — Utilisation of funds by recipient irrelevant — Corporate social responsibility expenditure incurred by assessee for earlier years allowable.

The assessee was a public sector undertaking. The AO disallowed the assessee’s claim of the corporate social responsibility expenditure on the ground that the expenditure was made of enduring long-term benefits for the communities in which the assessee operated, and included establishments of medical facilities, sanitation, schools and houses and vocational training centres, and that it was to be treated as capital expenditure.

The CIT(A) held that the assessee did not establish any direct nexus between the incurring of the corporate social responsibility expenditure and the running of its business and upheld the order of the AO. The Tribunal held that prior to the insertion of Explanation 2 to Section 37(1) of the Income-tax Act, 1961 with effect from 1st April, 2015, the settled legal position was that corporate social responsibility expenditure was allowable under section 37(1) until a specific bar for allowing such expenditure was introduced prospectively in 2014, and allowed the deduction.

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

“i)   Explanation 2 was inserted by the Finance Act, 2014 with effect from April 1, 2015 to section 37(1) of the Income-tax Act, 1961 and is prospective.

ii)   The Assessing Officer without specifying which part of the assessee’s corporate social responsibility expenditure was directed towards capital assets had straightaway held that the expenditure was capital in nature by taking into account, albeit illustratively, the purposes for which the recipient had utilized the funds. The capital asset on which the funds were utilised by the recipient was not the asset of the payer, i. e., the assessee. The assessee had provided funds in discharge of its obligation as mandated by law on the advice of the Department of Public Enterprises and therefore, it could not be said that the obligation placed on the assessee by law was not connected wholly and exclusively to its business.

iii)   There is nothing on record which would show that the assessee had directed investment of funds which were offered in fulfilment of discharge of its legal obligation in a capital asset. The Tribunal had concluded that the corporate social responsibility expenses incurred by the assessee were allowable under section 37. Explanation 2 appended to section 37(1) was not retrospective in nature. No question of law arose.”

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Business expenditure — Broken period interest paid for purchase of securities held as stock-in-trade — Deductible expense.

36. CIT vs. State Bank of Hyderabad
[2023] 455 ITR 122 (Telangana.)
A.Y. 1998–99: Date of order: 4th January, 2023
Sections 28 and 37 of ITA 1961

Business expenditure — Broken period interest paid for purchase of securities held as stock-in-trade — Deductible expense.

The assessee, a banking company, filed its return of income for A.Y. 1998–99 and claimed deduction of broken period interest paid by it on purchase of securities which were held by the assessee bank as stock-in-trade. The AO denied the claim of the assessee by relying upon the decision of the Supreme Court in the case of Vijaya Bank Limited vs. Addl.CIT (1991) 187 ITR 541(SC), wherein it was held that such expenditure was required to be capitalised and cannot be allowed as deduction. This view was confirmed by the CIT(A).

The Tribunal decided the issue in favour of the assessee and held that the assessee had purchased the securities to hold them as stock-in-trade, and therefore, the interest paid for broken period was allowable as deduction.

On appeal by the Department, the Telangana High Court upheld the view of the Tribunal and held as follows:

“i) We find that it is the contention of the respondent that respondent had been holding its securities all along as stock-in-trade which is not in dispute. For successive assessment years, Revenue has accepted the fact that respondent had been holding the securities as stock-in-trade.

ii) Circular No. 665 dated 5th October, 1993 of the CBDT has clarified the decision of the Supreme Court in Vijaya Bank Ltd (supra). CBDT has clarified that where the banks are holding securities as stock-in-trade and not as investments, principles of law enunciated in Vijaya Bank Ltd (supra) would not be applicable. Therefore, CBDT has clarified that assessing officer should determine on the facts and circumstances of each case as to whether any particular security constitute stock-in-trade or investment taking into account the guidelines issued by Reserve Bank of India from time to time.

iii) It is in the above back drop that Tribunal has held that the respondent had purchased securities to hold them as stock-in-trade. Therefore, interest paid on such securities would be an allowable deduction.

iv) We are in agreement with the finding returned by the Tribunal. That apart, this is a finding of fact rendered by the Tribunal and in an appeal u/s. 260A of the Income-tax Act, 1961 we are not inclined to disturb such a finding of fact, that too, when the legal position is very clear.”

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Appeal to Commissioner (Appeals) — Limitation — Appeal should be heard within reasonable time.

35. Venkat Rao Paleti vs. CIT(A)
[2023] 455 ITR 48 (Telangana):
A.Y. 2017–18: Date of order: 13th March, 2023
Sections 246A and 250 of ITA 1961]

Appeal to Commissioner (Appeals) — Limitation — Appeal should be heard within reasonable time.

The assessee is an Individual. The assessment for A.Y. 2017–18 was completed in November 2019 by way of best judgment assessment order passed under section 144 of the Income-tax Act, 1961. The assessee filed appeal before the CIT(A) under section 246A of the Act in February 2020. The appeal was not taken up for hearing till March 2023. In the meanwhile, notice was issued for attaching the bank account of the assessee.

The assessee filed a writ petition seeking direction for expedited hearing of the appeal. The Telangana High Court allowed the writ and held as under:

“i) Grievance of the petitioner is that the appeal filed by him against the assessment order has not yet been taken up for hearing though three years have passed by and in the meanwhile, garnishee notices have been issued by respondent No. 2 to the banker of the petitioner.

ii) Sub-section (6A) of section 250 of the Income-tax Act, 1961 says that in every appeal, the Commissioner (Appeals), where it is possible, may hear and decide such appeal within a period of one year from the end of the financial year in which such appeal is filed before him under sub-section (1) of section 246A of the Act. Though the provision pertains to appeals filed u/s. 246A of the Act, none the less the objective behind the provision is to hear an appeal as early as possible.

iii) That being the position, we direct respondent No. 1 to take on board the appeal filed by the petitioner on February 23, 2020 against the assessment order dated November 14, for the A.Y. 2017–18 and dispose of the same within a period of three months from the date of receipt of a copy of this order.”

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Article 13(4) of India-Mauritius DTAA (prior to its amendment) — Capital gain arising on sale of shares of Indian company is not taxable in India.

6. [TS-389-ITAT-2023(Del)]
SAIF II SE Investments Mauritius Limited vs. ACIT
[ITA No: 1812/Del/2022]
A.Y.: 2018-19

Dated: 14th August, 2023

Article 13(4) of India-Mauritius DTAA (prior to its amendment) — Capital gain arising on sale of shares of Indian company is not taxable in India.

FACTS

Assessee is a Mauritius-based investment-cum-holding company. It derived long-term capital gains from sale of shares of NSE, an Indian company. Assessee contended that such long term capital gains were exempt under Article 13(4) of India-Mauritius DTAA. AO denied such exemption on the following grounds:

(a) Assessee was a conduit and the real owners of the income were ultimate holding companies, which were based in Cayman Islands.

(b) TRC was not sufficient to establish the tax residency of assessee, if substance established otherwise.

(d) Control and management of assessee was not in Mauritius.

DRP upheld order of AO.

Being aggrieved, assessee appealed to ITAT.

HELD

• NSE was a regulated entity. Acquisition and sale of shares of NSE was approved by various regulatory authorities, such as, FIPB, SEBI, RBI, NSE. It can be assumed that regulatory authorities would have gone into the shareholding and financial structure of the assessee and its parent companies and all other relevant factors.

• AO’s conclusion that assessee was an entity without commercial substance is contrary to the conclusion reached by above authorities.

• TRC issued by an authority in the other tax jurisdiction is the most credible evidence to prove the residential status of an entity and the TRC cannot be doubted.

• Accordingly, long term capital gains arising to assessee qualified for exemption under Article 13(4). Hence, it could not be taxed in India.

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Article 12 of India-USA DTAA — Payment received by Amazon for cloud services provided by it is not royalty or fees for included services in terms of Article 12 of DTAA.

5. [2023] 153 taxmann.com 45 (Delhi – Trib.)
Amazon Web Services, Inc. vs. ACIT
[ITA No: 522&523/Del/2023]
A.Y.: 2014-15 & A.Y.: 2016-17

Dated: 1st August, 2023

Article 12 of India-USA DTAA — Payment received by Amazon for cloud services provided by it is not royalty or fees for included services in terms of Article 12 of DTAA.

FACTS

Assessee provided standard and automated cloud computing services named AWS Services to its customers across the globe. The customers electronically executed a standard contract available on its website. Case was reopened under section 147 of the Act. Assessee had contended that its income is not chargeable to tax. However, AO had passed order treating income of assessee as royalty/fees for included services under the Act and DTAA. DRP confirmed addition proposed by AO.
Being aggrieved, assessee appealed to ITAT.

HELD

Vis-à-vis taxation as Royalty
• AWS Services are standard and automated services. They are publicly available online to everyone who executes a standard contract with the assessee.

• For the following reasons, receipt is not in nature of royalty:

Customers are granted a non-exclusive and non-transferable license to access services without the source code of the license.

Customers have no right to use or commercially exploit the IP and no equipment is placed at the disposal of the customers.

Customer has a limited, non-exclusive, revocable, non-transferable right to use AWS trademarks. Such use is only for identification of the customer who is using AWS Services for their computing needs.

Incidental/ancillary support provided to the customers includes answering queries/troubleshooting for use of AWS Services subscribed by them. Support does not include code development, debugging, performing administrative task.

• In reaching its conclusion, Tribunal followed the decision in undernoted cases where it was held that payment was not in nature of royalty.

Vis-à-vis taxation as fees for includes services

• The services provided were in the form of general support, troubleshooting, etc. They did not result in any transfer of technology or knowledge which enabled the customers to develop and provide cloud computing services on their own in future.

• AWS services provided by the assessee were standardised services that did not provide any technical services to its customers.

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Section 68 — The department without dislodging the primary onus that was duly discharged by the appellant under section 68 of the Act could not have drawn adverse inferences and treat the transaction as unexplained cash credit.

29. ITO vs. Sharda Shree Agriculture & Developers (P.) Ltd
[2022] 99 ITR(T) 143 (Raipur – Trib.)
ITA No.:84 (RPR) OF 2017
A.Y.: 2012–13

Date: 5th August, 2022

Section 68 — The department without dislodging the primary onus that was duly discharged by the appellant under section 68 of the Act could not have drawn adverse inferences and treat the transaction as unexplained cash credit.

FACTS

During the relevant A.Y. 2012–13, the assessee company had received share application money of Rs. 26,00,000 from its directors and close relatives and had received share application money of Rs. 2,44,00,000 from two companies namely M/s Chandika Vanijiya Pvt Ltd and M/s Neel kamal Vanjiya Pvt Ltd Out of the above, the assessee company had refunded the amount of Rs. 26,00,000 to its directors and close relatives in the same A.Y. i.e., A.Y. 2012–13 and the assessee company had refunded amount of Rs. 38,50,500 to M/s Chandika Vanijiya Pvt Ltd in the same A.Y. i.e., A.Y. 2012–13 and balance amount of Rs. 95,00,000 in A.Y. 2015–16.

During the scrutiny proceedings, to substantiate the genuineness of the above transactions, the assessee company had submitted the following documents — copies of return of income along with computation of income, audited financial statements, details of bank accounts along with complete details of the share applicants. The Ld AO had passed the assessment Order under section 143(3) on 31st March, 2015 and made the following additions under section 68 of the Act on the ground that the transactions were not genuine:

i. Opening balance in respect of Share Application money of Rs. 92,62,500

ii. Share Application money received of Rs. 26,00,000 from its directors and close relatives

iii. Share Application money received of Rs. 2,44,00,000 from two companies – M/s Chandika Vanijiya Pvt Ltd and M/s Neel Kamal Vanjiya Pvt Ltd.

The assessee company preferred an appeal before CIT(A). On appeal, the assessee company brought to the notice of the Ld CIT(A) that the Ld AO had issued notices under section 133(6) on 28th March, 2015 which were received by the investor companies based in Kolkata on 3rd April, 2015, i.e., after passing the assessment order dated 31st March, 2015, and the fact was supported by the endorsements of the postal department. The investor companies upon receipt of the notice under section 133(6) had filed their responses both by way of an Email dated 4th April, 2015, as well as reply was dispatched through speed post on 6th April, 2015. The Ld CIT(A) had remanded the matter to the Ld AO but the Ld AO failed to rebut the claim of the assessee company. The Ld CIT(A) had allowed the appeal on the following grounds:

i. Amount pertaining to opening balance cannot be added as unexplained cash credit u/s 68 and deleted the addition.

ii. In respect of share application money of Rs. 26,00,000 and Rs. 2,44,00,000 during the year, the assessee company to substantiate the genuineness of the transaction had submitted the documentary evidences — in support thereof, viz. notarised affidavits of the investor companies and copies of the share application forms, audited financial statements, copies of the bank statements, confirmations of the share applicants, copies of the resolution passed in the meeting of the board of directors of the investor companies. The assessee company had proved the identity and creditworthiness of the investor companies and genuineness of the transaction and had discharged the onus under section 68 and hence deleted the addition.

iii. The replies filed by the investor companies had also proved their identity and creditworthiness and affirmed the genuineness of the transaction.

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

HELD

The Tribunal observed that there were twofold reasons that had primarily weighed with the Ld AO for drawing adverse inferences as regards the share application money/premium received by the assessee company from the aforesaid investor companies, which were:
i. That the notices issued under section133(6) of the Act were not complied with by the investor companies; and

ii. That the commission issued under section131(1)(d) of the Act had revealed that neither of the aforesaid companies were available at their respective addresses.

The Tribunal held that the Ld AO had failed to call the requisite details well within the reasonable time and that resulted in delay in furnishing of the reply by the investor companies. Further, the Tribunal also observed that the investor companies had furnished the requisite information and the same were found available on the assessment record. The Tribunal further observed that the assessee company in the course of the proceedings before the CIT(A) had furnished substantial documentary evidences to support the authenticity of its claim of having received share application money from the aforesaid investor companies, i.e., M/s Neel Kamal Vanijya Pvt. Ltd and M/s Chandrika Vanijya Pvt Ltd and when the CIT(A) remanded the matter to Ld AO, the Ld AO failed to rebut much the less dislodge the claim of the assessee company of having received genuine share application money from the aforesaid share subscribers.

The Tribunal viewed that both the investor companies had placed on record supporting documentary evidences which duly substantiated their identity and creditworthiness, as well as the genuineness of the transaction in question, which had neither been rebutted by the Ld AO in the course of the original assessment proceedings; nor in the remand proceedings, therefore, the department without dislodging the primary onus that was duly discharged by the assessee company could not have drawn adverse inferences as regards the transactions in question.

In result the appeal filed by the revenue was dismissed.

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Section 10B(7) r.w.s. 80IA(10) — The onus is on the department to prove that there existed an arrangement between the assessee and its associate enterprises to earn more than the ordinary profit and if that is not established then there cannot be any addition and corresponding disallowance under the said provisions.

28. DCIT vs. Halliburton Technology Industries (P) Ltd
[2022] 99 ITR(T) 699 (Pune – Trib.)
ITA No.:277(PUNE) OF 2021
A.Y.: 2011–12

Date: 10th June, 2022

Section 10B(7) r.w.s. 80IA(10) — The onus is on the department to prove that there existed an arrangement between the assessee and its associate enterprises to earn more than the ordinary profit and if that is not established then there cannot be any addition and corresponding disallowance under the said provisions.

FACTS

The assessee company was engaged in the export of IT enabled services [ITES] and was registered as a 100 per cent export-oriented undertaking with the SEEPZ special economic zone. The assessee company had filed its return of income for the relevant A.Y. 2011–12 on 30th November, 2011, and declared total income as NIL under normal provisions after claiming deduction under section 10B of the Act and a book profit of Rs. 9,60,43,389 under section 115JB of the Act. The case was selected for the scrutiny proceedings and the Ld AO observed that the assessee company had earned more than ordinary profits as the operating margin of the assessee company was 22.38 per cent and the operating margins of the comparable was 13.08 per cent. For this sole reason, the Ld AO was of the view that there was an arrangement between the assessee company and its associate enterprises that produced more than the ordinary profits to the assessee company and invoked the provisions of Section 10B(7) r.w.s. 80-IA(10) of the Act, thereby excluding the amount of Rs. 2,88,27,056 from the eligible profits claimed by the assessee company.

Aggrieved by the order, the assessee company had filed an appeal before the Ld CIT(A). The Ld CIT(A) had observed the following:

i. That these international transactions of the assessee company had been accepted in the past by the TPO.

ii. That the Ld AO had simply taken the mean margin of the comparables and neglected the comparables with more profit than the assessee company.

iii. That the basis for arriving at the decision that the assessee company was having more than ordinary profits was not sound and;

iv. That the Ld AO had not brought forward any proof of any arrangements for the disallowance under section 10B(7) r.w.s. 80-IA(10) of the Act.

The Ld CIT(A) relied on various judicial decisions placed before him and allowed the appeal of the assessee company. Aggrieved by the order of CIT(A),the revenue filed further appeal before the Tribunal.

HELD

The Tribunal upheld the order of CIT(A) on the ground that it was mandatory for the Revenue to prove that there is some special arrangement between the assessee and its associated enterprise to earn extra profit. The Ld AO had specifically not demonstrated any proof of arrangement for disallowance under the provisions of section 10B(7) r.w.s. 80-IA(10) of the Act. The burden of proof had not been discharged by Ld AO.

The Tribunal relied on the following judicial pronouncements while deciding the matter:

i. CIT vs. Schmetz India (P) Ltd [2016] 384 ITR 140 (Bom. HC) – approved by the Hon’ble SC.

ii. Honeywell Automation India Ltd vs. DCIT [2015] Taxmann.com 539 (Pune – Trib)

iii. Western Knowledge Systems & Solutions (India) Pvt Ltd [2012] 52 SOT 172 (Chennai)

iv. Digital Equipment India Ltd vs. DCIT [2006] 103 TTJ 329 (Bang.)

v. Visual Graphics Computing Services India (P) Ltd vs. ACIT [2012] 52 SOT 172 (Chennai) (URO)

vi. Zavata India (P) Ltd vs. ITO [2013] 141 ITD 456 (Hyd. – Trib)

vii. Visteon Technical & Services Centre (P) Ltd vs. Asstt. CIT [2012] 24 taxmann.com 353 (Chennai)

viii. A T Kearney India (P) Ltd vs. ITO [2015] 153 ITD 693 (Delhi – Trib)

ix. Eaton Industries (P) Ltd vs. ACIT in [IT Appeal No. 2544 (PUN) of 2012, dated 30th October, 2017]

x. Honeywell Automation India Ltd vs. Dy CIT [2020] 115 taxmann.com 326 (Pune – Trib.)

In result the appeal filed by the revenue was dismissed.

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Against a defect notice issued under section 139(9), an appeal lies to CIT(A) under section 246A(1)(a) as such notice has the effect of creating liability under the Act, which the assessee denies or would jeopardize refund.

27. V K Patel Securities Pvt Ltd vs. ADIT
ITA No. 1009/Mum./2023
A.Y.: 2019–20
Date of Order: 20th June, 2023
Sections: 139(9)

Against a defect notice issued under section 139(9), an appeal lies to CIT(A) under section 246A(1)(a) as such notice has the effect of creating liability under the Act, which the assessee denies or would jeopardize refund.

FACTS
The assessee, a stock broker, filed its return of income for the year under consideration on 21st September, 2019 declaring a total income of Rs. 3,82,74,330. The CPC issued a defect notice u/s 139(9) of the Act with error “Tax Payer has shown gross receipts or income under the head ‘Profits and Gains of Business or Profession’ more than Rs. 1 crore, however, the books of accounts have not been audited.”

The CPC did not process the return of income filed by the assessee.

Aggrieved by the above said defect notice issued by CPC, the assessee filed “e-Nivaran Grievance”, against which response communication was issued on 16th February, 2021, invalidating the return filed by the assessee.

Aggrieved, the assessee challenged the said defect notice, by filing an appeal before the CIT(A), who dismissed the appeal of the assessee holding that there is no provision to file appeal against the defect notice issued under section 139(9) of the Act.

HELD

The Tribunal observed that the Pune bench of ITAT has held in the case of Deere & Company vs. DCIT [(2022) 138 taxmann.com 46 (Pune)] has held that the defect notice issued under section 139(9) of the Act has the effect of creating liability under the Act, which the assessee denies or would jeopardize refund. Hence it will get covered within the ambit of section 246A(1)(a) of the Act.

The Tribunal held that in view of the said decision of Pune bench of ITAT, the defect notice issued under section 139(9) is appealable, if the assessee denies its liability or if it would jeopardise the refund.

The Tribunal set aside the order passed by the CIT(A) and held that the assessee could file an appeal in the instant case.

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Tax Audit and Penalty under Section 271B

ISSUE FOR CONSIDERATION

A failure to get accounts audited or to obtain and furnish the audit report as required under section 44AB is made liable to a penalty under section 271B of a sum equal to 0.5 per cent of the total sales, turnover or gross receipts of business or profession subject to a ceiling of Rs. 1,50,000.

The provision of section 271B, introduced by the Finance Act, 1984, has undergone various changes from time to time, including the omission of the words “without reasonable cause” with effect from 10th September, 1986. Presently, the failure to get the accounts audited or to obtain and furnish an audit report, as required under section 44AB, are made liable to penalty subject to the discretion of the AO. Section 273B provides that no penalty shall be imposable where the person proves that he had a reasonable cause for the failure specified under section 271B. Section 274 provides that no order imposing a penalty shall be made unless the Assessee has been heard or is given a reasonable opportunity of being heard.

Section 44AA read with Rule 6F requires maintenance of books of account and other documents to enable the AO to compute the total income in accordance with the provisions of the Act. Failure to keep and maintain the books of account and other documents as required by section 44AA is made liable to penalty under section 271A of a sum of Rs. 25,000 with effect from 1st April, 1976 at the discretion of the AO where there is no reasonable cause.

An issue has arisen about the possibility of levy of penalty under section 271B for failure to get accounts audited in cases where no books of account are maintained. Conflicting views are available on the subject supported by the decisions of different benches of the ITAT. The Ranchi Bench of the tribunal has held that it is possible to levy penalty under section 271B even where books of account are not maintained, while the Delhi Bench has held that no such penalty is leviable where no books of account are maintained.

RAKESH KUMAR JHA’S CASE

The issue arose in the case of Rakesh Kumar Jha vs. ITO, 224 TTJ (Ranchi) 11 before the Ranchi Bench of the tribunal. In that case, the Assessee was running the business of tuition classes and was required to maintain books of account and get such books of account audited. The Assessee had maintained the books of account that were rejected by the AO. However, the Assessee had failed to get the books of account audited. The income of the Assessee was estimated by the AO by applying provisions of section 145(3) of the Act which act of estimation was confirmed by the tribunal under a separate order. A penalty under section 271B was levied by the AO for the failure to get the books of account audited and the levy of penalty was confirmed in appeal by the CIT(A). In the further appeal before the tribunal, the Assessee contended that his books of account were rejected, and therefore, he was held to have not maintained the proper books of account as prescribed. It was, therefore, not possible for him to get the accounts audited under section 44AB of the Act, and in that view of the matter, it was not possible to levy penalty under section 271B for not getting the accounts audited.

The Assessee relied on the decision of the Allahabad High Court in the case of CIT vs. Bisauli Tractors, 217 CTR 558 to plead that no penalty under section 271B was leviable. The tribunal noted that the Assessee had maintained the books of account that were rejected by the AO and his income was estimated and which act of estimation had become final by the order of the tribunal. It found that the decision of the Allahabad High Court was not applicable to the facts of the case of the Assessee, in as much as the Assessee in the case before the tribunal had maintained the books of account, but had failed to get the same audited, and therefore, the levy of penalty by the AO was in order. Importantly, the tribunal held that even otherwise, the penalty could have been levied under section 271B for the failure to get the books of account audited where no books of account were maintained, after analysing the provisions of sections 44AA and 44AB and the provisions of levy of penalty under sections 271A and 271B.

The tribunal noted that those provisions were independent of each other and so operated by prescribing specific requirements on the assessee and by providing separate penalties for the respective non-compliances. In para 6 of the order, it gave an example to highlight that reading the provisions collectively might confer unjust benefit to the person who had not maintained books of account and had claimed that no penalty under section 271B should be levied and the penalty, if levied, should be the one under section 271A, only. The said paragraph reads as under: “Suppose there are two persons namely, Ram and Shyam. Both are required to maintain their books of account and also get those audited as required under ss. 44AA and 44AB. Ram maintains his books of account but did not get those audited, whereas Shyam did not maintain his book of accounts at all and there was no question of audit of the same as the books did not exist at all. Under these circumstances, if the contention of the learned counsel is to be accepted, Ram will be subjected to higher penalty under s. 271B of the Act, whereas Shyam who has committed double default would escape with lesser penalty. This proposition, in our humble view, is neither legally justified nor it can pass the test of application of principles of justice, equity and good conscience.”

The tribunal held that to exclude the case of a person from levy of penalty under section 271B on the ground that he has not maintained books of account was not justified legally, and was in violation of the principals of justice, equity and good conscience.

The tribunal extensively referred to the decision of the Madhya Pradesh High Court in the case of Bharat Construction Co vs. ITO, 153 CTR 414 wherein the order of the AO levying penalty under section 271B for not getting the accounts audited, preceded by the proceedings for levy of penalty under section 271A for non-maintenance of books, was upheld by the High Court on the ground that the defaults contemplated under the two provisions were separate and distinct.

The tribunal accordingly upheld the order of AO, levying penalty under section 271B and dismissed the appeal of the Assessee.

TARANJEET SINGH ALAGH’S CASE

The issue again arose in the case of Taranjeet Singh Alagh vs. ITO, in ITA No. 787/Del/2020 for A.Y. 2015–16. In this case for A.Y. 2015–16, the Assessee was found to have not maintained the books of account and had not obtained the audit report. The AO had initiated the penalty proceedings under section 271A for not maintaining the books of account and under section 271B for not obtaining and furnishing the Tax Audit Report. The AO later dropped the proceedings under section 271A but levied the penalty under section 271B of the Act. The order of the AO was confirmed by the CIT(A).

On further appeal, it was contended in writing by the Assessee before the tribunal that the AO was convinced that no books of account were maintained, and of the reason for not maintaining the books; he had, therefore, dropped the penalty proceedings under section 271A of the Act.

It was further contended that no penalty under section 271B was maintainable where no books of account were maintained, as no audit was possible. Reliance was placed on the decision of the bench in the case of Chander Prakash Batra, ITA No. 4305/Del./2011 to support the proposition that no penalty could have been levied.

The tribunal noted the facts, particularly, the fact that the Assessee was held to be not in default under section 271A. It proceeded to hold that no penalty under section 271B was leviable where books of account were not maintained, and the reason for not maintaining the books was found to be justified by the AO. Paragraph 4.1 of the order reads as under: “We have given our thoughtful consideration to the present appeal, admittedly, the penalty was initiated U/s 271A of the Act for non-maintenance of books of account as well as under s. 271B for not complying with the provisions of section 44AB of the Act regarding the auditing of the account. The penalty for non-maintenance on books of account was dropped but the penalty for not getting the accounts audited is sustained. We find merits into the contentions of the Assessee that if he was not guilty of non maintaining of books of account, the presumption would be that he shall not required to maintain the books of account. Under these undisputed facts, imposing penalty for non auditing of books of account is not justified. Therefore, we hereby direct the Assessing authority to delete the penalty.”

The appeal of the Assessee was allowed by the Tribunal, and the penalty was deleted.

OBSERVATIONS

There are two distinct provisions, one requires the maintenance of books of account by specified persons in certain prescribed cases, and another provision requires the audit of accounts that were required to be maintained by the first provision. Section 44A provides for maintenance of accounts, while section 44AB requires the audit of accounts that are required to be maintained by section 44A of the Act.

There are distinct provisions for levy of penalty for two different defaults. One for penalising an Assessee under section 271A for the offence of not maintaining books of account, and the second for penalising him under section 271B for not getting the accounts audited, and obtaining the audit report and filing it in time. These two provisions are separate and are provided for by two distinct provisions introduced at different points of time for penalising two different offences.

In the circumstances, where two separate defaults are committed, for which two separate penalties are provided for, on first blush, it is possible to levy two separate penalties. While this may be true in cases where two offences are not interrelated and are independent and distinct, in the case under consideration, however, the second offence is related to the first, and the second offence can happen only where the person has committed the first offence. This peculiar situation requires us to address the possibility of considering whether the second offence can at all be penalised when the person has already been penalised for the first offence. In other words, can the second offence be ever committed where the books of account are not maintained at all? Can a law require the audit of accounts which are not maintained at all? It seems not. To require a person to get the accounts audited, obtain an audit report and file the same in a case where he has not maintained the books at all; in his case, an audit is an impossibility, and therefore, he cannot be penalised for not doing something which was impossible.

The Allahabad High Court precisely held that no penalty was leviable for not obtaining the audit report in cases where the Assessee had otherwise not maintained the books of account — Bisauli Tractors (supra). The court appreciated that the Assessee could not have got the accounts audited when he had not maintained the books at all. The court rightly held that in such situations, it was appropriate for the authorities to have initiated and levied penalty under section 271A.

The Madhya Pradesh High Court noticed that the offences were separate, and for which separate penalties were provided for in the law and, therefore, did not see any reason why two penalties for separate defaults could not be levied. In confirming the penalty under section 271B, had the court realised that the two offences were interrelated and the first offence, once committed, had rendered impossible the commitment of the second offence, it might not have confirmed the penalty for the second offence.

Importantly, the main and only issue before the court was whether the notice issued under section 271B, and the pursuant order of penalty passed suffered from the law of limitation under section 275(b) or not. The court, while upholding the actions of the AO observed, though it was not called upon to do so, stated that it was possible to pass separate orders due to different provisions of law that provided for penalty at the varying rates. With due respect to the Ranchi bench, the tribunal should have ignored or treated the observations of the court at the best as obiter dicta, not having the force of precedent. Had the case before the bench been decided independent of the observations, maybe the outcome would have been more forceful.

The Allahabad High Court, for its decision, drew analogy from the cases decided under the sales tax laws applicable to the State of Uttar Pradesh. Those were the cases where the court found that the levy of two penalties was not called for, though the defaults were not parallel. Under the Income-tax Act, 1961, not deducting tax at sourceis an offense and not depositing tax is another offense,but a person is not penalised twice; the reason being the two are interrelated, the second cannot be penalised where the person is penalised for the first, i.e., for not deducting.

Section 273B saves cases from levy of penalty in cases where the failure was for a reasonable cause and what better cause can be conceived for the defence under section 271B, where the books of account are not maintained at all.

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There is no need for the AO to issue reopening notice before the expiry of time available to file return under section 139(4) and that too before the end of the assessment year itself. Reopening of an assessment cannot be resorted to as an alternative for not selecting a case for scrutiny.

26. Uttarakhand Poorv Sainik Kalyan Nigam Ltd vs. ITO
ITA No. 3129/Delhi/2018
A.Y. : 2014–15
Date of Order : 23rd June, 2023
Sections : 139(4), 147

There is no need for the AO to issue reopening notice before the expiry of time available to file return under section 139(4) and that too before the end of the assessment year itself. Reopening of an assessment cannot be resorted to as an alternative for not selecting a case for scrutiny.

FACTS

For the assessment year 2014–15, the assessee filed its return of income belatedly under section 139(4), on 6th October, 2015, declaring total income to be Rs. Nil after claiming exemption of Rs. 5,11,44,966 under section 10(26BB) of the Act. This return of income was not selected for scrutiny by the AO.

The AO, in fact, prior to the date of filing of return of income by the assessee issued a notice under section 148 of the Act on 22nd January, 2015, i.e., before end of the assessment year itself and before expiry of time available to assessee to file belated return.

Aggrieved, the assessee preferred an appeal to CIT(A) where interalia it raised this issue of reopening notice, being issued before the end of the assessment year itself. The CIT(A) decided this ground against the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal interalia challenging the validity of assumption of jurisdiction by learned AO in the reassessment proceedings.

HELD
The Tribunal observed that:

i) The assessee had time to file return belatedly under section 139(4) of the Act up to 31st March, 2016. While this is so, there is absolutely no need for the AO to issue reopening notice under section 148 of the Act. The AO could have selected the belated return filed by the assessee for scrutiny and proceeded to determine the total income of the assessee in the manner known to law.

ii) When the due date for filing the belated return of income under section 139(4) of the Act was available to the assessee, the AO prematurely reopened the assessment by issuing notice under section 148 of the Act on 22nd January, 2015 much before the end of the assessment year itself.

iii) Against the belated return of income filed by the assessee under section 139(4) of the Act on 6th October, 2015, the AO had time to issue notice under section 143(2) of the Act till 30th September, 2016.

iv) When the return of income is not filed within the due date prescribed under section 139(1) of the Act, the AO is entitled as per the statute to issue notice under section 142(1) of the Act calling for the return of income. Without resorting to this statutory provision, the AO cannot directly proceed to reopen the assessment. In any case, when the due date for filing the return of income is available in terms of section 139(4) of the Act to the assessee, how there could be any satisfaction on the part of the learned AO to conclude that the income of the assessee has escaped assessment.

The Tribunal held:

i) Nothing prevented the AO to select the filed returns for scrutiny, and frame the assessment in accordance with law. When this provision is available with the AO, where is the need to issue reopening notice that too before the end of the assessment year itself. The Tribunal declared the reopening notice issued u/s 148 of the Act to be premature;

ii) In any case, the revenue cannot resort to reopening proceedings merely because a particular return is not selected for scrutiny. Reopening of an assessment cannot be resorted to as an alternative for not selecting a case for scrutiny. There should be conscious formation of belief based on tangible information that income of an assessee had escaped assessment;

iii) The issue in dispute has already been adjudicated by the co-ordinate Bench of Delhi Tribunal in ITO vs. Momentum Technologies Pvt Ltd [ITA No.5802/Del/2017 dated 31st March, 2021 for A.Y. 2011–12]. Similar view was also addressed by the co-ordinate Bench of Bombay Tribunal in Bakimchandra Laxmikant vs. ITO [(1986) 19 ITD 527 (Bombay)].

iv) Following the judicial precedents mentioned hereinabove, the Tribunal quashed the reassessment proceedings framed by the AO as void abinitio.

shailesh.kwebmaker

Third proviso to section 50C being a beneficial provision, the benefit extended by third proviso to section 50C should be extended to a case where value determined by stamp valuation authority has been substituted by the value determined by DVO.

25. Smt. Krishna Yadav vs. ITO
ITA No. 2496/Del/2017 (Delhi)
A.Y.: 2005–06
Date of Order: 22nd February, 2022
Section: 50C

Third proviso to section 50C being a beneficial provision, the benefit extended by third proviso to section 50C should be extended to a case where value determined by stamp valuation authority has been substituted by the value determined by DVO.

FACTS
The assessee, an individual, filed return of income, for assessment year 2005–06, declaring total income of Rs. 46,18,500. In the course of assessment proceedings, the Assessing Officer (AO) noticed that during the year under consideration, the assessee has sold immovable property consisting of land and constructed portion for a sale consideration of Rs. 90 Lakh. The Stamp Valuation Authority has determined the value of the property at Rs. 1,02,36,200.

The AO issued a show cause-notice to the assessee to explain, why the value determined by the Stamp Valuation Authority should not be considered as deemed sale consideration. Though, the assessee objected to the proposed action of the AO, rejecting assessee’s submission, the AO proceeded to substitute the declared sale consideration with the value determined by the Stamp Valuation Authority in terms of section 50C of the Act. Hence, the AO proceeded to compute short term capital gain by making an addition of Rs. 12,36,200.

Aggrieved, the assessee preferred an appeal to CIT(A) who directed the AO to refer the valuation of the property to DVO. Consequently, the DVO determined the value of the property at Rs. 92,37,400 as on the date of sale. Thus, based on the value determined by the DVO, the Commissioner (Appeals) restricted the addition on the ground of short term capital gain to Rs. 2,37,500 being the difference between the declared sale consideration and the value determined by the DVO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal observed that:

i) It is a fairly accepted position that the valuation of asset involves some amount of guess work and estimation;

ii) Consequent to determination of the fair market value of the immovable property transferred by the assesse, the difference between the declared sale consideration and the value determined by the DVO has narrowed down to Rs. 2,37,400;

iii) After determination of market value of asset as on the date of sale by the DVO, the difference between the declared sale consideration and the market value is within the range of 5 per cent, as referred to, in third proviso to section 50C(1) of the Act;

iv) There are various judicial precedents, wherein, it has been held that the third proviso to section 50C(1) of the Act introduced by Finance Act, 2018, w.e.f., 1st April, 2019, will apply retrospectively. In this context, the decision of the Tribunal in the case of Maria Fernandes Cheryl vs. ITO, [2021] 123 taxmann.com 252 (Mum.) was referred to.

The Tribunal held that the third proviso to section 50C being a beneficial provision, in our considered opinion, the said benefit should be extended to the assessee, as, ultimately the value determined by the Stamp Valuation Authority has been substituted by DVO’s valuation in terms of sub-section (3) of section 50C of the Act. The Tribunal held that the addition of Rs. 2,37,400 towards short-term capital gain needs to be deleted.

shailesh.kwebmaker

Eligibility of Educational Institutions to Claim Exemption Under Section 10(23C) of the Income-Tax Act – Part I

INTRODUCTION

1.1 Section 10 of the Income-tax Act, 1961 (‘the Act’) excludes/exempts income falling within any of the clauses contained therein while computing the total income of a previous year of any person. The scope of this write-up is restricted to certain provisions contained in section 10(23C) of the Act which deals with the exemption of income earned by educational institutions existing solely for educational purposes.

1.2 Section 10(22) of the Act was a part of the statute right from the enactment of the Income-tax Act, 1961. The said section provided exemption for any income of a university or other educational institution existing ‘solely’ for educational purposes and not for purposes of profit. Section 10(22) was omitted by the Finance (No. 2) Act, 1998 w.e.f. 1st April, 1999. The CBDT, in its Circular No. 772 dated 23rd December, 1998 (235 ITR (St.) 35), stated that section 10(22) provided a blanket exemption from income-tax to educational institutions existing solely for educational purposes and in the absence of any monitoring mechanism for checking the genuineness of their activities, the said provision has been misused. Therefore, it was thought fit to omit section 10(22) from the Act and, in its place, insert certain sub-clauses in section 10(23C) as mentioned hereinafter.

1.3 Section 10(23C) of the Act was introduced by the Taxation Laws (Amendment) Act, 1975 w.e.f. 1st April, 1976 exempting income of certain specified funds/ institutions which are not relevant for the purpose of this write up. The Finance (No. 2) Act, 1998 while omitting section 10(22) of the Act, inter alia introduced clauses (iiiab), (iiiad) and (vi) in section 10(23C) of the Act granting exemption to certain universities or other educational institutions existing solely for educational purposes and not for purposes of profit and which satisfied the criteria stated in those clauses. Section 10(23C)(iiiab) of the Act covers any educational institution which is wholly or substantially financed by the Government.

Section 10(23C)(iiiad) of the Act as amended by the Finance Act, 2021 applies to any educational institution if the aggregate annual receipts of the person from such institution does not exceed R5 crores. Section 10(23C)(vi) exempts income of any educational institution other than those mentioned in sub-clauses (iiiab) or (iiiad) and which is approved by the specified authority. In this write-up, we are mainly considering section 10(23C) (vi).

1.4 Section 10(23C)(vi) contains several provisos which have been amended from time to time. Substantial amendments were made in the last three years. As such, at different points of time, proviso numbers have also undergone changes. These provisos (except the one dealing with anonymous donation referred to in section 115BBC) are not applicable to educational institution covered u/s 10(23C)(iiib) and 10 (23C)(iiid). In this write-up, we are largely concerned with some of the provisions contained in some provisos (since 2010). For this purpose, we have made reference to only provisos which are relevant to educational institutions and to the issue under consideration. The first proviso to section 10(23C) requires an educational institution to make an application in the prescribed form and manner to the Principal Commissioner or Commissioner for grant of approval. The second proviso empowers the Principal Commissioner or Commissioner to call for such documents or information from the institution as it thinks is necessary to satisfy itself about the genuineness of the activities of the institution. Another proviso deals with the time limit for making an application for approval under which there is no power to entertain belated applications. The third proviso contains provisions for application or accumulation of income, investment in specified modes, etc. The seventh proviso (which is similar to section 11(4A)) states that the benefit of section 10(23C)(vi) shall not apply to income being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of accounts are maintained in respect of such business.

1.5 The meaning of the term ‘education’ used in the definition of ‘charitable purpose’ in section 2(15) of the Act was explained by the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust vs. CIT (1975) 101 ITR 234. The assessee, in this case, was the sole trustee of a trust which had the object of educating people by establishing, conducting and helping educational institutions, founding and running reading rooms and libraries, etc. The assessee claimed that for the present it was educating people through newspapers and journals, and it would be taking up other ways and means of education as noted in the trust deed as and when it is possible. One of the questions considered by the Supreme Court was whether the assessee was engaged in ‘educational activities’ thereby entitling it to exemption u/s 11 r.w.s. 2(15) of the Act.

On facts, the Supreme Court denied the benefit of exemption u/s 11 of the Act and also took the view that the term ‘education’ in section 2(15) means systematic schooling or training given to students that results in developing knowledge, skill, mind and character of students by normal schooling.

The Supreme Court held that the word ‘education’ was not used in a wide and extended sense which would result in every acquisition of knowledge to constitute education.

1.6 A Constitution bench comprising five Judges of the Supreme Court in the case of ACIT vs. Surat Art Silk Cloth Manufacturers Association (1978) 121 ITR 1, laid down what came to be known as the ‘predominant test’ in the context of section 2(15). In this case, the assessee was a company set up under the provisions of section 25 of the Companies Act, 1956 with the object of promoting commerce and trade in art silk yarn, raw silk, etc., to carry on business of art silk yarn, etc. belonging to and on behalf of members, to obtain import and export licences required by members and to do other things as are incidental or conducive to the attainment of its objects.

The AO denied exemption u/s 11 on the grounds that certain objects carried on by the assessee were not charitable in nature and, therefore, the assessee could not be said to have been set up for ‘advancement of any other object of general public utility’. The Supreme Court decided the issue in favour of the assessee and held that if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust from being a valid charity for the purpose of claiming exemption. In relation to the restrictive words ‘not involving the carrying on of any activity for profit’ used in section 2(15) of the Act, the Supreme Court observed that it was the object of general public utility that must not involve the carrying on of any activity for profit and not its advancement or attainment.

1.7 In the case of Aditanar Educational Institution vs. ACIT (1997) 224 ITR 310, an issue arose before the Supreme Court as to whether an educational society or a trust or other similar body running an educational institution solely for educational purposes and not for the purpose of profit could be regarded as ‘other educational institutions’ falling within section 10(22) of the Act. The assessee was a society set up with the object to establish, run, manage or assist educational institutions. The benefit u/s 10(22) was sought to be denied on the ground that the same would be available only to educational institutions as such and not to anyone who finances the running of such an institution.

The Supreme Court rejected the Revenue’s argument that the assessee was only a financing body and did not come within the scope of ‘other educational institution’.

The Supreme Court held that the assessee was entitled to exemption u/s 10(22) of the Act as the assessee was set up with the sole purpose of imparting education at the levels of colleges and schools.

1.8 In the case of American Hotel & Lodging Association, Educational Institute vs. CBDT (2008) 301 ITR 86, the Supreme Court dealt with the scope of enquiry to be undertaken by the prescribed authority u/s 10(23C)(vi) at the time of granting approval. In this case, the prescribed authority rejected the application made by the assessee for registration u/s 10(23C) on the grounds that there was a surplus which was repatriated outside India and, therefore, the assessee had not applied its income for the purpose of education in India. The Supreme Court, after considering the relevant provisos to section 10(23C), held that the threshold condition for grant of approval was existence of an educational institution and the conditions prescribed by the provisos such as application of income/ accumulation, etc. were subsequent, the compliance with which would depend on future events. The Supreme Court held that the prescribed authority could stipulate compliance with such monitoring conditions as a condition subject to which approval is granted. Supreme Court also noted the 13th proviso to section 10(23C) which empowered the prescribed authority to withdraw the approval earlier granted if the monitoring conditions were not met. In this case, referring to the judgment of Surat Art Silk’s case (supra), the Court had stated that “it has been held by this court that the test of predominant object of the activity is to be seen whether it exists solely for education and not to earn profit. However, the purpose would not lose its character merely because some profit arises from the activity”. The Court further stated that in deciding the character of the recipient, it is not necessary to look at the profit of each year, but to consider the nature of the activities undertaken in India. According to the Court, existence of surplus from the activity will not mean absence of educational purpose. The test is – the nature of activity.

1.9 The Supreme Court in the case of Queen’s Educational Society vs. CIT (2015) 372 ITR 699 was concerned with the correctness of the view taken by the lower authorities that an educational institution ceases to exist solely for educational purposes whenever a profit/ surplus is made by such an institution. The assessee was established with the sole object of imparting education. The AO denied the assessee’s claim for exemption u/s 10(23C) (iiiad) on the basis that the assessee had earned profit and, therefore, had ceased to solely exist for educational purposes. The Supreme Court overturned the decision of the High Court which had approved the decision of the AO and held that where surplus made by the educational society was ploughed back for educational purposes, the educational society exists solely for educational purposes and not for the purposes of profit.

The Supreme Court also placed reliance on the tests laid down in its earlier decisions in the cases of Surat Art Silk Cloth Manufacturers Association, Aditanar Educational Institution and American Hotel and Lodging Association (supra) to determine whether an educational institution exists solely for educational purposes.

1.10 All the aforesaid sub-clauses of section 10 (referred in para 1.2 and 1.3) apply to a university or other educational institutions existing ‘solely’ for educational purposes and not for the purpose of profit. The interpretation of these provisions and the term ‘solely’ had given rise to considerable litigation and was a subject matter of dispute before different authorities/Courts. Several other issues also arose while interpreting the aforesaid provisions in section 10.

1.11 Recently, this issue came-up before the Supreme Court [in the context of approval u/s 10(23C)(vi)] in the case of New Noble Educational Society vs. CCIT (2022) 448 ITR 594 and the Supreme Court has now settled this dispute and therefore, it is thought fit to consider the said decision in this feature.

New Noble Educational Society [and other cases] vs. CCIT (2011) 334 ITR 303 (AP)

2.1 Before the Andhra Pradesh High Court, a batch of writ petitions came-up against the rejection of applications of the petitioners for grant of approval u/s 10(23C)(vi) and the direction was sought for the Chief Commissioner of Income-tax (Authority) to grant the requisite approval to the petitioners (societies/trust) from A.Y. 2009 -10 onwards.

2.1.1 In the above cases, different facts were involved for the purpose of rejecting the approval. These cases also involved some common questions. As such, the High Court first decided to deal with the common questions and subsequently also dealt with each case separately considering their facts as well as other issues involved therein considered by the Authority for rejecting the application for approval.

2.1.2 It appears that in some of the above batch of cases, the relevant constitution documents, apart from the object of imparting education, also provided other objects such as: to organize sports, games and cultural activities, to solve problems of members on social grounds; provide employment amongst educated people; promote economic and educational needs of Christians in particular and others in general; to strive for an upliftment of socially, economically and educationally weaker section of the societies in general and of the Christian community in particular; establish associate organization, such as an orphanage, hostels for needy students, home for the aged, disabled, hospitals for poor etc. It appears that the Authority had rejected the application for approval in these cases, on the grounds that they are not created ‘solely’ for the purpose of education. Additionally, the approval was also denied on the grounds that they were not registered under the Andhra Pradesh Charitable Trust and Hindu Religious Institution and Endowments Act, 1987 (A.P. Charities Act) and in some cases, the application for approval was rejected only on this second ground. In some cases there were other reasons also for rejecting the approval.

2.1.3 While proceeding to decide the common issues in the batch of petitioners, the Court framed , with the consent of the petitioners, the following common questions for adjudications:

“(1) Whether the objects in the memorandum of association of a society/trust are conclusive proof of such a trust existing solely as an educational institution entitled for the benefits, and being eligible for approval, under section 10(23C)(vi) of the Act?

(2) Whether registration, under section 43 of the A.P. Act No. 30 of 1987, is a condition precedent for seeking approval under section 10(23C)(vi) of the Act?

(3) Whether the certificate issued by the Commissioner of Endowments, as the appropriate authority under section 43 of the A.P. Act No. 30 of 1987, is conclusive proof of an assessee being a charitable institution existing solely for the purpose of education?

(4) Even in case the assessee produces a certificate of registration under section 43 of the A.P. Act No.30 of 1987 can the Commissioner of Income-tax refuse approval/sanction under section 10(23C)(vi) of the Act, 1961? ”

2.2 The Court then proceeded to consider the first question that whether the object of the trust are conclusive proof that it is existing ‘solely’ as an education institution for granting the requisite approval.

2.2.1 On behalf of the petitioners, it was inter alia contended that section 10(23C)(vi) makes or distinguishes between the educational institution and the society/trust running it; the approval is granted to the educational institution and not to the society/trust; it is only the object of educational institution which should be considered and not that of society/trust; the society/trust which runs the educational institution is entitled to pursue objects other than those relating exclusively for educational purposes; at the stage of grant of approval, only the objects of the society/trust are required to be examined, and not the manner of application of funds by it; the other objects of the petitioners are also ancillary to education, etc.

2.2.2 On behalf of the Revenue, it was inter alia contended that it was immaterial whether the societies/trust peruses all its objects enumerated in its trust deed, even if an object is not pursued in real terms in a particular year, the society/trust can pursue it in other year as it has mandate to do so; such objects of a trust fall foul of the conditions specified in section 10(23C)(vi); exemption is granted to society/trust and not to any of its limb engaged in a particular activity; it is necessary that all the objects mentioned in the trust deed are exclusively for education and not for any other purpose; CBDT in its instruction dated 29th October, 1977 had explicitly prohibited spending of surplus of an educational institution for non-educational purposes; even if no amount is spent for non-educational purpose, the society/trust would not be entitled to exemption if its existence is not solely for educational purpose.

2.2.3 The Court then noted that section 10(23C)(vi) is analogous to earlier section 10(22) except for the approval etc. requirements provided in section 10(23C)(vi) and to that extent judicial pronouncements made in the context of section 10(22) are relevant. Further, considering provisions of section 10(23C)(vi), the Court stated as under (pages 309-310):

“In order to be eligible for exemption, under section 10(23C)(vi) of the Act, it is necessary that there must exist an educational institution. Secondly, such institution must exist solely for educational purposes and, thirdly, the institution should not exist for the purpose of profit. (CIT v. Sorabji Nusserwanji Parekh, [1993] 201 ITR 939 (Guj)). In deciding the character of the recipient of the income, it is necessary to consider the nature of the activities undertaken. If the activity has no co-relation to education, exemption has to be denied. The recipient of the income must have the character of an educational institution to be ascertained from its objects. (Aditanar Educational Institution, [1997] 224 ITR 310 (SC)). The emphasis in section 10(23C)(vi) is on the word “solely”. “Solely” means exclusively and not primarily. (CIT v. Gurukul Ghatkeswar Trust, (2011) 332 ITR 611 (AP); CIT v. Maharaja Sawai Mansinghji Museum Trust, [1988] 169 ITR 379 (Raj)). In using the said expression, the Legislature has made it clear that it intends to exempt the income of the institutions established solely for educational purposes and not for commercial activities. (Oxford University Press v. CIT, [2001] 247 ITR 658 (SC)). This requirement would militate against an institution pursuing the objects other than education….”

2.2.4 While rejecting the contention with regard to distinction between the society/trust and educational institution run by it, the Court stated as under (page 309):

“An educational society, running an educational institution solely for educational purposes and not for the purpose of profit, must be regarded as “other educational institution” under section 10(23C)(vi) of the Act. It would be unreal and hyper-technical to hold that the assessee-society is only a financing body and will not come within the scope of “other educational institution”. If, in substance and reality, the sole purpose for which the assessee has come into existence is to impart education at the level of colleges and schools, such an educational society should be regarded as an “educational institution”. (Aditanar Educational Institution v. Addl. CIT, [1997] 224 ITR 310 (SC)). Educational institutions, which are registered as a society, would continue to retain their character as such and would be eligible to apply for exemption under section 10(23C)(vi) of the Act. (Pine – grove International Charitable Trust v. Union of India, [2010] 327 ITR 73 (P&H)). The distinction sought to be made between the society, and the educational institution run by it, does not, therefore, merit acceptance.”

2.2.5 The Court also analysed the effect of relevant provisos to section 10(23C) referred to in para 1.4 above and noted the position that there is a difference between stipulation of conditions and compliance therewith. In this context, the Court stated that the threshold conditions are aimed at discovering the actual existence of an educational institution by the authority by following the specified procedure. If the pre-requisite conditions of actual existence of educational institution are fulfilled then the question of compliance with the requirements, contemplated by various other provisos would arise. In this context, the Court further stated as under (page 312):

“Compliance with monitoring conditions/requirements under the third proviso, like application, accumulation, deployment of income in specified assets, whose compliance depends on events that have not taken place on the date of the application for initial approval, can be stipulated as conditions by the prescribed authority subject to which approval may be granted, provided they are not in conflict with the provisions of the Act. While imposing conditions, subject to which approval is granted, the prescribed authority may insist on a certain percentage of the accounting income to be utlisied/applied for imparting education. Similarly, the prescribed authority may grant approval on such terms and conditions as it deems fit in cases where the institution applies for initial approval for the first time….”

2.2.6 Finally, the Court concluded on the first question referred to in para 2.1.3 and held as under (page 313):

“We, accordingly, hold that in cases where approval, under section 10(23C)(vi) of the Act, is initially sought, the objects in the memorandum of association of a society/trust are conclusive proof of such a trust existing solely as an educational institution entitled for the benefits, and as being eligible for approval, under section 10(23C)(vi) of the Act. In addition, an application in the prescribed proforma should be submitted to the prescribed authority within the time stipulated and the specified documents should be enclosed thereto. However, in cases where an application is submitted, seeking renewal of the exemption granted earlier, the prescribed authority shall, in addition to the conditions aforementioned, also examine whether the income of the applicant-society has been applied solely for the purposes of education in terms of section 10(23C)(vi) of the Act, the provisos thereunder, the Income-tax Rules, and the documents enclosed to the application submitted in Form 56D.”

2.2.7 To broadly summarize this issue, the High Court rejected the assessee’s argument seeking to make a distinction between the society and the educational institution run by it. The High Court held in the new cases, that for determining the eligibility for approval u/s 10(23C)(vi), the objects in the memorandum of association of a society/trust are conclusive proof to determine whether or not such a trust exists solely as an educational institution. In addition to this, in existing cases for renewal [or otherwise also], the actual conduct should be examined. The term ‘solely’ means exclusively and not primarily. The High Court further observed that if there are other objects in the memorandum which are non-educational, the fact that the assessee has not applied its income towards such non-educational objects would not entitle the assessee to the benefits u/s 10(23C)(vi) of the Act. However, if the primary or dominant purpose of an institution is “educational”, another object which is merely ancillary or incidental to the primary or dominant purpose would not disentitle the institution to the benefit of section 10(23C)(vi).

2.3 The High Court considered the remaining three questions [referred to in para 2.1.3 above] as inter-linked and inter-connected. For dealing with these questions, the High Court analysed the relevant provisions of the A. P. Charities Act under which it seems that the registration of educational institution is mandatory. Thus, the High Court also considered the issue as to whether registration by an educational institution under the A. P. Charities is a condition precedent for seeking approval u/s 10(23C)(vi). Answering the question in the negative, the High Court held that registration u/s 43 of the A. P. Charities Act is not a condition precedent for seeking approval u/s 10(23C)(vi). However, the Authority can prescribe such registration as a condition subject to which approval is granted u/s 10(23C)(vi) of the Act. The High Court further observed that the certificate of registration under the A.P. Charities Act is one of the factors which can be considered while considering the application for approval. The High Court also stated that the registration certificate issued under A.P. Charities Act is not a conclusive proof for treating the institution as existing solely for the purpose of education and despite the issuance of such certificate, the Authority is entitled to refuse application for approval u/s 10(23C)(vi).

R. R. M. Educational Society vs. CCIT (2011) 339 ITR 323 (AP)

3 In the above case, the petitioner was a society registered under the A. P. (Telangana Areas) Public Societies Registration Act, 1350 [this Act was replaced by the A. P. Societies Registration Act, 2001 – A. P. Registration Act]. The objects of the Society were as follows (pages 325-326):

“(i) To open, run and continue an institution for providing higher, technical and medical education and training to the students community of students to promote literacy and eradicate unemployment;

(ii) To open, run and continue the hostels for the poor students community;

(iii) To organize seminars, workshops, debates, camps and forums, etc., for poor students community;

(iv) To encourage social, educational and literary activities among the students;

(v) To open, run and continue primary, secondary and high schools for students, and

(vi) to conduct cultural programmes, help for poor people of community for their study.”

3.1 It was claimed that the aforesaid objects were amended in a meeting and the amended objects were registered with the Registrar of Societies on 24th August, 2009. After the amendment, the objects were as under (page 326):

“(a) To open, run continue an institution for providing higher, technical and medical education and training to the students community of students to promote literacy and eradicate unemployment, and

(b) To open, run and continue primary, secondary and high schools for students.”

3.2 It appears that the petitioners had applied for approval u/s10(23C)(vi) in the prescribed Form 56D on 27th May, 2009 for the A.Ys. 2008-09 and 2009-10. The application for approval was rejected by the Authority by order dated 26th May, 2010 on the grounds that, in so far as A.Y. 2008-09 was concerned, it was time barred and, in so far as A.Y.2009-10 was concerned, some of the objects were non-educational and therefore, the society did not exist solely for educational purpose; and the society was not registered under the A.P. Charities Act. The petitioner had challenged this order before the High Court by filing a writ petition on various grounds including the ground, for A.Y.2008-09, that the Authority ought to have condoned the delay in filing application for approval.

3.3 For the purpose of deciding the issue of condonation of delay, the Court considered the relevant proviso [as well as subsequent amendments made in this respect] dealing with time-limit provided for making application for approval and noted that no power is vested with the Authority to entertain an application filed beyond the statutory period. In this regard, the Court took the view that the Authority, being the creature of the statue, cannot travel beyond the statutory provisions, and could not, therefore, have condoned the delay.

3.4 The Court further considered the criteria for ascertaining whether the object of the institution relate to education as contemplated in section 10(23C)(vi). The Court then stated as under (page 330):

“If there are several objects of a society some of which relate to “education” and others which do not, and the trustees or the managers in their discretion are entitled to apply the income or property to any of those objects, the institution would not be liable to be regarded as one existing solely for educational purposes, and no part of its income would be exempt from tax. In other words, where the main or primary objects are distributive, each and every one of the objects must relate to “education” in order that the institution may be held entitled for the benefits under Section 10(23-C)(vi) of the Act.

If the primary or dominant purpose of an institution is “educational”, another object which is merely ancillary or incidental to the primary or dominant purpose would not disentitle the institution from the benefit. The test which has, therefore, to be applied is whether the object, which is said to be non-educational, is the main or primary object of the institution or it is ancillary or incidental to the dominant or primary object which is “educational”. (Addl. Cit v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1(SC)). The test is the genuineness of the purpose tested by the obligation created to spend the money exclusively on “education”.

If that obligation is there, the income becomes entitled to exemption. (Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC)”

3.5 After considering the legal position with regard to approval of application u/s 10(23C) in detail and referring to various judicial pronouncements [largely similar to what was considered in the case of New Noble Educational Society referred to in para 2 above], the Court stated as under (pages 331-332):

“The objects of the petitioner, as it originally stood, included “to eradicate unemployment”; “to encourage social activities among the students” and to “help poor people of community for their study”. These objects do not relate solely to education. The sense in which the word “education” has been used, in section 2(15) of the Income-tax Act, is the systematic instruction, schooling or training given to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. The word “education”, in section 2(15), has not been used in that wide and extended sense according to which every acquisition of further knowledge constitutes education. What education connotes, in that clause, is the process of training and developing the knowledge, skill, mind and character of students by formal schooling. (Sole Trustee, Loka Shikshana Trust, [1975] 101 ITR 234 (SC)). This definition of “education” is wide enough to cover the case of an “educational institution” as, under section 10(23C)(vi), the “educational institution” must exist “solely” for educational purposes (Maharaja Sawai Mansinghji Museum Trust, [1988] 169 ITR 379 (Raj)).

The element of imparting education to students, or the element of normal schooling where there are teachers and taught, must be present so as to fall within the sweep of section 10(23C)(vi) of the Act. Such an institution may, incidentally, take up other activities for the benefit of students or in furtherance of their education. It may invest its funds or it may provide scholarships or other financial assistance which may be helpful to the students in pursuing their studies. Such incidental activities alone, in the absence of the actual activity of imparting education by normal schooling or normal conduct of classes, would not be sufficient for the purpose of qualifying the institution for the benefit of section 10(23C)(vi) (Sorabji Nusserwanji Parekh, [1993] 201 ITR 939 (Guj)). Section 2(15) is wider in terms than section 10(23C)(vi) of the Act. If the assessee›s case does not fall within section 2(15), it is difficult to put it in section 10(23C)(vi) of the Act (Maharaja Sawai Mansinghji Museum Trust, [1988] 169 ITR 379 (Raj)).”

3.6 Dealing with the case of amendment in the objects of the Society and its effect, the Court referred to the relevant provisions of the A. P. Registration Act dealing with the amendment of the by-laws of the society and stated as under (page 332):

“…On a conjoint reading of sub-sections (3) and (4) of section 8, it is only when the amendment to the objects of the society is intimated to the Registrar and the Registrar, on being satisfied that the amendment is not contrary to the provisions of the Act, registers and certifies such an alteration would it be a valid alteration under the Act. It is only from the date the Registrar certifies the alteration that the amendment, to the objects of the society, comes into force.

3.6.1 In this context, the Court also further stated as under (page 332):

“The amended objects also included “eradicating unemployment”. While this object may be charitable in nature, it is not solely for the purpose of education which is the requirement under section 10(23C)(vi) of the Act. …”

3.7 Finally, while upholding the order of rejection of approval, the Court held as under (page 333):

“The order of the first respondent, in rejecting the petitioner’s application for the assessment year 2009-10 on the ground that their objects were non-educational, cannot be faulted. Even if the petitioner’s contention that registration under A.P Act 30 of 1987 is not a condition precedent, in view of the judgment of this court in New Noble Educational Society v. Chief CIT, [2011] 334 ITR 303 (AP) (judgment in W.P No. 21248 of 2010 and batch dated November 11, 2010), is to be accepted, since the object of “eradicating unemployment” can neither be said to be integrally connected with or as being ancillary to, the object of providing education, the order of the first respondent in rejecting the petitioner’s application for exemption under section 10(23C)(vi) for the assessment year 2009-10 cannot be faulted.”

[To be continued]

shailesh.kwebmaker

Article 5 of India-Singapore DTAA; Section 9(1) of the IT Act – (i) Since the Indian parent company of Singapore subsidiary (Sing Sub) carried on all material activities, and since the Singapore subsidiary was merely shipping goods to Indian customers, fixed place PE of Sing Sub was constituted as what is relevant to be seen is the scope of activities carried out; (ii) on facts, dependent agent PE was constituted; (iii) the AO was directed to compute profit and attribute the same to PE as per directions given and various decisions on the issue.

Redington Distribution Pte. Ltd. vs. The DCIT
TS-908-ITAT-2022-Chny
ITA No: 14/Chny/2020
A.Y..: 2011-12
Date of order: 16th November, 2022

Article 5 of India-Singapore DTAA; Section 9(1) of the IT Act – (i) Since the Indian parent company of Singapore subsidiary (Sing Sub) carried on all material activities, and since the Singapore subsidiary was merely shipping goods to Indian customers, fixed place PE of Sing Sub was constituted as what is relevant to be seen is the scope of activities carried out; (ii) on facts, dependent agent PE was constituted; (iii) the AO was directed to compute profit and attribute the same to PE as per directions given and various decisions on the issue.

FACTS

Sing Sub, a Singapore entity is a tax resident of Singapore. It is a subsidiary of I Co, a listed Indian company and a leading supply chain solutions provider worldwide. Sing Sub was also engaged in the same business.

In the course of survey conducted at the premises of I Co, the tax authority found certain evidences, such as, emails, correspondence between I Co and Sing Sub, documents, etc. It also recorded statements of certain employees of I Co who were providing certain services to Sing Sub. In the process, it identified employees involved in sales function, who comprised a team called ‘Dollar Business’. It was found that ‘Dollar Business’ pertained to the USD business of Indian customers. Factually, the ‘Dollar Business’ was the same business with the the only difference being that based on request of customers (usually, those having Units in SEZ, etc.). its billing was done in USD instead of INR.

Analysis of the statements and documentary evidences showed that entire ‘Dollar Business’ beginning with the identification of customers, submitting quotes for various equipment, fixing price, granting of credit and ending with collection of receivables was performed by the ‘Dollar Team’. Thus, except for shipping of the equipment from Singapore, all other functions were undertaken by the ‘Dollar Team’ in India. Further, ‘Dollar Team’ directly reported to Singapore office. It was also noted that in Singapore, Sing Sub had employed very few employees because the only operation carried out in Singapore was shipping of goods.

Accordingly, with regards to Explanation 2 to Section 9(1) (i) of the Act, and Article 5 of India-Singapore DTAA, the AO concluded that Sing Sub had a PE in India. Further, in addition to all the aforementioned functions, I Co also appointed staff for activity of Sing Sub. Therefore, the AO further concluded that Sing Sub also had a dependent agent PE in India.

The DRP held that since entire sales function was habitually performed in India through ‘Dollar Team’, all the conditions of PE were satisfied and further, the ‘Dollar Team’ also constituted dependent agent PE of Sing Sub in India.

Before the Tribunal, Sing Sub contended as follows.

Sing Sub had taken support of the‘Dollar Team’ for certain back-office operations and ‘Dollar Team’ mainly acted as a communication channel between Sing Sub and the customer/vendor and channel partners.

The AO had mainly relied upon the statement of one junior employee who was not even employed with I Co during the relevant assessment year. Further, the AO not only ignored the statements of other employees, employed during the relevant assessment year, but also ignored statements given by clients of Sing Sub.

It was evident from these statements that clients had directly negotiated with original equipment manufacturers (“OEM”). Even though ‘Dollar Team’ provided quotations to Indian customers, they were subject to approval of OEMs. ‘Dollar Team’ did not have any role, either in negotiating the price or in concluding the contract.

To constitute a fixed place PE under Article 5 of India-Singapore DTAA, the premises where the non-resident was carrying out its operations should be at its disposal.

However, the AO had not shown that any employee of Sing Sub had travelled to India and that premises of I Co were occupied by them, or that premises were habitually available at the disposal of Sing Sub¹.

To constitute a dependent agent PE: the agent should be legally and economically dependent on the foreign principal; the agent should have authority to conclude contracts in India; and it should have habitually exercised such authority. However, I Co is a listed Indian company, which is much larger than Sing Sub. Hence, it cannot be said to be dependent on I Co².

For computing the profit attributable to Indian operations, the AO also included sales of non-Indian operations. This was against the principles of taxation. Further, the AO had determined attribution percentage in an arbitrary manner whereby only 10.35 per cent was attributed to Sing Sub whereas 89.65 per cent was attributed to the PE. If at all it is held that Sing Sub had a PE in India, only reasonable profit should be attributed to PE³.

1. In support of its contention, F Co relied on the decisions in E-funds IT Solution Inc. [2017] 399 ITR 34 (SC), UOI vs. UAE Exchange Centre Ltd. [2020] 425 ITR 30 (SC) and in Airlines Rotables Ltd. vs. JDIT [2011] 44 SOT 368 (Mum ITAT).

2. In support of its contention, F Co relied on the decision in Varian India (P) Ltd. vs. ADIT [2013] 142 ITD 692 (Mum ITAT).

3. In support of its contention, F Co relied on the decisions in Annamalais Timber Trust & Co. vs. CIT [1961] 41 ITR 781 (Mad.) and in Motorola Inc. [2005] 95 ITD 269 (SB).

Before the Tribunal, the department’s representative reiterated the contentions of the AO in his order. He further mentioned that the appellant’s representative had merely questioned and challenged the evidences collected by the tax authority in the course of survey, but had not provided any material evidence to establish that Sing Sub had carried out all business activities only in Singapore.

HELD

(i) Fixed Place PE

Based on the analysis of the statements and documentary evidences collected during the survey, the AO had discussed the modus operandi of business of Sing Sub and I Co. On the basis of findings of survey, Sing Sub and I Co had the same customers. I Co routed business through Sing Sub when those customers required import duty benefit. ‘Dollar Team’ exclusively worked for Sing Sub right from identifying the customers, negotiating the price, following up for outstanding receivables, etc. The sales manager of ‘Dollar Team’ had categorically admitted that he had negotiated with Indian customers, had also fixed terms and conditions of sales and further, that except for preparation of shipping documents for shipment of goods by Sing Sub, all other activities were carried out by I Co.

In terms of Article 5(1) of India-Singapore DTAA, ‘PE’ means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

It was abundantly clear from the nature of work carried out by ‘Dollar Team’ that it was the backbone of Sing Sub’s business. The fact that customers of I Co and Sing Sub were same supported this proposition.

There is no dispute that in terms of decision in E-funds IT Solution Inc. [2017] 399 ITR 34 (SC), it was essential that premises of I Co should be at the disposal of Sing Sub and business of Sing Sub should be carried on through that place. In this case, since ‘Dollar Team’ carried out its functions from premises of I Co, there was no dispute that premises of I Co were at the disposal of Sing Sub.

In UOI v. UAE Exchange Centre Ltd. [2020] 425 ITR 30 (SC), it was held that if the services rendered by the subsidiary or holding company are in the nature of preparatory or auxiliary, then no PE was constituted. However, in this case, services rendered by the ‘Dollar Team’ of I Co were neither preparatory nor auxiliary, but main functions of a business entity.

In Airlines Rotables Ltd. vs. JDIT [2011] 44 SOT 368 (Mum ITAT), it was held that there should not only be a physical location through which the business of foreign enterprise should be carried out, but it should also have some sort of a right to use such place for its business. In this case, ‘Dollar Team’ of I Co continuously occupied premises of I Co and also carried out the business of Sing Sub from there.

The facts brought out by the AO from the evidences collected during survey clearly indicated fixed place PE was constituted in India.

(ii) Dependent Agent PE

In terms of Article 5(8) of India-Singapore DTAA, a ‘dependent agent’ PE is constituted when a person, other than an agent of an independent status, habitually exercises authority to conclude contracts on behalf of the enterprise, and also habitually secures orders wholly or almost wholly for the enterprise.

As regards a dependent agent PE, the Revenue should not only prove that ‘Dollar Team’ acted as agent and it habitually exercised authority to conclude contracts but also that the agent was legally and economically dependent. As discussed earlier, except for thepreparation of shipping documents for shipment of goods by Sing Sub, all other activities were carried out by ‘Dollar Team’. This was supported by the facts brought on record and evidences collected in the course of assessment proceedings. Therefore, the activities undertaken by ‘Dollar Team’ of I Co constituted dependent agent PE of Sing Sub. The assessee has relied upon decision in Varian India (P) Ltd. vs. ADIT [2013] 142 ITD 692 (Mum ITAT) and argued that independent agent cannot constitute a PE. Since ‘Dollar Team’ of I Co constituted dependent agent PE, the said decision has no application in case of Sing Sub.

(iii) Attribution of Profits

For the purpose of computing the profit of Sing Sub for attribution to PE, the AO considered the unaudited profit before tax. When audited figures are available, unaudited figures should not be considered. The AO should distribute profits showm in the books of Sing Sub between Sing Sub and PE in India. Further, the AO had considered profit margin of I Co for attribution of profit to PE. However, the AO should have adopted the profit margin of Sing Sub and attributed the same between PE in India and Sing Sub.

Sing Sub has also disputed inclusion of non-Indian sales by the AO for computing profits and contended that only sales in INR to end-customers should be considered. Sing Sub has also disputed inclusion of royalty in turnover. The assessee has relied upon decisions in Annamalais Timber Trust & Co. vs. CIT [1961] 41 ITR 781 (Mad.) and in Motorola Inc. [2005] 95 ITD 269 (SB) and submitted that the AO may be directed to attribute a reasonable amount of profits to PE in India. The DRP has directed the AO to consider audited financial statements.

However, as the facts are not clear, and also because Sing Sub was unable to provide correct computation of sales made through Indian PE to compute profit attributable to PE in India, the AO was directed to reconsider the issue as per directions given by DRP, the Tribunal and also decisions in Annamalais Timber Trust & Co. vs. CIT [1961] 41 ITR 781 (Mad.) and in Motorola Inc. [2005] 95 ITD 269 (SB).

shailesh.kwebmaker

Where the assessee stated that the source of cash deposit in its bank accounts was the balance of cash in hand brought forward from earlier assessment years, but the AO treated the same as an unexplained investment without assigning any reason, then impugned additions made u/s 69 was not justified.

Where the Department had accepted that the assessee had earned a tuition fee in preceding assessment years then in terms of principle of consistency, the AO had no justifiable reason to disbelieve assessee’s claim of having received income from tuition fee and add the same to assessee’s income as unexplained money u/s 69A.

53. Smt. Sarabjit Kaur vs. ITO
[2022] 96 ITR(T) 440 (Chandigarh – Trib.)
ITA Nos.:1144 & 1145 (Chd.) of 2019
A.Ys.: 2011-12 and 2013-14
Date of order: 30th March, 2022
Sections: 69, 69A

Where the assessee stated that the source of cash deposit in its bank accounts was the balance of cash in hand brought forward from earlier assessment years, but the AO treated the same as an unexplained investment without assigning any reason, then impugned additions made u/s 69 was not justified.

Where the Department had accepted that the assessee had earned a tuition fee in preceding assessment years then in terms of principle of consistency, the AO had no justifiable reason to disbelieve assessee’s claim of having received income from tuition fee and add the same to assessee’s income as unexplained money u/s 69A.

FACTS

A.Y. 2011-12

The assessee earned income from tuition as well as rent, and interest from bank and other parties. An information was received from the Investigation Wing of the Income Tax Department vide letter dated15th March, 2017 that the assessee had deposited cash of Rs. 8,00,000 in her bank account maintained with Axis Bank, Jagraon and Rs. 5,40,000 in her bank account with HDFC bank, thus, totalling to a deposit of Rs. 13,40,000. In view of this information, a notice u/s 148 of the Income-tax Act, 1961 was issued and in response to the said notice, the assessee filed the return which was originally filed u/s 139(1).

During the course of re-assessment proceedings, the assessee was required to explain the source of cash deposit of Rs. 13,40,000. The assessee stated before the AO that the deposit was from the closing balance of cashin hand in the immediately preceding assessment year amounting to Rs. 12,61,473 and was also partly out of cash withdrawals of Rs. 3 lakhs from Axis bank. The assessee was asked to furnish cash book/cash flow statement but the same were not furnished. The AO gave benefit of cash withdrawal of Rs. 3 lakhs from the Axis Bank and counted such withdrawal towards availability of cash for the purpose of cash deposit but proceeded to treat the remaining amount of Rs. 10,40,000 as unexplained and added the same to the income of the assessee u/s 69. The AO also proceeded to add the tuition fee of Rs. 2,03,600 as income from undisclosed sources. The assessment was completed at an income of Rs. 12,84,780.

Against the order of the learned AO, the assessee preferred first appeal before the CIT(A) who confirmed the action of the AO. Aggrieved by the order of CIT(A), the assessee filed a further appeal before the ITAT.

A.Y. 2013-14

The assessee had deposited cash of Rs. 10,40,000 in her bank account maintained with HDFC Bank, Jagraon.

Acting on the information received from the Investigation Wing vide letter 15th March, 2017, the assessee’s case was reopened by issuing notice u/s 148 of the Act. In response to the notice, the assessee filed the return which was originally filed u/s 139(1). The assessee was asked to explain the cash deposit in the bank account and the response of the assessee was that the amount was deposited from the brought forward cash balance of the immediately preceding assessment year i.e. year ending 31st March, 2012 amounting to Rs. 12,58,949. However, the assessee could not produce any books of account or cash flow statement in support of her claim. The re-assessment was completed by treating the cash deposit of Rs. 10,40,000 as unexplained income u/s 69 and tuition income of Rs. 2,03,600 as unexplained income u/s 69A of the Act.

Against the order of the ld. assessing officer, the assessee preferred first appeal before the CIT(A) who confirmed the action of the AO. Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The assessee submitted that he had regularly filed the balance sheet/statement of affairs for every assessment year along with the income and expenditure account. The assessee also submitted that in the assessment order passed u/s 143(3) r.w.s. 147 for A.Y.2010-11, the return of income was accepted and so was the cash deposit.

The assessee also contended that even the tuition income had been accepted in earlier assessment years as well as in subsequent assessment years and, therefore, there was no reason for not having accepted the tuition income for A.Y. 2011-12 and having treated it as income from unexplained sources. The Tribunal’s attention was also drawn to the assessment order passed u/s 143(3) r.w.s 147 for A.Y. 2012-13, wherein also the returned income of the assessee was accepted, which included cash deposits as well as tuition income. It was submitted that the availability of opening cash in hand had been duly justified by filing of balance sheet for the immediately preceding assessment year which had already been accepted by the Department and, therefore, there was no reason to not accept the same for the purpose of making cash deposit in A.Y. 2011-12.

Reliance was placed on the decision of ITAT Camp Bench at Jalandhar in Holy Faith International (P.) Ltd. vs. Dy. CIT [IT Appeal No. 181 (Asr) of 2017, dated 15th January, 2019] to contend that completed assessment cannot be reopened u/s 148 by simply acting upon the information received from the Investigation Wing and without application of mind by the AO.

It was observed by the Tribunal that if the assessee’s explanation of having the opening cash in hand was to be disbelieved, there should have been cogent reasoning behind the same. Since the Department had no cogent reasoning behind the disbelief, the Tribunal accepted the assessee’s contention that as on 31st March, 2010 the assessee had a closing balance of cash in hand of Rs. 12,61,473 which ought to have been considered for the purposes of explaining the source of cash deposits in the bank accounts.

The Tribunal by concurring with the view of the assessee, opined that the lower authorities had no reason to disbelieve the assessee’s claim of having earned tuition income during the years under consideration in light of the rule of consistency which was enshrined in the decision of the Apex Court in the case of Radhasoami Satsang vs. CIT [1992] 60 Taxman 248/193 ITR 321.

Accordingly, the appeals of the assessee for both the years under consideration were partly allowed.

shailesh.kwebmaker

Where the assessee was hiring trucks from an open market on individual and need basis and payments had not been made to any sub-contractor since the assessee did not have any contract with the truck owner and therefore the question of TDS did not arise in respect of payments towards lorry hire charges

52. Dineshbhai Bhavanbhai Bharwad vs. ITO
[2022] 96 ITR(T) 429 (Ahmedabad – Trib.)
ITA No.:1488 (Ahd.) of 2016
A.Y.:2007-08
Date: 31st March, 2022
Section: 194C r.w.s 40(a)(ia)

Where the assessee was hiring trucks from an open market on individual and need basis and payments had not been made to any sub-contractor since the assessee did not have any contract with the truck owner and therefore the question of TDS did not arise in respect of payments towards lorry hire charges.

FACTS

During the year under consideration, the assessee had debited sum of Rs. 10,41,14,765 as ‘Lorry Hire Charges’.

In the course of the assessment proceedings, the assessee was asked to furnish the complete details and copy of account of said expenses. The assessee had produced all the ledger accounts of the said expenses and submitted that as individual payments do not exceed Rs. 20,000, no TDS was deducted. On going through the ledger accounts, it was noticed by the AO that the assessee ought to have deducted tax at source u/s 194C of the Act, since in a number of individual cases the payment exceeded Rs. 50,000. The AO partly disallowed lorry hire charges u/s 40(a)(ia), since the assessee failed to deduct tax at source u/s 194C in individual cases where payment exceeded Rs. 50,000.

Against the order of the learned AO, the assessee preferred the first appeal before the CIT(A) who confirmed the action of the AO. Aggrieved by the order of CIT(A), the assessee filed a further appeal before the ITAT.

HELD

The assessee had submitted that he did not have any contract, and had hired trucks from the open market on individual and need basis. In support of his contentions, the assessee had filed truck numbers. It was observed by the ITAT that truck numbers as well as owners of all trucks were different.

Reliance was placed on the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Mukesh Travels Co.[2014] 367 ITR 706, wherein it was held that the vital requirement for invoking section 194C is the existence of relationship of contractor and sub-contractor between the assessee and the transporter. If the said relationship does not exist, then the liability to deduct tax at source u/s 194C does not arise.

The ITAT had considered the above decision of Jurisdictional High Court and concurred with the view of the assessee that the payments have not been made to any sub-contractor.

Accordingly, the ITAT held that the question of TDS u/s 194C does not arise. Consequently, the appeal filed by the assessee was allowed and the disallowance made u/s 40(a)(ia) was deleted.

shailesh.kwebmaker

There need not be any “occasion” for receipt of gift by the assessee from his relative.

51. ITO vs. Dr. Satish Natwarlal Shah
ITA No. 379/Ahd./2020 (Ahemadabad-Trib.)
A.Y.: 2012-13
Date of order: 19th October, 2022
Section: 56(2)(v)

There need not be any “occasion” for receipt of gift by the assessee from his relative.

FACTS

A doctor by profession, the assessee filed his return of income for A.Y. 2012-13, declaring a total income of Rs. 16,34,278. In the course of assessment proceedings, the (AO) noticed that the assessee had received a gift of Rs. 3,12,24,009, of which Rs. 2,61,82,207 were shares of various companies, and the balance was a monetary gift. The assessee had also gifted Rs. 1,06,65,848 to his relatives. The AO sought an explanation from the assessee regarding the gifts received and given.

The assessee replied that the gift, in the form of shares and debentures of Rs. 2,61,82,207 was received by him on 4th October, 2011 from his brother Sanjay N. Shah, residing in the U.S.A. Also, the amount of Rs. 44,00,000; Rs. 13,436 and Rs. 1,736 were received by him on 25th November, 2011, 2nd January, 2012 and 4th January, 2012, respectively from his brother Sanjay N. Shah. To substantiate this, he filed a declaration of the gift from his brother that they had been made out of natural love and affection.

The AO noticed that the assessee had gifted Rs. 53,71,016 to Seema S. Shah; Rs. 26,71,238 to Shailja S. Shah and Rs. 7,53,138 to Sapna S. Shah, the three daughters of his brother Sanjay Shah.

The AO disbelieved the above gifts received by the assessee from his brother and also the gifts by the assessee to his nieces. The AO held that the assessee had failed to prove the source of investment into shares by his NRI brother, which the assessee eventually got in the form of a gift, and a gift to nieces has no logic. He further held that even if this transaction of gifting is to be believed, it appears to be a kind of family arrangement for equalisation of wealth amongst the family members. The AO treated the above gift as unexplained and added Rs. 3,06,13,009 as income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A), who held that though the AO cannot ask for the source of source, the assessee has properly explained the same during assessment proceedings itself. The CIT(A) held that the AO accepted the purchase of shares by the assessee’s brother under the NRI quota, and the funds which were paid through the assessee’s brother’s NRE bank account. He observed that the AO was satisfied about the genuineness of the gift. However, the AO had doubted the “occasion of the gift” in the absence of any family function, namely marriage, etc.

The CIT(A) relying upon decisions of Vishakhapatnam Tribunal in Dr. Vempala Bala Manohar vs. ITO [68 taxmann.com 410]; Rajasthan High Court in Arun Kumar Kothari [31 taxmann.com 258] and Andhra Pradesh High Court in Pendurthi Chandrasekhar [91 taxmann.com 229], held that no occasion needs to be proved for accepting a gift from a relative more particularly where the relationship is one as defined in section 56(2)(v). The CIT(A) deleted the addition made by the AO.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that it is an admitted case that the genuineness of the gift, though doubted by the AO in assessment proceedings, during appellate proceedings, the AO was satisfied with the evidences produced by the assessee by way of additional documents, and thus the AO was satisfied with the genuineness of the gift by the assessee’s brother who is an NRI. The only remaining doubt of the AO was that there is no justification in gifting such a huge sum without there being any big occasion in the assessee’s family namely wedding, etc.

The Tribunal noted that the co-ordinate bench in the case of Dr. Vempala Bala Manohar (supra) has held tat the lack of occasion cannot be a ground to doubt the transaction of gift between family members. It observed that similar is the ratio of the decision of the Rajasthan High Court in the case of Arun Kumar Kothari (supra) and the Andhra Pradesh and Telangana High Court in the case of Pendurthi Chandrasekhar (supra). Following the ratio of these judgments the Tribunal held that the source and genuineness having been proved beyond doubt, there need not be any “occasion” for the assessee having received gift from his brother, who is a relative as per Explanation 2 to section 56(2)(v).

The Tribunal upheld the order of CIT(A) deleting the addition made by the A.O.

shailesh.kwebmaker

Credit for tax deducted at source needs to be allowed even though the amount so deducted is not reflected in Form No. 26AS of the payee.

50. Liladevi Dokania vs. ITO
ITA No. 126/Srt./2021 (Surat-Trib.)
A.Y.: 2019-20
Date of order: 27th June, 2022
Sections: 199, 203

Credit for tax deducted at source needs to be allowed even though the amount so deducted is not reflected in Form No. 26AS of the payee.

FACTS

The assessee, an individual, during the previous year relevant to the assessment year under consideration, earned rental income and offered the same for taxation under the head ‘Income from House Property’. The tenant, while paying rent, deducted TDS but did not deposit the same with the Government. The assessee claimed the amount of tax deducted by the tenant even though the same was not reflected in Form No. 26AS of the assessee. The AO , CPC did not allow credit of Rs. 5,71,770.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

On perusal of the documents produced before it, the Tribunal held that it is clear that the assessee received the rent income, and the tenant deducted TDS but has not deposited the same with the Government. The Tribunal noted that the issue is no more res integra as the Gujarat High Court, in the case of Kartik Vijaysinh Sonavane [(2021) 132 taxmann.com 293 (Guj.)], has held that where the employer of the D.S. assessee has deducted TDS, it will always be open for the Department to recover from the said employer and credit of the same could not have been denied to the assessee.

Following the judgment of the High Court of Gujarat in the case of Kartik Vijaysinh Sonavane, the Tribunal directed the AO to verify the assessee’s claim and allow credit of TDS in accordance with the law.

The Tribunal allowed the appeal filed by the assessee.

shailesh.kwebmaker

The second proviso to section 10(34) categorically states that dividends received on or after 1st April, 2020 alone would be subjected to tax. In the instant case, since the dividend was received during F.Y. 2019-20 relevant to A.Y. 2020-21, there is no case for taxing the said dividend during the year under consideration i.e. A.Y. 2020-21

49. Manmohan Textiles Ltd. vs. National Faceless
Appeal Centre
I.T.A. No. 1884/Mum. /2022 (Mum.-Trib.)
A.Y.: 2020-21
Date of order: 6th September, 2022
Sections: 10(34), 154

The second proviso to section 10(34) categorically states that dividends received on or after 1st April, 2020 alone would be subjected to tax. In the instant case, since the dividend was received during F.Y. 2019-20 relevant to A.Y. 2020-21, there is no case for taxing the said dividend during the year under consideration i.e. A.Y. 2020-21.

FACTS

The assessee filed its return of income, declaring a loss of Rs. 1,40,712. The return of income was processed, determining the total income to be Rs. 1,05,850. While processing the return, a dividend of Rs. 2,46,859 claimed to be exempt u/s 10(34) in the return of income was treated as taxable.

Aggrieved by the addition, the assessee filed a rectification application to the CPC, who dismissed the application and upheld its earlier action.

Aggrieved, the assessee filed an appeal to CIT (A). The CIT (A) observed that dividend income is not exempt and has become taxable. He upheld the action of the CPC in taxing the dividend income.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

Having gone through the provisions of section 10(34), the Tribunal noted that the same is amended by the Finance Act 2020 and is applicable from A.Y. 2021-22 onwards. It held that the second proviso is incorporated only from 1st April, 2021 and categorically states that the dividends received on or after 1st April alone will be subject to tax. The Tribunal noted that in the present case, admittedly, the dividend has been received in F.Y. 2019-20 relevant to A.Y. 2020-21 and therefore, it held that there is no case for taxing the said dividend income during the year under consideration. The Tribunal directed the AO to treat the dividend income as exempt u/s 10(34).

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Enhancing the assessed book profit for the amount disallowed u/s 14A is not a mistake apparent on record, which can be rectified by passing an order u/s 154

48. Manyata Promoters Pvt. Ltd. vs. JCIT
ITA No. 548/Bang/2022 (Bang.-Trib.)
A.Y.: 2017-18
Date of order: 6th September, 2022
Sections:14A, 154

Enhancing the assessed book profit for the amount disallowed u/s 14A is not a mistake apparent on record, which can be rectified by passing an order u/s 154.

FACTS

The assessee, engaged in the business of development and lease of office space and related interiors, filed its return of income for the assessment year under consideration on 31st October, 2017. On 7th August, 2017, the National Company Law Tribunal approved the scheme of amalgamation of Pune Embassy Projects Pvt. Ltd. with the assessee company. The return of income filed by the assessee was revised on 30th March, 2018. In the revised return of income, the assessee declared a total income of RNil under the normal provisions and a book profit of Rs. 26,04,02,080 u/s 115JB of the Act.

In the course of assessment proceedings, the AO disallowed a sum of Rs. 14,49,60,000 u/s 14A and added Rs. 58,29,802 towards the difference in income as per Form No. 26AS and the financials of the assessee. The AO also denied credit of TDS of Rs. 4,02,70,802, which the assessee claimed in its return of income.

The assessee filed a rectification application requesting that credit of TDS as claimed in the return of income be granted.

In an order passed u/s 154 of the Act, pursuant to the rectification application filed by the assessee, the AO made an adjustment to book profits u/s 115JB for the amount disallowed u/s 14A of the Act. He considered this to be a mistake apparent on the record. The AO did not grant a credit for TDS as claimed by the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A), who granted relief to the assessee for adjustment made by the AO to the book profits u/s 115JB. With regards to short credit of TDS, the CIT(A) held that this did not arise out of the order passed u/s 154, which is in appeal before him and therefore dismissed the same.

Aggrieved, Revenue preferred an appeal against the action of the CIT(A) in granting relief in respect of adjustment made by the AO to the book profits u/s 115JB.

HELD

The Tribunal noted that CIT(A), while deciding the issue in favour of the assessee, has considered the issue both, from the point of view that whether an adjustment of book profits for disallowance u/s 14A is a mistake apparent on record, and also on merits by relying on the decision of the jurisdictional High Court in the case of CIT vs. Gokaldas Images Pvt. Ltd. [(2020) 122 taxmann.com 160 (Kar. HC)].

The Tribunal held that the AO cannot go beyond the profits as per the profit and loss account prepared in accordance with the Companies Act except in the manner provided in Explanation 1 to section 115JB of the Act, and therefore the action of the A.O. to make adjustment for disallowance u/s 14A to the book profits u/s 115JB is not tenable. The scope of rectification is limited to correcting errors of facts or errors of law based on material available on record. Enhancing the book profit for the amount disallowed u/s 14A is not a mistake apparent on record but is subject to interpretations and hence cannot be rectified by passing an order u/s 154 of the Act. The Tribunal held that it saw no reason to interfere with the order of C.I.T. (A).

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

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

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

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

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

FACTS

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

HELD

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FACTS

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

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

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

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

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

HELD

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Assessment Year

Amount of CSR expenditure

2013-2014

Rs. 3,79,19,732

2014-201

Rs. 5,32,92,063

2013-2014

Rs. 6,44,00,000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

shailesh.kwebmaker

Corpus Donations – Recent Developments

INTRODUCTION

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

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

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

MEANING OF THE TERM CORPUS/RELEVANT PROVISIONS IN THE ACT

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

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

(a) Section 2(24) (iia)

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

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

CORPUS DONATIONS WHETHER A CAPITAL RECEIPT?

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

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

CORPUS DONATION EXEMPT INCOME – THE OTHER VIEW

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

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

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

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

(b) Section 11(1)(d)

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

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

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

WHEN WILL A DONATION BE TREATED AS A CORPUS DONATION

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

(1) the contribution is voluntary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(c) Explanation 2 to section 11(1)

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

• Emphasis Supplied

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

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

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

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

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

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

(c) maintains such corpus as separately identifiable; and

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

(e) Explanation 4 to section 11(1)

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

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

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

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

(e) Explanation 4

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

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

CONCLUSION

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

shailesh.kwebmaker

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

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

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

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

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

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

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

shailesh.kwebmaker

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

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

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

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

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

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

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

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

shailesh.kwebmaker

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

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

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

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

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

“i) The Memorandum Explaining the Provisions of the Finance Bill, 2022 ([2022] 440 ITR (St.) 226) explicitly stipulates that the amendment made to section 14A of the Income-tax Act, 1961 will take effect from April 1, 2022 and will apply in relation to the A Y. 2022-23 and subsequent assessment years. The amendment of section 14A which is “for removal of doubts” cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood.

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

shailesh.kwebmaker

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

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

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

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

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

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

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

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

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

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

shailesh.kwebmaker

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

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

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

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

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

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

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

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

shailesh.kwebmaker

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

ISSUE FOR CONSIDERATION

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

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

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

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

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

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

(i) …………………………….;

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

(iii) ………;

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

(v) ……………..

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

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

CEMETILE INDUSTRIES’ CASE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

P R PACKAGING SERVICE’S CASE

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

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

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

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

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

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

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

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

OBSERVATIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

INTRODUCTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CONCLUSION

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

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

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

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

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

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

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

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

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

shailesh.kwebmaker

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

shailesh.kwebmaker

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