BCAJ | Bombay Chartered Accountant Journal

Glimpses of Supreme Court Rulings

1. K. Krishnamurthy vs. The Deputy Commissioner of Income Tax

(2025) 171 taxmann.com 413 (SC)

Penalty under section 271AAA — The imposition of penalty is not mandatory – Penalty may be levied if there is undisclosed income in the specified previous year — It is obligatory on the part of the Assessing Officer to demonstrate and prove that undisclosed income of the specified previous year was found during the course of search or as a result of the search – Appellant admitted ₹2,27,65,580/- as income for AY 2011-12 during the search before DDIT (Inv.) as well as substantiated the manner in which the said undisclosed income was derived and paid tax together with interest thereon, albeit belatedly, therefore, penalty under Section 271AAA(1) was not attracted on the said amount of ₹2,27,65,580 — Appellant had not offered in the declaration before the DDIT(Inv.) any income on land transactions belonging to Mr. Sharab Reddy and Mr. NHR Prasad Reddy — Appellant offered ₹2,49,90,000/- under the head “Income From Other Sources” on account of these land transactions during the course of assessment proceedings only and not at any time during the search — Penalty under Section 271AAA(1) of the Income-tax Act 1961 was therefore leviable on the said amount.

A Memorandum of Understanding (‘MOU’) dated 19^th January, 2009 was entered into between Mr. Hashim Moosa on the one hand and the Appellant as well as Mr. Surendra Reddy on the other, for procuring lands at a certain price from the land procurers, i.e. the Appellant and Mr. Surendra Reddy. As per Clause 10 of this MOU, ₹10,00,000/- (Rupees Ten lakhs only) was paid to the procurers for arranging facilitation of transfer of land from the landowners to Mr. Hashim Moosa / his nominees. No other payment, except a reimbursement under Clause 11, was contemplated under this MOU.

A transaction was entered into between Mr. Hashim Moosa and the Space Employees’ Co-operative Society Ltd. (in short ‘Society’) on 26^th September, 2009. It was in order to facilitate purchase of land for this transaction that the MOU dated 19^th January, 2009 was entered into by the Appellant with Mr. Hashim Moosa.

A search and seizure operation was carried out at the Appellant’s premises on 25^th November, 2010, under section 132 of the Act. The Appellant disclosed an income of ₹2,27,65,580/- as a consequence of the search and seizure.

A notice dated 21^st August, 2012 under Section 142(1) of the Act was issued to the Appellant calling for return of income for Assessment Year (‘AY’) 2011-2012. The Appellant filed his return of income on 05^th November, 2012. The Appellant returned a total income of ₹4,77,11,330/- for Previous Year (‘PY’) 2010-2011, relevant to AY 2011-2012.

The Respondent issued the Assessment Order dated 15^th March, 2013 for PY 2010-2011 relevant to AY 2011-2012, in respect of the Appellant. The total income assessed was ₹4,78,02,616/-.

The Assessing Officer noted that Space Employees’s Co-operative Housing Society Limited entered into an MOU on 26-09-2009 with Mr. HashimMoosa for acquiring 120 acres (which was further extended to 150 acres) of lands in Hoskote Taluk for a consideration of ₹74,26,980/- per acre. The Society will pay Mr. Moosa ₹73,26,980/- per acre of registered land to and the balance ₹1 lakh per acre shall be deposited in a Joint Escrow Account till the entire 120 acres of land is registered in favour of the Society.

To procure lands for the Society, Mr. HashimMoosa had entered into an MOU on 19-01-2009 with Mr. K. Krishna Murthy (Appellant) and P. Surendra Reddy for procuring lands @ ₹70,00,000/- per acre.

Mr. Krishnamurthy (Appellant) and Mr. Ananda Reddy had transferred 16.25 acres of lands which are in the names Mr. NHR Prasada Reddy and Mr. Sharab Reddy in favour of the Society.

On the basis of the copies of sale deeds collected from the Society, it was seen that Mr. N.H.R. Prasad Reddy sold 7 acres and 36 guntas of land to the Society and received total sale consideration of ₹4,34,50,000/-. Similarly, his brother Mr. N.H. Sharaba Reddy sold 10 acres and 33 guntas of lands to the Society and received sale consideration of ₹5,95,37,500/-. Overall they had sold 18 acres and 29 guntas of land and received total sale consideration of ₹10,29,87,500/. The consideration received by them works out to ₹55,00,000/- per acre.

Though, the Assessee had admitted that he had undertaken transaction and had promised to get alternative lands to Mr. NHR Prasad Reddy & Sharab Reddy, he had not offered any income on this count before the DDIT (Inv.). The Assessee offered an amount of ₹2,49,90,000/- during the course of assessment proceedings under the head income from other sources (income from assignment of rights) being the difference between the cost of lands which he has acquired on behalf of the brothers and cost of lands at which it is transferred to society.

On 30^th September, 2013, an order imposing penalty under section 271AAA of the Act was passed against the Appellant for AY 2011-2012. The Respondent imposed penalty on the Appellant solely on the ground that the Appellant did not make payment of tax and penalty in terms of section 271AAA(2) of the Act after receipt of Show Cause Notice and considering the entire received income as the undisclosed income.

On the same day, another order imposing penalty under Section 271AAA of the Act was passed in respect of AY 2010-2011. Penalty at the rate of 10% (Ten per cent) was imposed on the entire returned income i.e. ₹4,78,02,616/- amounting to ₹47,80,261/-.

The CIT (Appeals), Bangalore allowed the appeal preferred against the Penalty Order dated 30^th September, 2013 in respect of AY 2010-2011 accepting the submission of the Appellant that 2009-10 cannot be the ‘specified previous year’ for the purpose of Section 271AAA of the Income-tax Act, 1961.

Appeal preferred against the Penalty Order dated 30^th September, 2013 in respect of AY 2011-2012 was however rejected solely relying on Section 271AAA(2) of the Income-tax Act, 1961 holding that the basic condition existing in the section has not been fulfilled.

The Income Tax Appellate Tribunal (‘ITAT’) vide order dated 17^th October, 2016 rejected the Appellant’s appeal against the CIT(A) order again on the ground of non-compliance with Section 271AAA(2) of the Income-tax Act, 1961.

The Appellant preferred an appeal under section 260A of the Act.

Before the High Court, it was contended by the Assessee that it had admitted an undisclosed income of ₹2,27,65,580/- and filed returns showing income of ₹4,78,02,616/-. Nothing was found during the course of search. Assessee had voluntarily filed return of income more than what he had admitted before the DDIT. The machinery section had thus failed and therefore, penalty could not have been imposed.

According to the High Court compliance of all three conditions in sub-clause (2) of Section 271AAA of the Act were mandatory and the third condition namely, the payment of tax, together with interest, if any, had not been fulfilled by the Assessee.

On the question as to whether penalty prescribed @10% of undisclosed Income under section 271AAA of the Act can be reduced, if the tax together with interest on the undisclosed income as declared by the Assessee in the course of search in a statement under Section 132(4) is partly complied with, the High Court held that admittedly, the Appellant had not disclosed the income at all. But for search, the same could not have been unearthed. Having filed the returns, the Assessee did not comply with the third condition of sub-section (2). The assessee was therefore not entitled to any relief.

The High Court dismissed the appeal of the Appellant vide the judgment dated 2^nd August, 2022.

On 6^th January, 2023, the Supreme Court was pleased to issue notice confined to the second question urged before the High Court.

The Supreme Court noted that Section 271AAA(1) of the Income-tax Act 1961 stipulates that the Assessing Officer may, notwithstanding anything contained in any other provisions of the Act, direct the Assessee, in a case where search has been carried out to pay by way of a penalty, in addition to the tax, a sum computed at the rate of 10% (Ten per cent) of the undisclosed income of the specified previous year. The Supreme Court was of the view that the imposition of penalty therefore is not mandatory. Consequently, penalty under this Section may be levied if there is undisclosed income in the specified previous year.

According to the Supreme Court, though under Section 271AAA(1) of the Income-tax Act 1961, the Assessing Officer has the discretion to levy penalty, yet this discretionary power is not unfettered, unbridled and uncanalised. Discretion means sound discretion guided by law. It must be governed by rule, not by humour, it must not be arbitrary, vague and fanciful. [See: Som Raj and Ors. vs. State of Haryana and Ors. 1990:INSC:53 : (1990) 2 SCC 653].

The Supreme Court noted that Section 271AAA(2) of the Act stipulates that Section 271AAA(1) shall not be applicable if the Assessee — (i) in a statement under sub-section (4) of Section 132 in the course of the search, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) pays the tax, together with interest, if any, in respect of the undisclosed income.

Consequently, if the aforesaid conditions (i) and (ii) are satisfied and the tax together with interest on the undisclosed income is paid up to the date of payment, even with delay, in the absence of specific period of compliance, then penalty at the rate of 10% (Ten per cent) under section 271AAA of the Act 1961 is normally not leviable.

The Supreme Court further noted that the expression ‘Undisclosed Income’ has been defined in Explanation (a) appended to Section 271AAA of the Act. According to the Supreme Court, as Section 271AAA is a penalty provision, it has to be strictly construed. The fact that the Assessee had surrendered some undisclosed income during the course of search or that the surrender was emerging out of the statements recorded during the course of search was not sufficient to fasten the levy of penalty. The onus was on the Assessing Officer to satisfy the condition precedent stipulated in the said Explanation, before the charge for levy of penalty is fastened on the Assessee.

Consequently, it is obligatory on the part of the Assessing Officer to demonstrate and prove that undisclosed income of the specified previous year was found during the course of search or as a result of the search.

The Supreme Court further noted that the expression ‘specified previous year’ has been defined in Explanation (b) appended to Section 271AAA of the Act 1961. Since in the present case, the search was conducted on 25^th November, 2010 and as the year for filing returns under Section 139(1) of the Act 1961 which ended prior to that date had expired on 31^st July, 2010, Explanation b(i) was not applicable so as to make AY 2010-11 the specified previous year. Consequently, by virtue of Explanation b(ii), AY 2011-12 (the year in which the search was conducted) was the specified previous year in the present case for the purpose of Section 271AAA(1) of the Income-tax Act, 1961.

The Supreme Court further held that in the present case, the Appellant admitted ₹2,27,65,580/- as income for AY 2011-12 during the search before DDIT (Inv.) as well as substantiated the manner in which the said undisclosed income was derived and paid tax together with interest thereon, albeit belatedly.

Consequently, all the conditions precedent mentioned in Section 271AAA(2) stood satisfied and, therefore, penalty under Section 271AAA(1) was not attracted on the said amount of ₹2,27,65,580/-.

However, in the assessment order dated 15^th March, 2013 passed under Section 143(3) of the Act, which has attained finality, it was an admitted position that the Appellant had not offered in the declaration before the DDIT(Inv.) any income on land transactions belonging to Mr. Sharab Reddy and Mr. NHR Prasad Reddy. From the assessment order dated 15^th March, 2013, it was apparent that the Appellant offered ₹2,49,90,000/- under the head income from other sources on account of these land transactions during the course of assessment proceedings only and not at any time during the search.

The argument that the said transactions had not been found in the search at the Appellant’s premises but had been found due to ‘copies of sale deeds collected from the society’ had no merits as the sale deeds had been collected as a result of the search and in continuation of the search. The Supreme Court was of the view that as the causation for collecting the sale deeds from the Society was the search at the Appellant’s premises, it cannot be said that the said documents were not found in the course of the search.

The Supreme Court further held that the expression ‘found in the course of search’ is of a wide amplitude. It does not mean documents found in the Assessee’s premises alone during the search. At times, search of an Assessee leads to a search of another individual and / or further investigation / interrogation of third parties. All these steps and recoveries therein would fall within the expression ‘found in the course of search’.

The Supreme Court reiterated that since income of `2,49,90,000/- constituted undisclosed income found during the search, penalty under Section 271AAA(1) of the Income-tax Act, 1961 was leviable on the said amount. Also, as the said amount was not admitted in the declaration before the DDIT(Inv.) during the course of search but was disclosed by the Appellant only during the assessment proceedings, and that too, after the Assessing Officer had asked for copies of the sale deeds from the Society, the exception carved out in Section 271AAA(2) was not attracted to the said portion of the income.

The Supreme Court disposed the appeal with a direction to the Appellant to pay penalty at the rate of 10% (Ten per cent) on ₹2,49,90,000/- and not on ₹4,78,02,616.

BCAJ Admin

Glimpses of Supreme Court Rulings

19. PCIT vs. Jupiter Capital Pvt. Ltd.

(2025) 170 taxmann.com 305 (SC)

Capital gains – Reduction of share capital – The reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the Assessee would be squarely covered within the ambit of the expression “sale, exchange or relinquishment of the asset” used in Section 2(47) the Income-tax Act, 1961 – Percentage of shareholding of the assessee in the Company prior to, and post, reduction in Share Capital is not relevant – Loss incurred on erosion of the net worth is allowable as capital loss.

The Respondent-Assessee was a company engaged in the business of investing in shares, leasing, financing and money lending. The Assessee had made an investment in Asianet News Network Pvt. Ltd. (ANNPL), an Indian company engaged in the business of telecasting news, by purchasing 14,95,44,130 shares having face value of ₹10/- each. Thereafter, the Assessee purchased 38,06,758 shares from other parties, thereby increasing its shareholding to 15,33,40,900 shares which constituted 99.88% of the total number of shares of the company, i.e., 15,35,05,750.

The said company incurred losses, as a result of which the net worth of the company got eroded. Subsequently, the company filed a petition before the Bombay High Court for reduction of its share capital to set off the loss against the paid-up equity share capital. The High Court ordered a reduction in the share capital of the company from 15,35,05,750 shares to 10,000 shares. Consequently, the share of the Assessee was reduced proportionately from 15,33,40,900 shares to 9,988 shares. However, the face value of shares remained the same at ₹10 even after the reduction in the share capital. The High Court also directed the company for payment of ₹3,17,83,474/- to the Assessee as a consideration.

During the year, the Assessee claimed long term capital loss accrued on the reduction in share capital from the sale of shares of such company. However, the Assessing Officer while disagreeing with the Assessee’s claim held that reduction in shares of the subsidiary company did not result in the transfer of a capital asset as envisaged in Section 2(47) of the Income-tax Act, 1961. The Assessing Officer took the view that although the number of shares got reduced by virtue of reduction in share capital of the company, yet the face value of each share as well as shareholding pattern remained the same. Hence there was no extinguishment of the rights of the shareholders. Extinguishment of rights would mean that the assessee has parted with those shares or sold off those shares to second party, which was not the case here.

In appeal the CIT(A) vide order dated 14th December, 2017 while distinguishing the facts of the present case from those involved in the decision of the Supreme Court in Kartikeya V. Sarabhai vs. Commissioner of Income Tax (reported in (1997) 7 SCC 524) held that any extinguishment of rights would involve parting the sale of percentage of shares to another party or divesting rights therein. The appeal was therefore dismissed.

However, the ITAT reversed the order passed by the CIT(A) and allowed the appeal filed by the Assessee observing that the decision of the Supreme Court in Kartikeya vs. Sarabhai (supra) was squarely applicable to the facts of the present case. On the account of reduction in number of shares held by the Assessee company in ANNPL, the Assessee has extinguished its right of 15,33,40,900 shares and in lieu thereof, the Assessee received 9,988 shares at ₹10/- each along with an amount of ₹3,17,83,474/-. The Assessee’s claim for capital loss on account of reduction in share capital in ANNPL was therefore allowable.

The Revenue went in appeal before the High Court. The High Court, dismissed the appeal filed by the Revenue and affirmed the order passed by the ITAT, observing that the AO’s view that the voting power of the Assessee had remained unchanged was untenable. The rationale was that if the shares were transferred at face value, the redeemable value would be ₹99,880/- whereas the value of 14,95,44,130 number of shares would have been ₹1,49,54,41,300/. According to the High Court, the ITAT had rightly followed the judgement in the case of Kartikeya V. Sarabhai vs. The Commissioner of Income Tax (supra).

The Supreme Court after having heard the learned ASG appearing for the Revenue, and having gone through the materials on record, were of the view that no error, not to speak of any error of law, was committed by the High Court in passing the impugned order.

According to the Supreme Court, whether reduction of capital amounts to transfer was no longer res integra in view of its decision in Kartikeya V. Sarabhai (supra).

According to the Supreme Court, the following principles are discernible from its aforesaid decision:

a. Section 2(47) of the Income-tax Act, 1961, which is an inclusive definition, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. While the taxpayer continues to remain a shareholder of the company even with the reduction of share capital, it could not be accepted that there was no extinguishment of any part of his right as a shareholder qua the company.

b. A company under section 66 of the Companies Act, 2013 has a right to reduce the share capital and one of the modes which could be adopted is to reduce the face value of the preference share.

c. When as a result of the reducing of the face value of the share, the share capital is reduced, the right of the preference shareholder to the dividend or his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital. Such a reduction of the right of the capital asset clearly amounts to a transfer within the meaning of Section 2(47) of the Income-tax Act, 1961.

The Supreme Court noted that in the present case, the face value per share has remained the same before the reduction of share capital and after the reduction of share capital. However, as the total number of shares have been reduced from 15,35,05,750 to 10,000 and out of this the Assessee was holding 15,33,40,900 shares prior to reduction and 9,988 shares after reduction, it can be said that on account of reduction in the number of shares held by the Assessee in the company, the Assessee has extinguished its right of 15,33,40,900 shares, and in lieu thereof, the Assessee received 9,988 shares at ₹10 each along with an amount of ₹3,17,83,474.

The Supreme Court observed that in the case of Kartikeya v. Sarabhai (supra) it has not made any reference to the percentage of shareholding prior to reduction of share capital and after reduction of share capital. In that case, it was observed that reduction of right in a capital asset would amount to ‘transfer’ under Section 2(47) of the Income-tax Act, 1961. Sale is only one of the modes of transfer envisaged by Section 2(47). Relinquishment of any rights in it, which may not amount to sale, can also be considered as transfer and any profit or gain which arises from the transfer of such capital asset is taxable under Section 45 of the Income-tax Act, 1961.

The Supreme Court noted the decision of a Division Bench of the Gujarat High Court in the case of Commissioner of Income-Tax vs. Jaykrishna Harivallabhdas reported in (1998) 231 ITR 108 where the Court clarified that receipt of some consideration in lieu of the extinguishment of rights is not a condition precedent for the computation of capital gains as envisaged under Section 48 of the Income-tax Act, 1961.

The Supreme Court further noted that in the case of Anarkali Sarabhai vs. CIT reported in (1997) 224 ITR 422, it was observed that the reduction of share capital or redemption of shares is an exception to the Rule contained in Section 77(1) of the Companies Act, 1956 that no company limited by shares shall have the power to buy its own shares. In other words, the
Court held that both reduction of share capital and redemption of shares involve the purchase of its own shares by the company and hence will be included within the meaning of transfer Under Section 2(47) of the Income-tax Act, 1961.

In view of the aforesaid, the Supreme Court held that that the reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the Assessee would be squarely covered within the ambit of the expression “sale, exchange or relinquishment of the asset” used in Section 2(47) the Income-tax Act, 1961.

The Supreme Court therefore dismissed the appeal filed by the Revenue authorities.

Note: The judgment of the Supreme Court in the case of Anarkali Sarabhai has been analysed in the column “Closements” in April, 1997 issue of BCAJ.

BCAJ Admin

Glimpses of Supreme Court Rulings

18. HDFC Bank Ltd. vs. State of Bihar &Ors.

(2024) 468 ITR 650 (SC)

Prosecution — Order dated 5^th October, 2021 u/s. 132(3) of the IT Act was served upon the Branch Manager of the bank directing the said branch of the bank to stop the operation of any bank lockers, bank — Subsequently, by an order dated 1^st November, 2021, the Branch Manager of the said bank was directed to revoke the restraint put on the bank accounts — On 9^th November, 2021, the concerned branch of the bank allowed Smt. SunitaKhemka (one of the searched person) to operate her bank locker bearing No. 462 on misinterpretation of the order dated 1^st November, 2021 — FIR was registered against Smt. SunitaKhemka and the staff of the bank for the offences punishable u/s. 34, 37, 120B, 201, 207, 217, 406, 409, 420 and 462 of the IPC for breach of the order dated 5^th October, 2021 — Held — FIR did not show that the appellant-bank had induced anyone since inception — Bank being a juristic person, question of mens rea does not arise — There was nothing to show that the bank or its staff members had dishonestly induced someone deceived to deliver any property to any person, and that the mens rea existed at the time of such inducement — As such, the ingredients to attract the offence u/s. 420 IPC would not be available — There was not even an allegation of entrustment of the property which the bank has misappropriated or converted for its own use to the detriment of the Income-tax Officer — As such, the provisions of sections 406 and 409 IPC would also not be applicable — Since there was no entrustment of any property with the bank, the ingredients of section 462 IPC were also not applicable — Likewise, since the offences u/s. 206, 217 and 201 of the IPC requires mens rea, the ingredients of the said sections also would not be available against the bank — FIR/complaint also did not show that the bank and its officers acted with any common intention or intentionally co-operated in the commission of any alleged offences — As such, the provisions of sections 34, 37 and 120B of the IPC would also not be applicable — Thus, continuation of the criminal proceedings against the bank would cause undue hardship to the bank — Therefore, the impugned judgment and order of the High Court and the FIR were quashed and set aside.

In October, 2021, Smt. Priyanka Sharma, Dy. Director of IT (Inv.), Unit-2 (2), (being Respondent No. 5 in the proceedings before the Supreme Court), conducted a search and seizure operation in the case of several income-tax assessees including Shri Sunil Khemka (HUF), Smt. SunitaKhemka and Smt. ShivaniKhemka at the third floor of Khataruka Niwas, South Gandhi Maidan, Patna. The said search and seizure operation was conducted based on warrants of authorisation issued u/s. 132(1) of the IT Act, 1961 (IT Act’ for short). During the search, it was found that Smt. SunitaKhemka held a bank locker bearing No. 462 in the Bank (appellant-bank before the Supreme Court) at its Exhibition Road Branch, Patna.

On the basis of the said operation, on 5^th October, 2021, an order u/s. 132(3) of the IT Act was served upon the Branch Manager of the appellant-bank at its Exhibition Road Branch, Patna by the concerned Authorised Officer. The order directed the said branch of the appellant-bank to stop the operation of any bank lockers, bank accounts and fixed deposits standing in the names of Shri Sunil Khemka (HUF), Smt. SunitaKhemka and Smt. ShivaniKhemka, among several other individuals and entities, with immediate effect. It was further clarified that contravention of the order would render the Branch Manager liable u/s. 275A of the IT Act and the same would result in penal action.

In compliance of the aforesaid order, the appellant-bank stopped the operation of the bank accounts, bank lockers and fixed deposits of the individuals/entities mentioned in the order. Further, on 7^th October, 2021, the appellant-bank blocked the bank accounts of the income-tax assesses named in the order and also sealed the bank locker bearing No. 462 belonging to Smt. SunitaKhemka.

Subsequently, on 1^st November, 2021, Respondent No. 5 issued an order to the Branch Manager of the appellant bank at its aforementioned branch thereby directing the appellant-bank to revoke the restraint put on the bank accounts of Smt. SunitaKhemka and three other persons, in view of the restraining order dated 5^th October, 2021 passed under s. 132(3) of the IT Act. Accordingly, the said persons, including Smt. SunitaKhemka, were to be allowed to operate their bank accounts. The said order was received by the concerned Branch Manager of the appellant bank of 8^th November, 2021 at 4:00 p.m. However, on 2^nd November, 2021 at 11:24 a.m., an email was sent to the Branch Manager which contained the same order.

Thereafter, on 9^th November, 2021, the concerned branch of the appellant-bank allowed Smt. SunitaKhemka to operate her bank locker bearing No. 462 and proper entries recording the operation of the said locker were made in the bank’s records.

Subsequently, on 20^th November, 2021, Respondent No. 5 conducted a search and seizure operation at the bank locker in the concerned branch of the appellant-bank, wherein it was found that Smt. SunitaKhemka had operated her bank locker with the assistance of the concerned officers of the appellant bank. This was validated by the entry made in the bank’s records and the CCTV footage of the bank. Resultantly, the concerned officials of the aforementioned branch of the appellant-bank were found to have breached the restraining order dated 5^th October, 2021.

Accordingly, on 20^th November, 2021, Respondent No. 5 issued summons u/s. 131(1A) of the IT Act to Abha Sinha-Branch Manager, Abhishek Kumar-Branch Operation Manager and Deepak Kumar-Teller Authoriser being the concerned officials of the appellant-bank at its aforementioned branch.

The aforementioned officials attended the office of Respondent No. 5 and their statements were recorded wherein Abha Sinha and Abhishek Kumar stated that there had been an inadvertent error on the part of the bank officials and they had misinterpreted the order dt. 1^st November, 2021. Since the said order pertained to the bank accounts of the concerned individuals including Smt. SunitaKhemka, the bank officials had misread the order to understand / assume that the revocation of the restraint extended to the bank lockers as well. Having misunderstood the order, the bank officials under a bona fide assumption that bank locker had been released as well, allowed Smt. SunitaKhemka to operate the same.

The statement of Smt. SunitaKhemka had also been recorded wherein she stated that her accountant Surendra Prasad, after speaking with Deepak Kumar, had informed her that the restraint on the aforementioned bank locker had been revoked and she could operate the said locker. This was specifically denied by Deepak Kumar in his statement.

Dissatisfied with the said explanations, Respondent No. 5 submitted a written complaint to the SHO, Gandhi Maidan Police Station seeking to register an FIR against Smt. SunitaKhemka and the concerned bank officials on the ground that the order dt. 5^th October, 2021 had been violated owing to the unlawful operation of the aforementioned locker.

On the basis of the said complaint, on 22^nd November, 2021, an FIR being Case No. 549 of 2021 came to be registered against Smt. SunitaKhemka and the staff of the appellant-bank at its aforementioned branch for the offences punishable under ss. 34, 37, 120B, 201, 207, 217, 406, 409, 420 and 462 of the IPC at the Gandhi Maidan Police Station, Patna.

Aggrieved by the registration of the FIR, the appellant-bank preferred a Criminal Writ Jurisdiction Case thereby invoking the inherent power of the High Court u/s. 482 of the Code of Criminal Procedure, 1973 (hereinafter referred to as ‘Cr.P.C.’) for the quashing of the FIR. The High Court vide the impugned order dismissed the writ petition finding it to be devoid of merit.

Being aggrieved thereby, the appellant-bank filed the present appeal before the Supreme Court.

The Supreme Court observed that for bringing out the offence under the ambit of section 420 IPC, the FIR must disclose the following ingredients: (a) That the appellant-bank had induced anyone since inception; (b) That the said inducement was fraudulent or dishonest; and (c) That mens rea existed at the time of such inducement.

According to the Supreme Court, the appellant-bank being a juristic person the question of mens rea could not arise. However, even reading the FIR and the complaint at their face value, there was nothing to show that the appellant-bank or its staff members had dishonestly induced someone, deceived to deliver any property to any person, and that the mens rea existed at the time of such inducement. As such, the ingredients to attract the offence under s. 420 IPC would not be available.

The Supreme Court further observed that insofar as the provisions of section 409 IPC is concerned, the following ingredients will have to be made out: (a) That there has been any entrustment with the property, or with any dominion over property on a person in the capacity of a public servant or banker, etc.; (b) That the said person commits criminal breach of trust in respect of that property.

For bringing out the case under criminal breach of trust, it will have to be pointed out that a person, with whom entrustment of a property is made, has dishonestly misappropriated it, or converted it to his own use, or dishonestly used it, or disposed of that property.

According to the Supreme Court, in the present case, there was not even an allegation of entrustment of the property which the appellant-bank had misappropriated or converted for its own use to the detriment of the respondent No. 5. As such, the provisions of section 406 and 409 IPC would also not be applicable.

Since there was no entrustment of any property with the appellant-bank, the ingredients of section 462 IPC were also not applicable. Likewise, since the offences under sections 206, 217 and 201 of the IPC requires mens rea, the ingredients of the said sections also would not be available against the appellant-bank.

Further, according to the Supreme Court, the FIR / complaint also does not show that the appellant bank and its officers acted with any common intention or intentionally cooperated in the commission of any alleged offences. As such, the provisions of ss. 34, 37 and 120B of the IPC would also not be applicable.

According to the Supreme Court the present case would squarely fall within categories (2) and (3) of the law laid down by it in the case of State of Haryana &Ors. vs. Bhajan Lal &Ors. 1992 Supp. (1) SCC 335.

The Supreme Court referred to its following observations in the case of Bhajan Lal &Ors. (supra):

“102. In the backdrop of the interpretation of the various relevant provisions of the Code under Chapter XIV and of the principles of law enunciated by this Court in a series of decisions relating to the exercise of the extraordinary power under Art. 226 or the inherent powers under s. 482 of the Code which we have extracted and reproduced above, we give the following categories of cases by way of illustration wherein such power could be exercised either to prevent abuse of the process of any Court or otherwise to secure the ends of justice, though it may not be possible to lay down any precise, clearly defined and sufficiently channelised and inflexible guidelines or rigid formulae and to give an exhaustive list of myriad kinds of cases wherein such power should be exercised. (1) Where the allegations made in the first information report or the complaint, even if they are taken at their face value and accepted in their entirety do not prima facie constitute any offence or make out a case against the accused. (2) Where the allegations in the first information report and other materials, if any, accompanying the FIR do not disclose a cognizable offence, justifying an investigation by police officers under s. 156(1) of the Code except under an order of a Magistrate within the purview of s. 155(2) of the Code; (3) Where the uncontroverted allegations made in the FIR or complaint and the evidence collected in support of the same do not disclose the commission of any offence and make out a case against the accused; (4) Where, the allegations in the FIR do not constitute a cognizable offence but constitute only a non-cognizable offence, no investigation is permitted by a police officer without an order of a Magistrate as contemplated under s. 155(2) of the Code; (5) Where the allegations made in the FIR or complaint are so absurd and inherently improbable on the basis of which no prudent person can ever reach a just conclusion that there is sufficient ground for proceeding against the accused; (6) Where there is an express legal bar engrafted in any of the provisions of the Code or the concerned Act (under which a criminal proceeding is instituted) to the institution and continuance of the proceedings and/or where there is a specific provision in the Code or the concerned Act, providing efficacious redress for the grievance of the aggrieved party; and (7) Where a criminal proceeding is manifestly attended with mala fide and/or where the proceeding is maliciously instituted with an ulterior motive for wreaking vengeance on the accused and with a view to spite him due to private and personal grudge.103. We also give a note of caution to the effect that the power of quashing a criminal proceeding should be exercised very sparingly and with circumspection and that too in the rarest of rare cases; that the Court will not be justified in embarking upon an enquiry as to the reliability or genuineness or otherwise of the allegations made in the FIR or the complaint and that the extraordinary or inherent powers do not confer an arbitrary jurisdiction on the Court to act according to its whim or caprice.”

The Supreme Court was of the view that the continuation of the criminal proceedings against the appellant-bank would cause undue hardship to the appellant-bank.

In the result, the Supreme Court passed the following order – (i) The appeal is allowed; (ii) The impugned judgment and order dt. 8^th June, 2022 passed by the learned Single Bench of the High Court of judicature at Patna in Criminal Writ Jurisdiction Case No. 1375 of 2021 is quashed and set aside; (iii) The First Information Report being Case No. 549 of 2021 registered at Gandhi Maidan Police Station, Patna on 22^nd November, 2021, against certain officials of the appellant-bank working at its Exhibition Road Branch, Patna for the offences punishable under ss. 34, 37, 120B, 201, 206, 217, 406, 409, 420 and 462 of the Indian Penal Code, 1860 is also quashed and set aside qua the appellant-bank.

BCAJ Admin

Glimpses of Supreme Court Rulings

15 Addl CIT vs. Ericsson India Pvt. Ltd
(2024) 468 ITR 2 (SC)

Jurisdiction to impose penalty- No Penalty can be imposed by the TPO u/s. 271G in respect of default that has occurred prior to the date of amendment conferring jurisdiction on TPO (i.e. 1^st October, 2014).

For the assessment year 2011-12, the assessee filed its returns together with transfer pricing report. A notice was issued by the Transfer Pricing (TPO) on 18th February, 2014 to produce some documents by 25^th March, 2014. The assesee did not comply with the said notice. On 5^th December, 2014, TPO issued notice alleging default and proposing penalty u/s. 271G. TPO passed order on 16^th January, 2015 proposing certain transfer pricing adjustment and imposing penalty of ₹64,43,03,352 u/s. 271G. A draft assessment order was passed on 22^nd June, 2015.

On writ petition being filed before the High Court, the High Court noted that till 1^st October, 2014, the jurisdiction and authority to impose penalty u/s. 271G was with the Assessing Officer (AO) as defined in section 2(7A). This changed with enactment of the Finance (No. 2) Act, 2014. The amendment expanded the jurisdiction of the TPO, who was for the first time authorized to inflict penalty for non-compliance of the notice.

The High Court following the judgment in Brij Mohan vs. CIT (1979) 120 ITR 1 (SC) and Varkey Chacko vs. CIT (1993) 203 ITR 885 (SC) quashed the order imposing penalty by holding that ‘event of default’ occurred in March, 2014, that is, well prior to the date of coming into force the amendment (from 1st October, 2014) and hence the order passed by TPO in respect of such default was without jurisdiction.

The Supreme Court dismissed the SLP as the issue was covered by its decision in Varkey Chacko vs. CIT (supra).

16 ITO vs. Tia Enterprises Pvt. Ltd
(2024) 468 ITR 10 (SC)

Statutory approvals — Approval granted by the statutory authorities, as required under the provision of the Act, has to be furnished to an assessee along with the reasons to believe — the statutory scheme encapsulated in the Income-tax Act provides that the reassessment proceedings cannot be triggered till the Assessing Officer has reasons to believe that income, which is otherwise chargeable to tax, has escaped assessment and the reasons recorded by him are placed before the specified authority for grant of approval to commence the process of assessment.

The Petitioner challenged the notice dated 30^th March, 2018 issued under section 148 of the Act and the order dated 6^th December, 2018 disposing of the objections of the Petitioner to the issuance of the aforesaid notice on one singular ground, namely, that the reassessment proceedings were commenced without the approval of the specific authority.

The High Court observed that the approval has a two-stage process. The satisfaction with regards to commencement of reassessment proceedings is required to be recorded by the Additional Commissioner of Income-tax (ACIT); and by Principal Commissioner of Income Tax (PCIT).

The High Court noted that the ACIT had made an endorsement that he was satisfied that it was a fit case for issue of notice u/s. 148, but the PCIT had not made any noting and merely signed the Form of Recording Reasons without a date. The High Court also noted that the reasons recorded by the Assessing Officer on 30^th March, 2018, were approved by ACIT and PCIT on the same date and the notice was also issued on 30^th March, 2018.

The Petitioner had alleged that this was a case of mechanical approval without application of mind and was contrary to law.

In counter affidavit, the respondent made an assertion that the PCIT had conveyed the approval to AO via letter F No. Pr. CIT-Delhi/148/2017-18 dated 30^th March, 2018, but the said letter was not annexed.

The High Court held that the approval granted by the statutory authorities, as required under the provisions of the Act, has to be furnished to an assessee along with the reasons to believe. The statutory scheme encapsulated in the Act provides that the reassessment proceedings cannot be triggered till the Assessing Officer has reasons to believe that income, which is otherwise chargeable to tax, has escaped assessment and the reasons recorded by him are placed before the specified authority for grant of approval to commence the process of assessment.

According to the High Court, the second condition requiring Assessing Officer to obtain prior approval of the specified authority was not fulfilled, as otherwise, there were no good reasons to not to furnish the same to the Petitioner along with the document which contained the Assessing Officer’s reasons for holding the belief that income otherwise chargeable to tax had escaped assessment.

The High Court therefore set aside the impugned notice and the impugned order.

The Supreme Court dismissed the SLP in view of the categorical finding recorded in paragraph 13 by the High Court and opining that in the facts of the case, no case for interference was made out by the Revenue.

17 PCIT vs. Nitin Nema
(2024) 468 ITR 105 (SC)

Reassessment — Gross Receipts of Sale consideration and income chargeable to tax are not same — Notice issued treating the sale consideration as asset which has escaped assessment is not sustainable.

A notice u/s. 148A(b) was issued observing that the amount of ₹72,05,085 was received by the assessee as a result of export transaction. The assessee had not filed return of income. Hence, a sum of ₹72,05,084 had escaped assessment. Since the amount of ₹72,05,084 was more that ₹50 lakhs, the said income was amenable to proceedings u/s. 148 and 148A.

Assesee filed his objections to the notice issued u/s. 148A(b). After considering the said reply, an order u/s. 148A(d) was passed rejecting the objections of the assessee and consequentially a notice u/s. 148 was issued.

The assesssee challenged the order dated 25^th March, 2023 passed u/s. 148A(d) of the Act deciding that it was a fit case for issuance of a notice u/s. 148 for assessment/ reassessment of income which had escaped assessment for the assessment year 2016-17. The assesee further challenged the consequential notice u/s. 148 of the Act.

The High Court observed that neither the notice u/s. 148A(b) nor the order u/s. 148A(d), nor the consequential notice u/s. 148 gave any indication that the amount of ₹72,05,084 alleged to be income escaping assessment, included land/building/shares/equities/loans/ advances, etc.

The High Court noted that the assessee had filed a rely to the notice u/s. 148A(b) explaining that the said amount of ₹72,05,084 was gross receipt of sale consideration of 16 scooters. Along with the reply, the details of items sold and payment receipt, computation of total income and computation of tax on total income was worked out.

The High Court observed that the said amount of ₹72,05,084 was the total sale consideration receipt of the transactions in question and not income chargeable to tax, which would obviously be less than the said amount.

The High Court noted the decision of the Karnataka High Court in Sanath Kumar Murali vs. ITO (2023) 455 ITR 370 (Kar) which held that the entirety of sale consideration does not constitute income.

According to the High Court, in passing the order u/s. 148A(d) the Respondent had adopted highly casual and perfunctory approach and elementary aspect of clear distinction between consideration of sale and income chargeable to tax was overlooked.

The High Court opined that had the Revenue arrived at the correct figure of income chargeable to tax instead of gross receipts / consideration, possibility of the amount of ₹72,05,084 coming
down to a figure below ₹50 lakhs could not be ruled out.

The High Court quashed the order u/s. 148A(d) and the notice u/s. 148 with costs.

The Supreme Court dismissed the SLP observing that it was not inclined to interfere with the impugned judgment and order of the High Court.

BCAJ Admin

Glimpses Of Supreme Court Rulings

13. Bank of Rajasthan Ltd. vs. Commissioner of Income Tax Civil Appeal Nos. 3291-3294 of 2009, decided on: 16th October, 2024

Broken period interest — Deduction — RBI categorise the government securities into the following three categories: (a) Held to Maturity (HTM); (b) Available for Sale (AFS); and (c) Held for Trading (HFT) — AFS and HFT are always held by Banks as stock-in-trade, therefore, the interest accrued on the said two categories of securities will have to be treated as income from the business of the Bank — if it is found that HMT Security is held as an investment, the benefit of broken period interest will not be available but the position will be otherwise if it is held as a trading asset.

The Appellant-Assessee, a Scheduled Bank, was engaged in the purchase and sale of government securities. The securities were treated as stock-in-trade in the hands of the Appellant. The amount received by the Appellant on the sale of the securities was considered for computing its business income. The Appellant consistently followed the method of setting off and netting the amount of interest paid by it on the purchase of securities (i.e., interest for the broken period) against the interest recovered by it on the sale of securities and offering the net interest income to tax. The result is that if the entire purchase price of the security, including the interest for the broken period is allowed as a deduction, then the entire sale price of the security is taken into consideration for computing the Appellant’s income. According to the Appellant’s case, the assessing officer allowed this settled practice while passing regular assessment orders for the assessment years 1990-91 to 1992-93. However, the Commissioner of Income Tax (for short, ‘CIT’) exercised jurisdiction Under Section 263 of the IT Act and interfered with the assessment orders. The CIT held that the Appellant was not entitled to the deduction of the interest paid by it for the broken period. The Commissioner relied upon a decision of this Court in the case of Vijaya Bank Ltd. vs. Additional Commissioner of Income Tax, Bangalore (1991) 187 ITR 541 (SC). The Supreme Court in that case held that under the head “interest on securities”, the interest for a broken period was not an allowable deduction. Being aggrieved by the orders of the CIT, the Appellant preferred an appeal before the Income Tax Appellate Tribunal (for short, ‘Appellate Tribunal’). The Tribunal allowed the appeal by holding that the decision of this Court in the case of Vijaya Bank Ltd. was rendered after considering Sections 18 to 21 of the IT Act, which have been repealed. Therefore, the Tribunal held that as the Appellant was holding the securities as stock-in-trade, the entire amount paid by the Appellant for the purchase of such securities, which included interest for the broken period, was deductible. The Respondent Department preferred an appeal before the High Court against the decision of the Appellate Tribunal. By the impugned judgment, the High Court interfered and, relying upon the decision of this Court in the case of Vijaya Bank Ltd. allowed the appeal.

This order was impugned in Civil Appeal Nos. 3291-3294 of 2009 before the Supreme Court.

The Supreme Court noted that a Scheduled Bank is governed by the provisions of the Banking Regulation Act, 1949 (for short, “the 1949 Act”). The 1949 Act, read with the guidelines of the Reserve Bank of India (for short, ‘RBI’), requires Banks to purchase government securities to maintain the Statutory Liquidity Ratio (for short, ‘SLR’). The guidelines dated 16th October, 2000 issued by the RBI categorise the government securities into the following three categories: (a) Held to Maturity (HTM); (b) Available for Sale (AFS); and (c) Held for Trading (HFT).

The interest on the securities is paid by the Government or the authorities issuing securities on specific fixed dates called coupon dates, say after an interval of six months. When a Bank purchases a security on a date which falls between the dates on which the interest is payable on the security, the purchaser Bank, in addition to the price of the security, has to pay an amount equivalent to the interest accrued for the period from the last interest payment till the date of purchase. This interest is termed as the interest for the broken period. When the interest becomes due after the purchase of the security by the Bank, interest for the entire period is paid to the purchaser Bank, including the broken period interest. Therefore, in effect, the purchaser of securities gets interest from a date anterior to the date of acquisition till the date on which interest is first due after the date of purchase.

The Supreme Court further noted that under the Income Tax Act, 1961 (for short, ‘the IT Act’), Section 18, which was repealed by the Finance Act, 1988, dealt with tax leviable on the interest on securities. Section 19 provided for the deduction of (i) expenses in realising the interest; and (ii) the interest payable on the money borrowed for investment. Section 20 dealt with the deduction of (i) expenses in realising the interest; and (ii) the interest payable on money borrowed for investment in the case of a Banking company. Section 21 provided that the interest payable outside India was not admissible for deduction. Sections 18 to 21 were repealed by the Finance Act, 1988, effective from 1^st April, 1989.

The Supreme Court also noted that Head ‘D’ (in Section 14) is of income from “profits and gains of business or profession” covered by Section 28 of the IT Act. Profits and gains from any business or profession that the Assessee carried out at any time during the previous year are chargeable to income tax. Under Section 36(1)(iii), the Assessee is entitled to a deduction of the amount of interest paid in respect of capital borrowed for the purposes of the business or profession. Section 37 provides that any expenditure which is not covered by Sections 30 to 36 and not being in the nature of capital expenditure, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed for computing the income chargeable under the head “profits and gains of business or profession”. Section 56 of the IT Act provides that income of every kind which is not to be excluded from the total income under the IT Act shall be chargeable to income tax under the head “income from other sources” if it is not chargeable to income tax under any of the other heads provided in Section 14. Therefore, interest on investments may be covered by Section 56. Section 57 provides for the deduction of expenditure not being in the nature of capital expenditure expended wholly and exclusively for the purposes of making or earning such income. In the case of interest on securities, any reasonable sum paid for the purposes of realising interest is also entitled to deduction Under Section 57 of the IT Act.

The Supreme Court noted following decisions on the subject:

Vijaya Bank Ltd. (1991) 187 ITR 541 (SC)
American Express International Banking Corporation (2002) 258 ITR 601 (Bombay)
Commissioner of Income Tax, Bombay vs. Citi Bank NA (dated 12^th August, 2008)(SC)
Cocanada Radhaswami Bank Ltd. MANU/SC/0163/1965 : (1965) 57 ITR 306

After considering the other decisions cited at the bar and the arguments of the parties, the Supreme Court observed that initially, CBDT issued Circular No. 599 of 1991 and observed that the securities held by Banks must be recorded as their stock-in-trade. The circular was withdrawn in view of the decision of this Court in the case of Vijaya Bank Ltd. (1991) 187 ITR 541 (SC). In the year 1998, RBI issued a circular dated 21^st April, 1998, stating that the Bank should not capitalise broken period interest paid to the seller as a part of cost but treat it as an item of expenditure under the profit and loss account. A similar circular was issued on 21^st April, 2001, stating that the Bank should not capitalise the broken period interest paid to the seller as a cost but treated it as an item of expenditure under the profit and loss account. In 2007, the CBDT issued Circular No. 4 of 2007, observing that a taxpayer can have two portfolios. The first can be an investment portfolio comprising securities, which are to be treated as capital assets, and the other can be a trading portfolio comprising stock-in-trade, which are to be treated as trading assets.

The Supreme Court further observed that Banks are required to purchase Government securities to maintain the SLR. As per RBI’s guideline dated 16^th October, 2000, there are three categories of securities: HTM, AFS and HFT. As far as AFS and HFT are concerned, there is no difficulty. When these two categories of securities are purchased, obviously, the same are not investments but are always held by Banks as stock-in-trade. Therefore, the interest accrued on the said two categories of securities will have to be treated as income from the business of the Bank. Thus, after the deduction of broken period interest is allowed, the entire interest earned or accrued during the particular year is put to tax. Thus, what is taxed is the real income earned on the securities. By selling the securities, Banks will earn profits. Even that will be the income considered under Section 28 after deducting the purchase price. Therefore, in these two categories of securities, the benefit of deduction of interest for the broken period will be available to Banks.

If deduction on account of broken period interest is not allowed, the broken period interest as capital expense will have to be added to the acquisition cost of the securities, which will then be deducted from the sale proceeds when such securities are sold in the subsequent years. Therefore, the profit earned from the sale would be reduced by the amount of broken period interest. Therefore, the exercise sought to be done by the Department is academic.

The securities of the HTM category are usually held for a long term till their maturity. Therefore, such securities usually are valued at cost price or face value. In many cases, Banks hold the same as investments. Whether the Bank has held HMT security as investment or stock-in-trade will depend on the facts of each case. HTM Securities can be said to be held as an investment (i) if the securities are actually held till maturity and are not transferred before and (ii) if they are purchased at their cost price or face value.

The Supreme Court made a reference to its decision in the case of Commissioner of Income Tax (Central), Calcutta vs. Associated Industrial Development Co. (P) Ltd., Calcutta (1972) 4 SCC 447. In the said decision, it was held that whether a particular holding of shares is by way of investments or forms part of the stock-in-trade is a matter which is within the knowledge of the Assessee. Therefore, on facts, if it is found that HMT Security is held as an investment, the benefit of broken period interest will not be available. The position will be otherwise if it is held as a trading asset.

The Supreme Court noted that on the factual aspects, the Tribunal, in a detailed judgment, recorded the following conclusions:

a. Interest income on securities right from assessment year 1989-90 is being treated as interest on securities and is taxed under Section 28 of the IT Act;

b. Since the beginning, securities are treated as stock-in-trade which has been upheld by the Department right from the assessment year 1982-83 onwards;

c. Securities were held by the Respondent Bank as stock-in-trade.

The findings of the Tribunal had been upset by the High Court. The impugned judgment proceeded on the footing that the decision in the case of Vijaya Bank Ltd. (1991) 187 ITR 541(SC) case would still apply. Thus, as a finding of fact, it was found that the Appellant Bank was treating the securities as stock-in-trade. As the securities were held as stock-in-trade, the income thereof was chargeable under Section 28 of the IT Act. Even the assessing officer observed that considering the repeal of Sections 18 to 21, the interest on securities would be charged as per Section 28 as the securities were held in the normal course of his business. The assessing officer observed that the Appellant-Bank, in its books of accounts and annual report, offered taxation on the basis of actual interest received and not on a due basis.

Therefore, in the facts of the case, as the securities were treated as stock-in-trade, the interest on the broken period cannot be considered as capital expenditure and will have to be treated as revenue expenditure, which can be allowed as a deduction. Therefore, the impugned judgment cannot be sustained, and the view taken by the Tribunal will have to be restored.

14. Gujarat Urja Vikas Nigam Ltd vs. CIT (2024) 465 ITR 798 (SC)

Business Expenditure — Deduction only on actual payment- Section 43B — Electricity duty on sale of power payable to Government adjusted against sums due to assesses by the Government — To be allowed on production of certificate from Chartered Accountant to establish that the adjustment was made within time.

In an intimation issued u/s. 143(1)(a) for AY 1991-92, the Assessing Officer inter alia disallowed ₹41,65,12,181 being amount of electricity duty payable to the State Government by the assessee on sale of electric power. In a rectification application filed by the assessee it relied upon the letter issued by the under Secretary to the Government of India, Energy and Petrochemical Department to contend that the electricity duty payable had been adjusted against the other amounts receivable from the Government and, hence, the adjustment made u/s. 143(1) and levy of additional tax u/s. 143(1A) was not warranted. The rectification application was rejected holding that there was no proof of such adjustment having been made within the stipulated period.

The appeal of the assessee on this issue was dismissed by the Commissioner of Income Tax (Appeals).

The Tribunal allowed the appeal of the assessee by following the decision of the co-ordinate Bench of the Tribunal in Ahmedabad Electricity Co. Ltd vs. ITO (ITA No. 378/Ahd/1988) wherein it was held that section 43B was not applicable to the electricity duty payable to the government.

The High Court reversed the order of the Tribunal following the decision of the Hon’ble Gujarat Court in CIT vs. Ahmedabad Electricity Ltd (2003) 262 ITR 97 (Guj), which reversed the order of the Tribunal holding that electricity duty on sale electricity has to be considered as an inadmissible item u/s. 43B of the Act.

On an appeal, the Supreme Court observed that in the context of section 43B of the Act, apart from entitlement, the assessee was duty bound to produce the certificate of a Chartered Accountant showing the proof of payment which the assessee claimed by way of adjustment of 21^st August,1990. The Supreme Court noted that such a certificate had not been produced till date. In the circumstances, the Supreme Court directed the assessee to produce the certificate before the Assessing Officer within a period of four weeks from the date of the order and that the Assessing Officer will take the certificate on records and decide the matter in accordance with law.

BCAJ Admin

Glimpses of Supreme Court Rulings

12. Shriram Investments vs. The Commissioner of Income Tax III, Chennai (Civil Appeal No. 6274 of 2013 dated 4^th October, 2024- SC)

Revised return of income — The Assessing Officer has no jurisdiction to consider the claim made by the Assessee in the revised return filed after the time prescribed by Section 139(5) for filing a revised return had already expired.

The Appellant-Assessee filed a return of income on 19^th November, 1989 under the Income Tax Act, 1961 (‘IT Act’) for the assessment year 1989–90. On 31^st October 1990, the Appellant filed a revised return.

As per intimation issued under Section 143(1)(a) of the IT Act on 27^th August 1991, the Appellant paid the necessary tax amount.

On 29^th October, 1991, the Appellant filed another revised return. The Assessing Officer did not take cognizance of the said revised return.

The Appellant, therefore, preferred an appeal before the Commissioner of Income Tax (Appeals) (‘CIT (Appeals)’). By the order dated 21^st July, 1993, the CIT (Appeals) dismissed the appeal on the ground that in view of Section 139(5) of the IT Act, the revised return filed on 29^th October, 1991 was barred by limitation.

Being aggrieved, the Appellant-Assessee preferred an appeal before the Income Tax Appellate Tribunal (for short, ‘the Tribunal).

The Tribunal partly allowed the appeal by remanding the case back to the file of the Assessing Officer. The Assessing Officer was directed to consider the Assessee’s claim regarding the deduction of deferred revenue expenditure.

The Respondent Department preferred an appeal before the High Court of Judicature at Madras. By the impugned judgment, the High Court proceeded to set aside the order of the Tribunal on the ground that after the revised return was barred by time, there was no provision to consider the claim made by the Appellant.

Before the Supreme Court, the Appellant relied upon a decision in the case of Wipro Finance Ltd. vs. Commissioner of Income Tax (2022) 137 taxmann.com 230 (SC). It was contended that the Tribunal did not direct consideration of the revised return but the Tribunal was rightly of the view that the assessing officer can consider claim made by the Appellant regarding deduction of deferred revenue expenditure in accordance with law. It was submitted that the Appellant was entitled to make a claim during the course of the assessment proceedings which otherwise was omitted to be specifically claimed in the return.

Revenue relied upon decisions in the case of Goetze (India) Ltd. vs. Commissioner of Income Tax (2006) 157 Taxman 1 (SC) and Principal Commissioner of Income Tax &Anr. vs. Wipro Limited (2022) 446 ITR 1. It was submitted that after the revised return was barred by limitation, there was no question of considering the claim for deduction made by the Appellant in the 2 revised returns. It was submitted that the High Court was absolutely correct in concluding that after the revised return was barred by limitation, the Assessing Officer had no jurisdiction to consider the case of the Appellant.

According to the Supreme Court, the issue which arose before the Supreme Court in Wipro Finance Ltd 2022 (137) taxmann.com 230 (SC) was not regarding the power of the Assessing Officer to consider the claim after the revised return was barred by time. In that case, the Court considered the appellate powers of the Tribunal under Section 254 of the IT Act. Moreover, it was a case where the department gave no objection for enabling the Assessee to set up a fresh claim.

The Supreme Court noted that in the case of Goetze (India) Ltd (2006) 157 Taxman 1 (SC), it had held that the Assessing Officer cannot entertain any claim made by the Assessee otherwise than by following the provisions ofthe IT Act.

The Supreme Court noted that in the present case, there was no dispute that when a revised return dated 29^th October, 1991 was filed, it was barred by limitation in terms of section 139(5) of the IT Act.

The Supreme Court after noting the provisions of section 139(5) of the IT Act and the decision in Wipro Limited (2022) 446 ITR 1, held that the Tribunal had not exercised its power under Section 254 of the IT Act to consider the claim. Instead, the Tribunal directed the Assessing Officer to consider the Appellant’s claim. The Assessing Officer had no jurisdiction to consider the claim made by the Assessee in the revised return filed after the time prescribed by Section 139(5) for filing a revised return had already expired. Therefore, according to the Supreme Court, there was no reason to interfere with the impugned judgment of the High Court. The appeal was, accordingly, dismissed.

BCAJ Admin

Glimpses of Supreme Court Rulings

9 C I T (E), Pune vs. Lata Mangeshkar Medical Foundation

(2024) 464 ITR 706 (SC)

Charitable Purpose — Exemption — Principle of consistency — High Court upheld the order of the lower authorities which allowed the exemption based on earlier appellate orders which had become final — Special Leave Petition dismissed

The Assessee Trust was running a hospital by the name “Deenanath Mangeshkar Hospital” in Pune. During the assessment proceeding for Assessment Year 2010–2011, the Assessing Officer (“AO”) denied the exemption under Section 11 of the Income Tax Act, 1961 (“the Act”) and then vide assessment order under Section 143(3) of the Act, computed the total income at ₹18,16,02,520. The exemption under section 11 of the Act was denied because —

(i) The Assessee-Trust had not furnished proper information to the Charity Commissioner and there was a shortfall in making provisionsfor the Indigent Patients Fund (“IPF”). According to AO, Assessee should have credited an amount of ₹2.14 crores to the IPF as against ₹75.96 lakhs only.

(ii) The Assessee Trust had generated a huge surplus and therefore, the intention of the trust was
profit-making. AO was of the opinion that the hospital of Assessee did not provide services to the poor and underprivileged class of the society.

(iii) The Assessee-Trust was running a canteen in the hospital with a profit motive and was not providing free meals.

(iv) There was a violation of provisions of Section 13(1)(c) of the Act by Assessee-Trust as remuneration was paid to two individuals, viz., Mrs. Bharati Mangeshkar, who is a trustee with no significant qualification and Mrs. Meena Kelkar, mother of the trustee Dr. Dhananjay Kelkar, who also did not possess any qualification and was beyond 65 years of age.

Being aggrieved by this assessment order dated 22^nd March, 2013, Assessee Trust preferred an Appeal before the Commissioner of Income Tax (Appeal) (“CIT(A)”). The CIT(A) granted relief to Assessee-Trust by restoring the exemption under Section 11 of the Act.

Revenue challenged the said order before the Income Tax Appellate Tribunal (“ITAT”). The ITAT was pleased to dismiss the Appeal by an order dated 23^rd June, 2017.

The order of the ITAT was challenged by the Revenue before the High Court. The High Court noted that CIT(A) while deciding the issue in favour of the Assessee noted that the facts in the year under Appeal, i.e., for Assessment Year 2010–2011 were identical to those of Assessment Years 2008–2009 and 2009–2010. The CIT(A) followed the orders of his predecessor for Assessment Years 2008–2009 and 2009–2010 and decided the issue in favour of the Assessee.

Revenue had challenged those orders of CIT(A) and filed an Appeal before the ITAT for Assessment Years 2008–2009 and 2009–2010. The co-ordinate Bench of the ITAT by an order dated 15th April, 2016 upheld the order of CIT(A).

According to the High Court, The ITAT for the assessment year 2010–11 had merely followed what its co-ordinate Bench held in its order dated 15^th April, 2016 for Assessment Years 2008–2009 and 2009–2010. Since there was nothing on record that the order of ITAT dated 15^th April, 2016 had been set aside or overruled in any manner by the High Court, the ITAT found no reason to interfere with the order of CIT(A). The High Court noted that the Appeals for those years were filed before the High Court for the earlier years had been dismissed on the ground of delay. In the circumstances, the High Court found no reason to interfere with the order of ITAT.

Revenue challenged the said order before the Supreme Court by way of a special leave petition. The Supreme Court dismissed the special leave petition holding that no case for its interference was made out by the Appellant.

10 PCIT vs. Trigent Software Ltd.

(2024) 464 ITR 770 (SC)

Business Expenditure — Capital or Revenue — Software company abandoned a new software that it was developing — High Court holding that the amount spent was deductible as revenue expenditure — Special Leave Petition dismissed.

The assessee was engaged in the business of software development solutions and management. The assessment for the assessment year 2007–08 was completed u/s. 143(3) r.w.s 147. The Assessing Officer disallowed the claim of expenditure of ₹7.09 crores in respect of the development of software that was abandoned.

The Commissioner of Income-tax (Appeals) allowed the claim of deduction holding that the expenditure for the development of a new product by the assessee was in the assessee’s existing line of business. The CIT(A) further held that though the assessee had shown the expenditure as capital work-in-progress for the earlier assessment years, the deduction had to be allowed as a revenue expenditure in the year in which the project in question was abandoned.

The Income Tax Appellate Tribunal upheld the view expressed by the Commissioner of Income-tax (Appeals).

The High Court held that the appellant was admittedly in the business of development of software solutions and management, and therefore its endeavour to develop a new software was nothing but an endeavour in its existing line of business of developing software solutions. Admittedly, the product that was sought to be developed never came into existence, and the same was abandoned. No new asset came into existence which would be of enduring benefit to the assessee, and, therefore the expenditure could only be said to be revenue in nature.

The Supreme Court dismissed the special leave petition of the Revenue holding that no case for interference was made out so as to exercise its jurisdiction under Article 136 of the Constitution of India.

11 Jt. CIT vs. Clix Capital Services Pvt. Ltd.

(2024) 464 ITR 768 (SC)

Penalty notice — Assessment order passed on 28^th October, 2011 — Show cause notice u/s. 274 for imposition of penalty issued on 9th November, 2017 — High Court holding that the notice is barred by limitation — SLP dismissed

On 31^st October, 2007, the assessee filed its return of income for the assessment year 2007–08 declaring a total income of ₹47,39,42,143.

A revised return of income was filed on 31^st March, 2009 declaring the total income of ₹47,14,28,736. In the revised return the assessee inter alia added back certain expenses amounting to ₹84,62,03,987 by way of abundant caution, having regard to the provision of section 40(a)(ia) of the Act. In the succeeding assessment year, that is, the assessment year 2008–09, the assessee claimed the said expense of ₹84,62,03,987 as a deduction, as the said amount had been actually expended.

The assessment order for the assessment year 2007–08 was passed u/s. 143(3) of the Act on 28^th October, 2011 determining total income at ₹102,06,71,340.

The Assessing Officer, in an internal communication dated 9^th September, 2013 addressed to the Additional Commissioner of Income-tax wrote that a penalty should be imposed on the assesee for failure to deduct tax at source qua assessment year 2007–08. A reminder was sent on 11^th July, 2014. A notice u/s. 274 of the Act was issued on 9^th November, 2017 calling upon the assessee to show cause as to why penalty should not be imposed u/d. 271C of the Act for the assessment year 2007–08.

The assessee filed a response on 19^th December, 2017, inter alia raising a preliminary objection, namely, that the notice was barred by limitation.

The assessee filed a writ petition before the Hon’ble Delhi High Court which directed that an order be passed on the objection of the assessee.

This led to the passing of the order dated 14^th June, 2018 which was followed by a second show-cause notice on 27^th June, 2018.

The assessee once again approached the court and filed a writ petition challenging both the show cause notices.

The High Court observed that section 275 of the Act has two limbs. The first limb concerns the fixation of a period of limitation when the penalty is sought to be imposed as fallout of action taken in another proceeding. On the other hand, the second limb of clause (c) of sub-section (i) of section 275 of the Act fixes the period of limitation, where initiation of action of imposition of penalty is taken on a standalone basis, that is, not as a consequence of action taken in another proceeding.

For the second limb, the legislature has provided a limitation of six months from the end of the month in which action for imposition of penalty is initiated. But there is no indication, as to when the period of six months ought to commence. The High Court agreed with the assessee that the proceedings should be commenced within a reasonable period.

The High Court was of the view that the show cause notice dated 9^th November, 2017 was delayed and therefore quashed the same.

On a special leave petition being filed by the Revenue, the Supreme Court dismissed the same holding that no case for interference was made out for it to exercise its jurisdiction under Article 136 of the Constitution of India.

BCAJ Admin

Glimpses of Supreme Court Rulings

Excise Commissioner Karnataka and Another

vs. Mysore Sales International Ltd. and Ors.

(2024) 466 ITR 205 (SC)

8. Tax collection at source — The liquor vendors (contractors) who bought the vending rights on auction could not be termed as “buyer” under Section 206C of the Income-Tax Act because they were excluded from the definition of “buyer” as per Clause (iii) of Explanation (a) to Section 206C, in as much as the goods [arrack] were not obtained by him by way of auction (i.e., only licence to carry on the business was obtained) and that the sale price of such goods to be sold by the buyer was fixed under a state enactment. Merely because there is a price range providing for a minimum and a maximum under the State Act, it cannot be said that the sale price is not fixed.

Principles of natural justice — Even though the statute may be silent regarding notice and hearing, the court would read into such provision the inherent requirement of notice and hearing before a prejudicial order is passed — Before an order is passed under Section 206C of the Income-Tax Act, it is incumbent upon the assessing officer to put the person concerned to notice and afford him an adequate and a reasonable opportunity of hearing, including a personal hearing.

Prior to 1993, there were several private bottling units in the State of Karnataka, and they were manufacturing and selling arrack.

In the year 1993, the state government discontinued private bottling units from engaging in the manufacture or bottling of arrack and instead decided as a policy to restrict those operations in the hands of state government companies or undertakings, such as, Mysore Sales International Limited and Mysore Sugar Company Limited.

Mysore Sales was entrusted with the above task for the northern districts of the State of Karnataka, while for the rest of the state, Mysore Sugar was entrusted with the responsibility.

The Karnataka Excise Act, 1965 (“the Excise Act”) provides for a uniform law relating to production, manufacture, possession, import, export, transport, purchase and sale of liquor and intoxicating drugs and the levy of duties of excise thereon in the State of Karnataka and for certain matter related thereto. Under the Excise Act, several Rules have been framed for appropriate enforcement of the excise law.

Auctions are conducted periodically for the purpose of conferring lease right for retail vending of arrack. It was conducted with reference to designated areas. Successful bidders are entitled to procure arrack from Mysore Sales and Mysore Sugar depending upon the area allotted to them and then to sell it in retail trade within their respective allotted areas. The retail sale price is fixed by the state government in terms of the Rules.

Section 206C of the Income-tax Act, 1961 casts an obligation on the “seller” of alcoholic liquor, etc., of collecting tax at source at the specified time from the “buyer”. As per Explanation (a), certain persons were not included within, rather excluded from, the definition of “buyer”.

A circular came to be issued by the Excise Commissioner of Karnataka on 16th June, 1998 to which an addendum was also issued. The circular clarified that since arrack was not obtained through auction and since the selling price of arrack was fixed by the Excise Commissioner, there was no question of recovery of tax from the excise (liquor) vendors or contractors.

In view of the above, Mysore Sales and Mysore Sugar (Assesses) did not recover the tax from the liquor vendors.

Assessing Officer (AO) issued notices dated 26th October, 2000 calling upon the Assessee to show cause as to why it should not pay the requisite tax amount which it had failed to collect from the “buyers”, i.e., the excise contractors for the financial years relevant to the assessment years under consideration. The Assessee had submitted its reply to such notice. Thereafter, the AO passed orders dated 17th January, 2001 under Section 206C(6) of the Income-tax Act for the assessment years 2000–2001, 1999–2000, 1998–1999, 1997–1998, 1996–1997 and 1995–1996. The AO held that the Assessee is a “seller” and the liquor vendors are “buyers” in terms of Section 206C of the Income-tax Act and hence, the Assessee was under a legal obligation to collect income tax at source from the liquor vendors (contractors) for the financial years relevant to the aforesaid assessment years. By the aforesaid orders, the Assessee was directed to pay certain sums of money as tax, which it had failed to collect from the liquor vendors or contractors. Following such orders, consequential demand notices for the respective assessment years under Section 156 of the Income-tax Act were also issued to the Assessee by the AO.

Mysore Sales / Mysore Sugar filed writ petitions before the High Court. While the main contention was that Section 206C(6) of the Income-tax Act was not applicable to it, a corollary issue raised was that before passing the order under Section 206C(6) of the Income-tax Act, no opportunity of hearing was given to it. Therefore, there was violation of the principles of natural justice. Learned Single Judge vide the judgment and order dated 27th October, 2003 [(2004) 265 ITR 498] dismissed the writ petitions confirming the orders passed under Section 206C(6) of the Income-tax Act.

Thereafter, Mysore Sales and Ors. preferred writ appeals before the Division Bench. However, by the judgment and order dated 13th March, 2006 [(2006) 286 ITR 136], the writ appeals were dismissed by affirming the orders passed by the AO and also that of the learned Single Judge.

Aggrieved by the aforesaid, SLP(C) No. 12524 of 2006 was preferred by Mysore Sales. After leave was granted on 23rd April, 2007, the same came to be registered as Civil Appeal No. 2168 of 2007. Mysore Sugar also filed an SLP.

According to the Supreme Court, the short point for consideration in this appeal was whether provisions of Section 206C of the Income-Tax Act were applicable in respect of the Appellant and whether the liquor vendors (contractors) who bought the vending rights from the Appellant on auction could be termed as “buyer” within the meaning of Explanation (a) to Section 206C of the Income-tax Act or excluded from the said definition of “buyer” as per Clause (iii) of Explanation (a) to Section 206C of the said Act.

The Supreme Court noted that under Section 17 of the Excise Act, the state government grants lease of right to any person for manufacture, etc., of liquor, arrack in this case. The licencing authority, i.e., Excise Commissioner, may grant to the lessee a licence in terms of his lease. In supplement to the above provision, Rule 3(1) of the 1987 Rules provides that the Excise Commissioner shall grant a licence for any specified area or areas for the manufacture or bottling of arrack. From 1st July, 1993, sub-Rule (2) of Rule 3 has come into force as per which provision the licence under Rule 3 of the 1987 Rules shall be issued only to a company or agency owned or controlled by the state government or to a state government department. This is how Mysore Sales was granted licence for the manufacture and bottling of arrack. Through a process of auction, excise contractors are shortlisted who are thereafter granted licence or permits to vend arrack by retail in their respective area(s). They are required to procure the arrack from the warehouse or depot on payment of the issue price fixed by the Excise Commissioner as per Rule 5(1) of the 1967 Rules. Rule 2 makes it very clear that no arrack in retail vend shall be sold except in sealed bottles or in sealed polythene sachets obtained from either a warehouse or a depot. For such retail vending, Rule 3 of the 1967 Rules requires the excise contractor to construct a counter in the shop. The right to retail vend of liquor is granted either by tender or by auction or by a combined process of tender-cum- auction, etc. As per Rule 17 of the 1987 Rules, the price to be paid by the lessee for the right of retail vend of arrack to the government for the supply of bottled arrack shall be fixed by the Commissioner with prior approval of the government. In so far the retail price is concerned, Rule 4 of the 1967 Rules says that the excise contractor can sell the arrack at a price within the range of minimum floor price and maximum ceiling price that may be fixed by the Excise Commissioner.

The Supreme Court observed that Sub-section (1) of Section 206C provides that every person who is a seller shall collect from the buyer of the goods specified in the table a sum equal to the percentage specified in the corresponding entry of the table. The collection is to be made at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of the receipt of such amount from the said buyer, be it in cash or by way of cheque or by way of draft, etc. In so far alcoholic liquor for human consumption (other than India made foreign liquor, i.e., IMFL), the amount to be collected is 10 per cent. Sub-section (3) provides that any person collecting such amount under Sub-section (1) shall pay the said amount within seven days of the collection to the credit of the central government or as the Central Board of Direct Taxes (CBDT) directs. Sub- section (4) clarifies that any amount so collected under Section 206C(1) and paid under Sub-section (3) shall be deemed as payment of income tax on behalf of the person from whom the amount has been collected and credit shall be given to such person for the amount so collected and paid at the time of assessment proceeding for the relevant assessment year. Sub-section (5) says that every person collecting such tax shall issue a certificate to the buyer within 10 days of debit or receipt of the amount. Sub-section (5A) requires the person collecting tax to prepare half yearly returns for the periods ending on 30th September and 31st March for each financial year and submit the same in the prescribed form before the competent income tax authority. Sub-section (6) says that any person responsible for collecting the tax, fails to collect the same, shall notwithstanding such failure be liable to pay the tax which he ought to have collected to the credit of the central government in accordance with the provisions of Sub-section (3). Sub-section (7) deals with a situation where such tax is not collected in which event the seller is liable to pay interest at the prescribed rate. Sub-section (8) on the other hand deals with a situation where the seller does not deposit the amount even after collecting the tax. In such an event also, he would be liable to pay interest.

The Explanation defines “buyer” and “seller” for the purposes of Section 206C. While Explanation (a) defines “buyer”, (b) defines “seller”. As per Explanation (a), “buyer” means a person who obtains, in any sale by way of auction, tender or by any other mode, goods of the nature specified in the table in Sub-section (1) or the right to receive any such goods but “buyer” would not include:

(i) a public sector company;

(ii) a buyer in the further sale of such goods obtained in pursuance of such sale;

(iii) a buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State Act.

On the other hand, “seller” has been defined to mean the central government, a state government or any local authority or corporation or authority established by or under a central, state or provincial act or any company or firm or cooperative society.

According to the Supreme Court, as per Explanation (a) (iii), if the goods are not obtained by the buyer by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any state enactment, then such a person would not come within the ambit of “buyer”. Explanation (a)(iii), thus, visualises two conditions for a person to be excluded from the meaning of “buyer” as per the definition in Explanation (a). The first condition is that the goods are not obtained by him by way of auction. The second condition is that the sale price of such goods to be sold by the buyer is fixed under a state enactment. These two conditions are joined by the word “and”. The word “and” is conjunctive to mean that both the conditions must be fulfilled; it is not either of the two. Therefore, to be excluded from the ambit of the definition of “buyer” as per Explanation (a)(iii), both the conditions must be satisfied.

In view of the above, the Supreme Court examined the position of an excise contractor. The Supreme Court noted that Mysore Sales was the licensee for the manufacture and bottling of arrack for specified area(s). By a process of auction or tender or auction- cum-tender, etc., excise contractors were shortlisted who are thereafter granted permits to vend arrack by retail in their respective area(s). These retail vendors, i.e., excise contractors had to procure the arrack from the warehouse or depot maintained by Mysore Sales on payment of the issue price fixed by the Excise Commissioner. The arrack was procured in sealed bottles or in sealed polythene sachets. Therefore, according to the Supreme Court, by the process of auction, etc., the excise contractors are only shortlisted and conferred the right to retail vend of arrack in their respective areas. It cannot be said that by virtue of the auction, certain quantities of arrack were purchased by the excise contractors. Thus, at this stage, there were two transactions, each distinct. The first transaction was shortlisting of excise contractors by a process of auction, etc., for the right to retail vend. The second transaction, which was contingent upon the first transaction, was obtaining of arrack for retail vending by the excise contractors on the strength of the permits issued to them post successful shortlisting following auction. Therefore, it was clear that arrack was not obtained by the excise contractors by way of auction. What was obtained by way of auction was the right to vend the arrack on retail on the strength of permits granted, following successful shortlisting on the basis of auction. Thus, the first condition under Clause (iii) was satisfied.

The Supreme Court observed that in Union of India vs. Om Parkash S.S. and Company (2001) 3 SCC 593, it had considered the issue of tax collection at source in respect of the liquor trade under Section 206C of the Income-tax Act and as to whether a licensee who is issued a licence by the government permitting him to carry on the liquor trade would be a “buyer” as defined in Explanation (a) to Section 206C of the Income-tax Act. It was held that “buyer” would mean a person who by virtue of the payment gets a right to receive specific goods and not where he is merely allowed / permitted to carry on business in that trade. On licences issued by the government permitting the licensee to carry on liquor trade, provisions of Section 206C are not attracted as the licensee does not fall within the concept of “buyer” referred to in that section. It was emphasised that a buyer has to be a buyer of goods and not merely a person who acquires a licence to carry on the business.

The requirement of the second condition under Explanation (a)(iii) is that the sale price of such goods to be sold by the buyer is fixed by or under any state statute. After the arrack is obtained in the above manner by the excise contractor, such person has to sell the same in the area(s) allotted to him at the sale price fixed as per Rule 4 of the 1967 Rules. Rule 4 of the 1967 Rules enables the excise contractor to sell the arrack in retail at a price within the range of minimum floor price and maximum ceiling price which is fixed by the Excise Commissioner. A minimum price and a maximum price are fixed within which range the arrack has to be sold by the excise contractor. Thus, according to the Supreme Court, the price of arrack to be sold in retail is not dependent on the market forces but pre-determined within a range. Therefore, though price range is provided for by the statute, it cannot be said that because there is a price range providing for a minimum and a maximum, the sale price is not fixed. The sale price is fixed by the statute but within a particular range beyond which price, either on the higher side or on the lower side, the arrack cannot be sold by the excise contractor in retail. Therefore, the arrack is sold at a price which is fixed statutorily under Rule 4 of the 1967 Rules and thus, the second condition stands satisfied.

The Supreme Court held that since both the conditions as mandated under Explanation (a)(iii) were satisfied, the excise contractors or the liquor vendors selling arrack would not come within the ambit of “buyer” as defined under Explanation (a) to Section 206C of the Income-tax Act.

The Supreme Court further held that though there is no express provision in Sub-section (6) or any other provision of Section 206C of the Income-tax Act regarding issuance of notice and affording hearing to such a person before passing an order thereunder, nonetheless, it is evident that an order passed under Section 206C(6) of the Income-tax Act, as in the present case, is prejudicial to the person concerned as such an order entails adverse civil consequences. It is trite law that when an order entails adverse civil consequences or is prejudicial to the person concerned, it is essential that principles of natural justice are followed. In the instant case, though show-cause notice was issued to the Assessee to which reply was also filed, the same would not be adequate having regard to the consequences that such an order passed under Section 206C(6) of the Income-tax Act would entail. Even though the statute may be silent regarding notice and hearing, the court would read into such provision the inherent requirement of notice and hearing before a prejudicial order is passed. We, therefore, hold that before an order is passed under Section 206C of the Income-tax Act, it is incumbent upon the AO to put the person concerned to notice and afford him an adequate and reasonable opportunity of hearing, including a personal hearing.

The Supreme Court allowed the appeals.

Notes:

1. Though the issue relates to TCS under the Income-tax Act, interestingly, the judgment is reported as Excise Commissioner, Karnataka & Anr [Appellant(s)] vs. Mysore Sales International Ltd & Ors [Respondent(s)]. From the facts, it appears that the Appellant was Mysore Sales International Ltd.

2. In the judgment, it seems inadvertently, in paras 4.5 to 4.8, reference is made to tax deduction at source [TDS] instead of tax collection at source [TCS]. In the above write-up, reference to TDS is avoided.

3. The provisions referred to in the judgment are those in force prior to amendments made by the Finance Act, 2003. It is worth noting that the definition of “buyer” has substantially undergone change as compared to the earlier one, and the current definition does not have the exclusion of the type from the scope of “buyer” under Section 206C which was considered in the above judgment.

BCAJ Admin

Glimpses of Supreme Court Rulings

6 Special Leave Petition — Dismissed on grounds of efflux of time — Question of Law kept open

PCIT vs. Atlanta Capital Pvt. Ltd.

(2024) 464 ITR 346 (SC)

A notice dated 27^th March, 2008 u/s. 148 of the Act for the assessment year 2001–02 was issued to the assessee at an old address, though the Assessing Officer had served letters dated 8^th August, 2007 and intimation u/s. 14(1) dated 25^th January, 2008 for the assessment year 2006–07 at the new address. The Tribunal quashed the reassessment proceedings holding that there was no proper service of notice. The Delhi High Court dismissed the appeal holding that there was no substantial question of law. According to the High Court, the mere fact that an assessee participated in the reassessment proceedings despite not having been issued or served with the notice u/s. 148 of the Act in accordance with law will not constitute a waiver of the jurisdictional requirement of the issuance and the service of notice.

The Supreme Court observed that the said notice as followed by the order passed by the Assessing Officer/Commissioner was set aside by the Income-Tax Appellate Tribunal on 21^st June, 2013. Subsequently the order of the Tribunal was upheld by the High Court on 15^th September, 2015. The proceeding initiated in 2008 was concluded by the order of the High Court in 2015. Yet another decade had passed thereafter. Under the circumstances, while keeping the question of law open for consideration in another case, the Supreme Court decided not to interfere with the judgment of the High Court.

7 Business Expenditure—Expenditure cannot be disallowed merely because no income is earned SLP dismissed since it was accepted that the business had commenced
PCIT vs. Hike Pvt. Ltd (2024) 464 ITR 394 (SC)

The assessee filed its return of income for the assessment year 2014–15 declaring a loss of ₹42,24,57,146. The assessment order u/s. 143(3) was passed determining total income at ₹78,83,350. The Assessing Officer inter alia disallowed the expenses of ₹43,01,40,500 for the reason that the assessee had not earned any revenue from its business. The only income that it had earned was income from other sources, i.e., interest earned on fixed deposits.

On an appeal, the Commissioner of Income-tax (Appeal) inter alia confirmed the disallowance of expenses.

The Tribunal reversed the view taken by the Commissioner of Income-tax (Appeals) noting that for AY 2012–13, the Assessing Officer had accepted the stand of the assessee that the expenses incurred by it were on revenue account and the later order passed by the Commissioner u/.s 263 for AY 2012–13 was quashed by the Tribunal.

Before the High Court, the Revenue contended that the expenditure was incurred before the business was set up and therefore not allowable. The High Court noted that the objection of the Assessing Officer was that the said amount was spent in building a brand for future utilization, therefore, was not in the nature of revenue. The High Court noted that even in AY 2012–13 the expenses were disallowed because according to the Assessing Officer, the business was not set up and the software purchased was not put to use.

The High Court considering that the assessee was in the business of software development did not interfere with the order of the Tribunal.

On a special leave by the Revenue, the Supreme Court declined to interfere with the High Court judgment as it was accepted that the business had commenced.

BCAJ Admin

Glimpses of Supreme Court Rulings

4. Condonation of delay in filing an appeal — Filing a belated appeal after knowing of a subsequent decision is not a sufficient ground for condonation of the delay

Commissioner of Income (International Taxation) vs. Bharti Airtel Ltd

(2024) 463 ITER 63 (SC)

The Supreme Court noted that before the High Court, the Commissioner of Income-tax filed an affidavit stating that pursuant to the impugned order a decision was taken not to file an appeal and it was only after coming to know that in another case, that the Tribunal had given a decision in favour of the Department, it was decided to file the appeal. The appeal was filed after a delay of about four years and 100 days.

According to the Supreme Court, the explanation given for the delay in filing the appeal had no merits and neither could it be construed to be a sufficient cause for condoning the same.

The Supreme Court dismissed the SLP holding that the High Court was justified in dismissing the appeal filed under section 260A of the Act on the ground of delay.

5. Substantial questions of law — Once an appeal under section 260A is admitted, the same has to be decided on merits at the time of final hearing

Commissioner of Income-tax vs. I.T.C. Ltd

(2024) 461 ITR 446 (SC)

The Supreme Court noted that the High Court had admitted the appeal formulating ten questions of law.

When the matter came up for final hearing, the High Court dismissed the appeal holding that no substantial questions of law arose from the judgement of the Tribunal.

According to the Supreme Court, on a combined reading of the order of admission and the order dismissing the appeal upon final hearing, it had no option but to set aside the impugned order and remand the matter to the High Court for hearing of the appeal.

The Supreme Court accordingly restored the appeal on the record of the High Court and directed the High Court to decide the case on merits.

BCAJ Admin

Glimpses of Supreme Court Rulings

14 Deputy Commissioner of Gift Tax,

Central Circle-II vs. BPL Ltd.

(2022) 448 ITR 739 (SC)

Gift-tax – Equity shares during lock-in period are not ‘quoted shares’ as defined- Valuation of “unquoted equity shares” in companies – Schedule II to the G.T. Act read with Rule 11 of Part C of Schedule III of the W.T. Act is a statutory rule which prescribes the method of valuation of “unquoted equity shares” in companies, other than investment companies, which prescription and method of valuation is mandatory in nature – The effect of Rule 11 of Part C of Schedule III of the W.T. Act is that unquoted shares must be valued as per the formula prescribed – No other method of valuation is permitted and allowed – Ad hoc depreciation/reduction from the quoted price of equity shares transferable in the open market is not permitted and allowed vide Rule 9 of Part C of Schedule III of the W.T. Act.

The assessee company was engaged in the the manufacture and sale of consumer electronic products like television sets, VCR’s, audio and video products, etc.

The assessee had also invested in various other companies manufacturing allied or similar electrical, electronic and engineering goods. On 2^nd March, 1993, the assessee transferred its holdings in eight companies to one Celestial Finance Ltd. for a total consideration of ₹23,10,03,974 which was equal to the cost of acquisition of the shares to the assessee.

The assessee had transferred the shares to Alpha Securities Pvt. Ltd., a 99.7 per cent subsidiary of the assessee. Alpha Securities Pvt. Ltd., in turn, had transferred the same to the 100 per cent subsidiary of Celestial Finance Ltd.

In the course of the assessment proceedings for A.Y. 1993-94, there was an audit objection dated 17^th August, 1995. The assessee satisfied the Department that there was no element of gift.

Thereafter, in August, 1998, a search was carried out u/s 132 of the Income-tax Act. The Deputy Commissioner of Gift Tax issued a notice u/s 16 of the Gift Tax Act, 1958. An assessment order was passed that concluded that there was a deemed gift u/s 4(1)(a) [which provided for deemed gift in a case where the property is transferred for inadequate consideration] and 4(1)(b) [this dealt with the situation where consideration was not intended to be passed] to the extent of ₹69,78,49,800. The gift tax with interest u/s 16B (from July, 1993 to January, 2000) was quantified at ₹54,01,12,525.

On appeal, the Commissioner of Income-tax (Appeals) upheld the validity of reopening, but reduced the quantum of the gift tax. He held that the shares of BPL Sanyo Utilities & Appliances Ltd. and BPL Sanyo Technologies Ltd. [the transfer of these shares were also the subject matter of gift tax proceedings] had to be treated as unquoted equity shares as they were in the lock-in-period and, therefore, valued under Rule 5 of Gift Tax Rules and directed that the said value be substituted in place of valuation that adopted the quoted value of shares. He deleted the amount assessed u/s 4(1)(b) as it was difficult to hold that the consideration was not intended to be passed. He also modified the interest u/s 16B.

On further appeal by the assessee and a cross objection by the Revenue, the Tribunal approved the action of the AO but accepted the finding of the Commissioner with regard to issue u/s 4(1)(b). The Tribunal dismissed the assessee’s appeal and accepted the Revenue’s appeal in part.

On an appeal to the High Court by the assessee, it was held that (i) the gift tax proceedings were validly initiated in the facts and circumstances of the case; (ii) there was a ‘deemed gift’ in terms of section 4(1)(a) as the status of subsidiary company was given probably to avoid payment of gift tax; and (iii) as the shares in question were not traded and were not tradable, the valuation made by Commissioner was proper.

The High Court further held that the interest u/s 16B was leviable on the returned income and not on the assessed income.

The High Court noted that the finding of the Commissioner (Appeals) deleting the deemed gift u/s 4(1)(b) for alleged non-receipt of consideration was confirmed by the Tribunal and no further appeal having been filed by the Revenue, the order of the Commissioner (Appeals) had become final.

On an appeal by the Revenue, the Supreme Court noted that the limited issue raised in the appeal before it related to the valuation of 29,46,500 shares of M/s. BPL Sanyo Technologies Ltd. and 69,49,900 shares of M/s. BPL Sanyo Utilities and Appliances Ltd. which were transferred by the Respondent-Assessee, M/s. BPL Ltd. to M/s. Celestial Finance Ltd. on 2^nd March, 1993. The shares of M/s. BPL Sanyo Technologies Ltd, and M/s. BPL Sanyo Utilities and Appliances Ltd, both public limited companies, were listed and quoted on the stock exchanges. However, these shares, being promoter quota shares, allotted to the Assessee on 17^th November, 1990 and 10^thJuly, 1991, were under a lock-inperiod up to 16^th November,1993 and 25^th May, 1994, respectively.

The Supreme Court noted that Sub-section (1)(a) to Section 4 of the Gift Tax Act, 1958 [G.T. Act] states that where a property is transferred otherwise than for adequate consideration, the amount by which the market value of the property, at the date of the transfer, exceeds the value of the consideration, shall be deemed as a gift made by the transferor. Sub-section (1) to Section 64 of the G.T. Act states that the value of any property, other than cash, which is transferred by way of gift, shall be its value on the date on which the gift was made and determined in the manner as laid down in Schedule II of the G.T. Act. Schedule II, which incorporates the rules for determining the value of a gifted property, states that the value of any property, other than cash, transferred by way of gift, subject to the modifications as stated, shall be determined in accordance with the provisions of Schedule III of the Wealth Tax Act, 1957 [W.T. Act]. The provisions of Part C of Schedule III of the W.T. Act lays down the method of valuation of shares and debentures of a company. Rules 9 and 11 of Part C of Schedule III of the W.T. Act relate to the valuation of quoted shares and debentures of companies and valuation of unquoted equity shares in companies other than investment companies respectively.

The expressions “quoted share” and “quoted debentures”, and “unquoted shares” and “unquoted debentures” have been defined vide Sub-rules (9) and (11), respectively, to Rule 2 of Part A of Schedule III of the W.T. Act. As per the definitions, the expression “quoted share” in case of an equity share means a share which is quoted on any recognised stock exchange with regularity from time to time and where the quotation of such shares is based on current transactions made in the ordinary course of business. Explanation to Sub-rule (9) of Rule 2 of Part A of Schedule III of the W.T. Act states that when a question arises on whether a share is a quoted share within the meaning of the rule, a certificate to that effect furnished by the concerned stock exchange in the prescribed form shall be accepted as conclusive. The expression “unquoted share”, in relation to an equity share, means a share which is not a quoted share.

The Supreme Court agreed with the view expressed by the High Court, which observed that the equity shares under the lock-in period were not “quoted shares”, for the simple reason that the shares in the lock-in period were not quoted in any recognised stock exchange with regularity from time to time.

According to the Supreme Court, when the equity shares are in a lock-in period, then as per the guidelines issued by the Securities and Exchange Board of India (SEBI), there is a complete ban on transfer, which is enforced by inscribing the words “not transferable” in the relevant share certificates.

The Supreme Court noted that the aforesaid position was accepted by the Revenue, which, however, had relied upon a general circular issued by SEBI, wherein it is stated that the shares under the lock-in period can be transferred inter se the promoters. This restricted transfer, according to the Supreme Court, would not make the equity shares in the lock-in period into “quoted shares” as defined vide Sub-rule (9) to Rule 2 of Part A of Schedule III of the W.T. Act, as the lock-in shares are not quoted in any recognised stock exchange with regularity from time to time, and it is not possible to have quotations based upon current transactions made in the ordinary course of business. The possibility of a transfer to promoters via a private transfer/sale does not satisfy the conditions to be satisfied to regard the shares as quoted.

The Supreme Court held that Rule 11 of Part C of Schedule III of the W.T. Act is a statutory Rule which prescribes the method of valuation of “unquoted equity shares” in companies (other than investment companies), which prescription and method of valuation is mandatory in nature. The effect of Rule 11 of Part C of Schedule III of the W.T. Act is that unquoted shares must be valued as per the formula prescribed. No other method of valuation is permitted and allowed. Any ad hoc depreciation/reduction from the quoted price of equity shares transferable in the open market is not permitted and allowed vide Rule 9 of Part C of Schedule III of the W.T. Act. The shares in question being “unquoted shares”, therefore, must be valued in terms of Rule 11 as a standalone valuation method.

Faced with the aforesaid position, the Revenue further relied upon Rule 21 of Part H of Schedule III of the W.T. Act before the Supreme Court.

The Supreme Court noted that Rule 21 of Part H of Schedule III of the W.T. Act had been enacted to clarify and remove doubts. It states that notwithstanding the negative covenants prohibiting or restricting transfer, the property should be valued for the purpose of the W.T. Act and the G.T. Act, but according to the Supreme Court, the valuation is not by overlooking or ignoring the restrictive conditions.

The Supreme Court held that the shares in the lock-in period have market value, which would be the value that they would fetch if sold in the open market. Rule 21 of Part H of Schedule III of the W.T. Act permits valuation of the property even when the right to transfer the property is forbidden, restricted or contingent. Rights and limitations attached to the property form the ingredients in its value. The purpose is to assume that the property which is being valued is being sold, and not to ignore the limitations for the purpose of valuation. This was clear from the wording of Rule 21 of Part H of Schedule III of the W.T. Act, which when read carefully expresses the legislative intent by using the words “hereby declared”. The Rule declares that the price or other consideration for which any property may be acquired by, or transferred, to any person under the terms of a deed of trust or through any other restrictive covenant, in any instrument of transfer, is to be ignored as per the provisions of the Schedule III of the W.T. Act. However, the price of such property is the price of the property with the restrictions if sold in the open market on the valuation date. In other words, notwithstanding the restrictions, hypothetically the property would be assumed to be saleable, but the valuation as per Schedule III of the W.T. Act would be made accounting and taking the limitation and restrictions, and such valuation would be treated as the market value. The Rules do not postulate a change in the nature and character of the property. Therefore, the property must be valued as per the restrictions and not by ignoring them.

In view of the aforesaid discussion, and for thereasons stated above, the appeal by the Revenue was dismissed.

Notes:

1. The above judgment of the Supreme Court gives an impression that this was a case of gift of shares. However, this was a case of transfer/sale of shares at cost and that had raised the issue of valuation of such shares and consequently the issue of deemed gift u/s 4(i)(a) of the Gift-Tax Act, 1958. The relevant facts are available in High Court judgment [(2007) 293 ITR 321(Karn)].

2. The Gift-Tax Act, 1958 is effectively inoperative from 1st October, 1998. Likewise, the Wealth-Tax Act, 1957 is also not operative from A.Y. 2016-17. However, the principle of valuation of shares of listed company during lock-in period of promoters’ quota shares decided by the Court will be still relevant.

15 Indian Institute of Science vs. Dy. Commissioner of Income Tax

(2022) 446 ITR 418 (SC)

Salary – Perquisite – Merely because an assessee might have adopted the Central Government Rules and/or the pay-scales etc., by that itself, it cannot be said that the assessee is a Central/State Government – Employees of such an assessee cannot be construed to be employees of the Central Government for the purposes of computing perquisite value which was governed by Sl. No. 2 of Table 1 appended to Rule 3 of the Rules.

The assessee, a premier research institution engaged in imparting higher learning and carrying out advanced research in science and technology, was recognised as a ‘Deemed University’ under the provisions of University Grants Commission Act, 1956 (‘the UGC Act’).

The service conditions of the employees of the assessee were governed by the rules as were applicable to the Central Government employees.

Accordingly, TDS returns in Form 24Q was filed by the assessee u/s 192 of the Act r.w.s 17(2) of the Act, for the period from 1^st April, 2009 to 31^st March, 2010, which was applicable in respect of the employees of the Central Government.

The AO, by an order dated 26^th April, 2013 passed u/s 201(1) and 201(1A) r.w.s 192 of the Act (A.Y. 2010-11), held that the assessee had not correctly worked out the perquisite value of accommodation in accordance with amended Rule 3 of the Rules, and was liable to be treated as an assessee in default u/s 201(1) of the Act for non-deduction/short deduction. It was further held that the assessee was liable to pay interest u/s 201(1A).

The assessee thereupon filed an appeal before the CIT (A) who, by an order dated 22^nd July, 2014, affirmed the orders passed by the AO.

The assessee thereupon filed an appeal before the Tribunal. The Tribunal, by an order dated 27^th February, 2015, inter alia, held that the employees of the assessee cannot be construed to be employees of the Central Government for the purposes of computing perquisite value which was governed by Sl. No. 1 of Table 1 appended to Rule 3 of the Rules. Accordingly, the appeal was dismissed.

The assessee, thereupon, filed an appeal before the Karnataka High Court. The High Court noted that the assessee, which was a Trust under the 1890 Act, was controlled and financed by the Central Government, and governed by the Rules governing the service conditions of the employees of the Central Government. According to the High Court, the assessee may be an instrumentality of the State for the purpose of Article 12 of the Constitution of India. However, for the purposes of Rule 3, the requirement was that the accommodation should be provided by the Central or State Government to the employees either holding office or post in connection with affairs of the Union or of a State or serving with anybody or undertaking under the control of such Government from deputation. The High Court held that merely because the assessee is a body or undertaking owned or controlled by the Central Government, it cannot be elevated to the status of Central Government. Thus, the assessee cannot claim that valuation of perquisites in respect of residential accommodation should be computed as in case of an accommodation provided by the Central Government. Therefore, Sl. No. 1 of Table 1 of Rule 3 of the Rules did not apply to the assessee.

The assessee thereupon filed a Special Leave Petition before the Supreme Court.

The Supreme Court agreed with the findings recorded by the High Court that even if the petitioner may be considered as a State instrumentality within the definition of Article 12 of the Constitution of India, the same cannot be treated at par with the Central/State Government employees under Table-I of Rule 3 of the Income- tax Rules, 1962. Accordingly, the rules applicable to government employees for the purpose of computing the value of perquisites u/s 17(2) would not be applicable in the case of the petitioner. The Supreme Court held that merely because the petitioner might have adopted the Central Government Rules and/or the pay-scales etc., by that itself, it cannot be said that the petitioner is a Central/State Government. The Supreme Court therefore declined to interfere with the order of the High Court.

Insofar as the merits of the claim is concerned, the Counsel for the Petitioner pointed out that some of the crucial aspects had not been considered on merits by the High Court and, therefore, the petitioner proposed to file a review application before the High Court pointing out certain aspects on merits.

The Supreme Court, without expressing anything on the same, simply permitted the petitioner to file a review application on the aforesaid only and directed that as and when such a review application is filed, the same be considered in accordance with law and on its own merits.

16 ACIT vs. Kalpataru Land Pvt. Ltd. (2022)

447 ITR 364 (SC)

Reassessment – Assessment could not be reopened on a change of opinion.

The assessment of the assessee, engaged in the business of real estate, for A.Y. 2013-2014 was completed u/s 143(3) of the Income -tax Act, 1961 (the Act) on 20^th February 2016 by determining nil total income.

On 27^th March 2019, a notice u/s 148 was issued to the petitioner for A.Y. 2013-2014.

The assessment was reopened for the reason that the assessee company had issued its shares at premium of ₹990 per share in F.Y. 2012-13 (relevant to A.Y. 2013-14). During the said period, the assessee company had no significant transaction except having capitalized its interest expenses to the cost of the land purchased. The valuation of shares at a high premium of ₹990 per share by the company was based on the Discounted Cash Flow (DCF) method, which projections of profitability, according the AO, were computed on unrealistic future growth projections. The AO was of the view that the company had received consideration which exceeded the Fair Market Value (FMV) of the shares and therefore was liable to be taxed as the difference between the aggregate value of the shares and FMV u/s 56(2) (viib) of the Act.

The High Court noted that by a letter dated 5^th October, 2015, the AO had called upon the assessee to produce evidence in support of increase of the authorised share capital, produce the evidence of share allotment and name and address of the parties from whom share premium was received, among other things. The assessee by its letter dated 23^rd December 2015, provided the details of share premium received including name of the party from whom it was received. After considering the same, the assessment order has been passed on 20^th February, 2016. Therefore, according to the High Court, it was not permissible for an AO to reopen the assessment based on the very same material with a view to take another view without consideration of material on record once view is conclusively taken by the AO.

The Supreme Court dismissed the SLP, considering the fact that earlier the AO had called upon the assessee to produce the evidence in support of increase of authorised share capital, produce the evidence of share allotment and names and addresses of the parties from whom share premium was received, among other things before passing the assessment order. According to the Supreme Court, the subsequent reopening could be said to be a change of opinion.

Note:

The Supreme Court has also dismissed SLPs of the Revenue for similar reasons in other two cases [(i) PCIT vs. State Bank of India (2022) 447 ITR 368 (SC); and (ii) DCIT vs. Financial Software and Systems P Ltd. (2022) 447 ITR 370 (SC)].

17 Harshit Foundation Sehmalpur Jalalpur Jaunpur vs. Commissioner of Income Tax, Faizabad

(2022) 447 ITR 372 (SC)

Charitable purpose – Registration –There is no provision in the Act by which it provides that on non-deciding the registration application u/s 12AA(2) within a period of six months there shall be deemed registration.

In an appeal filed u/s 260A of the Income-tax Act, 1961 (‘the Act’) by the Revenue before the Allahabad High Court from the order dated 28^th June, 2013 passed by the Income-tax Appellate Tribunal, Lucknow, the Appellant had raised a question as to whether non-disposal of the application for registration within a period of six months will result in deemed grant of registration u/s 12AA(2) of the Act.

The High Court set aside the order of the Tribunal and allowed the Revenue’s appeal holding that non-disposal of the application for registration, by granting or refusing registration, before expiry of six months as provided u/s 12AA(2) of the Act would not result in deemed grant of registration by following the decision of its Full Bench in CIT vs. Muzafar Nagar Development Authority (2015) 372 ITR 209 (All) (FB).

After considering in detail the provisions of Section 12AA(2) of the Act, the Supreme Court found that there is no specific provision in the Act by which it provides that on non-deciding the registration application u/s 12AA (2) within a period of six months there shall be deemed registration.

According to the Supreme Court, the Full Bench of the High Court had rightly held that even if in a case where the registration application u/s 12AA is not decided within six months, there shall not be any deemed registration. The Supreme Court was in complete agreement with the view taken by the Full Bench of the High Court. The Special Leave Petition was, therefore, dismissed.

BCAJ Admin

Glimpses of Supreme Court Rulings

3 All India Bank Officers’ Confederation vs. The Regional Manager, Central Bank of India and Ors.

Civil Appeal Nos. 7708 of 2014, 18459 of 2017, 18460 of 2017, 18462 of 2017, 18463 of 2017, 18461 of 2017, 18464 of 2017, 18465-18466 of 2017, 18457-18458 of 2017 and 18467 of 2017

Decided On: 7^th May, 2024

Does Section 17(2)(viii) and / or Rule 3(7)(i) lead to a delegation of the ‘essential legislative function’ to the CBDT? — The subordinate authority’s power under Section 17(2)(viii), to prescribe ‘any other fringe benefit or amenity’ as perquisite is not boundless, it is demarcated by the language of Section17oftheAct—Anything made taxable by the rule-making authority under Section 17(2)(viii) should be a ‘perquisite’ in the form of ‘fringe benefits or amenity’ — The enactment of subordinate legislation for levying tax on interest free / concessional loans as a fringe benefit is within the rule- making power under Section 17(2)(viii) of the Act

Is Rule 3(7)(i) arbitrary and violative of Article 14 of the Constitution insofar as it treats the PLR of SBI as the benchmark? — SBI is the largest bank in the country and the interest rates fixed by them invariably impact and affect the interest rates being charged by other banks — By fixing a single clear benchmark for computation of the perquisite or fringe benefit, the Rule prevents ascertainment of the interest rates being charged by different banks from the customers and,thus,checks unnecessary litigation — Therefore, Rule 3(7) is intra vires Article 14 of the Constitution of India

The appeals filed by staff unions and officers’ associations of various banks before the Supreme Court, impugned the judgments of the High Courts, which dismissed their writ petitions,where the vires of Section17(2)(viii) of the Income Tax Act, 1961 or Rule 3(7)(i) of the Income Tax Rules, 1962, or both, were challenged.

The Supreme Court noted that Section 17(2)(viii) of the Act includes in the definition of ‘perquisites’,‘any other fringe benefit or amenity’,‘as may be prescribed’. Rule3 of the Rules prescribes additional ‘fringe benefits’ or ‘amenities’,taxable as perquisites, pursuant to Section17(2)(viii). It also prescribes the method of valuation of such perquisites for taxation purposes. Rule 3(7)(i) of the Rules stipulates that interest-free / concessional loan benefits provided by banks to bank employees shall be taxable as ‘fringe benefits’ or ‘amenities’ if the interest charged by the bank on such loans is lesser than the interest charged according to the Prime Lending Rate of the State Bank of India.

Section 17(2)(viii) and Rule 3(7)(i) were challenged on the grounds of excessive and unguided delegation of essential legislative function to the Central Board of Direct Taxes. Rule 3(7)(i) was also challenged as arbitrary and violative of Article 14 of the Constitution insofar as it treats the PLR of SBI as the benchmark instead of the actual interest rate charged by the bank from a customer on a loan.

The Supreme Court noted that Sections 15 to 17 of the Act relate to income tax chargeable on salaries. Section 15 stipulates incomes that are chargeable to income tax as ‘salaries’. Section 16 prescribes deductions allowable under ‘salaries’. Section 17 defines the expressions ‘salary’, ‘perquisites’ and ‘profits in lieu of salary’ for Sections 15 and 16.

According to the Supreme Court, after specifically stipulating what is included and taxed as ‘perquisite’, Clause (viii) to Section 17(2), as a residuary clause, deliberately and intentionally leaves it to the rule-making authority totax ‘any other fringe benefit or amenity’ by promulgating a rule. The residuary Clause is enacted to capture and tax any other ‘fringe benefit or amenity’ within the ambit of ‘perquisites’, not already covered by Clauses (i) to (viia) to Section 17(2).

The Supreme Court noted that in terms of the power conferred under Section 17(2)(viii), CBDT has enacted Rule 3(7)(i) of the Rules. Rule 3(7)(i) states that interest-free/concessional loan made available to an employee or a member of his household by the employer or any person on his behalf, for any purpose, shall be determined as the sum equal to interest computed at the rate charged per annum by SBI, as on the first date of the relevant previous year in respect of loans for the same purpose advanced by it on the maximum outstanding monthly balance as reduced by interest, if any,actually paid. However, the loans made available for medical treatment in respect of diseases specified in Rule 3A or loans whose value in aggregate does not exceed ₹20,000/-, are not chargeable.

The Supreme Court observed that the effect of the Rule is two-fold. First, the value of interest-free or concessional loans is to be treated as ‘other fringe benefit or amenity’ for the purpose of Section 17(2)(viii) and, therefore, taxable as a ‘perquisite’. Secondly, it prescribes the method of valuation of the interest- free/concessional loan for the purposes of taxation.

The Supreme Court observed that Section 17(2)(viii) is a residuary clause, enacted to provide flexibility. Since it is enacted as an enabling catch-within-domain provision, the residuary Clause is not iron-cast and exacting. A more pragmatic and common sensical approach can be adopted by locating the prevalent meaning of ‘perquisites’ in common parlance and commercial usage.

The Supreme Court noted that the expression ‘perquisite’ is well-understood by a common person who is conversant with the subject matter of a taxing statute. New International Webster’s Comprehensive Dictionary defines ‘perquisites’ as any incidental profit from service beyond salary or wages; hence, any privilege or benefit claimed due. ‘Fringe benefit’ is defined as any of the various benefits received from an employer apart from salary, such as insurance, pension, vacation, etc. Similarly, Black’s Law Dictionary defines ‘fringe benefit’ as a benefit (other than direct salary or compensation) received by an employee from the employer,such as insurance,a company car, or a tuition allowance. The Major Law Lexicon has elaborately defined the words ‘perquisite’ and ‘fringe benefit’.

‘Perquisites’ has also been interpreted as an expression of common parlance in several decisions of this Court. For example, ‘perquisite’ was interpreted in Arun Kumar v. Union of India (2007) 1 SCC 732, with respect to Section 17(2) of the Act. The Court referenced its dictionary meanings and held that ‘perquisites’ were a privilege, gain or profit incidental to employment and in addition to regular salary or wages. This decision refers to the observations of the House of Lords in Owen vs. Pook (1969) 2 WLR 775 (HL), where the House observed that ‘perquisite’ has a known normal meaning, namely, a personal advantage. However, the perquisites do not mean the mere reimbursement of a necessary disbursement. Reference was also made to Rendell vs. Went (1964) 1 WLR 650 (HL), wherein the House held that ‘perquisite’ would include any benefit or advantage, having a monetary value, which a holder of an office derives from the employer’s spending on his behalf.

Similarly, in Additional Commissioner of Income Tax vs. Bharat Patel (2018) 15 SCC 670, the Court held that ‘perquisite’, in the common parlance relates to any perk or benefit attached to an employee or position besides salary or remuneration. It usually includes non-cash benefits given by the employer to the employee in addition to the entitled salary or remuneration.

The Supreme Court thus concluded that, ‘perquisite’ is a fringe benefit attached to the post held by the employee unlike‘profit in lieu of salary’,which is a reward or recompense for past or future service. It is incidental to employment and in excess of or in addition to the salary. It is an advantage or benefit given because of employment, which otherwise would not be available.

From this perspective, the Supreme Court was of the opinion that the employer’s grant of interest-free loans or loans at a concessional rate will certainly qualify as a ‘fringe benefit’ and ‘perquisite’, as understood through its natural usage in common parlance.

According to the Supreme Court, two issues would arise for its consideration: (I) Does Section 17(2)(viii) and/or Rule 3(7)(i) lead to a delegation of the ‘essential legislative function’ to the CBDT?; and (II) Is Rule 3(7)(i)arbitraryandviolativeofArticle14oftheConstitutioninsofarasittreats the PLR of SBI as the benchmark?

I. Does Section17(2)(viii)and/or Rule3(7)(i) lead to a delegation of the ‘essential legislative function’ to the CBDT?

The Supreme Court noted that a Constitution Bench of Seven Judges of this Court in Municipal Corporation of Delhi v. Birla Cotton, Spinning and Weaving Mills, Delhi and Anr.1968: INSC:47, has held that the legislature must retain with itself the essential legislative function. ‘Essential legislative function’ means the determination of the legislative policy and its formulation as a binding Rule of conduct.Therefore,once the legislature declares the legislative policy and lays down the standard through legislation, it can leave the remainder of the task to subordinate legislation. In such cases, the subordinate legislation is ancillary to the primary statute. It aligns with the framework of the primary legislation as long as it is made consistent with it, without exceeding the limits of policy and standards stipulated by the primary legislation.The test,therefore, is whether the primary legislation has stated with sufficient clarity, the legislative policy and the standards that are binding on subordinate authorities who frame the delegated legislation.

The Supreme Court was of the opinion, the subordinate authority’s power under Section 17(2)(viii), to prescribe ‘any other fringe benefit or amenity’ as perquisite is not boundless. It is demarcated by the language of Section 17 of the Act. Anything made taxable by the rule-making authority under Section 17(2)(viii) should be a ‘perquisite’ in the form of ‘fringe benefits or amenity’. According to the Supreme Court, the provision clearly reflects the legislative policy and gives express guidance to the rule-making authority.

Section 17(2) provides an ‘inclusive’ definition of ‘perquisites’. Section 17(2)(i) to (vii)/(viia) provides for certain specific categories of perquisites. However, these are not the only kind of perquisites. Section 17(2)(viii) provides a residuary Clause that includes ‘any other fringe benefits or amenities’ within the definition of ‘perquisites’, as prescribed from time to time. The express delineation does not take away the power of the legislature, as the plenary body, to delegate the rule-making authority to subordinate authorities, to bring within the ambit of ‘perquisites’ any other ‘fringe benefit’ or annuities’ as ‘perquisite’. The legislative intent, policy and guidance is drawn and defined. Pursuant to such demarcated delegation, Rule 3(7)(i) prescribes interest- free/loans at concessional rates as a ‘fringe benefit’ or ‘amenity’, taxable as ‘perquisites’. This becomes clear once we view the analysis undertaken in Birla Cotton (supra)viz. the ‘essential legislative function’ test.

The Supreme Court after referring to plethora of judgements was of the opinion that the enactment of subordinate legislation for levying tax on interest free/concessional loans as a fringe benefit was within the rule-making power underSection17(2)(viii)of the Act.Section17(2)(viii)itself,and the enactment of Rule 3(7)(i) was not a case of excessive delegation and falls within the parameters of permissible delegation. Section 17(2) clearly delineates the legislative policy and lays down standards for the rule-making authority. Accordingly, Rule 3(7)(i) was intra vires Section 17(2)(viii) of the Act. Section 17(2)(viii) does not lead to an excessive delegation of the ‘essential legislative function’.

II. Is Rule3(7)(i) arbitrary and violative of Article 14 of the Constitution in so far as it treats the PLR of SBI as the benchmark?

Rule 3(7)(i) posits SBI’s rate of interest, that is the PLR, as the benchmark to determine the value of benefit to the Assessee in comparison to the rate of interest charged by other individual banks. According to the Supreme Court, the fixation of SBI’s rate of interest as the benchmark is neither an arbitrary nor unequal exercise of power. The rule-making authority has not treated unequal as equals. SBI is the largest bank in the country and the interest rates fixed by them invariably impact and affect the interest rates being charged by other banks. By fixing a single clear benchmark for computation of the perquisite or fringe benefit, the Rule prevents ascertainment of the interest rates being charged by different banks from the customers and, thus, checks unnecessary litigation. Rule 3(7)(i) ensures consistency in application, provides clarity for both the Assessee and the revenue department, and provides certainty as to the amount to be taxed. When there is certainty and clarity, there is tax efficiency which is beneficial to both the taxpayer and the tax authorities. These are all hallmarks of good tax legislation. Rule 3(7)(i) is based on a uniform approach and yet premised on a fair determining principle which aligns with constitutional values. Therefore, Rule 3(7) was held to be intra vires Article 14 of the Constitution of India.

The Supreme Court therefore dismissed the appeals and upheld the impugned judgments of the High Courts of Madras and Madhya Pradesh.

BCAJ Admin

Glimpses Of Supreme Court Rulings

2 Bharti Cellular Limited vs. Assistant Commissioner of Income Tax, Circle 57,

Kolkata and Ors.

Civil Appeal Nos. 7257 of 2011 and Ors. Decided On: 28^th February, 2024

Deduction of tax at source— Section 194-H of the Act fixes the liability to deduct tax at source on the ‘person responsible to pay’ — The Assessees neither pay nor credit any income to the person with whom he has contracted — The Assessees, therefore, would not be under a legal obligation to deduct tax at source on the income / profit component in the payments received by the distributors / franchisees from the third parties / customers, or while selling/transferring the pre-paid coupons or starter-kits to the distributors

The Assessees were cellular mobile telephone service providers in different circles as per the licence granted to them under Section 4 of the Indian Telegraph Act, 1885by the Department of Telecommunications, Government of India. To carry on business, the Assessees have to comply with the licence conditions and the Rules and Regulations of the DoT and the Telecom Regulatory Authority of India. Cellular mobile telephone service providers have wide latitude to select the business model they wish to adopt in their dealings with third parties, subject to statutory compliances being made by the operators.

As per the business model adopted by the telecom companies, the users can avail of post-paid and prepaid connections.

Under the prepaid business model, the end-users or customers are required to pay for services in advance, which can be done by purchasing recharge vouchers or top-up cards from retailers. For a new prepaid connection, the customers or end-users purchase a kit, called a start-up pack, which contains a Subscriber Identification Mobile card, commonly known as a SIM card, and a coupon of the specified value as advance payment to avail the telecom services.

The Assessees have entered into franchise or distribution agreements with several parties. It is the case of the Assessees that they sell the start-up kits and recharge vouchers of the specified value at a discounted price to the franchisee/distributors. The discounts are given on the printed price of the packs.

This discount, as per the Assessees, is not a ‘commission or brokerage’ under Explanation (i) to Section 194-H of the Act.

The Revenue, on the other hand, submits that the difference between ‘discounted price’ and ‘sale price’ in the hands of the franchisee/distributors being in the nature of ‘commission or brokerage’ is the income of the franchisee / distributors, the relationship between the Assessees and the franchisee/distributor is in the nature of principal and agent, and therefore, the assesses are liable to deduct tax at source under Section 194-H of the Act.

The Supreme Court by its common judgment decided the appeals preferred by the Revenue and the Assessees, who were cellular mobile telephone service providers.

The High Courts of Delhi and Calcutta had held that the Assessees were liable to deduct tax at source under Section 194-H of the Act, whereas the High Courts of Rajasthan, Karnataka and Bombay have held that Section 194-H of the Act was not attracted to the circumstances under consideration.

The Supreme Court noted that Section 194-H of the Act imposes the obligation to deduct tax at source, states that any person responsible for paying at the time of credit or at the time of payment, whichever is earlier, to a resident any income by way of commission or brokerage, shall deduct income tax at the prescribed rate. The expression “any person (…) responsible for paying” is a term defined vide Section 204 of the Act. As per the Clause (iii) of Section 204, in the case of credit or in the case of payment in cases not covered by Clauses (i), (ii), (ii)(a), (ii)(b), “the person responsible for paying” is the payer himself, or if the payer is a company, the company itself and the principal officer thereof.

Explanation (i) to Section 194-H of the Act defines the expressions ‘commission’ or ‘brokerage’, which includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable Article or thing, not being securities;

According to the Supreme Court, payment is received when it is actually received or paid. The payment is receivable when the amount is actually credited in the books of the payer to the account of the payee, though the actual payment may take place in future. The payment received or receivable should be to a person acting on behalf of another person. The words “another person” refer to “the person responsible for paying”. The words “direct” or “indirect” in Explanation (i) to Section 194-H of the Act are with reference to the act of payment. Without doubt, the legislative intent to include “indirect” payment ensures that the net cast by the Section is plugged and not avoided or escaped, albeit it does not dilute the requirement that the payment must be on behalf of “the person responsible for paying”. This means that the payment / credit in the account should arise from the obligation of “the person responsible for paying”. The payee should be the person who has the right to receive the payment from “the person responsible for paying”. When this condition is satisfied, it does not matter if the payment is made “indirectly”.

The Supreme Court noted that the services rendered by the agent to the principal, according to the latter portion of Explanation (i) to Section 194-H of the Act, should not be in the nature of professional services. Further, Explanation (i) to Section 194-H of the Act restricts the application of Section 194-H of the Act to the services rendered by the agent to the principal in the course of buying and selling of goods, or in relation to any transaction relating to any asset, valuable article, or thing, not being securities. The latter portion of the Explanation (i) to Section 194-H of the Act is a requirement and a pre-condition. It should not be read as diminishing or derogating the requirement of the principal and agent relationship between the payer and the recipient / payee.

According to the Supreme Court, it is well settled that the expression ‘acting on behalf of another person’ postulates the existence of a legal relationship of principal and agent, between the payer and the recipient/payee. The law of agency is technical. Whether in law the relationship between the parties is that of principal-agent is answered by applying Section 182 of the Contract Act, 1872. Therefore, the obligation to deduct tax at source in terms of Section 194-H of the Act arises when the legal relationship of the principal-agent is established. It is necessary to clarify this position, as in day-to-day life, the expression ‘agency’ is used to include a vast number of relationships, which are strictly, not relationships between a principal and agent.

The Supreme Court observed that agency in terms of Section 182 of the Contract Act exists when the principal employs another person, who is not his employee, to act or represent him in dealings with a third person. An agent renders services to the principal. The agent does what has been entrusted to him by the principal to do. It is the principal he represents before third parties, and not himself. As the transaction by the agent is on behalf of the principal whom the agent represents, the contract is between the principal and the third party. Accordingly, the agent, except in some circumstances, is not liable to the third party.

The Supreme Court noted that the Assessees had entered into franchise or distribution agreements with several parties. The Assessees sells the start-up kits and recharge vouchers of the specified value at a discounted price to the franchisee/distributors. The discounts are given on the printed price of the packs.

The Supreme Court noted that as per the agreement, the franchisee/distributor is appointed for marketing of prepaid services and for appointing the retailer or outlets for sale promotion. The retailers or outlets for sale promotion are appointed by the franchisee / distributor and not the Assessee.

The Supreme Court noted that the franchisees / distributors were required to pay in advance the price of the welcome kit containing the SIM card, recharge vouchers, top-up cards, e-tops, etc. The above mentioned price was a discounted one. Such discounts were given on the price printed on the pack of the prepaid service products. The franchisee / distributor paid the discounted price regardless of, and even before, the prepaid products being sold and transferred to the retailers or the actual consumer. The franchisee / distributor was free to sell the prepaid products at any price below the price printed on the pack. The franchisee/distributor determined his profits / income.

According to the Supreme Court, the franchisees / distributors earn their income when they sell the prepaid products to the retailer or the end-user / customer. Their profit consists of the difference between the sale price received by them from the retailer/end-user/customer and the discounted price at which they have ‘acquired’ the product. Though the discounted price is fixed or negotiated between the Assessee and the franchisee / distributor, the sale price received by the franchisee / distributor is within the sole discretion of the franchisee/distributor. The Assessee has no say in this matter.

The Supreme Court observed that the income of the franchisee/distributor, being the difference between the sale price received by the franchisee/distributor and the discounted price, is paid or credited to the account of the franchisee / distributor when he sells the prepaid product to the retailer / end-user/customer. The sale price and accordingly the income of the franchisee / distributor is determined by the franchisee / distributor and the third parties. Accordingly, the Assessee does not, at any stage, either pay or credit the account of the franchisee / distributor with the income by way of commission or brokerage on which tax at source under Section 194-H of the Act is to be deducted.

The Supreme Court held that the main provision of Section 194-H of the Act, which fixes the liability to deduct tax at source on the ‘person responsible to pay’ — an expression which is a term of art — as defined in Section 204 of the Act and the liability to deduct tax at source arises when the income is credited or paid by the person responsible for paying. The expression “direct or indirect” used in Explanation (i) to Section 194-H of the Act is no doubt meant to ensure that “the person responsible for paying” does not dodge the obligation to deduct tax at source, even when the payment is indirectly made by the principal-payer to the agent- payee. However, deduction of tax at source in terms of Section 194-H of the Act is not to be extended and widened in ambit to apply to true / genuine business transactions, where the Assessee is not the person responsible for paying or crediting income. In the present case, the Assessees neither pay nor credit any income to the person with whom he has contracted. Explanation (i) to Section 194-H of the Act, by using the word “indirectly”, does not regulate or curtail the manner in which the Assessee can conduct business and enter into commercial relationships. Neither does the word “indirectly” create an obligation where the main provision does not apply. The tax legislation recognises diverse relationships and modes in which commerce and trade are conducted, albeit obligation to deduct tax at source arises only if the conditions as mentioned in Section 194-H of the Act are met and not otherwise. This principle does not negate the compliance required by law.

The Supreme Court further noted, it was not the case of the Revenue that tax is to be deducted when payment is made by the distributors / franchisees to the mobile service providers. It is also not the case of the revenue that tax is to be deducted under Section 194-H of the Act on the difference between the maximum retail price income of the distributors / franchisees and the price paid by the distributors/franchisees to the Assessees.

The Supreme Court observed that the Assessees are not privy to the transactions between distributors / franchisees and third parties. It is, therefore, impossible for the Assessees to deduct tax at source and comply with Section 194-H of the Act, on the difference between the total / sum consideration received by the distributors / franchisees from third parties and the amount paid by the distributors/ franchisees to them.

According to the Supreme Court, the argument of the Revenue that Assessees should periodically ask for this information/data and thereupon deduct tax at source should be rejected as far-fetched, imposing unfair obligation and inconveniencing the assesses, beyond the statutory mandate. Further, it will be willy-nilly impossible to deduct, as well as make payment of the tax deducted, within the timelines prescribed by law, as these begin when the amount is credited in the account of the payee by the payer or when payment is received by the payee, whichever is earlier. The payee receives payment when the third party makes the payment. This payment is not the payment received or payable by the Assessee as the principal. The distributor / franchisee is not the trustee who is to account for this payment to the Assessee as the principal. The payment received is the gross income or profit earned by the distributor / franchisee.It is the income earned by distributor / franchisee as a result of its efforts and work and not a remuneration paid by the Assessee as a cellular mobile telephone service provider.

The Supreme Court concluded that the Assessees would not be under a legal obligation to deduct tax at source on the income / profit component in the payments received by the distributors/franchisees from the third parties / customers, or while selling / transferring the pre-paid coupons or starter- kits to the distributors. Section 194-H of the Act is not applicable to the facts and circumstances of this case. Accordingly, the appeals filed by the Assessee — cellular mobile service providers, challenging the judgments of the High Courts of Delhi and Calcutta were allowed and these judgments are set aside. The appeals filed by the Revenue challenging the judgments of High Courts of Rajasthan, Karnataka and Bombay were dismissed.

BCAJ Admin

Glimpses of Supreme Court Rulings

58 C.I.T. Delhi vs. Bharti Hexacom Ltd.

(2003) 458 ITR 593 (SC)

Capital or Revenue expenditure — Amortisation of Licence fees to operate telecommunication services — Payment of one-time entry fee and licence fee based on percentage of annual revenue earned — Both payments are capital in nature and to be amortised.

The National Telecom Policy of 1994 was substituted by the New Telecom Policy of 1999 dated 22^nd July, 1999. The said Policy of 1999 stipulated that the licencee would be required to pay a one-time entry fee and additionally, a licence fee on a percentage share of gross revenue. The entry fee chargeable would be the fee payable by the existing operator up to 31,sup>st July, 1999,calculated up to the said date and adjusted upon notional extension of the effective date. Subsequently, w.e.f. 1^st August, 1999, the licence fee was payable on a percentage of Annual Gross Revenue (“AGR”) earned. The quantum of revenue share to be charged as a licence fee was to be finally decided after obtaining recommendation of the Telecom Regulatory Authority of India (“TRAI”) but in the meanwhile, the Government of India fixed 15 per cent of the gross revenue of the licencee as provisional licence fee. On receipt of TRAI’s recommendation by the Government, adjustment of the dues was to be made.

Pursuant to the request of the Assessee, a licence was granted to it, inter alia on certain terms and conditions to establish, maintain and operate cellular mobile services. Accordingly, having accepted the Policy of 1999 and migrated there to, after paying the licence fee up to 31^st July, 1999, i.e., the one-time licence fee as stipulated in the Communication dated 22^nd July, 1999, the Respondent-assessee continued in the business of cellular telecommunication and associated value-added services, under the regime governed by the Policy of 1999.

The Assessee filed its return of income on 1^st November, 2004, for the assessment year 2003–2004 declaring nil income. The same was processed under Section 143(1) of the Act on 30^th March, 2006. The case was selected for scrutiny and a notice was issued to the Assessee under Section 143(2) of the Act, on 20^th October, 2005.

It was noted that an amount of ₹11,88,81,000, which was the licence fee paid by the Assessee on a revenue sharing basis, was claimed by the Assessee as revenue expenditure. In that regard, vide questionnaire dated 15^th November, 2006, the Assessee was required to explain as to why the said amount may, instead, be treated as capital expenditure and amortised over the remaining licence period of 12 years. The Respondent-Assessee furnished its response to the questionnaire, on 4^th December, 2006. On consideration of the Assessee’s response, an Assessment Order was passed on 27^th December, 2006, observing that the amount of ₹11,88,81,000, i.e., the licence fee paid by the Assessee on revenue sharing basis, which was claimed as a revenue expense, ought to have instead been amortised over the remainder of the licence period, i.e., 12 years. Accordingly, an amount of ₹99,06,750 was allowed as a deduction under Section 35ABB of the Act, and the remaining amount of ₹10,89,74,250 was disallowed and added back to the income of the Assessee.

Being aggrieved, the Assessee filed an appeal before the Commissioner of Income Tax (Appeal), New Delhi. In view of the decision of the Commissioner of Income Tax (Appeal) in the Assessee’s own case for the assessment year 2003–2004, it was reaffirmed vide order dated 27^th September, 2007 that the annual licence fee calculated on the basis of annual gross revenue of the Assessee would be revenue expenditure deductible under Section 37 of the Act.

Aggrieved by the said order, the Revenue preferred an appeal before the Tribunal, New Delhi. By order dated 24^th July, 2009, the Tribunal dismissed the Revenue’s appeal following its earlier order dated 29^th May, 2009 in ITA No.5335 (Del)/2003 in the case of Bharti Cellular Ltd., for the assessment year 2000–2001, the facts of which case were held to be identical to the facts of the case at hand. Being aggrieved, the Revenue filed an appeal before the High Court of Delhi.

The Delhi High Court in the judgment dated 19^th December, 2013 made the following preliminary observations:

i. Section 35ABB applies when expenditure of a capital nature is incurred by an Assessee for acquiring a right for operating telecommunication services. It is immaterial whether the expenditure is / was incurred before or after commencement of the business to operate telecommunication services but what is material is that the payment should be actually made. That Section 35ABB is not a deeming provision but comes into operation and is effective when the expenditure itself is of a capital nature and is incurred towards acquiring a right to operate telecommunication services or for the purposes of obtaining a licence for the said services. That Section 35ABB does not help in determining and deciding the question, as to, whether licence fee paid under the Policy of 1999 under the 1994 Agreement, was / is capital or revenue in nature.

ii. That there was no decision of the Supreme Court or any of the High Courts directly applicable to the factual matrix of the case.

The Delhi High Court discerned the facts of the present case as under:

i. The licence was issued under a statutory mandate and was required and acquired, before the commencement of operations or business, to establish and also to maintain and operate cellular telephone services.

ii. The licence was for initial setting up but, thereafter, for maintaining and operating cellular telephone services during the term of the licence.

iii. Contrary to what was stated, under the licence agreement executed in 1994, the considerations paid and payable were with the understanding that there would be only two players who would have unfettered right to operate and provide cellular telephone service in the circle. The payment, therefore, had the element of warding off competition or protecting the business from third-party competition.

iv. Under the 1994 agreement, the licence was initially for 10 years extendable by one year or more at the discretion of the Government / authority.

v. 1994 Licence was not assignable or transferable to a third party or by way of a sub-licence or in partnership. There was no stipulation regarding transfer or issue of shares to third parties in the company.

vi. Under the 1994 agreement, the licencee was liable to pay a fixed licence fee for the first three years. For the fourth year and onwards, the licencee was liable to pay variable licence fee @ ₹5,00,000 per 100 subscribers or part thereof, with a specific stipulation on minimum licence fee payable for the fourth to sixth year and with modified but similar stipulations from the seventh year onwards.

vii. The licence could be revoked at any time breach of the terms and conditions or in default of payment of consideration by giving 60 days’ notice.

viii. The authority also reserved the right to revoke the licence in the interest of the public by giving 60 days’ notice.

ix. Under the 1999 policy, the licencee had to forgo the right of operating in the regime of a limited number of operators and agreed to multiparty regime competition where additional licences could be issued without limit.

x. There was a lock-in period on the present shareholding for a period of five years from date of licence agreement, i.e., the effective date, and even transfer of shareholding directly or indirectly through subsidiary or holding company was not permitted during this period. This had the effect of ‘modifying’ or clarifying the 1994 agreement, which was silent.

xi. Licence fee calculated as a percentage of gross revenue was payable w.e.f. 1^st August, 1999. This was provisionally fixed at 15 per cent of the gross revenue of the licensee but was subject to the final decision of the Government about the quantum of revenue share to be charged as licence fee after obtaining recommendation of TRAI.

xii. At least 35 per cent of the outstanding dues,including interest payable as on 31^st July, 1999 and liquidated damages in full, had to be paid on or before 15th August, 1999. Dates for payments of arrears were specified.

xiii. Past dues up to 31^st July, 1999 along with liquidated damages had to be paid as stipulated in the 1999 policy, on or before 31^st January, 2000 or on an earlier date as stated.

xiv. The period of licences under the 1999 policy was extended to 20 years starting from the effective date.

xv. Failure to pay the licence fee on a yearly basis would result in cancellation of licences. Therefore, to this extent, licence fee was / is payable for operating and continuing operations as a cellular telephone operator.

On a consideration of the aforesaid aspects, the Delhi High Court held that the payment of licence fee was capital in part and revenue in part and that it would not be correct to hold that the whole fee was capital or revenue in nature in its entirety. It was further observed that the licencees / Assessees in question required a licence in order to start or commence business as cellular telephone operators; that payment of licence fee was a precondition for the Assessees to commence or set up the business. That it was a privilege granted to the Assessee subject to payment and compliance with the terms and conditions.

It was observed by the High Court that the licence granted by the Government or the concerned authority to the Assessee would be a capital asset and yet, since the Assessee had to make the payment on a yearly basis on the gross revenue to continue to be able to operate and run the business, it would also be in the nature of revenue expenditure. Having opined thus, the High Court decided to apportion the licence fee as partly revenue and partly capital and divided the licence fee into two periods, that is, before and after 31^st July, 1999 and observed that the licence fee that had been paid or was payable for the period upto 31^st July, 1999, i.e. the date set out in the Policy of 1999, should be treated as capital expenditure and the balance amount payable on or after the said date should be treated as revenue expenditure.

In an appeal filed before the Supreme Court by the Revenue, the Supreme Court noted the provisions of the Act and observed that Section 35ABB of the Act governs the treatment of expenditure incurred by entities to obtain a licence for operating telecommunication services in India. The provision addresses the tax treatment of such expenses and ensures that they align with the income tax framework. With effect from 1^st April 1996, this provision provides for amortisation of capital expenditure incurred for acquisition of any right to operate telecommunication services, regardless of whether such cost is incurred before the commencement of such business or thereafter. The cost is allowed to be amortised in equal installments in the years for which the licence is in force. The amortisation commences from the year in which such business commences (where such cost is incurred before the commencement of such business) or the year in which such cost is actually paid, irrespective of the method of accounting adopted by the Assessee for such expenditure.

The Supreme Court also noted provisions of the Telegraph Act, which is the parent legislation under which licences to establish, maintain or work a telegraph are issued.

The Supreme Court then referred to the terms of the Licence Agreement entered into under the Policy of 1994 and the terms of migration of the existing licencees to the New Telecom Policy, 1999 regime, with a view to examine whether the nature and character of the licence fee was changed in light of migration.

The Supreme Court, thereafter, made a detailed review of relevant case law detailing the nature and characteristics of capital expenditure and revenue expenditure and the tests to identify the same.

The Supreme Court culled out the broad principles / tests that have been forged and adopted by it from time to time, while determining whether a given expenditure is capital or revenue in nature.

The Supreme Court, having regard to the tests and principles forged by this Court from time to time, proceeded to consider whether the High Court of Delhi was right in apportioning the licence fee as partly revenue and partly capital by dividing the licence fee into two periods, i.e., before and after 31^st July, 1999 and accordingly holding that the licence fee paid or payable for the period upto 31^st July, 1999 i.e. the date set out in the Policy of 1999 should be treated as capital and the balance amount payable on or after the said date should be treated as revenue.

The Supreme Court answered the said question in the negative, against the assessees and in favour of the Revenue for the following reasons:

i. Reliance placed by the High Court on the decisions in Jonas Woodhead and Sons (1997) 224 ITR 342 (SC) and Best and Co. (1966) 60 ITR 11 (SC) and the decision of the Madras High Court in Southern Switch Gear Ltd. (1984)148ITR272(Mad) as approved by this Court (1998) 232ITR 359(SC) appeared to be misplaced in as much as the said cases did not deal with a single source / purpose to which payments in different forms had been made. On the contrary, in the said cases, the purpose of payments was traceable to different subject matters and accordingly, it was held that the payments could be apportioned. However, in the present case, the licence issued under Section 4 of the Telegraph Act was a single licence to establish, maintain and operate telecommunication services. Since it was not a licence for divisible rights that conceive of divisible payments, apportionment of payment of the licence fee as partly capital and partly revenue expenditure was without any legal basis.

ii. Perhaps, the decision of the High Court could have been sustained if the facts were such that even if the Assessee-operators did not pay the annual licence fee based on AGR, they would still be able to hold the right of establishing the network and running the telecom business. However, such a right was not preserved under the scheme of the Telegraph Act. Hence, the apportionment made by the High Court was not sustainable.

iii. The fact that failure to pay the annual variable licence fee led to revocation or cancellation of the licence vindicated the legal position that the annual variable licence fee was paid towards the right to operate telecom services. Though the licence fee was payable in a staggered or deferred manner, the nature of the payment which flowed was plainly from the licensing conditions and could not be recharacterised. A single transaction cannot be split up, in an artificial manner, into a capital payment and revenue payments by simply considering the mode of payment. Such a characterisation would be contrary to the settled position of law and decisions of the Supreme Court, which suggest that payment of an amount in installments alone does not convert or change a capital payment into a revenue payment.

iv. It is trite that where a transaction consists of payments in two parts, i.e., lump-sum payment made at the outset, followed up by periodic payments, the nature of the two payments would be distinct only when the periodic payments have no nexus with the original obligation of the Assessee. However, in the present case, the successive installments relate to the same obligation, i.e., payment of licence fee as consideration for the right to establish, maintain and operate telecommunication services as a composite whole. This is because in the absence of a right to establish, maintenance and operation of telecommunication services is not possible. Hence, the cumulative expenditure would have to be held to be capital in nature.

v. Thus, the composite right conveyed to the Assessees by way of grant of licences is the right to establish, maintain and operate telecommunication services. The said composite right cannot be bifurcated in an artificial manner, into the right to establish telecommunication services on the one hand and the right to maintain and operate telecommunication services on the other. Such bifurcation is contrary to the terms of the licensing agreement(s) and the Policy of 1999.

vii. Further, it is to be noticed that even under the 1994 Policy regime, the payment of licence fee consisted of two parts:

a) A fixed payment in the first three years of the licence regime;

b) A variable payment from the fourth year of the licence regime onwards, based on the number of subscribers.

Having accepted that both components, fixed and variable, of the licence fee under the 1994 Policy regime must be duly amortised, there was no basis to reclassify the same under the Policy of 1999 regime as revenue expenditure in so far as variable licence fee is concerned.

As per the Policy of 1999, there was to be a multi-licence regime in as much as any number of licences could be issued in a given service area. Further, the licence was for a period of 20 years instead of 10 years as per the earlier regime. The migration to the Policy of 1999 was on the condition that the entire policy must be accepted as a package and consequently, all legal proceedings and disputes relating to the period up to 31^st July, 1999 were to be closed. If the migration to the Policy of 1999 was accepted by the Assessees here in or the other service providers, then all licence fee paid up to 31^st July, 1999 was declared as a one-time licence fee as stated in the communication dated 22^nd July, 1999 which was treated to be a capital expenditure. The licence granted under the Policy of 1999 was non-transferable and non-assignable. More importantly, if there was a default in the payment of the licence fee, the entire licence could be revoked after 60 days’ notice. The provisions of the Telegraph Act, particularly Section 8 thereof, are also to the same effect. Having regard to the aforesaid facts and in light of the aforesaid conclusions, the Supreme Court held that the payment of entry fee as well as the variable annual licence fee paid by the Assessees to the DoT under the Policy of 1999 was capital in nature and may be amortised in accordance with Section 35ABB of the Act.

According to the Supreme Court, the High Court of Delhi was not right in apportioning the expenditure incurred towards establishing, operating and maintaining telecom services as partly revenue and partly capital by dividing the licence fee into two periods, that is, before and after 31st July, 1999 and accordingly, holding that the licence fee paid or payable for the period up to 31^st July, 1999 i.e. the date set out in the Policy of 1999 should be treated as capital and the balance amount payable on or after the said date should be treated as revenue. The nature of payment being for the same purpose cannot have a different characterisation merely because of the change in the manner or measure of payment or for that matter the payment being made on an annual basis.

Therefore, in the ultimate analysis, the nomenclature and the manner of payment are irrelevant. The payment post 31^st July, 1999 is a continuation of the payment pre-31^st July, 1999 albeit in an altered format which does not take away the essence of the payment. It is a mandatory payment traceable to the foundational document, i.e., the license agreement as modified post migration to the 1999 policy. Consequence of non-payment would result in ouster of the licensee from the trade. Thus, this is a payment which is intrinsic to the existence of the licence as well as trade itself. Such a payment has to be treated or characterised as capital only.

In the result, the judgment of the Division Bench of the High Court of Delhi, dated 19^th December, 2013 in ITA No.1336 of 2010 and connected matters, was set aside.

The judgments passed by the High Courts of Delhi, Bombay and Karnataka, following the judgment of the Division Bench of the High Court of Delhi, dated 19^th December, 2013, were also consequently set aside.

The appeals filed by the Revenue were allowed

BCAJ Admin

Glimpses of Supreme Court Rulings

57 Mangalam Publications, Kottayam vs. Commissioner of Income Tax, Kottayam

Civil Appeal Nos. 8580-8582 of 2011

Decided On: 23rd January, 2024

Reassessment — No reason to believe – Dehors the provisional balance sheet for the assessment year 1989-90 submitted before the South Indian Bank for obtaining credit (which was considered to be unreliable by CIT(A) in the earlier year), there were no other material in the possession of the Assessing Officer to come to the conclusion that income of the Assessee for the three assessment years had escaped assessment — The assessment cannot be reopened on a mere change of opinion in as much as the original assessment orders were passed after due scrutiny.

Defective return of income — A defective return cannot be regarded as an invalid return — The Assessing Officer has the discretion to intimate the Assessee about the defect(s) and it is only when the defect(s) are not rectified within the specified period that the Assessing Officer may treat the return as an invalid return. Ascertaining the defects and intimating the same to the Assessee for rectification, are within the realm of discretion of the Assessing Officer — It is for him to exercise the discretion — The burden is on the Assessing Officer — If he does not exercise the discretion, the return of income cannot be construed as a defective return.

The Assessee was a partnership firm at the relevant point of time though it had registered itself as a company since the assessment year 1994-95. The Assessee is carrying on the business of publishing newspaper, weeklies and other periodicals in several languages under the brand name “Mangalam”. Prior to the assessment year 1994-95, the status of the Assessee was that of a firm, being regularly assessed to income tax.

For the assessment year 1990-91, Assessee filed a return of income on 22nd October, 1991 showing a loss of ₹5,99,390.00. Subsequently, the Assessee filed a revised computation showing income at ₹5,63,920.00. Assessee did not file any balance sheet along with the return of income on the ground that books of account were seized by the income tax department (department) in the course of search and seizure operations on3rd December, 1995 and that those books of account were not yet returned. In the assessment proceedings, the Assessing Officer did not accept the contention of the Assessee and made an analysis of the incomings and outgoings of the Assessee for the previous year under consideration. After considering various heads of income and sale of publications, the Assessing Officer made a lump sum addition of ₹1 lakh to the disclosed income vide the assessment order dated 29th January, 1992 passed under Section 143(3) of the Act.

Likewise, for the assessment year 1991-1992, the Assessee did not file any balance sheet along with the return of income for the same reason mentioned for the assessment year 1990-1991. The return of income was filed on 22nd October, 1991 showing a loss of ₹21,66,760.00. As per the revised profit and loss account, the sale proceeds of the publications were shown at ₹8,21,24,873.00. The Assessing Officer scrutinised the net sale proceeds as per the Audit Bureau of Circulation figure and the certified Performance Audit Report. On that basis, the assessing officer accepted the sale proceeds of ₹8,21,24,873.00 as correct being in conformity with the facts and figures available in the Audit Bureau of Circulation report and the Performance Audit Report. After considering the incomings and outgoings of the relevant previous year, the Assessing Officer reworked the aforesaid figures but found that there was a deficiency of ₹29,17,931.00 in the incoming and outgoing statement which the Assessee could not explain. Accordingly, this amount was added to the total income of the Assessee. Further, the Assessee could not produce proper vouchers in respect of a number of items of expenditure. Accordingly, an addition of ₹1,50,000.00 was made to the total income of the Assessee vide the assessment order dated 29th January, 2022 passed under Section 143(3) of the Act.

For the assessment year 1992-1993 also, the Assessee filed the return of income on 7th December, 1992 showing a loss of ₹10,50,000.00. However, a revised return was filed subsequently on 28th January, 1993 showing loss of ₹44,75,212.00. Like the earlier years, Assessee did not maintain books of account and did not file the balance sheet for the same reason. However, the Assessee disclosed total sale proceeds of the weeklies at ₹7,16,95,530.00 and also advertisement receipts to the extent of ₹40 lakhs. The profit was estimated at ₹41,63,500.00 before allowing depreciation. On scrutiny of the performance certificate issued by the Audit Bureau of Circulation, the Assessing Officer observed that total sale proceeds of the weeklies after allowing sale commission came to ₹7,22,94,757.00. Following the profit percentage adopted in earlier years, the Assessing Officer estimated the income from the weeklies and other periodicals at 7.50 per cent before depreciation, adding the estimated advertisement receipts of ₹40 lakhs to the total sale receipts of ₹7,22,94,757.00. The Assessing Officer held that the total receipt from sale of weeklies and periodicals came to ₹7,62,94,757.00. The profit earned before depreciation at the rate of 7.50 per cent on the turnover came to ₹57,22,106.00. In respect of the daily newspaper, the Assessing Officer worked out the loss at ₹22,95,872.00 as against the loss of ₹41,23,500.00 claimed by the Assessee. Taking an overall view of the matter, the Assessing Officer estimated the business income of the Assessee during the assessment year 1992-1993 at ₹10,00,000.00 vide the assessment order dated 26th March, 1993 passed under Section 143(3) of the Act.

For the assessment year 1993-1994, the Assessee had submitted the profit and loss account as well as the balance sheet along with the return of income. While examining the balance sheet, the Assessing Officer noticed that the balance in the capital account of all the partners of the Assessee firm together was ₹1,85,75,455.00 as on 31st March, 1993 whereas the capital of the partners as on 31st December, 1985 was only ₹2,55,117.00. According to the Assessing Officer, none of the partners had any other source of income apart from one of the partners, Smt. Cleramma Vargese, who had a business under the name and style of “Mangalam Finance”. As the income assessed for all the years was found to be not commensurate with the increase in the capital by ₹1,83,20,338.00 (₹1,85,75,455.00 – ₹2,55,117.00) from 1985 to 1993, it was considered necessary to reassess the income of the Assessee as well as that of the partners for the assessment years 1988-1989 to 1993-1994. After obtaining the approval of the Commissioner of Income Tax, Trivandrum, notice under Section 148 of the Act was issued and served upon the Assessee on 29th March, 2000.

In respect of the assessment year 1990-1991, the Assessee informed the Assessing Officer that the return of income filed which culminated in the assessment order dated 29th January, 1992 may be considered as the return in the reassessment proceedings. The Assessing Officer took cognizance of the profit and loss account and the balance sheet filed by the Assessee before the South Indian Bank on the basis of which assessment of income for the assessment years 1988 – 1989 and 1989 – 1990 were completed. Objection of the Assessee that the aforesaid balance sheet was prepared only for the purpose of obtaining loan from the South Indian Bank and therefore could not be relied upon for income tax assessment was brushed aside. The reassessment was made on the basis of the accounts submitted to the South Indian Bank. By the reassessment order dated 21st March, 2002 passed under Section 144/147 of the Act, the Assessing Officer quantified
the total income of the Assessee at ₹29,66,910.00 thereafter order was passed allocating income among the partners.

Likewise, for the assessment year 1991-1992, the Assessing Officer passed a reassessment order dated 21st March, 2002 under Section 144/147 of the Act determining total income at ₹13,91,700.00. Following the same, allocation of income was also made amongst the partners.

In so far assessment year 1992-1993 is concerned, the Assessing Officer passed the reassessment order also on 21st March, 2002 under Section 144/147 of the Act determining the total income of the Assessee at ₹25,06,660.00. Thereafter, the allocation of income was made amongst the partners in the manner indicated in the order of reassessment.

The Assessing Officer had worked out the escaped income for the three assessment years of 1990-91, 1991-92 and 1992-93 at ₹50,96,041.00. This amount was further apportioned between the three assessment years in proportion to the sales declared by the Assessee in the aforesaid assessment years.

Against the aforesaid three reassessment orders for the assessment years 1990-91, 1991-92 and 1992-93, Assessee preferred three appeals before the first appellate authority i.e. Commissioner of Income Tax (Appeals), IV Cochin (briefly “the CIT(A)” hereinafter). Assessee raised the ground that it had disclosed all material facts necessary for completing the assessments. The assessments having been completed under Section 143(3) of the Act, the assessments could not have been reopened after expiry of four years from the end of the relevant assessment year as per the proviso to Section 147 of the Act. It was pointed out that the limitation period for the last of the three assessment years i.e. 1992-93, had expired on 31st March, 1997 whereas the notices under Section 148 of the Act were issued and served on the Assessee only on 29th March, 2000. Therefore, all the three reassessment proceedings were barred by limitation. The Assessee also argued that the alleged income escaping assessment could not be computed on an estimated basis. In the present case, the Assessing Officer had allocated the alleged escaped income for the three assessment years in proportion to the corresponding sales turnover. It was further argued that as per Section 282(2), notice under Section 148 of the Act in the case of a partnership firm was required to be made to a member of the firm. In the present case, the notices were issued to the partnership firm. Therefore, such notices could not be treated as valid.

CIT(A) rejected all the above contentions urged by the Assessee. CIT(A) relied on Section 139(9)(f) of the Act and thereafter held that the Assessee had not furnished the details as per the aforesaid provisions and therefore fell short of the requirements specified therein. Vide the common appellate order dated 26th February, 2004, CIT(A) held that, as the Assessee had failed to disclose all material facts necessary to make assessments, therefore it could not be said that the reassessment proceedings were barred by limitation in terms of the proviso toSection 147. The other two grounds raised by the Assessee were also repelled by the first appellateauthority. Thereafter, CIT(A) made a detailed examination of the factual aspect thereafter it proposed enhancement of the quantum of escaped income. Following thesame, CIT(A) enhanced the assessment by fixing the unexplained income at ₹1,44,02,560.00 for the assessment years 1987-88 to 1993-94 which was thereafter apportioned in respect of the relevant three assessment years.

Thus, as against the total escaped income of ₹50,96,040.00 for the above three assessment years as quantified by the Assessing Officer, CIT(A) enhanced and redetermined such income at ₹68,20,854.00.

The CIT(A), however, in the appellate order had noted that the Assessee had filed its balance sheet as on 31st December, 1985 while filing the return of income for the assessment year 1986-87. The next balance sheet was filed on 31st March, 1993. No balance sheet was filed in the interregnum on the ground that it could not maintain proper books of accounts as the relevant materials were seized by the department in the course of a search and seizure operation and not yet returned. CIT(A) further noted that the Assessing Officer had taken the balance sheet as on 31st March, 1989 filed by the Assessee before the South Indian Bank as the base for reconciling the accounts of the partners. It was noticed that CIT(A) in an earlier appellate order dated 26th March, 2002 for the assessment year 1989-90 in the Assessee’s own case had held that the profit and loss account and the balance sheet furnished to the South Indian Bank were not reliable. CIT(A) in the present proceedings agreed with such finding of his predecessor and held that the unexplained portion, if any, of the increase in capital and current account balance with the Assessee had to be analysed on the basis of the balance sheet filed before the Assessing Officer as on 31st December, 1985 and as on 31st March, 1993.

Aggrieved by the common appellate order passed by the CIT(A) dated 26th February, 2004, Assessee preferred three separate appeals before the Tribunal.

In the three appeals filed by the Assessee, revenue also filed cross objections.

By the common order dated 29th October, 2004, the Tribunal allowed the appeals filed by the Assessee and set aside the orders of reassessment for the three assessment years as affirmed and enhanced by the CIT(A). Tribunal held that the re-examination carried out by the Assessing Officer was not based on any fresh material or evidence. The reassessment orders could not be sustained on the basis of the balance sheet filed by the Assessee before the South Indian Bank because in an earlier appeal of the Assessee itself, CIT(A) had held that such balance sheet and profit and loss account furnished to the bank were not reliable. The original assessments were completed under Section 143(3) of the Act. Therefore, it was not possible to hold that the Assessee had not furnished necessary details for completing the assessments at the time of original assessment. In such circumstances, the Tribunal held that the case of the Assessee squarely fell within the four corners of the proviso to Section 147. Consequently, the reassessments were held to be barred by limitation, thus without jurisdiction. While allowing the appeals of the Assessee, the Tribunal dismissed the cross objections filed by the revenue.

Against the aforesaid common order of the Tribunal, the Respondent preferred three appeals before the High Court under Section 260A of the Act. All the three appeals were allowed by the High Court vide the common order dated 12th October, 2009. According to the High Court, the finding of the Tribunal that the Assessee had disclosed fully and truly all material facts necessary for completion of the original assessments was not tenable. Holding that there was no material before the Tribunal to come to the conclusion that the Assessee had disclosed fully and truly all material facts required for completion of original assessments, the High Court set aside the order of the Tribunal, and remanded the appeals back to the Tribunal to consider the appeals on merit after issuing notice to the parties.

It is against this order that the Assessee filed the special leave petitions which on leave being granted were registered as civil appeals. The related civil appeals were also filed by the partners of the Assessee firm which were dependent on the outcome of the main civil appeals.

The Supreme Court observed that from a reading of the reasons recorded by the Assessing Officer leading to formation of his belief that income of the Assessee had escaped assessment for the assessment years under consideration, the only material which came into possession of the Assessing Officer subsequently was the balance sheet of the Assessee for the assessment year 1989-90 obtained from the South Indian Bank. After obtaining this balance sheet, the Assessing Officer compared the same with the balance sheet and profit loss account of the Assessee for the assessment year 1993-94. On such comparison, the Assessing Officer noticed significant increase in the current and capital accounts of the partners of the Assessee. On that basis, he drew the inference that profit of the Assessee for the three assessment years under consideration would be significantly higher which had escaped assessment. The figure of under assessment was quantified at ₹1,69,92,728.00. Therefore, he recorded that he had reason to believe that due to omission or failure on the part of the Assessee to disclose fully and truly all material facts necessary for the assessments, incomes chargeable to tax for the three assessment years had escaped assessment.

The Supreme Court noted that the Assessee did not submit regular balance sheet and profit and loss account for the three assessment years under consideration on the ground that books of account and other materials/documents of the Assessee were seized by the department in the course of search and seizure operation, which were not yet returned to the Assessee. In the absence of such books etc., it became difficult for the Assessee to maintain year-wise regular books of account etc. However, regular books of account and profit and loss account were filed by the Assessee along with the return of income for the assessment year 1993-94.

According to the Supreme Court, the Assessing Officer culled out the figures discernible from the balance sheet for the assessment year 1989-90 obtained from the South Indian Bank, and compared the same with the balance sheet submitted by the Assessee before the Assessing Officer for the assessment year 1993-94 to arrive at the aforesaid conclusion.

The Supreme Court noted that the Assessee had filed its regular balance sheet as on 31st December, 1985 while filing the return of income for the assessment year 1986-87. The next balance sheet filed was on 31st March, 1993 for the assessment year 1993-94. No balance sheet was filed in the interregnum as according to the Assessee, it could not maintain proper books of account as the relevant materials were seized by the department in the course of a search and seizure operation and not yet returned. It was not possible for it to obtain ledger balances to be brought down for the succeeding accounting years.

As regards to the balance sheet on 31st March, 1989 filed by the Assessee before the South Indian Bank, and which was construed by the Assessing Officer to be the balance sheet of the Assessee for the assessment year 1989-90, the Supreme Court observed that the explanation of the Assessee was that it was prepared on provisional and estimate basis and was submitted before the South Indian Bank for obtaining credit and therefore could not be relied upon in assessment proceedings.

The Supreme Court noted that this balance sheet was also relied upon by the Assessing Officer in the reassessment proceedings of the Assessee for the assessment year 1989-90. In the first appellate proceedings, CIT(A) in its appellate order dated 26th March, 2002 held that such profit and loss account and the balance sheet furnished to the South Indian Bank were not reliable and had discarded the same. That being the position, according to the Supreme Court, the Assessing Officer could not have placed reliance on such a balance sheet submitted by the Assessee allegedly for the assessment year 1989-90 to the South Indian Bank for obtaining credit. Dehors such a balance sheet, there was no other material in the possession of the Assessing Officer to come to the conclusion that income of the Assessee for the three assessment years had escaped assessment.

Further, the Supreme Court observed that Section 139 places an obligation upon every person to furnish voluntarily a return of his total income if such income during the previous year exceeded the maximum amount which is not chargeable to income tax. The Assessee is under further obligation to disclose all material facts necessary for his assessment for that year fully and truly. However, the constitution bench of the Supreme Court in Calcutta Discount Company Limited, has held that while the duty of the Assessee is to disclose fully and truly all primary and relevant facts necessary for assessment, it does not extend beyond this. Once the primary facts are disclosed by the Assessee, the burden shifts onto the Assessing Officer.

According to the Supreme Court, it was not the case of the revenue that the Assessee had made a false declaration. On the basis of the “balance sheet” submitted by the Assessee before the South Indian Bank for obtaining credit which was discarded by the CIT(A) in an earlier appellate proceeding of the Assessee itself, the Assessing Officer upon a comparison of the same with a subsequent balance sheet of the Assessee for the assessment year 1993-94 which was filed by the Assessee and was on record, erroneously concluded that there was escapement of income and initiated reassessment proceedings.

According to the Supreme Court, while framing the initial assessment orders of the Assessee for the three assessment years in question, the Assessing Officer had made an independent analysis of the incomings and outgoings of the Assessee for the relevant previous years and thereafter had passed the assessment orders under Section 143(3) of the Act. An assessment order under Section 143(3) was preceded by notice, enquiry and hearing under Section 142(1), (2) and (3) as well as under Section 143(2). If that be the position and when the Assessee had not made any false declaration, it was nothing but a subsequent subjective analysis of the Assessing Officer that income of the Assessee for the three assessment years was much higher than what was assessed and therefore, had escaped assessment. This was nothing but a mere change of opinion which cannot be a ground for reopening of assessment.

The Supreme Court also dealt with the aspect of defective return. According to the Supreme Court, admittedly, the returns for the three assessment years under consideration were not accompanied by the regular books of account. Though under Sub-section (9)(f) of Section 139, such returns could have been treated as defective returns by the Assessing Officer and the Assessee intimated to remove the defect failing which the returns would have been invalid, however, the materials on record do not indicate that the Assessing Officer had issued any notice to the Assessee bringing to its notice such defect and calling upon the Assessee to rectify the defect within the period as provided under the aforesaid provision. In other words, the Assessing Officer had accepted the returns submitted by the Assessee for the three assessment years under question. The Supreme Court noted that it was the case of the Assessee that though it could not maintain and file regular books of account with the returns in the assessment proceedings for the three assessment years under consideration, nonetheless it had prepared and filed the details of accounts as well as incomings and outgoings of the Assessee etc. for each of the three assessment years which were duly verified and enquired into by the Assessing Officer in the course of the assessment proceedings which culminated in the orders of assessment under Sub-section (3) of Section 143.

According to the Supreme Court, a return filed without the regular balance sheet and profit and loss account may be a defective one but certainly not invalid. A defective return cannot be regarded as an invalid return. The Assessing Officer has the discretion to intimate the Assessee about the defect(s) and it is only when the defect(s) are not rectified within the specified period that the Assessing Officer may treat the return as an invalid return. Ascertaining the defects and intimating the same to the Assessee for rectification, are within the realm of discretion of the Assessing Officer. It is for him to exercise the discretion. The burden is on the Assessing Officer. If he does not exercise the discretion, the return of income cannot be construed as a defective return. As a matter of fact, in none of the three assessment years, the Assessing Officer had issued any declaration that the returns were defective.

The Supreme Court noted that the Assessee has asserted that though it could not file regular books of account along with the returns for the three assessment years under consideration because of seizure by the department, nonetheless the returns of income were accompanied by tentative profit and loss account and other details of income like cash flow statements, statements showing the source and application of funds reflecting the increase in the capital and current accounts of the partners of the Assessee etc., which were duly enquired into by the Assessing Officer in the assessment proceedings.

In view of above, the Supreme Court was of the view that the Tribunal was justified in coming to the conclusion that the reassessments for the three assessment years under consideration were not justified. The High Court had erred in reversing such findings of the Tribunal. Consequently, the Supreme Court set aside the common order of the High Court and restored the common order of the Tribunal dated 29th October, 2004.

BCAJ Admin

Glimpses of Supreme Court Rulings

55 Commissioner of Income Tax vs. Jindal Steel & Power Limited (and connected appeals)

(2024) 460 ITR 162 (SC)

Industrial Undertaking — Captive Power Plant — Deduction under section 80-IA — The market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity for computing the profits of the eligible business — The rate of power sold to or supplied to the State Electricity Board cannot be the market rate of power sold to a consumer in the open market.

Depreciation — There is no requirement under the second proviso to Sub-rule (1A) of Rule 5 of the Rules that any particular mode of computing the claim of depreciation has to be opted for before the due date of filing of the return — All that is required is that the Assessee has to opt before filing of the return or at the time of filing the return that it seeks to avail the depreciation provided in Section 32 Under Sub-Rule (1) of Rule 5 read with Appendix-I instead of the depreciation specified in Appendix-1A in terms of Sub-rule (1A) of Rule 5.

RECOMPUTATION OF DEDUCTION UNDER SECTION 80IA OF THE INCOME TAX ACT, 1961.

The Assessee, M/s Jindal Steel and Power Ltd., Hisar, a public limited company was engaged in the business of generation of electricity, manufacture of sponge iron, M.S. Ingots etc.

Since electricity supplied by the State Electricity Board was inadequate to meet the requirements of its industrial units, the Assessee set up captive power generating units to supply electricity to its industrial units. Surplus power was supplied by the Assessee to the State Electricity Board.

The Assessee filed its return of income for the assessment year 2001-02 on 29th October, 2001 declaring nil income. The total income computed by the Assessee at nil was arrived at after claiming various deductions, including under Section 80IA of the Act. Since there was substantial book profit of the Assessee, net book profit being ₹1,11,43,36,230.00, income tax was levied under Section 115JB of the Act at the rate of 7.5 per cent along with surcharge and interest.

The return of income filed by the Assessee was processed by the Assessing Officer under Section 143(1) of the Act. After such processing, a refund was made to the Assessee.

Thereafter, the case was selected for scrutiny following which statutory notices under Section 143(2) and 142(1) of the Act were issued calling upon the Assessee to furnish details for clarification, which were complied with by the Assessee. During the assessment proceedings, the issue relating to deduction under Section 80IA of the Act came up for consideration. Assessee had claimed deduction under the said provision of a sum amounting to ₹80,10,38,505. The deduction claimed under Section 80IA related to profits of the power generating units of the Assessee.

The Assessing Officer noticed that the Assessee had shown a substantial amount of profit in its power generating units. The power generated was used for its own consumption and also supplied to the State Electricity Board in the State of Chhattisgarh and prior to the creation of the State of Chhattisgarh, to the State Electricity Board of the State of Madhya Pradesh. The electricity generated by the Assessee in its captive power plants at Raigarh (Chhattisgarh) was primarily used by it for its own consumption in its manufacturing units; while the additional/ surplus electricity was supplied to the State Electricity Board. Assessee had entered into an agreement on 15th July, 1999 with the State Electricity Board as per which Assessee had supplied the surplus electricity to the State Electricity Board at the rate of ₹2.32 per unit. Thus, for the assessment year under consideration, the Assessee was paid at the rate of ₹2.32 per unit for the surplus electricity supplied to the State Electricity Board.

It was further noticed by the Assessing Officer that the Assessee had supplied power (electricity) to its industrial units for captive consumption at the rate of ₹3.72 per unit.

Assessing Officer took the view that the Assessee had declared inflated profits by showing supply of power at the rate of ₹3.72 per unit to its sister units i.e., for captive consumption. According to the Assessing Officer, there was no justification to claim electricity charge at the rate of ₹3.72 per unit for supply to its own industrial units when the Assessee was supplying power to the State Electricity Board at the rate of ₹2.32 per unit. Assessing Officer observed that the profit calculated by the Assessee (power generating units) at the rate of ₹3.72 per unit was not the real profit; the price per unit was inflated so that profit attributable to the power generating units could qualify for deduction from the taxable income under the Act. Thus, it was held to be a colourable device to reduce taxable income. On such an assumption, the Assessee was asked to explain its claim of deduction under Section 80IA of the Act which the Assessee complied with.

Response of the Assessee was considered by the Assessing Officer. By the assessment order dated 26th March, 2004 passed under Section 143(3) of the Act, the Assessing Officer held that ₹3.72 claimed by the Assessee as the rate at which power was supplied by it to its own industrial units was not the true market value. According to the Assessing Officer, the rate of ₹2.32 per unit agreed upon between the Assessee and the State Electricity Board and at which rate surplus electricity was supplied by the Assessee to the State Electricity Board was the market value of electricity. Therefore, for the purpose of computing the profit of the power generating units, the selling rate of power per unit was taken at ₹2.32. On that basis, Assessing Officer held that there was an excessive claim of deduction of ₹1.40 per unit on captive consumption (₹3.72 – ₹2.32), following which the Assessing Officer worked out the excess deduction claimed by the Assessee under Section 80IA at ₹31,98,66,505. Therefore, the Assessing Officer restricted the claim of deduction of the Assessee under Section 80IA at ₹48,11,72,000/- (₹80,10,38,505 – ₹31,98,66,505).

Aggrieved by the aforesaid reduction in the claim of deduction under Section 80IA of the Act, the Assessee preferred appeal before the Commissioner of Income Tax (Appeals), Rohtak (‘CIT (A)’). By the appellate order dated 16th May, 2005, CIT (A) confirmed the reduction of deduction under Section 80IA.

Assailing the order of CIT (A), Assessee preferred further appeal before the Income Tax Appellate Tribunal, Delhi (‘the Tribunal’). The Revenue also filed a cross appeal arising out of the same order before the Tribunal but on a different issue. The grievance of the Assessee before the Tribunal in its appeal was against the action of CIT (A) in affirming the reduction of deduction under Section 80IA of the Act made by the Assessing Officer.

In its order dated 7th June, 2007, the Tribunal noted that the dispute between the parties related to the manner of computing profits of the undertaking of the Assessee engaged in the business of generation of power for the purpose of relief under Section 80IA of the Act. The difference between the Assessee and the revenue was with regard to the determination of the market value of electricity per unit so as to compute the income accrued to the Assessee on supply made by it to its own manufacturing units. After referring to the provisions of Section 80IA of the Act, more particularly to Sub-section (8) of Section 80IA and also upon an analysis of the meaning of the expression “market value”, Tribunal came to the conclusion that the price at which electricity was supplied by the Assessee to the State Electricity Board could not be equated with the market value as understood for the purpose of Section 80IA(8) of the Act. In this regard, the Tribunal also analysed various provisions of the Electricity (Supply) Act, 1948 and the agreement dated 15th July, 1999 entered into between the Assessee and the State Electricity Board. Consequently, Tribunal was of the view that the stand of the revenue could not be approved thereafter it was held that the price recorded by the Assessee at ₹3.72 per unit, being the price at which the Electricity Board supplied electricity, was the market value for the purpose of Section 80IA(8) of the Act. Thus, the Tribunal upheld the stand of the Assessee and set aside the order of CIT (A) by directing the Assessing Officer to allow relief to the Assessee under Section 80IA as claimed.

Aggrieved by the aforesaid finding rendered by the Tribunal, revenue preferred appeal before the High Court of Punjab and Haryana under Section 260A of the Act. The High Court in its order dated 2nd September, 2008, disposed of the appeal by following its order dated 2nd September, 2008 passed in the connected ITA No. 544 of 2006 (Commissioner of Income Tax, Hisar vs. M/s. Jindal Steel and Power Ltd.). That was an appeal by the revenue on the same issue against the order dated 31st March, 2006, passed by the Tribunal in the case of the Assessee itself for the assessment year 2000-2001. Insofar as allowance of deduction under Section 80IA of the Act was concerned, the High Court answered the question against the revenue as it was submitted at the bar that the issue already stood covered by the previous decision against the revenue.

Aggrieved, Revenue filed appeal before the Supreme Court. The Supreme Court noted the provisions of section 80-IA, and adverting to Sub-section (1) observed that, where the gross total income of an Assessee includes any profits and gains derived from any business of an industrial undertaking or an enterprise which are referred to in Sub-section (4), referred to as eligible business, this Section provides that a deduction shall be allowed in computing the total income. Such deduction shall be allowed from the profits and gains of an amount which is equivalent to hundred percent of the profits and gains derived from such business for the first five assessment years as specified in Sub-section (2) and thereafter 25 per cent of the profits and gains for a further period of five assessment years. As per the proviso, if the Assessee is a company, then the benefit for the further five years would be 30 per cent instead of 25 per cent.

As per Sub-section (2), the deduction specified in Sub-section (1) may be claimed by the Assessee at its option for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park or generates power or commences transmission or distribution of power.

Adverting to Sub-section (4) of Section 80-IA, the Supreme Court observed that as per Sub-section (4) (iv), Section 80-IA is applicable to an industrial undertaking which is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period commencing on the 1st day of April 1993 and ending on the 31st day of March, 2003; and starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on the 1st day of April, 1999 and ending on the 31st day of March, 2003. Proviso below Clause (iv) says that such deduction shall be allowed only in relation to the profits derived from laying of such a network of new lines for transmission or distribution.

According to the Supreme Court, crucial to the issue under consideration was Sub-section (8) of Section 80-IA.

The Supreme Court noted that Sub-section (8) says that where any goods held for the purposes of the eligible business are transferred to any other business carried on by the Assessee or where any goods held for the purposes of any other business carried on by the Assessee are transferred to the eligible business but the consideration for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods as on the date of the transfer, then for the purposes of deduction under Section 80-IA, the profits and gains of such eligible business shall be computed as if the transfer had been made at the market value of such goods as on that date. The proviso says that if the Assessing Officer finds exceptional difficulties in computing the profits and gains of the eligible business in the manner specified in Sub-section (8), then in such a case, the Assessing Officer may compute such profits and gains on such a reasonable basis as he may deem fit. The explanation below the proviso defines “market value” for the purpose of Sub-section (8). It says that market value in relation to any goods means the price that such goods would ordinarily fetch on sale in the open market.

The Supreme Court observed that the expression “open market” was however not defined.

The Supreme Court also noted the relevant provisions of the Electricity (Supply) Act, 1948 (“the 1948 Act”), which was the enactment governing the field at the relevant point of time. As per Section 43 of the 1948 Act, the State Electricity Board was empowered to enter into arrangements for purchase or sale of electricity under certain conditions. Sub-section (1) says that the State Electricity Board may enter into arrangements with any person producing electricity within the State for purchase by the State Electricity Board on such terms as may be agreed upon of any surplus electricity which that person may be able to dispose of. Thus, what Sub-section (1) provides is that if any person who produces electricity has surplus electricity, he may dispose of such surplus electricity by entering into an arrangement with the State Electricity Board for supply of such surplus electricity by him and purchase thereof by the State Electricity Board.

Section 43A provides for the terms, conditions and tariff for sale of electricity by a generating company. It says that a generating company may enter into a contract for the sale of electricity generated by it with the State Electricity Board of the State in which the generating station owned or operated by the generating company is located or with any other person with the consent of the competent government.

As per Section 44, no person can establish or acquire a generating station or generate electricity without the previous consent in writing of the State Electricity Board. However, such an embargo would not be applicable to the Central Government or any corporation created by a central act or any generating company. As per Section 45, the State Electricity Board has been empowered to enter upon and shut down a generating station if the same is in operation contravening certain provisions of the 1948 Act.

The Supreme Court noted that since electricity from the State Electricity Board to the industrial units of the Assessee was inadequate, the Assessee had set up captive power plants to supply electricity to its industrial units. For disposal of the surplus electricity, the Assessee could not supply the same to any third-party consumer. Therefore, in terms of the provisions of Section 43A of the 1948 Act, the Assessee had entered into an agreement dated 15th July, 1999 with the State Electricity Board as per which, the Assessee had supplied the surplus electricity to the State Electricity Board at the rate of ₹2.32 per unit determined as per the agreement. Thus, for the assessment year under consideration, the Assessee was paid at the rate of ₹2.32 per unit for the surplus electricity supplied to the State Electricity Board. The Supreme Court also noted that the State Electricity Board had supplied power (electricity) to the industrial consumers at the rate of ₹3.72 per unit

According to the Supreme Court, there was no dispute that the Assessee or rather, the captive power plants of the Assessee are entitled to deduction under Section 80-IA of the Act. For the purpose of computing the profits and gains of the eligible business, which was necessary for quantifying the deduction under Section 80-IA, the Assessee had recorded in its books of accounts that it had supplied power to its industrial units at the rate of R3.72 per unit.

The Supreme Court observed that while the Assessing Officer accepted the claim of the Assessee for deduction under Section 80-IA, he, however, did not accept the profits and gains of the eligible business computed by the Assessee on the ground that those were inflated by showing supply of power to its own industrial units for captive consumption at the rate of ₹3.72 per unit. Assessing Officer took the view that there was no justification on the part of the Assessee to claim electricity charge at the rate of ₹3.72 for supply to its own industrial units when the Assessee was supplying surplus power to the State Electricity Board at the rate of ₹2.32 per unit. Finally, the Assessing Officer held that ₹2.32 per unit was the market value of electricity and on that basis, reduced the profits and gains of the Assessee thereby restricting the claim of deduction of the Assessee under Section 80-IA of the Act.

According to the Supreme Court, there was no dispute that the Assessee was entitled to deduction under Section 80-IA of the Act for the relevant assessment year. The only issue was with regard to the quantum of profits and gains of the eligible business of the Assessee and the resultant deduction under Section 80IA of the Act. The higher the profits and gains, the higher would be the quantum of deduction. Conversely, if the profits and gains of the eligible business of the Assessee is determined at a lower figure, the deduction under Section 80-IA would be on the lower side. Assessee had computed the profits and gains by taking ₹3.72 as the price of electricity per unit supplied by its captive power plants to its industrial units. The basis for taking this figure was that it was the rate at which the State Electricity Board was supplying electricity to its industrial consumers. Assessing Officer repudiated such a claim. According to him, the rate at which the Assessee had supplied the surplus electricity to the State Electricity Board i.e., ₹2.32 per unit, should be the market value of electricity. Assessee cannot claim two rates for the same good i.e., electricity. When it supplies electricity to the State Electricity Board at the rate of R2.32 per unit, it cannot claim R3.72 per unit for supplying the same electricity to its sister concern i.e., the industrial units. This view of the Assessing Officer was confirmed by the CIT (A).

The Supreme Court noted that the Tribunal had rejected such contention of the revenue which had been affirmed by the High Court.

The Supreme Court, reverting back to Sub-section (8) of Section 80-IA, observed that if the Assessing Officer disputes the consideration for supply of any goods by the Assessee as recorded in the accounts of the eligible business on the ground that it does not correspond to the market value of such goods as on the date of the transfer, then for the purpose of deduction under Section 80-IA, the profits and gains of such eligible business shall be computed by adopting arm’s length pricing. In other words, if the Assessing Officer rejects the price as not corresponding to the market value of such good, then he has to compute the sale price of the good at the market value as per his determination. The explanation below the proviso defines market value in relation to any goods to mean the price that such goods would ordinarily fetch on sale in the open market. Thus, as per this definition, the market value of any goods would mean the price that such goods would ordinarily fetch on sale in the open market.

But the expression “open market” was not a defined expression.

The Supreme Court noted that Black’s Law Dictionary, 10th Edition, defines the expression “open market” to mean a market in which any buyer or seller may trade and in which prices and product availability are determined by free competition. P. Ramanatha Aiyer’s Advanced Law Lexicon has also defined the expression “open market” to mean a market in which goods are available to be bought and sold by anyone who cares to. Prices in an open market are determined by the laws of supply and demand.

Therefore, according to the Supreme Court, the expression “market value” in relation to any goods as defined by the explanation below the proviso to Sub-section (8) of Section 80IA would mean the price of such goods determined in an environment of free trade or competition. “Market value” is an expression which denotes the price of a good arrived at between a buyer and a seller in the open market i.e., where the transaction takes place in the normal course of trading. Such pricing is unfettered by any control or Regulation; rather, it is determined by the economics of demand and supply.

Section 43A of the 1948 Act lays down the terms and conditions for determining the tariff for supply of electricity. The said provision makes it clear that tariff is determined on the basis of various parameters. That apart, it is only upon granting of specific consent that a private entity could set up a power generating unit. However, such a unit would have restrictions not only on the use of the power generated but also regarding determination of tariff at which the power generating unit could supply surplus power to the concerned State Electricity Board. Thus, determination of tariff of the surplus electricity between a power generating company and the State Electricity Board cannot be said to be an exercise between a buyer and a seller under a competitive environment or a transaction carried out in the ordinary course of trade and commerce. It is determined in an environment where one of the players has the compulsive legislative mandate not only in the realm of enforcing buying but also to set the buying tariff in terms of the extant statutory guidelines. Therefore, the price determined in such a scenario cannot be equated with a situation where the price is determined in the normal course of trade and competition. Consequently, the price determined as per the power purchase agreement cannot be equated with the market value of power as understood in the common parlance. The price at which the surplus power supplied by the Assessee to the State Electricity Board was determined entirely by the State Electricity Board in terms of the statutory Regulations and the contract. Such a price cannot be equated with the market value as is understood for the purpose of Section 80IA (8). On the contrary, the rate at which the State Electricity Board supplied electricity to the industrial consumers would have to be taken as the market value for computing deduction under Section 80IA of the Act.

Thus, on careful consideration, the Supreme Court was of the view that the market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity. It should not be compared with the rate of power sold to or supplied to the State Electricity Board since the rate of power to a supplier cannot be the market rate of power sold to a consumer in the open market. The State Electricity Board’s rate when it supplies power to the consumers have to be taken as the market value for computing the deduction under Section 80-IA of the Act.

That being the position, the Supreme Court held that the Tribunal had rightly computed the market value of electricity supplied by the captive power plants of the Assessee to its industrial units after comparing it with the rate of power available in the open market i.e., the price charged by the State Electricity Board while supplying electricity to the industrial consumers. Therefore, the High Court was fully justified in deciding the appeal against the revenue.

DEPRECIATION-EXERCISE OF OPTION TO ADOPT WRITTEN DOWN VALUE METHOD

The Assessee had purchased 25 MV turbines on and around 8th July, 1998 for the purpose of its eligible business. Assessee claimed depreciation on the said turbines at the rate of 25 per cent on WDV basis.

On perusal of the materials on record, the Assessing Officer held that in view of the change in the law with regard to allowance of depreciation on the assets of the power generating unit w.e.f. 1st April, 1997, the Assessee would be entitled to depreciation on the straight line method in respect of assets acquired on or after 1st April, 1997 as per the specified percentage in terms of Rule 5(1A) of the Income Tax Rules, 1962. Assessing Officer however noted that the Assessee did not exercise the option of claiming depreciation on WDV basis. Therefore, it would be entitled to depreciation on the straight line method. On that basis, as against the depreciation claim of the Assessee of ₹2,85,37,634/-, the Assessing Officer allowed depreciation to the extent of ₹1,59,10,047/-.

In the appeal before the CIT (A), the Assessee contended that the Assessing Officer had erred in limiting the allowance of depreciation on the turbines to ₹1,59,10,047/- as against the claim of ₹2,85,37,634/-. However, vide the appellate order dated 16th May, 2005, CIT (A) confirmed the disallowance of depreciation made by the Assessing Officer.

On further appeal by the Assessee before the Tribunal, vide the order dated 7th June, 2007, the Tribunal on the basis of its previous decision in the case of the Assessee itself for the assessment year 2000-2001 answered this question in favour of the Assessee.

When the matter came up before the High Court in appeal by the revenue under Section 260A of the Act, the High Court referred to the proviso to Sub-rule (1A) of Rule 5 of the Rules and affirmed the view taken by the Tribunal. The High Court held that there was no perversity in the reasoning of the Tribunal and therefore, the question raised by the revenue could not be said to be a substantial question of law.

The Supreme Court noted that Rule 5 provides for the method of calculation of depreciation allowed under Section 32(1) of the Act. It says that such depreciation of any block of assets shall be allowed, subject to provisions of Sub-rule (2), as per the specified percentage mentioned in the second column of the table in Appendix-I to the Rules on the WDV of such block of assets as are used for the purposes of the business or profession of the Assessee during the relevant previous year.

As per Sub-rule (1A), the allowance under Clause (i) of Sub-section (1) of Section 32 of the Act in respect of depreciation of assets acquired on or after the 1st day of April, 1997 shall be calculated at the percentage specified in the second column of the table in Appendix-IA to the Rules. As per the first proviso, the aggregate depreciation of any asset should not exceed the actual cost of that asset. The second proviso says that the undertaking specified in Clause (i) of Sub-section (1) of Section 32 of the Act may instead of the depreciation specified in Appendix-IA may opt for depreciation under Sub-rule (1) read with Appendix-I but such option should be exercised before the due date for furnishing the return of income under Sub-section (1) of Section 139 of the Act. The last proviso clarifies that any such option once exercised shall be final and shall apply to all the subsequent assessment years.

The Supreme Court observed that in the instant case, there was no dispute that the Assessee had claimed depreciation in accordance with Sub-rule (1) read with Appendix-I before the due date of furnishing the return of income. The view taken by the Assessing Officer as affirmed by the first appellate authority that the Assessee should opt for one of the two methods was not a statutory requirement. Therefore, the revenue was not justified in reducing the claim of depreciation of the Assessee on the ground that the Assessee had not specifically opted for the WDV method.

The Supreme Court agreed with the view expressed by the Tribunal and the High Court that there is no requirement under the second proviso to Sub-rule (1A) of Rule 5 of the Rules that any particular mode of computing the claim of depreciation has to be opted for before the due date of filing of the return. All that is required is that the Assessee has to opt before filing of the return or at the time of filing the return that it seeks to avail the depreciation provided in Section 32 under the Sub-Rule (1) of Rule 5 read with Appendix-I instead of the depreciation specified in Appendix-1A in terms of Sub-rule (1A) of Rule 5 which the Assessee had done. According to the Supreme Court there was no merit in the question proposed by the revenue. The same is therefore answered in favour of the Assessee and against the revenue.

56 Shah Originals vs. Commissioner of Income Tax-24, Mumbai

(2024) 459 ITR 385 (SC)

Export profits – Deduction under section 80HHC — The gain from foreign exchange fluctuations from the EEFC account does not fall within the meaning of “derived from” the export of garments by the Assessee — The profit from exchange fluctuation is independent of export earnings and could not be considered for computing deduction under section 80HHC.

The Assessee, a 100 per cent Export-Oriented Unit (EOU), filed its return of income for the assessment year 2000-01 declaring the total taxable income at ₹28,25,080/-. The Assessee for the relevant assessment year had export turnover at ₹8,27,15,688/-. The said turnover included an amount of ₹26,62,927/- being gains on accounts of foreign currency fluctuations in the assessment year 2000-01. The Assessee treated the said earning from foreign currency as income earned by the Assessee in the course of its export of goods/ merchandise out of India, i.e., profits of business from exports outside India. The Assessee claimed deduction under Section 80HHC of the Income Tax Act.

The Assessing Officer (AO), by the assessment order dated 10th February, 2006, disallowed the deduction claim of ₹26,62,927/- and added it to the Assessee’s taxable income. According to the AO, the gain/ profit on account of foreign currency fluctuations in the Exchange Earners Foreign Currency (EEFC) account could not be attributed as an earning from the export of goods/ merchandise outside India by the Assessee. The Assessee had completed the export obligations and received the foreign exchange remittances from the buyers / importers of the Assessee’s goods. The credit of the foreign currency in the EEFC account and positive fluctuation at the end of the financial year could not be treated as the Assessee’s income/ receipt from the principal business, i.e., export of goods and merchandise outside India. The AO noted that the Reserve Bank Notification No. FERA.159/94-RB dated 1st March, 1994 permitted foreign exchange earners to open and operate an EEFC account by crediting a percentage of foreign exchange into the account. The guidelines issued in continuation of the Notification dated 1st March, 1994 allow the units covered by the notification to credit twenty-five per cent or as permitted, in the EEFC accounts and operate in foreign currency. In other words, the credit of foreign exchange to the EEFC account facilitated the foreign exchange earners to use the foreign currency in the EEFC account depending upon the business necessities of the exporter.

The AO observed that the Assessee received the foreign exchange remittances and credited the foreign exchange in the EEFC account. At the end of the financial year, the convertible foreign exchange value was reflected in the Assessee’s balance sheet. The Assessee had gained/ earned from the fluctuation in foreign currency credited to its EEFC account. The AO was therefore of the view that the maintenance of an EEFC account was neither necessary nor incidental in any manner to the export activity of the Assessee. Crediting remittances or maintaining a balance in an EEFC account was akin to any deposit held by an Assessee in the Indian Rupee. The Assessee was not entitled to the deduction under Section 80HHC because gains from foreign currency fluctuation were not profit derived from exporting goods / merchandise outside India.

The Assessee, aggrieved by the disallowance, filed an appeal before the Commissioner of Income Tax (Appeals), who dismissed the Assessee’s appeal by the order dated 21st November, 2006.

The Assessee filed further appeal before the Income Tax Appellate Tribunal, Mumbai. On 25th October, 2007, the Appellate Tribunal. By an order dated 25th October, 2007, the Tribunal set aside the disallowance of the deduction claimed under Section 80HHC of the Act of the gains earned on account of foreign exchange fluctuations.

The Revenue filed an appeal under Section 260A of the Act. The appeal at the instance of Revenue was allowed by the High Court, resulting in restoring the disallowance of the deduction under Section 80HHC of the Act.

The Assessee filed an appeal before the Supreme Court.

According to the Supreme Court, the following question fell for its consideration: “whether the gain on foreign exchange fluctuation in the EEFC account of the Assessee partakes the character of profits of the business of the Assessee from exports and can the gain be included in the computation of deduction under profits of the business of the Assessee under Section 80HHC of the Act?”

The Supreme Court observed that Section 80HHC provides for the deduction of profits the Assessee derives from exporting such goods/merchandise. The operation of Section 80HHC is substantially dependent on two sets of expressions, viz., (a) is engaged in the business of export outside India of any goods/merchandise; (b) a deduction to the extent of profits defined in Sub-section (1B) derived by the Assessee from the export of such goods / merchandise.

The Supreme Court, after noting the construction/ interpretation of the expression “derived from” adopted by it and by few High Courts, observed that the expressions “derived from” and “since” are used in multiple instances in the Act. Unless the context does not permit, the construction of the expression “derived from” must be consistent.

According to the Supreme Court, in interpreting Section 80HHC, the expression “derived from” has a deciding position with the other expression viz., “from the export of such goods or merchandise”. While appreciating the deduction claimed as profits of a business, the test is whether the income/ profit is derived from the export of such goods/ merchandise.

The Supreme Court observed that the relevant words in Section 80HHC of the Act, are, “derived by the Assessee from the export of such goods or merchandise”, and in the background of interpretation given to the said expression by it in catena of cases, the Section enables deduction to the extent of profits derived by the Assessee from the export of such goods and merchandise and none else.

The Supreme Court observed that the policy behind the deductions of profits from the business of exports was to encourage and incentivise export trade. Through Section 80HHC, the Parliament restricted the deduction of profit from the Assessee’s export of goods/ merchandise. According to the Supreme Court, the interpretation now suggested by the Assessee would add one more source to the sources stated in Section 80HHC of the Act. Such a course was impermissible. The strict interpretation was in line with a few relative words, namely, manufacturer, exporter, purchaser of goods, etc. adverted to in Section 80HHC of the Act. From the requirements of Sub-sections (2) and (3) of Section 80HHC, it should be held that the deduction was intended and restricted only to profits of the business of export of goods and merchandise outside India by the Assessee. Therefore, including other income as an eligible deduction would be counter-productive to the scope, purpose, and object of Section 80HHC of the Act.

By applying the meaning of the words “derived from”, as held in the catena of cases, the Supreme Court was of the view that profits earned by the Assessee due to price fluctuation, in the facts and circumstances of this case, could not be included or treated as derived from the business of export income of the Assessee.

The Supreme Court concluded that the gain from foreign exchange fluctuations from the EEFC account does not fall within the meaning of “derived from” the export of garments by the Assessee. The profit from exchange fluctuation is independent of export earnings.

The Supreme Court consequently dismissed the appeal.

BCAJ Admin

Glimpses of Supreme Court Rulings

53 Kotak Mahindra Bank Limited vs. Commissioner of Income Tax, Bangalore (2023) 458 ITR 113(SC)

Settlement Commission — Immunity from prosecution and penalty as contemplated — Section 245H — Based on such disclosures and on noting that the Appellant co-operated with the Commission in the process of settlement, the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act — The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act.

The facts giving rise to the present appeal, in a nutshell, are that the Appellant-Assessee, Kotak Mahindra Bank Limited (formerly, “M/s. ING Vysya Bank Limited”) is a Public Limited Company carrying on the business of banking and is assessed to tax in Bangalore where its registered office is located. Apart from the business of banking, the Appellant also carries out leasing business on receiving approval from the Reserve Bank of India (hereinafter “RBI” for short) vide Circular dated 19th February, 1994. Thus, the Appellant derives its income, inter alia, from banking activities as well as from leasing transactions.

The Appellant filed its income tax returns for the assessment years 1994–1995 to 1999–2000, and assessment orders were passed up to the assessment year 1997–1998 and the assessment for the subsequent years was pending. During the assessment proceedings for the assessment year 1997–1998, the Assessing Officer (AO) made certain additions and disallowances based on which the assessment already concluded for the assessment years 1994–1995 to 1996–1997 were proposed to be reopened. The AO then passed an Assessment Order dated 30th March, 2000, for the assessment year 1997–1998. The main issue pertained to the income with respect to the activity of leasing. As per the Assessment Order, the Appellant had been accounting for lease rental received, by treating the same as a financial transaction. As a result, the lease rental was bifurcated into a capital repayment portion and an interest component. Only the interest component was offered to tax. In other words, the Appellant treated such leases as loans granted to the “purported” lessees to purchase assets. In such cases, the ownership of the assets is vested with the lessees. However, the Appellant claimed depreciation on those assets under Section 32 of the Income-tax Act, 1961 (“the Act”) though the Appellant was not the owner of the assets for the purpose of the said transactions.

On 9th June, 2000, the AO issued a notice under Section 148 of the Act for the reassessment of income for the aforesaid assessment years. The AO also passed a penalty order dated 14th June, 2000, levying a penalty under Section 271(1)(c) of the Act, after being satisfied that the Appellant had concealed its income as regards lease rental.

While various proceedings, such as an appeal before the CIT(A) for the assessment year 1997–1998, re-assessment proceedings for the assessment years 1994–1995 to 1996–1997 and regular assessment proceedings for the assessment years 1998–1999 and 1999–2000 were pending before various income tax authorities, the Appellant, on 10th July, 2000, approached the Settlement Commission at Chennai to settle its income tax liabilities under Section 245C(1) of the Act. The Appellant sought for determination of its taxable income for the assessment years 1994–1995 to 1999–2000, after considering the issues pertaining to the income assessable in respect of its leasing transaction; eligibility to avail depreciation in respect of leased assets; the quantum of allowable deduction under Section 80M and exemption under Sections 10(15) and 10(23G); and depreciation on the investments portfolio of the bank classified as permanent investments.

When matters stood thus, the concluded assessments for earlier assessment years were reopened by the issuance of notices under Section 148 of the Act. The Appellant filed returns under protest with respect to the said assessment years.

Before the Settlement Commission, the Respondents-Revenue raised a preliminary objection contending that the Appellant did not fulfil the qualifying criteria as contemplated under Section 245C(1) and, hence, the application filed by the Appellant was not maintainable, as, under the said provision, the Appellant was required to make an application in the prescribed manner containing full and true disclosure of its income which had not been disclosed before the AO and also the manner in which such income had been derived. That unless there is a true and full disclosure there would be no valid application and the Settlement Commission will not be able to assume jurisdiction to proceed with the admission of the application. It was thus contended that the purported application made before the Settlement Commission was not an application as contemplated under Section 245C(1) of the Act for the reason that the Appellant had not made a full and true disclosure of its income which had not been disclosed before the AO.

After considering the contentions of both parties, the Settlement Commission passed an Order dated 11th December, 2000, entertaining the application filed by the Appellant under Section 245C and rejecting the preliminary objections raised by the Revenue. The Settlement Commission allowed the application filed by the Appellant by way of a speaking order and permitted the Appellant to pursue its claim under Section 245D. Thus, the application proceeded further under Section 245D(1) of the Act.

The Revenue challenged the Order dated 11th December, 2000, passed by the Settlement Commission before the High Court of Karnataka at Bangalore by way of Writ Petition No. 13111 of 2001. The Revenue questioned the jurisdiction of the Settlement Commission in entertaining the application filed by the Appellant under Section 245C(1) of the Act.

The learned Single Judge of the High Court of Karnataka, after going through the legislative history of the provisions of Chapter-XIXA, accepted the argument advanced by the Appellant that the proviso to Section 245C as it stood earlier, which enabled the Commissioner to raise an objection even at the threshold to entertain an application of this nature had been later shifted to sub-section (l)(A) of Section 245D and from the year 1991, it had been totally omitted, and in the light of such legislative history, it was not open to the Revenue to raise any such preliminary objection regarding maintainability of the application itself. It was further held that the application can be proceeded with by the Settlement Commission for determination of the same on merits and it was not necessary that the Revenue should be permitted to raise a preliminary objection as to the maintainability of the application.

The learned Single Judge disposed of the above Writ Petition by way of an Order dated 18th August, 2005, in favour of the Appellant herein by holding that notwithstanding any preliminary finding, it was still open to the Commissioner to agitate or to apprise the Commission of all the aspects of the matter that he may find fit to be placed before the Commission. The Single Judge was of the view that it was not necessary to examine the legal position that may require an interpretation of provisions of Section 245C at that stage when the matter itself was still at large before the Settlement Commission as the very object of Chapter-XIXA was to settle cases and to reduce the disputes and not to prolong litigation. Thus, the High Court disposed of the Writ Petition, holding that it was open to the parties to raise all their contentions before the Commission at the stage of disposal of the application and the Commission may, independent of the findings which it has given under the Order dated 11th December, 2000, examine all the contentions and proceed to pass orders on merits in accordance with the provisions of the Act.

As a result of the Order dated 18th August, 2005, passed by the High Court of Karnataka, the Settlement Commission heard both parties on merits as well as on the issue of maintainability. The Settlement Commission upheld the maintainability of the application filed by the Appellant and passed an Order dated 4th March, 2008, under Sections 245D(1) and 245D(4), determining the additional income at ₹196,36,06,201. As regards the issue of immunity from penalty and prosecution, the Commission, having regard to the fact that the Appellant had co-operated in the proceedings before the Settlement Commission, and true and full disclosure was made by the Appellant before the Commission, granted immunity under Section 245H(1) from the imposition of penalty and prosecution under the Act and the relevant Sections of the Indian Penal Code. Further, the Settlement Commission annulled the penalty levied by the AO under Section 271(1)(c) for the assessment year 1997–1998 in respect of non-disclosure of lease rental income. The same was annulled considering that the non-disclosure was on account of RBI guidelines and subsequent disclosure on the part of the Appellant, of additional income of the lease income before the Settlement Commission when the Appellant realised the omission to disclose the same as per income tax law.

Being aggrieved by the Order dated 4th March, 2008, passed by the Settlement Commission, the Respondent-Revenue preferred Writ Petition bearing No. 12239 of 2008 (T-IT) before the High Court of Karnataka assailing the said Order. The learned Single Judge of the High Court vide Order dated 20th May, 2010, upheld the Order of the Settlement Commission as regards the jurisdiction to entertain the application and also as regards the correctness of the Order passed by the Settlement Commission in determining the tax liability, but found fault with the Commission in so far as granting immunity to the Appellant from the levy of penalty and initiation of prosecution was concerned. The Single Judge was of the view that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles and that the burden was on the Appellant herein to prove that there was no concealment or wilful neglect on its part and in the absence of such evidence before the Settlement Commission, the Order granting immunity from penalty and prosecution was an illegal order. The learned Single Judge, thus, remanded the matter to the Settlement Commission for the limited purpose of reconsidering the question of immunity from levy of penalty and prosecution and the Order of the AO levying penalty, after providing an opportunity to both parties.

Being aggrieved by the remand order passed by the learned Single Judge, the Appellant preferred Writ Appeal No. 2458 of 2018 before a Division Bench of the High Court.

In the meanwhile, Revenue preferred Special Leave Petition (C) CC No. 19663 of 2010 before the Supreme Court against the Order dated 20th May, 2010, passed by the learned Single Judge in Writ Petition No. 12239 of 2008. On 6th January, 2012, the Supreme Court directed the Special Leave Petition to stand over for eight weeks and directed the Settlement Commission to dispose of the matter remanded to it by the High Court. In pursuance of the Order dated 6th January, 2012, passed by this Court, the Settlement Commission, Chennai, issued a notice in the remanded matter on 30th January, 2012.

On 10th February, 2012, the Appellant moved an application before the Supreme Court seeking modification of its Order dated 6th January, 2012, by issuing a direction to the High Court to dispose of Writ Appeal No. 2458 of 2010. It was contended that the filing of a Special Leave Petition against the order of the learned Single Judge was not proper as a Writ Appeal should have been filed. That admittedly, Writ Appeal No. 2458 of 2010 was pending before the High Court and the Revenue suppressed this vital information while filing the Special Leave Petition. The Supreme Court by way of an Order dated 21st February, 2012, recalled its earlier Order dated 6th January, 2012, passed in SLP (C) CC No. 19663 of 2010 and directed the High Court to dispose of Writ Appeal No. 2458 of 2010 within a period of two months.

Following the same, a Division Bench of the High Court of Karnataka vide Order dated 6th July, 2012, dismissed the Writ Appeal preferred by the Appellant and upheld the Order passed by the learned Single Judge. It was observed that the Order of the learned Single Judge remanding the matter to the Settlement Commission for adjudication did not suffer from any material irregularity or illegality.

Aggrieved by the judgment dated 6th July, 2012, in Writ Appeal No. 2458 of 2010, the Appellant has preferred Civil Appeal before the Supreme Court.

According to the Supreme Court, the following points emerged for its consideration:

“Whether the Division Bench of the High Court was right in affirming the findings of the learned Single Judge, to the effect that the Settlement Commission ought not to have exercised discretion under Section 245H of the Act and granted immunity to the Assessee de hors any material to demonstrate that there was no wilful concealment on the part of the Assessee to evade tax and on that ground, remanding the matter to the Commission for fresh consideration?”

The Supreme Court found that in the present case, the Settlement Commission had rightly considered the relevant facts and material and, accordingly, decided to grant immunity to the Appellant from prosecution and penalty. The Supreme Court arrived at this conclusion having regard to the following aspects of the matter, recorded by the Settlement Commission:

The Commission in its order dated 4th March, 2008, had noted that the Appellant had realised while adhering to the RBI guidelines of accounting of lease income that there was an error in not disclosing the full lease rental receipts as per income tax law. Thus, the Appellant offered additional income under various heads, which were not considered by the AO. Considering the nature and circumstances and the complexities of the investigation involved, the Commission was of the view that the application was to proceed under Section 245D(1) of the Act and that prima facie, a full and true disclosure of income not disclosed before the AO had been made by the Appellant. The findings of the Commission to this effect are usefully extracted as under:

“4.3 We have considered the rival submissions. We are of the opinion that there is no bar for banking companies to approach the Commission. The disclosure of the material facts in the return of income or the documents accompanying return of income is not a bar for the applicant to approach the Commission. In view of this, we hold that the applicant is eligible to approach the Commission.
…

5.1 Finally we have carefully gone through the settlement application and the confidential annexures and are satisfied that the complexities of investigation as brought out in the application do exist. We have also considered the nature and circumstances of the case as explained by the applicant’s representative. The applicant is an established scheduled bank with several branches. The applicant has realized that when adhering to RBI guidelines of accounting of lease income there was an error in not disclosing the full lease rental receipts as per income tax law. In addition the applicant has offered additional income under various heads not considered by the Assessing Officer. We are satisfied that the nature and circumstances and the complexities of investigation involved do warrant the application to be proceeded with under Section 245D(1) of the Act. We are also reasonably satisfied that, prima facie, a full and true disclosure of income not disclosed before the Assessing Officer has been made by the applicant. Additionally, taking a practical view of the case, we are also concerned by the time taken to dispose of this application, particularly in respect of a scheduled bank. We feel that the matters need to be given a quietus and brought to close as speedy collection of taxes is also an important function of the Settlement Commission. We therefore allow the application to be proceeded with Under Section 245D(1) of the Act.”

According to the Supreme Court, the aforesaid findings of the Settlement Commission demonstrated that it had applied its mind to the aspect of whether there was wilful concealment of income by the Assessee. Having noted that non-disclosure was on account of RBI guidelines, which required a different standard of disclosure, the Commission decided to grant immunity to the Appellant from prosecution and penalty.

In the light of the aforesaid discussion, the Supreme Court was of the view that the learned Single Judge of the High Court was not right in holding that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles. The Division Bench was also not justified in affirming such a view of the learned Single Judge. The Supreme Court was of the view that the Commission had adequately applied its mind to the circumstances of the case, as well as to the relevant law and accordingly exercised its discretion to proceed with the application for settlement and grant immunity to the Assessee from penalty and prosecution. The Order of the Commission dated 4th March, 2008, did not suffer from such infirmity as would warrant interference by the High Court, by passing an order of remand.

The Supreme Court concluded that in the present case, the Appellant placed material and particulars before the Commission as to the manner in which income pertaining to certain activities was derived and has sought to offer such additional income to tax. Based on such disclosures and on noting that the Appellant co-operated with the Commission in the process of settlement, the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act. The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act.

The Supreme Court was of the view that the Order of the Settlement Commission dated 4th March, 2008, was based on a correct appreciation of the law, in light of the facts of the case and the High Court ought not to have interfered with the same. Therefore, the judgment dated 6th July, 2012, passed by the High Court of Karnataka at Bangalore in Writ Appeal No. 2458 of 2010 whereby the judgment of the learned Single Judge dated 20th May, 2010, passed in Writ Petition No. 12239 of 2008, remanding the matter to the Settlement Commission to determine afresh, the question as to immunity from levy of penalty and prosecution was affirmed, was set aside by the Supreme Court. Consequently, the order of the learned Single Judge was also set aside. The Order of the Settlement Commission dated 4th March, 2008, was restored. The appeal was accordingly allowed.

54 Director of Income Tax, New Delhi vs. Travelport Inc. Civil
(2023) 454 ITR 289 (SC)

India-USA DTAA – Article 7 — Under Explanation 1(a) under clause (i) of Sub-section (1) of Section 9 of the Income-tax Act, 1961, what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India — What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact — Article 7 of DTAA is of no assistance as the entire income was taxable in contracting state.

Before the Supreme Court, the Respondents in the appeals before it were in the business of providing electronic global distribution services to Airlines through what is known as “Computerized Reservation System” (hereinafter referred to as CRS). For the said purpose, the Respondents maintain and operate a Master Computer System, said to consist of several mainframe computers and servers located in other countries, including the USA. This Master Computer System is connected to airlines’ servers, to and from which data is continuously sent and obtained regarding flight schedules, seat availability, etc.

In order to market and distribute the CRS services to travel agents in India, the Respondents had appointed Indian entities and had entered into distribution agreements with them.

The Respondents earned an amount of USD 3 / EURO 3 accordingly, as the case may be, per booking made in India. Out of the said earnings, of USD 3 / EURO 3, the Respondents paid various amounts to the Indian entities, which ranged from USD / EURO 1 to USD / EURO 1.8. In other words, the amount paid by the Respondents to their Indian entities ranged from 33.33 per cent to about 60 per cent of their total earnings.

The respective Assessing Officers in the original proceedings came to the conclusion that the entire income earned out of India by the Respondents was taxable. This was on the basis that the income was earned through the hardware installed by the Respondents in the premises of the travel agents and that, therefore, the total income of USD / EURO 3 was taxable.

The orders of assessment so passed were upheld by the respective Commissioners of Income Tax (Appeals) by independent orders.

Appeals were filed by the Respondents before the Tribunal and the Revenue also filed cross objections on a different aspect. The Tribunal held that the Respondents herein constitute Permanent Establishment (PE) in two forms, namely, fixed place PE and dependent agent PE (DAPE). At the same time, the Tribunal also held that the lion’s share of activity was processed in the host computers in USA / Europe and that the activities in India were only minuscule in nature. Therefore, as regards attribution to the PE constituted in India, the Tribunal assessed it at 15 per cent of the revenue and held, on the basis of the functions performed, assets used and risks undertaken (FAR), that this 15 per cent of the total revenue was the income accruing or arising in India. This 15 per cent worked out to 0.45 cents. However, the payment made to the distribution agents was USD 1 / EURO 1 in many cases and much more in some cases. Therefore, the Tribunal held that no further income was taxable in India.

The Revenue filed miscellaneous applications, but the same were dismissed by the Tribunal, clarifying that after apportioning the revenue, no further income was taxable in India, as the remuneration paid to the agent in India exceeded the apportioned revenue.

Appeals were filed both by the Revenue and Assesses against the orders of the Tribunal before the Delhi High Court. The Delhi High Court dismissed the appeals filed by the Revenue on the grounds that no question of law arose in these matters. The Delhi High Court held that insofar as attribution is concerned, the Tribunal had adopted a reasonable approach.

Aggrieved by the orders passed by the Delhi High Court, the Revenue has come up with the above appeals.

Assailing the judgment of the High Court, it was argued by the learned Additional Solicitor General: (i) that the attribution of only 15 per cent of the revenue as income accruing / arising in India within the meaning of Section 9(1)(i) of the Income-tax Act, 1961 read with Article 7 of the Treaty, was completely wrong; and (ii) that the computers placed in the premises of the travel agents and the nodes / leased lines form a fixed place PE of the Respondent in India.

The Supreme Court was of the view that there was no need to go into the second contention of the learned Additional Solicitor General because the approach of the Tribunal and the High Court on the question of attribution appears to be fair and reasonable.

So far as the first contentions were concerned, the Tribunal had arrived at the quantum of revenue accruing to the Respondent in respect of bookings in India, which could be attributed to activities carried out in India, on the basis of FAR analysis (functions performed, assets used and risks undertaken). The Commission paid to the distribution agents by the Respondents was more than twice the amount of attribution, and this had already been taxed. Therefore, the Tribunal had rightly concluded that the same extinguished the assessment.

Further, the question as to what proportion of profits arose or accrued in India was essentially one of the facts. Therefore, according to the Supreme Court, the concurrent orders of the Tribunal and the High Court did not call for any interference.

The Supreme Court observed that under Explanation 1(a), under clause (i) of Sub-section (1) of Section 9
of the Income-tax Act, 1961, what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India. What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact. On this question of fact, the Tribunal had taken into account relevant factors.

According to the Supreme Court, Article 7 of the India-USA DTAA also may not really come to the rescue of the Revenue for the reason that in the contracting state, the entire income derived by the Respondents, namely, USD / EURO 3 would be taxable. That is why Section 9(1) confines the taxable income to that proportion which is attributable to the operations carried out in India.

Therefore, the Supreme Court was of the view that the impugned order(s) of the High Court did not call for interference. Insofar as the second issue, namely, the question of permanent establishment was concerned, the Supreme Court did not go into the same, as it had concurred with the High Court on the first issue.

All the appeals filed by the Appellant-Department of Income Tax were, therefore, dismissed.

BCAJ Admin

Glimpses of Supreme Court Rulings

51 Principal Commissioner of Income Tax vs. Krishak Bharti Cooperative Ltd. (2023) 458 ITR 190 (SC)

Double Taxation Avoidance — Assessee was entitled to credit for the tax, which would have been payable in Oman even though a dividend, being an incentive in Oman to promote development in that country, was exempt in Oman — DTAA between India and Oman, Article 25.

The Assessee, a multi-State Co-operative Society, is registered in India under the administrative control of the Department of Fertilizers, Ministry of Agriculture and Co-operation, Government of India. In the course of its business of manufacturing fertilisers, it entered into a joint venture with Oman Oil Company to form the Oman Fertilizer Company SAOC (for short ‘OMIFCO’ or ‘the JV’), a registered company in Oman under the Omani laws. The Assessee has a 25 per cent share in the JV. The JV manufactures fertilizers, which are purchased by the Central Government. The Assessee has a branch office in Oman which is independently registered as a company under the Omani laws having permanent establishment status in Oman in terms of Article 25 of the DTAA. The branch office maintains its own books of account and submits returns of income under the Omani income tax laws.The assessment for the relevant year was completed under Section 143(3) of the Income Tax Act, 1961 (‘the Act’). The Assessing Officer allowed a tax credit in respect of the dividend income received by the Assessee from the JV. The dividend income was simultaneously brought to the charge of tax in the assessment as per the Indian tax laws. However, under the Omani tax laws, exemption was granted to the dividend income by virtue of the amendments made in the Omani tax laws w.e.f. the year 2000.

The Assessing Officer allowed credit for the said tax, which would have been payable in Oman, but for which exemption was granted.

Thereafter, the Principal Commissioner of Income Tax (‘PCIT’) issued a show cause notice under Section 263 of the Act on the ground that the reliance placed on Article 25(4) of DTAA was erroneous in this case, and no tax credit was due to the Assessee under Section 90 of the Act. This notice was duly replied to by the Assessee. However, the PCIT rejected all the contentions raised by the Assessee inter alia holding that Article 25 of Omani tax laws was not applicable in the instant case because there was no tax payable on dividend in Oman and, accordingly, no tax has been paid and that Assessee was not covered under the exemption.

Questioning the order of PCIT, the Assessee preferred an appeal before the Income Tax Appellate Tribunal (‘ITAT’), which allowed the appeal holding that the order passed by the PCIT under Section 263 of the Act was without jurisdiction and was not sustainable in law.

The order passed by the ITAT was challenged before the Delhi High Court by preferring an Income Tax Appeal, which had been dismissed by the High Court by the impugned judgment holding that as per the relevant terms of the DTAA between India and Oman, the Assessee was entitled to claim the tax credit, which had been rightly allowed by the Assessing Officer.

On further appeal by the Revenue, the Supreme Court noted that Article 25 (2) of the DTAA provides that where a resident of India derives income, which in accordance with this agreement, may be taxed in the Sultanate of Oman, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax paid in the Sultanate of Oman, whether directly or by deduction. Article 25(4) clarifies that the tax payable in a Contracting State mentioned in Clause 2 and Clause 3 of the said Article shall be deemed to include the tax which would have been payable but for the tax incentive granted under the laws of the Contracting State and which are designed to promote development.

The Supreme Court noted that the revenue was relying upon Article 11 which provides that dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. Thus, according to the revenue, the dividend received by the Assessee was taxable in India and was not exempt because the same was not designed as a tax incentive in Oman to promote development in that country. In the same manner, it was argued that the letter issued by the Secretary General for Taxation, Ministry of Finance, Oman was not issued by the competent Omani authority and has no statutory force.

The Supreme Court observed that the term ‘incentive’ is neither defined in the Omani Tax Laws nor in the Income Tax Act, 1961. Faced with this situation, the JV addressed a letter in November, 2000 to Oman Oil Company seeking clarification regarding the purpose of Article 8(bis) of the Omani Tax Laws. The clarification letter dated 11th December, 2000, was addressed by the Secretary General for Taxation, Sultanate of Oman, Ministry of Finance, Muscat to Oman Oil Company SAOC.

The Supreme Court noted that the said letter of the Omani Finance Ministry clarified that the dividend distributed by all companies, including the tax-exempt companies would be exempt from payment of income tax in the hands of the recipients. By extending the facility of exemption, the Government of Oman intends to achieve its objective of promoting development within Oman by attracting investments. Since the Assessee had invested in the project by setting up a permanent establishment in Oman, as the JV was registered as a separate company under the Omani laws, it was aiding in promoting the economic development within Oman and achieving the object of Article 8 (bis). The Omani Finance Ministry concluded by saying that tax would be payable on dividend income earned by the permanent establishments of the Indian Investors, as it would form part of their gross income under Article 8, if not for the tax exemption provided under Article 8(bis).

According to the Supreme Court, a plain reading ofArticle 8 and Article 8(bis) would manifest that underArticle 8, dividend is taxable, whereas, Article 8(bis) exempts dividend received by a company from its ownership of shares, portions, or shareholding in the share capital in any other company. Thus, Article 8(bis) exempts dividend tax received by the Assessee from its PE in Oman and by virtue of Article 25, the Assessee was entitled to the same tax treatment in India as it received in Oman.

Insofar as the argument concerning the Assessee not having PE in Oman, the Supreme Court noted that from the year 2002 to 2006, a common order was made under Article 26(2) of the Income Tax Law of Oman. The High Court had extracted the opening portion of the above order. From the said letter it was apparent that the Assessee’s establishment in Oman had been treated as PE from the very inception up to the year 2011. According to the Supreme Court, there was no reason as to why all of a sudden, the Assessee’s establishment in Oman would not be treated as PE when for about 10 years it was so treated, and that the tax exemption was therefore granted based upon the provisions contained in Article 25 read with Article 8(bis) of the Omani Tax Laws.

The Supreme Court also dealt with the contention raised by the Appellant to the effect that the letter dated 11th December, 2000, issued by the Secretary General for Taxation, Ministry of Finance, Sultanate of Oman had no statutory force as per Omani Tax Laws, hence, the same could not be relied upon to claim exemption. The Supreme Court was of the view that the above letter was only a clarificatory communication interpreting the provisions contained in Article 8 and Article 8(bis) of the Omani Tax Laws. The letter itself did not introduce any new provision in the Omani Tax Laws. In this view of the matter, the Supreme Court was not convinced that the argument raised by the Appellant would lead it to deny exemption to the Assessee.

The Supreme Court concluded that the Appellant had not been able to demonstrate as to why the provisions contained in Article 25 of DTAA and Article 8(bis) of the Omani Tax Laws would not be applicable and, consequently, it held that the appeals had no substance and therefore dismissed.

52 Kerala State Co-operative Agricultural and Rural Development Bank Ltd. vs. The Assessing Officer, Trivandrum and Ors. (2023) 458 ITR 384 (SC)

Deduction in respect of income of co-operative societies — Section 80P — If a co-operative society is not a co-operative bank, then such an entity would be entitled to deduction under Sub-section (2) of Section 80P of the Act but on the other hand, if it is a co-operative bank within the meaning of Section 56 of Banking Regulation Act, 1949 read with the provisions of NABARD Act, 1981 then it would not be entitled to the benefit of deduction in view of Sub-section (4) of Section 80P of the Act.

The Appellant / Assessee, a State-level Agricultural and Rural Development Bank was governed as a co-operative society under the Kerala Co-operative Societies Act, 1969 (“State Act, 1969”) and is engaged in providing credit facilities to its members who are co-operative societies only.

The Kerala State Co-Operative Agricultural Development Banks Act, 1984 (“State Act, 1984”) was passed ‘to facilitate the more efficient working of Co-operative “Agricultural and Rural Development Banks” in the State of Kerala.’

On 27th October, 2007, the Appellant / Assessee filedits Return of Income for the Assessment Year 2007-08 of Rs.27,18,052 claiming deduction under Section 80P(2)(a)(i) of the Act.

Upon scrutiny, on 22nd December, 2009, an Assessment Order under Section 143(3) of the Act, was passed by the Assessing Officer for the Assessment Year 2007-08, disallowing the deduction of Rs.36,39,87,058 under Section 80P(2)(a)(i) holding that the Appellant / Assessee was neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank. The Assessing Officer held the Appellant / Assessee was a “co-operative bank” and thus, was hit by the provisions of Section 80(P)(4) and was not entitled to the benefit of Section 80(P)(2) of the Act. The total income was assessed at Rs.36,69,47,233.

Aggrieved by the Assessment Order dated 27th December, 2009, the Appellant / Assessee filed an appeal before the Commissioner of Income Tax (Appeals) (“CIT(A)”).

The CIT(A) vide Order dated 30th July, 2010 confirmed the disallowance made by the Assessing Officer. The CIT (A) was of the view that the Appellant / Assessee was actively playing the role of a development bank in the State and was no longer a land mortgage bank but was a development bank. CIT(A) further observed that with the insertion of Section 80P(4), co-operative banks are placed at par with other commercial banks and the Appellant / Assessee who was in the business of banking through its primary co-operative banks was definitely a co-operative bank within the meaning of Section 80P(4). Consequently, the appeal was dismissed.

Being aggrieved by the Order passed by CIT(A), the Appellant / Assessee filed a further appeal before the Income Tax Appellate Tribunal (“ITAT”).

The ITAT vide Order dated 23rd February, 2011, partly allowed the appeal. The ITAT held that the Appellant / Assessee was a co-operative bank and was not a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Hence, it was consequently hit by the provision of Section 80P(4) and thus, the deduction claimed was rightly denied. However, the ITAT clarified that to the extent that the Appellant / Assessee was acting as a State Land Development Bank which fell within the purview of the National Bank for Agriculture and Rural Development Act, 1981 (“NABARD Act, 1981”,) and was eligible for financial assistance from NABARD, the Appellant / Assessee’s claim merited acceptance and it would be entitled to deduction under Section 80P(2)(a)(i) on the income relatable to its lending activities as such a bank.

Aggrieved by the Order passed by the ITAT in only partly allowing its appeal, the Appellant / Assessee preferred an appeal against the ITAT’s Order dated 23rd February, 2011. The issue raised by the Appellant / Assessee was with respect to the ITAT’s finding that the Appellant / Assessee was neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank, hence, not entitled to the exemption of its income under Section 80P(2)(a)(i) of the Act.

On 26th November, 2015, the Kerala High Court dismissed the Assessee’s Appeal, holding that the ITAT’s findings did not warrant any interference as the case did not involve any substantial question of law.

Against the judgment dated 26th November, 2015, the Appellant / Assessee preferred a Special Leave Petition (C) bearing No. 2737 of 2016. The Supreme Court vide Order dated 1st February, 2016, issued notice and granted a stay of recovery of demand made by the Income Tax Authorities from the Appellant / Assessee for the A.Y. 2007-08.

The Supreme Court observed that Section 80P speaks about deduction in respect of income of co-operative societies from the gross total income referred to in Sub-section (2) of the said Section. From the said income, there shall be deducted, in accordance with the provisions of Section 80P, sums specified in Sub-section (2), in computing the total income of the Assessee for the purpose of payment of income tax. Sub-section (2) of Section 80P enumerates various kinds of co-operative societies. Sub-section (2)(a)(i) states that if a co-operative society is engaged in carrying on the business of banking or providing credit facilities to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities shall be deducted. The Sub-section makes a clear distinction between the business of banking on the one hand and providing credit facilities to its members by co-operative society on the other.

The Supreme Court noted that while Section 80P was inserted into the Act with effect from 1st April, 1968, however, Sub-section (4) was reinserted with effect from 1st April, 2007, in the present form. Earlier Sub-section (4) was omitted with effect from 1st April, 1970.

The Supreme Court noted the objects and reasons for the insertion of sub-section (4) to Section 80P of the Act by referring to the speech of the Finance Minister dated 28th February, 2006, CBDT Circular dated 28th December, 2006, containing explanatory notes on provisions contained in the Finance Act, 2006 and clarification by the CBDT, in a letter dated 9th May, 2008, and observed that the limited object of Section 80-P(4) was to exclude co-operative banks that function on a par with other commercial banks i.e. which lend money to members of the public.

The Supreme Court noted that a co-operative bank is defined in Section 56 (c)(i)(cci) of the Banking Regulation Act, 1949 to be a state co-operative bank, a central co-operative bank and a primary co-operative bank and central co-operative bank and state co-operative bank to have the same meanings as under the NABARD Act, 1981.

The Supreme Court further noted that Section 2(d) of NABARD Act, 1981 defines central co-operative bank while Section 2(u) defines a state co-operative bank to mean the principal co-operative society in a State, the primary object of which is financing of other co-operative societies in the State, which means it is in the nature of an apex co-operative bank having regard to the definition under Section 56 of the Banking Regulation Act, 1949, in relation to co-operative bank. The proviso states that in addition to such principal society in a State, or where there is no such principal society in a State, the State Government may declare any one or more co-operative societies carrying on the business of banking in that State to be also or to be a state co-operative bank or state co-operative banks within the meaning of the definition. Section 2(v) of NABARD Act, 1981 defines a state land development bank to mean the co-operative society which is the principal land development bank (by whatever name called) in a State and which has as its primary object the providing of long-term finance for agricultural development.

The Supreme Court also noted that as per Clause (c) of Section 5 of the Banking Regulation Act, 1949, a banking company is defined as any company which transacts the business of banking in India. Clause (b) of Section 5 of the Banking Regulation Act, 1949 defines banking business to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Thus, it is only when a co-operative society is conducting banking business in terms of the definition referred to above that it becomes a co-operative bank. In such a case, Section 22 of the Banking Regulation Act, 1949 would apply wherein it would require a licence to run a co-operative bank. In other words, if a co-operative society is not conducting the business of banking as defined in Clause (b) of Section 5 of the Banking Regulation Act, 1949, it would not be a co-operative bank and not so within the meanings of a state co-operative bank, a central co-operative bank or a primary co-operative bank in terms of Section 56(c)(i)(cci).

According to the Supreme Court, if a co-operative society is not a co-operative bank, then such an entity would be entitled to deduction under Sub-section (2) of Section 80P of the Act but on the other hand, if it is a co-operative bank within the meaning of Section 56 of Banking Regulation Act, 1949 read with the provisions of NABARD Act, 1981 then it would not be entitled to the benefit of deduction in view of Sub-section (4) of Section 80P of the Act.

According to the Supreme Court, a co-operative society which is not a state co-operative bank within the meaning of the NABARD Act, 1981 would not be a co-operative bank within the meaning of Section 56 of the Banking Regulation Act, 1949. In the instant case, in A.P. Varghese vs. The Kerala State Co-operative Bank Ltd. reported in AIR 2008 Ker 91, the Kerala State Co-operative Bank being declared as a state co-operative bank by the Kerala State Government in terms of NABARD Act, 1981 and the Appellant society not being so declared, would imply that the Appellant society was not a state co-operative bank.

The Supreme Court thus concluded that although the Appellant society was an apex co-operative society within the meaning of the State Act, 1984, it was not a co-operative bank within the meaning of Section 5(b) read with Section 56 of the Banking Regulation Act, 1949. The Appellant was thus not a co-operative bank within the meaning of Sub-section (4) of Section 80P of the Act. The Appellant was a co-operative credit society under Section 80P(2)(a)(i) of the Act whose primary object was to provide financial accommodation to its members who were all other co-operative societies and not members of the public. Consequently, the Appellant was entitled to the benefit of deduction under Section 80P of the Act.

BCAJ Admin

Glimpses of Supreme Court Rulings

48 Magnum International Trading Co. (P) Ltd vs. Commissioner of Income Tax, Delhi II

[2023] 454 ITR 141 (SC)

Exports – Special deduction — Section 80 HHC — Amendments made to Section 80-HHC(3) of the 1961 Act vide Finance (No. 2) Act, 1991, substituting Sub-section (3) to Section 80-HHC of the 1961 Act and prescribing a different formula, are applicable with effect from 1st April, 1992 and the amendments do not have a retrospective effect — Profits on sale of shares having been taxed as profits and gains of business should be treated as income from business for computation under clause (b) to section 80HHC(3) and should also be included in the total turnover — Surplus funds when deposited in bank or otherwise to earn interest are not taxable under head income from business and could not be considered for computation of deduction under section 80HHC.

Before the Supreme Court, the question raised pertained to the computation of deduction under Section 80-HHC of the Income-tax Act, 1961, as applicable to the aforesaid assessment years 1989-90, 1990-01 and 1991-92.

The Supreme Court noted that in the assessment year 1989-1990, the Assessing Officer had excluded the interest income of ₹1,03,28,913 and income from the sale of shares of ₹1,15,52,953 while computing the deduction under Section 80-HHC of the Act in terms of the proportionality formula prescribed under Sub-section (b) to Section 80-HHC(3) of the Act.

The Supreme Court observed that in P R Prabhakar vs. Commissioner of Income Tax, Coimbatore [2006] 284 ITR 548 (SC) it has been held that the amendments made to Section 80-HHC(3) of the Act vide Finance (No. 2) Act, 1991, substituting sub-section (3) to Section 80-HHC of the Act and prescribing a different formula, were applicable with effect from 01.04.1992. The amendments did not have a retrospective effect.

According to the Supreme Court, on the question of treatment/ head of income from the sale of shares, the Assessing Officer has contradicted himself. In the assessment order, after a detailed discussion, on the one hand, it had been held that income from the sale of shares was income from ‘profits and gains of business or profession’, which was not taxable as ‘income from capital gains’, yet for the purpose of computation of deduction under Section 80-HHC(3) of the Act, income from sale of shares had not been treated as ‘income from business’.

In view of the finding, as recorded by the Assessing Officer, on the head under which income from sale of shares was taxable, which finding has attained finality, the Supreme Court had no difficulty in accepting the plea and stand of the Assessee, that income from the sale of shares should be treated as ‘income from business’ for computation of deduction under Clause (b) to Section 80-HHC(3) of the Act.

The Supreme Court clarified that, once the income from the sale of shares is to be included under the head ‘income from business’, the amount will also be included in the total turnover of the business.

With regard to interest income, the Supreme Court agreed with the stand of the Revenue that this income should be taxed as ‘income from other sources’. The Supreme Court noted that the Commissioner of Income Tax (Appeals) had reversed the findings given by the Assessing Officer on the ground that the surplus funds had been utilised for earning interest income. He held that surplus funds were ‘transitory surplus funds’ and utilisation of the same for earning interest income cannot take away the character of ‘business income’ from such interest. According to the Supreme Court, this finding is fallacious and wrong. The surplus funds, when deposited in a bank or otherwise to earn interest, are not taxable under the head ‘income from business’, but under the head ‘income from other sources’. This income does not have a direct nexus nor is earned by way of business activity. Accordingly, the interest income is not to be treated as ‘income from business’ for computation of the deduction in terms of Clause (b) to Section 80-HHC(3) of the Act.

The Supreme Court clarified that the same reasoning would equally apply in the appeals for assessment years 1990-1991 and 1991-1992, in which years, the issue related to the treatment of interest income is raised, that is, whether it should be taxed under the head ‘income from business’ or under the head ‘income from other sources’. In consonance with its findings recorded above, the interest income earned in the assessment years 1990-1991 and 1991-1992 of R95,83,895 and R1,18,56,913 respectively, would be taxable under the head ‘income from other sources’.

Accordingly, Civil Appeals pertaining to the assessment years 1990-1991 and 1991-1992, were partly allowed.

49 ACIT, Surat vs. Kantilal Exports, Surat

[2023] 454 ITR 112 (SC)

Unexplained expenditure — Section 69C — ITAT found that the Assessee was maintaining the books of account outside the regular books — Addition upheld based on the consumption shown in the audit report which was later explained to be a typographical error by the Chartered Accountant — Reversal of this finding by the High Court solely based on the Statements filed before the ITAT for the first time is not proper.

The Assessing Officer made additions of ₹17,15,00,000 as unexplained expenditure under Section 69C of the Act taking into consideration the actual consumption of diamonds as 4,30,701.14 carats as mentioned in the audit report and after considering the consistent trend on yield which was found to be between 10-18 per cent. The Assessing Officer also considered the alternative prayer made by the Assessee on claiming deductions as expenditure under Section 80HHC. The CIT (Appeals) reversed the addition. The ITAT, on appreciation of the entire material on record and after taking into consideration the remand order which was necessitated due to the affidavits filed before the ITAT of the Typist and the Chartered Accountant, reversed the order passed by the CIT (Appeals) and restored the Assessment Order by upholding the addition of ₹17,50,00,000 as unexplained expenditure under Section 69C of the Act. The High Court set aside the order passed by the ITAT solely relying upon the two affidavits – one of the Typist and another of the Chartered Accountant and accepted the submission on behalf of the Assessee that there was a typographical error in the audit report in which the consumption was shown at 4,30,701.14 carats and that the actual consumption was 2,90,701.14 carats.

The Supreme Court after going through the findings recorded by the Assessing Officer, CIT (Appeals) as well as the ITAT observed that before the Assessing Officer, though it was the specific case on behalf of the Assessee that the figure of ₹4,30,701.10 was a typing mistake, except the statement of the Assessee, no further material was produced before the Assessing Officer. Therefore, the Assessing Officer proceeded further with the assessment taking into consumption of 4,30,701.14 carats. Thereafter, considering the figure of yield in different assessment years, the Assessing Officer came to the conclusion that the percentage of the yield would range between 10-18 per cent. Thereafter, the Assessing Officer specifically gave the finding that taking into consideration the figures on record for the relevant year under consideration, the yield would come to 24 per cent. Therefore, taking into consideration the average yield in the last assessment years, the Assessing Officer treated the same as unexplained income and made the additions of ₹17,50,00,000 under Section 69C. The ITAT has concurred with the said findings. Solely relying upon the statements of the Typist and the Chartered Accountant, the High Court had reversed the findings of the Assessing Officer as well as the ITAT. According to the Supreme Court, the High Court had not properly appreciated and considered the fact that the affidavits were filed for the first time before the ITAT. The High Court had also not at all considered the conduct on the part of the Assessee, which came to be considered in detail by the ITAT in its order. It was found that there had been a search in the case of the Assessee and its group concern on 7th January, 1999 which was concluded on 23rd March, 1999 and during the course of the search, duplicate cash book, ledger and other books showing the unaccounted manufacturing and trading arrived at by the Assessee in diamonds were found. The ITAT had also noted that a huge addition was made in the case of Assessee’s group in the block assessment on the basis of the books so found. Therefore, it was found that the Assessee was maintaining the books of accounts outside the regular books. The aforesaid had not at all been considered by the High Court while passing the impugned order.

In view of the above and for the reasons stated above, the Supreme Court held that the impugned judgment and order passed by the High Court was unsustainable and the same deserved to be quashed and set aside and was, accordingly, quashed and set aside. The orders passed by the ITAT as well as the Assessment Order were restored.

The Appeal was, accordingly, allowed.

50 PCIT vs. R. F. Nangrani HUF

[2023] 454 ITR 426 (SC)

Capital Gains — Amount received by the assessee on retirement from the firm — Amounts received from the incoming partners — Matter remanded for consideration.

The assessee was a partner in a firm. It retired from partnership firm on 14th August, 2008. When it retired, it received a sum of ₹15 crore from the partnership firm M/s Landmark Developments. It purported to be in full and final settlement of its right, title and interest as a partner. The assessee was having 50 per cent share in the firm. The other 50 per cent was being held by two other partners who had a 25 per cent share each.

According to the Assessing Officer, the consideration for payment of ₹15 crore received by the assessee was brought in by three incoming partners. The entire consideration paid accordingly, was debited to the account of the new partners. The Assessing Officer sought to bring the amount of ₹14,15,61,370 to tax. This was after deducting the amount of ₹84,38,630 which stood to the credit of the capital account of the assessee.

This order came to be upheld by the Commissioner of Income Tax (Appeals).

However, the Income Tax Appellate Tribunal allowed the appeal of the assessee. ITAT purported to follow the order passed by the jurisdictional High Court.

In further appeal, the High Court did not find favour with the contentions of the Revenue.

Before the Supreme Court, the Revenue contended that there was no basis for fixing the payment of an ad hoc amount of ₹15 crore to the Assessee. It was only on mutual understanding and after considering the 15-year association of Assessee with the firm and also future expected profit, the Assessee had relinquished his rights and shares in favour of continuing partners (including new partners entered on the date of retirement deed) and has received ₹15 crore as full and final settlement of right, title interest in excess of the amount standing to the credit of the capital account of the assessee.

According to the assessee, though the amount may appear to be in excess of the share standing to the credit of the capital account of the assessee, the amount in excess was attributable to the goodwill. This was subject matter of decisions of the Supreme Court and since goodwill under the law as it stood was to be taken into consideration in determining the share of the retiring partner, no part of the amount received by the assessee was exigible to tax.

According to the Supreme Court, it did not find any discussion in the order of the High Court on any submission on the lines which had been addressed before it. The Supreme Court was therefore of the view that the matter should, therefore, be reconsidered by the High Court with reference to the facts as were not in dispute and the law which governed the field. The Supreme Court allowed the appeal, setting aside the order of the High Court.

BCAJ Admin

Glimpses Of Supreme Court Rulings

5. (2018) 400 ITR 9 (SC)

DIT
vs. S.R.M.B. Dairy Farming (P.) Ltd.

Dated:
23.11.2017

Appeal to
the High Court – Monetary Limits for Litigation by Department – Circular would
apply even to the pending matters but subject to two caveats provided in Surya
Herbal case

The
Supreme Court was concerned with the implementation of Instruction No.3 of
2011, dated February 9, 2011, providing for appeals not to be filed before the
High Court(s) where the tax impact was less than Rs.10 lakh which was issued in
supersession of the earlier Instruction No. 1979 of 2000, dated March 27, 2000.

The instruction/circular in
question was stated to have a prospective effect as per the revenue and, thus,
cases which were pending in the High Court and had been filed prior to the
instruction in question (Instruction No.3) but had tax effect of less than
Rs.10 lakh were, thus, required to be determined on their merits and not be
dismissed by applying the circular/instruction.

The Supreme Court noted
that there had been a divergence of legal opinion on this aspect amongst the
High Courts.

The Madras High Court,
Kerala High Court, Chhattisgarh High Court and the Punjab and Haryana High Court
had taken a view that the existing circular/instruction prevailing at the
relevant time when the appeal/reference was made would apply and there would be
no retrospective application of the circular.

On the other hand, the line
of reasoning adopted by the Bombay High Court, Madhya Pradesh High Court, Delhi
High Court and the Karnataka High Court was, that as the value of money went
down and the cases of the Revenue increased, the choking docket required such
an endeavour and there was no reason why the same policy should not be applied
to old matters to achieve the objective of the policy laid down by the Central
Board of Direct Taxes (“CBDT”). An earlier circular dated June 5, 2007 issued
by the Central Board of Direct Taxes was also taken note of which required all
the appeals pending before the court to be examined, with a direction to
withdraw the cases wherein the criteria for monetary limit as per the
prevailing instructions was not satisfied unless the question of law involved
or raised in the appeal referred to the High Court was of recurring nature, and
therefore, required to be settled by a higher court.

The Supreme Court noted
that the view adopted by the Delhi Court making the Circular applicable to pending matters came
up before a three-Judges Bench of the Supreme Court in SLP(C) No.CC 13694 of
2011 titled CIT vs. Surya Herbal Ltd. (2013) 350 ITR 300 (SC).

According to the Supreme
Court, the aforesaid order, should have laid the controversy to rest. The
retrospective applicability of the Circular dated February 9, 2011 was not
interfered with, but with two caveats – (i) Circular should not be applied by
the High Courts ipso facto when the matter had a cascading effect; (ii)
where common principles may be involved in subsequent group of matters or a
large number of matters. In that matter it was opined that in such cases, the
attention of the High Court would be drawn and the Department was even given
liberty to move the High Court in two weeks.

The Supreme Court was of
the view that this order held the field and should continue to hold the field.
According to the Supreme Court therefore, the Circular would apply even to the
pending matters but subject to two caveats provided in Surya Herbal case (supra).

6. (2018) 400 ITR 26 (SC)

Mathur
Marketing Pvt. Ltd. vs. CIT

Dated:
12.09.2017

Appeal to
High Court – If an issue is raised specifically before the High Court and it
has not been taken into consideration by the High Court in passing the order,
the appropriate remedy for the aggrieved party would be to file an application
for review of the said order

Vide order dated August 10,
2017, the Supreme Court had permitted the appellant to examine as to whether
the oral arguments were advanced on substantial question No.3 raised in the
memo of appeal filed before the High Court u/s. 260A of the Income-tax Act,
1961.

An affidavit had been filed
on behalf of the appellant in which it had been stated that the issue of powers
of the Commissioner (Appeals) had come in appeal under Rule 46A and were
specifically raised before the High Court.

In that view of the matter,
the Supreme Court was of the opinion that, if indeed such issue was raised
specifically before the High Court and it had not been taken into consideration
by the High Court in passing the impugned order dated January 17, 2006, the
appropriate remedy for the appellant would be to file an application for review
of the said order.

7. (2018) 400 ITR 23 (SC)

CIT
vs. Chet Ram (HUF)

Dated:
12.09.2017

Capital
Gains – Compulsory Acquisition – Enhancement of Compensation

In the appeals before the
Supreme Court, the only question that arose for consideration was as to whether
the respondents-assessees who had received some amount of enhanced compensation
as also interest thereon under an interim order passed by the High Court in
pending appeals relating to land acquisition matter were liable to be assessed for
income-tax in the year in which it has been received or not.

The Supreme Court noted
that in the case of CIT vs. Ghanshyam (HUF) (2009) 315 ITR 1 (SC), it
had considered the provisions of section 45(5) of the Act and had held that in
view of the amendment in the Act, the person who has received enhanced
compensation and interest thereon even by an interim order passed by the court
would be assessed to tax for that enhanced compensation.

Following the above
decision, the Supreme Court allowed the appeals setting aside the orders of the
High Court as also for the Tribunal and held that the Respondents were liable
to pay tax on enhanced amount of compensation and interest received by them
during the year in question.

8. (2018) 400 ITR 141 (SC)

DCIT
vs. ACE Multi Axes Systems Ltd.
A.Y.: 2005-06 Dated: 05.12.2017

Section
80IB – Deduction in respect of SSI – The scheme of the statute does not in any
manner indicate that the incentive provided has to continue for 10 consecutive
years irrespective of continuation of eligibility conditions. Applicability of
incentive is directly related to the eligibility and not de hors the same. If
an industrial undertaking does not remain small scale undertaking or if it does
not earn profits, it cannot claim the incentive

The
respondent-assessee was engaged in manufacture and sale of components/parts of
CNC lathes and similar machines. Its income was assessed for the assessment
year 2005-2006 at Rs. 1,79,82,653/-. However, the Commissioner of Income Tax,
interfered with the assessment u/s. 263 to the extent it allowed deduction u/s.
80IB(3) of the Act and directed fresh decision on the said issue vide order
dated 16^th January, 2009. Thereafter, the Assessing authority on 14^th
December, 2009 disallowed the claim of Rs. 75,81,910/- towards deduction u/s.
80IB(3). The same was upheld by the Commissioner in appeal and the Income Tax
Appellate Tribunal in second appeal. However, the High Court had reversed the
said orders and upheld the claim.

The issue before Supreme
Court was when once the eligible business of an assessee is granted the benefit
of deduction u/s. 80-IB on satisfaction of requisite conditions (including the
condition of being small-scale industry) in the initial assessment years,
whether such benefit can be denied for subsequent years [during the qualifying
period of ten consecutive years] when it ceases to be a small-scale industry.

The Supreme Court observed
that the scheme of the statute does not in any manner indicate that the
incentive provided has to continue for 10 consecutive years irrespective of
continuation of eligibility conditions. Applicability of incentive is directly
related to the eligibility and not de hors the same. If an industrial
undertaking does not remain small scale undertaking or if it does not earn
profits, it cannot claim the incentive. No doubt, certain qualifications are
required only in the initial assessment year, e.g. requirements of initial
constitution of the undertaking. Clause 2 limits eligibility only to those
undertakings as are not formed by splitting up of existing business, transfer
to a new business of machinery or plant previously used. Certain other
qualifications have to continue to exist for claiming the incentive such as
employment of particular number of workers as per sub-clause 4(i) of Clause 2
in an assessment year. For industrial undertakings other than small scale
industrial undertakings, not manufacturing or producing an Article or things
specified in 8^th Schedule is a requirement of continuing nature.

The Supreme Court on
examination of the scheme of the provision held that there is no manner of
doubt that incentive meant for small scale industrial undertakings cannot be
availed by industrial undertakings which do not continue as small scale
industrial undertakings during the relevant period. Each assessment year is a
different assessment year, except for block assessment.

The Supreme Court was
unable to appreciate the logic of the observations made by the High Court that
the object of legislature is to encourage industrial expansion which implies
that incentive should remain applicable even where on account of industrial
expansion small scale industrial undertakings ceases to be small scale
industrial undertakings. According to the Supreme Court, incentive is given to
a particular category of industry for a specified purpose. An incentive meant
for small scale industrial undertaking cannot be availed by an Assessee which
is not such an undertaking. It does not, in any manner, mean that the object of
permitting industrial expansion is defeated, if benefit is not allowed to other
undertakings.

9. (2018) 400 ITR 279 (SC)

CIT
vs. Chaphalkar Brothers

Dated:
07.12.2017

Capital or
revenue receipt – Subsidy – The object of the grant of the subsidy was in order
that persons come forward to construct Multiplex Theatre Complexes, the idea
being that exemption from entertainment duty for a period of three years and
partial remission for a period of two years should go towards helping the
industry to set up such highly capital intensive entertainment centres – The
fact that the subsidy took a particular form and the fact that it was granted
only after commencement of production would make no difference – The subsidy
was capital in nature

The Supreme Court was
concerned with a batch of appeals arising from the judgements dealing with
cases came from Maharashtra and West Bengal.

The Civil Appeals relating
to Maharashtra were concerned with the subsidy scheme of the State Government
which took the form of an exemption of entertainment duty in Multiplex Theatre
Complexes newly set up, for a period of three years, and thereafter payment of
entertainment duty @ 25% for the subsequent two years. The necessary amendment
in the Bombay Entertainments Duty Act to effectuate the aforesaid subsidy
scheme was first done by way of an ordinance before 4^th December,
2001, which ultimately became part of an Amendment Act.

For the sake of
convenience, the Supreme Court took the facts of one of the matters before it,
namely, Civil Appeal Nos. 6513-6514 of 2012, the assessment order in that case
(dated 21.01.2006) found that the aforesaid scheme was really to support the
on-going activities of the multiplex and not for its construction. Since the
scheme took the form of a charge on the gross value of the ticket and
contributed towards the day to-day running expenses, the Assessing Officer held
that it was in the nature of a revenue receipt. The appeal filed before the
Commissioner met with the same fate and was dismissed substantially on the same
reasoning. However, the Income-Tax Appellate Tribunal by its judgment dated
30.06.2009, went into the matter in some detail, and after setting out the
object of the aforesaid scheme allowed the appeal of the assessee. The appeal
before the High Court was dismissed.

The Supreme Court applying
the tests contained in both Sahney Steel and Press Works Ltd. vs. CIT (228
ITR 253 (SC) as well as CIT vs. Ponni Sugars and Chemicals Ltd. (2008)
306 ITR 392 (SC), was of the view that the object, as stated in the
statement of objects and reasons, of the amendment ordinance was that since the
average occupancy in cinema theatres has fallen considerably and hardly any new
theatres have been started in the recent past, the concept of a Complete Family
Entertainment Centre, more popularly known as Multiplex Theatre Complex, has
emerged. These complexes offer various entertainment facilities for the entire
family as a whole. It was noticed that these complexes are highly capital
intensive and their gestation period is quite long and therefore, they need
Government support in the form of incentives qua entertainment duty. It
was also added that government with a view to commemorate the birth centenary
of late Shri V. Shantaram decided to grant concession in entertainment duty to
Multiplex Theatre Complexes to promote construction of new cinema houses in the
State. According to the Supreme Court the aforesaid object was clear and
unequivocal. The object of the grant of the subsidy was in order that persons
come forward to construct Multiplex Theatre Complexes, the idea being that
exemption from entertainment duty for a period of three years and partial
remission for a period of two years should go towards helping the industry to
set up such highly capital intensive entertainment centres. This being the
case, it was difficult to accept Revenue’s argument that it is only the
immediate object and not the larger object which must be kept in mind in that
the subsidy scheme kicks in only post construction, that is when cinema tickets
are actually sold. The Supreme Court opined that the object of the scheme is
only one-there was no larger or immediate object. According to the Supreme
Court the fact that object was carried out in a particular manner was
irrelevant, as had been held in both Ponni Sugar and Sahney Steel.

The Supreme Court therefore
had no hesitation in holding that the finding of the Jammu and Kashmir High
Court in Shree Balaji Alloys vs. CIT (2011) 333 ITR 335 (J&K) on the
facts of the incentive subsidy contained in that case was absolutely correct.
Once the object of the subsidy was to industrialise the State and to generate
employment in the State, the fact that the subsidy took a particular form and
the fact that it was granted only after commencement of production would make
no difference.

The Supreme Court further held that
since the subsidy scheme in the West Bengal case was similar to the scheme in
the Maharashtra case, being to encourage development of Multiplex Theatre
Complexes which are capital intensive in nature, and since the subsidy scheme
in that case was also similar to the Maharashtra cases, in that the amount of
entertainment tax collected was to be retained by the new Multiplex Theatre
Complexes for a period not exceeding four years, the West Bengal cases must
follow the judgement that had been delivered in the Maharashtra case.

BCAJ Admin

Glimpses Of Supreme Court Rulings

17. Deemed dividend – Section 2(22)(e) – Decision of the Supreme Court in C.I.T., Delhi-II vs. Madhur Housing and Development Company (2018) 401 ITR 152 (SC)

National Travel Services vs. CIT (2018) 401 ITR 154 (SC)

The Assessee, a partnership firm consisted of three partners, namely, Mr. Naresh Goyal, Mr. Surinder Goyal and M/s. Jet Enterprises Private Limited having a profit sharing ratio of 35%, 15% and 50% respectively. The Assessee firm had taken a loan of Rs. 28,52,41,516/- from M/s Jetair Private Limited, New Delhi. In this Company, the Assessee subscribed to the equity capital of the aforesaid Company in the name of two of its partners, namely, Mr. Naresh Goyal and Mr. Surinder Goyal totaling 48.19 per cent of the total shareholding. Thus, Mr. Naresh Goyal and Mr. Surinder Goyal were shareholders on the Company’s register as members of the Company. They held the aforesaid shares for and on behalf of the firm, which happened to be the beneficial shareholder.

The question that arose before the Supreme Court in this appeal was, as to whether section 2(22)(e) of the Act was attracted inasmuch as a loan had been made to a shareholder, who was a person who was the beneficial owner of shares holding not less than 10% of the voting power in the Company, and whether the loan was made to any concern in which such shareholder was a partner and in which he had a substantial interest, which is defined as being an interest of 20% or more of the share of the profits of the firm.

Before the Supreme Court, the assessee relied upon the judgement of the Delhi High Court in CIT vs. Ankitech Private Limited (2012) 340 ITR 14 (Del) in which it was held that the expression “shareholder” would mean a registered shareholder and also placed on an order dated 05.10.2017 passed by the Supreme Court in Civil Appeal No. 3961 of 2013 [C.I.T., Delhi-II vs. Madhur Housing and Development Company] in which the Supreme Court had expressly affirmed the reasoning of the Delhi High Court and contended that it was clear that the firm, not being a registered shareholder, could not possibly be a person to whom section 2(22)(e) would apply.

The Supreme Court, after hearing the parties was of the view that Ankitech’s case was wrongly decided. According to the Supreme Court, “shareholder”, post amendment, had only to be a person who is the beneficial owner of shares. One cannot be a registered owner and beneficial owner in the sense of a beneficiary of a trust or otherwise at the same time. It was clear therefore that the moment there is a shareholder, who need not necessarily be a member of the Company on its register, who is the beneficial owner of shares, the section gets attracted without more. To state, therefore, that two conditions have to be satisfied, namely, that the shareholder must first be a registered shareholder and thereafter, also be a beneficial owner was not only mutually contradictory but was plainly incorrect.

The Supreme Court was prima facie of the view that the Ankitech judgement (supra) required to be reconsidered, and therefore, directed that the matter be placed before the Hon’ble Chief Justice of India in order to constitute an appropriate Bench of three learned Judges in order to have a relook at the entire question.

Note: This issue had been discussed in Closements in the BCAJ published in December, 2017 and January, 2018.

18. Wealth-tax – Valuation of asset – Section 7(2)(a) is discretionary and enabling provision to Wealth Tax Officer to adopt the method as laid down in section 7(2)(a) for a running business, but the above enabling power cannot be held as obligation or shackles on right of Assessing Officer to adopt an appropriate method

Bimal Kishore Paliwal and Ors. vs. Commissioner of Wealth Tax (2017) 398 ITR 553 (SC)

G.D. & Sons of which firm the Appellants were partners, purchased land and building in semi-constructed condition on 04.06.1965 for a sum of Rs. 8,00,000/-. The construction was completed and Cinema Theatre, Alpana started running in the premises. The Alpana Cinema property was valued by assessment books of accounts. On pending assessment of Wealth Tax of one of the partners, the Wealth Tax Officer made a reference for valuation of the Alpana Cinema to Department Valuation Officer, New Delhi by Reference dated 29.04.1976. Valuation Officer after inspecting the site submitted its report dated 26.04.1977 valuing the property for assessment year 1970-71, 1971-72, 1972-73, 1973-74 and 1974-75. Notices u/s. 17 of the Wealth Tax Act, 1957 were issued to the Appellants on 30.03.1979. Assessees got the property valued by an approved Valuer adopting income capitalisation method. The assessment order was passed by the Wealth Tax Officer in March, 1983 making assessment for the period from 1970-71 to 1974-75. The assessment was completed as per percentage of the right of different Assessees which they had in the Firm. The Assessing Officer relied on the Valuation Report submitted by the Departmental Valuer. The Assessee, aggrieved by the assessment order, filed appeal before the Appellate Assistant Commissioner of Wealth Tax. The Appellate Authority by its detailed order dated 23.01.1986 affirmed the assessment made by the Assessing Officer on the basis of valuation by land and building method. The income capitalisation method as was relied on by the Assessee was not approved.

Being aggrieved by the different assessment orders the Assessees filed Wealth Tax Appeal before the Income Tax Appellate Tribunal (ITAT), Delhi Bench, Delhi. The ITAT accepted the case of the Assessee to the effect that the proper basis for valuing the Cinema building would be capitalisation of the income. The ITAT held that since the building could be used only for film exhibition and it cannot be used for any other purpose, the method of its valuation has to be necessarily different from the one normally adopted in the case of buildings which are capable of being used as commercial buildings. The Revenue, aggrieved by the Tribunal’s order filed reference application through Department. Although, initially the same was rejected by the Tribunal, on the direction of the High Court two questions were referred to the High Court for decision.

The High Court vide its judgment and order dated 21.10.2005 answered the questions in favour of Revenue and against the Assessee. The High Court held that Wealth Tax Officer was justified in adopting the land and building method. The High Court held that yield/rent capitalisation method would not be correct method of valuation of the property in question.

The Supreme Court noted that sub-section (2) of section 7 begins with non obstante Clause which enables the Wealth Tax Officer to determine the net value of the assets of the business as a whole instead of determining separately the value of each asset held by the Assessee in such business. The language of s/s. (2) provides overriding power to the Wealth Tax Officer to adopt and determine the net value of the business having regard to the balance-sheet of such business. The enabling power has been given to Wealth Tax Officer to override the normal Rule of valuation of the properties, that is the value which it may fetch in open market, Wealth Tax Officer can adopt in a case where he may think it fit to adopt such methodology.

The Supreme Court noted that the Appellants’ submission was that the provision of section 7(2)(a) is a stand alone provision and is to be applied in all cases where Assessee is carrying on a business.

The Supreme Court however, did agree with the above submission.

The Supreme Court held that overriding power has been provided to override the normal method of valuation of property as given by s/s. 7(1) to arm the Wealth Tax Officer to adopt the method of valuation as given in s/s. (2)(a). The purpose and object of giving overriding power is not to fetter the discretion. The Wealth Tax Officer is not obliged to mandatorily adopt the method provided in section 7(2)(a) in all cases where Assessee is carrying on a business. The language of s/s. (2)(a) does not indicate that the provisions mandate the Wealth Tax Officer to adopt the method in all cases of running business.

The Supreme Court pointed out in Juggilal Kamlapat Bankers vs. ITO (1984) 145 ITR 485 (SC), it had categorically laid down that resort to section 7(2)(a) is discretionary and enabling provision to Wealth Tax Officer to adopt the method as laid down in section 7(2)(a) for a running business, but the above enabling power cannot be held as obligation or shackles on right of Assessing Officer to adopt an appropriate method.

According to the Supreme Court, in the present case reference was made to the Departmental Valuer by Assessing Officer u/s. 7(3). Thus, there was a conscious decision of the Assessing Officer to obtain the report from the Departmental Valuer. The above conscious decision itself contained the decision of Assessing Officer not to resort to section 7(2)(a). The Valuation report of Departmental Valuer had been received, which has been relied on by the Assessing Officer for assessing the Assessee in the relevant year. The Supreme Court therefore did not find any error in the order of the Assessing Officer in adopting the land and building method by making a reference to Departmental Valuer to value the property on the said method.

The Supreme Court further held that the proposition that if two reasonable constructions of taxing statute are possible, that construction which favours the assessee must be adopted, could not be read to mean that under two methods of valuation the value which is favourable to the assessee should be adopted.

19. Industrial Undertaking – Deduction u/s. 80IA – The quantum of deduction allowable u/s. 80-IA of the Act has to be determined by computing the gross total income from business, after taking into consideration all the deductions allowable Under sections 30 to 43D of the Act irrespective of the fact as to whether the Assessee has claimed the deductions allowable under sections 30 to 43D of the Act or not

Plastiblends India Limited vs. Addl. Commissioner of Income Tax, Mumbai and Ors. (2017) 398 ITR 568 (SC)

The Assessment Years involved in the appeals before the Supreme Court were 1997-98 to 2000-01. The Assessee was engaged in the business of manufacture of master batches and compounds. For this purpose, it had manufacturing undertakings at Daman Units I and II. Units I and II began to manufacture Article or things in the previous years relevant to Assessment Years 1994-95 and 1995-96 respectively. Accordingly, for the year under consideration i.e. Assessment Year 1997-98, profits of the business of both the undertakings were eligible for 100% deduction u/s. 80-IA of the Act. The Assessee did not claim depreciation while computing its income under the head profits and gains of business. Consequently, deduction u/s. 80-IA was also claimed on the basis of such profits i.e. without reducing the same by depreciation allowance. This position was accepted by the Assessing Officer (AO) in an intimation made u/s. 143(1)(a) of the Act. Likewise, for the Assessment Year 1996-97, the Assessee did not claim deduction on account of depreciation. Though this position was not accepted by the AO, the claim of the Assessee was upheld by the Tribunal.

In the Assessment Year 1997-98, from which Assessment Year the dispute had arisen, the annual accounts prepared by the Assessee for the year disclosed that it earned a net profit of Rs. 1,80,85,409/-. This was arrived at after charging depreciation of Rs. 64,98,968/- in accordance with the Companies Act, 1956. The Assessee filed its return of income for Assessment Year 1997-98 determining the gross total income at Rs. 2,46,04,962/-. The gross total income included profits and gains derived from business of undertakings I and II at Daman aggregating to Rs. 2,46,04,962/-, which profits were eligible for deduction u/s. 80-IA of the Act. After reducing the gross total income by the deductions available u/s. 80-IA, the total income was computed at Rs. Nil. The AO initiated reassessment proceedings and passed an assessment order u/s.143(3) read with section 147 computing the gross total income at Rs. 34,15,583/. Though the Assessee had disclaimed deduction in respect of depreciation, the AO allowed deduction on this account as well in respect of the same in the sum of Rs. 2,13,89,379/- while computing the profit and gains of business. After reducing the gross total income by the brought forward loss of Rs. 98,47,170/-, he determined the business loss to be carried forward to Assessment Year 1998-99 at Rs. 66,25,587/-.

Aggrieved by the said assessment order, the Assessee filed the appeal before the Commissioner of Income Tax (Appeals) {CIT(A)} urging that the AO erred in not considering the Tribunal’s decision in the Assessee’s own case for the Assessment Year 1996-97 wherein it had been held that depreciation could not be thrust on it. The CIT(A) upheld the Assessee’s submission that claim for depreciation was optional, based on the Tribunal’s order in its own case for Assessment Year 1996-97 and hence, allowed the appeal.

Aggrieved by the appellate order of the CIT(A), the AO filed an appeal before the Tribunal with the plea that CIT(A) erred in directing him to work out business profit and deduction u/s. 80-IA of the Act without taking into account the corresponding depreciation amount. The Tribunal reversed the appellate order of the CIT(A) following the decision of the High Court of Bombay in Scoop Industries P. Ltd. vs. Income-Tax Officer (2007) 289 ITR 195. Aggrieved by the Tribunal’s order, the Assessee filed the appeal thereagainst before the High Court of Bombay u/s. 260A of the Act on the basis that a substantial question of law arose for consideration. The High Court was pleased to admit the appeal.

The Division Bench of the High Court at Bombay in the Assessee’s case noticed that there was a conflict of opinion in two earlier decisions viz. Grasim Industries Ltd. vs. Assistant Commissioner of Income-Tax and Ors. (2000) 245 ITR 677, wherein it was held that the profits and gains eligible for deduction under Chapter VI-A shall be the same as profits and gains computed in accordance with the provisions of the Act and included in the gross total income and the decision in Scoop Industries P. Ltd., where it was held that depreciation whether claimed or not has to be reduced for arriving at the profits eligible for deduction under Chapter VI-A. Noticing this conflict of opinion, the matter was referred to the Full Bench, to resolve the conflict.

The Full Bench of the High Court of Bombay has upheld the stand of the Revenue, that, whilst computing a deduction under Chapter VI-A, it was mandatory to grant deduction by way of depreciation. The High Court proceeded on the basis that the computation of profits and gains for the purposes of Chapter VI-A is different from computation of profits under the head ‘profits and gains of business’. It has, therefore, concluded that, even assuming that the Assessee had an option to disclaim current depreciation in computing the business income, depreciation had to be reduced for computing the profits eligible for deduction u/s. 80-IA of the Act. The High Court concluded that section 80-IA provides for a special deduction linked with profits and is a code by itself and in so doing relied on the decisions of this Court in the case of Liberty India vs. Commissioner of Income Tax (2009) 317 ITR 218, Commissioner of Income Tax vs. Williamson Financial Services and Ors. (2008) 297 ITR 17 and Commissioner of Income Tax, Dibrugarh vs. Doom Dooma India Ltd. (2009) 310 ITR 392. The High Court proceeded on the basis that this Court in the aforementioned decisions has held that for computing such special deduction, any device adopted by an Assessee to reduce or inflate the profits of such eligible business has to be rejected. The High Court ultimately held that the quantum of deduction eligible u/s. 80-IA has to be determined by computing the gross total income from business after taking into consideration all the deductions allowable under Sections 30 to 43D including depreciation u/s. 32.

After the Full Bench answered the reference in the aforesaid manner, the appeal of the Assessee was disposed of by the Division Bench vide order dated November 03, 2009 following the aforesaid opinion of the Full Bench.

According to the Supreme Court, the singular issue which was required to be considered in these appeals pertained to claim of depreciation while allowing deduction u/s. 80-IA.
The Supreme Court noted that interpreting the provisions of section 32 of the Act (which prevailed in the relevant Assessment Years) it had in CIT vs. Mahendra Mills (2000) 243 ITR 56, held that it is a choice of an Assessee whether to claim or not to claim depreciation.

The Supreme Court observed that section 32 deals with depreciation and allows the deductions enumerated therein from the profits and gains of business or profession. Section 80-IA of the Act, on the other hand, contains a special provision for assessment of industrial undertakings or enterprises which are engaged in infrastructure development etc. The issue was as to whether claim for deduction on account of depreciation u/s. 80-IA is the choice of the Assessees or it has to be necessarily taken into consideration while computing the income under this provision.

The Supreme Court held that firstly, the Apex Court decision in the case of Mahendra Mills (supra) could not be construed to mean that by disclaiming depreciation, the Assessee can claim enhanced quantum of deduction u/s. 80IA. Secondly, the Apex Court in the case of Distributors (Baroda) P. Ltd. (supra) and in the case of Liberty India (supra) had clearly held that the special deduction under Chapter VIA has to be computed on the gross total income determined after deducting all deductions allowable under sections 30 to 43D of the Act and any device adopted to reduce or inflate the profits of eligible business has got to be rejected.

Thirdly, the Apex Court in the case of Albright Morarji and Pandit Ltd. (supra), Grasim Industries Ltd. (supra) and Asian Cable Corporation Ltd. (supra) had only followed the decisions of the Apex Court in the case of Distributors Baroda (supra). According to the Supreme Court, the quantum of deduction allowable u/s. 80-IA of the Act has to be determined by computing the gross total income from business, after taking into consideration all the deductions allowable under sections 30 to 43D of the Act.

Therefore, whether the Assessee has claimed the deductions allowable under sections 30 to 43D of the Act or not, the quantum of deduction u/s. 80IA has to be determined on the total income computed after deducting all deductions allowable under sections 30 to 43D of the Act. _

BCAJ Admin

Glimpses of Supreme Court Rulings

1.
Business Income – Set of
accumulated losses of amalgamating company by the amalgamated under section 72A
to be allowed after adjusting the remission of cessation of interest liability
of amalgamating company which are chargeable to tax under section 41(1)

McDowell and Company Ltd. vs. CIT (2017)
393 ITR 570 (SC)

There was a
company known as M/s. Hindustan Polymers Limited (HPL) which had become a sick
industrial company. Proceedings in respect of the said company were pending
before the Board for Industrial and Financial Reconstruction (BIFR) under Sick
Industrial Companies Act (SICA). At that stage, petitions under sections 391
and 392 of the Companies Act, 1956, were filed in the High Court of Bombay and
Madras for amalgamation of HPL with the Assessee-Appellant, i.e., M/s. McDowell
and Company Limited. Both the High Courts approved the scheme of amalgamation
as a result of which, w.e.f. 01.04.1977, HPL stood amalgamated with the
Assessee/Appellant-company.

HPL owed a lot
of money to banks and financial institutions. In its books of accounts, the
interest which had accrued on the loans given by such financial companies was
shown as the money payable on account of interest to the said banking companies
and was reflected as expenditure on that count. As the interest payable was
treated as expenditure, benefit thereof was taken in the assessment orders
made. The Assessee had approached the Central Government, before moving the
High Court, with the scheme of amalgamation for getting benefits of section 72A
of the Act. This section makes provisions relating to carry forward and set off
accumulated loss and unabsorbed depreciation allowance in certain cases of
amalgamation or demerger etc. Under certain circumstances and on
fulfillment of conditions laid down therein, the company which takes over the
sick company is allowed to set off losses of the amalgamating company as its
own losses. The Central Government had made a declaration to this effect u/s.
72A of the Act granting the benefit of the said provision to the Assessee.

Under the
scheme of amalgamation that was approved by the High Court, after following the
procedure in terms of sections 391 and 392 of the Companies Act, which included
the consent of the secured creditors as well, the banks which had advanced
loans to HPL agreed to waive off the interest which had accrued prior to
01.04.1977. This interest was claimed as expenditure by HPL in its returns. On
the waiver of this interest, it became income in terms of section 41(1) of the
Act. In the return filed by the Assessee for the Assessment Year 1983-1984, the
Assessee claimed set off of the accumulated losses which it had taken over from
HPL by virtue of the provisions contained in section 72A of the Act. This was
allowed. However, later on, it came to the notice of the Assessing Officer that
while allowing the aforesaid benefit to the Assessee, the income which had
accrued u/s. 41 of the Act had not been set off against the accumulated loses.
It so happened that on certain grounds, the assessment was reopened by the
Assessing Officer and while undertaking the exercise of reassessment, the
Assessing Officer also noticed that the aforesaid fact, viz., the income which
had accrued within section 41(1) of the Act as mentioned above, was not set off
while giving benefit of accumulated losses u/s. 72A of the Act to the Assessee.
The Assessing Officer, therefore, treated the aforesaid income at the hands of
the Assessee and adjusted the same from the accumulated losses. The assessment
order was drawn accordingly. This reassessment was challenged by the Assessee
by filing appeal before the Commissioner of Income Tax (Appeals), which was
dismissed. However, in further appeal before the ITAT, the Assessee succeeded
inasmuch as the ITAT held that the aforesaid income u/s. 41(1) of the Act was
not at the hands of the Assessee herein but it may be treated as income of the
HPL and since HPL was a different Assessee and a different entity, the Assessee
herein was not liable to pay any taxes on the said income. Feeling aggrieved
thereby, the Revenue sought reference u/s. 256 of the Act and ultimately, the
reference was made on the following questions of law:

“Whether on the
facts and in the circumstances of the case, the Tribunal was justified in law
in upholding that the over due interest waived by the financial institutions
amounting to Rs. 25.02 lakhs is not assessable in the hands of the Assessee?”

This question
of law was decided in favour of Revenue by the impugned judgment.

The Supreme
Court held that the Assessee was given the benefit of accumulated losses of the
amalgamating company. The effect thereof was that though these losses were
suffered by the amalgamating company they were deemed to be treated as losses
of the Assessee company by virtue of section 72A of the Act. In a case like
this, it cannot be said that the Assessee would be entitled to take advantage
of the accumulated losses but while calculating these accumulated losses at the
hands of amalgamated company, i.e., HPL, the income accrued u/s. 41(1) of the
Act at the hands of HPL would not be accounted for. That had to be necessarily
adjusted in order to see what are the actual accumulated losses, the benefit
whereof is to be extended to the Assessee.

According to
the Supreme Court, this appeal was without any merit and was, accordingly,
dismissed.

Note:
Interestingly, the above case arose as a result of amalgamation which was
effective from 1/4/1977, but the issue came-up in relation to Asst. Year.
1983-84. In the above case, the Apex Court distinguished its earlier judgement
in the case of Saraswati Industrial Syndicate Ltd. [186 ITR 278] on the ground
that in the instant case the assessee had the benefit of carry forward losses
of the sick company [amalgamating company] u/s. 72A and the assessee company
[amalgamated company] had, in fact, availed the benefit of the waiver of
interest [which accrued to the assessee after the sick company had ceased to
exist due to amalgamation] and therefore, the same should be adjusted against
such losses and in that case, the Court dealt with the provisions of section
41(1) per se where section 72A was not the subject matter of the
decision. Therefore, the facts of the two cases are different. The judgment in
the case of Saraswati Industrial Syndicate Ltd. has been analysed in the column
“Closements” in the December, 1990 issue of the BCAJ. It may also be
noted that subsequently, section 41(1) has been substituted by the Finance Act,
1992 [w.e.f. Asst. Year. 1993-94] which effectively nullified the effect of the
ratio of the judgment in the case of Saraswati Industrial Syndicate Ltd.

2. Exemption – Compensation
received on compulsory acquisition of agricultural land – The acquisition
process is initiated by invoking the provisions of Land Acquisition Act, 1894
by the State Government is completed with the award and the only thing that
remains thereafter is to pay the compensation as fixed under the award and take
possession of the land in question from the owner and to avoid litigation if
such owner enters into negotiations and settles the final compensation with the
buyer, the character of acquisition would not change from that of compulsory
acquisition to the voluntary sale

Balakrishnan
vs. UOI and Ors. (2017) 391 ITR 178 (SC)

The Appellant
was the owner of 27.70 acres of land in Sy. No. 18.60 hectares of paddy field
in Block No. 17 of Attippra village in Thiruvananthapuram District comprised in
Sy. No. 293/8. This was agricultural land. The Appellant was using the same to
grow paddy.

The Government
of Kerala sought to acquire the aforesaid property of the Appellant for the
public purpose namely, ‘3rd phase of development of Techno Park’. For this
purpose, Notification u/s. 4(1) of the Land Acquisition Act, 1894 (hereinafter
referred to as the ‘LA Act’) was issued on 01.10.2005. An opportunity was given
to the Appellant to file his objections, if any, u/s. 5A of the LA Act. Record
does not reveal as to whether such objections were filed or not. However
admittedly, thereafter, declaration u/s. 6 of the LA Act was issued on
02.09.2006 wherein the Government had declared that it was decided to acquire
the land for the aforesaid purpose. After this acquisition, the Land
Acquisition Collector (Special Tahsildar), after following the due procedure,
even passed the award on 15.02.2007. As per this award, compensation was fixed
at Rs. 14,36,616/-. The amount of compensation fixed by the Land Acquisition
Collector was not acceptable to the Appellant. At that stage, some negotiations
started between the parties on the amount of compensation and ultimately it was
agreed by the Techno Park, for whom the property in question was acquired, to
pay a sum of Rs. 38,42,489/-. After this amount was agreed upon between the
parties, the Appellant agreed to execute a sale deed of the property in
question in favour of Techno Park. Such sale deed was executed on 08.05.2008
and duly registered with the Sub-Registrar, Kazhakoottam. While disbursing the
aforesaid amount of sale consideration, the Techno Park deducted 10% of the
amount of TDS and it was later refunded to the Appellant herein by the Income
Tax Department on completion of the assessment for the assessment year 2009-10,
taking a view that no capital gain was payable on the aforesaid amount received
by the Appellant as the same was exempted u/s. 10(37) of the Income-tax Act,
1961 (hereinafter referred to as ‘ the Act’).

However,
thereafter on 30.05.2012, a notice was issued to the Appellant u/s. 148 of the
Act whereby the Income Tax Department decided to re-open the assessment on the
ground that income which was assessable to income tax escaped assessment during
the year 2009-10. The stand which was taken by the Revenue in this notice was
that the amount of compensation/consideration received by the Appellant against
the aforesaid land was not the result of compulsory acquisition and on the
contrary it was the voluntary sale made by the Appellant to the Techno Park
and, therefore, the provisions of section 10(37) of Act were not applicable.

The Appellant
objected to the re-opening of the said assessment by filing his reply dated
30.11.2012. However, the Joint Commissioner, Income Tax Range-I, Kawadiar,
Thiruvananthapuram, took the view that the case did not come under compulsory
acquisition and directed the Assessing Officer to compute the income
accordingly. This direction dated 11.03.2013 of the Joint Commissioner was
challenged by the Appellant by filing a Civil Writ Petition in the High Court
of Kerala. The learned Single Judge, however, dismissed the said writ petition
vide judgement dated 11.07.2013 relying upon the earlier judgement of the same
High Court in case of Info Park Kerala vs. Assistant Commissioner of Income
Tax (2008) 4 KLT 782. The writ appeal preferred by the Appellant met
the same fate as it was dismissed affirming the view of the learned
Single Judge.

It is in the
aforesaid backdrop, the following question arose before the Supreme Court for
its consideration.

“Whether, on
the facts and circumstances of the case, the High Court was justified in
denying the claim for exemption u/s. 10(37) of the Income-tax Act, 1961 to the
Appellant?”

The Supreme
Court observed that on the transfer of agricultural land by way of compulsory
acquisition under any law, no capital gain tax is payable. The Supreme Court
noted that the initial view of the Income Tax Department, while refunding the
aforesaid TDS amount to the Appellant, was that the land in question was
compulsorily acquired under the LA Act and, therefore, capital gain tax was not
payable.

According to
the Supreme Court, from the facts mentioned above, it was apparent that the
acquisition process was initiated by invoking the provisions of LA Act by the
State Government. For this purpose, not only Notification u/s. 4 was issued, it
was followed by declaration u/s. 6 and even Award u/s. 9 of the LA Act. With
the award the acquisition under the LA Act was completed. Only thing that
remained thereafter, was to pay the compensation as fixed under the award and
take possession of the land in question from the Appellant. No doubt, in case,
the compensation as fixed by the Land Acquisition Collector was not acceptable
to the Appellant, the LA Act provides
for making a reference u/s.18 of the Act to the District Judge for determining
the compensation and to decide as to whether the compensation fixed by the Land
Acquisition Collector was proper or not. However, the matter thereafter is only
for quantum of compensation which has nothing to do with the acquisition. The
Supreme Court held that it was clear from the above that insofar as acquisition
was concerned, the Appellant had succumbed to the action taken by the
Government in this behalf. His only objection was to the market value of the
land that was fixed as above. To reiterate his grievance, the Appellant could
have either taken the aforesaid adjudicatory route of seeking reference under
section18 of the LA Act leaving it to the Court to determine the market value.
Instead, the Appellant negotiated with Techno Park and arrived at amicable
settlement by agreeing to receive the compensation in the sum of Rs.
38,42,489/-. For this purpose, after entering into the agreement, the Appellant
agreed to execute the sale deed as well which was a necessary consequence and a
step which the Appellant had to take.

The Supreme
Court reiterated that insofar as acquisition of the land was concerned, the
same was compulsorily acquired as the entire procedure prescribed under the LA
Act was followed. The settlement took place only qua the amount of the
compensation which was to be received by the Appellant for the land which had
been acquired. According to the Supreme Court, had steps not been taken by the
Government under sections 4 and 6 followed by award u/s. 9 of the LA Act, the Appellant would not have agreed to
divest the land belonging to him to Techno Park. He was compelled to do so
because of the compulsory acquisition and to avoid litigation entered into
negotiations and settled the final compensation. Merely because the
compensation amount is agreed upon would not change the character of acquisition
from that of compulsory acquisition to the voluntary sale. It may be mentioned
that this is now the procedure which is laid down even under the Right to Fair
Compensation and Transparency in Land Acquisition, Rehabilitation and
Resettlement Act, 2013 as per which the Collector can pass rehabilitation and
resettlement award with the consent of the parties/land owners. Nonetheless,
the character of acquisition remains compulsory.

The Supreme
Court doubted the correctness of the judgment in the case of Info Park
Kerala vs. Assistant Commissioner of Income Tax (2008) 4 KLT 782.
The Court in the said case took the view that since the title in the property
was passed by the land owners on the strength of sale deeds executed by them,
it was not a compulsory acquisition. The Supreme Court did not subscribe with
the aforesaid view. According to the Supreme Court, it was clear that but for
Notification u/s. 4 and Award u/s. 9 of the LA Act, the Appellant would not
have entered into any negotiations for the compensation of the consideration
which he was to receive for the said land. As far as the acquisition of the
land in question was concerned, there was no consent. The Appellant was put in
such a condition that he knew that his land had been acquired and he could not
have done much against the same. The Appellant, therefore, only wanted to
salvage the situation by receiving as much compensation as possible
commensurate with the market value thereof and in the process avoid the
litigation so that the Appellant is able to receive the compensation well in
time. If for this purpose the Appellant entered into the negotiations, such
negotiations would be confined to the quantum of compensation only and cannot
change or alter the nature of acquisition which would remain compulsory. The
Supreme Court, therefore, overruled the judgment of the Kerala High Court in Info
Park Kerala vs. Assistant Commissioner of Income Tax (2008) 4 KLT 782.

The Supreme
Court allowed the appeal of the Appellant and quashed the proceedings u/s.148
of the Act.

Note: The above
judgment is very useful in the context of current scenario of emphasis on
infrastructure development by the government and consequent need for land
acquisition with the resultant issue of taxation of capital gain arising on
compulsory acquisition of urban agricultural land, which may arise very often.
In such cases where the assessee receives higher compensation on negotiations
with the concerned party in the process of such acquisition, the benefit of
exemption u/s. 10(37) will be crucial and this judgement will become beneficial
in that context and may also help in reducing the litigation on contesting the
acquisition proceeding under the LA Act.
Furthermore, in this case, the issue arising out of re-assessment proceedings
initiated in the year 2012 got finally resolved in 2017 [i.e. in a short period
of 5 years] at the level of the Apex Court. This shows clear advantage of
adopting the route of filing Writ Petition challenging such re-assessment
proceedings, especially involving a clear point of law. In normal course, the
matter generally would not have got resolved at that level in a period of less
than two decades.

3.
Exemption/Deduction – Though
Section 10A, as amended, is a provision for deduction, the stage of deduction
would be while computing the gross total income of the eligible undertaking
under Chapter IV of the Act and not at the stage of computation of the total
income under Chapter VI

C.I.T. and Ors. vs. Yokogawa India
Ltd. (2017) 391 ITR 274 (SC)

The Supreme
Court formulated the following specific questions arising in the group of cases
before it for consideration.

(i) Whether
section 10A of the Act is beyond the purview of the computation mechanism of
total income as defined under the Act. Consequently, is the income of a section
10A unit required to be excluded before arriving at the gross total income of
the Assessee?

(ii) Whether
the phrase “total income” in section 10A of the Act is akin and pari
materia with the said expression as appearing in section 2(45) of the Act?

(iii) Whether
even after the amendment made with effect from 1.04.2001, section 10A of the
Act continues to remain an exemption section and not a deduction section?

(iv) Whether
losses of other 10A Units or non 10A Units can be set off against the profits
of 10A Units before deductions u/s.10A are effected?

(v) Whether
brought forward business losses and unabsorbed depreciation of 10A Units or non
10A Units can be set off against the profits of another 10A Units of the
Assessee.

The Supreme
Court clarified that the decision of this Court with regard to the provisions
of section 10A of the Act would equally be applicable to cases governed by the
provisions of section 10B in view of the said later provision being pari
materia with section 10A of the Act though governing a different situation.

The Supreme
Court considered the submissions advanced and the provisions of section 10A as
it stood prior to the amendment made by the Finance Act, 2000 with effect from
1.4.2001; the amended section 10A thereafter and also the amendment made by the
Finance Act, 2003 with retrospective effect from 1.4.2001.

The Supreme
Court observed that retention of section 10A in Chapter III of the Act after
the amendment made by the Finance Act, 2000 would be merely suggestive and not
determinative of what is provided by the section as amended, in contrast to
what was provided by the un-amended Section. The true and correct purport and
effect of the amended section would have to be construed from the language used
and not merely from the fact that it had been retained in Chapter III.
According to the Supreme Court, the introduction of the word ‘deduction’ in
section 10A by the amendment, in the absence of any contrary material, and in
view of the scope of the deductions contemplated by section 10A, it had to be
understood that the section embodied a clear enunciation of the legislative
decision to alter its nature from one providing for exemption to one providing
for deductions.

The Supreme
Court held that the difference between the two expressions ‘exemption’ and
‘deduction’, though broadly may appear to be the same i.e. immunity from
taxation, the practical effect of it in the light of the specific provisions
contained in different parts of the Act would be wholly different. The above
implications could not be more obvious than from the cases which had been filed
by assessee having loss making eligible units and/or non-eligible units seeking
the benefit of this section.

The Supreme
Court noted that sub-section 4 of section 10A which provides for pro-rata
exemption, necessarily involving deduction of the profits arising out of
domestic sales, was one instance of deduction provided by the amendment.
Profits of an eligible unit pertaining to domestic sales would have to enter
into the computation under the head “profits and gains from business”
in Chapter IV and denied the benefit of deduction. The provisions of
sub-section 6 of section 10A, as amended by the Finance Act of 2003, granting
the benefit of adjustment of losses and unabsorbed depreciation etc.
commencing from the year 2001-02 on completion of the period of tax holiday
also virtually worked as a deduction which had to be worked out at a future
point of time, namely, after the expiry of period of tax holiday. The absence
of any reference to deduction u/s.10A in Chapter VI of the Act could be
understood by acknowledging that any such reference or mention would have been
a repetition of what has already been provided in section 10A. The provisions
of sections 80HHC and 80HHE of the Act providing for somewhat similar
deductions would be wholly irrelevant and redundant if deductions u/s. 10A were
to be made at the stage of operation of Chapter VI of the Act. The retention of
the said provisions of the Act i.e. section 80HHC and 80HHE, despite the
amendment of section 10A, indicated that some additional benefits to eligible
section 10A units, not contemplated by sections 80HHC and 80HHE, was intended
by the legislature. Such a benefit could only be understood by a legislative
mandate to understand that the stages for working out the deductions u/s. 10A
and 80HHC and 80HHE are substantially different.

The Supreme
Court held that from a reading of the relevant provisions of section 10A it was
more than clear that the deductions contemplated therein were qua the
eligible undertaking of an Assessee standing on its own and without reference
to the other eligible or non-eligible units or undertakings of the Assessee.
The benefit of deduction is given by the Act to the individual undertaking and
resultantly flows to the Assessee. This was also clear from the contemporaneous
Circular No. 794 dated 09.08.2000 which stated in paragraph 15.6 that,

“The export
turnover and the total turnover for the purposes of sections 10A and 10B shall
be of the undertaking located in specified zones or 100% Export Oriented
Undertakings, as the case may be, and this shall not have any material
relationship with the other business of the Assessee outside these zones or
units for the purposes of this provision.”

If the specific
provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and
10A (4)] that the unit that is contemplated for grant of benefit of deduction
is the eligible undertaking and that is also how the contemporaneous Circular
of the department (No. 794 dated 09.08.2000) understood the situation, it was
only logical and natural that the stage of deduction of the profits and gains
of the business of an eligible undertaking has to be made independently and,
therefore, immediately after the stage of determination of its profits and
gains. At that stage the aggregate of the incomes under other heads and the
provisions for set off and carry forward contained in sections 70, 72 and 74 of
the Act would be premature for application. The deductions u/s. 10A therefore
would be prior to the commencement of the exercise to be undertaken under
Chapter VI of the Act for arriving at the total income of the Assessee from the
gross total income. The somewhat discordant use of the expression “total
income of the Assessee” in Section 10A could be reconciled by
understanding the expression “total income of the Assessee” in section
10A as ‘total income of the undertaking’.

The Supreme
Court answered the appeals and the questions arising therein, as formulated
above, by holding that though section 10A, as amended, is a provision for
deduction, the stage of deduction would be while computing the gross total
income of the eligible undertaking under Chapter IV of the Act and not at the
stage of computation of the total income under Chapter VI. All the appeals were
disposed of accordingly.

4. Assessment – Prima facie
adjustment – Capital or revenue – Even though it is may be a debatable issue
but where the jurisdictional High Court has taken a particular view,
authorities under its jurisdiction are bound by it and it could not be said that the issue was a debatable one in that State

DCIT vs.
Raghuvir Synthetics Ltd. (2017) 394 ITR 1 (SC)

The
Respondent-Assessee, a public limited company, filed its return for the
assessment year 1994-95, wherein it had claimed revenue expenditure of Rs.
65,47,448 on advertisement and public issue. However, in the return of income,
the company made a claim that if the aforesaid claim could not be considered as
a revenue expenditure then alternatively the said expenditure may be allowed
u/s. 35D of the Income-tax Act, 1961 (hereinafter referred to as “the
Act”) by way of capitalising in the plant and machinery obtained.

The Assessing
Officer issued an intimation u/s. 143(1)(a) of the Act disallowing a sum of Rs.
58,92,700 out of the preliminary expenditure incurred on public issue. He,
however, allowed one-tenth of the total expenses and raised demand on the
balance amount.

The intimation
was challenged before the first appellate authority which allowed the appeal by
holding that the concept of “prima facie adjustment” u/s.
143(1)(a) of the Act could not be invoked as there could be more than one
opinion on whether public issue expenses were covered by section 35D or section
37 of the Act.

Feeling
aggrieved by the order passed by the first appellate authority, the Revenue
preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal
upheld the order of the Commissioner of Income-tax (Appeals) and dismissed the
appeal filed by the Revenue.

The Appellant
preferred an appeal u/s. 260A of the Act before the High Court of Gujarat at
Ahmedabad. The Division Bench of the High Court by the impugned order dismissed
the appeal on the ground that a debatable issue cannot be disallowed while
processing return of income u/s. 143(1)(a) of the Act.

The Supreme
Court noted that there was a divergence of opinion between the various High
Courts; one view being that the preliminary expenses incurred on raising a
share capital is revenue expenditure and a contrary view that the said expenses
are capital expenditure and cannot be allowed as revenue expenditure.

The Supreme
Court held that even though it was a debatable issue but as the Gujarat High
Court in the case of Ahmedabad Mfg. and Calico (P.) Ltd. (1986) 162 ITR 800
(Guj) had taken a view that it is capital expenditure which was subsequently
followed by Alembic Glass Industries Ltd. vs. CIT (1993) 202 ITR 214 (Guj)
and the registered office of the Respondent-Assessee being in the State of
Gujarat, the law laid down by the Gujarat High Court was binding. Therefore, so
far as the present case was concerned, it could not be said that the issue was
a debatable one.

According to the Supreme
Court, the order passed by the Commissioner of Income-tax (Appeals), the
Income-tax Appellate Tribunal and also the order of the Gujarat High Court were
not sustainable and were therefore set aside as they had wrongly held that the
issue was debatable and could not be considered in the proceedings u/s. 143(1)
of the Act. The Supreme Court allowed the appeal of the Revenue.

BCAJ Admin

Glimpses of Supreme Court Rulings

7. Non-resident – Permanent Establishment – As
per Article 5 of the DTAA with UK, the PE has to be a fixed place of business
‘through’ which business of an enterprise is wholly or partly carried on. Some
examples of fixed place are given in Article 5(2), by way of an inclusion.
Article 5(3), on the other hand, excludes certain places which would not be
treated as PE, i.e. what is mentioned in Clauses (a) to (f) as the ‘negative
list’. A combined reading of sub-articles (1), (2) and (3) of Article 5 would
clearly show that only certain forms of establishment are excluded as mentioned
in Article 5(3), which would not be PEs. Otherwise, sub-article (2) uses the
word ‘include’ which means that not only the places specified therein are to be
treated as PEs, the list of such PEs is not exhaustive. In order to bring any
other establishment which is not specifically mentioned, the requirements laid
down in sub-article (1) are to be satisfied. Twin conditions which need to be
satisfied are: (i) existence of a fixed place of business; and (b) through that
place business of an enterprise is wholly or partly carried out.

Formula
One World Championship Ltd. vs. Commissioner of Income Tax, International
Taxation-3, Delhi and Ors. (2017) 394 ITR 80 (SC)

Brief background of the
factual matrix of this case is: Federation Internationale de l’ Automobile
[FIA], a non- profit association, was established to represent the interest of
motoring organisations and motor car users globally. It is a principal body for
Rules and Regulations for all major international four- wheel motorsports
events and accordingly, was a regulatory body which regulates FIA Formula- One
World Championship [F-1 Championship]. “Formula One” [F-1] is with reference to
set of rules that all participants’ cars must confirm to. This has been the
premier form of motor racing since its inception in 1950. The F-1 Championship
is an annual series of motor racing conducted in the name and style of Grand
Prix over three day duration at purpose-built circuits, etc., in
different countries around the world. The F-1 season consists of series of
races, known as Grand Prix, held across the world on specially designed and
built F-1 circuits. Formula-One World Championship Ltd [FOWC], a UK resident,
entered into an agreement with FIA and Formula-One Asset Management Ltd [FOAM]
under which the FOWC was licensed all commercial rights in the F-1 Championship
for 100 years term and accordingly, FOWC became Commercial Right Holder [CRH]
in respect of F-1 Championship events.

Furthermore, in F-1
Championship events, about 12 to 15 teams typically compete in any one annual
racing season. The teams assemble and construct their vehicle, which complies
with defined technical specifications and engage drivers who can successfully
manoeuvre the F-1 cars in the racing events. All teams are known as
“Constructors” and enter into a contract with FOWC and FIA, known as “Concorde
Agreement”. They also bind themselves in a covenant with FOWC that they would
not participate in any other similar motor racing event what-so-ever nor would
they promote in any name any other rival event. The F-1 racing teams
exclusively participate in about 19 to 21 F-1 annual racing events fixed by the
FIA. As such, on the one hand, participating teams have to enter into Concorde
Agreement with FOWC & FIA and on the other hand, promoters, like Jaypee,
also have to enter in to RPC with FOWC for hosting, promoting and staging F-1
racing events. This is, in effect, a closed circuit event, since no team other
than those bound by a contract with FOWC is permitted participation. Every F-1
racing event is hosted, promoted and staged by a promoter with whom FOWC enters
into contract and whose events is nominated by CRH (i.e. FOWC) to the FIA for
inclusion in the official F-1 racing events calendar. In other words, the FOWC
is the exclusive nominating body at whose instance the event promoter is
permitted participation. Grant of a right to host, stage and promote the F-1
racing event also carries with it a covenant or representation that F-1 racing
teams with their cars, drivers and other ancillary and support staff will
participate in the motor racing event hosted at the promoter’s motor-racing
circuit displaying the highest level of technical skill etc. These teams
and FOWC also represent that the highest level of skill in racing management
and maintenance of cars would be on display in the events. All these would
generally be revealed in the relevant Race Promotion Contract entered into by
promoter with FOWC.

FOWC had entered into a
‘Race Promotion Contract’ (RPC) dated September 13, 2011 with Jaypee Sports
International Ltd, Indian Resident, (Jaypee) granting Jaypee the right to host,
stage and promote the Formula One Grand Prix of India event for a consideration
of US$ 40 million. There was also a prior agreement [RPC] in 2007 between them
[prior RPC] which was replaced by this RPC. Some other agreements were also
entered into between FOWC and Jaypee as well as group companies of FOWC and
Jaypee.

As per the arrangement, the
promoter [Jaypee] was to construct the necessary circuit, as per the
specifications approved by FOWC and FIA, which will meet all the requirements
of the regulations and for which, the final inspection was to be completed by
FIA before the agreed time. In terms of the prior RPC, Buddh International Circuit
in Greater Noida [in National Capital Region (NCR)] was constructed [Buddh
Circuit] and current RPC replaced that RPC. Under the agreement, the promoter
is the owner of the motor racing circuit [in this case Buddh Circuit], which is
capable of hosting various motor racing events. The promoter who wishes to host
various motor racing events at such circuit is bound to include the hosting of
F-1 Grand Prix events. The Jaypee had secured the privilege to host such events
under the RPC. The rights and obligations of both the parties were elaborately
mentioned in the RPC, including the right of access to the circuit by FOWC, as
well as its group concerns, with which also the Jaypee had entered into
separate agreements. Pursuant to this RPC and these agreements, the races were
held in India in 2011, 2012 and 2013.

The applications were filed
by FOWC and Jaypee before the Authority for Advance Rulings (AAR), in which
advance ruling of AAR was solicited on two main questions/queries:

“ (i) whether the payment of consideration
receivable by FOWC in terms of the said RPC from Jaypee was or was not royalty
as defined in Article 13 of the ‘Double Taxation Avoidance Agreement’ (DTAA)
entered into between the Government of United Kingdom and the Republic of
India?; and

(ii) whether FOWC was having any ‘Permanent Establishment’ (PE) in India
in terms of Article 5 of DTAA?

Another
related question was also raised, viz.,

(iii) whether any part of the consideration
received or receivable by FOWC from Jaypee outside India was subject to tax at
source Under section195 of the Indian Income Tax Act, 1961 (hereinafter after
referred to as the ‘Act’).”

AAR answered the first
question holding that the consideration paid or payable by Jaypee to FOWC
amounted to ‘Royalty’ under the DTAA. Second question was answered in favour of
FOWC holding that it did not have any PE in India. As far as the question of
subjecting the payments to deduction of tax at source u/s. 195 of the Act was
concerned, AAR ruled that since the amount received/receivable by FOWC was
income in the nature of Royalty and it was liable to pay tax thereon to the
Income-tax department in India, it was incumbent upon Jaypee to deduct the tax
at source on the payments made to FOWC.

FOWC and Jaypee challenged
the ruling on the first issue by filing writ petitions in the Delhi High Court
contending that the payment would not constitute Royalty Under Article 13 of
the India-UK Double Tax Avoidance Agreement (DTAA). Revenue also filed the writ
petition challenging the answer of the AAR on the second issue by taking the
stand that FOWC had ‘permanent establishment’ (PE) in India in terms of Article
5 of the DTAA and, therefore, tax was payable accordingly.

All these writ petitions
were decided by the High Court vide common judgement dated November 30, 2016
[390 ITR 199]. The High Court reversed the findings of the AAR on both the
issues. Whereas it held that the amount paid/payable under RPC by Jaypee to
FOWC would not be treated as Royalty, as per the High Court FOWC had the PE in
India and, therefore, it is taxable in India. The High Court also held, as the sequitur,
that Jaypee was bound to make appropriate deductions from the amount payable to
FOWC u/s.195 of the Act.

The Court also noted that
the bone of contention before this Court pertains to PE of FOWC in India and
the arguments advanced by both parties before this court was virtually the same
which were advanced before the High Court as well.

Therefore, their main
contentions before the High Court may be worth noting in brief. These are
summarised hereunder.

The broad contentions of
the assessees before the High Court, interalia, include that the FOWC
has only one place of business in its office in UK and did not have any fixed
place of office or business in India. By granting the right to host, stage and
promote the race to Jaypee, it did ‘business with a party that is resident of
India’, it did not undertake any business operations in India. Its business was
limited to a grant outside India of the right to Jaypee and after such grant of
the right, the Jaypee could host, stage and promote the F-1 events in
accordance with F-1 regulations. If limited access at the circuit granted to
FOWC by Jaypee accounted a fixed place, it would come into existence only at
the time when the race is held which is after the grant of right by FOWC: A
mere provision in the RPC for Jaypee to allow access to FOWC for a very short duration and its affiliates
to the circuit for a very short duration prior to and during the F-1 event
could not make the Buddh Circuit [ which belongs to Jaypee] as a place at the
FOWC’s disposal. There was also uncertainty as to staging of event on a regular
basis which could not result in bringing into existence a fixed place PE of
FOWC. Merely because Jaypee had entered into agreement with FOWC’s affiliates,
which were conditions precedent to RPC, it did not extend the scope of its role
nor did it result in its possession or operating from a fixed place of business
in India. The circuit and other rights arose by virtue of the ownership of the
circuit which was that of Jaypee, those rights could be exploited only when
granted by it. The activities were undertaken by each of the affiliates
independently and on their own account and did not constitute its PE.

The broad contentions of
the Revenue before the High Court, interalia, included: for deciding
fixed place of business in terms of Article 5, it is adequate if the place of
business is at the disposal of the enterprise to be used in business. Such
place need not be owned by the enterprise, it could be rented or otherwise
available at the disposal of the enterprise. The mere fact that an enterprise
has certain amount of space at its disposal, which is used for business
activities, is sufficient to constitute a place of business and no formal
/legal right to use the place is necessary. A place of business could
constitute a PE, even if it exists only for a very short period of time because
the nature of the business is such that it will be carried on for that short
period of time. FOWC’s business is to exploit commercial rights arising from
races and this business is carried on through exploitation of these commercial
rights, either by itself or through any one or more of its affiliates as
mentioned in ‘Concorde Agreement’. The fixed place is Buddh Circuit in Greater
Noida, which is owned by Jaypee and which was designed and constructed in terms
of prior RPC of 2007, which was replaced and continued by the current RPC of
2011. The said Buddh Circuit includes not only racing circuit but all the
attached buildings in the complex, including vending areas, hosting and
broadcasting facilities, media centres, etc., as widely defined in the
RPC itself and was available to FOWC and its affiliates (including their
employees and third party contractors appointed by them) for carrying on their
business operations. Under the RPC, Jaypee was obliged to allocate promotional
area in such a manner as FOWC shall specify and access to restricted area is
regulated by passes and tickets issued by FOWC. The FOWC and its affiliates
have complete access to the circuit in all its dimensions for a period
beginning 14 days prior to the event and 7 days after the event. Under the
terms of RPC, the fixed place was available to FOWC for carrying out its
business functions for a period of 5 years, extendable by another period of 5
years. In effect, FOWC had complete control over entire area during the event which
is apparent from the wholesome reading of the RPC and other agreements with
affiliates. Considering the overall arrangement under RPC and agreement with
the affiliates and the actual conduct the FOWC has fixed place of business at
its disposal through which it has carried out business operations and as such
it has a PE in India. For this purpose, the Revenue also relied on various
parts of the commentary of OECD on Article 5.

The judgement of the High
Court was challenged before the Supreme Court.

As per FOWC and Jaypee, no
tax was payable in India on the consideration paid under RPC as it was neither
Royalty nor FOWC had any PE in India. The Revenue did not challenge the
findings of the High Court that the amount paid under RPC does not constitute royalty.
Therefore, that aspect of the matter attained finality. The main question in
the appeals before the Supreme Court, therefore, pertained to PE.

The Supreme Court noted the
scheme of the Act as well as relevant provisions of DTAA on the subject. For
this the Court considered the basic scheme of taxation under sections 4 and 5.
The Court also considered the scope of taxation for non-resident under the Act
and noted that the income tax on non-resident is source based, i.e., source of
such income is India and, therefore, even a non-resident is liable to pay tax
on incomes earned in India. ‘Resident in India’ and ‘Not-ordinarily Resident in
India’ are covered by the provisions contained in section 6.

The Supreme Court further
noted that in the present case, it was concerned with the consideration
received by FOWC as a result of Agreement signed with Jaypee Sports. FOWC,
being a UK Company, was admittedly the non-resident in India. Since the
question was whether the aforesaid consideration/income earned by FOWC was
subject to tax in India or not, it had to be decided as to whether that income
accrued or arose in India. Section 9 contains varied situations where income is
deemed to accrue or arise in India.

The Supreme Court observed
that it was clear from the reading of Clause (i) of sub-section (1) of section
9 of the Act that it includes all those incomes, whether directly or
indirectly, which are accruing or arising through or from any business
connection in India is deemed to accrue in India. Therefore, an income which is
earned directly or indirectly, i.e. even indirectly, is to be deemed to accrue
or earned in India. Further, such an income should have some business
connection in India. Clause (a) of Explanation (1) stipulates that where all
the business operations are not carried in India and only some such operations
of business are carried in India, the income of the business deemed under this
clause to accrue or arise in India shall be only such part of the income as is
reasonably attributable to the operations carried in India. Explanation (2)
makes certain further provisions in respect of ‘business connection’. The
meaning of the expression ‘through’ is again clarified in Explanation (4).

If a non-resident has a PE in India, then
business connection in India stands established. Section 92F of the Act
contains definitions of certain terms, though those definitions have relevance
for the purposes of computation of arms length price, etc. Clause (3) thereof
defines ‘enterprise’ and such an enterprise includes a PE of a person. PE is
defined in Clause (iiia) in the following manner:

(iiia)
“permanent establishment”, referred to in Clause (iii), includes a
fixed place of business through which the business of the enterprise is wholly
or partly carried on;

The Supreme Court also
noted Article 5 of DTAA between India and United Kingdom which lays down as to
what would constitute a PE. As per sub-article (1) of Article 5, a fixed place
of business through which the business of an enterprise is wholly or partly
carried on, is known as ‘permanent establishment’. It requires that there has
to be a fixed place of business. It also requires that from such a place
business of an enterprise (FOWC in the instant case) is carried on, whether
wholly or partly. Sub-Article (2) gives the illustrations of certain places
which will be treated as PEs. Sub-Article (3) excludes certain kinds of places
from the term PE. Sub-Article (4) enumerates the circumstances under which a
person is to be treated as acting on behalf of non-resident enterprise and
shall be deemed to have a PE under sub-article (4) of the enterprise.
Sub-Article (5) excludes certain kinds of agents of enterprise, namely, broker,
general commission agent or agent of an independent status, by clarifying that
if the business is carried on through these persons, the enterprise shall not
be deemed to be a PE. However, one exception thereto is carved out, namely, if
the activities of such an agent are carried out wholly or almost wholly for the
enterprise, or for the enterprise and other enterprises which are controlled by
it or have a controlling interest in it or are subject to same common control,
then, such an agent will not be treated as an agent of an independent status.
It means that if the business is carried out with such a kind of agent, the
enterprise will be deemed to have a PE in India.

The Supreme Court further
stated that as per Article 5 of the DTAA, the PE has to be a fixed place of
business ‘through’ which business of an enterprise is wholly or partly carried
on. Some examples of fixed place are given in Article 5(2), by way of an
inclusion. Article 5(3), on the other hand, excludes certain places which would
not be treated as PE, i.e. what is mentioned in Clauses (a) to (f) is the
‘negative list’. A combined reading of sub-articles (1), (2) and (3) of Article
5 would clearly show that only certain forms of establishment are excluded as
mentioned in Article 5(3), which would not be PEs. Otherwise, sub-article (2)
uses the word ‘include’ which means that not only the places specified therein
are to be treated as PEs, the list of such PEs is not exhaustive. In order to
bring any other establishment which is not specifically mentioned, the
requirements laid down in sub-article (1) are to be satisfied. Twin conditions
which need to be satisfied are: (i) existence of a fixed place of business; and
(b) through that place business of an enterprise is wholly or partly carried
out.

The Supreme Court was of
the firm opinion that it could not be denied that Buddh Circuit is a fixed
place. From this circuit different races, including the Grand Prix is
conducted, which is undoubtedly an economic/business activity. The core
question was as to whether this was put at the disposal of FOWC? Whether this
was a fixed place of business of FOWC was the next question. For this, the
Court first discussed on a crucial parameter, viz., the manner in which
commercial rights which are held by FOWC and its affiliates, have been
exploited in the instance case. In this context, according to the Court, the
entire arrangement between the FOWC and its affiliates on the one hand and
Jaypee on the other hand is to be kept in mind. Various agreements cannot be
looked into by isolating them from each other. Their wholesome reading would
bring out the real transaction between the parties. Such an approach is
essentially required to find out as to who is having the real and dominant
control over the event to determine as to whether Buddh Circuit was at the
disposal of FOWC and whether it carried out any business therefrom or not.
There is a inalienable relevance of witnessing the wholesome arrangement in
order to have a complete picture of the relationship between FOWC and Jaypee.
That would reveal the real essence of the FOWC’s role. Effectively, according
to the Court, in a case like this, what is to be seen is the substance of the
arrangement and not merely the form.

The Apex Court then
observed that a mere running of the eye over the flowchart of these commercial
rights, produced by the Revenue, bring about the following material factors
evidently discernible:

”(i)
FIA had assigned commercial rights in favour of FOAM vide agreement
dated April 24, 2001 and on the same day another agreement was signed between
FOAM and FOWC vide which these rights were transferred to FOWC. Vide another
agreement of 2011, these rights stand transferred in favour of FOWC for a
period of 100 years. Vide Concorde Agreement of 2009, FOWC is authorised to
exploit the commercial rights directly or through its affiliates only.
Significantly, this agreement defines “F-1 Business” to mean exploitation of
various rights, including media rights, hospitality rights, title sponsorship, etc.

(ii) Armed
with the aforesaid rights, FOWC signed first agreement with Jaypee on October
25, 2007 whereby it granted right to promote the event to Jaypee. This is
replaced by race promotion contract dated September, 13, 2011. Under this
agreement, right to host, stage and promote the event are given by FOWC to
Jaypee for a consideration of US $ 40 million. On the same day, another
agreement is signed between Jaypee and three affiliates of FOWC whereby Jaypee
gives back circuit rights, mainly media and title sponsorship, to Beta Prema 2
and paddock rights to Allsports. FOAM is engaged to generate TV Feed. All the
revenues from the aforesaid activities are to go to the said companies, namely,
Beta Prema2, Allsports and FOAM respectively.
These three companies are admittedly affiliates to FOWC.

Though Beta Prema 2 is
given media rights, etc., on September 13, 2011, it had entered in to
title sponsorship agreement dated August 16, 2011 with Bharti Airtel(i.e., more
than a month before getting these rights from Jaypee) whereby it transferred
those rights to Bharti Airtel for a consideration of US$ 8 million.

Service agreement is signed
between FOWC and FOAM on October, 28, 2011 (i.e., on the date of the race)
whereby FOAM engaged FOWC to provide various services like licensing and
supervision of other parties at the event, travel and transport and data
support services. The aforesaid arrangement clearly demonstrates that the
entire event is taken over and controlled by FOWC and its affiliates. There
cannot be any race without participating/competing teams, a circuit and a
paddock. All these are controlled by FOWC and its affiliates. Event has taken
place by conduct of race physically in India. Entire income is generated from
the conduct of this event in India. Thus, commercial rights are with FOWC which
are exploited with actual conduct of race in India.

(iii) Even
the physical control of the circuit was with FOWC and its affiliates from the
inception, i.e. inclusion of event in a circuit till the conclusion of the
event. Omnipresence of FOWC and its stamp over the event is loud, clear and
firm. Mr. Rohatgi is right in his submission that the undisputed facts were
that race was physically conducted in India and from this race income was
generated in India. Therefore, a commonsense and plain thinking of the entire
situation would lead to the conclusion that FOWC had made their earning in
India through the said track over which they had complete control during the
period of race. The appellants are trying to trivialise the issue by harping on
the fact that duration of the event was three days and, therefore, control, if
at all, would be for that period only. His reply was that the duration of the
agreement was five years, which was extendable to another five years. The
question of the permanent establishment has to be examined, keeping in mind
that the aforesaid race was to be
conducted only for three days in a year and for the entire period of race the
control was with FOWC.

(iv) Even
when we examine the matter by examining the race promotion contract agreement
itself, it points towards the same conclusion. The High Court in its judgement
has reproduced relevant clauses of the agreement which we have already
reproduced above. “

The RPC is analysed by the
High Court which brings out the real position and after referring to High
Court’s analysis of various clauses of RPC, the Court stated that it is an
agreement with the same which correctly captures the substance of the relevant
clauses of the RPC. From this, it appears that this seems to be in line with
the above referred material factors brought out by the Court from the flowchart
of commercial rights, produced by the Revenue.

The Supreme Court, after
considering various agreements and nature of business activity involved in this
case, also held that the High Court had rightly concluded that having regard to
the duration of the event, which was for limited days, and for the entire
duration FOWC had full access through its personnel, number of days for which
the access was there would not make any difference. In this context, after
referring to the discussion of the High Court on this aspect, the Court noted
that a stand at a trade fair, occupied regularly for three weeks a year,
through which an enterprise obtained contracts for a significant part of its
annual sales, was held to constitute a PE (Joseph Fowler vs. MNR (1990) 2
CTC 2351 (Tax Court of Canada). Likewise, a temporary restaurant operated
in a mirror tent at a Dutch flower show for a period of seven months was held
to constitute a PE (Antwerp Court of Appeal, 2001 WTD 106-11).

The Supreme Court also
noted the following two judgements referred to by High Court:

(i) In Universal Furniture Ind. AB vs.
Government of Norway, a Swedish company sold furniture abroad that was
assembled in Sweden. It hired an individual tax resident of Norway to look
after its sales in Norway, including sales to a Swedish company, which used to
compensate him for use of a phone and other facilities. Later, the company
discontinued such payments and increased his salary. The Norwegian tax
authorities said that the Swedish company had its place of business in Norway.
The Norwegian court agreed, holding that the salesman’s house amounted to a
place of business: it was sufficient that the Swedish Company had a place at
its disposal, i.e. the Norwegian individual’s home, which could be regarded as
‘fixed’.

(ii) In Joseph Fowler vs. Her Majesty
the Queen 1990 (2) CTC 2351, the issue was whether a United States tax
resident individual who used to visit and sell his wares in a camper trailer,
in fairs, for a number of years had a fixed place of business in Canada. The
fairs used to be once a year, approximately for three weeks each. The court
observed that the nature of the individual’s business was such that he held
sales in similar fares, for duration of two or three weeks, in two other
locales in the United States. The court held that conceptually, the place was
one of business, notwithstanding the short duration, because it amounted to a
place of management or a branch having regard to peculiarities of the business.

Coming to the second aspect
of the issue, namely, whether FOWC carried on any business and commercial
activity in India or not, the Supreme Court held that FOWC is the Commercial
Right Holder (CRH). These rights could be exploited with the conduct of F-1
Championship, which is organised in various countries. It was decided to have
this championship in India as well. In order to undertake conducting of such
races, the first requirement was to have a track for this purpose. Then, teams
would be needed who would participate in the competition. Another requirement
was to have the public/viewers who would be interested in witnessing such races
from the places built around the track. Again, for augmenting the earnings in
these events, there would be advertisements, media rights, etc. as well.
It was FOWC and its affiliates which have been responsible for all the
aforesaid activities. The Concorde Agreement is signed between FIA, FOA and
FOWC whereby not only FOWC became Commercial Rights Holder for 100 years, this
agreement further enabled participation of the teams who agreed for such
participation in the FIA Championship each year for every event and undertook
to participate in each event with two cars. FIA undertook to ensure that events
were held and FOWC, as CRH, undertook to enter into contracts with event
promoters and host such events. All possible commercial rights, including
advertisement, media rights, etc. and even right to sell paddock seats,
were assumed by FOWC and its associates. Thus, as a part of its business, FOWC
(as well as its affiliates) undertook the aforesaid commercial activities in
India.

According to the Supreme
Court, it was difficult to accept the arguments of the Appellants that it was
Jaypee who was responsible for conducting races and had complete control over
the event in question. Mere construction of the track by Jaypee at its expense
would be of no consequence. Its ownership or organising other events by Jaypee
was also immaterial. The examination in the present case was limited to the
conduct of the F-1 Championship and control over the track during that period.

The Supreme Court observed
that, no doubt, FOWC, as CRH of these events, was in the business of exploiting
these rights, including intellectual property rights. However, these became
possible, in the instant case, only with the actual conduct of these races and
active participation of FOWC in the said races, with access and control over
the circuit.

According to the Supreme
Court, the test laid down by the Andhra Pradesh High Court in Visakhapatnam
Port Trust case (1993) 144 ITR 146 (AP) was fully satisfied. Not only the Buddh
Circuit was a fixed place where the commercial/economic activity of conducting
F-1 Championship was carried out, one could clearly discern that it was a
virtual projection of the foreign enterprise, namely, Formula-1 (i.e. FOWC) on
the soil of this country. As per Philip Baker, a PE must have three
characteristics: stability, productivity and dependence. All characteristics
were present in this case. Fixed place of business in the form of physical
location, i.e. Buddh Circuit, was at the disposal of FOWC through which it
conducted business. The taxable event had taken place in India and non-resident
FOWC was liable to pay tax in India on the income it has earned on this soil.

The Supreme Court also
dealt with incidental issues raised by the assessees during the hearing. First
was on the interpretation of section 195 of the Act. It could not be disputed
that a person who makes the payment to a non-resident is under an obligation to
deduct tax u/s.195 of the Act on such payments. The Supreme Court held that the
High Court rightly relying on the judgement in the case of GE India Technology
Centre Private Limited (2010) 327 ITR 456 (SC), held that payments made by
Jaypee to FOWC under the RPC were business income of the FOWC through PE at the
Buddh Circuit, and, therefore, chargeable to tax and Jaypee was bound to make
appropriate deductions from the amounts paid u/s.195 of the Act.

The Supreme Court, however,
accepted the submission of assessee that only that portion of the income of
FOWC, which was attributable to the said PE, would be treated as business
income of FOWC and only from that part of income deduction was required to be
made u/s.195 of the Act. The Supreme Court observed that in GE India Technology
Centre Private Limited, it has been clarified that though there is an
obligation to deduct tax, the obligation is limited to the appropriate portion
of income which is chargeable to tax in India and in respect of other payments
where no tax is payable, recourse is to be made u/s. 195(2) of the Act. It
would be for the Assessing Officer to adjudicate upon the aforesaid aspects
while passing the Assessment Order, namely, how much business income of FOWC
was attributable to PE in India, which was chargeable to tax. At that stage,
Jaypee could also press its argument that penalty etc. be not charged as the
move on the part of Jaypee in not deducting tax at source was bona fide. The
Supreme Court however, made it clear that it had not expressed any opinion on
this either way.

The Court also clarified
that so far as appeal filed by the Revenue is concerned, it was submitted by
the learned counsel appearing for the Revenue that the issue of dependent agent
PE had now become academic. This was in view of the fact that the Court had
already held that the FOWC had a fixed place PE through which it was carrying
on business in India. As such, the Court did not examine that issue and
disposed of the appeal of the Revenue accordingly.

Notes:

i)
In the above case, the Apex Court has accepted the basic principle that
determination of existence of a PE of an enterprise should be based on actual
facts of the relevant case. The above judgements are primarily based on complex
arrangements and factual matrix of the case from which the Court ascertained
the real position relevant for determination of PE etc. [and rendered
its judgement running into more than 50 printed pages of ITR] which has been
briefly digested. In the process, the Court has made various observations
confirming certain internationally accepted principles and tests (such as test
of fixed place of business, disposal test, duration test, virtual projection of
foreign enterprise test, etc.) relating to determination of fixed place
PE under Article 5 of the relevant DTAA. These principles and tests have been
applied to the real facts emerging in this case to come to the conclusion that
the FOWC has PE in India through which it was carrying on business in India.
Effectively, the Court has gone by the substance of the arrangement rather than
merely its form. The Court, in the process, has also referred to relevant
commentaries on this Article given by OECD as well as by learned authors Philip
Baker and Klaus Vogel and also referred to various judicial precedents
including the celebrated judgements of the Apex Court in the cases of Azadi
Bachao Andolan [(2003) 263 ITR 706], Transmission Corporation [(1999) 239 ITR
587] and GE Technology Center [(2010) 327 ITR 456]. All these three judgments
were analysed by us in the column ‘Closements’ (in the months of December,
2003/ January, 2004, October, 1999 and December, 2010 respectively) of this
journal.

ii) The
assessees should become wiser from the approach of the Court in applying those
principles and tests to such complex arrangements and should be cautious in
arranging their factual affairs in such cases. This judgement should be mainly
viewed from this perspective and now, more so with the GAAR provisions becoming
effective from 01.04.2017. In future, in this respect, global developments in
the area of BEPS should also be borne in mind, more particularly, in this
context, Anti-abuse Rules for PEs situated in third Jurisdiction contained in
Article 10 of MLI [Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Sharing (BEPS)], which is expected
to become effective for certain Indian covered tax agreement [DTAAs] within
about the next two years.

iii) In this column, generally, as a policy
(decided for various justifiable reasons in the past), the judgements reported
in ITRs are digested. Currently, for this column, we are considering 394/395
ITRs. Whenever it is felt that a particular judgement of the Apex Court lays
down some important relevant principles relating to tax matter, which is of a
general interest for larger readership of the journal, the same is picked up
(on a case to case basis) for analysis in greater detail in our another column
‘Closements’ (which now does not feature every month) even before it is so
reported, like the one relating to ‘deemed dividend’ analysed in that column in
this issue of the journal and Part II thereof will appear in the next issue.

iv) Recently,
another judgement of the Apex Court has also been delivered in the case of
E-funds IT Solution Inc. [which is decided, based on its facts, in favour of
the assessee]. In this also, principles and tests for determination of
existence of PE, in the context of India-USA DTAA, have been considered. In
this, the above judgement has also been considered. The same will be digested
in this column in due course.

8. Closing
Stock-Valuation-With dissolution of the firm, if the business comes to an end,
the cost method of valuing closing stock is not permissible and has to be
valued at the market rate but where the dissolution is by operation of law and
the business does not come to an end, it is not necessary to value the stock in
trade at market prices and could be valued at cost method of valuation.

Revision-Erroneous
and prejudicial to revenue- If the view taken by the Assessing Officer is
plausible view, the CIT cannot exercise his power u/s. 263.

Commissioner
of Income Tax-Gujarat-II vs. Kwality Steel Suppliers Complex (2017) 395 ITR 1
(SC)

The Respondent-Assessee was
a registered firm engaged in the business of sale of scrap of ship materials.
The firm was constituted with two partners, i.e., mother and son. During the
period under consideration, the firm was dissolved on 01.02.1993 on account of
the death of one of the partners. At the time of dissolution, the firm had
valued the closing stock at cost price.

The Respondent-Assessee
filed return of income showing total income of Rs. 16,41,760/- for assessment
year 1993-1994. The relevant previous year is financial year 1992-1993. On this
return, the assessment order was passed by the Assessing Officer on 24.02.1995
u/s. 143(3) of the Act accepting the method of valuation adopted by the
Respondent-Assessee.

Subsequently, the
Commissioner of Income Tax (CIT) in exercise of his revisional jurisdiction
u/s. 263 of the Act issued show cause notice dated 27.02.1997 and directed the
Assessing Officer to value the closing stock at the time of dissolution at the
market price. He further observed in his order that the Assessing Officer had
erred while passing the assessment order for the year 1993-1994. According to
him, during the accounting year under consideration, the firm was dissolved,
and therefore, the closing stock was to be valued at market rate in view of the
decision of the Supreme Court in the case of A.L.A. Firm vs. Commissioner of
Income Tax [(1991) 189 ITR 285]. So, he added the average gross profit of
15 per cent to the disclosed value of the closing of Rs. 12 crore and the same
resulted in addition of Rs. 1.82 crore.

The Respondent-Assessee
questioned the validity of the order passed u/s. 263 of the Act taking the plea
that revisional jurisdiction could not be exercised in this manner. However,
the CIT by his order dated 20.03.1997 rejected the contention of the Assessee
and set aside the assessment order with a direction to the Assessing Officer to
pass fresh order in accordance with the direction given in the order passed by
CIT.

The Assessee
challenged the said order dated
20.03.1997 by filing appeal before the Income Tax Appellate Tribunal (ITAT),
ITAT dismissed the appeal on 28.04.2000.

This order of ITAT was
challenged before the High Court in the form of statutory appeal u/s. 260A of
the Act. The High Court has accepted the contention of the Assessee and,
thereby, set aside the revisional order dated 20.03.1997 passed by CIT. For
this, the High Court referred to various judgments of the Apex Court dealing
with cases of dissolution of the firm including the judgement in the case of
Shakhti Trading Co. [(2001) 250 ITR 871] in which it was effectively held that
if post dissolution the business is continued, the closing stock could be
valued at cost.

The Revenue challenged the
order of the High Court before the Supreme Court.

According to the Supreme
Court, the moot question was as to whether the view taken by the Assessing
officer in accepting the valuation of the closing stock at cost price was a
plausible view in the circumstances of this case. If it was so, then CIT could
not have exercised his revisionary jurisdiction u/s. 263 of the Act.

The Supreme Court observed
that the judgement in ALA Firm’s case proceeded on the basis that with the
dissolution of the firm, the business of the firm comes to an end and in that
situation, the cost method of valuing the stock was not permissible.

The Supreme Court wondered
as to whether this situation would apply in the instant case where the
partnership firm stood dissolved by the operation of law in view of the death
of one of the partners, i.e., the mother, but the business did not come to an
end as the other partner, viz., son, who inherited the share of the mother,
continued with the business. According to the Supreme Court, in a situation
like this, there was no question of selling the assets of the firm including
stock-in-trade and, therefore, it was not necessary to value stock-in-trade at
market price.

The Supreme Court on
consideration of the judgement in Chainrup Sampatram vs. CIT (1953) 24 ITR
481 (SC) observed that the position which emerges from the said judgement
is that when a business continues, it may not be necessary to follow the market
rate to value the closing stock as the reasons, because of which the same is to
be done are not available.

According to the Supreme
Court when this position becomes clear, it follows that in the instant case the
view taken by the Assessing Officer in accepting the book value of the
stock-in-trade was a plausible and permissible view. In this scenario, the CIT
could not have exercised his powers u/s. 263 of the Act.

The Supreme Court dismissed
the appeal of the Revenue with costs.

Note:

The judgements of the Apex
Court in the cases of A.L.A Firm and Shakhti Trading Co. (in which the
judgement of the Apex Court in Chainrup Sampatram was also relied) have been analysed
by us in the column ‘Closements’ (in the months of July, 1991 and September,
2001 respectively) of this journal. It may also be noted that para 24 of ICDS
II (Valuation of Inventories) now specifically provides that in the event of
dissolution of a firm, the inventory on the date of dissolution shall be valued
at Net Realizable Value, notwithstanding the fact whether the business is
discontinued or not. It is also worth noting that recently, the Delhi High
Court in the case of the Chamber of Tax Consultants (vide order dated
11.11.2017) has struck down some of the provisions of certain ICDSs as ultra
vires the Act and this includes the said para 24 of ICDS II.

9. Export markets development allowance –
Weighted deduction – Agreement stated that Mr. Jack Barouk had agreed to work
as an agent of the assessee on payment of the commission and RBI had approved
the same as ‘Selling Agency Agreement’ – Entitled to weighted deduction u/s.
35(1)(b)(iv)

Velvet
Carpet and Co. Ltd. vs. Commissioner of Income Tax (2017) 395 ITR 515 (SC)

In the return filed by the
Assessee for the assessment year 1983-84, it had stated that a sum of Rs.
4,60,433 was paid by the Assessee to one Mr. Jack Barouk of Brussels who was
appointed by the Assessee as its commercial agent in the said country for the
sale of the Assessee’s goods. Section 35B(1)(b)(iv), provides for weighted
deduction that is in addition to the actual amount spent, one-third thereof as
an additional expenditure in case the expenditure is incurred wholly and exclusively
on maintenance outside India of a branch, office or agent for the promotion of
the sale outside India of such goods, services or facilities.

The Appellant had filed
appeal against the order of the Assessing Officer refusing to give benefit of the
aforesaid provision, with the Commissioner of Income-tax (Appeals), which was
dismissed. However, in further appeal preferred before the Income-tax Appellate
Tribunal [ITAT], the Appellant succeeded. The ITAT, looking into the agreement
that was entered into between the Assessee and the aforesaid Mr. Jack Barouk,
found that the agreement was an agency agreement. The ITAT also took into
consideration another supporting fact that as per the legal requirement, the
said agreement was approved by the Reserve Bank of India and the Reserve Bank
of India in its approval had treated this agreement to be an agency agreement.

The High Court while
allowing the appeal of the Department and rejecting the claim of the Assessee,
observed that at no stage, the Assessee had put up a case that it had maintained
branch or agency outside the country.

The Supreme Court observed
that what was not in dispute was that the expenditure was in fact incurred. It
was also incurred wholly and exclusively outside India as the payment was made
to Mr. Jack Barouk a resident of Brussels. It was also not in dispute that this
payment was made against some sales of carpets belonging to the Assessee, made
by the said Mr. Jack Barouk. The only dispute was as to whether he could be
treated as “agent” of the Assessee.

The Supreme Court went
through the agreement that was entered into between the Assessee and Mr. Jack
Barouk. It was in the form of communication dated October 24, 1977 addressed by
Mr. Jack Barouk to the Assessee, stating therein the terms and conditions on
which two parties agreed to work together. In this communication, Mr. Jack
Barouk agreed to keep the goods of the Assessee in his godown, show the said
products to the visiting customers personally and secure orders from the territories
mentioned therein namely, Benelux and France.

This communication further
stated that he will be given 5 %
commission on all goods shipped by the Assessee to the aforesaid
territories on the orders procured by the said Mr. Jack Barouk. The Assessee
had accepted and agreed on the aforesaid terms contained in the said
communication and there was a specific endorsement to this effect by the
Assessee that the said communication, on acceptance by the Assessee, became a
valid and enforceable agreement between the parties.

The aforesaid terms clearly
stated that Mr. Jack Barouk had agreed to work as an agent of the Assessee and
on the orders procured he was to get 5 % commission. The Supreme Court held
that this aspect that the agreement was in fact an agency agreement which stood
conclusively established by the registration given by the Reserve Bank of India
vide its letter dated October 29, 1977. Captioned communication of the Reserve
Bank of India reads as “Registration of Selling Agency Arrangement”.

The Supreme Court observed that the Reserve Bank of India while
giving its accord to the arrangement established between the parties it was
termed as an agency arrangement. The Supreme Court therefore held that Mr. Jack
Barouk was an agent of the Assessee and, therefore, all the conditions
stipulated in section 35B(1)(b)(iv) for giving weighted deduction of
expenditure incurred by the Assessee stood established. The Supreme Court
allowed the appeal and set aside the impugned order of the High Court and
restored the order of the Income-tax Appellate Tribunal. _

BCAJ Admin

Glimpses of Supreme Court Rulings

14. Question of Law –
Whether the trading activity in the nature of re-export of imported goods
carried on by the SEZ unit of the assessee is to be considered as ‘services’
eligible for exemption u/s. 10AA of the Income-tax Act in view of the
definition of ‘services’ in Special Economic Zones Rules, 2006 though there is
no such provision in section 10AA of the Act, is a question of law.

CIT vs. Bommidala Enterprises Pvt. Ltd. (2016) 389 ITR 1
(SC)

In an appeal filed before the Andhra Pradesh High Court, the
Department had raised the following questions of law:

1. In the facts and circumstances of the case,
whether the Tribunal was correct in upholding the finding of the Commissioner
of Income-tax (Appeals) that the trading activity carried on by the SEZ unit of
the assessee was to be considered as ‘services’ eligible for exemption u/s.
10AA of the Income-tax Act by relying on the definition of “services” as per
Special Economic Zone Rules, 2006 when there was no such provision in section
10AA of the Act?

2. In the facts and circumstances of the case,
whether the Tribunal was justified in relying on the instructions issued by the
Ministry of Commerce regarding the applicability of exemption u/s. 10AA of the
Income-tax Act to the trading activity in the nature of re-export of imported
goods though there was no subsequent amendment made to the provisions of the
Income-tax Act to give effect to the clarification contained in the
instructions in spite of the mention in the said instructions that appropriate amendments are being issued?

3. In the facts and circumstances of the case,
whether the Tribunal was correct in law in upholding the exemption claimed u/s.
10AA of the Income-tax Act when the respondent assessee was not involved either
in manufacture or production of article/or/thing or provide any services as
required in the said statutory provision but was engaged in trading activity
only?

The Revenue’s Counsel contended before the High Court that
the assessee was carrying on trading business and not the manufacturing
business. The High Court however held that this was a factual aspect and it had
been taken care of by the authorities below (both CIT(A) and ITAT held that the
assessee was entitled to exemption u/s. 10AA) and that the fact finding could
not be interfered with, unless it was found perverse. The High Court dismissed
the appeal of the Revenue.

On further appeal, the Supreme Court observed that the
question of law that was raised by the Appellant-Revenue herein before the High
Court was as to whether trading activity carried on by the SEZ unit of the
Respondent-Assessee was to be considered as ‘service’ eligible for exemption u/s.
10AA of the Income-tax Act. The Supreme Court noted the submission of the
Appellant that for this purpose, the Income-tax Appellate Tribunal could not
have relied upon the definition of ‘services’ as per SEZ Rules when there was
no such provision u/s. 10AA of the Act.

The Supreme Court observed that a perusal of the order of the
High Court showed that this aspect was not considered and brushed aside by
merely saying that the Tribunal had held it to be a ‘service’ and that it was a
question of fact. The Supreme Court held that no doubt, insofar as activity
carried on by the Respondent-Assessee was concerned, factual aspects were not
in dispute.

However, whether that would constitute ‘service’ within the
meaning of section 10AA of the Act would be a question of law and not a
question of fact. The High Court was, therefore, in error in not entertaining
the said plea and dismissing the appeal of the Revenue by labelling it as a
question of fact. The Supreme Court, therefore, set aside the order of the High
Court and remanded the case to the High Court to decide the aforesaid question
of law.

15. Deduction of tax at source – Assessee not heard by the
High Court and the review petition also dismissed – Supreme Court set aside the
orders and remanded the matter for decision afresh

Novo Nordisk Pharma India Ltd. vs. CIT (2016) 389 ITR 134
(SC)

The High Court allowed the appeal filed by the Revenue. The
question was as to whether the transaction between the assessee and the person
to whom certain payments were made was one attracting the provisions of section
194C of the Act.

The assessee sought review because: (i) the Counsel of the
assessee was unable to appear on the day of hearing and argue the case as he
was engaged in other court; (ii) the Court had not examined the relevant board
circular, (iii) that the deductee having paid the tax, there was no loss to the
Revenue, and as such the situation did not warrant levy of interest.

The High Court dismissed the review petition holding that:
(i) inability to appear due to other engagement could hardly constitute a
ground for review; (ii) the Board Circular was not relevant as the matter was
decided considering the three inter-linking agreements; and (iii) whether the
deductee had paid its tax or not was not a relevant question in so far the
provisions of section 194C was concerned as section 201 was only consequential.

On appeal, the Supreme Court noted that it was a fact that
the assessee was not heard when the impugned judgment was delivered. Even the
review petition filed by the Appellant before the High Court was also rejected.

In the circumstances, the Supreme Court set
aside the impugned judgment and the matters were remitted to the High Court for
hearing afresh.

BCAJ Admin

Glimpses of Supreme Court Rulings

7. Capital gains –
Exemption u/s. 54E is available to the depreciable assets which is a long term
capital asset and cannot be denied by referring to the fiction created u/s.50.

CIT vs. V.S. Dempo Company Ltd. (2016) 387 ITR 354 (SC)

In the return filed by the assessee for the Assessment Year
1989-90, the assessee had disclosed that it had sold its loading platform M.V.
Priyadarshni for a sum of Rs.1,37,25,000/- on which it had earned some capital
gains. On the said capital gains the assessee had also claimed that it was
entitled for exemption u/s. 54E of the Income Tax Act. The asset was purchased
in the year 1972 and sold sometime in the year 1989. Thus, the asset was almost
17 years old. Going by the definition of long term capital asset contained in
section 2(29B), it was admittedly a long-term capital asset. The Assessing
Officer however rejected the claim for exemption u/s. 54E on the ground that
the assessee had claimed depreciation on this asset and, therefore, provisions
of section 50 were applicable. Though this was upheld by the Commissioner of
Income Tax (Appeals), the Income Tax Appellate Tribunal allowed the appeal of
the assessee herein holding that the assessee was entitled for exemption under
Section 54E of the Act. The High Court dismissed the appeal of the Revenue.
While doing so the High Court relied upon its own judgment in the case of CIT
vs. ACE Builders Pvt. Ltd. [(2006) 281 ITR 210 [Bom]. The High Court
observed that section 50 of the Act which is a special provision for computing
the capital gains in the case of depreciable assets was not only restricted for
the purposes of section 48 or section 49 of the Act as specifically stated
therein, the said fiction created in sub-section (1) & (2) of section 50
had limited application only in the context of mode of computation of capital
gains contained in sections 48 and 49 and would have nothing to do with the
exemption that is provided in a totally different provision i.e. section 54E.
Section 48 deals with the mode of computation and section 49 relate to cost
with reference to certain mode of acquisition. This aspect was analysed by the
judgment of the Bombay High Court in the case of CIT vs. ACE Builders Pvt.
Ltd. (supra) in the following manner:

“In our opinion, the assessee cannot be denied exemption
u/s. 54E, because, firstly, there is nothing in section 50 to suggest that the
fiction created in section 50 is not only restricted to sections 48 and 49 but
also applies to other provisions. On the contrary, section 50 makes it
explicitly clear that the deemed fiction created in sub-section (1) & (2)
of section 50 is restricted only to the mode of computation of capital gains
contained in Section 48 and 49. Secondly, it is well established in law that a
fiction created by the legislature has to be confined to the purpose for which
it is created. In this connection, we may refer to the decision of the Apex
Court in the case of State Bank of India vs. D. Hanumantha Rao reported in 1998
(6) SCC 183. In that case, the Service Rules framed by the bank provided for
granting extension of service to those appointed prior to 19.07.1969.

The respondent therein who had joined the bank on 1.7.1972
claimed extension of service because he was deemed to be appointed in the bank
with effect from 26.10.1965 for the purpose of seniority, pay and pension on
account of his past service in the army as Short Service Commissioned Officer.
In that context, the Apex Court has held that the legal fiction created for the
limited purpose of seniority, pay and pension cannot be extended for other
purposes. Applying the ratio of the said judgment, we are of the opinion, that
the fiction created u/s. 50 is confined to the computation of capital gains
only and cannot be extended beyond that.

Thirdly, Section 54E does not make any distinction between
depreciable asset and non-depreciable asset and, therefore, the exemption
available to the depreciable asset u/s. 54E cannot be denied by referring to
the fiction created u/s. 50. Section 54E specifically provides that where
capital gain arising on transfer of a long term capital asset is invested or
deposited (whole or any part of the net consideration) in the specified assets,
the assessee shall not be charged to capital gains. Therefore, the exemption
u/s. 54E of the I.T. Act cannot be denied to the assessee on account of the
fiction created in Section 50.”

The Supreme Court held that it was in agreement with the
aforesaid view taken by the High Court.

The Supreme Court noted that the Gujarat High Court as well
as Guahati High Court had also taken the same view in the following cases:

1. CIT
vs. Polestar Industries [(2014) 221 Taxman 423 (Guj)];

2. CIT vs. Tax vs. Assam Petroleum Industries
(P.) Ltd. [(2003) 262 ITR 587 (Guj.)].

The Supreme Court also noted that against the aforesaid
judgments no appeal had been filed.

In view of the foregoing, the Supreme Court did not find any
merit in the instant appeal which was accordingly, dismissed.

8. Business Expenditure – Amortisation of expenditure for
issue of share u/s. 35D – Amortisation allowable over a period of 10 years –
Where benefit is allowed for the first two assessment years, it cannot be denied
in the subsequent balance period.

Shasun Chemicals and Drugs Ltd. V. CIT (2016) 388 ITR 1
(SC)

Business Expenditure – Bonus – Dispute with workmen – Payment
made to Trust to comply with the requirement of section 43B but the dispute was
settled and the payment was made before the expiry of time permissible u/s. 36
– Deduction was allowable and the provisions of section 40A(9) were not
attracted.

The assessee went in for public issue of shares in order to
raise funds to meet the capital expenditure and other expenditure relating to
expansion of its existing units of production both at Pondicherry and Cuddalore
and for expansion of its Research and Development Activity. The assessee issued
to public 15,10,000 equity shares of Rs.10/- each for cash at a premium of
Rs.30/- per share aggregating to Rs.6,04,00,000/-.

The aforesaid issue was opened for public subscription during
the financial year ending 31.03.1995 relevant to the Assessment Year 1995-96.
The assessee had, in the prospectus issued, clearly stated under the column
projects that the production capacity of its existing products, more
particularly Ibuprofen and Ranitidine was proposed to be increased.

The assessee incurred a sum of Rs.45,51,890/- towards the
aforesaid share issue expenses and claimed 1/10th of the aforesaid share issue
expenses each year u/s. 35D of the Act from the Assessment Years 1995-96 to
2004-05. The Assessing Officer on the same set of facts allowed the claim of
the assessee (1/10th of the share issue expenses u/s. 35D of the Act) for the
initial Assessment Year being the Assessment Year 1995-96 after examining the
materials produced. However, the Assessing Officer disallowed the expenses for
the Assessment Year 1996-97 on the ground that the share issue expenses were
not eligible for deduction in view of the decision of the Supreme Court in the
case of Brooke Bond India Ltd. vs. CIT [(1997) 225 ITR 798 (SC)],
stating that the expenditure incurred was capital in nature and hence not
allowable for computing the business profits.

Aggrieved against the aforesaid disallowance made by the
Assessing Officer for the Assessment Year 1996-97, the assessee filed an appeal
before the Commissioner of Income Tax (Appeals), [hereinafter referred to as
CIT(A)] who vide his order directed the Assessing Officer to verify
physically the factory premises of the assessee and find out, whether there
were any additions to the plant and machinery at the factory and whether there
were any additions to the buildings at the factory whereby any expansion has
been made to the existing industrial undertaking to justify the claim made by
the assessee.

In furtherance to the aforesaid direction, the Assessing
Officer after making due physical verification of the factory premises and on
being satisfied with the expansion of the facilities to the industrial
undertaking duly allowed the claim of share issue expenses. While doing so, the
Assessing Officer, for the assessment year 1996-97, passed a detailed and
elaborate order after scrutinising all the materials made available to him and
recorded a positive finding of fact that there was an expansion to the existing
units of the industrial undertaking and after being satisfied of the same duly
allowed the claim of share issue expenses u/s. 35D.

In the return by the assessee for the assessment year
2001-02, it was mentioned by the assessee that it had paid bonus to its
employees to the tune of Rs.96,08,002/- in the said Financial Year and,
therefore, it claimed deduction. However, invoking the provisions of section
40A(9), the said expenditure was disallowed on the ground that it was not paid
in cash to the concerned employees. CIT(A) allowed the expenditure and the same
view was taken by the ITAT but the High Court has reversed the view of ITAT on
this ground also.

In the aforesaid backdrop, two questions were raised before
the Supreme Court by the assessee.

As regards to the issue amortisation u/s. 35D of the
expenditure incurred on issue of shares, the Supreme Court noted that in the
Income Tax Return which was filed for the Assessment Year 1995-96, the assessee
had claimed that it had incurred a sum of Rs.45,51,890/- towards the share
issue expenses and had claimed 1/10th of the aforesaid share issue expenses
u/s. 35D of the Act from the Assessment Year 1995-96. This claim of the
assessee was found to be justified and allowable under the aforesaid provisions
and on that basis 1/10th share issue expenses was allowed u/s. 35D of the Act.
When it was again claimed for the Assessment Year 1996-97, though it was
disallowed and on directions of the Appellate Authority, the Assessing Officer
made physical verification of the factory premises. He was satisfied that there
was expansion of the facilities to the industrial undertaking of the assessee.
It was on this satisfaction that for the Assessment Year 1996-97 also the
expenses were allowed. The Supreme Court held that once this position is
accepted and the clock had started running in favour of the assessee, it had to
complete the entire period of 10 years and benefit granted in first two years
could not have been denied in the subsequent years as the block period was 10
years starting from the Assessment Year 1995-96 to Assessment Year 2004-05. The
Supreme Court observed that the High Court, however, disallowed the same
following the judgment of the Supreme Court in the case of Brooke Bond India
Ltd (supra). In the said case it was held that the expenditure incurred on
public issue for the purpose of expansion of the company is a capital
expenditure. However, in spite of the argument raised to the effect that the
aforesaid judgment was rendered when section 35D was not on the statute book
and this provision had altered the legal position, the High Court still chose
to follow the said judgment. According to the Supreme Court it was here where
the High Court went wrong as the instant case was to be decided keeping in view
the provisions of section 35D. The Supreme Court held that in any case, it
warrants repetition that in the instant case under the very same provisions
benefit was allowed for the first two Assessment Years and, therefore, it could
not have been denied in the subsequent block period. The Supreme Court thus,
answered the question in favour of the assessee holding that the assessee was
entitled to the benefit of section 35D for the Assessments Years in question.

So far as the other question regarding deduction on account
of payment of bonus to the employees of the assessee was concerned, the Supreme
Court noted that in the Assessment Years in question the workers of the
assessee had raised a dispute of quantum of bonus which had led to the labour
unrest as well. Because of this the workers had finally refused to accept the
bonus offered to them. Faced with this situation, the assessee had made the
payment to the Trust to comply with the requirement of section 43B, as the said
provision makes it clear that deduction in respect of bonus would be allowed
only if actual payment was made. Pertinently, the dispute could be settled with
the workers well in time and for that reason payment of bonus was made to the
workers on the very next day of deposit of the said amount in the Trust by the
assessee. This happened before the expiry of due date by which such payment was
supposed to be made in order to claim deduction u/s. 36 of the Act. However,
since the payment was made from the Trust, the Assessing Officer took the view
that as the payment was not made by the assessee to the employees directly in
cash, it was not allowable in view of the provisions of section 40A(9). Though
this view was not accepted by the CIT(A) as well as ITAT, the High Court had
found justification in the stand taken by the Assessing Officer. According to
the Supreme Court, here also the High Court had gone wrong in relying upon the
provisions of section 40A(9) of the Act.

The provisions of section 36 which enumerate various kinds of
expenses which are allowable as deduction while computing the business income
u/s. 28. The amount paid by way of bonus is one such expenditure which is
allowable under clause (ii) of sub-section (1) of section 36. According to the
Supreme Court there was no dispute that this amount was paid by the assessee to
its employees within the stipulated time. Embargo specified u/s. 43B or
40A(9) did not come in the way of the
assessee. Therefore, the High Court was wrong in disallowing this expenditure
as deduction while computing the business income of the assessee and the
decision of the ITAT was correct.

On both counts, the order of the High Court was set aside by
the Supreme Court and the appeals were allowed.

Note: In the above case, in the context of the second
issue relating to deductibility of bonus payment, some of the observations of
the apex court relating to sections 40A(9) and 43B lack clarity and do not seem
to be in line with the provisions and hence, they are ignored.

9 Appeal to the High
Court – High Court must frame the substantial question(s) of law arising in the
appeal before answering the same.

Jai Hind Cycle Company Ltd. vs. CIT (2016) 388 ITR 482
(SC)

The only point canvassed at the hearing before the Supreme
Court was that the income tax appeal u/s. 260A
had been decided by the High Court without framing any substantial
question of law. This, according to the Appellant was impermissible on the
basis of several decisions of the Supreme Court including the one in M.
Janardhana Rao vs. Joint CIT reported in [(2005) 273 ITR 50 (SC)].

The Supreme Court after perusing the said order of the Court,
was of the view that the High Court ought to have framed the substantial
question(s) of law arising in the appeal before answering the same. The High
Court having not done that, the Supreme Court set aside the order passed by the
High Court and remanded the matter to the High Court for a de novo
consideration after formulating the substantial question(s) of law arising, if
any.

The Supreme Court clarified that it had
expressed no opinion on the merits of the case.

BCAJ Admin

Glimpses of Supreme Court Rulings

6. Appeal to the Supreme Court – Dismissed as it was against
the order of remand

Addl. CIT vs. Vidarbh
Irrigation Department Corporation (2017)
392 ITR 1 (SC)

The issue that arose
before the Supreme Court was as to whether the Respondent, namely, Vidarbh
Irrigation Department Corporation (VIDC) was a local authority within the
meaning of section 10(20A) of the Act.

The Supreme Court noted
that though this provision stood omitted vide section 4(m) w e f
1-4-2003 by the Finance Act 2002 but as the assessment year in question was
prior thereto and therefore was relevant.

The Supreme Court found
that the High Court referring to the judgement of the Supreme Court in Gujarat
Industrial Development Corporation vs. CIT [(1997) 227 ITR 414(SC)] had
observed that if the authority is constituted under the enactment either for
satisfying the need for housing accommodation or for planning, development or
improvement of cities, towns and villages or for both, income of such authority
was exempt from tax u/s. 10(20A).

The Supreme Court noted
that according to the High Court the Tribunal had not considered the issue in
the light of the provisions of VIDC as well as the Maharashtra Irrigation Act,
1976 and the Bombay Canal Rules, 1934 and hence it had remanded the case back
to the Tribunal for fresh consideration.

The Supreme Court declined
to interfere with the judgment of the High Court and dismissed the appeal of
the Income-tax Department because the High Court had only remanded the issue to
the Tribunal for fresh consideration.

7.
Depreciation – The construction was made by the firm though the assessee
company had reimbursed the amount but the fact remained that the construction
was not carried out by the assessee himself and therefore, Explanation 1 to
section 32 would not come to the aid of
the assessee – Assessee not entitled to depreciation

Mother Hospital Pvt.
Ltd. vs. CIT (2017) 392 ITR 628 (SC)

A partnership firm Mother
Hospital had been constituted by Dr. M. Ali, Dr. Ayesha Beevi and their three
children. 4.3 acres of land belonged to the firm. The purpose of the
partnership firm was to run a super speciality hospital in Thrissur Town in
Central Kerala and, accordingly, the firm started construction of the hospital
building. Since it was felt expedient to form a private limited company to run
and manage the hospital (then under construction), a company, Mother Hospital
Private Ltd., was formed for the said purpose and was incorporated on
30.12.1988. The shares which are held by seven persons are closely related to
each other, viz., (1) Dr. M. Ali; (2) Dr. Ayesha Beevi (wife of Dr. M. Ali);
(3) Nisha, (4) Shabna and (5) Sharmini (all children of Dr. M. Ali and Dr. Ayesha
Beevi); (6) Khadeeja Beevi (mother of Dr. M. Ali); (7) and Akbar Ali (father of
Ayesha Devi). Out of the total capital of Rs.1,33,63,520/- of the company, the
value of the shares held by Khadeeja Beevi and Akbar Ali were Rs.5,000/- each.

Thereafter, an agreement
was entered into between the firm and the company by which it was agreed that
the firm will complete the construction of the building and hand over
possession of the same on completion, on the condition that the entire cost of
construction of the building should be borne by the company. The relevant
clause in the agreement read as under:

“The hospital building
shall belong to the company on the company taking possession thereof; but
however that the firm has and will have a lien on the hospital building and on
any improvements or additions thereto until the money owing by the company to
the firm by virtue of this agreement is fully paid off.”

The company took
possession of the building on its completion on 18.12.1991 and was running the
hospital therein with effect from 19.12.1991. The accounts of the company were
debited with the cost of construction of the building, i.e., Rs.1,37,83,149.83.
The accounts of the firm had also been credited with the payments of
Rs.1,06,78,456/- made by the company to the firm for completion of the
construction. The balance amount payable by the company to the firm had been
carried as the company’s liability in its Balance Sheet, for which the firm had
a lien on the building.

This amount was later paid
to the firm. The one time building tax payable by the owner of a building under
the Kerala Building Tax Act was also paid by the company.

Since the ownership of the
land had to remain with the firm, it was also agreed that the land would be
given on lease by the firm to the company and agreement dated 01.02.1989
provided for the said contingency as well in clause 4(g) which read as under:

“(g) In consideration of
the FIRM agreeing with the COMPANY to permit situation of the hospital building
or any additions thereto belonging to the FIRM as aforesaid, the COMPANY shall
pay to the FIRM a ground rent of Rs.100/- per month, but however that the
liability to pay such ground rent shall be on and from the 1^st day
of April 93 only.”

The first assessment year
of the company was 1992-1993. The company filed its return for the said year in
which it claimed depreciation on the building part of the said property u/s. 32
of the Income-tax Act. The assessment officer, after construing the provisions
of the aforesaid agreement came to the conclusion that the assessee had not
become the owner of the property in question in the relevant assessment year
and, therefore, rejected the claim of depreciation. Appeal preferred by the
assessee-company before the Commissioner of Income Tax (Appeals) met with the
same fate. However, in further appeal before the Income Tax Appellate Tribunal
(ITAT), the appellant succeeded. This success, however, was proved to be only
of temporary nature inasmuch as the appeal of the Revenue against the order of
the ITAT filed u/s. 260A of the Income-tax Act before the High Court was
allowed setting aside the aforesaid order of ITAT.

The High Court held that
the assessee had not become the owner of the property in question in the
relevant assessment year and clause 4(g) could not confer any ownership rights
on the assessee.

On an appeal by the
assessee-company against the order of the High Court, the Supreme Court agreed
with the view taken by the High Court. The Supreme Court held that the building
which was constructed by the firm belonged to the firm. Admittedly it was an
immovable property. The title in the said immovable property cannot pass when
its value is more than Rs.100/- unless it is executed on a proper stamp paper
and is also duly registered with the sub-Registrar. Nothing of the sort took
place. In the absence thereof, it could not be said that the assessee had
become the owner of the property.

Before the Supreme Court,
another argument was raised by the learned counsel appearing for the appellant.
It was submitted that having regard to clause 4(g), the appellant had become
the lessee of the property in question and since the construction was made by
the appellant from its funds, by virtue of Explanation (1) to section 32 of the
Income-tax Act, the assessee was, in any case, entitled to claim depreciation.
This explanation read as under:

“32(1)
……………………

Explanation 1. Where the
business or profession of the assessee is carried on in a building not owned by
him but in respect of which the assessee holds a lease or other right of
occupancy and any capital expenditure is incurred by the assessee for the
purposes of the business or profession on the construction of any structure or
doing of any work in or in relation to and by way of renovation or extension of
or improvement to the building, the provisions of this clause shall apply as if
the said structure or work is a building owned by the assessee.”

According to the Supreme
Court, from the plain language of the aforesaid explanation it was clear that,
it is only when the assessee holds a lease right or other right of occupancy
and any capital expenditure is incurred by the assesee on the construction of
any structure or doing of any work in or in relation to and by way of
renovation or extension of or improvement to the building and the expenditure
on construction is incurred by the assessee, that assessee would be entitled to
depreciation to the extent of any such expenditure incurred.

The Supreme Court held
that in the instant case, the record showed that the construction was made by
the firm. It was a different thing that the assessee had reimbursed the amount.
The construction was not carried out by the assessee himself. Therefore, the
explanation also would not come to the aid of the assessee. The Supreme Court,
thus, dismissed the appeal being without any merit.

8. Non-resident – Shipping Business – Fees for technical
services – Maersk Net System was a facility which enabled the agents to access
several information like tracking of cargo of a customer, transportation
schedule, customer information, documentation system and several other
informations – Expenditure which was incurred for running this business was
shared by all the agents – By no stretch of imagination, payments made by the
agents could be treated as fee for technical service, it was in the nature of
reimbursement of cost whereby the agents paid their proportionate share of the
expenses incurred on these said systems and for maintaining those systems –
Also, Maersk Net System was an integral part of the shipping business and the
business could not be conducted without the same and ‘profit’ from operation of
ships under Article 19 of DTAA would necessarily include expenses for earning
that income and cannot be separated

DIT (International
taxation) vs. A. P. Moller Maersk A/S

(2017) 392 ITR 186 (SC)

The Respondent Assessee, a
foreign company engaged in the shipping business and was a tax resident of
Denmark, with whom India has entered into a Double Taxation Avoidance Agreement
(hereinafter referred to as the ‘DTAA’). The Assessing Officer (AO) assessed
the income in the hands of the Assessee and allowed the benefit of the said
DTAA. However, while making the assessment, the AO observed that the Assessee
had agents working for it, namely, Maersk Logistics India Limited (MLIL),
Maersk India Private Limited (MIPL), Safmarine India Private Limited (SIPL) and
Maersk Infotech Services (India) Private Limited (MISPL). These agents booked
cargo and acted as clearing agents for the Assessee. In order to help all its
agents, across the globe, in this business, the Assessee had set up and was
maintaining a global telecommunication facility called Maersk Net System which
was a vertically integrated communication system. The agents were paying for
said system on pro-rata basis. According to the Assessee, it was merely a
system of cost sharing and the payments received by the Assessee from MIPL,
MLIL, SIPL and MISPL were in the nature of reimbursement of expenses. The AO
did not accept this contention and held that the amounts paid by these three
agents to the Assessee was consideration/fees for technical services rendered
by the assesses and, accordingly, held them to be taxable in India under
Article 13(4) of the DTAA and assessed tax @ 20% u/s. 115A of the Income-tax
Act, 1961.

The Assessee preferred an
appeal against the Assessment Order before the Commissioner of Income Tax
(Appeals) (for short, ‘CIT (A)’). The CIT(A) dismissed the appeal. Aggrieved by
the order passed by the CIT(A), the Assessee preferred further appeal before
the Income Tax Appellate Tribunal (ITAT). Here, the Assessee succeeded as the
ITAT, allowed the appeal of the Assessee.

Aggrieved by the order
passed by the ITAT, the department filed an appeal before the High Court of
Bombay. The High Court, dismissed the Revenue’s appeal holding that the ITAT
had correctly observed that utilisation of the Maersk Net Communication System
was an automated software based communication system which did not require the
Assessee to render any technical services. It was merely a cost sharing
arrangement between the Assessee and its agents to efficiently conduct its
shipping business. The High Court further held that the principles involved in
the decision of The Director of Income Tax (International Taxation)-1 vs.
M/s. Safmarine Container Lines NV (2014)
367 ITR 209 would also govern the present case and that the Maersk Net used
by the agents of the Assessee entailed certain costs reimbursement. It was part
of the shipping business and could not be captured under any other provisions
of the Income Tax Act except under DTAA. While arriving at the aforesaid
decision, the High Court specifically observed that there was no finding by the
AO or the Commissioner that there was any profit element involved in the
payments received by the Assessee from its agents.

The Supreme Court noted
that the facts which emerged on record were that the Assessee was having its IT
System, which was called the Maersk Net. As the Assessee was in the business of
shipping, chartering and related business, it had appointed agents in various
countries for booking of cargo and servicing customers in those countries, preparing
documentation etc. through these agents. Aforementioned three agents were
appointed in India for the said purpose. All these agents of the Assessee,
including the three agents in India, used the Maersk Net System. This system
was a facility which enabled the agents to access several information like
tracking of cargo of a customer, transportation schedule, customer information,
documentation system and several other informations. For the sake of
convenience of all these agents, a centralised system was maintained so that
agents were not required to have the same system at their places to avoid
unnecessary cost. The system comprised of booking and communication software,
hardware and a data communications network. The system was, thus, integral part
of the international shipping business of the Assessee and ran on a combination
of mainframe and non-mainframe servers located in Denmark. Expenditure which
was incurred for running this business was shared by all the agents. In this
manner, the systems enabled the agents to co-ordinate cargos and ports of call
for its fleet.

The Supreme Court held
that aforesaid were the findings of facts. It was clearly held that no
technical services were provided by the Assessee to the agents. Once these were
accepted, by no stretch of imagination, payments made by the agents could be
treated as fee for technical service. It was in the nature of reimbursement of
cost whereby the three agents paid their proportionate share of the expenses
incurred on these said systems and for maintaining those systems. It was
re-emphasised that neither the AO nor the CIT (A) had stated that there was any
profit element embedded in the payments received by the Assessee from its
agents in India. Record showed that the Assessee had given the calculations of
the total costs and pro-rata division thereof among the agents for
reimbursement. Not only that, the Assessee had even submitted before the
Transfer Pricing Officer that these payments were reimbursement in the hands of
the Assessee and the reimbursement was accepted as such at arm’s length. Once
the character of the payment is found to be in the nature of reimbursement of
the expenses, it could not be income chargeable to tax.

The Supreme Court further
noted that, the Revenue itself had given the benefit of Indo-Danish DTAA to the
Assessee by accepting that under Article 9 thereof, freight income generated by
the Assessee in these Assessment Years was not chargeable to tax as it arose
from the operation of ships in international waters. The Supreme Court held
that once that was accepted and it was also found that the Maersk Net System
was an integral part of the shipping business and the business could not be
conducted without the same, which was allowed to be used by the agents of the
Assessee as well in order to enable them to discharge their role more
effectively as agents, it was only a facility that was allowed to be shared by
the agents. By no stretch of imagination it could be treated as any technical
services provided to the agents. In such a situation, ‘profit’ from operation
of ships under Article 19 of DTAA would necessarily include expenses for
earning that income and cannot be separated, more so, when it was found that
the business could not be run without these expenses.

9. Prevention of Corruption Act – Returns and the orders in
the I. T. proceedings would not by themselves establish that such income had
been from lawful source

State of Karnataka vs.
Selvi J. Jayalalitha & Ors. (2017) 392 ITR 97 (SC)

Cash credits – The process
undertaken by the Income Tax authorities u/s. 68 of the Act is only to
determine as to whether the receipt is an income from undisclosed sources or
not and is unrelated to the lawfulness of the sources or of the receipt.

In a case of a person
having disproportionate assets to his known sources of income under the
Prevention of Corruption Act, 1988, the Supreme Court has made the following
observations:

1. Though
the I.T. returns and the orders passed in the I.T. proceedings in the instant
case recorded the income of the Accused concerned as disclosed in their
returns, in view of the charge levelled against them, such returns and the
orders in the I.T. proceedings would not by themselves establish that such
income had been from lawful source as contemplated in the Explanation to
section 13(1)(e) and that independent evidence would be required to account for
the same.

2. Even if
such returns and orders are admissible in evidence, the probative value would
depend on the nature of the information furnished, the findings recorded in the
orders and having a bearing on the charge levelled. In any view of the matter,
however, such returns and orders would not ipso facto either
conclusively prove or disprove the charge and can at best be pieces of evidence
which have to be evaluated along with the other materials on record.

3. Neither
the income tax returns nor the orders passed in the proceedings relatable
thereto, either definitively attest the lawfulness of the sources of income of
the Accused persons or are of any avail to them to satisfactorily account the
disproportionateness of their pecuniary resources and properties as mandated by
section 13(1)(e) of the Act.

4. The
property in the name of the income tax Assessee itself cannot be a ground to
hold that it actually belongs to such an Assessee and that if this proposition
was accepted, it would lead to disastrous consequences. In such an eventuality
it will give opportunities to the corrupt public servant to amass property in
the name of known person, pay income tax on their behalf and then be out from
the mischief of law.

5. In the
tax regime, the legality or illegality of the transactions generating profit or
loss is inconsequential qua the issue whether the income is from a
lawful source or not. The scrutiny in an assessment proceeding is directed only
to quantify the taxable income and the orders passed therein do not certify or
authenticate that the source(s) thereof to be lawful and are thus of no
significance vis-à-vis a charge u/s. 13(1)(e) of the Act.

6. The
submission of income tax returns and the assessments orders passed thereon,
does not constitute a full proof defence against a charge of acquisition of
assets disproportionate to the known lawful sources of income as contemplated
under the PC Act and that further scrutiny/analysis thereof is imperative to
determine as to whether the offence as contemplated by the PC Act is made out
or not.

7. If the Assessing Officer on the consideration
of the materials sought for is not satisfied with the explanation provided by
the Assessee qua an income determined by undisclosed sources, in terms
of section 68, such income can be made subject to income tax.

8. Even if
such transaction is evidenced by banking operations as well as contemporaneous
records pertaining thereto, the same ipso facto would not be
determinative to hold that the transaction was a genuine transaction.

9. The process undertaken by the Income Tax authorities u/s.
68 of the Act is only to determine as to whether the receipt is an income from
undisclosed sources or not and is unrelated to the lawfulness of the sources or
of the receipt. Thus even if a receipt claimed as a gift is after the scrutiny
of the Income Tax Authorities construed to be income from undisclosed sources
and is subjected to income tax, it would not for the purposes of a charge u/s.
13(1)(e) of the Act be sufficient to hold that it was from a lawful source in
absence of any independent and satisfactory evidence to that effect.

BCAJ Admin

Glimpses Of Supreme Court Rulings

14. Search and seizure – Assessment of third
person – It is an essential condition precedent that any money, bullion or
jewellery or other valuable articles or thing or books of accounts or documents
seized or requisitioned should belong to a person other than the person
referred to in section 153A of the Act.

Appeal – Power
to admit additional ground – As per the provisions of section 153C of the Act,
incriminating material which is seized has to pertain to the Assessment Years
in question and when it is undisputed that the documents which are seized do
not establish any co-relation, document-wise, essential requirement u/s. 153C of
the Act for assessment under that provision is not fulfilled, it becomes a
jurisdictional fact – Tribunal was justified in admitting the additional ground

Commissioner
of Income Tax-III, Pune vs. Sinhgad Technical Education Society (2017) 397 ITR
344 (SC)

A search and
seizure operation was carried out under section 132 of the Act on one Mr. M. N.
Navale, President of the Sinhgad Technical Education Society (the
assessee-society), and his wife on July 20, 2005 from where certain documents
were seized. On the basis of these documents, which according to the Revenue
contained notings of cash entries pertaining to capitation fees received by
various institutions run by the Assessee, a notice u/s.153C of the Act was
issued on April 18, 2007.

In the order of
assessment, the Assessee was treated as an Association of Person (AOP). Having
regard to the complexity involved in the accounts and the changes to be
effected on account of the change in the status of the Assessee to that of AOP,
a special audit u/s. 142(2A) of the Act was conducted. On the basis of special
audit report, taxable incomes for the Assessment Years 1999-2000 to 2006-07 had
been worked out.

Assessment Year
1999-2000 was covered u/s.147 of the Act, Assessment Year 2006-07 was covered
u/s.143(3) of the Act and Assessment Years 2000-01 to 2005-06 were covered
u/s.153C read with section143(3) of the Act.

The Assessee
filed appeal there against, which was partially allowed by the Commissioner of
Income Tax (Appeals) {CIT(A)}. He, however, upheld the order of the AO, holding
that the Assessee was not eligible for exemption u/s.11 of the Act and,
therefore, donations received were rightly treated as income. Against the
aforesaid part of the order, which was against the Assessee, it preferred further
appeal to the ITAT. In the appeal before the ITAT, the Assessee raised
additional ground questioning the validity of the notice u/s.153C of the Act on
the ground that satisfaction was not properly recorded and also that the notice
u/s.153C was time barred in respect of Assessment Years 2000-01 to 2003-04. The
ITAT allowed the Assessee to raise the additional ground and decided the same
in favour of the Assessee thereby quashing the notice in respect of the
aforesaid Assessment Years. Challenging this order, the Revenue filed appeals
before the High Court. However, the High Court dismissed these appeals.

The objection
of the Revenue before the Supreme Court was that it was improper on the part of
the ITAT to allow additional ground to be raised, when the Assessee had not
objected to the jurisdiction u/s.153C of the Act before
the AO.

The Supreme
Court noted that the ITAT permitted this additional ground by giving a reason
that it was a jurisdictional issue taken up on the basis of facts already on
the record and, therefore, could be raised. The ITAT had held that as per the
provisions of section 153C of the Act, incriminating material which was seized
had to pertain to the Assessment Years in question and it was an undisputed
fact that the documents which were seized did not establish any co-relation,
document-wise, with the aforesaid four Assessment Years. Since this requirement
u/s. 153C of the Act was essential for assessment under that provision, it
became a jurisdictional fact. The Supreme Court found this reasoning of the
ITAT to be logical and valid, having regard to the provisions of section 153C
of the Act. According to the Supreme Court, para 9 of the order of the ITAT
revealed that the ITAT had scanned through the Satisfaction Note and the material
which was disclosed therein was culled out and it showed that the same belonged
to Assessment Year 2004-05 or thereafter. After taking note of the material in
para 9 of the order, the position that emerged therefrom was discussed in para
10. It was specifically recorded that the counsel for the Department could not
point out to the contrary. It was for this reason the High Court had also given
its imprimatur to the aforesaid approach of the Tribunal. The Supreme
Court further noted that the learned senior Counsel appearing for the
Respondent, had argued that notices in
respect of Assessment Years 2000-01 and 2001-02 were even time-barred.

The Supreme
Court held that the ITAT rightly permitted this additional ground to be raised
and correctly dealt with the same ground on merits as well. Order of the High
Court affirming this view of the Tribunal was, therefore, without any blemish.
In view of the aforementioned findings, the Supreme Court was of the view that
it was not necessary to enter into the controversy as to whether the notice in
respect of the Assessment Years 2000-01 and 2001-02 was time-barred.

The Supreme
Court observed that the Gujarat High Court in Kamleshbhai Dharamshibhai
Patel vs. CIT (2013) 31 taxmann.com 50 had categorically held that it was
an essential condition precedent that any money, bullion or jewellery or other
valuable articles or thing or books of accounts or documents seized or
requisitioned should belong to a person other than the person referred to in
section153A of the Act. According to the Supreme Court, this proposition of law
laid down by the High Court was correct, which was also stated by the Bombay
High Court in the impugned judgement as well. The Supreme Court noted that
judgement of the Gujarat High Court in the said case went in favour of the
Revenue when it was found on facts that the documents seized, in fact, pertain
to third party, i.e. the Assessee, and, therefore, the said condition precedent
for taking action u/s.153C of the Act had been satisfied.

The Supreme
Court also held that likewise, the Delhi High Court in SSP Aviation Limited
vs. DCIT (2012) 346 ITR 177 (Delhi) had also decided the case on altogether
different facts which had no bearing once the matter was examined in the
aforesaid hue on the facts of this case. The Bombay High Court has rightly
distinguished the said judgement as not applicable.

According to
the Supreme Court, there was no merit in these appeals.

The Supreme
Court however, clarified that it had not dealt with the matter on merits
insofar as incriminating material found against the Assessee or Mr. Navale was
concerned.

The Supreme
Court dismissed the appeals with the aforesaid observations.

15. Search and
seizure – In view of the amendment made in section 132A of the IT Act, 1961 by
Finance Act of 2017, namely, that the ‘reason to believe’ or ‘reason to
suspect’, as the case may be, shall not be disclosed to any person or any
authority or the appellate Tribunal as recorded by IT authority u/s.132 or section
132A, the Supreme Court could not go into that question of validity of the
search at all

N. K.
Jewellers and Ors. vs. Commissioner of Income Tax

(398 ITR 116
(SC).

On 27^th
May, 2000, an employee of the Appellant was returning from Amritsar by train No.
2030, Swarn Shatabdi Express and he was found in the possession of Rs. 30 lakh
cash in a search by Railway Police. The SHO, GRP Station, Jalandhar after
making enquiries from the concerned employee registered a case under sections
411/414 of the Indian Penal Code on 27^th May, 2000.

The said
information was received by the Investigation Unit, Jalandhar from SHO, GRP
Station Jalandhar on 29^th May, 2000. Warrant of authorisation
u/s.132A of the IT Act, 1961 (the Act), was obtained from the Director of IT,
Ludhiana and the cash of Rs. 30 lakh was requisitioned on 3^rd June,
2000 and seized. Proceeding for assessment for the block period from 1^st
April, 1991 to 3^rdJune, 2000 u/s. 158BD of the Act was initiated.

The explanation
of the Appellant before the assessing authority was that his employee had gone
to Amritsar to make some purchases of gold but the transaction did not
materialise. The AO was of the view that the amount represented sales of gold
made by the Appellant on earlier occasions and the sale proceeds were being
carried back to Delhi. After considering the statements of various persons and
other material on record, the authorities came to the conclusion that it was
concealed income and accordingly, the Appellant was assessed to tax. As such, the
explanation of the Appellant was not accepted and the High Court also took the
view that the Appellant was disbelieved for adequate reasons and hence, no
substantial question of law arises for its consideration.

Before the
Supreme Court, the learned Counsel for the Appellant submitted that the
proceedings initiated u/s.132 of the Act were invalid for the reason that it
could not be based on a search conducted on a train by the police authorities
and, therefore, the proceedings initiated for block assessment period 1^st
April, 1991 to 3^rd June, 2000 were without jurisdiction.

The Supreme
Court noted that this plea was not raised by the Appellant before any of the
authorities. Further, it noted the amendment made in section 132A of the IT
Act, 1961 by Finance Act of 2017, namely, that the ‘reason to believe’ or
‘reason to suspect’, as the case may be, shall not be disclosed to any person
or any authority or the appellate Tribunal as recorded by IT authority u/s.132
or Section132A. According to the Supreme Court, it therefore, could not go into
that question at all. Even otherwise, the Supreme Court found that the
explanation given by the Appellant regarding the amount of cash of Rs. 30 lakh
found by the GRP and seized by the authorities had been disbelieved and had
been treated as income not recorded in the books of account maintained by it.
In view of the above, according to the Supreme Court there was no infirmity in
the order passed by the High Court.

Accordingly,
the civil appeal was dismissed.

16. Appeal to
the High Court – In order to admit the second appeal, what is required to be
made out by the Appellant being sine qua non for exercise of powers u/s.
100 of the Code, is existence of “substantial question of law”
arising in the case so as to empower the High Court to admit the appeal for
final hearing by formulating such question

Maharaja
Amrinder Singh vs. The Commissioner of Wealth Tax (2017) 397 ITR 752 (SC)

The issue
involved in the wealth tax appeals for the three assessment years 1981-82,
1982-83 and 1983-84 was decided by the Tribunal in favour of the Appellant
(assessee) which gave rise to filing of the appeals before the High Court by
the Revenue u/s. 27-A of the Act questioning therein the legality and
correctness of the orders of the Tribunal. The High Court allowed the appeals
filed by the Revenue setting aside the order dated 05.07.2011 passed by the
Income Tax Appellate Tribunal and restoring the order of assessment passed by
the Assessing Officer for levying penalty for the entire period of delay in
respect of the said Assessment Years, which gave rise to filing of these
appeals by way of special leave before the Supreme Court by the Assessee.

The short
question, which arose for consideration before the Supreme Court in these
appeals, was whether the High Court was justified in allowing the appeals filed
by the Revenue and thereby was justified in setting aside the orders passed by
the Tribunal.

The Supreme
Court observed that in Santosh Hazari vs. Purushottam Tiwari (Deceased) by
L.Rs., (2001) 3 SCC 179, it had held that in order to admit the second
appeal, what is required to be made out by the Appellant being sine qua non for
exercise of powers u/s. 100 of the Code of Civil Procedure, 1908, is existence
of “substantial question of law” arising in the case, so as to
empower the High Court to admit the appeal for final hearing by formulating
such question. In the absence of any substantial question of law arising in
appeal, the same merits dismissal in limine on the ground that the
appeal does not involve any substantial question of law within the meaning of
section100 of the Code.

According to
the Supreme Court, the interpretation made by it of section 100 in Santosh
Hazari’s Case (supra), would equally apply to section27-A of the Act
because firstly, both sections provide a remedy of appeal to the High Court;
secondly, both sections are identically worded and in pari materia; thirdly,
section27-A is enacted by following the principle of “legislation by
incorporation”; fourthly, section 100 is bodily lifted from the Code and
incorporated as Section27-A in the Act; and lastly, since both sections are
akin to each other in all respects, the appeal filed u/s. 27-A of the Act has
to be decided like a second appeal u/s.100 of the Code.

The Supreme
Court on the facts of the case, found that the High Court had proceeded to
decide the appeals without formulating the substantial question(s) of law. The
High Court did not make any effort to find out as to whether the appeals
involved any substantial question(s) of law and, if so, which was/were that
question(s), nor it formulated such question(s), if in its opinion, really
arose in the appeals. The High Court failed to see that it had jurisdiction to
decide the appeals only on the question(s) so formulated and not beyond it.
[Section27(5)].

In the light
of foregoing and keeping in view the law laid down in the case of Santosh
Hazari (supra), the Supreme Court held that the impugned orders were not
legally sustainable and thus were liable to be set aside. As a result, the
appeals succeed and were allowed. Impugned orders were set aside. Both the
cases were remanded to the High Court for deciding the appeals afresh in
accordance with the observations made above. _

BCAJ Admin

Glimpses Of Supreme Court Rulings

1. Sedco Forex International Inc. vs. Commissioner of
Income Tax, Meerut and Ors. (2017) 399 ITR 1 (SC). A. Ys.: 1986-87, 1987-88, 2000-2001.

Non-resident
– Prospecting for, or extra production of mineral ore – All amounts pertaining
to the aforesaid activity which are received on account of provisions of
services and facilities in connection with the said facility are treated as
profits and gains of the business under section 44BB – The fixed amount which
was paid to the Assessees in respect of the contract which was indivisible was
towards mobilisation fee and the same was not for reimbursement of expenses as
the same was payable irrespective of the amount of expenditure incurred and
thus was covered by the provisions of section 44BB.

In the group of appeals
that came up for hearing before the Supreme Court, the appeals filed by Sedco
Forex International Inc., M/s. Transocean Offshore Inc., M/s. Sedco Forex
International Drilling Inc. respectively were taken up as lead matters and,
therefore, for the sake of brevity, the factual matrix from the said appeals,
was considered for answering the question involved.

During the years under
consideration, the Assessees were engaged in executing the contracts all over
the world including India in connection with exploration and production of
mineral oil. The Assessees were companies incorporated outside India and,
therefore, non-resident within the meaning of section 6 of the Act. The
Assessees entered into agreements with ONGC, Enron Oil and Gas India Ltd. The
aforesaid agreements provided for the scope of work along with separate
consideration for the work undertaken. Since the dispute was about mobilisation
charges, the Supreme Court noted clauses in respect thereof which read as
under:

“Operating
Rate-Receipts for undertaking drilling operations computed by per day rates
provided in the contract. The operating rates shall be payable from the time
the drilling unit is jacked-up and ready at the location to spud the first
well.

Mobilisation-charges
for the transport of the drilling unit from a location outside India to a
location in India as may be designated by ONGC”.

In addition to the above,
Assessees also received amounts from the operator towards reimbursement of
expenses like catering, boarding/lodging, fuel, customs duty, the supply of
material etc., with which the Supreme Court was not concerned.

The Assessees filed their
return of income declaring income from charter hire of the rig. The same was
offered to tax u/s. 44BB of the Act. In the case of Sedco Forex International
Inc., the Assessee did not include the amount received as mobilisation charges
to the gross revenue for the purpose of computation u/s. 44BB of the Act. In
the case of Transocean Offshore Inc., the Assessee included 1% of the
mobilisation fees. The mobilisation fees were offered to tax on a 1% deemed
profit basis on the ratio of the CBDT Instruction No. 1767 dated July 1, 1987.

The AO
included the amounts received for mobilisation/demobilisation to the gross
revenue to arrive at the “profits and gains” for the purpose of
computing TAX u/s. 44BB of the Act. The Commissioner of Income Tax (Appeals)
confirmed the action of the AO. The Income Tax Appellate Tribunal in the case
of Sedco Forex International Inc. dismissed the appeal of the Assessee and the
action of the AO was upheld insofar as the mobilisation charges were concerned.
In the case of Transocean Offshore Inc., the ITAT upheld the view taken by the
Assessee and directed the AO to assess the profits on mobilisation charges at
1% of the amount received. This was done following the Circular of CBDT
Instruction No. 1767 dated July 1, 1987 and decision of the third Member in the
case of Saipem S.P.A. vs. Deputy Commissioner of Income Tax 88 ITD 213 (Del).
The High Court held that the mobilization charges reimbursed inter alia
even for the services rendered outside India were taxable u/s. 44BB of the Act
as the same were not governed by the charging provisions of sections 5 and 9 of
the Act. Even on the issue of reimbursement in M/s. Sedco Forex International
Drilling Inc., the High Court followed its earlier judgments dated September
20, 2007 and May 22, 2009 to hold that reimbursement of expenses incurred by
the Assessee was to be included in the gross receipts, and taxable u/s. 44BB of
the Act.

According to the Supreme
Court the issue that needed examination
was as to whether mobilisation charges received by the Assessees could be
treated as ‘income’ u/s. 5 of the Act and would fall within the four corners of
section 9, namely, whether it could be attributed as having arisen or deemed to
arise in India.

The Supreme Court noted
that the argument of the learned Counsel appearing for the Assessees was that
the amount was received by way of reimbursement of expenses for the operation
carried outside India and the payment was also received outside India. It was
on this premise, entire edifice was built to argue that it was not an
“income” and, in any case, not taxable in India at the hands of the
Assessees which were foreign entities.

The Supreme Court noted
Clause 3.2 of the Agreement dated September 3, 1985 and Clause 4.2 of the
Agreement dated July 12, 1986. Clause 3.2 of the Agreement dated September 3,
1985 pertained to providing the Shallow Dash Water Jack Up Rig against which
payment was made to the Assessees. This Clause said that the Assessees shall be
paid ‘mobilisation fee’ for the mobilisation of drilling unit from its present
location in Portugal to the well location designated by ONGC, offshore Mumbai,
India. Fixed amount was agreed to be paid which was mentioned in the said
Clause. The aforesaid mobilisation fee was payable to the Assessees after the
jacking up of the drilling at the designated location and ready to spud the
well. After the aforesaid operation, Assessees were required to raise invoice
and ONGC was supposed to make the payment within 30 days of the receipt of this
invoice. Insofar as Clause 4.2 of Agreement dated July 12, 1986 was concerned,
it related to mobilisation of drilling unit. Here again, ‘mobilisation fee’ was
payable for the mobilisation of the drilling unit from the place of its origin
to the port of entry (Kandla Port, Mumbai). Hence, a fixed amount of
mobilisation fee was payable under the aforesaid contracts as
“compensation”. Contracts specifically described the aforesaid
amounts as ‘fee’. According to the Supreme Court it was in this hue, it had to
consider as to whether it would be treated as “income” u/s. 5 of the
Act and could be attributed as income earned in India as per section 9 of the
Act. For this purpose, section 44BB(2) had to be invoked.

The Supreme Court noted that
section 44BB starts with non-obstante clause, and the formula contained
therein for computation of income is to be applied irrespective of the
provisions of sections 28 to 41 and sections 43 and 43A of the Act. It was not
in dispute that Assessees were assessed under the said provision which was
applicable in the instant case. For assessment under this provision, a sum
equal to 10% of the aggregate of the amounts specified in sub-section (2) shall
be deemed to be the profits and gains of such business chargeable to tax under
the head ‘profits and gains of the business or profession’. Sub-section (2)
mentions two kinds of amounts which shall be deemed as profits and gains of the
business chargeable to tax in India. Sub-clause (a) thereof relates to amount
paid or payable to the Assessee or any person on his behalf on account of
provision of services and facilities in connection with, or supply of plant and
machinery on hire used, or to be used in the prospecting for, or extraction or
production of, mineral oils in India. Thus, according to the Supreme Court all
amounts pertaining to the aforesaid activity which are received on account of
provisions of services and facilities in connection with the said facility are
treated as profits and gains of the business.

This Clause clarifies that
the amount so paid shall be taxable whether these are received in India or
outside India. Clause (b) deals with amount received or deemed to be received
in India in connection with such services and facilities as stipulated therein.
Thus, whereas Clause (a) mentions the amount which is paid or payable, Clause
(b) deals with the amounts which are received or deemed to be received in
India. The Supreme Court therefore was of the opinion that in respect of amount
paid or payable under Clause (a) of sub-section (2), it was immaterial whether
these were paid in India or outside India. On the other hand, amount received
or deemed to be received have to be in India.

The Supreme Court held that
from the bare reading of the clauses, amount paid under the aforesaid contracts
as mobilisation fee on account of provision of services and facilities in
connection with the extraction etc. of mineral oil in India and against the
supply of plant and machinery on hire used for such extraction, Clause (a)
stood attracted. Thus, this provision contained in Section 44BB had to be read
in conjunction with sections 5 and 9 of the Act and sections 5 and 9 of the Act
could not be read in isolation.

The aforesaid amount paid
to the Assessees as mobilisation fee had to be treated as profits and gains of
business and, therefore, would be
“income” as per section 5. This provision also treats this income as
earned in India, fictionally, thereby satisfying the test of section 9 of the
Act as well.

The Supreme Court
reiterated that the amount which was paid to the Assessees was towards
mobilisation fee. It did not mention that the same was for reimbursement of
expenses. In fact, it was a fixed amount paid which could be less or more than
the expenses incurred. Incurring of expenses, therefore, would be immaterial.
According to the Supreme Court, it was also to be borne in mind that the
contract in question was indivisible. Having regard to these facts in the
present case as per which the case of the Assessees got covered under the
aforesaid provisions, the Supreme Court did not find any merit in any of the
contentions raised by the Assessees.

In the batch of appeals,
before the Supreme Court there was a solitary appeal which was preferred by the
Director of Income Tax, New Delhi (Revenue) against the judgment of the High
Court of Uttarakhand. The computation of income of the Assessee was done u/s.
44BB of the Act.

However, the amount which
was sought to be taxed was reimbursement of cost of tools lost in hole by ONGC.
The Supreme Court held that it was thus, clear that this was not the amount
which was covered by sub-section (2) of section 44BB of the Act as ONGC had
lost certain tools belonging to the Assessee, and had compensated for the said
loss by paying the amount in question. On these facts, conclusion of the High
Court was correct. Even otherwise, the tax effect is Rs. 15,12,344/-.
Therefore, that Civil Appeal filed by the Revenue was dismissed.

2. K. Lakshmanya and Company vs. Commissioner of
Income Tax and Ors. (2017) 399 ITR 657 (SC) A.Y.s:
1993-94, 1994-95.

Refund –
Interest on refund – Section 244A is even wider than section 244 and is not
restricted to refund being issued to the Assessee in pursuance to an order
referred to in section 240. Under this section, it is enough that the refund
becomes due under the Income-tax Act, in which case the Assessee shall, subject
to the provisions of this section, be entitled to receive simple interest.

The Assessee, being a
partnership firm, filed a return for assessment years 1993-94 and 1994-95 and
once the order of assessment was completed, interest under sections 234(A) to
(C) was levied.

Aggrieved by this levy of
interest, the Assessee filed an application before the Settlement Commission,
requesting the Commission to waive the interest on the ground that it caused
hardship to it. The Settlement Commission, by its order dated 22.03.2000,
referred to a circular of the CBDT which gave it the power to waive such interest;
and by the aforesaid order, interest was partially waived for the assessment
years in question. On an application made by the Assessee, the Assessing
Officer, by his order dated 25.04.2000 refused to grant interest on the refund
that was payable, and was not paid, within three months from the specified
date. This was done on two grounds, namely, that the provisions of section
244A do not provide for payment of
interest on refund due on account of waiver of interest that is charged under
sections 234(A)-(C) of the Act and second, that the power assumed by the
Settlement Commission for waiver of interest, by following the CBDT circular
referred to, does not enable the Commission to provide for payment of interest
u/s. 244A.

An appeal that was filed
before the C.I.T. (Appeals) was allowed. This was done by referring to a
judgment of the Madras High Court in Commissioner of Income-Tax vs. Needle
Industries Pvt. Ltd. 233 ITR 370 and with reference to the CBDT circular
which enabled the Settlement Commission to waive interest. An appeal by the
Revenue to the Income-Tax Appellate Tribunal was dismissed. However, in appeal
to the High Court, by the judgment dated 09.12.2009, the High Court of
Karnataka held that, since waiver of interest was within the discretion of the
Settlement Commission, no right flowed to the Assessee to claim refund as a
matter of right under law. In the aforesaid circumstances, the judgements of
the Tribunal and C.I.T. (Appeals) were set aside and the Assessing Officer’s
order was restored.

The question that arose
before the Supreme Court therefore was whether the High Court of Karnataka at
Bangalore was correct in holding that the Assessee in the present case was not
entitled to interest u/s. 244A of the Income-Tax, 1961 Act, when refund arose
to it on account of interest that was partially waived by an order of the
Settlement Commission.

According to the Supreme
Court, a reading of the section 240 showed that refund may become due to the
Assessee, either as a result of an order passed in appeal or other proceedings
under this Act. It was clear that refund that arises as a result of an order
passed u/s. 245(D)(4) was an order passed in “other proceedings under this
Act”. Thus, it was clear that the Assessee in the present case was covered
by section 240 of the Act.

The Supreme Court noted
that when it comes to interest on refund, section 244, which applied to
assessment years up to and including assessment year 1989-90, makes it clear
that it would apply where a refund is due to the Assessee in pursuance of an
order referred to in section 240. It is only if the Assessing Officer does not
grant the refund within three months from the end of the month in which such
order is passed, that the Central Government shall pay to the assesses simple
interest on the amount of refund due.

According to the Supreme
Court, section 244A is even wider than section 244 and is not restricted to
refund being issued to the Assessee in pursuance to an order referred to in
section 240. Under this section, it is enough that the refund becomes due under
the Income-tax Act, in which case the Assessee shall, subject to the provisions
of this section, be entitled to receive simple interest.

The Supreme Court was of
the view that the present case would fall outside sub-clauses (a) and (aa) of
this provision and, therefore, fall within the residuary clause, namely
sub-clause (b) of section 244A.

The Supreme Court held that
the Madras High Court in Needle Industries Pvt. Ltd. (supra) concerned
itself with the position prior to the advent of section 244A. It found that the
expression “refund of any amount” used by section 240 and 244 would
include not only tax and penalty but interest also. It was, therefore, held
that the clear intention of Parliament is that the right to interest will
compensate the Assessee for the excess payment during the intervening period
when the Assessee did not have the benefit of use of such money paid in
whatsoever character. The Supreme Court further noted that in Sandvik Asia
Ltd. vs. CIT (2006) 280ITR 643 (SC), it had expressly approved the decision
of the Madras High Court.

The Supreme Court also
referred to its decision in CIT vs. HEG Ltd. (2010) 324 (331) (SC) which
considered the meaning of the expression “where refund of any amount become due
to the assessee” in section 244A(1).

The Supreme Court referred
to its decision in UOI vs. Tata Chemicals Ltd. (2014) 363 ITR 658 (SC)
and observed that it clearly showed that a corresponding right exists, to
refund to individuals any sum paid by them as taxes which are found to have
been wrongfully existed or believed to be, for any reason, inequitable.

The statutory obligation to
refund, being non discretionary, carries with it the right to interest, also
making it clear that the right to interest is parasitical. The right to claim
refund is automatic once the statutory provisions have been complied with.

The Supreme Court held that
of the view that the expression “due” only means that a refund
becomes due if there is an order under the Act which either reduces or waives
tax or interest. It is of no matter that the interest that is waived is
discretionary in nature, for the moment that discretion is exercised, a concomitant
right springs into being in favour of the Assessee. According to the Supreme
Court the C.I.T. (Appeals) and the ITAT were therefore correct in their view
and that consequently, the High Court was incorrect in its view that since a
discretionary power has been exercised, no concomitant right was found for
refund of interest to the Assessee.

The appeals were
accordingly allowed by the Supreme Court.

3. Commissioner of Income Tax vs. Modipon Ltd.
(2018) 400 ITR 1 (SC)A.Y.:1993-94,
1996-97,1998-99

Business
expenditure – The advance deposit of central excise duty constitutes actual
payment of duty within the meaning of Section 43B and, therefore, the Assessee
is entitled to the benefit of deduction of the said amount.

The question that was
involved in the appeals before the Supreme Court was formulated as under:

“Whether the Assessee is
entitled to claim deduction under 43B of the Income Tax Act, 1961 in respect of
the excise duty paid in advance in the Personal Ledger Account (“PLA”
for short)?”

The Revenue urged that
though levy of excise is on manufacture of excisable goods, actual payment of
duty is at the stage of removal. The advance duty paid in the PLA is
adjusted/debited from time to time, against clearances/removal made by the
Assessee. Unless such clearances/removal are made and excise duty is debited
from the advance deposit there is no actual payment of duty so as to entitle an
Assessee to the benefit of deduction u/s. 43B of the Income-tax Act which
contemplates deduction only against actual payment as distinguished from
accrual of liability. It was urged on behalf of the Revenue that the amount in
deposit was akin to a loan and under the provisions of Central Excise Rules,
part or whole of the said amount could be refunded to the Assessee. It was
further submitted that Under Rule 21 of the Central Excise Rules, 1944, at any
time before removal, the Commissioner or the other authorities prescribed
therein may remit duty in respect of manufactured goods lost or damaged or
otherwise unfit for consumption or marketing. The amount of advance deposit,
therefore, did not represent actual payment of duty so as to entitle an
Assessee to the benefit of deduction under section 43B. Accordingly the orders
of the High Courts challenged in the appeals were liable to interference.

In reply, the learned
senior Counsel appearing for the Assessee has submitted that u/s. 3 of the
Central Excise Act, the event for levy of excise duty is the manufacture of
goods though the duty is to be paid at the stage of removal of the goods.
Pointing out the provisions of Rule 173G of the Central Excise Rules, 1944 it
was submitted that the advance deposit of central excise duty in a current
account is a mandatory requirement from which adjustments are made, from time to
time, against clearances effected. Though, Sub-rule (1)(A) contemplates refund
from the current account, such refund could be granted only on reasons being
recorded by the concerned authority i.e., the Commissioner on the application
filed by the Assessee. Refund is not a matter of right. The amount deposited in
the PLA is irretrievably lost to the Assessee. Payment of central excise duty
takes place at the time of deposit in the PLA, though the deposit is on the
basis of an approximation and the precise amount of duty qua the goods removed
is ascertained at the stage of removal/clearances. The said facts, according to
the learned Counsel, would not make the deposit anything less than actual
payment of duty.

The Supreme Court noted
that deposit of Central Excise Duty in the PLA is a statutory requirement. The
Central Excise Rules, 1944, specify a distinct procedure for payment of excise
duty leviable on manufactured goods. It is a procedure designed to bring in
orderly conduct in the matter of levy and collection of excise duty when both
manufacture and clearances are a continuous process. Debits against the advance
deposit in the PLA have to be made of amounts of excise duty payable on
excisable goods cleared during the previous fortnight. The deposit once made is
adjusted against the duty payable on removal and the balance is kept in the
account for future clearances/removal. No withdrawal from the account is
permissible except on an application to be filed before the Commissioner who is
required to record reasons for permitting an Assessee to withdraw any amount
from the PLA. Sub-rules (3), (4), (5) and (6) of Rule 173G indicates a strict
and vigorous scrutiny to be exercised by the central excise authorities with
regard to manufacture and removal of excisable goods by an Assessee. According
to the Supreme Court, the self removal scheme and payment of duty under the Act
and the Rules clearly showed that upon deposit in the PLA the amount of such
deposit stood credited to the Revenue with the Assessee having no domain over
the amount(s) deposited.

The Supreme Court was of
the view that the analogy of decisions in C.I.T. vs. Pandavapura Sahakara
Sakkare Karkhane Ltd. 198 ITR 690 (Kar.) and C.I.T. vs. Nizam Sugar
Factory Ltd. 253 ITR 68 (AP) would apply to the case in hand, in which, it
was held that where Assessee had no control over the amounts received, the same
could not be taxed in its hands.

The Supreme Court observed
that the Delhi High Court in the appeals arising from the orders passed by it
had also taken the view that the purpose of introduction of section 43B was to
plug a loophole in the statute which permitted deductions on an accrual basis
without the requisite obligation to deposit the tax with the State.
Resultantly, on the basis of mere book entries an Assessee was entitled to
claim deduction without actually paying the tax to the State. Having regard to
the object behind the enactment of section 43B and the preceding discussions,
the Supreme Court held that the legislative intent would be achieved by giving
benefit of deduction to an Assessee upon advance deposit of central excise duty
notwithstanding the fact that adjustments from such deposit are made on
subsequent clearances/removal effected from time to time.

The Supreme Court concluded
that the High Courts were justified in taking the view that the advance deposit
of central excise duty constitutes actual payment of duty within the meaning of
section 43B and, therefore, the Assessee is entitled to the benefit of deduction
of the said amount.

The Supreme Court dismissed
the appeals and affirmed the orders of the High Courts of Delhi and Calcutta
impugned in these appeals.

4. ITO
vs. Venkatesh Premises Co-op. Society Ltd. (Civil Appeal No. 2708 of 2018 dated
12.3.2018 arising from SLP(C) No. 30194/2010)

Principle
of mutuality – Certain receipts by cooperative societies, from its members i.e.
non-occupancy charges, transfer charges, common amenity fund charges and
certain other charges, are exempt from income tax based on the doctrine of
mutuality.

A common question of law
that arose for consideration in a batch of appeals before the Supreme Court was
as to whether certain receipts by cooperative societies, from its members i.e.
non-occupancy charges, transfer charges, common amenity fund charges and
certain other charges, are exempt from income tax based on the doctrine of
mutuality.

The challenge was based on
the premise that such receipts were in the nature of business income,
generating profits and surplus, having an element of commerciality and
therefore exigible to tax.

The assessee in one of the
appeals (Civil Appeal No.1180 of 2015 – Sea Face Park Co.Op. Housing Society
Ltd. vs. Income Tax Officer) assailed the finding that such receipts, to
the extent they were beyond the limits specified in the Government notification
dated 09.08.2001 issued u/s. 79A of the Maharashtra Cooperative Societies Act,
1960 (hereinafter referred to as ‘the Act’) was exigible to tax falling beyond
the mutuality doctrine.

The Supreme Court noted the
primary facts, for better appreciation from SLP (C) No.30194 of 2010 (ITO
vs. Venkatesh Premises Co-op. Society Ltd.). The assessing officer held
that receipt of non-occupancy charges by the society from its members, to the
extent that it was beyond 10% of the service charges/maintenance charges
permissible under the notification dated 09.08.2001, stands excluded from the
principle of mutuality and was taxable. The order was upheld by the
Commissioner of Income Tax (Appeals). The Income Tax Appellate Tribunal held
that the notification dated 09.08.2001 was applicable to cooperative housing
societies only and did not apply to a premises society. It further held that
the transfer fee paid by the transferee member was exigible to tax as the transferee
did not have the status of a member at the time of such payment and, therefore,
the principles of mutuality did not apply. The High Court set aside the finding
that payment by the transferee member was taxable while upholding taxability of
the receipt beyond that specified in the government notification.

The Supreme Court held that
the doctrine of mutuality, based on common law principles, is premised on the
theory that a person cannot make a profit from himself. An amount received from
oneself, therefore, cannot be regarded as income and taxable. Section 2(24) of
the Income-tax Act defines taxable income. The income of a cooperative society
from business is taxable u/s. 2(24)(vii) and will stand excluded from the
principle of mutuality. The essence of the principle of mutuality lies in the
commonality of the contributors and the participants who are also the
beneficiaries. The contributors to the common fund must be entitled to
participate in the surplus and the participators in the surplus are contributors
to the common fund. The law envisages a complete identity between the
contributors and the participants in this sense. The principle postulates that
what is returned is contributed by a member. Any surplus in the common fund
shall therefore not constitute income but will only be an increase in the
common fund meant to meet sudden eventualities. A common feature of mutual
organisations in general can be stated to be that the participants usually do
not have property rights to their share in the common fund, nor can they sell
their share. Cessation from membership would result in the loss of right to
participate without receiving a financial benefit from the cessation of the
membership.

The Supreme Court noted
that in the appeals before it, transfer charges were payable by the outgoing
member. The Supreme Court held that if for convenience, part of it was paid by
the transferee, it would not partake the nature of profit or commerciality as
the amount is appropriated only after the transferee is inducted as a member.
In the event of non-admission, the amount is returned. The moment the
transferee is inducted as a member the principles of mutuality apply. Likewise,
non-occupancy charges are levied by the society and is payable by a member who
does not himself occupy the premises but lets it out to a third person. The
charges are again utilised only for the common benefit of facilities and
amenities to the members. Contribution to the common amenity fund taken from a
member disposing property is similarly utilised for meeting sudden and regular
heavy repairs to ensure continuous and proper hazard free maintenance of the
properties of the society which ultimately enures to the enjoyment, benefit and
safety of the members. These charges are levied on the basis of resolutions
passed by the society and in consonance with its byelaws. The receipts in the
present cases are indisputably been used for mutual benefit towards maintenance
of the premises, repairs, infrastructure and provision of common amenities.

The Supreme Court further
held that any difference in the contributions payable by old members and fresh
inductees cannot fall foul of the law as sufficient classification exists.
Membership forming a class, the identity of the individual member not being
relevant, induction into membership automatically attracts the doctrine of
mutuality. If a Society has surplus FSI available, it is entitled to utilise
the same by making fresh construction in accordance with law. Naturally such
additional construction would entail extra charges towards maintenance,
infrastructure, common facilities and amenities. If the society first inducts
new members who are required to contribute to the common fund for availing
common facilities, and then grants only occupancy rights to them by draw of
lots, the ownership remaining with the society, the receipts cannot be
bifurcated into two segments of receipt and costs, so as to hold the former to
be outside the purview of mutuality classifying it as income of the society
with commerciality.

The Supreme Court with
reference to decision in The New India Cooperative Housing Society vs. State
of Maharashtra 2013 (2) MLJ 666 relied upon by the Revenue to contend that
any receipt by the society beyond that permissible in law under the
notification was not only illegal but also amounted to rendering of services
for profit attracting an element of commerciality and thus was taxable held
that the challenge by the aggrieved was to the transfer fee levied by the
society in excess of that specified in the notification, which was a completely
different cause of action having no relevance to the present controversy.

According to the Supreme
Court, it was not the case of the Revenue that such receipts has not been
utilized for the common benefit of those who have contributed to the funds.

Also, there was no reason
to take a view different from that taken by the High Court, that the notification
dated 09.08.2001 is applicable only to cooperative housing societies and has no
application to a premises society which consists of non-residential premises.

In the result, all appeals
preferred by the Revenue were dismissed by the Supreme Court and Civil Appeal
No.1180 of 2015 preferred by the assessee society was allowed.

BCAJ Admin

Glimpses Of Supreme Court Rulings

10. Co-operative Society – Deduction u/s. 80P –
If the income of a society is falling within any one head of exemption, it has
to be exempted from tax notwithstanding that the condition of other heads of
exemption are not satisfied – A deduction would however not be admissible to a
co-operative bank – Also, where the activities of the society are in violation
of the Co-operative Societies Act, deduction cannot be allowed.

The Citizen
Co-operative Society Limited vs. ACIT (2017) 397 ITR 1 (SC)

The Assessee as
Co-operative Society had filed return of income for the Assessment Year
2009-10, for the year ending March 31, 2009 on September 30, 2009 declaring NIL
income. In the return filed, the Assessee claimed a sum of Rs. 4,26,37,081/- as
deduction u/s. 80P of the Act.

The Assessing
Officer held that deduction in respect of income of co-operative societies u/s.
80P of the Act was not admissible to the Appellant as the benefit of deduction,
as contemplated under the said provision was, inter alia, admissible to
those co-operative societies which carried on business of banking or providing
credit facilities to its members. On the contrary, the Appellant society was
carrying on the banking business for public at large and for all practical
purposes, it was acting like a co-operative bank governed by the Banking
Regulation Act, 1949, and its operation was not confined to its members but
outsiders as well.

Insofar as
disallowance of deduction claimed u/s. 80P of the Act was concerned, the CIT
(A) rejected the claim for deduction thereby upheld the order of the Assessing
Officer. While doing so, the CIT (A) followed the order of the Income Tax
Appellate Tribunal (ITAT) in the case of the Appellant itself in respect of
Assessment Years 2007-08 and 2008-09.

Further, appeal
to the ITAT met the same fate as ITAT also referred to its aforesaid order and
dismissed the appeal of the Appellant.

Undeterred, the
Appellant approached the High Court in the form of appeal u/s. 260A of the Act.
This appeal was dismissed by the High Court with the observations that there
was no illegality or infirmity in the order passed by the ITAT.

The Supreme
Court noted that section 80P of the Act provides for certain deduction in
respect of incomes of the co-operative societies. A co-operative society is
defined by section 2(19) of the Act. Where the gross total income of such
co-operative societies includes any income referred to in sub-section (2) of
section 80P, the sums specified in s/s. (2) are allowed as deduction in
accordance with and subject to the provisions of the said section, while
computing the total income of the Assessee. The profit exempted is the net
profit included in the total income and not the gross profit of the business.
Sub-section (2) enlists those sums which are allowed as deductions. Clause (a)
of s/s. (2) includes seven kinds of co-operative societies which are entitled
to this benefit, and in respect of the co-operative societies engaged in the
activities mentioned in those seven classes, the whole of the amount of profits
and gains of business attributable to anyone or more of such activities is
exempted from income by allowing the said income as deduction.

The Supreme
Court observed that in the present petition it was concerned with sub-clause
(i) of Clause (a) of sub-section (2) of section 80P, which enlisted a
co-operative society engaged in carrying on the business of banking or
providing credit facilities to its members.

The Supreme
Court observed that there could not be any dispute to the proposition that
section 80P of the Act was a benevolent provision which was enacted by the
Parliament in order to encourage and promote growth of co-operative sector in
the economic life of the country. It was done pursuant to declared policy of
the Government. Therefore, such a provision had to be read liberally,
reasonably and in favour of the Assessee (See-Bajaj Tempo Limited, Bombay
vs. Commissioner of Income Tax, Bombay City-III, Bombay (1992) 3 SCC 78).
It was also trite that such a provision had to be construed as to effectuate
the object of the Legislature and not to defeat it (See-Commissioner of
Income Tax, Bombay and Ors. vs. Mahindra and Mahindra Limited and Ors.
(1983) 4 SCC 392). Therefore, all those co-operative societies which fall
within the purview of section 80P of the Act are entitled to deduction in
respect of any income referred to in s/s. (2) thereof. Clause (a) of s/s. (2)
gives exemption of whole of the amount of profits and gains of business
attributable to anyone or more of such activities which are mentioned in s/s.
(2).

The Supreme
Court held that sub-section (i) of Clause (a) of sub-section (2), with which it
was concerned, recognised two kinds of co-operative societies, namely: (i)
those carrying on the business of banking and; (ii) those providing credit
facilities to its members.

The Supreme
Court referring to its decisions in the case of Kerala State Cooperative
Marketing Federation Limited and Ors. vs. Commissioner of Income Tax (1998)
5 SCC 48, and of the Punjab and Haryana High Court in the case of Commissioner
of Income Tax vs. Punjab State Co-operative Bank Ltd. (2008) 300 ITR 24
(Punjab & Haryana H.C.), observed that if the income of a society is
falling within any one head of exemption, it has to be exempted from tax
notwithstanding that the condition of other heads of exemption are not
satisfied.

The Supreme
Court noted that with the insertion of s/s. (4) by the Finance Act, 2006, which
was in the nature of a proviso to the aforesaid provision, it was made clear
that such a deduction would not be admissible to a co-operative bank. However,
if it was a primary agriculture credit society or a primary co-operative
agriculture and rural development bank, the deduction would still be provided.
Thus, co-operative banks were specifically excluded from the ambit of section
80P of the Act.

According to
the Supreme Court, if one had to go by the aforesaid definition of
‘co-operative bank’, the Appellant did not get covered thereby. It was also a
matter of common knowledge that in order to do the business of a co-operative
bank, it was imperative to have a licence from the Reserve Bank of India, which
the Appellant did not possess. The Reserve Bank of India itself had clarified
that the business of the Appellant did not amount to that of a co-operative
bank. The Appellant, therefore, would not come within the mischief of
sub-section (4) of section 80P.

However,
according to the Supreme Court, the main reason for disentitling the Appellant
from getting the deduction provided u/s. 80P of the Act was not s/s. (4)
thereof. What has been noticed by the Assessing Officer, after discussing in
detail the activities of the Appellant, was that the activities of the
Appellant were in violations of the provisions of the Mutually Aided Co-op
Societies Act, 1995 (MACSA) under which it is registered. It was pointed out by
the Assessing Officer that the Assessee was catering to two distinct categories
of people. The first category was that of resident members or ordinary members.
In the opinion of the Supreme Court, there may not be any difficulty as far as
this category was concerned. However, the Assessee had carved out another
category of ‘nominal members’. These were those members who were making
deposits with the Assessee for the purpose of obtaining loans, etc. and,
in fact, they are not members in real sense. Most of the business of the
Appellant was with this second category of persons who had given deposits which
were kept in Fixed Deposits with a motive to earn maximum returns. A portion of
these deposits was utilised to advance gold loans, etc. to the members
of the first category. It was found, as a matter of fact, that the depositors
and borrowers were quiet distinct. In reality, such activity of the Appellant
was that of finance business and could not be termed as co-operative society.
It was also found that the Appellant was engaged in the activity of granting
loans to general public as well. All this was done without any approval from
the Registrar of the Societies. With indulgence in such kind of activity by the
Appellant, it was remarked by the Assessing Officer that the activity of the
Appellant was in violation of the Co-operative Societies Act. Moreover, it was
a co-operative credit society which was not entitled to deduction u/s. 80P
(2)(a)(i) of the Act.

The Supreme
Court noted that a specific finding was also rendered that the principle of
mutuality was missing in the instant case.

According to
the Supreme Court, these were the findings of fact which had remained unshaken
till the stage of the High Court. Once the aforesaid aspects were taken into
consideration, the conclusion was obvious, namely, the Appellant could not be
treated as a co-operative society meant only for its members and providing
credit facilities to its members.

The Supreme
Court held that such a society could not claim the benefit of section 80P of
the Act. The appeal, therefore, was dismissed with costs.

11. Offences and Prosecution – If there is an
attempt to evade tax of the amount less than the monetary limit prescribed in
the Circular, no prosecution should be launched.

Suresh
Sholapurmath and Ors. vs. Income Tax Department and Ors. (2017) 397 ITR 145
(SC)

The assessee
was liable to pay Rs.1465. Rs. 465 was paid but, the document was tampered with
by showing it as Rs.1465.

The Karnataka
High Court refused to quash the prosecution proceedings against the Appellants.
The High Court declined to follow the Circular which provided that if there is
an attempt to evade tax of less than Rs.25,000, no prosecution could be
launched. According to the High Court, this was not a case of evasion of tax
but of furnishing of false declaration and hence circular would not be of any
assistance to the assessee.

The Supreme
Court noted that the amount involved is small, and was paid with interest long
ago. According to the Supreme Court, the Circular dated February 7, 1992
squarely applied and, therefore, no proceedings should have been filed as the
amount was below Rs. 25,000. In view of this, the Supreme Court set aside the
judgement of the High Court and quashed the proceeding against the appellants.

12. Interest on Refund – Whether an assessee is
entitled to interest u/s. 244A of the Income-tax Act, 1961 on excess self
assessment tax – The High Court could not have disagreed with the decision of a
co-ordinate Bench – Appropriate course of action would have been to refer the
matter to a larger Bench

Engineers
India Ltd. vs. Commissioner of Income Tax (2017) 397 ITR 16 (SC)

The issue
before the Supreme Court pertained to grant of interest u/s. 244A of the
Income-tax Act, 1961 for the Assessment Year 2006-07.

The impugned
judgment of the High Court revealed that another judgment of the Co-ordinate
Bench of the same High Court in the case of CIT vs. Sutlej Industries Ltd.
[2010] 325 ITR 331 (Delhi) was cited wherein the view taken was that in such
circumstances the Assessee would be entitled to interest u/s. 244A of the Income-tax
Act on the refund of the self-assessment tax. The High Court however did not
agree with the aforesaid view and made the following observation:

“Having
found the position of law as indicated above, we express, with respect, our
inability to subscribe to, or follow, the view taken by the other Division
Bench of this Court in the case of CIT vs. Sutlej Industries Ltd.”

The Supreme
Court held that in the impugned judgment, the Bench had differed with the
earlier view expressed by the Co-ordinate Bench. In the circumstances,
according to the Supreme Court, the appropriate course of action would have
been to refer the matter to the larger Bench.

The Supreme
Court noted that subsequently in the case of Sutlej Industries Ltd. vs. CIT
(I.T.A. Nos. 493 of 2003 and 120 of 2004) [2005] 272 ITR 180 (Delhi) pending
before the High Court, the High Court had referred the matter to a larger
Bench. In these circumstances, the Supreme Court set aside the impugned
judgment of the High Court and remanded the appeal to the High Court for its
decision afresh along with I.T.A. Nos. 493 of 2003 and 120 of 2004 by a larger
Bench.

The appeal was
disposed of accordingly.

13. Non-resident – Permanent Establishment – No
part of the main business and revenue earning activity of the two American
companies was carried on through a fixed business place in India put at their
disposal – The Indian company only rendered support services which enabled the
assessees in turn to render services to their clients abroad – This outsourcing
of work to India would not give rise to a fixed place or service PE

ADIT vs.
E-Funds IT Solution Inc. (2017) 399 ITR 34 (SC)

The assesses,
e-Funds Corporation, USA [e-Funds Corp] and e-Funds IT Solutions Group Inc.,
USA [e-Funds Inc] were companies incorporated in United States of America [USA]
and were residents of the said country. They were assessed and had paid taxes
on their global income in USA. e-Funds Corp was the holding company having
almost 100% shares in IDLX Corporation, another company incorporated in USA.
IDLX Corporation held almost 100% shares in IDLX International BV, incorporated
in Netherlands and later in turn held almost 100% shares in IDLX Holding BV,
which was a subsidiary again incorporated in Netherlands. IDLX Holding BV was almost
a 100% shareholder of e-Funds International India Private Limited, a company
incorporated and resident of India [e-Funds India] IDLX International BV was
also the parent/holding company having almost 100% shares in e-Funds Inc.,
which, as noticed above, was a company incorporated in USA.

Both e-Funds
Inc. and e-Funds Corp. had entered into international transactions with e-Funds
India. e-Funds India being a domestic company and resident in India was taxed
on the income earned in India as well as its global income in accordance with
the provisions of the Income–tax Act. The international transactions between
the assessees and e-Funds India and the income of e-Funds India, it was
accepted, were made subject matter of arms length pricing adjudication by the
Transfer Pricing Officer [TPO] and the Assessing Officer [AO] in the returns of
income filed by e-Funds India.

The assessing
authority for assessment years 2000-01 to 2002-03 and 2004-05 to 2007- 08 in
the case of e-Funds Corporation, USA and for assessment years 2000-01 to
2002-03 and 2005-06 to 2007- 08 in the case of e-Funds IT Solutions Group Inc.,
USA decided that the assessees had a permanent establishment [PE] as they had a
fixed place where they carried on their own business in Delhi, and that,
consequently, Article 5 of the India U.S. Double Taxation Avoidance Agreement
of 1990 [DTAA] was attracted. Consequently, the assessees were liable to pay
tax in respect of what they earned from the aforesaid fixed place PE in India.

The CIT
(Appeals) dismissed the appeals of the assessees holding that Article 5 was
attracted, not only because there was a fixed place where the assessees carried
on their business, but also because they were having “service PEs” and “agency
PEs” under Article 5.

In an appeal to
the ITAT, the ITAT held that the CIT (Appeals) was right in holding that a case
of “fixed place PE” and “service PE” had been made out under Article 5, but
said nothing about the “agency PE” as that was not argued by the Revenue before
the ITAT. However, the ITAT, on a calculation formula different from that of
the CIT (Appeals), arrived at a nil figure of income for all the relevant
assessment years.

The appeal of
the assessees to the Delhi High Court proved successful [(2014) 364 ITR 256
(Delhi)] and the High Court, by an elaborate judgment, has set aside the
findings of all the authorities referred to above, and further dismissed the
cross-appeals of the Revenue.

Consequently,
the Revenue was in appeal before the Supreme Court.

The Supreme
Court observed that the Income-tax Act, in particular section 90 thereof, does
not speak of the concept of a PE. This is a creation only of the DTAA. By
virtue of Article 7(1) of the DTAA, the business income of companies which are
incorporated in the US will be taxable only in the US, unless it is found that
they were having PEs in India, in which event their business income, to the
extent to which it is attributable to such PEs, would be taxable in India. The
Supreme Court noted that Article 5 of the DTAA provides for three distinct
types of PEs with which it was concerned in the present case: fixed place of
business PE under Articles 5(1) and 5(2); service PE under Article 5(2) (l) and
agency PE under Article 5(4). According to the Supreme Court, specific and
detailed criteria are set out in the aforesaid provisions in order to fulfill
the conditions of these PEs existing in India. The burden of proving the fact
that a foreign assessee has a PE in India and must, therefore, suffer tax from
the business generated from such PE is initially on the Revenue.

In the context
of fixed place PE, on the behalf of the Revenue, it was argued that under
Article 5(1) of the DTAA, on the facts of these cases, a case of fixed place PE
has been made out. In support of this, it was, inter-alia, pointed out
that: Most of the employees are in India (In fact, the High Court records that
40% of the employees of the entire group are in India). e-Funds Corp has call
centers and software development centers only in India. e-Funds Corp is
essentially doing marketing work only and its contracts with clients are
assigned, or sub-contracted to e-Funds India. The master services agreement
between the American and the Indian entity gives complete control to the
American entity in regard to personnel employed by the Indian entity. It is
only through the proprietary database and software of e-Funds Corp, that
e-Funds India carries out its functions for e-Funds Corp. The High Court
records that the software, intangible data etc. is provided free of cost
and then states that this is irrelevant. The Corporate office of e-Funds India
houses an ‘International Division’ comprising the President’s office and a
sales team servicing e-Funds India and eFunds group entities in the United
Kingdom, South East Asia, Australia and Venezuela. The President’s office
primarily oversees operations of e-Funds India and eFunds group entities
overseas. The sales team undertakes marketing efforts for affiliate entities
also. The Transfer Pricing [TP] Report says that e-Funds India provides
management support and marketing support services to eFunds Corp group
companies outside India. Regarding supervision of personnel rendering the
services, the TP Report states that “The President’s office manages the
operations of eFunds India and eFunds group entities in UK and Australia and
accordingly, employees of these entities report to the President. The
President’s overall reporting is to EFC. Though the personnel rendering
marketing services are employees of EFI, they report to overseas group entities
to the extent that they are engaged in rendering services to such entities.”
Heavy reliance was also placed upon the Form 10 K report dtd. 31/3/2003 filed
by the e-Fund Corp for the group with the United States Securities and Exchange
Commission.

The Revenue’s
counsel had further submitted that on these facts, the assessees satisfy the
requirements of fixed place PE. For this, reliance was also placed on the judgment
of the Apex Court in the case of Formula One World Championship Ltd. [(2017)
394 ITR 80 (SC)] [Formula One] and contented that physically located premises
are at the disposal of the assessees with the degree of permanence required,
viz., the entire year. It was also contended that the High Court was not right
in holding that the place of management PE under Article 5(2)(a) was prima
facie made out, but since the said provision had not been invoked and requires
factual determination, the Revenue’s argument is dismissed on this score. Heavy
reliance was also placed on the MAP settlement made for the Asst. Years 2003-04
and 2004-05 by the assessees to contend that the assessees have admitted for
those years that some income is attributable to their Indian PEs and this
admission would continue to bind the assessees in all subsequent years.

On the other
hand, on behalf of the assessees, it was, inter-alia, contended that the
tests for determining the existence of fixed place PE have now been settled by
the Apex Court in the case Formula One (supra). These require that the
fixed place must be at the disposal of assessees, which means that the
assessees must have a right to use the premises for the purpose of his own
business and that has not been made out in the facts of this case. The TPO has
specifically held that whatever is paid under various agreements between the
assessees and the Indian company are at arm’s length pricing and this being the
case, even if fixed place PE is found, once arm’s length price is paid, the US
companies go out of the net of Indian taxation. Referring to Article 5(6) of
the DTAA, it was further contended that mere fact that a 100 per cent
subsidiary is carrying on the business in India does not by itself means that
the holding company would have a PE in India. It was also further pointed out
that ultimately there are four businesses that the assessees are engaged in
viz., ATM Management Services, Electronic Payment Management, Decision Support
and Risk Management and Global Outsourcing and Professional Services. All these
businesses are carried on outside India and the property through they are
carried out viz., ATM networks, software solutions and other hardware networks
and information technology infrastructure were all located outside India. The
activities of e-Funds India are independent business activities on which, as
has been noticed by the High Court, independent profits are made and income is
assessed to tax in India. For this, a specific reference was also made to the report
of Deloitte Haskins and Sells dated 13/3/2009, which was produced before the
CIT (A). It was further contended that MAP settlement made for the Asst Years
2003-04 and 2004-05 cannot be considered as precedent to hold that there is a
PE in subsequent years. In fact, this settlement was without prejudice to the
assessees contention that they have no PE in India and it is also clarified in
the follow-up letters that the same is not binding on subsequent years.

Since the
Revenue originally relied on fixed place of business PE, the Supreme Court
tackled it first. The Supreme Court observed that under Article 5(1), a PE
means a fixed place of business through which the business of an enterprise is
wholly or partly carried on. According to the Supreme Court, what is a “fixed
place of business” was no longer res integra. In Formula One’s case (supra),
it had after setting out Article 5 of the DTAA, held that the principal test,
in order to ascertain as to whether an establishment has a fixed place of
business or not, is that such physically located premises have to be ‘at the
disposal’ of the enterprise. For this purpose, it is not necessary that the
premises are owned or even rented by the enterprise. It will be sufficient if
the premises are put at the disposal of the enterprise. However, merely giving
access to such a place to the enterprise for the purposes of the project would
not suffice. The place would be treated as ‘at the disposal’ of the enterprise
when the enterprise has right to use the said place and has control thereupon.

Thus, it was
clear that there must exist a fixed place of business in India, which was at
the disposal of the US companies, through which they carry on their own
business. There was, in fact, no specific finding in the assessment order or
the appellate orders that applying the aforesaid tests, any fixed place of
business had been put at the disposal of these companies. The assessing
officer, CIT (Appeals) and the ITAT had essentially adopted a fundamentally
erroneous approach in saying that they were contracting with a 100% subsidiary
and were outsourcing business to such subsidiary, which resulted in the
creation of a PE. The High Court has dealt with this aspect in some detail and
the Supreme Court agreed with the findings of the High Court in this regard.

The Supreme
Court further held that the reliance placed by the Revenue on the United States
Securities and Exchange Commission Form 10K Report, as had been correctly
pointed out by the High Court, is also misplaced. It is clear that this report
evidently speaks of the e- Funds group of companies worldwide as a whole.

According to
the Supreme Court, the Deloitte’s report dated 31/03/2009 [which was produced
before the CIT(Appeals)] showed that no part of the main business and revenue
earning activity of the two American companies was carried on through a fixed
business place in India which had been put at their disposal. It was clear from
the report that the Indian company only rendered support services which enabled
the assessees in turn to render services to their clients abroad. This
outsourcing of work to India would not give rise to a fixed place PE and the
High Court judgment was, therefore, correct on this score.

In the context
of existence of service PE under Article 5(2)(l) of the DTAA, in addition to
some of the facts pointed for fixed place PE [including the fact of TP report
regarding supervision of personnel rendering service], it was, inter-alia,
further pointed out by Revenue’s counsel that: The Master sub-contractor
agreement between e-Funds Corp and e-Funds India discussed in the CIT(A)’s
order provides in clause 1.1(a) that : “Subcontractors personnel assigned to
work with eFunds IT or Customers located in the United States shall be directed
by eFunds IT or by Subcontractors supervisor acting at the direction of eFunds
IT. In the event Subcontractors personnel are assigned to perform such services
in India, the Subcontractor shall supervise such work, acting at the direction
of eFunds IT. eFunds IT shall be the sole judge of performance and capability
of each of subcontractors personnel and may request the removal of one or more
of Subcontractors personnel from a project covered by any statement of work as
follows.” It is submitted that the personnel engaged in providing these
services were ostensibly the employees of e-Funds India but were de facto
working under the control and supervision of eFunds Corp. In this regard,
reference was made to relevant part of the judgement in DIT vs. Morgan
Stanley and Company Inc. [(2007) 292 ITR 416 (SC)]. Furthermore, the AO in
the Assessment Order has observed that e-Funds Corp has seconded two employees
to e-Funds India and these employees worked as Sr. Director Technical Services and Country
Head-Business Development. The activities of the seconded employees go beyond
mere ‘stewardship activities’ in terms of Morgan Stanley’s case [supra].
The term ‘Other Personnel’ has to be seen in the context of the facts of this
case which show that e-Funds India was not an independent subsidiary.

In the context
of service PE, in addition to some of the points made out in connection with
non-existence of fixed place PE, the
assessee’s counsel, inter alia, further contended that under Article
5(2)(l) of the DTAA, it is necessary that the foreign enterprises must provide
services to customers who are in India, which is not Revenue’s case as all
their customers exist only outside India. It was also pointed out that the
entire personnel engaged only by the Indian company and the facts that the US
companies may indirectly control such employees is only for the purpose of
protecting their own interest. The reliance was also placed on the judgment of
the Supreme Court in Morgan Stanley’s case (supra).

Insofar as a
service PE was concerned, the Supreme Court noted that the requirement of
Article 5(2)(l) of the DTAA was that an enterprise must furnish services
“within India” through employees or other personnel. In this regard, the
Supreme Court referred to its judgment in Morgan Stanley’s case (supra)
and noted that none of the customers of the assessees were located in India or
have received any services in India. This being the case, it was clear that the
very first ingredient contained in Article 5(2)(l) was not satisfied.

However, the
learned Attorney General, relying upon paragraph 42.31 of the OECD Commentary,
had argued that services have to be furnished within India, which does not mean
that they have to be furnished to customers in India. Para 42.31 of the OECD
Commentary states that “Whether or not the relevant services are furnished to a
resident of a state does not matter: what matters is that the services are
performed in the State through an individual present in that State.”

Based upon the
said paragraph, it was argued that in assessment year 2005-06, two employees of
the American company were seconded in India and that, therefore, it was clear
that management of the American company through these employees had obviously
taken place. The High Court, in dealing with this contention, had found it was
not known as to what functions they performed and to whom they reported and it
was also not known whether the services were performed related to services
provided to an associated enterprise in which case clause 5(2)(l)(ii) would be
applicable. According to the High Court, whether the seconded employees were
performing stewardship services or were directly involved with the working
operations was relevant. It was the case of the assessee that they were deputed
to look towards development of domestic work in India and cost of such
personnel was fully borne e-Funds India. They were working under the control
and supervision of e-Funds India. This factual assertion was not negated or
questioned by the AO.

The Supreme
Court agreed with the approach of the High Court in this regard. It held that
para 42.31 of the OECD Commentary does not mean that services need not be
rendered by the foreign assessees in India. If any customer is rendered a
service in India, whether resident in India or outside India, a “service PE”
would be established in India. As noticed hereinabove, no customer, resident or
otherwise, received any service in India from the assessees. All its customers
received services only in locations outside India. Only auxiliary operations
that facilitated such services were carried out in India. This being so, it was
not necessary to advert to the other ground namely, that “other personnel”
would cover personnel employed by the Indian company as well, and that the US
companies through such personnel were furnishing services in India. This being
the case, it was clear that as the very first part of Article 5(2)(l) was not
attracted, the question of going to any other part of the said Article did not
arise. It was perhaps for this reason that the AO did not give any finding on
this score.

The Supreme
Court agreed with the assessee’s counsel that the “agency PE” aspect of the
case need not be gone into as it was given up before the ITAT. However, the
Supreme Court was of the view that for the sake of completeness, it was
necessary to agree with the High Court, that it had never been the case of
Revenue that e-Funds India was authorised to or exercised any authority to
conclude contracts on behalf of the US company, nor was any factual foundation
laid to attract any of the said clauses contained in Article 5(4) of the DTAA.

Dealing with
the issue of effect of MAP settlement for the Asst. Years 2003-04 and 2004-05,
the Supreme Court referred to the relevant paras of OECD Manual on MAP and, in
particular, Best Practice No.3, relied on by the Revenue’s counsel and noted
that this would show that a competent authority should engage in discussion
with the other competent authority in a principled, fair and objective manner,
with each case being decided on its own merits. It is also specifically
observed that, where an agreement is not otherwise achievable, then both
parties should look for appropriate opportunities for compromise in order to
eliminate double taxation on the facts of the case, even though a principled
approach is important. The learned Attorney General also relied upon Best
Practice No. 1 of the said OECD Manual, which requires the publication of
mutual agreements reached that may apply to a general category of taxpayers
which would then improve guidance for the future. According to the Supreme
Court, the Best Practice No. 1 has no application on the facts of the present
case, as the agreement reached applies only to the respondent companies, and not
to any general category of taxpayers. It is clear, therefore, that the
assessee’s counsel Shri Ganesh is right in replying upon para 3.6 of the OECD
Manual, which deals with settlements which are often case and time specific and
they are not considered as precedents for the tax-payers or the tax
administration. It is very clear, therefore, that such agreement cannot be
considered as a precedent for subsequent year, and the High Court’s conclusion
on this aspect is also correct.

Note: In the above case, in the context of fixed place PE, the Court has followed internationally accepted tests confirmed by the Supreme Court in the case of Formula One (supra) and applied the same to the facts found by the High Court in this case. The judgement in Formula One’s case is digested in this column in the last month and since this case, in this respect, follows the same, it is thought fit to consider in this column in this month, which is now also reported in ITR. In the context of service PE, primarily it has relied on its earlier judgment in the case of Morgan Stanley (supra), which has been analysed in greater detail by us in this journal in the column Closements in the months of September/October, 2007. The above judgement is also primarily based on the factual findings of the High Court and also based on certain lack of findings of facts at the lower level. As such, this judgement should be read, understood and applied accordingly. For the purpose of deciding the issues raised in this case, the Court has also referred to and considered the relevant part of OECD commentaries on OECD Model as well as by learned authors Klaus Vogel & Arvind A. Skaar (on PE) and also the OECD Manual on MAP etc. _

BCAJ Admin

Glimpses of Supreme Court Rulings

10. Transfer of case – Where the
Income-tax/assessment file of the Assessee is transferred from one Assessing
Officer to another Assessing Officer and the two Assessing Officers are not
subordinate to the same Director General or Chief Commissioner or Commissioner
of Income-tax, u/s. 127(2)(a) of the Act an agreement between the Director
General, Chief Commissioner or Commissioner, as the case may be, of the two
jurisdictions is necessary.

Noorul Islam
Educational Trust vs. CIT (2016) 388 ITR 489 (SC)

The challenge before the
Supreme Court in the present appeal was against the order of the High Court of
Madras, Madurai Bench, dated March 20, 2015 passed in W.A. No. 98 of 2010 CIT
vs. Noorul Islam Educational Trust [2015] 375 ITR 226 (Mad) by which the
transfer of the income-tax/assessment file of the Appellant from Tamil Nadu to
Kerala as made by the jurisdictional Commissioner of Income-tax (CIT-II,
Madurai, Tamil Nadu) had been upheld.

According to the Supreme
Court, for the purpose of the appeal, it was necessary to note the provisions
of section 127(2)(a) of the Income-tax Act, 1961 (for short “the
Act”) which reads as under:

127. Power to transfer
cases.–(1) …

(2) Where the Assessing
Officer or Assessing Officers from whom the case is to be transferred and the
Assessing Officer or Assessing officers to whom the case is to be transferred
are not subordinate to the same Director General or Chief Commissioner or
Commissioner,–

(a) Where the Directors
General or Chief Commissioners or Commissioners to whom such Assessing Officers
are subordinate are in agreement, then the Director General or Chief
Commissioner or Commissioner from whose jurisdiction the case is to be
transferred may, after giving the Assessee a reasonable opportunity of
being-heard in the matter, wherever it is possible to do so, and after
recording his reasons for doing so, pass the order;

The Supreme Court held
that as the Income-tax/assessment file of the Appellant-Assessee had been
transferred from one Assessing Officer in Tamil Nadu to another Assessing
Officer in Kerala and the two Assessing Officers were not subordinate to the
same Director General or Chief Commissioner or Commissioner of Income-tax, u/s.
127(2)(a) of the Act an agreement between the Director General, Chief
Commissioner or Commissioner, as the case may be, of the two jurisdictions was necessary.

The Supreme Court noted
that the counter affidavit filed on behalf of the Revenue did not disclose that
there was any such agreement. In fact, it had been consistently and repeatedly
stated in the said counter affidavit that there was no disagreement between the
two Commissioners. The Supreme Court held that absence of disagreement could
not tantamount to agreement as visualised u/s. 127(2)(a) of the Act, which
contemplated a positive state of mind of the two jurisdictional Commissioners
of Income-tax which was conspicuously absent.

In the above
circumstances, the Supreme Court held that the transfer of the
Income-tax/assessment file of the Appellant-Assessee from the Assessing
Officer, Tamil Nadu to Assessing Officer, Kerala was not justified and/or
authorised u/s. 127(2)(a) of the Act. The order of the High Court was,
therefore, interfered with by the Supreme Court and the transfer was
accordingly set aside. The appeal was allowed in the above terms.

11. Reassessment – Notice u/s. 147 issued on
ground that no material to show debts written off as required under provisions
of section 36 was valid.

DDIT vs. Sumitomo
Mitsui Banking Corporation (2016) 387 ITR 164 (SC)

The High Court allowed the
petition of the assessee challenging the notice dated March 30, 2010 issued
u/s. 148 of the Act seeking to reopen the assessment for assessment year
2004-05 for the reason that the assessment was sought to be reopened only on
the ground that bad debts had not been proved to have become irrecoverable
which issue had been decided by the Supreme Court in TRF Ltd. vs. CIT
[(2010) 323 of ITR 397 (SC)] against the revenue.

The Revenue challenged the
order of the High Court dated February 22, 2011 passed in Writ Petition (L) No.
140 of 2011 by which the reopening of the assessment of the Respondent-Assessee
sought to be made by issuing a notice u/s. 148 of the Income-tax Act, 1961 had
been interfered with.

The Supreme Court having regard to the fact that though the
Respondent- Assessee had disclosed that the bad debts were transferred to Kotak
Mahindra Bank Ltd. for realisation, the authority recording the reasons prior
to issuance of notice u/s. 148 of the Income-tax Act, 1961 had specifically
recorded that there was no material available on record to indicate that the
bad debts had been written off as mandatorily required u/s. 36(1)(vii) of the
Income-tax Act, 1961 as amended with effect from April 1, 1989. The Supreme
Court held that if that be so, no fault could be found with the notice issued.
Consequently, the Supreme Court allowed the appeal by setting aside the order
of the High Court and dismissing the writ petition filed by the
Respondent-Assessee challenging the said notice. The Supreme Court, however,
made it clear that it had expressed no opinion on the merits of the
reassessment, which had been made on December 24, 2010, and it would be open
for the Respondent-Assessee to urge all questions as may be open, in law, in
the event the Respondent-Assessee seeks to challenge the reassessment order
dated December 24, 2010.

12. Offences and prosecution – The Deputy
Director of Income Tax, cannot be construed to be an authority to whom appeal
would ordinarily lie from the decisions/orders of the I.T. Os. involved in the
search proceedings so as to empower him to lodge the complaint in view of the
restrictive preconditions imposed by section 195 of the Code of Criminal
Procedure – The Supreme Court on a cumulative reading of sections 177, 178 and
179 of the Code of Criminal Procedure in particular and the inbuilt flexibility
discernible in the latter two provisions, where a single and combined search
operation had been undertaken simultaneously both at Bhopal and Aurangabad for
the same purpose, held that the alleged offence could be tried by courts
otherwise competent at both the aforementioned places.

Babita Lila & Anr v UOI (2016) 387
ITR 305

The Appellants, who are husband and
wife, were residents of both Bhopal and Aurangabad. A search operation was
conducted by the authorities under the Income-tax Act, 1961 (for short,
hereinafter referred to as “the Act”) on 28.10.2010 at both the
residences of the Appellants, in course whereof their statements were recorded
on oath u/s. 131 of the Act. In response to a query made by the authorities, it
was alleged that they made false statements denying of having any locker either
in individual names or jointly in any bank. It later transpired that they did
have a safe deposit locker with the Axis Bank (formerly known as UTI Bank) at
Aurangabad which they had also operated on 30.10.2010. The search at Aurangabad
was conducted by the Income Tax Officer, Nashik and Income Tax Officer, Dhule
and the statements of the Appellants were also recorded at Aurangabad.

Based on the revelation
that the Appellants, on the date of the search, did have one locker as
aforementioned and that their statements to the contrary were false and
misleading, a complaint was filed under provisions of the Indian Penal Code by
the Deputy Director of Income Tax (Investigation)-I, Bhopal (M.P.) on 30.5.2011
in the court of the Chief Judicial Magistrate, Bhopal, (M.P.) and the same was
registered as R.T. No. 5171 of 2011.

The Trial Court on
9.6.2011, took note of the offences imputed and issued process against the
Appellants. In doing so, the Trial Court, amongst others, noted that the search
proceedings undertaken by the authorities u/s. 132 of the Act were deemed to be
judicial proceedings in terms of section 136 and in course whereof, as alleged,
the Appellants had made false statements with regard to their locker and that
on the basis of the documents and evidence produced on behalf of the
complainant, sufficient grounds had been made out against them to proceed u/s.
191, 193, 200 of the Indian Penal Code.

The Appellants challenged
impugned this order of the Trial Court before the High Court u/s. 482 Code of
Criminal Procedure (for short hereinafter to be referred to as “the
Code”) and sought annulment thereof primarily on the ground that the
search operations having been undertaken by the I.T. O’s of Nashik and Dhule,
the complaint could not have been lodged by the Deputy Director of Income Tax
(Investigation)-I, Bhopal (M.P.) who was not the appellate authority in terms
of section 195(4) of the Code and further no part of the alleged offence having
been committed within the territorial limits of the Court of the Chief Judicial
Magistrate, Bhopal, it had no jurisdiction to either entertain the complaint or
take cognisance of the accusations. The High Court has declined to interfere in
the proceedings on either of these contentions.

Being aggrieved by the
rejection of their challenge to the initiation of their prosecution under
sections 109/191/193/196/200/420/120B/34 of the Indian Penal Code on the basis
of a complaint made by the Deputy Director of Income Tax (Investigation)-I,
Bhopal (M.P.), both on the ground of lack of competence of the complainant and
of jurisdiction of the Trial Court at Bhopal, the Appellants sought the
remedial intervention of the Supreme Court under Article 136 of the
Constitution of India.

Referring to section 195
of the Code as a whole, it has been urged on behalf of the Appellants that the
Deputy Director of Income Tax (Investigation)-I, Bhopal (M.P.), in the facts of
the case was not competent to lodge the complaint, he being not the authority
to whom appeals would ordinarily lie from the orders or actions of the I.T.
Os., Nashik and Dhule.

It was further urged on
behalf of the Appellants that having regard to the place of search, the
recording of their statements as well as of the location of the locker, no
cause of action for initiation of the criminal proceedings had arisen within
the jurisdiction of the court of the Chief Judicial Magistrate, Bhopal in terms
of sections 177 and 178 of the Code and thus the High Court had grossly erred
in deciding contrary thereto.

In refutation of the
arguments advanced on behalf of the Appellants, the learned Solicitor General
maintained that having regard to the scheme of Chapters XIII and XX and the
underlying legislative intent ascertainable therefrom, the Deputy Director of
Income Tax (Investigation)-I, Bhopal (M.P.) had the competence and jurisdiction
to lodge the complaint at Bhopal.

Vis-a-vis the competence of the court of the Chief Judicial
Magistrate, Bhopal, the learned Solicitor General insisted that as the
Appellants were the residents, both of Bhopal and Aurangabad and search
operations were conducted simultaneously at both the places, and further as
they had been filing their income tax returns at Bhopal, the Trial Court before
which the complaint had been filed, was competent to take cognisance of the
offences alleged in terms of section 178 (b) and (d) of the Code.

According to the Supreme
Court, the rival submissions stirred up two major issues pertaining to the
maintainability and adjudication of the complaint lodged before the Chief
Judicial Magistrate, Bhopal, (M.P.) by the Deputy Director, Income Tax
(Investigation)-I, Bhopal, (M.P.) in the face of the prescription of section
195(1)(b) of the Code, in particular read with the other cognate sub-sections
thereof as well as the limits of the territorial jurisdiction of the court
before which the prosecution of the Appellants had been initiated in the
context of section 177 of the Code.

The Supreme Court noted
that section 195(1)(b) of the Code, which was relevant for the instant pursuit,
prohibited taking of cognisance by a court vis-a-vis the offences
mentioned in the three Clauses (i), (ii) and (iii) except on a complaint in
writing of the Court when the offence(s) is/are alleged to have been committed
in or in relation to any proceeding before it or in respect of a document
produced or given in evidence in such a proceeding or by such officer of that
court as it may authorise in writing or by some other court to which the court
(in the proceedings before which the offence(s) has been committed) is
subordinate.

The Supreme Court held
that the search operations did constitute a proceeding under the Act before an
income tax authority and that therefore, the same was deemed to be a judicial
proceeding within the meaning inter alia of sections 193 and 196 of the
Indian Penal Code and that every income tax authority for the said purpose
would be deemed to be a civil court for the purposes of section 195. The
Supreme Court however noted that it was held that that was not an issue between
the parties.

The Supreme Court after
considering the relevant provisions and the cited judgments held that, neither
the hierarchy of the income tax authorities as listed in section 116 of the Act
nor in the notification issued u/s. 118 thereof, nor their duties, functions,
jurisdictions as prescribed by the cognate provisions, permit a deduction that
in the scheme of the legislation, the Deputy Director of Income Tax has been
conceived also to be an appellate forum to which appeals from the orders/decisions
of the I.T. Os./assessing officers would ordinarily lie within the meaning of
Section 195(4) of the Code. The Deputy Director of Income Tax (Investigation)-I
Bhopal, (M.P.), therefore could not be construed to be an authority to whom
appeal would ordinarily lie from the decisions/orders of the I.T. Os. involved
in the search proceedings in the case in hand so as to empower him to lodge the
complaint in view of the restrictive preconditions imposed by section 195 of
the Code. The complaint filed by the Deputy Director of Income Tax,
(Investigation)-I, Bhopal (M.P.), thus on an overall analysis of the facts of
the case and the law involved had to be held as incompetent.

According to the Supreme
Court, the objection on the competence of the Court of the Chief Judicial
Magistrate, Bhopal to entertain the complaint and take cognisance of the
offences alleged, though reduced to an academic exercise, required to be dealt.

The Supreme Court held
that the Appellants as assessees, had residences both at Bhopal and Aurangabad
and had been submitting their income tax returns at Bhopal. The search
operations were conducted simultaneously both at Bhopal and Aurangabad in
course whereof allegedly the Appellants, in spite of queries made, did not
disclose that they in fact did hold a locker located at Aurangabad. They in
fact denied that they held any locker, either individually or jointly.

The locker, eventually
located, though at Aurangabad, had a perceptible co-relation or nexus with the
subject matter of assessment and thus the returns filed by the Appellants at
Bhopal which in turn were within the purview of the search operations. The
search conducted simultaneously at Bhopal and Aurangabad had to be construed as
a single composite expedition with a common mission. Having regard to the
overall facts and the accusation of false statement made about the existence of
the locker in such a joint drill, it could not be deduced that in the singular
facts and circumstances, no part of the offence alleged had been committed
within the jurisdictional limits of the Chief Judicial Magistrate, Bhopal.

The Supreme Court held
that Chapter XIII of the Code sanctions the jurisdiction of the criminal courts
in inquires and trials. Whereas Section 177 of the Code stipulates the ordinary
place of inquiry and trial, Section 178 enumerates the places of inquiry or
trial. In terms of Section 179, when an act is an offence by reason of anything
which has been done and of a consequence which has ensued, the offence may be
inquired into or tried by a court within whose local jurisdiction such thing
has been done or such consequence has ensued.

The Supreme Court on a cumulative
reading of sections 177, 178 and 179 of the Code in particular and the inbuilt
flexibility discernible in the latter two provisions, held that in the
attendant facts and circumstances of the case where to repeat, a single and
combined search operation had been undertaken simultaneously both at Bhopal and
Aurangabad for the same purpose, the alleged offence could be tried by courts
otherwise competent at both the aforementioned places. To confine the
jurisdiction within the territorial limits to the court at Aurangabad would
amount to impermissible and illogical truncation of the ambit of sections 178
and 179 of the Code. The objection with regard to the competence of the Court
of the Chief Judicial Magistrate, Bhopal was hence rejected.

Thus, though the territorial
jurisdiction at the Bhopal Trial Court was held to be valid, in view of the
complainant not being competent, the proceedings were quashed by the Supreme
Court.

13. Appeal to the High Court – Review petition
filed against the order dismissing the tax appeal on the grounds that the tax
in dispute was less than Rs.2 lakh contending that the tax effect was more than
Rs.2 lakh was dismissed by the High Court as not maintainable – Orders of the
High Court set aside holding review petition was maintainable and requesting to
decide the review petition and thereafter the appeal itself, if so required, on
the merits.

CIT vs. Automobile
Corp. of Goa (2016) 387 ITR 140 (SC)

The High Court by the
order dated August 25, 2010 has disposed of the appeal filed by the Revenue
without entering into the merits on the ground that the tax demand which formed
the subject matter of the appeal was less than Rs. 2,00,000. Thereafter, the
High Court by the order dated March 28, 2012 had dismissed the review petition
filed by the Revenue holding the same to be not maintainable against the order
passed under the provisions of section 260A of the Income-tax Act, 1961.

Before Supreme Court, an
affidavit was filed by the Revenue explaining how the notional tax effect was
far beyond the amount of Rs. 2,00,000. The Supreme Court further noted that in CIT
vs. Meghalaya Steels Ltd. [2015] 377 ITR 112 (SC), decided on August 5,
2015, a view had been taken by it that the review would be available in respect
of the orders passed u/s. 260A of the Income-tax Act, 1961.

In view of the above, the
Supreme Court allowed the appeals and set aside both the orders dated August
25, 2010 and March 28, 2012 passed by the High Court in Tax Appeal No. 7 of
2004 and Civil Application (Review) No. 26 of 2010 respectively and requested
the High Court to decide the review petition and thereafter the appeal itself,
if so required, on the merits. The Supreme Court, however, made it clear that
it had expressed no opinion on the merits of any of the contentions of the
parties.

BCAJ Admin

Glimpses of Supreme Court Rulings

10 Search and seizure – The Supreme Court declined to interfere
in the order of the High Court after finding that the Assessing Officer had
examined some of the borrowers mentioned in the pronotes and they had
categorically stated that the amount advanced was 50 per cent, or less which
explanation had been accepted by the first appellate authority and confirmed by
the Tribunal and held that when all of them were carrying on same business from
the same premises, it is but natural that if any concealed income have been
found at the time of search and survey, it has to be distributed among all the
family members who were carrying on business.

CIT vs. Rekha Bai (2017) 393 ITR 22 (SC)

The assessee, an individual, was carrying on the business of
financier by giving her husband a power of attorney. On August 9, 1989, a
search was conducted under section 132 of the Income-tax Act in the premises of
the assessee and several incriminating documents were seized. The pronotes to
the value of Rs. 28,16,900, the note books containing entries of amounts
advanced and repayments received back, the details of amounts advanced to
various parties and the details of date wise interest receipts were seized.

While making the assessment, the Assessing Officer made an
addition of Rs.15,21,120, Rs.6,05,163 and Rs.10,22,082 for the three assessment
years i.e. 1988-89 to 1990-91 under the head “Income from other sources”.

The Commissioner of Income-tax (Appeals) allowed the appeals
by a common order holding that the concealed income should not be entirely
assessed in the hands of the assessee and should be divided among the assessee,
her husband, her husband’s Hindu undivided family and her son. He further held
that the face value of the pronotes cannot be taken as the amounts actually lent
and fixed the concealed income at a much lower figure.

The Tribunal held that the order of the Commissioner of
Income-tax (Appeals) was reasonable in all respects and confirmed the same.

The High Court held that there was a clear finding given by
the Tribunal that the amount reflected in the seized pronotes were inflated and
actual amount of advance made by the assessee-respondent were less than the
amounts shown in the respective pronotes. The Tribunal noted that the Revenue
had not produced any further evidence or material to show that what was stated
in the pronote was the actual amount advanced. The High Court also did not find
any error in the order of the Tribunal and their finding was that the income
computed in these cases was to be attributed to the assessee-respondent, her
husband, Hindu undivided family and her son. The High Court further held that
the authorities below rightly pointed out that it was not so probable that the
entire income was earned by the assessee-respondent at a particular assessment
year or assessment years. A reasonable conclusion was made that the income had
been earned over a period of time.

Before the Supreme Court the Learned Counsel appearing for
the Appellant Revenue submitted that the full value of the pronotes seized at
the time of survey should have been taken into account.

From the order of the first appellate authority, the Supreme
Court noted that the Assessing Officer had examined some of the borrowers
mentioned in the pro-notes and they had categorically stated that the amount
advanced was 50 per cent, or less which explanation had been accepted by the
first appellate authority and confirmed by the Tribunal.

The Supreme Court held that the Department had failed to
bring on record any material to the contrary except the seized documents which,
according to the Supreme Court, could not absolve the Department or give any
right to negate the view taken by the first appellate authority and the
Tribunal. So far as the income divided among the family members of the
Respondent-Assessee was concerned the Supreme Court noted that all of them were
carrying on same business from the same premises. Therefore, it was but natural
that if any concealed income had been found at the time of search and survey,
it had to be distributed among all the family members who were carrying on
business.

The Supreme Court accordingly dismissed the appeal of the
Revenue.

11 Search and seizure – Block Assessment – As the issue of
invalidity of the search warrant was not raised at any point of time prior to
the notice u/s. 158BD and having participated in the proceedings of assessment
initiated under Section 158BC, the information discovered in the course of the
search, if capable of generating the satisfaction for issuing a notice u/s.
158BD could not altogether become irrelevant for further action u/s. 158BD

Gunjan Girishbhai Mehta vs. Director of Investigation
(2017) 393 ITR 310 (SC)

Notice u/s. 132 of the
Income-tax Act, 1961 (the Act) was issued in the name of a dead person. The
said notice was duly received by the Petitioner as the legal heir of the dead
person. Notice of assessment u/s. 158BC of the Act was issued and in the
assessment proceedings, where the income was declared to be “nil”,
the Petitioner as the legal heir had participated. Thereafter, notice u/s.
158BD of the Act was issued to the Petitioner on the basis of information
coming to light in the course of search. Aggrieved, the Petitioner moved the
High Court and on dismissal of the writ petition, filed the special leave
petition.

The point urged before the
Supreme Court was that if the original search warrant is invalid, the
consequential action u/s. 158BD would also be invalid. The Supreme Court did
not agree with the Petitioner. The Supreme Court held that the issue of
invalidity of the search warrant was not raised at any point of time prior to
the notice u/s.158BD. In fact, the Petitioner had participated in the
proceedings of assessment initiated u/s.158BC of the Act. The information
discovered in the course of the search, if capable of generating the
satisfaction for issuing a notice u/s.158BD, could not altogether become
irrelevant for further action u/s. 158BD of the Act.

The Supreme Court further
held that the reliance placed on the decision of the High Court of Punjab and
Haryana in CIT vs. Rakesh Kumar [2009] 313 ITR 305 (P & H) against
which special leave petition [SLP(C) No. CC 3623/2009] was dismissed by it and
its decision in Asst. CIT vs. A.R. Enterprises [2013] 350 ITR 489 (SC)
was on entirely different facts.

The Supreme Court observed
that in Rakesh Kumar (supra) the challenge was to the proceedings of
assessment u/s. 158BC of the Act on the basis of a search warrant issued in the
name of a dead person. The issue in A.R. Enterprises (supra) had no
similarity to the issue in hand, namely, the validity of the proceedings u/s.
158BD of the Act. For the aforesaid reasons, according to the Supreme Court
there was no merit in the special leave petition and thus the same was
dismissed.

12 Business Expenditure – Amortisation of preliminary expenses –
The “premium amount” collected by the Company on its subscribed
issued share capital was not and could not be said to be the part of
“capital employed in the business of the Company” for the purpose of
section 35D(3)(b) of the Act and hence is not entitled to claim any deduction
in relation to the amount received towards premium from its various shareholders
on the issued shares of the Company.

Berger Paints India Ltd vs. CIT (2017) 393 ITR 113 (SC)

The Appellant, a Limited Company, was engaged in the business
of manufacture and sale of various kinds of paints. For the Assessment Year
1996-97, the Appellant (Assessee) filed their income tax return and declared
the total income at Rs. 3,64,64,527/-, which was revised to Rs. 3,58,92,771/-
and then again revised to Rs. 3,57,26,644/-.

A notice was issued by the A.O.
to the Appellant (Assessee) u/s. 143(2) of the Act which called upon the
Appellant to explain as to, on what basis the Appellant had claimed in the
return a deduction under the head “preliminary expenses” amounting to
Rs. 7,03,306/- being 2.5% of the “capital employed in the business of the
company” u/s. 35D of the Act.

In reply, the Appellant (Assessee) contended therein that it
had issued shares on a premium which, according to them, was a part of the
capital employed in their business. The Appellant, therefore, contended that it
was on this basis, it claimed the said deduction and was, therefore, entitled
to claim the same u/s. 35D of the Act.

The A.O. did not agree with
the explanation given by the Appellant. He was of the view that the expression
“capital employed in the business of the company” did not include the
“premium amount” received by the Appellant on share capital. The A.O.
accordingly calculated the allowable deduction u/s. 35D of the Act at Rs.
1,95,049/- and disallowed the remaining one by adding back to the total income
of the Appellant for taxation purpose.

The Appellant, felt
aggrieved, and filed an appeal before the Commissioner of Income Tax (Appeals).
The Commissioner was of the view that since the “capital employed”
consisted of subscribed capital, debentures and long term borrowings, any
“premium” collected by the Appellant-Company on the shares issued by
it should also be included in the said expression and be treated as the capital
contributed by the shareholders. The Commissioner also was of the view that the
share premium account, which was shown as reserve in the balance sheet of the
Company, was in the nature of the capital base of the Company and hence
deduction u/s. 35D of the Act was admissible with reference to the said amount
also. Accordingly, the Commissioner allowed the appeals, set aside the order of
A.O. and disallowance of Rs. 5,08,257/- made by the A.O. and, therefore,
deleted the said sum.

The Revenue felt aggrieved
and filed an appeal before the Tribunal. The Tribunal allowed the appeal and
reversed the view taken by the Commissioner of Income Tax (Appeals). The
Tribunal held that the premium collected by the Appellant-Company on the share capital
did not tantamount to “capital employed in the business of the
Company” within the meaning of section 35D(3) of the Act.

The Company-Assessee felt aggrieved and filed appeal u/s.
260A of the Act before the High Court. The High Court dismissed the appeal and
affirmed the order of the Tribunal.

Feeling aggrieved, the Assessee-Company filed an appeal
before the Supreme Court.

According to the Supreme Court, the short question that fell
for consideration was whether “premium” collected by the Appellant-Company
on its subscribed share capital is “capital employed in the business of
the Company” within the meaning of section 35D of the Act so as to enable
the Company to claim deduction of the said amounts as prescribed u/s. 35D of
the Act?

The Supreme Court agreed
with the view of the High Court that the capital employed in the business of
the Company is restricted to the issued share capital, debentures and long term
borrowings, and that there was no room for holding that the premium, if any,
collected by the Company on the issue of its share capital would also constitute a part of the capital employed in the business of the Company
for purposes of deduction u/s. 35D.

According to the Supreme Court also, the “premium
amount” collected by the Company on its subscribed share capital was not
and could not be said to be the part of “capital employed in the business
of the Company” for the purpose of section 35D(3)(b) of the Act and hence
the Appellant-Company was rightly held not entitled to claim any deduction in
relation to the amount received towards premium from its various shareholders
on the issued shares of the Company.

According to the Supreme Court, there was more than one
reason to hold so. First, if the intention of the Legislature were to treat the
amount of “premium” collected by the Company from its shareholders
while issuing the shares to be the part of “capital employed in the
business of the company”, then it would have been specifically said so in
the Explanation (b) of sub-section (3) of section 35D of the Act. It was,
however, not said. Second, on the other hand, non-mentioning of the words does
indicate the legislative intent that the Legislature did not intend to extend
the benefit of section 35D to such sum. Third, these two reasons were in
conformity with the view taken by it in the case of Commissioner of Income
Tax, West Bengal vs. Allahabad Bank Ltd. (1969) 2 SCC 143, wherein the
question arose as to whether an amount of Rs. 45,50,000/- received by the
Assessee (Bank) in cash as “premium” from its various shareholders on
issuing share on premium was liable to be included in their paid up capital for
the purpose of allowing the Assessee to claim rebate under Paragraph D of Part
II of the first Schedule to the Indian Finance Act 1956. The Supreme Court
after examining the issue in the context of Para D read with its Explanation
held that “share premium account” was liable to be included in the
paid up capital for the purposes of computing rebate. One of the reasons to
allow such inclusion with the paid up capital was that such inclusion was
permitted by the specific words in the Explanation. Such was, however, not the
case here.

Its conclusion was further supported by the fact that the
Companies Act provides in its Schedule V-Part II (Section 159) a Form of Annual
Return, which is required to be furnished by the Company having share capital
every year. Column III of this Form, which deals with capital structure of the
company, provides the breakup of “issued shares capital breakup”.
This column does not include in it the “premium amount collected by the
company from its shareholders on its issued share capital”. This was
indicative of the fact that such amount was not considered a part of the
capital unless it was specifically provided in the relevant section.

Further, section 78 of the Companies Act which deals with the
“issue of shares at premium and discount” requires a Company to
transfer the amount so collected as premium from the shareholders and keep the
same in a separate account called “securities premium account”. It
does not anywhere say that such amount be treated as part of capital of the
company employed in the business for one or other purpose, as the case may be,
even under the Companies Act.

The appeal was accordingly dismissed.

13 Capital Gains – Amount paid by the subsidiary to its parent
company, in a scheme of settlement between two groups of shareholders whereby
ownership of the holding company remained with the majority shareholders and
the subsidiary was transferred to the minority shareholders, could not be
charged to capital gains tax in the hands of the holding company.

CIT vs. Annamalaiar Mills (2017) 393 ITR 293 (SC)

M/s. Annamalaiar Mills (P.) Ltd., Respondent herein was a
holding company of M/s. Annamalaiar Textiles (P.) Ltd. Hundred percent shares
of M/s. Annamalaiar Textiles (P.) Ltd. were held by the Respondent-company. In
the Respondent-company, there were two groups of shareholders; the majority
shareholder called Group A was having 61.26 % shares whereas the minority
shareholders called Group B were holding 38.74 %, shares.

An agreement was entered
into between the two groups on June 24, 1985 by which Group A came to hold all
the shares in the holding company, i.e., the Respondent herein and Group B was
given 100 % shares in the subsidiary company, i.e., M/s. Annamalaiar Textiles
(P.) Ltd. However, M/s. Annamalaiar Textiles (P.) Ltd. also paid a sum of Rs.
42.45 lakh to the Respondent-company.

Proceedings under the Gift-tax Act were initiated in respect
of payment of Rs. 42.45 lakh received by the Respondent-company.

The Assessing Officer treated the amount of Rs. 42.45
lakhspaid by the M/s. Annamalaiar Textiles (P.) Ltd. to the Respondent-company
as capital gains on the footing that since both the companies were now 100
% owned by Group A or Group B, as the
case may be, payment of Rs. 42.45 lakh was to offset valuation of the shares of
M/s. Annamalaiar Textiles (P.) Ltd.

The order of the Assessing Officer was upheld in the appeal
before the Commissioner of Income-tax (Appeals). However, the Income-tax
Appellate Tribunal, Madras, in appeal preferred by the Respondent herein
accepted the pleas put forth by the Respondent herein, set aside the assessment
and restored the matter to the Income-tax Officer so that the assessee may
approach the Central Board of Direct Taxes. The Income-tax Officer was further
directed to finalise the assessment in accordance with the directions that may
be given by the Central Board of Direct Taxes.

The matter was taken up before the High Court of Madras and
the order of the Tribunal was upheld by the Madras High Court.

The sole question which arose for
our consideration before the Supreme Court was therefore as to whether the sum
of Rs. 42.45 lakh paid by M/s. Annamalaiar Textiles (P.) Ltd. to the
Respondent-company was liable to any capital gains or not.

The Supreme Court noted that it was not in dispute that M/s.
Annamalaiar Textiles (P.) Ltd. did not pay any amount to the shareholders who
ultimately got the shares transferred in their names. The Respondent was
holding 100 percent shares of M/s. Annamalaiar Textiles (P.) Ltd., before it
was transferred to Group B. No payment was made to the shareholders belonging to
Group B and, therefore, the question of there being any capital gains at the
hands of the Respondent herein does not arise.

The
Supreme Court also noted that the transaction of payment of Rs. 42.45 lakh had
been subjected under the Gift-tax Act and the Department could not claim both
under the Gift-tax Act and also levy tax under the Income-tax Act.

In view of the above, the Supreme Court did not
find any merit in the Civil Appeal and the same was dismissed.

BCAJ Admin

Glimpses of Supreme Court Rulings

14. Capital Gains – Cost of Acquisition – Value as on
1-4-1974 – High Court not to interfere with the finding of fact by the Tribunal
unless the same is palpably incorrect and therefore perverse – Assessing
Officer and Commissioner of Income Tax valued the land at Rs. 2 or 3 per sq.
yard while the Tribunal determined the value at Rs.150/- per sq. yard which
finding was reversed by the High Court.

Ashok Prapann vs. CIT (2016) 389 ITR 462 (SC)

The assessment year in question was 1989-90. The Assessee has
been subjected to payment of income-tax on capital gains accruing from land
acquisition compensation and sale of land. It was not in dispute that the land
in question was sold for Rs.150/- per sq. yard. The dispute was as to how the
cost of acquisition was to be worked out for the purposes of deduction of such
cost from the receipts so as to arrive at the correct quantum of capital gains
exigible to tax under the Income-tax Act, 1961 (for short “the Act”).
The Assessing Officer as well as the first appellate authority took into
account the declaration made in the return filed by the Assessee under the
Wealth-tax Act (Rs. 2 per square yard) in respect of the very plot of land as
the cost of acquisition. Some instances of comparable sales showing higher
value at which such transactions were made (Rs. 70 per square yard) were also
laid by the Assessee before the Assessing Officer. The same were not accepted
on the ground that such sales were subsequent in point of time, i.e., 1978-79
whereas u/s. 55(2) of the Act the crucial date for determination of the cost of
acquisition was April 1, 1974.

The learned Tribunal took the view that the comparable sales
could not altogether be ignored. Therefore, though the comparable sales were at
a higher value of Rs. 70 per square yard, the learned Tribunal thought it
proper to determine the cost of acquisition at Rs. 50 per square yard. In the
second appeal, the High Court exercising jurisdiction u/s. 260A of the Act
reversed the said finding.

The Supreme Court observed that a declaration in the return
filed by the Assessee under the Wealth-tax Act would certainly be a relevant
fact for determination of the cost of acquisition which u/s. 55(2) of the Act
to be determined by a determination of fair market value. Equally relevant for
the purposes of aforesaid determination would be the comparable sales though
slightly subsequent in point of time for which appropriate adjustments can be
made as had been made by the learned Tribunal (from Rs. 70 per square yard to
Rs. 50 per square yard). The Supreme Court held that comparable sales, if
otherwise genuine and proved, could not be shunted out from the process of
consideration of relevant materials. The same had been taken into account by
the learned Tribunal which is the last fact finding authority under the Act.
Unless such cognizance was palpably incorrect and, therefore, perverse, the
High Court should not have interfered with the order of the Tribunal. According
to the Supreme Court, the order of the High Court overlooked the aforesaid
severe limitation on the exercise of jurisdiction u/s. 260A of the Act.

The Supreme Court further noted that apart from the above, it
appeared that there was an on-going process under the Land Acquisition Act,
1894 for determination of compensation for a part of the land belonging to the
Assessee which was acquired [39 acres (approx.)]. The reference court enhanced
the compensation to Rs. 40 per square yard. The above fact, though subsequent,
would not again be altogether irrelevant for the purposes of consideration of
the entitlement of the Assessee. However, as the determination of the cost of
acquisition by the learned Tribunal was on the basis of the comparable sales
and not the compensation awarded under the Land Acquisition Act, 1894 (the
order awarding higher compensation was subsequent to the order of the learned
Tribunal) and the basis adopted was open for the learned Tribunal to consider,
the Supreme Court was of the view that
in the facts of the present case, the High Court ought not to have interfered
with the order of the learned Tribunal.

Consequently and taking into account all the reasons stated
above, the Supreme Court allowed the appeal. The order of the High Court was
set aside and that of the learned Tribunal was restored.

15. Cost of Construction – Reference to the Department
Valuation Officer though made in 1997 was valid in view of insertion of section
142A by Finance (No.2) Act, 2014 w.r.e.f. 15-11-1972 and subsequent amendments,
as the assessment had not become final and conclusive because appeal filed by
Revenue u/s. 260A was pending before the High Court but the order of the High
Court not interfered with in view of the finding recorded by the Tribunal that
local Public Work Department rates are to be applied and adopted in place of
Central Public Works Departments rates.

CIT vs Sunita Mansingha (2017) 393 ITR 121

The proceedings for block assessment year 1997-98 were
initiated against the Respondents as a result of search conducted at the
residence of assessee u/s. 132 of the Act on 24.3.1997. The Assessing Officer inter
alia found that the assessee had half share in a farm house cum swimming
pool and she owned a residential House at 13-37, Shastri Nagar, Bhilwara. The
said properties were referred to the Departmental Valuation Officer (DVO) for
valuing the cost of construction. By a report dated 2.6.1997, the cost of farm
house was determined at Rs.23,54,200 as against Rs.5,82,600 declared as cost of
construction. The 50% difference in the cost of construction, which worked out
at Rs.8,81,300 was added to income of the assessee as income from undisclosed
sources. Similarly, an addition of Rs.12,19,145 was made on account of
undisclosed investment in cost of construction of house at Shastri Nagar as per
the report of DVO.

The Commissioner of Income-tax (Appeals) sustained the
addition to the tune of Rs.2,56,691 on account of alleged unexplained
investment in the construction of residential house at Shastri Nagar, Bhilwara.
The Tribunal deleted the entire amount added by the Assessing Officer.

A question was raised before the High Court regarding
deletion of addition on account of unexplained investment in construction of
house property on the basis of reference to Departmental Valuation Officer. The
High Court noted that no question was raised regarding deletion of addition of
Rs.8,81,300 though the same had been deleted for the same reason.

The High Court, following the decision of Supreme Court in Smt.
Amiya Bala Paul vs. CIT (2003) 262 ITR 407 (SC), held that the Assessing
Officer could not have made addition of certain amount by way of unexplained
investment in construction of immovable property namely residential house
situated at Bhilwara and farm house situated at Atun on the basis of valuation
report obtained by referring the issue to DVO, as no power existed under the
Act of making such a reference.

The Supreme Court observed that even though the Tribunal had
held that the reference to the Departmental Valuation Officer in question was
not valid, in view of the decision of the Supreme Court in the case of Smt.
Amiya Bala Paul vs. CIT (supra), it had also held that it was a settled
principle of law that in place of Central Public Works Department rates, local
Public Works Department rates were to be applied and adopted to determine the
cost of construction.

The Supreme Court held that in view of the fact that section
142A was inserted by the Finance (No. 2) Act, 2004 (23 of 2004) w.r.e.f. 15^th
November, 1972 and subsequently again substituted by the Finance Act, 2010 (14
of 2010) w.e.f. 1^st July, 2010 and the Finance (No. 2) Act, 2014 (25
of 2014) w.e.f. 1^stOctober, 2014, as the proviso to sub-section (3)
of section 142A as it existed during the relevant period, reference to the
Departmental Valuation Officer could have been made because assessment in the
present case had not become final and conclusive because the appeal preferred
by the Revenue u/s. 260A of the Income-tax Act, 1961 was pending before the
Rajasthan High Court.

However, in view of the finding recorded by the Tribunal that
the local Public Works Department rates were to be applied and adopted in place
of Central Public Works Department rates, the Supreme Court did not find any
good ground to interfere in the impugned judgment on this issue on merits. The
appeal was thus dismissed.

16. Capital or Revenue Expenditure – Interest and other
expenditure towards creation of assets is revenue expenditure and is to be
allowed as deduction in the year it is incurred though capitalized in the
books.

CIT vs. Shri Rama Multi Tech Ltd. (2017) 393 ITR 371 (SC)

For the assessment year 2000-01, the Respondent, a public
limited company, had incurred an expenditure of Rs.3,37,84,348 towards payment
of interest on loans taken and other items for setting up the industry. Even
though it had capitalised the said amount and claimed depreciation before the
assessing authority, however, in appeal, the Respondent raised additional
ground claiming deduction of the aforesaid amount on interest paid with some
other expenditure on other items connected therewith as revenue expenditure.

The Commissioner of Income-tax (Appeals) vide order dated
March 5, 2004, allowed the claim of the Respondent-Assessee only to the extent
of interest amount of Rs. 2,92,45,670 paid on loans taken by it for
establishing the industry. He, however, disallowed the other expenditures,
namely, financial charges, professional expenses, upfront fee, etc.

The Revenue, feeling aggrieved by the said allowance,
preferred an appeal before the Income-tax Appellate Tribunal which vide order
dated December 2, 2004 upheld the order of the Commissioner of Income-tax
(Appeals) in so far as it related to the allowance of the expenditure claimed
towards payment of interest and also allowed expenditure on other items connected
therewith. The High Court did not interfere in the appeal preferred by the
Revenue on the ground that the Tribunal has followed the decision of the
Gujarat High Court in the case of Deputy CIT vs. Core Healthcare Ltd.
[2001] 251 ITR 61 (Guj).

Feeling aggrieved, the Commissioner of Income-tax has
preferred appeal before the Supreme Court.

The Supreme Court noted that it had in the case of Deputy
CIT vs. Core Health Care Ltd. [2008] 298 ITR 194 (SC) had affirmed the view
taken by the Gujarat High Court.

In this view of the matter, the Supreme Court held that the
Income-tax Appellate Tribunal was justified in allowing the expenditure of Rs.
3,37,84,348 towards the interest paid on the loans taken and expenditure on
other items connected therewith for establishment of the unit, while affirming
the order of the Commissioner of Income-tax (Appeals).

Learned Counsel for the Revenue-Appellant submitted before
the Supreme Court that the Respondent cannot claim depreciation on the amount
of interest which has been allowed as revenue expenditure and therefore, the depreciation referable to such interest expenditure be reversed.

Learned Counsel for the Respondent however, submitted that
there was nothing on record to show that depreciation on this amount had been
taken by the Respondent.

The Supreme Court, in view of the aforesaid contentions,
directed that if as a fact the Respondent has taken any depreciation on the
amount of interest and other items which has been allowed as revenue
expenditure, that much depreciation should be reversed by the assessing
authority.

Subject to the aforesaid observations, the appeals were
dismissed.

17. Capital Gains –
Slump Sale – Section 50 (2) applies to a case where any block of assets are
transferred by the Assessee but where the entire running business with assets
and liabilities is sold by the Assessee in one go, such sale could not be
considered as “short-term capital assets”.

CIT vs. Equinox Solution Pvt. Ltd. (2017) 393 ITR 566 (SC)

The Respondent-Assessee was engaged in the business of
manufacturing sheet metal components out of CRPA & OP sheds at Ahmedabad.
The Respondent decided to sell their entire running business in one go. With
this aim in view, the Respondent sold their entire running business in one go
with all its assets and liabilities on 31.12.1990 to a Company called
“Amtrex Appliances Ltd.” for Rs. 58,53,682/-.

The Respondent filed their income tax return for the
Assessment Year 1991-1992. In the return, the Respondent claimed deduction u/s.
48 (2) of the Act as it stood then by treating the sale to be in the nature of
“slump sale” of the going concern being in the nature of long term
capital gain in the hands of the Assessee.

The Assessing Officer did not accept the contention of the
Assessee in claiming deduction. According to the Assessing Officer, the case of
the Assessee was covered u/s. 50 (2) of the Act because it was in the nature of
short term capital gain as specified in section 50 (2) of the Act and hence did
not fall u/s. 48 (2) of the Act as claimed by the Assessee. The Assessing
Officer accordingly reworked the claim of the deduction treating the same to be
falling u/s. 50 (2) of the Act and framed the assessment order.

The Assessee, felt aggrieved, filed appeal before the CIT
(Appeals). The Commissioner of Appeals allowed the Assessee’s appeal insofar as
it related to the issue of deduction. He held that when it was an undisputed
fact that the Assessee has sold their entire running business in one go with
its assets and liabilities at a slump price and, therefore, the provisions of
section 50 (2) of the Act could not be applied to such sale. He held that it
was not a case of sale of any individual or one block asset which may attract
the provisions of section 50 (2) of the Act. He then examined the case of the
Assessee in the context of definition of “long term capital gain” and
“short term capital asset” and held that since the undertaking itself
is a capital asset owned by the Assessee nearly for six years and being in the
nature of long term capital asset and the same having been sold in one go as a
running concerned, it cannot be termed a “short terms capital gain”
so as to attract the provisions of section 50 (2) of the Act as was held by the
Assessing Officer. The CIT (Appeals) accordingly allowed the Assessee to claim the deduction as was claimed by them before the Assessing Officer.

The Revenue felt aggrieved of the order of the CIT (Appeal),
and filed an appeal before the Income Tax Appellate Tribunal. The Tribunal
concurred with the reasoning and the conclusion arrived at by the Commissioner
of Appeal and accordingly dismissed the Revenue’s appeal.

The Revenue, felt aggrieved of the order of the Tribunal, and
carried the matter to the High Court in further appeal u/s. 260-A of the Act.
By impugned order, the High Court dismissed the appeal holding that the appeal
does not involve any substantial question of law within the meaning of section
260-A of the Act.

It was against this order that the Revenue felt aggrieved and
carried the matter to the Supreme Court in appeal by way of special leave.

The Supreme Court held that no fault could be found in the
reasoning and the conclusion arrived at by the CIT (Appeals) in his order
which, according to the Supreme Court was rightly upheld by the Tribunal and
then by the High Court and called for no interference by it.

According to the Supreme Court, the case of the Respondent
(Assessee) did not fall within the four corners of section 50 (2) of the Act.
Section 50 (2) applies to a case where any block of assets are transferred by
the Assessee but where the entire running business with assets and liabilities
is sold by the Assessee in one go, such sale could not be considered as
“short-term capital assets”. In other words, the provisions of
section 50 (2) of the Act would apply to a case where the Assessee transfers
one or more block of assets, which he was using in thw running of his business.
Such was not the case here because in this case, the Assessee had sold the
entire business as a running concern.

The Supreme Court drew
support with the law laid down by it in Commissioner of Income Tax, Gujarat
vs. Artex Manufacturing Co. 1997 (6) SCC 437 and in Premier Automobiles
Ltd. vs. Income Tax Officer and Anr. 264 ITR 193

The Supreme Court did not find any merit in the
appeal and was accordingly dismissed.

BCAJ Admin

Glimpses of Supreme Court Rulings

3. Capital or Revenue receipt – The principle
that unless the grant-in-aid received by and assessee is utilied for
acquisition of an asset, the same must be understood to be in the nature of
revenue receipt, is not applicable to all situations – Subvention monies paid
by a parent company to its loss making Indian company are to be understood to
be payments made in order to protect capital investment of the assessee-company
and could not be treated as revenue receipts

Siemens Pub.
Communication Network P. Ltd. vs. CIT[(2017) 390 ITR 1 SC)]

The assessee
was engaged in the business of manufacturing digital electronic
switching systems, computer software and also software services. The return of
income for the assessment year 1999-2000 was filed declaring a loss of
Rs.9,08,30,417. In the statement of computation, the assessee had shown a sum
of Rs.21,28,40,000 as monies received from Siemens AG Germany, its principal
shareholder. In the course of the assessment proceedings the assessee explained
the said sum, as “subvention payment” from principal shareholder, made for two
reasons, namely, the company was potentially sick company, and that its
capacity to borrow had reduced substantially leading to shortage of working
capital. Siemens AG in its letter explained that as a parent company it had
agreed to infuse further capital by reimbursing the accumulated loss. The assessee
contended that the subvention monies were capital receipt and could not be
treated as income.

The Assessing Officer
rejected the contention of the assessee. The first appellate authority however
allowed the appeal holding the said monies as capital receipt. The Tribunal, in
the appeal filed by the Revenue, upheld the findings of the first appellate
authority. On a further appeal by the revenue, the High Court restored the
order of the Assessing Officer by relying on the two decisions of the Supreme
Court in Sahney Steel and Press Works Ltd vs. CIT [(1997) 228 ITR 253 (SC)]
and CIT vs. Ponni Sugars and Chemicals Ltd [(2008) 306 ITR 392 (SC)] in
which it was held that unless the grant-in-aid received by the assessee is
utilised for acquisition of an asset, the same must be understood to be in the
nature of revenue receipt.

On an appeal by the
assessee, the Supreme Court held that the understanding of the High Court that
the principle of law laid down in the aforesaid two decisions was applicable to
all situations was not correct. According to the Supreme Court, the aforesaid
view overlooked the fact that in both the above decisions the subsidies
received were in the nature of grant-in-aid from public funds and not by way of
voluntary contribution by the parent company as in the present case. The above
apart, the voluntary payments made by a parent company to its loss making
Indian company could also be understood to be payments made in order to protect
capital investment of the assessee-company. If that was so, the payments made
to the assessee-company by the parent company for the assessment year in
question could not be held to be revenue receipts. The Supreme Court approved
the decision of the Delhi High Court in CIT vs. Handicrafts and Handlooms
Export Corporation of India Ltd [(2014) 360 ITR 130 (Del)] which had taken
a similar view.

The Supreme Court allowed
the appeal setting aside the order of the High Court.

4. Writ – Existence of alternative remedy – The
High Court was not justified in dismissing the writ petition filed by and
assessee challenging the issuance of notice u/s. 148 as not maintainable

Jeans Knit Private
Limited v. DCIT [(2017) 390 ITR 10 (SC)]

The High Courts in the
batch of cases that were before the Supreme Court had dismissed the writ
petitions preferred by the assessee challenging the issuance of notice u/s. 148
and the reasons which were recorded by the Assessing Officer for reopening the
assessment. These writ petitions were dismissed by the High Courts as not
maintainable. According to the Supreme Court, the aforesaid view taken by the
High Courts was contrary to the law laid down by the Supreme Court in Calcutta
Discount Co. Ltd. vs. ITO [(1961) 41 ITR 191 (SC)]. The Supreme Court,
therefore, set aside the impugned judgments and remitted the cases to the
respective High Courts to decide the writ petitions on merits.

The Supreme Court however clarified that it had not made any
observations on the merits of the cases, i.e. the contentions which were raised
by the assessee challenging the move of the Income-tax authorities to reopen
the assessment and that each case would be examined on its own merits keeping
in view the scope of judicial review while entertaining such matters, as laid
down by the Supreme Court in various judgments.

The Supreme Court while
coming to the aforesaid conclusion was conscious of the fact that the High
Court had referred to the judgment of the Supreme Court in CIT vs. Chhabil
Dass Agarwal [(2013) 357 ITR 357 (SC)]. According to the Supreme Court the
principle laid down in the said case did not apply to these cases.

The Supreme Court further
directed that the stay of reassessment that was granted during the pendency of
these appeals would continue till the disposal of the writ petitions before the
High Courts.

The Supreme Court allowed the appeals in the aforesaid terms.

5. Exemption – Residential Palace – Though a
part of the residential palace is found to be in occupation of the tenant and
remaining is in occupation of the Ruler for his residence, the Ruler is
entitled to claim exemption for the whole of his residential palace u/s.
10(19A)

Maharao Bhim Singh of
Kota vs. CIT (2017) 390 ITR 532 (SC)

Principle of Res
judicata – Though the principle of res judicata does not apply to
income-tax proceedings and each assessment year is an independent year in
itself, yet, in the absence of any valid and convincing reason, Revenue should
not pursue the same issue again to higher Courts. There should be a finality
attached to the issue once it stands decided by the higher Courts on merits.

Rule of interpretation –
If two Statutes dealing with the same subject use different language, then it
is not permissible to apply the language of one Statute to other while
interpreting such Statutes.

Rule of interpretation –
Once the Assessee is able to fulfill the conditions specified in section for
claiming exemption under the Act then provisions dealing with grant of
exemption should be construed liberally because the exemptions are for the
benefit of the Assessee.

The Appellant was the
Ruler of the princely State of Kota, now a part of State of Rajasthan. He owned
extensive properties which, inter alia, included his two residential
palaces known as “Umed Bhawan Palace” and “City Palace”.
The Appellant was using Umed Bhawan Palace for his residence.

In exercise of the powers
conferred by section 60A of the Indian Income-tax Act, 1922 (XI of 1922), the
Central Government issued an order called “The Part B States (Taxation
Concessions) Order, 1950” (hereinafter referred to as “The
Order”). It was issued essentially to grant exemptions, reductions in rate
of tax and the modifications in relation to specified kinds of income earned by
the persons (Ruler and his family members) from various sources as specified
therein. The Order was published in the Gazette of India, extraordinary, on
02.12.1950.

Paragraph 15 of the Order
dealt with various kinds of exemptions. Item (iii) of Paragraph 15, provided
that the bona fide annual value of the residential palace of the Ruler of a
State which is situated within the State and is declared by the Central
Government as his inalienable ancestral property would be exempt from payment
of Income-tax.

In pursuance of the powers
conferred under item (iii) of Paragraph 15 of the Order, the Central
Government, Ministry of Finance (Revenue Division) issued a notification
bearing No. S.R.O. 1619 dated 14.05.1954 declaring the Appellant’s
aforementioned two palaces, viz., Umed Bhawan and City Palace as his official
residences (Serial No. 21 of the Table).

On 20.09.1976, the
Ministry of Defence requisitioned portion of the Umed Bhawan Palace (918.26
Acres of the land including houses and other construction standing on the land)
for their own use and realized Rs. 80,000/- as rent by invoking the provisions
of Requisition and Exhibition of Immovable Property Act, 1952. According to the
Appellant, the period for which the land was requisitioned expired in 1993
though the land still continued to remain in the occupation of the Ministry of
Defence.

A question arose in the
Appellant’s income-tax assessment proceedings regarding taxability of the
income derived by the Appellant (Assessee) from the part of the property
requisitioned by the Defence Ministry, which was a portion of the Appellant’s
official residence (Umed Bhawan Palace). The question was whether the rental
income received by the Appellant from the requisitioned property by way of rent
was taxable in his hands. In other words, the question was as to whether the
Appellant was entitled to get full benefit of the exemption granted to him u/s.
10A(19A) of the Income-tax Act, 1961 (for short, “the I.T. Act”) from
payment of income-tax or it was confined only to that portion of palace which
was in his actual occupation as residence and the rest which was in occupation
of the tenant would be subjected to payment of tax.

The Commissioner of Income
Tax (Appeals) answered the question in Appellant’s favour and held that since
the Appellant was in occupation of part of his official residence during the
assessment year in question, he was entitled to claim full benefit of the
exemption for his official residence as provided u/s. 10(19A) of the I.T. Act
notwithstanding the fact that portion of the residence was let out to the
Defence Ministry. The Revenue, felt aggrieved, carried the matter in appeal
before the Income Tax Appellate Tribunal. The Tribunal affirmed the order of
the Commissioner of Income Tax and dismissed the Revenue’s appeal. The
Tribunal, however, on an application made by the Revenue u/s. 256(1) of the
I.T. Act referred the following question of law to the High Court of Rajasthan
for answer.

“Whether on the facts and
in the circumstances of the case, the Tribunal was justified in holding that
the rental income from Umed Bhawan Palace was exempt u/s. 10(19A) of the IT
Act, 1961?”

The Division Bench of the
High Court while hearing the reference noticed cleavage of opinion on the
question referred in this case in two earlier decisions of the High Court of
Rajasthan. One was in the case of Maharawal Laxman Singh vs. C.I.T. (1986)
160 ITR 103 (Raj.) and Anr. was in Appellant’s own case, C.I.T.
vs. H.H. Maharao Bhim Singhji (1988) 173 ITR 79 (Raj.). So far as the case
of Maharwal Laxman Singh (supra) was concerned, the High Court had
answered the question in favour of the Revenue and against the Assessee,
wherein it was held that in such factual situation arising in the case, annual
value of the portion which was in the occupation of the tenant was not exempt
from payment of Income-tax and, therefore, income derived therefrom was
required to be added to the total income of the Assessee, whereas in case of
H.H. Maharao Bhim Singhji (supra), the High Court answered the question
against the Revenue and in favour of the Assessee holding therein that in such
a situation, the Assessee was entitled to claim full exemption in relation to
his palace u/s. 10(19A) of the I.T. Act notwithstanding the fact that portion
of the palace was let out to a tenant. It was held that any rental income derived
from the part of his rental property was, therefore, not liable to tax. The
Division Bench, therefore, referred the matter to the Full Bench to resolve the
conflict arising between the two decisions and answer the referred question on
merits.

The Full Bench of the High
Court answered the question against the Appellant (Assessee) and in favour of
the Revenue.

It was held that so long as the Assessee continued to remain
in occupation of his official residential palace for his own use, he would be
entitled to claim exemption available u/s. 10(19A) of the I.T. Act but when he
was found to have let out any part of his official residence and at the same
time was found to have retained its remaining portion for his own use, he
becomes disentitled to claim benefit of exemption available u/s. 10(19A) for
the entire palace. It was held that in such circumstances, he was required to
pay income-tax on the income derived by him from the portion let out in
accordance with the provisions of the I.T. Act and the benefit of exemption
remained available only to the extent of portion which was in his occupation as
residence.

The Supreme Court observed
that in order to claim exemption from payment of income-tax on the residential
palace of the Ruler u/s. 10(19A), it is necessary for the Ruler to satisfy that
first, he owns the palace as his ancestral property; second, such palace is in
his occupation as his residence; and third, the palace is declared exempt from
payment of income-tax under Paragraph 15 (iii) of the Order, 1950 by the
Central Government.

According to the Supreme
Court, where part of the residential palace is found to be in occupation of the
tenant and remaining is in occupation of the Ruler for his residence, a
question would arise as to whether in such circumstances, the Ruler is entitled
to claim exemption for the whole of his residential palace u/s. 10(19A) or such
exemption would confine only to that portion of the palace which is in his
actual occupation. In other words, whether the exemption would cease to apply
to let out portion thereby subjecting the income derived from let out portion
to payment of income-tax in the hands of the Ruler.

The Supreme Court noted that this very question was examined
by the M.P. High Court in the case of Bharatchandra Banjdeo [(1985) 154 ITR 236
(MP)] in detail. It was held that no reliance could be placed on section 5(iii)
of the Wealth Tax Act while construing section 10(19A) for the reason that the
language employed in section 5(iii) was not identical with the language of
section 10(19A) of the I.T. Act. Their Lordships distinguished the decision of
Delhi High Court rendered in the case of Mohd. Ali Khan vs. CIT (1983) 140
ITR 948 (Delhi), which arose under the Wealth Tax Act. It was held that
even if the Ruler had let out the portion of his residential palace, yet he
would continue to enjoy the exemption in respect of entire palace because it is
not possible to split the exemption in two parts, i.e., the one in his
occupation and the other in possession of the tenant.

The Supreme Court held
that in section 10(19A) of the I.T. Act, the Legislature has used the
expression “palace” for considering the grant of exemption to the
Ruler whereas on the same subject, the Legislature has used different
expression namely “any one building” in section 5(iii) of the Wealth
Tax Act. It could not ignore this distinction while interpreting section
10(19A) which, according to the Supreme Court, was significant.

The Supreme Court was of
the view that if the Legislature intended to spilt the Palace in part(s), alike
houses for taxing the subject, it would have said so by employing appropriate
language in section 10(19A) of the I.T. Act. However, no such language was
employed in section 10(19A).

The Supreme Court noted
that section 23(2) and (3), uses the expression “house or part of a
house”. Such expression does not find place in section 10(19A) of the I.T.
Act. Likewise, there is no such expression in section 23, specifically dealing
with the cases relating to “palace”. According to the Supreme Court,
this significant departure of the words in section 10(19A) of the I.T. Act and
section 23 also suggest that the Legislature did not intend to tax portion of
the “palace” by splitting it in parts.

According to the Supreme
Court, it is a settled Rule of interpretation that if two Statutes dealing with
the same subject use different language then it is not permissible to apply the
language of one Statute to other while interpreting such Statutes. Similarly,
once the Assessee is able to fulfill the conditions specified in section for
claiming exemption under the Act then provisions dealing with grant of
exemption should be construed liberally because the exemptions are for the
benefit of the Assessee.

The Supreme Court held
that the view taken by the M.P. High Court in Bharatchandra Banjdeo’s case (supra)
and the Rajasthan High Court in H.H. Maharao Bhim Singhji’s case (supra)
was a correct view.

The Supreme Court further noted that the question involved in
this case had also arisen in previous Assessment Years’ (1973-74 till 1977-78)
and was decided in Appellant’s favour when Special Leave Petition (C) No. 3764
of 2007 filed by the Revenue was dismissed by it on 25.08.2010 by affirming the
order of the Rajasthan High Court referred supra.

In such a factual
situation where the Revenue consistently lost the matter on the issue then,
according to the Supreme Court, there was no reason much less justifiable
reason for the Revenue to have pursued the same issue any more in higher
courts.

The Supreme Court held
that though the principle of res judicata does not apply to income-tax
proceedings and each assessment year is an independent year in itself, yet, in
the absence of any valid and convincing reason, there was no justification on
the part of the Revenue to have pursued the same issue again to higher Courts.
There should be a finality attached to the issue once it stands decided by the
higher Courts on merits. This principle, according to the Supreme Court,
applied to this case on all force against the Revenue. [see Radhasoami Satsang,
Saomi Bagh, Agra’s case (1992) 193 ITR 321 (SC)].

In the light of foregoing
discussion, the Supreme Court held that the reasoning and the conclusion
arrived at by the High Court in the impugned order including the view taken by
the Rajasthan High Court in Maharaval Lakshmansingh’s case (supra) did
not lay down correct principle of law whereas the view taken by the M.P. High
Court in cases of Bharatchandra Bhanjdeo (supra), Commissioner of
Income-Tax vs. Bharatchandra Bhanjdev (1989) 176 ITR 380 (MP) and H.H.
Maharao Bhim Singhji (supra) laid down correct principle of law.

The appeal was accordingly
allowed. The impugned order was set aside. As a consequence, the question
referred to the High Court in the reference proceedings out of which this
appeal arose was answered in favour of the Appellant (Assessee) and against the
Revenue.

BCAJ Admin

Glimpses of Supreme Court Rulings

1. Capital Gains – The sale of the business by the Official Liquidator as ongoing concern of the partnership firm which stands dissolved but continues the business as per court’s order pending completion of winding up could not be treated as slump sale when there is a specific and separate valuation for land and building and of machinery. Business Income – As per the Court orders in the winding up petition, 40% of the income for the period 1.4.1994 to 20.11.1994 of the partnership firm that stood dissolved was to be retained by the successful bidder as tax component because after dissolution the same was taxed as AOP – The said income subject to tax in the hands of the successful bidder and not in the hands of the outgoing partners

Vatsala Shenoy vs. JCIT (2016) 389 ITR 519 (SC)

One S. Raghuram Prabhu started the business of manufacturing beedies in the year 1939. His brother-in-law joined him in the year 1940 and this sole proprietorship was converted into a partnership firm with the name ‘M/s. Mangalore Ganesha Beedi Works’ (hereinafter referred to as the ‘firm’). It was reconstituted thereafter from time to time and lastly on June 30, 1982. Partnership deed dated June 30, 1982 was entered between thirteen persons with the same name. Duration of this firm was five years, which period could be extended by six months. Thereafter, the affairs of the firm had to be wound up as provided in Clause 16 of the Partnership Deed. The firm was dissolved on December 06, 1987 by afflux of time after extending the life of the firm by a period of six months, as per the terms stipulated in the Partnership Deed. However, because of the difference of opinion among the erstwhile partners, the affairs of the firm could not be wound up.

Therefore, two of the partners of the firm filed a petition before the High Court under the provisions of Part X of the Companies Act, 1956 for winding up of the affairs of the firm in terms of section 583(4)(a) thereof. The said petition was registered as Company Petition No. 1 of 1988. Significantly, though the firm stood dissolved on December 06, 1987, and thereafter Company Petition No. 1 of 1988 for the winding up proceedings after dissolution was filed in the High Court, the business of the partnership firm continued because of the interim order passed by the High Court. This was because of the agreement of the partners, as stipulated in the Partnership Deed itself, providing that on dissolution, the firm was to be sold as a continuing concern to that partner(s) who could give the highest price therefor.

Considering the clauses in partnership deed, specific order dated November 05, 1988 was passed by the High Court permitting the group of partners, seven in number, who had controlling interest, to continue the business as an interim arrangement till the completion of winding up proceedings. Ultimately, the orders dated June 14, 1991 were passed in the said company petition for winding up the affairs of the firm by selling its assets as an ‘ongoing concern’. Though this order was challenged by some of the partners by filing special leave petition in Supreme Court, the same was dismissed as withdrawn in the year 1994. In this manner, orders dated June 14, 1991 became final, which had permitted the sale of the firm, as an ongoing concern, to such of its partner(s), who makes an offer of highest price. Reserve price of Rs.30 crore was also fixed thereby mandating that the price cannot be less than Rs.30 crore. The successful bidder was also required to accept further liability to pay interest @ 15% per annum towards the amount of price payable to partners from December 06, 1987 till the date of deposit. In the order dated June 14, 1991, it was also directed that the successful bidder shall deposit the offer price together with interest with the Official Liquidator within a period of sixty days of the date of acceptance of the offer.

On the aforesaid terms, these partners individually or in groups offered their bids. Bid of Association of Persons comprising three partners (hereinafter referred to as ‘AOP-3’), at Rs. 92 crore, turned out to be the highest and the same was accepted by the High Court vide order dated September 21, 1994. AOP-3 deposited this amount of Rs. 92 crore with the Official Liquidator on November 17, 1994 and with the occurrence of this event, assets of the firm were treated as having been sold to
AOP-3 on November 20, 1994. Even actual handing over of the business of the firm along with its assets by the Official Liquidator to the said AOP-3 took place on January 07, 1995.

Since the firm stood dissolved with effect from December 06, 1987, upto December 06, 1987, it is the firm which had filed the income tax returns in respect of the income which it had earned, for payment of income tax thereupon. However, as mentioned above, though the firm was dissolved, but the business continued because of the orders passed by the High Court keeping in view the provisions contained in the Partnership Deed. The income that was earned from the date of dissolution till the date of winding up and when the firm was sold to AOP-3 was assessed at the hands of dominant partners controlling the business activities (seven in number) as “Association of Persons” (AOP), meaning thereby, the income from the business of the said firm December 06, 1987 till winding up was assessed as an AOP. At the same time, these Assessees were also filing their individual returns as well.

The Assessees filed the return for the Assessment Year 1995-1996. It is in this Assessment Year the assets of the firm were sold as ongoing concern to AOP-3 on September 21, 1994. The Assessing Officer, while making the assessments, bifurcated this Assessment Year into two periods. One period from April 01, 1994 to November 20, 1994 (as AOP of the partners who had continued the business in that capacity in previous years). Second period from November 20, 1994 till March 31, 1995 (as the business was handed over to AOP-3 and the assessment was treated as that of AOP-3). While doing so, the Assessing Officer observed that the entire capital gains on the sale as a going concern of the business of the firm as well as the proportionate profits for the period April 01, 1994 to November 20, 1994, when the controlling AOP was carrying on business as computed in accordance with the order of the High Court in Company Petition No. 1 of 1988, on a notional basis a sum of Rs. 9,57,57,007 should be taxed in the hands of the firm. However, according to the Assessing Officer, to protect interests of the Revenue, the same amounts were included in the assessment of the AOP for the first period.

The income and tax computations were made separately for the two periods in the order of assessment. The Assessing Officer apportioned the consideration among the various assets comprised within the business with further splitting between short term and long term capital gains. While the aforesaid treatment was given to the assessment of the income of the firm, insofar as the Assessees as individuals (partners) were concerned, on the same date the Assessing Officer made assessment in their cases also by including therein the proportionate share from out of Rs. 92 crore (the amount of auction bid) as capital gain at their hands and bifurcated the same into long term and short term gain.

The approach adopted by the Assessing Officer was to take into consideration market value of the assets of the firm, viz. land, building and plant & machinery, which had already been evaluated by the Registered Valuers. The market value of these three assets was Rs. 21,52,90,000. Since total sale consideration at which the firm was sold was Rs. 92 crore, balance amount of Rs. 70,47,10,000 was treated as representing goodwill of the firm which was taxed as long term gain. This mode of arriving at short term and long term capital gain and taxing it accordingly by the Assessing Officer has received the stamp of approval by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, as well as the High Court.

The argument of the learned senior Counsel for the Assessees was that since it was a sale of an ongoing concern, it had to be treated as a slump sale within the meaning of section 2(42C) of the Act and, therefore, it was not permissible for the Assessing Officer to assign the amount of Rs. 92 crore into different heads of land, building and machinery and treating balance amount as goodwill. It was a capital asset as an ongoing concern which was sold at Rs. 92 crore and in the absence of provisions relating to mode of computation and deductions at the relevant time, which were inserted subsequently only with effect from April 01, 2000, as per the decision in the case of PNB Finance Limited [307 ITR 75- SC], the consideration was to be treated as capital receipt and no capital gain was payable thereon.

Second submission of the learned senior Counsel for the Assessees pertained to the payment of tax on the income which the business earned from April 01, 1994 till November 20, 1994. The learned Counsel argued that as per the orders of the High Court in the winding up petition, 40% of this income was retained by AOP-3 as a tax component because of the reason that for business income of the earlier years, after the dissolution, the same was taxed as an AOP. Therefore, the individual partners could not be taxed on the said business income in the year in question, as held in Radhasoami Satsang, Saomi Bagh, Agra vs. Commissioner of Income Tax 193 ITR 321 and Commissioner of Income Tax vs. Excel Industries Ltd. 358 ITR 295. His related submission was that in any case this amount was not received by the Assessees as it was retained by AOP-3 and, therefore, tax was not payable by the Assessees.

The Supreme Court held that on the aforesaid facts, it became clear that asset of the firm that was sold was the capital asset within the meaning of section 2(14) of the Act. Once it is held to be the “capital asset”, gain therefrom is to be treated as capital gain within the meaning of section 45 of the Act.

According to the Supreme Court, the Assessees, however, were attempting to wriggle out from payment of capital gain tax on the ground that it was a “slump sale” within the meaning of section 2(42C) of the Act and there was no mechanism at that time as to how the capital gain is to be computed in such circumstances, which was provided for the first time by Section 50B of the Act with effect from April 01, 2000. However, in the opinion of the Supreme Court this argument failed in view of the fact that the assets were put to sale after their valuation. There was a specific and separate valuation for land as well as building and also machinery. Such valuation had to be treated as that of a partnership firm which had already stood dissolved.

The Supreme Court further held that as per the definition of slump sale in section 2(42C), sale in question could be treated as slump sale only if there was no value assigned to the individual assets and liabilities in such sale. This had obviously not happened. The Supreme Court observed that not only value was assigned to individual assets, even the liabilities were taken care of when the amount of sale was apportioned among the outgoing partners. Once it was held that the sale in question was not slump sale, obviously section 50B also did not get attracted as this section contained special provision for computation of capital gains in case of slump sale. As a fortiori, the judgment in the case of PNB Finance Limited also was not applicable.

The Supreme Court, in the aforesaid scenario, held that when the Official Liquidator has distributed the amount among the nine partners, including the Assessees herein, after deducting the liability of each of the partners, the High Court had rightly held that the amount received by them was the value of net asset of the firm which would attract capital gain.

The partnership firm had dissolved and thereafter winding up proceedings were taken up in the High Court. The result of those proceedings was to sell the assets of the firm and distribute the share thereof to the erstwhile partners. Thus, the ‘transfer’ of the assets triggered the provisions of section 45 of the Act and making the capital gain subject to the payment of tax under the Act.

Insofar as argument of the Assessees that tax, if at all, should have been demanded from the partnership firm was concerned, the Supreme Court held that on the facts of this case that may not be the situation, the firm had dissolved much before the transfer of the assets of the firm and this transfer took place few years after the dissolution, that too under the orders of the High Court with clear stipulation that proceeds thereof shall be distributed among the partners.

Insofar as the firm was concerned, after the dissolution on December 06, 1987, it had not filed any return as the same had ceased to exist. Even in the interregnum, it was the AOP which had been filing the return of income earned during the said period. In this context, the Court also noted the detailed observations of the High Court which, interalia, explained the effect of sale of business conducted by the court among the partners under clause 16 of the partnership deed as : “once the partnership is dissolved, the partners would become entitled to specific share in the assets of the firm which is proportionate to their share in sharing the profits of the firm and they are placed in the same position as the tenants in common and for the purpose of dissolution and u/s. 47 of the Indian Partnership Act, 1932…”…”.. it is clear that the order passed by the assessing authority confirmed in the first appeal and by the Income-tax Appellate Tribunal (Special Bench) holding that the appellants as erstwhile partners are liable to pay capital gain on the amount received by them towards the value of their share in the net assets of the firm are liable for capital gains u/s. 45 of the Act. The said finding is justified..”

Advert to the second argument, the Supreme Court noted that it had been argued that insofar as income of the firm in the Assessment Year in question was concerned, it could not be taxed at the hands of the Assessees. According to the Supreme Court, there was merit in this submission.

First, and pertinently, it was an admitted case that 40% of the said income was allowed by the High Court to be retained by the successful bidder (AOP-3) precisely for this very purpose. This 40% represented the tax which was to be paid on the income generated by the ongoing concern being run by the Association of Persons, as authorised by the High Court. Secondly, in the previous years, the Department had taxed the AOP and this procedure had to continue in the Assessment Year in question as well.

According to the Supreme Court, the High Court had dealt with this aspect very cursorily, without taking into consideration the aforesaid aspects. The High Court dealt with the issue as to how the business income/revenue income was to be treated/calculated, but the question of taxability at the hands of the Assessees has not been touched upon at all.

The Supreme Court allowed the appeals partly only to the extent that business income/revenue income in the Assessment Year in question was to be assessed at the hands of AOP-3, in terms of the orders of the High Court, as AOP-3 retained the tax amount from the consideration which was payable to the Assessees and it was AOP-3 which was supposed to file the return in that behalf and pay tax on the said revenue income.

Insofar as the appeals preferred by the Revenue were concerned, they arose out of the protected assessment which was made at the hands of the partnership firm. As the Supreme Court upheld the order of the Assessing Officer in respect of payment of capital gain tax by the Assessees, these appeals were rendered otiose and were disposed of as such.

Note: The above judgment is based on the peculiar facts of that case and specific provisions of the partnership deed as well as earlier orders of the High Court and the Apex Court. As such, this should be read and understood in that context.

2. Advance Tax – In cases where receipt is by way of salary, deduction u/s. 192 is required to be made and no question of payment of advance tax could arise in such cases and thus provisions for interest for default of advance in payment of advance tax (section 234B) and for deferment of advance tax (section 234C) would have no application

Ian Peter Morris vs. ACIT (2016) 389 ITR 501 (SC)

The Appellant-Assessee along with three others had promoted a company, namely, “Log in Systems Innovations Private Limited” (the acquiree company) in the year 1990. The said company was acquired by one Synergy Credit Corporation Limited (the acquirer company). The Appellant was offered the position of executive director in the acquirer company for a gross compensation of Rs. 1,77,200 per annum. This was by a letter for an offer of appointment dated October 8, 1993. On October 15, 1993, an acquisition agreement was executed between the acquirer company and the acquiree company on a going concern basis for a total consideration of Rs. 6,00,000. On the same date, i.e., October 15, 1993, a non-compete agreement was signed between the Appellant-Assessee and the acquirer company imposing a restriction on the Appellant from carrying on any business of computer software development and marketing for a period of five years for which the Appellant-Assessee was paid a sum of Rs. 21,00,000. The question that arose in the proceedings commencing with the assessment order was whether the aforesaid amount of Rs. 21 lakh was on account of “salary” or the same was a “capital receipt”.

The Assessing Officer held it to be an addition to salary for the Assessment Year 1994-95. The Commissioner of Income-tax (Appeals) held it to be a capital receipt not exigible to tax. The Tribunal reversed the order of the first appellate authority and held it to be revenue receipt covered by the provisions of section 17(1)(iv). The Tribunal sustained the levy of interest u/s. 234B and 234C as consequential in nature. The High Court upheld the order of the Tribunal.

The Appellant-Assessee filed a Special Leave Petition before the Supreme Court. A limited notice was issued confining the scrutiny of the court to correctness of levy of interest as ordered/affirmed by the High Court.

The aforesaid limited notice, therefore, had to be understood to have concluded the issue with regard to the nature of the receipt, namely, that the same was salary.

The Supreme Court held that a perusal of the relevant provisions of Chapter XVII of the Act (Part A, B, C and F of Chapter XVII) would go to show that against salary a deduction, at the requisite rate at which income tax is to be paid by the person entitled to receive the salary, is required to be made by the employer failing which the employer is liable to pay simple interest thereon.

The provisions relating to payment of advance tax is contained in Part “C” and interest thereon in Part “F” of Chapter XVII of the Act. In cases where receipt is by way of salary, deduction u/s. 192 of the Act is required to be made. No question of payment of advance tax under Part “C” of Chapter XVII of the Act can arise in cases of receipt by way of “salary”. If that is so, Part “F” of Chapter XVII dealing with interest chargeable in certain cases (section 234B – Interest for defaults in payment of advance tax and section 234C–Interest for deferment of advance tax) would have no application to the present situation in view of the finality that has to be attached to the decision that what was received by the Appellant-Assessee under the non-compete agreement was by way of salary. The Supreme Court allowed the appeals for the aforesaid reasons. The Supreme Court set aside order of the High Court so far as the payment of interest u/s. 234B and section 234C of the Act was concerned.

Note: The above judgment should now be read with the proviso to section 209(1) inserted by the Finance Act, 2012 w. e. f 1/4/2012.

BCAJ Admin

Glimpses of Supreme Court Rulings

5. Business expenditure – Disallowance – A tax
at source is to be deducted at the time of credit of such sum to the account of
the contractor or at the time of payment thereof, whichever is earlier – One
consequence for default in compliance with these provisions provided u/s.
40(a)(ia) of the Act is that the payments made by such a person to a contractor
shall not be treated as deductible expenditure – The word ‘payable’ occurring
in section 40(a)(ia) refers not only to those cases where the amount is yet to
be paid but also covers the cases where the amount is actually paid

Palam Gas Service vs. Commissioner of
Income Tax (2017) 394 ITR 300 (SC)

The Appellant-Assessee was engaged in the
business of purchase and sale of LPG cylinders under the name and style of
Palam Gas Service at Palampur. During the course of assessment proceedings, it
was noticed by the Assessing Officer that the main contract of the Assessee for
carriage of LPG was with the Indian Oil Corporation, Baddi. The Assessee had
received the total freight payments from the IOC Baddi to the tune of Rs.
32,04,140/-. The Assessee had, in turn, got the transportation of LPG done
through three persons, namely, Bimla Devi, Sanjay Kumar and Ajay to whom he
made the freight payment amounting to Rs. 20,97,689/-.

The Assessing
Officer observed that the Assessee had made a sub-contract with the said three
persons within the meaning of section 194C of the Act and, therefore, he
was liable to
deduct tax at source from the payment of Rs.
20,97,689/-. On account of his failure to do so, the said freight expenses were
disallowed by the Assessing Officer as per the provisions of section 40(a)(ia)
of the Act.

Against the order of the Assessing Officer,
the Assessee preferred an appeal before the Commissioner of Income Tax
(Appeals), Shimla who vide his order dated August 17, 2012 upheld the
order of the Assessing Officer.

The matter thereafter came up in appeal
before the Income Tax Appellate Tribunal which too met with the same fate.

In further appeal to the High Court u/s.
260A of the Act, the outcome remained unchanged as the High Court of Himachal
Pradesh also dismissed the appeal affirming the order of the ITAT.

The Supreme Court noted that section 40 of
the Act enumerates certain situations wherein expenditure incurred by the
Assessee, in the course of his business, will not be allowed to be deducted in
computing the income chargeable under the head ‘Profits and Gains from Business
or Profession’. One such contingency is provided in Clause (ia) of sub-section
(a) of section 40. As per Clause (ia), certain payments made, which include
amounts payable to a contractor or sub-contractor, would not be allowed as
expenditure in case the tax is deductible at source on the said payment under
Chapter XVIIB of the Act and such tax has not been deducted or, after
deduction, has not been paid during the previous year or in the subsequent year
before the expiry of the time prescribed under sub-section (1) of section 200
of the Act.

The Supreme Court further noted that in the
instant case, certain payments were made by the Appellant Assessee, in the
Assessment Year 2006-2007, but the tax at source was not deducted and deposited.
Also, as per section 194C of the Act, payments to contractors and
sub-contractors were subject to tax deduction at source. The Income Tax
Department/Revenue had, therefore, not allowed the amounts paid to the
sub-contractors as deduction while computing the income chargeable to tax at
the hands of the Assessee in the said Assessment Year.

The Supreme Court observed that section
40(a)(ia) uses the expression ‘payable’ and on that basis the question which
was raised for consideration was:

“Whether the provisions of section 40(a)(ia)
shall be attracted when the amount is not ‘payable’ to a contractor or
sub-contractor but has been actually paid?”

The Supreme Court observed that the question
was, as noted above, when the word used in section 40(a)(ia) is ‘payable’,
whether this section would cover only those contingencies where the amount is
due and still payable or it would also cover the situations where the amount is
already paid but no tax was deducted thereupon.

The Supreme Court noted that as per section
194C, it is the statutory obligation of a person, who is making payment to the
sub-contractor, to deduct tax at source at the rates specified therein. Plain
language of the section suggested that such a tax at source is to be deducted
at the time of credit of such sum to the account of the contractor or at the
time of payment thereof, whichever is earlier. Thus, tax has to be deducted in
both the contingencies, namely, when the amount is credited to the account of
the contractor or when the payment is actually made. Section 200 of the Act
imposes further obligation on the person deducting tax at source, to deposit
the same with the Central Government or as the Board directs, within the
prescribed time.

According to the Supreme Court, a conjoint reading
of these two sections would suggest that not only a person, who is paying to
the contractor, is supposed to deduct tax at source on the said payment whether
credited in the account or actual payment made, but also deposit that amount to
the credit of the Central Government within the stipulated time. The time
within which the payment is to be deposited with the Central Government is
mentioned in Rule 30(2) of the Rules.

The Supreme Court held that section
40(a)(ia) covers not only those cases where the amount is payable, but also
when it is paid. In this behalf, one has to keep in mind the purpose with which
section 40 was enacted. Once it is found that the aforesaid sections mandate a
person to deduct tax at source not only on the amounts payable but also when
the sums are actually paid to the contractor, any person who does not adhere to
this statutory obligation has to suffer the consequences which are stipulated
in the Act itself. Certain consequences of failure to deduct tax at source from
the payments made, where tax was to be deducted at source or failure to pay the
same to the credit of the Central Government, are stipulated in section 201 of
the Act. This section provides that in that contingency, such a person would be
deemed to be an Assessee in default in respect of such tax. While stipulating
this consequence, section 201 categorically states that the aforesaid sections
would be without prejudice to any other consequences which that defaulter may
incur. Other consequences are provided u/s. 40(a)(ia) of the Act, namely,
payments made by such a person to a contractor shall not be treated as
deductible expenditure. When read in this context, it is clear that section
40(a)(ia) deals with the nature of default and the consequences thereof. Default
is relatable to Chapter XVIIB (in the instant case sections 194C and 200, which
provisions are in the aforesaid Chapter). When the entire scheme of obligation
to deduct the tax at source and paying it over to the Central Government is
read holistically, it cannot be held that the word ‘payable’ occurring in
section 40(a)(ia) refers to only those cases where the amount is yet to be paid
and does not cover the cases where the amount is actually paid. If the
provision is interpreted in the manner suggested by the Appellant herein, then
even when it is found that a person, like the Appellant, has violated the
provisions of Chapter XVIIB (or specifically sections 194C and 200 in the
instant case), he would still go scot free, without suffering the consequences
of such monetary default in spite of specific provisions laying down these
consequences.

The Supreme Court accordingly dismissed the
appeal with costs.

6.
Income – Disallowance of expenditure in relation to income not forming
part of total income – If the income in question is taxable and, therefore,
includible in the total income, the deduction of expenses incurred in relation
to such an income must be allowed, however, such deduction would not be
permissible merely on the ground that the tax on the dividend received by the
Assessee has been paid by the dividend paying company and not by the recipient
Assessee, when u/s. 10(33) of the Act, such income by way of dividend is not a
part of the total income of the recipient Assessee – In the earlier assessment
years when the Revenue had failed to establish any nexus between the
expenditure disallowed and the earning of the dividend income in question, no
disallowance could have been for assessment year 2002-03

Godrej and Boyce Manufacturing Company
Limited vs. Dy. Commissioner of Income Tax and Ors. (2017) 394 ITR 449 (SC).

For the Assessment Year 2002-2003, the
Appellant-Company filed its return declaring a total loss of Rs. 45,90,39,210/-. In the said return, it had shown income by way of dividend
from companies and income from units of mutual funds to the extent of Rs.
34,34,78,686. Dividend income to the extent of 98% of the said amount was
contributed by the Godrej group companies, whereas only 0.05% thereof amounting
to Rs.1,71,000/- came from non-Godrej group companies. A sum of Rs.66,79,000/-
constituting 1.95% of the aforesaid dividend income, came from mutual funds.
Admittedly, a substantial part of the Appellant’s investment in the group
companies was in the form of bonus shares, which did not involve any fresh
capital investment or outlay.

The other relevant fact was that on the
first day of the previous year relevant to the Assessment Year 2002-2003 i.e. 1^stApril, 2001, the investment in shares and mutual funds of the Appellant
company stood at Rs. 127.19 crore whereas at the end of the previous year i.e.
as on 31^stMarch, 2002, the investment was Rs. 125.54 crore. The
above figures would go to show that there were no fresh investments made during
the previous year relevant to the Assessment Year 2002-2003. In fact, the
investments had come down to the extent noticed above.

Furthermore, as against the investment of
Rs. 125.54 crore as on 31^st March, 2002, on the said date, the
Appellant had a total of Rs. 280.64 crore by way of interest free funds in the
form of share capital (Rs. 6.55 crore) as well as Reserves and Surplus (Rs.
274.09 crore). On the other hand, as against the investment of Rs. 127.19 crore
on the first day of the previous year i.e. 1^stApril, 2001, the
Appellant had a total of Rs. 270.51 crore by way of interest    free
funds   in   the   form   of
share   capital (Rs. 6.55 crore) and Reserves and Surplus (Rs.
263.96 crore). The above facts showed that the Appellant had sufficient
interest free funds available for the purpose of making investments.

For the Assessment Year 1998-1999, the
Appellant’s dividend income was Rs. 11,41,34,093/-. The Assessing Officer
notionally allocated Rs. 1,47,40,000/- out of the total interest expenditure of
Rs. 34,64,89,000/- as referable to the earning of the said dividend income and
had disallowed such interest expenditure and consequently reduced the exemption
available u/s. 10(33) of the Act to the net dividend. In appeal, the
Commissioner of Income Tax (Appeals) allowed exemption of the entire dividend
income on the ground that the Assessing Officer had failed to show any nexus
between the investments in shares and units of mutual funds on the one hand and
the borrowed funds on the other. The learned Income Tax Appellate Tribunal which was moved by the Revenue confirmed the
appellate order. The said order had attained finality.

For the Assessment Years 1999-2000 and
2001-2002, the issue with regard to exemption u/s. 10(33) of the Act was
similarly held in favour of the Assessee by the Commissioner of Income Tax
(Appeals) and the learned Tribunal, once again. Initially, the Assessing
Officer, in both the Assessment Years, had disallowed notionally computed
interest expenditure as being relatable to the earning of dividend income. The
said appellate order(s) had also attained finality. For the intervening
Assessment Year 2000-2001, there was no scrutiny of the Appellant’s return of
income. Consequently, the exemption for dividend income was allowed in full,
without disallowing any expenditure incurred in relation to earning such income.

However, for
the Assessment Year 2002-2003, the
Assessing Officer did not allow interest expenditure to the extent of
Rs. 6,92,06,000/- holding the same to be attributable    to
earning    the    dividend
income    of Rs. 34,34,78,686/-. The said figure of
interest expenditure disallowed was worked out from the total interest
expenditure for the year on a notional basis in the ratio of the cost of the
investments in shares and units of mutual funds to the cost of the total assets
appearing in the balance sheet. Though the aforesaid order of the Assessing
Officer was reversed by the Commissioner of Income Tax (Appeals) following the
earlier orders pertaining to the previous Assessment Years, the learned
Tribunal, in appeal, took a different view by its order dated 26^thAugust,
2009. The learned Tribunal held that sub-sections (2) and (3) of Section 14A of
the Act (inserted by the Finance Act, 2006 with effect from 1^stApril,
2007) were retrospectively applicable to the Assessment Year 2002-2003 and, therefore,
the matter should be remanded to the Assessing Officer for recording his
satisfaction/findings in the light of the said sub-sections of section 14A of
the Act. This was notwithstanding the fact that the only disallowance made by
the Assessing Officer which was reversed in appeal by the Commissioner of
Income Tax (Appeals) was in respect of interest expenditure that was worked out
on a notional basis.

The High Court by the judgement dated 12^thAugust, 2010, inter alia, held that section 14A of the Act has to
be construed on a plain grammatical construction thereof and the said provision
is attracted in respect of dividend income referred to in section 115-O as such
income is not includible in the total income of the shareholder. Sub-sections
(2) and (3) of section 14A of the Act and Rule 8D of the Income Tax Rules, 1962
(hereinafter referred to as
“the   Rules”)      would,
however,    not    apply
to    the AY 2002-03 as the said provisions do not have
retrospective effect. Notwithstanding the above, the High Court upheld the
remand as made by the Tribunal to the AO though for a slightly different
reason. The High Court in its judgment also held that the tax paid u/s. 115-O
of the Act is an additional tax on that component of the profits of the
dividend distributing company which is distributed by way of dividends and that
the same is not a tax on dividend income of the Assessee.

Aggrieved, the Assessee filed an appeal
before the Supreme Court raising the following two questions:

(a) Irrespective of the factual position and
findings in the case of the Appellant, whether the phrase “income which
does not form part of total income under this Act” appearing in section
14A includes within its scope dividend income on shares in respect of which tax
is payable u/s. 115-O of the Act and income on units of mutual funds on which
tax is payable u/s. 115-R.

(b) Whatever be the view on the legal
aspects, whether on the facts and in the circumstances of the Appellant’s case
and bearing in mind the unanimous findings of the lower authorities over a
considerable period of time (which were accepted by the Revenue), there could
at all be any question of the provisions of section 14A in the Appellant’s
case.

The Supreme Court held that the object
behind the introduction of section 14A of the Act by the Finance Act of 2001 is
clear and unambiguous. The legislature intended to check the claim of allowance
of expenditure incurred towards earning exempted income in a situation where an
Assessee has both exempted and non-exempted income or includible and
non-includible income. While there can be no scintilla of doubt that if
the income in question is taxable and, therefore, includible in the total
income, the deduction of expenses incurred in relation to such an income must
be allowed, such deduction would not be permissible merely on the ground that
the tax on the dividend received by the Assessee has been paid by the dividend
paying company and not by the recipient Assessee, when u/s. 10(33) of the Act,
such income by way of dividend is not a part of the total income of the
recipient Assessee. A plain reading of section 14A would go to show that the
income must not be includible in the total income of the Assessee. Once the
said condition is satisfied, the expenditure incurred in earning the said
income cannot be allowed to be deducted. The section does not contemplate a
situation where even though the income is taxable in the hands of the dividend
paying company and the same to be treated as not includible in the total income
of the recipient Assessee, yet, the expenditure incurred to earn that income
must be allowed on the basis that no tax on such income has been paid by the
Assessee. Such a meaning, if ascribed to section 14A, would be plainly beyond
what the language of section 14A can be understood to reasonably convey.

The Supreme Court further held that
irrespective of the question of sub-sections (2) and (3) of section 14A being
retrospective, what could not be denied was that the requirement for attracting
the provisions of section 14A(1) of the Act was proof of the fact, that the
expenditure sought to be disallowed/deducted had actually been incurred in
earning the dividend income.

According to the Supreme Court, insofar as
the Appellant-Assessee was concerned, the issues stood concluded in its favour
in respect of the Assessment Years 1998-1999, 1999-2000 and 2001-2002. Earlier
to the introduction of sub-sections (2) and (3) of section 14A of the Act, such
a determination was required to be made by the Assessing Officer in his best
judgement. In all the aforesaid assessment years referred to above, it was held
that the Revenue had failed to establish any nexus between the expenditure
disallowed and the earning of the dividend income in question. In the appeals
arising out of the assessments made for some of the assessment years, the
aforesaid question was specifically looked into from the standpoint of the
requirements of the provisions of sub-sections (2) and (3) of section 14A of
the Act which had by then been brought into force. It is on such consideration
that findings have been recorded that the expenditure in question bore no
relation to the earning of the dividend income and hence, the Assessee was
entitled to the benefit of full exemption claimed on account of dividend
income.

The Supreme
Court held that in the aforesaid fact situation, a different view could not
have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of
section 14A of the Act read with Rule 8D of the Rules merely prescribe a
formula for determination of expenditure incurred in relation to income which
does not form part of the total income under the Act, in a situation where the
Assessing Officer is not satisfied with the claim of the Assessee. Whether such
determination is to be made on application of the formula prescribed under Rule
8D or in the best judgment of the Assessing Officer, what the law postulates is
the requirement of a satisfaction in the Assessing Officer that having regard
to the accounts of the Assessee, as placed before him, it is not possible to
generate the requisite satisfaction with regard to the correctness of the claim
of the Assessee. It is only thereafter that the provisions of section 14A(2)
and (3) read with Rule 8D of the Rules or a best judgement determination, as
earlier prevailing, would become applicable.

In the present case, there was no mention of
the reasons which had prevailed upon the Assessing Officer, while dealing with
the Assessment Year 2002-2003, to hold that the claims of the Assessee that no
expenditure was incurred to earn the dividend income could not be accepted and
why the orders of the Tribunal for the earlier Assessment Years were not
acceptable to the Assessing Officer, particularly, in the absence of any new
fact or change of circumstances. Neither any basis had been disclosed
establishing a reasonable nexus between the expenditure disallowed and the
dividend income received. That any part of the borrowings of the Assessee had
been diverted to earn tax free income despite the availability of surplus or
interest free funds available (Rs. 270.51 crore as on 1.4.2001 and Rs. 280.64
crore as on 31.3.2002) remained unproved by any material whatsoever. While it
was true that the principle of res judicata would not apply to
assessment proceedings under the Act, the need for consistency and certainty
and existence of strong and compelling reasons for a departure from a settled
position had to be spelt out which conspicuously was absent in the present
case.

In the above circumstances, the Supreme
Court held that the second question formulated must go in favour of the
Assessee and it must be held that for the Assessment Year in question i.e.
2002-2003, the Assessee was entitled to the full benefit of the claim of
exemption in relation to dividend income without any deductions.

The Supreme Court allowed the appeal and the order of the High Court was set aside subject to the conclusions, as above, on the
applicability of section 14A with regard to dividend income on which tax is
paid u/s. 115-O of the Act. _

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

1.
CIT (Exemptions) vs. Jagannath
Gupta Family Trust (2019) 411 ITR 235 (SC)

Charitable purpose – The High Court allowed
the appeal mainly on one ground, namely, that one bogus donation would not
establish that the activities of the trust are not genuine – According to the
Supreme Court, the High Court had committed error in entertaining the appeal
against the remand order passed by the appellate-authority, and in quashing the
order of cancellation of registration

Jagannath Gupta Family Trust (the Trust), a
registered Trust u/s. 12AA of the Income Tax Act, 1961, (for short ‘the Act’)
and also approved u/s. 80G(5)(vi) of the Act, was created with an avowed object
of public and charitable purposes, namely, medical relief, education, any other
causes of public utility etc. The Trust is running an Engineering College.

A survey was conducted u/s. 133A of the Act,
in the premises of School of Human Genetics and Population Health (SHGPH),
Kolkata by the Investigation Wing on 27.01.2014. During the said survey the
Income-tax Department noticed a donation entry of Rs. 37,00,000/- (Rupees
Thirty-Seven Lakh) in two tranches in the months of February and March, 2013.
According to the Department, such donation given to the Trust was bogus and
sham. The donor did not actually donate such amount, such entry was shown by
receiving the amount in cash from the Trust, by retaining commission.

In view of such allegation, the Commissioner
of Income-tax (Exemptions) initiated the proceedings for cancellation of
registration and issued a show-cause notice to the Trust on 04.12.2015. The
Trust replied to the same and contested the proceedings. The main plank of the
defence was that the procedure adopted by the Department was contrary to the
principles of natural justice. It was also the case of the Trust, that though a
statement of the representative of the donor was recorded and on the said basis
proceedings were initiated for cancellation of registration, but the Trust was
not given any opportunity to cross examine such representative.

After receipt of the explanation to the
show-cause notice, alleging that the activities of the Trust were neither
genuine nor as per the objects of the trust, further alleging that the
transaction in question was only a money laundering, therefore, receipt of
donation in lieu of cash was never the object of the trust and as such it was
to be treated as ingenuine and illegal activity. It was also held that such activities
were carried out by the Trust not only in one year but in several years.

By recording the aforesaid findings, the
primary authority, by order dated 15.03.2016, in exercise of power u/s. 12AA(3)
of the Act, cancelled the registration of the Trust.

Aggrieved by the order of cancellation dated
15.03.2016, the Trust filed an appeal before the Income Tax Appellate Tribunal,
at Kolkata. The appellate authority, recorded a finding that, though the
statement of the donor was made basis for initiating proceedings for
cancellation of registration of the Trust, but the Trust was not given an
opportunity to cross-examine the representative. The appellate-authority held
that an opportunity of cross-examination of the representative of the donor was
to be given to the Trust. The appellate-authority set aside the order dated
15.03.2016 and remanded the matter for fresh consideration by primary
authority.

Aggrieved by the order of the appellate
authority dated 10.04.2017, the Trust filed an appeal, before the High Court of
Calcutta. By the impugned order, the High Court allowed the appeal by order
dated 18.09.2017 and quashed the order of cancellation of registration. The
High Court held that while it was possible that a particular donation may be
bogus or fictitious and, the Trust may be assessed to tax therefor and other
steps could be taken but the single donation which was allegedly bogus, would
not establish that the activities of the trust were not genuine and not being
carried out in accordance with the objects of the trust. It also held that if
there were multiple bogus transactions of similar kind, it may lead to
reasonable assessment for the Competent Authority to hold that the trust was
engaged in such activities which could be said to be not genuine or not in
conformity with the objects of the trust.

The Commissioner of Income tax (Exemptions),
Kolkata, aggrieved by the Order dated 18.09.2017 passed by the High Court of Calcutta filed an appeal before the Supreme Court.

The Supreme Court noted that in the
proceedings initiated for the cancellation of registration, mainly it was the
case of the Trust that proceedings for cancellation were initiated only on the ex-parte
statement of the representative of the donor, without giving any opportunity to
the Assessee. It noted that though a survey was also conducted on the Trust,
but nothing adverse was found during such survey to support the case of the
Revenue, to cancel the registration. The Supreme Court, on the perusal of the
order passed by the High Court, found that the High Court had allowed the Writ
Petition mainly on one ground, namely, that one bogus donation would not
establish that the activities of the trust are not genuine.

According to the Supreme Court, such a reason
assigned by the High Court was erroneous and ran contrary to the plain language
of section 12AA(3) of the Act. In view of the serious allegations made against
the Trust, it was a matter for consideration of the issue, after giving
opportunity as pleaded by the Trust but the High Court had committed error in
entertaining the appeal against the remand order passed by the
appellate-authority, and in quashing the order of cancellation of registration.

The Supreme
Court therefore set aside order of the High Court, but however, clarified that
it had not expressed any opinion on merits, and it was open to the Commissioner
of Income Tax (Exemptions), Kolkata to consider all the issues on its own
merit, uninfluenced by the observations made by the appellate authority, the
High Court or in this order by it.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

13.
ITO vs. Urban Improvement Trust and Ors. (2018) 409 ITR 1 (SC)

Exemption – Local
Authority – The word “Municipal Committee” occurring in clause (iii) Explanation
to section 10(20) has a definite purpose and object, namely, to cover those
bodies, which are discharging municipal functions but are not covered by the
definition of municipalities as is required to be constituted by Article 243Q
of the Constitution of India – Urban Improvement Trust constituted under the
Rajasthan Urban Improvement Act, 1959 was not covered by the definition of
Municipal Committee as contained in clause (iii) of Explanation to section
10(20) of the Act.

A notice u/s. 142(1) of the
Act dated 01.08.2005 was issued requiring the Assessee to file a return for the
assessment year 2003-2004. A reply was submitted on behalf of the Assessee that
Urban Improvement Trust-the Assessee was a municipality within the meaning of
Article 243P of the Constitution of India, hence it was not required to file an
income tax return. Assessing Officer passed an assessment order dated
28.03.2006 rejecting the contention of the Assessee that its income was
exempted u/s. 10(20). An appeal was filed by the Assessee before the
Commissioner (Appeals). Commissioner (Appeals) passed an order on 10.02.2010
holding that Assessee was a local authority within the meaning of section
10(20) of the Act. The Revenue filed an appeal before the Income Tax Appellate
Tribunal challenging the appellate order. The ITAT accepted the Revenue’s claim
that Assessee was not covered within the definition of clause (iii) of
Explanation to section 10(20). The Appellate Tribunal allowed the appeal and
restored back the matter to the Commissioner of Income Tax (Appeals) for
consideration of the other issues.

Both
the Assessee and Revenue aggrieved by the order of ITAT had filed appeals
before the High Court. The High Court decided all the appeals vide its judgment
dated 25.07.2017. High Court held the Assessee to be local authority within the
meaning of section 10(20) Explanation. After answering the above issue in
favour of the Assessee, the High court held that other issues have became
academic. Consequently, the appeals filed by the Revenue were dismissed and
that of the Assessee were allowed.

According to the Supreme
Court, the only issue which arose before it was as to whether the Urban
Improvement Trust constituted under the Rajasthan Urban Improvement Act, 1959
was a local authority within the meaning of Explanation to section 10(20) of
the I.T. Act, 1961.

The Supreme Court noted
that section 10(20) was amended by Finance Act, 2002 w.e.f. 01.04.2003. By
Finance Act, 2002, provisions of section 10(20A) were also deleted. Section
10(20A), which existed prior to amendments made by Finance Act, 2002 exempted
any income of an authority constituted in India by or under any law enacted
either for the purpose of dealing with and satisfying the need for housing
accommodation or for the purpose of planning, development or improvement of
cities, towns and villages or for both. The Rajasthan Urban Improvement Act,
1959 was enacted for the improvement of Urban Areas in Rajasthan. The Rajasthan
Urban Improvement Act, 1959 was, thus, clearly covered by Section 10(20A). It
was availing exemption u/s. 10(20A) prior to Finance Act, 2002.

According to the Supreme
Court it had to decide as to what was the consequence of deletion of section
10(20A) and further insertion of Explanation u/s. 10(20) providing for an
exhaustive definition of the word “local authority”, which was not
defined under the Act prior to Finance Act,
2002?

The Supreme Court on
perusal of the Scheme of the Rajasthan Urban Improvement Act, 1959 as well as
the Rajasthan Municipalities Act, 1959 held that the provisions of the said Act
indicated that Urban Improvement Trust undertook development in the urban area
included in municipality/municipal board. Urban Improvement Trust was not
constituted in place of the municipality/municipal board rather it undertook
the act of improvement in urban areas of a municipality/municipal board under
the Rajasthan Urban Improvement Act, 1959. It could also perform certain
limited power of the municipal board as referred to in sections 47 and 48 but
on the strength of such provision Urban Improvement Trust did not become a
municipality or municipal board.

The Supreme Court further
observed that Learned Counsel for the Assessee had not based its claim on the
basis of clause (ii) of Explanation which relates to Municipalities rather it
had confined its claim to only clause (iii). Under clause (iii) claim of the
Assessee was that it was a “Municipal Committee”. The Supreme Court, thus,
proceeded to examine as to whether the Assessee was a Municipal Committee
within the meaning of Explanation to section 10(20) or not?

The Supreme Court noted
that the word “Municipal Committee” as occurring in section 10(20)
Explanation came for consideration before it in Agricultural Produce Market
Committee Narela, Delhi vs. Commissioner of Income Tax and Anr. (2008) 305 ITR
1. In the above case, it had examined the Explanation to section 10(20) as
amended by Finance Act, 2002 and the definition of local authority contained
therein. It held that the words “Municipal Committee and District
Board” in Explanation were used out of abundant caution. In 1897, when the
General Clauses Act was enacted there existed in India Municipal Committees and
District Boards, which were discharging the municipal functions in different
parts of the country. The expression “Municipal Committee and District
Board” were included by amendments incorporated by Finance Act, 2002 to
take into its fold those Municipal Committees and District Board which are
still discharging municipal functions where no other municipalities or boards
to discharge municipal functions have been constituted.

The Supreme Court held that
the word “Municipal Committee” occurring in clause (iii) Explanation,
thus, had a definite purpose and object. Purpose and object was to cover those
bodies, which are discharging municipal functions but were not covered by the
definition of municipalities as was required to be constituted by Article 243Q
of the Constitution of India. Urban Improvement Trust constituted under the
Rajasthan Urban Improvement Act, 1959, thus, could not be held to be covered by
the definition of Municipal Committee as contained in clause (iii) of
Explanation to section 10(20) of the Act.

The Supreme Court observed
that in New Okhla Industrial Development Authority vs. Chief Commissioner of
Income Tax and Ors. (2018) 406 ITR 178, it had considered in detail the
object and purpose of section 10(20A), the object and purpose of Finance Act, 2002
amendment adding the Explanation to section 10(20) and deletion of section
10(20A).

The Supreme Court further
held that the provision of sections 47 and 48 which permits certain powers of
the municipal boards to be performed by the Trust does not transform the Trust
into a Municipal Committee. The power entrusted u/s. 47 and 48 was for limited
purpose, for purposes of carrying out the improvement by the Improvement
Trusts. Further, sections 61 to 64 which empowers levy of betterment charges,
were again in reference to and in context of carrying out improvement by the
Improvement Trust in urban areas. The Municipal Board, Kota performed its
functions, in areas where Municipal Board existed. There was no reason to
accept that Urban Improvement Trust was a Municipal Committee within the
meaning of section 10(20) Explanation clause (iii). Also, section 105, which
provides for ultimate dissolution of Trust and transfer of its assets and
liabilities to the Municipal Board, does not in any manner improve the case of
the Assessee. The provision was for different purpose and object. The above
provision did not support the contention that Improvement Trust was a Municipal
Committee as referred to in clause (iii) of Explanation to section 10 of the
Act.

The Supreme Court was,
thus, of the view that Scheme of the Rajasthan Urban Improvement Act, 1959 did
not permit acceptance of the contention of the Appellant Assessee that Urban
Improvement Trust was a Municipal Committee within the meaning of section
10(20) Explanation (iii).

According to the
Supreme Court, the High Court had based its decision on the fact that functions
carried out by the Assessee were statutory functions and it was carrying on the
functions for the benefit of the State Government for urban development. The
said reasoning could not have lead to the conclusion that it was a Municipal
Committee within the meaning of section 10(20) Explanation clause (iii). The
High Court has not adverted to the relevant facts and circumstances and without
considering the relevant aspects had arrived at erroneous conclusions.

14. Honda Siel Cars India Ltd. vs. CIT (2018)
409 ITR 42 (SC)

Capital or revenue expenditure – Lump-sum
payment of technical fee as well as continuing royalty both as capital
expenditure – Assessee is entitled to depreciation thereon

The
Supreme Court in its judgment in Honda Siel Cars India Ltd. vs. CIT [2017]
395 ITR 713 (SC) for the assessment years 1999-2000 and other years treated
the lump-sum payment of technical fee as well as continuing royalty both as
capital expenditure for the assessment years in question. On a miscellaneous
application filed by the Appellant, the Supreme Court held that since these
were capital expenditure, the applicant/Appellant would be entitled to
depreciation thereon.

15. Anil Kumar Nehru vs. ACIT Civil
Appeal No(s). 11750 of 2018; Dated:
31^st December, 2018

Appeal to the High Court – Condonation of
delay – Delay of 1662 days – The High Court should not take a technical view
and dismiss the appeal on the ground of delay when appeals for earlier
assessment years with identical issues are already pending before it

The Supreme Court noted that on the identical issue raised by the
appellant in respect of earlier assessment, the appeal was pending before the
High Court. In these circumstances, according to the Supreme Court, the High
Court should not have taken such a technical view of dismissing the appeal in
the instant case on the ground of delay, when it had to decide the question of
law between the parties in any case in respect of earlier assessment year. For
this reason, the Supreme Court, set aside the order of the High Court; condone
the delay for filing the appeal and directed the High Court to decide the
appeal on merits.

The
appeals were allowed accordingly.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

5. Pr. CIT vs. NRA Iron and Steel Pvt. Ltd. (2019) 418 ITR 449 (SC)

Notice – Service of notice – Application for recall of ex parte
order – Service of notice on authorised representative – Section 2(35) defines
‘principal officer’ which includes agent of the company and the term ‘agent’
would certainly include a power of attorney holder – No ground for recall of
judgment

An application was filed for recall of the judgment for the A.Y. 2009-10
passed by the Supreme Court on the ground that the applicant company was not
served with the notice of the SLP at its registered office, nor was a copy of
the SLP served on the applicant company.

The applicants submitted that the court notices
were sent to the earlier registered office address of the company, i.e., at
310, 3rd Floor, B-Block, International Trade Tower, Nehru Place, New Delhi.
However, on 19^th May, 2014, the company had changed its registered
office to 211, Somdutt Chambers II, 9, Bhikaji Cama Place, New Delhi 110066.

Thereafter, on 23^rd January, 2019, the registered office was
again changed to 1205, Cabin No. 1, 89 Hemkunt Chambers, Nehru Place, New
Delhi.

The applicants submitted that they learnt of the judgment dated 5^thMarch, 2019 passed by the Court from a news clipping published in The
Economic Times on 7^th March, 2019. Subsequently, the application
for recall was filed on 12^th March, 2019.

The company submitted that on an inspection of the court record it
learnt that the affidavit of dasti service filed by the Revenue
Department on 19^th December, 2018 showed an acknowledgement receipt
by Mr. Sanjeev Narayan, the chartered accountant of the applicant company, on
13^th December, 2018.

The company also placed on record the affidavit of Mr. Sanjeev Narayan
wherein he had stated that he was the authorised representative of the company
before the Income Tax authorities but was not engaged before the High Court or
the Supreme Court. He submitted that he had received service on 13^th
December, 2018 from one of the Inspectors of the Income Tax Department, but he bona
fide believed that the documents were ‘some Income Tax return documents
from Income Tax Department.’ He further submitted that he was suffering from an
advanced stage of cataract and had undergone surgery in both eyes, on 4^th
January, 2019 and 23^rd January, 2019, respectively.

The Department in its counter affidavit submitted that the dasti
notice was duly served on Mr. Narayan at his office address, in his capacity as
the authorised representative of the company who was holding a power of
attorney of the company for the A.Y. 2009-10. The POA appointed all four
partners of the firm, i.e., Mr. Mohan Lal, Advocate, Mr. Ashwani Kumar,
Chartered Accountant, Mr. Sanjeev Narayan, Chartered Accountant, and Mr.
Surender Kumar, FCA, as their counsel and authorised them to represent the
company at all stages of the proceedings. The POA executed by the company in
favour of Mr. Sanjeev Narayan was placed on record.

It was further submitted on behalf of the Revenue that even though Mr.
Narayan had stated that he underwent the cataract surgery on 4^th
January, 2019 and 23^rd January, 2019, this was much after the notice
had been served on 13^th December, 2018. Further, Mr. Narayan had
appeared before the tax authorities after the date of service on 13^thDecember,
2018, and prior to his surgery, to represent the company and its sister
concerns on the 14^th, 21^st, 28^th and 29^th
of December, 2018. In these circumstances, it was pointed out, there was no
merit in the contention raised by the company, and hence no ground was made out
to recall the judgment passed by the Supreme Court.

During oral hearing on the recall application, a submission was made by
the counsel for the company that Mr. Sanjeev Narayan was not the ‘principal
officer’ of the company and hence service could not have been effected upon
him.

* The Supreme Court noted that section 2(35) defines ‘principal
officer’, which includes agent of the company and the term ‘agent’ would
certainly include a power of attorney holder {State of Rajasthan vs.
Basant Nehata [2005 (12) SCC 77]}.

* It held that Mr. Narayan admittedly being the power of attorney holder
of the applicant (M/s. NRA Iron & Steel Pvt. Ltd.) for the A.Y. 2009-10,
was the agent of the company and hence notice could be served on him as the
agent of the company in this case.

* The Supreme Court observed that the ground taken by Mr. Narayan that
even though notice was served on 13^th December, 2018, he assumed
that they were ‘some Income Tax return documents’ lacked credibility. It was
difficult to accept that the envelope containing the dasti notice from
this Court was considered to be ‘some Income Tax return documents’. Also, the
deponent had not disclosed as to whether the envelope containing the dasti notice
was ever opened. Further, the ground urged that the chartered accountant was
suffering from an advanced stage of cataract and hence was constrained from
informing his clients, was again not worthy of credence. The dasti notice
was served on him at his office on 13^thDecember, 2018 which was
much prior to his surgery which took place on 4^th January, 2019.
Furthermore, Mr. Narayan appeared before the Income Tax authorities to
represent the company and its sister concerns on various dates prior to his
surgery, i.e., on 14^th, 21^st, 28^thand 29^thDecember, 2018.

The Supreme Court stated that keeping in view the above-mentioned facts
and circumstances, it was satisfied that the applicant company was duly served
through its authorised representative and was provided sufficient opportunities
to appear before the Court and contest the matter. The company chose to let the
matter proceed ex parte. The grounds for recall of the judgment were
therefore devoid of any merit whatsoever.

The Supreme Court dismissed the application for recall.

6. Pr CIT vs. I-Ven Interactive Limited (2019) 418 ITR 662 (SC)

Assessment – Change of address – Notice – In absence of any application
for change in address and/or change in the name of the assessee in the
Permanent Account Number database, the assessing officer would be justified in
sending the notice at the available address mentioned in the PAN database of
the assessee, more particularly when the return has been filed under e-module
scheme – Mere mentioning the new address in the return of income is not enough
– The change of address in the database of the PAN is a must

The assessee filed return of income for the A.Y.
2006-07 on 28^th November, 2006 declaring total income of Rs.
3,38,71,716. The said return was filed under the e-module scheme and thereafter
a hard copy of the same was filed on 5^th December, 2006. The return
of income was accompanied with the balance sheet and profit and loss account.
The return was processed u/s 143(1) of the Act. A notice u/s 143(2) of the Act
was issued to the assessee on 5^th October, 2007. The notice was sent
at the assessee’s address available as per the PAN database. A further
opportunity was provided to the assessee vide notice u/s 143(2) on 25^th
July, 2008. This notice was also issued at the available address as per the PAN
database. Thereafter, further notices u/s 142(1) were issued to the assessee on
23^rdJanuary, 2008, 25^th July, 2008 and 5^th
October, 2008 along with questionnaires calling for various details and were
duly served on the assessee company.

In response to the said notice, the representative
of the company appeared on 28^th November, 2008 and 4^th
December, 2008. The assessee participated in the proceedings before the AO.
However, the assessee challenged the notice under sections 143(2) and 142(1) on
the ground that the said notices were not served upon the assessee as the assessee
never received those notices and the subsequent notices served and received by
the assessee were beyond the period of limitation prescribed under proviso to
section 143(2) of the Act.

The AO vide assessment order dated 24^th
December, 2008 completed the assessment u/s 143(3) by making disallowance of
Rs. 8,91,17,643 u/s 14A, read with Rule 8 of the Rules, and computed the total
income at Rs. 5,52,45,930.

Being aggrieved by the assessment order dated 24^th
December, 2008, the assessee preferred an appeal before the learned C.I.T.
(Appeals). The C.I.T. (Appeals) allowed the appeal vide order dated 23^rd
December, 2010 holding, inter alia, that the AO completed the assessment
u/s 143(3) without assuming valid jurisdiction u/s 143(2), and therefore the
assessment framed u/s 143(3) was invalid. The C.I.T. (Appeals) observed that as
the subsequent service of notice u/s 143(2) was beyond the period of limitation
prescribed under the proviso to section 143(2) and earlier no notices
were served upon the assessee and / or received by the assessee as the same
were sent at the old address, and in the meantime the assessee changed its
address, therefore the assessment order was bad in law. The Revenue preferred
an appeal before the Income Tax Appellate Tribunal which came to be dismissed
by the I.T.A.T. vide order dated 19^th January, 2015. The orders
passed by the C.I.T. (Appeals) as well as the I.T.A.T. were confirmed by the
High Court.

Hence, the Revenue preferred an appeal before the
Supreme Court.

The Supreme Court noted at the outset that the
notice u/s 143(2) was sent by the AO to the assessee at the address as
mentioned in the PAN database on 5^thOctober, 2007 and the same was
within the time limit prescribed in the proviso to section 143(2) of the
Act.

It recorded, however, that it was the case of the
assessee that the said notice was not served as the assessee had changed its
name and address and shifted to a new address prior thereto and therefore the
said notice was not served upon the assessee, and by the time when subsequent
notices were served, notice u/s 143(2) was barred by the period prescribed in proviso
to section 143(2). Therefore, the assessment order was bad in law. It was the
case on behalf of the assessee that vide communication dated 6^th
December, 2005 the assessee had intimated to the AO about the new address and
despite this, the AO sent the notice at the old address.

The Supreme Court observed that the alleged
communication dated 6^th December, 2005 was not forthcoming. Neither
was it produced before the AO nor before the Supreme Court. In the affidavit,
too, filed in compliance with the order dated 21^st August, 2019, the
assessee has stated that the alleged communication dated 6^th
December, 2005 was not available. Thus, the assessee had failed to prove the
alleged communication of that date. The only document available was Form No. 18
filed with the ROC.

The Supreme Court held that the filing of Form-18
with the ROC could not be said to be intimation to the AO with respect to
intimation of change in address. According to the Court, it appeared that no
application was made by the assessee to change the address in the PAN database
and in the PAN database the old address continued. Therefore, in absence of any
intimation to the AO with respect to change in address, the AO was justified in
issuing the notice at the address available as per the PAN database. Hence, the
AO could not be said to have committed any error; in fact, the AO was justified
in sending the notice at the address as per the PAN database. If that was so,
the notice dated 5^th October, 2007 could be said to be within the
period prescribed in proviso to section 143(2) of the Act. Once the
notice is issued within the period prescribed as per the said proviso,
the same can be said to be sufficient compliance of section 143(2) of the Act.
And once the notice is sent within the period prescribed in the proviso
to section 143(2), in that case, the actual service of the notice upon the
assessee thereafter would be immaterial.

In a given case it may happen that though the
notice is sent within the period prescribed, the assessee may avoid actual
service of the notice till the period prescribed expired. Even in the case
relied upon by the Assessee [Asst. CIT vs. Hotel Blue Moon (2010) 321 ITR
362 (SC)], it was observed that the AO must necessarily issue notice
u/s 143(2) within the time prescribed in the proviso to section 143(2)
of the Act.

The Supreme Court, therefore, in the facts and
circumstances of the case, held that the High Court was not justified in
dismissing the appeal and confirming the orders passed by the C.I.T. (Appeals)
and the I.T.A.T. setting aside the assessment order solely on the ground that
the assessment order was bad in law on the ground that subsequent service of
notice upon the assessee u/s 143(2) was beyond the time prescribed in the
proviso to section 143(2) of the 1961 Act.

The Supreme Court, in the context of the
observations made by the High Court while concurring with the view of the
Tribunal that merely by filing of return of income with the new address it
shall be enough for the assessee to discharge its legal responsibility for
observing proper procedural steps as per the Companies Act and the Income Tax
Act is concerned, held that mere mentioning of the new address in the return of
income without specifically intimating the AO with respect to change of address
and without getting the PAN database changed, is not enough and sufficient.

In the absence of any specific intimation to the AO
with respect to change in address and / or change in the name of the assessee,
the AO would be justified in sending the notice at the available address
mentioned in the PAN database, more particularly when the return has been filed
under the e-module scheme. It is required to be noted that notices u/s 143(2)
are issued on selection of cases generated under the automated system of the
Department which picks up the address of the assessee from the database of the
PAN. Therefore, the change of address in the database of PAN is a must; in case
of change in the name of the company and / or any change in the registered
office or the corporate office, the same has to be intimated to the Registrar
of Companies in the prescribed format (Form 18) and after completing the said
requirement, the assessee is required to approach the Department with the copy
of the said document and the assessee is also required to make an application
for change of address in the Departmental database of PAN, which in the present case the assessee had failed to do.

Accordingly, the appeal was allowed by the Supreme
Court. The impugned judgment and order passed by the High Court, as well as the
orders passed by the C.I.T. (Appeals) and the I.T.A.T., were quashed and set
aside. The matter was remanded to the C.I.T. (Appeals) to consider the appeal
on merits on other grounds, in accordance with the law.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

7. New Okhla Industrial Development Authority
and Ors. vs. Commissioner of Income Tax-Appeals and Ors. (2018) 406 ITR 209
(SC)

Deduction
of tax at source – Rent – Amounts constituting annual lease rent payable to
GNOIDA, expressed in terms of percentage (e.g. 1%) of the total premium for the
duration of the lease, are rent, and therefore subject to TDS

The
Respondent Rajesh Projects (India), a private limited company engaged in the
business of real estate activities of constructing, selling residential units
etc., entered into a long-term lease for 90 years with the Greater Noida
Industrial Development Authority for Plot No. GH-07A for development and
marketing of Group Flats. As per terms of the lease deed, the company partially
paid the consideration amount for the acquisition of the plot to Greater Noida
at the time of execution of the lease deed and is also paying the balance lease
premium annually as per the terms and conditions of the lease deed.

Notice
u/s. 201/201(A) of the Income Tax Act, 1961 was issued by the Income Tax
department inquiring regarding non-deduction of tax at source under section
194-I of the Income Tax Act from the annual lease rent paid to Greater Noida.
The Respondent-company replied to the notices. The Respondents case was that it
did not deduct tax at source as it was advised by Greater Noida that it is a
Government authority, hence the tax deduction at source provisions are not
applicable. The Assessing Officer passed the order dated 31.03.2014 for the
Financial Year 2010-2011 and 2011-2012, whereby the Respondent was held as
“assessee-in-default” for non-deduction/non-deposit of TDS on account
of payment of lease rent and interest made to Greater Noida. Consequent demand
was raised against the Respondents.

Aggrieved by the order, the Respondent-company
filed an appeal before the Commissioner of Income Tax-Appeals. Respondents
prayed to stay the demand which was refused and recovery proceedings were
initiated. Aggrieved by assessment and recovery proceedings emanating
therefrom, the Respondent-company filed a Writ Petition praying for various
reliefs including the relief that Respondent-company be not treated as
“assessee-in-default” under the Income Tax Act for non-deduction/depositing
the tax at source in respect of payment of rent on lease land and in respect of
other charges paid to Greater Noida. Different other entities also filed the
writ petitions in the Delhi High Court praying for more or less the same
reliefs relating to lease rent payment and for payment of interest to Greater
Noida. All the writ petitions involving common questions of law and facts were
heard together and were allowed by the Delhi High Court.

Before the High Court, Greater Noida and the Noida authorities contended
that they are local authorities within the meaning of section 10(20) of the
Income Tax Act, 1961, hence their income is exempt from the Income Tax. It was
further contended that the interest received by them is exempt u/s. 194A(3)(iii)(f)
of the Income Tax Act and they were exempted from payment of any tax on the
interest.

The
revenue refuted the contention of Greater Noida and Noida contending that
w.e.f. 01.04.2003, the Greater Noida and Noida is not a local authority within
the meaning of section 10(20) and further they are also not entitled for the
benefit of notification issued u/s. 194A(3)(iii)(f). It was further contended
that with regard to payment of rent to the Noida and Greater Noida, the
Respondent-company was liable to deduct the tax on payment of interest, no
income-tax was deducted by the Respondent-company while paying rent to Noida
and Greater Noida, hence they are “assessee-in-default”.

The Delhi
Court held as follows:

(1)
Amounts paid as part of the lease premium in terms of the time-schedule(s) to
the Lease Deeds executed between the Petitioners and GNOIDA, or bi-annual or
annual payments for a limited/specific period towards acquisition of lease hold
rights are not subject to TDS, being capital payments;

(2)
Amounts constituting annual lease rent, expressed in terms of percentage (e.g.
1%) of the total premium for the duration of the lease, are rent, and therefore
subject to TDS. Since the Petitioners could not make the deductions due to the
insistence of GNOIDA, a direction is issued to the said authority (GNOIDA) to
comply with the provisions of law and make all payments, which would have been
otherwise part of the deductions, for the periods, in question, till end of the
date of this judgment. All payments to be made to it, henceforth, shall be
subject to TDS.

(3)
Amounts which are payable towards interest on the payment of lump sum lease
premium, in terms of the Lease which are covered by Section 194-A are covered
by the exemption u/s. 194A(3)(f) and therefore, not subjected to TDS.

(4) For
the reason mentioned in (3) above, any payment of interest accrued in favour of
GNOIDA by any Petitioner who is a bank-to the GNOIDA, towards fixed deposits,
are also exempt from TDS.

Aggrieved
by the aforesaid judgment of Delhi High Court, Greater Noida, Noida as well as
Revenue has filed appeals before the Supreme Court.

The
Supreme Court held that insofar as the appeals filed by Noida/Greater Noida
were concerned, the principal submission raised by the Appellant is applicability
of section 10(20) of the Income Tax Act. In New Okhla Industrial Development
Authority vs. Commissioner of Income Tax-Appeals and Ors., (406 ITR 178) it
had been held that Noida was not a “local authority” within the
meaning of section 10(20) of the Income Tax Act as amended by the Finance Act,
2002 w.e.f. 01.04.2003.

Insofar as
the question relating to exemption u/s. 194A(3) (iii)(f) by virtue of
notification dated 24.10.1970, i.e. the exemption of interest income of the
Noida, was concerned, in Commissioner of Income Tax (TDS) Kanpur and Anr.
vs. Canara Bank(406 ITR 161) it had been held that Noida was covered by the
notification dated 22.10.1970, and therefore the judgment of the Delhi High
Court holding that Noida/Greater Noida was entitled for the benefit of section
194A(3)(iii)(f) had to be approved. Coming to the direction of the High Court
regarding deduction of tax at source on the payment of lease rent as per
section 194-I of the Income Tax Act, 1961, the Supreme Court held that a
perusal of the Circular dated 30.01.1995 relied by Noida/Greater Noida indicate
that circular was issued on the strength of section 10(20A) and section 10(20)
as it existed at the relevant time. Section 10(20) has been amended by Finance
Act, 2002 by adding an explanation and further section 10(20A) has been omitted
w.e.f. 01.04.2003. The very basis of the circular has been knocked out by the
amendments made by Finance Act, 2002. Thus, the Circular could not be relied by
Noida/Greater Noida to contend that there was no requirement of deduction of
tax at source u/s. 194-I. Thus, deduction at source is on payment of rent u/s.
194-I, which was clearly the statutory liability of the Respondent-company. The
High Court has adjusted the equities by recording its conclusion and issuing a
direction.

In view of
what has been stated above, the Supreme Court did not find any error in the
judgment of the High Court dated 16.02.2017. In result, all the appeals were
dismissed.

8. Commissioner
of Income Tax (TDS), Kanpur and Ors. vs. Canara Bank (2018) 406 ITR 161 (SC)

Deduction
of tax at source – Payment of interests by the banks to the State Industrial
Development Authority does not require any deduction at source in terms of
section 194A(3)(iii)(f)

The New Okhla Industrial
Development Authority (NOIDA), hereinafter referred to as “Authority”
was constituted by Notification dated 17.04.1976 issued u/s. 3 of the Uttar
Pradesh Industrial Area Development Act, 1976 hereinafter referred to as
“1976 Act”. The Canara Bank, is the banker of the Authority. The Bank
made a payment of Rupees Twenty Crore Ten Lakh as interest to Authority in form
of FDs/Deposits for the financial year 2005-06. The Canara Bank, however, did
not deduct tax at source u/s. 194A of the Income Tax Act, 1961 hereinafter
referred to as “IT Act, 1961”.

Notices
were issued by the Commissioner of Income-tax (TDS) to Canara Bank asking for
information pertaining to interest paid to the Authority on its deposits.
Notices were also issued by the Commissioner of Income-tax (TDS) to the Bank
for showing cause for not deducting tax at source. A writ petition had been
filed by the NOIDA being Writ Petition No. 1338/2005 challenging the notices
issued to the Authority as well as its bankers. Assessment proceeding could not
proceed due to certain interim directions passed by the High Court in the above
writ petition. The writ petition was ultimately dismissed by the High Court on
28.02.2011 holding that the Authority was not a local authority within the
meaning of section 10(20) of IT Act, 1961 and its income was not exempt from
tax. The Assessing Officer thereafter proceeded to pass an order u/s.
201(1)/201(1A) read with section 194A of the IT Act, 1961 dated 28.02.2013.

Income Tax
Authority held that the Bank was an Assessee in default. The default was
computed and demand notice as per section 156 of the IT Act, 1961 was issued.
Penalty proceeding was also separately initiated. The Canara Bank aggrieved by
the order of the Assessing Officer dated 28.02.2013 filed an appeal before the
Commissioner of Income Tax (Appeals). Before the Commissioner, the bank relied
on Notification dated 22.10.1970 issued u/s. 194A(3) (iii)(f) of the IT Act,
1961. The Appellate Authority vide its judgment dated 02.12.2013 allowed the
appeal setting aside the order of the Assessing Officer. The Revenue aggrieved
by the judgment of the Appellate Authority filed an appeal before the Income
Tax Appellate Tribunal. The Tribunal also held that payment of interests by the
banks to the State Industrial Development Authority did not require any
deduction at source in terms of section 194A(3)(iii)(f).

The
Revenue aggrieved by the order of the Tribunal filed an appeal u/s. 260A of the
Act before the High Court. The Division Bench of the High Court vide its
judgment dated 04.04.2016 dismissed the appeal.

The
Supreme Court noted the provisions of section 194A of the IT Act, 1961and the
Notification dated 22.10.1970 issued u/s. 194A(3)(iii)(f).

According to the Supreme Court, to decide the controversy, it was
necessary to ascertain the concept of a Corporation. The Supreme Court observed
that a Corporation is an artificial being which is a legal person. It is a
body/corporate established by an Act of Parliament or a Royal Charter. It
possesses properties and rights which are conferred by the Charter constituting
it expressly or incidentally.

The
Supreme Court noted that before it, there was no issue that the Authority was
not a Corporation. It was also not contended that Authority was not a statutory
corporation. What was contended before it was that Authority having not been
established by a Central, State or Provincial Act was not covered by
Notification dated 22.10.1970 hence, not eligible for the benefit.

The
Supreme Court observed that the Appellant on the one hand submits that the
Authority has not been established by 1976 Act rather it has been established
under the 1976 Act, hence it was not covered by Notification dated 22.10.1970
whereas the Respondent submits that Authority has been established by the 1976
Act and hence, it fulfills the condition as enumerated under Notification dated
2.10.1970. Alternatively, it was submitted that words “by and under”
have been interchangeably used in the IT Act, 1961 and there was no difference,
even if, the Authority was established under the 1976 Act.

The
Supreme Court noted that section 194A(3)(iii) clauses (b), (c) and (d) refer to
expression “established”. In sub clause (b) expression used is
“established by or under a Central, State or Provincial Act”, in sub
clause (c) the expression used is “established under the Life Insurance
Corporation Act” and in sub clause (d) expression used is
“established under the Unit Trust of India Act”. The Supreme Court
held that the section thus uses both the expressions “by or under”.
According to the Supreme Court, the expression established by or under an Act
had come for consideration before it on several occasions. In Sukhdev Singh
vs. Bhagatram Sardar Singh Raghuvanshi (1975) 45 Com Cas 285 (SC), the
Court had occasion to consider the status of company incorporated under the
Companies Act. The Court held that Company incorporated is not a Company
created by the Companies Act. Again in S.S. Dhanoa vs. Muncipal Corporation,
Delhi (1981) 3 SCC 431 the Court had occasion to consider a Registered
Society which was a body/corporate. The question was as to whether the State
Body/corporate is a Corporation within the meaning of Clause Twelfth of section
21 of the Indian Penal Code (Indian Penal Code). The Court again held that
expression Corporation means a Corporation created by the legislature. Another
judgment which had occasion to consider the expression established by or under
the Act was a judgment in Dalco Engineering Private Limited vs. Satish
Prabhakar Padhye and Ors. (2010) 4 SCC 378. The Court had occasion to
examine the provision of section 2k, of the Persons with Disabilities (Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995,
specifically expression “establishment” means a Corporation
established by or under Central, Provincial or State Act. The Court held that
the phrase established by or under the Act is a standard term used in several
enactments to denote a statutory corporation established or brought into
existence by or under the statute. On Company it was held that the company is
not established under the Companies Act and an incorporated company does not
“owe” its existence to the Companies Act.

The Supreme Court reverting back to the provisions of 1976, Act observed
that the very preamble of that Act reads “an Act to provide for the
Constitution of an Authority for the development of certain areas in the State
into industrial and urban township and for masses connected through with”.

According
to the Supreme Court, the Act itself provides for constitution of an authority.
Section 2(b) of the 1976 Act defines Authority as authority constituted u/s. 3
of the Act. The Supreme Court observed that when one compares the provisions of
section 3 of 1976 Act with those of The State Financial Corporations Act, 1951,
it becomes clear that the establishment of Corporation in both the enactments
is by a notification by State Government. In the present case, notification has
been issued in exercise of power of section 3, the Authority has been
constituted.

According to the Supreme Court it having already laid down in Dalco
Engineering (supra) that establishment of various financial corporations
under State Financial Corporation Act, 1951 is establishment of a Corporation
by an Act or under an Act, the above ratio fully covers the present case and
therefore there was no doubt that the Authority have been established by the
1976 Act and it was clearly covered by the Notification dated 22.10.1970.
Further, the composition of the Authority was statutorily provided by section 3
of 1976 Act itself, hence, there was no denying that Authority had been
constituted by Act itself.

The
Supreme Court dismissed the appeal, holding that the High Court did not commit
any error in dismissing the appeal filed by the Revenue.

9. Deputy
Commissioner of Income Tax, Chennai vs. T. Jayachandran (2018) 406 ITR 1 (SC)

Income
–The Respondent had acted only as a broker and could not claim any ownership on
the sum of Rs. 14,73,91,000/- and that the receipt of money was only for the
purpose of taking demand drafts for the payment of the differential interest
payable by Indian Bank and that the assessee had actually handed over the said
money to the Bank itself, the said sum of Rs. 14,73,91,000/- could not be
termed as the income of the Respondent

The Respondent-an individual and the proprietor of Chandrakala and Company, was a stock broker
registered with the Madras Stock Exchange. He was stated to be an approved
broker of the Indian Bank. During the assessment years 1991-92, 1992-93 and
1993-94 the Respondent acted as a broker to the Indian Bank in purchase of the
securities from different financial institutions. It was
the case of the Revenue that the Indian Bank, in order to save itself from
being charged unusually high rate of interest on borrowing money from the
market, lured Public Sector Undertaking (PSUs) to make fixed term deposit with
it on higher rate of interest. The rate of interest offered to the PSUs for
making huge term deposits was to the extent of 12.75% of interest on fixed
deposits against the approved 8% rate of interest in accordance with the RBI
directions.

In order
to pay higher interest to the PSUs who made a fixed term deposit with the
Indian Bank, the bank requested the Respondent to purchase securities on its
behalf at a prescribed price which was unusually high but adequate to cover the
market price of the securities, brokerage/incidental charges to be levied by
the Respondent on these transactions, apart from covering the extra interest
payable to the PSUs. The Respondent, on the instructions of Indian Bank,
purchased securities at a particular rate quoted by the Bank and sold them to
Indian Railways Finance Corporation.

Bank of
Madura was the routing bank through which the securities were purchased and
sold to Indian Bank for which Bank of Madura charged service charges. The
Respondent was paid commission in respect of transactions done on behalf of
Indian Bank. Under instructions from Indian Bank, a portion of the amount
realised from the security transactions carried on behalf of Indian Bank was
paid by way of additional interest to certain Public Sector Undertakings (PSU)
on the deposits made with the Indian Bank and out of eight PSUs three had
confirmed the receipt of such additional interest through demand drafts.

The
Respondent filed his return of income for the Assessment Year 1991-92 declaring
his income at Rs. 4,82,83,620/-. The Assessing Officer passed assessment order
u/s. 143(3) and raised a demand for a sum of Rs. 14,73,91,000/- with regard to
the sum payable to the PSUs while holding that the Respondent has not acted as
a broker in the transactions carried out for the Indian Bank rather as an
independent dealer and that there was no overriding title in favour of the
PSU’s with regard to the additional amount earned out of the securities
transactions and it is a case of application of income after accrual and,
hence, the said amount is liable to be assessed as the income of the
Respondent.

The
Respondent, being dissatisfied with the order, preferred an Appeal before the
Commissioner for Income Tax (Appeals). Learned Commissioner of Income Tax
(Appeals), set aside the demand for additional tax while deciding the issue in
favour of the Respondent and held that the alleged additional interest payable
to the PSUs could not be considered as the income of the Respondent.

Being
aggrieved, the Revenue filed an appeal before the Income Tax Appellate Tribunal
(hereinafter referred to as ‘the Tribunal’). The Tribunal, allowed the appeal
filed by the Revenue and held that the amount received at the hands of the
Respondent which was alleged to be payable to the PSUs was the income of the
Respondent and there was no overriding title existing in favour of the PSUs so
as to cause diversion of income.

In the
meanwhile criminal proceedings were initiated with respect to the present
transactions in question against the Respondent along with others which was
decided by the CBI court.

The court,
while acquitting the Respondent had observed that the relationship between the
Indian Bank and the Respondent was that of principal-agent and with regard to
the transactions in question the Respondent acted in the capacity of a broker
and not as an individual dealer.

However, the Tribunal refused to rely on the evidence produced in the
trial court on the ground that the assessment proceedings were different from
the criminal proceedings and the evidence adduced in the trial court couldn’t
be relied to absolve the Respondent from the tax liability.

Being
aggrieved by the order of the ITAT, the Assessee filed Tax Case Appeal before
the High Court. The High Court, set aside the order of the Tribunal while
relying on the evidence given in the criminal case in this regard.

Being
aggrieved, the Revenue filed an appeal before the Supreme Court.

According
to the Supreme Court, the only point for consideration before it was whether on
the facts and circumstances of the present case the High Court was right in
holding that the alleged additional interest payable to PSUs could not be
assessed as income of the Respondent?

The
Supreme Court was of the view that the answer to the short question whether the
alleged interest payable to the PSUs could be assessed as an income of the
Respondent depended on the determination of true nature of relationship between
the Indian Bank and the Respondent with regard to the transactions in question
and the capacity in which he held the amount of Rs. 14,73,91,000/-.

As to the question of
relationship between the Indian Bank and the Respondent, the Supreme Court
observed that the normal settlement process in Government securities is that
during transaction banks make payments and deliver the securities directly to
each other. The broker’s only function is to bring the buyer and seller
together and help them to negotiate the terms for which he earns a commission
from both the parties. He does not handle either cash or securities. In this
respect, the broker functions like the broker in the interbank foreign exchange
market. The conduct of the Respondent in the transaction in question could not
be termed to be strictly within the normal course of business and the
irregularities could be noticed from the manner in which the whole transactions
were conducted. However, the same could not be basis for holding the Respondent
liable for tax with regard to the sum in question and what was required to be
seen was whether there accrued any real income to the Respondent or not.

According to the Supreme Court, it was required to be seen in what
capacity the Respondent held the said amount-independently or on behalf of the
Indian Bank. The Assessing Officer, while passing assessment order, had held
that there existed no agreement between the Respondent and the Indian Bank
about the payment of additional interest to the PSUs and there was no
overriding title in respect of the additional interest for the PSUs. However,
in the opinion of the Supreme Court, the position in this regard was very much
settled that an agreement need not be in writing but could be oral also and the
same could be inferred from the conduct of the parties.

Further, while considering the claim of the Respondent and the view of
the Assessing Officer, how the bank itself had treated the Respondent, was a
matter of relevance. The relationship between the Indian Bank and the
Respondent was very much clear by the evidence led during the criminal
proceedings. The Executive Director of the Bank had specifically spoken about
the role of the Respondent as a broker specifically engaged by the Bank for the
purchase of securities and that the Bank had included the interest money too in
the consideration paid, for the purpose of taking demand drafts in favour of
PSUs. Further, the evidence led by other bank officials pointed out that the
price of securities itself were fixed by the bank authorities and as per their
directions the Respondent had purchased the securities at the market price and
the differential amount was directed to be used for taking demand drafts from
the bank itself for paying additional interest to the PSUs. Further, the letter
dated 25.03.1994 by the Bank wherein the Bank had acknowledged the receipt of
Demand Drafts taken by the Respondent gave an unblurred picture about the
capacity of the Respondent in holding the amount in question. Consequently, the
conduct of the parties, as recorded in the criminal proceedings showing the
receipt of amount by the broker, the purpose of receipt and the demand drafts
taken by the broker at the instance of the bank were sufficient to prove the
fact that the Respondent acted as a broker to the Bank and, hence, the additional
interest payable to the PSUs could not be held to be his property or income.

According
to the Supreme Court, the income that had actually accrued to the Respondent
was taxable. What income has really occurred to be decided, not by reference to
physical receipt of income, but by the receipt of income in reality. Given the
fact that the Respondent had acted only as a broker and could not claim any
ownership on the sum of Rs. 14,73,91,000/- and that the receipt of money was
only for the purpose of taking demand drafts for the payment of the
differential interest payable by Indian Bank and that the Respondent had
actually handed over the said money to the Bank itself, the Supreme Court held
that the Respondent held the said amount
in trust to be paid to the public sector units on behalf of the Indian Bank
based on prior understanding reached with the bank at the time of sale of
securities and, hence, the said sum of Rs. 14,73,91,000/- could not be termed
as the income of the Respondent. According to the Supreme Court, the decision
rendered by the High Court therefore required no interference.

The Supreme Court dismissed
the appeal.

10. New Okhla Industrial Development Authority
vs. Chief Commissioner of Income Tax and Ors.

(2018)
406 ITR 178 (SC)

Exemption
– Local Authority – After omission of section 10(20A), only provision under
which a Body or Authority can claim exemption is section 10(20) – Local authority having been exhaustively
defined in the Explanation to section 10(20), an entity has to fall u/s. 10(20)
to claim exemption.

The
Appellant-New Okhla Industrial Development Authority (hereinafter referred to
as the “Authority”) has been constituted u/s. 3 of the U.P.
Industrial Area Development Act, 1976 (hereinafter referred to as the ‘Act,
1976’) by notification dated 17.04.1976. The Act, 1976 was enacted by State
Legislature to provide for the constitution of an Authority for the development
of certain areas in the State into industrial and urban township and for
matters connected therewith. Under the Act, 1976 various functions have been
entrusted to the Authorities. Notices u/s. 142 of the Income Tax Act dated
28.07.1998 and 08.08.1998 were issued to the Appellant. The Appellant
challenging the said notices filed writ petition contending that Appellant was
a local authority, hence, was exempted from payment of income tax u/s.10(20)
and section 10(20A) of Income Tax Act, 1961 (hereinafter referred to as
“I.T. Act, 1961).

The writ
petition was allowed by the Division Bench of the Allahabad High Court on
14.02.2000 holding that the Appellant was a local body. It was held that it is
covered by the exemption u/s. 10(20A) of I.T. Act, 1961. The Division Bench,
however, did not go into the question whether it was also exempt u/s. 10(20).

By the Constitution (74^th Amendment) Act, 1992, the
Parliament had inserted Part IXA of the Constitution providing for the
constitution of Municipalities. A notification dated 24.12.2001 was issued by
the Governor in exercise of the power under the proviso to Clause (1) of
Article 243Q of the Constitution of India specifying the Appellant to be an
“industrial township” with effect from the date of the notification
in the Official Gazette. A notice dated 29.08.2005 was issued by the Assistant
Commissioner of Income Tax to the Appellant for furnishing Income Tax Return
for the assessment year 2003-2004 and 2004-2005. Notice mentioned that after
omission of section 10(20A) w.e.f. 01.04.2003 the Authority had become taxable.
Notice u/s. 142(1) was also enclosed for the above purpose.

The
Appellant vide its letter dated 20.09.2005 replied the notice dated 29.08.2005
stating that it was a local authority and exempt from Income Tax hence notice
u/s. 142 be withdrawn. The Appellant filed a writ petition praying for quashing
the notice u/s. 142 of the Income Tax Act dated 29.08.2005. The High Court in
the writ petition decided the question “whether New Okhla Industrial
Development Authority (NOIDA) is a local authority after 01.04.2003 within the
meaning of section 10(20) of the Income Tax Act, 1961”. The Division Bench
of the High Court relying on two judgments of the Supreme Court in Agricultural
Produce Market Committee, Narela, Delhi vs. Commissioner of Income Tax and Anr.
(2008) 9 SCC 434 and Adityapur Industrial Area Development Authority vs.
Union of India and Ors. (2006) 5 SCC 100, held that after 01.03.2003 the
NOIDA is not a local authority within the meaning of section 10(20) of the I.T.
Act, 1961. The writ petition was consequently dismissed.

According
to the Supreme Court, the only issue that arose for consideration in these
appeals was as to whether the Appellant was a local authority within the
meaning of section 10(20) as amended by Finance Act, 2002 w.e.f. 01.04.2003.
According to the Supreme Court, the submissions made by the parties could be
dealt with in the following two heads:

A. The
status of the Authority by virtue of notification dated 24.12.2001 issued under
Clause (1) of Article 243Q issued by the Governor specifying New Okhla
Industrial Area to be an “industrial township”.

B. Whether
the Appellant is a local authority “within the meaning of section 10
sub-section (20) as explained in Explanation added by Finance Act, 2002.

The
Supreme Court held as under:

(A) Part
IXA of the Constitution:

The
proviso is an exception to the constitutional provisions which provide that
there shall be constituted in every State a Nagar Panchayat, a Municipal
Council and a Municipal Corporation. Exception is covered by proviso that where
an industrial township is providing municipal services the Governor having
regard to the size of the area and the municipal services either being provided
or proposed to be provided by an industrial establishment specify it to be an
industrial township.

The words
‘industrial township’ have been used in contradiction of a Nagar Panchayat, a
Municipal Council and a Municipal Corporation. The object of issuance of
notification is to relieve the mandatory requirement of constitution of a
Municipality in a State in the circumstances as mentioned in proviso but
exemption from constituting Municipality does not lead to mean that the
industrial establishment which is providing municipal services to an industrial
township is same as Municipality as defined in Article 243P(e).

Article 243P(e)
defines Municipality as an institution of self-government constituted under
Article 243Q. The word constituted used under Article 243P(e) read with Article
243Q clearly refers to the constitution in every State a Nagar Panchayat, a
Municipal Council or a Municipal Corporation. Further, the words in proviso
“a Municipality under this Clause may not be constituted” clearly
means that the words “may not be constituted” used in proviso are
clearly in contradistinction with the word constituted as used in Article
243P(e) and Article 243Q. Thus, notification under proviso to Article 243Q(1)
is not akin to constitution of Municipality. According to the Supreme Court,
industrial township as specified under notification dated 24.12.2001 is not
akin to Municipality as contemplated under Article 243Q.

B. Section
10(20) as amended by the Finance Act, 2002:

By the Finance Act, 2002 an Explanation has been added to section 10(20)
of the I.T. Act, 1961 and section 10(20A) has been omitted. Prior to Finance
Act, 2002 there being no definition of ‘local authority’ under the I.T. Act,
the provisions of section 3(31) of the General Clauses Act, 1897 were pressed
into service while interpreting the extent and meaning of local authority. The
Explanation having now contained the exhaustive definition of local authority,
the definition of local authority as contained in section 3(31) of General Clauses
Act, 1892 is no more applicable.

The
Explanatory Notes on Finance Act, 2002 clearly indicates that by Finance Act,
2002 the exemption under section 10(20) has been restricted to the Panchayats
and Municipalities as referred to in Articles 243P(d) and 243P(e). Further by
deletion of clause (20A), the income of the Housing Boards of the States and of
Development Authorities became taxable.

After
omission of section 10(20A) only provision under which a Body or Authority can
claim exemption is section 10(20). Local authority having been exhaustively
defined in the Explanation to section 10(20) an entity has to fall u/s. 10(20)
to claim exemption.

In Adityapur Industrial Area Development Authority (supra) after
considering section 10(20) as amended by the Finance Act, 2002 and consequences
of deletion of section 10(20A) it had been held that the benefit, conferred by
section 10(20-A) of the Income Tax Act, 1961 on the Assessee therein, had been
expressly taken away. Moreover, the Explanation added to section 10(20)
enumerates the “local authorities” which did not cover the Assessee
therein.

In Gujarat
Industrial Development Corporation vs. Commissioner of Income Tax, 1997 (7) SCC
17, after considering the provisions of section 10(20A) of I.T. Act it was
held that Gujarat Industrial Development Corporation was entitled for exemption
u/s. 10(20A).

The Gujarat Industrial Development Corporation was held to be entitled
for exemption u/s. 10(20A) at the time when the provision was in existence in
the statute book and after its deletion from the statute book the exemption was
no more available.

Further,
Explanation to section 10(20) uses the word ‘means’ and not the word
‘includes’. Hence, it was not possible to extend the definition of ‘local
authority’ as contained in the Explanation to section 10(20). It was also not
possible to refer to the definitions in other Acts, as the IT Act now
specifically defines ‘local authority’.

The
Supreme Court thus concluded that the Appellant was not covered by the definition
of local authority as contained in Explanation to section 10(20).

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

14. Snowtex Investment Ltd. vs.
Pr. CIT; [2019] 414 ITR 227 (SC)

Loss – Set off – Speculative transaction – The assessee having made an
admission on a statement of fact that the principal business activity was
trading in shares and securities, must bind it – The principal business of the
assessee thus not being of granting loans and advances during the assessment
year, the deeming fiction under section 73 was attracted – The provisions which
were contained in the Finance Act (No. 2) 2014 insofar as they amended the
Explanation to section 73, were not clarificatory

The appellant was registered as a non-banking financial company under
the Reserve Bank of India Act, 1934. The appellant filed its return of income
for the assessment year 2008-09 on 27^th September, 2008. By an order
dated 14^th December, 2010 the AO recorded that the principal business
activity of the assessee was trading in shares and securities. The loss from
share trading was held to be a speculation loss. The AO further held that in
view of the provisions of section 43(5)(d), activities pertaining to futures
and options could not be treated as speculative transactions. The loss from
speculation was held not to be capable of being set off against the profits
from business.

Against the AO’s order for the assessment year 2008-2009, an appeal was
filed before the CIT(A). The CIT(A) rejected the contention of the assessee
that the AO had erred in not allowing the speculation loss to be set off
against profits of trading in futures and options.

The assessee appealed against the decision of the CIT(A). The Income Tax
Appellate Tribunal, by its decision dated 6^th November, 2015 held
that the claim of the assessee for setting off the loss from share trading
should be allowed against the profits from transactions in futures and options,
since the character of the activities was similar. The ITAT held that the
assessee who was in the business of share trading had treated the entire
activity of the purchase and sale of shares, which comprised both of
delivery-based and non-delivery-based trading, as one composite business.

The Revenue appealed before the High Court which, by its judgement dated
22^ndNovember, 2016 accepted its submission. The High Court held
that the profits which had arisen from trading in futures and options were not
profits from a speculative business. Hence, the loss on trading in shares could
not be set off against the profits arising from the business of futures and
options.

On an appeal by the assessee, the Supreme Court noted that the
provisions of section 43(5) were amended by the Finance Act, 2005. Prior to the
amendment, section 43(5) defined a ‘speculative transaction’ to mean a
transaction in which a contract for the purchase or the sale of any commodity
including stocks and shares is settled otherwise than by the actual delivery or
transfer of the commodity or scripts. The impact of the amendment by the
Finance Act, 2005 was that an eligible transaction on a recognised stock
exchange in respect of trading in derivatives was deemed not to be a
speculative transaction. With effect from 1^st April, 2006 trading in
derivatives was by a deeming fiction not regarded as a speculative transaction
when it was carried out on a recognised stock exchange. The circular of the CBDT
dated 27^th February, 2006 indicated that this amendment was
occasioned by the changes which were introduced by SEBI both at the legal and
the technological level for bringing in greater transparency in the market for
derivatives.

The Supreme Court further noted that section 73 deals with losses from
speculation business. Under sub-section (1) of section 73, a loss computed in
relation to speculation business carried on by an assessee can only be set off
against the profits and gains of another speculation business. The Explanation
to section 73 contains a deeming fiction where certain businesses shall, for
the purposes of that section, be deemed to be speculation businesses. The
Explanation also carves out an exception in respect of certain specified businesses
which shall lie outside the fold of the deeming fiction. Prior to amendment of
the Explanation by the Finance (No. 2) Act, 2014 with effect from 1^st
April, 2015, the business of trading in shares carried on by a company was not
excluded from its purview. However, by the amendment which was brought into
force from 1^st April, 2015, the Explanation to section 73 further
excluded from the deeming fiction a company whose principal business was
trading in shares or banking.

The Court observed that while, on the one hand, Parliament amended
section 43(5) with effect from 1^st April, 2006 as a result of which
trading in derivatives on recognised stock exchanges fell outside the purview
of the business of speculation, a corresponding amendment to the Explanation to
section 73 in respect of trading in shares was brought in only with effect from
1^stApril, 2015.

The submission which had been urged on behalf of the appellant was that
there was no logical reason to exclude from the purview of speculation business,
trading in shares, whereas trading in derivatives was excluded, from the ambit
of section 43(5) after 1^st April, 2006.

The Supreme Court first dealt with the first submission, namely, that
the Explanation to section 73, as it stood prior to the amendment, excluded
from the deeming definition of a speculation business a situation where the
principal business of a company was granting of loans and advances.

The Court noted that there was no dispute about the fact that the
assessee was registered as an NBFC under the provisions of the Reserve Bank of
India Act, 1934. Before the Supreme Court it was urged that the principal
business was of granting of loans and advances. According to the Court, the
correctness of this aspect of the submission was not required to be determined
in the facts of the present case since the High Court had relied upon the
specific admission of the assessee that during the assessment year in question
its sole business was of dealing in shares.

The Supreme Court noted that while the assessee had given loans and
advances of Rs. 11.32 crores during the assessment year, it included
interest-free lending to the extent of Rs. 9.58 crores.

Having regard to these facts and circumstances, the specific admission
of the assessee before the AO assumed significance. According to the Supreme
Court, the assessee had made an admission on a statement of fact which must
bind it. Thus, the principal business of the assessee was not of granting loans
and advances during the assessment year. As a consequence, the
deeming fiction under section 73 was attracted. Hence, the finding of the High
Court on the first aspect could not be faulted.

So far as the second submission which was canvassed in the course of the
hearing of the appeal was concerned, the Supreme Court held that it was
difficult to hold that the provisions which were contained in the Finance Act
(No. 2) 2014 insofar as they amended the Explanation to section 73 were
clarificatory or that notwithstanding the provision by which the amendment was
brought into force with effect from 1^stApril, 2015, that it should
be given retrospective effect.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

2. Commissioner of Income Tax vs. Laxman Das
Khandelwal (2019) 416 ITR 485 (SC)

Assessment – Entire
assessment proceedings stand vitiated as the AO lacks jurisdiction in absence
of notice u/s 143(2) of the Act – The scope of the provision of section 292BB
is to make service of notice having certain infirmities to be proper and valid
if there was requisite participation on part of the assessee but the section
does not save complete absence of notice

The assessee, an
individual, was carrying on a business of brokerage. Search and seizure operation
was conducted u/s 132 of the Act on 11^th March, 2010 at his
residential premises. The assessee submitted return of income on 24^th
August, 2011, declaring total income of Rs. 9,35,130. The assessment was
completed u/s 143(3) read with section 153(D) of the Act. A sum of Rs. 9,09,110
was added on account of unexplained cash u/s 69 of the 1961 Act. Another sum of
Rs. 15,09,672 was added on account of unexplained jewellery; Rs.45,00,000 was
added on account of unexplained hundies; and Rs. 29,53,631 was added on
account of unexplained cash receipts.

Aggrieved, the assessee
filed an appeal before the Commissioner of Income Tax (Appeals). The CIT(A)
deleted an amount of Rs. 7,48,463 holding that jewellery found in locker
weighing 686.4 grams stood explained in view of Circular No. 1916 and further
deleted the addition of Rs. 29,23,98,117 out of Rs. 29,53,52,631 holding that
the correct approach would be to apply the peak formula to determine in such
transaction which comes to Rs. 29,54,514 as on 5^th March, 2010.

Aggrieved, Revenue filed
an appeal. The assessee filed cross-objection on the ground of jurisdiction of
the AO regarding non-issue of notice u/s 143(2) of the Act. The Tribunal upheld
the cross-objection and quashed the entire reassessment proceedings on the
finding that the same stood vitiated as the AO lacked jurisdiction in absence
of notice u/s 143(2) of the Act.

In an appeal arising
from the decision of the Tribunal, the issue that arose before the High Court
was the effect of absence of notice u/s 143(2) of the Act. The assessee relied
upon the decision of the Supreme Court in Assistant Commissioner of
Income Tax and Anr. vs. Hotel Blue Moon (2010) 321 ITR 362 (SC). On the
other hand, reliance was placed by the Revenue on the provisions of section
292BB of the Act to submit that the respondent having participated in the
proceedings, the defect, if any, stood completely cured.

The
High Court dismissed the appeal in view of the decision of the Supreme Court in
Hotel Blue Moon (Supra).

According to the Supreme
Court, the law on the point as regards applicability of the requirement of
notice u/s 143(2) of the Act was quite clear from the decision in the Blue
Moon case. However, the issue that needed to be considered was the
impact of section 292BB of the Act.

The Supreme Court
observed that according to section 292BB of the Act, if the assessee had
participated in the proceedings, by way of legal fiction, notice would be
deemed to be valid even if there be infractions as detailed in the said
section. The scope of the provision is to make service of notice having certain
infirmities to be proper and valid if there was requisite participation on part
of the assessee. According to the Supreme Court, the section does not save
complete absence of notice. For section 292BB to apply, the notice must have
emanated from the Department. It is only the infirmities in the manner of
service of notice that the section seeks to cure. The section is not intended
to cure complete absence of notice itself.

The
Supreme Court held that since the facts on record were clear that no notice u/s
143(2) of the Act was ever issued by the Department, the findings rendered by
the High Court and the Tribunal and the conclusion arrived at were correct.
Therefore, there was no reason to take a different view in the matter. The
appeal was, therefore, dismissed.

3. Prashanti Medical
Services and Research Foundation vs. Union of India (UOI) and Others (2019) 416
ITR 485 (SC)

Business Expenditure –
Donations to notified eligible projects and schemes – Neither the appellant nor
the assessee has any right to set up a plea of promissory estoppel
against the exercise of legislative power such as the one exercised while
inserting sub-section (7) in section 35AC of the Act, more so when it was made
applicable uniformly to all alike the appellant prospectively – No deduction
could be allowed to an assessee either for the period 2017-2018 or for any
subsequent period for any amount received by the appellant from such assessee
for their project

The appellant is a
charitable trust registered under the provisions of the Bombay Public Trust
Act, 1950. It set up a heart hospital in Ahmedabad. The project began in the
year 2014 (on 5^th May, 2014).

On
27^th September, 2014, the appellant filed an application u/s 35AC of
the Act before the National Committee for Promotion of Social and Economic
Welfare, Department of Revenue, North Block, New Delhi (‘the Committee’) for
grant of approval to their hospital project as specified in section 35AC of the
Act so as to enable any ‘assessee’ to incur expenditure by way of making
payment of any amount to the appellant for construction of their approved
hospital project and accordingly claim appropriate deduction of such payment
from their total income during the previous year. Like the appellant, several
persons, as specified in section 35AC of the Act, also made applications to the
Committee for grant of approval to their hospital projects.

A notification was
issued by the Government of India on 7^th December, 2015 mentioning
therein that the Committee has approved 28 projects as ‘eligible projects’ u/s
35AC of the Act. The name of the appellant appeared at serial No. 10 in the
said notification.

According to the
appellant, they received amounts by way of donation from several assessees
during the years 2015-2016, 2016-2017 and 2017-18. These assessees then claimed
deduction of the amounts, which they had donated for the hospital project, from
their total income.

The benefit of claiming
deduction was, however, discontinued from the assessment year 2018-2019 by
insertion of sub-section (7) in section 35AC of the Act by the Finance Act,
2016 with effect from 1^st April, 2017.

The appellant in the petition
questioned the constitutional validity of sub-section (7) of section 35AC of
the Act inter alia on the ground that once the Committee granted
approval to the appellant’s hospital project for a period of three financial years,
the same could not be withdrawn qua the appellant on the strength of
insertion of sub-section (7) in section 35AC of the Act. In other words, the
challenge was on the ground that sub-section (7) of section 35AC was
essentially prospective in nature and, therefore, it would have no application
to those projects which were approved by the Committee prior to insertion of
sub-section (7), i.e., 1^st April, 2017. The challenge was also on
the ground that the Revenue could not apply sub-section (7) retrospectively and
withdraw the benefits, whether fully or partially, which were approved to the
appellant. It was, therefore, contended that the appellant and the assessees
should be held entitled to avail the full benefit for the three financial years
in terms of the notification dated 7^th December, 2015.

The High Court, in the
impugned order, repelled the challenge and while upholding the pleas raised by
the respondent (Revenue) dismissed the appellant’s petition, which gave rise to
filing of the appeal before the Supreme Court by the appellant after obtaining
special leave from the Court.

The Supreme Court noted
that one of the main objects for which section 35AC was enacted was to allow
the assessees to claim deduction of the amount paid by them to the appellant
for their project. It observed that none of the assessees (donees), who claimed
to have paid amounts to any eligible projects, came forward complaining that
despite their donating the amount to the appellant for his project they were
denied the benefit of claiming deduction of such amount from their total income
by virtue of sub-section (7) of section 35AC of the Act during the financial
year 2017-2018.

The Supreme Court noted
that the benefit of the deduction available u/s 35AC of the Act was duly
availed of by all the assessees for two financial years, namely, 2015-2016 and
2016-2017. The dispute was confined only to the third financial year, i.e.,
2017-2018, because for that year, the assessees were not allowed to claim
deduction of the amount paid by them to the appellant on account of insertion
of sub-section (7) in section 35AC of the Act with effect from 1^st
April, 2017.

The Court was of the
view that sub-section (7) was prospective in its operation and, therefore, all
the assessees were rightly allowed to claim deduction of the amount paid by
them to eligible projects from their total income during two financial years,
namely, 2015-2016 and 2016-2017. If sub-section (7) had been retrospective in
its operation then the deduction for 2015-2016 and 2016-2017, too, would have
been disallowed.

The Supreme Court held
that a plea of promissory estoppel is not available to an assessee
against the exercise of legislative power, nor any vested right accrues to an
assessee in the matter of grant of any tax concession to him. In other words,
neither the appellant nor the assessee has any right to set up a plea of
promissory estoppel against the exercise of legislative power such as
the one exercised while inserting sub-section (7) in section 35AC of the Act,
more so when it was made applicable uniformly to all alike the appellant
prospectively.

According to the Supreme
Court no deduction could be allowed to an assessee either for the period
2017-2018 or for any subsequent period for any amount received by the appellant
from such assessee for their project.

The
Supreme Court observed that in a taxing statute, a plea based on equity or /
and hardship is not legally sustainable. The constitutional validity of any
provision and especially taxing provision cannot be struck down on such
reasoning.

The Supreme Court
dismissed the appeal finding it to be without any merit.

BCAJ Admin

Glimpses Of Supreme Court Rulings

16. Business Income – Section 28(iv) of the Act
does not apply to a case where the receipt is in the nature of cash or money –
Section 41(1) of the Act does not apply in case of a waiver of loan as it does
not amount to cessation of trading liability.

The Commissioner
vs. Mahindra and Mahindra Ltd.

(2018) 404
ITR 1 (SC)

The Respondent [assessee],
way back, decided to expand its jeep product line by including FC-150 and
FC-170 models. For this purpose, on 18.06.1964, it entered into an agreement
with Kaiser Jeep Corporation (for short ‘the KJC’) based in America wherein KJC
agreed to sell the dies, welding equipments and die models to the Assessee. The
final price of the tooling and other equipments was agreed at $6,50,000
including cost, insurance and freight (CIF). Meanwhile, the Respondent took all
the requisite approvals from the concerned Government Departments. The said
toolings and other equipments were supplied by the Kaiser Jeep Corporation
through its subsidiary Kaiser Jeep International Corporation (KJIC).

However, for the
procurement of the said toolings and other equipments, the KJC agreed to
provide loan to the Respondent at the rate of 6% interest repayable after 10
years in installments. For this purpose, the Respondent addressed a letter dated
07.06.1965 to the Reserve Bank of India (RBI) for the approval of the said loan
agreement. The RBI and the concerned Ministry approved the said loan agreement.

Later on, it was informed
to the Respondent that the American Motor Corporation (AMC) had taken over the
KJC and also agreed to waive the principal amount of loan advanced by the KJC
to the Respondent and to cancel the promissory notes as and when they got
matured. The same was communicated to the Respondent vide letter dated
17.02.1976.

On 30.06.1976 the
Respondent filed its return for the assessment year 1976-77 and shown Rs.
57,74,064/- as cessation of its liability towards the American Motor
Corporation. After perusal of the return, the Income Tax Officer (ITO)
concluded that with the waiver of the loan amount, the credit represented
income and not a liability. Accordingly, the ITO, vide order dated 03.09.1979,
held that the sum of Rs. 57,74,064/- was taxable u/s. 28 of the Act.

Being dissatisfied, the
Respondent preferred an appeal before the Commissioner of Income Tax (Appeals).
After perusal of the matter, learned CIT (Appeals), vide order dated
23.03.1981, dismissed the appeal and upheld the order of the ITO with certain
modifications.

Being aggrieved, the
Respondent as well as the Revenue preferred appeals before the Tribunal. The
Tribunal, vide order dated 16.08.1982, set aside the order passed by learned
CIT (Appeals) and decided the case in favour of the Respondent.

Being aggrieved, the
Revenue filed a Reference before the High Court at Bombay. In that Reference,
three applications were filed, one by the Assessee and rest two by the Revenue.
Vide impugned common judgment and order dated 29.01.2003, the High Court confirmed
certain findings of the Tribunal in favour of the Respondent.

On
further appeal filed by the Revenue, the Supreme Court observed that the short
point for consideration before it was whether in the present facts and
circumstances of the case the sum of Rs. 57,74,064/- due by the Respondent to
Kaiser Jeep Corporation which later on waived off by the lender constitute
taxable income of the Respondent or not?

According to the Supreme
Court, the term “loan” generally refers to borrowing something,
especially a sum of cash that is to be paid back along with the interest
decided mutually by the parties. In other terms, the debtor is under a
liability to pay back the principal amount along with the agreed rate of
interest within a stipulated time.

The Supreme Court observed
that it is a well-settled principle that creditor or his successor may exercise
their “Right of Waiver” unilaterally to absolve the debtor from his
liability to repay. After such exercise, the debtor is deemed to be absolved from
the liability of repayment of loan subject to the conditions of waiver. The
waiver may be a partly waiver i.e., waiver of part of the principal or interest
payable, or a complete waiver of both the loan as well as interest amounts.
Hence, waiver of loan by the creditor results in the debtor having extra cash
in his hand. It is receipt in the hands of the debtor/Assessee.

According to the Supreme
Court, the short but cogent issue in the instant case was whether waiver of
loan by the creditor is taxable as a perquisite u/s. 28 (iv) of the Act or
taxable as a remission of liability u/s. 41 (1) of the Act.

The Supreme Court held that
on a plain reading of section 28 (iv) of the Act, prima facie, it
appeared that for the applicability of the said provision, the income which
could be taxed should arise from the business or profession. Also, in order to
invoke the provision of section 28 (iv) of the Act, the benefit which is
received has to be in some other form rather than in the shape of money.

In the present case, it was
a matter of record that the amount of Rs. 57,74,064/- was a cash receipt due to
the waiver of loan. Therefore, the very first condition of section 28 (iv) of
the Act, which says any benefit or perquisite arising from the business shall
be in the form of benefit or perquisite other than in the shape of money, was
not satisfied in the present case. Hence, according to the Supreme Court, in no
circumstances, it could be said that the amount of Rs. 57,74,064/- could be
taxed under the provisions of section 28 (iv) of the Act.

The Supreme Court further
held that on a perusal of the provisions of section 41(1) of the Act, it was
evident that it is a sine qua non that there should be an allowance or
deduction claimed by the Assessee in any assessment for any year in respect of
loss, expenditure or trading liability incurred by the Assessee. Then,
subsequently, during any previous year, if the creditor remits or waives any such
liability, then the Assessee is liable to pay tax u/s. 41 of the Act.

The objective behind this
section was simple. It was made to ensure that the Assessee does not get away
with a double benefit once by way of deduction and another by not being taxed
on the benefit received by him in the later year with reference to deduction
allowed earlier in case of remission of such liability.

It was undisputed fact that
the Respondent had been paying interest at 6% per annum to the KJC as per the
contract, but the Assessee never claimed deduction for payment of interest u/s.
(1) (iii) of the Act. In the case at hand, learned CIT (A) relied upon section
41 (1) of the Act and held that the
Respondent had received amortisation benefit. Amortisation is an accounting
term that refers to the process of allocating the cost of an asset over a
period of time, hence, it is nothing else than depreciation.

Depreciation is a reduction
in the value of an asset over time, in particular, to wear and tear. Therefore,
the deduction claimed by the Respondent in previous assessment years was due to
the deprecation of the machine and not on the interest paid by it.

Moreover, the purchase
effected from the Kaiser Jeep Corporation was in respect of plant, machinery
and tooling equipments which were capital assets of the Respondent. The said
purchase amount had not been debited to the trading account or to the profit or
loss account in any of the assessment years.

There is difference between
‘trading liability’ and ‘other liability’. Section 41 (1) of the Act
particularly deals with the remission of trading liability. Whereas in the
instant case, waiver of loan amounted to cessation of liability other than
trading liability. Hence, according to the Supreme Court, there was no force in
the argument of the Revenue that the case of the Respondent would fall u/s. 41 (1)
of the Act.

The Supreme Court dismissed
the appeal of the Revenue.

17. Reassessment – Section 147 of the Act does
not allow the re-assessment of an income merely because of the fact that the
assessing officer has a change of opinion with regard to the interpretation of
law differently on the facts that were well within his knowledge even at the
time of assessment

Income Tax
Officer vs. TechSpan India Private Ltd. and Ors. (2018) 404 ITR 10 (SC).

TechSpan India Private Ltd.
– the Respondent, was engaged in the business of development and export of
computer softwares and human resource services. It was eligible for deduction
u/s. 10A of the Act.

On 25.10.2001, the
Respondent filed its return of income for the assessment year 2001-02 declaring
a loss of Rs. 3,31,301/-. The Respondent, while filing the return for the
aforementioned period, has declared its income from two sources, namely,
software development and human resource development but claimed expenses
commonly for both. It also claimed deduction under Section 10A of the IT Act
for the income from the software development. The said return was accepted and
accordingly intimated to the Respondent.

The return was selected for
regular assessment under Section 143(3) of the Act and a show cause notice
dated 09.03.2004 was issued to the Respondent to show cause as to why the
expenses claimed with regard to the allocation of common expenses between the
two heads, viz., software development and human resource development do not
reveal any basis for such allocation. The issue was duly contested and decided
vide order dated 29.11.2004 and the proceedings ended with a rectification of
the Assessment Order u/s. 154 of the Act while arriving at an income of Rs. 31,63,570/-
which was fully set-off against the loss brought forward and the income was
assessed as ‘Nil’ for the assessment year 2001-2002.

On 10.02.2005, a Notice was
served upon the Respondent by the Revenue for re-opening the assessment u/s.
148 on the ground that the deduction u/s. 10A of the Act has been allowed in
excess and the income escaped assessment worked out to Rs. 57,36,811/- in the
original assessment. The Respondent filed a detailed reply objecting to the
re-assessment. However, by order dated 17.08.2005, the objections were rejected
and reassessment was approved by the Revenue.

Being aggrieved, the
Respondent challenged the above said show cause notice dated 10.02.2005 as well
as the order dated 17.08.2005 before the High Court. Vide judgement and order
dated 24.02.2006, the High Court set aside the show cause notice dated
10.02.2005 as well as the re-assessment order dated 17.08.2005.

Being aggrieved, the
Revenue has filed this appeal before the Supreme Court.

According to the Supreme Court,
the only point for consideration before it was whether the re-opening of the
completed assessment was justified in the present facts and circumstances of
the case?

The Supreme Court held that
the language of section 147 makes it clear that the assessing officer certainly
has the power to re-assess any income which escaped assessment for any
assessment year subject to the provisions of sections 148 to 153. However, the
use of this power is conditional upon the fact that the assessing officer has some
reason to believe that the income has escaped assessment. The use of the words
‘reason to believe’ in section 147 has to be interpreted schematically as the
liberal interpretation of the word would have the consequence of conferring
arbitrary powers on the assessing officer who may even initiate such
re-assessment proceedings merely on his change of opinion on the basis of same
facts and circumstances which has already been considered by him during the
original assessment proceedings. Such could not be the intention of the
legislature. The said provision was incorporated in the scheme of the Act so as
to empower the Assessing Authorities to re-assess any income on the ground
which was not brought on record during the original proceedings and escaped his
knowledge; and the said fact would have material bearing on the outcome of the
relevant assessment order.

According to the Supreme
Court, section 147 of the Act does not allow the re-assessment of an income
merely because of the fact that the assessing officer has a change of opinion
with regard to the interpretation of law differently on the facts that were
well within his knowledge even at the time of assessment. Doing so would have
the effect of giving the assessing officer the power of review and section 147
confers the power to re-assess and not the power to review.

To check whether it is a
case of change of opinion or not one has to see its meaning in literal as well
as legal terms. The word change of opinion implies formulation of opinion and
then a change thereof. In terms of assessment proceedings, it means formulation
of belief by an assessing officer resulting from what he thinks on a particular
question. It is a result of understanding, experience and reflection.

There is a conceptual difference
between power to review and power to re-assess. The Assessing Officer has no
power to review; he has the power to re-assess. But re-assessment has to be
based on fulfillment of certain pre-condition and if the concept of
“change of opinion” is removed, as contended on behalf of the
Department, then, in the garb of re-opening the assessment, review would take
place.

One must treat the concept
of “change of opinion” as an in-built test to check abuse of power by
the Assessing Officer. Hence, after 1^st April, 1989, Assessing
Officer has power to re-open, provided there is “tangible material”
to come to the conclusion that there is escapement of income from assessment.
Reasons must have a live link with the formation of the belief.

Before interfering with the
proposed re-opening of the assessment on the ground that the same is based only
on a change in opinion, the court ought to verify whether the assessment
earlier made has either expressly or by necessary implication expressed an
opinion on a matter which is the basis of the alleged escapement of income that
was taxable. If the assessment order is non-speaking, cryptic or perfunctory in
nature, it may be difficult to attribute to the assessing officer any opinion
on the questions that are raised in the proposed re-assessment proceedings.

Every attempt to bring to
tax, income that has escaped assessment, cannot be absorbed by judicial
intervention on an assumed change of opinion even in cases where the order of
assessment does not address itself to a given aspect sought to be examined in
the re-assessment proceedings.

According to the Supreme
Court, the fact in controversy in this case was with regard to the deduction
u/s. 10A of the IT Act which was allegedly allowed in excess. The show cause
notice dated 10.02.2005 reflected the ground for re-assessment in the present
case, that is, the deduction allowed in excess u/s. 10A and, therefore, the
income had escaped assessment to the tune of Rs. 57,36,811. In the order in
question dated 17.08.2005, the reason purportedly given for rejecting the
objections was that the Assessee was not maintaining any separate books of
accounts for the two categories, i.e., software development and human resource
development, on which it has declared income separately.

However, a bare perusal of
notice dated 09.03.2004 which was issued in the original assessment proceedings u/s. 143 made it clear that
the point on which the re-assessment proceedings were initiated, was well
considered in the original proceedings. In fact, the very basis of issuing the
show cause notice dated 09.03.2004 was that the Assessee was not maintaining
any separate books of account for the said two categories and the details filed
did not reveal proportional allocation of common expenses made to these
categories. Even the said show cause notice suggested how proportional
allocation should be done.

All these things lead to an
unavoidable conclusion that the question as to how and to what extent deduction
should be allowed u/s. 10A of the IT Act was well considered in the original
assessment proceedings itself. Hence, initiation of the re-assessment
proceedings u/s. 147 by issuing a notice u/s. 148 merely because of the fact
that now the Assessing Officer was of the view that the deduction u/s. 10A was
allowed in excess, was based on nothing but a change of opinion on the same
facts and circumstances which were already in his knowledge even during the
original assessment proceedings.

In light of the forgoing
discussion, the Supreme Court held that impugned judgement and order of the
High Court dated 24.02.2006 did not call for any interference. The appeal was
accordingly dismissed with no order as to costs.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

1.
The Peerless General Finance
and Investment Company Ltd. vs. CIT (2019) 416 ITR 1 (SC)

Capital or revenue receipt – Deposits by
way of subscription pursuant to investment schemes made by subscribers which
have never been forfeited are capital receipts – Nature of receipt cannot be
decided only by the treatment of such subscriptions in the accounts of the
assessee

The assessee company had floated various
schemes which required subscribers to deposit certain amounts by way of
subscriptions in its hands and, depending upon the scheme in question, these
subscribed amounts at the end of the scheme were ultimately repaid with
interest. The schemes also contained forfeiture clauses as a result of which
if, midway, a certain amount was forfeited, then the said amount would
immediately become income in the hands of the assessee.

For the assessment years 1985-86 and
1986-87, the AO treated these amounts as income inasmuch as under the
accounting system followed by the assessee, these amounts were credited to the
profit and loss account for the years in question as income. The Commissioner
of Income Tax (Appeals) dismissed the appeal from the original assessment
orders and confirmed the same. The Income Tax Appellate Tribunal, on the other
hand, allowed the appeals by relying upon the judgement of this Court in Peerless
General Finance and Investment Co. Limited and Anr. vs. Reserve Bank of India,
(1992) 2 SCC 343 in which, according to the Appellate Tribunal, the
Supreme Court finally decided the question in the assessee’s own case stating
that such amounts cannot be treated to be income but are in the nature of
capital receipts. This was not only because of the interpretation of an RBI
circular of 1987, but also because, on general principles, such amounts must be
treated to be capital receipts or otherwise they would violate the provisions
of the Companies Act.

It further went through the various clauses
contained in the scheme and found that in point of fact no subscription
certificate had, in fact, been forfeited as a result of which it was clear that
there would be no income in the hands of the assessee for these two years. It
also dealt with certificates that were surrendered prior to the stated time and
stated that in such cases whatever would remain as surplus in the hands of the
assessee would be treated as income. It went on to state that there would be no
estoppel in law against the assessee making a claim that these amounts
were in the nature of capital receipts and not income, and also relied upon
certain judgements of the Supreme Court to buttress the proposition that the
Supreme Court had also held that what is the true position in law cannot be
deflected by what the assessee may or may not do in its treatment of the matter
at hand in its accounts. The appeal against the order of the Commissioner of
Income Tax (Appeals) was allowed by the Income Tax Appellate Tribunal.

In the first round, the High Court, by its
judgement dated 9^th September, 1999 stated that since no question of
law arose, the reference applications before it were dismissed.

The Supreme Court, by an order dated 3^rd
December, 2002 set aside the High Court judgement and referred the questions of
law to the High Court.

On remand, the High Court, by the impugned
judgement dated 6^th October, 2005, allowed the appeal against the
Appellate Tribunal holding that a perusal of the subscription scheme of the
company showed that since forfeiture of the amounts deposited was possible,
this amount should be treated as income and not as a capital receipt. Further,
it relied heavily upon the fact that the assessee had itself treated such amounts
as income and credited them to its profit and loss account for the years in
question and would, therefore, be estopped by the same. Referring to the
judgement of the Supreme Court in Peerless General Finance and Investment
Co. Limited (Supra), it went on to state that since the said judgement
dealt with an RBI circular of 1987, which itself was only prospective, any law
declared as to the effect of clause 12 of that circular would be prospective in
nature and would, therefore, not apply to the assessment years in question.

On an appeal by the assessee company, the
Supreme Court observed that the question raised in the appeal was as to whether
receipts of subscriptions in the hands of the assessee company for the previous
years relevant to the assessment years 1985-86 and 1986-87 should be treated as
income and not capital receipts inasmuch as the assessee has in its books of
accounts shown this sum as income.

The Supreme Court noted that the
subscriptions were received in the years in question from the public at large
under a collective investment scheme and these subscriptions were never at any
point of time forfeited. It observed that this being the case and surrendered
certificates not being the subject matter of the appeal before it, it was clear
that even on general principles deposits by way of amounts pursuant to these
investment schemes made by subscribers which have never been forfeited could
only be stated to be capital receipts.

The Supreme
Court held that while it was true that there was no direct focus of the Court
on whether subscriptions so
received were capital or revenue in nature, still the Supreme Court had also,
on general principles, held that such subscriptions would be capital receipts
and if they were treated to be income it would violate the Companies Act. It
was, therefore, incorrect to state, as had been stated by the High Court, that
the decision in Peerless General Finance and Investment Co. Limited
(Supra) must be read as not having laid down any absolute proposition
of law that all receipts of subscription at the hands of the assessee for these
years must be treated as capital receipts.

The Supreme Court reiterated that though its
focus was not directly on this, yet, a pronouncement by the Supreme Court, even
if it could not be strictly called the ratio decidendi of the judgement,
would certainly be binding on the High Court. Even otherwise, it was clear that
on general principles also such subscription could not possibly be treated as
income. In cases of this nature it would not be possible to go only by the
treatment of such subscriptions in the hands of accounts of the assessee itself.

In the circumstances, the Supreme Court set
aside the judgement of the High Court and restored that of the Income Tax
Appellate Tribunal. The appeal was allowed.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

18. Tapan Kumar Dutta vs. Commissioner of Income
Tax, West Bengal (24.04.2018) (2018) 404 ITR 28 (SC)

Search and seizure – Assessment of third person – A notice u/s.
158BD could be issued to a person with respect to whom search was not conducted
but undisclosed income was found as belonging to such person from the material
seized from the residence or business premises of the person with respect to
whom search was made u/s. 132 – Notice issued u/s. 158BC together with notice
issued on the person searched not valid – Subsequent notice u/s. 158BD was
valid

The Appellant was a partner in a
Partnership Firm by name “Nityakali Rice Mill” (in short ‘the Firm’).
On 06.11.1998, a search was conducted at the business premises of the Firm by
the Income Tax Department and several documents/books including a sum of Rs. 34
lakh were seized.

Thereafter, on 09.09.1999, a notice
was issued to the Appellant by the Assessing Officer u/s. 158BC of the Income
Tax Act, 1961 (in short ‘the IT Act’) to prepare and file a true and correct
return of his total income including the undisclosed income in respect of which
he was assessed for the block period 1989-90 to 1999-2000. On the very same
day, a separate notice u/s. 158BC was issued in the name of the said Firm by
the very same Assessing Officer. Pursuant to the same, the Appellant filed his
block return for the aforesaid period on 08.11.1999 declaring his aggregate
undisclosed income at Rs. 14 lakh.

Meanwhile, an application was filed
by the Appellant before the Additional Commissioner of Income Tax, Asansol,
praying for his intervention and issue of necessary direction to the Assessing
Officer u/s. 144A of the IT Act. On 14.08.2000, the Additional Commissioner
perused the records and directed the Assessing Officer to take appropriate
steps in order to determine the income of the Assessee. The Additional
Commissioner issued separate directions u/s. 144A of the IT Act in the cases of
Nitya Kali Rice Mill, Kartick Dutta, Shambhu Mondal and Tamal Mondal and the
Draft Assessment Order u/s. 158BC of the IT Act was sent to the Joint
Commissioner of Income Tax, Burdwan, Range-2 for approval which was returned by
the Joint Commissioner on 16.11.2000 stating that no warrant for authorisation
was issued in the names of the persons mentioned in the Draft Assessment Order.

On 20.11.2000, Block Assessment
Order was passed by the Deputy Commissioner of Income Tax stating that the
return filed in the case of the Firm should be accepted as ‘Nil’ income and
also directed to initiate proceedings against the Appellant for the assessment
of undisclosed income for the block period u/s. 158BD of the IT Act. Pursuant
to the order dated 20.11.2000, a fresh notice u/s. 158BC read with section
158BD of the IT Act was issued to the Appellant to file the block return for
the period 1989-90 to 1999-2000. Consequently, the Appellant intimated the
Assessing Officer through a letter dated 21.10.2002 that the block return has
already been filed for the aforesaid period on 08.11.1999. Further, the issue
of fresh notice does not extend the time allowed for completion of the
assessment under Chapter XIV of the IT Act.

On 29.11.2002, the Assessing
Officer passed the assessment order while assessing the undisclosed income of
the Appellant to the tune of Rs. 3,48,56,430/. Being aggrieved, the Appellant
preferred an appeal before the Commissioner of Income Tax (Appeals). Vide order
dated 18.09.2003, the Commissioner of Income Tax (Appeals) held that the
undisclosed income of the block period in the instant case should be taken in
the aggregate sum of Rs. 66,55,911/- as against Rs. 3,48,56,430/- as assessed
by the Assessing Officer.

Being aggrieved, the Appellant
preferred an Appeal before the Tribunal. At the same time, the Revenue also
went in appeal before the Tribunal. The Tribunal, vide order dated 29.04.2005,
dismissed the appeal filed by the Appellant while partly allowing the appeal
filed by the Revenue. Being aggrieved, the Appellant filed an appeal before the
High Court. Vide judgment and order dated 17.11.2005, the Division Bench had
dismissed the appeal filed by the Assessee.

Being aggrieved by the judgment and
order dated 17.11.2005, the Appellant has preferred this appeal before the
Supreme Court.

According to the Supreme Court, the
only point for consideration before it was whether in the facts and
circumstances of the present case, the issue of second (fresh) notice u/s.
158BD of the IT Act was valid or not?

The Supreme Court noted that in the
instant case, it was a matter of dispute that second notice issued on
20.11.2000 was not valid and competent since the first notice issued by the
same Assessing Officer dated 09.09.1999 u/s. 158BC was valid and the assessment
ought to be made in pursuance of that notice and, therefore, the Assessing
Officer had no authority to issue the second notice.

The Supreme Court considered the
provisions of section 158BD and observed that a notice u/s. 158BD could be
issued to a person with respect to whom search was not conducted but
undisclosed income was found as belonging to such person from the material
seized from the residence or business premises of the person with respect to
whom search was made u/s. 132.

Section 158BD speaks of the
condition that “where the Assessing Officer is satisfied that any
undisclosed income belongs to any person other than the searched person”,
which means that the Assessing Officer must have to be satisfied that any
undisclosed income belongs to any person other than the searched person.

According to the Supreme Court, in
the present case, it was not in dispute that the Assessing Officer, who was
assessing the Firm as well as the Appellant, was the same person. In other
words, the same Assessing Officer having jurisdiction over the searched person
could proceed against the present Appellant. Therefore, the present Assessing
Officer had jurisdiction to proceed against the present Appellant to make a
block assessment under Chapter XIV-B of the IT Act, in case the Assessing
Officer was prima facie satisfied that any undisclosed income belonged
to the present Appellant.

The Supreme Court held that at the
time when notice u/s. 158BC was issued by the Assessing Officer to Nitya Kali
Rice Mill, it was not necessary for the Assessing Officer to arrive at a
satisfaction that any undisclosed income belongs to Nitya Kali Rice Mill. A
search was conducted against Nitya Kali Rice Mill under section 132 of the Act.
Since the notice u/s. 158BC issued to Nitya Kali Rice Mill and the notice u/s.
158BC issued to the Appellant were on the same day i.e., on 09.09.1999, the
question of coming to a satisfaction that any undisclosed income based on
seized books of accounts or documents or assets belonged to the present
Appellant did or could not arise inasmuch as no reasonable or prudent man can
come to such satisfaction unless the seized books of accounts or documents or
assets are perused, examined and verified.

Therefore, the Assessing Officer
was right in arriving at a decision that the notice u/s. 158BC issued to the
present Appellant on 09.09.1999 did not satisfy the requirement of section
158BD of the Act. He, therefore, rightly proceeded to issue fresh notice
(second Notice) u/s. 158BD on 20.11.2000 after recording a satisfaction that
any undisclosed income based on seized books of account or document or assets
or other materials may belong to the Appellant. In fact, in the present case,
the AO had himself come to a conclusion that the notice issued u/s. 158BC on
09.09.1999 to the Assessee was not in conformity with the requirement of
section 158BD of the Act. The Assessing Officer had proceeded u/s. 158BD of the
Act not in pursuance of any direction by the Joint Commissioner but after being
satisfied that the case squarely fell within the ambit of section 158BD of the
Act.

The Supreme Court, therefore,
dismissed the appeal concluding that the High Court was right in passing the
judgment and order dated 17.11.2005.

19. Addl. Commissioner of Income Tax vs. Bharat
V. Patel (24.04.2018) (2018) 404 ITR 37 (SC)

Perquisite – The Respondent got the Stock Appreciation Rights
(SARs) and, eventually received an amount on account of its redemption prior to
01.04.2000 on which date the amendment of Finance Act, 1999 (27 of 1999) came
into force – In the absence of any express statutory provision regarding the
applicability of such amendment from retrospective effect, the said amount was
not liable to pay tax

The Respondent was employed as the
Chairman-cum-Managing Director of the (P&G) India Ltd., at the relevant
time and the said company is the subsidiary of (P&G) USA through Richardson
Vicks Inc. USA and that (P&G) USA owned controlling equity. The Respondent
was working as a salaried employee. The (P&G) USA was the company who had
issued the Stock Appreciation Rights (SARs.) to the Respondent without any
consideration from 1991 to 1996. The said SARs were redeemed on 15.10.1997 and
in lieu of that the Respondent received an amount of Rs. 6,80,40,724/- from
(P&G) USA. However, when the Respondent filed his return for the Assessment
Year:1998-99, he claimed this amount as an exemption from the ambit of Income
Tax.

The Tribunal was of the view that
the stock options are capital assets and such assets in the instant case
acquired for consideration, hence, gain arising therefrom is liable to capital
gain tax. However, the stand of the Revenue before the Tribunal was that the
amount in question is taxable as perquisite u/s. 17(2)(iii) of the Act or in
alternatively u/s. 28(iv) of the Act instead of capital gains. The High Court
also upheld the view of the Tribunal but the High Court disagreed that such
capital gains arose to the Respondent on redemption of Stock Appreciation
Rights since there was no cost of acquisition involved from the side of the
Respondent.

The Supreme Court, before examining
the case at hand, considered the meaning of the words “Perquisite”
and “Capital Gains”. According to the Supreme Court, the word “Perquisite”
in common parlance may be defined as any perk or benefit attached to an
employee or position besides salary or remuneration. Broadly speaking, these
are usually non-cash benefits given by an employer to an employee in addition
to entitled salary or remuneration. It may be said that these benefits are
generally provided by the employers in order to retain the talented employees
in the organisation. There are various instances of perquisite such as
concessional rent accommodation provided by the employer, any sum paid by an
employer in respect of an obligation which was actually payable by the employee
etc. Section 17(2) of the Act was enacted by the legislature to give the broad
view of term perquisite. On the other hand, the word ‘Capital Gains’ means a
profit from the sale of property or an investment. It may be short term or long
term depending upon the facts and circumstances of each case. This gain or
profit is charged to tax in the year in which transfer of the capital assets
takes place.

According to the Supreme Court, in
the instant case, the fundamental question which arose for its consideration
was with regard to the taxability of the amount received by the Respondent on
redemption of Stock Appreciation Rights (SARs.).

The Supreme Court noted that,
particularly, in order to bring the perquisite transferred by the employer to
the employees within the ambit of tax, legislature brought an amendment u/s. 17
of the Act by inserting clause (iiia) in section 17(2) of the Act through the
Finance Act, 1999 (27 of 1999) with effect from 01.04.2000, which was later on
omitted by the Finance Act, 2000.

According to the Supreme Court, the
intention behind the said amendment brought by the legislature was to bring the
benefits transferred by the employer to the employees as in the instant case,
within the ambit of the Income Tax Act, 1961. It was the first time when the
legislature specified the meaning of the cost for acquiring specific
securities. Only by this amendment, legislature determined what would
constitute the specific securities. By this amendment, legislature clearly
covered the direct or indirect transfer of specified securities from the
employer to the employees during or after the employment. On a perusal of the
said clause, it was evident that the case of the Respondent fell under such
clause. However, since the transaction in the instant case pertained to period
prior to 01.04.2000, hence, such transaction could not be covered under the
said Clause in the absence of an express provision of retrospective effect.

The Supreme Court did not find any
force in the argument of the Revenue that the case of the Respondent would fall
under the ambit of section 17(2)(iii) of the Act instead of section 17(2)(iiia)
of the Act. The Supreme Court held that it is a fundamental principle of law
that a receipt under the Act must be made taxable before it can be treated as
income. Courts cannot construe the law in such a way that brings an individual
within the ambit of Income Tax Act to pay tax who otherwise is not liable to
pay. In the absence of any such specific provision, if an individual is
subjected to pay tax, it would amount to the violation of his Constitutional
Right.

The Supreme Court observed that on
the point of applicability of clause (iiia) of section 17(2) of the Act, it had
settled the position in Infosys Technologies Ltd. (297 ITR 167).

The Supreme Court further held that
the High Court had rightly rejected the stand of the Revenue that the amendment
brought in by section 17(2) of the Act was clarificatory, hence, retrospective
in nature.

Further, according to the Supreme
Court Circular No. 710 dated 24.07.1995 prima facie dealt with the cases
where the employer issued shares to the employees at less than the market
price. In the instant case, the Respondent was allotted Stock Appreciation
Rights (SARs.) by the (P&G) USA which was different from the allotment of
shares. Hence, such Circular had no applicability on the instant case.
Moreover, a Circular could not be used to introduce a new tax provision in a
Statute which was otherwise absent.

On the alternate contention of the
Revenue that the case of the Respondent would come within the ambit of the
28(iv) of the IT Act, the Supreme Court held that such benefit or perquisite
should have arisen from the business activities or profession whereas in the
instant case there was nothing as such. The applicability of section 28(iv) was
confined only to the case where there was any business or profession related
transaction involved. Hence, the instant case could not be covered u/s. 28(iv)
of the Act for the purpose of tax liability.

The Supreme Court summed up by
holding that, the Respondent got the Stock Appreciation Rights (SARs) and,
eventually received an amount on account of its redemption prior to 01.04.2000
on which date the amendment of Finance Act, 1999 (27 of 1999) came into force.
In the absence of any express statutory provision regarding the applicability
of such amendment from retrospective effect, it did not find any force in the
argument of the Revenue that such amendment came into force retrospectively. It
is well established Rule of interpretation that taxing provisions shall be
construed strictly so that no person who is otherwise not liable to pay tax, be
made liable to pay tax.

20. Commissioner of Income Tax vs. Container
Corporation of India Ltd. (2018) 404 ITR
397 (SC)

Infrastructure facility – Inland Container Depots (ICDs) are
Inland Ports and subject to the provisions of the section 80IA and deduction
could be claimed for the income earned out of these Depots

Container Corporation of India Ltd.
(CONCOR)-the Respondent herein, a government Company, was engaged in the
business of handling and transportation of containerised cargo and was under
the direct administrative control of Ministry of Railways. Its operating
activities were mainly carried out at its Inland Container Depots (ICDs),
Container Freight Stations (CFSs) and Port Side Container Terminals (PSCTs)
spread all over the country.

The Respondent herein filed its
returns of income for the assessment years 2003-04 to 2005-06 claiming
deduction under various heads including deduction u/s. 80-IA of the Act.

This issue is with regard to the
deduction claimed u/s. 80-IA on the profits earned from the Inland Container
Depots (ICDs) and on rolling stocks. The claim for deduction on the profits
earned from the ICDs and further the deduction on account of rolling stocks had
been rejected by the Assessing Officer.

The Respondent herein, being aggrieved with the aforesaid order,
filed an appeal to the Commissioner of Income Tax (Appeals). Learned CIT
(Appeals), partly allowed the appeal while rejecting the deduction claimed u/s.
80-IA of the Act. Being aggrieved, the Respondent herein further preferred
appeal before the Tribunal. The Tribunal, partly allowed the appeal and held
that the deduction u/s. 80-IA could be claimed with regard to the rolling stocks
of the company but not with regard to the ICDs.

Being aggrieved, the Respondent herein challenged the same before
the High Court. The Division Bench of the High Court, allowed the appeals and
held that the Respondent herein was entitled to claim deduction on the income
earned from the ICDs for the relevant period under consideration u/s. 80-IA of
the IT Act.

Being aggrieved by the judgment and
order of the High Court, the Revenue has preferred this appeal before the
Supreme Court.

According to the Supreme Court, the
only point for consideration before it was whether in the facts and
circumstances of the case the Inland Container Depots (ICDs) under the control
of the Respondent, during the relevant period, qualified for deduction u/s.
80-IA(4) of the Act or not.

The Supreme Court noted that the
ICDs function for the benefit of exporters and importers located in industrial
centers which are situated at distance from sea ports. The purpose of
introducing them was to promote the export and import in the country as these
depots acts as a facilitator and reduce inconvenience to the person who wishes
to export or import but place of his business is situated in a land locked area
i.e., away from the sea. These depots reduce the inconvenience in import and export
in the sense that it reduces the bottlenecks that are arising out of handling
and customs formalities that are required to be done at the sea ports by
allowing the same to be done at these depots only that are situated near to
them. The term ICDs was inserted in 1983 u/s. 2(12) of the Customs Act, 1962
which defines ‘customs port’ and by the provisions of section 7(1)(aa) of the
Customs Act, 1962 power has been given to the Central Board of Excise and
Custom(CBEC) to notify which place alone to be considered as Inland Container
Depots for the unloading of imported goods and the loading of export goods by
Notification in the official Gazette.

With the purpose of boosting
country’s infrastructure and specially the transport infrastructure, the
Finance Act, 1995 which came into effect from 01.04.1996 brought an amendment
to the provisions of section 80-IA of the Act. Section 80-IA of the Act talks
about deduction in respect of profits and gains from industrial undertaking or
enterprises engaged in the infrastructure development etc. The said amendment
for the first time brought a provision under which a percentage of profits
derived from the operation of infrastructure facility was allowed a deduction
while computing the income of the Assessee. A ten years tax concession was
allowed to the enterprises in accordance with the provisions of the section
subject to fulfillment of conditions given therein, which develops, maintains
and operates any new infrastructure facility such as roads, highways,
expressways, bridges, airports, ports and rail system or any other public
facility of similar nature as notified.

The said provision gives the power
to the Board to notify certain other enterprises which can avail the benefit of
section 80-IA of the Act, which do not fall within any of the specified
categories but carries out activities of similar nature.

Further, Central Board of Direct
Taxes (CBDT), in exercise of its power u/s. 80-IA(12)(ca), vide Notification
dated 01.09.1998 notified ICDs and CFSs as infrastructure facility.

In addition to the above, the
Finance Act, 1998, which came into effect on 01.04.1999, made a change in the
definition of ‘Infrastructure facility’ as is relevant to the present case. The
words ‘Inland water ways and inland ports’ were added in the definition of
infrastructure facility. A noticeable change was further
brought by the Finance Act, 2001, which came into effect from 01.04.2002, in
the terms that the power of the Board to extend the benefit of the said
provisions to any infrastructure facility of similar nature by issuing a Notification
was taken away. The new explanation to section 80-IA(4) of the Act was
substituted by the Finance Act, 2001 which defined “infrastructure
facility”.

It was contended on behalf of the
Appellant that the High Court erred in relying on the Notification issued by
CBDT to hold that the enterprises holding ICDs are allowed to claim deductions
u/s. 80-IA of the Act. As the said power of the Board was specifically taken
away by the amendment made by Finance Act, 2001, in light of the said
amendment, the Notifications which were issued by the CBDT would cease to
operate after the Assessment Year 2002-03.

The Supreme Court held that the
aforesaid argument did not have much force as the said amendment was silent
with regard to any effect it would have upon the Notifications issued earlier
by the Board in due exercise of its power. Had it been the intention of the
legislature that the Notifications issued by the Board earlier were of no
effect after 2002-03, it would have had found a place in the said amendment. In
the absence of the same, the Supreme Court was unable to concur with learned
Senior Counsel that the Notifications which were issued in legitimate exercise
of the power conferred on the Board would cease to have effect after the
Assessment Year 2002-03.

It was also contended on behalf of
the Appellant that the High Court committed a grave error in holding ICDs as
Inland Ports. It was further contended that the ICDs were never understood to
fall in the category of ‘Inland Port’ under the scheme of the Act. The argument
in support of this contention was that if the word ‘Inland Port’, as used in
the Explanation attached to section 80-IA(4) of the Act defining
‘infrastructure facility’ included ICDs, there would have been no need for the
CBDT to separately exercise its power given. The Supreme Court held that the
Notification which was issued by the CBDT came into effect on 01.09.1998 i.e.,
the time when the term ‘Inland Port’ was not in itself inserted in the
provisions of Explanation attached to section 80-IA(4) of the Act defining the
term ‘infrastructure facility’. It was inserted through Finance Act, 1998 which
came into effect from 01.04.1999. So there seems to be no conflict within the
Notification issued by the Board and the fact that the ICDs are Inland Ports or
not.

The Supreme Court further held that
the Respondent has been held entitled for the benefit of section 80IA of the
Act much before the Finance Act, 2001 which came into force on 01.04.2002 and
exemption for the period of 10 years could not be curtailed or denied by any
subsequent amendment regarding the eligibility conditions under the period is
modified or specific provision is made that the benefit from 01.04.2002 onwards
shall only be claimed by the existing eligible units if they fulfill the new
conditions.

The Supreme Court thereafter dealt
with the issue as to whether the ICDs could be termed as Inland Ports so as to
entitle it for deduction u/s. 80-IA of the Act. The Supreme Court observed that
term port, in commercial terms, is a place where vessels are in a habit of
loading and unloading goods. The term ‘Port’ as is used in the Explanation
attached to section 80-IA(4) seems to have maritime connotation perhaps that is
the reason why the word airport is found separately in the Explanation.
Considering the nature of work that is performed at ICDs, they cannot be termed
as Ports. However, taking into consideration the fact that a part of activities
that are carried out at ports such as custom clearance are also carried out at
these ICDs, the claim of the Respondent herein could be considered within the
term ‘Inland port’ as is used in the Explanation.

The Supreme Court noted that the
term ‘Inland Port’ has been defined nowhere. But the Notification that has been
issued by the Central Board of Excise & Customs (CBEC) dated 24.04.2007 in
terms holds that considering the nature of work carried out at these ICDs they
can be termed as Inland Ports. Further, the communication dated 25.05.2009
issued on behalf of the Ministry of Commerce and Industry confirming that the
ICDs are Inland Ports, fortified the claim of the Respondent herein. The
Supreme Court held that though both the Notification and communication are not
binding on CBDT to decide whether ICDs can be termed as Inland Ports within the
meaning of section 80-IA of the Act, the Appellant herein was unable to put
forward any reasonable explanation as to why these notifications and
communication should not be relied to hold ICDs as Inland Ports. Unless shown
otherwise, it could not be held that the term ‘Inland Ports’ is used
differently u/s. 80-IA of the Act. All these facts taken together clear the
position beyond any doubt that the ICDs are Inland Ports and subject to the
provisions of the section and deduction could be claimed for the income earned
out of these Depots. However, the actual computation is to be made in
accordance with the different Notifications issued by the Customs department
with regard to different ICDs located at different places.

The Supreme Court, in view of
foregoing held that the judgment of the High Court did not call for any
interference and, hence, the appeal was accordingly dismissed.

___________________________________________________________________________________________________

Corrigendum

Namaskaar printed
on Page 5 of August, 2018 Journal was contributed by K C Narang, Chartered
Accountant and not by Mukesh Trivedi, Chartered Accountant. This inadvertent
error is regretted.

BCAJ Admin

Glimpses Of Supreme Court Rulings

10. CIT vs. Essar Teleholdings Ltd.

(2018) 401 ITR 445 (SC); 31^stJanuary, 2018

Income – Disallowance of
expenditure u/s. 14A – Rule 8D was intended to operate prospectively

The Assessee (Respondent in
appeal) filed his return of income for the assessment year 2003-2004 on
01.12.2003 declaring a loss of Rs. 69,92,67,527/-. The Assessing Officer vide
its order dated 27.03.2006 held that during the year under consideration, the
Assessee company was in receipt of both taxable and non-taxable dividend
income. Accordingly, the dividend on investment exempt u/s. 10(23G) was
considered by the A.O. for the purpose of disallowance u/s. 14A. Hence,
proportionate interest relating
to investment on
which exemption u/s. 10(23G) was available as
per the working amounted to Rs. 26 crores was disallowed u/s. 14A r.w.s.
10(23G) of the I.T. Act.

The Assessee filed an appeal,
which was partly allowed by order dated 05.03.2009. The Assessee filed an
appeal before the ITAT. The ITAT allowed the Assessee’s appeal relying on the
Bombay High Court’s judgement in Godrej and Boyce Manufacturing Co. Limited
vs. Deputy Commissioner of Income Tax, Mumbai and Anr., reported in (2010)
328 ITR 81(Bom.). The ITAT held that Rule 8D is only prospective and in the
year under consideration Rule 8D was not applicable. ITAT set aside the order
of CIT(A) and restored the issue back to the file of the Assessing Officer for de
novo adjudication without invoking the provisions of Rule 8D. Against the
order of ITAT, the revenue filed an appeal before the High Court. The High
Court following its earlier judgement of Godrej and Boyce Manufacturing Co.
Limited vs. Deputy Commissioner of Income Tax, Mumbai and Anr. (supra)
dismissed the appeal. The Commissioner of Income Tax aggrieved by the judgement
of the High Court approached the Supreme Court.

According to the Supreme
Court, the only question to be considered and answered was as to whether Rule 8D
of Income Tax Rules is prospective in operation as held by the High Court or it
is retrospective in operation and shall also be applicable in the assessment
year in question as contended by the revenue.

The Supreme Court noted that
section 14A was inserted by Finance Act, 2001 and the provisions were fully
workable without their being any mechanism provided for computing the
expenditure. Although section 14A was made effective from 01.04.1962 but proviso
was immediately inserted by Finance Act, 2002, providing that section 14A shall
not empower assessing officer either to reassess u/s. 147 or pass an order
enhancing the assessment or reducing a refund already made or otherwise
increasing the liability of the Assessees u/s.154, for any assessment year
beginning on or before 01.04.2001. Thus, all concluded transactions prior to 01.04.2001 were
made final and not allowed to be re-opened.

The Supreme Court also noted
that the memorandum of explanation explaining the provisions of Finance Act,
2006 clearly mentioned that section 14A sub-section (2) and sub-section (3)
shall be effective with effect from the assessment year 2006-07, which
according to the Supreme Court was another indicator that provision was intended
to operate prospectively.

The Supreme Court observed
that the new mode of computation was brought in place by Rule 8D. No Assessing
Officer, even in his imagination could have applied the methodology, which was
brought in place by Rule 8B. Thus, retrospective operation of Rule 8B cannot be
accepted on the strength of law laid down by this Court in CWT vs. Shravan
Kumar Swarup & Sons (1994) 210 ITR 886 (SC).

The Supreme Court further
noted that Rule 8D had again been amended by Income Tax (Fourteenth Amendment)
Rules, 2016 w.e.f. 02.06.2016, by which Rule 8D sub-rule (2) had been
substituted by a new provision.

The method for determining the
amount of expenditure brought in force w.e.f. 24.03.2008 had been given a
go-bye and a new method has been brought into force w.e.f. 02.06.2016.

According to the Supreme
Court, by interpreting the Rule 8D retrospective, there would be a conflict in
applicability of 5^th & 14^th Amendment Rules which
clearly indicated that the Rule was prospective in operation, and had been
prospectively changed by adopting another methodology.

The Supreme Court took notice
of the submission of the Assessee that it is well-settled that subordinate
legislation ordinarily is not retrospective unless there are clear indications
to the same.

The Supreme Court held that
there was no indication in Rule 8D to the effect that Rule 8D intended to apply
retrospectively.

Applying the principles of
statutory interpretation for interpreting retrospectivity of a fiscal statute
and looking into the nature and purpose of sub-section (2) and sub-section (3)
of section 14A as well as purpose and intent of Rule 8D coupled with the
explanatory notes in the Finance Bill, 2006 and the departmental understanding
as reflected by Circular dated 28.12.2006, the Supreme Court was of the opinion
that Rule 8D was intended to operate prospectively.

The appeals filed by the
Revenue were therefore dismissed by the Supreme Court.

11. CIT vs. Rajasthan and Gujarati Foundation

(2018) 402 ITR 441 (SC); 13^th
December, 2017

Income of Charitable Trust –
income of a charitable trust derived from building, plant and machinery and
furniture is to be computed in a normal commercial manner after providing for
allowance for normal depreciation and deduction thereof from gross income of
the trust – Though the amount spent on acquiring the assets is treated as
application of income in the year of acquisition, still depreciation has to be
allowed on the same in the subsequent years – Amendment in section 11(6) vide
Finance (No.2) Act of 2014 noted.

In a batch of petitions and
appeals filed by the IT Department [for various assessment years including
assessment year 2006-07 in one of the appeals in which question raised brings
out the common controversy] against the orders passed by various High Courts
granting benefit of depreciation on the assets acquired by the
Respondents-assessees, the Supreme Court noted that all the Assessees were
charitable institutions registered u/s. 12A of the IT Act. For this reason, in the
previous year to the year with which it was concerned and in which year the
depreciation was claimed, the entire expenditure incurred for acquisition of
capital assets was treated as application of income for charitable purposes
u/s. 11(1)(a) of the Act. The view taken by the AO in disallowing the
depreciation which was claimed u/s. 32 of the Act was that once the capital
expenditure was treated as application of income for charitable purposes, the
Assessees had virtually enjoyed a 100 per cent write off of the cost of assets
and, therefore, the grant of depreciation would amount to giving double benefit
to the Assessee. In most of these cases, the CIT(A) had affirmed the view, but,
the Tribunal reversed the same and the High Courts had accepted the decision of
the Tribunal thereby dismissing the appeals of the IT Department.

From the judgements of the
High Courts, the Supreme Court found that the High Courts had primarily
followed the judgment of the Bombay High Court in CIT vs. Institute of
Banking Personnel Selection (2003) 264 ITR 110 (Bom). In the said
judgement, the contention of the Department predicated on double benefit was
turned down. The Supreme Court noted the reference to the decision of the
co-ordinate bench in CIT vs. Munisuvrat Jain (1994) Tax LR 1084 (Bom)
made by the High Court, in which it was held that income of a charitable trust
derived from building, plant and machinery and furniture was liable to be
computed in a normal commercial manner to be computed u/s. 11 on commercial
principles after providing for allowance for normal depreciation and deduction
thereof from gross income of the trust. The Supreme Court also noted the
reference to another decision of the co-ordinate bench in the case of Director
of IT (Exemption) vs. Framjee Cawasjee Institute (1993) 109 CTR (Bom) 463
made by the High Court, in which the Tribunal, had taken the view that when the
ITO stated that full expenditure had been allowed in the year of acquisition of
the assets, what he really meant was that the amount spent on acquiring those
assets had been treated as ‘application of income’ of the trust in the year in
which the income was spent in acquiring those assets. This did not mean that in
computing income from those assets in subsequent years, depreciation in respect
of those assets cannot be taken into account. This view of the Tribunal had
been confirmed by the High Court in the above judgement.

The Supreme Court held that
the aforesaid view taken by the Bombay High Court correctly stated the
principles of law and there was no need to interfere with the same.

The Supreme Court observed
that most of the High Courts had taken the aforesaid view with only exception
thereto by the High Court of Kerala which had taken a contrary view in Lissie
Medical Institutions vs. CIT (2012) 348 ITR 344 (Ker).

The Supreme Court noted that
the legislature, realising that there was no specific provision in this behalf
in the IT Act, has made amendment in section 11(6) of the Act vide Finance
Act No. 2/2014 which became effective from the asst. yr. 2015-16. The Supreme
Court agreed with the Delhi High Court that the said amendment was prospective
in nature.

The Supreme Court clarified
that it follows that once Assessee is allowed depreciation, he shall be
entitled to carry forward the depreciation as well.

For the aforesaid reasons, the Supreme
Court affirmed the view taken by the High Courts in these cases and dismissed
these matters.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

12. Pr. Commissioner of Income Tax vs. A.A.
Estate Pvt. Ltd. (2019) 413 ITR 438 (SC)

Appeal to the High Court – There is
a distinction between the questions proposed by the appellant for admission of
the appeal and the questions framed by the Court – The questions proposed by
the appellant fall u/s 260-A(2)(c) of the Act, whereas the questions framed by
the High Court fall u/s 260-A(3) of the Act – The appeal is to be heard on
merits only on the questions framed by the High Court under sub-section (3) of
section 260-A of the Act as provided u/s 260-A(4) of the Act – The expression
‘such question’ referred to in sub-section (5) of section 260-A of the Act means
the questions which are framed by the High Court under sub-section (3) of
section 260-A at the time of admission of the appeal and not the one proposed
in section 260-A(2)(c) of the Act by the appellant – The respondent has a right
to argue ‘at the time of hearing’ of the appeal that the questions framed are
not involved in the appeal by taking recourse to sub-section (5) of section
260-A of the Act

In the case of the
respondent-assessee who was engaged in the business of development and building
of properties, the Assessing Officer completed the assessment u/s 143(3) read
with section 153A of the Income Tax Act, 1961 for the assessment year 2008-09
and determined the total income at Rs. 7,77,49,790.

Subsequently, the AO issued a
notice u/s 148 of the Act seeking to reopen the assessment on the basis of
information received from the ADIT (Investigation). By this notice, the AO
proposed to make an addition of Rs. 1,70,94,000 towards unaccounted sale
proceeds alleged to have been made by the assessee on the basis of one
document, which was seized by the Revenue Department in their search operation
carried out on 30^th November, 2007 in the business premises of
another assessee by name M/s Ashok Buildcom Ltd.

The assessee objected to the
issuance of the notice contending inter alia that, first, there was no
factual foundation for issue of notice; second, there was no case for any
‘escaped assessment’; and third, there was no case or ‘reason to believe’.

The AO overruled these objections
and passed a re-assessment order by adding the sum of Rs. 1,70,94,000 in the
total income of the assessee.

Aggrieved at this, the assessee
filed an appeal before the CIT (Appeals). But the appeal was dismissed and the
addition made by the AO was upheld. Still aggrieved, the assessee filed a
second appeal before the ITAT. The Tribunal allowed the appeal and set aside
the order of the CIT (Appeals).

However, the Commissioner of Income
Tax felt aggrieved and filed an appeal before the High Court u/s 260-A of the
Act. By its impugned order, the High Court dismissed the appeal and affirmed
the order of the Tribunal, giving rise to the filing of the special leave to
appeal by the Commissioner of Income Tax in the Supreme Court.

The short question which therefore
arose for consideration before the Supreme Court was whether the High Court was
justified in dismissing the appeal filed by the Commissioner of Income Tax.

According to the Supreme Court, the
case had to be remanded to the High Court for the following reasons:

First, the High Court did not
formulate any substantial question of law as was required to be framed u/s
260-A of the Act.

Second, in para 2 of the impugned
order, the High Court observed that ‘Revenue urges following questions of law
for our consideration’. However, from a reading of para 2, the two questions
set out in it were not the questions framed by the High Court as were required
to be framed u/s 260-A(3) of the Act for hearing the appeal but were the
questions urged by the appellant.

According to the Supreme Court,
there is a distinction between the questions proposed by the appellant for
admission of the appeal and the questions framed by the Court. The questions
proposed by the appellant fall u/s 260-A(2)(c) of the Act, whereas the
questions framed by the High Court fall u/s 260-A(3) of the Act. The appeal is
to be heard on merits only on the questions framed by the High Court under
sub-section (3) of section 260-A of the Act as provided u/s 260-A(4) of the
Act.

Third, if the High Court was of the
view that the appeal did not involve any substantial question of law, it should
have recorded a categorical finding to that effect saying that the questions
proposed by the appellant either do not arise in the case or / and are not
substantial questions of law so as to attract the rigor of section 260-A of the
Act for its admission and, accordingly, should have dismissed the appeal in
limine.

According to the Supreme Court,
this was not done and instead the High Court without admitting the appeal and
framing any question of law had issued notice of appeal to the assessee, heard
both the parties on the questions urged by the appellant and dismissed it.
According to the Supreme Court, the respondent had a right to argue ‘at the
time of hearing’ of the appeal that the questions framed were not involved in
the appeal and this the respondent could urge by taking recourse to sub-section
(5) of section 260-A of the Act. But this stage in this case did not arise
because the High Court neither admitted the appeal nor framed any question as
required under sub-section (3) of section 260-A of the Act. The expression
‘such question’ referred to in sub-section (5) of section 260-A of the Act
means the questions which are framed by the High Court under sub-section (3) of
section 260-A at the time of admission of the appeal and not the ones proposed
in section 260-A(2)(c) of the Act by the appellant.

The Supreme Court, therefore,
concluded that the High Court had not decided the appeal in conformity with the mandatory procedure prescribed in section 260-A of the Act.

Fourth, the High Court should have
seen that the following substantial questions of law did arise in the appeal
for being answered on their respective merits:

(i) Whether the reasons contained
in notice u/s 148 are relevant and sufficient for issuance of the said notice
dated 22^nd September, 2010?

(ii) Whether any case of escaped
assessment within the meaning of section 147 read with section 148 of the Act
for the assessment year in question is made out by the Commissioner of Income
Tax on the basis of the reasons set out in the notice?

(iii) Whether a case of presumption
as contemplated u/s 132(4A) of the Act could be drawn against the assessee on
the basis of a document (Annexure AB-1) which was seized in a search operation
carried out in the business premises of another assessee, M/s Ashok Buildcom,
by adding a sum of Rs. 1,70,94,000 for determining the total tax liability of
the respondent for the year in question as an escaped assessment so as to
enable the Department to issue notice dated 22^ndSeptember, 2010 u/s
148 of the Act to the respondent?

The Supreme Court thus remanded the
case to the High Court for deciding the appeal afresh to answer the questions
framed above on merits in accordance with the law.

13. Pr. Commissioner of Income Tax vs. Ballarpur
Industries Ltd. (2019) 413 ITR 447 (SC)

Appeal to the Appellate Tribunal –
Tribunal is the final fact-finding authority – Inconsistent findings recorded
by the Tribunal – High Court dismissed the appeal – Appeal to the Supreme Court
— Matter remanded for fresh consideration

In the case of the
respondent-assessee, a limited company, which was engaged in the business of
manufacturing of various kinds of papers, a question arose before the AO in the
assessment for assessment year 1993-94 as to what was the true nature of
payment of Rs. 3.25 crores made by the assessee to one Mr. G.R. Hada pursuant
to the compromise arrived at between the assessee company and Mr. Hada in a
civil suit filed by the latter against the company and others.

According to the assessee, Mr. Hada
and the company were the joint promoters of a company called M/s Andhra Pradesh
Rayons Limited in which Mr. Hada was holding 10.25% shares and the remaining
shares were held by other promoter shareholders in different percentages. Since
the dispute arose amongst the promoter shareholders, Mr. Hada filed a civil
suit against the assessee and other promoter shareholders on the basis of an
agreement, which was entered into amongst the promoter shareholders. In the
abovementioned suit, a compromise was arrived at between the assessee and Mr.
Hada. Pursuant to the said compromise, the assessee paid a sum of Rs. 3.25
crores to Mr. Hada.

The assessee claimed a deduction of
Rs. 3.25 crores in the assessment year in question as revenue expenditure
because, according to them, they had paid the said sum to Mr. Hada for running
their business.

The AO examined the claim in the
context of the terms of the agreement and held that the claim could not be
considered as ‘revenue expenditure’. He therefore rejected the claim.

The assessee
felt aggrieved by this order and filed an appeal to the Commissioner of Income
Tax (Appeals). However, the CIT (Appeals) confirmed the addition made by the
AO.

The assessee filed a second appeal
in the Income Tax Appellate Tribunal. The Tribunal examined the question and
allowed the appeal and directed the AO to allow the deduction of Rs. 3.25
crores as claimed by the assessee.

But now the Commissioner of Income
Tax-Revenue felt aggrieved and filed an appeal in the High Court. The High
Court dismissed the appeal, which gave rise to the filing of an appeal by way
of special leave by the Revenue in the Supreme Court.

According to the Supreme Court, the
short question which arose for its consideration was whether the High Court was
justified in dismissing the appeal filed by the Commissioner of Income Tax. The
Court held that the order of the High Court as well as the order of the
Tribunal had to be set aside and the case was required to be remanded to the
Tribunal to decide the appeal filed by the assessee afresh on merits in
accordance with law for the following reasons:

In para 26 of the order, the
Tribunal has recorded a finding, which read as under:

‘…The AO did not dispute the fact
that the expenditure related to the business of the Assessee. The CIT (A),
however, reversed the findings of the AO and held that the expenditure cannot
be considered as business expenditure. A perusal of the CIT (A)’s order can
only lead to a conclusion that the CIT (A) was of the view that the expenditure
in question was not a capital expenditure but of a revenue nature…’

The aforesaid observation of the
Tribunal, on what the AO and the CIT (Appeals) held, was not correct and rather
inconsistent with the finding of the AO. The Tribunal, therefore, had not
correctly appreciated what the AO and the CIT (Appeals) had held and what was
their reasoning which led to their respective conclusions.

Having wrongly observed about their
respective reasoning and the finding, the Tribunal proceeded to examine the
case and eventually reversed the order of CIT (Appeals). The High court did not
notice the aforesaid observation of the Tribunal and upheld the order of the
Tribunal.

According to the Supreme Court, in
such a situation like the one arising in the case and keeping in view the
question involved, the matter deserved to be remanded to the Tribunal for
deciding the appeal filed by the assessee afresh on merits, because the
Tribunal being the last Court of appeal on facts its finding on the question of
facts was of significance.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

This
feature was launched in April, 2002, to summarise the direct taxes judgments of
the highest court of the country. Although Closements carried analysis of
Supreme Court decisions, this column was started as the number of decisions on
tax matters from the Supreme Court kept increasing. Kishor Karia and Atul
Jasani, the first contributors, continue to digest important cases. The feature
covers judgments other than those covered under Closements.

16.
Ravi Agrawal vs. Union of India (UOI) and Anr. (2019) 410 ITR 399 (SC)

Special Deduction u/s. 80DD in respect of
maintenance including medical treatment of a dependant who is a person with
disability – Supreme Court urged to Union of India to have a relook into this
provision considering the hardships faced by the parent/guardian of the
disabled

A Public Interest Litigation was filed by
the Petitioner in the interest of handicapped children whose parents have taken
Jeevan Aadhar Policy from the Life Insurance Corporation of India (for short,
LIC) for the livelihood of their children.

The Petitioner pointed out that even when
the entire subscription is paid under this policy meant for handicapped
persons, this policy does not have maturity claim. The amount is payable to the
dependant only on the demise of the proposer/life assured. This was in
confirmity with the requirement of section 80DD

It was the submission of the Petitioner that
by incorporating such a provision, the Respondents are denying the benefit of
the insurance to the handicapped persons to get annuity or lump sum amount
during the lifetime of the parent/guardian of such a handicapped person,
whereas the beneficiaries of other life insurance policy are getting annuity
during the lifetime of the person who has taken insurance policy. This,
according to the Petitioner, violates the fundamental right of equality of the
handicapped person enshrined in Article 14 of the Constitution.

According to the Supreme Court, in essence,
the grievance of the Petitioner was that benefit of Jeevan Aadhar policy should
not be deferred till the death of the Assessee/life assured and it should be
allowed to be utilised for the benefit of the disabled person even during the
lifetime of the Assessee.

It was the submission of the Respondent No.
1/Union of India that the aforesaid provision was specifically provided for in
the Act keeping in view the fact that the guardians of children with disability
were always faced with the grim reality about the need for maintenance of the
disabled after the death of the primary care giver, i.e. the parent or the
guardian. Many of them would like to deposit some amount during their lifetime
in some special instrument which would ensure payment of a reasonable sum
regularly to the disabled on their death. Thus, a separate deduction from Gross
Total Income of a specified amount deposited in a year in any scheme of LIC or
any other insurer specifically framed for providing recurring or lump sum
payment for the maintenance and upkeep of a handicapped dependant after the
death of the Assessee and approved by the CBDT in this behalf was incorporated
in the statute. As the scheme was designed to, to a great extent, to assuage
the anxiety in the minds of parents/guardians of handicapped dependants about
the destiny of their wards on their death and, therefore, to allow for annuity
payments to the handicapped dependant under Jeevan Aadhar policy to commence
after a certain age of the subscriber was not possible.

Meeting the argument of the Petitioner based
on Article 14 of the Constitution of India, it is argued that the deduction
u/s. 80DD of the Act had been specifically provided for persons with
disability. This was a valid classification for providing specific regime for
this class of persons.

The Supreme Court observed that section 80DD
of the Act was a provision made by the Parliament under the Act in order to
give incentive to the persons whose dependants were persons with disability.
Incentive was to give such persons concessions in income tax by allowing
deductions of the amount specified in section 80DD of the Act in case such
parents/guardians of dependants with disability take insurance policies of the
nature specified in this provision. Purpose was to encourage these
parents/guardians to make regular payments for the benefit of dependants with
disability. In that sense, the Legislature, in its wisdom thought it
appropriate to allow deductions in respect of such contribution made by the
parent/guardian in the form of premium paid in respect of such insurance
policies. This deduction was admissible only when conditions stipulated therein
are satisfied. Insofar as insurance policy was concerned, it incorporated a condition
(which was impugned in the present writ petition) to the effect that the amount
shall not be given to the handicapped persons during the lifetime of the
parent/guardian/life assured. This was in conformity with section 80DD(2)(b) of
the Act.

According to the Supreme Court, to some
extent, the grievance of the Petitioner was justified in this behalf in the
plea that when there was a need to get these funds for the benefit of
handicapped persons, that would not be given to such a person only because of
the reason that the assured who was a parent/guardian was still alive. This
would happen even when the entire premium towards the said policy has been paid
as the policy did not have maturity claim. Thus, after making the entire
premium for number of years, i.e. during the duration of the policy, the amount
would still remain with the LIC.

However, the Supreme Court noted that the
purpose behind such a policy was altogether different. As noted from the
provisions of section 80DD as well as from the explanatory memorandum of the
Finance Bill, 1998, by which this provision was added, the purpose was to
secure the future of the persons suffering from disability, namely, after the
death of the parent/guardian. The presumption was that during his/her lifetime,
the parent/guardian would take care of his/her handicapped child.

Further, the Supreme Court observed that
such a benefit of deduction from income for the purposes of tax was admissible
subject to the conditions mentioned in section 80DD of the Act. The Legislature
had provided the condition that amount/annuity under the policy was to be
released only after the death of the person assured. This was the legislative
mandate. There was no challenge to this provision. The prayer was that section
80DD of the Act be suitably amended.

According to the Supreme Court, it could not
give a direction to the Parliament to amend or make a statutory provision in a
specified manner. The Court can only determine, in exercise of its power of
judicial review, as to whether such a provision passes the muster of the
Constitutional Scheme. Though, there was no specific prayer in this behalf, but
in the body of writ petition, argument of discrimination was raised. However,
according to the Supreme Court, the Respondents were able to successfully
demonstrate that the main provision was based on reasonable classification,
which had a valid rational behind it and there was a specific objective sought
to be achieved thereby.

The Supreme Court noted that the Petitioner
may be justified in pointing out that there could be harsh cases where
handicapped persons may need the payment on annuity or lump sum basis even
during the lifetime of their parents/guardians. For example, where guardian has
become very old but is still alive, though he may not able to earn any longer
or he may be a person who was in service and has retired from the said service
and is not having any source of income. In such cases, it may be difficult for
such a parent/guardian to take care of the medical needs of his/her disabled
child. Even when he/she has paid full premium, the handicapped person is not
able to receive any annuity only because the parent/guardian of such
handicapped person is still alive. There may be many other such situations.

However, it is for the Legislature to take
care of these aspects and to provide suitable provision by making necessary
amendments in section 80DD of the Act. In fact, the Chief Commissioner for
Persons with Disabilities has also felt that like other policy holders, Jeevan
Aadhar policy should also be allowed to mature after 55 years of age of the
proposer and the annuity amount should be disbursed through the LLCs or
National Trust.

In the aforesaid circumstances, the Supreme
Court disposed of this writ petition by urging upon Respondent No. 1 to have a
relook into this provision by taking into consideration all the aspects,
including those highlighted by it in the judgment, and explore the possibility
of making suitable amendments.

17. Commissioner of Income-tax (Exemptions) vs.
Progressive Education Society (2019) 410 ITR 370 (SC)

Appeal to the High Court – Condonation of delay – Delay of 362 days –
Delay owing to difference of opinion between two officers – Appeal filed after
taking legal oinion – Delay condoned subject to payment of costs

The Supreme Court found that the High Court
had dismissed the appeal preferred by the Appellant on the ground of delay. The
delay was of 362 days. As per the High Court, the delay was not satisfactorily
explained. The Supreme Court noted that the main cause of the delay was
difference of opinion between the two Officers and ultimately legal opinion was
taken and it was decided to file the appeal.

According to the Supreme Court, having
regard to the importance of the matter, the High Court should hear the appeal
on merits. The Supreme Court set aside the impugned order condoning the delay
in filing the appeal in the High Court subject to payment of costs of rupees
one lakh to be paid the respondent within a period of four weeks.

The Supreme Court remitted the matter to the
High Court with a direction that it shall decide the appeal on merits.

18. CIT (LTU) vs. Reliance Industries Ltd (2019) 410 ITR 466 (SC)

Business expenditure – Interest on borrowed
capital – The finding that the interest free funds available to the assessee
were sufficient to meet its investment was a finding of fact

The Supreme Court noted that the appeals
before it arose from the judgment of the Bombay High Court dated 22 and 23
August, 2017 for Assessment Years 2003-04, 2004-05, 2005-06 and 2006-07. The
High Court had passed a common order for all the Assessment Years. The appeals
by the Revenue raised the following questions:

1. Whether the High
Court is correct in holding that interest amount being interest referable to
funds given to subsidiaries is allowable as deduction u/s. 36(1)(iii) of the
Income Tax Act, 1961 (for short the Act’) when the interest would not have been
payable to banks, if funds were not provided to subsidiaries;

2. Whether on the
facts and in the circumstances of the case and in law, the High Court is
correct in upholding the Tribunal’s view that prior to insertion of
Explanation-5 to section 32 of the Act, the claim of depreciation was optional
and could not be thrust on the assessee, if it had not claimed it;

3. Whether on the
facts and in the circumstances of the case and in law, the High Court is
correct in upholding the Tribunal’s view that pre-operative expenses incurred
in connection with creation of plant & machinery in units which have not
commenced production, are revenue in nature;

4. Whether on the
facts and in the circumstances of the case and in law, the High Court is
correct in upholding the Tribunal’s view that expenditure on estimated basis
cannot be reduced from dividends for deduction u/s. 80M of the Act; and

5. Whether on the
facts and in the circumstances of the case and in law, the High Court is
correct in upholding the Tribunal’s view in sustaining the deletion of the
Transfer Pricing adjustment made to consultancy charges, especially when the
TPO had adopted the same mark up in relation to its European associate, what
the assessee itself had adopted in relation to its USA associate.

The Supreme Court held that insofar as the
first question was concerned, the issue raised was a pure question of fact. The
High Court had noted the finding of the Tribunal that the interest free funds
available to the assessee were sufficient to meet its investment. Hence, it
could be presumed that the investments were made from the interest free funds
available with the assessee. The Tribunal has also followed its own order for
Assessment Year 2002-03. In view of the above findings, the Supreme Court found
no reason to interfere with the judgment of the High Court in regard to the
first question. Accordingly, the appeals were dismissed in regard to the first
question.

The Supreme Court held that insofar as the
second question was concerned, the issue, was governed by the decision of this
Court in Plastiblends India Limited vs. Additional Commissioner of Income
Tax, Mumbai and Another (2017) 398 ITR 568 (SC). The High Court did not
have the benefit of this decision. Hence, it was appropriate that the issue be
remanded for fresh decision by the High Court bearing in mind the law laid down
in the above case. The Supreme Court kept open all the rights and contentions
of the Revenue and the assessee in regard to the applicability of the provision
for the relevant Assessment Years.

As regards, the third question pertaining to
pre- operative expenses; the fourth question pertaining to the deduction u/s.
80M of the Act; and the fifth question pertaining to transfer pricing, the
Supreme Court found that the High Court has failed to independently evaluate
the merits of the departmental appeals. Hence, the Supreme Court was of the opinion that it would be appropriate that the aforesaid
questions were considered afresh by the
High Court.

In order to facilitate a fresh exercise
being conducted in relation to the aforesaid four questions (Question Nos.2, 3,
4 and 5), the Supreme Court allowed the appeals and set aside the impugned
judgment of the High Court. The appeals were restored to the file of the High
Court for that purpose.

These appeals were accordingly disposed of.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

11.
Mahabir Industries vs. Pr. CIT (2018) 406 ITR 315 (SC)

Industrial undertaking – Deduction u/s.
80IA, 80IB and 80IC – The Assessees had started claiming and were allowed
deductions from the Assessment Years 1998-99 and 1999-2000 u/s. 80-IA and from
the Assessment Year 2000-01 to Assessment Year 2005-06 under section 80-IB of
the Act and thus were entitled to the deduction under the new provision i.e.
section 80-IC on fulfilling conditions contained in sub-section (2) of section
80-IC for the first time for the Assessment Year 2006-07

The Assessee
manufactured polythene for which it had its factory in Shimla, Himachal
Pradesh. The activity undertaken by the Assessee, an industrial undertaking,
qualified for exemption from income tax u/s. 80-IA of
the Act.

This deduction
under section 80-IA was claimed and allowed for two Assessment Years i.e.
1998-99 and 1999-2000.

Section 80-IA of the
Act was originally introduced in the year 1991 by the Finance (No. 2) Act, 1991
w.e.f. April 1, 1991. There were amendments in the section from time to time.
This section was amended by the Finance Act, 1999 w.e.f. April 1, 2000. Along
with this provision, section 80-IB was also introduced for the first time by
the same Finance Act, 1999.

From the Assessment
Year 2000-01 to Assessment Year 2005-06, the Assessee claimed deduction u/s.
80-IB.

Another provision
in the form of section 80-IC was inserted by Finance Act, 2003 w.e.f. April 1,
2004. The provisions of section 80-IC provided deduction to manufacturing units
situated in the State of Sikkim, Himachal Pradesh and Uttaranchal and
North-Eastern States. The deduction was provided to new units established in
the aforesaid States, and also to existing units in those States if substantial
expansion was carried out.

The Assessee completed substantial expansion (by investing in new plant
and machinery of value more than 50% of the value of plant and machinery
already installed as on 1 April, 2005) to the manufacturing unit situated at
Baddi, Himachal Pradesh in the Assessment Year 2006-07. In view of the
substantial expansion, the Assessee claimed deduction u/s. 80-IC @100% for
Assessment Years 2006-07 and 2007-08, which was also allowed by the Assessing
Officer (AO) after passing the order u/s. 143(3) of the Act.

However,
thereafter, deductions for the Assessment Year 2008-09 and Assessment Year
2009-2010 were rejected by the AO on the ground that this was 11^th
and 12^th year of deduction and as per section 80-IC(6), total
deductions u/s. 80-IC and section 80-IB cannot exceed the total period of ten
years. Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal
upheld the order of the AO. The High Court dismissed the appeals on the ground
that it cannot claim deduction u/s. 80-IC, 80-IB or 10C for a period exceeding
ten years.

The Assessee framed
the questions of law in the appeal before the Supreme Court:

(a) Whether the Hon’ble High Court was justified
in holding that the Petitioner was not entitled to deduction u/s. 80-IC of the
Act by virtue of provision s/s. (6), when the same was not even applicable to
the Petitioner?

(b) Whether the Hon’ble High Court was justified in
holding that the provisions of section 80-IC(6) of the Act apply to all the
undertaking claiming deduction u/s. 80-IB(4) of the Act when 80-IC(6) refers to
only those undertakings which are covered by second proviso to section
80-IB(4)?

(c) Whether the Hon’ble High Court was justified
in holding that the Petitioner is not eligible for deduction u/s. 80-IC for a
period of 10 assessment years when substantial expansion was carried out by the
Petitioner and a substantially new unit was claiming deduction u/s. 80-IC of
the Act?

(d) Whether the Hon’ble High Court was justified in
holding that the Petitioner was not entitled to deduction u/s. 80-IC of the Act
for assessment year 2008-09 and 2009-10 when the total period of deduction of
ten years was expiring after assessment year 2009-10?

The Supreme Court
noted that the High Court judgment had taken a categorical view that the moment
‘substantial expansion’ is completed as per section 80-IC(8)(ix), the statutory
definition of ‘initial assessment year’ {Section 80-IC(8)(v)} comes into play.
As a consequence, section 80-IC(3)(ii) would entitle the unit to hundred per
cent deduction for five years commencing with completion of ‘substantial
expansion’ followed by twenty-five per cent deduction for next five years i.e.
subject to maximum of ten years. According to the Supreme Court, the High
Court, thus, accepted that when the substantial expansion is done in a
particular Assessment Year and that is made during the period mentioned in
sub-section (2) of section 80-IC, not only benefit admissible u/s. 80-IC shall
get triggered, the year in which such substantial expansion is completed is to
be treated as ‘initial assessment year’. Having said so, it has put a cap of
ten years by invoking the provision of section 80-IC(6). According to the
Supreme Court, as per the provisions of sub-section (6) of section 80-IC, no
deduction is allowed to any undertaking or enterprise under that section, where
the total period of deduction inclusive of the period of deduction under that
section, or under the second proviso to sub-section (4) of section 80-IB or
u/s. 10C, as the case may be, exceeds ten assessment years. The total period of
ten years, thus, is to be counted in the following three circumstances:

(a) When the
deduction has been given u/s. 80-IC for a period of ten years, no further
deduction is admissible.

(b) When the
deduction is given under second proviso to sub-section (4) of section 80-IB.

The said second
proviso reads as under:

Provided further
that in the case of such industries in the North-Eastern Region, as may be
notified by the Central Government, the amount of deduction shall be hundred
per cent of profits and gains for a period of ten assessment years, and the
total period of deduction shall in such a case not exceed ten assessment years.

This provision
pertains to those industries which are in the North-Eastern Region.

It is again a
special provision in respect of certain industrial undertakings in
North-Eastern Region.

The Supreme Court
held that the Assessee in the instant case had not got deduction u/s. 80-IC for
a period of ten years as he started claiming deduction under this provision
w.e.f. Assessment Year 2006-07. Situation Nos. (b) and (c) mentioned above would
not apply to the Assessee as it’s undertaking/enterprise was not established in
North-Eastern Region. It was, thus, clear that the High Court had failed to
appreciate that the provisions of section 80-IC(6) of the Act state that the
total period of deduction u/s. 80-IC and section 80-IB cannot exceed ten
assessment years only if the manufacturing unit was claiming deduction under
second proviso to section 80-IB(4) of the Act i.e. units located in the
North-Eastern State.

According to the
Supreme Court, the matter could be looked into from another angle. U/s. 80-IA,
deduction is provided to such industrial undertakings or enterprises which are
engaged in infrastructure development etc., provided they fulfill the
conditions mentioned in s/s. (4) thereof. Section 80-IB makes provisions for
deduction in respect of those industrial undertakings, other than
infrastructure development undertakings, which are enumerated in the said
provision. On the other hand, the intention behind section 80-IC is to grant deduction
to the units making new investments in the State by establishing new
manufacturing unit or even to the existing manufacturing unit which carried out
substantial expansions. The purport behind the three types of deductions
specified in section 80-IA, section 80-IB and section 80-IC was, thus,
different. Section 80-IC stipulates the period for which hundred per cent
deduction is to be given and then deduction at reduced rates is to be given. If
the Assessee had earlier availed deduction u/s. 80-IA and section 80-IB, that
would be of no concern in as much as on carrying out substantial expansion, which
was carried out and completed in the Assessment Year 2006-07, the Assessee became entitled to deduction u/s. 80-IC from the initial
year. The term ‘initial year’ is referable to the year in which substantial
expansion has been completed, which legal position was stated by the High Court
itself and even accepted by the Department as it had not challenged that part
of the judgment.

The inclusion of
period for the deduction is availed u/s. 80-IA and section 80-IB, for the
purpose of counting ten years, is provided in sub-section (6) of section 80-IC
and it is limited to those industrial undertakings or enterprises which are
set-up in the North-Eastern Region. By making specific provision of this kind,
the Legislature had shown its intent, namely, where the industry is not located
in North-Eastern State, the period for which deduction is availed earlier by an
Assessee u/s. 80-IA and section 80-IB would not be reckoned for the purpose of
availing benefit of deduction u/s. 80-IC of the Act.

The Supreme Court
observed that insofar as the factum of substantial expansion of the
Assessee’s unit in the Assessment Year 2006-07 was concerned, the same was not
subject matter of any controversy in the instant case. It hads been accepted by
the Department that Assessee had carried out substantial expansion. Precisely,
for this reason, the AO had allowed deduction for Assessment Years 2006-07 and
2007-08. Therefore, issue was not as to whether there is a substantial
expansion or not. The issue was only as to how a period of ten years was to be
calculated, namely, whether those Assessment Years in respect of which
deduction u/s. 80-IA and section 80-IB was allowed were to be counted for the
purpose of giving deduction u/s. 80-IC.

The Supreme Court
was of the opinion that it was wrong on the part of the AO not to allow
deduction to the Assessee u/s. 80-IC for the Assessment Years 2008-09 and
2009-2010. As a result, the judgment of the High Court on this aspect was set
aside and the appeals were accordingly allowed.

12. CIT vs. Classic Binding Industries (2018) 407 ITR 429 (SC)

Industrial undertaking – Deduction u/s.
80IC – After availing deduction for a period of 5 years @ 100% of such profits
and gains from the ‘units’, the Assessees would be entitled to deduction for
remaining 5 Assessment Years @ 25% (or 30% where the Assessee is a company), as
the case may be, and not @ 100%.

The Assessee firm
derived income from manufacturing of printed embossed book binding cover
material of cotton in sheet form and security fiber of dual coloured
combination. The Assessee firm comprised of nine partners during the relevant
assessment year. The Assessee started its business activity/operation on 11^th
July, 2005 and initial Assessment Year for claim of deduction u/s. 80-IC of the
Act was Assessment Year 2006-07. The Assessee had already claimed deduction
u/s. 80-IC to the extent of the 100% eligible profit for five Assessment Years
2006-07 to Assessment Year 2010-11. However, it was noticed that the Assessee
firm had again claimed 100% deduction against eligible profits in the relevant
Assessment Year 2012-13 which is seventh year of production for the firm by
claiming substantial expansion in Financial Year 2010-11.

The Assessee was
asked to furnish the reasons and justification for the said claim of 100% as
against the eligible norm of 25%. The Assessee submitted its reasons for claim
stating that the Assessee fulfills all the conditions for the claim of 100%
deduction.

The Assessing
Officer found that in view of the provisions of section 80-IC of the Act
Assessee firm had already claimed deduction u/s. 80-IC of the Act at the rate
of 100% for five years from Assessment Year 2006-07 to Assessment Year 2010-11,
i.e., from the date of setting up of the industrial undertaking and in view of
the same, it would be eligible for claim of deduction @ 25% of its eligible
business profits for the remaining five years, i.e., from Assessment Year
2011-2012 to Assessment Year 2015-2016. The Assessing Officer denied the claim
of the enhanced deduction in view of the substantial expansion was claimed by
the Assessee and, accordingly, restricted the deduction to 25% of eligible
profits for the assessment year 2012-13.

On appeal, the
CIT(A) following the decision of the jurisdictional Tribunal in the case of Hycron
Electronics vs. ITO and other related cases, upheld the order of the
Assessing Officer and dismissed the appeal of the Assessee for 100% deduction.

Feeling aggrieved,
the Assessee filed further appeal before the ITAT. While observing that both
the parties agreed that the issue involved in appeals, was squarely covered
against the Assessee in view of the decision of the coordinate bench of ITAT in
the case of Hycron Electronics, dismissed the appeal by a composite order for
Assessment Years 2011-12 and Assessment Year 2012-13 by holding that Assessee
was eligible for deduction u/s. 80 of the Act @ 25% of the profit derived from
industrial undertaking for these years and not @ 100% of deduction claimed by
the Assessee.

Dissatisfied with
the aforesaid order, Assessee filed appeal u/s. 260A before the High Court of
Himachal Pradesh, Shimla raising therein substantial questions of law. The
result of other Assessees was also on almost same pattern, who filed their
respective appeals as well. The High Court decided the issue in a composite
judgment, in favour of all these Assessees. The High Court held that there was
no restriction that undertaking or enterprise established after 7^th
January, 2003 could not carry out ‘Substantial Expansion’ and could not be
carried out more than once as long as period of eligibility for claiming
deduction u/s. 80-IC of the Act.

The Supreme Court
noted the provisions of section 80IC of the Act and observed that whereas the
exemption is provided @ 100% of such profits and gains for five assessment
years commencing with the initial assessment years and, thereafter, 25% (or 30%
where the Assessee is a company) of the profits and gains for next five years.
The deduction is limited to a period of 10 years.

In this backdrop,
according to the Supreme Court, the question before it was as to whether these
Assessees, who had availed deductions @ 100% for first five years on the ground
that they had set up a manufacturing unit as prescribed under s/s. (2) of the
Act, could start claiming deductions @ 100% again for next five years as they
had undertaken “substantial expansion” during the period mentioned in
s/s. (2)?

The Supreme Court
noted that in the instant case, it was concerned with the Assessees who had
established their undertakings in the State of Himachal Pradesh. S/s. (3),
mentions the period of 10 years commencing with the initial Assessment Year.
S/s. (6) puts a cap of 10 years, which is the maximum period for which the
deduction can be allowed to any undertaking or enterprise under this section,
starting from the initial Assessment Year. Another significant feature under
s/s. (3) is that the deduction allowable is 100% of such profits and gains from
an undertaking or an enterprise for five Assessment Years commencing with the
initial Assessment Year and thereafter the deduction is allowable at 25% (or
30% where the Assessee is a company) of the profits and gains. Cumulative
reading of these provisions brings out the following aspects:

(a) Those undertakings or enterprises fulfilling
the conditions mentioned in sub-section (2) of section 80-IC become entitled to
deduction under this provision.

(b) This deduction is allowable from the initial
Assessment Year. “Initial Assessment Year” is defined in section
80-IB(14)(c) of the Act.

(c) The deduction is @ 100% of such profits and
gains for first 5 Assessment Years and thereafter a deduction is permissible @
25% (or 30% where the Assessee is a company).

(d) Total period of deduction is 10 years, which
means 100% deduction for first 5 years from the initial Assessment Year and 25%
(or 30% where the Assessee is a company) for the next 5 years.

According to the
Supreme Court, keeping in mind the aforesaid scheme and spirit behind this
provision, such a situation could not be countenanced where an Assessee is able
to secure deduction @ 100% for the entire period of 10 years. If that was
allowed it would amount to doing violence to the provisions of sub-section (3)
read with sub-section (6) of section 80-IC. A pragmatic and reasonable interpretation
of section 80-IC would be to hold that once the initial Assessment Year
commences and an Assessee, by virtue of fulfilling the conditions laid down in
sub-section (2) of Section 80-IC, starts enjoying deduction, there cannot be
another “Initial Assessment Year” for the purposes of section 80-IC
within the aforesaid period of 10 years, on the basis that it had carried
substantial expansion in its unit.

The Supreme Court
expressly stated that it was conscious of its recent judgment in Mahabir
Industries vs. Principal Commissioner of Income Tax (406 ITR 315). However,
a fine distinction needed to be noted between the two sets of cases. In Mahabir
Industries, the Assessees had availed the initial deduction under a different
provision, namely, section 80-IA of the Act, i.e. by fulfilling the conditions
mentioned in sub-section (4) of section 80-IA. Those conditions were altogether
different. Deduction in respect of profits and gains under the said provision
was admissible when these profits and gains are from industrial undertakings or
enterprises engaged in infrastructure development etc. Even this availment
started at a time when section 80-IC was not even on the statute book. Section
80-IC was inserted by the Finance Act, 2003 with effect from April 01, 2004.
The Assessees in those cases had started claiming and were allowed deductions
from the Assessment Years 1998-99 and 1999-2000 u/s. 80-IA and from the
Assessment Year 2000-01 to Assessment Year 2005-06 u/s. 80-IB of the Act. The
deduction was, thus, claimed by the Assessees in those appeals under the new
provision i.e. section 80-IC on fulfilling conditions contained in sub-section
(2) of section 80-IC for the first time for the Assessment Year 2006-07. Thus,
insofar as those cases were concerned, the initial Assessment Year u/s. 80-IC
started only from the Assessment Year 2006-07. In contrast, position here was
altogether different. These Assessees had availed deduction u/s. 80-IC alone.
Initially, they claimed the deduction on the ground that they had set up their
units in the State of Himachal Pradesh and after availing the deduction @ 100%
they wanted continuation of this rate of 100% for the next 5 years also under
the same provision on the ground that they had made substantial expansion. The
Supreme Court held that, as pointed out above, once the Assessees had started
claiming deduction u/s. 80-IC and the initial Assessment Year has commenced
within the aforesaid period of 10 years, there could not be another initial
Assessment Year thereby allowing 100% deduction for the next 5 years also when
s/s. (3), in no uncertain terms, provides for deduction @ 25% only for the next
5 years. Also, the Assessees accepted the legal position that they could not
claim deduction of more than 10 years in all u/s. 80-IC.

The Supreme Court therefore held that after
availing deduction for a period of 5 years @ 100% of such profits and gains
from the ‘units’, the Assessees would be entitled to deduction for remaining 5
Assessment Years @ 25% (or 30% where the Assessee is a company), as the case
may be, and not @ 100%. The question of law was, thus, answered in favour of
the Revenue thereby allowing all these appeals.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

4. Pr. Commissioner of Income Tax (New Delhi) vs.
Maruti Suzuki India Limited (2019) 416 ITR 613 (SC)

Assessment
– Notice to non-existing person – Despite the fact that the AO was informed of
the amalgamating company having ceased to exist as a result of the approved
scheme of amalgamation, the jurisdictional notice was issued only in its name –
The basis on which jurisdiction was invoked was fundamentally at odds with the
legal principle that the amalgamating entity ceases to exist upon the approved
scheme of amalgamation – Participation in the proceedings by the appellant in
the circumstances cannot operate as an estoppel against law – Not a
procedural violation of the nature adverted to in section 292B

The assessee was a joint
venture between Suzuki Motor Corporation and Maruti Suzuki India Limited (MSIL)
in which the shareholding was 70% and 30%, respectively. It was known upon
incorporation as Suzuki Metal India Limited. Subsequently, with effect from 8^th
June, 2005, its name was changed to Suzuki Powertrain India Limited (SPIL).

Some time later, on 28^th
November, 2012, the assessee filed its return of income for the A.Y. 2012-13
declaring an income of Rs. 212,51,51,156. The return of income was filed in the
name of SPIL (no amalgamation having taken place on the relevant date).

On 29^th
January, 2013, a scheme for amalgamation of SPIL and MSIL was approved by the
High Court with effect from 1^st April, 2012. The terms of the
approved scheme provided that all liabilities and duties of the transferor
company would stand transferred to the transferee company without any further
act or deed. On the scheme coming into effect, the transferor was to stand
dissolved without winding up. The scheme stipulated that the order of
amalgamation would not be construed as an order granting exemptions from the
payment of stamp duty or taxes or any other charges, if payable, in accordance
with the law.

Accordingly,
on 2^ndApril 2013, MSIL intimated the AO about the amalgamation. The
case was selected for scrutiny with the issuance of a notice u/s 143(2) on 26^thSeptember, 2013 followed by a notice u/s 142(1) to the amalgamating
company.

On 22^nd
January, 2016, the Transfer Pricing Officer passed an order u/s 92CA(3)
determining the Arm’s Length Price of royalty at 3% and making an adjustment of
Rs. 78.97 crores in respect of royalty paid by the assessee for the relevant
previous year.

A draft
assessment order was then passed on 11^th March, 2016 in the name of
Suzuki Powertrain India Limited (amalgamated with Maruti Suzuki India Limited).
The draft assessment order sought to increase the total income of the assessee
by Rs. 78.97 crores in accordance with the order of the TPO in order to ensure
that the international transaction with regard to the payment of royalty to the
associated enterprises is at arm’s length.

MSIL
participated in the assessment proceedings of the erstwhile amalgamating
entity, SPIL, through its authorised representatives and officers.

On 12^th
April, 2016, MSIL filed an appeal before the Dispute Resolution Panel as
successor in interest of the erstwhile SPIL, since amalgamated. Form 35A was
verified by Mr. Kenichi Ayukawa, MD and CEO of MSIL. The grounds of appeal did
not allude to the objection that the draft assessment order was passed in the
name of SPIL (amalgamated with MSIL), or that this defect would render the
assessment proceedings invalid.

The DRP, on 14^th
October, 2016, issued its order in the name of MSIL (as successor in interest
of the erstwhile SPIL, since amalgamated).

But the final assessment
order was passed on 31^stOctober, 2016 in the name of SPIL
(amalgamated with MSIL), making an addition of Rs. 78.97 crores to the total
income of the assessee. While preferring an appeal before the Tribunal, the
assessee raised the objection that the assessment proceedings were continued in
the name of the non-existent or merged entity SPIL and that the final assessment
order which was also issued in the name of a non-existent entity, would thus be
invalid.

By its decision dated 6^th
April, 2017 the Tribunal set aside the final assessment order on the ground
that it was void ab initio, having been passed in the name of a
non-existent entity by the AO. The decision of the Tribunal was affirmed in an
appeal u/s 260A by the Delhi High Court on 9^th January, 2018
following its earlier decision in the case of the assessee for the A.Y.
2011-12.

On further appeal by the Revenue,
the Supreme Court observed that while assessing the merits of the rival
submissions, it was necessary at the outset to advert to certain significant
facets of the present case:

First, the income which is
sought to be subjected to the charge of tax for A.Y. 2012-13 was the income of
the erstwhile entity (SPIL) prior to amalgamation. This was on account of a
transfer pricing addition of Rs. 78.97 crores;

Second, under the approved
scheme of amalgamation, the transferee had assumed the liabilities of the
transferor company including tax liabilities;

Third, the consequence of
the scheme of amalgamation approved u/s 394 of the Companies Act 1956 was that
the amalgamating company ceased to exist (Saraswati Industrial Syndicate
Ltd. [282 ITR 186]);

Fourth, upon the
amalgamating company ceasing to exist, it cannot be regarded as a person u/s
2(31) of the Act, 1961 against whom assessment proceedings can be initiated or
an order of assessment passed;

Fifth, a notice u/s 143(2)
was issued on 26^th September, 2013 to the amalgamating company,
SPIL, which was followed by a notice to it u/s 142(1);

Sixth, prior to the date on
which the jurisdictional notice u/s 143(2) was issued, the scheme of
amalgamation had been approved on 29^th January, 2013 by the High
Court of Delhi under the Companies Act, 1956 with effect from 1^stApril,
2012;

Seventh, the AO assumed
jurisdiction to make an assessment in pursuance of the notice u/s 143(2). The
notice was issued in the name of the amalgamating company in spite of the fact
that on 2^ndApril, 2013 the amalgamated company MSIL had addressed a
communication to the AO intimating to him the fact of the amalgamation.

According
to the Supreme Court, in the above conspectus of the facts, the initiation of
assessment proceedings against an entity which had ceased to exist was void ab
initio.

The
Court noted that in Spice Entertainment, a Division Bench of the
Delhi High Court (2012) 280 ELT 43 (Delhi) dealt with the
question as to whether an assessment in the name of a company which has been
amalgamated and has been dissolved is null and void, or whether the framing of
an assessment in the name of such company is merely a procedural defect which
can be cured. The High Court held that upon a notice u/s 143(2) being
addressed, the amalgamated company had brought the fact of the amalgamation to
the notice of the AO. Despite this, the AO did not substitute the name of the
amalgamated company and proceeded to make an assessment in the name of a
non-existent company which rendered it void. This, in the view of the High
Court, was not merely a procedural defect. Moreover, the participation by the
amalgamated company would have no effect since there could be no estoppel against law.

Following
the decision in Spice Entertainment, the Delhi High Court quashed
the assessment orders which were framed in the name of the amalgamating company
in (i) Dimension Apparels; (ii) Micron Steels; and (iii) Micra India. The Supreme
Court noted the facts in all these three cases.

The
Supreme Court further noted that a batch of civil appeals was filed before it
against the decisions of the Delhi High Court, the lead appellant being Spice
Enfotainment. On 2^nd November, 2017 the Supreme Court
dismissed the civil appeals and tagged Special Leave Petitions.

It
observed that the doctrine of merger results in the settled legal position that
the judgement of the Delhi High Court stands affirmed by the above decision in
the civil appeals.

The
Supreme Court further noted that the order of assessment in the case of the
respondent for A.Y. 2011-12 was set aside on the same ground. This resulted in
a Special Leave Petition by the Principal Commissioner of Income Tax – 6,
Delhi. The SLP was dismissed on 16^th July, 2018 in view of the order
dated 2^nd November, 2017 governing Civil Appeal No. 285 of 2014 in Spice
Enfotainment and the connected batch of cases. According to the Supreme
Court, although leave was not granted by it, reasons had been assigned by the
Supreme Court for rejecting the SLP. The law declared would attract the
applicability of Article 141 of the Constitution (Kunhayammed, 381 ITR
245).

After
considering the contention urged on behalf of the Revenue that a contrary
position emerges from the decision of the Delhi High Court in Skylight
Hospitality LLP (405 ITR 296) which was affirmed on 6^thApril,
2018 by the Supreme Court, it held that there was no conflict between the
decisions of the Supreme Court in Spice Enfotainment (dated 2^nd
November, 2017) and in Skylight Hospitality LLP (dated 6^th April,
2018).

Referring
to the provisions of section 292B of the Income-tax Act, the Supreme Court held
that in this case the notice u/s 143(2) under which jurisdiction was assumed by
the AO was issued to a non-existent company. The assessment order was issued
against the amalgamating company. This was a substantive illegality and not a
procedural violation of the nature adverted to in section 292B.

The
Supreme Court ultimately concluded that in the present case, despite the fact
that the AO was informed of the amalgamating company having ceased to exist as
a result of the approved scheme of amalgamation, the jurisdictional notice was
issued only in its name. The basis on which jurisdiction was invoked was
fundamentally at odds with the legal principle that the amalgamating entity
ceases to exist upon approval of the scheme of amalgamation. Participation in
the proceedings by the appellant in the circumstances cannot operate as an estoppel
against law. This position now holds the field in view of the judgement of a
Co-ordinate Bench which dismissed the appeal of the Revenue in Spice
Enfotainment on 2^nd November, 2017. The decision in Spice
Enfotainment had been followed in the case of the respondent while
dismissing the Special Leave Petition for A.Y. 2011-12. Thus, there was no
reason to take a different view.

For the
above reasons, the Supreme Court found no merit in the appeal and accordingly
dismissed it.

BCAJ Admin

Glimpses Of Supreme Court Rulings

1.
1. Commissioner of Income Tax, Kolkata vs. Calcutta Export Company
(2018) 404 ITR 654 (SC)

Business
Expenditure – Disallowance u/s. 40(a)(ia) – The amended provision of section
40(a)(ia) of the Act should be interpreted liberally and equitable and applies
retrospectively from the date when section 40(a)(ia) was inserted i.e., with effect
from the Assessment Year 2005-2006

Calcutta Export Company, a
partnership firm, a manufacturer and exporter of casting materials, filed its
return of income for the Assessment Year 2005-06 for Rs. 4,18,17,910/-. The
case was selected for scrutiny and the assessment u/s. 143(3) of the Act was
completed on 28.12.2007. The Assessing Officer, vide order dated 12.10.2009,
disallowed the export commission charges paid by the assessee to Steel Crackers
Pvt. Ltd. amounting to Rs. 40,82,089/- while stating that the tax deducted at
source (TDS) on such commission amount on 07.07.2004, 07.09.2004 and 07.10.2004
ought to have been deposited by the assessee before the end of the previous
year i.e. 31.03.2005 to get the commission amount deducted from the total
income in terms of the provisions of section 40(a)(ia) of the Act as it stood then.
But the same was deposited on 01.08.2005, hence, the assessee could not be
allowed to claim deduction of the commission amount from the total income. The
Assessing Officer revised the total income to Rs. 4,58,99,999/- with the
requirement to pay the additional tax amount of Rs. 23,88,832/- by the
assessee.

Being aggrieved by the
order dated 12.10.2009, the assessee preferred an appeal before the
Commissioner of Income tax (Appeals). Learned CIT (Appeals), vide order dated
01.08.2011, allowed the appeal while holding that the commission amount was
eligible for deduction under the said Assessment Year.

Being aggrieved, the
Revenue preferred an appeal before the Tribunal, which came to be dismissed on
29.02.2012.

Being aggrieved by the
order dated 29.02.2012, the Revenue preferred an appeal before the High Court.
The High Court, vide judgment and order dated 03.09.2012, dismissed the appeal.

Aggrieved by the judgment
and order dated 03.09.2012, the Revenue has preferred this appeal before the
Supreme Court.

According to the Supreme
Court, the point that arose for its consideration was as to whether the
amendment made by the Finance Act, 2010 in section 40(a)(ia) of the IT Act is
retrospective in nature to apply to the present facts and circumstances of the
case.

If it is so, then the tax
duly paid by the assessee on 01.08.2005 was well in accordance with law and the
assessee is allowed to claim deduction for the tax deducted and paid to the
government, in the previous year in which the tax was deducted.

For deciding as to the
retrospective effect of the amendment made by Finance Act, 2010, the Supreme
Court noted the section as it stood before and after the amendment made through
the Finance Act, 2010 and the purpose of such insertion or amendment to the
said provisions. The Supreme Court noted that the purpose of bringing the said
amendment to the existing provision of section had been highlighted in the
memorandum explaining the provision which read as under:

“With a view to augment
compliance of TDS provisions, it is proposed to extend the provisions of the
section 40(a)(ia) to payments of interest, commission or brokerage, fee for
professional services or fee for technical services to the residents and
payments to a residential contractor or sub-contractor for carrying out any
work (including supply of labour for carrying out any work), on which tax has
not been deducted or after deduction, has not been paid before the expiry of
the time prescribed under sub-section (1) of section 200 and in accordance with
the provisions of other provisions of Chapter XVII-B”.

According to the Supreme
Court, the purpose was very much clear from the above referred explanation by
the memorandum that it came with a purpose to ensure tax compliance. The fact
that the intention of the legislature was not to punish the assessee was
further reflected from a bare reading of the provisions of section 40(a)(ia) of
the Act. It only resulted in shifting of the year in which the expenditure
could be claimed as deduction. In a case where the tax deducted at source was
duly deposited with the government within the prescribed time, the said amount
could be claimed as a deduction from the income in the previous year in which
the TDS was deducted. However, when the amount deducted in the form of TDS was
deposited with the government after the expiry of period allowed for such
deposit then the deductions could be claimed only in the previous year in which
such TDS payment was made to the government.

However, it had caused some
genuine and apparent hardship to the assessees especially in respect of tax
deducted at source in the last month of the previous year, the due date for
payment of which as per the time specified in section 200 (1) of Act was only
on 7^th of April in the next year. The assessee in such case, thus,
had a period of only seven days to pay the tax deducted at source from the
expenditure incurred in the month of March so as to avoid disallowance of the
said expenditure u/s. 40(a)(ia) of Act.

With a view to mitigate
this hardship, section 40(a)(ia) was amended by the Finance Act, 2008.

The amendments made by the
Finance Act, 2008 thus provided that no disallowance u/s. 40(a)(ia) of the Act
shall be made in respect of the expenditure incurred in the month of March if
the tax deducted at source on such expenditure had been paid before the due
date of filing of the return. The amendment was given retrospective operation
from the date of 01.04.2005 i.e., from the very date of substitution of the provision.

Therefore, the assessees
were, after the said amendment in 2008, classified in two categories namely;
one; those who have deducted that tax during the last month of the previous
year and two; those who have deducted the tax in the remaining eleven months of
the previous year. It was provided that in case of assessees falling under the
first category, no disallowance u/s. 40(a)(ia) of the Act shall be made if the
tax deducted by them during the last month of the previous year has been paid
on or before the last day of filing of return in accordance with the provisions
of section 139(1) of the Act for the said previous year. In case, the assessees
were falling under the second category, no disallowance u/s. 40(a)(ia) of Act
where the tax was deducted before the last month of the previous year and the
same was credited to the government before the expiry of the previous year.
According to the Supreme Court, the net effect was that the assessee could not
claim deduction in the previous year in which the tax was deducted and the
benefit of such deductions could be claimed in the next year only.

The
Supreme Court observed that the amendment though had addressed the concerns of
the assessees falling in the first category but with regard to the case falling
in the second category, it was still resulting into unintended consequences and
causing grave and genuine hardships to the assessees who had substantially
complied with the relevant TDS provisions by deducting the tax at source and by
paying the same to the credit of the Government before the due date of filing
of their returns u/s. 139(1) of the Act. The disability to claim deductions on
account of such lately credited sum of TDS in assessment of the previous year
in which it was deducted, was detrimental to the small traders who may not be
in a position to bear the burden of such disallowance in the present Assessment
Year.

In order to remedy this
position and to remove hardships which were being caused to the assessees
belonging to such second category, amendments were made in the provisions of
section 40(a) (ia) by the Finance Act, 2010.

Thus, the Finance Act, 2010 further relaxed the rigors of section 40(a)(ia) of
the Act to provide that all TDS made during the previous year can be deposited
with the Government by the due date of filing the return of income. The idea
was to allow additional time to the deductors to deposit the TDS so made.
However, the Memorandum explaining the provisions of the Finance Bill, 2010
expressly mentioned as follows: “This amendment is proposed to take effect
retrospectively from 1^st April, 2010 and will, accordingly, apply in
relation to the Assessment Year 2010-11 and subsequent years.”

The controversy surrounding
the above amendment was whether the amendment being curative in nature should
be applied retrospectively i.e., from the date of insertion of the provisions
of section 40(a)(ia) or to be applicable from the date of enforcement.

The Supreme Court held that
the TDS results in collection of tax and the deductor discharges dual
responsibility of collection of tax and its deposition to the government.
Strict compliance of section 40(a)(ia) may be justified keeping in view the
legislative object and purpose behind the provision but a provision of such
nature, the purpose of which is to ensure tax compliance and not to punish the
tax payer, should not be allowed to be converted into an iron rod provision
which metes out stern punishment and results in malevolent results,
disproportionate to the offending act and aim of the legislation.

Legislature can and do
experiment and intervene from time to time when they feel and notice that the
existing provision is causing and creating unintended and excessive hardships
to citizens and subject or have resulted in great inconvenience and
uncomfortable results. Obedience to law is mandatory and has to be enforced but
the magnitude of punishment must not be disproportionate by what is required
and necessary. The consequences and the injury caused, if disproportionate do
and can result in amendments which have the effect of streamlining and
correcting anomalies. As discussed above, the amendments made in 2008 and 2010
were steps in the said direction only. Legislative purpose and the object of
the said amendments were to ensure payment and deposit of TDS with the
Government.

The Supreme Court further held that a proviso which is inserted to remedy
unintended consequences and to make the provision workable, a proviso which
supplies an obvious omission in the section, is required to be read into the
section to give the section a reasonable interpretation and requires to be
treated as retrospective in operation so that a reasonable interpretation can
be given to the section as a whole.

The purpose of the
amendment made by the Finance Act, 2010 was to solve the anomalies that the
insertion of section 40(a)(ia) was causing to the bonafide tax payer.
The amendment, even if not given operation retrospectively, may not materially
be of consequence to the Revenue when the tax rates are stable and uniform or
in cases of big assessees having substantial turnover and equally huge expenses
and necessary cushion to absorb the effect. However, marginal and medium
taxpayers, who work at low gross profit rate and when expenditure which becomes
subject matter of an order u/s. 40(a)(ia) is substantial, can suffer severe
adverse consequences if the amendment made in 2010 is not given retrospective
operation i.e., from the date of substitution of the provision. Transferring or
shifting expenses to a subsequent year, in such cases, would not wipe off the
adverse effect and the financial stress. Such could not be the intention of the
legislature. Hence, the amendment made by the Finance Act, 2010 being curative
in nature was required to be given retrospective operation i.e., from the date
of insertion of the said provision.

The Supreme Court concluded
that the amended provision of section 40(a)(ia) of the Act should be
interpreted liberally and equitable and applies retrospectively from the date
when section 40(a)(ia) was inserted i.e., with effect from the Assessment Year
2005-2006 so that an assessee should not suffer unintended and deleterious
consequences beyond what the object and purpose of the provision mandates.

Since the assessee has
filed its returns on 01.08.2005 i.e., in accordance with the due date under the
provisions of section 139 Act, hence, was allowed to claim the benefit of the
amendment made by Finance Act, 2010 to the provisions of section 40(a)(ia) of
the IT Act.

2.
2. Commissioner of Income Tax vs. HCL
Technologies Ltd. (2018) 404 ITR 719 (SC)

Export of computer
software – Exemption/Deduction – If the deductions on freight,
telecommunication and insurance attributable to the delivery of computer
software u/s. 10A of the Act are allowed only in Export Turnover but not from
the Total Turnover then, it would give rise to illogical result which would
cause grave injustice to the Respondent which could have never been the
intention of the legislature – When the object of the formula is to arrive at
the profit from export business, expenses excluded from export turnover have to
be excluded from total turnover also

The Respondent – HCL
Technologies Ltd., a company registered under the Companies Act, 1956, was
engaged in the business of development and export of computer softwares and
rendering technical services.

The
Respondent had shown gross income from business at Rs. 267,01,76,529/- while
claiming deductions under section 10A of the Act to the tune of Rs.
273,45,39,379/- showing a net loss of Rs. 6,43,62,850/-. The Respondent filed
its return of income for the Assessment Year 2004-05 on 01.11.2004 declaring
the income at Rs. 91,25,68,114/-. Thereafter, on 31.03.2005, a revised return
of income for Rs. 91,16,99,060/- was filed by the Respondent which was selected
for scrutiny u/s. 143 of the Act.

The Assessing Officer, vide
order dated 28.12.2006, held that the software development charges, as claimed
by the Respondent, were nothing but in the nature of expenses incurred for
technical services provided outside India. Further, in view of the fact that it
was not purely technical services and some element of software development was
also involved in it and in the absence of such bifurcation, the Assessing
Officer estimated such expense at the rate of 40% and remaining 60% for
providing technical services by the Respondent in foreign exchange to its
offshore clients and assessed the taxable income at Rs. 137,20,34,576/- and
levied penalty to the tune of Rs. 21,81,90,239/-.

Being aggrieved, the
Respondent preferred an appeal before the Commissioner of Income Tax (Appeals).
Learned CIT (Appeals), vide order dated 09.05.2007, partly allowed the appeal
while estimating 10% as software development charge incurred for technical
services provided outside India as against 60% estimated by the Assessing
Officer.

Being aggrieved, the
Respondent as well as the Revenue, preferred cross appeals before the Tribunal.
The Tribunal, vide order dated 23.01.2009, dismissed the appeal filed by the
Revenue while allowing the appeal of the Respondent.

Being aggrieved, the
Revenue preferred an appeal before the High Court. The High Court, vide order
dated 15.12.2009, dismissed the appeal of the Revenue.

Hence, Revenue filed
appeals before the Supreme Court.

According to the Supreme Court, the only point for consideration before it was
whether in the facts and circumstances of the case, the software development
charges were to be excluded while working out the deduction admissible u/s. 10A
of the Act on the ground that such charges were relatable towards expenses
incurred on providing technical services outside India?

The Supreme Court noted
that the Respondent was engaged in the business of software development for its
customers engaged in different activities at software development centres of
the Respondent. However, in the process of such customised software
development, certain activities were required to be carried out at the sight of
customers on site, located outside India for which the employees of the
branches of the Respondent located in the country of the customers were
deployed. Moreover, after delivery of such softwares as per requirement, in
order to make it fully functional and hassle free functioning subsequent to the
delivery of softwares in many cases, there could be requirement of technical
personnel to visit the client on site. The Assessing Officer had not brought any
evidence that the Respondent was engaged in providing simply technical services
independent to software development for the client for which the expenditures
were incurred outside India in foreign currency.

The Supreme Court further
noted that the Respondent company had claimed deduction u/s. 10A as per
certificates filed on Form No. 56F. The Respondent, while computing the
deduction, had taken the same figure of export turnover as of total turnover.
The Respondent had cited various judicial cases but all these cases pertained
to deduction u/s. 80HHC.

The Supreme Court also
noted that the definition of total turnover had been defined in section 80HHC
and 80HHE of the Act and that the definition of total turnover had not been
defined u/s. 10A of the Act.

The Supreme Court held that
the definition of total turnover given u/s. 80HHC and 80HHE could not be
adopted for the purpose of section 10A as the technical meaning of total
turnover, which does not envisage the reduction of any expenses from the total
amount, is to be taken into consideration for computing the deduction u/s. 10A.
When the meaning is clear, there is no necessity of importing the meaning of
total turnover from the other provisions. If a term is defined u/s. 2 of the
Act, then the definition would be applicable to all the provisions wherein the
same term appears. As the term ‘total turnover’ has been defined in the
Explanation to section 80HHC and 80HHE, wherein it has been clearly stated that
“for the purposes of this section only”, it would be applicable only
for the purposes of that sections and not for the purpose of section 10A. If
denominator includes certain amount of certain type which numerator does not
include, the formula would render undesirable results.

In the instant case, if the
deductions on freight, telecommunication and insurance attributable to the
delivery of computer software u/s. 10A of the Act are allowed only in Export
Turnover but not from the Total Turnover then, it would give rise to
inadvertent, unlawful, meaningless and illogical result which would cause grave
injustice to the Respondent which could have never been the intention of the
legislature.

Even in common parlance,
when the object of the formula is to arrive at the profit from export business,
expenses excluded from export turnover have to be excluded from total turnover
also.

On the issue of expenses on
technical services provided outside, one has to follow the same principle of
interpretation as followed in the case of expenses of freight, telecommunication
etc., otherwise the formula of calculation would be futile. Hence, in the same
way, expenses incurred in foreign exchange for providing the technical services
outside should be allowed to excluded from the total turnover.

According to the Supreme
Court, the appeal was devoid of merits and thus was dismissed.

3. 3. Mahaveer Kumar Jain vs. Commissioner of
Income-tax (2018) 404 ITR 738 (SC)

Income-tax Act not
applicable to Sikkim till 1989 – Prize money earned in Sikkim State Lottery in
1986 – Once the assessee having paid the income tax at source in the State of
Sikkim as per the law applicable at the relevant time in Sikkim, the same
income was not taxable under the Income-tax Act, 1961

The Appellant, a resident
of Jaipur, Rajasthan, having income from business and property, won the first
prize of Rs. 20 lakhs in the 287^th Bumper Draw of the Sikkim State
Lottery held on 20.02.1986 at Gangtok organised by the Director, State Lottery,
Government of Sikkim, Gangtok. Out of Rs. 20 lakhs, the Appellant herein
received Rs. 16,20,912/- through two Demand Drafts for Rs. 8,10,000/- and Rs.
8,10,912/- each, after deduction of Rs. 2 lacs being agent’s/seller’s
commission and Rs. 1,79,088/- being Income Tax under the Sikkim State Income
Tax Rules, 1948.

The Appellant herein filed
Income Tax Return for the Assessment Year (AY) 1986-87 disclosing the income
from lottery at Rs. 20 lakhs and deducting the agent/seller commission of Rs. 2
lakhs out of the same. He claimed deduction u/s. 80TT of the Act on Rs.
20,00,000/- i.e. the gross amount of the prize money won in the lottery in
accordance with the provisions of the charging section.

On scrutiny, the Assessing
Officer (AO), vide order dated 08.01.1988, allowed the deduction u/s. 80TT of
the Act on Rs. 18 lakhs instead of Rs. 20 lakhs while holding that the
Government of Sikkim, had deducted the tax at source from the lottery amount of
Rs. 18 lakhs as Rs. 2 lakhs have been paid to the agent directly. In other
words, under the relevant provisions of section 80TT of the Act, the deduction
can be claimed only on net income out of lottery and not on the gross income.
The said order was further confirmed by the Commissioner of Income Tax,
(Appeals) vide order dated 31.10.1988.

Being aggrieved, the
present Appellant preferred an appeal before the Income Tax Appellate Tribunal
challenging the computation by the Assessing Officer (AO) of the deduction u/s.
80TT of the IT Act. The Appellant Assessee raised an additional ground before
the Tribunal claiming that the authorities below have grossly erred in law in
treating the lottery income of Sikkim Government as income under the Act.

Though the Tribunal allowed
the appeal partly vide order dated 26.02.1993 but it dismissed the objections
raised by the Appellant herein as to legality of assessment order and held that
the lottery amount is taxable under the provisions of Act.

However, at the instance of
the Appellant Assessee, the Tribunal framed certain questions under Act and
referred the same to the High Court for opinion, considering them the questions
of law fit for reference which are as under:

1. Whether on the facts and in the circumstance
of the case, the Hon’ble Tribunal was justified in holding that income from
Sikkim State Lottery is taxable under the Income Tax Act, 1961?

2. Whether in the facts and circumstances of the
case the Tribunal was justified in holding that deduction u/s. 80TT is
applicable on the net winning amount received by the Assessee and not on the
gross amount of the winning prize?

A Division
Bench of the High Court, vide judgment and order dated 10.09.2004, answered the
questions raised in affirmative.

Aggrieved
by the judgment and order dated 10.09.2004, the Appellant-Assessee preferred
appeal by way of special leave before the Supreme Court.

According
to the Supreme Court, the issue that arose for its consideration in the present
case was whether income from lottery earned is taxable under the Act especially
when such income was already taxed under the provisions of Sikkim State Income
Tax Rules, 1948. If so, whether the deduction that is to be allowed on such
income u/s. 80TT of the Act is on ‘gross income’ or on the ‘net income’.

The
Supreme Court noted that prior to 26.04.1975, Sikkim was not considered to be a
part of India. Any income accruing or arising there from would be treated as
income accruing or arising in any foreign country. However, by the 36^th
amendment to the Indian Constitution in 1975, Sikkim became part of the Indian
Union. This, amendment was effected by introducing Article 371F in the
Constitution.

According
to the Supreme Court, on a plain reading of this provisions of Article 371F, it
was clear that all laws which were in force prior to April 26, 1975, in the
territories now falling within the State of Sikkim or any part thereof were
intended to continue to be in force until altered or repealed. Therefore, the
law in force prior to the merger, continued to be applicable.

The
Income-tax Act was made applicable only by Notification made in 1989 and the
first assessment year would be 1990-91 and by the application of this Act, the
Sikkim State Income Tax Manual, 1948 stood repealed.

The
Supreme Court observed that in the present case, it was concerned with the
assessment year 1986-87, and, during this time, the Income-tax Act had not been
made applicable to the territories of Sikkim. The law corresponding to the
Income-tax Act, which immediately was in force in the relevant State was Sikkim
State Income Tax Rules, 1948. Hence, there could be two situations, first is that
the person was a resident of Sikkim during the time period of 1975-1990 and the
income accrued and received by him there only. In such a case, no question of
applicability of the Income-tax Act arises.

However,
the problem arises where the income accrues to a person from the State of
Sikkim who was not a resident of Sikkim but of some other part of India. The
question that arises is whether the provisions of the Income-tax Act are
applicable to such income and whether the same could be subjected to tax under
the said Act especially in light of the fact that the income has already been
subjected to tax under the Sikkim State Income Tax Rules, 1948.

According
to the Supreme Court, the Appellant, being a resident of Rajasthan, received
the income arising from winning of lotteries from Sikkim during the Assessment
Year in question was liable to be included in the hands of the assessee as
resident of India within the State of Rajasthan where Income-tax Act was in
force notwithstanding that the same had accrued or arisen to him at a place
where the Income-tax Act was not in force even in respect of income accruing to
him without taxable territory. Section 5 of the Income-tax Act casts a very
wide net and all incomes accruing anywhere in the world would be brought within
its ambit.

However,
in the present case, that the amount had been earned by the Appellant-Assessee
in the State of Sikkim and the amount of lottery prize was sent by the
Government of Sikkim to Jaipur on the request made by the Appellant. The
result, therefore, was that, while section 5 of the Act would not be
applicable, the existing Sikkim State Income Tax Rules, 1948 would be
applicable, since Sikkim was a part of India for the accounting year,
therefore, on the same income, two types of income-taxes could not be applied.
It was a fundamental Rule of law of taxation that, unless otherwise expressly
provided, income cannot be taxed twice.

According
to the Supreme Court, therefore, the only question remained to be decided was
whether in fact there was a specific provision for including the income earned
from the Sikkim lottery ticket prior to 01.04.1990 and after 1975, in the
income-tax return or not. The Supreme Court after going through the relevant
provisions could not find such a provision in the Act wherein a specific
provision has been made by the legislature for including such an income by an
Assessee from lottery ticket. In the absence of any such provision, according
to the Supreme Court, the Assessee in the present case could not be subjected
to double taxation. Furthermore, a taxing Statute should not be interpreted in
such a manner that its effect will be to cast a burden twice over for the
payment of tax on the taxpayer unless the language of the Statute is so
compelling that the court has no alternative than to accept it. In a case of
reasonable doubt, the construction most beneficial to the taxpayer is to be
adopted. So, it was clear enough that the income in the present case was
taxable only under one law. By virtue of Clause (k) to Article 371F of the
Constitution which starts with a non-obstante clause, it would be clear that
only the Sikkim Regulations on Income-tax would be applicable in the present
case. Therefore, the income could not be brought to tax any further by applying
the rates of the Income-tax Act.

In view of the aforementioned
discussions, the Supreme Court held that once the assessee had paid the income
tax at source in the State of Sikkim as per the law applicable at the relevant
time in Sikkim, the same income was not taxable under the Income-tax Act, 1961.
Having decided so, the other issue whether the income that is to be allowed deduction
u/s. 80TT of the IT Act is on ‘Net Income’ or ‘Gross Income’, became academic.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

5. Pr. CIT vs. NRA Iron and Steel Pvt. Ltd.
(2019) 412 ITR 161 (SC)

Cash credits – Where sums of money are credited as share
capital / premium: (1) The assessee is under a legal obligation to prove the
genuineness of the transaction, the identity of the creditors and
credit-worthiness of the investors who should have the financial capacity to
make the investment in question to the satisfaction of the AO, so as to discharge
the primary onus; (2) The assessing officer is duty-bound to investigate the
credit-worthiness of the creditor / subscriber, verify the identity of the
subscribers and ascertain whether the transaction is genuine, or whether these
are bogus entries of name-lenders, and (3) If the inquiries and investigations
reveal that the identity of the creditors is dubious or doubtful, or they lack
credit-worthiness, then the genuineness of the transaction would not be
established. In such a case, the assessee would not have discharged the primary
onus contemplated by section 68 of the Act.

The assessee had filed the
original return of income for the assessment year 2009-10 on 29.09.2009
declaring a total income of Rs. 7,01,870.

A notice was issued u/s. 148 of
the Act to re-open the assessment on 13.04.2012 for the reasons recorded
therein.

The assessee filed submissions
on 23.04.2012 to the notice u/s. 148, and objections on 30.04.2012. The
objections were rejected on 13.08.2012.

The assessee company in its
return showed that money aggregating to Rs. 17,60,00,000 had been received
through share capital / premium during the financial year 2009-10 from
companies located in Mumbai, Kolkata, and Guwahati. The shares had a face value
of Rs. 10 and were subscribed by the investor companies at a premium of Rs. 190
per share.

The assessee was called upon to
furnish details of the amounts received and provide evidence to establish the
identity of the investor companies, the credit-worthiness of the subscribers
and the genuineness of the transaction.

The assessee, inter alia,
submitted that the entire share capital had been received by the assessee
through normal banking channels by account payee cheques / demand drafts and
produced documents such as income tax return acknowledgments to establish the
identity and genuineness of the transaction. It was submitted that there was no
cause to take recourse to section 68 of the Act and that the onus on the
assessee company stood fully discharged.

The A.O. had issued summons to
the representatives of the investor companies. Despite the summons having been
served, nobody appeared on behalf of any of the investor companies. The
department only received submissions through postal mail, which created a doubt
about the identity of the investor companies. In some cases, the investor
companies could not be found at the given addresses.

The A.O. independently got field
inquiries conducted with respect to the identity and credit-worthiness of the
investor companies and to examine the genuineness of the transaction. Inquiries
were made in Mumbai, Kolkata, and Guwahati where these companies were stated to
be located.

The A.O. recorded that the
inquiries in Mumbai revealed that out of the four companies in the city, two
were found to be non-existent at the address furnished.

With respect to the Kolkata
companies, the response came through postal mail only. However, nobody
appeared, nor did they produce their bank statements to substantiate the source
of the funds from which the alleged investments were made.

With respect to the Guwahati
companies, Ispat Sheet Ltd. and Novelty Traders Ltd., inquiries revealed that
they were non-existent at the given address.

The A.O. found that:

(i) None of the investor-companies which had invested amounts
ranging between Rs. 90,00,000 and Rs. 95,00,000 as share capital in the
respondent company-assessee during the A.Y. 2009-10 could justify making
investment at such a high premium of Rs. 190 per share when the face value of
the shares was only Rs. 10;

(ii) Some of the investor companies were found to be
non-existent;

(iii) Hardly any one of the companies produced bank
statements to establish the source of funds for making such a huge investment
in shares, even though they were declaring a very meagre income in their
returns;

(iv) None of the investor-companies appeared before the A.O.,
but merely sent a written response through postal mail.

The A.O. held that the
assessee had failed to discharge the onus by cogent evidence either of the credit-worthiness
of the so-called investor-companies, or the genuineness of the transaction.

As a consequence, the amount of Rs. 17,60,00,000 was added
back to the total income of the assessee for the assessment year in question.
The assessee filed an appeal before the Commissioner of Income Tax (Appeals),
New Delhi. Reliance was placed on the decision of the Delhi High Court in CIT
vs. Lovely Exports Pvt. Ltd. (2008) 299 ITR 268 (Delhi). An S.L.P,
against the said judgement was dismissed.

The Commissioner of Income
Tax (Appeals), New Delhi, vide order dated 11.04.2014 deleted the addition made
by the A.O. on the ground that the respondent had filed confirmations from the
investor companies, their income tax returns, acknowledgments with PAN numbers
and copies of their bank accounts to show that the entire amount had been paid
through normal banking channels, and hence discharged the initial onus u/s. 68
of the Act, for establishing the credibility and identity of the shareholders.

The Revenue filed an appeal before the Income Tax Appellate
Tribunal (ITAT). The ITAT dismissed the appeal and confirmed the order of the
CIT(A) vide order dated 16.10.2017 on the ground that the assessee had
discharged his primary onus to establish the identity and credit-worthiness of
the investors, especially when the investor companies had filed their returns
and were being assessed.

The Revenue filed an appeal u/s. 260A of the Act before the
Delhi High Court to challenge the order of the Tribunal. The respondent
company-assessee did not appear before the High Court. Hence, the matter
proceeded ex parte. The High Court dismissed the appeal filed by the
Revenue vide the impugned order dated 26.02.2018 and affirmed the decision of
the Tribunal on the ground that the issues raised before it were urged on facts
and the lower appellate authorities had taken sufficient care to consider the
relevant circumstances. Hence no substantial question of law arose for their
consideration.

Aggrieved by the order passed by the High Court, the Revenue
filed an S.L.P. before the Supreme Court. The assessee, however, remained
unrepresented despite notices. The matter was finally heard on 5.02.2019 when
judgement was reserved.

The Supreme Court heard the learned counsel for the Revenue
and examined the material on record. According to the Supreme Court, the issue
which arose for its determination was whether the respondent-assessee had
discharged the primary onus to establish the genuineness of the transaction
required u/s. 68 of the Act.

The Supreme Court, on reading the provisions of section 68 of
the Act, was of the view that the use of the words “any sum found credited
in the books” in section 68 of the Act indicated that the section was
widely worded and included investments made by the introduction of share
capital or share premium.

The Supreme Court observed
that it was settled law that the initial onus is on the assessee to establish
by cogent evidence the genuineness of the transaction and credit-worthiness of
the investors u/s. 68 of the Act. The court noted the decisions in CIT vs.
Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal), Kale Khan Mohammad Hanif
vs. CIT (1963) 50 ITR 1 (SC) and Roshan Di Hatti vs. CIT (1977) 107 ITR (SC),
CIT vs. Oasis Hospitalities Pvt. Ltd. (2011) 333 ITR 119 (Delhi), Shankar Ghosh
vs. ITO (1985) 23 TTJ (Cal), CIT vs. Kamdhenu Steel & Alloys Limited and
Ors. (2012) 206 Taxmann 254 (Delhi). The court observed that the
judgements cited held that the A.O. ought to conduct an independent inquiry to
verify the genuineness of the credit entries.

In the present case, the court noted that the A.O. made an
independent and detailed inquiry, including survey of the so-called investor
companies located in Mumbai, Kolkata and Guwahati to verify the
credit-worthiness of the parties, the source of funds invested and the
genuineness of the transactions. The field reports revealed that the
shareholders were either non-existent, or lacked credit-worthiness.

On the issue of unexplained credit entries / share capital,
the Supreme Court examined the judgements in Sumati Dayal vs. CIT (1995)
214 ITR 801 (SC), CIT vs. P. Mohankala (2007) 291 ITR 278, Pr. CIT vs. NDR
Promoters Pvt. Ltd. (2019) 410 ITR 379, Roshan Di Hatti vs. CIT (1992) 2 SCC
378, Nemi Chand Kothari vs. CIT (2003) 264 ITR 254 (Gau), CIT vs. N.R.
Portfolio (P) Ltd. (2014) 222 Taxman 157 (Del), CIT vs. Divine Leasing &
Financing Ltd. (2007) 158 Taxman 440, and CIT vs. Value Capital
Service (P) Ltd. (2008)307 ITR 334.

The Supreme Court held that the principles which emerge where
sums of money are credited as share capital / premium are:

1) The assessee is under a legal obligation to prove the
genuineness of the transaction, the identity of the creditors and the
credit-worthiness of the investors who should have the financial capacity to
make the investment in question, to the satisfaction of the A.O., so as to
discharge the primary onus.

2) The A.O. is duty-bound to investigate the
credit-worthiness of the creditor / subscriber, verify the identity of the
subscribers and ascertain whether the transaction is genuine, or these are
bogus entries of name-lenders.

3) If the inquiries
and investigations reveal the identities of the creditors to be dubious or
doubtful, or that they lack credit-worthiness, then the genuineness of the
transaction would not be established.

In such a case, the assessee would not have discharged the
primary onus contemplated by section 68 of the Act. In the present case, the
court observed that the A.O. had conducted detailed inquiry which revealed
that:

(i) There was no
material on record to prove, or even remotely suggest, that the share
application money was received from independent legal entities. The survey
revealed that some of the investor companies were non-existent and had no
office at the address mentioned by the assessee. For example:

a. The companies Hema Trading Co. Pvt. Ltd. and Eternity
Multi Trade Pvt. Ltd. in Mumbai were found to be non-existent at the address
given and the premises was owned by some other person.

b. The companies in Kolkata did not appear before the A.O.,
nor did they produce their bank statements to substantiate the source of the
funds from which the alleged investments were made.

c. The two companies in Guwahati, viz., Ispat Sheet Ltd. and
Novelty Traders Ltd., were found to be non-existent at the address provided.

The genuineness of the transaction was found to be completely
doubtful.

(ii) The inquiries revealed that the investor companies had
filed returns for a negligible taxable income, which showed that the investors
did not have the financial capacity to invest funds ranging between Rs.
90,00,000 and Rs. 95,00,000 in the assessment year 2009-10 for purchase of
shares at such a high premium. For example:

(a) Neha Cassettes Pvt. Ltd. Kolkata had disclosed a taxable
income of Rs. 9,744 for the A.Y. 2009-10, but had purchased shares worth Rs.
90,00,000 in the assessee company;

(b) Warner Multimedia Ltd. Kolkata filed a NIL return, but
had purchased shares worth Rs. 95,00,000 in the assessee company;

(c) Ganga Builders Ltd. Kolkata had filed a return for Rs.
5,850 but invested in shares to the tune of Rs. 90,00,000 in the assessee
company.

(iii) There was no
explanation whatsoever offered as to why the investor companies had applied for
shares of the assessee company at a high premium of Rs. 190 per share, even
though the face value of the share was Rs. 10.

(iv) Furthermore, none of
the so-called investor companies established the source of funds from which the
high share premium was invested.

(v) The mere mention of the income tax file number of an investor
was not sufficient to discharge the onus u/s. 68 of the Act.

According to the Supreme Court, the lower appellate
authorities appeared to have ignored the detailed findings of the A.O. from the
field inquiry and investigations carried out by his office. The authorities
below had erroneously held that merely because the assessee had filed all the
primary evidence the onus on the assessee stood discharged. The lower appellate
authorities failed to appreciate that the investor companies which had filed
income tax returns with a meagre or nil income, had to explain how they had
invested such huge sums of money in the assessee company. Clearly, the onus to
establish the credit-worthiness of the investor companies was not discharged.
The entire transaction seemed bogus and lacked credibility. The court /
authorities below did not even advert to the field inquiry conducted by the
A.O. which revealed that in several cases the investor companies were found to
be non-existent and the onus to establish the identity of the investor
companies was not discharged by the assessee.

The Supreme Court observed that the practice of conversion of
unaccounted money through the cloak of share capital / premium must be
subjected to careful scrutiny. This would be particularly so in the case of
private placement of shares, where a higher onus is required to be placed on
the assessee since the information is within the personal knowledge of the
assessee. The assessee is under a legal obligation to prove the receipt of
share capital / premium to the satisfaction of the A.O., failure of which would
justify addition of the said amount to the income of the assessee.

The court held that on the facts of the case, the assessee
company had clearly failed to discharge the onus required u/s. 68 of the Act
and the A.O. was justified in adding back the amounts to the assessee’s income.

The Supreme Court allowed the appeal filed by the appellant –
Revenue –and set aside the judgement of the High Court, the ITAT and the
CIT(A). The order passed by the A.O. was restored.

6. CIT vs. Gujarat
Cypromet Ltd. (2019) 412 ITR 397 (SC)

Business expenditure – Conversion of unpaid interest into
funded interest loan – Explanation 3C in clear terms provides that conversion
of interest amount into loan shall not be deemed to be regarded as “actually
paid” amount within the meaning of section 43B – Interest not allowable

The respondent-assessee
filed a return of income showing total loss of Rs. 3,76,70,656 on 31.10.2001.
The assessment order was passed on 17.03.2004 for the assessment year 2001-02.

The A.O. disallowed the
deduction claimed by the assessee with regard to payment of interest amounting
to Rs. 2,51,31,154 to the Industrial Development Bank of India. The A.O.
referred to the circular dated 16.12.1988 as well as the judgement of the
Madhya Pradesh High Court in Eicher Motors Ltd. vs. CIT (2009) 315 ITR
312 (MP). The assessee, aggrieved by the A.O.’s order, filed an appeal
before the Commissioner of Income-tax (Appeals), which was partly allowed.

An appeal was filed before
the Income-tax Appellate Tribunal against the order of the Commissioner of
Income-tax (Appeals), which was dismissed by the Income-tax Appellate Tribunal
on 24.06.1985.

Against the order of the
Income-tax Appellate Tribunal, an appeal was filed in the High Court, which was
dismissed following the decision in CIT vs. Bhagwati Autocast Ltd. (2003)
261 ITR 481 (Guj).

On an appeal by the
Revenue, the Supreme Court noted that the interest liability which accrued
during the relevant assessment year was not actually paid back by the assessee,
rather, it was sought to be adjusted in the further loan of Rs. 8 crore which
was obtained from the Industrial Development Bank of India.

The Supreme Court observed
that the judgement of the Delhi High Court relied upon by the learned counsel
for the appellant in CIT vs. M.M. Aqua Technologies Ltd. (2015) 376 ITR
498 (Del) referred to section 43B as well as Explanation 3C and held
that Explanation 3C having retrospective effect with effect from 1.04.1989
would be applicable to the year in question. The Delhi High Court in its
judgement has referred to the judgement of the Madhya Pradesh High Court in Eicher
Motors Limited (supra). In Eicher Motors, the court had noted that
Explanation 3C in clear terms provided that such conversion of interest amount
into loan shall not be deemed to be regarded as “actually paid” amount within
the meaning of section 43B. In view of a clear legislative mandate removing
this doubt and making the intention of the legislature clear in relation to
such a transaction, it was not necessary to interpret the unamended section 43B
in detail.

The court held that in the
impugned judgement, the Gujarat High Court had relied upon Bhagwati
Autocast Ltd. (supra) which was not a case covered by section 43B(d),
rather, it was a case of section 43B(a). The provisions of section 43B covered
a host of different situations. The statutory Explanation 3C inserted by the
Finance Act, 2006 was squarely applicable in the facts of the present case.
According to the Supreme Court, the attention of the High Court was not invited
to Explanation 3C. The Supreme Court was of the view that the A.O. had rightly
disallowed the deduction as claimed by the assessee. The appellate authority,
the Income-tax Appellate Tribunal and the High Court had erred in reversing the
said disallowance.

The Supreme Court, therefore, allowed the appeal. The
question of law was answered in favour of the Revenue.

7. CIT vs. Tasgaon Taluka S.S.K. Ltd. (2019) 412
ITR 420 (SC)

Business expenditure – Sugarcane purchase price paid to
the cane growers by the assessee-society more than the statutory minimum price
and determined under Clause 5A of the Control Order, 1966 – The entire / whole
amount of difference between the statutory minimum price and the state advisory
price per se could not be said to be an appropriation of profit – Only
that part / component of profit, while determining the final price worked out /
state advisory price / additional purchase price would be and / or can be said
to be an appropriation of profit

The assessee, a
co-operative society engaged in the business of production of sugarcane and
sale thereof, filed its return of income for the assessment year 1998-99
declaring NIL income. In the return, the assessee computed carry-forward loss
of Rs. 40,00,339 and unabsorbed depreciation of Rs. 1,67,26,665. The return was
processed u/s. 143(1)(a) of the Act, making adjustment of Rs. 2,02,242
relatable to section 40A(3) of the Act. Thereafter, the assessee filed a
revised return wherein business loss was shown to the tune of Rs. 3,32,42,426.

It was noticed that the price paid by the assessee to the
sugarcane growers, most of whom were its members, was in excess of what was
payable as per the Sugarcane (Control) Order, 1966.

The A.O. held that the difference between the price paid as
per Clause 3 of the Control Order, 1966 determined by the Central Government,
and the price determined by the State Government under Clause 5A of the Control
Order, 1966 (and consequently paid by the assessee to the cane growers) could
be said to be a distribution of profit, as in the price determination under
Clause 5A of the Control Order, 1966, there was an element of profit and
therefore the price paid to the cane growers determined by the State Government
was excessive and therefore it was not deductible as expenditure and was
required to be included in the income of the assessee.

Alternatively, the A.O. also held that the excess cane price
paid to the cane growers over the statutory minimum price (SMP) was
disallowable as per section 40A(2)(a) of the Act by observing that the purchase
price paid was excessive and unreasonable.

On an appeal, the
Commissioner of Income Tax (Appeals), relying upon and considering the decision
of a Special Bench, Mumbai ITAT in the case of Manjara Shetkari Sakhar
Karkhana Limited dated 19.08.2004 allowed the appeal preferred by the
assessee and held that the price actually paid for the procurement of the
sugarcane is to be allowed as business expenditure. The learned CIT(A) also
observed and held that the excess payment of cane price as fixed by the State
Government (SAP) over and above the SMP for sugarcane to members and
non-members cannot be disallowed u/s. 40A(2)(b) of the Act, despite the fact that
profit is one of the components in asserting the price. The CIT(A) observed
that just because profit is one of the components in asserting the price, it
cannot be said that profit is separately distributed in the guise of additional
price. The learned CIT(A) observed that the amount paid by the
assessee–co-operative society to the sugarcane growers is considered for the
procurement of the sugarcane and it cannot be construed to be appropriation of
profits. Consequently, the learned CIT(A) deleted the addition made by the A.O.

The learned ITAT confirmed the order passed by the learned
CIT(A), which was further confirmed by the High Court. The High Court had
dismissed the appeal preferred by the department by observing that the question
was covered by the judgement of the High Court in the case of Commissioner
of Income Tax vs. Manjara Shetkari Sahakari Sakhar Karkhana Limited,
reported in (2008) 301 I.T.R. 191 (Bom).

On further appeal by the department, the Supreme Court
observed that the short question posed before it for consideration was whether
the sugarcane purchase price paid to the cane growers by the assessee-society
more than the SMP and determined under Clause 5A of the Control Order, 1966,
could be said to be the sharing of profit / appropriation of profit or was
allowable as expenditure?

The Supreme Court noted that the entire scheme / mechanism
while determining the additional purchase price under Clause 5A had been dealt
with and considered by it in detail in the case of Maharashtra Rajya Sahakari
Sakhar Karkhana Sangh Limited (1995) Supp. (3) SCC 475. In the said
decision it was observed that the additional purchase price / SAP is paid at
the end of the season; the Bhargava Commission had recommended payment of
additional price at the end of the season on 50:50 profit sharing basis between
the growers and factories to be worked out in accordance with the 2^nd
Schedule to the Control Order, 1966; that the additional purchase price
comprises of not only the cost of cultivation, but profit as well; the price
thus being paid on recovery of cane and profits made from sale of sugar is not
minimum but optimum price which is paid to a cane grower. The additional cane
price or additional state-fixed price is paid as a matter of incentive. The
entire price structure of cane is founded on two basic factors, one, the
recovery percentage and two, the incentive for sharing profit arrived at by
working out receipt minus expenditure.

Therefore, the Supreme Court held that to the extent of the
component of profit which would be a part of the final determination of SAP and
/ or the final price / additional purchase price fixed under Clause 5A would
certainly be and / or said to be an appropriation of profit. However, at the
same time, the entire / whole amount of difference between the SMP and the SAP per
se could not be said to be an appropriation of profit. Only that part / component
of profit, while determining the final price worked out / SAP / additional
purchase price would be and / or can be said to be an appropriation of profit
and for that an exercise has to be done by the A.O. by calling upon the
assessee to produce the statement of accounts, balance sheet and the material
supplied to the State Government for the purpose of deciding / fixing the final
price / additional purchase price / SAP under Clause 5A of the Control Order,
1966. Merely because the higher price is paid to both, members and non-members,
qua the members, still the question would remain with respect to the
distribution of profit / sharing of the profit.

So far as the non-members
were concerned, the same could be dealt with and / or considered applying section
40A (2) of the Act, i.e., the A.O. on the material on record has to determine
whether the amount paid is excessive or unreasonable or not. However, this
being not the subject matter in the present appeals, the Supreme Court
restricted itself to the present appeals qua the sugarcane purchase
price paid by the society to the cane growers above the SMP determined under
Clause 3 and the difference of sugarcane purchase price between the price
determined under Clause 3 and Clause 5A of the Control Order, 1966.

The Supreme Court observed that the A.O. would have to take
into account the manner in which the business works, the modalities and manner
in which SAP / additional purchase price / final price are decided and to
determine what amount would form part of the profit and after undertaking such
an exercise whatever is the profit component is to be considered as sharing of
profit / distribution of profit and the rest of the amount is to be considered
as deductible as expenditure.

In view of the above and for the reasons stated above, the question of
law was answered accordingly, partly in favour of the department and partly in
favour of the assessee.

8. Pr. CIT vs. Yes Bank Ltd. (2019)
412 ITR 459 (SC)

Appeal to the High Court – The High Court could not have
dismissed the appeal without framing any substantial question of law as was
required to be framed u/s. 260-A of the Act though heard the appeal bipartite
and that too without deciding any issue arising in the case

The appellant is the Union of India (Income Tax Department)
and the respondent-bank is the assessee.

In the course of assessment proceedings of the
respondent-assessee (bank) for the assessment year 2007-08, a question arose as
to whether the respondent-assessee (bank) was entitled to claim deduction u/s.
35-D of the Act for the assessment year in question. In other words, the
question arose as to whether the respondent-bank was an industrial undertaking
so as to entitle them to claim deduction u/s. 35-D of the Act.

The case of the respondent was that they, being an industrial
undertaking, were entitled to claim the deduction u/s. 35-D of the Act. The
A.O. passed an order dated 31.10.2009 which gave rise to the proceedings before
the Commissioner u/s. 263 of the Act which resulted in passing of an adverse
order dated 14.11.2011 by the Commissioner.

This, in turn, gave rise to the filing of the appeal by the
respondent before the ITAT against the order of the Commissioner. By an order
dated 5.12.2014, the ITAT allowed the appeal which gave rise to filing of the
appeal by the Revenue (Income-tax Department) in the High Court u/s. 260-A of
the Act.

The High Court dismissed the appeal after hearing both the
parties, giving rise to the filing of an appeal by way of a special leave
petition before the Supreme Court. The short question that arose for
consideration before the Supreme Court was whether the High Court was justified
in dismissing the appellant’s appeal.

According to the Supreme
Court, firstly, the High Court did not frame any substantive question of law as
was required to be framed u/s. 260-A of the Act though it heard the appeal
bipartite. In other words, the High Court did not dismiss the appeal in
limine on the ground that the appeal does not involve any substantial
question of law. Secondly, the High Court dismissed the appeal without deciding
any issue arising in the case saying that it was not necessary. Thirdly, the
main issue involved in the appeal, as rightly taken note of by the High Court,
was with regard to the applicability of section 35-D of the Act to the
respondent-assessee (bank). It was, however, not decided.

The Supreme Court was of the view that the High Court should
have framed the substantive question of law on the applicability of section
35-D of the Act in addition to other questions and then should have answered
them in accordance with the law rather than to leave the question(s) undecided.

The Supreme Court noted that the issue with regard to
applicability of section 35-D of the Act to the respondent-bank was already
pending consideration before the High Court at the instance of the respondent
in one appeal.
In such a case, both the appeals should have been decided together.

According to the Supreme Court, the order of the High Court
was not legally sustainable. It therefore set aside the order of the High
Court. The appeal was accordingly remanded to the High Court for its decision
on merits in accordance with law along with another appeal, if pending, after
framing proper substantive question(s) of law arising in the case.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

2. Vijay
Industries vs. CIT (2019) 412 ITR 1 (SC)

Newly-established
industrial undertakings or hotel business in backward areas – Deduction u/s.
80HH – Prior to insertion of section 80AB from 01.04.1981 – Deduction to be out
of profits and gains without deducting therefrom depreciation and investment allowance

In the appeals before the
Supreme Court, the issue related to the interpretation to be accorded to the
provisions of section 80HH, as it existed at the relevant time, during the
Assessment Years 1979-80 and 1980-81. Section 80HH provides deduction from
income at specified rates in respect of certain industrial undertakings which
are covered by the said provision.

The Supreme Court noted the
provisions of section 80HH as it stood at the relevant time and observed that
the section grants deduction from profits and gains to an undertaking engaged
in manufacturing or in the business of a hotel. The deduction is admissible at
the rate of 20% of the profits and gains of the undertaking for 10 assessment
years. Certain conditions are to be fulfilled in order to be eligible for such
a deduction. According to the Supreme Court, the conflict in the appeals before
it was confined to one aspect, viz., 20% deduction of gross profits and gains
or net income. Whereas the Assessee wants deduction at the rate of 20% of
profits and gains, i.e., gross profits, the stand of the Income Tax Department
is that deduction at the rate of 20% is to be computed after taking into
account depreciation, unabsorbed depreciation and investment allowance.

To put it otherwise, as per
the Department, the income of the Assessee is to be computed in accordance with
the provisions contained in sections 28 to 44DB which are the provisions for
computation of “income” under the head “profits and gains of business or
profession”. Once income is arrived at after the application of the aforesaid
provisions, 20% thereof is allowable as deduction u/s. 80HH. The Assessee, on
the other hand, submits that section 80HH uses the expression “profits and
gains” which is different from “income”. Therefore, whatever profits and gains
are earned by an undertaking covered by section 80HH of the Act, 20% thereof is
admissible as deduction. As a corollary, from such profits and gains of the
industrial undertaking, depreciation or unabsorbed investment allowances, which
are the deductions admissible u/s. 32 and 32AB of the Act, cannot be taken into
consideration.

The Supreme Court noted that in the case of Motilal
Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax (2000) 9 SCC 63 it
had taken the view which was favourable to the Department. This view was
followed by the High Court in the impugned judgement thereby dismissing the
appeals of the Appellants/Assessees herein. The Assessees in the present
appeals submitted that the aforesaid view taken in the Motilal Pesticides case
was not a correct view as it ignored certain earlier judgements on this very
issue. Therefore, according to them, the Motilal Pesticides case needed a
re-look. The Division Bench of the Supreme Court, after hearing the arguments
advanced by the counsel for the parties on the aforesaid lines, noted the
conflict and passed orders dated 05.11.2014, thereby referring the matter to a
larger Bench.

The Division Bench of the
Supreme Court had noted that sub-section (1) of section 80HH allows “a
deduction from such profits and gains of an amount equal to 20% thereof” in
computing the total income of the Assessee. Thus, so far as deduction
admissible under this provision is concerned, it is from the “profits and gains”.
In this context the first question would be: what meaning is to be assigned to
the expression “profits and gains”? According to the Supreme Court, the
reference order dated 05.11.2014 rightly made a distinction between “profits
and gains” and “income”, which captured the legal position lucidly and
succinctly. The High Court noted the argument of the Assessee that the concept
“profits and gains” is a wider concept than the concept of “income”. The
profits and gains/loss are arrived at after making actual expenses incurred
from the figure of sales by the Assessee. It does not include any depreciation
and investment allowance, as admittedly these are not the expenses actually
incurred by the Assessee. However, the term “income” does take into
consideration the deductions on account of depreciation and investment
allowance. Therefore, the term profits and gains is not synonymous with the
term “income”. The High Court, however, held that it was bound by the judgement
of the Supreme Court in Motilal Pesticides (I) Pvt. Limited (supra).

In that case, the Supreme
Court set out section 80HH in para 2 and section 80M in para 3 of the
judgement. It was noticed that whereas section 80HH uses the expression
“any profits and gains derived from”, section 80M uses the expression
“any income”. Section 80M was held, in the Cloth Traders (P) Ltd.
vs. CIT (1979) 118 ITR 243 (SC), to mean that for the purpose of that
section, deduction is to be allowed on the gross total income and not on net
income. This was overruled in Distributors (Baroda) Pvt. Ltd. vs. Union of
India (1985) 155 ITR 120 (SC).

The Division Bench of the
Supreme Court, which made a reference to the larger bench, in its order dated
05.11.2014 noted that Bhagwati, J. who was party to the earlier decision in the
Cloth Traders’ case, delivered a judgement in the Distributors (Baroda) case
holding that the cloth traders’ case was obviously incorrectly decided because
the words “any income” could not possibly refer to gross total income
but referred only to “net income”. Further, the Distributors (Baroda)
case followed the judgement of this Court (the Supreme Court) in Cambay
Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC) which
decision concerned itself with section 80E of the Income-tax Act. The Supreme
Court noted that in marked contrast to the section under consideration in this
appeal, i.e. 80HH, section 80E uses the expression “total income [as
computed in accordance with the provisions of this Act]” and goes on to
speak of any profits and gains, so computed, for the purpose of deduction u/s.
80E. In the present case, the said words are conspicuous by their absence in
section 80HH even though the expression “profits and gains” is the
same expression used in section 80E.

According to the Division
Bench of the Supreme Court, therefore, the finding in paragraph 4 in Motilal
Pesticides (supra) that the language of section 80HH and section 80M is
the same was, with respect, prima facie, incorrect. Conceptually,
“any income” and “profits and gains” are different under
the Income-tax Act.

The Supreme Court also
noted that section 80M read with section 80AA and AB and section 80T which
speak of “any income” and section 28 which speaks of “income
from profits and gains”, showed that conceptually the two expressions were
understood as distinct in law.

The Division Bench of the
Supreme Court further noted that in paragraph 5 of the judgement in Motilal
Pesticides (supra), the learned senior counsel appearing for the
appellant had submitted that both Cloth Traders and Distributors (Baroda) were
cases which pertained to section 80M only and the Supreme Court had no occasion
to consider the application of section 80AB with reference to section 80HH of
the Act. The Court in repelling this contention referred to another decision in
H.H. Sir Rama Varma vs. CIT (1994) 205 ITR 433 (SC), which dealt with
the then newly-enacted section 80AA and 80AB. Both these sections again were
relatable to deductions made u/s. 80M; and section 80T with which that
judgement was concerned, also uses the expression “any income” as
opposed to “profits and gains”. According to the Division Bench of
the Supreme Court, therefore, prima facie Varma’s case again had very
little to do with the concept of “profits and gains” with which it
was concerned here.

The Supreme Court held that
reading of section 80HH along with section 80A would clearly signify that such
a deduction has to be of gross profits and gains, i.e., before computing the
income as specified in sections 30 to 43D of the Act. It was correctly pointed
out by the Division Bench in the reference order that in the Motilal Pesticides
case the Court followed the judgement rendered in the Cloth Traders (P) Ltd.
case, which was a case u/s. 80M of the Act, on the premise that the language of
section 80HH and section 80M were the same. This basis was clearly incorrect as
the language of two provisions is materially different. The judgement of
Motilal Pesticides was, therefore, erroneous. The Supreme Court overruled this
judgement.

The Supreme Court was also
unable to subscribe to the contention of the learned senior counsel for the
Revenue that section 80AB, which was inserted by Finance (No. 2) Act, 1980 with
effect from 01.04.1981 was clarificatory in nature. According to the Supreme
Court, it was a provision made with prospective effect as the very Amendment
Act said so. Therefore, it could not apply to the Assessment Years 1979-80 and
1980-81, when section 80AB was brought on the statute book after these
assessment years. This position became clear from the reading of Circular No.
281 dated 22.09.1980 issued by the Central Board of Direct Taxes itself. This
circular inter alia described the reasons for adding new section 80AA
and 80AB. It referred to the judgement in the M/s. Cloth Traders case and
mentioned that the directions specified in the aforesaid sections would be
calculated with reference to the net income as computed in accordance with the
provisions of the Act (before making any deduction under Chapter VIA) and not
with reference to the gross amount of such income, subject, however, to the
other requirements of the respective sections. Notwithstanding the same, this
circular also categorically mentioned that it will take effect from 01.04.1981.

The Supreme Court allowed
all the appeals.

3. CIT
vs. Rashtradoot (HUF) (2019) 412 ITR 17 (SC)

Appeal to
the High Court – Section 260A – The High Court could not have dismissed the
appeal after hearing both parties without having framed question(s) and
answered them by assigning reasons – Matter remanded

Income tax proceedings were
initiated against the Respondent (Assessee) on the basis of a search operation
which was carried out by the Income-tax Department in the Assessee’s premises
on 04.09.1997. This gave rise to initiation of assessment proceedings for the
block period from 01.04.1987 to 04.09.1997 (Assessment Years 1987-88 to 1996-97
and 1997-98 up to 04.09.1997) against the Assessee to determine their tax
liability as a result of search operations carried out in their premises. The
matter, out of the block assessment proceedings, reached the Tribunal (ITAT) at
the instance of the Respondent against the order of the assessing authorities.
The Tribunal, however, decided the various issues arising in the case in favour
of the Respondent (Assessee) by allowing the Respondent’s appeal, which gave
rise to filing of the appeal by the Revenue before the High Court u/s. 260A of
the Income-tax Act, 1961.

The High Court by impugned
judgement dismissed the Revenue’s appeal, which gave rise to filing of the
appeal by way of special leave by the Revenue in the Supreme Court.

According to the Supreme
Court, the High Court neither discussed nor assigned any reason in support of
its conclusion for the dismissal of the appeal. Apart from the above, the High
Court while deciding the appeal heard the learned counsel for the parties and
yet did not frame any substantial question of law arising in the case.

According
to the Supreme Court, the High Court has jurisdiction to dismiss the appeal
filed u/s. 260A of the Act on the ground that it does not involve any
substantial question of law. Such dismissal is considered as a dismissal of the appeal in limine, i.e., dismissal without issuing any
notice of appeal to the Respondent and without hearing the Respondent. The High
Court also has the jurisdiction to dismiss the appeal by answering the
question(s) framed on merits or by dismissing the appeal on the ground that the
question(s) though framed, such question(s) does/do not arise in the appeal.
The High Court, although it may not have framed any particular question at the
time of admitting the appeal along with other questions, yet it has the
jurisdiction to frame additional questions at a later stage before final
hearing of the appeal by assigning reasons as provided in proviso to section
260A (4) and section 260A (5) of the Act; and lastly, the High Court has
jurisdiction to allow the appeal but this the High Court can do only after
framing the substantial question(s) of law and hearing the Respondent by
answering the question(s) framed in the Appellant’s favour.

However, in this case, the
Supreme Court found that the High Court did not dismiss the appeal in limine
but dismissed it after hearing both the parties. In such a situation, according
to the Supreme Court, the High Court should have framed the question(s) and
answered them by assigning the reasons accordingly one way or another by
exercising powers under sub-section (4) and (5) of section 260A of the Act.

In the absence of any
discussion and/or the reasoning/ground as to why the order of ITAT does not
suffer from any illegality and why the grounds of Revenue are not acceptable
and why the appeal does not involve any substantial question(s) of law, or
though framed cannot be answered in Revenue’s favour, the Supreme Court held
that the impugned order suffered from jurisdictional errors and, therefore, was
legally unsustainable for want of compliance of the requirements of sub-section
(4) and (5) of section 260A of the Act.

The Supreme Court thus
allowed the appeal, setting aside the impugned order and remanded the case to
the High Court with a request to decide the appeal filed by the Revenue
(Commissioner of Income Tax) afresh on merits in accordance with law.

4. Kakadia Builders Pvt. Ltd. and Ors. vs. ITO (2019)
412 ITR 128 (SC)

Settlement
Commission – Waiver of interest – The Commission does not have the power to
reduce or waive interest statutorily payable u/s. 234A, 234B and 234C except to
the extent of granting relief under the circulars issued by the Board u/s. 119
of the Act – The terminal point for the levy of interest u/s. 234B would be up
to the date of the order u/s. 245D (1) and not up to the date of the order of
settlement u/s. 245D (4) – Commission cannot reopen its concluded proceedings
by invoking section 154 of the Act so as to levy interest u/s. 234B

On 19.01.1994, a search and
seizure operation was carried out in the premises of the Appellants (Assessee)
under the Income-tax Act, 1961.

During pendency of the
assessment proceedings, which were initiated for determination of the tax
liability as a result of search and seizure operation, the Appellants on
12.03.1996 and 03.09.1996 filed the settlement applications before the
Settlement Commission and offered to settle their tax matter in accordance with
the procedure provided under Chapter XIXA of the Act.

On 11.08.2000, the
Settlement Commission passed an order u/s. 245D (4) of the Act. By the said
order, the Settlement Commission made certain additions and waived interest
chargeable u/s. 234A, 234B and 234C of the Act.

The Appellants (Assessee)
felt aggrieved and filed rectification applications before the Settlement
Commission on 29.12.2000 for amending its order dated 11.08.2000. The Revenue
(Commissioner of Income-tax) also felt aggrieved by the order dated 11.08.2000
and filed a rectification application u/s. 154 of the Act before the Settlement
Commission on 26.07.2002.

By order dated 11.10.2002,
the Settlement Commission dismissed the applications filed by the Appellants
(Assessee) and partly allowed the application filed by the Respondents
(Revenue) rectifying its order dated 11.08.2000 insofar as it pertained to
waiver of interest, which was granted to the Appellants (Assessee). The
Appellants (Assessee) felt aggrieved by the order dated 11.10.2002 passed by
the Settlement Commission and filed petitions in the High Court of Gujarat.

The High Court, by order
dated 03.03.2014, allowed the petitions and set aside the order dated
11.10.2002 passed by the Settlement Commission and granted liberty to the
Revenue to follow the remedies as may be available to it against the order
passed by the Settlement Commission dated 11.08.2000.

The Revenue, therefore,
felt aggrieved and filed petitions against the order dated 11.08.2000
questioning its legality. The High Court, although in the concluding paragraph
observed that the petitions are disposed of, yet in substance it allowed the
petitions and modified the order dated 11.08.2000 of the Settlement Commission
by reversing the waiver of interest in terms of the Settlement Commission’s
directions contained in its order dated 11.10.2002.

The Appellants (Assessee)
felt aggrieved by the said order and filed the appeals by way of special leave
in the Supreme Court.

The short question which
arose for consideration in the appeals before the Supreme Court was whether the
High Court was justified in allowing the petitions and thereby was justified in
modifying the order dated 11.08.2000 passed by the Settlement Commission.

At the outset, the Supreme
Court noted that the issue involved in the appeals was governed by the law laid
down by the decision of two Constitution Benches of the Supreme Court. One was
rendered on 18.10.2001 in Commissioner of Income-tax, Mumbai vs. Anjum M.H.
Ghaswala and Ors. (2001) 252 ITR 1 (SC) and the other was rendered on
21.10.2010 in Brij Lal and Ors. vs. Commissioner of Income-tax, Jalandhar
(2010) 328 ITR 477 (SC).

So far as the decision
rendered in Ghaswala (supra) is concerned, the question involved therein
was whether the Settlement Commission constituted u/s. 245B of the Act has the
jurisdiction to reduce or waive the interest chargeable u/s. 234A, 234B and
234C of the Act while passing the order of settlement u/s. 245D of the Act.
After examining the scheme of the Act in the context of the powers of the
Settlement Commission, it was held that the Commission in exercise of its power
u/s. 245D (4) and (6), does not have the power to reduce or waive interest
statutorily payable u/s. 234A, 234B and 234C except to the extent of granting
relief under the circulars issued by the Board u/s. 119 of the Act. So far as
the decision rendered in Brijlal (supra) is concerned, the Supreme Court
examined the following three questions:

(I) Whether section 234B
applies to proceedings of the Settlement Commission under Chapter XIX-A of the
said Act?

(II) If the answer to the
above question is in the affirmative, what is the terminal point for levy of
such interest – whether such interest should be computed up to the date of the
order u/s. 245D (1), or up to the date of the order of the Commission u/s. 245D
(4)?

(III) Whether the
Settlement Commission could reopen its concluded proceedings by invoking
section 154 of the said Act so as to levy interest u/s. 234B, though it was not
so done in the original proceedings?

After examining these
questions, the Supreme Court answered the questions as under:

(1) Sections 234A, 234B and
234C are applicable to the proceedings of the Settlement Commission under
Chapter XIX-A of the Act to the extent indicated hereinabove.

(2) Consequent upon
conclusion (1), the terminal point for the levy of interest u/s. 234B would be
up to the date of the order u/s. 245D (1) and not up to the date of the order
of settlement u/s. 245D (4).

(3) The Settlement
Commission cannot reopen its concluded proceedings by invoking section 154 of
the Act so as to levy interest u/s. 234B, particularly in view of section 245I.

The Supreme Court noted
that when the Settlement Commission passed the first order on 11.08.2000
disposing of the application of the Appellants (Assessee), the issue with
regard to the powers of the Settlement Commission was not settled by any
decision of this Court. These two decisions were rendered after the Settlement
Commission passed the order in this case. Therefore, the Settlement Commission
had no occasion to examine the issue in question in the context of law laid
down by this Court in these two decisions. However, the issue in question was,
at that time, pending before the High Court in the petitions.

According to the Supreme
Court, in a situation like the one arising in the case, the High Court instead
of going into the merits of the issue, should have set aside the order dated
11.08.2000 passed by the Settlement Commission and remanded the case to the
Settlement Commission for deciding the issue relating to waiver of interest
payable u/s. 234A, 234B, and 234C of the Act afresh keeping in view the scope
and the extent of powers of the Settlement Commissioner in relation to waiver
of interest as laid down in the said two decisions.

The
Supreme Court was of the view that the High Court had committed a
jurisdictional error when it observed that they (the High Court) adopted the
directions contained in the order of the Settlement Commission dated 11.10.2002
and then went on to make the said directions as a part of the impugned order in
relation to waiver of interest. This approach of the High Court was wholly
without jurisdiction.

The High Court failed to
see that the order dated 11.10.2002 of the Settlement Commission was already
set aside by the High Court itself in the first round vide order dated
03.03.2014 in the light of law laid down by this Court in Brijlal (supra)
wherein it is laid down that the Settlement Commission has no power to pass
orders u/s. 154.

The Supreme Court allowed the appeal setting aside the impugned
order and the order dated 11.08.2000 passed by the Settlement Commission to the
extent it decided the issue in relation to waiver of interest and remanded the
case to the Settlement Commission to decide the issue relating to waiver of
interest payable by the Assessee afresh keeping in view the law laid down by
this Court in Ghaswala (supra) and Brijlal (supra) after
affording an opportunity to the parties concerned.

BCAJ Admin

Glimpses Of Supreme Court Rulings

12. Industrial
Infrastructure Development Corporation (Gwalior) M. P. Ltd. vs. CIT (2018) 403
ITR 1 (SC)

Registration
of Trusts – Commissioner of Income-tax had no power to cancel registration till
October 1, 2004 and the power conferred by the amendment was prospective –
Order of Commissioner of Income-tax passed u/s. 12A is quasi judicial in nature
and therefore section 21 of General Clauses Act has no application

The Appellant, a State
Government Undertaking, was established with a view to develop and assist the
State in the development of industrial growth centers/areas, to promote,
encourage and assist the establishment growth and development of industries in
the State of M.P.

On 10.02.1999, the
Appellant filed an application in the format prescribed u/s. 12-A of the Act to
the Commissioner of Income Tax (hereinafter referred to as “the CIT”)
for grant of registration. According to the Appellant, since they were engaged
in public utility activity which, according to them, was for a charitable
purpose u/s. 2(15) of the Act, they were entitled to claim registration as
provided u/s. 12A of the Act. Since the application for registration was
delayed in its filing, the Appellant also made an application for condonation
of delay in filing the application.

By order dated 13.04.1999,
the CIT (Gwalior) condoned the delay and granted the registration certificate
as prayed for by the Appellant. In Clause 3 of the registration certificate, it
was mentioned that the certificate is granted without prejudice to the
examination on merits of the claim of exemption after the return is filed.

On 27.11.2000, the CIT
issued a show cause notice to the Appellant stating therein as to why the
registration certificate granted to the Appellant by order dated 10.02.1999
u/s.12A of the Act be not cancelled/withdrawn. The show cause notice also set
out the factual grounds for the withdrawal of the registration certificate. The
Appellant was asked to reply the show cause notice. The Appellant accordingly
filed their reply and opposed the grounds on which the withdrawal/cancellation
of the certificate was proposed.

By order dated 29.04.2002,
the CIT did not find any substance in the stand taken by the Appellant in their
reply and accordingly cancelled/withdrawn the certificate issued to the
Appellant.

The Appellant felt
aggrieved and filed rectification application u/s.154 of the Act before the CIT
on 04.07.2002 contending therein that the order of the CIT dated 29.04.2002
cancelling/withdrawing the registration certificate contains an error apparent
and, therefore, it is required to be rectified or/and recalled. It was
contended that once the CIT grants the registration certificate u/s. 12A, he
has no power to cancel/recall the certificate granted to the Assessee.

On 20.12.2002, the CIT
rejected the application filed by the Appellant for rectification holding that
there was no error in his order cancelling the registration certificate granted
to the Appellant. In other words, the CIT held that he had the power to cancel
the certificate once granted by him and, therefore, the order for cancelling
the registration certificate is legal and proper.

Aggrieved by the said
order, the Appellant filed an appeal before the Income Tax Appellate Tribunal,
Agra Bench. By order dated 26.08.2004, the ITAT allowed the Appellant’s appeal
and set aside the order dated 29.04.2002 passed by the CIT by which he had
cancelled/withdrawn the registration certificate.

The Revenue felt aggrieved
by the order of the ITAT and filed appeal in the High Court at Gwalior Bench
u/s. 260-A of the Act. The High Court, allowed the appeal filed by the Revenue
and set aside the order passed by the ITAT and restored the order of the CIT.

The Division Bench of the
High Court placed reliance on section 21 of the General Clauses Act and held
that since there is no express power in the Act for cancelling the registration
certificate u/s. 12A of the Act and hence power to cancel can be traced from
section 21 of the General Clauses Act to support such order. In other words, in
the opinion of the High Court, section 21 is the source of power to pass
cancellation of the certification granted by the CIT when there is no express
power available u/s. 12A of the Act.

It is against this order,
the Assessee felt aggrieved and filed the appeal by way of special leave before
the Supreme Court.

According to the Supreme
Court, the main questions, that arose for its consideration in this appeal,
were four:

First, whether the CIT has
express power to cancel/withdraw/recall the registration certificate once
granted by him u/s. 12A of the Act and, if so, under which provision of the
Act?

Second, when the CIT grants
registration certificate u/s.12A of the Act to the Assessee, whether grant of
certificate is his quasi judicial function and, if so, its effect on exercise
of his power of cancellation of such grant of registration certificate?

Third, whether Section 21
of the General Clauses Act can be applied to support the order of cancellation
of the registration certificate granted by the CIT u/s. 12A of the Act, in
case, if it is held that there is no express power of cancellation of
registration certificate available to the CIT u/s. 12A of the Act? and

Fourth, what is the effect
of the amendment made in section 12AA introducing Sub-clause (3) therein by
Finance (No-2) Act 2004 w.e.f. 01.10.2004 conferring express power on the CIT
to cancel the registration certificate granted to the Assessee u/s. 12A of the
Act.

The Supreme Court held
that, the CIT had no express power of cancellation of the registration
certificate once granted by him to the Assessee u/s. 12A till 01.10.2004. It is
for the reasons that, first, there was no express provision in the Act vesting
the CIT with the power to cancel the registration certificate granted u/s. 12A
of the Act. Second, the order passed u/s. 12A by the CIT is a quasi judicial
order and being quasi judicial in nature, it could be withdrawn/recalled by the
CIT only when there was express power vested in him under the Act to do so. In
this case there was no such express power.

Indeed, the functions
exercisable by the CIT u/s. 12A are neither legislative and nor executive but
as mentioned above they are essentially quasi judicial in nature.

Third, an order of the CIT
passed u/s. 12A does not fall in the category of “orders” mentioned
in Section 21 of the General Clauses Act. The expression “order”
employed in section 21 would show that such “order” must be in the
nature of a “notification”, “rules” and “bye
laws” etc. (see – Indian National Congress (I) vs. Institute of
Social Welfare and Ors., 2002 (5) SCC 685).

In other words, the order,
which can be modified or rescinded by applying section 21, has to be either
executive or legislative in nature whereas the order, which the CIT is required
to pass u/s. 12A of the Act, is neither legislative nor an executive order but
it is a “quasi judicial order”. It is for this reason, section 21 has
no application in this case.

The general power, u/s. 21
of the General Clauses Act, to rescind a notification or order has to be
understood in the light of the subject matter, context and the effect of the
relevant provisions of the statute under which the notification or order is
issued and the power is not available after an enforceable right has accrued
under the notification or order. Moreover, section 21 has no application to
vary or amend or review a quasi judicial order. A quasi judicial order can be
generally varied or reviewed when obtained by fraud or when such power is
conferred by the Act or Rules under which it is made. (See Interpretation of
Statutes, Ninth Edition by G.P. Singh page 893).

According to the Supreme
Court, it was not in dispute that an express power was conferred on the CIT to
cancel the registration for the first time by enacting sub-section (3) in
section 12AA only with effect from 01.10.2004 by the Finance (No. 2) Act 2004
(23 of 2004) and hence such power could be exercised by the CIT only on and
after 01.10.2004, i.e., (assessment year 2004-2005), because the amendment in
question was not retrospective but was prospective in nature.

The Supreme Court allowed
the appeal setting aside the order of the High Court and restoring the order of
the ITAT, however clarifying that, the CIT would be free to exercise his power
of cancellation of registration certificate u/s. 12AA(3) of the Act in the case
at hand in accordance with law.

13. The
Director, Prasar Bharati vs. CIT (2018) 403 ITR 161 (SC)

Deduction
of tax at source – Payments made by the Appellant pursuant to the agreement in
question were in the nature of payment made by way of “commission”
and, therefore, the Appellant was under statutory obligation to deduct the
income tax at the time of credit or/and payment to the payee

The Appellant known as
“Prasar Bharati Doordarshan Kendra” functioned under the Ministry of
Information and Broadcasting, Government of India. The dispute in this case
related to the Appellant’s Regional Branch at Trivandrum.

The Appellant, in the
course of their business activities, which included the running of the TV
channel called “Doordarshan”, had been regularly telecasting
advertisements of several consumer companies.

With a view to have a
better regulation of the practice of advertising and to secure the best
advertising services for the advertisers, the Appellant entered into an
agreement with several advertising agencies. The agreement, inter alia,
provided that the Appellant would pay 15% by way of commission to the Agency.

In the assessment year
2002-2003 (01.06.2001 to 31.03.2002) and 2003-2004 (01.04.2002 to 31.03.2003),
the Appellant paid a sum of Rs. 2,56,75,165/- and Rs. 2,29,65,922/- to various
accredited Agencies, with whom they had entered into the aforementioned agreement
for telecasting the advertisements given by these Agencies relating to products
manufactured by several consumer companies. The amount was paid by the
Appellant to the Agencies towards the commission in terms of
the agreement.

The AO was of the view that
the provisions of section 194H of the Act were applicable to the payments made
by the Appellant to the Agencies because the payments were made in the nature
of “commission” as defined in Explanation appended to section 194H of
the Act. The AO held that the Appellant, therefore, committed default thereby
attracting the rigor of section 201(1) of the Act because they failed to deduct
the “tax at source” from the amount paid to various advertising
agencies during the Assessment Years in question as provided u/s.194A of the
Act.

On quantification, the AO
found that during the Assessment Year 2002-2003, the Appellant had paid a sum
of Rs. 2,56,75,165/- towards the commission to the Agencies and on this sum,
they were required to deduct tax amount to Rs. 16,34,283/- and a sum of Rs.
3,80,611/- towards interest for delayed payment u/s. 201(1-A) of the Act and
during the Assessment Year 2003-2004, the Appellant had paid a sum of Rs.
2,29,65,922/- towards the commission to the Agencies and on this sum, they were
required to deduct tax amounting to Rs. 11,15,944/- and a sum of Rs. 1,54,050/-
towards interest for delayed payment u/s. 201(1-A) of the Act.

The Appellant felt
aggrieved and filed appeals before the Commissioner of Income Tax (Appeals)-II,
Thiruvananthapuram. By order dated 04.03.2005, the Commissioner concurred with
the reasoning and conclusion arrived at by AO and accordingly dismissed the
appeals.

The Appellant felt
aggrieved and filed appeals before the Tribunal. By order dated 28.03.2007, the
Tribunal following its earlier order allowed the appeals and set aside the
orders passed by AO and CIT (Appeals).

The Revenue (Income Tax
Department), felt aggrieved by the order passed by the Tribunal, filed appeals
u/s. 260-A of the Act in the High Court. By impugned judgment, the High Court
allowed the appeals and while setting aside the Tribunal’s order restored the order of CIT (Appeals) and AO.

The High Court was of the
opinion that the provisions of section 194H were applicable to the payments made
by the Appellant to the Agencies during the period in question because the
payments made were in the nature of “commission” paid to the Agencies
as defined in Explanation appended to section 194H of the Act and since the
Appellant failed to deduct the “tax at source” while making these
payments to the Agencies in terms of the agreement in question, they committed
default of non-compliance of section 194H resulting in attracting the
provisions of section 201 of the Act.

The Appellant (Assessee)
felt aggrieved and filed appeals by way of special leave in Supreme Court.

According to the Supreme
Court, the High Court was right in holding that the provisions of section 194H
were applicable to the Appellant because the payments made by the Appellant
pursuant to the agreement in question were in the nature of payment made by way
of “commission” and, therefore, the Appellant was under statutory
obligation to deduct the income tax at the time of credit or/and payment to the
payee.

The aforementioned
conclusion of the High Court was clear from the undisputed facts emerging from
the record of the case because we notice that the agreement itself has used the
expression “commission” in all relevant clauses; Second, there is no
ambiguity in any Clause and no complaint was made to this effect by the
Appellant; Third, the terms of the agreement indicate that both the parties
intended that the amount paid by the Appellant to the agencies should be paid
by way of “commission” and it was for this reason, the parties used
the expression “commission” in the agreement; Fourth, keeping in view
the tenure and the nature of transaction, it is clear that the Appellant was
paying 15% to the agencies by way of “commission” but not under any
other head; Fifth, the transaction in question did not show that the
relationship between the Appellant and the accredited agencies was principal to
principal rather it was principal and Agent; Sixth, it was also clear that
payment of 15% was being made by the Appellant to the agencies after collecting
money from them and it was for securing more advertisements for them and to
earn more business from the advertisement agencies; Seventh, there was a Clause
in the agreement that the tax shall be deducted at source on payment of trade
discount; and lastly, the definition of expression “commission” in
the Explanation appended to Section 194H being an inclusive definition giving
wide meaning to the expression “commission”, the transaction in
question did fall under the definition of expression “commission” for
the purpose of attracting rigour of section 194H of the Act.

14. K.
Raveendranathan Nair vs. CIT (2018) 403 ITR 180 (SC)

Appeal to
the High Court – Court fees – Wherever Assessee is in appeal in the High Court
which is filed u/s. 260A of the IT Act, the court fee payable shall be the one
which was payable on the date of such assessment order – In those cases where
the Department files appeal in the High Court u/s. 260A of the IT Act, the date
on which the appellate authority set aside the judgement of the Assessing
Officer would be the relevant date for payment of court fee

The Supreme Court noted
that by amendment in the Income Tax Act, 1961 (hereinafter referred to as the
‘IT Act’) in the year 1998, section 260A was inserted providing for statutory
appeal against the orders passed by the Income Tax Appellate Tribunal. In this
very section, under sub-section (2)(b), court fees on such appeals was also
prescribed which was fixed at Rs. 2,000/-. However, sub-section (2)(b) of
section 260A prescribing the aforesaid fee was omitted by amendment carried out
in the said Act, with effect from June 01, 1999. It was presumably for the
reason that insofar as court fee payable on such appeals are concerned, which
are to be filed in the High Court, it is the State Legislature which is
competent to legislate in this behalf.

In the State of Kerala, the
law of court fee is governed by the Kerala Court Fees and Suits Valuation Act,
1959 (hereinafter referred to as the ‘1959 Act’). Section 52 thereof relates to
the fee payable in appeals. Thus, with the omission of Clause (b) of
sub-section (2) of section 260A of the IT Act, fee became payable on such
appeals as per section 52. The State Legislature thereafter amended the 1959
Act by Amendment Act of 2003 and inserted section 52A therein, which was passed
on March 06, 2003. In fact, before that an Ordinance was promulgated on October
25, 2002 which was replaced by the aforesaid Amendment Act, the Act
categorically provided that section 52A is deemed to have come into force on
October 26, 2002. As per the amended provision, viz. section 52A of the 1959
Act, the fee on memorandum of appeals against the order of the Income Tax
Appellate Tribunal or Wealth Tax Appellate Tribunal is to be paid at the rates
specified in sub-item (c) of item (iii) of Article 3 of Schedule II. This
sub-item (c) reads as under:

(c) Where such income                         One
percent of the assessed income,
     exceeds two lakh rupees                   subject to a maximum of ten
thousand rupees

It is clear from the above
that fee is now payable, where such income exceeds two lakh rupees, at the rate
of 1% of the ‘assessed income’, subject to a maximum of ten thousand rupees.

The question that arose for
consideration before the High Court in the impugned judgement, against which
the appeals arose before the Supreme Court, was payment of fee as per the
aforesaid Schedule on the appeals that are filed on or after October 26, 2002.
As per the State of Kerala, on all appeals which are filed against the order of
Income Tax Appellate Tribunal or the Wealth Tax Appellate Tribunal on or after
October 26, 2002, fee is payable as per the aforesaid amended provisions. The
Appellant herein, however, contend that in all those cases which were even
pending before the lower authorities, i.e. the Assessing Officer, Commissioner
of Income Tax (Appeals) or Income Tax Appellate Tribunal and orders were passed
even before October 01, 1998, the right to appeal had accrued with effect from
October 01, 1998 and, therefore, such cases would be governed as on the date
when the orders were passed by the lower authorities and the court fee would be
payable as per the unamended provisions. The High Court has not accepted this
plea of the Appellant and has held that any appeal ‘filed’ on or after October
26, 2002 shall be governed by section 52A of the 1959 Act.

The Supreme Court held as
under:

(i) Wherever Assessee is in
appeal in the High Court which is filed u/s. 260A of the IT Act, if the date of
assessment is prior to March 06, 2003, section 52A of the 1959 Act shall not
apply and the court fee payable shall be the one which was payable on the date
of such assessment order.

(ii) In those cases where
the Department files appeal in the High Court u/s. 260A of the IT Act, the date
on which the appellate authority set aside the judgement of the Assessing
Officer would be the relevant date for payment of court fee. If that happens to
be before March 06, 2003, then the court fee shall not be payable as per
Section 52A of the 1959 Act on such appeals.

15. B. L. Passi vs. CIT (2018) 404 ITR 19 (SC)

Royalty or
fees for technical services – The Appellant was not entitled to deduction u/s.
80-O as there was no material on record to prove the sales effected by Sumitomo
Corporation to its customers in India in respect of any product developed with
the assistance of Appellant’s information and also on as to how the service
charges payable to Appellant were computed

The Appellant filed his
return disclosing income of Rs.
57,40,360/- for the
Assessment Year (AY) 1997-98 while claiming deduction of Rs. 58,87,045/-
under Section 80-O of the Income Tax Act, 1961 (in short ‘the IT Act’) on a
gross foreign exchange receipt of Rs. 1,17,74,090/- received from Sumitomo
Corporation, Japan. Sumitomo Corporation was interested in supplying dies for
manufacturing of body parts to Indian automobile manufacturers and entered into
a contract with the Appellant under which the services of the Appellant herein
were engaged by using his specialised commercial and industrial knowledge about
the Indian automobile industry. Sumitomo Corporation also agreed to pay
remuneration at the rate of 5% of the contractual amount between Sumitomo Corporation
and its Indian customers on sales of its products so developed. The Appellant
claimed to have supplied to Sumitomo Corporation the industrial and commercial
knowledge, information about market conditions and Indian manufacturers of
automobiles and also technical assistance as required by the Corporation.

The case of the Appellant
was selected for scrutiny by the Income Tax Department, Delhi and in response
to notice u/s. 143(2) of the IT Act, the Appellant along with others attended
the assessment proceedings from time to time justifying the claim u/s. 80-O of
the IT Act. The Assessing Officer, vide order dated 27.03.2000 u/s.143(3) of
the IT Act assessed the total income at Rs. 1,18,43,060/- and determined the
sum payable by the Assessee to the tune of Rs. 43,25,960/-. Being aggrieved by
the order dated 27.03.2000, the Appellant preferred an appeal before the
Commissioner of Income Tax (Appeals). The Appellate Authority, vide order dated
20.02.2002, partly allowed the appeal and held that the Appellant is entitled
to deduction u/s. 80-O of the IT Act. Being aggrieved by the order dated
20.02.2002, the Revenue went in appeal before the Tribunal. The Tribunal, vide
order dated 10.10.2005, allowed the appeal filed by the Revenue. The Appellant
approached the High Court by filing an appeal challenging the order of the
Tribunal dated 10.10.2005 which was dismissed on 13.12.2006 by a Division Bench
of the High Court.

Aggrieved by the judgement
and order dated 13.12.2006, the Appellant filed this appeal by way of special
leave before the Supreme Court.

The Supreme Court noted
that, provisions similar to section 80-O of the Act were originally in the
former section 85-C of the Income Tax Act, 1961 which was substituted by
Finance (No. 2) Act, 1971. Section 80-O was inserted in place of section 85C
which was deleted by the Finance (No. 2) Act, 1967. While moving the bill
relevant to the Finance Act No. 2 of 1967, the then Finance Minister highlighted
the fact that fiscal encouragement needs to be given to Indian industries to
encourage them to provide technical know-how and technical services to newly
developing countries. It is also seen that the object was to encourage Indian
companies to develop technical know-how and to make it available to foreign
companies so as to augment the foreign exchange earnings of this country and
establish a reputation of Indian technical know-how for foreign countries. The
objective was to secure that the deduction under the section shall be allowed
with reference to the income which is received in convertible foreign exchange
in India or having been received in convertible foreign exchange outside India,
is brought to India by and on behalf of taxpayers in accordance with the
Foreign Exchange Regulations.

The Supreme Court in
respect to the facts of the case at hand observed that, it was evident from
record that the major information sent by the Appellant to the Sumitomo
Corporation was in the form of blue prints for the manufacture of dies for
stamping of doors. Several letters were exchanged between the parties but there
was nothing on record as to how this blue print was obtained and dispatched to
the aforesaid company. It was also evident on record that the Appellant has not
furnished the copy of the blue print which was sent to the Sumitomo Corporation
neither before the Assessing Officer nor before the Appellate authority nor
before the Tribunal. The provisions of section 80-O of the IT Act mandate the
production of document in respect of which relief has been sought. The Supreme
Court was of the opinion that therefore it had to examine whether the services
rendered in the form of blue prints and information provided by the Appellant
fell within the ambit of section 80-O of the IT Act or any of the conditions
stipulated therein in order to entitle the Assessee to claim deduction.

The blue prints made
available by the Appellant to the Corporation could be considered as technical
assistance provided by the Appellant to the Corporation in the circumstances if
the description of the blue prints was available on record. The said blue
prints were not even produced before the lower authorities. In such scenario,
when the claim of the Appellant was solely relying upon the technical
assistance rendered to the Corporation in the form of blue prints, its
unavailability created a doubt and burden of proof was on the Appellant to
prove that on the basis of those blue prints, the Corporation was able to start
up their business in India and he was paid the amount as service charge.

Further, with regard to the
remuneration to be paid to the Appellant for the services rendered, in terms of
the letter dated 25.01.1995, it had been specifically referred that the
remuneration would be payable for the commercial and industrial information
supplied only if the business plans prepared by the Appellant resulted
positively. Sumitomo Corporation would pay to PASCO International service
charges equivalent to 5% (per cent) of the contractual amount between Sumitomo
and its customers in India on sales of its products so developed. From a
perusal of the above, it was clear to the Supreme Court that the Appellant was
entitled to service charges at the rate of 5% (per cent) of the contractual
amount between Sumitomo Corporation and its customers in India on sales of its
products so developed but there was nothing on record to prove that any product
was so developed by the Sumitomo Corporation on the basis of the blue prints
supplied by the Appellant as also that the Sumitomo Corporation was able to
sell any product developed by it by using the information supplied by the
Appellant. Meaning thereby, there was no material on record to prove the sales
effected by Sumitomo Corporation to its customers in India in respect of any
product developed with the assistance of Appellant’s information and also on as
to how the service charges payable to Appellant were computed.

In view of the foregoing
discussion, the Supreme Court was of the view that in the present facts and
circumstances of the case, the services of managing agent, i.e., the Appellant,
rendered to a foreign company, were not technical services within the meaning
of section 80-O of the IT Act. The Appellant had failed to prove that he
rendered technical services to the Sumitomo Corporation and also the relevant
documents to prove the basis for alleged payment by the Corporation to him. The
letters exchanged between the parties could not be claimed for getting
deduction u/s. 80-O of the IT Act.

The Supreme Court further held
that the Appellant was a managing agent and the High Court was right in holding
the principal agent relationship between the parties and that there was no
basis for grant of deduction to the Appellant u/s. 80-O of the IT Act.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

9 Pr. Commissioner of Income Tax vs. Aarham Softronics (2019) 412 ITR 623 (SC)

Industrial
undertaking – Deduction u/s. 80-IC – Eligible to claim deduction of 100% of the
profits for first five years and thereafter at 25% of profits for next five
years – Carries out substantial expansion within ten-year period – Further
entitled to deduction of 100% of profits from the year of expansion – Total
period of deduction, however, not to exceed ten years – Classic Binding
Industries’ case (407 ITR 429) not a good law

To understand
the question of law that arose before the Supreme Court in clear terms, the
Court noted that sub-section (2) of section 80-IC applies to an undertaking or
enterprise which has, inter alia, begun or begins to manufacture or
produce any article or thing by setting up a new factory in the area specified
therein, which includes the State of Himachal Pradesh. Sub-section (3) of
section 80-IC is in two parts: in certain cases, exemption from income is
provided at the rate of 100% of such profits and gains earned from the
aforesaid undertaking or enterprise for ten assessment years commencing with
the initial assessment year. The other clause relates to another category of
undertakings or enterprises (to which the cases before it belong) where the
exemption is at the rate of 100% of profits and gains for five assessment years
commencing with the initial assessment year and, thereafter, 25% of profits and
gains. The total exemption, thus, is for a period of ten years, namely, @100%
for the first five years and @ 25% for the remaining five years.

In the cases
before the Supreme Court, all the assessees started claiming exemption @ 100%
on profits and gains and availed it for a period of five years. During this
period, these assessees carried out ‘substantial expansion’ and claimed on that
basis that they should be allowed exemption from profits and gains for another
five years @ 100% instead of 25% from the 6th to the 10th year as well. They,
however, admitted that the total period during which they were entitled to
exemption would not exceed ten years as per the mandate of sub-section (6).

In this
backdrop, the question that arose before the Supreme Court was as to whether
the assessees could again start claiming 100% exemption for the next five years
from profits and gains after availing the same for the first five years on the
ground that they had carried out substantial expansion.

The High Court
had answered the question in the affirmative and for this reason it was the
Department that had moved the Supreme Court challenging the said decision by
filing appeals.

These appeals
were heard and decided by a Division Bench of the Supreme Court by its
judgement dated 20^th August, 2018 (407 ITR 429). The judgement of
the High Court was reversed on the aforesaid issue.

But it so
happened that in some of the appeals the respondent assessees were not served
with the notice and hence remained unrepresented. Since the appeals in respect
of these assessees were decided in their absence, they filed miscellaneous
applications for recall of the order, with a prayer to decide the appeals
afresh after giving them a hearing. In view of this, by a separate order their
applications were allowed and their appeals restored. Even the Revenue had
filed a few SLPs against the common judgement of the High Court as these SLPs
were not filed earlier when a batch of appeals was decided on 20^th
August, 2018 by the Supreme Court. The Supreme Court, therefore, heard the
appeals arising out of these SLPs along with the other appeals in which the
earlier judgement rendered had been recalled.

In the judgement
dated 20^th August, 2018 the Court took the view that once ‘initial
assessment year’ starts on fulfilling the conditions laid down in sub-section
(2) of section 80-IC, there cannot be another ‘initial assessment year’ for the
purposes of section 80-IC within the aforesaid period of ten years. While doing
so, the Court referred to section 80-IB(14)(c) of the Act, on the basis of
which an opinion was formed that there cannot be another ‘initial assessment
year’ for the purposes of section 80-IC within the aforesaid period of ten
years. According to the Supreme Court, this was the apparent error which was
committed. Section 80-IB(14) starts with the words ‘for the purpose of this
section’. Thus, ‘initial assessment year’ defined therein was relatable only to
the deductions that were provided under the provisions of section 80-IB,
namely, in respect of profits and gains from certain industrial undertakings
other than infrastructure development undertakings.

Further, clause
(v) of sub-section (8) of section 80-IC provides the definition of ‘initial
assessment year’ for the purpose of section 80-IC, which was not noticed by the
Court while pronouncing the judgement in the Commissioner of Income Tax
vs. M/s Classic Binding Industries case. According to the Supreme
Court, a mistake had occurred in the Classic Binding judgement.

As per this
definition, there could be an ‘initial assessment year’, relevant to the
previous year, in any of the following contingencies: (i) The previous year in
which the undertaking or the enterprise begins to manufacture or produce
articles or things; or (ii) Commences operation; or (iii) Completes substantial
expansion. The first two events are relatable to new units whereas the third
incident would occur in respect of existing units. The benefit of section 80-IC
is, thus, admissible not only when an undertaking or enterprise sets up a new
unit and starts manufacturing or producing articles or things. The advantage of
these provisions also accrues to those existing units, if they carry out
‘substantial expansion’ of their units by investing required capital in the
assessment year relevant to the previous year. ‘Substantial expansion’ is
defined in clause (ix) of sub-section (8) of section 80-IC. As per the
aforesaid definition, an existing unit would be treated as having carried out
substantial expansion when there is an increase in the investment in the plant
and machinery by at least 50% of the book value of the plant and machinery (before
taking depreciation in any year).

The Supreme
Court noted that the assessees had initially set up new industry in the state
of Himachal Pradesh of the nature specified u/s. 80-IC of the Act. As a result,
they became entitled to avail the concession provided in the said provision.
After five years and before the expiry of ten years, the assessees had carried
out substantial expansion of their units in terms of the aforesaid definition.
Considering the definition of ‘initial assessment year’, the Court was inclined
to accept that there could be another ‘initial assessment year’ on the
fulfilment of the condition mentioned in the said definition, namely,
completion of substantial expansion of the existing unit.

According to the
Supreme Court, therefore, the moment substantial expansion takes place, another
‘initial assessment year’ gets triggered. This new event entitles that unit to
start getting deduction @ 100% of the profits and gains. However, at the same
time, a new period of ten years does not start. This is so because the total
period for which deduction could be allowed has been capped at ten years,
inasmuch as sub-section (6) in no uncertain terms stipulates that deduction
shall be not allowed for a period exceeding ten assessment years.

The Supreme
Court, having examined the scheme in the aforesaid manner, came to the
conclusion that the definition of ‘initial assessment year’ contained in clause
(v) of sub-section (8) of section 80-IC could lead to a situation where there
could be more than one ‘initial assessment year’ within the said period of ten
years.

10 Pr. Commissioner of Income Tax vs. Nokia India Pvt. Ltd. (2019) 413 ITR
146 (SC)

Appeal to the
High Court – Substantial question of law – Reassessment – High Court dismissing
the appeal holding that assessment could not be reopened on a mere change of
opinion based on explanation given by an Assessing Officer to an audit
objection in a return processed u/s. 143(1) – High Court could not have
dismissed the appeal in
limine – Question of
law arose

The
respondent-assessee filed its return of income for the assessment year
1999-2000 declaring the taxable income as ‘nil’ after setting off of business
income of Rs. 12,97,86,402 against unabsorbed business losses and depreciation.
Since book profits were nil, the assessee’s case was that no tax was payable
u/s. 115JA of the Act. The assessee filed a revised return reporting a business
income of Rs. 12,97,44,989 but still showing ‘nil’ taxable income after
claiming set-off of unabsorbed business losses. There was no scrutiny of the
return and intimation u/s. 143(1) of the Act was issued to the assessee.

Subsequently, a
notice dated 20^th September, 2004 u/s. 148 of the Act was issued
seeking to reopen the assessment. This notice was dropped on 6^th /
13^thFebruary, 2006 after the assessee raised objections. On 13^th
February, 2006 a second notice u/s. 148 of the Act was issued. The reasons
provided to the assessee on 30^th August, 2006 for the reopening were
that after examination of the records for the assessment year 1999-2000, it was
revealed that during the year the assessee made various provisions in the
return of income for gratuity, doubtful debts, warranty, obsolescence which
were in the nature of ‘unascertained liabilities’ and were not added to the
book profit. This had resulted in underassessment of income for the assessment
year in question.

The assessee
filed its objections which were rejected by the Assessing Officer (AO) by order
dated 8^th November, 2006. Subsequently, by an order dated 30^th
November, 2006 the AO disallowed 20% of foreign travel expenses to the extent
of Rs. 1,71,95,149, provision for warranty to the extent of Rs. 1,77,45,202,
FOC marketing expenses (after depreciation) to the extent of Rs. 18,41,099, as
well as disallowed 25% of provision for obsolescence of inventory to the extent
of Rs. 12,13,037 and made addition to closing stock of Rs. 29,60,347.

By his order
dated 22^nd February, 2010 the Commissioner of Income-tax (Appeals)
rejected the assessee’s arguments u/s. 148 but deleted the disallowance of 20%
of foreign travel expenses and provision for warranty, but sustained the other
issues. Aggrieved by the said order, both the Revenue and the assessee filed
appeals before the Income-tax Appellate Tribunal (ITAT).

By a common
order dated 3^rd June, 2016 the ITAT allowed the assessee’s appeal
after examining the audit objection raised qua the assessment order of
the AO and the AO’s response thereto.

The Revenue
filed an appeal to the High Court only against the allowing of the assessee’s
appeal by the ITAT. It was urged by the Revenue that since the return filed was
processed u/s. 143(1) of the Act and intimation sent, there was no occasion for
the AO to have formed an opinion in the first place. Consequently, there was no
change of opinion when he decided to reopen the assessment. The Revenue further
submitted that the AO’s reply to the audit objection did not constitute the
formation of an opinion either.

The High Court
examined the letter dated 24^thSeptember, 2003 written by the AO in
response to the audit objection and held that not only did he examine the
records but came to the conclusion that ‘there was prima facie no
evidence that the liabilities were not ascertained liabilities’. The ITAT was
therefore right in holding that the reopening was based merely on a change of
opinion. According to the High Court, no question of law arose.

The Revenue
being aggrieved by the order of the High Court dismissing their appeal in
limine, filed the appeal by way of special leave in the Supreme Court.

According to the
Supreme Court, the following substantial questions of law did arise in this
appeal filed by the Revenue (the appellant herein) u/s. 260-A of the Act in the
High Court against the order passed by the ITAT and the same should have been
framed by the High Court for deciding the appeal on merits in accordance with
law:

“1. Whether the
ITAT was justified in holding that the notice issued by the AO u/s. 148 was bad
in law when admittedly the impugned notice was issued in the case where the
assessment was made u/s. 143(1) of the Act but not u/s. 143(3) of the Act.

2. Whether the
ITAT was justified in holding that the notice issued u/s. 148 of the Act was
bad because it was based on mere change of opinion by overlooking the fact that
there was no foundation to form any such opinion.

3. When
admittedly the notice in question satisfied the requirements of section 148 of
the Act as it stood, namely, that first, it contained the facts constituting
the ‘reasons to believe’, and second, it furnished the necessary details for
assessing the escaped income of the assessee, whether the ITAT was still justified
in declaring the notice as being bad in law without taking into consideration
any of these admitted facts.

4. In case, if
the notice is held proper and legal, whether the finding recorded by the ITAT
on the merits of the case on each item, which is subject matter of the notice,
is legally sustainable?”

According to the
Supreme Court, the aforementioned four questions framed needed to be answered
by the High Court on their respective merits while deciding the appeal filed by
the Revenue (the Appellant) u/s. 260-A of the Act.

The Supreme
Court remanded the case to the High Court for answering the aforementioned
questions on merits in accordance with the law.

11 The Commissioner of
Income Tax, New Delhi vs. Ram Kishan Dass (2019) 413 ITR 337 (SC)

Special
Audit – Power of the assessing officer to extend the time for submission of
audit report – The provisions of section 142(2C), as they stood prior to the
amendment which was enacted with effect from 1^st April, 2008 by the
Finance Act, 2008 did not preclude the exercise of jurisdiction and authority
by the assessing officer to extend time for the submission of the audit report
directed under sub-section (2A), without an application by the Assessee – The
amendment was intended to remove an ambiguity and was clarificatory in nature

The Supreme
Court noted that in the batch of cases before it, the submission of the
assessees was that the assessing officer (AO) had no jurisdiction or authority
u/s. 142(2C), as it stood prior to 1^st April, 2008, to extend time
for the submission of the audit report of the auditor appointed under the
provisions of sub-section (2A). The AO, at the relevant time, was authorised to
extend time (not exceeding 180 days) from the date on which a direction under
sub-section (2A) was received by the assessee, only on an application made by
the assessee and for any good and sufficient reason. If the assessee made no
application, the AO would have no jurisdiction to extend time.

The Revenue’s
contention was that even before 1^stApril, 2008 the jurisdiction of
the AO to extend time for the submission of the audit report was not confined
to a situation in which the assessee had made an application for extension.
Consequently, the incorporation of a provision for a suo motu exercise
of power by the AO, with effect from 1^st April, 2008 by the Finance
Act, 2008 was only intended to remove an ambiguity and was clarificatory in
nature.

The Tribunal
had come to the conclusion that prior to the insertion of the expression suo
motu with effect from 1^st April, 2008 in section 142(2C), the AO
had no jurisdiction to extend time for the submission of the report of an
auditor appointed under sub-section (2A) of his own accord. As a consequence,
it was held that the assessment which was made u/s. 153A, in respect of the
assessment years in question, was barred by limitation.

A Division
Bench of the Delhi High Court had dismissed the batch of appeals filed by the
Revenue against the aforesaid order of the Income-tax Appellate Tribunal.

According to
the Supreme Court, there were two ways of looking at the situation. Firstly,
the proviso to sub-section (2C) creates a remedy for an assessee to apply for
extension where, for a good and sufficient reason, the audit report could not
be submitted. Otherwise, the assessee may face a penalty u/s. 271 apart from
being subjected to a best judgement assessment u/s. 144. By extending time at
the behest of the assessee, the AO allows the original order calling for an
audit report to be duly implemented. The creation of a remedy under the proviso
in favour of the assessee cannot be construed to detract from the authority
which vests in the AO, who has specified the time limit for the submission of
an audit report in the first instance, to extend time without an application by
the assessee.

To hold
otherwise, and to construe the proviso to sub-section (2C) as foreclosing the
authority of the AO to extend time without a request by the assessee, would
lead to an absurd consequence. The assessee would then be in control of whether
or not to seek an extension of time where the audit report has not been
finalised. Even if the auditor, for genuine reasons (not bearing on the default
of the assessee), was unable to comply with the time schedule, having regard to
the nature or complexity of the accounts, the assessee would then have a sole
and unrestricted power to determine whether an extension should be sought.

Not seeking an
extension would in effect defeat the underlying purpose and object of directing
the assessee to obtain a report of an auditor under sub-section (2A). The
legislature could not have intended this consequence. An interpretation which
would defeat the purpose underlying sub-section (2A) must be avoided. The AO
who has fixed the time in the first instance must necessarily, as an incident
of the authority to fix time, be entitled to extend time without an application
by the assessee. While extending time, the AO will be subject to the overall
ceiling of time fixed under the proviso to sub-section 2C.

Secondly, the
alternate construction of the proviso is that the expression ‘and for any good
and sufficient reason’ should be read to mean ‘or for any good and sufficient
reason’. As a matter of statutory interpretation, it is well settled that the
expression ‘and’ can, in a given context, be read as ‘or’. The contention of
the assessees opposing this construction by urging that in the context of
sub-section (2A), it has been held by the Supreme Court in Sahara India
(Firm), Lucknow vs. CIT (300 ITR 403) that the word ‘and’ is used in
the conjunctive sense would not necessarily furnish an index to how the
expression ‘and’ in the proviso to sub-section (2C) should be construed. The
interpretation of the expression must be based on the context in which it is
used. In the proviso to sub-section (2C), the expression ‘and’ is used in
connection with the grant of an extension of time and not in the context of the
formation of an opinion for ordering a special audit. The power was of a
procedural nature.

As to the
contention of the assessees that the amendment to the proviso to sub-section
(2C) by the Finance Act would indicate that the amendment was intended to be
prospective with effect from 1^st April, 2008 and, that prior to this
date, the AO had no jurisdiction to grant an extension of time, save on the
application by the assessee, the Supreme Court held that the reason for the
introduction of the amendment arose because of the element of ambiguity
inherent in the erstwhile position as it stood before 1^st April,
2008. The ambiguity was precisely on the question as to whether the AO was
precluded from granting an extension of time of his own accord merely because
the assessee was permitted to apply for an extension. Since the purpose of the
amendment was to remove this ambiguity, the Supreme Court was of the view that
by the Finance Act, Parliament essentially clarified the position as it existed
prior to the amendment.

According to
the Supreme Court, there was no substance in the submission urged on behalf of
the assessees that to adopt an interpretation which we have placed on the
provisions of section 142(2C) would enable the AO to extend the period of
limitation for making an assessment u/s. 153B. Explanation (iii) to section
153B (1), as it stood at the material time, provided for the exclusion of the
period commencing from the date on which the AO had directed the assessee to
get his accounts audited under sub-section (2A) of section 142 and ending on
the day on which the assessee is required to furnish a report under that
sub-section. The day on which the assessee is required to furnish a report of
the audit under sub-section (2A) marks the culmination of the period of
exclusion for the purpose of limitation.

Where the AO
had extended the time, the period, commencing from the date on which the audit
was ordered and ending with the date on which the assessee is required to
furnish a report, would be excluded in computing the period of limitation for
framing the assessment u/s. 153B. The principle governing the exclusion of time
remains the same. The date on which the exclusion culminates is the date which
the AO fixes originally, or on extension for submission of the report.

The Supreme Court concluded that the
provisions of section 142(2C) of the Income-tax Act, 1961 as they stood prior
to the amendment which was enacted with effect from 1^st April, 2008
by the Finance Act, 2008 did not preclude the exercise of jurisdiction and
authority by the AO to extend time for the submission of the audit report
directed under sub-section (2A), without an application by the assessee. The
amendment was intended to remove an ambiguity and was clarificatory in nature.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

4. Commissioner of Income Tax I vs. Virtual Soft
Systems Ltd. (2018) 404 ITR 409 (SC)

Income – Real Income – Method of accounting followed, as derived
from the ICAI’s Guidance Note, was a valid method of capturing real income
based on the substance of finance lease transaction – The bifurcation of the
lease rental was, by no stretch of imagination, an artificial calculation and,
therefore, lease equalisation was an essential step in the accounting process
to ensure that real income from the transaction in the form of revenue receipts
only was captured for the purposes of income tax

The Respondent-Virtual Soft Systems
Ltd., a company registered under the provisions of the Companies Act, 1956,
filed return of income for the Assessment Year 1999-2000 declaring loss of Rs.
70,24,178/- while claiming an amount of Rs. 1,65,12,077/- as deduction for
lease equalisation charges.

The Assessing Officer, in his
Assessment Order disallowed deduction claimed as the lease equalisation charges
amounting to Rs. 1,65,12,077/- and added the same to the income of the
Respondent.

Being aggrieved with the said
Assessment Order, the Respondent preferred an appeal before the Commissioner of
Income Tax (Appeals). Learned CIT (Appeals), upheld the order of the Assessing
Officer and dismissed the appeal. Being ssatisfied, the Respondent preferred an
appeal before the ITAT, who allowed the appeal of the Respondent while setting
aside the orders passed by Learned CIT (Appeals) and the Assessing Officer.

Being aggrieved, the Revenue took
the matter before the High Court. The High Court dismissed the appeal at the
preliminary stage while confirming the decision of the ITAT. Being aggrieved,
the Revenue took the matter before the Supreme Court.

According to the Supreme Court, the
short question that arose for its consideration was whether the deduction on
account of lease equalisation charges from lease rental income could be allowed
under the Income Tax Act, 1961, on the basis of Guidance Note issued by the
Institute of Chartered Accountants of India (ICAI).

The Supreme Court after noting
provisions of section 211 of the Companies Act, 1956 before and after the 1999
amendment observed that the purpose behind the amendment in section 211 of the
Companies Act, 1956 was to give clear sight that the accounting standards, as
prescribed by the ICAI, shall prevail until the accounting standards are
prescribed by the Central Government under this Sub-section. The purpose behind
the accounting standards was to arrive at a computation of real income after
adjusting the permissible deprecation and that these accounting standards were
made by the body of experts after extensive study and research.

The Supreme Court after going
through the Guidance Note observed that at the first look, it appeared that the
method of accounting provided in the Guidance Note of 1995, on the one hand,
adjusted the inflated cost of interest of the assets in the balance sheet.
Secondly, it captured “real income” by separating the element of capital
recovery (essentially representing repayment of principal amount by the lessee,
the principal amount being the net investment in the lease), and the finance
income, which was the revenue receipt of the lessor as remuneration/reward for
the lessor’s investment. As per the Guidance Note, the annual lease charge
represented recovery of the net investment/fair value of the asset lease term.
The finance income reflected a constant periodic rate of return on the net
investment of the lessor outstanding in respect of the finance lease. While the
finance income represented a revenue receipt to be included in income for the
purpose of taxation, the capital recovery element (annual lease charge) was not
classifiable as income, as it was not, in essence, a revenue receipt chargeable
to income tax.

The Supreme
Court held that the method of accounting followed, as derived from the ICAI’s
Guidance Note, was a valid method of capturing real income based on the
substance of finance lease transaction. The Rule of substance over form is a
fundamental principle of accounting, and is in fact, incorporated in the ICAI’s
Accounting Standards on Disclosure of Accounting Policies being accounting
standards which is a kind of guidelines for accounting periods starting from 01.04.1991.
According to the Supreme Court, it is a cardinal principle of law that the
difference between capital recovery and interest or finance income is essential
for accounting for such a transaction with reference to its substance. If the
same was not carried out, the Respondent would be assessed for income tax not
merely on revenue receipts but also on non-revenue items which was completely
contrary to the principles of the IT Act and to its Scheme and spirit.

Further, the
bifurcation of the lease rental was, by no stretch of imagination, an
artificial calculation and, therefore, lease equalisation was an essential step
in the accounting process to ensure that real income from the transaction in
the form of revenue receipts only was captured for the purposes of income tax.
Moreover, there was no express bar in the IT Act which barred the bifurcation
of the lease rental. This bifurcation was analogous to the manner in which a
bank would treat an EMI payment made by the debtor on a loan advanced by the
bank. The repayment of principal would be a balance sheet item and not a
revenue item. Only the interest earned would be a revenue receipt chargeable to
income tax. Hence, according to the Supreme Court there was no force in the
contentions of the Revenue that whole revenue from lease should be subjected to
tax under the IT Act.

The Supreme Court noted that in the
present case, the relevant Assessment Year was 1999-2000. The main contention
of the Revenue was that the Respondent could not be allowed to claim deduction
regarding lease equalisation charges since there was no express provision
regarding such deduction in the IT Act. The Supreme Court however held that the
Respondent could be charged only on real income which could be calculated only
after applying the prescribed method. The IT Act was silent on such deduction.
For such calculation, it was obvious that the Respondent had to take recourse
of Guidance Note prescribed by the ICAI if it was available. Only after
applying such method which was prescribed in the Guidance Note, the Respondent
could show fair and real income which was liable to tax under the IT Act.

Therefore, it was wrong to say that
the Respondent claimed deduction by virtue of Guidance Note rather it only
applied the method of bifurcation as prescribed by the expert team of ICAI.
Further, a conjoint reading of section 145 of the IT Act read with section 211
(un-amended) of the Companies Act made it clear that the Respondent was
entitled to do such bifurcation and there was no illegality in such bifurcation
as it was according to the principles of law. Moreover, the Rule of
interpretation says that when internal aid is not available then for the proper
interpretation of the Statute, the Court may take the help of external aid. If
a term is not defined in a Statute then it’s meaning could be taken as is
prevalent in ordinary or commercial parlance. Hence, there was no force in the
contentions of the Revenue that the accounting standards prescribed by the
Guidance Note could not be used to bifurcate the lease rental to reach the real
income for the purpose of tax under the IT Act.

The Supreme Court therefore
dismissed the appeal.

5. Commissioner of Income Tax, Chennai vs. S.
Ajit Kumar (2018) 404 ITR 526 (SC)

Search and seizure – Block assessment – Words “and such other
materials or information as are available with the Assessing Officer and
relatable to such evidence” occurring in section 158BB of the Act – Any
material or evidence found/collected in a Survey which has been simultaneously
made at the premises of a connected person can be utilized while making the
Block Assessment in respect of an Assessee u/s. 158BB read with section 158BH
of the IT Act

A search was conducted by the
officers of the Income Tax Department in the premises of the Assessee on
17.07.2002 which was concluded on 21.08.2002. On the same date, there was a
survey in the premises of Elegant Constructions and Interiors Ltd. (hereinafter
referred to as ‘ECIL’)-the builder and interior decorator who constructed and
decorated the house of the Assessee at Valmiki Nagar. Pursuant to the same, the
fact that the Assessee having engaged the above contractor for construction of
the house came out. At the same time, from the survey in the builder’s
premises, the fact of the Assessee having paid Rs. 95,16,000/- to ECIL in cash
was revealed which was not accounted for.

The Assessing Officer, vide order
dated 31.08.2004, after having regard to the facts and circumstances of the
case, completed the block assessment and, inter alia, held that the said
amount is liable to tax as undisclosed income of the block period.

Being aggrieved with the order
dated 31.08.2004, the Assessee filed an appeal before the Commissioner of
Income Tax (Appeals). Learned CIT (Appeals), vide order dated 15.02.2005, held
that it was due to the search action that the Department had found that the
Assessee had engaged the services of ECIL. Hence, the order of block assessment
was upheld.

Being dissatisfied, the Assessee
brought the matter before the Tribunal by way of an appeal. The Tribunal, vide
order dated 28.04.2006, set aside the decisions of the Assessing Officer and
learned CIT (Appeals) and allowed the appeal.

Being aggrieved, the Revenue filed
an appeal before the High Court. The High Court, vide order dated 22.11.2006,
dismissed the appeal.

According to the Supreme Court, the
short point for its consideration in this appeal is as to whether in the light
of present facts and circumstances of the instant case, the material found in
the course of survey in the premises of the builder could be used in Block
Assessment of the Assessee?

The Supreme Court noted that in the instant case, the office and residential
premises of the Assessee was searched on 17.07.2002 and finally concluded on
21.08.2002. During the course of search, certain evidence were found which
showed that the Assessee had indulged in understatement of his real income
relating to the block period from 01.04.1996 to 17.07.2002. Consequently, a
notice dated 25.02.2003, u/s. 158BC of the IT Act, was issued to the Assessee
and he was asked to file block assessment. In reply to such notice, the
Assessee filed return on 11.08.2003, admitting the undisclosed income as
“NIL”.

The Supreme Court further noted
that in the present case, it was an admitted position that the cost of
investment was disclosed to the Revenue in the course of return filed by the
Assessee. The Assessee also disclosed the detail of transaction between the
Assessee and ECIL in the assessment year 2001-2002. However, he had not
disclosed the payment of Rs. 95,16,000/- in cash made to ECIL.

According the Supreme Court, on a
perusal of the provision of section 158BB, it was evident that for the purpose
of calculating the undisclosed income of the block period, it could be calculated
only on the basis of evidence found as a result of search or requisition of
books of accounts or other documents and such other materials or information as
are available with the Assessing Officer and relatable to such evidence.
Section 158BB has prescribed the boundary which has to be followed. No
departure from this provision is allowed otherwise it may cause prejudice to
the Assessee. However, section 158BH of the IT Act has made all other
provisions of the IT Act applicable to assessments made under Chapter XIV B
except otherwise provided under that Chapter. The Supreme Court noted that
Chapter XIV B of the IT Act, which relates to Block Assessment, came up for
consideration before it in CIT vs. Hotel Blue Moon (2010) 321 ITR 362 (SC)
wherein it has been held that the special procedure of Chapter XIV-B is
intended to provide a mode of assessment of undisclosed income, which has been
detected as a result of search. It is not intended to be a substitute for
regular assessment. Its scope and ambit is limited in that sense to materials
unearthed during search. It is in addition to the regular assessment already
done or to be done. The assessment for the block period can only be done on the
basis of evidence found as a result of search or requisition of books of
accounts or documents and such other materials or information as are available
with the assessing officer. Therefore, the income assessable in block
assessment under Chapter XIV-B is the income not disclosed but found and
determined as the result of search u/s. 132 or requisition u/s. 132-A of the
Act.

The Supreme Court held that the
power of survey has been provided u/s. 133A of the IT Act. Therefore, any
material or evidence found/collected in a Survey which has been simultaneously
made at the premises of a connected person can be utilised while making the
Block Assessment in respect of an Assessee u/s. 158BB read with section 158BH
of the IT Act. The same would fall under the words “and such other
materials or information as are available with the Assessing Officer and
relatable to such evidence” occurring in section 158BB of the Act. In the
present case, the Assessing Officer was therefore justified in taking the
adverse material collected or found during the survey or any other method while
making the Block Assessment.

As a result, the appeal succeeded
and was allowed. The impugned orders were set aside and the orders passed by
the Assessing Officer making the Block Assessment were restored.

6. Commissioner of Income Tax, Karnal (Haryana)
vs. Carpet India, Panipat (Haryana) (2018) 405 ITR 469 (SC)

Exports – Special deduction – The question as to whether
supporting manufacturer who receives export incentives in the form of duty draw
back (DDB), Duty Entitlement Pass Book (DEPB) etc. is entitled for deduction
under section 80HHC of the Income Tax Act, 1961 referred to a larger Bench

Carpet India (P) Ltd.-the Assessee,
a partnership firm deriving income from the manufacturing and sale of carpets
to IKEA Trading (India) Ltd. (Export House) as supporting manufacturer, filed a
‘Nil’ return for the Assessment Year (AY) 2001-2002 on 30.10.2001, inter
alia, stating the total sales amounting to Rs. 6,49,83,432/- with total
export incentives of Rs. 68,82,801/- as Duty Draw Back (DDB) and claimed deduction
u/s. 80HHC amounting to Rs. 1,57,68,742/- out of the total profits of Rs.
1,97,10,927/- at par with the direct exporter.

On scrutiny, the Assessing Officer, allowed the deduction u/s. 80HHC to the
tune of Rs. 1,08,96,505/- instead of 1,57,68,742/- as claimed by the Assessee
while arriving at the total income of Rs. 57,18,040/-.

Being aggrieved, the Assessee
preferred an appeal before the Commissioner of Income Tax (Appeals) which was
allowed while holding that the Assessee was entitled to the deduction of export
incentives u/s. 80HHC at par with the exporter.

The Revenue went in appeal before
the Income Tax Appellate Tribunal as well as before the High Court but the same
got dismissed leaving it to take recourse of the Supreme Court by way of special
leave.

According to the Supreme Court, the
short but important question of law that arose before it was whether in the
facts and circumstances of the present case, supporting manufacturer who
receives export incentives in the form of duty draw back (DDB), Duty
Entitlement Pass Book (DEPB) etc., is entitled for deduction under section
80HHC of the IT Act at par with the direct exporter?

The Supreme Court noted that in the
case at hand, it was evident that the total income of the Assessee for the
concerned Assessment Year was Rs. 1,97,10,927/- out of which it claimed
deduction to the tune of Rs. 1,57,68,742/- u/s. 80HHC of the IT Act which was
partly disallowed by the Assessing Officer and deduction was allowed only to
the tune of Rs. 1,08,96,505/-. However, the Assessee claimed the deduction at
par with the direct exporter u/s. 80HHC of the IT Act which has been eventually
upheld by the High Court.

According to the Supreme Court, in
the instant case, the whole issue revolved around the manner of computation of
deduction u/s. 80HHC of the IT Act, in the case of supporting manufacturer. On
perusal of various provisions of the IT Act, it was clear that section 80HHC of
the IT Act provides for deduction in respect of profits retained from export
business and, in particular,
s/s. (1A) and s/s. (3A), provides for deduction in the case of supporting
manufacturer. The “total turnover” has to be determined as per clause
(ba) of the Explanation whereas “Profits of the business” has to be
determined as per clause (baa) of the Explanation. Both these clauses provide
for exclusion and reduction of 90% of certain receipts mentioned therein
respectively. The computation of deduction in respect of supporting
manufacturer, is contemplated by section 80HHC(3A), whereas the effect to be
given to such computed deduction is contemplated u/s. 80HHC(1A) of the IT Act.
In other words, the machinery to compute the deduction is provided in section
80HHC(3A) of the IT Act and after computing such deduction, such amount of
deduction is required to be deducted from the gross total income of the
Assessee in order to arrive at the taxable income/total income of the Assessee,
as contemplated by section 80HHC(1A) of the IT Act.

The Supreme Court observed that in CIT
vs. Baby Marine Exports (2007) 290 ITR 323 (SC), the question of law
involved was “whether the export house premium received by the Assessee is
includible in the “profits of the business” of the Assessee while
computing the deduction under section 80HHC of the Income Tax Act, 1961?”.
The said case mainly dealt with the issue related with the eligibility of
export house premium for inclusion in the business profit for the purpose of
deduction u/s. 80HHC of the IT Act. Whereas in the instant case, the main point
of consideration was whether the Assessee-firm, being a supporting
manufacturer, was to be treated at par with the direct exporter for the purpose
of deduction of export incentives u/s. 80HHC of the IT Act, after having regards
to the peculiar facts of the instant case.

The Supreme Court noted that while
deciding the issue in Baby Marine Exports (supra), it held that on plain
construction of section 80HHC(1-A), the Respondent was clearly entitled to
claim deduction of the premium amount received from the export house in computing
the total income. The export house premium could be included in the business
profit because it was an integral part of business operation of the Respondent
which consisted of sale of goods by the Respondent to the export house.

The Supreme Court also noted that
the aforesaid decision had been followed by it in Special Leave to Appeal
(Civil) No. 7615 of 2009, Commissioner of Income Tax Karnal vs. Sushil Kumar
Gupta.

The Supreme Court however was of
the view that both these cases were not identical and could not be related with
the deduction of export incentives by the supporting manufacturer u/s. 80HHC of
the IT Act.

As Explanation
(baa) of section 80HHC specifically reduces deduction of 90% of the amount
referable to section 28(iiia) to (iiie) of the IT Act, hence, the Supreme Court
was of the view that these decisions required re-consideration by a larger
Bench since this issue has larger implication in terms of monetary benefits for
both the parties. After giving thoughtful consideration, the Supreme Court was of
the view that the following substantial question of law of general importance
arose for its re-consideration:

“Whether in
the light of peculiar facts and circumstances of the instant case, supporting
manufacturer who receives export incentives in the form of duty draw back
(DDB), Duty Entitlement Pass Book (DEPB) etc. is entitled for deduction under
section 80HHC of the Income Tax Act, 1961?”

Accordingly,
it referred this batch of appeals to the larger Bench and directed the registry
to place the matters before the Hon’ble Chief Justice of India for appropriate orders.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

4. Seshasayee
Steels P. Ltd. vs. ACIT

[2020]
421 ITR 46 (SC)

Capital
Gains – Transfer – In order that the provisions of section 53A of the T.P. Act
be attracted, first and foremost the transferee must, in part performance of
the contract, have taken possession of the property or any part thereof; and
secondly, the transferee must have performed or be willing to perform his part
of the agreement – The expression ‘enabling the enjoyment of’ in section
2(47)(vi) must take colour from the earlier expression ‘transferring’, so that
it can be stated on the facts of a case that a de facto transfer of
immovable property has, in fact, taken place, making it clear that the de
facto owner’s rights stand extinguished – On the facts of the case, the
assessee’s rights in the said immovable property were extinguished on the
receipt of the last cheque, as also that the compromise deed could be stated to
be a transaction which had the effect of transferring the immovable property in
question

The
appellant-assessee entered into an agreement with Vijay Santhi Builders Limited
on 15^th May, 1998 to sell a property for a total sale consideration
of Rs. 5.5 crores.

Pursuant to
this agreement, a Power of Attorney (PoA) was executed on 27^th
November, 1998 by which the assessee appointed one Chandan Kumar, Director of
M/s Vijay Santhi Builders Ltd., to execute and join in execution of the
necessary number of sale agreements and / or sale deeds in respect of the
schedule mentioned property after developing the same into flats. The PoA also
enabled the builder to present before all the competent authorities such
documents as were necessary to enable development of the same and the sale
thereof to various persons.

The
appellant did not file any return for A.Y. 2004-2005. Apparently, it was
detected later by the A.O. that the agreement to sell had been entered into and
that, subsequently, a memorandum of compromise had also been entered into
between the parties dated 19^th July, 2003. Based on the discovery of
this fact, a notice dated 4^th November, 2008 issued u/s 148 was
served on the appellant. Even in response to this notice, no Income tax return
was filed. A notice dated 8^th September, 2009 was then issued u/s
142(1) fixing the case for hearing on 20^thSeptember, 2009. Once
again, the appellant did not turn up, as a result of which another notice dated
23^rd October, 2009 was issued; but this time, too, the assessee did
not turn up. So a third letter was issued on 11^th December, 2009
fixing the case for hearing on 22^nd December, 2009. In response to
this letter, the assessee by a letter dated 29^th December, 2009
sought time for one month.

Since time
bar was foremost in the mind of the A.O., the limitation falling on this
transaction by 31^st December, 2009, a best judgment assessment order
was then passed u/s 144 dated 31^stDecember, 2009. Vide this
order, the entire sale consideration was treated as a capital gain and brought
to tax.

An appeal
was preferred against this order. The Commissioner of Income Tax (Appeals), by
an order dated 28^th October, 2010, examined the three documents in
question and ultimately dismissed the appeal. The Income Tax Appellate
Tribunal, by an order dated 24^thJune, 2011, agreed with the CIT(A)
and found that on or about the date of the agreement to sell the conditions
mentioned in section 2(47)(v) of the Act could not be stated to have been
complied with, in that the very fact that the compromise deed was entered into
on 19^th July, 2003 would show that the obligations under the
agreement to sell were not carried out in their true letter and spirit. As a
result of this, section 53A of the Transfer of Property Act, 1882 could not
possibly be said to be attracted. What was then referred to was the memorandum
of compromise dated 19^th July, 2003 under which various amounts had
to be paid by the builder to the owner so that a complete extinguishment of the
owner’s rights in the property would then take place. The last two payments
under the compromise deed were contingent upon M/s Pioneer Homes also being
paid off, which apparently was done. The Appellate Tribunal held that the
transfer therefore took place during the A.Y. 2004-05 as the last cheque was
dated 25^th January, 2004.

The High
Court, by the impugned judgment dated 25^th January, 2012, adverted
to the concurrent findings of the authorities and stated that the three questions
of law that were set out were all answered in favour of the Revenue and against
the assessee.

The Supreme
Court observed that in order that the provisions of section 53A of the T.P. Act
be attracted, first and foremost the transferee must, in part performance of
the contract, have taken possession of the property or any part thereof.
Secondly, the transferee must have performed or be willing to perform his part
of the agreement. It is only if these two important conditions, among others,
are satisfied that the provisions of section 53A can be said to be attracted on
the facts of a given case.

According to
the Supreme Court, on a reading of the agreement to sell dated 15^th
May, 1998 it was clear that both the parties were entitled to specific performance
(Clause 14). Clause 16 was crucial and the expression used was that ‘the party
of the first part hereby gives “permission” to the party of the second part to
start construction on the land’. Clause 16, therefore, leads to the position
that a license was given to another upon the land for the purpose of developing
the land into flats and selling the same. Such license could not be said to be
‘possession’ within the meaning of section 53A, which is a legal concept and
which denotes control over the land and not actual physical occupation of the
land. This being the case, section 53A of the T.P. Act was not attracted to the
facts of this case for this reason alone.

Turning to
the argument of the assessee based on section 2(47)(vi) of the Income-tax Act,
the Supreme Court made a reference to its judgment in Commissioner of
Income Tax vs. Balbir Singh Maini (2018) 12 SCC 354 and applying the
test given in the aforesaid judgment, observed that it was clear that the
expression ‘enabling the enjoyment of’ must take colour from the earlier
expression ‘transferring’, so that it can be stated on the facts of a case that
a de facto transfer of immovable property has, in fact, taken place
making it clear that the de facto owner’s rights stand extinguished.
According to the Supreme Court, as on the date of the agreement to sell, the
owner’s rights were completely intact both as to ownership and to possession
even de facto, so that this section equally could not be said to be
attracted.

Coming to
the third argument of the appellant, the Supreme Court was of the view that
what has to be seen is the compromise deed and as to which pigeonhole such a
deed can possibly be said to fall into u/s 2(47). According to the Supreme
Court, a perusal of the compromise deed showed that the agreement to sell and
the PoA were confirmed and a sum of Rs. 50 lakhs was reduced from the total
consideration of Rs. 6.10 crores. Clause 3 of the said compromise deed
confirmed that the party of the first part, that is, the appellant, had received
a sum of Rs. 4,68,25,644 out of the agreed sale consideration. Clause 4
recorded that the balance Rs. 1.05 crores towards full and final settlement in
respect of the agreement entered into would then be paid by seven post-dated
cheques. Clause 5 then stated that the last two cheques would be presented only
upon due receipt of the discharge certificate from one M/s Pioneer Homes. In
this context, the ITAT had found that all the cheques mentioned in the
compromise deed had, in fact, been encashed. This being the case, it was clear
that the assessee’s rights in the said immovable property were extinguished on
the receipt of the last cheque, as also that the compromise deed could be
stated to be a transaction which had the effect of transferring the immovable property
in question.

According to
the Supreme Court, the pigeonhole, therefore, that would support the orders
under appeal would be section 2(47)(ii) and (vi) of the Act in the facts of the
present case. This being the case, the Supreme Court dismissed the appeal but
for the reasons stated by this judgment.

5. Maruti
Suzuki India Ltd. vs. Commissioner of Income Tax, Delhi

(2020)
421 ITR 510 (SC)

Business
expenditure – Deduction only on actual payment – The unutilised credit under
MODVAT scheme does not qualify for deductions u/s 43B of the Income-tax Act –
The sales tax paid by the assessee was debited to a separate account titled
‘Sales Tax recoverable account’ which could have set off sales tax against his
liability on the sales of finished goods, i.e., vehicles – Assessee cannot
claim deduction of unutilised balance in ‘Sales Tax recoverable account’

The assessee
company was engaged in the manufacture and sale of various Maruti cars and also
traded in spares and components of the vehicles. It acquired excisable raw
materials and inputs which were used in the manufacture of the vehicles. The
assessee had also been taking benefit of MODVAT credit on the raw material and
inputs used in the manufacturing.

At the end
of A.Y. 1999-2000, an amount of Rs. 69,93,00,428 was left as unutilised MODVAT
credit. In the return it was claimed that the company was eligible for
deduction u/s 43B as an allowable deduction. Similarly, the company claimed
deduction u/s 43B of an amount of Rs. 3,08,99,171 in respect of Sales Tax
Recoverable Account.

The A.O.
passed an assessment order dated 28^th March, 2002 and disallowed the
claim of deduction of Rs. 69,93,00,428 as well as of Rs. 3,08,99,171. Aggrieved
by this order, the assessee filed an appeal before the Commissioner of Income
Tax who also sustained the disallowance. An appeal to ITAT met with the same
fate. The ITAT took the view that the advance payment of Excise Duty which
represented unutilised MODVAT credit without incurring the liability of such
payment, was not an allowable deduction u/s 43B. The assessee filed an appeal
u/s 260A in the High Court. The Court answered the question relating to the
above noted disallowance in favour of the Revenue. Aggrieved by this judgment,
the assessee filed appeals before the Supreme Court.

According to
the Supreme Court, the following two questions arose for its consideration:

(i) Whether the ITAT had committed an error of
law in upholding the disallowance of the amount of Rs. 69,93,00,428 which
represented MODVAT credit of Excise Duty that remained unutilised by 31^st
March, 1999, i.e., the end of the relevant accounting year?

(ii) Whether the ITAT committed an error of law in
upholding the disallowance of Rs. 3,08,99,171 in respect of Sales Tax
Recoverable Account u/s 43B?

The Supreme
Court noted that the unutilised MODVAT credit on 31^st March, 1999 to
the credit of the assessee was Rs. 69,93,00,428. This credit was accumulated to
the account of the assessee due to the payment of Excise Duty on raw materials
and inputs which were supplied to it by the suppliers and reflected in the
invoices by which raw materials and inputs were supplied. The appellant was
entitled to utilise this credit in payment of Excise Duty to which the assessee
was liable in payment of Excise Duty on manufacture of its products.

According to
the Supreme Court, an analysis of the provision of section 43B indicated that
deduction thereunder was to be allowed on fulfilment of the following
conditions:

(a) there should be an actual payment of Excise
Duty whether ‘by way of tax, duty, cess or fee, by whatever name’;

(b) such payment has to be ‘under any law for the
time being in force’;

(d) irrespective of the method of accounting
regularly employed by the assessee, deduction shall be allowed while computing
the income tax for the previous year ‘in which (the) sum is actually paid’ by
the assessee;

(e) the expression ‘any such sum payable’ refers
to a sum for which the assessee incurred liability in the previous year even
though such sum might not have been payable within that year under the relevant
law.

According to
the Supreme Court, the crucial words in section 43B(a) were ‘any sum payable by
the assessee by way of tax, duty, cess or fee…’. One had therefore to examine
as to whether unutilised credit under the MODVAT scheme was a sum payable by
the assessee.

The Supreme
Court noted that the Excise Duty is levied under the Central Excise Act, 1944
and collected as per the Central Excise Rules, 1944. The taxable event is
manufacture and production of excisable articles and payment of duty is
relatable to the date of removal of such article from the factory. When the
appellant purchases raw materials and inputs for manufacture of vehicles, it
maintains a separate account containing the Excise Duty as mentioned in the
sale invoices. The credit of such Excise Duty paid by the appellant is to be
given to the appellant by virtue of Rules 57A to 57F of the Central Excise
Rules, 1944 as it then existed. The appellant was fully entitled to discharge
his liability to pay Excise Duty on vehicles manufactured by adjusting the
credit of Excise Duty earned by it as per the MODVAT scheme. The liability to
pay Excise Duty on the raw materials and inputs which are used by the appellant
is on the manufacturers of such raw materials and inputs manufactured by them
and not on the assessee.

The Supreme
Court held that as per section 43B(a) of the Income-tax Act, deduction is
allowed on ‘any sum payable by the assessee by way of tax, duty, cess or fee’.
The credit of Excise Duty earned by the appellant under the MODVAT scheme as
per Central Excise Rules, 1944 is not the sum payable by the assessee by way of
tax, duty, cess, etc. The scheme, u/s 43B, is to allow deduction when a sum is
payable by the assessee by way of tax, duty and cess and had been actually paid
by him. Furthermore, the deduction u/s 43B is allowable only when the sum is
actually paid by the assessee. In the present case, the Excise Duty leviable on
the appellant on the manufacture of vehicles was already adjusted in the
assessment year concerned from the credit of Excise Duty under the MODVAT
scheme. The unutilised credit in the MODVAT scheme cannot be treated as a sum
actually paid by the appellant. When the assessee pays the cost of raw
materials where the duty is embedded, it does not ipso facto mean that
the assessee is the one who is liable to pay Excise Duty on such raw material /
inputs. It is merely the incidence of Excise Duty that has shifted from the
manufacturer to the purchaser and not the liability for the same. The Supreme
Court, thus, concluded that the unutilised credit under the MODVAT scheme does
not qualify for deductions u/s 43B of the Income Tax Act.

The Supreme
Court thereafter dealt with the authorities relied upon by the assessee.

The Supreme
Court, dealing with the observations in Eicher Motors Ltd. and Anr. vs.
Union of India and Ors., (1999) 2 SCC 361 that the facility of credit
is as good as tax paid till tax is adjusted on future goods made in context of
57-F(4-A) of the Central Excise Rules, 1944, held that the said observation
cannot be read to mean that payment of Excise Duty by the appellant which was a
component of the sales invoice purchasing the raw material / inputs by the
appellant is also payment of Excise Duty on raw material / inputs.

The Supreme
Court observed that the question which was answered in Collector of
Central Excise, Pune and Ors. vs. Dai Ichi Karkaria Ltd. and Ors. (1999) 7 SCC
448 was entirely different to the one which had arisen in the present
case. In the above case, it was held that in determining the cost of the
excisable product covered by the MODVAT scheme u/s 4(1)(b) read with Rule 6 of
the Valuation Rules, the Excise Duty paid on raw material covered by the MODVAT
scheme is not to be included. The Court in the above case has laid down that
credit for the Excise Duty paid for the raw material can be used at any time
when making payment of Excise Duty on excisable products. The use of such
credit is at the time of payment of Excise Duty on the excisable product, i.e.,
at the time when the appellant is to pay Excise Duty on its manufactured
vehicles.

The Court
observed that in Berger Paints India Ltd. vs. Commissioner of Income Tax
(2004) 266 ITR 99, the claim of the assessee was that the entire sum of
Rs. 5,85,87,181 was the duties actually paid during the relevant previous year.
The above was not a case for unutilised MODVAT credit; hence, the said case
cannot be held to lay down any ratio with respect to allowable deduction
u/s 43B in respect of unutilised MODVAT credit.

Coming to
the second question, i.e. with regard to disallowance of Rs. 3,08,99,171 in
respect of the sales tax recoverable amount, the Supreme Court noted the fact
that the assessee pays sales tax on the purchase of raw materials and computers
used in the manufacture of cars. Though the sales tax paid is part of the cost
of raw materials, the assessee debits the purchases net of sales tax; the sales
tax paid is debited to a separate account titled ‘Sales Tax Recoverable A/c’.
Under the Haryana General Sales Tax Act, 1973 the assessee could set off such
sales tax against its liability on the sales of the finished goods, i.e. the
cars. Whenever the goods are sold, the tax on such sales is credited to the
aforesaid account.

According to
the Supreme Court, the High Court had rightly answered the above question in
favour of the Revenue relying on its discussion with respect to Question No. 1.
The sales tax paid by the appellant was debited to a separate account titled
‘Sales Tax recoverable account’. The assessee could have set off sales tax
against his liability on the sales of finished goods, i.e. vehicles. There was
no infirmity in the view of the High Court answering the above question.

Lastly, it was contended by the
assessee that the return for the assessment year in question was to be filed
before 30^th September, 1999 and the unutilised credit was, in fact,
fully utilised by 30^thApril, 1999 itself. It was submitted that
since the unutilised credit was utilised for payment of Excise Duty on the
manufactured vehicles, the said amount ought to have been allowed as
permissible deduction u/s 43B.

The Supreme
Court held that there was no liability to adjust the unutilised MODVAT credit
in the year in question, because had there been liability to pay Excise Duty by
the appellant on manufacture of vehicles, the unutilised MODVAT credit could have
been adjusted against the payment of such Excise Duty. In the present case, the
liability to pay Excise Duty of the assessee was incurred on the removal of
finished goods in the subsequent year, i.e., the year beginning from 1^st
April, 1999 and the unutilised MODVAT Credit as it was on 31^st
March, 1999, on which date the assessee was not liable to pay any more Excise
Duty. Hence, it was not a case where the appellant could claim benefit of the proviso
to section 43B.

The appeal was therefore dismissed.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

1.
Universal Cables Ltd. vs. Commissioner
of Income Tax

Jabalpur (2020) 420 ITR 111 (SC)

Refund – Interest on refund of
TDS deducted erroneously – Deductor to be paid interest u/s 244A of the Act

The appellant, M/s Universal
Cables Ltd., erroneously deducted tax on interest payments made to IDBI with
regard to the provisions contained in section 194A(3)(iii)(b) of the Act. The
TDS was Rs. 7,06,022 on payment of interest to IDBI, Bombay. IDBI objected to
the deduction of income tax as no tax was required to be deducted in respect of
payments made to a financial corporation established by or under a Central /
State or provincial Act; as IDBI was covered under the same, no tax was
required to be deducted on the payment of interest made to it. In view of the
above, the appellant requested the Income-tax Officer (TDS) to refund the
amount of Rs. 7,06,022 which was erroneously deducted and credited to the
account of the Central Government. The Commissioner of Income-tax, Jabalpur, by
an order dated 2nd February, 1996 directed the Income-tax Officer (TDS) to
refund the said amount to the appellant.

After the
grant of refund, the appellant requested the Department to grant interest on
the refund u/s 244A of the Act. The Income-tax Officer (TDS) declined to grant
interest. On an appeal, the Commissioner of Income-tax (Appeals) directed the
Income-tax Officer (TDS) to grant interest u/s 244A of the Act on the refunded sum
from the date of payment to the Government treasury to the date of issue of
refund voucher. On an appeal by the Revenue, the Tribunal reversed the order of
the Commissioner of Income-tax (Appeals), holding that the appellant was not an
assessee under the Act but only a tax deductor and that the tax refunded by the
Department was not a refund as per section 237 of the Act and therefore was not
entitled to refund u/s 244A of the Act. The High Court dismissed the appeal of
the appellant.

On further appeal to the Supreme
Court, the appellant relied on the decision of the Supreme Court in Union
of India vs. Tata Chemicals Ltd. reported in (2014) 363 ITR 658,
in particular, paragraph 37 on page 675 of the said decision.

The Supreme Court held that from
the dictum in the said judgment, it was clear that there was no reason to deny
payment of interest to the deductor who had deducted tax at source and
deposited the same with the treasury. According to the Supreme Court, this
observation squarely applied to the appellant.

As a result, the Supreme Court
allowed the appeal of the appellant and directed the Department to pay interest
as prescribed u/s 244A of the Act as applicable at the relevant time at the
earliest.

2. Union of India (UOI) and Ors. vs. Gautam Khaitan

(2020) 420 ITR 140 (SC)

Undisclosed foreign income and
assets – In order to give benefit to the assessee(s) and to remove anomalies,
the date 1^st July, 2015 has been substituted in sub-section (3) of
section 1 of the Black Money Act in place of 1^st April, 2016 – By
doing so, the assessee(s), who desired to take the benefit of one-time
opportunity could have made declaration prior to 30^th September,
2015 and paid the tax and penalty prior to 31^stDecember, 2015

An appeal was filed before the
Supreme Court challenging the interim order passed by the Division Bench of the
Delhi High Court in Writ Petition (Crl.) No. 618 of 2019 dated 16^th
May, 2019 thereby restraining the appellants from taking and / or continuing
any action against the respondent pursuant to the order dated 22^nd
January, 2019 u/s 55 of the Black Money (Undisclosed Foreign Income and Assets)
and Imposition of Tax Act, 2015 (hereinafter referred to as the Black Money
Act).

According to the Supreme Court,
the short question that fell for its consideration was as to whether the High
Court was right in observing that in exercise of the powers under the
provisions of sections 85 and 86 of the Black Money Act, the Central Government
had made the said Act retrospectively applicable from 1^st July, 2015
and passed a restraint order.

The Supreme Court, from the
Statement of Objects and Reasons, observed that the Black Money Act had been
enacted for the following purposes:

(a) to unearth the black money stashed in foreign countries;

(b) to prevent unaccounted money going abroad;

(d) To prevent illegitimate income and assets kept outside the country
from being utilised in ways which are detrimental to India’s social, economic
and strategic interests and its national security.

The Black Money Act was passed by
Parliament on 11^thMay, 2015 and received Presidential assent on 26^th
May, 2015. Sub-section (3) of section 1 provides that save as otherwise
provided in the said Act, it shall come into force on the 1^st day of
April, 2016. However, by the notification / order notified on 1^st
July, 2015, which was impugned before the High Court, it had been provided that
the Black Money Act shall come into force on 1^st July, 2015, i.e.,
the date on which the order was issued under the provisions of sub-section (1)
of section 86 of the Black Money Act.

The Supreme Court noted that the
scheme of the Black Money Act is to provide stringent measures for curbing the
menace of black money. Various offences have been defined and stringent
punishments have also been provided. However, the scheme of the Black Money Act
also provided a one-time opportunity to make a declaration in respect of any
undisclosed asset located outside India and acquired from income chargeable to
tax under the Income-tax Act. Section 59 of the Black Money Act provides that
such a declaration was to be made on or after the date of commencement of the
Black Money Act, but on or before a date notified by the Central Government in
the Official Gazette. The date so notified for making a declaration is 30^th
September, 2015, whereas the date for payment of tax and penalty was notified
to be 31^st December, 2015. As such, an anomalous situation was
arising; if the date under sub-section (3) of section 1 of the Black Money Act
was to be retained as 1^st April, 2016, then the period for making a
declaration would have lapsed by 30^th September, 2015 and the date
for payment of tax and penalty would have also lapsed by 31^st
December, 2015.

However, in
view of the date originally prescribed by sub-section (3) of section 1 of the
Black Money Act, such a declaration could have been made only after 1^st
April, 2016. Therefore, in order to give the benefit to the assessee(s) and to
remove the anomalies, the date 1^st July, 2015 had been substituted
in sub-section (3) of section 1 of the Black Money Act in place of 1^st
April, 2016. According to the Supreme Court, this was done to enable the
assessee(s) desiring to take benefit of section 59 of the Black Money Act. By
doing so, the assessee(s) who desired to take the benefit of the one-time
opportunity could have made a declaration prior to 30^th September,
2015 and paid the tax and penalty prior to 31^st December, 2015.

According to the Supreme Court,
the penal provisions under sections 50 and 51 of the Black Money Act would come
into play only when an assessee fails to take benefit of section 59 and neither
discloses assets covered by the Black Money Act, nor pays the tax and penalty
thereon. The Supreme Court therefore concluded that the High Court was not
right in holding that by the notification / order impugned before it, the penal
provisions were made retrospectively applicable.

The Supreme Court also noted that
in the factual scenario of the present case, the assessment year in
consideration was 2019-2020 and the previous year relevant to the assessment
year was the year ending on 31^st March, 2019 and in that view of the
matter, the interim order passed by the High Court was not sustainable in law;
the same was quashed and set aside.

3. Dalmia Power Limited and
Ors. vs. ACIT

(2020) 420 ITR 339 (SC)

Amalgamation of companies –
Revised return of income filed after amalgamation beyond the due date of filing
revised return provided u/s 139(5) without seeking permission from Central
Board of Direct Taxes u/s 119(2)(b) is a valid return where the Scheme of
Arrangement and Amalgamation which is approved by NCLT so provides and is not
objected to by the Department.

The appellant No. 1, M/s Dalmia
Power Limited, was engaged in the business of building, operating, maintaining
and investing in power and power-related businesses directly or through
downstream companies. The appellant No. 2, M/s Dalmia Cement (Bharat) Limited,
was engaged in the business of manufacturing and selling of cement, generation
of power, maintaining and operating rail systems and solid waste management
systems which provide services to the cement business. The appellants had their
registered offices at Dalmiapuram Lalgudi Taluk, Dalmiapuram, District
Tiruchirappalli, Tamil Nadu.

The appellant No. 1 filed its
original return of income u/s 139(1) of the Act on 30^th September,
2016 for A.Y. 2016-2017, declaring a loss of Rs. 6,34,33,806. Similarly,
appellant No. 2 filed its original return of income u/s 139(1) of the Act on 30^th
November, 2016 for A.Y. 2016-2017 declaring NIL income (after setting off
brought forward loss amounting to Rs. 56,89,83,608 against total income of Rs.
56,89,83,608).

With a view to restructure and
consolidate their businesses and enable better realisation of the potential of
their businesses, which would yield beneficial results, enhanced value creation
for their shareholders, better security to their creditors and employees, the
appellants (also referred to as ‘Transferee Companies’ or ‘Amalgamated
Companies’) entered into four inter-connected Schemes of Arrangement and
Amalgamation with nine companies, viz., DCB Power Ventures Ltd., Adwetha Cement
Holdings Ltd., Odisha Cement Ltd., OCL India Ltd., Dalmia Cement East Ltd.,
Dalmia Bharat Cements Holdings Ltd., Shri Rangam Securities & Holdings
Ltd., Adhunik Cement Ltd. and Adhunik MSP Cement (Assam) Ltd. (also referred to
as ‘Transferor Companies’ or ‘Amalgamating Companies’) and their respective
shareholders and creditors.

The appointed date of the Schemes
was 1^st January, 2015 and these would come into effect from 30^th
October, 2018.

The Transferor and Transferee
Companies filed company petitions under sections 391 to 394 of the Companies
Act, 1956 before the Madras and Guwahati High Courts.

On the coming into force of the
Companies Act, 2013, the company petitions were transferred to NCLT, Chennai
and NCLT, Guwahati.

The Schemes were duly approved
and sanctioned by the NCLT, Guwahati vide orders dated 18^th May,
2017 and 30^th August, 2017. NCLT, Chennai sanctioned the Schemes
vide orders dated 16^th October, 2017, 20^th October, 2017,
26^th October, 2017, 28^th December, 2017, 10^th
January, 2018, 20^th April, 2018 and 1^st May, 2018.

The appellants / Transferee
Companies manually filed revised returns of income on 27^th November,
2018 with the Department after the Schemes were sanctioned and approval was
granted by the NCLT. The revised returns were based on the revised and modified
computations of total income and tax liability of the Transferor / Amalgamated
Companies. In the revised returns of income, the appellant No. 1 claimed losses
in the current year to be carried forward amounting to Rs. 2,44,11,837; whereas
appellant No. 2 claimed losses in the current year, to be carried forward,
amounting to Rs. 11,05,93,91,494.

The revised
returns were filed after the due date for filing revised returns of income u/s
139(5) for the A.Y. 2016-2017 since the NCLT passed the final order on 1^st
May, 2018. Consequentially, it was an impossibility to file the revised returns
before the prescribed date of 31^stMarch,
2018.

On 4^th December, 2018,
the Department issued a notice u/s 143(2) of the Income-tax Act to give effect
to the approval of the Scheme.

On 5^th December, 2018,
the Department recalled the notice dated 4^th December, 2018 on the
ground that the appellants had belatedly filed their revised returns without
obtaining permission from the Central Board of Direct Taxes (CBDT) for
condonation of delay u/s 119(2)(b) of the Act read with CBDT Circular No.
9/2015 dated 9^thJune, 2015.

Next, on 28^th
December, 2018, the Department passed an assessment order u/s 143(3) of the
Act, stating that in view of the Scheme of Arrangement and Amalgamation, the
notice issued u/s 143(2), and the assessment proceedings for A.Y. 2016-2017 had
become infructuous with respect to appellant No. 2.

The appellants filed writ
petitions before the Madras High Court praying for quashing of the order dated
5^thDecember, 2018 and for a direction to the Department to complete
the assessment for A.Y. 2015-2016 and A.Y. 2016-2017 after taking into account
the revised income tax returns filed on 27^th November, 2018, as well
as the orders dated 20^th April, 2018 and 1^st May, 2018
passed by the NCLT, Chennai approving the Schemes of Arrangement and
Amalgamation.

The learned Single Judge of the
Madras High Court, vide common judgment and order dated 30^th April,
2019 allowed the writ petitions filed by the appellants and quashed the order
dated 5^th December, 2018 passed by the Department and directed the
Department to receive the revised returns filed pursuant to the approval of the
Schemes of Arrangement and Amalgamation by the NCLT, Chennai and complete the
assessment for A.Y. 2015-2016 and A.Y. 2016-2017 in accordance with law within
a period of 12 weeks.

The Department filed writ appeals
under clause 15 of the Letters Patent Act challenging the judgment and order
dated 30^th April, 2019 passed by the Single Judge.

A Division Bench of the Madras
High Court, vide the impugned judgment dated 4^th July, 2019 allowed
the writ appeals and reversed the judgment of the Single Judge.

Aggrieved by the judgment of the
Division Bench, the appellants filed appeals before the Supreme Court on 9^th
August, 2019.

According to the Supreme Court,
the issue arising for consideration in the appeals was whether the Department
ought to have permitted the assessee companies (the appellants) to file the
revised income tax returns for the A.Y. 2016-2017 after the expiry of the due
date prescribed u/s 139(5) of the Act on account of the pendency of proceedings
for amalgamation of the assessee companies with other companies in the group
under sections 230-232 of the Companies Act, 2013.

The Supreme Court observed that a
perusal of the Scheme of Arrangement and Amalgamation showed that the
appellants were entitled to file revised returns of income after the prescribed
time limit for filing or revising the returns had lapsed without incurring any
liability on account of interest, penalty or any other sum.

The Court noted that in
compliance with section 230(5) of the Companies Act, 2013, notices under Form
No. CAA 3 under sub-rule (1) of Rule 8 of the Companies (Compromises,
Arrangements and Amalgamations) Rules, 2016 were sent to the Department.

Rule 8(3) of the Companies
(Compromises, Arrangements and Amalgamations) Rules, 2016 provides that any
representation made to the statutory authorities notified u/s 230(5) shall be
sent to the NCLT within a period of 30 days from the date of receipt of such
notice. In case no representation is received within 30 days, it shall be
presumed that the statutory authorities have no representation to make on the
proposed scheme of compromise or arrangement.

The Supreme Court noted that the
Department did not raise any objection within the stipulated period of 30 days
despite service of notice.

Pursuant thereto, the Schemes
were sanctioned by the NCLT. Accordingly, the Schemes attained statutory force
not only inter se the Transferor and Transferee Companies, but also in
rem, since there was no objection raised either by the statutory
authorities, the Department or other regulators or authorities likely to be
affected by the Schemes.

As a consequence, when the
companies merged and amalgamated with one another, the amalgamating companies
lost their separate identity and character and ceased to exist upon the
approval of the Schemes of Amalgamation.

Every scheme of arrangement and
amalgamation must provide for an appointed date. The appointed date is the date
on which the assets and liabilities of the transferor company vest in and stand
transferred to the transferee company. The Schemes come into effect from the
appointed date, unless modified by the Court.

The Supreme Court observed that
in Marshall Sons & Co. (India) Ltd. vs. ITO it had held that
where the Court does not prescribe any specific date but merely sanctions the
scheme presented, it would follow that the date of amalgamation / date of
transfer is the date specified in the scheme as ‘the transfer date’. It was
further held that pursuant to the Scheme of Arrangement and Amalgamation, the
assessment of the Transferee Company must take into account the income of both
the Transferor and the Transferee Companies.

The Court noted that in the
present case, appellant Nos. 1 and 2 / Transferee Companies filed their
original returns of income on 30^th September, 2016 and 30^th
November, 2016, respectively. Thereafter, they entered into Schemes of
Arrangement and Amalgamation with nine Transferor Companies in 2017. The
Schemes were finally sanctioned and approved by the NCLT, Chennai vide final
orders dated 20^th April, 2018 and 1^st May, 2018. The
appointed date as per the Schemes was 1^st January, 2015.
Consequently, the Transferor / Amalgamating Companies ceased to exist with
effect from the appointed date, and the assets, profits and losses, etc. were
transferred to the books of the appellants / Transferee Companies / Amalgamated
Companies.

The Schemes incorporated
provisions for filing the revised returns beyond the prescribed time limit
since the Schemes would come into force retrospectively from the appointed
date, i.e., 1^st January, 2015.

Accordingly, the appellants filed
their revised returns on 27^th November, 2018. The re-computation
would have a bearing on the total income of the appellants with respect to the
A.Y. 2016-2017, particularly on matters in relation to carrying forward losses,
unabsorbed depreciation, etc.

The counsel appearing for the
Department relied on sections 139(5) and 119(2)(b) of the Act read with
Circular No. 9 of 2015 issued by the Central Board of Direct Taxes to contend
that the appellant ought to have made an application for condonation of delay
and sought permission from the Central Board of Direct Taxes before filing the
revised returns beyond the statutory period of 31^st March, 2018. The
appellants having belatedly filed their revised returns on 27^th
November, 2018, which was beyond the due date of 31^st March, 2018
for the A.Y. 2016-17, the assessment could be done on the basis of the original
returns filed by the appellants.

According to the Supreme Court,
the provisions of section 139(5) were not applicable to the facts and
circumstances of the present case since the revised returns were not filed on
account of an omission or wrong statement or omission contained therein. The
delay occurred on account of the time taken to obtain sanction of the Schemes
of Arrangement and Amalgamation from the NCLT. In the facts of the present
case, it was an impossibility for the assessee companies to have filed the
revised returns of income for the A.Y. 2016-2017 before the due date of 31^stMarch, 2018 since the NCLT had passed the last orders granting approval
and sanction of the Schemes only on 22^nd April, 2018 and 1^st
May, 2018.

The Supreme Court further held
that a perusal of section 119(2)(b) showed that it was applicable in cases of
genuine hardship to admit an application, claim any exemption, deduction,
refund or any other relief under this Act after the expiry of the stipulated
period under the Act. This provision would not be applicable where an assessee
has restructured his business and filed a revised return of income with the
prior approval and sanction of the NCLT, without any objection from the
Department.

The Court observed that the rules
of procedure have been construed to be the handmaiden of justice. The purpose
of assessment proceedings is to assess the tax liability of an assessee
correctly in accordance with law.

According to the Supreme Court,
sub-section (1) of section 170 makes it clear that it is incumbent upon the
Department to assess the total income of the successor in respect of the
previous assessment year after the date of succession. In the present case, the
predecessor companies / transferor companies have been succeeded by the
appellants / transferee companies who have taken over their business along with
all assets, liabilities, profits and losses, etc. In view of the provisions of
section 170(1) of the Income-tax Act, the Department is required to assess the
income of the appellants after taking into account the revised returns filed
after the amalgamation of the companies.

According to the Court, the
learned Single Judge had rightly allowed the writ petitions. The Court set
aside the impugned judgment and order dated 4^th July, 2019 passed by
the learned Division Bench and restored the judgment dated 30^th
April, 2019 passed by the learned Single Judge, allowing the civil appeals.

The Supreme Court directed the
Department to receive the revised returns of income for A.Y. 2016-2017 filed by
the appellants and complete the assessment for A.Y. 2016-2017 after taking into
account the Schemes of Arrangement and Amalgamation as sanctioned by the NCLT.

Note: The
judgment of the Apex Court in the case of Marshall Sons & Co.
(India) Ltd. vs. ITO (223 ITR 809) was analysed by us in the column
‘Closements’ in the February, 1997 issue of this Journal.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

7. Sankalp Recreation Private Limited vs. Union of India and Ors. (2019) 418 ITR 673 (SC)

Purchase of immovable property by Central Government – In terms of an
auction where the Chief Commissioner reserves the right to reject any tender
form, including the highest bid, without assigning any reason – Cancellation
without reasons is not per se invalid especially when the Commissioner
had indicated the reasons for doing so to CBDT – So long as the auction process
is conducted in a bona fide manner and in public interest, a judicial
hands-off is mandated

A property admeasuring 1,053.5 square meters bearing Plot No. 27/A, Survey
No. 8, 9, 10, opposite Santacruz Police Station at the junction of Juhu Tara
Road and Linking Road, Santacruz (West), Mumbai 400054, although acquired by
the Union of India in 1994 u/s 269UD(1) of the Act, could only be sold in 2018.
Despite various attempts starting in 1994, several auctions conducted qua
the said property failed. Even an auction dated 27^th March, 2017
with a reserve price fixed of Rs. 32.11 crores failed to elicit a response from
any buyer. This being the case, Sankalp Recreation Pvt. Ltd., the appellant,
then made an offer to the Central Board of Direct Taxes to purchase the
aforesaid property for a sum of Rs. 32.11 crores. But this offer could not be
accepted because the CBDT stated that accepting such an offer by a private
treaty would be beyond their jurisdiction.

In the meanwhile, a fresh valuation report of the aforesaid property was
called for which was submitted on 4^th September, 2017 valuing the
property at Rs. 29,91,35,000. Pursuant to this, a brochure / catalogue was
circulated sometime in September, 2017.

The reserve price was fixed at Rs. 30 crores and the appellant was again
the sole bidder, offering Rs. 30.21 crores, or Rs. 21 lakhs above the reserve
price.In a letter dated 26^th September, 2017, the CCIT-2 sent a
report to the CBDT stating that although the bid of Rs. 30.21 crores offered by
the appellant was above the reserve price, it was less than the sum of Rs.
32.11 crores that had been offered by the same bidder earlier. In view of this,
a clarification was sought as to the future course of action.

On 20^th November, 2017, the CBDT directed that the auction
proceedings be kept in abeyance for the time being and appointed a valuer from
outside the State, viz., Mr. P. Ramaraj, District Valuation Officer, Chennai.
This valuer submitted a report on 23^rd February, 2018 valuing the
property at Rs. 31.07 crores because on 23^rd January, 2018 a cap had
been introduced in the TDR which would be available by way of FSI. Short of
this cap, the Chennai valuer valued the property at Rs. 36,51,59,000. Based on
this report, the property was put up for auction yet again.

Meanwhile, through a letter dated 4^th May, 2018, the earlier
auction which had yielded the sum of Rs. 30.21 crores from the appellant, was
treated as cancelled. The said letter specifically called upon the appellant to
participate in the upcoming auction to be conducted shortly.

The appellant, by a communication dated 12^th April, 2018,
referred to the return of the Demand Drafts of Rs. 7.5 crores and Rs. 5 lakhs
towards earnest money and caution money stating that the burden of interest
liability was continuing. The appellant made it clear that he would be
participating in a future auction and he was not exiting the auction
proceedings.

Pursuant to the valuation report, a notice for a public auction was
published on 10^th May, 2018 with the reserve price this time fixed
at Rs. 31.10 crores. On 17^th May, 2018 the Income tax Department
wrote to the appellant in which it intimated the fact that a fresh auction was
to be conducted on 30^thMay, 2018 and that the appellant should
participate in the same.

Meanwhile, the appellant, being aggrieved by the cancellation of the
auction process in which he was the highest bidder at Rs. 30.21 crores, filed a
writ petition in the High Court of Judicature at Bombay on 21^stMay,
2018. Two days later, on the 23^rd, the High Court permitted
Respondent Nos. 2 and 3 to conduct a fresh auction subject to refraining from
confirmation of the sale.

On 30^th May, 2018 the fresh auction was conducted and another
person (auction purchaser) was the sole bidder, with the bid being equal to the
reserve price of Rs. 31.10 crores.

Ultimately, by the impugned judgment dated 27^th July, 2018,
finding no infirmity in the auction process and finding that the cancellation,
though without reason, was not arbitrary, the High Court dismissed the writ
petition filed.

Before the Supreme Court, the learned counsel appearing on behalf of the
appellant urged that the cancellation being without reason was per se invalid in law and, therefore, ought to
have been set aside by the High Court. He also argued that the process of
conducting yet another auction after so many auctions had failed was itself
arbitrary and that as he was the highest bidder at Rs. 30.21 crores, that is,
Rs. 21 lakhs above the reserve price, the auction sale ought to have been
confirmed in his favour. Further, after citing a number of judgments, he made a
‘with-prejudice’ offer stating that he was willing to abide by the earlier
offer made by him of Rs. 32.11 crores.

The learned senior counsel appearing for auction purchaser urged that
there was no infirmity whatsoever in the
entire process. He highlighted the fact that under Clause 16 of the
brochure / catalogue, the Chief Commissioner reserved the right to reject any
tender form, including the highest bid, without assigning any reason. He, inter
alia, also made a ‘with-prejudice’ offer that his client would pay a sum of
Rs. 35 crores with an adjustment qua the earnest money that had been
deposited and lying with the Union of India, with a reasonable rate of interest
thereon.

The Supreme Court, referring to its earlier judgments which held that so
long as the auction process is conducted in a bona fide manner and in
the public interest a judicial hands-off is mandated, concluded that the
reasons disclosed both in the report dated 26^th September, 2017 and
the letter dated 6^th April, 2018 from the Government of India,
Ministry of Finance, to the Chief Commissioner of Income Tax made it clear that
there was no arbitrariness that was discernible in the entire auction process.
This being the case, the appeal had to be dismissed. The Supreme Court further
held that the offer made by the auction purchaser was very fair and directed
that from the figure of Rs. 35 crores, which would be paid within a period of
12 weeks directly to the Union treasury, a sum equivalent to interest of 9% on
the amount of Rs. 7.78 crores that was lying with the Union, calculated from
the date on which it was deposited with the Union till the date of the order,
be subtracted and the net figure be handed over as aforesaid.

8. Genpact India Private Limited vs. DCIT (2014) 419 ITR 440 (SC)

Appealable Orders – The contingencies detailed in (ii) and (iii) of section 246A(1)(a) arise
out of assessment proceedings u/s 143 or u/s 144 of the Act but the first
contingency is a standalone postulate and is not dependent purely on the
assessment proceedings either u/s 143 or u/s 144 of the Act – The expression
‘denies his liability to be assessed’ is quite comprehensive to take within its
fold every case where the assessee denies his liability to be assessed under
the Act

Alternative remedy – The High Court must not interfere if there is an
adequate, efficacious, alternative remedy available to the petitioner and he
has approached the High Court without availing the same unless he has made out
an exceptional case warranting such interference, or there exist sufficient
grounds to invoke the extraordinary jurisdiction under Article 226 – It cannot
be laid down as a proposition of law that once a petition is admitted, it could
never be dismissed on the ground of alternative remedy

Out of the opening share capital of 25,68,700 shares held by its sole
shareholder and holding company Genpact India Investment, Mauritius, the
appellant bought back 2,50,000 shares in May, 2013 at the rate of Rs. 32,000
per share for a total consideration of Rs. 800 crores.

On 10^th May, 2013, Chapter XIIDA consisting of sections
115QA, 115QB and 115QC was inserted in the Income-tax Act, 1961 (hereinafter
referred to as the Act) by the Finance Act, 2013 which came into effect from 1^stJune, 2013.

Some time later, on 10^th September, 2013, a scheme for
arrangement was approved by the High Court of Delhi in Company Petition No. 349
of 2013. Pursuant thereto, the appellant bought back another tranche of
7,50,000 shares at the rate of Rs. 35,000 per share for a total consideration
of Rs. 2,625 crores from Genpact India Investment, Mauritius.

In the income tax return for A.Y. 2014-15 filed on 28^th
November, 2014, the appellant stated that ‘Details of tax on distributed
profits of domestic companies and its payment’ were given in ‘Schedule DDT’
where the details of the aforesaid transactions were given but the liability to
pay any tax was denied.

A notice u/s 143(2) was issued to the appellant on 3^rdSeptember,
2015 seeking further explanation, pursuant to which requisite details were
furnished.

Vide his letter dated 28^th December, 2016, the assessee
submitted that the buyback of shares had been done in pursuance of the ‘scheme
of arrangement’ u/s 391 of the Companies Act, 1956 approved by the Hon’ble High
Court of Delhi and in such a manner that the same was not a buyback in terms of
section 115QA of the Act.

The matter was thereafter considered and an
assessment order was passed by the first respondent on 31^stDecember,
2016. As many as ten additions were made by the first respondent, one of them
being in respect of liability u/s 115QA of the Act. According to the first
respondent, section 115QA was introduced to provide that where shares are
bought back at a price higher than the price at which those shares were issued,
then the balance amount would be treated as distribution of income to the
shareholder and tax @20% would be payable by the company. Section 115QA was
applicable only to domestic unlisted companies.

Insofar as nine additions made by the first respondent were concerned,
an appeal was filed by the appellant. The appeal was decided in his favour but
a further challenge at the instance of the Revenue was under consideration.

As regards the issue concerning tax u/s 115QA, the appellant filed a
Writ Petition (Civil) No. 686 of 2017 in the High Court submitting, inter
alia, that the order passed by the first respondent was without
jurisdiction as buyback of shares in the instant case was in pursuance of the
‘scheme of arrangement’ approved by the High Court.

The High Court disposed of the petition with the following directions:

(i) The Court declines to entertain this writ petition under Article 226 of the Constitution against the
impugned demand raised by the Revenue by way of the impugned assessment order
u/s 115QA of the Act against the assessee;

(ii) The assessee is granted an opportunity to file
an appeal u/s 246A of the Act before the CIT(A) to challenge the impugned
assessment order only insofar as it creates a demand u/s 115QA;

(iii) If such an appeal is filed within ten days
from today, it will be considered on its own merits and a reasoned order
disposing of the appeal will be passed by the CIT(A) on all issues raised by
the assessee, not limited to the issues raised in the present petition as well
as on the response thereto by the Revenue in accordance with law;

(iv) The reasoned order shall be passed by the
CIT(A) not later than 31^st October, 2019. It will be communicated to
the petitioner within ten days thereafter. For a period of two weeks after the
date of such communication of order, the demand under the impugned assessment
order, if it is affirmed by the CIT(A) in appeal, will not be enforced against
the assessee;

(v) The
Court places on record the statement of the Revenue that it will not raise any
objection before the CIT(A) as to the maintainability of such an appeal and as
to the appeal being barred by limitation. The Court also takes on record the
statement of the Revenue that it will not enforce the demand in terms of the
impugned assessment order till the disposal of the above appeal. All of the
above is subject to the assessee filing the appeal before the CIT(A) within ten
days from today;

(vi) It is made clear that this Court has not
expressed any view whatsoever on the contentions of either party on the merits
of the case.

A challenge to the aforesaid view taken by the High
Court was raised by way of a Special Leave Petition No. 20728 of 2019 filed in
the Court on 26^th August, 2019. Within the time limit of ten days as
afforded by the High Court, an appeal was also preferred by the appellant
‘without prejudice’ on 30^th August,2019 against the ‘demand raised /
order passed u/s 115QA’. The aforesaid SLP came up before the Supreme Court on
6^th September, 2019, whereafter the matter was adjourned on a few
occasions and then taken up for final disposal.

The Supreme Court after going through the appeal
provisions observed that one of the key expressions appearing in section
246(1)(a) as well as in section 246A(1)(a) is ‘where the assessee denies his
liability to be assessed under this Act.’

It noted that a similar expression occurring in section 30 of the
Income-tax Act, 1922 came up for consideration before it in Commissioner
of Income Tax, U.P., Lucknow vs. Kanpur Coal Syndicate (1964) 53 ITR 225,
wherein it was concluded that the expression ‘denial of liability’ is
comprehensive enough to take in not only the total denial of liability but also
the liability to tax under particular circumstances.

The Court noted that the submission advanced on behalf of the appellant,
however, was that ‘denial of the assessee’s liability to be assessed’ in
section 246A is confined to his liability to be assessed u/s 143(3) and the
same has nothing to do with the liability to pay tax u/s 115QA. According to
the appellant, tax payable in respect of buyback of shares u/s 115QA is not a
tax payable on ‘total income’.

The Supreme Court considered the kinds of orders or situations that are
referred to in section 246(1)(a) of the Act, which are:

(i) An order against the assessee, where the assessee denies his
liability to be assessed under this Act, or

(ii) An intimation under sub-section (1) or sub-section (1B) of section
143 where the assessee objects to the making of adjustments, or

(iii) Any order of assessment under sub-section (3) of section 143 or
section 144, where the assessee objects:

to the amount of income assessed, or

to the amount of tax determined, or

to the amount of loss computed, or

to the status under which he is assessed.

According to the Supreme Court, the contingencies detailed in (ii) and
(iii) hereinabove arise out of assessment proceedings u/s 143 or section 144 of
the Act but the first contingency is a standalone postulate and is not
dependent purely on the assessment proceedings either u/s 143 or u/s 144 of the
Act. The expression ‘denies his liability to be assessed’ as held by this court
in Kanpur Coal Syndicate was quite comprehensive to take within
its fold every case where the assessee denies his liability to be assessed
under the Act.

The Supreme Court held that section 115QA stipulates that in case of
buyback of shares referred to in the provisions of the said section, the
company shall be liable to pay additional income tax at the rate of 20% on the
distributed income. Any determination in that behalf, be it regarding
quantification of the liability or the question whether such company is liable
or not, would be matters coming within the ambit of the first postulate
referred to hereinabove. Similar is the situation with respect to provisions of
section 246A(1)(a) where again, out of certain situations contemplated, one of
them is ‘an order against the assessee where the assessee denies his liability
to be assessed under this Act’. The computation and extent of liability is
determined under the provisions of section 115QA.Such determination under the
Act would squarely get covered under the said expression. There was no reason
why the scope of such expression be restricted and confined to issues arising
out of or touching upon assessment proceedings either u/s 143 or u/s 144.

The Court therefore rejected the submissions advanced by the appellant
and held that an appeal would be maintainable against the determination of
liability u/s 115QA of the Act. It thereafter dealt with the question whether
the High Court was justified in refusing to entertain the writ petition because
of the availability of adequate appellate remedy. According to the Supreme
Court, the law on the point was very clear and was summarised in Commissioner
of Income Tax and Ors. vs. Chhabil Dass Agarwal (2014) 1 SCC 603 as
under:

‘…It is settled law that non-entertainment of petitions under writ
jurisdiction by the High Court when an efficacious alternative remedy is
available is a Rule of self-imposed limitation. It is essentially a Rule of
policy, convenience and discretion rather than a Rule of law. Undoubtedly, it
is within the discretion of the High Court to grant relief under Article 226
despite the existence of an alternative remedy. However, the High Court must
not interfere if there is an adequate, efficacious, alternative remedy
available to the petitioner and he has approached the High Court without
availing the same unless he has made out an exceptional case warranting such
interference, or there exist sufficient grounds to invoke the extraordinary
jurisdiction under Article 226…’

The Supreme Court, referring to its various other
decisions, observed that while it can be said that it has recognised some
exceptions to the Rule of alternative remedy, i.e., where the statutory
authority has not acted in accordance with the provisions of the enactment in
question, or in defiance of the fundamental principles of judicial procedure,
or has resorted to invoke the provisions which are repealed, or when an order
has been passed in total violation of the principles of natural justice.
However, the Court further stated that the proposition laid down by it in many
cases that the High Court will not entertain a petition under Article 226 of
the Constitution if an effective alternative remedy is available to
the aggrieved person or the statute under which the action complained of has
been taken, itself contains a mechanism for redressal of grievance still holds
the field. Therefore, when a statutory forum is created by law for redressal of
grievances, a writ petition should not be entertained ignoring the statutory
dispensation.

Therefore, the Supreme Court did not find any infirmity in the approach
adopted by the High Court in refusing to entertain the writ petition. The
submission that once the threshold was crossed (i.e., the petition is
admitted)despite the preliminary objection being raised, the High Court ought
not to have considered the issue regarding alternate remedy may not be correct.
The first order dated 25^th January, 2017 passed by the High Court
did record the preliminary objection but was prima facie of the view
that the transactions defined in section 115QA were initially confined only to
those covered by section 77A of the Companies Act. Therefore, without rejecting
the preliminary objection, notice was issued in the matter. The subsequent
order undoubtedly made the earlier interim order absolute. However, the
preliminary objection having not been dealt with and disposed of, the matter
was still at large.

In State of U.P. vs. U.P. Rajya Khanij Vikas Nigam Sangharsh
Samiti and Ors. (2008) 12 SCC 675 the Supreme Court dealt with an issue
whether, after admission, the writ petition could not be dismissed on the
ground of alternate remedy and held that it cannot be laid down as a
proposition of law that once a petition is admitted, it could never be
dismissed on the ground of alternative remedy.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

9. Purshottam
Khatri vs. Commissioner of Income Tax, Bhopal (2019)
419 ITR 475 (SC)

Appeal
to the High Court – Substantial question of law – The only entry on facts for
the High Court exercising its appellate jurisdiction u/s 260A of the Income-tax
Act, 1961 is in a case where the Tribunal’s judgment and findings therein are
perverse – The High Court otherwise cannot interfere with the Tribunal’s
judgment on facts

The assessee left
India in 1968 and was employed in Muscat and Dubai till the previous year
relevant to the assessment year 1992-93 and thereafter returned to India.

A
search was carried out u/s 132 of the Act in the premises of the assessee at
Bhopal for a period of 13 days from 18^th to 30^th October,
1996. Thereafter, an assessment was made u/s 158BC r/w/s 143(3) of the Act by
the A.O. on 29^thOctober, 1997 determining the total undisclosed
income for the block period 1^st April, 1986 to 18^th
October, 1996 at Rs. 2,10,48,043. One of the additions was of Rs. 1,03,50,020
in respect of an alleged unexplained part of the deposits in the NRE accounts.

The assessee filed an
appeal before the Income Tax Appellate Tribunal, Indore Bench (the Tribunal).
By an order dated 7^th July, 2000, the Tribunal deleted some of the
additions (including the aforesaid addition of Rs. 1,03,50,020) made by the
A.O. to the undisclosed income of the assessee and allowed the appeal in part.

The
Revenue filed an appeal before the High Court which, by a judgment dated 25^th
January, 2006, set aside the order of the Tribunal in which the Tribunal, after
looking at the exchange vouchers and other evidence produced by the assessee,
had held that the entire sum of $7,55,534 was explained, as a result of which
the sum of $3,14,534, equivalent to Rs. 1,03,49,720, could not be held to be
unexplained deposits.

Aggrieved, the
assessee filed an appeal before the Supreme Court.

The Supreme Court
noted that the impugned judgment had added as unexplained income a sum of Rs.
1.03 crores, basically on the ground that the assessee had been unable to
present declaration forms that had been filled by him at the time of his visits
to India from abroad. According to the Supreme Court, keeping in mind the fact
that these declaration forms were asked for long after such expenditure had
been incurred, it could not possibly be said that the Tribunal’s judgment and
findings therein were perverse, which was the only entry on facts for the High
Court exercising its appellate jurisdiction u/s 260A of the Income-tax Act,
1961.

The Supreme Court
held that the High Court ought not to have interfered with the Tribunal’s
judgment as no substantial question of law arose therefrom.

Accordingly, the
Supreme Court allowed the appeal and set aside the judgment of the High Court
and reinstated that of the appellate Tribunal.

10. H.S.
Ramchandra RA.O. vs. Commissioner of Income Tax and Ors. (2019)
419 ITR 480 (SC)

Capital
or revenue receipt – Amount received by the assessee for relinquishing
secretaryship could not be treated as a capital receipt – It might have been a
different matter had it been a case of life-time appointment

On 14^th
July, 2000 a search was conducted in the residential premises of the assessee.
During the course of the search proceedings the assessee had admitted that he
had received from Dr. K. R. Paramahamsa, Chairman of Paramahamsa Foundation
& Trust, Bangalore, a sum of Rs. 42 lakhs for relinquishing his life
membership and secretaryship in Jayanagar Education Society. The assessee,
pursuant to the said search, filed return for the block period 1^st
April, 1990 to 14^th July, 2000 on 24^th April, 2001
declaring undisclosed income as nil. In the said block return in the statement
enclosed to part III of the return pertaining to ‘total income and loss for the
A.Y. 1997-98’, the assessee had mentioned that he had treated Rs. 35,00,000
received from Dr. K.R. Paramahamsa for relinquishing two posts held by him in
Jayanagar Education Society as a capital receipt. The A.O., after calling upon
the assessee to justify the said claim and after considering the reply thereof,
held the amount of Rs. 37,54,266 as exigible to tax under the Act by treating
the same as income under the head ‘Income from other sources’ and raised the
demand accordingly by treating the said income as undisclosed income.

Aggrieved by this,
the assessee filed an appeal before the CIT(A) contending that the receipt of
Rs. 37,54,266 was for relinquishing life membership and secretaryship of the Jayanagar
Education Society by enclosing the copy of the proceedings of the executive
committee meetings held on 15^th September, 1996 and 2^nd
October, 1996 regarding change in management and his resignation to the
abovesaid two posts, and thus claimed the said amount received as capital
receipt and so not exigible to tax. The appellate authority, after considering
the contentions raised by the assessee, rejected the same and held that it is
to be treated as revenue receipt.

The assessee filed a
further appeal before the Tribunal which, after considering the contentions
raised by the assessee and the case law relied thereunder, came to the
conclusion that the amount of Rs. 37,54,266 was capital in nature and
accordingly allowed the appeal and reversed the findings of the first appellate
authority who had confirmed the finding of the A.O..

The Revenue had then
filed an appeal before the High Court which held that the amount received by
the assessee could not be treated as a capital receipt since to forego life
membership or secretaryship, there was no capital asset which had been
transferred by the assessee in favour of Dr. Paramahamsa. Further, the assessee
was not earning any income or making profit out of the said posts and, by
virtue of relinquishing the same, the assessee did not lose monetarily and as
such the amount received from Dr. Paramahamsa by the assessee could not be
termed or construed as capital receipt.

The assessee filed an
appeal before the Supreme Court. The Supreme Court observed that the issue
involved in the appeal was essentially questioning the finding of fact recorded
by the authorities below whether the amount received by the appellant in the
sum of Rs. 37,54,266 was a capital receipt or a revenue receipt in the hands of
the appellant.

The Supreme Court
noted that the authorities below had found that going by the admission of the
appellant, the amount received could not be treated as capital receipt but only
as revenue receipt. For that, the authorities had relied on the statement given
by the appellant. The substance of the admission was that the appellant was
holding the post of secretary of the institution [Paramahamsa Foundation (R)
Trust] until 1996 but he left the institution after new members were elected to
the managing committee. That being the case, according to the Supreme Court,
the question of the appellant invoking the principle of capital asset did not
arise. It may have been a different matter if it was a case of life-time
appointment of the appellant as secretary of the institution concerned. No such
evidence was produced by the appellant before the A.O. or before it (the
Supreme Court).

Taking an overall
view of the matter, the Supreme Court upheld the conclusion reached by the High
Court that the amount received in the hands of the appellant could not be
treated as capital receipt. Thus, the order of the A.O. was affirmed and the
appeal was dismissed.

11. Senior Bhosale Estate (HUF) vs.
Assistant Commissioner of Income Tax (2019)
419 ITR 732 (SC)

Appeal to the High Court – Limitation – Condonation of
delay of 1,754 days – Appellant(s) had asserted that they had no knowledge
about passing of order dated 29^th December, 2003 until they were
confronted with the auction notices in June, 2008 issued by the competent
authority – Unless that fact is refuted, the question of disbelieving the stand
taken by the appellant(s) on affidavit does not arise

The High Court had
dismissed the application of the appellant(s), a Hindu Undivided Family which
was under control of the Court of Wards, for condonation of delay of 1,754 days
in filing the appeal u/s 260A of the Act for the reason that the appellant(s) had
not monitored the actions of the Court of Wards, Nagpur who was managing the
properties of the appellant.

On an appeal before
it, the Supreme Court observed that the appellant(s) had asserted that they had
no knowledge about the passing of the order dated 29^th December,
2003 until they were confronted with the auction notices in June, 2008 issued
by the competent authority.

The
Supreme Court noted that soon thereafter, the appellant(s) filed appeal(s)
accompanied by the subject application(s) on 19^th July, 2008.
Notably, the respondent(s) did not expressly refute the stand taken by the
appellant(s) that they had no knowledge about the passing of the order dated 29^th
December, 2003 until June, 2008. According to the Supreme Court, unless that
fact is refuted, the question of disbelieving the stand taken by the
appellant(s) on affidavit does not arise and for which reason the High Court
should have shown indulgence to the appellant(s) by condoning the delay in
filing the concerned appeal(s). This aspect had been glossed over by the High
Court.

The
Supreme Court, therefore, allowed the appeals setting aside the impugned order
of the High Court and relegated the parties before the High Court by allowing
the civil application(s) filed by the appellant(s) for condonation of delay in
filing the appeal(s) concerned. As a result, the appeal(s) concerned stood
restored to the file of the High Court to be proceeded with in accordance with
the law.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

9. Cognizant Technology Solutions India Pvt. Limited vs. Deputy
Commissioner of Income Tax Civil Appeal No. 1992 of 2020 [Arising out of
Special Leave Petition (Civil) No. 23705 of 2019] Date of order: 4^th
March, 2020

Dividend – Whether payments made to the
shareholders, under purchase of shares through the scheme of ‘arrangements and
compromise’, was a dividend within the meaning of section 2(22)(d)/2(22)(a) of
the Act, requiring to remit the taxes into the government account u/s 115O –
Communication merely a notice and not an order – Matter disposed of with
directions

The assessee, who was engaged in the business of
development of computer software and related services, approached the High
Court in the Financial Year 2016-17 with a Scheme of Arrangement and Compromise
under sections 391 to 393 of the Companies Act, 1956 to buy back its shares.
The High Court sanctioned the scheme on 18^th April, 2016 in Company
Petition No. 102 of 2016, pursuant to which the assessee purchased 94,00,534
shares at a price of Rs. 20,297 per share from its four shareholders and made a
total remittance of Rs. 19,080 crores approximately. According to the
appellant, this buy-back of shares was effected in May, 2016.

Thereafter, the assessee made statutory filing
under Form 15 CA (under Rule 37BB of the Income Tax Rules, 1962) after
obtaining requisite certificate from a Chartered Accountant in Form 15CB
furnishing details of remittances made to non-residents.

The assessee received a letter from the Deputy
Commissioner of Income Tax, Large Taxpayer Unit-1, Chennai in connection with
non-payment of tax on the remittances made to the non-residents in F.Y.s
2015-16 and 2016-17.

According to the assessee, it was under the
impression that since its scheme of arrangement and compromise between the
shareholders and the company was in accordance with sections 391 to 393 of the
Companies Act and approved by the Court, the provisions of section 115-QA,
115-O or 2(22) of the Income-tax Act were not applicable to its case.

However, the Department took the view that the
payments made to the shareholders under purchase of shares through the scheme
of arrangements and compromise was a dividend within the meaning of section
2(22)(d)/2(22)(a) of the Act, requiring it to remit the taxes into the government
account u/s 115-O of the Act.

Since the assessee company had failed to remit the
taxes within the stipulated period, it was ‘deemed to be an assessee in
default’ u/s 115-Q of the Act. Therefore, it was required to remit the taxes
(calculated @ 15% of the total payments of Rs. 19,415,62,77,269 to the
shareholders and surcharge, etc. as per the Act) along with the interest
payable u/s 115-P.

The said communication dated 22^nd March,
2018 was received by the assessee on or about the 26^th of March,
2018 and soon thereafter its bank accounts were attached by the Department.

In the meantime, an application was preferred by
the assessee on 20^th March, 2018 before the Authority for Advance
Ruling (AAR) u/s 245Q seeking a ruling on the issue whether the assessee was
liable to pay tax on the buy-back of its shares u/s 115QA or section 115-O or
any other provision of the Act.

The assessee challenged the communication dated 22^ndMarch, 2018 by filing a writ petition in the High Court, submitting inter
alia that while the issue was pending before the AAR u/s 245Q, in view of
the bar provided u/s 245RR of the Act, the matter could not have been
considered. It was also submitted that the assessee was never put to notice
whether it would be liable u/s 115-O. It was further submitted that all the
while the Department was only soliciting information which the appellant had
readily furnished and at no stage was the assessee put to notice that its
liability would be determined in any manner.

The writ petition came up before a Single Judge of
the High Court on 3^rd April, 2018 when he granted an order of
interim stay of the impugned proceedings subject to the condition that the
petitioner pays 15% of the tax demanded and furnishes a bank guarantee or security
by way of fixed deposits for the remaining taxes (only) to be paid.

The Single Judge by his decision dated 25^th
June, 2019 dismissed the writ petition as not being maintainable and relegated
the assessee to avail the remedy before the Appellate Authority under the Act.
However, during the course of his decision, the Single Judge concluded that
there was no need for issuance of any notice before making a demand u/s 115-O
of the Act and the notice issued on 21^st November, 2017 calling for
details where after meetings were convened, was quite adequate. He rejected the
submission that there would be a bar in terms of section 245RR. The Single
Judge did not find any merit in the contention that the shares purchased
pursuant to the order of the Company Court could not be treated as dividend.

The assessee, being aggrieved, challenged the
aforesaid view by filing a Writ Appeal. While discussing the issues that came
up for consideration, the Division Bench observed that the Single Judge after
having found the writ petition to be not maintainable, ought not to have gone
into merits. As regards the nature of the communication dated 22^nd
March, 2018 and the maintainability of an appeal challenging the same, the
Division Bench noted the contention of the assessee that it was not known as to
whether the impugned order dated 22^nd March, 2018 was a show cause
notice or final order. The Division Bench held that though there appeared to be
some element of contradiction in the counter affidavit filed, the said order
appeared to be a final one. Besides, the further action taken indicated that
the order under challenge was a final one. If it was only a show cause notice,
then there was no need to challenge it and instead the consequential freezing
alone required to be questioned. The Division Bench also held that the further
question as to whether the order under challenge violated the principles of
natural justice or requisite procedure contemplated under the Act was a matter
for consideration before the Appellate Authority. According to the Division
Bench, the learned Single Judge had rightly observed that the appeal could be
entertained and decided on merit.

The view taken by the Division Bench of the High
Court was challenged before the Supreme Court.

On the issue whether the communication dated 22^nd
March, 2018 was in the nature of determination of the liability, the Supreme
Court heard both the parties at considerable length, at the end of which it was
agreed by the learned advocate for the Department that the communication dated
22^nd March, 2018 could be treated as a show cause notice and the
Department permitted to conclude the issue within a reasonable time, provided
the interim order passed by the Single Judge of the High Court on 3^rdApril,
2018 was continued. The course suggested by the counsel for the Department was
acceptable to the senior counsel for the assessee.

In the peculiar facts and circumstances of the
case, the Supreme Court while disposing of this Appeal, directed as under:

(a) The
communication dated 22^nd March, 2018 shall be treated as a show
cause notice calling upon the assessee to respond with regard to the aspects
adverted to in it;

(b) The
assessee shall be entitled to put in its reply and place such material, on
which it seeks to place reliance, within ten days;

(d) The
matter shall thereafter be decided on merits by the authority concerned within
two months;

(e) Pending
such consideration, as also till the period to prefer an appeal from the
decision on merits is not over, the interim order passed by the Single Judge of
the High Court on 3^rd April, 2018 and as affirmed by the Supreme
Court vide its interim order dated 14^th October, 2019, shall
continue to be in operation; and

(f) The
amount of Rs. 495,24,73,287 deposited towards payment of tax and the amount of
Rs. 2806,40,15,294 which stands deposited and invested in the form of Fixed
Deposit Receipts shall be subject to the decision to be taken by the authority
concerned on merits, or to such directions as may be issued by the Appellate
Authority.

However, the Supreme Court clarified that it had
stated the facts of the case only by way of narration of events and explaining
the chronology. It shall not be held to have dealt with the merits or demerits
of the rival contentions. The merits of the matter shall be gone into
independently by the authorities concerned without being influenced in any way
by any of the observations made by the High Court and the Supreme Court.

The Supreme Court disposed of the appeal in the
aforesaid terms.

10. Rajasthan State Electricity Board, Jaipur vs. The Dy. Commissioner
of Income Tax (Assessment) and Ors. Civil Appeal No. 8590 of 2010 Date of order: 19^th March, 2020

Additional tax – Section 143(1-A) – For invoking the provisions of
section 143(1-A) of the Act, the Revenue must prove that the assessee has
attempted to evade tax by establishing facts and circumstances from which a reasonable
inference can be drawn that the assessee has, in fact, attempted to evade tax
lawfully payable by it

The assessee, a Government Company as defined u/s
617 of the Companies Act, 1956, filed its return on 30^th December,
1991 for the A.Y. 1991-92 showing a loss amounting to Rs. (-)4,27,39,32,972.
Due to a bona fide mistake, the assessee claimed 100% depreciation of
Rs. 3,33,77,70,317 on the written down value of assets instead of 75%
depreciation. Under the un-amended section 32(2) of the Income tax Act, 1961
the assessee was entitled to claim 100% depreciation. However, after the
amendment the depreciation could only be 75%. The assessee supported the
returns with provisional revenue account, balance sheet as on 31^st
March, 1991, details of gross fixed assets, computation chart and depreciation
chart. No tax was payable on the said return by the assessee.

An intimation u/s 143(1)(a)
dated 12^th February, 1992 was issued by the A.O. disallowing 25% of
the depreciation, restricting it to 75%. Additional tax u/s 143(1-A) amounting
to Rs. 8,63,64,827 was demanded. The assessee filed an application u/s 154
dated 18^thFebruary, 1992 praying for rectification of the demand.
The assessee also filed a petition u/s 264 against the demand of additional
tax. In the petition it was stated that even after allowing only 75% of
depreciation, the income of the assessee remained in loss to the extent of Rs.
3,43,94,90,393. The assessee prayed for quashing the demand of additional tax.

The application filed u/s 154 was rejected by the
A.O. on 28^th February, 1992. The revision petition u/s 264 came to
be dismissed by the Commissioner of Income Tax by his order dated 31^st
March, 1992. Rejecting the revision petition, the Commissioner of Income Tax
held that whenever adjustment is made, additional tax has to be charged @ 20%
of the tax payable on such ‘excess amount’. The ‘excess amount’ refers to the
increase in the income and by implication the reduction in loss where even
after the addition there is negative income.

Aggrieved by the order of the Commissioner of
Income Tax, a writ petition challenging the demand of additional tax which was
reduced to an amount of Rs. 7,67,68,717 was filed by the assessee in the High
Court. The learned Single Judge vide judgment dated 19^th
January, 1993 allowed the writ petition quashing the levy of additional tax u/s
143(1-A). The Revenue was aggrieved by this judgment of the Single Judge and
filed a Special Appeal which was allowed by the Division Bench of the High
Court vide its judgment dated 13^th November, 2007 upholding
the demand of additional tax. The assessee then filed an appeal before the
Supreme Court.

After noting the relevant provisions and amendments
thereto, the Supreme Court observed that the amendments brought by the Finance
Act, 1993 with retrospective effect, i.e., from 1^st April, 1989,
were fully attracted with regard to the assessment in question (for A.Y.
1991-92). As per the substituted sub-section (1-A), where the loss declared by
an assessee has been reduced by reason of adjustments made under sub-section
(1)(a), the provisions of sub-section (1-A) would apply. The Supreme Court
noted that the Commissioner of Income Tax while rejecting the revision petition
of the petitioner had taken the view that whenever adjustment is made,
additional tax would be charged @ 20% of the tax payable on such excess amount.
The excess amount refers to the increase in the income and by implication the
reduction in loss where even after the addition there is negative income.
According to the Court, whether there should be levy of additional tax in all
circumstances and in cases where the loss is reduced, was the question to be
answered in the present case.

The Court noted that by the Taxation Laws (Amendment)
Act, 1991, a third proviso was inserted in section 32. Prior to the
insertion of this proviso, the depreciation was not restricted to 75% of
the amount calculated at the percentage on the written down value of such
assets. The return was filed by the assessee on 31^st December, 1991,
prior to which date the Taxation Laws (Amendment) Act, 1991 had come into
operation. It was due to a bona fide mistake and oversight that the
assessee claimed 100% depreciation instead of 75%. The 100% depreciation of Rs.
3,33,77,70,317 was claimed on the written down value of the assets; 25%
depreciation was, thus, disallowed, restricting it to 75% and after reducing
25% of the depreciation the loss remained to the extent of Rs.
(-)3,43,94,90,393. Even after reduction of 25% depreciation the return of loss
of the assessee remained in the negative. In claiming 100% depreciation the
assessee claimed that there was no intention to evade tax and the said claim
was only a bona fide mistake.

The Supreme Court noted that by the Finance Act,
1993 section 143(1-A) was substituted with retrospective effect from 1st April,
1989 seeking to cover cases of returned income as well as returned loss.

In Commissioner of Income Tax, Gauhati vs.
Sati Oil Udyog Limited and Anr. (2015) 7 SCC 304, the Supreme Court
noted that it had occasion to consider elaborately the provisions of section
143(1-A), its object and validity. There was a challenge to the retrospective
nature of the provisions of section 143(1-A) as introduced by the Finance Act,
1993. The Gauhati High Court had held that retrospective effect given to the
amendment would be arbitrary and unreasonable. An appeal was filed by the
Revenue in this Court in which the Supreme Court had occasion to examine the
Constitutional validity of the provisions. The Supreme Court in the above
judgment had held that the object of section 143(1-A) was the prevention of
evasion of tax. Relying on its earlier judgment in K.P. Varghese vs. ITO,
(1981) 4 SCC 173, the Court in the above case held that the provisions
of section 143(1-A) should be made to apply only to tax evaders.

The Supreme Court observed that in the above case
it upheld the Constitutional validity of section 143(1-A), subject to holding
that the section can only be invoked where it is found on facts that the lesser
amount stated in the return filed by the assessee is a result of an attempt to
evade tax lawfully by the assessee.

According to the Supreme Court, applying the ratio
of the above judgment in the present case, it needed to find out whether 100%
depreciation as mentioned in the return filed by the assessee was a result of
an attempt to evade tax lawfully payable.

The Supreme Court, from the facts, noted that even
after disallowing 25% of the depreciation, the assessee in the return remained
in loss and the 100% depreciation was claimed in the return due to a bona
fide mistake. By the Taxation Laws (Amendment) Act, 1991 the depreciation
in the case of a company was restricted to 75% which, due to oversight, was
missed by the assessee while filing the return. The Commissioner of Income Tax
by deciding the revision petition had also not made any observation to the
effect that the 100% depreciation claimed was with the intent to evade payment
of tax lawfully payable by the assessee; rather, the Commissioner in his order
dated 31^st March, 1992 had observed that whenever adjustment is
made, additional tax has to be charged @ 20% of the tax payable on such excess amount.

The Court held that it is true that while
interpreting a tax legislation the consequences and hardship are not looked
into, but the purpose and object for which taxing statutes have been enacted
cannot be lost sight of. While considering the very same provision, section
143(1-A), its object and purpose and while upholding the provision, the Court
had held that the burden of proving that the assessee has attempted to evade
tax is on the Revenue which may be discharged by the Revenue by establishing
facts and circumstances from which a reasonable inference can be drawn that the
assessee has, in fact, attempted to evade tax lawfully payable by it. In the
present case, not even a whisper that the claim of 100% depreciation by the
assessee, 25% of which was disallowed, was with the intent to evade tax. The
provisions of section 143(1-A) in the facts of the present case cannot be
mechanically applied; it had made a categorical pronouncement in Commissioner
of Income Tax, Gauhati vs. Sati Oil Udyog Limited and Anr. (Supra),
that section 143(1-A) can only be invoked when the lesser amount stated in the
return filed by the assessee is a result of an attempt to evade tax lawfully
payable by the assessee.

In view of the above, the
Supreme Court held that mechanical application of section 143(1-A) in the facts
of the present case was uncalled for. It therefore allowed the appeal and set
aside the judgment of the Division Bench of the High Court as well as the
demand of additional tax dated 12^thFebruary, 1992 as amended on 28^th
February, 1992.

11. New Delhi Television Ltd. vs. Deputy Commissioner of Income Tax Civil Appeal No. 1008 of 2020 Date of order: 3^rd April, 2020

Re-assessment – Information which comes to the notice of the A.O. during
proceedings for subsequent assessment years can definitely form tangible
material to invoke powers vested with the A.O. u/s 147 of the Act

Re-assessment – The duty of the assessee is to disclose all primary
facts before the A.O. and it is not required to give any further assistance to
the A.O. by disclosure of other facts – It is for the A.O. at this stage to
decide what inference should be drawn from the facts of the case

Re-assessment – The assessee must be put to notice of all the provisions
on which the Revenue relies – The noticee or the assessee should not be
prejudiced or be taken by surprise

New Delhi Television Limited (hereinafter referred
to as the assessee), an Indian company engaged in running television channels
of various kinds, has several foreign subsidiaries one of which is based in the
United Kingdom named NDTV Network Plc, U.K. (hereinafter referred to as NNPLC).

The assessee submitted a return for F.Y. 2007-08,
i.e. A.Y. 2008-09, on 29^th September, 2008 declaring a loss. This
return was processed u/s 143 of the Income-tax Act, 1961. The case was selected
for scrutiny and the final assessment order was passed on 3^rd
August, 2012.

NNPLC had issued step-up coupon bonds of US $100
million which were arranged by Jeffries International and the funds were
received by NNPLC through Bank of New York. These bonds were issued in July,
2007 through the Bank of New York for a period of five years. The assessee had
agreed to furnish corporate guarantee for this transaction. These bonds were
subscribed to by various entities. They were to be redeemed at a premium of
7.5% after the expiry of the period of five years. However, these bonds were
redeemed in advance at a discounted price of US $74.2 million in November,
2009.

The A.O. held that NNPLC had virtually no financial
worth, it had no business worth the name and therefore it could not be believed
that it could have issued convertible bonds of US $100 million unless the
repayment along with interest was secured. This was secured only because of the
assessee agreeing to furnish a guarantee in this regard. Though the assessee
had never actually issued such guarantee, the A.O. was of the view that the
subsidiary of the assessee could not have raised such a huge amount without
having this assurance from the assessee. The transaction was of such a nature
that the assessee should be required to maintain an arm’s length from its
subsidiary, meaning that it should be treated like a guarantee issued by any
corporate guarantor in favour of some other corporate entity. The A.O. did not
doubt the validity of the transaction but imposed guarantee fee @ 4.68% by
treating it as a business transaction and added Rs. 18.72 crores to the income
of the assessee.

On 31^st March, 2015, the Revenue sent a
notice to the assessee stating that the authority has reason to believe that
net income chargeable to tax for the A.Y. 2008-09 had escaped assessment within
the meaning of section 148 of the Act. This notice did not give any reasons.
The assessee then asked for reasons and thereafter on 4^thAugust,
2015 the reasons were provided. The main reason given was that in the following
assessment year, i.e. A.Y. 2009-10, the A.O. had proposed a substantial
addition of Rs. 642 crores to the account of the assessee on account of monies
raised by it through its subsidiaries NDTV BV, The Netherlands, NDTV Networks
BV, The Netherlands (NNBV), NDTV Networks International Holdings BV, The
Netherlands (NNIH) and NNPLC.

The assessee had raised its
objection before the Dispute Resolution Panel (DRP) which came to the
conclusion that all these transactions with the subsidiary companies in the
Netherlands were sham and bogus transactions and that these transactions were
done with a view to get the undisclosed income, for which tax had not been
paid, back to India by this circuitous round-tripping. The A.O. relied upon the
order of the DRP holding that there is reason to believe that the funds
received by NNPLC were actually the funds of the assessee. It was specified
that NNPLC had a capital of only Rs. 40 lakhs. It did not have any business
activities in the United Kingdom except a postal address. Therefore, it
appeared to the A.O. that it was unnatural for anyone to make such a huge
investment of $100 million in a virtually non-functioning company and
thereafter get back only 72% of their original investment. According to the
A.O., ‘The natural inference could be that it was NDTV’s own funds introduced
in NNPLC in the garb of the impugned bonds.’ The details of the investors were
given in this communication giving reasons. Mention had also been made of
complaints received from a minority shareholder in which it is alleged that the
money introduced in NNPLC was shifted to another subsidiary of the assessee in
Mauritius from where it was taken to a subsidiary of the assessee in Mumbai and
finally to the assessee. NNPLC itself was placed under liquidation on 28^th
March, 2011.

Therefore, the A.O. was of the opinion that there
were reasons to believe that the funds received by NNPLC were the funds of the
assessee under a sham transaction and that the amount of Rs. 405.09 crores
introduced into the books of NNPLC during F.Y. 2007-08 corresponding to A.Y.
2008-09 through the transaction involving the step-up coupon convertible bonds,
pertained to the assessee.

The assessee filed a reply to the notice and the
reasons given, and claimed that there had been no failure on its part to
disclose fully and truly all material facts necessary to make an assessment. The
assessee also claimed that the proceedings had been initiated on a mere change
of opinion and there was no reason to believe it. According to the assessee the
A.O. had accepted the genuineness of the transaction wherein NNPLC, the
subsidiary, had issued convertible bonds which had been subscribed by many
entities. It was urged that the A.O. had treated the transaction to be genuine
by levying guarantee fees and adding it back to the income of the assessee. In
the alternative, it was submitted that the notice had been issued beyond the
period of limitation of four years. According to the assessee it had not
withheld any material facts and, therefore, limitation of six years as
applicable to the first proviso to section 147 would not apply.

The A.O. did not accept these objections. The claim
of the assessee was disposed of by the A.O. vide order dated 23^rd
November, 2015 wherein he held that there was non-disclosure of material facts
by the assessee and the notice would be within limitation since NNPLC was a
foreign entity and admittedly a subsidiary of the assessee and the income was
being derived through this foreign entity. Hence, the case of the assessee
would fall within the second proviso of section 147 of the Act and the
extended period of 16 years would be applicable. The objections were
accordingly rejected.

Aggrieved, the petitioner filed a writ petition in
the High Court challenging the notice. The writ petition was dismissed on 10^th
August, 2017. Against this the assessee filed an appeal before the Supreme
Court.

According to the Supreme Court, the following
issues arose for its consideration:

(i) Whether
in the facts and circumstances of the case, it can be said that the Revenue had
a valid reason to believe that undisclosed income had escaped assessment?

(ii) Whether
the assessee did not disclose fully and truly all material facts during the
course of original assessment which led to the finalisation of the assessment
order and undisclosed income escaping detection?

(iii) Whether
the notice dated 31^st March, 2015 along with reasons communicated on
4^th August, 2015 could be termed to be a notice invoking the
provisions of the second proviso to section 147 of the Act?

Question No. 1

After consideration, the Supreme Court observed
that the main issue was whether there was sufficient material before the A.O.
to take a prima facie view that income of the assessee had escaped
assessment. It noted that the original order of assessment was passed on 3^rd
August, 2012. It was thereafter, on 31^st December, 2013, that the
DRP in the case of A.Y. 2009-10 raised doubts with regard to the corporate
structure of the assessee and its subsidiaries. It was noted in the order of
the DRP that certain shares of NNPLC had been acquired by Universal Studios
International B.V., Netherlands, indirectly by subscribing to the shares of
NNIH.

It was recorded in the reasons communicated on 4^thAugust, 2015 that NNPLC had no business activity in London. It had no
fixed assets and was not even paying rent. Other than the fact that NNPLC was
incorporated in the U.K., it had no other commercial business there. NNPLC had
declared a loss of Rs. 8.34 crores for the relevant year. It was also noticed
from the order of the A.O. that the assessee is the parent company of NNPLC and
it is the dictates of the assessee which were important for running NNPLC.
According to the Revenue, tax evasion petitions were filed by the minority
shareholders of the assessee company on various dates, i.e., 11^th
March, 2014, 25^thJuly, 2014, 13^th October, 2014 and 11^th
March, 2015, which complaints described in detail the communication between the
assessee and the subsidiaries and also allegedly showed evidence of
round-tripping of the assessee’s undisclosed income through a layer of
subsidiaries which led to the issuance of the notice in question.

According to the Supreme Court, the question as to
whether the facts which came to the knowledge of the A.O. after the assessment
proceedings for the relevant year were completed could be taken into
consideration for coming to the conclusion that there were reasons to believe
that income had escaped assessment, is the question that requires to be
answered. The Supreme Court, referring to its judgments in Claggett
Brachi Co. Ltd., London vs. Commissioner of Income Tax, Andhra Pradesh 1989
Supp (2) SCC 182; M/s Phool Chand Bajrang Lal and Anr. vs. Income Tax Officer
and Anr. (1993) 4 SCC 77; and Ess Kay Engineering Co. (P) Ltd.
vs. Commissioner of Income Tax, Amritsar (2001) 10 SCC 189, observed
that a perusal of the aforesaid judgments clearly showed that subsequent facts
which come to the knowledge of the A.O. can be taken into account to decide
whether the assessment proceedings should be re-opened or not.

Information which comes to the notice of the A.O.
during proceedings for subsequent assessment years can definitely form tangible
material to invoke powers vested with the A.O. u/s 147 of the Act. The material
disclosed in the assessment proceedings for the subsequent years as well as the
material placed on record by the minority shareholders form the basis for
taking action u/s 147. At the stage of issuance of notice, the A.O. is to only
form a prima facie view. In the opinion of the Supreme Court, the material
disclosed in the assessment proceedings for subsequent years was sufficient to
form such a view and it accordingly held that there were reasons to believe
that income had escaped assessment in this case. Question No. 1 was answered
accordingly.

Question No. 2

Coming to the second question, whether there was
failure on the part of the assessee to make a full and true disclosure of all
the relevant facts, the Supreme Court noted that the Revenue had placed
reliance on certain complaints made by the minority shareholders and it was
alleged that those complaints revealed that the assessee was indulging in
round-tripping of its funds. According to the Revenue the material disclosed in
these complaints clearly showed that the assessee was guilty of creating a
network of shell companies with a view to transfer its un-taxed income in India
to entities abroad and then bring it back to India, thereby avoiding taxation.
The Supreme Court did not go into this aspect of the matter because those
complaints were neither before the High Court nor before it and, therefore, it
would be unfair to the assessee if it relied upon such material which the
assessee was not confronted with.

According to the Supreme Court, the issue before it
was whether the Revenue could take the benefit of the extended period of
limitation of six years for initiating proceedings under the first proviso
of section 147. This could only be done if the Revenue could show that the
assessee had failed to disclose fully and truly all material facts necessary
for its assessment. In the opinion of the Supreme Court, the assessee had
disclosed all the facts it was bound to disclose. If the Revenue wanted to
investigate the matter further at that stage, it could have easily directed the
assessee to furnish more facts.

The Supreme Court held that the conclusion of the
High Court that there was no ‘true and fair disclosure’ was not correct. The
assessee had made a disclosure about having agreed to stand guarantee for the
transaction by NNPLC and it had also disclosed the factum of the
issuance of convertible bonds and their redemption. The Supreme Court noted
that the A.O. knew who were the entities who had subscribed to the convertible
bonds and in other proceedings relating to the subsidiaries the same A.O. had
knowledge of the addresses and the consideration paid by each of the
bondholders as was apparent from the assessment orders dated 3^rd
August, 2012 passed in the cases of M/s NDTV Labs Ltd. and M/s NDTV Lifestyle
Ltd. Therefore, in the opinion of the Supreme Court, there was full and true
disclosure of all material facts necessary for its assessment by the assessee.

The Supreme Court noted that the fact that step-up
coupon bonds for US $100 million were issued by NNPLC was disclosed; who were
the entities which subscribed to the bonds was disclosed; and the fact that the
bonds were discounted at a lower rate was also disclosed before the assessment
was finalised. According to the Court, this transaction was accepted by the
A.O. and it was clearly held that the assessee was only liable to receive a
guarantee fees on the same which was added to its income. Without stating
anything further on the merits of the transaction, the Supreme Court was of the
view that it could not be said that the assessee had withheld any material
information from the Revenue.

As regards the contention
of the Revenue that the assessee, to avoid detection of the actual source of
funds of its subsidiaries, did not disclose the details of the subsidiaries in
its final accounts, balance sheets and profit and loss account for the relevant
period as was mandatory under the provisions of the Indian Companies Act, 1956,
the Supreme Court noted that the assessee had obtained an exemption from the
competent authority under the Companies Act, 1956 from providing such details
in its final accounts, balance sheets, etc. The assessee was therefore not
bound to disclose this to the A.O. The A.O., before finalising the assessment
of 3^rdAugust, 2012, had never asked the assessee to furnish the
details.

Regarding the contention of the Revenue that the
assessee did not disclose who had subscribed what amount and what was its
relationship with the assessee, the Supreme Court observed that the first part
did not appear to be correct. It noted that there was material on record to
show that on 8^th April, 2011 NNPLC had sent a communication to the
Deputy Director of Income Tax (Investigation), wherein it had not only
disclosed the names of all the bond holders but also their addresses and number
of bonds along with the total consideration received. This chart formed part of
the assessment orders dated 3^rd August, 2012 in the case of M/s NDTV
Labs Ltd. and M/s NDTV Lifestyle Ltd. The said two assessment orders were
passed by the same officer who had passed the assessment order in the case of
the assessee on the same date itself. Therefore, the entire material was
available with the Revenue.

The Supreme Court was of the view that the assessee
had disclosed all the primary facts necessary for the assessment of its case to
the A.O. What the Revenue was urging before it was that the assessee did not
make a full and true disclosure of certain other facts. According to the Court,
the assessee had disclosed all primary facts before the A.O. and it was not
required to give him any further assistance by disclosure of other facts. It
was for the A.O. at this stage to decide what inference should be drawn from
the facts of the case. In the present case, the A.O., on the basis of the facts
disclosed to him, did not doubt the genuineness of the transaction set up by
the assessee. This the A.O. could have done even at that stage on the basis of
the facts which he already knew. The other facts relied upon by the Revenue
were the proceedings before the DRP and facts subsequent to the assessment
order, and which the Supreme Court had already dealt with while deciding
Question No. 1. However, according to the Supreme Court, that cannot lead to
the conclusion that there is non-disclosure of true and material facts by the
assessee.

The Court noted that whereas before it the Revenue
was strenuously urging that the assessee is guilty of non-disclosure of
material facts, but before the High Court the case of the Revenue was just the
opposite. The Revenue, in response to the writ petition filed by the assessee
before the High Court, had contended that the condition that the income should
have escaped assessment due to failure on the part of the assessee to disclose
fully and truly all material facts necessary for making assessment, was not
relevant to decide the issue before the Hon’ble Court. According to the Supreme
Court, the Revenue could not now turn around and urge that the assessee is
guilty of non-disclosure of facts.

The Supreme Court held that the assessee had fully
and truly disclosed all material facts necessary for its assessment and,
therefore, the Revenue could not take benefit of the extended period of
limitation of six years. Question No. 2 was answered accordingly.

Question No. 3

It was urged by the Revenue that in terms of the
second proviso to section 147 of the Act read with section 149(1)(c),
the limitation period would be 16 years since the assessee had derived income
from a foreign entity.

The Supreme Court noted that the notice dated 31^st
March, 2015 was conspicuously silent with regard to the second proviso.
It did not rely upon the second proviso. Besides,, there was no case set
up in relation to the second proviso either in the notice or even in the
reasons supplied on 4^th August, 2015 with regard to the notice. It
was only while rejecting the objections of the assessee that reference had been
made to the second proviso in the order of disposal of objections dated
23^rd
November, 2015.

On behalf of the Revenue it was urged that mere
non-naming of the second proviso in the notice does not help the
assessee. It had been urged that even if the source of power to issue notice
has been wrongly mentioned but all relevant facts were mentioned, then the
notice could be said to be a notice under the provision which empowers the
Revenue to issue such notice.

The Supreme Court observed that there could be no
quarrel with this proposition of law. However, according to it, the noticee or
the assessee should not be prejudiced or be taken by surprise. The
uncontroverted fact was that in the notice dated 31^st March, 2015
there was no mention of any foreign entity. Even after the assessee
specifically asked for reasons, the Revenue only relied upon facts to show that
there was reason to believe that income has escaped assessment and this
escapement was due to the non-disclosure of material facts. There was nothing
in the reasons to indicate that the Revenue was intending to apply the extended
period of 16 years. It was only after the assessee filed its reply to the
reasons given that in the order of rejection for the first time was reference
made to the second proviso by the Revenue.

According to the Supreme
Court this was not a fair or proper procedure. If not in the first notice, at
least at the time of furnishing the reasons the assessee should have been
informed that the Revenue relied upon the second proviso. The assessee
must be put to notice of all the provisions on which the Revenue relies. In
case the Revenue had issued a notice to the assessee stating that it relied
upon the second proviso, the assessee would have had a chance to show
that it was not deriving any income from any foreign asset or financial interest
in any foreign entity, or that the asset did not belong to it or any other
ground which may be available. The assessee could not be deprived of this
chance while replying to the notice.

The Court held that the Revenue cannot take a fresh
ground. The notice and reasons given thereafter do not conform to the
principles of natural justice and the assessee did not get a proper and
adequate opportunity to reply to the allegations which were now being relied
upon by the Revenue. The assessee could not be taken by surprise at the stage
of rejection of its objections or at the stage of proceedings before the High
Court that the notice is to be treated as a notice invoking provisions of the
second proviso of section 147 of the Act.

Accordingly, the Supreme Court answered the third
question by holding that the notice issued to the assessee and the supporting
reasons did not invoke provisions of the second proviso of section 147
and therefore the Revenue could not be permitted to take benefit of the second proviso.

The Supreme
Court allowed the appeal by holding that the notice issued to the assessee
showed sufficient reasons to believe on the part of the A.O. to reopen the
assessment but since the Revenue had failed to show non-disclosure of facts,
the notice having been issued after a period of four years was required to be
quashed. Having held so, it was made clear that it had not expressed any
opinion on whether on the facts of this case the Revenue could take benefit of
the second proviso or not. Therefore, the Revenue may issue fresh notice
taking benefit of the second proviso if otherwise permissible under law.
It was clarified that both the parties shall be at liberty to raise all
contentions with regard to the validity of such notice.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

6. Civil
Appeal Nos. 5437-5438/2012, 4702/2014 and Civil Appeal No. 1727/2020 [arising
out of SLP (C) No. 25761/2015] Ananda
Social and Educational Trust vs. CIT Date
of order: 19^th February, 2020

Registration of Charitable Trust – Section 12AA – The Commissioner is
bound to satisfy himself that the object of the trust is genuine and that its
activities are in furtherance of the objects of the trust, that is, equally
genuine – Section 12AA pertains to the registration of a trust and not to
assess what a trust has actually done – The term ‘activities’ in the provision
includes ‘proposed activities’

The Supreme Court
consolidated three matters wherein the common question of grant of registration
u/s 12AA of the Act was involved.

In Ananda Social and
Educational Trust vs. CIT (Civil Appeal Nos. 5437-5438/2012), the trust
was formed as a society and it applied for registration. No activities had been
undertaken by it before the application was made. The Commissioner rejected the
application on the sole ground that since no activities had been undertaken by
the trust, it was not possible to register it, presumably because it was not
possible to be satisfied about whether its activities were genuine. The Income
Tax Appellate Tribunal reversed the order of the Commissioner. The Revenue
Department approached the High Court by way of an appeal. The High Court upheld
the order of the Tribunal and came to the conclusion that in case of a
newly-registered trust even though there were no activities, it was possible to
consider whether it could be registered u/s 12AA of the Act.

The Supreme Court dismissed
the appeal holding that the reasons assigned by the High Court in passing the
impugned judgment(s) and order(s) needed no interference as the same were in
consonance with law.

In DIT(E) vs.
Foundation of Ophthalmic and Optometry Research Education Centre (Civil Appeal
No. 4702/2014), the appeal had been preferred by the appellant Director
of Income Tax against the impugned judgment and the order passed by the Delhi
High Court holding that a newly-registered trust is entitled for registration
u/s 12AA of the Act on the basis of its objects, without any activity having
been undertaken.

The Supreme Court, after
noting the provisions of section 12AA, observed that the said section provides
for registration of a trust. Such registration can be applied for by a trust
which has been in existence for some time and also by a newly-registered trust.
There is no stipulation that the trust should have already been in existence
and should have undertaken any activities before making the application for
registration.

The Court noted that section
12AA of the Act empowers the Principal Commissioner or the Commissioner of
Income Tax on receipt of an application for registration of a trust to call for
such documents as may be necessary to satisfy himself about the genuineness of
the activities of the trust or institution, and make inquiries in that behalf;
it empowers the Commissioner to thereupon register the trust if he is satisfied
about the objects of the trust or institution and the genuineness of its
activities.

The Supreme Court further
noted that in the present case, the trust was formed as a society on 30^th
May, 2008 and it applied for registration on 10^thJuly, 2008, i.e.
within a period of about two months.

No activities had been
undertaken by the respondent trust before the application was made. The
Commissioner rejected the application on the sole ground that since no
activities had been undertaken by the trust, it was not possible to register
it, presumably because it was not possible to be satisfied about whether its
activities were genuine. The Income Tax Appellate Tribunal, Delhi reversed the
order of the Commissioner. The Revenue Department approached the High Court by
way of an appeal. The High Court upheld the order of the Tribunal and came to
the conclusion that in case of a newly-registered trust even though there were no
activities, it was possible to consider whether the trust can be registered u/s
12AA of the Act.

The Supreme Court observed
that section 12AA undoubtedly requires the Commissioner to satisfy himself
about the objects of the trust or institution and the genuineness of its
activities and grant a registration only if he is so satisfied. The said
section requires the Commissioner to be so satisfied in order to ensure that
the object of the trust and its activities are charitable since the consequence
of such registration is that the trust is entitled to claim benefits under
sections 11 and 12. In other words, if it appears that the objects of the trust
and its activities are not genuine, that is to say not charitable, the
Commissioner is entitled to refuse and in fact bound to refuse such
registration.

It was argued before the
Supreme Court that the Commissioner is required to be satisfied about two
things – firstly that the objects of the trust and secondly that its activities
are genuine. If there have been no activities undertaken by the trust then the
Commissioner cannot assess whether such activities are genuine and, therefore,
the Commissioner is bound to refuse the registration of such a trust.

The Supreme Court held that
the purpose of section 12AA is to enable registration only of such trust or
institution whose objects and activities are genuine. In other words, the
Commissioner is bound to satisfy himself that the objects of the trust are
genuine and that its activities are in furtherance of the objects of the trust,
that is, equally genuine. Since section 12AA pertains to the registration of a
trust and not to assess what a trust has actually done, the Supreme Court was
of the view that the term ‘activities’ in the provision includes ‘proposed activities’.
That is to say, a Commissioner is bound to consider whether the objects of the
Trust are genuinely charitable in nature and whether the activities which the
trust proposed to carry on are genuine, in the sense that they are in line with
the objects of the trust. In contrast, the position would be different where
the Commissioner proposes to cancel the registration of a trust under
sub-section (3) of section 12AA of the Act. There, the Commissioner would be
bound to record the finding that an activity or activities actually carried on
by the Trust are not genuine, being not in accordance with the objects of the
trust. Similarly, the situation would be different where the trust has, before
applying for registration, been found to have undertaken activities contrary to
the objects of the trust.

The Supreme Court therefore
found that the view of the Delhi High Court in the impugned judgment was
correct and liable to be upheld.

Further, the Court noted that
the Allahabad High Court in IT Appeal No. 36 of 2013, titled ‘Commissioner
of Income Tax-II vs. R.S. Bajaj Society’ had taken the same view as
that of the Delhi High Court in the impugned judgment. The Allahabad High Court
had also referred to a similar view taken by the High Courts of Karnataka and Punjab
& Haryana. However, a contrary view was taken by the Kerala High Court in
the case of Self Employers Service Society vs. Commissioner of Income Tax
(2001) Vol. 247 ITR 18. According to the Supreme Court that view,
however, did not commend itself as the facts in Self Employers Service
Society (Supra) suggested that the Commissioner of Income Tax had
observed that the applicant for registration as a trust had undertaken
activities which were contrary to the objects of the trust.

According to the Supreme
Court, therefore, there was no reason to interfere with the impugned judgment
of the High Court of Delhi. The appeal was, accordingly, dismissed.

In
CIT(E) vs. Sai Ashish Charitable Trust (Civil Appeal No. 1727/2020 [@SLP(C) No.
25761/2015], the Trust which applied for registration u/s 12AA of the
Income Tax Act, 1961 was found not to have spent any part of its income on
charitable activities. The Commissioner of Income Tax, therefore, refused the
registration of the Trust.

The Income Tax Appellate Tribunal
reversed the decision of the Commissioner of Income Tax on the basis of the
judgment of the Delhi High Court in the matters referred to above.

The Supreme Court, for the
reasons stated earlier, was of the view that the object of the provision in question
is to ensure that the activities undertaken by the trust are not contrary to
its objects and that a Commissioner is entitled to refuse registration if the
activities are found contrary to the objects of the trust.

According to the Supreme
Court, in the present case, what had been found was that the trust had not
spent any amount of its income for charitable purposes. This was a case of not
carrying out the objects of the trust and not of carrying on activities
contrary to its objects. These circumstances may arise for many reasons,
including not finding suitable circumstances for carrying on activities.
Undoubtedly, the inaction in carrying out charitable purposes might also become
actionable depending on other circumstances; but it was not concerned with such
a case here.

In these circumstances, the
Supreme Court felt that it was for the Commissioner of Income Tax to consider
the issue by exercising his powers under sub-section (3) of section 12AA, if
the facts justify such actions.

The appeal was, however,
dismissed.

7. Connectwell Industries Pvt. Ltd. vs. Union of India Civil
Appeal No. 1919 of 2010 Date
of order: 6^th March, 2020

Recovery of
tax – Unless there is preference given to the Crown debt by a statute, the dues
of a secured creditor have preference over Crown debts – Though the sale was
conducted after the issuance of the notice as well as the attachment order
passed by the Tax Recovery Officer in 2003, the fact remained that a charge
over the property was created much prior to the notice issued by the Tax
Recovery Officer – Hence the rigours of Rule 2 and Rule 16 of Schedule II were
not applicable

Biowin Pharma India Ltd.
(‘BPIL’) obtained a loan from the Union Bank of India. Property situated at
Plot No. D-11 admeasuring 1,000 sq. metres situated at Phase-III, Dombivli
Industrial Area, MIDC, Kalyan along with plant, machinery and building was
mortgaged as security to the bank. Union Bank of India filed OA No. 1836 of
2000 before the Debt Recovery Tribunal III, Mumbai (hereinafter referred as
‘the DRT’) for recovery of the loan advanced to BPIL. The DRT allowed the OA
filed by Union Bank of India and directed BPIL to pay a sum of Rs.
4,76,14,943.20 along with interest at the rate of 17.34% per annum from the
date of the application till the date of payment and / or realisation. A
recovery certificate in terms of the order passed by the DRT was issued and
recovery proceedings were initiated against BPIL.

The Recovery Officer, DRT III
attached the property on 29^th November, 2002. The Recovery Officer,
DRT III then issued a proclamation of sale of the said property on 19^th
August, 2004. A public auction was held on 28^thSeptember, 2004. The
DRT was informed that there were no bidders except Connectwell Industries Pvt.
Ltd. (the auction purchaser). The offer made by the auction purchaser to
purchase the property for an amount of Rs. 23,00,000 was accepted by the
Recovery Officer, DRT III. On 14^th January, 2005 a certificate of
sale was issued by the Recovery Officer, DRT III in favour of the auction
purchaser. The possession of the disputed property was handed over to the
auction purchaser on 25^th January, 2005 by the Recovery Officer, DRT
III and a certificate of sale was registered on 10^th January, 2006.

The Maharashtra Industrial
Development Corporation (hereinafter referred to as ‘the MIDC’) informed the
Recovery Officer, DRT III that it received a letter dated 23^rd
March, 2006 from the Tax Recovery Officer, Range 1, Kalyan stating that the
property in dispute was attached by him on 17^th June, 2003. The
auction purchaser requested the Regional Officer, MIDC by a letter dated 10^th
April, 2006 to transfer the property in dispute in its favour in light of the
sale certificate issued by the DRT on 25^th January, 2005. As the
MIDC failed to transfer the plot in the name of the auction purchaser, the
auction purchaser filed a writ petition before the High Court seeking a
direction for issuance of ‘No Objection’ certificate in respect of the plot and
to restrain the Tax Recovery Officer, Range 1, Kalyan from enforcing the
attachment of the said plot, which was performed on 11^th February,
2003.

The question posed before the
High Court was whether the auction purchaser who had made a bona fide
purchase of the property in the auction sale as per the order of the DRT is
entitled to have the property transferred in its name in spite of the
attachment of the said property by the Income Tax Department. Relying upon Rule
16 of Schedule II to the Act, the High Court came to the conclusion that there
can be no transfer of a property which is the subject matter of a notice. The
High Court was also of the view that after an order of attachment is made under
Rule 16(2), no transfer or delivery of the property or any interest in the
property can be made, contrary to such attachment. The High Court held that
notice under Rule 2 of Schedule II to the Act was issued on 11^th
February, 2003 and the property in dispute was attached under Rule 48 on 17^th
June, 2003, whereas the sale in favour of the auction purchaser took place on 9^th
December, 2004 and the sale certificate was issued on 14^th January,
2005. Therefore, the transfer of the property made subsequent to the issuance
of the notice under Rule 2 and the attachment under Rule 48 was void. The
submission made on behalf of the auction purchaser, that the sale in favour of
the appellant was at the behest of the DRT and not the defaulter, i.e. BPIL,
was not accepted by the High Court. In view of the above findings, the High
Court dismissed the writ petition.

Being aggrieved, the auction
purchaser filed an appeal before the Supreme Court.

At the outset, the Supreme
Court observed that it is trite law that unless there is preference given to
the Crown debt by a statute, the dues of a secured creditor have preference
over Crown debts. [Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co.
and Ors. (2000) 5 SCC 694; Union of India and Ors. vs. Sicom Ltd. and Anr. (2009)
2 SCC 121; Bombay Stock Exchange vs. V.S. Kandalgaonkar and Ors. (2015) 2 SCC
1; Principal Commissioner of Income Tax vs. Monnet Ispat and Energy Ltd. (2018)
18 SCC 786].

The Supreme Court noted that
Rule 2 of Schedule II to the Act provides for a notice to be issued to the
defaulter requiring him to pay the amount specified in the certificate, in
default of which steps would be taken to realise the amount. The crucial
provision for adjudication of the dispute in this case is Rule 16. According to
Rule 16(1), a defaulter or his representative cannot mortgage, charge, lease or
otherwise deal with any property which is subject matter of a notice under Rule
2. Rule 16(1) also stipulates that no civil court can issue any process against
such property in execution of a decree for the payment of money. However, the
property can be transferred with the permission of the Tax Recovery Officer.
According to Rule 16(2), if an attachment has been made under Schedule II to
the Act, any private transfer or delivery of the property shall be void as
against all claims enforceable under the attachment.

According to the Supreme
Court, there was no dispute regarding the facts of this case. The property in
dispute was mortgaged by BPIL to the Union Bank of India in 2000 and the DRT
passed an order of recovery against BPIL in 2002. The recovery certificate was
issued immediately, pursuant to which an attachment order was passed prior to
the date on which notice was issued by the Tax Recovery Officer under Rule 2 of
Schedule II to the Act. The Supreme Court observed that though the sale was
conducted after the issuance of the notice as well as the attachment order
passed by the Tax Recovery Officer in 2003, but the fact remained that a charge
over the property was created much prior to the notice issued by the Tax
Recovery Officer on 16^th November, 2003. The High Court had held
that Rule 16(2) was applicable to this case on the ground that the actual sale
took place after the order of attachment was passed by the Tax Recovery Officer.
According to the Supreme Court, the High Court failed to take into account the
fact that the sale of the property was pursuant to the order passed by the DRT
with regard to the property over which a charge was already created prior to
the issuance of notice on 11^th February, 2003. The Supreme Court
held that as the charge over the property was created much prior to the
issuance of notice under Rule 2 of Schedule II to the Act by the Tax Recovery
Officer, the auction purchaser was right in its submissions that the rigours of
Rule 2 and Rule 16 of Schedule II were not applicable to the instant case.

The Supreme Court set aside
the judgment of the High Court and allowed the appeal. The MIDC was directed to
issue a ‘No Objection’ certificate to the auction purchaser. The Tax Recovery
Officer was restrained from enforcing the attachment order dated 17^th
June, 2003.

8. Commissioner of Income Tax, Udaipur vs.
Chetak Enterprises Pvt. Ltd. Civil Appeal No. 1764 of 2010 Date of order: 5^th March, 2020

Special
deduction – Section 80-IA – Carrying on business of (i) developing, (ii)
maintaining and operating, or (iii) developing, maintaining and operating any
infrastructure facility – The agreement was initially executed between the
erstwhile partnership firm and the State Government, but with clear
understanding that as and when the partnership firm is converted into a
company, the name of the company in the agreement so executed be recorded
recognising the change – The assessee company qualified for the deduction u/s
80-IA

Effect of
conversion of partnership firm into a company under Part IX of the Companies
Act – All properties, movable and immovable (including actionable claims),
belonging to or vested in a company at the date of its registration would vest
in the company as incorporated under the Act

The erstwhile partnership
firm, M/s Chetak Enterprises, entered into an agreement with the Government of
Rajasthan for construction of a road and collection of road / toll tax. The
construction of the road was completed by the said firm on 27^th
March, 2000 and the same was inaugurated on 1^st April, 2000. The
firm was converted into a private limited company on 28^th March,
2000 and named as M/s Chetak Enterprises (P) Ltd. (for short, ‘the assessee
company’) under Part IX of the Companies Act, 1956. On conversion of the firm
into a company, an intimation was sent to the Chief Engineer (Roads), P.W.D.,
Rajasthan, Jaipur. The said authority noted the change and cancelled the
registration of the firm and granted a fresh registration code to the assessee
company. As aforesaid, the road was inaugurated on 1^st April, 2000
and the assessee company started collecting toll tax. For the assessment year 2002-2003,
the assessee company claimed deduction u/s 80-IA of the Income-tax Act, 1961.
The A.O. declined that claim of the assessee company which decision was
reversed by the Commissioner of Income Tax (Appeals), Udaipur. The Income Tax
Appellate Tribunal confirmed the decision of the first appellate authority,
following its decision in the case of the assessee company for the A.Y.
2001-2002. As a result, the Department preferred an appeal before the High
Court which came to be dismissed.

Being aggrieved, the
Department filed two separate special leave petitions before the Supreme Court
pertaining to A.Ys. 2001-02 and 2002-2003. As regards the Civil Appeal
pertaining to A.Y. 2001-2002, the same was disposed of due to low tax effect,
leaving the question of law open.

According to the Supreme
Court, it was not in dispute that an agreement was executed between the
erstwhile partnership firm and the State Government for construction of the
road and collection of toll tax. Before the commencement of the assessment year
in question, i.e. 2002-2003, the construction of the road was completed (on 27^th
March, 2000) and it was inaugurated on 1^st April, 2000. Before the
date of inauguration, the partnership firm was converted into a company on 28^th
March, 2000 under Part IX of the Companies Act.

The Supreme Court noted that
the Memorandum of Association of the assessee company revealed the main object
as follows:

‘On conversion of the
partnership firm into a company limited by shares under these presents to
acquire by operation of law under Part IX of the Companies Act, 1956 as going
concern and continue the partnership business now being carried on under the
name and style of M/s Chetak Enterprises including all its assets, movables and
immovables, rights, debts and liabilities in connection therewith.’

The Supreme Court also noted
that before the agreement was executed with the erstwhile partnership firm, it
was clearly understood that the partnership firm would in due course be
converted into a registered limited company. This was evident from the
communication addressed to the Chief Engineer on 23^rd October, 1998
at the time of replying to the notice inviting bids. An explicit request was
made to allow the partnership firm to change its constitution and consequently
a change of name in the agreement after converting the firm into a company with
the existing partners as its Directors. The Chief Engineer being the
appropriate authority of the State, vide letter dated 27^th
August, 1999, took note of the request made by the erstwhile partnership firm
and informed the said firm that its offer was accepted subject to terms and
conditions specified in that regard. It is only after this interaction that an
agreement was entered into between the Government of Rajasthan and the
erstwhile partnership firm, and the communication sent by the Chief Engineer,
dated 27th August, 1999, was made part of the agreement. After the conversion
of the partnership firm into a company under Part IX of the Companies Act, the
State authorities had noted the change and provided a fresh registration code
to the assessee company.

The Supreme Court further
noted the effect of conversion of the partnership firm into a company under
Part IX of the Companies Act. According to the Supreme Court, all properties,
movable and immovable (including actionable claims), belonging to or vested in
a firm at the date of its registration would vest in the company as
incorporated under the Act. In other words, the property acquired by a promoter
can be claimed by the company after its incorporation without any need for
conveyance on account of statutory vesting. On such statutory vesting, all the
properties of the firm, in law, vest in the company and the firm is succeeded
by the company. The firm ceases to exist and assumes the status of a company
after its registration as a company. A priori, it must follow
that the business is carried on by the enterprise owned by a company registered
in India and the agreement entered into between the erstwhile partnership firm
and the State Government, by legal implication, assumes the character of an
agreement between the company registered in India and the State Government for
(i) developing, (ii) maintaining and operating, or (iii) developing,
maintaining and operating a new infrastructure facility.

The
Supreme Court observed that for the purpose of considering compliance of clause
(a) of section 80-IA(4)(i), the assessee must be an enterprise carrying on
business of (i) developing, (ii) maintaining and operating, or (iii)
developing, maintaining and operating any infrastructure facility, which
enterprise is owned by a company registered in India. According to the Supreme
Court, that stipulation was fulfilled in the present case as the registered
firm was converted into a company under Part IX of the Companies Act on 28^th
March, 2000, which was before the commencement of assessment year 2002-2003.
For the assessment year under consideration, the activity undertaken by the
assessee was only maintaining and operating or developing, maintaining and
operating the infrastructure facility, inasmuch as, the construction of the
road was completed on 27^th March, 2000 and the same was inaugurated
on 1^st April, 2000, whereafter toll tax was being collected by the
assessee company.

Further, as regards clause
(b) of section 80-IA(4)(i), the requirement predicated was that the assessee
must have entered into an agreement with the Central Government or a State
Government or a local authority or any other statutory body for (i) developing,
(ii) maintaining and operating, or (iii) developing, maintaining and operating
a new infrastructure facility. According to the Supreme Court, in the present
case the agreement was initially executed between the erstwhile partnership
firm and the State Government, but with a clear understanding that as and when
the partnership firm is converted into a company, the name of the company in
the agreement so executed be recorded recognising the change. Notably, the
agreement itself mentioned that M/s Chetak Enterprises as party to the agreement
was meant to include its successors and assignee. Further, the State Government
had granted sanction to the company and the original agreement entered into
with the firm automatically stood converted in favour of the assessee company
which came into existence on 28^th March, 2000 being the successor of
the erstwhile partnership firm. Thus understood, even the stipulation in clause
(b) of section 80-IA(4)(i) was fulfilled by the assessee company.

The Supreme Court held that
since these were the only two issues which weighed with the A.O. to deny
deduction to the assessee company as claimed u/s 80-IA of the Income-tax Act,
the first appellate authority was justified in reversing the view taken by the
A.O. For the same reason, the ITAT, as well as the High Court had justly
affirmed the view taken by the first appellate authority, holding that the
respondent / assessee company qualified for the deduction u/s 80-IA being an
enterprise carrying on the stated business pertaining to infrastructure
facility and owned by a company registered in India on the basis of the
agreement executed with the State Government to which the respondent / assessee
company has succeeded in law after conversion of the partnership firm into a
company.

In view of the above, the Supreme
Court dismissed the appeal.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

7.
National Co-operative Development Corporation vs. Commissioner of Income
Tax, Delhi (2020) 427 ITR 288 (SC)

Business Income – To decide the question as to whether a particular
source of income is business income one would have to look to the notions of
what is business activity

Business Expenditure – There can be an amount treated as a capital
receipt while the same amount expended may be a revenue
expenditure

Income – Diversion by overriding title – If a portion of income
arising out of a corpus held by the assessee consumed for the purposes of
meeting some recurring expenditure arising out of an obligation imposed on the
assessee by a contract or by statute or by own volition or by the law of the
land, and if the income before it reaches the hands of the assessee is already
diverted away by a superior title, the portion passed or liable to be passed on
is not the income of the assessee

The function of the appellant corporation, the National Co-operative
Development Corporation, inter alia was to advance loans or grant subsidies to State Governments for
financing co-operative societies, provide loans and grants directly to the
national level co-operative societies, as also to the State level co-operative
societies, the latter on the guarantee of State Governments. The funding process
for the appellant corporation was by way of grants and loans received from the
Central Government.

The appellant was required to maintain a fund called the National
Co-operative Development Fund (‘the Fund’) which is, inter alia, credited with all monies received by it by way of grants and loans
from the Central Government, as well as sums of money as may from time to time
be realised out of repayment of loans made from the Fund or from interest on
loans or dividends or other realisations on investments made from the
Fund.

In furtherance of this, as and when surplus funds accumulated, the
appellant invested the idle funds in fixed deposits which generated income. The
income by way of interest on debentures and loans advanced to the State
Governments / Apex Co-operative Institutions were credited to this
account.

The appellant being an intermediary or ‘pass through’ entity, treated
the funds received from the Central Government as capital receipts and the
interest component as income; however, it claimed the component of interest
income earned on the funds received u/s 13(1) of the NCDC Act and sums disbursed
by way of ‘grants’ to national or state level co-operative societies, as
eligible for deduction for determining its ‘taxable income’.

The A.O. in his assessment order for A.Y. 1976-77 opined that the
non-refundable grants were in the nature of capital expense and not a revenue
expense and, thus, disallowed the same as a deduction. What weighed with the
A.O. was also the fact that the grants received from the Central Government were
in the nature of a capital receipt exempt from tax. The A.O. noted that no
deduction as sought for had been claimed in the previous assessment
years.

An appeal was preferred before the Commissioner of Income-tax
(Appeals), New Delhi [‘CIT(A)’], which in terms of an order dated
22^nd August, 1980 opined that the grants made by the appellant
without doubt fell within its authorised activities which were interlinked and
interconnected with its main business of advancing loans on interest to State
Governments and co-operative societies. These grants were intended to be
utilised for various projects which were admittedly of capital nature and
resulted in the acquisition of capital assets, but not by the appellant itself.
In terms of section 37 of the IT Act as it stood for the relevant assessment
year, any expenditure (except of the prohibited type) laid out or expended
wholly and exclusively for the purpose of the business was allowable as a
deduction while computing business income. The functions and activities of the
appellant included giving loans and grants which, in fact, was the very purpose
for which it had been set up.

The Income-tax Appellate Tribunal (‘ITAT’), Delhi bench, however,
accepted the view taken by the A.O. and did not agree with the approach of the
CIT(A), setting aside the order of the CIT(A). The rationale for doing so was
slightly different. It held that the grants, additional grants and other sums
received by the appellant from the Central Government went to a single fund and
were not treated as its income and, thus, the disbursements made from the same
could not be treated as revenue expenses. The disbursement of monies to State
Governments and co-operative societies was held to be a pure and simple
application of the fund u/s 13(2) of the NCDC Act and could not be expenditure
in the nature of revenue.

On a reference made u/s 256(1), the High Court opined that since the
business of the appellant was to receive funds and to then advance them as loans
or grants, the interest income earned which was so applied would also fall under
the head ‘D’ of section 14 of Chapter IV of the IT Act under the head of
‘Profits and gains of business or profession’ being a part of its normal
business activity. The High Court delved into the scheme of the NCDC Act and in
view of section 13, which provided for the creation of a fund being the common
pool where all accretions get amalgamated, including from interest on loans and
dividends and interest earned on FDRs, it was held that the monies which were
advanced from the fund cannot be distinctly identified as forming part of the
interest income. The other aspect the High Court opined on was that in order to
claim deduction as revenue expenditure, the appellant has to first establish
that it incurred expenditure. The advancement of loans to the State Governments
and co-operative societies could not be claimed as expenditure as the same does
not leave the hands of the appellant irretrievably. It is not necessary for us
to delve further into this issue as that was not the question framed to be
answered.

According to the Supreme Court, the first aspect which required
consideration was whether interest on loans or dividends would fall under the
head of ‘Income from other sources’ u/s 56 or would it amount to income from
‘Profits and gains of business or profession’ under head ‘D’ of section
14.

The Supreme Court was of the view that the only business of the
appellant was to receive funds and then to advance these as loans or grants. The
interest income arose on account of the funds so received and it may not have
been utilised for a certain period of time, being put in fixed deposits so that
the amount did not lie idle. The income generated was again applied to the
disbursement of grants and loans. The income generated from interest was
necessarily interlinked to the business of the appellant and would, thus, fall
under the head of ‘Profits and gains of business or profession’. There would,
therefore, be no requirement of taking recourse to section 56 for taxing the
interest income under this residuary clause as ‘Income from other sources’.
According to the Supreme Court, to decide the question as to whether a
particular source of income is business income, one would have to look to the
notions of what is the business activity. The activity from which the income is
derived must have a set purpose. The business activity of the appellant was
really that of an intermediary to lend money or to give grants.

Thus, the generation of interest income in support of only this
business (not even primary) for a period of time when the funds are lying idle
and utilised for the same purpose would ultimately be taxable as business
income. The fact that the appellant did not carry on business activity for
profit motive is not material as profit-making is not an essential ingredient on
account of self-imposed and innate restrictions arising from the very statute
which creates the appellant corporation and the very purpose for which it has
been set up. The Supreme Court drew support from its judgment in
The Sole Trustee, Lok Shikshana Trust vs. The Commissioner of Income
Tax, Mysore, (1976) 1 SCC 254.

In view of the aforesaid finding, the crucial issue, according to the
Supreme Court,would be whether the amounts advanced as grants from this income
generated could be adjusted against the income to reduce the impact of taxation
as a revenue expense.

The Supreme Court noted that undoubtedly the amount received to be
advanced as loans and grants by the appellant from the Central Government were
treated as capital receipts. The line of argument on behalf of the appellant
was, however, predicated on a plea that assuming it to be so, the grants (and
not loans) could not be treated as capital expenditure as neither any enduring
advantage nor benefit had accrued to the appellant, nor had any asset come into
existence which belonged to or was owned by the latter. Thus, what may be a
capital receipt in the hands of the appellant may still be revenue
expenditure.

The Court was not in disagreement with the aforesaid proposition to
the extent that there could be an amount treated as a capital receipt while the
same amount expended may be a revenue expenditure. But the question was whether
this was so in the present case.

The Supreme Court noted that undoubtedly the interest income was not
directly received as a capital amount. It was actually generated by utilising
the capital receipts when the funds were lying idle though the income so
generated was then applied for the very objective for which the appellant
corporation was set up, i.e., disbursement of grants and advancement of
loans.

The Supreme Court observed that the impugned judgment of the High
Court dealt with both loans and grants but on the question of references framed
before it the dispute related to only grants. The Court noted that it was not
the appellant’s case that the amounts advanced as loans, the same being payable
with interest, could be adjusted as expenses against the business income
generated by investing the amounts and consequently earning interest on the
same. The argument was predicated on the reasoning that since the interest
generated is treated as a business income, the grants made, which would never
come back, should be adjustable as expenses against the same. The Supreme Court
noted that to the extent the grants were returned, the CIT(A) did not allow the
entire deduction as claimed for but only did so qua the amount which was disbursed as grant and never received
back.

The Court noted that the very purpose for which the statutory
appellant corporation had been set up was to advance loans or grant subsidies to
State Governments for financing co-operative societies, etc. There was no other
function which the appellant carried out, nor did it generate any funds of its
own from any other business. In a sense the role was confined to receiving funds
from the Central Government and appropriately advancing the same as loans,
grants or subsidies. The objectives were wholly socio-economic and the amounts
received including grants came with a prior stipulation for them to be passed on
to the downstream entities. This was the reason they have been treated as
capital receipts. However, the Supreme Court was unable to opine that since this
was a pass-through entity on the basis of a statutory obligation, the
advancement of loans and grants was not a business activity when really it was
the only business activity. Once it was business activity, the interest
generated on the unutilised capital had to be held to be business
income.

The disbursement of non-refundable grants was an integral part of the
business of the appellant corporation as contemplated u/s 13(1) of the NCDC Act
and, thus, was for the purpose of its business. The purpose was direct; merely
because the grants benefited a third party it would not render the disbursement
as ‘application of income’ and not expenditure.

The Supreme Court did not find force in the submission of the Revenue
that the direct nexus of monies given as outright grants from the taxable
interest income could not be distinctly identified. It noted that the CIT(A) had
allowed the business expenditure only to a certain amount on the basis of the
facts and figures as they emerged from the balance sheet. This was a burden
which was to be discharged by the appellant and the CIT(A) had been satisfied
with the nexus of interest income with the disbursement of grants made, as
having been established.

The Court also noted another principle to test the proposition, i.e.,
of diversion by overriding title and that this principle was originally set out
in the case of Sitaldas Tirathdas (1961) 2 SCR 634 and the principle has been followed since then. If a portion of
income arising out of a corpus held by the assessee consumed for the purposes of
meeting some recurring expenditure arising out of an obligation imposed on the
assessee by a contract or by statute or by own volition or by the law of the
land and if the income before it reaches the hands of the assessee is already
diverted by a superior title, the portion passed or liable to be passed on is
not the income of the assessee. The test, thus, is what amounts to application
of income and what is the diversion by overriding title. The principle, in a
sense, would apply if the Act or the Rules framed thereunder or other binding
directions bind the institution to spend the interest income on disbursal of
grants.

However, the Supreme Court noted that the NCDC Act did not specify as
to who should be the grantee and what should be amount to be granted. All that
was prescribed was that the business of the appellant corporation was to provide
loans or grants for the avowed object for which it has been set up. The decision
with regard to who should get the grant was taken by the appellant directly in
the course of, and for the purpose of, its business. Thus, whether the amount
agreed to be given should be given as a loan or a grant, or both, was entirely
at the business discretion of the appellant. No grantee had a superior title to
the funds. Hence, this was not a case of diversion of income by overriding
title.

The Supreme Court also noted that even though in the view of the
appellant itself for the preceding years in question it never claimed any such
adjustments, but that, according to the Court, did not preclude the right of the
appellant as they sought to make out a case of a mistake at a subsequent
date.

Besides, the Supreme Court stated that by the Finance Act of 2003 a
provision in section 36 was added as sub-clause (1)(xii) so as to provide that
an expenditure not being capital expenditure incurred by a corporation or body
corporate, by whatever name called, constituted or established by a Central,
State or Provincial Act for the objects and purposes authorised by such Act
under which such corporation or body corporate was constituted or established,
shall be allowed as a deduction in computing the income under the head ‘profits
and gains of business or profession’.

According to the Supreme Court, prior to the insertion of this
sub-clause such expenses would be permissible under the general section 37(1)
which provides for deduction of permissible expenses on principles of commercial
accountancy. After the amendment, such expenses get allowed under the specific
section, viz., section 36(1)(xii) after the amendment by the Finance Act,
2003.

In conclusion, the Supreme Court stated that it was unable to agree
with the findings arrived at by the A.O., the ITAT and the High Court
albeit for different reasons and it concurred with the view taken by the
CIT(A) for the reasons set out hereinabove.

8. Raj Pal Singh
vs. Commissioner of Income Tax, Rohtak, Haryana (2020) 427 ITR 1 (SC)

Capital Gains – Compulsory acquisition – Date of accrual – In matters
relating to compulsory acquisition of land under the Land Acquisition Act of
1894, completion of transfer with vesting of land in the Government essentially
correlates with taking over of possession by the Government – However, where
possession is taken before the relevant stage for such taking over, capital
gains shall be deemed to have accrued upon arrival of the relevant stage and not
before – To be more specific, in such cases capital gains shall be deemed to
have accrued (a) upon making of the award, in the case of ordinary acquisition
referable to section 16, and (b) after expiration of 15 days from the
publication of the notice mentioned in section 9(1) in the case of urgency
acquisition u/s 17

Effect of continuing in possession of property after expiry of lease
– Where the time period of any lease of immovable property is limited, it
determines by efflux of such time, as per section 111(a) of the Act of 1882 – In
terms of section 108(q) of the Transfer of Property Act of 1882, on
determination of lease the lessee is bound to put the lessor into possession of
the leased property – In a case where lessee does not deliver possession to the
lessor after determination of the lease but the lessor accepts rent or otherwise
assents to his continuing in possession, in the absence of an agreement to the
contrary, the status of such lessee is that of tenant holding over, in terms of
section 116 of the Act of 1882 – But in the absence of acceptance of rent or
otherwise assent by the lessor, the status of lessee is that of tenant at
sufferance

The land, admeasuring 41 kanals and 14 marlas and comprising Khasra Nos. 361 to 369 and 372 to 375 at village
Patti Jattan, Tehsil and District Ambala, became an evacuee property after its
original owner migrated to Pakistan; the same was allotted to the said Mr. Amrik
Singh, who had migrated to India, in lieu of his property left behind in Pakistan. However, a substantial part
of the subject land, except that comprising Khasra Nos. 361 and 364 admeasuring
5 kanals and 7 marlas, had been given by the original owner on a lease for 20 years to a
Government College, the S.A. Jain College, Ambala City, and the lease was to
expire on 31^st August, 1967. Later, the said College moved the
Government of Haryana for compulsory acquisition of the subject land. While
acting on this proposition, a Notification u/s 4 of the Land Acquisition Act,
1894 was issued by the Government of Haryana on 15^th May, 1968
seeking to acquire the land for public purpose, namely, a playground for the
College. This was followed by the declaration dated 13^th August, 1969
u/s 6 of the Act of 1894. Ultimately, after submission of the claim for
compensation, the Land Acquisition Collector, Ambala, proceeded to make the
award on 29^thSeptember, 1970.

The award provided that the land owners were entitled to interest
from the date of the Notification u/s 4 which was issued on 15^th May,
1968. Interest at the rate of 6% per annum would be paid to the land owners in
addition to the compensation and solatium from 15^th May, 1968 to
date.

For the assessment year 1971-1972 the assessee declared its income at
Rs. 1,408, inclusive of Rs. 408 from the house property and Rs. 1,000 being the
amount of interest earned. While not accepting the income so declared, the A.O.
in his assessment order enhanced the income from house property to Rs. 1,200 and
also enhanced the interest income to Rs. 11,596 with reference to the interest
of Rs. 10,596 received under the award in question. However, the A.O. observed
that capital gains were not relevant for the year under consideration because
the land in question had been acquired in the earlier years.

Being aggrieved by the order, the assessee preferred an appeal before
the Appellate Assistant Commissioner of Income-tax.

Though the ground of appeal concerning house property was accepted
and the addition made by the A.O. in that regard was deleted, but on examination
of the award dated 29^th September, 1970 the CIT(A) found that the
assessee was paid Rs. 62,550 as compensation and Rs. 9,532 as solatium, yet,
capital gains on this account were not taxed by the A.O. Accordingly, a show
cause notice dated 18^th November, 1983 was issued to the assessee as
to why capital gains relating to the acquisition of this land be not charged to
tax in the assessment year under consideration. The assessee in its reply dated
26^th December, 1983 stated, inter alia, that in the urgency acquisition u/s 17 of the Act the transfer
takes place immediately after the Notification and the owner ceases to be in
possession of the land in question. The CIT(A), in his order dated
17^th May, 1984, rejected the submissions made on behalf of the
assessee and held that the capital gains on the acquisition of the land
amounting to Rs. 23,146 were required to be added to the income of the previous
year relevant to the assessment year under consideration.

Against the order so passed by the CIT(A), the assessee preferred an
appeal before the Income-tax Appellate Tribunal, Chandigarh Bench.

The ITAT referred to its order pertaining to the assessment year
1975-1976 in which a similar question of capital gains arising out of another
award of compensation for acquisition of another parcel of land was involved.
The ITAT in that case held that capital gains arising from the acquisition of
the lands in question were assessable for the accounting period in which the
assessee was divested of the title to the property that vested in the
Government, that is, the date of taking possession. The ITAT in its order dated
19^th December, 1985 for A.Y. 1971-1972, however, found that the
actual date of taking possession by the Government was not known and hence
proceeded to restore the matter to the file of the A.O. to find out the date
when the Government took possession while observing that if possession was taken
before the award and before 1^st April, 1970, capital gains were not
to be included in the income for the A.Y. 1971-1972, but if possession was taken
during the period 1^stApril, 1970 to 31^st March, 1971,
capital gains would be assessable for this A.Y.,1971-1972.

In the meantime, against the aforesaid award dated 29^thSeptember, 1970, the appellant took up the proceedings in LA Case Nos. 37
and 38 of 1971 before the Additional District Judge, Ambala who, by the order
dated 30^thDecember, 1984, allowed a marginal enhancement of the
amount of compensation and corresponding solatium and interest. Still not
satisfied, the appellant preferred an appeal, being Regular First Appeal No. 390
of 1975, before the Punjab and Haryana High Court seeking further enhancement.
The High Court allowed this appeal by its judgment dated 25^th
October, 1985 and awarded compensation by applying the rate of Rs. 8 per sq. yd.
against Rs. 3.50 and Rs. 2.50 per sq. yd., as allowed by the Additional District
Judge and the Land Acquisition Collector, respectively. The High Court also
allowed 30% solatium and corresponding interest.

In compliance with the directions of the ITAT in the aforesaid order
dated 19^th December, 1985, the A.O. served a specific question to the
assessee about the date on which possession of the acquired land was taken by
the Government of Haryana. In his reply, the appellant stated the date of
possession was 15^th May, 1968, being the date of Notification u/s 4
of the Act of 1894. Though no evidence in this regard was adduced but the
appellant relied upon the decision of the Kerala High Court in the case of
Peter John vs. Commissioner of Income-tax (1986) 157 ITR 711
to submit that capital gains, if any, arise at the point of time when
the land vests in the Government and such date in the present case was 15th May,
1968.

The A.O. took note of all the facts of this case in his reassessment
order dated 25^th January, 1988 and observed that ‘since in the
instant case, the award was announced on 29^th September, 1970, the
said date, 29^th September, 1970, is deemed to be the date of taking
possession by the Government’. In this view of the matter, the A.O. held that
‘taxability of capital gains arose in the previous year relevant to the
assessment year under consideration’.

The A.O. also noticed that the appellant failed to place on record
the date of publication of the notice u/s 9 of the Act of 1894 and observed that
there was no reference to urgency acquisition in the present case nor any such
mention was found in the award dated 29^th September, 1970. In the
given circumstances, the A.O. held that the acquisition in question was not a
matter of urgency u/s 17 of the Act of 1894 and that the acquisition had only
been under the ‘normal powers’.

With the aforesaid findings, the A.O. proceeded to assess the tax
liability of the appellant on long-term capital gains arising on account of
acquisition on the basis of the amount of compensation allowed in the award
dated 29^th September, 1970 as also the enhanced amount of
compensation accruing finally as a result of the aforesaid order dated
30^th December, 1984 passed by the Additional District Judge and the
judgment dated 25^th October, 1985 passed by the High Court. As
regards interest income, the A.O. carried out protective assessment on accrual
basis @ 12% per annum for the previous year relevant to the assessment year in
question, i.e., for the period 1^st April, 1970 to 31^st
March, 1971 while providing that such calculation would be subject to amendment,
if necessary.

The aforesaid order of re-assessment dated 25^thJanuary,
1988 was challenged by the appellant before the CIT(A). This appeal was
considered and dismissed by the CIT(A) through an elaborate order dated
31^st March, 1989.

Being aggrieved by the order so passed by the CIT(A), the appellant
preferred an appeal before the ITAT.

The ITAT referred to the observations regarding ‘possession of land’
as occurring in the award dated 29^th September, 1970 and observed
that as per those observations possession of the land in question was supposed
to have been taken on 15^th May, 1968, as from that date the assessee
was entitled to interest at 6% per annum on the amount of compensation. The ITAT
further observed that to sort out the controversy, such stipulation in the award
was required to be depended upon and the date of actual physical possession was
inferable from the intention of the parties and the language of such stipulation
in the award. On this reasoning, the ITAT held that since the actual physical
possession changed hands on 15^th May, 1968, the transaction should be
considered as having taken place on that date and not on the date of award,
i.e., 29^th September, 1970; and hence, capital gains were not to be
taxed for the year under consideration. Having reached this conclusion, the ITAT
held that the very basis of assessing capital gains having been knocked out, the
other issues were rendered redundant.

On a reference to the High Court u/s 256(1), the High Court answered
the reference in favour of the Revenue while holding that the Collector had not
taken possession of the land u/s 17 of the Act of 1894 and that the said
provision was not invoked by the State Government. The High Court further held
that for the purpose of assessment of capital gains, the date of award (i.e.,
29^th September, 1970) was required to be taken as the date of taking
over possession because, on that date, the land in question vested in the
Government u/s 16 of the Act of 1894.

Being aggrieved by the judgment and order dated 23^rd
April, 2008 so passed by the High Court, holding that the capital gains arising
out of the acquisition in question were chargeable to tax in the A.Y. 1971-1972,
the assessee preferred an appeal by special leave before the Supreme
Court.

The Supreme Court noted that the assessment in question is for the
assessment year 1971-1972 in relation to the assessee Amrik Singh HUF. The
appellant Raj Pal Singh is the son of the late Amrik Singh and is the
Karta of the assessee HUF.

According to the Supreme Court, the principal points that arose for
its determination in this appeal were:

1. As to whether, on
the facts and in the circumstances of the present case, transfer of the capital
asset (land in question), resulting in capital gains for the purposes of section
45 of the Act of 1961 was complete on 15^th May, 1968, the date of
Notification for acquisition u/s 4 of the Act of 1894; and hence, capital gains
arising out of such acquisition and interest accrued could not have been charged
to tax with reference to the date of award, i.e., 29^th September,
1970?

2. As to whether the
fact situation of the present case was similar to that of the other case of the
appellant in relation to A.Y. 1975-1976 where the same issue relating to the
date of accrual of capital gains was decided by the ITAT in favour of the
appellant with reference to the date of taking possession by the Government, and
having not challenged the same, it was not open for the Revenue to question the
similar decision of the ITAT in the present case pertaining to the A.Y.
1971-1972?

The Supreme Court in a brief overview of the scheme of the Act of
1894, as existing at the relevant point of time, observed that publication of
preliminary Notification u/s 4 by itself did not vest the property in the
Government; it only informed about the intention of the Government to acquire
the land for a public purpose. After this Notification, in the ordinary course,
u/s 5A the Land Acquisition Collector was required to examine the objection, if
any, to the proposed acquisition, and after examining his report, if so made,
the Government was to issue declaration u/s 6 signifying its satisfaction that
the land was indeed required for public purpose. These steps were to be followed
by notice u/s 9 stating that the Government intended to take possession of the
land and inviting claims for compensation. Thereafter, the Collector was to make
his award u/s 11. As noticed hereinbefore, as per section 16 of the Act of 1894
the Land Acquisition Collector, after making the award, could have taken
possession of the land under acquisition and thereupon the land vested in the
Government free from all encumbrances.

A deviation from the process above-noted and a somewhat different
process was permissible in section 17 of the Act of 1894 whereunder, in cases of
urgency and if the Government had so directed, the Collector could have taken
possession of any waste or arable land after fifteen days from the publication
of the notice mentioned in section 9(1), even though the award had not been
made, and thereupon the land was to vest in the Government free from all
encumbrances.

The Supreme Court, after noting various authorities on the subject,
opined that in matters relating to compulsory acquisition of land under the Act
of 1894, completion of transfer with vesting of land in the Government
essentially correlates with taking over of possession of the said land. However,
where possession is taken before arriving of the relevant stage for such taking
over, capital gains shall be deemed to have accrued upon arrival of the relevant
stage and not before that. To be more specific, in such cases capital gains
shall be deemed to have accrued (a) upon making of the award, in the case of
ordinary acquisition referable to section 16; and (b) after the expiry of
fifteen days from the publication of the notice mentioned in section 9(1) in the
case of urgency acquisition u/s 17.

According to the Supreme Court the land in question was subjected to
acquisition under the Act of 1894 by adopting the ordinary process leading to
award u/s 11. Therefore, ordinarily, capital gains would have accrued upon
taking over of possession after making of the award. Consequently, capital gains
to the assessee for the acquisition in question could not have accrued before
the date of award, i.e., 29^th September, 1970.

The Court noted that on the strength of the submission that the land
in question had already been in possession of the beneficiary of acquisition, it
had been suggested on behalf of the assessee that the land vested in the
Government immediately upon issuance of the Notification u/s 4 of the Act of
1894, i.e., 15^th May, 1968, and the capital gains accrued on that
date. This suggestion and the contentions founded thereupon, in the opinion of
the Supreme Court, were totally meritless.

In order to wriggle out of the above-mentioned plain operation of
law, it had been desperately suggested on behalf of the appellant before the
Supreme Court that it had been a case of urgency acquisition and, hence, the
process contemplated by section 17 of the Act of 1894 would apply. This
suggestion, according to the Supreme Court, was also baseless and suffered from
several infirmities.

In the first place, it was evident on the face of the record that it
had not been a matter of urgency acquisition and nowhere had it appeared that
the process contemplated by section 17 of the Act of 1894 was resorted to. Even
the contents of the award dated 29^th September, 1970 made it clear
that the learned Land Acquisition Collector only awarded interest from the date
of initial Notification for the reason that the land was in possession of the
College; it was nowhere stated that he had received any directions from the
Government to take possession of the land before making of the award while
acting u/s 17.

Secondly, if at all the proceedings were undertaken u/s 17 of the Act
of 1894, the land could have vested in the Government only after expiration of
fifteen days from the date of publication of the notice u/s 9(1); and, in any
case, could not have vested in the Government on the date of publication of the
initial Notification u/s 4 of the Act of 1894. Significantly, the assessee did
not divulge the date of publication of the notice u/s 9(1) despite the queries
of the A.O. The suggestion about application of the process contemplated by
section 17 of the Act of 1894 remained totally unfounded.

In view of the above, according to the Supreme Court, the only
question that remained was as to what is the effect of the possession of the
College over a part of the subject land at the time of issuance of the initial
Notification for acquisition.

The Supreme Court noted that it was not in dispute that a large part
of the subject land was given on lease to the College and the said lease expired
on 31^stAugust, 1967 but the land continued in possession of the
College.

Where the time period of any lease of immovable property is limited,
it determines by efflux of such time, as per section 111(a) of the Act of 1882.
Further, in terms of section 108(q) of the Act of 1882, on determination of
lease, the lessee is bound to put the lessor into possession of the leased
property. In a case where the lessee does not deliver possession to the lessor
after determination of the lease but the lessor accepts rent or otherwise
assents to his continuing in possession, in the absence of an agreement to the
contrary, the status of such lessee is that of tenant holding over, in terms of
section 116 of the Act of 1882. But in the absence of acceptance of rent or
otherwise assent by the lessor, the status of lessee is that of tenant at
sufferance.

According to the Supreme Court, the part of the land in question
which was given on lease, the possession of the College after determination of
the lease on 31^stAugust, 1967 was only that of a tenant at
sufferance because it has not been shown whether the lessor, i.e., the
appellant, accepted rent or otherwise assented to the continuation of the lease.
The possession of the College over the part of land in question being only that
of tenant at sufferance, had the corresponding acknowledgment of the title of
the appellant and of the liability of the College to pay mesne profits for use and occupation. The same status of the parties
qua the land under lease existed on the date of Notification for
acquisition, i.e., 15^th May, 1968 and continued even until the date
of award, i.e., 29^th September, 1970. In other words, even until the
date of award the appellant continued to carry its status as owner of the land
in question and that status was not lost only because a part of the land
remained in possession of the College. In this view of the matter, the
suggestion that the land vested in the Government on the date of initial
Notification remains totally baseless and could only be rejected.

Apart from the above, the significant factor for which the entire
case of the assessee was knocked to the ground was that neither on the date of
Notification, i.e., 15^th May, 1968, nor until the date of award the
Government took over possession of the land in question. The possession had been
of the erstwhile lessee, the College. Even if the said College was going to be
the ultimate beneficiary of the acquisition, it could not be said that
immediately upon issuance of the Notification u/s 4 of the Act of 1894 its
possession became the possession of the Government. Its possession, according to
the Supreme Court, remained that of tenant at sufferance and not
beyond.

The Supreme Court held that viewed from any angle, it was clear that
accrual of capital gains in the present case had not taken place on
15^th May, 1968. If at all possession of the College was to result in
vesting of the land in the Government, such vesting happened only on the date of
award, i.e., 29^th September, 1970, and not before. In other words,
the transfer of land from the assessee to the Government reached its completion
not before 29^th September, 1970, and hence, the earliest date for
accrual of capital gains because of this acquisition was the date of award,
i.e., 29^th September, 1970. Therefore, the assessment of capital
gains as income of the appellant for the previous year relevant to A.Y.
1971-1972 does not suffer from any infirmity or error.

Coming to the second question about the effect of the decision of the
ITAT in relation to the other case of the assessee for the A.Y. 1975-1976 where
the issue concerning date of accrual of capital gains was decided against the
Revenue with reference to the date of taking possession, the Supreme Court noted
that the said decision for the A.Y. 1975-1976 was not appealed against and had
attained finality. It had been argued on behalf of the appellant before the
Supreme Court that it was therefore not open for the Revenue to question the
similar decision of the ITAT in the present case pertaining to the A.Y.
1971-1972.

The Supreme Court noted that in the case pertaining to the A.Y.
1975-1976, the question of capital gains arose in the backdrop of the fact that
another parcel of land of the appellant was acquired for the purpose of
construction of a warehouse in Ambala City. The Notification u/s 4 of the Act of
1894 was issued on 26^th June, 1971 and the award of compensation was
made on 27^th June, 1974 but possession of the said land was taken by
the Government on 4^th September, 1972, i.e., before making of the
award. In the given set of facts and circumstances, the ITAT accepted the
contention that the case fell under the urgency provision contained in section
17 of the Act of 1894 where the assessee was divested of the title to the
property that vested in the Government with effect from 4^th
September, 1972, the date of taking over possession. Hence, the ITAT held that
the capital gains arising from the said acquisition were not assessable for the
accounting period relevant for the A.Y. 1975-1976.

According to the Supreme Court,the principle that if the Revenue has
not challenged the correctness of the law laid down by the High Court and has
accepted it in the case of one assessee, then it is not open to the Revenue to
challenge its correctness in the case of other assessees without just cause,
would not apply in the present case for more than one reason.

In the first place, it was ex facie evident that the matter involved in the said case pertaining to the
A.Y. 1975-1976 was taken to be an acquisition under the urgency provision
contained in section 17 of the Act of 1894, whereas the acquisition proceedings
in the present case had not been of urgency acquisition but had been of ordinary
process where possession could have been taken only u/s 16 after making of the
award.

Secondly, the fact that the said case relating to the A.Y. 1975-1976
was not akin to the present case was indicated by the ITAT itself. While the
answer in relation to the A.Y. 1975-1976 was given by the ITAT in favour of the
assessee to the effect that possession having been taken on the specified date,
i.e., 4^th September, 1972, capital gains were not assessable for the
A.Y. 1975-1976, but while deciding the appeal relating to the present case for
the A.Y. 1971-1972, the ITAT found that the date of taking over possession was
not available and hence the matter was restored to the file of the ITO to find
out the actual date of possession.

Thirdly, even if it was assumed that the stand of Revenue in the
present case was not in conformity with the decision of the ITAT in relation to
the A.Y. 1975-1976, it could not be said that Revenue had no just cause to take
such a stand. As noticed, while rendering the decision in relation to the A.Y.
1975-1976, the ITAT did not notice the principles available in various decisions
including that of the Supreme Court in Governor of Himachal Pradesh and Ors. vs. Avinash Sharma 1970 SC AIR
1576 that even in the case of urgency acquisition u/s 17 of the Act of
1894, land was to vest in Government not on the date of taking over possession
but only on the expiration of fifteen days from the publication of the notice
mentioned in section 9(1). Looking to the facts of the present case and the law
applicable, the Revenue had every reason to question the correctness of the
later decision of the ITAT dated 29^th June, 1990 in the second round
of proceedings pertaining to the A.Y. 1971-1972.

Fourthly, the ITAT itself on being satisfied about the question of
law involved in this case, made a reference by its order dated 15^th
July, 1991 to the High Court. The High Court having dealt with the matter in the
reference proceedings and having answered the reference in conformity with the
applicable principles, the assessee could not be heard to question the stand of
the Revenue with reference to the other order for the A.Y. 1975-1976. In any
case, according to the Supreme Court, it could not be said that the decision in
relation to the A.Y. 1975-1976 had been of any such nature which would preclude
the Revenue from raising the issues which are germane to the present
case.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

5. Shree
Choudhary Transport Company vs. Income Tax Officer Civil Appeal No. 7865 of 2009 Date of order: 29^th July, 2020

Disallowance
of expenditure – Section 40(a)(ia) – The provisions relating to liability to
deduct tax at source are mandatory in nature – The expression ‘payable’ used in
this provision, that section 40(a)(ia) covers not only those cases where the
amount is payable but also when it is paid – Sub-clause (ia), having been
inserted to clause (a) of section 40 of the Act with effect from 1^st
April, 2005 by the Finance (No. 2) Act, 2004 would apply from the assessment
year 2005-06 – The date of assent of the President of India to the Finance (No.
2) Act, 2004 is not the date of applicability of any provision, for the
specific date is provided in the Finance Act – The amendment by the Finance
(No. 2) Act, 2014 limiting the disallowance to 30% of the sum payable is of the
substantive provision and cannot be applied retrospectively – Defaulting
assessee cannot claim prejudice or hardship

The
assessee-appellant, a partnership firm, had entered into a contract with M/s
Aditya Cement Limited, Shambupura, District Chittorgarh, for transporting
cement to various places in India. As the appellant did not have its own
transport vehicles, it had engaged the services of other transporters for the
purpose. The cement marketing division of M/s Aditya Cement Limited, namely,
M/s Grasim Industries Limited, effected payments towards transportation charges
to the appellant after due deduction of TDS, as shown in Form No. 16A issued by
the company.

On 28^th
October, 2005 the assessee-appellant filed its return for the assessment year
2005-2006 showing total income at Rs. 2,89,633 in the financial year 2004-2005
arising out of the business of ‘transport contract’.

In the course
of assessment proceedings, the A.O. examined the dispatch register maintained
by the appellant for the period 1^st April, 2004 to 31^stMarch,
2005 containing all particulars as regards the trucks hired, date of hire,
memos (or biltis) and challan numbers, freight and commission
charges, net amount payable, the dates on which the payments were made, the
destination of each truck, etc. The contents of the register also indicated
that each truck was sent only to one destination under one challan / bilty;
and if one truck was hired again, it was sent to the same or other destination
/ trip as per a separate challan. The commission charged by the
appellant from the truck operators / owners ranged from Rs. 100 to Rs. 250 per
trip.

On verifying
the contents of the record placed before him, the A.O. observed that while
making payments to the truck operators / owners, the appellant had not deducted
tax at source even if the net payment exceeded Rs. 20,000. The A.O. therefore
proceeded to disallow the deduction of payments made to the truck operators /
owners exceeding Rs. 20,000 without TDS, which in total amounted to Rs.
57,11,625, and added the same back to the total income of the
assessee-appellant. The A.O. also disallowed a lump sum of Rs. 20,000 from
various expenses debited to the profit & loss account and finalised the
assessment.

Aggrieved by
this order, the assessee-appellant preferred an appeal before the Commissioner
of Income Tax (Appeals) that was considered and dismissed on 15^th
January, 2008.

Still
aggrieved, the appellant approached the Income Tax Appellate Tribunal, Jodhpur
Bench in further appeal. This appeal was considered and dismissed by ITAT by an
order dated 29^th August, 2008.

The ITAT found
that the agreement in question was on a principal-to-principal basis whereby
the appellant was awarded the work of transporting cement from Shambupura but
as the appellant did not own any trucks, it had engaged the services of other
truck operators / owners for transporting the cement; such a transaction was a
separate contract between the appellant and the truck operator / owner. The
ITAT, therefore, endorsed the findings of the A.O. and the CIT(A).

The aggrieved
appellant now approached the High Court against the ITAT order. However, this
appeal was dismissed summarily by the High Court by its short order dated 15^th
May, 2009.

On further
appeal, the Supreme Court was of the view that the principal questions arising
for its determination in this appeal were as follows:

1. As to whether section 194C of
the Act does not apply to the present case?

2. Whether disallowance u/s
40(a)(ia) of the Act is confined / limited to the amount ‘payable’ and not to
the amount ‘already paid’; and whether the decision of this Court in Palam
Gas Service vs. Commissioner of Income-Tax (2017) 394 ITR 300 requires
reconsideration?

3. As to whether sub-clause (ia)
of section 40(a) of the Act, as inserted by the Finance (No. 2) Act, 2004 with
effect from 1^st April, 2005 is applicable only from the financial
year 2005-2006 and, hence, is not applicable to the present case relating to
the financial year 2004-2005; and, at any rate, the whole of the rigour of this
provision cannot be applied to the present case?

4. And whether the payments in
question have rightly been disallowed from deduction while computing the total
income of the assessee?

Question No.
1

According to
the Supreme Court, the nature of the contract entered into by the appellant
with the consignor company made it clear that the appellant was to transport
the goods (cement) of the consignor company and in order to execute this
contract the appellant hired the transport vehicles, namely, the trucks from
different operators / owners. The appellant received freight charges from the
consignor company, who indeed deducted tax at source while making such payment
to the appellant. Thereafter, the appellant paid the charges to the persons
whose vehicles were hired for the purpose of the said work of transportation of
goods. Thus, the goods in question were transported through the trucks employed
by the appellant but there was no privity of contract between the truck operators
/ owners and the said consignor company. It was the responsibility of the
appellant to transport the goods (cement) of the company; how to accomplish
this task of transportation was a matter exclusively within the domain of the
appellant. Hence, hiring the services of truck operators / owners for this
purpose could have only been under a contract between the appellant and the
said truck operators / owners. Whether such a contract was reduced into writing
or not was hardly of any relevance. In the given scenario and set-up, the said
truck operators / owners answered to the description of ‘sub-contractor’ for
carrying out the whole or part of the work undertaken by the contractor (i.e.,
the appellant) for the purpose of section 194C(2).

The Supreme
Court was of the view that the decision of the Delhi High Court in the case of Commissioner
of Income-Tax vs. Hardarshan Singh (2013) 350 ITR 427 relied upon by
the appellant had no application to the facts of the present case. The Supreme
Court observed that in that case, as regards the income of the assessee
relatable to transportation through other transporters, it was found that the
assessee had merely acted as a facilitator or as an intermediary between the
two parties (i.e., the consignor company and the transporter) and had no
privity of contract with either of such parties.

According to the Supreme Court, in Palam
Gas Service vs. Commissioner of Income-Tax (2017) 394 ITR 300, the
facts of that case were akin to the facts of the present case and of apposite
illustration. Therein, the assessee was engaged in the business of purchase and
sale of LPG cylinders whose main contract for carriage of LPG cylinders was
with Indian Oil Corporation, Baddi (Himachal Pradesh) and for which the
assessee received freight payments from the principal. The assessee got the
transportation of LPG done through three persons to whom he made the freight
payments. The A.O. had held that the assessee had entered into a sub-contract
with the said three persons within the meaning of section 194C. These findings
of the A.O. were concurrently upheld up to the High Court and, after
interpretation of section 40(a)(ia), this Court also approved the decision of
the High Court while dismissing the appeal with costs. The Supreme Court rejected
the contention of the appellant attempting to distinguish the nature of
contract in Palam Gas Service by suggesting that, therein, the
assessee’s sub-contractors were specific and identified persons with whom the
assessee had entered into a contract, whereas the present appellant was free to
hire the services of any truck operator / owner and, in fact, the appellant
hired the trucks only on need basis.

The Supreme
Court therefore affirmed the concurrent findings in regard to the applicability
of section 194C to the present case. Question No. 1 was, therefore, answered in
the negative – that is, against the assessee-appellant and in favour of the
Revenue.

Question No.
2.

According to
the Supreme Court, the decision in Palam Gas Service (Supra)
was a direct answer to all the contentions urged on behalf of the appellant in
the present case. In that case, the Supreme Court approved the views of the
Punjab and Haryana High Court in the case of P.M.S. Diesels and Ors. vs.
Commissioner of Income-Tax (2015) 374 ITR 562 as regards the mandatory
nature of the provisions relating to the liability to deduct tax at source.
Having said that deducting tax at source is obligatory, the Supreme Court in
that case had proceeded to deal with the issue as to whether the word ‘payable’
in section 40(a)(ia) would cover only those cases where the amount is payable
and not where it has actually been paid. It took note of the exhaustive
interpretation of various aspects related with this issue by the Punjab and
Haryana High Court in the case of P.M.S. Diesels (Supra) as also
by the Calcutta High Court in the case of Commissioner of Income-Tax,
Kolkata-XI vs. Crescent Export Syndicate (2013) 216 Taxman 258, and
while approving the same it held, as regards implication and connotation of the
expression ‘payable’ used in this provision, that section 40(a)(ia) covers not
only those cases where the amount is payable but also when it is paid.

According to
the Supreme Court, it was ex facie evident that the term ‘payable’ has
been used in section 40(a)(ia) only to indicate the type or nature of the
payments by the assessees to the payees referred therein. In other words, the
expression ‘payable’ is descriptive of the payments which attract the liability
for deducting tax at source and it has not been used in the provision in
question to specify any particular class of default on the basis of whether
payment has been made or not.

The Supreme
Court agreed with the observations in Palam Gas Service that the
enunciations in P.M.S. Diesels had been of correct interpretation
of the provisions contained in section 40(a)(ia). According to the Supreme
Court, the decision in Palam Gas Service did not require any
reconsideration. That being the position, the contention urged on behalf of the
appellant that disallowance u/s 40(a)(ia) did not relate to the amount already
paid, was rejected.

In view of the
above, Question No. 2 was also answered in the negative – against the
assessee-appellant and in favour of the Revenue.

Question No.
3

Conscious of
the position that the decision of this Court in Palam Gas Service
practically covers the substance of the present matter against the assessee,
the assessee-appellant made a few alternative attempts to argue against the
disallowance in question.

It was
submitted that the said sub-clause (ia) having been inserted to clause (a) of
section 40 with effect from 1^st April, 2005 by the Finance (No. 2)
Act, 2004, would apply only from the financial year 2005-2006 and, hence, could
not apply to the present case pertaining to the financial year 2004-2005.

The Supreme
Court held that it is well settled that in income tax matters the law to be
applied is that in force in the assessment year in question, unless stated
otherwise by express intendment or by necessary implication. The provision in
question, having come into effect from 1^stApril, 2005 would apply
from and for the assessment year 2005-2006 and would be applicable for the
assessment in question.

According to
the Supreme Court, the supplemental submission that in any case disallowance
could not be applied to the payments already made prior to 10^th
September, 2004, the date on which the Finance (No. 2) Act, 2004 received the
assent of the President of India, was equally baseless. The said date of assent
of the President of India to Finance (No. 2) Act, 2004 is not the date of
applicability of the provision in question, for the specific date had been
provided as 1^st April, 2005.

In yet another
alternative attempt, the appellant argued that by way of Finance (No. 2) Act,
2014, disallowance u/s 40(a)(ia) has been limited to 30% of the sum payable and
the said amendment deserves to be held retrospective in operation.

According to
the Supreme Court since this is not a curative amendment relating to the
procedural aspects concerning deposit of the deducted TDS, it cannot be applied
retrospectively. The amendment is of the substantive provision by the Finance
(No. 2) Act, 2014.

The Supreme
Court in passing observed that the assessee-appellant was either labouring
under the mistaken impression that he was not required to deduct TDS or under
the mistaken belief that the methodology of splitting a single payment into
parts below Rs. 20,000 would provide him escape from the rigour of the provisions
of the Act providing for disallowance. In either event, the appellant had not
been a bona fide assessee who had made the deduction and deposited it
subsequently. Having defaulted at every stage, the attempt on the part of the
assessee-appellant to seek some succour in the amendment of section 40(a)(ia)
by the Finance (No. 2) Act, 2014 could only be rejected as entirely baseless,
even preposterous.

Hence, Question
No. 3 was also answered in the negative – that is, against the
assessee-appellant and in favour of the Revenue.

Question No.
4

According to
the Supreme Court, the answers to Question Nos. 1 to 3 practically conclude the
matter but it had formulated Question No. 4 essentially to deal with the last
limb of submissions regarding the prejudice likely to be suffered by the
appellant.

The Supreme
Court was of the view that the suggestion on behalf of the appellant about the
likely prejudice because of disallowance deserved to be rejected for three
major reasons. In the first place, the said provisions are intended to enforce
due compliance of the requirement of other provisions of the Act and to ensure
proper collection of tax as also transparency in the dealings of the parties.
The necessity of disallowance comes into operation only when a default of the
nature specified in the provisions takes place. Looking to the object of these
provisions, the suggestions about prejudice or hardship carry no meaning at
all. Secondly, by way of the proviso as originally inserted and its
amendments in the years 2008 and 2010, requisite relief to a bona fide
taxpayer who had collected TDS but could not deposit it within time before
submission of the return was also provided; and as regards the amendment of
2010, the Supreme Court ruled it to be retrospective in operation. The proviso
so amended, obviously, safeguarded the interest of a bona fide assessee
who had made the deduction as required and had paid the same to the Revenue.
The appellant having failed to avail the benefit of such relaxation, too,
cannot now raise a grievance of alleged hardship. Thirdly, the appellant had
shown total payments in truck freight account at Rs. 1,37,71,206 and total
receipts from the company at Rs. 1,43,90,632. What has been disallowed was that
amount of Rs. 57,11,625 on which the appellant failed to deduct the tax at
source and not the entire amount received from the company or paid to the truck
operators / owners. Viewed from any angle, there was no case of prejudice or
legal grievance with the appellant.

Hence, the
answer to Question No. 4 was clearly in the affirmative – that is, against the
appellant and in favour of the Revenue and that the payments in question had
rightly been disallowed from deduction while computing the total income of the
assessee-appellant.

6. The Assistant Commissioner of
Income-Tax-12(3)(2) vs. Marico Ltd. Special Leave Petition (Civil) Diary No. 7367/2020 Date of order: 1^st June, 2020

(Arising out of order dated 21^st
August, 2019 in WP No. 1917/2019 passed by the Bombay High Court)

Reassessment –
Change of opinion – The non-rejection of the explanation in the Assessment
Order would amount to the A.O. accepting the view of the assessee, thus taking
a view / forming an opinion – Once an opinion is formed during the regular
assessment proceedings, the A.O. cannot reopen the same only on account of a
different view

For the
assessment year 2014-15 the petitioner filed its revised return of income
declaring a total income of Rs. 418.04 crores under normal provisions of the
Act and Rs. 670.82 crores as book profits u/s 115JB. In its return, the
petitioner had inter alia claimed a deduction of Rs. 47.04 crores on
account of amortisation of brand value, while computing book profits at Rs.
670.82 crores u/s 115JB.

The Respondent
No.1 passed an assessment order dated 30^th January, 2018 u/s 143(3)
r/w/s 144C. The above assessment order accepted the petitioner’s claim for
allowing depreciation for amortisation of brand value to determine book profits
u/s 115JB at Rs. 684.04 crores after examination.

Thereafter, on
27^th March, 2019 the impugned notice was issued seeking to reopen
the assessment for the A.Y. 2014-15. The assessment was sought to be reopened
for the reason that the assessee company had claimed deduction of Rs.
47,04,58,042 from the book profits on the ground that after revaluation of the
assets of certain brands having the net book value of Rs. 473 crores were
written off and charged to capital redemption reserve and securities premium
during A.Y. 2007-08. The amount written off pertained to brands Manjal and
Nihar acquired in A.Y. 2006-07 and Fiancee and Haircode acquired in A.Y.
2007-08. According to the A.O., there was no provision in section 115JB for
granting deduction for the amortisation not charged in the profit & loss account
on a notional basis.

The petitioner
by a letter dated 14^th May, 2019 objected to the reopening notice on
the ground that it was without jurisdiction inasmuch as it was based on change
of opinion. This very issue / reason for reopening the assessment was the
subject matter of consideration during the regular assessment proceedings,
leading to the assessment order dated 30^th January, 2018.

The A.O. by an
order dated 9^th June, 2019 rejected the objections by holding that
the basis of the reopening notice was not on account of change of opinion. It
was for the reason that the A.O. had not formed any opinion with regard to the
same in the order dated 30^th January, 2018 passed u/s 143(3) as
there was no discussion on it in the impugned order dated 30^th
January, 2018.

The High Court,
in a writ challenging the reopening notice, noted that the A.O. during the
course of regular assessment proceedings leading to the assessment order dated
30^th January, 2018, on the basis of the profit & loss account
and balance sheet and the practice for the earlier years, i.e. A.Y. 2013-14,
had issued notice on 25^th September, 2017 to the petitioner to show
cause why the amount of Rs. 47.04 crores being claimed as book depreciation on
intangibles should not be disallowed to determine book profits u/s 115JB. The
above query of the A.O. was responded to by the petitioner in great detail by
its letters dated 10^th October, 2017 and 21^st December,
2017. It justified its claim for deductions by placing reliance on the
decisions of the Courts. The A.O. thereafter proceeded to pass an assessment
order dated 30^th January, 2018 u/s 143(3) and did not make the
proposed disallowance.

The High Court
observed that a query was raised on the very issue of reopening during regular
assessment proceedings. The parties had responded to it and the assessment
order dated 30^th January, 2018 made no reference to the above issue
at all. However, according to the High Court, once a query has been raised by
the A.O. during the assessment proceedings and the assessee has responded to
that query, it would necessarily follow that the A.O. has accepted the
petitioner’s / assessee’s submissions so as to not deal with that issue in the
assessment order.

The High Court
rejected the submission of the Counsel for the Revenue that in the absence of
the A.O. adjudicating upon the issue it cannot be said that he had formed an
opinion during the regular assessment proceedings leading to the order dated 30^th
January, 2018. According to the High Court, any adjudication would only be on
such issue where the assessee’s submissions are not acceptable to the Revenue,
then the occasion to decide a lis would arise, i.e. adjudication.
However, where the Revenue accepts the view propounded by the assessee in
response to the Revenue’s query, the A.O. has to form an opinion whether or not
the stand taken by the assessee is acceptable. Therefore, it must follow that
where queries have been raised during the assessment proceedings and the
assessee has responded to the same, then the non-discussion of the same or
non-rejection of the response of the assessee would necessarily mean that the
A.O. has formed an opinion accepting the view of the assessee. Thus, an opinion
is formed during the regular assessment proceedings (and it) bars the A.O. from
reopening the same only on account of a different view.

Therefore, the
High Court quashed and set aside the notice issued u/s 148.

On a Special
Leave Petition by the Revenue, the Supreme Court noted that according to the
record certain queries were raised by the A.O. on 25^th September,
2017 during the assessment proceedings which were responded to by the assessee
vide letters dated 10^th October, 2017 and 21^st November,
2017. After considering the said responses, the assessment order was passed on
30^th January, 2018. Subsequently, by a notice dated 27^thMarch,
2019 issued u/s 148, the matter was sought to be reopened.

The Supreme
Court observed that while accepting the challenge to the issuance of notice,
the High Court in paragraph 12 of its judgment observed as under:

‘12. Thus we
find that the reasons in support of the impugned notice is the very issue in
respect of which the Assessing Officer has raised the query dated 25 September
2017 during the assessment proceedings and the Petitioner had responded to the
same by its letters dated 10 December 2017 and 21 December 2017 justifying its
stand. The non-rejection of the explanation in the Assessment Order would
amount to the Assessing Officer accepting the view of the assessee, thus taking
a view / forming an opinion. Therefore, in these circumstances, the reasons in
support of the impugned notice proceed on a mere change of opinion and
therefore would be completely without jurisdiction in the present facts.
Accordingly, the impugned notice dated 27 March 2019 is quashed and set aside.’

According to
the Supreme Court, in the given circumstances there was no reason to interfere
in the matter. The special leave petition was, accordingly, dismissed.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

3. Commissioner
of Income Tax, Karnal (Haryana) vs. Carpet India, Panipat (Haryana) (2020)
424 ITR 316 (SC) Date of order: 27^th August, 2019

Export – Deduction u/s 80HHC – Supporting manufacturer –
The computation of deduction in respect of supporting manufacturer is
contemplated by section 80HHC(3A), whereas the effect to be given to such
computed deduction is contemplated u/s 80HHC(1A) – The supporting manufacturers
cannot be treated on par with the direct exporter for the purpose of deduction
u/s 80HHC

M/s Carpet
India (P) Ltd., the assessee, a partnership firm, was deriving income from the
manufacturing and sale of carpets to M/s IKEA Trading (India) Ltd. (Export
House) as a supporting manufacturer.

The
assessee filed a ‘Nil’ return for A.Y. 2001-2002 on 30^th October,
2001, inter alia stating the total sales at Rs.
6,49,83,432 with total export incentives of Rs. 68,82,801 as Duty Draw Back
(DDB). It claimed deduction u/s 80HHC amounting to Rs. 1,57,68,742 out of the
total profits of Rs. 1,97,10,927 at par with the direct exporter.

On
scrutiny, the A.O., vide
order dated 25^th February, 2004, allowed the deduction u/s 80HHC to
the tune of Rs. 1,08,96,505 instead of Rs. 1,57,68,742 as claimed by the
assessee while arriving at the total income of Rs. 57,18,040.

Being
aggrieved, the assessee preferred an appeal before the Commissioner of Income
Tax (Appeals) which was allowed vide
order dated 12^th August, 2004 while holding that the assessee was
entitled to the deduction of export incentives u/s 80HHC at par with the
exporter.

The
Revenue went in appeal before the Income Tax Appellate Tribunal as well as
before the High Court but the same got dismissed vide
orders dated 23^rd February, 2007 and 13^th May, 2008,
respectively, leading it to approach the Supreme Court by way of special leave.

According
to the Supreme Court, the short but important question of law that arose before
it was whether in the facts and circumstances of the case, a supporting
manufacturer who receives export incentives in the form of duty draw back
(DDB), Duty Entitlement Pass Book (DEPB), etc., is entitled to deduction u/s
80HHC at par with the direct exporter.

The Court
noted that it was evident that the total income of the assessee for the A.Y.
concerned was Rs. 1,97,10,927 out of which it claimed deduction to the tune of
Rs. 1,57,68,742 u/s 80HHC which was partly disallowed by the A.O. Deduction was
allowed only to the extent of Rs. 1,08,96,505. However, the assessee had
claimed deduction at par with the direct exporter u/s 80HHC which had been
eventually upheld by the High Court.

According
to the Supreme Court, the whole issue revolved around the manner of computation
of deduction u/s 80HHC in the case of a supporting manufacturer. On perusing
various provisions of the Act, the Court observed that it was clear that
section 80HHC provides for deduction in respect of profits retained from export
business and, in particular, sub-section (1A) and sub-section (3A) provide for
deduction in the case of a supporting manufacturer. The ‘total turnover’ has to
be determined as per clause (ba) of the Explanation, whereas ‘Profits of the
business’ has to be determined as per clause (baa) of the Explanation. Both
these clauses provide for exclusion and reduction of 90% of certain receipts
mentioned therein, respectively. The computation of deduction in respect of the
supporting manufacturer is contemplated by section 80HHC(3A), whereas the
effect to be given to such computed deduction is contemplated u/s 80HHC(1A). In
other words, the machinery to compute the deduction is provided in section
80HHC(3A) and after computing such deduction, such amount of deduction is
required to be deducted from the gross total income of the assessee in order to
arrive at the taxable income / total income of the assessee as contemplated by
section 80HHC(1A).

The Supreme Court observed that in Commissioner of Income Tax, Thiruvananthapuram vs. Baby
Marine Exports (2007) 290 ITR 323 (SC) which was relied upon by the authorities below, the question of law
involved was ‘whether the export house premium received by the assessee is
includible in the “profits of the business” of the assessee while
computing the deduction u/s 80HHC?’ The said case mainly dealt with the issue
related to the eligibility of export house premium for inclusion in the
business profit for the purpose of deduction u/s 80HHC. In the instant case,
the main point of consideration was whether the assessee firm, being a
supporting manufacturer, is to be treated at par with the direct exporter for
the purpose of deduction of export incentives u/s 80HHC after having regard to
the peculiar facts of the case.

The Court
noted that while deciding the issue in Baby
Marine Exports (Supra), a two-Judge Bench of the
Supreme Court held that the export house premium could be included in the
business profit because it was an integral part of the business operation of
the assessee which consisted of sale of goods by it to the export house.

The
aforesaid decision was followed by another Bench of two Judges of the Supreme
Court in Special Leave to Appeal (Civil) No. 7615 of 2009, Civil Appeal No.
6437 of 2012 and Ors. Commissioner of Income Tax, Karnal vs. Sushil Kumar Gupta
decided on 12^th September, 2012. The
question considered in the aforesaid case was ‘whether 90% of export benefits
disclaimed in favour of a supporting manufacturer have to be reduced in terms
of Explanation (baa) of section 80HHC while computing deduction admissible to
such supporting manufacturer u/s 80HHC(3A)?’

This
question was answered in favour of the assessee and against the Department
following the judgment in the case of CIT
vs. Baby Marine Exports [2007] 290 ITR 323.

According
to the Supreme Court, these two cases were not identical and could not be
related with the deduction of export incentives by the supporting manufacturer
u/s 80HHC.

The Court
was not in agreement with these decisions and as Explanation (baa) of section
80HHC specifically reduces deduction of 90% of the amount referable to sections
28(iiia) to (iiie), hence it opined that these decisions required
reconsideration by a larger Bench since this issue had larger implication in
terms of monetary benefits for both the parties.

The larger
Bench of the Supreme Court, after noting the provisions of section 80HHC,
observed that given the statutory scheme it was clear that the exporter stands
on a completely different footing from the supporting manufacturer as the
parameters and scheme for claiming deduction relatable to exporters u/s
80HHC(1) read with (3) are completely different from those of supporting
manufacturers u/s 80HHC(1A) read with (3A) thereof.

The larger
Bench extracted the reasons for reference from the order of the division Bench
and noted the following substantial question of law framed for its
reconsideration:

‘Whether
in the light of the peculiar facts and circumstances of the instant case,
supporting manufacturer who receives export incentives in the form of duty draw
back (DDB), Duty Entitlement Pass Book (DEPB), etc. is entitled for deduction
u/s 80HHC?’

The larger
Bench of the Supreme Court agreed with the reasoning and analysis of the
referring judgment, namely, that Baby Marine
Exports (Supra) dealt with an issue related to
the eligibility of export house premium for inclusion in business profit for
the purpose of deduction u/s 80HHC. Whereas in the present appeals the point
for consideration was completely different, that is, whether the assessee being
a supporting manufacturer is to be treated on a par with the direct exporter
for the purpose of deduction of export incentives u/s 80HHC. The larger Bench
of the Supreme Court, therefore, answered the question referred to it by
stating that Baby Marine Exports (Supra)
dealt with an entirely different question and could not be relied upon to
arrive at the conclusion that the supporting manufacturers are to be treated on
par with the direct exporter for the purpose of deduction u/s 80HHC.
Consequently, the decision in CIT vs. Sushil Kumar
Gupta (CA No. 6437/2012) decided on 12^thSeptember, 2012
was overruled.

This being
the case, it allowed these appeals in favour of the Revenue and set aside the
impugned judgment(s).

4. Bangalore Club vs. The Commissioner of Wealth Tax and Ors. Civil
Appeal Nos. 3964-71 of 2007 Date of
order: 8^th September, 2020

Wealth
tax – Club – In a social club persons who are banded together do not band
together for any business or commercial purpose in order to make income or
profits – Not an Association of Persons – Section 21AA was enacted not to rope
in association of persons per se
as ‘one more taxable person’ to whom the Act would apply – The object was to
rope in certain assessees who have resorted to the creation of a large number
of associations of persons without specifically defining the shares of the
members of such associations so as to evade tax – Club was not created to
escape tax liability – Shares of members were not indeterminate – Section 21AA
was not attracted

The
question before the Supreme Court for determination in the appeals for the
assessment years 1981-82 and 1984-85 up to 1990-91 was whether Bangalore Club
was liable to pay wealth tax under the Wealth Tax Act.

The order
of assessment dated 3^rd March, 2000 passed by the Wealth Tax
Officer, Bangalore referred to the fact that Bangalore Club was not registered
as a society, a trust or a company. The A.O. came to the conclusion that the
rights of the members were not restricted only to use or possession, but
definitely as persons to whom the assets of the Club belonged. After referring
to section 167A inserted into the Income Tax Act, 1961, and after referring to
Rule 35 of the Club Rules, the A.O. concluded that the number of members and
the date of dissolution were all uncertain and variable and therefore
indeterminate, as a result of which the Club was liable to be taxed under the
Wealth Tax Act.

By an
order dated 25^th October, 2000, the CIT (Appeals) dismissed the
appeal against the aforesaid order.

By a
detailed order passed by the Income Tax Appellate Tribunal, Bangalore dated 7^th
May, 2002, the Appellate Tribunal first referred to the Objects of the
Bangalore Club, which it described as a ‘social’ Club, as follows:

‘1. To
provide for its Members, social, cultural, sporting, recreational and other
facilities;

2. To
promote camaraderie and fellowship among its members.

3. To
run the Club for the benefit of its Members from out of the subscriptions and
contributions of its members.

4. To
receive donations and gifts without conditions for the betterment of the Club.
The General Committee may use its discretion to accept sponsorships for
sporting Areas.

5. To
undertake measures for social service consequent on natural calamities or
disasters, national or local.

6. To
enter into affiliation and reciprocal arrangements with other Clubs of similar
standing both in India and abroad.

7. To
do all other acts and things as are conducive or incidental to the attainment
of the above objects.

Provided
always and notwithstanding anything hereinafter contained, the aforesaid
objects of the Club, shall not be altered, amended, or modified, except, in a
General Meeting, for which the unalterable quorum shall not be less than 300
members. Any resolution purporting to alter, amend, or modify the objects of
the Club shall not be deemed to have been passed, except by a two thirds
majority of the Members present and voting thereon.’

The
Tribunal then set out Rule 35 of the Club Rules, which stated as follows:

‘RULE 35
APPOINTMENT OF LIQUIDATORS:

If it
be resolved to wind up, the Meeting shall appoint a liquidator or liquidators
and fix his or their remuneration. The liquidation shall be conducted as nearly
as practicable in accordance with the laws governing voluntary liquidation
under the Companies Act or any statutory modifications thereto and any surplus
assets remaining after all debts and liabilities of the Club have been
discharged shall be divided equally amongst the Members of the Club as defined
in Rules 6.1(i), 6.1(ii), 6.1(iii), 6.2(i), 6.2(ii), 6.2(iii), 6.2(vii),
6.2(viii) and 6.2(ix).’

After
setting out section 21AA of the Wealth Tax Act, the Tribunal then referred to
the Court’s judgment in CIT vs. Indira Balkrishna
(1960) 39 ITR 546 and held: ‘From the facts of the case, it is clear that members who have
joined here have not joined to earn any income or to share any profits. They
have joined to enjoy certain facilities as per the objects of the club. The
members themselves are contributing to the receipts of the club. The members
themselves are contributing to the receipts of the club (sic) and what is the difference between the Income and Expenditure can
be said to be only surplus and not income of the Assessee-club. It is an
accepted principle that principle of mutuality is applicable to the Assessee
club and hence not liable to income-tax also. At the most, this may be called
the “Body of Individuals” but not an AOP formed with an intention to
earn income.’

The
Tribunal then referred to a CBDT Circular dated 11^th January, 1992
explaining the pari materia provision
of section 167A in the Income Tax Act and therefore inferred, from a reading of
the aforesaid Circular, that section 21AA would not be attracted to the case of
the Bangalore Club. It was held, on a reading of Rule 35, that since members
are entitled to equal shares in the assets of the Club on winding up after
paying all debts and liabilities, the shares so fixed are determinate, also
making it clear that section 21AA would have no application to the facts of the
present case.

As a
result, the Appellate Tribunal allowed the appeal and set aside the orders of
the A.O. and the CIT (Appeals).

Against
this order, by a cryptic order of the High Court, the decision in CWT vs. Chikmagalur Club (2005) 197 ITR 609 (Kar.)
was stated to cover the facts of the present case, as a result of which the
question raised was decided in favour of the Revenue by the impugned order
dated 23^rdJanuary, 2007. A review petition filed against the
aforesaid order was dismissed on 19^th April, 2007.

The
Supreme Court, after noting the provisions of section 3 of the Wealth Tax Act,
observed that only three types of persons can be assessed to wealth tax u/s 3,
i.e., individuals, Hindu undivided families and companies. Therefore, if
section 3(1) alone were to be looked at, the Bangalore Club neither being an
individual, nor an HUF, or a company, could not possibly be brought into the
wealth tax net under this provision.

The Court
further noted that by the Finance Bill of 1981, section 21AA was introduced
into the Wealth Tax Act. The Explanatory notes on the introduction of this
section were as follows:

‘21.1
Under the Wealth Tax Act, 1957, individuals and Hindu Undivided Families are
taxable entities but an association of persons is not charged to wealth tax on
its net wealth. Where an individual or a Hindu Undivided Family is a member of
an association of persons, the value of the interest of such member in the
association of persons is determined in accordance with the provisions of the
Rules and is includible in the net wealth of the member.

21.2
Instances had come to the notice of the Government where certain assessees had
resorted to the creation of a large number of associations of persons without
specifically defining the shares of the members therein with a view to avoiding
proper tax liability. Under the existing provisions, only the value of the
interest of the member in the association which is ascertainable is includible
in his net wealth. Accordingly, to the extent the value of the interest of the
member in the association cannot be ascertained or is unknown, no wealth tax is
payable by such member in respect thereof.

21.3
In order to counter such attempts at tax avoidance through the medium of
multiple associations of persons without defining the shares of the members,
the Finance Act has inserted a new section 21-AA in the Wealth Tax Act to
provide for assessment in the case of associations of persons which do not
define the shares of the members in the assets thereof. Sub-section (1)
provides that where assets chargeable to wealth tax are held by an association
of persons (other than a company or a co-operative society) and the individual
shares of the members of the said association in income or the assets of the
association on the date of its formation or at any time thereafter, are
indeterminate or unknown, wealth tax will be levied upon and recovered from
such association in the like manner and to the same extent as it is leviable
upon and recoverable from an individual who is a citizen of India and is
resident in India at the rates specified in Part I of Schedule I or at the rate
of 3 per cent, whichever course is more beneficial to the Revenue.’

After
noting the provisions of section 21AA, which was enacted w.e.f. 1^st
April, 1981, the Supreme Court observed that for the first time, from 1^st
April, 1981, an association of persons other than a company or co-operative
society had been brought into the tax net so far as wealth tax was concerned,
with the rider that the individual shares of the members of such association in
the income or assets or both on the date of its formation or at any time
thereafter must be indeterminate or unknown. It was only then that the section
was attracted.

According
to the Supreme Court, the first question that arose was as to the meaning of
the expression ‘association of persons’ which occurs in section 21AA.

It
referred to its earlier judgment, where the expression ‘association of persons’
occurred in the Income Tax Act, 1922, a cognate tax statute, in CIT vs. Indira Balkrishna (Supra), wherein
it was held that an association of persons must be one in which two or more
persons join in a common purpose or common action, and as the words occur in a
section which imposes a tax on income, the association must be one the object
of which is to produce income profits or gains. According to the Supreme Court,
the aforesaid decision correctly laid down the crucial test for determining
what is an association of persons within the meaning of section 3 of the Income
Tax Act.

The
Supreme Court noted that under the Act an Explanation had been added to the
definition of ‘person’ contained in section 2(31) w.e.f. 1^st April,
2002, sub-clause (v) of which includes ‘an association of persons or a body of
individuals, whether incorporated or not’. Therefore, after 1^st
April, 2002, the ratio of the
aforesaid judgments had been undone by this Explanation insofar as income tax
was concerned.

The Court,
after referring to the plethora of judgments and the relevant principle of
construction in Craies on Statute Law,
6^th Edn., at p. 167, viz.,
that where the Legislature uses in an Act a legal term which has received
judicial interpretation, it must be assumed that the term is used in the sense
in which it has been judicially interpreted, unless a contrary intention
appears, observed that in order to be an association of persons attracting
section 21AA of the Wealth Tax Act, it is necessary that persons band together
with some business or commercial object in view in order to make income or
profits. The presumption gets strengthened by the language of section 21AA(2)
which speaks of a business or profession carried on by an association of
persons which then gets discontinued or dissolved. The thrust of the provision,
therefore, is to rope in associations of persons whose common object is a
business or professional object, namely, to earn income or profits.

From the
objects of the Bangalore Club being a social club, it was clear that the
persons who had banded together did not band together for any business or
commercial purpose in order to make income or profits. The Court noted the
nature of these kinds of clubs from its judgment in Cricket Club of India Ltd. vs. Bombay Labour Union (1969) 1 SCR
600.

The Court
also noted its judgment in CWT vs. Ellis Bridge Gymkhana
(1998) 229 ITR 1 (SC). In this case, the Ellis Bridge
Gymkhana, like the Bangalore Club, was an unincorporated club. The assessment
years involved in this case were from 1970-71 to 1977-78, i.e., prior to
section 21AA coming into force. Despite the fact that section 21AA did not
apply, the Court referred to section 21AA. It was held that an association of
persons cannot be taxed at all u/s 3 of the Act. That is why an amendment was
necessary to be made by the Finance Act, 1981 whereby section 21AA was inserted
to bring to tax the net wealth of an association of persons where individual
shares of the members of the association were unknown or indeterminate.

A perusal
of this judgment would show that section 21AA had been introduced in order to
prevent tax evasion. It was not enacted to rope in an association of persons per se as ‘one more taxable person’ to
whom the Act would apply. The object was to rope in certain assessees who have
resorted to the creation of a large number of associations of persons without
specifically defining the shares of the members so as to evade tax. In
construing section 21AA, it is important to have regard to this object.

The
Supreme Court concluded that the Bangalore Club was an association of persons
and not the creation, by a person who was otherwise assessable, of one among a
large number of associations of persons without defining the shares of the
members so as to escape tax liability. It is clear, therefore, that section
21AA of the Wealth Tax Act did not get attracted to the facts of the present
case.

But the
Court noted that the impugned judgment of the High Court had relied solely upon
CWT vs. Chikmagalur Club (Supra). This case
dealt with a club that was registered under the provisions of the Karnataka
Societies Registration Act, 1960. The High Court had relied upon the
pronouncement of the Supreme Court in the case of the Commissioner of Wealth Tax vs. Ellis Bridge Gymkhana (Supra)
to conclude that the assessee was an association of persons and the members
were the owners of the assets and the individual shares of the members in the
ownership of the assets and the individual shares of the members in the income
or assets or both of the association on the date of formation or any time
thereafter was indeterminate or unknown and, accordingly, the assessee was
subjected to wealth tax.

The Supreme
Court observed that the High Court in Chikmagalur
Club (Supra) had only referred to paragraph 17 and
omitted to refer to paragraphs 19, 32 and 33 of the Ellis Bridge Gymkhana judgment (Supra). Had
all these paragraphs been referred to, it would have been clear that a social
club like the Chikmagalur Club could not possibly be said to be an association
of persons, regard being had to the object sought to be achieved by enacting
section 21AA, a section enacted in order to prevent tax evasion. Further, the
High Court judgment was completely oblivious of the line of judgments starting
with Indira Balkrishna’s case (Supra) by which
‘association of persons’ must mean persons who are banded together with a
common object – and, in the context of a taxation statute, common object being
a business, the object being to earn income or profits. This judgment did not
refer to Indira Balkrishna (Supra) and the
judgments following it at all. For all these reasons, the Supreme Court held
that the judgment in CWT vs. Chikmagalur Club
(Supra) was not correctly decided, and hence was
overruled. Consequently, the High Court judgment which rests solely upon the
decision in the Chikmagalur Club
case had no legs to stand on.

Thereafter,
the Supreme Court referred to some of the points raised by the Additional
Solicitor-General. According to the Court, the submission that section 21AA(2)
which deals with dissolution of an association of persons and the fact that on
dissolution under Rule 35 of the Bangalore Club, members get an equal share,
would show, first, that the Bangalore Club was an association of persons; and
second, that the members’ share in its income and assets was indeterminate or
unknown, was an argument which had to be rejected.

The
Supreme Court held that first and foremost, sub-section (2) begins with the
words ‘any business or profession carried on’ by an association of persons. No
business or profession was carried on by a social members’ club. Further, the
association of persons mentioned in sub-section (1) must be persons who have
banded together for a business objective – to earn profits – and if this itself
is not the case, then sub-section (2) cannot possibly apply. Insofar as Rule 35
was concerned, again what was clear was that on liquidation any surplus assets
remaining after all debts and liabilities of the club had been discharged shall
be divided equally amongst all categories of members of the club. This would
show that ‘at any time thereafter’ within the meaning of section 21AA(1), the
members’ shares were determinate in that on liquidation each member of
whatsoever category got an equal share.

The
judgments cited by the assessee’s counsel in CWT
vs. Rama Varma Club 226 ITR 898 and CWT vs. George Club 191 ITR 368 were both
judgments in which no part of the assets was to be distributed even on
liquidation to any of the members of these clubs. Thus, it was held in these
cases that the members did not have any share in the income or assets of the
club at all. The same were not the facts in this case inasmuch as under Rule 35
the members of the Bangalore Club were entitled to receive surplus assets in
the circumstances stated in Rule 35 – equally on liquidation. However, the
result remained the same, viz.,
that even if it be held that the Bangalore Club was an association of persons,
the members’ shares being determinate, section 21AA was not attracted.

The
Supreme Court then referred to the judgment in Bangalore
Club vs. CIT (2013) 5 SCC 509 relied upon by the
Additional Solicitor-General only in order to point out that the Bangalore Club
was taxed as an AOP under the Income Tax Act and could not and should not,
therefore, escape liability under the Wealth Tax Act (an allied and cognate
Act). The Supreme Court held that first and foremost, the definition of
‘person’ in section 2(31) of the Income Tax Act would take in both an
association of persons and a body of individuals. For the purposes of income
tax, the Bangalore Club could perhaps be treated as a ‘body of individuals’
which is a wider expression than ‘association of persons’ in which such body of
individuals may have no common object at all but would include a combination of
individuals who had nothing more than a unity of interest. This distinction had
been made by the Andhra Pradesh High Court in Deccan
Wine and General Stores vs. CIT 106 ITR 111 at
pages 116 and 117. Apart from this, to be taxed as an association of persons
under the Income Tax Act is to be taxed as an association of persons per se. But, as held earlier, section
21AA does not enlarge the field of taxpayers but only plugs evasion as the
association of persons must be formed with members who have indeterminate
shares in its income or assets. For all these reasons, the argument that being
taxed as an association of persons under the Income Tax Act, the Bangalore Club
must be regarded to be an ‘association of persons’ for the purpose of a tax
evasion provision in the Wealth Tax Act as opposed to a charging provision in
the Income Tax Act, cannot be accepted.

Further,
according to the ASG, the fact that the membership of the club is a fluctuating
body of individuals would necessarily lead to the conclusion that the shares of
the members in the assets or the income of the club would be indeterminate. The
Supreme Court observed that in CWT vs. Trustees of
H.E.H. Nizam’s Family 108 ITR 555 (1977), it had
to construe section 21 of the Wealth Tax Act. The argument made in that case
was that, as the members of the Nizam’s family trust who are beneficiaries
thereof would be a fluctuating body of persons, hence the beneficiaries must be
said to be indeterminate as a result of which section 21(4) of the Act would
apply and not section 21(1). This was repelled by the Court stating that it was
clear from the language of section 3 that the charge of wealth tax was in
respect of the net wealth on the relevant valuation date and, therefore, the
question in regard to the applicability of sub-section (1) or (4) of section 21
had to be determined with reference to the relevant valuation date. The Wealth
Tax Officer had to determine who were the beneficiaries in respect of the
remainder on the relevant date and whether their shares were indeterminate or
unknown. It was not at all relevant whether the beneficiaries may change in
subsequent years before the date of distribution, depending upon contingencies
which may come to pass in future. So long as it was possible to say on the
relevant valuation date that the beneficiaries are known and their shares are
determinate, the possibility that the beneficiaries may change by reason of
subsequent events such as birth or death would not take the case out of the
ambit of sub-section (1) of section 21. The share of a beneficiary can be said
to be indeterminate if at the relevant time the share cannot be determined, but
merely because the number of beneficiaries vary from time to time one cannot
say that it is indeterminate. The Court also referred to other judgments on the
issue.

The
Supreme Court therefore held that what had to be seen in the facts of the
present case was the list of members on the date of liquidation as per Rule 35
cited hereinabove. Given that as on that particular date there would be a fixed
list of members belonging to the various classes mentioned in the rules, it was
clear that, applying the ratio
of the Trustees of H.E.H. Nizam’s Family (Supra),
such list of members not being a fluctuating body, but a fixed body as on the
date of liquidation, would again make the members ‘determinate’ as a result of
which section 21AA would have no application.

For all
the above reasons, the impugned judgment and the review judgment were set aside
by the Supreme Court and the appeals were allowed with no order as to costs.

Note. The
following preamble of the judgment makes for interesting reading:

‘In the year of grace 1868, a
group of British officers banded together to start the Bangalore Club. In the
year of grace 1899, one Lt. W.L.S. Churchill was put up on the Club’s list of
defaulters, which numbered 17, for an amount of Rs. 13/- being for an unpaid
bill of the Club. The “Bill” never became an “Act”. Till
date, this amount remains unpaid. Lt. W.L.S. Churchill went on to become Sir
Winston Leonard Spencer Churchill, Prime Minister of Great Britain. And the
Bangalore Club continues its mundane existence, the only excitement being when
the tax collector knocks at the door to extract his pound of flesh.’

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

1. Director of Income Tax-II
(International Taxation), New Delhi and Ors. vs. Samsung Heavy Industries Co.
Ltd. Civil Appeal No.
12183 of 2016 Date of order: 22^nd July, 2020

DTAA between India and Republic of Korea – Permanent Establishment –
Taxability of income attributable to a ‘permanent establishment’ set up in a
fixed place in India – Profits earned by the Korean GE on supplies of
fabricated platforms could not be made attributable to its Indian PE as the
installation PE came into existence only after the transaction stood
materialised – No taxability could arise in a case where the sales are directly
billed to the Indian customer and the price at which billing is done for the
supplies does not include any element for services rendered by the PE – When it
comes to ‘fixed place’ permanent establishments under double taxation avoidance
treaties, the condition precedent for applicability of Article 5(1) of the double
taxation treaty and the ascertainment of a ‘permanent establishment’ is that it
should be an establishment ‘through which the business of an enterprise’ is
wholly or partly carried on – The maintenance of a fixed place of business
which is of a preparatory or auxiliary character in the trade or business of
the enterprise would not be considered to be a permanent establishment under
Article 5 – It is only so much of the profits of the enterprise that may be
taxed in the other state as is attributable to that permanent establishment –
The onus is on the Department to first show that the project office in India is
a permanent establishment

The Oil and Natural
Gas Corporation (ONGC) on 28^th February, 2006 awarded a ‘turnkey’
contract to a consortium comprising of the respondent / assessee, Samsung Heavy Industries
Co. Ltd. (a company incorporated in South Korea), and Larsen & Toubro
Limited, being a contract for carrying out the ‘work’ inter alia, of
surveys, design, engineering, procurement, fabrication, installation and
modification at existing facilities and start-up and commissioning of entire
facilities covered under the ‘Vasai East Development Project’ (Project).

On 24^th
May, 2006 the assessee set up a Project Office in Mumbai which, as per the
assessee, was to act as ‘a communication channel’ between the assessee and ONGC
in respect of the project. Pre-engineering, survey, engineering, procurement
and fabrication activities which took place abroad, all took place in the year
2006. Commencing from November, 2007, these platforms were then brought outside
Mumbai to be installed at the Vasai East Development Project. The project was
to be completed by 26^th July, 2009.

With regard to A.Y.
2007-2008 the assessee filed a return of income on 21^st August, 2007
showing Nil profit, as a loss of Rs. 23.5 lakhs had allegedly been incurred in
relation to the activities carried out by it in India.

On 29^th
August, 2008, a show cause notice was issued to the assessee by the Income-tax
Authorities requiring it to show cause as to why the return of income had been
filed only at Nil; the assessee replied to it in detail on 2^nd
February, 2009.

But dissatisfied
with the reply, a draft assessment order was passed on 31^st
December, 2009 (Draft Order) by the Assistant Director of Income
Tax-International Transactions at Dehradun (Assessing Officer). This draft
order went into the terms of the agreement in great detail and concluded that
the project in question was a single indivisible ‘turnkey’ project, whereby ONGC
was to take over a project that was to be completed only in India. As a result,
profits arising from the successful commissioning of the project would also
arise only in India. Having so held, the draft order then went on to attribute
25% of the revenues allegedly earned outside India (which totalled Rs.
113,43,78,960) as being the income of the assessee exigible to tax, which came
to Rs. 28,35,94,740.

The Dispute
Resolution Panel, by its order dated 30^th September, 2010, after
considering objections to the draft order by the assessee, confirmed the
finding contained in the said order that the agreement was a ‘turnkey’ project
which could not be split up, as a result of which the entire profit earned from
the project would be earned within India. Basing itself on data obtained from
the database ‘Capital Line’, the Panel picked up four similar projects executed
by companies outside India and found the average profit margin to be 24.7%,
which, according to the Panel, would therefore justify the figure of 25%
arrived at in the draft order. The Panel having dismissed the assessee’s
objections, the draft order was made final by the A.O. on 25^th
October, 2010.

The assessee then
filed an appeal against the assessment order before the Income Tax Appellate
Tribunal (ITAT).

The ITAT confirmed
the decisions of the A.O. and the DRP that the contract was indivisible. It
then went on to deal with the argument on behalf of the assessee that the
Project Office was only an auxiliary office and did not involve itself in any
core activity of business, as the accounts that were produced would show that
there was no expenditure which related to execution of the project. The ITAT
held that the arguments put forward in this respect were only by inference such
as the accounts were maintained by the assessee in India but the maintenance of
accounts was in the hands of the assessee and the mere mode of maintaining the
accounts alone could not determine the character of the PE as the role of the
PE would only be relevant to determine what kind of activities it had to carry
on. Having held thus, the ITAT found that there was a lack of material to
ascertain as to the extent to which the activities of the business were carried
on by the assessee through the Mumbai project office; and therefore it was
considered just and proper to set aside the attribution of 25% of gross revenue
earned outside India – which was attributed as income earned from the Mumbai
project office – the matter being sent back to the A.O. to ascertain profits
attributable to the Mumbai project office after examining the necessary facts.

An appeal from the
ITAT was filed in the High Court in Uttarakhand by the assessee. While
admitting the appeal, the High Court framed five substantial questions of law
as follows:

(i) Whether, on the facts and in the
circumstances of the case, the Tribunal erred in law in holding that the
appellant had a fixed place ‘Permanent Establishment’ (PE) in India under
Article 5(1)/(2) of the Double Taxation Avoidance Agreement between India and
Korea (the Treaty), in the form of a project office in Mumbai?

(ii) Whether, on the facts and circumstances of the
case and in law, the finding of the Tribunal that the project office was opened
for coordination and execution of the VED project and all activities to be
carried out in relation to the said project were routed through the project
office only, is perverse inasmuch as the same is based on selective and / or
incomplete reference to the material on record, irrelevant considerations and
incorrect appreciation of the role of the project office?

(iii) Without prejudice, whether, on the facts and
the circumstances of the case and in law, the Tribunal erred in not holding that even if the appellant had a fixed place PE in India, no
income on account of offshore activities, i.e., the operations carried out
outside India (viz., designing, engineering, material procurement, fabrication,
transportation activities) was attributable to the said PE, instead, in setting
the issue to the file of the A.O.?

(iv) Without prejudice, whether, on the facts and
circumstances of the case and in law, the Tribunal erred in not holding that
even if the appellant had fixed place PE in India, no income could be brought
to tax in India since the appellant had incurred overall losses in respect of
the VED project?

(v) Whether, on the facts and circumstances of the
case, the contract was divisible / distinguishable pertaining to the activities
associated with designing, fabrication and installation of platforms and, if so,
whether the activities pertaining to designing and fabrication took place in
any part of India?

By the impugned
judgment dated 27^th December, 2013, the High Court found that the
order of the A.O. had been confirmed by the ITAT and concerned itself only with
the following question:

‘Can it be said
that the agreement permitted the India Taxing Authority to arbitrarily fix a
part of the revenue to the permanent establishment of the appellant in India?’

The High Court held
that the question as to whether the project office opened in Mumbai cannot be
said to be a ‘permanent establishment’ within the meaning of Article 5 of the
DTAA would be of no consequence. The High Court then held that there was no finding
that 25% of the gross revenue of the assessee outside India was attributable to
the business carried out by the project office of the assessee. According to
the Court, neither the A.O. nor the ITAT made any effort to bring on record any
evidence to justify this figure. That being the position, the appeal of the
assessee was allowed.

According to the
Supreme Court, the question as to the taxability of income attributable to a
‘permanent establishment’ set up in a fixed place in India, arising from the ‘Agreement
for avoidance of double taxation of income and the prevention of fiscal
evasion’ with the Republic of Korea (DTAA) had been raised by the Department in
the present appeal.

The Supreme Court
noted the relevant provisions of the DTAA and some of its own judgments which
had dealt with similar double taxation avoidance treaty provisions, namely, (i)
DIT vs. Morgan Stanley & Co. Inc. (2006) 284 ITR 260 (SC), and
(ii) CIT vs. Hyundai Heavy Industries Co. Ltd. (2007) 291 ITR 482 (SC).

Applying the tests
laid down in the aforesaid judgments to the facts of the present case, the
Supreme Court held that profits earned by the Korean GE on supplies of
fabricated platforms could not be made attributable to its Indian PE as the
installation PE came into existence only after the transaction stood
materialised. It emerged only after the fabricated platform was delivered in
Korea to the agents of ONGC. Therefore, the profits on such supplies of
fabricated platforms could not be said to be attributable to the PE.

According to the
Supreme Court there was one more reason for coming to the aforesaid conclusion.
In terms of Paragraph (1) of Article 7, the profits to be taxed in the source
country were not the real profits but hypothetical profits which the PE would have
earned if it was wholly independent of the GE. Therefore, even if it was
assumed that the supplies were necessary for the purposes of installation
(activity of the PE in India) and even if it was assumed that the supplies were
an integral part, still no part of the profits on such supplies could be
attributed to the independent PE unless it was established by the Department
that the supplies were not at arm’s length price. No such taxability could
arise in the present case as the sales were directly billed to the Indian
customer (ONGC) and also as there was no allegation made by the Department that
the price at which billing was done for the supplies included any element for
services rendered by the PE.

The Supreme Court
therefore concluded that the profits that accrued to the Korean GE for the
Korean operations were not taxable in India.

The Court referred
to its decisions in Ishikawajma-Harima Heavy Industries Ltd. vs. Director
of Income Tax, Mumbai (2007) 3 SCC 481, and E-Funds IT Solution
Inc. (2017) 399 ITR 34 (SC), where a similar double taxation treaty
agreement entered into between Japan and India and India and the USA were
considered. The Court observed that a reading of the aforesaid judgments made
it clear that when it comes to ‘fixed place’ permanent establishments under
double taxation avoidance treaties, the condition precedent for applicability
of Article 5(1) of the double taxation treaty and the ascertainment of a
‘permanent establishment’ is that it should be an establishment ‘through which
the business of an enterprise’ is wholly or partly carried on. Further, the
profits of the foreign enterprise are taxable only where the said enterprise
carries on its core business through a permanent establishment. Besides, the
maintenance of a fixed place of business which is of a preparatory or auxiliary
character in the trade or business of the enterprise would not be considered to
be a permanent establishment under Article 5. Further, it is only so much of
the profits of the enterprise that may be taxed in the other State as is
attributable to that permanent establishment.

The Supreme Court
referred to the application submitted by the assessee to the RBI dated 24^th
April, 2006, the Board Resolution dated 3^rd April, 2006 and the RBI
approval dated 24^th May, 2006 and observed that a reading of the
Board Resolution would show that the project office was established to
coordinate and execute ‘delivery documents in connection with construction of
offshore platform modification of existing facilities for ONGC’. Unfortunately,
the ITAT relied upon only the first paragraph of the Board Resolution and then
jumped to the conclusion that the Mumbai office was for coordination and
execution of the project itself. The finding, therefore, that the Mumbai office
was not a mere liaison office but was involved in the core activity of
execution of the project itself was therefore clearly perverse. Equally, when
it was pointed out that the accounts of the Mumbai office showed that no
expenditure relating to the execution of the contract was incurred, the ITAT
rejected the argument stating that as the accounts are in the hands of the
assessee and the mere mode of maintaining accounts alone cannot determine the
character of permanent establishment. This was another perverse finding which
is set aside.

Equally, the
finding that the onus is on the assessee and not on the Tax Authorities to
first show that the project office at Mumbai is a permanent establishment was
also incorrect. The Supreme Court further observed that though it was pointed
out to the ITAT that there were only two persons working in the Mumbai office,
neither of whom was qualified to perform any core activity of the assessee, the
ITAT chose to ignore the same. That being the case, it was clear that no
permanent establishment had been set up within the meaning of Article 5(1) of
the DTAA as the Mumbai project office could not be said to be a fixed place of
business through which the core business of the assessee was wholly or partly
carried on. The Mumbai project office, on the facts of the present case, would
fall within Article 5(4)(e) of the DTAA, inasmuch as the office was solely an
auxiliary office meant to act as a liaison office between the assessee and
ONGC.

The appeal against
the impugned High Court judgment was therefore dismissed by the Supreme Court.

2. Shiv Raj Gupta vs. Commissioner of Income Tax,
Delhi-IV Civil Appeal No.
12044 of 2016 Date of order: 22^nd
July, 2020

Appeal u/s 260-A – Substantial questions of
law – It is only the substantial question of law that is framed that can be
answered and no other – If some other question is to be answered, the Court
must first give notice of the same to both sides, hear them, pronounce a reasoned
order and thereafter frame another substantial question of law, which it may
then answer

Reasonableness of the amount paid –
Commercial expediency has to be adjudged from the point of view of the assessee
and that the Income-tax Department cannot enter into the thicket of
reasonableness of amounts paid by the assessee

Non-compete fees – Payment under an
agreement not to compete (negative covenant agreement) was a capital receipt
not exigible to tax till A.Y. 2003-2004 – It was only vide the Finance
Act, 2002 with effect from 1^st April, 2003 that the said capital
receipt was now made taxable [see section 28(v-a)]

A Memorandum of
Understanding (MoU) dated 13^th April, 1994 was made between the
appellant Mr. Shiv Raj Gupta, who was the Chairman and Managing Director of M/s
Central Distillery and Breweries Ltd. (CDBL), which had a unit in Meerut
manufacturing beer and Indian-Made Foreign Liquor (IMFL) and three group
companies of M/s Shaw Wallace Company Group (SWC group). The appellant, his
wife, son, daughter-in-law and two daughters were the registered holders of
1,86,109 equity shares of Rs. 10 each constituting 57.29% of the paid-up equity
share capital of CDBL listed on the Bombay and Delhi Stock Exchanges.

The MoU referred to
a direction of the Supreme Court which was made by an order dated 11^th
March, 1994 that made it clear that the company’s manufacturing activity at the
Meerut plant was suspended until a secondary effluent treatment plant is
installed and made operative by the company. This led to the sale of this
controlling block of shares, which was sold at the price of Rs. 30 per share
(when the listed market price of the share was only Rs. 3 per share). It was
stated in the said MoU that the entire sale consideration of Rs. 55,83,270 had
since been paid by the SWC group to Mr. Gupta as a result of which he has
irrevocably handed over physical possession, management and control of the said
brewery and distillery of CDBL to a representative of the SWC group on 10^th
February, 1994.

By a Deed of
Covenant dated 13^th April, 1994, Mr. Gupta gave a restrictive
covenant to and in favour of the SWC group for not carrying on directly or
indirectly any manufacturing or marketing activities whatsoever relating to
IMFL or beer for a period of ten years from the date of the agreement for the
consideration of a non-competition fee to be paid to him by SWC.

But the A.O. held,
by an order dated 31^st March, 1998, that despite the fact that the
appellant owned a concern, namely, M/s Maltings Ltd., which also manufactured
IMFL, being a loss-making concern, no real competition could be envisaged
between a giant, namely, the SWC group and this loss-making dwarf, as a result of
which the huge amount paid under the Deed of Covenant could not be said to be
an amount paid in respect of a restrictive covenant as to non-competition. It
was further held that the son of the appellant was not paid any such
non-compete fee or amount despite the fact that he also resigned from his
position as Joint Managing Director. It was also held that this was a lump sum
payment with no reason as to why such a huge amount of Rs. 6.6 crores was being
paid. It was also found that there was no penalty clause to enforce the
performance of obligations under the aforesaid Deed of Covenant, as a result of
which, applying the judgment in McDowell & Co. Ltd. vs. CTO (1985) 3
SCC 230, the Deed of Covenant was held to be a colourable device to
evade tax payable u/s 28(ii)(a) of the Income-tax Act, 1961. As a result
thereof, this amount was then brought to tax under the aforesaid provision.

An appeal to the
Commissioner of Income Tax (Appeals) was dismissed. When it came before the
Appellate Tribunal, the Learned Accountant Member (A.M.) differed with the
learned Judicial Member (J.M.). The A.M. held that the two deeds would have to
be read separately and that Revenue cannot challenge the business perception of
the assessee. Further, it was held that there was no colourable device involved
and that, as a result, the non-compete fee payable under the Deed of Covenant
was not taxable u/s 28(ii)(a) or any other provision of the Act. The J.M., on
the other hand, substantially agreed with the A.O., as a result of which he
decided in favour of the Revenue.

A reference was
then made to a third member, who was also a Judicial Member. This Member
emphasised the fact that a share worth Rs. 3 was sold for Rs. 30 under the MoU
as a result of transfer of control of the CDBL. It cannot be said that these
shares have been undervalued, neither can it be said that there was any
collusion or other sham transaction, as a result of which the amount of Rs. 6.6
crores has escaped income tax. He pointed out that by a letter dated 2^nd
April, 1994, a ‘penalty clause’ was provided for, in that, out of the amount
received by the assessee, a sum of Rs. 3 crores was to be deposited with the
SWC group for two years under a public deposit scheme, it being made clear that
in case there is any breach of the terms of the MoU resulting in loss, the
amount of such loss will be deducted from this deposit. The result, therefore,
was that the appeal stood allowed by a majority of 2:1 in the Appellate
Tribunal.

The Revenue
preferred an appeal u/s 260-A to the High Court. In its grounds of appeal, the
Revenue framed the substantial questions of law that arose in the matter as
follows:

A) Whether the ITAT has correctly interpreted the
provisions of section 28(ii) of the Income-tax Act, 1961?

B) Whether the ITAT was correct in holding that
the receipt of Rs. 6.6 crores by the respondent / assessee as non-compete fee
was a capital receipt u/s 28(iv) of the Act and not a revenue receipt as
envisaged in section 28(ii)?

C) Whether the ITAT failed to distinguish between
the nature of capital and the nature of benefit in the commercial sense in
respect of the amount of Rs. 6.6 crores received in view of the restrictive
Deed of Covenant dated 13^th April, 1994?

D) Whether the Judicial Member of the ITAT was
correct in recording his difference of opinion that the receipt of Rs. 6.6
crores by the respondent / assessee was actually a colourable exercise to evade
tax and the same was held to be taxable u/s 28(ii)?

By the impugned
judgment of the Division Bench of the Delhi High Court dated 22^nd
December, 2014, the Division Bench framed the following substantial question of
law:

‘Whether, on the
facts and in the circumstances of the case, the amount of Rs. 6.6 crores
received by the assessee from SWC is on account of handing over management and
control of CDBL (which were earlier under the management and control of the
assessee) to SWC as terminal benefit and is taxable u/s 28(ii) or the same is
exempt as capital receipt being non-competition fee by executing Deed of
Covenant?’

After going through
the MoU and the Deed of Covenant, both dated 13^th April, 1994, and
extensively referring to the order of the A.O. dated 31^st March,
1998, the High Court agreed with the A.O. and the first J.M. of the Appellate
Tribunal, stating that the Deed of Covenant could not be read as a separate
document and was not in its real avatar a non-compete fee at all. However, in
its ultimate conclusion, disagreeing with the A.O. and the minority judgment of
the Tribunal, the High Court went on to state that the said sum of Rs. 6.6
crores could not be brought to tax u/s 28(ii)(a), but would have to be treated
as a taxable capital gain in the hands of the appellant, being part of the full
value of the sale consideration paid for transfer of shares.

On an appeal by the
appellant, the Supreme Court observed that the bone of contention was whether
the said Deed of Covenant could be said to contain a restrictive covenant as a
result of which payment was made to the appellant, or whether it was in fact
part of a sham transaction which, in the guise of being a separate Deed of
Covenant, was really in the nature of payment received by the appellant as
compensation for terminating his management of CDBL, in which case it would be
taxable u/s 28(ii)(a) of the Act.

The learned counsel
appearing on behalf of the appellant inter alia raised as a preliminary
submission the fact that u/s 260-A it is only the substantial question of law
that is framed that can be answered and no other. If some other question is to
be answered, the Court must first give notice of the same to both sides, hear
them, pronounce a reasoned order and thereafter frame another substantial
question of law, which it may then answer. This procedure had not been followed
in the present case as it was clear that the substantial question of law framed
did not contain within it the question as to whether the assessee could be
taxed outside the provisions of section 28(ii)(a). The entire judgment was,
therefore, vitiated and must be set aside on this ground alone.

After hearing both
the sides, the Supreme Court was of the view that the appeal had to succeed
first on the preliminary ground raised by the counsel for the appellant.

The Supreme Court
after noting the provisions of Section 260A observed that the said provision,
being modelled on a similar provision that is contained in section 100 of the
Code of Civil Procedure, makes it clear that the High Court’s jurisdiction
depends upon a substantial question of law being involved in the appeal before
it. First and foremost, it shall formulate that question and on the question so
formulated, the High Court may then pronounce judgment, either by answering the
question in the affirmative or negative or by stating that the case at hand
does not involve any such question. If the High Court wishes to hear the appeal
on any other substantial question of law not formulated by it, it may, for
reasons to be recorded, formulate and hear such questions if it is satisfied
that the case involves such question [Section 260-A(4)]. Under sub-section (6),
the High Court may also determine any issue which, though raised, has not been
determined by the Appellate Tribunal or has been wrongly determined by the
Appellate Tribunal by reason of a decision on a substantial question of law
raised.

The Court referred
to its judgments in Kshitish Chandra Purkait vs. Santosh Kumar Purkait
(1997) 5 SCC 438, Dnyanoba Bhaurao Shemade vs. Maroti Bhaurao Marnor (1999) 2
SCC 471 (see paragraph 10) and Biswanath Ghosh vs. Gobinda Ghosh
(2014) 11 SCC 605 (paragraph 16) in the context of the provisions of
section 100 of the Code and, noting its provisions, observed that the
substantial question of law that was raised by the High Court did not contain
any question as to whether the non-compete fee could be taxed under any
provision other than section 28(ii)(a). Without giving an opportunity to the
parties followed by reasons for framing any other substantial question of law
as to the taxability of such amount as a capital receipt in the hands of the
assessee, the High Court answered the substantial question of law treating Rs.
6.60 crores as consideration paid for sale of shares, rather than a payment u/s
28(ii)(a) of the Act.

According to the
Supreme Court, without any recorded reasons and without framing any substantial
question of law on whether the said amount could be taxed under any other
provision of the Act, the High Court had gone ahead and held that the amount of
Rs. 6.6 crores received by the assessee was part of the full value of sale
consideration paid for the transfer of shares – and not for handing over
management and control of CDBL, and was consequently not taxable u/s 28(ii)(a).
Nor was it exempt as a capital receipt being non-compete fee, as it was taxable
as a capital gain in the hands of the respondent-assessee as part of the full
value of sale consideration paid for transfer of shares. The Court held that
this finding was contrary to the provisions of section 260-A(4), requiring the
judgment to be set aside on this score.

The Supreme Court
thereafter also dealt with the merits of the findings given by the High Court.
In paragraph 22, the High Court had found as under:

‘22. …No doubt,
market price of each share was only Rs. 3 per share and the purchase price
under the MOU was Rs. 30, but the total consideration received was merely about
Rs. 56 lakhs. What was allegedly paid as non-compete fee was ten times more,
i.e., Rs. 6.60 crores. The figure per se does not appear to be a
realistic payment made on account of non-compete fee, de hors and
without reference to sale of shares, loss of management and control of CDBL.
The assessee had attributed an astronomical sum as payment toward non-compete
fee, unconnected with the sale of shares and hence not taxable. Noticeably, the
price received for sale of shares it is accepted was taxable as capital gain.
The contention that quoted price of each share was mere Rs. 3 only, viz., price
as declared of Rs. 30 is fallacious and off-beam. The argument of the assessee
suffers from a basic and fundamental flaw which is conspicuous and evident.’

The Supreme Court
held that the aforesaid finding was contrary to the settled law. A catena of
judgments has held that commercial expediency has to be adjudged from the point
of view of the assessee and that the Income-tax Department cannot enter into the
thicket of reasonableness of amounts paid by the assessee. The Court referred
to its judgments in CIT vs. Walchand & Co. (1967) 3 SCR 214, J.K.
Woollen Manufacturers vs. CIT (1969) 1 SCR 525, CIT vs. Panipat Woollen &
General Mills Co. Ltd. (1976) 2 SCC 5, Shahzada Nand & Sons vs. CIT (1977)
3 SCC 432, and S.A. Builders Ltd. vs. CIT (2007) 1 SCC 781.

It affirmed the
view taken by the Delhi High Court in CIT vs. Dalmia Cement (B) Ltd.
(2002) 254 ITR 377 (Del)] that once it is established that there was
nexus between the expenditure and the purpose of the business (which need not
necessarily be the business of the assessee itself), the Revenue cannot
justifiably claim to put itself in the armchair of the businessman or in the
position of the Board of Directors and assume the role of deciding how much is
reasonable expenditure having regard to the circumstances of the case. No
businessman can be compelled to maximise his profit. The Income Tax Authorities
must put themselves in the shoes of the assessee and see how a prudent
businessman would act. They must not look at the matter from their own
viewpoint but that of a prudent businessman. As already stated above, we have
to see the transfer of the borrowed funds to a sister concern from the point of
view of commercial expediency and not from the point of view whether the amount
was advanced for earning profits.

The Court noted
that the same principle had also been cited with approval by its judgment in Hero
Cycles (P) Ltd. vs. CIT (2015) 16 SCC 359.

According to the
Supreme Court, the High Court’s next finding in paragraph 56 was based on the
judgment in Vodafone International Holdings B.V. vs. Union of India (UOI)
and Ors., which was as follows:

‘56. In view of the
aforesaid discussion and our findings on the true and real nature of the
transaction camouflaged as “non-compete fee”, we have no hesitation and
reservation that the respondent-assessee had indulged in abusive tax
avoidance.’

To this, the
Supreme Court reiterated that the majority judgment of the Appellate Tribunal
had correctly found that:

(i) A share of the face value of Rs. 10 and market
value of Rs. 3 was sold for Rs. 30 as a result of control premium having to be
paid.

(ii) It is important to note that each member of the
family was paid for his / her shares in the company, the lion’s share being
paid to the assessee’s son and wife as they held the most number of shares
within the said family.

(iii) The non-compete fee of Rs. 6.6 crores was paid
only to the assessee. This was for the reason stated in the Deed of Covenant,
namely, that Mr. Shiv Raj Gupta had acquired considerable knowledge, skill,
expertise and specialisation in the liquor business. There is no doubt that on
facts he has been Chairman and Managing Director of CDBL for a period of about
35 years; that he also owned a concern, namely, M/s Maltings Ltd., which
manufactured and sold IMFL and beer and that he was the President of the
All-India Distilleries Association and the H.P. Distilleries Association.

(iv) It is further recorded in the judgment of the
A.M. that the amount of Rs. 6.6 crores was arrived at as a result of
negotiations between the SWC group and the appellant.

(v) That the restrictive covenant for a period of
ten years resulted in the payment of Rs. 66 lakhs per year so that the
appellant ‘…will not start or engage himself, directly or indirectly, or
provide any service, assistance or support of any nature, whatsoever, to or in
relation to the manufacturing, dealing and supplying or marketing of IMFL and /
or beer.’ Given the personal expertise of the assessee, the perception of the
SWC group was that he could either start a rival business or engage himself in
a rival business, which would include manufacturing and marketing of IMFL and
beer at which he was an old hand, having experience of 35 years.

(vi) As was correctly held by the
second J.M., it was also clear that the withholding of Rs. 3 crores out of Rs.
6.6 crores for a period of two years by way of a public deposit with the SWC
group for the purpose of deduction of any loss on account of any breach of the
MoU, was akin to a penalty clause, making it clear thereby that there was no
colourable device involved in having two separate agreements for two entirely
separate and distinct purposes.

According to the Supreme
Court, the reasons given by the A.O. and the minority judgment of the Appellate
Tribunal were all reasons which transgressed the lines drawn by the judgments
cited, which state that the Revenue has no business to second-guess commercial
or business expediency of what parties at arm’s length decide for each other.
For example, stating that there was no rationale behind the payment of Rs. 6.6
crores and that the assessee was not a probable or perceptible threat or
competitor to the SWC group, was the perception of the A.O., which could not
take the place of business reality from the point of view of the assessee. The
fact that M/s Maltings Ltd. had incurred a loss in the previous year was again
neither here nor there. It may in future be a direct threat to the SWC group
and may turn around and make profits in future years.

Besides, M/s
Maltings Ltd. was only one concern of the assessee – it was the assessee’s
expertise in this field on all counts that was the threat perception of the SWC
group which cannot be second-guessed by the Revenue. Equally, the fact that
there was no penalty clause for violation of the Deed of Covenant had been
found to be incorrect given the letter dated 2^nd April, 1994. The
fact that the respondent-assessee in his letter dated 26^th March,
1998 in reply to the show cause notice had stated that the SWC group had gained
substantial commercial advantage by the purchase of shares in CDBL as the
turnover increased from Rs. 9.79 crores in the accounting period ending 31^st
March, 1991 to Rs. 45.17 crores in the accounting period ending 31^stMarch,
1997, was again neither here nor there. As a matter of fact, the SWC group, due
to its own advertisement and marketing efforts, may well have reached this
figure after a period of six years (the date 30^th September, 1995
was wrongly recorded by the High Court in paragraph 19 – the correct date as per the letter dated 26^th
March, 1998 was 31^st March, 1991).

Lastly, the Supreme
Court referred to its judgment in Guffic Chem (P) Ltd. vs. CIT (2011) 4
SCC 254 wherein it was held that a payment under an agreement not to
compete (negative covenant agreement) was a capital receipt not exigible to tax
till A.Y. 2003-2004. It was only vide the Finance Act, 2002 with effect from 1^st
April, 2003 that the said capital receipt was made taxable [see section
28(v-a)]. The Finance Act, 2002 itself indicated that during the relevant
assessment year compensation received by the assessee under non-competition
agreement was a capital receipt, not taxable under the 1961 Act. It became
taxable only with effect from 1^st April, 2003.

The Supreme Court,
following its aforesaid decision, therefore allowed the appeal and set aside
the impugned judgment of the High Court.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

3 Pr. Commissioner of Income-tax vs. Petrofils Co-operative Limited (2021) 431 ITR 501 (SC)

Depreciation – Unabsorbed depreciation – Effect of amendment of section 32(2) by Finance Act, 2001 – Any unabsorbed depreciation available to an assessee on 1st April, 2002 (assessment year 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by the Finance Act, 2001

Prior to the Finance (No. 2) Act of 1996, the unabsorbed depreciation for any year was allowed to be carried forward indefinitely and by a deeming fiction became an allowance of the immediately succeeding year. The Finance (No. 2) Act of 1996 restricted the carrying forward of unabsorbed depreciation and set-off to a limit of eight years from the assessment year 1997-98. Thus, the brought-forward depreciation for A.Y. 1997-98 was eligible to be carried forward and set off against income till A.Y. 2005-06. Section 32(2) of the Act was amended by the Finance Act, 2001 to provide that the depreciation allowance or the part of the allowance to which effect has not been given shall be added to the amount of depreciation for the following previous year and deemed to be part of the allowance of that previous year and so on from the succeeding year.

A question arose before the Gujarat High Court in an appeal filed by the Revenue as to whether the ITAT was right in law in directing the Assessing Officer (A.O.) to allow carry-forward of depreciation which had been allowed to the assessee because unabsorbed depreciation up to 1997-98 would become depreciation of the current year and to be treated in accordance with law.

The High Court dismissed the appeal following its judgment in the case of General Motors India P. Ltd. vs. Deputy Commissioner of Income-tax reported in (2013) 354 ITR 244 (Guj) wherein it was held that any unabsorbed depreciation available to an assessee on the 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by the Finance Act, 2001.

On an SLP, the Supreme Court held that in view of the judgments on the interpretation of section 32(2) delivered by the Delhi, Gujarat, Madras and Bombay High Courts, which were upheld by it by special leave petitions being dismissed, no question of law arose for determination in these special leave petitions.

4. The Mavilayi Service Co-operative Bank Ltd. vs. CIT (2021) 431 ITR 1 (SC)

Co-operative society – Special deduction – A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication by adding the word ‘agriculture’ into section 80P(2)(a)(i) when it is not there – Section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative societies engaged in banking business, i.e., engaged in lending money to members of the public, which have a licence in this behalf from the RBI

The appeals were filed before the Supreme Court by co-operative societies who had been registered as ‘primary agricultural credit societies’, together with one ‘multi-State co-operative society’, and raised questions as to deductions that could be claimed u/s 80P(2)(a)(i) and, in particular, whether these assessees were entitled to such deductions after the introduction of section 80P(4) by section 19 of the Finance Act, 2006.

All these assessees, who were stated to be providing credit facilities to their members for agricultural and allied purposes, had been classified as primary agricultural credit societies by the Registrar of Co-operative Societies under the Kerala Co-operative Societies Act, 1969 (‘Kerala Act’), and were claiming a deduction u/s 80P(2)(a)(i) which had been granted to them up to A.Y. 2007-08.

However, with the introduction of section 80P(4), the scenario changed. In respect of these assessees, the A.O. denied their claims for deduction, relying upon section 80P(4) holding that as per the Audited Receipt and Disbursal Statement furnished by the assessees in these cases, agricultural credits that were given by the assessee-societies to their members were found to be negligible – the credits given to such members being for purposes other than agricultural credit.

The decisions of the A.O.s were challenged up to the Kerala High Court. Before the High Court, the assessees relied upon a decision of a Division Bench of the same Court in Chirakkal Service Co-operative Bank Ltd. vs. CIT (2016) 384 ITR 490 (Ker). The High Court, after considering section 80P(4), various provisions of the Kerala Act, the Banking Regulation Act, 1949, the bye-laws of the societies, etc., held that once a co-operative society is classified by the Registrar of Co-operative Societies under the Kerala Act as being a primary agricultural credit society, the authorities under the IT Act cannot probe into whether agricultural credits were in fact being given by such societies to their members, thereby going behind the certificate so granted. This being the case, the High Court in Chirakkal (Supra) held that since all the assessees were registered as primary agricultural credit societies, they would be entitled to the deductions u/s 80P(2)(a)(i) read with section 80P(4).

However, the Department contended that the judgment in Chirakkal (Supra) was rendered per incuriam by not having noticed the earlier decision of another Division Bench of the Kerala High Court in Perinthalmanna Service Co-operative Bank Ltd. vs. ITO and Anr. (2014) 363 ITR 268 (Ker) where, in an appeal challenging orders u/s 263, it was held that the revisional authority was justified in saying that an inquiry has to be conducted into the factual situation as to whether a co-operative bank is in fact conducting business as a co-operative bank and not as a primary agricultural credit society, and depending upon whether this was so for the relevant assessment year, the A.O. would then allow or disallow deductions claimed u/s 80P, notwithstanding that mere nomenclature or registration certificates issued under the Kerala Act would show that the assessees are primary agricultural credit societies.

These divergent decisions led to a Reference order dated 9th July, 2018 to a Full Bench of the Kerala High Court.

The Full Bench, by the impugned judgment dated 19th March, 2019, referred to section 80P, various provisions of the Banking Regulation Act and the Kerala Act and held that the main object of a primary agricultural credit society which exists at the time of its registration must continue at all times, including for the assessment year in question. Notwithstanding the fact that the primary agricultural credit society is registered as such under the Kerala Act, yet, the A.O. must be satisfied that in the particular assessment year its main object is, in fact, being carried out. If it is found that as a matter of fact agricultural credits amount to a negligible amount, then it would be open for the A.O., applying the provisions of section 80P(4), to state that as the co-operative society in question (although registered as a primary agricultural credit society) is not, in fact, functioning as such, the deduction claimed u/s 80P(2)(a)(i) must be refused. This conclusion was reached after referring to several judgments but relying heavily upon the judgment of the Supreme Court in Citizen Co-operative Society Ltd. vs. Asst. CIT, Hyderabad (2017) 9 SCC 364.

Being aggrieved by the Full Bench judgment, the appellant assessees were before the Supreme Court.

The Supreme Court noted the relevant provisions of various applicable Acts and also the bye-laws of some of the appellants that were available on record and noted that though the main object of the primary agricultural society in question was to provide financial assistance in the form of loans to its members for agricultural and related purposes, yet, some of the objects went well beyond, and included performing of banking operations ‘as per Rules prevailing from time to time’, opening of medical stores, running of showrooms and providing loans to members for purposes other than agriculture.

The Supreme Court made the following observations for the proper interpretation of section 80P:

First, the marginal note to section 80P which reads ‘Deduction in respect of income of co-operative societies’ is important, in that it indicates the general ‘drift’ of the provision.

Second, for purposes of eligibility for deduction, the assessee must be a ‘co-operative society’. A co-operative society is defined in section 2(19) as being a co-operative society registered either under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies. This, therefore, refers only to the factum of a co-operative society being registered under the 1912 Act or under the State law. For purposes of eligibility, it is unnecessary to probe any further as to whether the co-operative society is classified as X or Y.

Third, the gross total income must include income that is referred to in sub-section (2).

Fourth, sub-clause (2)(a)(i) then speaks of a co-operative society being ‘engaged in’ carrying on the business of banking or providing credit facilities to its members. What is important qua sub-clause (2)(a)(i) is the fact that the co-operative society must be ‘engaged in’ providing credit facilities to its members.

Fifth, as has been held in Udaipur Sahkari Upbhokta Thok Bhandar Ltd. vs. CIT (2009) 8 SCC 393 at paragraph 23, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction u/s 80P. Therefore, the A.O. under the IT Act cannot be said to be going behind any registration certificate when he engages in a fact-finding inquiry as to whether the co-operative society concerned is in fact providing credit facilities to its members. Such fact-finding inquiry [see section 133(6)] would entail examining all relevant facts of the co-operative society in question to find out whether it is, as a matter of fact, providing credit facilities to its members, whatever be its nomenclature. Once this task is fulfilled by the assessee, by placing reliance on such facts as would show that it is engaged in providing credit facilities to its members, the A.O. must then scrutinise the same and arrive at a conclusion as to whether this is, in fact, so.

Sixth, in Kerala State Co-operative Marketing Federation Ltd. and Ors. (Supra) it has been held that the expression ‘providing credit facilities to its members’ does not necessarily mean agricultural credit alone. Section 80P being a beneficial provision must be construed with the object of furthering the co-operative movement generally, and section 80P(2)(a)(i) must be contrasted with section 80P(2)(a)(iii) to (v) which expressly speaks of agriculture. Further, it must also be contrasted with sub-clause (b) which speaks only of a ‘primary’ society engaged in supplying milk, etc., thereby defining which kind of society is entitled to deduction, unlike the provisions contained in section 80P(2)(a)(i). Further, the proviso to section 80P(2), when it speaks of sub-clauses (vi) and (vii), further restricts the type of society which can avail of the deductions contained in those two sub-clauses, unlike any such restrictive language in section 80P(2)(a)(i). Once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members also does not disentitle the society in question from availing of the deduction. The distinction between eligibility for deduction and attributability of the amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted.

Seventh, section 80P(1)(c) also makes it clear that section 80P is concerned with the co-operative movement generally and, therefore, the moment a co-operative society is registered under the 1912 Act, or a State Act, and is engaged in activities which may be termed as residuary activities, i.e., activities not covered by sub-clauses (a) and (b), either independently or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c). The reach of sub-clause (c) is extremely wide and would include co-operative societies engaged in any activity, completely independent of the activities mentioned in sub-clauses (a) and (b), subject to the cap of Rs. 50,000 to be found in sub-clause (c)(ii). This puts an end to any argument that in order to avail of a benefit u/s 80P a co-operative society once classified as a particular type of society must continue to fulfil those objects alone. If such objects are only partially carried out and the society conducts any other legitimate type of activity, such co-operative society would only be entitled to a maximum deduction of Rs. 50,000 under sub-clause (c).

Eighth, sub-clause (d) also points in the same direction, in that interest or dividend income derived by a co-operative society from investments with other co-operative societies are also entitled to deduct the whole of such income, the object of the provision being furtherance of the co-operative movement as a whole.

Coming to the provisions of section 80P(4), the Supreme Court referred to the speech of the Finance Minister on 28th February, 2006, the Circular dated 28th December, 2006 containing explanatory notes on provisions contained in the Finance Act, 2006 and a clarification by the CBDT, in a letter dated 9th May, 2008, and observed that the limited object of section 80P(4) was to exclude co-operative banks that function at par with other commercial banks, i.e., which lend money to members of the public. Thus, from section 3 read with section 56 of the Banking Regulation Act, 1949, it would be clear that a primary co-operative bank cannot be a primary agricultural credit society, as a co-operative bank must be engaged in the business of banking as defined by section 5(b) of the Banking Regulation Act, 1949, which means the accepting, for the purpose of lending or investment, of deposits of money from the public. Likewise, u/s 22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by the RBI. As opposed to this, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities.

The Supreme Court, therefore, concluded that the ratio decidendi of Citizen Co-operative Society Ltd. (Supra), must be given effect to. Section 80P, being a benevolent provision enacted by Parliament to encourage and promote the co-operative sector in general, must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as was sought to be done by the Revenue in the present case by adding the word ‘agriculture’ into section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative societies engaged in banking business, i.e., engaged in lending money to members of the public, which have a licence in this behalf from the RBI.

According to the Supreme Court, judged by this touchstone, it was clear that the impugned Full Bench judgment was wholly incorrect in its reading of Citizen Co-operative Society Ltd. (Supra). Clearly, therefore, once section 80P(4) was out of harm’s way, all the assessees in the present case were entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Further, in case it is found that there were instances of loans being given to non-members, profits attributable to such loans obviously could not be deducted.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

9. Tamil Nadu State Marketing Corporation Ltd. vs. Union of India [2020] 429 ITR 327 (SC)

Validity of provision – When the vires of any provision of any Act is challenged, it is the High Court alone which can decide the same in exercise of powers under Article 226 of the Constitution of India – Once the show cause notice is issued by the Authority calling upon the person to show cause why an action should not be taken under a particular provision of the Act, it can be said that the cause of action has arisen for that person to challenge the vires of that provision of the Act and the person need not wait till the adjudication by the adjudicating authority

A show cause notice was issued by the A.O. for the Assessment Year 2017-18 stating that the VAT expense levied on the appellant was an exclusive levy by the State Government and therefore was squarely covered by section 40(a)(iib) of the Income-tax Act, and therefore VAT expenditure was not allowable as deduction in accordance with section 40(a)(iib) while computing the income of the appellant. The A.O. finalised the assessment and passed the assessment order for the A.Y. 2017-18 vide order dated 30th December, 2019.

The High Court, vide judgment and order dated 26th February, 2020 in Writ Petition No. 538 of 2020, set aside the said assessment order insofar as disallowance in terms of section 40(a)(iib) was concerned, on the ground of violation of principles of natural justice.

During the pendency of the matter before the A.O., the appellant filed another writ petition before the High Court challenging the validity of section 40(a)(iib). It was the case on behalf of the appellant that the amount which was deductible in computing the income chargeable in terms of the Income-tax Act was not being allowed under the garb of the aforesaid provision. According to the appellant, the said provision was discriminatory and violative of Article 14 of the Constitution of India, inasmuch as many Central Government undertakings had not been subjected to any such computation and were enjoying exemption.

The High Court dismissed the said writ petition without deciding the validity of section 40(a)(iib) by observing that the issue of raising a challenge to the vires of the provision need not be entertained at this stage as the matter was still sub judice before the IT Authority even though it was open to the aggrieved party to question the same at the appropriate stage. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the High Court in dismissing the said writ petition without deciding the vires of section 40(a)(iib) on merits, the appellant preferred an appeal before the Supreme Court.

According to the Supreme Court, when the vires of section 40(a)(iib) was challenged, it was the High Court alone which could decide the same in exercise of powers under Article 226 of the Constitution of India. The Supreme Court held that the High Court ought to have decided the issue on merits, irrespective of the fact whether the matter was sub judice before the IT Authority. The vires of a relevant provision goes to the root of the matter. Once the show cause notice was issued by the A.O. calling upon the appellant to show cause why the VAT expenditure was not allowable as deduction in accordance with section 40(a)(iib) while computing the income of the appellant, it could be said that the cause of action had arisen for the appellant to challenge the vires of section 40(a)(iib) and the appellant need not wait till the assessment proceedings before the IT Authority were finalised.

According to the Supreme Court, the stage at which the appellant approached the High Court and challenged the vires of section 40(a)(iib) could be said to be the appropriate moment and the High Court ought to have decided the issue at that stage. Therefore, the Supreme Court remanded the matter to the High Court to decide the writ petition with respect to the challenge to the vires of section 40(a)(iib) on merits.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

1. Travancore Education Society vs. CIT [2021[ 431 ITR 50 (SC)

Charitable purposes – The object of a trust which admittedly collects capitation fees for admission in addition to regular fees cannot be said to be charitable and is not entitled to be registered u/s 12AA

The assessee was a society registered under the Travancore-Cochin Literary, Science and Charitable Trust Act, 1955. It had established an engineering college named ‘Travancore Engineering College’. During a search operation in the office of the assessee, several incriminating materials were found which disclosed the receipt of capitation fees for admission of students. It was collected by the trust in addition to the prescribed fees. The fact that capitation fee was being collected was admitted by the treasurer of the trust, one Shajahan, and the secretary, Sainulabdeen, in the statement given by them. On these facts, the Commissioner rejected the application for registration u/s 12AA. According to the Commissioner, the object of the trust was not charitable. The Tribunal dismissed the appeal of the assessee.

On appeal, the High Court agreed with the Tribunal that on the materials it was evident that the trust was not carrying out any charitable activities entitling it for registration u/s 12AA.

On further appeal, the Supreme Court dismissed the appeal holding that there was no ground to interfere with the order passed by the High Court.

2. PCIT vs. Majestic Developers [2021] 431 ITR 49 (SC)

Special deduction in respect of housing project – Condition precedent – Proof of completion of project within specified time must be satisfied in terms of local State Act

The assessee was involved in the business of development and construction. For the assessment year 2008-09, it filed its return of income on 29th September, 2008 declaring an income of Rs. 2,53,460 by claiming deduction u/s 80-IB. This return of income was taken up for scrutiny and was accepted. Subsequently, in exercise of the power vested u/s 147, reassessment proceedings were commenced for withdrawing the deduction allowed u/s 80-IB and reassessment proceedings came to be concluded by withdrawing the said deduction.

The claim of the assessee for deduction u/s 80-IB, which was in respect of a residential project ‘Majestic Residency’ had been disallowed by the A.O. on the ground that the assessee had failed to produce the completion certification.

The first appellate authority, the Commissioner of Income-tax (Appeals), considered the assessee’s claim in the background of the provisions, viz., u/s 80-IB(10) and clause (ii) of the Explanation to clause (a), and allowed the claim since the documents and explanation proved or established that the assessee had completed the project within five years from the date of commencement.

The Revenue, being aggrieved by the said order, preferred a second appeal before the Income-tax Appellate Tribunal which came to be dismissed by arriving at a conclusion that in a similar / identical fact situation, the issue had been dealt with by the jurisdictional High Court in CIT vs. Ittina Properties Pvt. Ltd. [2014] 49 taxmann.com 201 (Karn.).

Revenue filed an appeal contending that the authorities erred in arriving at the conclusion that the assessee was entitled to deduction u/s 80-IB(10) by relying upon the decision in Ittina Properties Pvt. Ltd. (Supra) which had not reached finality.

The High Court dismissed the appeal, holding that the completion certificate which is referred to in section 310 of the Karnataka Municipal Corporation Act, 1976 (KMC Act) is the completion certificate which is required to be issued by the architect and / or engineering supervisor, as the case may be, of the factum of completion of the building or project to the Commissioner. It is only after the completion certificate is furnished and inspection conducted by the Commissioner that the occupancy certificate would be issued by the Commissioner of the Bengaluru Mahanagara Palike. According to the High Court, the contention of the Revenue that the completion certificate was required to be issued by the local authority as prescribed under clause (ii) of the Explanation to clause (a) of sub-section (10) of section 80-IB could not therefore be accepted.

The Supreme Court dismissed the appeal of the Revenue opining that the judgment of the High Court did not warrant any interference, clarifying that the observations as to the scope of section 310(2) of the KMC Act made in the impugned judgment were qua the State of Karnataka given the particular local Act in that case.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

Date of order: 9th September, 2021

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

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

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

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

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

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

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

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

Glimpses of Supreme Court Rulings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

Glimpses of Supreme Court Rulings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

Glimpses of Supreme Court Rulings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

Glimpses of Supreme Court Rulings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

—
Swami Vivekananda

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

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

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

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

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

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

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

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

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

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

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

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

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

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

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

The Revenue, therefore, appealed against that judgment.

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

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

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

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

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

————– ——————

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Name of the Investor

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

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

Sangam
Distributors Pvt. Ltd.

Rs.
20,00,000

Rs.
10,00,000

Fountain
Commerce Pvt. Ltd.

Rs.
25,00,000

NIL

Panorama
Commercial Pvt. Ltd.

NIL

Rs.
25,00,000

Sanskar
Distributors Pvt. Ltd.

Rs.
10,00,000

Rs.
20,00,000

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

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

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

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

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

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

Sl. No.

Name of the Allottees Companies

Amount of Investment

Amar Commercial Pvt. Ltd.

R 1,40,00,000

Fountain Commerce Pvt. Ltd.

R 25,00,000

Ganga Marketing Pvt. Ltd.

R 20,00,000

Gurukul Vinayak Put. Ltd.

R 80,00,000

Heaven Mercantile Pvt. Ltd.

R 1,00,00,000

Neelkamal Trade Link Pvt. Ltd.

R 1,50,00,000

Red Hot Mercantile Pvt. Ltd.

R 80,00,000

Sanskar Distributors Pvt. Ltd.

R 10,00,000

Sangam Distributors Pvt. Ltd.

R 20,00,000

Total

R 6,25,00,000

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

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

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

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

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

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

FROM
UNPUBLISHED ACCOUNTS

Extracts from
Auditor’s Report

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

Place: Bengaluru For
X&X LLP

Date: April 13, 2022 Chartered
Accountants

(FRN:
X)

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

_________________________

[A
BCAJ Spoof by Vinayak Pai V]

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The civil appeal was dismissed accordingly.

BCAJ Admin

Glimpses of Supreme Court Rulings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

Glimpses of Supreme Court Rulings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Supreme Court therefore dismissed the appeal.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Notes

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

Glimpses of Supreme Court Rulings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The aggrieved Assessees therefore approached the Supreme Court.

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

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

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

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

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

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

Base fare for
Singapore – Delhi (set by IATA)

Net fare (set by the
Airline)

Actual fare (set by
the travel agent)

Standard commission
(7 per cent of the base fare)

Supplementary
Commission (actual fare – net fare)

Rs. 1 lakh

Rs. 60,000

Rs. 80,000

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

Rs. 80,000 –

Rs. 60,000 =

Rs. 20,000

Ceiling price

Income of the assesee

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

Income of the travel
agent

Additional income of
the travel agent

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BCAJ Admin

Glimpses of Supreme Court Rulings

1 PCIT vs. Matrix Clothing Pvt Ltd

(2022) 448 ITR 732,737 (SC)

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

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

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

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

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

2 PCIT vs. Tata Sons Ltd

(2022) 449 ITR 166 (SC)

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

On 6th March, 2009, the AO issued a notice under section 148 of the Act seeking to re-open the assessment for A.Y. 2004-05. The Respondent contended that the reopening notice was issued much before the reasons were recorded for reopening the assessment, thus the reopening notice was without jurisdiction. However, the AO did not accept the Respondent’s contention and passed an order of assessment under section 143(3) r. w. s. 148 of the Act.

In appeal, the CIT (A) held that the reopening notice had been issued without having recorded the reasons which led the AO to form a reasonable belief that income chargeable to tax escaped assessment. He noted that reasons were recorded on 19th March, 2009 while the impugned notice issued is dated 6th March, 2009. In the above facts, the CIT (A) held the entire proceeding of reopening to assessment is vitiated as notice under section 148 of the Act is bad in law.

Being aggrieved, the Revenue filed Appeal to the Tribunal. The Tribunal specifically asked the Revenue to produce the assessment record so as to substantiate its case that impugned notice under section 148 of the Act was issued only after recording the reasons for reopening the assessment. The Revenue produced the record of assessment for A.Y. 2004-05 before the Tribunal. The Tribunal from the entries made in the assessment record produced, found an entry as regards issue of notice under section 148 dated 6th March, 2009. However, no entries prior thereto i.e. 6th March, 2009 were produced before the Tribunal, so as to establish that the reasons were recorded prior to the issue of notice dated 6th March, 2009 under section 148 of the Act. Thus, the Tribunal concluded that prior to 6th March, 2009 there was nothing in the record which would indicate that any reasons were recorded prior to the issue of notice. Therefore, in the absence of the Revenue being able to show that the reasons were recorded prior to 6th March, 2009, the Tribunal held that reopening notice was without jurisdiction.

The High Court noted that both the CIT (A) and the Tribunal had concurrently come to a finding of fact that no reasons were recorded by the AO prior to issuing the reopening notice dated 6th March, 2009. Nothing had been brought on record to suggest that the above finding of fact was perverse. Thus, the appeal did not give rise to any substantial question of law and was dismissed.

The Supreme Court dismissed the Special Leave Petition of the Revenue observing that it appeared that the reasons to reopen the assessment were recorded after issuance of notice of the reassessment notice and, therefore, it could be seen that when the notice for reassessment was issued, there was no subjective satisfaction. According to the Supreme Court, the High Court had not committed any error in setting aside the reassessment proceedings.

3 SRC Aviation Pvt Ltd vs.

ACIT (2022) 449 ITR 169 (SC)

Business Expenditure – Finding that bonus was paid in lieu of the dividend to avoid payment of dividend distribution tax – Not allowable under section 36(1)(ii) of Act

The facts in brief are that the assessee, a private limited company, of which, Arvind Chadha and Anoop Chadha are two shareholders and directors holding 50 per cent equity shares each since inception of the company.

In A.Y. 2011-2012, the company has paid bonus of Rs. 1 crore each to both the directors namely Arvind Chadha and Anoop Chadha. Similarly, in the A,Y. 2014-2015 the company paid a bonus of Rs. 1.5 crore each to both the Directors.

The AO disallowed the same relying upon section 36 (1)(ii) of the Act. The AO was inter alia of the view that bonus was paid to avoid payment of dividend distribution tax.

The CIT (A), in the appeal filed by the Assessee, vide orders dated 24th March, 2014 and 29th November, 2016 confirmed the disallowance and took a view that had the impugned bonus not been paid to these two directors, the amount would have been paid to them as dividend.

The order of the CIT (A) was challenged before the ITAT. The Tribunal also agreed with the AO and CIT (A) and upheld the order of AO and CIT(A).

Aggrieved by the order of the ITAT, the assessee challenged the order before the High Court Court.

Before the High Court, the appellant submitted that the appellant company had been paying bonus to the above working directors apart from the directors’ remuneration and the same was being allowed as deductible business expenditure and no disallowance was ever made in the past. The remuneration including bonus was paid on the basis of Board resolution for the services rendered by the aforesaid two directors. Further, the directors had declared the bonus as part of the ‘salary’ under section 15 of the Act in their returns of income and the same were accepted and assessed as such in their assessments.

The High Court noted that there were only two directors in the company. The entire amount had been paid to both of them. It was not the case of the Appellant that there had been any term of employment nor was there any case that any special services had been rendered by these two directors.

The High Court noted that the AO and CIT (A) had given a concurrent finding that the assessee had paid the bonus in lieu of the dividend and therefore, the above sum was disallowed under section 36(1)(ii) of Act. The ITAT also after considering the findings of the AO and the CIT (A) had inter alia held that the payment of bonus or commission was not allowable as deduction under section 36(1)(ii) of the Act in the hands of the assessee company. The High Court dismissed the appeals in the absence of any substantial question of law.

The Supreme Court dismissed the Special Leave Petitions observing that there was a concurrent finding of fact by the AO, CIT (Appeal) and Income Tax Appellate Tribunal, Delhi which had been duly affirmed by the High Court, disallowing the payment of bonus to the two Directors of the petitioner-company. According to the Supreme Court, no case to interfere with the impugned Order passed by the High Court of Delhi was made out.

4 ACIT vs. CEAT Ltd

(2022) 449 ITR 171 (SC)

Reassessment – Assessment sought to be re-opened beyond four years – Conditions precedent for re-opening of the assessment beyond four years were not satisfied – No allegations of suppression of material fact – Re- assessment was on change of opinion – Notice rightly quashed

Petitioner challenged the notice dated 27th March, 2019 issued under section 148 of the Income Tax Act, 1961 (the Act) for A.Y. 2012-13 and the order dated 31st October, 2019 rejecting petitioner’s objections before the High Court.

The High Court observed that since the notice issued was after expiry of four years from the end of the relevant assessment year and assessment under section 143(3) of the Act was completed, proviso to Section 147 of the Act would apply. Therefore, the Respondent has to first show that there was a failure on the part of petitioner to disclose material facts required for assessment.

The High Court after considering the reasons recorded for reopening of the assessment was of the view that the Respondent had failed to show which facts, material or otherwise has not been disclosed. Further, the reasons indicated a change of opinion which was impermissible in law. According to the High Court, the entire basis for re-opening was due to the mistake of the AO that resulted in under-assessment.

The High Court observed that the Hon’ble Apex Court in Indian & Eastern Newspaper Society vs. Commissioner of Income-tax [1979] 119 ITR 996 (SC) has held that an error discovered on a reconsideration of the same material (and no more) does not give power to the AO to re-open the assessment.

This view had been followed by a full bench of the Karnataka High Court in Dell India (P) Ltd vs. JCIT, LTU, Bangalore (2021) 432 ITR 212 (Karn).

The High Court quashed the notice issued under section 148 of the Act and allowed the writ petition.

The Supreme Court noted that it was not in dispute that the assessment was sought to be re-opened beyond four years. Therefore, all the conditions under section 148 of the Income-tax Act for re-opening the assessment beyond four years were required to be satisfied. The Supreme Court, after going through the reasons recorded for re-opening was of the opinion that the conditions precedent for re-opening of the assessment beyond four years were not satisfied. The re-assessment was on change of opinion. There were no allegations of suppression of material fact. Under the circumstances, no error had been committed by the High Court in setting aside the re-opening notice under section 148 of the Income-tax Act. The Supreme Court was in complete agreement with the view taken by the High Court. The Special Leave Petition was therefore dismissed.

5 CIT vsJai Prakash Associates Ltd.

(2022) 449 ITR 183 (SC)

Deduction of tax at source – TDS on non-convertible debentures and FDR below Rs.5,000 – No TDS is leviable – Once, there is no liability to deduct TDS, there is no question of charging any interest

The question that arose for consideration in an appeal filed before the Tribunal was – Whether charging of interest under section 201(1A) becomes time barred when action under section 201(1) is time barred despite the section not providing for limitation?

The High Court remanded the matter to the Tribunal to reconsider the question in light of decision of the Allahabad High Court in Mass Awash Pvt Ltd vs. CIT (IT) (2017) 397 ITR 305 (All). The High Court in that case held that a power conferred without limitation has to be exercised within a reasonable time but what is reasonable time would depend upon facts of each case.

The Supreme Court, however, noted that the main issue was with respect to the chargeability of TDS on non-convertible debentures and FDR below Rs.5,000/-.

The Supreme Court after going through the judgment and orders passed by the Tribunal as well as the High Court, was of the opinion that no error has been committed by the Tribunal and/or the High Court on the chargeability of TDS amount on non-convertible debentures and fixed deposit of the value less than Rs.5,000. Both, the Tribunal as well as the High Court had concurrently found that, on non-convertible debentures and fixed deposit of the value less than Rs.5,000/-, there shall not be any TDS applicable. The Supreme Court was in complete agreement with the view taken by the Tribunal as well as the High Court. Once, there is no liability to deduct TDS on non- convertible debentures and fixed deposit of the value less than Rs. 5,000/-, there was no question of charging any interest.

However, at the same time the issue whether the levy of the interest was time barred considering section 201(1)/201(1A) of the Income-tax Act, 1961 not having been dealt with and considered in High Court, the Supreme Court kept the question of law on the aforesaid open.

The Supreme Court dismissed the Special Leave Petition of the Revenue.

6 Pioneer Overseas Corporation USA (India Branch) vs. CIT (IT) (2022) 449 ITR 186 (SC)

Interest – Waiver – Merely raising the dispute before any authority could not be a ground not to levy the interest and/or waiver of interest under section 220(2A) of the Act

The assessee is the branch office of Pioneer Overseas Corporation, United States of America (“POC US?). The assessee is engaged in Contract Research Activities and cultivation of parent seeds. The assessee has been regularly filing its returns of income. Since the A.Y. 1993- 94, it has been claiming exemption by treating its entire income as agricultural income in terms of Section 10(1) r.w.s. 2(1A) of the Act. This claim was accepted by the Department for the said assessment year as for the succeeding A.Ys. 1994-95, 1995-96 and 1996-97.

While concluding the assessment for the A.Y. 1997-98 and onwards, the AO treated the entire income of the Assessee as “business income?. The AO attributed the deemed income from research activity holding the assessee to be a Permanent Establishment (“PE?) of POC US carrying on research activity in India.

The appeal filed by the assessee against the aforementioned assessment order was partly allowed by the CIT (A) by deleting 50 per cent of the addition made by the AO on account of estimated attribution of income holding inter alia that only that much profit could be attributed to the PE which was derived from the assets and activities of the PE in India.

In the further appeal filed by the assessee, the ITAT for the A.Ys, 1997-98 to 2001-02 held by its orders dated 30th November, 2009 and 24th December, 2009 that only 10 per cent of income was, therefore, to be treated as agricultural income and the balance was to be taxed as “business income?. On the issue of attribution of income on account of research activity carried out by the assessee, the ITAT remanded the matter to the AO for attribution of profits based on the transfer pricing method employed by the AO in subsequent A.Ys. 2002-03 to 2006-07.

In the remand proceedings, the AO attributed reimbursed cost plus markup of 17 per cent as appropriate arm’s length price for the research services provided by the assessee to POC US for the A.Ys. 1997-98 to 2001-02.

In the year 2005 POC US invoked the Mutual Agreement Procedure (“MAP?) under Article 27 of the India-US Double Taxation Avoidance Agreement (“DTAA?) and sought resolution of the tax matters pertaining to the assessee. Consequent upon negotiations between the Competent Authorities of the two countries, an agreement was concluded with respect to allocation of taxing rights qua the income taxable in India in the hands of the assessee branch (PE) and setting-off of the taxes paid in India by the assessee against the taxes payable in the US by POC US. On this basis, the assessment for A.Ys. 1997-98 to 2006-07 were finalized and taxes along with interest were paid by the assessee under section 220 of the Act.

By a letter dated 10th August, 2011, the MAP ruling was finalized by the US authorities by providing tax credit in the US to the Petitioner for the tax assessed in India on 90 per cent of income held to be business income. The relief was granted on double taxation in the US tax years corresponding to the Indian assessment years under consideration.

On 26th December, 2011, the Petitioner filed an application before the CIT under section 220(2A) of the Act for waiver of interest levied under section 220(2) of the Act. This was followed by a letter dated 27th April, 2012 wherein the Petitioner reiterated its request.

By the impugned order dated 6th May, 2016, the CIT dismissed the aforementioned application on the ground that no genuine hardship had been caused to the Petitioner.

The High Court, in a writ petition filed by the assessee held that no error was committed by the CIT in rejecting the assessee’s request for waiver of interest under section 220(2) of the Act. Under Section 220(2A) of the Act, the three conditions that are required to be satisfied are (i) payment of the amount towards interest under section 220(2A) of the Act should cause the Assessee “genuine hardship?; (ii) default in the payment of the amount should be due to circumstances beyond the control of the Assessee; and (iii) the Assessee should have cooperated in the proceedings for recovery of the amount.

It was urged before the Court that interest under section 220(2) of the Act was paid besides incurring costs on maintaining a bank guarantee was more than 1.5 times of the tax amount. The High Court agreed with CIT that the mere fact that the interest was 1.5 times the tax by itself does not have any relevance for determining whether the Assessee was suffering from any “genuine hardship?. According to the High Court, the fact that the Assessee is a part of “DuPont?, a global conglomerate which had in 2011 $37.96 billion in net sales and $6.253 billion as operating profit, cannot be said to be an irrelevant factor in considering whether any “genuine hardship? was undergone by the assessee. Further, in comparison to the profitability of the assessee over the years, the amount paid by it towards interest under section 220(2) of the Act was merely $0.004 billion (approx). In the circumstances, the conclusion arrived at by the CIT that no “genuine hardship? could said to have been caused to the assessee could not be said to be an erroneous exercise of discretion by the CIT. It was a plausible view to take and did not call for interference by the High Court in exercise of its extraordinary jurisdiction under Article 226 of the Constitution.

The Supreme Court noted that the issue involved in the Special Leave Petition was with respect to the waiver of interest under section 220(2A) of the Act. The appropriate competent Authority rejected the application of the assessee for waiver of interest while exercising the powers under section 220(2A) of the Act. The same had been confirmed by the High Court.

The Supreme Court noted that it is the case of the assessee that as the dispute was pending for Mutual Agreement Procedure [MAP] resolution which subsequently came to be culminated in the year 2012; the liability to pay the tax arose thereafter and therefore the assessee should be entitled to the waiver of interest under section 220(2)(A)(ii) of the Act. According to the Supreme Court, the aforesaid plea was without any substance. Merely raising the dispute before any authority could not be a ground not to levy the interest and/or waiver of interest under section 220(2A) of the Act. Otherwise, each and every assessee may raise a dispute and thereafter may contend that as the assessee was bona fidely litigating and therefore no interest shall be leviable. The Supreme Court held that under section 220(2) of the Act, the levy of simple interest on non-payment of the tax @ 1 per cent p.a. was mandatory.

The Supreme Court was in complete agreement with the view taken by the High Court. The Special Leave Petition was therefore dismissed.

BCAJ Admin

Glimpses of Supreme Court Rulings

1. Charitable Institution – Recognition under section 80G(5)(vi) – The only condition that is required to be fulfilled for seeking renewal is specified under section 80G(5)(ii) and the clauses narrated therein. The section only postulates that any income of the charitable trust may be used for charitable purpose – Whether the income is used for charitable purpose or not can checked by the assessing authority at the time of the assessment

23 DIT(E) vs. D. R. Ranka Charitable Trust(2022) 447 ITR 766 (SC)

The assessee, a charitable trust, was granted registration under section 12A of the Act on 21th July, 1986. It was also granted recognition under section 80G(5)(vi) of the Act for the years 2005-06, 2006-07 and 2007-08.

The assessee filed its returns regularly. On 1st January, 2009 the assessee filed an application for renewal under section 80G of the Act. The DIT (E) rejected the application. Aggrieved by the same, the assessee preferred an appeal before the Tribunal. The Tribunal expressed a doubt whether the assessee was entitled even for the benefit under section 12A and therefore remanded the matter.

On remand, the Commissioner passed an order on 31st August, 2009 rejecting the application for renewal of the recognition under section 80G. Aggrieved by the same, the assesse preferred an appeal before the Tribunal. The Tribunal dismissed the appeal.

The High Court observed that the Commissioner had noted that the assessee had let out the building for business purposes. According to the Commissioner, the income was not used for charitable purposes, there was absence of charitable activity and the activity of the trust was not in consonance with the objects of the Trust.

The High Court noted that it was the contention of the assessee that the condition as specified in section 80G(5)(ii) postulated that income could be used for charitable purposes and that letting out of the property was not barred by law. The assessee had used the income towards repayment of the loan borrowed in the earlier year and paid interest thereon, which was the application of the income.

The High Court held that the only condition that required to be fulfilled for seeking renewal was specified under section 80G(5)(ii) and the clauses narrated therein and none of the clauses could be said to be applicable to the facts of the present case. The section only postulates that any income derived from the charitable trust may be used for charitable purpose. According to the High Court, the Tribunal was not right in holding that the assessee was not eligible for approval under section 80G. The High Court was of the view that whether the income is used for charitable purpose or not can be checked by the assessing authority at the time of the assessment.

The Supreme Court dismissed the appeal of the Revenue holding that the High Court’s decision on the conditions to be considered for renewal of approval of the assessee under section 80G was correct.

Note: It may be noted that substantial changes have been made with regard to approval/renewal under section 80G by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020.

2. Settlement of cases–The order passed by the Settlement Commission being bereft of reasons is unsustainable, and the fact that the assessee has made payment in terms of the order passed by the Settlement Commission could not be a ground to sustain the order passed by the Settlement Commission

24 Nand Lal Srivastava Ors vs. CIT(2022) 447 ITR 769 (SC)

During search operations at different premises of assessee, certain incriminating documents were seized. Pursuant thereto the assessment was made under section 158BC(c) of Income Tax Act, 1961.

The assessee moved an application under section 245-C of the Act before the Settlement Commission. During the pendency of the proceedings before Settlement Commission, the assessee approached the High Court vide Writ Petition No. 506 of 2008 and connected matters, wherein an order was passed on 18th March, 2008 directing Settlement Commission to decide settlement application filed by assessee by 31st March, 2008.

Pursuant thereto the Commission passed an order, paras 4 and 5 of the which read as under:

“4.This would involve more than 1500 assessments. The Settlement Commission deals only with the assessments which involve complexity of investigation and the application is intended to provide quietus to litigation. For example, in one group of cases where 23 applications are involved, the paper book which has been filed before the Settlement Commission runs into thirty thousand pages. It goes without saying that sufficient and proper opportunity is required to be given both to the applicant and the Commissioner of Income Tax Department for arriving at a proper settlement.

5. At this juncture, it is not practicable for the Commission to examine the records and investigate the case for proper settlement. Even giving adequate opportunity to the applicant and the department, as laid down in Section 245D(4) of Income Tax Act, 1961 is not practicable. However, to comply with the directions of the Hon’ble High Court, we hereby pass an order u/s 245D(4)of Income Tax Act, 1961.”

The Commission granted immunity to the assessee from prosecution and penalty under the Act and directed the assesse to make payment of tax along with interest within 35 days. The undisclosed income of the assessee was settled in the manner stated in para 6 of the order and the Income Tax Commissioner was directed to compute total income etc. in compliance of said order.

The Commissioner of Income Tax, Allahabad filed writ petitions challenging the aforesaid orders. The writ was filed on the grounds that without any hearing or looking to the record and giving opportunity to parties, the Settlement Commission, under the garb of compliance of this Court’s order, had passed orders of settlement without following the procedure prescribed in the statute i.e. it was obligatory upon the Settlement Commission to examine the record and report of the Commissioner, give opportunity to the parties, hear them and only thereafter pass an appropriate order. The entire procedure as contemplated in Section 245D(4) of the Income-tax Act, 1961 had been completely overlooked by the Settlement Commission, and, therefore, the impugned orders are patently illegal and null in the eyes of law.

The assessee contended that he had already complied with the impugned order of Settlement Commission, deposited the amount of tax as per the Settlement Order and the consequential order was also passed by the Commissioner of Income Tax. Since there was no interim order in these writ petitions, the assessee would be prejudiced in case the impugned orders are now set aside.

The High Court held that the mere fact that the orders impugned in the writ petitions had been complied with since there was no interim order, would not validate a patently illegal and bad order, which had been passed in flagrant violation of the statutory provision. It was not a case, where things could not be restored or where restitution is impossible.

According to the High Court, the manner in which the impugned orders were passed by the Settlement Commission clearly showed a complete lack of sensibility on its part. The High Court quashed the orders on 31st March, 2008 passed by the Settlement Commission.

The Supreme Court agreed with the judgment dated 25th February, 2015 of the High Court that the order passed by the Settlement Commission being bereft of reasons was unsustainable. Further the fact that the Respondent has made payment in terms of the order passed by the Settlement Commission could not be a ground to sustain the said order, being contrary to the mandate of Section 245D(4) of the Income-tax Act,1961. But the Supreme Court, however was of the view that the matter had to be remitted for fresh decision.

The Supreme Court noted that the Settlement Commission had been wound up, and the matters pending before the Settlement Commission were being adjudicated and decided by the Interim Board constituted under section 245AA of the Income-tax Act, 1961.

In view of the above position, the Supreme Court remitted the matter to the Interim Board with a request that the matter to be taken up expeditiously and should be preferably decided within a period of six months from the date of first hearing. A reasoned order would be passed.

Recording the aforesaid, the impugned judgment was partly set-aside and the appeals were allowed in the aforesaid terms. The Supreme Court however clarified that it had not made any observations or given any findings on the merits.

3 Capital or Revenue – Finding of facts by lower authorities upheld by the High Court, namely, that the amount received as compensation was of revenue nature -no interference was called for

25 Manoj B Joshi vs. 8th ITO and others (2022) 447 ITR 757 (SC)

On 10th April, 1985 the appellant entered into an agreement termed as ‘Memorandum of Understanding’ with one Mr. Dalvi, who was to acquire certain piece of land bearing Survey No. 6 of village Barave, taluka Kalyan, for construction of buildings, to be used mainly for residential purpose. Mr. Dalvi wanted to sell the flats, which he proposed to construct, to third parties on ownership basis. Said Mr. Dalvi, the developer, was short of funds to undertake this project. The appellant therefore, offered to promote a Cooperative Housing Society and there by collect funds from the proposed members of the Society. Consequently, the aforesaid MOU dated 10th April, 1985 was entered into by and between the appellant and Mr. Dalvi whereby it was agreed that Mr. Dalvi will construct the flats with the help of monies that the appellant will hand over to Mr. Dalvi after collecting the same from the prospective buyers thereof, the members of the proposed society. Mr. Dalvi will give these flats to the appellant, who in turn will allot the flats to various members of the proposed Society, which was to be named as Krushna Housing Society.

In his capacity as promoter, the appellant collected funds of Rs. 29,11,000 from prospective members of the proposed Society. The appellant says that he added an amount of Rs. 2,00,000 as his own contribution as a member of the proposed Society towards one flat and paid total Rs. 31,11,000 to Mr. Dalvi on various dates between 3rd April,1985 to 31st March,1989. It was also agreed as per the clauses of the MOU dated 10th April, 1985 that if Mr. Dalvi fails to complete the development and carry out construction as agreed, the promoters or the Society will be entitled to claim refund of the booking amount along with interest.

On account of certain legal problems, Mr. Dalvi could not honor his commitments of development and construction. Therefore, the parties entered into another agreement, also termed as Memorandum of Understanding dated 1st December, 1989 where by Mr. Dalvi agreed to refund the entire amount paid by the appellant of Rs. 31,11,000. In addition to refund of the said amount with interest by the said MOU dated 1st December, 1989 Mr. Dalvi also agreed to pay an additional amount of Rs. 29,11,000 i.e. the amount in issue, to the appellant inter-alia as a compensation for cancellation of arrangement and the so called understanding entered into between the appellant and Mr. Dalvi, in terms of an MoU dated 10th April, 1985. Accordingly, the amount in issue was paid by Mr. Dalvi to the appellant, in the F.Ys. 1996-97 and 1997-98.

In the meantime the appellant and Mr. Dalvi entered into a third agreement, called ‘Release Deed’, dated 11th June, 1997, declaring that Mr. Dalvi is released absolutely forever and from all obligations, arising under MOU dated 10th April, 1985.

The appellant filed income tax returns on 13th November, 1998 in regards to the A.Y. in issue i.e.1998-99,declaring total income of Rs. 25,48,000. Along with the returns, the appellant submitted two agreements, termed as MoUs dated 10th April, 1995 and 1st December, 1989. The appellant also submitted a copy of the Release-deed dated 11th June, 1997.

The appellant claimed that the amount in issue of Rs. 29,11,000 was an amount received by the appellant as a compensation on account of the transactions reflected by the aforesaid three documents which was not an income within the definition of section 2(24) of the Act and in the alternative, that if at all, it was a’ capital gain’. However, the authorities treated the amount in issue as income earned by the appellant as and by way of ‘income from other sources’, by rejecting the claim of the appellant. According to the High Court, the facts demonstrated that the appellant was paid the amount in issue so that no action in future could be initiated against the Developer, Mr. Dalvi, by the members of the proposed housing society for having failed to construct flats for them as was initially agreed by Mr. Dalvi. In other words, the appellant had received this amount in issue to indemnify Mr. Dalvi against any action (that too if any) that may be taken against Mr. Dalvi in future.

This amount in issue was not paid to the appellant towards any right/title/ interest that the appellant had in present in any immovable property.

The High Court held that all the three lower authorities were fully justified in treating the receipt of amount in issue of Rs. 29,11,000 by the appellant, not only as an income but also as income received by the appellant from other source as contemplated by Sections 14 r.w.s 56 of the said Act and subject the same to taxation accordingly.

The Supreme Court noted that the findings of fact recorded by the AO which had been affirmed right till the High Court, were: (i) the appellant had entered in to an MoU dated 10th April, 1985 with Shirish Dalvi, a developer who was to acquire certain pieces and parcels of the land in Village Barve, Taluka Kalyan and there upon construct residential buildings/ apartments; (ii) the appellant had collected funds from prospective members of the proposed society; (iii) these funds were transferred to Shirish Dalvi; (iv) subsequently, Shirish Dalvi faced legal problems in acquiring the land and in obtaining clear title and necessary permissions; (v) thereupon, another MoU dated 01st February, 1989 was arrived and executed between the appellant and Shirish Dalvi, pursuant to which the amount received from the proposed members was refunded to the appellant, albeit this amount has not been brought to tax as income of the appellant, but another amount of Rs. 29,11,000 received stated as a compensation by the assessee has been brought to tax as income from other sources.

According to the Supreme Court, in view of the factual background, there was no justification and reason to hold that this amount received was not taxable being a capital receipt. Whether or not the amount would be taxable as income from business or income from other sources, was not an issue and therefore was not examined and answered in the present case. The appeal was accordingly, dismissed without any order as to costs.

BCAJ Admin

Glimpses of Supreme Court Rulings

18 Deputy Commissioner of Income-tax vs. Kerala State Electricity Board (2022) 447 ITR 193 (SC)

Company – Minimum Alternate tax – Section 115JB – Provisions not applicable to the Electricity Board or similar entities totally owned by the State or Central Government

Business Expenditure – Section 43B could not be invoked in making the assessment of the liability of the appellant under the Income-tax Act with regards to the amounts collected by the appellant pursuant to the obligation cast on the appellant under section 5 of the Kerala Electricity Duty Act, 1963.

For the A.Y. 2002-03, the appellant filed returns declaring the current loss at Rs. 411,56,63,704. The returns were subsequently revised and loss reduced to Rs. 203,81,27,595. The assessment was made under section 143(3) of the Income-tax Act.

The assessing authority invoked the legal fiction under section 115JB of the Income-tax Act, which enables the Revenue to arrive at a fictitious conclusion regarding the total income of the assessee and assess the tax on such total income. Further, the assessing authority relying upon section 43B of the Income-tax Act rejected the claim of the assessee that the amount collected by the assessee from the consumer under section 5 of the Kerala Electricity Duty Act, was not the income of the assessee and consequently not eligible to tax under the provisions of the Income-tax Act.

Though, the first appellate authority accepted the submission of the assessee on the abovementioned two issues, the Tribunal by the order under appeal confirmed the views of the assessing authority in rejecting the claim of the appellant.

The High Court noted that all the three sections (sections 115J, 115JA and 115JB) created legal fictions regarding the “total income” (a defined expression under section 2(45) of the Act) of the companies. While the earlier two sections mandate the Department to make the assessment on a fictitious amount of “total income” where the actual amount of total income computed in accordance with the Income-tax Act is less than 30 per cent of the book profits of the company, section 115JB mandates the Department to resort to the fiction in those cases where the tax payable on the basis of the “total income” computed in accordance with the Income-tax Act is less than a specified percentage of the book profit. Further, sections 115JA and 115JB also stipulate a definite manner of preparing the annual accounts including the profit and loss accounts. More specifically, section 115JB stipulates that the accounting policies, and standards, etc., shall be uniform both for the purpose of Income-tax as well as for the information statutorily required to be placed before the annual general meeting conducted in accordance with section 210 of the Companies Act, 1956.

The High Court further noted that that under section 166 of the Companies Act every company is mandated to hold a general meeting in each year. Section 210 mandates that every year the board of directors of the company in the general meeting shall lay before the company a balance-sheet as at the end of the relevant period and also a profit and loss account for the period. Parts II and III of Schedule VI to the Companies Act specify the method and manner of maintaining the profit and loss account.

The High Court observed that, the appellant though, is by definition a company under the Income-tax Act, and deemed to be a company for the purpose of the Income-tax Act, by virtue of the declaration under section 80 of the Electricity (Supply) Act, it is not a company for the purpose of the Companies Act. Therefore, the appellant is not obliged to either to convene an annual general meeting or place its profit and loss account in such a general meeting. As a matter of fact, a general meeting contemplated under section 166 of the Companies Act is not possible in the case of the appellant as there are no shareholders for the appellant Board. On the other hand, under section 69 of the Electricity (Supply) Act, the appellant is obliged to keep proper accounts, including the profit and loss account, and prepare an annual statement of accounts, balance-sheet, etc., in such a form as may be prescribed by the Central Government and notified in the Official Gazette. The prescription of the rules in this regard is required to be made in consultation with the Comptroller and Auditor-General of India, and also the State Governments. Such accounts of the appellant are required to be audited by the Comptroller and Auditor-General of India or such other person duly authorised by the Comptroller and Auditor- General of India. The accounts so prepared along with the audit report is required to be laid annually before the State Legislature and also published in the prescribed manner and copies of such publication shall be made available for sale at a reasonable price, obviously for the benefit of the general public who wish to scrutinise the accounts.

The High Court looked at the legislative history and the mischief sought to be remedied by the amendment. The High Court noted the Circular No. 762 issued by CBDT ((1998) 230 ITR (St.) 12, 42).

The High Court noted that the Legislature found that the number of companies paying the marginal and also the zero-tax had grown. Such companies earned substantial book profits and paid handsome dividends to the shareholders without paying any tax to the exchequer. Such a result was achieved by these companies by taking advantage of the then existing legal position which permitted the adoption of dual accounting policies and practices, one for the purpose of computation of Income-tax and another for determining the book profits for the payment of dividends. Therefore, the amendment was made to plug the loophole in the law. However, the companies engaged in the business of generation and distribution of electricity and enterprises engaged in developing, maintaining and operating infrastructure facilities, as a matter of policy, were not brought within the purview of the amendment (section 115JA) for the reason that such a policy would promote the infrastructural development of the country.

According to the High Court, considering the background in which section 115JA is introduced into the Income-tax Act, section 115JB, being substantially similar to section 115JA, could not have a different purpose and need not be interpreted in a manner different of section 115JA.

According to the High Court, another reason for which fiction fixed under section 115JB could not be pressed into service against the appellant was that the appellant or bodies, similar to the appellant, totally owned by the Government—either State or Central— have no shareholders. Profit, if at all, made by the appellant would be for the benefit of entire body politic of the State of Kerala. In the final analysis, all taxation is meant for the welfare of the people in a Constitutional Republic. Therefore, the enquiry as to the mischief sought to be remedied by the amendment, becomes irrelevant.

Coming to the next question of whether section 43B of the Act was properly invoked, the High Court on a plain reading of section 43B opined that the only clause relevant in the context of the facts of the appellant’s case was clause (a) which deals with “any sum payable by the assessee by way of tax, duty, . . . . under any law for the time being in force”. According to the High Court, the words, “by way of tax” were relevant as they were indicative of the nature of liability. The liability to pay and the corresponding authority of the State to collect the tax (flowing from a statute) is essentially in the realm of the rights of the sovereign. Whereas the obligation of the agent to account for and pay the amounts collected by him on behalf of the principal is purely fiduciary. The nature of the obligation, continues to be fiduciary even in a case wherein the relationship of the principal and agent is created by a statute. The High Court held that that, when section 43B(a) speaks of the sum payable by way of tax, etc.; the said provision is dealing with the amounts payable to the sovereign qua sovereign, but not the amounts payable to the sovereign qua principal. Therefore, section 43B could not be invoked in making the assessment of the liability of the appellant under the Income-tax Act with regards to the amounts collected by the appellant pursuant to the obligation cast on the appellant under section 5 of the Kerala Electricity Duty Act, 1963.

The Supreme Court, after going through the circumstances on record and considering the rival submissions concluded that no interference was called for and therefore, dismissed the appeal of the Revenue.

19 Commissioner of Income-tax vs. SBI Home Finance Ltd. (2022) 447 ITR 659 (SC)

Depreciation – Leased assets – Lessee having a right to purchase the plant after the expiry of a stipulated period of time – The alleged third party interest does not affect the ownership of the lessor nor can it be doubted or disputed

A plant was being set up on the premises of M/s. Maize Products, a division of Sayaji Industries Ltd (SIL). M/s. Western Paques India Ltd. (WPIL) approached the assessee for leasing finance for the aforesaid effluent treatment and bio-gas generation plant, being set up at the premises of M/s. Maize Products of SIL. Pursuant to such an approach, the assessee itself acquired the said plant and leased out the same to WPIL upon taking symbolic possession. According to the terms of the agreement between SIL and WPIL, SIL had a right to purchase the plant after the expiry of a stipulated period of time.

The Tribunal held that the ownership of the assessee could not be established or accepted because that there was a stipulation that a third party, other than the lessee to whom the plant was leased out by the assessee, had a right to purchase.

The High Court observed that in the present case, neither SIL had claimed any right; nor WPIL. Similarly, neither SIL nor WPIL in their return had claimed depreciation for the plant. WPIL had not claimed any benefit of payment of interest on capital borrowed. On the other hand, WPIL had treated the rental paid to the assessee for the plant as revenue expenditure. If it was finance, then the assessee would be entitled to recover the principal. But in this case by reason of the agreement the assessee would not be entitled to recover any principal.

The High Court further noted from the additional paper book filed that on account of default on the part of WPIL to pay the rental, the assessee had filed a suit in the Bombay High Court in which a Receiver has been appointed. The Court Receiver had taken possession of the said plant and an undertaking had been given on behalf of SIL that it will preserve the possession carefully and execute an agency agreement with the Receiver, and will neither part with the possession nor mortgage, alienate, encumber or create any third party interest and had further undertaken to cover the said plant by insurance, etc. However, SIL had neither claimed any title or possession over the plant nor claimed depreciation in respect thereof. It had also not exercised its option to purchase.

Therefore, the High Court was of the view that in respect of the period covered by the financial year under assessment, the ownership of the assessee in respect of the plant could not be disputed for the purpose of section 32 of the Act. According to the High Court, the lessee cannot dispute the title of the lessor and the alleged third party interest does not affect the ownership of the lessor nor can it be doubted or disputed. In this case, the lessee had never claimed ownership of the plant. Thus, the alleged right of SIL to purchase the plant would in no way affect the ownership of the assessee. The ownership of the assessee was not only absolute and perfect but also apparent and real until SIL established its rights.

The High Court, therefore, held that the assessee was the owner of the plant for the purpose of section 32 and by leasing it out to WPIL the assessee had used the plant wholly for the purpose of its business, namely, for carrying on the business of leasing, and the income earned by the way of a rental of the plant was business income.

The Supreme Court dismissed the appeal after going through the relevant clauses of the agreements dated 8th December, 1993 and 30th December,1994 holding that on construing the relevant clauses, it was apparent that the Respondent assessee had become the owner of the plant and machinery and that the lease rentals in the entirety had been taxed as a revenue receipt/ income.

20 Ashok Leyland Ltd vs. CIT (2022) 447 ITR 661 (SC)

Export – Special deduction –The unabsorbed loss should not be deducted to arrive at the profits for the purposes of calculating the deduction under section 80HHC

The assessee was engaged in the manufacture and sale of chassis for medium and heavy duty commercial vehicles, engines, etc. The assessment for the year 1991-92 was originally completed under section 143(3); again after the giving effect to the order in appeal.

Subsequently, it was taken up for rectification under section 154 on the question of depreciation, as regards the lease of buses to MSRTC and Pune Municipal Transport Corporation which according to the revenue was a sale transaction. Apart from that the relief under section 80HHC, as well as the interest and commitment charges on the loan were also taken up for consideration.

As regards the claim for deduction under section 80HHC, the AO reworked the calculation.

Aggrieved by the said order, the assessee went on appeal. The Commissioner of Income-tax (Appeals) inter alia on the question of deduction under section 80HHC rejected the appeal for deduction.

The Tribunal allowed the appeal.

The revenue filed an appeal before the High Court.

One of the questions of law raised before the High Court related to deduction of unabsorbed loss to arrive profits for the purpose of calculating the deduction under section 80HHC. The Tribunal upheld the claim following CIT vs. Vegetable Products Ltd [1973] 88 ITR 192 (SC). The revenue questioned this contending that the brought forward loss should be deducted from the profits and gains of business for the purpose of working out the relief under section 80HHC.

The High Court observed that section 80A(1) describes the deductions to be computed from the gross total income. Section 80B(5) defines the total income as one computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A. Touching on the provision of section 80AB, in the case of IPCA Laboratory Ltd vs. Dy. CIT [2004] 266 ITR 521, the Supreme Court held that in computing the total income of the assessee, both profits as well as losses will have to be taken into consideration. Referring to section 80B(5) as well as to section 80AB, the Apex Court held that for the purposes of working out the relief under section 80HHC, the computation has to be made first as given under section 80AB, which means, the computation of income has to be in accordance with the provisions of the Act. Hence, before deduction under section 80HHC is considered, the assessing authority has to compute the income in accordance with the provisions of the Act. In which event, the profits and gains of income from business will have to be computed taking note of section 72A also. The Commissioner (Appeals) pointed out that the accumulated loss which were carried forward and set off under the provisions of section 72A were correctly deducted by the assessing authority before computing the deduction under section 80HHC. Hence, the computation done was in accordance with the scheme, as interpreted by the Supreme Court. The High Court did not find any justification to accept the plea of the assessee that the unabsorbed loss should not be deducted to arrive at the profits for calculating the deduction under section 80HHC. According to the High Court, the order of the Tribunal in this regard was unsustainable, and hence the question was answered in favour of the revenue.

The Supreme Court dismissed the appeal of the assessee holding that the issue raised in the appeal by the assessee was covered against them, vide its judgment in CIT vs. Shirke Construction Equipment Ltd [2007] 161 Taxman 212/291 ITR 380 (SC)/[2007] 14 SCC 787.

The appeal was dismissed without any order as to costs.

21 Director of Income-tax (Exemptions) vs. Meenakshi Amma Endowment Trust
(2022) 447 ITR 663 (SC) Charitable purpose – Registration – Application should be decided looking at the objects of the Trust in a case where activity has not commenced

The assessee trust was established by way of a trust deed dated 23rd January, 2008. The assessee sought for registration under section 12A on 31st October, 2008. The assessee was called upon to furnish certain details which were furnished. The assessee fairly indicated that they had not yet commenced any activities of the trust.Not being satisfied with this reply the Director of IT (Exemptions) refused to grant registration and, consequently, recognition under section 80G was also refused by orders dated 13th April, 2009. Aggrieved by the same the assessee approached the Tribunal challenging the order of the Director of IT (Exemptions).

The Tribunal taking into consideration the law laid down by the Division Bench this court in Sanjeevamma Hanumanthe Gowda Charitable Trust vs. DIT (Exemptions) [2006] 285 ITR 327/155 Taxman 466 (Kar.) directed the Director of Income-tax (Exemptions) to grant recognition to the trust if other conditions are satisfied. The Tribunal noted that the trust was formed on 23rd January, 2008 and within a period of nine months they had filed an application under section 12A for issuance of the registration claiming exemption. The fact that the corpus of the trust was nothing but the contribution of Rs. 1,000 by each of the trustees as corpus fund showed that the trustees were contributing the funds by themselves in a humble way and intended to commence charitable activities. The grievance of the concerned authorities seemed to be that there was no activity which could be termed as charitable as per the details furnished by the assessee, therefore, such registration could not be granted. The Tribunal was of the view that when the trust itself was formed in January, 2008, with the money available with the trust, one cannot expect them to do activity of charity immediately and because of that situation the authority could not have concluded that the trust was not intending to do any activity of charity. In such a situation the objects of the trust had to be taken into consideration by the authority and the objects of the trust could be read from the trust deed itself. In the subsequent returns filed by the trust, if the Revenue came across that factually the trust had not conducted any charitable activities, it was always open to the authorities concerned to withdraw the registration already granted or cancel the said registration under section 12AA(3) of the Act.

The High Court dismissed the appeal of the revenue holding that the conclusion arrived at by the Tribunal was just and it did not give rise to any substantial question of law.

The Supreme Court also dismissed the appeal of the Revenue in view of its judgment in Ananda Social & Educational Trust vs. CIT [2020] 426 ITR 340 (SC) which judgment had approved the view taken by the Delhi High Court in DIT vs. Foundation of Ophthalmic & Optometry Research Education Centre [2013] 355 ITR 361.

The Supreme Court however, observed that the dismissal of the appeal would not bar the AO from cancelling the registration in case he finds that the ‘charitable activity’ was not undertaken, set-up or established by the assessee.

Business income – Remission or cessation of liability – The turnover tax paid by the assessee was allowed as deduction in the assessments during the preceding assessment years and therefore, when refund is received in the assessment year 1995-96, it is income assessable under section 41(1) of the Income-tax Act

22 Ishwardas Sons vs. Commissioner of Income-tax (2022) 447 ITR 755 (SC)

The question raised before the High Court, in this appeal, was whether the Tribunal was justified in cancelling assessment of Rs. 25,27,734 being the refund of turnover tax assessed by the department during the previous year relevant for the A.Y. 1995-96.It was the case of the Revenue that the turnover tax paid by the assessee was allowed as deduction in the assessments during the preceding A.Ys. 1990-91, 1991-92 and 1992-93 and therefore, when refund is received in the relevant A.Y. 1995-96, it is income assessable under section 41(1) of the Income-tax Act.

It was the case of the assessee that the High Court in IT Appeal No. 232/2002 in assessee’s own case had held that the turnover tax recovered by the assessee and retained as a contingency deposit in their account was income assessable at their hands. Based on this judgment, the contention of the assessee was that the very same income got assessed in the year in which it is recovered from the principals.

From the orders of the Tribunal, the High Court noted that the assessee has not disputed that the deduction was allowed to it on payment of turnover tax during the A.Ys.1990-91, 1991-92 and 1992-93 as stated by the AO. However, the Tribunal had proceeded to allow the appeal by holding that by virtue of decision of High Court in another case, the refund order had not become final and so much so, it was not income of the assessee. The High Court was unable to agree with this reasoning of the Tribunal because it was not the assessee’s case that the department had filed a further appeal or claimed return of the refund amount. The High Court, therefore, reversed the order of the Tribunal. However, it was clarified that if the assessee has not claimed deduction of the turnover tax on payment basis under section 43B for 1990-91, 1991-92 and 1992-93 as stated in the order, then it would be open to the assessee to produce evidence that no deduction is claimed for payment of turnover tax for the A.Ys. 1990-91, 1991-92 and 1992-93 as stated in the assessment order and if the same is found to be a mistake, the AO would exclude the amount from assessment by rectifying the order.

Before the Supreme Court, an order of remand to the High Court was sought by the assessee but, however, the Supreme Court was not inclined to pass remit order, as the issue, in its opinion, had been correctly decided. The Supreme Court, therefore, declined to exercise its power under Article 136 of the Constitution of India and dismissed the appeal.

BCAJ Admin

Glimpses of Supreme Court Rulings

44. CIT vs. Prakash Chand Lunia
(2023) 454 ITR 61 (SC)

Business Loss — Loss of confiscation — Search was conducted by Directorate of Revenue Intelligence (DRI) officers at premises of Assessee — Recovered slabs of silver and two silver ingots were confiscated — The decision of the High Court holding that the loss on confiscation of silver by DRI official of Customs Department was business loss relying upon decision of Supreme Court in case Piara Singh is reversed as the assessee was carrying on an otherwise legitimate silver business and his business could not be said to be smuggling of the silver bars as was the case in the case of Piara Singh (supra) — Also, any loss incurred by way of an expenditure by an Assessee for any purpose which is an offence or which is prohibited by law is not deductible in terms of Explanation 1 to Section 37 of the Act.

A search was conducted by the Directorate of Revenue Intelligence (DRI) officers at the premises situated at NOIDA taken on rent by the Assessee, Shri Prakash Chand Lunia. The DRI recovered 144 slabs of silver from the premises and two silver ingots from the business premises of the Assessee at Delhi. The Assessee was arrested under section 104 of the Customs Act for committing offence punishable under Section 135 of the Customs Act. The Collector, Customs held that the Assessee Shri Prakash Chand Lunia was the owner of silver/bullion and the transaction, thereof, was not recorded in the books of accounts. The Collector of Customs, New Delhi ordered confiscation of the said 146 slabs of silver weighing 4641.962 Kilograms, valued at Rs. 3.06 Crores. The Collector Customs further imposed a personal penalty of Rs. 25 Lakhs on Shri Prakash Chand Lunia under Section 112 of the Customs Act. The Collector held that the silver under reference was of smuggled nature.

During the course of the assessment proceedings for the A.Y. 1989–90, the AO observed that the Assessee was not able to explain the nature and source of acquisition of silver of which he was held to be the owner; therefore, the deeming provisions of Section 69A of the Income-tax Act, 1961 (hereinafter, referred to as ‘the Act’) would be applicable. The investment in this regard was not found recorded in the books of accounts of the Assessee that were produced before the then AO. Accordingly, the AO passed an assessment Order and made an addition of Rs. 3,06,36,909 under section 69A of the Act.

In appeals preferred by the Assessee against the assessment order, the CIT(A) dismissed the appeal of the Assessee.

Feeling aggrieved, the Assessee preferred the appeal before the ITAT. The ITAT, Jaipur also upheld the order of the CIT(A) so far as Section 69A is concerned. However, the ITAT partly allowed the appeal of the Assessee. As regards some other minor additions, the ITAT set aside some minor other additions and remanded the matter to the AO for fresh examination.

The AO re-examined the issue and addition was made. The CIT(A) also upheld the order of the AO. The Assessee preferred the appeal against the fresh order passed by the CIT(A) before the ITAT. The ITAT, in the second round as well, upheld the order of the authorities below.

A reference was made by the ITAT to the High Court with the following questions of law:

(i) “Whether on the facts and in the circumstances of the case, the Tribunal after construing and interpreting the provisions contained in Section 69A of the Income-tax Act, 1961 was right in law, in holding that the Assessee was the owner of the 144 silver bars found at premises No. A 11 & 12, Sector – VII, Noida and two silver bars found at premises of M/s Lunia & Co. Delhi and in sustaining addition of Rs. 3,06,36,909 being unexplained investment in the hands of the Assessee under Section 69A of the Act?

(ii) If the answer to the above question is in affirmative then, whether, on the facts and in the circumstances of the case, the Tribunal was right in law in distinguishing the ratio laid down by their Lordships of the Supreme Court in the case of Piara Singh vs. CIT, 124 ITR 41 and thereby not allowing the loss on account of confiscation of silver bars?

While the reference was pending before the High Court, penalty proceedings were initiated against the Assessee. An order under Section 271(1)(c) of the Act came to be confirmed by both the CIT(A) and the ITAT. Accordingly, the Assessee filed an appeal under Section 260A of the Act against the Penalty order, before the High Court. The High Court while deciding both the cases together, qua the first question, decided in favour of the Revenue, and the same was to be added to his income as a natural consequence. However, with regard to the second question, the High Court held that loss of confiscation by the DRI official of Customs Department was business loss. While holding, the High Court relied upon the decision of the Supreme Court in the case of CIT, Patiala vs. Piara Singh reported in 124 ITR 41.

An appeal was filed before the Supreme Court against the judgment and order passed by the High Court.

According to the Supreme Court, the short question which was posed for consideration before it was whether the High Court has erred in law in allowing the Respondent – Assessee the loss of confiscation of silver bars by DRI officials as a business loss, relying upon the decision of this Court in the case of CIT Patiala vs. Piara Singh, [(1980) 124 ITR 40 – SC].

On going through the judgment and order passed by the High Court, it appeared to the Supreme Court that the High Court had simply relied upon the decision of the Supreme Court in the case of Piara Singh (supra). After going through the decision in the case of Piara Singh (supra), the Supreme Court was of the opinion that the High Court had materially erred in relying upon the decision in the case of Piara Singh (supra).

The Supreme Court noted that in the case of Piara Singh (supra), the Assessee was found to be in the business of smuggling of currency notes and to that it was found that confiscation of currency notes was a loss occasioned in pursuing his business, i.e., a loss which sprung directly from carrying on of his business and was incidental to it. Due to this, the Assessee in the said case was held to be entitled to deduction under Section 10(1) of the Income Tax Act, 1922. In view of the above fact, the Supreme Court in the case of Piara Singh (supra) distinguished its decisions in the case of Haji Aziz & Abdul Shakoor Bros. [(1961) 41 ITR 350 –SC] and the decision in the case of Soni Hinduji Kushalji & Co. [(1973) 89 ITR 112 (AP)] and did not agree with the decision of the Bombay High Court in the case of J S Parkar vs. V B Palekar, [(1974) 94 ITR 616 (Bom)]. The Supreme Court observed that in all the aforesaid three cases which were relied upon by the Revenue in the case of Piara Singh (supra), the assessees were found to be involved in legitimate businesses and not smuggling business. However, they were found to have smuggled goods contrary to law, which resulted in an infraction of law and resultant confiscation by customs authorities.

The Supreme Court noted that in the case of Haji Aziz (supra), the Assessee claimed deduction of fine paid by him for release of his dates confiscated by customs authorities, which was rejected on the ground that the amount paid by way of penalty for breach of law was not a normal business carried out by it. In the case of Soni Hinduji Kushalji (supra) and J S Parkar (supra), the customs authorities had confiscated gold from Assessees otherwise engaged in legitimate businesses. In the aforesaid two cases, the Assessee claimed the value of gold seized as a trading / business loss. It was held that the Assessees were not entitled to the deductions claimed as business loss.

In the case of Soni Hinduji (supra), the Andhra Pradesh High Court held that when a claim for deduction is made, the loss must be one that springs directly from or is incidental to the business which the Assessee carries on and not every sort or kind of loss which has absolutely no nexus or connection with his business. It was observed that confiscation of contraband gold was an action in rem and not a proceeding in personam. Thus, a proceeding in rem in the strict sense of the term is an action taken directly against the property (i.e., smuggled gold); and even if the offender is not known, the customs authorities have the power to confiscate the contraband gold.

In the case of J S Parkar (supra), the Assessee not only claimed the value of the gold confiscated as a trading loss, but also set off of the said loss against his assumed and assessed income from undisclosed sources. The value of gold was sought to be taxed under section 69/69A of the Act by the tax authorities. However, the Bombay High Court held the Assessee to be the owner of the smuggled confiscated gold and not entitled to claim value of such gold as a trading loss.

The Supreme Court noted that in the present case, the ownership of the confiscated silver bars of the Assessee was not disputed. Even on that, there were concurrent findings by all the authorities below and including the customs authorities. Therefore, the question that required consideration was as to whether the Assessee could claim the business loss of the value of the silver bar confiscated and whether the decision of this Court in the case of Piara Singh (supra) would be applicable?

To answer the aforesaid question, the Supreme Court noted that in the present case, the main business of the Assessee was dealing in silver. His business could not be said to be smuggling of the silver bars as was the case in the case of Piara Singh (supra). He was carrying on an otherwise legitimate silver business and in attempt to make larger profits, he indulged into smuggling of silver, which was an infraction of law. In that view of the matter, the decision of the Supreme Court in the case of Piara Singh (supra), which had been relied upon by the High Court while passing the impugned judgment and order, would not be applicable to the facts of the case. On the other hand, the decision of the Supreme Court in the case of Haji Aziz (1961) 41 ITR 350 (SC) and the decisions of the Andhra Pradesh High Court and the Bombay High Court, which were pressed into service by the Revenue in Piara Singh (supra), would be applicable with full force.

In view of the above, the impugned judgment and order passed by the High Court quashing and setting aside the order passed by the AO, CIT(A) and the ITAT, which rejected the claim of the Assessee to treat the silver bars confiscated by the customs authorities as business loss, and consequently allowing the same as business loss, were unsustainable and the same were quashed and set aside by the Supreme Court.

By a separate order, Justice Shri M M Sundresh, while concurring with the ultimate conclusion arrived at in overturning the decision of the High Court by Justice Shri M R Shah, gave his own reasoning on the aforesaid aspect. After considering the provisions of Section 37(1), including Explanation 1 thereto and that of Section 115BBE of the Act and after referring to the plethora of judgements on the subject, he concluded as follows:

I. The word “any expenditure” mentioned in Section 37 of the Act takes in its sweep loss occasioned in the course of business, being incidental to it.

II. As a consequence, any loss incurred by way of an expenditure by an Assessee for any purpose which is an offence or which is prohibited by law is not deductible in terms of Explanation 1 to Section 37 of the Act.
III. Such an expenditure / loss incurred for any purpose which is an offence shall not be deemed to have been incurred for the purpose of business or profession or incidental to it, and hence, no deduction can be made.

IV. A penalty or a confiscation is a proceeding in rem, and therefore, a loss in pursuance to the same is not available for deduction, regardless of the nature of business, as a penalty or confiscation cannot be said to be incidental to any business.

V. The decisions of this Court in Piara Singh (supra) and Dr T A Quereshi [(2006) 287 ITR 547- SC] do not lay down correct law in light of the decision of this Court in Haji Aziz (supra) and the insertion of Explanation 1 to Section 37.

The appeal of the Revenue, therefore, deserves to be allowed, though conscious of the fact that Section 115BBE of the Act may not have an application to the case on hand being prospective in nature.

Note:
The detailed discussion by Justice Shri M M Sundresh on subject with reference to English and Indian cases makes it a good read.

45. D N Singh vs. CIT
(2023) 454 ITR 595 (SC)

Unexplained money, etc. — Section 69A — Assessee must be found to be the owner, and he must be the owner of any money, bullion, jewellery or other valuable articles — Short delivery of bitumen by carrier — A carrier who clings on to possession not only without having a shadow of a right, but what is more, both contrary to the contract as also the law cannot be found to be the owner — No material to show that the goods short delivered were sold — Bitumen not a valuable article — Addition could not be made.

The Appellant–Assessee carried on business as carriage contractor for bitumen loaded from oil companies namely HPCL, IOCL and BPCL from Haldia. The goods were to be delivered to various divisions of the Road Construction Department of the Government of Bihar. According to the Appellant, it has been in the business for roughly three decades.

A scam was reported in the media. The scam consisted of transporters of bitumen, lifted from oil companies, misappropriating the bitumen and not delivering the quantity lifted to the various Divisions of the Road Construction Department of the Government of Bihar. The scam had its repercussion in the assessments under the Act.

By an Assessment Order dated 27th March, 1998 being passed for A.Y. 1995–96, the AO, taking note of the scam, issued ShowCause Notice dated 23rd January, 1998, alleging that the Appellant had lifted 14,507.81 metric tonnes of bitumen but delivered only 10,064.1 metric tonnes. This meant that the Appellant had not delivered 4,443 metric tonnes. The Appellant produced photocopies of challans to establish that the bitumen had been delivered. Summons was issued by the AO to the Executive Engineers and Junior Engineers. It is the case of the Appellant that all Junior Engineers, except Shri Madan Prasad and Ahia Ansari, accepted the factum of delivery of bitumen. The AO, in fact, noticed that only those Junior Engineers accepted receipt of bitumen, where the Engineer in-charge or the Executive Engineer accepted the delivery. Shri Madan Prasad denied that the signature alleged to be his, was not his signature. The AO found that the Junior Engineers denied putting stamp and took the position that if there was stamp, then, it must indicate the name of the section. The AO added a sum of Rs. 2,19,85,700 being the figure arrived at, by finding that 4,443 metric tonnes of bitumen had not been delivered. This was done by invoking Section 69A of the Act.

For the A.Y. 1996–97, the AO passed Order dated 31st March, 1999. The Appellant, in its Return, disclosed a net profit of Rs. 6,76,133. On scrutiny, the AO, again, noticing the scam and finding that while 10,300.77 metric tonnes had been lifted by the Appellant, only 8,206.25 metric tonnes had been delivered. Accordingly, it was found that 2,094.52 metric tonnes had not been delivered. On the said basis and again invoking Section 69A of the Act, a sum of Rs. 1,04,71,720.30 was added as income of the Appellant.

The Commissioner Appeals found that all Junior Engineers, except two, had accepted delivery. After finding that the addition made by the AO in respect of quantity, where Junior Engineers had accepted delivery, was untenable, the Appellate Authority ordered deletion of a sum of Rs. 2,01,14,659. This amount represented the value of 4,064.28 metric tonnes. In regard to the disputed quantity, viz., the dispute raised by Shri Madan Prasad and Ahia Ansari, Junior Engineers, the matter was remanded back for affording an opportunity for cross-examination. This Order related to the A.Y. 1995–96.

Also, for A.Y. 1996–97, the Appellate Authority found merit in the case of the Appellant that except two Junior Engineers, the others had accepted the delivery. The addition of Rs. 1,04,71,720 was ordered to be deleted.

The Revenue filed appeals before the Income-Tax Appellate Tribunal (hereinafter referred to as, ‘the ITAT’, for short) for both the Assessment Years, viz., 1995–96 and 1996–97.

In regard to the order passed by the Appellate Authority for the A.Y. 1995–96, another development took place during the pendency of the Appeal before the ITAT. By rectification Order dated 31st May, 2001, the CIT(A) set aside the addition of Rs. 2,01,14,659 with the direction to the AO that he shall issue summons to the concerned Jr. Engineers, who have received 4,064.28 metric tonnes of bitumen as per challans furnished by the Appellant, record their statement, allow the Appellant an opportunity to cross-examine them and, if necessary, refer their signatures to the handwriting experts to establish the genuineness or otherwise of such signatures. Only after carrying out these directions, any addition shall be made.

The Revenue had filed an Appeal before the ITAT for the A.Y. 1995–96. The Appellant had filed cross-objection in the said Appeal. The Appellant also filed appeal before the ITAT against the Order of Rectification passed under Section 154 of the Act. The ITAT dismissed the Appeals filed by the Revenue and the Appellant taking note of the Order of the CIT(A), passed under Section 154 of the Act, by which, the matter stood remitted back. The cross-objection came to be disposed of accordingly.

For the A.Y. 1996–97, the ITAT disposed of the Appeal filed by the Revenue and also the cross-objection filed. The Appeal filed by the Revenue was allowed. The Tribunal found that the Appellant had not disputed the lifting of the bitumen. The claim made by the Appellant that full supply was made, stood demolished, when photocopies of delivery challans were found to be false and fabricated. The Executive Engineers, it was further found, had confirmed non-delivery to the tune of 2,090.40 metric tonnes. The Commissioner Appeals, it was found, reached a wrong conclusion, as he did not address himself to the explanation offered by the Junior Engineers. It was found that all Executive Engineers of the Consignee Divisions presented a case of non-delivery before the AO. Thus, the ITAT allowed the Appeal filed by the Revenue and sustained the Order of the AO relating to addition on account of short supply of bitumen for the A.Y. 1996–97.

On an appeal to the High Court by the Appellant–Assessee for the A.Y. 1996–97, the Court, after referring to the submissions, focussed on the scope of Section 69A of the Act. The High Court found that the word “owner” has different meaning in different contexts, and when a transporter sells the goods and receives money for that not on behalf of the real owner, it became the owner for the purpose of tax. Having lifted bitumen and not supplied to the Road Construction Department to which it was to be supplied, the Appellant would be liable to pay tax on the bitumen lifted and not delivered. The High Court distinguished the judgment in Dhirajlal Haridas vs. CIT (Central), Bombay (1982) 138 ITR 570 by noting that for determining the person liable to pay tax, the test laid down by this Court was to find out the person entitled to that income. The Court also went on to distinguish the judgment in CIT vs. Amritlal Chunilal (1984) 40 CTR Bombay 387. It was found that in the said case, the Assessee, therein, was not found to be the owner whereas the ITAT found the Appellant to be the owner. The High Court agreed with the said finding. Thereafter, the High Court went on to deal with the argument that the words “other valuable articles” in Section 69A could not include “bitumen”. The argument of the Appellant which is noted is that for applying Section 69A bitumen should have some nexus with money, bullion or jewellery. It was found that any Article which has value would come under the expression “valuable article” under Article 69A and the value of such Article can be deemed to be the income of the Assessee, should the Assessee fail to offer any explanation or the explanation offered be unsatisfactory. The argument that Section 69A would not apply as the Appellant had offered an explanation was not accepted as it was found that an explanation though offered, being not accepted, would lead to the invocation of Section 69A if the explanation was not satisfactory. In other words, Section 69A applied. Lastly, in regard to the argument of the Appellant that the cost of the bitumen and not the value, thereof, was added as income, the High Court found that the Appellant did not have a case that it had sold the bitumen at the price lower than the cost. The Appellant was found to be the owner of the bitumen and the addition was sustained.

The Supreme Court noted that Section 69A may be broken down into the following essential parts:

a. The Assessee must be found to be the owner;

b. He must be the owner of any money, bullion, jewellery or other valuable articles;
c. The said articles must not be recorded in the Books of Account, if any maintained;

d. The Assessee is unable to offer an explanation regarding the nature and the source of acquiring the articles in question; or the explanation, which is offered, is found to be, in the opinion of the Officer, not satisfactory;

e. If the aforesaid conditions are satisfied, then, the value of the bullion, jewellery or other valuable Article may be deemed as the income of the financial year in which the Assessee is found to be the owner;

f. In the case of money, the money can be deemed to be the income of the financial year.

Applying the provision to the facts of the case, the Supreme Court noted that the points that arise were as follows:

I. The question would arise, as to whether the Appellant could be treated as the owner of the bitumen;

II. The further question would arise, as to whether bitumen could be treated as other valuable articles;

III. Thirdly, the question arises, as to how the value of the bitumen is to be ascertained.

As regards the first question, viz., whether the Appellant could be treated as the owner of the bitumen is concerned, it was indisputable that the Appellant was engaged as a carrier to deliver the bitumen, after having lifted the same from the Oil Companies to the various Divisions of the Road Construction Department of the Government of Bihar.

Under Section 15 of the Carriage by Road Act, 2007, which repealed the Carriers Act, 1865, if the consignee fails to take delivery of any consignment of goods within 30 days, the consignment is to be treated as unclaimed. The period of 30 days is declared inapplicable to perishable consignments, in which case, a period of 24 hours’ notice or any lesser period, as may be agreed between the consignor and the common carrier, suffices. In the case of perishable consignment, following such notice, the consignment can be sold. In a case where the goods are not perishable, if there is failure by the consignee to remove the goods after the receipt of a notice of 15 days from the carrier, the common carrier is given a right to sell the consignment without further notice. Section 15(3) enables the carrier to retain a sum equal to the freights, storage and other charges, due, including expenses incurred for the sale. The surplus from the sale proceeds is to be returned to the consigner or the consignee. Section 15(4) clothes the carrier with a right to sell in the event of failure by the consignee to make payment of the freight and other charges, at the time of taking delivery. In such cases, if the other ingredients of Section 69A are satisfied, there may be no fallacy involved if an Assessee is found to be the owner of the goods which he disposes of under the authority of law.

The Supreme Court noted that in this case, it is not the case of either party that the Appellant had become the owner of the bitumen in question in a manner authorised by law. On the other hand, the specific case of the Appellant is that the Appellant never became the owner and it remained only a carrier. However, as noticed, if it is found that there has been short delivery, this would mean that the Appellant continued in possession contrary to the terms of contract of carriage.

The Supreme Court further observed that when goods are entrusted to a common carrier, the entrustment would amount to a contract of bailment within the meaning of Section 148 of the Contract Act, 1872 when it is for being carried by road, as in this case.

According to the Supreme Court, to apply Section 69A of the Act, it is indispensable that the Officer must find that the other valuable article, inter alia, is owned by the Assessee. A bailee, who is a common carrier, is not an owner of the goods. A bailee who is a common carrier would necessarily be entrusted with the possession of the goods. The purpose of the bailment is the delivery of the goods by the common carrier to the consignee or as per the directions of the consignor. During the subsistence of the contract of carriage of goods, the bailee would not become the owner of the goods. In the case of an entrustment to the carrier otherwise than under a contract of sale of goods also, the possession of the carrier would not convert it into the owner of the goods.

The Supreme Court further noted that Section 405 of the Indian Penal Code, 1860 reads as follows:

“Whoever, being in any manner entrusted with property, or with any dominion over property, dishonestly misappropriates or converts to his own use that property, or dishonestly uses or disposes of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust, or wilfully suffers any other person so to do, commits ‘criminal breach of trust’.

Illustration (f) Under Section 405 is apposite, and it reads as follows:

Illustration f. A, a carrier, is entrusted by Z with property to be carried by land or by water. A dishonestly misappropriates the property. A has committed a criminal breach of trust.”

The Supreme Court noted the provisions of Sections 27 and 39 of the Sale of Goods Act, 1930, and observed that sale by a carrier does not pass title except when it is immunised by the conduct of the owner of the good, which would in turn estop the owner from impugning the title of the buyer.

The Supreme Court noted that in the commentary in the context of Section 69A on Sampath Iyengar’s, Law of Income Tax, it was observed it cannot be said in the case of stolen property that the thief is the owner thereof.

The Supreme Court observed that the question would arise pointedly, as to, when a common carrier refuses to deliver the consignment, and continues to possess it contrary to contract and law, and converts it into his use and presumably sells the same, as to whether he could be found to be the owner of the goods. Would he be any different from a person who commits theft and sells it claiming to be the owner. Can a thief become the owner? It would be straining the law beyond justification if the Court were to recognise a thief as the owner of the property within the meaning of Section 69A. Recognising a thief as the owner of the property would also mean that the owner of the property would cease to be recognised as the owner, which would indeed be the most startling result. While possession of a person may in appropriate cases, when there is no explanation forthcoming about the source and quality of his possession, justify an
AO finding him to be the owner, when the facts are known that the carrier is not the owner and somebody else is the owner, then to describe him as the owner may produce results which are most illegal apart from being unjust.

After considering the other relevant laws and various judgment of the Supreme Court dealing with the meaning of “owner” in the context of different provisions of the Income-tax Act, 1961 and applying various test considered therein, the Supreme Court, in this context, summarised its findings as under:

1. Appellant as a carrier was entrusted with the goods.

2. The possession of the Appellant began as a bailee.

3. Proceeding further on the basis that instead of delivering the goods, the Appellant did not deliver the goods to the concerned divisions of the department in the State of Bihar.

4. Ownership of the goods in question by no stretch of imagination stood vested at any point of time in the Appellant.

5. Property would pass from the consignor to the consignee on the basis of the principles which are declared in the Sale of Goods Act. It is inconceivable that any of those provisions would countenance passing of property in the goods to the Appellant who was a mere carrier of the goods.

6. Section 405 of the Indian Penal Code makes it an offence for a person entrusted with property, which includes goods entrusted to a carrier, being misappropriated or dishonestly being converted to the use of the carrier. A specific illustration under Section 405 makes it abundantly clear that any such act by a carrier attracts the offence under Section 405. The Supreme Court in other words would have to allow the commission of an offence by the Appellant in the process of finding that the Appellant is the owner of the goods. In other words, proceeding on the basis that there was short delivery of the goods by the Appellant, inevitably, the Supreme Court must find that the act was not a mere omission or a mistake but a deliberate act by a carrier involving it in the commission of an offence Under Section 405. In other words, the Court must necessarily find that the Appellant continued to possess the bitumen and misappropriated. It is in this state that the AO would have to find that the Appellant by the deliberate act of short delivering the goods and continuing with the possession of the goods not only contrary to the contract but also to the law of the land, both in the Carriers Act 1865 and breaking the penal law as well, the Appellant must be treated as the owner.

7. Under Section 54 of Transfer of Property Act, a carrier who clings on to possession not only without having a shadow of a right, but what is more, both contrary to the contract as also the law cannot be found to be the owner.

8. The possession of the carrier who deliberately refuses to act under the contract but contrary to it, is not only wrongful, but more importantly, makes it a case where the possession itself is without any right with the carrier to justify his possession.

9. Recognising any right with the carrier in law would involve negation of the right of the actual owner, which if the property in the goods under the contract has passed on to the consignee is the consignee and if not the consignor.

The Supreme Court found that the Appellant was bereft of any of the rights or powers associated with ownership of property.

Approaching the issue from another angle, the Supreme Court observed that the rationale of the Revenue involves ownership of the bitumen being ascribed to the Appellant based on possession of the bitumen contrary to the contract of carriage and with the intention to misappropriate the same, which further involves the sale of the bitumen for which there is no material as such. But proceeding on the basis that such a sale also took place, even than what is important is, the requirement in Section 69A that the AO must find that the Assessee is the owner of the bitumen. According to the Supreme Court, in the facts, the Appellant could not be found to be the owner. The Appellant could not be said to be in possession in his own right, accepting the case of the Revenue that there was short delivery. The Appellant did not possess the power of alienation. The right over the bitumen as an owner at no point of time could have been claimed by the Appellant. The possession of the Appellant at best was a shade better than that of a thief as the possession had its origin under a contract of bailment. Hence, the Supreme Court held that the AO acted illegally in holding that one Appellant was the ‘owner’ and on the said basis made the addition.

The Supreme Court, thereafter, referred to the Principles of Ejusdem Generis and Noscitur a Sociis, which are Rules of construction and observed that when it comes to value, it is noticed that in the definition of the word “valuable” in Black’s Law Dictionary, it is defined as “worth a good price; having a financial or market value”. The word “valuable” has been defined again as an adjective and as meaning worth a great deal of money in the Concise Oxford Dictionary. Valuable, therefore, cannot be understood as anything which has any value. The intention of the law-giver in introducing Section 69A was to get at income which has not been reflected in the books of account but found to belong to the Assessee. Not only it must belong to the Assessee, but it must be other valuable articles. The Supreme Court considered few examples to illustrate the point. Let us take the case of an Assessee who is found to be the owner of 50 mobile phones, each having a market value of Rs. 2 Lakhs each. The value of such articles each having a price of Rs. 2 Lakhs would amount to a sum of Rs. 1 Crore. Let us take another example where the Assessee is found to be the owner of 25 highly expensive cameras. Could it be said that despite having a good price or worth a great deal of money, they would stand excluded from the purview of Section 69A. On the other hand, let us take an example where a person is found to be in possession of 500 tender coconuts. They would have a value and even be marketable but it may be wholly inapposite to describe the 500 tender coconuts as valuable articles. It goes both to the marketability, as also the fact that it may not be described as worth a ‘good’ price. Each case must be decided with reference to the facts to find out that while articles or movables worth a great deal of money or worth a good price are comprehended articles which may not command any such price must stand excluded from the ambit of the words “other valuable articles”. The concept of ‘other valuable articles’ may evolve with the arrival in the market of articles, which can be treated as other valuable articles on satisfying the other tests.

Bitumen is defined in the Concise Oxford English Dictionary as “a black viscous mixture of hydrocarbons obtained naturally or as a residue from petroleum distillation, used for road surfacing and roofing”. Bitumen appears to be a residual product in the petroleum refineries, and it is usually used in road construction, which is also probabalised by the fact that the Appellant was to deliver the bitumen to the Road Construction Department of the State. Bitumen is sold in bulk ordinarily. The Supreme Court noted that in the Assessment Order, the Officer has proceeded to take R4,999.58 per metric ton as taken in the AG Report on bitumen scam. Thus, it is that the cost of bitumen for 2,094.52 metric ton has been arrived at as Rs. 1,04,71,720.30. This would mean that for a kilogram of bitumen, the price would be only Rs 5 in 1995–96 (F.Y.).

Bitumen may be found in small quantities or large quantities. If the ‘article’ is to be found ‘valuable’, then in small quantity, it must not just have some value but it must be ‘worth a good price’ {See Black’s Law Dictionary (supra)} or ‘worth a great deal of money’ {See Concise Oxford Dictionary (supra)} and not that it has ‘value’. Section 69A would then stand attracted. But if to treat it as ‘valuable article’, it requires ownership in large quantity, in the sense that by multiplying the value in large quantity, a ‘good price’ or ‘great deal of money’ is arrived at then it would not be valuable article. Thus, the Supreme Court concluded that ‘bitumen’ as such could not be treated as a ‘valuable article’.

In view of these findings, the Supreme Court did not deal with other points. The appeals were allowed. The impugned judgment was stand set aside and though on different grounds, the order by the Commissioner Appeals deleting the addition made on the aforesaid basis was restored.

Shri Hrishikesh Roy, J. agreed with judgement of Shri K M Joseph J. that for the purposes of Section 69A, –the deeming effect of the provision will only apply if the Assessee is the owner of the impugned goods. Secondly, for any Article to be considered as ‘valuable article’ Under Section 69A, it must be intrinsically costly, and it will not be regarded as valuable if huge mass of a non-precious and common place Article is taken into account, for imputing high value and added his reasoning to justify his opinion.

Section 69A provides as a Rule of evidence that for the deeming effect to apply, the Assessee must be the owner of money, bullion, jewellery and other valuable articles on which he is unable to offer a satisfactory explanation. Someone having mere possession and without legal ownership or title over the goods will not be covered within the ambit of Section 69A. In the present case, the Assessee was certainly not the owner of the bitumen — but was the carrier who was supplying goods from the consignor – oil marketing companies to the consignee – Road Construction Department. Notably, due to short delivery of goods, the possession of the Assessee was unlawful. The inevitable conclusion, therefore, is that the Assessee is not the owner, for the purposes of Section 69A.

For purpose of Section 69A of Income-tax Act, 1961, an ‘article’ shall be considered ‘valuable’ if the concerned Article is a high-priced Article commanding a premium price. As a corollary, an ordinary ‘article’ cannot be bracketed in the same category as the other high-priced articles like bullion, gold, jewellery mentioned in Section 69A by attributing high value to the run-of-the-mill article, only on the strength of its bulk quantity. To put it in another way, it is not the ownership of huge volume of some low cost ordinary Article but precious gold and the likes that would attract the implication of deemed income under Section 69A.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

1 Kerala State Beverages Manufacturing & Marketing Corporation Ltd. vs. The Assistant Commissioner of Income Tax

(2022) 440 ITR 492 (SC)

Disallowance under section 40(a)(iib) of the Income-tax Act, 1961 – The gallonage fee, licence fee and shop rental (kist) with respect to FL-9 and FL-1 licences granted to the State Govt. Undertakings would squarely fall within the purview of Section 40(a)(iib) of the Income-tax Act, 1961 – The surcharge on sales tax and turnover tax, is not a fee or charge coming within the scope of Section 40(a)(iib)(A) or 40(a)(iib)(B), as such same is not an amount which can be disallowed under the said provision.

For A.Y. 2014-2015, the Deputy Commissioner of Income Tax finalised the Appellant’s income assessment u/s 143(3) of the Income-tax Act, 1961 vide Assessment Order dated 14th December, 2016. The Principal Commissioner of Income Tax exercised the power of revision as contemplated u/s 263 of the Act and set aside the order of assessment on the ground that same is erroneous and is prejudicial to the interest of the revenue, to the extent it failed to disallow the debits made in the Profit & Loss Account of the Assessee, with respect to the amount of surcharge on sales tax and turnover tax paid to the State Government, which ought to have been disallowed u/s 40(a)(iib). Against the order of the Principal Commissioner, Income Tax, dated 25th September, 2018, the Appellant filed an appeal before the Income Tax Appellate Tribunal.

With respect to A.Y. 2015-2016, assessment against the Appellant was completed u/s 143(3) by the Assistant Commissioner of Income Tax vide order of assessment dated 28th December, 2017. Debits contained in the Profit & Loss Account of the Appellant with respect to payment of gallonage fee, licence fee, shop rental (kist) and surcharge on sales tax, amounting to a total sum of Rs. 811,90,88,115 were disallowed u/s 40(a)(iib). Aggrieved by the said order, Appellant filed an appeal before the Commissioner of Income Tax (Appeals), which was dismissed. The Appellant carried the matter by way of a second appeal before the Tribunal.

The Tribunal dismissed the appeals by a common order dated 12th March, 2019. The Appellant thereafter filed a miscellaneous application on the ground that the Tribunal had failed to consider the issue agitated against the disallowance of the surcharge on sales tax. The said miscellaneous application was allowed by recalling earlier order dated 12th March, 2019 and a fresh order was passed on 11th October, 2019, finding the issue against the Appellant and dismissing the appeal.

Aggrieved by the aforesaid three orders, the Appellant filed Income Tax Appeals before the High Court, which were disposed of by the common impugned order. In the common impugned order passed by the High Court, the question of law raised, was answered partly in favour of the Assessee/Appellant and partly in favour of the revenue.

On further appeal by the Assessee/Appellant as well as by the Revenue, the Supreme Court observed that, while it is the case of the Assessee/Appellant that the gallonage fees, licence fee, and shop rental (kist) for FL-9 licence and FL-1 licence, the surcharge on sales tax and turnover tax do not fall within the purview of the abovesaid amended section, the case of the Revenue is that all the aforesaid amounts are covered under section 40(a)(iib) as such, such amounts are not deductible for computation of income, for A.Ys. 2014-2015 and 2015-2016.

The Supreme Court noted that during the A.Ys. 2014-2015 and 2015-2016 the Appellant was holding FL-9 and FL-1 licences to deal in wholesale and retail of Indian Made Foreign Liquor (IMFL) and Foreign Made Foreign Liquor (FMFL) granted by the Excise Department. FL-9 licence was issued to deal in wholesale liquor, which they were selling to FL-1, FL-3, FL-4, 4A, FL-11, FL-12 licence holders. The FL-1 licence was for the sale of foreign liquor in sealed bottles, without the privilege of consumption within the premises. The gallonage fee is payable under Section 18A of the Kerala Abkari Act and Rule 15A of the Foreign Liquor Rules. The Appellant was the only licence holder for the relevant years so far as FL-9 licence to deal in wholesale, and so far as FL-1 licences are concerned, it was also granted to one other State owned Undertaking, i.e., Kerala State Co-operatives Consumers’ Federation Ltd. By interpreting the word ‘exclusively’ as worded in Section 40(a)(iib)(A) of the Act, the High Court in the impugned order has held that the levy of gallonage fee, licence fee and shop rental (kist) with respect to FL-9 licences granted to the Appellant will clearly fall within the purview of Section 40(a)(iib) and the amounts paid in this regard is liable to be disallowed. At the same time, the amount of gallonage fee, licence fee and shop rental (kist) paid with respect to FL-1 licences granted in favour of the Appellant for retail business; the High Court has held that it is not an exclusive levy, as such disallowance made with respect to the same cannot be sustained. Regarding surcharge on sales tax and turnover tax, it is held that same is not a ‘fee’ or ‘charge’ within the meaning of Section 40(a)(iib) as such same is not an amount that can be disallowed under the said provision.

The Supreme Court noted that section 40 of the Income-tax Act, 1961 is a provision that deals with the amounts which are not deductible while computing the income chargeable under the head ‘Profits and gains of business or profession’. Section 40 of the Act is amended in 2013, and 40(a)(iib) is inserted by Amending Act 17 of 2013, which has come into force from 1st April, 2014. In terms of Article 289 of the Constitution of India, the property and income of a State shall be exempt from Union taxation. Therefore, in terms of Article 289, the Union is prevented from taxing the States on its income and property. It is the constitutional protection granted to the States in terms of the abovesaid Article. This protection has led the States in shifting income/profits from the State Government Undertakings into Consolidated Fund of the respective States to have protection under Article 289. In the instant case, the KSBC, a State Government Undertaking, is a company like any other commercial entity, which is engaged in the business and trade like any other business entity for the purpose of wholesale and retail business in liquor. As much as these kinds of undertakings are under the States control, the total shareholding or in some cases majority of shareholding is held by States. As such, they exercise control over it and shift the profits by appropriating the whole of the surplus or a part of it to the Government by way of fees, taxes or similar such appropriations. From the relevant Memorandum to the Finance Act, 2013 and underlying object for amendment of Income-tax Act by Act 17 of 2013, by which Section 40(a)(iib)(A)(B) is inserted, it is clear that the said amendment is made to plug the possible diversion or shifting of profits from these undertakings into State’s treasury. In view of Section 40(a)(iib) of the Act, any amount, as indicated, which is levied exclusively on the State-owned undertaking (KSBC in the instant case), cannot be claimed as a deduction in the books of State-owned undertaking. Thus, the same is liable to income tax.

The Supreme Court observed that in the instant case, the gallonage fee, licence fee, shop rental (kist), surcharge and turnover tax are the amounts of which Assessee claims that they are not attracted by Section 40(a)(iib) of the Act. On the other hand, it is the case of the Respondent/revenue that all the said components attract the ingredients of Section 40(a)(iib)(A) or Section 40(a)(iib)(B), as such, they are not deductible. Broadly these levies can be divided into three categories. Gallonage fee, licence fee and shop rental (kist) are in the nature of fee imposed under the Abkari Act of 1902. These are the fees payable for the licences issued under FL-9 and FL-1. In the impugned order, the High Court has held that the gallonage fee, licence fee and shop rental (kist) with respect to FL-9 licence are not deductible, as it is an exclusive levy on the Corporation. Further a distinction is drawn from FL-1 licence from FL-9 licence, to apply Section 40(a)(iib), only on the ground that, FL-1 licences are issued not only to the Appellant/KSBC but also issued to one other Government Undertaking, i.e., Kerala State Co-operatives Consumers’ Federation Ltd. The High Court has held that as there is no other player holding licences under FL-9 like KSBC as such the word ‘exclusivity’ used in Section 40(a)(iib) attract such amounts. At the same time only on the ground that FL-1 licences are issued not only to the KSBC but also to Kerala State Co-operatives Consumers’ Federation Ltd., High Court has held that exclusivity is lost so as to apply the provision u/s 40(a)(iib). If the amended provision under Section 40(a) (iib) is to be read in the manner, as interpreted by the High Court, it will literally defeat the very purpose and intention behind the amendment. The aspect of exclusivity under Section 40(a)(iib) is not to be considered with a narrow interpretation, which will defeat the very intention of Legislature, only on the ground that there is yet another player, namely, Kerala State Co-operatives Consumers’ Federation Ltd. which is also granted licence under FL-1. The aspect of ‘exclusivity’ under Section 40(a)(iib) has to be viewed from the nature of undertaking on which levy is imposed and not on the number of undertakings on which the levy is imposed. If this aspect of exclusivity is viewed from the nature of the undertaking, in this particular case, both KSBC and Kerala State Co-operatives Consumers’ Federation Ltd. are undertakings of the State of Kerala; therefore, the levy is an exclusive levy on the State Government Undertakings. Thus, any other interpretation would defeat the very object behind the amendment to Income-tax Act, 1961.

The Supreme Court held that once the State Government Undertaking takes licence, the statutory levies referred above are on the Government Undertaking because it is granted licences. Therefore, the finding of the High Court that gallonage fee, licence fee and shop rental (kist) so far as FL-1 licences are concerned, is not attracted by Section 40(a)(iib), cannot be accepted and such finding of the High Court runs contrary to object and intention behind the legislation.

Further, the contention that because another State Government Undertaking, i.e., Kerala State Co-operatives Consumers’ Federation Ltd., was also granted licences during the relevant years, exclusivity mentioned in Section 40(a)(iib) is lost, also cannot be accepted, for the reason that exclusivity is to be considered with reference to nature of the licence and not on the number of State-owned Undertakings.

Regarding the surcharge on sales tax, the Supreme Court noted that the High Court had held in favour of KSBC and against the revenue. The reasoning of the High Court was that surcharge on sales tax is a tax, and Section 40(a) (iib) does not contemplate ‘tax’ and a surcharge on sales tax is not a ‘fee’ or a ‘charge’. Therefore, High Court was of the view that the surcharge levied on KSBC does not attract Section 40(a)(iib) of the Act.

According to the Supreme Court, the ‘fee’ or ‘charge’ as mentioned in Section 40(a)(iib) is clear in terms, and that will take in only ‘fee’ or ‘charge’ as mentioned therein or any fee or charge by whatever name called, but cannot cover tax or surcharge on tax and such taxes are outside the scope and ambit of Section 40(a)(iib)(A) and Section 40(a)(iib)(B) of the Act. The surcharge which is imposed on KSBC is under Section 3(1) of the KST Act.

According to the Supreme Court, a reading of preamble and Section 3(1) of the KST Act make it abundantly clear that the surcharge on sales tax levied by the said Act is nothing but an increase of the basic sales tax levied u/s 5(1) of the KGST Act, as such the surcharge is nothing but a sales tax. It is also settled legal position that a surcharge on a tax is nothing but the enhancement of the tax (K. Srinivasan 1972(4) SCC 526 and Sarojini Tea Co. Ltd. (1992) 2 SCC 156).

So far as the turnover tax was concerned, the Supreme Court noted that such tax was imposed not only on KSBC in terms of Section 5(1)(b) of the KGST Act, but it is imposed on various other retail dealers specified u/s 5(2) of the said Act. According to the Supreme Court, turnover tax is also a tax and the very same reason which have been assigned above for surcharge would equally apply to the turnover tax also. As such, turnover tax was also outside the purview of Section 40(a) (iib)(A) and 40(a)(iib)(B).

For the aforesaid reasons, the Supreme Court held that the gallonage fee, licence fee and shop rental (kist) with respect to FL-9 and FL-1 licences granted to the Appellant would squarely fall within the purview of Section 40(a)(iib) of the Income-tax Act, 1961. The surcharge on sales tax and turnover tax is not a fee or charge coming within the scope of Section 40(a)(iib)(A) or 40(a)(iib)(B), as such same is not an amount which can be disallowed under the said provision.

Accordingly, the civil appeal filed by the Assessee was dismissed, and the civil appeals filed by the revenue were partly allowed to the extent indicated above. As a result, the assessments completed against the Assessee with respect to A.Ys. 2014-2015 and 2015-2016 were set aside. The assessing officer was directed to pass revised orders after computing the liability according to the directions as indicated above.

BCAJ Admin

Glimpses of Supreme Court Rulings

46. CIT vs. AbhisarBuildwell Pvt Ltd
(2023) 454 ITR 212 (SC)

Search and seizure — Assessment u/s 153A —Procedure – (i) In case of search under section 132 or requisition under section 132A, the AO assumes the jurisdiction for block assessment under section 153A; (ii) all pending assessments / reassessments shall stand abated; (iii) in case any incriminating material is found / unearthed, even, in case of unabated / completed assessments, the AO would assume the jurisdiction to assess or reassess the ‘total income’ taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and (iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments / unabated assessments, meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act, 1961 — however, the completed / unabated assessments can be reopened by the AO in exercise of powers under sections 147 / 148 of the Act, subject to fulfillment of the conditions as envisaged / mentioned under sections 147 / 148 of the Act and those powers are saved.

According to the Supreme Court, the question posed for its consideration was, as to whether in respect of completed assessments / unabated assessments, whether the jurisdiction of AO to make an assessment is confined to incriminating material found during the course of search under section 132 or requisition under section 132A or not, i.e., whether any addition could be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act or not.

The Supreme Court noted that it was the case on behalf of the Revenue that in case of search under section 132 or requisition under section 132A, the assessment has to be done under section 153A of the Act. The AO thereafter has the jurisdiction to pass assessment orders and to assess the ‘total income’ taking into consideration other material, even though no incriminating material is found during the search in respect of completed/unabated assessments.

The Supreme Court, at the outset, noted that various High Courts, namely, Delhi High Court, Gujarat High Court, Bombay High Court, Karnataka High Court, Orissa High Court, Calcutta High Court, Rajasthan High Court and the Kerala High Court have taken the view that no addition can be made in respect of completed / unabated assessments in absence of any incriminating material. The lead judgment was by the Delhi High Court in the case of Kabul Chawla (2016) 380 ITR 573 (Del), which had been subsequently followed and approved by the other High Courts, referred to hereinabove. One another lead judgment on the issue was the decision of the Gujarat High Court in the case of Saumya Construction (2016) 387 ITR 529 (Guj), which had been followed by the Gujarat High Court in the subsequent decisions, referred to hereinabove. Only the Allahabad High Court in the case of Principal CIT vs. MehndipurBalaji (2022) 447 ITR 517 (All) had taken a contrary view.

The Supreme Court observed that before the insertion of section 153A in the statute, the relevant provision for block assessment was under section 158BA of the Act. The erstwhile scheme of block assessment under section 158BA envisaged assessment of ‘undisclosed income’ for two reasons: firstly, there were two parallel assessments envisaged under the erstwhile regime, i.e., (i) block assessment under section 158BA to assess the ‘undisclosed income’ and (ii) regular assessment in accordance with the provisions of the Act to make assessment qua income other than undisclosed income. Secondly, the ‘undisclosed income’ was chargeable to tax at a special rate of 60 per cent under section 113, whereas income other than ‘undisclosed income’ was required to be assessed under regular assessment procedure and was taxable at the normal rate. Therefore, section 153A came to be inserted and brought into the statute. Under the section 153A regime, the legislation intended to do away with the scheme of two parallel assessments and tax the ‘undisclosed’ income also at the normal rate of tax as against any special rate. Thus, after the introduction of section 153A and in case of search, there shall be block assessment for six years. Search assessments / block assessments under section 153A are triggered by conducting a valid search under section 132. The very purpose of the search, which is a prerequisite / trigger for invoking the provisions of sections 153A / 153C is the detection of undisclosed income by undertaking extraordinary power of search and seizure, i.e., the income which cannot be detected in the ordinary course of regular assessment. Thus, the foundation for making search assessments under sections 153A / 153C can be said to be the existence of incriminating material showing undisclosed income detected as a result of the search.

According to the Supreme Court, on a plain reading of section 153A of the Act, it was evident that once a search or requisition is made, a mandate is cast upon the AO to issue a notice under section 153A to the person. The notice would require such person to furnish the return of income in respect of each assessment year falling within six assessment years immediately preceding the assessment year, relevant to the previous year in which such search is conducted or requisition is made, and assess or reassess the same.

The Supreme Court noted that as per the provisions of section 153A, in case of a search under section 132 or requisition under section 132A, the AO gets the jurisdiction to assess or reassess the ‘total income’ in respect of each assessment year falling within six assessment years. However, as per the second proviso to section 153A, the assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate. As per sub-section (2) of section 153A, if any proceeding initiated or any order of assessment or reassessment made under sub-section (1) has been annulled in appeal or any other legal proceeding, then, notwithstanding anything contained in sub-section (1) or section 153A, the assessment or reassessment relating to any assessment year which has abated under the second proviso to sub-section (1), shall stand revived with effect from the date of receipt of the order of such annulment by the CIT. Therefore, according to the Supreme Court, the intention of the legislation seemed to be that in case of search, only the pending assessment /reassessment proceedings shall abate and the AO would assume the jurisdiction to assess or reassess the ‘total income’ for the entire six years period / block assessment period. The intention did not seem to be to reopen the completed / unabated assessments, unless any incriminating material is found with respect to the concerned assessment year falling within the last six years preceding the search. The Supreme Court, therefore held that, on the true interpretation of section 153A of the Act, 1961, in case of a search under section 132 or requisition under section 132A and during the search any incriminating material is found, even in case of unabated/completed assessment, the AO would have the jurisdiction to assess or reassess the ‘total income’ taking into consideration the incriminating material collected during the search and other material which would include income declared in the returns, if any, furnished by the assessee as well as the undisclosed income. However, in case during the search no incriminating material is found, in case of completed / unabated assessment, the only remedy available to the Revenue would be to initiate the reassessment proceedings under sections 147 / 148 of the Act, subject to fulfillment of the conditions mentioned in sections 147 / 148, as in such a situation, the Revenue cannot be left with no remedy. Therefore, even in case of block assessment under section 153A in case of unabated / completed assessment and in case no incriminating material is found during the search, the power of the Revenue to have the reassessment under sections 147 / 148 of the Act has to be saved, otherwise, the Revenue would be left without a remedy.

The Supreme Court further held that if the submission on behalf of the Revenue in the case of search even where no incriminating material is found during the course of the search in case of unabated / completed assessment, the AO can assess or reassess the income / total income taking into consideration the other material, is accepted then there will be two assessment orders, which shall not be permissible under the law.

For the reasons stated hereinabove, the Supreme Court was in complete agreement with the view taken by the Delhi High Court in the case of Kabul Chawla (supra) the Gujarat High Court in the case of Saumya Construction (supra) and the decisions of the other High Courts taking the view that no addition can be made in respect of the completed assessments in absence of any incriminating material.
In view of the above and for the reasons stated above, the Supreme Court concluded as under:

(i) that in case of search under section 132 or requisition under section 132A, the AO assumes the jurisdiction for block assessment under section 153A;

(ii) all pending assessments / reassessments shall stand abated;

(iii) in case any incriminating material is found / unearthed, even, in case of unabated / completed assessments, the AO would assume the jurisdiction to assess or reassess the ‘total income taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and

(iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments / unabated assessments. This means, with respect to completed/unabated assessments, no addition can be made by the AO in the absence of any incriminating material found during the course of a search under section 132 or requisition under section 132A of the Act, 1961. However, the completed / unabated assessments can be reopened by the AO in the exercise of powers under sections 147 / 148 of the Act, subject to fulfillment of the conditions as envisaged/mentioned under sections 147 / 148 of the Act and those powers are saved.

47. Maharishi Institute of Creative Intelligence vs. CIT (E)
(2023) 454 ITR 533 (SC)

Charitable Trust — Registration under section 12A — The assessee cannot be denied the exemption in the absence of a certificate of registration, since the year 1987, i.e., from the date on which the assessee applied for registration under section 12A (when there was no requirement of issuance of a certificate of registration), it continued to avail the benefit of registration under section 12A at least up to the A.Y. 2007–08.

The assessee applied for registration under section 12A of the Act as per the provisions of law prevailing in the year 1987. Thereafter, the assessee continued to be granted the exemption under section 12A of the Act.

Till 1987 there was no requirement of issuance of any certificate of registration of section 12A. Only filing an application for registration under section 12A and processing the same by the Department was sufficient. However, in the year 1997, there was an amendment, which required the issuance of the certificate of registration under section 12A also.

Despite the above, the assessee even after 1997 continued to avail of the exemption under section 12A of the Act even post 1987 till the A.Y. 2007-08.

The AO considering the facts as in earlier years up to 2007-08 and based on the registration under section 12A in the year 1987, granted the benefit of exemption under section 12A and accordingly passed an assessment order for the A.Y. 2010-11.

The assessment order came to be taken under suomotu revision by the CIT in the exercise of powers under section 263 of the Act. The CIT set aside the assessment order on the ground that the AO mechanically granted the benefit of exemption under section 12A without in fact verifying whether any registration in favour of the assessee was issued under section 12A of the Act or not. Therefore, the CIT thought that the assessment order was against the interest of the Revenue.

In appeal, at the instance of the assessee, the Tribunal set aside the order passed by the CIT.

The order passed by the Tribunal was the subject matter of appeal before the High Court at the instance of the Revenue. Taking into consideration the amendment in the year 1997, the High Court allowed the appeal preferred by the Revenue and set aside the order passed by the Tribunal by observing that as the assessee had failed to produce the certificate of registration, the assessee was not entitled to the exemption under section 12A.

The assessee filed the review application which was dismissed.

The judgment and order passed by the High Court allowing the appeal preferred by the Revenue were the subject matter of the appeal before the Supreme Court.

The Supreme Court having heard the learned counsel appearing for respective parties noted that it was not disputed that since 1987 i.e. from the date on which the assessee applied for registration under section 12A, the assessee continued to avail the benefit of exemption under section 12A at least up to the A.Y. 2007-08. Even post-1997, the assessee continued to avail of the exemption under section 12A based on its registration in the year 1987.

In that view of the matter, the Supreme Court was of the view that the AO was justified in granting the benefit of exemption under section 12A for the A.Y. 2010-11. According to the Supreme Court, what was required to be considered was the relevant provision prevailing in the year 1987, namely, the day on which the assessee applied for the registration. At the relevant time, there was no requirement for the issuance of any certificate of registration.

The Supreme Court observed that for all these years after 1997 till the year 2007-08, the assessee continued to avail the benefit of exemption solely based on the registration in the year 1987. The Revenue and even the CIT never claimed that in the earlier years there was no certificate of registration or the registration was not granted at all. Even from the material on record, namely, a communication dated 3rd June, 2015 which was considered by the Tribunal, it was apparent that the assessee was granted registration on 22nd September, 1987. Therefore, it could not be said that there was no registration at all.

In view of the above, the Supreme Court held that the impugned judgment and order passed by the High Court was erroneous and unsustainable and was quashed and set aside. The order passed by the Tribunal was restored.

The appeal was accordingly allowed to the aforesaid extent.

BCAJ Admin

Glimpses of Supreme Court Rulings

41. Jagdish Transport Corporation and Ors. vs.
UOI and Ors.
(2023) 454 ITR 264 (SC)

Settlement Commission — Settlement Commission passed an order to comply with the directions of the High Court to dispose of the application on or before 31st March, 2008, after specifically observing that it was not practicable for the Commission to examine the records and investigate the case for proper Settlement and to give adequate opportunity to the applicant and the Department, as laid down in section 245D(4) of the Act — The order passed by the Settlement Commission was a nullity and could not be said to be an order in the eye of law — Matter was remitted to the Interim Board for fresh adjudication.

A search was conducted under section 132 of the Income-tax, Act, 1961 (for short “the Act”) on the business premises of the assessee firm as well as the residence of the partners.

Consequently, notices under section 153A were issued to all the assessees for the A.Ys. 1998-99 to 2004-05.

The return of income was filed by assesses under section 153A of the Act for the aforesaid assessment years.

An application under section 245C(1) of the Act was filed by the assesses before the Income Tax Settlement Commission (for short “the Settlement Commission”).

As per section 245HA, inserted by the Finance Act, 2007, the application was to be decided by the Settlement Commission on or before 31st March, 2008, failing which the proceedings before the Settlement Commission shall stand abated.

The High Court, by way of an interim order, directed the Settlement Commission to dispose of the application under section 245D of the Act by 31st March, 2008.

By order dated 31st March, 2008, the Settlement Commission disposed of the proceedings and settled the undisclosed income at Rs.59,00,000. The Settlement Commission also passed an order that theCIT/AO may take appropriate action in respect of the matters, not placed before the Commission by the applicant, as per the provisions ofsection 245F(4) of the Act.

The Settlement Commission passed the following order:

1. In the abovementioned cases, the Hon’ble High Court of Uttar Pradesh at Lucknow has passed orders dated 19th March, 2008 directing the Settlement Commission to complete the proceedings under section 245D(4) by 31st March, 2008.

2. The Rule 9 Report in this case has been received.

3. In all, the Principal Bench of the Commission has till 26th March, 2008 received more than 325 orders from various High Courts in the month of March, 2008, directing the Principal Bench to complete the cases by 31st March, 2008.

4. This would involve more than 1,500 assessments. The Settlement Commission deals with the assessments which only involve the complexity of investigation and the application is intended to prove quietus to litigation. For example, in one group of cases where 23 applications are involved, the paper book, filed before the Settlement Commission runs into 30,000 pages. It goes without saying that sufficient and proper opportunity is required to be given both to the applicant and the CIT for arriving at a proper settlement.

5. At this juncture, it is not practicable for the Commission to examine the records and investigate the case for proper settlement. Even giving adequate opportunity to the applicant and the department, as laid down in section 245(D)(4) of the Income-tax Act, 1961, is not practicable. However, to comply with the directions of the Hon’ble High Court, we hereby pass an order under section 245D(4) of the Income-tax Act, 1961, as under:

6. The undisclosed income is settled as under:

Jagdish Transport Corporation: Rs.32,00,000

Surendar Kr. Tandon: Rs.6,00,000

Sandhya Tandon: Rs.6,00,000

Kiran Tandon: Rs.7,00,000

Virender Kr. Tandon: Rs.8,00,000

Total: Rs.59,00,000

7. The CIT/AO may take such action as appropriate in respect of the matters, not placed before the Commission by the applicant, as per the provisions of section 245F(4) of IT Act, 1961.

8. Prayer for granting immunity from penalty and prosecution under all Central Acts. In view of the discussions in preceding paras, we grant immunity from prosecution and penalty under the Income-tax Act, 1961 only as regards issues arising from the application and covered by this Order.

9. Interest leviable, if any, shall be charged as per law.

10. It is settled that the amount of tax along with interest shall be paid by the applicants within 35 days from the date of receipt of intimation from the AO.

11. In view of the statutory time limit prescribed under section 245D(4A) of the Act, the Settlement Commission directs the Commissioner of Income-tax to compute the total income, income tax, interest and penalty, if any, payable as per this order and communicate to the applicant immediately along with the demand notice and challan under intimation to this office.

12. In case of failure to adhere to the scheme of payment, the immunity granted under section 245(H)(1) shall be withdrawn in terms of sub-section (1A) of the said section.

In the light of the observations made in para 7 by the Settlement Commission, the AO issued the show cause notice for re-assessment on the various transactions which are detected but were not disclosed by the Appellants before the Settlement Commission.

The show cause notice was the subject-matter of Writ Petition before the High Court. However, thereafter, during the pendency of the proceedings, the AO passed the Assessment Order, which was challenged before the High Court by way of an amendment.

The Division Bench of the High Court dismissed the writ petition on the grounds that the order passed by the Settlement Commission dated 31st March, 2008 was a nullity as the Settlement Commission itself observed that it was not practicable for the Commission to examine the records and investigate the case for proper Settlement and even giving adequate opportunity to the applicant and the Department, as laid down in section 245D(4) of the Act was not practicable.

According to the Supreme Court, considering the order passed by the Settlement Commission dated 31st March, 2008 and the manner in which the Settlement Commission disposed of the application under section 245, the High Court was justified in observing that the order passed by the Settlement Commission was a nullity and could not be said to be an order in the eye of law. The Supreme Court noted that the Settlement Commission specifically observed in para 5 of the order dated 31st March, 2008 that it was not practicable for the Commission to examine the records and investigate the case for proper Settlement and that even giving adequate opportunity to the applicant and the Department, as laid down in section 245D(4) of the Act. However, thereafter, the Settlement Commission passed an order to comply with the directions of the High Court to dispose of the application on or before 31st March, 2008. The Supreme Court was of the view that the High Court ought to have remitted the matter back to the Settlement Commission to pass a fresh order in accordance with law and on merits after following due procedure as required under section 245D(4) of the Act.

The Supreme Court therefore set aside the impugned judgment and order passed by the High Court. It set aside the subsequent assessment/re-assessment order passed by the AO, which was the subject-matter of writ petition before the High Court. It also set aside the order passed by the Settlement Commission dated 31st March, 2008 and remanded the matter to the Settlement Commission for a fresh decision.

The Supreme Court noted that the Settlement Commission has been wound up and the matters pending before the Settlement Commission are being adjudicated and decided by the Interim Board constituted under section 245AA of the Act. In view of the above position, the matter was remitted to the Interim Board with a request that the matter to be taken up expeditiously and would be preferably decided within a period of six months from the date of first hearing and a reasoned order would be passed.

42. CIT vs. Glowshine Builders & Developers Pvt Ltd
(2023) 454 ITR 249 (SC)

Capital Gains or Business Profits — Assessee engaged in the business of building and development — Sale of land — ITAT had not considered the relevant aspects/relevant factors while considering the transaction in question as stock in trade. It had also not considered the other relevant aspects which as such were required to be considered by the ITAT — The matter was remanded to the ITAT to consider the appeal afresh.

The assessee entered into an agreement dated 6th May, 2008 with one M/s Kirit City Homes Pvt Ltd. The development rights in a property at Vasai were sold for a total consideration of Rs. 15,94,06,500. As per paragraph 6 of the development agreement and as per the receipt of the deed, consideration of Rs. 15,94,06,500 was agreed and received by the assessee.

During assessment, it was noticed by the AO that the aforesaid was not disclosed while filing the return of income. The assessee did not enter the aforesaid income into his profit and loss account. It was asked to explain the transaction as it was not appearing in its profit and loss account. The agreement dated 6th May, 2008 was also furnished to the assessee along with the notice. In response, the assessee vide letter dated 4th October, 2011 stated that the transaction was duly offered to tax in A.Y. 2008-09 reflecting a consideration of Rs. 5,24,27,354. The assessee also stated that it had entered into a “rectification deed” with the said party on 30th May, 2008. By the said ratification, it was claimed that the value of the development rights was reduced from Rs. 15,94,06,500 to Rs. 5,24,27,354.

According to the AO, as the transaction was pertaining to A.Y. 2009-10, a show cause notice dated 10th October, 2011 was issued under section 142(1) requiring the assessee to explain as to why the provisions of section 50C of the I.T. Act should not be applied and why the sale proceeds should not be treated at R15,94,06,500 and taxed in A.Y. 2009-10.

The assessee replied to the same. With regard to the applicability of provision of section 50C, he stated that he had sold its stock in trade and not the assets.

The AO made the addition of R15,94,06,500 by treating the same as short term capital gains and consequently, added the same to the income for the year under consideration.

The CIT(A), Mumbai dismissed the appeal and confirmed the addition made by the AO and upheld the view of the AO to treat the transaction as income for capital gains for the AY 2009-10. The CIT(A) also discarded the submissions made by the assessee that transfer of development rights were made in F.Y. 2008-09 pursuant to the MOU dated 27th December, 2007. In the absence of proof to buttress such claim, the CIT(A) also discarded the claim of the assessee that value of the transfer of development rights was reduced from Rs. 15,94,06,500 to Rs. 5,24,27,354.

The ITAT, after examining the chart submitted by the assessee pertaining to opening and closing balance for the assessment years 1996-97 to 2007-08 held that the assessee in all these years showed inventory and expenses. Consequently, ITAT held that the assessee was engaged in the business of building and development. The ITAT further noted that the assessee showed the cost of land along with related expenditure as work in progress/inventory since 1999-2000 and the assessment orders were subsequently made under section 143(3) of the IT Act, wherein the AO accepted the nature of business of the assessee. Therefore, ITAT concluded that what was sold by the assessee was part of its inventory and not a capital asset. The ITAT also held that the assessee had reduced the sale consideration from Rs. 15,94,06,500 to Rs. 5,24,27,354 during F.Y. 2007-08 on the basis of MOU dated 27th December, 2007 and the said amount of the income had already been declared in the A.Y. 2008-09 i.e., F.Y. 2007-08 and therefore, such income could not be declared in A.Y. 2009-10 i.e., F.Y. 2008-09. The ITAT also confirmed and/or agreed with the assessee that the sale consideration was Rs. 5,24,27,354 only. Based on these findings, the ITAT reversed the findings of the AO as well as the CIT(A) and allowed the appeal by deleting the addition made by the AO of Rs. 15,94,06,500.

The High Court dismissed the appeal filed by the Revenue by holding that none of the questions proposed by the Revenue were substantial questions of law.

The Supreme Court noted that the AO treated the transaction as capital assets. ITAT had reversed the said findings and held that the transaction was stock in trade. The AO specifically recorded the findings on examining the balance sheets for the A.Y. 2006-07 to 2009-10 that there was not even a single sale during all these years and that there were negligible expenses and the transaction in question was the only transaction i.e., transfer of development rights in respect of land and consequently, it was held that the transaction was one of transfer of capital assets and not one of transfer of stock in trade. However, the ITAT after examining the opening and closing balance for the A.Y. 1996-97 to 2007-08 observed that in multiple years, inventory was shown in the balance sheet and held that the transaction in question is sale of stock in trade.

According to the Supreme Court, ITAT neither dealt with the findings given by the AO nor verified/examined the total sales made by the assessee during the relevant time and during the previous years. The Supreme Court was of the opinion that merely on the basis of recording of the inventory in the books of accounts, the transaction in question would not become stock in trade. The Supreme Court observed that it is settled position of law that in order to examine whether a particular transaction is sale of capital assets or business expense, multiple factors like frequency of trade and volume of trade, nature of transaction over the years etc., are required to be examined. According to the Supreme Court, the ITAT, without examining any of the relevant factors had confirmed that the transaction was transfer of stock in trade.

According to the Supreme Court, the High Court had also failed to appreciate that even in the event of acceptance of claim made by the assessee, including the assertion that Rs. 15,94,06,500 was shown in the tax return in the earlier AY i.e., 2008-09, the differential amount of Rs. 10,69,79,146 on account of reduction in sale consideration of development rights was to be assessed in the current year as either capital gain or business income. The Supreme Court noted that as per the claim of the assessee and the entry made and reflected in the ledger account of the assessee as on 31st March, 2008, an amount of Rs. 15,94,06,500 was paid to a third party i.e., SICCL. However, thereafter, according to the assessee there was a rectification deed dated 30th May, 2008 and the amount was reduced from Rs. 15,94,06,500 to Rs. 5,24,27,354. According to the Supreme Court, the ITAT had not even questioned the factum of refund of differential amount of Rs. 10,69,79,146 to the purchaser on account of rectification deed dated 30th May, 2008. The ITAT ought to have appreciated that the moment the receipt of amount is received and recorded in the books of accounts of the assessee unless shown to be refunded/returned, it had to be treated as income in the hands of the recipient. The ITAT has also not considered the aforesaid aspect.

The Supreme Court therefore concluded that the ITAT had not considered the relevant aspects/relevant factors while considering the transaction in question as stock in trade and had not considered the relevant aspects as above which as such were required to be considered by the ITAT, the matter was therefore required to be remanded to the ITAT to consider the appeal afresh in light of the observations made hereinabove and to take into consideration the relevant factors while considering the transaction as stock in trade or as sale of capital assets or business transaction.

Accordingly, the impugned judgment and order passed by the High Court and that of the ITAT were quashed and set aside and the matter was remitted back to the ITAT to consider the appeal afreshin accordance with law and on its own merits, while taking into consideration the observations made hereinabove and to take an appropriate decision on whether the transaction in question was the sale of capital assets or sale of stock in trade and other aspects referred hereinabove.

43. CIT vs. Paville Projects Pvt Ltd
(2023) 453 ITR 447 (SC)
Civil Appeal No. 6126 of 2021 (Arising out of SLP (C) No. 13380 of 2018)

Decided On: 6th April, 2023

Revision — Prejudicial to the interest of the Revenue — Understood in its ordinary meaning it is of wide import and is not confined to loss of tax but courts have treated loss of tax as prejudicial to the interests of the Revenue — If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it would certainly be prejudicial to the interests of the Revenue — However, only in a case where two views are possible and the Assessing Officer has adopted one view, such a decision, which might be plausible and it has resulted in loss of Revenue, such an order is not revisable under section 263.

The assessee was engaged in manufacture and export of garments, shoes, etc. It filed its income tax return for the A.Y. 2007-08 wherein it showed sale of the property/building “Paville House” for an amount of Rs. 33 crores.

The building “Paville House” was constructed by the assessee on the piece of land which was purchased in the year 1972. The said house of the company was duly reflected in the balance sheet of the company.

There had been litigation between shareholders of the Company being family members. Litigations in the Company Law Board and the High Court culminated in arbitration. In the arbitration proceedings, an interim award was passed whereby an amicable settlement termed as “family settlement” was recorded between the parties. As per the interim award, three shareholders namely, (1) Asha, (2) Nandita and (3) Nikhil were paid Rs. 10.35 crores each.

The assessee showed gains arising from sale of “Paville House” amounting to Rs. 1,21,16,695 as “long term capital gains” in the computation of their income for A.Y. 2007-08. The working computation of capital gains was accepted by the AO, whereby the cost of removing encumbrances claimed (Rs.10.33 Crores paid to three shareholders pursuant to the interim award) was taken as “cost of improvement” and the deduction was claimed to remove encumbrances on computation of capital gains. On the balance amount capital gain tax was offered and paid. The assessment was completed on 15th December, 2009 by the AO under section 143(3) of the Income-tax Act, 1961 (for short “IT Act”) accepting the “long term capital gains” as per sheet attached in computation of income.

Later, a notice dated 24th October, 2011 was issued by the CIT under section 263 of the IT Act to show cause as to why the assessment order should not be set aside.

The Commissioner vide its order dated 24th April, 2011 held that the assessment order passed under section 143(3) of the IT Act was erroneous and prejudicial to the interest of the revenue on the issue relating to deduction of Rs.31.05 Crores claimed by the assessee as cost of improvement while computing long term capital gains. The claim of the assessee that the said payment was made by them towards settlement of litigation, which according to the assessee amounted to discharge of encumbrances and required to be considered as cost of improvement, was not accepted by the Commissioner as according to him it did not fall under the definition of “cost of improvement” contained in section 55(1)(b) of the IT Act. According to the Commissioner, the expenses claimed by the assessee neither constituted expenditure that is capital in nature nor resulted in any additions or alterations that provide an enhanced value of an enduring nature to the capital asset. The Commissioner also held that the payment as contended was not made by the assessee to remove encumbrances. The Commissioner also held that provisions of sections 50A and 55(1)(b) of the IT Act were not complied with and the assessment order was not framed in consonance with the provisions of the IT Act and thus the assessment order was erroneous and prejudicial to the interest of the revenue. Consequently, the Commissioner set aside the assessment order passed by the AO with a direction to the AO to recompute the capital gains of the assessee in consonance with the provisions of the IT Act as discussed in the order.

On appeal, the ITAT relying upon the decision of this Court in the case of Malabar Industrial Co Ltd vs. CIT [(2000) 2 SCC 718: (2000) 243 ITR 83 (SC)] concluded that the Commissioner wrongly invoked the jurisdiction under section 263 of the IT Act. The ITAT also observed that there was no error on facts declared. The ITAT held that every loss of revenue as a consequence of AO’s order cannot be treated as prejudicial to the interest of the revenue, when two views were possible and AO took a view which CIT did not agree with. The ITAT also upheld the allowability of the assessee’s claim of deduction of payment made to the shareholders relying upon the decision of the Bombay High Court in CIT vs. Smt. Shakuntala Kantilal [(1991) 190 ITR 56 (Bombay)]. The ITAT relying on the Tribunal’s order (Bombay Bench) in Chemosyn Ltd vs. ACIT [2012 (25) Taxxman.com 325 (Bombay)] held that the CIT’s observation of expenditure incurred for payment of shareholders not being deductible as incorrect.

The Department’s appeal against the ITAT’s order was dismissed by the High Court wherein the High Court has confirmed the ITAT’s findings. The High Court agreed with the findings recorded by the ITAT that the claim for deduction of Rs. 31.05 crores was for ending the litigation and the litigation ended only when the building was sold and the payment was made as per the direction of the Company Law Board as well as the interim arbitral award and therefore, the same was deductible under section 55(1)(b) of the IT Act, as allowed by the AO.

On a further appeal by the Revenue, the Supreme Court observed that the assessee had heavily relied upon the decision of this Court in the case of Malabar Industrial Co Ltd (supra). In the said case it is observed and held that in order to exercise the jurisdiction under section 263(1) of the Income-tax Act, 1961 the Commissioner has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. However, if one of them is absent, recourse cannot be had to section 263(1) of the Act. The Supreme Court noted that “What can be said to be prejudicial to the interest of the Revenue” has been dealt with and considered in paragraphs 8 to 10 in the case of Malabar Industrial Co Ltd (supra). Understood in its ordinary meaning it is of wide import and is not confined to loss of tax but courts have treated loss of tax as prejudicial to the interests of the Revenue.

The Supreme Court noted that even as observed in paragraph 9 in the case of Malabar Industrial Co Ltd (supra) that the scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. It was further observed that if due to an erroneous order of the ITO, the Revenue was losing tax lawfully payable by a person, it would certainly be prejudicial to the interests of the Revenue. However, only in a case where two views were possible and the AO had adopted one view, such a decision, which might be plausible and it had resulted in loss of Revenue, such an order was not revisable under section 263.

The Supreme Court applying the law laid down in the case of Malabar Industrial Co Ltd (supra) to the facts of the case on hand and even as observed by the Commissioner, held that the order passed by the AO was erroneous as well as prejudicial to the interest of the Revenue. In the facts and circumstances of the case, it could not be said that the Commissioner exercised the jurisdiction under section 263 not vested in it. The erroneous assessment order had resulted into loss of the Revenue in the form of tax. Under the Circumstances and in the facts and circumstancesof the case narrated hereinabove, it was held that the High Court had committed a very serious error in setting aside the order passed by the Commissioner passed in exercise of powers under section 263 of the Income-tax Act, 1961.

The Supreme Court restored the order passed by the Commissioner passed in exercise of powers under section 263 of the Income-tax Act, 1961.

Note:

It is worth noting that by insertion of Explanation 2 by the Finance Act, 2015 [w.e.f. 1st June, 2015], the scope/powers of revisional jurisdiction of CIT/PCIT under section 263 is effectively widened by providing deeming fiction for treating order of the AO as ‘erroneous in so far as it is prejudicial to the interest of the revenue’ under certain circumstances.

shailesh.kwebmaker

Glimpses Of Supreme Court Ruilings

14. Yum! Restaurants (Marketing) Private Limited vs.
Commissioner of Income Tax, Delhi

Date of order: 24^th April, 2020

Doctrine of mutuality – Applicability of – The
receipt of money from an outside entity without affording it the right to have
a share in the surplus does not only subjugate the first test of common
identity, but also contravenes the other two conditions for the existence of
mutuality, i.e., impossibility of profits and obedience to the mandate – There
is a fine line of distinction between absence of obligation and presence of
overriding discretion – An arrangement wherein one member is subjected to the
absolute discretion of another, in such a manner that the entire liability may
fall upon one whereas benefits are reaped by all, is antithetical to the mutual
character in the eyes of law – The raison d’être behind the refund of
surplus to the contributors or mandatory utilisation of the same in the
subsequent assessment year is to reduce their burden of contribution in the
next year proportionate to the surplus remaining from the previous year –
Non-fulfilment of this condition is antithetical to the test of mutuality

The
appellant company Yum! Restaurants (Marketing) Private Limited (‘YRMPL’ or
‘assessee company’ or ‘assessee’) was incorporated by Yum! Restaurants (India)
Pvt. Ltd. (‘YRIPL’), formerly known as Tricon Restaurants India Pvt. Ltd., as
its fully-owned subsidiary for undertaking the activities relating to
advertising, marketing and promotion (‘AMP activities’) for and on behalf of
YRIPL and its franchisees after having obtained approval from the Secretariat
for Industrial Assistance (‘SIA’) for the purpose of economisation of the cost
of advertising and promotion of the franchisees as per their needs. The
approval was granted subject to certain conditions as regards the functioning
of the assessee whereby it was obligated to operate on a non-profit basis on
the principles of mutuality.

In
furtherance of the approval, the assessee entered into a tripartite operating
agreement (the ‘tripartite agreement’) with YRIPL and its franchisees, wherein
the assessee company received fixed contributions to the extent of 5% of gross
sales for the proper conduct of the AMP activities for the mutual benefit of
the parent company and the franchisees.

For the
assessment year 2001-02, the assessee filed its return stating the income to be
Nil under the pretext of the mutual character of the company. The same was not accepted by the A.O.
who observed that the assessee company along with the franchisees was to
contribute a fixed percentage of its revenue to YRMPL. However, as per the
tripartite agreement submitted by YRMPL, YRIPL had the sole absolute discretion
to pay to YRMPL any amount as it may deem appropriate and that YRIPL had no
obligation to pay any amount if it chooses not to do so. YRIPL was under no
legal obligation to pay any amount of contribution as per its own version
reflected from the tripartite agreement. The A.O. determined the total income
at Rs. 44,44,002, being the excess of income over expenditure for A.Y. 2001-02.

The
imposition of liability by the A.O. was upheld by the CIT(A) on the ground of taint
of commerciality in the activities undertaken by the assessee company.

The
liability was further confirmed by the Tribunal, wherein the essential
ingredients of the doctrine of mutuality were found to be missing. The Tribunal
inter alia found that apart from others, contributions were also
received from M/s Pepsi Foods Ltd. and YRIPL. Pepsi Foods Ltd. was neither a
franchisee nor a beneficiary. Similarly, some contribution was also received
from YRIPL who was not under any obligation to pay. Thus, the essential
requirement, that the contributors to the common fund are either to participate
in the surplus or they are beneficiaries of the contribution, was missing.
Through the common AMP activities no benefit accrued to Pepsi Foods Ltd. or
YRIPL. Accordingly, the principles of mutuality could not be applied.

The
consistent line of opinion recorded by the aforementioned three forums was
further approved in appeal by the High Court.

According
to the Supreme Court, the following questions of law arose in the present case:

(i)
Whether the assessee company would qualify as a mutual concern in the eyes of
law, thereby exempting subject transactions from tax liability?

(ii)
Whether the excess of income over expenditure in the hands of the assessee
company is not taxable?

The
assessee had contended before the Supreme Court that the sole objective of the
assessee company was to carry on the earmarked activities on a no-profit basis
and to operate strictly for the benefit of the contributors to the mutual
concern. It was further contended that the assessee company levied no charge on
the franchisees for carrying out the operations. While assailing the
observations made in the impugned judgment, holding that Pepsi Foods Ltd. and
YRIPL were not beneficiaries of the concern, the assessee company had urged
that YRIPL was the parent company of the assessee and earned a fixed percentage
from the franchisees by way of royalty. Therefore, it benefited directly from
enhanced sales as increased sales would translate into increased royalties. A
similar argument had been advanced as regards Pepsi Foods Ltd. It was stated
that under a marketing agreement the franchisees were bound to serve Pepsi
drinks at their outlets and, thus, an increase in the sales at KFC and Pizza
Hut outlets as a result of AMP activities would lead to a corresponding
increase in the sales of Pepsi. It was pointed out that Pepsi was also
advertised by the franchisees in their advertising and promotional material,
along with Pizza Hut and KFC.

As
regards the doctrine of mutuality, it was urged by the assessee company that
the doctrine merely requires an identity between the contributors and
beneficiaries and it does not contemplate that each member should contribute to
the common fund or that the benefits must be derived by the beneficiaries in
the same manner or to the same extent. Reliance had been placed by the
appellant upon reported decisions to draw a parallel between the functioning of
the assessee company and clubs to support the presence of mutuality.

The
Revenue / respondent had countered the submissions made by the assessee company
by submitting that the moment a non-member joins the common pool of funds created
for the benefit of the contributors, the taint of commerciality begins and
mutuality ceases to exist in the eyes of law. It had been submitted that the
assessee company operated in contravention of the SIA approval as contributions
were received from Pepsi, despite it not being a member of the brand fund. It
was urged that once the basic purpose of benefiting the actual contributors was
lost, mutuality stands wiped out.

The
Supreme Court held that it was undisputed that Pepsi Foods Ltd. was a contributor
to the common pool of funds. However, it did not enjoy any right of
participation in the surplus or any right to receive back the surplus which was
a mandatory ingredient to sustain the principle of mutuality.

The
assessee company was realising money both from the members as well as
non-members in the course of the same activity carried on by it. The Supreme
Court noted that in Royal Western India Turf Club Ltd., AIR 1954 SC 85
it has categorically held such operations to be antithetical to mutuality.
Besides, the dictum in Bankipur Club (1997) 5 SCC 394 was apposite.

According
to the Supreme Court, the contention of the assessee company that Pepsi Foods
Ltd., in fact, did benefit from the mutual operations by virtue of its
exclusive contracts with the franchisees was tenuous, as the very basis of
mutuality was missing. Even if any remote or indirect benefit is being reaped
by Pepsi Foods Ltd., the same could not be said to be in lieu of
it being a member of the purported mutual concern and, therefore, could not be
used to fill the missing links in the chain of mutuality. The surplus of a
mutual operation was meant to be utilised by the members of the mutual concern
as members enjoy a proximate connection with the mutual operation. Non-members,
including Pepsi Foods Ltd., stood on a different footing and had no proximate
connection with the affairs of the mutual concern. The exclusive contract
between the franchisees and Pepsi Foods Ltd. stood on an independent footing
and YRIPL as well as the assessee company were not responsible for
implementation of the contract. As a result, the first limb of the
three-pronged test stood severed.

The
Supreme Court held that the receipt of money from an outside entity without
affording it the right to have a share in the surplus did not only subjugate
the first test of common identity, but also contravened the other two
conditions for the existence of mutuality, i.e., impossibility of profits and
obedience to the mandate. The mandate of the assessee company was laid down in
the SIA approval wherein the twin conditions of mutuality and non-profiteering
were envisioned as the sine qua non for the functioning of the assessee
company. The contributions made by Pepsi Foods Ltd. tainted the operations of
the assessee company with commerciality and concomitantly contravened the
prerequisites of mutuality and non-profiteering.

The
Court further held that YRIPL and the franchisees stand on two substantially
different footings. For, the franchisees are obligated to contribute a fixed
percentage for the conduct of AMP activities, whereas YRIPL is under no such
obligation in utter violation of the terms of the SIA approval. Moreover, even
upon request for the grant of funds by the assessee company, YRIPL is not bound
to accede to the request and enjoys a ‘sole and absolute’ discretion to decide
against such request. An arrangement wherein one member is subjected to the
absolute discretion of another, in such a manner that the entire liability may
fall upon one whereas benefits are reaped by all, is the antithesis to the
mutual character in the eyes of law.

According
to the Supreme Court, the contention advanced by the appellant that it is not
mandatory for every member of the mutual concern to contribute to the common
pool failed to advance the case of the appellant. The Court held that there is
a fine line of distinction between absence of obligation and presence of
overriding discretion. In the present case, YRIPL enjoyed the latter to the
detriment of the franchisees of the purported undertaking, both in matters of
contribution and of management. In a mutual concern, it is no doubt true that
an obligation to pay may or may not be there, but in the same breath it is
equally true that an overriding discretion of one member over others cannot be
sustained in order to preserve the real essence of mutuality wherein members
contribute for the mutual benefit of all and not of one at the cost of others.

The
Court observed that the settled legal position is that in order to qualify as a
mutual concern, the contributors to the common fund either acquire a right to
participate in the surplus or an entitlement to get back the remaining
proportion of their respective contributions. Contrary to the above stated
legal position, as per clause 8.4 the franchisees did not enjoy any
‘entitlement’ or ‘right’ on the surplus remaining after the operations were
carried out for a given assessment year. As per the aforesaid clause the
assessee company may refund the surplus subject to the approval of its Board of
Directors. It implied that the franchisees / contributors could not claim a
refund of their remaining amount as a matter of right. According to the Supreme
Court, the raison d’être behind the refund of surplus to the
contributors or mandatory utilisation of the same in the subsequent assessment
year is to reduce their burden of contribution in the next year proportionate
to the surplus remaining from the previous year. Thus, the fulfilment of this
condition is essential. In the present case, even if any surplus is remaining
in a given assessment year, it would not reduce the liability of the
franchisees in the following year as their liability to the extent of 5% was
fixed and non-negotiable, irrespective of whether any funds were surplus in the
previous year. The only entity that could derive any benefit from the surplus
funds was YRIPL, i.e., the parent company. This was antithetical to the test of
mutuality.

It was
observed that the dispensation predicated in the tripartite agreement may
result in a situation where YRIPL would not contribute even a single paisa to
the common pool and yet be able to derive profits in the form of royalties out
of the purported mutual operations, created from the fixed 5% contribution made
by the franchisees. This would be nothing short of derivation of gains /
profits out of inputs supplied by others. According to the Supreme Court, the
doctrine of mutuality, in principle, entails that there should not be any
profit-earning motive, either directly or indirectly. One of the tests of
mutuality requires that the purported mutual operations must be marked by an
impossibility of profits and this crucial test was also not fulfilled in the
present case.

The
Supreme Court further observed that the exemption granted to a mutual concern
is premised on the assumption that the concern is being run for the mutual
benefit of the contributors and the contributions made by the members ought to
be directed accordingly. Contrary to this fundamental tenet, the tripartite
agreement relieves the assessee company from any specific obligation of
spending the amounts received by way of contributions for the benefit of the contributors.
It explicates that the assessee company does not hold such amount under any
implied trust for the franchisees.

According
to the Supreme Court, the assessee company had acted in contravention of the
terms of approval.

The
appellant had urged before the Supreme Court that no fixed percentage of
contribution could be imputed upon YRIPL as it did not operate any restaurant
directly and, thus, the actual volume of sales could not be determined.
According to the Court this argument was not tenable as YRIPL received a fixed
percentage of royalty from the franchisees on the sales. If the franchisees
could be obligated with a fixed percentage of contribution, 5% in the present
case, there was no reason as to why the same obligation ought not to apply to
YRIPL.

The
Court further noted that the text of the tripartite agreement pointed towards
the true intent of the formation of the assessee company as a step-down subsidiary.
It was established to manage the retail restaurant business, the advertising,
media and promotion at the regional and national level of KFC, Pizza Hut and
other brands currently owned or to be acquired in future. In its true form, it
was not contemplated as a non-business concern because operations integral to
the functioning of a business were entrusted to it.

The
Supreme Court held that the doctrine of mutuality bestows a special status to
qualify for exemption from tax liability. The appellant having failed to fulfil
the stipulations and to prove the existence of mutuality, the question of
extending exemption from tax liability to the appellant, that, too at the cost
of the public exchequer, did not arise.

The
assessee company had relied upon reported decisions before the Supreme Court to
establish a parallel between the operations carried out by it and clubs.
According to the Supreme Court, all the members of the club not only have a
common identity in the concern but also stand on an equal footing in terms of
their rights and liabilities towards the club or the mutual undertaking. Such
clubs are a means of social intercourse and are not formed for the facilitation
of any commercial activity. On the contrary, the purported mutual concern in
the present case undertook a commercial venture wherein contributions were
accepted both from the members as well as from non-members. Moreover, one
member was vested with a myriad set of powers to control the functioning and
interests of other members (franchisees), even to their detriment. Such
assimilation could not be termed as a case of ordinary social intercourse
devoid of commerciality.

The
Supreme Court was of the view that once it had conclusively determined that the
assessee company had not operated as a mutual concern, there was no question of
extending exemption from tax liability.

To
support an alternative claim for exemption, the assessee company took a plea in
the written submissions that it was acting under a trust for the contributors
and was under an overriding obligation to spend the amounts received for
advertising, marketing and promotional activities. It urged that once the
incoming amount is earmarked for an obligation, it does not become ‘income’ in
the hands of the assessee as no occasion for the application of such income
arises.

The
Supreme Court left the question of diversion by overriding title open as the
same was neither framed nor agitated in the appeal memo before the High Court
or before it (except a brief mention in the written submissions), coupled with
the fact that neither the Tribunal nor the High Court had dealt with that plea
and that the rectification application raising that ground was pending before
the Tribunal.

15. Basir Ahmed
Sisodiya vs. The Income Tax Officer Date of order: 24^th
April, 2020

Cash credits – The
appellant / assessee, despite being given sufficient opportunity, failed to
prove the correctness and genuineness of his claim in respect of purchase of
marble from unregistered dealers to the extent of Rs. 2,26,000 and resultantly,
the said transactions were assumed as bogus entries (standing to the credit of
named dealers who were non-existent creditors of the assessee) – The appellant
/ assessee, however, in penalty proceedings had offered explanation and caused
to produce affidavits and record statements of the unregistered dealers
concerned and establish their credentials and that explanation having been
accepted by the CIT(A) who concluded that the materials on record would clearly
suggest that the unregistered dealers concerned had sold marble slabs on credit
to the appellant / assessee, as claimed – That being the indisputable position,
the Supreme Court deleted the addition of amount of Rs. 2,26,000

The appellant / assessee was served with a notice u/s
143(2) of the Income-tax Act, 1961 (the ‘1961 Act’) by the A.O. for the A.Y.
1998-99, pursuant to which an assessment order was passed on 30^th
November, 2000. The A.O., while relying on the balance sheet and the books of
accounts, inter alia took note of the credits amounting to Rs. 2,26,000.
He treated that amount as ‘cash credits’ u/s 68 of the 1961 Act and added the
same in the declared income of the assessee (the ‘second addition’). According
to the A.O., the credits of Rs. 2,26,000 shown in the names of 15 persons were
not correct and any correct proof / evidence had not been produced by the
assessee with respect to the income of the creditors and source of income. He
also made other additions to the returned income.

Aggrieved, the assessee preferred an appeal before the
Commissioner of Income Tax (Appeals), Jodhpur. The appeal was partly allowed vide
order dated 9^th January, 2003. However, as regards the trading
account and credits in question, the CIT(A) upheld the assessment order.

The
assessee then preferred a further appeal to the ITAT. Having noted the issues
and objections raised by the Department and the assessee, the ITAT partly
allowed the appeal vide order dated 4^th November, 2004.
However, the order relating to the second addition regarding the credits of Rs.
2,26,000 came to be upheld.

The
assessee then filed an appeal before the High Court u/s 260A of the 1961 Act.
The appeal was admitted on 27^th April, 2006 on the following
substantial question of law:

‘Whether
claim to purchase of goods by the assessee could be dealt with u/s 68 of the
Income-tax Act as a cash credit, by placing burden upon the assessee to explain
that the purchase price does not represent his income from the disclosed
sources?’

The High
Court dismissed the appeal vide impugned judgment and order dated 21^st
August, 2008 as being devoid of merits. The High Court opined that the amount
shown to be standing to the credit of the persons which had been added to the
income of the assessee, was clearly a bogus entry in the sense that it was only
purportedly shown to be the amount standing to the credit of the fifteen
persons, purportedly on account of the assessee having purchased goods on
credit from them, while since no goods were purchased, the amount did represent
income of the assessee from undisclosed sources which the assessee had only
brought on record (books of accounts), by showing to be the amount belonging to
the purported sellers and as the liability of the assessee. That being the
position, the contention about impermissibility of making addition under this
head, in view of addition of Rs. 10,000 having been made in trading account,
rejecting the books of accounts for the purpose of assessing the gross profit,
could not be accepted. The gross profit shown in the books had not been
accepted on the ground that the assessee had not maintained day-to-day stock
registers, nor had he produced or maintained other necessary vouchers, but
then, if those books of accounts did disclose certain other assets which were
wrongly shown to be liabilities, and for acquisition of which the assessee did
not show the source, it could not be said that the A.O. was not entitled to use
the books of accounts for this purpose.

The
assessee in the civil appeal before the Supreme Court reiterated the argument
that the A.O., having made the addition u/s 144 of the 1961 Act being ‘best
judgment assessment’, had invoked powers under sub-section (3) of section 145.
For, assessment u/s 144 is done only if the books are rejected. In that case,
the same books could not be relied upon to impose subsequent additions as had
been done in this case u/s 68.

The
assessee filed an I.A. No. 57442/2011 before the Supreme Court for permission
to bring on record subsequent events. By this application, the assessee placed
on record an order passed by the CIT(A) dated 13^th January, 2011
which considered the challenge to the order passed by the Income-Tax Officer
(ITO) u/s 271(1)(c) dated 17^th November, 2006 qua the
assessee for the self-same assessment year 1998-99. The ITO had passed the said
order as a consequence of the conclusion reached in the assessment order which
had by then become final up to the stage of ITAT vide order dated 27^thApril, 2006 – to the effect that the stated purchases by the assessee
from unregistered dealers were bogus entries effected by him. As a result,
penalty proceedings u/s 271 were initiated by the ITO. That order was set aside
by the appellate authority [CIT(A)] in the appeal preferred by the assessee, vide
order dated 13^th January, 2011 with a finding that the assessee
had not made any concealment of income or furnished inaccurate particulars of
income for the assessment year concerned. As a consequence of this decision of
the appellate authority, even the criminal proceedings initiated against the
assessee were dropped / terminated and the assessee stood acquitted of the
charges u/s 276(C)(D)(1)(2) of the 1961 Act vide judgment and order
dated 6^th June, 2011 passed by the Court of Additional Chief City
Magistrate (Economic Offence), Jodhpur City in proceedings No. 262/2005.

The
Supreme Court noted that during the course of appellate proceedings, the
appellant filed an application under Rule 46A vide letter dated 16^th
October, 2008 and the same was sent to the ITO, Ward-1, Makrana vide
this office letter dated 28^th January, 2009 and 1^st
December, 2010 to submit remand report after examination of additional
evidences. Along with the application under Rules 46A, the appellant filed
affidavits from 13 creditors, the Sales Tax Order for the Financial Year
1997-98 showing purchases from unregistered dealers to the tune of Rs.
2,28,900, cash vouchers duly signed on revenue stamp for receipt of payment by
the unregistered dealers and copy of ration card / Voter ID Card to show the
identity of the unregistered dealers. The A.O. recorded statements of 12
unregistered dealers out of 13. In the report dated 22^nd December,
2010, he mentioned that statements of the above 12 persons were recorded on 15^th
/ 16^th December, 2010 and in respect of identify the unregistered
dealers filed photo copies of their voter identity cards and all of them had
admitted that they had sold marble on credit basis to Basir Ahmed Sisodiya, the
appellant, during F.Y. 1997-98 and received payments after two or three years.
However, he observed that none of them had produced any evidence in support of
their statement since all were petty, unregistered dealers of marble and doing
small business and therefore no books of accounts were maintained. Some of them
had stated that they were maintaining small dairies at the relevant period of
time but they could not preserve the old dairies. Some of them had stated that
they had put their signature on the vouchers on the date of the transactions.

The
Supreme Court further noted that the CIT(A) had observed that in respect of the
addition of Rs. 2,26,000 there had been no denial of purchase of marble slabs
worth Rs. 4,78,900 and sale of goods worth Rs. 3,57,463 and disclosure of
closing stock of Rs. 2,92,490 in the trading account for the year ended on 31^st
March, 1998. Without purchases of marble, there could not have been sale and
disclosure of closing stock in the trading account which suggested that the
appellant must have purchased marble slabs from unregistered dealers. The
CIT(A) had found that the explanation given by the appellant in respect of
purchases from unregistered dealers and their genuineness were substantiated by
filing of affidavits and producing these before the A.O. in the course of
remand report, and the A.O. did not find anything objectionable in respect of
the identity of the unregistered dealers and claims made for the sale of marble
slabs to the appellant in the F.Y. relevant to A.Y. 1998-99.

The
Supreme Court observed that considering the findings and conclusions recorded
by the A.O. and which were commended to the appellate authority as well as the
High Court, it must follow that the assessee despite being given sufficient
opportunity, failed to prove the correctness and genuineness of his claim in
respect of purchase of marble from unregistered dealers to the extent of Rs.
2,26,000. As a result, the said transactions were assumed as bogus entries
(standing to the credit of named dealers who were non-existent creditors of the
assessee).

According
to the Supreme Court, the assessee, however, in penalty proceedings had offered
explanation and caused to produce affidavits and record statements of the
unregistered dealers concerned and establish their credentials and that
explanation having been accepted by the CIT(A) who concluded that the materials
on record would clearly suggest that the unregistered dealers concerned had
sold marble slabs on credit to the assessee, as claimed.

The
Supreme Court was therefore of the view that the factual basis on which the
A.O. formed his opinion in the assessment order dated 30^th November,
2000 (for A.Y. 1998-99) in regard to the addition of Rs. 2,26,000, stood
dispelled by the affidavits and statements of the unregistered dealers
concerned in penalty proceedings. That evidence fully supported the claim of
the assessee. The appellate authority vide order dated 13^th
January, 2011, had not only accepted the explanation offered but also recorded
a clear finding of fact that there was no concealment of income or furnishing
of any inaccurate particulars of income by the appellant / assessee for the
A.Y. 1998-99. That now being the indisputable position, it must necessarily
follow that the addition of the amount of Rs. 2,26,000 could not be justified,
much less maintained.

The
Supreme Court, therefore, allowed the appeal.

16. Union of India (UOI) and Ors. vs. U.A.E.
Exchange Centre Date of order: 24^th
April, 2020

India-UAE DTAA – Merely
having a fixed place of business through which the business of the assessee is
being wholly or partly carried on is not conclusive unless the assessee has a
PE situated in India, so as to attract Article 7 dealing with business profits
to become taxable in India, to the extent attributable to the PE of the
assessee in India – As per Article 5, which deals with and defines the
‘Permanent Establishment (PE)’, a fixed place of business through which the
business of an enterprise is wholly or partly carried on is to be regarded as a
PE and would include the specified places referred to in Clause 2 of Article 5,
but Article 5(3) of the DTAA which starts with a non obstante clause and
also contains a deeming provision predicates that notwithstanding the preceding
provisions of the Article concerned, which would mean clauses 1 and 2 of
Article 5, it would still not be a PE if any of the clauses in Article 5(3) are
applicable – No income as specified in section 2(24) of the 1961 Act was earned
by the liaison office of the respondent in India because the liaison office was
not a PE in terms of Article 5 of DTAA as it was only carrying on activity of a
preparatory or auxiliary character

The
respondent, a limited company incorporated in the United Arab Emirates (UAE)
was engaged in offering, among other things, remittance services for
transferring amounts from UAE to various places in India. It had applied for
permission u/s 29(1)(a) of the Foreign Exchange Regulation Act, 1973 (‘the 1973
Act’), pursuant to which approval was granted by the Reserve Bank of India (the
RBI) vide letter dated 24^th September, 1996.

The
respondent set up its first liaison office in Cochin, Kerala in January, 1997
and thereafter in Chennai, New Delhi, Mumbai and Jalandhar. The activities carried on by the respondent
from the said liaison offices were stated to be in conformity with the terms
and conditions prescribed by the RBI in its letter dated 24^th
September, 1996. The entire expenses of the liaison offices in India were met
exclusively out of funds received from the UAE through normal banking channels.
Its liaison offices undertook no activity of trading, commercial or industrial,
as the case may be. The respondent had no immovable property in India otherwise
than by way of lease for operating the liaison offices. No fee / commission was
charged or received in India by any of the liaison offices for services
rendered in India. It was claimed that no income accrued or arose or was deemed
to have accrued or arisen, directly or indirectly, through or from any source
in India from liaison offices within the meaning of section 5 or section 9 of
the Income-tax Act, 1961 (the 1961 Act). According to the respondent, the
remittance services were offered by it to non-resident Indians (NRIs) in the
UAE. The contract pursuant to which the funds were handed over by the NRI to
the respondent in the UAE was entered into between the respondent and the NRI
remitter in the UAE. The funds were collected from the remitter by charging a
one-time fee of Dirhams 15. After collecting the funds from the NRI remitter,
the respondent made an electronic remittance of the funds on behalf of its
customer in one of two ways:

(i) By telegraphic transfer through bank
channels; or

(ii) On
the request of the NRI remitter, the respondent sent an instrument / cheque
through its liaison offices to the beneficiaries designated by the NRI
remitter.

In
compliance with section 139 of the ITA, 1961, the respondent had been filing
its returns of income from the A.Y. 1998-99 and until 2003-04, showing Nil
income, as according to the respondent no income had accrued or was deemed to
have accrued to it in India, both under the 1961 Act as well as the agreement
entered into between the Government of the Republic of India and the Government
of the UAE, which is known as the Double Taxation Avoidance Agreement (‘DTAA’).
This agreement (DTAA) had been entered into between the two sovereign countries
in exercise of powers u/s 90 of the 1961 Act for the purpose of avoidance of
double taxation and prevention of fiscal evasion with respect to taxes and
income on capital. The DTAA had been notified vide notification No. GSR
No. 710(E) dated 18^th November, 1993. The returns were filed on a
regular basis by the respondent and were accepted by the Department without any
demur.

However,
as some doubt was entertained, the respondent filed an application u/s 245Q(1)
before the Authority for Advance Rulings (Income Tax), New Delhi, which was
numbered as AAR No. 608/2003 and sought ruling of the Authority on the
following question:

‘Whether
any income is accrued / deemed to be accrued in India from the activities
carried out by the Company in India?’

The
Authority vide its ruling dated 26^th May, 2004 answered the
question in the affirmative, saying, ‘Income shall be deemed to accrue in India
from the activity carried out by the liaison offices of the applicant in
India.’ In so holding, the Authority opined that in view of the deeming
provision in sections 2(24), 4 and 5 read with section 9 of the 1961 Act, the
respondent-assessee would be liable to pay tax under the 1961 Act as it had
carried on business in India through a ‘permanent establishment’ (PE) situated
in India and the profits of the enterprise needed to be taxed in India, but
only that proportion that was attributable to the liaison offices in India (the
PE).

The
Authority held that the applicant had liaison offices in India which attended
to the complaints of the clients in cases where remittances were sent directly
to banks in India from the UAE. In addition, in cases where the applicant had
to remit the amounts to the beneficiaries in India as per the directions of the
NRIs, the liaison offices downloaded the information from the internet, printed
cheques / drafts in the name of the beneficiaries in India and sent them
through couriers to various places in India. Without the latter activity, the
transaction of remittance of the amounts in terms of the contract with the NRIs
would not be complete. The commission which the applicant received for
remitting the amount covered not only the business activities carried on in the
UAE but also the activity of remittance of the amount to the beneficiary in
India by cheques / drafts through courier which was being attended to by the
liaison offices.

There
was, therefore, a real relation between the business carried on by the
applicant for which it received commission in the UAE and the activities of the
liaison offices (downloading of information, printing and preparation of
cheques / drafts and sending the same to the beneficiaries in India), which
contributed directly or indirectly to the earning of income by the applicant by
way of commission. There was also continuity between the business of the
applicant in the UAE and the activities carried on by the liaison offices in
India. Therefore, it followed that income had deemed to have accrued / arisen
to the applicant in the UAE from ‘business connection’ in India.

The
Authority further held that insofar as the amount was remitted telegraphically
by transferring directly from the UAE through bank channels to various places
in India and in such remittances the liaison offices had no role to play except
attending to the complaints, if any, in India regarding the remittances in
cases of fraud etc., it could be said to be auxiliary in character. However,
downloading the data, preparing cheques for remitting the amount and
dispatching the same through courier by the liaison offices was an important
part of the main work itself because without remitting the amount to the
beneficiaries as desired by the NRIs, performance of the contract would not be
complete. It was a significant part of the main work of the UAE establishment.
It, therefore, followed that the liaison offices of the applicant in India for
the purposes of this mode of remittance were a ‘permanent establishment’ within
the meaning of the expression in the DTAA.

Following
the impugned ruling of the Authority, dated 26^th May, 2004, the
Department issued four notices of even date, i.e., 19^th July, 2004
u/s 148 of the 1961 Act addressed to the respondent and pertaining to A.Y.s
2000-01, 2001-02, 2002-03 and 2003-04, respectively. The respondent approached
the Delhi High Court by way of Writ Petition No. 14869/2004, inter alia
for quashing of the ruling of the Authority dated 26^th May, 2004,
quashing of the stated notices and for a direction to the appellants not to tax
the respondent in India because no income had accrued to it or was deemed to
have accrued to it in India from the activities of its liaison offices in
India.

The High
Court was of the opinion that the Authority proceeded on a wrong premise by
first examining the efficacy of section 5(2)(b) and section 9(1)(i) of the 1961
Act instead of applying the provisions in Articles 5 and 7 of the DTAA for
ascertaining the respondent’s liability to tax. Further, the nature of
activities carried on by the respondent-assessee in the liaison offices being
only of a preparatory and auxiliary character, were clearly excluded by virtue
of the deeming provision. The High Court distinguished the decisions relied
upon by the Authority in Anglo-French Textile Co. Ltd., by
agents, M/s. Best & Company Ltd., Madras vs. Commissioner of Income
Tax, Madras AIR 1953 SC 105 and R.D. Aggarwal & Company
(Supra). The ratio in these decisions, according to the High
Court, was that the non-resident entity could be taxed only if there was a
business connection between the business carried on by a non-resident which
yields profits or gains and some activity in the taxable territory which
contributes directly or indirectly to the earning of those profits or gains.

The High
Court then concluded that the activity carried on by the liaison offices of the
respondent in India did not in any manner contribute directly or indirectly to the
earning of profits or gains by the respondent in the UAE and every aspect of
the transaction was concluded in the UAE, whereas the activity performed by the
liaison offices in India was only supportive of the transaction carried on in
the UAE. The High Court also took note of Explanation 2 to section 9(1)(i) and
observed that the same reinforces the fact that in order to have a business
connection in respect of a business activity carried on by a non-resident
through a person situated in India, it should involve more than what is
supportive or subsidiary to the main function referred to in clauses (a) to
(c). The High Court eventually quashed the impugned ruling of the Authority and
also the notices issued by the Department u/s 148 of the 1961 Act, since the
notices were based on the ruling which was being set aside. The High Court,
however, gave liberty to the appellants to proceed against the respondent on
any other ground as may be permissible in law.

Feeling
aggrieved, the Department filed a Special Leave Petition before the Supreme
Court.

According
to the Supreme Court, the core issue that was required to be answered in the
appeal was whether the stated activities of the respondent-assessee would
qualify the expression ‘of preparatory or auxiliary character’?

The
Supreme Court observed that having regard to the nature of the activities
carried on by the respondent-assessee, as held by the Authority, it would
appear that the respondent was engaged in ‘business’ and had ‘business
connections’ for which, by virtue of the deeming provision and the sweep of
sections 2(24), 4 and 5 read with section 9 of the 1961 Act, including the
exposition in Anglo-French Textile Co. Ltd. (Supra) and R.D.
Aggarwal & Company (Supra), it would be a case of income deemed to
accrue or arise in India to the respondent. However, in the present case, the
matter in issue would have to be answered on the basis of the stipulations in
the DTAA notified in exercise of the powers conferred u/s 90 of the 1961 Act.

Keeping
in view the finding recorded by the High Court, the Supreme Court proceeded on
the basis that the respondent-assessee had a fixed place of business through
which its business was being wholly or partly carried on. That, however, would
not be conclusive until a further finding is recorded that the respondent had a
PE situated in India so as to attract Article 7 dealing with business profits
to become taxable in India, to the extent attributable to the PE of the
respondent in India. For that, one has to revert back to Article 5 which deals
with and defines the ‘Permanent Establishment (PE)’. A fixed place of business
through which the business of an enterprise is wholly or partly carried on is
regarded as a PE. The term ‘Permanent Establishment (PE)’ would include the specified
places referred to in clause 2 of Article 5. According to the Supreme Court, it
was not in dispute that the place from where the activities were carried on by
the respondent in India was a liaison office and would, therefore, be covered
by the term PE in Article 5(2). However, Article 5(3) of the DTAA opens with a non
obstante clause and also contains a deeming provision. It predicates that
notwithstanding the preceding provisions of the Article concerned, which would
mean clauses 1 and 2 of Article 5, it would still not be a PE if any of the
clauses in Article 5(3) are applicable. For that, the functional test regarding
the activity in question would be essential. The High Court had opined that the
respondent was carrying on stated activities in the fixed place of business in
India of a preparatory or auxiliary character.

The
Supreme Court, after noting the meaning of the expression ‘business’ in section
2(13) of the 1961 Act, discerning the meaning of the expressions ‘business
connection’ and ‘business activity’ from section 9(1) of the 1961 Act and the
dictionary meaning of the expressions ‘preparatory’ and ‘auxiliary’, concluded
that since the stated activities of the liaison offices of the respondent in
India were of preparatory or auxiliary character, the same would fall within
the excepted category under Article 5(3)(e) of the DTAA. As a result, it could
not be regarded as a PE within the sweep of Article 7 of the DTAA.

According
to the Supreme Court, while answering the question as to whether the activity
in question could be termed as other than that ‘of preparatory or auxiliary
character’, it was to be noted that the RBI had given limited permission to the
respondent u/s 29(1)(a) of the 1973 Act on 24^th September, 1996.
From paragraph 2 of the stated permission it was evident that the RBI had
agreed for establishing a liaison office of the respondent at Cochin, initially
for a period of three years, to enable the respondent to (i) respond quickly
and economically to inquiries from correspondent banks with regard to suspected
fraudulent drafts; (ii) undertake reconciliation of bank accounts held in
India; (iii) act as a communication centre receiving computer (via modem)
advices of mail transfer T.T. stop payments messages, payment details, etc.,
originating from the respondent’s several branches in the UAE and transmitting
to its Indian correspondent banks; (iv) printing Indian Rupee drafts with a
facsimile signature from the Head Office and counter signature by the
authorised signatory of the office at Cochin; and (v) following up with the
Indian correspondent banks. These were the limited activities which the
respondent had been permitted to carry on within India. This permission did not
allow the respondent-assessee to enter into a contract with anyone in India but
only to provide service of delivery of cheques / drafts drawn on the banks in
India.

The
permitted activities were required to be carried out by the respondent subject
to conditions specified in Clause 3 of the permission, which included not to
render any consultancy or any other service, directly or indirectly, with or
without any consideration and further that the liaison office in India shall
not borrow or lend any money from or to any person in India without prior
permission of the RBI. The conditions made it amply clear that the office in
India would not undertake any other activity of trading, commercial or
industrial, nor shall it enter into any business contracts in its own name
without prior permission of the RBI. The liaison office of the respondent in
India could not even charge commission / fee or receive any remuneration or
income in respect of the activities undertaken by it in India. From the onerous
stipulations specified by the RBI, it could be safely concluded, as opined by
the High Court, that the activities in question of the liaison office(s) of the
respondent in India were circumscribed by the permission given by the RBI and
were in the nature of preparatory or auxiliary character. That finding reached
by the High Court was unexceptionable.

The
Supreme Court concluded that the respondent was not carrying on any business
activity in India as such, but only dispensing with the remittances by
downloading information from the main server of the respondent in the UAE and
printing cheques / drafts drawn on the banks in India as per the instructions
given by the NRI remitters in the UAE. The transaction(s) had been completed
with the remitters in the UAE, and no charges towards fee / commission could be
collected by the liaison office in India in that regard. To put it differently,
no income as specified in section 2(24) of the 1961 Act was earned by the
liaison office in India and more so because the liaison office was not a PE in
terms of Article 5 of the DTAA (as it was only carrying on activity of a
preparatory or auxiliary character).

The
concomitant was that no tax could be levied or collected from the liaison
office of the respondent in India in respect of the primary business activities
consummated by the respondent in the UAE. The activities carried on by the
liaison office in India as permitted by the RBI clearly demonstrated that the
respondent must steer away from engaging in any primary business activity and
in establishing any business connection as such. It could carry on activities
of preparatory or auxiliary nature only. In that case, the deeming provisions
in sections 5 and 9 of the 1961 Act could have no bearing whatsoever.

The Supreme
Court dismissed the appeal with no order as to costs.

shailesh.kwebmaker

Educational Institution – Exemption – Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes as intuition for the purpose of making profits – Assessing Authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down.

Chief CIT vs. ST. Peter’s Educational Society [2016] 385 ITR 66 (SC)

The petitioner Society registered under the Societies Registration Act, 1860 as well as under the provisions of the Bombay Public Trusts Act, 1950, was engaged in imparting higher and specialised education. It is specialised in imparting education in the field of communication including advertising and its related subjects. The petitioner had also been granted the registration u/s. 12A of the Act. The Director of Income Tax (Exemption) had issued a notice u/s. 12AA(3) of the Act and called upon the petitioner to explain as to why its registration u/s. 12A of the Act should not be withdrawn. The said notice came to be challenged by the petitioner before the Gujarat High Court by filing a writ petition, which was withdrawn at a later stage in view of the fact that only show-cause notice was under challenge. However, the procedure initiated by the Director of income tax (Exemption) u/s. 12AA(3) of the Act were dropped by an order dated March 3, 2014 and accordingly the registration granted in favour of the petitioner u/s. 12A of the Act, remained intact. The petitioner submitted an application for getting an exemption certification u/s. 10 (23C)(vi) of the Act, for the assessment year 2013- 14 and onwards on September 30, 2013. The petitioner was called upon to make submissions. By two letters dated February 28, 2014 and August 13, 2014 detailed submissions were made before the Commissioner with whom the application was pending for adjudication. By the order dated September 29, 2014 the Commissioner refused to issue the certificate u/s. 10(23C)(vi) of the Act on various grounds.

By way of a writ petition under articles 14, 19(1)(g) and 226 of the Constitution of India the petitioner challenged the order dated September 29, 2014 passed by the Commissioner by which the application submitted by the by the petitioner to issue exemption certificate in its favour u/s. 10(23C)(vi) of the Act. had been refused.

The High Court noted that it was an admitted position that a certificate u/s. 12A of the Act had already been issued in favour of the petitioner and the same had continued till date. Therefore, according to the High Court it was established that the petitioner-institution was a charitable trust as far as applicability of the Income-tax Act was concerned.

The High Court held that the sole object of the institution was to impart education. By providing latest information and thereafter training to those people who were already in the field of advertising communication, etc. and in such process if certain persons became super-specialists in a particular field, and for which the institution was charging fee, such a case would not fall under proviso to section 2(15).

The High Court concluded that the petitioner institution was established for the sole purpose of imparting education in a specialized field.

Before the Supreme Court, the learned Solicitor General appearing for the Income-tax Department and the counsel appearing for the respondent-assessee in the appeal did not dispute that the issue involved in these appeals was squarely covered by the judgment of the Supreme Court in Queen’s Educational Society vs. CIT [2015] 372 ITR 699 (SC). The Supreme Court noted that the matter pertained to the exemption to the educational institutions u/s.10(23C) of the Income-tax Act, 1961. In the said judgment, the court summarized the legal position as under:

“11. Thus, the law common to section 10(23C) (iiiad) and (vi) may be summed up as follow:

(1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes as intuition for the purpose of making profits.

(2) The predominant object test be applied- the purpose of education should not be submerged by a profit making motive. .

(3) A distinction must be drawn between the making of the surplus and an institution being carried on ‘for profit’. No inference arises that merely because imparting education result in making a profit, it becomes an activity for profit.

(4) If after meeting the expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes.

(5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons.”

The Supreme Court noted that there was a difference of opinion amongst various High Courts on the aforesaid issue. While summarizing the law, it approved the judgments of Punjab and Haryana High Court, Delhi and Bombay High Courts and reversed the view taken by the Uttarakhand High Court. In so far as the judgment of the Punjab and Haryana High Court was concerned, it was given in the case of Pinegrove International Charitable Trust vs. Union of India [2010] 327 ITR 73 (P&H). The relevant para in this behalf which also stated as to how such cases were to be dealt with reads as under:

“25. We approve the judgment of the Punjab and Haryana, Delhi and Bombay High Courts. Since we have set aside the judgment the Uttarakhand High Court and since the Chief Commissioner of Income-tax’s orders cancelling exemption which were set aside by the Punjab and Haryana High Court were passed almost solely upon the law declared by the Uttarakhand High Court, it is clear that these orders cannot stand. Consequently, the Revenue’s appeal from the Punjab and Haryana High Court’s judgment dated January 29, 2010, and the judgments following it are dismissed. We reiterate that the correct tests which have been culled out in the three Supreme Court judgment stated above, namely, Surat Art Silk Cloth, Aditanar and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profits. In addition, we hasten to add that the 13th proviso to section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institution be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that the Revenue is at liberty to pass fresh order if such necessity is felt after taking into consideration the various provisions of law contained in section 10(23C) read with section 11 of the Income-tax Act.”

The Supreme Court dismissed the appeal clarifying that the observations made in para. 25 in Queen’s Educational Society (supra) shall be followed

shailesh.kwebmaker

Reassessment – Rent enhanced in 1994 with effect from 1-9-1987- Notice issued u/s.148 seeking to reopen the concluded assessment for the assessment year 1989-90- The notice was without jurisdiction inasmuch as such enhancement though with retrospective effect, was made only in the year 1994.

P.G. And W Sawoo Pvt. Ltd. vs. ACIT (SC) [2016] 385 ITR 60 (SC)

The premises belonging to the appellant were let out on rent to the Government of India. The rent was enhanced from Rs.4.00 to Rs. 8.11 per sq. ft. per month effective from September 1, 1987. The said enhancement of rent was made by a letter dated March 29, 1994 of the Estate Manager of the Government of India. The enhancement was subject to conditions including execution of a fresh lease agreement and communication of acceptance of the conditions incorporated therein. Such acceptance was communicated by the appellant by letter dated March 30, 1994.

A notice was issued u/s. 148 of the Income-tax Act, 1961 (“the Act”) seeking to reopen the concluded assessment of the appellant-assessee for the assessment year 1989- 90 (for the period of 21 month commencing on July 1, 1987 and ending on March 31, 1989).

The contention of the assessee before the Supreme Court was that having regard to the provisions of sections 5, 22 and 23 of the Act and the decision of the Supreme Court in E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 (SC), no income accrued or arose and no annual value which is taxable under sections 22 and 23 of the Act was received or receivable by the assessee at any point of time during the previous year corresponding to the assessment year 1989-90. Hence, the impugned notice seeking to reopen the assessment in question was without jurisdiction or authority of law.

The Respondent –Revenue contended that the enhancement of rent was retrospective, i.e. from September 1, 1987 and, therefore, the income must have to be understood to have been received in the said assessment year, i.e. 1989-90.

The Supreme Court held that no such right to receive the rent accrued to the assessee at any point of time during the assessment year in question, inasmuch as such enhancement though with retrospective effect, was made only in the year 1994. The contention of Revenue that the enhancement was with retrospective effect did not alter the situation as retrospectivity was with regard to the right to receive rent with effect from an anterior date. The right, however, came to be vested only in the year 1994.

The Supreme Court therefore concluded that the notice seeking to reopen the assessment for the assessment year 1989-90 was without jurisdiction and authority of law. The said notice, therefore, was liable to be interfered with and the order of the High Court set aside. The Supreme Court ordered accordingly and consequently, the appeal was allowed.

shailesh.kwebmaker

Industrial Undertaking – Special Deduction – Profits derived from business – So long as the profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies (which reimburses, wholly or partially, costs actually incurred) is the Government would make no difference and thus are qualified for deduction u/s. 80-IB(4)

CIT vs. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC)

The
assessee was engaged in the business of manufacturing of steel and
ferro silicon. The assessee submitted its return of income for the year
2004-05 disclosing an income of Rs.2,06,970 after claiming deduction
u/s. 80-IB of the Income Tax Act, 1961 on the profits and gains of
business of its industrial undertaking. The assessee had received the
following amounts on account of subsides:

The
Assessing Officer, in the assessment order held that the amounts
received by the assessee as subsides were revenue receipts and did not
qualify for deduction u/s. 80-IB(4) of the Act and accordingly, the
assessee’s claim for deduction of an amount of Rs.2,74,09,386 on account
of the three subsidies aforementioned were disallowed. The assessee
preferred an appeal before the Commissioner of Income-tax (Appeals),
who, dismissed the appeal of the assessee. Aggrieved by the aforesaid
order, the assessee preferred an appeal before the Income-tax Appellate
Tribunal which allowed the appeal of the assessee. The Revenue carried
the matter to the High Court u/s. 260A of the Act, which decided the
matter against the Revenue. The Revenue therefore filed an appeal before
the Supreme Court against this judgment.

The Supreme Court
analysed all the decisions cited on behalf of the Revenue. The Supreme
Court noted that in the first decision, that is, in Cambay Electric
Supply Industrial Co. Ltd. vs. CIT (113 ITR 84), it was held that since
an expression of wider import had been used, namely, “attributable to”
instead of “derived from”, the Legislature intended to cover receipts
from sources other than the actual conduct of the business of generation
and distribution of electricity. In short, a step removed from the
business of the industrial undertaking would also be subsumed within the
meaning of the expression “attributable to”. The Supreme Court observed
that since it was directly concerned with the expression “derived
from”, this judgment was relevant only in so far as it made distinction
between the expression “derived from”, as being something directly from,
as opposed to “attributable to”, which could be said to include
something which was indirect as well.

The Supreme Court noted
that the judgment in Sterling Foods (237 ITR 579) laid down a very
important test in order to determine whether profits and gains are
derived from business or an industrial undertaking. It has stated that
there would be a direct nexus between such profits and gains and the
industrial undertaking or business. Such nexus cannot be only
incidental. It therefore found, on the facts before it, that by reason
of an export promotion scheme, an assessee was entitled to import
entitlements which it would thereafter sell. Obviously, the sale
consideration therefrom could not be said directly from profits and
gains by the industrial undertaking but only attributable to such
industrial undertaking inasmuch as such import entitlements did not
relate to manufacture or sale of the products of the undertaking, but
related only to an event which was post manufacture namely, export. The
Supreme Court held that on an application of the aforesaid test to the
facts of the present case, it could be said that as all the four
subsidies in the present case were revenue receipts which were
reimbursed to the assessee for elements of cost relating to manufacture
or sale of their products, there could certainly be said to be a direct
nexus between profits and gains of the industrial undertaking or
business, and reimbursement of such subsidies. The Supreme Court noted
that according to the Counsel for the Revenue the fact that the
immediate source of the subsides was the fact that the Government gave
them and that, therefore, the immediate source not being from the
business of the assessee, the element of directness was missing. The
Supreme Court did not agree with this contention. According to the
Supreme Court, what is to be seen for the applicability of section 80-IB
and 80-IC is whether the profits and gains are derived from the
business. So long as profits and gains emanate directly from the
business itself, the fact that the immediate source of the subsidies is
the Government would make no difference, as it cannot be disputed that
the said subsidies are only in order to reimburse, wholly or partially,
costs actually incurred by the assessee in the manufacturing and selling
of its products. The “profits and gains” spoken of by sections 80-IB
and 80-IC have reference to net profit. And net profit can only be
calculated by deducting from the sale price of an article all elements
of cost which go into manufacturing or selling it. Thus understood, it
was clear that profits and gains are derived from the business of the
assessee, namely profits arrived at after deducting manufacturing cost
and selling costs reimbursed to the assessee by the Government
concerned.

According to the Supreme Court the judgment in
Pandian Chemicals Limited vs. CIT (262 ITR 278) was also
distinguishable, as interest on a deposit made for supply of electricity
was not an element of cost at all, and this being so, was therefore a
step removed from the business of the industrial undertaking. The
derivation of profits on such a deposit made with the Electricity Board
could not therefore be said to flow directly from the industrial
undertaking itself, unlike the facts of the present case, in which, as
has held above, all the subsidies aforementioned went towards
reimbursement of actual costs of manufacture and sale of the product of
the business of the assessee.

Further, the Supreme Court
observed that Liberty India (317 ITR 218) being the fourth judgment in
this line also did not help the Revenue. What the court was concerned
with was an export incentive, which was very far removed from
reimbursement of an element of cost. A Duty Entitlement Pass Book
Drawback Scheme was not related to the business of an industrial
undertaking or selling its products. Duty entitlement pass book
entitlement arose only when the undertaking exported the said product,
that is after it manufactured or produced the same. Pithily put, if
there were no export, there were no duty entitlement pass book
entitlement, and therefore its relation to manufacture of a product and
or sale within India was not proximate or direct but was one step
removed. Also, the object behind the duty entitlement pass book
entitlement, as has been held by the court, was to neutralize the
incidence of customs duty payment on the import content of the export
product which was provided for by credit to customs duty against the
export product. In such a scenario, it could not be said that such duty
exemption scheme was derived from profits and gains made by the
industrial undertaking or business itself.

The Supreme Court
referred to the decision of the Calcutta High Court in Merinoply and
Chemicals Ltd. vs. CIT [1994] 209 ITR 508 (Cal), in which it was held
that transport subsidies were inseparably connected with the business
carried on by the assessee.

The Supreme Court noted that
however, in CIT vs. Andaman Timber Industries Ltd.[2000] 242 ITR
204(Cal), the same High Court had arrived at an opposite conclusion in
considering whether a deduction was allowable u/s. 80HH of the Act in
respect of transport subsidy without noticing the aforesaid earlier
judgment of a Division Bench of that very court.

The Supreme
Court further observed that a Division Bench of the Calcutta High Court
in CIT v. Cement Manufacturing Company Limited, distinguished the
judgment in CIT vs. Andaman Timber Industries Ltd. and followed the
impugned judgment of the Gauhati High Court in the present case.

According
to the Supreme Court the judgment in Merinoply and Chemicals Ltd. and
the recent judgment of the Calcutta High Court had correctly appreciated
the legal position.

The Supreme Court thereafter referred to
the judgment in Jai Bhagwan Oil and Flour Mills [(2009) 14 SCC 63] in
which it was held that and economically viable transport subsidy was
given so that industry could become competitive.

Further, the
Supreme Court referred to the decision in Sahney Steel and Press Works
Ltd. vs. CIT[1997] 228 ITR 253(SC), which dealt with subsidy received
from the state Government in the form of refund of sales tax paid on raw
materials, machinery, and finished goods subsidy on power consumed by
the industry; and exemption from water rate. It was held that such
subsidies were treated as assistance given for the purpose of carrying
on the business of the assessee.

The Supreme Court thereafter
referred to a Delhi High Court judgment in CIT vs. Dharam Pal Prem Chand
Ltd. [2009] 317 ITR 353 (Delhi) from which a special leave petition
preferred in the Supreme Court was dismissed. This judgment also
concerned itself with section 80-IB of the Act, in which it was held
that refund of excise duty should not be excluded in arriving at the
profit derived from business for the purpose of claiming deduction u/s.
80-IB of the Act.

The Supreme Court thereafter considered one
further argument made by the Counsel for the Revenue. He had argued that
as the subsidies that were received by the respondent, would be income
from other sources referable to section 56 of the Income-tax Act, any
deduction that was to be made, could only be made from income from other
sources and not from profits and gains of business, which was a
separate and distinct head as recognised by section 14 of the Income-tax
Act. The Supreme Court held that the Counsel for the Revenue was not
correct in his submission that assistance by way of subsidies which were
reimbursed on the incurring of costs relatable to a business, were
under the head “Income from other sources”, which is a residuary head of
income that could be availed only if income did not fall under any of
the other four heads of income. The Supreme Court held that section
28(iii)(b) specifically states that income from cash assistance, by
whatever name called, received or receivable by any person against
exports under any scheme of the Government of India, would be income
chargeable to income-tax under the head “Profits and gains of business
or profession”. If cash assistance received or receivable against
exports schemes are included as being income under the head “Profits and
gains of business or profession”, it was obvious that subsidies which
go to reimbursement of cost in the production of goods of a particular
business would also have to be included under the head “Profits and
gains of business of profession”, and not under the head “Income from
other sources”.

The Supreme Court therefore dismissed the appeal.

shailesh.kwebmaker

Search and Seizure – Block Assessment – Limitation – As a general rule, when there is no stay of the assessment proceedings passed by the court, Explanation 1 to section 158BE of the Act may not be attracted. In those cases where stay of some other nature is granted than the stay of the assessment proceedings but the effect of such stay is to prevent the Assessing Officer from effectively passing assessment order, even that kind of stay order may be treated as stay of the assessment proceedings. Search and Seizure – Block Assessment – Limitation to be reckoned with the last panchnama when the search is finally concluded in the absence any challenge to subsequent searches

VLS Finance Ltd. & Anr. vs. CIT & Anr. [2016] 384 ITR 1 (SC)

Search and seizure took place in the business premises of the appellant companies on June 22, 1998 on the strength of warrant of authorisation dated June 19, 1998, which went up to in the morning hours of June 23, 1998. It was followed by further searches from time to time which went on till August 5.

Notice u/s. 158BC(c) of the Income-tax Act, 1991 (hereinafter referred to as the “Act”), was issued on June 28, 1999 requiring the appellants to furnish return for the block period from April 1, 1988 to June 22, 1998. This notice was withdrawn and another notice was issued on July 26, 1999. In response thereto, the appellants filed return for the aforesaid block period on September 10, 1999. As per section 158BE of the Act, assessment is to be completed within two years from the end of the month in which the last of the authorised for search under section 132 or for requisition u/s. 132A, as the case may be. However, the Assessing Officer could not do so because of certain developments which took place.

A direction u/s. 142(2A) was issued on June 29, 2000, which was served to the appellants on July 19, 2000 for conducting special audit for the aforesaid block period.

A writ petition (Civil) no.4685 of 2000 was filed by the Appellants, wherein a challenge was laid to the aforesaid order dated June 29, 2000, issued by Respondent No.2 directing a special audit in respect of appellants u/s. 142(2A) of the Act. In the said writ petition, the appellants also challenged the clarificatory order dated August 10, 2000 issued by respondent No.2 with regasrd to special audit in respect of appellant No.1 for the period from the assessment year 1994-95 to assessment year 1998-99 and in so far as appellant No.2 the period for assessment year 1994-95 to assessment year 1996-97.

During the pendency of the writ petition, as amendment application was filed being CM No. 9305 of 2006, seeking to add addional ground that the block assessment proceedings u/s. 158BC (c) of the Act were time barred. The appellant submitted that the time limit for completion of block assessment expired on June 30, 2000 in terms of section 158BE of the Act, since 2 years period expired on that date. It was further submitted that the authorization executed on June 22, 1998 could not have been utilised for conducting further search till August, 1998. It was also contended that the order u/s. 142(2A) of the Act was issued in violation of principles of natural justice as there was no complexity in the accounts of the appellants and, therefore, there was no justification in law to order special audit u/s. 142(2A) of the Act.

The respondents filed their affidavit in reply to the show cause explaining that the order for special audit u/s. 142(2A) of the Act was issued with proper authorization made by the Commissioner of Income Tax after due deliberation and on the basis of the report of the Assessing Officer, viz., Assistant Commissioner of Income Tax, New Delhi. It was further submitted that the period of completion of block assessment was to expire on August 31, 2000 and not on June 30, 2000 as claimed by the appellants. As per the respondents, since seizure operations were conducted from June 22, 1998 and there operations concluded only on August 5, 1998, the time limit of two years for completion of “block assessment” was to expire only on August 31, 2000.

In Writ Petition (Civil) No.4685 of 2000, interim order dated August 24, 2000 was passed, giving interim stay of the orders dated June 29, 2000.

This stay remained in operation during the pendency of the writ petition.

The matter was finally heard and decided by the Delhi High Court vide judgment dated December 15, 2006. It has quashed the direction for special audit in view of the fact that no hearing was afforded to the appellant before issuing such direction, which was necessary as per the law laid down in the case of Rajesh Kumar vs. Deputy CIT(287 ITR 91).

However, the High Court decided the question of limitation in favour of the Department holding that the period between August 24, 2000, i.e., date on which interim order was passed staying special audit direction under section 142(2A) dated June 29, 2000 and December 15, 2016, i.e., when the High Court has passed the order setting aside the direction for appeal audit, be excluded in counting limitation for concluding block assessment.

The appellant contended before the High Court that since there was no stay on block assessment proceedings in terms of interim order dated August 24, 2000, the direction to exclude the period between August 24, 2000 to December 15, 2006 was beyond its jurisdiction. It was alternatively contended before the High Court that the limitation for passing the block assessment having expired on June 30, 2000 in terms of section 158.

BE(1) of the Act, the direction to exclude the limitation period between August 24, 2000 to December 15, 2006 would not, in any case, save limitation. While rejecting the aforesaid contentions raised by the appellants, the High Court held that since special audit was an important and integral step in the assessment proceedings, once the direction for special audit was stayed by the High Court, assessment proceedings ipso facto could not go on. The High Court rejected the assessee’s second alternative argument holding that limitation period of two years was years was to be calculated from August 5, 1998, on which date last panchnama was drawn.

On appeal, the Supreme Court observed that in effect the central issue was one of limitation, which had the following two facts, viz:

(a) Whether the period of limitation expired on August 31, 2000 or the last date for completing block assessment was June 30, 2000?

(b) Whether the period between August 24, 2000 and December 15, 2006, when interim stay was in operation, required to be excluded for the purposes of counting limitation period?

The Supreme Court taking the second issue first, noted that it was not in dispute that the period during which interim stay of the order passed by the court was in operation had to be excluded while computing the period of two years as limitation period prescribed for completing the block assessment. The parties had, however, joined issue on the nature of stay order which qualify for such exclusion.

The Supreme Court noted that the plea of the appellants was that only that period could be excluded in computing the period of limitation, during which assessment proceedings were stayed. A certain distinction was tried to be drawn in the instant case by referring to the interim order which was passed by the High Court on August 24, 2000 which had stayed the order of the Department directing compulsory audit. It was, thus, argued that stay was limited only to conducting compulsory audit and there was no stay of the assessment proceedings.

The Supreme Court referring the language of Explanation 1 held that it was not in doubt that this explanation granted benefit of exclusion only for those cases where “the assessment proceeding is stayed by an order or injunction” of the court. On literal construction, therefore, it became clear from the reading of this provision that the period that was to be excluded while computing the period of limitation for completion of block assessments was the period during which assessment proceedings are stayed by an order of a court and this provision shall not apply if the stay of some other kind, i.e., other than staying the assessment proceedings, was passed. The counsel for the appellants were justified in their contention that the provision relating to limitation need to be strictly construed.

The Supreme Court further held that as a general rule, therefore, when there is no stay of the assessment proceedings passed by the court, Explanation 1 to section 158BE of the Act may not be attracted. However, this general statement of legal principle has to be read subject to an exception in order to interpret it rationally and practically. In those cases where stay of some other nature is granted than the stay of the assessment proceedings but the effect of such stay is to prevent the Assessing Officer from effectively passing assessment order, even that kind of stay order may be treated as stay of the assessment proceedings because of the reason that such stay order becomes an obstacle for the Assessing Officer to pass an assessment order thereby preventing the Assessing Officer to proceed with the assessment proceedings and carry out appropriate assessment. For an example, if the court passes an order injecting the Assessing Officer from summoning certain records either from the assessee or even from a third party and without those records it is not possible to proceed with the assessment proceedings and pass the assessment order even such type of order may amount to staying the assessment proceedings. In that context, the High Court, in the impugned judgment had propounded the correct and relevant test, viz,. whether the special audit is an intergral pat of the assessment proceedings, i.e., without special audit it is not possible for the Assessing Officer to carry out the assessment ? If it is so, the stay of the special audit may qualify as stay of assessment proceedings and, therefore, would be covered by the said Explanation.

The Supreme Court agreed with the High Court that the special audit was an integral step towards assessment proceedings. The argument of the appellants that the writ petition of the appellant was ultimately allowed and the court had quashed the order directing special audit would mean that no special audit was needed and, therefore, it was not open to the respondent to wait for special audit, would not be a valid argument to the issue that was being dealt with. The Assessing Officer had, after going through the matter, formed an opinion that there was a need for special audit and the report of special audit was necessary for carrying out the assessment. Once such an opinion was formed, naturally, the Assessing Officer would not proceed with the assessment till the time that special audit report is received, inasmuch as in his opinion, report of the special audit was necessary. Take a situation where the order of special audit is not challenged. The Assessing Officer would naturally wait for this report before proceeding further. Order of special audit followed by conducting special audit and report thereof, thus, become part of assessment proceedings. If the order directing special audit is challenged and an interim order is granted staying the making of a special report, the Assessing Officer would not proceed with the assessment in the absence of the audit as he thought, in his wisdom, that special audit report is needed. That would be the normal and natural approach of the Assessing Officer at that time. It is stated at the cost of repetition that in the estimation of the Assessing Officer special audit was essential for passing proper assessment order. If the court, while undertaking judicial review of such an order of the Assessing Officer directing special audit ultimately holds that such an order is wrong (for whatever reason) that event happens at a later date and would not mean that the benefit of exclusion of the period during which there was a stay order is not to be given to the Revenue. Explanation 1 which permits exclusion of such a time is not dependent upon the final outcome of the proceedings in which interim stay was granted.

The Supreme Court therefore, answered this question in favour of Revenue.

With this, the Supreme Court reverted to the other question, viz., from which date the period of limitation was to be counted, i.e., from June 22, 1998 when the respondent authorities visited the premises of the appellants on the basis of warrant of authorization dated June 19, 1998 or August 5, 1998, on which date the Revenue authorities last visited the premises of the appellants on the basis of the same warrant of authorization dated June 19, 1998 and conducted the search of the appellant’s premises. If the period was to be counted from June 19, 1998, the last date by which the assessment was to be carried would be June 30, 2000. If it was to be counted from August 5, 1998, then the limitation period was to expire on August 31, 2000. In the event the last date for completing the block assessment was held to be June 30, 2000, then the assessment became time barred even before the interim stay was granted by the High Court as it was granted on August 24, 2000, i.e., after the supposed limitation period was over and, therefore, the conclusion was reached in answering the other question, as above, would not come to the rescue of the Department. On the other hand, if the period of limitation was to expire on August 31, 2000, then by virtue of our answer to the first issue, the period of limitation for block assessment had not expired inasmuch as this court had passed an order dated February 5, 2007 that audit may go on but no final assessment order be passed.

The Supreme Court observed that the Revenue authorities visited and searched the premises of the appellants for the first time on June 22, 1998. In the panchanama drawn on that date, it was remarked “temporarily concluded”, meaning thereby, according to the Revenue authorities, search had not been concluded. For this reason, the respondent authorities visited many times on subsequent occasions and every time panchnama was drawn with the same remarks, i.e., “temporarily concluded”. It was only on August 5, 1998 when the premises were searched last, the panchnama drawn on that date recorded the remarks that the search was “finally concluded”. Thus, according to the respondents, the search had finally been completed only on August 5, 1998 and panchnama was duly drawn on the said date as well. The appellants, in the writ petition filed, had nowhere challenged the validity of searches on the subsequent dates raising a plea that the same were illegal in the absence of any fresh and valid authorization. On the contrary, the appellant proceeded on the basis that search was conducted from June 22, 1998 and finally concluded on August 5, 1998.

On the aforesaid facts and in the absence of any challenge by the appellants to the subsequent searches, the Court held that it cannot countenance the arguments of the appellants that limitation period was not to be counted from the last date of search when the search operation completed, i.e., August 5, 1998. The Supreme Court, therefore, decided this issue also in favour of the respondents.

shailesh.kwebmaker

Journal

Brieficles

Resources

About

Reach Us