Category: In the High Courts: Part A-Reported Decisions

“i) A civil suit was filed by A in which the assessee was impleaded as a party. There was an interim order passed by the trial court which was affirmed by the Court as well. Thus, the assessee was justified in reducing the valuation of the closing stock.

ii) The assessee had reduced the closing stock and the same was taken as opening stock in A. Y. 2007-08 which was accepted by the Assessing Officer while framing the assessment u/s. 143(3). Thus no loss to Revenue had been caused.

iii) In view of the above, no substantial question of law arises. Consequently the appeal stands dismissed.”

The petitioner purchased a property from one ‘M’ on 17-05-1995. ‘M’ had defaulted in making payment of income tax dues for various assessment years. The Assessing Officer issued several demand notices on ‘M’ during the years 1989 to 1994 for recovery of the unpaid taxes. However, ‘M’ had not paid such taxes. Thereupon the Tax Recovery Officer (TRO) attached the above property by issuing an order dated 22-05-1995. Thereafter, he passed an order dated 08- 11-1995 u/s. 281 declaring the above sale transaction as void. He passed the order without any notice to the petitioner. Later on 03-02-2004, he wrote to ‘M’ indicating that the department would proceed with the auction sale of the property under attachment to recover the dues of ‘M’. The Gujarat High Court allowed the writ petition filed by the petitioner and held as under:

“i) Section 281 provides certain transfers to be void. S/s. (1) thereof provides that where, during the pendency of any proceedings under the Act or after the completion thereof, but before the service of notice under rule 2 of the Second Schedule, any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer) of, any of his assets in favour of any other person, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of completion of the said proceedings or otherwise. Proviso to s/s. (1), however, provides that such charge or transfer shall not be void if made for adequate consideration and without notice of pendency of such proceedings or without notice of such tax or other sum payable by the assessee or with the permission of the Assessing Officer.

ii) It can thus be seen that, even if the transaction creating a charge or parting of possession has been entered into by the assessee during the pendency of any proceedings under the Act or after completion thereof, the eventuality of such charge or transfer being declared void can be avoided provided one of the two conditions contained in the proviso is satisfied. Under such circumstances, the transferee can demonstrate that the transaction had taken place with the previous permission of the Assessing Officer or that the same was entered into for adequate consideration and without notice of pendency of such proceedings or without notice of such tax or other sum payable by the assessee.

iii) This element of the transaction being with adequate consideration and without notice would equally apply to the assessee as well as the transferee. In a given case, it may even be open for the assessee to establish that the transaction was for adequate consideration without notice. In a given case, even if the assessee had notice of the pendency or the outstanding tax or sum payable, the transferee can still take shelter of the transactions having been entered into by him for adequate consideration and without notice.

 iv) It is, therefore, that the Courts have read into this provision the requirement of hearing the transferee also. Quite apart from this, Courts have taken a view that s/s. (1) of section 281 only provides for the eventuality of the transaction hit by the said provision as being void. It does not create any machinery for the revenue authorities to entertain dispute and declare the transaction to be void for which purpose, only a civil suit would lie.

v) The Bombay High Court in the case of Gangadhar Vishwanath Ranade (No. 2) vs. T.R.O. [1989] 177 ITR 176 held that u/s. 281, the TRO has no power to declare a transfer as void. This decision of the Bombay High Court was carried in appeal before the Supreme Court. The Apex Court in TRO vs. Gangadhar Vishwanath Ranade [1998] 234 ITR 188/100 Taxman 236 confirmed the view of the Bombay High Court.

vi) The issue involved in the instant case is squarely covered by the decision of the Supreme Court in the case of Gangadhar Vishwanath Ranade (supra). Therefore, the order passed by the Tax Recovery Officer u/s. 281 was liable to be set aside.”

The petitioners were directors of a private company. On 24-06-2002, the Assessing Officer issued notices to the directors u/s. 179(1) of the Income-tax Act, 1961, for recovery of the tax dues of the company of Rs. 7,53,649/- in respect of the A. Y. 1998-99. Being not satisfied by the reply given by the directors, the Assessing Officer passed order u/s. 179 for recovery of the tax dues from the directors. The Commissioner dismissed the revision petition made u/s. 264 of the Act.

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

“i) The company had run into losses. The company had substantial dues towards the bank from which it had taken loan. Certain properties were also mortgaged to the bank. To realise its dues, the bank filed a petition before the Debt Recovery Tribunal where the parties agreed to settle the total dues for Rs. 25 lakh. The properties of the company were valued at Rs. 18 lakh. The balances was supplied by the directors from their personal resources. Additionally, in order to strike the name of the company off the register of companies, the directors agreed to forgo their loans to the company which were in excess of Rs. 16 lakh.

ii) When such facts were established, the Assessing Officer ought to have held that the petitioners had succeeded in establishing that non-recovery of the tax dues of the company could not be attributed to gross neglect, misfeasance or breach of duty on the part of the directors in relation to the affairs of the company.

iii) The assets of the company may not have been mortgaged to the bank. Nevertheless, the Debts Recovery Tribunal held the bank entitled to recover the suit dues by sale of hypothecated machinery and movables and by sale of immovable property. This would not bring the action of the petitioners within the expression of gross neglect, misfeasance or breach of duty on their part.

iv) The contention of the counsel of the Revenue that the petitioners should have offered the properties for recovery of the Department was not tenable. The orders passed by the Income Tax Officer and the Commissioner were to be quashed.”

The assessee, an investment and security business company, had raised additional capital and offered shares at a premium of Rs. 90 per share during the previous year relevant to the A. Y. 2005-06. The Assessing Officer completed the assessment of the assessee for the A. Y. 2005-06 u/s. 143(3) on 24-12-2007. Subsequently the Assessing Officer issued notice u/s. 148 on the basis of the investigation report dated 13- 03-2006 received from the DIT (Investigation), New Delhi. The said report indicated that the assessee was amongst the beneficiaries of bogus accommodation entries. The Delhi High Court allowed the writ petition filed by the assessee and held as under:

“i) It is evident from the aforesaid that the reassessment proceedings were initiated by the impugned notice which expressly and plainly states that ‘reasons to believe’ are based upon the materials contained in the investigation report of 13-03-2006. The notice itself does not spell out that the report was not on the record when the original assessment was completed on 24-12-2007, nor did the revenue even suggest so in the counter affidavit filed in the proceedings. It is only in a subsequently filed additional affidavit that the position is sought to be clarified. Clearly, the High Court refrains from making such an enquiry at a time when the Assessing Officer has, in the first instance, failed to spell out clearly in section 148 notice itself that such report was not on record. In other words ‘the reasons to believe’ do not state even in one sentence that the investigation report was not with the Assessing Officer when he completed the assessment.

ii) The material on record in fact suggests otherwise. The nature of the queries put to assessee and the replies and confirmation furnished to the Assessing Officer in the course of the regular assessment clarify that what excited the suspicion was indeed gone into by the Assessing Officer himself while framing the assessment u/s. 143(3).

iii) Such being the case the Court has no doubt that the impugned notice, in the circumstances of the case, is based upon stale information which was available at the time of the original assessment and in fact appears to have been used by the Assessing Officer at the relevant time, i.e., during the completion of proceedings u/s. 143(3).

iv) Therefore, the attempt to reopen the proceedings u/ss 147 and 148 is really the result of a change of opinion. Consequently, the impugned notice and all proceedings further thereto are beyond the authority of law and were liable to be quashed.”

The assessee borrowed money for investment in shares of a company P owning an immovable property the value of which was much higher than the book value. The assessee had not received dividend. The assessee’s claim for deduction of interest on borrowed funds u/s. 57(iii) of the Income-tax Act, was disallowed by the Assessing Officer on the ground that the investment could not be said to have been made for earning dividend. The Tribunal upheld the disallowance.

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

“i) Even though the language of section 37(1) of the Income-tax Act, 1961, is a little wider than that of section 57(iii), that cannot make any difference in the true interpretation of section 57(iii). The language of section 57(iii) is clear and unambiguous and it has to be construed according to its plain natural meaning and merely because a slightly wider phraseology is employed in another section which may take in something more, it does not mean that section 57(iii) should be given a narrow and constricted meaning not warranted by the language of the section and, in fact, contrary to such language.

ii) There was no reason why a proper expenditure should have been disallowed only because the investment was not made for the purpose of earning dividend. There is no finding that the investment was made otherwise than for the purpose of making an income. The Tribunal and the Assessing Officer were wrong in disallowing the expenditure.”

The assessee, a real estate developer obtained approval for a housing project on 16-03-2005 from the Development Authority. It completed the project in 2008 and by a letter dated 05-11-2008 applied to the Competent Authority for the issue of the completion certificate. The assessee’s claim for deduction u/s. 80-IB(10) was denied inter alia, on the ground that the completion certificate was not obtained within the period of four years as prescribed by the Finance Act, 2004 w.e.f. 01-04-2005. The Tribunal allowed the assessee’s claim for deduction accepting the assessee’s claim that, since the approval was granted to the assessee 16-03-2005 i.e., prior to 01-04-2005, the assessee was not expected to fulfill the conditions which were not on the statute when such approval was granted to the assessee.

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

“i) The approval for the project was given by the Development Authority on 16-03-2005. Clearly, the approval related to the period prior to the amendment, which insisted on the issuance of the completion certificate by the end of the four year period, was brought into force. The application of such stringent conditions, which are left to an independent body such as the local authority who is to issue the completion certificate, would have led to not only hardship but absurdity.

ii) As a consequence, the Tribunal was not, therefore, in error of law while holding in favour of the assessee.”

For the A. Y. 2004-05, the assessee had filed return of income on 29-10-2004. The Assessing Officer issued the notice u/s. 143(2) of the Income-tax Act, 1961 on 14-07-2005. The assessee claimed that the notice u/s. 143(2) was not valid since it has been issued beyond the period of three months of date of filing of the return as prescribed by the CBDT Circulars Nos. 9 and 10. The Tribunal rejected the assessee’s contention and dismissed the appeal filed by the assessee. The Tribunal accepted the contention of the Revenue that the Assessing Officer was competent to issue notice u/s. 143(2) after the expiry of period of three months from the date of filing of the return.

In the appeal by the asessee before the High Court, the Revenue contended that such a notice u/s. 143(2) could have been issued within 12 months from the date of filing of the return and, therefore, the notice was well within time. The Calcutta High Court allowed the assessee’s appeal, reversed the decision of the Tribunal and held as under:

“i) Even assuming that the intention of the CBDT was to restrict the time for selection of the cases for scrutiny to a period of three months, it could not be said that the selection in the case of the assessee was made within the period. The return was filed on 29-10-2004, and the case was selected for scrutiny on 06-07-2005. By any process of reasoning, it was not open to the Tribunal to come to the finding that the Department acted within the four corners of Circular No.s 9 and 10 issued by the CBDT. The Circulars were evidently violated. The Circulars were binding upon the Department u/s. 119.

 ii) Even assuming that the circulars were not meant for the purpose of permitting unscrupulous assessees from evading tax, it could not be said that the Department, which is the State, can be permitted to selectively apply the standards set by itself for its own conduct. When the Department has set down a standard for itself, the Department is bound by that standard and cannot act with discrimination. If it does that, the act of the Department is bound to be struck down under Article 14 of the Constitution. In the facts of the case, it was not necessary to decide whether the intention of the CBDT was to restrict the period of issuance of the notice from the date of filing of the return laid down u/s. 143(2).

 iii) Thus, the notice u/s. 143(2) was not in legal exercise of jurisdiction.”

The assessee, a registered public charitable trust, being unable to utilise income from property to extent of 85 % wrote a letter conveying department to exercise option available under Clause (2) of Explanation to section 11(1) for allowing accumulation of income. The Assessing Officer added to the income of assessee on ground that for claiming exemption the assessee had to give declaration in the prescribed form which was not done by the assessee. While exercising option a mistake was committed by the assessee, as the amount was wrongly mentioned to a lower figure, but later on the same was rectified. On appeal, the Commissioner (Appeals) allowed only that part which was declared by the assessee in original letter before due date and disallowed remaining revised amount by observing that the revision option was not exercised within due date. On cross appeals, the Tribunal allowed the assessee’s claim and deleted entire amount on ground that the mistake was bona fide and the requirement of exercising option within prescribed time was only directory in nature.

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

“i) U/s. 11, a charitable trust unable to utilise its income derived from property held under trust wholly for charitable or religious purposes to the extent of 85 % would have an option either in terms of clause (2) of Explanation to s/s. (1) thereof, or as provided u/s/s. (2). When such an option is covered u/s/s. (2) i.e., the income is sought to be accumulated or set apart for the period prescribed, that the requirement of making a declaration in the prescribed manner arises. In case of an option under Clause (2) of Explanation to s/s. (1), there is no such requirement of making declaration but the requirement is exercising of such option in writing before the expiry of the time allowed u/s/s. (1) of section 139 for furnishing the return of income.

 ii) In the present case, the assessee did exercise such option as is apparent from the letter dated 22-09-2009. In such letter, the assessee conveyed to the department that the assessee gave a notice of option exercised by the trust to allow to spend surplus amount of Rs. 59,17,600 that may remain at the end of the previous year ended on 31-03-2009, during the immediately following the previous year, i.e., 2009-10. In the caption, the assessee referred to as the subject-notice of option exercised as required under Clause (2) of Explanation to section 11(1). These things are thus abundantly clear – firstly, that such option was exercised before last date of filing the return, which was 30-09-2009 and secondly, that such option was exercised in terms of clause (2) of Explanation to section 11(1). That was clearly not an option u/s/s. (2) of section 11. The caption of the said communication dated 22-09–00- as well as the contents of the letter make this clear. If that be so, the assessee cannot be precluded from pursuing such option on the ground as was done by the Assessing Officer that no declaration in the prescribed form was made. As we have noticed that such declaration was required only if the assessee’s option was to be covered by the provision of section 11(2).

 iii) It is true that in such option exercised on 22/09/2009, the assessee indicated a smaller figure of Rs. 57,17,600 and it was only later that the same was corrected to Rs. 1,05,67,047. However, the Tribunal has taken note of facts on record namely that the option in fact was exercised within the time permitted under the statute. It was a bona fide error to indicate a wrong figure. The intention to avail carry over of the un-spend income to the next year was clear.

iv) The requirement of exercising an option within the time permitted under Clause (2) of Explanation to section 11(1) is directory and not mandatory. Substantial compliance thereof would therefore be sufficient.

v) Even otherwise, without going to the extent of holding such time limit as directory and not mandatory, in the facts of the present case, the Tribunal committed no error in granting the benefit to the assessee for the entire amount since it was a mere oversight or bona fide error in not indicating the correct and full amount for the option under clause (2) of Explanation to section 11(1).”

The assessee was engaged in the business of manufacture and trading of pharmaceutical products. The assessee gave incentives to its distributors/dealers/ stockists under different schemes. In the relevant year, i.e. A. Y. 2005-06, the incentive so given of Rs. 70,67,089/- was disallowed by the Assessing Officer u/s. 40(a)(ia) of the Income-tax Act, 1961, treating the same as commission, on the ground that the assessee has not deducted tax at source u/s. 194H of the Act. CIT(A) and the Tribunal deleted the addition holding that the payment was not commission and the provisions of sections 194H and 40(a)(ia) were not applicable.

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

“i) The assessee had undertaken sales promotion scheme viz., product discount scheme and product campaign under which the assessee had offered an incentive on case to case basis to its stockists/ dealers/agents. An amount of Rs. 70,67,089/- was claimed as deduction towards expenditure incurred under the said sales promotional scheme. The relationship between the assessee and the distributors/ stockists was that of principle to principle and in fact the distributors were the customers of the assessee to whom the sales were effected either directly or through the consignment agent. As the distributors/ stockists were the persons to whom the product was sold, no services were offered to the assessee and what was offered to the distributor was a discount under the product distribution scheme or product campaign scheme to buy the assessee’s products.

ii) The distributors/stockists were not acting on behalf of the assessee and that most of the credit was by way of goods on meeting the sales target, and hence, it could not be said to be a commission payment within the meaning of Explanation (i) to section 194H of the Act. The contention of the Revenue in regard to the application of Explanation (i) below section 194H being applicable to all categories of sales expenditure cannot be accepted. Such reading of Explanation (i) below section 194H would amount to reading the said provision in abstract. The application of the provision is required to be considered to the relevant facts of every case.

iii) We are satisfied that in the facts of the present case that as regards sales promotional expenditure in question, the provisions of Explanation (i) below section 194H of the Act are rightly held to be not applicable as the benefit which is availed by the dealers/ stockists of the assessee is appropriately held to be not a payment of any commission in the concurrent findings as recorded by the CIT(A) and the Tribunal.

iv) We do not find that the appeal gives rise to any substantial question of law. It is accordingly dismissed.”

II. REPORTED:

1. Business Expenditure: Disallowance: Ss. 40(a)(ia), 40A(3) and 194C(2): A. Ys. 2005-06 and 2009-10: ONGC acquiring lands from farmers and others: Land losers forming society for enabling to survive by way of alternate means of plying vehicles on rent to the ONGC: Society receiving amounts from ONGC and distributing to farmers/members: Payments not expended by society and would not come within the meaning of expenditure either u/s. 40(a)(ia) or section 40A(3): No disallowance can be made: ITO vs. Ankleshwar Taluka ONGC and Land Loser Travellers Co-operative Society; A. Y. 2005-06; 362 ITR 87 (Guj): CIT vs. Ankleshwar Taluka ONGC and Land Loser Travellers Co-operative Society; A. Y. 2009-10; 362 ITR 92 (Guj):

ONGC acquired lands in a particular area from farmers and other persons. Land losers formed the assessee society to enable them to earn a source of livelihood by means of plying vehicles on rent to ONGC. The assessee society received the amounts from ONGC on behalf of the members and distributed the same amongst the members. ONGC deducted the tax at source on such payment to the assessee society.

A. Y. 2005-06:

 In the A. Y. 2005-06, the assessee society received Rs. 2,57,62,253 and distributed the same to the members. The Assessing Officer was of the view that the society was a sub-contractor and that it ought to have deducted tax at source on payments made to each of the farmers u/s. 194C(2) and disallowed the whole of the amount of Rs. 2,57,62,253/- u/s. 40(a)(ia) of the Income-tax Act, 1961. He made a further addition of Rs. 51,47,250/- being 20% of the said amount by way of disallowance u/s. 40A(3) on the ground that the said amount was paid to the members in cash. The Commissioner (Appeals) deleted the addition. He held that there was no element of works contract in terms of the provisions of section 194C in the activities performed by the society and, accordingly, set aside the disallowance u/s. 40(a)(ia). He also held that there was no case for disallowance u/s. 40A(3) as no expenditure was incurred by the society in distributing the rentals to the members. The Tribunal concurred with the findings of the Commissioner (Appeals) and dismissed the appeal filed by the Revenue.

In appeal before the High Court, the Revenue raised the question of disallowance u/s. 40(a)(ia) but did not raise the question of disallowance u/s. 40A(3) of the Act. The Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) In the light of the concurrent findings of fact recorded by the Tribunal upon appreciation of evidence on record, the reasoning adopted by the Tribunal was just and reasonable.

 ii) Thus, it was not possible to state that there was any infirmity in the order of the Tribunal so as to give rise to any question of law, much less, a substantial question of law so as to warrant interference.” A. Y. 2009-10: In this year, the assessee society had received an amount of Rs. 3.79 crore from ONGC and the same was distributed by the assessee society to its members. The Assessing Officer made an addition of 20% of the said amount by way of disallowance u/s. 40A(3) of the Act, on the ground that the assessee had paid these amounts to its members in cash. The Tribunal deleted the addition.

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

“The view of the Commissioner (Appeals) and the Tribunal that the payments were not expended by the assessee and that, therefore, would not come within the meaning of expenditure (be it based on section 40(a)(ia) or section 40A(3) of the Act) was to be confirmed.”